American Land Lease 2006 Annual Report

ANNUAL 2006 REPORT COMPANY PROFILE American Land Lease is a real estate investment trust (REIT) that owns residential land lease communities located in Florida, Arizona and Alabama. As of December 31, 2006, American Land Lease owned 31 residential land lease communities with 8,044 operational home sites, 1,192 developed expansion sites, 1,566 undeveloped expansion sites and 129 recreational vehicle sites. TABLE OF CONTENTS Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3 Financial Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-5 Operational Highlights 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Sales Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Enhancing Our Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2007 and Beyond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Defining Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-11 Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 QUALITY, INTEGRITY AND INNOVATION “Our residents and homeowners, partners and shareholders can count on our commitments to quality, integrity and market leadership. Our unique land lease concept, combined with the superior quality of homes, amenities and lifestyle offered in our communities, delivers a dependable return on investment and enables us to maintain our position providing premier homes for active adults.” – Bob Blatz, President & Chief Operating Officer A FOUNDATION OF Continued growth in a challenging market Despite daunting challenges in the home sales markets in 2006, it was another good year for American Land Lease. The performance delivered by our core residential land lease business provides an increasing base of income that is the foundation for a steady and sustainable rate of growth. 2006 will be remembered as the year that demonstrated the stability, power and performance of our residential land lease business model, which makes our communities and homes an ever-more attractive value for our customers and shareholders, and shelters our business from the fluctuations and uncertainties of the traditional real estate market. We are proud that we continue to offer a safe and sustainable return on investment to both our homebuyers and our investors. Our target consumer remains the vast middle market of retirees, with a keen eye towards the needs of the burgeoning Baby Boomer generation. Our superior product and lifestyle, bundled in an unbeatable value, continues to attract quality buyers. In 2006, this trend boosted the price of the new manufactured homes sold in our communities to an average of $129,000, a 10.3% increase. We enjoyed growth in Net Asset Value - approximately 5.0% to growth in land lease revenues and 5.3% to new home sales...in a year that can best be described as “challenging” for the traditional home building and residential real estate markets nationally. This steady annual return demonstrates again the stability of a growing retirement market and the advantages of our land lease concept. SUCCESS Investing in Innovation In 2006, we continued our programs of infrastructure improvement and aggressive expansion of the concept of traditional retirement community amenities. New and upgraded clubhouses and recreation centers are being transformed into multi-faceted, neighborhood gathering places offering the more vigorous and rewarding lifestyle sought by today’s retirees. One such showcase is The Landings clubhouse in Riverside Club. This Florida waterfront community’s second clubhouse, The Landings, is a stunning 20,000 square-foot recreation center with innovative features like an Internet café and coffee bar, mini day spa and 586seat performing arts facility. We also renovated and expanded the clubhouse at Blue Heron Pines and added a second one at Sunlake Estates. This level of amenities is unprecedented in residential land lease communities. It is another reason we continue to be a market leader. Partnering with our Residents One of the primary advantages of the land lease concept that we tout is the true partnership it represents between homeowner and land owner. Unlike most master-planned and site-built communities where a developer simply sells the land and walks away, we remain on site as a managing partner, ready to do what it takes to enhance and protect our mutual investment in the land and community. This was proven in dramatic fashion in 2006 at The Woodlands at Church Lake in Central Florida where we invested significant company resources to wage a protracted legal battle with county officials, eventually reversing their decision to permit a concrete factory next door to this quiet, wooded lakefront community and its more than 300 residents. This effort demonstrated the true nature of our corporate culture and our commitment to our residents. A Compelling Promise To succeed, every enterprise must offer a product or service with a compelling and competitive difference. For us, that difference is the land lease. The power and appeal of this concept has led us to brand it with a value-forward positioning in all our marketing and sales efforts as the Set-for-Life Lease. This uniquely affordable payment bundles land costs with our superior community management, services and amenities. It allows homebuyers to lock in a major cost of living in a low monthly payment that can never go up. Combined with the outstanding value of our manufactured home product, the Setfor-Life Lease positions American Land Lease with an offer of the best home prices, lifestyle and long-term financial security on the market – an unbeatable proposition for today’s longer living, longer-range planning retirees. Dealing from Strength We are fortunate to be able to fund our growth by leveraging the revenue produced by our properties. Our long-term record of responsible performance helps us access capital on favorable terms. We work hard to enhance customer service with the hiring and training of top on-site management professionals. We are successfully redeveloping existing home sites with the new generation of high quality HUD-Code manufactured homes with higher price points that deliver better value to today’s customer. We also continue to leverage our buying power with the manufactured home industry to influence the price, quality and customized design of our product. For the year, we strengthened our infrastructure and amenities across Florida. We successfully entered an exciting new market on the Alabama Gulf Coast. And in Arizona, we enjoyed a second straight year of improved sales success, acquiring and upgrading a showcase community in The Reserve at Fox Creek, and achieving a record 98 home sales – a 24% sales increase following 2005’s 139% increase. In 2006, we expanded our utilization of technology as a tool for more effective marketing and sales, and more responsive customer service. The Internet has become an integral aspect of our marketing and operational activities – and we are expanding its use as we look towards the future. We have sharpened our focus on a new and recognizably unique generation of retirees who seek value in a more active and enriching lifestyle. By continuing to meet their needs and exceed their expectations, we assure a growing and prosperous future for them...and for our Company. Using Strategic Acquisitions for Future Growth Notwithstanding the slowing of new home sales due to national market conditions, American Land Lease continued to grow through the strategic – and opportunistic – acquisition of three new communities, providing a substantial increase in our inventory of revenue-generating home sites. We now own some 2,500 entitled expansion home sites, an enviable five to six years worth of inventory. These three new communities – Park Place on Florida’s Treasure Coast, The Grove in Coastal Alabama, and The Reserve at Fox Creek in the national recreation and resort area of Western Arizona near Las Vegas, Nevada – reflect our commitment to growing the Company with compelling destination locations for our communities. Each is being upgraded in the signature American Land Lease style. Perhaps more significant than the communities we purchased are the ones we considered and passed on, having failed to meet our rigorous criteria for acquisition and growth. ANNUAL 2006 RE PORT 1 LETTER TO SHAREHOLDERS A discussion of 2006’s achievements Dear Fellow Shareholders: 2006 was a solid year for American Land Lease that showed again the strength of our business plan: owning land lease communities that serve active adults. The land lease position enjoys important insulation from economic fluctuations; the active adult market is deep and growing rapidly with the aging of the Baby Boom. We ‘keep score’ by considering a number of metrics. The most fundamental is Net Asset Value or “NAV”. (NAV, our expected liquidation value, and other terms such as “NOI”, “capitalization rate”, “cap rate”, “FFO”, “AFFO”, and “Total Return” are defined on page 11.) During 2006, NAV increased substantially as property net operating income (“NOI”) increased by 11.3% and as market capitalization rates declined to the range of 5% to 7%. Our New Home Sales volumes and profitability were significantly impacted by the national decline in home sales…off 16.8% overall, and 18% on a same community basis. While these are substantial declines and explain the decline in Funds From Operation (“FFO”), they are best understood as no more than a slowing in the rate of increase in NAV. Reported financial results per share were: Net income $1.24 FFO $1.66 AFFO $1.47 8.1% 2.4% 4.5% These increases are due about 5.0% to “same site” results, i.e., the increase in rents, expenses and income from sites leased in both 2005 and 2006, 5.7% to the increase in the number of leased sites, 0.6% increase to improved golf course results and 4.9% to newly acquired properties. For those homeowners who chose to sell their homes sited on our land, it was good news to receive prices averaging 8.4% more than in 2005. We consider this to be a good measure of customer satisfaction…and evidence of increasing security for our land leases. Land development is our second business activity. It involves improving raw land by constructing streets, subdividing residential lots, building community facilities such as clubhouses and golf courses, and in securing the governmental permits required for these improvements. Developed land provides an inventory of home sites available to be leased in the future. During 2006, American Land Lease: • Invested more than $54.7 million in land development and land acquisition, including $7.6 million of capitalized interest. • Added 128 developed sites and acquired an additional 1,260 sites in land held for development so that at year end, ANL owned: 8,044 Leased sites Potential sites in land held for, 2,758 or under, development 129 Recreational vehicle sites 10,931 Total home sites • Spent $9.0 million to upgrade clubhouses at Sunlake Estates and Blue Heron Pines, and to construct a new 20,000 square-foot clubhouse at Riverside Club. • Spent $5.8 million for continued site work for expansions of Blue Heron Pines, Gulfstream Harbor and The Villages at Country Club – which will lead to opening new subdivisions when market demand supports increased home sales activity. New home sales is our third business activity. We sell new homes, to be sited on land leased from American Land Lease, in order to increase our portfolio of land leases. Our 2006 new home sales activity is summarized below: New home sales Cost of sales Gross margin Overhead Income New home sales Average selling price Gross margin $47.2 million $31.5 million $15.7 million $10.6 million $5.4 million 362 $129,000 33.3% 8.3% 11.3% 1.3% Flat 3.6% 16.8% 10.3% 2.3% Total Return, defined as the $1.00 dividend and $2.81 in share price appreciation lagged the increase in NAV and compared as follows to other benchmarks: One Year 26.12% 10.44% 34.35% 16.39% Three Years 69.07% 12.58% 23.80% 52.12% Five Years 155.20% 11.99% 22.55% 163.59% Small Cap REIT Russell 2000 All REIT Index ANL This steady progress is good news for shareholders and is welcomed by us: we are shareholders too, owning more than 23.5% of American Land Lease. The 2006 results were based on continued success in each of the four distinct activities in which American Land Lease is engaged: the ownership of land leased to others; land development; new home sales; and portfolio management. Owning land leases is the primary business activity of American Land Lease and all other activities are undertaken in its support. We are focused on the ownership of land, leased to homeowners, in residential subdivisions improved with such amenities as golf courses and marinas that support an “active retirement” lifestyle. Land lease rents are effectively secured, at least to the extent of the cost of relocation of the home, by the value of the home sited on the leased land. Some measures of this activity are: • Property Revenue $36.2 million • Property Expenses $13.6 million • Net Operating Income $22.6 million 15.3% 12.4% 16.2% Here are our key ‘takeaways’: 1. After five consecutive years of increased activity, 2006 saw a significant decrease in the number of homes sold. Many of our homebuyers rely upon the sale of their current home to fund their retirement home – and as that market slowed, we saw a slow down in our home sales 2 ANNUAL 2006 RE PORT activity. Demand in our Florida communities may also have been reduced by lingering concerns following the hurricanes in 2004-05. 2. There remains good demand for our homes….as evidenced by the increased average selling price for new homes. 3. Our New Home Sales business continues to be profitable due to a number of factors including the higher quality of homes offered for sale, better cost control through our job cost system, and the improving professionalism of the American Land Lease sales team. That said, we are focused on further improvements in such areas as Internet marketing, conversion of sales leads to closings, and construction cycle time. While profitability in this activity is most welcome, it bears mention that the origination of profitable land lease investments continues to be our primary objective for New Home Sales and we measure success through the increases in NAV which result from this activity. The 300 new land leases originated in 2006 are expected to provide an 8.7% first year return on their total costs. Portfolio management is our fourth business activity: the acquisition and disposition of land lease communities. Here, our objective is to upgrade the American Land Lease portfolio by selling properties with lower expected returns and reallocating the sales proceeds to properties that we prefer for one or more of their expected rent growth, the value of their homes or their potential for land development and new home sales. During 2006, we acquired three new communities and sold one. We purchased: • The Reserve at Fox Creek – a 314 home site community located in Bullhead City, Arizona across the Colorado River from Laughlin, Nevada. At the time of acquisition, there were 211 home sites occupied and 103 home sites fully developed to be filled through future new home sales. • The Grove – a 425 home site community located in Foley, Alabama near Gulf Shores. At the time of acquisition, there were 91 home sites occupied, 74 fully developed and 260 to be developed, to be filled through future new home sales. • Park Place – a 465 home site community located in Sebastian, Florida 50 miles north of our Savanna Club community and less than 10 miles south from where we are developing Sebastian Beach & Tennis Village. At the time of acquisition, there were 365 home sites occupied and 100 home sites fully developed to be filled through future new home sales. Each of these communities is an excellent addition to the ANL portfolio. They all share common characteristics of being high quality, age-restricted communities in desirable locations. In completing these acquisitions, we further our plans for geographic diversification. The property that we sold was a 90 home site community located in New Jersey. As we begin 2007, we have, as always, numerous concerns ranging from those fundamental and outside our control, such as the direction of interest rates and the turbulence in the national home sales markets, to those more within our power, such as enhancing the retirement experience of our residents and improving our new home sales business by more consistent execution. Still, as we look to the future, we see great strengths in American Land Lease and these make us optimistic. Our portfolio of land lease communities produces a predictable and growing rental stream. Its stability is due, in part, to our focus on senior communities and, in part, to the high average value of the homes located on our sites. We are pleased by the high quality homes and the good neighbors introduced to our communities through the success of New Home Sales, even in challenging markets like the one that we are experiencing. We are grateful for the hard work and personal qualities of the American Land Lease team. They make it fun to come to work each day, and demonstrate that, no matter the challenge, our people truly make a difference. In particular, we’d like to express our thanks to Shannon Smith, ANL CFO. Shannon is Bob’s full partner in the management of company operations and ANL owes much to their effectiveness as a team. We also owe thanks to our three colleagues on the American Land Lease Board: Bruce Benson, Bruce Moore and Todd Sheets. Each is compensated solely in equity and approaches his work from the shareholder’s point of view. We are fortunate to have elected Tom Harvey, in January 2007, as another independent director. Tom brings to the Board great integrity; the intellect to be Executive Director of the Center for Real Estate Development of the Kenan-Flagler Business School at the University of North Carolina; and a wealth of experience in home building and real estate development, including serving as the senior Pulte executive for the state of Florida. Tom is a great addition. We three take seriously our responsibility for your and our mutual investment in American Land Lease and welcome your questions and comments. We look forward to seeing you at the Annual Meeting to be held Thursday, May 3rd in Washington, D.C. Sincerely, Terry Considine Chairman/CEO Thomas L. Rhodes Vice Chairman Robert G. Blatz President/COO ANNUAL 2006 RE PORT 3 FINANCIAL PERFORMANCE 2006 22,586 (4,346) 5,387 (3,995) (7,880) 293 -12,045 1,056 -(1,410) 11,691 9,753 1,410 1,938 4,346 --- OPERATING DATA Income from rental property operations before depreciation Depreciation Income from sales operations General and administrative expenses Interest expenses Interest and other income Casualty gain Income before discontinued operations and minority interest in Operating Partnership Income (loss) from discontinued operations, net Income tax benefit Minority interest in Operating Partnership Net income Net income available to common stockholders Minority interest in Operating Partnership Preferred stock dividends Real estate depreciation Income tax benefit Casualty gain Discontinued operations: Real estate depreciation (Gain) loss on sale of real estate Minority interest in Operating Partnership attributed to discontinued operations Funds from operations Accrued preferred stock dividends Funds from operations available to common shareholders Capital replacements Adjusted funds from operations 2005 19,434 (3,490) 5,640 (3,353) (5,657) 23 237 12,834 116 600 (1,600) 11,950 10,303 1,600 1,647 3,490 (600) (237) 67 (1,006) 140 16,648 (1,938) 14,710 (1,703) 13,007 66 (237) 16 16,285 (1,647) 14,638 (1,348) 13,290 PER SHARE DATA Funds from operations Adjusted funds from operations Dividends paid to common stockholders 1.66 1.47 1.00 1.70 1.54 1.00 PAYOUT RATIO PER COMMON SHARE AND OP UNIT Funds from operations Adjusted funds from operations Ratio of free cash flow to interest expense 60.2% 68.0% 1.3:1.0 58.8% 64.9% 1.7:1.0 SAME STORE DATA Revenues Operating expenses Net operating income 10.5% 9.0% 11.3% 10.1% 9.5% 10.4% 4 ANNUAL 2006 RE PORT Performance Graph The following graph compares the change in the cumulative total return of the Company’s common stock for the period from December 31, 2001 through December 31, 2006 with the (1) cumulative total return of the SNL Manufacturer and the (2) Standard & Poor’s 500 Stock Index. The following graph was prepared based on the following assumptions: (1) an initial investment of $100 was invested at the close of business on December 31, 2001 in (a) common stock of the Company; (b) stock of the companies in the SNL Manufactured Homes REIT Index; and (c) of the companies in the Standard & Poor’s 500 Index; and (2) all dividends received were reinvested. The stock price performance shown on the following graph is not necessarily indicative of future price performance. Total Return Performance Period Ending Index American Land Lease, Inc. SNL Manufactured Homes REITS Index S&P 500 12/31/01 100.00 100.00 100.00 12/31/02 115.31 95.93 77.90 12/31/03 173.28 123.13 100.24 12/31/04 206.17 132.83 111.14 12/31/05 226.48 129.49 116.59 12/31/06 263.59 149.59 135.00 ANNUAL 2006 RE PORT 5 OPERATIONAL HIGHLIGHTS 2006 Creating Net Asset Value by Excellence in Operations Arizona Properties In 2006, Net Operating Income was $6,254,000 up 9.1% over the prior year, based on a stable occupancy rate of 92.8%, average rental increases of 5%, and increases in passthrough billings to homeowners of 19.7%. Key projects in 2006 included: • The upgrading of our clubhouse at Lost Dutchman. A long time centerpiece of activity within the community, this redevelopment effort enhanced the infrastructure of the building, and added new beauty and accessibility to facilities in constant use by the community’s residents. Renovation of the golf practice range at Rancho Mirage. This six-hole golf practice range allows residents to play 18 holes of short distance golf by combining tees and greens. In order to enhance the playability of the course, a new irrigation system, grass and landscaping were added to improve both the playing experience as well as the visual appeal of this key community amenity. Investment in community enrichment through capital replacement spending on items such as remodeling bathrooms at several communities, replacing pool furniture, upgrading kitchens and replacing woodshop equipment. American Land Lease invests in residential land lease communities that primarily serve “active adults,” who qualify to live in our age restricted communities. The Company has a total of 31 properties, 21 of which are “developing” communities in which new homes are being sold to be sited on expansion home sites. A 5.1% increase in operational home sites reflects the addition of 300 home sites leased for the first time in 2006 throughout our portfolio, as our development and home sales activities continue. These communities are located primarily in Florida and Arizona. Property Operations Highlights Florida Properties In 2006, Net Operating Income was $16,632,000 in Florida, up 11.0% over the prior year. On December 31, 2006 occupancy was 98.9%, as defined by a percentage of total operational home sites. Key initiatives in 2006 included: • A company-wide focus on improved amenities that enhance the competitive appeal of our communities and better serve the lifestyle choices of our customers. Amenity upgrades and expansion of our clubhouse at Blue Heron Pines, the redevelopment and expansion of the clubhouse at Sunlake Estates, the completion of a fitness facility at Savanna Club, and the opening of a 20,000 square-foot clubhouse and lifestyle facility at Riverside Club. Each of these upgrades was guided by input from our homeowners and customers on how best to enhance their lifestyles and increase the value of living in Clubhouse Grand Opening an American Land at Riverside Club Lease community. A continuing community upgrade program, which saw 37 new homes constructed in our Florida subdivisions that improve overall quality and curb appeal. Initial results are encouraging, as we see an increase in new homes being constructed in these communities, as well as higher home resale values for current residents. The average resale price of homes increased approximately 3.5% from 2005 to 2006. A review of the entire ANL portfolio for redevelopment potential, including our ongoing conversion of the Caribbean Cove community from an “all age” to an agerestricted community, now named Gulfstream Harbor III. This process has included constructing new homes, refurbishing the clubhouse and recreation areas, and executing an overall community improvement plan. The success of this transition is reflected in an encouraging first year of new home sales. • • • Our People The success of American Land Lease is the result of contributions by many outstanding individuals. We would like to recognize those who were distinguished among their peers for truly exceptional performance in 2006. ALICIA OWEN Regional/Project Manager of the Year ROSANNE NOBILE Finance/Accounting Manager of the Year CASEY MURPHY Sales Manager of the Year Cypress Greens and Royal Palm Village BOB RUSSELL Community Manager of the Year – Florida Riverside Club CAROL FRANGIPANE Community Manager of the Year – Arizona La Casa Blanca LOIS UNGER Unsung Hero Corporate Headquarters CAROL AUGERI Unsung Hero Savanna Club • • 6 ANNUAL 2006 RE PORT SALES 2006 was a challenging year for home sales. Our home sales unit volume decreased 16.8% in 2006, from 435 to 362 new home closings. We continued our success in Arizona, where we had 98 home sales as compared to 79 closings in 2005; much of the success in Arizona came from our new acquisition, The Reserve at Fox Creek. Despite a tough market, our homes and communities continued to perform well. Sales slowed, but home values increased in every community. The dollar volume of new home sales decreased 8.2% as compared to 2005. This was partially driven by lower unit volumes offset by a 10.3% increase in the average price to $129,000 as compared to the 2005 average home price of $117,000. This increase represents a continuing escalation in the quality Blue Heron Pines Clubhouse of homes sited in American Land Lease communities, and is tangible evidence of the commitment to our communities by new homeowners. Many of 2006’s new home sales were in existing communities where they replaced homes that had become dated or had been removed. We view this as a key element of our overall business plan to build for the future as we steadily improve the quality of homes within our communities. HIGHLIGHTS A VERAGE N EW H OME P RICES $90,00 0 $101,0 00 $117,0 00 $129,0 00 2003 2004 2005 2006 We continued to improve our use of technology by expanding our website, implementing a web-hosted lead management program and a site selection sales program. We view the development of our webbased marketing strategies as critical to the future of our home sales marketing programs. We have focused on development of our websites, e-mail marketing campaigns, e-newsletters and search engine optimization to market better to our customers and more easily provide the information needed to attract new homeowners to our communities. We also continue to work closely with manufacturers to gain better pricing, and more importantly, to upgrade the quality of product that is offered to American Land Lease homebuyers. As we continue to populate our communities with a new generation of manufactured homes, we are changing the streetscape with features such as 9-foot sidewalls, 9-foot flat ceilings and 5/12 roof pitches that create a more traditional roofline. New kitchens feature Subzero® appliances and marble countertops. Enhanced exterior packages include spacious front porches and paver driveways and walkways. These high quality homes beautify our streetscapes, creating a favorable impression for our current and future residents. N EW H OME S ALES 500 475 450 425 400 375 350 325 300 275 250 225 200 435 414 392 362 307 237 2001 2002 2003 2004 2005 2006 ANNUAL 2006 RE PORT 7 ENHANCING OUR PORTFOLIO and dances. Living at Sebastian Beach & Tennis Village will establish a new standard for the quality of community, homes and services in the American Land Lease portfolio. At the end of 2006, we had made significant progress towards finalizing the first phase of 120 home sites. In the summer, a local election resulted in a new town, the Town of Grant-Valkaria. Our community was divided between two jurisdictions – the town and the county. As a result, our project has been delayed as the two governmental entities resolve how to provide the necessary jurisdiction and oversight as well as the responsibility for future services to our homeowners and community. Planning, design and permitting activities for the Village Centre and other amenities continued, and we anticipate construction of this substantial amenity at Sebastian Beach & Tennis Village to begin in 2007 in time to support our first new home sales. Savanna Club Golf & Tennis Resort Port St. Lucie, Florida Selling continued into the final phase at Savanna Club. When sold out in 2007, our total number of home sites will exceed 1,067. We completed a 12,000 squarefoot auditorium, which enables the community to host professional performances and large activities such as dances and dinners. This facility complements the clubhouse that was finished in 2003. We also completed a 5,000 squarefoot Fitness Center, which houses a complete weight room and aerobics center, an indoor basketball/volleyball court, a fitness pool and additional tennis courts. Riverside Club Ruskin, Florida Riverside Club is a unique community, offering a waterfront and golf club lifestyle on the Florida Gulf Coast, just 30 minutes south of Tampa and 39 miles north of Sarasota. In 2006, we began and completed a second clubhouse. This 20,000+ square-foot facility includes a resort-style pool and a large gathering room that will accommodate social gatherings, lectures, dances, and even indoor basketball, as well as a coffee bar and sports bar facilities. This recreational complex has established a new standard of excellence and lifestyle for retirement communities in the state of Florida. Further expansion at Riverside Club will add over 500 additional new home sites. Sunlake Estates Grand Island, Florida We began the expansion of the clubhouse facilities by adding a second building as well as updating and enhancing the current clubhouse facility. When completed in early 2007, these enhancements will bring almost 10,000 square-feet of Growing through Acquisition American Land Lease spent approximately $44.6 million in 2006 to expand its portfolio through the acquisition of three high quality, age restricted communities. These communities add geographical diversification to our portfolio while increasing the overall quality. Each also represents an opportunity for the company to leverage its success by continuing to grow through the building of new subdivisions within developing communities and by improving and expanding existing facilities. The Reserve at Fox Creek Bullhead City, Arizona The Reserve at Fox Creek is a 314 home site community in Bullhead City, Arizona. Situated on a 56 acre site above the Colorado River basin near the Arizona/Nevada state border, The Reserve provides residents with a lifestyle that includes boating, mountains, and Nevada gaming activities. The Grove Foley, Alabama The Grove is a 425 home site community in Foley, Alabama. Situated on a 112 acre site between Mobile and Pensacola near the Florida/Alabama state border, The Grove provides residents with easy access to boating, fishing and recreational activities along Gulf of Mexico beaches, less than 10 miles away. Park Place Sebastian, Florida Park Place is a 465 home site community in Sebastian, Florida. Situated on a 145 acre site with a 25 acre lake, Park Place features a lifestyle of boating, fishing, beaches, preserves and Atlantic Ocean Coastal recreational areas less than 5 miles from home. Coasta Country comforts. Coastal charm. Growing through Construction and Development American Land Lease spent approximately $54.7 million in 2006 to build new subdivisions in its developing communities and to improve and expand existing facilities. The following projects were complete or in progress at the end of 2006: Sebastian Beach & Tennis Village Micco, Florida In 2005 we purchased a parcel of land to build a new community, our first undertaking of building a community from the ground up. Located just north of Sebastian, Florida, Sebastian Beach & Tennis Village will be a oneof-a-kind, 533 home community providing the very finest in resort-style active adult living. In 2006, we undertook the many construction and development activities required to make this innovative coastal Village a reality. The community will focus around the Village Centre, a 22,000 square-foot lifestyle center with a resort-style lap pool, a fitness center, a media room, activity rooms, and a large hall that will support touring entertainment groups 8 ANNUAL 2006 RE PORT 2007 AND BEYOND clubhouse space and facilities to the residents of Sunlake Estates. Adding a fitness center, a sports bar and pub, billiards and poker rooms, the new facility, home to the “Scrub Jay Lounge,” provides more high quality lifestyle amenities to this outstanding and close-knit community. Blue Heron Pines Blue Heron Pines Golf Course Community Punta Gorda, Florida We completed renovation of the clubhouse and pool area at Blue Heron Pines, nearly doubling the size of the facility for current and future resident enjoyment. This exceptionally well-updated clubhouse opened in early 2006 with an improved fitness center, computer center, billiard room and kitchen facilities. We will continue to monitor the market for acquisition opportunities. We believe the Company is well positioned to acquire communities that require further sales and development. Administration and Accounting Consistent, complete, timely, and accurate financial reporting and controls are a central hallmark of our Company. Our corporate accounting staff focuses much of its attention and efforts on reporting, and assisting management with business control and compliance with the Sarbanes/Oxley legislation and the rules of the New York Stock Exchange. Within the current environment, we are maintaining uncompromising standards of accounting and financial controls as well as working to improve our risk management processes. In addition to regulatory compliance issues, we are focused on reducing overhead costs and implementing technology that helps us better serve our customers. We continued to: • Strengthen our accounting systems and our ability to analyze data. We advanced our work with an integrated database for tenant accounts, property operations, accounts payable, accounts receivable, general accounting, and real-time inventory cost tracking and measurement of home sale profitability. Employ technology that emphasizes our focus on cost controls and profitability within our growing home sales business. As a result, we were able to maintain acceptable margins within the home sales business during a year of rising prices for almost every component of home construction. Cost control also means raising the value we are able to pass on to our customers. Promote direct payment of land rent by our customers using the Automated Clearing House (ACH) program. At year-end, 74% of our customers used this payment method, up from 66% a year ago. This system makes payment easy, timely, and secure for our residents, and provides us with a low cost and accurate method for processing receipts. Future Development Plans The development pipeline for American Land Lease provides for our future growth. We continue the site planning process for the balance of the undeveloped land in our portfolio. We plan to move forward through the entitlement and permitting processes to begin construction on several additional projects in 2007. Our development pipeline includes the following communities: Riverside Club - Ruskin, Florida We began planning for the final phase of development at Riverside Club, which will add an additional 212 home sites. This also requires the building of a bridge between the current community and the final phase; construction on the bridge is scheduled for completion in 2007. Villages at Country Club - Mesa, Arizona We continued site construction at our Villages at Country Club project. This unique infill project combined a closed, older mobile home park and adjacent land the Company purchased to build an entirely new community. In this innovative development, the company has partnered with a local builder to build a “town home” within a highly amenitized community in which the residents will make a lease payment based on their land and the amenities associated with the community. We expect to begin selling into this project in mid 2007. • • Beyond 2007 Other projects in the development pipeline are at various stages of planning, design and engineering. We are constantly seeking opportunities within our communities to update current amenities, build value through the placement of new homes and increase value for our homeowners, all of which translates to greater value for the company and our shareholders. We gained a great deal of knowledge from our community conversion project at Caribbean Cove/Gulfstream Harbor III and will incorporate the “lessons learned” from that initiative into future redevelopment projects. Landings Clubhouse at Riverside Club ANNUAL 2006 RE PORT 9 DEFINING POLICIES It’s just the way we like to do business policy is to limit the sum of total debt outstanding, plus development commitments to 80% of the value of our leased land. 7. Diversify Geographically: All markets are cyclical. We plan a geographically diversified portfolio as the best hedge against local market fluctuations. While today our portfolio is 72% in Florida, we expect, over time, that our investment in other markets will increase as a percentage of the total portfolio. 8. Make Managers Owners: We consider that the operators of our business, both Managers and Directors, should have the same interests as do our Shareholders. The factors that most reliably align these interests are the substantial stock and “OP Units” owned by Managers and Directors plus the use of American Land Lease equity in lieu of Board fees and as a significant part of Managers’ compensation. Eight Policies that Define American Land Lease American Land Lease (ANL) succeeds by providing quality services to residents, good jobs to employees, and attractive returns to shareholders. Its business is defined by eight policies: 1. Own Land Leases: We lease land to homeowners, generally in residential land lease communities. These land leases provide secure and predictable rents. The homeowner bears the risk of economic depreciation as well as the cost of home improvements. 2. Measure Profitability by Net Asset Value (NAV): We measure economic profitability by changes in NAV. 3. Pay Dividends from AFFO while Retaining Cash for Reinvestment: The dividend rate is based on several factors, two of which are AFFO and the REIT requirement of distribution of taxable income. Retained AFFO is available, for example, to acquire properties, fund land development, repay debt, and repurchase shares. 4. Invest in Better Neighborhoods: We seek to own “subdivision” communities rather than more common “trailer park” communities because the more valuable the home that is located on our land, the more secure is our land rent. 5. Limit Development Risk: Development is inherently uncertain. We are conscious of its risks. We will develop communities when we perceive a reasonable balance between risk and reward. In addition to development of communities, we will, in some cases, expand existing communities and redevelop others. 6. Use Debt with Caution: We use debt leverage to increase financial returns. We generally seek long-term, fixed-rate, and non-recourse debt: long term because that matches the character of our investments; fixed-rate because land rents do not fluctuate with the bond market and we want a predictable return on our investments; non-recourse to reduce the risk that one bad investment will jeopardize the overall enterprise. We manage our maturities to reduce the re-pricing and refunding risk in any individual year. We do use some short-term debt to fund short-term uses, such as inventory held for sale and our inventory of developed home sites. Our Accounting Policies and Definitions 1. American Land Lease has elected to be taxed as a real estate investment trust or “REIT.” In general, a REIT is not subject to federal income taxation of its income from rental properties. Many, but not all, states follow the federal treatment. Income from provision of services is generally subject to customary state and federal corporate income taxes. American Land Lease will not provide services that are not usual and customary for REIT qualification purposes. Any such services are provided to American Land Lease through subsidiaries which pay tax at the entity level. American Land Lease’s income tax provision is based on its qualification as a REIT. In addition, we have an approximate $64 million net operating loss carry over available to offset substantially all income taxes that may become due if we should fail to qualify as a REIT. 2. American Land Lease conducts its business through Asset Investors Operating Partnership, L.P., the Operating Partnership whose general partner is American Land Lease and whose limited partners hold “OP Units,” exchangeable for American Land Lease common stock. This Operating Partnership structure is also known as an “UPREIT.” 10 ANNUAL 2006 RE PORT OP Units can be used as consideration for our purchase of a property, and are redeemable for cash or, at our election, shares of our common stock on a one-for-one basis. OP Units may offer the holders the opportunity to defer recognition of taxes otherwise due on the sale of a property. OP Units receive the same dividend as our common stock. For the year ended December 31, 2006, we deducted $184 per home site in Capital Replacement spending. 5. We measure economic profitability by Adjusted Funds From Operations (AFFO) AFFO is defined as FFO less an annual provision for Capital Replacements at least equal to $125 per developed home site. 3. American Land Lease reports 6. In developing, redeveloping or Funds From Operations (FFO). FFO expanding a property, we capitalize is defined in a manner consistent related costs, including any allocated with the guidelines of the National interest expense, as part of our Association of Real Estate Investment investment. A common example is Trusts (“NAREIT”) as net income the development of new home sites. (loss), computed in accordance with Generally Accepted Accounting Community Clubhouse, The Grove 7. Capital spending which adds a Principles (“GAAP”), excluding gains material feature or revenue source and losses from extraordinary items is called a Capital Enhancement and is capitalized as and sales of depreciable real estate property, net of related part of our investment. A common example is the income taxes, plus real estate related depreciation and addition of a marina facility to an existing community. amortization (excluding amortization of financing costs), including depreciation for unconsolidated partnerships 8. In purchasing a property, we generally consider, and joint ventures. American Land Lease calculates FFO as part of our investment decision, a program of based upon the NAREIT definition as adjusted for the spending to improve the property. Such spending, minority interest in the Operating Partnership owned by whether or not otherwise capitalized, is capitalized persons other than us and amortization of intangibles. as part of our investment. Common examples are correction of deferred maintenance, upgrades t o 4. We generally capitalize spending for items that community center s , and improved landscaping. cost more than $250 and have a useful life of more than one year. Capitalized spending which maintains 9. Total Return for one year is defined by NAREIT a property is termed a Capital Replacement and is as the total of the closing price at year-end plus deducted in the calculation of AFFO. A common any dividends paid less the closing price for the example is parking lot repaving. This spending is prior year-end. Divide the result by the closing better considered a recurring cost of preserving an price of the prior year-end. The return is calculated asset rather than as an additional investment. It is a with dividends reinvested on a quarterly basis. cash proxy for depreciation. It is our policy to deduct at least $125 per developed home site in determining AFFO, even if that entire amount is not spent in any one year. Over time, $125 per home site is considered a reasonable minimum provision for Capital Replacement spending. By deduction of at least $125 per developed home site each year, reported profitability as measured by AFFO is not overstated. Any amount deducted but not spent is available to offset spending in future years. Capital Replacement spending in a year that is more than $125 per home site, except as to amounts deducted and not spent in prior years, will be deducted in determining AFFO for that year. 10. The MSCI US REIT Index (“REIT Index”) includes 104 REITs with a market capitalization of approximately $356 billion at December 31, 2006. 11. For financial reporting purposes, we consolidate entities in which we own substantially all of the capital stock as well as those where we do not have total ownership but do control investment decisions with respect to underlying assets. Entities in which we do not have controlling ownership interest are accounted for by the equity method. ANNUAL 2006 RE PORT 11 CORPORATE BOARD OF INFORMATION DIRECTORS Terry Considine Chairman Thomas L. Rhodes Vice Chairman, Director, Chairman of the Nominating Corporate Governance Committee, Chairman and Director of National Review magazine and Chairman of the Board of Directors of The Lynde and Harry Bradley Foundation Bruce D. Benson Director and Chairman of Compensation Committee Owner and President of Benson Mineral Group Tom Harvey Director Executive Director of the Center for Real Estate Development of the Kenan-Flagler Business School at the University of North Carolina Bruce E. Moore Director Founder and Chief Executive Officer of Brandywine Financial Services Corporation Todd Sheets Director and Chairman of Audit Committee A private investor. Formerly Managing Director at Raymond James and Associates, Inc. and Pinehill Capital Partners EXECUTIVE OFFICERS Terry Considine Chief Executive Officer Robert G. Blatz President and Chief Operating Officer Shannon E. Smith Chief Financial Officer, Treasurer and Secretary CORPORATE OFFICE American Land Lease 29399 U.S. Highway 19 North, Suite 320 Clearwater, Florida 33761-9852 Telephone: (727) 726-8868 • Toll-Free: (800) 826-6069 Fax: (727) 725-4391 www.AmericanLandLease.com STOCK TRANSFER AGENT AND REGISTRAR Wells Fargo Shareowner Services PO Box 64854 161 North Concord Exchange St. Paul, Minnesota 55164-0854 Telephone: (651) 450-4075 • Toll-Free: (800) 468-9716 LEGAL COUNSEL Hill, Ward & Henderson, P.A. Tampa, Florida Skadden, Arps, Slate, Meagher & Flom LLP Los Angeles, California INDEPENDENT AUDITORS Ernst & Young LLP Tampa, Florida Stock Listing: New York Stock Exchange Common Stock Symbol: ANL Preferred Stock Symbol: ANL-PA 12 ANNUAL 2006 RE PORT 29399 U.S. Highway 19 North, Suite 320 Clearwater, Florida 33761-9852 (800) 826-6069 www.AmericanLandLease.com ULA ALLC253 3/07 10.5M