Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-11718
MANUFACTURED HOME COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 36-3857664
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
TWO NORTH RIVERSIDE PLAZA, SUITE 800, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
(312) 279-1400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 Par Value The New York Stock Exchange
(Title of Class) (Name of exchange on which registered)
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 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 | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 the 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 nonaffiliates was
approximately $571.5 million as of February 28, 2003 based upon the closing
price of $29.04 on such date using beneficial ownership of stock rules adopted
pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting
stock owned by Directors and Officers, some of whom may not be held to be
affiliates upon judicial determination.
At March 24, 2003, 22,223,647 shares of the Registrant's
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III incorporates by reference the Registrant's Proxy Statement relating to
the Annual Meeting of Stockholders to be May 7, 2003.
MANUFACTURED HOME COMMUNITIES, INC.
TABLE OF CONTENTS
Page
----
PART I.
Item 1. Business............................................................................... 3
Item 2. Properties............................................................................. 8
Item 3. Legal Proceedings...................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders.................................... 16
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............. 17
Item 6. Selected Financial Data................................................................ 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 20
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.............................. 31
Item 8. Financial Statements and Supplementary Data............................................ 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 31
PART III.
Item 10. Directors and Executive Officers of the Registrant..................................... 32
Item 11. Executive Compensation................................................................. 32
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 32
Item 13. Certain Relationships and Related Transactions......................................... 32
Item 14. Controls and Procedures................................................................ 32
PART IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 33
2
PART I
ITEM 1. BUSINESS
THE COMPANY
GENERAL
Manufactured Home Communities, Inc., together with MHC Operating Limited
Partnership (the "Operating Partnership") and other consolidated subsidiaries
("Subsidiaries"), are referred to herein as the "Company", "MHC", "we", "us",
and "our". The Company is a fully integrated company that owns and operates
manufactured home communities ("Communities") and recreational vehicle resorts
("Resorts") (collectively known as "Properties"). The Company was formed to
continue the property operations, business objectives and acquisition strategies
of an entity that had owned and operated Communities since 1969. As of December
31, 2002, we owned or had an ownership interest in a portfolio of 142
Communities and Resorts located throughout the United States containing 51,582
residential sites. Our Properties are located in 21 states (with the number of
Properties in each state shown parenthetically) - Florida (51), California (25),
Arizona (19), Colorado (10), Delaware (7), Nevada (5), Oregon (4), Indiana (3),
Illinois (2), Iowa (2), New York (2), Texas (2), Utah (2), Pennsylvania (1),
Maryland (1), Montana (1), New Mexico (1), Michigan (1), Virginia (1), West
Virginia (1), and Washington (1).
Communities are residential developments designed and improved for the
placement of detached, single-family manufactured homes that are produced
off-site and installed and set on residential sites ("Site Set") within the
Community. The owner of each home leases the site on which it is located. Modern
Communities are similar to typical residential subdivisions, containing
centralized entrances, paved streets, curbs and gutters and parkways. In
addition, these Communities often provide a clubhouse for social activities and
recreation and other amenities, which may include swimming pools, shuffleboard
courts, tennis courts, laundry facilities and cable television service. In some
cases, utilities are provided or arranged for by the owner of the Community;
otherwise, the resident contracts for the utility directly. Some Communities
provide water and sewer service through municipal or regulated utilities, while
others provide these services to residents from on-site facilities. Each
Community is generally designed to attract, and is marketed to, one of two types
of residents - 1) retirees and empty-nesters or 2) families and first-time
homeowners. We believe both types of Communities are attractive investments and
focus on owning Communities in or near large metropolitan markets and retirement
destinations.
Resorts are similar to Communities in their overall design and the
amenities they provide. However, our Resorts include sites designed to
accommodate Site Set homes, park model homes, luxury motorcoaches and a variety
of recreational vehicles. Our Resorts are marketed to attract residents seeking
a second home or vacation home as well as those seeking a long-term or full
season recreational vehicle site. A majority of our Resort residents own homes
in the Resort and/or lease the site annually or for a full season (six months or
longer).
We have approximately 1,000 full-time employees dedicated to carrying out
our operating philosophy and strategies of value enhancement and service to
residents. The operations of each Property are coordinated by an on-site team of
employees that typically includes a manager or two-person management team,
clerical and maintenance workers, each of whom work to provide maintenance and
care of the Properties. Direct supervision of on-site management is the
responsibility of our regional vice presidents and regional and district
managers. These individuals have significant experience in addressing the needs
of residents and in finding or creating innovative approaches to maximize value
and increase cash flow from property operations. Complementing this field
management staff are approximately 60 corporate employees who assist on-site
management in all property functions.
FORMATION OF THE COMPANY
The Company, formed in March 1993, is a Maryland corporation which has
elected to be taxed as a real estate investment trust ("REIT"). The Company
generally will not be subject to Federal income tax to the extent it distributes
100% 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, its income is taxable at regular corporate rates. Even if the
Company qualifies for taxation as a REIT, the Company is subject to certain
state and local taxes on its income and property and Federal income and excise
taxes on its undistributed income.
The operations of the Company are conducted primarily through the
Operating Partnership. The Company contributed the proceeds from its initial
public offering and subsequent offerings to the Operating Partnership for a
general partnership interest. The financial results of the Operating Partnership
and the Subsidiaries are consolidated in the Company's consolidated financial
statements. In addition, since certain activities, if performed by the Company,
may not be qualifying REIT activities under the Internal Revenue Code of 1986,
as amended (the "Code"), the Company has formed taxable REIT subsidiaries as
defined in the Code to engage in such activities. Realty Systems, Inc. ("RSI")
is a wholly owned subsidiary of the Company that, doing business
3
as Carefree Sales, is engaged in the business of purchasing, selling and leasing
manufactured homes that are located or will be located in Properties owned and
managed by the Company. Carefree Sales also provides brokerage services to
residents at such Properties. Typically, residents move from a Community but do
not relocate their homes. Carefree Sales may provide brokerage services, in
competition with other local brokers, by seeking buyers for the homes. Carefree
Sales also leases homes to prospective residents with the expectation that the
tenant eventually will purchase the home. Community Systems, Inc. ("CSI") leases
from the Operating Partnership certain real property within or adjacent to
certain Properties consisting of golf courses, pro shops, and restaurants.
BUSINESS OBJECTIVES AND OPERATING STRATEGIES
Our strategy seeks to maximize both current income and long-term growth in
income. We focus on Properties that have strong cash flow and we expect to hold
such Properties for long-term investment and capital appreciation. In
determining cash flow potential, we evaluate our ability to attract and retain
high quality residents in our Properties who take pride in their Property and in
their home. These business objectives and their implementation are determined by
our Board of Directors and may be changed at any time. Our investment and
operating approach includes:
- Providing consistently high levels of services and amenities in
attractive surroundings to foster a strong sense of community and
pride of home ownership;
- Efficiently managing the Properties to increase operating margins by
controlling expenses, increasing occupancy and maintaining
competitive market rents;
- Increasing income and property values by continuing the strategic
expansion and, where appropriate, renovation of the Properties;
- Utilizing management information systems to evaluate potential
acquisitions, identify and track competing properties and monitor
resident satisfaction; and
- Selectively acquiring Properties that have potential for long-term
cash flow growth and to create property concentrations in and around
major metropolitan areas and retirement destinations to capitalize
on operating synergies and incremental efficiencies.
We are committed to enhancing our reputation as the most respected brand
name in the industry. Our strategy is to own and operate the highest quality
Properties in sought-after locations near both urban areas and retirement
destinations across the United States. The focus is on creating an attractive
residential environment for homeowners by providing a well-maintained,
comfortable Property with a variety of organized recreational and social
activities and superior amenities. In addition, we regularly conduct evaluations
of the cost of housing in the market places in which our Properties are located
as well as survey rental rates of competing Communities and Resorts. From time
to time we also conduct satisfaction surveys of our residents to determine the
factors they consider most important in choosing a Property.
FUTURE ACQUISITIONS
Over the last seven years our portfolio of Properties has grown by 73
Properties. We continually review the Properties in our portfolio to ensure they
fit our business objectives. Over the last 3 years, through the acquisition or
sale of 44 Properties, we have redeployed capital to markets we believe have
greater long-term potential. We believe that opportunities for Property
acquisitions are still available and in general consolidation within the
industry will continue (see - The Industry - Industry Consolidation). However,
we also believe that many transactions occurring in the private marketplace are
at valuations that would prevent a reasonable return on the invested capital.
When investing capital we consider all potential uses of the capital including
repurchases of our stock. As a result, during 1999 and 2000 we implemented our
stock repurchase program and our Board of Directors continues to review the
conditions under which we will repurchase our stock. These conditions include,
but are not limited to, market price, balance sheet flexibility, other
opportunities and capital requirements. (For more information on the Company's
stock repurchase program see Note 4 to the accompanying financial statements.)
Increasing acceptability of and demand for Site Set homes and continued
constraints on development of new Properties continue to add to their
attractiveness as an investment. We believe we have a competitive advantage in
the acquisition of new Properties due to our experienced management, significant
presence in major real estate markets and substantial capital resources. We are
actively seeking to acquire additional Communities and Resorts and are engaged
in various stages of negotiations relating to the possible acquisition of a
number of Properties.
4
We anticipate that newly acquired Properties will be located in the United
States. We utilize market information systems to identify and evaluate
acquisition opportunities, including a market database to review the primary
economic indicators of the various locations in which we expect to expand our
operations. Acquisitions will be financed from the most appropriate sources of
capital, which may include undistributed funds from operations, issuance of
additional equity securities, sales of investments, collateralized and
uncollateralized borrowings and issuance of debt securities. In addition, the
Operating Partnership may issue units of limited partnership interest ("OP
Units") to finance acquisitions. We believe that an ownership structure which
includes the Operating Partnership will permit us to acquire additional
Communities and Resorts in transactions that may defer all or a portion of the
sellers' tax consequences.
When evaluating potential acquisitions, we will consider such factors as:
- - the replacement cost of the Property,
- - the geographic area and type of Property,
- - the location, construction quality, condition and design of the Property,
- - the current and projected cash flow of the Property and the ability to
increase cash flow,
- - the potential for capital appreciation of the Property,
- - the terms of tenant leases, including the potential for rent increases,
- - the potential for economic growth and the tax and regulatory environment
of the community in which the Property is located,
- - the potential for expansion of the physical layout of the Property and the
number of sites,
- - the occupancy and demand by residents for Properties of a similar type in
the vicinity and the residents' profile,
- - the prospects for liquidity through sale, financing or refinancing of the
Property,
- - the competition from existing Properties and the potential for the
construction of new Properties in the area.
We expect to purchase Properties with physical and market characteristics
similar to the Properties in our current portfolio.
PROPERTY EXPANSIONS
Several of our Properties have available land for expanding the number of
sites available to be leased to residents. Development of these sites
("Expansion Sites") is predicated by local market conditions and permitted by
zoning and other applicable laws. When justified, development of Expansion Sites
allows us to leverage existing facilities and amenities to increase the income
generated from the Properties. Where appropriate, facilities and amenities may
be upgraded or added to certain Properties in order to make those Properties
more attractive in their markets. Our acquisition philosophy has included the
desire to own Properties with potential Expansion Site development, and we have
been successful in acquiring a number of such Properties. Several examples of
these Properties include the 1993 acquisition of The Heritage with potential
development of approximately 288 Expansion Sites, the 1994 acquisition of Bulow
Village with potential development of approximately 725 Expansion Sites, the
1997 acquisition of Golf Vista Estates with potential development of
approximately 88 Expansion Sites, the 1999 acquisition of Coquina Crossing with
potential development of approximately 393 Expansion Sites, and the 2001
acquisitions of Grand Island and The Lakes at Countrywood with combined
potential Expansion Sites of 224 sites.
Of our 142 Properties, ten may be expanded consistent with existing zoning
regulations. In 2003, we expect to develop an additional 130 Expansion Sites
within 3 of these Properties. As of December 31, 2002, we had approximately 753
Expansion Sites available for occupancy in 25 of the Properties. We filled 154
Expansion Sites in 2002 and expect to fill an additional 150 to 200 Expansion
Sites in 2003.
LEASES
At our Communities a typical lease entered into between the resident and
the Company for the rental of a site is for a month-to-month or year-to-year
term, renewable upon the consent of both parties or, in some instances, as
provided by statute. These leases are cancelable, depending on applicable law,
for non-payment of rent, violation of Community rules and regulations or other
specified defaults. Non-cancelable long-term leases, with remaining terms
ranging up to ten years, are in effect at certain sites within 25 of the
Communities. Some of these leases are subject to rental rate increases based on
the Consumer Price Index ("CPI"), in some instances taking into consideration
certain floors and ceilings and allowing for pass-throughs of certain items such
as real estate taxes, utility expenses and capital expenditures. Generally,
market rate adjustments are made on an annual basis.
REGULATIONS AND INSURANCE
General. Our Properties are subject to various laws, ordinances and
regulations, including regulations relating to recreational facilities such as
swimming pools, clubhouses and other common areas. We believe that each Property
has the necessary permits and approvals to operate.
5
Rent Control Legislation. At certain of our Communities, state and local
rent control laws, principally in California, limit our ability to increase
rents and to recover increases in operating expenses and the costs of capital
improvements. Enactment of such laws has been considered from time to time in
other jurisdictions. We presently expect to continue to maintain Communities,
and may purchase additional Communities, in markets that are either subject to
rent control or in which rent-limiting legislation exists or may be enacted. For
example, Florida has enacted a law that generally provides that rental increases
must be reasonable. Also, certain jurisdictions in California in which we own
Communities limit rent increases to changes in the CPI or some percentage
thereof. As part of our effort to realize the value of our Properties subject to
restrictive regulation, we have initiated lawsuits against several
municipalities imposing such regulation in an attempt to balance the interests
of our shareholders with the interests of our residents
Insurance. We believe that the Properties are covered by adequate fire,
flood, property, earthquake and business interruption insurance (where
appropriate) provided by reputable companies and with commercially reasonable
deductibles and limits. Due to the lack of available commercially reasonable
coverage, we are self-insured for terrorist incidents, except at certain
Properties where terrorist insurance coverage is required by debt covenants. We
believe our insurance coverage is adequate based on our assessment of the risks
to be insured, the probability of loss and the relative cost of available
coverage. We have obtained title insurance insuring title to the Properties in
an aggregate amount which we believe to be adequate.
INDUSTRY
THE INDUSTRY
We believe that modern Properties similar to ours provide an opportunity
for increased cash flows and appreciation in value. These may be achieved
through increases in occupancy rates and rents, as well as expense controls,
expansion of existing Properties and opportunistic acquisitions, for the
following industry specific reasons:
- Barriers to Entry: We believe that the supply of new Properties will
be constrained due to barriers to entry into the industry. The most
significant barrier has been the difficulty in securing zoning from
local authorities. This has been the result of (i) the public's
historically poor perception of the industry, and (ii) the fact that
Properties generate less tax revenue because the homes are treated
as personal property (a benefit to the home owner) rather than real
property. Another factor that creates substantial barriers to entry
is the length of time between investment in a Community's
development and the attainment of stabilized occupancy and the
generation of revenues. The initial development of the
infrastructure may take up to two or three years. Once the Community
is ready for occupancy, it may be difficult to attract residents to
an empty Community. Substantial occupancy levels may take several
years to achieve.
- Industry Consolidation: According to an industry analyst's industry
report, there are approximately 50,000 Communities in the United
States, and approximately 6.5% or 3,250 of the Communities have more
than 200 sites and would be considered "investment-grade"
properties. The five public REITs that own Communities own
approximately 531 or about 16% of the "investment-grade"
Communities. In addition, based on a report prepared by one analyst,
the top 150 owners of Communities own approximately 69% of the
"investment-grade" assets. We believe that this relatively high
degree of fragmentation in the industry provides us, as a national
organization with experienced management and substantial financial
resources, the opportunity to purchase additional Communities.
- Stable Tenant Base: We believe that Communities tend to achieve and
maintain a stable rate of occupancy due to the following factors:
(i) residents own their own homes, (ii) Communities tend to foster a
sense of community as a result of amenities such as clubhouses,
recreational and social activities and (iii) since moving a Site Set
home from one Community to another involves substantial cost and
effort, residents often sell their home in-place (similar to
site-built residential housing) with no interruption of rental
payments.
SITE SET HOUSING
Based on the current growth in the number of individuals living in Site
Set homes, we believe that Site Set homes are increasingly viewed by the public
as an attractive and economical form of housing.
We believe that the growing popularity of Site Set housing is primarily
the result of the following factors:
- - Importance of Home Ownership. According to the Fannie Mae 2001 National
Housing Survey ("FNMA Survey") renters' desire to own a home continues to
be a top priority.
6
- - Affordability. For a significant number of people, Site Set housing
represents the only means of achieving home ownership. In addition, the
total cost of housing in a Property (home cost, site rent and related
occupancy costs) is competitive with and often lower than the total cost
of alternative housing, such as apartments and condominiums, and generally
substantially lower than "stick-built" residential alternatives.
- - Lifestyle Choice. As the average age of the United States population has
increased, Site Set housing has become an increasingly popular housing
alternative for retirement and "empty-nest" living. According to the FNMA
Survey, the baby-boom generation - the 80 million people born between 1945
and 1964 - will constitute 18% of the U.S. population within the next 30
years and more than 32 million will reach age 55 within the next ten
years. Among those individuals who are nearing retirement (age 40 to 54),
approximately 33% plan on moving upon retirement. We believe that Site Set
housing is especially attractive to such individuals when located within a
Property that offers an appealing amenity package, close proximity to
local services, social activities, low maintenance and a secure
environment.
- - Construction Quality. Since 1976, all Site Set housing has been required
to meet stringent Federal standards, resulting in significant increases in
the quality of the industry's product. The Department of Housing and Urban
Development's standards for Site Set housing construction quality are the
only Federally regulated standards governing housing quality of any type
in the United States. Site Set homes produced since 1976 have received a
"red and silver" government seal certifying that they were built in
compliance with the Federal code. The code regulates Site Set home design
and construction, strength and durability, fire resistance and energy
efficiency, and the installation and performance of heating, plumbing, air
conditioning, thermal and electrical systems. In newer homes, top grade
lumber and dry wall materials are common. Also, manufacturers are required
to follow the same fire codes as builders of site-built structures.
- - Comparability to Site-Built Homes. The Site Set housing industry has
experienced a trend towards multi-section homes. Many modern Site Set
homes are longer (up to 80 feet compared to 50 feet in the 1960's) and
wider than earlier models. Many such homes have vaulted ceilings,
fireplaces and as many as four bedrooms, and closely resemble single
family ranch style site-built homes.
AVAILABLE INFORMATION
We file reports electronically with the Securities and Exchange
Commission. The public may read and copy any materials we file with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW., Washington, DC 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy information and statements, and other information
regarding issuers that file electronically with the SEC at http://www.sec.gov.
We maintain an Internet site with information about the Company and hyperlinks
to our filings with the SEC at http://www.mhchomes.com. Requests for copies of
our filings with the SEC and other investor inquiries should be directed to:
Investor Relations Department
Manufactured Home Communities, Inc.
Two North Riverside Plaza
Chicago, Illinois 60606
Phone: 1-800-247-5279
e-mail: investor_relations@mhchomes.com
7
ITEM 2. PROPERTIES
Our Properties provide attractive amenities and common facilities that
create a comfortable and attractive home for our residents, with most offering a
clubhouse, a swimming pool, laundry facilities and cable television service.
Many also offer additional amenities such as sauna/whirlpool spas, golf courses,
tennis, shuffleboard and basketball courts and exercise rooms. Since residents
in our Properties own their homes, it is their responsibility to maintain their
homes and the surrounding area. It is our role to ensure that residents comply
with our Property policies and to provide maintenance of the common areas,
facilities and amenities. We hold periodic meetings with our Property management
personnel for training and implementation of our strategies. The Properties
historically have had, and we believe they will continue to have, low turnover
and high occupancy rates.
The distribution of our Properties throughout the United States reflects
our belief that geographic diversification helps insulate the portfolio from
regional economic influences. We intend to target new acquisitions in or near
markets where our Properties are located and will also consider acquisitions of
Properties outside such markets. The following table identifies our five largest
markets and provides information regarding our Properties including Communities
owned in joint ventures.
NUMBER OF PERCENT OF PERCENT OF TOTAL
MAJOR MARKET PROPERTIES TOTAL SITES TOTAL SITES REVENUES
------------ ---------- ----------- ----------- --------
Florida 51 23,038 44.66% 38.61%
California 25 6,215 12.05% 19.96%
Arizona 19 5,413 10.49% 8.76%
Colorado 10 3,455 6.70% 8.54%
Delaware 7 2,238 4.34% 4.10%
Other 30 11,223 21.76% 20.03%
--- ------ ------ ------
Total 142 51,582 100.00% 100.00%
=== ====== ====== ======
Our largest Property, Bay Indies, located in Venice, Florida, accounted for 2.7%
of our total revenues for the year ended December 31, 2002.
The following table lists our Resort Properties and those Communities in
which we have a non-controlling joint venture interest:
NUMBER
OF SITES
LOCATION AS OF
PROPERTY CITY, STATE 12/31/02
- ---------------------------- ---------------------- ---------------
RESORT PROPERTIES
Mt Hood Welches OR 436
Fun & Sun San Benito TX 1,435
Southern Palms Eustis FL 950
Sherwood Forest RV Kissimmee FL 512
Bulow RV Flagler Beach FL 352
Tropic Winds Harlingen TX 531
Countryside Apache Junction AZ 560
Golden Sun Apache Junction AZ 329
Breezy Hill Pompano Beach FL 762
Highland Wood Pompano Beach FL 148
Date Palm RV Cathedral City CA 140
--------
TOTAL RESORT PROPERTY SITES 6,155
--------
COMMUNITIES OWNED IN JOINT VENTURES
Trails West Tucson AZ 503
Plantation Calimesa CA 385
Manatee Bradenton FL 290
Home Hallandale FL 136
Villa del Sol Sarasota FL 207
Voyager RV Resort Tuscon AZ --
Preferred Interests in College Heights --
--------
TOTAL SITES OWNED IN JOINT VENTURES 1,521
--------
8
The following table sets forth certain information relating to the
Communities we owned as of December 31, 2002, categorized by our major markets.
We define our core Community portfolio ("Core Portfolio") as Communities owned
throughout both periods of comparison. Excluded from the Core Portfolio are any
Communities acquired or sold during the period, any Resort Properties and any
Communities owned through joint ventures which, together, are referred to as the
"Non-Core" Properties. The following table excludes Resort Properties and any
Communities owned through joint Ventures.
NUMBER MONTHLY MONTHLY
OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT
LOCATION AS OF AS OF AS OF AS OF AS OF
PROPERTY CITY, STATE 12/31/02 12/31/02 12/31/01 12/31/02 12/31/01
- --------------------------------- ------------------------ -------- --------- --------- --------- ----------
FLORIDA
EAST COAST:
Bulow Plantation Flagler Beach FL 276 97.5% (b) 99.4% (b) $322 $258
Carriage Cove Daytona Beach FL 418 95.7% 97.4% $426 $399
Coquina Crossing St Augustine FL 361 84.5% (b) 91.1% (b) $324 $317
Coral Cay at Vero Beach Margate FL 819 91.5% 93.4% $435 $428
Countryside North Vero Beach FL 646 96.6% (b) 95.7% (b) $324 $315
Heritage Village Vero Beach FL 436 96.1% 97.0% $354 $346
Holiday Village Vero Beach FL 128 72.7% 78.1% $307 $286
Holiday Village Ormond Beach FL (a) 301 87.4% (d) $313 (d)
Indian Oaks Rockledge FL 211 98.1% (b) 96.2% (b) $260 $243
Lakewood Village Melbourne FL 349 92.8% 95.1% $387 $359
Lighthouse Pointe Port Orange FL 433 89.1% (b) 88.9% (b) $324 $308
Maralago Cay Lantana FL 602 94.5% 96.3% $437 $417
Pickwick Port Orange FL 432 98.6% 97.2% $335 $310
The Meadows Palm Beach Gardens FL 388 85.3% (b) 82.6% (b) $373 $331
CENTRAL:
Grand Island Grand Island FL (a) 307 71.5% (b) 76.4% (b) $291 $282
Mid-Florida Lakes Leesburg FL 1,226 88.6% (b) 91.1% (b) $339 $325
Oak Bend Ocala FL 262 88.2% (b) 87.4% (b) $292 $250
Sherwood Forest Kissimmee FL 769 96.9% (b) 96.6% (b) $345 $334
Villas at Spanish Oaks Ocala FL 459 91.5% 93.9% $317 $301
GULF COAST (TAMPA/NAPLES):
Bay Indies Venice FL 1,309 98.2% 98.9% $345 $323
Bay Lake Estates Nokomis FL 228 95.6% 96.1% $424 $370
Buccaneer N. Ft. Myers FL 971 98.5% 99.1% $348 $331
Country Place New Port Richey FL 515 99.4% (b) 97.9% (b) $272 $237
Down Yonder Largo FL 362 99.2% 99.4% $388 $375
East Bay Oaks Largo FL 328 96.0% 97.3% $391 $367
Eldorado Village Largo FL 227 94.3% 96.0% $391 $370
Glen Ellen Clearwater FL (a) 117 76.9% (d) $322 (d)
Hacienda Village New Port Richey Fl (a) 519 95.0% (d) $333 (d)
Harbor View New Port Richey FL (a) 471 98.9% (d) $228 (d)
Hillcrest Clearwater FL 279 83.9% 84.2% $367 $345
Holiday Ranch Largo FL 150 92.7% 92.7% $353 $341
Lake Fairways N. Ft. Myers FL 896 99.2% 99.1% $376 $364
Lake Haven Dunedin FL 379 89.7% 92.9% $399 $382
Lakes at Countrywood Plant City FL (a) 423 94.8% (b) 96.5% (b) $256 $246
Meadows at Countrywood Plant City FL 737 99.1% 98.9% $299 $285
Oaks at Countrywood Plant City FL 168 70.8% (b) 67.9% (b) $256 $248
Pine Lakes N. Ft. Myers FL 584 99.3% 99.1% $458 $439
Silk Oak Clearwater FL (a) 180 93.3% (d) $358 (d)
The Heritage N. Ft. Myers FL 455 87.3% (b) 83.5% (b) $319 $306
Windmill Manor Bradenton FL 292 94.9% 95.9% $370 $357
Windmill Village N. Ft. Myers FL 491 96.3% 98.6% $323 $310
Windmill Village North Sarasota FL 471 98.1% 98.5% $346 $332
Windmill Village South Sarasota FL 306 99.7% 99.3% $364 $332
------ ---- ---- ---- ----
TOTAL FLORIDA MARKET 19,681 94.0% 98.7% $346 $307
------ ---- ---- ---- ----
FLORIDA MARKET - CORE PORTFOLIO 17,363 94.4% 97.4% $363 $343
------ ---- ---- ---- ----
9
NUMBER MONTHLY MONTHLY
OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT
LOCATION AS OF AS OF AS OF AS OF AS OF
PROPERTY CITY, STATE 12/31/02 12/31/02 12/31/01 12/31/02 12/31/01
- ------------------------------------ ------------------ ---------- ----------- ----------- --------- ----------
CALIFORNIA
NORTHERN CALIFORNIA:
California Hawaiian San Jose CA 418 97.6% 98.1% $675 $636
Colony Park Ceres CA 178 93.8% 86.0% $375 $353
Concord Cascade Pacheco CA 283 98.9% 98.9% $560 $544
Contempo Marin San Rafael CA 396 98.7% 98.7% $674 $644
Coralwood Modesto CA 194 99.0% 97.4% $438 $413
Four Seasons Fresno CA 242 75.6% 73.6% $267 $254
Laguna Lake San Luis Obispo CA 290 99.7% 99.7% $368 $344
Monte del Lago Castroville CA 310 97.7% (b) 97.8% (b) $560 $513
Quail Meadows Riverbank CA 146 100.0% 100.0% $390 $363
Royal Oaks Visalia CA 149 81.9% 81.9% $290 $273
DeAnza Santa Cruz Santa Cruz CA 198 99.0% 99.5% $558 $526
Sea Oaks Los Osos CA 125 97.6% 100.0% $418 $349
Sunshadow San Jose CA 121 100.0% 100.0% $651 $605
Westwinds (4 Properties) San Jose CA 723 99.2% 98.9% $719 $656
SOUTHERN CALIFORNIA:
Date Palm Country Club Cathedral City CA 538 94.1% 95.9% $679 $640
Lamplighter Spring Valley CA 270 99.3% 98.1% $642 $565
Meadowbrook Santee CA 332 100.0% 99.1% $627 $603
Rancho Mesa El Cajon CA 158 99.4% 99.4% $567 $535
Rancho Valley El Cajon CA 140 100.0% 98.6% $627 $550
Royal Holiday Hemet CA 179 67.0% 64.2% $285 $277
Santiago Estates Sylmar CA 300 96.3% 96.0% $646 $617
----- ---- ---- ---- ----
TOTAL CALIFORNIA MARKET 5,690 95.8% 95.4% $568 $531
----- ---- ---- ---- ----
CALIFORNIA MARKET - CORE PORTFOLIO 5,690 95.8% 95.4% $568 $531
----- ---- ---- ---- ----
ARIZONA
Apollo Village Phoenix AZ 236 83.9% (b) 91.6% (b) $401 $371
The Highlands at
Brentwood Mesa AZ 273 88.9% 93.8% $475 $456
Carefree Manor Phoenix AZ 128 92.2% 97.7% $353 $322
Casa del Sol #1 Peoria AZ 245 81.2% 86.6% $460 $422
Casa del Sol #2 Glendale AZ 239 86.6% 94.1% $477 $455
Casa del Sol #3 Glendale AZ 236 89.8% 94.1% $477 $439
Central Park Phoenix AZ 293 92.5% 95.2% $409 $386
Desert Skies Phoenix AZ 164 93.9% 97.6% $338 $317
Fairview Manor Tucson AZ 235 85.1% 91.1% $342 $326
Hacienda de Valencia Mesa AZ 364 79.4% 85.2% $395 $377
Palm Shadows Glendale AZ 294 87.1% 90.8% $372 $355
Sedona Shadows Sedona AZ 198 93.4% 91.4% $355 $327
Sunrise Heights Phoenix AZ 199 88.4% 90.5% $386 $358
The Mark Mesa AZ 410 74.9% 91.7% $392 $383
The Meadows Tempe AZ 391 85.2% 92.3% $455 $439
Whispering Palms Phoenix AZ 116 93.1% 94.8% $295 $282
----- ---- ---- ---- ----
TOTAL ARIZONA MARKET 4,021 85.9% 91.9% $410 $385
----- ---- ---- ---- ----
ARIZONA MARKET - CORE PORTFOLIO 4,021 85.9% 91.9% $410 $385
----- ---- ---- ---- ----
10
NUMBER MONTHLY MONTHLY
OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT
LOCATION AS OF AS OF AS OF AS OF AS OF
PROPERTY CITY, STATE 12/31/02 12/31/02 12/31/01 12/31/02 12/31/01
- ----------------------------------- ---------------- ----------- ---------- ----------- ------------ --------------
COLORADO
Bear Creek Sheridan CO 124 97.6% 97.6% $446 $409
Cimarron Broomfield CO 327 97.6% 98.2% $445 $417
Golden Terrace Golden CO 265 96.6% 98.6% $491 $464
Golden Terrace South Golden CO 160 95.0% 96.3% $487 $441
Golden Terrace West Golden CO 316 96.5% 98.1% $498 $454
Hillcrest Village Aurora CO 601 91.7% 95.5% $491 $445
Holiday Hills Denver CO 736 92.3% 95.4% $466 $437
Holiday Village Co. Springs CO 240 92.9% 96.7% $446 $427
Pueblo Grande Pueblo CO 252 96.4% 96.8% $296 $281
Woodland Hills Denver CO 434 93.8% 97.9% $439 $418
----- ---- ---- ---- ----
TOTAL COLORADO MARKET 3,455 94.2% 96.8% $394 $424
----- ---- ---- ---- ----
COLORADO MARKET - CORE PORTFOLIO 3,455 94.2% 96.8% $394 $424
----- ---- ---- ---- ----
NORTHEAST
Aspen Meadows Rehoboth DE 200 100.0% 99.5% $277 $262
Camelot Meadows Rehoboth DE 302 100.0% 99.9% $272 $265
Mariners Cove Millsboro DE 374 90.0% (b) 89.3% (b) $399 $381
McNicol Rehoboth DE 93 100.0% 98.9% $278 $258
Sweetbriar Rehoboth DE 146 95.9% 98.6% $228 $199
Waterford Bear DE 731 96.4% (b) 97.4% (b) $410 $398
Whispering Pines Lewes DE 392 95.2% 95.2% $274 $269
Pheasant Ridge Mt. Airy MD 101 98.0% 97.0% $468 $453
Brook Gardens Lackawanna NY 424 93.9% 96.5% $446 $435
Greenwood Village Manorville NY 507 99.3% 99.4% $406 $389
Green Acres Breinigsville PA 595 94.8% 96.1% $438 $420
Meadows of Chantilly Chantilly VA 500 94.8% 96.6% $544 $512
Independence Hill Morgantown WV 203 87.2% 88.2% $221 $214
----- ---- ---- ---- ----
TOTAL NORTHEAST MARKET 4,568 95.6% 96.3% $387 $372
----- ---- ---- ---- ----
NORTHEAST MARKET - CORE PORTFOLIO 4,568 95.6% 96.3% $387 $372
----- ---- ---- ---- ----
11
NUMBER MONTHLY MONTHLY
OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT
LOCATION AS OF AS OF AS OF AS OF AS OF
PROPERTY CITY, STATE 12/31/02 12/31/02 12/31/01 12/31/02 12/31/01
- -------------------------------------------------- ----------------- -------- --------- ---------- ---------- ---------
MIDWEST
Five Seasons Cedar Rapids IA 390 76.4% (b) 79.0% (b) $264 $253
Holiday Village Sioux City IA 519 73.8% 80.5% $253 $248
Golf Vista Estates Monee IL 411 88.1% (b) 88.4% (b) $393 $387
Willow Lake Estates Elgin IL 617 94.2% 96.8% $660 $624
Forest Oaks Chesterton IN 227 76.2% 83.7% $333 $305
Oak Tree Village Portage IN 361 88.9% 90.0% $332 $302
Windsong Indianapolis IN 268 72.0% 84.0% $309 $292
Creekside Wyoming MI 165 93.3% 94.5% $382 $374
----- ---- ---- ---- ----
TOTAL MIDWEST MARKET 2,958 83.3% 87.9% $399 $380
----- ---- ---- ---- ----
MIDWEST MARKET - CORE PORTFOLIO 2,958 83.3% 87.9% $399 $380
----- ---- ---- ---- ----
NEVADA, UTAH, NEW MEXICO
Del Rey Albuquerque NM 407 76.7% 84.5% $341 $328
Bonanza Las Vegas NV 353 72.8% 75.9% $473 $465
Boulder Cascade Las Vegas NV 299 82.1% 86.9% $436 $417
Cabana Las Vegas NV 263 95.4% 97.3% $442 $432
Flamingo West Las Vegas NV 258 88.8% (b) 84.1% (b) $449 $430
Villa Borega Las Vegas NV 293 87.0% 91.1% $433 $421
All Seasons Salt Lake City UT 121 96.7% 98.3% $352 $328
Westwood Village Farr West UT 314 95.2% (b) 96.5% (b) $259 $237
----- ---- ---- ---- ----
TOTAL NEVADA, UTAH, NEW MEXICO MARKET 2,308 85.2% 88.1% $398 $383
----- ---- ---- ---- ----
NEVADA, UTAH, NEW MEXICO MARKET - CORE PORTFOLIO 2,308 85.2% 88.1% $398 $380
----- ---- ---- ---- ----
NORTHWEST
Casa Village Billings MT 491 88.0% 92.3% $294 $282
Falcon Wood Village Eugene OR 183 92.9% 97.8% $364 $363
Quail Hollow Fairview OR 137 93.4% 97.8% $500 $442
Shadowbrook Clackamas OR 156 96.8% 98.7% $494 $444
Kloshe Illahee Federal Way WA 258 99.6% 99.6% $513 $478
------ ---- ---- ---- ----
TOTAL NORTHWEST MARKET 1,225 92.9% 96.1% $397 $374
------ ---- ---- ---- ----
NORTHWEST MARKET - CORE PORTFOLIO 1,225 92.9% 96.1% $397 $374
------ ---- ---- ---- ----
GRAND TOTAL ALL MARKETS 43,906 92.2% 93.0% $403 $385
====== ==== ==== ==== ====
GRAND TOTAL ALL MARKETS - CORE PORTFOLIO 41,588 92.5% (c) 94.0% (c) $409 $387
====== ==== ==== ==== ====
(a) Represents a Property that is not part of the Core Portfolio.
(b) The process of filling Expansion Sites at these Properties is ongoing. A
decrease in occupancy may reflect development of additional Expansion
Sites.
(c) Changes in total portfolio occupancy include the impact of acquisitions
and expansion programs and are therefore not comparable.
(d) Property acquired in 2002.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations.
12
ITEM 3. LEGAL PROCEEDINGS
DEANZA SANTA CRUZ MOBILE ESTATES
The residents of DeAnza Santa Cruz Mobile Estates, a property located in
Santa Cruz, California, brought several actions opposing fees and charges in
connection with water service at the property. As a result of one action, the
Company rebated approximately $36,000 to the residents. The DeAnza Santa Cruz
Homeowners Association then proceeded to a jury trial alleging these
"overcharges" entitled them to an award of punitive damages. In January 1999, a
jury awarded the HOA $6.0 million in punitive damages. On December 21, 2001 the
California Court of Appeal for the Sixth District reversed the $6.0 million
punitive damage award, the related award of attorneys' fees, and, as a result,
all post-judgment interest thereon, on the basis that punitive damages are not
available as a remedy for a statutory violation of the California Mobile Home
Residency Law ("MRL"). The decision of the appellate court left the HOA, the
plaintiff in this matter, with the right to seek a new trial in which it must
prove its entitlement to either the statutory penalty and attorneys' fees
available under the MRL or punitive damages based on causes of action for fraud,
misrepresentation or other tort. In order to resolve this matter, the Company
accrued for and agreed to pay $201,000 to the HOA. This payment resolves the
punitive damage claim. The HOA's attorney has made a motion asking for an award
of attorneys' fees and costs in the amount of approximately $1.5 million as a
result of this resolution of the litigation. The Company will vigorously oppose
any award of attorneys' fees and costs, and has asked the court to rule that the
Company is the prevailing party.
In a separate matter, in December 2000 the HOA and certain individual
residents of the Property filed a complaint in the Superior Court of California,
County of Santa Cruz (No. CV 139825) against the Company, certain affiliates of
the Company and certain employees of the Company (the "2000 Lawsuit"). The 2000
Lawsuit sought damages, including punitive damages, for intentional infliction
of emotional distress, unfair business practices, and unlawful retaliation
purportedly arising from allegedly retaliatory rent increases which were noticed
by the Company to certain residents in September 2000. The Company believes that
the residents who received rent increase notices with respect to rent increases
above those permitted by the local rent control ordinance were not covered by
the ordinance either because they did not comply with the provisions of the
ordinance or because they are exempted by state law. On December 29, 2000, the
Superior Court of California, County of Santa Cruz enjoined such rent increases.
The Company entered into a settlement agreement with the plaintiffs in the
2000 Lawsuit which settlement was approved by the court on July 22, 2002. The
Company believes the settlement agreement is of significant benefit to the
Company. First, pursuant to the settlement agreement all past, present and
future tenants of the Property agree to alternative dispute resolution
procedures which provide that during the next 25 years future disputes will be
resolved through arbitration before a retired judge rather than in court, and
that in such future arbitration proceedings all claims to trial by jury and for
punitive damages are waived.
Second, the settlement agreement provides a process for determining the
rent for 15 sites not subject to rent control, including in certain
circumstances, back rent owing from certain dates in 2001. The settlement
agreement generally gives tenants at these sites three (3) options with respect
to their tenancies. Such tenants may (1) enter into a 34-year lease providing a
rent based on rent control with future escalations based on the CPI, but with
the Company retaining the right to charge market rents determined by the Company
upon turnover; (2) enter into a ten (10) year lease with a monthly rent to be
determined by binding arbitration and effective October 1, 2001; or (3) elect to
sell such tenant's home to a third party and pay back rent owing to the Company
(the amount of which will be determined by arbitration if not agreed to between
the tenant and the Company) since January 1, 2001. In certain circumstances the
Company will purchase the tenant's home based upon a mechanism provided in the
settlement agreement.
In exchange for the tenants' agreement to the alternative dispute
resolution procedures, the process for resolving back rent owed by tenants not
subject to rent control, and to dismiss the 2000 Lawsuit, the Company accrued
for and agreed to pay $730,000.
OTHER CALIFORNIA RENT CONTROL LITIGATION
As part of the Company's effort to realize the value of its Properties
subject to rent control, the Company has initiated lawsuits against several
municipalities in California. The Company's goal is to achieve a level of
regulatory fairness in California's rent control jurisdictions, and in
particular those jurisdictions that prohibit increasing rents to market upon
turnover. This regulatory feature, called vacancy control, allows tenants to
sell their homes for a premium representing the value of the future discounted
rent-controlled rents. In the Company's view, such regulation results in a
transfer of the value of the Company's shareholders' land, which would otherwise
be reflected in market rents, to tenants upon the sales of their homes in the
form of an inflated purchase price that cannot be attributed to the value of the
home being sold. As a result, in the Company's view, the Company loses the value
of its asset and the selling tenant leaves the community with a windfall
13
premium. The Company has discovered through the litigation process that certain
municipalities considered condemning the Company's communities at values well
below the value of the underlying land. In the Company's view, a failure to
articulate market rents for sites governed by restrictive rent control would put
the Company at risk for condemnation or eminent domain proceedings based on
artificially reduced rents. Such a physical taking, should it occur, could
represent substantial lost value to shareholders. The Company is cognizant of
the need for affordable housing in the jurisdictions, but asserts that
restrictive rent regulation with vacancy control does not promote this purpose
because the benefits of such regulation are fully capitalized into the prices of
the homes sold. The Company estimates that the annual rent subsidy to tenants in
these jurisdictions is approximately $15 million. In a more well-balanced
regulatory environment, the Company would receive market rents that would
eliminate the subsidy and homes would trade at or near their intrinsic value.
The Company's efforts to achieve a balanced regulatory environment
incentivize tenant groups to file lawsuits against the Company seeking large
damage awards. The 2000 Lawsuit described above under DeAnza Santa Cruz Mobile
Estates is one example. The homeowners association at Contempo Marin ("CMHOA"),
a 396 site property in San Rafael, California, sued the Company in December 2000
over a prior settlement agreement on a capital pass-through after the Company
sued the City of San Rafael in October 2000 alleging its rent control ordinance
is unconstitutional. In the Contempo Marin case, the CMHOA prevailed on a motion
for summary judgment on an issue that permits the Company to collect only $3.72
out of a pass-through amount of $7.50 that the Company believes had been agreed
to by the CMHOA in a settlement agreement. The Company intends to vigorously
defend the matter. The Company believes that such lawsuits will be a consequence
of the Company's efforts to change rent control since tenant groups actively
desire to preserve the premium value of their homes in addition to the
discounted rents provided by rent control. The Company has determined that its
efforts to rebalance the regulatory environment despite the risk of litigation
from tenant groups are necessary not only because of the $15 million annual
subsidy to tenants, but also because of the condemnation risk.
ELLENBURG COMMUNITIES
The Company and certain other parties entered into a settlement agreement
(the "Settlement"), which was approved by the Los Angeles County Superior Court
in April 2000. The Settlement resolved substantially all of the litigation and
appeals involving the Ellenburg Properties, and transactions arising out of the
settlement closed on May 22, 2000. Only the appeal of one entity remains, the
outcome of which is not expected to materially affect the Company (see Note 5).
In connection with the Ellenburg Acquisition, on September 8, 1999,
Ellenburg Fund 20 ("Fund 20") filed a cross complaint in the Ellenburg
dissolution proceeding against the Company and certain of its affiliates
alleging causes of action for fraud and other claims in connection with the
Ellenburg acquisition. The Company subsequently successfully had the cross
complaint against the Company and its affiliates dismissed with prejudice by the
California Superior Court. However, Fund 20 has appealed. Although this appeal
was one not resolved by the Settlement, the California Court of Appeal dismissed
Fund 20's substantive appeals on March 13, 2003 as moot.
In October 2001, Fund 20 sued the Company and certain of its affiliates
again, this time in Alameda County, California making substantially the same
allegations. The Company obtained an injunction preventing the case from
proceeding until the Fund 20 appeal is decided and other related proceedings in
Arizona (from which the Company has already been dismissed with prejudice) are
concluded. When the March 13, 2003 Court of Appeal dismissal becomes final in
May 2003, the Company will seek to have the Alameda County action dismissed if
Fund 20 will not voluntarily dismiss this action. The Company believes Fund 20's
allegations are without merit and will vigorously defend itself.
COUNTRYSIDE AT VERO BEACH
The Company has received letters dated June 17, 2002 and August 26, 2002
from Indian River County ("County"), claiming that the Company currently owes
sewer impact fees in the amount of approximately $518,000 with respect to the
Property known as Countryside at Vero Beach, located in Vero Beach, Florida,
purportedly under the terms of an agreement between the County and a prior owner
of the Property. In response, the Company has advised the County that these fees
are no longer due and owing as a result of a 1996 settlement agreement between
the County and the prior owner of the Property, providing for the payment of
$150,000 to the County to discharge any further obligation for the payment of
impact or connection fees for sewer service at the Property. The Company paid
this settlement amount (with interest) to the County in connection with the
Company's acquisition of the Property. Accordingly, the Company believes that
the County's claims are without merit.
DELAWARE DECLARATORY JUDGMENT ACTION
In April 2002, the Company entered into a Stipulation and Consent Order to
Cease and Desist (the "Consent Order") with the State of Delaware (the "State").
The Consent Order resolved various issues raised by the State concerning the
terms of a
14
new lease form used or proposed for use by the Company at certain of its
Properties in Delaware. Among other provisions, the Consent Order contemplated
that the Company would work with the State to develop and implement a new lease
form for use in Delaware. The Consent Order expressly provided that nothing
contained therein would preclude the Company from seeking declaratory relief
from a court as to the legality or enforceability of any provisions which the
Company might wish to incorporate in future leases.
Throughout the summer of 2002, the Company's Delaware legal counsel
engaged in dialogue with representatives of the State concerning various
matters, including the lease provisions to which the State had objected but
which the Company wished to incorporate in future leases. Through this process,
it became apparent that the parties could not reach agreement as to the legality
or enforceability of the proposed lease provisions, and that the Company would
need to seek declaratory relief from a court in order to resolve the matter, as
contemplated by the Consent Order. Accordingly, on August 29, 2002, the Company
filed a Petition for Declaratory Judgment and Other Relief (as amended, the
"Petition") in Sussex County, Delaware Superior Court (the "Court").
In response to the filing of the Petition, on October 1, 2002, the State
filed its Answer to Petition for Declaratory and Other Relief, and Counterclaims
for Civil Enforcement and Contempt (as amended, "Answer and Counterclaim") with
the Court. In the Answer and Counterclaim, the State seeks, inter alia,
restitution, statutory penalties, investigative costs and attorneys' fees under
the Delaware Mobile Home Lots and Leases Act, the Consumer Fraud Act, the
Uniform Deceptive Trade Practices Act and the Delaware Consumer Contracts law,
and separately seeks a finding of contempt and related contempt penalties for
alleged violations of the Consent Order.
The Company filed a Motion to Dismiss Respondents' Counterclaims with the
Court on October 29, 2002, and the State filed a Motion for Summary Judgment
with the Court on November 15, 2002. These motions are in the briefing stage. On
December 30, 2002, the Company filed a First Amended Petition for Declaratory
Judgment and Other Relief with the Court, and on January 31, 2003, the State
filed an Amended Answer and Counterclaim with the Court. The State filed a
Motion to Dismiss with Prejudice Petitioner's First Amended Petition for
Declaratory Judgment an Other Relief for Failure to Join and Indispensable Third
Party with the Court on February 25, 2003.
The Company believes that it has complied, and continues to comply, with
the Consent Order, and that the filing of the Petition was expressly
contemplated by the Consent Order. The Company believes that the State's
allegations in the Answer and Counterclaim are without merit and will vigorously
defend itself.
WESTWINDS
The Operating Partnership is the ground lessee ("Lessee") of certain
property in San Jose, California under ground leases ("Leases") from the
Nicholson Family Trust ("Lessor"). On February 13, 2001, Lessor filed a petition
for arbitration of disputes over whether certain items constitute "gross
revenue" under the Leases, in which petition Lessor seeks damages and
termination of the Leases. Lessee responded on March 12, 2001 disputing Lessor's
contentions. Lessor claims that "gross revenue" for the purpose of calculating
percentage rent owing to Lessor under the Leases includes certain amounts Lessee
has recouped from tenants of the Property (who are protected by rent control)
related to ground rent already paid to Lessor. Lessee has successfully been able
to pass-through to tenants at the Property increases in ground rent under the
Leases. Lessee contends that this pass-through results in reimbursement of lease
expense, not "gross revenue." Lessor also contends that the "net income" of RSI
from the Property should be included in the gross revenue calculation. Lessee
disputes this for many reasons, including, but not limited to, the fact that RSI
is not a lessee under the Leases, the sales activity is not conducted by Lessee,
and RSI is a separate company from Lessee.
Lessor's motion for summary judgment on the pass-through issue was denied
by an arbitration panel on November 2, 2001. Lessor and Lessee agreed to mediate
the dispute and the matter was settled and the lease was amended in early 2002.
Pursuant to the settlement and amendment, Lessee agreed to pay $338,000 related
to prior period rent which was expensed in the first quarter of 2002 and to
prepay rent of $632,000 based on a recalculation of rent in the amended lease.
The rent prepayment and related legal costs will be amortized into ground rent
expense over the remaining life of the lease.
OTHER
The Company is involved in various other legal proceedings arising in the
ordinary course of business. Management believes that all proceedings herein
described or referred to, taken together, are not expected to have a material
adverse impact on the Company.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company, for which proxies were
solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934,
was held on May 8, 2002. At the Annual Meeting, Samuel Zell, David A. Helfand
and Michael A. Torres were each elected to serve as directors of the Company
until the 2005 Annual Meeting of Stockholders.
Votes Cast
-----------------------------------
For Withheld
---------------- -------------
Samuel Zell 17,515,839 60,873
David A. Helfand 17,515,876 60,836
Michael A. Torres 17,523,492 53,220
There were 4,156,070 broker non-votes.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the period indicated, the high and low
sales prices for the Company's common stock as reported by The New York Stock
Exchange under the trading symbol MHC.
Distributions Return of Capital
Close High Low Made GAAP Basis (a)
-------- -------- -------- ------------- -----------------
2002
1st Quarter $33.0000 $33.6300 $30.6500 $.4750 $.15
2nd Quarter 35.1000 35.6600 32.5000 .4750 .18
3rd Quarter 31.8800 35.1400 30.0500 .4750 .17
4th Quarter 29.6300 31.9200 27.5000 .4750 .00
2001
1st Quarter $27.0000 $29.0000 $25.5400 $.4450 $.00
2nd Quarter 28.1000 28.3500 26.3100 .4450 .16
3rd Quarter 30.4200 30.4700 27.9000 .4450 .16
4th Quarter 31.2100 31.6700 29.8000 .4450 .11
(a) Represents distributions per share in excess of net income per share-basic
on a GAAP basis and is not the same as return of capital on a tax basis.
The number of beneficial holders of the Company's common stock at December 31,
2002 was approximately 5,065.
17
ITEM 6. SELECTED FINANCIAL AND OPERATING INFORMATION
The following table sets forth selected financial and operating
information on a historical basis for the Company. The following information
should be read in conjunction with all of the financial statements and notes
thereto included elsewhere in this Form 10-K. The historical operating data for
the years ended December 31, 2002, 2001, 2000, 1999 and 1998 have been derived
from the historical Financial Statements of the Company audited by Ernst & Young
LLP, independent auditors.
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(Amounts in thousands, except for per share and property data)
(1) YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
PROPERTY OPERATIONS:
Community base rental income ........................... $ 197,795 $ 194,103 $ 188,051 $ 180,348 $ 164,086
Resort base rental income .............................. 9,147 5,748 7,414 9,526 7,153
Utility and other income ............................... 19,713 20,403 19,378 19,569 17,617
--------- --------- --------- --------- ---------
Property operating revenues ......................... 226,655 220,254 214,843 209,443 188,856
Property operating and maintenance ..................... 63,554 61,481 58,661 57,595 52,481
Real estate taxes ...................................... 18,212 17,296 16,766 16,309 14,346
Property management .................................... 9,292 8,984 8,690 8,337 7,108
--------- --------- --------- --------- ---------
Property operating expenses ......................... 91,058 87,761 84,117 82,241 73,935
--------- --------- --------- --------- ---------
Income from property operations .................. 135,597 132,493 130,726 127,202 114,921
HOME SALES OPERATIONS:
Gross revenues from inventory home sales ............... 33,543 -- -- -- --
Cost of inventory home sales ........................... (27,192) -- -- -- --
--------- --------- --------- --------- ---------
Gross profit from inventory home sales ........... 6,351 -- -- -- --
Brokered resale revenues, net .......................... 1,592 -- -- -- --
Home selling expenses .................................. (7,671) -- -- -- --
Ancillary services revenues, net ....................... 522 -- -- -- --
--------- --------- --------- --------- ---------
Income from home sales operations ................ 794 -- -- -- --
OTHER INCOME AND EXPENSES:
Interest income ........................................ 967 639 1,009 1,669 1,070
Equity in income of affiliates ......................... -- 1,811 2,408 2,065 3,048
Other corporate income ................................. 1,277 1,353 670 280 355
General and administrative ............................. (8,192) (6,687) (6,423) (6,092) (5,411)
Interest and related amortization ...................... (50,729) (51,305) (53,280) (53,775) (49,693)
Depreciation on corporate assets ....................... (1,277) (1,243) (1,139) (1,005) (995)
Depreciation on real estate assets and other costs ..... (35,911) (34,728) (34,312) (34,393) (28,336)
--------- --------- --------- --------- ---------
Total other income and expenses ..................... (93,865) (90,160) (91,067) (91,251) (79,962)
--------- --------- --------- --------- ---------
Income from operations ................................. 42,526 42,333 39,659 35,951 34,959
Net income from discontinued operations ................ 1,083 1,043 989 884 704
Gain on sale of Properties and other ................... 13,014 8,168 12,053 -- --
--------- --------- --------- --------- ---------
Income before allocation to Minority Interests ...... 56,623 51,544 52,701 36,835 35,663
(Income) allocated to Common OP Units .................. (8,926) (8,209) (8,463) (6,219) (6,733)
(Income) allocated to Perpetual Preferred OP Units ..... (11,252) (11,252) (11,252) (2,844) --
--------- --------- --------- --------- ---------
Net income before extraordinary loss on the early
extinguishment of debt .............................. 36,445 32,083 32,986 27,772 28,930
Extraordinary loss on the extinguishment of debt (net of
$264 allocated to minority interests) .............. -- -- (1,041) -- --
--------- --------- --------- --------- ---------
NET INCOME ....................................... $ 36,445 $ 32,083 $ 31,945 $ 27,772 $ 28,930
========= ========= ========= ========= =========
Income from operations per Common Share - basic .......... $ 1.57 $ 1.60 $ 1.47 $ 1.16 $ 1.11
========= ========= ========= ========= =========
Income from operations per Common Share - diluted ........ $ 1.54 $ 1.57 $ 1.45 $ 1.15 $ 1.09
========= ========= ========= ========= =========
Net income per Common Share before
extraordinary item - basic ............................ $ 1.69 $ 1.53 $ 1.54 $ 1.10 $ 1.13
========= ========= ========= ========= =========
Net income per Common Share before
extraordinary item - diluted .......................... $ 1.64 $ 1.49 $ 1.51 $ 1.09 $ 1.12
========= ========= ========= ========= =========
Net income per Common Share - basic ...................... $ 1.69 $ 1.53 $ 1.49 $ 1.10 $ 1.13
========= ========= ========= ========= =========
Net income per Common Share - diluted .................... $ 1.64 $ 1.49 $ 1.46 $ 1.09 $ 1.12
========= ========= ========= ========= =========
Dividend declared per Common Share ....................... $ 1.90 $ 1.78 $ 1.66 $ 1.55 $ 1.45
========= ========= ========= ========= =========
Weighted average Common Shares outstanding - basic ....... 21,617 21,036 21,469 25,224 25,626
========= ========= ========= ========= =========
Weighted average Common OP Units outstanding ............. 5,403 5,466 5,592 5,704 5,955
========= ========= ========= ========= =========
Weighted average Common Shares outstanding - diluted ..... 27,632 27,010 27,408 31,252 31,962
========= ========= ========= ========= =========
18
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(continued)
(Amounts in thousands, except for per share and property data)
BALANCE SHEET DATA: (1) AS OF DECEMBER 31,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Real estate, before accumulated depreciation (2) .... $ 1,296,007 $ 1,238,138 $ 1,218,176 $ 1,264,343 $ 1,237,431
Total assets ........................................ 1,162,850 1,101,805 1,104,304 1,160,338 1,176,841
Total mortgages and loans ........................... 760,233 708,857 719,684 725,264 750,849
Minority interests .................................. 168,501 171,147 171,271 179,397 70,468
Stockholders' equity ................................ 177,619 175,150 168,095 211,401 310,441
OTHER DATA:
Funds from operations (3) ........................... $ 68,393 $ 66,957 $ 63,807 $ 68,477 $ 64,089
Net cash flow:
Operating activities ............................. $ 80,176 $ 80,708 $ 68,001 $ 72,580 $ 71,977
Investing activities ............................. $ (72,973) $ (23,067) $ 23,102 $ (37,868) $ (262,762)
Financing activities ............................. $ (1,287) $ (59,134) $ (94,932) $ (41,693) $ 203,533
Total Properties (at end of period) (4) ............. 142 149 154 157 154
Total sites (at end of period) ...................... 51,582 50,663 51,304 53,846 53,009
Total sites (weighted average for the year) (5) ..... 42,962 46,243 46,964 46,914 43,932
(1) See the Consolidated Financial Statements of the Company included
elsewhere herein. Certain 2001, 2000, 1999, and 1998 amounts have been
reclassified to conform to the 2002 financial presentation. Such
reclassifications have no effect on the operations or equity as originally
presented.
(2) We believe that the book value of the Properties, which reflects the
historical costs of such real estate assets less accumulated depreciation,
is less than the current market value of the Properties.
(3) We generally consider Funds From Operations ("FFO") to be an appropriate
measure of the non-GAAP performance of an equity Real Estate Investment
Trust ("REIT"). FFO was redefined by the National Association of Real
Estate Investment Trusts ("NAREIT") in April 2002, as net income (computed
in accordance with generally accepted accounting principles ["GAAP"]),
before allocation to minority interests, excluding gains (or losses) from
sales of property, plus real estate depreciation and after adjustments for
unconsolidated partnerships and joint ventures. For purposes of presenting
FFO, the revised definition of FFO has been given retroactive treatment.
We believe that FFO is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flows from
operating activities, financing activities and investing activities, it
provides investors an understanding of our ability to incur and service
debt and to make capital expenditures. We compute FFO in accordance with
the NAREIT definition which may differ from the methodology for
calculating FFO utilized by other equity REITs and, accordingly, may not
be comparable to such other REITs' computations. FFO in and of itself does
not represent cash generated from operating activities in accordance with
GAAP and therefore should not be considered an alternative to net income
as an indication of our performance or to net cash flows from operating
activities as determined by GAAP as a measure of liquidity and is not
necessarily indicative of cash available to fund cash needs.
(4) During the year ended December 31, 1998, 41 Properties were acquired; net
operating income attributable to such Properties during 1998 was
approximately $7.6 million, which included approximately $3.9 million of
depreciation and amortization expense. During the year ended December 31,
1999, three Properties were acquired; net operating income attributable to
such Properties during 1999 was approximately $87,000, which included
approximately $104,000 of depreciation expense. During the year ended
December 31, 2000, three Properties and a water and wastewater treatment
company were sold; net operating income attributable to such Properties
during 2000 was approximately $1.6 million, which included approximately
$623,000 of depreciation expense. During the year ended December 31, 2001,
three Properties were acquired, including one through the termination of a
lease; net operating income attributable to such Properties during 2001
was approximately $1.3 million, which included approximately $396,000 of
depreciation expense. Also during the year ended December 31, 2001, eight
Properties were sold; net operating income attributable to such Properties
during 2001 was $1.0 million, which included approximately $235,000 of
depreciation expense. During the year ended December 31, 2002, eleven
Properties were acquired; net operating income attributable to such
Properties during 2002 was approximately $2.0 million, which included
approximately $809,000 of depreciation expense. Also during the year ended
December 31, 2002, eighteen Properties was sold; net operating income
attributable to such Properties during 2002 was $5.4 million, which
included approximately $1.2 million of depreciation expense.
(5) Excludes Resort sites and sites in Properties owned through unconsolidated
joint ventures.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the historical Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Form 10-K. The following discussion may
contain certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 which reflect management's current
views with respect to future events and financial performance. Such
forward-looking statements are subject to certain risks and uncertainties,
including, but not limited to, the effects of future events on the Company's
financial performance; the adverse impact of external factors such as inflation
and consumer confidence; and the risks associated with real estate ownership.
PROPERTY ACQUISITIONS, JOINT VENTURES AND DISPOSITIONS
The following chart lists the Properties acquired and sold since January
1, 2000:
PROPERTY TRANSACTION DATE SITES
-------- ---------------- -----
TOTAL SITES AS OF JANUARY 1, 2000 ................................... 53,846
ACQUISITIONS:
Grand Island (f.k.a. Golden Lakes) ............................. January 3, 2001 307
Lakes at Countrywood (f.k.a. Chain O' Lakes).................... January 3, 2001 423
Bulow Resort RV ................................................ July 1, 2001 352
Mt. Hood ....................................................... March 12, 2002 450
Harbor View Village ............................................ July 10, 2002 471
Countryside .................................................... July 31, 2002 560
Golden Sun ..................................................... July 31, 2002 329
Breezy Hill .................................................... July 31, 2002 762
Highland Woods ................................................. August 14, 2002 148
Holiday Village ................................................ July 31, 2002 301
Tropic Winds ................................................... August 7, 2002 531
Silk Oak Lodge ................................................. October 1, 2002 180
Hacienda Village ............................................... December 18, 2002 519
Glen Ellen ..................................................... December 31, 2002 117
EXPANSION SITE DEVELOPMENT AND OTHER:
Sites added in 2000 ............................................ 108
Sites added in 2001 ............................................ 143
Sites added in 2002 ............................................ 90
DISPOSITIONS:
FFEC-Six (water and wastewater service company) ................ February 29, 2000 --
Mesa Regal RV Resort ........................................... May 22, 2000 (2,005)
Naples Estates ................................................. May 22, 2000 (484)
Mon Dak ........................................................ May 22, 2000 (161)
Dellwood Estates ............................................... February 13, 2001 (136)
Briarwood ...................................................... February 13, 2001 (166)
Bonner Springs ................................................. February 13, 2001 (211)
Carriage Park .................................................. February 13, 2001 (143)
North Star ..................................................... February 13, 2001 (219)
Quivira Hills .................................................. February 13, 2001 (142)
Rockwood ....................................................... February 13, 2001 (264)
Candlelight .................................................... October 5, 2001 (585)
College Heights (17 Properties) ............................... September 1, 2002 (3,220)
Camelot Acres .................................................. November 13, 2002 (319)
-------
TOTAL SITES AS OF DECEMBER 31, 2002 ................................. 51,582
=======
20
TRENDS
Occupancy in our Properties as well as our ability to increase rental
rates directly affect revenues. In 2002, occupancy in our Core Portfolio
decreased 1.3%. Also during 2002, average monthly base rental rates for the Core
Portfolio increased approximately 5.3%. We project continued growth during 2003
in our Core Portfolio performance. Core Portfolio base rental-rate growth is
expected to be approximately 4 percent. Assuming current economic conditions
continue to impact occupancies, overall revenue growth will be approximately 2.5
to 3 percent. Core Portfolio operating expenses are expected to grow in excess
of CPI due to continued increases in insurance, real estate taxes and utility
expenses. These projections would result in growth of approximately 2 percent in
Core Portfolio income from operations (also referred to as net operating income
or "NOI").
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, which
require us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosures. We
believe that the following critical accounting policies, among others, affect
our more significant judgments and estimates used in the preparation of our
consolidated financial statements.
We periodically evaluate our long-lived assets, including our investments
in real estate, for impairment indicators. Our judgments regarding the existence
of impairment indicators are based on factors such as operational performance,
market conditions and legal factors. Future events could occur which would cause
us to conclude that impairment indicators exist and an impairment loss is
warranted.
The valuation of financial instruments under Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments" ("SFAS No. 107") and Statement No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities" requires us to
make estimates and judgments that affect the fair value of the instruments.
Where possible, we base the fair values of our financial instruments, including
our derivative instruments, on listed market prices and third party quotes.
Where these are not available, we base our estimates on other factors relevant
to the financial instrument.
Real estate is recorded at cost less accumulated depreciation.
Depreciation is computed on the straight-line basis over the estimated useful
lives of the assets. We use a 30-year estimated life for buildings acquired and
structural and land improvements, a ten-to-fifteen-year estimated life for
building upgrades and a three-to-seven-year estimated life for furniture,
fixtures and equipment. Expenditures for ordinary maintenance and repairs are
expensed to operations as incurred and significant renovations and improvements
that improve the asset and extend the useful life of the asset are capitalized
over their estimated useful life. The determination of useful lives, salvage
value, and depreciation method used are in conformity with GAAP. However, the
useful lives, salvage value, and customary depreciation method used for land
improvements and other significant assets may significantly and materially
overstate the depreciation of the underlying assets and therefore understate the
Net Income of the Company. In addition, the Financial Accounting Standards Board
("FASB") is currently reviewing the methods of depreciation and cost
capitalization for all industries and in June 2001 issued FASB Exposure Draft,
"Accounting in Interim and Annual Financial Statements for Certain Costs and
Activities Related to Property, Plant and Equipment", the implementation of
which, if issued, could also have a material effect on the Company's results of
operations.
Certain costs, primarily legal costs, relative to our efforts to
effectively change the use and operations of several Properties subject to rent
control (see Note 17) are currently classified in other assets. These costs, to
the extent these efforts are successful, are capitalized to the extent of the
established value of the revised project and included in the net investment in
real estate for the appropriate Properties (see Note 5). To the extent these
efforts are not successful, these costs will be expensed. In addition, we
capitalize certain costs, primarily legal costs, related to entering into lease
agreements which govern the term under which we may enter into leases with
individual tenants and which are expensed over the term of the lease agreement.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. The Interpretation requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. The Company will adopt FIN 46 in the third quarter of 2003.
We have not yet determined the effect the adoption of the Interpretation will
have on the Company.
21
We have chosen to account for our stock compensation in accordance with
APB No. 25, "Accounting for Stock Issued to Employees", based upon the intrinsic
value method, which results in no compensation expense for options issued with
an exercise price equal to or exceeding the market value of the Common Shares on
the date of grant. We will elect to account for our stock compensation in
accordance with SFAS No. 123 and its amendment (SFAS No. 148), "Accounting for
Stock Based Compensation", effective in the first quarter of 2003, which will
result in compensation expense being recorded based on the fair value of the
stock option compensation issued. We have not yet determined the effect the
statement will have on the Company.
22
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 2002 TO YEAR ENDED DECEMBER 31, 2001
Since December 31, 2000, the gross investment in real estate increased
from $1,218 million to $1,296 million as of December 31, 2002, due primarily to
the aforementioned acquisitions and dispositions of Properties during the
period. The total number of sites owned or controlled increased from 51,304 as
of December 31, 2000 to 51,582 as of December 31, 2002.
The following table summarizes certain financial and statistical data for
the Property Operations for the Core Portfolio and the Total Portfolio for the
years ended December 31, 2002 and 2001.
CORE PORTFOLIO TOTAL PORTFOLIO
-------------------------------------------- --------------------------------------------
INCREASE / INCREASE /
(dollars in thousands) 2002 2001 (DECREASE) % CHANGE 2002 2001 (DECREASE) % CHANGE
-------- -------- ---------- -------- -------- -------- ---------- --------
Community base rental income ...... $186,889 $179,579 $ 7,310 4.1% $197,795 $194,103 $ 3,692 1.9%
Resort base rental income ......... 494 439 55 12.5% 9,147 5,748 3,399 59.1%
Utility and other income .......... 18,244 18,786 (542) (2.9%) 19,713 20,403 (690) (3.4%)
-------- -------- ---------- -------- -------- -------- ---------- --------
Property operating revenues .. 205,627 198,804 6,823 3.4% 226,655 220,254 6,401 2.9%
Property operating and
Maintenance .................. 54,240 53,024 1,216 2.3% 63,554 61,481 2,073 3.4%
Real estate taxes ................. 16,443 15,271 1,172 7.7% 18,212 17,296 916 5.3%
Property management ............... 8,430 8,120 310 3.8% 9,292 8,984 308 3.4%
-------- -------- ---------- -------- -------- -------- ---------- --------
Property operating expenses .. 79,113 76,415 2,698 3.5% 91,058 87,761 3,297 3.8%
-------- -------- ---------- -------- -------- -------- ---------- --------
Income from property operations ... $126,514 $122,389 $ 4,125 3.4% $135,597 $132,493 $ 3,104 2.3%
======== ======== ========== ======== ======== ======== ========== ========
Site and Occupancy Information (1):
Average total sites ............... 41,489 41,428 61 0.1% 44,552 46,243 (1,691) (3.7%)
Average occupied sites ............ 38,642 39,108 (466) (1.2%) 41,435 43,576 (2,141) (4.9%)
Occupancy % ....................... 93.1% 94.4% (1.3%) (1.3%) 93.0% 94.2% (1.2%) (1.2%)
Monthly base rent per site ........ $ 403.04 $ 382.65 $ 20.39 5.3% $ 397.80 $ 371.20 $ 26.61 7.1%
Total sites
As of December 31, ........... 41,588 41,472 116 0.3% 43,906 45,743 (1,837) (4.0%)
Total occupied sites
As of December 31, ........... 38,399 38,991 (592) (1.5%) 40,410 42,887 (2,477) (5.8%)
(1) Site and occupancy information excludes Resort sites and Properties owned
through unconsolidated joint ventures as well as the sites of Properties
sold during 2002.
Property Operating Revenues
The 4.1% increase in Community base rental income for the Core Portfolio
reflects a 5.3% increase in monthly base rent per site coupled with a 1.2%
decrease in average occupied sites. The decrease in utility and other income for
the Core Portfolio is due primarily to decreases in utility income, which
resulted from lower expenses for these items.
Property Operating Expenses
The increase in property operating and maintenance expense for the Core
Portfolio is due primarily to increases in property payroll, insurance and other
expenses, repair and maintenance and administrative expenses, partially offset
by decreased utility expense. The increase in Core Portfolio real estate taxes
is generally due to higher property assessments on certain Properties. Property
management expense for the Core Portfolio, which reflects costs of managing the
23
Results of Operations (continued)
Properties and is estimated based on a percentage of Property operating
revenues, increased by 3.8% due to increases in payroll costs and office
expenses.
Home Sales Operations
The following table summarizes certain financial and statistical data for
the Home Sales Operations for the years ended December 31, 2002 and 2001.
HOME SALES OPERATIONS
-------------------------------------------------
INCREASE /
(dollars in thousands) 2002 2001 (DECREASE) % CHANGE
---------- ---------- ---------- ----------
(Pro forma)
Gross revenues from new home sales $ 30,618 $ 32,608 (1,990) (6.1%)
Cost of new home sales ............ (24,689) (25,925) 1,236 4.8%
---------- ---------- ---------- ----------
Gross profit from new home sales .. 5,929 6,683 (754) (11.3%)
Gross revenues from used home sales 2,925 3,631 (706) (19.4%)
Cost of used home sales ........... (2,503) (2,561) 58 2.3%
---------- ---------- ---------- ----------
Gross profit from used home sales . 422 1,070 (648) (60.6%)
Brokered resale revenues, net ..... 1,592 1,723 (131) (7.6%)
Home selling expenses ............. (7,671) (8,240) 569 6.9%
Ancillary services revenues, net .. 522 1,092 (570) (52.2%)
---------- ---------- ---------- ----------
Income from home sales operations . $ 794 $ 2,328 (1,534) (65.9%)
========== ========== ========== ==========
HOME SALES VOLUMES:
New home sales .................. 420 485 (65) (13.4%)
Used home sales ................. 184 250 (66) (26.4%)
Brokered home resales ........... 986 1,114 (128) (11.5%)
Prior to January 1, 2002, the results of operations of RSI were accounted
for using the equity method and reported on a single line item called Equity in
Income of Affiliates. As a result of the acquisition of RSI (see Note 7), the
Company owns and controls RSI and consolidates the financial results of RSI with
those of the Company. The pro forma presentation of detailed 2001 amounts is for
comparison purposes and has no effect on previously reported net income. For the
year ended December 31, 2001, equity in income of affiliates was approximately
$1.8 million and included the $2.3 million of income from home sales operations
presented above as well as $539,000 of interest income, $15,000 of corporate
expenses and $1.0 million of interest expense.
New home sales gross profit reflects a 13.4% decrease in sales volume
coupled with a 1.1% increase in the gross margin. The average selling price of
new homes increased $6,000 or 8.7% compared to 2001. Used home gross profit
reflects a decrease in both volume and gross margin on used home sales. Brokered
resale revenues reflects decreased resale volumes. The 6.9% decrease in home
selling expenses primarily reflects reductions in payroll and advertising
expenses.
Other Income and Expenses
The increase in interest income reflects a decrease in notes receivable
offset by an increase in chattel notes receivable acquired through the
acquisition of RSI. The decrease in other corporate income primarily reflects
decreased income from unconsolidated joint ventures. The increase in general and
administrative expense is due to increases in costs related to operating a
public company, increased payroll costs and increased consulting and legal
costs. Interest and related amortization decreased due to lower interest rates
during the period. The weighted average outstanding debt balances for the years
ended December 31, 2002 and 2001 were $731.8 million and $713.2 million,
respectively. The effective interest rate was 6.8% and 7.0% per annum for the
years ended December 31, 2002 and 2001, respectively.
24
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000
Since December 31, 1999, the gross investment in real estate decreased
from $1,264 million to $1,238 million as of December 31, 2001, due primarily to
the aforementioned acquisitions and dispositions of Properties during the
period. The total number of sites owned or controlled decreased from 53,846 as
of December 31, 1999 to 50,663 as of December 31, 2001.
The following table summarizes certain financial and statistical data for
the Core Portfolio and the Total Portfolio for the years ended December 31, 2001
and 2000.
CORE PORTFOLIO TOTAL PORTFOLIO
-------------------------------------------- --------------------------------------------
INCREASE / INCREASE /
(dollars in thousands) 2001 2000 (DECREASE) % CHANGE 2001 2000 (DECREASE) % CHANGE
-------- -------- ---------- -------- -------- -------- ---------- --------
Community base rental income (1) .. $192,160 $183,615 $ 8,545 4.7% $195,644 $189,064 $ 6,580 3.5%
Resort base rental income ......... 439 345 94 27.2% 5,748 7,415 (1,667) (22.5%)
Utility and other income .......... 19,783 18,319 1,464 8.0% 22,014 20,782 1,232 5.9%
-------- -------- ---------- -------- -------- -------- ---------- --------
Property operating revenues . 212,382 202,279 10,103 5.0% 223,406 217,261 6,145 2.8%
Property operating and
maintenance .................. 57,787 54,150 3,637 6.7% 62,008 59,199 2,809 4.7%
Real estate taxes ................. 16,773 16,321 452 2.8% 17,420 16,888 532 3.2%
Property management ............... 8,594 8,121 473 5.8% 8,984 8,690 294 3.4%
-------- -------- ---------- -------- -------- -------- ---------- --------
Property operating expenses .. 83,154 78,592 4,562 5.8% 88,412 84,777 3,635 4.3%
-------- -------- ---------- -------- -------- -------- ---------- --------
Income from property operations ... 129,228 123,687 5,541 4.5% 134,994 132,484 2,510 1.9%
======== ======== ========== ======== ======== ======== ========== ========
Site and Occupancy Information (2):
Average total sites ............... 44,966 44,828 138