Hilltop 10Q 2005 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-31987

Affordable Residential Communities Inc.

(Exact name of Registrant as specified in its charter)

MARYLAND	84-1477939
(State of incorporation)	(I.R.S. employer identification no.)
600 Grant Street, Suite 900
Denver, Colorado	80203
(Address of principal executive offices)	(Zip code)

(303) 291-0222

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No x

The number of shares of the Registrant’s common stock outstanding at July 27, 2005 was 40,956,581.

AFFORDABLE RESIDENTIAL COMMUNITIES INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2005
INDEX

Item	Description	Page
	PART I—FINANCIAL INFORMATION
1.	Consolidated Financial Statements
	Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004 (unaudited)		2
	Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004 (unaudited)		3
	Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004 (unaudited)		4
	Notes to Consolidated Financial Statements (unaudited)		6
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
3.	Quantitative and Qualitative Disclosures About Market Risk		44
4.	Controls and Procedures		45
	PART II—OTHER INFORMATION
6.	Exhibits		46

AFFORDABLE RESIDENTIAL COMMUNITIES INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
(in thousands, except share and per share data)
(unaudited)

	June 30,			December 31,
	2005			2004
Assets
Rental and other property, net	$	1,587,040			$	1,532,780
Assets held for sale	3,368				54,123
Cash and cash equivalents	19,616				39,802
Tenant notes and other receivables, net	32,826				18,799
Inventory	307				11,230
Loan origination costs, net	14,510				14,403
Loan reserves	35,453				31,019
Goodwill	85,264				85,264
Lease intangibles and customer relationships, net	16,087				19,106
Prepaid expenses and other assets	10,315				6,476
Total assets	$	1,804,786			$	1,813,002
Liabilities and Stockholders’ Equity
Notes payable	$	1,089,004			$	1,001,622
Liabilities related to assets held for sale	2,656				29,516
Accounts payable and accrued expenses	31,273				37,877
Dividends payable	10,084				15,505
Tenant deposits and other liabilities	15,109				12,776
Total liabilities	1,148,126				1,097,296
Minority interest	51,440				56,659
Commitments and contingencies
Stockholders’ equity
Preferred stock, no par value, 5,000,000 shares authorized, 5,000,000 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively; liquidation preference of $25 per share plus accrued but unpaid dividends	119,108				119,108
Common stock, $.01 par value, 100,000,000 shares authorized, 40,955,729 and 40,874,061 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively	410				409
Additional paid-in capital	791,922				790,528
Unearned compensation	(939		)		(235		)
Accumulated other comprehensive income	1,206				1,208
Retained deficit	(306,487		)		(251,971		)
Total stockholders’ equity	605,220				659,047
Total liabilities and stockholders’ equity	$	1,804,786			$	1,813,002

The accompanying notes are an integral part of these consolidated financial statements.

AFFORDABLE RESIDENTIAL COMMUNITIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(in thousands, except per share data)
(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Revenue
Rental income	$	51,366		$	47,884		$	102,224		$	86,210
Sales of manufactured homes	18,288			2,082			26,278			2,789
Utility and other income	5,835			5,114			11,481			9,097
Net consumer finance interest income (expense)	155			32			205			(40		)
Total revenue	75,644			55,112			140,188			98,056
Expenses
Property operations	20,042			17,626			40,363			30,234
Real estate taxes	4,407			4,080			8,698			7,390
Cost of manufactured homes sold	16,190			1,809			24,405			2,365
Retail home sales, finance and insurance	4,112			1,498			7,317			2,079
Property management	2,494			1,600			4,759			3,054
General and administrative	6,259			4,304			11,618			19,099
Initial public offering related costs	—			—			—			4,417
Early termination of debt	—			—			—			13,427
Depreciation and amortization	22,224			17,242			42,255			32,152
Interest expense	16,544			12,729			31,817			27,209
Total expenses	92,272			60,888			171,232			141,426
Interest income	(277		)	(450		)	(660		)	(792		)
Loss before allocation to minority interest	(16,351		)	(5,326		)	(30,384		)	(42,578		)
Minority interest	618			452			1,170			3,536
Loss from continuing operations	(15,733		)	(4,874		)	(29,214		)	(39,042		)
Income from discontinued operations	72			343			1,000			795
Gain (loss) on sale of discontinued operations	52			—			(678		)	—
Minority interest in discontinued operations	(6		)	(17		)	(17		)	(38		)
Net loss	(15,615		)	(4,548		)	(28,909		)	(38,285		)
Preferred stock dividend	(2,578		)	(2,578		)	(5,156		)	(3,810		)
Net loss attributable to common stockholders	$	(18,193	)	$	(7,126	)	$	(34,065	)	$	(42,095	)
Loss per share from continuing operations
Basic loss per share	$	(0.45	)	$	(0.18	)	$	(0.84	)	$	(1.22	)
Diluted loss per share	$	(0.45	)	$	(0.18	)	$	(0.84	)	$	(1.22	)
Income per share from discontinued operations
Basic income per share	$	—		$	0.01		$	0.01		$	0.02
Diluted income per share	$	—		$	0.01		$	0.01		$	0.02
Loss per share attributable to common stockholders
Basic loss per share	$	(0.45	)	$	(0.17	)	$	(0.83	)	$	(1.20	)
Diluted loss per share	$	(0.45	)	$	(0.17	)	$	(0.83	)	$	(1.20	)
Weighted average share information
Common shares outstanding	40,877			40,857			40,869			35,045

The accompanying notes are an integral part of these consolidated financial statements.

AFFORDABLE RESIDENTIAL COMMUNITIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 and 2004
(in thousands)
(unaudited)

	Six Months Ended June 30,
	2005			2004
Cash flow from operating activities
Net loss attributable to common stockholders	$	(34,065	)	$	(42,095	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	42,255			32,152
Stock grant compensation expense	326			10,144
Preferred stock dividend declared	5,156			3,810
Partnership preferred unit distributions declared	786			—
Minority interest in net loss	(1,956		)	(3,536		)
Non-cash IPO related costs	—			389
Early termination of debt	—			7,100
Depreciation and minority interest included in income from discontinued operations	22			1,897
Loss on sale of discontinued operations	678			—
Gain on sale of manufactured homes	(1,873		)	—
Changes in operating assets and liabilities, net of acquisitions	(10,340		)	9,110
Net cash provided by operating activities	989			18,971
Cash flow from investing activities
Acquisition of Hometown communities	—			(507,136		)
Acquisition of D.A.M. and other communities	—			(14,754		)
Purchases of manufactured homes	(68,300		)	(44,856		)
Proceeds from community sales	48,721			—
Proceeds from manufactured home sales	13,014			—
Community improvements and equipment purchases	(32,605		)	(10,068		)
Net cash used in investing activities	(39,170		)	(576,814		)
Cash flow from financing activities
Cash flow from IPO
Common stock offering	—			437,790
Preferred stock offering	—			125,000
Common stock offering expenses	—			(36,813		)
Preferred stock offering expenses	—			(5,593		)
Cash flow from IPO related financing transactions
Debt issued in the financing transactions	—			500,000
Debt paid in the financing transactions	—			(439,048		)
Payment of loan origination costs	—			(8,122		)
Release of restricted cash	—			12,278
Release of loan reserves	—			19,089
New loan reserves	—			(14,247		)
Proceeds from issuance of debt	155,483			5,000
Repayment of debt	(94,352		)	(5,690		)

AFFORDABLE RESIDENTIAL COMMUNITIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 and 2004
(in thousands)
(unaudited)

	Six Months Ended June 30,
	2005			2004
Payment of common and OP Unit dividends	(27,045		)	(6,474		)
Payment of preferred dividends	(5,156		)	(2,091		)
Payment of partnership preferred distributions	(786		)	—
Repurchase of OP Units	(1,836		)	—
Restricted cash	—			456
Loan reserves	(4,434		)	(992		)
Loan origination costs	(3,879		)	(1,589		)
Net cash provided by financing activities	17,995			578,954
Net (decrease) increase in cash and cash equivalents	(20,186		)	21,111
Cash and cash equivalents, beginning of period	39,802			26,631
Cash and cash equivalents, end of period	$	19,616		$	47,742
Non-cash financing and investing transactions:
Debt assumed in connection with acquisitions	$	—		$	122,863
OP Units issued in connection with acquisitions	$	—		$	33,142
Notes receivable for manufactured home sales	$	11,402		$	—
Supplemental cash flow information:
Cash paid for interest	$	33,931		$	28,243

The accompanying notes are an integral part of these consolidated financial statements.

AFFORDABLE RESIDENTIAL COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Business, Basis of Presentation and Summary of Significant Accounting Policies

Business

Affordable Residential Communities Inc. (the “Company” or “ARC”) is a Maryland corporation organized as a fully integrated, self-administered and self-managed equity real estate investment trust (“REIT”) for U. S. Federal income tax purposes and is engaged in the acquisition, renovation, repositioning and operation of primarily all-age manufactured home communities, the retail sale and financing of manufactured homes, the rental of manufactured homes and other related businesses including acting as agent in the sale of homeowners’ insurance and related products, all exclusively to residents and prospective residents of our communities. We were organized in July 1998 and operate primarily through Affordable Residential Communities LP (the “Operating Partnership” or “OP”) and its subsidiaries, of which we are the sole general partner and owned 94.8% as of June 30, 2005.

On February 18, 2004, we completed an initial public offering (“IPO”) of approximately 22.3 million shares of our common stock at $19.00 per share (excluding approximately 2.3 million shares sold by selling stockholders) and 5.0 million shares of our preferred stock priced at $25.00 per share. The net proceeds to the Company from our IPO of common stock and preferred stock were $517.5 million before expenses. On March 17, 2004, we issued 791,592 shares of common stock pursuant to the underwriters’ exercise of their over-allotment option generating net proceeds to the Company of $14.0 million. In conjunction with the IPO, we also completed a financing transaction consisting of $500.0 million of new mortgage debt and the repayment of certain existing indebtedness (see Note 2).

Concurrent with our IPO and the financing transaction noted above, we acquired 90 manufactured home communities from Hometown America, L.L.C. (“Hometown”). The 90 acquired communities are located in 24 states and totaled 26,406 homesites. The total purchase price for these communities and related assets was approximately $615.3 million including assumed indebtedness with a fair value of $93.1 million. See Note 2 for a discussion of the Company’s significant 2004 acquisitions.

As of June 30, 2005, we owned and operated 315 communities (net of one community classified as discontinued operations, see Note 10) consisting of 62,942 homesites (net of 126 homesites classified as discontinued operations) in 27 states with occupancy of 84.5%. Our five largest markets are Dallas-Fort Worth, Texas, with 11.5% of our total homesites; Atlanta, Georgia, with 7.9% of our total homesites; Salt Lake City, Utah, with 6.0% of our total homesites; the Front Range of Colorado, with 5.2% of our total homesites; and Kansas City-Lawrence-Topeka, with 3.9% of our total homesites. We also conduct a retail home sales business.

Our common stock is traded on the New York Stock Exchange under the symbol “ARC”. Our Series A Cumulative Redeemable Preferred Stock is traded on the New York Stock Exchange under the symbol “ARC-PA”. We have no public trading history prior to February 12, 2004.

Basis of Presentation

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America and in conformity with the rules and regulations of the Securities and Exchange Commission requires us to make estimates and assumptions that affect the reported amount of

assets and liabilities, the disclosure of contingent assets and liabilities and the reported amount of revenues and expenses during the reporting period. Actual results may differ from previously estimated amounts.

The interim consolidated financial statements presented herein reflect all adjustments that are necessary to fairly present the financial position, results of operations and cash flows of the Company, and all such adjustments are of a normal and recurring nature. The results of operations for the interim period ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. These financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.

The accompanying consolidated financial statements include all of our accounts, which include the results of operations of the manufactured home communities acquired only for the periods subsequent to the date of acquisition. We have eliminated all significant intercompany balances and transactions.

Summary of Significant Accounting Policies

Rental and Other Property

We carry rental property at cost, less accumulated depreciation. We capitalize significant renovations and improvements that substantially improve asset quality and/or extend the useful life of assets and depreciate them over their estimated remaining useful lives. We expense maintenance and repairs as incurred.

Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the various classes of rental property assets are as follows:

Asset Class				Estimated Useful Lives (Years)
Manufactured home communities and improvements				10 to 30
Buildings				10 to 20
Rental homes				3
Furniture and other equipment				5
Computer software and hardware				3

We evaluate the recoverability of our investment in rental property whenever events or changes in circumstances indicate that the recoverability of the net book value of the asset is questionable. Our assessment of the recoverability of rental property includes, but is not limited to, recent operating results and expected net operating cash flows from future operations. In the event that facts and circumstances indicate that the carrying amount of rental property may be impaired, we perform an evaluation of recoverability in which we compare the estimated future undiscounted cash flows associated with the asset to the asset’s carrying amount to determine if an impairment adjustment is required. If this review indicates that the asset’s carrying amount will not be fully recoverable, we will reduce the carrying value of the asset to its estimated fair value. We recorded no impairment charges during the three and six months ended June 30, 2005 and 2004.

Effective January 1, 2005, we changed our estimate of the depreciable life of our rental homes from 10 years to 3 years. Homes in our rental home portfolio will now be depreciated over 3 years of service to an estimated salvage value of 70%. This change was made to align the depreciable lives of our rental homes to our intent to sell homes from our rental home portfolio after a 3 year period to reduce the costs of repairs and maintenance. This change in estimate did not have a material impact on our financial positions, results of operations or cash flows.

Revenue Recognition

We recognize rental income on homesites and homes when earned and due from residents. Leases entered into by tenants for the rental of a site are generally month-to-month and are renewable by mutual agreement of the resident and us or, in some cases, as provided by statute. Leases entered into by home renters are generally one year in duration and are renewable by mutual agreement between the home renter and us. We defer rent received in advance and recognize it in income when earned. On lease with option to purchase contracts, we defer recognition of all down-payments, supplemental lease payments and sales commissions until the point of sale, which generally is at the end of the lease term.

We recognize revenues from manufactured home sales when we receive the down payment, the buyer arranges financing, we transfer title, possession and other attributes of ownership to the buyer, and we have no further obligations to perform significant additional activities.

Restricted Stock Grants

We have included a charge of $10.1 million in general and administrative expense for the six months ended June 30, 2004, representing the value of 530,000 shares of common stock that were granted on February 18, 2004 under our 2003 equity incentive plan and vested on the date of grant. We valued the shares at $19.00 per share, the price at which we sold shares in the IPO (see Note 2). In addition, during 2004 we granted 95,000 shares of restricted common stock that vest over five years. In June 2004, 42,500 of these restricted shares were forfeited and in October 2004, an additional 37,500 shares of restricted stock were forfeited pursuant to the terms of their issuance. During the six months ended June 30, 2005, 3,000 of these shares vested. In April 2005, the ARC board of directors approved an award of 80,000 shares of common stock to Scott D. Jackson, the Company’s Chief Executive Officer, under the Company’s 2003 equity incentive plan. The shares granted will vest over three years with 20,000 shares vesting immediately and 20,000 shares vesting on each of the anniversary dates until April 29, 2008. Vesting is subject to Mr. Jackson’s continued employment with the Company and may be accelerated in the event of death, a change in control, or termination other than for cause. Vested shares may not be sold by Mr. Jackson until the first anniversary date of vesting without the prior written consent of the Compensation Committee. All shares, vested and unvested, are entitled to receive dividends and to vote unless forfeited.

We have recorded the unvested portion of the 72,000 outstanding restricted shares as of June 30, 2005 as unearned compensation on the balance sheet and are amortizing the balance ratably over the vesting period. We recorded compensation expense related to restricted shares of $312,000 and $326,000 during the three and six months ended June 30, 2005, respectively, as compared to $90,000 and $135,000 during the same periods in 2004.

We consider the number of vested shares issued under our 2003 equity incentive plan as common stock outstanding and include them in the denominator of our calculation of basic earnings per share. We also consider the total number of restricted shares granted under our 2003 equity incentive plan in the denominator of our calculation of diluted earnings per share if they are dilutive. We return shares forfeited to the 2003 equity incentive plan as shares eligible for future grant and adjust any compensation expense previously recorded on such shares in the period the forfeiture occurs.

Interest and Internal Cost Capitalization

We capitalize our interest costs (using our average cost of borrowings) and internal costs (using actual time spent and related costs) on development of long-lived assets from the date we begin substantive activities through the date we place such assets into service in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 34, Capitalization of Interest and SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, respectively. The long-lived assets on which we capitalize interest include general construction activities in our communities, manufactured homes and, in

the case of the communities acquired, the cost of the vacant homesites we acquired on which we are making improvements and placing a manufactured home for rent or sale. We capitalized interest and internal costs of $0.2 million and $0.5 million during the three and six months ended June 30, 2005, respectively, as compared to $1.2 million and $1.8 million capitalized during the same periods in 2004.

Accumulated Other Comprehensive Income and Comprehensive Loss

Amounts recorded in accumulated other comprehensive income as of June 30, 2005 represent unrecognized gains on our interest rate swap, which qualifies as a cash flow hedge and will be marked to market over the life of the instrument. Including these unrecognized gains or losses, our comprehensive loss for the three and six months ended June 30, 2005 was $18.5 million and $34.1 million, respectively, compared with a comprehensive loss of $5.3 million and $40.8 million during the same periods in 2004.

Reclassifications

Certain prior year balances have been reclassified to conform to the current year presentation.

2. IPO and Acquisitions

IPO and Hometown Acquisition

On February 18, 2004, we completed our IPO of approximately 22.3 million shares of our common stock at $19.00 per share (excluding approximately 2.3 million shares sold by selling stockholders) and 5.0 million shares of our preferred stock priced at $25.00 per share. The net proceeds to the Company from our IPO of common stock and preferred stock were $517.5 million before expenses. On March 17, 2004, we issued 791,592 shares of common stock pursuant to the underwriters’ exercise of their over-allotment option generating net proceeds to the Company of $14.0 million. Concurrent with the IPO, we also completed the refinancing of $240.0 million of our mortgage debt and raised an additional $260.0 million of new mortgage debt. The new mortgage debt at the time of the IPO consisted of $215.3 million of 10 year fixed rate debt with an interest rate of 5.53%, $100.7 million of 5-year fixed rate debt with an interest rate of 5.05% and $184.0 million of floating rate debt. Proceeds from the IPO and new debt were used to purchase the Hometown communities, repay our Rental Home Credit Facility and redeem the Preferred Interest issued by one of our subsidiaries (see Note 6 to the Company’s consolidated financial statements for the year ended December 31, 2004 as filed on Form 10-K).

On February 18, 2004 and subsequent dates thereafter, we acquired 90 manufactured home communities from Hometown. The 90 acquired communities are located in 24 states and include 26,406 homesites. The total purchase price for all the communities we acquired consisted of the following (in thousands):

Cash purchase price	$	522,131
Debt assumed in connection with the acquisition	93,139
Total purchase price	$	615,270

Our purchase price allocation is as follows (in thousands):

Land	$	90,296
Rental and other property	494,429
Manufactured homes	9,761
Lease intangibles	811
Customer relationships	14,496
Notes receivable	5,477
	$	615,270

D. A. M. Portfolio Acquisition

On June 30, 2004, we acquired 36 manufactured home communities from D.A.M. MASTER ENTITY, L.P. The communities are located in 3 states and include 3,573 homesites. The total purchase price (including the costs of manufactured homes) was approximately $65.5 million, including assumed indebtedness with a fair value of $29.7 million. In addition to cash and the assumption of debt, this acquisition was funded through the issuance of Series “B”, “C” and “D” Partnership Preferred Units (“PPUs”), for proceeds totaling $33.1 million. All of the “D” series PPUs totaling $8.0 million were redeemed for cash on July 6, 2004. See Note 3 for further discussion of the PPUs.

Our purchase price allocation is as follows (in thousands):

Land	$	9,225
Rental and other property	55,501
Manufactured homes	803
Customer relationships	52
Other assets/liabilities, net	(78		)
Total purchase price allocation	$	65,503

We have prepared the following unaudited pro-forma income statement information as if the Hometown and D.A.M. acquisitions had occurred on January 1, 2004. The pro-forma data is not necessarily indicative of the results that actually would have occurred if we had consummated the acquisitions on January 1, 2004 (in thousands, except per share information):

	Three Months Ended June 30,							Six Months Ended June 30,
	2005 Actual			2004 Pro-Forma				2005 Actual			2004 Pro-Forma
Revenue	$	75,644			$	57,676		$	140,188		$	111,513
Total expenses	$	92,272			$	63,198		$	171,232		$	153,962
Interest income	$	(277	)		$	(450	)	$	(660	)	$	(852	)
Loss from continuing operations before allocation to minority interest	$	(16,351	)		$	(5,072	)	$	(30,384	)	$	(41,597	)
Minority interest	$	618			$	436		$	1,170		$	3,473
Loss from continuing operations	$	(15,733	)		$	(4,636	)	$	(29,214	)	$	(38,124	)
Discontinued operations	$	118			$	326		$	305		$	1,047
Net loss	$	(15,615	)		$	(4,310	)	$	(28,909	)	$	(37,077	)
Net loss attributable to common stockholders	$	(18,193	)		$	(6,888	)	$	(34,065	)	$	(40,887	)
Basic loss per share	$	(0.45	)		$	(0.17	)	$	(0.83	)	$	(1.17	)
Weighted average shares outstanding	40,877				40,857			40,869			35,045
Diluted loss per share	$	(0.45	)		$	(0.17	)	$	(0.83	)	$	(1.17	)

Other Acquisitions

During the period from January 1, 2004 through December 31, 2004, in addition to the Hometown and D.A.M. portfolio acquisitions, we acquired six manufactured home communities from unaffiliated third parties for approximately $16.5 million in cash and $3.8 million in assumed debt. We accounted for these acquisitions utilizing the purchase method of accounting and, accordingly, have allocated the purchase price to the assets acquired and liabilities assumed based on estimated fair values at the date of their acquisition. We allocated the majority of the purchase price to the rental property and intangible assets, including customer relationships and leases intangibles. No acquisitions were made in the three and six months ended June 30, 2005.

We have not presented pro-forma results of operations for the three or six months ended June 30, 2004 as if these other acquisitions were made on the first day of 2004, as the effects of these other acquisitions are not material to our financial position, results of operations or cash flows for this period.

The table below summarizes all of our manufactured home community acquisitions for the period January 1, 2004 through June 30, 2005:

Date

Portfolio

Community

Location

Homesites

Feb-04

Weatherly Estates I

Lebanon, TN

270

Feb-04

Weatherly Estates II

Clarksville, TN

131

Feb-04

HTA

100 Oaks

Fultondale, AL

235

Feb-04

HTA

Jonesboro

Jonesboro, GA

Feb-04

HTA

Bermuda Palms

Indio, CA

185

Feb-04

HTA

Breazeale

Laramie, WY

117

Feb-04

HTA

Broadmore

Goshen, IN

370

Feb-04

HTA

Butler Creek

Augusta, GA

376

Feb-04

HTA

Camden Point

Kingsland, GA

268

Feb-04

HTA

Carnes Crossing

Summerville, SC

604

Feb-04

HTA

Castlewood Estates

Mableton, GA

334

Feb-04

HTA

Casual Estates

Liverpool, NY

961

Feb-04

HTA

Riverdale

Riverdale, GA

481

Feb-04

HTA

Columbia Heights

Grand Forks, ND

302

Feb-04

HTA

Conway Plantation

Conway, SC

299

Feb-04

HTA

Crestview

Stillwater, OK

238

Feb-04

HTA

Country Village

Jacksonville, FL

643

Feb-04

HTA

Eagle Creek

Tyler, TX

194

Feb-04

HTA

Eagle Point

Marysville, WA

230

Feb-04

HTA

Falcon Farms

Port Byron, IL

215

Feb-04

HTA

Forest Creek

Elkhart, IN

167

Feb-04

HTA

Fountainvue

Lafontaine, IN

120

Feb-04

HTA

Foxhall Village

Raleigh, NC

315

Feb-04

HTA

Golden Valley

Douglasville, GA

131

Feb-04

HTA

Huron Estates

Cheboygan, MI

111

Feb-04

HTA

Indian Rocks

Largo, FL

148

Feb-04

HTA

Knoll Terrace

Corvallis, OR

212

Feb-04

HTA

La Quinta Ridge

Indio, CA

151

Feb-04

HTA

Lakewood

Montgomery, AL

396

Feb-04

HTA

Lakewood Estates

Davenport, IA

180

Feb-04

HTA

Landmark Village

Fairburn, GA

524

Feb-04

HTA

Marnelle

Fayetteville, GA

205

Feb-04

HTA

Oak Ridge

Elkhart, IN

204

Feb-04

HTA

Oakwood Forest

Greensboro, NC

482

Feb-04

HTA

Pedaler’s Pond

Lake Wales, FL

214

Feb-04

HTA

Pinecrest Village

Shreveport, LA

446

Feb-04

HTA

Pleasant Ridge

Mount Pleasant, MI

305

Feb-04

HTA

President’s Park

Grand Forks, ND

174

Feb-04

HTA

Riverview

Clackamas, OR

133

Feb-04

HTA

Saddlebrook

N. Charleston, SC

425

Feb-04

HTA

Sherwood

Hartford City, IN

134

Feb-04

HTA

Southwind Village

Naples, FL

337

Feb-04

HTA

Springfield Farms

Brookline Sta, MO

290

Feb-04

HTA

Stonegate

Shreveport, LA

157

Feb-04

HTA

Terrace Heights

Dubuque, IA

317

Feb-04

HTA

Torrey Hills

Flint, MI

377

Feb-04	HTA	Twin Pines	Goshen, IN	238
Feb-04	HTA	Villa	Flint, MI	319
Feb-04	HTA	Winter Haven Oaks	Winterhaven, FL	343
Feb-04	HTA	Green Park South	Pelham, AL	421
Feb-04	HTA	Hunter Ridge	Jonesboro, GA	838
Feb-04	HTA	Friendly Village	Lawrenceville, GA	203
Feb-04	HTA	Misty Winds	Corpus Christi, TX	354
Feb-04	HTA	Shadow Hills	Orlando, FL	670
Feb-04	HTA	Smoke Creek	Snellville, GA	264
Feb-04	HTA	Woodlands of Kennesaw	Kennesaw, GA	273
Feb-04	HTA	Sunset Vista	Magna, UT	207
Feb-04	HTA	Sea Pines	Mobile, AL	429
Feb-04	HTA	Woodland Hills	Montgomery, AL	628
Feb-04	HTA	The Pines	Ladson, SC	204
Feb-04	HTA	Shady Hills	Nashville, TN	251
Feb-04	HTA	Trailmont	Goodlettsville, TN	131
Feb-04	HTA	Chisholm Creek	Wichita, KS	254
Feb-04	HTA	Big Country	Cheyenne, WY	251
Feb-04	HTA	Heritage Point	Montgomery, AL	264
Feb-04	HTA	Lakeside	Lithia Springs, GA	103
Feb-04	HTA	Plantation Estates	Douglasville, GA	138
Feb-04	HTA	Green Acres	Petersburg, VA	182
Feb-04	HTA	Lakeside	Davenport, IA	124
Feb-04	HTA	Evergreen Village	Pleasant View, UT	238
Feb-04	HTA	Four Seasons	Fayetteville, GA	214
Feb-04	HTA	Alafia Riverfront	Riverview, FL	96
Feb-04	HTA	Highland	Elkhart, IN	246
Feb-04	HTA	Birchwood Farms	Birch Run, MI	143
Feb-04	HTA	Cedar Terrace	Cedar Rapids, IA	255
Feb-04	HTA	Five Seasons Davenport	Davenport, IA	270
Feb-04	HTA	Silver Creek	Davenport, IA	280
Feb-04	HTA	Encantada	Las Cruces, NM	354
Feb-04	HTA	Royal Crest	Los Alamos, NM	180
Feb-04	HTA	Brookside Village	Dallas, TX	394
Feb-04	HTA	Meadow Glen	Keller, TX	409
Feb-04	HTA	Silver Leaf	Mansfield, TX	145
Mar-04	HTA	Lamplighter Village	Marietta, GA	431
Mar-04	HTA	Shadowood	Acworth, GA	506
Mar-04	HTA	Stone Mountain	Stone Mountain, GA	354
Mar-04	HTA	Marion Village	Marion, IA	486
Mar-04	HTA	Autumn Forest	Brown Summit, NC	299
Mar-04	HTA	Woodlake	Greensboro, NC	308
Mar-04	HTA	Arlington Lakeside	Arlington, TX	233
Apr-04	HTA	Pine Ridge	Sarasota, FL	126
Apr-04	HTA	Cedar Knoll	Waterloo, IA	290
Apr-04	HTA	Mallard Lake	Pontoon Beach, IL	278
Jun-04	NA	Kopper View	West Valley City, UT	61
Jun-04	NA	Overpass Point	Tooele, UT	182
Jun-04	D.A.M.	Pleasant View	Berwick, PA	108

Jun-04

D.A.M.

Brookside

Berwick, PA

171

Jun-04

D.A.M.

Beaver Run

Linkwood, MD

118

Jun-04

D.A.M.

Carsons

Chambersburg, PA

130

Jun-04

D.A.M.

Chelsea

Sayre, PA

Jun-04

D.A.M.

Collingwood

Horseheads, NY

101

Jun-04

D.A.M.

Crestview

Sayre, PA

Jun-04

D.A.M.

Valley View in Danboro

Danboro, PA

231

Jun-04

D.A.M.

Valley View in Ephrata

Ephrata, PA

149

Jun-04

D.A.M.

Frieden

Schuylkill Haven, PA

192

Jun-04

D.A.M.

Green Acres

Chambersburg, PA

Jun-04

D.A.M.

Gregory Courts

Honey Brook, PA

Jun-04

D.A.M.

Valley View in Honey Brook

Honey Brook, PA

146

Jun-04

D.A.M.

Huguenot

Port Jervis, NY

166

Jun-04

D.A.M.

Maple Manor

Taylor, PA

316

Jun-04

D.A.M.

Monroe Valley

Jonestown, PA

Jun-04

D.A.M.

Moosic Heights

Avoca, PA

152

Jun-04

D.A.M.

Mountaintop

Narvon, PA

Jun-04

D.A.M.

Pine Haven

Blossvale, NY

130

Jun-04

D.A.M.

Sunny Acres

Somerset, PA

207

Jun-04

D.A.M.

Suburban

Greenburg, PA

202

Jun-04

D.A.M.

Blue Ridge

Conklin, NY

Jun-04

D.A.M.

Chambersburg I&II

Chambersburg, PA

100

Jun-04

D.A.M.

Hideaway

Honey Brook, PA

Jun-04

D.A.M.

Kintner

Vestal, NY

Jun-04

D.A.M.

Martins

Nottingham, PA

Jun-04

D.A.M.

Nichols

Phoenixville, PA

Jun-04

D.A.M.

Scenic View

East Earl, PA

Jun-04

D.A.M.

Shady Grove

Atglen, PA

Jun-04

D.A.M.

Valley View in Blandon

Fleetwood, PA

Jun-04

D.A.M.

Valley View in Morgantown

Morgantown, PA

Jun-04

D.A.M.

Valley View in Tuckerton

Reading, PA

Jun-04

D.A.M.

Valley View in Wernersville

Wernersville, PA

Jun-04

D.A.M.

Pine Terrace

Schuylkill Haven, PA

Jun-04

D.A.M.

Sunnyside

Trooper, PA

Jun-04

D.A.M.

Oakwood Lake Village

Tunkhannock, PA

Jul-04

Western Mobile Estates

West Valley City, UT

145

Sep-04

Willow Creek Estates

Ogden, UT

137

3. Common Stock, Preferred Stock and Minority Interest Related Transactions

On March 16, 2005, we declared a quarterly dividend of $0.3125 per share of common stock. We paid the total common stock dividend of $12.8 million on April 15, 2005 to shareholders of record on March 31, 2005. Also on March 16, 2005, we declared a dividend of $0.5156 on each share of our Series A Cumulative Redeemable Preferred Stock. We paid the total preferred stock dividend of $2.6 million on April 29, 2005 to shareholders of record on April 15, 2005.

On May 23, 2005, we declared a quarterly dividend of $0.1875 per share of common stock. We paid the total common stock dividend of $7.7 million on July 15, 2005 to shareholders of record on June 30, 2005. Also on May 23, 2005, we declared a dividend of $0.5156 on each share of our Series A Cumulative Redeemable Preferred Stock. We paid the total preferred stock dividend of $2.6 million on July 29, 2005 to shareholders of record on July 15, 2005.

At June 30, 2005, minority interest consisted of 2,261,451 OP Units that were issued to various limited partners and 1,005,688 PPUs issued on June 30, 2004 as part of the D.A.M. portfolio acquisition. Each OP Unit outstanding is paired with 1.9268 shares of our special voting stock (each a “Paired Equity Unit”) that allows each holder to vote an OP Unit on matters as if it were a common share of our stock. Each OP Unit is redeemable for cash, or at our election, one share of our common stock. During the second quarter of 2005, the Company redeemed for cash approximately 142,000 OP Units totaling approximately $1.8 million.

The PPUs outstanding as of June 30, 2005 consist of 300,000 Series “B” units and 705,688 Series “C” units. The Series “B” PPUs carry a liquidation preference of $25 per unit and earn cash distributions at the rate of 6.25% per annum, payable quarterly. The Series “B” PPUs can be redeemed at the option of the Operating Partnership for common stock, cash and/or notes payable after the fifth anniversary of their issuance. In July 2005, according to the terms of the Series “B” PPUs, the Series “B” PPU holders requested redemption of their units, and the Operating Partnership elected to repurchase them for approximately $2.5 million in cash and notes payable totaling approximately $5.0 million. As of June 30, 2005, we have accrued $78,125 of the Series “B” PPU preferred distribution, representing the portion of the preferred distribution earned by Series “B” preferred unitholders through that date.

The Series “C” PPUs carry a liquidation preference of $25 per unit and earn cash distributions at the rate of 6.25% per annum, payable quarterly. The Series “C” PPUs can be redeemed at the option of the Operating Partnership for cash after the fifth anniversary of their issuance. Series “C” PPU holders can request redemption of their units after the two and a half year anniversary of issuance, at which time the Operating Partnership must redeem the PPUs or repurchase them with common stock, cash and/or a note payable, at the Operating Partnership’s option. Series “B” and “C” units have the same priority as to the payment of distributions. As of June 30, 2005, we had accrued $183,773 of the Series “C” PPU preferred distribution, representing the portion of the preferred distribution earned by Series “C” preferred unitholders through that date.

We have recorded an equity transfer adjustment between additional paid-in capital and the minority interest in our consolidated balance sheet as of June 30, 2005 to account for changes in the respective ownership in the underlying equity of the Operating Partnership.

The following summarizes the activity of the minority interest in the Operating Partnership (in thousands):

Minority interest at December 31, 2004	$	56,659
Minority interest in loss	(1,153		)
Transfer to stockholders’ equity	(271		)
Repurchase of OP Units	(1,836		)
Distributions to PPU holders	(786		)
Distributions to OP unit holders	(1,173		)
Minority interest at June 30, 2005	$	51,440

4. Rental and Other Property, Net

The following summarizes rental and other property (in thousands):

	June 30,			December 31,
	2005			2004
Land	$	211,822		$	211,383
Land improvements and buildings	1,297,792			1,268,002
Rental homes and improvements	249,169			197,668
Furniture, equipment and vehicles	14,478			12,434
Subtotal	1,773,261			1,689,487
Less accumulated depreciation	(186,221		)	(156,707		)
Rental and other property, net	$	1,587,040		$	1,532,780

We have capitalized interest and internal costs of $0.2 million and $0.5 million in the cost of land and building improvements and manufactured home purchases for the three and six months ended June 30, 2005, respectively, as compared to $1.7 million and $2.4 million capitalized during the same periods in 2004.

5. Notes Payable

The following table sets forth certain information regarding our notes payable (in thousands):

	June 30,		December 31,
	2005		2004
Senior fixed rate mortgage due 2012, 7.35% per annum	$	302,325		$	303,903
Senior fixed rate mortgage due 2014, 5.53% per annum	211,921			213,333
Senior fixed rate mortgage due 2009, 5.05% per annum	98,926			99,651
Senior variable rate mortgage due 2006, LIBOR plus 3.00% per annum (6.22% at June 30, 2005)	140,468			150,871
Various individual fixed rate mortgages due 2005 through 2031, averaging 7.31% per annum	153,074			153,818
Revolving credit mortgage facility due 2005, LIBOR plus 2.95% per annum (6.17% at June 30, 2005)	58,764			51,000
Trust preferred securities due 2035, LIBOR plus 3.25% per annum (6.26% at June 30, 2005)	25,780			—
Consumer finance facility due 2008, LIBOR plus 3.00% per annum (6.18% at June 30, 2005)	9,369			—
Lease receivable facility due 2007, LIBOR plus 7.00% per annum (10.22% at June 30, 2005)	42,100			—
Floorplan line of credit due 2007, ranging from prime plus 0.75% to prime plus 4.00% per annum (averaging 6.59% at June 30, 2005)	43,945			27,999
Other loans	2,332			1,047
	$	1,089,004		$	1,001,622

Senior Fixed Rate Mortgage Due 2012

We entered into the Senior Fixed Rate Mortgage due 2012 on May 2, 2002. It is an obligation of certain of our special purpose real property subsidiaries and is collateralized by 105 manufactured home communities. The Senior Fixed Rate Mortgage due 2012 bears interest at a fixed rate of 7.35% per annum, will amortize based on a 30-year schedule and matures on May 1, 2012. Pursuant to the terms of the mortgage agreement, we have established reserves relating to the mortgaged properties for real estate

taxes, insurance, capital spending (included in loan reserves) and property operating expenditures (included in cash and cash equivalents). The Senior Fixed Rate Mortgage due 2012 contains customary defeasance-based prepayment penalties for repayments made prior to maturity.

Senior Fixed Rate Mortgage Due 2014

We entered into the Senior Fixed Rate Mortgage due 2014 on February 18, 2004, in connection with the completion of our IPO and the Hometown acquisition. It is an obligation of certain real property subsidiaries of the Operating Partnership and is collateralized by 46 manufactured home communities owned by these subsidiaries. The Senior Fixed Rate Mortgage due 2014 bears interest at a fixed rate of 5.53% per annum, will amortize based on a 30-year schedule and will mature on March 1, 2014. Pursuant to the terms of the mortgage agreement, we have established reserves relating to the mortgaged properties for real estate taxes, insurance, capital spending and property operating expenditures. The Senior Fixed Rate Mortgage due 2014 contains customary defeasance-based prepayment penalties for repayments made prior to maturity.

Senior Fixed Rate Mortgage Due 2009

We entered into the Senior Fixed Rate Mortgage due 2009 on February 18, 2004, in connection with the completion of our IPO and the Hometown acquisition. It is an obligation of certain real property subsidiaries of the Operating Partnership and is collateralized by 29 manufactured home communities owned by these subsidiaries. The Senior Fixed Rate Mortgage due 2009 bears interest at a fixed rate of 5.05% per annum, will amortize based on a 30-year amortization schedule and will mature on March 1, 2009. Pursuant to the terms of the mortgage agreement, we have established reserves relating to the mortgaged properties for real estate taxes, insurance, capital spending and property operating expenditures. The Senior Fixed Rate Mortgage due 2009 contains customary defeasance-based prepayment penalties for repayments made prior to maturity.

Senior Variable Rate Mortgage Due 2006

We entered into the Senior Variable Rate Mortgage due 2006 on February 18, 2004, in connection with the completion of our IPO and the Hometown acquisition. It is an obligation of certain real property subsidiaries of the Operating Partnership and is collateralized by 44 manufactured home communities owned by these subsidiaries. The Senior Variable Rate Mortgage due 2006 bears interest at a variable rate based upon a spread of 3.00% over the one-month LIBOR (6.22% at June 30, 2005) and will mature in February 2006. At our option and subject to certain conditions, we may extend the Senior Variable Rate Mortgage due 2006 for three additional 12-month periods. In connection with the second and third extensions, we would be required to pay extension fees of 0.25% and 0.375% of the outstanding principal balance, respectively. We purchased interest rate caps to limit our interest costs in the event of increases in the one-month LIBOR above 5.00%, and intend to purchase such caps for any extensions, as applicable. We will incur an exit fee equal to 0.50% of the loan amount payable upon any repayment of the principal amount of the loan. The exit fee will be subject to reduction by an amount equal to 0.50% of the principal amount of any first mortgage loans provided by the lenders to refinance the Senior Variable Rate Mortgage due 2006. Pursuant to the terms of the mortgage agreement, we have established reserves relating to the mortgaged properties for real estate taxes, insurance, capital spending and property operating expenditures. We may repay the Senior Variable Rate Mortgage due 2006 subject to a prepayment penalty calculated as the product of 0.25%, the number of payment dates remaining to maturity and the amount being repaid for prepayments made in months one through twelve. Prepayments made in months 13 to 24 are subject to a flat 1% fee of amounts repaid.

Various Individual Fixed Rate Mortgages Due 2005 Through 2031

We have assumed various individual fixed rate mortgages in connection with the acquisition of various properties that were encumbered at the time of acquisition . We have refinanced one property and expect to refinance additional properties over time. The mortgages are secured by specific manufactured home communities and are subject to early pre-payment penalties, the terms of which vary from mortgage to mortgage. The mortgages are as follows:

a) Mortgages assumed and one refinanced as part of individual property purchases. These notes total approximately $46.7 million at June 30, 2005, mature from 2006 through 2028 and have an average effective annual interest rate of 7.25%.

b) Mortgages assumed in conjunction with the Hometown acquisition. These notes total approximately $77.4 million at June 30, 2005, mature from 2005 through 2031 and carry an average effective annual interest rate of 7.06%.

c) Notes assumed in conjunction with the D.A.M. portfolio purchase. These notes total approximately $29.0 million at June 30, 2005, mature in 2008 and carry an average effective annual interest rate of 7.18%.

Revolving Credit Mortgage Facility

In September 2004, we obtained a Revolving Credit Mortgage Facility for borrowings of up to $85.0 million. This facility is an obligation of a subsidiary of the Operating Partnership and is secured by 33 communities that previously secured the cancelled Senior Revolving Credit Facility (see Note 6 to the Company’s consolidated financial statements for the year ended December 31, 2004 as filed on Form 10-K), as well as various additional communities acquired subsequent to our IPO. Advances under the Revolving Credit Mortgage Facility are limited by borrowing base requirements related to the value and cash flows of the communities securing the loan. The Revolving Credit Mortgage Facility bears interest at the one month LIBOR plus 2.95% (6.17% at June 30, 2005) and has a term of one year. We incurred a commitment fee of 0.5% at the closing of the facility and will pay origination fees of 0.5% with each advance. The facility contains no significant financial covenants.

Trust Preferred Securities Due 2035

On March 15, 2005, the Company issued $25.8 million in unsecured trust preferred securities. The $25.8 million trust preferred securities bear interest at 3-month LIBOR plus 3.25% (6.26% at June 30, 2005). Interest on the securities is paid on the 30^th of March, June, September and December of each year. The Company may redeem these securities on or after March 30, 2010 in whole or in part from time to time at principal amount plus accrued interest. The securities are mandatorily redeemable on March 15, 2035 if not redeemed sooner.

Consumer Finance Facility

We entered into the Retail Home Sales and Consumer Finance Debt Facility (the “Consumer Finance Facility”) on February 18, 2004, in connection with the completion of our IPO and the Hometown acquisition and amended it in April 2005 in connection with entering into a two-year, $75.0 million secured revolving lease receivables credit facility (see Lease Receivables Facility below). The Consumer Finance Facility, as amended, has a total commitment of $125.0 million and a term of four years. This facility is an obligation of a subsidiary of our Operating Partnership, and borrowings under this facility are secured by manufactured housing conditional sales contracts. Borrowings under the facility are limited by specified borrowing base requirements related to the value of the collateral securing the facility. The facility bears interest at a variable rate based upon a spread of 3.00% over the one-month LIBOR (6.18% at June 30,

2005). The facility includes customary affirmative and negative covenants, including minimum GAAP tangible net worth and maximum leverage covenants. We are in compliance with all financial covenants under the facility as of June 30, 2005. During the quarter, we paid a commitment fee of 1.00% on the original committed amount and 0.75% of the amended committed amount and will pay additional annual commitment fees payable on each anniversary of the closing. Advances under the facility will be subject to a number of conditions, including certain underwriting and credit screening guidelines and the conditions that the home must be located in one of our communities, the loan term may not exceed 12 years for a single-section home or 15 years for a multi-section home and the loan amount shall not exceed 90% of the value of the home securing the conditional sales contract.

The availability of advances under the Consumer Finance Facility is subject to certain conditions that are beyond our control. Conditions that could result in our inability to draw on these facilities include a downgrade in the credit rating of the lender and the absence of certain markets for financing debt obligations secured by securities or mortgage loans. Funding under this facility may also be denied if the lender determines that the value of the assets serving as collateral would be insufficient to maintain the required 75% loan-to-value ratio upon giving effect to a request for funding. The lender can also at any time require that we prepay amounts funded or provide additional collateral if, in its judgment, this is necessary to maintain the 75% loan-to-value ratio.

Lease Receivables Facility

On April 6, 2005, the Company entered into a two-year, $75.0 million secured revolving credit facility (the “Lease Receivables Facility”) with Merrill Lynch Mortgage Capital Inc. to be used to finance the purchase of manufactured homes and for general corporate purposes.

Borrowings under the Lease Receivables Facility are secured by an assignment of all lease receivables and rents, an assignment of the underlying manufactured homes and a pledge by ARCHC LLC and ARC Housing GP LLC of 100% of the outstanding equity in ARC Housing LLC and ARC HousingTX LP (collectively, “Housing”), each an indirect wholly-owned subsidiary of Affordable Residential Communities LP. Borrowings under the Lease Receivables Facility will bear interest at the one-month LIBOR plus 7.00% (10.22% at June 30, 2005), decreasing to one-month LIBOR plus 3.25% after July 31, 2005, provided Housing meets certain quarterly performance targets. Interest is payable monthly.

Borrowings under the Lease Receivables Facility are limited to an amount equal to approximately 55% of the net book value of the eligible manufactured housing units owned by Housing and their associated setup costs and located in ARC’s communities, subject to applicable borrowing base requirements. The maximum amount available under the Lease Facility will decrease by $3.0 million per quarter commencing July 1, 2005 until maturity in March 2007.

Floorplan Lines of Credit

In August 2004, we amended our floorplan line of credit to provide borrowings of up to $50.0 million secured by manufactured homes in inventory. Under the amended line of credit, the lender will advance 90% of the purchase cost of manufactured homes for the first $40.0 million in advances, with the remaining $10.0 million in advances made at 75% of such home costs. Repayments of borrowed amounts are due upon sale or lease of the related manufactured home. Advances under the amended line of credit will bear interest ranging from the prime rate plus 0.75% to the prime rate plus 4.00% (averaging 6.59% at June 30, 2005) based on the length of time each advance has been outstanding. Monthly curtailment payments are required for unsold homes beginning 360 days following the purchase of the home. The required curtailment payment will be between 3.00% and 5.00% of the home’s original invoice amount depending on the type of home and the number of months since the home’s purchase. The amended line of credit requires the Operating Partnership to maintain a minimum tangible net worth of $500.0 million, a

maximum debt to tangible net worth ratio of 3 to 1, and minimum cash and cash equivalents of $15.0 million, all as defined in the agreement. We are in compliance with all financial covenants under the line of credit as of June 30, 2005. The line of credit is subject to a commitment fee of $250,000, an unused line fee of .25% per annum and an early termination fee of 1.00% to 3.00%, based on the termination date.

6. Loss per share

The following table reflects the calculation of loss per share on a basic and diluted basis (amounts in thousands, except per share information):

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Loss per share from continuing operatiions:
Loss from continuing operations	$	(15,733	)	$	(4,874	)	$	(29,214	)	$	(39,042	)
Preferred stock dividends	(2,578		)	(2,578		)	(5,156		)	(3,810		)
Net loss from continuing operations	$	(18,311	)	$	(7,452	)	$	(34,370	)	$	(42,852	)
Weighted average share information:
Common shares outstanding	40,877			40,857			40,869			35,045
Basic loss per share from continuing operations	$	(0.45	)	$	(0.18	)	$	(0.84	)	$	(1.22	)
Diluted loss per share from continuing operations	$	(0.45	)	$	(0.18	)	$	(0.84	)	$	(1.22	)
Income per share from discontinued operations:
Income from discontinued operations	$	72		$	343		$	1,000		$	795
Loss on sale of discontinued operations	52			—			(678		)	—
Minority interest in discontinued operations	(6		)	(17		)	(17		)	(38		)
Net loss from discontinued operations	$	118		$	326		$	305		$	757
Basic income per share from discontinued operations	$	—		$	0.01		$	0.01		$	0.02
Diluted income per share from discontinued operations	$	—		$	0.01		$	0.01		$	0.02
Loss per share to common stockholders:
Net loss to common stockholders	$	(18,193	)	$	(7,126	)	$	(34,065	)	$	(42,095	)
Basic loss per share to common stockholders	$	(0.45	)	$	(0.17	)	$	(0.83	)	$	(1.20	)
Diluted loss per share to common stockholders	$	(0.45	)	$	(0.17	)	$	(0.83	)	$	(1.20	)

For the three and six months ended June 30, 2005, 4.4 million shares of common stock related to outstanding warrants, PPUs and OP Units and unvested restricted stock have been excluded from the diluted loss per share calculation as the impact would be anti-dilutive in nature. Excluded from the diluted loss per share calculation for the three and six months ended June 30, 2004, were 2.4 million and 2.5 million shares, respectively.

7. Property Operations Expense

During the three and six months ended June 30, 2005 and 2004, we incurred property operations expense as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Utilities and telephone	$	7,112	$	6,833	$	15,075	$	11,751
Salaries and benefits	6,991		5,255		13,018		9,262
Repairs and maintenance	2,695		2,594		5,362		4,129
Insurance	926		827		1,803		1,400
Bad debt expense	568		610		1,429		1,095
Advertising	85		256		290		507
Other operating expense	1,665		1,251		3,386		2,090
	$	20,042	$	17,626	$	40,363	$	30,234

8. Retail Home Sales, Finance and Insurance Expense

During the three and six months ended June 30, 2005 and 2004, we incurred retail home sales, finance and insurance expense as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005		2004
Utilities and telephone		$	70		$	16	$	110	$	37
Salaries and benefits		2,105			793		3,463		1,224
Repairs and maintenance		32			96		51		262
Insurance		107			71		195		74
Bad debt expense		280			10		309		10
Advertising		825			154		1,914		208
Other operating expense		693			358		1,275		264
		$	4,112		$	1,498	$	7,317	$	2,079

9. General and Administrative Expense

During the three and six months ended June 30, 2005 and 2004, we incurred general and administrative expense as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005		2004
Salaries and benefits(a)		$	3,506		$	2,533	$	6,646	$	15,284
Travel		625			509		1,177		1,076
Professional services		1,219			499		2,209		1,160
Insurance		329			141		437		385
Rent		46			87		99		259
Other administrative expense		534			535		1,050		935
		$	6,259		$	4,304	$	11,618	$	19,099

(a) The six months ended June 30, 2004 includes $10.1 million incurred in conjunction with the IPO in which we granted 530,000 shares of restricted stock that vested immediately (see Note 1).

10. Discontinued Operations

In July 2004, we entered into a real estate auction agreement to sell 12 communities comprising 2,933 homesites. In addition to the 12 communities, as part of the auction, the Company also contracted to sell two parcels of undeveloped commercial land located adjacent to one of its communities in Colorado. The auction was held in September 2004. These sales, other than the sale of one of the 12 properties, closed during the fourth quarter of 2004, resulting in net proceeds to the Company of $21.6 million after selling commissions, sales expenses and the repayment of approximately $6.0 million of associated debt. The remaining community continues to be held for sale and was classified as discontinued operations as of December 31, 2004 and June 30, 2005, based on the Company’s intent to sell this community during 2005.

In September 2004, we entered into an agreement to sell three communities, comprising 1,073 homesites, to an unaffiliated third party for a total sales price of approximately $5.9 million. These sales closed during the fourth quarter of 2004.

In October 2004, we entered into a real estate auction agreement to sell 12 communities comprising 2,440 homesites. The auction was held in December 2004. Eleven of these 12 sales closed during the first quarter of 2005, resulting in net proceeds to the Company of $12.4 million after selling commissions, sales expenses and the repayment of approximately $28.9 million of associated debt included in liabilities related to assets held for sale, and other required debt payments. The remaining community was sold in April 2005. Also in October 2004, we entered into agreements to sell three communities comprising 709 homesites to unaffiliated third parties for a total sales price of approximately $7.9 million. These sales closed during the fourth quarter of 2004.

In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” each of the communities sold during 2005 and 2004 have been classified as discontinued operations as of June 30, 2005 and December 31, 2004. We have included $3.4 million and $54.1 million of net assets related to these communities as assets held for sale in the accompanying consolidated balance sheets as of June 30, 2005 and December 31, 2004, respectively. We have also included $2.7 million and $29.5 million of obligations related to these communities as liabilities related to assets held for sale in the accompanying balance sheets as of June 30, 2005 and December 31, 2004, respectively. In addition, we have presented the operations of each of these communities as discontinued operations in the accompanying consolidated statements of operations for the three and six months ended June 30, 2005 and 2004 and recorded income of $0.1 million and a loss of $0.7 million, respectively, related to the sale of the discontinued operations for the three and six months ended June 30, 2005. The following table summarizes combined balance sheet and income statement information for the discontinued operations noted above (in thousands):

	June 30, 2005			December 31, 2004
Assets
Rental and other property, net	$	3,035			$	52,848
Tenant, notes and other receivables, net	—				309
Lease intangibles and customer relationships, net	—				593
Prepaid expenses and other assets	333				373
	$	3,368			$	54,123
Liabilities
Notes payable	$	2,700			$	28,951
Accounts payable and accrued expenses	34				262
Tenant deposits and other liabilities	(78		)		303
	$	2,656			$	29,516

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005		2004
Statement of Operations
Revenue		$	220		$	3,787	$	1,968	$	6,285
Operating expenses		148			3,444		968		5,490
Income from discontinued operations		$	72		$	343	$	1,000	$	795

11. Commitments and Contingencies

In the normal course of business, from time to time we are involved in legal actions relating to the ownership and operations of our properties. In our opinion, the liabilities, if any, which may ultimately result from such legal actions, will not have a material adverse effect on our financial position, results of operations or cash flows.

In the normal course of business, from time to time we incur environmental obligations relating to the ownership and operation of our properties. In our opinion, the liabilities, if any, which may ultimately result from such environmental obligations, will not have a material adverse effect on our financial position, results of operations or cash flows.

12. Segment Information

We operate in three business segments—real estate, retail home sales and finance and insurance. A summary of our business segment information is shown below (in thousands).

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Total revenue
Real estate	$	56,787		$	52,998		$	113,138		$	95,160
Retail home sales	18,292			2,082			26,283			2,793
Finance and insurance	563			32			750			94
Corporate and other	2			—			17			9
	$	75,644		$	55,112		$	140,188		$	98,056
Operating expenses, cost of manufactured homes sold and real estate taxes
Real estate	$	24,449		$	21,706		$	49,061		$	37,624
Retail home sales	19,046			3,101			29,903			3,985
Finance and insurance	1,124			162			1,552			331
Corporate and other	132			44			267			128
	$	44,751		$	25,013		$	80,783		$	42,068
Net segment income(a)
Real estate	$	32,338		$	31,292		$	64,077		$	57,536
Retail home sales	(754		)	(1,019		)	(3,620		)	(1,192		)
Finance and insurance	(561		)	(130		)	(802		)	(237		)
Corporate and other	(130		)	(44		)	(250		)	(119		)
	$	30,893		$	30,099		$	59,405		$	55,988
Property management expense	$	2,494		$	1,600		$	4,759		$	3,054
General and administrative expense	$	6,259		$	4,304		$	11,618		$	19,099
IPO related costs	$	—		$	—		$	—		$	4,417
Early termination of debt	$	—		$	—		$	—		$	13,427
Interest expense
Real estate	$	15,008		$	12,107		$	29,382		$	24,476
Retail home sales	588			33			888			(31		)
Corporate and other	948			589			1,547			2,764
	$	16,544		$	12,729		$	31,817		$	27,209

(a) Net segment income represents total revenues less expenses for property operations, real estate taxes, cost of manufactured homes sold and retail home sales, finance, insurance and other operations. Net segment income is a measure of the performance of the properties before the effects of the following expenses: property management, general and administrative, IPO related costs, depreciation, amortization, early termination of debt, impairment charges, interest expense and the effect of discontinued operations.

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Amortization expense	$	3,256		$	2,530		$	6,791		$	4,660
Depreciation expense
Real estate	$	18,842		$	14,904		$	35,212		$	27,591
Retail home sales	9			13			15			19
Finance and insurance	2			2			3			3
Corporate and other	115			(207		)	234			(121		)
	$	18,968		$	14,712		$	35,464		$	27,492
Interest income	$	(277	)	$	(450	)	$	(660	)	$	(792	)
Loss before allocation to minority interest	$	(16,351	)	$	(5,326	)	$	(30,384	)	$	(42,578	)
Minority interest	$	618		$	452		$	1,170		$	3,536
Loss from continuing operations	$	(15,733	)	$	(4,874	)	$	(29,214	)	$	(39,042	)
Income from discontinued operations	$	66		$	326		$	983		$	757
Gain (loss) on sale of discontinued operations	$	52		$	—		$	(678	)	$	—
Net loss	$	(15,615	)	$	(4,548	)	$	(28,909	)	$	(38,285	)
Preferred stock dividend	$	(2,578	)	$	(2,578	)	$	(5,156	)	$	(3,810	)
Net loss attributable to common stockholders	$	(18,193	)	$	(7,126	)	$	(34,065	)	$	(42,095	)

	June 30,		December 31,
	2005		2004
Identifiable assets
Real estate	$	1,721,766		$	1,738,226
Retail home sales	55,510			30,053
Finance and insurance	13,028			735
Corporate and other	14,482			43,988
	$	1,804,786		$	1,813,002
Notes payable
Real estate	$	1,007,579		$	972,575
Retail home sales	43,945			27,999
Finance and insurance	9,369			—
Corporate and other	28,111			1,048
	$	1,089,004		$	1,001,622

13. Subsequent Events

In July 2005, according to the terms the Series “B” PPUs, the Series “B” PPU holders requested redemption of their units, and the Operating Partnership elected to repurchase them with approximately $2.5 million in cash and notes payable totaling approximately $5.0 million (see Note 3).

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated historical financial statements and notes appearing elsewhere in this Form 10-Q and the financial information set forth in the tables below.

FORWARD-LOOKING STATEMENTS

This report and the documents incorporated by reference herein include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995 (the “Exchange Act”). All statements, other than statements of historical facts, included in this report that address results or developments that ARC expects or anticipates will or may occur in the future, where statements are preceded by, followed by or include the words “believes,” “expects,” “may,” “will,” “would,” “could,” “should,” “seeks,” “approximately,” “intends,” “plans,” “projects,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases, including such things as our business strategy, our ability to obtain future financing arrangements, estimates relating to our future distributions, our understanding of our competition, market trends, projected capital expenditures, the impact of technology on our products, operations and business are forward-looking statements.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. These risks, and the following factors, could cause actual results to vary from our forward-looking statements: national, regional and local economic climates, future terrorist attacks in the U.S. or abroad, competition from other forms of single or multifamily housing, changes in market rental rates, supply and demand for affordable housing, the cost of acquiring, transporting, setting or selling manufactured homes, the availability of manufactured homes from manufacturers, the availability of financing for us to acquire additional manufactured homes, the ability of manufactured home buyers to obtain financing, our ability to maintain rental rates and maximize occupancy, the level of repossessions by manufactured home lenders, the adverse impact of external factors such as changes in interest rates, inflation and consumer confidence, the ability to identify acquisitions, the pace of acquisitions and/or dispositions of communities and new or rental homes, our corporate debt ratings, demand for home purchases in our communities and demand for financing of such purchases, demand for rental homes in our communities, the condition of capital markets, actual outcome of the resolution of any conflict, our ability to successfully operate acquired properties, our ability to maintain our REIT status, environmental uncertainties and risks related to natural disasters, and changes in and compliance with real estate permitting, licensing and zoning laws including legislation affecting monthly leases and rent control and increases in property taxes.

Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized, or even substantially realized, and that they will have the expected consequences to or effects on the Company and its business or operations. Forward-looking statements made in this report speak as of the date hereof. The Company undertakes no obligation to update or revise any forward-looking statement in this report.

GENERAL STRUCTURE OF THE COMPANY AND RECENT DEVELOPMENTS

We are a fully integrated, self-administered and self-managed equity REIT focused on the acquisition, renovation, repositioning and operation of primarily all-age manufactured home communities. We also conduct certain complementary business activities focused on improving and maintaining occupancy in our communities, including the rental of manufactured homes, the retail sale of manufactured homes, the financing of sales of manufactured homes and acting as agent in the sale of homeowners’ insurance and other related insurance products. We conduct substantially all of our activities through our Operating Partnership, of which we are the sole general partner and in which we hold a 94.8% ownership interest.

Beginning in 1995, our co-founders founded several companies under the name “Affordable Residential Communities” or “ARC” for the purpose of engaging in the business of acquiring, renovating, repositioning and operating manufactured home communities, as well as certain related businesses. We were formed in July 1998 as a Maryland corporation for the purpose of acting as the investment vehicle for and a co-general partner of our Operating Partnership, the fourth real property partnership organized and operated by our co-founders. In May 2002, we completed a reorganization in which we acquired substantially all the other real property partnerships and other related businesses organized and operated by our co-founders.

On February 18, 2004, we completed our IPO. We issued approximately 24.5 million shares of common stock at $19.00 per share in which selling shareholders offered approximately 2.3 million shares. On March 18, 2004, our underwriters exercised their over-allotment option to purchase 791,592 shares of common stock at $19.00 per share. Concurrent with the IPO, we raised $125.0 million of gross proceeds through the issuance of 5.0 million shares of Series A Cumulative Redeemable Preferred Stock.

In connection with the IPO we completed the following additional transactions:

· The acquisition of 90 communities from Hometown America for approximately $615.3 million comprising 26,406 homesites. This includes eleven communities acquired post-closing upon the completion of the loan assumption process, with the final three loan assumptions completed on April 9, 2004.

· A financing transaction totaling $500.0 million comprising of $215.3 million of 10 year fixed rate mortgage debt with an interest rate of 5.53%, $100.7 million of 5 year fixed rate mortgage debt with an interest rate of 5.05% and $184.0 million of 2 year floating rate mortgage debt. We used the proceeds to repay certain indebtedness and to fund a portion of the Hometown acquisition.

· The closing of a $250.0 million finance facility to support our in-community home sales and finance programs. The facility consists of two funding components: (1) a $225.0 million four-year facility to fund consumer loans and (2) a commitment for a $25.0 million facility to fund for-sale home inventory. This facility subsequently was amended to reduce the commitment to a total of $200.0 million including a lease receivables line of credit (see Note 5 to the consolidated financial statements).

On June 30, 2004, we acquired 36 manufactured home communities from the D.A.M. MASTER ENTITY, L.P. The communities are located in 3 states and include 3,573 homesites. The total purchase price (including the costs of manufactured homes) was approximately $65.5 million including assumed indebtedness with a fair value of $29.7 million.

In August 2004 we cancelled our $125.0 million Senior Revolving Credit Facility and incurred approximately $3.3 million in debt extinguishment costs. In September 2004, we obtained our Revolving Credit Mortgage Facility for borrowings of up to $85.0 million. This facility is an obligation of a subsidiary of the Operating Partnership and is secured by 33 communities that previously secured the cancelled Senior Revolving Credit Facility, as well as various additional communities acquired subsequent to our

IPO. Advances under the Revolving Credit Mortgage Facility are limited by borrowing base requirements related to the value and cash flows of the communities securing the loan. The Revolving Credit Mortgage Facility bears interest at the one month LIBOR plus 2.95% (6.17% at June 30, 2005) and has an initial term of one year. We incurred a commitment fee of 0.5% at the closing of the facility and will pay origination fees of 0.5% with each advance. The facility contains no significant financial covenants.

In August 2004, we amended our floorplan lines of credit to provide borrowings of up to $50.0 million, secured by manufactured homes in inventory. Under the amended lines of credit, the lender will advance 90% of the purchase cost of manufactured homes for the first $40.0 million in advances, with the remaining $10.0 million in advances made at 75% of home costs. Repayments of borrowed amounts are due upon sale or lease of the related manufactured home. Advances under the amended lines of credit will bear interest ranging from the prime rate plus 0.75% to the prime rate plus 4.00% (averaging 6.59% June 30, 2005) based on the length of time each advance has been outstanding. Monthly curtailment payments are required for unsold homes beginning 360 days following the purchase of the home. The required curtailment payment will be between 3.00% and 5.00% of the home’s original invoice amount depending on the type of home and the number of months since the home’s purchase. The amended lines of credit require us to maintain a minimum tangible net worth of $500.0 million, a maximum debt to tangible net worth ratio of 3 to 1, and minimum cash and cash equivalents of $15.0 million, all as defined in the agreement. We are in compliance with all financial covenants of the lines of credit as of June 30, 2005. The lines of credit are subject to a commitment fee of $250,000, an unused line fee of .25% per annum and a termination fee of 1.00% to 3.00%, based on the termination date.

In July, 2004, we completed the acquisition of the Western Mobile Estates manufactured home community located in West Valley City, Utah, comprising 145 homesites. The total purchase price of $3.8 million included $3.76 million in seller financing. In September, 2004, we completed the acquisition of the Willow Creek Estates manufactured home community located in Ogden, Utah, comprising 137 homesites for a total cash purchase price of $3.2 million.

Also in July 2004, we entered into a real estate auction agreement to sell 12 communities comprising 2,933 homesites. In addition to the 12 communities, as part of the auction, the Company also contracted to sell two parcels of undeveloped commercial land located adjacent to one of its communities in Colorado. The auction was held in September 2004. These sales, other than the sale of one of the 12 properties, closed during the fourth quarter of 2004, resulting in net proceeds to the Company of $21.6 million after selling commissions, sales expenses and the repayment of approximately $6.0 million of associated debt. The remaining community continues to be held for sale and was classified as held for sale as of June 30, 2005 based on the Company’s intent to sell this community during 2005.

In October 2004, we entered into a real estate auction agreement to sell 12 communities comprising 2,440 homesites. The auction was held in December 2004. Eleven of these 12 sales closed during the first quarter of 2005, resulting in net proceeds to the Company of $12.4 million after selling commissions, sales expenses and the repayment of approximately $28.9 million of associated debt included in liabilities related to assets held for sale, and other required debt payments. The remaining community was classified as discontinued operations as of December 31, 2004 and March 31, 2005, and was sold in April 2005. Also in October 2004, we entered into agreements to sell three communities comprising 709 homesites to unaffiliated third parties for a total sales price of approximately $7.9 million. These sales closed during the fourth quarter of 2004.

OVERVIEW OF RESULTS

For the three and six months ended June 30, 2005, net loss available to common stockholders was $18.2 million and $34.1 million, or $0.45 per share and $0.83 per share, respectively, as compared to net losses attributable to common stockholders of $7.1 million and $42.1 million, or $0.17 per share and $1.20 per share for the same periods in 2004. For the three and six months ended June 30, 2005, funds from operations available to common stockholders (“FFO”) was $0.5 million and $2.1 million, respectively, as compared to FFO of $9.3 million and ($12.4) million for the same periods in 2004. Our results for the six months ended June 30, 2004 reflect the inclusion of one-time charges of $27.9 million related to our IPO, acquisition of certain assets from Hometown America LLC and the repayment of certain indebtedness. On a same community basis, revenue in our real estate segment of $35.5 million and $71.0 million, respectively, for the three and six months ended June 30, 2005, was comparable to real estate segment revenue of $35.6 million and $70.9 million for the same periods in 2004. Same community expenses increased 5.2% and 8.4% to $15.2 million and $30.3 million for the three and six months ended June 30, 2005, as compared to the same periods in 2004. As a result, real estate net segment income from same communities for the three and six months ended June 30, 2005 decreased 4.3% and 5.2% to $20.3 million and $40.7 million, respectively, as compared to the same periods in 2004. See FFO and Real Estate Net Segment Income included hereinafter in this section for definitions of FFO and real estate net segment income and for reconciliations of real estate net segment income to net loss, the most directly comparable GAAP measures.

Total portfolio occupancy averaged 82.8% and 82.3% for the three and six months ended June 30, 2005, respectively, as compared to 83.2% and 83.8% for the same periods in 2004. Occupancy was 84.5% and 83.0% as of June 30, 2005 and 2004, respectively. Average same community occupancy was 83.7% and 83.3% for the three and six months ended June 30, 2005, respectively, as compared to 84.6% and 85.0% for the same periods in 2004. The decreases mainly are due to lenders moving repossessed homes out of the communities, the lack of available chattel financing for manufactured home buyers, our decision to position our inventory to facilitate conversion of renters to long-term owner residents by holding for sale homes coming off lease, and, in the case of the total portfolio occupancy, the Hometown acquisition.

Net occupancy increased by 874 residents during the second quarter of 2005, or 1.4%, as compared to an increase of 380 residents in the first quarter. In addition, the Company removed a net 716 lots from its total homesite count in the second quarter of 2005 as part of an ongoing review of operations. This had the further effect of increasing occupancy by 1.0% at the end of the second quarter of 2005, as compared to the end of the first quarter. The net reduction of 716 lots is comprised of the following: (a) 502 lots that were determined to be unsuitable for use, (b) 283 lots that have been reclassified as lots held for future development, and (c) 69 lots that were added. Of the net 716 lots removed from the homesite count, 175 were in the Company’s top ten markets. As a result of both the resident increase (accounting for a 1.4% increase in occupancy) and the total homesite reduction (accounting for a 1.0% increase in occupancy), total portfolio occupancy at the end of second quarter of 2005 increased 2.4% to 84.5% from 82.1% at the end of the first quarter.

The following table summarizes our occupancy net activity for the three months ended June 30, 2005 and 2004.

	For the Three Months Ended June 30,
	Same				Real Estate
	Communities				Segment
	2005		2004		2005		2004
Homeowner activity:
Homeowner move ins	99		105		176		149
Homeowner move outs	(424	)	(378	)	(803	)	(649	)
Home sales	702		53		989		100
Repossession move outs	(366	)	(554	)	(421	)	(561	)
Net homeowner activity	11		(774	)	(59	)	(961	)
Home renter activity:
Home renter move ins	766		1,208		1,081		1,530
Home renter lease with option to purchase move ins	896		—		1,232		—
Home renter move outs	(1,152	)	(996	)	(1,380	)	(1,356	)
Net home renter activity	510		212		933		174
Net activity	521		(562	)	874		(787	)
Acquisitions and other—homeowners	—		—		—		3,430
Acquisitions and other—home renters	—		—		—		23
Net activity, including acquisitions and other	521		(562	)	874		2,666

The following reconciles the above activity to the period end occupied homesites.

Net homeowner activity	11		(774	)	(59	)	2,469
Occupied homeowner sites, beginning of period	26,004		27,840		45,727		44,431
Occupied homeowner sites, end of period	26,015		27,066		45,668		46,900
Net home renter activity	510		212		933		197
Occupied home renter sites, beginning of period	5,235		4,233		6,566		5,516
Occupied home renter sites, end of period	5,745		4,445		7,499		5,713
Total occupied homesites, end of period	31,760		31,511		53,167		52,613
Total occupancy percentage(1)	85.1	%	83.9	%	84.5	%	83.0	%

(1) As a result of the reduction of 716 lots (247 same communities) at June 30, 2005, total occupancy increased by 1.0% (0.5% same communities).

The following table summarizes our occupancy net activity for the six months ended June 30, 2005 and 2004.

	For the Six Months Ended June 30,
	Same				Real Estate
	Communities				Segment
	2005		2004		2005		2004
Homeowner activity:
Homeowner move ins	315		230		466		320
Homeowner move outs	(823	)	(668	)	(1,526	)	(1,142	)
Home sales	1,278		67		1,763		115
Repossession move outs	(832	)	(644	)	(943	)	(1,045	)
Net homeowner activity	(62	)	(1,015	)	(240	)	(1,752	)
Home renter activity:
Home renter move ins	1,391		2,495		1,977		2,980
Home renter lease with option to purchase move ins	1,469		—		2,045		—
Home renter move outs	(2,049	)	(2,164	)	(2,528	)	(2,408	)
Net home renter activity	811		331		1,494		572
Net activity	749		(684	)	1,254		(1,180	)
Acquisitions and other—homeowners	—		—		—		20,781
Acquisitions and other—home renters	—		—		—		908
Net activity, including acquisitions and other	749		(684	)	1,254		20,509

The following reconciles the above activity to the period end occupied homesites.

Net homeowner activity	(62	)	(1,015	)	(240	)	19,029
Occupied homeowner sites, beginning of period	26,077		28,081		45,908		27,871
Occupied homeowner sites, end of period	26,015		27,066		45,668		46,900
Net home renter activity	811		331		1,494		1,480
Occupied home renter sites, beginning of period	4,934		4,114		6,005		4,233
Occupied home renter sites, end of period	5,745		4,445		7,499		5,713
Total occupied homesites, end of period	31,760		31,511		53,167		52,613
Total occupancy percentage(1)	85.1	%	83.9	%	84.5	%	83.0	%

(1) As a result of the reduction of 716 lots (247 same communities) at June 30, 2005, total occupancy increased by 1.0% (0.5% same communities).

On June 30, 2005, our total manufactured homes owned was 8,718 homes. In the three and six months ended June 30, 2005, as compared to the same periods in 2004, we increased sales of older homes primarily through our in-community sales operations in which we focused on affordable price points, increased marketing and training of our employees. We expect increased sales and leasing activity in the coming months due to our continued focus on affordable price points, marketing and training of our employees, and the availability of chattel financing through our consumer finance program. In the three and six months ended June 30, 2005, we sold 989 and 1,763 manufactured homes, respectively, from our home inventory, compared with 100 and 115 for the same periods in 2004.

BUSINESS OBJECTIVES, PROPERTY MANAGEMENT AND OPERATING STRATEGIES

We continue to believe our industry needs to re-address its fundamental competitive advantage—affordability. We believe that we can provide a clean, attractive and affordable place to live that is competitive with other forms of housing, provides real value and service to our residents and generates profits for our investors. To that end, we have built a business plan that provides affordability and value in the home, in the financing and in our communities. We continue to focus on (i) our in-community sales program, (ii) our consumer finance program and (iii) completing the integration of the Hometown acquisition in terms of human resources, capital expenditures and information systems.

With respect to our occupancy programs, our primary tools are (i) our rental home program, including our lease with option to purchase program, (ii) our for-sale inventory and (iii) our consumer finance program. Our focus is to utilize our community managers, leasing managers and district level marketing managers to make (i) cash sales of vacant used homes, used rental homes coming off lease and newly purchased repossessions, (ii) home leases with option to purchase, and (iii) standard home leases. Through Enspire Finance LLC, our finance subsidiary, and our in-community sales, we are focusing on the sale of new and used homes at prices greater than $15,000.

With respect to property management, we expanded our district management infrastructure from seven districts to twelve districts in 2004 to reflect the increase of approximately 30,000 homesites to our overall portfolio. Our integration priorities for the portfolio include human resources, training, IT systems and capital expenditure projects. We upgraded virtually all of the community managers from the acquired Hometown communities, causing delays in driving our occupancy programs in 2004.

THE PROPERTIES

As of June 30, 2005, our portfolio consisted of 315 manufactured home communities (net of one community classified as discontinued operations, see Note 10 in the accompanying consolidated financial statements) comprising 62,942 homesites located in 27 states and 67 markets, primarily oriented toward all-age living. Our five largest markets are Dallas/Fort Worth, Texas, with 11.5% of our total homesites; Atlanta, Georgia, with 7.9% of our total homesites; Salt Lake City, Utah, with 6.0% of our total homesites; the Front Range of Colorado, with 5.2% of our total homesites; and Kansas City-Lawrence-Topeka, Kansas, with 3.9% of our total homesites.

As of June 30, 2005, our communities had an occupancy rate of 84.5%, and the average monthly rental income per occupied homesite was $326. Homesite leases by homeowners generally are month-to-month, or in limited cases year-to-year, and require security deposits. In the case of our residents renting homes from us, lease terms are typically one year, and require a security deposit.

The following table sets forth certain information regarding our communities, arranged from our largest to smallest market, as of June 30, 2005:

												Rental Income
	Number		Percentage						Occupancy			Per Occupied
	of Total		of Total			Occupancy			Without			Homesite
Market(1)	Homesites		Homesites			Percentage			Lot Adj.(3)			Per Month(2)
Dallas—Ft. Worth, TX		7,223		11.5	%		82.7	%		82.4	%		$	349
Atlanta, GA		4,969		7.9	%		89.2	%		88.7	%		349
Salt Lake City, UT		3,792		6.0	%		92.1	%		91.1	%		348
Front Range of CO		3,287		5.2	%		89.1	%		89.0	%		429
Kansas City—Lawrence—Topeka, MO—KS		2,428		3.9	%		89.6	%		89.5	%		285
Jacksonville, FL		2,256		3.6	%		88.2	%		88.2	%		349
Wichita, KS		2,178		3.5	%		66.7	%		65.6	%		273
Orlando, FL		1,986		3.2	%		89.8	%		89.7	%		368
St. Louis, MO—IL		1,912		3.0	%		81.0	%		79.4	%		290
Oklahoma City, OK		1,887		3.0	%		78.5	%		78.4	%		289
Greensboro—Winston Salem, NC		1,398		2.2	%		69.5	%		68.8	%		270
Davenport—Moline—Rock Island, IA—IL		1,385		2.2	%		86.8	%		85.5	%		265
Inland Empire, CA		1,223		1.9	%		95.1	%		95.1	%		397
Elkhart—Goshen, IN		1,212		1.9	%		85.6	%		85.2	%		326
Charleston—North Charleston, SC		1,179		1.9	%		81.8	%		81.8	%		251
Southeast Florida		1,125		1.8	%		96.0	%		96.0	%		495
Raleigh—Durham—Chapel Hill, NC		1,094		1.7	%		85.7	%		85.7	%		340
Nashville, TN		1,071		1.7	%		72.8	%		70.8	%		291
Sioux City, IA—NE		994		1.6	%		79.8	%		79.8	%		290
Syracuse, NY		931		1.5	%		64.7	%		55.2	%		340
Subtotal—Top 20 Markets		43,530		69.2	%		84.5	%		83.7	%		339
All Other Markets		19,412		30.8	%		84.4	%		83.1	%		297
Total / Weighted Average		62,942		100.0	%		84.5	%		83.5	%		$	326

(1) Markets are defined by our management.

(2) Rental Income is defined as homeowner rental income, home renter rental income and other rental income reduced by move-in bonuses and rent concessions.

(3) Represents occupancy percentages excluding the impact of the 716 lot adjustment as described above.

COMMUNITIES

Comparison of the Three and Six Months Ended June 30, 2005 to the Same Periods in 2004

The following tables present certain information relative to our real estate segment as of June 30, 2005 and 2004 and for the three and six months ended June 30, 2005 and 2004. “Same Communities” reflects information for all communities owned by us at both January 1, 2004 and June 30, 2005. “Same Communities” does not include the Hometown acquisition, the D.A.M. portfolio acquisition or the six other communities that we acquired subsequent to January 1, 2004 (in thousands, except home, community and income and revenue per unit information):

	Same Communities(4)						Real Estate Segment(4)
	2005			2004			2005			2004
Three Months Ended June 30:
Average total homesites	37,485			37,554			63,493			60,539
Average total rental homes	6,388			6,344			8,422			7,609
Average occupied homesites—homeowners	26,026			27,446			45,722			45,159
Average occupied homesites—rental homes	5,352			4,335			6,841			5,227
Average total occupied homesites	31,378			31,781			52,563			50,386
Average occupancy—rental homes	83.8		%	68.3		%	81.2		%	68.7		%
Average occupancy—total(5)	83.7		%	84.6		%	82.8		%	83.2		%
Real estate revenue
Homeowner rental income	$	22,505		$	22,990		$	39,338		$	37,575
Home renter rental income	9,245			9,054			11,701			9,987
Other	158			128			327			322
Rental income	31,908			32,172			51,366			47,884
Utility and other income	3,560			3,445			5,421			5,114
Total real estate revenue	35,468			35,617			56,787			52,998
Real estate expenses
Property operations expenses	12,169			11,574			20,042			17,626
Real estate taxes	3,033			2,873			4,407			4,080
Total real estate expenses	15,202			14,447			24,449			21,706
Real estate net segment income	$	20,266		$	21,170		$	32,338		$	31,292
Average monthly real estate revenue per total occupied homesite(1)	$	377		$	374		$	360		$	351
Average monthly homeowner rental income per homeowner occupied homesite(2)	$	288		$	279		$	287		$	277
Average monthly real estate revenue per total homesite(3)	$	315		$	316		$	298		$	292

(1) Average monthly real estate revenue per occupied homesite defined as total real estate revenue divided by average total occupied homesites divided by the number of months in the period.

(2) Average monthly homeowner rental income per homeowner occupied homesite defined as homeowner rental income divided by average homeowner occupied homesites divided by the number of months in the period.

(3) Average monthly real estate revenue per total homesite defined as total real estate revenue divided by average total homesites divided by the number of months in the period.

(4) Real estate segment and homesite data excludes discontinued operations.

(5) As a result of the reduction of 716 lots (247 same communities) at June 30, 2005, average occupancy increased by 0.3% (0.1% same communities).

	Same Communities(4)						Real Estate Segment(4)
	2005			2004			2005			2004
Six Months Ended June 30:
Average total homesites	37,512			37,554			63,563			53,838
Average total rental homes	6,422			6,059			8,369			6,918
Average occupied homesites—homeowners	26,065			27,697			45,838			40,296
Average occupied homesites—rental homes	5,189			4,241			6,501			4,824
Average total occupied homesites	31,254			31,938			52,339			45,120
Average occupancy—rental homes	80.8		%	70.0		%	77.7		%	69.7		%
Average occupancy—total(5)	83.3		%	85.0		%	82.3		%	83.8		%
Real estate revenue
Homeowner rental income	$	45,043		$	46,404		$	78,666		$	66,999
Home renter rental income	18,501			17,591			22,932			18,727
Other	272			237			626			484
Rental income	63,816			64,232			102,224			86,210
Utility and other income	7,201			6,697			10,914			8,950
Total real estate revenue	71,017			70,929			113,138			95,160
Real estate expenses
Property operations expenses	24,286			22,223			40,363			30,234
Real estate taxes	6,029			5,749			8,698			7,390
Total real estate expenses	30,315			27,972			49,061			37,624
Real estate net segment income	$	40,702		$	42,957		$	64,077		$	57,536
Average monthly real estate revenue per total occupied homesite(1)	$	379		$	370		$	360		$	352
Average monthly homeowner rental income per homeowner occupied homesite(2)	$	288		$	279		$	286		$	277
Average monthly real estate revenue per total homesite(3)	$	316		$	315		$	297		$	295
As of June 30:
Total communities	199			199			315			313
Total homesites	37,301			37,554			62,942			63,400
Occupied homesites	31,760			31,511			53,167			52,613
Total rental homes owned	6,486			6,616			8,718			8,023
Occupied rental homes	5,745			4,445			7,499			5,713

(1) Average monthly real estate revenue per occupied homesite defined as total real estate revenue divided by average total occupied homesites divided by the number of months in the period.

(3) Average monthly real estate revenue per total homesite defined as total real estate revenue divided by average total homesites divided by the number of months in the period.

(4) Real estate segment and homesite data excludes discontinued operations.

(5) As a result of the reduction of 716 lots (247 same communities) at June 30, 2005, average occupancy increased by 0.1%.

	Three Months Ended June 30,
	Same
	Communities(a)						As Reported
	2005			2004			2005			2004
Net segment income:
Real estate	$	20,266		$	21,170		$	32,338		$	31,292
Retail home sales	—			—			(754		)	(1,019		)
Finance and insurance	(561		)	(130		)	(561		)	(130		)
Corporate and other	(130		)	(44		)	(130		)	(44		)
	19,575			20,996			30,893			30,099
Other expenses:
Property management	1,576		(b)	1,011		(b)	2,494			1,600
General and administrative	6,245		(c)	4,275		(c)	6,259			4,304
Initial public offering related costs	—			—			—			—
Early termination of debt	—			—			—			—
Depreciation and amortization	14,166			11,902			22,224			17,242
Interest expense	10,413			9,736			16,544			12,729
Total other expenses	32,400			26,924			47,521			35,875
Interest income	(277		)	(403		)(e)	(277		)	(450		)
Loss before allocation to minority interest	(12,548		)	(5,525		)	(16,351		)	(5,326		)
Minority interest	474			469			618			452
Loss from continuing operations	(12,074		)	(5,056		)	(15,733		)	(4,874		)
Income from discontinued operations	—			—			72			343
Loss on sale of discontinued operations	—			—			52			—
Minority interest in discontinued operations	—			—			(6		)	(17		)
Net loss	(12,074		)	(5,056		)	(15,615		)	(4,548		)
Preferred stock dividend	—			—			(2,578		)	(2,578		)
Net loss attributable to common stockholders	$	(12,074	)	$	(5,056	)	$	(18,193	)	$	(7,126	)

(a) Same communities information excludes results of communities acquired in the Hometown, D.A.M. and other acquisitions after January 1, 2004 and the communities sold or held for sale before June 30, 2005.

(b) Prorated based on 199 communities as compared to 315 in 2005 and 313 in 2004.

(d) Excludes restricted stock expenses of $10.1 million recognized in connection with the IPO.

(e) Excludes interest earned on additional cash received in connection with the IPO, the financing transaction and the Hometown acquisition.

	Six Months Ended June 30,
	Same
	Communities(a)						As Reported
	2005			2004			2005			2004
Net segment income:
Real estate	$	40,702		$	42,957		$	64,077		$	57,536
Retail home sales	—			—			(3,620		)	(1,192		)
Finance and insurance	(802		)	(237		)	(802		)	(237		)
Corporate and other	(250		)	(119		)	(250		)	(119		)
	39,650			42,601			59,405			55,988
Other expenses:
Property management	3,006		(b)	2,075		(b)	4,759			3,054
General and administrative	11,590		(c)	8,950		(d)	11,618			19,099
Initial public offering related costs	—			—			—			4,417
Early termination of debt	—			—			—			13,427
Depreciation and amortization	25,326			24,829			42,255			32,152
Interest expense	20,263			22,179			31,817			27,209
Total other expenses	60,185			58,033			90,449			99,358
Interest income	(660		)	(698		)(e)	(660		)	(792		)
Loss before allocation to minority interest	(19,875		)	(14,734		)	(30,384		)	(42,578		)
Minority interest	761			1,231			1,170			3,536
Loss from continuing operations	(19,114		)	(13,503		)	(29,214		)	(39,042		)
Income from discontinued operations	—			—			1,000			795
Loss on sale of discontinued operations	—			—			(678		)	—
Minority interest in discontinued operations	—			—			(17		)	(38		)
Net loss	(19,114		)	(13,503		)	(28,909		)	(38,285		)
Preferred stock dividend	—			—			(5,156		)	(3,810		)
Net loss attributable to common stockholders	$	(19,114	)	$	(13,503	)	$	(34,065	)	$	(42,095	)

(b) Prorated based on 199 communities as compared to 315 in 2005 and 313 in 2004.

(d) Excludes restricted stock expenses of $10.1 million recognized in connection with the IPO.

(e) Excludes interest earned on additional cash received in connection with the IPO, the financing transaction and the Hometown acquisition.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2005 to the Three Months Ended June 30, 2004

Overview. Our results for the three months ended June 30, 2005 include the operations of communities acquired in the Hometown, D.A.M. and other 2004 acquisitions for a full quarter, whereas our results for the three months ended June 30, 2004 include the operations of the Hometown communities but not the D.A.M. acquisition.

Revenue. Revenue for the three months ended June 30, 2005 was $75.6 million, as compared to $55.1 million for the three months ended June 30, 2004, an increase of $20.5 million, or 37%. Rental income increased by $3.5 million, primarily due to $3.8 million from 2004 acquisitions partially offset by a $0.3 million decrease from same communities. The decrease in same communities revenues primarily is due to $1.2 million from lower occupancy partially offset by $0.7 million from increased rental rates and $0.2 million from higher home renter rental income. Revenue from the sale of manufactured homes increased by $16.2 million as the Company sold 889 more homes than in the second quarter of 2004, and a greater percentage of these sales were new homes sold at higher average selling prices. Utility and other income increased by $0.7 million due to our 2004 acquisitions and improved recovery of utilities from residents.

Property Operations Expense. For the three months ended June 30, 2005, total property operations expense was $20.0 million, as compared to $17.6 million for the three months ended June 30, 2004, an increase of $2.4 million, or 14%. The increase primarily is due to additional expense of $1.8 million from 2004 acquisitions and an increase of $0.6 million in expenses in same communities. The increase in property operations expense from same communities primarily is due to an increase in salaries and benefits of $1.0 million, or 29%, partially offset by a decrease in repairs and maintenance expense of $0.2 million and a decrease in utilities expense of $0.1 million.

Real Estate Taxes Expense. Real estate taxes expense for the three months ended June 30, 2005 was $4.4 million, as compared to $4.1 million for the three months ended June 30, 2004, an increase of $0.3 million or 8%. The increase is due primarily to our 2004 acquisitions.

Cost of Manufactured Homes Sold. The cost of manufactured homes sold was $16.2 million for the three months ended June 30, 2005, as compared to $1.8 million for the three months ended June 30, 2004, an increase of $14.4 million. The increase primarily was due to the increase in sales of manufactured homes by 889 units as discussed above.

Retail Home Sales, Finance and Insurance. For the three months ended June 30, 2005, total retail home sales, finance, insurance and other operations expense was $4.1 million as compared to $1.5 million for three months ended June 30, 2004, an increase of $2.6 million. This increase is due to the increase in manufactured homes sold and the costs associated with creating the community based sales and finance organization. The increase is partially offset by the elimination of the costs of maintaining stand-alone retail stores.

Property Management Expense. Property management expense for the three months ended June 30, 2005 was $2.5 million, as compared to $1.6 million for the three months ended June 30, 2004, an increase of $0.9 million, or 56%. The increase primarily is due to the expansion in 2004 from seven to twelve district offices in 2004 and the related staffing costs for the new districts in connection with the 2004 acquisitions and the resultant increase in our community portfolio.

General and Administrative Expense. General and administrative expense for the three months ended June 30, 2005 was $6.3 million, as compared to $4.3 million for the three months ended June 30, 2004, an increase of $2.0 million, or 45%. The increase primarily was due to increased salaries and benefits resulting from the Company’s acquisition growth, as well as consulting costs related to Sarbanes-Oxley compliance.

Depreciation and Amortization Expense. Depreciation and amortization expense for the three months ended June 30, 2005 was $22.2 million, as compared to $17.2 million for the three months ended June 30, 2004, an increase of $5.0 million, or 29%. The increase primarily is due to increased depreciation on communities acquired in our 2004 acquisitions.

Interest Expense. Interest expense for the three months ended June 30, 2005 was $16.5 million, as compared to $12.7 million for the three months ended June 30, 2004, an increase of $3.8 million, or 30%. The increase is due to a higher outstanding average debt balance of approximately $178 million, as well as higher effective weighted average interest rates on our variable rate debt.

Minority Interest. Minority interest for the three months ended June 30, 2005 was $0.6 million as compared to $0.5 million for the three months ended June 30, 2004, an increase of $0.1 million, or 37%. The increase primarily was due to the minority interest share of our increase in loss before allocation to minority interest partially offset by a decrease in minority interest share of net loss to 5.2% for the second quarter of 2005 from 5.6% for the second quarter of 2004.

Net Loss Available to Common Stockholders. As a result of the foregoing, our net loss available to common stockholders was $18.2 million for the three months ended June 30, 2005, as compared to $7.1 million for the three months ended June 30, 2004, an increase of $11.1 million or 155%.

Comparison of the Six Months Ended June 30, 2005 to the Six Months Ended June 30, 2004

Overview. Our results for the six months ended June 30, 2005 include the operations of communities acquired in the Hometown, D.A.M. and other 2004 acquisitions for a full six-month period, whereas our results for the six months ended June 30, 2004 include the operations of the Hometown communities from the date of acquisition, February 18, 2004, through June 30, 2004, but not the D.A.M. acquisition.

Revenue. Revenue for the six months ended June 30, 2005 was $140.2 million, as compared to $98.1 million for the six months ended June 30, 2004, an increase of $42.1 million, or 43%. Rental income increased by $16.0 million, primarily due to $16.4 million from 2004 acquisitions partially offset by a $0.4 million decrease from same communities. The decrease in same communities revenues primarily is due to $2.7 million from lower occupancy partially offset by $1.4 million from increased rental rates and $0.9 million from higher home renter rental income. Revenue from the sale of manufactured homes increased by $23.5 million as the Company sold 1,648 more homes than in the first six months of 2004, and a greater percentage of these sales were new homes sold at higher average selling prices. Utility and other income increased by $2.4 million due to our 2004 acquisitions and improved recovery of utilities from residents.

Property Operations Expense. For the six months ended June 30, 2005, total property operations expense was $40.4 million, as compared to $30.2 million for the six months ended June 30, 2004, an increase of $10.2 million, or 34%. The increase primarily is due to additional expense of $8.1 million from 2004 acquisitions and an increase of $2.1 million in expenses in same communities. The increase in property operations expense from same communities primarily is due to an increase in salaries and benefits of $1.8 million, or 27%, an increase in utilities expense of $0.2 million and an increase in insurance expense of $0.1 million.

Real Estate Taxes Expense. Real estate taxes expense for the six months ended June 30, 2005 was $8.7 million, as compared to $7.4 million for the six months ended June 30, 2004, an increase of $1.3 million or 18%. The increase is due primarily to our 2004 acquisitions.

Cost of Manufactured Homes Sold. The cost of manufactured homes sold was $24.4 million for the six months ended June 30, 2005, as compared to $2.4 million for the six months ended June 30, 2004, an increase of $22.0 million. The increase primarily was due to the increase in sales of manufactured homes.

The increase primarily was due to the increase in sales of manufactured homes by 1,648 units as discussed above.

Retail Home Sales, Finance and Insurance. For the six months ended June 30, 2005, total retail home sales, finance, insurance and other operations expense was $7.3 million as compared to $2.1 million for six months ended June 30, 2004, an increase of $5.2 million. This increase is due to the increase in manufactured homes sold and the costs associated with creating the community based sales and finance organization. The increase is partially offset by the elimination of the costs of maintaining stand-alone retail stores.

Property Management Expense. Property management expense for the six months ended June 30, 2005 was $4.8 million, as compared to $3.1 million for the six months ended June 30, 2004, an increase of $1.7 million, or 56%. The increase primarily is due to the expansion in 2004 from seven to twelve district offices in 2004 and the related staffing costs for the new districts in connection with the 2004 acquisitions and the resultant increase in our community portfolio.

General and Administrative Expense. General and administrative expense for the six months ended June 30, 2005 was $11.6 million, as compared to $19.1 million for the six months ended June 30, 2004, a decrease of $7.5 million, or 39%. The decrease primarily was due to a non-recurring $10.1 million expense incurred in the 2004 first quarter in conjunction with the IPO in which we granted 530,000 shares of restricted stock that vested immediately. The decrease partially was offset by increased salaries and benefits resulting from the Company’s acquisition growth, as well as consulting costs related to Sarbanes-Oxley compliance.

IPO Related Costs. During the six months ended June 30, 2004, we incurred $4.4 million in organization and other costs directly related to the IPO. These costs included legal fees, third party due diligence costs, travel expenses, transfer taxes, filing fees and other miscellaneous items.

Early Termination of Debt. During the six months ended June 30, 2004, we wrote off $7.1 million of loan origination costs and incurred an expense of $6.3 million related to exit fees applicable to the repayment of debt in the financing transaction.

Depreciation and Amortization Expense. Depreciation and amortization expense for the six months ended June 30, 2005 was $42.3 million, as compared to $32.2 million for the six months ended June 30, 2004, an increase of $10.1 million, or 31%. The increase primarily is due to increased depreciation on communities acquired in our 2004 acquisitions.

Interest Expense. Interest expense for the six months ended June 30, 2005 was $31.8 million, as compared to $27.2 million for the six months ended June 30, 2004, an increase of $4.6 million, or 17%. The increase is due to a higher outstanding average debt balance of approximately $161.0 million, as well as higher effective weighted average interest rates on our variable rate debt.

Minority Interest. Minority interest for the six months ended June 30, 2005 was $1.2 million as compared to $3.5 million for the six months ended June 30, 2004, a decrease of $2.3 million, or 67%. The decrease primarily was due to the minority interest share of our decrease in loss before allocation to minority interest partially offset by a decrease in minority interest share of net loss to 5.2% as of June 30, 2005, from 13.9% for all periods prior to our IPO.

Preferred Stock Dividend. As of June 30, 2005, the ARC board of directors had declared a $0.5156 dividend on each of the 5,000,000 outstanding shares of our Series A Preferred Stock, paid April 29, 2005, and a $0.5156 dividend payable July 29, 2005, for a combined $5.2 million of preferred dividends for the six months ended June 30, 2005. For the second quarter of 2004 the dividend declared and paid also was $0.5156 per share, or $2.6 million, however, for the quarter ended March 31, 2004, the dividend declared was $0.4182 per share, or $1.2 million prorated from funding of the IPO on February 18, 2004. Preferred dividends totaled $3.8 million for the six months ended June 30, 2004.

Net Loss Available to Common Stockholders. As a result of the foregoing, our net loss available to common stockholders was $34.1 million for the six months ended June 30, 2005, as compared to $42.1 million for the six months ended June 30, 2004, a decrease of $8.0 million or 19%. Our net loss available to common stockholders for the six months ended June 30, 2004 includes $27.9 million of costs related to the IPO, the related financing transaction and the Hometown acquisition including: (1) $10.1 million from restricted stock grants; (2) $4.4 million from IPO related organization and other costs; and (3) $13.4 million from the early termination of debt.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s principal liquidity demands have historically been, and are expected to continue to be, recurring and non-recurring capital improvements of communities, debt repayment, the purchase of new and used homes for lease and sale, property acquisitions, funding loans to home buyers, Operating Partnership unit distributions, and common and preferred stock dividends. The Company intends to meet these liquidity requirements through its working capital provided by operating activities; available financing under its floor plan line of credit for home purchases, its consumer finance facility to fund home loans, its lease receivables line of credit to be secured by homes in the Company’s rental portfolio; other available unsecured financing; and the potential sale of communities. The Company considers these sources to be adequate to meet all operating requirements, including recurring capital improvements, debt service, other normally recurring expenditures of a capital nature and, if necessary, to pay dividends to its stockholders to maintain qualification as a REIT in accordance with the Internal Revenue Code (the “Code”).

Our operating cash flows have not been sufficient to cover the distributions to our stockholders that we have made quarterly since our IPO in February 2004. On May 23, 2005, we declared a reduced distribution to our common stockholders for the second quarter of 2005. Our Board of Directors reviews our practices with respect to the payment of dividends on a quarterly basis. Should our operating cash flows not improve, we may need to take additional action with respect to the payment of dividends, which may include the further reduction or elimination of our distributions to our common stockholders.

To accomplish our plans and growth objectives for the next 12 months, we intend to invest significant funds for the purchase of manufactured homes for rent, lease with option to purchase and sale. We expect to commit to these expenditures only as demand warrants and we have entered into no significant forward purchase commitments with respect to these purchases. To optimize the long-term returns from our acquisitions, we also plan to incur non-recurring capital expenditures, of which approximately 40% are expected to be used to allow for the placement of manufactured homes onto vacant homesites in our communities. In addition, we plan to make recurring capital expenditures as necessary to keep our communities up to our standards and for general capital improvements.

We expect to fund our short-term liquidity needs described above through net cash provided by operations, borrowings under our $50 million floorplan line of credit, borrowings under our $75 million lease receivables line of credit and other sources of capital. In addition, we have identified up to 50 communities for sale and we have the ability to sell additional communities if conditions warrant.

In addition, in order to facilitate sales of new and existing homes with our goal of increasing occupancy, we also plan to finance a significant portion of our home sales during 2005. We have a $125 million consumer finance facility to support our in-community home sales financing program under which we may finance up to 75% of the principal amount of qualifying loans made to qualifying home buyers.

We expect to refinance our $85 million revolving credit mortgage facility and our senior variable rate mortgage when due in 2005 and 2006. In addition to our existing sources of capital, we have significant experience in raising private equity and we may in the future use that experience to enter into financing

joint ventures or other similar arrangements if we determine that such a structure would provide an efficient means of raising capital.

Our plan is to increase occupancy through the activities described above. However, based on our historical results, we do not believe that the Company will be able to fully fund its debt service obligations and recurring capital expenditures, as well as its plans and growth objectives described above, out of operating cash flows. Accordingly, our ability to implement our plans and growth objectives described above will depend upon our ability to obtain adequate funding from the financing sources described above or from other available funding sources. We cannot assure that we will sell additional communities, sell new or used homes, borrow under our consumer finance line of credit, refinance expiring credit lines or make other arrangements necessary to fund some or all of our activities to increase occupancy. Should we not be able to obtain sufficient funds for these purposes, we may determine that it is necessary to substantially defer or eliminate some or all of our plans and growth objectives that require these funds, including home purchases, consumer loans, and non-recurring capital expenditures.

CASH FLOWS

Comparison of the Six Months Ended June 30, 2005 to the Six Months Ended June 30, 2004

Cash provided by operations was $1.0 million for the six months ended June 30, 2005, as compared with $19.0 million for the same period in 2004. The decrease in cash provided by operations primarily was due to payments made in the first half of 2005 for substantial accruals incurred at the end of 2004 for capital expenditures and repairs and maintenance activities as compared to a relatively low level of such payments in the first half of 2004.

Cash used in investing activities was $39.2 million in the six months ended June 30, 2005, compared with $576.8 million for the same period in 2004. The decrease in cash used in investing activities primarily was due to the Hometown portfolio acquisition in the first half of 2004, as well as proceeds from community sales in the first half of 2005.

Cash provided by financing activities was $18.0 million in the six months ended June 30, 2005, compared with $579.0 million for the same period in 2004. The decrease in cash provided by financing activities primarily was due to the issuance of additional indebtedness and common and preferred stock issuances in connection with our IPO in the first half of 2004, as well as increases in the repayment of existing indebtedness and the payment dividends in the first half of 2005.

INFLATION

Inflation in the U.S. has been relatively low in recent years and did not have a material impact on our results of operations for the three and six months ended June 30, 2005 and 2004. Although the impact of inflation has been relatively insignificant in recent years, it remains a factor in the United States economy and may increase the cost of acquiring or replacing property, plant, and equipment and the costs of labor and utilities.

COMMITMENTS

At June 30, 2005, we had $1,089.0 million of consolidated indebtedness outstanding with the following repayment obligations (in thousands):

2005	$	108,578
2006(1)	162,928
2007	52,886
2008	71,067
2009	113,458
Thereafter	574,040
Commitments	1,082,957
Unamortized premium related to indebtedness assumed in Hometown and DAM acquisitions	6,047
	$	1,089,004

(1) $140.5 million of senior variable rate mortgage debt due 2006 may be extended for three additional 12-month periods at our option and subject to certain conditions.

FFO

As defined by NAREIT, FFO represents income (loss) from continuing operations (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of loan origination costs) and after adjustments for unconsolidated partnerships and joint ventures. We present FFO because we consider it an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (as amended in November 1999 and April 2002), which may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating

activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Reconciliation of FFO:
Loss from continuing operations	$	(15,733	)	$	(4,874	)	$	(29,214	)	$	(39,042	)
Plus:
Depreciation and amortization	22,224			17,242			42,255			32,152
Income from discontinued operations	72			343			1,000			795
Depreciation and amortization from discontinued operations	(18		)	1,085			5			1,825
Less:
Amortization of loan origination fees	(1,911		)	(855		)	(3,772		)	(1,722		)
Depreciation expense on furniture, equipment and vehicles	(529		)	(81		)	(951		)	(449		)
Minority interest portion of FFO reconciling items	(1,038		)	(978		)	(2,074		)	(2,151		)
FFO(a)	3,067			11,882			7,249			(8,592		)
Less: preferred stock dividends	(2,578		)	(2,578		)	(5,156		)	(3,810		)
FFO available to common stockholders	$	489		$	9,304		$	2,093		$	(12,402	)

(a) Our FFO for the six months ended June 30, 2004 includes $27.9 million of costs related to the IPO, financing transactions and the Hometown acquisition.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We use some derivative financial instruments to manage, or hedge, interest rate risks related to our borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors.

As of June 30, 2005, our total debt outstanding was $1,089.0 million, comprised of $767.2 million of indebtedness subject to fixed interest rates and $321.8 million, or 30%, of our total consolidated debt, subject to variable interest rates. In February 2004 we entered into a two-year interest rate swap agreement pursuant to which we effectively fixed the base rate portion of the interest rate with respect to $100 million of our variable rate debt. As a result, approximately 80% of our total indebtedness is subject to fixed interest rates for a minimum of two years.

If LIBOR and the prime rate were to increase by 1.00%, the increase in interest expense on the variable rate debt would decrease future earnings and cash flows by approximately $3.2 million annually. If, after consideration of the interest rate swap agreement described above, LIBOR and the prime rate were to increase by 1.00%, the increase in interest expense on the variable rate debt would decrease future earnings and cash flows by approximately $2.2 million annually.

Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

The fair value of debt outstanding as of June 30, 2005 was approximately $1,117.7 million.

The following table sets forth certain information with respect to our indebtedness outstanding as of June 30, 2005 (dollars in thousands):

						Weighted
			Percentage			Average
	Amount of		of Total			Interest			Maturity
	Debt		Debt			Rate			Date
Fixed Rate Debt
Senior fixed rate mortgage due 2012	$	302,325		27.8	%		7.35	%	2012
Senior fixed rate mortgage due 2014	211,921			19.5	%		5.53	%	2014
Senior fixed rate mortgage due 2009	98,926			9.1	%		5.05	%	2009
Various individual fixed rate mortgages due 2005 through 2031	153,074			14.0	%		7.20	%	2005 to 2031
Other loans	1,006			0.1	%		8.67	%	2005
	767,252			70.5	%		6.52	%
Variable Rate Debt
Senior variable rate mortgage due 2006	140,468			12.9	%		6.22	%	2006
Revolving credit mortgage facility due 2005	58,764			5.4	%		6.17	%	2005
Trust preferred securities due 2035	25,780			2.4	%		6.26	%	2035
Consumer finance facility due 2008	9,369			0.9	%		6.18	%	2008
Lease receivable facility due 2007	42,100			3.8	%		10.22	%	2007
Floorplan lines of credit due 2007	43,945			4.0	%		6.59	%	2007
Other loans	1,326			.0.1	%		6.97	%	2012
	321,752			29.5	%		6.79	%
	$	1,089,004		100.0	%		6.60	%

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

(a) Exhibits:

See Exhibit Index

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	AFFORDABLE RESIDENTIAL COMMUNITIES INC.
Date: July 28, 2005
	By:	/s/ LAWRENCE E. KREIDER
		Lawrence E. Kreider
		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and a duly authorized officer)

EXHIBIT INDEX

Exhibit Number					Exhibit Title
31.1					Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.
31.2					Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.
32.1					Certification of Chief Executive Officer of Affordable Residential Communities Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2					Certification of Chief Financial Officer of Affordable Residential Communities Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Good

Hilltop (HTH) 10-Q2005 Q2 Quarterly report

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