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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 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
ASSOCIATED ESTATES REALTY CORPORATION
(Exact name of registrant as specified in its charter)
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Ohio 34-1747603 5025 Swetland Court, Cleveland, Ohio 44143-1467
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(State or other jurisdiction of (I.R.S. Employer (Address of principal executive offices) (Zip Code)
incorporation or organization) Identification Number)
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Registrant's telephone number, including area code (216) 261-5000
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Shares, without par value New York Stock Exchange, Inc.
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Depositary Shares, each representing 1/10 of a Share New York Stock Exchange, Inc.
of 9 3/4% Class A Cumulative Redeemable Preferred
Shares, without par value
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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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, was $278,164,706 as of March 20, 1997.
The number of Common Shares outstanding as of March 20, 1997 was 15,322,391.
DOCUMENTS INCORPORATED BY REFERENCE
(To The Extent Indicated Herein)
Portions of the Annual Performance Report to Shareholders for the fiscal year
ended December 31, 1996 (in Parts II, III and IV). Notice of Annual Meeting and
Proxy Statement for the Annual Meeting of Shareholders to be held on May 8, 1997
(in Part III).
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ASSOCIATED ESTATES REALTY CORPORATION
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1996
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1996 MARCH 21, 1997
1996 ANNUAL PROXY
ITEM FORM 10-K REPORT STATEMENT
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PART I
1. Business 1 - -
Strategy and Philosophy 1 - -
Management and Operations Strategy 2 - -
Acquisition and Development 2 - -
Financing 3 - -
Registration statements filed in connection with financing 4 - -
Acquisitions, development and dispositions 4
Competitive Conditions 5
Main Offices 6 - -
Employees 6 - -
2. Properties 6 - -
Market-rate Properties 6 - -
Government-Assisted Properties 6 - -
Congregate Care Facilities 7 - -
Undeveloped Land 7 - -
Indebtedness Encumbering the Properties 7 - -
Government Programs 7 - -
Rental Assistance Program 7 - -
Mortgage Insurance Programs 9 - -
3. Legal Proceedings 10 - -
4. Submission of Matters to a Vote of Security Holders 10 - -
PART II
5. Market for the Registrant's Common Equity and
Related Stockholder Matters 11 44 -
6. Selected Financial Data 12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 18 -
8. Financial Statements and Supplementary Data 14 25 -
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 14 - -
PART III
10. Directors and Executive Officers of the Registrant 15 - 3
11. Executive Compensation 16 - 6
12. Security Ownership of Certain Beneficial Owners and
Management 17 - 2
13. Certain Relationships and Related Transactions 17 - 9
Glossary 18 - -
PART IV
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 20 - -
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See "Glossary" for the definitions of certain capitalized terms used in
this Form 10-K.
PART I
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ITEM 1. BUSINESS
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Associated Estates Realty Corporation (the "Company"), a fully
integrated real estate company, was formed in July 1993 to continue the business
of the Associated Estates Group ("AEG") of developing, acquiring, owning and
managing multifamily residential rental apartment facilities. The Company's
portfolio currently consists of 85 multifamily properties (the "Properties")
containing 16,066 suites located in 49 different governmental jurisdictions in
Indiana, Ohio, Michigan and Pennsylvania.
Of the Company's 16,066 suites, 13,811 suites are contained in
conventional, market-rate properties (the "Market-rate Properties") and 2,085
suites are contained in properties, the rents of which are subsidized by the
United States Department of Housing and Urban Development (the
"Government-Assisted Properties"). The remaining 170 suites are contained in
apartment communities for elderly persons that provide residents with one daily
meal, housekeeping, laundry and other services and recreational and educational
activities ("Congregate Care Facilities"). Economic occupancy during 1996
averaged 95.5%. Additionally, the Company owns seven undeveloped land parcels
containing an aggregate of 201.7 acres.
The Company is a self-administered and self-managed Real Estate
Investment Trust ("REIT") and accordingly, does not engage or pay for a REIT
advisor. The Company manages all of the Properties, and either AEG or the
Company has managed all of the Properties continuously since their acquisition
or development by AEG or the Company. Of the Company's 85 Properties, 43 were
developed and two were acquired by AEG prior to the IPO and 40 Properties were
acquired in separate transactions by the Company after the IPO. Subsequent to
the IPO, the Company also acquired the remaining 50% interest in two of the
Properties included in the Company's Portfolio at the time of the IPO which were
previously owned by joint ventures (together with the 40 Properties referred to
above, the "Acquired Properties"). Nine of the Acquired Properties are located
in northern Ohio, 22 are located in central Ohio, nine are located in Michigan,
one is located in Pittsburgh, Pennsylvania and one is located in Indianapolis,
Indiana. The 40 Properties acquired since the IPO contain 7,362 suites,
including 220 suites that were added to these Properties after their
acquisition.
The property located in Pittsburgh, Pennsylvania is owned by Associated
Estates Realty Corporation of Pennsylvania, Inc., a wholly owned subsidiary of
the Company. The property located in Indianapolis, Indiana is owned by
Associated Estates Realty Corporation of Indiana, LLC, also a wholly owned
subsidiary of the Company.
The Company also currently manages 7,052 residential suites and eight
commercial properties (containing an aggregate of approximately 825,000 square
feet of gross leasable area), not owned by the Company. In addition, the Company
owns substantially all of the economic interests in five corporations which
provide management and other services for the Company.
Strategy and Philosophy. The Company, together with affiliated
entities, has assembled, through development, acquisition and substantial
rehabilitation, one of the largest portfolios of multifamily properties in the
Great Lakes region. The Company is committed to superior service and attentive,
"hands-on" management necessary to maintain and enhance its position as a
leading owner, developer and manager of multifamily properties.
The Company is committed to increasing its cash flow and Funds From
Operations (on an aggregate and per share basis) and the value of its portfolio
of Properties. The Company is also committed to continuing growth through the
active management of the Properties and the selective acquisition and
development of additional multifamily properties.
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Management and Operations Strategy. The Company has employed a strategy
of developing and acquiring a group of multifamily properties in various
locations that has resulted in a strategically balanced portfolio allowing the
Company to respond to changing lifestyles and demographics. The Company provides
a variety of multifamily rental housing types with monthly rents ranging from
$369 to $988 and a portfolio average of $609 per suite at December 31, 1996. The
Company operates using a centralized management approach to provide a stable
operating environment that maximizes the economic returns of the Properties
through consistent and predictable cash flow and enhances the value of its
properties. Strategically located in 49 separate government jurisdictions, the
management of the Properties is supervised by a team of real estate
professionals that together possess over 130 years of experience in the property
management industry. A regional office has been established in the Columbus,
Ohio area within a one hour drive from each of the Central Ohio Properties to
provide closer oversight of these Properties.
The Company's management approach is to monitor its marketplace closely
and to seek to provide superior services to its residents through hands on
management. All management personnel work and live in close proximity to the
Properties. The Company believes this concept simplifies the handling of
management tasks and on-site situations and helps ensure that the site staff
provide quality service to their residents. The Company has developed and has
substantially completed the installation of a proprietary leasing and marketing
information system known as LISA(R). This system furnishes senior management up
to the minute information concerning leasing traffic, occupancy trends and daily
activities on a property by property basis and for the portfolio as a whole.
This technology greatly enhances the flow of information between management and
operations by providing an on-line communication link with each of the
Properties.
Over the years, the Company has also applied its management approach to
the management of properties for third parties. Although this is not an area of
additional growth, the Company believes that third-party property management can
broaden the Company's knowledge of a market, create opportunities for future
acquisitions, enhance purchasing power, provide a network for new personnel and
generate fee income.
The Company intends to maximize all available sources of capital which
may include the selective disposition of certain Properties and/or undeveloped
land. Notwithstanding the selective dispositions of assets, the Company plans to
continue its annual program of improvements to its Properties and its ongoing
practice of regular maintenance and periodic renovation, which are intended to
yield long-term benefits. The Company believes that these activities will
enhance shareholder value.
Acquisition and Development. Since completion of the IPO, the Company
has acquired 40 properties that contain an aggregate of 7,142 suites. The
Company intends to continue to acquire primarily Market-rate Properties with
attractive initial yields, leases at below market rental rates or properties
where the Company believes it can grow cash flow and benefit from the potential
for capital appreciation, and where the Company believes that its financial
strength and management capabilities can enhance value. Substantial
rehabilitation and the repositioning of apartment properties has historically
been an important component of AEG's business, and the Company believes that it
may be able to capitalize on this experience in connection with future
acquisitions.
The Company's strategy is to benefit from its access to the capital
markets by taking advantage of investment opportunities, principally in markets
where the acquisition of a property or properties can provide the basis for
establishing an ongoing presence and/or where day-to-day management issues may
create favorable opportunities for the acquisition of properties. The Company
believes acquisition opportunities exist in markets experiencing favorable
economic growth patterns where multifamily properties can be acquired at below
replacement cost or where the construction of multifamily apartments is
difficult due to zoning restrictions or where properties have been undermanaged.
These opportunities may provide for the future growth of the Company beyond its
current markets. The Company completed the acquisition of The Gables at White
River, a 228-suite multifamily property located in Indianapolis, Indiana on
February 6, 1997, and one 10-acre parcel of land in central Ohio on March 7,
1997.
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The Company currently is engaged, and as a matter of course, engages in
discussions with third-party owners of multifamily properties and management and
construction companies regarding potential acquisitions or management by the
Company of existing multifamily properties or newly constructed multifamily
properties that the Company will acquire upon completion of construction. At
March 18, 1997, the Company was under contract to purchase five properties, four
in Ohio and one in Indiana, consisting of 1,108 suites, and four parcels of
undeveloped land in Ohio and Michigan containing an aggregate of 148.5 acres,
three of which are located adjacent to or in the vicinity of multifamily
properties presently owned by the Company. The Company also, in the normal
course of its business, enters into non binding letters of intent concerning the
possible acquisition of properties and businesses. It is the Company's policy to
not disclose information about properties that are the subjects of such letters
of intent. There is no guarantee that the Company will be successful in
acquiring the five properties and the four land parcels currently under
contract. The Company expects that acquisitions will continue to provide a
source of growth for the Company.
Development of new properties is also an important component of the
Company's business. The Company plans to selectively develop multifamily
properties either on land currently owned or controlled by the Company or on
land the Company may acquire in the future. The Company has completed the
expansion of a total of 220 suites on parcels of land adjacent to The Residence
at Newark, Muirwood Village at Zanesville, Wyndemere and Georgetown Park
Apartments. In addition, the Company has commenced construction of Bradford at
Easton, a 324-suite multifamily property in Columbus, Ohio that will be
completed in the Fall of 1997. Construction is also in progress at The Residence
at Barrington, a 288-suite multifamily property located in Aurora, Ohio having
an anticipated completion date of August 1997 for the 168 suites in phase one of
the development, and 1998 for the 120 suites in phase two. Phase one of The
Village of Western Reserve was also underway at the end of 1996, with completion
of the 108-suite phase one expected by December 1997; phase two is scheduled for
future development. Over time, the Company may alter its mix of acquisition and
development to take advantage of varying market opportunities.
Financing. Sixty-four of the Company's 77 wholly owned properties were
unencumbered at December 31, 1996 with annualized earnings before interest,
depreciation and amortization of approximately $41 million and an historical
cost basis of approximately $374 million. The remaining 13 of the Company's
wholly owned properties have an historical cost basis of $104.2 million and
secured property specific debt of $69 million at December 31, 1996. A lender has
been advised of the Company's intent to prepay property specific debt in the
aggregate amount of $14.7 million secured by three of the Company's wholly owned
properties. The Company expects to finance the prepayment of these mortgages
using borrowings under its Line of Credit and/or its Medium-Term Note Program.
There can be no assurances, however, that these mortgages will be repaid.
Unsecured debt, which totaled $148.8 million at December 31, 1996, consisted of
$42.5 million in Medium-Term Notes, Senior Notes of $84.8 million and amounts
drawn on the revolving credit facility of $21.5 million. The Company's
proportionate share of the mortgage debt relating to the seven joint venture
properties was $18 million at December 31, 1996. The weighted average interest
rate on the secured, unsecured and the Company's proportionate share of the
joint venture debt was 8.0% at December 31, 1996.
The Company utilizes borrowings under a $75 million unsecured revolving
credit facility (the "Line of Credit") for the acquisition and development of
multifamily properties and working capital purposes. The Line of Credit 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, the LIBOR margin
is 150 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 25 basis points and 37.5 basis points 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 December 31, 1996, $21.5 million was drawn on the
Line of Credit with a weighted average interest rate of 7.5%.
During the year ending December 31, 1996, the Company issued six
Medium-Term Notes (the
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"MTN's") aggregating $42.5 million under its $75 million MTN program. The
principal amounts of these MTN's range from $2.5 million to $15 million and bear
interest from 6.60% to 7.93% over terms of between 5 to 30 years. The holder of
a $2.5 million, 30 year MTN has the option to require payment on March 15, 2003.
The net proceeds to the Company with respect to these issuances were $42
million, of which $32.1 million was applied to amounts outstanding under the
Line of Credit and the remaining $9.9 million was used to acquire a multifamily
property.
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. The total amount of the shelf filing includes a $117.5 million
Medium-Term Note Program and $218.8 million available under previous shelf
registrations. The 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 year ended December 31, 1996, the Company acquired six
multifamily properties containing 1,289 suites and three parcels of land
consisting of 43 acres for an aggregate purchase price of $59.1 million. The
acquisitions are located in Michigan, Ohio and western Pennsylvania, and were
financed with borrowings under the Line of Credit, the issuance of MTN's and the
assumption of mortgage indebtedness. 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
The Residence at 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. Construction has also commenced at The Village of
Western Reserve, a 108-suite property located in Streetsboro, Ohio that is
expected to be completed in the Fall of 1997. In addition, the Company owns five
parcels of undeveloped land, two of which are in Ohio and three of which are in
Michigan, containing 84 acres on which an estimated 783 suites could be
developed. Development activities for the construction of 274 suites have
commenced with respect to two of these parcels.
Subsequent to December 31, 1996, the Company acquired a multifamily
property containing 228 suites and a 10-acre parcel of land for an aggregate
purchase price of $12.7 million which was financed with borrowings under the
Company's Line of Credit. The multifamily property is located in Indianapolis,
Indiana, and the parcel of land is located in central Ohio. The Company is
currently under contract to purchase five multifamily properties containing an
aggregate of 1,108 suites and four parcels of undeveloped land containing an
aggregate 148.5 acres for a total purchase price of $68.9 million. The
multifamily properties are located in Ohio and Indiana, while the land parcels
are located in Ohio and Michigan. With the exception of one 37 acre parcel
located in Avon, Ohio, the land parcels under contract are located adjacent to
or in the vicinity of multifamily properties presently owned by the Company. The
Company expects to finance the acquisition of the multifamily property and five
land parcels using borrowings under the Line of Credit and/or the Medium-Term
Note Program. There can be no assurances, however, that the Company will be
successful in acquiring the multifamily property and the land parcels under
contract.
The Company is exploring opportunities to sell several of the
Government-Assisted Properties. 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. No loss is anticipated from the
aforementioned,
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potential property dispositions; however, there can be no assurances that the
Company will be successful in disposing of the Government-Assisted Properties or
the parcel of land.
The Company intends to finance future acquisitions and developments
with the most appropriate sources of capital, which may include undistributed
Funds From Operations, the issuance of equity or debt securities, bank and other
institutional borrowings, or through the exchange of properties. The Company may
also determine to raise additional working capital through one or more of these
sources.
Competitive Conditions. The Company operates in the northern Ohio,
central Ohio, Michigan, Pittsburgh, Pennsylvania and, most recently,
Indianapolis, Indiana rental markets. The Company believes that the demand for
the Market-rate Property rental suites will increase as the supply of
market-rate, multifamily apartment suites remains below demand in the Company's
markets. While demand does fluctuate throughout the markets in which the Company
operates, demand for the most part exceeds the supply of multifamily housing
available in those markets. The rents at the majority of the Market-rate
Properties target the middle-market renter who comprises the largest segment of
renters in these markets. Consequently, there is a stable and consistent market
for these suites. In some cases, however, Market-rate Property rents are
established to target the upper-middle-income renters where the location of the
property, size of the unit and the property's amenities contribute to the
marketability of these suites.
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 57% 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 50 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 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
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, and an increase of 5.4% in household
formations.
With an average economic occupancy for the Core Portfolio Market-rate
Properties over 95.2%, 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
expenditures for the Core Portfolio Properties will increase 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 moderate 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.
The market for the Government-Assisted Properties is unique in that the
residents of these properties receive assistance under the Rental Assistance
Program. See "Item 2. The Properties-Government Programs." At many of the
Government-Assisted Properties, waiting lists of qualified applicants are
maintained which minimize the need to advertise these suites. The average
Economic Occupancy of these Properties consistently exceeds 98%.
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Main Offices. The Company's offices are located at 5025 Swetland Court
in Richmond Heights, Ohio. The headquarters contain approximately 41,000 square
feet and a 3.7 acre parcel of adjacent land for further development or
expansion.
Employees. The Company has approximately 825 employees; approximately
135 of whom are located at the Company's headquarters and the remainder work at
the respective sites of the individual Properties. The Company believes that its
relations with its employees are good.
ITEM 2. THE PROPERTIES
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The Northern Ohio Properties consist of (i) 52 Properties containing
10,053 suites, eight of which are owned by joint ventures in which the Company
owns interests ranging between 33 1/3% and 66 2/3%, located in 25 governmental
jurisdictions, (ii) two properties that are currently under construction that,
when completed in the Fall of 1997 and Winter of 1998, respectively, will
contain an aggregate 396 suites, and (iii) two undeveloped land parcels
consisting of 129 acres. The joint ventures consist of two general partnerships
and six limited partnerships in which the Company is a general partner. The
Company has the authority to manage the day-to-day operations of the Properties
owned by the joint ventures. With respect to seven of these joint ventures, the
unanimous consent of the Company's joint venture partners is required for any
sale of the Property owned by the joint venture or the refinancing of the
indebtedness encumbering such Property. The Company has determined that a 90
acre parcel of undeveloped land, which was one of the assets acquired by the
Company at the time of the IPO, and is presently zoned for office and industrial
use, will not be rezoned for multifamily use and, accordingly, the Company
intends to sell this parcel of land.
The Central Ohio Properties consist of (i) 22 Properties located in 14
governmental jurisdictions, consisting of 3,135 suites, (ii) one property that
is currently under construction that, when completed in the Fall of 1997, will
contain 324 suites, and (iii) two undeveloped land parcels consisting of 20
acres.
The Michigan Properties consist of (i) nine Properties located in eight
governmental jurisdictions consisting of 2,182 suites, and (ii) undeveloped land
parcels adjacent to three of the Michigan Properties consisting of 17.7, 20 and
15 acres, respectively.
In addition, the Company is currently under contract to purchase, in
separate transactions, five properties in Ohio and Indiana consisting of 1,108
suites and four parcels of undeveloped land in Ohio and Michigan consisting of
an aggregate of 148.5 acres. With the exception of one 37 acre parcel located in
Avon, Ohio, the land parcels under contract are located adjacent to or in the
vicinity of multifamily properties presently owned by the Company. The Company
is also exploring opportunities to sell several of the Government-Assisted
Properties and has received an expression of interest from a number of different
sources. There can be no assurances, however, that the Company will be
successful in acquiring the properties or land parcel under contract or
disposing of any of the Government-Assisted Properties.
Market-rate Properties. Sixty-eight of the Company's Properties are
market-rate apartment properties in townhome, garden and high-rise buildings
consisting of 13,811 suites.
Upon closing of the IPO, the Company acquired a noteholder interest in
one property, in which one of the principals of the Company has a general
partnership interest. Since 1984, the property has been unable to generate
sufficient cash flow to meet the scheduled interest payments under these notes.
The noteholder is entitled to substantially all cash flows from operations. To
the extent that the cumulative unpaid debt service on the notes is greater than
seven years of aggregate principal and interest amortization (the cumulative
amount of debt service), which occurred in 1995, the Company can exercise its
rights under a security agreement and foreclose on the property.
Government-Assisted Properties. Sixteen of the Company's Properties are
Government-Assisted Properties consisting of 2,085 suites (1,965 of which are
Contract Suites and 120 of which are market rate suites). Pursuant to the HUD
rental subsidy program, these suites must be held available to persons meeting
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the criteria for eligibility (either low-income elderly or family). A portion of
the rent for these suites is paid directly to the Company by eligible residents
and the balance is remitted to the Company by HUD. Increases in rents are
established by the provisions of the applicable HAP Contract. See "Government
Programs."
Congregate Care Facilities. The Company's two Congregate Care
Facilities were developed to bridge a gap in the housing market for the elderly
between traditional rental housing and skilled nursing homes. The Congregate
Care Facilities are designed for older persons who do not require on-site
medical or custodial care but have special concerns that are not fulfilled by
traditional apartment housing. Residents of the Company's Congregate Care
Facilities pay market rental rates that are unregulated and are not subsidized.
Undeveloped Land. The Company also owns seven tracts of undeveloped
land. One parcel comprises approximately 90 acres and is zoned to permit
single-family, office-laboratory and production-distribution uses that the
Company has determined will not be rezoned for multifamily property development
and, accordingly, the Company plans to sell this parcel. The Company also owns
three undeveloped land parcels in Ohio, two in the Central region and one in the
Northern region, consisting of 10, 10 and 39 acres, respectively, that are zoned
for multifamily property development. In addition, the Company owns undeveloped
land parcels adjacent to three of the Michigan Properties consisting of 17.7, 20
and 15 acres, respectively, all of which are currently zoned for multifamily
property development.
Indebtedness Encumbering the Properties. AEG financed and, in many
cases, refinanced the acquisition, development and rehabilitation of its
Properties with a variety of sources of mortgage indebtedness, including
indebtedness insured by HUD under programs administered pursuant to Section
221(d)(4) of the National Housing Act. See "Government Programs." The mortgage
indebtedness currently encumbering nine of the Properties, including four of the
Government-Assisted Properties (one of which is a joint venture property) and
one of the Congregate Care Facilities, is insured by HUD under this program.
Pursuant to this program, certain aspects of the Company's operation of the
subject Properties are governed by the provisions of separate Regulatory
Agreements. See "Government Programs." Other sources of financing have included
tax-exempt and conventional mortgage financing.
Government Programs. Twenty of the Company's Properties (including one
of its Congregate Care Facilities) benefit from, and certain aspects of their
operations are governed by regulation pursuant to, the rental assistance and/or
the mortgage insurance program described below. Eighteen of these Properties are
each owned by a wholly owned subsidiary of the Company and the Company is a
joint venture partner in two of these Properties with the Company's interest
ranging from 50% to 662/3%. The following summary of the programs is qualified
in its entirety by reference to the applicable Federal statutes and the
regulations promulgated thereunder. There can be no assurance that the terms of
such programs will not change or that any such changes will not be detrimental
to the Company.
Rental Assistance Program. The Company currently is entitled
to receive rental assistance subsidies from HUD under Section 8 of the
United States Housing Act of 1937, as amended (the "Rental Assistance
Program"), for 1,965 of the 2,085 rental suites in 16 multifamily
properties (the "Government-Assisted Properties"). Approximately 94.2%
of the total rental suites in the Government-Assisted Properties (the
"Contract Suites") are eligible to receive rental assistance (one
Government-Assisted Property contains 77 Contract Suites and 120
non-subsidized suites). The Company is a 50% joint venture partner in
one Government-Assisted Property consisting of 108 suites.
The Rental Assistance Program is a federal rent subsidy
program designed to assist in making housing available to low and very
low income persons and families. Under the Rental Assistance Program,
HUD will make monthly housing assistance payments ("HAP Payments") to
or for the account of the Company with respect to Contract Suites on
behalf of persons and families meeting HUD eligibility requirements
("Eligible Residents"). The amount of each monthly HAP Payment with
respect to each Contract Suite is equal to the rent (the "Contract
Rent") agreed to by HUD pursuant to the terms of a Housing Assistance
7
<PAGE> 10
Payments Contract (a "HAP Contract"), less the rent payment payable by
the Eligible Resident for such month. An Eligible Resident is required
to make rent payments (including a reasonable allowance for the cost of
utilities paid by the resident) not exceeding 30% of the Eligible
Resident's adjusted income. Thus, the total rental income payable to,
or for the account of, the Company with respect to each
Government-Assisted Property is equal to the rent paid by Eligible
Residents and the HAP Payments actually paid by HUD pursuant to the
applicable HAP Contract.
Below is a table setting forth the final expiration dates of
the HAP Contracts for the Company's Government-Assisted Properties:
<TABLE>
<CAPTION>
Final
Property Expiration Date
-------- ---------------
<S> <C>
Somerset West: 38 suites............................ September 1997
Shaker Park Gardens II.................................... August 2000
Statesman II.............................................. November 2000
Tallmadge Acres........................................... March 2001
Puritas Place............................................. September 2011
Jennings Commons.......................................... November 2001
West High Apartments...................................... November 2001
Rainbow Terrace........................................... January 2002
Somerset West: 39 suites............................ March 2002
Lake Shore Village........................................ October 2002
State Road Apartments..................................... December 2016
St. James (Riverview)..................................... November 2009
Twinsburg Apartments...................................... June 2009
Village Towers............................................ November 2009
Hillwood I................................................ July 2016
Ellet Development......................................... December 2017
Sutliff Apartments II..................................... November 2019
</TABLE>
The Company will not seek an extension of the Somerset West
HAP contract on the 38 suites which expires in September 1997.
Somerset West is a 197-suite property containing 120 Market-rate and 77
Government-Assisted suites. The Company intends to operate this
property as a market-rate property once the HAP Contracts expire.
Contract Rents are adjusted at least annually in accordance
with one of two adjustment processes, the annual adjustment factor
method or the budget method. Contract Rents for all but one of the
Government-Assisted Properties are adjusted pursuant to the "annual
adjustment factor" method. Annual adjustment factors are determined
each year by HUD and applied to then current Contract Rents. The annual
adjustment factors are calculated by HUD for individual metropolitan
areas based on either a local consumer price index survey or pursuant
to a formula which includes components reflecting changes in market
area rents and utility costs.
Additionally, HUD may permit special additional adjustments to
reflect increases in actual and necessary expenses of owning and
maintaining Contract Suites which result from substantial general
increases in real property taxes, utility rates, insurance or similar
costs, upon demonstration that such general cost increases are not
adequately compensated for by the annual adjustments.
The Contract Rents for one Government-Assisted Property are
determined by the budget method, in which the Contract Rents are based
on the total cost of operating the
8
<PAGE> 11
Government-Assisted Property, the amount necessary to fund required
reserves and an amount which provides a reasonable return on the
owner's equity. Contract Rents are revised to reflect an annual
operating budget submitted by the Company as approved by HUD.
Mortgage Insurance Programs. The mortgage indebtedness
encumbering nine of the Properties including four of the
Government-Assisted Properties (one of which is a joint venture
property and one of the Company's Congregate Care Facilities) is
insured by HUD pursuant to the mortgage insurance program administered
under Section 221(d)(4) of the National Housing Act.
Owners of projects financed by loans insured by HUD under the
HUD programs previously described are required to enter into Regulatory
Agreements with HUD which remain in effect so long as the mortgage loan
on the property is insured or held by HUD. Each wholly owned subsidiary
of the Company that benefits from a government program has entered into
a separate Regulatory Agreement in connection with the Property owned
by it. The Regulatory Agreements contain certain covenants that
restrict the operation of the subject Properties.
- --------------
9
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Other than routine litigation and administrative proceedings arising in
the ordinary course of business, the Company is not presently involved in any
litigation; nor, to the knowledge of the Company, is any litigation threatened
against the Company or any of the Properties, which is reasonably likely to have
a material adverse effect on the liquidity or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
None
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- -------------------------------------------------------------------------------
The information on the Market for the Registrant's Common Equity and
Related Stockholder Matters is incorporated by reference to page 44 of the
Company's 1996 Annual Report to Shareholders.
The Company anticipates that dividends will be paid quarterly using net
cash provided by operations. On December 9, 1996, the Company declared a $0.45
per share dividend for shareholders of record on December 31, 1996, which was
paid on January 31, 1997. On February 19, 1997, the Company declared a dividend
of $0.465 per common share for the quarter ending March 31, 1997 which is
payable on May 1, 1997 to shareholders of record on April 15, 1997.
11
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
SELECTED FINANCIAL DATA
The following tables set forth selected financial data on a
consolidated basis for the Company and on a combined basis for Associated
Estates Group ("AEG"). This information should be read in conjunction with (i)
the historical consolidated and combined financial statements, including the
notes thereto, of the Company and AEG, respectively, and (ii) Management's
Discussion and Analysis of Financial Condition and Results of Operations, each
of which is included elsewhere in this report.
<TABLE>
<CAPTION>
Associated Estates Group
("AEG"-Predecessor)
------------------------
For the For the For the
period period year
(Dollars in thousands except per share For the year ended November 19- January 1- ended
amounts and average monthly rental revenue) December 31, December 31, November 18, December 31,
1996 1995 1994 1993 1993 1992
------------ --------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUE:
Rental $ 87,975 $ 70,045 $ 48,859 $ 4,256 $ 32,879 $ 36,143
Property management fees 393 417 494 58 466 467
Property management fees-affiliates 3,387 3,796 3,437 390 2,726 3,029
Painting services 1,634 1,067 1,271 247 1,287 1,618
Interest 216 352 617 235 596 803
Other 828 1,266 587 28 378 547
------------ --------- ----------- ------------ ---------- ---------
Total revenue 94,433 76,943 55,265 5,214 38,332 42,607
EXPENSES:
Property operating and maintenance
expenses (before depreciation and
amortization) 37,056 29,279 21,084 1,623 16,365 16,832
Property co-management fees 184 191 181 22 283 217
Painting services 1,427 1,001 1,257 197 1,211 1,302
General and administrative 5,737 5,326 4,012 403 2,497 3,295
Depreciation and amortization 15,536 12,657 8,122 639 4,788 5,415
Interest expense 15,494 11,515 6,494 644 10,159 11,939
Nonrecurring property transfer costs - - - 530 - -
------------ --------- ----------- ------------ ----------- ----------
Total expenses 75,434 59,969 41,150 4,058 35,303 39,000
------------ --------- ----------- ------------ ----------- ----------
Income from operations 18,999 16,974 14,115 1,156 3,029 3,607
Equity in net income (loss) of joint
ventures 305 297 134 (170) (149) 15
------------ --------- ----------- ------------ ----------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 19,304 17,271 14,249 986 2,880 3,622
Extraordinary item - (1,097) (727) (3,876) - -
------------ --------- ----------- ------------ ----------- ----------
NET INCOME (LOSS) $ 19,304 $ 16,174 $ 13,522 $ (2,890) $ 2,880 $ 3,622
============ ========= =========== ============ =========== ==========
NET INCOME (LOSS) APPLICABLE TO COMMON
SHARES $ 13,820 $ 14,041 $ 13,522 $ (2,890)
=========== ========= =========== ============
PER COMMON SHARE DATA:
Income before extraordinary item $ .99 $ 1.09 $ 1.19 $ 0.09
============ ========= =========== ============
Net income (loss) $ .99 $ 1.01 $ 1.13 $ (0.27)
============ ========= =========== ============
Dividends $ 1.80 $ 1.72 $ 1.60 $ 0.19
============ ========= =========== ============
Weighted average common shares outstanding
(in thousands) 13,932 13,869 11,942 10,862
============ ========= =========== ============
OTHER DATA:
Cash flow provided by (used in):
Operating activities $ 31,060 $ 28,881 $ 34,481 $ 139 $ 10,680 $ 8,340
Investing activities $ (75,771) $ (94,151) $ (113,567)$ (2,013)$ 780 $ 119
Financing activities $ 43,149 $ 66,247 $ 49,651 $ 30,242 $ (8,523) $ (8,459)
Funds From Operations (a) $ 28,915 $ 27,253 $ 22,316 $ 2,219 $ 8,149 $ 9,592
Earnings before interest, depreciation
and amortization (b) $ 46,929 $ 41,270 $ 30,667 $ 3,027 $ 19,583 $ 22,823
Total properties (at end of period) 84 78 66 45 45 45
CORE PORTFOLIO:
Total multifamily suites (at end of period) 15,838 14,501 12,093 8,704 8,704 8,704
Average monthly rental revenue per
multifamily suite $ 581 $ 564 $ 529 $ 518 $ 519 $ 519
Economic Occupancy (d) 95.5% 95.7% 95.2% 94.3% 94.1% 93.9%
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Associated
Estates
Group
("AEG"-
Predecessor)
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA AT DECEMBER 31:
Real estate, before accumulated depreciation $ 513,966 $ 433,965 $312,716 $161,838 $ 155,875
Real estate, after accumulated depreciation 401,864 336,663 227,303 84,201 83,433
Total assets 417,746 351,710 240,309 129,705 106,321
Total debt (c) 217,813 171,234 105,113 60,389 144,392
Total shareholders' equity 158,016 139,170 94,897 45,079 (65,160)
</TABLE>
(a) The Company considers Funds From Operations ("FFO"), as defined by the
National Association of Real Estate Investment Trusts ("NAREIT"), to be
an appropriate measure of the performance of an equity REIT. For
periods ended prior to January 1, 1996, FFO was defined by NAREIT to
mean net income (loss) determined in accordance with GAAP, excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization, and after adjustment for unconsolidated
partnerships and joint ventures. FFO should not be considered as an
alternative to net income (as determined in accordance with GAAP) as an
indicator of the Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure
of the Company's liquidity, nor is it necessarily indicative of
sufficient cash flow to fund all of the Company's needs. Adjustments
for all periods, as applicable, consisted only of depreciation and
amortization and extraordinary items. In March 1995, the NAREIT
modified the definition of FFO, among other things, to eliminate
amortization of deferred financing costs and depreciation of non-real
estate assets as items added back to net income when computing FFO. The
modified definition of FFO became effective for periods ended after
December 31, 1995. FFO presented herein (whether defined under the old
or modified NAREIT definition) is not necessarily comparable to FFO
presented by other real estate companies due to the fact that not all
real estate companies use the same definition.
(b) Includes earnings before interest, depreciation and amortization from
joint ventures calculated on the same basis. Income before interest,
depreciation and amortization 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.
(c) Amount excludes the Company's share of mortgage indebtedness relating
to the unconsolidated joint ventures of approximately $17,969, $18,164,
$18,342 and $19,105 at December 31, 1996, 1995, 1994 and 1993,
respectively.
(d) Economic Occupancy is calculated as the actual rent revenue divided by
the total rent expected to be earned based on the market rental rate
for all suites.
13
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS.
- --------------
The information required on Management's Discussion and Analysis of
Financial Condition and Results of Operations is incorporated by reference to
pages 18 through 24 of the Company's 1996 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
The information required on Financial Statements and Supplementary Data
is incorporated by reference to pages 25 through 43 of the Company's 1996 Annual
Report to Shareholders.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
- ------------------------------------------------------------------------------
DISCLOSURE.
- -----------
None.
14
<PAGE> 17
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information regarding the Company's Directors contained in the Notice
of Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders to
be held on May 8,1997, is incorporated by reference in this Annual Report on
Form 10-K.
The Executive Officers of the Company as of March 1, 1997 are:
<TABLE>
<CAPTION>
Name Age Position with the Company
------------------- --- --------------------------------------------
<S> <C> <C>
Jeffrey I. Friedman 45 Chairman of the Board, President, Chief
Executive Officer and Director
Dennis W. Bikun 40 Chief Financial Officer and Treasurer
Martin A. Fishman 55 Vice President - General Counsel and Secretary
Thomas G. Selby 41 Vice President of Operations
Jerome Spevack 65 Executive Vice President and Director
</TABLE>
Jeffrey I. Friedman has been Chairman of the Board, President and Chief
Executive Officer of the Company since its organization. Mr. Friedman joined AEG
in 1974 and was the Chief Executive Officer and President of Associated Estates
Corporation, a company in the AEG group, from 1979 to 1993.
Dennis W. Bikun has been Chief Financial Officer of the Company since
its organization. Mr. Bikun joined AEG in 1983 as Director of Information
Management Services of Associated Estates Corporation. From 1985 to 1991 he was
a Vice President of Associated Estates Corporation, and was the Chief Financial
Officer of Associated Estates Corporation from 1991 until the formation of the
Company. Mr. Bikun is a Certified Public Accountant.
Martin A. Fishman has been Vice President - General Counsel of the
Company since its organization. Mr. Fishman joined AEG in 1986 as Vice President
- - General Counsel of Associated Estates Corporation, a position he held until
the formation of the Company.
Thomas G. Selby joined the Company in 1996 as Vice President of
Operations. Prior to joining the Company, Mr. Selby served as Managing Director
of Asset Management from 1994 to 1996 for The Balcor Company, a national real
estate company. Previously, he served as Senior Vice President for Balcor
Property Management from 1986 to 1994.
Jerome Spevack has been Executive Vice President and a Director of the
Company since its organization. Mr. Spevack joined AEG in 1967 and has held
various positions within the organization, including Executive Vice President of
Associated Estates Corporation since 1979 and President of A.E.C. Management
Company, also an AEG company, since 1987. Mr. Spevack is a Certified Property
Manager.
In addition to the executive officers named in the table above, the
following persons hold positions in senior management with the Company as
indicated:
Barbara E. Hasenstab joined the Company in 1996 as Director of Investor
Relations. Prior to joining the Company, Ms. Hasenstab was responsible for
investor relations for Caliber System, Inc., a Fortune 500 transportation and
logistics company. Ms. Hasenstab has 18 years of experience in investor
relations and is 43 years old.
15
<PAGE> 18
Terrence P. Keenan joined the Company in 1995 as Director of Construction
and Development. Prior to joining the Company, Mr. Keenan was the Project
Manager for the Richard Jacobs Group. Mr. Keenan has 16 years of experience in
the construction of real estate properties and is 38 years old.
Steven E. Lee joined the Company in 1997 as a Regional Director of
Operations and has been involved in multifamily property management for 14
years. Mr. Lee has supervisory responsibility for properties in Michigan and
northern Ohio, as well as the Company's two properties in Indianapolis, Indiana
and Pittsburgh, Pennsylvania. Mr. Lee is a Certified Property Manager and is 41
years old.
Jeffrey Lustic joined AEG in 1980 and is currently the Company's Director
of Budgets, having responsibility for coordinating and monitoring the annual
operating budgets for the Properties. Mr. Lustic is 40 years old.
John W. McGinty joined AEG in 1990 and is currently the Director of
Financial Reporting, having overall responsibility for all aspects of financial
reporting. Mr. McGinty is a Certified Public Accountant and is 39 years old.
Richard Q. Mansfield joined the Company in 1995 as a Regional Director of
Operations and has been involved in multifamily property management for 20
years. Mr. Mansfield has supervisory responsibility for properties in northeast
Ohio and is 41 years old.
Terrence J. O'Driscoll joined AEG in 1988 and is currently the Company's
Director of Financial Development. Mr. O'Driscoll is a Certified Public
Accountant and is 40 years old.
James G. Owen joined AEG in 1986 and is currently the Company's Director
of Operations, with supervisory responsibility for regional operations in
northern and central Ohio and the government-subsidized properties. Mr. Owen is
a Certified Property Manager and is 42 years old.
Ron V. Pathak joined the Company in 1995 as a Regional Director of
Operations to continue a 14 year career in multifamily property management and
presently has supervisory responsibilities for properties in northern Ohio. Mr.
Pathak is a Certified Property Manager and is 43 years old.
Jennifer C. Reynolds joined the Company in 1996 as a Regional Director of
Operations and has been involved in property management for 12 years. Ms.
Reynolds has supervisory responsibility for properties in central Ohio. Ms.
Reynolds is a Certified Property Manager and is 44 years old.
Lita L. Weiss joined AEG in 1987 as Associate Counsel. Ms. Weiss has been
practicing law for 19 years with an emphasis in employment, housing, regulatory
and premises security law. Ms. Weiss is 64 years old.
Nan R. Zieleniec joined AEG in 1990 and is currently the Director of
Human Resources, having responsibility for all areas of human resource planning
and administration. Ms. Zieleniec is 38 years old.
ITEM 11. EXECUTIVE COMPENSATION.
- ---------------------------------
The information on Executive Compensation contained in the Notice of
Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders to be
held on May 8, 1997, is incorporated by reference in this Annual Report on Form
10-K.
16
<PAGE> 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
The information on Security Ownership of Certain Beneficial Owners and
Management contained in the Notice of Annual Meeting and Proxy Statement for the
Annual Meeting of Shareholders to be held on May 8, 1997, is incorporated by
reference in this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information on Certain Relationships and Related Transactions
contained in the Notice of Annual Meeting and Proxy Statement for the Annual
Meeting of Shareholders to be held on May 8, 1997, is incorporated by reference
in this Annual Report on Form 10-K.
17
<PAGE> 20
GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Form 10-K.
"AEG" means the Associated Estates Group, which includes (i) various
general partnerships, limited partnerships and corporations which sold interests
in 45 multi-family properties to the Company, (ii) Associated Estates
Corporation, (iii) A.E.C. Management Company, (iv) Estates Mortgage Company, (v)
Associated Health Care Management, Inc., (vi) Merit Management Corporation,
(vii) Merit Painting Services, Inc. and (viii) The Children's Computer Co.
"Central Ohio" means the area comprising the following Ohio counties:
Franklin, Fairfield, Licking, Madison, Muskingum, Pickaway and Warren.
"Central Ohio Properties" means multifamily Properties acquired by the
Company located in Central Ohio.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Common Shares" means the Common Shares, without par value, of the
Company.
"Company" means Associated Estates Realty Corporation, an Ohio
corporation, including, where the context requires, its subsidiaries and the
Service Companies.
"Congregate Care Facility" means a residential apartment community for
elderly persons that provides services to its residents which may include
prepared meals, housekeeping and laundry service and a variety of recreational
and educational activities.
"Contract Rent" means monthly rental amounts, as determined by HUD, for
each Contract Suite payable pursuant to a HAP Contract.
"Contract Suite" means a suite contained in a Government-Assisted
Property for which the owner of such property receives rent subsidies from HUD
pursuant to a HAP Contract.
"Market-rate Properties" means multifamily Properties which are operated
as conventional multifamily residential apartments, the operations of which are
not subject to regulation by HUD.
"Distributable Cash Flow" means Funds From Operations less scheduled
mortgage debt amortization payments and provisions for ongoing capitalized
improvements to the Properties.
"Economic Occupancy" means the actual rent revenue divided by the total
rent expected to be earned based on the market rental rate for all suites.
"Economic Vacancies" means the dollar amount of rent lost due to suites
not being leased determined at the Potential Suite Rent of each vacant suite.
"Eligible Resident" means a family or individual whose income, as
determined in accordance with HUD regulations, does not exceed income limits
promulgated by HUD for the housing market area and which meets certain other
conditions specified in the regulations.
"Funds From Operations" or "FFO" means net income (computed in accordance
with generally accepted accounting principles), excluding gains (or losses) from
sales of property and extraordinary and nonrecurring items, plus depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint ventures.
"Government-Assisted Properties" means multifamily Properties, the rents
of which are subsidized and certain aspects of the operations of which are
regulated by HUD pursuant to Section 8 of the National Housing Act of 1937.
"HAP Contract" means the agreement between HUD and the owner of a
Government-Assisted Property which provides for rent subsidies to be paid by HUD
to such owner and obligates such owner to comply with certain HUD regulations
governing certain aspects of its operations of such Government-Assisted
Properties.
18
<PAGE> 21
"HAP Payment" means a housing assistance payment the owner of a
Government-Assisted Property receives from HUD pursuant to a HAP Contract.
"HUD" means the United States Department of Housing and Urban
Development.
"IPO" means initial public offering. The Company completed an initial
public offering of 7,250,000 common shares in November 1993, the proceeds of
which were used to acquire the various businesses from AEG.
"Michigan Properties" means multifamily Properties acquired by the
Company located in Michigan.
"National Housing Act" means the National Housing Act, as amended from
time to time.
"Northern Ohio" means the area comprising the following Ohio counties:
Cuyahoga, Geauga, Lake, Lorain, Lucas, Medina, Portage and Summit.
"Northern Ohio Properties" means multifamily Properties acquired by the
Company located in Northern Ohio.
"Perpetual Preferred Shares" means the 2,250,000 Depositary Shares, each
representing 1/10 of a share of the Company's 9.75% Class A Cumulative
Redeemable Preferred Shares.
"Physical Occupancy" means the total number of suites less the number of
unoccupied suites divided by the total number of suites expressed as a
percentage.
"Potential Suite Rent" means the rent at which a suite is expected to be
leased based on its market value.
"Property" means a multifamily residential rental apartment facility.
"Properties" means, collectively, the Northern Ohio Properties
(including approximately 63,000 square feet of commercial space contained in a
mixed-use multifamily Property and other commercial space ancillary to certain
of the multifamily Properties), the Central Ohio Properties, the Michigan
Properties, the Western Pennsylvania Property, the Indianapolis, Indiana
Property and seven tracts of primarily undeveloped land owned by the Company.
"Regulatory Agreement" means an agreement between HUD and the owner of a
property, the mortgage indebtedness of which is insured by HUD, pursuant to
which certain aspects of the operations of such property are regulated.
"REIT" means a real estate investment trust as defined pursuant to
Sections 856 through 860 of the Code; a type of corporate ownership of real
estate in which income is taxed only at the level of the individual
shareholders.
"Service Companies" means Associated Estates Management Company, Merit
Management Corporation, Merit Painting Services, Inc., Estates Mortgage Company
and Children's Computer Company. These are management and service companies in
which Associated Estates Realty Corporation owns substantially all of the
economic interests in order to provide the Company with as much of the economic
benefits of such corporations' operations as possible while furthering the
Company's current intention of complying with the Code requirements for
qualification as a REIT.
"Suite" means an apartment unit in a multifamily Property.
"Total Market Capitalization" means the aggregate market value of the
Company's outstanding Common and Perpetual Preferred Shares and total long-term
debt of the Company.
19
<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) The following documents are filed as part of this Report.
1. FINANCIAL STATEMENTS: The following Consolidated Financial
Statements of Associated Estates Realty Corporation and Report
of Independent Accountants are incorporated by reference to
pages 25 through 43 of the Registrant's 1996 Annual Report to
Shareholders:
Report of Independent Accountants - Associated
Estates Realty Corporation.
Consolidated Balance Sheets as of December 31, 1996
and 1995.
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994
Notes to Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES: The following financial
statement schedule of Associated Estates Realty Corporation is
filed as part of this Report and should be read in conjunction
with the Consolidated Financial Statements of Associated
Estates Realty Corporation.
<TABLE>
<CAPTION>
Schedule Page
<S> <C>
-------- ----
III Real Estate and Accumulated Depreciation. S-1
</TABLE>
Schedules not listed above have been omitted because
they are not applicable or are not required or the
information required to be set forth therein is
included in the Consolidated Financial Statements or
Notes thereto.
(b) Reports on Form 8-K for the quarter ended December 31, 1996.
None
(c) EXHIBITS: The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedules are filed as
part of, or incorporated by reference into, this Report.
20
<PAGE> 23
<TABLE>
<CAPTION>
FILED HEREWITH OR
INCORPORATED
HEREIN BY
NUMBER TITLE REFERENCE
- --------------- ------------------------------------------------------------ ---------------------
<S> <C> <C>
3.1 Second Amended and Restated Articles of Incorporation of the Exhibit 3.1 to Form
Company S-11 filed June 30,
1994 (File No. 33-
80950 as amended)
3.2 Code of Regulations of the Company Exhibit 3.2 to Form
S-11 filed June 30,
1994 (File No. 33-
80950 as amended).
4.1 Specimen Stock Certificate Exhibit 3.1 to Form S-
11 filed September 2,
1993 (File No. 33-
68276 as amended).
4.2 Form of Indemnification Agreement Exhibit 4.2 to Form S-
11 filed September 2,
1993 (File No. 33-
68276 as amended).
4.3 Promissory Note dated October 23, 1991 from Triangle Exhibit 4.3 to Form S-
Properties Limited Partnership, et. al., in favor of PFL 11 filed September 2,
Life Insurance Company; Open End Mortgage from Triangle 1993 (File No. 33-
Properties Limited Partnership I, et. al., in favor of PFL 68276 as amended).
Life Insurance Company (The Registrant undertakes to provide
additional long-term loan documents upon request)
4.4 Promissory Note dated February 28, 1994 in the amount of $25 Exhibit 4.4 to Form
million. Open-End Mortgage Deed and Security Agreement from 10-K filed March 31,
AERC to National City Bank (Westchester Townhouse); Open-End 1993.
Mortgage Deed and Security Agreement from AERC to National
City Bank (Bay Club); Open-End Mortgage Deed and Security
Agreement from Winchester II Apartments, Inc. to National City
Bank (Winchester II Apartments); and Open-End Mortgage Deed
and Security Agreement from Portage Towers Apartments, Inc.
to National City Bank (Portage Towers Apartments).
4.6 Indenture dated as of March 31, 1995 between Associated Exhibit 4.6 to Form
Estates Realty Corporation and National City Bank. 10-Q filed May 11,
1995.
4.7 $75 Million 8 3/8% Senior Note due April 15, 2000 Exhibit 4.7 to Form
10-Q filed May 11,
1995.
4.8 Revolving Credit Facility - Second Amended and Restated Exhibit 4.8 to Form
Credit Agreement dated September 26, 1995, by and among the 10-Q filed November
Company, as Borrower, and National City Bank, as Agent, and 11, 1995
the Banks identified therein.
4.8a Fourth Amendment to Revolving Credit Facility dated March 8, Exhibit 4.1 to Form
1996, by and among the Company, as Borrower, and National 10-Q filed May 13,
City Bank, as Agent, and the banks identified therein. 1996.
4.8b Fifth Amendment to Credit Agreement dated November 27, 1996, Exhibit 4.8b filed
by and among the Company, as Borrower, the banks and lending herewith.
institutions, as Banks, and National City Bank, as Agent.
4.9 Form of Medium-Term Note-Fixed Rate-Senior Security. Exhibit 4(i) to Form S-
3 filed December 7,
1995 (File No.
33-80169) as
amended.
4.10 Form of Preferred Share Certificate. Exhibit 4.1 to Form 8-
K filed July 12, 1995.
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
FILED HEREWITH OR
INCORPORATED
HEREIN BY
NUMBER TITLE REFERENCE
- --------------- ------------------------------------------------------------ ---------------------
<S> <C> <C>
4.11 Form of Deposit Agreement and Depositary Receipt. Exhibit 4.2 to Form 8-
K filed July 12, 1995.
4.12 Ten Million Dollar 7.10% Senior Notes Due 2002 Exhibit 4.12 to Form
10-K filed March 28,
1996.
10 Associated Estates Realty Corporation Directors' Deferred Exhibit 10 to Form
Compensation Plan 10-Q filed November
14, 1996
10.1 Registration Rights Agreement among the Company and certain Exhibit 10.1 to Form
holders of the Company's Common Shares S-11 filed September
2, 1993 (File No. 33-
68276 as amended).
10.2 Stock Option Plan Exhibit 10.2 to Form
S-11 filed September
2, 1993 (File No. 33-
68276 as amended).
10.3 Amended and Restated Employment Agreement between the Exhibit 10.1 to Form
Company and Jeffrey I. Friedman 10-Q filed May 13,
1996.
10.4 Equity-Based Incentive Compensation Plan Exhibit 10.4 to Form
10-K filed March 29,
1995.
10.5 Long-Term Incentive Compensation Plan Exhibit 10.5 to Form
10-K filed March 29,
1995.
10.6 Lease Agreement dated November 29, 1990 between Royal Exhibit 10.6 to Form
American Management Corporation and Airport Partners 10-K filed March 29,
Limited Partnership. 1995.
10.7 Sublease dated February 28, 1994 between the Company as Exhibit 10.7 to Form
Sublessee, and Progressive Casualty Insurance Company, as 10-K filed March 29,
Sublessor. 1995.
10.8 Assignment and Assumption Agreement dated May 17, 1994 Exhibit 10.8 to Form
between the Company, as Assignee, and Airport Partners 10-K filed March 29,
Limited Partnership, as Assignor. 1995.
10.9 Form of Restricted Share Agreement dated December 6, 1995 by Exhibit 10.9 to Form
and between the Company and William A. Foley, Gerald C. 10-K filed March 28,
McDonough, Frank E. Mosier and Richard T. Schwarz. 1996.
10.14 Share Option Agreement dated November 18, 1993 by and between Exhibit 10.14 to Form
the Company and William A. Foley, Gerald C. McDonough, Frank 10-K filed March 30,
E. Mosier and Richard T. Schwarz. 1993.
13.1 The following portions of the 1996 Annual Report: Exhibit 13.1 filed
Management's Discussion and Analysis, Report of Independent herewith.
Accountants, Financial Statements, Notes to Financial
Statements and Shareholder Information. Except for these
portions of the Annual Report expressly incorporated by
reference, the report is not deemed to be filed as part of
this Form 10-K.
21.1 List of Subsidiaries Exhibit 21.1 filed
herewith.
23.1 Consent of Independent Accountants Exhibit 23.1 filed
herewith.
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
FILED HEREWITH OR
INCORPORATED
HEREIN BY
NUMBER TITLE REFERENCE
- --------------- ------------------------------------------------------------ ---------------------
<S> <C> <C>
27 Financial Data Schedule Exhibit 27 filed
herewith.
</TABLE>
23
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 26th day of March,
1997.
ASSOCIATED ESTATES REALTY CORPORATION
By /s/ Jeffrey I. Friedman
---------------------------------------------
Jeffrey I. Friedman, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 26th day of March, 1997.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------------------- -------------------------------------- --------------
<S> <C> <C>
/s/ Jeffrey I. Friedman Chairman of the Board, President, March 26, 1997
- ------------------------------------------------- Chief Executive Officer and Director --------------
Jeffrey I. Friedman (Principal Executive Officer)0
/s/ Dennis W. Bikun Chief Financial Officer (Principal March 26, 1997
- ------------------------------------------------- Financial Officer and Principal --------------
Dennis W. Bikun Accounting Officer)
/s/ Albert T. Adams Director March 26, 1997
- ------------------------------------------------- --------------
Albert T. Adams
/s/ Gerald C. McDonough Director March 26, 1997
- ------------------------------------------------- --------------
Gerald C. McDonough
/s/ Mark L. Milstein Director March 26, 1997
- ------------------------------------------------- --------------
Mark L. Milstein
/s/ Frank E. Mosier Director March 26, 1997
- ------------------------------------------------- --------------
Frank E. Mosier
/s/ Richard T. Schwarz Director March 26, 1997
- ------------------------------------------------- --------------
Richard T. Schwarz
/s/ Jerome Spevack Director March 26, 1997
- ------------------------------------------------- --------------
Jerome Spevack
</TABLE>
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
-----------------------------------------------------------------
To the Board of Directors
of Associated Estates Realty Corporation
Our audits of the consolidated financial statements referred to in our
report dated February 19, 1997 appearing on page 25 of the 1996 "Annual Report
to Shareholders" of Associated Estates Realty Corporation (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the Financial Statement Schedule
listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement
Schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PRICE WATERHOUSE LLP
Cleveland, Ohio
February 19, 1997
S-1
<PAGE> 28
<TABLE>
<CAPTION>
SCHEDULE III - Continued
ASSOCIATED ESTATES REALTY CORPORATIOn
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
INITIAL COST HISTORICAL COST
------------------------------------------------------------------------------------------
ENCUMBRANCES BUILDINGS & IMPROVEMENTS BUILDINGS & ACCUMULATED
PROPERTY (1) LAND IMPROVEMENTS (2) LAND IMPROVEMENTS TOTAL DEPRECIATION
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESIDENTIAL MULTIFAMILY
PROPERTIES NORTHERN OHIO
Bay Club $ - $ 129,295 $3,621,553 $47,201 $129,295 $3,668,754 3,798,049 $962,140
Cloisters 6,132,545 646,512 6,046,443 - 646,512 6,046,443 6,692,955 264,416
Colonade Elyria - 181,353 886,818 424 181,353 887,242 1,068,595 505,726
Colonnade West - 180,264 1,114,901 681,816 277,146 1,699,835 1,976,981 1,233,841
Cultural Gardens - 84,377 1,417,195 79,135 84,377 1,496,330 1,580,707 1,441,235
Edgewater Landing - 417,639 4,518,082 165,413 417,639 4,683,495 5,101,134 433,667
Ellet - - 2,174,674 136,088 - 2,310,762 2,310,762 1,400,078
Gates Mills Club - 65,441 3,110,746 311,114 66,845 3,420,456 3,487,301 2,467,197
Gates Mills III 6,893,880 277,898 7,387,584 224,330 277,898 7,611,914 7,889,812 5,963,457
Hillwood I - - 1,449,483 148,019 - 1,597,502 1,597,502 1,278,187
Holly Park - 497,500 6,947,935 17,946 497,500 6,965,881 7,463,381 1,669,830
Huntington Hills - 360,799 3,181,028 - 360,799 3,181,028 3,541,827 2,014,650
Jennings - 205,100 1,665,155 11,893 205,100 1,677,048 1,882,148 844,134
Kensington Village 4,101,233 887,632 4,945,582 - 887,632 4,945,582 5,833,214 215,355
Mallard's Crossing 4,702,195 941,070 8,499,250 - 941,070 8,499,250 9,440,320 570,688
Memphis Manor - 128,948 852,270 100,701 128,948 952,971 1,081,919 887,585
Park Place - 145,000 1,447,097 262,807 161,077 1,693,827 1,854,904 1,491,861
Pinecrest - 302,150 2,156,000 - 302,150 2,156,000 2,458,150 664,768
Portage Towers - 388,353 5,609,249 2,168,397 524,150 7,641,849 8,165,999 5,087,870
Puritas Place - 204,412 2,697,720 327,407 204,412 3,025,127 3,229,539 1,496,069
Rainbow Terrace 1,935,123 256,000 8,194,477 660,415 256,000 8,854,892 9,110,892 7,622,747
Riverview Towers - - 2,300,004 153,213 - 2,453,217 2,453,217 1,425,192
Shaker Park Gardens 2,985,837 276,787 3,012,464 5,253 276,787 3,017,717 3,294,504 2,933,073
Somerset West 7,708,269 389,527 9,004,652 5,200 389,527 9,009,852 9,399,379 4,735,412
State Road - - 1,184,542 59,464 - 1,244,006 1,244,006 913,774
Statesman II - 222,657 1,632,507 22,089 222,657 1,654,596 1,877,253 1,636,811
Sutliff II - - 3,276,512 169,572 - 3,446,084 3,446,084 2,711,447
Tallmadge Acres - 235,559 4,643,644 775,265 269,869 5,384,599 5,654,468 3,595,207
The Oaks 1,938,157 170,000 2,241,624 25,047 170,000 2,266,671 2,436,671 868,359
The Triangle 17,003,915 - 20,578,668 1,321,115 - 21,899,783 21,899,783 5,930,020
Timbers - 208,636 1,784,832 23,759 208,636 1,808,591 2,017,227 566,498
Timbers II - 191,475 2,271,715 61,219 191,475 2,332,934 2,524,409 682,291
Treetops 5,797,820 1,189,861 6,558,356 - 1,189,861 6,558,356 7,748,217 285,858
Twinsburg - - 2,833,574 310,484 - 3,144,058 3,144,058 1,752,635
Vantage Villa - 565,952 4,586,084 - 565,952 4,586,084 5,152,036 178,489
Villa Moderne - 96,584 746,332 65,435 102,564 805,787 908,351 753,882
Village Towers - - 2,442,343 164,584 - 2,606,927 2,606,927 1,513,757
Washington Manor - 108,035 602,676 425 108,035 603,101 711,136 345,335
West High - - 2,714,785 67,093 - 2,781,878 2,781,878 2,726,414
West Park Plaza 127,890 820,402 36,018 127,890 856,420 984,310 834,009
Westchester Townhouses - 693,300 5,685,526 26,625 693,300 5,712,151 6,405,451 1,985,652
Westlake Investment - 35,685 323,834 739,102 35,685 1,062,936 1,098,621 811,390
Williamsburg at
Greenwood Village - 843,642 12,929,692 32,604 843,642 12,962,29 13,805,93 1,239,495
<CAPTION>
INITIAL COST HISTORICAL COST
---------------------------------------------------
TOTAL COST,
NET OF DEPRECIABLE DATE OF
ACCUMULATED LIVES CONSTRUCTION/
PROPERTY DEPRECIATION YEARS ACQUISITION
- -------------------------------------------------------------------------
<S> <C> <C> <C>
RESIDENTIAL MULTIFAMILY
PROPERTIES NORTHERN OHIO
Bay Club $2,835,909 10-30 December, 1990
Cloisters 6,428,539 5-30 September, 1995
Colonade Elyria 562,869 10-30 July, 1994
Colonnade West 743,140 10-30 July, 1964
Cultural Gardens 139,472 10-30 April, 1966
Edgewater Landing 4,667,467 5-30 April, 1994
Ellet 910,684 30 January, 1978
Gates Mills Club 1,020,104 5-30 December, 1980
Gates Mills III 1,926,355 6-40 December, 1978
Hillwood I 319,315 14-30 June, 1976
Holly Park 5,793,551 10-30 September, 1990
Huntington Hills 1,527,177 30 October, 1982
Jennings 1,038,014 10-30 November, 1981
Kensington Village 5,617,859 5-30 September, 1995
Mallard's Crossing 8,869,632 5-30 February, 1995
Memphis Manor 194,334 5-30 December, 1966
Park Place 363,043 5-30 October, 1966
Pinecrest 1,793,382 7-30 September, 1987
Portage Towers 3,078,129 6-40 May, 1973
Puritas Place 1,733,470 5-30 October, 1981
Rainbow Terrace 1,488,145 3-30 September, 1981
Riverview Towers 1,028,025 30 October, 1979
Shaker Park Gardens 361,431 15-17 May, 1964
Somerset West 4,663,967 5-30 March, 1982
State Road 330,232 14-30 September, 1977
Statesman II 240,442 13 May, 1987
Sutliff II 734,637 5-30 December, 1979
Tallmadge Acres 2,059,261 6-40 June, 1981
The Oaks 1,568,312 7-30 June, 1985
The Triangle 15,969,763 5-30 March, 1989
Timbers 1,450,729 7-30 September, 1987
Timbers II 1,842,118 5-30 September, 1989
Treetops 7,462,359 5-30 September, 1995
Twinsburg 1,391,423 10-30 July, 1979
Vantage Villa 4,973,547 5-30 October, 1995
Villa Moderne 154,469 15-30 October, 1963
Village Towers 1,093,170 30 October, 1979
Washington Manor 365,801 10-30 July, 1994
West High 55,464 5-15 December, 1981
West Park Plaza 150,301 5-30 April, 1964
Westchester Townhouses 4,419,799 7-30 November, 1989
Westlake Investment 287,231 15-30 October, 1985
Williamsburg at
Greenwood Village 12,566,443 5-30 February, 1994
</TABLE>
S-2
<PAGE> 29
<TABLE>
<CAPTION>
SCHEDULE III - Continued
ASSOCIATED ESTATES REALTY CORPORATIOn
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
INITIAL COST HISTORICAL COST
------------------------------------------------------------------------------------------
ENCUMBRANCES BUILDINGS & IMPROVEMENTS BUILDINGS & ACCUMULATED
PROPERTY (1) LAND IMPROVEMENTS (2) LAND IMPROVEMENTS TOTAL DEPRECIATION
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Winchester (3) 4,453,316 299,660 5,133,088 1,020,871 344,355 6,109,264 6,453,619 4,969,919
Winchester II - 352,200 8,295,653 262,197 372,877 8,537,173 8,910,050 6,336,268
CENTRAL OHIO
Arrowhead Station - 477,838 4,217,039 - 477,838 4,217,039 4,694,877 262,397
Bedford Commons - 928,921 5,963,753 2,720 928,921 5,966,473 6,895,394 397,945
Bentley Station - 516,215 3,094,063 4,857 516,215 3,098,920 3,615,135 242,991
Bolton Estates - 707,601 5,124,052 1,794 707,601 5,125,846 5,833,447 416,269
Bradford at Easton 426,773 3,233,748 426,773 3,233,748 3,660,521 15,255
Residence at Christopher Wren - 1,560,355 13,753,580 2,418 1,560,355 13,755,998 15,316,353 1,283,500
Colony Bay East - 714,150 4,952,909 20,478 714,150 4,973,387 5,687,537 280,399
Heathermoor - 1,796,346 9,087,316 2,563 1,796,346 9,089,879 10,886,225 718,506
Kensington Grove - 533,117 4,600,057 - 533,117 4,600,057 5,133,174 223,184
Lake Forest - 840,155 6,134,704 7,105 840,155 6,141,809 6,981,964 497,076
Muirwood Village at Bennell - 675,296 4,014,709 1,281 675,296 4,015,990 4,691,286 379,294
Muirwood Village at Gemstar - 114,540 642,256 220 114,540 642,476 757,016 60,607
Muirwood Village at London - 205,097 3,728,615 2,471 205,097 3,731,086 3,936,183 351,797
Muirwood Village at Mt. Sterling - 152,812 1,475,391 439 152,812 1,475,830 1,628,642 140,128
Muirwood Village at Zanesville - 368,530 4,820,330 2,822,964 368,530 7,643,294 8,011,824 605,233
Pendleton Lakes - 797,609 4,932,928 54,400 797,609 4,987,328 5,784,937 390,953
Perimeter Lakes - 1,268,762 8,737,593 - 1,268,762 8,737,593 10,006,355 79,714
The Residence at Newark - 323,159 2,807,885 1,331,872 323,159 4,139,757 4,462,916 379,697
Sheffield at Sylvan - 347,590 3,110,650 1,774,059 526,332 4,705,967 5,232,299 368,871
Sterling Park - 645,538 3,919,325 1,172 645,538 3,920,497 4,566,035 308,854
Residence at Turnberry - 868,868 11,596,329 4,376 868,868 11,600,705 12,469,573 1,078,385
Wyndemere - 602,128 2,782,217 1,502,475 602,128 4,284,692 4,886,820 283,075
The Residence at Washington - 289,960 2,588,283 - 289,960 2,588,283 2,878,243 78,431
MICHIGAN
Arbor Landings - 1,032,000 7,565,586 13,157 1,032,000 7,578,743 8,610,743 493,703
Aspen Lakes Apartments 3,021,750 339,696 5,643,387 - 339,696 5,643,387 5,983,083 57,178
Central Park Place - 1,013,474 7,362,973 35,895 1,013,474 7,398,868 8,412,342 492,659
Country Place Apartments 2,350,213 767,864 4,181,210 - 767,864 4,181,210 4,949,074 216,594
Georgetown Park Apartments - 1,778,286 10,640,423 5,398,467 1,778,286 16,038,890 17,817,176 862,638
Oaks and Woods at Hampton - 3,025,954 27,226,016 - 3,025,954 27,226,016 30,251,970 1,270,461
The Landings at the Preserve - 814,961 7,189,996 - 814,961 7,189,996 8,004,957 305,716
Spring Brook - 609,742 5,334,981 - 609,742 5,334,981 5,944,723 88,161
Summer Ridge - 1,250,919 11,199,772 - 1,250,919 11,199,772 12,450,691 276,999
PENNSYLVANIA
Chestnut Ridge - 2,145,735 19,226,161 - 2,145,735 19,226,161 21,371,896 531,582
LAND
<CAPTION>
INITIAL COST HISTORICAL COST
---------------------------------------------------
TOTAL COST,
NET OF DEPRECIABLE DATE OF
ACCUMULATED LIVES CONSTRUCTION/
PROPERTY DEPRECIATION YEARS ACQUISITION
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Winchester (3) 1,483,700 5-30 March, 1972
Winchester II 2,573,782 6-40 March, 1979
CENTRAL OHIO
Arrowhead Station 4,432,480 5-30 March,1995
Bedford Commons 6,497,449 5-30 December, 1994
Bentley Station 3,372,144 5-30 August, 1994
Bolton Estates 5,417,178 5-30 July, 1994
Bradford at Easton 3,645,266 October, 1995
Residence at Christopher Wren 14,032,853 5-30 March, 1994
Colony Bay East 5,407,138 5-30 February, 1995
Heathermoor 10,167,719 5-30 August, 1994
Kensington Grove 4,909,990 5-30 July, 1995
Lake Forest 6,484,888 5-30 July, 1994
Muirwood Village at Bennell 4,311,992 5-30 March, 1994
Muirwood Village at Gemstar 696,409 5-30 March, 1994
Muirwood Village at London 3,584,386 5-30 March, 1994
Muirwood Village at Mt. Sterling 1,488,514 5-30 March, 1994
Muirwood Village at Zamesville 7,406,591 5-30 March, 1994
Pendleton Lakes 5,393,984 5-30 March, 1994
Perimeter Lakes 9,926,641
The Residence at Newark 4,083,219 5-30 March, 1994
Sheffield at Sylvan 4,863,428 5-30 March, 1994
Sterling Park 4,257,181 5-30 August, 1994
Residence at Turnberry 11,391,188 5-30 March, 1994
Wyndemere 4,603,745 5-30 September 1994
The Residence at Washington 2,799,812 5-30 February, 1996
MICHIGAN
Arbor Landings 8,117,040 5-30 January, 1995
Aspen Lakes Apartments 5,925,905 5-30 September, 1996
Central Park Place 7,919,683 5-30 December, 1994
Country Place Apartments 4,732,480 5-30 June, 1995
Georgetown Park Apartments 16,954,538 10-30 December, 1994
Oaks and Woods at Hampton 28,981,509 5-30 August, 1995
The Landings at the Preserve 7,699,241 5-30 September, 1995
Spring Brook 5,856,562 -
Summer Ridge 12,173,692 -
PENNSYLVANIA
Chestnut Ridge 20,840,314 5-30 March, 1996
LAND
</TABLE>
S-3
<PAGE> 30
SCHEDULE III - Continued
<TABLE>
ASSOCIATED ESTATES REALTY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<CAPTION>
INITIAL COST HISTORICAL COST
------------------------------------------------------------------------------
ENCUMBRANCES BUILDINGS & IMPROVEMENTS BUILDINGS &
PROPERTY (1) LAND IMPROVEMENTS (2) LAND IMPROVEMENTS TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NORTHERN OHIO
Maysom - 2,739,630 199,533 2,739,630 199,533 2,939,163
LAND HELD FOR DEVELOPMENT
NORTHERN OHIO
Barrington - 2,357,169 - 2,357,169 - 2,357,169
Westlake Investment - 523,314 - 523,314 - 523,314
Western Reserve Village - 691,059 - 691,059 - 691,059
CENTRAL OHIO
Bradford at Easton - 1,606,677 - 1,606,677 - 1,606,677
Muirwood Village at Mt. - 100,168 - 100,168 - 100,168
Sterling
MICHIGAN
Arbor Landings - Phase II - 649,507 - 649,507 - 649,507
Aspen Lakes Apts. 400,000 400,000 400,000
Georgetown Park Apartments - 350,000 - 350,000 - 350,000
----------- ----------- ------------ ---------- ---------- ------------ ------------
$69,024,253 $49,664,708 $404,414,988 23,874,456 50,199,272 427,754,880 477,954,152
=========== =========== ============
MANAGEMENT SERVICE
COMPANIES 3,887,132 721,119 3,166,013 3,887,132
---------- ---------- ------------ ------------
Land, Building &
Improvements 27,761,588 50,920,391 430,920,893 481,841,284
========== ========== ============
FURNITURE, FIXTURE 20,286,700
& EQUIPMENT 11,838,491
Construction in progress ------------
$513,966,475
============
<CAPTION>
INITIAL COST HISTORICAL COST
------------------------------------------------------
TOTAL COST,
NET OF DEPRECIABLE DATE OF
ACCUMULATED ACCUMULATED LIVES CONSTRUCTION/
PROPERTY DEPRECIATION DEPRECIATION YEARS ACQUISITION
- ---------------------------------------------------------------------------------------------
NORTHERN OHIO
<S> <C> <C> <C> <C>
Maysom - 2,939,163 - June, 1988
LAND HELD FOR DEVELOPMENT
NORTHERN OHIO
Barrington - 2,357,169 - September, 1996
Westlake Investment - 523,314 - October, 1985
Western Reserve Village - 691,059 - August, 1996
CENTRAL OHIO
Bradford at Easton - 1,606,677 - October, 1995
Muirwood Village at Mt. - 100,168 - December, 1996
Sterling
MICHIGAN
Arbor Landings - Phase II - 649,507 - August, 1995
Aspen Lakes Apts. 400,000 September, 1996
Georgetown Park Apartments - 350,000 - December, 1994
------------ ------------
101,684,940 376,269,212
MANAGEMENT SERVICE
COMPANIES 350,225 3,536,907 10-30 November,1993
------------ ------------
Land, Building &
Improvements 102,035,165 379,806,119
FURNITURE, FIXTURE
& EQUIPMENT 10,067,664 10,219,036
Construction in progress - 11,838,491
------------ ------------
$112,102,829 $401,863,646
(1) Encumbrances include mortgage debt, deferred liability and other obligations
secured by the real estate assets.
(2) Improvements include the purchase price adjustment for certain properties in
which cash was paid to unrelated third parties to acquire their interests.
(3) Refer to Note 9 to the December 31, 1996 financial statements of Associated
Estates Realty Corporation.
</TABLE>
S-4
<PAGE> 31
<TABLE>
<CAPTION>
ASSOCIATED ESTATES REALTY CORPORATION SCHEDULE III - Continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
September 30, 1996
Initial Cost Historical Cost
------------------------------------------------------------------------------------------------
Total Cost,
Net of
Encumbrances Buildings & Improvements Buildings & Accumulated Accumulated
Property (1) Land Improvements (2) Land Improvements Total Depreciation Depreciation
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JOINT VENTURE PROPERTIES
INVESTMENTS IN WHICH
AERC AS A 50% INTEREST
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
College Towers - $ 340,000 $3,351,247 $ 36,558 $ 340,000 $3,387,805 $3,727,805 $3,232,697 $ 495,108
Highland House - 54,053 209,903 - 54,053 209,903 263,956 209,903 54,053
Lakeshore Village 4,273,904 482,217 3,861,676 - 482,217 3,861,676 4,343,893 1,834,298 2,509,595
--------- --------- ---------- -------- --------- ---------- ---------- ---------- ----------
4,273,904 876,270 7,422,826 36,558 876,270 7,459,384 8,335,654 5,276,898 3,058,756
--------- --------- ---------- -------- --------- ---------- ---------- ---------- ----------
INVESTMENTS IN WHICH
AERC AS A 33% INTEREST
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
Americana 12,073,628 504,207 7,127,922 492,825 504,207 7,620,747 8,124,954 7,185,407 939,547
Euclid House 1,660,139 105,000 1,218,156 7,371 105,000 1,225,527 1,330,527 1,125,310 205,217
Gates Mills Towers 19,122,030 - 10,358,694 9,458,595 1,351,214 18,466,075 19,817,289 11,509,604 8,307,685
Watergate 14,639,618 499,849 13,538,629 603,762 499,849 14,142,391 14,642,240 12,291,278 2,350,962
---------- --------- ---------- --------- --------- ---------- ---------- ---------- ----------
47,495,415 1,109,056 32,243,401 10,562,553 2,460,270 41,454,740 43,915,010 32,111,599 11,803,411
---------- --------- ---------- ----------- --------- ---------- ---------- ---------- ----------
$51,769,319 $1,985,326 $39,666,227 $10,599,111 $3,336,540 $48,914,124 52,250,664 37,388,497 14,862,167
=========== ========== =========== =========== ========== =========== ========== ========== ==========
Other Furniture and 2,837,019 2,770,694 66,325
---------- ----------- -----------
Equipment 55,087,683 $40,159,191 $14,928,492
========== =========== ===========
<CAPTION>
Depreciable Date of
Lives Construction/
Years Acquisition
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
JOINT VENTURE PROPERTIES
INVESTMENTS IN WHICH
AERC AS A 50% INTEREST
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
College Towers 7-30 January, 1969
Highland House 5-30 June, 1964
Lakeshore Village 3-30 October, 1982
INVESTMENTS IN WHICH
AERC AS A 33% INTEREST
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
Americana 5-30 June, 1968
Euclid House 7-30 August 1969
Gates Mills Towers 10-30 December, 1969
Watergate 5-30 July, 1971
<FN>
(l) Encumbrances include mortgage debt and other obligations secured by the real estate assets.
(2) Improvements include the purchase price adjustment for certain properties in which cash was paid to unrelated third parties to
acquire their interests.
</TABLE>
S-5
<PAGE> 32
SCHEDULE III (continued)
ASSOCIATED ESTATES REALTY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
The Aggregate Cost for Federal Income Tax purposes was approximately
$500 million and $400 million at December 31, 1996 and 1995, respectively.
The changes in Total Real Estate Assets for the years ended December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Balance, beginning of period $433,964,558 $312,716,186
Disposal of fixed assets (130,924) -
New acquisition properties 61,376,510 110,081,513
Improvements 18,756,331 11,166,859
------------ ------------
Balance, end of period $513,966,475 $433,964,558
============ ============
</TABLE>
The changes in Accumulated Depreciation and Amortization for the years
ended December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Balance, beginning of period $ 97,301,859 $ 85,413,118
Disposal of fixed assets (126,024) (3,226)
Depreciation for period 14,926,994 11,891,967
------------ ------------
Balance, end of period $112,102,829 $ 97,301,859
============ ============
</TABLE>
(i) In connection with the Offering, the Company paid cash to unrelated
third parties to acquire their interests in the operations of the
Company's predecessor-AEG. Accordingly, the cash paid is reflected as a
purchase price adjustment.
S-6
<PAGE> 1
Exhibit 4.8(b)
- --------------------------------------------------------------------------------
FIFTH AMENDMENT TO CREDIT AGREEMENT
BY AND AMONG
ASSOCIATED ESTATES REALTY CORPORATION,
BORROWER,
NATIONAL CITY BANK,
AS AGENT
AND
THE BANKS IDENTIFIED ON SCHEDULE 1
DATED: AS OF NOVEMBER 27, 1996
- --------------------------------------------------------------------------------
<PAGE> 2
FIFTH AMENDMENT TO
CREDIT AGREEMENT
------------------
THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made as
of November 27, 1996, by and among ASSOCIATED ESTATES REALTY CORPORATION, an
Ohio corporation ("Borrower"), the banks and lending institutions identified on
SCHEDULE 1, attached hereto and made a part hereof by this reference (the
"Banks"), and NATIONAL CITY BANK, a national banking association, in its
capacity as agent for the Banks under the Credit Agreement defined in the
recitals below (in such capacity, the "Agent").
R E C I T A L S
---------------
A. Pursuant to that certain Credit Agreement, dated as of March 30,
1994, by and among Borrower, the Banks identified on Schedule 1.1 thereto and
the Agent, such Banks agreed to advance certain Loans to Borrower, on the terms
and subject to the conditions set forth therein, and Borrower agreed to repay
such Loans, with interest thereon, as provided therein.
B. The aforementioned credit agreement has been amended (1) by a First
Amendment to Credit Agreement, dated as of May 17, 1994; (2) by a Second
Amendment to Credit Agreement dated as of February 24, 1995, pursuant to which
the aforementioned credit agreement was amended and restated in its entirety;
(3) by a Third Amendment to Credit Agreement, dated as of September 26, 1995,
pursuant to which such credit agreement was again amended and restated pursuant
to a Second Amended and Restated Credit Agreement dated as of September 26,
1995; and (4) by a Fourth Amendment to Credit Agreement, dated as of March 26,
1996 (as
2
<PAGE> 3
amended, and amended and restated as aforesaid, such credit agreement is
referred to as the "Credit Agreement").
C. NBD Bank ("NBD") has assigned all of its rights and obligations as a
"Bank" under the Credit Agreement and the other Loan Documents to The First
National Bank of Chicago ("First Chicago"), and First Chicago has accepted such
assignment and assumed and agreed prospectively to perform the duties and
obligations of a Bank under the Credit Agreement with respect to the interests
so assigned, all in accordance with the terms of a Assignment and Assumption
Agreement effective as of November 6, 1996; and
D. Borrower, the Banks and the Agent have agreed further to amend the
Credit Agreement in order to reflect the parties' mutual understandings
regarding certain mutually acceptable changes in the covenants of Borrower
thereunder, upon and subject to the terms and conditions hereinafter set forth.
NOW, THEREFORE, for Ten Dollars ($10.00) and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. DEFINED TERMS. Capitalized terms which are used in this
Amendment without being defined herein shall have the meanings ascribed to them
in the Amended Credit Agreement (as hereinafter defined).
2. AMENDMENT OF THE CREDIT AGREEMENT. The parties agree that
the Credit Agreement shall be further amended, effective as of the Effective
Date (as hereinafter defined), as follows:
3
<PAGE> 4
(a) Section 1.2 of the Credit Agreement shall be
amended by deleting the definition of "Capitalized
Income Value" appearing on pages 3 and 4 thereof, and
by substituting the following therefor:
"'CAPITALIZED INCOME VALUE'" means, as of
any date, an amount equal to Borrower's
EBITDA, including Service EBITDA in an
amount not to exceed $1,500,000 on an
annualized basis, divided by nine and
three-quarters percent (9.75%) (the
"Capitalization Factor"). For the purposes
of this provision, Borrower's EBITDA shall
be subject to adjustment to reflect any
acquisitions made by Borrower during the
applicable fiscal period on a PRO FORMA
basis acceptable to the Agent, assuming the
lesser of 90% or actual occupancy."
(b) Section 1.2 of the Credit Agreement shall be
further amended by deleting the definition of "Market
Value" appearing on pages 12 and 13 thereof, and by
substituting the following therefor:
"'MARKET VALUE' means, as of any date, an
amount equal to the sum of (i) Borrower's
Capitalized Income Value, plus (ii) fifty
percent (50%) of the book value of
Borrower's Assets Under Development and Raw
Land, PLUS (iii) one hundred percent (100%)
of the value of cash equivalents owned and
held by Borrower (all as of the date of
determination of Market Value)."
(c) Section 5.19 of the Credit Agreement shall be
amended by deleting all of subsections (d), (e), (f)
and (g) of Section 5.19 from the Credit Agreement,
and by substituting the following therefor:
"(d) LEVERAGE RATIO. Borrower shall at all
times maintain a ratio of Liabilities to
EBITDA, on an annualized basis (determined
by multiplying the quarterly EBITDA by a
factor of four, and subject to the
adjustment described in the following
sentence), of not more than five and
three-quarters (5.75) to one (1). For the
purposes of this provision, Borrower's
EBITDA shall be adjusted to reflect any
acquisitions made by Borrower during the
quarter on a PRO FORMA basis acceptable to
the Agent, assuming the lesser of 90% or
actual occupancy.
4
<PAGE> 5
(e) DEBT SERVICE COVERAGE RATIO. Borrower
shall at all times maintain a ratio of
EBITDA to all required payments of debt
service as described in this Section
5.19(e), on an annualized basis (determined
by multiplying the quarterly EBITDA by a
factor of four, and subject to the
adjustments described in the following
sentence), of not less than two (2.00) to
one (1). For the purposes of this provision:
(i) Borrower's EBITDA shall be subject to
adjustment to reflect any acquisitions made
by Borrower during the applicable fiscal
period on a PRO FORMA basis acceptable to
the Agent, assuming the lesser of 90% or
actual occupancy, to exclude Service EBITDA
in excess of $1,500,000 with respect to any
annual period and to reflect, in a manner
acceptable to Agent, the proper treatment of
such items of expense as payment of real
property AD VALOREM taxes (which, while paid
in a specific quarter, pertain to a
semi-annual or annual period), as well as
extraordinary items of income or expense, to
the extent that the foregoing are not
accrued or annualized in accordance with
GAAP on Borrower's financial statements; and
(ii) "debt service" shall include actual
payments of principal and/or interest on
Indebtedness for Borrower Money, together
with projected principal payments on all of
Borrower's non-amortizing Indebtedness for
Borrowed Money (excluding any construction
loans); such projected principal payments
shall be calculated on the basis of the rate
of interest then applicable to such
Indebtedness and a twenty-five (25) year
mortgage amortization schedule for such
Indebtedness.
(f) UNENCUMBERED DEBT SERVICE COVERAGE
RATIO. Borrower shall at all times maintain
a ratio of Unencumbered EBITDA to all
required payments of debt service as
described in this Section 5.19(f) on
Indebtedness for Borrowed Money which is
Unencumbered Debt, on an annualized basis
(determined by multiplying the quarterly
Unencumbered EBITDA by a factor of four, and
subject to the adjustments described in the
following sentence) of not less than two
(2.0) to one (1). For the purposes of this
provision: (i) Unencumbered EBITDA shall be
subject to adjustment to reflect any
acquisition of an Unencumbered Real Estate
5
<PAGE> 6
Asset (other than Raw Land or Assets Under
Development) made by Borrower during the
applicable period, on a PRO FORMA basis
acceptable to Agent, assuming the lesser of
90% or actual occupancy, and to reflect, in
a manner acceptable to the Agent, the proper
treatment of such items of expense as
payment of real property AD VALOREM taxes
(which, while paid in a specific quarter,
pertain to an annual or semi-annual period);
and (ii) "debt service" shall include actual
payments of principal and/or interest on
Indebtedness for Borrowed Money, together
with projected principal payments on all of
Borrower's non-amortizing Indebtedness for
Borrowed Money (excluding any construction
loans) which is Unencumbered Debt; such
projected principal payments shall be
calculated on the basis of the rate of
interest then applicable to such
indebtedness and a twenty-five (25) year
mortgage amortization schedule for such
indebtness.
(g) UNENCUMBERED REAL ESTATE ASSETS TO
UNENCUMBERED DEBT RATIO. The ratio of the
aggregate value of Borrower's Unencumbered
Real Estate Assets to the aggregate
outstanding principal balance of Borrower's
Unencumbered Debt shall at all times equal
or exceed two (2.0) to one (1). The
aggregate value of Borrower's Unencumbered
Real Estate Assets for the purposes of this
Section 5.19(g) shall be determined (x) by
including therein fifty percent (50%) of the
book value of the Assets Under Development
and of the Raw Land comprised within
Borrower's Unencumbered Real Estate Assets,
and (y) with respect to Unencumbered Real
Estate Assets other than Assets Under
Development or Raw Land, determined by
reference to the Capitalization Factor.
As amended as provided herein, the Credit Agreement is
referred to as the "Amended Credit Agreement".
3. CONDITIONS PRECEDENT TO THIS AMENDMENT. On or prior to the
Effective Date, each of the following conditions precedent shall have been
satisfied:
6
<PAGE> 7
(a) PROOF OF CORPORATE AUTHORITY. The Agent shall
have received from Borrower copies, certified by a
duly authorized officer of Borrower to be true and
complete on and as such date, of records of all
corporate action taken by Borrower to authorize (i)
Borrower's execution and delivery of this Amendment
and the Substitute Note (hereafter defined); and (ii)
the performance by Borrower of its other obligations
and agreements hereunder, under the Amended Credit
Agreement and under the Substitute Note;
(b) INCUMBENCY CERTIFICATE. The Agent shall have
received from Borrower an incumbency certificate
substantially similar to that which is attached as
EXHIBIT A and made a part hereof by this reference,
dated as of the Effective Date, signed by a duly
authorized officer and giving the name and bearing a
specimen signature of each individual who shall be
authorized to execute this Amendment for and on
behalf of Borrower;
(c) OFFICERS' CERTIFICATE. The Agent shall have
received from Borrower a certificate substantially
similar to that which is attached hereto as EXHIBIT B
and made a part hereof by this reference, dated as of
the Effective Date, signed by a duly authorized
officer of Borrower and certifying, on terms
acceptable to the Agent, that each of the
representations and warranties of Borrower in the
Credit Agreement was true and correct when made and,
giving effect to the information set forth or
referred to in the Officers' Certificate, each of the
warranties and representations of Borrower in the
Amended Credit Agreement remains true and correct in
all material respects on and as of the Effective
Date.
(d) LEGALITY OF TRANSACTIONS. No change in applicable
law shall have occurred as a consequence of which it
shall have become and continue to be unlawful (i) for
the Agent or any Bank to perform any of its
agreements or obligations hereunder or under Amended
Credit Agreement or any other Loan Document (giving
effect to the transactions described herein) on or as
of the Effective Date; or (ii) for Borrower to
perform any of its agreements or obligations
hereunder or under the Amended Credit Agreement or
any Loan Document.
(e) PERFORMANCE, ETC. Borrower shall have duly and
properly performed, complied with
7
<PAGE> 8
and observed, in all material respects, each of its
covenants, agreements and obligations contained in
each of the Loan Documents to which Borrower is a
party or by which Borrower is bound. No event shall
have occurred on or prior to the Effective Date, and
no condition shall then exist, which (giving effect
to the amendments to the Credit Agreement effected
hereby) constitutes or would (with the delivery of
notice or the passing of time, or both) constitute a
Default or an Event of Default under the Credit
Agreement or under any Loan Document.
(f) COMPLIANCE WITH LAWS. Each of the borrowings made
and each Letter of Credit issued under or pursuant to
the Credit Agreement prior to the Effective Date is,
and each borrowing to be made and each Letter of
Credit to be issued under the Amended Credit
Agreement will be, in compliance with the
requirements of all applicable laws, regulations,
rules and orders, including without limitation all
Environmental Laws and all applicable requirements
imposed by the SEC or by the Board of Governors of
the Federal Reserve System under Regulations U, G and
X.
(g) LEGAL OPINION. The Agent and each Bank shall have
received a written legal opinion, addressed to the
Agent and each Bank and dated as of the Effective
Date, from legal counsel for Borrower, substantially
in the form attached hereto as EXHIBIT C, and
otherwise acceptable to the Agent and each Bank.
(h) PAYMENT OF CERTAIN EXPENSES. Borrower shall have
reimbursed the Agent for all reasonable out-of-pocket
costs and expenses, including without limitation all
fees and disbursements of legal counsel to the Agent,
which shall have been incurred by the Agent in
connection with the negotiation and preparation of
this Amendment.
(i) CHANGES: NONE ADVERSE. From the date of the most
recent financial statements of Borrower delivered in
accordance with the requirements of the Credit
Agreement, through and including the Effective Date,
no changes shall have occurred in the assets,
liabilities, financial condition, business,
operations or prospects of Borrower or Borrower's
Consolidated Subsidiaries which, individually or in
the aggregate, are material and
8
<PAGE> 9
adverse to Borrower and its Consolidated
Subsidiaries.
(j) COMPLIANCE CERTIFICATE. The Agent shall have
received a Compliance Certificate substantially
similar to that which is attached as EXHIBIT D and
made a part hereof by this reference, executed by a
duly authorized officer of Borrower, dated on and as
of the Effective Date and showing (with
substantiating data reasonably acceptable to the
Agent), the required calculations under which shall
demonstrate Borrower's compliance as of the Effective
Date with the covenants set forth in the Credit
Agreement (giving effect to the amendment thereof
effected hereby).
(k) OTHER APPROVALS. The Agent shall have received
such other approvals, opinions, certificates,
instruments and documents with respect to the
transactions described herein as it may request.
(l) REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties made by or on behalf
of Borrower in the Amended Credit Agreement shall be
true, correct and complete in all material respects
as of the Effective Date.
(m) SUBSTITUTE NOTE. Borrower shall have executed and
delivered to the Agent a substitute promissory note
(the "Substitute Note") in favor of First Chicago,
substantially similar to that which is attached
hereto as EXHIBIT E and made a part hereof by this
reference.
4. REGARDING BORROWER'S DEBT RATINGS. Borrower represents that
as of the Effective Date, Borrower's Debt Ratings are as follows:
Moody's: Baaa3 ; and
S&P: BBB- _.
5. RATIFICATION. Except as specifically modified and amended
as contemplated by this Agreement, the Credit Agreement is unchanged, and
remains in full force and effect. Borrower, the Banks and the Agent each hereby
ratifies and affirms the Credit Agreement and every term and condition thereof,
as the same are amended as provided hereby.
6. BINDING EFFECT. This Amendment shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
9
<PAGE> 10
7. EFFECTIVE DATE. The amendments contemplated by this
Amendment shall be effective as of the date first set forth above (the
"Effective Date"). Promptly after the Effective Date, First Chicago shall return
to Borrower the original Substitute Promissory Note dated as of September 25,
1995, and previously executed and delivered by Borrower in favor of NBD,
legended to reflect the replacement of such note by the Substitute Note as
hereinabove described.
8. COUNTERPARTS. This Amendment may be executed in multiple
counterparts, and signature pages from any counterpart may be appended to any
other counterpart. All such counterparts shall constitute a single, unified
instrument.
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered by or on behalf of each of the parties as of the date first set forth
above.
BORROWER:
ASSOCIATED ESTATES REALTY
CORPORATION
By: /s/ Jeffrey I. Friedman
-----------------------------------
Jeffrey I. Friedman
President
AGENT:
NATIONAL CITY BANK
By: /s/ Gary L. Wimer
-----------------------------------
Gary L. Wimer
Vice President
THE BANKS:
NATIONAL CITY BANK
By: /s/ Gary L. Wimer
-----------------------------------
Gary L. Wimer
Vice President
BANK ONE, CLEVELAND, N.A.
By: /s/ Douglas D. Lyons
-----------------------------------
Name: Douglas D. Lyons
Title: Vice President
10
<PAGE> 11
MANUFACTURERS AND TRADERS TRUST
COMPANY
By: /s/ Kevin B Quinn
-----------------------------------
Name: Kevin B. Quinn
Title: Banking Officer
COMERICA BANK
By: /s/ John D. Price III
-----------------------------------
Name: John D. Price III
Title: Vice President
HARRIS TRUST & SAVINGS BANK
By: /s/ Gregory M. Bins
-----------------------------------
Name: Gregory M. Bins
Title: Vice President
THE FIRST NATIONAL BANK OF
CHICAGO
By: /s/ Gregory A. Glbert
-----------------------------------
Name: Gregory A. Glbert
Title: Vice President
HUNTINGTON BANK-CLEVELAND, N.A.
By: /s/ Gerald A. Buck
-----------------------------------
Name: Gerald A. Buck
Title: Vice President
11
<PAGE> 1
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION & ANALYSIS
OVERVIEW
Associated Estates Realty Corporation (the "Company") is a Real Estate
Investment Trust ("REIT") that currently owns or is a joint venture partner in
84 multifamily properties containing 15,838 suites located in Ohio, Michigan and
western 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. REITs 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
Sixty-four of the Company's 77 wholly owned properties were unencumbered at
December 31, 1996 with annualized earnings before interest, depreciation and
amortization of approximately $41 million and an historical cost basis of
approximately $374 million. The remaining 13 of the Company's wholly owned
properties have an historical cost basis of $104.2 million and secured property
specific debt of $69 million at December 31, 1996. Unsecured debt, which totaled
$148.8 million at December 31, 1996, consisted of $42.5 in Medium-Term Notes,
Senior Notes of $84.8 million and amounts drawn on the revolving credit facility
of $21.5 million. The Company's proportionate share of the mortgage debt
relating to the seven joint venture properties was $18 million at December 31,
1996. The weighted average interest rate on the secured, unsecured and the
Company's proportionate share of the joint venture debt was 8.0% at December 31,
1996.
The Company utilizes borrowings under a $75 million unsecured revolving
credit facility (the "Line of Credit") for the acquisition and development of
multifamily properties and working capital purposes. 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 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 150 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 25 basis points and 37.5 basis points 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 December 31, 1996, $21.5 million was drawn on the
Line of Credit with a weighted average interest rate of 7.5%.
During the year ended December 31, 1996, the Company issued six Medium-Term
Notes (the "MTN's") aggregating $42.5 million under its $75 million MTN program.
The principal amounts of these MTN's range from $2.5 million to $15 million and
bear interest from 6.60% to 7.93% over terms of between 5 to 30 years. The
holder of a $2.5 million, 30 year
18
<PAGE> 2
MTN has the option to require payment on March 15, 2003. The net proceeds to the
Company with respect to these issuances were $42 million, of which $32.1 million
was applied to amounts outstanding under the Line of Credit and the remaining
$9.9 million was used to acquire a multifamily property.
DEBT TO TOTAL MARKET CAPITALIZATION
December 31, 1996
[Pie Chart]
Market Equity 64.2%
Total Debt 35.8%
COMPONENTS OF DEBT
December 31, 1996
[Pie Chart]
Line of Credit 9.2%
Property Specific - Variable Rate 0.8%
Property Specific - Fixed Rate 35.7%
Medium - Term Notes 18.1%
Senior Notes 36.2%
Registration statements filed in connection with financing
The Company has filed two 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 $201.4 million of securities under these shelf filings available for
issuance.
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 year ended December 31, 1996, the Company acquired six
multifamily properties containing 1,289 suites and three parcels of land
consisting of 43 acres for an aggregate purchase price of $59.1 million. The
acquisitions are located in Michigan, Ohio and western Pennsylvania, and were
financed with borrowings under the Line of Credit, the issuance of MTN's and the
assumption of mortgage indebtedness. 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
The Residence at 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. Construction has also commenced at The Village of
Western Reserve, a 108 suite property located in Streetsboro, Ohio that is
expected to be completed in the Fall of 1997. In addition, the Company owns five
parcels of undeveloped land, two of which are in Ohio and three of which are in
Michigan, containing 84 acres on which an estimated 783 suites could be
developed. Development activities for the construction of 274 suites have
commenced with respect to two of these parcels.
Subsequent to December 31,1996, the Company acquired a multifamily property
containing 228 suites
19
<PAGE> 3
for an aggregate purchase price of $12.5 million which was financed with
borrowings under the Company's Line of Credit. The multifamily property is
located in Indianapolis, Indiana. The Company is currently under contract to
purchase one multifamily property containing an aggregate of 102 suites and five
parcels of undeveloped land containing an aggregate of 158.5 acres for a total
purchase price of $10.1 million. The multifamily property is located in
Columbus, Ohio while the land parcels are located in Ohio and Michigan. With the
exception of one 37 acre parcel located in Avon, Ohio, the land parcels under
contract are located adjacent to or in the vicinity of multifamily properties
presently owned by the Company. The Company expects to finance the acquisition
of the multifamily property and five land parcels using borrowings under the
Line of Credit. There can be no assurances, however, that the Company will be
successful in acquiring the multifamily property and the land parcels under
contract.
The Company is exploring opportunities to dispose of several of the
Government-Assisted Properties and has received an expression of interest from a
housing authority that operates Government-Assisted properties in the vicinity
of the properties being considered for disposition. 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. No loss is
anticipated from the aforementioned, potential property dispositions; however,
there can be no assurances that the Company will be successful in disposing of
the Government-Assisted Properties or the parcel of land.
Dividends
On December 9, 1996, the Company declared a dividend of $0.45 per common
share for the quarter ending December 31, 1996 which was paid on January 31,
1997 to shareholders of record on December 31, 1996. On November 25, 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
December 16, 1996 to shareholders of record on December 5, 1996.
Cash flow sources and applications
Net cash provided by operating activities increased $2,179,000 from
$28,881,500 to $31,060,500 for the year ended December 31, 1996 when compared
with the year ended December 31, 1995. This increase was primarily the result of
collections of outstanding notes and accounts receivable.
Net cash flows used for investing activities of $75,770,800 for the year
ended December 31, 1996 were primarily used for the acquisition of multifamily
real estate, properties and undeveloped land parcels.
Net cash flows provided by financing activities of $43,149,000 for the year
ended December 31, 1996 were primarily comprised of borrowings on the Line of
Credit and the issuance of MTN's and the 1,450,000 common shares. Funds were
also used to pay dividends on the Company's common and Perpetual Preferred
Shares as well as repayments on the Line of Credit.
RESULTS OF OPERATIONS
Comparison of the year ended December 31, 1996 to the year ended December 31,
1995
Overall, total revenue increased $17,491,800 or 22.7% and total expenses
before net income of the joint ventures increased $15,466,600 or 25.8% for the
year. Net income applicable to common shares decreased $221,200 or 1.6%, after
the dividends on the Company's Perpetual Preferred Shares.
In the following discussion of the comparison of the year ended December
31,1996 to the year ended December 31, 1995, the term Core Portfolio Properties
refers to the 36 wholly owned multifamily properties acquired by the Company at
the time of
20
<PAGE> 4
the IPO and the 21 properties acquired during 1994 and the acquisition of the
remaining 50% interest in two properties in which the Company was a joint
venture partner at the time of the IPO. Acquired Properties refers to the 21
properties acquired between January 1, 1995 and December 31, 1996.
During the year ended December 31, 1996, the Acquired Properties generated
total revenues of $24,525,700 while incurring property, operating and
maintenance expenses of $9,534,800.
Rental revenues
Rental revenues increased $17,929,700 or 25.6% for the year. Rental revenues
from the Acquired Properties increased $15,564,900 for the year. Increases in
occupancy and suite rents at the Core Portfolio Market-rate and Government-
Assisted Properties resulted in a $2,364,800 or 3.9% increase in rental revenue
from these properties. The balance of the increase resulted from increased
rental revenues attributable to office space and other miscellaneous rental
revenue items.
Other revenues
Property management fees and property management fees - affiliates decreased
$432,800 or 10.3% for the year. This decrease was due in part to a decline in
management fees attributable to a supplemental management fee pursuant to the
terms of the management contract between the Company and a managed property. No
supplemental management fee was earned at this managed property in 1996 due to
an increase in operating and repair and maintenance expenses.
Painting service revenue and painting service revenue - affiliates increased
$567,300 or 53.2% for the year and reflects an increase in revenue generated
from suite painting and major renovation projects when compared to the previous
year. The increase in painting service and painting service revenue - affiliates
was partially offset by an increase in painting service expenses as discussed
elsewhere herein.
Other income decreased $572,300 or 35.4% for the year. The decrease is due
primarily to a reduction in the amount of real estate tax refunds received in
comparison to the prior year as well as a reduction of supervisory management
fees earned for overseeing the improvement of tenant space at the commercial
properties managed by the Company.
Property operating and maintenance expenses
Property operating and maintenance expenses increased $7,778,900 or 26.6%
for the year. Operating and maintenance expenses at the Acquired Properties
increased $6,780,800 for the year due primarily to the operating and maintenance
expenses incurred at the six properties acquired during 1996 and the recognition
of a full year's operating expenses at the 15 properties acquired during 1995.
Property operating and maintenance expenses at the Core Portfolio Properties
increased $998,100, or 3.8% when compared to the prior 12 month period primarily
due to increases in personnel, utilities and real estate taxes which were
partially offset by a decrease in building and grounds repairs and maintenance
expenses for suite improvements such as the replacement of appliances and
carpeting. 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 $270 per suite for the year ended December 31, 1996
as compared to $301 per suite for the year ended December 31, 1995.
Other expenses
Depreciation and amortization increased $2,878,200 or 22.7% for the year
primarily due to the increased depreciation and amortization expense recognized
on the Acquired Properties.
Painting service expenses increased $426,200 or 42.6% for the year. These
increases were primarily the result of payroll related expenses attributable to
the increased sales activity of the painting company.
General and administrative expenses increased $404,900 or 7.3% for the year.
This increase is primarily attributable to payroll and related expenses.
21
<PAGE> 5
Interest expense increased $3,978,400 or 34.5% for the year 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.
Net income applicable to common shares
Net income applicable to common shares is reduced by dividends on the
Perpetual Preferred Shares of $5,484,400.
Comparison of the year ended December 31, 1995 to the year ended December 31,
1994
Overall, total revenue increased $21,675,800 or 39.2% and total expenses
before the extraordinary item and the net income of the joint ventures increased
$18,817,800 or 45.7% for the year. Net income applicable to common shares
increased $518,900 or 3.8% after the extraordinary item, 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 year ended December
31,1995 to the year ended December 31, 1994, the term Core Portfolio Properties
refers to the 36 wholly owned multifamily properties acquired by the Company at
the time of the IPO. Acquired Properties refers to the 36 properties acquired
between January 1, 1994 and December 31, 1995 and the acquisition of the
remaining 50% interest in two properties in which the Company was a joint
venture partner at the time of the IPO.
During the year ended December 31, 1995, the Acquired Properties generated
total revenues of $30,727,800 while incurring property, operating and
maintenance expenses of $10,883,300. The net income applicable to common shares
of the Acquired Properties was $2,427,400 for the same period.
Rental revenues
Rental revenues increased $21,185,800 or 43.4% for the year. Rental revenues
from the Acquired Properties increased $19,520,200 for the same period.
Increases in occupancy and suite rents at the Core Portfolio Market-rate and
Government-Assisted Properties resulted in a $1,516,900 or 4.0% increase in
rental revenue from these properties. The balance of the increase resulted from
increased rental revenues attributable to office space and other miscellaneous
rental revenue items.
Other revenues
Property management fees and property management fees - affiliates increased
$281,800 or 7.2% for the year. This increase was due in part to the increase in
management fees attributable to increased rental revenues in the northeast Ohio
market where all of the managed properties are located and the recognition of
supplemental management fee revenue pursuant to the terms of the management
contract between the Company and a managed property. These increases were offset
by a decline in management fee revenue as a result of the sale of one of the
managed properties to a non-affiliated third party who then terminated the
management contract with the Company.
Painting service revenue and painting service revenue - affiliates decreased
$203,700 or 16.0% for the year and reflects the decline in revenue generated
from suite painting and major renovation projects when compared to the previous
year. The decrease in painting service and painting service revenue - affiliates
was partially offset by a decline in painting service expenses as discussed
elsewhere herein.
Other income increased $411,800 or 34.2% for the year. The increase is due
primarily to an increase in real estate tax refunds during 1995 and supervisory
fees received for services provided while overseeing the improvement of tenant
space at the commercial properties managed by the Company. The increase in real
estate tax refunds and supervisory fees was partially offset by a decrease in
interest income in 1995 due primarily to a reduction in the Company's
investments as substantially all available cash is used for the acquisition of
multifamily properties or is applied to the outstanding balance of the Line of
Credit.
22
<PAGE> 6
Property operating and maintenance expenses
Property operating and maintenance expenses increased $8,193,400 or 38.9%
for the year. Operating and maintenance expenses at the Acquired Properties
increased $7,034,800 for the year due primarily to the operating and maintenance
expenses incurred at the 15 properties acquired during 1995 and the recognition
of a full year's operating expenses at the 21 properties acquired during 1994.
Property operating and maintenance expenses at the Core Portfolio Properties
increased $1,158,600 when compared to the prior 12 month period primarily due to
increases in utilities, real estate taxes and building and grounds repair and
maintenance expenses for suite improvements such as the replacement of
appliances and carpeting. 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 $384 per suite for the year ended
December 31, 1995 as compared to $286 per suite for the year ended December 31,
1994.
Other expenses
Depreciation and amortization increased $4,535,000 or 55.8% for the year
primarily due to the increased depreciation and amortization expense recognized
on the Acquired Properties of $3,882,700 and an increase in the amortization of
financing fees of $382,200, primarily associated with the fees incurred with
respect to the Revolving Credit Facility and the Senior Notes as discussed
elsewhere herein.
Painting service expenses decreased $255,300 or 20.3% for the year. These
decreases were primarily the result of a reduction in payroll related expenses
attributable to a decline in the sales activity of the painting company.
General and administrative expenses increased $1,323,600 or 31.6% for the
year. This increase is primarily attributable to (i) payroll and related
expenses and (ii) occupancy costs for the Company's relocated headquarters
facility.
Interest expense increased $5,021,100 or 77.3% for the year primarily due to
the interest incurred with respect to the additional borrowings under the
Revolving Credit Facility that were used for the acquisition of properties
subsequent to the Second Offering combined with higher average interest rates.
The weighted average interest rate on credit facility borrowings was 8.18% for
the year ended December 31, 1995 compared to 7.03% for the year ended December
31, 1994. In addition, the Company incurred interest on the $75 million Senior
Notes at an effective rate of 8.48% during 1995. Interest rates declined towards
the end of 1995 and the Company was able to issue $10 million of Senior Notes at
7.10% and, subsequent to December 31, 1995, issued $7.5 million of Medium-Term
Notes at a weighted average interest rate of 6.75%.
Equity in net income of joint ventures
The combined equity in net income of joint ventures increased $7,800 or
2.6%, and $163,900 or 122.8% for the years ended December 31, 1996 and 1995,
respectively. These increases are primarily attributable to increased rents and
occupancies.
The following table presents the historical statements of operations of the
Company's beneficial interest in the operations of the joint ventures for the
years ended December 31, 1996, 1995 and 1994 and the pro forma statement of
operations for the year ended December 31, 1994. The pro forma statement of
operations is presented as if the June 30, 1994 acquisition of the remaining 50%
interest in two joint ventures occurred on January 1, 1994.
<TABLE>
<CAPTION>
For the year ended December 31,
Historical Historical Pro forma Historical
1996 1995 1994 1994
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beneficial interests in
joint venture operations
Rental revenue $ 6,570,679 $ 6,562,882 $ 6,270,045 $ 6,391,578
Cost of operations 3,968,802 3,955,746 3,831,515 3,905,193
------------ ----------- ----------- -----------
2,601,877 2,607,136 2,438,530 2,486,385
Interest income 19,266 22,625 25,302 26,012
Interest expense (1,782,706) (1,801,623) (1,817,597) (1,850,210)
Depreciation (483,619) (481,103) (477,580) (479,049)
Amortization (49,629) (49,629) (49,629) (49,629)
------------ ----------- ----------- -----------
Net income $ 305,189 $ 297,406 $ 119,026 $ 133,509
============ =========== =========== ===========
</TABLE>
23
<PAGE> 7
Extraordinary item
The extraordinary item of $1,097,500 recognized during 1995 primarily
relates to the write off of $911,000 of deferred financing costs in connection
with the extinguishment of the Revolving Credit Facility. The balance of the
extraordinary item recognized during the year relates to the write off of
deferred financing costs in connection with the repayment of certain mortgage
indebtedness.
Net income applicable to common shares
Net income applicable to common shares is reduced by dividends on the
Perpetual Preferred Shares of $2,132,700.
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 57% 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 50 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 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 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 for the Core Portfolio Market-rate
Properties over 95.2%, 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
expenditures for the Core Portfolio Properties will increase 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 moderate 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 Market-rate 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 policy term
aggregate. Management has no plans to abandon any of the properties and is
unaware of any other material loss contingencies.
24
<PAGE> 8
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Associated Estates Realty Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Associated
Estates Realty Corporation and its subsidiaries at December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
/s/ Price Waterhouse LLP
- ------------------------
Cleveland, Ohio
February 19, 1997
25
<PAGE> 9
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real estate assets
Land $ 44,241,900 $ 37,782,564
Buildings and improvements 430,920,893 371,213,067
Furniture and fixtures 20,286,700 16,714,676
- -----------------------------------------------------------------------------------------------------------
495,449,493 425,710,307
Less: accumulated depreciation (112,102,829) (97,301,859)
- -----------------------------------------------------------------------------------------------------------
383,346,664 328,408,448
Construction in progress 18,516,982 8,254,251
- -----------------------------------------------------------------------------------------------------------
Real estate, net 401,863,646 336,662,699
Cash and cash equivalents 1,286,959 2,848,285
Restricted cash and investments 5,625,003 5,078,884
Accounts and notes receivable
Rents 1,569,907 1,401,655
Affiliates 1,784,297 731,580
Deferred charges and prepaid expenses 5,616,394 4,986,914
- -----------------------------------------------------------------------------------------------------------
$ 417,746,206 $ 351,710,017
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured debt $ 69,024,253 $ 68,909,238
Unsecured debt 148,788,707 102,325,107
- -----------------------------------------------------------------------------------------------------------
Total indebtedness 217,812,960 171,234,345
Accounts payable and accrued expenses 14,361,609 12,068,684
Dividends payable 6,895,071 5,963,834
Resident security deposits 4,154,418 3,668,159
Funds held for non-owned properties 1,571,219 5,399,836
Accrued interest 2,521,644 1,997,181
Accumulated losses and distributions of joint ventures
in excess of investment and advances 12,413,087 12,208,299
- -----------------------------------------------------------------------------------------------------------
Total liabilities 259,730,008 212,540,338
Commitments and contingencies -- --
Shareholders ' equity
Preferred shares, Class A cumulative, without par value;
3,000,000 authorized; 225,000 issued and outstanding 56,250,000
56,250,000
Common shares, without par value, $.10 stated value;
50,000,000 authorized; 15,322,381 and 13,872,381 issued
and outstanding at December 31, 1996 and 1995, respectively 1,532,238
1,387,238
Paid-in capital 133,073,035 102,567,007
Accumulated dividends in excess of net income (32,839,075) (21,034,566)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 158,016,198 139,169,679
- -----------------------------------------------------------------------------------------------------------
$ 417,746,206 $ 351,710,017
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 10
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Rental $87,975,036 $ 70,045,335 $ 48,859,511
Property management fees 393,051 416,868 493,861
Property management fees - affiliates 3,386,625 3,795,646 3,436,837
Painting services 370,757 246,086 549,741
Painting services - affiliates 1,263,085 820,493 720,516
Other 1,044,514 1,616,846 1,205,005
- ------------------------------------------------------------------------------------------------------------
94,433,068 76,941,274 55,265,471
Expenses
Property operating and maintenance 37,056,123 29,277,260 21,083,844
Depreciation and amortization 15,535,587 12,657,372 8,122,349
Painting services 1,427,243 1,001,029 1,256,359
General and administrative 5,921,440 5,516,493 4,192,868
Interest expense 15,493,876 11,515,476 6,494,388
- ------------------------------------------------------------------------------------------------------------
75,434,269 59,967,630 41,149,808
- ------------------------------------------------------------------------------------------------------------
Income before equity in net income of joint
ventures and extraordinary item 18,998,799 16,973,644 14,115,663
Equity in net income of joint ventures 305,189 297,406 133,509
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 19,303,988 17,271,050 14,249,172
Extraordinary item - extinguishment of debt
(prepayment fees and write off of deferred
finance costs) -- (1,097,531) (727,267)
- ------------------------------------------------------------------------------------------------------------
NET INCOME $19,303,988 $ 16,173,519 $ 13,521,905
============================================================================================================
NET INCOME APPLICABLE TO COMMON SHARES $13,819,566 $ 14,040,789 $ 13,521,905
============================================================================================================
Income Per Common Share:
Income before extraordinary item $ .99 $ 1.09 $ 1.19
============================================================================================================
Net income $ .99 $ 1.01 $ 1.13
============================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 13,931,807 13,869,595 11,942,371
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 11
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Common Accumulated
Cumulative Shares Dividends in
Preferred (at $.10 Paid - In Excess of
Total Shares stated value) Capital Net Income
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 45,078,671 $ - $1,086,188 $ 46,882,643 $ (2,890,160)
Net income 13,521,905 - - - 13,521,905
Issuance of 3,000,000 common shares,
net of underwriters' discounts and
offering expenses of $3,843,105 58,031,895 - 300,000 57,731,895 -
Additional offering costs of IPO (54,278) - - (54,278) -
Issuance of 7,506 common shares in
exchange for interests in properties 170,762 - 750 170,012 -
Common share dividends declared (21,851,764) - - - (21,851,764)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 94,897,191 - 1,386,938 104,730,272 (11,220,019)
Net income 16,173,519 - - - 16,173,519
Issuance of 3,000 restricted common
shares - - 300 (300) -
Issuance of 225,000 preferred shares,
net of underwriters' discounts and
offering expenses 54,087,035 56,250,000 - (2,162,965) -
Common share dividends declared (23,855,336) - - - (23,855,336)
Preferred share dividends declared (2,132,730) - - - (2,132,730)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 139,169,679 56,250,000 1,387,238 102,567,007 (21,034,566)
Net income 19,303,988 - - - 19,303,988
Unrealized holding losses on
investment securities (18,500) - - (18,500) -
Issuance of 1,450,000 common shares,
net of underwriters' discounts and
offering expenses of $1,774,222 30,669,528 - 145,000 30,524,528 -
Common share dividends declared (25,624,075) - - - (25,624,075)
Preferred share dividends declared (5,484,422) - - - (5,484,422)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $158,016,198 $56,250,000 $1,532,238 $133,073,035 $(32,839,075)
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 19,303,988 $ 16,173,519 $ 13,521,905
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 15,535,587 12,657,372 8,122,349
Write off of deferred finance costs -- 1,096,506 174,791
Equity in net income of joint ventures (305,189) (297,406) (133,509)
Earnings distributed from joint ventures 423,959 244,625 212,630
Net change in - Accounts and notes receivable (168,252) (300,914) 943,997
- Accounts and notes receivable - affiliates (1,052,717) 538,260 153,997
- Accounts payable and accrued expenses 1,584,630 2,128,390 1,430,703
- Other operating assets and liabilities 131,711 1,182,829 (977,123)
- Restricted cash (564,619) (337,538) 2,929,100
- Funds held for non-owned properties (3,828,617) (4,204,178) 8,101,683
- ------------------------------------------------------------------------------------------------------------------------
Total adjustments 11,756,493 12,707,946 20,958,618
- ------------------------------------------------------------------------------------------------------------------------
Net cash flow provided by operations 31,060,481 28,881,465 34,480,523
Cash flow from investing activities:
Acquisition of real estate (net of liabilities assumed) (74,176,202) (93,106,549) (108,611,232)
Fixed asset additions (1,680,625) (1,238,134) (5,039,770)
Distributions from joint ventures 86,018 193,687 84,348
Net cash flow used for investing activities (75,770,809) (94,150,996) (113,566,654)
Cash flow from financing activities:
Principal payments on mortgage notes payable (2,921,236) (22,495,032) (29,716,349)
Proceeds from senior and medium-term notes 42,500,000 84,682,000 --
Line of credit borrowings 170,950,000 110,444,000 102,920,000
Line of credit repayments (167,050,000) (132,344,000) (63,420,000)
Deferred financing and offering costs (822,030) (2,571,544) (1,044,592)
Common share dividends paid (24,692,838) (23,439,254) (16,304,012)
Preferred share dividends paid (5,484,422) (2,132,730) --
Proceeds from the issuance of common shares, net of
$1,609,500 and $1,358,757 of underwriting
commissions and $164,722 and $2,480,961 of
offering expenses paid in 1996 and 1994, respectively 30,669,528 -- 57,215,520
Proceeds from the issuance of preferred shares, net of
$1,771,875 of underwriting commissions and $374,333
of offering expenses paid -- 54,103,792 --
Net cash flow provided by financing activities 43,149,002 66,247,232 49,650,567
Increase (decrease) in cash and cash equivalents (1,561,326) 977,701 (29,435,564)
Cash and cash equivalents, beginning of period 2,848,285 1,870,584 31,306,148
Cash and cash equivalents, end of period $ 1,286,959 $ 2,848,285 $ 1,870,584
========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
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 December 31, 1996, the Company owned or was a joint
venture partner in 84 multifamily properties containing 15,838 suites.
Additionally, the Company managed 40 non-owned properties, 32 of which were
multifamily properties consisting of 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 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 (Note 7).
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.
Cash Equivalents
The Company considers highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
Real Estate and Depreciation
Real estate assets are stated at cost less accumulated depreciation. Included
in land are parcels of undeveloped real estate held for future development.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements 10 - 30 years
Furniture, fixtures and equipment 3 - 10 years
</TABLE>
Management reviews the carrying value of real estate assets using estimated
future cash flows, including estimated proceeds from disposition,
30
<PAGE> 14
whenever an event or change in circumstances might indicate that the asset value
may not be recoverable.
Expenditures for maintenance and repairs are charged to operations as
incurred. Betterments that improve or extend the life of the asset beyond its
original condition are capitalized. Costs incurred in connection with resident
turnover such as suite cleaning, painting, carpet cleaning or replacement,
appliance repair or replacement and other associated costs are charged to
operations.
Deferred Leasing and Financing Costs
Costs incurred in obtaining long-term financing are deferred and amortized
over the life of the associated instrument on a straight-line basis, which
approximates the effective interest method. Costs incurred with respect to shelf
registrations are capitalized and allocated on a pro rata basis to subsequent
offerings thereunder. External costs incurred in the leasing of commercial and
retail space are amortized on a straight-line basis over the terms of the
related lease agreements.
Revenue Recognition
The Company's residential property leases are for terms of generally one year
or less. Rental income is recognized on the straight-line basis. 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 ("HUD"). Provision is made for estimated amounts of
revenue increases that may not be granted.
Revenues earned by the Service Companies are recognized on the accrual basis.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code
of 1986 (the "Code"), as amended. As a REIT, the Company is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only, provided it distributes at least 95% of its taxable income and meets
certain other qualifications.
At December 31, 1996 and 1995, the Company's net tax basis of properties
exceeds the amount set forth in the Company's Consolidated Balance Sheets by $78
million and $74.5 million, respectively.
Net Income Per Share
Primary earnings per common share for income before extraordinary item and
net income have been computed by dividing common share dividends declared for
the period by the weighted average number of common shares outstanding plus the
undistributed income before extraordinary item 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.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
2. DEVELOPMENT AND ACQUISITION OF MULTIFAMILY PROPERTIES
Construction in progress including the cost of land for the development of
multifamily properties was $18,516,982 and $8,254,251 at December 31, 1996 and
1995, 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 of approximately $1,394,800, $440,000
and $27,500 were capitalized during the years ended December 31, 1996, 1995 and
1994, respectively. The following schedule details construction in progress at
December 31, 1996:
31
<PAGE> 15
<TABLE>
<CAPTION>
(dollars in thousands) Construction
Costs
Number Incurred Estimated
Property of Suites Land Cost to Date Completion
- -------- --------- --------- ------- ----------
<S> <C> <C> <C> <C>
AURORA, OH
The Residence at Barrington - Phase I 168 $ 1,375 $ 4,229 Fall 1997
The Residence at Barrington - Phase II 120 982 - Winter 1998
288 2,357 4,229
ANN ARBOR, MI
Arbor Landings Apts. II 160* 650 151 Summer 1998
COLUMBUS, OH
Bradford at Easton 324 1,607 6,564 Fall 1997
FENTON, MI
Georgetown Park Apts. 120* 350 7 1998*
GRAND RAPIDS, MI
Aspen Lakes 114* 400 11 1998*
STREETSBORO, OH
The Village of Western Reserve 108 691 449 Fall 1997
WESTLAKE, OH
Westlake 300* 523 23 1999*
MT. STERLING, OH
Muirwood Mt. Sterling 89* 100 13 1999*
Other - - 391
---------------------------------------------------
1,503 $ 6,678 $ 11,838
===================================================
</TABLE>
*Estimated
During the period January 1, 1996 through December 31, 1996, the Company
acquired, in separate purchase transactions, six multifamily properties
containing an aggregate of 1,289 suites and three parcels of land consisting of
43 acres for an aggregate purchase price of $59.1 million, which were financed
with (i) borrowings under the Company's Line of Credit of $46.1 million, (ii)
net proceeds of $9.9 million from the issuance of a Medium-Term Note, and (iii)
the assumption of mortgage indebtedness with a stated value of $3.1 million.
During 1996, the construction and leasing of 116 suites were completed at a
total cost of $6.5 million.
During the period January 1, 1995 through December 31, 1995, the Company
acquired, in separate purchase transactions, 15 multifamily properties
consisting of 2,276 suites and three parcels of land consisting of 89.7 acres
for an aggregate cost of $106 million. These acquisitions were financed with (i)
$2.5 million of available cash, (ii) $42.2 million of proceeds from the
Perpetual Preferred Share offering (Note 13), (iii) borrowings under the
Revolving Credit Facility and Line of Credit of $37.4 million, and (iv) the
assumption of mortgage indebtedness with a stated value of $23.9 million. The
mortgage indebtedness was adjusted to market value at the date of acquisition,
using interest rates reflecting the Company's incremental borrowing rate. During
1995, the construction and leasing of 132 additional suites adjacent to three of
the Company's properties were completed at a total cost of $6 million.
During the period January 1, 1994 through December 31, 1994, the Company
acquired, in separate purchase transactions, 21 multifamily properties
consisting of 3,349 suites for an aggregate cost of $139.9 million. These
acquisitions were financed with (i) $42.5 million of available cash, (ii) the
remaining proceeds from the IPO and the Second Offering (Note 13), (iii)
borrowings under the Company's Revolving Credit Facility of $63.7 million, (iv)
the assumption of mortgage indebtedness in the principal amount of $20.5
million, and (v) the issuance of a short-term note of $13.2 million. In July
1994, the construction and leasing of 40 additional suites adjacent to one of
the acquired properties was completed at a total cost of $1.4 million.
32
<PAGE> 16
3. RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments, some of which are required by HUD for
certain government-subsidized properties, include residents' security deposits,
reserve funds for replacements and other escrows held for the future payment of
real estate taxes and insurance. The reserve funds for replacements are intended
to provide cash to defray future costs that may be incurred to maintain the
associated property. In addition, certain escrows are maintained in connection
with mortgage servicing operations.
Restricted cash and investments are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Resident security deposits $ 793,160 $ 729,939
Escrow and other reserve
funds required by mortgagee 4,831,843 4,348,945
--------------------------
$5,625,003 $5,078,884
==========================
</TABLE>
Debt securities owned with a purchased maturity of less than 18 months are
classified as "held to maturity" and securities with a purchased maturity
greater than 18 months are classified as "available for sale". Investments are
comprised of U.S. treasury bills with maturities of less than 18 months and
collateralized mortgage obligations issued by the Federal Home Loan Mortgage
Company ("FHLMC") maturing in 2023. At December 31, 1996 and 1995, treasury
bills with a cost of $1,976,620 and $998,582 had fair values of $2,008,253 and
$1,013,927, respectively, and are stated at cost in the Consolidated Balance
Sheet. Investments in obligations issued by the FHLMC were stated at their fair
value of $423,000 and $398,000 at December 31, 1996 and 1995, respectively.
Included in additional paid-in capital is $18,500 at December 31, 1996 of
unrealized losses related to available for sale securities. During the fourth
quarter of 1995, the Company reclassified its investment in the FHLMC to
available for sale.
4. DEFERRED CHARGES AND PREPAID EXPENSES
Deferred charges and prepaid expenses consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred financing and
leasing costs $3,407,556 $3,360,115
Less: accumulated amortization (620,093) (774,193)
-------------------------
2,787,463 2,585,922
Prepaid expenses 1,393,936 1,065,615
Other assets 1,434,995 1,335,377
-------------------------
$5,616,394 $4,986,914
=========================
</TABLE>
Amortization expense was $608,594, $765,404 and $382,187 for the years ended
December 31, 1996, 1995 and 1994, respectively. In 1995, deferred financing
costs were written off upon the early termination of the Revolving Credit
Facility and the repayment of mortgage debt. Deferred financing fees written off
of $1,096,506 and $174,791 for the years ended December 31, 1995 and 1994,
respectively, are reflected as an extraordinary item in the statement of
operations. Further, debt prepayment fees of $1,025 and $552,476 were included
as extraordinary items in 1995 and 1994, respectively.
5. SECURED DEBT
Secured debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Conventional mortgage debt,
maturing at various dates
to 2018 $37,737,709 $40,195,438
Federally insured mortgage
debt, maturing at various
dates to 2028 31,286,544 28,713,800
-----------------------------
$69,024,253 $68,909,238
=============================
</TABLE>
Conventional Mortgage Debt
Conventional mortgages payable are comprised of six and seven loans
(nonrecourse, fixed rate, project specific loans) at December 31, 1996 and 1995,
respectively, each of which is 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.
33
<PAGE> 17
The average interest rate on conventional mortgages was 8.44% at
December 31, 1996 and 1995.
Federally Insured Mortgage Debt
Federally insured mortgage debt which encumbered eight and seven of the
properties at December 31, 1996 and 1995, respectively (including one property
which is funded through Industrial Development Bonds), is insured by HUD
pursuant to one 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. Seven of the eight federally insured mortgages have a fixed rate
and the remaining mortgage ($1,938,157 at December 31, 1996) has a variable
rate. Interest rates on the HUD-insured indebtedness range from 7.0% to 10.25%
(averaging 8.22% at December 31, 1996).
Under certain of the mortgage agreements, the Company is required to make
escrow deposits for taxes, insurance and replacement of project assets. The
variable rate mortgage is secured by a letter of credit which is renewed
annually.
Real estate assets pledged as collateral for all mortgage debt had a net book
value of $65,757,695 and $63,806,533 at December 31, 1996 and 1995,
respectively.
6. UNSECURED DEBT
Unsecured debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Senior notes, due 2000 to 2002
with interest payable quarterly $ 84,788,707 $ 84,725,107
Medium-Term Notes, due 2001 to
2026 with interest payable
quarterly 42,500,000 -
Line of Credit, due 1997 21,500,000 17,600,000
------------ -------------
$148,788,707 $ 102,325,107
============ =============
</TABLE>
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 Line of Credit. Senior Notes with a principal balance of
$75 million accrue interest at 8.38% and mature in 2000. Senior Notes with a
principal balance of $10 million accrue interest at 7.10% and mature in 2002.
Medium-Term Notes Program
During 1996, the Company issued six Medium- Term Notes (the "MTN's")
aggregating $42.5 million under its $75 million MTN program. The principal
amounts of these MTN's range from $2.5 million to $15 million and bear interest
from 6.60% to 7.93% over terms of between 5 to 30 years, with a weighted average
maturity of 6.9 years at December 31, 1996. The holder of a $2.5 million, 30
year MTN has the option to require payment on March 15, 2003. The net proceeds
were used to repay amounts outstanding under the Line of Credit and to acquire a
multifamily property.
Line of Credit
In September 1995, the Company entered into a $75 million unsecured credit
facility (the "Line of Credit") and simultaneously extinguished a $125 million
secured revolving credit facility. 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. 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, fixed in increments of 30, 60, 90,
120 or 180 days or,
34
<PAGE> 18
alternatively, borrowings are at prime rate. An annual commitment fee of 25 to
37.5 basis points on the average daily unused amount of the facility was 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.
The weighted average interest rate on borrowings outstanding under the Line of
Credit was 7.47% at December 31, 1996.
As of December 31, 1996, the scheduled maturities of secured and unsecured
indebtedness for each of the next five years and thereafter, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 22,872,505
1998 1,485,579
1999 1,608,131
2000 90,631,655
2001 22,253,014
Thereafter 78,962,076
------------
$217,812,960
============
</TABLE>
7. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
As described in Note 1, the Company's interests in 50% or less owned joint
venture partnerships are included in the financial statements on the equity
basis of accounting.
At December 31, 1996, the Company's interests in the joint venture
partnerships are as follows:
<TABLE>
<CAPTION>
Ownership
---------
<S> <C>
Americana 33 1/3%
Euclid House 33 1/3%
Gates Mills Towers 33 1/3%
Watergate 33 1/3%
College Towers 50%
Highland House 50%
Lakeshore Village 50%
</TABLE>
Summarized financial information for these joint ventures is as follows:
<TABLE>
<CAPTION>
Balanced sheet data 1996 1995
---- ----
<S> <C> <C>
Real estate, net $14,928,492 $16,037,491
Other assets 3,633,528 3,732,040
$18,562,020 $19,769,531
===========================
Amounts payable to the Company $ 227,577 $ 204,161
Mortgages payable 51,769,320 52,330,572
Other liabilities 3,312,635 3,467,035
Accumulated deficit (36,747,512) (36,232,237)
$18,562,020 $19,769,531
===========================
</TABLE>
<TABLE>
<CAPTION>
Operating data
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Rental revenues $18,254,406 $18,295,281 $17,731,141
Other revenues 127,729 135,488 105,461
Operating and maintenance expenses 11,093,688 10,993,346 10,836,427
Depreciation and amortization 1,493,727 1,486,041 1,477,035
Interest expense 5,176,499 5,230,842 5,342,542
Net income $ 618,221 $ 720,540 $ 180,598
===========================================
Company's proportionate interest in:
Depreciation and amortization $ 533,248 $ 530,731 $ 528,678
Interest expense 1,782,706 1,801,622 1,850,210
Net income of joint ventures 305,189 297,406 133,509
</TABLE>
The Company's proportionate share of net distributions was $509,977,
$438,312, and $296,978 for the years ended December 31, 1996, 1995 and 1994,
respectively. Revenues from property management fees-affiliates charged to joint
ventures aggregated $746,514, $745,924 and $737,580 for the years ended December
31, 1996, 1995 and 1994, respectively. The corresponding expenses are included
in the operating and maintenance expenses of the joint ventures, as set forth
above.
Lakeshore Village is governed by regulations pursuant to the property's rent
subsidy and mortgage insurance programs under HUD, which contain provisions
governing certain aspects of the operations of the property (Note 10). Rent
subsidies of $802,517, $809,032 and $756,098 for the years ended December 31,
1996, 1995 and 1994, respectively, were received by the property.
8. TRANSACTIONS WITH AFFILIATES
The Company provides certain services to (and is reimbursed for certain
expenses incurred on behalf of) certain multifamily properties in which the
Company maintains an equity interest, and certain other affiliated entities for
management, painting, loan servicing, and property and casualty insurance
services.
35
<PAGE> 19
Summarized affiliate transaction activity follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Property management fee revenues $ 3,386,625 $ 3,795,646 $ 3,436,837
Painting service revenues 1,263,085 820,493 720,516
Loan origination and servicing revenue 14,471 14,644 15,339
Expenses incurred on behalf of and reimbursed
by affiliates(1) 7,794,430 7,144,565 7,011,734
Laundry revenue 516,868 333,426 316,954
Property and casualty insurance commissions (34,320) (30,775) (25,772)
Corporate office rent(2) -- -- (58,084)
</TABLE>
(1) Primarily payroll and employee benefits, reimbursed at cost.
(2) Prior to June 1994, the Company leased approximately 25,000 square feet of
office space for its corporate headquarters from an affiliated entity owned
by certain officers and/or directors of the Company.
9. NOTEHOLDER INTEREST
The Company has a noteholder interest in one multifamily property which,
since 1984, has been unable to generate sufficient cash flow, as defined, to
meet the scheduled interest payments under notes payable to the Company.
Accordingly, the Company is entitled to all cash flows from operations. To the
extent that the cumulative unpaid debt service on the notes is greater than
seven years of aggregate principal and interest amortization (the cumulative
amount of debt service), which occurred in 1995, the Company can exercise its
rights under a security agreement and foreclose on the property. Because, in
substance, the Company will eventually own title to the property, most likely
through foreclosure, the property is presented in the financial statements as if
owned by the Company. Summarized financial information for this property is as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Real estate, net $ 1,484,399 $1,627,592
Other assets 1,124,209 1,155,449
$ 2,608,608 $2,783,041
=============================
Mortgage notes payable $ 4,453,316 $4,600,690
Other liabilities 419,586 480,626
Accumulated deficit (2,264,294) (2,298,275)
$ 2,608,608 $2,783,041
=============================
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Rental and other revenue $2,270,750 $2,250,140 $2,146,625
Property operating and
maintenance expenses 1,202,178 1,295,223 1,172,803
Depreciation and amortization 143,949 143,893 143,893
Interest expense 335,644 353,334 395,011
Net income $588,979 $457,690 $ 434,918
=======================================
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
The Company owns one property which derives part of its rental revenues from
commercial tenants with noncancellable operating leases. Future minimum lease
payments to be received, assuming no new or renegotiated leases, or option
extensions, for each of the next five years and thereafter, are as follows:
<TABLE>
<S> <C>
1997 $ 972,228
1998 966,627
1999 909,751
2000 597,000
2001 278,773
Thereafter 419,328
----------
$4,143,707
==========
</TABLE>
The Company leases certain equipment under capital leases. Such equipment is
included in property, plant and equipment with a cost of $698,427 and
accumulated depreciation of $247,327 at December 31, 1996. The Company also
leases certain equipment under operating leases. Future minimum lease payments
under all capital and noncancellable operating leases in which the Company is
the lessee, principally for ground leases, for each of the next five years and
thereafter, are as follows:
<TABLE>
<CAPTION>
Capital Operating
------- ---------
<S> <C> <C>
1997 $ 214,480 $ 129,521
1998 204,594 127,166
1999 78,721 101,261
2000 2,216 101,261
2001 -- 101,261
Thereafter -- 5,377,940
----------------------------
500,011 $5,938,410
==========
Less interest 44,686
$ 455,325
==========
</TABLE>
36
<PAGE> 20
Certain of the ground lease agreements contain provisions which, upon
expiration of the lease, require reversion of the land and building to the
lessor. Such provisions exist for nine properties included in the financial
statements and expire at various dates from 2021 to 2086. Rental revenues
derived from such properties were $9,376,871, $9,257,290 and $8,992,670 for the
years ended December 31, 1996, 1995 and 1994, respectively. Furthermore, at the
end of the term of the lease, any remaining replacement reserves revert to the
lessor. Management believes that the replacement reserves will be utilized for
their intended purpose prior to the end of the lease term. Such cash reserves
included in restricted cash were $1,481,538 and $1,390,249 at December 31, 1996
and 1995, respectively. With respect to such leases, the Company incurred ground
rent expense of $101,261, $101,261 and $89,080 for the years ended December 31,
1996, 1995 and 1994, respectively.
The Company owns one property which is subject to a warranty deed reversion
provision. This provision requires that the assignment of fee simple title shall
expire in 2037. At December 31, 1996, the net book value of this property was
$1,733,470.
Certain of the Company's properties are governed by regulations pursuant to
rent subsidies or mortgage insurance programs, which contain provisions
governing certain aspects of the operations of the properties. Among other
things, such provisions may include the maintenance of a reserve fund for
replacements, the renting of properties to qualifying residents, and the
requirement to make distributions in accordance with certain regulations.
Certain approvals may be required to encumber properties having rental
subsidies.
The rent subsidy program provides that HUD will make monthly housing
assistance payments to the Company on behalf of persons who reside in approved
properties and who meet the eligibility criteria. The amount of the total
monthly rental and the subsidy is determined at least annually by HUD. This
arrangement is evidenced by a contract between HUD and the Company. Such
contracts have scheduled expiration dates between October 1997 and November
2018. HUD may abate subsidy payments if the Company defaults on any obligations
under such contract and fails to cure each default after receiving notice
thereof. Rent subsidies of $11,174,488, $10,666,547 and $10,197,314 for the
years ended December 31, 1996, 1995 and 1994, respectively, were received by the
15 wholly owned properties eligible for federal rent subsidies. As discussed in
Note 5, certain obligations are insured by federal mortgage insurance programs.
The Company believes that the contracts will be renewed or that the properties
will be operated as conventional, market-rate apartments upon expiration of the
contracts.
At December 31, 1996, the Company had entered into construction contracts in
the amount of approximately $31.3 million for the development of multifamily
properties.
11. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by
management using available market information and appropriate valuation
methodologies. Considerable judgment is necessary to interpret market data and
develop estimated fair values. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize on
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Rents, accounts and notes receivable, accounts payable, accrued expenses and
other liabilities are carried at amounts which reasonably approximate
corresponding fair values.
Mortgages and notes payable with an aggregate carrying value of $69,024,253
and $68,909,238 at December 31, 1996 and 1995, respectively, have an estimated
aggregate fair value of approximately $69,029,601 and $71,668,123, respectively.
The Line of Credit is carried at an amount which approximates fair market value.
37
<PAGE> 21
Estimated fair value is based on interest rates currently available to the
Company for issuance of debt with similar terms and remaining maturities.
Senior and Medium-Term Notes with an aggregate carrying value of
$127,288,707 and $84,725,107 at December 31, 1996 and 1995, respectively, have
an estimated fair value of $130,446,465 and $90,002,644, respectively.
Disclosure about the fair value of financial instruments is based on
pertinent information available to management as of December 31, 1996 and 1995.
Although management is not aware of any factors that would significantly affect
the fair value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since that date and current estimates of
fair value may differ significantly from the amounts presented herein.
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest for the years ended December 31, 1996, 1995 and 1994
was $16,294,050, $10,430,373 and $6,748,209, respectively, which is net of
capitalized interest.
The following summarizes the non-cash investing and financing activities of
the Company which are not reflected in the Consolidated Statements of Cash
Flows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Assumption of mortgage debt in connection with the acquisition
of properties (and additional joint venture interests in 1994) $3,036,251 $25,791,140 $21,739,991
Issuance of short-term note in connection with the
acquisition of a property -- -- 13,200,000
Assumption of liabilities in connection with the
acquisition of properties 923,691 1,081,530 2,266,146
Dividends declared but not paid 6,895,071 5,963,834 5,547,752
Assumption of net liabilities and issuance of common shares
to certain affiliates to acquire the additional joint venture interests -- -- 817,000
Capital lease obligations 319,802 35,946 342,676
Offering expenses accrued 96,785 58,089 223,766
</TABLE>
13. PREFERRED AND COMMON SHARES
On December 11, 1996, the Company completed an offering of 1,300,000 common
shares at $22.375 per share. On December 17, 1996, the underwriters exercised
150,000 shares of the over-allotment option at $22.375 per share. The net
proceeds of approximately $30.7 million were applied to reduce debt.
On July 25, 1995, the Company completed an offering of 2,000,000 Depositary
Shares, each representing 1/10 of a share of the Company's 9.75% Class A
Cumulative Redeemable Preferred Shares (the "Perpetual Preferred Shares"). On
July 27, 1995, the underwriters exercised 250,000 shares of the over-allotment
option. Each Depositary Share has a $25 liquidation preference ($56.3 million in
the aggregate). Net proceeds to the Company after expenses relating to the
offering and underwriting discounts and commissions were approximately $54.1
million. Dividends on the Perpetual Preferred Shares are cumulative from the
date of issue and are payable quarterly. Except in certain circumstances
relating to the preservation of the Company's status as a REIT, the Perpetual
Preferred Shares are not redeemable prior to July 25, 2000. On and after July
25, 2000, the Perpetual Preferred Shares will be redeemable for cash at the
option of the Company.
The Company is authorized to issue 3,000,000 Class B Cumulative Preferred
Shares, without par value, and 3,000,000 Noncumulative Preferred Shares, without
par value.
On August 23, 1994, the Company completed an underwritten offering of
3,000,000 common shares at $20.63 per share. Substantially all of the net
proceeds of $58.4 million were applied to reduce debt.
14. DIVIDENDS PER SHARE
Total dividends declared per common share and the related components for
the years ended December 31, 1996 and 1995, as reported for income tax purposes,
were as follows:
38
<PAGE> 22
<TABLE>
<CAPTION>
For the year ended December 31, 1996
------------------------------------
Ordinary Non-Taxable
Date Paid Income Return of Capital Dividends
-------------------------------------------------------
<S> <C> <C> <C> <C>
1st quarter 5/1/96 $ .32 $ .13 $ .45
2nd quarter 8/1/96 .32 .13 .45
3rd quarter 11/1/96 .32 .13 .45
4th quarter 1/31/97 .32 .13 .45
-------------------------------------------------------
$1.28 $ .52 $1.80
=======================================================
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1995
------------------------------------
Ordinary Non-Taxable
Date Paid Income Return of Capital Dividends
-------------------------------------------------------
<S> <C> <C> <C> <C>
1st quarter 5/1/95 $ .32 $ .11 $ .43
2nd quarter 8/1/95 .32 .11 .43
3rd quarter 11/1/95 .32 .11 .43
4th quarter 1/31/96 .32 .11 .43
-------------------------------------------------------
$ 1.28 $ .44 $ 1.72
=======================================================
</TABLE>
15. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution retirement plan pursuant to
Section 401(k) of the Internal Revenue Code, whereby eligible employees may
elect to contribute between 1% and 10% of their gross wages. The Company matches
such contributions at a rate of 25% up to a maximum participant contribution of
4%. The Company made contributions to this plan, net of reimbursements from
managed but non-owned properties, of $46,555, $39,827 and $31,280 for the years
ended December 31, 1996, 1995 and 1994, respectively. Additionally, the Company
offers medical, dental and life insurance benefits to employees.
Effective October 14, 1993, the Company established an incentive and
nonqualified stock option plan under which 543,093 of the Company's common
shares are reserved for awards of share options to eligible key employees.
Options may be granted at per share prices not less than fair market value at
the date of grant, and in the case of incentive options, must be exercisable
within ten years thereof. Option awards granted are vested in equal annual
increments over no fewer than three years, beginning on the first anniversary of
the date of grant, and accordingly, 346,599, 216,379 and 113,800 options were
exercisable at December 31, 1996, 1995 and 1994, respectively. Activity under
the Plan is summarized as follows (all options were granted at $22 per share
except 25,000 shares issued in 1996 were granted at $20.25 per share):
<TABLE>
<CAPTION>
Granted and
Authorized Outstanding Available
-------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1993 543,093 364,850 178,243
Granted -- 5,000 (5,000)
Forfeited -- (5,000) 5,000
-------------------------------------------------
Balance at December 31, 1994 543,093 364,850 178,243
Granted -- 5,000 (5,000)
-------------------------------------------------
Balance at December 31, 1995 543,093 369,850 173,243
Granted -- 30,000 (30,000)
-------------------------------------------------
Balance at December 31, 1996 543,093 399,850 143,243
=================================================
</TABLE>
In 1995, the Company's shareholders approved a long-term incentive
compensation plan (the "Long-Term Plan") and an equity-based incentive
compensation plan (the "Equity Plan"). Participants in the Long-Term Plan will
earn incentive compensation over a three year period (the "Plan Period") based
on specific levels of Funds From Operations, as defined, per share that are
established at the outset of the Plan Period. Initial awards under the Long-Term
Plan will be based on the Plan Period beginning January 1, 1995 and ending
December 31, 1997. Beginning with the calendar year 1998, a new three year Plan
Period will begin each year. Payment of the incentive compensation earned under
the Long-Term Plan may be made in cash, restricted shares of the Company's
common shares or a combination thereof as determined by the board of directors.
The first payment under the Long-Term Plan will be made in 1998, the second
payment in 2001, and then it is anticipated that payments will be made each year
thereafter until the Long-Term Plan terminates in 2005.
The Equity Plan provides for the grant to participants of options to
purchase common shares, awards of common shares subject to restrictions on
transfer, awards of common shares issuable in the future upon satisfaction of
certain conditions, rights to purchase common shares and other awards based on
common shares. The option price with respect to the grant of options to purchase
common shares will be determined at the time of the grant but will not be less
than 100% of the fair market
39
<PAGE> 23
value of the common shares at the date of the grant or 110% in the case of a
participant who, at the date of grant, owns shares with more than 10% of the
total combined voting power of all classes of stock of the Company. The rights
to purchase common shares will enable a participant to purchase common shares
(i) at the fair market value of such shares on the date of such grant or (ii) at
85% of such fair market value on such date if the grant is made in lieu of cash
compensation. Under the terms of the Equity Plan, these grants and awards may
not aggregate more than 1,400,000 common shares and no participating employee
may receive awards with respect to more than 250,000 common shares during any
calendar year.
In December 1995, a total of 3,000 restricted shares were issued to two
officers and four directors. Deferred compensation of $41,000 and $61,500 at
December 31, 1996 and 1995, respectively, has been reflected as a reduction of
paid-in capital in the accompanying financial statements.
The Company has an employment agreement with the President and Chief
Executive Officer for an initial three-year term which commenced November 18,
1993 and is automatically extended for an additional year at the end of each
year of the agreement. Annual base salary under the agreement was $440,000 for
1996, $385,000 for 1995, and $350,000 for 1994. The initial agreement provided
for an annual cash bonus equal to 15% to 100% of the base salary if the
Company's Distributable Cash Flow, as defined, per common share, for any year
exceeds, by 5% to 20% or more, the amount for the immediate preceding year.
Under the bonus plan, no incentive compensation was earned in 1994 and $101,000
was earned in 1995. This employment agreement was amended in January, 1996 to
provide for a performance bonus based upon annual performance benchmarks tied to
Funds From Operations per Share. The incentive amounts are set at the beginning
of each fiscal year commensurate with the responsibilities of a CEO. In 1996,
$227,854 in incentive compensation was earned.
The Company does not recognize compensation cost for stock options when
the option exercise price equals or exceeds the market value on the date of the
grant. Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair values of the options granted at the grant
dates, consistent with the method of FASB Statement 123, the Company's net
income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net income applicable
to common shares
As reported $ 13,819,566 $ 14,040,789
Pro forma $ 13,809,049 $ 14,030,289
Income per common share
As reported $ .99 $ 1.01
Pro forma $ .99 $ 1.01
</TABLE>
The pro forma effect on net income for 1996 and 1995 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $21,920,407 $23,425,393 $24,025,193 $25,062,075
Income before extraordinary item 4,791,177 4,924,206 4,984,243 4,604,362
Net income 4,791,177 4,924,206 4,984,243 4,604,362
Net income applicable to
common shares 3,420,072 3,553,101 3,613,138 3,233,255
Income before extraordinary
item per common share $ .25 $ .25 $ .26 $ .23
Net income per common share $ .25 $ .25 $ .26 $ .23
Weighted average number of
shares outstanding (in thousands) 13,872 13,872 13,872 14,109
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $17,230,815 $18,307,125 $19,628,351 $21,774,983
Income before extraordinary item 4,131,334 4,091,683 4,341,876 4,706,157
Extraordinary item -- -- 911,093 186,438
Net income 4,131,334 4,091,683 3,430,783 4,519,719
Net income applicable to
common shares 4,131,334 4,091,683 2,669,158 3,148,614
Income before extraordinary
item per common share $ .30 $ .29 $ .26 $ .24
Net income per common share $ .30 $ .29 $ .19 $ .23
Weighted average number of shares
outstanding (in thousands) 13,869 13,869 13,869 13,870
</TABLE>
40
<PAGE> 24
17. PRO FORMA CONDENSED FINANCIAL
INFORMATION (UNAUDITED)
As more fully described in Note 2, during the years ended December 31,
1996, 1995 and 1994, the Company completed the acquisition of six, 15 and 21
multifamily properties (the "Acquired Properties") with total suites of 1,289,
2,276 and 3,349, respectively, and three land parcels consisting of 43 acres
during 1996 and three land parcels consisting of 89.7 acres during 1995, for an
aggregate purchase price of $59.1 million, $106 million and $139.9 million at
December 31, 1996, 1995 and 1994, respectively. The multifamily property
acquisitions are summarized as follows:
<TABLE>
<CAPTION>
Year Built or Month Acquired
Multifamily Property Location Renovated (r) Suites by the Company
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 Acquisitions:
Bedford Commons Columbus, Ohio 1987 112 December
Bentley Station Columbus, Ohio 1993 96 August
Bolton Estates Columbus, Ohio 1992 196 July
Central Park Place Grand Rapids, Michigan 1988 216 December
Edgewater Landing Cleveland, Ohio 1988(r) 241 April
Georgetown Park Apartments Fenton, Michigan 1987-94 288 December
Heathermoor Worthington, Ohio 1989 280 August
Lake Forest Columbus, Ohio 1994 192 July
Muirwood Village at Bennell Columbus, Ohio 1988 140 March
Muirwood Village at Gemstar Columbus, Ohio 1988 24 March
Muirwood Village at London London, Ohio 1989 112 March
Muirwood Village at Mt. Sterling Mt. Sterling, Ohio 1990 48 March
Muirwood Village at Zanesville Zanesville, Ohio 1991 128 March
Pendleton Lakes Columbus, Ohio 1993 160 March
Residence at Christopher Wren Gahanna, Ohio 1993 264 March
Residence at Turnberry Pickerington, Ohio 1991 216 March
Sheffield at Sylvan Circleville, Ohio 1989 88 March
Sterling Park Grove City, Ohio 1994 128 August
The Residence at Newark Newark, Ohio 1993 72 March
Williamsburg at Greenwood Village Sagamore Hills, Ohio 1990 260 February
Wyndemere Franklin, Ohio 1991 88 September
----
3,349
1995 Acquisitions:
Arbor Landings Apartments Ann Arbor, Michigan 1990 168 January
Arrowhead Station Columbus, Ohio 1987 102 March
Cloisters Toledo, Ohio 1990 188 September
Colony Bay East - Phase I Columbus, Ohio 1994 96 February
Country Place Apartments Mt. Pleasant, Michigan 1987-89 144 June
Colony Bay East - Phase II Columbus, Ohio 1995 60 July
Kensington Grove Westerville, Ohio 1995 76 July
Kensington Village Toledo, Ohio 1985-90 190 September
Mallard's Crossing Medina, Ohio 1990 192 February
Muirwood Village at Circleville Circleville, Ohio 1989 48 July
(located adjacent to Sheffield at Sylvan)
Oaks at Hampton Rochester Hills, Michigan 1986-88 272 August
Woods at Hampton Rochester Hills, Michigan 1986-88 272 August
The Landings at the Preserve Battle Creek, Michigan 1990-91 190 September
Treetops Toledo, Ohio 1988-89 128 September
Vantage Villa Toledo, Ohio 1974 150 October
-----
2,276
</TABLE>
continued
41
<PAGE> 25
<TABLE>
<CAPTION>
Year Built or Month Acquired
Multifamily Property Location Renovated (r) Suites by the Company
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 Acquisitions:
Aspen Lakes Grand Rapids, Michigan 1981 144 September
Chestnut Ridge Pittsburgh, Pennsylvania 1986 468 March
Perimeter Lakes Dublin, Ohio 1992 189 September
The Residence at Washington Washington Ct. House, Ohio 1995 72 February
Spring Brook Apartments Holland, Michigan 1986 168 June
Summer Ridge Apartments Kalamazoo, Michigan 1989-91 248 April
-----
1,289
6,914
=====
</TABLE>
The operating results of the Acquired Properties and additional joint
venture interests are included in the results of operations of the Company from
the dates of acquisition.
The following unaudited supplemental pro forma operating data for 1996
is presented to reflect the effects of: (i) the six property and three land
parcel acquisitions completed in 1996, (ii) the offering of 1,450,000 shares of
Common Stock, and (iii) the issuance of Medium-Term Notes, as if such
transactions had occurred on January 1, 1996. The unaudited supplemental pro
forma operating data for 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 1/10th of a share of the Company's 9.75%
Class A Cumulative Redeemable Preferred Shares, (iii) the 15 property and three
land parcel acquisitions completed in 1995, (iv) the issuance of 3,000
restricted shares in 1995, (v) the six property and three land parcel
acquisitions completed in 1996, and (vi) the offering of 1,450,000 shares of
Common Stock completed in 1996, as if such transactions had occurred on January
1, 1995. The unaudited supplemental pro forma operating data for 1994 is
presented to reflect the effects of: (i) the issuance of the Senior Notes, (ii)
the Second Offering, (iii) the offering of 2,250,000 Depositary Shares, each
representing 1/10th of a share of the Company's 9.75% Class A Cumulative
Redeemable Preferred Shares, (iv) the 21 property acquisitions and the
acquisition of the two joint venture interests completed in 1994, and (v) the 15
property and three land parcel acquisitions completed in 1995, as if such
transactions had occurred on January 1, 1994.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Revenues $97,658 $93,163 $78,845
*Net income 21,045 19,301 19,597
*Net income applicable to
common shares 15,560 13,817 15,166
*Net income per common share $ 1.02 $ .90 $ 1.09
Weighted average common shares
outstanding 15,322 15,322 13,869
*Before extraordinary item
</TABLE>
The 1994 pro forma financial information does not include the revenue
and expenses for Sterling Park Apartments, Lake Forest Apartments, Colony Bay
East Phase I and II, or Kensington Grove for the period January 1 through
December 31, 1994. The 1995 pro forma financial information does not include the
revenue and expenses for Colony Bay East Phase I and II, or Kensington Grove for
the period January 1, 1995 through the date the property was acquired by the
Company. The revenue and expenses of the aforementioned properties were excluded
from the pro forma financial information for the periods as mentioned as they
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
42
<PAGE> 26
results of operations of future periods of the Company.
18. SUBSEQUENT EVENTS
From January 1 through February 19, 1997, the Company acquired one
multifamily property containing 228 suites for an aggregate purchase price of
$12.5 million. This acquisition was financed with borrowings under the Company's
Line of Credit. The Company is currently under contract to purchase five parcels
of undeveloped land consisting of 158.5 acres and one additional property
consisting of 102 suites for a total cost of $10.1 million. The Company expects
to finance these acquisitions using borrowings under the Line of Credit. There
can be no assurance, however, that the Company will be successful in acquiring
the properties and land parcel under contract.
The Company is considering the disposition of six Government-Assisted
Properties with a net book value of $3.7 million at December 31, 1996 and net
operating income of $2.6 million for the year then ended. Management believes
that the disposition value will exceed the book value of the assets and as a
result, such assets are stated at cost in the Consolidated Balance Sheet. The
six properties receive federal rent subsidies from HUD. The Company intends to
acquire conventional, market-rate properties with the value received from the
disposition of these properties.
43
<PAGE> 27
SHAREHOLDER INFORMATION
Corporate Headquarters
Associated Estates Realty Corporation
5025 Swetland Court
Richmond Heights, Ohio 44143-1467
216-261-5000
Annual Meeting
The annual meeting of shareholders of Associated Estates Realty Corporation will
be held on Thursday, May 8, 1997 at 10:00 a.m. E.D.T. at:
The Forum
One Cleveland Center
1375 East 9th Street
Cleveland, Ohio 44114
Independent Accountants
Price Waterhouse LLP
Cleveland, Ohio
Legal Counsel
Baker & Hostetler LLP
Cleveland, Ohio
Transfer Agent, Registrar and Dividend
Disbursing Agent
National City Bank
Corporate Trust Department
P.O. Box 92301
Cleveland, Ohio 44193-0900
Telephone: 800-622-6757
Dividend Reinvestment and Stock Purchase Plan
The Company maintains a Dividend Reinvestment and Stock Purchase Plan for
registered shareholders. Details of the Plan are available by contacting the
Company or the transfer agent.
Investor Relations
Additional information may be obtained by contacting the Company's investor
relations department in writing at the corporate headquarters address above, by
telephone at 216-473-8798, or through the Company's web site on the Internet at
http://www.aecrealty.com.
New York Stock Exchange
AEC: Common Shares
AECPRA: Class A Cumulative Redeemable Preferred Shares
The number of holders of record of the Company's common shares at December 31,
1996 was 327. The high and low closing sale prices of the Company's common
shares for each quarter in 1996 and 1995 as reported by the New York Stock
Exchange are shown below.
<TABLE>
<CAPTION>
Price Range Dividends Declared
1996 1995 Per Share
High Low High Low 1996 1995
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $21 7/8 $20 1/2 $21 3/8 $18 5/8 $ .45 $ .43
Second Quarter 21 1/2 20 1/8 21 7/8 19 1/8 .45 .43
Third Quarter 21 1/8 20 21 1/2 19 5/8 .45 .43
Fourth Quarter 24 20 1/8 21 1/2 18 3/4 .45 .43
--------------------
$ 1.80 $ 1.72
====================
</TABLE>
44
<PAGE> 1
Exhibit 21.1
LIST OF SUBSIDIARIES
OF
ASSOCIATED ESTATES REALTY CORPORATION
-------------------------------------
State of
Subsidiary Incorporation
- ---------------------------------------------------------- -------------
AERC of Indiana, LLC Indiana
Aspen Lakes - AERC, Inc. Michigan
Associated Estates Realty Corporation of Pennsylvania, Inc. Ohio
Cloisters Apartments, Inc. Ohio
Country Place, Inc. Michigan
Ellet Apartments, Inc. Ohio
Gables Indiana, Inc. Ohio
Gates Mills III Apartments, Inc. Ohio
Gates Mills Club Housing, Inc. Ohio
Hillwood I Apartments, Inc. Ohio
Jennings Commons Apartments, Inc. Ohio
Kensington Apartments, Inc. Ohio
PatCon, Inc. Ohio
Puritas Place Apartments, Inc. Ohio
Rainbow Terrace Apartments, Inc. Ohio
Riverview Towers Apartments, Inc. Ohio
Shaker Park Gardens II, Inc. Ohio
Somerset West Apartments, Inc. Ohio
State Road Apartments, Inc. Ohio
Statesman II Apartments, Inc. Ohio
Sutliff Apartments, Inc. Ohio
Tallmadge Acres Apartments, Inc. Ohio
The Oaks at the Woods Company, Inc. Ohio
Treetop Village, Inc. Ohio
Twinsburg Apartments, Inc. Ohio
Village Tower Apartments, Inc. Ohio
West High Apartments, Inc. Ohio
<PAGE> 1
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in (i) the
Prospectus constituting part of the Registration Statement on Form S-3 (No.
33-89622), (ii) the Prospectus constituting part of the Registration Statement
on Form S-3 (No. 33-80169), (iii) the Registration Statement on Form S-8 (No.
33-88430), and (iv) the Prospectus constituting part of the Registration
Statement on Form S-3 (No. 333-22419) of Associated Estates Realty Corporation
of our report dated February 19, 1997, appearing on Page 25 of the "Annual
Report to Shareholders" which is incorporated in this Annual Report on Form
10-K. We also consent to the incorporation by reference of our report on the
Financial Statement Schedule, which appears on page S-1 of this Form 10-K.
Price Waterhouse LLP
Cleveland, Ohio
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,286,959
<SECURITIES> 5,625,003
<RECEIVABLES> 3,354,204
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,266,166
<PP&E> 513,966,475
<DEPRECIATION> (112,102,829)
<TOTAL-ASSETS> 417,746,206
<CURRENT-LIABILITIES> 29,503,961
<BONDS> 0
<COMMON> 1,532,238
0
56,250,000
<OTHER-SE> 100,233,960
<TOTAL-LIABILITY-AND-EQUITY> 417,746,206
<SALES> 87,975,036
<TOTAL-REVENUES> 94,433,068
<CGS> 37,056,123
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22,884,270
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,493,876
<INCOME-PRETAX> 19,303,988
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,303,988
<EPS-PRIMARY> .99
<EPS-DILUTED> .99
</TABLE>
