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

FORM 10-Q

For the quarterly period ended September 30, 2002

OR

Commission file number 1-12496

CHATEAU COMMUNITIES, INC.
(exact name of registrant as specified in its charter)

6160 South Syracuse Way, Greenwood Village, Colorado 80111
(Address of principal executive offices)

(303) 741-3707
Registrant’s telephone number, including area code

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

The number of shares of the Registrant’s Common Stock outstanding on October 1, 2002 was 29,290,749 shares.

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CHATEAU COMMUNITIES, INC.
FORM 10-Q
INDEX

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PART I.  FINANCIAL INFORMATION

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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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)

1.      Background and Basis of Presentation:

2.      Acquisition of CWS:

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______________

3.      Comprehensive Income:

4.      Common Stock and Related Transactions:

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5.      Financing:

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6.      Related Party Transactions:

7.      Rental Property Held for Sale / Discontinued Operations:

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8.      Goodwill:

9.      New Accounting Pronouncements:

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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, competition of other forms of single or multi-family housing 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 September 30, 2002, we have disposed of 18 properties and two parcels of land for approximately $82.0 million (see further discussion under “Liquidity and Capital Resources” below).

As of September 30, 2002, our portfolio comprised 207 manufactured home communities containing 68,842 manufactured homesites and 1,359 park model/RV sites, located in 32 states. We also fee manage 37 properties, containing an aggregate of 8,075 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 nine months ended September 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 “Same Store Portfolio.”

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Comparison of three months ended September30, 2002 to three months ended September30, 2001

For the three months ended September30, 2002, income from continuing operations was $1,044,000, a decrease of $7,666,000 from the three months ended September30, 2001. The decrease was due to increased depreciation and interest from the acquisition of CWS and the loss on sales of properties, offset somewhat by the increase in operating income from the CWS properties and Same Store Portfolio.

Rental revenue for the three months ended September 30, 2002 was $65,692,000 an increase of $5,912,000 from the three months ended September 30, 2001. The increase is primarily due to the acquisition of CWS and rental increases in our Same Store Portfolio, offset somewhat by declining occupancy.

As of September 30, 2002, occupancy in our stabilized portfolio was 91.7 percent compared with 93.2 percent at September 30, 2001. The active expansion portfolio had occupancy of 79.1 percent, while our greenfield development portfolio had occupancy of 30.7 percent, for a total occupancy of 87.1 percent. On a per-site basis, weighted monthly rental revenue for the three months ended September 30, 2002 was $354 compared with $333 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 37 manufactured home communities for N’Tandem Trust and equity earnings/losses from our taxable REIT subsidiary, Community Sales, Inc. (“CSI”). See further discussion on N’Tandem Trust under “Liquidity and Capital Resources” below.

We recognized a loss of $730,000 from CSI in the third quarter of 2002, compared with a loss of $66,000 in the third quarter of 2001. The increase in losses is primarily due to fewer new home sales, an adjustment to the inventory reserve for obsolescence, and increased overhead costs in the CWS sales locations. The additional inventory reserve adjustment was approximately $285,000 and was due to events in the industry, including an over supply of repossessed and other pre-owned homes. In addition, in the third quarter, CSI recorded a one-time loss of approximately $500,000 in connection with the closure of its only company-owned home sales dealership located in Elkhart, Indiana.

Property operating and maintenance expense for the three months ended September 30, 2002 increased by $2,860,000 or 15.1 percent from the same period a year ago. The majority of the increase was due to the CWS acquisition. The remaining change is due to increases in our Same Store Portfolio, including increased property insurance, healthcare and administrative costs, offset by a decrease in collection costs, which were unusually high in 2001. We expect these costs to continue to increase at levels higher than historic norms.

Administrative expense for the three months ended September 30, 2002 increased by $1,113,000 from the same period a year ago. Administrative expense in the third quarter of 2002 was 5.1 percent of total revenues as compared to 3.8 percent in the same period of 2001. This increase was primarily due to a number of operational-related consulting projects that were completed in the third quarter of 2002.

Depreciation and amortization expense for the three months ended September 30, 2002, increased $5,588,000 from the same period a year ago. The increase is due to the CWS acquisition, as well as increased depreciation in the joint ventures that we consolidate. In addition, corporate depreciation related to investments in technology increased this quarter by $430,000. Depreciation expense as a percentage of average depreciable rental property in the third quarter of 2002 remained relatively unchanged from 2001.

Comparison of nine months ended September30, 2002 to nine months ended September30, 2001

For the nine months ended September30, 2002, income from continuing operations was $11,084,000, a decrease of $15,178,000 from the nine months ended September30, 2001. The decrease was due to

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increased depreciation and interest from the acquisition of CWS, offset somewhat by the increase in operating income from the acquisition properties and Same Store Portfolio, and the gain on sale of properties.

Rental revenue for the nine months ended September 30, 2002 was $195,409,000 an increase of $39,533,000 from the nine months ended September 30, 2001. The increase is primarily due to the acquisition of CWS and rental increases in our Same Store Portfolio, offset somewhat by declining occupancy. On a per-site basis, weighted monthly rental revenue for the nine months ended September 30, 2002 was $349 compared with $328 for the same period in 2001, an increase of 6.4 percent.

Management fee and other income primarily include management and transaction fee income for the management of 37 manufactured home communities for N’Tandem Trust and equity earnings/losses from CSI. See further discussion on N’Tandem Trust under “Liquidity and Capital Resources” below.

We recognized a loss of $1,430,000 from CSI in the first nine months of 2002, compared with a loss of $341,000 in 2001. The increased losses are due primarily to fewer new home sales and an adjustment to the inventory reserve for obsolescence and increased overhead costs in the CWS sales locations. The additional inventory reserve adjustment was approximately $285,000 and was due to events in the industry, including an over supply of repossessed and other pre-owned homes. In the third quarter, CSI recorded a one-time loss of approximately $500,000 in connection with the closure of its only company-owned home sales dealership located in Elkhart, Indiana. In addition, CSI adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”, as of January 1, 2002, resulting in an impairment charge in the first quarter of approximately $1 million. This charge is reflected as a cumulative effect of a change in accounting principle and is not included in CSI’s operating loss.

Property operating and maintenance expense for the nine months ended September 30, 2002 increased by $14,602,000 or 31.3 percent from the same period a year ago. The majority of the increase was due to the CWS acquisition. The remaining change is due to increases in our Same Store Portfolio, including increased property insurance, healthcare and administrative costs offset by a decrease in collection costs, which were unusually high in 2001. We expect these costs to continue to increase at levels higher than historic norms.

Administrative expense for the nine months ended September 30, 2002 increased by $3,160,000 from the same period a year ago. Administrative expense for the first nine months of 2002 was 5.1 percent of total revenues as compared to 4.3 percent in the same period of 2001. This increase was primarily due to a number of operational-related consulting projects that were completed in the first nine months of 2002.

Depreciation and amortization expense for the nine months ended September 30, 2002, increased $16,888,000 from the same period a year ago. The increase is due to the CWS acquisition, as well as increased depreciation in the joint ventures that we consolidate. In addition, corporate depreciation related to investments in technology increased this year by $1,200,000. Depreciation expense as a percentage of average depreciable rental property for the nine months ended September 30, 2002, remained relatively unchanged from 2001.

Industry Conditions

The manufactured housing industry continues to face significant challenges. The financing market for manufactured homes, which is tapped by our residents in purchasing the homes they place in our communities, remains constrained by historical standards. Several lenders have exited the market place while others have tightened their underwriting standards. Additionally, readily available and lower rate mortgage financing for our traditional residents allows them the opportunity to purchase a moderately priced site built home, which carries an affordable monthly payment. These conditions combined with the economic conditions affecting many of our markets has made it more difficult for us to attract new residents, increase occupancy rates and generate a positive contribution from CSI.

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In addition, the industry will continue to be challenged by the over supply of repossessed and other pre-owned homes, which may affect the pricing for these homes. We are currently in discussion with a significant retail lender in the industry who owns approximately 400 repossessed homes in our portfolio. This lender currently pays rent on these homes, yet is facing financial difficulty. We are discussing a plan for future rent payments and in certain areas, rent abatement or reduction.

Due to the economic uncertainties and the issues discussed above, we continue to focus on our collection process and costs. Total collection costs, as a percent of revenue continue to be higher than our expectations, specifically in our Detroit and Atlanta markets, and we expect it to continue to be a difficult collection environment.

We are in the process of reviewing our organization structure with the objective of reducing costs. Included in that review, will be an evaluation of our current staffing at both the property, divisional and corporate levels. The evaluation will be completed and the plan implemented in the fourth quarter, to be effective in January 2003. We expect to incur one-time costs in the range of $300,000-$600,000 in connection with this reorganization.

Discontinued Operations

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. Assets held for sale are carried at the lower of book value or fair value, less costs to sell the assets. As of September 30, 2002, we have sold 18 properties and two parcels of land for approximately $82.0 million. During the first nine months of 2002, we sold 12 properties and two parcels of land for a combined gross sales price of approximately $40.2 million and a gain of $4.5 million of which $3.6 million is included in discontinued operations. The net proceeds of $28.6 million were used to reduce outstanding balances under the Acquisition Facility and our Credit Facilities. In addition, we have approximately $9.9 million in an escrow account related to the sale of two properties. Due to the timing of the sale of one property, $2.5 million was received in October 2002. The remaining $7.4 million will be used to purchase two replacement properties in November 2002 to affect a tax deferred exchange.

During the third quarter 2002, we identified one community for disposition and as such, reclassified this asset from rental property to rental property held for sale. As a result, we evaluated the carrying value of this asset and recognized an asset impairment charge of approximately $1.3 million. For the three and nine month periods presented, in accordance with SFAS No. 144 “Accounting for The Impairment or Disposal of Long-Lived Assets”, income from discontinued operations includes the results of operations through the property sale date (if the property was sold prior to September 30, 2002) of nine properties containing 1,751 sites that were sold or designated as held for sale in 2002. As of September 30, 2002, eight of the properties have been sold and the remaining one is expected to close in the next several months.

Liquidity and Capital Resources

Net cash provided by operating activities was $66,767,000 for the nine months ended September 30, 2002, compared with $73,762,000 for the nine months ended September 30, 2001. The decrease in cash provided by operating activities was due primarily to payments of operating liabilities.

Net cash provided by investing activities for the nine months ended September 30, 2002 was $20,204,000 as compared to net uses of $369,868,000 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.

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During the nine months ended September 30, 2002, we invested approximately $12.5 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 nine months ended September 30, 2002, recurring property capital expenditures, other than development costs, were approximately $8.8 million. In addition, we invested approximately $285,000 in storage sheds, $150,000 in sub-metering and $4.6 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.

Net cash used in financing activities for the nine months ended September 30, 2002 was $83,876,000. This was due primarily to net payments on our Credit Facilities (discussed below) and distributions to our shareholders and OP unitholders.

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 September 30, 2002 we had approximately $124 million outstanding under our Credit Facilities and had available $58.5 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.

On October 15, 2002, Standard & Poor’s Ratings Services changed our debt rating to BBB-. The reason for the change was due to our announcement of lower than expected earnings for the remainder of 2002 as well as lower coverage ratios since completing the CWS acquisition in 2001. This downgrade has resulted in an immediate increase in the interest rate on $250 million of variable rate debt by a range of 15 to 20 basis points.

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 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.

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N’Tandem Trust

During 2002, we purchased additional equity in N’Tandem Trust and as of September 30, 2002, we currently own approximately 19 percent of N’Tandem’s outstanding equity. Also, as of September 30, 2002, we have loaned and advanced approximately $40 million to N’Tandem. We also guarantee N’Tandem’s working capital line of credit, which has $16.5 million outstanding as of September 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. N’Tandem will likely continue to generate negative cash flow from operations in the near term. We believe that based on current market conditions the loans and advances to N’Tandem will be recovered from the ultimate sale of the properties.

New Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. This Statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers” and SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”. This statement amends SFAS No. 13, “Accounting for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 is generally effective for us for the year ended December 31, 2003. We do not expect the adoption of SFAS No. 145 will have a significant effect on our results of operations or financial position.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This statement requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. This statement nullifies the guidance of the Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)”. Under EITF No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. SFAS No. 146 acknowledges that an entity’s commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for the initial measurement of the liability. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect the adoption of SFAS No. 146 will have a significant effect on our results of operations or financial position.

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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.

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 September 30, 2002:

Based on the average amount outstanding of our variable rate debt for the three and nine months ended September 30, 2002 if the LIBOR rate under these facilities was 100 basis points higher or lower during the three or nine months ended September 30, 2002, then our interest expense (before adjustments for capitalized items), for the periods would have increased or decreased by approximately $623,000 and $1,868,000, respectively.

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Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures. The term “disclosure controls and procedures,” as defined by the regulations of the Securities and Exchange Commission (“SEC”), means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit to the SEC under the Securities Exchange Act of 1934, as amended (the “Act”), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit to the SEC under the Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions to be made regarding required disclosure. The Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures as of a date within 90 days of the filing date of this Form 10-Q and have concluded that our disclosure controls and procedures are effective as of the date of such evaluation.

Changes in Internal Controls

We also maintain a system of internal controls. The term “internal controls,” as defined by the American Institute of Certified Public Accountants’ Codification of Statement on Auditing Standards, AU Section 319, means controls and other procedures designed to provide reasonable assurance regarding the achievement of objectives in the reliability of our financial reporting, the effectiveness and efficiency of our operations and of our compliance with applicable laws and regulations. There have been no significant changes in our internal controls or in other factors that could significantly affect such controls subsequent to the date we carried out our evaluation.

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PART II.       OTHER INFORMATION

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 September 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.

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