1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-12486
Associated Estates Realty Corporation
(Exact name of registrant as specified in its charter)
Ohio 34-1747603
(State or other jurisdiction of (I.R.S.
incorporation or organization) Employer
Identification
Number)
5025 Swetland Court, Richmond Hts., Ohio 44143-1467
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 261-5000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period
that the registrant was required to file such
reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ x ] No [ ]
Number of shares outstanding as of May 12, 1998:
17,074,257 shares
ASSOCIATED ESTATES REALTY CORPORATION
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INDEX
PART I - FINANCIAL INFORMATION Page
Condensed Financial Statements
ITEM 1
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 3
Consolidated Statements of Income for the three
month periods ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the three
month periods ended March 31, 1998 and 1997 5
Notes to Financial Statements 6
Management's Discussion and Analysis of Financial
ITEM 2 Condition and Results of Operations 15
PART II - OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security-Holders 27
ITEM 6 Exhibits and Reports on Form 8-K 27
SIGNATURES 31
3
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(Unaudited)
ASSETS
Real estate assets:
Land $ 69,442,077 $ 54,906,050
Buildings and improvements 614,638,786 550,156,521
Furniture and fixtures 26,262,983 24,997,001
710,343,846 630,059,572
Less: accumulated depreciation (135,747,454) (130,668,538)
574,596,392 499,391,034
Construction in progress 19,575,374 16,439,393
Real estate, net 594,171,766 515,830,427
Cash and cash equivalents 1,640,205 2,251,819
Restricted cash 4,803,887 10,125,513
Accounts and notes receivable:
Rents 2,205,151 2,256,158
Affiliates and joint ventures 13,975,351 14,439,155
Other 1,571,393 2,385,829
Deferred charges and prepaid expenses 9,219,267 6,621,404
$627,587,020 $553,910,305
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured debt $ 72,514,448 $ 57,817,981
Unsecured debt 322,368,206 260,352,307
Total indebtedness 394,882,654 318,170,288
Accounts payable and accrued expenses 16,807,608 16,197,356
Dividends payable 7,939,916 7,938,692
Resident security deposits 5,245,570 4,867,011
Funds held on behalf of managed
properties
Affiliates and joint ventures 7,278,194 7,124,217
Other 2,466,412 2,340,115
Accrued interest 4,271,145 3,776,884
Accumulated losses and distributions of
joint ventures in excess of investment
and advances 12,487,569 12,337,664
Total liabilities 451,379,068 372,752,227
Commitments and contingencies - -
Shareholders' equity:
Preferred shares, Class A cumulative,
without par value; 3,000,000
authorized; 225,000 issued and
outstanding 56,250,000 56,250,000
Common shares, without par value, $.10
stated value; 50,000,000 authorized;
17,074,257 and 17,073,773 issued and
outstanding at March 31, 1998
and December 31, 1997, respectively 1,707,425 1,707,377
Paid-in capital 171,588,908 171,752,807
Accumulated dividends in excess of net
income (53,338,381) (48,552,106)
Total shareholders' equity 176,207,952 181,158,078
$627,587,020 $553,910,305
The accompanying notes are an integral part
of these financial statements
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ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended March 31,
1998 1997
Revenues
Rental $ 29,104,614 $ 23,159,943
Property management fees 948,838 980,805
Painting services 348,555 508,444
Other 306,798 229,208
30,708,805 24,878,400
Expenses
Property operating and maintenance 12,302,462 9,225,320
Depreciation and amortization 5,314,595 4,328,837
Painting services 337,939 438,721
General and administrative 1,833,612 1,511,547
Interest expense 6,431,667 4,106,609
Total expenses 26,220,275 19,611,034
Income before equity in net income
(loss) of joint ventures 4,488,530 5,267,366
Equity in net income (loss) of
joint ventures 36,216 (41,839)
Net income $ 4,524,746 $ 5,225,527
Net income applicable to common
shares $ 3,153,641 $ 3,854,421
Earnings Per Common Share - Basic:
Net income $ .18 $ .25
Earnings Per Common Share - Diluted:
Net Income $ .18 $ .25
Dividends paid per common share $ .465 $ .465
Weighted average number of common
shares outstanding - Basic 17,071,950 15,320,718
- Diluted 17,075,383 15,350,538
The accompanying notes are an integral part
of these financial statements
5
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
(UNAUDITED)
1998 1997
Cash flow from operating activities:
Net income $ 4,524,746 $ 5,225,527
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,314,595 4,328,837
Equity in net (income) loss of joint ventures (36,216) 41,839
Earnings distributed from joint ventures 104,982 67,190
Net change in - Accounts and notes 865,443 (576,732)
receivable
- Accounts and notes receivable-
affiliates and joint ventures 463,804 (2,344,737)
- Accounts payable and accrued
expenses (1,283,100) (3,725,979)
- Other operating assets and
liabilities (2,096,408) 709,118
- Restricted cash 5,321,626 110,070
- Funds held for non-owned
managed properties 153,977 (173,897)
- Funds held for non-owned
managed properties affiliates
and joint ventures 126,297 (360,339)
Total adjustments 8,935,000 (1,924,630)
Net cash flow provided by operations 13,459,746 3,300,897
Cash flow from investing activities:
Real estate acquired or developed (net of liabilities
assumed) (66,095,671) (31,560,293)
Fixed asset additions (359,946) (406,865)
Distributions from joint ventures 81,139 123,930
Net cash flow used for investing activities (66,374,478) (31,843,228)
Cash flow from financing activities:
Principal payments on mortgage notes (317,304) (334,801)
Proceeds from senior and medium-term notes - 15,000,000
Term loan borrowings 45,000,000 -
Line of credit borrowings 107,500,000 64,900,000
Line of credit repayments (90,500,000) (43,300,000)
Deferred financing and offering costs (68,557) (179,212)
Common share dividends paid (7,939,916) (6,895,071)
Preferred share dividends paid (1,371,105) (1,371,106)
Stock options exercised - 238
Net cash flow provided by financing activities 52,303,118 27,820,048
Decrease in cash and cash equivalents (611,614) (722,283)
Cash and cash equivalents, beginning of period 2,251,819 1,286,959
Cash and cash equivalents, end of period $ 1,640,205 $ 564,676
The accompanying notes are an integral part
of these financial statements
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ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business
Associated Estates Realty Corporation (the "Company") is a
self-administered and self-managed real estate investment trust
("REIT") which specializes in the acquisition, development,
ownership and management of multifamily properties. At March 31,
1998, the Company owned or was a joint venture partner in 90
multifamily properties containing 18,920 suites. Additionally,
the Company managed 40 non-owned properties, 32 of which were
multifamily properties consisting of 7,052 suites and eight of
which were commercial properties containing an aggregate of
approximately 825,000 square feet of gross leasable area.
Through special purpose entities, collectively referred to as the
"Service Companies", the Company provides to both owned and non-
owned properties, management, painting and computer services as
well as mortgage origination and servicing.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of the Company, all subsidiaries, 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 with
related party relationships, is deemed to have operating control.
The preferred share interest is not an impermissible investment
for purposes of the Company's REIT qualification test.
Investments in joint ventures, which are 50% or less owned
by the Company, are presented using the equity method of
accounting.
All significant intercompany balances and transactions have
been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited financial statements have been
prepared by the Company's management in accordance with generally
accepted accounting principles for interim financial information
and applicable rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of
normally recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations for
the three month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the full year.
These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto included
in the Associated Estates Realty Corporation Annual Report on
Form 10-K for the year ended December 31, 1997.
Use of Estimates
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting periods.
Actual results could differ from these estimates.
7
Recent Accounting Pronouncements
Effective December 31, 1997, the Company implemented
Statement of Financial Accounting Standards ("SFAS") No. 128 -
Earnings Per Share. All periods have been presented on the same
basis. Effective March 31, 1998, the Company implemented SFAS
No. 130 - Reporting Comprehensive Income. At March 31, 1998, the
Company had no items of other comprehensive income requiring
additional disclosure.
In June 1997, the FASB issued SFAS No. 131 - Disclosure
about Segments of an Enterprise and Related Information. SFAS
No. 131 establishes standards for disclosure about operating
segments in annual financial statements and selected information
in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas
and major customers. The statement supersedes SFAS No. 14 -
Financial Reporting for Segments of a Business Enterprise. The
new standard becomes effective for the Company for the year
ending December 31, 1998, and requires that comparative
information from earlier years be restated to conform to the
requirements of this standard.
Reclassifications
Certain reclassifications have been made to the 1997
financial statements to conform to the 1998 presentation.
2. DEVELOPMENT AND ACQUISITION OF MULTIFAMILY PROPERTIES
Development Activity
Construction in progress, including the cost of land, for
the development of multifamily properties was $19,575,374 and
$16,439,393 at March 31, 1998 and December 31, 1997,
respectively. The Company capitalizes interest costs on funds
used in construction, real estate taxes and insurance from the
commencement of development activity through the time the
property is available for leasing. Interest, real estate taxes
and insurance aggregating approximately $361,640 and $464,000
were capitalized during the three month periods ended March 31,
1998 and 1997, respectively. For the three month period ended
March 31, 1998, the construction and leasing of 44 suites at two
properties were completed at a total cost of $3.5 million. The
following schedule details construction in progress at March 31,
1998:
Placed in
(dollars in thousands) Number Costs Service March 31, 1998 Estimated
of Incurred through Land Building Scheduled
Property Suites to Date 3/31/98 Cost Cost Completion
AURORA, OHIO
The Residence at Barrington-Phase I 168 $15,567 $ 13,300 $ 196 $ 2,071 1998
The Residence at Barrington-Phase II 120 5,369 - 982 4,387 1998
288 20,936 13,300 1,178 6,458
ANN ARBOR, MICHIGAN
Arbor Landings Apartments II 160* 1,974 650 1,324 1998
FENTON, MICHIGAN
Georgetown Park Apartments III 120* 4,196 - 350 3,846 1998
GRAND RAPIDS, MICHIGAN
Aspen Lakes II 118* 551 - 402 149 1998
STREETSBORO, OHIO
The Village of Western Reserve 108 6,804 4,392 302 2,110 1998
WESTLAKE, OHIO
Westlake 300* 648 - 523 125 1999
Other 349* 2,158 - 592 1,566
1,443 $37,267 $ 17,692(1) $3,997 $ 15,578
* Estimated
(1) Including land of $1,568.
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Acquisition Activity
During the period January 1, 1998 through March 31, 1998,
the Company acquired four multifamily properties containing 1,320
suites for an aggregate purchase price of $74.4 million of which
$17.0 million represents liabilities assumed including mortgage
indebtedness of $15.0 million. The balance of the purchase price
was financed using borrowings under an unsecured 90 day term loan
of $44.5 million and borrowings under the Company's Line of
Credit of approximately $14.4 million. The properties are
located in Coconut Creek, Florida; Duluth, Georgia; Columbia,
Maryland; and Toledo, Ohio.
Three of the four properties were acquired in anticipation
of the proposed merger with MIGRA and the purchase of the MIG
REIT properties (Note 11). The three properties were owned, at
least in part, by MIG Residential Trust. The aggregate purchase
price of these properties was $59.5 million of which
approximately $16.3 million represented assumed liabilities.
3. SHAREHOLDERS' EQUITY
The following table summarizes the changes in shareholders'
equity since December 31, 1997:
Common
Class A Shares Accumulated
Cumulative (at $.10 Dividends
Preferred stated Paid-In In Excess Of
Shares value) Capital Net Income Total
Balance, Dec. 31, 1997 $ 56,250,000 $1,707,377 $171,752,807 $ (48,552,106) $181,158,078
Net income - - - 4,524,746 4,524,746
Issuance of 484 restricted
common shares - 48 (48) - -
Additional costs relating
to common stock offering - - (163,851) - (163,851)
Common share
dividends declared - - - (7,939,916) (7,939,916)
Preferred share
dividends declared - - - (1,371,105) (1,371,105)
Balance, March 31, 1998 $56,250,000 $1,707,425 $171,588,908 $(53,338,381) $176,207,952
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 $44.2 million and $29.4 million at March 31, 1998
and December 31, 1997, respectively. Five of the six
conventional mortgages have a fixed rate and the remaining
mortgage ($8.1 million) 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 March 1, 2024.
The balance of the federally insured mortgages was $28.3 million
and $28.4 million at March 31, 1998 and December 31, 1997,
respectively. Six of the seven federally insured mortgages have
a fixed rate and the remaining mortgage ($1.9 million) has a
variable rate.
9
Under certain of the mortgage agreements, the Company is
required to make escrow deposits for taxes, insurance and
replacement of project assets. The variable rate mortgage is
secured by a letter of credit which is renewed annually.
5. UNSECURED DEBT
Senior Notes
The Senior Notes with aggregate net proceeds of $83.6
million after underwriting commissions, offering expenses and
discount, were issued during 1995 in the principal amounts of $75
million and $10 million and accrue interest at 8.38% and 7.10%,
respectively, and mature in 2000 and 2002, respectively. The
balance of the $75 million Senior Note, net of unamortized
discounts, was $74.9 million at March 31, 1998 and December 31,
1997.
Medium-Term Notes Program
The Company issued ten Medium-Term Notes (the "MTN's")
having an aggregate balance of $92.5 million at March 31, 1998
and December 31, 1997. The principal amounts of these MTN's
range from $2.5 million to $20 million and bear interest from
6.18% to 7.93% over terms ranging from two to 30 years, with a
stated weighted average maturity of 10 years at March 31, 1998.
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. Should these holders request prepayment, the
weighted average maturity would be 5.23 years. The weighted
average interest rate of the ten MTN's is 6.97%. Six of the
MTN's in the aggregate amount of $42.5 million were issued in
1996, with the balance issued in 1997.
The Company's current MTN Program provides for the issuance
from time-to-time of up to $102.5 million of MTN's due nine
months or more from the date of issue and may be subject to
redemption at the option of the Company or repayment at the
option of the holder prior to the stated maturity date. These
MTN's may bear interest at fixed rates or at floating rates and
can be issued in minimum denominations of $1,000. There are
currently $62.5 million of additional MTN borrowings available
under the current program.
From time to time, the Company may enter into hedge agreements
to minimize its exposure to interest rate risks.
Line of Credit
During September 1997, the Company reached an agreement with
its agent bank to increase its $75 million unsecured credit
facility (the "Line of Credit") to $100 million. The Company
also negotiated a competitive bid option which could further
reduce interest cost on its 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. For the three months ended March 31, 1998, 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 20 basis points on the average daily
unused amount of the facility is payable quarterly in arrears.
The Company also exercised its option to extend the line for one
additional year through September 1998. The weighted average
interest rate on borrowings outstanding under the Line of Credit
was 6.81% at March 31, 1998. At March 31, 1998, $100 million was
drawn on the Line of Credit. At March 31, 1998, the Company was
in violation of certain financial ratio covenants under the Line
of Credit. The Company has received waivers of these violations
through the next calculation date of June 30, 1998. The Company
is in the process of renegotiating and amending its credit
facility to increase available borrowings from $100 to $250
10
million, reduce the interest rate and to relax certain of its
covenants. While the Company believes the new facility (which
will fund repayment of borrowings under the existing facility)
will be closed June 15, 1998, there can be no assurance that this
will occur.
The Company entered into a 90 day term loan on January 30,
1998 for $45 million. This term loan was used to acquire the
four multifamily properties (Note 2). The pricing relating to
the 90 day term loan mirrors the Line of Credit. The loan has
been extended to June 30, 1998.
6. TRANSACTIONS WITH AFFILIATES AND JOINT VENTURES
The Company provides management and other services to (and
is reimbursed for certain expenses incurred on behalf of) certain
non-owned properties in which the Company's Chief Executive
Officer and/or other related parties have varying ownership
interests. The entities which own these properties, as well as
other related parties, are referred to as "affiliates". The
Company also provides similar services to joint venture
properties.
Summarized affiliate and joint venture transaction activity
follows:
March 31,
1998 1997
Property management fee and other
miscellaneous service revenues
- affiliates $ 583,931 $ 626,231
- joint ventures 226,945 211,815
Painting service revenues
- affiliates 99,912 116,267
- joint ventures 93,901 33,437
Expenses incurred on behalf
of and reimbursed by(1) - affiliates 1,144,958 1,139,151
- joint ventures 641,641 652,951
Interest income - affiliates 167,984 61,765
Interest expense - affiliates (129,379) (76,215)
- joint ventures (11,810) (5,783)
(1) Primarily payroll and employee benefits, reimbursed at cost.
Property management fees and other miscellaneous receivables
due from affiliates and joint venture properties were $4,508,717
and $4,542,798 in the aggregate at March 31, 1998 and December
31, 1997, respectively. Other miscellaneous payables due to
affiliates and joint venture properties were $143,254 and
$329,000 in the aggregate at March 31, 1998 and December 31,
1997, respectively.
In the normal course of business, the Company advances funds
on behalf of, or holds funds for the benefit of affiliates and
joint ventures. Funds advanced to affiliates and joint ventures
aggregated $8,626,159 and $840,475 at March 31, 1998,
respectively, and $9,048,403 and $847,954 at December 31, 1997,
respectively. Except for insignificant amounts, advances to
affiliates bear interest; the rate charged was 8.3% on a weighted
average basis, during the periods ending March 31, 1998 and 1997.
The Company held funds for the benefit of affiliates and joint
ventures in the aggregate amount of $5,561,077 and $1,573,863 at
March 31, 1998, respectively, and $4,989,674 and $1,805,543 at
December 31, 1997, respectively.
Subsequent to December 31, 1997, certain affiliated entities
which owed the Company a substantial amount of the advances
described above, made capital calls to their partners for the
purpose of effecting repayment of such advances. Thereafter,
approximately $3.5 million of advances were repaid pursuant to
such capital calls. However, a corporation (the "Corporation")
owned by a member of the Company's board of directors, and his
siblings (including the wife of the Company's Chairman and Chief
Executive Officer) which serves as general partner of certain
affiliated entities, has informed the Company that the
11
Corporation has caused the commencement of a review of
expenditures relating to approximately $2.9 million of capital
calls from certain HUD subsidized affiliated entities, to
determine the appropriateness of such expenditures and whether
certain of such expenditures are properly the responsibility of
Associated Estates Realty Corporation. Should this review result
in any dispute with respect to the foregoing expenditures, such
disagreement will be resolved through binding arbitration. The
Company believes that all expenditures were appropriate and,
accordingly, does not believe that the ultimate outcome of any
disagreement will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
At March 31, 1998, two notes of equal amounts were
receivable from the Company's Chief Executive Officer aggregating
$3,342,000 (included in "Accounts and notes receivables-
affiliates and joint ventures"). The notes were entered into on
May 23, 1997 and bear interest, payable quarterly at the 30-day
LIBOR plus the LIBOR margin on the Company's Line of Credit, with
principal due May 1, 2002. The 30-day LIBOR averaged 5.65% for
the period ending March 31, 1998 while the LIBOR margin on the
Company's Line of Credit ranged from 75 to 125 basis points. One
of the notes is collateralized by 150,000 of the Company's common
shares; the other note is unsecured. The Company recognized
interest income of $56,229 for the period ending March 31, 1998
relating to these notes.
7. PREFERRED AND COMMON SHARES
On July 2, 1997, the Company completed an offering of
1,750,000 common shares at $23.50 per share. The net proceeds of
approximately $38.8 million were applied to reduce debt.
8. EARNINGS PER SHARE
Earnings Per Share
Earnings per share ("EPS") has been computed pursuant to the
provisions of SFAS No. 128 which became effective after December
15, 1997; all periods prior thereto have been restated to conform
with the provisions of this Statement.
The following table provides a reconciliation of both income
before extraordinary items and the number of common shares used
in the computations of basic EPS, which utilizes the weighted
average number of common shares outstanding without regard to
dilutive potential common shares, and diluted EPS, which includes
all such shares.
For the three months
ended March 31,
1998 1997
Income Before Extraordinary Items $ 4,524,746 $ 5,225,527
Less: Preferred stock dividends 1,371,105 1,371,106
Applicable to common shares $ 3,153,641 $ 3,854,421
Number of Shares
Basic-average shares outstanding 17,071,950 15,320,718
Add: Dilutive effect of stock options 3,433 28,152
Incremental shares of restricted stock - 1,668
Diluted shares 17,075,383 15,350,538
Per Share Amount-Income
Before Extraordinary Item
Basic $ .18 $ .25
Diluted $ .18 $ .25
12
Options to purchase 1,070,274 shares of common stock were
outstanding at March 31, 1998 and December 31, 1997, a portion of
which has been reflected above using the treasury stock method.
9. PRO FORMA CONDENSED FINANCIAL INFORMATION (UNAUDITED)
The following unaudited supplemental pro forma operating
data for 1998 is presented to reflect, as of January 1, 1998, the
effects of: (i) the four property acquisitions completed in 1998.
The following unaudited supplemental pro forma operating data for
1997 is presented to reflect, as of January 1, 1997, the effects
of: (i) the eight property acquisitions completed in 1997, (ii)
the four property acquisitions completed in 1998, and (iii) the
offering of 1,750,000 common shares.
For the three months
ended March 31,
(In thousands, except per share amounts) 1998 1997
Revenues $ 31,772 $ 30,700
*Net income 4,411 5,704
*Net income applicable to common shares (Basic and 3,040 4,333
Diluted)
*Net income per common shares (Basic and Diluted) $ .18 $ .25
Weighted average common shares outstanding:
- Basic 17,074 17,074
- Diluted 17,075 17,075
*Before extraordinary item
The 1997 pro forma financial information does not include
the revenue and expenses for Oak Bend Apartments and Waterstone
Apartments, properties that were acquired in 1997 for the period
January 1, 1997 through the date the properties were acquired by
the Company. The revenue and expenses of Oak Bend Apartments and
Waterstone Apartments were excluded from the pro forma financial
information for such periods as the properties were under
construction during substantially all of the periods prior to
their acquisition.
The unaudited pro forma condensed statement of operations is
not necessarily indicative of what the actual results of
operations of the Company would have been assuming the
transactions had been completed as set forth, nor does it purport
to represent the results of operations of future periods of the
Company.
10. SUBSEQUENT EVENTS
On April 9, 1998, the Company issued a $20 million, 10 year
note under its Medium-Term Notes Program bearing interest at a
face of 6.87%, and an all in rate of 7.17%. The all in rate
considers all anticipated issuance costs and the effects of a
treasury rate lock which was settled upon pricing of the MTN.
The net proceeds to the Company of $19.9 million were applied to
amounts outstanding under the Line of Credit. The Company has
$62.5 million of additional MTN borrowings available under the
current program.
The Company is exploring opportunities to dispose of a
number of its multifamily properties; namely the joint venture
properties as well as the government assisted and congregate care
portfolio.
On March 17, 1998, the Company declared a dividend of $.465
per common share for the quarter ending March 31, 1998, which was
paid on May 1, 1998 to shareholders of record on April 15, 1998.
13
11. PROPOSED MERGER AND RELATED TRANSACTIONS
Proposed Merger
Subject to customary conditions to closing and the approval
of the Company's shareholders, the Company has entered into a
definitive merger agreement with MIG Realty Advisors, Inc.
("MIGRA"). Pursuant to the terms of the merger agreement with
MIGRA, the Company will also acquire the property management
business of several of MIGRA's affiliates and the right to
receive certain asset management fees, including disposition fees
that would have otherwise been received by MIGRA upon the sale of
certain of the properties owned by institutions advised by MIGRA.
In exchange for their interest in MIGRA and the affiliated
property management businesses, the shareholders of MIGRA will
receive approximately 408,318 of the Company's common shares at
the closing of the merger. Subject to the achievement of certain
performance criteria, the shareholders of MIGRA have the
opportunity to receive additional contingent consideration to be
paid in the form of the Company's common shares. Such contingent
consideration may have a value of up to $3.1 million and $6.4
million on the first and second anniversary of the merger,
respectively. However, the Company may reduce the purchase price
for the MIGRA Operations to the extent that any of MIGRA's or a
MIGRA affiliate's advisory clients have not consented to the
assignment of or have terminated any advisory, asset, property
management or mortgage servicing agreement to the Company.
Conversely, the purchase price may be increased to the extent
that MIGRA enters into any new asset or property management or
mortgage servicing agreement on or before the 90 days preceding
the closing of the merger. In no event, however, will the amount
of any price increase exceed the amount of any price decrease.
Acquisition Activity
From January 1 through February 26, 1998, the Company
acquired four multifamily properties containing 1,320 suites for
an aggregate purchase price of $74.4 million of which $15.5
million represents liabilities assumed including mortgage
indebtedness of $15.0 million. The balance of the purchase price
was financed using borrowings under an unsecured 90 day term loan
of $44.5 million and borrowings under the Company's Line of
Credit of approximately $14.4 million. The properties are
located in Coconut Creek, Florida; Duluth, Georgia; Columbia,
Maryland; and Toledo, Ohio.
Proposed Acquisitions
On January 28, 1998 (the "Contract Date"), the Company
entered into a contract to acquire certain assets, consisting
principally of the multifamily properties as further described
below, from MIG Residential REIT, Inc. The seller of the
properties has agreed to exchange its assets for a combination of
cash and an equity interest (the "Equity Consideration") in the
Company totaling $108.5 million. The seller may elect to receive
a portion of the total consideration in cash, up to a maximum of
$11.1 million. The Company intends to finance any cash portion
of the purchase price with borrowings made available through the
Company's proposed amended and restated Line of Credit. The
number of common shares issued will be determined based on the
amount of Equity Consideration divided by the average closing
price of the Company's common shares over the 20 day period
preceding the purchase of the Proposed Acquisition Properties.
For purposes of determining the number of shares issued as Equity
Consideration, however, the 20 day average price cannot exceed
the average closing price of the Company's common shares over the
20 day period preceding the Contract Date times 106%.
The Company has also entered into separate contracts to
purchase three parcels of undeveloped land containing an
aggregate of 144 acres for an approximate purchase price of $9.8
million. One of the parcels is located in Avon, Ohio (a suburb
of Cleveland), one of the parcels is located in Crestview Hills,
Kentucky adjacent to a multifamily real estate property currently
under contract and one of the parcels is located in Cranberry
Township, Pennsylvania (a suburb of Pittsburgh). Approximately
838 multifamily apartments may be constructed on the undeveloped
land: 312 in Avon, Ohio; 300 in Crestview Hills, Kentucky; and
14
226 in Cranberry Township, Pennsylvania. The Company expects to
finance the undeveloped land acquisitions using borrowings under
the Company's proposed amended and restated Line of Credit.
There can be no assurances, however, that the Company will
be successful in its attempts to acquire the Proposed Acquisition
Properties and the three parcels of undeveloped land currently
under contract.
15
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") which, at March 31, 1998,
owned or was a joint venture partner in 90 multifamily properties
containing 18,920 suites located in Florida, Georgia, Ohio,
Maryland, 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 set
forth in the Consolidated Statements of Operations contained in
the financial statements, including trends which might appear,
should not be taken as indicative of future operations.
Liquidity and Capital Resources
The Company has elected to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended,
commencing with its taxable year ending December 31, 1994.
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 borrowings under a $100 million
unsecured revolving credit facility (the "Line of Credit") for
the acquisition and development of multifamily properties and
working capital purposes. The Line of Credit includes certain
restrictive covenants which, among others, requires the Company
to maintain a minimum level of net worth, to limit dividends to
90% of Distributable Cash Flow, to restrict the use of its
borrowings and to maintain certain debt coverage ratios. At
March 31, 1998, the Company was in violation of certain of these
covenants. The Company, however, has received waivers of these
violations from the bank group that issued the Line of Credit.
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 20 basis points on the average daily
unused amount of the facility is paid quarterly in arrears. The
Line of Credit expires in September 1998. At March 31, 1998,
$100 million was drawn on the Line of Credit with a weighted
average interest rate of 6.8%.
The Company is currently negotiating a three year $250
million unsecured revolving credit facility (the "Proposed
Amended and Restated Line of Credit"). The Proposed Amended and
Restated Line of Credit can be extended one additional year by
the Company without consent of the Banks provided that the
Company is not in default of the Proposed Amended and Restated
Line of Credit agreement. Thereafter, the maturity of the Line
of Credit may be extended annually at the request of the Company
and approval of the Banks on an evergreen basis. There is a
closing fee equal to 37.5 basis points of the maximum commitment
amount. In addition, the Company shall pay an annual facility
fee equal to 15 basis points of the total amount of the
commitment. The interest rate will be scaled based on the
Company's credit rating by Moody's and Standard & Poors. The
pricing is currently being negotiated and the interest rate
margin based on the Company's credit rating is expected to range
somewhere between 90 to 100 basis points. Other features of the
Proposed Amended and Restated Line of Credit include a
Competitive Bid Option up to 50% of the maximum commitment and an
option to fund Swingline Loans up to $5 million.
Seventy-one of the Company's 83 wholly owned properties were
unencumbered at March 31, 1998 with annualized earnings before
interest, depreciation and amortization of approximately $58.7
million and an historical cost basis of approximately $566.4
million. The remaining twelve of the Company's wholly owned
properties, have an historical cost basis of $130.7 million and
secured property specific debt of $72.5 million at March 31,
1998. Unsecured debt, which totaled $322.4 million at March 31,
1998, consisted of $92.5 million in Medium-Term Notes, Senior
Notes of $84.9 million, an unsecured 90 day term loan of $45.0
million and amounts drawn on the revolving credit facility of
$100 million. The Company's proportionate share of the mortgage
debt relating to the seven joint venture properties was $17.7
million at March 31, 1998. The weighted average interest rate on
the secured, unsecured and the Company's proportionate share of
the joint venture debt was 7.4% at March 31, 1998.
16
On April 9, 1998 the Company issued a 10-year, $20 million
Medium-Term Note (the "MTN") under its $102.5 million MTN
program. The weighted average interest rate, including the
effect of the settlement of a Treasury Lock agreement, is 7.2%.
The net proceeds to the Company with respect to this issuance
were $19.4 million, which 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. The securities may be offered from time to
time at prices and upon terms to be determined at the time of
sale.
Acquisitions, development and dispositions:
The Company intends to continue to finance its multifamily
property acquisitions and development with the most appropriate
sources of capital, which may include undistributed Funds From
Operations, the issuance of equity securities, bank and other
institutional borrowings, the issuance of debt securities, the
assumption of mortgage indebtedness or through the exchange of
properties. The Company may also determine to raise additional
working capital through one or more of these sources.
During the quarter ended March 31, 1998, the Company or a
subsidiary of the Company acquired four multifamily properties
containing an aggregate of 1,320 suites for an aggregate purchase
price of $74.4 million, of which $17.0 million represents
liabilities assumed including mortgage indebtedness of $15.0
million. The balance of the purchase price was financed using
borrowings under an unsecured 90 day term loan of $44.5 million
and borrowings under the Line of Credit of approximately $14.4
million. The acquired properties are located in Coconut Creek,
Florida, Atlanta, Georgia, Columbia, Maryland and Toledo, Ohio.
The Falls Apartments was acquired by AERC of Georgia, a wholly
owned qualified REIT subsidiary of the Company.
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;
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, or that the merger did
not close. 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 has three newly constructed multifamily
properties in lease-up. Bradford at Easton, a 324 suite property
located in Columbus, Ohio was completed in the fourth quarter of
1997 and presently has 290 suites leased. The Residence at
Barrington, a planned 288 suite property located in Aurora, Ohio
(a city located southeast of Cleveland), had 148 suites completed
and 207 suites leased. The Village of Western Reserve, a 108
suite property in Streetsboro, Ohio (also located southeast of
Cleveland) had 75 suites completed and 85 suites leased. The
Village of Western Reserve and The Residence at Barrington (the
"New Construction Properties") are scheduled for completion in
the second and fourth quarter of 1998, respectively.
The Company is anticipating the construction of an
additional 398 suites (collectively the "Suite Additions") during
1998 on land adjacent to multifamily properties currently owned
by the Company as follows:
17
Property Location Suites
Arbor Landings Apartments II Ann Arbor, Michigan 160
Georgetown Park Apartments III Fenton, Michigan 120
Aspen Lakes II Grand Rapids, Michigan 118
Total Suites 398
The Company is exploring opportunities to dispose of a
number of its joint venture, government assisted and congregate
care multifamily properties.
The Company has also entered into separate contracts to
purchase three parcels of undeveloped land containing an
aggregate of 144 acres for an approximate purchase price of $15.0
million. One of the parcels is located in Avon, Ohio (a suburb
of Cleveland), one of the parcels is located in Crestview Hills,
Kentucky adjacent to a multifamily real estate property currently
under contract and one of the parcels is located in Cranberry
Township, Pennsylvania (a suburb of Pittsburgh). Approximately
810 multifamily apartments may be constructed on the undeveloped
land; 312 in Avon, Ohio; 272 in Crestview Hills, Kentucky; and
226 in Cranberry Township, Pennsylvania. The Company expects to
finance the undeveloped land acquisitions using borrowings under
the Company's Proposed Amended and Restated Line of Credit.
The Proposed Merger with MIG Realty Advisors, Inc.:
Subject to customary conditions to closing and the approval
of the Company's shareholders, the Company has entered into a
definitive merger agreement with MIGRA. Pursuant to the terms of
the merger agreement with MIGRA, the Company expects to acquire
the property management business of several of MIGRA's affiliates
and the right to receive certain asset management fees, including
disposition and incentive fees that would have otherwise been
received by MIGRA upon the sale of certain of the properties
owned by institutions advised by MIGRA. Founded in 1982, MIGRA
currently manages, through its affiliated management companies,
38 Multifamily Apartment Properties containing 11,333 suites.
MIGRA's asset management, property management, investment
advisory and mortgage servicing operations are collectively
referred to herein as the "MIGRA Operations."
In exchange for their interest in MIGRA and the affiliated
property management businesses, the shareholders of MIGRA will
receive approximately 408,318 (based on the average closing
prices of the Company's common shares for the 20 trading days
preceding the date of the merger agreement price, which average
price is $23.63) of the Company's common shares at the closing of
the merger. Subject to the achievement of certain performance
criteria, the shareholders of MIGRA have the opportunity to
receive additional contingent consideration to be paid in the
form of the Company's common shares. Such contingent
consideration may aggregate up to $3.1 million and $6.4 million
on the first and second anniversary of the merger, respectively.
A portion of the shares to be issued will be based on the average
closing price of the Company's common shares for the 20 days
immediately preceding the contingent payment date.
The Company may reduce the purchase price for the MIGRA
Operations to the extent that any of MIGRA's or a MIGRA
affiliate's advisory clients have not consented to the assignment
of, or have terminated any advisory, asset, property management
or mortgage servicing agreement to the Company (the "Reduction
Provision") or have not sold their multifamily apartment
properties to the Company. Conversely, the purchase price may be
increased to the extent that MIGRA enters into any new asset or
property management or mortgage servicing agreement on or before
the 90 days preceding the closing of the merger. In no event,
however, will the amount of any price increase exceed the amount
of any price decrease. The initial purchase price has been
reduced by $5.6 million pursuant to the Reduction Provision and
other price reduction provisions. Assuming all contingent
consideration is paid and the affect of the Reduction Provision,
the total purchase price for MIGRA, the property management
business, and the rights to the disposition fees will be
approximately $13.5 million.
18
The Proposed Acquisition of Multifamily Real Estate Properties:
On January 28, 1998 (the "Contract Date"), the Company
entered into a contract to acquire certain assets, consisting
principally of the multifamily properties as further described
below, (the "Proposed Acquisition Properties"). The Proposed
Acquisition Properties are as follows:
Number Year
of Placed
Name of Property Location Suites in Service
20th and Campbell Apartments Phoenix, Arizona 204 1989
Annen Woods Apartments Pikesville, Maryland 132 1987
Desert Oasis Apartments Palm Desert, California 320 1990
Fleetwood Apartments Houston, Texas 104 1993
Hampton Point Apartments Silver Springs, Maryland 352 1986
Morgan Place Apartments Atlanta, Georgia 186 1989
Peachtree Apartments St. Louis, Missouri 156 1989
Windsor Falls Apartments Raleigh, North Carolina 276 1994
The seller of the Proposed Acquisition Properties has
agreed to exchange its assets for a combination of cash and an
equity interest (the "Equity Consideration") in the Company
totaling $108.5 million. The cash portion of the purchase price
may not exceed $11.1 million. The number of common shares issued
will be determined based on the amount of Equity Consideration
divided by the average closing price of the Company's common
shares over the 20 day period preceding the purchase of the
Proposed Acquisition Properties. For purposes of determining the
number of shares issued as Equity Consideration, however, to the
extent that the 20 day average price does not exceed the average
closing price of the Company's common shares over the 20 day
period preceding the Contract Date times 106%, no adjustment in
the number of shares determined at the Contract Date will be
made. The Company intends to finance any cash portion of the
purchase price with borrowings made available through the
Company's Proposed Amended and Restated Line of Credit. The
amount of cash ultimately paid will be determined at the
discretion of the Seller in an amount up to $11.1 million.
In addition to the Proposed Acquisition Properties, the
Company has entered into three separate Partnership Interest
Purchase Agreements pursuant to which the Company may purchase
the general partnership interest of MIG Development Company, an
affiliate of MIGRA, in three limited partnerships each of which
owns a multifamily property (together referred to as the
"Development Properties") one of which has recently achieved
stabilized occupancy while the remaining two are currently under
construction for an aggregate purchase price of approximately
$90.8 million. The Development Properties are as follows:
Number Year
of Placed
Name of Property Location Suites in Service
Windsor Hollywood Hollywood, Florida 388 1998
Windsor Pines Pembroke Pines, Florida 368 under construction
Kirkman Orlando, Florida 460 under construction
Dividends:
On March 17, 1998, the Company declared a dividend of $0.465
per common share for the quarter ending March 31, 1998 which was
paid on May 1, 1998 to shareholders of record on April 15, 1998.
On February 13, 1998, the Company declared a dividend of $0.60938
per depositary share on its Class A Cumulative Preferred Shares
(the "Perpetual Preferred Shares") which was paid on March 16,
1998 to shareholders of record on February 27, 1998.
Cash flow sources and applications:
Net cash provided by operating activities increased
$10,158,800 from $3,300,900 to $13,459,700 for the quarter ended
19
March 31, 1997 when compared with the quarter ended March 31,
1998. This increase was primarily the result of an increase in
cash provided by a decrease in accounts and notes receivable,
accounts and notes receivable - affiliates and joint ventures and
restricted cash which was offset somewhat by uses of cash from
other operating assets and liabilities and an increase in cash
provided by the income derived from the Company's multi-family
property operations.
Net cash flows used for investing activities of $66,374,500
for the quarter ended March 31, 1998 were primarily used for the
acquisition and development of multifamily real estate,
properties and undeveloped land parcels.
Net cash flows provided by financing activities of
$52,303,100 for the quarter ended March 31, 1998 were primarily
comprised of borrowings on the Line of Credit and other unsecured
short-term borrowings. Funds were also used to pay dividends on
the Company's common and Perpetual Preferred Shares as well as
repayments on the Line of Credit.
RESULTS OF OPERATIONS
Comparison of the quarter ended March 31, 1998 to the quarter
ended March 31, 1997
Overall, total revenue increased $5,830,400 or 23.4% and
total expenses increased $6,609,200 or 33.7% for the quarter.
Net income applicable to common shares decreased $700,800 or
18.2%, after the dividends on the Company's Perpetual Preferred
Shares.
In the following discussion of the comparison of the quarter
ended March 31, 1998 to the quarter ended March 31, 1997, the
term Core Portfolio Properties refers to the 71 wholly owned
multifamily properties owned by the Company at December 31, 1996.
Acquired Properties refers to the 12 properties acquired between
January 1, 1997 and March 31, 1998.
During the quarter ended March 31, 1998, the Acquired
Properties generated total revenues of $6,077,800 while incurring
property, operating and maintenance expenses of $2,003,000.
Rental Revenues:
Rental revenues increased $5,944,700 or 25.7% for the
quarter. Increases in occupancy and suite rents at the Core
Portfolio Market-rate and Government-Assisted Properties resulted
in a $268,800 or 1.2% increase in rental revenue from these
properties. The balance of the increase resulted from increased
rental revenues attributable to office space and other
miscellaneous rental revenue items.
Other Revenues:
Painting service revenues decreased $159,900 or 31.5%, for
the quarter. The decrease is primarily due to a decline in sales
cause by heightened competition and a decline in the level of
contract services.
Other income increased $77,600 or 33.9% for the quarter.
The increase is due primarily to an increase in the amount of
interest income earned in comparison to the prior year.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$3,077,100 or 33.4% for the quarter. Operating and maintenance
expenses at the Acquired Properties increased $1,895,100 for the
quarter due primarily to the operating and maintenance expenses
incurred at the eight properties acquired during 1997 and the
four properties acquired in 1998. Property operating and
maintenance expenses at the Core Portfolio Properties increased
$1,181,900, or 13.0% when compared to the quarter ended March 31,
1997 primarily due to increases in personnel, utilities and
building and grounds repair and maintenance expenses which were
offset by a slight decrease in advertising expenses. Building
renovations and suite and common area refurbishment in the Core
Portfolio Properties that were not considered to be capital in
nature averaged $82 per suite for the quarter ended March 31,
1998 as compared to $63 per suite for the quarter ended March 31,
1997.
20
Other expenses:
Depreciation and amortization increased $985,800 or 22.8%
for the quarter primarily due to the increased depreciation and
amortization expense recognized on the Acquired Properties.
General and administrative expenses increased $322,100 or
21.3% for the quarter. This increase is primarily attributable
to payroll, consulting and training expenses.
Interest expense increased $2,325,100 or 56.6% for the
quarter primarily due to the interest incurred with respect to
the additional borrowings under the Line of Credit that were used
for the acquisition of properties.
Net income applicable to common shares:
Net income applicable to common shares is reduced by
dividends on the Perpetual Preferred Shares of $1,371,100.
Equity in net income of joint ventures:
The combined equity in net income of joint ventures
increased $78,100 or 186.7% for the quarter primarily
attributable to increased rents and occupancies.
The following table presents the historical statements of
operations of the Company's beneficial interest in the operations
of the joint ventures for the quarters ended March 31, 1998 and
1997.
For the quarter ended
March 31,
1998 1997
Beneficial interests in
joint venture operations
Rental revenue $ 1,725,500 $ 1,624,600
Cost of operations 1,137,100 1,096,400
588,400 528,200
Interest income 600 6,400
Interest expense (436,800) (443,200)
Depreciation (105,500) (120,800)
Amortization (10,500) (12,400)
Net income $ 36,200 $ (41,800)
Outlook
The following three paragraphs contain forward-looking
statements and are subject to certain risks, trends and
uncertainties that could cause actual results to vary from those
projected. Readers are cautioned not to place undue reliance on
forward-looking statements, which are based only on current
judgments and current knowledge. These forward-looking
statements are intended to be covered by the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned that the Company's forward-looking
statements involve risks and uncertainty, including without
limitation risks of a lessening of demand for the apartments
owned by the Company, changes in government regulations affecting
the Government-Assisted Properties, and expenditures that cannot
be anticipated such as utility rate and usage increases,
unanticipated repairs, additional staffing, insurance increases
and real estate tax valuation reassessments.
Approximately 52% of the Company's multifamily properties
are located in the greater Cleveland/Akron, Ohio area which is
the fourteenth largest consumer market in the United States
containing over four million people within a 50 mile radius of
Akron. In central Ohio, Columbus is the only city in the
northeast quadrant of the country that has experienced continuous
population growth since 1970, according to Census Bureau data.
Columbus, Ohio was selected by the E & Y Kenneth Leventhal Real
21
Estate Group as one of the 12 best investment markets in the
country because of its well-diversified economic base, strong
rental growth and lower vacancy rates. The Company's Michigan
portfolio is located in ten separate markets having a combined
projected population growth of approximately 4.2%, or 153,000
people, with a projected 8.5% increase in job growth or an
additional 17,000 jobs.
With an average economic occupancy for the Core Portfolio
Market-rate Properties at 93%, and strong market fundamentals, it
would appear that opportunities exist for increasing the rate of
rental growth at the Company's Market-rate Properties. The
Company anticipates that rental revenues will increase between
two to three percent in 1998 when compared to 1997. The 1998
rental revenue increase objective should be achieved through a
combination of rent and occupancy increases. Markets like
Columbus and Indianapolis, where there is an abundance of
undeveloped land suitable for development, will continue to be
sensitive to the impact of new multifamily housing starts. Some
of these new starts, particularly those in proximity to the
Company's properties, may have a short-term effect on
occupancies. The Company believes that its 1998 rental revenue
growth objectives are reasonable given the geographic diversity
of the Company's Core Portfolio Market-rate Properties.
The Company expects that building and grounds repair and
maintenance expenditures for the Core Portfolio Properties will
increase when compared to the prior year as the Company continues
to maintain its properties to maximize their earnings potential.
Real estate tax increases should begin to moderate as the effect
of the reassessed values diminishes over time. Utility
expenditures will vary over prior periods as the effect of
weather related usage variances is factored into the level of
utility expense.
Inflation
Substantially all of the Market-rate residential leases at
the properties allow, at the time of renewal, for adjustments in
the rent payable thereunder, and thus may enable the Company to
seek increases in rents. The substantial majority of these
leases are for one year or less and the remaining leases are for
terms up to two years. The short-term nature of these leases
generally serves to reduce the risk to the Company of the adverse
effect of inflation.
Contingencies
There are no recorded amounts resulting from environmental
liabilities as there are no known contingencies with respect
thereto. Future claims for environmental liabilities are not
measurable given the uncertainties surrounding whether there
exists a basis for any such claims to be asserted and, if so,
whether any claims will, in fact, be asserted. Furthermore, no
condition is known to exist that would give rise to a liability
for site restoration, post closure and monitoring commitments, or
other costs that may be incurred with respect to the sale or
disposal of a property. Phase I environmental audits have been
completed on all of the Company's wholly owned and joint venture
properties. The Company has obtained environmental insurance
covering (i) pre-existing contamination, (ii) on-going third
party contamination, (iii) third party bodily injury and (iv)
remediation. The policy is for a five year term and carries a
limit of liability of $2 million per environmental contamination
discovery (with a $50,000 deductible) and has a $10 million
policy term aggregate. Management has no plans to abandon any of
the properties and is unaware of any other material loss
contingencies. The Company has completed the installation of
financial reporting and leasing management systems, which
together comprise the Company's primary reporting systems, that
are Year 2000 compliant.
The U.S. Department of Housing and Urban Development ("HUD")
notified the Company that Rainbow Terrace Apartments, Inc., (the
Company's subsidiary corporation that owns Rainbow Terrace
Apartments) is in default under the terms of the Regulatory
Agreement and Housing Assistance Payments Contract ("HAP
Contract") pertaining to this property. Among other matters, HUD
alleges that the property is poorly managed and Rainbow Terrace
Apartments has failed to complete certain physical improvements
to the property. Moreover, HUD claims that the property is not
in compliance with numerous technical regulations concerning
whether certain expenses are properly chargeable to the property.
As provided in the Regulatory Agreement and HAP Contract, in the
event of a default, HUD has the right to exercise various
remedies including terminating future payments under the HAP
Contract and foreclosing the government-insured mortgage
encumbering the property.
22
This controversy arose out of a Comprehensive Management
Review of the property initiated by HUD in the Spring of 1997,
which included a complete physical inspection of the property.
Rainbow Terrace Apartments believes that it has corrected the
management deficiencies cited by HUD in the Comprehensive
Management Review (other than the completion of certain physical
improvements to the property) and, in a series of written
responses to HUD, justified the expenditures questioned by HUD as
being properly chargeable to the property in accordance with
HUD's regulations. Moreover, Rainbow Terrace Apartments believes
it has repaired any physical deficiencies noted by HUD in its
Comprehensive Management Review that might pose a threat to the
life and safety of its residents. The Company is unable to
predict the outcome of the controversy with HUD, but does not
believe it will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
In the normal course of business, the Company advances funds
on behalf of, or holds funds for the benefit of affiliates which
own real estate properties managed by the Company or one of the
Service Companies. One of these affiliates, a corporation (the
"Corporation") owned by a member of the Company's board of
directors and his siblings (including the wife of the Company's
Chairman and Chief Executive Officer), which serves as general
partner of certain affiliated entities, has informed the Company
that the Corporation has caused the commencement of a review of
expenditures relating to approximately $2.9 million of capital
calls from certain HUD subsidized affiliated entities, to
determine the appropriateness of such expenditures and whether
certain of such expenditures are properly the responsibility of
the Company. Should this review result in any dispute with
respect to the foregoing expenditures, such disagreement will be
resolved through binding arbitration. The Company believes that
all expenditures were appropriate and, accordingly, does not
believe that the ultimate outcome of any disagreement will have a
material adverse effect on the Company's financial position,
results of operations or cash flows.
23
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
Atlanta, Georgia
The Falls 02/03/98 Duluth Garden 520 1986 963
Central Ohio
Oak Bend Commons 05/30/97 Canal Winchester Garden/Tnhm 102 1997 1,110
Saw Mill Village 04/22/97 Columbus Garden 340 1987 1,161
Cincinnati, Ohio
Remington Place Apartments 03/31/97 Cincinnati Garden 234 1988-90 830
Coconut Creek, Florida
Cypress Shores 02/03/98 Coconut Creek Garden 300 1991 991
Columbia, Maryland
Reflections 02/03/98 Columbia Garden 184 1985 1,020
Indianapolis, Indiana
The Gables at White River 02/06/97 Indianapolis Garden 228 1991 974
Waterstone Apartments 08/29/97 Indianapolis Garden 344 1997 984
Michigan
Clinton Place 08/25/97 Clinton Twp. Garden 202 1988 954
Spring Valley Apartments 10/31/97 Farmington Hills Garden 224 1987 893
Toledo, Ohio
Country Club Apartments 02/19/98 Toledo Garden 316 1989 811
Hawthorne Hills Apartments 05/14/97 Toledo Garden 88 1973 1,145
3,082 973
CORE PORTFOLIO PROPERTIES
Market rate
Central Ohio
Arrowhead Station 02/28/95 Columbus Townhomes 102 1987 1,344
Bedford Commons 12/30/94 Columbus Townhomes 112 1987 1,157
Bolton Estates 07/27/94 Columbus Garden 196 1992 687
Colony Bay East 02/21/95 Columbus Garden 156 1994 903
Heathermoor 08/18/94 Worthington Gdn/Tnhms 280 1989 829
Kensington Grove 07/17/95 Westerville Gdn/Tnhms 76 1995 1,109
Lake Forest 07/28/94 Columbus Garden 192 1994 788
Muirwood Vllg. at Bennell 03/07/94 Columbus Ranch 164 1988 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
Perimeter Lakes 09/20/96 Dublin Gdn/Tnhms 189 1992 999
Residence at Christopher Wren 03/14/94 Gahanna Gdn/Tnhms 264 1993 1,062
Residence at Turnberry 03/16/94 Pickerington Gdn/Tnhms 216 1991 1,182
Sheffield at Sylvan 03/03/94 Circleville Ranch 136 1989 791
Sterling Park 08/25/94 Grove City Garden 128 1994 763
The Residence at Newark 03/03/94 Newark Ranch 112 1993-94 868
The Residence at Washington 02/01/96 Wash. Ct. House Ranch 72 1995 862
Wyndemere 09/21/94 Franklin Ranch 128 1991-95 768
3,135 903
Northeastern Ohio
Bay Club IPO Willowick Garden 96 1990 925
Colonnade West IPO Cleveland Garden 216 1964 502
Cultural Gardens IPO Euclid Mid Rise 186 1966 688
Edgewater Landing 04/20/94 Cleveland High Rise 241 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
For the three months ending For the three months ending
March 31, 1998 March 31, 1997
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
Atlanta, Georgia
The Falls N/A 88.3% $ 686 $ 0.71 N/A N/A N/A N/A
Central Ohio
Oak Bend Commons 91.9% 96.1% $ 709 $ 0.64 N/A N/A N/A N/A
Saw Mill Village 83.6 90.6 755 0.65 N/A N/A N/A N/A
Cincinnati, Ohio
Remington Place Apartments 89.1% 95.3% $ 646 $ 0.78 N/A N/A N/A N/A
Coconut Creek, Florida
Cypress Shores N/A 95.0% $ 837 $0.84 N/A N/A N/A N/A
Columbia, Maryland
Reflections N/A 95.1% $ 885 $0.87 N/A N/A N/A N/A
Indianapolis, Indiana
The Gables at White River 88.5% 93.4% $ 739 $ 0.76 N/A N/A N/A N/A
Waterstone Apartments 92.2 96.2 796 0.81 N/A N/A N/A N/A
Michigan
Clinton Place 93.5% 95.0% $ 701 $ 0.73 N/A N/A N/A N/A
Spring Valley Apartments 99.0 96.4 802 0.90 N/A N/A N/A N/A
Toledo, Ohio
Country Club Apartments N/A 100.0% $ 613 $ 0.76 N/A N/A N/A N/A
Hawthorne Hills Apartments 94.2% 100.0 548 0.48 N/A N/A N/A N/A
90.7% 97.2% $ 728 $ 0.73 N/A N/A N/A N/A
CORE PORTFOLIO PROPERTIES
Market rate
Central Ohio
Arrowhead Station 91.6% 95.1% $ 706 $ 0.53 96.9% 94.1% $ 680 $ 0.51
Bedford Commons 93.7 98.2 785 0.68 97.6 93.8 744 0.64
Bolton Estates 93.9 99.5 466 0.68 95.8 98.0 459 0.67
Colony Bay East 92.8 98.7 521 0.58 93.2 90.4 511 0.57
Heathermoor 95.3 96.4 552 0.67 96.1 95.0 538 0.65
Kensington Grove 92.3 94.7 771 0.70 92.9 93.4 772 0.70
Lake Forest 89.9 93.8 545 0.70 90.4 97.9 547 0.69
Muirwood Vllg. at Bennell 96.1 97.6 510 0.66 97.5 97.0 474 0.62
Muirwood Vllg. at London 95.3 94.6 508 0.66 96.7 96.4 499 0.65
Muirwood Vllg. at Mt. Sterling 90.5 95.8 498 0.65 94.7 100.0 495 0.64
Muirwood Vllg. at Zanesville 91.5 98.0 522 0.68 95.3 96.4 522 0.68
Pendleton Lakes East 92.3 100.0 528 0.59 96.0 94.1 490 0.55
Perimeter Lakes 95.0 98.4 713 0.72 94.1 89.9 703 0.70
Residence at Christopher Wren 94.6 93.2 746 0.70 95.7 93.2 722 0.68
Residence at Turnberry 90.6 96.3 744 0.64 91.3 93.5 734 0.62
Sheffield at Sylvan 98.4 97.1 507 0.65 98.4 92.6 501 0.63
Sterling Park 97.3 100.0 565 0.74 94.1 97.7 545 0.71
The Residence at Newark 97.2 100.0 563 0.65 95.5 88.4 554 0.64
The Residence at Washington 90.6 93.1 525 0.61 91.1 94.4 527 0.61
Wyndemere 96.4 97.7 539 0.70 98.1 96.1 532 0.69
93.7% 97.0% $ 592 $ 0.66 95.0% 94.5% $ 577 $ 0.64
Northeastern Ohio
Bay Club 99.2% 100.0% $ 634 $ 0.69 97.5% 96.9% $ 622 $ 0.67
Colonnade West 91.0 92.6 402 0.81 96.1 95.4 401 0.80
Cultural Gardens 96.0 98.9 501 0.74 95.4 93.5 498 0.72
Edgewater Landing 96.9 96.7 413 0.72 93.6 98.8 413 0.71
Gates Mills III 90.0 95.3 722 0.83 93.1 97.8 671 0.77
Holly Park 99.4 100.0 702 0.81 97.8 99.0 651 0.74
Huntington Hills 98.2 95.3 663 0.68 96.6 97.6 646 0.66
Mallard's Crossing 91.7 98.4 704 0.71 98.7 98.4 688 0.69
Memphis Manor 94.3 98.3 436 0.82 91.8 95.0 441 0.80
Park Place 89.9 96.3 541 0.73 93.6 98.2 522 0.69
<page 24>
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Suites Rehab. Sq. Ft.
Pinecrest IPO Broadview Hts. Garden 96 1987 r 598
Portage Towers IPO Cuyahoga Falls High Rise 376 1973 869
The Triangle (b) IPO Cleveland High Rise 273 1989 616
Timbers IPO Broadview Hts. Garden 96 1987-89 930
Villa Moderne IPO North Olmsted Garden 135 1963 504
Washington Manor 07/01/94 Elyria Garden 120 1963-64 541
West Park Plaza IPO Cleveland Garden 118 1964 520
Westchester Townhouses IPO Westlake Townhomes 136 1989 1,000
Westlake Townhomes IPO Westlake Townhomes 7 1985 1,000
Williamsburg at Greenwood Vllg. 02/18/94 Sagamore Hills Townhomes 260 1990 938
Winchester Hills I (c) IPO Willoughby Hills High Rise 362 1972 822
Winchester Hills II IPO Willoughby Hills High Rise 362 1979 822
Woodlands of North Royalton
fka Somerset West (a) IPO North Royalton Gdn/Tnhms 197 1982 1,038
4,350 782
Michigan
Arbor Landings Apartments 01/20/95 Ann Arbor Garden 168 1990 1,116
Aspen Lakes 09/04/96 Grand Rapids Garden 144 1981 789
Central Park Place 12/29/94 Grand Rapids Garden 216 1988 850
Country Place Apartments 06/19/95 Mt. Pleasant Garden 144 1987-89 859
Georgetown Park Apartments 12/28/94 Fenton Garden 360 1987-96 1,005
The Landings at the Preserve 09/21/95 Battle Creek Garden 190 1990-91 952
The Oaks and Woods at Hampton 08/08/95 Rochester Hills Gdn/Tnhms 544 1986-88 1,050
Spring Brook Apartments 06/20/96 Holland Gdn/Tnhms 168 1986-88 818
Summer Ridge Apartments 04/01/96 Kalamazoo Garden 248 1989-91 960
2,182 961
Toledo, Ohio
Kensington Village 09/14/95 Toledo Gdn/Tnhms 506 1985-90 1,072
Vantage Villa 10/30/95 Toledo Garden 150 1974 935
656 1,041
Pittsburgh, Pennsylvania
Chestnut Ridge 03/01/96 Pittsburgh Garden 468 1986 769
Core Market Rate 10,791 869
GOVERNMENT ASST.-ELDERLY
Ellet Development IPO Akron High Rise 100 1978 589
Hillwood I IPO Akron High Rise 100 1976 570
Puritas Place (d) IPO Cleveland High Rise 100 1981 518
Riverview IPO Massillon High Rise 98 1979 553
State Road Apartments IPO Cuyahoga Falls Garden 72 1977 r 750
Statesman II IPO Shaker Heights Garden 47 1987 r 796
Sutliff Apartments II IPO Cuyahoga Falls High Rise 185 1979 577
Tallmadge Acres IPO Tallmadge Mid Rise 125 1981 641
Twinsburg Apartments IPO Twinsburg Garden 100 1979 554
Village Towers IPO Jackson Twp. High Rise 100 1979 557
West High Apartments IPO Akron Mid Rise 68 1981 r 702
1,095 602
GOVERNMENT ASST.-FAMILY
Jennings Commons IPO Cleveland Garden 50 1981 823
Rainbow Terrace IPO Cleveland Garden 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
12,741 838
For the three months ending For the three months ending
March 31, 1998 March 31, 1997
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.
Pinecrest 91.4% 97.9% $ 465 $ 0.79 97.2% 94.8% $ 457 $ 0.76
Portage Towers 95.5 96.0 580 0.68 86.1 86.7 563 0.65
The Triangle (b) 97.6 98.2 934 1.52 99.7 99.3 898 1.46
Timbers 89.2 89.6 707 0.76 96.2 90.6 680 0.73
Villa Moderne 96.9 97.8 455 0.91 95.9 98.5 437 0.87
Washington Manor 95.0 96.7 391 0.73 99.3 98.3 370 0.68
West Park Plaza 93.7 98.3 430 0.84 95.3 95.8 423 0.81
Westchester Townhouses 93.5 93.4 779 0.78 91.8 93.4 746 0.75
Westlake Townhomes 98.6 100.0 814 0.82 100.0 100.0 781 0.78
Williamsburg at Greenwood Vllg 83.8 90.8 865 0.92 91.9 94.6 838 0.89
Winchester Hills I (c) 88.8 93.1 577 0.72 87.8 92.0 566 0.69
Winchester Hills II 86.2 92.8 617 0.77 87.3 90.9 601 0.73
Woodlands of North Royalton
fka Somerset West (a) 75.5 80.2 699 0.68 93.6 95.4 686 0.66
91.5% 94.9% $ 618 $ 0.79 93.4% 94.9% $ 599 $ 0.77
Michigan
Arbor Landings Apartments 97.8% 98.8% $ 867 $ 0.78 95.9% 95.2% $ 838 $ 0.75
Aspen Lakes 95.0 97.2 557 0.71 90.7 89.6 550 0.70
Central Park Place 96.0 98.6 611 0.73 92.9 94.0 609 0.72
Country Place Apartments 95.4 96.5 544 0.63 94.7 91.0 516 0.60
Georgetown Park Apartments 93.7 95.8 679 0.68 95.3 93.3 670 0.67
The Landings at the Preserve 96.8 98.9 754 0.80 91.8 88.9 657 0.69
The Oaks and Woods at Hampton 91.4 90.4 813 0.78 95.5 95.0 783 0.75
Spring Brook Apartments 100.0 97.6 485 0.60 95.3 96.4 469 0.57
Summer Ridge Apartments 93.6 94.0 693 0.72 90.4 95.6 672 0.70
94.5% 95.3% $ 696 $ 0.72 94.1% 93.7% $ 671 $ 0.70
Toledo, Ohio
Kensington Village 97.6% 97.8% $ 569 $ 0.53 98.0% 98.6% $ 547 $ 0.51
Vantage Villa 89.7 96.7 576 0.62 94.2 98.0 603 0.64
95.8% 97.6% $ 571 $ 0.55 97.1% 98.5% $ 560 $ 0.54
Pittsburgh, Pennsylvania
Chestnut Ridge 92.8% 91.5% $ 740 $ 0.96 94.7% 96.6% $ 695 $ 0.90
Core Market Rate 93.1% 95.6% $ 629 $ 0.72 94.2% 94.8% $ 609 $ 0.70
GOVERNMENT ASST.- ELDERLY
Ellet Development 100.0% 100.0% $ 587 $ 1.00 99.3% 100.0% $ 587 $1.00
Hillwood I 99.3 100.0 598 1.05 100.0 100.0 596 1.05
Puritas Place (d) 99.9 100.0 782 1.51 99.9 100.0 782 1.51
Riverview 100.0 100.0 591 1.07 100.0 100.0 591 1.07
State Road Apartments 100.0 100.0 597 0.80 100.0 100.0 589 0.79
Statesman II 99.2 100.0 647 0.81 98.5 97.7 651 0.82
Sutliff Apartments II 100.0 100.0 586 1.02 99.9 100.0 586 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 99.9 100.0 603 1.09
Village Towers 100.0 100.0 579 1.04 99.6 100.0 579 1.04
West High Apartments 100.0 100.0 790 1.13 100.0 100.0 790 1.13
100.0% 100.0% $ 631 $ 1.05 100.0% 99.9% $ 630 $ 1.05
GOVERNMENT ASST.- FAMILY
Jennings Commons 99.7% 100.0% $ 674 $ 0.82 99.7% 100.0% $ 674 $ 0.82
Rainbow Terrace 95.5 98.6 663 0.86 99.4 96.7 773 1.01
Shaker Park Gardens II 98.9 100.0 544 0.72 100.0 99.3 531 0.71
96.5 99.9 638 0.83 99.6 97.5 712 0.93
98.8% 99.6% $ 633 $ 0.95 100.0% 99.0% $ 662 $ 0.99
CONGREGATE CARE
Gates Mills Club 94.8% 95.8% $ 870 $ 1.21 98.3% 100.0% $ 806 $ 1.12
The Oaks 87.9 80.0 1,023 1.52 97.1 96.0 985 1.47
92.5 91.2 915 1.29 97.8 98.8 859 1.22
93.9% 96.1% $ 633 $ 0.76 95.2% 95.5% $ 620 $ 0.74
<page 25>
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Suites Rehab. Sq. Ft.
Joint Venture Properties
Northeastern Ohio
Market rate
Americana IPO Euclid High Rise 738 1968 803
College Towers IPO Kent Mid Rise 380 1969 662
Euclid House IPO Euclid Mid Rise 126 1969 654
Gates Mills Towers IPO Mayfield Hts. High Rise 760 1969 856
Highland House IPO Painesville Garden 36 1964 539
Watergate IPO Euclid High Rise 949 1971 831
2,989 789
Government Asst.- Family
Lakeshore Village IPO Cleveland Garden 108 1982 786
3,097 789
Core 15,838 834
Portfolio average 18,920 850
For the three months ending For the three months ending
March 31, 1998 March 31, 1997
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.
Joint Venture Properties
Northeastern Ohio
Market rate
Americana 89.5% 93.6% $ 487 $ 0.61 85.0% 92.1% $ 480 $ 0.60
College Towers 92.8 97.6 418 0.63 92.0 89.2 398 0.60
Euclid House 92.2 93.7 440 0.67 88.0 93.7 434 0.66
Gates Mills Towers 93.2 95.3 713 0.83 93.3 96.4 676 0.79
Highland House 98.6 100.0 417 0.77 99.7 97.2 401 0.74
Watergate 93.5 96.0 544 0.65 88.0 92.9 538 0.65
92.5% 95.4% $ 543 $ 0.69 89.7% 93.2% $ 526 $ 0.67
Government Asst.-Family
Lakeshore Village 99.9% 100.0% $ 662 $ 0.84 99.3% 100.0% $ 669 $ 0.85
93.0 95.5 549 0.70 90.3 93.5 533 0.68
Core 93.8% 96.0% $ 627 $ 0.75 94.8% 95.1% $ 613 $ 0.73
Portfolio average 93.4% 96.2% $ 632 $ 0.74 94.7% 94.6% $ 542 $ 0.53
<FN>
______________
(a) Woodlands of North Royalton fka Somerset West has 39
Contract Suites and 158 Market-rate suites.
(b) The Triangle also contains 63,321 square feet of
office/retail space.
(c) The Company acquired a noteholder interest entitling the
Company to substantially all cash flows from operations.
The Company has certain rights under a security agreement
to foreclose on the property to the extent that the unpaid
principal and interest on the underlying notes exceed seven
years equivalent principal and interest payments.
(d) The property was developed in 1981 subject to a warranty
deed provision which states that the assignment of fee
simple title of the property to the Company shall expire
in 2037.
r = Rehabilitated
</FN>
26
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 three month period ended March 31, 1998 and
1997 are summarized in the following table:
For the three
months ended
March 31,
(In thousands) 1998 1997
Net income applicable to common shares $ 3,154 $ 3,854
Depreciation on real estate assets
Wholly owned properties 4,925 4,071
Joint venture properties 106 120
Funds From Operations 8,185 8,045
Depreciation - other assets 192 94
Amortization of deferred financing fees 208 175
Fixed asset additions (68) (114)
Fixed asset additions - joint venture properties - -
Distributable Cash Flow $ 8,517 $ 8,200
Weighted average shares outstanding 17,074 15,322
27
PART II
OTHER INFORMATION
Except to the extent noted below, the items required in
Part II are inapplicable or, if applicable, would be answered in
the negative and have been omitted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Filed herewith or
incorporated
herein by
Number Title reference
2.01 Second Amended and Restated Agreement and Plan of Merger by Exhibit 2.01 to Form
and among the Company, MIG Realty Advisors, Inc. ("MIGRA") 8-K filed March 31,
and the MIGRA stockholders dated as of March ___, 1998 1998.
2.02 Purchase Agreement by and between MIG REIT/Morgan Place, Inc. Exhibit 2.02 to Form
and the Company dated as of January 28, 1998. 8-K filed March 31,
1998
2.03 Purchase Agreement by and between MIG REIT/Annen Woods, Inc. Exhibit 2.03 to Form
and the Company dated as of January 28, 1998 8-K filed March
31,1998
2.04 Purchase Agreement by and between MIG Peachtree Corporation Exhibit 2.04 to Form
and the Company dated as of January 28, 1998 8-K filed March 31,
1998
2.05 Purchase Agreement by and between MIG Fleetwood, Ltd. and Exhibit 2.05 to Form
the 8-K filed March 31,
Company dated as of January 28, 1998. 1998
2.06 Purchase Agreement by and between MIG REIT Falls, L.L.C. and Exhibit 2.06 to Form
the Company dated as of January 28, 1998. 8-K filed March 31,
1998
2.07 Purchase Agreement by and between MIG 20th and Campbell Exhibit 2.07 to Form
Corporation and the Company dated as of January 28, 1998 8-K filed March 31,
1998
2.08 Purchase Agreement by and between Desert Oasis Corporation Exhibit 2.08 to Form
and the Company dated as of January 28, 1998 8-K filed March 31,
1998
2.09 Purchase Agreement by and between MIG Hampton Corporation Exhibit 2.09 to Form
and the Company dated as of January 28, 1998. 8-K filed March 31,
1998
2.10 Purchase Agreement dated January 28, 1998 between Stonemark Exhibit 10.01 to
Apartments II, Inc., and the Company Form 8-K filed
February 17, 1998
2.11 Purchase Agreement dated January 28, 1998 between MIG Atlanta Exhibit 10.02 to
Falls Corp. and the Company Form 8-K filed
February 17, 1998
2.12 Purchase Agreement dated January 28, 1998 between MIG Exhibit 10.03 to
Reflections Inc. and the Company Form 8-K filed
February 17, 1998
3.1 Second Amended and Restated Articles of Incorporation of the Exhibit 3.1 to
Company Form S-11 filed
June 30, 1994 (File
No. 33-80950 as
amended).
3.2 Code of Regulations of the Company Exhibit 3.2 to Form
S-11 filed June 30,
1994 (File No. 33-
80950 as amended).
4.1 Specimen Stock Certificate Exhibit 3.1 to Form
S-11 filed
September 2, 1993
(File No. 33-68276
as amended).
4.2 Form of Indemnification Agreement Exhibit 4.2 to Form
S-11 filed
September 2, 1993
(File No. 33-68276
as amended).
4.3 Promissory Note dated October 23, 1991 from Triangle Exhibit 4.3 to Form
Properties Limited Partnership, et. al. in favor of PFL S-11 filed
Life Insurance Company; Open End Mortgage from Triangle September 2, 1993
Properties Limited Partnership I, et. al., in favor of (File No. 33-68276
PFL Life Insurance Company (The Registrant undertakes to as amended).
provide additional long-term loan documents upon request).
4.4 Promissory Note dated February 28, 1994 in the amount of $25 Exhibit 4.4 to Form
million. Open End Mortgage Deed and Security Agreement 10-K filed March 31,
from AERC to National City Bank (Westchester Townhouse); 1993.
Open End Mortgage Deed and Security Agreement from AERC to
National City Bank (Bay Club); Open End Mortgage Deed and
Security Agreement from Winchester II Apartments, Inc. to
National City Bank (Winchester II Apartments); and Open End
Mortgage Deed and Security Agreement from Portage Towers
Apartments, Inc. to National City Bank (Portage Towers
Apartments).
4.6 Indenture datead as of March 31, 1995 between Associated Estates Exhibit 4.6 to Form
Realty Corporation and National City Bank. 10-Q filed May 11,
1995.
4.7 $75 Million 8-3/8% Senior Note due April 15, 2000. Exhibit 4.7 to Form
10-Q filed May 11,
1995.
4.8 Revolving Credit Facility-Second Amended and Restated Credit Exhibit 4.8 to Form
Agreement dated September 26, 1995 by and among the Company, 10-Q filed
as Borrower, and National City Bank, as Agent and the Banks November 11, 1995.
identified therein.
4.8a Fourth Amendment to Revolving Credit Facility dated March 8, 1996 Exhibit 4.1 to Form
by and among the Company, as Borrower, and National City Bank, 10-Q filed May 13,
as Agent, and the banks identified therein. 1996.
29
4.8b Fifth Amendment to Credit Agreement dated November 27, 1996 by Exhibit 4.8b to Form
and among the Company, as Borrower, the Banks and Lending 10-K filed March
Institutions, as Banks, and National City Bank, as Agent. 26, 1997.
4.8c Third Amended and Restated Credit Agreement dated November 27, Exhibit 4.8c to Form
1997 by and among the Company, as Borrower, the Banks and 10-K filed
National City Bank, as Agent, and the Banks identified therein. March 31, 1998.
4.8d Seventh Amendment to Credit Agreement by and among Associated Exhibit 4.8d to Form
Estates Realty Corporation, Borrower, National City Bank, as 10-K filed March 31,
Agent and The Banks identified therein. 1998.
4.9 Form of Medium Term Note-Fixed Rate-Senior Security. Exhibit 4(i) to Form
S-3 filed December
7, 1995 (File No.
33-80169) as amended.
4.10 Form of Preferred Share Certificate. Exhibit 4.1 to Form
8-K filed July 12,
1995.
4.11 Form of Deposit Agreement and Depositary Receipt. Exhibit 4.2 to Form 8-K
filed July 12, 1995.
4.12 Ten Million Dollar 7.10% Senior Notes Due 2002. Exhibit 4.12 to Form
10-K filed March 28,
1996.
10 Associated Estates Realty Corporation Directors Deferred Exhibit 10 to Form 10-Q
Compensation Plan. filed November 14,
1996.
10.1 Registration Rights Agreement among the Company and certain Exhibit 10.1 to Form S-11
holders of the Company's Common Shares. filed September 2,
1993 (File No. 33-68276
as amended).
10.2 Stock Option Plan Exhibit 10.2 to Form
S-11 filed
September 2, 1993
(File No. 33-68276
as amended).
10.3 Amended and Restated Employment Agreement between the Company Exhibit 10.1 to Form
and Jeffrey I. Friedman. 10-Q filed May 13,
1996.
10.4 Equity Based Incentive Compensation Plan. Exhibit 10.4 to Form
10-K filed March 29,
1995.
10.5 Long Term Incentive Compensation Plan. Exhibit 10.5 to Form
10-K filed March 29,
1995.
10.6 Lease Agreement dated November 29, 1990 between Royal American Exhibit 10.6 to Form
Management Corporation and Airport Partners Limited 10-K filed March 29,
Partnership. 1995.
30
10.7 Sublease dated February 28, 1994 between the Company as Exhibit 10.7 to Form
Sublessee and Progressive Casualty Insurance Company, 10-K filed March 29,
as Sublessor. 1995.
10.8 Assignment and Assumption Agreement dated May 17, 1994 Exhibit 10.8 to Form
between the Company, as Assignee and Airport Partners 10-K filed March 29,
Limited Partnership, as Assignor. 1995.
10.9 Form of Restricted Share Agreement dated December 6, 1995 Exhibit 10.9 to Form
by and between the Company and William A. Foley, 10-K filed March 28,
Gerald C. McDonough, Frank E. Mosier and Richard T. Schwarz. 1996.
10.10 Pledge Agreement dated May 23, 1997 between Jeffrey I. Exhibit 10.01 to Form
Friedman and the Company. 10-Q filed
August 8, 1997.
10.11 Secured Promissory Note dated May 23, 1997 in the amount of Exhibit 10.02 to Form 10-Q
$1,671,000 executed by Jeffrey I. Friedman in favor of the filed August 8, 1997.
Company.
10.12 Unsecured Promissory Note dated May 23, 1997 in the amount of Exhibit 10.03 to Form 10-Q
$1,671,000 executed by Jeffrey I. Friedman in favor of the filed August 8, 1997.
Company.
10.14 Share Option Agreement dated November 18, 1993 by and between Exhibit 10.14 to
the Company and William A. Foley, Gerald C. McDonough, Form 10-K filed
Frank E. Mosier and Richard T. Schwarz. March 30, 1993.
27 Financial Data Schedule Exhibit 27 filed
herewith.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated February 3,
1998 was filed on February 17, 1998 as amended by
Form 8-K/A-1 dated February 3, 1998 and filed on
April 8, 1998. A Current Report on Form 8-K dated
February 19, 1998 was filed on March 31, 1998.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
ASSOCIATED ESTATES REALTY
CORPORATION
May 12, 1998 /s/ Dennis W. Bikun
(Date) Dennis W. Bikun, Chief
Financial Officer and
Treasurer