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 September 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 November 13, 1998:
22,596,958 shares
2
ASSOCIATED ESTATES REALTY CORPORATION
INDEX
PART I - FINANCIAL INFORMATION Page
ITEM 1 Condensed Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income for the three and
nine month periods ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 1998 and 1997 5
Notes to Financial Statements 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 34
SIGNATURES 37
3
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
(Unaudited)
ASSETS
Real estate assets:
Land $ 88,278,636 $ 54,906,050
Buildings and improvements 749,001,597 550,156,521
Furniture and fixtures 32,009,550 24,997,001
869,289,783 630,059,572
Less: accumulated depreciation (149,433,938) (130,668,538)
719,855,845 499,391,034
Construction in progress 49,494,451 16,439,393
Real estate, net 769,350,296 515,830,427
Cash and cash equivalents 1,787,636 2,251,819
Restricted cash 7,091,140 10,125,513
Accounts and notes receivable:
Rents 2,394,064 2,256,158
Affiliates and joint ventures 15,166,723 14,439,155
Other 2,876,192 2,385,829
Deferred charges, intangible assets and prepaid expenses 15,375,076 6,621,404
$814,041,127 $553,910,305
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured debt $ 63,878,679 $ 57,817,981
Unsecured debt 408,535,991 260,352,307
Total indebtedness 472,414,670 318,170,288
Accounts payable and accrued expenses 18,470,815 16,197,356
Dividends payable 10,507,585 7,938,692
Resident security deposits 5,845,258 4,867,011
Funds held on behalf of managed properties:
Affiliates and joint ventures 6,510,044 7,124,217
Other 4,066,826 2,340,115
Accrued interest 4,533,848 3,776,884
Accumulated losses and distributions of joint ventures
in excess of investment and advances 12,752,363 12,337,664
Total liabilities 535,101,409 372,752,227
Operating partnership minority interest 10,902,557 -
Commitments and contingencies - -
Shareholders' equity:
Preferred shares, Class A cumulative, without
par value; 3,000,000 authorized, liquidation preference
of $25 per share, 225,000 issued and outstanding 56,250,000 56,250,000
Common shares, without par value, $.10 stated
value; 50,000,000 authorized; 22,621,958 and
17,073,773 issued at September 30, 1998
and December 31, 1997, respectively 2,262,195 1,707,377
Paid-in capital 277,120,515 171,752,807
Accumulated dividends in excess of net income (67,129,026) (48,552,106)
Less: Treasury shares, at cost, 25,000 shares at
September 30, 1998 (466,523) -
Total shareholders' equity 268,037,161 181,158,078
$814,041,127 $553,910,305
The accompanying notes are an integral part
of these financial statements
4
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
Revenues
Rental $35,783,150 $ 26,154,443 $95,773,865 $ 74,258,037
Property management fees 1,426,665 930,124 3,256,711 2,844,349
Asset management fees 636,108 - 636,108 -
Painting services 481,775 448,666 1,202,759 1,304,519
Other 680,874 531,240 1,694,168 1,342,604
39,008,572 28,064,473 102,563,611 79,749,509
Expenses
Property operating and maintenance 15,886,030 11,334,163 41,104,763 31,005,051
Depreciation and amortization 7,082,905 4,818,185 18,105,384 13,680,669
Painting services 469,027 395,440 1,200,968 1,154,075
Preliminary project costs 200,456 - 200,456 -
General and administrative 3,078,635 1,331,472 6,713,606 4,402,314
Interest expense 7,346,108 4,681,293 20,890,667 13,641,493
Total expenses 34,063,161 22,560,553 88,215,844 63,883,602
Income before equity in net income of
joint ventures, minority interest
and extraordinary items 4,945,411 5,503,920 14,347,767 15,865,907
Equity in net income of joint ventures 105,950 272,104 312,839 492,586
Minority interest in operating (39,353) - (39,353) -
partnership
Income before extraordinary item 5,012,008 5,776,024 14,621,253 16,358,493
Extraordinary loss or (gain)
extinguishment of debt - 19,733 124,895 (1,023,713)
Net income $ 5,012,008 $ 5,756,291 $14,496,358 $ 17,382,206
Net income applicable to common shares $ 3,640,903 $ 4,385,186 $10,383,043 $ 13,268,891
Earnings Per Common Share - Basic:
Net income before extraordinary item $ .16 $ .26 $ .55 $ .77
Net income $ .16 $ .26 $ .55 $ .83
Earnings Per Common Share - Diluted:
Net income before extraordinary item $ .16 $ .26 $ .55 $ .77
Net income $ .16 $ .26 $ .54 $ .83
Dividends paid per common share $ .465 $ .465 $ 1.395 $ 1.395
Weighted average number of
common shares outstanding - Basic 22,598,199 17,052,189 18,954,875 15,904,262
- Diluted 23,057,918 17,078,126 19,109,799 15,930,835
The accompanying notes are an integral part
of these financial statements
5
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,
(UNAUDITED)
1998 1997
Cash flow from operating activities:
Net income $ 14,496,358 $ 17,382,206
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 18,105,384 13,680,669
Minority interest in operating partnership 39,353 -
Loss (gain) on extinguishment of debt 124,895 (1,023,713)
Equity in net income of joint ventures (312,838) (492,588)
Earnings distributed from joint ventures 394,267 509,228
Net change in assets and liabilities net of effect of the
MIGRA merger - Accounts and notes receivable 91,832 (3,011,883)
- Accounts and notes receivable- (5,541,263)
affiliates and joint ventures 819,490
- Accounts payable and accrued expenses (5,962,278) (1,916,246)
- Other operating assets and liabilities (1,543,222) 1,382,030
- Restricted cash 5,373,197 712,809
- Funds held for non-owned managed properties 1,495,162 352,256
- Funds held for non-owned managed properties-
affiliates and joint ventures (2,952,997) 1,373,220
Total adjustments 15,672,245 6,024,519
Net cash flow provided by operations 30,168,603 23,406,725
Cash flow from investing activities:
Loans receivable-affiliate - (3,342,000)
Real estate acquired or developed (net of liabilities assumed) (133,012,361) (108,585,330)
Fixed asset additions (3,038,473) (1,706,381)
Distributions from joint ventures 244,457 (100,833)
Net cash flow used for investing activities (135,806,377) (113,734,544)
Cash flow from financing activities:
Principal payments on mortgage notes (8,763,651) (19,068,056)
Proceeds from mortgage notes - 8,100,000
Proceeds from senior and medium-term notes 20,000,000 50,000,000
Proceeds from the issuance of common shares,
net of $2,187,500 of underwriting commissions
and $150,306 of offering expenses - 38,838,432
Line of Credit borrowings 948,100,000 305,600,000
Line of Credit repayments (821,100,000) (265,900,000)
Deferred financing and offering costs (2,091,850) (606,798)
Common share dividends paid (26,391,069) (21,958,666)
Preferred share dividends paid (4,113,316) (4,113,315)
Purchase of treasury shares (466,523) -
Stock options exercised - 1,717
Net cash flow provided by financing activities 105,173,591 90,893,314
Decrease in cash and cash equivalents (464,183) 565,495
Cash and cash equivalents, beginning of period 2,251,819 1,286,959
Cash and cash equivalents, end of period $ 1,787,636 $ 1,852,454
The accompanying notes are an integral part
of these financial statements
6
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 September 30, 1998, the Company owned, or was a joint
venture partner in, 101 multifamily properties containing 21,346
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 consisting of 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 management, painting and
computer services as well as mortgage origination and servicing
to both owned and non-owned properties.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of the Company, all subsidiaries, the Service
Companies and the operating partnership structured as a DownREIT.
The Company holds a preferred share interest in the Service
Companies which entitles it to receive 95% of the economic
benefits from operations and which is convertible into a majority
interest in the voting common shares. The outstanding voting
common shares of these Service Companies are held by an executive
officer of the Company. The Service Companies are consolidated
because, from a financial reporting perspective, the Company is
entitled to virtually all economic benefits and has operating
control. 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 that 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.
As further described in Note 2, the Company entered into an
operating partnership structured as a DownREIT of which a 41%
interest is owned by limited partners. Interests held by limited
partners in real estate partnerships controlled by the Company
are reflected as "Operating partnership minority interest."
Capital contributions, distributions and profits and losses are
allocated to minority interests in accordance with the terms of
the operating partnership agreement.
7
All significant intercompany balances and transactions have
been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited financial statements have been
prepared by the Company's management in accordance with generally
accepted accounting principles for interim financial information
and applicable rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of
normally recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations for
the three and nine month periods ended September 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 Company's 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.
Reclassifications
Certain reclassifications have been made to the 1997
financial statements to conform to the 1998 presentation.
Recent Accounting Pronouncements
During 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 130 - Reporting
Comprehensive Income ("SFAS 130") and SFAS 131 - Disclosure About
Segments of an Enterprise and Related Information and in 1998,
SFAS 133 - Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"). In Addition, in March 1998, the
Emerging Issues Task Force of the Financial Accounting Standards
Board reached a consensus opinion on issue #97-11, Accounting for
Internal Costs Relating to Real Estate Property Acquisitions
("EITF 97-11").
SFAS 130 specifies the presentation and disclosure for
reporting comprehensive income which includes those items which
have been formerly reported as a component of stockholders'
equity. SFAS 131 establishes standards for disclosing
information about an entity's operating segments and related
information in interim and annual financial statements. SFAS and
130 and 131 are effective for the Company for the year ending
December 31, 1998. SFAS 133 requires fair value accounting for
all derivatives, including recognizing all such instruments on
the balance sheet with an offsetting amount recorded in the
income or as part of comprehensive income. This statement is
effective for the Company for the year ending December 31, 2000.
EIFT 97-11 requires that the internal costs of identifying and
acquiring an operating property should be expensed as incurred.
The adoption of SFAS 130, SFAS 131, SFAS 133 and EITF 97-11
are not expected to have a material impact on the Company's
financial position, results of operations or cash flows.
8
2. DEVELOPMENT AND ACQUISITION OF MULTIFAMILY PROPERTIES
Development Activity
Construction in progress, including the cost of land, for
the development of multifamily properties was $49,494,451 and
$16,439,393 at September 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 $933,190 and $1,681,120
and $561,000 and $1,474,000 were capitalized during the three and
nine month periods ended September 30, 1998 and 1997,
respectively. For the nine month period ended September 30,
1998, the construction and leasing of 281 suites at four
properties were completed at a total cost of $12.7 million. The
following schedule details construction in progress at September
30, 1998:
Placed in
(dollars in thousands) Number Costs Service September 30, 1998 Estimated
of Incurred through Land Building Scheduled
Property Suites to Date 9/30/98 Cost Cost Completion
AURORA, OHIO
The Residence at Barrington-Phase I 168 $ 15,348 $14,630 $ 65 $ 653 1998
The Residence at Barrington-Phase II 120 9,664 5,590 393 3,681 1998
288 25,012 20,220 458 4,334
ANN ARBOR, MICHIGAN
Arbor Landings Apartments II 160 6,798 508 621 5,669 1999
BATTLE CREEK, MICHIGAN
The Landings at the Preserve 90 308 - 266 42 2000
FENTON, MICHIGAN
Georgetown Park Apartments III 120 7,098 6,211 70 817 1998
GRAND RAPIDS, MICHIGAN
Aspen Lakes II 118 710 - 402 308 2000
MT. STERLING, OHIO
Muirwood Village at Mt. Sterling II 90 146 - 126 21 TBD
WESTLAKE, OHIO
Westlake 300 695 - 523 172 2000
ORLANDO, FLORIDA
Windsor at Kirkman Apts. 460 30,500 - 3,222 27,278 1999
AVON, OHIO
Village at Avon 312 3,505 - 2,158 1,347 2000
Other 278* 1,661 - 225 1,435
2,216 $ 76,433 $26,939(1) $ 8,071 $ 41,423
* Estimated
(1) Including land of $2,202
TBD-To be determined
Acquisition Activity
During the period January 1, 1998 through September 30,
1998, without regard to the merger of MIGRA and the related
9
acquisition of the eight MIG REIT Properties and the one
development property, the Company acquired five multifamily
properties containing 1,584 suites and a parcel of land
containing 42 acres for an aggregate purchase price of $95.1
million of which $17.2 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 $35.6 million. The
properties are located in Coconut Creek, Florida; Duluth,
Georgia; Columbia, Maryland; Indianapolis, Indiana; and Toledo,
Ohio. The land parcel is located in Avon, Ohio. Three of the
five properties were acquired in anticipation of the merger with
MIGRA and the purchase of the MIG REIT properties and one
development property. 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.
As consideration for their interest in MIGRA and the
affiliated property management businesses, the shareholders of
MIGRA received 408,314 of the Company's common shares. The
number of shares issued was determined based on the average
closing price 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 provides for up to $3.1 million and
$6.4 million in contingent consideration payable on the first and
second anniversary of the merger, respectively. The agreement
also provides for certain reductions to the purchase price if any
of MIGRA's or a MIGRA affiliate's advisory clients did not
consent to the assignment of, or terminated any advisory, asset,
property management or mortgage servicing agreement prior to the
merger. The initial purchase price, including contingent
consideration, was reduced by $5.6 million pursuant to the price
reduction provisions of the merger agreement.
The Company recorded approximately $4.9 million in
intangibles assets which represents the allocation of the
purchase price to the purchase of the investment advisory, asset
management and mortgage servicing operations including the
property management and asset advisory contracts and key
executives retained. These intangibles are amortized on a
straight-line basis over a period of six years, which represents
its estimated life. If there is an event or change in
circumstance that indicates an impairment in the value of the
intangible assets has occurred, the Company's policy is to write
off any unamortized balance.
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
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 average closing prices of the Company's
common shares for the 20 trading days 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.
10
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 cash of $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 a parcel of real
property located in Orlando, Florida upon which a 460 suite
multifamily apartment complex known as Windsor at Kirkman
Apartments is being constructed. Windsor at Kirkman Apartments
is approximately 48% complete. Certain limited partners of HP
Advisors received 459,719 operating partnership units ("OP
units"), representing four classes of limited partnership
interests, in exchange for their interests in Windsor at Kirkman
Apartments. The number of OP 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. Commencing one year from the date of issuance,
the holders of the Class A OP units can put these units to the
operating partnership for cash, subject to certain conditions.
The Company has the option to redeem the OP units
for cash or common shares, exchangeable on a one-for-one basis.
The Class B and C OP units and Class E OP units, are convertible
into Class A OP units at the option of the Company, one and two
years, respectively, from the date of issuance. 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.
11
3. SHAREHOLDERS' EQUITY
The following table summarizes the changes in shareholders'
equity since December 31, 1997:
Class A Accumulated
Cumulative Common Dividends Treasury
Preferred Shares Paid-In In Excess Of Shares
Shares (at $.10 Capital Net Income (at cost) Total
stated value)
Balance, Dec. 31, 1997 $56,250,000 $ 1,707,377 $171,752,807 $(48,552,106) - $181,158,078
Net income - - - 14,496,358 - 14,496,358
Issuance of 484
restricted common
shares - 48 (48) - - -
Issuance of 5,547,701
common shares
relating to the
MIGRA merger and the
acquisition of the
MIG REIT properties - 554,770 105,508,589 - - 106,063,359
Additional costs
relating to common
share offering - - (140,833) - - (140,833)
Purchase of
treasury shares - - - - (466,523) (466,523)
Common share
dividends declared - - - (28,959,962) - (28,959,962)
Preferred share
dividends declared - - - (4,113,316) - (4,113,316)
Balance, September 30,
1998 $56,250,000 $ 2,262,195 $277,120,515 $(67,129,026) $(466,523) $268,037,161
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 $35.9 million and $29.4 million at September 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 $28.0 million
and $28.4 million at September 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.
12
5. UNSECURED DEBT
Senior Notes
The Company has two Senior Notes outstanding in the
principal amounts of $75 million and $10 million that accrue
interest at 8.38% and 7.10%, respectively, and mature in 2000 and
2002, respectively. The balance of the $75 million Senior Notes,
net of unamortized discounts, was $74.9 million at September 30,
1998 and December 31, 1997.
Medium-Term Notes Program
The Company has eleven Medium-Term Notes (the "MTN's")
outstanding having an aggregate balance of $112.5 million and
$92.5 million at September 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 September 30, 1998. The holders
of two MTN's with stated terms of 30 years each have a right to
repayment of five and seven years from the issue date of the
respective MTN. If these holders exercised their right to
prepayment, the weighted average maturity would be 5.8 years.
The weighted average interest rate of the eleven MTN's is 6.95%.
One and four of the MTN's in the aggregate amounts of $20.0
million and $50.0 million were issued in 1998 and 1997,
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 September 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. In
July 1998, the Line of Credit was increased from $200 million to
$250 million. 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. 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 September 30, 1998, $210
million was outstanding under this facility.
The Company recently advised its bank group that it is
not in compliance with one of the financial covenants concerning
the Company's net worth. The net worth covenant requires that the
Company maintain a minimum net worth of $400 million, based on a
formula that incorporates the annualized multiple of the most
recent quarter's earnings before interest, taxes, depreciation and
amortization (EBITDA). The Company is currently in discussions with
its bank group that it expects will result in a waiver by the banks
of the breach of the net worth covenant, along with a modest
increase in borrowing costs under its Line of Credit. The bank
group has continued to make advances under the Line of Credit
following the Company's notification that it was not in compliance
with the net worth covenant.
MIGRA maintains two separate $500,000 Line of Credit
facilities ("MIGRA Line of Credit Facilities") which the Company
assumed at the time of the merger. The MIGRA Line of Credit
Facilities are used to provide working capital and for general
corporate purposes for MIGRA's operations. MIGRA's borrowings
under these facilities bear interest at prime plus one percent.
The Company subsequently paid off one of the MIGRA Line of Credit
Facilities at maturity, on October 31, 1998. The other facility
will mature on May 1, 2000. At September 30, 1998, approximately
$1 million was outstanding under these facilities.
13
6. TRANSACTIONS WITH AFFILIATES AND JOINT VENTURES
The Company provides management and other services to (and
is reimbursed for certain expenses incurred on behalf of) certain
non-owned properties in which the Company's Chief Executive
Officer and/or other related parties have varying ownership
interests. The entities which own these properties, as well as
other related parties, are referred to as "affiliates". The
Company also provides similar services to joint venture
properties.
Summarized affiliate and joint venture transaction activity
follows:
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
Property management fee and other
miscellaneous service revenues
- affiliates $ 712,103 $542,330 $ 1,755,039 $ 1,648,635
- joint ventures 230,387 224,399 693,941 663,150
Painting service revenues
- affiliates 99,011 84,925 281,362 322,873
- joint ventures 85,353 61,148 298,319 135,585
Expenses incurred on behalf of and re-
imbursed by(1) - affiliates 990,588 1,189,510 3,147,024 3,334,170
- joint ventures 635,532 660,758 1,918,110 1,920,786
Interest income - affiliates 200,417 211,518 692,284 414,982
Interest expense - affiliates (100,230) (90,839) (313,360) (261,169)
- joint ventures (4,550) (5,151) (19,487) (16,907)
(1) Primarily payroll and employee benefits, reimbursed at cost.
Property management fees and other miscellaneous receivables
due from affiliates and joint venture properties were $6,810,327
and $4,542,798 in the aggregate at September 30, 1998 and
December 31, 1997, respectively. Other miscellaneous payables
due to affiliates and joint venture properties were $231,549 and
$329,000 in the aggregate at September 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 $7,485,383 and $871,013 at September 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 September 30, 1998. The
Company held funds for the benefit of affiliates and joint
ventures in the aggregate amount of $5,037,193 and $1,241,302 at
September 30, 1998, respectively, and $4,989,674 and $1,805,543
at December 31, 1997, respectively.
In February 1998, 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 of approximately $2.9
million relating to certain HUD subsidized properties 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
14
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 September 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 weighted average interest
rate charged was 6.76% for the nine month period ending September
30, 1998. One of the notes is collateralized by 150,000 of the
Company's common shares; the other note is unsecured. The
Company recognized interest income of $56,184 and $169,366 for
the three and nine month period ending September 30, 1998
relating to these notes.
7. PREFERRED AND COMMON SHARES
On July 2, 1997, the Company completed an offering of
1,750,000 common shares at $23.50 per share. The net proceeds of
approximately $38.8 million were applied to reduce debt.
On June 30, 1998, the Company issued 408,314 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 common shares at market prices. The timing of stock
purchases are made at the discretion of management. During the
third quarter of 1998, 25,000 shares were repurchased at an
aggregate cost of $466,523 which was funded primarily from
operating cash flows.
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.
15
For the three months For the nine months
ended September 30, ended September 30,
1998 1997 1998 1997
Basic Earnings Per Share:
Income before extraordinary items $ 5,012,008 $ 5,776,024 $14,621,253 $16,358,493
Less: Preferred share dividends ( 1,371,105) ( 1,371,105) ( 4,113,315) ( 4,113,315)
Income before extraordinary items
applicable to common shares 3,640,903 4,404,919 10,507,938 12,245,178
Extraordinary items gain (loss) - (19,733) (124,895) 1,023,713
Net income applicable to common shares $ 3,640,903 $ 4,385,186 $10,383,043 $13,268,891
Diluted Earnings Per Share:
Income before extraordinary items $ 5,012,008 $ 5,776,024 $14,621,253 $16,358,493
Add: Minority interest in operating
partnership 39,353 - 39,353 -
Less: Preferred share dividends ( 1,371,105) ( 1,371,105) ( 4,113,315) ( 4,113,315)
Income before extraordinary items
applicable to common shares 3,680,256 4,404,919 10,547,291 12,245,178
Extraordinary items gain (loss) - (19,733) (124,895) 1,023,713
Net income applicable to common shares $ 3,680,256 $ 4,385,186 $10,422,396 $13,268,891
Number of Shares:
Basic-average shares outstanding 22,598,199 17,052,189 18,954,875 15,904,262
Add: Dilutive effect of stock options - 25,937 - 26,573
Operating partnership units 459,719 - 154,924 -
Diluted shares 23,057,918 17,078,126 19,109,799 15,930,835
Per Share Amount-Income
Before Extraordinary Item:
Basic $ .16 $ .26 $ .55 $ .77
Diluted $ .16 $ .26 $ .55 $ .77
Per Share Amount-Net Income:
Basic $ .16 $ .26 $ .55 $ .83
Diluted $ .16 $ .26 $ .54 $ .83
Options to purchase 1,243,474 and 1,070,274 common shares
were outstanding at September 30, 1998 and December 31, 1997,
respectively, a portion of which has been reflected above using
the treasury stock method.
16
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:
Nine months ended
September 30,
1998 1997
Issuance of common shares in connection with the
acquisition of MIG REIT properties and the MIGRA
merger $106,063,359 $ -
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 5,543,977 3,703,513
Dividends declared but not paid 10,507,585 -
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 thirteen
property acquisitions completed in 1998, (iii) the merger of
MIGRA and (iv) the offering of 1,750,000 common shares.
For the nine months
ended September 30,
1998 1997
(In thousands, except
per share amounts)
Revenues $ 113,067 $ 107,767
*Net income 11,495 16,443
*Income applicable to common shares 7,382 12,329
*Income per common share
- Basic $ 0.33 $ 0.55
- Diluted $ 0.32 $ 0.53
Weighted average common shares outstanding:
- Basic 22,597 22,597
- Diluted 23,057 23,057
*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.
17
The 1997 and 1998 pro forma financial information does not
include the revenue and expenses for Windsor at Kirkman
Apartments and Steeplechase at Shiloh Crossing Apartments,
properties that were acquired in 1998, for the period January 1
through the date the properties were acquired by the Company.
The revenue and expenses of Windsor at Kirkman Apartments and
Steeplechase at Shiloh Crossing Apartments were excluded from the
pro forma financial information for such periods as the
properties were under construction during substantially all of
the periods prior to their acquisition.
The unaudited pro forma condensed statement of operations is
not necessarily indicative of what the actual results of
operations of the Company would have been assuming the
transactions had been completed as set forth, nor does it purport
to represent the results of operations of future periods of the
Company.
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
Agreement and Housing Assistance Payments Contract ("HAP
Contract") pertaining to this property. Among other matters, HUD
alleges that the property is poorly managed and that Rainbow
Terrace Apartments, Inc. has failed to complete certain physical
improvements to the property. Moreover, HUD claims that the
owner 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.
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, Inc. 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, Inc.
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 pursuant to 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, August, September,
October and November 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
September 30, 1998, the Company had receivables of $1.35 million
related to these retroactive rent increase requests. At
September 30, 1998, Rainbow Terrace Apartments, Inc. had net
assets of $1.3 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.
18
12. SUBSEQUENT EVENTS
The Company is exploring opportunities to strategically
dispose of a number of its multifamily properties which include
certain joint venture, government assisted and congregate care
properties.
On August 26, 1998, the Company declared a dividend of $.465
per common share for the quarter ending September 30, 1998, which
was paid on October 31, 1998 to shareholders of record on October
15, 1998.
The Company is currently under contract to purchase a parcel
of land containing 24 acres for a purchase price of approximately
$2.1 million. The land parcel is located in Cranberry Township,
Pennsylvania (a suburb of Pittsburgh). The Company expects to
finance the land parcel acquisition with borrowings made
available through the Company's Line of Credit. There can be no
assurances, however, that the Company will be successful in its
attempts to acquire the land parcel currently under contract.
In connection with the MIGRA transaction, and subsequent to
September 30, 1998, the Company acquired the general and certain
limited partnership interests in a partnership that owns one
multifamily property located in Pembroke Pines, Florida
containing 368 suites for a purchase price of approximately $34.2
million. In exchange for cash of $16.6 million and the
assumption of mortgage indebtedness of $16.5 million, the Company
received 1,887,345 OP units, bringing the Company's general
partnership interest in HP Advisors to 83%. Certain limited
partners of HP Advisors received 62,313 Class D OP units in exchange
for their interests in the property.
Additionally, subsequent to September 30, 1998, the Company
acquired a parcel of land containing 48 acres for a purchase price of
approximately $3.9 million which was financed with borrowings
under the Company's Line of Credit. The Company plans to
construct 535 suites on the land parcel.
19
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 September 30,
1998, owned or was a joint venture partner in 101 multifamily
properties containing 21,346 suites located in Florida, Georgia,
Ohio, Maryland, Michigan, Indiana, 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 Income 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. In
July 1998, the Line of Credit was increased from $200 million to
$250 million. 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 September 30, 1998, $210
million was outstanding under this facility.
The Company recently advised its bank group that it is not in
compliance with one of the financial covenants concerning the
Company's net worth. The net worth covenant requires that the
Company maintain a minimum net worth of $400 million, based on a
formula that incorporates an annualized multiple of the most recent
quarter's earnings before interest, taxes, depreciation and
amortization (EBITDA). The Company is currently in discussions
with its bank group that it expects will result in a waiver by the
banks of the breach of the net worth covenant, along with a modest
increase in borrowing costs under its Line of Credit. The bank
group has continued to make advances under the Line of Credit
following the Company's notification that it was not in compliance
with the net worth covenant.
MIG Realty Advisors, Inc. ("MIGRA") maintains two separate
$500,000 Line of Credit facilities ("MIGRA Line of Credit
Facilities") which the Company assumed at the time of the merger.
The MIGRA Line of Credit Facilities are used to provide working
capital and for general corporate purposes for MIGRA's
operations. MIGRA's borrowings under these facilities bear
interest at prime plus one percent. The Company subsequently
paid off one of the MIGRA Line of Credit Facilities at maturity,
20
on October 31, 1998. The other facility will mature on May 1,
2000. At September 30, 1998, approximately $1 million was
outstanding under these facilities.
Eighty-three of the Company's 94 wholly owned properties
were unencumbered at September 30, 1998 with annualized earnings
before interest, depreciation and amortization of approximately
$74.7 million and an historical cost basis of approximately
$235.4 million. The remaining eleven of the Company's wholly
owned properties, have an historical cost basis of $151.4 million
and secured property specific debt of $63.9 million at September
30, 1998. Unsecured debt, which totaled $408.5 million at
September 30, 1998, consisted of $112.5 million in Medium-Term
Notes; Senior Notes of $84.9 million; amounts drawn on the
revolving credit facility of $210 million; and amounts drawn on
the MIGRA Line of Credit Facilities of approximately $1 million.
The Company's proportionate share of the mortgage debt relating
to the seven joint venture properties was $17.6 million at
September 30, 1998. The weighted average interest rate on the
secured, unsecured and the Company's proportionate share of the
joint venture debt was 7.3% at September 30, 1998.
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 a shelf registration statement on file 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
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 was determined based on the average
closing price of the Company's common shares for the 20 trading
days preceding the date of the merger agreement or $23.63 per
share. 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 and represented all shares that
were held back at the closing of the merger. The shares were
issued at $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 provides for up to $3.1 million and
$6.4 million in contingent consideration payable on the first and
second anniversary of the merger, respectively. The agreement
also provides for certain reductions to the purchase price if any
of MIGRA's or a MIGRA affiliate's advisory clients did not
consent to the assignment of, or have terminated any advisory,
asset, property management or mortgage servicing agreement prior
to the merger. The initial purchase price, including contingent
consideration, was reduced by $5.6 million pursuant to the price
reduction provisions of the merger agreement.
21
The Company recorded approximately $4.9 million in
intangibles assets which represents the allocation of the
purchase price to the purchase of the investment advisory, asset
management and mortgage servicing operations including the
property management and asset advisory contracts and key
executives retained. These intangibles are amortized on a
straight-line basis over a period of six years, which represents
its estimated life. If there is an event or change in
circumstance that indicates an impairment in the value of the
intangible assets has occurred, the Company's policy is to write
off any unamortized balance.
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
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 average closing prices of the Company's
common shares for the 20 trading days 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 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 cash of $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 a parcel of real
property located in Orlando, Florida upon which a 460 suite
multifamily apartment complex known as Windsor at Kirkman
Apartments is being constructed. At the date of acquisition,
Windsor at Kirkman Apartments was approximately 30% complete.
Certain limited partners of HP Advisors received 459,719
operating partnership units ("OP units"), representing four
classes of limited partnership interests, in exchange for their
interests in Windsor at Kirkman Apartments. The number of OP
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. Commencing
one year from the date of issuance, the holders of the Class A OP
units can put these units to the operating partnership for cash,
subject to certain conditions. The Company has the option to
redeem the OP units for cash or common shares, exchangeable on a
one-for-one basis. The Class B and C OP units and Class E OP
units are convertible into Class A OP units at the option of the
Company, one and two years, respectively, from the date of
issuance. 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.
In connection with the MIGRA transaction, and subsequent to
September 30, 1998, the Company acquired the general and certain
limited partnership interests in a partnership that owns a
multifamily property, Windsor Pines Apartments ("Pines"), a 368
suite multifamily property in Pembroke Pines, Florida, for total
consideration of $34.2 million. In exchange for cash of $16.6
million and the assumption of mortgage indebtedness of $16.5
22
million, the Company received 1,887,345 OP units, bringing the
Company's general partnership interest in HP Advisors to 83%.
Certain limited partners of HP Advisors received 62,313 Class D
OP units in exchange for their interests in Pines. The number of
OP units issued for the Pines property was determined based on
the average closing prices of the Company's common shares for the
20 trading days preceding the original closing date of the
transaction or $17.54 per share. The Class D OP units are
convertible into Class A OP units at the option of the Company
two years from June 30, 1998. Once converted into Class A OP
units, the holders can put these units to the operating
partnership for cash, subject to certain conditions. The Company
has the option to redeem the units for cash or common shares,
exchangeable on a one-for-one basis. 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.
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 September 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 five multifamily
properties containing 1,584 suites and a parcel of land
containing 42 acres for an aggregate purchase price of $95.1
million of which $17.2 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 $35.6 million. The
properties are located in Coconut Creek, Florida; Duluth,
Georgia; Columbia, Maryland; Indianapolis, Indiana; and Toledo,
Ohio. The land parcel is located in Avon, Ohio. Three of the
five properties were acquired in anticipation of the merger with
MIGRA and the purchase of the MIG REIT properties and one
development property. 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.
The remainder of the Acquisitions, development and
dispositions sections contain forward-looking statements.
Certain risks, trends and uncertainties could cause actual
results to vary from those contained in the forward-looking
statements. Readers are cautioned not to place undue reliance on
forward-looking statements, which are based only on current
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 properties and land parcels under
contract as described below.
Bradford at Easton, a newly developed 324 suite property
located in Columbus, Ohio, achieved stabilized occupancy during
the second quarter and was 98.5% physically occupied at September
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 99.1% 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 suite 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) and is scheduled for completion in the third
quarter of 2000. Windsor at Kirkman Apartments, the newly
23
acquired development project, is a planned 460 suite property
located in Orlando, Florida and is scheduled for completion in
the second quarter of 1999.
The Company is in the process of constructing or planning
the construction of an additional 578 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 II Grand Rapids, Michigan 118 2nd Qtr. 2000
Georgetown Park Apartments III Fenton, Michigan 120 4th Qtr. 1998
The Landings at the Preserve(a) Battle Creek, Michigan 90 2nd Qtr. 2000
Muirwood Village at Mt. Sterling II Mt. Sterling, Ohio 90 TBD
578
(a) A clubhouse will also be added to The Landings at the Preserve.
TBD - To be determined.
Additionally, the Company acquired a parcel of land
containing 42 acres for an aggregate purchase price of
approximately $2.1 million. The land parcel is located in Avon,
Ohio (a suburb of Cleveland). The Company plans to construct 312
suites on the land parcel. The purchase price was financed with
borrowings under the Company's Line of Credit.
Subsequent to September 30, 1998, the Company acquired a parcel
of land containing 48 acres for an aggregate purchase price of
approximately $3.9 million. The land parcel is located in Atlanta,
Georgia. The Company plans to construct 535 suites on the land
parcel. The purchase price was financed with borrowings under the
Company's Line of Credit.
The Company has entered into a contract to purchase a parcel
of land containing 24 acres for a purchase price of approximately
$2.1 million. The land parcel is located in Cranberry Township,
Pennsylvania (a suburb of Pittsburgh). The Company will commence
construction of Berkley Manor, a 226 suite property on this
parcel after the consummation of the anticipated purchase in
1999.
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. The Company recognizes that the sale of these
assets may have a short term dilutive effect on earnings.
Dividends:
On August 26, 1998, the Company declared a dividend of
$0.465 per common share for the quarter ending September 30, 1998
which was paid on October 31, 1998 to shareholders of record on
October 15, 1998. Additionally, on August 26, 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 September 15, 1998 to shareholders of record on
September 4, 1998.
Cash flow sources and applications:
Net cash provided by operating activities increased
$6,761,878 from $23,406,725 to $30,168,603 for the nine months
ended September 30, 1998 when compared with the nine months ended
September 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, funds held for non-owned managed properties, and
restricted cash which was offset somewhat by uses of cash from
other operating assets and liabilities, accounts payable and
accrued expenses, and funds held for non-owned properties -
affiliates and joint ventures.
24
Net cash flows used for investing activities of $135,806,377
for the nine months ended September 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
$105,173,591 for the nine months ended September 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.
24
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 1998 to the
three months ended September 30, 1997
Overall, total revenue increased $10,944,100 or 39.0% and
total expenses before the equity in net income of the joint
ventures, minority interest expense and extraordinary item
increased $11,502,600 or 51.0% for the quarter. Net income
applicable to common shares decreased $744,300 or 17.0%, after
payment of the dividends on the Company's Perpetual Preferred
Shares.
In the following discussion of the comparison of the three
months ended September 30, 1998 to the three months ended
September 30, 1997, the term Core Portfolio Properties refers to
the 74 wholly owned multifamily properties owned by the Company
at June 30, 1997. Acquired Properties refers to the 20
properties acquired between July 1, 1997 and September 30, 1998.
During the quarter ended September 30, 1998, the Acquired
Properties generated total revenues of $12,571,600 while
incurring property, operating and maintenance expenses of
$4,170,100.
Rental Revenues:
Rental revenues increased $9,628,700 or 36.8% for the
quarter. Increases in occupancy and suite rents at the Core
Portfolio Market-rate and Government-Assisted Properties resulted
in a $405,900 or 1.7% increase in rental revenue from these
properties. The balance of the increase resulted from increased
rental revenues attributable to the commercial properties and
other miscellaneous rental revenue items.
Other Revenues:
Other income increased $149,600 or 28.2% for the quarter.
The increase is due primarily to real estate tax refunds.
The Company recognized asset management fee revenues of
$636,100 during the quarter. These revenues represent the
collection of management fees by MIGRA relating to their
institutional investor clients.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$4,551,900 or 40.2% for the quarter. Operating and maintenance
expenses at the Acquired Properties increased $3,459,000 for the
quarter due primarily to the operating and maintenance expenses
incurred at the three properties acquired during 1997, the
thirteen properties acquired in 1998, and the newly constructed
properties of Bradford at Easton and The Village of Western
Reserve. Property operating and maintenance expenses at the Core
Portfolio Properties increased $1,092,800, or 10.3% when compared
to the quarter ended September 30, 1997 primarily due to
increases in personnel; building and grounds repair and
maintenance; and real estate taxes and insurance. Building
renovations and suite and common area refurbishment in the Core
Portfolio Properties that were not considered to be capital in
nature averaged $156 per suite for the quarter ended September
30, 1998 as compared to $144 per suite for the quarter ended
September 30, 1997.
25
Other expenses:
Depreciation and amortization increased $2,264,700 or 47.0%
for the quarter primarily due to the increased depreciation and
amortization expense recognized on the Acquired Properties as
well as the amortization expense recognized relating to the
intangible assets recorded in connection with the merger of MIGRA
into the Company.
General and administrative expenses increased $1,747,200 or
131.2% for the quarter. This increase is primarily attributable
to payroll, consulting and training expenses as well as overhead
costs incurred as a result of the MIGRA transaction.
Interest expense increased $2,664,800 or 56.9% 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 and general working capital
purposes.
Preliminary project cost expense of $200,500 were charged to
operations during the quarter. These costs consist primarily of
certain pre-development costs, such as architectural, legal and
accounting fees, that were incurred on projects that the Company
decided not to pursue.
Net income applicable to common shares:
Net income applicable to common shares is reduced by
dividends declared on the Perpetual Preferred Shares of
$1,371,100.
RESULTS OF OPERATIONS
Comparison of the nine months ended September 30, 1998 to the
nine months ended September 30, 1997
Overall, total revenue increased $22,814,100 or 28.6% and
total expenses before the equity in net income of the joint
ventures, minority interest expense and extraordinary item
increased $24,332,200 or 38.1% for the nine month period. Net
income applicable to common shares before the extraordinary item
decreased $1,737,200 or 14.2%, after payment of dividends on the
Company's Perpetual Preferred Shares.
In the following discussion of the comparison of the nine
months ended September 30, 1998 to the nine months ended
September 30, 1997, the term Core Portfolio Properties refers to
the 69 wholly owned multifamily properties owned by the Company
at December 31, 1996. Acquired Properties refers to the 25
properties acquired between January 1, 1997 and September 30,
1998, and the two newly constructed properties.
During the nine months ended September 30, 1998, the
Acquired Properties generated total revenues of $29,939,000 while
incurring property, operating and maintenance expenses of
$10,826,600.
Rental Revenues:
Rental revenues increased $21,515,800 or 29.0% for the nine
month period. The majority of this increase is attributable to
an increase in rental revenues from the Acquired Properties of
$20,480,800 for the same period. Increases in occupancy and
suite rents at the Core Portfolio Market-rate and Government-
Assisted Properties resulted in a $1,035,000 or 1.6% increase in
rental revenue from these properties.
Other Revenues:
Other revenues increased $351,600 or 26.2% primarily due to
refunds of workers compensation.
The Company recognized asset management fee revenues of
$636,100 for the nine month period. These revenues represent the
collection of management fees by MIGRA relating to their
institutional investor clients.
26
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$10,099,700 or 32.6% for the nine month period. Operating and
maintenance expenses at the Acquired Properties increased
$7,709,600 for the nine month period due primarily to the
operating and maintenance expenses incurred at the 25 properties
acquired between January 1, 1997 and September 30, 1998, and the
two newly constructed properties. Property operating and
maintenance expenses at the Core Portfolio Properties increased
$2,390,100 or 8.6% when compared to the prior nine month period
primarily due to increases in payroll, real estate taxes and
insurance, and other operating expenses. Total expenditures for
building renovations and suite and common area refurbishment in
the Core Portfolio Properties that were not considered to be
capital in nature averaged $363 per suite for the nine months
ended September 30, 1998 as compared to $338 per suite for the
nine months ended September 30, 1997.
Other expenses:
Depreciation and amortization increased $4,424,700 or 32.3%
for the nine month period primarily due to the increased
depreciation and amortization expense recognized on the Acquired
Properties as well as the amortization expense recognized
relating to the intangible assets recorded in connection with the
merger of MIGRA into the Company.
General and administrative expenses increased $2,311,300 or
52.5% for the nine 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. Additionally, the increase is attributable to overhead
costs incurred as a result of the MIGRA transaction.
Interest expense increased $7,249,200 or 53.1% for the nine
month period 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 and general
working capital purposes.
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 $1,023,713 recognized
during 1997 relates to the write-off of a debt premium in
connection with the early repayment of the related mortgage
indebtedness.
Net income applicable to common shares:
Net income applicable to common shares is reduced by
dividends paid on the Perpetual Preferred Shares of $4,113,300.
Equity in net income of joint ventures:
The combined equity in net income of joint ventures
decreased $179,700 or 36.5% and $166,200 or 61.1% for the nine
and three months ended September 30, 1998 as compared to the nine
and three months ended September 30, 1997, respectively. These
decreases are primarily attributable to decreased rents and
occupancies.
The following table presents the historical statements of
operations of the Company's beneficial interest in the operations
of the joint ventures for the quarter and nine month period ended
September 30, 1998 and 1997.
27
For the three months For the nine months
ended September 30, ended September 30,
1998 1997 1998 1997
Beneficial interests in
joint venture operations
Rental revenue $ 1,750,260 $ 1,708,060 $ 5,222,610 $ 5,016,690
Cost of operations 1,093,540 886,840 3,265,050 2,836,060
656,720 821,220 1,957,560 2,180,630
Interest income 3,650 3,824 18,439 16,326
Interest expense (434,840) (440,420) (1,307,790) (1,325,280)
Depreciation (106,560) (100,110) (319,140) (341,870)
Amortization (13,020) (12,410) (36,230) (37,220)
Net income $ 105,950 $ 272,104 $ 312,839 $ 492,586
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.
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.
Markets like Columbus and Indianapolis, in which 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 expects that fourth quarter 1998 rental
revenues for the Core Portfolio Market-rate Properties will be
consistent with the rental revenues achieved during the third
quarter of 1998. Core Portfolio Market-rate rental rates will grow
at modest rates through 1999. The Company believes that its 1998
and 1999 rental revenue growth objectives are reasonable given the
market demographics in the markets where the Company's Core
Portfolio Market-rate Properties are located.
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.
28
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 of 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 issue ("Year 2000") is the result of computer
programs being written using two digits rather than four to define
the applicable year. Any of the Company's computer programs that
have time-sensitive hardware and software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability
to process transactions, collect rents, or engage in similar normal
business activities.
The Company believes that it has identified all of its informa-
tion technology ("IT") and is in the process of identifying its
non-IT systems to assess their Year 2000 readiness. Critical IT
systems include, but are not limited to: accounts receivable and
rent collections, accounts payable and general ledger, human
resources and payroll (both property and corporate levels), cash
management, fixed assets, all IT hardware (such as desktop/laptop
computers and data networking equipment). Critical non-IT systems
include telephone systems, fax machines, copy machines as well as
property environmental, health safety and security systems (such
as elevators and alarm systems).
The Company has conducted an assessment of its core internal and
external IT systems and, though not related to a Year 2000
remediation strategy, installed Year 2000 compliant financial report-
ing and accounting systems. The Company is currently in the process
of determining its exposure to any non-IT systems that are not Year
2000 compliant and believes that all such systems will have been
identified and evaluated with respect to their Year 2000 compliance
by the close of the fourth quarter of 1998. The Company has not yet
estimated that the total Year 2000 project cost pending completion of
evaluation of its non-IT systems.
In some cases, various third party vendors have been queried on
their Year 2000 readiness. The Company continues to query its
significant suppliers and vendors to determine the extent to which
the Company's interface systems are vulnerable to those third
parties' failure to remediate their own Year 2000 issues. To date,
the Company is not aware of any significant suppliers or vendors
with a Year 2000 issue that would materially impact the Company's
results of operatons, liquidity or capital resources. However, there
can be no assurances that the systems of other companies, on which
the Company's systems rely, will be timely converted and would not
have an adverse effect on the Company's systems.
The Company believes it has an effective program in place that
will resolve the Year 2000 issue in a timely manner. In addition,
the Company has commenced its contingency planning for critical
operational areas that might be affected by the Year 2000 issue if
compliance by the Company is delayed. Aside from catastrophic
failure of banks or governmental agencies, the Company believes
that it could continue its normal business operations if
compliance by the Company is delayed. The Company does not
believe that the Year 2000 issue will materially impact its results
of operations, liquidity or capital resources.
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 that Rainbow
Terrace Apartments, Inc. has failed to complete certain physical
improvements to the property. Moreover, HUD claims that the
owner 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.
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, Inc. 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, Inc.
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 pursuant to 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, August, September and
October 1998 HAP payments for Rainbow Terrace Apartments. As part
of the Company's ongoing discussions with HUD concerning the
29
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
September 30, 1998, the Company had receivables of $1.35 million
related to these retroactive rent increase requests. At
September 30, 1998, Rainbow Terrace Apartments, Inc. had net
assets of $1.3 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.
30
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
706 888
Indiana
Steeplechase at Shiloh Crossing
Apartments 08/11/98 Indianapolis Garden 264 1998 929
Waterstone Apartments 08/29/97 Indianapolis Garden 344 1997 984
608 960
Maryland
The Gardens at Annen Woods 06/30/98 Metro D.C. Garden 132 1987 1,269
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
668 962
Michigan
Clinton Place 08/25/97 Clinton Twp. Garden 202 1988 954
Spring Valley Apartments 10/31/97 Farmington Hills Garden 224 1987 893
426 922
Missouri
Peachtree Apartments 06/30/98 Chesterfield Garden 156 1989 929
North Carolina
Windsor Falls Apartments 06/30/98 Raleigh Garden 276 1994 979
Central Ohio
Bradford at Easton 05/01/98 Columbus Garden 324 1996 1,010
Toledo, Ohio
Country Club Apartments 02/19/98 Toledo Garden 316 1989 811
Northeastern Ohio
Village at Western Reserve 08/01/98 Streetsboro Ranch 108 1998 999
Texas
Fleetwood Apartments 06/30/98 Houston Garden 104 1993 1,019
4,516
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 Vllg at Bennell 03/07/94 Columbus Ranch 164 1988 769
Muirwood Vllg at London 03/03/94 London Ranch 112 1989 769
Muirwood Vllg at Mt. Sterling 03/03/94 Mt. Sterling Ranch 48 1990 769
Muirwood Vllg at Zanesville 03/07/94 Zanesville Ranch 196 1991-95 769
For the three months ending For the three months ending
September 30, 1998 September 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 90.1% 91.2% $ 796 $ 0.81 N/A N/A N/A N/A
California
Desert Oasis Apartments 91.7% 94.7% $ 670 $ 0.77 N/A N/A N/A N/A
Florida
Cypress Shores 92.3% 98.3% $ 846 $ 0.85 N/A N/A N/A N/A
Georgia
The Falls 98.6% 93.7% $ 718 $ 0.75 N/A N/A N/A N/A
Morgan Place Apartments 94.7 96.2 802 1.18 N/A N/A N/A N/A
97.5% 94.3% $740 $ 1.04
Indiana
Steeplechase at Shiloh
Crossing Apartments
Waterstone Apartments 91.9% 97.7% $ 796 $ 0.81 N/A 88.4% N/A N/A
91.9% 97.7% $ 796 $ 0.81 88.4%
Maryland
The Gardens at Annen Woods 96.6% 97.0% $ 924 $ 0.73 N/A N/A N/A N/A
Hampton Point Apartments 96.3 98.0 803 0.98 N/A N/A N/A N/A
Reflections 95.0 96.2 895 0.88 N/A N/A N/A N/A
96.0% 97.3% $ 852 $ 3.03
Michigan
Clinton Place 94.2% 96.0% $ 699 $ 0.73 N/A 93.6% N/A N/A
Spring Valley Apartments 98.2 96.4 810 0.91 N/A N/A N/A N/A
96.5% 96.2% $ 757 $ 0.82 93.6%
Missouri
Peachtree Apartments 91.2% 94.2% $ 786 $ 0.85 N/A N/A N/A N/A
North Carolina
Windsor Falls Apartments 94.2% 95.3% $ 776 $ 0.79 N/A N/A N/A N/A
Central Ohio
Bradford at Easton 95.8% 98.5% $ 707 $ 0.70 N/A N/A N/A N/A
Toledo, Ohio
Country Club Apartments 96.1% 95.9% $ 625 $ 0.77 N/A N/A N/A N/A
Northeastern Ohio
Village at Western Reserve N/A 99.1% $ 776 $ 0.78 N/A N/A N/A N/A
Texas
Fleetwood Apartments 94.8% 89.4% $ 925 $ 0.91 N/A N/A N/A N/A
Repositioned Properties
Woodlands of North Royalton
fka Somerset West (a) 75.9% 77.7% $ 714 $ 0.69 89.4% 87.3% $ 699 $ 0.67
Williamsburg at Greenwood Vllg 88.6 93.5 899 0.96 91.6 91.6 888 0.95
83.8% 86.7% $ 819 $ 0.83 90.8% 89.9% $ 807 $ 0.82
CORE PORTFOLIO PROPERTIES
Market rate
Central Ohio
Arrowhead Station 94.0% 98.0% $ 716 $ 0.53 88.1% 88.2% $ 696 $ 0.52
Bedford Commons 96.6 98.2 784 0.68 97.7 96.4 771 0.67
Bolton Estates 94.9 93.4 468 0.68 94.4 95.9 469 0.68
Colony Bay East 89.1 96.8 522 0.58 95.3 97.4 517 0.57
Heathermoor 97.9 99.3 553 0.67 97.7 97.9 548 0.66
Kensington Grove 94.5 94.7 772 0.70 93.1 94.7 779 0.70
Lake Forest 92.7 94.3 551 0.70 92.0 96.9 550 0.70
Muirwood Vllg at Bennell 90.9 91.5 512 0.67 93.4 97.0 499 0.65
Muirwood Vllg at London 96.9 98.2 510 0.66 97.8 98.2 504 0.66
Muirwood Vllg at Mt. Sterling 96.6 97.9 487 0.63 91.3 89.6 500 0.65
Muirwood Vllg at Zanesville 93.1 94.4 524 0.68 92.7 94.9 525 0.68
31
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Suites Rehab. Sq. Ft.
Oak Bend Commons 05/30/97 Canal Winchester Garden/Tnhm 102 1997 1,110
Pendleton Lakes East 08/25/94 Columbus Garden 256 1990-93 899
Perimeter Lakes 09/20/96 Dublin Gdn/Tnhms 189 1992 999
Residence at Christopher Wren 03/14/94 Gahanna Gdn/Tnhms 264 1993 1,062
Residence at Turnberry 03/16/94 Pickerington Gdn/Tnhms 216 1991 1,182
Saw Mill Village 04/22/97 Columbus Garden 340 1987 1,161
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
3,577 903
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
Hawthorne Hills Apartments 05/14/97 Toledo Garden 88 1973 1,145
Kensington Village 09/14/95 Toledo Gdn/Tnhms 506 1985-90 1,072
Vantage Villa 10/30/95 Toledo Garden 150 1974 935
744 1,053
Pittsburgh, Pennsylvania
Chestnut Ridge 03/01/96 Pittsburgh Garden 468 1986 769
Core Market Rate 11,326 865
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
For the three months ending For the three months ending
September 30, 1998 September 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.
Oak Bend Commons 92.3 96.1 $ 707 $0.64 85.5% 95.1% $658 $0.59
Pendleton Lakes East 92.8% 96.1% 527 0.59 94.4 98.8 517 0.58
Perimeter Lakes 95.8 97.9 716 0.72 94.1 92.6 719 0.72
Residence at Christopher Wren 96.6 98.9 738 0.70 96.6 96.6 745 0.70
Residence at Turnberry 93.6 94.4 744 0.63 86.5 89.8 740 0.63
Saw Mill Village 91.1 94.4 742 0.64 90.3 87.6 745 0.64
Sheffield at Sylvan 98.8 97.8 509 0.64 100.9 97.8 504 0.64
Sterling Park 97.6 98.4 552 0.72 96.7 96.9 550 0.72
The Residence at Newark 97.4 97.3 569 0.66 96.5 95.5 560 0.65
The Residence at Washington 97.0 97.2 517 0.60 95.5 88.9 530 0.61
Wyndemere 97.2 91.4 543 0.71 96.0 96.9 534 0.70
94.5% 96.1% $ 610 $ 0.65 93.6% 94.8% $ 606 $ 0.65
Cincinnati, Ohio
Remington Place Apartments 93.0% 96.2% $ 654 $ 0.79 92.2% 94.4% $ 660 $ 0.80
Indianapolis, Indiana
The Gables at White River 92.4% 90.8% $ 746 $ 0.77 90.6% 93.9% $ 720 $ 0.74
Northeastern Ohio
Bay Club 93.6% 89.6% $ 639 $ 0.69 98.0% 99.0% $622 $0.67
Colonnade West 91.9 96.3 400 0.80 91.4 91.2 405 0.81
Cultural Gardens 97.1 95.2 509 0.74 96.4 99.5 503 0.73
Edgewater Landing 95.6 96.3 417 0.71 94.9 98.3 416 0.71
Gates Mills III 91.8 96.3 728 0.83 93.7 98.4 717 0.82
Holly Park 92.1 100.0 709 0.81 91.0 100.0 685 0.78
Huntington Hills 97.4 97.6 669 0.69 97.5 97.6 656 0.67
Mallard's Crossing 97.0 97.4 719 0.72 97.0 97.4 699 0.70
Memphis Manor 93.8 96.7 439 0.79 90.1 95.8 443 0.80
Park Place 91.3 93.3 527 0.69 90.1 92.7 555 0.73
Pinecrest 93.4 97.9 458 0.77 90.4 93.8 473 0.79
Portage Towers 94.8 93.6 591 0.68 94.0 94.4 573 0.66
The Triangle (b) 95.3 93.8 943 1.53 96.5 97.1 913 1.48
Timbers 92.8 96.9 686 0.74 93.8 89.6 730 0.78
Villa Moderne 96.6 99.3 455 0.90 94.8 99.3 445 0.88
Washington Manor 97.2 95.8 395 0.73 97.2 99.2 387 0.72
West Park Plaza 95.2 97.5 428 0.82 91.7 90.7 427 0.82
Westchester Townhouses 96.0 100.0 802 0.80 92.2 91.9 775 0.78
Westlake Townhomes 100.0 100.0 825 0.83 93.9 100.0 801 0.80
Winchester Hills I (c) 92.0 93.9 573 0.70 90.9 93.9 574 0.70
Winchester Hills II 88.6 93.9 607 0.74 90.7 89.8 616 0.75
93.7% 95.7% $ 600 $ 0.79 93.5% 95.3% $ 595 $ 0.78
Michigan
Arbor Landings Apartments 94.3% 98.8% $ 908 $ 0.81 98.5% 97.6% $ 851 $ 0.76
Aspen Lakes 95.8 97.9 559 0.71 94.0 97.9 554 0.70
Central Park Place 97.1 99.1 616 0.72 95.3 95.8 607 0.71
Country Place Apartments 99.0 99.3 555 0.65 100.6 97.9 532 0.62
Georgetown Park Apartments 87.4 96.1 641 0.64 92.8 89.4 676 0.67
The Landings at the Preserve 94.9 96.3 773 0.81 94.8 94.2 683 0.72
The Oaks and Woods at Hampton 96.8 97.4 812 0.77 96.4 96.7 810 0.77
Spring Brook Apartments 98.4 98.2 511 0.62 98.0 97.0 477 0.58
Summer Ridge Apartments 92.9 94.4 706 0.74 96.0 99.2 678 0.71
94.7% 97.3% $ 700 $ 0.73 95.9% 95.7% $ 684 $ 0.71
Toledo, Ohio
Hawthorne Hills Apartments 94.7% 98.9% $ 561 $ 0.49 87.4% 93.2% $ 548 $ 0.48
Kensington Village 98.0 95.8 590 0.55 96.1 96.4 559 0.52
Vantage Villa 96.1 97.3 579 0.62 86.3 92.7 613 0.66
97.2% 96.6% $ 582 $ 0.55 93.0% 96.1% $ 569 $ 0.54
Pittsburgh, Pennsylvania
Chestnut Ridge 91.2% 91.0% $ 778 $ 1.01 97.8% 95.5% $ 716 $ 0.93
Core Market Rate 94.2% 95.9% $ 633 $ 0.72 94.1% 95.3% $ 623 $ 0.71
GOVERNMENT ASST.-ELDERLY
Ellet Development 100.0% 100.0% $ 587 $1.00 100.0% 100.0% $ 587 $1.00
Hillwood I 98.6 99.0 596 1.05 100.0 100.0 596 1.05
Puritas Place (d) 99.9 100.0 782 1.51 99.8 100.0 782 1.51
Riverview 99.5 99.0 591 1.07 99.7 100.0 591 1.07
State Road Apartments 99.8 100.0 596 0.79 99.0 100.0 596 0.79
32
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Suites Rehab. Sq. Ft.
Statesman II IPO Shaker Heights Garden 47 1987 r 796
Sutliff Apartments II IPO Cuyahoga Falls High Rise 185 1979 577
Tallmadge Acres IPO Tallmadge Mid Rise 125 1981 641
Twinsburg Apartments IPO Twinsburg Garden 100 1979 554
Village Towers IPO Jackson Twp. High Rise 100 1979 557
West High Apartments IPO Akron Mid Rise 68 1981 r 702
1,095 602
GOVERNMENT ASST.-FAMILY
Jennings Commons IPO Cleveland Garden 50 1981 823
Rainbow Terrace IPO Cleveland Garden 484 1982 r 768
Shaker Park Gardens II IPO Warrensville Garden 151 1964 753
685 769
1,780 666
CONGREGATE CARE
Gates Mills Club IPO Mayfield Heights High Rise 120 1980 721
The Oaks IPO Westlake Garden 50 1985 672
170 707
13,276 835
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 16,373 843
Portfolio average 21,346 869
For the three months ending For the three months ending
September 30, 1998 September 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.
Statesman II 99.8% 100.0% $646 $0.81 99.6% 100.0% $650 $0.82
Sutliff Apartments II 100.0 100.0 586 1.02 100.0 100.0 586 1.02
Tallmadge Acres 99.9 100.0 658 1.03 100.0 100.0 658 1.03
Twinsburg Apartments 99.8 100.0 603 1.09 100.0 100.0 603 1.09
Village Towers 100.0 100.0 579 1.04 99.9 100.0 579 1.04
West High Apartments 99.9 100.0 790 1.13 99.7 98.5 790 1.13
99.9% 99.8% $ 630 $ 1.05 100.0% 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 96.3 94.4 663 0.86 96.6 96.7 773 1.01
Shaker Park Gardens II 99.9 100.0 540 0.72 98.7 98.0 531 0.71
97.2 96.1 637 0.83 97.2 97.2 713 0.93
98.8% 98.4% $ 633 $ 0.95 98.9% 98.9% $ 662 $ 0.99
CONGREGATE CARE
Gates Mills Club 93.5% 95.8% $ 916 $ 1.27 97.7% 97.5% $ 862 $ 1.20
The Oaks 94.5 96.0 1,041 1.55 94.6 78.0 1,033 1.54
93.8 95.9 953 1.35 96.7 91.8 912 1.29
94.8% 96.2% $ 637 $ 0.75 94.8% 95.7% $ 632 $ 0.75
Joint Venture Properties
Northeastern Ohio
Market rate
Americana 90.9% 92.0% $ 490 $ 0.61 89.0% 95.0% $ 480 $ 0.60
College Towers 95.7 100.0 405 0.61 91.4 97.4 403 0.61
Euclid House 93.1 96.8 444 0.68 90.3 92.9 435 0.66
Gates Mills Towers 93.4 96.3 710 0.83 94.5 98.7 703 0.82
Highland House 98.6 100.0 420 0.78 98.9 100.0 409 0.76
Watergate 92.2 92.2 552 0.66 93.8 94.8 545 0.66
92.9 94.5% $ 543 $ 0.69 92.7% 96.2% $ 536 $ 0.68
Government Asst.-Family
Lakeshore Village 97.8% 100.0% $ 668 $ 0.85 100.2% 100.0% $ 669 $ 0.85
93.2 94.7 549 0.70 93.1 96.3 543 0.69
Core 94.7% 95.9% $ 630 $ 0.75 94.7% 95.8% $ 625 $ 0.74
Portfolio average 94.4% 95.8% $ 656 $ 0.76 94.5% 95.2% $ 572 $ 0.66
<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>
33
HISTORICAL FUNDS FROM OPERATIONS AND DISTRIBUTABLE CASH FLOW
Industry analysts generally consider Funds From Operations
("FFO") to be an appropriate measure of the performance of an
equity REIT. FFO is defined as net income (computed in
accordance with generally accepted accounting principles),
excluding gains (or losses) from sales of property, non-recurring
and extraordinary items, plus depreciation on real estate assets
and after adjustments for unconsolidated joint ventures.
Adjustments for joint ventures are calculated to reflect FFO on
the same basis. FFO does not represent cash generated from
operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash
available to fund cash needs and should not be considered an
alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flow as a
measure of liquidity. Distributable Cash Flow is defined as FFO
less capital expenditures funded by operations and loan
amortization payments. The Company believes that in order to
facilitate a clear understanding of the consolidated historical
operating results of the Company, FFO and Distributable Cash Flow
should be presented in conjunction with net income as presented
in the consolidated financial statements and data included
elsewhere in this report.
FFO and Funds Available for Distribution ("Distributable
Cash Flow") for the three and nine month periods ended September
30, 1998 and 1997 are summarized in the following table:
For the three months For the nine months
ended September 30, ended September 30,
(In thousands) 1998 1997 1998 1997
Net income applicable to common shares $ 3,641 $ 4,385 $ 10,383 $ 13,269
Depreciation on real estate assets
Wholly owned properties 6,428 4,451 16,654 12,734
Joint venture properties 107 100 319 342
Amortization of intangible assets 140 - 140 -
Preliminary project costs 200 - 200 -
Extraordinary item - 20 125 (1,024)
Funds From Operations 10,516 8,956 27,821 25,321
Depreciation - other assets 216 191 633 434
Amortization of deferred financing fees 312 186 713 539
Fixed asset additions (108) (273) (273) (504)
Fixed asset additions - joint venture properties - - - -
Distributable Cash Flow $ 10,936 $ 9,060 $ 28,894 $ 25,790
Weighted average shares - Basic 22,598 17,052 18,955 15,904
Weighted average shares - Diluted 23,058 17,078 19,110 15,931
34
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Filed herewith or
incorporated
herein by
Number Title reference
2.01 Second Amended and Restated Agreement and Plan of Merger by Exhibit 2.01 to Form
and among the Company, MIG Realty Advisors, Inc. ("MIGRA") 8-K filed March 31,
and the MIGRA stockholders dated as of March __, 1998. 1998.
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).
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 Limited Exhibit 4.3 to Form S-
Partnership, et. al., in favor of PFL Life Insurance Company; Open End 11 filed September
Mortgage from Triangle Properties Limited Partnership I, et. al., in 2, 1993 (File No. 33-
favor of PFL Life Insurance Company (The Registrant undertakes to 68276 as amended).
provide additional long-term loan documents upon request).
4.4 Promissory Note dated February 28, 1994 in the amount of $25 million. Exhibit 4.4 to Form
Open-End Mortgage Deed and Security Agreement from AERC to National 10-K filed March 31,
City Bank (Westchester Townhouse); Open-End Mortgage Deed and Security 1993.
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 Realty Exhibit 4.6 to Form
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.
4.8e Credit Agreement dated June 30, 1998, by and among Associated Estates Exhibit 4.8e to Form
Realty Corporation, as Borrower; the banks and lending institutions 10-Q filed August 14,
identified therein as Banks; National City Bank, as Agent and Bank of 1998.
America National Trust and Savings Association, as Documentation Agent.
4.8f First Amendment to Credit Agreement by and among Associated Estates Exhibit 4.8f filed
Realty Corporation, as Borrower; National City Bank, as Managing Agent herewith.
for itself and on behalf of the Existing Banks and First Merit Bank,
N.A. and Southtrust Bank, N.A. as the New Banks.
4.8g Second Amendment to Credit Agreement by and among Associated Estates Exhibit 4.8g filed
Realty Corporation, as Borrower, National City Bank, as Managing Agent herewith.
for itself and on behalf of the Existing Banks and National City Bank,
Bank of America National Commerzbank Aktiengesellschaft.
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 Compensation Exhibit 10 to Form
Plan. 10-Q filed
November 14, 1996.
10.1 Registration Rights Agreement among the Company and certain holders of Exhibit 10.1 to Form
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, and Exhibit 10.7 to Form
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 E. 10-K filed March 28,
Mosier and Richard T. Schwarz. 1996.
10.10 Pledge Agreement dated May 23, 1997 between Jeffrey I. Friedman and the Exhibit 10.01 to Form
Company. 10-Q filed August 8,
1997.
10.11 Secured Promissory Note dated May 23, 1997 in the amount of $1,671,000 Exhibit 10.02 to Form
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 and 10-K filed March 30,
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 June 30, 1998 was
filed on July 13, 1998 as amended by Form 8-K/A-1 dated
June 30, 1998 and filed on August 31, 1998.
37
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
November 16, 1998 /s/ Dennis W. Bikun
(Date) Dennis W. Bikun, Vice
President, Chief Financial
Officer and Treasurer