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 June 30, 1998
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.)
3410 South Galena Street, Suite 210 80231
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 614-9400
(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 August 7, 1998, 5,136,840 shares of Asset Investors Corporation Common
Stock were outstanding.
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements: Page
Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997............................................ 1
Statements of Income for the three and six months ended
June 30, 1998 and 1997 (unaudited)............................... 2
Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (unaudited)............................... 3
Notes to Financial Statements (unaudited)........................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 12
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders.............. 23
Item 6. Exhibits and Reports on Form 8-K................................. 23
(i)
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
June 30 December 31,
1998 1997
---- ----
(unaudited)
ASSETS
Real estate, net of accumulated depreciation of $1,581 and $693 $ 67,729 $ 40,726
Investments in participating mortgages 27,838 25,415
Cash and cash equivalents 1,971 21,802
Investment in CAX 21,037 20,866
Other assets, net 9,884 10,352
---------- ----------
Total Assets $ 128,459 $ 119,161
========== ==========
LIABILITIES
Secured notes payable $ 10,456 $ 10,677
Secured short-term financing 7,000 --
Accounts payable and accrued liabilities 2,882 2,607
---------- ----------
20,338 13,284
---------- ----------
MINORITY INTEREST IN OPERATING PARTNERSHIP 24,558 22,362
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, 50,000 shares authorized 5,117
and 5,108 shares issued and outstanding, respectively 51 51
Additional paid-in capital 231,376 231,221
Dividends in excess of accumulated earnings (147,864) (147,757)
---------- ----------
83,563 83,515
---------- ----------
Total Liabilities and Stockholders' Equity $ 128,459 $ 119,161
========== ==========
See Notes to Condensed Consolidated Financial Statements.
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ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
RENTAL PROPERTY OPERATIONS
Rental and other property revenues $ 2,108 $ 568 $ 3,852 $ 568
Interest on participating mortgages 764 -- 1,547 --
Property operating expenses (807) (243) (1,600) (243)
-------- -------- -------- --------
Income from property operations before depreciation 2,065 325 3,799 325
Depreciation (495) (130) (888) (130)
-------- --------- -------- --------
Income from rental property operations 1,570 195 2,911 195
-------- -------- -------- --------
SERVICE OPERATIONS
Property management fees and other income 62 23 139 23
Property management costs and other expenses (22) (15) (46) (15)
Amortization of management contracts (689) (19) (1,516) (19)
-------- -------- -------- --------
Loss from service operations (649) (11) (1,423) (11)
-------- -------- -------- --------
OTHER ACTIVITIES
Non-agency MBS bonds revenues -- 450 50 2,450
Equity in earnings of CAX 266 484 534 948
Management fees to former manager -- (97) -- (374)
-------- -------- -------- --------
Income from other activities 266 837 584 3,024
-------- -------- -------- --------
General and administrative expenses (336) (87) (658) (423)
Interest and other income 219 795 552 847
Interest expense (268) (55) (476) (81)
-------- -------- -------- --------
INCOME BEFORE GAIN ON RESTRUCTURING OF BONDS AND
MINORITY INTEREST 802 1,674 1,490 3,551
Gain on restructuring of bonds -- -- -- 5,287
-------- -------- -------- --------
INCOME BEFORE MINORITY INTEREST 802 1,674 1,490 8,838
Minority interest in Operating Partnership (175) -- (318) --
-------- -------- -------- --------
NET INCOME $ 627 $ 1,674 $ 1,172 $ 8,838
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ .12 $ .32 $ .23 $ 1.76
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ .12 $ .32 $ .23 $ 1.75
======== ======== ======== ========
DIVIDENDS DECLARED PER SHARE $ .250 $ .300 $ .250 $ .775
======== ======== ======== ========
Weighted-Average Common Shares Outstanding 5,115 5,012 5,112 4,990
Weighted-Average Common Shares and Common Share
Equivalents Outstanding 5,142 5,035 5,142 5,020
See Notes to Condensed Consolidated Financial Statements.
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ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,172 $ 8,838
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation and amortization 2,404 149
Minority interest in Operating Partnership 318 --
Amortization of non-agency MBS bonds -- 469
Equity in earnings of CAX (534) (948)
Accrued interest on participating mortgages (394) --
Increase in other assets (639) (197)
Increase in accounts payable and accrued liabilities 47 107
Gain on restructuring of assets -- (7,359)
------- -------
Net cash provided by operating activities 2,374 1,059
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of real estate (25,556) (22,871)
Investments in participating mortgages, net (2,012) --
Capital replacements (175) --
Principal collections and indemnifications on non-agency MBS bonds
-- 547
Dividends from CAX 359 939
Proceeds from the restructuring of assets -- 69,743
--------- ---------
Net cash provided by (used in) investing activities (27,384) 48,358
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Common Stock dividends (1,279) (3,874)
Payment of distributions to minority interest in Operating Partnership
(356) (6)
Proceeds from secured short-term financing 7,000 --
Principal paydown on secured short-term financing -- (3,000)
Principal paydown on secured notes payable (221) (22)
Proceeds from the issuance of Common Stock 35 11
---------- ----------
Net cash provided by (used in) financing activities 5,179 (6,891)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(19,831) 42,526
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,802 417
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,971 $ 42,943
========== ==========
See Notes to Condensed Consolidated Financial Statements.
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ASSET INVESTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. The Company
Asset Investors Corporation ("AIC" and, together with its subsidiaries, the
"Company") is a Maryland corporation that owns and operates manufactured home
communities and has elected to be taxed as a real estate investment trust
("REIT"). The Company's Common Stock, par value $.01 per share, is listed on the
New York Stock Exchange under the symbol "AIC." In May 1997, the Company
contributed its net assets to Asset Investors Operating Partnership, L.P. (the
"Operating Partnership") in exchange for the sole general partner interest in
the Operating Partnership. AIC held a 78% interest in the Operating Partnership
as of June 30, 1998. The Operating Partnership also owns the non-voting capital
stock of both AIC Manufactured Housing Corp. ("AICMHC") and AIC Management Corp.
("Management Corp.") and approximately 27% of the Common Stock of Commercial
Assets, Inc. ("CAX"). AICMHC owns interests in manufactured home community
management contracts, and Management Corp. owns the management agreement
pursuant to which it manages CAX. CAX is a publicly-traded REIT (American Stock
Exchange, Inc.: CAX) formed by the Company in August 1993.
Prior to 1997, 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 February
1997, the Company decided to restructure the Company's asset base and redeploy
its assets in an attempt to both reduce risks associated with the Company's
non-agency MBS bonds and maximize long-term, risk-adjusted returns to
stockholders. In March 1997, the Company contributed its portfolio of non-agency
MBS bonds into an owner trust in a structured transaction in which the Company
received $67,671,000 cash proceeds and retained a small equity interest.
Subsequently, the Company has acquired interests in 21 manufactured home
communities and two recreational vehicle parks with approximately 3,670
developed homesites, 380 recreational vehicle sites, 750 sites ready for homes
and 1,790 sites available for future development.
Prior to November 1997, the Company was managed by Financial Asset Management
LLC (the "Manager"). An investor group led by Terry Considine, Thomas L. Rhodes
and Bruce D. Benson acquired the Manager in September 1996. Mr. Considine is the
Chairman and Chief Executive Officer of both the Company and CAX. Mr. Rhodes is
Vice Chairman and Mr. Benson is a director of both the Company and CAX. In
November 1997, the Company's stockholders approved the acquisition of the assets
and operations of the Manager in order to become a self-managed and
self-administered REIT. The $11,692,000 purchase price was paid by issuing
676,700 limited partnership units of the Operating Partnership ("OP Units") plus
up to 240,000 additional OP Units if certain performance goals, including
investment and share price targets, are achieved by the Company within a
specified time period.
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 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 June 30, 1998, and for the three and six months then ended and for all prior
periods presented. These statements are condensed and do not include all the
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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,
1997.
Certain reclassifications have been made in the Condensed Consolidated Financial
Statements to conform to the classifications currently used. The effect of such
reclassifications on amounts previously reported is immaterial.
C. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the
Operating Partnership and all majority-owned subsidiaries. The minority interest
in the Operating Partnership represents the OP Units which are redeemable at the
option of the holder. When a holder elects to redeem OP Units, the Company
determines whether such OP Units will be redeemed for cash or shares of Common
Stock. The holders of OP Units receive the same amount per OP Unit in
distributions as the holders of Common Stock receive in dividends. As of June
30, 1998, 1,425,000 OP Units were outstanding. All significant intercompany
balances and transactions have been eliminated in consolidation. The Company's
investment in CAX is recorded under the equity method.
Rental Properties and Depreciation
Rental properties are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight line method over an estimated useful
life of 25 years for land improvements and buildings and five years for
furniture and other equipment. Significant renovations and improvements, which
improve and/or extend the useful life of the asset, are capitalized and
depreciated over the remaining estimated life. Maintenance, repairs and minor
improvements are expensed as incurred.
When conditions exist which indicate that the carrying amount of a property may
be impaired, the Company will evaluate the recoverability of its net investment
in the property by assessing current and future levels of income and cash flows.
As of June 30, 1998, there has been no impairment of the Company's investment in
rental properties.
Amortization
Included in other assets is the cost related to the acquisition of management
contracts, which is being amortized over a period of three years.
Revenue Recognition
The Company derives its income from the rental of homesites. The leases entered
into by residents for the rental of the site are generally for terms not longer
than one year and the rental revenues associated with the leases are recognized
when earned and due from residents. Property management revenues for services
provided to communities not owned by the Company are recognized when earned.
- 5 -
Income Taxes
The Company has elected to be taxed as a REIT as defined under the Internal
Revenue Code of 1986, as amended (the "Code"). In order for the Company to
qualify as a REIT, at least 95% of the Company's gross income in any year must
be derived from qualifying sources. The activities of AICMHC and Management
Corp. are not qualifying sources.
As a REIT, the Company generally will not be subject to federal income taxes at
the corporate level if it distributes at least 95% of its REIT taxable income to
its stockholders. REITs are also subject to a number of other organizational and
operational requirements. If the Company fails to qualify as a REIT in any
taxable year, its taxable income will be subject to federal income tax at
regular corporate rates (including any applicable alternative minimum tax). Even
if the Company qualifies as a REIT, it may be subject to certain state and local
income taxes and to federal income and excise taxes on its undistributed income.
At June 30, 1998, the Company's net operating loss ("NOL") carryover was
approximately $95,000,000 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 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.
In November 1997, the Company incorrectly documented a transaction. The effect
of which was that the Company was not in compliance with the requirements
necessary to maintain its status as a REIT. In June 1998, the Company received
confirmation from the Internal Revenue Service that its status as a REIT has not
been terminated as a result of the incorrect documentation of the transaction in
1997.
Earnings Per Share
Basic earnings per share for the three and six months ended June 30, 1998 and
1997 are based upon the weighted-average number of shares of Common Stock
outstanding during each such period. Diluted earnings per share reflect the
effect of any dilutive, unexercised stock options in each such period. In
November 1997, the Company's stockholders approved a one-for-five reverse split
of the Company's Common Stock. Accordingly, all historical weighted-average
share and per share amounts have been restated to reflect the reverse stock
split.
Statements of Cash Flows
For purposes of reporting cash flows, cash maintained in bank accounts, money
market funds and highly-liquid investments with an initial maturity of three
months or less are considered to be cash and cash equivalents. The Company paid
$417,000 and $63,000 in interest during the six months ended June 30, 1998 and
1997, respectively.
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Non-cash investing and financing activities for the six months ended June 30,
1998 and 1997 were (in thousands):
1998 1997
---- ----
Unrealized holding gains and losses on debt securities $ -- $ 5,475
Real estate acquired under earn-out agreements 52 --
Issuance of Common Stock for services 120 101
Consideration for acquisition of real estate:
Issuance of Common Stock -- 1,250
Assumption of secured notes payable -- 4,962
Issuance of OP Units 2,145 316
Issuance of OP Units for Participating Mortgages 17 --
Receivables from minority interest in subsidiaries 319 --
D. Real Estate
Real estate at June 30, 1998 and December 31, 1997, was (in thousands):
June 30, December 31,
1998 1997
---- ----
Land $ 7,704 $ 5,286
Land improvements and buildings 61,160 35,689
Furniture and other equipment 446 444
--------- ---------
69,310 41,419
Less accumulated depreciation (1,581) (693)
--------- ---------
Investment in real estate, net $ 67,729 $ 40,726
========= =========
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities.
E. Investments in Participating Mortgages
As of December 31, 1997, the Company had investments in and notes receivable of
$15,872,000 from joint ventures in which the Company owned a 50% joint venture
interest. Effective January 1, 1998, the Company sold its interest in the
various joint ventures and consolidated the various notes into a single note
secured by a number of manufactured home communities. The note bears 10%
interest, matures in 20 years and provides for additional advances up to a
maximum of $20,000,000. In addition, the Company receives additional interest up
to 50% of the borrower's profit from such communities.
In addition, the Company has first and second mortgage loans secured by four
contiguous manufactured home communities in Arizona. The first mortgage loan
bears 10% interest. The second mortgage loan accrues 15% interest and pays 9%
interest through July 1998, with the pay rate increasing 1% each year thereafter
to a maximum of 12% per annum. Both loans mature in April 2001. The Company
receives additional interest of 3% of gross revenues, increasing to 11% of gross
revenues in the event of a refinancing of the communities, and 50% of net
proceeds from a sale or refinancing of the properties. In 1997, the mortgage
loans were accounted for as an equity investment in real estate. Effective
January 1, 1998, the Company reclassified the investment to participating
mortgages.
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As of June 30, 1998, the Company had investments in participating mortgages of
$27,838,000. During the three and six months ended June 30, 1998, the Company
had earnings of $764,000 and $1,547,000, respectively, from these mortgages.
F. Non-agency MBS Bonds
In March 1997, the Company resecuritized its portfolio of non-agency MBS bonds
by contributing them to a 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 realized net
proceeds of $67,671,000 and recorded a net gain of $5,287,000 from the sale. The
Company's retained equity interest in the trust represents the first-loss class
of the portfolio, providing credit support for the senior debt securities. The
future cash flow from the retained equity interest is not determinable and,
accordingly, no carrying value has been assigned to it. During the three and six
months ended June 30 1997, the Company recognized $450,000 and $2,450,000 of
interest income from the non-agency MBS bonds, respectively. The Company
recorded revenues of $0 and $50,000, respectively, from the retained equity
interest during the three and six months ended June 30, 1998.
G. Investment in Commercial Assets
On June 30, 1998 and December 31, 1997, the Company owned 2,761,126 shares
(approximately 27%) of the Common Stock of CAX. In November 1997, CAX sold or
resecuritized its entire portfolio of commercial mortgage loan securitizations
of multi-family real estate ("CMBS bonds"). CAX received $77,693,000 of cash and
an equity interest in an owner trust arising from the resecuritization
transaction, and recognized a net gain of $5,786,000 in the fourth quarter of
1997. Summarized financial information of CAX as reported by CAX is (in
thousands):
Balance Sheets June 30, December 31,
1998 1997
---- ----
(unaudited)
Cash and cash equivalents $ 14,322 $ 74,153
Short-term investments 57,978 --
Investment in and notes receivable from Westrec and affiliates 4,290 1,710
CMBS bonds 1,855 1,981
Other assets 583 304
----------- -----------
Total assets 79,028 78,148
Total liabilities 532 443
----------- -----------
Stockholders' equity $ 78,496 $ 77,705
=========== ===========
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Statements of Income Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Interest $ 1,042 $ 49 $ 2,095 $ 160
CMBS bonds 44 2,193 84 4,237
----------- ----------- ----------- -----------
Total revenues 1,086 2,242 2,179 4,397
----------- ----------- ----------- -----------
General and administrative 88 121 174 244
Management fees 12 311 17 608
----------- ----------- ----------- -----------
Total expenses 100 432 191 852
----------- ----------- ----------- -----------
Net income 986 1,810 1,988 3,545
Unrealized holding gains on CMBS bonds
-- 943 -- 1,958
----------- ----------- ----------- -----------
Comprehensive income $ 986 $ 2,753 $ 1,988 $ 5,503
=========== =========== =========== ===========
H. Secured Notes Payable
Secured notes payable at June 30, 1998 and December 31, 1997 consist of
$4,665,000 and $4,805,000, respectively, of non-recourse notes payable which
bear 8.25% interest and $5,791,000 and $5,872,000, respectively, of non-recourse
notes payable which bear 7.5% interest. All of the notes mature in October 2000.
The notes are secured by four manufactured home communities, which have net
carrying values of $23,206,000 and $23,517,000, respectively, at June 30, 1998
and December 31, 1997. The scheduled payments of principal on the secured notes
payable subsequent to June 30, 1998 are as follows: 1998 - $216,000, 1999 -
$487,000, and 2000 - $9,753,000. The secured notes payable require escrow
payments for the payment of property taxes. At June 30, 1998 and December 31,
1997, $217,000 and $34,000, respectively, was held in escrow.
I. Secured Short-Term Financing
In June 1998, the Company borrowed $7,000,000 of secured short-term financing in
connection with the acquisition of a manufactured home community. The note bears
11% interest, secured by the acquired community and $10,000,000 of participating
mortgages, and matures in December 1998. In July 1998, the Company repaid this
note (see Note M).
In 1996, the Company had a $10,000,000 secured revolving credit and term loan
agreement with a bank. Borrowings of $3,000,000 under this credit facility were
repaid and the agreement was canceled during the first quarter of 1997.
J. Commitments and Contingencies
The Company has a $1,000,000 unsecured line of credit with a bank through July
31, 1998. Advances under this line bear interest at prime. At June 30, 1998 and
December 31, 1997, no advances were outstanding.
In connection with a participating mortgage on a manufactured home community,
the Company entered into an earn-out agreement with respect to unoccupied
homesites. The Company advances an additional $17,000 pursuant to the
participating mortgage for each newly occupied homesite either in the form of
cash or 946 OP Units, as determined by the borrower. One new homesite was
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occupied during each of the first and second quarters of 1998 and the Company
advanced the applicable amount in the form of OP Units and cash during the first
and second quarters of 1998, respectively.
K. Common Stock and Dividends
In November 1997, the Company's stockholders approved a one-for-five reverse
split of the Company's Common Stock. The par value per share and number of
authorized shares were not changed as a result of the reverse stock split. In
connection with the split, $202,000 was transferred from common stock to
additional paid-in capital. All outstanding OP Units and options were also
adjusted to reflect the one-for-five reverse stock split.
In February 1998, the Company announced that it was changing the date on which
its quarterly dividends are declared from the last month of the quarter to the
first month of the subsequent quarter. This change was made to allow the
dividend to be based on actual results instead of estimated results.
Accordingly, no dividend was declared during the first quarter of 1998. In April
and July 1998, the Company declared a $0.25 per share dividend on the Common
Stock for the first and second quarters of 1998. Concurrently, the Operating
Partnership declared a $0.25 per OP Unit distribution for the first and second
quarters of 1998. During the three and six months ended June 30, 1997, the
Company declared $0.30 and $0.775, respectively, per share dividends on the
Common Stock, and the Operating Partnership declared a $0.30 per OP Unit
distribution for the second quarter of 1997. The Operating Partnership did not
exist during the first quarter of 1997.
L. Other Matters
Prior to November 1997, the Manager provided all personnel and related overhead
necessary to conduct the Company's activities in exchange for various fees
provided for in the management agreement between the Company and the Manager
(the "AIC Management Agreement"). In November 1997, the Company's stockholders
approved the purchase of the Manager's assets and operations for $11,692,000 in
order for the Company to become a self-managed and self-administered REIT. The
purchase price and related costs were allocated $6,553,000 to the AIC Management
Agreement and $5,936,000 to a management agreement pursuant to which the Company
now provides management services to CAX (the "CAX Management Agreement"). The
Manager is owned by an investor group involving Terry Considine, Thomas L.
Rhodes and Bruce D. Benson. Mr. Considine is Chairman of the Board of Directors
and Chief Executive Officer of both the Company and CAX. Mr. Rhodes is Vice
Chairman and Mr. Benson is a director of both companies. This investment group
acquired the Manager in September 1996 at the same price at which they sold its
assets and operations to the Company in November 1997.
As a result of such acquisition, the Company expensed the $6,553,000 allocated
to the AIC Management Agreement in the fourth quarter of 1997, and the employees
of the Manager are now employed by the Company. The CAX Management Agreement has
been extended through December 31, 1998, and the Company is amortizing such
agreement over 36 months. During the three and six months ended June 30, 1998,
the Company earned management fees of $9,000 and $12,000, respectively, under
the CAX Management Agreement (net of elimination for the Company's 27% ownership
of CAX). As of June 30, 1998 and December 31, 1997, the net book value of the
CAX Management Agreement was $4,733,000 and $5,722,000, respectively, and is
included in other assets. Certain officers and directors of the Company also
serve as officers, directors or both of CAX.
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Through March 31, 1997, the Manager received a "Base Fee," an "Incentive Fee"
and an "Administrative Fee," all of which were payable quarterly. The Base Fee
was an annual fee equal to 3/8 of 1% of the "average invested assets" of the
Company for such year. The Incentive Fee was equal to 20% of the amount of the
Company's net income which was in excess of the return on the Company's "average
net worth" equal to the "Ten-Year U.S. Treasury rate" plus 1%. The Manager
received an Administrative Fee of up to $3,500 per annum per non-agency MBS bond
for certain bond administration and other related services.
In connection with the change in the Company's assets, the AIC Management
Agreement was amended effective April 1, 1997, to: (i) increase the Base Fee
from 3/8 of 1% to 1% per annum of "average invested assets;" (ii) provide for an
acquisition fee (the "Acquisition Fee") of 0.5% of the cost of real estate
investments acquired; and (iii) change the Incentive Fee to be calculated from
Adjusted Funds From Operations ("AFFO") rather than net income. AFFO is
generally equal to the Company's net income plus (a) depreciation of rental
properties, (b) amortization of management contracts and (c) minority interest
in the Operating Partnership; less capital replacement reserves. The
Administrative Fee was essentially eliminated as a result of the
resecuritization of the non-agency MBS bonds.
During the three and six months ended June 30, 1997, the Company incurred the
following fees under the AIC Management Agreement:
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
------------------------ ------------------
Base Fees $ 51,000 $ 97,000
Incentive Fees 21,000 53,000
Administrative Fees 25,000 224,000
Acquisition Fees 152,000 152,000
----------- -----------
Total $ 249,000 $ 526,000
=========== ===========
The Company incurred $1,472,000 of additional Incentive Fees during the six
months ended June 30, 1997 from its gain on the restructuring of its bonds plus
an additional fee of $600,000 in exchange for the Manager agreeing to continue
as a loss mitigation advisor on the non-agency MBS bonds. Such fees were charged
against the Company's gain from such restructuring.
M. Subsequent Events
In July 1998, the Company acquired three contiguous manufactured housing
communities in Orlando, Florida for approximately $32,500,000. The communities
have 919 developed homesites and expansion capacity for an additional 230
homesites. The Company funded the acquisition with proceeds from $39,000,000 of
non-recourse, secured short-term financing on both the acquired communities and
other communities in its portfolio which had a net carrying value at June 30,
1998 of $36,513,000. In addition, proceeds from the financing were used to repay
the $7,000,000 of secured short-term financing outstanding at June 30, 1998.
- 11 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Introduction
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. Certain information
included in this Report, the Company's Annual Report to Stockholders and other
Company filings (collectively "SEC Filings") under the Securities Act of 1933,
as amended, and the Securities Exchange Act of 1934, as amended (as well as
information communicated orally or in writing between the dates of such SEC
Filings) contains or may contain information that is forward looking, including,
without limitation, statements regarding projections of the Company's future
financial performance, cash flow, dividends and anticipated returns on real
estate investments. 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: general economic and business
conditions; interest rate changes; financing and refinancing risks; risks
inherent in owning real estate or debt secured by real estate; future
development rate of homesites; competition; the availability of real estate
assets at prices which meet the Company's investment criteria; the Company's
ability to reduce expense levels, implement rent increases and use leverage; and
other risks set forth in the Company's Securities and Exchange Commission
filings. Readers should carefully review the Company's financial statements and
the notes thereto, as well as the risk factors described in the SEC Filings.
Business
Asset Investors Corporation, a Maryland corporation formed in 1986, ("AIC" and
together with its consolidated subsidiaries the "Company") is a
self-administered and self-managed real estate investment trust ("REIT") engaged
in the ownership, acquisition, development and management of manufactured home
communities. AIC's shares of common stock ("Common Stock") are listed on the New
York Stock Exchange ("NYSE") under the symbol "AIC." The Company also owns
approximately 27% of the common stock of Commercial Assets, Inc. ("CAX"). CAX is
a publicly-traded REIT (American Stock Exchange, Inc.: CAX). In May 1997, the
Company contributed all of its net assets to Asset Investors Operating
Partnership, L.P. (the "Operating Partnership") in exchange for the sole general
partner interest in the Operating Partnership and substantially all of the
Operating Partnership's initial capital. As of June 30, 1998, AIC owned 78% of
the Operating Partnership.
A manufactured home community is a residential subdivision designed and improved
with sites for the placement of manufactured homes and related improvements and
amenities. Manufactured homes are detached, single-family homes which are
produced off-site by manufacturers and installed on sites within the community.
Manufactured homes are available in a variety of designs and floor plans,
offering many amenities and custom options.
Modern manufactured home communities are similar to typical residential
subdivisions containing centralized entrances, paved streets, curbs and gutters
and parkways. The communities frequently provide a clubhouse for social and
recreation activities and other amenities, which may include golf courses,
swimming pools, shuffleboard courts and laundry facilities. Utilities are
provided or arranged for by the owner of the community. Community lifestyles,
primarily promoted by resident managers, include a wide array of social
activities that serve to promote a sense of neighborhood. The communities
- 12 -
provide an attractive and affordable housing alternative for retirees, empty
nesters and start-up or single-parent families.
The owner of each home in the Company's communities leases the site on which the
home is located. The typical lease entered into between the tenant and one of
the Company's manufactured home communities for the rental of a site is
month-to-month or year-to-year, renewable upon the consent of both parties or,
in some instances, as provided by statute. In some circumstances, the Company
also offers a 99-year lease to a tenant in order to enable the tenant to have
some benefits of an owner of real property (e.g. the Homestead exemption). These
leases are cancelable, depending on state law, for non-payment of rent,
violation of community rules and regulations or other specified defaults.
Generally, market rate adjustments are made on an annual basis. The Company owns
the underlying land, utility connections, streets, lighting, driveways, common
area amenities and other capital improvements and is responsible for enforcement
of community guidelines and maintenance. Each homeowner within the manufactured
home community is responsible for the maintenance of his home and leased site
including lawn care in some communities.
The Company believes that manufactured home communities, once fully occupied,
tend to achieve a stable rate of occupancy. The cost and effort involved in
relocating a home to another community generally encourages the owner of the
home to resell it within the community.
REIT Status
In November 1997, the Company incorrectly documented a transaction by having the
Operating Partnership acquire all of the voting common stock of Asset Investors
Equity, Inc. ("AIE"), a consolidated subsidiary of the Company, instead of
having another subsidiary acquire AIE's voting common stock. As a result of the
transaction, the Company was not in compliance with the technical requirements
necessary to maintain its status as a REIT. In June 1998, the Company received
confirmation from the Internal Revenue Service that its status as a REIT will
not be terminated as a result of the incorrect documentation of the transaction
in 1997.
Recent Developments
Manufactured Home Community Acquisitions
During the first seven months of 1998, AIC acquired interests in seven
manufactured home communities, for total consideration of $60.2 million
consisting of $19 million cash, units of limited partnership interests in the
Operating Partnership ("OP Units") with a total recorded value of $2.2 million
and $39 million of secured short-term financing. As of July 31, 1998, the
Company has interests in 24 manufactured home communities and two recreational
vehicle parks. The communities consist of 4,590 developed homesites, 800 sites
ready for homes, 1,960 sites available for future development and 380
recreational vehicle sites. Of such properties, 18 communities are located in
Florida, four are in Arizona and one each is in Pennsylvania and New Jersey. The
recreational vehicle parks are in California and Arizona.
Growth and Operating Strategies
The Company measures its economic profitability based on Funds From Operations
("FFO") and Adjusted Funds From Operations ("AFFO"). The Company's management
believes that FFO and AFFO provide investors with an understanding of the
Company's ability to incur and service debt and make capital expenditures. The
- 13 -
Board of Governors of the National Association of Real Estate Investment Trusts
("NAREIT") defines FFO as net income (loss), computed in accordance with
generally accepted accounting principles ("GAAP"), excluding gains and losses
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of financing costs), and
after adjustments for unconsolidated partnerships and joint ventures. The
Company calculates FFO in a manner consistent with the NAREIT definition, which
includes adjustments for minority interest in the Operating Partnership and
amortization of goodwill related to controlled management contracts, including
the investment advisory agreement between the Company and CAX. AFFO is equal to
FFO less an estimated annual reserve for capital replacements of $50 per
homesite. Neither FFO nor AFFO should be considered an alternative to net income
or net cash flows from operating activities, as calculated in accordance with
GAAP, as an indication of the Company's performance or as a measure of
liquidity. Neither FFO nor AFFO is necessarily indicative of cash available to
fund future cash needs.
The Company's primary objective is to maximize stockholder value by increasing
the amount and predictability of AFFO on a per share basis. The Company seeks to
achieve this objective primarily by improving net operating income from its
existing portfolio of manufactured home communities and by acquiring additional
communities at values that are accretive on a per share basis. The Company
intends to follow operating and financial strategies, including: (i) obtaining a
geographically diverse portfolio of communities; (ii) providing a minimum $50
per homesite per year for capital replacements to maintain its communities;
(iii) utilizing long-term, fixed-rate, fully-amortizing debt; and (iv)
maintaining a ratio of (a) AFFO plus interest expense to (b) interest expense of
at least 2 to 1. In addition, the Company seeks to: (i) selectively acquire
manufactured home communities that have potential long-term appreciation of
value through, among other things, rent increases, expense efficiencies and
in-park homesite absorption and development; (ii) improve the profitability of
its communities through aggressive management of occupancy, community
development and maintenance and expense control; (iii) develop and maintain
resident satisfaction and a reputation for quality communities through
maintenance of the physical condition of the communities and providing
activities that improve the community lifestyle; and (iv) recruit and retain
quality community management personnel.
Future Acquisitions
From time to time, the Company evaluates acquisition opportunities in the
manufactured home community industry and expects to acquire additional
properties as opportunities can be identified on terms considered beneficial by
management. The acquisition of interests in additional communities could also
result in the Company becoming increasingly leveraged as it incurs debt in
connection with these transactions.
When evaluating potential acquisitions, the Company considers such factors as:
(i) the geographic area and type of property; (ii) the location, construction
quality, condition and design of the property; (iii) the current and projected
cash flow of the property and the ability to increase cash flow; (iv) the
potential for capital appreciation of the property; (v) the terms of tenant
leases, including the potential for rent increases; (vi) the potential for
economic growth and the tax and regulatory environment of the community in which
the property is located; (vii) the potential for expansion of the physical
layout of the property and/or the number of sites; (viii) the occupancy and
demand by residents for properties of a similar type in the vicinity and the
residents' profile; (ix) the prospects for liquidity through sale, financing or
refinancing of the property; (x) competition from existing manufactured home
communities and the potential for the construction of new communities in the
area; and (xi) the replacement cost of the property.
- 14 -
Expansion of Existing Communities
The Company also seeks to increase the number of homesites and earnings
generated from its existing portfolio of manufactured home communities and from
future acquisitions by expanding the number of sites available to be leased to
residents if justified by local market conditions and permitted by zoning and
other applicable laws. As of July 31, 1998, the Company has an interest in 11
communities with 802 sites ready for homes and 1,960 sites available for future
development.
Properties
The manufactured home communities in which the Company has interests are
primarily located in Florida and Arizona. The following table sets forth certain
information as of July 31, 1998, with respect to the Company's communities and
principal markets:
Average
Monthly
Developed Rent RV Sites Ready Sites Available
Community Location Homesites Occupancy (1) per Site Sites for Homes for Development
- --------------------------------------------------------------------------------------------------------------------------------
Owned and Participating Mortgage Communities
Cardinal Court Largo, FL 138 98% $250 -- -- --
Forest View Homosassa, FL 185 98 213 -- 126 (2) --
Marina Dunes Marina, CA -- -- -- 65 -- --
Park Royale Pinellas Park, FL 259 94 315 -- 50 (2) --
Pinewood St. Petersburg, FL 220 98 273 -- -- --
Pleasant Living Riverview, FL 244 100 251 -- -- --
Stonebrook Homosassa, FL 120 97 227 -- 98 (2) --
Sun Valley Tarpon Springs, FL 261 100 328 -- -- --
Westwind I Dunedin, FL 195 99 343 -- -- --
Westwind II Dunedin, FL 189 99 362 -- -- --
Mullica Woods Egg Harbor City, NJ 90 100 422 -- -- --
Salem Farm Bensalem, PA 28 100 395 -- -- --
Serendipity Ft. Myers, FL 338 98 263 -- -- --
Brentwood West Mesa, AZ 350 100 274 -- -- --
Gulfstream Harbor Orlando, FL 379 100 306 -- 3 171
Gulfstream Harbor II Orlando, FL 286 100 299 -- 22 --
Caribbean Cove Orlando, FL 255 100 267 -- 31 --
Apache Acres Apache Junction, AZ (2) 28 100 200 98 -- --
Blue Star Apache Junction, AZ (2) 28 100 200 125 -- --
Lost Dutchman Apache Junction, AZ (2) 125 100 236 96 -- --
Sun Valley Apache Junction, AZ (2) 268 100 227 -- -- --
Brentwood Hudson, FL (2) 70 89 186 -- 76 74
Casa del Mar Punta Gorda, FL (2) 105 100 221 -- 138 212
Royal Palm Haines City, FL (2) 219 99 200 -- 67 175
Savanna Club Port St. Lucie, FL (2) 3 100 215 -- -- 1,328
Sun Lake Grand Island, FL (2) 212 100 285 -- 191 --
================================================================================
4,595 99% $269 384 802 1,960
================================================================================
<FN>
(1) Excludes recreational vehicle sites, which are leased on a seasonal basis.
(2) The Company holds notes receivable secured by the communities. The notes
earn interest and participate in profits from the communities.
</FN>
- 15 -
Number of Sites
---------------------------------------------------------------
Available for
Number of Ready for Future Recreational
Communities Developed Homes Development Vehicles
----------- --------- ----- ----------- --------
Florida 18 3,678 802 1,960 --
Arizona 5 799 -- -- 319
New Jersey 1 90 -- -- --
Pennsylvania 1 28 -- -- --
California 1 -- -- -- 65
--- ----- ---- ------ ----
Total 26 4,595 802 1,960 384
=== ===== ==== ====== ====
Taxation of the Company
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), and the Company intends to operate in such a
manner. The Company's current qualification as a REIT depends on its ability to
meet the various requirements imposed by the Code, through actual operating
results, distribution levels and diversity of stock ownership. As indicated
above (see "REIT Status"), the Company was not in compliance with one of the
technical requirements for maintaining its status as a REIT as a result of a
transaction that was incorrectly documented in November 1997. In June 1998, the
Internal Revenue Service confirmed that the Company's status as a REIT has not
been terminated as a result of the incorrect documentation of the transaction in
1997.
If the Company qualifies for taxation as a REIT, it will generally not be
subject to federal corporate income tax on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a corporation. If the Company fails to qualify as a REIT in any
taxable year, its taxable income will be subject to federal income tax at
regular corporate rates (including any applicable alternative minimum tax). The
Company has a NOL carryover of approximately $95 million that could be used in
the event that the Company fails to qualify as a REIT. Even if the Company
qualifies as a REIT, it may be subject to certain state and local income and
other taxes and to federal income and excise taxes on its undistributed income.
If in any taxable year the Company fails to qualify as a REIT and incurs a tax
liability, the Company might need to borrow funds or liquidate certain
investments in order to pay the applicable tax and the Company would not be
compelled under the Code to make distributions. Unless entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. Although the Company currently intends to operate in a
manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause the Company to fail to
qualify as a REIT or may cause the Board of Directors to revoke the REIT
election.
The Company and its stockholders may be subject to state or local taxation in
various jurisdictions, including those in which it or they transact business or
reside. The state and local tax treatment of the Company and its stockholders
may not conform to the federal income tax treatment.
NOL and Capital Loss Carryovers
At June 30, 1998, the Company's NOL carryover was approximately $95,000,000 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
- 16 -
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
In February 1998, the Company announced that it was changing the date on which
its quarterly dividends are declared from the last month of the quarter to the
first month of the subsequent quarter. This change was made to allow the
dividend to be based on actual results instead of estimated results.
Accordingly, no dividend was declared during the first quarter of 1998. In April
1998, AIC declared a $0.25 per share dividend on its Common Stock for the first
quarter of 1998 totaling $1,279,000, which was paid in May 1998. Similarly, the
Operating Partnership declared and paid a $0.25 per OP Unit distribution to
holders of OP Units. In July 1998, AIC and the Operating Partnership each
declared a $0.25 per share dividend and per OP Unit distribution, as applicable,
for the second quarter payable in August 1998. During the three and six months
ended June 30, 1997, AIC declared and paid $0.30 and $0.775, respectively, per
share dividends on its Common Stock, totaling $1,514,000 and $3,874,000,
respectively. During the three months and six months ended June 30, 1997, the
Operating Partnership declared a $0.30 per OP Unit distribution as the Operating
Partnership did not exist during the first quarter of 1997.
Acquisition of Manager
Prior to November 1997, the Company's daily activities were performed by
Financial Asset Management LLC (the "Manager" or "FAM") pursuant to an annual
management agreement (the "AIC Management Agreement"). The Manager provided all
personnel and related overhead necessary to conduct the Company's activities in
exchange for various fees provided for in the AIC Management Agreement. In
addition, the Manager provided similar services to CAX pursuant to a separate
agreement (the "CAX Management Agreement") (collectively, the "Management
Agreements"). In November 1997, the Company's stockholders approved the
acquisition of the Manager's assets and operations for a purchase price of
$11,692,000, which was paid by issuing 676,696 OP Units. In addition, FAM will
be entitled to an additional 240,000 OP Units if the Company achieves certain
performance goals, including investment and share price targets, by June 1999.
FAM was acquired in September 1996 by an investor group involving Terry
Considine, Thomas L. Rhodes and Bruce D. Benson. Mr. Considine is Chairman of
the Board of Directors and Chief Executive Officer of both the Company and CAX.
Mr. Rhodes is Vice Chairman and Mr. Benson is a director of both companies.
As a result of the Company's November 1997 acquisition, the AIC Management
Agreement was cancelled and the fees formerly payable by the Company to the
Manager ceased. The employees of the Manager employed to perform the services
under the AIC Management Agreement and the CAX Management Agreement are now
employed by the Company. Certain officers and directors of the Company also
serve as officers, directors or both of CAX.
As a result of the Company's purchase of the CAX Management Agreement, the
Company manages CAX's daily activities in exchange for various fees. The CAX
Management Agreement has been extended through December 31, 1998 and provides
for the following fees: (i) Acquisition Fees equal to 0.5% of the cost of each
asset acquired by CAX; (ii) Base Fees equal to 1% per annum of CAX's "average
invested assets," and (iii) Incentive Fees equal to 20% of the amount by which
CAX's REIT income exceeds the amount calculated by multiplying CAX's "average
net worth" by the "Ten Year United States Treasury rate" plus 1%. The Company
does not expect to receive significant fees from the CAX Management Agreement
until CAX begins to invest its funds in real estate assets. Although there can
- 17 -
be no assurance of when CAX will make such investments or the amount thereof,
the Company believes that CAX will begin making such investments in 1998.
RESULTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 1998
Comparison of three and six months ended June 30, 1998 to three and six months
ended June 30, 1997
Due to the change in the Company's business from investing in non-agency MBS
bonds to owning and managing manufactured home communities, the results of
operations for the first half of 1998 are not comparable to the first half of
1997.
Rental Property and Service Operations
During the three and six months ended June 30, 1998, the Company earned
$2,108,000 and $3,852,000 of rental and other property revenues and $764,000 and
$1,547,000 of interest on participating mortgages and incurred $807,000 and
$1,600,000 of property operating expenses and $495,000 and $888,000 of
depreciation related to the acquired communities, respectively. In addition,
during the same periods, the Company earned $62,000 and $139,000 of property
management fees and other income (including $9,000 and $12,000 of fees earned
under the CAX Management Agreement) less $22,000 and $46,000 of expenses and
$689,000 and $1,516,000 of amortization related to the management contracts
acquired (including the CAX Management Agreement).
The Company's first acquisition of interests in manufactured home communities
and property management contracts was in May 1997. During the three and six
months ended June 30, 1997, the Company earned $568,000 of rental and other
property revenues and incurred $243,000 of property operating expenses and
$130,000 of depreciation. During the same periods, the Company earned $23,000 of
property management fees and other income, less $15,000 of expenses and $19,000
of amortization related to the management contracts acquired.
CAX
Income from the Company's 27% ownership interest in CAX for the three and six
months ended June 30, 1998 was $266,000 and $534,000, respectively, compared to
$484,000 and $948,000, respectively, for the same periods of 1997. CAX reported
to the Company that the decrease in income is primarily because of the
restructuring of CAX's portfolio of CMBS bonds. The proceeds from the
restructuring of CAX's CMBS bond portfolio were invested in highly-liquid,
short-term investments during the first half of 1998 which earned lower returns
than the CMBS bonds.
Non-agency MBS Bonds
Through March 1997, the Company owned a portfolio of unrated credit support debt
interests in non-conforming residential mortgage loan securitizations known as
"non-agency MBS bonds." In February 1997, the Company decided to restructure its
asset base in order to reduce risk associated with the Company's non-agency MBS
bond portfolio and attempt to maximize long-term, risk-adjusted returns to
stockholders. In March 1997, the Company contributed its portfolio of non-agency
MBS bonds into an owner trust in a structured transaction in which the Company
- 18 -
received $67.7 million cash and retained a small equity interest in the trust.
Income from the Company's non-agency MBS bonds decreased to $50,000 during the
first six months of 1998 compared with $2,450,000 for the same period in 1997
primarily due to the resecuritization of the bonds in March 1997. The revenues
from the non-agency MBS bonds subsequent to March 1997 represent income from the
retained equity interest. No income was recognized from the retained equity
interest during the second quarter of 1998, and the Company anticipates
receiving minimal, if any, additional income in the future from such retained
interest.
Management Fees
The Company incurred $97,000 and $374,000 of management fees to the Manager
during the three and six months ended June 30, 1997, respectively. There were no
management fees in 1998 due to the Company's acquisition of its management
agreement in November 1997.
General and Administrative Expenses
General and administrative expenses were $336,000 and $658,000 for the three and
six months ended June 30, 1998, respectively, compared to $87,000 and $423,000,
respectively for the same periods in 1997. The variances between the periods are
due to salary, rent and other general and administrative expenses incurred by
the Company as a result of its acquisition of the Manager's assets and
operations and costs incurred by the Company in evaluating potential
acquisitions not completed by the Company.
Interest and Other Income
Interest and other income for the three and six months ended June 30, 1998 was
$219,000 and $552,000, respectively, compared to $795,000 and $847,000,
respectively, for the same periods in 1997. The variances between the periods
are due to the cash balances from the restructuring of the non-agency MBS bonds.
The proceeds from the restructuring were temporarily invested until used to
acquire manufactured home communities. In May 1997, the Company used $22,871,000
cash to acquire interests in its first eight communities, and it continued to
use its cash during the remainder of 1997 and first six months of 1998 to
acquire additional interests in communities. In June 1998, the Company completed
the redeployment of the proceeds from the restructuring of its bond portfolio
and, therefore, does not expect to receive significant interest income in the
future. The average interest rate on the Company's temporary investments during
both the three and six months ended June 30, 1998 was 5.3% compared to 5.5% and
4.8%, respectively, for the same periods in 1997.
Interest Expense
Interest expense for the three and six months ended June 30, 1998, was $268,000
and $476,000, respectively, compared to $55,000 and $81,000, respectively, for
the same periods of 1997. Included in the 1998 interest expense is interest on
the secured notes payable assumed with the acquisition of four manufactured home
communities. In addition, the Company incurred $62,000 of interest expense on
$7,000,000 of secured short-term borrowings that occurred in June 1998. Interest
expense of $55,000 during the three and six months ended June 30, 1997, was on
the secured notes payable assumed with the acquisition of two manufactured home
communities. In addition, $26,000 of interest expense during the six months
ended June 30, 1997 was on $3,000,000 of secured short-term borrowings that were
outstanding during a portion of the first quarter of 1997.
- 19 -
Gain on Restructuring of Bonds
In connection with the resecuritization of the non-agency MBS bonds, the Company
realized net proceeds of $69,743,000 before related management fees. A gain of
$7,359,000 was recognized during the first quarter of 1997, reduced by both
$1,472,000 of Incentive Fees related to the gain and an additional fee of
$600,000 incurred in exchange for the Manager agreeing to continue as a loss
mitigation advisor on the non-agency MBS bonds.
Comparison of quarter ended June 30, 1998 to quarter ended March 31, 1998
Rental Property and Service Operations
Income from rental property operations was $1,570,000 during the second quarter
of 1998 compared to $1,341,000 during the first quarter of 1998. The increase in
income from rental property operations was due to properties acquired in the
second quarter of 1998 and a full quarter of earnings on properties acquired
during the first quarter of 1998. The Company recognized a loss from service
operations of $649,000 during the second quarter of 1998 compared to a loss
during the first quarter of 1998 of $774,000. The decreased loss was primarily
due to the write off during the first quarter of 1998 of the remaining cost of
property management contracts on manufactured home communities which the Company
acquired during such period.
CAX
Income from the Company's 27% ownership interest in CAX for the first two
quarters of 1998 was comparable because CAX was invested in short-term
investments during both quarters.
Non-agency MBS Bonds
Income from the Company's non-agency MBS bonds decreased to $0 during the second
quarter of 1998 compared with $50,000 for the first quarter of 1998. The
revenues from the non-agency MBS bonds represent income from the Company's small
retained equity interest in the trust involved in the 1997 resecuritization of
the Company's bond portfolio. Because of credit losses on the underlying
collateral, the Company anticipates minimal, if any, earnings from the retained
equity interest in the future.
General and Administrative Expenses
General and administrative expenses for the first two quarters of 1998 were
comparable.
Interest and Other Income
Interest and other income decreased to $219,000 during the second quarter of
1998 compared with $333,000 during the first quarter of 1998 because of the
Company's use of $19 million cash to purchase manufactured home communities
during the first half of 1998. Minimal interest income is expected in the future
due to the Company's reduced cash balances.
- 20 -
Interest Expense
Interest expense increased to $268,000 during the second quarter of 1998
compared to $208,000 during the first quarter due to interest incurred in June
1998 on $7,000,000 of secured short-term financing used to acquire a
manufactured home community. Interest expense is expected to increase in the
future as the Company uses debt to acquire additional communities.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company has cash and cash equivalents of $1,971,000.
The Company's principal demands for liquidity include normal operating
activities, payments of principal and interest on outstanding debt, acquisitions
of or additional investments in properties, dividends paid to stockholders and
distributions made to limited partners in the Operating Partnership.
Net cash provided by operating activities was $2,374,000 during the six months
ended June 30, 1998, compared to $1,059,000 during the same period in 1997. The
increase was primarily a result of higher earnings from rental property
operations partially offset by earnings from the non-agency MBS bonds in 1997.
Net cash used in investing activities was $27,384,000 during the first half of
1998 primarily related to the acquisition of manufactured home communities.
During the first half of 1997, net cash provided by investing activities of
$48,358,000 included $69,743,000 from the restructuring of the Company's bond
portfolio offset by $22,871,000 used to acquire communities.
Net cash provided by financing activities was $5,179,000 during the first six
months of 1998 compared to $6,891,000 of net cash used in financing activities
for the same period in 1997. The variance was primarily due to the borrowing and
repayment of secured short-term financings and the timing of the payment of
dividends on Common Stock in 1998 (see "Dividend Distributions").
Secured notes payable at June 30, 1998, consist of $4,665,000 of notes which
bear 8.25% interest and $5,791,000 of notes which bear 7.5% interest. All such
notes mature in October 2000. The notes are secured by four manufactured home
communities and were assumed by the Company in connection with the acquisition
of such communities. The secured notes payable require escrow payments for the
payment of property taxes. At June 30, 1998, $217,000 was held in such escrow
accounts.
The Company had a $1,000,000 unsecured line of credit with a bank that expired
July 31, 1998. Advances under this line bear interest at the prime rate. At June
30, 1998 and December 31, 1997, no advances were outstanding on this line of
credit.
The Company expects to meet its long-term liquidity requirements through
long-term, secured borrowings, the issuance of OP Units and equity securities
and cash generated by operations.
YEAR 2000 COMPLIANCE
Management believes that the cost of modification or replacement of its
accounting and reporting software and hardware that is not compliant with Year
2000 requirements will not be material to the Company's financial position or
results of operations.
- 21 -
PART II
OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's 1998 Annual Meeting of Stockholders was held on June 30, 1998. At
the meeting, Messrs. Thomas L. Rhodes and Elliot H. Kline were elected as Class
III Directors to terms expiring in 2001. There were 4,468,931 and 4,473,149
votes cast "for" the election of Messrs. Rhodes and Kline, respectively, and
141,092 and 136,874, respectively, votes were withheld. In addition, the
stockholders approved the Asset Investors Corporation 1998 Stock Incentive Plan.
Of the votes cast, 2,017,038 were cast "for" approval of the plan and 897,958
were cast "against" approval of the Plan with 38,654 abstentions.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
3.1 Certificate of Incorporation of Asset Investors Corporation (the
"Registrant"), as amended (incorporated herein by reference to
Exhibit 3.1(b) to the Quarterly Report on Form 10-Q of the
Registrant for the quarter ended June 30, 1989, Commission File
No. 1-9360, filed on August 14, 1989).
3.2 By-laws of the Registrant, as amended and restated (incorporated
herein by reference to Exhibit 3.3 to the Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31,
1993, Commission File No. 1-9360 filed March 31, 1994).
3.2(a) June 21, 1994 Amendment to the By-laws of the Registrant
(incorporated herein by reference to Exhibit 3.3(b) to the
Annual Report on Form 10-K of the Registrant for the fiscal year
ended December 31, 1994, Commission File No. 1-9360 filed March
30, 1995).
3.2(b) March 15, 1995 Amendment to the By-laws of the Registrant
(incorporated herein by reference to Exhibit 3.3(c) to the
Annual Report on Form 10-K of the Registrant for the fiscal year
ended December 31, 1994, Commission File No. 1-9360 filed March
30, 1995).
3.2(c) January 14, 1997, Amendment to the By-laws of the Registrant
(incorporated herein by reference to Exhibit 3.2(c) to the
Annual Report on Form 10-K of the Registrant for the fiscal year
ended December 31, 1996, Commission File No. 1-9360, filed on
March 24, 1997).
10.3 1998 Stock Incentive Plan of the Registrant
27 Financial Data Schedule
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(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by the
Registrant during the period covered by this Quarterly Report
on Form 10-Q and during July 1998:
Amendment No. 1 to Form 8-K dated February 27, 1998, reporting
the acquisition of manufactured home community assets which
included: (i) Statement of Excess of Revenues Over Specific
Operating Expenses of the Salem Farm Manufactured Home
Community for the year ended December 31, 1997; and (ii)
Statement of Excess of Revenues Over Specific Operating
Expenses of the Mullica Woods Adult Community for the year
ended December 31, 1997.
Form 8-K dated May 29, 1998, reporting the acquisition of
manufactured housing community assets and related Amendment
No. 1 to Form 8-K dated May 29, 1998, reporting the
acquisition of manufactured home community assets which
included: (i) Statement of Excess of Revenues Over Specific
Operating Expenses of the Brentwood West Manufactured Home
Community for the year ended December 31, 1997 (audited) and
the period from January 1, 1998 to March 31, 1998 (unaudited);
and (ii) Statement of Excess of Revenues Over Specific
Operating Expenses of the Serendipity Manufactured Home
Community for the year ended December 31, 1997 (audited) and
the period from January 1, 1998 to March 31, 1998 (unaudited).
Form 8-K dated July 16, 1998, reporting the acquisition of
manufactured housing community assets.
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: August 14, 1998 By /s/David M. Becker
-------------------------
David M. Becker
Chief Financial Officer
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