sui09300910q.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 September 30, 2009.
 
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
 
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 September 30, 2009:  18,794,736







 
 
 
 
 

 

SUN COMMUNITIES, INC.

INDEX

   
Pages
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited):
 
 
 
Consolidated Balance Sheets ─ September 30, 2009 and  December 31, 2008
 
3
 
Consolidated Statements of Operations ─ Periods Ended September 30, 2009 and 2008
 
4
 
Consolidated Statements of Comprehensive Loss ─ Periods Ended September 30, 2009 and 2008
 
5
 
Consolidated Statement of Stockholders’ Deficit ─ Nine Months Ended September 30, 2009
 
5
 
Consolidated Statements of Cash Flows ─ Nine Months Ended September 30, 2009 and 2008
 
6
 
Notes to Consolidated Financial Statements
 
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
28
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
44
Item 4.
Controls and Procedures
 
45
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
 
46
Item 1A.
Risk Factors
 
46
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds 
 
46
Item 4.
Submission of Matters to a Vote of Security Holders
 
46
Item 6.
Exhibits
 
47
 
Signatures
 
48








 
2

 

SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
 (In thousands, except per share amounts)
 

   
(Unaudited)
       
   
September 30, 2009
   
December 31, 2008
 
ASSETS
           
Investment property, net
 
$
1,072,850
   
$
1,099,020
 
Cash and cash equivalents
   
5,079
     
6,162
 
Inventory of manufactured homes
   
3,683
     
3,342
 
Investment in affiliates
   
2,428
     
3,772
 
Notes and other receivables
   
69,781
     
57,481
 
Other assets
   
35,384
     
37,152
 
Assets of discontinued operations
   
-
     
70
 
TOTAL ASSETS
 
$
1,189,205
   
$
1,206,999
 
                 
                 
LIABILITIES
               
Debt
 
$
1,155,646
   
$
1,139,152
 
Lines of credit
   
88,883
     
90,419
 
Other liabilities
   
40,133
     
37,240
 
Liabilities of discontinued operations
   
-
     
70
 
TOTAL LIABILITIES
   
1,284,662
     
1,266,881
 
                 
Commitments and contingencies
               
                 
STOCKHOLDERS’ DEFICIT
               
Preferred stock, $0.01 par value, 10,000 shares authorized, none issued
 
$
-
   
$
-
 
Common stock, $0.01 par value, 90,000 shares authorized   (September 30, 2009 and December 31, 2008, 20,597 and 20,313 shares issued respectively)
   
206
     
203
 
Additional paid-in capital
   
463,608
     
459,847
 
Officer's notes
   
(5,163
)
   
(8,334
)
Accumulated other comprehensive loss
   
(2,108
)
   
(2,851
)
Distributions in excess of accumulated earnings
   
(483,666
)
   
(445,147
)
Treasury stock, at cost  (September 30, 2009 and December 31, 2008, 1,802 shares)
   
(63,600
)
   
(63,600
)
Total Sun Communities, Inc. stockholders' deficit
   
(90,723
)
   
(59,882
)
Noncontrolling interest
   
(4,734
)
   
-
 
TOTAL STOCKHOLDERS’ DEFICIT
   
(95,457
)
   
(59,882
)
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
$
1,189,205
   
$
1,206,999
 

See accompanying Notes to Consolidated Financial Statements.










 
3

 
 
 

SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
 (In thousands, except per share amounts)
(Unaudited)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
REVENUES
                       
Income from real property
 
$
48,597
   
$
47,788
   
$
148,093
   
$
145,792
 
Revenue from home sales
   
8,433
     
7,933
     
24,112
     
24,204
 
Rental home revenue
   
5,062
     
5,186
     
15,449
     
15,318
 
Ancillary revenues, net
   
4
     
35
     
261
     
349
 
Interest
   
1,554
     
1,129
     
4,194
     
2,741
 
Other income (loss)
   
(258
)
   
(816
)
   
(161
)
   
2,884
 
Total revenues
   
63,392
     
61,255
     
191,948
     
191,288
 
                                 
COSTS AND EXPENSES
                               
Property operating and maintenance
   
13,249
     
12,469
     
38,641
     
36,857
 
Real estate taxes
   
3,848
     
3,844
     
12,150
     
12,183
 
Cost of home sales
   
6,046
     
6,073
     
17,313
     
18,893
 
Rental home operating and maintenance
   
3,864
     
4,135
     
12,423
     
11,566
 
General and administrative - real property
   
3,687
     
3,691
     
12,753
     
12,546
 
General and administrative - home sales and rentals
   
1,890
     
1,676
     
5,532
     
5,003
 
Georgia flood damage
   
800
     
-
     
800
     
-
 
Depreciation and amortization
   
15,841
     
16,025
     
47,960
     
48,097
 
Interest
   
15,109
     
15,361
     
44,093
     
45,311
 
Interest on mandatorily redeemable debt
   
839
     
847
     
2,509
     
2,535
 
Total expenses
   
65,173
     
64,121
     
194,174
     
192,991
 
                                 
Loss before income taxes and equity loss from affiliates
   
(1,781
)
   
(2,866
)
   
(2,226
)
   
(1,703
)
Provision for state income tax
   
(103
)
   
(141
)
   
(382
)
   
(34
)
Equity loss from affiliates
   
(854
)
   
(1,486
)
   
(1,344
)
   
(14,036
)
Loss from continuing operations
   
(2,738
)
   
(4,493
)
   
(3,952
)
   
(15,773
)
Income (loss) from discontinued operations
   
177
     
(274
)
   
(155
)
   
(785
)
Net loss
   
(2,561
)
   
(4,767
)
   
(4,107
)
   
(16,558
)
Less:  income (loss) attributable to noncontrolling interest
   
(526
)
   
726
     
(690
)
   
(602
)
Net loss attributable to Sun Communities, Inc.
 
$
(2,035
)
 
$
(5,493
)
 
$
(3,417
)
 
$
(15,956
)
                                 
                                 
Weighted average common shares outstanding:
                               
Basic
   
18,513
     
18,213
     
18,437
     
18,151
 
Diluted
   
18,513
     
18,213
     
18,437
     
18,151
 
                                 
Basic and diluted loss per share:
                               
Continuing operations
 
$
(0.12
)
 
$
(0.28
)
 
$
(0.18
)
 
$
(0.84
)
Discontinued operations
   
0.01
     
(0.02
)
   
(0.01
)
   
(0.04
)
Basic and diluted loss per share
 
$
(0.11
)
 
$
(0.30
)
 
$
(0.19
)
 
$
(0.88
)
                                 
Cash dividends per common share:
 
$
0.63
   
$
0.63
   
$
1.89
   
$
1.89
 

See accompanying Notes to Consolidated Financial Statements.




 
4

 
 
 

SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
FOR THE PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
 (In thousands)
(Unaudited)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Amounts attributable to Sun Communities, Inc. common stockholders:
                       
Loss from continuing operations, net of state income taxes
 
$
(2,193
)
 
$
(5,190
)
 
$
(3,278
)
 
$
(15,200
)
Income (loss) from discontinued operations, net of state income taxes
   
158
     
(303
)
   
(139
)
   
(756
)
Loss attributable to Sun Communities, Inc.
 
$
(2,035
)
 
$
(5,493
)
 
$
(3,417
)
 
$
(15,956
)

SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
 (In thousands)
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net loss
 
$
(2,561
)
 
$
(4,767
)
 
$
(4,107
)
 
$
(16,558
)
Unrealized gain (loss) on interest rate swaps
   
(494
)
   
4
     
832
     
(64
)
Total comprehensive loss
   
(3,055
)
   
(4,763
)
   
(3,275
)
   
(16,622
)
Less: Comprehensive income (loss) attributable to the noncontrolling interest
   
(324
)
   
733
     
(347
)
   
(604
)
Comprehensive loss attributable to Sun Communities, Inc.
 
$
(2,731
)
 
$
(5,496
)
 
$
(2,928
)
 
$
(16,018
)


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 Stock-holders' Deficit
 
 Balance as of December 31, 2008
  $ 203     $ 459,847     $ (8,334 )   $ (2,851 )   $ (445,147 )   $ (63,600 )   $ (59,882 )   $ -     $ (59,882 )
 Issuance of common stock, net
    3       1,506       -       -       -       -       1,509       -       1,509  
 Stock-based compensation - amortization and forfeitures
    -       2,255       -       -       14       -       2,269       -       2,269  
 Net loss
    -       -       -       -       (3,417 )     -       (3,417 )     (690 )     (4,107 )
 Unrealized gain on interest rate swaps
    -       -       -       743       -       -       743       89       832  
 Repayment of officer's notes
    -       -       3,171       -       -       -       3,171       -       3,171  
 Cash distributions declared of $1.89 per share
    -       -       -       -       (35,116 )     -       (35,116 )     (4,133 )     (39,249 )
 Balance as of September 30, 2009
  $ 206     $ 463,608     $ (5,163 )   $ (2,108 )   $ (483,666 )   $ (63,600 )   $ (90,723 )   $ (4,734 )   $ (95,457 )


See accompanying Notes to Consolidated Financial Statements.
 
 
5

 
 
 

SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (In thousands)
(Unaudited)
 
   
2009
   
2008
 
OPERATING ACTIVITIES:
           
Net loss
 
$
(4,107
)
 
$
(16,558
)
Less: Loss from discontinued operations, net of tax
   
(155
)
   
(785
)
Loss from continuing operations
   
(3,952
)
   
(15,773
)
Adjustments to reconcile loss from continuing operations to net cash provided by operating activities:
         
Gain from land dispositions
   
(90
)
   
(3,336
)
Gain on disposal of other assets and depreciated homes, net
   
(3,643
)
   
(2,502
)
Gain on valuation of derivative instruments
   
(5
)
   
(2
)
Stock compensation expense
   
2,335
     
1,696
 
Depreciation and amortization
   
51,342
     
51,137
 
Amortization of deferred financing costs
   
1,228
     
1,145
 
Equity loss from affiliates
   
1,344
     
14,036
 
Change in notes receivables from financed sales of inventory homes, net of repayments
   
(2,554
)
   
(3,226
)
Change in inventory, other assets and other receivables, net
   
(3,746
)
   
(6,445
)
Change in accounts payable and other liabilities
   
3,119
     
4,010
 
Net cash provided by operating activities of continuing operations
   
45,378
     
40,740
 
Net cash used for operating activities of discontinued operations
   
(438
)
   
(351
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
44,940
     
40,389
 
                 
INVESTING ACTIVITIES:
               
Investment in properties
   
(30,321
)
   
(32,316
)
Investment in affiliate
   
-
     
(500
)
Proceeds related to dispositions of land
   
172
     
6,508
 
Proceeds related to disposition of other assets and depreciated homes, net
   
455
     
342
 
Payment of notes receivable and officer's notes, net
   
6,930
     
1,692
 
NET CASH USED FOR INVESTING ACTIVITIES
   
(22,764
)
   
(24,274
)
                 
FINANCING ACTIVITIES:
               
Issuance (redemption) of common stock and OP units, net
   
1,509
     
(459
)
Borrowings on lines of credit
   
106,197
     
88,785
 
Payments on lines of credit
   
(107,733
)
   
(102,612
)
Proceeds from issuance of notes payable and other debt
   
40,231
     
52,549
 
Payments on notes payable and other debt
   
(23,737
)
   
(13,538
)
Payments for deferred financing costs
   
(477
)
   
(338
)
Distributions to stockholders and OP unit holders
   
(39,249
)
   
(39,093
)
NET CASH USED FOR FINANCING ACTIVITIES
   
(23,259
)
   
(14,706
)
             
-
 
  Net increase (decrease) in cash and cash equivalents
   
(1,083
)
   
1,409
 
  Cash and cash equivalents, beginning of period
   
6,162
     
5,415
 
  Cash and cash equivalents, end of period
 
$
5,079
   
$
6,824
 
                 
SUPPLEMENTAL INFORMATION:
               
Cash paid for interest
 
$
39,545
   
$
42,990
 
Cash paid for interest on mandatorily redeemable debt
 
$
2,509
   
$
2,587
 
Cash paid for state income taxes
 
$
526
   
$
249
 
Noncash investing and financing activities:
               
Unrealized gain (loss) on interest rate swaps
 
$
832
   
$
(64
)


See accompanying Notes to Consolidated Financial Statements.



 
6

 
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 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 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, 2008 as filed with the SEC on March 13, 2009, as amended on March 30, 2009 (the “2008 Annual Report”).

Reference in this report to Sun Communities, Inc., “we”, “our” and “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 2008 Annual Report, with the exception of the impact of our adoption in the first quarter of 2009 of the following accounting standards:  Statement of Financial Accounting Standards (SFAS) No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, which is now included within the FASB Accounting Standards Codification TM (“ASC”) Topic 810, Consolidation; 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”, which is included within ASC Topic 260, Earnings Per Share. See Recent Accounting Pronouncements in Note 17 for further information on our adoption of these accounting standards.

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.  In December 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. In the fourth quarter of fiscal 2008, we announced our 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 ASC Topic 360, Plant Property and Equipment.

We completed the sale of the cable television services business during the third quarter ended September 30, 2009.  Cash proceeds from this sale were $0.3 million, resulting in a net gain on sale of $0.2 million, which is recorded in loss from discontinued operations. In accordance with ASC Topic 205, Presentation of Financial Statements, the cable television service business has been presented as a discontinued operation in the Consolidated Financial Statements for all periods presented.


 
7

 
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



2.  
Discontinued Operations, continued

The following tables set forth certain summarized financial information of the discontinued operation (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Total revenues
 
$
268
   
$
178
   
$
623
   
$
573
 
Total expenses
   
(91
)
   
(452
)
   
(778
)
   
(1,358
)
Income (loss) from discontinued operations
   
177
     
(274
)
   
(155
)
   
(785
)
Less:  Income (loss) attributable to noncontrolling interest
   
19
     
29
     
(16
)
   
(29
)
Income (loss) from discontinued operations attributable to Sun Communities, Inc. common stockholders
 
$
158
   
$
(303
)
 
$
(139
)
 
$
(756
)
 
 
   
September 30, 2009
   
December 31, 2008
 
ASSETS
           
Accounts receivable, net
 
$
-
   
$
16
 
Other assets
   
-
     
54
 
Total assets
 
$
-
   
$
70
 
LIABILITIES
               
Accounts payable
 
$
-
   
$
16
 
Deferred income
   
-
     
38
 
Other liabilities
   
-
     
16
 
Total liabilities
 
$
-
   
$
70
 
 
3.  
Investment Property

The following table sets forth certain information regarding investment property (in thousands):
 
   
September 30, 2009
   
December 31, 2008
 
Land
 
$
116,266
   
$
116,292
 
Land improvements and buildings
   
1,184,893
     
1,177,362
 
Rental homes and improvements
   
199,677
     
194,649
 
Furniture, fixtures, and equipment
   
34,523
     
34,050
 
Land held for future development
   
26,986
     
26,986
 
Investment property
   
1,562,345
     
1,549,339
 
Less: Accumulated depreciation
   
(489,495
)
   
(450,319
)
 Investment property, net
 
$
1,072,850
   
$
1,099,020
 
 
Land improvements and buildings consist primarily of infrastructure, roads, landscaping, clubhouses, maintenance buildings and amenities.

On September 21, 2009, a flood caused substantial damage to our property, Countryside Village of Atlanta, located in Lawrenceville, Georgia.  We are still in the preliminary stages of assessing the damage to our property.  We have comprehensive insurance coverage for both property damage and business interruption, subject to deductibles and certain limitations.  We believe the cost of the damage sustained from the flooding will be in excess of our insurance deductible.  We have recorded a charge of $0.8 million associated with the flooding.  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.

 
8

 
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


4.  
Secured Borrowing and Collateralized Receivables

We have completed various transactions involving our installment notes since the third quarter of fiscal 2008. We have received a total of $49.2 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 accordance with ASC Topic 860, Transfers and Servicing. 

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 %
Less than or equal to 15
 
100%
Greater than 15 but less than 64
 
90%
64 or more
 
65%

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 net balance of the collateralized receivables was $44.9 million and $26.1 million as of September 30, 2009 and December 31, 2008, respectively.  The collateralized receivables are presented net of allowance for losses of $0.1 million as of September 30, 2009 and December 31, 2008.  The outstanding balance on the secured borrowing was $45.0 million and $26.2 million as of September 30, 2009 and December 31, 2008, 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, 2008
 
$
26,211
 
Financed sales of manufactured homes
   
21,690
 
Principal payments and payoffs from our customers
   
(1,439
)
Repurchases
   
(1,406
)
Total activity
   
18,845
 
Ending balance as of  September 30, 2009
 
$
45,056
 

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 $1.2 million and $0.7 million for the three months ended September 30, 2009 and 2008, respectively.   The amount of interest income and expense recognized was $2.8 million and $0.7 million for the nine months ended September 30, 2009 and 2008, respectively.  

For federal tax purposes, we treat these transfers of collateralized receivables as sales of financial assets.




 
9

 
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):
 
   
September 30, 2009
   
December 31, 2008
 
Installment notes receivable on manufactured homes, net
 
$
16,407
   
$
21,232
 
Collateralized receivables, net (see Note 4)
   
44,913
     
26,159
 
Other receivables, net
   
8,461
     
10,090
 
Total notes and other receivables, net
 
$
69,781
   
$
57,481
 

Installment Notes Receivable on Manufactured Homes

The installment notes of $16.4 million and $21.2 million as of September 30, 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 September 30, 2009 and December 31, 2008. The installment notes represent financing provided by us to purchasers of manufactured homes generally located in our communities.  The installment notes receivable have interest payable monthly at a net weighted average interest rate and a maturity of 7.8 percent and 12.8 years and 7.6 percent and 13.8 years at September 30, 2009 and December 31, 2008, respectively.

Collateralized Receivables

We have completed various transactions involving our installment notes since the third quarter of fiscal 2008. We have received a total of $49.2 million of cash proceeds in exchange for relinquishing our 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 $44.9 million and $26.1 million as of September 30, 2009 and December 31, 2008, respectively.  The collateralized receivables are presented net of allowance for losses of $0.1 million as of September 30, 2009 and December 31, 2008.  The collateralized receivables have interest payable monthly at a weighted average interest rate and maturity of 10.8 percent and 13.8 years and 10.1 percent and 14.0 years, as of September 30, 2009 and December 31, 2008, respectively.  See Note 4 for additional information.

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 receivables, 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 that estimates our unrecoverable costs associated with these repossessed homes.  We estimate our unrecoverable costs to be the repurchase price plus repair 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 $0.2 million as of September 30, 2009 and December 31, 2008.




 
10

 
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 $1.6 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 $0.4 million, and rebates and other receivables of $2.6 million as of September 30, 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 receivables of $0.3 million, and rebates and other receivables of $4.0 million as of December 31, 2008.

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 September 30, 2009 and December 31, 2008 (in thousands except for shares and units):
 
   
September 30, 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
 
$
597
     
36,711
     
-
   
$
963
     
59,263
     
-
 
Secured - $6.6 million
   
3,031
     
81,515
     
58,643
     
4,894
     
131,591
     
94,669
 
Secured - $1.0 million
   
469
     
43,397
     
-
     
757
     
70,057
     
-
 
Subtotal secured notes
   
4,097
     
161,623
     
58,643
     
6,614
     
260,911
     
94,669
 
                                                 
Unsecured - $1.0 million
   
469
     
-
     
-
     
757
     
-
     
-
 
Unsecured - $1.3 million
   
597
     
-
     
-
     
963
     
-
     
-
 
Subtotal unsecured notes
   
1,066
     
-
     
-
     
1,720
     
-
     
-
 
Total promissory notes
 
$
5,163
     
161,623
     
58,643
   
$
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 $4.7 million based on the closing price of our shares on the New York Stock Exchange of $21.52 as of September 30, 2009. The unsecured notes are fully recourse to the officer.

Total interest received was $0.1 million for the three months ended September 30, 2009 and 2008. Total interest received was $0.2 million and $0.4 million for the nine months ended September 30, 2009 and 2008, respectively.

The reduction in the aggregate principal balance of these notes was $3.2 million and $0.3 million for the nine months ended September 30, 2009 and 2008, respectively. The notes are due in two remaining installments on December 31, 2009 and 2010.

6.  
Investment in Affiliates

In October 2003, we purchased 5,000,000 shares of common stock of Origen Financial, Inc. (“Origen”). We own approximately 19 percent of Origen as of September 30, 2009, and our investment is accounted for using the equity method of accounting.  As of September 30, 2009, our investment in Origen had a market value of approximately $8.0 million based on a quoted market closing price of $1.60 per share from the “Pink Sheet Electronic OTC Trading System”.

We recorded our estimated equity allocation of the reported losses from Origen of $0.8 million and $1.2 million for the three and nine months ended September 30, 2009, respectively.   We recorded equity losses from Origen of $1.5 million and $14.1 million for the three and nine months ended September 30, 2008, respectively.  These equity losses included other than temporary impairment charges of $1.3 million and $8.1 million for the three and nine months ended September 30, 2008, respectively.




 
11

 
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



6.  
Investment in Affiliates, continued

Summarized consolidated financial information of Origen at September 30, 2009 and 2008 is presented below before elimination of inter-company transactions (amounts in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Revenues
 
$
19,791
   
$
23,469
   
$
62,538
   
$
69,199
 
Less:
                               
Expenses
   
24,119
     
32,517
     
68,810
     
88,765
 
Loss on sale of loans
   
-
     
-
     
-
     
22,377
 
Loss from continuing operations
   
(4,328
)
   
(9,048
)
   
(6,272
)
   
(41,943
)
Income from discontinued operations
   
-
     
7,875
     
-
     
11,004
 
Net loss
 
$
(4,328
)
 
$
(1,173
)
 
$
(6,272
)
 
$
(30,939
)
 
In August 2008, we entered into an agreement with four unrelated companies (“Members”) to form a new limited liability company, Origen Financial Services, LLC (the “LLC”).  We 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 us to become licensed to originate loans in each of the 18 states in which we do business.  We own 25.0 percent of the LLC as of September 30, 2009, and the investment is accounted for using the equity method of accounting.  We recorded an insignificant amount of income (loss) associated with our equity allocation of the LLC’s financial results for the three months ended September 30, 2009 and 2008, respectively.  We recorded losses of $0.1 million associated with our equity allocation of the LLC’s financial results for the nine months ended September 30, 2009.Our equity allocation of the LLC’s financial results was insignificant for the nine months ended September 30, 2008.

7.  
Debt and Lines of Credit

The following table sets forth certain information regarding debt (in thousands):
 
   
September 30, 2009
   
December 31, 2008
 
Collateralized term loans - CMBS, due July 1, 2011-2016 interest at 4.9-5.3% as of September 30, 2009 and December 31, 2008.
 
$
473,254
   
$
478,907
 
Collateralized term loans - FNMA, due May 1, 2014 and January 1, 2015, interest at  3.2 – 5.2% and 4.5 - 5.2% as of September 30, 2009 and December 31, 2008, respectively.
   
374,562
     
377,651
 
Preferred OP Units, redeemable at various dates from December 1, 2009 through January 5, 2014, average interest at 6.8% as of September 30, 2009 and December 31, 2008.
   
48,947
     
49,447
 
Secured borrowing, maturing at various dates from April 30, 2010 through November 24, 2031, average interest at 10.8% and 10.1% as of September 30, 2009 and December 31, 2008, respectively (see Note 4).
   
45,056
     
26,211
 
Mortgage notes, other, maturing at various dates from April 1, 2012 through May 1, 2017, average interest at 5.3% and 5.4% as of September 30, 2009 and December 31, 2008, respectively.
   
213,827
     
206,936
 
Total debt
 
$
1,155,646
   
$
1,139,152
 



 
12

 
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



7.  
Debt and Lines of Credit, continued

Collateralized Term Loans

The collateralized term loans totaling $473.3 million as of September 30, 2009, are secured by 87 properties comprising of 31,211 sites representing approximately $543.4 million of net book value.

We recently 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 resulting in an increase of the effective interest rate on the borrowings, which resulted in higher interest expense. We do not believe that the lender had the right to increase the facility fee and have reserved all of our rights with respect to the increased fee. We are considering all of our available remedies to challenge the validity of the increased fee.

Preferred OP Units

Our 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, our 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, we redeemed $0.5 million of the $1.8 million of the Series B-3 Preferred OP Units.

Secured Borrowing

Since the third quarter of fiscal 2008, we have completed various transactions involving our 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 regarding our collateralized receivables and secured borrowing transactions.

Mortgage Notes

The mortgage notes totaling $213.8 million as of September 30, 2009, are collateralized by 19 communities comprising of 6,387 sites representing approximately $184.4 million of net book value.

During June 2009, we completed a financing of $18.5 million with Bank of America. The loan has a three year term. The interest rate is 400 basis points over LIBOR, with a minimum rate of 5.0 percent (effective rate 5.0 percent at September 30, 2009). Proceeds of $11.2 million were used to repay mortgage notes that matured in June 2009. The remaining proceeds were used to pay down our unsecured line of credit.

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 as of September 30, 2009 and December 31, 2008 was $84.3 million and $85.8 million, respectively. In addition, $3.3 million of availability was used to back standby letters of credit as of September 30, 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 our 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 1.9 percent as of September 30, 2009.  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 September 30, 2009 and December 31, 2008, $27.4 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, we entered into a $10.0 million manufactured home floor plan facility. The floor plan facility has a committed term of one 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 (effective rate 7.0 percent at September 30, 2009).  The outstanding balance as of September 30, 2009 was $4.6 million.

Our previous $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.

 
13

 
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



7.  
Debt and Lines of Credit, continued


As of September 30, 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
   
Remainder of 2009
   
2010
   
2011
   
2012
   
2013
   
After 5 years
 
Lines of credit
 
$
88,883
   
$
-
   
$
4,583
   
$
84,300
   
$
-
   
$
-
   
$
-
 
Mortgage loans payable:
                                                       
Maturities
   
988,123
     
-
     
-
     
103,708
     
31,623
     
26,816
     
825,976
 
Principal amortization
   
73,520
     
3,479
     
14,060
     
13,865
     
13,030
     
13,230
     
15,856
 
Preferred OP Units
   
48,947
     
470
     
825
     
-
     
4,300
     
3,345
     
40,007
 
Secured borrowing
   
45,056
     
428
     
1,823
     
2,010
     
2,216
     
2,360
     
36,219
 
Total
 
$
1,244,529
   
$
4,377
   
$
21,291
   
$
203,883
   
$
51,169
   
$
45,751
   
$
918,058
 
 
The most restrictive of our debt agreements place limitations on secured and unsecured borrowings and contain minimum debt service coverage, leverage, distribution and net worth requirements. As of September 30, 2009, we were in compliance with all covenants.

8.  
Share-Based Compensation

At the Annual Meeting of Stockholders held on July 29, 2009, the stockholders approved the Sun Communities, Inc. Equity Incentive Plan (“2009 Equity Plan”).  The 2009 Equity Plan had been adopted by the Board and was effective upon approval by our stockholders. The 2009 Equity Plan replaced the Sun Communities, Inc. Stock Option Plan adopted in 1993, amended and restated in 1996 and 2000. The 2009 Equity Plan terminates automatically July 29, 2019.  The maximum number of shares of common stock that may be issued under the 2009 Equity Plan is 950,000 shares.

The purpose of the 2009 Equity Plan was to provide certain key employees additional incentive to promote our financial success and to provide an incentive which we may use to induce able persons to enter into or remain in the employment of the Company or a Subsidiary by providing such persons an opportunity to acquire or increase his or her direct proprietary interest in the operations and future of the Company.

On July 29, 2009, we issued 80,000 shares of restricted stock to our officers under the 2009 Equity Plan. The awards vest ratably over a six year period beginning on the fourth anniversary of the grant date, and have a fair value of $14.95 per share.  The fair value was determined by using the closing share price of our common stock on the date the grant was issued.

Additionally, on July 29, 2009, we issued 10,500 director options under our 2004 Non-Employee Director Option Plan.  The weighted average fair value of the options issued is estimated on the date of the grant using the Binomial (lattice) option pricing model, with the following weighted average assumptions used for the grants in the period indicated:


   
July 2009 Award
Estimated fair value per share of options granted:
 
$
1.66
 
Assumptions:
       
Annualized dividend yield
   
16.90
%
Common stock price volatility
   
32.70
%
Risk-free rate of return
   
3.24
%
Expected option terms (in years)
   
7.3
 

In September 2009, we filed a registration statement on Form S-8 with the SEC.  The Form S-8 registered the remaining 870,000 that are issuable under the 2009 Equity Plan. The Form S-8 also registered 100,000 shares of common stock that are issuable under the 2004 Non-Employee Director Option Plan.

 
14

 
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9.  
Stockholders’ Deficit

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 2009 or 2008.  There is no expiration date specified for the buyback program.

 
In March 2009, our Operating Partnership issued 110,444 Common OP Units to Water Oak, Ltd.  During 2009, holders of Common OP Units converted 119,806 units to common stock.

The vesting requirements for 67,598 restricted shares granted to our employees were satisfied during the nine months ended September 30, 2009.

Our shelf registration for up to $300.0 million of common stock, preferred stock and debt securities expired December 31, 2008.  In March 2009, we 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. The SEC declared the new shelf registration effective in May 2009.

We registered 1.6 million shares of common stock for sale pursuant to a sales agreement that we entered into with Brinson Patrick Securities Corporation. Sales under the agreement commenced on August 27, 2009 and 100,000 shares of common stock were sold as of September 30, 2009. The 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 $19.98.  We received net proceeds of approximately $1.9 million during the quarter ended September 30, 2009 from the sales of these shares of common stock.  The proceeds were used to pay down our unsecured line of credit.

10.  
Other Income

The components of other income are summarized as follows (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Brokerage commissions
 
$
107
   
$
114
   
$
380
   
$
474
 
Gain on sale of land
   
94
     
33
     
90
     
3,336
 
Loss on disposition of assets, net
   
(454
)
   
(615
)
   
(565
)
   
(528
)
Other, net
   
(5
)
   
(348
)
   
(66
)
   
(398
)
Total other income (loss)
 
$
(258
)
 
$
(816
)
 
$
(161
)
 
$
2,884
 
 

 

 
15

 
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11.  
Segment Reporting

Our consolidated operations can be segmented into Real Property Operations and Home Sales and Rentals.  Transactions between our 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 September 30, 2009
   
Three Months Ended September 30, 2008
 
   
Real Property Operations
   
Home Sales and Home Rentals
   
Consolidated
   
Real Property Operations
   
Home Sales and Home Rentals
   
Consolidated
 
Revenues
 
$
48,597
   
$
13,495
   
$
62,092
   
$
47,788
   
$
13,119
   
$
60,907
 
Operating expenses/Cost of sales
   
17,097
     
9,910
     
27,007
     
16,313
     
10,208
     
26,521
 
Net operating income/gross profit
   
31,500
     
3,585
     
35,085
     
31,475
     
2,911
     
34,386
 
Adjustments to arrive at net income (loss):
                                               
Other revenues
   
1,308
     
(8
)
   
1,300
     
317
     
31
     
348
 
General and administrative
   
(3,687
)
   
(1,890
)
   
(5,577
)
   
(3,691
)
   
(1,676
)
   
(5,367
)
Georgia flood damage
   
(800
)
   
-
     
(800
)
   
-
     
-
     
-
 
Depreciation and amortization
   
(11,045
)
   
(4,796
)
   
(15,841
)
   
(11,314
)
   
(4,711
)
   
(16,025
)
Interest expense
   
(15,876
)
   
(72
)
   
(15,948
)
   
(16,103
)
   
(105
)
   
(16,208
)
Equity income (loss) from affiliates, net
   
(836
)
   
(18
)
   
(854
)
   
(1,500
)
   
14
     
(1,486
)
Provision for state income taxes
   
(103
)
   
-
     
(103
)
   
(141
)
   
-
     
(141
)
Income (loss) from continuing operations
   
461
     
(3,199
)
   
(2,738
)
   
(957
)
   
(3,536
)
   
(4,493
)
Income (loss) from discontinued operations
   
177
     
-
     
177
     
(274
)
   
-
     
(274
)
Net income (loss)
   
638
     
(3,199
)
   
(2,561
)
   
(1,231
)
   
(3,536
)
   
(4,767
)
Less: Net income (loss) attributable to noncontrolling interest
   
(189
)
   
(337
)
   
(526
)
   
435
     
291
     
726
 
Net income (loss) attributable to Sun Communities, Inc.
 
$
827
   
$
(2,862
)
 
$
(2,035
)
 
$
(1,666
)
 
$
(3,827
)
 
$
(5,493
)
 



 
16

 
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



11.  
Segment Reporting, continued

   
Nine Months Ended September 30, 2009
   
Nine Months Ended September 30, 2008
 
   
Real Property Operations
   
Home Sales and Home Rentals
   
Consolidated
   
Real Property Operations
   
Home Sales and Home Rentals
   
Consolidated
 
Revenues
 
$
148,093
   
$
39,561
   
$
187,654
   
$
145,792
   
$
39,522
   
$
185,314
 
Operating expenses/Cost of sales
   
50,791
     
29,736
     
80,527
     
49,040
     
30,459
     
79,499
 
Net operating income/gross profit
   
97,302
     
9,825
     
107,127
     
96,752
     
9,063
     
105,815
 
Adjustments to arrive at net income (loss):
                                               
Other revenues
   
4,046
     
248
     
4,294
     
4,924
     
1,050
     
5,974
 
General and administrative
   
(12,753
)
   
(5,532
)
   
(18,285
)
   
(12,546
)
   
(5,003
)
   
(17,549
)
Georgia flood damage
   
(800
)
   
-
     
(800
)
   
 -
     
-
     
-
 
Depreciation and amortization
   
(33,318
)
   
(14,642
)
   
(47,960
)
   
(34,173
)
   
(13,924
)
   
(48,097
)
Interest expense
   
(46,379
)
   
(223
)
   
(46,602
)
   
(47,618
)
   
(228
)
   
(47,846
)
Equity income (loss) from affiliates, net
   
(1,211
)
   
(133
)
   
(1,344
)
   
(14,050
)
   
14
     
(14,036
)
Provision for state income taxes
   
(382
)
   
-
     
(382
)
   
(34
)
   
-
     
(34
)
Income (loss) from continuing operations
   
6,505
     
(10,457
)
   
(3,952
)
   
(6,745
)
   
(9,028
)
   
(15,773
)
Loss from discontinued operations
   
(155
)
   
-
     
(155
)
   
(785
)
   
-
     
(785
)
Net income (loss)
   
6,350
     
(10,457
)
   
(4,107
)
   
(7,530
)
   
(9,028
)
   
(16,558
)
Less: Net income (loss) attributable to noncontrolling interest
   
418
     
(1,108
)
   
(690
)
   
(274
)
   
(328
)
   
(602
)
Net income (loss) attributable to Sun Communities, Inc.
 
$
5,932
   
$
(9,349
)
 
$
(3,417
)
 
$
(7,256
)
 
$
(8,700
)
 
$
(15,956
)
 
 
   
September 30, 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
 
$
931,565
   
$
141,285
   
$
1,072,850
   
$
954,196
   
$
144,824
   
$
1,099,020
 
Cash and cash equivalents
   
4,126
     
953
     
5,079
     
6,138
     
24
     
6,162
 
Inventory of manufactured homes
   
-
     
3,683
     
3,683
     
-
     
3,342
     
3,342
 
Investment in affiliate
   
2,089
     
339
     
2,428
     
3,300
     
472
     
3,772
 
Notes and other receivables
   
65,439
     
4,342
     
69,781
     
52,697
     
4,784
     
57,481
 
Other assets
   
33,216
     
2,168
     
35,384
     
34,744
     
2,408
     
37,152
 
Assets of discontinued operations
   
-
     
-
     
-
     
70
     
-
     
70
 
Total assets
 
$
1,036,435
   
$
152,770
   
$
1,189,205
   
$
1,051,145
   
$
155,854
   
$
1,206,999
 



 
17

 
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




12.  
Derivative Instruments and Hedging Activities

Our objectives in using interest rate derivatives are to add stability to interest expense, manage exposure to interest rate movements, and minimize the variability that changes in interest rates 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 September 30, 2009, 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 September 30, 2009:
 
Type
 Purpose
 Effective Date
 Maturity Date
 Notional (in millions)
 Based on
 Variable Rate
 Fixed Rate
 Spread
 Effective Fixed Rate
Swap
Floating to Fixed Rate
09/04/02
07/03/12
25.0
3 Month LIBOR
0.5875%
4.7000%
2.0000%
6.7000%
Swap
Floating to Fixed Rate
01/02/09
01/02/14
20.0
3 Month LIBOR
0.5950%
2.1450%
2.0000%
4.1450%
Swap
Floating to Fixed Rate
02/13/09
02/13/11
25.0
1 Month LIBOR
0.2438%
1.5700%
2.0500%
3.6200%
Cap
Cap Floating Rate
04/28/09
05/01/12
152.4
3 Month LIBOR
0.6013%
11.0000%
0.0000%
N/A
 
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 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.

In accordance with ASC Topic 815, Derivatives and Hedging, we have recorded the fair value of our derivative instruments designated as cash flow hedges on the balance sheet. See Note 16 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 September 30, 2009 and December 31, 2008 (in thousands):
 
 
Asset Derivatives
 
Liability Derivatives
 
 
 Balance Sheet Location
 
Fair Value
 
 Balance Sheet Location
 
Fair Value
 
Derivatives designated as hedging instruments under ASC Topic 815
   
September 30, 2009
   
December 31, 2008
     
September 30, 2009