<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-12486
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ASSOCIATED ESTATES REALTY CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C> <C>
Ohio 34-1747603 5025 Swetland Court, Richmond Hts., Ohio 44143-1467
- ------------------------------- ---------------- ---------------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer (Address of principal executive offices) (Zip Code)
incorporation or organization) Identification Number)
</TABLE>
Registrant's telephone number, including area code (216) 261-5000
(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 / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
-------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common as of the latest practicable date.
13,872,381 shares outstanding as of August 13, 1996.
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ASSOCIATED ESTATES REALTY CORPORATION
INDEX
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION Page
----
<S> <C>
ITEM 1 Financial Statements
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995.........................................................................3
Consolidated Statements of Operations for the six and three
month periods ended June 30, 1996 and 1995....................................................4
Consolidated Statements of Cash Flows for the six month
period ended June 30, 1996 and 1995...........................................................5
Notes to Financial Statements..................................................................6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................................10
PART II - OTHER INFORMATION
ITEM 4 Submission of Matters to a vote of Security-Holders............................................20
ITEM 6 Exhibits and Reports on Form 8-K...............................................................20
SIGNATURES .....................................................................................................21
</TABLE>
Page 2
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ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Real estate assets:
Land $ 48,123,199 $ 43,829,336
Buildings and improvements 416,464,418 373,420,546
Furniture and fixtures 17,947,050 16,714,676
------------- -------------
482,534,667 433,964,558
Less: accumulated depreciation (104,334,304) (97,301,859)
------------- -------------
Real estate, net 378,200,363 336,662,699
Cash and cash equivalents 1,595,895 2,848,285
Restricted cash and investments 5,498,321 5,078,884
Accounts and notes receivable:
Rents 1,083,596 1,363,587
Affiliates 676,416 731,580
Other 49,138 38,068
Deferred charges and prepaid expenses 4,092,872 3,651,537
Other assets 1,328,461 1,335,377
------------- -------------
$ 392,525,062 $ 351,710,017
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured debt $ 66,624,929 $ 68,909,238
Unsecured debt 153,106,907 102,325,107
------------- -------------
Total indebtedness 219,731,836 171,234,345
Capital lease obligations 416,999 274,319
Accounts payable and accrued expenses 10,901,088 11,794,365
Dividends payable -- 5,963,834
Resident security deposits 4,152,805 3,668,159
Funds held for non-owned properties 3,013,000 5,399,836
Accrued interest 2,187,815 1,997,181
Accumulated losses and distributions of equity
investees in excess of investment and advances 12,283,520 12,208,299
------------- -------------
Total liabilities 252,687,063 212,540,338
Commitments and contingencies -- --
Shareholders' equity:
Preferred shares, Class A cumulative, without par value;
3,000,000 shares authorized; 225,000 issued and outstanding 56,250,000 56,250,000
Common shares, without par value, $.10 stated value;
50,000,000 shares authorized; 13,872,381 shares
issued and outstanding 1,387,238 1,387,238
Paid-in capital 102,506,016 102,567,007
Accumulated dividends in excess of net income (20,305,255) (21,034,566)
------------- -------------
Total shareholders' equity 139,837,999 139,169,679
------------- -------------
$ 392,525,062 $ 351,710,017
============= =============
</TABLE>
The accompanying notes are an integral part
of these financial statements
Page 3
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ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Rental $21,852,214 $16,416,648 $42,412,081 $32,137,020
Property management fees 100,787 103,374 192,867 223,316
Property management fees-affiliates 856,957 962,677 1,719,071 1,841,576
Painting service 128,372 112,447 202,148 142,606
Painting service-affiliates 410,585 198,662 618,087 334,982
Other 176,338 392,661 429,135 632,807
----------- ----------- ----------- -----------
23,525,253 18,186,469 45,573,389 35,312,307
Expenses
Property operating and maintenance 8,916,564 6,728,275 17,431,273 13,103,246
Depreciation and amortization 3,784,012 2,993,745 7,333,967 5,756,453
Painting services 473,710 290,180 732,090 444,465
General and administrative 1,586,063 1,274,118 2,878,388 2,566,334
Interest expense 3,991,336 2,896,219 7,615,422 5,360,357
----------- ----------- ----------- -----------
Total expenses 18,751,685 14,182,537 35,991,140 27,230,855
Income before equity in net
income of joint ventures 4,773,568 4,003,932 9,582,249 8,081,452
Equity in net income of
joint ventures 150,638 87,751 133,134 141,565
----------- ----------- ----------- -----------
Net income $ 4,924,206 $ 4,091,683 $ 9,715,383 $ 8,223,017
=========== =========== =========== ===========
Net income applicable to common shares $ 3,553,101 $ 4,091,683 $ 6,973,173 $ 8,223,017
=========== =========== =========== ===========
Per Common Share:
Net income $ .26 $ .30 $ .50 $ .59
=========== =========== =========== ===========
Dividends paid $ .45 $ .43 $ .90 $ .86
=========== =========== =========== ===========
Weighted average number of common
shares outstanding (in thousands) 13,872 13,869 13,872 13,869
</TABLE>
The accompanying notes are an integral part
of these financial statements
Page 4
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ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 9,715,383 $ 8,223,017
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,333,967 5,756,453
Equity in net income of joint ventures (133,134) (141,565)
Earnings distributed from joint ventures 181,239 84,568
Net change in accounts and notes receivable 268,921 409,791
Net change in accounts and notes receivable-affiliates 55,164 (197,645)
Net change in accounts payable and accrued expenses (1,122,988) 13,148
Net change in other operating assets and liabilities 109,971 484,950
Net change in restricted cash (419,437) (324,038)
Net change in funds held for non-owned properties (2,386,836) (2,826,829)
------------ ------------
Total adjustments 3,886,867 3,258,833
------------ ------------
Net cash flow provided by operations 13,602,250 11,481,850
Cash flow from investing activities:
Acquisition of real estate (net of liabilities assumed) (47,521,197) (27,224,935)
Fixed asset additions (210,832) (436,765)
Distributions from joint ventures 27,116 91,838
------------ ------------
Net cash flow used for investing activities (47,704,913) (27,569,862)
Cash flow from financing activities:
Increase in unsecured debt 50,483,715 41,119,500
Decrease in secured debt (2,284,309) (13,520,689)
Payments of deferred financing and offering costs (339,504) (1,098,937)
Payments under capital lease obligations (59,723) (28,494)
Common share dividends paid (12,207,696) (11,511,586)
Preferred share dividends paid (2,742,210) --
------------ ------------
Net cash flow provided by financing activities 32,850,273 14,959,794
------------ ------------
Decrease in cash and cash equivalents (1,252,390) (1,128,218)
Cash and cash equivalents, beginning of period 2,848,285 1,870,584
------------ ------------
Cash and cash equivalents, end of period $ 1,595,895 $ 742,366
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements
Page 5
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ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
The Company is a self-administered and self-managed real estate
investment trust ("REIT") which specializes in acquisition, development,
ownership and management of multifamily properties in Ohio, Michigan and
Pennsylvania ("Great Lakes Region"). At June 30, 1996, the Company owned or was
a joint venture partner in 82 multifamily properties containing 15,457 suites.
Additionally, the Company manages 40 non-owned properties, 32 of which are
multifamily properties consisting of 7,052 suites and eight of which are
commercial properties containing an aggregate of approximately 825,000 square
feet of gross leasable area. The Company's real estate property management
operations, a painting service company, a computer services company and a
mortgage origination and servicing company have for the most part been assigned
to affiliates of the Company that are collectively referred to as the
"Service Companies".
As referred to herein, the "Company" means Associated Estates Realty
Corporation, its wholly owned subsidiaries, which own certain of the real estate
properties, and the Service Companies.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION/COMBINATION
The accompanying consolidated financial statements include the
accounts of the Company, its wholly owned subsidiaries, which own certain of the
real estate properties, and the Service Companies, which provide various
services to both owned and non-owned properties. The Company holds a preferred
share interest in these Service Companies which entitles it to receive 95% of
the economic benefits from operations and which is convertible into a majority
interest in the voting common shares. The outstanding voting common shares of
these Service Companies are held by an executive officer of the Company. The
Service Companies are consolidated because, from a financial reporting
perspective, the Company is entitled to virtually all economic benefits and has
operating control over the companies.
One property included in the financial statements is 33-1/3% owned by
third party investors. As this property has an accumulated deficit, no
recognition of the third party interest is reflected in the financial statements
since it is the Company's policy to recognize minority interests only to the
extent that the third party's investment and accumulated share of income exceeds
distributions and its share of accumulated losses. Investments in joint
ventures, which are 50% or less owned by the Company, are presented using the
equity method of accounting. Since the Company intends to fulfill its
obligations as a partner in the joint ventures, the Company has recognized its
share of losses and distributions in excess of its investment.
The accompanying unaudited financial statements reflect all
adjustments which are, in the opinion of management, necessary to reflect a fair
presentation of the results for the interim periods presented, and all such
adjustments are of a normal recurring nature.
All significant inter-entity balances and transactions have been
eliminated in consolidation.
Certain reclassifications have been made to the 1995 financial
statements to conform to the 1996 presentation.
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USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
3. ACQUISITION AND DEVELOPMENT OF MULTIFAMILY PROPERTIES
During the period January 1, 1996 through June 30, 1996, the Company
acquired, in separate purchase transactions, four multifamily properties
containing an aggregate of 956 suites for an aggregate purchase price of $42.5
million, which were financed with borrowings under the Company's Line of Credit.
Construction in progress for the development of multifamily property
was $12,767,695 and $8,254,251 at June 30, 1996 and December 31, 1995,
respectively. The Company capitalizes interest on funds used in constructing
property from the date of initiation of construction activities through the time
the property is ready for leasing. The Company also capitalizes real estate
taxes and insurance costs during the construction period. The following schedule
details construction in progress at June 30, 1996:
<TABLE>
<CAPTION>
Construction Percent
(dollars in thousands) Estimated Cost Construction Percent Percent
Number of Construction Incurred to Complete Leased Occupied Estimated
Property Suites Land Cost Costs Date at 6/30/96 at 6/30/96 at 6/30/96 Completion
- ---------------------- ----------- --------- ------------ ------------ ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AURORA, OH
Barrington-Phase I 168 $ 1,375 $ 11,134 $ 1,124 3% - - Summer 1997
Barrington-Phase II 120 982 7,953 - - - Winter 1997
--- ------- ---------- -----------
288 2,357 19,087 1,124
ANN ARBOR, MI
Arbor Landings II TBD 650 TBD 90 - - - TBD
COLUMBUS, OH
Bradford at Easton 324 2,033 14,700 3,077 20% - - Fall 1997
FENTON, MI
Georgetown expansion 48 483 2,879 2,360 90% 59% 34% Summer 1996
WESTLAKE, OH
Westlake TBD 523 TBD - - - - TBD
Future Development - - -
Project Costs - - - 71
----------- --------- ---------- -----------
660 $ 6,046 $ 36,666 $ 6,722
<FN>
TBD (To be determined)
</TABLE>
At June 30, 1996, the Company held land having an historical cost of
$2,897,690 that it intends to sell since the land cannot be rezoned for
multifamily use. Management estimates that proceeds from the sale of land will
exceed its cost and as a result, the land is stated at cost.
4. SHAREHOLDERS' EQUITY
The following table summarizes the changes in shareholders' equity
since December 31, 1995:
<TABLE>
<CAPTION>
Class A Accumulated
Cumulative Common Dividends
Preferred Shares Paid-In In Excess Of
Shares (at $.10 stated value) Capital Net Income Total
---------------- ---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, Dec. 31, 1995 $ 56,250,000 $ 1,387,238 $ 102,567,007 $ (21,034,566) $ 139,169,679
Net income - - - 9,715,383 9,715,383
Common share
dividends declared - - - (6,243,862) (6,243,862)
Preferred share
dividends declared - - - (2,742,210) (2,742,210)
Additional offering costs - - (60,991) - (60,991)
----------------------------- --------------- --------------- ---------------
Balance, June 30, 1996 $ 56,250,000 $ 1,387,238 $ 102,506,016 $ (20,305,255) $ 139,837,999
============================== =============== =============== ===============
</TABLE>
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5. SECURED DEBT
CONVENTIONAL MORTGAGE DEBT
Conventional mortgages payable are comprised of nonrecourse, project
specific, loans to the Company which are collateralized by the associated real
estate and resident leases. Mortgages payable are generally due in monthly
installments of principal and/or interest and mature at various dates
through August 1, 2018.
FEDERALLY INSURED MORTGAGE DEBT
This mortgage indebtedness is insured by HUD pursuant to certain of the
mortgage insurance programs administered under the National Housing Act of 1934.
These government-insured loans are nonrecourse to the Company. Payments of
principal, interest and HUD mortgage insurance premiums are made in equal
monthly installments and mature at various dates through August 1, 2028.
Under certain of the mortgage agreements, the Company is required to
make escrow deposits for taxes, insurance and replacement of project assets. One
underlying mortgage is secured by a letter of credit which is renewed annually.
6. UNSECURED DEBT
SENIOR NOTES
The Senior Notes were issued in 1995, and net proceeds of $83.6
million, after underwriting commissions, offering expenses and discounts, were
applied to amounts drawn on the Company's Revolving Credit Facility or Line of
Credit. Notes with a principal balance of $75 million accrue interest at 8.38%
and mature in 2000. The remaining notes, in the principal amount of $10 million,
accrue interest at 7.10% and mature in 2002.
LINE OF CREDIT
The Company utilizes a $75 million unsecured revolving credit facility
(the "Line of Credit"). The Line of Credit includes certain restrictive
covenants which, among others, requires the Company to maintain a minimum level
of net worth, to limit dividends to 90% of Distributable Cash Flow, to restrict
the use of its borrowings and to maintain certain debt coverage ratios. The Line
of Credit provides for a scaled reduction in the LIBOR, prime rate and
commitment fee margins based on the Company's credit ratings. Based on the
Company's present credit ratings and pursuant to a March 1996 interest rate
reduction amendment to the Line of Credit, the LIBOR margin is 150 basis points
("BP") fixed in increments of 30, 60, 90, 120 or 180 days and Prime Rate
borrowings are at the Prime Rate with no margin. An annual commitment fee of
.25% to .375% based on the average daily unused amount of the facility is paid
quarterly in arrears. The Line of Credit expires in September 1997 and the
Company has the option to extend the facility for an additional one year
period. At June 30, 1996, $60.9 million was drawn on the Line of Credit.
MEDIUM TERM NOTES PROGRAM
The Company's $75 million Medium Term Notes Program became effective on
January 3, 1996. The Company issued two notes under the MTN Program aggregating
$7.5 million. The net proceeds of approximately $7.4 million were applied to
amounts borrowed under the Line of Credit.
One note with a principal balance of $5 million accrues interest at
6.83% and is due in 2003. The second note has a principal balance of $2.5
million and accrues interest at 6.60% and is due in 2026. The holder of the $2.5
million note has the option to require repayment on March 15, 2003.
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7. EARNINGS PER SHARE
Net income per share has been computed by dividing common share
dividends paid or declared for the period by the weighted average number of
common shares outstanding plus the undistributed net income applicable to common
shareholders as appropriate, divided by the weighted average number of common
shares outstanding. Common share equivalents were excluded from the earnings per
share calculation as they were not dilutive. The weighted average number of
shares outstanding utilized in the calculation was 13,872,381 and 13,869,381 for
the periods ended June 30, 1996 and 1995, respectively.
8. PRO FORMA FINANCIAL INFORMATION
The following unaudited supplemental pro forma operating data for the
six months ended June 30, 1996 is presented to reflect the effects of the four
property acquisitions completed through June 30, 1996, as if such transactions
had occurred on January 1, 1996. The unaudited supplemental pro forma operating
data for the six months ended June 30, 1995 is presented to reflect the effects
of (i) the issuance of the Senior and Medium Term Notes, (ii) the offering of
2,250,000 Depositary Shares, each representing 1/10 of a share of the Company's
9 3/4% Class A Cumulative Redeemable Preferred Shares, (iii) the 15 property
acquisitions completed in 1995, and (iv) the four property acquisitions
completed in 1996, as if such transactions had occurred on January 1, 1995.
<TABLE>
<CAPTION>
For the six months ended
June 30,
------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995
------- -------
<S> <C> <C>
Revenues $47,103 $44,164
Net income applicable to common shares 7,216 6,794
Net income applicable to common shares per share 0.52 0.49
Weighted average common shares outstanding 13,872 13,872
</TABLE>
The 1995 pro forma financial information does not include the revenue
and expenses for Colony Bay East Phase I and II, Kensington Grove or the
Residence at Washington for the period January 1 through June 30, 1995. The
revenue and expenses of the aforementioned properties were excluded from the pro
forma financial information for the period as they were under construction for
substantially all of the period prior to their acquisition.
9. SUBSEQUENT EVENTS
On July 2, 1996, the Company declared a dividend of $.45 per share for
the quarter ending June 30, 1996. The dividend will be paid on August 1, 1996 to
shareholders of record on July 15, 1996.
Subsequent to June 30, 1996, the Company aquired a parcel of land
consisting of 12.5 acres for an aggregate cost of $.5 million which was
financed with borrowings under the Company's Line of Credit.
Page 9
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ASSOCIATED ESTATES REALTY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Associated Estates Realty Corporation (the "Company") is a Real Estate
Investment Trust ("REIT") that currently owns or is a joint venture partner in
82 multifamily properties containing 15,457 suites located in Ohio, Michigan and
Pennsylvania.
The following discussion should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this report.
Historical results and percentage relationships set forth in the Consolidated
Statements of Operations contained in the financial statements, including trends
which might appear, should not be taken as indicative of future operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has elected to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended, commencing with
its taxable year ending December 31, 1994. REIT's are subject to a number of
organization and operational requirements including a requirement that 95% of
the income that would otherwise be considered as taxable income be distributed
to its shareholders. Providing the Company continues to qualify as a REIT, it
will generally not be subject to a Federal income tax on net income.
The Company expects to meet its short-term liquidity requirements
generally through its net cash provided by operations. The Company believes that
its net cash provided by operations will be sufficient to meet both operating
requirements and the payment of dividends by the Company in accordance with REIT
requirements in both the short and long term.
Financing:
The Company utilizes a $75 million unsecured revolving credit facility
(the "Line of Credit") that includes certain restrictive covenants which, among
others, require the Company to maintain a minimum level of net worth, to limit
dividends to 90% of Distributable Cash Flow, to restrict the use of its
borrowings and to maintain certain debt coverage ratios. The Line of Credit
provides for a scaled reduction in the LIBOR or prime rate margins and
commitment fees based on the Company's credit ratings. Based on the Company's
present credit ratings and pursuant to a March 1996 interest rate reduction
amendment, the LIBOR margin is 150 BP, fixed in increments of 30, 60, 90, 120 or
180 days and Prime Rate borrowings are at the Prime Rate with no margin. An
annual commitment fee of between 0.25% and 0.375% on the average daily unused
amount of the facility is paid quarterly in arrears. The Line of Credit expires
in September 1997 and the Company has the option to extend the facility for an
additional one year period. At June 30, 1996, $60.9 million was drawn on the
Line of Credit with a weighted average interest rate of 7.28%.
Sixty-three of the Company's 75 wholly owned properties were
unencumbered at June 30, 1996 with annualized earnings before interest,
depreciation and amortization of over $40.0 million and an historical cost basis
of over $354.6 million. The remaining twelve of the Company's wholly owned
properties, having an historical cost basis of $94.3 million, secured $65.0
million of property specific mortgage debt at June 30, 1996 which comprised
27.5% of the Company's outstanding debt. The Company's proportionate share of
the mortgage debt relating to the seven joint venture properties was $18.1
million at June 30, 1996. The Company's unsecured debt totaled $153.1 million
at June 30, 1996 which comprised 64.8% of the Company's outstanding debt. The
Company's Senior Notes and Medium Term Notes have been rated BBB- and Baa3 by
Standard and Poor's and Moody's, respectively. The weighted average interest
rate on the Company's debt, including the amounts drawn on the Line of
Credit, was 7.98% at June 30, 1996.
The Company has filed shelf registration statements with the Securities
and Exchange Commission for the registration of up to $250 million and $200
million of debt securities, preferred shares, depositary shares, common shares
and common share warrants in January and December of 1995, respectively. The
Company has $233.8 million of securities under these shelf filings available for
issuance.
Page 10
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Acquisitions and dispositions:
The Company intends to continue to finance its multifamily property
acquisitions and development with the most appropriate sources of capital, which
may include undistributed Funds From Operations, the issuance of equity
securities, bank and other institutional borrowings, the issuance of debt
securities, the assumption of mortgage indebtedness or through the exchange of
properties. The Company may also determine to raise additional working capital
through one or more of these sources.
During the six-month period ended June 30, 1996, the Company acquired
four multifamily properties containing an aggregate of 956 suites for an
aggregate purchase price of $42.5 million. The acquisitions are located in
Michigan, Ohio and Western Pennsylvania, and were financed with borrowings under
the Line of Credit. The Company has also entered into a contract for the
construction of a 324 suite property that will be known as Bradford at Easton on
a 45 acre Columbus, Ohio land parcel owned by the Company with an estimated
completion in the Fall of 1997. The Company is also developing Barrington, a 288
suite multifamily property in Aurora, Ohio that will be constructed in two
phases with an estimated completion of the first phase in the Fall of 1997. The
construction of Bradford at Easton and Barrington Phase I was approximately
20% and 3% complete, respectively, at June 30, 1996.
The Company is currently under contract to purchase two parcels of
undeveloped land located in Streetsboro and Mt. Sterling, Ohio consisting of
12.5 and 10 acres, respectively, and a multifamily property in Grand Rapids,
Michigan, containing 144 suites for an aggregate purchase price of $6.7 million.
If acquired, the Company will commence construction of a 112 suite multifamily
property on the Streetsboro land parcel in the Summer of 1996. The parcel
of land under contract in Mt. Sterling, Ohio is adjacent to a property owned by
the Company and will be held for future development. The Company expects to
finance the acquisition of the property and two land parcels using borrowings
under the Line of Credit and the assumption of mortgage indebtedness. There can
be no assurances, however, that the Company will be successful in acquiring
the property and the two land parcels under contract.
The Company is exploring opportunities to sell several of the
Government Assisted properties and has received an expression of interest from a
number of different sources. In addition, the Company has determined that a 90
acre parcel of land which was one of the assets acquired by the Company at the
time of the IPO that is presently zoned for office and industrial use will not
be rezoned for multifamily use. The Company intends to sell the property and has
received interest from parties interested in developing office and industrial
buildings on the property.
Cash flow sources and applications:
Net cash provided by operating activities increased $2,120,400 for the
six-month period ended June 30, 1996 when compared with the six-month period
ended June 30, 1995. This increase was primarily the result of an increase in
earnings before depreciation and amortization attributable to the increase in
the Company's asset portfolio that was partially offset by a decrease in
accounts payable and accrued expenses.
Net cash flows used for investing activities of $47,704,900 for the
six-month period ended June 30, 1996 were primarily used for the acquisition of
multifamily real estate.
Net cash flows provided by financing activities of $32,850,300 for the
six-month period ended June 30, 1996 were primarily comprised of borrowings on
the Line of Credit and Medium Term Note Program. Funds were also used to pay
dividends on the Company's common and Perpetual Preferred Shares.
On July 2, 1996, the Company declared a dividend of $0.45 per common
share for the quarter ending June 30, 1996 which was paid on August 1, 1996 to
shareholders of record on July 15, 1996. On May 22, 1996, the Company declared a
dividend of $0.60938 per depositary share on its Class A Cumulative Preferred
Shares (the "Perpetual Preferred Shares") which was paid on June 17, 1996 to
shareholders of record on June 3, 1996.
Page 11
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RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTHS ENDED JUNE 30, 1996 TO THE THREE-MONTHS ENDED
JUNE 30, 1995.
Overall, total revenue increased $5,338,800 or 29.4% and total expenses
before the net income of the joint ventures increased $4,569,100 or 32.2% for
the quarter ended June 30, 1996 as compared to the quarter ended June 30, 1995.
Net income applicable to common shares decreased $538,600 or 13.2% after the
Company's interest in the net income of the joint venture properties and
dividends on the Company's Perpetual Preferred Shares.
In the following discussion of the comparison of the three-months ended
June 30, 1996 to the three-months ended June 30, 1995, the term "Core Portfolio
Properties" refers to the 60 wholly owned properties that were acquired by the
Company prior to March 31, 1995 and "Acquired Properties" refers to the 15
multifamily properties acquired between April 1, 1995 and June 30, 1996.
During the three-months ended June 30, 1996, the Acquired Properties
generated total revenues of $4,679,800 while incurring property, operating and
maintenance expenses of $1,785,200.
Rental Revenues:
Rental revenues increased $5,435,600 or 33.1% for the quarter. Rental
revenues from the Acquired Properties increased $4,622,800 for the same period.
Increases in occupancy and suite rents at the Core Portfolio market rate and
Government Assisted properties resulted in a $812,900 or 5.0% increase in rental
revenue from these properties.
The following table summarizes the comparative rents per suite and
economic occupancies(1) by property type:
<TABLE>
<CAPTION>
Average Net Collected Average Economic
Rent Per Suite(2) Occupancy
-------------------------------------- --------------------
For the three-months Percent For the three-months
ended June 30, Increase ended June 30,
----------------------- -------- --------------------
1996 1995 1996 1995
---------- ---------- ---- ----
<S> <C> <C> <C> <C> <C>
Core Portfolio Properties:
Market rate $ 569 $ 540 5.4% 96.6% 94.9%
Market rate - joint venture
properties 483 478 1.0% 92.8% 92.9%
Government Assisted 643 620 3.7% 99.6% 99.8%
Weighted average - Core
Portfolio Properties 573 547 4.8% 96.8% 95.6%
</TABLE>
Table I on page 17 summarizes the rental rates, occupancies and certain
other information for each of the Acquired Properties and Core Portfolio
Properties.
- --------
1 Economic occupancy is defined as the actual rent revenue divided by
the total rent expected to be earned based on the market rental rate of all
occupied suites.
2 Net collected rent revenue per suite is defined as the rent revenue
recognized on occupied suites at the actual rents in accordance with the
respective leases divided by the total number of suites available to be leased.
Page 12
<PAGE> 13
Other Revenues:
Property management fees and property management fees - affiliates
decreased $108,300 or 10.2% for the three-month period. This decrease was due
primarily to a decline in supplemental management fees earned on two of the
Government Assisted properties managed by the Company. These supplemental
management fees are based on the cash flow available for distribution of the two
managed properties which declined due to an increase in repair and maintenance
expenses at the two managed properties.
Painting service revenue and painting service revenue - affiliates
increased $227,800 or 73.2% for the quarter and reflects an increase in revenue
generated from suite painting and major renovation projects when compared with
the three-months ended June 30, 1995. The increase in painting service revenue
and painting service revenue - affiliates was partially offset by an increase
in painting service expenses as discussed elsewhere herein.
Other income for the three-months ended June 30, 1996 decreased
$203,700 or 32.2% when compared with the three-months ended June 30, 1995. The
decrease is due primarily to a decrease in supervisory management fees received
from one of the managed properties.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased $2,188,300 or
32.5% for the quarter. Operating and maintenance expenses at the Acquired
Properties increased $1,777,100 for the quarter due primarily to the operating
and maintenance expenses incurred at the 15 properties that were acquired
between April 1, 1995 and June 30, 1996. Property operating and maintenance
expenses at the Core Portfolio Properties increased $411,200 or 6.1% when
compared with the three-months ended June 30, 1995 primarily due to increases
in payroll, advertising and real estate taxes which were offset by a decline in
maintenance and repair expenses. Payroll expense at the Core Portfolio
Properties increased $133,400 or 8% due to an increase in staff at the
properties acquired during 1994. Real estate taxes for the Core Portfolio
Properties increased $254,700 or 18.9% due primarily to the increase in the
real estate tax valuations for certain properties. Total expenditures for
building renovations and suite and common area refurbishment (including suite
painting) in the Core Portfolio Properties averaged $119 per suite for the
three-months ended June 30, 1996 as compared to $136 per suite for the
three-months ended June 30, 1995.
Other expenses:
Depreciation and amortization increased $790,300 or 26.4% for the
quarter primarily due to the increased depreciation and amortization expense
recognized on the Acquired Properties of $919,800.
Painting services expenses increased $183,500 or 63.2% for the quarter.
These increases were primarily the result of an increase in payroll related
expenses attributable to the increased sales of the painting company.
Interest expense increased $1,095,100 or 37.8% for the quarter
primarily due to the interest incurred with respect to the additional borrowings
under the Line of Credit that were used for the acquisition of properties.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX-MONTHS ENDED JUNE 30, 1996 TO THE SIX-MONTHS ENDED JUNE
30, 1995.
Overall, total revenue increased $10,261,100 or 29.1% and total
expenses before the net income of the joint ventures increased $8,760,300 or
32.2% for the six-month period. Net income applicable to common shares decreased
$1,249,800 or 15.2% after the Company's interest in the net income of the joint
venture properties and dividends on the Company's Perpetual Preferred Shares.
Page 13
<PAGE> 14
In the following discussion of the comparison of the six-months ended
June 30, 1996 to the six-months ended June 30, 1995, the term "Core Portfolio
Properties" refers to the 56 wholly owned properties that were acquired by the
Company prior to December 31, 1994 and "Acquired Properties" refers to the 19
multifamily properties acquired between January 1, 1995 and June 30, 1996.
During the six-months ended June 30, 1996, the Acquired Properties
generated total revenues of $10,606,200 while incurring property, operating and
maintenance expenses of $4,175,500.
Rental Revenues:
Rental revenues increased $10,275,100 or 32.0% for the six-month
period. Rental revenues from the Acquired Properties increased $8,949,500 for
the same period. Increases in occupancy and suite rents at the Core Portfolio
Conventional and Government-Assisted Properties resulted in a $1,325,900 or 4.4%
increase in rental revenue from these properties.
Other Revenues:
Property management fees and property management fees - affiliates
decreased $153,000 or 7.4% for the six-month period. This decrease was due
primarily to a decline in supplemental management fees earned on two of the
Government Assisted properties managed by the Company. These supplemental
management fees are based on the cash flow available for distribution of the two
managed properties which declined due to an increase in repair and maintenance
expenses at the two managed properties.
Painting service revenue and painting service revenue - affiliates
increased $342,600 or 71.7% for the six-month period and reflects the increase
in revenue generated from suite painting and major renovation projects when
compared with the six-months ended June 30, 1995. The increase in painting
service revenue and painting service revenue - affiliates was partially offset
by an increase in painting service expenses as discussed elsewhere herein.
Other income for the six-months ended June 30, 1996 decreased $203,700
or 32.2% when compared with the six-months ended June 30, 1995. The decrease
is due primarily to a decrease in supervisory management fees received from
one of the managed properties.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased $4,328,000 or
33.0% for the six-months ended June 30, 1996. Operating and maintenance expenses
at the Acquired Properties increased $3,612,300 for the six-month period due
primarily to the operating and maintenance expenses incurred at the four
properties acquired during 1996 and the recognition of a full six-month period's
operating expenses at the 15 properties acquired during 1995. Property operating
and maintenance expenses at the Core Portfolio Properties increased $715,700
when compared with the six-months ended June 30, 1995 primarily due to
increases in real estate taxes, personnel and advertising expenses. Total
expenditures for building renovations and suite and common area refurbishment
in the Core Portfolio Properties, including suite painting, averaged $195 per
suite for the six-months ended June 30, 1996 as compared to $221 per suite for
the six-months ended June 30, 1995.
Other expenses:
Depreciation and amortization increased $1,577,500 or 27.4% for the
six-months ended June 30, 1996 as compared to the six-months ended June 30,
1995 primarily due to the increased depreciation and amortization expense
recognized on the Acquired Properties of $1,763,300.
Painting service expenses increased $287,600 or 64.7% for the six-month
period. These increases were primarily the result of additional payroll related
expenses attributable to an increase in the sales activity of the painting
company.
General and administrative expenses for the six-months ended June 30,
1996 increased $312,100 or 12.2% when compared with the six-months ended June
30, 1995. This increase is primarily attributable
Page 14
<PAGE> 15
to payroll and related expenses.
Interest expense increased $2,255,100 or 42.1% for the six-month period
primarily due to the interest incurred with respect to the additional borrowings
that were used for the acquisition of properties.
Equity in net income (loss) of the joint ventures:
The following table presents the historical statements of operations of
the Company's beneficial interest in the operations of the joint ventures for
the three- and six-months ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
For the three-months ended For the six-months ended
June 30, June 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
-------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Beneficial interests in
joint venture operations
Rental revenue $ 1,662,691 $ 1,645,686 $ 3,305,295 $ 3,271,562
Cost of operations 937,266 980,008 2,020,310 1,974,470
-------------- -------------- --------------- -------------
725,425 665,678 1,284,985 1,297,092
Interest income 5,537 5,482 9,230 12,140
Interest expense (446,612) (450,922) (894,373) (902,873)
Depreciation (120,476) (120,079) (240,936) (239,979)
Amortization (13,236) (12,408) (25,772) (24,815)
-------------- -------------- --------------- -------------
Net income $ 150,638 $ 87,751 $ 133,134 $ 141,565
============== ============== =============== =============
</TABLE>
Net income applicable to common shares:
Net income applicable to common shares is reduced by dividends on the
Perpetual Preferred Shares of $1,371,000 and $2,742,000 for the three and
six-month periods ended June 30, 1996, respectively.
OUTLOOK
The following two paragraphs contain forward-looking statements and are
subject to certain risks, trends and uncertainties that could cause actual
results to vary from those projected. Readers are cautioned not to place undue
reliance on forward-looking statements, which are based only on current
judgments and current knowledge. These forward-looking statements are intended
to be covered by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that the Company's
forward-looking statements involve risks and uncertainty, including without
limitation risks of a lessening of demand for the apartments owned by the
Company, changes in government regulations affecting the Government Assisted
Properties and expenditures that cannot be anticipated such as utility rate and
usage increases, unanticipated repairs, additional staffing, insurance
increases and real estate tax valuation reassessments.
Approximately 59% of the Company's multifamily properties are located
in the greater Cleveland/Akron, Ohio area which is the fourteenth largest
consumer market in the United States containing over four million people
within a fifty mile radius of Akron. In Central Ohio, Columbus is the only
city in the northeast quadrant of the country that has experienced continuous
population growth since 1970, according to Census Bureau data. Columbus, Ohio
was selected by the E & Y Kenneth Leventhal Real Estate Group as one of the 12
best investment markets in the country because of its well-diversified economic
base, strong rental growth and lower vacancy rates. The Company's Michigan
portfolio is located in eight separate markets having a combined projected
population growth of approximately 4.2%, or 153,000 people with a projected
8.5% increase in job growth or an additional 17,000 jobs.
With an average economic occupancy over 96%, a turnover rate of 43.5%
and strong market fundamentals, it would appear that opportunities exist for
continued rental growth at the Company's market-rate properties. The Company
expects that building and grounds repair and maintenance
Page 15
<PAGE> 16
expenditures for the Core Portfolio properties will increase slightly when
compared to the prior year as the Company continues to maintain its properties
to maximize their earnings potential. Real estate tax increases should begin to
decline as the effect of the reassessed values diminishes over time. Utility
expenditures will vary over prior periods as the effect of weather related usage
variances is factored into the level of utility expense.
INFLATION
Substantially all of the residential leases at the properties allow, at
the time of renewal, for adjustments in the rent payable thereunder, and thus
may enable the Company to seek increases in rents. The substantial majority of
these leases are for one year or less and the remaining leases are for up to two
years. The short-term nature of these leases generally serves to reduce the risk
to the Company of the adverse effect of inflation.
CONTINGENCIES
There are no recorded amounts resulting from environmental liabilities
as there are no known contingencies with respect thereto. Future claims for
environmental liabilities are not measurable given the uncertainties surrounding
whether there exists a basis for any such claims to be asserted and, if so,
whether any claims will, in fact, be asserted. Furthermore, no condition is
known to exist that would give rise to a liability for site restoration, post
closure and monitoring commitments, or other costs that may be incurred with
respect to the sale or disposal of a property. Phase I environmental audits have
been completed on all of the Company's wholly owned and joint venture
properties. The Company has obtained environmental insurance covering (i)
pre-existing contamination, (ii) on-going third party contamination, (iii) third
party bodily injury and (iv) remediation. The policy is for a five year term and
carries a limit of liability of $2 million per environmental contamination
discovery (with a $50,000 deductible) and has a $10 million policy term
aggregate. Management has no plans to abandon any of the properties and is
unaware of any other material loss contingencies.
Page 16
<PAGE> 17
The following tables present information concerning the Multifamily
Properties owned by Associated Estates Realty Corporation.
<TABLE>
<CAPTION>
For the three months ending
------------------------------------
June 30, 1996
------------------------------------
Year Average Average Average Rent
Type of Total Built or Unit Size Economic Physical Per
The Multifamily Properties Location Construction Suites Rehab. Sq. Ft. Occupancy Occupancy Suite Sq. Ft.
- ------------------------------- --------------- ------------------ ------ -------- --------- ---------- --------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MARKET RATE
ACQUIRED PROPERTIES
MARKET RATE
CENTRAL OHIO PROPERTIES
Kensington Grove Westerville Garden/Townhm/Ranch 76 1995 1,109 95.4 98.7 751 0.68
The Residence at Washington Wash. Ct. House Ranch 72 1995 862 99.9 95.8 846 0.98
----- ----- ----- ------ ----- ------
148 989 97.7% 97.3% $ 797 $ 0.81
WESTERN PENNSYLVANIA
Chestnut Ridge Pittsburgh Garden 468 1986 769 86.2% 91.0 $ 676 $ 0.88
MICHIGAN PROPERTIES
Country Place Apartments Mt. Pleasant Garden 144 1987 859 100.0% 99.3 494 0.58
Summer Ridge Apartments Kalamazoo Garden 248 1989-91 960 95.5 92.7 664 0.69
Spring Brook Apartments Holland Garden/Townhomes 168 1986 818 N/A N/A N/A N/A
The Oaks and Woods at Hampton Rochester Hills Garden/Townhomes 544 1986-88 1,050 100.0 98.0 758 0.72
The Landings at the Preserve Battle Creek Garden 190 1990-91 952 95.7 95.8 648 0.68
----- ----- ----- ------ ----- ------
1,294 966 98.6% 96.6% $ 685 $ 0.69
NORTHERN OHIO PROPERTIES
Cloisters Toledo Townhomes 188 1990 1,037 90.8% 95.2% $ 504 $ 0.49
Kensington Village Toledo Garden/Townhomes 190 1985-90 920 93.2 95.8 434 0.47
Treetops Toledo Townhomes 128 1988-89 1,350 96.5 95.3 716 0.53
Vantage Villa Toledo Garden 150 1974 935 92.8 94.0 573 0.61
----- ----- ----- ------ ----- ------
656 1,041 93.3 95.1 541 0.52
----- ----- ----- ------ ----- ------
Acquired Property Subtotal 2,566 960 95.0% 94.6% $ 689 $ 0.72
CORE PORTFOLIO PROPERTIES
MICHIGAN PROPERTIES
Arbor Landings Apartments Ann Arbor Garden 168 1990 1,116 98.1% 97.6% $ 816 $ 0.73
Central Park Place Grand Rapids Garden 216 1988 850 95.9% 89.8% 610 0.72
Georgetown Park Apartments Fenton Garden 312 1987-95 1,005 95.2 96.8 660 0.66
----- ----- ----- ------ ----- ------
696 984 96.2% 94.8% $ 682 $ 0.69
CENTRAL OHIO PROPERTIES
Arrowhead Station Columbus Townhomes 102 1987 1,344 100.0% 97.1% $ 654 $ 0.49
Bedford Commons Columbus Townhomes 112 1987 1,157 99.9 99.1 713 0.62
Bentley Station Columbus Garden 96 1993 891 96.7 99.0 506 0.57
Bolton Estates Columbus Garden 196 1992 687 94.3 96.4 456 0.66
Colony Bay East Columbus Garden 156 1994 903 96.9 100.0 485 0.54
Heathermoor Worthington Garden/Townhomes 280 1989 829 99.1 98.6 526 0.63
Lake Forest Columbus Garden 192 1994 788 94.3 96.4 532 0.68
Muirwood Village at Bennell Columbus Ranch 140 1988 807 98.0 97.9 478 0.59
Muirwood Village at Gemstar Columbus Ranch 24 1988 769 98.3 91.7 468 0.61
Muirwood Village at London London Ranch 112 1989 769 99.2 93.8 490 0.64
Muirwood Village at Mt. Sterling Mt. Sterling Ranch 48 1990 769 95.4 91.7 483 0.63
Muirwood Village at Zanesville Zanesville Ranch 196 1991 769 100.0 98.0 507 0.66
Pendleton Lakes Columbus Garden 160 1990 903 99.0 100.0 495 0.55
Residence at Christopher Wren Gahanna Garden/Townhomes 264 1993 1,062 96.5 97.7 704 0.66
Residence at Turnberry Pickerington Garden/Townhomes 216 1991 1,182 93.1 92.1 719 0.61
Sheffield at Sylvan Circleville Ranch 136 1989 791 96.7 96.3 499 0.63
Sterling Park Grove City Garden 128 1994 763 96.9 95.3 528 0.69
The Residence at Newark Newark Ranch 112 1993 868 99.7 95.5 534 0.62
Wyndemere Franklin Ranch 128 1991 768 99.8 97.7 520 0.68
----- ----- ----- ------ ----- ------
2,798 892 97.4% 97.0% $ 553 $ 0.62
NORTHERN OHIO PROPERTIES
Bay Club Willowick Garden 96 1990 925 98.8% 97.9% $ 612 $ 0.66
Colonade Elyria Elyria Garden 72 1964 512 96.1 93.1 362 0.71
Colonade West Cleveland Garden 216 1964 502 96.7 95.8 392 0.78
Cultural Gardens Euclid Mid Rise 186 1966 688 96.0 96.2 487 0.71
Edgewater Landing Cleveland High Rise 241 1988 r 585 98.2 97.5 409 0.70
Gates Mills III Mayfield Hts. High Rise 320 1978 874 96.8 96.9 653 0.75
Holly Park Kent Garden 192 1990 875 94.6 97.4 695 0.79
Huntington Hills Stow Townhomes 85 1982 976 95.3 94.1 637 0.65
Mallard's Crossing Medina Garden 192 1990 998 99.8 95.8 664 0.67
Memphis Manor Cleveland Garden 120 1966 554 97.8 96.7 435 0.79
Park Place Parma Hts. Mid Rise 164 1966 760 96.7 98.2 520 0.68
<CAPTION>
For the three months ending
---------------------------------------
June 30, 1995
---------------------------------------
Average Average Rent
Economic Physical Per
The Multifamily Properties Occupancy Occupancy Suite Sq. Ft.
- ------------------------------- --------- --------- ----- -------
<S> <C> <C> <C> <C>
MARKET RATE
ACQUIRED PROPERTIES
MARKET RATE
CENTRAL OHIO PROPERTIES
Kensington Grove N/A N/A N/A N/A
The Residence at Washington N/A N/A N/A N/A
----- ----- ----- ----
N/A N/A N/A N/A
WESTERN PENNSYLVANIA
Chestnut Ridge N/A N/A N/A N/A
MICHIGAN PROPERTIES
Country Place Apartments N/A N/A N/A N/A
Summer Ridge Apartments N/A N/A N/A N/A
Spring Brook Apartments N/A N/A N/A N/A
The Oaks and Woods at Hampton N/A N/A N/A N/A
The Landings at the Preserve N/A N/A N/A N/A
----- ----- ----- ----
N/A N/A N/A N/A
NORTHERN OHIO PROPERTIES
Cloisters N/A N/A N/A N/A
Kensington Village N/A N/A N/A N/A
Treetops N/A N/A N/A N/A
Vantage Villa N/A N/A N/A N/A
----- ----- ----- ----
N/A N/A N/A N/A
----- ----- ----- ----
Acquired Property Subtotal N/A N/A N/A N/A
CORE PORTFOLIO PROPERTIES
MICHIGAN PROPERTIES
Arbor Landings Apartments 93.1% 94.0% $ 800 $ 0.72
Central Park Place 98.1 98.6% 578 0.68
Georgetown Park Apartments 98.0 96.9 621 0.62
----- ----- ----- ----
96.5% 96.7% $ 652 $ 0.66
CENTRAL OHIO PROPERTIES
Arrowhead Station 84.7% 87.3% $ 628 $ 0.47
Bedford Commons 95.9 96.4 697 0.60
Bentley Station 92.8 93.8 491 0.55
Bolton Estates 88.3 88.8 448 0.65
Colony Bay East 99.0 94.8 457 0.51
Heathermoor 89.9 91.1 513 0.62
Lake Forest 90.1 85.4 515 0.65
Muirwood Village at Bennell 95.7 97.1 470 0.58
Muirwood Village at Gemstar 92.1 95.8 461 0.60
Muirwood Village at London 98.9 96.4 474 0.62
Muirwood Village at Mt. Sterling 97.1 95.8 463 0.60
Muirwood Village at Zanesville 88.3 93.4 573 0.82
Pendleton Lakes 90.8 98.8 479 0.53
Residence at Christopher Wren 96.4 98.1 697 0.66
Residence at Turnberry 91.7 93.5 701 0.59
Sheffield at Sylvan 99.0 100.0 490 0.62
Sterling Park 87.0 95.3 520 0.68
The Residence at Newark 99.3 100.0 519 0.60
Wyndemere 99.7 96.6 502 0.65
----- ----- ----- ----
92.9% 94.1% $ 533 $ 0.59
NORTHERN OHIO PROPERTIES
Bay Club 97.8% 99.0% $ 585 $ 0.63
Colonade Elyria 98.7 98.6 346 0.68
Colonade West 98.7 97.2 370 0.74
Cultural Gardens 96.0 97.8 474 0.69
Edgewater Landing 96.3 95.0 404 0.69
Gates Mills III 91.5 96.3 643 0.74
Holly Park 90.3 89.1 712 0.81
Huntington Hills 97.3 98.8 614 0.63
Mallard's Crossing 94.6 94.3 626 0.63
Memphis Manor 98.5 100.0 412 0.74
Park Place 98.1 95.1 497 0.65
</TABLE>
Page 17
<PAGE> 18
<TABLE>
<CAPTION>
For the three months ending
--------------------------------------
June 30, 1996
--------------------------------------
Year Average Average Average Rent
Type of Total Built or Unit Size Economic Physical Per
The Multifamily Properties Location Construction Suites Rehab. Sq. Ft. Occupancy Occupancy Suite Sq. Ft.
- --------------------------------- ---------------- ----------------- ------- -------- --------- --------- --------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pinecrest Broadview Hts. Garden 96 1987 r 598 95.8 94.8 452 0.76
Portage Towers Cuyahoga Falls High Rise 376 1973 869 96.5 92.6 549 0.63
Somerset West (a) North Royalton Garden/Townhomes 197 1982 1,038 92.1 94.4 685 0.66
Timbers I Broadview Hts. Garden 48 1987 920 98.6 95.8 646 0.70
Timbers II Broadview Hts. Garden 48 1989 940 90.8 93.8 696 0.74
The Triangle (b) Cleveland High Rise 273 1989 616 97.4 98.9 864 1.40
Villa Moderne North Olmsted Garden 135 1963 504 95.0 94.1 422 0.84
Washington Manor Elyria Garden 48 1963 584 99.3 95.8 383 0.66
West Park Plaza Cleveland Garden 118 1964 520 99.2 94.9 416 0.80
Westchester Townhouses Westlake Townhomes 136 1989 1,000 93.0 90.4 759 0.76
Westlake Townhomes Westlake Townhomes 7 1985 1,000 100.0 100.0 761 0.76
Williamsburg at Greenwood Village Sagamore Hills Townhomes 26 1990 938 97.2 95.8 795 0.85
Winchester Hills I (c) Willoughby Hills High Rise 362 1972 822 93.6 92.0 557 0.68
Winchester Hills II Willoughby Hills High Rise 362 1979 822 92.7 93.6 592 0.72
------ ----- ----- ----- ----- ------
4,350 782 95.9 95.2 589 0.75
------ ----- ----- ----- ----- ------
Core Market Rate Properties 7,844 839 96.4% 95.8% $ 584 $ 0.70
GOVERNMENT ASST.-ELDERLY
Ellet Development Akron High Rise 100 1978 589 100.0% 100.0% $ 585 $ .99
Hillwood I Akron High Rise 100 1976 570 100.0 100.0 596 1.05
Puritas Place (d) Cleveland High Rise 100 1981 518 99.9 97.0 782 1.51
Riverview Massillon High Rise 98 1979 553 100.0 100.0 591 1.07
State Road Apartments Cuyahoga Falls Garden 72 1977 r 750 100.0 100.0 599 0.80
Statesman II Shaker Heights Garden 47 1987 r 796 100.0 100.0 650 0.82
Sutliff Apartments II Cuyahoga Falls High Rise 185 1979 577 100.0 100.0 586 1.02
Tallmadge Acres Tallmadge Mid Rise 125 1981 641 100.0 100.0 658 1.03
Twinsburg Apartments Twinsburg Garden 100 1979 554 100.0 100.0 606 1.09
Village Towers Jackson Twp. High Rise 100 1979 557 99.5 100.0 579 1.04
West High Apartments Akron Mid Rise 68 1981 r 702 100.0 100.0 786 1.12
------ ----- ----- ----- ----- ------
1,095 602 100.0% 99.7% $ 631 $ 1.05
GOVERNMENT ASST.-FAMILY
Jennings Commons Cleveland Garden 50 1981 823 100.0% 100.0% $ 674 $ 0.82
Rainbow Terrace Cleveland Garden 484 1982 r 768 98.4 97.3 708 0.92
Shaker Park Gardens II Warrensville Garden 151 1964 753 99.8 98.7 531 0.71
------ ----- ----- ----- ----- ------
685 769 98.8 97.8 667 0.87
Core Portfolio ------ ----- ----- ----- ----- ------
Government Asst. Propeties 1,780 666 99.6% 99.0% $ 645 $ 0.97
CONGREGATE CARE
Gates Mills Club Mayfield Heights High Rise 120 1980 721 96.3% 97.$% 758 $ 1.05
The Oaks Westlake Garden 50 1985 672 96.5 90.0 956 1.42
------ ----- ----- ----- ----- ------
170 707 96.3 95.3 817 1.16
------ ----- ----- ----- ----- ------
9,794 806 97.1 % 96.4% $ 599 $ 0.74
JOINT VENTURE PROPERTIES
NORTHEAST OHIO
MARKET RATE
Americana Euclid High Rise 738 1968 803 89.6% 89.8% $ 485 $ 0.60
College Towers Kent Mid Rise 380 1969 662 91.9 91.3 404 0.61
Euclid House Euclid Mid Rise 126 1969 654 94.5 96.0 431 0.66
Gates Mills Towers Mayfield Hts. High Rise 760 1969 856 96.8 98.2 654 0.76
Highland House Painesville Garden 36 1964 539 98.6 94.4 392 0.73
Watergate Euclid High Rise 949 1971 831 91.0 92.2 531 0.64
------ ----- ----- ----- ----- ------
2,989 789 92.8% 93.2% $ 521 $ 0.66
GOVERNMENT ASST.-FAMILY
Lakeshore Village Cleveland Garden 108 1982 786 99.4% 98.1% $ 669 $ 0.85
------ ----- ----- ----- ----- ------
3,097 789 93.2 93.4 528 0.67
------ ----- ----- ----- ----- ------
15,457 763 96.7% 95.7% $ 592 $ 0.80
====== ===== ===== ===== ===== ======
<CAPTION>
For the three months ending
------------------------------------
June 30, 1995
------------------------------------
Average Average Rent
Economic Physical Per
The Multifamily Properties Occupancy Occupancy Suite Sq. Ft.
- ------------------------------- --------- --------- ------- -------
<S> <C> <C> <C> <C>
Pinecrest 96.1 93.8 433 0.72
Portage Towers 98.4 98.4 529 0.61
Somerset West (a) 97.2 94.9 671 0.65
Timbers I 98.8 97.9 630 0.68
Timbers II 97.3 100.0 687 0.73
The Triangle (b) 94.5 95.2 833 1.35
Villa Moderne 97.9 97.8 406 0.81
Washington Manor 99.2 93.8 366 0.63
West Park Plaza 95.7 98.3 398 0.77
Westchester Townhouses 95.8 96.3 717 0.72
Westlake Townhomes 97.6 100.0 729 0.73
Williamsburg at Greenwood Village 98.4 98.1 767 0.82
Winchester Hills I (c) 94.3 95.0 543 0.66
Winchester Hills II 93.9 95.9 570 0.69
----- ----- ----- ------
95.7 96.2 570 0.73
----- ----- ----- ------
Core Market Rate Properties 94.8% 95.5% $ 564 $ 0.67
GOVERNMENT ASST.-ELDERLY
Ellet Development 99.9% 100.0% $ 589 $1.00
Hillwood I 100.0 100.0 596 1.05
Puritas Place (d) 100.0 100.0 782 1.51
Riverview 100.0 100.0 590 1.07
State Road Apartments 100.0 100.0 596 0.79
Statesman II 100.0 100.0 650 0.82
Sutliff Apartments II 100.0 100.0 586 1.02
Tallmadge Acres 99.7 100.0 659 1.03
Twinsburg Apartments 99.9 100.0 602 1.09
Village Towers 100.0 100.0 579 1.04
West High Apartments 100.0 100.0 788 1.12
----- ----- ----- ------
100.0% 100.0% $ 631 $ 1.05
GOVERNMENT ASST.-FAMILY
Jennings Commons 100.0% 100.0% $ 674 $ 0.82
Rainbow Terrace 98.7 97.9 619 0.81
Shaker Park Gardens II 100.0 100.0 530 0.70
----- ----- ----- ------
99.4 98.5 603 0.78
Core Portfolio ----- ----- ----- ------
Government Asst. Properties 99.8% 99.4% $ 620 $ 0.93
CONGREGATE CARE
Gates Mills Club 97.6% 100.0% $ 691 $ 0.96
The Oaks 96.2 94.0 920 1.37
----- ----- ----- ------
97.1 98.2 758 1.07
----- ----- ----- ------
95.9% 96.3% $ 582 $ 0.72
JOINT VENTURE PROPERTIES
NORTHEAST OHIO
MARKET RATE
Americana 93.0% 95.9% $ 475 $ 0.59
College Towers 89.3 82.6 385 0.58
Euclid House 95.4 96.8 424 0.65
Gates Mills Towers 94.9 95.7 647 0.76
Highland House 96.9 100.0 375 0.70
Watergate 92.1 93.4 535 0.64
----- ----- ----- ------
92.9% 93.4% $ 514 $ 0.65
GOVERNMENT ASST.-FAMILY
Lakeshore Village 98.8% 100.0% $ 671 $ 0.85
----- ----- ----- ------
93.3 93.7 522 0.66
----- ----- ----- ------
95.6% 95.7% $ 572 $ 0.71
===== ===== ===== ======
<FN>
(a) Somerset West has 77 Contract Suites and 120 Conventional Property suites.
(b) The Triangle also contains 63,321 square feet of office/retail space.
(c) The Company acquired a noteholder interest entitling the Company to
substantially all cash flows from operations. The Company has certain
rights under a security agreement to foreclose on the property to the
extent that the unpaid principal and interest on the underlying notes
exceed seven years equivalent principal and interest payments. Unpaid
principal and interest is expected to exceed seven years of equivalent
principal and interest payments in 1995.
(d) The property was developed by AEG in 1981 subject to a warranty deed
reversion provision. This provision states that the assignment of fee
simple title of the property to AEG (transferred to the Company) shall
expire in 2037.
r = Rehabilitated
</TABLE>
Page 18
<PAGE> 19
HISTORICAL FUNDS FROM OPERATIONS AND DISTRIBUTABLE CASH FLOW
Industry analysts generally consider Funds From Operations to be an
appropriate measure of the performance of an equity REIT. Funds From Operations
is defined as net income (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from sales of property,
non-recurring and extraordinary items, plus depreciation on real estate assets
and after adjustments for unconsolidated joint ventures. Adjustments for joint
ventures are calculated to reflect Funds From Operations on the same basis.
Funds From Operations does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and is
not necessarily indicative of cash available to fund cash needs and should not
be considered an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flow as a measure of
liquidity. Distributable Cash Flow is defined as Funds From Operations less
capital expenditures funded by operations and loan amortization payments. The
Company believes that in order to facilitate a clear understanding of the
consolidated historical operating results of the Company, Funds From Operations
and Distributable Cash Flow should be presented in conjunction with net income
(loss) as presented in the consolidated financial statements and data included
elsewhere in this report.
Funds From Operations and Funds Available for Distribution
("Distributable Cash Flow") for the six month period ended June 30, 1996 and
1995 are summarized in the following table:
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
(IN THOUSANDS) 1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME APPLICABLE TO COMMON SHARES $ 3,553 $ 4,092 $ 6,973 $ 8,223
Depreciation on real estate assets
Wholly owned properties 3,556 2,689 6,886 5,263
Joint venture properties 120 120 241 240
-------- -------- -------- --------
FUNDS FROM OPERATIONS 7,229 6,901 14,100 13,726
Depreciation - other assets 77 60 146 121
Amortization of deferred financing fees 164 256 302 396
Scheduled mortgage principal amortization (222) (181) (439) (321)
Scheduled mortgage principal amortization-
joint venture properties (48) (44) (95) (87)
Fixed asset additions (64) (206) (179) (392)
Fixed asset additions - joint venture properties -- (6) -- (20)
-------- -------- -------- --------
DISTRIBUTABLE CASH FLOW $ 7,136 $ 6,780 $ 13,835 $ 13,423
======== ======== ======== ========
Weighted average shares outstanding 13,872 13,869 13,872 13,869
</TABLE>
Page 19
<PAGE> 20
PART II
OTHER INFORMATION
Except to the extent noted below, the items required in Part II are
inapplicable or, disapplicable, would be answered in the negative and have been
omitted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On May 8, 1996, the Company held its Annual Meeting of Shareholders.
The only matter presented to the shareholders for a vote was the election of
directors, each to serve a term of one year. The following sets forth the
nominees for director and the results of voting:
<TABLE>
<CAPTION>
Votes "For" Votes "Abstained"
----------- -----------------
<S> <C> <C>
Jeffery I. Friedman 11,802,031.108 22,299
Mark L. Milstein 11,801,831.108 22,499
Jerome Spevack 11,802,331.108 21,999
Albert T. Adams 11,781,431.108 42,899
Gerald C. McDonough 11,801,031.108 23,299
Frank E. Mosier 11,801,731.108 22,599
Richard T. Schwarz 11,802,331.108 21,999
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
FILED HEREWITH OR
INCORPORATED
HEREIN BY
Number TITLE REFERENCE
---------- ------------------------------------------------------------ ----------------------
<S> <C> <C>
27 Financial Data Schedule Exhibit 27 filed
herewith.
</TABLE>
(b) Reports on Form 8-K
None
Page 20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASSOCIATED ESTATES REALTY CORPORATION
August 13, 1996 /s/ Dennis W. Bikun
- --------------------------------- --------------------
(Date) Dennis W. Bikun, Chief Financial Officer
and Treasurer
Page 21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,595,895
<SECURITIES> 5,498,321
<RECEIVABLES> 1,809,150
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,903,366
<PP&E> 482,534,667
<DEPRECIATION> (104,334,304)
<TOTAL-ASSETS> 392,525,062
<CURRENT-LIABILITIES> 20,671,707
<BONDS> 0
<COMMON> 1,387,238
0
56,250,000
<OTHER-SE> 82,200,761
<TOTAL-LIABILITY-AND-EQUITY> 392,525,062
<SALES> 42,412,081
<TOTAL-REVENUES> 45,573,389
<CGS> 17,581,273
<TOTAL-COSTS> 10,944,445
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,615,422
<INCOME-PRETAX> 9,715,383
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,715,383
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,715,383
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
