SUI 2013.09.30 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 September 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 September 30, 2013:  36,139,992


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)
September 30, 2013
 
December 31, 2012
ASSETS
 
 
 
Investment property, net (including $56,326 for consolidated variable interest entities at September 30, 2013 and December 31, 2012; see Note 8)
$
1,695,317

 
$
1,518,136

Cash and cash equivalents
4,955

 
29,508

Inventory of manufactured homes
4,005

 
7,527

Notes and other receivables, net
170,584

 
139,850

Other assets
61,830

 
59,607

TOTAL ASSETS
$
1,936,691

 
$
1,754,628

LIABILITIES
 
 
 
Debt (including $45,386 and $45,900 for consolidated variable interest entities at September 30, 2013 and December 31, 2012, respectively; see Note 8)
$
1,353,448

 
$
1,423,720

Lines of credit
54,765

 
29,781

Other liabilities
108,782

 
88,137

TOTAL LIABILITIES
1,516,995

 
1,541,638

Commitments and contingencies

 

STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock, $0.01 par value. Authorized: 10,000 shares;
Issued and outstanding: 3,400 shares at September 30, 2013 and December 31, 2012
34

 
34

Common stock, $0.01 par value. Authorized: 90,000 shares;
Issued and outstanding: 36,140 at September 30, 2013 and 29,755 shares at December 31, 2012
361

 
298

Additional paid-in capital
1,140,625

 
876,620

Accumulated other comprehensive loss
(454
)
 
(696
)
Distributions in excess of accumulated earnings
(739,197
)
 
(683,734
)
Total Sun Communities, Inc. stockholders' equity
401,369

 
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
(29,764
)
 
(24,572
)
Consolidated variable interest entities
(920
)
 
(508
)
Total noncontrolling interests
18,327

 
20,468

TOTAL STOCKHOLDERS’ EQUITY
419,696

 
212,990

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,936,691

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
REVENUES
 
 
 
 
 
 
 
Income from real property
$
80,158

 
$
63,015

 
$
234,969

 
$
188,818

Revenue from home sales
14,145

 
10,461

 
40,200

 
31,513

Rental home revenue
8,445

 
6,712

 
23,783

 
19,514

Ancillary revenues, net
932

 
(112
)
 
1,376

 
(124
)
Interest
3,442

 
2,847

 
9,587

 
7,907

Brokerage commissions and other income, net
79

 
95

 
349

 
530

Total revenues
107,201

 
83,018

 
310,264

 
248,158

COSTS AND EXPENSES
 
 
 
 
 
 
 
Property operating and maintenance
24,379

 
18,067

 
66,593

 
51,261

Real estate taxes
5,602

 
4,933

 
17,146

 
14,741

Cost of home sales
10,161

 
7,791

 
29,360

 
24,535

Rental home operating and maintenance
5,504

 
5,118

 
14,252

 
13,090

General and administrative - real property
5,927

 
5,165

 
19,086

 
15,405

General and administrative - home sales and rentals
2,227

 
1,905

 
7,473

 
5,985

Acquisition related costs
619

 
847

 
2,769

 
1,434

Depreciation and amortization
28,790

 
22,092

 
80,116

 
63,027

Interest
17,823

 
17,066

 
54,888

 
50,644

Interest on mandatorily redeemable debt
809

 
825

 
2,430

 
2,499

Total expenses
101,841

 
83,809

 
294,113

 
242,621

Income (loss) before income taxes and distributions from affiliate
5,360

 
(791
)
 
16,151

 
5,537

Provision for state income taxes
(90
)
 
(84
)
 
(186
)
 
(190
)
Distributions from affiliate
700

 
600

 
1,550

 
3,250

Net income (loss)
5,970

 
(275
)
 
17,515

 
8,597

Less:  Preferred return to Series A-1 preferred OP units
690

 
586

 
1,909

 
1,744

Less:  Preferred return to Series A-3 preferred OP units
45

 

 
121

 

Less:  Amounts attributable to noncontrolling interests
(28
)
 
(211
)
 
415

 
463

Net income (loss) attributable to Sun Communities, Inc.
5,263

 
(650
)
 
15,070

 
6,390

Less: Series A preferred stock distributions
1,514

 

 
4,542

 

Net income (loss) attributable to Sun Communities, Inc. common stockholders
$
3,749

 
$
(650
)
 
$
10,528

 
$
6,390

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
36,128

 
26,938

 
34,263

 
26,427

Diluted
36,143

 
26,938

 
34,279

 
26,444

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.10

 
$
(0.02
)
 
$
0.31

 
$
0.24

Diluted
$
0.10

 
$
(0.02
)
 
$
0.31

 
$
0.24

 
 
 
 
 
 
 
 
Dividends per common share:
$
0.63

 
$
0.63

 
$
1.89

 
$
1.89

 
 
 
 
 
 
 
 


See accompanying Notes to Consolidated Financial Statements.






4


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited - dollars in thousands)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss)
$
5,970

 
$
(275
)
 
$
17,515

 
$
8,597

Unrealized gain on interest rate swaps
89

 
44

 
266

 
643

Total comprehensive income (loss)
6,059

 
(231
)
 
17,781

 
9,240

Less: Comprehensive income (loss) attributable to the noncontrolling interests
(20
)
 
(206
)
 
439

 
529

Comprehensive income (loss) attributable to Sun Communities, Inc.
$
6,079

 
$
(25
)
 
$
17,342

 
$
8,711



See accompanying Notes to Consolidated Financial Statements.









































5


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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
 
Non-controlling Interests
 
Total Stockholders' Equity
Balance as of December 31, 2012
$
34

 
$
298

 
$
876,620

 
$
(696
)
 
$
(683,734
)
 
$
20,468

 
$
212,990

Issuance of common stock from exercise of options, net

 

 
201

 

 

 

 
201

Issuance and associated costs of common stock, net

 
63

 
261,717

 

 

 

 
261,780

Issuance of preferred OP units

 

 

 

 

 
3,463

 
3,463

Share-based compensation - amortization and forfeitures

 

 
2,087

 

 
89

 

 
2,176

Net income

 

 

 

 
17,100

 
415

 
17,515

Unrealized gain on interest rate swaps

 

 

 
242

 

 
24

 
266

Distributions

 

 

 

 
(72,652
)
 
(6,043
)
 
(78,695
)
Balance as of September 30, 2013
$
34

 
$
361

 
$
1,140,625

 
$
(454
)
 
$
(739,197
)
 
$
18,327

 
$
419,696




See accompanying Notes to Consolidated Financial Statements.






























6


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - dollars in thousands)
 
Nine Months Ended September 30,
 
2013
 
2012
OPERATING ACTIVITIES:
 
 
 
Net income
$
17,515

 
$
8,597

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain from dispositions
(761
)
 
(87
)
Gain on valuation of derivative instruments

 
(4
)
Stock compensation expense
2,176

 
1,070

Depreciation and amortization
75,070

 
61,144

Amortization of deferred financing costs
2,212

 
1,252

Distributions from affiliate
(1,550
)
 
(3,250
)
Change in notes receivable from financed sales of inventory homes, net of repayments
(10,089
)
 
(6,466
)
Change in inventory, other assets and other receivables, net
7,406

 
1,892

Change in other liabilities
2,347

 
(6,221
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
94,326

 
57,927

INVESTING ACTIVITIES:
 
 
 
Investment in properties
(140,681
)
 
(90,331
)
Acquisitions
(82,718
)
 
(59,734
)
Investment in note receivable of acquired properties
(49,441
)
 

Proceeds related to affiliate dividend distribution
1,550

 
3,250

Proceeds related to disposition of land

 
172

Proceeds related to disposition of assets and depreciated homes, net
757

 
1,355

Decrease (increase) in notes receivable, net
224

 
(6,054
)
NET CASH USED IN INVESTING ACTIVITIES
(270,309
)
 
(151,342
)
FINANCING ACTIVITIES:
 
 
 
Issuance and associated costs of common stock, OP units, and preferred OP units, net
261,780

 
300,793

Net proceeds from stock option exercise
201

 
149

Distributions to stockholders, OP unit holders, and preferred OP unit holders
(74,185
)
 
(52,928
)
Payments to retire preferred operating partnership units
(300
)
 

Borrowings on lines of credit
260,248

 
149,511

Payments on lines of credit
(235,264
)
 
(275,557
)
Proceeds from issuance of other debt
24,368

 
83,427

Payments on other debt
(82,668
)
 
(77,804
)
Payments for deferred financing costs
(2,750
)
 
(1,309
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
151,430

 
126,282

Net (decrease) increase in cash and cash equivalents
(24,553
)
 
32,867

Cash and cash equivalents, beginning of period
29,508

 
5,857

Cash and cash equivalents, end of period
$
4,955

 
$
38,724

SUPPLEMENTAL INFORMATION:
 
 
 
Cash paid for interest (net of capitalized interest of $424 and $0, respectively)
$
44,595

 
$
42,834

Cash paid for interest on mandatorily redeemable debt
$
2,430

 
$
2,499

Cash paid for state income taxes
$
158

 
$
320

Noncash investing and financing activities:
 
 
 
Unrealized gain on interest rate swaps
$
266

 
$
643

Reduction in secured borrowing balance
$
11,534

 
$
9,246

Change in dividends declared and outstanding
$
4,510

 
$
4,814

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

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.

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

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

 
The purchase price allocations for 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 nine months ended September 30, 2013 for all acquisitions described above is set forth in the following table (in thousands):

 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
(unaudited)
Revenue
$
7,598

 
$
11,734

Net income
$
2,021

 
$
2,866








9

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


2.      Real Estate Acquisitions, continued

The following unaudited pro forma financial information presents the results of our operations for the three and nine months ended September 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
September 30,
 
Nine Months Ended
September 30,
 
(unaudited)
 
2013
 
2012
 
2013
 
2012
Total revenues
$
103,838

 
$
90,515

 
$
314,029

 
$
264,055

Net income attributable to Sun Communities, Inc. shareholders
$
4,137

 
$
4,294

 
$
14,427

 
$
14,294

Net income per share attributable to Sun Communities, Inc. shareholders - basic
$
0.11

 
$
0.16

 
$
0.42

 
$
0.54

Net income per share attributable to Sun Communities, Inc. shareholders - diluted
$
0.11

 
$
0.16

 
$
0.42

 
$
0.54


Acquisition related costs of approximately $0.6 million and $0.8 million and $2.8 million and $1.4 million have been incurred for the three and nine months ended September 30, 2013 and 2012, respectively, and are presented as “Acquisition related costs” in our consolidated statements of operations.



10

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


3.      Investment Property

The following table sets forth certain information regarding investment property (in thousands):
 
 
September 30, 2013
 
December 31, 2012
Land
 
$
191,589

 
$
178,993

Land improvements and buildings
 
1,752,996

 
1,608,825

Rental homes and improvements
 
375,296

 
305,838

Furniture, fixtures, and equipment
 
60,139

 
54,354

Land held for future development
 
29,521

 
29,295

Investment property
 
2,409,541

 
2,177,305

Accumulated depreciation
 
(714,224
)
 
(659,169
)
Investment property, net
 
$
1,695,317

 
$
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.


11

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. 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 $106.5 million (net of allowance of $0.7 million) and $93.8 million (net of allowance of $0.6 million) as of September 30, 2013 and December 31, 2012, respectively.  The outstanding balance on the secured borrowing was $107.2 million and $94.4 million as of September 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):

 
Nine Months Ended
 
September 30, 2013
Beginning balance
$
94,409

Financed sales of manufactured homes
24,368

Principal payments and payoffs from our customers
(4,834
)
Principal reduction from repurchased homes
(6,700
)
Total activity
12,834

Ending balance
$
107,243


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 $2.7 million and $2.4 million and $7.7 million and $6.8 million for the three and nine months ended September 30, 2013 and 2012, respectively.  



12

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


5.      Notes and Other Receivables

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

 
 
September 30, 2013
 
December 31, 2012
Installment notes receivable on manufactured homes, net
 
$
24,605

 
$
21,898

Collateralized receivables, net (see Note 4)
 
106,566

 
93,834

Other receivables, net
 
39,413

 
24,118

Total notes and other receivables, net
 
$
170,584

 
$
139,850


Installment Notes Receivable on Manufactured Homes

The installment notes of $24.6 million (net of allowance of $0.1 million) and $21.9 million (net of allowance of 0.1 million) as of September 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 8.9 percent and 11.9 years as of September 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):

 
Nine Months Ended
 
September 30, 2013
Beginning balance
$
22,019

Financed sales of manufactured homes
6,354

Principal payments and payoffs from our customers
(2,962
)
Principal reduction from repossessed homes
(675
)
Total activity
2,717

Ending balance
$
24,736


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 $106.5 million (net of allowance of $0.7 million) and $93.8 million (net of allowance of $0.6 million ) as of September 30, 2013 and December 31, 2012, respectively.  The receivables have a net weighted average interest rate and maturity of 10.7 percent and 13.5 years as of September 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 September 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.


13

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 September 30, 2013 (in thousands).

 
Nine Months Ended
 
September 30, 2013
Beginning balance
$
(697
)
Lower of cost or market write-downs
322

Increase to reserve balance
(433
)
Total activity
(111
)
Ending balance
$
(808
)

Other Receivables

As of September 30, 2013, other receivables were comprised of amounts due from residents for rent and water and sewer usage of $8.0 million (net of allowance of $0.6 million), home sale proceeds of $6.3 million, insurance receivables of $2.5 million, insurance settlement of $3.7 million, rebates and other receivables of $3.6 million, a contingent asset of $10.0 million (see Note 2, "Real Estate Acquisitions") and a note receivable of $5.3 million. The note bears interest at LIBOR plus 475 basis points, 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 and is due on May 31, 2014.  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.

6.
Intangibles

Our intangible assets include 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 $39.0 million and $35.3 million at September 30, 2013 and December 31, 2012, respectively. The accumulated amortization is $13.8 million and $11.8 million at September 30, 2013 and December 31, 2012, respectively. Aggregate net amortization expense related to intangible assets was $1.2 million and $0.7 million and $3.6 million and $2.2 million for the three and nine months ended September 30, 2013 and 2012, respectively.





14

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


7.      Investment in Affiliates

Origen Financial Services, LLC (“OFS LLC”)

At September 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 August 29, 2013, the dividend payment represented a return of capital. Our investment in Origen had a market value of approximately $5.8 million based on a quoted market closing price of $1.15 per share from the OTC Pink Marketplace as of September 30, 2013.

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

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
(unaudited)
 
2013
 
2012
 
2013
 
2012
Revenues
$
12,079

 
$
14,228

 
$
37,959

 
$
50,608

Expenses
(13,123
)
 
(16,619
)
 
(40,683
)
 
(52,427
)
Net loss
$
(1,044
)
 
$
(2,391
)
 
$
(2,724
)
 
$
(1,819
)



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):

 
September 30, 2013
 
December 31, 2012
ASSETS
 
 
 
Investment property, net
$
56,326

 
$
56,326

Other assets
3,882

 
4,598

   Total Assets
$
60,208

 
$
60,924

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Debt
$
45,386

 
$
45,900

Other liabilities
5,012

 
1,773

Noncontrolling interests
(920
)
 
(508
)
   Total Liabilities and Stockholders' Equity
$
49,478

 
$
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 3.3 percent and 3.1 percent of our consolidated total liabilities at September 30, 2013 and December 31, 2012, respectively. Noncontrolling interest related to the consolidated VIEs comprised less than 1.0 percent of our consolidated total equity at September 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
 
September 30, 2013
 
December 31, 2012
 
September 30, 2013
 
December 31, 2012
 
September 30, 2013
 
December 31, 2012
Collateralized term loans - CMBS
$
682,368

 
$
725,951

 
4.1
 
4.5
 
5.4
%
 
5.2
%
Collateralized term loans - FNMA
366,917

 
369,810

 
9.6
 
10.3
 
3.6
%
 
3.8
%
Aspen and Series B-3 preferred OP Units
47,022

 
47,322

 
7.9
 
8.4
 
6.9
%
 
6.9
%
Secured borrowing (see Note 4)
107,243

 
94,409

 
13.4
 
12.8
 
10.7
%
 
11.0
%
Mortgage notes, other
149,898

 
186,228

 
6.0
 
6.2
 
4.6
%
 
4.3
%
Total debt
$
1,353,448

 
$
1,423,720

 
6.5
 
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 $1.0 billion as of September 30, 2013, are secured by 99 properties comprised of 39,342 sites representing approximately $668.0 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 acquisition of Rainbow RV Resort. The note had a principal balance of $0.6 million and did not incur any interest.

In January 2013, we paid off the sellers note associated with the acquisition of Palm Creek Golf & RV Resort. 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 $149.9 million as of September 30, 2013, are collateralized by 20 properties comprised of 8,317 sites representing approximately $252.4 million of net book value.

Lines of Credit

In May 2013, we entered into a credit agreement with Citibank, N.A. and certain other lenders 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 September 30, 2013, the margin was 1.65%. At September 30, 2013, we had approximately $51.7 million outstanding under the Facility. There was no amount outstanding on the previous senior secured revolving credit facility at December 31, 2012. At September 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 "Real Estate Acquisitions"). This loan was paid off in March 2013.

We also have a $20.0 million secured line of credit agreement collateralized by a portion of our rental home portfolio, which was reduced from $50.0 million in July 2013. 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 September 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 on $50.0 million of availability 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 September 30, 2013 the effective interest rate was 7.0%.  The outstanding balance was $3.1 million and $4.8 million at September 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 September 30, 2013, we were in compliance with all covenants.

10.      Equity Transactions

The Company is incorporated in the state of Maryland and under the law of that state the concept of treasury shares does not exist. All shares repurchased are considered authorized but unissued. Accordingly, we have retrospectively reclassified $63.6 million from treasury stock to common stock and additional paid in capital on our consolidated balance sheet.

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 the acquisition 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 nine months ended September 30, 2013, there were no units converted to common stock. During the three and nine months ended September 30, 2012, holders of common OP units converted zero and 2,000 units to common stock, respectively.

Cash dividends of $0.63 per share were declared for the quarter ended September 30, 2013. On October 18, 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 September 30, 2013. In addition, cash dividends of $0.4453 per share were declared on the Company's Series A cumulative redeemable preferred stock. On October 15, 2013 cash payments of approximately $1.5 million for aggregate dividends were made to Series A cumulative redeemable preferred stockholders of record as of October 2, 2013.

11.      Share-Based Compensation

In August 2013, we granted 36,000 shares of restricted stock to employees under our Sun Communities, Inc. Equity Incentive Plan ("2009 Equity Plan"). The restricted shares had a fair value of $48.22 per share and will vest as follows: August 6, 2016: 35 percent; August 6, 2017: 35 percent; August 6, 2018: 20 percent; August 6, 2019: five percent; and August 6, 2020: five percent. The fair value was determined using the closing price of our common stock on the date the shares were issued.

In June 2013, we granted 250,000 shares of restricted stock to an executive officer under our 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.


18

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




11.      Share-Based Compensation, continued

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.

During the nine months ended September 30, 2013, 9,442 shares of common stock were issued in connection with the exercise of stock options and the net proceeds received were $0.2 million.

The vesting requirements for 36,666 restricted shares granted to our employees were satisfied during the nine months ended September 30, 2013.


19

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


12.     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 $18.0 million annually. This transient revenue is estimated to be recognized 39% in the first quarter, 14% in the second, 29% in the third quarter and 18% in the fourth quarter of each fiscal year.

A presentation of segment financial information is summarized as follows (amounts in thousands):

 
Three Months Ended September 30, 2013
 
Three Months Ended September 30, 2012
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
Revenues
$
80,158

 
$
22,590

 
$
102,748

 
$
63,015

 
$
17,173

 
$
80,188

Operating expenses/Cost of sales
29,981

 
15,665

 
45,646

 
23,000

 
12,909

 
35,909

Net operating income/Gross profit
50,177

 
6,925

 
57,102

 
40,015

 
4,264

 
44,279

Adjustments to arrive at net income (loss):
 
 
 
 
 
 
 
 
 
 
 
Other revenues
3,521

 
932

 
4,453

 
2,942

 
(112
)
 
2,830

General and administrative
(5,927
)
 
(2,227
)
 
(8,154
)
 
(5,165
)
 
(1,905
)
 
(7,070
)
Acquisition related costs
(619
)
 

 
(619
)
 
(847
)
 

 
(847
)
Depreciation and amortization
(19,551
)
 
(9,239
)
 
(28,790
)
 
(14,760
)
 
(7,332
)
 
(22,092
)
Interest expense
(18,628
)
 
(4
)
 
(18,632
)
 
(17,885
)
 
(6
)
 
(17,891
)
Distributions from affiliate
700

 

 
700

 
600

 

 
600

Provision for state income tax
(90
)
 

 
(90
)
 
(84
)
 

 
(84
)
Net income (loss)
9,583

 
(3,613
)
 
5,970

 
4,816

 
(5,091
)
 
(275
)
Less:  Preferred return to A-1 preferred OP units
690

 

 
690

 
586

 

 
586

Less: Preferred return to A-3 preferred OP units
45

 

 
45

 

 

 

Less:  Net income (loss) attributable to noncontrolling interests
272

 
(300
)
 
(28
)
 
328

 
(539
)
 
(211
)
Net income (loss) attributable to Sun Communities, Inc.
8,576

 
(3,313
)
 
5,263

 
3,902

 
(4,552
)
 
(650
)
Less: 7.125% Series A Cumulative Preferred Stock Distributions
1,514

 

 
1,514

 

 

 

Net income (loss) attributable to Sun Communities, Inc. common stockholders
$
7,062

 
$
(3,313
)
 
$
3,749

 
$
3,902

 
$
(4,552
)
 
$
(650
)















20

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


12.     Segment Reporting, continued

 
Nine Months Ended September 30, 2013
 
Nine Months Ended September 30, 2012
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
Revenues
$
234,969

 
$
63,983

 
$
298,952

 
$
188,818

 
$
51,027

 
$
239,845

Operating expenses/Cost of sales
83,739

 
43,612

 
127,351

 
66,002

 
37,625

 
103,627

Net operating income/Gross profit
151,230

 
20,371

 
171,601

 
122,816

 
13,402

 
136,218

Adjustments to arrive at net income (loss):
 
 
 
 
 
 
 
 
 
 
 
Other revenues
9,936

 
1,376

 
11,312

 
8,437

 
(124
)
 
8,313

General and administrative
(19,086
)
 
(7,473
)
 
(26,559
)
 
(15,405
)
 
(5,985
)
 
(21,390
)
Acquisition related costs
(2,769
)
 

 
(2,769
)
 
(1,434
)
 

 
(1,434
)
Depreciation and amortization
(53,757
)
 
(26,359
)
 
(80,116
)
 
(41,798
)
 
(21,229
)
 
(63,027
)
Interest expense
(56,985
)
 
(333
)
 
(57,318
)
 
(53,051
)
 
(92
)
 
(53,143
)
Distributions from affiliate
1,550

 

 
1,550

 
3,250

 

 
3,250

Provision for state income tax
(186
)
 

 
(186
)
 
(190
)
 

 
(190
)
Net income (loss)
29,933

 
(12,418
)
 
17,515

 
22,625

 
(14,028
)
 
8,597

Less:  Preferred return to A-1 preferred OP units
1,909

 

 
1,909

 
1,744

 

 
1,744

Less: Preferred return to A-3 preferred OP units
121

 

 
121

 

 

 

Less:  Net income (loss) attributable to noncontrolling interests
1,503

 
(1,088
)
 
415

 
1,985

 
(1,522
)
 
463

Net income (loss) attributable to Sun Communities, Inc.
26,400

 
(11,330
)
 
15,070

 
18,896

 
(12,506
)
 
6,390

Less: 7.125% Series A Cumulative Preferred Stock Distributions
4,542

 

 
4,542

 

 

 

Net income (loss) attributable to Sun Communities, Inc. common stockholders
$
21,858

 
$
(11,330
)
 
$
10,528

 
$
18,896

 
$
(12,506
)
 
$
6,390


 
September 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
$
1,416,314

 
$
279,003

 
$
1,695,317

 
$
1,296,753

 
$
221,383

 
$
1,518,136

Cash and cash equivalents
4,452

 
503

 
4,955

 
29,071

 
437

 
29,508

Inventory of manufactured homes

 
4,005

 
4,005

 

 
7,527

 
7,527

Notes and other receivables
160,964

 
9,620

 
170,584

 
131,000

 
8,850

 
139,850

Other assets
58,043

 
3,787

 
61,830

 
54,959

 
4,648

 
59,607

Total assets
$
1,639,773

 
$
296,918

 
$
1,936,691

 
$
1,511,783

 
$
242,845

 
$
1,754,628



21

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


13.     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 September 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 September 30, 2013 and December 31, 2012.

We had no unrecognized tax benefits as of September 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 September 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 and $0.2 million for the three and nine months ended September 30, 2013 and 2012, respectively.
 

22

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


14.     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 September 30,
 
Nine Months Ended September 30,
Numerator
 
2013
 
2012
 
2013
 
2012
Basic earnings: net income attributable to common stockholders
 
$
3,749

 
$
(650
)
 
$
10,528

 
$
6,390

Add: amounts attributable to common noncontrolling interests
 

 

 

 

Diluted earnings: net income available to common stockholders and unitholders
 
$
3,749

 
$
(650
)
 
$
10,528

 
$
6,390

Denominator
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
35,499

 
26,938

 
33,802

 
26,145

Weighted average unvested restricted stock outstanding
 
629

 

 
461

 
282

Basic weighted average common shares and unvested restricted stock outstanding
 
36,128

 
26,938

 
34,263

 
26,427

Add: dilutive securities
 
15

 

 
16

 
17

Diluted weighted average common shares and securities
 
36,143

 
26,938

 
34,279

 
26,444

Earnings per share available to common stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.10

 
$
(0.02
)
 
$
0.31

 
$
0.24

Diluted
 
$
0.10

 
$
(0.02
)
 
$
0.31

 
$
0.24


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 nine months ended September 30, 2013 and 2012 (amounts in thousands):

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Stock options
 

 
57

 

 

Unvested restricted stock
 

 
289

 

 

Common OP units
 
2,069

 
2,070

 
2,069

 
2,071

Series A-1 preferred OP units
 
1,111

 
1,111

 
1,111

 
1,111

Series A-3 preferred OP units
 
75

 

 
64

 

Aspen preferred OP units
 
526

 
526

 
526

 
526

Total securities
 
3,781

 
4,053

 
3,770

 
3,708


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)


15.     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 September 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 September 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
 
0.2731%
 
2.1450%
 
1.8700%
 
4.0150%
Cap
 
Cap Floating Rate
 
4/1/2012
 
4/1/2015
 
$
152.4

 
3 Month LIBOR
 
0.2740%
 
11.2650%
 
—%
 
N/A
Cap
 
Cap Floating Rate
 
10/3/2011
 
10/3/2016
 
$
10.0

 
3 Month LIBOR
 
0.2740%
 
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 16 for information on the determination of fair value for the derivative instruments.  The following table summarizes the fair value of derivative instruments included in our consolidated balance sheets as of September 30, 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
 
 
September 30, 2013
 
December 31, 2012
 
 
 
September 30, 2013
 
December 31, 2012
Interest rate swaps and cap agreement
Other assets
 
$

 
$

 
Other liabilities
 
$
193

 
$
459

Total derivatives designated as hedging instruments
 
 
$

 
$

 
 
 
$
193

 
$
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 accumulated 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.










24

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



15.     Derivative Instruments and Hedging Activities, continued

Our hedges were highly effective and had minimal effect on income.  The following tables summarize the impact of derivative instruments for the three and nine months ended September 30, 2013 and 2012 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 September 30,
 
 
 
Three Months Ended September 30,
 
 
 
Three Months Ended September 30,
 
 
2013
 
2012
 
 
 
2013
 
2012
 
 
 
2013
 
2012
Interest rate swaps and cap agreement
 
$
89

 
$
44

 
Interest expense
 
$

 
$

 
Interest expense
 
$

 
$

Total
 
$
89

 
$
44

 
Total
 
$

 
$

 
Total
 
$

 
$


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)
 
 
Nine Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
 
 
2013
 
2012
 
 
 
2013
 
2012
Interest rate swaps and cap agreement
 
$
266

 
$
643

 
Interest expense
 
$

 
$

 
Interest expense
 
$

 
$
3

Total
 
$
266

 
$
643

 
Total
 
$

 
$

 
Total
 
$

 
$
3


Certain of our derivative instruments contain provisions that require us to provide ongoing collateralization on derivative instruments in a liability position.  As of September 30, 2013 and December 31, 2012, we had collateral deposits recorded in other assets of approximately $0.7 million and $1.2 million, respectively.


25

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


16.     Fair Value of Financial Instruments

Our financial instruments consist primarily of cash and cash equivalents, accounts and notes receivable, accounts payable, derivative instruments, and debt.

ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories:

Level 1—Quoted unadjusted prices for identical instruments in active markets.

Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all observable inputs and significant value drivers are observable in active markets.

Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable, including assumptions developed by us.

We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Derivative Instruments
The derivative instruments held by us are interest rate swaps and cap agreements for which quoted market prices are indirectly available. For those derivatives, we use model-derived valuations in which all observable inputs and significant value drivers are observable in active markets provided by brokers or dealers to determine the fair values of derivative instruments on a recurring basis.

Installment Notes on Manufactured Homes
The net carrying value of the installment notes on manufactured homes approximates the fair value as the interest rates in the portfolio are comparable to current prevailing market rates.

Long Term Debt and Lines of Credit
The fair value of long term debt (excluding the secured borrowing) is based on the estimates of management and on rates currently quoted and rates currently prevailing for comparable loans and instruments of comparable maturities.

Collateralized Receivables and Secured Borrowing
The fair value of these financial instruments offset each other as our collateralized receivables represent a transfer of financial assets and the cash proceeds received from these transactions have been classified as a secured borrowing in the consolidated balance sheets. The net carrying value of the collateralized receivables approximates the fair value as the interest rates in the portfolio are comparable to current prevailing market rates.

Other Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate their fair market values due to the short-term nature of these instruments.

The table below sets forth our financial assets and liabilities that required disclosure of their fair values on a recurring basis and presents the carrying values and fair values as of September 30, 2013 and December 31, 2012 that were measured using the valuation techniques described above. The table excludes other financial instruments such as cash and cash equivalents, accounts receivable, and accounts payable because the carrying values associated with these instruments approximate fair value since their maturities are less than one year.








26

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


16.    Fair Value of Financial Instruments, continued
 
 
September 30, 2013
 
December 31, 2012
Financial assets
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Installment notes on manufactured homes, net
 
$
24,605

 
$
24,605

 
$
21,898

 
$
21,898

Collateralized receivables, net
 
$
106,566

 
$
106,566

 
$
93,834

 
$
93,834

Financial liabilities
 
 
 
 
 
 
 
 
Derivative instruments
 
$
193

 
$
193

 
$
459

 
$
459

Long term debt (excluding secured borrowing)
 
$
1,246,205

 
$
1,263,936

 
$
1,329,311

 
$
1,355,331

Secured borrowing
 
$
107,243

 
$
107,243

 
$
94,409

 
$
94,409

Lines of credit
 
$
54,765

 
$
54,765

 
$
29,781

 
$
29,781


The derivative instruments are the only financial liabilities that were required to be carried at fair value in the consolidated balance sheets for the periods indicated, and we have no financial assets that are required to be carried at fair value.

17.     Recently Adopted Accounting Pronouncements

In July 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 requires an entity to present its unrecognized tax benefits net of its deferred tax assets when settlement in this manner is available under the tax law, which would be based on facts and circumstances as of the balance sheet reporting date and would not consider future events. Gross presentation in the notes to the financial statements will still be required. ASU 2013-11 will apply on a prospective basis to all unrecognized tax benefits that exist at the effective date, with the option to apply it retrospectively. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. While the adoption of this pronouncement will not have an impact on our results of operations or cash flows, we are currently evaluating the impact of presenting unrecognized tax benefits net of our deferred tax assets where applicable on our consolidated balance sheet.
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The provisions of ASU 2013-02 are effective for annual reporting periods beginning after December 15, 2012. The adoption of this pronouncement did not have any impact on our consolidated financial statements.
In January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” ("ASU 2013-01") which amends ASC Topic 210, Balance Sheet. The updated guidance in ASC Topic 210 clarifies that ordinary trade receivables are not in the scope of ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Specifically, ASU 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the Codification or subject to a master netting arrangement or similar agreement. An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of ASU 2011-11, which was January 1, 2013. Early adoption was not permitted. The adoption of this pronouncement did not have any impact on our results of operations or financial condition.

27

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


18.    Commitments and Contingencies

On September 16, 2013, we settled all of the claims arising out of the litigation that we filed on December 26, 2012 in Oakland County (Michigan) Circuit Court against MHC Operating Limited Partnership (“MHC”) (an affiliate of Equity Lifestyle Properties, Inc.), the contributors of the Morgan RV Properties (the “Contributors”) and certain of their affiliates with respect to MHC’s assertion of claims against the Morgan RV Properties. Under the settlement agreement, MHC released all of its claims against the Morgan RV Properties, we released all of our rights with respect to one other RV community owned by an affiliate of the Contributors and MHC reimbursed us for certain costs and expenses and paid us certain additional consideration. The Contributors and their affiliates paid us $250,000 by increasing the principal balance of our existing $5.0 million note receivable in full satisfaction of their obligation under the specific indemnity related to MHC’s claims to the Morgan RV Properties. No party admitted any liability under the settlement agreement.

On June 4, 2010 we settled all of the claims arising out of the litigation filed in 2004 by TJ Holdings, LLC in the Superior Court of Guilford County, North Carolina and the associated arbitration proceeding commenced by TJ Holdings in Southfield, Michigan. Under the terms of the settlement agreement, in which neither party admitted any liability whatsoever, we paid TJ Holdings $360,000. In addition, pursuant to this settlement, TJ Holdings’ percentage ownership interest in Sun/Forest, LLC will be increased on a one time basis, in the event of a sale or refinance of all of the SunChamp Properties, to between 9.03% and 28.99% depending on our average closing stock price as reported by the NYSE during the 30 days preceding the sale or refinance of all the SunChamp Properties. Once this percentage ownership interest has been adjusted, there will be no further adjustments from subsequent sales or refinances of the SunChamp Properties. The likelihood of a sale or refinancing of all of the SunChamp properties is not probable as these properties continue to see growth potential nor do we have a need to refinance all of the properties, so we do not expect it to have a material adverse impact on our results of operations or financial condition.

We are involved in various other legal proceedings arising in the ordinary course of business. All such proceedings, taken together, are not expected to have a material adverse impact on our results of operations or financial condition.


28

SUN COMMUNITIES, INC.


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto, along with our 2012 Annual Report. Capitalized terms are used as defined elsewhere in this Form 10-Q.

OVERVIEW

We are a fully integrated, self-administered and self-managed REIT. We own, operate, and develop manufactured housing and RV communities concentrated in the midwestern, southern, and southeastern United States. As of September 30, 2013, we owned and operated a portfolio of 185 developed properties located in 25 states, including 149 manufactured housing communities, 25 RV communities, and 11 properties containing both manufactured housing and RV sites.

We have been in the business of acquiring, operating, developing and expanding manufactured housing and RV communities since 1975. We lease individual sites with utility access for placement of manufactured homes and RVs to our customers. We are also engaged through SHS in the marketing, selling, and leasing of new and pre-owned homes to current and future residents in our communities. The operations of SHS support and enhance our occupancy levels, property performance, and cash flows.

SIGNIFICANT ACCOUNTING POLICIES

We have identified significant accounting policies that, as a result of the judgments, uncertainties, and complexities of the underlying accounting standards and operations involved could result in material changes to our financial condition or results of operations under different conditions or using different assumptions. Details regarding significant accounting policies are described fully in our 2012 Annual Report.

SUPPLEMENTAL MEASURES

In addition to the results reported in accordance with GAAP, we have provided information regarding Net Operating Income (“NOI”) in the following tables. NOI is derived from revenues minus property operating and maintenance expenses and real estate taxes