sui03311010q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[
X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the
quarterly period ended March 31, 2010.
or
[
] TRANSITION PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission
file number 1-12616
SUN
COMMUNITIES, INC.
(Exact
Name of Registrant as Specified in its Charter)
Maryland
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38-2730780
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(State
of Incorporation)
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(I.R.S.
Employer Identification No.)
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27777
Franklin Rd.
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Suite
200
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Southfield,
Michigan
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48034
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(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
[ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
[ ] No [ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
(Check one):
Large
accelerated filer [ ]
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Accelerated
filer [ X ]
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Non-accelerated
filer [ ]
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Smaller
reporting company [ ]
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Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [ X ]
Number of
shares of Common Stock, $0.01 par value per share, outstanding
as of
March 31, 2010: 18,987,149
SUN
COMMUNITIES, INC.
INDEX
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Pages
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PART
I – FINANCIAL INFORMATION
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Item
1.
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Financial
Statements (Unaudited):
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Consolidated
Balance Sheets ─ March 31, 2010 and December 31, 2009
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3
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Consolidated
Statements of Operations ─ Periods Ended March 31, 2010 and
2009
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4
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Consolidated
Statements of Comprehensive Income ─ Periods Ended March 31, 2010 and
2009
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5
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Consolidated
Statement of Stockholders’ Deficit ─ Three Months Ended March 31,
2010
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5
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Consolidated
Statements of Cash Flows ─ Three Months Ended March 31, 2010 and
2009
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6
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Notes
to Consolidated Financial Statements
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7
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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24
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Item
3.
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Quantitative
and Qualitative Disclosures about Market Risk
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35
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Item
4.
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Controls
and Procedures
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36
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PART
II – OTHER INFORMATION
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Item
1.
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Legal
Proceedings
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37
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Item
1A.
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Risk
Factors
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37
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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37
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Item
6.
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Exhibits
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38
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Signatures
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39
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SUN
COMMUNITIES, INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF MARCH 31, 2010 AND DECEMBER 31, 2009
(In
thousands, except per share amounts)
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(Unaudited)
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March
31, 2010
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December
31, 2009
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ASSETS
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Cash
and cash equivalents
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Inventory
of manufactured homes
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Notes
and other receivables
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Commitments
and contingencies
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Preferred
stock, $0.01 par value, 10,000 shares authorized, none
issued
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Common stock, $0.01 par value, 90,000 shares
authorized
(March 31, 2010 and December 31, 2009, 20,789 and 20,635 shares issued
respectively)
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Additional
paid-in capital
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Accumulated
other comprehensive loss
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Distributions
in excess of accumulated earnings
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Treasury
stock, at cost (March 31, 2010 and December 31, 2009, 1,802
shares)
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Total
Sun Communities, Inc. stockholders' deficit
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TOTAL
STOCKHOLDERS’ DEFICIT
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TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
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See
accompanying Notes to Consolidated Financial Statements.
SUN
COMMUNITIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE PERIODS ENDED MARCH 31, 2010 AND 2009
(In
thousands, except per share amounts)
(Unaudited)
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Three
Months Ended March 31,
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2010
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2009
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REVENUES
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Income
from real property
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Property
operating and maintenance
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Rental
home operating and maintenance
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General
and administrative - real property
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General
and administrative - home sales and rentals
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Depreciation
and amortization
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Interest
on mandatorily redeemable debt
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Income
before income taxes and equity income (loss) from
affiliates
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Provision
for state income taxes
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Equity
income (loss) from affiliates
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Income
from continuing operations
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Loss
from discontinued operations
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Less:
amounts attributable to noncontrolling interests
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Net
income attributable to Sun Communities, Inc. common
stockholders
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Amounts
attributable to Sun Communities, Inc. common
stockholders:
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Income
from continuing operations, net of state income
taxes
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Loss
from discontinued operations, net of state income
taxes
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Net
income attributable to Sun Communities, Inc. common
stockholders
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Weighted
average common shares outstanding:
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Basic
and diluted earnings (loss) per share:
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Basic
and diluted earnings per share
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Cash
dividends per common share:
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See
accompanying Notes to Consolidated Financial Statements.
SUN
COMMUNITIES, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
FOR
THE PERIODS ENDED MARCH 31, 2010 AND 2009
(In
thousands)
(Unaudited)
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Three
Months Ended
March
31,
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2010
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2009
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Unrealized
loss on interest rate swaps
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Total
comprehensive income
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Less:
amounts attributable to noncontrolling interests
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Comprehensive
income attributable to Sun Communities, Inc. common
stockholders
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SUN
COMMUNITIES, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIT
FOR
THE THREE MONTHS ENDED MARCH 31, 2010
(In
thousands, except per share amounts)
(Unaudited)
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Common
Stock
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Additional
Paid-in Capital
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Officer's
Notes
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Accumulated
Other Comprehensive Loss
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Distributions
in Excess of Accumulated Earnings
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Treasury
Stock
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Total
Sun Communities Stockholders' Deficit
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Non-controlling
Interest
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Total
Stockholders' Deficit
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Balance
as of December 31, 2009
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Issuance
of common stock, net
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Stock-based
compensation - amortization and forfeitures
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Unrealized
loss on interest rate swaps and cap
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Repayment
of officer's notes
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Cash
distributions declared of $0.63 per share
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See
accompanying Notes to Consolidated Financial Statements.
SUN
COMMUNITIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(In
thousands)
(Unaudited)
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Three
Months Ended March 31,
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2010
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2009
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OPERATING
ACTIVITIES:
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Less:
Loss from discontinued operations, net of tax
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Income
from continuing operations
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Adjustments
to reconcile income from continuing operations to net cash provided by
operating activities:
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Gain
on disposal of other assets and depreciated homes,
net
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Loss
(gain) on valuation of derivative instruments
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Stock
compensation expense
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Depreciation
and amortization
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Amortization
of deferred financing costs
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Equity
(income) loss from affiliates, net
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Change
in notes receivable from financed sales of inventory homes, net of
repayments
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Change
in inventory, other assets and other receivables,
net
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Change
in accounts payable and other liabilities
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Net
cash provided by operating activities of continuing
operations
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Net
cash used for operating activities of discontinued
operations
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NET
CASH PROVIDED BY OPERATING ACTIVITIES
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Proceeds
related to dispositions of land
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Proceeds
related to disposition of other assets and depreciated homes,
net
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Reduction
of notes receivable and officer's notes, net
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NET
CASH USED FOR INVESTING ACTIVITIES
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Issuance
and associated costs of common stock and OP units,
net
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Borrowings
on lines of credit
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Payments
on lines of credit
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Payments
to retire preferred operating partnership units
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Proceeds
from issuance of notes payable and other debt
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Payments
on notes payable and other debt
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Payments
for deferred financing costs
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Distributions
to stockholders and OP unit holders
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NET
CASH USED FOR FINANCING ACTIVITIES
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Net
increase in cash and cash equivalents
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Cash
and cash equivalents, beginning of period
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Cash
and cash equivalents, end of period
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SUPPLEMENTAL
INFORMATION:
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Cash
paid for interest on mandatorily redeemable debt
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Cash
paid for state income taxes
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Noncash
investing and financing activities:
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Unrealized
loss on interest rate swaps
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Reduction
in secured borrowing balance
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Receivable
for issuance of stock
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See
accompanying Notes to Consolidated Financial Statements.
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis
of Presentation
These
unaudited interim Consolidated Financial Statements of Sun Communities, Inc., a
Maryland corporation, and all wholly-owned or majority-owned and
controlled subsidiaries, including Sun Communities Operating Limited Partnership
(the “Operating Partnership”), SunChamp LLC (“SunChamp”), and Sun Home Services,
Inc. (“SHS”), have been prepared pursuant to the Securities and Exchange
Commission (“SEC”) rules and regulations and in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”). Certain information and footnote disclosures required for
annual financial statements have been condensed or excluded pursuant to SEC
rules and regulations. Accordingly, the interim financial statements do not
include all of the information and footnotes required by GAAP for complete
financial statements and should be read in conjunction with the Consolidated
Financial Statements and accompanying notes included in our Annual Report on
Form 10-K for the year ended December 31, 2009 as filed with the SEC on March
11, 2010, as amended on March 30, 2010 (the “2009 Annual Report”).
Reference
in this report to Sun Communities, Inc., “we”, “our”, “us” and the “Company”
refer to Sun Communities, Inc. and its subsidiaries, unless the context
indicates otherwise.
The
accompanying Consolidated Financial Statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring
nature.
We
completed the sale of our cable television services business during the third
quarter ended September 30, 2009. The cable television services
business has been classified and presented as discontinued operations in the
Consolidated Financial Statements and related notes. See Note 2 for
additional information.
The
following Notes to Consolidated Financial Statements present interim disclosures
as required by the SEC. These statements have been prepared on a basis that is
substantially consistent with the accounting principles applied in our 2009
Annual Report.
Certain
reclassifications have been made to prior periods’ financial statements in order
to conform to current period presentation.
2. Discontinued
Operations
We had
investments in certain land improvements and equipment that provided cable
television services to certain communities within the Real Property Operations
segment. During the fourth quarter of 2008, we determined that the
cable television assets could not provide the necessary return on investment to
justify the capital investment required to keep up with the technological
advances in the offered product and subsequently announced our intention to exit
the cable television service business. We completed the sale of the
cable television services business during the third quarter of
2009. Cash proceeds from this sale were $0.3 million, resulting in a
net gain on sale of $0.1 million. The results of the cable television service
business for the prior periods have been presented as a discontinued operation
in the Consolidated Financial Statements.
The
following tables set forth certain summarized financial information of the
discontinued operation (in thousands):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
|
|
|
|
|
|
Less: amounts
attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations attributable to Sun Communities, Inc. common
stockholders
|
|
|
|
|
|
|
|
|
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
following table sets forth certain information regarding investment property (in
thousands):
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
Land
improvements and buildings
|
|
|
|
|
|
|
|
|
Rental
homes and improvements
|
|
|
|
|
|
|
|
|
Furniture,
fixtures, and equipment
|
|
|
|
|
|
|
|
|
Land
held for future development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and amenities.
In May
2010, we entered into an agreement to acquire a manufactured home community
located in San Antonio, Texas with 225 developed and 61 partially undeveloped
sites for approximately $2.8 million, excluding closing costs. We
expect to fund this acquisition using cash on hand and borrowings under our
revolving credit facility, if necessary. The purchase of this
property is contingent upon completion of our due diligence and other customary
closing conditions; accordingly, we can provide no assurance that we will
purchase this property.
In
September 2009, a flood caused substantial damage to our property, Countryside
Village of Atlanta, located in Lawrenceville, Georgia. We have
comprehensive insurance coverage for both property damage and business
interruption, subject to deductibles and certain limitations. The
claim remains under review and we believe the cost of the damage sustained from
the flooding will be in excess of our insurance deductible. We
recorded a charge of $0.8 million associated with the flooding in the third
quarter of 2009. This charge represents our deductible, net of
expected insurance recoveries for the replacement of assets that exceed the net
book value of assets damaged in the flood.
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.
|
Transfers
of Financial Assets
|
We have
completed various transactions involving our installment notes and during 2010
we have received a total of $4.3 million of cash proceeds in exchange for
relinquishing our right, title and interest in the installment notes. We have no
further obligations or rights with respect to the control, management,
administration, servicing, or collection of the installment notes.
However,
we are subject to certain recourse provisions requiring us to purchase the
underlying homes collateralizing such notes, in the event of a note default and
subsequent repossession of the home. The recourse provisions are
considered to be a form of continuing involvement, and we have recorded these
transactions as a transfer of financial assets.
In the
event of note default, and subsequent repossession of a manufactured home, the
terms of the agreement require us to repurchase the manufactured home. Default
is defined as the failure to repay the installment note according to contractual
terms. The repurchase price is calculated as a percentage of the outstanding
principal balance of the installment note, plus any outstanding late fees,
accrued interest, legal fees, and escrow advances associated with the
installment note. The percentage used to determine the repurchase
price of the outstanding principal balance on the installment note is based on
the number of payments made on the note. In general, the repurchase price is
determined as follows:
Number
of Payments
|
|
Recourse
%
|
|
|
|
|
|
|
Greater
than 15 but less than 64
|
|
|
|
|
|
|
|
|
|
The
transferred assets have been classified as collateralized receivables in Notes
and Other Receivables (see Note 5) and the cash proceeds received from these
transactions have been classified as a secured borrowing in Debt (see Note 7)
within the Consolidated Balance Sheets. The balance of the
collateralized receivables was $55.1 million (net of allowance of $0.2 million)
and $52.2 million (net of allowance of $0.2 million) as of March 31, 2010 and
December 31, 2009, respectively. The outstanding balance on the
secured borrowing was $55.3 million and $52.4 million as of March 31, 2010 and
December 31, 2009, respectively.
The
balances of the collateralized receivables and secured borrowings
fluctuate. The balances increase as additional installment notes are
transferred and exchanged for cash proceeds. The balances are reduced
as the related installment notes are collected from the customers, or as the
underlying collateral is repurchased. The change in the aggregate
gross principal balance of the collateralized receivables is as follows (in
thousands):
Beginning
balance as of December 31, 2009
|
|
|
|
|
Financed
sales of manufactured homes
|
|
|
|
|
Principal
payments and payoffs from our customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance as of March 31, 2010
|
|
|
|
|
The
collateralized receivables earn interest income and the secured borrowings
accrue interest expense at the same interest rates. The amount of
interest income and expense recognized was $1.5 million and $0.7 million for the
three months ended March 31, 2010 and 2009,
respectively.
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5.
|
Notes
and Other Receivables
|
The
following table sets forth certain information regarding notes and other
receivables (in thousands):
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
Installment
notes receivable on manufactured homes, net
|
|
|
|
|
|
|
|
|
Collateralized
receivables, net (see Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes and other receivables, net
|
|
|
|
|
|
|
|
|
Installment
Notes Receivable on Manufactured Homes
The
installment notes of $14.1 million (net of allowance of $0.1 million) and $12.6
million (net of allowance of $0.1 million) as of March 31, 2010 and December 31,
2009, respectively, are collateralized by manufactured homes. The notes
represent financing provided by us to purchasers of manufactured homes generally
located in our communities and require monthly principal and interest
payments. The notes have a net weighted average interest rate and
maturity of 7.4 percent and 12.1 years as of March 31, 2010, and 7.4 percent and
12.4 years as of December 31, 2009.
Collateralized
Receivables
Certain
transactions involving our installment notes were recorded as a transfer of
financial assets (see Note 4) and classified as collateralized
receivables. The receivables have a balance of $55.1 million (net of
allowance of $0.2 million) and $52.2 million (net of allowance of $0.2 million)
as of March 31, 2010 and December 31, 2009, respectively. The
receivables have a net weighted average interest rate and maturity of 11.1
percent and 13.6 years as of March 31, 2010, and 10.9 percent and 13.8 years as
of December 31, 2009.
Allowance
for Losses for Collateralized and Installment Notes Receivable
We are
generally able to recover our investment in uncollectible notes receivable by
repurchasing the homes that collateralized these notes receivable and then
selling or leasing these homes to potential residents in our communities.
Although our experience supports a high recovery rate for repossessed homes, we
believe there is some degree of uncertainty about recoverability of our
investment in these repossessed homes. We have established a loan
loss reserve to record our estimated unrecoverable costs associated with these
repossessed homes. We estimate our unrecoverable costs to be the
repurchase price plus repair and remarketing costs that exceed the estimated
selling price of the home being repossessed. A historical average of
this excess cost is calculated based on prior repossessions and applied to our
estimated annual future repossessions to create the allowance for installment
notes and collateralized receivables. The allowance for losses for
collateralized and installment notes receivable was approximately $0.3 million
as of March 31, 2010 and December 31, 2009, respectively.
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5.
|
Notes
and Other Receivables, continued
|
Other
Receivables
Other
receivables were comprised of amounts due from residents of $1.2 million (net of
allowance of $0.2 million), home sale proceeds of $3.0 million, an employee loan
of $0.4 million, insurance receivables of $0.7 million, and rebates and other
receivables of $3.4 million as of March 31, 2010. Other receivables
were comprised of amounts due from residents of $1.5 million (net of allowance
of $0.2 million), home sale proceeds of $3.4 million, an employee loan of $0.5
million, insurance receivables of $0.9 million, and rebates and other
receivables of $2.9 million as of December 31, 2009.
Officer’s
Notes
Officer’s
notes, presented as a portion of the stockholders’ deficit in the balance sheet,
are 10 year, LIBOR + 1.75% notes, with a minimum and maximum interest rate of 6%
and 9%, respectively. The following table sets forth certain
information regarding officer’s notes as of March 31, 2010 and December 31, 2009
(in thousands except for common stock and OP units):
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
|
|
|
Secured
by
|
|
|
|
|
|
Secured
by
|
|
Promissory
Notes
|
|
Outstanding
Principal Balance
|
|
|
Common
Stock
|
|
|
Common
OP Units
|
|
|
Outstanding
Principal Balance
|
|
|
Common
Stock
|
|
|
Common
OP Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
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|
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|
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|
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|
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|
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|
|
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|
|
|
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|
|
The
officer’s personal liability on the secured promissory notes is limited to all
accrued interest on such notes plus fifty percent of the deficiency, if any,
after application of the proceeds from the sale of the secured shares and/or the
secured units to the then outstanding principal balance of the promissory
notes. The value of secured common stock and secured OP Units total
approximately $3.5 million based on the closing price of our shares on the New
York Stock Exchange of $25.20 as of March 31, 2010. The unsecured notes are
fully recourse to the officer.
Total
interest received was $0.1 million for the three months ended March 31, 2010 and
2009. The reduction in the aggregate principal balance of these notes
was $1.8 million and $2.9 million for the three months ended March 31, 2010 and
2009, respectively. The terms of the officer’s notes require that the remaining
balance is due on December 31, 2010.
6.
|
Investment
in Affiliates
|
Origen
Financial, LLC. (“LLC”)
In August
2008, we entered into an agreement with four unrelated companies (“Members”) to
form a new limited liability company. We contributed cash of
approximately $0.5 million toward the formation of the LLC. The LLC
purchased the origination platform of Origen Financial, Inc. (“Origen”). The
purpose of the venture is to originate manufactured housing installment
contracts for its Members thereby eliminating the need for us to become licensed
to originate loans in each of the 18 states in which we do
business.
As of
March 31, 2010, we had an ownership interest in the LLC of 25
percent. In December 2009, we concluded that our investment in the
LLC was not recoverable due to operating losses, liquidity concerns, and
declining revenue trends and recorded an other than temporary impairment charge
to reduce the carrying value of our investment to zero. We are not
obligated to fund the LLC and no longer record equity losses. We
recorded a $0.1 million loss associated with our equity allocation of the LLC’s
financial results for the three months ended March 31, 2009.
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6.
|
Investment
in Affiliates, continued
|
Origen
In
October 2003, we purchased 5,000,000 shares of common stock of Origen. As of
March 31, 2010, we had an ownership interest in Origen of approximately 19
percent, and the carrying value of our investment was $0.8
million. Our investment in Origen had a market value of approximately
$8.4 million based on a quoted market closing price of $1.67 per share from the
“Pink Sheet Electronic OTC Trading System” as of March 31, 2010.
We
recorded our equity allocation of the anticipated loss from Origen of $0.8
million for the three months ended March 31, 2010. We recorded
our equity allocation of the reported income from Origen of $0.1 million for the
three months ended March 31, 2009.
Summarized
financial information for Origen is presented before elimination of
inter-company transactions (amounts in thousands):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Debt
and Lines of Credit
|
The
following table sets forth certain information regarding debt (in
thousands):
|
|
Principal
Outstanding
|
|
|
Weighted
Average Years to Maturity
|
|
|
Weighted
Average Interest Rates
|
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
Collateralized
term loans - CMBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
term loans - FNMA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Secured
borrowing (see Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
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|
|
|
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|
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|
|
|
|
|
|
|
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.
|
Debt
and Lines of Credit, continued
|
Collateralized
Term Loans
The
collateralized term loans totaling $841.7 million as of March 31, 2010, are
secured by 87 properties comprised of 31,245 sites representing approximately
$532.8 million of net book value.
We
exercised our option to extend the due date of approximately $152.4 million of
secured, variable rate borrowings to May 1, 2014. In connection with this
extension, the lender increased the facility fee associated with this borrowing.
See Note 16 for additional information.
Preferred
OP Units
We
redeemed $0.9 million and $0.5 million of Series B-3 Preferred OP Units in the
three months ended March 31, 2010 and 2009, respectively.
Our
Operating Partnership had $35.8 million of convertible Preferred OP Units that
were redeemable January 1, 2014. In February 2010, our Operating
Partnership completed a ten year extension on the redemption date associated
with the $35.8 million convertible Preferred OP Units. The Preferred
OP Units provided for an annual preferred rate that was the greater of the 10
year U.S. Treasury bond yield in effect as of January 2nd each calendar year
plus, a spread of 239 basis points or 6.5 percent, but no greater than 8.6
percent. In connection with the extension, the maximum annual preferred rate on
the Preferred OP Units was increased to 9.0 percent from 8.6
percent. These Preferred OP Units are convertible into 526,212 common
shares based on a conversion price of $68 per share.
Secured
Borrowing
See Note
4 for additional information regarding our collateralized receivables and
secured borrowing transactions.
Mortgage
Notes
The
mortgage notes totaling $213.0 million as of March 31, 2010, are collateralized
by 19 communities comprised of 6,388 sites representing approximately $180.8
million of net book value.
Lines
of Credit
We have
an unsecured revolving line of credit facility with a maximum borrowing capacity
of $115.0 million, subject to certain borrowing base calculations. The
outstanding balance on the line of credit was $94.5 million and $89.1 million as
of March 31, 2010 and December 31, 2009, respectively. In addition, $4.0 million
of availability was used to back standby letters of credit as of March 31, 2010
and December 31, 2009. Borrowings under the line of credit bear an interest rate
of LIBOR plus 165 basis points, or Prime plus 40 basis points at our
option. Prime means for any month, the prevailing “prime rate” as
quoted in the Wall Street Journal. The weighted average interest rate
on the outstanding borrowings was 1.9 percent as of March 31,
2010. The borrowings under the line of credit mature October 1, 2011,
assuming the election of a one year extension that is available at our
discretion. As of March 31, 2010 and December 31, 2009, $16.5 million and $21.9
million, respectively, were available to be drawn under the facility based on
the calculation of the borrowing base at each date.
In March
2009, we entered into a $10.0 million manufactured home floor plan facility. The
floor plan facility initially had a committed term of one year. In February
2010, the floor plan facility was renewed indefinitely until our lender provides
us 12 month notice of their intent to terminate the agreement. The interest rate
is 100 basis points over the greater of Prime or 6.0 percent (effective rate 7.0
percent at March 31, 2010). Prime means the prevailing “prime rate”
as quoted in the Wall Street Journal on the first business day of each
month. The outstanding balance was $4.0 million and $5.4 million as
of March 31, 2010 and December 31, 2009, respectively.
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.
|
Debt
and Lines of Credit, continued
|
As of
March 31, 2010, the total of maturities and amortization of debt and lines of
credit during the next five years, are as follows (in thousands):
|
|
Maturities
and Amortization By Year
|
|
|
|
Total
Due
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
After
5 years
|
|
|
|
|
|
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|
The most
restrictive of our debt agreements place limitations on secured and unsecured
borrowings and contain minimum fixed charge coverage, leverage, distribution and
net worth requirements. As of March 31, 2010, we were in compliance with all
covenants.
In
November 2004, our Board of Directors authorized us to repurchase up to
1,000,000 shares of our common stock. We have 400,000 common shares
remaining in the repurchase program. No common shares were
repurchased during 2010 or 2009. There is no expiration date
specified for the buyback program.
Common OP
Unit holders can convert their Common OP units into an equivalent number of
shares of common stock at any time. During 2010, holders of Common OP
Units converted 25,005 units to common stock.
The
vesting requirements for 16,800 restricted shares granted to our employees were
satisfied during the three months ended March 31, 2010.
Our shelf
registration statement on Form S-3 for a proposed offering of up to $300.0
million of our common stock, preferred stock and debt securities was declared
effective with the SEC in May 2009. We entered into a sales agreement
to issue and sell up to 1,600,000 shares of common stock from time to time
pursuant to our effective shelf registration statement on Form
S-3. Sales under the agreement commenced during the third quarter of
2009. We issued 131,953 shares of common stock during the three
months ended March 31, 2010. We issued an additional 18,047 shares of common
stock on April 1, 2010. The 150,000 shares of common stock were sold
at the prevailing market price of our common stock at the time of each sale with
a weighted average sale price of $24.66. During 2010, we received net
proceeds of approximately $3.6 million related to the issuance of common
stock. The proceeds were placed in an investment account as of March
31, 2010 and subsequently used to pay down our unsecured line of credit. We have
1,350,000 shares remaining and we may continue to sell shares of common stock
under this program from time to time based on market conditions, although we are
not under any obligation to sell shares.
On April
23, 2010, aggregate dividends, distributions and dividend equivalents of $13.3
million were made to common stockholders, common OP unitholders, and restricted
stockholders of record on April 13, 2010.
The
components of other income are summarized as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on disposition of assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
consolidated operations can be segmented into Real Property Operations and Home
Sales and Rentals. Transactions between our segments are eliminated
in consolidation. Seasonal recreational vehicle revenue is included
in Real Property Operations’ revenues and is approximately $5.5 million
annually. This seasonal revenue is recognized approximately 50% in the first
quarter, 6.5% in both the second and third quarters and 37% in the fourth
quarter of each fiscal year.
A
presentation of segment financial information is summarized as follows (amounts
in thousands):
|
|
Three Months Ended March 31,
2010
|
|
|
Three Months Ended March 31,
2009
|
|
|
|
Real Property Operations
|
|
|
Home Sales and Home Rentals
|
|
|
Consolidated
|
|
|
Real Property Operations
|
|
|
Home Sales and Home Rentals
|
|
|
Consolidated
|
|
Revenues
|
|
$ |
52,007 |
|
|
$ |
13,116 |
|
|
$ |
65,123 |
|
|
$ |
50,999 |
|
|
$ |
12,661 |
|
|
$ |
63,660 |
|
Operating
expenses/Cost of sales
|
|
|
17,220 |
|
|
|
9,867 |
|
|
|
27,087 |
|
|
|
16,789 |
|
|
|
9,960 |
|
|
|
26,749 |
|
Net
operating income/Gross profit
|
|
|
34,787 |
|
|
|
3,249 |
|
|
|
38,036 |
|
|
|
34,210 |
|
|
|
2,701 |
|
|
|
36,911 |
|
Adjustments
to arrive at net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
revenues
|
|
|
2,073 |
|
|
|
221 |
|
|
|
2,294 |
|
|
|
1,429 |
|
|
|
195 |
|
|
|
1,624 |
|
General
and administrative
|
|
|
(3,490 |
) |
|
|
(1,933 |
) |
|
|
(5,423 |
) |
|
|
(4,166 |
) |
|
|
(1,826 |
) |
|
|
(5,992 |
) |
Depreciation
and amortization
|
|
|
(11,274 |
) |
|
|
(5,299 |
) |
|
|
(16,573 |
) |
|
|
(11,120 |
) |
|
|
(5,084 |
) |
|
|
(16,204 |
) |
Interest
expense
|
|
|
(15,838 |
) |
|
|
(84 |
) |
|
|
(15,922 |
) |
|
|
(15,015 |
) |
|
|
(65 |
) |
|
|
(15,080 |
) |
Equity
income (loss) from affiliates, net
|
|
|
(819 |
) |
|
|
- |
|
|
|
(819 |
) |
|
|
99 |
|
|
|
(72 |
) |
|
|
27 |
|
Provision
for state income tax
|
|
|
(132 |
) |
|
|
- |
|
|
|
(132 |
) |
|
|
(133 |
) |
|
|
- |
|
|
|
(133 |
) |
Income
(loss) from continuing operations
|
|
|
5,307 |
|
|
|
(3,846 |
) |
|
|
1,461 |
|
|
|
5,304 |
|
|
|
(4,151 |
) |
|
|
1,153 |
|
Loss
from discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(172 |
) |
|
|
- |
|
|
|
(172 |
) |
Net
income (loss)
|
|
|
5,307 |
|
|
|
(3,846 |
) |
|
|
1,461 |
|
|
|
5,132 |
|
|
|
(4,151 |
) |
|
|
981 |
|
Less: Net
income (loss) attributable to noncontrolling interest
|
|
|
519 |
|
|
|
(395 |
) |
|
|
124 |
|
|
|
547 |
|
|
|
(443 |
) |
|
|
104 |
|
Net
income (loss) attributable to Sun Communities, Inc.
|
|
$ |
4,788 |
|
|
$ |
(3,451 |
) |
|
$ |
1,337 |
|
|
$ |
4,585 |
|
|
$ |
(3,708 |
) |
|
$ |
877 |
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
Real
Property
Operations
|
|
|
Home
Sales and Home Rentals
|
|
|
Consolidated
|
|
|
Real
Property
Operations
|
|
|
Home
Sales and Home Rentals
|
|
|
Consolidated
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
of manufactured homes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
and other receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11.
|
Derivative
Instruments and Hedging Activities
|
Our
objective in using interest rate derivatives is to manage exposure to interest
rate movements thereby minimizing the effect of interest rate changes and the
effect it could have on future cash flows. Interest rate swaps and caps are used
to accomplish this objective. We require hedging derivative instruments to be
highly effective in reducing the risk exposure that they are designated to
hedge. We formally designate any instrument that meets these hedging criteria as
a hedge at the inception of the derivative contract.
As of
March 31, 2010, we had four derivative contracts consisting of three interest
rate swap agreements with a total notional amount of $70.0 million and an
interest rate cap agreement with a notional amount of $152.4 million. We
generally employ derivative instruments that effectively convert a portion of
our variable rate debt to fixed rate debt and to cap the maximum interest rate
on certain variable rate borrowings. We do not enter into derivative instruments
for speculative purposes.
The
following table provides the terms of our interest rate derivative contracts
that were in effect as of March 31, 2010:
Type
|
|
Purpose
|
|
Effective
Date
|
|
Maturity
Date
|
|
Notional
(in
millions)
|
|
Based
on
|
|
Variable
Rate
|
|
Fixed
Rate
|
|
Spread
|
|
Effective
Fixed Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
financial derivative instruments are designated and qualify as cash flow hedges
and the effective portion of the gain or loss on such hedges are reported as a
component of accumulated other comprehensive income (loss) in our Consolidated
Balance Sheets. To the extent that the hedging relationship is not effective,
the ineffective portion is recorded in interest expense. Hedges that received
designated hedge accounting treatment are evaluated for effectiveness at the
time that they are designated as well as through the hedging
period.
We have
recorded the fair value of our derivative instruments designated as cash flow
hedges on the balance sheet. See Note 14 for information on the determination of
fair value for the derivative instruments. The following table
summarizes the fair value of derivative instruments included in our Consolidated
Balance Sheets as of March 31, 2010 and December 31, 2009 (in
thousands):
|
Asset
Derivatives
|
|
Liability
Derivatives
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
Derivatives
designated as hedging instruments
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
March
31, 2010
|
|
December
31, 2009
|
Interest
rate swaps and cap agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These
valuation adjustments will only be realized under certain situations. For
example, if we terminate the swaps prior to maturity or if the derivatives fail
to qualify for hedge accounting, then we would need to amortize amounts
currently included in other comprehensive income (loss) into interest expense
over the terms of the derivative contracts. We do not intend to
terminate the swaps prior to maturity and, therefore, the net of valuation
adjustments through the various maturity dates will approximate zero, unless the
derivatives fail to qualify for hedge accounting.
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11.
|
Derivative
Instruments and Hedging Activities,
continued
|
Our
hedges were highly effective and had minimal effect on income. The
following table summarizes the impact of derivative instruments for the three
months ended March 31, 2010 and 2009, respectively, as recorded in the
Consolidated Statements of Operations (in thousands):
Derivatives
in cash flow hedging
|
|
Amount
of Gain or (Loss) Recognized in OCI (Effective Portion)
|
|
Location of Gain or
(Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
Amount of Gain or
(Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
Location of Gain or
(Loss) Recognized in Income on Derivative
(Ineffective Portion and Amount Excluded from Effectiveness
Testing)
|
|
Amount of Gain or
(Loss) Recognized in Income on Derivative
(Ineffective Portion and Amount Excluded from Effectiveness
Testing)
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
2010
|
|
|
2009
|
|
|
|
2010
|
|
|
2009
|
|
Interest
rate swaps and cap agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain
of our derivative instruments contain provisions that require us to provide
ongoing collateralization on derivative instruments in a liability
position. As of March 31, 2010 and December 31, 2009, we had
collateral deposits recorded in other assets of $3.2 million.
We have
elected to be taxed as a real estate investment trust (“REIT”) as defined under
Section 856(c) of the Internal Revenue Code of 1986 (“Code”), as amended. In
order for us to qualify as a REIT, at least ninety-five percent (95%) of our
gross income in any year must be derived from qualifying sources. In addition, a
REIT must distribute at least ninety percent (90%) of its REIT ordinary taxable
income to its stockholders.
Qualification
as a REIT involves the satisfaction of numerous requirements (some on an annual
and quarterly basis) established under highly technical and complex Code
provisions for which there are only limited judicial or administrative
interpretations, and involves the determination of various factual matters and
circumstances not entirely within our control. In addition, frequent changes
occur in the area of REIT taxation which requires us to continually monitor our
tax status. We analyzed the various REIT tests and confirmed that we continued
to qualify as a REIT for the quarter ended March 31, 2010.
As a
REIT, we generally will not be subject to U.S. federal income taxes at the
corporate level on the ordinary taxable income we distribute to our stockholders
as dividends. If we fail to qualify as a REIT in any taxable year, our taxable
income will be subject to U.S. federal income tax at regular corporate rates
(including any applicable alternative minimum tax). Even if we qualify as a
REIT, we may be subject to certain state and local income taxes and to U.S.
federal income and excise taxes on our undistributed income.
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12.
|
Income
Taxes, continued
|
SHS, our
taxable REIT subsidiary, is subject to U.S. federal income taxes. Our deferred
tax assets and liabilities reflect the impact of temporary differences between
the amounts of assets and liabilities for financial reporting purposes and the
bases of such assets and liabilities as measured by tax laws. Deferred tax
assets are reduced, if necessary, by a valuation allowance to the amount where
realization is more likely than not assured after considering all available
evidence. Our temporary differences primarily relate to net operating loss
carryforwards and depreciation. A federal deferred tax asset of $1.0 million is
included in other assets in our Consolidated Balance Sheets as of March 31, 2010
and December 31, 2009.
We had no
unrecognized tax benefits as of March 31, 2010 and 2009. We expect no
significant increases or decreases in unrecognized tax benefits due to changes
in tax positions within one year of March 31, 2010.
We
classify certain state taxes as income taxes for financial reporting
purposes. We record the Michigan Business Tax and Texas Margin Tax as
income taxes in our financial statements. We recorded a provision for
state income taxes of approximately $0.1 million for the three months ended
March 31, 2010 and 2009.
A
deferred tax liability is included in our Consolidated Balance Sheets of $0.4
million, as of March 31, 2010 and December 31, 2009, in relation to the Michigan
Business Tax. No deferred tax liability is recorded in relation to
the Texas Margin Tax as of March 31, 2010 and December 31, 2009.
We and
our subsidiaries are subject to income taxes in the U.S. and various state
jurisdictions. Tax regulations within each jurisdiction are subject to the
interpretation of the related tax laws and regulations and require significant
judgment to apply. With few exceptions, we are no longer subject to U.S.
Federal, State and Local, examinations by tax authorities before
2005.
Our
policy is to report income tax penalties and income tax related interest expense
as a component of income tax expense. No interest or penalty
associated with any unrecognized income tax benefit or provision was accrued,
nor was any income tax related interest or penalty recognized during the three
months ended March 31, 2010.
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We have
outstanding stock options and unvested restricted shares, and our Operating
Partnership has Common OP Units, and convertible Preferred OP Units, which if
converted or exercised, may impact dilution. Our unvested restricted
shares qualify as participating securities and are included in the earnings
allocation of computing basic earnings per share (“EPS”) under the two-class
method.
Computations
of basic and diluted EPS from continuing operations were as follows (in
thousands, expect per share data):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
Numerator
|
|
2010
|
|
|
2009
|
|
Basic
earnings: net income from continuing operations attributable to common
stockholders
|
|
|
|
|
|
|
|
|
Add:
net income attributable to noncontrolling interests of operating
partnership
|
|
|
|
|
|
|
|
|
Diluted
earnings: net income from continuing operations available to common
stockholders and unitholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
Weighted
average unvested restricted stock outstanding
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares and unvested restricted stock
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average common shares and securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share from continuing operations available to
common stockholders
|
|
|
|
|
|
|
|
|
We
excluded securities from the computation of diluted EPS because the inclusion of
these securities would have been anti-dilutive for the periods
presented. The following table presents the number of outstanding
potentially dilutive securities that were excluded from the computation of
diluted EPS as of March 31, 2010 and 2009 (amounts in thousands):
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Convertible
Preferred OP Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
figures above represent the total number of potentially dilutive securities, and
do not reflect the incremental impact to the number of diluted weighted average
shares outstanding that would be computed if the impact to us had been dilutive
to the calculation of EPS available to common stockholders.
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14.
|
Fair
Value of Financial Instruments
|
Our
financial instruments consist primarily of cash and cash equivalents, accounts
and notes receivable, accounts payable, derivative instruments, and debt. We
utilize fair value measurements to record fair value adjustments to certain
assets and liabilities and to determine fair value disclosures. The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:
Derivative
Instruments
The
derivative instruments held by us are interest rate swaps and cap agreements for
which quoted market prices are indirectly available. For those derivatives, we
use model-derived valuations in which all observable inputs and significant
value drivers are observable in active markets provided by brokers or dealers to
determine the fair values of derivative instruments on a recurring
basis.
Installment
Notes on Manufactured Homes
The net
carrying value of the installment notes on manufactured homes reasonably
estimates the fair value of the underlying collateral (manufactured home) which
would be placed into service for use in our Rental Program or held for
sale.
Long
Term Debt and Lines of Credit
The fair
value of long term debt (excluding the secured borrowing) is based on the
estimates of management and on rates currently quoted and rates currently
prevailing for comparable loans and instruments of comparable
maturities.
Collateralized
Receivables and Secured Borrowing
The fair
value of these financial instruments offset each other as our collateralized
receivables represent a transfer of financial assets and the cash proceeds
received from these transactions have been classified as a secured borrowing in
the Consolidated Balance Sheets.
Other
Financial Instruments
The
carrying values of cash and cash equivalents, accounts receivable, and accounts
payable approximate their fair market values due to the short-term nature
of these instruments.
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14.
|
Fair
Value of Financial Instruments,
continued
|
The table
below sets forth our financial assets and liabilities that required disclosure
of their fair values on a recurring basis as of March 31, 2010. The
table presents the carrying values and fair values of our financial instruments
as of March 31, 2010 and December 31, 2009 that were measured using the
valuation techniques described above. The table does not include financial
instruments with maturities less than one year because the carrying values
associated with these instruments approximate fair value.
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Financial
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment
notes on manufactured homes, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
term debt (excluding secured borrowing)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We use a
fair value hierarchy established by FASB guidance that requires the use of
observable market data, when available, and prioritizes the inputs to valuation
techniques used to measure fair value in the following categories:
Level
1—Quoted unadjusted prices for identical instruments in active
markets.
Level
2—Quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active and
model-derived valuations in which all observable inputs and significant value
drivers are observable in active markets.
Level
3—Model derived valuations in which one or more significant inputs or
significant value drivers are unobservable, including assumptions developed by
us.
The table
below sets forth, by level, our financial assets and liabilities that were
required to be carried at fair value in the Consolidated Balance Sheets as of
March 31, 2010.
Assets
|
|
Total
Fair Value
|
|
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Level
1
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Level
2
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Level
3
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SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15.
|
Recent
Accounting Pronouncements
|
Accounting
Standards Adopted in 2010
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets, an amendment of FASB Statement No. 140”, which is included in ASC Topic
860, Transfers and Servicing. The updated guidance in ASC Topic 860
removes the concept of a QSPE and eliminates the exception for QSPEs from
consolidation guidance. In addition, it also established specific
conditions for reporting a transfer of a portion of a financial asset as a
sale. If the transfer does not meet established sale conditions, sale
accounting can be achieved only if the transferor transfers an entire financial
asset or a group of entire financial assets and surrenders control over the
entire transferred asset(s). The updated guidance in ASC Topic 860 is
effective for fiscal years beginning after November 15, 2009. The
adoption of the updated guidance within ASC Topic 860 did not have any impact on
our results of operations or financial condition.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)”, which is included in ASC Topic 810, Consolidation. The updated
guidance in ASC Topic 810 requires an enterprise to perform an analysis to
determine whether the enterprise’s variable interest or interests give it a
controlling financial interest in a VIE. This analysis identifies the primary
beneficiary of a VIE as the enterprise that has both of the following
characteristics, among others: (a) the power to direct the activities of a VIE
that most significantly impact the entity’s economic performance and (b) the
obligation to absorb losses of the entity, or the right to receive benefits from
the entity, that could potentially be significant to the VIE. Under the updated
guidance in ASC Topic 810, ongoing reassessments of whether an enterprise is the
primary beneficiary of a VIE are required. The updated guidance in ASC Topic 810
is effective as of the beginning of an entity’s first annual reporting period
that begins after November 15, 2009. The adoption of the
updated guidance within ASC Topic 810 did not have any impact on our results of
operations or financial condition as we do not currently have an unconsolidated
VIE.
SUN
COMMUNITIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
16.
|
Commitments
and Contingencies
|
On or
about November 19, 2009, we, Sun Secured Financing LLC, Aspen-Ft. Collins
Limited Partnership, Sun Secured Financing Houston Limited Partnership, Sun
Communities Finance, LLC, Sun Holly Forest LLC and Sun Saddle Oak LLC
(collectively, the “Plaintiffs”) filed suit against ARCS Commercial Mortgage
Co., L.P., PNC ARCS, LLC, and the Federal National Mortgage Association
(collectively, the “Defendants”) in the United States District Court for the
District of Columbia as Case No. 1:09-cv-02162. The essence of the
dispute is whether the terms of a commercial credit facility permitted
Defendants to increase the Variable Facility Fee applicable to the outstanding
variable rate loans in conjunction with an extension of the credit facility
(and, if so, whether the Defendants properly exercised that
right). As of April 29, 2009, the Plaintiffs have been paying the
increased Variable Facility Fee. The Plaintiffs seek a judgment for
the amount paid above the original Variable Facility Fee from April 29, 2009 to
the date of judgment and an order that the Variable Facility Fee shall be
returned to the original rate of 58 basis points on a going forward basis
through the end of the extension period. The Defendants have filed a
motion to dismiss the lawsuit, which motion has been fully briefed by the
parties. Oral argument has not yet been scheduled.
On April
9, 2003, T.J. Holdings, LLC (“TJ Holdings”), a member of Sun/Forest, LLC
(“Sun/Forest”) (which, in turn, owns an equity interest in SunChamp), filed a
complaint against us, SunChamp, certain other of our affiliates, including two
of our directors, in the Superior Court of Guilford County, North Carolina. The
complaint alleges that the defendants wrongfully deprived the plaintiff of
economic opportunities that they took for themselves in contravention of duties
allegedly owed to the plaintiff and purports to claim damages of $13.0 million
plus an unspecified amount for punitive damages. We believe the complaint and
the claims threatened therein have no merit and will defend it vigorously. These
proceedings were stayed by the Superior Court of Guilford County, North Carolina
in 2004 pending final determination by the Circuit Court of Oakland County,
Michigan as to whether the dispute should be submitted to arbitration and the
conclusion of all appeals therefrom. On March 13, 2007, the Michigan Court of
Appeals issued an order compelling arbitration of all claims brought in the
North Carolina case. TJ Holdings has filed an application for review in the
Michigan Supreme Court which has been denied and, accordingly, the North
Carolina case is permanently stayed. TJ Holdings had filed an arbitration demand
in Southfield, Michigan based on the same claims. We intend to vigorously defend
against the allegations.
We are
involved in various other legal proceedings arising in the ordinary course of
business. All such proceedings, taken together, are not expected to have a
material adverse impact on our results of operations or financial
condition.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion and analysis of the consolidated financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements and the notes thereto, along with our 2009 Annual Report.
Capitalized terms are used as defined elsewhere in this Form 10-Q.
OVERVIEW
We are a
self-administered and self-managed real estate investment trust, or REIT. We
own, operate, and develop manufactured housing communities concentrated in the
midwestern, southern, and southeastern United States. We are fully integrated
real estate companies which, together with our affiliates and predecessors, have
been in the business of acquiring, operating, and expanding manufactured housing
communities since 1975. As of March 31, 2010, we owned and operated a portfolio
of 136 properties located in 18 states (the “Properties” or “Property”),
including 124 manufactured housing communities, 4 recreational vehicle
communities, and 8 properties containing both manufactured housing and
recreational vehicle sites. As of March 31, 2010, the Properties contained an
aggregate of 47,566 developed sites comprised of 42,299 developed manufactured
home sites and 5,267 recreational vehicle sites and an approximately 6,000
manufactured home sites suitable for development. We lease individual parcels of
land (“sites”) with utility access for placement of manufactured homes (“MHs”)
and recreational vehicles (“RVs”) to our customers. The Properties
are designed to offer affordable housing to individuals and families, while also
providing certain amenities.
We are
engaged through a taxable subsidiary, SHS, in the marketing, selling, and
leasing of new and pre-owned homes to current and future residents in our
communities. The operations of SHS support and enhance our occupancy levels,
property performance, and cash flows.
SIGNIFICANT
ACCOUNTING POLICIES
We have
identified significant accounting policies that, as a result of the judgments,
uncertainties, and complexities of the underlying accounting standards and
operations involved could result in material changes to our financial condition
or results of operations under different conditions or using different
assumptions. Details regarding significant accounting policies are described
fully in our 2009 Annual Report.
SUPPLEMENTAL
MEASURES
In
addition to the results reported in accordance with GAAP, we have provided
information regarding Net Operating Income (“NOI”) in the following tables. NOI
is derived from revenues minus property operating expenses and real estate
taxes. We use NOI as the primary basis to evaluate the performance of our
operations. A reconciliation of NOI to net income attributable to Sun
Communities, Inc. is included in “Results of Operations” below.
We
believe that NOI is helpful to investors and analysts as a measure of operating
performance because it is an indicator of the return on property investment, and
provides a method of comparing property performance over time. We use NOI as a
key management tool when evaluating performance and growth of particular
properties and/or groups of properties. The principal limitation of NOI is that
it excludes depreciation, amortization, interest expense, and non-property
specific expenses such as general and administrative expenses, all of which are
significant costs, and therefore, NOI is a measure of the operating performance
of our properties rather than of the Company overall. We believe that
these costs included in net income often have no effect on the market value of
our property and therefore limit its use as a performance measure. In addition,
such expenses are often incurred at a parent company level and therefore are not
necessarily linked to the performance of a real estate asset.
NOI
should not be considered a substitute for the reported results prepared in
accordance with GAAP. NOI should not be considered as an alternative to net
income as an indicator of our financial performance, or to cash flows as a
measure of liquidity; nor is it indicative of funds available for our cash
needs, including our ability to make cash distributions. NOI, as
determined and presented by us, may not be comparable to related or similarly
titled measures reported by other companies.
We also
provide information regarding Funds From Operations (“FFO”). A
definition of FFO and a reconciliation of FFO to net income are included in the
presentation of FFO in “Results of Operations” following the “Comparison of the
Three Months ended March 31, 2010 and 2009”.
RESULTS
OF OPERATIONS
We report
operating results under two segments: Real Property Operations and Home Sales
and Rentals. The Real Property Operations segment owns, operates, and
develops manufactured housing communities concentrated in the midwestern,
southern, and southeastern United States and is in the business of acquiring,
operating, and expanding manufactured housing communities. The Home
Sales and Rentals segment offers manufactured home sales and leasing services to
tenants and prospective tenants of our communities. We evaluate
segment operating performance based on NOI.
The
accounting policies of the segments are the same as those applied in the
Consolidated Financial Statements, except for the use of NOI. We may allocate
certain common costs, primarily corporate functions, between the segments
differently than we would for stand alone financial information prepared in
accordance with GAAP. These allocated costs include expenses for shared services
such as information technology, finance, communications, legal, and human
resources. We do not allocate interest expense and certain other corporate costs
not directly associated with the segments’ NOI.
COMPARISON
OF THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
REAL
PROPERTY OPERATIONS - SAME SITE
A key
management tool we use when evaluating performance and growth of our properties
is a comparison of Same Site communities. Same Site communities consist of
properties owned and operated for the same period in both years for the three
months ended March 31, 2010 and 2009. Our Same Site portfolio is
equal to our total portfolio for the three months ended March 31, 2010 and
2009. The Same Site data may change from time-to-time depending on
acquisitions, dispositions, management discretion, significant transactions, or
unique situations.
In order
to evaluate the growth of the Same Site communities, management has classified
certain items differently than our GAAP statements. The
reclassification difference between our GAAP statements and our Same Site
portfolio is the reclassification of water and sewer revenues from income from
real property to utilities. A significant portion of our utility
charges are re-billed to our residents. We reclassify these
amounts to reflect the utility expenses associated with our Same Site portfolio
net of recovery.
The
following tables reflect certain financial and other information for our Same
Site communities as of and for the three months ended March 31, 2010 and
2009:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
Financial
Information (in thousands)
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
%
Change
|
|
Income
from Real Property
|
|
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Property
operating expenses:
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Legal,
taxes, & insurance
|
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Property
operating expenses
|
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As
of March 31,
|
|
Other
Information
|
|
2010
|
|
|
2009
|
|
|
Change
|
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Weighted
average monthly rent per site (2)
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Sites
available for development
|
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(1)
|
Occupied sites and occupancy %
include manufactured housing and permanent recreational vehicle sites, and
exclude seasonal recreational vehicle
sites.
|
(2)
|
Average
rent relates only to manufactured housing sites, and excludes permanent
and seasonal recreational vehicle
sites.
|
Real
Property NOI increased by $0.6 million from $34.2 million to $34.8 million, or
1.7 percent. The growth in NOI is primarily due to increased revenues. Income
from real property revenues consist of manufactured home and recreational
vehicle site rent, and miscellaneous other property revenues. Income
from real property revenues increased $0.7 million, from $48.4 million to $49.1
million, or 1.4 percent. The growth in income from real property was
due to a combination of factors. Revenue from our manufactured home
and recreational vehicle portfolio increased by $0.7 million due to average
rental rate increases of 2.6 percent and due to the increased number of occupied
home sites. This growth in revenue was partially offset by rent concessions
offered to new residents and current residents who convert from home renters to
home owners.
Property
operating expenses increased $0.1 million, from $14.2 million to $14.3 million,
or 0.8 percent. Payroll and benefits increased by $0.1 million due to
increased wages from annual merit raises, and increased health benefit and
workers compensation expense. Supplies and repair expenses increased
by $0.1 million due to increased landscape maintenance costs. Other property
operating expenses increased by $0.1 million due to increased administrative
costs for postage, office supplies, and other general office
charges. These costs were partially offset by decreased legal fees
(related to delinquency and other property matters) and decreased insurance
charges of $0.2 million.
HOME
SALES AND RENTALS
We
acquire pre-owned and repossessed manufactured homes located within our
communities from lenders and dealers at substantial discounts. We
lease or sell these value priced homes to current and prospective
residents. We also purchase new homes to lease and sell to current
and prospective residents. The programs we have established for our
customers to lease or buy new and pre-owned homes have helped to stabilize
portfolio occupancy.
The
Rental Program has proven to be an effective response to the adverse factors we
faced during the industry downturn and now draws nearly 15,000 applications per
year to rent homes in our properties. The program has replaced the independent
dealer network, a majority of which were forced to go out of business during the
early part of the decade, which formerly directed potential residents to our
properties.
The
following table reflects certain financial and other information for our Rental
Program as of and for the three months ended March 31, 2010 and 2009 (in
thousands, except for certain items marked with *):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
Financial
Information
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
%
Change
|
|
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Site
rent from Rental Program (1)
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Repairs
and refurbishment
|
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Rental
Program operating and maintenance
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Number
of occupied rentals, end of period*
|
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Investment
in occupied rental homes
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Number
of sold rental homes*
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Weighted
average monthly rental rate*
|
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(1)
|
The
renter’s monthly payment includes the site rent and an amount attributable
to the leasing of the home. The site rent is reflected in the Real
Property Operations segment. For purposes of management analysis, the site
rent is included in the Rental Program revenue to evaluate the growth and
performance of the Rental Program.
|
Rental
Program NOI increased $1.4 million from $7.1 million to $8.5 million or 19.1
percent due to increased revenues of approximately $0.5 million and decreased
expenses of $0.9 million. Revenues increased approximately $0.5 million
primarily due to the increased number of residents participating in the Rental
Program as indicated in the table above.
The
decline in operating and maintenance expenses of $0.9 million was due to several
factors. Commissions decreased by $0.3 million due to a realignment
of the commission plan that decreased the amount of commission paid on new and
renewed leases. Expenses associated with repairs and refurbishment
decreased by $0.4 million, primarily due to a decline in the average cost
associated with preparing a previously leased home for a new
occupant. Marketing and other costs decreased by approximately $0.2
million due to reductions in bad debt expense, advertising, and utility expenses
associated with unoccupied rental homes.
The
following table reflects certain financial and statistical information for our
Home Sales Program for the three months ended March 31, 2010 and 2009 (in
thousands, except for statistical information):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
Financial
Information
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
%
Change
|
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Pre-owned
home cost of sales
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Gross
margin % – new homes
|
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|
Gross
profit – pre-owned homes
|
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|
Gross
margin % – pre-owned homes
|
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|
Home
Sales NOI decreased by $0.2 million, from $2.0 million to $1.8 million, or 12.0
percent primarily due to reduced profit margins on pre-owned homes.
The gross
profit margin on new home sales increased 0.3 percent from 13.4 percent to 13.7
percent. Although the gross profit margin slightly increased due to
increased average sale prices on Florida homes, the overall gross profit on new
home sales decreased primarily due to a 21.1 percent decline in sales
volume.
The gross
profit margin on pre-owned home sales decreased 6.8 percent from 30.2 percent to
23.4 percent. Pre-owned home sales include the sale of homes that
have been utilized in our Rental Program. The average selling price of rental
homes has decreased, which in turn, has helped to increase overall sales volume
of pre-owned home sales by 35.4 percent which was done in order to meet our goal
of converting our home renters to home owners, allowing us to stabilize
portfolio revenues.
OTHER
INCOME STATEMENT ITEMS
Other revenues include other
income, interest income, and ancillary revenues, net. Other revenues
increased by $0.7 million, from $1.6 million to $2.3 million, or 43.8
percent. This increase was primarily due to increased interest income
of $0.5 million and certain fees of $0.2 million received related to property
easements. The increase in interest income was primarily due to the
additional installment notes receivable recognized in association with the
transfer of financial assets that are recorded as collateralized receivables in
the Consolidated Balance Sheets. The interest income on these
collateralized receivables is offset by the same amount of interest expense
recognized on the secured borrowing recorded in association with this
transaction. See Note 4 – Transfers of Financial Assets for additional
information.
Real Property general and
administrative costs decreased by $0.7 million, from $4.2 million to $3.5
million, or 16.7 percent due to decreased compensation costs of $0.1 million and
decreased tax expense of $0.7 million, partially offset by increased consulting
fees of $0.1 million. The compensation cost decreased due to reduced
amortization of deferred compensation associated with certain restricted stock
awards which fully vested in the prior year. The decreased tax
expense includes the reversal of a provision for $0.7 million related to the
Michigan Department of Treasury public notice dated February 5, 2010, and
reversed on March 31, 2010, regarding the filing methodology for federally
disregarded single member limited liability companies under the former Michigan
Single Business Tax. The provision included an estimated tax
liability for several single member limited liability companies for the years
1997-2007, whose taxable income was included in our consolidated Michigan Single
Business Tax returns for those years.
Home Sales and Rentals general and
administrative costs increased by $0.1 million, from $1.8 million to $1.9
million, or 5.6 percent due to increased salary and commission costs.
Depreciation and amortization
costs increased by $0.4 million, from $16.2 million to $16.6 million, or 2.5
percent due to increased depreciation on investment property for use in our
Rental Program of $0.2 million and by increased amortization of promotions and
other depreciation of $0.2 million.
Interest expense on debt,
including interest on mandatorily redeemable debt, increased by $0.8 million,
from $15.1 million to $15.9 million, or 5.3 percent due to increased expense
associated with the increase in our FNMA facility fee of $0.5 million and our
secured borrowing arrangements of $0.8 million, partially offset by a reduction
in expense of $0.5 million primarily due to lower interest rates charged on
variable rate debt. The interest expense on our secured borrowing is
offset completely by the interest income recognized on our collateralized
receivables. See Note 4 – Transfers of Financial Assets for
additional information.
Equity loss from affiliates
increased by $0.8 million, from income of a nominal amount to a loss of $0.8
million due to our equity allocation of Origen’s reported losses.
The
following is a summary of our consolidated financial results which were
discussed in more detail in the preceding paragraphs (in
thousands):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses/Cost of sales
|
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|
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|
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|
|
Adjustments
to arrive at net loss:
|
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|
|
|
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General
and administrative
|
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Depreciation
and amortization
|
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|
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|
|
|
|
|
|
|
|
|
|
|
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|
Equity
income from affiliates
|
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|
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Provision
for state income taxes
|
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Income
from continuing operations
|
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Loss
from discontinued operations
|
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Less:
amounts attributable to noncontrolling interest
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Net
income attributable to Sun Communities, Inc. common
stockholders
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FUNDS
FROM OPERATIONS
We
provide information regarding FFO as a supplemental measure of operating
performance. FFO is defined by the National Association of Real
Estate Investment Trusts (“NAREIT”) as net income (computed in accordance GAAP),
excluding gains (or losses) from sales of depreciable operating property, plus
real estate-related depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. Due to the variety among owners
of identical assets in similar condition (based on historical cost accounting
and useful life estimates), we believe excluding gains and losses related to
sales of previously depreciated operating real estate assets, and excluding real
estate asset depreciation and amortization, provides a better indicator of our
operating performance. FFO is a useful supplemental measure of our
operating performance because it reflects the impact to operations from trends
in occupancy rates, rental rates, and operating costs, providing perspective not
readily apparent from net income. Management believes that the use of
FFO has been beneficial in improving the understanding of operating results of
REITs among the investing public and making comparisons of REIT operating
results more meaningful. Management, the investment community, and
banking institutions routinely use FFO, together with other measures, to measure
operating performance in our industry. Further, management uses FFO for planning
and forecasting future periods.
Because
FFO excludes significant economic components of net income including
depreciation and amortization, FFO should be used as an adjunct to net income
(loss) and not as an alternative to net income. The principal limitation of FFO
is that it does not represent cash flow from operations as defined by GAAP and
is a supplemental measure of performance that does not replace net income as a
measure of performance or net cash provided by operating activities as a measure
of liquidity. In addition, FFO is not intended as a measure of a REIT’s ability
to meet debt principal repayments and other cash requirements, nor as a measure
of working capital. FFO only provides investors with an additional performance
measure. Management also uses an Adjusted Funds from Operations (“Adjusted FFO”)
non-GAAP financial measure, which excludes certain gain and loss items that
management considers unrelated to the operational and financial performance of
our core business. Other REITs may use different methods for calculating FFO and
Adjusted FFO and, accordingly, our FFO and Adjusted FFO may not be comparable to
other REITs.
The
following table reconciles net income to FFO and calculates FFO data for both
basic and diluted purposes for the three months ended March 31, 2010 and 2009
(in thousands, except for per share/OP unit amounts):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
Benefit
for state income taxes (1)
|
|
|
|
|
|
|
|
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Gain
on disposition of assets, net
|
|
|
|
|
|
|
|
|
Funds
from operations (FFO)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Weighted
average Common Shares/OP Units outstanding:
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|
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|
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|
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|
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|
|
|
|
|
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|
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|
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FFO
per weighted average Common Share/OP Unit - Basic
|
|
|
|
|
|
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|
FFO
per weighted average Common Share/OP Unit - Diluted
|
|
|
|
|
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|
The table
below adjusts FFO to exclude certain items as detailed below (in thousands,
except for per share/OP unit amounts):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Michigan
Business tax reversal
|
|
|
|
|
|
|
|
|
Equity
affiliate adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
Benefit
for state income taxes (1)
|
|
|
|
|
|
|
|
|
Gain
on disposition of assets, net
|
|
|
|
|
|
|
|
|
Adjusted
funds from operations (FFO)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
FFO per weighted average Common Share/OP Unit -
Diluted
|
|
|
|
|
|
|
|
|
(1) The tax benefit for the
periods ended March 31, 2010 and 2009 represents the reversal of a tax provision
for potential taxes payable on the sale of company assets related to the
enactment of the Michigan Business Tax. These taxes do not impact Funds from
Operations and would be payable from prospective proceeds of such sales.
LIQUIDITY
AND CAPITAL RESOURCES
Our
principal liquidity demands have historically been, and are expected to continue
to be, distributions to our stockholders and the unitholders of the Operating
Partnership, capital improvements of properties, the purchase of new and
pre-owned homes, property acquisitions, development and expansion of properties,
and debt repayment.
We expect
to meet our short-term liquidity requirements through working capital provided
by operating activities and through borrowings on our lines of credit. We
consider these resources to be adequate to meet our operating requirements,
including recurring capital improvements, routinely amortizing debt and other
normally recurring expenditures of a capital nature, payment of dividends to our
stockholders to maintain qualification as a REIT in accordance with the Code,
and payment of distributions to our Operating Partnership’s
unitholders.
From time
to time, we evaluate acquisition opportunities that meet our criteria for
acquisition. Should such investment opportunities arise in 2010, we will finance
the acquisitions through secured financing, debt and/or equity venture capital,
the assumption of existing debt on the properties or the issuance of certain
equity securities.
During
the three months ended March 31, 2010, we have invested $1.8 million related to
the acquisition of homes intended for the Rental Program net of proceeds from
third party financing from homes sales. Expenditures for 2010 will be
dependent upon the condition of the markets for repossessions and new home
sales, as well as rental homes. We have a $10.0 million floor plan facility. Our
ability to purchase homes for sale or rent may be limited by cash received from
third party financing of our home sales, available floor plan financing and
working capital available on our unsecured line of credit.
Cash and
cash equivalents increased by $3.6 million from $4.5 million as of December 31,
2009, to $8.1 million as of March 31, 2010. Net cash provided by operating
activities from continuing operations decreased by $1.7 million from $18.5
million for the three months ended March 31, 2009 to $16.8 million for the three
months ended March 31, 2010.
Our net
cash flows provided by operating activities from continuing operations may be
adversely impacted by, among other things: (a) the market and economic
conditions in our current markets generally, and specifically in metropolitan
areas of our current markets; (b) lower occupancy and rental rates of our
properties; (c) increased operating costs, such as wage and benefit costs,
insurance premiums, real estate taxes and utilities, that cannot be passed on to
our tenants; (d) decreased sales of manufactured homes and (e) current
volatility in economic conditions and the financial markets. See
“Risk Factors” in our 2009 Annual Report.
We have
an unsecured revolving line of credit facility with a maximum borrowing capacity
of $115.0 million, subject to certain borrowing base calculations. The
outstanding balance on the line of credit as of March 31, 2010 and December 31,
2009 was $94.5 million and $89.1 million, respectively. In addition, $4.0
million of availability were used to back standby letters of credit as of March
31, 2010 and December 31, 2009. Borrowings under the line of credit bear an
interest rate of LIBOR plus 165 basis points, or Prime plus 40 basis points. We
have the option to borrow at either rate. The effective weighted
average interest rate on the outstanding borrowings was 1.9 percent as of March
31, 2010. As of March 31, 2010, $16.5 million was available to be drawn under
the facility based on the calculation of the borrowing base. During
2010, the highest balance on the line of credit was $102.3
million. The borrowings under the line of credit mature October 1,
2011, assuming an election of a one-year extension that is available at our
discretion. If we are unable to refinance our facility, we cannot be sure we
will be able to secure alternative financing on satisfactory terms or at all. If
the revolving facility matures without renewal, replacement, or extension, our
borrowing capacity would immediately be reduced by $115.0 million and it would
adversely impact our business, results of operation and financial
condition. We are evaluating options to renew, replace, or amend the
facility. Although the unsecured revolving line of credit is a committed
facility, the financial failure of one or more of the participating financial
institutions may reduce the amount of available credit for use by
us.
The line
of credit facility contains various leverage, fixed charge coverage, net worth
maintenance and other customary covenants all of which were complied with as of
March 31, 2010. The most limiting covenants contained in the line of credit are
the distribution coverage and fixed charge coverage ratios. The distribution
coverage covenant requires that distributions be no more than 90 percent of
funds from operations as defined in the terms of the line of credit
agreement. The fixed charge coverage ratio covenant requires a
minimum ratio of 1.45:1. As of March 31, 2010, the distribution
coverage was 80.8 percent and the fixed charge coverage ratio was
1.72:1.
While
many of our fundamentals and those of the manufactured housing industry have
been improving over recent years, the current economic downturn and the lack of
liquidity in the lending environment have generally resulted in a reduction of
the availability of financing and higher borrowing costs which may result in us
not being able to successfully extend, refinance or repay our debt. Although
base interest rates have generally decreased relative to their levels prior to
the disruptions in the financial markets, the tightening of credit markets has
affected the credit risk spreads charged over base interest rates on, and the
availability of, mortgage loan financing. For us, this is the most relevant
consequence of this financial turmoil. Since we carry a substantial amount of
debt, it may limit our ability to obtain additional financing; and in planning
for, or reacting to, changes in our business and our industry. It also renders
us more vulnerable to general adverse economic and industry conditions and
requires us to dedicate a significant portion of our cash flow to service our
debt. We believe this risk is somewhat mitigated because we have
adequate working capital provided by operating activities as noted above and we
have only limited debt maturities until July 2011. We are evaluating options to
renew, replace, or amend our debt agreements. Specifically, our debt
maturities (excluding normal amortization payments and assuming the election of
certain extension provisions which are at our discretion) for 2010 through 2014
are as follows:
2010
|
$0.4
million
|
2011
|
$103.7
million and any balance outstanding on the unsecured line of credit or the
floor plan facility
|
2012
|
$35.8
million
|
2013
|
$30.2
million
|
2014
|
$485.1
million
|
We
anticipate meeting our long-term liquidity requirements, such as scheduled debt
maturities, large property acquisitions, and Operating Partnership unit
redemptions through the issuance of certain equity securities and/or the
collateralization of our properties. We currently have 30 unencumbered
properties with an estimated market value of $215.7 million, most of which
support the borrowing base for our $115.0 million unsecured line of
credit. As of March 31, 2010, the borrowing base was in excess of
$115.0 million by $20.5 million, which would allow us to remove properties from
the borrowing base at our discretion for collateralization. From time
to time, we may also issue shares of our capital stock or preferred stock, issue
equity units in our Operating Partnership, utilize debt and/or equity venture
capital, or sell selected assets. Our ability to finance our long-term liquidity
requirements in such a manner will be affected by numerous economic factors
affecting the manufactured housing community industry at the time, including the
availability and cost of mortgage debt, our financial condition, the operating
history of the properties, the state of the debt and equity markets, and the
general national, regional, and local economic conditions. If it were to become
necessary for us to approach the credit markets, the current volatility in the
credit markets could make borrowing more difficult to secure and more
expensive. See “Risk Factors” in Item 1A of our 2009 Annual
Report. If we are unable to obtain additional debt or equity
financing on acceptable terms, our business, results of operations and financial
condition would be adversely impacted.
As of
March 31, 2010, our debt to total market capitalization approximated 70.3
percent (assuming conversion of all Common Operating Partnership Units to shares
of common stock). The debt has a weighted average maturity of approximately 4.9
years and a weighted average interest rate of 4.9 percent.
Capital
expenditures for the three months ended March 31, 2010 and 2009 included
recurring capital expenditures of $0.9 million and $1.3 million, respectively.
We are committed to the continued upkeep of our Properties and therefore do not
expect a significant decline in our recurring capital expenditures during
2010.
Net cash
used for investing activities was $6.4 million for the three months ended March
31, 2010, compared to $6.3 million for the three months ended March 31, 2009.
The difference is due to decreased investment in property of $1.3 million offset
by decreased principal repayment on an officer’s note and other notes receivable
of $1.4 million.
Net cash
used for financing activities was $6.9 million for the three months ended March
31, 2010, compared to $11.6 million for the three months ended March 31, 2009.
The difference is due to increased net proceeds received from the issuance of
additional shares of $2.4 million, increased net borrowings on the lines of
credit of $6.1 million, partially offset by reduced proceeds received from the
issuance of debt of $3.3 million, increased repayments on notes payable and
other debt of $0.3 million, and increased distributions to our stockholders and
OP unitholders of $0.2 million.
FORWARD-LOOKING
STATEMENTS
This Form
10-Q contains various “forward-looking statements” within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934, and we intend
that such forward-looking statements will be subject to the safe harbors created
thereby. For this purpose, any statements contained in this filing that relate
to prospective events or developments are deemed to be forward-looking
statements. Words such as “believes,” “forecasts,” “anticipates,” “intends,”
“plans,” “expects,” “may”, “will” and similar expressions are intended to
identify forward-looking statements. These forward-looking statements reflect
our current views with respect to future events and financial performance, but
involve known and unknown risks and uncertainties, both general and specific to
the matters discussed in this filing. These risks and uncertainties may cause
our actual results to be materially different from any future results expressed
or implied by such forward looking statements. Such risks and uncertainties
include the national, regional and local economic climates, the ability to
maintain rental rates and occupancy levels, competitive market forces, changes
in market rates of interest, the ability of manufactured home buyers to obtain
financing, the level of repossessions by manufactured home lenders and those
risks and uncertainties referenced under the headings entitled “Risk Factors”
contained in our 2009 Annual Report, and our filings with the SEC. The
forward-looking statements contained in this Quarterly Report on Form 10-Q speak
only as of the date hereof and we expressly disclaim any obligation to provide
public updates, revisions or amendments to any forward-looking statements made
herein to reflect changes in our expectations of future events.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Our
principal market risk exposure is interest rate risk. We mitigate this risk by
maintaining prudent amounts of leverage, minimizing capital costs and interest
expense while continuously evaluating all available debt and equity resources
and following established risk management policies and procedures, which include
the periodic use of derivatives. Our primary strategy in entering into
derivative contracts is to minimize the variability interest rate changes could
have on our future cash flows. We generally employ derivative instruments that
effectively convert a portion of our variable rate debt to fixed rate debt. We
do not enter into derivative instruments for speculative purposes.
We have
four derivative contracts consisting of three interest rate swap agreements with
a total notional amount of $70.0 million, and an interest rate cap agreement
with a notional amount of $152.4 million as of March 31, 2010. The first swap
agreement fixes $25.0 million of variable rate borrowings at 6.70 percent
through July 2012. The second swap agreement fixes $20.0 million of
variable rate borrowings at 4.15 percent through January 2014. The third swap
agreement fixes $25.0 million of variable rate borrowing at 3.62 percent through
February 2011 and is based upon 30-day LIBOR. We have an interest cap agreement
with a cap rate of 11.0 percent, a notional amount of $152.4 million, and a
termination date of May 1, 2012. Each of these derivative contracts
is based upon 90-day LIBOR unless otherwise noted.
Our
remaining variable rate debt totals $247.4 million and $194.4 million as of
March 31, 2010 and 2009, respectively, which bear interest at Prime, various
LIBOR or Fannie Mae Discounted Mortgage Backed Securities (“DMBS”) rates. If
Prime, LIBOR, or DMBS increased or decreased by 1.0 percent during the three
months ended March 31, 2010 and 2009, we believe our interest expense would have
increased or decreased by approximately $0.6 million and $0.5 million based on
the $248.2 million and $209.7 million average balances outstanding under our
variable rate debt facilities for the three months ended March 31, 2010 and
2009, respectively. A portion of our variable debt is floating on
DMBS rates. If the credit markets tighten, and there are fewer or no
buyers of this security, the interest rate may be negatively impacted resulting
in higher interest expense.
ITEM
4. CONTROLS AND PROCEDURES
|
(a)
|
Under
the supervision and with the participation of our management, including
the Chief Executive Officer, Gary A. Shiffman, and Chief Financial
Officer, Karen J. Dearing, we evaluated the effectiveness of the design
and operation of our disclosure controls and procedures as of the end of
the period covered by this quarterly report, pursuant to Rule 13a-15 of
the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures as of the end of the
period covered by this report were effective to ensure that information we
are required to disclose in our filings with the SEC under the Exchange
Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms, and to ensure that
information we are required to disclose in the reports that we file under
the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer,
as appropriate to allow timely decisions regarding required
disclosure.
|
|
(b)
|
There
have been no changes in our internal control over financial reporting
during the quarterly period ended March 31, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
|
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
See Note
16 of the Consolidated Financial Statements contained herein.
ITEM
1A. RISK FACTORS
You
should review our Annual Report on Form 10-K for the year ended December 31,
2009, which contains a detailed description of risk factors that may materially
affect our business, financial condition, or results of
operations. There are no material changes to the disclosure on these
matters set forth in such Form 10-K.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Issuer
Purchases of Equity Securities
In
November 2004, the Board of Directors authorized us to repurchase up to
1,000,000 shares of our common stock. We have 400,000 common shares
remaining in the repurchase program. No common shares were
repurchased during the three months ended March 31, 2010. There is no
expiration date specified for the buyback program.
Recent
Sales of Unregistered Securities
Holders
of our Common OP Units have converted 25,005 units to common stock during
2010.
All of
the above partnership units and shares of common stock were issued in private
placements in reliance on Section 4(2) of the Securities Act of 1933, as
amended, including Regulation D promulgated there under. No underwriters were
used in connection with any of such issuances.
Use
of Proceeds from Sales of Registered Securities
We issued
131,953 shares of common stock during the three months ended March 31, 2010. We
issued an additional 18,047 shares of common stock on April 1,
2010. During 2010, we received net proceeds of approximately $3.6
million related to the issuance of common stock. The proceeds were
placed in an investment account as of March 31, 2010 and subsequently used to
pay down our unsecured line of credit.
ITEM
6. EXHIBITS
Exhibit
No.
|
|
Description
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Securities Exchange Act Rules
13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Securities Exchange Act Rules
13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
SUN
COMMUNITIES, INC.
|
Dated:
May 6, 2010
|
|
By:
|
/s/
Karen J. Dearing
|
|
|
|
Karen
J. Dearing, Chief Financial Officer and Secretary
(Duly
authorized officer and principal financial
officer)
|