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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

AMERICAN LAND LEASE, INC.
(Exact name of registrant as specified in its charter)

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.

As of May 12, 2003, 7,000,040 shares of common stock were outstanding.

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AMERICAN LAND LEASE, INC.  AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

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(i)

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AMERICAN LAND LEASE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)

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AMERICAN LAND LEASE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)

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AMERICAN LAND LEASE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

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AMERICAN LAND LEASE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)

A.     The Company

American Land Lease, Inc. (“ANL” and, together with its subsidiaries, the “Company”) formerly Asset Investors Corporation, is a Delaware corporation that owns home sites leased to owners of homes situated on the leased land and operates the communities composed of these homes. The Company has elected to be taxed as a real estate investment trust (“REIT”). ANL’s common stock, par value $.01 per share (“common stock”), is listed on the New York Stock Exchange under the symbol “ANL.”  In May 1997, ANL contributed its net assets to Asset Investors Operating Partnership, L.P. (the “Operating Partnership”) in exchange for the sole general partner interest in the Operating Partnership and substantially all of Operating Partnership’s initial capital. As of March 31, 2003, based on total home sites, 77% of the Company’s portfolio of residential land lease communities is located in Florida and 22% is located in Arizona.

Interests in the Operating Partnership held by limited partners other than ANL are referred to as “OP Units.”  The Operating Partnership’s income is allocated to holders of OP Units based on the weighted average number of OP Units outstanding during the period. The holders of the OP Units receive distributions, prorated from the date of issuance, in an amount equivalent to the dividends paid to holders of common stock.  After holding the OP Units for one year, the limited partners generally have the right to redeem their OP Units for cash.  Notwithstanding that right, the Operating Partnership may elect to acquire some or all of the OP Units tendered for redemption in exchange for shares of common stock in lieu of cash.  At March 31, 2003, the Operating Partnership had approximately 941,000 OP units outstanding, excluding those owned by ANL, and ANL owned 88% of the Operating Partnership. 

B.     Presentation of Financial Statements

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature.  Operating results for the three months ended March 31, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the statements and notes thereto included on Form 10-K.

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C.      Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Operating Partnership and all majority owned subsidiaries.  The minority interest in the Operating Partnership represents the OP Units that are redeemable at the option of the holder.  All significant intercompany balances and transactions have been eliminated in consolidation. 

Depreciation

Rental properties are recorded at cost less accumulated depreciation, unless considered impaired.  If events or circumstances indicate that the carrying amount of a property may be impaired, the Company will make an assessment of its recoverability by estimating the future undiscounted cash flows, excluding interest charges, of the property.  If the carrying amount exceeds the aggregate future cash flows, the Company would recognize an impairment loss to the extent the carrying amount exceeds the fair value of the property.  As of March 31, 2003, based on periodic reviews, management believes that no impairments exist.  No impairment losses were recognized for three months ended March 31, 2003 or for the three months ended March 31, 2002.

Significant renovations and improvements, which improve or extend the useful life of an asset, are capitalized and depreciated over the remaining estimated life.  In addition, the Company capitalizes direct and indirect costs (including interest, taxes and other costs) in connection with the development of additional home sites within its residential land lease communities.  Maintenance, repairs and minor improvements are expensed as incurred.

Depreciation of personal property is reported in property operating expenses, golf operating expenses, selling and marketing expenses, or general and administrative expenses, based upon the use of the associated asset.  Depreciation expense relating to personal property totaled approximately $44,000 and $17,000 for the three months ended March 31, 2003 and 2002, respectively.

Cash Equivalents

The Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents.

Inventory

Carrying amounts for inventory are determined on a specific identification basis and are stated at the lower of cost or market. If actual market conditions are less favorable than those projected by management, inventory write-downs may be required that could have a significant impact on the Company’s results of operations and cash flows.

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Non-agency MBS and CMBS Bonds

The Company is the beneficiary of certain grantor trusts formed coincident with the securitization and sale of mortgage assets owned by the Company until sold in 1997.  The operation of these grantor trusts is vested with the indentured trustee and under the terms of the trust indenture, the Company does not control the management of the trust and the indentured trustee is an unrelated third party.  As a result, the operation of the trust is not consolidated in the financial statements of the Company.  The Company does not provide any credit enhancements to the trust and does not have contingent liability for the results of operation of the trust.

The Company’s non-agency mortgage backed securities bonds (“MBS”) and commercial mortgage backed securities bonds (“CMBS”) were acquired at a significant discount to par value.  The amortized cost of the non-agency MBS and CMBS bonds was equal to the outstanding principal amount net of unamortized discount and allowances for credit losses.  Earnings from non-agency MBS and CMBS bonds are recognized based upon the relationship of cash flows received during the period and estimates of future cash flows to be received over the life of the bonds.  The Company classifies its non-agency MBS and CMBS bonds as available-for-sale, carried at fair value in the financial statements.  The Company generally estimates fair value of the non-agency MBS and CMBS bonds based on the present value of future expected cash flows of the bonds.  The fair value of the non-agency MBS and CMBS bonds, based on the underlying assets that secure the bonds, are estimated using our best estimate of the future cash flows, capitalization rates and discount rates commensurate with the risks involved.  The carrying amount of the MBS and CMBS assets at March 31, 2003 and 2002 was approximately $240,000 and $254,000, respectively and is included in other assets. 

Revenue Recognition

The Company derives most of its income from the rental of home sites.  The leases entered into by residents for the rental of home sites are generally for terms of one year and the rental revenues associated with the leases are recognized when earned and due from residents.  Property management revenues for services provided to communities not owned by the Company are recognized when earned. 

Sales of homes by the Company are recorded upon the closing of the home sale transaction and title passing to the purchaser.

Deferred Financing Costs

Fees and costs incurred in obtaining financing are capitalized.  Such costs are amortized over the terms of the related loan agreements using the effective interest method and are charged to interest expense.

Advertising Costs

Costs of advertising are expensed the first time the advertising takes place.  Direct response advertising conducted by the Company during the periods was expensed as incurred, as the Company could not define the expected period of future benefits.  For the three months ended March 31, 2003 and 2002, advertising expenses were approximately $296,000 and $285,000, respectively.

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Equity in (Losses) Earnings of Unconsolidated Real Estate Partnerships

The Company owns an interest in two partnerships that develop, own and operate residential land lease communities.   Investments in real estate partnerships in which the Company has influence, but does not have control, are accounted for under the equity method.  Under the equity method, the Company’s pro-rata share of the (losses) or earnings of the unconsolidated real estate partnership for the periods presented is included in equity in (losses) earnings from unconsolidated real estate partnerships.  During the fourth quarter of 2002, we changed our method of accounting for our investment in unconsolidated real estate partnerships from the cost method of accounting to the equity method in accordance with generally accepted accounting principles.  The previous method of accounting did not have a materially different result from generally accepted accounting principles.  However, due to increased operating losses, our proportionate share of the net loss has become more material and we have now recorded our investment in the unconsolidated real estate partnerships in accordance with generally accepted accounting principles.

Income Taxes

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”).  To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to its shareholders.  It is management’s current intention to adhere to these requirements and maintain the Company’s REIT status.  As a REIT, the Company generally will not be subject to corporate level federal income tax on taxable income that it distributes currently to its stockholders.  If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes and penalties, including taxes on its undistributed taxable income.  In addition, taxable income from non-REIT activities conducted through taxable subsidiaries is subject to federal, state, and local income taxes.

Earnings and profits, which determine the taxability of dividends to stockholders, differ from net income reported for financial reporting purposes due to differences for U.S. Federal tax purposes in the estimated useful lives and methods used to compute depreciation and the carrying value (basis) of the investments in properties, among other things.

At March 31, 2003, the Company’s NOL carryover was approximately $64,000,000 for the parent REIT entity and $2,592,000 for the Company’s taxable subsidiaries that are consolidated for financial reporting, but not for federal income tax purposes.  Subject to certain limitations, the REIT’s NOL carryover may be used to offset all or a portion of the Company’s REIT taxable income, and as a result, to reduce the amount that the Company is required to distribute to stockholders to maintain its status as a REIT.  It does not, however, affect the tax treatment to shareholders of any distributions that the Company does make.  The REIT’s and the taxable subsidiaries’ NOL carryovers are scheduled to expire between 2007 and 2009, and 2020 and 2022, respectively.

Earnings Per Share

Basic earnings per share are based upon the weighted-average number of shares of common stock outstanding during each year.  Diluted earnings per share for the three months ended March 31, 2003 and 2002 reflect the effect of dilutive, unexercised stock options, both vested and unvested, and unvested

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restricted stock of 112,000 and 72,000, respectively, without regard to vesting restrictions on options issued.  Vested and unvested stock options together with unvested restricted shares issued totaling 208,000 and 313,000 for the three months ended March 31, 2003 and 2002, have been excluded from diluted earnings per share as their effect would be anti-dilutive.

Stock-Based Compensation

Prior to 2003, the Company accounted for stock options under the recognition and measurement provisions of APB No. 25, Accounting for Stock Issued to Employees, and related interpretations.  No employee compensation expense for stock options is reflected in 2002 net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.    Effective January 1, 2003, the Company adopted the preferable fair value recognition provisions of Statement of Financial Accounting Standard (“SFAS”) No. 123, Accounting for Stock Based Compensation, prospectively to all employee awards granted, modified, or settled after January 1, 2003 as described in SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123.  Therefore, the cost related to stock-based employee compensation included in the determination of net income for 2002 and 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of Statement No. 123.  The Company recorded approximately $1,000, net of minority interest in the Operating Partnership, as compensation expense for stock options issued after January 1, 2003.  The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.

As more fully described in Note L, the Company made a grant of performance based restricted stock in 2003.  To the extent that it is probable that the performance targets will be reached, the Company provides compensation expense ratably over the vesting period.  The Company provided $71,000 in compensation expense related to the performance based restricted stock awards for the three months ended March 31, 2003.

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Capitalized Interest

Interest incurred relating to the development of communities is capitalized during the active development period. The Company’s strategy is to master plan, develop, and build substantially all of the home sites in its communities.  Accordingly, substantially all projects, excluding finished lots where the home is available for occupancy, are undergoing active development.  During the three months ended March 31, 2003 and 2002, capitalized interest was approximately $845,000 and $872,000, respectively.

Legal Contingencies

The Company is currently involved in certain legal proceedings.  The Company does not believe these proceedings will have a material adverse effect on its consolidated financial position.  It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in assumptions and the effectiveness of strategies, related to these proceedings.

Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates. 

Reclassifications

Certain reclassifications have been made in the 2002 consolidated financial statements to conform to the classifications used in the current period, including treatment of discontinued operations.  Such reclassifications have no material effect on the amounts as originally presented.

D.     Real Estate

Real estate at March 31, 2003 and December 31, 2002 is as follows (in thousands):

Land improvements and buildings consist primarily of infrastructure, roads, landscaping, clubhouses, maintenance buildings and common amenities.

The Company calculates depreciation using the straight-line method over an estimated useful life of 5 to 75 years for land improvements, 30 to 45 years for buildings and 5 years for furniture and other equipment. Land is not depreciated.  The Company’s real estate investment consists of buildings, land improvements, and land.  Buildings consist primarily of the clubhouses at its residential land lease communities maintained as amenities for tenant use.  A majority of the Company’s investment in land improvements consists of long-lived assets such as lateral infrastructure at its residential land lease communities including sanitary sewer and storm water collection systems, potable water supply systems,

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roads and walkways.  The balance of land improvements consists of assets with shorter lives such as marinas, fencing, swimming pools, spas, shuffleboard courts, tennis courts and other tenant amenities. 

During the three months ended March 31, 2003, the Company sold a 28 home site community in Bensalem, Pennsylvania to a third party for an aggregate sales price of approximately $1,125,000.  The net proceeds of $1,082,000 were used to repay a portion of the Company’s outstanding short-term indebtedness and for other corporate purposes.  The Company recognized a loss on the sale of approximately $86,000, net of minority interest in the Operating Partnership.

During the three months ended March 31, 2003, the Company sold 3 home sites for total consideration of approximately $90,000 to existing tenants in Arizona.

E.     Home Sales Business

The Company owns an inventory of developed vacant sites within our portfolio of residential land lease communities.  In addition, the Company owns undeveloped land that is contiguous to existing occupied communities. The Company’s home sales business seeks to facilitate the conversion of this inventory of unleased land into leased sites with long-term cash flows.  For the three months ended March 31, 2003 and 2002, the Company’s home sales business resulted in 98 and 58, respectively, of home sites being leased and occupied with new homes, an increase of 69% in 2003 over 2002.

F.     Discontinued Operations

Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets” (“SFAS No. 144”) became effective for fiscal years beginning after December 15, 2001.  In accordance with SFAS No. 144, net income and gain (loss) on the disposition of real estate for communities sold or considered held for sale after December 31, 2001 are reflected in our statements of operations as “discontinued operations” for all periods presented.  Below is a summary of discontinued operations. No assets met the criteria of FAS 144 to be classified as held for sale as of March 31, 2003.

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G.     Secured Long-Term Notes Payable

The following table summarizes the Company’s secured long-term notes payable (in thousands):

On March 21, 2003, the Company closed two non-recourse loans secured by properties in Florida totaling $7,040,000.  The loans bear interest at a rate equal to the London Interbank Offered Rate (“LIBOR”) plus 250 basis points.  These non-amortizing loans mature in March of 2013.

H.     Secured Short-Term Financing

The Company has a revolving line of credit with a bank with a total commitment of $17,000,000 that bears interest at the bank’s “Reference Rate” (4.25% at March 31, 2003).  The line of credit is secured by real property and improvements located in St. Lucie County, Florida and Maricopa County, Arizona with a net book value of $31,035,000. The revolving line of credit matures in May 2003.  At March 31, 2003, $7,528,000 was outstanding and $9,472,000 was not drawn under the revolving line of credit.  The availability of funds to the Company under the line of credit is subject to certain borrowing base restrictions and other customary restrictions, including compliance with financial and other covenants thereunder.  Based upon the application of these covenants as of March 31, 2003, the entire undrawn balance of  $9,472,000 was available to the Company.

The Company has a floor plan line of credit with a floor plan lender providing a credit facility of $11,000,000 with a variable interest rate indexed to the prime rate and spreads varying from 1% to 1.75%, depending on the manufacturer and age of the inventory.  During the three months ended March 31, 2003, the Company’s current floor plan lender acquired the former floor plan lender’s notes and amounts due from the Company were consolidated with the current floor plan lender’s facility described above.  Individual advances mature as early as 360 days or have no stated maturity, based upon the manufacturer.  Amounts outstanding are non-recourse to the Company for the period of time the financed home is subject to a repurchase agreement with the manufacturer of the home.  This floor plan line of credit is secured by inventory located in the Company’s residential land lease communities with a carrying value of approximately $11,302,000.  At March 31, 2003, $9,700,000 was outstanding and $1,300,000 was available under the floor plan credit facility. 

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I.     Commitments and Contingencies

The Company is party to various legal actions resulting from its operating activities.  These actions are routine litigation and administrative proceedings arising in the ordinary course of business, some of which are covered by liability insurance, and none of which are expected to have a material adverse effect on the consolidated financial condition or results of operations of the Company and its subsidiaries taken as a whole.

The Company entered into various construction contracts with third parties to develop subdivisions within the Company’s existing portfolio of residential land lease communities. Certain of these contracts contain cancellation provisions at the option of the Company. The unpaid balance of these contracts remaining at March 31, 2003 is approximately $7,632,000.

As of March 31, 2003, the Company’s outstanding purchase obligations with manufacturers of homes to be constructed in the Company’s communities totaled $1,040,000.

The Company has agreed to invest up to an additional $680,000 in a real estate joint venture in four equal, annual installments of $170,000, of which no payments have been disbursed as of March 31, 2003.

In connection with the acquisition of a residential land lease community, the Company entered into an earn-out agreement with respect to 142 unoccupied home sites.  The Company advances an additional $16,500 pursuant to the earn-out agreement for each newly occupied home site either in the form of cash or 946 OP Units, as determined by the seller.   During the three months ended March 31, 2003 and 2002, the Company advanced $115,500 and $33,000, respectively, in cash for newly occupied home sites.  At March 31, 2003, there were 75 unoccupied home sites subject to the earnout.

J.     Operating Segments

Investments in residential land lease communities constitute substantially the Company’s entire portfolio, and as such, management of the Company assesses the performance of the Company as one operating segment. 

K.     Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each type of financial instrument.  The estimates of fair value have been determined by the Company using available market information and valuation methodologies.

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L.     Common Stock and Dividends

Officer Stock Loans

In previous years, the Company had provided loans to three of its executive officers in an amount equal to the total cash required to purchase common stock in the Company at the then prevailing market prices.  These loans have a 10-year maturity, are 25% recourse to the executive officers, bear interest at 7.5% and are secured by the stock acquired with the proceeds from the loan.  During the year ended December 31, 2002, an officer who had separated from the Company repaid the balance due in full in accordance with the terms of the loan.  As of March 31, 2003, the total balance outstanding on loans made to two officers secured by Company common stock was $845,000 and principal and interest payments made on these obligations during the three months ended March 31, 2003 and 2002 were $20,000 and $41,000, respectively, and the loans are current with respect to principal and interest.  In compliance with current regulations, the Company will not provide loans to executive officers in the future.

Restricted Stock

The Company issued 50,000 shares of restricted stock to members of management during the three months ended March 31, 2003. The restricted stock was issued at the fair value of the common stock on the date of issuance.  The restricted stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of and is subject to a risk of forfeiture within the vesting period.  Vesting periods of the restricted stock issued range from four to five years.  The fair value of the restricted stock is amortized to compensation expense over the vesting period. 

Changes in unamortized deferred compensation re restricted stock for the three months ended March 31, 2003 and 2002, respectively are as follows:

In addition to the ratable amortization of fair value over the vesting period, dividends paid on unvested shares of restricted stock are charged to compensation expense in the period paid.  The total compensation expense charged to income related to restricted share awards was $91,000 and $46,000 for the three months ended March 31, 2003 and 2002, respectively.

Effective 2003, the Company made a grant of performance based restricted stock awards whereby the Company issued restricted common stock (the “HPS shares”) under the terms of the 1998 Stock Incentive Plan.  Dividends are paid on the HPS shares in the same amounts and at the same time as dividends are paid on outstanding common stock. In furtherance of the Company’s goal of making share ownership the primary motivation of its senior management team, the Company has made grants of performance based restricted stock which vest over a three year period, as described below.  Future grants of performance based restricted stock and the terms thereof will be subject to the approval of the Board of Directors. 

The HPS shares vest based upon the extent, if any, that the total return realized by shareholders exceeds the ten-year average total return of the Equity REIT Index, as reported by the National Association of Real Estate Investment Trusts (“NAREIT”).  Total return is defined as the total of the closing price at

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year-end plus any dividends paid less the closing price for the prior year-end.  The total return for the Company is measured over a three-year period that ends on the final valuation date.  To the extent that shares are not vested as of the final valuation date, such shares are forfeited and are returned to the Company.  Vesting is achieved ratably on the final valuation date to the extent that excess value has been realized.  In order for management to earn vesting in all of the HPS shares for a given final valuation date, the actual total return to shareholders for the three-year period is required to exceed the Equity REIT Index total return by 5%. 

The 2003 HPS grant was 50,000 shares with a final measurement date of December 31, 2005.  The Equity REIT Index total return was 10.53% for the period ending December 31, 2002.  For the 2003 HPS grant to fully vest, the actual total return over three-year period is required to be 15.53%.  If the actual total return is between 10.53% and 15.53% then a ratable portion of the shares would vest (for example, one half of the shares would vest if the actual total return is 13.03%).  If the actual total return does not exceed 10.53%, all shares would be forfeited, but none of the dividends paid during the three-year period would be forfeited.

For the three months ended March 31, 2003, the Company has provided compensation expense of $71,000 related to the above plan.

Dividends

The Company’s dividend is set quarterly by the Company’s Board of Directors and is subject to change or elimination at any time.  During the three months ended March 31, 2003 and 2002, the Company paid quarterly dividends on common stock of $0.25 per share, totaling $1,718,000 and $1,662,000 respectively.

M.     Certain Relationships and Related Transactions

During the three months ended March 31, 2002, Brandywine Financial Services Corporation, an affiliate of Brandywine, received fees of $56,000 to provide back office support to both the Company’s communities and the Company’s corporate office located in Florida.  Bruce Moore, a Director of the Company, is also an owner of Brandywine Financial Services as of March 31, 2003. Pursuant to the Company’s consolidation of its offices from Chadds Ford, Pennsylvania and Denver, Colorado to Clearwater, Florida, the Company now performs these functions out of its Clearwater office.  Effective March 31, 2002, Brandywine Financial Service’s services to the Company were terminated. 

As of January 1, 2003, the Company’s third party management contracts were cancelled.  These contracts had been acquired in 1997 from entities affiliated with Brandywine Financial Services Corporation (“Brandywine”) in exchange for common stock of the Company.  Bruce Moore, a Director of the Company, is also an owner of Brandywine.  The purchase agreement provided that the common stock issued was to be held in escrow and released to Brandywine ratably over ten years. When the contracts were cancelled, approximately 16,000 shares were returned to the Company.  The Company’s basis in these third party management contracts had been fully amortized to expense in prior years.  The Company recorded the forfeiture of the common stock as “Other income” and as an increase to treasury stock, totaling $227,000.

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N.     Recent Accounting Developments

In July 2002, FASB issued Statement of Financial Accounting Standard No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and nullifies EITF 94-3.  The Company adopted SFAS No. 146 in January 2003.  The adoption of SFAS 146 did not have a material effect on the Company’s financial position or results of operations.

In November 2002, FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements of Guarantees, Including Indirect Guarantees of Indebtedness of Others, (“FIN 45”).  FIN 45 will significantly change current practice in the accounting for, and disclosure of, guarantees.  Guarantees meeting the characteristics described in FIN 45, which are not included in the long list of exceptions, are required to be initially recorded at fair value, which is different from the general current practice of recording a liability only when a loss is probable and reasonably estimable.  FIN 45 also requires a guarantor to make significant new disclosures for virtually all guarantees, even if the likelihood of the guarantor’s having to make payments under the guarantee is remote.  FIN 45’s disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002.  FIN 45’s initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.  The guarantor’s previous accounting for guarantees issued prior to the date of FIN 45’s initial application should not be revised or restated to reflect its provisions.  The Company adopted FIN 45 in January 2002.  The adoption of FIN 45 did not have a material impact on the Company’s financial position or results of operations.

In December 2002, the FASB issued Statement No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure – an amendment of FASB Statement No. 123” (“SFAS 148”).  SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide transition alternatives for adopting the accounting provisions of SFAS 123 and also amends the disclosure requirements of SFAS 123.  Additionally, SFAS 148 requires disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The transition provisions of SFAS 148 were adopted on January 1, 2003 when the Company adopted the accounting provisions of SFAS 123.  See Note C for information on the impact that the adoption of SFAS 148 had on the Company’s financial position and results of operations.

In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities”(“FIN 46”).  In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities.  A variable interest entity often holds financial assets, including loans or receivables, real estate or other property.  A variable interest entity may be essentially passive or it may engage in activities on behalf of another company.  Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity though voting interests.  FIN 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both.  FIN 46’s consolidation requirements apply immediately to variable interest entities created or acquired after January 31, 2003.  The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003.  Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established.  The Company adopted FIN 46 in February 2003.  The adoption of FIN 46 did not have a material impact on the Company’s financial position or results of operations.

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O.     Subsequent Events

The Company’s dividend is set quarterly and is subject to change or elimination at any time.  On April 23, 2003, the Board of Directors declared a quarterly cash dividend of $0.25 per common share for the quarter ended March 31, 2003, payable on May 22, 2003, to shareholders of record on May 7, 2003.  Shareholders may reinvest the dividends paid under the Dividend Reinvestment and Stock Purchase Plan that was adopted in May of 2002.  The Plan allows shareholders to acquire additional shares of common stock by reinvesting some or all of the cash dividends paid on the Company’s outstanding common stock.

In April 2003, the Company received commitments from a lender for loans totaling $7,030,000.  Terms of the commitments provide for interest at a variable rate, LIBOR plus 250 basis points, non-amortizing, non-recourse notes maturing in ten years.

As disclosed in Note L, the Compensation Committee of the Board of Directors approved the High Performance Stock award on May 6, 2003.

Introduction

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements in certain circumstances.  Certain information included in this report and our other filings with the Securities and Exchange Commission under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as well as information communicated orally or in writing between the dates of these SEC filings, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements may include projections relating to our cash flow, dividends, anticipated returns on real estate investments and opportunities to acquire additional communities. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.  Such factors include: general economic and business conditions; interest rate changes; financing and refinancing risks; risks inherent in owning real estate or debt secured by real estate; future development rate of home sites; competition; the availability of real estate assets at prices which meet our investment criteria; our ability to reduce expense levels, implement rent increases, use leverage and other risks set forth in our SEC filings.  In addition, our current and continuing qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code and depends on our ability to meet the various requirements imposed by the Internal Revenue Code, through actual operating results, distribution levels and diversity of stock ownership.  Readers should carefully review our financial statements and the notes thereto, as well as the risk factors described in the documents we file from time to time with the Securities and Exchange Commission.

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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions.  We believe that of our significant accounting policies (see Note C to the consolidated financial statements), the following may involve a higher degree of judgment and complexity.

Real estate and other long-lived assets are recorded at cost, less accumulated depreciation, unless considered impaired.  If events or circumstances indicate that the carrying amount of a property may be impaired, we will make an assessment of its recoverability by estimating the undiscounted future cash flows, excluding interest charges, of the property. In the event the property is under development, the estimate of future cash flows includes all future expenditures necessary to develop the property.  If the carrying amount exceeds the aggregate future cash flows, we would recognize an impairment loss to the extent the carrying amount exceeds the fair value of the property.

Real property investments are subject to varying degrees of risk.  Several factors may adversely affect the economic performance and value of our real estate investments.  These factors include changes in the national, regional and local economic climates; local conditions, such as an oversupply of residential land lease properties or a reduction in the demand for our residential land lease properties; and competition from other housing sources including single and multifamily properties; plus changes in market rental rates. Additional factors that may adversely affect the economic performance and value of our development properties include regulatory changes that impact the number of home sites that can be built on our undeveloped land, changes in projected costs to construct new subdivisions in our communities and regulatory changes made by local, regional, state or national authorities.  Any adverse changes in these factors could cause impairment in our real estate.

We capitalize direct and indirect costs (including interest, real estate taxes, and other costs) in connection with initial capital expenditures, capital enhancements, and capital replacements, as well as similar spending for development and redevelopment of our properties.  Indirect costs that are not capitalized, including general and administrative expenses, are charged to expense as incurred.  The amounts capitalized vary with the volume, cost and timing of these activities and, especially, with the pace of development and redevelopment activities. As a result, changes in the volume, cost and timing of these activities may have a significant impact on our financial results.

The most significant capitalized cost is interest. We capitalize interest when the following three conditions are present: (i) expenditures for the asset have been made, (ii) activities necessary to get the asset ready for its intended use are in progress and (iii) interest cost is being incurred.  Our determination of the activities in progress for a development property is subject to professional judgment.  The most significant judgment is the determination to capitalize interest relating to the ownership of land being developed as new home sites. In many cases, the development activity is expected to take place over several years and in multiple phases. It is our conclusion that the entirety of each parcel is under development and is a qualifying asset.  Accordingly, interest is capitalized with respect to the entire parcel until such time as development activities cease or the individual home site is ready for its intended use.  We regularly review the amount of capitalized costs in conjunction with our review of impairment of long-lived assets.

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Rental Property Depreciation

Depreciation is computed using the straight-line method over an estimated useful life of 5 to 75 years for land improvements, 30 to 45 years for buildings and 5 years for furniture and other equipment, all of which are judgmental determinations.  These determinations may prove to be different than the actual life of any individual asset.

Inventory

Carrying amounts for inventory are determined on a specific identification basis and are stated at the lower of cost or market. If actual market conditions are less favorable than those projected by management, if customer preferences change, or if material improvements are made by suppliers that are preferred by our customers to inventory we own, inventory write-downs may be required. Any such write-downs may have a significant impact on our financial results.  On a quarterly basis, we review each home in inventory that is older than one year and evaluate our carrying amount versus recent offers, comparable sales, and our asking price in order to derive an estimate of its market value.  In the event that the carrying amount exceeds our estimate of market value, less a normalized margin, we record a write-down of the carrying amount as a charge to the cost of home sales in the current period.  As of March 31, 2003, $1,400,000 of our total inventory of $11,689,000 was older than one year. In the quarter ending March 31, 2003, we recorded a charge of $135,000 (9.6% of inventory over one year) to write carrying amounts down to market value.

Legal Contingencies

The Company is currently involved in certain legal proceedings.  The Company does not believe these proceedings will have a material adverse effect on its consolidated financial position.  It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in assumptions and the effectiveness of strategies, related to these proceedings. The amount of loss contingencies involving litigation, for which a loss is probable and such loss can be reasonably estimated, is determined through consultation with legal counsel representing the Company.  The Company’s evaluation of loss contingencies arising from litigation, claims and assessments, considers unasserted claims and associated estimates of loss, if any, are provided to the extent probable and reasonably estimable.

Portfolio Summary

⁽¹⁾ As of March 31, 2003, 5,945 of these operational home sites were occupied.

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Occupancy Roll Forward

Operating Strategy

In addition to reviewing financial measures determined in accordance with generally accepted accounting principles (“GAAP”), we assess the performance of the business by using several generally accepted industry financial measures, including funds from operations which is defined below.  We believe this measure provides useful information regarding our performance, but this measure should not be considered as an alternative to net income or net cash flow from operating activities, as determined in accordance with GAAP. 

The Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income or loss, computed in accordance with generally accepted accounting principles, excluding gains and losses from debt restructuring and sales of property, plus real estate related depreciation and amortization (excluding amortization of financing costs) and after adjustments for unconsolidated partnerships and joint ventures.  We calculate FFO beginning with the NAREIT definition and include adjustments for the minority interest in the Operating Partnership owned by persons other than us. 

FFO is not necessarily indicative of cash available to fund our cash needs, including our ability to make distributions, since FFO does not consider recurring capital expenditures, principal maturities or other capital expenditure commitments of the Company. Our basis of computing FFO is not necessarily comparable with that of other REITs.

We use FFO in measuring our operating performance and believe that it is helpful to investors because we believe that (i) the items that result in a difference between FFO and net income do not impact the ongoing operating performance of a real estate company,  (ii) FFO captures real estate performance by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than do other depreciating assets such as machinery, computers or other personal property, and (iii) other real estate companies, analysts and investors utilize FFO in analyzing the results of real estate companies.

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A reconciliation of net income, determined in accordance with GAAP, to FFO for the three months ended March 31, 2003 and 2002, is reflected in the table below (in thousands):

⁽¹⁾ The Company acquired certain third party management contracts in 1997 through the issuance of common stock.  The terms of the purchase agreement provided that the common stock was issued under an escrow agreement that provided for a ratable release of the common stock based upon the continued existence of the third party management contracts.  The property owner cancelled the management contracts effective January of 2003 and under the terms of the escrow agreement approximately 16,000 shares of common stock were returned to the Company.  The Company’s basis in these third party contracts had been fully amortized to expense in prior years.  The Company recorded the forfeiture of the common stock as increases to treasury stock and other income in the three months ended March 31, 2003.  This element of net income has been excluded in arriving at FFO as the ratable amortization of the Company’s basis in the contracts was excluded in arriving at FFO in prior periods.  The forfeiture of common stock associated with third party management contracts did not occur in the past two years and no additional common stock is subject to contractual escrow agreements at March 31, 2003.

For the three months ended March 31, 2003 and 2002, net cash flows were as follows (in thousands):

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RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 2003

Comparison of Three Months Ended March 31, 2003 to Three Months Ended March 31, 2002

Rental Property Operations

Rental and other property revenues from our owned properties totaled $6,418,000 for the three months ended March 31, 2003 compared to $5,907,000 for the three months ended March 31, 2002, an increase of $511,000 or 8.7%.  The increase of 8.7% is attributed to a 4.0% increase associated with sites leased for both periods and 4.7% to newly leased sites.  The increase in property operating revenue was a result of:

Golf course operating revenues totaled $338,000 for the three months ended March 31, 2003 compared to $339,000 for the three months ended March 31, 2002, a decrease of $1,000 or 0.3%.  Golf revenue increases at one community were offset by decreases at a second community.

Property operating expenses from our owned properties totaled $2,350,000 for the three months ended March 31, 2003 compared to $2,249,000 for the same period in 2002, an increase of $101,000 or 4.5%.   The increase in property operating expenses was a result of:

Golf course operating expenses totaled $303,000 for the three months ended March 31, 2003 compared to $351,000 for the three months ended March 31, 2002, a decrease of $48,000 or 13.7%.  The decrease is due to maintenance cost incurred in 2002 to revitalize the golf course fairways and greens that did not recur in 2003.

Depreciation expense was $650,000 during the three months ended March 31, 2003 compared to $631,000 during the same period in 2002.  The increase was as a result of an increase in depreciable property attributable to the continued development of previously undeveloped home sites.

Same store property revenues for the three months ended March 31, 2003, increased by 7.9% from the three months ended March 31, 2002 consisting of an 8.4% increase from same store rental revenues offset by flat golf revenues.  Expenses related to those revenues increased 2.6% over that same period consisting of a 5.8% increase in same store rental expenses offset by a decrease of golf expenses.  Same store property net operating income increased 10.8% for the three months ended March 31, 2003.  Our same store base included 98% of our property operating revenues for the three months ended March 31, 2003.

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The Company believes that same store information provides the user of these financial statements with a comparison of the profitability for properties owned during both reporting periods that cannot be obtained from a review of the consolidated statements of income. This comparison can be useful to an understanding of the “parts” in addition to an understanding of the “whole”.  A reconciliation of same store operating results used in the above calculation to total operating revenues and total expenses for the three months ended March 31, 2003 and 2002 determined in accordance with generally accepted accounting principles is reflected in the table below (in thousands):