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, 2009.

or

 

o 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

 

38-2730780

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

27777 Franklin Rd.

 

 

Suite 200

 

 

Southfield, Michigan

 

48034

(Address of Principal Executive Offices)

 

(Zip Code)

 

(248) 208-2500

(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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (Check one):

 

Large accelerated filer [ ]

Accelerated filer [ X ]

Non-accelerated filer [ ]

Smaller reporting company [ ]

 

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, 2009: 18,619,612

 

 

 

 

 

 

 

 

 

 


 

SUN COMMUNITIES, INC.

 

INDEX

 

 

 

Pages

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited):

 

 

Consolidated Balance Sheets ─ March 31, 2009 and  December 31, 2008

 

3

 

Consolidated Statements of Operations ─ Three Months Ended March 31, 2009 and 2008

4

 

Consolidated Statements of Comprehensive Income (Loss) ─ Three Months Ended March 31, 2009 and 2008

5

 

Consolidated Statement of Stockholders’ Deficit ─ Three Months Ended March 31, 2009

5

 

Consolidated Statements of Cash Flows ─ Three Months Ended March 31, 2009 and 2008

6

 

Notes to Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

36

Item 4.

Controls and Procedures

37

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 4.

Submission of Matters to a Vote of Security Holders

38

Item 6.

Exhibits

38

 

Signatures

39

 

 

 

 

 

2

 

 


SUN COMMUNITIES, INC.

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(In thousands, except per share amounts)

 

 

 

March 31,
2009

(Unaudited)

 

December 31,
2008

 

ASSETS

 

 

 

 

 

 

 

Investment property, net

 

$

1,084,128

 

$

1,089,304

 

Cash and cash equivalents

 

 

6,588

 

 

6,162

 

Inventory of manufactured homes

 

 

9,674

 

 

13,058

 

Investment in affiliates

 

 

3,799

 

 

3,772

 

Notes and other receivables

 

 

60,088

 

 

57,481

 

Other assets

 

 

33,250

 

 

37,152

 

Assets of discontinued operations

 

 

68

 

 

70

 

TOTAL ASSETS

 

$

1,197,595

 

$

1,206,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Debt

 

$

1,141,911

 

$

1,139,152

 

Lines of credit

 

 

88,447

 

 

90,419

 

Other liabilities

 

 

35,904

 

 

37,240

 

Liabilities of discontinued operations

 

 

78

 

 

70

 

TOTAL LIABILITIES

 

$

1,266,340

 

$

1,266,881

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

Preferred stock, $.01 par value, 10,000 shares authorized, none issued

 

$

 

$

 

Common stock, $.01 par value, 90,000 shares authorized (March 31, 2009 and December 31, 2008, 20,421 and 20,313 shares issued respectively)

 

 

204

 

 

203

 

Additional paid-in capital

 

 

460,164

 

 

459,847

 

Officer's notes

 

 

(5,427

)

 

(8,334

)

Accumulated other comprehensive loss

 

 

(2,855

)

 

(2,851

)

Distributions in excess of accumulated earnings

 

 

(455,957

)

 

(445,147

)

Treasury stock, at cost (March 31, 2009 and December 31, 2008, 1,802 shares)

 

 

(63,600

)

 

(63,600

)

Total Sun Communities, Inc. stockholders' deficit

 

 

(67,471

)

 

(59,882

)

Noncontrolling interest

 

 

(1,274

)

 

 

TOTAL STOCKHOLDERS’ DEFICIT

 

 

(68,745

)

 

(59,882

)

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

1,197,595

 

$

1,206,999

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

 

 

3

 

 


SUN COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2009

 

2008

 

REVENUES

 

 

 

 

 

 

 

Income from real property

 

$

50,999

 

$

50,349

 

Revenue from home sales

 

 

7,461

 

 

7,503

 

Rental home revenue

 

 

5,200

 

 

4,996

 

Ancillary revenues, net

 

 

195

 

 

226

 

Interest

 

 

1,272

 

 

805

 

Other income

 

 

157

 

 

871

 

Total revenues

 

 

65,284

 

 

64,750

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

 

 

 

Property operating and maintenance

 

 

12,605

 

 

12,074

 

Real estate taxes

 

 

4,184

 

 

4,169

 

Cost of home sales

 

 

5,423

 

 

5,839

 

Rental home operating and maintenance

 

 

4,537

 

 

3,466

 

General and administrative - real property

 

 

4,166

 

 

4,158

 

General and administrative - home sales and rentals

 

 

1,826

 

 

1,612

 

Depreciation and amortization

 

 

16,204

 

 

15,861

 

Interest

 

 

14,245

 

 

15,380

 

Interest on mandatorily redeemable debt

 

 

835

 

 

844

 

Total expenses

 

 

64,025

 

 

63,403

 

 

 

 

 

 

 

 

 

Income before income taxes and net equity income (loss) from affiliates

 

 

1,259

 

 

1,347

 

Benefit (provision) for state income taxes

 

 

(133

)

 

235

 

Income (loss) from affiliates, net

 

 

27

 

 

(4,830

)

Income (loss) from continuing operations

 

 

1,153

 

 

(3,248

)

Loss from discontinued operations

 

 

(172

)

 

(241

)

Net income (loss)

 

 

981

 

 

(3,489

)

Less: Net income (loss) attributable to noncontrolling interest

 

 

104

 

 

(394

)

Net income (loss) attributable to Sun Communities, Inc.

 

$

877

 

$

(3,095

)

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

18,511

 

 

18,077

 

Diluted

 

 

20,698

 

 

18,077

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per share:

 

 

 

 

 

 

 

Continuing operations

 

$

0.06

 

$

(0.16

)

Discontinued operations

 

 

(0.01

)

 

(0.01

)

Basic and diluted earnings (loss) per share

 

$

0.05

 

$

(0.17

)

 

 

 

 

 

 

 

 

Cash dividends per common share:

 

$

0.63

 

$

0.63

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

4

 

 


SUN COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2009

 

2008

 

Amounts attributable to Sun Communities, Inc. common stockholders:

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of state income taxes

 

$

1,031

 

$

(2,881

)

Loss from discontinued operations, net of state income taxes

 

 

(154

)

 

(214

)

Net income (loss) attributable to Sun Communities, Inc.

 

$

877

 

$

(3,095

)

 

SUN COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(In thousands)

(Unaudited)

 

 

 

 

Three Months Ended
March 31,

 

 

 

2009

 

2008

 

Net income (loss)

 

$

981

 

$

(3,489

)

Unrealized loss on interest rate swaps

 

 

(4

)

 

(1,416

)

Total comprehensive income (loss)

 

 

977

 

 

(4,905

)

Less: Comprehensive income (loss) attributable to the noncontrolling interest

 

 

104

 

 

(554

)

Comprehensive income (loss) attributable to Sun Communities, Inc.

 

$

873

 

$

(4,351

)

 

SUN COMMUNITIES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2009

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Common stock

 

Additional paid-in capital

 

Officer's notes

 

Accumulated other comprehensive loss

 

Distributions in excess of accumulated earnings

 

Treasury stock

 

Total Sun Communities stockholders' deficit

 

Non

controlling interest

 

Total stockholders’ deficit

 

Balance as of December 31, 2008

 

$

203

 

$

459,847

 

$

(8,334

)

$

(2,851

)

$

(445,147

)

$

(63,600

)

$

(59,882

)

$

 

$

(59,882

)

Cancellation of common stock, net

 

 

1

 

 

(132

)

 

 

 

 

 

 

 

 

 

(131

)

 

 

 

(131

)

Stock-based compensation - amortization and forfeitures

 

 

 

 

449

 

 

 

 

 

 

(25

)

 

 

 

424

 

 

 

 

424

 

Repayment of officer's notes

 

 

 

 

 

 

2,907

 

 

 

 

 

 

 

 

2,907

 

 

 

 

2,907

 

Net income

 

 

 

 

 

 

 

 

 

 

877

 

 

 

 

877

 

 

 

 

877

 

Unrealized loss on interest rate swaps

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

 

(4

)

 

 

 

(4

)

Noncontrolling interest distribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,378

)

 

(1,378

)

Net income attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

104

 

 

104

 

Cash distributions declared of $0.63 per share

 

 

 

 

 

 

 

 

 

 

(11,662

)

 

 

 

(11,662

)

 

 

 

(11,662

)

Balance as of March 31, 2009

 

$

204

 

$

460,164

 

$

(5,427

)

$

(2,855

)

$

(455,957

)

$

(63,600

)

$

(67,471

)

$

(1,274

)

$

(68,745

)

 

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

5

 

 


 

 

SUN COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2009

 

2008

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income (loss)

 

$

877

 

$

(3,095

)

Less: Loss from discontinued operations, net of tax

 

 

(154

)

 

(241

)

Income (loss) from continuing operations

 

 

1,031

 

 

(2,854

)

Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:

 

 

 

 

 

 

 

Noncontrolling interest allocation of income (loss)

 

 

104

 

 

(394

)

Gain from land disposition

 

 

 

 

(673

)

Gain on disposal of other assets

 

 

(17

)

 

(39

)

Loss (gain) on valuation of derivative instruments

 

 

(3

)

 

4

 

Stock compensation expense

 

 

418

 

 

439

 

Depreciation and amortization

 

 

16,789

 

 

16,861

 

Amortization of deferred financing costs

 

 

395

 

 

370

 

Net equity (income) loss from affiliates

 

 

(27

)

 

4,830

 

Change in notes receivable from sales of financed homes, net of repurchases

 

 

(410

)

 

504

 

Change in inventory, other assets and other receivables, net

 

 

(1,599

)

 

(5,516

)

Change in accounts payable and other liabilities

 

 

(862

)

 

(1,506

)

Net cash provided by operating activities of continuing operations

 

 

15,819

 

 

12,026

 

Net cash used for operating activities of discontinued operations

 

 

(144

)

 

(84

)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

15,675

 

 

11,942

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Investment in properties

 

 

(5,916

)

 

(6,202

)

Proceeds related to disposition of land

 

 

2

 

 

2,708

 

Proceeds related to disposition of other assets

 

 

32

 

 

90

 

Payment of notes receivable and officer's notes, net

 

 

3,027

 

 

182

 

NET CASH USED FOR INVESTING ACTIVITIES

 

 

(2,855

)

 

(3,222

)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Cancellation of common stock and Common OP Units, net

 

 

(131

)

 

(80

)

Borrowings on lines of credit

 

 

39,406

 

 

25,614

 

Payments on lines of credit

 

 

(41,378

)

 

(18,750

)

Proceeds from issuance of notes payable and other debt

 

 

7,593

 

 

 

Payments on notes payable and other debt

 

 

(4,834

)

 

(2,951

)

Payments for deferred financing costs

 

 

(10

)

 

(16

)

Distributions to stockholders and OP unit holders

 

 

(13,040

)

 

(12,999

)

NET CASH USED FOR FINANCING ACTIVITIES

 

 

(12,394

)

 

(9,182

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

426

 

 

(462

)

Cash and cash equivalents, beginning of period

 

 

6,162

 

 

5,415

 

Cash and cash equivalents, end of period

 

$

6,588

 

$

4,953

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest

 

$

12,368

 

$

14,065

 

Cash paid for interest on mandatorily redeemable debt

 

$

834

 

$

896

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

Unrealized loss on interest rate swaps

 

$

(4

)

$

(1,416

)

Rental homes transferred from inventory to investment property for use in Rental Program

 

$

7,358

 

$

5,033

 

Financed home sales transferred from inventory and investment property to notes receivable

 

$

4,142

 

$

3,209

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

6

 

 


 

SUN COMMUNITIES, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

Basis of Presentation

 

These unaudited consolidated financial statements of Sun Communities, Inc., a Maryland corporation, (the “Company”) and all majority-owned or wholly-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 should be read in conjunction with the consolidated financial statements and accompanying notes of the Company included in our Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the SEC on March 13, 2009, as amended on March 30, 2009 (the “2008 Annual Report”).

 

The Company’s cable television services are held for sale 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 2008 Annual Report, with the exception of the impact of our adoption in the first quarter of 2009 of Statement of Financial Accounting Standards (SFAS) No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”) and FASB Staff Position Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP EITF 03-6-1”). See Recent Accounting Pronouncements in Note 17 for further information on our adoption of SFAS 160 and FSP EITF 03-6-1. 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. Certain reclassifications have been made to prior periods’ financial statements in order to conform to current period presentation.

 

2.

Discontinued Operations

 

The Company has investments in certain land improvements and equipment that provides cable television services to certain communities within the Real Property Operations segment. In December 2008, the Company 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. In the fourth quarter of fiscal 2008, the Company announced its intention to exit the cable television service business and recorded a $4.1 million impairment charge on the cable television assets. This impairment charge was recognized in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).

 

SFAS 144 also provides criteria to evaluate if a component of an entity is deemed to be held for sale and eligible for presentation as a discontinued operation. Based on the Company’s plan to sell and exit the cable television services business within the next twelve months, the cable television services business is reported as a discontinued operation in the consolidated financial statements for all periods presented.

 

The following tables set forth certain summarized financial information of the discontinued operation (in thousands):

 

 

 

 

Three Months Ended

March 31,

 

 

 

2009

 

2008

 

Total revenues

 

$

183

 

$

204

 

Total expenses

 

 

(355

)

 

(445

)

Loss before state income taxes

 

 

(172

)

 

(241

)

Benefit (provision) for state income tax

 

 

 

 

 

Loss from discontinued operations

 

 

(172

)

 

(241

)

Less: Loss attributable to noncontrolling interest

 

 

(18

)

 

(27

)

Loss from discontinued operations attributable to Sun Communities, Inc. common stockholders

 

$

(154

)

$

(214

)

 

 

7

 

 


SUN COMMUNITIES, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.

Discontinued Operations, continued



 

 

 

March 31,

2009

 

December 31,

2008

 

ASSETS

 

 

 

 

 

Accounts receivable, net

 

$

14

 

$

16

 

Other assets

 

 

54

 

 

54

 

Total assets

 

$

68

 

$

70

 

LIABILITIES

 

 

 

 

 

 

 

Accounts payable

 

$

19

 

$

16

 

Deferred income

 

 

36

 

 

38

 

Other liabilities

 

 

23

 

 

16

 

Total liabilities

 

$

78

 

$

70

 

 

3.

Investment Property

 

The following table sets forth certain information regarding investment property (in thousands):

 

 

 

March 31,
2009

 

December 31,
2008

 

Land

 

$

116,289

 

$

116,292

 

Land improvements and buildings

 

 

1,179,703

 

 

1,177,362

 

Rental homes and improvements

 

 

191,232

 

 

184,933

 

Furniture, fixtures, and equipment

 

 

34,094

 

 

34,050

 

Land held for future development

 

 

26,986

 

 

26,986

 

Investment property

 

 

1,548,304

 

 

1,539,623

 

Less: Accumulated depreciation

 

 

(464,176

)

 

(450,319

)

Investment property, net

 

$

1,084,128

 

$

1,089,304

 

 

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

 

4.

Secured Borrowing and Collateralized Receivables

 

The Company has completed various transactions involving its installment notes since the third quarter of fiscal 2008. The Company has received a total of $35.1 million of cash proceeds in exchange for relinquishing its right, title and interest in the installment notes. The Company is subject to certain recourse provisions requiring the Company to purchase the underlying homes collateralizing such notes, in the event of a note default and subsequent repossession of the home.

 

FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 140”) sets forth the criteria that must be met for control over transferred assets to be considered to have been surrendered, which includes, amongst other things: (1) the transferred assets have been isolated from the transferor, including put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When a company transfers financial assets and fails any one of the SFAS 140 criteria, the company is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. The determination about whether the isolation criteria of SFAS 140 have been met to support a conclusion regarding surrender of control is largely a matter of law. As such, the evidence required for testing whether or not the first criteria of SFAS 140 has been satisfied requires a legal "true sale" opinion analyzing the treatment of the transfer under state laws as if the Company was a debtor under the bankruptcy code. A "true sale" legal opinion includes several legally relevant factors, including the nature of retained interests in the loans sold. Legal opinions as to a "true sale" are never absolute and unconditional, but contain qualifications based on the inherent equitable powers of a bankruptcy court, as well as the unsettled state of the common law.

 

8

 

 


SUN COMMUNITIES, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

4.

Secured Borrowing and Collateralized Receivables, continued

 

It was the intent of both parties for these transactions to qualify for sale accounting under SFAS 140 and the terms of the agreements clearly stipulate that the Company has no further obligations or rights with respect to the control, management, administration, servicing, or collection of the installment notes. In addition, the transferee has obtained the right to pledge or exchange the installment notes. For federal tax purposes, the Company treats the transfers of loans which do not qualify as “true sales” under SFAS 140, as sales.

 

Notwithstanding these facts, the Company was unable to satisfy the first criteria for sale accounting treatment under SFAS 140 and therefore, the Company has recorded these transactions as a transfer of financial assets. The transferred assets have been classified as collateralized receivables and the cash proceeds received from these transactions have been classified as a secured borrowing in the Consolidated Balance Sheet.

 

The collateralized receivables earn interest income and the secured borrowings accrue borrowing costs at the same interest rates. The amount of interest income and expense recognized was $0.7 million for the three months ended March 31, 2009. The collateralized receivables and secured borrowings are reduced as the related installment notes are collected from the customers. The balance of the collateralized receivables was $32.5 million, net of a loan loss provision of $0.1 million as of March 31, 2009. The balance of the collateralized receivables was $26.1 million, net of a loan loss provision of $0.1 million as of December 31, 2008. The outstanding balance on the secured borrowing was $32.6 million and $26.2 million as of March 31, 2009 and December 31, 2008, respectively.

 

In the event of note default, and subsequent repossession of a manufactured home, the terms of the agreement require the Company to repurchase the manufactured home. Default is defined as the failure to repay the installment note according to contractual terms. If default on the installment note results in repossession of the home, the home is repurchased. 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, based on the number of payments made since the loan origination date, the repurchase price is determined as follows:

 

Number of Payments

 

Recourse %

 

Less than or equal to 15

 

100

%

Greater than 15 but less than 64

 

90

%

64 or more

 

65

%

 

5.

Notes and Other Receivables

 

The following table sets forth certain information regarding notes and other receivables (in thousands):

 

 

March 31,

2009

 

December 31,

2008

 

Installment notes receivable on manufactured homes, net

$

19,260

 

$

21,232

 

Collateralized receivables, net (see Note 4)

 

32,498

 

 

26,159

 

Other receivables, net

 

8,330

 

 

10,090

 

Total notes and other receivables, net

$

60,088

 

$

57,481

 

 

The installment notes of $19.3 million and $21.2 million as of March 31, 2009 and December 31, 2008, respectively, are collateralized by manufactured homes. The installment notes are presented net of allowance for losses of $0.1 million as of March 31, 2009 and December 31, 2008. The installment notes represent financing provided by the Company to purchasers of manufactured homes located in its communities. The installment notes receivable have interest payable monthly at a net weighted average interest rate and a maturity of 7.4 percent and 13.1 years and 7.6 percent and 13.8 years at March 31, 2009 and December 31, 2008, respectively.

 

9

 

 


SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.

Notes and Other Receivables, continued



 

The Company has completed various transactions involving its installment notes. The Company has received a total of $35.1 million of cash proceeds in exchange for relinquishing its right, title and interest in the installment notes. These transactions were recorded as a transfer of financial assets. The transferred assets have been classified as collateralized receivables with a net balance of $32.5 million and $26.1 million as of March 31, 2009 and December 31, 2008, respectively. The collateralized receivables are presented net of allowance for losses of $0.1 million as of March 31, 2009 and December 31, 2008. The collateralized receivables have interest payable monthly at a weighted average interest rate and maturity of 10.4 percent and 13.7 years and 10.1 percent and 14.0 years, as of March 31, 2009 and December 31, 2008, respectively. See Note 4 for additional information.

 

The net increase in the aggregate principal balance of collateralized receivables of $32.5 million during 2009 is due to the following items:

 

 

New transfers of installment notes of $7.6 million, offset by -

 

principal payments and payoffs from the Company’s customers of $0.7 million and;

 

repurchase of the underlying collateral (manufactured homes) of $0.5 million.

 

Other receivables were comprised of amounts due from residents of $1.1 million (net of allowance of $0.2 million), home sale proceeds of $3.5 million, an employee loan of $0.5 million, insurance proceeds of $0.3 million, and rebates and other receivables of $2.9 million as of March 31, 2009. Other receivables were comprised of amounts due from residents of $1.6 million (net of allowance of $0.3 million), home sale proceeds of $3.7 million, an employee loan of $0.5 million, insurance proceeds of $0.3 million, and rebates and other receivables of $4.0 million as of December 31, 2008.

 

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, 2009 and December 31, 2008 (in thousands except for shares and units):

 

 

 

March 31,

2009

 

December 31,

2008

 

 

 

 

 

Secured by

 

 

 

Secured by

 

Promissory Notes

 

Outstanding
Principal
Balance

 

Common
Stock

 

Common
OP Units

 

Outstanding
Principal
Balance

 

Common
Stock

 

Common
OP Units

 

Secured - $1.3 million

 

$

627

 

38,591

 

 

$

963

 

59,263

 

 

Secured - $6.6 million

 

 

3,187

 

85,690

 

61,646

 

 

4,894

 

131,591

 

94,669

 

Secured - $1.0 million

 

 

493

 

45,620

 

 

 

757

 

70,057

 

 

Subtotal secured notes

 

 

4,307

 

169,901

 

61,646

 

 

6,614

 

260,911

 

94,669

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured - $1.0 million

 

 

493

 

 

 

 

757

 

 

 

Unsecured - $1.3 million

 

 

627

 

 

 

 

963

 

 

 

Subtotal unsecured notes

 

 

1,120

 

 

 

 

1,720

 

 

 

Total promissory notes

 

$

5,427

 

169,901

 

61,646

 

$

8,334

 

260,911

 

94,669

 

 

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 shares and secured OP Units total approximately $2.7 million based on the closing price of the Company’s shares on the New York Stock Exchange of $11.83 as of March 31, 2009. The unsecured notes are fully recourse to the officer.

 

The reduction in the aggregate principal balance of these notes was $2.9 million and $0.1 million for the three months ended March 31, 2009 and 2008, respectively. Total interest received was $0.1 million for the three months ended March 31, 2009 and 2008. The notes are due in two remaining installments on December 31, 2009 and 2010.

 

10

 

 


SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

6.

Investment in Affiliates

 

In October 2003, the Company purchased 5,000,000 shares of common stock of Origen Financial, Inc. (“Origen”). The Company owns approximately 19% of Origen as of March 31, 2009, and its investment is accounted for using the equity method of accounting. As of March 31, 2009, the Company’s investment in Origen had a market value of approximately $3.8 million based on a quoted market closing price of $0.75 per share from the “Pink Sheet Electronic OTC Trading System”.

 

The Company recorded its equity allocation of the anticipated earnings from Origen of $0.1 million for the three months ended March 31, 2009. The Company recorded its equity allocation of the reported losses from Origen of $4.8 million for the three months ended March 31, 2008.

 

Summarized consolidated financial information of Origen at March 31, 2009 and 2008 is presented below before elimination of inter-company transactions (amounts in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2009

 

2008

 

Revenues

 

$

22,815

 

$

25,718

 

Expenses

 

 

(22,302

)

 

(29,051

)

Loss on sale of loan portfolio

 

 

 

 

(21,659

)

Net income (loss)

 

 

513

 

 

(24,992

)

 

 

 

 

 

 

 

 

Equity income (loss) from Origen affiliate

 

$

99

 

$

(4,830

)

 

In August 2008, the Company entered into an agreement with four unrelated companies (“Members”) to form a new limited liability company, Origen Financial Services, LLC (the “LLC”). The Company contributed cash of $0.5 million toward the formation of the limited liability company. The LLC purchased the origination platform of Origen. The purpose of the venture is to originate manufactured housing installment contracts for its Members thereby eliminating the need for the Company to become licensed to originate loans in each of the 18 states in which it does business. The Company owns 25.0 percent of the LLC as of March 31, 2009, and the investment is accounted for using the equity method of accounting. The Company 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.

 

7.

Debt and Lines of Credit

 

The following table sets forth certain information regarding debt (in thousands):

 

 

 

March 31,

2009

 

December 31,

2008

 

Collateralized term loans - CMBS, due July 1, 2011-2016 interest at 4.93-5.32% as of March 31, 2009 and December 31, 2008.

 

$

476,957

 

$

478,907

 

Collateralized term loans - FNMA, due May 1, 2014 and January 1, 2015, interest at 2.68 - 5.20% and 4.51 - 5.20% as of March 31, 2009 and December 31, 2008, respectively.

 

 

376,607

 

 

377,651

 

Preferred OP Units, redeemable at various dates from December 1, 2009 through January 5, 2014, average interest at 6.8% as of March 31, 2009 and December 31, 2008.

 

 

48,947

 

 

49,447

 

Secured borrowing, maturing at various dates from May 30, 2010 through December 9, 2029, average interest at 10.4% and 10.1% as of March 31, 2009 and December 31, 2008, respectively (see Note 4).

 

 

32,592

 

 

26,211

 

Mortgage notes, other, maturing at various dates from June 1, 2009 through May 1, 2017, average interest at 5.43% as of March 31, 2009 and December 31, 2008.

 

 

206,808

 

 

206,936

 

Total debt

 

$

1,141,911

 

$

1,139,152

 

 

11

 

 


SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.

Debt and Lines of Credit, continued


The collateralized term loans totaling $853.6 million as of March 31, 2009, are secured by 87 properties comprising of 31,195 sites representing approximately $551.2 million of net book value. The mortgage notes totaling $206.8 million as of March 31, 2009, are collateralized by 18 communities comprising of 6,445 sites representing approximately $177.0 million of net book value.

 

The Company recently exercised its option to extend the due date of approximately $152.0 million of secured, variable rate borrowings to May 1, 2014. In connection with this extension, the lender increased the facility fee resulting in an increase of the effective interest rate on the borrowings, which could result in higher interest expense. The Company does not believe that the lender had the right to increase the facility fee and has reserved all of its rights with respect to the increased fee. The Company is considering all of its available remedies to challenge the validity of the increased fee.

 

The Company has 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, 2009 and December 31, 2008 was $83.0 million and $85.8 million, respectively. In addition, $3.3 million of availability was used to back standby letters of credit as of March 31, 2009 and December 31, 2008. Borrowings under the line of credit bear an interest rate of LIBOR plus 165 basis points, or prime plus 40 basis points at the Company’s option. Prime means for any month, the prevailing “prime rate” as quoted in the Wall Street Journal on last day of such calendar month. The weighted average interest rate on the outstanding borrowings was 2.20 percent as of March 31, 2009. The borrowings under the line of credit mature October 1, 2011 assuming the election of a one year extension that is available at the Company’s discretion. As of March 31, 2009 and December 31, 2008, $28.7 million and $25.9 million, respectively, were available to be drawn under the facility based on the calculation of the borrowing base at each date.

 

In March 2009, the Company entered into a $10.0 million manufactured home floor plan facility. The floor plan facility has a committed term of 1 year; thereafter, advances are discretionary and terms are subject to change. The interest rate is 100 basis points over the greater of prime or 6.0 percent (7.0 percent at March 31, 2009). The outstanding balance as of March 31, 2009 was $5.4 million.

 

The Company’s $40.0 million floor plan facility matured on March 1, 2009. As of December 31, 2008, the outstanding balance on the floor plan was $4.6 million.

 

Since the third quarter of fiscal 2008, the Company has completed various transactions involving its installment notes. These transactions were recorded as a transfer of financial assets, and the cash proceeds related to these transactions were recorded as a secured borrowing. See Note 4 for additional information.

 

In June 2008, the Company completed a financing of $27.0 million with Bank of America (formally LaSalle Bank Midwest). The loan has a three year term, with a two year extension at the Company’s option. The terms of the loan require interest only payments for the first year, with the remainder of the term being amortized based on a 30 year table. The interest rate is 205 basis points over LIBOR, or prime plus 25 basis points (3.5 percent at March 31, 2009). The proceeds from the financing were used to repay an existing mortgage note of $4.3 million with the remainder used to pay down the Company’s lines of credit.

 

The Company’s Operating Partnership had $13.7 million of Series B-3 Preferred OP Units that were redeemable at various dates from December 1, 2009 through January 1, 2011. In October 2008, the Company’s Operating Partnership completed a three year extension on the redemption dates for $11.9 million of these units; the remaining $1.8 million of these units mature in accordance with the original agreement.

 

In January 2009, the Company redeemed $0.5 million of the $1.8 million of the Series B-3 Preferred OP Units.

 

12

 

 


SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.

Debt and Lines of Credit, continued


As of March 31, 2009, 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

 

April 2009 – March 2010

 

April 2010 – March 2011

 

April 2011 – March 2012

 

April 2012 – March 2013

 

April 2013 – March 2014

 

After 5 years

 

Lines of credit

 

$

88,447

 

$

5,447

 

$

 

$

83,000

 

$

 

$

 

$

 

Mortgage loans payable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturities

 

 

981,258

 

 

11,200

 

 

 

 

103,707

 

 

14,133

 

 

26,880

 

 

825,338

 

Principal amortization

 

 

79,114

 

 

12,846

 

 

13,918

 

 

13,053

 

 

12,997

 

 

13,200

 

 

13,100

 

Preferred OP Units

 

 

48,947

 

 

1,295

 

 

 

 

 

 

7,645

 

 

40,007

 

 

 

Secured borrowing

 

 

32,592

 

 

1,321

 

 

1,452

 

 

1,598

 

 

1,736

 

 

1,824

 

 

24,661

 

Total

 

$

1,230,358

 

$

32,109

 

$

15,370

 

$

201,358

 

$

36,511

 

$

81,911

 

$

863,099

 

 

The most restrictive of the Company’s debt agreements place limitations on secured and unsecured borrowings and contain minimum debt service coverage, leverage, distribution and net worth requirements. As of March 31, 2009, the Company was in compliance with all covenants.

 

8.

Share-Based Compensation

 

The Company’s primary share-based compensation is restricted stock.  In February 2008, the Company issued twenty five thousand shares of restricted stock to certain key employees. The awards vest over a 10 year period beginning on the fourth anniversary of the grant date and have a weighted average grant date fair value of $19.92 per share.

 

9.

Stockholders’ Deficit

 

In November 2004, the Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock. The Company has 400,000 common shares remaining in the repurchase program. No common shares were repurchased during 2009 or 2008.

 

In March 2009, the Operating Partnership issued 110,444 Common OP Units to Water Oak, Ltd which were immediately converted to common stock.

 

The Company’s shelf registration for up to $300.0 million of common stock, preferred stock and debt securities expired December 31, 2008. In March 2009, the Company filed a new shelf registration statement on Form S-3 with the SEC to replace the previous shelf registration for a proposed offering of up to $300.0 million of our common stock, preferred stock and debt securities. Although our new shelf registration statement has been filed, the SEC has not declared the new shelf registration statement effective as of the date of this Form 10-Q filing.

 

10.

Other Income

 

The components of other income are summarized as follows (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2009

 

2008

 

Brokerage commissions

 

$

135

 

$

192

 

Gain on disposition of land and other assets, net

 

 

17

 

 

712

 

Other, net

 

 

5

 

 

(33

)

Total other income

 

$

157

 

$

871

 

 

13

 

 


SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

11.

Segment Reporting



 

The consolidated operations of the Company can be segmented into Real Property Operations and Home Sales and Rentals. Transactions between the Company’s segments are recorded at cost. 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, 2009

 

 

 

Real
Property
Operations

 

Home Sales
and Home
Rentals

 

Consolidated

 

Revenues

 

$

50,999

 

$

12,661

 

$

63,660

 

Operating expenses/Cost of sales

 

 

16,789

 

 

9,960

 

 

26,749

 

Net operating income/Gross profit

 

 

34,210

 

 

2,701

 

 

36,911

 

Adjustments to arrive at net income (loss):

 

 

 

 

 

 

 

 

 

 

Other revenues

 

 

1,429

 

 

195

 

 

1,624

 

General and administrative

 

 

(4,166

)

 

(1,826

)

 

(5,992

)

Depreciation and amortization

 

 

(11,120

)

 

(5,084

)

 

(16,204

)

Interest expense

 

 

(15,015

)

 

(65

)

 

(15,080

)

Equity income (loss) from affiliates, net

 

 

99

 

 

(72

)

 

27

 

Provision for state income tax

 

 

(133

)

 

 

 

(133

)

Income (loss) from continuing operations

 

 

5,304

 

 

(4,151

)

 

1,153

 

Loss from discontinued operations

 

 

(172

)

 

 

 

(172

)

Net income (loss)

 

 

5,132

 

 

(4,151

)

 

981

 

Less: Net income (loss) attributable to noncontrolling interest

 

 

547

 

 

(443

)

 

104

 

Net income (loss) attributable to Sun Communities, Inc.

 

$

4,585

 

$

(3,708

)

$

877

 

 

 

 

 

Three Months Ended March 31, 2008

 

 

 

Real
Property
Operations

 

Home Sales
and Home
Rentals

 

Consolidated

 

Revenues

 

$

50,349

 

$

12,499

 

$

62,848

 

Operating expenses/Cost of sales

 

 

16,243

 

 

9,305

 

 

25,548

 

Net operating income/Gross profit

 

 

34,106

 

 

3,194

 

 

37,300

 

Adjustments to arrive at net income (loss):

 

 

 

 

 

 

 

 

 

 

Other revenues

 

 

967

 

 

935

 

 

1,902

 

General and administrative

 

 

(4,158

)

 

(1,612

)

 

(5,770

)

Depreciation and amortization

 

 

(11,306

)

 

(4,555

)

 

(15,861

)

Interest expense

 

 

(16,185

)

 

(39

)

 

(16,224

)

Equity loss from affiliate

 

 

 

 

(4,830

)

 

(4,830

)

Benefit for state income tax

 

 

235

 

 

 

 

235

 

Income (loss) from continuing operations

 

 

3,659

 

 

(6,907

)

 

(3,248

)

Loss from discontinued operations

 

 

(241

)

 

 

 

(241

)

Net income (loss)

 

 

3,418

 

 

(6,907

)

 

(3,489

)

Less: Net income (loss) attributable to noncontrolling interest

 

 

386

 

 

( 780

)

 

(394

)

Net income (loss) attributable to Sun Communities, Inc.

 

$

3,032

 

$

(6,127

)

$

(3,095

)

 

 

14

 

 


SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

11.

Segment Reporting, continued

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 

Real
Property
Operations

 

Home Sales
and Home
Rentals

 

Consolidated

 

Real
Property
Operations

 

Home Sales
and Home
Rentals

 

Consolidated

 

Identifiable assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment property, net

 

$

946,193

 

$

137,935

 

$

1,084,128

 

$

954,196

 

$

135,108

 

$

1,089,304

 

Cash and cash equivalents

 

 

6,256

 

 

332

 

 

6,588

 

 

6,138

 

 

24

 

 

6,162