SUI 2013.06.30 10Q


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, 2013.
 
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 [ X ]
Accelerated filer [ ]
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, 2013:  36,108,318


1



INDEX

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)

 
(unaudited)
June 30, 2013
 
December 31, 2012
ASSETS
 
 
 
Investment property, net (including $55,962 and $56,326 for consolidated variable interest entities at June 30, 2013 and December 31, 2012, respectively; see Note 8 )
$
1,676,813

 
$
1,518,136

Cash and cash equivalents
6,488

 
29,508

Inventory of manufactured homes
9,091

 
7,527

Notes and other receivables
160,755

 
139,850

Other assets
63,621

 
59,607

TOTAL ASSETS
$
1,916,768

 
$
1,754,628

LIABILITIES
 
 
 
Debt (including $45,555 and $45,900 for consolidated variable interest entities at June 30, 2013 and December 31, 2012, respectively; see Note 8)
$
1,353,489

 
$
1,423,720

Lines of credit
18,286

 
29,781

Other liabilities
105,873

 
88,137

TOTAL LIABILITIES
1,477,648

 
1,541,638

Commitments and contingencies

 

STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock, $0.01 par value, 10,000 shares authorized (3,400 shares issued at June 30, 2013 and December 31, 2012)
34

 
34

Common stock, $0.01 par value, 90,000 shares authorized (37,910 and 31,557 shares issued at June 30, 2013 and December 31, 2012, respectively)
379

 
316

Additional paid-in capital
1,203,373

 
940,202

Accumulated other comprehensive loss
(535
)
 
(696
)
Distributions in excess of accumulated earnings
(720,950
)
 
(683,734
)
Treasury stock, at cost  (1,802 shares at June 30, 2013 and December 31, 2012)
(63,600
)
 
(63,600
)
Total Sun Communities, Inc. stockholders' equity
418,701

 
192,522

Noncontrolling interests:
 
 
 
Series A-1 preferred OP units
45,548

 
45,548

Series A-3 preferred OP units
3,463

 

Common OP units
(27,965
)
 
(24,572
)
Consolidated variable interest entities
(627
)
 
(508
)
Total noncontrolling interests
20,419

 
20,468

TOTAL STOCKHOLDERS’ EQUITY
439,120

 
212,990

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,916,768

 
$
1,754,628




See accompanying Notes to Consolidated Financial Statements.



3

Table of Contents


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - dollars in thousands, except per share amounts)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
REVENUES
 
 
 
 
 
 
 
Income from real property
$
75,746

 
$
61,507

 
$
154,811

 
$
125,803

Revenue from home sales
13,199

 
11,439

 
26,055

 
21,052

Rental home revenue
7,977

 
6,511

 
15,338

 
12,802

Ancillary revenues, net
(27
)
 
(64
)
 
444

 
(12
)
Interest
3,182

 
2,655

 
6,145

 
5,060

Other income, net
74

 
175

 
270

 
435

Total revenues
100,151

 
82,223

 
203,063

 
165,140

COSTS AND EXPENSES
 
 
 
 
 
 
 
Property operating and maintenance
22,268

 
17,168

 
42,214

 
33,194

Real estate taxes
5,788

 
4,936

 
11,544

 
9,808

Cost of home sales
9,383

 
8,971

 
19,199

 
16,744

Rental home operating and maintenance
4,485

 
4,148

 
8,748

 
7,972

General and administrative - real property
6,369

 
5,182

 
13,159

 
10,240

General and administrative - home sales and rentals
2,812

 
2,082

 
5,246

 
4,080

Acquisition related costs
1,108

 
423

 
2,150

 
587

Depreciation and amortization
26,064

 
21,067

 
51,326

 
40,935

Interest
18,201

 
16,781

 
37,065

 
33,578

Interest on mandatorily redeemable debt
812

 
833

 
1,621

 
1,674

Total expenses
97,290

 
81,591

 
192,272

 
158,812

Income before income taxes and distributions from affiliate
2,861

 
632

 
10,791

 
6,328

Provision for state income taxes
(37
)
 
(53
)
 
(96
)
 
(106
)
Distributions from affiliate
450

 
1,900

 
850

 
2,650

Net income
3,274

 
2,479

 
11,545

 
8,872

Less:  Preferred return to Series A-1 preferred OP units
646

 
579

 
1,219

 
1,158

Less:  Preferred return to Series A-3 preferred OP units
46

 

 
76

 

Less:  Amounts attributable to noncontrolling interests
33

 
237

 
443

 
674

Net income attributable to Sun Communities, Inc.
2,549

 
1,663

 
9,807

 
7,040

Less: Series A preferred stock distributions
1,514

 

 
3,028

 

Net income attributable to Sun Communities, Inc. common stockholders
$
1,035

 
$
1,663

 
$
6,779

 
$
7,040

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
35,887

 
26,469

 
33,331

 
26,028

Diluted
35,907

 
26,485

 
33,348

 
26,045

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.03

 
$
0.06

 
$
0.20

 
$
0.27

Diluted
$
0.03

 
$
0.06

 
$
0.20

 
$
0.27

 
 
 
 
 
 
 
 
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 INCOME
(Unaudited - dollars in thousands)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
3,274

 
$
2,479

 
$
11,545

 
$
8,872

Unrealized gain on interest rate swaps
85

 
343

 
177

 
599

Total comprehensive income
3,359

 
2,822

 
11,722

 
9,471

Less: Comprehensive income attributable to the noncontrolling interests
40

 
274

 
459

 
735

Comprehensive income attributable to Sun Communities, Inc.
$
3,319

 
$
2,548

 
$
11,263

 
$
8,736



See accompanying Notes to Consolidated Financial Statements.









































5


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2013
(Unaudited - dollars in thousands)

 
7.125% Series A Cumulative Redeemable Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Distributions in Excess of Accumulated Earnings
 
Treasury Stock
 
Non-controlling Interests
 
Total Stockholders' Equity
Balance as of December 31, 2012
$
34

 
$
316

 
$
940,202

 
$
(696
)
 
$
(683,734
)
 
$
(63,600
)
 
$
20,468

 
$
212,990

Issuance of common stock from exercise of options, net

 

 
149

 

 

 

 

 
149

Issuance and associated costs of common stock, net

 
63

 
261,904

 

 

 

 

 
261,967

Issuance of preferred OP units

 

 

 

 

 

 
3,463

 
3,463

Share-based compensation - amortization and forfeitures

 

 
1,118

 

 
52

 

 

 
1,170

Net income

 

 

 

 
11,102

 

 
443

 
11,545

Unrealized gain on interest rate swaps

 

 

 
161

 

 

 
16

 
177

Distributions

 

 

 

 
(48,370
)
 

 
(3,971
)
 
(52,341
)
Balance as of June 30, 2013
$
34

 
$
379

 
$
1,203,373

 
$
(535
)
 
$
(720,950
)
 
$
(63,600
)
 
$
20,419

 
$
439,120




See accompanying Notes to Consolidated Financial Statements.






























6


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - dollars in thousands)
 
Six Months Ended June 30,
 
2013
 
2012
OPERATING ACTIVITIES:
 
 
 
Net income
$
11,545

 
$
8,872

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain from dispositions
(1,713
)
 
(87
)
Gain on valuation of derivative instruments

 
(4
)
Stock compensation expense
1,170

 
688

Depreciation and amortization
49,425

 
40,010

Amortization of deferred financing costs
1,916

 
813

Distributions from affiliate
(850
)
 
(2,650
)
Change in notes receivable from financed sales of inventory homes, net of repayments
(2,738
)
 
(4,435
)
Change in inventory, other assets and other receivables, net
1,469

 
4,729

Change in accounts payable and other liabilities
216

 
(4,452
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
60,440

 
43,484

INVESTING ACTIVITIES:
 
 
 
Investment in properties
(89,922
)
 
(60,930
)
Acquisitions
(82,718
)
 
(24,482
)
Investment in note receivable of acquired properties
(49,441
)
 

Proceeds related to affiliate dividend distribution
850

 
2,650

Proceeds related to disposition of land

 
172

Proceeds related to disposition of assets and depreciated homes, net
697

 
1,211

Increase in notes receivable, net
(144
)
 
(5,736
)
NET CASH USED IN INVESTING ACTIVITIES
(220,678
)
 
(87,115
)
FINANCING ACTIVITIES:
 
 
 
Issuance and associated costs of common stock, OP units, and preferred OP units, net
261,967

 
157,343

Net proceeds from stock option exercise
149

 
149

Distributions to stockholders, OP unit holders, and preferred OP unit holders
(47,843
)
 
(34,184
)
Borrowings on lines of credit
189,392

 
71,635

Payments on lines of credit
(200,887
)
 
(176,038
)
Proceeds from issuance of other debt
15,522

 
54,567

Payments on other debt
(78,363
)
 
(30,521
)
Payments for deferred financing costs
(2,719
)
 
(678
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
137,218

 
42,273

Net decrease in cash and cash equivalents
(23,020
)
 
(1,358
)
Cash and cash equivalents, beginning of period
29,508

 
5,857

Cash and cash equivalents, end of period
$
6,488

 
$
4,499

SUPPLEMENTAL INFORMATION:
 
 
 
Cash paid for interest
$
29,780

 
$
28,519

Cash paid for interest on mandatorily redeemable debt
$
1,621

 
$
1,677

Cash paid for state income taxes
$
219

 
$
320

Noncash investing and financing activities:
 
 
 
Unrealized gain on interest rate swaps
$
177

 
$
599

Reduction in secured borrowing balance
$
7,299

 
$
6,081

Change in dividends declared and outstanding
$
4,498

 
$
2,935

Noncash investing and financing activities at the date of acquisition:
 
 
 
Acquisitions - A-3 preferred OP units issued
$
3,463

 
$

Acquisitions - release of note receivable and accrued interest
$
49,441

 
$


See accompanying Notes to Consolidated Financial Statements.





7

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



1.      Basis of Presentation

The 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 rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information 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. The accompanying consolidated financial statements reflect, in the opinion of management, all adjustments, including adjustments of a normal and recurring nature, necessary for a fair presentation of the interim financial statements. Certain reclassifications have been made to prior periods’ financial statements in order to conform to current period presentation.

The results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the SEC on February 25, 2013 and amended on February 27, 2013 (the “2012 Annual Report”). These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our 2012 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.







8

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


2.      Real Estate Acquisitions

2013 Activity:

During the second quarter of 2013, we acquired Big Timber Lake RV Resort ("Big Timber Lake"), a recreational vehicle ("RV") community with approximately 528 sites located in Cape May, New Jersey, and Jellystone RV Resort ("Jellystone"), an RV community with approximately 299 sites located in North Java, New York.
During the first quarter of 2013, we acquired ten RV communities from Gwynns Island RV Resort LLC, Indian Creek RV Resort LLC, Lake Laurie RV Resort LLC, Newpoint RV Resort LLC, Peters Pond RV Resort Inc., Seaport LLC, Virginia Tent LLC, Wagon Wheel Maine LLC, Westward Ho RV Resort LLC and Wild Acres LLC (collectively, "Morgan RV Properties"), with approximately 3,700 sites located in Ohio, Virginia, Maine, Massachusetts, Connecticut, New Jersey and Wisconsin. In connection with the acquisition, we also recorded a contingent asset of $10.0 million as of the acquisition date which resulted from a covenant made by the seller in the Second Amendment to Omnibus Agreement related to the 2012 revenue of the acquired properties.  The contingent asset was estimated using a probability weighted model of the potential shortfall in the 2012 revenue from that represented by the seller and is recorded at its estimated fair value in notes and other receivables.

2012 Activity:

During the fourth quarter of 2012, we acquired Palm Creek Golf & RV Resort ("Palm Creek"), a community with 283 manufactured home sites, 1,580 RV sites and expansion potential of approximately 550 manufactured housing or 990 RV sites located in Casa Grande, Arizona; Lake-In-Wood Camping Resort ("Lake In Wood"), an RV community with approximately 425 sites located in Lancaster County, Pennsylvania; and Rainbow RV Resort ("Rainbow"), an RV community with approximately 500 sites located in Frostproof, Florida. We also acquired four manufactured home communities (the "Rudgate Acquisition Properties") with approximately 1,996 sites located in southeast Michigan and entered into management agreements with Rudgate Village Company Limited Partnership, Rudgate Clinton Company Limited Partnership and Rudgate Clinton Estates L.L.C. under which we manage two manufactured home communities (the "Rudgate Managed Properties") with approximately 1,598 sites located in southeast Michigan. In addition, we provided mezzanine financing to the Rudgate Managed Properties. The Rudgate Managed Properties are accounted for as variable interest entities and are included in our 2012 acquisition activity (See Note 8 for details).

During the third quarter of 2012, we acquired Blazing Star RV Resort ("Blazing Star"), an RV community with 260 sites located in San Antonio, Texas and Northville Crossing Manufactured Home Community ("Northville Crossing"), a manufactured housing community with 756 sites located in Northville, Michigan.

During the first quarter of 2012, we acquired Three Lakes RV Resort, Blueberry Hill RV Resort and Grand Lake Estates (collectively, the "Additional Florida Properties"), one of which is located in Hudson, Florida, one of which is located in Bushnell, Florida and one of which is located in Orange Lake, Florida, comprised of 1,114 sites in the aggregate.











9

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



2.      Real Estate Acquisitions, continued

The following tables summarize the amounts of the assets acquired and liabilities assumed recognized at the acquisition dates and the consideration paid for the 2013 and 2012 acquisitions (in thousands):

 
 
2013
At Acquisition Date
 
Morgan RV Properties
 
Jellystone
 
Big Timber Lake
 
Total
Investment in property
 
$
95,145

 
$
8,264

 
$
21,548

 
$
124,957

Inventory of manufactured homes
 
4,253

 
1,490

 
350

 
6,093

Notes and other receivables
 
10,000

 

 

 
10,000

In-place leases and other intangible assets
 
2,664

 
390

 
580

 
3,634

Other assets
 
157

 
7

 
48

 
212

Below market leases
 

 

 
(3,490
)
 
(3,490
)
Other liabilities
 
(3,697
)
 
(930
)
 
(1,157
)
 
(5,784
)
Total identifiable assets and liabilities assumed
 
$
108,522

 
$
9,221

 
$
17,879

 
$
135,622

 
 
 
 
 
 
 
 
 
 Consideration
 
 
 
 
 
 
 
 
Cash
 
$
55,618

 
$
9,221

 
$
17,879

 
$
82,718

Series A-3 preferred OP units
 
3,463

 

 

 
3,463

Extinguishment of note receivable
 
49,441

 

 

 
49,441

Fair value of total consideration transferred
 
$
108,522

 
$
9,221

 
$
17,879

 
$
135,622

 
 
2012
At Acquisition Date
 
Addtl Florida Properties
 
Blazing Star
 
Northville Crossing
 
Rainbow
 
Rudgate Acquisition and Managed Properties
 
Palm Creek
 
Lake in Wood
 
Total
Investment in property
 
$
25,384

 
$
6,913

 
$
30,814

 
$
7,572

 
$
123,754

 
$
87,979

 
$
14,457

 
$
296,873

Inventory of manufactured homes
 
112

 
220

 
187

 
679

 
2,978

 

 

 
4,176

Notes and other receivables
 

 

 
1,169

 

 
3,002

 

 

 
4,171

In-place leases
 
180

 

 
260

 
40

 
8,110

 
2,058

 

 
10,648

Other assets
 

 
193

 

 

 
745

 
686

 
43

 
1,667

Other liabilities
 
(1,194
)
 
(179
)
 
(221
)
 
(331
)
 
(1,832
)
 
(880
)
 

 
(4,637
)
Assumed debt
 

 
(4,104
)
 

 

 
(15,103
)
 
(43,619
)
 
(755
)
 
(63,581
)
Total identifiable assets and liabilities assumed
 
$
24,482

 
$
3,043

 
$
32,209

 
$
7,960

 
$
121,654

 
$
46,224

 
$
13,745

 
$
249,317

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Consideration
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash (1)
 
$
24,482

 
$
3,043

 
$
32,209

 
$
7,351

 
$
54,054

 
$
10,247

 
$
13,745

 
$
145,131

New debt proceeds (2) (3)
 

 

 

 
609

 
67,600

 
35,977

 

 
104,186

Fair value of total consideration transferred
 
$
24,482

 
$
3,043

 
$
32,209

 
$
7,960

 
$
121,654

 
$
46,224

 
$
13,745

 
$
249,317


(1) On September 28, 2012, Northville Crossing was encumbered with a $21.7 million loan.
(2) Subsequent to the acquisition, in January 2013, we paid off the $36.0 million sellers note for Palm Creek (See Note 9).
(3) Subsequent to the acquisition, in April 2013, we paid off the $0.6 million sellers note for Rainbow (See Note 9).

10

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



2.      Real Estate Acquisitions, continued

The purchase price allocations for Additional Florida Properties, Blazing Star, Northville Crossing, Rainbow, Rudgate Acquisition Properties, Rudgate Managed Properties, Palm Creek, Lake In Wood, Morgan RV Properties, Jellystone and Big Timber Lake are preliminary and may be adjusted as final costs and final valuations are determined.

The amount of revenue and net income included in the consolidated statements of operations for the the three and six months ended June 30, 2013 and 2012 for all acquisitions described above is set forth in the following table (in thousands):

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
(unaudited)
 
2013
 
2012
 
2013
 
2012
Revenue
$
13,312

 
$
7,987

 
$
26,863

 
$
16,162

Net income
$
390

 
$
354

 
$
3,750

 
$
2,034


The following unaudited pro forma financial information presents the results of our operations for the three and six months ended June 30, 2013 and 2012 as if the properties were acquired on January 1, 2012. The unaudited pro forma results reflect certain adjustments for items that are not expected to have a continuing impact, such as adjustments for acquisition costs incurred, management fees and purchase accounting. The information presented below has been prepared for comparative purposes only and does not purport to be indicative of either future results of operations or the results of operations that would have actually occurred had the acquisitions been consummated on January 1, 2012 (in thousands, except per-share data).

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
(unaudited)
 
2013
 
2012
 
2013
 
2012
Total revenues
$
105,168

 
$
94,372

 
$
210,191

 
$
189,976

Net income attributable to Sun Communities, Inc. shareholders
$
2,960

 
$
4,579

 
$
10,290

 
$
13,830

Net income per share attributable to Sun Communities, Inc. shareholders - basic
$
0.08

 
$
0.17

 
$
0.31

 
$
0.53

Net income per share attributable to Sun Communities, Inc. shareholders - diluted
$
0.08

 
$
0.17

 
$
0.31

 
$
0.53


Acquisition related costs of approximately $1.1 million and $0.4 million and $2.2 million and $0.6 million have been incurred for the three and six months ended June 30, 2013 and 2012, respectively, and are presented as “Acquisition related costs” in our Consolidated Statements of Operations.



11

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


3.      Investment Property

The following table sets forth certain information regarding investment property (in thousands):
 
 
June 30, 2013
 
December 31, 2012
Land
 
$
191,603

 
$
178,993

Land improvements and buildings
 
1,738,992

 
1,608,825

Rental homes and improvements
 
353,801

 
305,838

Furniture, fixtures, and equipment
 
58,397

 
54,354

Land held for future development
 
29,295

 
29,295

Investment property
 
2,372,088

 
2,177,305

Accumulated depreciation
 
(695,275
)
 
(659,169
)
Investment property, net
 
$
1,676,813

 
$
1,518,136


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

See Note 2, "Real Estate Acquisitions," for details on recent acquisitions.


12

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


4.      Transfers of Financial Assets

We completed various transactions with an unrelated entity involving our notes receivable under which we received cash proceeds in exchange for relinquishing our right, title and interest in certain notes receivable. 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 by the unrelated entity. The recourse provisions are considered to be a form of continuing involvement, and therefore these transferred loans did not meet the requirements for sale accounting. We continue to recognize these transferred loans on our balance sheet and refer to them as collateralized receivables as a transfer of financial assets. The proceeds from the transfer have been recognized as a secured borrowing.

In the event of note default, and subsequent repossession of a manufactured home by the unrelated entity, 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 collateralized receivable, 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
%
Equal to or 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 9) within the consolidated balance sheets. The balance of the collateralized receivables was $102.0 million (net of allowance of $0.6 million) and $93.8 million (net of allowance of $0.6 million) as of June 30, 2013 and December 31, 2012, respectively.  The outstanding balance on the secured borrowing was $102.6 million and $94.4 million as of June 30, 2013 and December 31, 2012, respectively.

The balances of the collateralized receivables and secured borrowings fluctuate. The balances increase as additional notes receivable are transferred and exchanged for cash proceeds. The balances are reduced as the related collateralized receivables 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):

 
Six Months Ended
 
June 30, 2013
Beginning balance
$
94,409

Financed sales of manufactured homes
15,523

Principal payments and payoffs from our customers
(2,927
)
Principal reduction from repurchased homes
(4,372
)
Total activity
8,224

Ending balance
$
102,633


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 $2.6 million and $2.3 million and $5.0 million and $4.4 million for the three and six months ended June 30, 2013 and 2012, respectively.  



13

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):

 
 
June 30, 2013
 
December 31, 2012
Installment notes receivable on manufactured homes, net
 
$
24,437

 
$
21,898

Collateralized receivables, net (see Note 4)
 
101,988

 
93,834

Other receivables, net
 
34,330

 
24,118

Total notes and other receivables
 
$
160,755

 
$
139,850


Installment Notes Receivable on Manufactured Homes

The installment notes of $24.4 million (net of allowance of $0.1 million) and $21.9 million (net of allowance of $0.1 million) as of June 30, 2013 and December 31, 2012, respectively, are collateralized by manufactured homes. The notes represent financing provided by us to purchasers of manufactured homes primarily located in our communities and require monthly principal and interest payments. The notes have a net weighted average interest rate and maturity of 8.8 percent and 11.7 years as of June 30, 2013, and 8.6 percent and 11.0 years as of December 31, 2012.

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

 
Six Months Ended
 
June 30, 2013
Beginning balance
$
22,019

Financed sales of manufactured homes
4,584

Principal payments and payoffs from our customers
(1,720
)
Principal reduction from repossessed homes
(346
)
Total activity
2,518

Ending balance
$
24,537


Collateralized Receivables

Collateralized receivables represent notes receivable that were transferred to a third party, but did not meet the requirements for sale accounting (see Note 4). The receivables have a balance of $102.0 million (net of allowance of $0.6 million) and $93.8 million (net of allowance of $0.6 million ) as of June 30, 2013 and December 31, 2012, respectively.  The receivables have a net weighted average interest rate and maturity of 10.8 percent and 13.4 years as of June 30, 2013, and 11.0 percent and 13.2 years as of December 31, 2012.

In January 2013, we entered into an agreement with Talmer Bank under which we may refer purchasers of homes in our communities to Talmer Bank to obtain loans to finance their home purchases. We do not receive referral fees or other cash compensation under the agreement. If Talmer Bank makes loans to purchasers referred by us under the agreement, and those purchasers default on their loans and Talmer Bank repossesses the homes securing such loans, we have agreed to purchase from Talmer Bank each such repossessed home for a price equal to 100% of the amount under each such loan, subject to certain adjustments; provided that the maximum outstanding principal amount of the loans subject to the agreement may not exceed $10.0 million. In addition, we have agreed to waive all site rent that would otherwise be due from Talmer Bank so long as it owns any homes on which loans were made pursuant to the agreement. The agreement expires November 1, 2013, but may be extended by mutual agreement of Talmer Bank and us. As of June 30, 2013, there have been no transactions under the agreement.

Each of Robert H. Naftaly and Arthur A. Weiss, who serve on our board of directors, is also a director of each of Talmer Bancorp, Inc. and its primary operating subsidiary, Talmer Bank. Each of Mr. Naftaly, Mr. Weiss, and Gary A. Shiffman, our Chairman of the Board, President and Chief Executive Officer, also owns less than one percent of Talmer Bancorp, Inc.'s common stock and may have a conflict of interest with respect to his obligations as our officer and/or director and his capacity as a shareholder and/or director of Talmer Bancorp, Inc. and Talmer Bank.


14

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


5.      Notes and Other Receivables, continued

Allowance for Losses for Collateralized and Installment Notes Receivable

The following table sets forth the allowance for collateralized and installment notes receivable as of June 30, 2013 (in thousands).

 
Six Months Ended
 
June 30, 2013
Beginning balance
$
(697
)
Lower of cost or market write-downs
243

Increase to reserve balance
(292
)
Total activity
(49
)
Ending balance
$
(746
)

Other Receivables

As of June 30, 2013, other receivables were comprised of amounts due from residents for rent and water and sewer usage of $4.4 million (net of allowance of $0.4 million), home sale proceeds of $5.7 million, insurance receivables of $2.1 million, insurance settlement of $3.7 million, rebates and other receivables of $3.4 million, a contingent asset of $10.0 million (see Note 2, "Real Estate Acquisitions") and a note receivable of $5.0 million. The note bears interest at LIBOR plus 475 basis points and is secured by senior mortgages on two RV communities, a pledge of $4.0 million in Series A-3 Preferred OP Units, a subordinated interest in cash collateral account and equity interests in another RV community.  As of December 31, 2012, other receivables were comprised of amounts due from residents for rent and water and sewer usage of $4.1 million (net of allowance of $0.5 million), home sale proceeds of $6.1 million, insurance receivables of $1.7 million, insurance settlement of $3.7 million, note receivable of $5.0 million, and rebates and other receivables of $3.5 million.

The $5.0 million note receivable became due on May 31, 2013 and is in default at June 30, 2013.  We have continued to charge interest beyond the maturity date and the borrower is current on these charges.  The Company is currently exploring its alternatives, including exercising its remedies under the loan documents or negotiating an extension with the borrowers.  Because this note is the personal obligation of the borrowers and is secured by the assets described above, the Company does not believe any allowance is necessary at June 30, 2013.

6.
Intangibles

Our intangible assets are in-place leases from acquisitions and capitalized costs in relation to leasing costs. These intangible assets are recorded within Other Assets on the consolidated balance sheets. They are amortized over a seven year amortization period. The gross carrying amount is $38.2 million and $35.2 million at June 30, 2013 and December 31, 2012, respectively. The accumulated amortization is $14.2 million and $11.8 million at June 30, 2013 and December 31, 2012, respectively. Aggregate net amortization expense related to intangible assets was $1.3 million and $0.7 million and $3.1 million and $1.7 million for the three and six months ended June 30, 2013 and 2012, respectively.

7.      Investment in Affiliates

Origen Financial Services, LLC (“OFS LLC”)

At June 30, 2013 and 2012, we had a 22.9 percent ownership interest in OFS 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”)

Through Sun OFI, LLC, a taxable REIT subsidiary, we own 5,000,000 shares of common stock of Origen which approximates an ownership interest of 19 percent. Although it is no longer originating or servicing loans, Origen continues to manage an existing portfolio of manufactured home loans and asset backed securities. We have suspended equity accounting for this investment as the carrying value of our investment is zero. We do, however, receive income from dividends on our shares of Origen common stock.  Per Origen's earnings release dated May 14, 2013, the dividend payment represented a return of capital. Our investment in Origen had a market value of approximately $6.8 million based on a quoted market closing price of $1.35 per share from the OTC Pink Marketplace as of June 28, 2013.

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
(unaudited)
 
2013
 
2012
 
2013
 
2012
Revenues
$
13,207

 
$
14,982

 
$
25,880

 
$
31,275

Expenses
(13,034
)
 
(18,010
)
 
(27,560
)
 
(30,737
)
Net loss
$
173

 
$
(3,028
)
 
$
(1,680
)
 
$
538




15

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


8.      Consolidated Variable Interest Entities

Variable interest entities ("VIEs") that are consolidated include Rudgate Village SPE, LLC, Rudgate Clinton SPE, LLC and Rudgate Clinton Estates SPE, LLC (the “Rudgate Borrowers”). We concluded that the Rudgate Borrowers qualify as VIEs as we are the primary beneficiary and hold a controlling financial interest in these entities due to our power to direct the activities that most significantly impact the economic performance of the entities, as well as our obligation to absorb the most significant losses and our rights to receive significant benefits from these entities.  As such, the transactions and accounts of these VIEs are included in the accompanying consolidated financial statements.

The following table summarizes the assets and liabilities included in our consolidated balance sheet after appropriate eliminations (in thousands):

 
June 30, 2013
 
December 31, 2012
ASSETS
 
 
 
Investment property, net
$
55,962

 
$
56,326

Other assets
4,286

 
4,598

   Total Assets
$
60,248

 
$
60,924

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Debt
$
45,555

 
$
45,900

Other liabilities
4,070

 
1,773

Noncontrolling interests
(627
)
 
(508
)
   Total Liabilities and Stockholders' Equity
$
48,998

 
$
47,165


Investment property, net and other assets related to the consolidated VIEs comprised approximately 3.1 percent and 3.5 percent of our consolidated total assets and debt and other liabilities comprised approximately 3.4 percent and 3.1 percent of our consolidated total liabilities at June 30, 2013 and December 31, 2012, respectively. Noncontrolling interest related to the consolidated VIEs comprised less than 1.0% of our consolidated total equity at June 30, 2013 and December 31, 2012.

9.      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, 2013
 
December 31, 2012
 
June 30, 2013
 
December 31, 2012
 
June 30, 2013
 
December 31, 2012
Collateralized term loans - CMBS
$
684,921

 
$
725,951

 
4.4

 
4.5

 
5.4
%
 
5.2
%
Collateralized term loans - FNMA
367,778

 
369,810

 
9.8

 
10.3

 
3.6
%
 
3.8
%
Aspen and Series B-3 preferred OP Units
47,322

 
47,322

 
8.1

 
8.4

 
6.9
%
 
6.9
%
Secured borrowing (see Note 4)
102,633

 
94,409

 
12.3

 
12.8

 
10.8
%
 
11.0
%
Mortgage notes, other
150,835

 
186,228

 
6.3

 
6.2

 
4.6
%
 
4.3
%
Total debt
$
1,353,489

 
$
1,423,720

 
6.7

 
6.8

 
5.3
%
 
5.2
%

Collateralized Term Loans

In May 2013, we extended $151.4 million of Fannie Mae (FNMA) debt until May 1, 2023, which had an original maturity date of May 1, 2013. The current weighted average interest rate on this debt is 4.3%.

The collateralized term loans totaling $1.1 billion as of June 30, 2013, are secured by 99 properties comprised of 36,844 sites representing approximately $671.7 million of net book value.



16

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



9.      Debt and Lines of Credit, continued

Aspen Preferred OP Units and Series B-3 Preferred OP units

The Aspen preferred OP units are convertible into 526,212 common shares based on a conversion price of $68 per share with a redemption date of January 1, 2024. The current preferred rate is 6.5%.

Secured Borrowing

See Note 4, "Transfers of Financial Assets", for additional information regarding our collateralized receivables and secured borrowing transactions.

Mortgage Notes
 
In May 2013, we paid off the entire $3.5 million mortgage agreement secured by Holiday West Village upon maturity.

In April 2013, we paid off the sellers note associated with the Rainbow acquisition (see Note 2). The note had a principal balance of $0.6 million and beared no interest.

In January 2013, we paid off the sellers note associated with the Palm Creek acquisition (see Note 2). The note had a principal balance of $36.0 million and an interest rate of 2.0%. We also paid off the remaining $30.0 million outstanding under our $36.0 million variable financing loan from Bank of America, N.A. and The Private Bank.

The mortgage notes totaling $150.8 million as of June 30, 2013, are collateralized by 20 properties comprised of 8,880 sites representing approximately $252.5 million of net book value.

Lines of Credit

In May 2013, we entered into a credit agreement consisting of a $350.0 million senior secured revolving credit facility (the "Facility"). The Facility replaced our previous $150.0 million senior secured revolving credit facility, which was scheduled to mature on October 1, 2014 and incurred interest at a floating rate based on the Eurodollar rate plus a margin that was determined based on our leverage ratio calculated in accordance with the previous credit agreement, which ranged from 2.25% to 2.95%.

The Facility has a four year term ending May 15, 2017, which can be extended for one additional year at our option, subject to the satisfaction of certain conditions as defined in the credit agreement. The credit agreement also provides for, subject to the satisfaction of certain conditions, additional commitments in an amount not to exceed $250.0 million. The Facility bears interest at a floating rate based on the Eurodollar rate plus a margin that is determined based on our leverage ratio calculated in accordance with the credit agreement, which can range from 1.65% to 2.90%. Based on our calculation of the leverage ratio as of June 30, 2013, the margin was 1.65%. At June 30, 2013, we had approximately $14.2 million outstanding under the Facility. There was no amount outstanding on the previous senior secured revolving credit facility at December 31, 2012. At June 30, 2013 and December 31, 2012, approximately $4.0 million of availability was used to back standby letters of credit.

The Facility is secured by a first priority lien on all of our equity interests in each entity that owns all or a portion of the properties constituting the borrowing base and collateral assignments of our senior and junior debt positions in certain borrowing base properties.

In February 2013, we entered into a $61.5 million credit agreement to fund a portion of the purchase of the Morgan RV Properties acquisition (See Note 2). This loan was paid off in March 2013.

We also have a $50.0 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% of the outstanding loan balance. The terms of the agreement require interest only payments for the first five years, with the remainder of the term being amortized based on a 10 year term. The interest rate is the prime rate as published in the Wall Street Journal adjusted the first day of each calendar month plus 200 basis points with a minimum rate of 5.5%. At June 30, 2013, the effective interest rate was 5.5%, and there was no amount outstanding. At December 31, 2012, we had $25.0 million outstanding under this line of credit.



17

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


9.      Debt and Lines of Credit, continued

Lastly, we have a $12.0 million manufactured home floor plan facility renewable indefinitely until our lender provides us a twelve month notice of their intent to terminate the agreement. The interest rate is 100 basis points over the greater of the prime rate as quoted in the Wall Street Journal on the first business day of each month or 6.0% . At June 30, 2013 the effective interest rate was 7.0%.   The outstanding balance was $4.1 million and $4.8 million at June 30, 2013 and December 31, 2012, respectively.

Covenants

The most restrictive of our debt agreements place limitations on secured borrowings and contain minimum fixed charge coverage, leverage, distribution and net worth requirements. At June 30, 2013, we were in compliance with all covenants.

10.      Equity Transactions

In March 2013, we closed an underwritten registered public offering of 5,750,000 shares of common stock at a price of $45.25 per share. The net proceeds from the offering were $249.5 million after deducting underwriting discounts and the expenses related to the offering. We used a portion of the proceeds to pay down debt. We used the remaining net proceeds of the offering to fund potential future acquisitions of properties and for working capital and general corporate purposes.

In February 2013, we issued $4.0 million of A-3 preferred OP units in connection with the Morgan RV Properties acquisition (see Note 2). A-3 preferred OP unit holders can convert the A-3 preferred OP units into shares of common stock based upon a conversion price of $53.75 per share. The A-3 preferred OP unit holders receive a preferred return of 4.5% per year.

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 2013 or 2012.  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 the three and six months ended June 30, 2013, there were no units converted to common stock. During the three and six months ended June 30, 2012, holders of common OP units converted 2,000 units to common stock.

Cash dividends of $0.63 per share were declared for the quarter ended June 30, 2013. On July 19, 2013 cash payments of approximately $24.1 million for aggregate dividends, distributions and dividend equivalents were made to common stockholders, Common OP unitholders and restricted stockholders of record as of June 28, 2013. In addition, cash dividends of $0.4475 per share were declared on the Company's Series A cumulative redeemable preferred stock. On July 15, 2013 cash payments of approximately $1.5 million for aggregate dividends were made to Series A cumulative redeemable preferred stock holders of record as of July 2, 2013.

11.      Share-Based Compensation

In June 2013, we granted 250,000 shares of restricted stock to an executive officer under our Sun Communities, Inc. Equity Incentive Plan ("2009 Equity Plan"). The restricted shares had a fair value of $47.56 per share and will vest as follows: June 20, 2016 - 87,500 shares; June 20, 2017 - 87,500 shares; June 20, 2018 - 50,000 shares; June 20, 2019 - 12,500 shares; and June 20, 2020 - 12,500 shares. The fair value was determined using the closing price of our common stock on the date the shares were issued.

In March 2013, we granted 1,000 shares of restricted stock to employees under our 2009 Equity Plan. The awards vest on March 12, 2016, and had a fair value of $45.68 per share. The fair value was determined using the closing price of our common stock on the date the shares were issued.

In February 2013, we granted 73,000 shares of restricted stock to our executive officers under our 2009 Equity Plan. The awards vest ratably over a six or eight year period beginning on the fourth anniversary of the grant date, and had a fair value of $45.69 per share. The fair value was determined by using the closing share price of our common stock on the date the shares were issued.

In February 2013, we granted 10,800 shares of restricted stock to our directors under our First Amended and Restated 2004 Non-Employee Director Option Plan. The awards vest on February 15, 2016, and had a fair value of $45.69 per share. The fair value was determined by using the closing share price of our common stock on the date the shares were issued.


18

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


11.      Share-Based Compensation, continued

During the six months ended June 30, 2013, 7,442 shares of common stock were issued in connection with the exercise of stock options and the net proceeds received were $0.1 million.

The vesting requirements for 8,750 restricted shares granted to our employees were satisfied during the six months ended June 30, 2013.

12.      Other Income

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Brokerage commissions
$
232

 
$
124

 
$
549

 
$
329

Other income (loss), net
(158
)
 
51

 
(279
)
 
106

Total other income, net
$
74

 
$
175

 
$
270

 
$
435


19

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


13.     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.  Transient RV revenue is included in Real Property Operations’ revenues and is expected to approximate $18.4 million annually. This transient revenue is estimated to be recognized 38% in the first quarter, 14% in the second, 31% in the third quarter and 17% 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, 2013
 
Three Months Ended June 30, 2012
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
Revenues
$
75,746

 
$
21,176

 
$
96,922

 
$
61,507

 
$
17,950

 
$
79,457

Operating expenses/Cost of sales
28,056

 
13,868

 
41,924

 
22,104

 
13,119

 
35,223

Net operating income/Gross profit
47,690

 
7,308

 
54,998

 
39,403

 
4,831

 
44,234

Adjustments to arrive at net income (loss):
 
 
 
 
 
 
 
 
 
 
 
Other revenues
3,256

 
(27
)
 
3,229

 
2,830

 
(64
)
 
2,766

General and administrative
(6,369
)
 
(2,812
)
 
(9,181
)
 
(5,182
)
 
(2,082
)
 
(7,264
)
Acquisition related costs
(1,108
)
 

 
(1,108
)
 
(423
)
 

 
(423
)
Depreciation and amortization
(17,410
)
 
(8,654
)
 
(26,064
)
 
(14,077
)
 
(6,990
)
 
(21,067
)
Interest expense
(18,993
)
 
(20
)
 
(19,013
)
 
(17,605
)
 
(9
)
 
(17,614
)
Distributions from affiliate
450

 

 
450

 
1,900

 

 
1,900

Provision for state income tax
(37
)
 

 
(37
)
 
(53
)
 

 
(53
)
Net income (loss)
7,479

 
(4,205
)
 
3,274

 
6,793

 
(4,314
)
 
2,479

Less:  Preferred return to A-1 preferred OP units
646

 

 
646

 
579

 

 
579

Less: Preferred return to A-3 preferred OP units
46

 

 
46

 

 

 

Less:  Net income (loss) attributable to noncontrolling interests
386

 
(353
)
 
33

 
800

 
(563
)
 
237

Net income (loss) attributable to Sun Communities, Inc.
6,401

 
(3,852
)
 
2,549

 
5,414

 
(3,751
)
 
1,663

Less: 7.125% Series A Cumulative Preferred Stock Distributions
1,514

 

 
1,514

 

 

 

Net income (loss) attributable to Sun Communities, Inc. common stockholders
$
4,887

 
$
(3,852
)
 
$
1,035

 
$
5,414

 
$
(3,751
)
 
$
1,663
















20

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


13.     Segment Reporting, continued

 
Six Months Ended June 30, 2013
 
Six Months Ended June 30, 2012
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
Revenues
$
154,811

 
$
41,393

 
$
196,204

 
$
125,803

 
$
33,854

 
$
159,657

Operating expenses/Cost of sales
53,758

 
27,947

 
81,705

 
43,002

 
24,716

 
67,718

Net operating income/Gross profit
101,053

 
13,446

 
114,499

 
82,801

 
9,138

 
91,939

Adjustments to arrive at net income (loss):
 
 
 
 
 
 
 
 
 
 
 
Other revenues
6,415

 
444

 
6,859

 
5,495

 
(12
)
 
5,483

General and administrative
(13,159
)
 
(5,246
)
 
(18,405
)
 
(10,240
)
 
(4,080
)
 
(14,320
)
Acquisition related costs
(2,150
)
 

 
(2,150
)
 
(587
)
 

 
(587
)
Depreciation and amortization
(34,206
)
 
(17,120
)
 
(51,326
)
 
(27,038
)
 
(13,897
)
 
(40,935
)
Interest expense
(38,357
)
 
(329
)
 
(38,686
)
 
(35,166
)
 
(86
)
 
(35,252
)
Distributions from affiliate
850

 

 
850

 
2,650

 

 
2,650

Provision for state income tax
(96
)
 

 
(96
)
 
(106
)
 

 
(106
)
Net income (loss)
20,350

 
(8,805
)
 
11,545

 
17,809

 
(8,937
)
 
8,872

Less:  Preferred return to A-1 preferred OP units
1,219

 

 
1,219

 
1,158

 

 
1,158

Less: Preferred return to A-3 preferred OP units
76

 

 
76

 

 

 

Less:  Net income (loss) attributable to noncontrolling interests
1,231

 
(788
)
 
443

 
1,657

 
(983
)
 
674

Net income (loss) attributable to Sun Communities, Inc.
17,824

 
(8,017
)
 
9,807

 
14,994

 
(7,954
)
 
7,040

Less: 7.125% Series A Cumulative Preferred Stock Distributions
3,028

 

 
3,028

 

 

 

Net income (loss) attributable to Sun Communities, Inc. common stockholders
$
14,796

 
$
(8,017
)
 
$
6,779

 
$
14,994

 
$
(7,954
)
 
$
7,040


 
June 30, 2013
 
December 31, 2012
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
Identifiable assets:
 
 
 
 
 
 
 
 
 
 
 
Investment property, net
$
1,414,816

 
$
261,997

 
$
1,676,813

 
$
1,296,753

 
$
221,383

 
$
1,518,136

Cash and cash equivalents
6,449

 
39

 
6,488

 
29,071

 
437

 
29,508

Inventory of manufactured homes

 
9,091

 
9,091

 

 
7,527

 
7,527

Notes and other receivables
151,947

 
8,808

 
160,755

 
131,000

 
8,850

 
139,850

Other assets
59,776

 
3,845

 
63,621

 
54,959

 
4,648

 
59,607

Total assets
$
1,632,988

 
$
283,780

 
$
1,916,768

 
$
1,511,783

 
$
242,845

 
$
1,754,628



21

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


14.     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, 2013.

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, 2013 and December 31, 2012.

We had no unrecognized tax benefits as of June 30, 2013 and 2012. We expect no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of June 30, 2013.

We classify certain state taxes as income taxes for financial reporting purposes.  We record Texas Margin Tax as income tax in our financial statements, and we recorded a provision for state income taxes of approximately $0.1 million for the six months ended June 30, 2013 and 2012.
 

22

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


15.     Earnings Per Share

We have outstanding stock options and unvested restricted shares, and our Operating Partnership has common OP units, convertible A-1 preferred OP units, convertible A-3 preferred OP units and Aspen preferred OP Units, which if converted or exercised, may impact dilution. 

Computations of basic and diluted earnings per share from continuing operations were as follows (in thousands, except per share data):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Numerator
 
2013
 
2012
 
2013
 
2012
Basic earnings: net income attributable to common stockholders
 
$
1,035

 
$
1,663

 
$
6,779

 
$
7,040

Add: amounts attributable to common noncontrolling interests
 

 

 

 

Diluted earnings: net income available to common stockholders and unitholders
 
$
1,035

 
$
1,663

 
$
6,779

 
$
7,040

Denominator
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
35,479

 
26,188

 
32,954

 
25,749

Weighted average unvested restricted stock outstanding
 
408

 
281

 
377

 
279

Basic weighted average common shares and unvested restricted stock outstanding
 
35,887

 
26,469

 
33,331

 
26,028

Add: dilutive securities
 
20

 
16

 
17

 
17

Diluted weighted average common shares and securities
 
35,907

 
26,485

 
33,348

 
26,045

Earnings per share available to common stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.03

 
$
0.06

 
$
0.20

 
$
0.27

Diluted
 
$
0.03

 
$
0.06

 
$
0.20

 
$
0.27


We excluded certain securities from the computation of diluted 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 earnings per share for the three and six months ended June 30, 2013 and 2012 (amounts in thousands):

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Common OP units
 
2,069

 
2,071

 
2,069

 
2,070

Series A-1 preferred OP units
 
1,111

 
1,111

 
1,111

 
1,111

Series A-3 preferred OP units
 
75

 

 
59

 

Aspen preferred OP units
 
526

 
526

 
526

 
526

Total securities
 
3,781

 
3,708

 
3,765

 
3,707


The figures above represent the total number of potentially dilutive securities, and do not necessarily reflect the incremental impact to the number of diluted weighted average shares outstanding that would be computed if the impact to us had been dilutive to the calculation of earnings per share available to common stockholders.

23

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


16.     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, 2013, we had three derivative contracts consisting of one interest rate swap agreement with a notional amount of $20.0 million and two interest rate cap agreements with a total notional amount of $162.4 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, 2013:

Type
 
Purpose
 
Effective Date
 
Maturity Date
 
 Notional
 (in millions)
 
Based on
 
Variable Rate
 
Fixed Rate
 
Spread
 
Effective Fixed Rate
Swap
 
Floating to Fixed Rate
 
1/1/2009
 
1/1/2014
 
$
20.0

 
3 Month LIBOR
 
0.2826%
 
2.1450%
 
1.8700%
 
4.0150%
Cap
 
Cap Floating Rate
 
4/1/2012
 
4/1/2015
 
$
152.4

 
3 Month LIBOR
 
0.2836%
 
11.2650%
 
—%
 
N/A
Cap
 
Cap Floating Rate
 
10/3/2011
 
10/3/2016
 
$
10.0

 
3 Month LIBOR
 
0.2836%
 
11.0200%
 
—%
 
N/A

Generally, 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 or does not qualify as a cash flow hedge, the ineffective portion is recorded in interest expense. Hedges that receive 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 17 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, 2013 and December 31, 2012 (in thousands):

 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments
 
 
June 30, 2013
 
December 31, 2012
 
 
 
June 30, 2013
 
December 31, 2012
Interest rate swaps and cap agreement
Other assets
 
$

 
$

 
Other liabilities
 
$
282

 
$
459

Total derivatives designated as hedging instruments
 
 
$

 
$

 
 
 
$
282

 
$
459


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, 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.