1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-12486
Associated Estates Realty Corporation
(Exact name of registrant as specified in its charter)
Ohio 34-1747603 5025 Swetland Court, 44143-1467
Richmond Hts., Ohio (Zip Code)
(State or other (I.R.S. Employer (Address of principal
jurisdiction of Identification executive offices)
incorporation or Number)
organization)
Registrant's telephone number, including area code (216) 261-5000
(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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common as of the latest practicable date.
17,072,436 shares outstanding as of August 8, 1997.
<page 2>
ASSOCIATED ESTATES REALTY CORPORATION
INDEX
PART I - FINANCIAL INFORMATION Page
Financial Statements
ITEM 1
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the six and
three month periods ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the six
month period ended June 30, 1997 and 1996 5
Notes to Financial Statements 6
Management's Discussion and Analysis of Financial
ITEM 2 Condition and Results of Operations 11
PART II - OTHER INFORMATION
Submission of Matters to a Vote of Security-Holders 23
ITEM 4
Exhibits and Reports on Form 8-K 23
ITEM 6
SIGNATURES 24
<page 3>
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
(Unaudited)
ASSETS
Real estate assets:
Land $ 51,386,948 $ 44,241,900
Buildings and improvements 485,745,568 430,920,893
Furniture and fixtures 22,779,442 20,286,700
559,911,958 495,449,493
Less: accumulated depreciation (120,632,856) (112,102,829)
439,279,102 383,346,664
Construction in progress (including land) 23,234,257 18,516,982
Real estate, net 462,513,359 401,863,646
Cash and cash equivalents 235,399 1,286,959
Restricted cash and investments 5,533,032 5,625,003
Accounts and notes receivable:
Rents 1,817,544 1,569,907
Affiliates 10,954,869 1,784,297
Deferred charges and prepaid expenses 6,215,872 5,616,394
$ 487,270,075 $ 417,746,206
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured debt $ 60,632,260 $ 69,024,253
Unsecured debt 230,820,507 148,788,707
Total indebtedness 291,452,767 217,812,960
Accounts payable and accrued expenses 14,038,011 14,361,609
Dividends payable 7,938,683 6,895,071
Resident security deposits 4,638,534 4,154,418
Funds held for non-owned properties 1,628,100 1,571,219
Accrued interest 3,217,117 2,521,644
Accumulated losses and distributions of equity
investees in excess of investment and advances 12,534,844 12,413,087
Total liabilities 335,448,056 259,730,008
Commitments and contingencies
Shareholders' equity:
Preferred shares, Class A cumulative, without par
value; 3,000,000 shares authorized; 225,000 issued
and outstanding 56,250,000 56,250,000
Common shares, without par value, $.10 stated value;
50,000,000 shares authorized; 15,322,436 and
15,322,381 issued and outstanding at June 30, 1997
and December 31, 1996, respectively 1,532,244 1,532,238
Paid-in capital 133,058,739 133,073,035
Accumulated dividends in excess of net income (39,018,964) (32,839,075)
Total shareholders' equity 151,822,019 158,016,198
$ 487,270,075 $ 417,746,206
The accompanying notes are an integral part
of these financial statements
<page 4>
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months For the six months
ended June 30 ended June 30,
1997 1996 1997 1996
Revenues
Rental $24,943,653 $ 21,852,215 $48,103,594 $ 42,412,081
Property management fees 81,829 100,787 182,738 192,867
Property management fees-affiliates 851,591 856,957 1,731,487 1,719,071
Painting service 140,206 128,372 262,638 202,148
Painting service-affiliates 207,204 410,585 593,216 618,087
Other 599,216 77,371 748,365 206,364
26,823,699 23,426,287 51,622,038 45,350,618
Expenses
Property operating and maintenance 10,480,847 8,916,564 19,670,888 17,431,273
Depreciation and amortization 4,533,647 3,784,012 8,862,484 7,333,967
Painting services 293,207 473,710 703,678 732,090
General and administrative 1,586,003 1,586,063 3,125,800 2,878,388
Interest expense 4,835,372 3,892,370 8,897,201 7,392,651
Total expenses 21,729,076 18,652,719 41,260,051 35,768,369
Income before equity in net income of
joint ventures and extraordinary
item 5,094,623 4,773,568 10,361,987 9,582,249
Equity in net income of joint ventures 262,319 150,638 220,482 133,134
Income before extraordinary item 5,356,942 4,924,206 10,582,469 9,715,383
Extraordinary item-gain on early
extinguishment of debt (1,043,446) - (1,043,446) -
Net income $ 6,400,388 $ 4,924,206 $11,625,915 $ 9,715,383
Net income applicable to common shares $ 5,029,284 $ 3,553,101 $ 8,883,705 $ 6,973,173
Per common share:
Net income before extraordinary item $ .26 $ .26 $ .51 $ .50
Net income $ .33 $ .26 $ .58 $ .50
Dividends paid $ .465 $ .45 $ .93 $ .90
Weighted average number of common
shares outstanding 15,322,415 13,872,381 15,322,401 13,872,381
The accompanying notes are an integral part
of these financial statements
5
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30,
(UNAUDITED)
1997 1996
Cash flow from operating activities:
Net income $ 11,625,915 $ 9,715,383
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 8,862,484 7,333,967
Gain on extinguishment of debt (1,043,446) -
Equity in net income of joint ventures (220,482) (133,134)
Earnings distributed from joint ventures 262,840 181,239
Net change in - Accounts and notes receivable (247,637) 268,921
- Accounts and notes receivable-affiliates (5,828,572) 55,164
- Accounts payable and accrued expenses (1,690,705) (1,182,711)
- Other operating assets and liabilities 1,514,055 109,971
- Restricted cash 91,971 (419,437)
- Funds held for non-owned properties 56,881 (2,386,836)
Total adjustments 1,757,389 3,827,144
Net cash flow provided by operating activities 13,383,304 13,542,527
Cash flow from investing activities:
Loans receivable - affiliate (3,342,000) -
Real estate acquired or developed (net of liabilities assumed) (66,415,525) (47,521,197)
Fixed asset additions (1,157,807) (210,832)
Distributions from joint ventures 79,399 27,116
Net cash flow used for investing activities (70,835,933) (47,704,913)
Cash flow from financing activities:
Principal payments on mortgage notes (16,491,993) (2,284,309)
Proceeds from mortgage notes 8,100,000 -
Proceeds from senior and medium-term notes 30,000,000 7,500,000
Line of Credit borrowings 181,400,000 106,300,000
Line of Credit repayments (129,400,000) (63,050,000)
Deferred financing and offering costs (445,994) (605,789)
Common share dividends paid (14,019,982) (12,207,696)
Preferred share dividends paid (2,742,210) (2,742,210)
Exercise of stock options 1,248 -
Net cash flow provided by financing activities 56,401,069 32,909,996
Decrease in cash and cash equivalents (1,051,560) (1,252,390)
Cash and cash equivalents, beginning of period 1,286,959 2,848,285
Cash and cash equivalents, end of period $ 235,399 $ 1,595,895
The accompanying notes are an integral part
of these financial statements
6
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business
Associated Estates Realty Corporation (the "Company") is a
self-administered and self-managed real estate investment trust
("REIT") which specializes in the acquisition, development,
ownership and management of multifamily properties in the Great
Lakes Region. At June 30, 1997, the Company owned or was a joint
venture partner in 85 multifamily properties containing 16,818
suites. Additionally, the Company managed 40 non-owned
properties, 32 of which were multifamily properties containing
7,052 suites and eight of which were commercial properties
containing an aggregate of approximately 825,000 square feet of
gross leasable area. Through special purpose entities,
collectively referred to as the "Service Companies", the Company
provides to both owned and non-owned properties, management,
painting and computer services as well as mortgage origination
and servicing.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of the Company, its wholly owned subsidiaries, which
own certain of the real estate properties, and the Service
Companies. The Company holds a preferred share interest in the
Service Companies which entitles it to receive 95% of the
economic benefits from operations and which is convertible into a
majority interest in the voting common shares. The outstanding
voting common shares of these Service Companies are held by an
executive officer of the Company. The Service Companies are
consolidated because, from a financial reporting perspective, the
Company is entitled to virtually all economic benefits and has
operating control.
One property included in the consolidated financial
statements is 33-1/3% owned by third party investors. As this
property has an accumulated deficit, no recognition of the third
party interest is reflected in the financial statements since it
is the Company's policy to recognize minority interest only to
the extent that the third party's investment and accumulated
share of income exceeds distributions and its share of
accumulated losses. Investments in joint ventures, which are 50%
or less owned by the Company, are presented using the equity
method of accounting. Since the Company intends to fulfill its
obligations as a partner in the joint ventures, the Company has
recognized its share of losses and distributions in excess of its
investment.
All significant intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Reclassifications
Certain reclassifications have been made to the 1996
financial statements to conform to the 1997 presentation.
7
2. DEVELOPMENT AND ACQUISITION OF MULTIFAMILY PROPERTIES
Construction in progress, including the cost of land, for
the development of multifamily properties was $23,234,257 and
$18,516,982 at June 30, 1997 and December 31, 1996, respectively.
The Company capitalizes interest costs on funds used in
construction, real estate taxes and insurance from the
commencement of development activity through the time the
property is ready for leasing. Interest, real estate taxes and
insurance aggregating approximately $913,000 and $1,394,800 were
capitalized at June 30, 1997 and December 31, 1996, respectively.
The following schedule details construction in progress at June
30, 1997:
Construction in Placed in Construction
(dollars in thousands) Number Progress Service Costs
of Land Building through Incurred Scheduled
Property Suites Cost Cost 6/30/97 to Date Completion
AURORA, OHIO
The Residence at
Barrington-Phase I 168 $ 1,179 $ 8,220 $ 3,043 $ 12,442 Late 1997
The Residence at
Barrington-Phase II 120 982 - - 982 Winter 1998
288 2,161 8,220 3,043 13,424
ANN ARBOR, MICHIGAN
Arbor Landings Apartments II 160* 650 232 - 882 Summer 1998
COLUMBUS, OHIO
Bradford at Easton 324 967 6,059 9,593 16,619 Fall 1997
FENTON, MICHIGAN
Georgetown Park Apartments III 120* 350 102 - 452 1998*
GRAND RAPIDS, MICHIGAN
Aspen Lakes II 114* 402 35 - 437 1998*
STREETSBORO, OHIO
The Village of Western Reserve 108 691 1,778 - 2,469 Late 1997
WESTLAKE, OHIO
Westlake 300* 523 66 - 589 1999*
Other 271 408 590 - 998 Various
1,685 $6,152 $ 17,082 $12,636 (1) $ 35,870
<FN>
*Estimated
(1) Including land of $2,244
</FN>
During the period January 1, 1997 through June 30, 1997, the
Company acquired, in separate purchase transactions, five
multifamily properties containing an aggregate of 980 suites and
one parcel of land consisting of 10 acres (together the "Acquired
Properties") for an aggregate purchase price of $53.5 million, of
which $2.6 million represented liabilities assumed. The Acquired
Properties are located in Indianapolis, Indiana; and Cincinnati,
Columbus and Toledo, Ohio. The purchase price of the Acquired
Properties has been financed primarily with cash on hand made
available through the line of credit.
8
3. SHAREHOLDERS' EQUITY
The following table summarizes the changes in shareholders'
equity since December 31, 1996:
Class A Accumulated
Cumulative Common Dividends
Preferred Shares Paid-In In Excess Of
Shares (at $.10 Capital Net Income Total
stated
value)
Balance, Dec. 31, 1996 $ 56,250,000 $1,532,238 $133,073,035 $(32,839,075) $158,016,198
Net income - - - 11,625,915 11,625,915
Exercise of stock
options - 6 1,242 - 1,248
Additional costs re-
lating to common
stock offering - - (15,538) - (15,538)
Common share
dividends declared - - - (15,063,594) (15,063,594)
Preferred share
dividends declared - - - (2,742,210) (2,742,210)
Balance, June 30, 1997 $56,250,000 $1,532,244 $133,058,739 $(39,018,964) $151,822,019
4. SECURED DEBT
Conventional Mortgage Debt
Conventional mortgages payable include nonrecourse, fixed
and variable rate, project specific loans to the Company which
are collateralized by the associated real estate and resident
leases. Mortgages payable are generally due in monthly
installments of principal and/or interest and mature at various
dates through August 1, 2018. The balance of the conventional
mortgages was $29.6 million and $37.7 million at June 30, 1997
and December 31, 1996, respectively. Three of the four
conventional mortgages have a fixed rate and the remaining
mortgage has a variable rate.
Federally Insured Mortgage Debt
Federally insured mortgage debt is insured by HUD pursuant
to one of the mortgage insurance programs administered under the
National Housing Act of 1934 (one property is funded through
Industrial Development Bonds). These government-insured loans
are nonrecourse to the Company. Payments of principal, interest
and HUD mortgage insurance premiums are made in equal monthly
installments and mature at various dates through August 1, 2028.
The balance of the federally insured mortgages was $31.0 million
and $31.3 million at June 30, 1997 and December 31, 1996,
respectively. Seven of the eight federally insured mortgages
have a fixed rate and the remaining mortgage has a variable rate.
Under certain of the mortgage agreements, the Company is
required to make escrow deposits for taxes, insurance and
replacement of project assets.
5. UNSECURED DEBT
Senior Notes
Senior Notes with a principal balance of $75 million accrue
interest at 8.38% and mature in 2000. Issued at an effective
interest rate of 8.48%, the balance of the $75 million senior
notes, net of unamortized discounts, was $74.8 million at June
30, 1997 and December 31, 1996. Senior Notes with a principal
balance of $10 million accrue interest at 7.10% and mature in
2002.
9
Medium-Term Notes Program
The Company has issued nine Medium-Term Notes (the "MTN's")
in the aggregate amount of $72.5 million and $42.5 million at
June 30, 1997 and December 31, 1996, respectively under a $75
million MTN Program. The principal amounts of these MTN's range
from $2.5 million to $15.0 million and bear interest ranging from
6.60% to 7.82% over terms ranging from five to 30 years. The
holders of two MTN's with stated terms of 30 years each may
request repayment five and seven years from the issue date of the
respective MTN. The weighted average interest rate of the nine
MTN's is 7.19%. Six of the MTN's in the aggregate amount of
$42.5 million were issued in 1996. Three MTN's in the aggregate
amount of $30 million were issued in 1997.
The Company has replaced the $75 million MTN Program with a
MTN Program that provides for the issuance from time to time of
up to $102.5 million of MTN's due nine months or more from the
date of issue. These MTN's may be subject to redemption at the
option of the Company or repayment at the option of the holder
prior to the stated maturity date of the MTN. These MTN's can
bear interest at fixed rates or at floating rates and can be
issued in minimum denominations of $1,000. At June 30, 1997,
there were no MTN's issued under the $102.5 million MTN Program.
Line of Credit
The Company utilizes a $75 million unsecured credit facility
(the "Line of Credit"). The Line of Credit includes certain
restrictive covenants which, among others, requires the Company
to (i) maintain a minimum level of net worth, (ii) limit
dividends to 90% of Distributable Cash Flow, as defined in the
agreement, (iii) restrict the use of its borrowings, and (iv)
maintain certain debt coverage ratios. The Line of Credit
provides for a scaled reduction in the LIBOR, prime rate and
commitment fee margins based on the Company's credit ratings.
During the quarter ending June 30, 1997, the Company negotiated a
reduction in pricing on its Line of Credit. For the six months
ended June 30, 1997, based on the Company's present credit
ratings, the LIBOR margin was 125 basis points, fixed in
increments of 30, 60, 90, 120 or 180 days or, alternatively,
borrowings are at prime rate. An annual commitment fee of 15 to
25 basis points on the average daily unused amount of the
facility was paid quarterly in arrears. The Line of Credit
expires in September 1997 and the Company has the option to
extend the facility for an additional one year period. At June
30, 1997, $73.5 million was drawn on the Line of Credit.
6. RELATED PARTY TRANSACTIONS
At June 30, 1997, the Company had two notes receivable of
equal amounts from the Chairman, President and Chief Executive
Officer aggregating $3,342,000 included in accounts and notes
receivables - affiliates. The notes were entered into on May 23,
1997 and bear interest, payable quarterly, at the LIBOR rate for
a one month interest period with principal due May 1, 2002. One
of the notes is collateralized by 150,000 of the Company's common
shares.
7. PREFERRED AND COMMON SHARES
On December 11, 1996, the Company completed an offering of
1,300,000 common shares at $22.375 per share. On December 17,
1996, the underwriters exercised an option to purchase an
additional 150,000 shares at $22.375 per share. The net proceeds
of approximately $30.7 million were applied to reduce debt.
As of December 31, 1996, 2,250,000 Depositary Shares, each
representing 1/10 of a share of the Company's 9.75% Class A
Cumulative Redeemable Preferred Shares (the "Perpetual Preferred
Shares"), were issued and outstanding. Each Depositary Share has
a $25 liquidation preference ($56.3 million in the aggregate).
Dividends on the Perpetual Preferred Shares are cumulative from
the date of issue and are payable quarterly. Except in certain
circumstances relating to the preservation of the Company's
status as a REIT, the Perpetual Preferred Shares are not
redeemable prior to July 25, 2000. On and after July 25, 2000,
the Perpetual Preferred Shares will be redeemable for cash at the
option of the Company.
10
The Company is authorized to issue 3,000,000 Class B
Cumulative Preferred Shares, without par value, and 3,000,000
Noncumulative Preferred Shares, without par value.
8. EARNINGS PER SHARE
Net income per share has been computed by dividing common
share dividends paid or declared for the period by the weighted
average number of common shares outstanding plus the
undistributed net income applicable to common shareholders as
appropriate, divided by the weighted average number of common
shares outstanding. Common share equivalents were excluded from
the earnings per share calculation as they were not dilutive.
The Company is required to adopt Statement of Financial
Accounting Standard No. 128 ("SFAS 128"), Earnings Per Share as
of December 31, 1997; earlier application is not permitted. SFAS
128 specifies the computation, presentation, and disclosure
requirements for earnings per share. The Company does not
believe that the adoption of SFAS 128 will have a material effect
on the Company's method of calculation or presentation of
earnings per share amounts.
9. PRO FORMA CONDENSED FINANCIAL INFORMATION (UNAUDITED)
The following unaudited supplemental pro forma operating
data for 1997 is presented to reflect, as of January 1, 1997, the
effects of four property acquisitions completed in 1997. The
following unaudited supplemental pro forma operating data for
1996 is presented to reflect, as of January 1, 1996, the effects
of: (i) the six property acquisitions completed in 1996, (ii)
the offering of 1,450,000 of common shares, and (iii) the four
property acquisitions completed in 1997.
For the six months
ended June 30,
(In thousands, except per share amounts) 1997 1996
Revenues $ 53,357 $ 51,295
*Net income 10,527 10,384
*Net income applicable to common shares 7,784 7,642
*Net income per common share $ .51 $ .50
Weighted average common shares outstanding 15,322 15,322
*Before extraordinary item
The 1997 and 1996 pro forma financial information does not
include the revenue and expenses for Oak Bend Apartments, a
property acquired in 1997, for the period January 1, 1997 through
the date the property was acquired by the Company or for the
period January 1, 1996 through December 31, 1996, respectively.
The revenue and expenses of Oak Bend Apartments were excluded
from the pro forma financial information for the periods
mentioned as the property was under construction for
substantially all of the periods prior to its acquisition.
The unaudited pro forma condensed statement of operations is
not necessarily indicative of what the actual results of
operations of the Company would have been assuming the
transactions had been completed as set forth, nor does it purport
to represent the results of operations of future periods of the
Company.
10. SUBSEQUENT EVENTS
On July 2, 1997, the Company completed a public offering of
1,750,000 common shares at a price of $23.50 per share. The net
proceeds of approximately $38.9 million were applied to reduce
debt.
11
ASSOCIATED ESTATES REALTY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Associated Estates Realty Corporation (the "Company") is a
Real Estate Investment Trust ("REIT") that currently owns, or is
a joint venture partner in, 85 multifamily properties containing
16,818 suites located in Ohio, Michigan, Indiana and Western
Pennsylvania.
The following discussion should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in
this report. Historical results and percentage relationships
contained in the financial statements, including trends which
might appear, should not be taken as indicative of future
operations.
Liquidity and Capital Resources
The Company has elected to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended.
REIT's are subject to a number of organization and operational
requirements including a requirement that 95% of the income that
would otherwise be considered as taxable income be distributed to
its shareholders. Providing the Company continues to qualify as
a REIT, it will generally not be subject to a Federal income tax
on net income.
The Company expects to meet its short-term liquidity
requirements generally through its net cash provided by
operations. The Company believes that its net cash provided by
operations will be sufficient to meet both operating requirements
and the payment of dividends in accordance with REIT requirements
in both the short and long term.
Financing:
The Company utilizes borrowing under a $75 million unsecured
revolving credit facility (the "Line of Credit") for the
acquisition and development of multifamily properties and working
capital purposes. The Line of Credit includes certain
restrictive covenants which, among others, requires the Company
to maintain a minimum level of net worth, to limit dividends to
90% of Distributable Cash Flow, to restrict the use of its
borrowing and to maintain certain debt coverage ratios. The Line
of Credit provides for a scaled reduction in the LIBOR or prime
rate margins and commitment fees based on the Company's credit
ratings. Based on the Company's present credit ratings, the
LIBOR margin is 125 basis points fixed in increments of 30, 60,
90, 120 or 180 days and Prime Rate borrowings are at the Prime
Rate with no margin. An annual commitment fee of between 15
basis points and 25 basis points on the average daily unused
amount of the facility is paid quarterly in arrears. The Line of
Credit expires in September 1997 and the Company has the option
to extend the facility for an additional one year period. At
June 30, 1997, $73.5 million was drawn on the Line of Credit with
a weighted average interest rate of 7.1%.
Sixty-seven of the Company's 78 wholly owned properties were
unencumbered at June 30, 1997 with annualized earnings before
interest, depreciation and amortization of over $46.3 million and
a historical cost basis of over $409.6 million. During the
quarter ended June 30, 1997, the Company repaid mortgaged debt in
the aggregate amount of $14.7 million, with a stated weighted average
interest rate of 10%, that was secured by three of the Company's
wholly owned properties. The Company utilized borrowings under the
Line of Credit to repay these mortgages. Unsecured debt, which
totaled $230.8 million at June 30, 1997, consisted of $72.5
million in Medium-Term Notes, Senior Notes of $84.8 million and
amounts drawn on the Line of Credit of $73.5 million.
The remaining 11 of the Company's wholly owned properties,
having a historical cost basis of $95.6 million, were encumbered
by secured property specific debt of $60.5 million at June 30,
1997. The Company's proportionate share of the mortgage debt
relating to the seven joint venture properties was $17.9 million
at June 30, 1997. The weighted average interest rate on the
secured, unsecured and the Company's proportionate share of the
joint venture debt was 7.65% at June 30, 1997.
12
During the quarter ending June 30, 1997, the Company issued
a $15 million Medium-Term Note (or "MTN") under its $75 million
MTN Program. The MTN bears interest at 7.82% over a 10-year
term. The net proceeds to the Company of $14.9 million were
applied to amounts outstanding under the Line of Credit.
Registration statements filed in connection with financing:
The Company has filed a shelf registration statement with
the Securities and Exchange Commission relating to the proposed
offering of up to $368.8 million of debt securities, preferred
shares, depositary shares, common shares and common share
warrants. The total amount of the shelf filing includes a $102.5
million MTN Program which replaced the $75 million MTN Program.
The securities may be offered from time to time at prices and
upon terms to be determined at the time of sale.
On July 9, 1997, the Company completed a public offering of
1,750,000 common shares at a price of $23.50 per share. The net
proceeds of this offering of $38.9 million, after underwriting
discounts and commissions and other offering expenses, were used
to repay indebtedness outstanding under the Company's Line of
Credit.
Acquisitions, development and dispositions:
The Company intends to continue to finance its multifamily
property acquisitions and development with the most appropriate
sources of capital, which may include undistributed Funds From
Operations, the issuance of equity securities, bank and other
institutional borrowings, the issuance of debt securities, the
assumption of mortgage indebtedness or through the exchange of
properties. The Company may also determine to raise additional
working capital through one or more of these sources.
During the period January 1, 1997 through June 30, 1997, the
Company acquired, in separate purchase transactions, five
multifamily properties containing an aggregate of 992 suites and
one parcel of land consisting of 10 acres for an aggregate
purchase price of $53.5 million, of which $2.6 million
represented liabilities assumed. The multifamily properties are
located in Indianapolis, Indiana; and Cincinnati, Columbus and
Toledo, Ohio. The purchase price of the acquired properties has
been financed primarily with cash on hand made available through
the Line of Credit. On August 6, 1997, the Company acquired a 4.5
acre parcel of land adjacent to The Landings at the Preserve, a
multifamily property owned by the Company located in Battle Creek
Michigan.
The remainder of the acquisitions, development and
dispositions section contains forward-looking statements and
certain risks, trends and uncertainties that could cause actual
results to vary from those contained in the forward-looking
statements. Readers are cautioned not to place undue reliance on
forward-looking statements, which are based only on current
judgements and current knowledge of management. These forward-
looking statements are intended to be covered by the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Factors which could cause actual results to differ
materially from those projected include the general economic
climate; the supply and demand for multifamily properties in the
Great Lakes Region; interest rate levels; the availability of
financing and other risks associated with the acquisition,
development and disposition of properties, including risks that
development or lease-up may not be completed on schedule.
Furthermore, there can be no assurances that the Company will be
successful in acquiring the multifamily properties and the land
parcels under contract as described below.
The Company is currently under contract to purchase two
multifamily properties containing an aggregate of 546 suites and
two parcels of undeveloped land containing an aggregate 61
acres for a purchase price of $39.5 million. The two multifamily
properties are located in Indianapolis, Indiana and Clinton
Township, Michigan, respectively, while the land parcels are
located in Ohio and Pennsylvania.
The Company has two newly constructed multifamily properties
in lease-up. Bradford at Easton, a 324 suite property located in
Columbus, Ohio had 212 suites completed of which 195 were leased
at June 30, 1997 and the 168 suite first phase of The Residence
at Barrington, a 288 suite property located in Aurora, Ohio (a
city located Southeast of Cleveland), had 76 suites completed of
which 74 were leased at June 30, 1997. The Company has also
commenced construction at The Village of Western Reserve,
13
a 108 suite property in Streetsboro, Ohio (also located
Southeast of Cleveland) and a 120 suite expansion to Georgetown
Park Apartments, a multifamily property owned by the Company in
Fenton, Michigan. The Bradford at Easton, Barrington Phase I and
Western Reserve properties (collectively the "New Construction
Properties") are scheduled for completion in the fourth quarter
of 1997 and the Georgetown addition in the third quarter of 1998.
The Company is anticipating the construction of an
additional 514 suites (collectively the "Suite Additions") during
1998 on land adjacent to multifamily properties currently owned
by the Company as follows:
Property Location Suites
Arbor Landings Apartments II Ann Arbor, Michigan 160
The Residence at Barrington, Phase II Aurora, Ohio 120
Georgetown Park Apartments III Fenton, Michigan 120
Aspen Lakes II Grand Rapids, Michigan 114
Total Suites 514
The Company estimates the total cost of the New Construction
Properties and the Suite Additions (a total of 1,114 suites) will
be approximately $73.2 million, of which $34.3 million has been
incurred through June 30, 1997, including land costs of $7.5
million.
The Company also owns approximately 63.5 acres of land,
adjacent to multifamily properties currently owned by the
Company, on which approximately 640 suites are planned for
development. Through June 30, 1997, the Company has incurred
approximately $1.8 million in preliminary development and land
costs for these and other planned development projects.
The Company is exploring opportunities to dispose of several
of its multifamily properties and has received an expression of
interest from various prospective buyers. In addition, the
Company has determined that a 90 acre parcel of land, which was
one of the assets acquired by the Company at the time of the
Company's initial public offering of common shares (the "IPO")
that is presently zoned for office and industrial use, will not
be rezoned for multifamily use. The Company intends to sell the
property.
Dividends
On June 6, 1997, the Company declared a dividend of $0.465
per common share for the quarter ending June 30, 1997, which was
paid on August 1, 1997 to shareholders of record on July 15,
1997. On May 8, 1997, the Company declared a dividend of
$0.60938 per depositary share on its Class A Cumulative Preferred
Shares (the "Perpetual Preferred Shares"), which was paid on June
16, 1997 to shareholders of record on June 2, 1997.
Cash flow sources and applications:
Net cash provided by operating activities decreased $0.2
million to $13.3 million from $13.5 million for the six-months
ended June 30, 1997 when compared with the six-months ended June
30, 1996. This decrease was primarily the result of the
application of cash flow from operating activities to the
reduction of accounts payable and accrued expenses, and an
increase in accounts receivable from affiliates.
Net cash flows used for investing activities of $70.8
million for the six-months ended June 30, 1997 were primarily
used for the acquisition of multifamily real estate, properties
and undeveloped land parcels.
Net cash flows provided by financing activities of $56.4
million for the six-months ended June 30, 1997 were primarily
comprised of borrowings on the Line of Credit and the issuance of
MTN's. Funds were also used to pay dividends on the Company's
common and Perpetual Preferred Shares.
14
RESULTS OF OPERATIONS
Comparison of the three-months ended June 30, 1997 to the three-
months ended June 30, 1996
Overall, total revenue increased $3,397,400 or 14.5% and
total expenses before the extraordinary item and the net income
of the joint ventures increased $3,076,400 or 16.5% for the
quarter. Net income applicable to common shares before the
extraordinary item increased $432,700 or 12.2%, after dividends
on the Company's Perpetual Preferred Shares.
In the following discussion of the comparison of the three-
months ended June 30, 1997 to the three-months ended June 30,
1996, the term Core Portfolio Properties refers to the 35 wholly
owned multifamily properties acquired by the Company at the time
of the IPO, the 35 properties acquired prior to April 1, 1996
and the acquisition of the remaining 50% interest in a property
in which the company was a joint venture partner at the time of
the IPO. Acquired Properties refers to the eight properties
acquired between April 1, 1996 and June 30, 1997.
During the three-months ended June 30, 1997, the Acquired
Properties generated total revenues of $2,643,500 while incurring
property, operating and maintenance expenses of $902,970.
Rental Revenues:
Rental revenues increased $3,091,400 or 14.2% for the
quarter. The majority of this increase is attributable to an
increase in rental revenues from the Acquired Properties of
$2,609,000 for the same period. Increases in occupancy and suite
rents at the Core Portfolio Market-rate and Government-Assisted
Properties resulted in a $482,400 or 2.2% increase in rental
revenue from these properties. Retroactive revenue increases
related to budget based Government-Assisted Properties are
recognized based on the applications submitted to the U.S.
Department of Housing and Urban Development.
Other Revenues:
Painting service revenue and painting service revenue -
affiliates decreased $191,500 or 35.5% for the quarter and
reflects a decrease in revenue generated from suite painting and
major renovation projects when compared to the previous quarter.
The decrease in painting service and painting service revenue -
affiliates was partially offset by a decrease in painting service
expenses as discussed elsewhere herein.
Other revenues increased $521,800 primarily due to (i)
refunds of prior years real estate taxes of $308,400 resulting
from successful challenges to the property values used to assess
real estate taxes at six multifamily properties and (ii) interest
income of $102,000 on amounts advanced to entities managed by the
Company. The balance of the increase relates to interest income
earned on the Company's investments and late charges assessed to
residents.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$1,564,300 or 17.5% for the quarter. Operating and maintenance
expenses at the Acquired Properties increased $899,500 for the
quarter due primarily to the operating and maintenance expenses
incurred at the eight properties acquired between April 1, 1996
and June 30, 1997. Property operating and maintenance expenses
at the Core Portfolio Properties increased $664,800, or 7.5% when
compared to the prior three month period primarily due to
increases in payroll, utilities, building and grounds repairs and
maintenance and other operating expenses. The increase in
utility expenses was primarily the result of a 30% rate increase
in the cost of natural gas. Payroll expense increased due to (i)
overtime and temporary labor costs incurred in preparing suites
for market, (ii) annual wage increases, and (iii) staff
additions. Building and grounds repairs and maintenance expenses
increased primarily as a result of an increase in suite make
ready costs such as cleaning, painting, carpet cleaning and
replacement and appliance replacements. Total expenditures for
building renovations and suite and common area refurbishment in
the Core Portfolio Properties that were not considered to be
capital in nature averaged $128 per suite for the three-months
ended June 30, 1997 as compared to $110 per suite for the three-
months ended June 30, 1996.
15
Other expenses:
Depreciation and amortization increased $749,600 or 19.8%
for the quarter primarily due to the increased depreciation and
amortization expense recognized on the Acquired Properties.
Painting service expenses decreased $180,500 or 38.1% for
the quarter. This decrease was primarily the result of a decline
in payroll related expenses attributable to the decreased sales
activity of the painting company.
Interest expense increased $943,000 or 24.2% for the quarter
primarily due to the interest incurred with respect to the
additional borrowings under the Line of Credit and MTN's that
were used for the acquisition of properties.
Net income applicable to common shares:
Net income applicable to common shares is reduced by
dividends on the Perpetual Preferred Shares of $1,371,100.
RESULTS OF OPERATIONS
Comparison of the six-months ended June 30, 1997 to the six-
months ended June 30, 1996
Overall, total revenue increased $6,271,400 or 13.8% and
total expenses before the extraordinary item and net income off
the joint ventures increased $5,491,700 or 15.4% for the six
month period. Net income applicable to common shares before the
extraordinary item increased $867,100 or 12.4%, after dividends
on the Company's Perpetual Preferred Shares.
In the following discussion of the comparison of the six-
months ended June 30, 1997 to the six-months ended June 30, 1996,
the term Core Portfolio Properties refers to the 35 wholly owned
multifamily properties acquired by the Company at the time of the
IPO, the 32 properties acquired prior to January 1, 1996 and
the acquisition of the remaining 50% interest in a property in
which the Company was a joint venture partner at the time of the
IPO. Acquired Properties refers to the 11 properties acquired
between January 1, 1996 and June 30, 1997.
During the six-months ended June 30, 1997, the Acquired
Properties generated total revenues of $6,907,300 while incurring
property, operating and maintenance expenses of $2,583,600.
Rental Revenues:
Rental revenues increased $5,691,500 or 13.4% for the six
month period. The majority of this increase is attributable to
an increase in rental revenues from the Acquired Properties of
$5,123,700 for the same period. Increases in occupancy and suite
rents at the Core Portfolio Market-rate and Government-Assisted
Properties resulted in a $567,800 or 1.4% increase in rental
revenue from these properties. Retroactive revenue increases
related to budget based Government-Assisted Properties are
recognized based on the applications submitted to the U.S.
Department of Housing and Urban Development.
Other Revenues:
Other revenues increased $542,000 primarily due to (i)
refunds of prior years real estate taxes of $308,400 resulting
from successful challenges to the property values used to assess
real estate taxes at six multifamily properties and (ii) interest
income of $102,000 on amounts advanced for major renovation
programs to entities managed by the Company. The balance of the
increase relates to interest income earned on the Company's
investments and late charges assessed to residents.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$1,564,300 or 17.5% for the six month period. Operating and
maintenance expenses at the Acquired Properties increased
$1,950,200 for the six month period due primarily to the
operating and maintenance expenses incurred at the 11 properties
acquired between January 1, 1996 and June 30, 1997. Property
operating and maintenance expenses at the Core Portfolio
16
Properties increased $289,400 or 1.7% when compared to the prior
six month period primarily due to increases in payroll and
utilities which were offset by decreases in real estate taxes,
insurance, advertising and other operating expenses. Total
expenditures for building renovations and suite and common area
refurbishment in the Core Portfolio Properties that were not
considered to be capital in nature averaged $186 per suite for
the six-months ended June 30, 1997 as compared to $180 per suite
for the six-months ended June 30, 1996.
Other expenses:
Depreciation and amortization increased $1,528,500 or 20.8%
for the six month period primarily due to the increased
depreciation and amortization expense recognized on the Acquired
Properties.
General and administrative expenses increased $247,400 or
8.6% for the six month period. This increase is primarily
attributable to payroll and payroll related expenses as the
Company continues to develop a team of professionals to provide
hands-on attention to the Company's expanding portfolio of
assets.
Interest expense increased $1,504,600 or 20.4% for the half
primarily due to the interest incurred with respect to the
additional borrowings under the Line of Credit and MTN's that
were used for the acquisition of properties.
Extraordinary item:
The extraordinary item of $1,043,446 recognized during 1997
relates to the write-off of a portion of the liabilities assumed
with respect to certain multifamily properties acquired by the
Company which related to the difference between the stated
interest rate and the effective interest rate on mortgage
indebtedness assumed. The mortgage indebtedness assumed upon the
acquisition of these properties was repaid in 1997.
Net income applicable to common shares:
Net income applicable to common shares is reduced by
dividends on the Perpetual Preferred Shares of $2,742,200.
Equity in net income of joint ventures:
The combined equity in net income of joint ventures
increased $111,680 or 74.1% and $87,350 or 65.6% for the three-
and six-months ended June 30, 1997 and 1996, respectively. These
increases are primarily attributable to an increase in net
collected rents as occupancies increased at the joint venture
properties and a reduction in property operating and maintenance
expenses.
The following table presents the historical statements of
operations of the Company's beneficial interest in the operations
of the joint ventures for the three- and six-months ended June
30, 1997 and 1996.
For the three-months For the six-months
ended June 30, ended June 30,
1997 1996 1997 1996
Beneficial interests in joint
venture operations
Rental revenue $1,684,070 $1,662,690 $3,308,630 $3,305,290
Cost of operations 852,880 937,270 1,949,220 2,020,310
831,190 725,420 1,359,410 1,284,980
Interest income 6,080 5,540 12,520 9,230
Interest expense (441,650) (446,610) (884,870) (894,370)
Depreciation (120,900) (120,660) (241,760) (241,890)
Amortization (12,400) (13,050) (24,820) (24,820)
Net income $ 262,320 $ 150,640 $ 220,480 $ 133,130
17
Outlook
The following three paragraphs contain forward-looking
statements and certain risks, trends and uncertainties could
cause actual results to vary from those contained in the forward-
looking statements. Readers are cautioned not to place undue
reliance on forward-looking statements, which are based only on
current judgments and current knowledge of management. These
forward-looking statements are intended to be covered by the safe
harbor provisions of the Private Securities Litigation Reform Act
of 1995. Investors are cautioned that the Company's forward-
looking statements involve risks and uncertainty, including
without limitation risks of a lessening of demand for the
apartments owned by the Company, changes in government
regulations affecting the Government-Assisted Properties, and
expenditures that cannot be anticipated such as utility rate and
usage increases, unanticipated repairs, additional staffing,
insurance increases and real estate tax valuation reassessments.
Approximately 54% of the Company's multifamily properties
are located in the greater Cleveland/Akron, Ohio area which is
the fourteenth largest consumer market in the United States
containing over four million people within a fifty mile radius of
Akron. In Central Ohio, which accounts for 26% of the Company's
multifamily properties, Columbus is the 30th largest metropolitan
area in the U.S. based on population. Population in the Central
Ohio region grew 7.6% from 1990 to 1996, ranking it 25th among
the top 50 fastest growing metropolitan areas in the U.S.,
according to Census Bureau data. Columbus, Ohio was selected by
the E & Y Kenneth Leventhal Real Estate Group as one of the 12
best apartment investment markets in the country because of its
well-diversified economic base, strong rental growth and lower
vacancy rates. The Company's Michigan portfolio, which comprises
11% of the Company's multifamily properties, is located in eight
separate markets each having a stable population and employment
outlook.
Permitting activity in Indianapolis has been increasing but
at a slower pace in the past two months. Thus far, the
competition in this market has not had any real effect on the
Company's multifamily property located in Indianapolis. Though
there are signs of excess multifamily apartment capacity in the
Columbus, Ohio market attributable to a number of newly
constructed properties that are at or near completion, supply of
multifamily apartments has remained fairly consistent with
demand. While an excess capacity of multifamily apartments may
have a short-run impact on the Company's multifamily properties
located in the Columbus, Ohio vicinity, including the impact of
the successful lease-up at Bradford at Easton on the rest of the
northeast Columbus, Ohio market, the estimated demand for
multifamily apartments currently exceeds the annualized permit
issuance. There does not appear to be any significant permitting
activity in the Northeast Ohio, Toledo or Michigan markets in
which the Company is operating multifamily apartment properties.
With an average economic occupancy for the Core Portfolio
market-rate properties over 94.6%, and favorable market
conditions, it would appear that opportunities exist for
continued rental growth at the Company's market-rate properties.
The Company expects that building and grounds repair and
maintenance expenditures for the Core Portfolio properties will
increase as the Company continues to maintain its properties to
maximize their earnings potential. Utility expenditures will
vary over prior periods as the effect of weather related usage
variances and rate variances are factored into the level of
utility expense.
Inflation
Substantially all of the residential leases at the
properties allow, at the time of renewal, for adjustments in the
rent payable thereunder, and thus may enable the Company to seek
increases in rents. The substantial majority of these leases are
for one year or less and the remaining leases are for terms up to
two years. The short-term nature of these leases generally
serves to reduce the risk to the Company of the adverse effect of
inflation.
Contingencies
There are no recorded amounts resulting from environmental
liabilities as there are no known contingencies with respect
thereto. Future claims for environmental liabilities are not
measurable given the uncertainties surrounding whether there
exists a basis for any such claims to be asserted and, if so,
whether any claims will, in fact, be asserted. Furthermore, no
18
condition is known to exist that would give rise to a liability
for site restoration, post closure and monitoring commitments, or
other costs that may be incurred with respect to the sale or
disposal of a property. Phase I environmental audits have been
completed on all of the Company's wholly owned and joint venture
properties. The Company has obtained environmental insurance
covering (i) pre-existing contamination, (ii) on-going third
party contamination, (iii) third party bodily injury, and (iv)
remediation. The policy is for a five year term and carries a
limit of liability of $2 million per environmental contamination
discovery (with a $50,000 deductible) and has a $10 million
policy term aggregate. Management has no plans to abandon any of
the properties and is unaware of any other material loss
contingencies.
19
The following tables present information concerning the Multifamily
Properties owned by Associated Estates Realty Corporation.
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Suites Rehab. Sq. Ft.
MARKET RATE
Acquired Properties
Central Ohio
Perimeter Lakes 09/20/96 Dublin Gdn/Tnhms 189 1992 999
Oak Bend Commons (a) 05/30/97 Columbus Garden 90 1997 1,110
Saw Mill Village 04/22/97 Columbus Garden 340 1987 1,161
619 1,104
Cincinnati, Ohio
Remington Place Apartments 03/31/97 Cincinnati Garden 234 1988-90 830
Indiana
The Gables at White River 02/06/97 Indianapolis Garden 228 1991 974
Michigan
Aspen Lakes 09/04/96 Grand Rapids Garden 144 1992 789
Spring Brook Apartments 06/20/96 Holland Gdn/Tnhms 168 1986 818
312 805
Toledo, Ohio
Hawthorne Hills Apartments 05/14/97 Toledo Garden 88 1973 1,145
1,481 980
CORE PORTFOLIO PROPERTIES
Market rate
Central Ohio
Arrowhead Station 02/28/95 Columbus Townhomes 102 1987 1,344
Bedford Commons 12/30/94 Columbus Townhomes 112 1987 1,157
Bolton Estates 07/27/94 Columbus Garden 196 1992 687
Colony Bay East 02/21/95 Columbus Garden 156 1994 903
Heathermoor 08/18/94 Worthington Gdn/Tnhms 280 1989 829
Kensington Grove 07/17/95 Westerville Gdn/Tnhms/Ranch 76 1995 1,109
Lake Forest 07/28/94 Columbus Garden 192 1994 788
Muirwood Vllg. at Bennell 03/07/94 Columbus Ranch 164 1990 769
Muirwood Vllg. at London 03/03/94 London Ranch 112 1989 769
Muirwood Vllg. at Mt. Sterling 03/03/94 Mt. Sterling Ranch 48 1990 769
Muirwood Vllg. at Zanesville 03/07/94 Zanesville Ranch 196 1991-95 769
Pendleton Lakes East 08/25/94 Columbus Garden 256 1990-93 899
Residence at Christopher Wren 03/14/94 Gahanna Gdn/Tnhms 264 1993 1,062
Residence at Turnberry 03/16/94 Pickerington Gdn/Tnhms 216 1991 1,182
Sheffield at Sylvan 03/03/94 Circleville Ranch 136 1989 791
Sterling Park 08/25/94 Grove City Garden 128 1994 763
The Residence at Newark 03/03/94 Newark Ranch 112 1993-94 868
The Residence at Washington 02/01/96 Wash. Ct. House Ranch 72 1995 862
Wyndemere 09/21/94 Franklin Ranch 128 1991-95 768
2,946 897
Northeastern Ohio
Bay Club IPO Willowick Garden 96 1990 925
Colonnade West IPO Cleveland Townhomes 216 1964 502
Cultural Gardens IPO Euclid Mid Rise 186 1966 688
Edgewater Landing 04/20/94 Cleveland High Rise 241 1988 r 585
Gates Mills III IPO Mayfield Hts. High Rise 320 1978 874
Holly Park IPO Kent Garden 192 1990 875
Huntington Hills IPO Stow Townhomes 85 1982 976
Mallard's Crossing 02/16/95 Medina Garden 192 1990 998
Memphis Manor IPO Cleveland Garden 120 1966 554
Park Place IPO Parma Hts. Mid Rise 164 1966 760
Pinecrest IPO Broadview Hts. Garden 96 1965 r 598
Portage Towers IPO Cuyahoga Falls High Rise 376 1973 869
Somerset West (b) IPO North Royalton Gdn/Tnhms 197 1982 1,038
The Triangle (c) IPO Cleveland High Rise 273 1989 616
Timbers IPO Broadview Hts. Garden 96 1987-89 930
Villa Moderne IPO North Olmsted Garden 135 1963 504
Washington Manor 07/01/94 Elyria Garden 120 1963-64 541
West Park Plaza IPO Cleveland Garden 118 1964 520
Westchester Townhouses IPO Westlake Townhomes 136 1989 1,000
For the three months ending For the three months ending
June 30, 1997 June 30, 1996
Average Average Rent Average Average Rent
Economic Physical Per Economic Physical Per
The Multifamily Properties Occupancy Occupancy Suite Sq. Ft. Occupancy Occupancy Suite Sq. Ft.
MARKET RATE
Acquired Properties
Central Ohio
Perimeter Lakes 93.4% 96.8% $ 716 $ 0.72 N/A N/A N/A N/A
Oak Bend Commons (a) N/A N/A N/A N/A N/A N/A N/A N/A
Saw Mill Village N/A 94.1 N/A N/A N/A N/A N/A N/A
93.4% 95.8% N/A N/A N/A N/A N/A N/A
Cincinnati, Ohio
Remington Place Apartments 84.8% 89.7% $ 640 $ 0.77 N/A N/A N/A N/A
Indiana
The Gables at White River 87.5% 91.2% $ 719 $ 0.74 N/A N/A N/A N/A
Michigan
Aspen Lakes 90.7% 91.7% $ 553 $ 0.70 N/A N/A N/A N/A
Spring Brook Apartments 99.9 98.8 472 0.58 N/A N/A N/A N/A
95.3% 95.5% $ 510 $ 0.63 N/A N/A N/A N/A
Toledo, Ohio
Hawthorne Hills Apartments N/A 85.2% $ 454 $ 0.40 N/A N/A N/A N/A
90.1% 93.5% $ 639 $ 0.72 N/A N/A N/A N/A
CORE PORTFOLIO PROPERTIES
Market rate
Central Ohio
Arrowhead Station 90.2% 86.3% $ 684 $ 0.51 100.0% 97.1% $ 654 $ 0.49
Bedford Commons 95.5 97.3 753 0.65 100.0 99.1 713 0.62
Bolton Estates 95.5 92.3 462 0.67 94.7 96.4 456 0.66
Colony Bay East 93.4 98.7 515 0.57 97.2 100.0 485 0.54
Heathermoor 98.1 98.6 543 0.66 99.4 98.6 526 0.63
Kensington Grove 93.6 97.4 776 0.70 96.5 98.7 751 0.68
Lake Forest 94.8 94.8 550 0.70 94.7 96.4 532 0.68
Muirwood Vllg. at Bennell 94.5 93.9 492 0.64 98.2 97.0 477 0.62
Muirwood Vllg. at London 96.5 99.1 502 0.65 99.4 93.8 490 0.64
Muirwood Vllg. at Mt. Sterling 99.6 97.9 499 0.65 95.4 91.7 483 0.63
Muirwood Vllg. at Zanesville 95.8 92.3 524 0.68 100.0 98.0 507 0.66
Pendleton Lakes East 92.7 96.5 514 0.57 98.2 99.6 499 0.56
Residence at Christopher Wren 93.5 97.0 729 0.69 96.6 97.7 704 0.66
Residence at Turnberry 93.4 94.9 741 0.63 93.6 92.1 719 0.61
Sheffield at Sylvan 97.4 97.8 503 0.64 97.3 96.3 499 0.63
Sterling Park 97.9 96.1 547 0.72 97.7 95.3 528 0.69
The Residence at Newark 94.7 93.8 556 0.64 99.1 95.5 534 0.62
The Residence at Washington 97.0 94.4 539 0.63 99.4 95.8 512 0.59
Wyndemere 97.2 91.4 531 0.69 99.9 97.7 520 0.68
95.0% 95.4% $ 576 $ 0.64 97.7% 97.0% $ 557 $ 0.62
Northeastern Ohio
Bay Club 100.0% 100.0% $ 623 $ 0.67 98.8% 97.9% $ 612 $ 0.66
Colonnade West 93.4 94.9 403 0.80 96.7 95.8 392 0.78
Cultural Gardens 94.6 96.8 502 0.73 96.0 96.2 487 0.71
Edgewater Landing 95.8 95.0 415 0.71 98.2 97.5 409 0.70
Gates Mills III 95.2 97.8 711 0.81 96.8 96.9 653 0.75
Holly Park 97.0 95.8 654 0.75 94.6 97.4 695 0.79
Huntington Hills 98.2 98.8 649 0.66 95.3 94.1 637 0.65
Mallard's Crossing 98.2 96.4 689 0.69 99.8 95.8 664 0.67
Memphis Manor 91.1 93.3 442 0.80 97.8 96.7 435 0.79
Park Place 96.3 94.5 534 0.70 96.7 98.2 520 0.68
Pinecrest 93.4 95.8 460 0.77 95.8 94.8 452 0.76
Portage Towers 86.7 93.6 570 0.66 96.5 92.6 549 0.63
Somerset West (b) 93.7 95.9 687 0.66 92.1 94.4 685 0.66
The Triangle (c) 97.8 97.8 899 1.46 98.4 98.9 848 1.38
Timbers 95.0 96.9 699 0.75 94.5 94.8 671 0.72
Villa Moderne 95.1 97.8 439 0.87 95.0 94.1 422 0.84
Washington Manor 97.5 96.7 383 0.71 97.4 94.2 370 0.68
West Park Plaza 96.4 95.8 427 0.82 99.2 94.9 416 0.80
Westchester Townhouses 93.9 100.0 750 0.75 93.0 90.4 759 0.7
20
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Suites Rehab. Sq. Ft.
Westlake Townhomes IPO Westlake Townhomes 7 1985 1,000
Williamsburg at Greenwood Vllg. 02/18/94 Sagamore Hills Townhomes 260 1990 938
Winchester Hills I (d) IPO Willoughby Hills High Rise 362 1972 822
Winchester Hills II IPO Willoughby Hills High Rise 362 1979 822
4,350 782
Michigan
Arbor Landings Apartments 01/20/95 Ann Arbor Garden 168 1990 1,116
Central Park Place 12/29/94 Grand Rapids Garden 216 1988 850
Country Place Apartments 06/19/95 Mt. Pleasant Garden 144 1988 859
Georgetown Park Apartments 12/28/94 Fenton Garden 360 1987-96 1,005
The Landings at the Preserve 09/21/95 Battle Creek Garden 190 1990-91 952
The Oaks and Woods at Hampton 08/08/95 Rochester Hills Gdn/Tnhms 544 1986-88 1,050
Summer Ridge Apartments 04/01/96 Kalamazoo Garden 248 1989-91 960
1,870 988
Toledo, Ohio
Cloisters 09/14/95 Toledo Townhomes 188 1990 1,037
Kensington Vllg. 09/14/95 Toledo Gdn/Tnhms 190 1985-90 920
Treetops 09/14/95 Toledo Townhomes 128 1988-89 1,350
Vantage Villa 10/30/95 Toledo Garden 150 1974 935
656 1,041
Pennsylvania
Chestnut Ridge 03/01/96 Pittsburgh Garden 468 1986 769
10,290 868
GOVERNMENT ASST.-ELDERLY
Ellet Development IPO Akron High Rise 100 1978 589
Hillwood I IPO Akron High Rise 100 1976 570
Puritas Place (e) IPO Cleveland High Rise 100 1981 518
Riverview IPO Massillon High Rise 98 1979 553
State Road Apartments IPO Cuyahoga Falls Garden 72 1977 r 750
Statesman II IPO Shaker Heights Garden 47 1987 r 796
Sutliff Apartments II IPO Cuyahoga Falls High Rise 185 1979 577
Tallmadge Acres IPO Tallmadge Mid Rise 125 1981 641
Twinsburg Apartments IPO Twinsburg Garden 100 1979 554
Village Towers IPO Jackson Twp. High Rise 100 1979 557
West High Apartments IPO Akron Mid Rise 68 1981 r 702
1,095 602
GOVERNMENT ASST.-FAMILY
Jennings Commons IPO Cleveland Garden 50 1981 823
Rainbow Terrace IPO Cleveland Garden 484 1982 r 768
Shaker Park Gardens II IPO Warrensville Garden 151 1964 753
685 769
1,780 666
CONGREGATE CARE
Gates Mills Club IPO Mayfield Heights High Rise 120 1980 721
The Oaks IPO Westlake Garden 50 1985 672
170 707
Wholly owned core portfolio 12,240 837
Joint Venture Properties
Northeastern Ohio
Market rate
Americana IPO Euclid High Rise 738 1968 803
College Towers IPO Kent Mid Rise 380 1969 662
Euclid House IPO Euclid Mid Rise 126 1969 654
Gates Mills Towers IPO Mayfield Hts. High Rise 760 1969 856
Highland House IPO Painesville Garden 36 1964 539
Watergate IPO Euclid High Rise 949 1971 831
2,989 789
Government Asst.-Family
Lakeshore Vllg. IPO Cleveland Garden 108 1982 786
3,097 789
Core 15,337 833
Portfolio average 16,818 847
For the three months ending For the three months ending
June 30, 1997 June 30, 1996
Average Average Rent Average Average Rent
Economic Physical Per Economic Physical Per
The Multifamily Properties Occupancy Occupancy Suite Sq. Ft. Occupancy Occupancy Suite Sq. Ft.
Westlake Townhomes 95.1 100.0 791 0.79 100.0 100.0 761 0.76
Williamsburg at Greenwood Vllg. 91.7 93.8 859 0.92 97.2 95.8 795 0.85
Winchester Hills I (d) 90.4 95.0 573 0.70 93.6 92.0 557 0.68
Winchester Hills II 86.6 92.5 609 0.74 92.7 93.6 592 0.72
93.6% 95.7% $ 607 $ 0.78 96.0% 95.2% $ 588 $ 0.75
Michigan
Arbor Landings Apartments 97.3% 97.0% $ 841 $ 0.75 98.1% 97.6% $ 816 $ 0.73
Central Park Place 96.0 96.8 605 0.71 96.0 89.8 610 0.72
Country Place Apartments 94.8 95.1 520 0.61 100.0 99.3 494 0.58
Georgetown Park Apartments 94.6 93.9 673 0.67 95.7 96.8 660 0.66
The Landings at the Preserve 94.0 94.7 675 0.71 96.3 95.8 648 0.68
The Oaks and Woods at Hampton 95.4 95.4 801 0.76 100.0 98.0 758 0.72
Summer Ridge Apartments 95.8 98.4 674 0.70 96.1 92.7 664 0.69
95.4% 95.7% $ 706 $ 0.71 98.1% 95.9% $ 684 $ 0.69
Toledo, Ohio
Cloisters 97.1% 95.2% $ 529 $ 0.51 91.7% 95.2% $ 504 $ 0.49
Kensington Vllg. 96.7 97.4 451 0.49 94.1 95.8 434 0.47
Treetops 97.8 96.9 735 0.54 97.0 95.3 716 0.53
Vantage Villa 95.2 93.3 599 0.64 93.8 94.0 573 0.61
96.8% 95.7% $ 563 $ 0.54 94.1% 95.1% $ 541 $ 0.52
Pennsylvania
Chestnut Ridge 98.3% 97.2% $ 702 $ 0.91 86.2% 91.0% $ 676 $ 0.88
94.7% 95.7% $ 618 $ 0.71 96.3% 95.7% $ 597 $ 0.69
GOVERNMENT ASST.-ELDERLY
Ellet Development 100.0% 100.0% $ 587 $1.00 100.0% 100.0% $ 585 $ .99
Hillwood I 100.0 100.0 596 1.05 100.0 100.0 596 1.05
Puritas Place (e) 99.6 100.0 782 1.51 99.9 97.0 782 1.51
Riverview 100.0 100.0 591 1.07 100.0 100.0 591 1.07
State Road Apartments 99.6 100.0 596 0.79 100.0 100.0 599 0.80
Statesman II 98.8 97.9 651 0.82 100.0 100.0 650 0.82
Sutliff Apartments II 100.0 100.0 586 1.02 100.0 100.0 586 1.02
Tallmadge Acres 100.0 100.0 658 1.03 100.0 100.0 658 1.03
Twinsburg Apartments 100.0 100.0 603 1.09 100.0 100.0 606 1.09
Village Towers 100.0 100.0 579 1.04 99.5 100.0 579 1.04
West High Apartments 100.0 100.0 790 1.13 100.0 100.0 786 1.12
100.0% 99.9% $ 631 $ 1.05 100.0% 99.7% $ 631 $ 1.05
GOVERNMENT ASST.-FAMILY
Jennings Commons 100.0% 100.0% $ 674 $ 0.82 100.0% 100.0% $ 674 $ 0.82
Rainbow Terrace 99.2 98.1 773 1.01 98.4 97.3 708 0.92
Shaker Park Gardens II 100.0 100.0 531 0.71 99.8 98.7 531 0.71
99.4 98.7 713 0.93 98.8 97.8 667 0.87
99.8% 99.4% $ 662 $ 0.99 99.6% 99.0% $ 645 $ 0.97
CONGREGATE CARE
Gates Mills Club 97.9% 99.2% $ 813 $ 1.13 96.3% 97.5% $ 758 $ 1.05
The Oaks 97.0 100.0 981 1.46 96.5 90.0 956 1.42
97.6 99.4 862 1.22 96.3 95.3 817 1.16
Wholly owned core portfolio 95.6% 96.3% $ 628 $ 0.75 96.8% 96.1% $ 607 $ 0.73
Joint Venture Properties
Northeastern Ohio
Market rate
Americana 87.0% 93.4% $ 480 $ 0.60 89.6% 89.8% $ 485 $ 0.60
College Towers 91.9 93.2 399 0.60 91.9 91.3 404 0.61
Euclid House 90.4 92.9 432 0.66 94.5 96.0 431 0.66
Gates Mills Towers 93.8 98.4 698 0.82 96.8 98.2 654 0.76
Highland House 99.7 97.2 406 0.75 98.6 94.4 392 0.73
Watergate 92.8 96.1 541 0.65 91.0 92.2 531 0.64
91.8% 95.5% $ 533 $ 0.68 92.8% 93.2% $ 521 $ 0.66
Government Asst.-Family
Lakeshore Vllg. 100.0% 100.0% $ 669 $ 0.85 99.4% 98.1% $ 669 $ 0.85
92.3 95.7 539 0.68 93.2 93.4 528 0.67
Core 95.3% 96.2% $ 620 $ 0.74 96.5% 95.6% $ 600 $ 0.72
Portfolio average 95.0% 95.9% $ 619 $ 0.73 96.5% 95.6% $ 523 $ 0.62
<FN>
______________
(a) The recently constructed 90 suites have not yet reached stabilized
occupancy. The Company has entered into a contract to acquire 12 additional
suites presently under construction; however, there can be no assurances
that the suites will be acquired.
(b) Somerset West has 77 Contract Suites and 120 Market-rate suites.
(c) The Triangle also contains 63,321 square feet of office/retail space.
(d) The Company acquired a noteholder interest entitling the Company to
substantially all cash flows from operations. The Company has certain
rights under a security agreement to foreclose on the property to the extent
that the unpaid principal and interest on the underlying notes exceed seven
years equivalent principal and interest payments.
(e) The property was developed in 1981 subject to a warranty deed provision
which states that the assignment of fee simple title of the property to the
Company shall expire in 2037.
r = Rehabilitated
</FN>
22
HISTORICAL FUNDS FROM OPERATIONS AND DISTRIBUTABLE CASH FLOW
Industry analysts generally consider Funds From Operations
("FFO") to be an appropriate measure of the performance of an
equity REIT. FFO is defined as net income (computed in
accordance with generally accepted accounting principles),
excluding gains (or losses) from sales of property, non-recurring
and extraordinary items, plus depreciation on real estate assets
and after adjustments for unconsolidated joint ventures.
Adjustments for joint ventures are calculated to reflect FFO on
the same basis. FFO does not represent cash generated from
operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash
available to fund cash needs and should not be considered an
alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flow as a
measure of liquidity. Distributable Cash Flow is defined as FFO
less capital expenditures funded by operations and loan
amortization payments. The Company believes that in order to
facilitate a clear understanding of the consolidated historical
operating results of the Company, FFO and Distributable Cash Flow
should be presented in conjunction with net income as presented
in the consolidated financial statements and data included
elsewhere in this report.
FFO and Funds Available for Distribution ("Distributable
Cash Flow") for the six month period ended June 30, 1997 and 1996
are summarized in the following table:
For the three months For the six months
ended June 30, ended June 30,
(In thousands) 1997 1996 1997 1996
Net income applicable to common shares $ 5,029 $ 3,553 $ 8,884 $ 6,973
Depreciation on real estate assets
Wholly owned properties 4,212 3,557 8,283 6,886
Joint venture properties 121 121 242 242
Extraordinary item-gain on early
extinguishment of debt (1,043) - (1,043) -
Funds From Operations 8,319 7,231 16,366 14,101
Depreciation - other assets 152 77 247 146
Amortization of deferred financing fees 182 164 358 327
Fixed asset additions (117) (64) (231) (179)
Distributable Cash Flow $ 8,536 $ 7,408 $ 16,740 $ 14,395
Weighted average shares outstanding 15,322 13,872 15,322 13,872
23
PART II
OTHER INFORMATION
Except to the extent noted below, the items required in
Part II are inapplicable or, if applicable, would be answered in
the negative and have been omitted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On May 8, 1997, the Company held its Annual Meeting of
Shareholders. The only matter presented to the shareholders for
a vote was the election of directors, each to serve a term of one
year. The following sets forth the nominees for director and the
results of voting:
Votes "For" Votes "Abstained"
Jeffrey I. Friedman 13,715,094.394 54,620
Mark L. Milstein 13,715,094.394 54,620
Jerome Spevack 13,714,392.342 55,322.052
Albert T. Adams 13,709,444.394 60,270
Gerald C. McDonough 13,714,184.394 55,530
Frank E. Mosier 13,715,192.342 54,522.052
Richard T. Schwarz 13,715,294.394 54,420
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Filed herewith or
incorporated
herein by
Number Title reference
27 Financial Data Schedule Exhibit 27 filed
herewith.
10.1 Pledge Agreement dated May 23, 1997 between Exhibit 10.1 filed
Jeffrey I. Friedman and the Company. herewith
10.2 Secured Promissory Note dated May 23, 1997 in Exhibit 10.2 filed
the amount of $1,671,000.00 executed by herewith
Jeffrey I. Friedman in favor of the Company.
10.3 Unsecured Promissory Note dated May 23, 1997 in Exhibit 10.3 filed
the amount of $1,671,000.00 executed by herewith
Jeffrey I. Friedman in favor of the Company.
(b) Reports on Form 8-K
None
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
ASSOCIATED ESTATES REALTY CORPORATION
August 8, 1997 /s/ Dennis W. Bikun
(Date) Dennis W. Bikun, Chief Financial Officer
and Treasurer