MANUFACTURED HOME COMMUNITIES INC, 10-Q, 1999-05-14

MANUFACTURED HOME COMMUNITIES INC
10-Q, 1999-05-14
REAL ESTATE INVESTMENT TRUSTS

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<PAGE> 1
FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999

[ ] 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 (I.R.S. Employer
of incorporation or organization) Identification No.)

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)

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 [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

26,087,738 shares of Common Stock as of April 30, 1999.

<PAGE> 2

MANUFACTURED HOME COMMUNITIES, INC.

TABLE OF CONTENTS

PART I - FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

INDEX TO FINANCIAL STATEMENTS

Page
----
<S> <C>
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998.....................................3

Consolidated Statements of Operations for the quarters ended March 31, 1999 and 1998.......................4

Consolidated Statements of Cash Flows for the quarters ended March 31, 1999 and 1998.......................5

Notes to Consolidated Financial Statements.................................................................6

ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................10

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings..................................................................................16

ITEM 6. Exhibits and Reports on Form 8-K...................................................................16

</TABLE>

2
<PAGE> 3

MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
March 31, December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Investment in rental property:
Land .......................................................... $ 272,358 $ 272,225
Land improvements ............................................. 866,528 865,720
Buildings and other depreciable property ...................... 97,685 95,669
Advances on rental property acquisitions ...................... 3,917 3,817
----------- -----------
1,240,488 1,237,431
Accumulated depreciation ...................................... (126,276) (118,021)
----------- -----------
Net investment in rental property ........................... 1,114,212 1,119,410
Cash and cash equivalents ........................................ 6,639 13,657
Notes receivable ................................................. 15,812 15,710
Investment in and advances to affiliates ......................... 7,559 7,797
Investment in joint ventures ..................................... 8,850 7,584
Rents receivable ................................................. 851 671
Deferred financing costs, net .................................... 4,819 4,634
Prepaid expenses and other assets ................................ 7,447 7,325
Due from affiliates .............................................. 53 53
----------- -----------
Total assets .................................................. $ 1,166,242 $ 1,176,841
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable ........................................ $ 492,394 $ 500,573
Unsecured term loan ........................................... 100,000 100,000
Unsecured line of credit ...................................... 136,000 145,000
Other notes payable ........................................... 5,276 5,276
Accounts payable and accrued expenses ......................... 36,773 33,341
Accrued interest payable ...................................... 4,885 4,911
Rents received in advance and security deposits ............... 9,713 6,495
Distributions payable ......................................... 12,532 294
Due to affiliates ............................................. 39 42
----------- -----------
Total liabilities ........................................... 797,612 795,932
----------- -----------

Commitments and contingencies

Minority interests ............................................... 67,477 70,468

Stockholders' equity:
Preferred stock, $.01 par value
10,000,000 shares authorized; none issued ................... -- --
Common stock, $.01 par value
50,000,000 shares authorized; 26,070,306 and 26,417,029
shares issued and outstanding for 1999 and 1998, respectively 262 262
Paid-in capital ............................................... 356,775 364,603
Deferred compensation ......................................... (7,029) (7,442)
Employee notes ................................................ (4,641) (4,654)
Distributions in excess of accumulated earnings ............... (44,214) (42,328)
----------- -----------
Total stockholders' equity .................................. 301,153 310,441
----------- -----------
Total liabilities and stockholders' equity .................... $ 1,166,242 $ 1,176,841
=========== ===========
</TABLE>

3
<PAGE> 4

MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
REVENUES
Base rental income ................................................................... $ 44,821 $ 37,208
RV base rental income ................................................................ 3,528 1,908
Utility and other income ............................................................. 5,511 4,803
Equity in income of affiliates ....................................................... 143 169
Interest income ...................................................................... 387 784
-------- --------
Total revenues ................................................................... 54,390 44,872
-------- --------

EXPENSES
Property operating and maintenance ................................................... 14,473 12,112
Real estate taxes .................................................................... 4,226 3,558
Property management .................................................................. 2,083 1,782
General and administrative ........................................................... 1,692 1,596
Interest and related amortization .................................................... 13,349 10,121
Depreciation on corporate assets ..................................................... 246 294
Depreciation on real estate assets and other costs ................................... 8,243 5,823
-------- -------
Total expenses ................................................................... 44,312 35,286
-------- --------

Income before allocation to minority interests ....................................... 10,078 9,586

(Income) allocated to minority interests ............................................. (1,844) (1,821)
-------- --------

Net income ........................................................................... $ 8,234 $ 7,765
======== ========

Net income per common share - basic .................................................. $ .31 $ .31
======== ========
Net income per common share - diluted ................................................ $ .31 $ .31
======== ========

Distributions declared per common share outstanding .................................. $ .3875 $ .3625
======== ========

Weighted average common shares outstanding - basic ................................... 26,157 24,805
======== ========
Weighted average common shares outstanding - diluted (Note 1) ........................ 32,340 31,095
======== ========
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE> 5

MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................... $ 8,234 $ 7,765
Adjustments to reconcile net income to
cash provided by operating activities:
Income allocated to minority interests ......................................... 1,844 1,821
Depreciation and amortization expense .......................................... 8,616 6,081
Equity in income of affiliates ................................................. (143) (169)
Amortization of deferred compensation and other ................................ 413 284
(Increase) in rents receivable ................................................. (180) (186)
(Increase) in prepaid expenses and other assets ................................ (122) (1,790)
Increase in accounts payable and accrued expenses .............................. 3,403 5,450
Increase in rents received in advance and security deposits .................... 3,218 3,312
-------- --------
Net cash provided by operating activities .......................................... 25,283 22,568
-------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments, net ............................................ -- (9,370)
Distributions from affiliates ...................................................... 381 282
Funding of notes receivable ........................................................ (102) (12,341)
Investment in joint ventures ....................................................... (1,266) (6,506)
Acquisition of rental properties ................................................... (1,184) (50,963)
Improvements:
Improvements - corporate ....................................................... (184) (98)
Improvements - rental properties ............................................... (1,605) (897)
Site development costs ......................................................... (208) (453)
-------- --------
Net cash used in investing activities .............................................. (4,168) (80,346)
-------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options ........................................ 1,451 1,459
Distributions to common stockholders and minority interests ........................ (289) (55)
Repurchase of common stock ......................................................... (11,795) --
Collection of principal payments on employee notes ................................. 13 34
Proceeds from line of credit ....................................................... 6,000 66,500
Repayments on mortgage notes payable and line of credit ............................ (23,179) (7,615)
Debt issuance costs ................................................................ (334) --
-------- --------
Net cash (used in) provided by financing activities ................................ (28,133) 60,323
-------- --------

Net (decrease) increase in cash and cash equivalents .................................... (7,018) 2,545
Cash and cash equivalents, beginning of period .......................................... 13,657 909
-------- --------
Cash and cash equivalents, end of period ................................................ $ 6,639 $ 3,454
======== ========

SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest ................................................ $ 13,226 $ 7,414
======== ========
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE> 6

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PRESENTATION:

These unaudited Consolidated Financial Statements of Manufactured Home
Communities, Inc., a Maryland corporation, and its subsidiaries (collectively,
the "Company"), have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the financial statements and notes thereto included in the Company's 1998 Annual
Report on Form 10-K (the "1998 Form 10-K"). The following Notes to Consolidated
Financial Statements highlight significant changes to the Notes included in the
1998 Form 10-K and present interim disclosures as required by the SEC. The
accompanying Consolidated Financial Statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
Certain reclassifications have been made to the prior periods' financial
statements in order to conform with current period presentation.

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131") which was effective for fiscal years beginning after December
15, 1997. SFAS No. 131 superseded Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position of the Company. The Company has one reportable segment which is the
operation of manufactured home communities.

NOTE 2 - EARNINGS PER COMMON SHARE

Earnings per common share are based on the weighted average number of
common shares outstanding during each period. In 1997, the Financial Accounting
Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 replaces the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements. The conversion of
Operating Partnership Units ("OP Units") has been excluded from the basic
earnings per share calculation. The conversion of an OP Unit to a share of
common stock will have no material effect on earnings per common share since the
allocation of earnings to an OP Unit is equivalent to the allocation of earnings
to a share of common stock.

<PAGE> 7

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - EARNINGS PER COMMON SHARE (CONTINUED)

The following table sets forth the computation of basic and diluted
earnings per share for the quarters ended March 31, 1999 and 1998:

<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Numerator:
Net income ......................................... $ 8,234 $ 7,765
Income allocated to minority interests ............. 1,844 1,821
------- -------
Numerator for diluted earnings per share-
income available to common shareholders
after assumed conversions ....................... $10,078 $ 9,586
======= =======

Denominator:
Weighted average shares outstanding ................ 26,157 24,805
Weighted average OP Units outstanding
assuming conversion ............................. 5,881 5,886
Employee stock options ............................. 302 404
------- -------
Denominator for diluted earnings per share-
adjusted weighted average shares and
assumed conversions ............................. 32,340 31,095
======= =======
</TABLE>

NOTE 3 - COMMON STOCK AND RELATED TRANSACTIONS

On April 9, 1999, the Company paid a $.3875 per share distribution for the
quarter ended March 31, 1999 to stockholders of record on March 26, 1999.

During the quarter ended March 31, 1999, the Company repurchased 545,500
shares of common stock in accordance with the common stock repurchase plan
approved by the Company's Board of Directors in March 1997 whereby the Company
is authorized to repurchase up to 1,000,000 shares of its common stock. As of
March 31, 1999, the Company had repurchased 897,300 shares of common stock.

On March 26, 1999, the Company, as general partner of MHC Operating Limited
Partnership ("Operating Partnership"), repurchased 200,000 OP Units from a
limited partner.

NOTE 4 - RENTAL PROPERTY

The Company is actively seeking to acquire additional manufactured home
communities and currently is engaged in negotiations relating to the possible
acquisition of a number of manufactured home communities. At any time these
negotiations are at varying stages which may include contracts outstanding to
acquire certain manufactured home communities which are subject to satisfactory
completion of the Company's due diligence review.

NOTE 5 - NOTES RECEIVABLE

At March 31, 1999 and December 31, 1998, the Company had approximately
$15.8 million and $15.7 million in notes receivable, respectively. The Company
has $1.1 million in purchase money notes receivable with monthly principal and
interest payments at 7.0%, maturing on July 31, 2001. The Company has
outstanding a $12.3 million loan ("The Meadows Loan") secured by a first
mortgage lien on The Meadows Mobile Home Park in Palm Beach Gardens, Florida
("The Meadows") which bears interest at the lesser of 9.0% or the cash flow of
The Meadows and matures on April 30, 1999, as amended. On April 1, 1999 the
Company effectively exchanged a portion of The Meadows Loan for an equity
interest in the partnership that owns The Meadows. The Company also has
outstanding a $1,750,000 loan, which bears interest at the rate of 8.5% and
matures on June 1, 2003.

<PAGE> 8

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - LONG-TERM BORROWINGS

As of March 31, 1999 and December 31, 1998, the Company had outstanding
mortgage indebtedness of approximately $492.4 million and $500.6 million,
respectively, encumbering 71 and 72 of the Company's properties, respectively.
As of March 31, 1999 and December 31, 1998, the carrying value of such
properties was approximately $623 million and $634 million, respectively.

The outstanding mortgage indebtedness consists in part of a $265.0 million
mortgage note (the "Mortgage Debt") collateralized by 29 properties beneficially
owned by MHC Financing Limited Partnership. The Mortgage Debt has a maturity
date of January 2, 2028 and pays interest at 7.015%. There is no principal
amortization until February 1, 2008, after which principal and interest are paid
from available cash flow and the interest rate is reset at a rate equal to the
then 10-year U.S. Treasury obligations plus 2.0%. In 1998, a joint venture
formed by the Company and Wolverine Investors L.L.C. borrowed approximately $68
million (the "College Heights Debt") at an interest rate of 7.19%, maturing July
1, 2008. The College Heights Debt is collateralized by 18 properties owned by
the joint venture. The Company also has outstanding debt on 23 properties in the
aggregate amount of approximately $160.8 million, which was recorded at fair
market value with the related discount or premium being amortized over the life
of the loan using the effective interest rate. In addition, the Company recorded
a $2.4 million loan in connection with a direct financing lease entered into in
May 1997. Scheduled maturities for the outstanding indebtedness, excluding the
Mortgage Debt and the College Heights Debt, are at various dates through
November 30, 2020, and fixed interest rates range from 7.25% to 9.05%.

The Company has a $175 million unsecured line of credit with a bank (the
"Credit Agreement") bearing interest at the London Interbank Offered Rate
("LIBOR") plus 1.125%. The Credit Agreement matures on August 17, 2000, at which
time the Company may extend the maturity date to August 17, 2002 and the Credit
Agreement would be converted to a term loan. The Company pays a fee on the
average unused amount of such credit equal to 0.15% of such amount. As of March
31, 1999, $136 million was outstanding under the Credit Agreement. The Company
paid fees related to the amendments which were immaterial.

The Company has a $100 million unsecured term loan (the "Term Loan") with a
group of banks with interest only payable monthly at a rate of LIBOR plus 1.0%.
The Term Loan matures on April 3, 2000 and may be extended to April 3, 2002.

The Company has approximately $5.3 million of installment notes payable,
secured by a letter of credit, each with an interest rate of 6.5%, maturing
September 1, 2002. Approximately $4 million of the notes pay principal annually
and interest quarterly and the remaining $1.3 million of the notes pay interest
only quarterly.

In July 1995, the Company entered into an interest rate swap agreement (the
"1998 Swap") fixing LIBOR on $100 million of the Company's floating rate debt at
6.4% for the period 1998 through 2003. The value of the 1998 Swap is impacted by
changes in the market rate of interest. Had the 1998 Swap been entered into on
March 31, 1999, the applicable LIBOR swap rate would have been 5.2%. Each 0.01%
increase or decrease in the applicable swap rate for the 1998 Swap increases or
decreases the value of the 1998 Swap versus its current value by approximately
$35,260. The Company accounts for the 1998 Swap as a hedge. Payments and
receipts under the 1998 Swap are accounted for as an adjustment to interest
expense.

<PAGE> 9

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - STOCK OPTIONS

Pursuant to the Amended and Restated 1992 Stock Option and Stock Award Plan
as discussed in Note 14 to the 1998 Form 10-K, certain officers, directors,
employees and consultants have been offered the opportunity to acquire shares of
common stock of the Company through stock options ("Options"). During the
quarter ended March 31, 1999, Options for 50,570 shares of common stock were
exercised.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

The Company has previously disclosed the outcome of the jury trial in the
litigation involving DeAnza Santa Cruz Mobile Estates, a property located in
Santa Cruz, California. Subsequent to such disclosure, on April 19, 1999, the
trial court denied all of the Company's and DeAnza's post-trial motions for
judgment notwithstanding the verdict, new trial and remittitur. The trial court
also awarded $700,000 of attorneys' fees to plaintiffs. As previously disclosed,
the Company will appeal the jury verdict and attorneys' fee award and believes
that, while no assurance can be given, such appeals will be successful.

The Company is involved in a variety of legal proceedings arising in the
ordinary course of business. All such proceedings, taken together, are not
expected to have a material adverse impact on the financial condition or results
of operations of the Company.

9
<PAGE> 10

MANUFACTURED HOME COMMUNITIES, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The following is a discussion of the interim results of operations,
financial condition and liquidity and capital resources of the Company for the
three months ended March 31, 1999 compared to the corresponding period in 1998.
It should be read in conjunction with the Consolidated Financial Statements and
Notes thereto included herein and the 1998 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.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 TO THREE MONTHS ENDED MARCH 31,
1998

Since March 31, 1998, the gross investment in rental property has increased
from $1.0 billion to $1.2 billion as of March 31, 1999 due to the following
acquisitions: (i) the Ellenburg Communities acquired throughout 1998; (ii)
Sherwood Forest RV Resort on April 30, 1998; (iii) Casa Del Sol Resort III on
May 14, 1998; (iv) a portfolio of eighteen properties (the "College Heights
Communities") on June 4, 1998; and (v) Sunset Oaks on August 13, 1998
(collectively, the "Acquisition Properties"). The total number of sites owned or
controlled has increased from 45,577 as of March 31, 1998 to 53,391 as of March
31, 1999.

The following table summarizes certain weighted average statistics for the
quarters ended March 31, 1999 and 1998. "Core Portfolio" represents an analysis
of properties owned as of the beginning of both periods of comparison.

<TABLE>
<CAPTION>
Core Portfolio Total Portfolio
----------------------------- ---------------------------
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Total sites 32,391 32,287 46,457 39,466
Occupied sites 30,689 30,675 43,731 37,516
Occupancy % 94.7% 95.0% 94.1% 95.1%
Monthly base rent per site $ $353 $ 340 $ 341 $ 330

</TABLE>

Base rental income ($44.8 million) increased $7.6 million or 20.5%. For the
Core Portfolio, base rental income increased approximately $1.2 million or 3.8%,
due to increased base rental rates. The remaining $6.4 million increase in base
rental income was attributed to the Acquisition Properties.

Monthly base rent per site for the total portfolio increased 3.3%,
reflecting a 3.8% increase in monthly base rent per site for the Core Portfolio,
partially offset by lower monthly base rents for the Acquisition Properties.
Average monthly base rent per site for the Acquisition Properties was $314 for
the quarter ended March 31, 1999.

Weighted average occupied sites increased by 6,215 sites while occupancy
percentage decreased 1% due to the addition of the Acquisition Properties to the
portfolio with lower occupancy percentages. Occupied sites at the Core Portfolio
remained stable.

10
<PAGE> 11

MANUFACTURED HOME COMMUNITIES, INC.

RESULTS OF OPERATIONS (CONTINUED)

Recreational Vehicle ("RV") base rental income ($3.5 million), which is
higher in the first quarter due to seasonality, increased $1.7 million primarily
due to Acquisition Properties.

Utility and other income ($5.5 million) increased $708,000 or 14.7%,
primarily due to an increase in utility income, real estate tax pass-ons and
other income of $627,000, attributed to the Acquisition Properties. The
remaining $81,000 reflected increased utility income and real estate tax
pass-ons at the Core Portfolio.

Interest income ($387,000) decreased $397,000 or 50.6%, primarily due to
decreased interest earned on notes receivable and a decrease in interest earned
on short-term investments. Short-term investments had average balances for the
quarters ended March 31, 1999 and 1998 of approximately $3.7 million and $8.0
million, respectively, which earned interest income at an effective rate of 4.8%
and 5.5% per annum, respectively. As of March 31, 1999, the Company had cash and
cash equivalents and short-term investments of $6.6 million.

Property operating and maintenance expenses ($14.5 million) increased $2.4
million or 19.5%. Expenses at the Acquisition Properties increased approximately
$2.5 million. Expenses at the Core Portfolio decreased slightly as decreases in
repairs and maintenance, property general and administrative expenses, and
insurance and other expenses were partially offset by increased payroll and
utility expenses. Property operating and maintenance expenses represented 26.6%
of total revenues in 1999 and 27.0% in 1998.

Real estate taxes ($4.2 million) increased $668,000 or 18.8% which was
attributed to the Acquisition Properties. Real estate taxes represented 7.8% of
total revenues in 1999 and 7.9% in 1998.

Property management expenses ($2.1 million) increased $301,000 or 16.9%.
The increase was primarily due to incremental management costs related to the
addition of the Acquisition Properties. Property management expenses represented
3.8% of total revenues in 1999 and 4.0% in 1998.

General and administrative expense ("G&A") ($1.7 million) increased $96,000
or 6.0%. The increase was primarily due to increased payroll resulting from
salary increases and increased public company related expenses. G&A represented
3.1% of total revenues in 1999 and 3.6% in 1998.

Interest and related amortization ($13.3 million) increased $3.2 million or
31.9%. The increase was due to higher weighted average outstanding debt balances
during the period, partially offset by slightly decreased effective interest
rate. The weighted average outstanding debt balances for the quarters ended
March 31, 1999 and 1998 were $738.0 million and $539.6 million, respectively.
The effective interest rates were 7.2% and 7.4%, respectively. Interest and
related amortization represented 24.5% of total revenues in 1999 and 22.6% in
1998.

11
<PAGE> 12
MANUFACTURED HOME COMMUNITIES, INC.

RESULTS OF OPERATIONS (CONTINUED)

Depreciation on corporate assets ($246,000) decreased $48,000 or 16.3%. The
decrease was due to a one-time expense incurred in 1998 as a result of
Acquisition Properties, partially offset by increased depreciation expense.
Depreciation on corporate assets represented 0.5% of total revenues in 1999 and
0.7% in 1998.

Depreciation on real estate assets and other costs ($8.2 million) increased
$2.4 million or 41.6% as a result of the addition of the Acquisition Properties.
Depreciation on real estate assets and other costs represented 15.2% of total
revenues in 1999 and 13.0% in 1998.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents decreased by $7.0 million when compared to
December 31, 1998. The major components of this decrease were repayments on the
line of credit and repurchases of common stock, partially offset by increased
cash provided by operating activities.

Net cash provided by operating activities increased $2.7 million from $22.6
million for the quarter ended March 31, 1998 to $25.3 million for the quarter
ended March 31, 1999. This increase reflected a $2.9 million increase in funds
from operations ("FFO"), as discussed below, and decreased prepaid expenses,
partially offset by decreased accounts payable accruals.

FFO was defined by the National Association of Real Estate Investment
Trusts ("NAREIT") in March 1995 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 significant non-recurring
items, if any. The Company computes 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. Funds
available for distribution ("FAD") is defined as FFO less non-revenue producing
capital expenditures and amortization payments on mortgage loan principal. The
Company believes that FFO and FAD are useful 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, they provide
investors an understanding of the ability of the Company to incur and service
debt and to make capital expenditures. FFO and FAD in and of themselves do 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 the Company's performance or to net cash flows from operating activities as
determined by GAAP as a measure of liquidity and are not necessarily indicative
of cash available to fund cash needs.

12
<PAGE> 13
MANUFACTURED HOME COMMUNITIES, INC.

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

The following table presents a calculation of FFO and FAD for the quarters
ended March 31, 1999 and 1998:

<TABLE>
<CAPTION>
March 31,
1999 1998
-------- ---------
<S> <C> <C>
Computation of funds from operations:
Income before allocation to minority interests .......... $ 10,078 $ 9,586
Depreciation on real estate assets and other costs .... 8,243 5,823
-------- --------
Funds from operations .................................... $ 18,321 $ 15,409
======== ========

Computation of funds available for distribution:
Funds from operations .................................... $ 18,321 $ 15,409
Non-revenue producing improvements -
rental properties .............................. (1,605) (897)
-------- --------
Funds available for distribution ......................... $ 16,716 $ 14,512
======== ========
</TABLE>

Net cash used in investing activities decreased $76.2 million from $80.3
million for the quarter ended March 31, 1998 to $4.2 million for the quarter
ended March 31, 1999 primarily due to the acquisition of Quail Meadows and
acquisition advances related to the Ellenberg Communities, the purchase of
short-term investments, the funding of The Meadows Loan, and the investment in
Plantation on the Lake and Trails West in 1998.

Capital expenditures for improvements were approximately $2.0 million for
the quarter ended March 31, 1999 compared to $1.4 million for the quarter ended
March 31, 1998. Of the $2.0 million, approximately $1.6 million represented
improvements to existing sites. The Company anticipates spending approximately
$5.4 million on improvements to existing sites during the remainder of 1999. The
Company believes these improvements are necessary in order to increase and/or
maintain occupancy levels and maintain competitive market rents for new and
renewing residents. The remaining $392,000 represented costs to develop
expansion sites at certain of the Company's properties and other corporate
headquarter costs. The Company is currently developing an additional 194 sites
which should be available for occupancy in 1999.

Net cash (used in) provided by financing activities decreased $88.5 million
from $60.3 million for the quarter ended March 31, 1998 to ($28.1) million for
the quarter ended March 31, 1999, primarily due to borrowings on the line of
credit in the quarter ended March 31,1998, as compared to repayments on the line
of credit in the quarter ended March 31, 1999 and repurchases of common stock in
1999.

Distributions to common stockholders and minority interests increased
approximately $234,000. On April 9, 1999, the Company paid a $.3875 per share
distribution for the quarter ended March 31, 1999 to stockholders of record on
March 26, 1999. Return of capital on a GAAP basis was $.078 per share for the
first quarter of 1999.

The Company expects to meet its short-term liquidity requirements,
including its distributions, generally through its working capital, net cash
provided by operating activities and availability under the existing line of
credit. The Company expects to meet certain long-term liquidity requirements
such as scheduled debt maturities, property acquisitions and capital
improvements by long-term collateralized and uncollateralized borrowings
including borrowings under its existing line of credit and the issuance of debt
securities or additional equity securities in the Company, in addition to
working capital.

13
<PAGE> 14
MANUFACTURED HOME COMMUNITIES, INC.

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities", which is required to be adopted in years beginning after June 15,
1999. SFAS No. 133 permits early adoption as of the beginning of any fiscal
quarter after its issuance. The Company has not yet determined the date at which
it will adopt SFAS No. 133. SFAS No. 133 will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
Company has not yet determined what the effect of SFAS No. 133 will be on the
earnings and financial position of the Company.

14
<PAGE> 15

MANUFACTURED HOME COMMUNITIES, INC.

YEAR 2000

The year 2000 issue ("Year 2000") is the result of computer programs and
embedded processors ("Systems") failing to properly account for the end of 1999
and the rollover to the year 2000. The Year 2000 issue comes from three
date-related problems and practices. First, some Systems define the year-portion
of date fields with two digits instead of four. As a result, programs and
equipment that have time-sensitive functions may interpret a date using "00" as
being 1900 rather than 2000. Second, the year 2000 is a leap year. There is a
possibility that some Systems may fail to account for the leap day properly.
Third, in practice, an artificial date of "9/9/99" is sometimes used as a
fictitious date when testing Systems. It is possible that some Systems will
reject the actual date of "September 9, 1999" as fictitious. Problems arising
from one or more of these problems and practices could result in failure of one
or more Systems causing a disruption of operations, including, among other
things, a temporary inability to process transactions, collect rents, or engage
in similar normal business activities.

Utilizing purchasing records, inventory listings, and direct communication
with employees, the Company is in the process of identifying all of its
information technology ("IT") and non-IT systems and assessing them for Year
2000 readiness. Critical systems include, but are not limited to: accounts
receivable, sales and inventory, human resources and payroll, accounts payable
and general ledger, Lotus Notes, Microsoft Office, tax preparation and filing
software, computers, data networking equipment, telephone systems, fax machines
and photocopiers, security and life safety systems (elevators, alarm systems),
process control systems (pool pumps and chlorine systems, sprinkler systems),
cable television systems, lift stations, and drinking water and waste water
treatment plants. The Company has completed the inventory, research and
assessment phases of its preparations for the Year 2000. The Company has
completed assessment of its drinking water, waste water treatment and lift
station facilities for which it is responsible and is reviewing the consultant's
comprehensive report. There were no material problems found during the
consultant's review. The Company is discussing with all of its significant
suppliers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company anticipates that scheduled system upgrades to its accounts
receivable system, accounts payable and general ledger system, and payroll
system will remediate current Year 2000 concerns. Remediation steps and
development of contingency plans will be completed in the second quarter of
1999. The Company has set a deadline for Year 2000 readiness of June 30, 1999.
There can be no guarantee that the systems of other companies on which the
Company's Systems rely will be timely converted and will not have an adverse
effect on the Company's Systems.

Through March 31, 1999, the Company's costs associated with remediation
efforts have been immaterial. In 1998, the Company retained a full-time contract
employee to perform Year 2000 research and documentation at an annual fee of
approximately $45,000 and will retain the employee through 1999. The cost to
retain a consultant to assess the waste water treatment and cable television
facilities has been budgeted at less than $50,000. The Company expects that
replacement of approximately 75 computers will be required with a capital budget
of approximately $200,000. The Company's total Year 2000 project costs and
estimates to complete do not include the estimated costs and time associated
with the impact of third-party Year 2000 issues. The total cost of the Year 2000
project is estimated to be immaterial assuming third parties remediate their own
Year 2000 issues. This assumption is based on management's best estimates, which
were derived utilizing numerous assumptions of future events, and there can be
no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated.

The Company has commenced its contingency planning for critical operational
areas that might be affected by the Year 2000 issue if compliance is delayed.
Aside from catastrophic failure of banks, governmental agencies, etc., the
Company believes that it could continue operations. For example, rent can be
collected and recorded by manual methods using hardcopy reports from previous
months; payroll can be processed by issuing manual checks relying on existing
payroll registers; bills can be paid as long as banks can process checks; basic
financial statements can be prepared manually and wastewater treatment plants
can be controlled manually.

15
<PAGE> 16

MANUFACTURED HOME COMMUNITIES, INC.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company has previously disclosed the outcome of the jury trial in
the litigation involving DeAnza Santa Cruz Mobile Estates, a property located in
Santa Cruz, California. Subsequent to such disclosure, on April 19, 1999, the
trial court denied all of the Company's and DeAnza's post-trial motions for
judgment notwithstanding the verdict, new trial and remittitur. The trial court
also awarded $700,000 of attorneys' fees to plaintiffs. As previously disclosed,
the Company will appeal the jury verdict and attorneys' fee award and believes
that, while no assurance can be given, such appeals will be successful.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits:

27 Financial Data Schedule

(b) Reports on Form 8-K:

Form 8-K dated January 22, 1999, filed February
4, 1999, relating to Item 5- "Other Events" on
certain litigation.

16
<PAGE> 17

SIGNATURES
----------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.

MANUFACTURED HOME COMMUNITIES, INC.

BY: /s/ Thomas P. Heneghan
--------------------------------
Thomas P. Heneghan
Executive Vice President,
Treasurer and
Chief Financial Officer

BY: /s/ Mark Howell
--------------------------------
Mark Howell
Principal Accounting Officer

DATE: May 5, 1999

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,639
<SECURITIES> 0
<RECEIVABLES> 851
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,368
<PP&E> 1,240,488
<DEPRECIATION> (126,276)
<TOTAL-ASSETS> 1,166,242
<CURRENT-LIABILITIES> 63,942
<BONDS> 0
0
0
<COMMON> 262
<OTHER-SE> 300,891
<TOTAL-LIABILITY-AND-EQUITY> 1,166,242
<SALES> 53,860
<TOTAL-REVENUES> 54,390
<CGS> 0
<TOTAL-COSTS> 20,782
<OTHER-EXPENSES> 1,692
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,349
<INCOME-PRETAX> 10,078
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,234
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31

</TABLE>