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1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year ended December 31, 1997
Commission file number 1-12496
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CHATEAU COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 38-3132038
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6430 South Quebec Street, Englewood, Colorado 80111
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (303) 741-3707
Securities registered pursuant to section 12(b) of the Act
and listed on the New York Stock Exchange:
Common Stock, $0.01 Par Value
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of voting stock held by non-affiliates of the
Registrant on March 12, 1998 was approximately $668,682,652 based on the closing
price of the stock on the New York Stock Exchange on such date. For the purposes
of this response, executive officers and directors have been deemed to be
affiliates of the Registrant.
The number of shares of the Registrant's Common Stock outstanding on March
12, 1998 was 27,339,225 shares.
Portions of the Registrant's 1997 definitive Proxy Statement to be filed
for its 1998 Annual Meeting of Shareholders are incorporated by reference into
Part III of this Report.
2
CHATEAU COMMUNITIES, INC.
FORM 10-K ANNUAL REPORT
for the year ended December 31, 1997
TABLE OF CONTENTS
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Item Pages
- ---- -----
PART I
1. Business...........................................................3
2. Properties.........................................................7
3. Legal Proceedings.................................................14
4. Submission of Matters to a Vote of Security Holders...............14
PART II
5. Market for Registrant's Common Equity and
Related Security Holder Matters..........................15
6. Selected Financial Data...........................................16
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................18
8. Financial Statements and Supplementary Data.......................25
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................46
PART III
10. Directors and Executive Officers of the Registrant................47
11. Executive Compensation............................................47
12. Security Ownership of Certain Beneficial Owners
and Management...........................................47
13. Certain Relationships and Related Transactions....................47
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K......................................48
Signatures........................................................53
FINANCIAL STATEMENT SCHEDULES
Chateau Communities, Inc. Financial Statement Schedules...........F1
3
PART I
Item 1. Business
General Development of Business.
Chateau Communities, Inc. (the "Company"), a self-administered and self-managed
equity real estate investment trust ("REIT"), is the largest owner/manager of
manufactured home communities in the United States, based both on the number of
communities and the number of residential homesites owned. The Company conducts
substantially all of its activities through CP Limited Partnership, a Maryland
limited partnership (the "Operating Partnership") in which it owns, directly and
through ROC Communities, Inc. ("ROC"), the other general partner of the
Operating Partnership, an approximate 89% general partner interest. The Company
owns and operates 153 manufactured home community properties containing 47,650
homesites and 1,350 park model/RV sites in 29 states. The company also fee
manages 32 manufactured home community properties containing 6,600 homesites.
Formation of the Company
The Company was formed in Maryland on August 25, 1993, as Chateau Properties,
Inc., to continue and expand the manufactured home operations and business
objectives of Chateau Estates ("Chateau"), a Michigan co-partnership. Chateau
had developed, owned and operated manufactured home communities and properties
since 1966.
On February 11, 1997, the Company completed a strategic merger of equals with
ROC (the "Merger"). The Merger and related transactions were accounted for using
the purchase method of accounting in accordance with generally accepted
accounting principles. Accordingly, the assets and liabilities of ROC were
adjusted to fair value for financial accounting purposes and the results of
operations of ROC were included in the results of operations of the Company
beginning in February 1997.
Industry Overview
A manufactured home community is a residential subdivision designed and improved
with homesites for the placement of manufactured homes including related
improvements and amenities. Manufactured homes are detached, single-family homes
which are produced off-site by manufacturers and installed on sites within the
community. Manufactured homes are available in a variety of architectural styles
and floor plans, offering a variety of amenities, custom options and on-site
built additional structures.
Modern manufactured home communities are similar to typical residential
subdivisions and generally contain centralized entrances, paved streets, curbs
and gutters and parkways. In addition, such communities often provide a variety
of amenities to residents which may include a clubhouse , swimming pools and
jacuzzis, playgrounds, basketball courts, picnic areas, shuffleboard courts,
tennis courts, cable television service, golf courses, marinas and laundry
facilities. Utilities are provided or arranged for by the owner of the
community. Some communities provide water and sewer service through public or
private utilities, while others provide these services to residents from on-site
facilities.
3
4
The owner of each home in a manufactured home community leases a site from the
community. The manufactured home community is the owner of the underlying land,
utility connections, streets, lighting, driveways, common area amenities and
other capital improvements and is responsible for enforcement of community
guidelines and maintenance. Each owner within the manufactured home community is
responsible for the maintenance of his home and leased site. Additionally,
manufactured home communities tend to have relatively stable resident bases,
with relatively few residents moving manufactured homes out of the communities.
Management thus tends to be less intensive, and capital expenditure needs less
significant, relative to multi-family rental apartment complexes.
Operating and Investment Strategies
The Company seeks to maximize long-term growth in income and portfolio value
through active management and expansion of certain of its manufactured home
communities and the acquisition and selective development of additional
communities. The Company focuses on manufactured home communities that have
growth potential and expects to hold such properties for long-term investment
and capital appreciation. The Company's operating and investment strategies
include:
Operations
* Providing attractive and desirable manufactured home communities for
existing and prospective residents;
* Aggressively managing properties to increase operating margins
through rent and occupancy increases and expense controls;
* Maintaining and upgrading communities on a continuous basis through
a program of regular and preventive maintenance and replacement;
* Offering residents accessibility to on-site managers to maximize
retention, encourage home maintenance and improvements and to
minimize turnover;
* Providing frequent personal contact between on-site managers and
residents to foster a sense of pride in the community and to promote
desirability of each Property; and
* Offering potential community residents the convenience of purchasing
a home already in place within the community.
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5
Acquisitions, Development and Expansions
* Selectively acquiring well-located manufactured home communities
that demonstrate the potential for increases in revenue and cash
flow through professional property management, improved operating
efficiencies, aggressive leasing and, where appropriate, expansion
or development;
* Acquiring properties in existing markets in order to achieve
economies of scale in operations, and in new markets where
portfolios may be acquired with regional management in place;
* Utilizing the expertise and relationships developed by the Company's
management to identify acquisition and development opportunities;
* Selectively developing new communities in regions where management
has significant experience and where further development is
supported by favorable demographics and strong market demand; and
* Capitalizing on opportunities to renovate and expand properties
consistent with local market demand.
Financing Strategies
The Company intends to maintain a conservative and flexible capital structure
that enables it to (i) continue to access the capital markets on favorable
terms; (ii) enhance potential earnings growth; (iii) minimize its level of
encumbered assets; and (iv) limit its exposure to variable rate debt. The
Company intends to maintain a debt-to-market capitalization ratio of
approximately 50% or less. The Company, however, may from time to time
re-evaluate this policy and decrease or increase such ratio accordingly in light
of then current economic conditions, relative costs to the Company of debt and
equity capital, market values of the properties and other factors.
Expansion and Improvement of Manufactured Home Community Properties
The Company will seek to increase the income generated from the manufactured
home communities and from any additional properties acquired by expanding the
number of sites available to be leased to residents if justified by local market
conditions and permitted by zoning and other applicable laws. During 1997, the
Company substantially completed the development of 509 expansion sites. As of
December 31, 1997, the Company had 43,800 total sites, of which approximately
3,500 were vacant. The Company owned at such date undeveloped land adjacent to
existing communities containing approximately 4,700 expansion sites, which are
zoned for manufactured housing. All necessary utilities are available at these
expansion sites, however, building permits would need to be obtained prior to
development. This undeveloped land will facilitate additional growth to the
extent conditions warrant. In addition, where appropriate, the Company will
consider upgrading or adding facilities and amenities to certain communities in
order to make those communities more attractive in their markets.
5
6
1997 Property Acquisitions
During 1997, the Company completed the following acquisitions:
Amount Fair Market
Allocated Value of
Acquisition Property Name to Assets OP Units
Date and Location Acquired Issued Cash
----------- ------------- --------- ----------- ----
February, 1997 75 communities acquired through see Note 3 to the Consolidated Financial
Merger with ROC Statements
November, 1997 Purchase of 4 communities in
Boston, Massachusetts $20,000 $ 500 $19,500
Various Investment in joint ventures $ 4,259 $ -- $ 4,259
Community Sales, Inc. ("CSI")
Prior to the Merger, new home sales and commercial brokerage activities at the
Company's communities were conducted by third parties. As a result of the
Merger, the Company acquired the sales and brokerage capabilities of CSI, which
had previously been operated as a taxable subsidiary of ROC, and which is now
operated as a taxable subsidiary of the Operating Partnership.
The Windsor Corporation ("Windsor")
In September 1997, the Company completed the acquisition of Windsor, the general
partner of five partnerships and advisor to one REIT owning 28 manufactured home
communities (containing 5,700 homesites), all of which had been managed by ROC
on a fee basis since 1993 and by the Company since the Merger. The acquisition
was financed with the issuance of 101,239 shares of common stock and $750,000 in
cash.
Competition
Many of the Properties are located in developed areas that include other
manufactured home community properties. The number of competitive manufactured
home community properties in a particular area could have a material effect on
the Company's ability to lease sites at the Properties or at any newly acquired
properties and on the rents charged. In addition, other forms of multi-family
residential properties and single-family housing provide housing alternatives to
potential residents of the Properties.
6
7
Employees
As of December 31, 1997, the Company had approximately 1,000 full and part-time
employees. The Company utilizes a resident administrator for the on-site
administration of each of the Properties. Important duties of on-site
administrators as well as the office manager include extensive contact with
residents through initial introduction to community rules and on-going
accessibility for resident assistance. Administrators notify residents who are
in violation of these rules and regulations. Typically, clerical and maintenance
workers are employed to assist these individuals in the management and care of
the Properties. Direct supervision of on-site administrators is the
responsibility of the Company's regional vice presidents and managers and
divisional senior vice presidents. These individuals have significant experience
in addressing the needs of residents and in finding or creating innovative
approaches to value maximization and increased cash flow from property
operations. Complementing this field management staff are 49 corporate employees
who assist on-site administrators in all property functions.
Commitment to resident satisfaction is demonstrated by the ongoing training that
the Company provides for on-site staff. Community administrators meet
periodically at regional seminars to review Company philosophy and policy, to
discuss relevant administration issues and solutions and to share ideas and
experiences.
Tax Status
The Company has elected to be taxed as a REIT under Section 856(c) of the
Internal Revenue Code of 1986, as amended (the "Code"). The Company generally
will not be subject to Federal income tax to the extent it distributes 95
percent of its REIT taxable income to its stockholders. REITs are subject to a
number of organizational and operational requirements. If the Company fails to
qualify as a REIT in any taxable year, the Company will be subject to Federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Even as a REIT, the Company is subject to
certain state and local taxes on its income and property and Federal income and
excise taxes to the extent of its undistributed income.
Item 2. Properties
At December 31, 1997 the Properties consisted of 131 manufactured home
communities containing 43,800 sites, in 28 states, with amenities designed for
either retirement or family living. The Company also fee managed 31 manufactured
home communities containing 6,500 sites in 13 states. The Company also owned
land adjacent to certain existing communities containing approximately 4,700
expansion sites which, although not yet developed, was zoned for manufactured
housing.
At December 31, 1997, the Properties had an average occupancy rate of
approximately 92 percent with weighted average rent for the year ended December
31, 1997 of $287 per month. Weighted average rent is calculated as rental and
utility income for the period, on a monthly basis, divided by the weighted
average occupied sites. Weighted average occupancy is computed by averaging the
number of revenue producing sites at the end of each month in the period.
7
8
The Company believes that the Properties provide amenities and common facilities
that create a safe and attractive community for the residents. All of the
Properties provide residents with attractive amenities with most offering a
clubhouse, a swimming pool and a library. Many Properties offer additional
amenities such as sauna/whirlpool spas, indoor pools, tennis courts,
shuffleboard courts, basketball courts, golf courses, day care facilities,
exercise rooms and marinas.
Since residents own their homes, it is their responsibility to maintain their
homes and the surrounding area. The communities have extensive rules and
regulations to maintain their appearance at the highest level. It is
management's role to insure that residents comply with community policies and to
provide maintenance of the common areas, facilities and amenities. The Company
continually monitors compliance by residents with its residents' regulations to
assure that the communities are maintained at the highest standards. The Company
holds periodic meetings of its property management personnel for training and
implementation of the Company's strategies, and property administrators make a
daily inspection of the Properties. The Company believes that, due in part to
this strategy, the Properties historically have had and will continue to have
low turnover and high occupancy rates. Since 1989, the Properties have averaged
an annual turnover of homes (where the home is moved out of the community) of
3-4 percent. During this period, the average annual turnover of residents in the
Properties (where the home is sold and remains within the community, typically
without interruption of rental income) has been approximately 10-12 percent.
The Operating Partnership owns a 100 percent beneficial interest in all of the
Properties, except for Emerald Lake, Fairways, Lakeland Junction, Lakes at
Leesburg, Palm Beach Colony, Winter Haven Oaks and Del Tura in which it owns a
99 percent beneficial interest and in which the Company owns the remaining 1
percent beneficial interest.
Leases
The typical lease entered into between the resident and one of the Company's
manufactured home communities for the rental of a site is month-to-month or
year-to-year, renewable upon the consent of both parties or, in some instances,
as provided by statute. In some cases, leases are for one-year terms with up to
ten renewal options exercisable by the resident, with rent adjusted according to
yearly rent reviews, or by the consumer price index. Leases or other terms of
residents' occupancy are cancelable for non-payment of rent, violation of
community rules and regulations or other specified defaults.
8
9
Indebtedness
At December 31, 1997, the aggregate amount of indebtedness encumbering the
Properties was approximately $114 million. The amounts outstanding as of
December 31, 1997 for the indebtedness encumbering each of these Properties is
set forth (in thousands) in the following table. Prepayment of these debt
obligations may result in significant prepayment penalties.
Weighted
Average
Amount of Interest
Property Pledged as Collateral Indebtedness Rate Maturity
- ------------------------------ ------------ ---- --------
Del Tura $ 32,747 8.40% 2000
Macomb 15,972 9.82% 1999
Other (9 properties) 7,222 8.13% 1998-2011
Pacific Life (38 properties) 58,028 7.16% 2000
--------
Total $113,969
========
9
10
The following table sets forth certain information, as of December 31, 1997,
regarding the properties.
Property
Information Weighted
Average
Core Portfolio Number Occupancy Monthly Rent
Location of Sites as of per Site
Community State (Closest Major City) 12/31/97 12/31/97 1997
- ----------------------------------------------------------------------------------------------------------------
100 Oaks AL Fultondale 230 90% $190
Bermuda Palms CA Palm Springs 185 94% 326
Eastridge CA San Jose 187 99% 597
La Quinta Ridge CA Palm Springs 152 85% 396
The Colony CA Palm Springs 220 96% 651
The Orchard CA San Francisco 233 100% 530
CV-Denver CO Denver 345 94% 339
CV-Longmont CO Longmont 310 99% 348
Friendly Village CO Greeley 226 99% 263
Pine Lakes Ranch CO Denver 762 97% 289
Redwood Estates CO Denver 753 97% 288
Audubon FL Orlando 280 94% 236
Colony Cove FL Sarasota 2207 100% 308
Conway Circle FL Orlando 111 95% 284
CV-Jacksonville FL Jacksonville 643 95% 265
Del Tura FL Fort Myers 1342 88% 422
Eldorado Estates FL Daytona Beach 126 95% 240
Emerald Lake FL Fort Myers 201 99% 278
Fairways Country Club FL Orlando 1142 98% 278
Hidden Valley FL Orlando 303 99% 268
Jade Isle FL Orlando 101 96% 287
Lakeland Harbor FL Tampa 504 100% 240
Lakeland Junction FL Tampa 191 100% 187
Lakes at Leesburg FL Orlando 640 100% 248
Land O' Lakes FL Orlando 173 99% 231
Midway Estates FL Vero Beach 204 87% 289
Mobiland-by-the-Sea FL Melbourne 217 65% 303
Orange Lake FL Orlando 244 94% 219
Palm Beach Colony FL West Palm Beach 285 96% 288
Pedaler's Pond FL Orlando 214 81% 176
Pinellas Cascades FL Clearwater 238 95% 335
Southwind Village FL Naples 338 92% 277
Starlight Ranch FL Orlando 783 94% 264
Town & Country FL Orlando 73 92% 276
Whispering Pines FL Clearwater 392 98% 329
Winter Haven Oaks FL Orlando 343 51% 198
Atlanta Meadows GA Atlanta 75 95% 214
Camden Point GA Kingsland 268 47% 167
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Property
Information Weighted
Average
Core Portfolio Number Occupancy Monthly Rent
Location of Sites as of per Site
Community State (Closest Major City) 12/31/97 12/31/97 1997
- ----------------------------------------------------------------------------------------------------------------
Castlewood Estates GA Atlanta 334 80% $296
Colonial Coach Estates GA Atlanta 481 74% 250
Golden Valley GA Atlanta 131 92% 222
Landmark GA Atlanta 524 96% 248
Marnelle GA Atlanta 205 96% 239
Oak Grove Estates GA Albany 174 98% 131
Paradise Village GA Albany 225 95% 132
Lakewood Estates IA Davenport 172 95% 226
Terrace Heights IA Dubuque 317 97% 231
Coach Royale ID Boise 91 100% 245
Maple Grove Estates ID Boise 270 96% 256
Shenandoah Estates ID Boise 147 99% 250
Maple Ridge IL Kankakee 201 100% 216
Maple Valley IL Kankakee 75 100% 216
Hickory Knoll IN Indianapolis 325 97% 267
Mariwood IN Indianapolis 296 90% 265
Pendleton IN Indianapolis 102 97% 192
Skyway IN Indianapolis 156 100% 259
Twin Pines IN Goshen 238 93% 207
Mosby's Point KY Cincinnati 150 99% 265
Rolling Hills KY Louisville 158 97% 179
Pinecrest Village LA Shreveport 448 66% 133
Stonegate, LA LA Shreveport 157 98% 164
Hillcrest MA Boston 83 95% 325
The Glen MA Boston 36 100% 377
Leisurewoods Rockland MA Boston 395 99% 304
Leisurewoods Taunton MA Boston 128 85% 250
Algoma Estates MI Grand Rapids 281 89% 266
Chesterfield MI Detroit 345 99% 333
Chestnut Creek MI Flint 134 100% 290
Clinton MI Detroit 1000 99% 338
Colonial Acres MI Kalamazoo 611 98% 259
Colonial Manor MI Kalamazoo 195 98% 259
Country Estates MI Grand Rapids 254 97% 249
Cranberry MI Pontiac 232 100% 317
Ferrand Estates MI Grand Rapids 420 100% 304
Forest Lake Estates MI Grand Rapids 221 72% 262
Holiday Estates MI Grand Rapids 205 100% 290
Howell MI Lansing 455 100% 342
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Property
Information Weighted
Average
Core Portfolio Number Occupancy Monthly Rent
Location of Sites as of per Site
Community State (Closest Major City) 12/31/97 12/31/97 1997
- ----------------------------------------------------------------------------------------------------------------
Lake in the Hills MI Detroit 238 100% $345
Leonard Gardens MI Grand Rapids 168 98% 274
Norton Shores MI Grand Rapids 656 85% 231
Novi MI Detroit 725 98% 371
Oakhill MI Flint 504 93% 329
Old Orchard MI Flint 200 100% 292
Orion MI Detroit 423 98% 317
Royal Estates MI Kalamazoo 183 90% 279
Science City MI Midland 171 98% 263
Torrey Hills MI Flint 346 99% 298
Villa MI Flint 319 97% 291
Cedar Knolls MN Minneapolis 458 98% 347
Cimmaron MN St. Paul 504 97% 351
President's Park MN Grand Forks 174 71% 214
Rosemount MN Minneapolis/St. Paul 182 100% 339
Twenty-Nine Pines MN St. Paul 152 91% 280
Countryside Village MT Great Falls 222 89% 197
Foxhall Village NC Raleigh 315 97% 283
Oakwood Forest NC Greensboro 481 96% 232
Buena Vista ND Fargo 400 97% 227
Columbia Heights ND Grand Forks 302 99% 240
Meadow Park ND Fargo 118 86% 169
Casa Linda NV Las Vegas 107 99% 383
Casual Estates NY Syracuse 961 84% 308
Shadybrook NY Syracuse 89 84% 308
Meadowbrook NY Ithaca 237 73% 249
Oak Orchard Estates NY Rochester 235 97% 261
Vance OH Columbus 110 96% 196
Willo-Arms OH Cleveland 262 100% 173
Yorktowne OH Cincinnati 354 97% 302
Crestview OK Stillwater 237 88% 169
Knoll Terrace OR Salem 212 99% 303
Riverview OR Portland 133 99% 343
Homestead Ranch TX McAllen 127 91% 200
Leisure World TX Brownsville 201 90% 181
The Homestead TX McAllen 99 94% 189
Trail's End TX Brownsville 307 80% 176
Eagle Point WA Seattle 230 98% 408
Breazeale WY Laramie 116 96% 208
- ----------------------------------------------------------------------------------------------------------------
Core Portfolio
Subtotal 37,422 93.6% $289
- ----------------------------------------------------------------------------------------------------------------
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Property
Information
Weighted
Active Expansion Average
Portfolio Number Occupancy Monthly Rent
Location of Sites as of per Site
Community State (Closest Major City) 12/31/97 12/31/97 1997
- ----------------------------------------------------------------------------------------------------------------
Butler Creek GA Augusta 358 82% $166
Crystal Lakes FL Tampa 329 49% 144
Foxwood Farms FL Orlando 375 74% 178
Gold Tree FL Tampa 295 88% 313
Oak Springs FL Orlando 438 76% 224
Falcon Farms IL Moline 215 86% 205
Anchor Bay MI Detroit 1319 95% 304
Avon MI Detroit 617 100% 372
Grand Blanc MI Flint 415 88% 319
MaComb/Westbrook MI Detroit 1537 95% 341
Springfield Farms MO Springfield 134 65% 154
Hunter's Chase OH Lima 135 33% 151
Conway Plantation SC Myrtle Beach 299 61% 157
Eagle Creek TX Tyler 174 44% 159
Regency Lakes VA Winchester 289 87% 196
- ----------------------------------------------------------------------------------------------------------------
Active Expansion
Portfolio Subtotal 6,378 82.6% $253
- ----------------------------------------------------------------------------------------------------------------
Total 43,800 92% $287
================================================================================================================
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Item 3. Legal Proceedings
Three separate purported class actions have been filed against the Company and
its directors in the Circuit Court of Montgomery County, Maryland alleging
breaches of fiduciary duty for agreeing to the Merger with ROC and refusing to
endorse alternative transactions proposed by Manufactured Home Communities, Inc.
or Sun Communities, Inc. The three class actions are entitled Harbor Finance
Partners v. Chateau Properties, et al. (Case No. 157467), Niles v. Chateau
Properties, et al. (Case No. 158284), and ZSA Asset Allocation Fund v. Boll, et
al. (Case No. 158652) and were filed on or about September 12, 1996, September
27, 1996 and October 4, 1996, respectively.
The Company agreed to settle the Harbor, Niles, and ZSA actions brought in 1996
for $287,000 plus expenses not to exceed $25,000, subject to court approval.
Reimbursement from the Company's directors' and officers' liability insurer,
Genesis Insurance Co., is being pursued in the amount of approximately $1.1
million, which includes the amount of the settlement plus expenses incurred in
the course of the defense and settlement of these actions.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders during the
last quarter of its fiscal year ended December 31, 1997.
14
15
PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder
Matters
The Company's common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol CPJ. The following table sets forth, for the quarterly periods
shown, the high and low sales price per share as reported on the NYSE for the
years ended December 31, 1996 and 1997.
Price Range
------------------- Cash Dividend
Quarter Ended High Low Declared
------------- ---- --- --------
March 31, 1996 $24-7/8 $22-1/8 $.405
June 30, 1996 $23-7/8 $21-5/8 $.405
September 30, 1996 $27 $22-1/8 $.405
December 31, 1996 $26-5/8 $23-7/8 $.405
Price Range
------------------- Cash Dividend
Quarter Ended High Low Declared
------------- ---- --- --------
March 31, 1997 $28 $24-3/4 $.43
June 30, 1997 $28-3/4 $24-3/4 $.43
September 30, 1997 $31-1/8 $27-7/8 $.43
December 31, 1997 $31-9/16 $29-1/4 $.43
The Company expects to continue to pay regular quarterly dividends to holders of
its Common Stock. Subject to the needs of the Company's acquisition and
expansion strategies and subject to the REIT qualification standards, the
Company intends to distribute annually up to 95 percent of its cash flow.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for Federal income tax purposes will be taxable to
stockholders as dividend income. Distributions in excess of earnings and profits
generally will be treated as a non-taxable reduction of the stockholder's basis
in the Common Stock to the extent thereof, with the remainder as taxable gain.
At March 12, 1998, there were approximately 600 holders of record and
approximately 12,000 beneficial owners of the Company's Common Stock.
15
16
Item 6. Selected Financial Data
The following table sets forth summary financial information of the Company and
its Predecessor for the periods and dates indicated.
Predecessor
For the period
For the Year Ended November 23- January 1 -
December 31, December 31, November 22,
In thousands, except per share data 1997 (1) 1996 1995 1994 1993 1993
--------- --------- --------- --------- --------- ---------
Operating Data:
Revenues:
Rental income $ 134,801 $ 67,233 $ 61,558 $ 47,318 $ 4,577 $ 38,242
Management, interest and other income 3,368 151 297 749 110 684
--------- --------- --------- --------- --------- ---------
Total revenues 138,169 67,384 61,855 48,067 4,687 38,926
Expenses:
Property operating and
administrative 56,053 26,870 24,410 19,944 1,867 16,909
Depreciation 31,510 11,452 11,014 7,230 707 5,823
Interest and related amortization 25,918 12,962 12,452 5,996 576 12,101
Reorganization costs 1,699
--------- --------- --------- --------- --------- ---------
Total expenses 113,481 51,284 47,876 33,170 4,849 34,833
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary
item and minority/majority interest 24,688 16,100 13,979 14,897 (162) 4,093
Extraordinary item (2) (829) (2,738)
Minority/majority interest in
income of Operating Partnership (2,986) (9,566) (7,847) (8,860) 1,717
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 21,702 $ 6,534 $ 5,303 $ 6,037 $ (1,183) $ 4,093
========= ========= ========= ========= ========= =========
Weighted average common shares
outstanding 23,688 6,022 5,959 5,750 5,750
Weighted average common shares
and OP Units outstanding 26,947 14,837 14,779 14,189 14,081
Earnings per Share/OP Unit Data:
Income (loss) before extraordinary
item $ .92 $ 1.09 $ .95 $ 1.05 $ (.01)
Extraordinary item $ -- $ -- $ (.06) $ -- $ (.20)
Net income (loss) - basic $ .92 $ 1.09 $ .89 $ 1.05 $ (.21)
Net income (loss) - diluted $ .91 $ 1.08 $ .89 $ 1.05 $ (.21)
Dividends/distributions declared $ 1.72 $ 1.62 $ 1.525 $ 1.425 $ .15
Cash Flow Data:
Net cash provided by operating
activities $ 54,545 $ 29,755 $ 28,097 $ 22,584 $ 4,980 $ 8,659
Net cash provided by (used in)
financing activities $ 21,088 $ (595) $ (24,365) $ 7,056 $ 15,591 $ (5,983)
Net cash (used in) investing activities $ (61,309) $ (29,518) $ (6,158) $ (46,214) $ (639) $ (3,416)
Balance Sheet Data:
Rental property, before accumulated
depreciation $ 836,175 $ 300,631 $ 276,423 $ 266,833 $ 151,069
Rental property, net of accumulated
depreciation $ 723,861 $ 219,338 $ 206,555 $ 207,977 $ 97,755
Total assets $ 782,738 $ 232,066 $ 212,034 $ 215,418 $ 120,524
Total debt $ 387,015 $ 168,315 $ 132,700 $ 132,747 $ 52,831
Minority/majority interest in
Operating Partnership $ 35,272 $ 26,552 $ 36,264 $ 41,569 $ 35,441
Shareholders' equity $ 322,966 $ 16,191 $ 24,308 $ 25,542 $ 23,424
16
17
Item 6. Selected Financial Data, Continued
Predecessor
-----------
For the period
For the Year Ended November 23- January 1 -
Other Data: December 31, December 31, November 22,
Dollars in thousands 1997 (1) 1996 1995 1994 1993 1993
------- ------- ------------ ------ -------------- ------------
Total properties (at end of period) 131 47 44 43 33
Total sites (at end of period) 43,800 20,279 19,594 19,185 15,261
Weighted average occupied sites 38,053 18,889 18,051 14,913 14,025 14,025
Funds from operations(3) $55,962 $27,460 $24,898 $22,015 $ 536 $ 9,822
(1) In February 1997, the Company completed the Merger with ROC. See Note 3 to
the Consolidated Financial Statements for information regarding the
merger.
(2) The extraordinary items represent prepayment penalties and certain other
related costs associated with the early extinguishment of debt.
(3) Funds from operations ("FFO") is defined by the National Association of
Real Estate Investment Trusts ("NAREIT") as consolidated net income of the
Operating Partnership without giving effect to gains (or losses) from debt
restructuring and sales of property and rental property depreciation and
amortization. Management believes that FFO is an important and widely used
measure of the operating performance of REITs, which provides a relevant
basis for comparison among REITs. For all periods presented, depreciation
of rental property and amortization of intangibles are the only non-cash
adjustments. FFO (i) does not represent cash flow from operations as
defined by generally accepted accounting principles; (ii) should not be
considered as an alternative to net income as a measure of operating
performance or to cash flows from operating, investing and financing
activities; and (iii) is not an alternative to cash flows as a measure of
liquidity. FFO is calculated as follows:
Predecessor
-----------
For the period
For the Year Ended November 23- January 1 -
Other Data: December 31, December 31, November 22,
In thousands 1997 (1) 1996 1995 1994 1993 1993
-------- ------- ------------ ------ -------------- ------------
Income (loss) before
extraordinary item $ 24,688 $16,100 $13,979 $14,897 $(162) $4,093
Depreciation of rental
property 30,867 11,360 10,919 7,118 698 5,729
Amortization of intangibles 407
-------- ------- ------- ------- ----- ------
Funds from Operations $ 55,962 $27,460 $24,898 $22,015 $ 536 $9,822
======== ======= ======= ======= ===== ======
17
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and Notes thereto included elsewhere in this Annual Report.
Certain statements in this discussion constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company or industry to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements.
Overview
The Company is the largest owner/manager of manufactured home communities in the
United States, based both on the number of communities and the number of
residential homesites owned. The Company added 89 manufactured home communities
to its portfolio over the three-year period ended December 31, 1997. At the end
of this period, the Company's portfolio was comprised of 131 manufactured home
communities containing 43,800 homesites in 28 states.
A substantial portion of the Company's growth since the beginning of 1995 can be
attributed to the Company's Merger with ROC on February 11, 1997. The historical
results of the Company in 1997 include the results of operations of ROC since
February 1, 1997. In addition, as a result of the Merger, the Company acquired
ROC's third-party property management operations and its taxable sales and
brokerage subsidiary, CSI.
Company growth since the beginning of 1995 can also be attributed to increased
operating results at existing communities, community expansions, new community
development and additional acquisition activities.
Since its organization, the Company has elected to qualify as a REIT under the
Code and thus does not generally pay federal corporate income taxes on its
earnings to the extent that such earnings are distributed to shareholders.
The Company conducts substantially all of its activities through the Operating
Partnership in which it owned a combined 90 percent general partner interest as
of December 31, 1997.
Historical Results of Operations
Comparison of the year ended December 31, 1997 to the year ended December 31,
1996
For the year ended December 31, 1997, income before minority interest was
$24,688,000, an increase of $8,588,000 from the year ended December 31, 1996.
The increase was due primarily to the Merger, as well as acquisitions that were
consummated in 1997 and 1996 by the Company or ROC, and increased net operating
income from communities owned by the Company and ROC at the beginning of the
period (the "Core 1996 Portfolio"). The increase in net operating income from
the Company's Core 1996 Portfolio was due to increased occupancy and rental
increases partially offset by general operating expense increases.
18
19
Rental revenue for the year ended December 31, 1997 was $134,801,000, an
increase of $67,568,000 from 1996. Approximately 80 percent of the increase was
due to the Merger, and 9 percent was due to 1997 and 1996 acquisitions made by
the Company or ROC. The remaining 11 percent increase was due to rental
increases and occupancy gains in the Company's Core 1996 Portfolio.
Weighted average occupancy for the year ended December 31, 1997 was 38,053 sites
compared with 18,889 sites for the same period in 1996. During 1997, the Company
increased occupancy by nearly 400 sites, primarily in its active expansion
communities. The occupancy rate for the total portfolio was 92.0 percent on
approximately 43,800 sites as of December 31, 1997, compared to 94.4 percent on
approximately 20,279 sites as of December 31, 1996. The decrease in the
occupancy rate is due to the increase in available sites added through
expansions of existing communities. The occupancy rate on the stabilized
portfolio was 93.6 percent as of December 31, 1997. On a per site basis,
weighted average monthly rental revenue for the year ended December 31, 1997 was
$287, which is consistent with the same period of 1996. For the Company's Core
1996 Portfolio, on a per site basis, weighted average monthly rental revenue for
the year ended December 31, 1997 was $289 compared with $278 for the same period
in 1996, an increase of 4.1 percent.
Management fee, interest and other income primarily include management fee
income for the management of 32 manufactured home communities, equity earnings
from the Company's sales subsidiary, CSI, and interest income on notes
receivable. The increase in 1997 from 1996 is due primarily to business
activities acquired in conjunction with the Merger.
Property operating and maintenance expense for the year ended December 31, 1997
increased by $20,945,000 or 115 percent from the same period a year ago. The
majority of the increase was due to the Merger and 1997 and 1996 acquisitions.
The remaining increase was due to increases in the Company's Core 1996
Portfolio. On a per site basis, monthly weighted average property operating and
maintenance expense increased 6.8 percent from approximately $80 in 1996 to
approximately $86 in 1997. A portion of this increase is due to the operating
expenses related to the properties managed by the Company for a management fee
beginning in 1997.
Real estate taxes for the year ended December 31, 1997 increased by $5,090,000
or 105 percent from the year ended December 31, 1996. The increase is due
primarily to the Merger, acquisitions and expansions of communities and general
increases. On a per site basis, monthly weighted average real estate taxes were
$21.78 in 1997 compared to $21.42 in 1996, an increase of 1.7 percent. Real
estate taxes may increase or decrease due to inflation, expansions and
improvements of communities, as well as changes in taxation in the tax
jurisdictions in which the Company operates.
Administrative expense for the year ended December 31, 1997 increased due to the
Merger. Administrative expense in 1997 was 5.0 percent of total revenues as
compared to 5.7 percent in 1996.
Interest and related amortization costs increased for the year ended December
31, 1997 by $12,956,000, as compared with the year ended December 31, 1996. The
increase is attributable to the indebtedness incurred in connection with the
Merger and to finance the 1997 and 1996 acquisitions. Interest expense as a
percentage of average debt outstanding decreased to approximately 7.7 percent in
1997 from approximately 8.1 percent in 1996. The decrease is due primarily to
the ROC debt assumed in the Merger having a lower average interest rate as well
as much of the financing in connection with the Merger and the 1997 and 1996
acquisitions being done with the Company's lines of credit which had a lower
average interest rate. In addition, in July 1997, the Company renegotiated its
lines of credit into a new line with a lower borrowing rate of 110 basis points
over LIBOR versus 150 basis points over LIBOR on the old lines.
19
20
Depreciation expense for the year ended December 31, 1997, increased $20.1
million from the same period a year ago. The increase is directly attributable
to the Merger and acquisitions. Depreciation expense as a percentage of average
depreciable rental property in 1997 remained relatively unchanged from 1996.
Comparison of year ended December 31, 1996 to year ended December 31, 1995
For the year ended December 31, 1996, income before majority interest and
extraordinary item was $16,100,000, an increase of $2,121,000 from the year
ended December 31, 1995. The increase was due primarily to increased net
operating income from communities owned by the Company on January 1, 1995 (the
"Core 1995 Portfolio") and to a lesser extent, the acquisition of three
communities in 1996 and one community in 1995. The increase in net operating
income from the Company's Core 1995 Portfolio was due to increased occupancy and
rental increases offset by general operating expense increases.
Rental revenue in 1996 was $67,233,000, an increase of $5,675,000 or 9.2 percent
from 1995. Approximately 2.3 percent of the increase was due to the acquisitions
of three communities in 1996 and one in 1995; 3.9 percent represented the effect
of annual rent increases in the Core 1995 Portfolio; 1.8 percent was due to
increased occupancy in the Core 1995 Portfolio and 1 percent was due to an
increase in amenity income. Weighted average occupancy for the year ended
December 31, 1996, was 18,889 sites, or 4.6 percent higher than weighted average
occupancy for the year ended December 31, 1995. Weighted average occupancy
increased in 1996 due to the 1996 and 1995 acquisitions and the filling of 265
additional sites that were either vacant at January 1, 1996 or developed in
1996. The occupancy rate was 94.4 percent on 20,279 sites as of December 31,
1996, as compared with 94.3 percent on 19,594 sites as of December 31, 1995. On
a per site basis, weighted average monthly rental revenue for the year ended
December 31, 1996 increased to $285 from $277 in 1995 or 3.2 percent due to
rental increases in the Core 1995 Portfolio in 1996.
The increase in amenity income of approximately $600,000 was due primarily to
the inclusion of the results of operations of four golf courses and a marina for
the period beginning January 1, 1996. These operations were previously conducted
by GC Properties, Inc. ("GCI"), a corporation wholly owned by an equity owner of
the Company, in order to permit the Company's qualification as a REIT under the
Internal Revenue Code. From November 23, 1993 through December 31, 1995, the
Company recognized net lease income from GCI, which was classified as other
income. In early 1996, the Company received a ruling from the Internal Revenue
Service allowing the Company to conduct these operations. Effective January 1,
1996, as a result of acquiring the operations of GCI, the Company has
consolidated these operations.
Property operating and maintenance expense for the year ended December 31, 1996
increased by $2,180,000 or 13.6 percent from the same period a year ago.
Approximately $1,028,000 of the increase represents the operating costs of the
golf course and marina operations discussed above. The remaining increase of
$1,152,000 or a 7.2 percent increase over the prior year, is due primarily to
the acquisition of three communities in 1996 and one in 1995. On a per site
basis, monthly weighted average property operating and maintenance expense
increased from $74 in 1995 to $80 in 1996, or 8.6 percent. Excluding the golf
course and marina operations, monthly weighted average property operating and
maintenance expense increased 2.4 percent, on a per site basis, year over year.
20
21
Real estate taxes for the year ended December 31, 1996, increased by $333,000,
or 7.4 percent, from the year ended December 31, 1995. The increase is due
primarily to acquisitions and expansions of communities and general increases.
On a per site basis, monthly weighted average real estate taxes were $21.40 in
1996 compared to $20.90 in 1995, an increase of 2.6 percent. Real estate taxes
may increase or decrease due to inflation, expansions and improvements of
communities, as well as changes in taxation in the tax jurisdictions in which
the Company operates.
Administrative expense for 1996 was relatively constant with 1995.
Administrative expense in 1996 was 5.7 percent of revenues as compared to 6.3
percent in 1995.
Interest and related amortization costs increased for the year ended December
31, 1996, by $510,000, as compared with the year ended December 31, 1995. The
increase is attributable to the indebtedness incurred to finance the 1996
acquisitions of three communities and one in 1995, as well as the investment in
a joint venture with ROC that owns six development communities. Interest expense
also increased due to the financing of the Company's repurchase and retirement
of 450,000 shares of its common stock in connection with the Merger. Interest
expense as a percentage of average debt outstanding decreased to approximately
8.1 percent in 1996 from approximately 8.9 percent in 1995.
Depreciation expense for the year ended December 31, 1996, increased $438,000
from the same period a year ago. The increase is due to acquisitions and
expansions. Depreciation expense as a percentage of average depreciable rental
property in 1996 remained relatively unchanged from 1995.
Liquidity and Capital Resources
Net cash provided by operating activities was $54,545,000 for the year ended
December 31, 1997, compared to $29,755,000 for the year ended December 31, 1996.
The increase in cash provided by operating activities was due primarily to the
increase in net operating income as a result of the Company's larger size.
Net cash provided by financing activities for the year ended December 31, 1997,
was $21,088,000. This amount includes net proceeds of $102 million received from
the issuance of senior notes and proceeds of $25,477,000 from the issuance of
984,423 shares to certain OP Unitholders at the time of the Merger. Use of cash
included distributions made to shareholders/OP Unitholders of $42,111,000; the
payment of $19,851,000 to repurchase and retire 750,000 shares of the Company's
common stock in connection with the Merger, and net payment on the line of
credit of $45,834,000 with the proceeds from the senior notes. The shares
purchased in 1997 and 1996 as a part of the program were purchased at an average
price of approximately $25.75.
21
22
Net cash used in investing activities for the year ended December 31, 1997 was
$61,309,000. This amount primarily represented the acquisition of four
communities, payment of merger costs, joint venture investments, and advances to
CSI, capital expenditures and construction and development costs. The
acquisition of the four communities for an aggregate purchase price of $20
million was financed by $19.5 million borrowed on the Company's line of credit
and $500,000 through the issuance of 16,480 OP Units. The Company invested
approximately $4 million in cash in other joint ventures. The Company also
advanced approximately $9 million to CSI. For the year ended December 31, 1997,
construction and development costs approximated $8.1 million, while recurring
property capital expenditures, other than construction and development costs,
were approximately $3.7 million. Recurring property capital expenditures in 1997
increased significantly over the same period in 1996, due to the increased
number of communities in the Company's portfolio. Capital expenditures have
historically been financed with funds from operations and it is the Company's
intention that such future expenditures will be financed with funds from
operations.
In July 1997, the Company entered into two new credit facilities with the First
National Bank of Chicago and other lenders, consisting of a $25 million term
loan and a $75 million revolving line of credit (the "First Chicago Credit
Facilities"). Effective July 1997, the interest rate on the revolving credit
facility was reduced to LIBOR plus 110 basis points (from LIBOR plus 150 basis
points). In addition, in September 1997, the Company secured a $7.5 million
revolving line of credit from Colorado National Bank which bears interest at a
rate of LIBOR plus 125 basis points (the "CNB Facility" and , together with the
First Chicago Credit Facilities, the "Credit Facilities"). As of December 31,
1997, approximately $25 million was outstanding under the Credit Facilities and
the Company had available $82.5 million in additional borrowing capacity.
On December 23, 1997, the Company issued 6.92% MandatOry Par Put Remarketed
Securities(SM) ("MOPPRS(SM)" ) due December 10, 2014. The net proceeds to the
Company from the issuance before deducting offering expenses, was approximately
$102.0 million. The net proceeds from the MOPPRS(SM) were utilized primarily to
reduce outstanding balances under the Credit Facilities and to finance
acquisitions. The MOPPRS(SM) are rated as "BBB" by Standard & Poor's Rating
Service and "Baa3" by Moody's Investors Service.
In connection with the issuance of the MOPPRS(SM), the Company and the Operating
Partnership entered into a Remarketing Agreement, dated as of December 23, 1997
(the "Remarketing Agreement"), with the remarketing dealer named therein (the
"Remarketing Dealer"), pursuant to which the MOPPRS(SM) are subject to mandatory
tender in favor of the Remarketing Dealer on December 10, 2004 (the "Remarketing
Date"), for a purchase price equal to 100% of the principal amount of the
outstanding MOPPRS(SM). Upon the Remarketing Dealer's election to remarket the
MOPPRS(SM), the interest rate to the December 10, 2014 maturity date of the
MOPPRS will be adjusted to equal the sum of 5.75% plus the Applicable Spread (as
defined in the Remarketing Agreement). In the event the Remarketing Dealer does
not elect to remarket the MOPPRS(SM), the MOPPRS(SM) will mature on the
Remarketing Date.
As of December 31, 1997, the Company had outstanding, in addition to the Credit
Facilities and the MOPPRS(SM), $145 million of other unsecured senior debt with
a weighted average interest rate and maturity of 8.2 percent and 4 years,
respectively, and $114 million of secured mortgage debt with a weighted average
interest rate and maturity of 7.95 percent and 2.5 years, respectively.
22
23
Repayment of long-term borrowings and amounts outstanding under the Credit
Facilities, future acquisitions of communities and land for development and new
community development activities represent the principal long-term liquidity
need of the Company. The Company does not expect to generate sufficient funds
from operations to finance these long-term liquidity needs and instead intends
to meet its long-term liquidity requirements through additional borrowing under
the Credit Facilities or other lines of credit, the issuance of additional
equity or debt securities and the assumption of existing secured or unsecured
indebtedness.
The Company expects to meet its short-term liquidity requirements, including
expansion activities and capital expenditure requirements, through cash flow
from operations and, if necessary, borrowings under the Credit Facilities and
other lines of credit.
In January 1998, the Company completed the acquisition of 16 properties, in
Connecticut, South Carolina, and Florida, containing approximately 2,333
homesites and 1,359 park/model RV sites, for a total of approximately $55.4
million. These acquisitions were financed by $33.7 million in borrowings under
the Company's line of credit, the issuance of 412,480 OP Units and $5.7 million
in cash available from the proceeds of the December 1997 Debt Offering. Nine of
the above communities, containing approximately 900 homesites and 1,100 park
model/RV sites, are subject to long-term ground leases.
In February 1998, the Company received net proceeds of approximately $53.9
million from the issuance of 1,850,000 shares of its common stock. The proceeds
from the offering were used to reduce outstanding balances under the Company's
line of credit from the January 1998 acquisitions and for the March 1998
acquisitions.
In March 1998, the Company completed the acquisition of 6 properties, 1 in
Michigan and 5 in Indiana, containing approximately 1,500 homesites, for a total
of approximately $36.7 million. These acquisitions were financed by the issuance
of common stock in February 1998 and by borrowings on the Company's line of
credit. In addition, CSI purchased a 60 percent interest in three retail sales
centers in Indiana, for approximately $1.2 million.
Inflation
All of the leases or terms of tenants' occupancies at the communities allow for
at least annual rental adjustments. In addition, all leases are short-term
(generally one year or less) and enable the Company to seek market rentals upon
reletting the sites. Such leases generally minimize the risk to the Company of
any adverse effect of inflation.
New Accounting Standards
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." This accounting
standard specifies new computation, presentation and disclosure requirements for
earnings per share to be applied retroactively. Among other things, SFAS No. 128
requires presentation of basic and diluted earnings per share on the face of the
income statement.
23
24
Year 2000 Compliance
The Company is currently engaged in a review with its software vendors to ensure
all systems are modified for year 2000 compliance. Since all systems are owned
and maintained by third party vendors, the Company believes that the additional
costs for compliance will not be material to future results of operations,
financial condition or cash flows of the Company.
Other
Funds from operations ("FFO") is defined by the National Association of Real
Estate Investment Trusts ("NAREIT") as consolidated net income of the Operating
Partnership without giving effect to gains (or losses) from debt restructuring
and sales of property and rental property depreciation and amortization.
Management believes that FFO is an important and widely used measure of the
operating performance of REITs, which provides a relevant basis for comparison
among REITs. For all periods presented, depreciation of rental property and
amortization of intangibles are the only non-cash adjustments. FFO (i) does not
represent cash flow from operations as defined by generally accepted accounting
principles; (ii) should not be considered as an alternative to net income as a
measure of operating performance or to cash flows from operating, investing and
financing activities; and (iii) is not an alternative to cash flows as a measure
of liquidity. FFO is calculated as follows:
For the year
ended December 31,
---------------------------------
1997 1996 1995
------- ------- -------
Income before extraordinary item $24,688 $16,100 $13,979
Depreciation of rental property 30,867 11,360 10,919
Amortization of intangibles 407 -- --
------- ------- -------
Funds from operations $55,962 $27,460 $24,898
======= ======= =======
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Item 8. Financial Statements and Supplementary Data
Report of Independent Accountants
To the Shareholders and Board of Directors of Chateau Communities, Inc.:
We have audited the accompanying consolidated balance sheets of Chateau
Communities, Inc. (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. We have also
audited the financial statement schedule as identified in item 14(a)(2) of this
Form 10-K. These financial statements and the financial statement schedule are
the responsibility of the management of Chateau Communities, Inc. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chateau Communities, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 4, 1998, except for Note 15
for which the date is March 10, 1998
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26
CHATEAU COMMUNITIES, INC.
CONDSOLIDATED STATEMENTS OF INCOME
For the Year Ended
December 31,
In dollars, except per share data 1997 1996 1995
-----------------------------------
Revenues:
Rental income $ 134,801 $ 67,233 $ 61,558
Management, interest and other income 3,368 151 297
--------- --------- ---------
138,169 67,384 61,855
Expenses:
Property operating and maintenance 39,146 18,201 16,021
Real estate taxes 9,946 4,856 4,523
Depreciation 31,510 11,452 11,014
Administrative 6,961 3,813 3,866
Interest and related amortization 25,918 12,962 12,452
--------- --------- ---------
113,481 51,284 47,876
--------- --------- ---------
Income before extraordinary
item and minority/majority interest 24,688 16,100 13,979
Extraordinary charge from early
extinguishment of debt -- -- (829)
--------- --------- ---------
Income before minority/majority interest 24,688 16,100 13,150
Minority/majority interest in income of
Operating Partnership (2,986) (9,566) (7,847)
--------- --------- ---------
Net income $ 21,702 $ 6,534 $ 5,303
========= ========= =========
Basic earnings per common share:
Income before extraordinary item $ .92 $ 1.09 $ .95
Extraordinary item -- -- (.06)
--------- --------- ---------
Net income $ .92 $ 1.09 $ .89
========= ========= =========
Diluted earnings per common share:
Income before extraordinary item $ .91 $ 1.08 $ .94
Extraordinary item -- -- (.05)
--------- --------- ---------
Net Income $ .91 $ 1.08 $ .89
========= ========= =========
Dividends/distributions declared per
common share/OP Unit outstanding $ 1.72 $ 1.62 $ 1.525
========= ========= =========
Tax status of dividends,
return of capital portion $ .62 $ .65 $ .53
========= ========= =========
Weighted average common shares
outstanding 23,688 6,022 5,959
========= ========= =========
Weighted average common
shares and OP Units outstanding 26,947 14,837 14,779
========= ========= =========
The accompanying notes are an integral part of the financial statements.
26
27
CHATEAU COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
December 31
Dollars in thousands, except per share data 1997 1996
---- ----
Assets
Rental property:
Land $ 111,832 $ 33,821
Land and improvements for expansion sites 14,437 1,988
Manufactured home community improvements 647,388 239,514
Community buildings 44,406 17,607
Furniture and other equipment 18,112 7,701
--------- ---------
Total rental property 836,175 300,631
Less accumulated depreciation 112,314 81,293
--------- ---------
Net rental property 723,861 219,338
Cash and cash equivalents 14,910 586
Rents, notes and other receivables 11,079 3,157
Investment in and advances to affiliates 21,646 3,408
Prepaid expenses and other assets 11,242 5,577
--------- ---------
Total assets $ 782,738 $ 232,066
========= =========
Liabilities
Debt $ 387,015 $ 168,315
Accrued interest payable 3,909 2,796
Accounts payable and other accrued expenses 15,848 7,489
Rents received in advance and security deposits 5,580 4,852
Distributions payable 12,148 5,871
--------- ---------
Total liabilities 424,500 189,323
Minority/majority interest in Operating Partnership 35,272 26,552
Shareholders' Equity
Preferred stock, $.01 par value, 2 million shares
authorized; no shares issued or outstanding
Common stock, $.01 par value, 90 million shares authorized:
25,476,172 and 5,660,960 shares issued and
outstanding at December 31, 1997
and 1996, respectively 255 57
Additional paid-in capital 356,780 28,187
Dividends in excess of accumulated earnings (33,174) (11,233)
Notes receivable, officers, 49,507 and 43,125
shares outstanding at December 31, 1997
and 1996, respectively (895) (820)
--------- ---------
Total shareholders' equity 322,966 16,191
--------- ---------
Total liabilities and shareholders' equity $ 782,738 $ 232,066
========= =========
The accompanying notes are an integral part of the financial statements.
27
28
CHATEAU COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Year Ended
December 31,
Dollars in thousands, except per share data 1997 1996 1995
-----------------------------------
Common stock:
Balance at beginning of period $ 57 $ 61 $ 58
Issuance of shares in connection with the Merger 196
Issuance of shares from awards, exercise of
options and sales to key employees 2 -- --
Issuance of shares in connection with
acquisitions 1
Issuance of shares in exchange for Units
in Operating Partnership 10 -- 3
Repurchase and retirement of shares (11) (4) --
--------- --------- ---------
Balance at end of period $ 255 $ 57 $ 61
========= ========= =========
Additional paid-in capital:
Balance at beginning of period $ 28,187 $ 33,152 $ 30,678
Issuance of shares in connection with the Merger 359,584
Issuance of shares from awards, exercise of
options and sales to key employees 4,492 239 150
Issuance of shares in connection with
acquisitions 3,022
Issuance of shares in exchange for Units
in Operating Partnership 159,693 -- 1,544
Repurchase and retirement of shares (28,676) (11,235) --
Transfer (to) from minority/majority interest
ownership in Operating Partnership (169,522) 6,031 780
--------- --------- ---------
Balance at end of period $ 356,780 $ 28,187 $ 33,152
========= ========= =========
Dividends in excess of accumulated earnings:
Balance at beginning of period $ (11,233) $ (8,064) $ (4,203)
Net income 21,702 6,534 5,303
Dividends declared, $1.72, $1.62
and $1.525 per share (43,643) (9,703) (9,164)
--------- --------- ---------
Balance at end of period $ (33,174) $ (11,233) $ (8,064)
========= ========= =========
Notes receivable, officers:
Balance at beginning of period $ (820) $ (841) $ (991)
Issuance of shares through sales
to key employees (100) -- --
Payments received 25 21 150
--------- --------- ---------
Balance at end of period $ (895) $ (820) $ (841)
========= ========= =========
Total shareholders' equity, end of period $ 322,966 $ 16,191 $ 24,308
========= ========= =========
The accompanying notes are an integral part of the financial statements.
28
29
CHATEAU COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
In thousands 1997 1996 1995
-----------------------------------
Cash flows from operating activities:
Net income $ 21,702 $ 6,534 $ 5,303
Adjustments to reconcile net income to net
cash provided by operating activities:
Income attributable to minority/majority interest 2,986 9,566 7,847
Extraordinary item -- -- 829
Depreciation and amortization 31,510 11,452 11,014
Amortization of debt issuance costs 480 437 538
Decrease (increase) in operating assets 1,495 (562) (77)
Increase (decrease) in operating liabilities (3,628) 2,328 2,643
--------- --------- ---------
Net cash provided by operating activities 54,545 29,755 28,097
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of Senior Notes 102,630 -- 74,866
Borrowings on line of credit 105,111 36,750
Payments on the line of credit (150,945) (30,000)
Principal payments on mortgages (1,596) (1,135) (45,066)
Prepayment penalties -- -- (667)
Payment of debt issuance costs (895) (234) (954)
Distributions to shareholders/OP
Unitholders (42,111) (24,065) (21,982)
Shares/OP Units repurchased (19,851) (12,171) (882)
Proceeds from the issuance of common shares 25,477 -- --
Exercise of common stock options and other 3,268 260 320
--------- --------- ---------
Net cash provided by (used in)
financing activities 21,088 (595) (24,365)
--------- --------- ---------
Cash flows from investing activities:
Acquisition of rental properties (22,655) (21,727) (2,766)
Disposition of rental property 2,455 -- --
Additions to rental properties (15,544) (4,731) (3,392)
Investment in joint ventures (4,259) -- --
Advances to Community Sales, Inc. ("CSI") (8,849) -- --
Merger costs (12,457) (3,060) --
--------- --------- ---------
Net cash used in investing activities (61,309) (29,518) (6,158)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 14,324 (358) (2,426)
Cash and cash equivalents, beginning of period 586 944 3,370
--------- --------- ---------
Cash and cash equivalents, end of period $ 14,910 $ 586 $ 944
========= ========= =========
Supplemental information:
Cash paid for interest $ 24,325 $ 12,176 $ 9,987
========= ========= =========
Fair market value of OP Units/shares issued
for acquisitions $ 3,683 $ 1,964 $ 3,434
========= ========= =========
The accompanying notes are an integral part of the financial statements.
29
30
CHATEAU COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
1. Organization and Formation of Company:
The Company was formed in November 1993 as Chateau Properties, Inc., a real
estate investment trust ("REIT"). In 1997, the Company merged with ROC
Communities, Inc, (ROC). The Company is engaged in the business of owning and
operating manufactured housing community properties primarily through CP Limited
Partnership, its Operating Partnership. As of December 31, 1997, the Company
owned 131 properties containing an aggregate of 43,800 homesites, located in 28
states. Approximately 29 percent of these homesites were in Florida and 27
percent were in Michigan. The Company also fee managed 31 properties containing
an aggregate of 6,500 homesites. A manufactured housing community is real estate
designed and improved with sites for placement of manufactured homes. The owner
of the home leases the site from the Company generally for a term of one year or
less.
2. Summary of Significant Accounting Policies:
Basis of Presentation
The accompanying consolidated financial statements of the Company include all
accounts of the Company, its wholly owned qualified REIT subsidiaries and its
Operating Partnership. The Company and ROC are the general partners, and as
such, the Company has unilateral control and complete responsibility for
management of the Operating Partnership including the right and power to make
all decisions and actions with respect to the acquisition, mortgage and sale of
properties and the other business affairs of the Operating Partnership. All
significant inter-entity balances and transactions have been eliminated in
consolidation.
Minority/Majority Interest
Income before minority/majority interest is ascribed to the limited partners of
the Operating Partnership (the Minority Interest") based on their respective
weighted average ownership percentage of the Operating Partnership. The
ownership percentage is determined by dividing the number of Operating
Partnership ("OP") Units held by the limited partners by the total OP Units
outstanding including the Units held by the Company. Issuance of additional
shares of common stock or OP Units changes the percentage ownership of both the
Minority Interest and the Company. Since an OP unit is equivalent to a common
share (due to, among other things, its exchangeability for a common share), such
transactions are treated as capital transactions and result in an equity
transfer adjustment among Shareholders' equity and Minority Interest in the
Company's balance sheet to account for the change in the respective ownership in
the underlying equity of the Operating Partnership.
30
31
CHATEAU COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
2. Summary of Significant Accounting Policies Continued:
Investments in and Advances to Affiliates
The Company conducts manufactured home sales and brokerage activities through
its taxable subsidiary Community Sales, Inc. ("CSI"). The Company owns 100% of
the preferred stock of CSI and is entitled to 100% of its cash flow. The Company
accounts for its investment in CSI utilizing the equity method of accounting.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles involves the use of certain management estimates and
assumptions that affect reported amounts and disclosures, such as the useful
lives of rental properties. Actual results could differ from those estimates.
Revenue Recognition
Rental income is recognized when earned and due from residents. The leases
entered into by residents for the rental of a site are generally for terms not
longer than one year and renewable upon the consent of both parties or, in some
instances, as provided by statute.
Rental Property
Rental property is carried at the lower of cost, less accumulated depreciation,
or fair value. Management evaluates the recoverability of its investment in
rental property in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived
Assets To Be Disposed Of". This statement requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that full asset recoverability is questionable. Management's assessment of
recoverability of its rental property under this statement includes, but is not
limited to, recent operating results, expected net operating cash flow and
management's plans for future operations.
Depreciation
Depreciation on manufactured home communities is computed primarily on the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives of the various classes of rental property assets are
primarily as follows:
Estimated Useful
Class of Asset Lives (Years)
- -------------- -------------
Manufactured home community improvements 20 to 30
Community buildings 25 to 30
Furniture and other equipment 4 to 10
31
32
CHATEAU COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
2. Summary of Significant Accounting Policies Continued:
Maintenance, repairs and minor improvements to rental properties are expensed
when incurred. Major improvements and renewals are capitalized. When rental
property assets are sold or otherwise retired, the cost of such assets, net of
accumulated depreciation compared to the sale proceeds, are recognized in income
as gains or losses on disposition.
Capitalized Interest
Interest is capitalized on projects during periods of construction. Interest
capitalized by the Company during 1997 was $708,000.
Income Taxes
The Company has elected to be taxed as a real estate investment trust ("REIT")
under Section 856(c) of the Internal Revenue Code of 1986, as amended. The
Company generally will not be subject to Federal income tax to the extent it
distributes its REIT taxable income to its shareholders. REITs are subject to a
number of organizational and operational requirements. If the Company fails to
qualify as a REIT in any taxable year, the Company will be subject to Federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. The Company remains subject to certain state
and local taxes on its income and property as well as Federal income and excise
taxes on its undistributed income.
Per Share Data
Basic earnings per share are computed based upon the weighted average number of
common shares outstanding during the period. The conversion of an OP unit to
common stock has no effect on earnings per common share since the earnings of an
OP unit are equivalent to the earnings of a share of common stock. Diluted
earnings per common share are computed assuming the exercise of all outstanding
stock options, which would have a dilutive effect, and the exchange of all OP
Units into common stock.
Stock-Based Compensation
During 1996 the Company adopted SFAS No. 123 for "Accounting for Stock-Based
Compensation." The Company has elected to continue to account for employee stock
based compensation under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and therefore the disclosure method
as permitted and required by SFAS No. 123 is presented in Note 9.
32
33
CHATEAU COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
2. Summary of Significant Accounting Policies Continued:
Cash Equivalents
All highly liquid investments with an initial maturity of three months or less
are considered to be cash equivalents.
Reclassifications
Certain reclassifications have been made to the prior year financial statements
to conform to the current year financial statement presentation. These
reclassifications have no impact on net operating results previously reported.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" requires
disclosures about the fair value of financial instruments whether or not such
instruments are recognized in the balance sheet. Due to the short-term nature of
the Company's financial instruments, other than debt, fair values are not
materially different from their carrying values. The carrying value of debt
approximates fair value.
Debt Issuance Costs
Costs incurred related to obtaining financing such as service and commitment
fees are deferred and are amortized over the term of the related
commitment/loans. These costs net of accumulated amortization are included in
prepaid expenses and other assets in the accompanying balance sheets.
3. Merger with ROC Communities, Inc.
On February 11, 1997, the Company completed its merger with ROC Communities,
Inc. (the "Merger"). The Merger and related transactions was accounted for using
the purchase method of accounting in accordance with generally accepted
accounting principles. Accordingly, the assets and liabilities of ROC were
adjusted to fair value for financial accounting purposes and the results of
operations of ROC were included in the results of operations of the Company
beginning in February 1997.
33
34
CHATEAU COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
3. Merger with ROC Communities, Inc. Continued:
In connection with the Merger, the related transactions occurred
- - The Company repurchased and retired 1,200,000 shares of its common stock,
of which 750,000, and 450,000 were repurchased in 1997 and 1996,
respectively
- - ROC purchased 350,000 shares of Chateau common stock, in 1996, which was
retired at the time of the Merger
- - The Company issued 1.042 shares of its common stock for each share of ROC
stock outstanding
- - The Company paid a stock dividend equal to .0326 shares of Company common
stock per common share/OP Unit outstanding
- - Certain OP Unitholders converted 6,170,908 OP Units into common shares.
These Unitholders waived their right to receive the above dividend and as
a result it was re-allocated to the existing shareholders, resulting in a
distribution to the common shareholders of .068 shares of common stock
- - Certain OP Unitholders purchased 984,423 additional shares of common stock
from the Company at $25.88 per share.
- - In May 1997 the Company's name was changed to Chateau Communities, Inc
The total price of $351 million was allocated as follows:
Rental property $ 501.3
Net working capital 15.8
Debt assumed (166.1)
--------
$ 351.0
========
34
35
CHATEAU COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
3. Merger with ROC Communities, Inc. Continued
The following unaudited pro forma income statement information has been prepared
as if the Merger and related transactions had occurred on January 1, 1996. In
addition, the pro forma information is presented as if the acquisitions of 14
properties made in 1996 by the Company and ROC had occurred on January 1, 1996.
No adjustments were made for the 1997 acquisitions made by the Company. The pro
forma income statement information is not necessarily indicative of the results
which actually would have occurred if the Merger had been consummated on January
1, 1996.
(In thousands, except per share data)
1997 1996
-------- --------
Revenues $142,600 $132,800
======== ========
Total expenses $117,500 $113,200
======== ========
Net income* $ 25,100 $ 19,600
======== ========
Per share* $ .89 $ .70
======== ========
*Assumes all OP Units are exchanged for common stock.
4. Common Stock and Related Transactions
The following table presents the changes in the Company's outstanding common
stock for the years ended December 31, 1997, 1996, and 1995.
1997 1996 1995
---- ---- ----
Common shares outstanding at January 1 5,660,960 6,095,960 5,750,000
Shares repurchased and retired (1,100,100) (450,000)
Shares issued in exchange for ROC
common stock outstanding 13,109,941
Shares issued in exchange for OP Units 6,170,908 335,460
Shares issued in connection with the stock dividend 310,323
Shares issued to certain OP Unitholders for cash 984,423
Shares issued through stock awards, sales to key
employees and the exercise of stock options 238,478 15,000 10,500
Shares issued in connection with the acquisiton
of Windsor Corporation 101,239
----------- ----------- -----------
Common shares outstanding at December 31 25,476,172 5,660,960 6,095,960
=========== =========== ===========
35
36
CHATEAU COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
4. Common Stock and Related Transactions Continued:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Accounting Standards ("SFAS") No. 128, "Earnings
Per Share". SFAS No. 128 establishes standards for computing and presenting
earnings per share ("EPS") and replaces the presentation of primary EPS with a
presentation of basic EPS and diluted EPS, as summarized in the table below:
(In thousands, except per share data) For the year ended December 31,
1997 1996 1995
---- ---- ----
Basic EPS:
Income (1) ................... $24,688 $16,100 $13,150
Shares (2) ................... 26,947 14,837 14,779
Per Share .................... $ .92 $ 1.09 $ .89
Diluted EPS:
Income (1) ................... $24,688 $16,100 $13,150
Shares (3) ................... 27,192 14,957 14,825
Per Share .................... $ .91 $ 1.08 $ .89
(1) Represents income before minority/majority interest
(2) Represents the weighted average shares and OP Units outstanding
(3) Represents the weighted average shares and OP Units outstanding, as well
as dilutive stock options
36
37
CHATEAU COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
5. Acquisitions of Rental Property:
(In thousands)
Amount Fair Market
Allocated Value of OP
Acquisition Property Name to Assets Units/Shares
Date and Location Acquired Issued Cash
----------- ------------ -------- ------ ----
Acquisitions - 1997:
February, 1997 75 communities acquired through the
Merger with ROC see note 3
November, 1997 Purchase of 4 communities in
Boston, Massachusetts $20,000 $ 500 $ 19,500
Various Investment in joint ventures (2) $ 4,259 $ -- $ 4,259
- ----------------------------------------------------------------------------------------------------------------
Acquisitions - 1996
March, 1996 Chestnut Creek Farm-
Davison, MI $ 3,400 $ 3,400
May, 1996 Maple Valley and Maple Ridge-
Manteno, IL $ 5,800 $ 1,000 $ 4,800
September, 1996 Joint venture with ROC
purchase of six
communities in six states (1) $10,300 $ 10,300
Various Other joint ventures (2) $ 4,200 $ 1,000 $ 3,200
- ----------------------------------------------------------------------------------------------------------------
Acquisitions - 1995:
September, 1995 Hidden Valley
Lake Buena Vista, FL