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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 JUNE 30, 1997
[ ] 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
(State or other jurisdiction of 36-3857664
incorporation or organization) (I.R.S. Employer Identification No.)
TWO NORTH RIVERSIDE PLAZA,
SUITE 800, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
(312) 474-1122
(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:
24,692,809 SHARES OF COMMON STOCK AS OF JULY 31, 1997.
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MANUFACTURED HOME COMMUNITIES, INC.
TABLE OF CONTENTS
PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996 ...................................................... 3
Consolidated Statements of Operations for the six months
and quarters ended June 30, 1997 and 1996 ............................. 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and 1996 ................................................ 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 ................... ........................... 17
ITEM 6. Exhibits and Reports on Form 8-K ................................. 17
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MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
June 30, December 31,
1997 1996
-------- -----------
ASSETS
Investment in rental property:
Land.................................................. $147,981 $138,514
Land improvements..................................... 397,226 370,440
Buildings and other depreciable property.............. 89,737 88,696
-------- --------
634,944 597,650
Accumulated depreciation.............................. (79,564) (71,481)
-------- --------
Net investment in rental property.................. 555,380 526,169
Cash and cash equivalents.............................. 1,613 324
Short-term investments (at cost,
which approximates market)............................ 3,820 1,968
Notes receivable....................................... 15,607 15,427
Investment in and advances to affiliates............... 5,807 6,836
Rents receivable....................................... 717 723
Deferred financing costs, net.......................... 1,770 1,999
Prepaid expenses and other assets...................... 3,993 14,279
Due from affiliates.................................... 116 149
-------- --------
Total assets....................................... $588,823 $567,874
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable................................ $199,135 $197,482
Term Loan............................................. 60,000 ---
Line of credit........................................ 19,000 57,500
Accounts payable and accrued expenses................. 17,741 14,364
Accrued interest payable.............................. 1,651 1,495
Rents received in advance and security deposits....... 3,424 1,897
Distributions payable................................. 9,043 8,439
Due to affiliates..................................... 99 105
-------- --------
Total liabilities.................................. 310,093 281,282
-------- --------
Commitments and contingencies
Minority interests..................................... 28,401 28,640
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value
10,000,000 shares authorized; none issued.......... --- ---
Common stock, $.01 par value
50,000,000 shares authorized; 24,688,643 and
24,951,948 shares issued and outstanding for
1997 and 1996, respectively........................ 247 249
Paid-in capital....................................... 288,023 293,512
Employee notes........................................ (6,100) (6,158)
Distributions in excess of accumulated earnings....... (31,841) (29,651)
-------- --------
Total stockholders' equity......................... 250,329 257,952
-------- --------
Total liabilities and stockholders' equity............ $588,823 $567,874
======== ========
The accompanying notes are an integral part of the financial statements.
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MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS AND QUARTERS ENDED JUNE 30, 1997 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the Six Months Ended For the Quarters Ended
June 30, June 30,
------------------------ ----------------------
1997 1996 1997 1996
--------- -------- -------- --------
REVENUES
Base rental income............................ $50,978 $45,660 $25,932 $23,195
Utility and other income...................... 5,483 4,539 2,745 2,240
Equity in income of affiliates................ 207 207 99 102
Interest income............................... 1,246 1,191 609 591
------- ------- ------- -------
Total revenues................................ 57,914 51,597 29,385 26,128
------- ------- ------- -------
EXPENSES
Property operating and maintenance............ 15,274 13,998 7,675 7,101
Real estate taxes............................. 3,914 4,016 1,987 2,006
Property management........................... 2,412 2,225 1,191 1,041
General and administrative.................... 2,212 1,952 1,062 981
Interest and related amortization............. 10,017 8,640 5,196 4,446
Depreciation on corporate assets.............. 289 220 146 124
Depreciation on real estate assets
and other costs............................. 8,034 7,323 4,077 3,763
------- ------- ------- -------
Total expenses.............................. 42,152 38,374 21,334 19,462
------- ------- ------- -------
Income before allocation to minority interests 15,762 13,223 8,051 6,666
(Income) allocated to minority interests...... (1,585) (1,311) (798) (661)
------- ------- ------- -------
Net income.................................... $14,177 $11,912 $ 7,253 $ 6,005
======= ======= ======= =======
Net income per weighted average common share
outstanding................................. $ .57 $ .48 $ .29 $ .24
======= ======= ======= =======
Distributions declared
per common share outstanding................ $ .66 $ .61 $ .33 $ .305
======= ======= ======= =======
Weighted average common shares outstanding.... 24,777 24,675 24,715 24,687
======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
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MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 14,177 $ 11,912
Adjustments to reconcile net income to
cash provided by operating activities:
Income allocated to minority interests................... 1,585 1,311
Depreciation and amortization expense.................... 8,792 8,107
Equity in income of affiliates........................... (207) (207)
Amortization of deferred compensation and other.......... 436 40
Writeoff of project costs................................ 57 ---
Decrease in rents receivable............................. 6 54
(Increase) decrease in prepaid expenses and other assets. (1,165) 839
Increase in accounts payable and accrued expenses........ 2,776 4,111
Increase in rents received in advance and
security deposits....................................... 1,527 1,572
-------- --------
Net cash provided by operating activities.................. 27,984 27,739
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments, net.................... (1,852) (4,168)
Net proceeds from sale of project related assets........... 11,148 ---
Distributions from affiliates.............................. 1,178 446
Collection of principal payments on notes receivable....... 100 70
Acquisition of rental properties........................... (34,649) (28,968)
Improvements:
Improvements - corporate................................. (147) (542)
Improvements - rental properties......................... (966) (1,461)
Site development costs................................... (904) (1,089)
-------- --------
Net cash used in investing activities...................... (26,092) (35,712)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options................ 1,333 348
Distributions to common stockholders and
minority interests........................................ (17,587) (16,350)
Repurchase of common stock................................. (7,260) ---
Collection of principal payments on employee notes......... 58 47
Proceeds from line of credit and term loan................. 98,900 25,600
Repayments on mortgage notes payable and line of credit.... (75,747) (1,370)
Debt issuance costs........................................ (300) (200)
-------- --------
Net cash (used in) provided by financing activities........ (603) 8,075
-------- --------
Net increase in cash and cash equivalents................... 1,289 102
Cash and cash equivalents, beginning of period.............. 324 760
-------- --------
Cash and cash equivalents, end of period.................... $ 1,613 $ 862
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest.................... $ 9,332 $ 8,020
======== ========
The accompanying notes are an integral part of the financial statements.
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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 1996
Annual Report on Form 10-K (the "1996 Form 10-K"). The following Notes to
Consolidated Financial Statements highlight significant changes to the Notes
included in the 1996 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
(a) Use of Estimates
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.
(b) Earnings Per Common Share
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("SFAS No. 128") is effective for years ending after December 15, 1997. The
Company will adopt SFAS No. 128 as of December 31, 1997 (earlier adoption is
not permitted). The Company expects the impact of the adoption of SFAS No. 128
to be immaterial. Had the Company adopted SFAS No. 128 in the second quarter
of 1997, the impact would have been immaterial.
NOTE 2 - COMMON STOCK AND RELATED TRANSACTIONS
The Company paid a $.33 per share distribution on April 11, 1997 and July
11, 1997, for the quarters ended March 31, 1997 and June 30, 1997,
respectively, to stockholders of record on March 28, 1997 and June 27, 1997,
respectively.
In March 1997, the Company's Board of Directors approved a common stock
repurchase plan whereby the Company is authorized to repurchase up to 1,000,000
shares of its common stock. As of June 30, 1997, the Company had repurchased
330,300 shares of common stock.
NOTE 3 - RENTAL PROPERTY
On March 14, 1997, the Company acquired California Hawaiian Mobile Estates
("California Hawaiian"), located in San Jose, California, for a purchase price
of approximately $23.3 million. The acquisition was funded with a borrowing
under the Company's line of credit. California Hawaiian consists of
approximately 412 developed sites.
On March 27, 1997, the Company acquired Golf Vista Estates ("Golf Vista"),
located in Monee, Illinois. The purchase price of approximately $7.4 million,
including deferred payments of $150,000 per year for the next five years, was
funded with existing available cash. Golf Vista consists of approximately 200
developed sites and 319 expansion sites.
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RENTAL PROPERTY (CONTINUED)
On May 29, 1997, the Company entered into a capital lease with East Tincup
Village, Inc., a Colorado corporation, for Golden Terrace South (formerly known
as East Tincup Village). The lease term is 110 months commencing on May 29,
1997, with monthly rental payments of approximately $18,000. The lease
contains an option for the Company to purchase Golden Terrace South at the
termination of the lease for $2.4 million. For financial accounting purposes,
the Company accounts for the lease as a direct financing lease; and,
accordingly, the Company has recorded an investment in real estate and a note
payable. Golden Terrace South consists of 80 developed sites and 86
recreational vehicle sites.
On April 23, 1997, the Company entered into an agreement to acquire a
portfolio of manufactured home communities from partnerships affiliated with
Mobileparks West for a proposed purchase price of approximately $115 million.
The communities, which consist of approximately 3,950 sites, are located in
California, Oregan, Utah, Arizona, Nevada and Washington. There can be no
assurance that the transaction will be completed, as it is subject to due
diligence, partnership approval and certain other conditions.
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 4 - NOTES RECEIVABLE
At June 30, 1997 and December 31, 1996, notes receivable consisted of the
following (amounts in thousands):
1997 1996
------- -------
$2.0 million note receivable with monthly principal
and interest payments at 9.0%, maturing
on 6/10/2003 (a).................................... $ 1,503 $ 1,596
$1.2 million purchase money notes with monthly
principal and interest payments at 7.0%,
maturing on 7/31/2001............................... 1,153 1,160
$10.0 million leasehold mortgage loan with interest
accruing at a stated rate of 12.5% with a
pay rate of 8.75%, maturing on 9/1/2013............. 11,306 11,071
$1.9 million note receivable with monthly interest
payments at prime plus 1.6%, maturing on 4/15/2000.. 1,645 1,600
------- -------
Total notes receivable................................. $15,607 $15,427
======= =======
(a) The $2.0 million note receivable was repaid on August 1, 1997.
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LONG-TERM BORROWINGS
At June 30, 1997 and December 31, 1996, long-term borrowings consisted of
the following (amounts in thousands):
1997 1996
-------- --------
$100.0 million mortgage note payable with monthly
interest only payments at LIBOR plus 1.05%,
maturing on 3/3/98 (a).............................. $100,000 $100,000
First mortgage loan with monthly principal and
interest payments at 7.40%, maturing on 3/1/2004.... 8,542 8,620
Purchase money note with structured principal and
interest payments at an imputed rate of 7.38%,
maturing on 7/11/2004............................... 1,334 1,334
First mortgage loan with monthly principal and
interest payments at a rate of 7.48%,
maturing on 8/1/2004................................ 24,373 24,544
$65.0 million first mortgage loan with monthly
principal and interest payments at 8.0%,
maturing on 9/1/2001................................ 62,486 62,984
$2.4 million note payable with monthly interest
payments at 9.05%, maturing on 7/31/2006............ 2,400 ---
-------- --------
Total collateralized borrowings........................ 199,135 197,482
$100.0 million line of credit at LIBOR
plus 1.125% (b)..................................... 19,000 57,500
$60.0 million term loan at LIBOR plus 1.00% (c)........ 60,000 ---
-------- --------
Total long-term borrowings............................. $278,135 $254,982
======== ========
(a) In October 1996, the Company entered into an interest rate swap agreement
fixing the London Interbank Offered Rate ("LIBOR") on the $100.0 million
mortgage debt (the "Mortgage Debt") at 5.57% effective January 10, 1997 through
March 3, 1998. The value of this agreement is impacted by changes in the
market rate of interest. Had the agreement been entered into on June 30, 1997,
the applicable LIBOR swap rate would have been 6.15%. Each 0.01% increase or
decrease in the applicable swap rate for this agreement increases or decreases
the value of the agreement entered into by the Company versus its current value
by approximately $2,500.
In July 1995, the Company entered into an interest rate swap agreement
(the "Swap") beginning at the maturity of the Mortgage Debt fixing LIBOR on the
refinancing of the Mortgage Debt at 6.4% for the period 1998 through 2003. The
cost of the Swap consisted only of legal costs which were deemed immaterial.
In the event that the Company does not refinance the Mortgage Debt, the risk
associated with the Swap is that the Company would be obligated to perform its
obligations under the terms of the Swap or would have to pay to terminate the
Swap. In either event, the impact of such transaction would be reflected in
the Company's statement of operations. The value of the Swap is impacted by
changes in the market rate of interest. Had the Swap been entered into on June
30, 1997, the applicable LIBOR swap rate would have been 6.77%. Each 0.01%
increase or decrease in the applicable swap rate for the Swap increases or
decreases the value of the Swap entered into by the Company versus its current
value by approximately $24,000.
(b) On March 1, 1997, the Company amended the credit agreement reducing the
interest rate from LIBOR plus 1.375% to LIBOR plus 1.125%. In addition, the
fee on the average unused amount was reduced to 0.125% of such amount from
0.15%. The Company did not pay any fees in connection with this amendment.
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LONG-TERM BORROWINGS (CONTINUED)
(c) On April 3, 1997, the Company entered into a $60.0 million term loan (the
"Loan") with a group of banks with interest only payable monthly at a rate of
LIBOR plus 1.0%. On June 2, 1997, the Company elected to set the LIBOR rate on
the Loan at 6.05% through January 2, 1998. The Loan matures on April 3, 2000
and may be extended to April 3, 2002. In connection with the Loan, the
outstanding balance under the $100.0 million line of credit was reduced by
$60.0 million.
As of June 30, 1997, the carrying value of the property collateralizing the
long-term borrowings was approximately $329.4 million.
NOTE 6 - STOCK OPTIONS
Pursuant to the Amended and Restated 1992 Stock Option and Stock Award
Plan as discussed in Note 13 to the 1996 Form 10-K, certain officers,
directors, key employees and consultants have been offered the opportunity to
acquire shares of common stock of the Company through stock options
("Options"). During the six months ended June 30, 1997, Options for 66,995
shares of common stock were exercised.
NOTE 7 - EMPLOYEE STOCK PURCHASE PLAN
The Company adopted, effective July 1, 1997, an Employee Stock Purchase
Plan. Pursuant to the Employee Stock Purchase Plan, certain employees and
directors of the Company may each annually acquire up to $100,000 of common
stock of the company. The aggregate number of common shares available under
the Employee Stock Purchase Plan shall not exceed 1,000,000, subject to
adjustment by the Board of Directors. The common stock may be purchased
quarterly at a price equal to 85% of the lesser of: (a) the closing price for a
share on the last day of such quarter; and (b) the greater of: (i) the closing
price for a share on the first day of such quarter, and (ii) the average
closing price for a share for all the business days in the quarter.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The litigation filed on September 17, 1996 by Chateau Properties, Inc.
("Chateau") against the Company and MHC Operating Limited Partnership and
various counterclaims filed by the Company (see discussion in Note 14 of Form
10-K) were dismissed on May 5, 1997.
The Company is involved in a variety of other 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.
NOTE 9 - PROPOSED MERGER
During 1996, the Company offered a merger proposal to Chateau in
opposition to Chateau's proposed merger with ROC Communities, Inc. ("ROC") and
incurred approximately $1.3 million in related costs and invested in certain
related saleable assets with a book value of approximately $9.9 million. These
expenditures were included in prepaid expenses and other assets as of December
31, 1996. On February 11, 1997, Chateau's shareholders approved Chateau's
merger with ROC. Thus, in the first quarter of 1997, the Company sold the
related assets it had acquired for approximately $11.1 million and incurred a
net write-off of approximately $57,000.
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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
six months and quarter ended June 30, 1997 compared to the corresponding
periods in 1996. It should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included herein and the 1996 Form 10-K.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 TO THREE MONTHS ENDED JUNE 30,
1996
Since June 30, 1996, the gross investment in rental property has increased
from $575 million to $635 million as of June 30, 1997 due to: (i) the
acquisition of Casa del Sol Resort No. 1 and Casa del Sol Resort No. 2
(collectively, the "Casa del Sol Resorts") on October 23, 1996; (ii) the
acquisition of California Hawaiian on March 14, 1997; (iii) the acquisition of
Golf Vista on March 27, 1997; and (iv) the acquisition of Golden Terrace South
on May 30, 1997. The total number of sites has increased from 26,876 as of
June 30, 1996 to 28,168 as of June 30, 1997.
The following table summarizes certain weighted average occupancy
statistics for the quarters ended June 30, 1997 and 1996. "Core Portfolio"
represents an analysis of properties owned during both periods of comparison.
Base rental income ($25.9 million) increased $2.7 million or 11.8%. For
the Core Portfolio, base rental income increased approximately $1.2 million or
5.4%, reflecting a 4.3% increase in base rental rates and a 1.1% increase
related to occupancy. The remaining $1.5 million increase in base rental
income was attributed to Waterford, acquired on February 28, 1996, Candlelight
Village, acquired on May 9, 1996, the Casa del Sol Resorts, California
Hawaiian, Golf Vista, and Golden Terrace South (collectively, the "Acquisition
Properties").
Monthly base rent per site for the total portfolio increased 4.8%,
reflecting a 4.5% increase in monthly base rent per site for the Core Portfolio
and higher monthly base rents for the Acquisition Properties. Average monthly
base rent per site for the Acquisition Properties was $333 for the second
quarter of 1997.
Weighted average occupancy increased 0.7% due to increased occupancy at
the expansion communities and the addition of the Acquisition Properties to the
portfolio with higher occupancy percentages.
Utility and other income ($2.7 million) increased $505,000 or 22.5%,
primarily due to an increase of $196,000 attributed to the Acquisition
Properties and an increase in utility income, real estate tax pass-ons and
other miscellaneous income at the Core Portfolio.
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MANUFACTURED HOME COMMUNITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Interest income ($609,000) increased $18,000 or 3.0%, primarily due to an
increase in interest earned on short-term investments. Short-term investments
had average balances for the quarters ended June 30, 1997 and 1996 of
approximately $3.2 million and $3.5 million, respectively, which earned
interest income at an effective rate of 5.3% and 5.2% per annum, respectively.
As of June 30, 1997, the Company had cash and cash equivalents and short- term
investments of $5.4 million.
Property operating and maintenance expenses ($7.7 million) increased
$574,000 or 8.1%. Approximately $513,000 of the increase was attributed to the
Acquisition Properties. The remaining 0.9% increase was due to increases in
property payroll of $39,000, utility expense of $48,000, and property general
and administrative expense of $48,000, partially offset by decreased repairs
and maintenance expense of $31,000 and insurance and other expenses of $43,000.
Property operating and maintenance expenses represented 26.1% of total
revenues in 1997 and 27.2% in 1996.
Real estate taxes ($2.0 million) decreased $19,000 or 0.9% due to lower
than expected assessed values at certain of the properties based on actual
bills received, partially offset by additional real estate taxes at the
Acquisition Properties. Real estate taxes represented 6.8% of total revenues
in 1997 and 7.7% in 1996.
Property management expenses ($1.2 million) increased $150,000 or 14.4%.
The increase was primarily due to an increase in management company payroll and
timing of certain expenses. Property management expenses represented 4.1% of
total revenues in 1997 and 4.0% in 1996.
General and administrative expense ("G&A") ($1.1 million) increased
$81,000 or 8.3%. The increase was primarily due to increased payroll resulting
from salary increases and timing of public company expenses. G&A represented
3.6% of total revenues in 1997 and 3.8% in 1996.
Interest and related amortization ($5.2 million) increased $750,000 or
16.9%. The increase was due to higher weighted average outstanding debt
balances during the period. The weighted average outstanding debt balances for
the quarters ended June 30, 1997 and 1996 were $274.7 million and $232.0
million, respectively. The effective interest rates were 6.9% and 7.2%,
respectively. Interest and related amortization represented 17.7% of total
revenues in 1997 and 17.0% in 1996.
In July 1995, the Company entered into an interest rate swap agreement
(the "Swap") beginning at the maturity of the Mortgage Debt fixing LIBOR on the
refinancing of the Mortgage Debt at 6.4% for the period 1998 through 2003. The
cost of the Swap consisted only of legal costs which were deemed immaterial.
In the event that the Company does not refinance the Mortgage Debt, the risk
associated with the Swap is that the Company would be obligated to perform its
obligations under the terms of the Swap or would have to pay to terminate the
Swap. In either event, the impact of such transaction would be reflected in
the Company's statement of operations. The value of the Swap is impacted by
changes in the market rate of interest. Had the Swap been entered into on June
30, 1997, the applicable LIBOR swap rate would have been 6.77%. Each 0.01%
increase or decrease in the applicable swap rate for the Swap increases or
decreases the value of the Swap entered into by the Company versus its current
value by approximately $24,000.
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MANUFACTURED HOME COMMUNITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
In October 1996, the Company entered into an interest rate swap agreement
fixing LIBOR on the Mortgage Debt at 5.57% effective January 10, 1997 through
March 3, 1998. The value of this agreement is impacted by changes in the
market rate of interest. Had the agreement been entered into on June 30, 1997,
the applicable LIBOR swap rate would have been 6.15%. Each 0.01% increase or
decrease in the applicable swap rate for this agreement increases or decreases
the value of the agreement entered into by the Company versus its current value
by approximately $2,500.
On March 1, 1997, the Company amended the credit agreement for its $100.0
million line of credit reducing the interest rate from LIBOR plus 1.375% to
LIBOR plus 1.125%. In addition, the fee on the average unused amount was
reduced to 0.125% of such amount from 0.15%. The Company did not pay any fees
in connection with this amendment.
On April 3, 1997, the Company entered into a $60.0 million term loan (the
"Loan") with a group of banks with interest only payable monthly at a rate of
LIBOR plus 1.0%. On June 2, 1997, the Company elected to set the LIBOR rate on
the Loan at 6.05% through January 2, 1998. The Loan matures on April 3, 2000
and may be extended to April 3, 2002. In connection with the Loan, the
outstanding balance under the $100.0 million line of credit was reduced by
$60.0 million.
Depreciation on corporate assets ($146,000) increased $22,000 or 17.7% due
to fixed asset additions in 1996 associated with the Company's conversion to a
new accounting software system. Depreciation on corporate assets represented
0.5% of total revenues in 1997 and 1996.
Depreciation on real estate assets and other costs ($4.1 million)
increased $314,000 or 8.3% as a result of the Acquisition Properties.
Depreciation on real estate assets and other costs represented 13.9% of total
revenues in 1997 and 14.4% in 1996.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO SIX MONTHS ENDED JUNE 30, 1996
The acquisition of California Hawaiian and Golf Vista in 1997 increased
base rental income, property operating and maintenance expenses, real estate
taxes and deprecation for the six months ended June 30, 1997.
The following table summarizes certain weighted average occupancy
statistics for the six months ended June 30, 1997 and 1996. "Core Portfolio"
represents an analysis of properties owned during both periods of comparison.
Base rental income ($51.0 million) increased $5.3 million or 11.6%. For
the Core Portfolio, base rental income increased approximately $2.5 million or
5.5%, reflecting a 4.4% increase in base rental rates and a 1.1% increase
related to occupancy. The remaining $2.8 million increase in base rental
income was attributed to the Acquisition Properties.
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MANUFACTURED HOME COMMUNITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Monthly base rent per site for the total portfolio increased 4.2%,
reflecting a 4.5% 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 $316 for the six months ended June 30, 1997.
Weighted average occupancy increased 0.9% due to increased occupancy at
the expansion communities and the addition of the Acquisition Properties to the
portfolio with higher occupancy percentages.
Utility and other income ($5.5 million) increased $944,000 or 20.8%,
primarily due to an increase of $286,000 attributed to the Acquisition
Properties, the collection of dividend income of $173,000 in the first quarter
of 1997, and increased utility income, real estate tax pass-ons and other
miscellaneous income at the Core Portfolio.
Interest income ($1.2 million) increased $55,000 or 4.6%, primarily due to
an increase in interest earned on short-term investments. Short-term
investments had average balances for the six months ended June 30, 1997 and
1996 of approximately $4.2 million and $3.4 million, respectively, which earned
interest income at an effective rate of 5.3% per annum in both years.
Property operating and maintenance expenses ($15.3 million) increased $1.3
million or 9.1%. Approximately $880,000 of the increase was attributed to the
Acquisition Properties. The remaining 3.0% increase was due to increases in
repairs and maintenance expense of $130,000, property payroll of $138,000,
utility expense of $143,000, and property general and administrative of
$118,000, partially offset by decreased insurance and other expenses of
$133,000. Property operating and maintenance expenses represented 26.4% of
total revenues in 1997 and 27.1% in 1996.
Real estate taxes ($3.9 million) decreased $102,000 or 2.5% due to lower
than expected assessed values at certain of the properties based on actual
bills received, partially offset by additional real estate taxes at the
Acquisition Properties. Real estate taxes represented 6.8% of total revenues
in 1997 and 7.8% in 1996.
Property management expenses ($2.4 million) increased $187,000 or 8.4%.
The increase was primarily due to an increase in management company payroll and
timing of certain expenses. Property management expenses represented 4.2% of
total revenues in 1997 and 4.3% in 1996.
G&A ($2.2 million) increased $260,000 or 13.3%. The increase was
primarily due to increased payroll resulting from salary increases and the
timing of public company related expenses. G&A represented 3.8% of total
revenues in 1997 and 1996.
Interest and related amortization ($10.0 million) increased $1.4 million
or 15.9%. The increase was due to higher weighted average outstanding debt
balances during the period. The weighted average outstanding debt balances for
the six months ended June 30, 1997 and 1996 were $263.0 million and $225.1
million, respectively. The effective interest rates were 7.1% and 7.2%,
respectively. Interest and related amortization represented 17.3% of total
revenues in 1997 and 16.7% in 1996.
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MANUFACTURED HOME COMMUNITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Depreciation on corporate assets ($289,000) increased $69,000 or 31.4% due
to fixed asset additions in 1996 associated with the Company's conversion to a
new accounting software system. Depreciation on corporate assets represented
0.5% of total revenues in 1997 and 0.4% in 1996.
Depreciation on real estate assets and other costs ($8.0 million)
increased $711,000 or 9.7% as a result of the Acquisition Properties. In
addition, in the first quarter of 1997, the Company incurred a $57,000
write-off of costs associated with the Company's opposition in 1996 to
Chateau's proposed merger with ROC. Depreciation on real estate assets and
other costs represented 13.9% of total revenues in 1997 and 14.2% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by approximately $1.3 million when
compared to December 31, 1996. The major components of this increase were
increased cash provided by operating activities, net proceeds from the sale of
project related assets, and net proceeds from the line of credit and term loan,
partially offset by the acquisition of California Hawaiian, Golf Vista, and
Golden Terrace South, payment of distributions and purchase of shares of the
Company's common stock under the common stock repurchase plan.
Net cash provided by operating activities increased $245,000 from $27.7
million for the six months ended June 30, 1996 to $28.0 million for the six
months ended June 30, 1997. This increase reflected a $3.3 million increase in
funds from operations ("FFO"), as discussed below, partially offset by
increased prepaid expenses and other assets and a decrease in 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.
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MANUFACTURED HOME COMMUNITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The following table presents a calculation of FFO and FAD for the quarters
and six months ended June 30, 1997 and 1996:
Net cash used in investing activities decreased $9.6 million from $35.7
million for the six months ended June 30, 1996 to $26.1 million for the six
months ended June 30, 1997 primarily due to proceeds from the sale of project
related assets, decreased purchases of short-term investments, increased
distributions from affiliates, and decreased corporate and property related
improvements, partially offset by increased payments for acquisitions in 1997.
During 1996, the Company offered a merger proposal to Chateau in
opposition to Chateau's proposed merger with ROC and incurred approximately
$1.3 million in project related costs and invested in certain project related
saleable assets with a book value of approximately $9.9 million. These
expenditures were included in prepaid expenses and other assets at December 31,
1996. On February 11, 1997, Chateau's shareholders approved Chateau's merger
with ROC. Thus, in the first quarter of 1997, the Company sold the related
assets it had acquired for approximately $11.1 million and incurred a net
write-off of approximately $57,000.
On March 14, 1997, the Company acquired California Hawaiian, located in
San Jose, California, for a purchase price of approximately $23.3 million. The
acquisition was funded with a borrowing under the Company's line of credit.
California Hawaiian consists of approximately 412 developed sites.
On March 27, 1997, the Company acquired Golf Vista, located in Monee,
Illinois. The purchase price of approximately $7.4 million, including deferred
payments of $150,000 per year for the next five years, was funded with existing
available cash. Golf Vista consists of approximately 200 developed sites and
319 expansion sites.
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MANUFACTURED HOME COMMUNITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On May 30, 1997, the Company entered into a capital lease with East Tincup
Village, Inc., a Colorado corporation, for Golden Terrace South (formerly known
as East Tincup Village). The lease term is 110 months commencing on May 29,
1997 with monthly rental payments of approximately $18,000. The lease contains
an option for the Company to purchase Golden Terrace South at the termination
of the lease for $2.4 million. For financial accounting purposes, the Company
accounts for the lease as a direct financing lease; and, accordingly, the
Company has recorded an investment in real estate and a note payable. Golden
Terrace South consists of 80 developed sites and 86 recreational vehicle sites.
In connection with an agreement Realty Systems, Inc. ("RSI") entered into
in July 1996, a lender provides floor plan financing to RSI for the purchase of
new inventory. This agreement reduced the Company's need to make contributions
to RSI in the first six months of 1997. In addition, in the first six months
of 1997, LP Management Corp. distributed approximately $800,000 to the Company.
Capital expenditures for improvements were approximately $2.0 million for
the six months ended June 30, 1997 compared to $3.1 million for the six months
ended June 30, 1996. Of the $2.0 million, approximately $966,000 represented
improvements to existing sites. The Company anticipates spending approximately
$2.0 million on improvements to existing sites during the remainder of 1997.
The Company believes these improvements are necessary in order to increase
and/or maintain occupancy levels and maximize rental rates charged to new and
renewing residents. The remaining $1.1 million 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 90 sites
which should be available for occupancy in 1997.
Net cash used in financing activities increased $8.7 million from $8.1
million provided by financing activities for the six months ended June 30, 1996
to $603,000 used in financing activities for the six months ended June 30, 1997
primarily due to the purchase of 330,300 shares of the Company's common stock
under the common stock repurchase plan and increased distributions to common
stockholders.
Distributions to common stockholders and minority interests increased
approximately $1.2 million due to an increase in the distribution per share.
On January 10, 1997, the Company paid a $.305 per share distribution for the
quarter ended December 31, 1996 to stockholders of record on December 27, 1996.
The Company paid a $.33 per share distribution on April 11, 1997 and July 11,
1997 for the quarters ended March 31, 1997 and June 30, 1997, respectively, to
stockholders of record on March 28, 1997 and June 27, 1997, respectively.
Return of capital on a GAAP basis was $0.05 and $0.04 per share for the
quarters ended March 31, 1997 and June 30, 1997, respectively.
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 its existing line of credit and the issuance of debt securities or
additional equity securities in the Company, in addition to working capital.
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("SFAS No. 128") is effective for years ending after December 15, 1997. The
Company will adopt SFAS No. 128 as of December 31, 1997 (earlier adoption is
not permitted). The Company expects the impact of the adoption of SFAS No. 128
to be immaterial. Had the Company adopted SFAS No. 128 in the second quarter
of 1997, the impact would have been immaterial.
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MANUFACTURED HOME COMMUNITIES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion in Note 8 of Notes to Consolidated Financial Statements
is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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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/ Judy A. Pultorak
---------------------------------------
Judy A. Pultorak
Principal Accounting Officer
DATE: August 7, 1997
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