================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-9360
ASSET INVESTORS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 84-1038736
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3600 South Yosemite Street, Suite 350 80237
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 793-2703
(Registrant's telephone number, including area code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __.
As of May 1, 1997, 24,873,345 shares of Asset Investors Corporation
Common Stock were outstanding.
================================================================================
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of March 31, 1997 (unaudited)
and December 31, 1996............................................. 1
Statements of Income for the three months ended
March 31, 1997 and 1996 (unaudited)............................... 2
Statements of Cash Flows for the three months ended
March 31, 1997 and 1996 (unaudited)............................... 3
Notes to Financial Statements (unaudited)......................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 10
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K................................ 17
(i)
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
March 31, December 31,
1997 1996
---- ----
(Unaudited)
Assets
Cash and cash equivalents $ 68,477 $ 417
Non-agency MBS Bonds -- 68,079
Investment in Commercial Assets 19,627 19,361
Other assets, net 762 2,487
------------ ------------
Total Assets $ 88,866 $ 90,344
============ ============
Liabilities
Accounts payable and accrued liabilities $ 1,070 $ 454
Management fees payable 2,349 525
Short-term borrowings -- 3,000
------------ ------------
Total Liabilities 3,419 3,979
------------ ------------
Stockholders' Equity
Common Stock, par value $.01 per share, 50,000,000 shares authorized;
24,843,345 and 24,840,140 shares issued and outstanding, respectively 248 248
Additional paid-in capital 228,759 228,753
Cumulative dividends (240,727) (238,367)
Cumulative net income 97,802 90,638
------------ ------------
Dividends in excess of net income (142,925) (147,729)
Unrealized holding (losses) gains on debt securities (635) 5,093
------------ ------------
Total Stockholders' Equity 85,447 86,365
------------ ------------
Total Liabilities and Stockholders' Equity $ 88,866 $ 90,344
============ ============
See Notes to Condensed Consolidated Financial Statements.
- 1 -
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
---------
1997 1996
---- ----
Revenues
Non-agency MBS bonds $ 2,000 $ 2,830
Equity in earnings of Commercial Assets 464 437
Interest and other income 52 86
--------- ---------
Total revenues 2,516 3,353
--------- ---------
Expenses
Management fees 277 452
General and administrative expenses 336 498
Interest expense 26 --
--------- ---------
Total expenses 639 950
--------- ---------
Net income before gain on resecuritization of non-agency MBS bonds 1,877 2,403
Gain on resecuritization of non-agency MBS bonds 7,359 --
Management fees on resecuritization of non-agency MBS bonds (2,072) --
--------- ---------
Net income $ 7,164 $ 2,403
========= =========
Net income per share $ .29 $ .10
========= =========
Weighted-average shares outstanding 24,841 24,365
Dividends per share $ .095 $ .090
See Notes to Condensed Consolidated Financial Statements.
- 2 -
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
---------
1997 1996
---- ----
Cash Flows From Operating Activities
Net income $ 7,164 $ 2,403
Adjustments to reconcile net income to net cash flows from operating
activities:
Accretion of discounts on non-agency MBS bonds 469 484
Equity in earnings of Commercial Assets (464) (437)
Decrease in other assets 405 208
Increase in accounts payable and accrued liabilities 2,440 365
Gain on resecuritization of non-agency MBS bonds (7,359) --
--------- ---------
Net Cash Provided By Operating Activities 2,655 3,023
--------- ---------
Cash Flows From Investing Activities
Acquisition of non-agency MBS bonds -- (4,157)
Principal collections on non-agency MBS bonds 510 604
Indemnifications from non-agency MBS bonds 37 165
Dividends from Commercial Assets 469 469
Proceeds from resecuritization of non-agency MBS bonds 69,743 --
--------- ---------
Net Cash Provided By (Used In) Investing Activities 70,759 (2,919)
--------- ---------
Cash Flows From Financing Activities
Dividends paid (2,360) (2,192)
Decrease in short-term borrowings, net (3,000) --
Issuance of Common Stock 6 --
--------- ---------
Net Cash Used In Financing Activities (5,354) (2,192)
--------- ---------
Cash and Cash Equivalents
Increase (decrease) 68,060 (2,088)
Beginning of period 417 5,328
--------- ---------
End of period $ 68,477 $ 3,240
========= =========
See Notes to Condensed Consolidated Financial Statements.
- 3 -
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. The Company
Asset Investors Corporation (the "Company") is a real estate investment
trust ("REIT") that was incorporated under Maryland law in 1986. Its shares of
common stock, par value $.01 per share ("Common Stock"), are listed on the New
York Stock Exchange under the symbol "AIC." The Company invests in real estate
assets and owns approximately 27% of the common stock of Commercial Assets, Inc.
(American Stock Exchange, Inc.: CAX) ("Commercial Assets"). Commercial Assets is
a publicly-traded REIT formed by the Company in August 1993 under Maryland law.
The Company's asset acquisition and other policies are determined by
its Board of Directors. The Company's By-laws, as amended, require that a
specified number of the Board of Directors and each committee thereof be
comprised of persons constituting Independent Directors. Pursuant to the
Company's By-laws, an Independent Director is a person "who is not affiliated,
directly or indirectly, with the person or entity responsible for directing or
performing the day-to-day business affairs of the corporation (the "advisor"),
including a person or entity to which the advisor subcontracts substantially all
of such functions, whether by ownership of, ownership interest in, employment
by, any material business or professional relationship with, or by serving as an
officer of the advisor or an affiliated business entity of the advisor."
Multi-Step Plan to Maximize Stockholder Value - In February 1997, the
Board of Directors adopted a multi-step plan (the "1997 Plan") to restructure
the Company's asset base and redeploy its assets in order to reduce risks
associated with the Company's non-agency MBS bond portfolio and maximize
long-term, risk-adjusted returns to stockholders. In March 1997, under the first
step of the 1997 Plan, the Company contributed its portfolio of non-agency MBS
bonds into a structured transaction in which the Company retained a small equity
interest. The Company plans to reinvest the cash proceeds from the
resecuritization of non-agency MBS bonds in the structured transaction in real
estate, a step which would likely reduce its return on assets from 1996 levels,
shift the Company's strategic emphasis to achieving capital appreciation, and
also reduce the risk borne by the Company in its portfolio.
In addition, under the 1997 Plan, the Company converted to an umbrella
partnership real estate investment trust ("UPREIT"). The Company contributed its
assets to an operating partnership while retaining the general partner's
interest. The Company anticipates that the operating partnership will facilitate
the future acquisition of real estate.
The 1997 Plan also provides for consideration of the Company's
acquisition of Financial Asset Management LLC (the "Manager"), a step which
would result in the Company becoming self-managed and fully integrated. A
special committee of Independent Directors has been established to evaluate this
acquisition. The special committee has engaged a financial advisor to assist
them in their evaluation.
B. Presentation of Financial Statements
The Condensed Consolidated Financial Statements of the Company
presented herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. These
- 4 -
financial statements reflect all adjustments, consisting of only normal
recurring accruals, which, in the opinion of management, are necessary to
present fairly the financial position, results of operations and cash flows of
the Company as of March 31, 1997, and for the period then ended and for all
prior periods presented. These statements are condensed and do not include all
the information required by generally accepted accounting principles ("GAAP") in
a full set of financial statements. These statements should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
Certain reclassifications have been made in the 1996 Condensed
Consolidated Financial Statements to conform to the classifications used in the
current year.
C. Summary of Significant Accounting Policies
Principles of Consolidation - The Condensed Consolidated Financial
Statements include the accounts of the Company and its wholly owned corporate
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation. The Company's investment in Commercial Assets is
recorded under the equity method. The Company has recorded its proportionate
share of the unrealized holding losses on the commercial mortgage-backed
securities ("CMBS bonds") of Commercial Assets.
Income Taxes - The Company operates in a manner that permits it to
qualify for the income tax treatment accorded to a REIT, as defined under the
Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the
Company's taxable income ("REIT income") is not subject to federal income tax at
the corporate level. Accordingly, no provision for taxes has been made in the
Condensed Consolidated Financial Statements.
In order to maintain its status as a REIT, the Company generally is
required, among other things, to distribute annually (as determined under the
Code) to its stockholders at least 95% of its REIT income prior to the
"dividends paid deduction." The Company also is required to meet certain asset,
income and stock ownership tests.
Statements of Cash Flows - For purposes of reporting cash flows, cash
maintained in bank accounts, money market funds and overnight cash investments
are considered to be cash and cash equivalents. The Company made interest
payments of $42,000 during the three months ended March 31, 1997.
Non-cash investing and financing activities for the three months ended
March 31, 1997 and 1996 were as follows (in thousands):
March 31,
---------
1997 1996
---- ----
Unrealized holding gains and losses on debt securities $ 5,728 $ 22
Distributions of Common Stock pursuant to DERs $ -- $ 87
- 5 -
D. Non-agency MBS Bonds
As of December 31, 1996, the Company owned debt interests in
residential mortgage loan securitizations collateralized by pools of
non-conforming (non-agency guaranteed) single-family mortgage loans ("non-agency
MBS bonds"). In March 1997, the Company resecuritized its non-agency MBS bonds
by contributing them to an owner trust in which it retained the equity interest.
In a private placement, the trust sold $199,894,000 principal amount of debt
securities representing senior interests in the trust's assets. The debt
securities are without recourse to the Company. The Company's equity interest
represents the first-loss class of the portfolio, providing credit support for
the senior debt securities. The equity interest has minimal economic value, and
accordingly, has no carrying value in the financial statements.
The outstanding principal balance of the 214 non-agency MBS bonds owned
by the Company at December 31, 1996, was $224,579,000, less total unamortized
discounts and allowance for credit losses of $162,500,000 for a net amortized
cost of $62,079,000. The portfolio was classified as available-for-sale and
included $6,000,000 of unrealized holding gains at December 31, 1996. The
Company realized a gain of $7,359,000 from the resecuritization of non-agency
MBS bonds in a structured transaction during the three months ended March 31,
1997.
E. Investment in Commercial Assets
On March 31, 1997 and December 31, 1996, the Company owned 2,761,126
shares (approximately 27%) of the common stock of Commercial Assets. Commercial
Assets is a REIT which manages ownership interests in commercial mortgage loan
securitizations of multi-family real estate. The mortgages which comprise the
collateral for Commercial Assets' CMBS bonds are secured by apartment
communities in 36 states. Approximately 25%, 12% and 8% of the mortgage loans
are collateralized by properties in Texas, Arizona and Georgia, respectively.
Presented below is the summarized financial information of Commercial Assets as
reported by Commercial Assets (in thousands):
Balance Sheets March 31, December 31,
1997 1996
---- ----
(Unaudited)
CMBS bonds, net of $2,374 and $3,389
of unrealized holding losses $ 67,368 $ 61,460
Cash and other assets 6,076 10,946
--------- ---------
Total Assets 73,444 72,406
Total Liabilities 529 487
--------- ---------
Stockholders' Equity $ 72,915 $ 71,919
========= =========
- 6 -
Three Months Ended
March 31,
---------
Statements of Income 1997 1996
-------- --------
(Unaudited)
CMBS bonds $ 2,044 $ 2,311
Interest 111 7
-------- --------
Total revenues 2,155 2,318
-------- --------
Management fees 297 378
General and administrative 123 330
Interest -- 3
-------- --------
Total expenses 420 711
-------- --------
Net Income $ 1,735 $ 1,607
======== ========
According to Commercial Assets, at March 31, 1997 and December 31,
1996, it had $2,374,000 and $3,389,000, respectively, of unrealized holding
losses on its CMBS bonds. The Company's share of these unrealized holding losses
on CMBS bonds of $635,000 and $907,000, respectively, is recorded as a reduction
in the carrying value of its investment in Commercial Assets and as a component
of stockholders' equity.
F. Short-Term Borrowings
On July 19, 1996, the Company renewed its one-year, $1,000,000
unsecured line of credit. Advances under this line bear interest at the prime
rate. At March 31, 1997 and December 31, 1996, there were no borrowings under
this line of credit.
On July 24, 1996, the Company secured a $10,000,000 revolving credit
and term loan agreement with a bank. The loan was collateralized by certain of
the Company's non-agency MBS bonds with a net carrying value of $19,461,000 at
December 31, 1996. At December 31, 1996, $3,000,000 was borrowed under this
credit facility at an average effective interest rate of 8.25%. The loan was
repaid and agreement canceled on March 18, 1997, as a result of the
resecuritization of the non-agency MBS bonds. One of the Company's Independent
Directors is a member of the Board of Directors of the parent holding company of
the bank.
G. Other Matters
The Company's day-to-day operations are performed by its Manager
pursuant to a management agreement (the "Management Agreement") which is
extended annually and currently is in effect through December 31, 1997. The
Management Agreement was approved by a majority of the Independent Directors.
Pursuant to the Management Agreement, the Manager advises the Company on its
business and oversees its day-to-day operations subject to the supervision of
the Company's Board of Directors. The Manager also is obligated to present to
the Company asset acquisition opportunities consistent with the policies and
objectives of the Company and to furnish the Board of Directors of the Company
with information concerning the acquisition, holding and disposition of assets.
The terms appearing in quotes below which are not defined herein are defined in
the Management Agreement.
- 7 -
The Manager receives various fees for the advisory and other services
performed in connection with the Management Agreement. The Manager provides all
personnel and certain overhead items (at its expense) necessary to conduct the
regular business of the Company.
Pursuant to the Management Agreement, through March 31, 1997, the
Manager received a "Base Fee," an "Incentive Fee" and an "Administrative Fee,"
all of which were payable quarterly per the terms of the Management Agreement.
The Base Fee was an annual fee equal to 3/8 of 1% of the "average invested
assets" of the Company and its subsidiaries for such year. The Incentive Fee was
equal to 20% of the amount of the Company's net book income, calculated in
accordance with GAAP, which was in excess of the return on the Company's
"average net worth" equal to the "Ten-Year U.S. Treasury Rate" plus one percent.
The Manager performed certain bond administration and other related services for
the Company pursuant to the Management Agreement and received an Administrative
Fee of up to $3,500 per annum per non-agency MBS bond for such services.
In connection with the planned change in portfolio assets pursuant to
the 1997 Plan, the Independent Directors of the Company approved an amendment to
the Management Agreement, effective April 1, 1997, that: (i) increased the Base
Fee from 3/8 of 1% to 1% per annum of "average invested assets;" (ii) provided
for an acquisition fee (the "Acquisition Fee") of 1/2 of 1% of the cost of real
estate investments charged at acquisition; and (iii) changed the Incentive Fee
to be calculated from Funds Available for Distribution and Reinvestment ("FADR")
rather than net book income. FADR is representative of the cash flow generated
by the Company and is equal to the Company's net book income adjusted by: (i)
amortization of the discount on the non-agency MBS bonds; (ii) principal
receipts and indemnifications from the non-agency MBS bonds; and (iii) certain
non-cash expenditures. The Administrative Fee will be substantially eliminated
as a result of the resecuritization of the non-agency MBS bonds. The amendment
to the Management Agreement was intended to align the fee structure with equity
interests in real estate, the new portfolio assets to be held.
During the three months ended March 31, 1997 and 1996, the Company
incurred management fees of $277,000 and $452,000, respectively, including: (i)
Base Fees of $46,000 and $53,000, respectively; (ii) Incentive Fees of $32,000
and $235,000, respectively; and (iii) Administrative Fees of $199,000 and
$164,000, respectively. No acquisition fees were incurred during the three
months ending March 31, 1997 or 1996.
The Company also incurred $1,472,000 of Incentive Fees during the three
months ended March 31, 1997, from the gain on the resecuritization of the
non-agency MBS bonds and an added value fee of $600,000 to compensate the
Manager for agreeing to continue as a loss mitigation advisor on the non-agency
MBS bonds. Because the Manager has agreed to continue on as the loss mitigation
advisor on the non-agency MBS bonds, the Company was able to realize more
proceeds and a higher gain from the structured transaction than if the Manager
did not continue as the loss mitigation advisor. The added value fee paid to the
manager represents a portion of the increased proceeds and higher gain.
The Company's 1997 Plan provides for consideration of the Company's
acquisition of the Manager, a step which would result in the Company becoming
self-managed and fully integrated. A special committee of Independent Directors
has been established to evaluate this transaction. The special committee has
engaged a financial advisor to assist them in their evaluation.
At March 31, 1997, the Company's net operating loss ("NOL") carryover
was approximately $96,000,000 and its capital loss carryover was approximately
$35,000,000. The NOL carryover may be used to offset all or a portion of the
- 8 -
Company's REIT income, and as a result, to reduce the amount of income that the
Company must distribute to stockholders to maintain its status as a REIT. The
NOL carryover is scheduled to expire between 2007 and 2009 and the capital loss
carryover is scheduled to expire between 1998 and 2000.
H. Subsequent Event
On May 14, 1997, the Company acquired interests in eight manufactured
housing communities and a related manufactured housing community management
business for an aggregate purchase price of approximately $29,400,000. The
consideration was approximately $22,900,000 of cash, the assumption of
approximately $5,000,000 of existing debt, 363,372 shares of Common Stock of the
Company and 91,760 Operating Partnership Units of the Company.
The properties acquired are eight adult communities located in the
Tampa, Florida area consisting of 1,540 home sites with the opportunity to
develop and lease an additional 364 home sites on an earn-out basis. The
management business acquired serves these eight communities plus an additional
four communities with 477 home sites located in the same market area.
- 9 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The Company is a REIT that was incorporated under Maryland law in 1986.
Its shares of Common Stock are listed on the New York Stock Exchange under the
symbol "AIC." The Company invests in real estate assets and owns 27% of the
common stock of Commercial Assets, a publicly-traded REIT formed by the Company
in August 1993.
The Company operates in a manner that permits it to qualify for the
income tax treatment accorded to a REIT under the Code. Accordingly, the
Company's REIT income, with certain limited exceptions, is not subject to state
or federal income tax at the corporate level. In order to maintain its REIT
status, the Company is required, among other things, to distribute annually (as
determined under the Code) to its stockholders at least 95% of its REIT income
prior to the "dividends paid deduction." The Company must also meet certain
asset, income and stock ownership tests.
The Company's asset acquisition and other policies are determined by
its Board of Directors. The Company's By-laws, as amended, require that a
specified number of the Board of Directors and each committee thereof be
comprised of persons constituting Independent Directors. Pursuant to the
Company's By-laws, an Independent Director is a person "who is not affiliated,
directly or indirectly, with the person or entity responsible for directing or
performing the day-to-day business affairs of the corporation (the "advisor"),
including a person or entity to which the advisor subcontracts substantially all
of such functions, whether by ownership of, ownership interest in, employment
by, any material business or professional relationship with, or by serving as an
officer of the advisor or an affiliated business entity of the advisor."
The Company's day-to-day operations are performed by the Manager,
pursuant to the Management Agreement which is extended annually subject to the
approval of a majority of the Independent Directors. The Manager is subject to
the supervision of the Board of Directors. As part of its duties, the Manager
presents the Company with asset acquisition opportunities consistent with the
policies and objectives of the Company and furnishes the Board of Directors with
information concerning the acquisition, holding and disposition of assets. The
Company has no employees. Certain employees of the Manager have been designated
as officers of the Company.
The Company has previously conducted its operations so as not to become
regulated as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). The 1940 Act exempts entities that, directly or
through majority-owned subsidiaries, are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate" ("Qualifying Interests"). In order to qualify for this exemption,
the Company, among other things, must maintain at least 55% of its assets in
Qualifying Interests and may also be required to maintain an additional 25% in
Qualifying Interests or other real estate-related securities. As a result of the
resecuritization, the Company holds insufficient Qualifying Interests to claim
this exemption. The Company does not now engage, nor has it engaged or intended
to engage in the business of investing, reinvesting, owning, holding or trading
of securities. Since the closing of resecuritization, the Company has taken the
steps necessary to give itself the benefits of a temporary exemption under the
1940 Act. In carrying out the 1997 Plan, the Company's intends that any new real
estate assets acquired will be Qualifying Interests. See "FORWARD LOOKING
INFORMATION" below.
Multi-Step Plan to Maximize Stockholder Value - In February 1997, the
Board of Directors adopted the 1997 Plan to restructure the Company's asset base
- 10 -
and redeploy its assets in order to reduce risk associated with the Company's
non-agency MBS bond portfolio and maximize long-term, risk-adjusted returns to
shareholders. Under the first step of the 1997 Plan, the Company completed the
resecuritization of its portfolio of non-agency MBS bonds in March 1997. The
Company contributed its non-agency MBS bonds to an owner trust in which it
retained an equity interest. The owner trust then sold debt securities
representing senior interests in the trust's assets. The Company's equity
interest in the trust represents the first-loss class of the portfolio,
providing credit support for the senior debt securities. Future earnings from
the retained equity interest are not considered probable because they are
dependent upon the credit losses on the underlying mortgage collateral.
Accordingly, the Company's equity interest in the trust has no carrying value in
the financial statements.
The Company plans to reinvest the cash proceeds from the
resecuritization in real estate, a step which would likely reduce its return on
assets from 1996 levels, shift the Company's strategic emphasis to the
management of income producing real estate with the potential of achieving
capital appreciation, and also reduce the investment risk borne by the Company
in its portfolio.
On May 14, 1997, the Company acquired interests in eight manufactured
housing communities and a related manufactured housing community management
business for an aggregate purchase price of approximately $29,400,000. The
consideration was approximately $22,900,000 of cash, the assumption of
approximately $5,000,000 of existing debt, 363,372 shares of Common Stock of the
Company and 91,760 Operating Partnership Units of the Company.
The properties acquired are eight adult communities located in the
Tampa, Florida area consisting of 1,540 home sites with the opportunity to
develop and lease an additional 364 home sites on an earn-out basis. The
management business acquired serves these eight communities plus an additional
four communities with 477 home sites located in the same market area.
In addition, under the 1997 Plan, the Company converted to an UPREIT.
The Company contributed its assets to an operating partnership while retaining
the general partner's interest. The Company anticipates that the operating
partnership will facilitate the future acquisition of real estate.
The 1997 Plan also provides for consideration of the Company's
acquisition of its Manager, a step which would result in the Company becoming
self-managed and fully integrated. A special committee of Independent Directors
has been established to evaluate this acquisition. The special committee has
engaged a financial advisor to assist them in their evaluation.
- 11 -
RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
The table below summarizes the Company's results of operations during
the three months ended March 31, 1997 and 1996 (in thousands, except per share
data).
Three Months Ended
March 31,
---------
1997 1996
---- ----
Revenues
Non-agency MBS bonds $ 2,000 $ 2,830
Equity in earnings of Commercial Assets 464 437
Interest and other income 52 86
--------- ---------
Total revenues 2,516 3,353
--------- ---------
Expenses
Management fees 277 452
General and administrative expenses 336 498
Interest expense 26 --
--------- ---------
Total expenses 639 950
--------- ---------
Book income prior to gain on structured transaction 1,877 2,403
Gain on structured transaction 7,359 --
Management fees on structured transaction (2,072) --
--------- ---------
Book income $ 7,164 $ 2,403
========= =========
Book income per share $ .29 $ .10
========= =========
Estimated REIT income $ 932 $ 3,860
========= =========
Estimated REIT income per share $ .04 $ .16
========= =========
Dividends $ 2,360 $ 2,192
========= =========
Dividends per share $ .095 $ .090
========= =========
Weighted-average shares outstanding 24,841 24,365
Book Income
Non-agency MBS Bonds - Income computed in accordance with GAAP ("book
income") from the Company's non-agency MBS bonds decreased to $2,000,000 during
the first quarter of 1997 compared with $2,830,000 for the same period in 1996
primarily due to the resecuritization of the bonds. The Company completed the
resecuritization of its non-agency MBS bonds in March 1997.
In connection with the transaction, the Company realized net proceeds
of $69,743,000 before related management fees. A gain of $7,359,000 is included
in results of operations for the three months ended March 31, 1997, along with
$1,472,000 of Incentive Fees during the three months ended March 31, 1997, from
resecuritization of non-agency MBS bonds related to the gain and an added value
fee of $600,000 to compensate the Manager for agreeing to continue as a loss
mitigation advisor on the non-agency MBS bonds. Because the Manager has agreed
- 12 -
to continue on as the loss mitigation advisor on the non-agency MBS bonds, the
Company was able to realize more proceeds and a higher gain from the structured
transaction. The added value fee paid to the manager represents a portion of the
increased proceeds and higher gain. The portfolio of non-agency MBS bonds was
classified as available-for-sale and included $6,000,000 of unrealized holding
gains at December 31, 1996.
Commercial Assets - Income from the Company's shares of Commercial
Assets (which, for book income purposes, is based on the Company's pro rata
share of Commercial Assets' book income) for the three months ended March 31,
1997 and 1996 was $464,000 and $437,000, respectively. Commercial Assets
reported to the Company that the increase in income is primarily due to
increased interest income and lower management fees and general administrative
expenses partially offset by lower revenues from the early redemption of two
CMBS bonds in May 1996.
At March 31, 1997 and December 31, 1996, Commercial Assets' CMBS bonds
had outstanding principal balances of $94,921,000 and $89,297,000, respectively,
and weighted-average coupons of 8.05% and 8.15%, respectively. The increase in
the outstanding principal balance and decrease weighted-average coupon of the
CMBS bonds from December 31, 1996 to March 31, 1997, was primarily the result of
the March 1997 contribution of two of the CMBS bonds (Lehman Capital Corporation
Trust Certificate, Series 1994-2 and Series 1994-3) into a newly created trust
(Blaylock Mortgage Capital Corporation Multi-family Trust). Interests in bond
classes within the same CMBS issuance which were owned by another party were
also contributed to the trust. The trust then issued seven classes of CMBS bonds
collateralized by the CMBS bond classes contributed into the trust. The Company
received an interest in five of the new bond classes which corresponded to the
Company's ownership interests in the two bonds contributed to the trust. The
Company also acquired the remaining $5,737,000 principal balance of two of the
new bond classes rated BB and B at a cost of $4,801,000, which resulted in the
100% ownership in the five subordinate new classes. The coupon on the new
classes is 6.425% compared to the coupon of 6.5% on the original two classes.
According to Commercial Assets, at March 31, 1997 and December 31,
1996, it had $2,374,000 and $3,389,000, respectively, of unrealized holding
losses on its CMBS bonds. The Company's share of these unrealized holding
losses, $635,000 and $907,000 as of March 31, 1997 and December 31, 1996,
respectively, was recorded as a reduction in the carrying value of its
investment in Commercial Assets and as a component of stockholders' equity.
Interest and Other Income - Interest and other income decreased during
the three months ended March 31, 1997, compared with the same period in 1996
because of lower average cash balances prior to the resecuritization of the
non-agency MBS bonds.
Management Fees - Included in Management Fees are Incentive Fees
incurred by the Company along with Base Fees and Administrative Fees applicable
to the non-agency MBS bonds prior to the resecuritization. Management Fees
decreased to $277,000 during the three months ended March 31, 1997 compared with
$452,000 for the same period in 1996 primarily due to the resecuritization of
the non-agency MBS bonds in March 1997 which resulted in lower Base Fees and
lower income for purposes of calculating Incentive Fees. In addition, an
increase in the average Ten-Year U.S. Treasury Rate had the effect of raising
the threshold above which Incentive Fees are paid.
In connection with the planned change in portfolio assets pursuant to
the 1997 Plan, the Independent Directors of the Company approved an amendment to
the Management Agreement, effective April 1, 1997, that: (i) increased the Base
Fee from 3/8 of 1% to 1% per annum of "average invested assets;" (ii) provided
- 13 -
for an acquisition fee (the "Acquisition Fee") of 1/2 of 1% of the cost of real
estate investments charged at acquisition; and (iii) changed the Incentive Fee
to be calculated from Funds Available for Distribution and Reinvestment ("FADR")
rather than net book income. FADR is representative of the cash flow generated
by the Company and is equal to the Company's net book income adjusted by: (i)
amortization of the discount on the non-agency MBS bonds; (ii) principal
receipts and indemnifications from the non-agency MBS bonds; and (iii) certain
non-cash expenditures. The Administrative Fee will be substantially eliminated
as a result of the structured transaction of the non-agency MBS bonds. The
amendment to the Management Agreement was intended to align the fee structure
with equity interests in real estate, the new portfolio assets to be held.
The 1997 Plan provides for consideration of the Company's acquisition
of the Manager, a step which would result in the Company becoming self-managed
and fully integrated. A special committee of the Board of Directors has been
established to evaluate this transaction. If the Company acquires the Manager,
management fees will be discontinued, but the Company will receive other
revenues and be obligated for expenses of the Manager. The impact of the
potential acquisition on the Company's earnings and cashflow is, in part,
dependent upon the consideration paid for the Manager and currently cannot be
estimated. See "FORWARD LOOKING INFORMATION" below.
General and Administrative Expenses - General and administrative
expenses decreased during the three months ended March 31, 1997, compared with
the same period in 1996 due primarily to the elimination of Dividend Equivalent
Rights ("DER") expense in the second quarter of 1996, reductions in accounting
and consulting fees, and lower costs associated with the Company's annual
report.
Interest Expense - Interest expense on the Company's borrowing
facilities during the three months ended March 31, 1997, was on the $3,000,000
of short-term borrowings outstanding at December 31, 1996, which were repaid
during the first quarter of 1997.
REIT Income
The Company's estimated REIT income during the three months ended March
31, 1997, was $932,000 compared to $3,860,000 during the three months ended
March 31, 1996. The decrease in estimated REIT income was primarily due to
higher credit losses on the non-agency MBS bonds and higher management fees.
Reconciliation of REIT Income and Book Income
Substantially all of the difference between REIT income and book income
is due to: (i) the method of recording credit losses, which for REIT income
purposes are not deducted until they occur and which for book income purposes
are estimated and reflected as a reduction of revenues in the form of lower
discount amortization included in income from non-agency MBS bonds; (ii)
differences in the calculation of discount and premium amortization for REIT
income compared to book income attributable to non-agency MBS bonds; (iii) gains
on the sales of assets recorded for book income purposes that resulted in either
capital losses or capital gains for REIT income purposes that are reduced to
zero by the Company's capital loss carryover; and (iv) recognition of income
from Commercial Assets which for REIT income purposes is based upon dividends
received and which for book income purposes is based on the Company's pro rata
share of Commercial Assets' book income.
- 14 -
NOL and Capital Loss Carryovers
At March 31, 1997, the Company's NOL carryover was approximately
$96,000,000 and its capital loss carryover was approximately $35,000,000. The
NOL carryover may be used to offset all or a portion of the Company's REIT
income, and as a result, to reduce the amount of income that the Company must
distribute to stockholders to maintain its status as a REIT. The NOL carryover
is scheduled to expire between 2007 and 2009 and the capital loss carryover is
scheduled to expire between 1998 and 2000.
Dividend Distributions
On March 6, 1997, the Company declared a first quarter dividend of
$2,360,000 or nine and a half cents per share, compared with $2,192,000, or nine
cents per share, for the same period in 1996. The 1997 first quarter dividend
was paid on March 31, 1997, to stockholders of record on March 17, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its cash flow from operating activities and other
capital resources to provide working capital to support its operations, for the
payment of dividends to its stockholders, for the acquisition of assets and for
the repayment of borrowings.
The table below summarizes the Company's operating cash flows and uses
of those cash flows for the three months ended March 31, 1997 and 1996 (in
thousands):
Three Months Ended
March 31,
---------
1997 1996
---- ----
Cash Generated By (Used In) Operations:
Non-agency MBS bonds:
Interest $ 2,469 $ 3,314
Principal 510 604
Indemnifications 37 165
Dividends from Commercial Assets 469 469
Repayment of short-term borrowings ( 3,000) --
Total expenses, net of interest income and other 187 (291)
--------- ----------
Cash Generated By Operations $ 672 $ 4,261
========= ==========
Issuance of Common Stock $ 6 $ --
========= ==========
Dividends Paid $ (2,360) $ (2,192)
========= ==========
Acquisitions of Non-agency MBS bonds $ -- $ (4,157)
========= ==========
Net proceeds from structured transaction $ 69,743 $ --
========= ==========
In March 1997, the Company completed the resecuritization of its
non-agency MBS bonds which provided the Company with approximately $67,671,000
of cash after payment of transaction costs and $2,072,000 of related management
- 15 -
fees. The Company plans to reinvest the cash in real estate. Investments in real
estate will likely reduce the Company's return on assets from 1996 levels,
however, such investments may result in increased opportunities for capital
appreciation and reduce portfolio risk. The Company's goal is to invest in real
estate assets with: (i) future growth potential, (ii) a stable, unlevered return
of approximately 9% to 10%, and (iii) the option to convert the underlying land
to an alternative use at some future point in time. There is no assurance that
the Company will achieve this goal. Until the proceeds from the structured
transaction can be reinvested into real estate, the Company may invest the
proceeds in short-term investments which generate lower returns. See "FORWARD
LOOKING INFORMATION" below.
The Company declared $2,360,000 ($.095 per share) in dividends during
the first three months of 1997. The Board of Directors will continue its policy
of reviewing its dividends on a quarter-to-quarter basis and will adjust
distribution levels as it considers necessary. The Company expects lower
earnings and cashflow for the remainder of 1997 compared to 1996 and the first
quarter of 1997 as the Company invests in low-yielding short-term investments
during this period of portfolio transition. Dividends for the remainder of 1997,
and possibly into the future are also expected to be lower than 1996 and first
quarter 1997 dividends. See "FORWARD LOOKING INFORMATION" below.
On July 19, 1995, the Company obtained a one-year, $1,000,000 unsecured
line of credit. The line of credit was renewed for an additional year on July
19, 1996. Advances under this line bear interest at the prime rate. At March 31,
1997 and December 31, 1996, there were no borrowings under this line of credit.
On May 14, 1997, the Company acquired interests in eight manufactured
housing communities and a related manufactured housing community management
business for an aggregate purchase price of approximately $29,400,000. The
consideration was approximately $22,900,000 of cash, the assumption of
approximately $5,000,000 of existing debt, 363,372 shares of Common Stock of the
Company and 91,760 Operating Partnership Units of the Company.
The properties acquired are eight adult communities located in the
Tampa, Florida area consisting of 1,540 home sites with the opportunity to
develop and lease an additional 364 home sites on an earn-out basis. The
management business acquired serves these eight communities plus an additional
four communities with 477 home sites located in the same market area.
FORWARD LOOKING INFORMATION
Some of the statements in this Form 10-Q, as well as statements made by
the Company in periodic press releases, oral statements made by the Company's
officials to analysts and stockholders in the course of presentations about the
Company and conference calls following quarterly earnings releases, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The statements include projections of the
Company's cash flow and dividends. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. Such factors include the following: general economic
and business conditions; interest rate changes; risks inherent in owning real
estate or debt secured by real estate; competition; the availability of real
estate assets at prices which meet the Company's investment criteria; the
Company's ability to maintain or reduce expense levels and the Company's ability
to complete the 1997 Plan.
- 16 -
PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
10.5(a) Trust Agreement dated as of March 26, 1997, among the
Registrant, as depositor, Asset Investors Secured Financing
Corporation and Wilmington Trust Company, as Owner Trustee
10.5(b) Pooled Certificate Transfer Agreement between the Registrant
and Asset Investors Secured Financing Corporation dated as of
March 26, 1997
10.5(c) Indenture, dated as of March 27, 1997, between Structured
Mortgage Trust 1997-1 and State Street Bank and Trust Company
10.5(d) Note Purchase Agreement, dated as of March 26, 1997, among
Structured Mortgage Trust 1997-1, Asset Investors Secured
Financing Corporation and Bear, Stearns & Co. Inc.
10.5(e) Trust Certificate issued to Asset Investors Secured Financing
Corporation evidencing its ownership of the Structured
Mortgage Trust 1997-1
27 Financial Data Schedule.
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Registrant
during the period covered by this Quarterly Report on Form
10-Q.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ASSET INVESTORS CORPORATION
(Registrant)
Date: May 14 , 1997 By /s/Kevin J. Nystrom
--------------------
Kevin J. Nystrom
Chief Financial Officer
- 17 -