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

FORM 10-Q

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 of the Registrant’s Common Stock outstanding on August 10, 2002 was 29,282,160 shares.

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CHATEAU COMMUNITIES, INC.
FORM 10-Q
INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHATEAU COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)

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

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CHATEAU COMMUNITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

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

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CHATEAU COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

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

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CHATEAU COMMUNITIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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The following discussion should be read in conjunction with the financial statements and notes appearing elsewhere in this report and with the December 31, 2001 Form 10-K. Certain information and 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 our plans, objectives and expectations, which are dependent upon a number of factors, including the ability to maintain rental rates and occupancy, the ability of manufactured home buyers to obtain financing, the level of repossessions by manufactured home lenders, the pace of acquisitions and dispositions, changes in interest rates and the condition of the capital markets, all of which may affect our ability to achieve our objectives.

Overview

In August 2001, we purchased CWS Communities Trust, a private real estate investment trust (“CWS”), for $552 million. The portfolio, located in 11 states, consisted of 46 manufactured home communities with approximately 16,600 homesites and 1,500 expansion sites and three RV, communities. This transaction extended our leading position in the manufactured housing community sector, making us substantially larger than the next largest REIT competitor in our sector.

During the third quarter of 2001, we implemented a disposition plan and from the inception of the plan through June 30, 2002, we have disposed of 15 properties and one parcel of land for approximately $66.4 million (see further discussion under “Liquidity and Capital Resources” below).

As of June 30, 2002, our portfolio comprised 212 manufactured home communities containing 69,789 manufactured homesites and 1,359 park model/RV sites, located in 32 states. We also fee manage 38 properties, containing an aggregate of 8,238 homesites.

Since our organization, we have elected to qualify as a REIT under the Internal Revenue Code and thus do not generally pay Federal corporate income taxes on earnings to the extent that such earnings are distributed to our shareholders in accordance with REIT requirements.

Results of Operations
The following table summarizes certain information relative to our properties as of and for the three and six months ended June 30, 2002 and 2001. We consider all communities owned by us at both the beginning of the period and the end of the period as our “Core Portfolio.”

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Comparison of three months ended June 30, 2002 to three months ended June 30, 2001

For the three months ended June 30, 2002, income before minority interests was $6,795,000, a decrease of $5,367,000 from the three months ended June 30, 2001. The decrease was due to increased depreciation and interest from the acquisition of CWS, offset somewhat by the increase in operating income from the CWS properties and Core Portfolio and the gain on sales of properties.

Rental revenue for the three months ended June 30, 2002 was $66,215,000 an increase of $16,860,000 from the three months ended June 30, 2001. The increase is primarily due to the acquisition of CWS and rental increases in our Core Portfolio.

As of June 30, 2002, occupancy in our stabilized portfolio was 90.7 percent. The active expansion portfolio had occupancy of 79.2 percent, while our greenfield development portfolio had occupancy of 34.6 percent, for a total occupancy of 87.9 percent. On a per-site basis, weighted monthly rental revenue for the three months ended June 30, 2002 was $348 compared with $327 for the same period in 2001, an increase of 6.6 percent.

Management fee and other income primarily include management and transaction fee income for the management of 38 manufactured home communities for N’Tandem Trust and equity earnings from our taxable REIT subsidiary, Community Sales, Inc. (“CSI”). See further discussion under “Liquidity and Capital Resources” below.

We recognized a loss of $228,000 from CSI in the second quarter of 2002, compared with income of $82,000 in the second quarter of 2001. The decrease in earnings is due primarily to fewer new home sales and increased overhead costs in the CWS sales locations.

Property operating and maintenance expense for the three months ended June 30, 2002 increased by $6,116,000 or 42.6 percent from the same period a year ago. The majority of the increase was due to the CWS acquisition, which accounted for $4.8 million. The remaining change is due to increases in our Core Portfolio, including increased collection costs, property insurance, healthcare and administrative costs. We expect these costs to continue to increase at levels higher than historic norms.

Administrative expense for the three months ended June 30, 2002 increased by $865,000 from the same period a year ago. Administrative expense in the second quarter of 2002 was 5.0 percent of total revenues as compared to 5.0 percent in the same period of 2001.

Depreciation and amortization expense for the three months ended June 30, 2002, increased $6,310,000 from the same period a year ago. Depreciation expense as a percentage of average depreciable rental property in the second quarter of 2002 remained relatively unchanged from 2001.

Comparison of six months ended June 30, 2002 to six months ended June 30, 2001

For the six months ended June 30, 2002, income before minority interests was $15,771,000, a decrease of $7,726,000 from the six months ended June 30, 2001. The decrease was due to increased depreciation and interest from the acquisition of CWS, offset somewhat by the increase in operating income from the acquisition properties and Core Portfolio and the gain on sale of properties.

Rental revenue for the six months ended June 30, 2002 was $132,313,000 an increase of $34,346,000 from the six months ended June 30, 2001. The increase is primarily due to the acquisition of CWS and rental increases in our Core Portfolio. On a per-site basis, weighted monthly rental revenue for the six months ended June 30, 2002 was $346 compared with $325 for the same period in 2001, an increase of 6.3 percent.

Management fee and other income primarily include management and transaction fee income for the management of 38 manufactured home communities and equity earnings from CSI. See Note 7 in the Notes to the Condensed Consolidated Financial Statements.

We recognized a loss of $700,000 from CSI in the first six months of 2002, compared with a loss of $275,000 in 2001. The increase in losses are due primarily to fewer new home sales and increased overhead costs in the CWS sales locations.

The industry has been faced with a critical lack of financing for our potential residents. The few remaining institutions offering financing for our product are offering high rates while maintaining very stringent underwriting criteria. These financing constraints make it difficult for us to compete with a conventional mortgage product. Until new lenders enter the market, it will continue to be difficult for the industry to sell homes at historic levels.

Given this current environment, we do not expect a positive contribution from CSI in the near future.

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Property operating and maintenance expense for the six months ended June 30, 2002 increased by $12,145,000 or 43.0 percent from the same period a year ago. The majority of the increase was due to the CWS acquisition, which accounted for $9.7 million. The remaining change is due to increases in our Core Portfolio, including increased collection costs, property insurance, healthcare and administrative costs. We expect these costs to continue to increase at levels higher than historic norms.

Administrative expense for the six months ended June 30, 2002 increased by $2,163,000 from the same period a year ago. Administrative expense for the first six months of 2002 was 5.0 percent of total revenues as compared to 4.6 percent in the same period of 2001.

Depreciation and amortization expense for the six months ended June 30, 2002, increased $11,259,000 from the same period a year ago. Depreciation expense as a percentage of average depreciable rental property in the second half of 2002 remained relatively unchanged from 2001.

Liquidity and Capital Resources

Net cash provided by operating activities was $42,777,000 for the six months ended June 30, 2002, compared with $47,927,000 for the six months ended June 30, 2001. The decrease in cash provided by operating activities was due primarily to the reduction of operating liabilities.

Net cash provided by investing activities for the six months ended June 30, 2002 was $8,253,000 as compared to net uses of $51,153,000 for the same period in 2001. This amount represents acquisitions, dispositions, investments in and advances to affiliates, lending activity, capital expenditures, and development costs. The decrease in cash used for investing activities is a result of our disposition plan and reduced acquisition activity.

During the six months ended June 30, 2002, we invested approximately $6.0 million, in cash and OP Units, in the expansion and development of our communities including finish costs on sites added in prior periods and progress on sites that will be added to our portfolio later in 2002. For the six months ended June 30, 2002, recurring property capital expenditures, other than development costs, were approximately $4.4 million. In addition, we invested approximately $800,000 in technology and other corporate related expenditures, $150,000 in storage sheds, $150,000 in sub-metering and $3.4 million, in cash and OP Units, in acquisition capital expenditures. Upon the acquisition of a property or portfolio, capital projects for that acquisition are identified and completed over the first twelve months of our ownership and are considered in our cap rate at the time of acquisition. Capital expenditures have historically been financed out of operating cash flow and it is our intention that such future expenditures will also be financed out of operating cash flow.

In the third quarter of 2001, we began implementing a disposition plan and started identifying a number of mature properties that no longer meet our portfolio objectives. As of June 30, 2002, we have sold 15 properties and a parcel of land for approximately $66.4 million. During the first six months of 2002, we sold five properties and one parcel of land for a combined gross sales price of approximately $18.4 million and a gain of $1.4 million. The net proceeds of $10.8 million for all of the 2002 dispositions were used to repay balances outstanding under the credit facility we incurred in connection with the CWS transaction (the “Acquisition Facility”) and our other credit facilities. In addition, we have approximately $7.4 million in an escrow account until a replacement property is identified to effect a non-taxable exchange. Due to the timing of the sales, approximately $11 million in proceeds from sales occurring in 2001 was received in January 2002 and was used to reduce the Acquisition Facility. At December 31, 2001, this amount was included in rents and other receivables. We will continue to evaluate our properties and, depending on market conditions, expect to sell additional communities in 2002.

Net cash used in financing activities for the six months ended June 30, 2002 was $48,614,000. This was due primarily to net payments on our Credit Facilities (discussed below) and distributions to our shareholders and OP unitholders.

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We have a line of credit available with BankOne, N.A., acting as lead agent. In May 2002, we increased the borrowing capacity to $175 million. The term of the facility was extended to February 2005 and the facility bears interest at LIBOR plus 100 basis points. In addition we have a $7.5 million revolving line of credit from US Bank, which bears interest at a rate of LIBOR plus 125 basis points and matures in March 2003 (together with our BankOne credit facility, “Credit Facilities”). As of June 30, 2002 we had approximately $138 million outstanding under our Credit Facilities and had available $44.5 million in additional borrowing capacity.

In May 2002, we completed the issuance of a $125 million term loan with BankOne acting as lead agent. The loan bears interest at LIBOR plus 120 basis points and matures in May 2004. The proceeds were used to pay off the Acquisition Facility that was due to mature in August 2002.

Our principal long term liquidity needs include: repayment of long-term borrowings and amounts outstanding under the Credit Facilities, future acquisitions of communities, acquisition of land for development, and new and existing community development activities. We do not expect to generate sufficient funds from operations to finance these long-term liquidity needs and instead intend to meet our long-term liquidity requirements through additional borrowings under our Credit Facilities or other lines of credit, the assumption of existing secured or unsecured indebtedness, proceeds from the disposition of properties, and, depending on market conditions and capital availability factors, the issuance of additional equity or debt securities.

We expect to meet our short-term liquidity requirements, including dividends, expansion activities and capital expenditure requirements, through cash flow from operations and, if necessary, and depending on our operating performance, borrowings under our Credit Facilities and other lines of credit.

N’Tandem Trust

During the first half of 2002, we purchased additional equity in N’Tandem Trust and as of June 30, 2002, we currently own approximately 19 percent of N’Tandem’s outstanding equity. Also as of June 30, 2002, we have loaned and advanced approximately $40 million to N’Tandem. We also guarantee N'Tandem's $20 million working capital line of credit, which has $16.5 million outstanding as of June 30, 2002. In addition, we own N’Tandem’s external advisor and provide management and other services to N’Tandem. As such, we possess significant influence over the operating and financial decisions of N’Tandem, and accordingly, account for our investment utilizing the equity method of accounting. The following table details the fees charged to N’Tandem for the respective periods (in thousands):

Management has evaluated the recoverability of our investment in and advances to N'Tandem and has determined that no valuation allowance is necessary at this time. We will continue to evaluate the recoverability and the need for an allowance.

Recently Issued Accounting Standards

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Standards (“SFAS”) No. 141, Business Combinations. SFAS No. 141 requires all business combinations to be accounted for by the purchase method and defines criteria under which intangible assets acquired in connection with a business combination be recognized as assets apart from goodwill. SFAS No. 141 is effective for all fiscal business combinations initiated after June 30, 2001. Adoption of SFAS No. 141 did not have and is not expected to have a significant impact on our financial position or results of operations.

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In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board (“APB”) Opinion No. 17, “Intangible Assets”. SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in business combinations) should be accounted for in financial statements upon their acquisition, and also addresses how goodwill and other intangible assets (including those acquired in business combinations) should be accounted for after they have been initially recognized in the financial statements. The major provisions of SFAS No. 142 and differences from APB Opinion No. 17 include (a) no amortization of goodwill and other certain intangible assets with indefinite lives, including excess reorganization value, (b) a more aggregate view of goodwill and accounting for goodwill based on units of the combined entity, (c) a better defined “two-step” approach for testing impairment of goodwill, (d) a better defined process for testing other intangible assets for impairment, and (e) disclosure of additional information related to goodwill and intangible assets. The “two-step” impairment approach to testing goodwill is required to be performed at least annually with the first step involving a screen for potential impairment and the second step measuring the amount of impairment. SFAS No. 142 is effective for financial statements issued for fiscal years beginning after December 15, 2001. Earlier application is permitted for entities with fiscal years beginning after March 15, 2001.

We adopted the provisions of SFAS No. 142 as of January 1, 2002 and were therefore required to have completed the first “step” of our goodwill impairment testing by the end of the second fiscal quarter. As a result of performing the first “step” of goodwill impairment testing, we have identified a potential impairment related solely to the goodwill associated with CSI’s investment in TOPS Home Sales Centers. We are required to quantify the impairment by December 31, 2002, and are in the process of completing our evaluation. We have not yet determined the full impact the provisions of SFAS No. 142, including our final tests for goodwill impairment, will have on our financial position or results of operations prospectively; however, we estimate a maximum impairment of less than $1 million that will be reflected as a cumulative effect of change in accounting principle, when recognized.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, but retains the requirements of SFAS No.121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value of the asset. SFAS No. 144 removes goodwill from its scope as the impairment of goodwill is addressed prospectively pursuant to SFAS No. 142. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those years. Adoption of SFAS No. 144 did not have a significant impact on our financial position or results of operations at the date of adoption. Properties of material amounts that meet the “held-for-sale criteria” under the standard will be treated as discontinued operations.

Other
Funds from operations (“FFO”) is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as consolidated net income without giving effect to gains (or losses) from debt restructuring and sales of property and rental property depreciation and amortization. We believe 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 (1) does not represent cash flow from operations as defined by generally accepted accounting principles; (2) 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; (3) is not an alternative to cash flow as a measure of liquidity; and (4) may not be comparable to similarly titled measures reported by other REITs.

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Our FFO is calculated as follows:

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The following table sets forth certain information related to our secured and unsecured indebtedness outstanding as of June 30, 2002:

Based on the average amount outstanding of our variable rate debt for the three and six months ended June 30, 2002 if the LIBOR rate under these facilities was 100 basis points higher or lower during the three or six months ended June 30, 2002, then our interest expense (before adjustments for capitalized items), for the periods would have increased or decreased by approximately $671,000 and $1,328,000, respectively.

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Property Information

We classify all our properties in the stable, greenfield development, or active expansion portfolio. The stable portfolio includes communities where we do not have, or have not recently had, expansion of the community. These communities normally have stable occupancy rates. The greenfield development portfolio includes properties where we are developing the community. The active expansion portfolio includes properties where we are currently, or have recently, expanded the community by adding homesites to the available homesites for rent. Generally, both the greenfield and the active expansion portfolios will have a lower occupancy rate than the stable portfolio, as they are in the lease-up phase. In addition, we own three park model/RV communities.

The following table sets forth certain information, as of June 30, 2002, regarding our properties, excluding the three park model/RV communities. A park model/RV community is a community where the majority of the sites are leased on an annual basis, although the resident only occupies the home for a portion of the year. A minority of the sites are rented with recreational vehicles on a daily, weekly or monthly basis. This table excludes four of our greenfield properties as there are currently no developed sites.

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