<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-12496
CHATEAU COMMUNITIES, INC.
(Exact name of Registrant as specified in its charter)
MARYLAND 38-3132038
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
6430 SOUTH QUEBEC STREET, ENGLEWOOD, CO
80111 (Address of principal executive offices,
including zip code)
(303) 741-3707
(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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of Registrant's Common Stock, $0.01par value,
on November 11, 1998 was 27,898,801 shares.
<PAGE> 2
CHATEAU COMMUNITIES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1998 and 1997 (unaudited) 1
Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997 2
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 (unaudited) 3
Notes to Condensed Consolidated Financial Statements (unaudited) 4-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION 14
SIGNATURES 20
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHATEAU COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 42,729 $ 35,296 $ 124,036 $ 99,020
Management fee, interest and other income 1,336 1,263 3,983 2,514
--------- --------- --------- ---------
44,065 36,559 128,019 101,534
Expenses:
Property operating and maintenance 12,631 10,846 35,517 28,599
Real estate taxes 3,136 2,578 9,162 7,272
Depreciation and amortization 10,577 8,968 29,535 24,144
Administrative 1,639 1,740 5,762 5,311
Interest and related amortization 7,670 6,757 23,226 18,828
--------- --------- --------- ---------
35,653 30,889 103,202 84,154
--------- --------- --------- ---------
Income before minority interests 8,412 5,670 24,817 17,380
Less income allocated to minority interests:
Preferred OP Units 1,523 -- 2,725 --
Common OP Units 809 557 2,522 2,245
--------- --------- --------- ---------
Net income available to
common shareholders $ 6,080 $ 5,113 $ 19,570 $ 15,135
========= ========= ========= =========
Basic earnings per common share $ .22 $ .20 $ .72 $ .66
========= ========= ========= =========
Diluted earnings per common share $ .22 $ .20 $ .72 $ .65
========= ========= ========= =========
Dividends/distributions declared
per common share/OP Unit outstanding $ .455 $ .43 $ 1.365 $ 1.29
========= ========= ========= =========
Weighted average common shares
Outstanding - basic 27,509 25,308 27,068 23,086
========= ========= ========= =========
Weighted average common shares/
OP Units outstanding - basic 31,169 28,064 30,556 26,510
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
1
<PAGE> 4
CHATEAU COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Rental property:
Land $ 134,492 $ 111,832
Land and improvements for expansion sites 20,478 14,437
Depreciable property 860,897 709,906
----------- -----------
1,015,867 836,175
Less accumulated depreciation 141,489 112,314
----------- -----------
Net rental property 874,378 723,861
Cash and cash equivalents 414 14,910
Receivables 4,277 2,936
Notes receivable 8,153 8,143
Investment in and advances to affiliates 43,860 21,646
Prepaid expenses and other assets 14,406 11,242
----------- -----------
Total assets $ 945,488 $ 782,738
=========== ===========
LIABILITIES
Debt $ 405,606 $ 387,015
Accounts payable and accrued expenses 23,740 19,757
Tenants' security deposits and rents received in advance 8,030 5,580
Accrued dividends and distributions 15,051 12,148
----------- -----------
Total liabilities 452,427 424,500
Minority Interests 120,929 35,272
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 2 million shares
authorized; no shares issued or outstanding
Common stock; $.01 par value, 90 million shares authorized; 27,892,252 and
25,476,172 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively 279 255
Additional paid-in capital 431,400 356,780
Dividends in excess of accumulated earnings (51,156) (33,174)
Notes receivable from officers (8,391) (895)
----------- -----------
Total shareholders' equity 372,132 322,966
----------- -----------
Total liabilities and shareholders' equity $ 945,488 $ 782,738
=========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
2
<PAGE> 5
CHATEAU COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,570 $ 15,135
Adjustments to reconcile net income to net cash
provided by operating activities:
Income attributable to limited partners' interest 2,522 2,245
Depreciation and amortization 29,535 24,144
Increase in accrued preferred distributions 762 --
Amortization of deferred financing costs 567 354
Increase in operating assets (5,416) (4,803)
Increase (decrease) in operating liabilities 6,449 (1,380)
---------- ----------
Net cash provided by operating activities 53,989 35,695
Cash flows from financing activities:
Borrowings on lines of credit 83,917 99,287
Payments on lines of credit (94,800) (82,370)
Mortgage principal payments (1,716) (1,124)
Payoff of mortgage notes (1,390) --
Dividends/distributions to shareholders/OP Unitholders (40,104) (29,929)
Common shares/OP Units reacquired and retired (932) (19,851)
Proceeds from the issuance of common shares 53,777 25,477
Net proceeds from the issuance of Preferred OP Units 73,002 --
Exercise of common stock options and other financing activities 203 3,109
---------- ----------
Net cash provided by (used in) financing activities 71,957 (5,401)
Cash flows from investing activities:
Acquisition of rental properties (109,033) (2,930)
Additions to rental property (9,195) (15,178)
Investment in and advances to joint ventures/affiliates (22,214) --
Payment of merger costs -- (12,457)
---------- ----------
Net cash used in investing activities (140,442) (30,565)
---------- ----------
Decrease in cash and cash equivalents (14,496) (271)
Cash and cash equivalents, beginning of period 14,910 586
---------- ----------
Cash and cash equivalents, end of period $ 414 $ 315
========== ==========
Supplemental cash flow information:
Fair market value of common shares/OP Units issued in connection with acquisitions $ 28,927 $ 3,121
========== ==========
Debt assumed in connection with acquisitions $ 32,579 --
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
3
<PAGE> 6
CHATEAU COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------
1. BASIS OF PRESENTATION AND FORMATION OF COMPANY:
The accompanying unaudited condensed consolidated financial statements
of Chateau Communities, Inc. (the "Company"), a real estate investment
trust ("REIT"), have been prepared in accordance with generally
accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included, and
such adjustments are of a normal recurring nature. The year-end
condensed consolidated balance sheet was derived from audited
consolidated financial statements, but does not include all disclosures
required by generally accepted accounting principles. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K
for the year ended December 31, 1997.
On February 11, 1997, the Company completed a strategic merger of
equals (the "Merger") with ROC Communities, Inc. ("ROC"). The Merger
and related transactions were accounted for using the purchase method
of accounting in accordance with generally accepted accounting
principles. Accordingly, the assets and liabilities of ROC were
adjusted to fair value for financial accounting purposes and the
results of operations of ROC were included in the results of operations
of the Company beginning in February 1997.
2. ACQUISITION OF RENTAL PROPERTIES
During the second quarter of 1998, the Company completed the following
acquisitions:
<TABLE>
<CAPTION>
Acquisition Acquisition Purchase
Date and Location Price
---- ------------ --------
(in thousands)
<S> <C> <C>
April 1998 Purchase of 12 communities in Michigan
(10) and North Carolina (2), containing an
aggregate of 3,036 homesites $ 75,300
</TABLE>
4
<PAGE> 7
CHATEAU COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
2. ACQUISITION OF RENTAL PROPERTIES CONTINUED:
During the first quarter of 1998, the Company completed the following
acquisitions:
<TABLE>
<CAPTION>
Acquisition Acquisition Purchase
Date and Location Price
---- ------------ --------------
(in thousands)
<S> <C> <C> <C>
January 1998 Purchase of 2 communities in South Carolina,
containing an aggregate of 961 homesites $ 15,800
January 1998 Purchase of 11 manufactured home communities and 3
park model/RV communities in Connecticut (4) and
Florida (10), containing an aggregate of 1,372
homesites and 1,359 park model/RV sites 38,200
March 1998 Purchase of 6 communities in Indiana (5) and
Michigan (1), containing an aggregate of 1,521
homesites 37,200
--------
$ 91,200
========
</TABLE>
The Company's total investment of $166.5 million was financed primarily
by the assumption of $32.5 million of mortgage and other notes, the
issuance of 923,828 OP Units, borrowing under the Company's lines of
credit and the proceeds received from the issuance of common stock in
April 1998. The lines of credit were subsequently repaid with the
issuance of $75 million of Series A Preferred Units (described below).
As of September 30, 1998, the Company owned 166 communities with an
aggregate of 51,154 residential homesites and 1,359 park model/RV
sites. In addition, the Company fee-managed approximately 7,100
residential homesites in 34 communities.
3. EQUITY FINANCINGS; COMMON STOCK AND RELATED TRANSACTIONS :
In April 1998, the Company, through its Operating Partnership,
completed the issuance of $75 million of 8.125% Series A Cumulative
Redeemable Preferred Units (the "Series A Preferred Units"). The
proceeds of this issuance were used to pay off the outstanding balances
on the Company's lines of credit, which were used to finance the
acquisition of properties. The Series A Preferred Units were issued in
a private placement exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.
In February 1998, the Company received net proceeds of approximately
$53.9 million from the issuance of 1,850,000 shares of its common
stock. The proceeds from the offering were used to finance the March
1998 acquisitions and to reduce outstanding balances under the
Company's lines of credit, which were used to finance the January 1998
acquisitions.
5
<PAGE> 8
CHATEAU COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
3. EQUITY FINANCINGS; COMMON STOCK AND RELATED TRANSACTIONS CONTINUED:
On August 20, 1998, the Company declared a cash dividend/distribution
of $.455 per common share/OP Unit to shareholders and OP Unitholders of
record as of September 30, 1998. The dividend/distribution was paid on
October 15, 1998 and is included in accrued dividends and distributions
in the accompanying condensed consolidated balance sheet as of
September 30, 1998.
On May 21, 1998, the Company declared a cash dividend/distribution of
$.455 per common share/OP Unit to shareholders and OP Unitholders of
record as of June 30, 1998. The dividend/distribution was paid on July
15, 1998.
On February 25, 1998, the Company declared a cash dividend/distribution
of $.455 per common share/OP Unit to shareholders and OP Unitholders of
record as of March 31, 1998. The dividend/distribution was paid on
April 14, 1998.
On November 20, 1997, the Company declared a cash dividend/distribution
of $.43 per common share/OP Unit to shareholders and OP Unitholders of
record as of December 29, 1997. The dividend/distribution was paid on
January 15, 1998 and is included in accrued dividends and distributions
in the accompanying condensed balance sheet as of December 31, 1997.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share". SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and replaces the presentation of
primary EPS with a presentation of basic EPS and diluted EPS, as
summarized in the table below:
<TABLE>
<CAPTION>
(In thousands, except per share data) FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic EPS:
Income (1) ........... $ 6,889 $ 5,670 $ 22,092 $ 17,380
Shares (2) ........... 31,169 28,064 30,556 26,510
Per Share ............ $ .22 $ .20 $ .72 $ .66
Diluted EPS:
Income (1) ............ $ 6,889 $ 5,670 $ 22,092 $ 17,380
Shares (3) ............ 31,337 28,386 30,751 26,759
Per Share ............. $ .22 $ .20 $ .72 $ .65
</TABLE>
(1) Represents income before minority interests less the income
allocated to the Series A Preferred OP Units.
(2) Represents the weighted average common shares and Units
outstanding.
(3) Represents the weighted average common shares and OP Units
outstanding, as well as dilutive stock options.
6
<PAGE> 9
CHATEAU COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
4. DEBT:
The following table sets forth certain information regarding debt of
the Company outstanding as of September 30, 1998:
<TABLE>
<CAPTION>
Weighted
Interest Rate Maturity Date Principal Balance
------------- ------------- -----------------
(in thousands)
<S> <C> <C> <C>
Fixed Rate Mortgage Debt 7.88 % 1999-2011 $ 130,661
Unsecured Senior Notes 7.46 % 2000-2004 245,000
Unsecured Lines of Credit 6.53 % 1999-2001 14,117
Capital Lease Obligation 11,695
Other Notes Payable various various 4,133
-----------
$ 405,606
===========
</TABLE>
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto included elsewhere in this
report. Certain statements in this discussion constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements may involve the Company's
plans, objectives and expectations, which are dependent upon a number of
factors, including site expansions, acquisitions, development and other new
business initiatives that are subject to a number of contingency factors such as
the effects of national and local economic conditions, changes in interest
rates, supply and demand for affordable housing and condition of the capital
markets that may prevent the Company from achieving its objectives.
On February 11, 1997, the Company completed a strategic merger of equals (the
"Merger") with ROC Communities, Inc. ("ROC"). The Merger and related
transactions were accounted for using the purchase method of accounting in
accordance with generally accepted accounting principles. Accordingly, the
assets and liabilities of ROC were adjusted to fair value for financial
accounting purposes and the results of operations of ROC were included in the
results of operations of the Company beginning in February 1997.
RESULTS OF OPERATIONS
Comparison of three months ended September 30, 1998 to three months ended
September 30, 1997
For the three months ended September 30, 1998, income before minority interests
was $8,412,000, an increase of $2,742,000 from the three months ended September
30, 1997. The majority of the increase was due to the acquisitions made in 1997
and during the first nine months of 1998 and increased net operating income from
the communities owned by the Company or ROC at the beginning of the 1997 period
(the "Core 1997 Portfolio").
Rental revenue for the three months ended September 30, 1998 was $42,729,000, an
increase of $7,433,000 from the three months ended September 30, 1997. The
majority of the increase was due to acquisitions and to rent increases and
occupancy gains from the Company's Core 1997 Portfolio.
Weighted average occupancy for the three months ended September 30, 1998 was
46,955 sites compared with 39,653 sites for the same period in 1997. The
occupancy rate was 92.1 percent on 51,154 sites as of September 30, 1998,
compared to 91.7 percent on 43,314 sites as of September 30, 1997. The occupancy
rate on the stabilized portfolio was 93.6 percent as of September 30, 1998. On a
per site basis, weighted average monthly rental revenue for the three months
ended September 30, 1998 was $294 compared with $288 in the same period of 1997.
For the Company's Core 1997 Portfolio, on a per site basis, weighted average
monthly rental revenue for the three months ended September 30, 1998 was $301
compared with $289 for the same period in 1997, an increase of 4.4 percent.
Property operating and maintenance expense for the three months ended September
30, 1998 increased by $1,785,000 or approximately 16.5 percent from the same
period a year ago. The majority of the increase was due to the 1997 and 1998
acquisitions. The remaining increase is due to increases in the Company's Core
1997 Portfolio. On a per site basis, monthly weighted average property operating
and maintenance expense decreased 1.7 percent from $91 for the three months
ended September 30, 1997 to $90 for the same period in 1998. The decrease was
due to the acquisition properties having lower rent and operating expenses on a
per site basis than the Core 1997 Portfolio. For the Core Portfolio, on a per
site basis, weighted average monthly property operating and maintenance expense
increased 3.4 percent to $94.21 per site.
Real estate taxes for the three months ended September 30, 1998, increased by
$558,000 or 21.6 percent from the three months ended September 30, 1997. The
increase is due primarily to acquisitions and expansions of communities and
general increases. On a per site basis, monthly weighted average real estate
taxes were $22.26 for the three months ended September 30, 1998 compared to
$21.67 for the same period in 1997. Real estate taxes may increase or decrease
in the future due to inflation, expansions and improvements of communities, as
well as changes in taxation in the tax jurisdictions in which the Company
operates.
8
<PAGE> 11
Administrative expense for the three months ended September 30, 1998 decreased
slightly compared to the same period in 1997. Administrative expense in 1998 was
3.7 percent of revenues as compared to 4.8 percent in 1997.
Interest and related amortization costs increased for the three months ended
September 30, 1998 by $913,000, as compared with the three months ended
September 30, 1997. The increase is attributable primarily to the indebtedness
incurred to finance the acquisitions. Interest expense as a percentage of
average debt outstanding decreased to approximately 7.5 percent in 1998 from
approximately 7.7 percent in 1997. The decrease is due primarily to the issuance
of $100 million of the MandatOry Par Put Remarketing Securities in December 1997
at an effective rate of 6.44 percent and a lower borrowing rate of 80 basis
points over LIBOR on the Company's short term lines of credit.
Depreciation expense for the three months ended September 30, 1998 increased
$1,609,000 from the same period a year ago. The increase is directly
attributable to acquisitions. Depreciation expense as a percentage of average
depreciable rental property in 1998 remained relatively unchanged from 1997.
Comparison of nine months ended September 30 1998 to nine months ended September
30, 1997
For the nine months ended September 30, 1998, income before minority interests
was $24,817,000, an increase of $7,437,000 from the nine months ended September
30, 1997. The increase was due primarily to the Merger, the acquisitions and
increased net operating income from communities in the Company's Core 1997
Portfolio.
Rental revenue for the first nine months of 1998 was $124,036,000; an increase
of $25,016,000 from the first nine months of 1997. The majority of the increase
was due to the Merger and the acquisitions in 1997 and in 1998. Rental revenue
increased 25 percent due to rent increases and occupancy gains in the Company's
Core 1997 Portfolio.
Weighted average occupancy for the nine months ended September 30, 1998 was
45,481 sites compared with 37,390 sites for the same period in 1997. On a per
site basis, weighted average monthly rental revenue for the nine months ended
September 30, 1998 was $292 compared with $286 in the same period of 1997. For
the Company's Core 1997 Portfolio, on a per site basis, weighted average monthly
rental revenue for the nine months ended September 30, 1998 was $298 compared
with $284 for the same period in 1997, an increase of 4.9 percent.
Management fee, interest and other income primarily includes management fee
income for the management of 34 manufactured home communities, equity earnings
from Community Sales, Inc., the Company's home sales subsidiary ("CSI") and
interest income on notes receivable and advances to joint ventures/affiliates.
CSI sold 375 new or pre-owned homes this year as compared to 311 in the same
period of 1997. CSI earned commissions in brokered sales of approximately 900
homes in the first nine months of 1998 as compared to 600 in the same period of
1997. Although the number of sales have increased in 1998 over 1997, the income
recognized by the Company in 1998 from CSI was less than what the Company
expected. This was due in part to lower margins on sales and the start up costs
incurred with CSI's new Financial Services Division. In addition, CSI
anticipated higher sales growth in 1998 and increased its sales and
administrative staff accordingly.
Property operating and maintenance expense for the nine months ended September
30, 1998 increased by $6,918,000 from the same period a year ago. The majority
of the increase was due to the Merger and 1997 and 1998 acquisitions. The
remaining increase is due to increases in the Company's Core 1997 Portfolio. On
a per site basis, monthly weighted average property operating and maintenance
expense increased 2.1 percent from $85 for the nine months ended September 30,
1997 to $87 for the same period in 1998. A portion of this increase is due to
the operating expenses related to the properties managed by the Company for a
management fee beginning in February 1997. For the Core 1997 Portfolio, on a per
site basis, weighted average monthly property operating and maintenance expense
increased 4.8 percent to $88.93 per site.
9
<PAGE> 12
Real estate taxes for the nine months ended September 30, 1998, increased by
$1,890,000 or 26.0 percent from the nine months ended September 30, 1997. The
increase is due primarily to the Merger, acquisitions and expansions of
communities and general increases. On a per site basis, monthly weighted real
estate taxes were $22.38 for the nine months ended September 30, 1998 compared
to $21.61 for the same period in 1997. Real estate taxes may increase or
decrease in the future due to inflation, expansions and improvements of
communities, as well as changes in taxation in the tax jurisdictions in which
the Company operates.
Administrative expense for the nine months ended September 30, 1998 increased
due to the Company's increased size. Administrative expense in 1998 was 4.5
percent of revenues as compared to 5.2 percent in 1997.
Interest and related amortization costs increased for the nine months ended
September 30, 1998 by $4,398,000, as compared with the nine months ended
September 30, 1997. The increase is attributable to the indebtedness incurred to
finance the 1997 and 1998 acquisitions. Interest expense as a percentage of
average debt outstanding remained relatively unchanged.
Depreciation expense for the nine months ended September 30, 1998 increased
$5,391,000 from the same period a year ago. The increase is directly
attributable to the Merger and acquisitions. Depreciation expense as a
percentage of average depreciable rental property in 1998 remained relatively
unchanged from 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $53,989,000 for the nine months
ended September 30, 1998, compared to $35,695,000 for the nine months ended
September 30, 1997. The increase in cash provided by operating activities was
due primarily to the increase in net operating income.
Net cash provided by financing activities for the nine months ended September
30, 1998 was $71,957,000. This was due primarily to $53.8 million of net
proceeds received from the issuance in February 1998 of common stock and $73
million net proceeds received from the issuance in April 1998 of $75 million of
Series A Preferred OP Units to an institutional investor. These proceeds were
offset partially by $40 million in dividends and distributions paid to
shareholders and OP Unitholders in the first nine months of 1998 and net
repayments on the lines of credit of $11 million.
Net cash used in investing activities for the nine months ended September 30,
1998 was $140,442,000. This amount represents acquisitions, joint venture
investments, capital expenditures and construction and development costs. In the
first nine months of 1998, the Company acquired, through four separate portfolio
acquisitions, 31 manufactured home communities and three park model/RV
communities with a total of 6,890 homesites and 1,359 park model/RV sites. Nine
of the properties acquired, containing approximately 900 homesites and 1,100
park model/RV sites, are subject to long term ground leases. The Company's total
investment of $166.5 million was financed primarily by the assumption of $32.5
million of mortgage and other notes, the issuance of 923,828 OP Units, borrowing
under the Company's lines of credit and the proceeds received from the issuance
of common stock. The lines of credit were subsequently repaid with the issuance
of $75 million of Series A Preferred OP Units. For the nine months ended
September 30, 1998, construction and development costs, including joint venture
investments and advances were approximately $9 million, while recurring property
capital expenditures, other than construction and development costs, were
approximately $4 million. Capital expenditures have historically been financed
out of funds from operations and it is the Company's intention that such future
expenditures will be financed with funds from operations.
In August 1998, the Company renegotiated its line of credit with Bank One, N.A.
(the "Bank One Credit Facility") increasing the line from $75 million to $100
million. The interest rate was reduced from LIBOR plus 110 basis points to a
maximum of LIBOR plus 80 basis points and its maturity date was extended to
2001.
10
<PAGE> 13
As of September 30, 1998, in addition to the Bank One Credit Facility, the
Company had a $7.5 million revolving line of credit from US Bank which bears
interest at a rate of LIBOR plus 125 basis points (the "USB Facility" and ,
together with the Bank One Credit Facility, the "Credit Facilities"). As of
September 30, 1998, approximately $14.1 million was outstanding under the Credit
Facilities and the Company had available $93.4 million in additional borrowing
capacity.
In December 1997, the Company issued 6.92% Mandatory Par Put Remarketed
Securities(SM) ("MOPPRS(SM)") due December 10, 2014. The net proceeds to the
Company from the issuance before deducting offering expenses, were approximately
$102.0 million. The net proceeds from the MOPPRS(SM) were utilized primarily to
reduce outstanding balances under the Credit Facilities and to finance
acquisitions. The MOPPRS(SM) are rated as "BBB" by Standard & Poor's Rating
Service and "Baa3" by Moody's Investors Service.
In connection with the issuance of the MOPPRS(SM), the Company and its operating
partnership entered into a Remarketing Agreement, dated as of December 23, 1997
(the "Remarketing Agreement"), with the remarketing dealer named therein (the
"Remarketing Dealer"), pursuant to which the MOPPRS(SM) are subject to mandatory
tender in favor of the Remarketing Dealer on December 10, 2004 (the "Remarketing
Date"), for a purchase price equal to 100% of the principal amount of the
outstanding MOPPRS(SM). Upon the Remarketing Dealer's election to remarket the
MOPPRS(SM), the interest rate to the December 10, 2014 maturity date of the
MOPPRS(SM) will be adjusted to equal the sum of 5.75% plus the Applicable Spread
(as defined in the Remarketing Agreement). In the event the Remarketing Dealer
does not elect to remarket the MOPPRS(SM), the MOPPRS(SM) will mature on the
Remarketing Date.
As of September 30, 1998, the Company had outstanding, in addition to the Credit
Facilities and the MOPPRS(SM), $145 million of other unsecured senior debt with
a weighted average interest rate and maturity of 8.2 percent and 3.2 years,
respectively, and $131 million of secured mortgage debt with a weighted average
interest rate and maturity of 7.9 percent and 2.7 years, respectively. As of
September, 30, 1998, the Company had approximately $406 million of total debt
outstanding, representing 29 percent of the Company's total market
capitalization. All of the debt is fixed rate debt, other than the $14 million
outstanding on the Company's Credit Facilities and has a weighted average
interest rate of 7.6 percent.
Repayment of long-term borrowings and amounts outstanding under the Credit
Facilities, future acquisitions of communities and land for development and new
community development activities represent the principal long-term liquidity
needs of the Company. The Company does not expect to generate sufficient funds
from operations to finance these long-term liquidity needs and instead intends
to meet its long-term liquidity requirements through additional borrowing under
the Credit Facilities or other lines of credit the assumption of existing
secured or unsecured indebtedness and depending on market conditions and capital
availability factors, the issuance of additional equity or debt securities.
The Company expects to meet its short-term liquidity requirements, including
expansion activities and capital expenditure requirements, through cash flow
from operations and, if necessary, borrowings under the Credit Facilities and
other lines of credit.
Management continues to assess the impact of the Year 2000 Issue on its
reporting systems and operations. The Year 2000 Issue exists because many
computer systems and applications abbreviate dates by eliminating the first two
digits of the year, assuming that these two digits are always "19". As a result,
date-sensitive computer programs may recognize a date using "00" as the year
1900 rather than the year 2000. Unless corrected, the potential exists for
computer system failures or incorrect processing of financial and operational
information, which could disrupt operations.
To help facilitate the Company's continued growth, substantially all of the
computer systems and applications in use in its home office and properties have
been, or are in the process of being upgraded and modified. The Company is of
the opinion that, in connection with those upgrades and modifications, it has
addressed applicable Year 2000 Issues as they might affect the computer systems
and applications located in the Company's offices and properties. The Company
anticipates that implementation of solutions to any Year 2000 Issue which it may
discover will require the expenditure of sums which the Company does not expect
to be material.
11
<PAGE> 14
The Company is exposed to the risk that one or more of its vendors or service
providers may experience Year 2000 problems which impact the ability of such
vendor or service provider to provide goods and services. Due to the
availability of alternative suppliers, this is not considered as significant a
risk with respect to the suppliers of goods. The disruption of certain services,
however, such as utilities, could, depending upon the extent of the disruption,
have a material adverse impact on the Company's operations. To date, the Company
is not aware of any vendor or service provider Year 2000 issue that management
believes would have a material adverse impact on the Company's operations.
The Company, however, has no means of ensuring that its vendors or service
providers will be Year 2000 ready. The inability of vendors or service providers
to complete the Year 2000 resolution process in a timely fashion could have an
adverse impact on the Company and the effect of non-compliance by vendors or
service providers is not determinable at this time. Residents do not pose Year
2000 problems for the Company in view of the nature of the Company's properties.
Widespread disruptions in the national or international economy, including
disruptions affecting the financial markets, resulting from Year 2000 issues, or
in certain industries, such as commercial or investment banks, could also have
an adverse impact on the Company. The likelihood and effect of such disruptions
is not determinable at this time. Management expects to have all systems
appropriately modified before any significant processing malfunctions could
occur and does not expect the Year 2000 Issue will materially impact the
financial condition or operations of the Company.
OTHER
Funds from operations ("FFO") is defined by the National Association of Real
Estate Investment Trusts ("NAREIT") as net income excluding gains (or losses)
from debt restructuring and sales of property plus rental property depreciation
and amortization. Management believes that FFO is an important and widely used
measure of the operating performance of REITs which provides a relevant basis
for comparison among REITs. FFO (i) does not represent cash flow from operations
as defined by generally accepted accounting principles; (ii) should not be
considered as an alternative to net income as a measure of operating performance
or to cash flows from operating, investing and financing activities; and (iii)
is not an alternative to cash flows as a measure of liquidity. FFO is calculated
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Income before minority interests $ 8,412 $ 5,670 $ 24,817 $ 17,380
Plus:
Depreciation and amortization 10,577 8,968 29,535 24,144
Less:
Depreciation expense on
corporate assets (62) (62) (187) (174)
Distribution on Preferred OP Units (1,523) -- (2,725) --
-------- -------- -------- --------
FFO $ 17,404 $ 14,576 $ 51,440 $ 41,350
======== ======== ======== ========
</TABLE>
12
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
13
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Three separate purported class actions have been filed against the Company and
its directors in the Circuit Court of Montgomery County, Maryland alleging
breaches of fiduciary duty for agreeing to the Merger with ROC and refusing to
endorse alternative transactions proposed by Manufactured Home Communities, Inc.
or Sun Communities, Inc. The three class actions are entitled Harbor Finance
Partners v. Chateau Properties, et al. (Case No. 157467), Niles v. Chateau
Properties, et al. (Case No. 158284), and ZSA Asset Allocation Fund v. Boll, et
al. (Case No. 158652) and were filed on or about September 12, 1996, September
27, 1996 and October 4, 1996, respectively. The Company agreed to settle the
Harbor, Niles, and ZSA actions brought in 1996 for $287,000 plus expenses not to
exceed $25,000, subject to court approval. Reimbursement from the Company's
directors' and officers' liability insurer, Genesis Insurance, Co., is being
pursued in the amount of approximately $1.1 million, which includes the amount
of the settlement plus expenses incurred in the course of the defense and
settlement of these actions.
A hearing has been scheduled for December 2, 1998. Any objecting shareholder
must give notice by that date. The Company expects the judge to enter an order
approving the settlement. Shareholders will have up to 20 days after the hearing
to appeal. If there are no appeals, the Company will then fund the settlement.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters for a Vote of Security Holders
Not Applicable
14
<PAGE> 17
- - --------------------------------------------------------------------------------
Item 5. Other Information
PROPERTY LISTING AND INFORMATION
The following table sets forth certain information, as of September 30, 1998,
regarding the properties.
- - --------------------------------------------------------------------------------
STABLE PORTFOLIO
================================================================================
<TABLE>
<CAPTION>
WEIGHTED
TOTAL AVERAGE
NUMBER OF OCCUPANCY AS MONTHLY RENT
LOCATION SITES OF PER SITE
- - ---------------------------------------------------------------------------------------------------------------------
COMMUNITY STATE (CLOSEST MAJOR CITY) 9/30/98 9/30/98 9/30/98
- - ---------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
100 Oaks AL Fultondale 230 92% $199
Bermuda Palms CA Palm Springs 185 93% $340
Eastridge CA San Jose 187 99% $616
La Quinta Ridge CA Palm Springs 152 85% $416
The Colony CA Palm Springs 220 97% $679
The Orchard CA San Francisco 233 100% $546
CV-Denver CO Denver 345 94% $362
CV-Longmont CO Longmont 310 100% $374
Friendly Village CO Greeley 226 98% $288
Pine Lakes Ranch CO Denver 762 98% $317
Redwood Estates CO Denver 753 97% $313
Cedar Grove CT New Haven 60 98% $282
Evergreen CT New Haven 102 100% $284
Green Acres CT New Haven 64 100% $279
Highland CT New Haven 50 98% $295
Anchor North FL Tampa Bay 94 97% $260
Audubon FL Orlando 280 98% $271
Colony Cove FL Sarasota 2,207 100% $321
Conway Circle FL Orlando 111 99% $299
Crystal Lake FL St. Petersburg 166 96% $256
CV-Jacksonville FL Jacksonville 643 95% $296
Del Tura FL Fort Myers 1,342 88% $432
Eldorado Estates FL Daytona Beach 126 97% $249
Emerald Lake FL Fort Myers 201 100% $293
Fairways Country Club FL Orlando 1,141 99% $289
Hidden Valley FL Orlando 303 100% $283
Indian Rocks FL Clearwater 148 65% $227
Jade Isle FL Orlando 101 96% $297
Lakeland Harbor FL Tampa 504 100% $246
Lakeland Junction FL Tampa 191 100% $192
Lakes at Leesburg FL Orlando 640 100% $254
Land O' Lakes FL Orlando 173 100% $241
Midway Estates FL Vero Beach 204 83% $298
Mobiland-by-the-Sea FL Melbourne 217 68% $310
Oak Springs FL Orlando 438 74% $234
Orange Lake FL Orlando 242 96% $238
Palm Beach Colony FL West Palm Beach 285 96% $296
Pedaler's Pond FL Orlando 214 84% $189
</TABLE>
15
<PAGE> 18
- - --------------------------------------------------------------------------------
STABLE PORTFOLIO
================================================================================
<TABLE>
<CAPTION>
WEIGHTED
TOTAL AVERAGE
NUMBER OF OCCUPANCY AS MONTHLY RENT
LOCATION SITES OF PER SITE
- - ---------------------------------------------------------------------------------------------------------------------
COMMUNITY STATE (CLOSEST MAJOR CITY) 9/30/98 9/30/98 9/30/98
- - ---------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Pinellas Cascades FL Clearwater 238 95% $356
Shady Lane FL Clearwater 108 94% $259
Shady Oaks FL Clearwater 250 99% $316
Shady Village FL Clearwater 156 96% $295
Southwind Village FL Naples 337 93% $292
Starlight Ranch FL Orlando 783 94% $288
Tarpon Glen FL Clearwater 170 90% $282
Town & Country FL Orlando 73 97% $287
Whispering Pines FL Clearwater 392 98% $349
Winter Haven Oaks FL Orlando 343 52% $204
Atlanta Meadows GA Atlanta 75 93% $231
Camden Point GA Kingsland 268 46% $179
Castlewood Estates GA Atlanta 334 84% $289
Colonial Coach Estates GA Atlanta 481 81% $265
Golden Valley GA Atlanta 131 92% $244
Landmark GA Atlanta 524 93% $281
Marnelle GA Atlanta 205 97% $259
Oak Grove Estates GA Albany 174 96% $133
Paradise Village GA Albany 226 96% $138
Lakewood Estates IA Davenport 172 96% $249
Terrace Heights IA Dubuque 317 97% $245
Coach Royale ID Boise 91 99% $266
Maple Grove Estates ID Boise 270 98% $278
Shenandoah Estates ID Boise 154 97% $273
Falcon Farms IL Moline 215 89% $228
Maple Ridge / Valley IL Kankakee 276 100% $234
Broadmore IN South Bend 292 86% $231
Forest Creek IN South Bend 167 93% $279
Fountainview IN Marion 120 88% $154
Hickory Knoll IN Indianapolis 325 99% $282
Mariwood IN Indianapolis 296 93% $275
Oak Ridge IN South Bend 204 97% $229
Pendleton IN Indianapolis 102 99% $205
Sherwood IN Marion 89 83% $154
Skyway IN Indianapolis 156 98% $273
Twin Pines IN Goshen 238 98% $224
Mosby's Point KY Cincinnati 150 97% $278
Rolling Hills KY Louisville 158 94% $192
Pinecrest Village LA Shreveport 446 70% $156
Stonegate, LA LA Shreveport 157 98% $175
Hillcrest MA Boston 83 94% $299
Leisurewoods Rockland MA Boston 394 99% $284
The Glen MA Boston 36 100% $362
Arbor Village MI Jackson 266 98% $238
Avon MI Detroit 617 100% $389
Canterbury Estates MI Grand rapids 209 61% $235
</TABLE>
16
<PAGE> 19
- - --------------------------------------------------------------------------------
STABLE PORTFOLIO
================================================================================
<TABLE>
<CAPTION>
WEIGHTED
TOTAL AVERAGE
NUMBER OF OCCUPANCY AS MONTHLY RENT
LOCATION SITES OF PER SITE
- - ---------------------------------------------------------------------------------------------------------------------
COMMUNITY STATE (CLOSEST MAJOR CITY) 9/30/98 9/30/98 9/30/98
- - ---------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Chesterfield MI Detroit 345 99% $356
Chestnut Creek MI Flint 160 97% $325
Clinton MI Detroit 1,000 98% $354
Colonial Acres MI Kalamazoo 612 96% $268
Colonial Manor MI Kalamazoo 195 98% $258
Country Estates MI Grand Rapids 254 94% $268
Cranberry MI Pontiac 232 100% $344
Ferrand Estates MI Grand Rapids 420 100% $321
Holiday Estates MI Grand Rapids 205 100% $307
Howell MI Lansing 455 100% $349
Huron Estates MI Flint 111 66% $204
Lake in the Hills MI Detroit 238 99% $356
Leonard Gardens MI Grand Rapids 168 99% $352
Macomb MI Detroit 1,426 98% $352
Millbrook Manor MI Lansing 305 91% $205
Norton Shores MI Grand Rapids 656 86% $245
Novi MI Detroit 725 98% $388
Oakhill MI Flint 504 90% $344
Old Orchard MI Flint 200 100% $303
Orion MI Detroit 423 99% $337
Pinewood MI Columbus 380 99% $275
Royal Estates MI Kalamazoo 183 92% $298
Science City MI Midland 171 99% $282
Springbrook MI Utica 398 97% $315
Sun Valley MI Jackson 203 96% $239
Swan Creek MI Ann Arbor 294 100% $333
The Highlands MI Flint 682 89% $251
Torrey Hills MI Flint 346 98% $330
Valley Vista MI Grand Rapids 137 93% $306
Villa MI Flint 319 97% $323
Yankee Spring MI Grand Rapids 284 82% $244
Cedar Knolls MN Minneapolis 458 99% $365
Cimmaron MN St. Paul 505 99% $368
President's Park MN Grand Forks 174 78% $213
Rosemount MN Minneapolis/St. Paul 182 100% $360
Twenty-Nine Pines MN St. Paul 152 93% $294
Countryside Village G.F. MT Great Falls 222 97% $198
Autumn Forest NC Greensboro 299 97% $206
Foxhall Village NC Raleigh 315 99% $321
Oakwood Forest NC Greensboro 481 93% $249
Woodlake NC Greensboro 308 99% $217
Buena Vista ND Fargo 400 97% $245
Columbia Heights ND Grand Forks 302 100% $257
Meadow Park ND Fargo 118 86% $179
Casa Linda NV Las Vegas 107 95% $417
Casual Estates NY Syracuse 1,050 77% $320
</TABLE>
17
<PAGE> 20
- - --------------------------------------------------------------------------------
STABLE PORTFOLIO
================================================================================
<TABLE>
<CAPTION>
WEIGHTED
TOTAL AVERAGE
NUMBER OF OCCUPANCY AS MONTHLY RENT
LOCATION SITES OF PER SITE
- - ---------------------------------------------------------------------------------------------------------------------
COMMUNITY STATE (CLOSEST MAJOR CITY) 9/30/98 9/30/98 9/30/98
- - ---------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Meadowbrook NY Ithaca 237 74% $255
Oak Orchard Estates NY Rochester 235 94% $273
Shadybrook NY Syracuse
Vance OH Columbus 110 96% $206
Willo-Arms OH Cleveland 262 100% $184
Yorktowne OH Cincinnati 354 98% $309
Crestview OK Stillwater 237 91% $189
Knoll Terrace OR Salem 212 99% $336
Riverview OR Portland 133 98% $365
Saddlebrook SC Charleston 426 94% $176
Homestead Ranch TX McAllen 126 91% $215
Leisure World TX Brownsville 201 90% $181
The Homestead TX McAllen 99 98% $212
Trail's End TX Brownsville 307 77% $175
Eagle Point WA Seattle 230 99% $433
Breazeale WY Laramie 116 97% $226
=====================================================================================================================
Totals 45,507 94% $314
=====================================================================================================================
</TABLE>
- - --------------------------------------------------------------------------------
ACTIVE EXPANSION PORTFOLIO
================================================================================
<TABLE>
<CAPTION>
WEIGHTED
TOTAL AVERAGE
NUMBER OF OCCUPANCY AS MONTHLY RENT
LOCATION SITES OF PER SITE
- - ---------------------------------------------------------------------------------------------------------------------
COMMUNITY STATE (CLOSEST MAJOR CITY) 9/30/98 9/30/98 9/30/98
- - ---------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Crystal Lakes FL Tampa 329 53% $150
Foxwood Farms FL Orlando 375 75% $187
Gold Tree FL Tampa 295 88% $328
Butler Creek GA Augusta 358 83% $176
Leisurewoods Taunton MA Boston 128 90% $262
Algoma Estates MI Grand Rapids 294 92% $282
Anchor Bay MI Detroit 1,384 92% $328
Forest Lake Estates MI Grand Rapids 221 77% $273
Grand Blanc MI Flint 415 95% $244
Westbrook MI Detroit 162 61% $364
Springfield Farms MO Springfield 134 60% $172
Hunter's Chase OH Lima 136 38% $175
Carnes Crossing SC Summerville 535 94% $163
Conway Plantation SC Myrtle Beach 299 63% $179
Eagle Creek TX Tyler 198 41% $162
Regency Lakes VA Winchester 384 68% $208
=====================================================================================================================
Totals 5,647 80% $228
=====================================================================================================================
</TABLE>
18
<PAGE> 21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and Index of Exhibits
(27.) Financial Data Schedule
(b) Reports on Form 8-K
None
19
<PAGE> 22
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, and in the capacities indicated, on the
13th day of November, 1998.
CHATEAU COMMUNITIES, INC.
By: /s/ Tamara D. Fischer
------------------------------------
Tamara D. Fischer
Executive Vice President
and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
20
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 414
<SECURITIES> 0
<RECEIVABLES> 12,430
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,015,867
<DEPRECIATION> (141,489)
<TOTAL-ASSETS> 945,488
<CURRENT-LIABILITIES> 0
<BONDS> 405,606
0
0
<COMMON> 431,679
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 945,488
<SALES> 0
<TOTAL-REVENUES> 128,019
<CGS> 0
<TOTAL-COSTS> 44,679
<OTHER-EXPENSES> 35,297
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,226
<INCOME-PRETAX> 24,817
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,570
<EPS-PRIMARY> .72
<EPS-DILUTED> .72
</TABLE>
