<PAGE> 1
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 September 30, 1997
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
Associated Estates Realty Corporation
(Exact name of registrant as specified in its charter)
Ohio 34-1747603
(State or other jurisdiction of (I.R.S.
incorporation or organization) Employer
Identification
Number)
5025 Swetland Court, Richmond Hts., Ohio 44143-1467
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 261-5000
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 [ ]
Number of shares outstanding as of November 14, 1997:
17,072,456 shares
<PAGE> 2
ASSOCIATED ESTATES REALTY CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
<S> <C> <C>
ITEM 1 Financial Statements
Consolidated Balance Sheets as of September 30,
1997 and December 31, 1996 3
Consolidated Statements of Operations for the three
and nine month periods ended September 30, 1997
and 1996 4
Consolidated Statements of Cash Flows for the nine
month period ended September 30, 1997 and 1996 5
Notes to Financial Statements 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 23
SIGNATURES 24
</TABLE>
<PAGE> 3
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited)
ASSETS
<S> <C> <C>
Real estate assets:
Land $ 55,365,438 $ 44,241,900
Buildings and improvements 528,652,163 430,920,893
Furniture and fixtures 24,228,261 20,286,700
608,245,862 495,449,493
Less: accumulated depreciation (125,275,070) (112,102,829)
482,970,792 383,346,664
Construction in progress (including land) 18,213,568 18,516,982
Real estate, net 501,184,360 401,863,646
Cash and cash equivalents 1,852,454 1,286,959
Restricted cash and investments 4,912,194 5,625,003
Accounts and notes receivable:
Rents 2,332,780 1,569,907
Affiliates 11,867,260 1,784,297
Deferred charges and prepaid expenses 6,948,321 5,616,394
$529,097,369 $ 417,746,206
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured debt $ 58,056,197 $ 69,024,253
Unsecured debt 238,536,407 148,788,707
Total indebtedness 296,592,604 217,812,960
Accounts payable and accrued expenses 14,333,001 14,361,609
Dividends payable - 6,895,071
Resident security deposits 4,786,216 4,154,418
Funds held for non-owned properties 2,247,385 1,571,219
Accrued interest 3,758,064 2,521,644
Accumulated losses and distributions of equity
investees in excess of investment and advances 12,328,894 12,413,087
Total liabilities 334,046,164 259,730,008
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; 17,072,456 and
15,322,381 issued and outstanding at September 30,
1997 and December 31, 1996, respectively 1,707,246 1,532,238
Paid-in capital 171,727,738 133,073,035
Accumulated dividends in excess of net income (34,633,779) (32,839,075)
Total shareholders' equity 195,051,205 158,016,198
$529,097,369 $ 417,746,206
</TABLE>
The accompanying notes are an integral part
of these financial statements
<PAGE> 4
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues
Rental $26,154,443 $22,305,674 $74,258,037 $64,717,755
Property management fees 98,693 100,128 281,431 292,995
Property management fees-affiliates 831,431 835,728 2,562,918 2,554,799
Painting service 221,570 108,016 484,208 310,163
Painting service-affiliates 227,095 368,123 820,311 986,210
Other 522,339 367,083 1,270,704 573,447
28,055,571 24,084,752 79,677,609 69,435,369
Expenses
Property operating and maintenance 11,334,163 9,684,254 31,005,051 27,115,528
Depreciation and amortization 4,818,185 3,858,100 13,680,669 11,192,067
Painting services 401,097 404,694 1,154,075 1,136,784
General and administrative 1,325,814 1,153,929 4,402,314 4,032,316
Interest expense 4,672,392 4,076,426 13,569,593 11,469,077
Total expenses 22,551,651 19,177,403 63,811,702 54,945,772
Income before equity in net income of
joint ventures and extraordinary item 5,503,920 4,907,349 15,865,907 14,489,597
Equity in net income of joint ventures 272,104 76,894 492,586 210,029
Income before extraordinary item 5,776,024 4,984,243 16,358,493 14,699,626
Extraordinary items-loss or (gain)
on early extinguishment of debt 19,733 - (1,023,713) -
Net income $ 5,756,291 $ 4,984,243 $17,382,206 $14,699,626
Net income applicable to common shares $ 4,385,186 $ 3,613,138 $13,268,891 $10,586,311
Per common share:
Net income before extraordinary item $ .26 $ .26 $ .77 $ .76
Net income $ .26 $ .26 $ .83 $ .76
Dividends paid $ .465 $ .45 $ 1.395 $ 1.35
Weighted average number of common
shares outstanding 17,053,427 13,872,381 15,905,750 13,872,381
</TABLE>
The accompanying notes are an integral part
of these financial statements
<PAGE> 5
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flow from operating activities:
Net income $ 17,382,206 $ 14,699,626
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,680,669 11,192,067
Gain on extinguishment of debt (1,023,713) -
Equity in net income of joint ventures (492,588) (210,030)
Earnings distributed from joint ventures 509,228 539,519
Net change in - Accounts and notes receivable (762,873) 212,858
- Accounts and notes receivable-affiliates (6,740,963) 370,215
- Accounts payable and accrued expenses (1,916,246) (1,902,686)
- Other operating assets and liabilities 1,382,030 1,113,205
- Restricted cash 712,809 (250,762)
- Funds held for non-owned properties 676,166 (3,291,052)
Total adjustments 6,024,519 7,773,334
Net cash flow provided by operating activities 23,406,725 22,472,960
Cash flow from investing activities:
Loans receivable - affiliate (3,342,000) -
Real estate acquired or developed (net of liabilities assumed) (108,585,330) (67,029,289)
Fixed asset additions (1,706,381) (487,142)
Contributions to joint ventures (100,833) (164,378)
Net cash flow used for investing activities (113,734,544) (67,680,809)
Cash flow from financing activities:
Principal payments on mortgage notes (19,068,056) (2,596,657)
Proceeds from mortgage notes 8,100,000 -
Proceeds from senior and medium-term notes 50,000,000 27,500,000
Proceeds from the issuance of common shares, net of
$2,187,500 of underwriting commissions and $150,306
of offering expenses 38,838,432 -
Line of Credit borrowings 305,600,000 147,450,000
Line of Credit repayments (265,900,000) (106,550,000)
Deferred financing and offering costs (606,798) (762,488)
Common share dividends paid (21,958,666) (18,450,267)
Preferred share dividends paid (4,113,315) (4,113,315)
Exercise of stock options 1,717 -
Net cash flow provided by financing activities 90,893,314 42,477,273
Increase (decrease) in cash and cash equivalents 565,495 (2,730,576)
Cash and cash equivalents, beginning of period 1,286,959 2,848,285
Cash and cash equivalents, end of period $ 1,852,454 $ 117,709
</TABLE>
The accompanying notes are an integral part
of these financial statements
<PAGE> 6
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business
Associated Estates Realty Corporation (the "Company") is a
self-administered and self-managed real estate investment trust
("REIT") which specializes in the acquisition, development,
ownership and management of multifamily properties in the Great
Lakes Region. At September 30, 1997, the Company owned or was a
joint venture partner in 87 multifamily properties containing
17,370 suites. Additionally, the Company managed 40 non-owned
properties, 32 of which were multifamily properties containing
7,052 suites and eight of which were commercial properties
containing an aggregate of approximately 825,000 square feet of
gross leasable area. Through special purpose entities,
collectively referred to as the "Service Companies", the Company
provides to both owned and non-owned properties, management,
painting and computer services as well as mortgage origination
and servicing.
Principles of Consolidation
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. The Company holds a preferred share interest in the
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.
One property included in the consolidated 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 interest 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.
All significant intercompany balances and transactions have
been eliminated in consolidation.
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.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130 - Reporting
Comprehensive Income. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components
in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a
business during a period and other events and circumstances from
nonowner sources. The Company does not expect this pronouncement
<PAGE> 7
to materially impact the presentation or form of the Company's
financial statements.
In June 1997, the FASB issued SFAS No. 131 - Disclosure about
Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for disclosure about operating segments in
annual financial statements and selected information in interim
financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and
major customers. The statement supersedes SFAS No. 14 - Financial
Reporting for Segments of a Business Enterprise. The new standard
becomes effective for the Company for the year ending December 31,
1998, and requires that comparative information from earlier years
be restated to conform to the requirements of this standard. The
Company does not expect this pronouncement to materially change
the Company's current reporting and disclosure.
Reclassifications
Certain reclassifications have been made to the 1996
financial statements to conform to the 1997 presentation.
2. DEVELOPMENT AND ACQUISITION OF MULTIFAMILY PROPERTIES
Construction in progress, including the cost of land, for
the development of multifamily properties was $18,213,568 and
$18,516,982 at September 30, 1997 and December 31, 1996,
respectively. The Company capitalizes interest costs on funds
used in construction, real estate taxes and insurance from the
commencement of development activity through the time the
property is ready for leasing. Interest, real estate taxes and
insurance aggregating approximately $1,474,000 and $1,394,800
were capitalized during the nine month period ended September
30, 1997 and the year ended December 31, 1996, respectively.
The following schedule details construction in progress at
September 30, 1997:
<TABLE>
<CAPTION>
Construction in Placed in Construction
(dollars in thousands) Number Progress Service Costs Estimated
of Land Building through Incurred Scheduled
Property Suites Cost Cost 9/30/97 to Date Completion
<S> <C> <C> <C> <C> <C> <C>
AURORA, OHIO
The Residence at Barrington-Phase I 168 $ 704 $ 6,885 $7,116 $ 14,705 1997
The Residence at Barrington-Phase II 120 982 - - 982 1998
288 1,686 6,885 7,116 15,687
ANN ARBOR, MICHIGAN
Arbor Landings Apartments II 160* 650 298 - 948 1998
COLUMBUS, OHIO
Bradford at Easton 324 276 1,700 15,990 17,966 1997
FENTON, MICHIGAN
Georgetown Park Apartments III 120* 350 954 - 1,304 1998*
GRAND RAPIDS, MICHIGAN
Aspen Lakes II 114* 402 55 - 457 1998*
STREETSBORO, OHIO
The Village of Western Reserve 108 605 2,195 902 3,702 1998
WESTLAKE, OHIO
Westlake 300* 523 85 - 608 1999*
Other 361 674 875 - 1,549 Various
1,775 $5,166 $ 13,047 $24,008 (1) $ 42,221
<PAGE> 8
<FN>
*Estimated
(1) Including land of $2,514
</FN>
</TABLE>
During the period January 1, 1997 through September 30,
1997, the Company acquired, in separate purchase transactions,
seven multifamily properties containing an aggregate of 1,532
suites and two parcels of land consisting of 14.5 acres (together
the "Acquired Properties") for an aggregate purchase price of
$89.7 million, of which $3.7 million represented liabilities
assumed. The Acquired Properties are located in Clinton,
Michigan; Indianapolis, Indiana; and Cincinnati, Columbus and
Toledo, Ohio. The purchase price of the Acquired Properties has
been financed primarily with cash on hand made available through
the Line of Credit (as defined herein).
3. SHAREHOLDERS' EQUITY
The following table summarizes the changes in shareholders'
equity since December 31, 1996:
<TABLE>
<CAPTION>
Common
Class A Shares Accumulated
Cumulative (at $.10 Dividends
Preferred stated Paid-In In Excess Of
Shares value Capital Net Income Total
<S> <C> <C> <C> <C> <C>
Balance, Dec. 31, 1996 $ 56,250,000 $ 1,532,238 $ 133,073,035 $(32,839,075) $ 158,016,198
Net income - - - 17,382,206 17,382,206
Exercise of stock
options - 8 1,709 - 1,717
Issuance of 1,750,000
common shares, net of
underwriters' discounts
and offering expenses
of $2,337,806 - 175,000 38,652,994 - 38,827,994
Common share
dividends declared - - - (15,063,595) (15,063,595)
Preferred share
dividends declared - - - (4,113,315) (4,113,315)
Balance, September 30,1997 $ 56,250,000 $ 1,707,246 $ 171,727,738 $(34,633,779) $ 195,051,205
</TABLE>
4. SECURED DEBT
Conventional Mortgage Debt
Conventional mortgages payable include nonrecourse, fixed
and variable rate, 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. The balance of the conventional
mortgages was $29.5 million and $37.7 million at September 30,
1997 and December 31, 1996, respectively. Three of the four
conventional mortgages have a fixed rate and the remaining
mortgage has a variable rate.
Federally Insured Mortgage Debt
Federally insured mortgage debt is insured by HUD pursuant
to one of the mortgage insurance programs administered under the
National Housing Act of 1934 (one property is funded through
Industrial Development Bonds). 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.
The balance of the federally insured mortgages was $28.6 million
and $31.3 million at September 30, 1997 and December 31, 1996,
respectively. Six of the seven federally insured mortgages have
a fixed rate and the remaining mortgage has a variable rate.
<PAGE> 9
Under certain of the mortgage agreements, the Company is
required to make escrow deposits for taxes, insurance and
replacement of project assets.
5. UNSECURED DEBT
Senior Notes
Senior Notes with a principal balance of $75 million accrue
interest at 8.38% and mature in 2000. Issued at an effective
interest rate of 8.48%, the balance of the $75 million senior
notes, net of unamortized discounts, was $74.8 million at
September 30, 1997 and December 31, 1996. Senior Notes with a
principal balance of $10 million accrue interest at 7.10% and
mature in 2002.
Medium-Term Notes Program
The Company has issued ten Medium-Term Notes (the "MTN's")
in the aggregate amount of $92.5 million and $42.5 million at
September 30, 1997 and December 31, 1996, respectively. The
principal amounts of these MTN's range from $2.5 million to $20
million and bear interest ranging from 6.18% to 7.82% over terms
ranging from two to 30 years. The holders of two MTN's with
stated terms of 30 years each may request repayment five and
seven years from the issue date of the respective MTN. The
weighted average interest rate of the ten MTN's is 6.97%. Six of
the MTN's in the aggregate amount of $42.5 million were issued in
1996. Four MTN's in the aggregate amount of $50 million were
issued in 1997.
The Company's current MTN Program provides for the issuance
from time to time of up to $102.5 million of MTN's due nine
months or more from the date of issue. These MTN's may be
subject to redemption at the option of the Company or repayment
at the option of the holder prior to the stated maturity date of
the MTN. These MTN's can bear interest at fixed rates or at
floating rates and can be issued in minimum denominations of
$1,000. At September 30, 1997, $82.5 million of additional MTN
borrowings were available under the current program.
Line of Credit
During the quarter ending September 30, 1997, the Company
reached an agreement with its agent bank to increase its $75
million unsecured credit facility (the "Line of Credit") to $100
million. The Company also negotiated a competitive bid option
which could further reduce the pricing on its Line of Credit.
The revisions are subject to the entire bank group's approval.
The Line of Credit includes certain restrictive covenants which,
among others, requires the Company to (i) maintain a minimum
level of net worth, (ii) limit dividends to 90% of Distributable
Cash Flow, as defined in the agreement, (iii) restrict the use of
its borrowings, and (iv) 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. For the nine months ended September 30, 1997,
based on the Company's present credit ratings, the LIBOR margin
was 125 basis points, fixed in increments of 30, 60, 90, 120 or
180 days or, alternatively, borrowings are at prime rate. An
annual commitment fee of 15 to 25 basis points on the average
daily unused amount of the facility was paid quarterly in
arrears. The Company also exercised its option to extend the
line for one additional year through September 1998. At
September 30, 1997, $61.2 million was drawn on the Line of
Credit.
6. RELATED PARTY TRANSACTIONS
At September 30, 1997, the Company had two notes receivable
of equal amounts from the Chairman, President and Chief Executive
Officer aggregating $3,342,000 included in accounts and notes
receivables - affiliates. The notes were entered into on May 23,
1997 and bear interest, payable quarterly, at the LIBOR rate for
a one month interest period with principal due May 1, 2002. One
of the notes is collateralized by 150,000 of the Company's common
shares.
<PAGE> 10
7. PREFERRED AND COMMON SHARES
On July 2, 1997, the Company completed an offering of
1,750,000 common shares at $23.50 per share. The net proceeds of
approximately $38.8 million were applied to reduce debt.
8. 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 Company is required to adopt Statement of Financial
Accounting Standard ("SFAS") No. 128 - Earnings Per Share
as of December 15, 1997; earlier application is not permitted.
SFAS specifies computation, presentation, and disclosure
requirements for earnings per share. Assuming the application of
the standard to the three and nine month periods ended September
30, 1997 and 1996, earnings per share would not have differed
from that presented in the statement of operations.
9. PRO FORMA CONDENSED FINANCIAL INFORMATION (UNAUDITED)
The following unaudited supplemental pro forma operating
data for 1997 is presented to reflect, as of January 1, 1997, (i)
the effects of five property acquisitions completed in 1997 and
(ii) the offering of 1,750,000 common shares. The following
unaudited supplemental pro forma operating data for 1996 is
presented to reflect, as of January 1, 1996, the effects
of: (i) the six property acquisitions completed in 1996, (ii)
the offering of 1,450,000 common shares, and (iii) the offering
of 1,750,000 common shares, and (iv) the five property
acquisitions completed in 1997.
<TABLE>
<CAPTION>
For the nine months
ended September 30,
(In thousands, except per share amounts) 1997 1996
<S> <C> <C>
Revenues $82,502 $78,822
*Net income 17,746 16,474
*Net income applicable to common shares 13,633 12,361
*Net income per common shares per share $ .80 $ .72
Weighted average common shares outstanding 17,072 17,072
*Before extraordinary item
</TABLE>
The 1997 and 1996 pro forma financial information does not
include the revenue and expenses for Oak Bend Apartments and
Waterstone Apartments, properties that were acquired in 1997, for
the period January 1, 1997 through the date the properties were
acquired by the Company or for the period January 1, 1996 through
September 30, 1996, respectively. The revenue and expenses of Oak
Bend Apartments and Waterstone Apartments were excluded
from the pro forma financial information for the periods
mentioned as the properties were under construction for
substantially all of the periods prior to their acquisition.
The unaudited pro forma condensed statement of operations is
not necessarily indicative of what the actual results of
operations of the Company would have been assuming the
transactions had been completed as set forth, nor does it purport
to represent the results of operations of future periods of the
Company.
10. SUBSEQUENT EVENTS
On October 31, 1997, the Company acquired one multifamily
property containing 224 suites in Farmington Hills, Michigan.
<PAGE> 11
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") which, at September 30,
1997 owned or was a joint venture partner in, 87 multifamily
properties containing 17,370 suites located in Ohio, Michigan,
Indiana and Western Pennsylvania (the "Great Lakes Region").
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
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.
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 in accordance with REIT requirements
in both the short and long term.
Financing:
The Company utilizes borrowing under a $100 million
unsecured revolving credit facility (the "Line of Credit") for
the acquisition and development of multifamily properties and
working capital purposes. The Company reached an agreement to
increase the total borrowing capacity under the Line of Credit
from $75 to $100 million in September 1997. The Company also
negotiated a competitive bid option which could further reduce
the pricing on its 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 borrowing 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,
the LIBOR margin is 125 basis points 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
15 basis points and 25 basis points on the average daily unused
amount of the facility is paid quarterly in arrears. The Line of
Credit expires in September 1998. At September 30, 1997, $61.2
million was drawn on the Line of Credit with a weighted average
interest rate of 6.98%.
Seventy of the Company's 80 wholly owned properties were
unencumbered at September 30, 1997 with annualized earnings
before interest, depreciation and amortization of over $50.8
million and a historical cost basis of over $491.7 million.
During the quarter ended September 30, 1997, the Company repaid
mortgage debt in the aggregate amount of $2.3 million, with a
stated weighted average interest rate of 8.5%, that was secured
by one of the Company's wholly owned properties. The Company
utilized borrowings under the Line of Credit to repay this
mortgage. Unsecured debt, which totaled $238.5 million at
September 30, 1997, consisted of $92.5 million in Medium-Term
Notes, Senior Notes of $84.8 million and amounts drawn on the
Line of Credit of $61.2 million.
The remaining ten of the Company's wholly owned properties,
having a historical cost basis of $90.6 million, were encumbered
by secured property specific debt of $58.0 million at September
30, 1997. The Company's proportionate share of the mortgage debt
relating to the seven joint venture properties was $17.8 million
at September 30, 1997. The weighted average interest rate on the
<PAGE> 12
secured, unsecured and the Company's proportionate share of the
joint venture debt was 7.55% at September 30, 1997.
During the quarter ending September 30, 1997, the Company
issued a $20 million Medium-Term Note (or "MTN") under its $102.5
million MTN Program. The MTN bears interest at 6.18% over a two-
year term. The net proceeds to the Company of $19.95 million
were used to repay indebtedness outstanding under the Line of
Credit. On July 2, 1997, the Company completed a public offering
of 1,750,000 common shares at a price of $23.50 per share (the
"Common Share Offering"). The net proceeds of this offering of
$38.8 million, after underwriting discounts and commissions and
other offering expenses, were used to repay indebtedness
outstanding under the Company's Line of Credit.
Registration statements filed in connection with financing:
The Company has filed a shelf registration statement with
the Securities and Exchange Commission relating to the proposed
offering of up to $368.8 million of debt securities, preferred
shares, depositary shares, common shares and common share
warrants (collectively the "Shelf Securities"). At September 30,
1997, $292.7 million was available under the shelf registration,
which includes $82.5 million available under the $102.5 million
MTN Program. The Shelf Securities may be offered from time to
time at prices and upon terms to be determined at the time of
sale.
Acquisitions, development 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 period January 1, 1997 through September 30,
1997, the Company acquired, in separate purchase transactions,
seven multifamily properties containing an aggregate of 1,532
suites and two parcels of land consisting of 14.5 acres (the
"Acquired Properties") for an aggregate purchase price of $89.7
million, of which $3.7 million represented liabilities assumed.
The multifamily properties are located in Clinton, Michigan;
Indianapolis, Indiana; and Cincinnati, Columbus and Toledo, Ohio.
The purchase price of the Acquired Properties has been financed
primarily with cash on hand made available through the Line of
Credit. On October 31, 1997, the Company acquired one
multifamily property containing 224 suites located in Farmington
Hills, Michigan.
The remainder of the acquisitions, development and
dispositions section contains forward-looking statements and
certain risks, trends and uncertainties that could cause actual
results to vary from those contained in the forward-looking
statements. Readers are cautioned not to place undue reliance on
forward-looking statements, which are based only on current
judgements and current knowledge of management. These forward-
looking statements are intended to be covered by the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Factors which could cause actual results to differ
materially from those projected include the general economic
climate; the supply and demand for multifamily properties in the
Great Lakes Region; interest rate levels; the availability of
financing and other risks associated with the acquisition,
development and disposition of properties, including risks that
development, lease-up or disposition may not be completed on
schedule.
The Company has three newly constructed multifamily
properties in lease-up. Bradford at Easton, a 324 suite property
located in Columbus, Ohio had 280 suites completed of which 239
were leased at September 30, 1997, the 168 suite first phase of
The Residence at Barrington, a 288 suite property located in
Aurora, Ohio (a city located Southeast of Cleveland), had 82
suites completed and 188 suites leased at September 30, 1997 and
The Village of Western Reserve, a 108 suite property in
Streetsboro, Ohio (also located Southeast of Cleveland) which had
14 suites completed and 46 suites leased at September 30, 1997.
The Company has also commenced construction on a 120 suite
expansion to Georgetown Park Apartments, a multifamily property
owned by the Company in Fenton, Michigan. The Bradford at
Easton, Barrington Phase I and Western Reserve properties
(collectively the "New Construction Properties") are scheduled
<PAGE> 13
for completion in the fourth quarter of 1997 and the Georgetown
addition is estimated to be completed in the third quarter of
1998.
The Company is anticipating the construction of an estimated
additional 514 suites (collectively the "Suite Additions") during
1998, on land adjacent to multifamily properties currently owned
by the Company as follows:
<TABLE>
<CAPTION>
Property Location Suites
<S> <C> <C>
Arbor Landings Apartments II Ann Arbor, Michigan 160
The Residence at Barrington, Phase II Aurora, Ohio 120
Georgetown Park Apartments III Fenton, Michigan 120
Aspen Lakes II Grand Rapids, Michigan 114
Total Suites 514
</TABLE>
The Company estimates the total cost of the New Construction
Properties and the Suite Additions (a total of 1,114 suites) will
be approximately $73.2 million, of which $40.1 million has been
incurred through September 30, 1997, including land costs of $7.5
million.
The Company also owns approximately 63.5 acres of land,
adjacent to multifamily properties currently owned by the
Company, on which approximately 661 suites are planned for
development. Through September 30, 1997, the Company has
incurred approximately $2.1 million in preliminary development
and land costs for these and other planned development projects.
The Company is exploring opportunities to dispose of several
of its multifamily properties and has received an expression of
interest from various prospective buyers. 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
Company's initial public offering of common shares (the "IPO")
that is presently zoned for office and industrial use, will not
be rezoned for multifamily use. The Company has entered into a
contract for the sale of the property and has been advised by the
buyer that it is their intent to consummate their acquisition of
the property in 1997.
Dividends:
On October 1, 1997, the Company declared a dividend of
$0.465 per common share for the quarter ending September 30,
1997, which was paid on October 31, 1997 to shareholders of
record on October 15, 1997. On August 27, 1997, 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 September 15, 1997 to shareholders of record on
September 5, 1997.
Cash flow sources and applications:
Net cash provided by operating activities increased $0.9
million to $23.4 million from $22.5 million for the nine-months
ended September 30, 1997 when compared with the nine-months ended
September 30, 1996. This increase was primarily the result of the
increase in cash flow from operations resulting from the Acquired
Properties and increasing operating cash flow from the Core
Portfolio Properties.
Net cash flows used for investing activities of $113.7
million for the nine-months ended September 30, 1997 were
primarily used for the acquisition of multifamily real estate,
properties and undeveloped land parcels.
Net cash flows provided by financing activities of $90.9
million for the nine-months ended September 30, 1997 were
primarily comprised of borrowings on the Line of Credit, the
issuance of MTN's and the Common Share Offering. Funds were also
used to pay dividends on the Company's common and Perpetual
Preferred Shares.
<PAGE> 14
RESULTS OF OPERATIONS
Comparison of the three-months ended September 30, 1997 to the
three-months ended September 30, 1996
Overall, total revenue increased $3,970,800 or 16.5% and
total expenses before the extraordinary item and the net income
of the joint ventures increased $3,374,200 or 17.6% for the
quarter. Net income applicable to common shares before the
extraordinary item increased $791,800 or 21.9%, after dividends
on the Company's Perpetual Preferred Shares.
In the following discussion of the comparison of the three-
months ended September 30, 1997 to the three-months ended
September 30, 1996, the term Core Portfolio Properties refers to
the 35 wholly owned multifamily properties acquired by the
Company at the time of the IPO, the 36 properties acquired prior
to July 1, 1996 and the acquisition of the remaining 50% interest
in a property in which the Company was a joint venture partner at
the time of the IPO. Acquired Properties refers to the nine
properties acquired between April 1, 1996 and September 30, 1997.
During the three-months ended September 30, 1997, the
Acquired Properties generated total revenues of $3,468,100 while
incurring property, operating and maintenance expenses of
$1,312,300.
Rental Revenues:
Rental revenues increased $3,848,800 or 17.3% for the
quarter. The majority of this increase is attributable to an
increase in rental revenues from the Acquired Properties of
$3,343,200 for the same period. Increases in occupancy and suite
rents at the Core Portfolio Market-rate and Government-Assisted
Properties resulted in a $505,600 or 2.3% increase in rental
revenue from these properties. Retroactive revenue increases
related to budget based Government-Assisted Properties are
recognized based on the applications submitted to the U.S.
Department of Housing and Urban Development.
Other Revenues:
Other revenues increased $122,050 primarily due to interest
income earned on amounts advanced to entities managed by the
Company.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$1,649,900 or 17.0% for the quarter. Operating and maintenance
expenses at the Acquired Properties increased $1,284,000 for the
quarter due primarily to the operating and maintenance expenses
incurred at the nine properties acquired between April 1, 1996
and September 30, 1997. Property operating and maintenance
expenses at the Core Portfolio Properties increased $365,900, or
3.8% when compared to the prior three-month period primarily due
to increases in payroll, building and grounds repair and
maintenance and other operating expenses. Payroll expense
increased due to (i) overtime and temporary labor costs incurred
in preparing suites for market, (ii) annual wage increases, and
(iii) staff additions. Building and grounds repair and
maintenance expenses increased primarily as a result of an
increase in suite make ready costs such as cleaning, painting,
carpet cleaning and replacement and appliance replacements.
Total expenditures for building renovations and suite and common
area refurbishment in the Core Portfolio Properties that were not
considered to be capital in nature averaged $159 per suite for
the three-months ended September 30, 1997 as compared to $154 per
suite for the three-months ended September 30, 1996.
Other expenses:
Depreciation and amortization increased $960,100 or 24.9%
for the quarter primarily due to the increased depreciation and
amortization expense recognized on the Acquired Properties.
General and administrative expenses increased $171,900 or
14.9% for the nine-month period. This increase is primarily
attributable to payroll and payroll related expenses as the
Company continues to develop a team of professionals to provide
hands-on attention to the Company's expanding portfolio of
assets.
<PAGE> 15
Interest expense increased $596,000 or 14.6% for the quarter
primarily due to the interest incurred with respect to the
additional borrowings under the Line of Credit and MTN's that
were used for the acquisition of properties.
Net income applicable to common shares:
Net income applicable to common shares is reduced by
dividends on the Perpetual Preferred Shares of $1,371,100.
RESULTS OF OPERATIONS
Comparison of the nine-months ended September 30, 1997 to the
nine-months ended September 30, 1996
Overall, total revenue increased $10,242,200 or 14.8% and
total expenses before the extraordinary items and net income of
the joint ventures increased $8,865,900 or 16.1% for the nine-
month period. Net income applicable to common shares before the
extraordinary items increased $1,658.900 or 15.7%, after
dividends on the Company's Perpetual Preferred Shares.
In the following discussion of the comparison of the nine-
months ended September 30, 1997 to the nine-months ended
September 30, 1996, the term Core Portfolio Properties refers to
the 35 wholly owned multifamily properties acquired by the
Company at the time of the IPO, the 32 properties acquired prior
to January 1, 1996 and the acquisition of the remaining 50%
interest in a property in which the Company was a joint venture
partner at the time of the IPO. Acquired Properties refers to
the 13 properties acquired between January 1, 1996 and September
30, 1997.
During the nine-months ended September 30, 1997, the
Acquired Properties generated total revenues of $12,200,000 while
incurring property, operating and maintenance expenses of
$4,626,300.
Rental Revenues:
Rental revenues increased $9,540,300 or 14.7% for the nine-
month period. The majority of this increase is attributable to
an increase in rental revenues from the Acquired Properties of
$8,559,000 for the same period. Increases in occupancy and suite
rents at the Core Portfolio Market-rate and Government-Assisted
Properties resulted in a $981,300 or 1.6% increase in rental
revenue from these properties. Retroactive revenue increases
related to budget based Government-Assisted Properties are
recognized based on the applications submitted to the U.S.
Department of Housing and Urban Development.
Other Revenues:
Other revenues increased $701,958 primarily due to (i)
refunds of prior years real estate taxes of $308,400 resulting
from successful challenges to the property values used to assess
real estate taxes at six multifamily properties and (ii) interest
income of $332,000 on amounts advanced for major renovation
programs to entities managed by the Company. The balance of the
increase relates to interest income earned on the Company's
investments and late charges assessed to residents.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$3,889,500 or 14.3% for the nine-month period. Operating and
maintenance expenses at the Acquired Properties increased
$3,229,700 for the nine-month period due primarily to the
operating and maintenance expenses incurred at the 13 properties
acquired between January 1, 1996 and September 30, 1997.
Property operating and maintenance expenses at the Core Portfolio
Properties increased $659,900 or 2.6% when compared to the prior
nine-month period primarily due to increases in payroll and
utilities which were offset by decreases in real estate taxes,
insurance, advertising and other operating expenses. Total
expenditures for building renovations and suite and common area
refurbishment in the Core Portfolio Properties that were not
considered to be capital in nature averaged $347 per suite for
the nine-months ended September 30, 1997 as compared to $323 per
suite for the nine-months ended September 30, 1996.
<PAGE> 16
Other expenses:
Depreciation and amortization increased $2,488,600 or 22.2%
for the nine-month period primarily due to the increased
depreciation and amortization expense recognized on the Acquired
Properties.
General and administrative expenses increased $370,000 or
9.2% for the nine-month period. This increase is primarily
attributable to payroll and payroll related expenses as the
Company continues to develop a team of professionals to provide
hands-on attention to the Company's expanding portfolio of
assets.
Interest expense increased $2,100,500 or 18.3% for the nine-
month period primarily due to the interest incurred with respect
to the additional borrowings under the Line of Credit and MTN's
that were used for the acquisition of properties.
Extraordinary items:
The extraordinary items of $1,023,700 recognized during 1997
relates primarily to the write-off of a portion of the
liabilities assumed with respect to certain multifamily
properties acquired by the Company which related to the
difference between the stated interest rate and the effective
interest rate on mortgage indebtedness assumed. The mortgage
indebtedness assumed upon the acquisition of these properties was
repaid in 1997.
Net income applicable to common shares:
Net income applicable to common shares is reduced by
dividends on the Perpetual Preferred Shares of $4,113,300.
Equity in net income of joint ventures:
The combined equity in net income of joint ventures
increased $195,200 or 253.9% and $282,600 or 134.6% for the
three- and nine-months ended September 30, 1997 and 1996,
respectively. These increases are primarily attributable to an
increase in net collected rents as occupancies increased at the
joint venture properties and a reduction in property operating
and maintenance expenses.
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 nine-months ended
September 30, 1997 and 1996.
<TABLE>
<CAPTION>
For the three-months For the nine-months
ended September 30, ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Beneficial interests in joint venture
operations
Rental revenue $1,708,060 $1,643,740 $5,016,690 $4,949,030
Cost of operations 886,840 994,450 2,836,060 3,014,760
821,220 649,290 2,180,630 1,934,270
Interest income 3,820 5,180 16,330 14,410
Interest expense (440,420) (444,000) (1,325,280) (1,338,360)
Depreciation (100,110) (121,170) (341,870) (361,130)
Amortization (12,410) (12,410) (37,220) (39,160)
Net income $ 272,100 $ 76,890 $ 492,590 $ 210,030
</TABLE>
Outlook
The following three paragraphs contain forward-looking
statements and certain risks, trends and uncertainties could
cause actual results to vary from those contained in the forward-
looking statements. Readers are cautioned not to place undue
reliance on forward-looking statements, which are based only on
current judgments and current knowledge of management. These
forward-looking statements are intended to be covered by the safe
<PAGE> 17
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 54% 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, which accounts for 25% of the Company's
multifamily properties, Columbus is the 30th largest metropolitan
area in the U.S. based on population. Population in the Central
Ohio region grew 7.6% from 1990 to 1996, ranking it 25th among
the top 50 fastest growing metropolitan areas in the U.S.,
according to Census Bureau data. Columbus, Ohio was selected by
the E & Y Kenneth Leventhal Real Estate Group as one of the 12
best apartment investment markets in the country because of its
well-diversified economic base, strong rental growth and lower
vacancy rates. The Company's Michigan portfolio, which comprises
11% of the Company's multifamily properties, is located in eight
separate markets each having a stable population and employment
outlook.
Permitting activity in Indianapolis has been increasing but
at a slower pace than 1996. Thus far, the competition in this
market has not had any real effect on the Company's multifamily
property located in Indianapolis. Though there are signs of
excess multifamily apartment capacity in the Columbus, Ohio
market attributable to a number of newly constructed properties
that are at or near completion, supply of multifamily apartments
has remained fairly consistent with demand. While an excess
capacity of multifamily apartments may have a short-run impact on
the Company's multifamily properties located in the Columbus,
Ohio vicinity, including the impact on the timing of the lease-up
at Bradford at Easton. The estimated demand for multifamily
apartments currently exceeds the annualized permit issuance in
the Greater Columbus, Ohio market. There does not appear to be
any significant permitting activity in the Northeast Ohio, Toledo
or Michigan markets in which the Company is operating multifamily
apartment properties.
With an average economic occupancy for the Core Portfolio
Market-rate properties over 94.4%, and favorable market
conditions, 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 expenditures for the Core Portfolio Properties will
increase as the Company continues to maintain its properties to
maximize their earnings potential. Utility expenditures will
vary over prior periods as the effect of weather related usage
variances and rate variances are 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 terms 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
<PAGE> 18
policy term aggregate. Management has no plans to abandon any of
the properties and is unaware of any other material loss
contingencies.
<PAGE> 19
The following tables present information concerning the Multifamily
Properties owned by Associated Estates Realty Corporation.
<TABLE>
<CAPTION>
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Suites Rehab. Sq. Ft.
MARKET RATE
Acquired Properties
Central Ohio
<S> <C> <C> <C> <C> <C>
Perimeter Lakes 09/20/96 Dublin Gdn/Tnhms 189 1992 999
Oak Bend Commons (a) 05/30/97 Columbus Garden 96 1997 1,110
Saw Mill Village 04/22/97 Columbus Garden 340 1987 1,161
625 1,104
Cincinnati, Ohio
Remington Place Apartments 03/31/97 Cincinnati Garden 234 1988-90 830
Indiana
The Gables at White River 02/06/97 Indianapolis Garden 228 1991 974
Waterstone Apartments 08/29/97 Indianapolis Garden 344 1997 984
572 980
Michigan
Aspen Lakes 09/04/96 Grand Rapids Garden 144 1992 789
Clinton Place 08/25/97 Clinton Twp. Garden 202 1988 954
346 885
Toledo, Ohio
Hawthorne Hills Apartments 05/14/97 Toledo Garden 88 1973 1,145
1,865 811
CORE PORTFOLIO PROPERTIES
Market rate
Central Ohio
Arrowhead Station 02/28/95 Columbus Townhomes 102 1987 1,344
Bedford Commons 12/30/94 Columbus Townhomes 112 1987 1,157
Bolton Estates 07/27/94 Columbus Garden 196 1992 687
Colony Bay East 02/21/95 Columbus Garden 156 1994 903
Heathermoor 08/18/94 Worthington Gdn/Tnhms 280 1989 829
Kensington Grove 07/17/95 Westerville Gdn/Tnhms 76 1995 1,109
Lake Forest 07/28/94 Columbus Garden 192 1994 788
Muirwood Vllg. at Bennell 03/07/94 Columbus Ranch 164 1990 769
Muirwood Vllg. at London 03/03/94 London Ranch 112 1989 769
Muirwood Vllg. at Mt. Sterling 03/03/94 Mt. Sterling Ranch 48 1990 769
Muirwood Vllg. at Zanesville 03/07/94 Zanesville Ranch 196 1991-95 769
Pendleton Lakes East 08/25/94 Columbus Garden 256 1990-93 899
Residence at Christopher Wren 03/14/94 Gahanna Gdn/Tnhms 264 1993 1,062
Residence at Turnberry 03/16/94 Pickerington Gdn/Tnhms 216 1991 1,182<PAGE>
Sheffield at Sylvan 03/03/94 Circleville Ranch 136 1989 791
Sterling Park 08/25/94 Grove City Garden 128 1994 763
The Residence at Newark 03/03/94 Newark Ranch 112 1993-94 868
The Residence at Washington 02/01/96 Wash. Ct. House Ranch 72 1995 862
Wyndemere 09/21/94 Franklin Ranch 128 1991-95 768
2,946 897
Northeastern Ohio
Bay Club IPO Willowick Garden 96 1990 925
Colonnade West IPO Cleveland Garden 216 1964 502
Cultural Gardens IPO Euclid Mid Rise 186 1966 688
Edgewater Landing 04/20/94 Cleveland High Rise 241 1988 r 585
Gates Mills III IPO Mayfield Hts. High Rise 320 1978 874
Holly Park IPO Kent Garden 192 1990 875
Huntington Hills IPO Stow Townhomes 85 1982 976
Mallard's Crossing 02/16/95 Medina Garden 192 1990 998
Memphis Manor IPO Cleveland Garden 120 1966 554
Park Place IPO Parma Hts. Mid Rise 164 1966 760
</TABLE>
<TABLE>
<CAPTION>
For the three months ending For the three months ending
September 30, 1997 September 30, 1996
Average Average Rent Average Average Rent
Economic Physical Per Economic Physical Per
The Multifamily Properties Occupancy Occupancy Suite Sq. Ft. Occupancy Occupancy Suite Sq. Ft.
MARKET RATE
Acquired Properties
Central Ohio
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Perimeter Lakes 94.1% 92.6% $ 719 $ 0.72 N/A N/A N/A N/A
Oak Bend Commons (a) 85.5 94.8 N/A N/A N/A N/A N/A N/A
Saw Mill Village 90.3 87.6 745 0.64 N/A N/A N/A N/A
91.6% 90.2% $ 736 $ 0.67 N/A N/A N/A N/A
Cincinnati, Ohio
Remington Place Apartments 92.2% 94.4% $ 660 $ 0.80 N/A N/A N/A N/A
Indiana
The Gables at White River 90.6% 93.9% $ 720 $ 0.74 N/A N/A N/A N/A
Waterstone Apartments N/A 88.4 222 0.23 N/A N/A N/A N/A
90.6% 90.6% $ 720 $ 0.74 N/A N/A N/A N/A
Michigan
Aspen Lakes 94.0% 97.9% $ 554 $ 0.70 N/A N/A N/A N/A
Clinton Place N/A 93.6 268 0.28 N/A N/A N/A N/A
96.7% 95.4% $ 387 $ 0.44 N/A N/A N/A N/A
Toledo, Ohio
Hawthorne Hills Apartments 87.4% 93.2% $ 548 $ 0.48 N/A N/A N/A N/A
92.8% 94.1% $ 586 $ 0.63 N/A N/A N/A N/A
CORE PORTFOLIO PROPERTIES
Market rate
Central Ohio
Arrowhead Station 88.1% 88.2% $ 696 $ 0.52 99.0% 99.0% $ 660 $ 0.49
Bedford Commons 97.7 96.4 771 0.67 99.4 98.2 718 0.62
Bolton Estates 94.4 95.9 469 0.68 90.0 91.8 453 0.66
Colony Bay East 95.3 97.4 517 0.57 96.6 96.8 493 0.55
Heathermoor 97.7 97.9 548 0.66 97.6 98.6 528 0.64
Kensington Grove 93.1 94.7 779 0.70 96.2 98.7 761 0.69
Lake Forest 92.0 96.9 550 0.70 90.4 92.7 538 0.68
Muirwood Vllg. at Bennell 93.4 97.0 499 0.65 96.4 95.7 483 0.63
Muirwood Vllg. at London 97.8 98.2 504 0.66 97.2 94.6 491 0.64
Muirwood Vllg. at Mt. Sterling 91.3 89.6 500 0.65 96.4 97.9 490 0.64
Muirwood Vllg. at Zanesville 92.7 94.9 525 0.68 99.7 95.4 518 0.67
Pendleton Lakes East 94.4 98.8 517 0.58 98.1 96.5 504 0.56
Residence at Christopher Wren 96.6 96.6 745 0.70 98.9 98.5 709 0.67
Residence at Turnberry 86.5 89.8 740 0.63 93.7 98.1 722 0.61
Sheffield at Sylvan 100.0 97.8 504 0.64 97.3 94.1 502 0.63
Sterling Park 96.7 96.9 550 0.72 93.0 94.5 537 0.70<PAGE>
The Residence at Newark 96.5 95.5 560 0.65 99.5 97.3 540 0.62
The Residence at Washington 95.5 88.9 530 0.61 99.2 88.9 519 0.60
Wyndemere 96.0 96.9 534 0.70 99.3 100.0 523 0.68
94.4% 95.8% $ 581 $ 0.65 96.6% 96.3% $ 562 $ 0.63
Northeastern Ohio
Bay Club 98.0% 99.0% $ 622 $ 0.67 96.6% 94.8% $ 618 $ 0.67
Colonnade West 91.4 91.2 405 0.81 94.6 91.2 397 0.79
Cultural Gardens 96.4 99.5 503 0.73 95.1 96.2 492 0.72
Edgewater Landing 94.9 98.3 416 0.71 95.3 96.3 409 0.70
Gates Mills III 93.7 98.4 717 0.82 91.9 93.8 664 0.76
Holly Park 91.0 100.0 685 0.78 92.4 100.0 686 0.78
Huntington Hills 97.5 97.6 656 0.67 95.6 97.6 641 0.66
Mallard's Crossing 97.0 97.4 699 0.70 97.1 93.8 674 0.68
Memphis Manor 90.1 95.8 443 0.80 94.3 91.7 440 0.79
Park Place 90.1 92.7 555 0.73 93.1 95.7 521 0.69 <PAGE>
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Suites Rehab. Sq. Ft.
<S> <C> <C> <C> <C> <C> <C>
Pinecrest IPO Broadview Hts. Garden 96 1965 r 598
Portage Towers IPO Cuyahoga Falls High Rise 376 1973 869
Somerset West (b) IPO North Royalton Gdn/Tnhms 197 1982 1,038
The Triangle (c) IPO Cleveland High Rise 273 1989 616
Timbers IPO Broadview Hts. Garden 96 1987-89 930
Villa Moderne IPO North Olmsted Garden 135 1963 504
Washington Manor 07/01/94 Elyria Garden 120 1963-64 541
West Park Plaza IPO Cleveland Garden 118 1964 520
Westchester Townhouses IPO Westlake Townhomes 136 1989 1,000
Westlake Townhomes IPO Westlake Townhomes 7 1985 1,000
Williamsburg at Greenwood Vllg. 02/18/94 Sagamore Hills Townhomes 260 1990 938
Winchester Hills I (d) IPO Willoughby Hills High Rise 362 1972 822
Winchester Hills II IPO Willoughby Hills High Rise 362 1979 822
4,350 782
Michigan
Arbor Landings Apartments 01/20/95 Ann Arbor Garden 168 1990 1,116
Central Park Place 12/29/94 Grand Rapids Garden 216 1988 850
Country Place Apartments 06/19/95 Mt. Pleasant Garden 144 1988 859
Georgetown Park Apartments 12/28/94 Fenton Garden 360 1987-96 1,005
The Landings at the Preserve 09/21/95 Battle Creek Garden 190 1990-91 952
The Oaks and Woods at Hampton 08/08/95 Rochester Hills Gdn/Tnhms 544 1986-88 1,050
Spring Brook Apartments 06/20/96 Holland Gdn/Tnhms 168 1986-88 818
Summer Ridge Apartments 04/01/96 Kalamazoo Garden 248 1989-91 960
2,038 974
Toledo, Ohio
Cloisters 09/14/95 Toledo Townhomes 188 1990 1,037
Kensington Village 09/14/95 Toledo Gdn/Tnhms 190 1985-90 920
Treetops 09/14/95 Toledo Townhomes 128 1988-89 1,350
Vantage Villa 10/30/95 Toledo Garden 150 1974 935
656 1,041
Pennsylvania
Chestnut Ridge 03/01/96 Pittsburgh Garden 468 1986 769
Core Market Rate 10,458 867
GOVERNMENT ASST.-ELDERLY
Ellet Development IPO Akron High Rise 100 1978 589
Hillwood I IPO Akron High Rise 100 1976 570
Puritas Place (e) IPO Cleveland High Rise 100 1981 518
Riverview IPO Massillon High Rise 98 1979 553
State Road Apartments IPO Cuyahoga Falls Garden 72 1977 r 750
Statesman II IPO Shaker Heights Garden 47 1987 r 796
Sutliff Apartments II IPO Cuyahoga Falls High Rise 185 1979 577<PAGE>
Tallmadge Acres IPO Tallmadge Mid Rise 125 1981 641
Twinsburg Apartments IPO Twinsburg Garden 100 1979 554
Village Towers IPO Jackson Twp. High Rise 100 1979 557
West High Apartments IPO Akron Mid Rise 68 1981 r 702
1,095 602
GOVERNMENT ASST.-FAMILY
Jennings Commons IPO Cleveland Garden 50 1981 823
Rainbow Terrace IPO Cleveland Gdn/Tnhms 484 1982 r 768
Shaker Park Gardens II IPO Warrensville Garden 151 1964 753
685 769
1,780 666
CONGREGATE CARE
Gates Mills Club IPO Mayfield Heights High Rise 120 1980 721
The Oaks IPO Westlake Garden 50 1985 672
170 707
Wholly owned core portfolio 12,408 836 <PAGE>
</TABLE>
<TABLE>
<CAPTION>
For the three months ending For the three months ending
September 30, 1997 September 30, 1996
Average Average Rent Average Average Rent
Economic Physical Per Economic Physical Per
The Multifamily Properties Occupancy Occupancy Suite Sq. Ft. Occupancy Occupancy Suite Sq. Ft.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pinecrest 90.4 93.8 473 0.79 94.6 77.1 456 0.76
Portage Towers 94.0 94.4 573 0.66 94.2 91.2 559 0.64
Somerset West (b) 89.4 87.3 699 0.67 94.0 97.5 699 0.67
The Triangle (c) 96.5 97.1 913 1.48 98.4 100.0 848 1.38
Timbers 93.8 89.6 730 0.78 95.3 99.0 687 0.74
Villa Moderne 94.8 99.3 445 0.88 94.9 91.1 428 0.85
Washington Manor 97.2 99.2 387 0.72 95.7 99.2 374 0.69
West Park Plaza 91.7 90.7 427 0.82 91.8 90.7 421 0.81
Westchester Townhouses 92.2 91.9 775 0.78 90.7 93.4 767 0.77
Westlake Townhomes 93.9 100.0 801 0.80 94.2 100.0 772 0.77
Williamsburg at Greenwood Vllg. 91.6 91.9 888 0.95 96.0 97.3 809 0.86
Winchester Hills I (d) 90.9 93.9 574 0.70 88.6 93.9 564 0.69
Winchester Hills II 90.7 89.8 616 0.75 87.8 90.6 601 0.73
93.1% 94.8% $ 617 $ 0.79 93.6% 94.3% $ 594 $ 0.76
Michigan
Arbor Landings Apartments 98.5% 97.6% $ 851 $ 0.76 97.7% 97.0% $ 821 $ 0.74
Central Park Place 95.3 95.8 607 0.71 94.3 98.6 613 0.72
Country Place Apartments 100.0 97.9 532 0.62 100.0 100.0 504 0.59
Georgetown Park Apartments 92.8 89.4 676 0.67 98.6 97.8 709 0.71
The Landings at the Preserve 94.8 94.2 683 0.72 95.5 97.4 666 0.70
The Oaks and Woods at Hampton 96.4 96.7 810 0.77 96.4 97.1 771 0.73
Spring Brook Apartments 98.0 97.0 477 0.58 96.4 94.0 474 0.58
Summer Ridge Apartments 96.0 99.2 678 0.71 94.0 96.4 693 0.72
96.0% 95.6% $ 693 $ 0.71 96.5% 97.2% $ 684 $ 0.70
Toledo, Ohio
Cloisters 95.8% 96.8% $ 540 $ 0.52 93.8% 97.9% $ 514 $ 0.50
Kensington Village 96.8 96.8 458 0.50 95.9 98.4 438 0.48
Treetops 95.9 95.3 736 0.55 97.0 96.1 715 0.53
Vantage Villa 86.3 92.7 613 0.66 95.2 94.7 573 0.61
93.7% 95.6% $ 571 $ 0.55 95.5% 97.0% $ 545 $ 0.52
Pennsylvania
Chestnut Ridge 97.8% 95.5% $ 716 $ 0.93 93.3% 97.4% $ 691 $ 0.90
Core Market Rate 94.4% 95.3% $ 623 $ 0.72 95.1% 95.7% $ 603 $ 0.70
GOVERNMENT ASST.-ELDERLY
Ellet Development 100.0% 100.0% $ 587 $1.00 99.7% 100.0% $ 586 $ .99
Hillwood I 100.0 100.0 596 1.05 99.4 100.0 593 1.04
Puritas Place (e) 99.8 100.0 782 1.51 99.2 99.0 782 1.51
Riverview 99.7 100.0 591 1.07 98.8 100.0 594 1.07
State Road Apartments 99.0 100.0 596 0.79 100.0 100.0 593 0.79
Statesman II 99.6 100.0 650 0.82 100.0 100.0 650 0.82
Sutliff Apartments II 100.0 100.0 586 1.02 100.0 100.0 585 1.01<PAGE>
Tallmadge Acres 100.0 100.0 658 1.03 99.3 100.0 653 1.02
Twinsburg Apartments 100.0 100.0 603 1.09 99.6 100.0 600 1.08
Village Towers 99.9 100.0 579 1.04 100.0 100.0 576 1.03
West High Apartments 99.7 98.5 790 1.13 99.9 100.0 794 1.13
100.0% 99.9% $ 631 $ 1.05 99.7% 99.9% $ 629 $ 1.05
GOVERNMENT ASST.-FAMILY
Jennings Commons 100.0% 100.0% $ 674 $ 0.82 100.0% 100.0% $ 663 $ 0.81
Rainbow Terrace 96.6 96.7 773 1.01 100.0 97.5 708 0.92
Shaker Park Gardens II 98.7 98.0 531 0.71 100.0 99.3 532 0.71
97.2 97.2 713 0.93 100.0 98.1 666 0.87
98.9% 98.9% $ 662 $ 0.99 99.9% 99.2% $ 643 $ 0.97
CONGREGATE CARE
Gates Mills Club 97.7% 97.5% $ 862 $ 1.20 96.1% 100.0% $ 799 $ 1.11
The Oaks 94.6 78.0 1,033 1.54 93.9 98.0 987 1.47
96.7 91.8 912 1.29 95.3 99.4 855 1.21
Wholly owned core portfolio 95.1% 95.8% $ 633 $ 0.76 95.9% 96.3% $ 613 $ 0.73 <PAGE>
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Suites Rehab. Sq. Ft.
Joint Venture Properties
Northeastern Ohio
Market rate
<S> <C> <C> <C> <C> <C> <C>
Americana IPO Euclid High Rise 738 1968 803
College Towers IPO Kent Mid Rise 380 1969 662
Euclid House IPO Euclid Mid Rise 126 1969 654
Gates Mills Towers IPO Mayfield Hts. High Rise 760 1969 856
Highland House IPO Painesville Garden 36 1964 539
Watergate IPO Euclid High Rise 949 1971 831
2,989 789
Government Asst.-Family
Lakeshore Village IPO Cleveland Garden 108 1982 786
3,097 789
Core 15,505 832
Portfolio average 17,370 830
</TABLE>
<TABLE>
<CAPTION>
For the three months ending For the three months ending
September 30, 1997 September 30, 1996
Average Average Rent Average Average Rent
Economic Physical Per Economic Physical Per
The Multifamily Properties Occupancy Occupancy Suite Sq. Ft. Occupancy Occupancy Suite Sq. Ft.
Joint Venture Properties
Northeastern Ohio
Market rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Americana 89.0% 95.0% $ 480 $ 0.60 86.1% 84.7% $ 493 $ 0.61
College Towers 91.4 97.4 403 0.61 88.8 93.7 402 0.61
Euclid House 90.3 92.9 435 0.66 95.9 96.8 431 0.66
Gates Mills Towers 94.5 98.7 703 0.82 93.3 94.6 666 0.78
Highland House 98.9 100.0 409 0.76 96.4 97.2 398 0.74
Watergate 93.8 94.8 545 0.66 90.0 89.1 544 0.65
92.7% 96.2% $ 536 $ 0.68 90.3% 90.4% $ 529 $ 0.67
Government Asst.-Family
Lakeshore Village 100.0% 100.0% $ 669 $ 0.85 99.9% 100.0% $ 669 $ 0.85
93.1 96.3 543 0.69 90.8 90.8 536 0.68
Core 94.9% 95.9% $ 625 $ 0.75 95.5% 95.2% $ 606 $ 0.73
Portfolio average 94.8% 95.7% $ 619 $ 0.75 95.5% 95.1% $ 531 $ 0.64 <PAGE>
<FN>
______________
(a) The recently constructed 96 suites have not yet reached stabilized occupancy. The Company
has entered into a contract to acquire 6 additional suites presently under construction;
however, there can be no assurances that the suites will be acquired.
(b) Somerset West has 39 Contract Suites and 158 Market-rate suites.
(c) The Triangle also contains 63,321 square feet of office/retail space.
(d) 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.
(e) The property was developed in 1981 subject to a warranty deed provision which states that the
assignment of fee simple title of the property to the Company shall expire in 2037.
r = Rehabilitated
</FN>
</TABLE>
<PAGE> 22
HISTORICAL FUNDS FROM OPERATIONS AND DISTRIBUTABLE CASH FLOW
Industry analysts generally consider Funds From Operations
("FFO") to be an appropriate measure of the performance of an
equity REIT. FFO 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 FFO on
the same basis. FFO 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 FFO
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, FFO and Distributable Cash Flow
should be presented in conjunction with net income as presented
in the consolidated financial statements and data included
elsewhere in this report.
FFO and Funds Available for Distribution ("Distributable
Cash Flow") for the nine month period ended September 30, 1997
and 1996 are summarized in the following table:
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
(In thousands) 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C>
Net income applicable to common shares $ 4,385 $ 3,613 $ 13,269 $ 10,586
Depreciation on real estate assets
Wholly owned properties 4,450 3,627 12,734 10,513
Joint venture properties 100 121 342 361
Extraordinary item - loss or (gain) on early
extinguishment of debt 20 - (1,024) -
Funds From Operations 8,955 7,361 25,321 21,460
Depreciation - other assets 191 80 438 226
Amortization of deferred financing fees 188 164 545 492
Fixed asset additions (273) (97) (504) (276)
Fixed asset additions - joint venture properties - -
Distributable Cash Flow $ 9,061 $ 7,508 $ 25,800 $ 21,902
Weighted average shares outstanding 17,053 13,872 15,906 13,872
</TABLE>
<PAGE> 23
PART II
OTHER INFORMATION
Except to the extent noted below, the items required in
Part II are inapplicable or, if applicable, would be answered in
the negative and have been omitted.
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
A Current Report on Form 8-K/A-1 dated February 6,
1997 was filed on July 2, 1997. This report
describes the Company's acquisition of multifamily
properties, partnership interests and undeveloped
land. This report includes (i) unaudited statements
of revenue and certain expenses of certain of the
multifamily properties for the period ended March
31, 1997 or date of acquisition, whichever is
earlier, and (ii) audited statements of revenue and
certain expenses for the year ended December 31,
1996 of those properties. The report also includes
pro forma financial information (unaudited of the
Company and the acquired properties as follows:
condensed balance sheet as of March 31, 1997;
condensed statement of operations for the three
months ended March 31, 1997 and for the year ended
December 31, 1996; and estimated twelve month pro
forma statement of taxable net operating income and
operating funds available.
<PAGE> 24
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
November 14, 1997 /s/ Dennis W. Bikun
(Date) Dennis W. Bikun, Chief Financial Officer
and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,852,454
<SECURITIES> 4,912,194
<RECEIVABLES> 14,200,040
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,948,321
<PP&E> 626,459,430
<DEPRECIATION> (125,275,070)
<TOTAL-ASSETS> 529,097,369
<CURRENT-LIABILITIES> 25,124,666
<BONDS> 0
0
56,250,000
<COMMON> 1,707,246
<OTHER-SE> 137,093,959
<TOTAL-LIABILITY-AND-EQUITY> 195,051,205
<SALES> 74,258,037
<TOTAL-REVENUES> 79,677,609
<CGS> 31,005,051
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,237,058
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,569,593
<INCOME-PRETAX> 17,382,206
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,382,206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,382,206
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
</TABLE>
