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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 MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-11718
MANUFACTURED HOME COMMUNITIES, INC.
(Exact name of registrant as specified in its Charter)
MARYLAND 36-3857664
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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:
24,975,866 SHARES OF COMMON STOCK AS OF APRIL 30, 1998.
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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 March 31, 1998 and December 31, 1997...................................... 3
Consolidated Statements of Operations for the quarters ended March 31, 1998 and 1997........................ 4
Consolidated Statements of Cash Flows for the quarters ended March 31, 1998 and 1997........................ 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.................................................................................... 15
ITEM 6. Exhibits and Reports on Form 8-K..................................................................... 15
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MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
March 31, December 31,
1998 1997
--------- ------------
ASSETS
Investment in rental property:
Land................................................................ $ 217,309 $ 206,375
Land improvements................................................... 679,317 612,670
Buildings and other depreciable property............................ 92,295 90,870
Advances on rental property acquisitions............................ 16,644 26,403
--------- ------------
1,005,565 936,318
Accumulated depreciation............................................ (95,132) (89,208)
--------- ------------
Net investment in rental property.................................. 910,433 847,110
Cash and cash equivalents............................................. 3,454 909
Short-term investments (at cost, which approximates market)........... 9,370 ---
Notes receivable...................................................... 13,488 1,147
Investment in and advances to affiliates.............................. 6,958 7,126
Investment in joint ventures.......................................... 6,507 ---
Rents receivable...................................................... 973 787
Deferred financing costs, net......................................... 3,259 3,265
Prepaid expenses and other assets..................................... 5,292 3,968
Due from affiliates................................................... 411 53
--------- ------------
Total assets....................................................... $ 960,145 $ 864,365
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.............................................. $ 409,515 $ 403,656
Unsecured term loan................................................. 60,000 60,000
Unsecured line of credit............................................ 84,000 25,000
Other notes payable................................................. 6,500 6,516
Accounts payable and accrued expenses............................... 20,120 17,197
Accrued interest payable............................................ 4,141 1,536
Rents received in advance and security deposits..................... 5,611 2,299
Distributions payable............................................... 11,190 55
Due to affiliates................................................... 102 78
--------- ------------
Total liabilities.................................................. 601,179 516,337
--------- ------------
Commitments and contingencies
Minority interests.................................................... 68,309 67,453
Stockholders' equity:
Preferred stock, $.01 par value; 10,000 shares authorized; none issued --- ---
Common stock, $.01 par value
50,000,000 shares authorized; 24,944,002 and 25,006,944
shares issued and outstanding for 1998 and 1997, respectively...... 250 248
Paid-in capital....................................................... 332,732 319,030
Employee notes........................................................ (5,062) (4,967)
Distributions in excess of accumulated earnings....................... (37,263) (33,736)
--------- ------------
Total stockholders' equity......................................... 290,657 280,575
--------- ------------
Total liabilities and stockholders' equity............................ $ 960,145 $ 864,365
========= ============
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 QUARTERS ENDED MARCH 31, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
March 31, March 31,
1998 1997
---------- ----------
REVENUES
Base rental income......................................... $ 37,208 $ 25,046
Utility and other income................................... 6,711 2,738
Equity in income of affiliates............................. 169 108
Interest income............................................ 784 637
---------- ----------
Total revenues.......................................... 44,872 28,529
---------- ----------
EXPENSES
Property operating and maintenance......................... 12,112 7,599
Real estate taxes.......................................... 3,558 1,927
Property management........................................ 1,782 1,221
General and administrative................................. 1,596 1,150
Interest and related amortization.......................... 10,121 4,821
Depreciation on corporate assets........................... 294 143
Depreciation on real estate assets and other costs......... 5,823 3,957
---------- ----------
Total expenses.......................................... 35,286 20,818
---------- ----------
Income before allocation to minority interests............... 9,586 7,711
(Income) allocated to minority interests..................... (1,821) (756)
---------- ----------
Net income................................................... $ 7,765 $ 6,955
========= ==========
Net income per common share - basic.......................... $ .31 $ .28
========= ==========
Net income per common share - diluted........................ $ .31 $ .28
========= ==========
Distributions declared per common share outstanding.......... $ .3625 $ .33
========= ==========
Weighted average common shares outstanding - basic........... 24,805 24,840
========= ==========
Weighted average common shares outstanding - diluted (Note 1) 31,095 27,840
========= ==========
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 QUARTERS ENDED MARCH 31, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
March 31, March 31,
1998 1997
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 7,765 $ 6,955
Adjustments to reconcile net income to
cash provided by operating activities:
Income allocated to minority interests....................... 1,821 756
Depreciation and amortization expense........................ 6,081 4,297
Equity in income of affiliates............................... (169) (108)
Amortization of deferred compensation and other.............. 284 219
Writeoff of project costs.................................... --- 57
(Increase) decrease in rents receivable...................... (186) 67
(Increase) in prepaid expenses and other assets.............. (1,790) (561)
Increase in accounts payable and accrued expenses............ 5,450 1,254
Increase in rents received in advance and security deposits.. 3,312 3,072
-------- --------
Net cash provided by operating activities...................... 22,568 16,008
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) redemption of short-term investments, net........... (9,370) 1,101
Net proceeds from sale of project related assets............... --- 11,148
Distributions from affiliates.................................. 282 1,011
(Funding) collection on notes receivable....................... (12,341) 49
Investment in joint ventures................................... (6,506) ---
Acquisition of rental properties............................... (50,963) (30,824)
Improvements:
Improvements - corporate..................................... (98) (88)
Improvements - rental properties............................. (897) (505)
Site development costs....................................... (453) (267)
-------- --------
Net cash used in investing activities.......................... (80,346) (18,375)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options.................... 1,459 1,104
Distributions to common stockholders and minority interests (55) (8,438)
Collection of principal payments on employee notes............. 34 27
Proceeds from line of credit................................... 66,500 24,000
Repayments on mortgage notes payable and line of credit........ (7,615) (13,375)
-------- --------
Net cash provided by financing activities...................... 60,323 3,318
-------- --------
Net increase (decrease) in cash and cash equivalents............. 2,545 951
Cash and cash equivalents, beginning of period................... 909 324
-------- --------
Cash and cash equivalents, end of period......................... $ 3,454 $ 1,275
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest......................... $ 7,414 $ 4,526
======== ========
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 1997
Annual Report on Form 10-K (the "1997 Form 10-K"). The following Notes to
Consolidated Financial Statements highlight significant changes to the Notes
included in the 1997 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
Earnings per common share are based on the weighted average number of
common shares outstanding during each year. In 1997, the Financial Accounting
Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128 replaces the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS No. 128 requirements. The
conversion of units of limited partnership interest ("OP Units") in MHC
Operating Limited Partnership has been excluded from the basic earnings per
share calculation because of certain restrictions on conversion. The
conversion of an OP Unit to common stock will have no effect on earnings per
common share since the allocation of earnings to an OP Unit is equivalent to
earnings allocated to a share of common stock.
The following table sets forth the computation of basic and diluted
earnings per share for the quarters ended March 31, 1998 and 1997:
1998 1997
------ ------
Numerator:
Net income $7,765 $6,955
Income allocated to minority interests 1,821 756
Numerator for diluted earnings per share- ------ ------
income available to common shareholders
after assumed conversions $9,586 $7,711
====== ======
Denominator:
Weighted average shares outstanding 24,805 24,840
Weighted average OP Units outstanding
assuming conversion 5,886 2,715
Employee stock options 404 285
Denominator for diluted earnings per share- ------ ------
adjusted weighted average shares and
assumed conversions 31,095 27,840
====== ======
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - COMMON STOCK AND RELATED TRANSACTIONS
On April 10, 1998, the Company paid a $.3625 per share distribution for
the quarter ended March 31, 1998 to stockholders of record on March 27, 1998.
In the first quarter of 1998, the Company, as general partner of MHC
Operating Limited Partnership (the "Operating Partnership"), approved the
addition of new limited partners to the Operating Partnership in connection
with certain acquisitions of rental property and investment in joint ventures
(see discussion in Note 3 and Note 4). The new limited partners received OP
Units which are exchangeable on a one-for-one basis for shares of the Company's
common stock.
NOTE 3 - RENTAL PROPERTY
On January 8, 1998, the Company acquired Quail Meadows, located in
Riverbank, California, for a purchase price of approximately $4.7 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Quail Meadows consists of approximately 146 developed sites.
On September 4, 1997, the Company entered into a portfolio purchase
agreement to acquire 38 manufactured home communities (the "Ellenburg
Communities") from partnerships having Ellenburg Capital Corporation ("ECC") as
the general partner for a puchase price in excess of $300 million. In December
1997, the Company closed on the acquisition of seventeen of the Ellenburg
Communities and gained effective control of an additional twelve communities.
During the quarter ended March 31, 1998, the Company closed on the acquisition
of three of the Ellenburg Communities for an aggregate purchase price of $25.4
million, made additional acquisition advances of approximately $33 million to
the partnerships which own seven of the Ellenburg Communities, and acquired
certain other undivided interests in certain of the Ellenburg Communities. The
Company funded the acquisition advances with borrowings under the Company's
line of credit. In connection with the supplemental agreement entered into in
December 1997 (the "Supplemental Agreement"), on February 12, 1998, the Company
exercised its right of first refusal on five of the Ellenburg Communities. A
third party, backed by one of the Company's competitors, has appealed certain
orders of the Superior Court for the state of California (the "California
Court") related to the Company's acquisition of the Ellenburg Communities. The
third party originally requested the California Court to stay all of its
proceedings and the Company's acquisition of the Ellenburg Communities pending
such appeal. The California Court denied this motion. The third party then
filed a writ of supersedeas with the California appellate court seeking a stay
of the California Court's orders and related transactions pending appeal. The
appellate court also refused to issue a stay and denied the writ of
supersedeas. The Company does not expect the appeals to be successful, or if
successful, to have a material impact on the Company's acquisition of the
Ellenburg Communities.
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.
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - NOTES RECEIVABLE
At March 31, 1998 and December 31, 1997, the Company had approximately
$13.4 million and $1.1 million in notes receivable, respectively. The Company
has $1.1 million in purchase money notes with monthly principal and interest
payments at 7.0%, maturing on July 31, 2001. On January 6, 1998, the Company
funded a $12.3 million loan (the "Meadows Loan") to Meadows Preservation, Inc.
The Meadows Loan is collateralized by The Meadows manufactured home community
located in Palm Beach Gardens, Florida, bears interest at a nominal rate of 9%,
subject to adjustment based on cash flow of the property, and matures on July
31, 1998. The Meadows loan was funded with a borrowing under the Company's
line of credit.
NOTE 5 - INVESTMENT IN JOINT VENTURE
On March 18, 1998, the Company entered into an approximately 50% joint
venture investment with Meadows Management Company to own two communities known
as "Plantation on the Lake" and "Trails West" for approximately $6.4 million.
Plantation on the Lake is located in Riverside, California and consists of 385
developed sites and 122 expansion sites. Trails West is located in Tucson,
Arizona and consists of 488 developed sites and 294 expansion sites. The
investment was funded with a $3.9 million borrowing under the Company's line of
credit and with the Company issuing approximately $2.5 million in OP Units.
NOTE 6 - LONG-TERM BORROWINGS
As of March 31, 1998 and December 31, 1997, the Company had outstanding
mortgage indebtedness of approximately $409.5 million and $403.7 million,
respectively, encumbering 44 and 43 of the Company's properties, respectively.
As of March 31, 1998 and December 31, 1997, the carrying value of such
properties was approximately $500 million and $493 million, respectively.
The outstanding indebtedness consists of a $265.0 million mortgage note
(the "Mortgage Debt") collateralized by 29 properties beneficially owned by MHC
Financing Limited Partnership. The Mortgage Debt has a maturity date of January
2, 2028 and pays interest at 7.015%. There is no principal amortization until
February 1, 2008 after which principal and interest are paid from available
cash flow and the interest rate is reset at a rate equal to the then 10-year
U.S. Treasury obligations plus 2.0%. The Company also has outstanding debt on
nine properties in the aggregate amount of approximately $47 million, which was
recorded at fair market value with the related discount or premium being
amortized over the life of the loan using the effective interest rate. In
addition, the Company recorded a $2.4 million loan in connection with a direct
financing lease entered into in May 1997. Scheduled maturities for the
outstanding indebtedness, excluding the Mortgage Debt, are at various dates
through November 30, 2020 and fixed interest rates range from 7.25% to 9.05%.
The Company has a $100.0 million unsecured line of credit with a bank (the
"Credit Agreement") bearing interest at the London Interbank Offered Rate
("LIBOR") plus 1.125%. The Company pays a fee on the average unused amount of
such credit equal to 0.125% of such amount. As of March 31, 1998, $84 million
was outstanding under the line of credit. On April 28, 1998, the Company
amended the Credit Agreement increasing the line of credit from $100.0 million
to $150.0 million. The Company paid fees related to this amendment which were
immaterial.
The Company has 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%. The
Loan matures on April 3, 2000 and may be extended to April 3, 2002. On April
7, 1998, the Company borrowed an additional $50.0 million at a rate of LIBOR
plus 1.0%, maturing on June 7, 1998. On April 28, 1998, the Company amended
the Loan which increased the borrowing from $60.0 million to $100.0 million.
The Company used the $40.0 million in proceeds to repay a portion of the $50.0
million borrowed on April 7, 1998. The Company paid fees related to this
amendment which were immaterial.
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LONG-TERM BORROWINGS (CONTINUED)
The Company has approximately $6.5 million of installment notes payable
secured by a letter of credit with interest rates of 7.5%, maturing September
1, 2002. Approximately $5.3 million of the notes pay principal annually and
interest quarterly and the remaining $1.3 million of the notes pay interest
quarterly.
In July 1995, the Company entered into an interest rate swap agreement
(the "1998 Swap") fixing LIBOR on $100 million of the Company's floating rate
debt at 6.4% for the period 1998 through 2003. The cost of the 1998 Swap
consisted only of legal costs which were deemed immaterial. The value of the
1998 Swap is impacted by changes in the market rate of interest. Had the 1998
Swap been entered into on March 31, 1998, the applicable LIBOR swap rate would
have been 5.9%. Each 0.01% increase or decrease in the applicable swap rate
for the 1998 Swap increases or decreases the value of the 1998 Swap entered
into by the Company versus its current value by approximately $42,000.
NOTE 7 - STOCK OPTIONS
Pursuant to the Amended and Restated 1992 Stock Option and Stock Award
Plan as discussed in Note 12 to the 1997 Form 10-K, certain officers,
directors, employees and consultants have been offered the opportunity to
acquire shares of common stock of the Company through stock options
("Options"). During the quarter ended March 31, 1998, Options for 58,593
shares of common stock were exercised.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is involved in a variety of legal proceedings arising in the
ordinary course of business. All such proceedings, taken together, are not
expected to have a material adverse impact on the financial condition or
results of operations of the Company.
NOTE 9 - SUBSEQUENT EVENTS
On April 9, 1998, the Company closed on the acquisition of five additional
Ellenburg Communities for an aggregate purchase price of approximately $60
million. The Company funded the acquisition with a borrowing under the
Company's line of credit.
On April 23, 1998, the Company completed an offering of 1,048,059 shares
of common stock (the "Unit Trust Offering") and sold the shares to Merrill
Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"). The offering
price per share was $25.4375, the closing price on April 23, 1998, resulting in
gross offering proceeds of approximately $26.7 million. Net of the
underwriter's discount and offering expenses, the Company received
approximately $25 million. The Underwriter intends to deposit the shares of
common stock with the trustee of the Equity Investor Fund Cohen & Steers Realty
Majors Portfolio, a unit investment trust (the "Trust"), in exchange for units
in the Trust.
On April 30, 1998, the Company acquired Sherwood Forest RV Park, located
adjacent to one of the Ellenburg Communities in Kissimmee, Florida, for a
purchase price of approximately $7.0 million. The acquisition was funded with
a borrowing under the Company's line of credit. Sherwood Forest consists of
approximately 512 developed sites and 144 expansion sites.
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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
three months ended March 31, 1998 compared to the corresponding period in 1997.
It should be read in conjunction with the Consolidated Financial Statements
and Notes thereto included herein and the 1997 Form 10-K.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 TO THREE MONTHS ENDED MARCH
31, 1997
Since March 31, 1997, the gross investment in rental property has
increased from $630 million to $1.0 billion as of March 31, 1998 due to the
following acquisitions: (i) Golden Terrace South on May 30, 1997; (ii) a
portfolio of eighteen manufactured home communities and two commercial
properties (collectively, the "MPW Properties") on August 29, 1997; (iii)
Arrowhead Village on September 16, 1997; (iv) the Ellenburg Communities on
December 18, 1997 and during the first quarter of 1998, and (v) Quail Meadows
on January 8, 1998. The total number of sites owned or controlled has
increased from 27,968 as of March 31, 1997 to 45,577 as of March 31, 1998.
The following table summarizes certain weighted average occupancy
statistics for the quarters ended March 31, 1998 and 1997. "Core Portfolio"
represents an analysis of properties owned as of the beginning of both periods
of comparison.
Core Portfolio Total Portfolio
--------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
Total sites 27,451 27,364 39,622 27,442
Occupied sites 26,091 25,931 37,675 26,009
Occupancy % 95.0% 94.8% 95.1% 94.8%
Monthly base rent per site $334 $320 $329 $321
Base rental income ($37.2 million) increased $12.2 million or 49%. For
the Core Portfolio, base rental income increased approximately $1.1 million or
4.6%, reflecting a 4.2% increase in base rental rates and a 0.4% increase
related to occupancy. The remaining $11.0 million increase in base rental
income was attributed to California Hawaiian acquired on March 14, 1997, Golden
Terrace South, the MPW Properties, Arrowhead Village, the Ellenburg Communities
and Quail Meadows (collectively, the "Acquisition Properties").
Monthly base rent per site for the total portfolio increased 2.5%,
reflecting a 4.4% 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 $321 for the quarter ended March 31, 1998.
Weighted average occupancy increased 0.3% due to increased occupancy at
the expansion communities and the addition of the Acquisition Properties to the
portfolio with higher occupancy percentages.
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MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
Utility and other income ($6.7 million) increased $4.0 million or 45%,
primarily due to an increase in utility income, real estate tax pass-ons and
other income of $2.0 million and RV income of $1.9 million, which is higher in
the first quarter due to seasonality, attributed to the Acquisition Properties.
The remaining $100,000 reflected increased utility income and real estate tax
pass-ons at the Core Portfolio.
Interest income ($784,000) increased $147,000 or 9%, primarily due to
interest earned on the Meadows Loan and an increase in interest earned on
short-term investments. Short-term investments had average balances for the
quarters ended March 31, 1998 and 1997 of approximately $8.0 million and $5.2
million, respectively, which earned interest income at an effective rate of
5.5% and 5.2% per annum, respectively. As of March 31, 1998, the Company had
cash and cash equivalents and short-term investments of $12.8 million.
Property operating and maintenance expenses ($12.1 million) increased $4.5
million or 59%. Approximately $4.6 million of the increase was attributed to
the Acquisition Properties. Partially offsetting the increase were decreases
in repairs and maintenance, utility expense, and insurance and other expenses,
partially offset by increased payroll and property general and administrative
expenses for the Core Portfolio. Property operating and maintenance expenses
represented 27.0% of total revenues in 1998 and 26.6% in 1997.
Real estate taxes ($3.6 million) increased $1.6 million or 85% attributed
to the Acquisition Properties. Real estate taxes represented 7.9% of total
revenues in 1998 and 6.8% in 1997.
Property management expenses ($1.8 million) increased $561,000 or 46%.
The increase was primarily due to the addition of a regional office in San
Jose, California and an increase in management company payroll. Property
management expenses represented 4.0% of total revenues in 1998 and 4.3% in
1997.
General and administrative expense ("G&A") ($1.6 million) increased
$446,000 or 39%. The increase was primarily due to increased payroll resulting
from salary increases and increased public company related expenses. G&A
represented 3.6% of total revenues in 1998 and 4.0% in 1997.
Interest and related amortization ($10.1 million) increased $5.3 million
or 110%. The increase was due to higher weighted average outstanding debt
balances during the period, as well as a slightly increased effective interest
rate. The weighted average outstanding debt balances for the quarters ended
March 31, 1998 and 1997 were $539.6 million and $251.2 million, respectively.
The effective interest rates were 7.4% and 7.3%, respectively. Interest and
related amortization represented 22.6% of total revenues in 1998 and 16.9% in
1997.
In July 1995, the Company entered into an interest rate swap agreement
(the "1998 Swap") fixing LIBOR on $100 million of the Company's floating rate
debt at 6.4% for the period 1998 through 2003. The cost of the 1998 Swap
consisted only of legal costs which were deemed immaterial. The value of the
1998 Swap is impacted by changes in the market rate of interest. Had the 1998
Swap been entered into on March 31, 1998, the applicable LIBOR swap rate would
have been 5.9%. Each 0.01% increase or decrease in the applicable swap rate
for the 1998 Swap increases or decreases the value of the 1998 Swap versus its
current value by approximately $42,000.
Depreciation on corporate assets ($156,000) increased $13,000 or 9% due to
fixed asset additions in 1997 associated with information systems.
Depreciation on corporate assets represented 0.3% of total revenues in 1998 and
0.5% in 1997.
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MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
Depreciation on real estate assets and other costs ($5.8 million)
increased $1.9 million or 49% as a result of the Acquisition Properties.
Depreciation on real estate assets and other costs represented 13.0% of total
revenues in 1998 and 13.9% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $2.5 million when compared to
December 31, 1997. The major components of this increase were increased cash
provided by operating activities and net proceeds from the line of credit,
partially offset by the purchase of short-term investments, funding of notes
receivable, the acquisition of Quail Meadows, additional acquisition advances
related to the Ellenburg Communities and the investment in Plantation on the
Lake and Trails West.
Net cash provided by operating activities increased $6.6 million from
$16.0 million for the quarter ended March 31, 1997 to $22.6 million for the
quarter ended March 31, 1998. This increase reflected a $3.7 million increase
in funds from operations ("FFO"), as discussed below, and increased accounts
payable accruals, partially offset by increased prepaid expenses.
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.
The following table presents a calculation of FFO and FAD for the quarters
ended March 31, 1998 and 1997:
March 31,
1998 1997
------- -------
Computation of funds from operations:
Income before allocation to minority interests.... $ 9,586 $ 7,711
Depreciation on real estate assets and other costs 5,823 3,957
------- -------
Funds from operations............................. $15,409 $11,668
======= =======
Computation of funds available for distribution:
Funds from operations............................. $15,409 $11,668
Non-revenue producing improvements -
rental properties.............................. (897) (505)
------- -------
Funds available for distribution.................. $14,512 $11,163
======= =======
12
13
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash used in investing activities increased $61.9 million from $18.4
million for the quarter ended March 31, 1997 to $80.3 million for the quarter
ended March 31, 1998 primarily due to the purchase of short-term investments,
the funding of the Meadows Loan, increased payments for acquisitions and the
investment in Plantation on the Lake and Trails West in 1998, and the one-time
collection of proceeds from the sale of project related assets in 1997,
partially offset by distributions from affiliates.
On January 6, 1998, the Company funded a $12.3 million loan to Meadows
Preservation, Inc. (the "Meadows Loan") The Meadows Loan is collateralized by
The Meadows manufactured home community located in Palm Beach Gardens, Florida,
bears interest at a nominal rate of 9%, subject to adjustment based on cash
flow of the property, and matures on July 31, 1998. The Meadows Loan was
funded with a borrowing under the Company's line of credit.
On January 8, 1998, the Company acquired Quail Meadows, located in
Riverbank, California, for a purchase price of approximately $4.7 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Quail Meadows consists of approximately 146 developed sites.
On September 4, 1997, the Company entered into a portfolio purchase
agreement to acquire 38 manufactured home communities (the "Ellenburg
Communities") from partnerships having Ellenburg Capital Corporation ("ECC") as
the general partner for a puchase price in excess of $300 million. In December
1997, the Company closed on the acquisition of seventeen of the Ellenburg
Communities and gained effective control of an additional twelve communities.
During the quarter ended March 31, 1998, the Company closed on the acquisition
of three of the Ellenburg Communities for an aggregate purchase price of $25.4
million, made additional acquisition advances of approximately $33 million to
the partnerships which own seven of the Ellenburg Communities, and acquired
certain other undivided interests in certain of the Ellenburg Communities. The
Company funded the acquisition advances with borrowings under the Company's
line of credit. In connection with the supplemental agreement entered into in
December 1997 (the "Supplemental Agreement"), on February 12, 1998, the Company
exercised its right of first refusal on five of the Ellenburg Communities. A
third party, backed by one of the Company's competitors, has appealed certain
orders of the Superior Court for the state of California (the "California
Court") related to the Company's acquisition of the Ellenburg Communities. The
third party originally requested the California Court to stay all of its
proceedings and the Company's acquisition of the Ellenburg Communities pending
such appeal. The California Court denied this motion. The third party then
filed a writ of supersedeas with the California appellate court seeking a stay
of the California Court's orders and related transactions pending appeal. The
appellate court also refused to issue a stay and denied the writ of
supersedeas. The Company does not expect the appeals to be successful, or if
successful, to have a material impact on the Company's acquisition of the
Ellenburg Communities.
On March 18, 1998, the Company entered into an approximately 50% joint
venture investment with Meadows Management Company to own two communities known
as "Plantation on the Lake" and "Trails West" for appoximately $6.4 million.
The investment was funded with a $3.9 million borrowing under the Company's
line of credit and with the Company issuing approximately $2.5 million in OP
Units.
Capital expenditures for improvements were approximately $1.4 million for
the quarter ended March 31, 1998 compared to $860,000 for the quarter ended
March 31, 1997. Of the $1.4 million, approximately $897,000 represented
improvements to existing sites. The Company anticipates spending approximately
$4.5 million on improvements to existing sites during the remainder of 1998.
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 $551,000 represented costs to develop
expansion sites at certain of the Company's properties and other corporate
headquarter costs. The Company is currently developing an additional 90 sites
which should be available for occupancy in 1998.
13
14
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash provided by financing activities increased $57.0 million from
$3.3 million for the quarter ended March 31, 1997 to $60.3 million for the
quarter ended March 31, 1998 primarily due to additional borrowings under the
line of credit and a decrease in distributions paid in the first quarter.
Distributions to common stockholders and minority interests decreased
approximately $8.4 million due to the timing of the payment of the
distributions. On April 10, 1998, the Company paid a $.3625 per share
distribution for the quarter ended March 31, 1998 to stockholders of record on
March 27, 1998. Return of capital on a GAAP basis was $.05 per share for the
first quarter of 1998.
The Company expects to meet its short-term liquidity requirements,
including its distributions, generally through its working capital, net cash
provided by operating activities and availability under the existing line of
credit. The Company expects to meet certain long-term liquidity requirements
such as scheduled debt maturities, property acquisitions and capital
improvements by long-term collateralized and uncollateralized borrowings
including borrowings under its existing line of credit and the issuance of debt
securities or additional equity securities in the Company, in addition to
working capital.
14
15
MANUFACTURED HOME COMMUNITIES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion in Note 16 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:
Form 8-K/A dated December 18, 1997, filed February 24, 1998,
relating to Item 2 - "Acquisition of Assets" and Item 7
"Financial Statements and Exhibits" on the acquisition of the
Ellenburg Communities.
15
16
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: May 1, 1998
16
5
0000895417
MANUFACTURED HOME COMMUNITIES, INC.
1
U.S. DOLLARS
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
1
12824
0
973
0
0
29717
1005565
(95132)
960145
41164
0
0
0
250
290407
960145
43919
44872
0
17452
1596
0
10121
9586
0
7765
0
0
0
7765
0.31
0.31
