<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-12486
Associated Estates Realty Corporation
(Exact name of registrant as specified in its charter)
Ohio 34-1747603
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
5025 Swetland Court, Richmond Hts., Ohio 44143-1467
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 261-5000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period
that the registrant was required to file such
reports), and (2) has been subject to
such filing requirements for the
past 90 days.
Yes [ x ] No [ ]
Number of shares outstanding as of May 14, 1999:
22,527,726 shares
<PAGE>2
ASSOCIATED ESTATES REALTY CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
<S> <C>
ITEM 1 Condensed Financial Statements
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 3
Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the three
month periods ended March 31, 1999 and 1998 5
Notes to Financial Statements 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
PART II - OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security-Holders 39
ITEM 6 Exhibits and Reports on Form 8-K 39
SIGNATURES 42
</TABLE>
<PAGE>3
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited)
ASSETS
<S> <C> <C>
Real estate assets
Land $ 90,435,383 $ 92,675,356
Buildings and improvements 767,179,503 778,450,807
Furniture and fixtures 31,999,312 30,804,870
----------- ------------
889,614,198 901,931,033
Less: accumulated depreciation (158,692,514) (153,941,702)
----------- ------------
730,921,684 747,989,331
Construction in progress 57,317,005 53,740,292
----------- -----------
Real estate, net 788,238,689 801,729,623
Properties held for sale, net 17,351,824 -
Cash and cash equivalents 20,201,610 1,034,655
Restricted cash 7,314,040 6,718,863
Accounts and notes receivable
Rents 3,104,115 2,801,835
Affiliates and joint ventures 7,830,557 13,113,400
Other 2,464,063 2,293,007
Intangible and other assets, net 13,115,729 13,093,972
------------ ------------
$859,620,627 $840,785,355
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured debt $110,230,031 $ 80,042,667
Unsecured debt 423,431,803 423,862,468
------------ ------------
Total indebtedness 533,661,834 503,905,135
Accounts payable and accrued expenses 18,842,463 21,525,517
Dividends payable 8,472,272 10,507,586
Resident security deposits 5,946,800 5,960,971
Funds held on behalf of managed properties
Affiliates and joint ventures 4,168,988 5,353,394
Other 3,784,184 4,128,298
Accrued interest 4,792,813 5,501,634
Accumulated losses and distributions of joint ventures
in excess of investment and advances 12,438,247 12,679,793
----------- -----------
Total liabilities 592,107,601 569,562,328
Operating partnership minority interest 11,987,910 12,034,880
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; 22,641,726 and
22,621,958 issued and outstanding at March 31, 1999
and December 31, 1998, respectively 2,264,172 2,262,195
Paid-in capital 277,124,317 277,134,988
Accumulated dividends in excess of net income (79,645,975) (75,991,638)
Accumulated other comprehensive income (875) (875)
Less: Treasury shares, at cost, 25,000 shares
at December 31, 1998 (466,523) (466,523)
------------ ------------
Total shareholders' equity 255,525,116 259,188,147
------------ ------------
$859,620,627 $840,785,355 <PAGE>
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements
<PAGE> 4
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended March 31,
1999 1998
<S> <C> <C>
Revenues
Rental $ 35,340,655 $ 29,104,614
Property management fees 1,295,738 948,838
Asset management fees 585,835 -
Painting services 287,043 348,555
Other 506,780 306,798
---------- ----------
38,016,051 30,708,805
Expenses
Property operating and maintenance 15,382,150 12,302,462
Depreciation and amortization 8,276,048 5,314,595
Painting services 307,401 337,939
General and administrative 3,870,946 1,833,612
Interest expense 8,250,732 6,431,667
------------ -----------
Total expenses 36,087,277 26,220,275
Income before equity in net (loss) income of
joint ventures, minority interest and cumulative effect
of a change in accounting principle 1,928,774 4,488,530
Equity in net (loss) income of joint ventures (26,737) 36,216
Minority interest in operating partnership (32,159) -
Income before cumulative effect of a change in ------------ -------------
accounting principle 1,869,878 4,524,746
Cumulative effect of a change in accounting principle 4,319,162 -
------------ -------------
Net income $ 6,189,040 $ 4,524,746
============ =============
Net income applicable to common shares $ 4,817,935 $ 3,153,641
============ =============
Earnings per common share - basic:
Income before cumulative effect of a change in
accounting principle $ .02 $ .18
============ =============
Cumulative effect of a change in accounting principle $ .19 $ -
============ =============
Net income $ .21 $ .18
============ =============
Earnings per common share - diluted:
Income before cumulative effect of a change in
accounting principle $ .02 $ .18
============ =============
Cumulative effect of a change in accounting principle $ .19 $ -
============ =============
Net Income $ .21 $ .18
============ =============
Pro forma amounts assuming the new capitalization
policy is applied retroactively:
Net income $ 1,869,878 $ 4,659,048
============ =============
Net income applicable to common shares $ 498,773 $ 3,287,943
Earnings per common share - basic: ============ =============
Net income $ .08 $ .27 <PAGE>
============ =============
Income applicable to common shares $ .02 $ .19
Earnings per common share - diluted: ============ =============
Net income $ .08 $ .27
============ =============
Income applicable to common shares $ .02 $ .19
============ =============
Dividends paid per common share $ .375 $ .465
============ =============
Weighted average number of
common shares outstanding - Basic 22,665,998 17,071,950
=========== =============
- Diluted 22,665,998 17,073,153
=========== =============
</TABLE>
The accompanying notes are an integral part
of these financial statements
<PAGE>5
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash flow from operating activities:
Net income $ 6,189,040 $ 4,524,746
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,276,048 5,314,595
Cumulative effect of a change in accounting principle (4,319,162) -
Minority interest in operating partnership 32,159 -
Equity in net loss (income) of joint ventures 26,737 (36,216)
Earnings distributed from joint ventures 383,389 104,982
Net change in - Accounts and notes receivable (473,336) 865,443
- Accounts and notes receivable of
affiliates and joint ventures 5,282,843 463,804
- Accounts payable and accrued expenses (437,093) (1,283,100)
- Other operating assets and liabilities (729,130) (2,096,408)
- Restricted cash (595,177) 5,321,626
- Funds held for non-owned managed properties (344,114) 153,977
- Funds held for non-owned managed properties
of affiliates and joint ventures (1,184,406) 126,297
---------- ----------
Total adjustments 5,918,758 8,935,000
---------- -----------
Net cash flow provided by operations 12,107,798 13,459,746
Cash flow from investing activities:
Real estate acquired or developed (net of liabilities assumed) (9,931,065) (66,095,671)
Fixed asset additions (214,506) (359,946)
(Contributions to) distributions from joint ventures (125,905) 81,139
----------- -----------
Net cash flow used for investing activities (10,271,476) (66,374,478)
Cash flow from financing activities:
Principal payments on secured debt (312,636) (317,304)
Proceeds from secured debt 30,500,000 -
Term loan borrowings - 45,000,000
Line of credit borrowings 257,000,000 107,500,000
Line of credit repayments (257,446,565) (90,500,000)
Deferred financing and offering costs (531,475) (68,557)
Common share dividends paid (10,507,586) (7,939,916)
Preferred share dividends paid (1,371,105) (1,371,105)
---------- ----------
Net cash flow provided by financing activities 17,330,633 52,303,118
---------- ----------
Increase (decrease) in cash and cash equivalents 19,166,955 (611,614)
Cash and cash equivalents, beginning of period 1,034,655 2,251,819
----------- ----------
Cash and cash equivalents, end of period $20,201,610 $1,640,205
=========== ==========
Supplemental disclosure of cash flow information:
Assumption of liabilities in connection with the
acquisition of properties - 1,988,898
Assumption of mortgage debt in connection with the
acquisition of properties - 15,013,771
Dividends declared but not paid 8,472,272 7,939,304
</TABLE>
The accompanying notes are an integral part
of these financial statements
<PAGE>6
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business
Associated Estates Realty Corporation (the "Company") is a
self-administered and self-managed real estate investment trust
("REIT") which specializes in the acquisition, development,
ownership and management of multifamily properties. In
connection with the merger of MIG Realty Advisors, Inc. ( MIGRA )
on June 30, 1998, the Company also acquired the property and
advisory management businesses of several of MIGRA's affiliates
and the right to receive certain asset management fees, including
disposition and incentive fees, that would have otherwise been
received by MIGRA upon the sale of certain of the properties
owned by institutions advised by MIGRA. MIG II Realty Advisors,
Inc. ("MIG"), MIGRA's successor, is a registered investment
advisor and also functions as a mortgage banker and as a real
estate advisor to pension systems. MIG recognizes revenue
primarily from its client's real estate acquisitions and
dispositions, loan origination and consultation, debt servicing,
asset and property management and construction lending
activities. MIG earns the majority of its debt servicing fee
revenue from two of its pension fund clients. MIG's asset
management, property management, investment advisory and mortgage
servicing operations, including those of the prior MIG
affiliates, are collectively referred to herein as the "MIGRA
Operations".
At March 31, 1999, the Company owned directly or indirectly,
or was a joint venture partner in 101 multifamily properties
containing 21,558 units. Of these properties, 75 were located in
Ohio, 11 in Michigan, two in Florida, two in Georgia, three in
Maryland, one in North Carolina, one in Texas, one in Arizona,
three in Indiana, one in California and one in Pennsylvania.
Additionally, the Company managed 57 non-owned properties, 50 of
which were multifamily properties consisting of 12,426 units (16
of which are owned by various institutional investors consisting
of 5,749 units) and seven of which were commercial properties
containing an aggregate of approximately 782,000 square feet of
gross leasable area. Through affiliates, collectively referred
to as the "Service Companies", the Company provides property and
asset management, investment advisory, painting and computer
services as well as mortgage origination and servicing to both
owned and non-owned properties.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of the Company, all subsidiaries, the Service
Companies and the operating partnership. 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. The
preferred share interest is not an impermissible investment for
purposes of the Company's REIT qualification test.
The Company entered into an operating partnership structured
as a DownREIT of which an aggregate 20% is owned by limited
partners. Interests held by limited partners in real estate
partnerships controlled by the Company are reflected as
"Operating partnership minority interest" in the Consolidated
Balance Sheets. Capital contributions, distributions and profits
and losses are allocated to minority interests in accordance with
the terms of the operating partnership agreement. In conjunction
with the acquisition of the operating partnership, the Company
issued a total of 522,032 operating partnership units ("OP
units") which consist of 84,630 Class A OP units, 36,530 Class B
OP units, 115,124 Class C OP units, 62,313 Class D OP units, and
223,435 Class E OP units. These OP units may, under certain
circumstances, become exchangeable into common shares of the
Company on a one-for-one basis. The Class A unitholders are
entitled to receive distributions per OP unit equal to the per
share distributions on the Company's common shares. At March 31,
1999, the Company charged $32,159 to minority interest in
operating partnership in the Consolidated Statements of Income
relating to the Class A unitholders allocated share of net
income. At March 31, 1999, the Class B, Class C, Class D and
Class E unitholders were not entitled to receive an allocation of
net income and did not receive any cash distributions from the
operating partnership.
<PAGE>7
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, that are 50% or less owned by the
Company, are presented using the equity method of accounting.
Since the Company intends to fulfill its obligations as a partner
in the joint ventures, the Company has recognized its share of
losses and distributions in excess of its investment.
All significant intercompany balances and transactions have
been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited financial statements have been
prepared by the Company's management in accordance with generally
accepted accounting principles for interim financial information
and applicable rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of
normally recurring adjustments) considered necessary for a fair
presentation have been included. The reported results of
operations are not necessarily indicative of the results that may
be expected for the full year. The results of operations for
the three month period ended March 31, 1999 include the cumulative
effect of a change in accounting principle related to the Company
changing its capitalization policy on certain replacements and
improvements (See Note 12). These financial statements should be
read in conjunction with the Company's audited financial statements
and notes thereto included in the Associated Estates Realty
Corporation Annual Report on Form 10-K for the year ended
December 31, 1998.
Change in Estimates
During the first quarter, the Company refined certain cutoff
procedures and its estimation process for the accumulation of
property operating expense accrual adjustments. This refinement
was facilitated, in part, by the migration to the
decentralization of certain functions to the properties and also
by the upgrading of the Company's information systems. This
refinement had the one time effect of reducing net income by
approximately $632,148 in the first quarter. In addition, in
connection with the Company's adoption of the change in its
policy for capitalizing certain replacements (Note 12), the
Company reassessed its remaining useful lives of certain
appliances and floor covering it had capitalized upon the
acquisition of a property. This change in useful lives had
the effect of reducing income by approximately $212,800
for the three month period ended March 31, 1999. Also,
the Company had determined in December 1998 that it would
replace certain of its software during 1999. Commencing January 1,
1999, the Company began amortizing the remaining net book value
over its revised estimated useful life of one year. This change
had the effect of reducing net income by approximately $237,000
for the three month period ended March 31, 1999.
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, disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting periods.
Actual results could differ from these estimates.
Recent Accounting Pronouncements
Effective December 31, 1998, the Company implemented
Statement of Financial Accounting Standards ( SFAS ) No. 130 -
Reporting Comprehensive Income. At March 31, 1999, the Company
had no items of other comprehensive income requiring additional
disclosure. Effective December 31, 1998, the Company implemented
SFAS No. 131 - Disclosures about Segments of an Enterprise and
Related Information. All periods have been presented on the same
basis.
<PAGE>8
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The provisions of
this statement require that derivative instruments be carried at
fair value on the balance sheet. The statement continues to
allow derivative instruments to be used to hedge various risks
and sets forth specific criteria to be used to determine when
hedge accounting can be used. The statement also provides for
offsetting changes in fair value or cash flows of both the
derivative and the hedged asset or liability to be recognized in
earnings in the same period; however, any changes in fair value
or cash flow that represent the ineffective portion of a hedge
are required to be recognized in earnings and cannot be deferred.
For derivative instruments not accounted for as hedges, changes
in fair value are required to be recognized in earnings. The
provisions of this statement become effective for quarterly and
annual reporting beginning January 1, 2000. Although the
statement allows for early adoption in any quarterly period after
June 1998, the Company has no plans to adopt the provisions of
SFAS No. 133 prior to the effective date. The impact of adopting
the provisions of this statement on the Company's financial
position, results of operations and cash flow subsequent to the
effective date is not currently estimable and will depend on the
financial position of the Company and the nature and purpose of
the derivative instruments in use by management at that time.
Effective January 1, 1999, the Company adopted Statement of
Position No. 98 - 5-Reporting on the Cost of Start-Up Activities.
At March 31, 1999, there was no material impact of adoption on the
provisions of this statement on the Company's financial position,
results of operations and cash flow.
2. DEVELOPMENT OF MULTIFAMILY PROPERTIES
Construction in progress, including the cost of land, for
the development of multifamily properties was $57,317,005 and
$53,740,292 at March 31, 1999 and December 31, 1998,
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 available for leasing. Capitalized interest, real
estate taxes and insurance aggregated approximately $978,486 and
$361,640 during the three month periods ended March 31, 1999 and
1998, respectively. For the three month period ended March 31,
1999, the construction and leasing of 48 units at one property
was completed at a total cost of $3.1 million. The following
schedule details construction in progress at March 31, 1999:
<TABLE>
<CAPTION>
(dollars in thousands) Placed in March 31, 1999 Estimated
Number Costs Service --------------
of Incurred through Land Building Scheduled
Property Units to Date 3/31/99 Cost Cost Completion
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ANN ARBOR, MICHIGAN
Arbor Landings Apartments II 160$ 10,266 $ 7,301 $ 193$ 2,772 1999
ATLANTA, GEORGIA
Boggs Road 535 4,104 - 3,955 149 TBD
BATTLE CREEK, MICHIGAN
The Landings at the Preserve 90 320 - 266 54 TBD
GRAND RAPIDS, MICHIGAN
Aspen Lakes II 118 750 - 402 348 TBD
WESTLAKE, OHIO
Westlake 300 745 - 523 222 TBD
ORLANDO, FLORIDA
Windsor at Kirkman Apts. 460 39,494 - 3,222 36,272 1999
AVON, OHIO
Village at Avon 312 7,300 - 2,158 5,142 2000
Other - 1,639 - 326 1,313
----- ------- ------ ------- -------
1,975 $64,618 $7,301(1) $11,045 $46,272
===== ======= ====== ======= =======
(1) Including land of $451.
</TABLE>
<PAGE>9
3. PROPERTIES HELD FOR SALE
The Company is in negotiations to sell six of its Market-
rate properties. Five of these properties are located in Ohio
and one is located in California. The Company anticipates that
these assets will be sold during 1999. The net real estate
assets of these six properties are presented on the
Consolidated Balance Sheet as Properties held for sale.
4. SHAREHOLDERS' EQUITY
The following table summarizes the changes in shareholders'
equity since December 31, 1998:
<TABLE>
<CAPTION>
Class A Common
Cumulative Shares
Preferred (at $.10 Paid-In
Shares stated value) Capital
----------- ------------- ------------
<S> <C> <C> <C>
Balance, Dec. 31, 1998 $56,250,000 $ 2,262,195 $ 277,134,988
Net income - - -
Issuance of 21,000
restricted common shares - 2,100 (2,100)
Retired 1,232 restricted
common shares - (123) 123
Deferred compensation - - (8,694)
Common share
dividends declared - - -
Preferred share
dividends declared - - -
----------- ------------- -------------
Balance, March 31, 1999 $56,250,000 $ 2,264,172 $ 277,124,317
=========== ============= =============
</TABLE>
<TABLE>
<CAPTION>
Accumulated Accumulated
Dividends Other Treasury
In Excess Of Comprehensive Shares
Net Income Income (at cost) Total
<S> <C> <C> <C> <C>
Balance, Dec. 31, 1998 $ (75,991,638)$ (875) $(466,523) $ 259,188,147
Net income 6,189,040 - - 6,189,040
Issuance of 21,000
restricted common shares - - - -
Retired 1,232 restricted
common shares - - - -
Deferred compensation - - - (8,694)
Common share
dividends declared (8,472,272) - - (8,472,272)
Preferred share
dividends declared (1,371,105) - - (1,371,105)
Balance, March 31, 1999 $ (79,645,975)$ (875) $(466,523) $ 255,525,116
</TABLE>
5. SECURED DEBT
Conventional Mortgage Debt
Conventional mortgages payable are comprised of ten and
seven loans at March 31, 1999 and December 31, 1998,
respectively, each of which is collateralized by the associated
real estate and resident leases. These nonrecourse project
specific loans accrue interest at a fixed rate with the exception
of one mortgage note which accrues interest at a variable rate.
Mortgages payable are generally due in monthly installments of
principal and/or interest and mature at various dates through
April, 2009. The balance of the conventional mortgages was $82.5
million and $52.2 million at March 31, 1999 and December 31,
1998, respectively.
On March 31, 1999, the Company received proceeds of $30.5
million from individual nonrecourse mortgage loans
collateralized by three properties owned by qualified REIT
subsidiaries, having a net book value of $40.8 million. The
proceeds from these loans was used to pay down the Company s
floating rate unsecured line of credit facility. The weighted
average maturity of the loans is 10 years, and the weighted average
interest rate is 7.375%.
Federally Insured Mortgage Debt
Federally insured mortgage debt which encumbered seven of
the properties at March 31, 1999 and December 31, 1998,
(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 March 1, 2024.
The balance of the federally insured mortgages was $27.7 million
and $27.9 million at March 31, 1999 and December 31, 1998,
respectively. Six of the seven federally insured mortgages have
a fixed rate and the remaining mortgage ($1.8 million) has a
variable rate.
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.
<PAGE>10
6. UNSECURED DEBT
Senior Notes
The Senior Notes were issued during 1995 in the principal
amounts of $75 million and $10 million and accrue interest at
8.38% and 7.10%, respectively, and mature in 2000 and 2002,
respectively. The balance of the $75 million Senior Note, net of
unamortized discounts, was $74.9 million at March 31, 1999 and
December 31, 1998.
Medium-Term Notes Program
The Company had 11 Medium-Term Notes (the "MTN's")
outstanding having an aggregate balance of $112.5 million at
March 31, 1999 and December 31, 1998, respectively. The
principal amounts of these MTN's range from $2.5 million to $20
million and bear interest from 6.18% to 7.93% over terms ranging
from two to 30 years, with a stated weighted average maturity of
9.02 years at March 31, 1999. The holders of two MTN's with
stated terms of 30 years each have a right to repayment in five
and seven years from the issue date of the respective MTN. If
these holders exercised their right to prepayment, the weighted
average maturity would be 4.66 years.
The Company's current MTN Program provides for the issuance,
from time to time, of up to $102.5 million of MTN's due nine
months or more from the date of issue and may be subject to
redemption at the option of the Company or repayment at the
option of the holder prior to the stated maturity date. These
MTN's may bear interest at fixed rates or at floating rates and
can be issued in minimum denominations of $1,000. At March 31,
1999, there was $62.5 million of additional MTN borrowings
available under the program.
From time to time, the Company may enter into hedge
agreements to minimize its exposure to interest rate risks.
There are no interest rate protection agreements outstanding as
of March 31, 1999.
Line of Credit
In June 1998, the Company completed a new unsecured $200
million revolving credit facility (the "Line of Credit") which
replaced a $100 million unsecured revolving credit facility.
During the third quarter of 1998, the Line of Credit was
increased from $200 million to $250 million. The new agreement
provided for an extension of the term for an additional year
through June 2001 with the Company having the option to extend
the term through June 2002. The Line of Credit included certain
restrictive covenants which, among others, required the Company
to (i) maintain a minimum level of net worth, (ii) limit
dividends to less than 95% and 90% of Distributable Cash Flow, as
defined in the agreement, for 1999 and 2000, respectively, and
(iii) maintain certain debt coverage ratios. The Company's
borrowings under this Line of Credit bore interest at variable
rates based on the prime rate or LIBOR plus a specified spread,
depending on the Company's long term senior unsecured debt rating
from Standard and Poor's and Moody's Investors Service. An
annual commitment fee of 15 basis points on the maximum
commitment, as defined in the agreement, payable annually in
advance on each anniversary date. The Line of Credit was used to
finance the acquisition of properties, to provide working capital
and for general corporate purposes. At March 31, 1999 and
December 31, 1998, $226.0 million was outstanding under this
facility. The weighted average interest rate on borrowings
outstanding under the Line of Credit was 6.59% and 7.04% at March
31, 1999 and December 31, 1998, respectively. As discussed in
Note 14, in May 1999, the Company has repaid all outstanding
obligations under this Line of Credit and has terminated the
facility. Additionally, the Company was not required to and did not
determine compliance with the financial covenants for the unsecured
facility for the first quarter.
MIGRA maintained a $500,000 Line of Credit facility ("MIGRA
Line of Credit Facility") which the Company assumed at the time
of the merger. On February 10, 1999, the Company paid off the
$446,565 outstanding MIGRA Line of Credit Facility and terminated
this facility.
<PAGE>11
7. TRANSACTIONS WITH AFFILIATES AND JOINT VENTURES
Management and Other Services
The Company provides management and other services to (and
is reimbursed for certain expenses incurred on behalf of) certain
non-owned properties in which the Company's Chief Executive
Officer and/or other related parties have varying ownership
interests. The entities which own these properties, as well as
other related parties, are referred to as "affiliates". The
Company also provides similar services to joint venture
properties.
Summarized affiliate and joint venture transaction activity
follows:
<TABLE>
<CAPTION>
March 31,
1999 1998
<S> <C> <C>
Property management fee and other
miscellaneous service revenues
- affiliates $495,132 $ 583,931
- joint ventures 223,366 226,945
Painting service revenues
- affiliates 75,862 99,912
- joint ventures 27,742 93,901
Expenses incurred on behalf (1)
of and reimbursed by
- affiliates 716,068 1,144,958
- joint ventures 1,018,981 641,641
Interest income - affiliates 74,868 167,984
Interest expense - affiliates (49,398) (129,379)
- joint ventures (5,744) (11,810)
(1) Primarily payroll and employee benefits, reimbursed at cost.
</TABLE>
Property management fees and other miscellaneous receivables
due from affiliates and joint venture properties aggregated
$5,723,689 and $6,677,611 at March 31, 1999 and December 31,
1998, respectively. There were no payables due to affiliates and
joint venture properties at March 31, 1999 and December 31, 1998.
Advances to Affiliates and Joint Ventures
In the normal course of business, the Company advances funds
on behalf of, or holds funds for the benefit of, affiliates and
joint ventures. Funds advanced to affiliates and joint ventures
aggregated $895,050 and $1,211,818 at March 31, 1999,
respectively, and $5,555,732 and $880,057 at December 31, 1998,
respectively. Except for insignificant amounts, advances to
affiliates bear interest; the weighted average rate charged was
8.3% during the periods ending March 31, 1999 and 1998. The
Company held funds for the benefit of affiliates and joint
ventures in the aggregate amount of $2,311,368 and $1,857,620 at
March 31, 1999, respectively, and $3,174,898 and $2,178,496 at
December 31, 1998, respectively.
In February 1998, certain affiliated entities which owed the
Company a substantial amount of the advances described above,
made capital calls to their partners for the purpose of effecting
repayment of such advances. Thereafter, approximately $4.0
million of advances were repaid pursuant to such capital calls.
However, a corporation (the "Corporation") owned by a member of
the Company's Board of Directors, and his siblings (including the
wife of the Company's Chairman and Chief Executive Officer) which
serves as general partner of certain affiliated entities, had
informed the Company that the Corporation has caused the
commencement of a review of approximately $2.9 million in
expenditures relating to certain HUD subsidized properties. The
Company believed that all expenditures were appropriate and that
the ultimate outcome of any disagreement would not have a
material adverse effect on the Company's financial position,
results of operations or cash flows.
<PAGE>12
On March 11, 1999, the Company, the Corporation, certain
shareholders of the Corporation and others entered into a
settlement agreement which resolved all disputes concerning the
aforementioned expenditures and other issues concerning the
management by the Company or one of its Service Companies of
various properties owned by entities in which the Corporation was
a general partner. Pursuant to that settlement agreement, the
Corporation and other affiliates funded all outstanding advances
made by the Company. At December 31, 1998, amounts outstanding
which were subsequently funded in the first quarter of 1999
pursuant to the settlement agreement were $4.7 million.
Notes Receivable
At March 31, 1999, two notes of equal amounts were
receivable from the Company's Chief Executive Officer aggregating
$3,342,000 (included in "Accounts and notes receivables-
affiliates and joint ventures"). The notes were entered into on
May 23, 1997 and bear interest, payable quarterly at the 30-day
LIBOR plus the LIBOR margin on the Company's Line of Credit, with
principal due May 1, 2002. The 30-day LIBOR averaged 5.01% for
the period ending March 31, 1999. One of the notes is
collateralized by 150,000 of the Company's common shares; the
other note is unsecured. The Company recognized interest income
of $54,320 for the period ending March 31, 1999 relating to these
notes.
8. RAINBOW TERRACE APARTMENTS
On February 9, 1998, HUD notified the Company that Rainbow
Terrace Apartments, Inc. ("RTA"), the Company's subsidiary
corporation that owns Rainbow Terrace Apartments, was in default
under the terms of the Regulatory Agreement and Housing
Assistance Payments Contract ("HAP Contract") pertaining to this
property. Among other matters, HUD alleged that the property was
poorly managed and that RTA had failed to complete certain
physical improvements to the property. Moreover, HUD claimed
that the owner was not in compliance with numerous technical
regulations concerning whether certain expenses were properly
chargeable to the property. As provided in the Regulatory
Agreement and HAP Contract, in the event of a default, HUD has
the right to exercise various remedies including terminating
future payments under the HAP Contract and foreclosing the
government-insured mortgage encumbering the property.
This controversy arose out of a Comprehensive Management
Review of the property initiated by HUD in the Spring of 1997,
which included a complete physical inspection of the property.
In a series of written responses to HUD, the Company stated its
belief that it had corrected the management deficiencies cited by
HUD in the Comprehensive Management Review (other than the
completion of certain physical improvements to the property) and
justified the expenditures questioned by HUD as being properly
chargeable to the property in accordance with HUD's regulations.
Moreover, the Company stated its belief that it had repaired any
physical deficiencies noted by HUD in its Comprehensive
Management Review that might pose a threat to the life and safety
of its residents.
In June 1998, HUD notified the Company that all future
Housing Assistance Payments ("HAP") for RTA were abated and
instructed the lender to accelerate the balance due under the
mortgage. Subsequent to the notification of the HAP abatements
and the acceleration of the mortgage, the lender advised the
Company that the acceleration notification had been rescinded
pursuant to HUD's instruction. HUD then notified the Company
that the HAP payments would be reinstated and that HUD was
reviewing further information concerning RTA provided by the
Company. The Company has received the monthly HAP payments for
RTA.
In June 1998, the Company filed a lawsuit against HUD
seeking to compel HUD to review certain budget based rent
increases submitted to HUD by the Company in 1995.
Since June 1998, the Company has been involved in ongoing
negotiations with HUD for the purpose of resolving these and
other disputes concerning other properties managed or formerly
managed by the Company or one of the Service Companies, which
were similarly the subject of Comprehensive Management Reviews
initiated by HUD in the Spring of 1997.
<PAGE>13
On March 12, 1999, the Company, Associated Estates
Management Company ("AEMC"), RTA, PVA Limited Partnership
("PVA"), the owner of Park Village Apartments, and HUD, entered
into a comprehensive settlement agreement (the "Settlement
Agreement") for the purpose of resolving certain disputes
concerning property operations at Rainbow Terrace Apartments,
Park Village Apartments ("Park Village"), Longwood Apartments
("Longwood") and Vanguard Apartments ("Vanguard"). Longwood was
managed by the Company until January 13, 1999. Park Village is
managed by the Company. Vanguard was managed by AEMC until
December 1997. All four properties are encumbered by HUD insured
mortgages, governed by HUD imposed regulatory agreements and
subsidized by Section 8 Housing Assistance Payments.
Under the terms of the Settlement Agreement, HUD has agreed
to pay RTA a retroactive rent increase totaling $1,784,467, which
represents the outstanding receivable recorded at March 31, 1999
and December 31, 1998. HUD has further agreed to release the
Company, AEMC, RTA and the owners and principals of PVA, Longwood
and Vanguard from all claims (other than tax or criminal fraud
claims) regarding the ownership or operation of Rainbow Terrace
Apartments, Park Village, Longwood and Vanguard. Moreover, HUD
has agreed not to issue a limited denial of participation,
debarment or suspension, program fraud civil remedy action or
civil money penalty, resulting from the ownership or management
of any of these projects, or to deny eligibility to any of their
owners, management agents or affiliates for participation in any
HUD program on such basis.
HUD's obligations under the Settlement Agreement are
conditional upon the performance by the Company, RTA and PVA of
certain obligations, the most significant of which is the
obligation to identify, on or before April 11, 1999, prospective
purchasers for both Rainbow Terrace Apartments and Park Village
who are acceptable to HUD, and upon HUD's approval, convey those
projects to such purchasers. Alternatively, if RTA and PVA are
unable to identify prospective purchasers acceptable to HUD, then
RTA and PVA have agreed to convey both projects to HUD pursuant
to deeds in lieu of foreclosure. In either case (conveyance to a
HUD approved purchaser or deed in lieu of foreclosure), no
remuneration will be received by either RTA or PVA in return,
except for the $1,784,467 retroactive rent increase payable to
RTA mentioned above. At March 31, 1999 and December 31, 1998,
the Company had receivables of $1,784,467 related to the 1995 and
1998 retroactive rental increase requests. At March 31, 1999,
RTA had net assets of approximately $1,827,319, including the
retroactive rental receivable of $1,784,467 due from HUD, and a
remaining amount due under the mortgage of approximately
$1,935,123. The transfer of RTA to a purchaser which is
acceptable to HUD or the direct transfer of RTA to HUD is not
expected to have a material impact on the results of operations
or cash flows of the Company. RTA and PVA requested HUD to
extend the April 11, 1999 deadline for identification of
potential purchasers. HUD granted that request and the deadline
was extended to May 31, 1999.
9. PREFERRED AND COMMON SHARES
Common Shares
In June and July 1998, the Company issued 408,314 and
5,139,387 common shares relating to the Company's merger of MIGRA
and the related acquisition of eight multifamily properties,
respectively.
On July 2, 1997, the Company completed an offering of
1,750,000 common shares at $23.50 per share. The net proceeds of
approximately $38.8 million were applied to reduce debt.
On December 17, 1996, the Company completed an offering of
1,450,000 common shares at $22.375 per share. The net proceeds
of approximately $30.7 million were applied to reduce debt.
<PAGE>14
Treasury Shares
On June 29, 1998, the Company's Board of Directors
authorized management to purchase, from time to time, up to
1,000,000 common shares at market prices. The timing of stock
purchases are made at the discretion of management. During the
third quarter of 1998, 25,000 shares were repurchased at an
aggregate cost of $466,523 which was funded primarily from
operating cash flows.
Preferred Shares
At March 31, 1999, 2,250,000 Depositary Shares were
outstanding, each representing 1/10 of a share of the Company's
9.75% Class A Cumulative Redeemable Preferred Shares (the
"Perpetual Preferred Shares"). 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. There are no
noncumulative preferred shares issued or outstanding at March 31,
1999 or December 31, 1998.
Shareholder Rights Plan
During January 1999, the Company adopted a Shareholder
Rights Plan in order to protect the interests of the Company and
its shareholders if any hostile takeover activity should occur.
To implement the Plan, the Board of Directors declared a
distribution of one Right for each of the Company's outstanding
common shares. Each Right entitles the holder to purchase from
the Company 1/1,000th of a Class B Series I Cumulative Preferred
Share (a "Preferred Share") at a purchase price of $40 per Right,
subject to adjustment. One one-thousandth of a Preferred Share
is intended to be approximately the economic equivalent of one
common share. The Rights will expire on January 6, 2009, unless
redeemed by the Company as described below.
The Rights are not currently exercisable and trade with the
Company's common shares. The Rights will become exercisable if a
person or group becomes the beneficial owner of 15% or more of
the then outstanding common shares of the Company or announces an
offer to acquire 15% or more of the Company's then outstanding
common shares.
If a person or group acquires 15% or more of the Company's
outstanding common shares, then each Right not owned by the
acquiring person or its affiliates will entitle its holder to
purchase, at the Right's then-current exercise price, fractional
preferred shares that are approximately the economic equivalent
of common shares (or, in certain circumstances, common shares,
cash, property or other securities of the Company) having a
market value equal to twice the then-current exercise price. In
addition, if, after the Rights become exercisable, the Company is
acquired in a merger or other business combination transaction
with an acquiring person or its affiliates or sells 50% or more
of its assets or earnings power to an acquiring person or its
affiliates, each Right will entitle its holder to purchase, at
the Right's then-current exercise price, a number of the
acquiring Company's common shares having a market value of twice
the Right's exercise price. The Board of Directors may redeem
the Rights, in whole, but not in part, at a price of $.01 per
Right.
The distribution was made on January 29, 1999 to
shareholders of record on that date. The initial distribution of
Rights is not taxable to shareholders.
10. EARNINGS PER SHARE
Earnings per share ("EPS") has been computed pursuant to the
provisions of SFAS No. 128. The following table provides a
reconciliation of both income before cumulative effect of a
change in accounting principle and the number of common shares
used in the computation of basic EPS, which utilizes the weighted
average number of common shares outstanding without regard to
dilutive potential common shares, and diluted EPS, which includes
all such shares.
<PAGE>15
<TABLE>
<CAPTION>
For the three months
ended March 31,
1999 1998
<S> <C> <C>
Basic Earnings Per Share:
Income before cumulative effect of a change in accounting
principle $ 1,869,878 $ 4,524,746
Less: Preferred share dividends 1,371,105 1,371,105
----------- -----------
Income before cumulative effect of a change in accounting
principle applicable to common shares 498,773 3,153,641
Plus: Cumulative effect of a change in accounting principle 4,319,162 -
----------- -----------
Income applicable to common shares $ 4,817,935 $ 3,153,641
=========== ===========
Diluted Earnings Per Share:
Income before cumulative effect of a change in accounting
principle $ 1,869,878 $ 4,524,746
Less: Preferred share dividends 1,371,105 1,371,105
Amortization expense relating to contingent merger
consideration 30,763 -
Income before cumulative effect of a change in accounting ------------ ------------
principle applicable to common shares 468,010 3,153,641
Plus: Cumulative effect of a change in accounting principle 4,319,162 -
----------- ------------
Income applicable to common share $ 4,787,172 $ 3,153,641
Number of Shares:
Basic-average shares outstanding 22,665,998 17,071,950
Dilutive shares - 1,203
---------- ----------
Diluted-average shares outstanding 22,665,998 17,073,153
Per Share Amount - Income before cumulative effect of a ========== ==========
change in accounting principle:
Basic $ .02 $ .18
========== ============
Diluted $ .02 $ .18
========== ============
Per Share Amount - Net Income
Basic $ .21 $ .18
========== ============
Diluted $ .21 $ .18
========== ============
Pro forma amounts assuming the new capitalization
policy is applied retroactively:
Net income $ 1,869,878 $ 4,659,048
Income applicable to common shares $ 498,773 $ 3,287,943
Per Share Amount - Net income:
Basic $ .08 $ .27
Diluted $ .08 $ .27
Per Share Amount - Income applicable to common shares:
Basic $ .02 $ .19
Diluted $ .02 $ .19
</TABLE>
Options to purchase 1,515,009 and 908,009 shares of common
stock were outstanding at March 31, 1999 and 1998, respectively,
a portion of which has been reflected above using the treasury
stock method.
<PAGE>16
11. INTERIM SEGMENT REPORTING
In 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company
has three reportable segments: (1) Market-rate multifamily
properties, (2) Government-Assisted multifamily properties, and
(3) Management and Service Operations. The Company has
identified these segments because the discrete information is the
basis upon which management makes decisions regarding resource
allocation and performance assessment. The Market-rate
multifamily properties are conventional multifamily residential
apartments (the operations are not subject to regulation by HUD).
The Government-Assisted properties are multifamily properties for
which the rents are subsidized and certain aspects of the
operations are regulated by HUD pursuant to Section 8 of the
National Housing Act of 1937. The Management and Service
Operations provide management and advisory services to the
Market-rate and Government-Assisted properties which are owned by
the Company, as well as to clients and properties that are not
owned, but managed. All of the Company's properties and
Management and Service Operations are located in the United
States.
The accounting policies of the segments are the same as
those described in the "Basis of Presentation and Significant
Accounting Policies". The Company evaluates the performance of
its segments and allocates resources to them based on EBITDA.
EBITDA should not be considered as an alternative to net income
(determined in accordance with generally accepted accounting
principles - "GAAP"), as an indicator of the Company's financial
performance, cash flow from operating activities (determined in
accordance with GAAP) or 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.
All of the Company's general and administrative costs which
were $3,870,946 and $1,833,612 for the periods ended March 31,
1999 and 1998, respectively, are included in the Management and
Service Operations tier as the Company considers these costs
directly attributable to the management business, regardless of
whether these costs relate to the management of non-owned or
owned properties.
Information on the Company's segments for the three months
ended March 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
For the three months ended March 31, 1999
Management
Government- and Service Total
Market-Rate Assisted Operations Consolidated
<S> <C> <C> <C> <C>
Total segment revenues $ 33,185,641 $2,447,210 $6,060,531 $ 41,693,382
Elimination of intersegment revenues (47,780) - (3,629,551) (3,677,331)
Consolidated revenues $ 33,137,861 $2,447,210 $2,430,980 $ 38,016,051
Equity in net income of joint
ventures $ (27,929) $ 3,664 $ (2,472) $ (26,737)
*EBITDA-including the proportionate
share of joint ventures $ 19,540,390 $ 1,507,281 $(1,903,525) $ 19,144,146
Total assets $827,836,921 $17,739,801 $14,043,905 $859,620,627
Capital expenditures, gross $ 9,566,952 $ 364,113 $ 214,506 $ 10,145,571
</TABLE>
<PAGE>17
<TABLE>
<CAPTION>
For the three months ended March 31, 1998
Management
Government- and Service Total
Market-Rate Assisted Operations Consolidated
<S> <C> <C> <C> <C>
Total segment revenues $ 25,825,591 $ 3,392,421 $ 4,439,661 $ 33,657,673
Elimination of intersegment revenues (47,500) - (2,901,368) (2,948,868)
Consolidated revenues $ 25,778,091 $ 3,392,421 $ 1,538,293 $ 30,708,805
Equity in net income of joint
ventures $ 29,778 $ 6,438 $ - $ 36,216
*EBITDA-including the proportionate
share of joint ventures $ 15,683,205 $ 1,725,973 $ (780,247) $ 16,628,931
Total assets $ 586,685,265 $16,671,412 $24,230,343 $627,587,020
Capital expenditures, gross $ 82,895,909 $ 203,431 $ 359,946 $ 83,458,286
*Intersegment revenues and expenses have been eliminated in the
computation of EBITDA for each of the segments.
</TABLE>
A reconciliation of total segment EBITDA to total
consolidated net income for the three months ended March 31, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Total EBITDA for reportable segments $19,144,146 $16,628,931
EBITDA-proportionate share of joint ventures (635,929) (588,390)
Equity in net (loss) income of joint ventures (26,737) 36,216
Depreciation and amortization (8,276,048) (5,314,595)
Interest expense (8,250,732) (6,431,667)
Interest income 185,988 212,615
Income taxes (270,810) (18,364)
Cumulative effect of a change in accounting
principle 4,319,162 -
Consolidated net income $ 6,189,040 $ 4,524,746
</TABLE>
12. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1999, the Company changed its method of
accounting to capitalize expenditures for certain replacements
and improvements, such as new HVAC equipment, appliances,
flooring, carpeting and kitchen/bath renovations. Previously,
these costs were charged to operations as incurred. Ordinary
repairs and maintenance, such as suite cleaning and painting, and
appliance repairs are expensed. The Company believes the change
in the capitalization method provides an improved measure of the
Company s capital investment, provides a better matching of
expenses with the related benefit of such expenditures, including
associated revenues, and is in the opinion of management,
consistent with industry practice. The cumulative effect of this
change in accounting principle increased net income for the three
months ended March 31, 1999 by $4,319,162 or $.19 per share
(basic and diluted). The effect of this change was to increase
income before cumulative effect of a change in accounting
principle by $940,794 or $.04 per share (basic and diluted) for
the three months ended March 31, 1999. The pro forma amounts
shown on the income statement have been adjusted to reflect the
retroactive application of the capitalization of such
expenditures and related depreciation for the three months ended
March 31, 1998 of which increased net income by $134,302 or $.01
per share (basic and diluted).
<PAGE>18
13. PRO FORMA CONDENSED FINANCIAL INFORMATION (UNAUDITED)
The following unaudited supplemental pro forma operating
data for 1998 is presented to reflect, as of January 1, 1998, the
effects of: (i) the 12 property acquisitions completed in 1998,
(ii) the merger of MIGRA in 1998, (iii) the sale of a property
in 1998, and (iv) the exclusion of Rainbow Terrace Apartments
operating results. There were no pro forma adjustments for 1999.
<TABLE>
<CAPTION>
For the three months
ended March 31,
1999 1998
(In thousands, except per share amounts)
<S> <C> <C>
Revenues $ 38,016 $ 35,514
*Net income 1,870 3,622
*Income applicable to common shares (Basic and Diluted) 499 2,251
Earnings per common shares (Basic and Diluted) $ .02 $ .10
Weighted average number of common shares outstanding:
common shares outstanding (Basic and Diluted) 22,666 22,666
*Before cumulative effect
</TABLE>
The 1999 and 1998 pro forma financial information does not
include the revenue and expenses for the period January 1 through
the date the properties were acquired by the Company for Windsor
at Kirkman Apartments, Windsor Pines and Steeplechase at Shiloh
Crossing Apartments which are properties that were acquired in
1998. The revenue and expenses of the aforementioned properties
were excluded from the pro forma financial information for 1999
and 1998 as the properties were under construction during
substantially all of the periods prior to their acquisition.
The unaudited pro forma condensed statement of operations is
not necessarily indicative of what the actual results of
operations of the Company would have been assuming the
transactions had been completed as set forth, nor does it purport
to represent the results of operations of future periods of the
Company.
14. SUBSEQUENT EVENTS
Treasury Shares
Subsequent to March 31, 1999, the Company repurchased 89,000
common shares at an aggregate cost of $957,378 which was funded
primarily from operating cash flows.
Dividends Declared
On March 30, 1999, the Company declared a dividend of $0.375
per common share for the quarter ending March 31, 1999, which was
paid on May 1, 1999 to shareholders of record on April 15, 1999.
Management Contract
On May 4, 1999, a pension fund client of MIG acquired a
multifamily property containing 248 units located in Fairfax
County, Virginia. MIG has been retained to provide asset and
property management services.
Secured Financing
On May 10, 1999, the Company collateralized individual
mortgages on 20 properties for $239 million in project specific,
non-recourse loans from The Chase Manhattan Bank. The loans have
maturities ranging from 8 to 12 years and fixed interest rates of
198 basis points over comparable treasuries. The weighted
average maturity of the loans is 10-1/4 years, and the weighted
average interest rate is 7.52%.
<PAGE>19
The proceeds from the loans were used to pay off the
Company's floating rate unsecured line of credit facility, which
had an outstanding balance of $228 million at the time of the
secured debt financing closing, and to provide additional working
capital. In the quarter ending June 30, 1999, the Company will
incur an extraordinary charge of approximately $1,726,139 which
represents a $750,000 facility fee charge and a $976,139 write off
of deferred finance costs related to the termination of the unsecured
line of credit facility.
<PAGE>20
ASSOCIATED ESTATES REALTY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Overview
Associated Estates Realty Corporation (the "Company") is a
self-administered and self-managed real estate investment trust
("REIT") which specializes in the acquisition, development,
ownership and management of multifamily properties. In
connection with the merger of MIG Realty Advisors, Inc. ( MIGRA )
on June 30, 1998, the Company also acquired the property and
advisory management businesses of several of MIGRA's affiliates
and the right to receive certain asset management fees, including
disposition and incentive fees, that would have otherwise been
received by MIGRA upon the sale of certain of the properties
owned by institutions advised by MIGRA. MIG II Realty Advisors,
Inc. ("MIG") MIGRA's successor, is a registered investment
advisor and also functions as a mortgage banker and as a real
estate advisor to pension systems. MIG recognizes revenue
primarily from its client's real estate acquisitions and
dispositions, loan origination and consultation, debt servicing,
asset and property management and construction lending
activities. MIG earns the majority of its debt servicing fee
revenue from two of its pension fund clients. MIG's asset
management, property management, investment advisory and mortgage
servicing operations, including those of the prior MIG
affiliates, are collectively referred to herein as the "MIGRA
Operations".
At March 31, 1999, the Company owned directly or indirectly,
or was a joint venture partner in 101 multifamily properties
containing 21,558 units. Of these properties, 75 were located in
Ohio, 11 in Michigan, two in Florida, two in Georgia, three in
Maryland, one in North Carolina, one in Texas, one in Arizona,
three in Indiana, one in California and one in Pennsylvania.
Additionally, the Company managed 57 non-owned properties, 50 of
which were multifamily properties consisting of 12,426 units (16
of which are owned by various institutional investors consisting
of 5,749 units) and seven of which were commercial properties
containing an aggregate of approximately 782,000 square feet of
gross leasable area. Through affiliates, collectively referred
to as the "Service Companies", the Company provides property and
asset management, investment advisory, painting and computer
services as well as mortgage origination and servicing to both
owned and non-owned properties.
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 Income contained in the
financial statements, including trends which might appear, should
not be taken as indicative of future operations. This discussion
may also contain forward-looking statements based on current
judgments and current knowledge of management, which are subject
to certain risks, trends and uncertainties that could cause
actual results to vary from those projected. Accordingly,
readers are cautioned not to place undue reliance on forward-
looking statements. 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, changes in
economic conditions in the markets in which the Company owns
properties, risks of a lessening of demand for the apartments
owned by the Company, changes in government regulations affecting
the Government-Assisted Properties, changes in or termination of
contracts relating to third party management and advisory
business, 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.
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, 1993. REITs
are subject to a number of organizational and operational
requirements including a requirement that 95% of the income that
would otherwise be considered as taxable income be distributed to
<PAGE>21
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, secured borrowings and property sales proceeds. 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. During 1999 and
2000, approximately $21 million and $107 million, respectively,
of the Company's debt will mature. Although the Company may no
longer be in a position to access public unsecured debt markets
due to revised credit ratings, the Company believes it has
adequate alternatives available to provide for its liquidity
needs including new secured borrowings and property sales
proceeds.
Financing:
On March 31, 1999, the Company received proceeds of $30.5
million in individual nonrecourse mortgage loans which are
collateralized by three properties owned by qualified REIT
subsidiaries, having a net book value of $40.8 million. Most of
the proceeds from these loans were used to pay down the Company's
floating rate unsecured line of credit facility. Subsequently,
on May 10, 1999, the Company received proceeds of $238.5 million
in 20 nonrecourse mortgage loans collateralized by individual
mortgages on 20 properties. There are no cross-default or cross-
collateralization provisions in the mortgages. The proceeds from
these loans were used to pay off the Company's floating rate
unsecured line of credit facility. After repayment of the
unsecured line of credit facility, the Company's total floating
rate debt outstanding was reduced to less than $17.0 million,
while completely eliminating all outstanding borrowings under the
Company's unsecured floating rate debt. These nonrecourse
financings have the effect of increasing the Company's weighted
average debt maturity from approximately 3.1 years to
approximately 7.5 years.
In June 1998, the Company completed a new unsecured $200
million revolving credit facility (the "Line of Credit") which
replaced a $100 million unsecured revolving credit facility.
During the third quarter of 1998, the Line of Credit was
increased from $200 million to $250 million. The new agreement
provided for an extension of the term for an additional year
through June 2001 with the Company having the option to extend
the term through June 2002. The Line of Credit includes certain
restrictive covenants which, among others, required the Company
to (i) maintain a minimum level of net worth, (ii) limit
dividends to less than 95% and 90% of Distributable Cash Flow, as
defined in the agreement, for 1999 and 2000, respectively, and
(iii) maintain certain debt coverage ratios. The Company's
borrowings under this Line of Credit bore interest at variable
rates based on the prime rate or LIBOR plus a specified spread,
depending on the Company's long term senior unsecured debt rating
from Standard and Poor's and Moody's Investors Service. Based on
the revised credit ratings the Company received from Moody's and
Standard and Poor's on March 16, 1999, the spread increased 85
basis points to 225 basis points. The Company believes that this
could have an adverse impact of up to $.05 on earnings per share
in 1999. An annual commitment fee of 15 basis points on the
maximum commitment, as defined in the agreement, payable annually
in advance on each anniversary date. During 1998, the Company
recognized a non-cash extraordinary charge of approximately
$0.125 million ($0.0063 per share), relating to the write-off of
unamortized deferred finance costs associated with the former
revolving credit facility. The Line of Credit is used to finance
the acquisition of properties, to provide working capital and for
general corporate purposes. At March 31, 1999, $226.0 million
was outstanding under this facility. As a result of the May 10,
1999, $238.5 million mortgage refinancing, which repaid the Line of
Credit in full, the Company was not required to, and did not,
determine compliance with the financial covenants for the unsecured
facility for the first quarter. In the quarter ending June 30,
1999, the Company will incur an extraordinary charge of approximately
$1,726,139 which represents a $750,000 facility fee charge and a
$976,139 write off of deferred finance costs related to the
termination of the unsecured line of credit facility.
The Company was in violation of certain financial ratio
covenants under the Line of Credit for the first quarter 1998
reporting period. The Company received waivers of those
violations through June 30, 1998. Additionally, the Company
<PAGE>22
advised its bank group that it was not in compliance with one of
the financial covenants concerning the Company's net worth for
the third quarter 1998 reporting period. The net worth covenant
required that the Company maintain a minimum net worth of $400
million, based on a formula that incorporates the annualized
multiple of the most recent quarter's earnings before interest,
taxes, depreciation and amortization ("EBITDA"), as defined in
the agreement. The Company negotiated with its bank group for a
waiver by the banks of the breach of the net worth covenant,
along with an increase in borrowing costs under its Line of
Credit from LIBOR plus 100 basis points to LIBOR plus 140 basis
points (based on the then-current credit rating). In addition,
certain of the covenants, including the minimum net worth
covenant, were modified to provide the Company a limited increase
in flexibility. The minimum net worth covenant was reduced from
$400 million to $325 million. The bank group continued to make
advances under the Line of Credit following the Company's
notification that it was not in compliance with the net worth
covenant. A $395,000 default waiver fee was paid in December
1998 and was reflected in the Consolidated Statements of Income
at December 31, 1998.
MIGRA maintained a $500,000 Line of Credit facility ("MIGRA
Line of Credit Facility") which the Company assumed at the time
of the merger. During February 1999, the Company paid off the
MIGRA Line of Credit Facility of $446,565 and terminated this
facility.
Seventy-nine of the Company's 94 wholly owned properties
were unencumbered at March 31, 1999 with annualized EBITDA of
approximately $64.2 million and a historical cost basis of
approximately $671.0 million. The remaining fifteen of the
Company's wholly owned properties, have an historical cost basis
of $203.3 million and secured property specific debt of $110.2
million at March 31, 1999. Unsecured debt, which totaled $423.4
million at March 31, 1999, consisted of $112.5 million in Medium-
Term Notes, Senior Notes of $84.9 million, and amounts drawn on
the Company's Line of Credit of $226.0 million. The Company's
proportionate share of the mortgage debt relating to the seven
joint venture properties was $17.5 million at March 31, 1999.
The weighted average interest rate on the secured, unsecured and
the Company's proportionate share of the joint venture debt was
7.28% at March 31, 1999.
After considering the effects of the May 10, 1999 $238.5
million mortgage refinancing, 59 of the Company's 94 wholly owned
properties remain unencumbered with annualized EBITDA of
approximately $36.7 million and a historical cost basis of
approximately $357.6 million. The remaining 35 of the Company's
wholly owned properties have an historical cost basis of $516.7
million.
The Company had 11 Medium-Term Notes (the "MTN's")
outstanding having an aggregate balance of $112.5 million at
March 31, 1999 and December 31, 1998, respectively. The
principal amounts of these MTN's range from $2.5 million to $20
million and bear interest from 6.18% to 7.93% over terms ranging
from two to 30 years, with a stated weighted average maturity of
9.02 years at March 31, 1999. The holders of two MTN's with
stated terms of 30 years each have a right to repayment of five
and seven years from the issue date of the respective MTN. If
these holders exercised their right to prepayment, the weighted
average maturity would be 4.66 years.
The Company's current MTN Program provides for the issuance,
from time-to-time, of up to $102.5 million of MTN's due nine
months or more from the date of issue and may be subject to
redemption at the option of the Company or repayment at the
option of the holder prior to the stated maturity date. These
MTN's may bear interest at fixed rates or at floating rates and
can be issued in minimum denominations of $1,000. At March 31,
1999, there are $62.5 million of additional MTN borrowings
available under the program. However, due to the downgrade of the
Company's credit rating to a non-investment grade rating in March
1999, the Company does not anticipate near to intermediate
issuance of additional MTN's or similar unsecured debt
instruments.
Registration statements:
The Company has a shelf registration statement on file with
the Securities and Exchange Commission relating to the proposed
offering of up to $368.8 million of debt securities, preferred
<PAGE>23
shares, depositary shares, common shares and common share
warrants. The total amount of the shelf filing includes a $102.5
million MTN Program of which MTN's totaling $40.0 million have
been issued leaving $62.5 million available. The securities may
be offered from time to time at prices and upon terms to be
determined at the time of sale. However, due to the currently
depressed price of the Company's common shares and downgrade of
the Company's public debt and preferred stock in March 1999, it
is unlikely that the Company will be in a position to offer any
securities under its shelf registration statement in the near
future.
Operating Partnership:
The Company entered into an operating partnership structured
as a DownREIT of which an aggregate 20% is owned by limited
partners. Interests held by limited partners in real estate
partnerships controlled by the Company are reflected as
"Operating partnership minority interest" in the Consolidated
Balance Sheets. Capital contributions, distributions and profits
and losses are allocated to minority interests in accordance with
the terms of the operating partnership agreement. In conjunction
with the acquisition of the operating partnership, the Company
issued a total of 522,032 operating partnership units ("OP
units") which consist of 84,630 Class A OP units, 36,530 Class B
OP units, 115,124 Class C OP units, 62,313 Class D OP units, and
223,435 Class E OP units. These OP units may, under certain
circumstances, become exchangeable into common shares of the
Company on a one-for-one basis. The Class A unitholders are
entitled to receive distributions per OP unit equal to the per
share distributions on the Company's common shares. At March 31,
1999, the Company charged $32,159 to minority interest in
operating partnership in the Consolidated Statements of Income
relating to the Class A unitholders allocated share of net
income. At March 31, 1999, the Class B, Class C, Class D and
Class E unitholders were not entitled to receive an allocation of
net income and did not receive any cash distributions from the
operating partnership.
Merger Contingent Consideration Payable:
Subject to certain conditions and adjustments, the MIGRA
Stockholders' Conversion Rights entitle the MIGRA Stockholders to
receive (a) on the second issuance date (June 30, 1999),
approximately 70,737 common shares, based on the average closing
price of the common shares of $12.34 for the 20 trading days
immediately preceding December 31, 1998, the date the contingent
consideration was met, or $872,934 and (b) on the third issuance
date (June 30, 2000) $3,011,329 of common shares of the Company
based on the average closing price of the common shares for the
20 trading days immediately preceding the date the consideration
was met. The obligation of the Company to issue common shares on
the second issuance date was contingent upon the issuance of a
certificate of occupancy for the Windsor Pines property and the
MIGRA stockholders' submission to the Company of multifamily
property acquisition opportunities with an aggregate gross asset
value of at least $50 million and an average yield of at least
85% of the pro forma yield of the properties being acquired by
the Company in connection with the acquisitions (the "Minimum
Yield"). The obligation of the Company to issue common shares on
the third issuance date is contingent upon the issuance of a
certificate of occupancy for the Windsor at Kirkman property and
the MIGRA stockholders' submission to the Company of an
additional $50 million of multifamily property acquisition
opportunities with the Minimum Yield. The contingencies
precedent to the third payment have not been met as of March 31,
1999.
Acquisitions, development and dispositions:
Should the Company acquire any multifamily properties in
1999, it would finance such acquisitions and development with the
most appropriate sources of capital, which may include the
assumption of mortgage indebtedness, bank and other institutional
borrowings, through the exchange of properties, undistributed
Funds From Operations, or secured debt financings.
For the three month period ended March 31, 1999, the Company
completed the construction and leasing of 48 units at one of the
Company's development properties.
<PAGE>24
The Company is in the process of constructing or planning
the construction of an additional 1,975 units owned by the
Company as follows:
<TABLE>
<CAPTION>
Additional Anticipated
Property Location Units Completion
<S> <C> <C> <C>
Arbor Landings Apts. II Ann Arbor, Michigan 160 2nd Qtr. 1999
Aspen Lakes II Grand Rapids, Michigan 118 TBD
Boggs Road Atlanta, Georgia 535 TBD
The Landings at the
Preserve(a) Battle Creek, Michigan 90 TBD
Village at Avon Avon, Ohio 312 4th Qtr. 2000
Windsor at Kirkman
Apartments Orlando, Florida 460 3rd Qtr. 1999
Westlake Westlake, Ohio 300 TBD
1,975
(a) A clubhouse will also be added to The Landings at the
Preserve.
TBD - To be determined.
</TABLE>
The Company is exploring opportunities to dispose of some of
its joint venture, Government-Assisted and congregate care
multifamily properties. The Company has retained a financial
advisor to evaluate the alternatives relating to the disposition
of its ownership of some of its Government-Assisted properties.
Additionally, the Company has obtained contracts or verbal
offers to sell six Market-rate properties, which the Company has
disclosed as Properties held for sale on the Consolidated Balance
Sheet, as follows:
<TABLE>
<CAPTION>
Property Location Units
<S> <C> <C>
Desert Oasis Palm Desert, California 320
Cultural Gardens Euclid, Ohio 186
Colonade West Cleveland, Ohio 216
Memphis West Cleveland, Ohio 120
Villa Moderne North Olmsted, Ohio 135
West Park Plaza Cleveland, Ohio 118
1,095
</TABLE>
The sale of any of these assets may have either an accretive
or dilutive effect on earnings depending upon the application of
proceeds derived from such sales, which will not be known until
the time of sale.
On May 4, 1999, a pension fund client of MIG acquired a
multifamily property containing 248 units located in Fairfax
County, Virginia. MIG has been retained to provide asset and
property management services.
Management Contract Cancellation:
On January 13, 1999, the Company terminated its management
contract for Longwood Apartments, which resulted in a loss of
management fee income for the first quarter of 1999 of
approximately $74,000. Moreover, pursuant to the terms of the
HUD Settlement Agreement discussed in Note 8 of the notes to the
financial statements, in the second quarter of 1999, the Company
may terminate its management contract for Park Village
Apartments, which will result in a partial loss of management fee
income in 1999. The management fees collected for Park Village
Apartments for the three months ended March 31, 1999 were $7,426.
<PAGE>25
In addition, pursuant to the terms of a separate settlement
agreement with affiliates entered into in conjunction with the
settlement agreement with the Corporation as discussed in Note 6,
the Company has agreed to end its management of certain
commercial properties owned by certain affiliated persons upon 60
days prior written notice from the respective owners of those
properties. Such notice has not been received. The management
fees generated from those commercial properties for the first
quarter ended March 31, 1999 was $28,036.
The Company will also lose management fees from Euclid
Medical & Commercial Arts Building, a non-owned commercial
property, because of foreclosure proceedings. The management
fees generated from this property for the first quarter ended
March 31, 1999 was $20,728.
In addition, if the Company proceeds with the proposed sale
of its interests in the joint venture properties, the Company
would no longer receive the management fees attributable to those
properties and one other property. The management fees generated
for these properties for the first quarter ended March 31, 1999
was $216,978. Certain third party owners of properties
currently managed by the Company have entered into contracts to
sell those properties, subject to certain contingencies. If all
those third party owned properties were sold, the Company would
similarly no longer receive the management fees generated from
those properties. The management fees generated for these
properties for the first quarter ended March 31, 1999 was
$87,874. The impact of the loss of these management fee
revenues would be partially offset by a reduction in operating
expenses.
Dividends:
On March 30, 1999, the Company declared a dividend of $0.375
per common share for the quarter ending March 31, 1999, which
was paid on May 1, 1999 to shareholders of record on April 15,
1999. The common share dividend was reduced to $0.375 from
$0.465 in order to reduce the Company's dividend payout ratio. On
February 16, 1999, 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 March 15,
1999 to shareholders of record on March 1, 1999.
Cash flow sources and applications:
Net cash provided by operating activities decreased
$1,351,948 from $13,459,746 to $12,107,798 for the quarter ended
March 31, 1999 when compared with the quarter ended March 31,
1998. This decrease was the result of decreases in accounts
and notes receivable of affiliates and joint ventures, and increases
in depreciation and amortization, and decreases in accounts
payable and accrued expenses, other operating assets and
liabilities and funds held for non-owned managed properties of
affiliates and joint ventures.
Net cash flows used for investing activities of $10,271,476
for the quarter ended March 31, 1999 were primarily used for the
acquisition and development of multifamily real estate properties
and undeveloped land parcels.
Net cash flows provided by financing activities of
$17,330,633 for the quarter ended March 31, 1999 were primarily
comprised of proceeds received from the mortgages on three
properties. 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.
During 1999 and 2000, approximately $113 million of the
Company's debt will mature. The Company intends to repay any
such debt as it matures through a combination of new secured
borrowings and property sales proceeds.
<PAGE>26
RESULTS OF OPERATIONS
Comparison of the quarter ended March 31, 1999 to the quarter
ended March 31, 1998
In the following discussion of the comparison of the quarter
ended March 31, 1999 to the quarter ended March 31, 1998, Market-
rate Properties refers to the Core and Acquired Property
portfolios. Core Properties represents the 34 wholly owned
multifamily properties acquired by the Company at the time of the
IPO and the 41 properties acquired in separate transactions or
developed by the Company during 1994 through 1997 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 17 properties acquired
between January 1, 1998 and December 31, 1998 as well as the
newly constructed properties.
Overall, total revenue increased $7,307,200 or 23.8% and
total expenses increased $9,867,000 or 37.6% for the quarter.
Net income applicable to common shares after deduction for the
dividends on the Company's Perpetual Preferred Shares increased
$1,664,300 or 52.8%.
During the quarter ended March 31, 1999, the Market-rate
Properties generated total revenues of $34,223,400 and property
operating and maintenance expenses of $14,391,800. Of these
amounts, the Acquired and Core Properties contributed total
revenues of $11,921,400 and $22,302,000, respectively, while
incurring property operating and maintenance expenses of
$4,681,100 and $9,710,700, respectively. The Government-Assisted
Properties generated total revenues of $2,447,200 while incurring
property operating and maintenance expenses of $990,300 for the
quarter ended March 31, 1999.
Rental Revenues:
Rental revenues increased $6,236,000 or 21.4% for the
quarter. Rental revenues from the Acquired Properties increased
$7,193,759 for the quarter. Occupancy and unit rents at the Core
Properties and Government-Assisted Properties resulted in a
$14,000 decrease and $946,900 or 28.1% decrease, respectively, in
rental revenue from these properties. The decrease in rental
revenues for the Government-Assisted Properties is attributable
to the removal of a particular property's operating results
in the reported results of operations as a result of a Settlement
Agreement. The balance of the increase resulted from increased
rental revenues attributable to office space and other miscellaneous
rental revenue items.
Other Revenues:
Other income increased $200,000 or 65.2% for the quarter.
The increase is due primarily to supervisory fees and late
charges earned in the current year.
The Company recognized property and asset management fee
revenues of $1,295,700 and $585,800, respectively, for the
quarter ended March 31, 1999 as compared to $948,800 and $0,
respectively, for the quarter ended March 31, 1998. The increase
in property and asset management fee revenues is primarily due to
the collection of these fees by MIGRA relating to their
institutional investor clients.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$3,079,700 or 25.0% for the quarter. Property operating and
maintenance expenses at the Acquired Properties increased
$3,330,500 for the quarter due primarily to the operating and
maintenance expenses incurred at the 13 properties acquired in
1998, and the newly constructed properties of Bradford at Easton,
<PAGE>27
The Village of Western Reserve and The Residence at Barrington.
Property operating and maintenance expenses at the Core
Properties increased $465,700, or 5.0% when compared to the three
months ended March 31, 1998 primarily due to increases in
personnel, building and grounds repair and maintenance, the one
time effect of additional operating expenses and real estate
and local taxes. Property operating and maintenance expenses
at the Government-Assisted Properties decreased $716,500 or 42.0%
for the quarter due primarily to the removal of a particular
property's operating results as described above.
Other expenses:
Depreciation and amortization increased $2,961,500 or 55.7%
for the quarter primarily due to the increased depreciation
expense recognized on the Acquired Properties and the additional
depreciation as a result of the adoption of the new
capitalization policy as well as the amortization expense of the
intangible assets. The amortization expense related to the
intangible assets is reflected as a charge to the Management and
Service Operations.
General and administrative expenses increased $2,037,300 or
111.1% for the quarter. This increase is primarily attributable
to payroll and related expenses due to the expense of the MIGRA
advisory operations. General and administrative expenses are
costs related to the Management and Service Operations.
Interest expense increased $1,819,100 or 28.3% for the
quarter primarily due to the interest incurred with respect to
the additional borrowings under the Line of Credit used for the
1998 acquisitions as well as the construction of properties.
Cumulative effect:
Effective January 1, 1999, the Company changed its method of
accounting to capitalize expenditures for certain replacements
and improvements, such as new HVAC equipment, appliances,
flooring, carpeting and kitchen/bath renovations to the
capitalization method. Previously, these costs were charged to
operations as incurred. Ordinary repairs and maintenance, such
as suite cleaning and painting, and appliance repairs are
expensed. The Company believes the change in the capitalization
method provides an improved measure of the Company s capital
investment, provides a better matching of expenses with the
related benefit of such expenditures, including associated
revenues, and is in the opinion of management, consistent with
industry practice. The cumulative effect of this change in
accounting principle increased net income for the three months
ended March 31, 1999 by $4,319,162 or $.19 per share (basic and
diluted). The effect of this change was to increase income
before cumulative effect of a change in accounting principle by
$1,250,637 or $.06 per share (basic and diluted) for the three
months ended March 31, 1999. The pro forma amounts shown on the
income statement have been adjusted to reflect the retroactive
application of the capitalization of such expenditures and
related depreciation for the three months ended March 31, 1998 of
which increased net income by $134,302 or $.01 per share (basic
and diluted).
Net income applicable to common shares:
Net income applicable to common shares is equal to net
income less dividends on the Perpetual Preferred Shares of
$1,371,100.
Equity in net income of joint ventures:
The combined equity in net income of joint ventures
decreased $63,000 or 173.8% for the quarter ended March 31, 1999.
The decrease is due primarily to increased depreciation and
interest expense at the joint venture level.
The following table presents the historical statements of
operations of the Company's beneficial interest in the operations
of the joint ventures for the quarters ended March 31, 1999 and
1998.
<PAGE>28
<TABLE>
<CAPTION>
For the three months ended
March 31,
1999 1998
<S> <C> <C>
Beneficial interests in
joint venture operations
Rental revenue $ 1,724,000 $ 1,725,500
Cost of operations 1,088,100 1,137,100
635,900 588,400
Interest income 3,250 700
Interest expense (514,900) (436,800)
Depreciation (138,800) (105,500)
Amortization (12,150) (10,500)
Net income $ (26,700) $ 36,300
</TABLE>
Outlook
The long term goal for the Company is to reduce portfolio
concentration in Ohio with dispositions within the state and
acquisitions in other geographic regions. Although current
conditions, principally restricted access to capital, dictate a
significant reduction in acquisitions for 1999, the Company's
long term plan is to seek economic diversification through
strategic acquisitions.
It is expected that to meet the Company's long term
strategic acquisition goal, individual acquisitions will be
located in the select metro areas of Atlanta, Washington, D.C.,
Orlando, south Florida and Tampa over the short term. Management
believes that these markets offer excellent diversification
characteristics as well as operational efficiency. In addition
to these direct investment markets, the Company will co-invest
with institutional clients in many markets that are in the long
term investment horizon. As with all growth markets at this
time, new development is active in these markets. The Company's
market research and operational experience in these areas will
guide site selection and pricing.
As mentioned, the Company's growth strategy includes co-
investment with institutional investors. Two programs have been
created for the implementation of the strategy. The first is a
co-investment development program that consists of individual
development partnerships allowing the Company and its
institutional partners to seek the high yields associated with
development. The projects in this program will be built for long
term hold or a forward contracted sale. The second program is a
multifamily pooled fund which is designed to offer a favorable
risk-return relationship for the Company. This fund will acquire
assets at stabilization or through forward contracts. Both
programs will employ moderate project specific debt. The
expected equity division is 25% from the Company and 75% from all
institutional investors. These two programs should allow the
Company to increase operational efficiency in growth markets at a
more rapid pace than direct individual investment because it
requires less capital resources from the Company but allows the
Company to apply its expertise in multifamily apartment
management.
The programs described above are currently being actively
marketed, and there can be no assurance that the Company will be
able to attract institutional capital to fund these programs.
Given the Midwestern concentration of the Market-rate
portfolio, management's performance expectations are consistent
with the recent past. Management projects that the market-rate
rental growth will be a modest 2.5% over 1999. General market
expectations for locations where the Company has significant
concentrations are as follows: Columbus is split between a
strengthening northern half and a flattening southern half,
<PAGE>29
Cleveland continues to exhibit stability, Michigan will continue
to grow but at a slower rate, Indianapolis is improving from very
competitive conditions, Washington, D.C., Atlanta, and Orlando
are in equilibrium with significant additions to employment and
apartment supply, and south Florida is tightening overall as
significant development is being absorbed.
Inflation
Management's belief is that any effects of minor inflation
fluctuations would be minimal on the operational performance of
this portfolio primarily due to the high correlation between
inflation and housing costs combined with the short term nature,
typically one year, of the leases.
<PAGE>30
Quantitative and Qualitative Disclosures About Market
Risk
The Company's primary market risk exposure is
interest rate risk. At March 31, 1999, the Company had
$244.3 million of variable rate debt. Additionally,
the Company has interest rate risk associated with
fixed rate debt at maturity.
Management has and will continue to manage
interest rate risk as follows: (I) maintain a
conservative ratio of fixed rate, long term debt to
total debt such that variable rate exposure is kept at
an acceptable level; (ii) hedge certain long term
variable rate debt through the use of interest rate
swaps or interest rate caps; and (iii) use treasury
locks where appropriate to hedge rates on anticipated
debt transactions. Management uses various financial
models and advisors to achieve those objectives.
The table below provides information about the
Company's financial instruments that are sensitive to
changes in interest rates. For debt obligations, the
table presents principal cash flows and related
weighted average interest rates by expected maturity
dates.
<TABLE>
<CAPTION>
Expected Maturity Date
Long term debt 1999 2000 2001 2002
<S> <C> <C> <C> <C>
Fixed:
Fixed rate mortgage debt $ 916,454 $16,028,782 $12,487,095 $ 1,482,769
Weighted average interest rate 7.93% 7.92% 7.76% 7.57%
MTN's 20,000,000 - 10,000,000 15,000,000
Weighted average interest rate 6.95% - 7.12% 7.09%
Senior notes - 74,931,803 - 10,000,000
Weighted average interest rate - 8.23% - 7.10%
Total fixed rate debt $20,916,454 $90,960,585 $22,487,095 $26,482,769
Variable:
LIBOR based credit facility $ - $ - $226,000,000 $ -
Variable rate mortgage debt 250,397 16,308,538 68,146 75,283
Total variable rate debt $ 250,397 $ 16,308,538 $226,068,146 $ 75,283
Total long term debt $21,166,851 $107,269,123 $248,555,241 $26,558,052
Fair Market
Long term debt 2003 Thereafter Total Value
Fixed:
Fixed rate mortgage debt $ 1,605,372 $ 59,426,297 $ 91,946,769 $ 95,035,334
Weighted average interest rate 7.57% 7.75% 8.12% -
MTN's 12,500,000 55,000,000 112,500,000 118,925,779
Weighted average interest rate 7.12% 7.23% 6.95% -
Senior notes - - 84,931,803 88,794,575
Weighted average interest rate - - 8.23% -
Total fixed rate debt $ 14,105,372 $114,426,297 $289,378,572 $302,755,688
Variable:
LIBOR based credit facility $ - $ - $226,000,000 $226,000,000
Variable rate mortgage debt 83,165 1,497,733 18,283,262 18,583,344
Total variable rate debt $ 83,165 $ 1,497,733 $244,283,262 $244,583,344
Total long term debt $ 14,188,537$ 115,924,030 $ 533,661,834$ 547,339,032
</TABLE>
On May 10, 1999, the Company collateralized individual mortgages
on 20 properties for $239 million in project specific, non-recourse
loans from The Chase Manhattan Bank. The loans have maturities
ranging from 8 to 12 years and fixed interest rates of 198 basis
points over comparable treasuries. The weighted average maturity of
the loans is 10-1/4 years, and the weighted average interest rate is
7.52%.
Sensitivity Analysis
The Company estimates that a 100 basis point
decrease in market interest rates would have changed
the fair value of fixed rate debt to a liability of
$314.2 million. The sensitivity to changes in interest
rates of the Company's fixed rate debt was determined
with a valuation model based upon changes that measure
the net present value of such obligation which arise
from the hypothetical estimate as discussed above.
<PAGE>31
Year 2000 Compliance
The year 2000 issue ("Year 2000") is the result of computer
programs being written using two digits rather than four to
define the applicable year. Any of the Company's computer
programs or hardware that have date sensitive software or
embedded chips may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process
transactions, pay vendors or engage in similar normal business
activities.
The Company believes that it has identified all of its
information technology ("IT") and non-IT systems to assess their
Year 2000 readiness. Critical IT systems include, but are not
limited to, operating and data networking and communication
systems, accounts receivable and rent collections, accounts
payable and general ledger, human resources and payroll, cash
management and all IT hardware (such as servers, desktop/laptop
computers and data networking equipment). Critical non-IT
systems include telephone systems, fax machines, copy machines
and property environmental, access and security systems (such as
elevators and alarm systems).
The Company's plan to resolve the Year 2000 issue involves
the following four phases: assessment, remediation, testing and
implementation. The Company has conducted an assessment and/or
survey of its core IT and non-IT systems at both its corporate
offices and properties and believes it is 85% complete on such
assessment which is currently under review by the Company's
technical staff.
Much of the mission critical operating systems, networking
and accounting software that has been purchased over the past few
years has been represented by vendors to already be Year 2000
compliant. The property management software currently being
tested and used at the Company's corporate offices and which is
to be rolled out to the properties during the second and third
quarters of 1999 has been affirmed by the vendor to be tested and
Year 2000 compliant. Hardware upgrades at all of the properties
are expected to be complete by June 1999 to ensure all hardware
is compliant. Testing by the Company of all such critical
systems represented by the vendors to be compliant is expected to
be complete by June 1999.
The estimated costs of these upgrades and conversions should
not exceed $500,000 and have been considered in the Company's
cash flow requirements for 1999.
The Company believes it has identified all non-IT systems at
all properties and expects to have 70% of its remediation and/or
testing complete on these systems by June of 1999. While a
complete technical assessment of all such systems is not final,
the Company does not anticipate expenditures in excess of
$500,000 to remediate non-IT systems at the properties since
findings to date suggest a low incidence of non-compliance on
critical systems. The Company may engage an outside technical
consultant to work with its internal technical staff to assist in
finalizing such assessment, remediation and testing.
In most cases, various third party vendors have been queried
on their Year 2000 readiness. While many responses have been
received to such queries, (especially by banks and other large
financial institutions), many have not yet responded. The
Company will continue to query its significant suppliers and
vendors to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. To date, the Company is
not aware of any significant suppliers or vendors with a Year
2000 issue that would materially impact the Company's results of
operations, liquidity or capital resources. However, there can
be no assurances that the systems of other companies, on which
the Company's systems rely, will be timely converted and would
not have an adverse effect on the Company's systems.
<PAGE>32
The Company believes it has an effective program in place
that will resolve the Year 2000 issue in a timely manner. In
addition, the Company has commenced its contingency planning for
critical operational areas that might be affected by the Year
2000 issue if compliance by the Company is delayed. The
Company's contingency plans will involve training and increased
awareness at the property management level, manual workarounds
and adjustment of staffing strategies. The Company intends to
have its contingency planning complete in the third quarter of
1999.
Aside from the catastrophic failure of banks or government
agencies, the Company believes it could continue its normal
business operations if compliance by the Company is delayed. In
the event of such catastrophic failures, the Company would be
unable to deposit rent checks, transfer cash, wire money, pay
vendors by check, or invest excess funds. The Company could be
subject to litigation for its inability to access cash to pay
vendors or failure to properly record business transactions or if
security or access systems fail at properties. However, given
that the Company intends to have contingency planning in place
and that the nature of its day-to-day real estate operations is
not heavily reliant on technology, the Company does not believe
that the Year 2000 issue will materially impact its results of
operations, liquidity or capital resources.
CONTINGENCIES
Environmental
There are no recorded amounts resulting from environmental
liabilities and there are no known contingencies with respect
thereto. Future claims for environmental liabilities are not
measurable given the uncertainties surrounding whether there <PAGE>
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.
Rainbow Terrace Apartments
On February 9, 1998, the U.S. Department of Housing and
Urban Development ("HUD") notified the Company that Rainbow
Terrace Apartments, Inc. ("RTA"), the Company's subsidiary
corporation that owns Rainbow Terrace Apartments, was in default
under the terms of the Regulatory Agreement and Housing
Assistance Payments Contract ("HAP Contract") pertaining to this
property. Among other matters, HUD alleged that the property was
poorly managed and that RTA had failed to complete certain
physical improvements to the property. Moreover, HUD claimed
that the owner was not in compliance with numerous technical
regulations concerning whether certain expenses were properly
chargeable to the property. As provided in the Regulatory
Agreement and HAP Contract, in the event of a default, HUD has
the right to exercise various remedies including terminating
future payments under the HAP Contract and foreclosing the
government-insured mortgage encumbering the property.
This controversy arose out of a Comprehensive Management
Review of the property initiated by HUD in the Spring of 1997,
which included a complete physical inspection of the property.
In a series of written responses to HUD, the Company stated its
belief that it had corrected the management deficiencies cited by
HUD in the Comprehensive Management Review (other than the
completion of certain physical improvements to the property) and
justified the expenditures questioned by HUD as being properly
chargeable to the property in accordance with HUD's regulations.
Moreover, the Company stated its belief that it had repaired any
physical deficiencies noted by HUD in its Comprehensive
Management Review that might pose a threat to the life and safety
of its residents.
<PAGE>33
In June 1998, HUD notified the Company that all future
Housing Assistance Payments ("HAP") for RTA were abated and
instructed the lender to accelerate the balance due under the
mortgage. Subsequent to the notification of HAP abatements and
the acceleration of the mortgage, the lender advised the Company
that the acceleration notification had been rescinded pursuant to
HUD's instruction. HUD then notified the Company that the HAP
payments would be reinstated and that HUD was reviewing further
information concerning RTA provided by the Company. The Company
has received all monthly HAP payments for RTA during 1998.
In June 1998, the Company filed a lawsuit against HUD
seeking to compel HUD to review certain budget based rent
increases submitted to HUD by the Company in 1995.
Since June 1998, the Company has been involved in ongoing
negotiations with HUD for the purpose of resolving these and
other disputes concerning other properties managed or formerly
managed by the Company or one of the Service Companies, which
were similarly the subject of Comprehensive Management Reviews
initiated by HUD in the Spring of 1997.
On March 12, 1999, the Company, Associated Estates
Management Company ("AEMC"), RTA, PVA Limited Partnership
("PVA"), the owner of Park Village Apartments, and HUD, entered
into a comprehensive settlement agreement (the "Settlement
Agreement") for the purpose of resolving certain disputes
concerning property operations at Rainbow Terrace Apartments,
Park Village Apartments ("Park Village"), Longwood Apartments
("Longwood") and Vanguard Apartments ("Vanguard"). Longwood was
managed by the Company until January 13, 1999. Park Village is
currently managed by the Company. Vanguard was formerly managed
by AEMC until December 1997. All four properties are encumbered
by HUD insured mortgages, governed by HUD imposed regulatory
agreements and subsidized by Section 8 Housing Assistance
Payments.
Under the terms of the Settlement Agreement, HUD has agreed
to pay RTA a retroactive rent increase totaling $1,784,467. HUD
has further agreed to release the Company, AEMC, RTA and the
owners and principals of PVA, Longwood and Vanguard from all
claims (other than tax or criminal fraud claims) regarding the
ownership or operation of Rainbow Terrace Apartments, Park
Village, Longwood and Vanguard. Moreover, HUD has agreed not to
issue a limited denial of participation, debarment or suspension,
program fraud civil remedy action or civil money penalty,
resulting from the ownership or management of any of these
projects, or to deny eligibility to any of their owners,
management agents or affiliates for participation in any HUD
program on such basis.
HUD's obligations under the Settlement Agreement are
conditional upon the performance by the Company, RTA and PVA of
certain obligations, the most significant of which is the
obligation to identify, on or before April 11, 1999, prospective
purchasers for both Rainbow Terrace Apartments and Park Village
who are acceptable to HUD, and upon HUD's approval, convey those
projects to such purchasers. Alternatively, if RTA and PVA are
unable to identify prospective purchasers acceptable to HUD, then
RTA and PVA have agreed to convey both projects to HUD pursuant
to deeds in lieu of foreclosure. In either case (conveyance to a
HUD approved purchaser or deed in lieu of foreclosure), no
remuneration will be received by either RTA or PVA in return,
except for the $1,784,467 retroactive rent increase payable to
RTA mentioned above. At March 31, 1999, the Company had
receivables of $1,784,467 related to the 1995 and 1998
retroactive rental increase requests. At March 31, 1999, RTA
had net assets of approximately $1,827,319, including the
retroactive rent receivable of $1,784,467 due from HUD, and a
remaining amount due under the mortgage of $1,935,123. The
transfer of RTA to a purchaser which is acceptable to HUD or the
direct transfer of RTA to HUD is not expected to have a material
impact on the results of operations or cash flows of the Company.
RTA and PVA requested HUD to extend the April 11, 1999 deadline
for identification of potential purchasers. HUD granted that
request and the deadline was extended to May 31, 1999.
<PAGE>34
Affiliate Transactions
In the normal course of business, the Company had followed a
practice of advancing funds on behalf of, or holding funds for
the benefit of, affiliates which own real estate properties
managed by the Company or one of the Service Companies. One of
these affiliates, a corporation (the "Corporation") owned by a
member of the Company's Board of Directors and his siblings
(including the wife of the Company's Chairman and Chief Executive
Officer), which serves as general partner of certain affiliated
entities, had informed the Company that the Corporation had
caused the commencement of a review of expenditures relating to
approximately $2.9 million of capital calls from certain HUD
subsidized affiliated entities, to determine the appropriateness
of such expenditures and whether certain of such expenditures are
properly the responsibility of the Company. The Company
previously stated its belief that all expenditures were
appropriate and that the ultimate outcome of any disagreement
would not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
On March 11, 1999, the Company, the Corporation, certain
shareholders of the Corporation and others entered into a
settlement agreement which resolved all disputes concerning the
aforementioned expenditures and other issues concerning the
management by the Company or one of its Service Companies of
various properties owned by entities in which the Corporation was
a general partner. Pursuant to that settlement agreement, the
Corporation and other affiliates funded all outstanding advances
made by the Company. At December 31, 1998, amounts outstanding
which were subsequently funded in the first quarter of 1999
pursuant to the settlement agreement were $4.7 million.
<PAGE>35
The following tables present information concerning the Multifamily
Properties owned by Associated Estates Realty Corporation.
<TABLE>
<CAPTION>
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Units Rehab. Sq. Ft.
<S> <C> <C> <C> <C> <C> <C>
MARKET RATE
Acquired Properties
Arizona
20th & Campbell Apartments 06/30/98 Phoenix Garden 204 1989 982
California
Desert Oasis Apartments 06/30/98 Palm Desert Garden 320 1990 875
Florida
Cypress Shores 02/03/98 Coconut Creek Garden 300 1991 991
Windsor Pines 10/23/98 Pembroke Pines Garden 368 1998 1,132
668 1,069
Georgia
The Falls 02/03/98 Atlanta Garden 520 1986 963
Morgan Place Apartments 06/30/98 Atlanta Garden 186 1989 679
706 888
Indiana
Steeplechase at Shiloh Crossing Apts 08/11/98 Indianapolis Garden 264 1998 929
Maryland
The Gardens at Annen Woods 06/30/98 Metro D.C. Garden 132 1987 1,269
Hampton Point Apartments 06/30/98 Metro D.C. Garden 352 1986 817
Reflections 02/03/98 Metro D.C. Garden 184 1985 1,020
668 962
Michigan
Georgetown-Phase II 02/01/99 Fenton Garden 120 1998 1,269
North Carolina
Windsor Falls Apartments 06/30/98 Raleigh Garden 276 1994 979
Central Ohio
Bradford at Easton 05/01/98 Columbus Garden 324 1996 1,010
Toledo, Ohio
Country Club Apartments 02/19/98 Toledo Garden 316 1989 811
Northeastern Ohio
Village at Western Reserve 08/01/98 Streetsboro Ranch 108 1998 999
Texas
Fleetwood Apartments 06/30/98 Houston Garden 104 1993 1,019
4,078
Repositioned Properties
Woodlands of North Royalton
fka Somerset West (a) IPO North Royalton Gdn/Tnhms 197 1982 1,038
Williamsburg at Greenwood Village 02/18/94 Sagamore Hills Townhomes 260 1990 938
457 981
CORE PORTFOLIO PROPERTIES
Market rate
Central Ohio
Arrowhead Station 02/28/95 Columbus Townhomes 102 1987 1,344
Bedford Commons 12/30/94 Columbus Townhomes 112 1987 1,157
Bolton Estates 07/27/94 Columbus Garden 196 1992 687
Colony Bay East 02/21/95 Columbus Garden 156 1994 903
Heathermoor 08/18/94 Worthington Gdn/Tnhms 280 1989 829
Kensington Grove 07/17/95 Westerville Gdn/Tnhms 76 1995 1,109
Lake Forest 07/28/94 Columbus Garden 192 1994 788
Muirwood Village at Bennell 03/07/94 Columbus Ranch 164 1988 769
Muirwood Village at London 03/03/94 London Ranch 112 1989 769
</TABLE>
<TABLE>
<CAPTION>
For the three months ending For the three months ending
March 31, 1999 March 31, 1998
Average Average Rent Average Average Rent
Economic Physical Per Economic Physical Per
The Multifamily Properties Occupancy Occupancy Suite Sq. Ft. Occupancy Occupancy Suite Sq. Ft.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MARKET RATE
Acquired Properties
Arizona
20th & Campbell Apartments 94.1% 95.6% $ 834 $ 0.85 N/A N/A N/A N/A
California
Desert Oasis Apartments 95.4% 97.2% $ 686 $ 0.78 N/A N/A N/A N/A
Florida
Cypress Shores 91.7% 93.7% $ 862 $ 0.87 N/A N/A N/A N/A
Windsor Pines 91.7 90.5 1,037 0.92 N/A N/A N/A N/A
91.7% 91.9% $ 958 $ 0.90 N/A N/A N/A N/A
Georgia
The Falls 83.5% 92.5% $ 723 $ 0.75 N/A N/A N/A N/A
Morgan Place Apartments 91.7 98.4 806 1.19 N/A N/A N/A N/A
85.9% 94.1% $ 745 $ 0.84 N/A N/A N/A N/A
Indiana
Steeplechase at Shiloh
Crossing Apartments 72.2% 79.5% $ 794 $ 0.85 N/A N/A N/A N/A
Maryland
The Gardens at Annen Woods 91.5% 90.9% $ 933 $ 0.74 N/A N/A N/A N/A
Hampton Point Apartments 94.7 97.4 805 0.99 N/A N/A N/A N/A
Reflections 95.3 95.7 898 0.88 N/A N/A N/A N/A
94.2% 95.7% $ 856 $ 0.89 N/A N/A N/A N/A
Michigan
Georgetown-Phase II 95.9% 95.8% $762 $ 0.60 N/A N/A N/A N/A
North Carolina
Windsor Falls Apartments 80.9% 84.8% $ 773 $ 0.79 N/A N/A N/A N/A
Central Ohio
Bradford at Easton 93.2% 94.4% $ 708 $ 0.70 N/A N/A N/A N/A
Toledo, Ohio
Country Club Apartments 91.1% 92.1% $ 641 $ 0.79 N/A N/A N/A N/A
Northeastern Ohio
Village at Western Reserve 90.1% 97.2% $ 789 $ 0.79 N/A N/A N/A N/A
Texas
Fleetwood Apartments 91.1% 93.3% $ 918 $ 0.90 N/A N/A N/A N/A
Repositioned Properties
Woodlands of North Royalton
fka Somerset West (a) 76.6% 91.9% $ 717 $0.69 75.3% 80.2% $ 699 $ 0.67
Williamsburg at Greenwood
Village 87.4 100.0 876 0.93 83.8 90.8 865 0.92
83.3% 96.5% $ 807 $ 0.82 80.6% 86.2% $ 794 $ 0.81
CORE PORTFOLIO PROPERTIES
Market rate
Central Ohio
Arrowhead Station 95.8% 97.1% $ 734 $ 0.55 91.6% 95.1% $ 706 $ 0.53
Bedford Commons 92.8 90.2 794 0.69 93.7 98.2 785 0.68
Bolton Estates 84.1 83.7 477 0.69 93.9 99.5 466 0.68
Colony Bay East 90.7 89.7 532 0.59 92.8 98.7 521 0.58
Heathermoor 95.6 95.4 561 0.68 95.3 96.4 552 0.67
Kensington Grove 89.5 86.8 799 0.72 92.2 94.7 771 0.70
Lake Forest 92.6 93.2 556 0.71 89.9 93.8 545 0.69
Muirwood Village at Bennell 84.8 86.0 519 0.68 96.1 97.6 510 0.66
Muirwood Village at London 97.5 95.5 512 0.67 95.3 94.6 508 0.66
</TABLE>
<PAGE>36
<TABLE>
<CAPTION>
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Units Rehab Sq. Ft.
<S> <C> <C> <C> <C> <C> <C> <C>
Muirwood Vllg. at Mt. Sterling 03/03/94 Mt. Sterling Ranch 48 1990 769
Muirwood Village at Zanesville 03/07/94 Zanesville Ranch 196 1991-95 769
Oak Bend Commons 05/30/97 Canal Winchester Garden/Tnhm 102 1997 1,110
Pendleton Lakes East 08/25/94 Columbus Garden 256 1990-93 899
Perimeter Lakes 09/20/96 Dublin Gdn/Tnhms 189 1992 999
Residence at Christopher Wren 03/14/94 Gahanna Gdn/Tnhms 264 1993 1,062
Residence at Turnberry 03/16/94 Pickerington Gdn/Tnhms 216 1991 1,182
Saw Mill Village 04/22/97 Columbus Garden 340 1987 1,161
Sheffield at Sylvan 03/03/94 Circleville Ranch 136 1989 791
Sterling Park 08/25/94 Grove City Garden 128 1994 763
The Residence at Newark 03/03/94 Newark Ranch 112 1993-94 868
The Residence at Washington 02/01/96 Wash. Ct. House Ranch 72 1995 862
Wyndemere 09/21/94 Franklin Ranch 128 1991-95 768
3,577 903
Cincinnati, Ohio
Remington Place Apartments 03/31/97 Cincinnati Garden 234 1988-90 830
Indianapolis, Indiana
The Gables at White River 02/06/97 Indianapolis Garden 228 1991 974
Waterstone Apartments 08/29/97 Indianapolis Garden 344 1997 984
572 980
Northeastern Ohio
Bay Club IPO Willowick Garden 96 1990 925
Colonnade West IPO Cleveland Garden 216 1964 502
Cultural Gardens IPO Euclid Mid Rise 186 1966 688
Edgewater Landing 04/20/94 Cleveland High Rise 241 1988r 585
Gates Mills III IPO Mayfield Hts. High Rise 320 1978 874
Holly Park IPO Kent Garden 192 1990 875
Huntington Hills IPO Stow Townhomes 85 1982 976
Mallard's Crossing 02/16/95 Medina Garden 192 1990 998
Memphis Manor IPO Cleveland Garden 120 1966 554
Park Place IPO Parma Hts. Mid Rise 164 1966 760
Pinecrest IPO Broadview Hts. Garden 96 1987 r 598
Portage Towers IPO Cuyahoga Falls High Rise 376 1973 869
The Triangle (b) IPO Cleveland High Rise 273 1989 616
Timbers IPO Broadview Hts. Garden 96 1987-89 930
Villa Moderne IPO North Olmsted Garden 135 1963 504
Washington Manor 07/01/94 Elyria Garden 120 1963-64 541
West Park Plaza IPO Cleveland Garden 118 1964 520
Westchester Townhouses IPO Westlake Townhomes 136 1989 1,000
Westlake Townhomes IPO Westlake Townhomes 7 1985 1,000
Winchester Hills I (c) IPO Willoughby Hills High Rise 362 1972 822
Winchester Hills II IPO Willoughby Hills High Rise 362 1979 822
3,893 759
Michigan
Arbor Landings Apartments 01/20/95 Ann Arbor Garden 168 1990 1,116
Aspen Lakes 09/04/96 Grand Rapids Garden 144 1981 789
Central Park Place 12/29/94 Grand Rapids Garden 216 1988 850
Clinton Place 08/25/97 Clinton Twp. Garden 202 1988 954
Country Place Apartments 06/19/95 Mt. Pleasant Garden 144 1987-89 859
Georgetown Park Apartments 12/28/94 Fenton Garden 360 1987-96 1,005
The Landings at the Preserve 09/21/95 Battle Creek Garden 190 1990-91 952
The Oaks and Woods at Hampton 08/08/95 Rochester Hills Gdn/Tnhms 544 1986-88 1,050
Spring Brook Apartments 06/20/96 Holland Gdn/Tnhms 168 1986-88 818
Spring Valley Apartments 10/31/97 Farmington Hills Garden 224 1987 893
Summer Ridge Apartments 04/01/96 Kalamazoo Garden 248 1989-91 960
2,608 955
Toledo, Ohio
Hawthorne Hills Apartments 05/14/97 Toledo Garden 88 1973 1,145
Kensington Village 09/14/95 Toledo Gdn/Tnhms 506 1985-90 1,072
Vantage Villa 10/30/95 Toledo Garden 150 1974 935
744 1,053
Pittsburgh, Pennsylvania
Chestnut Ridge 03/01/96 Pittsburgh Garden 468 1986 769
Core Market Rate 12,096 883
</TABLE>
<TABLE>
<CAPTION>
For the three months ending For the three months ending
March 31, 1999 March 31, 1998
Average Average Rent Average Average Rent
Economic Physical Per Economic Physical Per
The Multifamily Properties Occupancy Occupancy Suite Sq. Ft. Occupancy Occupancy Suite Sq. Ft.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Muirwood Vllg. at Mt. Sterling 98.3% 97.9% $ 487 $ 0.63 90.5% 95.8% $ 498 $ 0.65
Muirwood Village at Zanesville 88.8 92.9 533 0.69 91.5 98.0 522 0.68
Oak Bend Commons 83.6 86.3 690 0.62 91.9 96.1 709 0.64
Pendleton Lakes East 91.8 95.3 538 0.60 92.2 100.0 528 0.59
Perimeter Lakes 93.4 94.2 721 0.72 94.9 98.4 713 0.71
Residence at Christopher Wren 85.0 90.2 729 0.69 94.6 93.2 746 0.70
Residence at Turnberry 91.6 94.4 768 0.65 90.5 96.3 744 0.63
Saw Mill Village 90.6 95.6 732 0.63 83.5 90.6 749 0.65
Sheffield at Sylvan 98.3 99.3 519 0.66 98.4 97.1 507 0.64
Sterling Park 94.3 96.1 559 0.73 97.3 100.0 565 0.74
The Residence at Newark 96.8 99.1 579 0.67 97.2 100.0 563 0.65
The Residence at Washington 97.6 97.2 520 0.60 90.6 93.1 525 0.61
Wyndemere 95.0 96.9 559 0.73 96.4 97.7 539 0.70
91.4% 93.2% $ 616 $ 0.66 92.5% 96.4% $ 610 $ 0.65
Cincinnati, Ohio
Remington Place Apartments 92.7% 97.4% $ 664 $ 0.80 89.1% 95.3% $ 642 $ 0.77
Indianapolis, Indiana
The Gables at White River 83.0% 90.4% $ 745 $ 0.76 88.1% 93.4% $ 717 $ 0.74
Waterstone Apartments 83.2 92.4 798 0.81 92.2 96.2 794 0.81
83.1% 91.6% $ 777 $ 0.79 90.7% 95.1% $ 763 $ 0.78
Northeastern Ohio
Bay Club 94.2% 99.0% $ 647 $ 0.70 99.2% 100.0% $634 $0.69
Colonnade West 93.7 96.8 412 0.82 90.9 92.6 402 0.80
Cultural Gardens 97.3 98.4 511 0.74 96.0 98.9 501 0.73
Edgewater Landing 96.0 96.7 423 0.72 96.9 96.7 413 0.71
Gates Mills III 92.6 95.1 704 0.81 90.0 95.3 722 0.83
Holly Park 98.6 100.0 714 0.82 99.9 100.0 702 0.80
Huntington Hills 93.3 98.8 670 0.69 98.2 95.3 663 0.68
Mallard's Crossing 92.2 92.2 736 0.74 91.7 98.4 704 0.71
Memphis Manor 98.5 98.3 441 0.80 94.0 98.3 438 0.79
Park Place 97.0 100.0 519 0.68 89.7 96.3 541 0.71
Pinecrest 92.5 94.8 465 0.78 91.2 97.9 465 0.78
Portage Towers 93.2 96.0 585 0.67 95.4 96.0 580 0.67
The Triangle (b) 97.8 98.5 939 1.52 97.6 98.2 934 1.52
Timbers 90.7 95.8 699 0.75 89.2 89.6 707 0.76
Villa Moderne 97.0 96.3 461 0.92 96.9 97.8 455 0.90
Washington Manor 96.0 99.2 402 0.74 95.0 96.7 391 0.72
West Park Plaza 96.3 94.9 441 0.85 93.6 98.3 430 0.83
Westchester Townhouses 93.7 95.6 785 0.79 93.5 93.4 779 0.78
Westlake Townhomes 99.5 100.0 832 0.83 98.6 100.0 814 0.81
Winchester Hills I (c) 90.4 95.9 568 0.69 88.5 93.1 577 0.70
Winchester Hills II 90.7 95.9 590 0.72 85.9 92.8 617 0.75
94.3% 96.7% $ 598 $ 0.79 93.1% 96.0% $ 598 $ 0.79
Michigan
Arbor Landings Apartments 95.0% 95.2% $ 892 $ 0.80 97.8% 98.8% $ 867 $ 0.78
Aspen Lakes 95.0 97.2 560 0.71 95.0 97.2 557 0.71
Central Park Place 96.1 99.5 631 0.74 95.9 98.6 611 0.72
Clinton Place 94.9 97.5 707 0.74 93.5 95.0 699 0.73
Country Place Apartments 93.0 98.6 570 0.66 95.4 96.5 544 0.63
Georgetown Park Apartments 85.8 85.8 675 0.67 93.7 95.8 679 0.68
The Landings at the Preserve 90.2 87.4 786 0.83 96.7 98.9 754 0.79
The Oaks and Woods at Hampton 95.4 97.4 811 0.77 91.4 90.4 813 0.77
Spring Brook Apartments 96.9 98.2 508 0.62 100.0 97.6 485 0.59
Spring Valley Apartments 97.6 96.9 824 0.92 99.0 96.4 802 0.90
Summer Ridge Apartments 90.1 93.1 696 0.73 93.6 94.0 693 0.72
93.4% 94.8% $ 716 $ 0.75 94.8% 95.4% $ 706 $ 0.74
Toledo, Ohio
Hawthorne Hills Apartments 91.9% 98.9% $ 582 $ 0.51 94.0% 95.4% $ 548 $ 0.48
Kensington Village 92.5 92.3 622 0.58 97.6 97.8 569 0.53
Vantage Villa 89.3 96.7 599 0.64 89.7 96.7 576 0.62
91.8% 94.0% $ 613 $ 0.58 95.6% 97.8% $ 568 $ 0.54
Pittsburgh, Pennsylvania
Chestnut Ridge 81.6% 82.9% $ 767 $ 1.00 92.8% 91.5% $ 740 $ 0.96
Core Market Rate 91.9% 94.3% $ 646 $ 0.73 93.2% 95.9% $ 637 $ 0.72
</TABLE>
<PAGE>37
<TABLE>
<CAPTION>
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Units Rehab. Sq. Ft.
<S> <C> <C> <C> <C> <C> <C>
GOVERNMENT ASST.-ELDERLY
Ellet Development IPO Akron High Rise 100 1978 589
Hillwood I IPO Akron High Rise 100 1976 570
Puritas Place (d) IPO Cleveland High Rise 100 1981 518
Riverview IPO Massillon High Rise 98 1979 553
State Road Apartments IPO Cuyahoga Falls Garden 72 1977 r 750
Statesman II IPO Shaker Heights Garden 47 1987 r 796
Sutliff Apartments II IPO Cuyahoga Falls High Rise 185 1979 577
Tallmadge Acres IPO Tallmadge Mid Rise 125 1981 641
Twinsburg Apartments IPO Twinsburg Garden 100 1979 554
Village Towers IPO Jackson Twp. High Rise 100 1979 557
West High Apartments IPO Akron Mid Rise 68 1981 r 702
1,095 602
GOVERNMENT ASST.-FAMILY
Jennings Commons IPO Cleveland Garden 50 1981 823
Rainbow Terrace IPO Cleveland Garden N/A 1982 r N/A
Shaker Park Gardens II IPO Warrensville Garden 151 1964 753
201 770
1,296 628
CONGREGATE CARE
Gates Mills Club IPO Mayfield HeightsHigh Rise 120 1980 721
The Oaks IPO Westlake Garden 50 1985 672
170 707
13,562 857
Joint Venture Properties
Northeastern Ohio
Market rate
Americana IPO Euclid High Rise 738 1968 803
College Towers IPO Kent Mid Rise 380 1969 662
Euclid House IPO Euclid Mid Rise 126 1969 654
Gates Mills Towers IPO Mayfield Hts. High Rise 760 1969 856
Highland House IPO Painesville Garden 36 1964 539
Watergate IPO Euclid High Rise 949 1971 831
2,989 789
Government Asst.-Family
Lakeshore Village IPO Cleveland Garden 108 1982 786
3,097 789
Core 16,659 851
Portfolio average 21,194 878
</TABLE>
<TABLE>
<CAPTION>
For the three months ending For the three months ending
March 31, 1999 March 31, 1998
Average Average Rent Average Average Rent
Economic Physical Per Economic Physical Per
The Multifamily Properties Occupancy Occupancy Suite Sq. Ft. Occupancy Occupancy Suite Sq. Ft.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GOVERNMENT ASST.-ELDERLY
Ellet Development 100.0% 100.0% $ 588 $1.00 100.0% 100.0% $ 587 $1.00
Hillwood I 100.0 100.0 601 1.05 99.3 100.0 598 1.05
Puritas Place (d) 100.0 100.0 774 1.50 99.9 100.0 782 1.51
Riverview 99.1 99.0 597 1.08 100.0 100.0 591 1.07
State Road Apartments 98.3 100.0 598 0.80 100.0 100.0 597 0.80
Statesman II 99.6 100.0 652 0.82 99.2 100.0 647 0.81
Sutliff Apartments II 100.0 100.0 583 1.01 100.0 100.0 586 1.02
Tallmadge Acres 99.2 100.0 658 1.03 100.0 100.0 658 1.03
Twinsburg Apartments 99.8 100.0 605 1.09 100.0 100.0 603 1.09
Village Towers 100.0 100.0 583 1.05 100.0 100.0 579 1.04
West High Apartments 97.3 100.0 802 1.14 100.0 100.0 790 1.13
99.5% 99.9% $ 632 $ 1.05 100.0% 100.0% $ 631 $ 1.05
GOVERNMENT ASST.-FAMILY
Jennings Commons 99.7% 100.0% $ 675 $ 0.82 99.7% 100.0% $ 674 $ 0.82
Rainbow Terrace N/A N/A N/A N/A N/A N/A N/A N/A
Shaker Park Gardens II 98.5 100.0 546 0.73 99.0 100.0 589 0.78
98.4 100.0 578 0.75 99.2 100.0 610 0.79
99.4% 99.9% $ 624 $ 0.99 100.0% 100.0% $ 627 $ 1.00
CONGREGATE CARE
Gates Mills Club 88.5% 89.2% $ 914 $ 1.27 94.8% 95.8% $ 870 $ 1.21
The Oaks 98.2 94.0 1,070 1.59 87.9 80.0 1,023 1.52
91.7 90.6 960 1.36 92.5 91.2 915 1.29
92.6% 94.8% $ 648 $ 0.76 93.9% 96.2% $ 640 $ 0.75
Joint Venture Properties
Northeastern Ohio
Market rate
Americana 88.7% 94.4% $ 494 $ 0.62 89.5% 93.6% $ 487 $ 0.61
College Towers 96.8 99.7 417 0.63 92.8 97.6 418 0.63
Euclid House 95.6 96.8 443 0.68 92.2 93.7 440 0.67
Gates Mills Towers 92.5 95.1 711 0.83 93.2 95.3 713 0.83
Highland House 100.0 100.0 417 0.77 98.6 100.0 417 0.77
Watergate 90.7 92.6 553 0.67 93.5 96.0 544 0.65
92.0% 94.9% $ 546 $ 0.69 92.5% 95.4% $ 543 $ 0.69
Government Asst.-Family
Lakeshore Village 97.7% 100.0% $ 675 $ 0.86 99.9% 100.0% $ 662 $ 0.84
92.3 95.1 552 0.70 93.0 95.5 549 0.70
Core 92.5% 94.9% $ 641 $ 0.75 93.8% 96.1% $ 633 $ 0.74
Portfolio average 91.6% 94.5% $ 678 $ 0.77 92.9% 95.3% $ 630 $ 0.72
<FN>
______________
(a) Woodlands of North Royalton (fka Somerset West) has 39
Contract Units and 158 Market-rate units.
(b) The Triangle also contains 63,321 square feet
of office/retail space.
(c) The Company acquired a noteholder interest entitling
the Company to substantially all cash flows from operations.
The Company has certain rights under a security agreement to
foreclose on the property to the extent that the unpaid
principal and interest on the underlying notes exceed seven
years equivalent principal and interest payments.
(d) The property was developed in 1981 subject to a warranty deed
provision which states that the assignment of fee simple title
of the property to the Company shall expire in 2037.
r = Rehabilitated
</FN>
</TABLE>
<PAGE>38
HISTORICAL FUNDS FROM OPERATIONS AND DISTRIBUTABLE CASH FLOW
The Company considers Funds From Operations ("FFO"), as defined by
the National Association of Real Estate Investment Trusts ("NAREIT"), to
be one of the measures of the performance of an equity REIT. FFO is
defined by NAREIT as net income (loss) before depreciation and amortiza-
tion of real estate assets, determined in accordance with generally
accepted accounting principles ("GAAP"), excluding gains (or losses) from
extraordinary items, unusual or non-recurring items and sales of
depreciated property. FFO of unconsolidated partnerships and joint
ventures is determined on a similar basis. Because the NAREIT definition
does not define unusual or non-recurring items, differences between the
Company's interpretation and other companies' interpretations may vary
which could affect the comparability of the Company's FFO to that reported
by other companies following the NAREIT definition. Further, FFO
presented herein is not necessarily comparable to FFO presented by other
real estate companies due to the fact that not all real estate
companies use the NAREIT definition. 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. Distributable Cash Flow is
defined as FFO less capital expenditures funded by operations and
amortization of deferred financing fees. The Company believes that
in order to facilitate a clear understanding of the consolidated
historical operating results of the Company, FFO and Distributable Cash
Flow should be presented in conjunction with net income as presented in
the consolidated financial statements and data included elsewhere in
this report.
FFO and Funds Available for Distribution ("Distributable Cash
Flow") for the three month period ended March 31, 1999 and 1998 are
summarized in the following table:
<TABLE>
<CAPTION>
For the three
months ended
March 31,
(In thousands) 1999 1998
<S> <C> <C>
Net income applicable to common shares $ 4,817 $ 3,154
Depreciation on real estate assets
Wholly owned properties 7,105 4,924
Joint venture properties 138 105
Amortization of intangibles 191 -
Nonrecurring expenses 381 -
Cumulative effect of a change in accounting
principle (4,320) -
Additional operating expenses 874 -
Funds From Operations 9,186 8,183
Depreciation - other assets 656 192
Amortization of deferred financing fees 336 209
Fixed asset additions (7) (68)
Fixed asset additions - joint venture - -
properties
Distributable Cash Flow $10,171 $ 8,516
Weighted average shares outstanding 22,666 17,072
</TABLE>
<PAGE>39
PART II
OTHER INFORMATION
Except to the extent noted below, the items required in Part II
are inapplicable or, if applicable, would be answered in the negative
and have been omitted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Filed herewith or
incorporated
herein by
Number Title reference
<S> <C> <C>
2.01 Second Amended and Restated Agreement and Plan of Merger by Exhibit 2.01 to Form
and among the Company, MIG Realty Advisors, Inc. ("MIGRA") 8-K filed March 31,
and the MIGRA stockholders dated as of March 30, 1998 1998.
3.1 Second Amended and Restated Articles of Incorporation of the Company Exhibit 3.1 to Form
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 Properties Exhibit 4.3 to Form
Limited Partnership, et. al., in favor of PFL Life Insurance S-11 filed September
Company; Open End Mortgage from Triangle Properties Limited 2, 1993 (File No.
Partnership I, et. al., in favor of PFL Life Insurance Company (The 33-68276 as
Registrant undertakes to provide additional long-term loan documents amended).
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 AERC to 10-K filed March 31,
National City Bank (Westchester Townhouse); Open-End Mortgage Deed 1993.
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).
<PAGE>40
4.6 Indenture dated as of March 31, 1995 between Associated Estates Exhibit 4.6 to Form
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.
4.8e Credit Agreement dated June 30, 1998, by and among Associated Exhibit 4.8e to Form
Estates Realty Corporation, as Borrower; the banks and lending 10-Q filed August
institutions identified therein as Banks; National City Bank, as 14, 1998.
Agent and Bank of America National Trust and Savings Association, as
Documentation Agent
4.8f First Amendment to Credit Agreement by and among Associated Estates Exhibit 4.8f to Form
Realty Corporation, as Borrower; National City Bank, as Managing 10-Q filed November
Agent for itself and on behalf of the Existing Banks and First Merit 16, 1998.
Bank, N.A. and Southtrust Bank, N.A. as the New Banks
4.8g Second Amendment to Credit Agreement by and among Associated Estates Exhibit 4.8g to Form
Realty Corporation, as Borrower, National City Bank, as Managing 10Q filed November
Agent for itself and on behalf of the Existing Banks and National 16, 1998.
City Bank, Bank of America National Commerzbank Aktiengesellschaft.
4.8h Third Amendment to Credit Agreement by and among Associated Estates Exhibit 4.8h to Form
Realty Corporation, as Borrower, National City Bank, as Managing 10-K filed March 30,
Agent, Bank of America National Trust & Savings Association, as 1999.
Documentation Agent and the banks identified therein.
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.
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 holders Exhibit 10.1 to Form
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).
<PAGE>41
10.3 Amended and Restated Employment Agreement between the Company and Exhibit 10.1 to Form
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 American Exhibit 10.6 to Form
Management Corporation and Airport Partners Limited Partnership. 10-K filed March 29,
1995.
10.7 Sublease dated February 28, 1994 between the Company as Sublessee, Exhibit 10.7 to Form
and Progressive Casualty Insurance Company, as Sublessor. 10-K filed March 29,
1995.
10.8 Assignment and Assumption Agreement dated May 17, 1994 between the Exhibit 10.8 to Form
Company, as Assignee, and Airport Partners Limited Partnership, as 10-K filed March 29,
Assignor. 1995.
10.9 Form of Restricted Agreement by and among the Company and Its Exhibit 10.9 to Form
Independent Directors. 10-K filed March 28,
1996.
10.10 Pledge Agreement dated May 23, 1997 between Jeffrey I. Friedman and Exhibit 10.01 to
the Company. Form 10-Q filed
August 8, 1997
10.11 Secured Promissory Note dated May 23, 1997 in the amount of Exhibit 10.02 to
$1,671,000 executed by Jeffrey I. Friedman in favor of the Company. Form 10-Q filed
August 8, 1997
10.12 Unsecured Promissory Note dated May 23, 1997 in the amount of Exhibit 10.03 to
$1,671,000 executed by Jeffrey I. Friedman in favor of the Company. Form 10-Q filed
August 8, 1997
10.14 Form of Share Option Agreement by and among the Company and Its Exhibit 10.14 to
Independent Directors. Form 10-K filed
March 30, 1993.
10.15 Agreement dated March 11, 1999 by and among the Company and The Exhibit 10.15 filed
Milstein Affiliates. herewith.
10.16 Agreement dated March 11, 1999 by and among the Company and The Exhibit 10.16 filed
Milstein Affiliates. herewith.
10.17 Separation Agreement and Release dated January 8, 1999 by and Exhibit 10.17 filed
between the Company and Dennis W. Bikun herewith.
18.1 Letter regarding change in accounting principles Exhibit 18.1 filed
herewith.
27 Financial Data Schedule Exhibit 27 filed
herewith.
(b) Reports on Form 8-K
None
</TABLE>
<PAGE>42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ASSOCIATED ESTATES REALTY
CORPORATION
May 14, 1999 /s/ Kathleen L. Gutin
(Date) Kathleen L. Gutin, CFO and
Vice President
<PAGE> 1
EXHIBIT 10.15
AGREEMENT
---------
THIS AGREEMENT (the "Agreement") made this 11th day of March 1999 among (i)
ASSOCIATED ESTATES REALTY CORPORATION (an Ohio corporation), ASSOCIATED ESTATES
MANAGEMENT COMPANY (an Ohio corporation), and all of their respective
subsidiaries, divisions, and/or affiliates (collectively referred to as "The
Company"), (ii) ASSOCIATED ESTATES CORPORATION, an Ohio corporation ("AEC"),
(iii) L.A.G.P., an Ohio corporation ("LAGP"), and (iv) MARK L. MILSTEIN AND
ROBERT I. MILSTEIN (collectively referred to as "Milstein").
RECITALS
--------
WHEREAS, The Company acted as management agent of Longwood Apartments
("Longwood") until on or about January 13, 1999 and currently is the management
agent of Park Village Apartments ("PVA"), Jaelot Apartments ("Jaelot"), Stow
Kent Gardens Apartments ("Stow-Kent"), Park Lane Villa Apartments ("Park Lane")
and University Towers Apartments ("UT"); and Associated Estates Management
Company ("AEMC") is the management agent of Hillwood II Apartments ("Hillwood");
PVA, Jaelot, Stow-Kent, Park Lane, UT and Hillwood are sometimes referred to
individually in this Agreement as a "Project" and collectively as the
"Projects".
WHEREAS, AEC is or was a general partner in each of the separate
respective partnerships that own Longwood, PVA, Jaelot, Stow-Kent, Park Lane and
UT; and LAGP was a general partner in the entity that owns Longwood;
WHEREAS, Milstein together with their sister Susan M. Friedman and
Jerome Spevack comprise all the shareholders of AEC and LAGP and together own a
majority of the partnership interests in Hillwood;
WHEREAS, The Company in its capacity as managing agent of Longwood and
PVA advanced funds on behalf of Longwood and PVA in the amount of $3,903,683 in
order to pay for the costs of curing certain housing code violations issued by
the City of Cleveland and for other operating expenses;
WHEREAS, The Company has demanded that AEC and LAGP as former general
partners of Longwood and AEC as the current general partner of PVA, repay those
advances together with accrued interest and Milstein has disputed The Company's
right to repayment of those advances; and
WHEREAS, The Company, AEC, LAGP and Milstein desire to resolve that
dispute pursuant to the terms and provisions of this Agreement;
<PAGE> 2
NOW THEREFORE, in consideration of their mutual promises made in this
Agreement, and for other valuable consideration, receipt of which is hereby
acknowledged by each party, the parties, intending to be legally bound, hereby
agree as follows:
1. COMPANY REPRESENTATIONS AND WARRANTIES. As an inducement to
Milstein, AEC and LAGP to enter into this Agreement, The Company hereby
represents and warrants as follows:
A. The total amount of advances made by The Company for
the benefit of Longwood and PVA as of March 11, 1999
is the sum of $3,942,611 ("Advance Principal"). As of
the date of this Agreement, there are no other unpaid
advances or interest thereon due with respect to any
of the Projects, except for interest in the amount of
$723,903 which has accrued for the period ending
March 11, 1999 ("Advance Interest").
B. The Company further represents and warrants that the
amounts shown in the columns headed "Adjusted Cash
Balance 01/22/99" and "Net Interest Due (to) from
Mgmt Company as of 12/31/98" in attached Schedule A
are true and accurate to the best of The Company's
knowledge and information as at 2/23/99. The Company
additionally represents that to the best of its
knowledge and information, as of 02/06/99 the amount
of trade payables as reflected on its books with
respect to PVA did not exceed $47,000.
2. COMPANY COVENANTS, The Company agrees as follows:
A. Notwithstanding anything to the contrary contained in
any of the respective management agreements between
The Company and the respective owners of PVA, Jaelot,
Stow-Kent, Park Lane, UT and Hillwood, The Company
agrees not to make any further advances on behalf of
those Projects without prior written notice to the
respective owner(s) of the Project(s) and to
Milstein, and without prior written approval of the
respective owner(s) of the Project(s). Nothing in the
foregoing sentence is intended to (i) create or imply
any legal obligation on the part of The Company or
any of its affiliates to advance any funds on behalf
of any of those Projects; or (ii) prohibit The
Company from incurring liabilities on behalf of any
Project in the ordinary course of business (subject
to all of the provisions of this Agreement) in
contemplation of the future receipt of Section 8
subsidies, tenant rents or reimbursements from
replacement reserves, including without limitation,
costs for utilities, repairs, maintenance, property
personnel, security and other Project costs.
B. The Company further agrees that any positive cash
balances for any Project will not be used by The
Company as a payment of any obligation of any other
Project or as a set off against any negative cash
balances for any other Project without first
providing written notice to the respective owner(s)
of the Project(s) and to Milstein, and without prior
written approval from the respective owner(s) of the
applicable Project(s).
C. Subject to applicable regulations of the United
States Department of Housing and Urban Development
("HUD"), The Company agrees to notify Milstein prior
to soliciting bids for construction work at any
Project where the cost of such work is expected to
exceed the sum of $10,000. Subject to applicable
regulations of HUD, The Company further agrees that
it will not recommend, execute, or otherwise award,
any contract or agreement for any such construction
work in excess of $10,000 without providing prior
written notice to the respective owner(s) of the
Project(s) and to Milstein, and without prior written
approval of the respective owner(s) of the
Project(s). Moreover, The Company will include in its
bidding solicitation process for such work any
qualified contractor recommended by Milstein.
-2-
<PAGE> 3
D. The Company hereby agrees that it will not incur any
obligation in excess of $10,000 on behalf of the
respective owner(s) of the Project(s) without prior
written notice to the respective owner(s) of the
Project(s) and to Milstein, and without prior written
approval of the respective owner(s) of the
Project(s).
E. The Company hereby agrees to protect, defend,
indemnify, and hold harmless (i) Milstein, and their
heirs, personal representatives, successors and
permitted assigns (as the case may be), and (ii)
LAGP, AEC, the owners of the Projects, and their
respective officers, directors, shareholders,
partners, principals, and agents, from any loss,
liability or expense arising out of any failure of
The Company to abide by (1) its agreement not to make
any further advances on behalf of the Projects
without prior written notice and approval as
contained in paragraph 2.A of this Agreement, or (2)
its agreement not to incur any obligation in excess
of $ 10,000 on behalf of the respective owner(s) of
the Projects without prior written notice and
approval as contained in paragraph 2.D of this
Agreement.
3. LONGWOOD INDEMNIFICATION AND RELEASE.
A. The Company agrees to protect, indemnify, defend and
hold harmless (i) Milstein, and their heirs, personal
representatives, successors and permitted assigns (as
the case may be), and (ii) AEC, LAGP, their officers,
directors, shareholders, partners, principals and
agents from all past, present, or future claims,
liabilities, losses, costs, damages, expenses, fines
or penalties arising out of or in connection with (i)
the Longwood housing code violations and any criminal
enforcement proceedings in connection therewith
issued or initiated by the City of Cleveland
currently pending before the Cleveland Housing Court;
and (ii) any unpaid vendor or utility bills incurred
at Longwood. The Company shall undertake, conduct and
control, through counsel of its own choosing and at
its expense, the settlement or defense of any such
matters and the indemnified parties shall cooperate
with The Company in connection therewith. To the best
of The Company's knowledge, there are no other
material liabilities or obligations chargeable to
AEC, LAGP, or Milstein arising out of the management
or operation of Longwood.
B. Except for the obligations of Milstein, AEC and LAGP
under this Agreement, The Company hereby irrevocably
waives and releases any and all past and present
claims, actions, causes of action, suits, and
defenses it may have against (i) Milstein, and their
heirs, personal representatives, successors and
permitted assigns (as the case may be), and (ii) AEC,
LAGP and their shareholders, partners, principals,
agents, officers, directors and permitted successors
and assigns (as the case may be) arising out of or in
connection with Longwood.
C. Except for the obligations of The Company under this
Agreement, Milstein, AEC and LAGP, on behalf of
themselves and their heirs, personal representatives,
successors & permitted assigns, officers, directors
and shareholders (as the case may be) hereby
irrevocably waive and release any and all past and
present claims, actions, causes of actions, suits and
defenses they may have against The Company, their
officers or directors arising out of or in connection
with Longwood.
4. PVA DEFENSE COSTS. The Company agrees to defend against, through
counsel of its own choosing and at its sole cost, the PVA housing code
violations and criminal enforcement proceedings in connection therewith
currently pending in the Cleveland Housing Court against PVA, AEC and others.
-3-
<PAGE> 4
5. PAYMENT OF DISPUTED CLAIM. On or before March 12,1999, Milstein
shall provide funding to enable AEC and/or LAGP to pay Associated Estates Realty
Corporation the combined principal sum of $3,942,611 together with interest in
the amount of $723,903. The parties to this Agreement hereby represent and
warrant that all of the undersigned have the authority to sign this Agreement on
behalf of their respective entities.
7. MISCELLANEOUS. Time is of the essence of this Agreement. This
Agreement is made in the State of Ohio and shall be governed by Ohio law. This
is the entire agreement between the parties and may not be modified or amended
except by a written document signed by the party against whom enforcement is
sought. This Agreement may be signed in more than one counterpart, in which case
each counterpart shall constitute an original of this Agreement. Paragraph
headings are for convenience only and are not intended to expand or restrict the
scope or substance of the provisions of this Agreement. Whenever used in this
Agreement, the singular shall include the plural, and pronouns shall be read as
masculine, feminine, or neuter, as the context requires. The parties further
agree that any and all disputes, claims or disagreements between the parties
arising out of or from this Agreement shall be fully and finally resolved
through mandatory and binding arbitration administered by the Cleveland, Ohio
offices of the American Arbitration Association ("AAA"). Any party to this
Agreement may initiate such arbitration by filing the appropriate demand for
arbitration with the AAA, and this agreement to arbitrate shall be specifically
enforceable. The prevailing party in any arbitration (or related litigation)
arising out of or from this Agreement shall be entitled to recover from the
opposing party its reasonable attorneys' fees incurred in connection with such
arbitration (or related litigation). This Agreement may not be assigned by any
party without the prior written consent of the other parties. This Agreement is
binding on any and all subsidiaries, divisions, and affiliates of the parties,
and on any and all assignees of the parties. The parties do not intend to confer
any benefit hereunder on any person, firms, or corporation other then the
parties to this Agreement.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the
day and year first written above.
/s/ Mark L. Milstein
- ------------------------------------
MARK L. MILSTEIN
/s/ Robert I. Milstein
- ------------------------------------
ROBERT I. MILSTEIN
ASSOCIATED ESTATES REALTY CORPORATION
BY: /s/ Jeffrey I. Friedman By: /s/ Martin A. Fishman his attorney in fact
-----------------------------------------------------------------------
pursuant to power of attorney dated 03-11-99
- --------------------------------------------
JEFFREY I. FRIEDMAN
AS ITS PRESIDENT
ASSOCIATED ESTATES MANAGEMENT COMPANY
BY: /s/ Jeffrey I. Friedman By: /s/ Martin A. Fishman his attorney in fact
-----------------------------------------------------------------------
pursuant to power of attorney dated 03-11-99
- --------------------------------------------
JEFFREY I. FRIEDMAN
AS ITS PRESIDENT
-4-
<PAGE> 5
ASSOCIATED ESTATES CORPORATION
BY: /s/ Jeffrey I. Friedman By: /s/ Martin A. Fishman his attorney in fact
-----------------------------------------------------------------------
pursuant to power of attorney dated 03-11-99
- --------------------------------------------
JEFFREY I. FRIEDMAN
AS ITS PRESIDENT
L.A.G.P.
BY: /s/ Jeffrey I. Friedman By: /s/ Martin A. Fishman his attorney in fact
-----------------------------------------------------------------------
pursuant to power of attorney dated 03-11-99
- --------------------------------------------
JEFFREY I. FRIEDMAN
AS ITS PRESIDENT
-5-
<PAGE> 1
EXHIBIT 10.16
AGREEMENT
---------
THIS AGREEMENT (the "Agreement") made this 11th day of March, 1999
among (1) MARK L. MILSTEIN AND ROBERT I. MILSTEIN (collectively referred to as
"Milstein") and (2) ASSOCIATED ESTATES REALTY CORPORATION (an Ohio corporation),
ASSOCIATED ESTATES MANAGEMENT COMPANY (an Ohio corporation), and all of their
respective subsidiaries, divisions, and/or affiliates (collectively referred to
as "The Company").
RECITALS
--------
WHEREAS, The Company manages the following properties owned by entities
in which Milstein and members of their family own all or substantial interests:
Eton Collection-Cambridge Court ("Eton-Cambridge"); Garfield Mall ("Garfield");
Mound Building ("Mound"); Parkway I Business Plaza ("Parkway I"); Parkway
Business Plaza II ("Parkway II"), Envoy Condominiums ("Envoy"), Shaker Club
Condominiums ("Shaker Club"); Devonshire Apartments ("Devonshire"); Franklin
House Apartments ("Franklin"); and Brookview Commons Apartments ("Brookview");
the foregoing properties are sometimes referred to individually in this
Agreement as a "Property" and collectively as the "Properties";
WHEREAS, certain disputes have arisen between Milstein and The Company
concerning the management of the Properties by The Company;
WHEREAS, Milstein. Associated Estates Corporation (a corporation in
which Milstein and members of their family own 95% of the common stock) and The
Company are simultaneously entering into an agreement concerning the resolution
of certain disputes arising out of the management of certain government assisted
apartment projects managed by The Company in which Associated Estates
Corporation is or was a general partner (the "Government Assisted Properties
Agreement"): and
WHEREAS, this Agreement is being entered in conjunction with the
overall resolution of certain disputes between Milstein and The Company,
including without limitation the matters concerning the Properties as provided
in this Agreement,
NOW THEREFORE, in consideration of their mutual promises made in this
Agreement, and for other valuable consideration. receipt of which is hereby
acknowledged by each party, the parties, intending to be legally bound, hereby
agree as follows:
1. REPRESENTATIONS AND WARRANTIES. As an inducement to Milstein to
enter into this Agreement, the Company represents and warrants to Milstein as
follows:
A. The Company has not made any advances on behalf of the
Properties that have not been repaid.
B. Except for Eton-Cambridge, ("Eton-Cambridge Advance
Interest"), all interest payable on prior advances made by The Company on behalf
of any of the Properties have been paid in full.
<PAGE> 2
C. The total Eton-Cambridge Advance Interest owed by Eton
Square Limited Partnership ("Eton") (the partnership that owns Eton-Cambridge)
as of March 11, 1999 is $320,000.
D. The Company further represents and warrants that the
amounts shown in the columns headed "Adjusted Cash Balance 01/22/99" and "Net
Interest Due (to) from Mgmt Company as of 12/31/98" in attached Schedule A are
true and accurate to the best of The Company's knowledge and information as at
2/23/99.
2. COMPANY COVENANTS. The Company hereby agrees that Milstein shall
have the opportunity and right to review and approve all budgets for each of the
Properties in advance of the adoption or issuance of such budget. The Company
further agrees to manage each of the Properties for which it has management
responsibilities in accordance with the applicable approved budget, and to
provide written notice to Milstein in advance of incurring any expense or
obligation that causes a negative variance in any approved budget line-item in
excess of $2,500. The Company further agrees to protect, defend, indemnify and
hold harmless Milstein from any and all obligations, claims, liabilities, or
damages, including attorneys' fees, arising out of any failure by the Company to
abide by the agreements regarding budgets contained in this paragraph 2.
3. PAYMENTS. On or before March 12, 1999, Milstein shall provide
funding to enable Eton to pay Associates Estates Management Company ("AEMC") the
sum of $320,000 which represents the Eton-Cambridge Advance Interest through
March 11, 1999.
4. CERTAIN MANAGEMENT CONTRACTS. Notwithstanding anything to the
contrary contained in the respective management contracts between The Company
and the respective owners of Eton-Cambridge, Parkway I, Parkway II, and Mound,
the respective owners of these Properties (or their authorized designee) will
have the unilateral right and option to terminate any or all of these management
contracts on sixty (60) days prior written notice to The Company. The Company
further represents, warrants, and agrees that The Company has not assigned, and
will not assign, its rights or obligations under these respective management
contracts to any other entity.
5. MISCELLANEOUS. Time is of the essence of this Agreement. This
Agreement is made in the State of Ohio and shall be governed by Ohio law. This
is the entire agreement between the parties and may not be modified or amended
except by a written document signed by the party against whom enforcement is
sought. This Agreement may be signed in more than one counterpart, in which case
each counterpart shall constitute an original of this Agreement. Paragraph
headings are for convenience only and are not intended to expand or restrict the
scope or substance of the provisions of this Agreement. Whenever used in this
Agreement, the singular shall include the plural, and pronouns shall be read as
masculine, feminine, or neuter, as the context requires. The parties further
agree that any and all disputes, claims or disagreements between the parties
arising out of or from this Agreement shall be fully and finally resolved
through mandatory and binding arbitration administered by the Cleveland, Ohio
offices of the American Arbitration Association ("AAA"). Any party to this
Agreement
-2-
<PAGE> 3
may initiate such arbitration by filing the appropriate demand for arbitration
with the AAA, and this agreement to arbitrate shall be specifically enforceable.
The prevailing party in any arbitration (or related litigation) arising out of
or from this Agreement shall be entitled to recover from the opposing party its
reasonable attorneys' fees incurred in connection with such arbitration (or
related litigation). This Agreement may not be assigned by any party without the
prior written consent of the other parties. This Agreement is binding on any and
all subsidiaries, divisions, and affiliates of the parties, and on any and all
assignees of the parties.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the
day and year first written above.
/s/ Mark L. Milstein
- -------------------------------------
MARK L. MILSTEIN
/s/ Robert I. Milstein
- -------------------------------------
ROBERT I. MILSTEIN
ASSOCIATED ESTATES REALTY CORPORATION
BY: /s/ Jeffrey I. Friedman By: /s/ Martin A. Fishman his attorney in fact
-----------------------------------------------------------------------
pursuant to power of attorney dated 03-11-99
- --------------------------------------------
JEFFREY I. FRIEDMAN,
AS ITS PRESIDENT
ASSOCIATED ESTATES MANAGEMENT COMPANY
BY: /s/ Jeffrey I. Friedman By: /s/ Martin A. Fishman his attorney in fact
-----------------------------------------------------------------------
pursuant to power of attorney dated 03-11-99
- --------------------------------------------
JEFFREY I. FRIEDMAN,
AS ITS PRESIDENT
-3-
<PAGE> 1
EXHIBIT 10.17
I, Dennis W. Bikun, on behalf of myself and my personal representatives, heirs
and assigns, agree to this Separation Agreement and Release ("Agreement") with
Associated Estates Realty Corporation (hereinafter "Associated") regarding the
termination of my employment. I understand and agree that Associated's
obligations and my obligations under this Agreement will not be effective unless
I sign this Agreement and do not revoke it as explained in Paragraph 16 below.
1. Voluntary Resignation
In signing this Agreement, I acknowledge that I am terminating my employment
by voluntary resignation effective January 8, 1999. I further resign as an
officer and director of all Associated affiliates and subsidiary companies, and
all predecessor companies where I may be currently serving in any such capacity,
effective January 8, 1999. I further agree that I will not seek or accept
employment or reemployment with Associated (or any of its affiliated or
subsidiary companies) and waive and release Associated and its affiliated and
subsidiary companies from any claim with respect to their failure or refusal to
offer to hire or reemploy me at any time in the future.
2. Salary Termination
I understand and agree that I will be paid my current salary through January
8, 1999. I further understand and agree that I will not be receiving any bonus
or incentive compensation for the years 1998, 1999, or any other time period,
nor will I be paid any vacation pay.
3. Benefits Termination and Continuation
I understand and agree that my currently elected benefits will be continued
through January 8, 1999, and will thereafter terminate by virtue of my no longer
being an employee of Associated. However, my currently elected benefits that are
covered by the Consolidated Omnibus Budget Reconciliation Act ("COBRA") will be
continued for eighteen (18) months starting on January 9, 1999, pursuant to
COBRA, if I elect such continuation of coverage. Associated will pay my
insurance premiums for such continuation, for a period not to exceed 18 months.
Associated will send to me the appropriate COBRA notices and election forms that
will allow me to elect such coverage if I desire.
4. Severance Pay
Associated shall pay one (1) year of my current salary of One Hundred
Seventy-Five Thousand Dollars and 00/100 Cents ($175,000.00) as severance pay,
from which all applicable payroll taxes and other required withholdings will be
made. This amount shall be paid as a lump sum during January, 1999. I
acknowledge and agree that my receipt of this severance pay is not a prior
entitlement.
5. Outplacement and Job References
Associated will pay for standard executive outplacement to be provided by
the firm of Lekan & Associates for a period not to exceed twelve (12) months
from the date that I sign this Agreement.
Associated will provide a positive job reference to any prospective employer
that contacts Associated for the purpose of determining my suitability for
future employment.
6. SERP
The Compensation Committee of Associated will vest my account balance as
follows: As of December 31, 1997, my balance was $25,659.00, and interest on
this balance will be $2,566.00 (calculated at 10%). The December 31, 1998,
Regular Contribution will be an amount equivalent to 6% of my 1998 W-2 eligible
earnings.
In addition, the Compensation Committee will pay me $51,416.00 which is the
<PAGE> 2
amount of the remaining four-fifths of my transition account balance that I
would have received had I remained employed with Associated.
7. Stock Options
I understand and agree that in accordance with Associated's applicable stock
option plan, I will have until April 8, 1999, to exercise the incentive stock
options on my November 18, 1993, stock options that were granted at $22.00 per
share and are 100% vested. I also understand and agree that in accordance with
Associated's applicable stock option plan, I will have until April 8, 1999, to
exercise only the vested October 21, 1997, incentive stock options that were
granted to me at $24.06 per share, and that any remaining non-vested stock
options are forfeited.
8. Restricted Shares
Associated will issue certificates to me for my December 6, 1995, restricted
shares of stock that will be fully vested as of December 6, 1998. Associated
will also issue certificates to me for the one-third (1/3) vested December 3,
1997, restricted shares of stock, and no other certificates will be issued and
no other restricted shares of stock shall vest.
9. Performance of Necessary Acts
I will cooperate fully with Associated in working towards a smooth
transition on matters for which I was responsible prior to my resignation. To
that end, I will perform all necessary acts and will share all information
relevant to work in progress at the time of my resignation. In the event my
testimony or assistance is needed for pending or future disputes involving
matters during my employment with Associated, I will cooperate by supplying
thorough and accurate information and by making myself available to Associated
and its counsel. Furthermore, in the event my testimony or assistance is
required by Associated after December 31, 1999, I will cooperate in the manner
just described, and I will be compensated as an independent consultant for any
time that consists of more than one-half of a workday in any one week at the
rate of $500.00 for each half day.
10. Release and Waiver
In return for the payments and obligations undertaken by Associated under
this Agreement, I hereby release Associated, its affiliated and subsidiary
companies, and its predecessor companies, including, without limitation,
Associated Estates Corporation and its and their officers, directors, present
and former employees, agents, successors, assigns, trustees, heirs,
administrators, and/or executors from any and all claims, obligations,
liabilities, or causes of action, whether or not now known to me, that I or
anyone else acting on my behalf may have, based upon any conduct up to and
including the effective date of this Agreement, including any conduct in
connection with or arising out of my employment or separation from employment
with Associated, except for Associated's obligations under this Agreement. I
release and waive all such claims, liabilities, obligations, and causes of
action, including but not limited to:
(a) Those claims arising under any federal, state, or local civil rights
laws, including, but not limited to, Title VII of the Civil Rights Act of 1964,
the Age Discrimination in Employment Act of 1967, the Civil Rights Acts of 1866
and 1871, the Family and Medical Leave Act, the Americans with Disabilities Act,
the Ohio Civil Rights Act, the Ohio Whistleblowers Protection Act, and all other
federal, state, or local laws or ordinances relating to employment; and
(b) Those claims arising under any federal, state, or local wage-hour or
wage-payment, pension, or labor laws, including, but not limited to, the
National Labor Relations Act, the Fair Labor Standards Act, and the Employee
Retirement Income Security Act of 1974 (except that I do not release any claims
<PAGE> 3
concerning payment of any and all vested, accrued benefits or amounts, if any,
due me under the terms of any benefit plans); and
(c) Those claims arising under any rule, regulation, constitution, public
policy, contract, common law, or tort law and any claim for breach of any
contract (whether express, oral, written, or implied), any claim for intentional
or negligent infliction of emotional distress, tortious interference with
contractual relations, wrongful or abusive discharge, defamation, fraud,
negligence, loss of consortium, and/or any actions similar thereto; and
(d) Any claim for attorneys' fees or costs pursuant to any of the claims
referred to above. I further agree that I shall not in any way seek, obtain or
accept (from any source or proceeding) any award, recovery, settlement, or
relief resulting from or connected with any of the claims released above. I
further agree not to institute in any federal, state, or local court or before
any federal, state, or other governmental agency or entity any claim, charge, or
complaint released under this Agreement.
I understand that excluded from this waiver and release are claims that
cannot by law be waived, and the right to file a charge of discrimination with
the Equal Employment Opportunity Commission, although I understand that I am
waiving the right to receive any benefit or relief from such a charge. Also
excluded from this release are my rights to indemnification pursuant to the
provisions of Associated's Code of Regulation by reason of my having served as
an officer of the Company.
11. Confidential Business Information and No Solicitation
I agree that I will keep in strictest confidence at all times all secret or
confidential information, or which from the circumstances ought in good faith
and in good conscience to be treated as confidential and proprietary, or which
might prove harmful to Associated or any of its officers or directors, if
disclosed, related to the business or affairs of Associated and its
subsidiaries, affiliates, or predecessor companies, including, without
limitation, Associated Estates Corporation which I have acquired in connection
with or as a result of my employment with Associated or its predecessors or its
affiliates.
I further agree that for a period of two (2) years following my separation
from employment with Associated, I will not attempt to solicit, or assist anyone
in attempting to solicit, any employee of Associated to leave Associated's
employ.
12. Return of Company Property
I agree that I will return any and all Company property in my possession, in
whatever form, to the Company's headquarters prior to my departure. However, I
will be allowed to retain the laptop computer and the "Palm Pilot" that were
obtained by the Company for my use. I agree that any and all files on the laptop
computer that relate to the Company will be migrated to the desktop computer in
my office at the Company.
13. Governing Law
The terms and conditions of this Agreement shall be governed by the laws of
the State of Ohio.
14. No Liability
Nothing contained in this Agreement is intended to constitute an admission
by Associated of liability or wrongdoing of any nature whatsoever to me, and
Associated expressly denies any alleged liability or wrongdoing.
15. Confidentiality and Non-Disparagement
I agree to keep this Agreement strictly confidential. I can reveal the terms
of this Agreement to my spouse, my attorney, and my tax advisor, or as
<PAGE> 4
required by a court order. I also agree that I will not disparage Associated,
its officers or directors, or its business in any manner to any person or
entity, and in return, Associated, through its officers and directors, will not
disparage me in any manner to any person or entity.
16. Time For Consideration And Voluntary Signing
I acknowledge and agree that I have carefully read and understand the
provisions of this Agreement, including the sections discussing release of
claims, and that I am voluntarily signing this Agreement. I have not relied on
any other representations, written or oral, in entering into this Agreement,
other than what is stated in this Agreement.
I agree that I have been provided with at least twenty-one (21) days to
review the terms of this Agreement and to consider its effect, including the
foregoing release, although I can sign this Agreement in less time if I desire.
I also agree that I have had ample opportunity, and have been encouraged, to
discuss this Agreement and my separation from employment with persons of my own
choosing, including an attorney. I understand this Agreement and its effect and
consequences on me.
I understand that I may revoke this Agreement after signing it, by providing
written notice of revocation to Nan Zieleniec so that she receives it at her
office at the Company not later than seven (7) days from the day I signed this
Agreement. If I revoke this Agreement, I understand that I will not receive any
payments or the benefit of any obligations that are described in this Agreement.
17. Complete Agreement
I agree that no promise or agreement not herein expressed has been made to
me and that this Separation Agreement and Release contains the entire agreement
between the parties hereto.
AGREED:
ASSOCIATED ESTATES REALTY DENNIS W. BIKUN
CORPORATION
By: By:
Date: Date:
------------------------ -------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 20,201,610
<SECURITIES> 7,314,040
<RECEIVABLES> 13,398,735
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,115,729
<PP&E> 964,283,027
<DEPRECIATION> (158,692,514)
<TOTAL-ASSETS> 859,620,627
<CURRENT-LIABILITIES> 46,007,520
<BONDS> 0
0
56,250,000
<COMMON> 2,264,172
<OTHER-SE> 197,010,944
<TOTAL-LIABILITY-AND-EQUITY> 859,620,627
<SALES> 35,340,655
<TOTAL-REVENUES> 38,016,051
<CGS> 15,382,150
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,454,395
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,250,732
<INCOME-PRETAX> 1,869,878
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,869,878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 4,319,162
<NET-INCOME> 6,189,040
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
Exhibit 18.1
May 14, 1999
Board of Directors
Associated Estates Realty Corporation
5025 Swetland Court
Richmond Heights, Ohio 44143-1467
Dear Directors:
We are providing this letter to you for inclusion as an exhibit
to your Form 10-Q filing pursuant to Item 601 of Regulation S-K.
We have been provided a copy of the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1999. Note No. 12
therein describes a change in accounting principle for a change
in the method of capitalizing certain expenditures, which have
previously been expensed. It should be understood that the
preferability of capitalizing these expenditures which were
previously expensed has not been addressed in any authoritative
accounting literature, and in expressing our concurrence below we
have relied on management's determination that this change in
accounting principle is preferable. Based on our reading of
management's stated reasons and justification for this change in
accounting principle in the Form 10-Q, and our discussions with
management as to their judgment about the relevant business
planning factors relating to the change, we concur with
management that such change represents, in the Company's
circumstances, the adoption of a preferable accounting principle
in conformity with Accounting Principles Board Opinion No. 20.
We have not audited any financial statements of the Company as of
any date or for any period subsequent to December 31, 1998.
Accordingly, our comments are subject to change upon completion
of an audit of the financial statements covering the period of
the accounting change.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
