sui06302011_10q.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 June 30, 2011.
 
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [ 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 June 30, 2011:  21,502,474






 
 
 
 
 

 

SUN COMMUNITIES, INC.

INDEX

   
Pages
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited):
 
 
 
Consolidated Balance Sheets ─ June 30, 2011 and  December 31, 2010
 
3
 
Consolidated Statements of Operations ─ Periods Ended June 30, 2011 and 2010
 
4
 
Consolidated Statements of Comprehensive (Loss) Income ─ Periods Ended June 30, 2011 and 2010
 
5
 
Consolidated Statement of Stockholders’ Deficit ─ Six Months Ended June 30, 2011
 
5
 
Consolidated Statements of Cash Flows ─ Six Months Ended June 30, 2011 and 2010
 
6
 
Notes to Consolidated Financial Statements
 
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
22
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
38
Item 4.
Controls and Procedures
 
38
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
 
39
Item 1A.
Risk Factors
 
39
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds 
 
39
Item 6.
Exhibits
 
40
 
Signatures
 
42








 
2

 

SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2011 AND DECEMBER 31, 2010
 (In thousands, except per share amounts)

   
(Unaudited)
       
   
June 30, 2011
   
December 31, 2010
 
ASSETS
           
Investment property, net
 
$
1,167,485
   
$
1,032,326
 
Cash and cash equivalents
   
4,007
     
8,420
 
Inventory of manufactured homes
   
4,389
     
2,309
 
Notes and other receivables
   
102,382
     
88,807
 
Other assets
   
44,532
     
30,829
 
TOTAL ASSETS
 
$
1,322,795
   
$
1,162,691
 
                 
                 
LIABILITIES
               
Debt
 
$
1,254,584
   
$
1,163,612
 
Lines of credit
   
88,325
     
94,527
 
Other liabilities
   
45,334
     
36,936
 
TOTAL LIABILITIES
 
$
1,388,243
   
$
1,295,075
 
                 
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   (June 30, 2011 and December 31, 2010, 23,304 and 21,716 shares issued respectively)
   
233
     
217
 
Additional paid-in capital
   
543,657
     
495,331
 
Accumulated other comprehensive loss
   
(1,842
)
   
(2,226
)
Distributions in excess of accumulated earnings
   
(574,417
)
   
(549,625
)
Treasury stock, at cost  (June 30, 2011 and December 31, 2010, 1,802 shares)
   
(63,600
)
   
(63,600
)
Total Sun Communities, Inc. stockholders' deficit
   
(95,969
)
   
(119,903
)
Noncontrolling interests
               
Preferred OP units
   
45,548
     
-
 
Common OP units
   
(15,027
)
   
(12,481
)
                 
TOTAL STOCKHOLDERS’ DEFICIT
   
(65,448
)
   
(132,384
)
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
$
1,322,795
   
$
1,162,691
 





See accompanying Notes to Consolidated Financial Statements.










 
3

 
 
 

SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 2011 AND 2010
 (In thousands, except per share amounts)
(Unaudited)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
REVENUES
                       
Income from real property
 
$
52,264
   
$
49,948
   
$
106,100
   
$
101,955
 
Revenue from home sales
   
8,146
     
9,598
     
16,381
     
17,635
 
Rental home revenue
   
5,427
     
5,052
     
10,757
     
10,131
 
Ancillary revenues, net
   
109
     
108
     
403
     
334
 
Interest
   
2,291
     
1,973
     
4,359
     
3,769
 
Other income (loss), net
   
25
     
62
     
(24
)
   
452
 
Total revenues
   
68,262
     
66,741
     
137,976
     
134,276
 
                                 
COSTS AND EXPENSES
                               
Property operating and maintenance
   
13,994
     
13,105
     
27,452
     
26,145
 
Real estate taxes
   
4,098
     
4,183
     
8,213
     
8,363
 
Cost of home sales
   
6,401
     
7,233
     
12,892
     
13,477
 
Rental home operating and maintenance
   
3,754
     
3,594
     
7,427
     
7,217
 
General and administrative - real property
   
4,833
     
5,627
     
9,311
     
9,117
 
General and administrative - home sales and rentals
   
1,952
     
1,853
     
3,925
     
3,786
 
Acquisition related costs
   
1,151
     
-
     
1,400
     
-
 
Depreciation and amortization
   
18,121
     
16,832
     
34,800
     
33,523
 
Interest
   
15,225
     
15,455
     
30,631
     
30,560
 
Interest on mandatorily redeemable debt
   
829
     
819
     
1,655
     
1,636
 
Total expenses
   
70,358
     
68,701
     
137,706
     
133,824
 
                                 
(Loss) income before income taxes and equity income (loss) from affiliates
   
(2,096
)
   
(1,960
)
   
270
     
452
 
Benefit (provision) for state income taxes
   
259
     
(129
)
   
128
     
(261
)
Equity income (loss) from affiliates
   
850
     
(758
)
   
1,200
     
(1,577
)
Net (loss) income
   
(987
)
   
(2,847
)
   
1,598
     
(1,386
)
Less:  Preferred return to preferred OP units
   
51
     
-
     
51
     
-
 
Less:  Amounts attributable to common noncontrolling interest
   
(148
)
   
(398
)
   
37
     
(274
)
Net (loss) income attributable to Sun Communities, Inc. common stockholders
 
$
(890
)
 
$
(2,449
)
 
$
1,510
   
$
(1,112
)
                                 
Weighted average common shares outstanding:
                               
Basic
   
21,090
     
19,031
     
21,068
     
18,848
 
Diluted
   
21,090
     
19,031
     
23,155
     
18,848
 
                                 
(Loss) earnings per share:
                               
Basic
 
$
(0.04
)
 
$
(0.13
)
 
$
0.07
   
$
(0.06
)
Diluted
 
$
(0.04
)
 
$
(0.13
)
 
$
0.07
   
$
(0.06
)
                                 
Cash dividends per common share
 
$
0.63
   
$
0.63
   
$
1.26
   
$
1.26
 


See accompanying Notes to Consolidated Financial Statements.

 
4

 
 
 

SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE PERIODS ENDED JUNE 30, 2011 AND 2010
 (In thousands)
(Unaudited)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net (loss) income
 
$
(987
)
 
$
(2,847
)
 
$
1,598
   
$
(1,386
)
Unrealized gain (loss) on interest rate swaps
   
19
     
(325
)
   
422
     
(757
)
Total comprehensive (loss) income
   
(968
)
   
(3,172
)
   
2,020
     
(2,143
)
Less: Comprehensive (loss) income attributable to the noncontrolling interest
   
(147
)
   
(431
)
   
75
     
(351
)
Comprehensive (loss) income attributable to Sun Communities, Inc. common stockholders
 
$
(821
)
 
$
(2,741
)
 
$
1,945
   
$
(1,792
)


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2011
 (In thousands, except per share amounts)
(Unaudited)

   
Common Stock
   
Additional Paid-in Capital
   
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, 2010
 
$
217
   
$
495,331
   
$
(2,226
)
 
$
(549,625
)
 
$
(63,600
)
 
$
(119,903
)
 
$
(12,481
)
 
$
(132,384
)
Issuance of common stock from exercise of options, net
   
-
     
690
     
-
     
-
     
-
     
690
     
-
     
690
 
Issuance and associated costs of common stock, net
   
16
     
47,081
     
-
     
-
     
-
     
47,097
     
-
     
47,097
 
Issuance of preferred OP units
   
-
     
-
     
-
     
-
     
-
     
-
     
45,548
     
45,548
 
Stock-based compensation - amortization and forfeitures
   
-
     
555
     
-
     
35
     
-
     
590
     
-
     
590
 
Net income
   
-
     
-
     
-
     
1,561
     
-
     
1,561
     
37
     
1,598
 
Unrealized gain on interest rate swaps and cap
   
-
     
-
     
384
     
-
     
-
     
384
     
38
     
422
 
Cash distributions
   
-
     
-
     
-
     
(26,388
)
   
-
     
(26,388
)
   
(2,621
)
   
(29,009
)
Balance as of June 30, 2011
 
$
233
   
$
543,657
   
$
(1,842
)
 
$
(574,417
)
 
$
(63,600
)
 
$
(95,969
)
 
$
30,521
   
$
(65,448
)


See accompanying Notes to Consolidated Financial Statements.




 
5

 
 
 

SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
 (In thousands)
(Unaudited)

   
Six Months Ended June 30,
 
   
2011
   
2010
 
OPERATING ACTIVITIES:
           
Net income (loss)
 
$
1,598
   
$
(1,386
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Gain on disposal of assets and depreciated homes, net
   
(1,518
)
   
(1,654
)
(Gain) loss on valuation of derivative instruments
   
(5
)
   
13
 
Stock compensation expense
   
634
     
1,301
 
Depreciation and amortization
   
35,736
     
34,187
 
Amortization of deferred financing costs
   
936
     
849
 
Equity loss from affiliates, net
   
-
     
1,577
 
Change in notes receivable from financed sales of inventory homes, net of repayments
   
(2,581
)
   
(2,599
)
Change in inventory, other assets and other receivables, net
   
(7,859
)
   
(418
)
Change in accounts payable and other liabilities
   
3,712
     
(418
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
30,653
     
31,452
 
                 
INVESTING ACTIVITIES:
               
Investment in properties
   
(39,507
)
   
(20,652
)
Acquisitions
   
(50,858
)
   
-
 
Proceeds related to disposition of assets and depreciated homes, net
   
677
     
195
 
Reduction of notes receivable and officer's notes, net
   
723
     
2,631
 
NET CASH USED FOR INVESTING ACTIVITIES
   
(88,965
)
   
(17,826
)
                 
FINANCING ACTIVITIES:
               
Issuance and associated costs of common stock, OP units, and preferred OP units, net
   
47,097
     
13,795
 
Net proceeds from stock option exercise
   
690
     
-
 
Distributions to stockholders, OP unit holders, and preferred OP unit holders
   
(29,009
)
   
(26,519
)
Borrowings on lines of credit
   
101,400
     
70,759
 
Payments on lines of credit
   
(107,602
)
   
(79,643
)
Proceeds from issuance of other debt
   
172,483
     
17,104
 
Payments on other debt
   
(129,221
)
   
(7,832
)
Payments for deferred financing costs
   
(1,939
)
   
(168
)
NET CASH PROVIDED (USED) FOR FINANCING ACTIVITIES
   
53,899
     
(12,504
)
                 
Net (decrease) increase in cash and cash equivalents
   
(4,413
)
   
1,122
 
Cash and cash equivalents, beginning of period
   
8,420
     
4,496
 
Cash and cash equivalents, end of period
 
$
4,007
   
$
5,618
 
                 
SUPPLEMENTAL INFORMATION:
               
Cash paid for interest
 
$
25,441
   
$
26,534
 
Cash paid for interest on mandatorily redeemable debt
 
$
1,657
   
$
1,636
 
Cash paid for state income taxes
 
$
359
   
$
401
 
Noncash investing and financing activities:
               
Unrealized gain (loss) on interest rate swaps
 
$
422
   
$
(757
)
Reduction in secured borrowing balance
 
$
4,739
   
$
2,978
 
Acquisitions - preferred OP units issued
 
$
45,548
   
$
-
 
Acquisitions - debt assumed
 
$
52,449
   
$
-
 
Acquisitions - other noncash consideration
 
$
1,833
   
$
-
 



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 wholly-owned or majority-owned  and controlled subsidiaries, including Sun Communities Operating Limited Partnership (the “Operating Partnership”), SunChamp LLC (“SunChamp”), and Sun Home Services, Inc. (“SHS”), have been prepared pursuant to the Securities and Exchange Commission (“SEC”) rules and regulations and in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC on February 24, 2011, as amended on March 31, 2011 (the “2010 Annual Report”).

Reference in this report to Sun Communities, Inc., “we”, “our”, “us” and the “Company” refer to Sun Communities, Inc. and its subsidiaries, unless the context indicates otherwise.

The accompanying Consolidated Financial Statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature.

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 2010 Annual Report.

Certain reclassifications have been made to prior periods’ financial statements in order to conform to current period presentation.

 
 2.
Real Estate Acquisitions

In June 2011, we closed on the acquisition of Kentland Communities (“Kentland”), comprising 17 manufactured home communities and 1 recreational vehicle community.  The 18 communities acquired are located in western Michigan and comprise 5,409 developed sites.  We believe the addition of Kentland complements our existing portfolio and enhances our long-term growth opportunities.

In May 2011, we acquired Orange City RV Resort (“Orange City”), a Florida recreational vehicle community comprising 525 developed sites.  We believe the addition of Orange City to our portfolio creates an excellent growth opportunity as well as creating a new recreational vehicle presence for us geographically.

Acquisition related costs of approximately $1.4 million have been incurred as of June 30, 2011 and are presented as “Acquisition related costs” in our Consolidated Statements of Operations.

The following table summarizes the preliminary amounts of the assets acquired and liabilities assumed recognized at the acquisition dates and the consideration paid for Kentland and Orange City:

At Acquisition Date
     
Investment in property
 
$
137,559
 
Inventory of manufactured homes
   
1,150
 
Notes
   
3,542
 
In-place leases
   
9,107
 
Other assets
   
1,116
 
Other liabilities
   
(1,786
)
Assumed debt
   
(52,449
)
         
Total identifiable assets and liabilities assumed
 
$
98,239
 
         
         
Consideration
       
         
Cash
   
29,761
 
POP units
   
45,548
 
New debt proceeds
   
22,930
 
         
Fair value of total consideration transferred
 
$
98,239
 

The purchase price allocation is preliminary and will continue to be adjusted as final costs and final valuations are determined. 

 
7

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


2.    Real Estate Acquisitions, continued

As of June 30, 2011, the total residual value of the acquired in-place leases above is $9.1 million. The amortization period is 7 years.

The results of operations of Kentland and Orange City are included in the Consolidated Statements of Operations beginning on their acquisition dates of June 2011 and May 2011, respectively. The following unaudited pro forma financial information presents the results of our operations for the six months ended June 30, 2011 and 2010 as if the properties were acquired on January 1, 2010. The unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of either the results of operations that would have actually occurred had these transactions occurred on January 1, 2010 or the future results of operations (in thousands, except per-share data).

   
Six Months Ended
 
   
June 30,
 
   
2011
   
2010
 
Total revenues
 
$
150,255
   
$
146,758
 
Net income attributable to Sun Communities, Inc. shareholders
 
$
3,112
   
$
432
 
Net income per share attributable to Sun Communities, Inc. shareholders - basic
   
0.15
     
0.02
 
Net income per share attributable to Sun Communities, Inc. shareholders - diluted
   
0.13
     
0.02
 

The amount of Kentland and Orange City’s revenue and earnings included in the Consolidated Statements of Operations for the six months ended June 30, 2011 is set forth in the following table:

   
Revenue
   
Earnings
 
Actual from acquisition date to June 30, 2011
 
$
519
   
$
266
 

 
3.
Investment Property

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

   
June 30, 2011
   
December 31, 2010
 
Land
 
$
124,073
   
$
116,837
 
Land improvements and buildings
   
1,324,544
     
1,190,761
 
Rental homes and improvements
   
226,035
     
209,824
 
Furniture, fixtures, and equipment
   
36,971
     
36,716
 
Land held for future development
   
26,746
     
26,406
 
Investment property
   
1,738,369
     
1,580,544
 
Accumulated depreciation
   
(570,884
)
   
(548,218
)
Investment property, net
 
$
1,167,485
   
$
1,032,326
 

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

See Note 2 for details on recent acquisitions.

 
4.
Transfers of Financial Assets

We have completed various transactions involving our installment notes and during 2011 we have received a total of $10.9 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 repurchase obligations requiring us to purchase the underlying homes collateralizing such notes, in the event of a note default and subsequent repossession of the home.  The repurchase provisions are considered to be a form of continuing involvement, and we have recorded these transactions as a transfer of financial assets.


 
8

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


4.    Transfers of Financial Assets, continued

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
 
Repurchase %
 
Less than or equal to 15
   
100
%
Greater than 15 but less than 64
   
90
%
Greater than 64 but less than 120
   
65
%
120 or more
   
50
%

The transferred assets have been classified as collateralized receivables in Notes and Other Receivables (see Note 5) and the cash proceeds received from these transactions have been classified as a secured borrowing in Debt (see Note 7) within the Consolidated Balance Sheets.  The balance of the collateralized receivables was $77.1 million (net of allowance of $0.4 million) and $71.0 million (net of allowance of $0.2 million) as of June 30, 2011 and December 31, 2010, respectively.  The outstanding balance on the secured borrowing was $77.5 million and $71.3 million as of June 30, 2011 and December 31, 2010, 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, 2010
 
$
71,278
 
Financed sales of manufactured homes
   
10,927
 
Principal payments and payoffs from our customers
   
(1,937
)
Repurchases
   
(2,802
)
Total activity
   
6,188
 
Ending balance as of  June 30, 2011
 
$
77,466
 

The collateralized receivables earn interest income and the secured borrowings accrue interest expense at the same interest rates.  The amount of interest income and expense recognized was $2.1 million and $1.7 million for the three months ended June 30, 2011 and 2010, respectively.  The amount of interest income and expense recognized was $4.0 million and $3.2 million for the six months ended June 30, 2011 and 2010, respectively.  

 
5.
Notes and Other Receivables

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

   
June 30, 2011
   
December 31, 2010
 
Installment notes receivable on manufactured homes, net
 
$
14,011
   
$
9,420
 
Collateralized receivables, net (see Note 4)
   
77,107
     
71,020
 
Other receivables, net
   
11,264
     
8,367
 
Total notes and other receivables
 
$
102,382
   
$
88,807
 


 
9

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

 
5.
Notes and Other Receivables, continued

Installment Notes Receivable on Manufactured Homes

The installment notes of $14.0 million (net of allowance of $0.1 million) and $9.4 million (net of allowance of $0.1 million) as of June 30, 2011 and December 31, 2010, respectively, are collateralized by manufactured homes. The notes represent financing provided by us to purchasers of manufactured homes generally located in our communities and require monthly principal and interest payments.  This also includes the notes receivable that were purchased in the Kentland acquisition.  See Note 2 for more information.  The notes have a net weighted average interest rate and maturity of 7.8 percent and 10.2 years as of June 30, 2011, and 7.0 percent and 11.1 years as of December 31, 2010.

The change in the aggregate gross principal balance of the installment notes is as follows (in thousands):

Beginning balance as of December 31, 2010
 
$
9,466
 
Financed sales of manufactured homes
   
1,997
 
Acquired notes (see Note 2)
   
3,542
 
Principal payments and payoffs from our customers
   
(581
)
Repurchases
   
(316
)
Total activity
   
4,642
 
Ending balance as of  June 30, 2011
 
$
14,108
 

Collateralized Receivables

Certain transactions involving our installment notes were recorded as a transfer of financial assets (see Note 4) and classified as collateralized receivables.  The receivables have a balance of $77.1 million (net of allowance of $0.4 million) and $71.0 million (net of allowance of $0.2 million) as of June 30, 2011 and December 31, 2010, respectively.  The receivables have a net weighted average interest rate and maturity of 11.3 percent and 13.2 years as of June 30, 2011, and 11.3 percent and 13.4 years as of December 31, 2010.

Allowance for Losses for Collateralized and Installment Notes Receivable

We are generally able to recover our investment in uncollectible notes receivable by repurchasing the homes that collateralized these notes receivable and then selling or leasing these homes to potential residents in our communities.  Although our experience supports a high recovery rate for repossessed homes, we believe there is some degree of uncertainty about recoverability of our investment in these repossessed homes.  When an account becomes 60 days delinquent, we stop accruing interest on the account.  We have established a loan loss reserve to record our estimated unrecoverable costs associated with these repossessed homes.  We estimate our unrecoverable costs to be the repurchase price plus repair and remarketing costs that exceed the estimated selling price of the home being repossessed.  A historical average of this excess cost is calculated based on prior repossessions and applied to our estimated annual future repossessions to create the allowance for installment notes and collateralized receivables.  The allowance for losses for collateralized and installment notes receivable was approximately $0.5 million and $0.3 million as of June 30, 2011 and December 31, 2010, respectively.

Other Receivables

Other receivables were comprised of amounts due from residents for rent and water usage of $1.9 million (net of allowance of $0.3 million), home sale proceeds of $2.7 million, insurance receivables of $1.0 million, and rebates and other receivables of $5.7 million as of June 30, 2011.  Other receivables were comprised of amounts due from residents for rent and water and sewer usage of $1.8 million (net of allowance of $0.4 million), home sale proceeds of $2.7 million, insurance receivables of $0.8 million, and rebates and other receivables of $3.1 million as of December 31, 2010. 

 
6.
Investment in Affiliates

Origen Financial Services, LLC. (“LLC”)

At June 30, 2011 and 2010, we had a 22.9 and 25.0 percent ownership interest, respectively, in LLC; an entity formed to originate manufactured housing installment contracts.  We have suspended equity accounting as the carrying value of our investment is zero.

Origen Financial, Inc. (“Origen”)

We own 5,000,000 shares of Origen which approximates an ownership interest of 19 percent.  We have suspended equity accounting for this investment as the carrying value of our investment is zero. We do, however, receive income from dividend payments.  Our investment in Origen had a market value of approximately $8.4 million based on a quoted market closing price of $1.68 per share from the “Pink Sheet Electronic OTC Trading System” as of June 30, 2011.

 
10

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


 
6.
Investment in Affiliates, continued

The unaudited revenue and expense amounts below represent actual results through May 2011 and estimated June 2011 results.

The following table sets forth certain summarized unaudited financial information for Origen (amounts in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenues
 
$
17,109
   
$
18,488
   
$
34,838
   
$
38,151
 
Expenses
   
(20,866
)
   
(22,562
)
   
(41,954
)
   
(47,431
)
Net loss
 
$
(3,757
)
 
$
(4,074
)
 
$
(7,116
)
 
$
(9,280
)

 
7.
Debt and Lines of Credit

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

   
Principal
Outstanding
   
Weighted Average
Years to Maturity
   
Weighted Average
Interest Rates
 
   
June 30,
2011
   
December 31, 2010
   
June 30,
2011
   
December 31, 2010
   
June 30,
2011
   
December 31, 2010
 
Collateralized term loans - CMBS
 
$
470,063
   
$
463,286
     
5.4
     
3.6
     
5.3
%
   
5.1
%
Collateralized term loans - FNMA
   
366,881
     
369,147
     
11.8
     
3.4
     
3.7
%
   
4.1
%
Preferred OP Units
   
48,322
     
48,322
     
9.7
     
10.2
     
6.9
%
   
6.9
%
Secured borrowing (see Note 4)
   
77,466
     
71,278
     
13.2
     
13.4
     
11.3
%
   
11.3
%
Mortgage notes, other
   
291,852
     
211,579
     
4.9
     
4.6
     
5.0
%
   
4.8
%
Total debt
 
$
1,254,584
   
$
1,163,612
     
7.7
     
4.6
     
5.0
%
   
5.3
%
 
 
Collateralized Term Loans

On March 1, 2011, we completed a collateralized mortgage backed security “CMBS” financing with JPMorgan Chase Bank, National Association for $115.0 million bearing an interest rate of 5.837% and a maturity of March 1, 2021.  This loan is secured by 11 properties.  The loan refinanced $104.8 million of CMBS debt which was scheduled to mature in July 2011 and was collateralized using the same property pool.

The collateralized term loans totaling $836.9 million as of June 30, 2011, are secured by 87 properties comprised of 31,370 sites representing approximately $508.7 million of net book value.

In July 2011, we reached a final agreement with the Fannie Mae (“FNMA”) and PNC Bank to settle the litigation we commenced in November 2009 over certain fees charged when the variable rate loan facility was extended in April 2009.   In accordance with the terms of the final agreement, we have the option to extend the maturity date of our entire $367.0 million credit facility with PNC Bank and FNMA from 2014 to 2023, subject to compliance with certain underwriting criteria. This agreement also provided a reduction in the facility fee charged on our variable rate facility, the effect of which reduced interest expense in the second quarter by $0.8 million. One half of this expense reduction is attributable to the first quarter of the year. 

Preferred OP Units

We redeemed $0.9 million of Series B-3 Preferred OP Units in the six months ended June 30, 2010.

In February 2010, our Operating Partnership completed a ten year extension on the redemption date associated with the $35.8 million convertible Preferred OP Units to January 1, 2024.  In connection with the extension, the maximum annual preferred rate on the Preferred OP Units was increased to 9.0 percent from 8.6 percent.  These Preferred OP Units are convertible into 526,212 common shares based on a conversion price of $68 per share.

Secured Borrowing

See Note 4 for additional information regarding our collateralized receivables and secured borrowing transactions.
 
 
11

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


 
7.
Debt and Lines of Credit, continued
 
Mortgage Notes

In June 2011, we assumed secured debt with a principal balance $52.4 million as a result of the Kentland acquisition (see Note 2 for acquisition details) that has a weighted average maturity of 4.7 years and weighted average annual rate of 5.7%.  This secured debt was recorded at fair value on the date of the acquisition. This debt is secured by 12 properties.

In June 2011, we also entered into a $22.9 million financing agreement to fund the Kentland acquisition (see Note 2 for acquisition details).  The agreement has a weighted average maturity of 3.9 years and weighted average annual rate of 3.0%.  The debt was collateralized by 6 properties – 5 Kentland properties and Orange City.

In May 2011, we also completed a refinancing agreement for $23.6 million bearing an interest rate of 5.38% and a maturity of June 1, 2021.  This loan is secured by 3 properties.  The loan refinanced $17.9 million of debt which was scheduled to mature in June 2012 and was collateralized using the same property pool.

The mortgage notes totaling $291.9 million as of June 30, 2011, are collateralized by 37 properties comprised of 11,738 sites representing approximately $179.8 million of net book value.

Lines of Credit

We have an unsecured revolving line of credit facility with a maximum borrowing capacity of $115.0 million, subject to certain borrowing base calculations. The outstanding balance on the line of credit was $71.4 million and $81.0 million as of June 30, 2011 and December 31, 2010, respectively. In addition, $4.0 million of availability was used to back standby letters of credit as of June 30, 2011 and December 31, 2010. Borrowings under the line of credit bear an interest rate of LIBOR plus 165 basis points, or Prime plus 40 basis points at our option.  Prime means for any month, the prevailing “prime rate” as quoted in the Wall Street Journal.  The weighted average interest rate on the outstanding borrowings was 2.0 percent as of June 30, 2011.  The borrowings under the line of credit mature October 1, 2011. As of June 30, 2011 and December 31, 2010, $39.6 million and $30.0 million, respectively, were available to be drawn under the facility based on the calculation of the borrowing base at each date.

In May 2010, we entered into a $20.0 million secured line of credit agreement collateralized by a portion of our rental home portfolio.  The net book value of the rental homes pledged as security for the loan must meet or exceed 200 percent of the outstanding loan balance.  The agreement has a maximum 10 year term that can be prepaid partially or in full at our option any time before the maturity date without penalty.  The terms of the agreement require interest only payments for the first 5 years, with the remainder of the term being amortized based on a 10 year term.  The interest rate for the first 5 years is Prime plus 200 basis points, with a minimum rate of 5.5 percent and a maximum rate of 9.0 percent (effective rate 5.5 percent at June 30, 2011); and thereafter at a fixed rate of 5.15 percent over the 5-year U.S. Treasury rate in effect on May 1, 2015. Prime shall mean the prime rate published in the Wall Street Journal adjusted the first day of each calendar month.  The outstanding balance was $9.0 million as of June 30, 2011 and December 31, 2010 and was collateralized by 521 and 522 rental homes with a net book value of $18.1 million and $18.0 million, respectively.

In March 2009, we entered into a $10.0 million manufactured home floor plan facility that was increased to $12.0 million in the second quarter of 2011. The floor plan facility initially had a committed term of one year. In February 2010, the floor plan facility was renewed indefinitely until our lender provides us 12 month notice of their intent to terminate the agreement. The interest rate is 100 basis points over the greater of Prime or 6.0 percent (effective rate 7.0 percent at June 30, 2011).  Prime means the prevailing “prime rate” as quoted in the Wall Street Journal on the first business day of each month.  The outstanding balance was $7.9 million and $4.5 million as of June 30, 2011 and December 31, 2010, respectively.
 
 
12

 
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
7.      Debt and Lines of Credit, continued

As of June 30, 2011, assuming the election of certain extension provisions, the total of maturities and amortization of debt and lines of credit during the next five years, are as follows (in thousands):

   
Total Due
   
Jul 2011 - Dec 2011
   
2012
   
2013
   
2014
   
2015
   
After 5 years
 
Lines of credit
 
$
88,325
   
$
71,400
   
$
7,925
   
$
-
   
$
-
   
$
-
   
$
9,000
 
Mortgage loans payable:
                                                       
Maturities
   
991,605
     
-
     
16,757
     
33,770
     
185,771
     
21,153
     
734,154
 
Principal amortization
   
137,191
     
7,964
     
16,543
     
17,043
     
15,196
     
13,314
     
67,131
 
Preferred OP Units
   
48,322
     
370
     
4,300
     
3,645
     
4,225
     
-
     
35,782
 
Secured borrowing
   
77,466
     
1,534
     
3,322
     
3,638
     
3,984
     
4,413
     
60,575
 
Total
 
$
1,342,909
   
$
81,268
   
$
48,847
   
$
58,096
   
$
209,176
   
$
38,880
   
$
906,642
 

The most restrictive of our debt agreements place limitations on secured and unsecured borrowings and contain minimum fixed charge coverage, leverage, distribution and net worth requirements. As of June 30, 2011, we were in compliance with all covenants.
 
8.      Equity Transactions

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 2011 or 2010.  There is no expiration date specified for the buyback program.
 
 
Common OP Unit holders can convert their Common OP units into an equivalent number of shares of common stock at any time.  During 2011, holders of Common OP Units converted 10,249 units to common stock.

The vesting requirements for 9,329 restricted shares granted to our employees were satisfied during the six months ended June 30, 2011.

Our shelf registration statement on Form S-3 for a proposed offering of up to $300.0 million of our common stock, preferred stock and debt securities was declared effective with the SEC in May 2009.  We entered into a sales agreement to issue and sell up to 1,600,000 shares of common stock from time to time pursuant to our effective shelf registration statement on Form S-3.  Sales under the agreement commenced during the third quarter of 2009 and we completed the final sale in May 2011.  On May 31, 2011, we entered into an amendment to the sales agreement pursuant to our effective shelf registration statement on Form S-3.  Our board of directors authorized the sale of an additional 1,600,000 shares after May 2011 under the sales agreement.  We issued 480,184 shares of common stock during the six months ended June 30, 2011.  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 $36.91.  Through June 30, 2011, we received net proceeds of approximately $17.4 million related to the issuance of common stock.  The proceeds were used to pay down our unsecured line of credit.

Subsequent to June 30, 2011, we issued an additional 161,378 shares of common stock at a weighted average sale price of $39.02 and received additional net proceeds of $6.2 million which were used to pay down our unsecured line of credit.

On August 6, 2010, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with REIT Opportunity, Ltd. (“REIT Ltd.”), which provides that, upon the terms and subject to the conditions set forth in the Purchase Agreement, REIT Ltd. is committed to purchase up to the lesser of $100,000,000 of our common stock, or 3,889,493 shares of our common stock, which is equal to one share less than twenty percent of our issued and outstanding shares of common stock on the effective date of the Purchase Agreement.  From time to time over the two year term of the Purchase Agreement, and at our sole discretion, we may present REIT Ltd. with draw down notices to purchase our common stock.  Any and all issuances of shares of common stock to REIT Ltd. pursuant to the Purchase Agreement will be registered on our effective shelf registration statement on Form S-3.  On January 5, 2011 we sold 915,827 shares of common stock at a weighted average sale price of $32.76 and received net proceeds of $30.0 million.  The funds were used to pay down our unsecured line of credit.

On May 6, 2011, we issued 134,500 shares of restricted stock to our officers and key employees under our 2009 Equity Incentive Plan.  The officer awards vest ratably over a six year period beginning on the fourth anniversary of the grant date.  The key employee awards vest ratably over a nine year period beginning on the third anniversary of the grant date.  All the awards have a fair value of $37.64.  The fair value was determined by using the closing share price of our common stock on the date the grant was issued.
 
 
 
 
 
13

 
 
 
8.      Equity Transactions, continued

In June 2011, we issued $45.5 million of Series A-1 preferred operating partnership (“Preferred OP”) units as a result of the Kentland acquisition (see Note 2 for details).  Preferred OP unit holders can convert the POP units into shares of common stock at any time after December 31, 2013 based on a conversion price of $41 per share with $100 par value.  These Series A-1 Preferred OP units are convertible, but not redeemable.  The Series A-1 Preferred OP unit holders receive a preferred return of 5.1% for the first two years and 6.0% thereafter.

On July 22, 2011, aggregate dividends, distributions and dividend equivalents of $14.9 million were made to common stockholders, common OP unitholders, and restricted stockholders of record on July 12, 2011.

On July 27, 2011, we issued 10,500 director options under our 2004 Non-Employee Director Option Plan.  We are in the process of obtaining a valuation to determine the weighted average fair value of the grant and will provide the results of the valuation in our September 30, 2011 Form 10-Q.

 
9.
Other Income (Loss)

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

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Brokerage commissions
 
$
146
   
$
135
   
$
294
   
$
274
 
Other (loss) income, net
   
(121
)
   
(73
)
   
(318
)
   
178
 
Total other income (loss), net
 
$
25
   
$
62
   
$
(24
)
 
$
452
 

 10.            Segment Reporting

Our consolidated operations can be segmented into Real Property Operations and Home Sales and Rentals.  Transactions between our segments are eliminated in consolidation.  Seasonal recreational vehicle revenue is included in Real Property Operations’ revenues and is approximately $5.5 million annually. This seasonal revenue is recognized approximately 49% in the first quarter, 6.5% in both the second and third quarters and 38% in the fourth quarter of each fiscal year.

A presentation of segment financial information is summarized as follows (amounts in thousands):
 
 
   
Three Months Ended June 30, 2011
   
Three Months Ended June 30, 2010
 
   
Real Property Operations
   
Home Sales and Home Rentals
   
Consolidated
   
Real Property Operations
   
Home Sales and Home Rentals
   
Consolidated
 
Revenues
  $ 52,264     $ 13,573     $ 65,837     $ 49,948     $ 14,650     $ 64,598  
Operating expenses/Cost of sales
    18,092       10,155       28,247       17,288       10,827       28,115  
Net operating income/Gross profit
    34,172       3,418       37,590       32,660       3,823       36,483  
Adjustments to arrive at net income (loss):
                                               
Other revenues
    2,316       109       2,425       2,035       108       2,143  
General and administrative
    (4,833 )     (1,952 )     (6,785 )     (5,627 )     (1,853 )     (7,480 )
Acquisition related costs
    (1,151 )     -       (1,151 )     -       -       -  
Depreciation and amortization
    (12,462 )     (5,659 )     (18,121 )     (11,543 )     (5,289 )     (16,832 )
Interest expense
    (15,781 )     (273 )     (16,054 )     (16,122 )     (152 )     (16,274 )
Equity income (loss) from affiliates, net
    850       -       850       (808 )     50       (758 )
Benefit (provision) for state income tax
    259       -       259       (129 )     -       (129 )
Net income (loss)
    3,370       (4,357 )     (987 )     466       (3,313 )     (2,847 )
Less:  Preferred return to preferred OP units
    51       -       51       -       -       -  
Less:  Net income (loss) attributable to noncontrolling interest
    243       (391 )     (148 )     (67 )     (331 )     (398 )
Net income (loss) attributable to Sun Communities, Inc.
  $ 3,076     $ (3,966 )   $ (890 )   $ 533     $ (2,982 )   $ (2,449 )
 
 
 
 
 
14

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


10.      Segment Reporting, continued
 
   
Six Months Ended June 30, 2011
   
Six Months Ended June 30, 2010
 
   
Real Property Operations
   
Home Sales and Home Rentals
   
Consolidated
   
Real Property Operations
   
Home Sales and Home Rentals
   
Consolidated
 
Revenues
  $ 106,100     $ 27,138     $ 133,238     $ 101,955     $ 27,766     $ 129,721  
Operating expenses/Cost of sales
    35,665       20,319       55,984       34,508       20,694       55,202  
Net operating income/Gross profit
    70,435       6,819       77,254       67,447       7,072       74,519  
Adjustments to arrive at net income (loss):
                                               
Other revenues
    4,335       403       4,738       4,221       334       4,555  
General and administrative
    (9,311 )     (3,925 )     (13,236 )     (9,117 )     (3,786 )     (12,903 )
Acquisition related costs
    (1,400 )     -       (1,400 )     -       -       -  
Depreciation and amortization
    (23,583 )     (11,217 )     (34,800 )     (22,930 )     (10,593 )     (33,523 )
Interest expense
    (31,803 )     (483 )     (32,286 )     (31,960 )     (236 )     (32,196 )
Equity income (loss) from affiliates, net
    1,200       -       1,200       (1,627 )     50       (1,577 )
Benefit (provision) for state income tax
    128       -       128       (261 )     -       (261 )
Net income (loss)
    10,001       (8,403 )     1,598       5,773       (7,159 )     (1,386 )
Less:  Preferred return to preferred OP units
    51       -       51       -       -       -  
Less:  Net income (loss) attributable to noncontrolling interest
    798       (761 )     37       452       (726 )     (274 )
Net income (loss) attributable to Sun Communities, Inc.
  $ 9,152     $ (7,642 )   $ 1,510     $ 5,321     $ (6,433 )   $ (1,112 )

 
   
June 30, 2011
   
December 31, 2010
 
   
Real Property Operations
   
Home Sales and Home Rentals
   
Consolidated
   
Real Property Operations
   
Home Sales and Home Rentals
   
Consolidated
 
Identifiable assets:
                                   
Investment property, net
 
$
1,013,549
   
$
153,936
     
1,167,485
   
$
890,867
   
$
141,459
   
$
1,032,326
 
Cash and cash equivalents
   
4,099
     
(92
)
   
4,007
     
8,385
     
35
     
8,420
 
Inventory of manufactured homes
   
-
     
4,389
     
4,389
     
-
     
2,309
     
2,309
 
Notes and other receivables
   
97,717
     
4,665
     
102,382
     
84,932
     
3,875
     
88,807
 
Other assets
   
41,797
     
2,735
     
44,532
     
28,408
     
2,421
     
30,829
 
Total assets
 
$
1,157,162
   
$
165,633
   
$
1,322,795
   
$
1,012,592
   
$
150,099
   
$
1,162,691
 

 
11.
Derivative Instruments and Hedging Activities

Our objective in using interest rate derivatives is to manage exposure to interest rate movements thereby minimizing the effect of interest rate changes and the effect it could have on future cash flows. Interest rate swaps and caps are used to accomplish this objective. We require hedging derivative instruments to be highly effective in reducing the risk exposure that they are designated to hedge. We formally designate any instrument that meets these hedging criteria as a hedge at the inception of the derivative contract.

As of June 30, 2011, we had three derivative contracts consisting of two interest rate swap agreements with a total notional amount of $45.0 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 June 30, 2011:

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
 
0.3030%
 
4.7000%
 
0.9000%
 
5.6000%
Swap
 
Floating to Fixed Rate
 
01/02/09
 
01/02/14
 
               20.0
 
3 Month LIBOR
 
0.3030%
 
2.1450%
 
0.9000%
 
3.0450%
Cap
 
Cap Floating Rate
 
04/28/09
 
05/01/12
 
             152.4
 
3 Month LIBOR
 
0.2458%
 
11.0000%
 
0.0000%
 
N/A


 
15

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


 
11.
Derivative Instruments and Hedging Activities, continued

Our financial derivative instruments are designated and qualify as cash flow hedges and the effective portion of the gain or loss on such hedges are reported as a component of accumulated other comprehensive income (loss) in our Consolidated Balance Sheets. To the extent that the hedging relationship is not effective, the ineffective portion is recorded in interest expense. Hedges that received designated hedge accounting treatment are evaluated for effectiveness at the time that they are designated as well as through the hedging period.

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 14 for information on the determination of fair value for the derivative instruments.  The following table summarizes the fair value of derivative instruments included in our Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010 (in thousands):

 
Asset Derivatives
 
Liability Derivatives
 
 
 Balance Sheet Location
 
Fair Value
 
 Balance Sheet Location
 
Fair Value
 
Derivatives designated as hedging instruments
   
June 30, 2011
   
December 31, 2010
     
June 30, 2011
   
December 31, 2010
 
Interest rate swaps and cap agreement
 Other assets
 
$
-
   
$
-
 
 Other liabilities
 
$
1,738
   
$
2,166
 
Total derivatives designated as hedging instruments
   
$
-
   
$
-
     
$
1,738
   
$
2,166
 


These valuation adjustments will only be realized under certain situations. For example, if we terminate the swaps prior to maturity or if the derivatives fail to qualify for hedge accounting, then we would need to amortize amounts currently included in other comprehensive income (loss) into interest expense over the terms of the derivative contracts.  We do not intend to terminate the swaps prior to maturity and, therefore, the net of valuation adjustments through the various maturity dates will approximate zero, unless the derivatives fail to qualify for hedge accounting.

Our hedges were highly effective and had minimal effect on income.  The following table summarizes the impact of derivative instruments for the three months ended June 30, 2011 and 2010 as recorded in the Consolidated Statements of Operations (in thousands):

Derivatives in
cash flow hedging
 
Amount of Gain or (Loss) Recognized in OCI (Effective Portion)
 
 Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
 Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
   
Three Months Ended June 30,
     
Three Months Ended June 30,
     
Three Months Ended June 30,
 
   
2011
   
2010
     
2011
   
2010
     
2011
   
2010
 
Interest rate swaps and cap agreement
 
$
19
   
$
(325
)
 Interest expense
 
$
-
   
$
-
 
 Interest expense
 
$
1
   
$
(7
)
Total
 
$
19
   
$
(325
)
 Total
 
$
-
   
$
-
 
 Total
 
$
1
   
$
(7
)


 
16

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


 
11.
Derivative Instruments and Hedging Activities, continued

The following table summarizes the impact of derivative instruments for the six months ended June 30, 2011 and 2010 as recorded in the Consolidated Statements of Operations (in thousands):

Derivatives in
cash flow hedging
 
Amount of Gain or (Loss) Recognized in OCI
(Effective Portion)
 
 Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
 Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
   
Six Months Ended June 30,
     
Six Months Ended June 30,
     
Six Months Ended June 30,
 
   
2011
   
2010
     
2011
   
2010
     
2011
   
2010
 
Interest rate swaps and cap agreement
 
$
422
   
$
(757
)
 Interest expense
 
$
-
   
$
-
 
 Interest expense
 
$
5
   
$
(13
)
Total
 
$
422
   
$
(757
)
 Total
 
$
-
   
$
-
 
 Total
 
$
5
   
$
(13
)

Certain of our derivative instruments contain provisions that require us to provide ongoing collateralization on derivative instruments in a liability position.  As of June 30, 2011 and December 31, 2010, we had collateral deposits recorded in other assets of approximately $3.1 million and $3.8 million, respectively.

 
12.
Income Taxes

We have elected to be taxed as a real estate investment trust (“REIT”) as defined under Section 856(c) of the Internal Revenue Code of 1986 (“Code”), as amended. In order for us to qualify as a REIT, at least ninety-five percent (95%) of our gross income in any year must be derived from qualifying sources. In addition, a REIT must distribute at least ninety percent (90%) of its REIT ordinary taxable income to its stockholders.

Qualification as a REIT involves the satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. In addition, frequent changes occur in the area of REIT taxation which requires us to continually monitor our tax status. We analyzed the various REIT tests and confirmed that we continued to qualify as a REIT for the quarter ended June 30, 2011.

As a REIT, we generally will not be subject to U.S. federal income taxes at the corporate level on the ordinary taxable income we distribute to our stockholders as dividends. If we fail to qualify as a REIT in any taxable year, our taxable income could be subject to U.S. federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if we qualify as a REIT, we may be subject to certain state and local income taxes and to U.S. federal income and excise taxes on our undistributed income.

SHS, our taxable REIT subsidiary, is subject to U.S. federal income taxes. Our deferred tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. Deferred tax assets are reduced, if necessary, by a valuation allowance to the amount where realization is more likely than not assured after considering all available evidence. Our temporary differences primarily relate to net operating loss carryforwards and depreciation. A federal deferred tax asset of $1.0 million is included in other assets in our Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010.

We had no unrecognized tax benefits as of June 30, 2011 and 2010. We expect no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of June 30, 2011.

We classify certain state taxes as income taxes for financial reporting purposes.  We record the Michigan Business Tax and Texas Margin Tax as income taxes in our financial statements.  We recorded a provision for state income taxes of approximately $0.2 million for the three months ended June 30, 2010.  We recorded a provision for state income taxes of approximately $0.3 million for the six months ended June 30, 2010.

On May 25, 2011, a new Michigan corporate income tax regime was enacted.  The enactment of this legislation and reporting periods will vary, but the change is to be reported in the quarter or period end that includes May 2011.  The impact of the enactment on our tax provision was a $0.4 million benefit during the quarter ended June 30, 2011 due to the elimination of the Michigan Business Tax with the new legislation enactment.  No deferred tax liability is recorded in relation to the Texas Margin Tax as of June 30, 2011 and December 31, 2010.

 
17

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


 
12.
Income Taxes, continued

We and our subsidiaries are subject to income taxes in the U.S. and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, we are no longer subject to U.S. Federal, State and Local, examinations by tax authorities before 2006.

Our policy is to report income tax penalties and income tax related interest expense as a component of income tax expense.  No interest or penalty associated with any unrecognized income tax benefit or provision was accrued, nor was any income tax related interest or penalty recognized during the six months ended June 30, 2011.

 
13.
(Loss) Earnings Per Share

We have outstanding stock options and unvested restricted shares, and our Operating Partnership has Common OP Units, and convertible Preferred OP Units, which if converted or exercised, may impact dilution.  Although our unvested restricted shares qualify as participating securities, we do not include them in the computation of basic earnings (loss) per share under the two-class method in periods we report net losses, as the result would be anti-dilutive.

Computations of basic and diluted (loss) earnings per share from continuing operations were as follows (in thousands, except per share data):

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
Numerator
 
2011
   
2010
   
2011
   
2010
 
Basic (loss) earnings: net (loss) income attributable to common stockholders
 
$
(890
)
 
$
(2,449
)
 
$
1,510
   
$
(1,112
)
Add: preferred return to preferred OP units
   
-
     
-
     
51
     
-
 
Add: amounts attributable to common noncontrolling interest
   
-
     
-
     
37
     
-
 
Diluted (loss) earnings: net (loss) income available to common stockholders and unitholders
 
$
(890
)
 
$
(2,449
)
 
$
1,598
   
$
(1,112
)
                                 
Denominator
                               
Weighted average common shares outstanding
   
238
     
18,469
     
20,875
     
18,848
 
Weighted average unvested restricted stock outstanding
   
-
     
-
     
193
     
-
 
Basic weighted average common shares and unvested restricted stock outstanding
   
238
     
18,469
     
21,068
     
18,848
 
Add: dilutive securities
   
-
     
-
     
2,087
     
-
 
Diluted weighted average common shares and securities
   
238
     
18,469
     
23,155
     
18,848
 
                                 
(Loss) earnings per share available to common stockholders:
                               
Basic
 
$
(0.04
)
 
$
(0.13
)
 
$
0.07
   
$
(0.06
)
Diluted
 
$
(0.04
)
 
$
(0.13
)
 
$
0.07
   
$
(0.06
)

We excluded securities from the computation of diluted (loss) earnings per share because the inclusion of these securities would have been anti-dilutive for the periods presented.  The following table presents the number of outstanding potentially dilutive securities that were excluded from the computation of diluted loss per share for the six months ended June 30, 2011 and 2010 (amounts in thousands):

   
June 30,
 
   
2011
   
2010
 
Stock options
   
78
     
150
 
Unvested restricted stock
   
-
     
146
 
Common OP units
   
-