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, 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. Employer
incorporation or organization) Identification
Number)
5025 Swetland Court, Richmond Hts., Ohio 44143-1467
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 261-5000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period
that the registrant was required to file such
reports), and (2) has been subject to
such filing requirements for the
past 90 days.
Yes [ x ] No [ ]
Number of shares outstanding as of August 14, 1998:
22,596,958 shares
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ASSOCIATED ESTATES REALTY CORPORATION
INDEX
PART I - FINANCIAL INFORMATION Page
ITEM 1 Condensed Financial Statements
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income for the six and
three month periods ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the six
month periods ended June 30, 1998 and 1997 5
Notes to Financial Statements 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II - OTHER INFORMATION
ITEM 2 Changes in Securities and Use of Proceeds 31
ITEM 4 Submission of Matters to a Vote of Security-Holders 32
ITEM 5 Other Information 32
ITEM 6 Exhibits and Reports on Form 8-K 33
SIGNATURES 37
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ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
(Unaudited)
ASSETS
Real estate assets:
Land $ 87,105,326 $ 54,906,050
Buildings and improvements 718,704,930 550,156,521
Furniture and fixtures 30,949,593 24,997,001
836,759,849 630,059,572
Less: accumulated depreciation (142,777,220) (130,668,538)
693,982,629 499,391,034
Construction in progress 50,186,761 16,439,393
Real estate, net 744,169,390 515,830,427
Cash and cash equivalents 1,803,147 2,251,819
Restricted cash 8,342,109 10,125,513
Accounts and notes receivable:
Rents 2,618,263 2,256,158
Affiliates and joint ventures 14,453,932 14,439,155
Other 2,494,320 2,385,829
Deferred charges, intangible assets and prepaid expenses 11,777,155 6,621,404
$785,658,316 $553,910,305
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured debt $ 64,173,447 $ 57,817,981
Unsecured debt 371,330,670 260,352,307
Total indebtedness 435,504,117 318,170,288
Accounts payable and accrued expenses 18,405,716 16,197,356
Dividends payable 10,513,686 7,938,692
Resident security deposits 5,801,636 4,867,011
Funds held on behalf of managed properties:
Affiliates and joint ventures 10,254,104 7,124,217
Other 2,597,569 2,340,115
Accrued interest 3,974,213 3,776,884
Operating partnership minority interest 10,863,204 -
Accumulated losses and distributions of joint ventures
in excess of investment and advances 12,667,668 12,337,664
Total liabilities 510,581,913 372,752,227
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; 22,610,078 and
17,073,773 issued and outstanding at June 30, 1998
and December 31, 1997, respectively 2,261,008 1,707,377
Paid-in capital 276,829,189 171,752,807
Accumulated dividends in excess of net income (60,263,794) (48,552,106)
Total shareholders' equity 275,076,403 181,158,078
$785,658,316 $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 For the six months ended
June 30, June 30,
1998 1997 1998 1997
Revenues
Rental $ 30,886,103 $ 24,943,653 $59,990,715 $ 48,103,594
Property management fees 881,208 933,420 1,830,046 1,914,225
Painting services 372,429 347,410 720,984 855,854
Other 706,497 582,156 1,013,295 811,364
32,846,237 26,806,639 63,555,040 51,685,037
Expenses
Property operating and maintenance 12,918,625 10,445,568 25,218,738 19,670,888
Depreciation and amortization 5,707,884 4,533,647 11,022,479 8,862,484
Painting services 394,002 319,914 731,941 758,635
General and administrative 1,799,001 1,559,296 3,634,966 3,070,843
Interest expense 7,112,892 4,853,591 13,544,559 8,960,200
Total expenses 27,932,404 21,712,016 54,152,683 41,323,050
Income before equity in net income of
joint ventures and extraordinary items 4,913,833 5,094,623 9,402,357 10,361,987
Equity in net income of joint ventures 170,665 262,319 206,887 220,482
Income before extraordinary item 5,084,498 5,356,942 9,609,244 10,582,469
Extraordinary item-extinguishment of debt (124,895) 1,043,446 (124,895) 1,043,446
Net income $ 4,959,603 $ 6,400,388 $ 9,484,349 $ 11,625,915
Net income applicable to common shares $ 3,588,498 $ 5,029,284 $ 6,742,139 $ 8,883,705
Earnings Per Common Share - Basic:
Net income before extraordinary item $ .22 $ .26 $ .40 $ .51
Net income $ .21 $ .33 $ .39 $ .58
Earnings Per Common Share - Diluted:
Net income before extraordinary item $ .22 $ .26 $ .40 $ .51
Net income $ .21 $ .33 $ .39 $ .58
Dividends paid per common share $ .465 $ .465 $ .93 $ .93
Weighted average number of
common shares outstanding - Basic 17,133,185 15,320,997 17,102,729 15,320,983
- Diluted 17,133,185 15,329,681 17,102,729 15,337,554
The accompanying notes are an integral part
of these financial statements
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ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30,
(UNAUDITED)
1998 1997
Cash flow from operating activities:
Net income $ 9,484,349 $ 11,625,915
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 11,022,479 8,862,484
Loss(gain) on extinguishment of debt 124,895 (1,043,446)
Equity in net income of joint ventures (206,886) (220,482)
Earnings distributed from joint ventures 298,607 262,840
Net change in assets and liabilities net of effect of the MIGRA
merger - Accounts and notes receivable (276,420) (1,848,505)
- Accounts and notes receivable- (5,100,535)
affiliates and joint ventures 2,452,693
- Accounts payable and accrued expenses (4,372,186) (1,690,705)
- Other operating assets and liabilities (365,808) 1,514,055
- Restricted cash 1,783,404 91,971
- Funds held for non-owned managed 3,129,887 (123,612)
properties
- Funds held for non-owned managed properties
affiliates and joint ventures 257,454 1,053,324
Total adjustments 13,848,119 1,757,389
Net cash flow provided by operations 23,332,468 13,383,304
Cash flow from investing activities:
Loans receivable-affiliate - (3,342,000)
Real estate acquired or developed (net of liabilities assumed) (104,110,880) (66,415,525)
Fixed asset additions (739,418) (1,157,807)
Distributions from joint ventures 145,131 79,399
Net cash flow used for investing activities (104,705,167) (70,835,933)
Cash flow from financing activities:
Principal payments on mortgage notes (8,658,305) (16,491,993)
Proceeds from mortgage notes - 8,100,000
Proceeds from senior and medium-term notes 20,000,000 30,000,000
Line of Credit borrowings 358,000,000 181,400,000
Line of Credit repayments (268,000,000) (129,400,000)
Deferred financing and offering costs (1,796,625) (445,994)
Common share dividends paid (15,878,833) (14,019,982)
Preferred share dividends paid (2,742,210) (2,742,210)
Stock options exercised - 1,248
Net cash flow provided by financing activities 80,924,027 56,401,069
Decrease in cash and cash equivalents (448,672) (1,051,560)
Cash and cash equivalents, beginning of period 2,251,819 1,286,959
Cash and cash equivalents, end of period $ 1,803,147 $ 235,399
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. On June 30,
1998, the Company consummated the merger of MIG Realty Advisors,
Inc. ("MIGRA") into the Company and the related acquisition of
eight multifamily properties and one development property. The
Company also acquired the property management businesses of
several of MIGRA's affiliates and the right to receive certain
asset management fees, including disposition and incentive fees,
that would have otherwise been received by MIGRA upon the sale of
certain of the properties owned by institutions advised by MIGRA.
MIGRA's asset management, property management, investment
advisory and mortgage servicing operations including those of
MIGRA's affiliates are collectively referred to herein as the
"MIGRA Operations".
At June 30, 1998, the Company owned, or was a joint venture
partner in, 99 multifamily properties containing 20,974 suites.
Additionally, the Company managed 59 non-owned properties, 51 of
which were multifamily properties consisting of 13,331 suites,
(19 of which are owned by various institutional investors
consisting of 6,279 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.
One property included in the financial statements is 33 1/3%
owned by third party investors. As this property has an
accumulated deficit, no recognition of the third party interest
is reflected in the financial statements since it is the
Company's policy to recognize minority interest only to the
extent that the third party's investment and accumulated share of
income exceeds distributions and its share of accumulated losses.
Investments in joint ventures, 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.
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
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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 and six month periods ended June 30, 1998 and 1997 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.
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 June 30, 1998, the
Company had no items of other comprehensive income requiring
additional disclosure. In June 1998, the FASB issued SFAS No.
133-Accounting for Derivative Instruments and Hedging Activities.
The statement requires fair value accounting for all derivatives,
including recognizing all such instruments on the balance sheet
with an offsetting amount recorded in the income statement or as
part of comprehensive income. The new standard becomes effective
for the Company for the year ending December 31, 2000. The
Company does not expect this pronouncement to have a material
impact on the Company's financial position, results of operations
or cash flows.
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 $50,186,761 and
$16,439,393 at June 30, 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 $747,930 and $913,000
were capitalized during the six month periods ended June 30, 1998
and 1997, respectively. For the six month period ended June 30,
1998, the construction and leasing of 98 suites at two properties
were completed at a total cost of $7.9 million. The following
schedule details construction in progress at June 30, 1998:
8
Placed in
(dollars in thousands) Number Costs Service June 30, 1998 Estimated
of Incurred through Land Building Scheduled
Property Suites to Date 6/30/98 Cost Cost Completion
AURORA, OHIO
The Residence at Barrington-Phase I 168 $16,046 $ 14,781 $ 54 $ 1,211 1998
The Residence at Barrington-Phase II 120 7,483 765 748 5,970 1998
288 23,529 15,546 802 7,181
ANN ARBOR, MICHIGAN
Arbor Landings Apartments II 160 3,263 - 650 2,613 1998
FENTON, MICHIGAN
Georgetown Park Apartments III 120 5,879 - 350 5,529 1998
GRAND RAPIDS, MICHIGAN
Aspen Lakes II 118 624 - 402 222 1998
STREETSBORO, OHIO
The Village of Western Reserve 108 7,636 6,551 179 906 1998
WESTLAKE, OHIO
Westlake 300* 674 - 523 151 1999
ORLANDO, FLORIDA
Windsor at Kirkman Apts. 460 26,709 - 3,222 23,487 1999
AVON, OHIO
Village at Avon 312 2,482 - 2,158 324 1999
Other 349* 1,488 - 592 896
2,215 $72,284 $22,097(1) $8,878 $ 41,309
* Estimated
(1) Including land of $2,067.
Acquisition Activity
During the period January 1, 1998 through June 30, 1998,
without regard to the merger of MIGRA and the related acquisition
of the eight MIG REIT Properties and the one development property,
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 initially 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 merger with MIGRA and the purchase of the MIG
REIT properties. 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.
On June 30, 1998, the Company consummated the merger of
MIGRA into the Company and the related acquisition of eight
multifamily properties and one development property. The Company
also acquired the property management businesses of several of
MIGRA's affiliates and the right to receive certain asset
management fees, including disposition and incentive fees that
would have otherwise been received by MIGRA upon the sale of
certain of the properties owned by institutions advised by MIGRA.
MIGRA's asset management, property management, investment
advisory and mortgage servicing operations including those of
MIGRA's affiliates are collectively referred to herein as the
"MIGRA Operations".
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As consideration for their interest in MIGRA and the
affiliated property management businesses, the shareholders of
MIGRA received 396,434 of the Company's common shares. The
number of shares issued for MIGRA was determined based on the
average closing prices of the Company's common shares for the 20
trading days preceding the date of the merger agreement or $23.63
per share. Subject to the achievement of certain performance
criteria, the former shareholders of MIGRA have the opportunity
to receive additional contingent consideration to be paid in the
form of the Company's common shares as further discussed in the
following paragraph.
The merger agreement provided for up to $3.1 million and
$6.4 million in contingent consideration payable on the first and
second anniversary of merger, respectively. The agreement also
provided for certain reductions to 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 prior to the merger. These
reductions are offset 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. The
initial purchase price, including contingent consideration, has
been reduced by $5.6 million pursuant to the price reduction
provisions of the merger agreement.
The Company also acquired eight multifamily properties from
subsidiaries of MIG Residential REIT, Inc. (the "MIG REIT
Properties") for $12 million in cash, the issuance of 5,139,387
unregistered common shares of the Company and the assumption of
approximately $0.6 million in liabilities. The number of common
shares was determined based on the closing price of the Company's
common shares over the 20 day period preceding the purchase of
the MIG REIT Properties or $18.76 per share. The cash portion of
the purchase price was financed using borrowings made available
through the Company's Line of Credit. The Company is required
to file for registration of the common shares issued within 60
days from the closing date.
The MIG REIT Properties are further described 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
1,730
In connection with the above transactions, the Company also
acquired the general and certain limited partnership interests in
a partnership that owns a multifamily property in development.
In exchange for $15.6 million, the Company received 661,663
operating partnership units, representing a 59% general
partnership interest in AERC HP Advisors Limited Partnership ("HP
Advisors"), a DownREIT partnership, which owns substantially all
of a parcel of real property located in Orlando, Florida upon
which a 460 suite multifamily apartment complex known as Windsor
at Kirkman Apartments ("Windsor") is being constructed. At the
date of acquisition, Windsor was approximately 30% complete.
Certain limited partner members of HP Advisors received 459,719
Operating Partnership units in exchange for their interests in
Windsor. The number of operating partnership units issued was
determined based on the average closing prices of the Company's
common shares for the 20 trading days preceding the date of the
merger agreement or $23.63 per share. As operating partnership
units can be exchangeable, subject to certain conditions, into
common shares of the Company, they are assumed to be issued at a
price related to the common shares of the Company. The cash paid
by the Company in exchange for its operating partnership units in
HP Advisors was financed using borrowings made available through
the Company's Line of Credit.
As of June 30, 1998, the Company's purchase price allocation
for the MIGRA related transactions is based upon all available
information and is subject to change. However, management does not
believe any changes will be material.
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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 - - - 9,484,349 9,484,349
Issuance of 484 restricted
common shares - 48 (48) - -
Issuance of 5,535,821
common shares relating
to the MIGRA merger and
the acquisition of the MIG
REIT properties - 553,583 105,229,053 - 105,782,636
Additional costs relating to
common stock offering - - (152,623) - (152,623)
Common share
dividends declared - - - (18,453,827) (18,453,827)
Preferred share
dividends declared - - - (2,742,210) (2,742,210)
Balance, June 30, 1998 $56,250,000 $ 2,261,008 $276,829,189 $ (60,263,794) $ 275,076,403
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 March 1, 2007. The balance of the conventional
mortgages was $36.0 million and $29.4 million at June 30, 1998
and December 31, 1997, respectively. The five conventional
mortgages have a fixed rate. On June 30, 1998, the Company paid
off an $8.1 million mortgage which had 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 $28.1 million
and $28.4 million at June 30, 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.
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.
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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 June 30, 1998 and December 31,
1997.
Medium-Term Notes Program
The Company issued eleven Medium-Term Notes (the "MTN's")
having an aggregate balance of $112.5 million and $92.5 million
at June 30, 1998 and December 31, 1997, respectively. The
principal amounts of these MTN's range from $2.5 million to $20
million and bear interest from 6.18% to 7.93% over terms ranging
from two to 30 years, with a stated weighted average maturity of
11 years at June 30, 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 5.9
years. The weighted average interest rate of the eleven MTN's is
6.95%. One, four and six of the MTN's in the aggregate amounts
of $20.0 million, $50.0 million and $42.5 million were issued in
1998, 1997 and 1996, respectively.
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 existing program.
From time to time, the Company may enter into hedge
agreements to minimize its exposure to interest rate risks.
There are no interest rate protection agreements outstanding as
of June 30, 1998.
Line of Credit
In June 1998, the Company completed a new unsecured $200
million revolving credit facility (the "Line of Credit") which
replaced a $100 million unsecured revolving credit facility. The
new agreement provides for a reduction in pricing and an
extension of the term for an additional year through June 2001.
The Line of Credit includes a competitive bid option for up to
50% of the amount of the facility. During the second quarter of
1998, the Company recognized a non-cash extraordinary charge of
approximately $124,895, relating to the write-off of unamortized
deferred finance costs associated with the former revolving
credit facility. The Company's borrowings under this Line of
Credit bear interest at variable rates based on the prime rate or
LIBOR plus a specified spread (currently 100 basis points),
depending on the Company's long term senior unsecured debt rating
from Standard and Poor's and Moody's Investors Service. The Line
of Credit is used to finance the acquisition of properties, to
provide working capital and for general corporate purposes. At
June 30, 1998, $174 million was outstanding under this facility.
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.
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Summarized affiliate and joint venture transaction activity
follows:
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
Property management fee and other
miscellaneous service revenues
- affiliates $ 459,005 $ 480,074 $ 1,042,936 $ 1,106,305
- joint ventures 236,609 226,936 463,554 438,751
Painting service revenues
- affiliates 82,439 121,681 182,351 237,948
- joint ventures 119,065 41,000 212,966 74,437
Expenses incurred on behalf
of and reimbursed by (1)
- affiliates 1,011,478 1,005,509 2,156,436 2,144,660
- joint ventures 640,937 607,077 1,282,578 1,260,028
Interest income - affiliates 210,701 141,699 378,685 203,464
Interest expense - affiliates (83,751) (94,115) (213,130) (170,330)
- joint ventures (12,227) (5,973) (24,037) (11,756)
(1) Primarily payroll and employee benefits, reimbursed at cost.
Property management fees and other miscellaneous receivables
due from affiliates and joint venture properties were $6,600,986
and $4,542,798 in the aggregate at June 30, 1998 and December 31,
1997, respectively. Other miscellaneous payables due to
affiliates and joint venture properties were $3,109,994 and
$329,000 in the aggregate at June 30, 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 $7,029,290 and $823,656 at June 30, 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 period ending June 30, 1998. The
Company held funds for the benefit of affiliates and joint
ventures in the aggregate amount of $5,496,577 and $1,647,533 at
June 30, 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 $4.0 million of advances were repaid pursuant to
such capital calls. However, a corporation (the "Corporation")
owned by a member of the Company's board of directors, and his
siblings (including the wife of the Company's Chairman and Chief
Executive Officer) which serves as general partner of certain
affiliated entities, 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
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 June 30, 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 June
30, 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 $113,182 for the period ending June 30, 1998 relating to these
notes.
13
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.
On June 30, 1998, the Company issued 396,434 and 5,139,387
common shares relating to the Company's merger of MIGRA and the
related acquisition of eight multifamily properties,
respectively.
On June 30, 1998, the Company's Board of Directors
authorized management to purchase from time to time up to
1,000,000 shares of its common stock. Purchases under the
program may be financed from funds generated through the sale of
properties and internally generated cash flow.
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 For the six months
ended June 30, ended June 30,
1998 1997 1998 1997
Income before extraordinary items $ 5,084,498 $ 5,356,943 $ 9,609,244 $10,582,469
Less: Preferred stock dividends 1,371,105 1,371,105 2,742,210 2,742,210
Income before extraordinary items
applicable to common shares 3,713,393 3,985,838 6,867,034 7,840,259
Extraordinary items (124,895) 1,043,446 (124,895) 1,043,446
Net income applicable to common shares $ 3,588,498 $ 5,029,284 $ 6,742,139 $ 8,883,705
Number of Shares
Basic-average shares outstanding 17,133,185 15,320,997 17,102,729 15,320,983
Add: Dilutive effect of stock options - 8,684 - 16,571
Diluted shares 17,133,185 15,329,681 17,102,729 15,337,554
Per Share Amount-Income
Before Extraordinary Item
Basic $ .22 $ .26 $ .40 $ .51
Diluted $ .22 $ .26 $ .40 $ .51
Per Share Amount-Net Income
Basic $ .21 $ .33 $ .39 $ .58
Diluted $ .21 $ .33 $ .39 $ .58
14
Options to purchase 1,015,274 and 1,070,274 shares of common
stock were outstanding at June 30, 1998 and December 31, 1997,
respectively, a portion of which has been reflected above using
the treasury stock method.
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following summarizes the non cash investing and
financing activities of the Company which are not reflected in
the Consolidated Statements of Cash Flows:
Six months ended
June 30,
1998 1997
Issuance of common shares in connection with the
acquisition of MIG REIT properties and the MIGRA
merger $105,782,635 $ -
Issuance of operating partnership units in connection
with the acquisition of the development property 10,863,204 -
Assumption of mortgage debt in connection with the
acquisition of properties 15,013,771 -
Assumption of liabilities in connection with the
acquisition of properties 5,342,371 1,486,809
Dividends declared but not paid 10,513,686 7,938,683
10. 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 twelve property acquisitions completed in
1998, and (ii) the merger of MIGRA. 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 twelve property
acquisitions completed in 1998, (iii) the merger of MIGRA, and
(iv) the offering of 1,750,000 common shares.
For the six months
ended June 30,
(In thousands, except per share amounts) 1998 1997
Revenues $ 75,557 $ 70,746
*Net income 8,869 11,086
*Income applicable to common shares 6,127 8,344
*Income per common share (Basic and Diluted) $ 0.27 $ 0.37
Weighted average common shares outstanding:
- Basic 22,610 22,610
- Diluted 22,610 22,610
*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.
15
The 1997 and 1998 pro forma financial information does not
include the revenue and expenses for Windsor at Kirkman
Apartments, a property that was acquired in 1998, for the period
January 1 through the date the property was acquired by the
Company. The revenue and expenses of Windsor at Kirkman were
excluded from the pro forma financial information for such
periods as the property was under construction during
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.
11. CONTINGENCIES
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 Agree-
ment 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 terminat-
ing future payments under the HAP Contract and foreclosing the
government-insured mortgage encumbering the property.
This controversy arose out of a Comprehensive Management
Review of the property initiated by HUD in the Spring of 1997,
which included a complete physical inspection of the property.
Rainbow Terrace Apartments believes that it has corrected the
management deficiencies citied 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 June 1998, HUD notified the Company that all future Housing
Assistance Payments ("HAP") for Rainbow Terrace Apartments were abated
and instructed the lender to accelerate the balance due under the
mortgage. Subsequent to the notification of HAP abatements and the
acceleration of the mortgage, the lender advised the Company that
the acceleration notification had been rescinded at HUD's
instruction. HUD then notified the Company that the HAP payments
would be reinstated and that HUD was reviewing further information
concerning Rainbow Terrace Apartments provided by the Company. The
Company has since received the July and August 1998 HAP payments
for Rainbow Terrace Apartments. As part of the Company's ongoing
discussions with HUD concerning the resolution of these matters,
the Company has been notified that HUD has agreed to review the
budget based rent increase submitted to HUD by the Company in 1995.
At December 31, 1997 and June 30, 1998, the Company had
receivables of $1.35 million related to these retroactive rent
increase requests. At June 30, 1998, Rainbow Terrace Apartments
had net assets of $2.4 million, including the retroactive rent
receivable of $1.35 million due from HUD, and a remaining amount
due under the mortgage of $1.9 million.
12. SUBSEQUENT EVENTS
The Company is exploring opportunities to strategically
dispose of a number of its multifamily properties; namely certain
joint venture, government assisted and congregate care properties.
On June 29, 1998, the Company declared a dividend of $.465
per common share for the quarter ending June 30, 1998, which was
paid on August 1, 1998 to shareholders of record on July 15,
1998.
On June 30, 1998, the Company announced that its Board of
Directors authorized management to purchase up to 1,000,000
shares of its common stock. Subsequent to June 30, 1998, 25,000
shares were repurchased at an aggregate cost of $467,894 which
was funded primarily from operating cash flows.
On July 23, 1998, the Company issued 11,880 common shares to
the MIGRA shareholders. Such shares were withheld at the closing
of the merger pending the receipt of a consent of a MIGRA client
with respect to the merger. The shares were issued at $23.63.
Such shares represent all of the shares that were held back at the
closing of the merger.
The Company is currently under separate contracts to
purchase a multifamily property containing 368 suites and two
parcels of land containing 72 acres for an aggregate purchase
price of approximately $41.3 million. The multifamily property
is located in Pembroke Pines, Florida. The land parcels are
located in Cranberry Township, Pennsylvania (a suburb of
Pittsburgh) and Atlanta, Georgia. The Company expects to finance
the multifamily property and land parcel acquisitions with
approximately $3.0 million in operating partnership units and the
remainder using borrowings under the Company's 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 land parcels currently under contract.
Subsequent to June 30, 1998, the Company acquired one
multifamily property located in Indianapolis, Indiana containing
264 suites for an aggregate purchase price of $18.7 million. The
purchase price was financed using borrowings under the Company's
Line of Credit.
Subsequent to June 30, 1998, the Company increased its
unsecured $200 million revolving credit facility to $235 million.
16
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 June 30, 1998,
owned or was a joint venture partner in 99 multifamily properties
containing 20,974 suites located in Florida, Georgia, Ohio,
Maryland, Michigan, Indiana, western Pennsylvania, Arizona,
California, Missouri, North Carolina and Texas.
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:
In June 1998, the Company completed a new unsecured $200
million revolving credit facility (the "Line of Credit") which
replaced a $100 million unsecured revolving credit facility. The
new agreement provides for a reduction in pricing and an
extension of the term for an additional year through June 2001.
The Line of Credit includes a competitive bid option for up to
50% of the amount of the facility. During the second quarter of
1998, the Company recognized a non-cash extraordinary charge of
approximately $0.125 million ($0.0075 per share), relating to the
write-off of unamortized deferred finance costs associated with
the former revolving credit facility. The Company's borrowings
under this Line of Credit bear interest at variable rates based
on the prime rate or LIBOR plus a specified spread (currently 100
basis points), depending on the Company's long term senior
unsecured debt rating from Standard and Poor's and Moody's
Investors Service. The Line of Credit is used to finance the
acquisition of properties, to provide working capital and for
general corporate purposes. At June 30, 1998, $174 million was
outstanding under this facility. Subsequent to June 30, 1998,
the Company increased its unsecured $200 million revolving credit
facility to $235 million.
Eighty-one of the Company's 92 wholly owned properties were
unencumbered at June 30, 1998 with annualized earnings before
interest, depreciation and amortization of approximately $68.1
million and an historical cost basis of approximately $674.8
million. The remaining eleven of the Company's wholly owned
properties, have an historical cost basis of $120.3 million and
secured property specific debt of $64.0 million at June 30, 1998.
Unsecured debt, which totaled $370.4 million at June 30, 1998,
consisted of $112.5 million in Medium-Term Notes, Senior Notes of
$84.9 million and amounts drawn on the revolving credit facility
of $173 million. The Company's proportionate share of the
mortgage debt relating to the seven joint venture properties was
$17.6 million at June 30, 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 June 30, 1998.
17
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 of which MTN's totaling $40.0 million have
been issued leaving $62.5 million available. The securities may
be offered from time to time at prices and upon terms to be
determined at the time of sale.
The MIGRA Transaction
On June 30, 1998, the Company consummated the merger of MIG
Realty Advisors, Inc. (MIGRA) into the Company and the related
acquisition of eight multifamily properties and one development
property. The Company also acquired the property management
businesses of several of MIGRA's affiliates and the right to
receive certain asset management fees, including disposition and
incentive fees that would have otherwise been received by MIGRA
upon the sale of certain of the properties owned by institutions
advised by MIGRA. MIGRA's asset management, property management,
investment advisory and mortgage servicing operations including
those of MIGRA's affiliates are collectively referred to herein
as the "MIGRA Operations".
As consideration for their interest in MIGRA and the
affiliated property management businesses, the shareholders of
MIGRA received 396,434 of the Company's common shares. The
number of shares issued for MIGRA was determined based on the
average closing prices of the Company's common shares for the 20
trading days preceding the date of the merger agreement or $23.63
per share. Subject to the achievement of certain performance
criteria, the former shareholders of MIGRA have the opportunity
to receive additional contingent consideration to be paid in the
form of the Company's common shares as further discussed in the
following paragraph.
The merger agreement provided for up to $3.1 million and
$6.4 million in contingent consideration payable on the first and
second anniversary of merger, respectively. The agreement also
provided for certain reductions to 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 prior to the merger. These
reductions are offset 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.
The initial purchase price has been reduced by $5.6 million
pursuant to the price reduction provisions of the merger
agreement.
The Company also acquired eight multifamily properties from
subsidiaries of MIG Residential REIT, Inc. (the "MIG REIT
Properties") for $12 million in cash, the issuance of 5,139,387
unregistered common shares of the Company and the assumption of
approximately $0.6 million in liabilities. The number of common
shares was determined based on the closing price of the Company's
common shares over the 20 day period preceding the purchase of
the MIG REIT Properties or $18.76 per share. The cash portion of
the purchase price was financed using borrowings made available
through the Company's Line of Credit. The Company is required
to register common shares issued within 60 days from the closing
date.
18
The MIG REIT Properties are further described 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
1,730
In connection with the above transactions, the Company also
acquired the general and certain limited partnership interests in
a partnership that owns a multifamily property in development.
In exchange for $15.6 million, the Company received 661,663
operating partnership units, representing a 59% general
partnership interest in AERC HP Advisors Limited Partnership ("HP
Advisors"), a DownREIT partnership, which owns substantially all
of a parcel of real property located in Orlando, Florida upon
which a 460 suite multifamily apartment complex known as Windsor
at Kirkman Apartments ("Windsor") is being constructed. At the
date of acquisition, Windsor is approximately 30% complete.
Certain limited partner members of HP Advisors received 459,719
Operating Partnership units in exchange for their interests in
Windsor. The number of operating partnership units issued was
determined based on the average closing prices of the Company's
common shares for the 20 trading days preceding the date of the
merger agreement or $23.63 per share. As operating partnership
units can be exchangeable, subject to certain conditions, into
common shares of the Company, they are assumed to be issued at a
price related to the common shares of the Company. The cash paid
by the Company in exchange for its operating partnership units in
HP Advisors was financed using borrowings made available through
the Company's Line of Credit.
The Company also entered into a contract to acquire Windsor
Pines Apartments ("Pines"), a 368 suite multifamily property
being constructed in Pembroke Pines, Florida for total
consideration of $38.1 million. The total consideration paid for
Pines will consist of cash of $35.1 million and the issuance of
126,958 operating partnership units in a yet to be formed
DownREIT partnership. The operating partnership units issued for
the Pines property will be determined based on the average
closing prices of the Company's common shares for the 20 trading
days preceding the date of the merger agreement or $23.63 per
share. As operating partnership units can be exchangeable,
subject to certain conditions, into common shares of the Company,
they are assumed to be issued at a price related to the common
shares of the Company. The cash required for the Pines purchase
will be financed using borrowings made available through the
Company's Line of Credit. There is no guarantee, however, that
the Company will be successful in acquiring Pines.
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, 1998 through June 30, 1998,
without regard to the merger of MIGRA, and the related acquisition
of the eight MIG REIT Properties and the one development property,
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 merger with MIGRA and the purchase of the MIG
REIT properties. 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. Subsequent to June 30,
1998, the Company acquired one multifamily property located in
Indianapolis, Indiana containing 264 suites for an aggregate
purchase price of $18.7 million. The purchase price was financed
using borrowings under the Company's Line of Credit.
19
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. Furthermore, there
can be no assurances that the Company will be successful in
acquiring the multifamily property and the land parcels under
contract as described below.
The Bradford at Easton, a newly developed 324 suite property
located in Columbus, Ohio, achieved stabilized occupancy during
the second quarter and was 95.4% physically occupied at June 30,
1998. The Village of Western Reserve, a newly developed 108
suite property located in Streetsboro, Ohio (a city located
southeast of Cleveland) was completed and achieved stabilized
occupancy in July, 1998 and is currently 100% physically
occupied. The Company considers occupancy at a newly developed
property to have stabilized once the property's physical
occupancy reaches 93%.
The Residence at Barrington, a planned 288 property located
in Aurora, Ohio (also located southeast of Cleveland) is
scheduled for completion in the fourth quarter of 1998. The
Company has recently commenced construction of The Village at
Avon, a 312 suite property located in Avon, Ohio (a city located
west of Cleveland).
The Company has entered into separate contracts to purchase
a multifamily property containing 368 suites and two land parcels
containing 72 acres for an aggregate purchase price of
approximately $41.3 million. The multifamily property is located
in Pembroke Pines, Florida. One parcel of land is located in
Cranberry Township, Pennsylvania (a suburb of Pittsburgh) and
will commence construction at Berkley Manor, a 226 suite property
after the consummation of the anticipated purchase in 1999. The
other land parcel is located in Atlanta, Georgia and will
commence construction after an anticipated purchase in the third
quarter of 1998.
The Company is in the process of constructing an additional
488 suites on land adjacent to multifamily properties currently
owned by the Company as follows:
Additional Anticipated
Property Location Suites Completion
Arbor Landings Apartments Ann Arbor, Michigan 160 1st Qtr. 1999
Aspen Lakes Grand Rapids, Michigan 118 1st Qtr. 1999
Georgetown Park Apartments Fenton, Michigan 120 4th Qtr. 1998 (a)
The Landings at the Preserve Battle Creek, Michigan 90 4th Qtr. 1999
488
(a) A clubhouse will also be added to The Landings at the Preserve.
20
The Company is exploring opportunities to dispose of a
number of its joint venture, government assisted and congregate
care multifamily properties. The Company has retained a
financial advisor to evaluate the alternatives relating to the
disposition of its ownership and management of government
assisted properties.
Dividends:
On June 29, 1998, the Company declared a dividend of $0.465
per common share for the quarter ending June 30, 1998 which was
paid on August 1, 1998 to shareholders of record on July 15,
1998. On May 18, 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 June
15, 1998 to shareholders of record on June 1, 1998.
Cash flow sources and applications:
Net cash provided by operating activities increased
$9,949,168 from $13,383,300 to $23,332,468 for the six months
ended June 30, 1998 when compared with the six months ended June
30, 1997. 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.
Net cash flows used for investing activities of $104,705,167
for the six months ended June 30, 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
$80,924,027 for the six months ended June 30, 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 and the repayment of an
$8,100,000 mortgage note.
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 1998 to the three
months ended June 30, 1997
Overall, total revenue increased $6,039,600 or 22.5% and
total expenses increased $6,220,388 or 28.6% for the quarter.
Net income applicable to common shares decreased $1,440,786 or
28.6%, after the dividends on the Company's Perpetual Preferred
Shares.
In the following discussion of the comparison of the three
months ended June 30, 1998 to the three months ended June 30,
1997, the term Core Portfolio Properties refers to the 35 wholly
owned multifamily properties owned by the Company at the time of
the IPO, the 37 properties acquired prior to April 1, 1997 and
the acquisition of the remaining 50% interest in two properties
which the Company was a joint venture partner at the time of the
IPO. Acquired Properties refers to the 18 properties acquired
between April 1, 1997 and June 30, 1998.
During the quarter ended June 30, 1998, the Acquired
Properties generated total revenues of $7,422,982 while incurring
property, operating and maintenance expenses of $2,812,624.
Rental Revenues:
Rental revenues increased $5,942,500 or 23.8% for the
quarter. Increases in occupancy and suite rents at the Core
Portfolio Market-rate and Government-Assisted Properties resulted
in a $466,800 or 2.0% 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:
Other income increased $124,300 or 21.4% for the quarter.
The increase is due primarily to refunds of workers compensation.
21
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$2,473,100 or 23.7% for the quarter. Operating and maintenance
expenses at the Acquired Properties increased $2,130,100 for the
quarter due primarily to the operating and maintenance expenses
incurred at the six properties acquired during 1997 and the
twelve properties acquired in 1998. Property operating and
maintenance expenses at the Core Portfolio Properties increased
$343,100, or 3.5% when compared to the quarter ended June 30,
1997 primarily due to increases in personnel, and real estate
taxes and insurance which were offset by a slight decrease in
utilities and building and grounds repair and maintenance
expenses. Building renovations and suite and common area
refurbishment in the Core Portfolio Properties that were not
considered to be capital in nature averaged $79 per suite for the
quarter ended June 30, 1998 as compared to $101 per suite for the
quarter ended June 30, 1997.
Other expenses:
Depreciation and amortization increased $1,174,237 or 25.9%
for the quarter primarily due to the increased depreciation and
amortization expense recognized on the Acquired Properties.
General and administrative expenses increased $239,700 or
15.4% for the quarter. This increase is primarily attributable
to payroll, consulting and training expenses.
Interest expense increased $2,259,300 or 46.6% 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.
RESULTS OF OPERATIONS
Comparison of the six-months ended June 30, 1998 to the six-
months ended June 30, 1997
Overall, total revenue increased $11,870,000 or 23.0% and
total expenses before the extraordinary item and net income off
the joint ventures increased $12,829,600 or 31.1% for the six
month period. Net income applicable to common shares before the
extraordinary item decreased $973,200 or 9.2%, after dividends on
the Company's Perpetual Preferred Shares.
In the following discussion of the comparison of the six-
months ended June 30, 1998 to the six-months ended June 30, 1997,
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 during 1994, 1995 and 1996 and
the acquisition of the remaining 50% interest in two properties
in which the Company was a joint venture partner at the time of
the IPO. Acquired Properties refers to the 20 properties
acquired between January 1, 1997 and June 30, 1998.
During the six-months ended June 30, 1998, the Acquired
Properties generated total revenues of $11,160,039 while
incurring property, operating and maintenance expenses of
$4,137,000.
Rental Revenues:
Rental revenues increased $11,887,100 or 24.7% for the six
month period. The majority of this increase is attributable to
an increase in rental revenues from the Acquired Properties of
$11,093,139 for the same period. Increases in occupancy and
suite rents at the Core Portfolio Market-rate and Government-
Assisted Properties resulted in a $794,000 or 1.8% increase in
rental revenue from these properties.
Other Revenues:
Other revenues increased $201,900 or 24.9% primarily due to
refunds of workers compensation.
22
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$5,547,900 or 28.2% for the six month period. Operating and
maintenance expenses at the Acquired Properties increased
$4,137,000 for the six month period due primarily to the
operating and maintenance expenses incurred at the 20 properties
acquired between January 1, 1997 and June 30, 1998. Property
operating and maintenance expenses at the Core Portfolio
Properties increased $1,410,800 or 7.8% when compared to the
prior six month period primarily due to increases in payroll,
real estate taxes and insurance, and other operating expenses
which were offset by a slight decrease in utilities. 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 $201 per suite for
the six months ended June 30, 1998 as compared to $183 per suite
for the six months ended June 30, 1997.
Other expenses:
Depreciation and amortization increased $2,160,000 or 24.4%
for the six month period primarily due to the increased
depreciation and amortization expense recognized on the Acquired
Properties.
General and administrative expenses increased $564,100 or
18.4% 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 $4,584,400 or 51.2% 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 $124,895 recognized during 1998
relates to the write-off of the deferred financing fees related
to the termination of the old $100 million unsecured revolving
credit facility. 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
decreased $13,600 or 6.2% and $91,700 or 35% for the six and
three months ended June 30, 1998 and 1997, respectively. These
decreases are primarily attributable to decreased rents and
occupancies.
23
The following table presents the historical statements of
operations of the Company's beneficial interest in the operations
of the joint ventures for the quarter and six month period ended
June 30, 1998 and 1997.
For the three months For the six months
ended June 30, ended June 30,
1998 1997 1998 1997
Beneficial interests in
joint venture operations
Rental revenue $1,746,864 $ 1,684,068 $ 3,472,360 $ 3,308,630
Cost of operations 1,034,407 852,879 2,171,511 1,949,223
712,457 831,189 1,300,849 1,359,407
Interest income 14,114 6,080 14,772 12,515
Interest expense (436,132) (441,643) (872,948) (884,867)
Depreciation (107,067) (120,899) (212,577) (241,759)
Amortization (12,707) (12,408) (23,209) (24,814)
Net income $ 170,665 $ 262,319 $ 206,887 $ 220,482
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
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.
24
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.
Year 2000 Compliance
The Year 2000 compliance issue concerns the inability of
computerized information systems to accurately calculate; store
or use a date after December 31, 1999. This could result in a
system failure or miscalculations causing disruptions of
operations. The Year 2000 compliance issue affects virtually all
companies and all organizations.
The Company has conducted an assessment of its core internal
and external computer information management systems, installed
Year 2000 compliant financial reporting and accounting systems
and is taking the further necessary steps to understand the
nature and extent of the work required to make its operational
systems, in those situations where the Company is required to do
so, Year 2000 compliant. These steps may require the Company to
modify, upgrade or replace some of its internal operational
systems. The total cost of bringing all internal operational
systems and equipment into Year 2000 compliance has not been
fully quantified.
Further, no estimates can be made as to any potential
adverse impact resulting from the failure of third-party service
providers and vendors to prepare for the Year 2000. The Company
is attempting to identify those risks as well as to receive
compliance certifications from those third party that have a
material impact on the Company's operations. The cost and timing
of third party Year 2000 compliance is not within the Company's
control and no assurance can be given with respect to the cost or
timing of such efforts or the potential effects of any failure to
comply.
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 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.
25
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 June 1998, HUD notified the Company that all future
Housing Assistance Payments ("HAP") for Rainbow Terrace
Apartments were abated and instructed the lender to accelerate
the balance due under the mortgage. Subsequent to the
notification of HAP abatements and the acceleration of the
mortgage, the lender advised the Company that the acceleration
notification had been rescinded at HUD's instruction. HUD then
notified the Company that the HAP payments would be reinstated
and that HUD was reviewing further information concerning Rainbow
Terrace Apartments provided by the Company. The Company has
since received the July and August 1998 HAP payments for Rainbow
Terrace Apartments. As part of the Company's ongoing discussions
with HUD concerning the resolution of these matters, the Company
has been notified that HUD has agreed to review the budget based
rent increase submitted to HUD by the Company in 1995. At
December 31, 1997 and June 30, 1998, the Company had receivables
of $1.35 million related to these retroactive rent increase
requests. At June 30, 1998, Rainbow Terrace Apartments had net
assets of $2.4 million, including the retroactive rent receivable
of $1.35 million due from HUD, and a remaining amount due under
the mortgage of $1.9 million.
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.
27
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
Arizona
20th & Campbell Apartments 06/30/98 Phoenix Garden 204 1989 982
California
Desert Oasis Apartments 06/30/98 Palm Desert Garden 320 1990 875
Florida
Cypress Shores 02/03/98 Coconut Creek Garden 300 1991 991
Georgia
The Falls 02/03/98 Atlanta Garden 520 1986 963
Morgan Place Apartments 06/30/98 Atlanta Garden 186 1989 679
Indiana
Waterstone Apartments 08/29/97 Indianapolis Garden 344 1997 984
Maryland
Hampton Point Apartments 06/30/98 Metro D.C. Garden 352 1986 817
Reflections 02/03/98 Metro D.C. Garden 184 1985 1,020
The Gardens at Annen Woods 06/30/98 Metro D.C. Garden 132 1987 1,269
Michigan
Clinton Place 08/25/97 Clinton Twp. Garden 202 1988 954
Spring Valley Apartments 10/31/97 Farmington Hills Garden 224 1987 893
Missouri
Peachtree Apartments 06/30/98 Chesterfield Garden 156 1989 929
North Carolina
Windsor Falls Apartments 06/30/98 Raleigh Garden 276 1994 979
Ohio
Bradford at Easton 05/01/98 Columbus Garden 324 1996 1,010
Country Club Apartments 02/19/98 Toledo Garden 316 1989 811
Hawthorne Hills Apartments 05/14/97 Toledo Garden 88 1973 1,145
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
Texas
Fleetwood Apartments 06/30/98 Houston Garden 104 1993 1,019
4,674
Repositioned Properties
Woodlands of North Royalton
fka Somerset West (a) IPO North Royalton Gdn/Tnhms 197 1982 1,038
Williamsburg at Greenwood Vllg. 02/18/94 Sagamore Hills Townhomes 260 1990 938
457 981
CORE PORTFOLIO PROPERTIES
Market rate
Central Ohio
Arrowhead Station 02/28/95 Columbus Townhomes 102 1987 1,344
Bedford Commons 12/30/94 Columbus Townhomes 112 1987 1,157
Bolton Estates 07/27/94 Columbus Garden 196 1992 687
Colony Bay East 02/21/95 Columbus Garden 156 1994 903
Heathermoor 08/18/94 Worthington Gdn/Tnhms 280 1989 829
Kensington Grove 07/17/95 Westerville Gdn/Tnhms 76 1995 1,109
Lake Forest 07/28/94 Columbus Garden 192 1994 788
Muirwood Village at Bennell 03/07/94 Columbus Ranch 164 1988 769
Muirwood Village at London 03/03/94 London Ranch 112 1989 769
Muirwood Vllg. at Mt. Sterling 03/03/94 Mt. Sterling Ranch 48 1990 769
Muirwood Village at Zanesville 03/07/94 Zanesville Ranch 196 1991-95 769
Pendleton Lakes East 08/25/94 Columbus Garden 256 1990-93 899
Perimeter Lakes 09/20/96 Dublin Gdn/Tnhms 189 1992 999
For the three months ending For the three months ending
June 30, 1998 June 30, 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
Arizona
20th & Campbell Apartments N/A 93.1% N/A N/A N/A N/A N/A N/A
California
Desert Oasis Apartments N/A 92.2% N/A N/A N/A N/A N/A N/A
Florida
Cypress Shores 88.3% 87.0% $ 841 $ 0.85 N/A N/A N/A N/A
Georgia
The Falls 75.4% 88.3% $ 713 $ 0.74 N/A N/A N/A N/A
Morgan Place Apartments N/A 94.6% N/A N/A N/A N/A N/A N/A
Indiana
Waterstone Apartments 94.4% 96.8% $ 799 $ 0.81 N/A N/A N/A N/A
Maryland
Hampton Point Apartments N/A 96.0% N/A N/A N/A N/A N/A N/A
Reflections 94.7% 95.1% $ 879 $ 0.86 N/A N/A N/A N/A
The Gardens at Annen Woods N/A 97.7 N/A N/A N/A N/A N/A N/A
Michigan
Clinton Place 95.1% 95.0% $ 700 $ 0.73 N/A N/A N/A N/A
Spring Valley Apartments 95.8 100.0 818 0.92 N/A N/A N/A N/A
Missouri
Peachtree Apartments N/A 91.7% N/A N/A N/A N/A N/A N/A
North Carolina
Windsor Falls Apartments N/A 94.9% N/A N/A N/A N/A N/A N/A
Ohio
Bradford at Easton N/A 95.4% $ 715 $ 0.71 N/A N/A N/A N/A
Country Club Apartments 97.0 97.5 627 0.77 N/A N/A N/A N/A
Hawthorne Hills Apartments 95.8 100.0 554 0.48 N/A N/A N/A N/A
Oak Bend Commons 93.8 99.0 700 0.63 N/A N/A N/A N/A
Saw Mill Village 90.7 94.1 752 0.65 N/A N/A N/A N/A
Texas
Fleetwood Apartments N/A 93.3% N/A N/A N/A N/A N/A N/A
Repositioned Properties
Woodlands of North Royalton
fka Somerset West (a) 81.1% 83.2% $ 698 $ 0.67 93.7% 95.9 $ 687 $ 0.66
Williamsburg at Greenwood Vllg. 89.5 94.2 871 0.93 91.7 93.8 859 0.92
86.3% 89.5% $ 797 $ 0.81 92.4% 94.7% $ 785 $ 0.80
CORE PORTFOLIO PROPERTIES
Market rate
Central Ohio
Arrowhead Station 91.6% 93.1% $ 709 $ 0.53 90.2% 86.3% $ 684 $ 0.51
Bedford Commons 94.8 97.3 786 0.68 95.5 97.3 753 0.65
Bolton Estates 96.8 97.4 463 0.67 95.5 92.3 462 0.67
Colony Bay East 92.6 94.2 524 0.58 93.4 98.7 515 0.57
Heathermoor 97.2 97.9 555 0.67 98.1 98.6 543 0.66
Kensington Grove 92.6 90.8 775 0.70 93.6 97.4 776 0.70
Lake Forest 92.0 95.3 544 0.69 94.8 94.8 550 0.70
Muirwood Village at Bennell 92.7 94.5 514 0.67 94.5 93.9 492 0.64
Muirwood Village at London 93.9 97.3 509 0.66 96.5 99.1 502 0.65
Muirwood Vllg. at Mt. Sterling 96.3 100.0 496 0.65 99.6 97.9 499 0.65
Muirwood Village at Zanesville 92.8 95.9 522 0.68 95.8 92.3 524 0.68
Pendleton Lakes East 92.6 96.9 527 0.59 92.7 96.5 514 0.57
Perimeter Lakes 94.1 98.9 721 0.72 93.4 96.8 716 0.72
27
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Suites Rehab. Sq. Ft.
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
Cincinnati, Ohio
Remington Place Apartments 03/31/97 Cincinnati Garden 234 1988-90 830
Indianapolis, Indiana
The Gables at White River 02/06/97 Indianapolis Garden 228 1991 974
Northeastern Ohio
Bay Club IPO Willowick Garden 96 1990 925
Colonnade West IPO Cleveland Garden 216 1964 502
Cultural Gardens IPO Euclid Mid Rise 186 1966 688
Edgewater Landing 04/20/94 Cleveland High Rise 241 1988r 585
Gates Mills III IPO Mayfield Hts. High Rise 320 1978 874
Holly Park IPO Kent Garden 192 1990 875
Huntington Hills IPO Stow Townhomes 85 1982 976
Mallard's Crossing 02/16/95 Medina Garden 192 1990 998
Memphis Manor IPO Cleveland Garden 120 1966 554
Park Place IPO Parma Hts. Mid Rise 164 1966 760
Pinecrest IPO Broadview Hts. Garden 96 1987 r 598
Portage Towers IPO Cuyahoga Falls High Rise 376 1973 869
The Triangle (b) IPO Cleveland High Rise 273 1989 616
Timbers IPO Broadview Hts. Garden 96 1987-89 930
Villa Moderne IPO North Olmsted Garden 135 1963 504
Washington Manor 07/01/94 Elyria Garden 120 1963-64 541
West Park Plaza IPO Cleveland Garden 118 1964 520
Westchester Townhouses IPO Westlake Townhomes 136 1989 1,000
Westlake Townhomes IPO Westlake Townhomes 7 1985 1,000
Winchester Hills I (c) IPO Willoughby Hills High Rise 362 1972 822
Winchester Hills II IPO Willoughby Hills High Rise 362 1979 822
3,893 759
Michigan
Arbor Landings Apartments 01/20/95 Ann Arbor Garden 168 1990 1,116
Aspen Lakes 09/04/96 Grand Rapids Garden 144 1981 789
Central Park Place 12/29/94 Grand Rapids Garden 216 1988 850
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 10,796 865
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
For the three months ending For the three months ending
June 30, 1998 June 30, 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.
Residence at Christopher Wren 92.2% 94.7% $ 742 $ 0.70 93.5% 97.0% $ 729 $ 0.69
Residence at Turnberry 93.9 96.8 743 0.63 93.4 94.9 741 0.63
Sheffield at Sylvan 98.3 98.5 510 0.65 97.4 97.8 503 0.64
Sterling Park 97.1 100.0 555 0.73 97.9 96.1 547 0.72
The Residence at Newark 98.2 98.2 568 0.65 94.7 93.8 556 0.64
The Residence at Washington 92.7 100.0 532 0.62 97.0 94.4 539 0.63
Wyndemere 95.8 98.4 549 0.71 97.2 91.4 531 0.69
94.2% 96.7% $ 593 $ 0.66 94.9% 95.5% $ 584 $ 0.65
Cincinnati, Ohio
Remington Place Apartments 91.5% 94.9% $ 650 $ 0.78 84.8% 89.7% $ 673 $ 0.81
Indianapolis, Indiana
The Gables at White River 91.9% 95.6% $ 731 $ 0.75 87.5% 91.2% $ 719 $0.74
Northeastern Ohio
Bay Club 99.7% 97.9% $ 639 $0.69 100.3% 100.0% $623 $0.67
Colonnade West 92.0 94.4 403 0.80 93.4 94.9 403 0.80
Cultural Gardens 97.0 99.5 506 0.74 94.6 96.8 502 0.73
Edgewater Landing 96.6 95.0 416 0.71 95.8 95.0 415 0.71
Gates Mills III 90.4 96.9 701 0.80 95.2 97.8 711 0.81
Holly Park 99.5 99.5 702 0.80 97.0 95.8 654 0.75
Huntington Hills 96.5 95.3 662 0.68 98.2 98.8 649 0.66
Mallard's Crossing 96.0 96.9 721 0.72 98.2 96.4 689 0.69
Memphis Manor 95.3 95.8 439 0.79 91.1 93.3 442 0.80
Park Place 93.6 95.1 525 0.69 96.3 94.5 534 0.70
Pinecrest 93.9 97.9 469 0.78 93.4 95.8 460 0.77
Portage Towers 95.7 96.5 588 0.68 86.7 93.6 570 0.66
The Triangle (b) 97.7 97.1 938 1.52 97.8 97.8 899 1.46
Timbers 92.5 97.9 707 0.76 95.0 96.9 699 0.75
Villa Moderne 96.2 100.0 451 0.90 95.1 97.8 439 0.87
Washington Manor 96.0 97.5 393 0.73 97.5 96.7 383 0.71
West Park Plaza 93.0 95.8 430 0.83 96.4 95.8 427 0.82
Westchester Townhouses 91.8 97.8 787 0.79 93.9 100.0 750 0.75
Westlake Townhomes 99.3 100.0 822 0.82 95.1 100.0 791 0.79
Winchester Hills I (c) 92.3 97.2 573 0.70 90.4 95.0 573 0.70
Winchester Hills II 88.5 97.5 600 0.73 86.6 92.5 609 0.74
94.3% 97.0% $ 596 $ 0.79 93.7% 95.8% $ 587 $ 0.77
Michigan
Arbor Landings Apartments 98.8% 98.8% $ 861 $ 0.77 97.3% 97.0% $ 841 $ 0.75
Aspen Lakes 95.4 97.9 559 0.71 90.7 91.7 553 0.70
Central Park Place 95.8 96.8 613 0.72 96.0 96.8 605 0.71
Country Place Apartments 94.1 95.8 550 0.64 94.8 95.1 520 0.61
Georgetown Park Apartments 93.2 96.4 747 0.74 94.6 93.9 673 0.67
The Landings at the Preserve 98.4 95.8 757 0.80 94.0 94.7 675 0.71
The Oaks and Woods at Hampton 94.4 98.5 813 0.77 95.4 95.4 801 0.76
Spring Brook Apartments 98.5 97.6 507 0.62 99.9 98.8 472 0.58
Summer Ridge Apartments 91.5 95.2 701 0.73 95.8 98.4 674 0.70
95.0% 97.1% $ 711 $ 0.74 95.4% 95.7% $ 678 $ 0.71
Toledo, Ohio
Kensington Village 98.3% 99.2% $ 577 $ 0.54 97.2% 96.4% $ 552 $ 0.51
Vantage Villa 95.1 97.3 577 0.62 95.2 93.3 599 0.64
97.6% 98.8% $ 577 $ 0.55 96.8% 95.7% $ 563 $ 0.54
Pittsburgh, Pennsylvania
Chestnut Ridge 95.0% 98.3% $ 760 $ 0.99 98.3% 97.2% $ 702 $ 0.91
Core Market Rate 94.5% 97.0% $ 629 $ 0.73 94.4% 95.5% $ 613 $ 0.71
GOVERNMENT ASST.-ELDERLY
Ellet Development 100.0% 100.0% $ 587 $1.00 100.0% 100.0% $ 587 $1.00
Hillwood I 99.7 99.0 594 1.04 100.6 100.0 596 1.05
Puritas Place (d) 100.0 100.0 782 1.51 99.6 100.0 782 1.51
Riverview 100.0 100.0 591 1.07 100.2 100.0 591 1.07
State Road Apartments 100.0 100.0 596 0.79 99.6 100.0 596 0.79
Statesman II 100.0 100.0 646 0.81 98.8 97.7 651 0.82
Sutliff Apartments II 100.0 100.0 586 1.02 100.4 100.0 586 1.02
28
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Suites Rehab. Sq. Ft.
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
12,746 835
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 15,843 832
Portfolio average 20,974 867
For the three months ending For the three months ending
June 30, 1998 June 30, 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.
Tallmadge Acres 100.0% 100.0% $ 658 $ 1.03 100.3% 100.0% $ 658 $ 1.03
Twinsburg Apartments 100.0 100.0 603 1.09 100.4 100.0 603 1.09
Village Towers 100.0 99.0 579 1.04 100.7 100.0 579 1.04
West High Apartments 100.0 100.0 792 1.13 100.0 100.0 790 1.13
100.0% 99.8% $ 630 $ 1.05 100.1% 99.9% $ 631 $ 1.05
GOVERNMENT ASST.-FAMILY
Jennings Commons 99.9% 100.0% $ 674 $ 0.82 100.0% 100.0% $ 674 $ 0.82
Rainbow Terrace 99.9 98.1 663 0.86 99.2 98.1 773 1.01
Shaker Park Gardens II 99.9 100.0 539 0.72 100.1 100.0 531 0.71
99.9 98.7 637 0.83 99.4 98.7 713 0.93
100.0% 99.4% $ 633 $ 0.95 99.8% 99.4% $ 662 $ 0.99
CONGREGATE CARE
Gates Mills Club 92.7% 95.0% $ 872 $ 1.21 97.9% 99.2% $ 813 $ 1.13
The Oaks 88.7 86.0 1,024 1.52 97.0 100.0 981 1.46
91.4 92.4 917 1.30 97.6 99.4 862 1.22
95.2% 97.3% $ 633 $ 0.76 95.3% 96.1% $ 623 $ 0.75
Joint Venture Properties
Northeastern Ohio
Market rate
Americana 91.3% 93.1% $ 490 $ 0.61 87.0% 93.4% $ 480 $ 0.60
College Towers 96.2 99.2 409 0.62 91.9 93.2 399 0.60
Euclid House 91.4 94.4 446 0.68 90.4 92.9 432 0.66
Gates Mills Towers 94.8 96.8 707 0.83 93.8 98.4 698 0.82
Highland House 97.6 97.2 416 0.77 99.7 97.2 406 0.75
Watergate 92.6 94.6 548 0.66 92.8 96.1 541 0.65
93.5 95.4% $ 542 $ 0.69 91.8% 95.5% $ 533 $ 0.68
Government Asst.-Family
Lakeshore Village 100.0% 100.0% $ 666 $ 0.85 100.2% 100.0% $ 669 $ 0.85
93.9 95.6 548 0.69 92.3 95.7 539 0.68
Core 95.1% 97.0% $ 626 $ 0.75 95.1% 96.0% $ 616 $ 0.74
Portfolio average 93.9% 96.2% $ 642 $ 0.74 94.7% 95.7% $ 552 $ 0.64
<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>
29
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, 1998 and 1997
are summarized in the following table:
For the three months For the six months
ended June 30, ended June 30,
(In thousands) 1998 1997 1998 1997
Net income applicable to common shares $ 3,588 $ 5,029 $ 6,742 $ 8,884
Depreciation on real estate assets
Wholly owned properties 5,300 4,212 10,225 8,284
Joint venture properties 107 121 213 242
Extraordinary item 125 (1,043) 125 (1,043)
Funds From Operations 9,120 8,319 17,305 16,367
Depreciation - other assets 224 151 416 244
Amortization of deferred financing fees 196 179 400 353
Fixed asset additions (97) (117) (165) (231)
Fixed asset additions - joint venture properties - - - -
Distributable Cash Flow $ 9,443 $ 8,532 $ 17,956 $16,733
Weighted average shares 17,133 15,321 17,103 15,321
30
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 30, 1998, the Company consummated the merger of
MIG Realty Advisors, Inc. ("MIGRA"), the acquisition of eight
multifamily properties from MIG Residential REIT, Inc. ("MIG
REIT") and the acquisition of the general and certain limited
partnership interests in AERC HP Advisors Limited Partnership
("HP Advisors"), which owns substantially all of a parcel of real
property in Orlando, Florida upon which a multifamily apartment
complex is being developed.
Pursuant to the merger agreement the Company issued
396,434 Common Shares to the MIGRA shareholders in exchange for
all of the issued and outstanding shares of MIGRA. The number of
shares issued was based on the average closing prices of the
Common Shares for the 20 trading days preceding the date the
merger agreement was executed which was $23.63 per share. The
MIGRA shareholders may receive additional contingent
consideration in the form of Common Shares if certain performance
criteria are achieved.
In connection with the acquisition of the eight
multifamily properties of MIG REIT, the Company issued 5,139,387
Common Shares to the subsidiaries of MIG REIT that held title to
the properties. The number of shares issued was based on the
average closing prices of the Common Shares for the 20 trading
days preceding the date the properties were acquired which was
$18.69 per share. The Common Shares issued to MIG REIT are
subject to a registration rights agreement pursuant to which the
Company has agreed to file a registration statement on Form S-3
relating to such shares on or before August 30, 1998.
The Company also issued 459,719 operating partnership
interests in HP Advisors to certain limited partners of HP
Advisors. The holders of the operating partnership units
exchange such units for Common Shares or cash as determined by
the Company. The number of shares issued was based on the
average closing prices of the Common Shares for the 20 trading
days preceding the date the merger agreement was executed which
was $23.63 per share.
The Company issued securities in the transactions
described in this item in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act, on
the basis that the securities were not issued in transactions
involving a public offering.
31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On June 29, 1998, the Company held its Annual Meeting of
Shareholders. Following are the matters the Company's
shareholders voted upon and the results of the vote:
For Against Abstain
(a) Proposal to approve the merger of MIGRA with 9,319,111 480,050 80,938
and into the Company and the issuance of
Common Shares in connection therewith.
(b) Proposal to approve the acquisition of the 9,297,596 500,967 81,537
multifamily properties from MIG REIT and the
issuance of Common Shares in connection
therewith.
(c) Proposal to approve the acquisitions of two 13,459,880 504,072 84,148
multifamily properties in development and
the issuance of operating partnership units
exchangeable into Common Shares in
connection therewith.
For Withheld
(d) The election of the following directors:
Albert T. Adams 13,419,871 1,352,636
Jeffrey I. Friedman 13,459,880 1,312,622
Gerald C. McDonough 13,460,279 1,312,228
Mark L. Milstein 13,459,580 1,312,927
Frank E. Mosier 13,457,629 1,314,878
Richard T. Schwarz 13,461,780 1,310,727
ITEM 5. OTHER INFORMATION
Shareholders who intend to submit proposals to be included
in the Company's proxy materials may do so in compliance with
Rule 14a-8 promulgated under the Securities Exchange Act of 1934
(the "Exchange Act"). Because the Company has scheduled the date
of its 1999 Annual Meeting of Shareholders for May 12, 1998, the
last date any such proposal will be received by the Company for
inclusion in the Company's proxy materials relating to the 1999
Annual Meeting has been changed to November 26, 1998. For those
shareholder proposals which are not submitted in accordance with
Rule 14a-8, the Company's designated proxies may exercise their
discretionary voting authority for any proposal received after
February 9, 1999, without any discussion of the proposal in the
Company's proxy materials.
32
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 and Exhibit 2.01 to Form
among the Company, MIG Realty Advisors, Inc. ("MIGRA") and the 8-K filed March 31,
MIGRA stockholders dated as of March __, 1998 1998.
2.02 Purchase Agreement by and between MIG REIT/Morgan Place, Inc. and Exhibit 2.02 to Form
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. and the Exhibit 2.03 to Form
Company dated as of January 28, 1998 8-K filed March
31,1998
2.04 Purchase Agreement by and between MIG Peachtree Corporation and the Exhibit 2.04 to
Company dated as of January 28, 1998 Form 8-K filed
March 31, 1998
2.05 Purchase Agreement by and between MIG Fleetwood, Ltd. and the Exhibit 2.05 to
Company dated as of January 28, 1998. Form 8-K filed
March 31, 1998
2.06 Purchase Agreement by and between MIG REIT Falls, L.L.C. and the Exhibit 2.06 to
Company dated as of January 28, 1998. Form 8-K filed
March 31, 1998
2.07 Purchase Agreement by and between MIG 20th and Campbell Corporation Exhibit 2.07 to
and the Company dated as of January 28, 1998 Form 8-K filed
March 31, 1998
2.08 Purchase Agreement by and between Desert Oasis Corporation and the Exhibit 2.08 to
Company dated as of January 28, 1998 Form 8-K filed
March 31, 1998
2.09 Purchase Agreement by and between MIG Hampton Corporation and the Exhibit 2.09 to
Company dated as of January 28, 1998. Form 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 Falls Exhibit 10.02 to
Corp. and the Company Form 8-K filed
February 17, 1998
2.12 Purchase Agreement dated January 28, 1998 between MIG Reflections Exhibit 10.03 to
Inc. and the Company Form 8-K filed
February 17, 1998
3.1 Second Amended and Restated Articles of Incorporation of the Company Exhibit 3.1 to Form
S-11 filed June 30,
1994 (File No. 33-
80950 as amended)
3.2 Code of Regulations of the Company Exhibit 3.2 to Form
S-11 filed June 30,
1994 (File No. 33-
80950 as amended).
33
4.1 Specimen Stock Certificate Exhibit 3.1 to Form S-
11 filed September
2, 1993 (File No.
33-68276 as
amended).
4.2 Form of Indemnification Agreement Exhibit 4.2 to Form S-
11 filed September
2, 1993 (File No.
33-68276 as
amended).
4.3 Promissory Note dated October 23, 1991 from Triangle Properties Exhibit 4.3 to Form S-
Limited Partnership, et. al., in favor of PFL Life Insurance 11 filed September
Company; Open End Mortgage from Triangle Properties Limited 2, 1993 (File No. 33-
Partnership I, et. al., in favor of PFL Life Insurance Company (The 68276 as amended).
Registrant undertakes to 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 from AERC to 10-K filed March 31,
National City Bank (Westchester Townhouse); Open-End Mortgage Deed 1993.
and Security Agreement from AERC to National City Bank (Bay Club);
Open-End Mortgage Deed and Security Agreement from Winchester II
Apartments, Inc. to National City Bank (Winchester II Apartments);
and Open-End Mortgage Deed and Security Agreement from Portage
Towers Apartments, Inc. to National City Bank (Portage Towers
Apartments).
4.6 Indenture dated as of March 31, 1995 between Associated Estates Exhibit 4.6 to Form
Realty Corporation and National City Bank. 10-Q filed May 11,
1995.
4.7 $75 Million 8-3/8% Senior Note due April 15, 2000 Exhibit 4.7 to Form
10-Q filed May 11,
1995.
4.8 Revolving Credit Facility - Second Amended and Restated Credit Exhibit 4.8 to Form
Agreement dated September 26, 1995, by and among the Company, as 10-Q filed
Borrower, and National City Bank, as Agent, and the Banks identified November 11, 1995
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, as 10-Q filed May 13,
Agent, and the banks identified therein. 1996.
4.8b Fifth Amendment to Credit Agreement dated November 27, 1996, by and Exhibit 4.8b to Form
among the Company, as Borrower, the banks and lending institutions, 10-K filed March 26,
as Banks, and National City Bank, as Agent. 1997
4.8c Third Amended and Restated Credit Agreement dated November 12, 1997, Exhibit 4.8c to Form
by and among the Company, as Borrower, the banks and National City 10-K filed March 31,
Bank, as Agent, and the Banks identified therein. 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 Agent 10-K filed March 31,
and the Banks Identified therein. 1998.
4.8e Credit Agreement dated June 30, 1998, by and among Associated Exhibit 4.8e filed
Estates Realty Corporation, as Borrower; the banks and lending herewith.
institutions identified therein as Banks; National City Bank, as
Agent and Bank of America National Trust and Savings Association, as
Documentation Agent.
34
4.9 Form of Medium-Term Note-Fixed Rate-Senior Security. Exhibit 4(i) to Form S-
3 filed December 7,
1995 (File No.
33-80169 as
amended).
4.10 Form of Preferred Share Certificate. Exhibit 4.1 to Form 8-
K filed July 12, 1995.
4.11 Form of Deposit Agreement and Depositary Receipt. Exhibit 4.2 to Form 8-
K filed July 12, 1995.
4.12 Ten Million Dollar 7.10% Senior Notes Due 2002. Exhibit 4.12 to Form
10-K filed March 28,
1996.
10 Associated Estates Realty Corporation Directors Deferred Exhibit 10 to Form
Compensation Plan. 10-Q filed
November 14, 1996
10.1 Registration Rights Agreement among the Company and certain holders Exhibit 10.1 to Form
of the Company's Common Shares. S-11 filed
September 2, 1993
(File No. 33-68276
as amended).
10.2 Stock Option Plan Exhibit 10.2 to Form
S-11 filed
September 2, 1993
(File No. 33-68276
as amended).
10.3 Amended and Restated Employment Agreement between the Company and Exhibit 10.1 to Form
Jeffrey I. Friedman. 10-Q filed May 13,
1996.
10.4 Equity-Based Incentive Compensation Plan Exhibit 10.4 to Form
10-K filed March 29,
1995.
10.5 Long-Term Incentive Compensation Plan Exhibit 10.5 to Form
10-K filed March 29,
1995.
10.6 Lease Agreement dated November 29, 1990 between Royal American Exhibit 10.6 to Form
Management Corporation and Airport Partners Limited Partnership. 10-K filed March 29,
1995.
10.7 Sublease dated February 28, 1994 between the Company as Sublessee, Exhibit 10.7 to Form
and Progressive Casualty Insurance Company, as Sublessor. 10-K filed March 29,
1995.
10.8 Assignment and Assumption Agreement dated May 17, 1994 between the Exhibit 10.8 to Form
Company, as Assignee, and Airport Partners Limited Partnership, as 10-K filed March 29,
Assignor. 1995.
10.9 Form of Restricted Share Agreement dated December 6, 1995 by and Exhibit 10.9 to Form
between the Company and William A. Foley, Gerald C. McDonough, Frank 10-K filed March 28,
E. Mosier and Richard T. Schwarz. 1996.
10.10 Pledge Agreement dated May 23, 1997 between Jeffrey I. Friedman and Exhibit 10.01 to Form
the Company. 10-Q filed August 8,
1997
35
10.11 Secured Promissory Note dated May 23, 1997 in the amount of Exhibit 10.02 to Form
$1,671,000 executed by Jeffrey I. Friedman in favor of the Company. 10-Q filed August 8,
1997
10.12 Unsecured Promissory Note dated May 23, 1997 in the amount of Exhibit 10.03 to Form
$1,671,000 executed by Jeffrey I. Friedman in favor of the Company. 10-Q filed August 8,
1997
10.14 Share Option Agreement dated November 18, 1993 by and between the Exhibit 10.14 to Form
Company and William A. Foley, Gerald C. McDonough, Frank E. Mosier 10-K filed March 30,
and Richard T. Schwarz. 1993.
27 Financial Data Schedule Exhibit 27 filed
herewith.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated February 19, 1998
was filed on March 31, 1998 as amended by Form 8-K/A-1
dated February 19, 1998 and filed on June 25, 1998.
36
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 14, 1998 /s/ Dennis W. Bikun
(Date) Dennis W. Bikun, Vice President,
Chief Financial Officer
and Treasurer