SUI 2014.09.30 10-Q


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, 2014.
 
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, 2014:  48,010,386





INDEX

 
 
 
 
 
Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013
 
 
 
Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2014
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013
 
 
 
 
 
 



2



PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

 
(unaudited) 
 September 30, 2014
 
December 31, 2013
ASSETS
 
 
 
Investment property, net (including $55,648 and $56,805 for consolidated variable interest entities at September 30, 2014 and December 31, 2013; see Note 8)
$
1,884,632

 
$
1,755,052

Cash and cash equivalents
259,152

 
4,753

Inventory of manufactured homes
5,480

 
5,810

Notes and other receivables, net
168,341

 
164,685

Other assets
113,192

 
68,936

TOTAL ASSETS
$
2,430,797

 
$
1,999,236

LIABILITIES
 
 
 
Debt (including $44,670 and $45,209 for consolidated variable interest entities at September 30, 2014 and December 31, 2013; see Note 8)
$
1,393,941

 
$
1,311,437

Lines of credit

 
181,383

Other liabilities
123,351

 
109,342

TOTAL LIABILITIES
1,517,292

 
1,602,162

Commitments and contingencies

 

STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock, $0.01 par value. Authorized: 10,000 shares;
Issued and outstanding: 3,400 shares at September 30, 2014 and December 31, 2013
34

 
34

Common stock, $0.01 par value. Authorized: 90,000 shares;
Issued and outstanding: 48,010 shares at September 30, 2014 and 36,140 shares at December 31, 2013
480

 
361

Additional paid-in capital
1,709,337

 
1,141,590

Accumulated other comprehensive loss
(277
)
 
(366
)
Distributions in excess of accumulated earnings
(807,590
)
 
(761,112
)
Total Sun Communities, Inc. stockholders' equity
901,984

 
380,507

Noncontrolling interests:
 
 
 
Series A-1 preferred OP units
43,670

 
45,548

Series A-3 preferred OP units
3,463

 
3,463

Common OP units
(35,498
)
 
(31,907
)
Consolidated variable interest entities
(114
)
 
(537
)
Total noncontrolling interests
11,521

 
16,567

TOTAL STOCKHOLDERS’ EQUITY
913,505

 
397,074

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,430,797

 
$
1,999,236




See accompanying Notes to Consolidated Financial Statements.


3




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,
 
2014
 
2013
 
2014
 
2013
REVENUES
 
 
 
 
 
 
 
Income from real property
$
94,245

 
$
80,158

 
$
267,847

 
$
234,969

Revenue from home sales
13,913

 
14,145

 
38,849

 
40,200

Rental home revenue
9,829

 
8,445

 
28,964

 
23,783

Ancillary revenues, net
3,565

 
932

 
5,198

 
1,376

Interest
3,545

 
3,442

 
10,425

 
9,587

Brokerage commissions and other income, net
338

 
79

 
720

 
349

Total revenues
125,435

 
107,201

 
352,003

 
310,264

COSTS AND EXPENSES
 
 
 
 
 
 
 
Property operating and maintenance
28,031

 
24,379

 
76,413

 
66,593

Real estate taxes
6,004

 
5,602

 
18,092

 
17,146

Cost of home sales
10,524

 
10,161

 
29,472

 
29,360

Rental home operating and maintenance
6,232

 
5,504

 
16,696

 
14,252

General and administrative - real property
6,971

 
5,927

 
23,177

 
19,086

General and administrative - home sales and rentals
2,313

 
2,227

 
7,932

 
7,473

Transaction costs
2,399

 
619

 
4,263

 
2,769

Depreciation and amortization
29,917

 
28,790

 
88,851

 
80,116

Asset impairment charge
837

 

 
837

 

Interest
18,619

 
17,823

 
54,149

 
54,888

Interest on mandatorily redeemable debt
808

 
809

 
2,417

 
2,430

Total expenses
112,655

 
101,841

 
322,299

 
294,113

Income before gain on dispositions, income taxes and distributions from affiliate
12,780

 
5,360

 
29,704

 
16,151

Gain on disposition of properties, net
13,631

 

 
14,516

 

Provision for state income taxes
(69
)
 
(90
)
 
(207
)
 
(186
)
Distributions from affiliate
400

 
700

 
1,200

 
1,550

Net income
26,742

 
5,970

 
45,213

 
17,515

Less:  Preferred return to Series A-1 preferred OP units
661

 
690

 
1,997

 
1,909

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

 
45

 
136

 
121

Less:  Amounts attributable to noncontrolling interests
1,851

 
(28
)
 
3,093

 
415

Net income attributable to Sun Communities, Inc.
24,185

 
5,263

 
39,987

 
15,070

Less: Series A preferred stock distributions
1,514

 
1,514

 
4,542

 
4,542

Net income attributable to Sun Communities, Inc. common stockholders
$
22,671

 
$
3,749

 
$
35,445

 
$
10,528

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
41,710

 
36,128

 
39,943

 
34,263

Diluted
41,722

 
36,143

 
39,959

 
34,279

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.54

 
$
0.10

 
$
0.89

 
$
0.31

Diluted
$
0.54

 
$
0.10

 
$
0.89

 
$
0.31

 
 
 
 
 
 
 
 
Distributions per common share:
$
0.65

 
$
0.63

 
$
1.95

 
$
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,
 
2014
 
2013
 
2014
 
2013
Net income
$
26,742

 
$
5,970

 
$
45,213

 
$
17,515

Unrealized gain on interest rate swaps

 
89

 
97

 
266

Total comprehensive income
26,742

 
6,059

 
45,310

 
17,781

Less: Comprehensive income attributable to the noncontrolling interests
1,851

 
(20
)
 
3,101

 
439

Comprehensive income attributable to Sun Communities, Inc.
$
24,891

 
$
6,079

 
$
42,209

 
$
17,342



See accompanying Notes to Consolidated Financial Statements.









































5



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014
(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, 2013
$
34

 
$
361

 
$
1,141,590

 
$
(366
)
 
$
(761,112
)
 
$
16,567

 
$
397,074

Issuance of common stock from exercise of options, net

 

 
126

 

 

 

 
126

Issuance, conversion of OP units and associated costs of common stock, net

 
119

 
564,339

 

 

 
(1,877
)
 
562,581

Share-based compensation - amortization and forfeitures

 

 
3,282

 

 
126

 

 
3,408

Net income

 

 

 

 
42,120

 
3,093

 
45,213

Unrealized gain on interest rate swaps

 

 

 
89

 

 
8

 
97

Distributions

 

 

 

 
(88,724
)
 
(6,270
)
 
(94,994
)
Balance at September 30, 2014
$
34

 
$
480

 
$
1,709,337

 
$
(277
)
 
$
(807,590
)
 
$
11,521

 
$
913,505




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,
 
2014
 
2013
OPERATING ACTIVITIES:
 
 
 
Net income
$
45,213

 
$
17,515

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain from disposition of assets
(3,606
)
 
(761
)
Gain from disposition of properties, net
(14,516
)
 

Asset impairment charges
837

 

Share-based compensation
3,408

 
2,176

Depreciation and amortization
89,190

 
75,070

Amortization of deferred financing costs
861

 
2,212

Distributions from affiliate
(1,200
)
 
(1,550
)
Change in notes receivable from financed sales of inventory homes, net of repayments
(13,806
)
 
(10,089
)
Change in inventory, other assets and other receivables, net
3,420

 
7,406

Change in other liabilities
(542
)
 
2,347

NET CASH PROVIDED BY OPERATING ACTIVITIES
109,259

 
94,326

INVESTING ACTIVITIES:
 
 
 
Investment in properties
(131,602
)
 
(140,681
)
Acquisitions of properties
(137,376
)
 
(82,718
)
Payment for deposit on acquisition
(50,000
)
 

Investment in note receivable of acquired properties

 
(49,441
)
Proceeds related to affiliate dividend distribution
1,200

 
1,550

Proceeds related to disposition of land
221

 

Proceeds related to disposition of assets and depreciated homes, net
3,940

 
757

Proceeds related to the disposition of properties
59,683

 

Issuance of notes and other receivables
(442
)
 
(684
)
Repayments of notes and other receivables
5,754

 
908

NET CASH USED FOR INVESTING ACTIVITIES
(248,622
)
 
(270,309
)
FINANCING ACTIVITIES:
 
 
 
Issuance and associated costs of common stock, OP units, and preferred OP units, net
562,581

 
261,780

Net proceeds from stock option exercise
126

 
201

Distributions to stockholders, OP unit holders, and preferred OP unit holders
(86,414
)
 
(74,185
)
Payments to retire preferred operating partnership units

 
(300
)
Borrowings on lines of credit
384,924

 
260,248

Payments on lines of credit
(566,307
)
 
(235,264
)
Proceeds from issuance of other debt
187,340

 
24,368

Payments on other debt
(87,579
)
 
(82,668
)
Proceeds received from return of prepaid deferred financing costs
2,384

 

Payments for deferred financing costs
(3,293
)
 
(2,750
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
393,762

 
151,430

Net change in cash and cash equivalents
254,399

 
(24,553
)
Cash and cash equivalents, beginning of period
4,753

 
29,508

Cash and cash equivalents, end of period
$
259,152

 
$
4,955

SUPPLEMENTAL INFORMATION:
 
 
 
Cash paid for interest (net of capitalized interest of $369 and $424, respectively)
$
43,294

 
$
44,595

Cash paid for interest on mandatorily redeemable debt
$
2,417

 
$
2,430

Cash paid for state income taxes
$
292

 
$
158

Noncash investing and financing activities:
 
 
 
Unrealized gain on interest rate swaps
$
97

 
$
266

Reduction in secured borrowing balance
$
17,119

 
$
11,534

Change in distributions declared and outstanding
$
8,580

 
$
4,510

Conversion of Series A-1 preferred OP units
$
1,878

 
$

Noncash investing and financing activities at the date of acquisition:
 
 
 
Acquisitions - Series 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.

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, 2013 as filed with the SEC on February 20, 2014 (the “2013 Annual Report”). These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our 2013 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 and Dispositions

Green Courte Real Estate Partners, LLC
In July 2014, we entered into agreements to acquire a portfolio of manufactured home communities from Green Courte Real Estate Partners, LLC sponsored funds (the "Green Courte Entities"). The portfolio consists of 59 manufactured home communities comprising over 19,000 sites in eleven states, including nearly 11,000 sites located in Florida. Approximately 14,000 sites, or 71%, of the portfolio is included in age-restricted communities. In connection with this transaction, the Company will assume the Green Courte Entities' right to acquire an additional manufactured home community pursuant to a binding purchase agreement.
Total consideration for the acquisition is approximately $1.32 billion, including the assumption of approximately $560 million of debt. We will pay approximately $311 million in cash (increased by the reduction in assumed mortgage debt prior to closing), issue approximately $262 million of common stock and common OP units, and issue $175 million of newly-created Series A-4 Convertible Perpetual Preferred Stock or Convertible Perpetual Preferred Operating Limited Partnership units to the Green Courte Entities. Additionally, an affiliate of the Green Courte Entities has committed to make an investment of not less than approximately $13 million in the Company’s equity.
Subject to certain conditions, we anticipate that the acquisition will occur in two separate closings. The closing with respect to 34 communities is anticipated to occur 10 business days after the loan assumption approval is obtained for a sufficient number of communities as set forth in the acquisition agreements, but not later than December 31, 2014 (or such earlier date as we determine upon notice to the Green Courte Entities). The closing with respect to the remaining 25 communities is anticipated to occur on January 6, 2015. The consummation of the acquisition is subject to certain confirmatory diligence and customary closing conditions, including obtaining certain third party consents. As a result, there can be no assurances as to the actual closings or the timing of either of the closings.
Pursuant to the acquisition agreements, we made an earnest money deposit in the aggregate amount of $50 million (“Earnest Money Deposit”). The Earnest Money Deposit may be forfeited if we fail to close on the transactions contemplated by any definitive agreement in breach of the terms thereof and such breach continues for a period of 10 days without cure. The Earnest Money Deposit is the sole remedy for any such breach and shall serve as liquidated damages, except that if such a default occurs after the first closing, we shall also pay the Green Courte Entities the sum of $25 million as additional liquidated damages.
Acquisitions
In June 2014, we acquired Lake Rudolph Campground and Recreational Vehicle Resort ("Lake Rudolph"), a recreational vehicle ("RV") community with 503 sites located in Santa Claus, Indiana.
In April 2014, we acquired Saco/Old Orchard Beach RV Resort ("Saco"), a community with 127 sites located in Saco, Maine.
In February 2014, we acquired Driftwood Camping Resort ("Driftwood"), an RV community with 698 sites and expansion potential of approximately 30 sites located in Clermont, New Jersey, and Seashore Campsites RV and Campground ("Seashore"), an RV community with 685 sites located in Cape May, New Jersey.
In January 2014, we acquired Castaways RV Resort & Campground ("Castaways"), an RV community with 369 sites and expansion potential of approximately 25 sites located in Worcester County, Maryland, and Wine Country RV Resort ("Wine Country"), an RV community with 166 sites and expansion potential of approximately 34 sites located in Paso Robles, California.














9

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


2.      Real Estate Acquisitions and Dispositions, continued

The following tables summarize the amounts of the assets acquired and liabilities assumed at the acquisition dates and the consideration paid for acquisitions completed in 2014 (in thousands):

At Acquisition Date
 
Wine Country
 
Castaways
 
Seashore
 
Driftwood
 
Saco
 
Lake Rudolph
 
Total
Investment in property
 
$
13,250

 
$
36,597

 
$
24,258

 
$
31,301

 
$
4,366

 
$
30,454

 
$
140,226

In-place leases and other intangible assets
 

 

 
500

 
790

 

 

 
1,290

Other assets
 
9

 
2

 
12

 
4

 
31

 
64

 
122

Below market franchise intangible
 

 

 

 

 
(6
)
 

 
(6
)
Other liabilities
 
(60
)
 
(497
)
 
(1,188
)
 
(836
)
 
(258
)
 
(1,417
)
 
(4,256
)
Total identifiable assets and liabilities assumed
 
$
13,199

 
$
36,102

 
$
23,582

 
$
31,259

 
$
4,133

 
$
29,101

 
$
137,376

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consideration
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash consideration transferred
 
$
13,199

 
$
36,102

 
$
23,582

 
$
31,259

 
$
4,133

 
$
29,101

 
$
137,376


The purchase price allocations for Wine Country, Castaways, Seashore, Driftwood, Saco and Lake Rudolph 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 three and nine months ended September 30, 2014 for all acquisitions described above is set forth in the following table (in thousands):
 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
 
(unaudited)
Revenue
$
10,105

 
$
16,184

Net income
$
5,806

 
$
9,031


The following unaudited pro forma financial information presents the results of our operations for the three and nine months ended September 30, 2014 and 2013 as if the properties were acquired on January 1, 2013. The unaudited pro forma results reflect certain adjustments for items that are not expected to have a continuing impact, such as adjustments for transaction 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, 2013 (in thousands, except per-share data).

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
(unaudited)
 
2014
 
2013
 
2014
 
2013
Total revenues
$
125,435

 
$
113,212

 
$
353,734

 
$
321,088

Net income attributable to Sun Communities, Inc. common stockholders
$
24,896

 
$
4,523

 
$
39,675

 
$
12,978

Net income per share attributable to Sun Communities, Inc. common stockholders - basic
$
0.60

 
$
0.13

 
$
0.99

 
$
0.38

Net income per share attributable to Sun Communities, Inc. common stockholders - diluted
$
0.60

 
$
0.13

 
$
0.99

 
$
0.38


Transaction costs of approximately $2.4 million and $0.6 million and $4.3 million and $2.8 million have been incurred for the three and nine months ended September 30, 2014 and 2013, respectively, and are presented as “Transaction costs” in our consolidated statements of operations.




10

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


2.      Real Estate Acquisitions and Dispositions, continued

Dispositions

During the nine months ended September 30, 2014, we closed on the sales of 10 manufactured housing ("MH") communities: Bedford Hills, White Oak, Falcon Pointe, Timberbrook, Woodlake Estates, Byrne Hill, Continental Estates, Davison East, Countryside Village and Desert View Village. During the first quarter of 2014, the Company chose to early adopt Accounting Standards Update ("ASU") 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" ("ASU 2014-08"). Pursuant to ASU 2014-08, the disposals of the communities do not qualify for presentation as discontinued operations, as the sales do not have a major impact on our operations and financial results and do not represent a strategic shift. Additionally, the communities are not considered individually significant components and therefore do not qualify for presentation as discontinued operations. A gain of $14.5 million is recorded in "Gain on disposition of properties, net" in our consolidated statement of operations.

3.      Investment Property

The following table sets forth certain information regarding investment property (in thousands):
 
 
September 30, 2014
 
December 31, 2013
Land
 
$
216,276

 
$
194,404

Land improvements and buildings
 
1,890,077

 
1,806,546

Rental homes and improvements
 
446,897

 
393,562

Furniture, fixtures, and equipment
 
67,245

 
65,086

Land held for future development
 
24,617

 
29,521

Investment property
 
2,645,112

 
2,489,119

Accumulated depreciation
 
(760,480
)
 
(734,067
)
Investment property, net
 
$
1,884,632

 
$
1,755,052


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

In September 2014, we recorded impairment charges of $0.8 million associated with a long-lived asset for an MH and RV community located in La Feria, Texas. This community consists of 280 developed sites. Circumstances that prompted this test of recoverability included a decrease in net operating income and the overall operating performance of the community. We recognized the impairment loss because the long-lived asset's carrying value was deemed not recoverable and exceeded the estimated fair value. We estimated the fair value of the long-lived asset based on discounted future cash flows and any potential disposition proceeds for the asset. The impairment loss is recorded in "Asset impairment charge" on our consolidated statements of operations.

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

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

11

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


4.      Transfers of Financial Assets, continued

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 %
Fewer 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 $117.5 million (net of allowance of $0.8 million) and $109.8 million (net of allowance of $0.7 million) as of September 30, 2014 and December 31, 2013, respectively.  The outstanding balance on the secured borrowing was $118.2 million and $110.5 million as of September 30, 2014 and December 31, 2013, 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, 2014
Beginning balance
$
110,510

Financed sales of manufactured homes
24,840

Principal payments and payoffs from our customers
(9,723
)
Principal reduction from repurchased homes
(7,397
)
Total activity
7,720

Ending balance
$
118,230


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 $3.0 million and $2.7 million and $8.6 million and $7.7 million for the three and nine months ended September 30, 2014 and 2013, 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, 2014
 
December 31, 2013
Installment notes receivable on manufactured homes, net
 
$
21,684

 
$
25,471

Collateralized receivables, net (see Note 4)
 
117,480

 
109,821

Other receivables, net
 
29,177

 
29,393

Total notes and other receivables, net
 
$
168,341

 
$
164,685


Installment Notes Receivable on Manufactured Homes

The installment notes of $21.7 million (net of allowance of $0.1 million) and $25.5 million (net of allowance of $0.1 million) as of September 30, 2014 and December 31, 2013, 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 8.7% and 11.6 years as of September 30, 2014, and 8.9% and 11.9 years as of December 31, 2013.

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

 
Nine Months Ended
 
September 30, 2014
Beginning balance
$
25,575

Financed sales of manufactured homes
568

Principal payments and payoffs from our customers
(3,145
)
Principal reduction from repossessed homes
(1,177
)
Total activity
(3,754
)
Ending balance
$
21,821


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 $117.5 million (net of allowance of $0.8 million) and $109.8 million (net of allowance of $0.7 million ) as of September 30, 2014 and December 31, 2013, respectively.  The receivables have a net weighted average interest rate and maturity of 10.5% and 14.3 years as of September 30, 2014, and 10.7% and 13.6 years as of December 31, 2013.

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, 2014 (in thousands):

 
Nine Months Ended
 
September 30, 2014
Beginning balance
$
(793
)
Lower of cost or market write-downs
274

Increase to reserve balance
(368
)
Total activity
(94
)
Ending balance
$
(887
)



13

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



5.      Notes and Other Receivables, continued

Other Receivables

As of September 30, 2014, other receivables were comprised of amounts due from residents for rent and water and sewer usage of $9.1 million (net of allowance of $0.7 million), home sale proceeds of $6.0 million, insurance receivables of $3.3 million, insurance settlement of $3.7 million, rebates and other receivables of $4.9 million and a note receivable of $2.2 million.  The $2.2 million note bears interest at 8.0% for the first two years and 7.9% for the remainder of the loan, is secured by the senior mortgage on one MH community and a deed of land, and is due on December 31, 2016. As of December 31, 2013, other receivables were comprised of amounts due from residents for rent and water and sewer usage of $6.9 million (net of allowance of $0.7 million), home sale proceeds of $5.7 million, insurance receivables of $2.0 million, insurance settlement of $3.7 million, rebates and other receivables of $4.6 million and two notes receivable of $4.3 million and $2.2 million.

In June 2014, our $4.3 million note receivable, which was 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, was paid in full.

6.
Intangible Assets

Our intangible assets include in-place leases from acquisitions, capitalized leasing costs and franchise fees. These intangible assets are recorded within Other assets on the consolidated balance sheets. The accumulated amortization and gross carrying amounts are as follows (in thousands):
 
 
 
 
September 30, 2014
 
December 31, 2013
Intangible Asset
 
Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
In-place leases
 
7 years
 
$
28,251

 
$
(10,913
)
 
$
26,961

 
$
(8,239
)
Capitalized leasing costs greater than 1 year
 
7 years
 
14,465

 
(6,192
)
 
13,359

 
(6,757
)
Franchise fees
 
15 years
 
764

 
(87
)
 
770

 
(29
)
Total
 
 
 
$
43,480

 
$
(17,192
)
 
$
41,090

 
$
(15,025
)

During 2014, in connection with our acquisitions, we purchased in-place leases valued at approximately $1.3 million with a useful life of seven years.

The aggregate net amortization expenses related to the intangible assets are as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Intangible Asset
 
2014
 
2013
 
2014
 
2013
In-place leases
 
$
891

 
$
840

 
$
2,674

 
$
2,451

Capitalized leasing costs greater than 1 year
 
390

 
383

 
1,118

 
1,105

Franchise fees
 
19

 
10

 
58

 
16

Total
 
$
1,300

 
$
1,233

 
$
3,850

 
$
3,572









14

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


7.      Investment in Affiliates

Origen Financial Services, LLC (“OFS LLC”)

At September 30, 2014 and 2013, we had a 22.9% 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%. 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 distributions on our shares of Origen common stock.  Our investment in Origen had a market value of approximately $8.4 million based on a quoted market closing price of $1.68 per share from the OTC Pink Marketplace as of September 30, 2014.

In September 2014, Origen announced that it has entered into an agreement to sell substantially all of its assets to an affiliate of GoldenTree Asset Management LP. Contingent upon the closing of the sale, Origen plans to dissolve and liquidate. The sale is pending stockholder approval.

The following table sets forth certain summarized unaudited financial information for Origen. The unaudited revenue and expense amounts represent actual results through August 2014 and budgeted September 2014 results (amounts in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
(unaudited)
 
2014
 
2013
 
2014
 
2013
Revenues
$
10,589

 
$
12,079

 
$
32,841

 
$
37,959

Expenses
(10,879
)
 
(13,123
)
 
(33,326
)
 
(40,683
)
Net income (loss)
$
(290
)
 
$
(1,044
)
 
$
(485
)
 
$
(2,724
)



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 sheets after appropriate eliminations (in thousands):

 
September 30, 2014
 
December 31, 2013
ASSETS
 
 
 
Investment property, net
$
55,648

 
$
56,805

Other assets
3,328

 
3,926

   Total Assets
$
58,976

 
$
60,731

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Debt
$
44,670

 
$
45,209

Other liabilities
10,266

 
6,564

Noncontrolling interests
(114
)
 
(537
)
   Total Liabilities and Stockholders' Equity
$
54,822

 
$
51,236


Investment property, net and other assets related to the consolidated VIEs comprised approximately 2.4% and 3.0% of our consolidated total assets and debt and other liabilities comprised approximately 3.6% and 3.2% of our consolidated total liabilities at September 30, 2014 and December 31, 2013, respectively. Noncontrolling interest related to the consolidated VIEs comprised less than 1.0% of our consolidated total equity at September 30, 2014 and December 31, 2013.

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, 2014
 
December 31, 2013
 
September 30, 2014
 
December 31, 2013
 
September 30, 2014
 
December 31, 2013
Collateralized term loans - CMBS
$
702,998

 
$
644,844

 
5.9
 
6.1
 
5.3
%
 
5.4
%
Collateralized term loans - FNMA
309,619

 
366,019

 
8.6
 
8.1
 
3.2
%
 
3.6
%
Collateralized term loans - Northwestern
98,026

 

 
11.4
 
N/A
 
4.2
%
 
N/A

Aspen and Series B-3 preferred OP Units
47,022

 
47,022

 
7.1
 
7.6
 
6.9
%
 
6.9
%
Secured borrowing (see Note 4)
118,230

 
110,510

 
14.2
 
13.5
 
10.5
%
 
10.7
%
Mortgage notes, other
118,046

 
143,042

 
6.1
 
6.0
 
5.0
%
 
4.6
%
Total debt
$
1,393,941

 
$
1,311,437

 
7.4
 
7.2
 
5.2
%
 
5.0
%

Collateralized Term Loans

In August 2014, we paid off $52.6 million of Fannie Mae ("FNMA") debt.



16

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


9.      Debt and Lines of Credit, continued

Additionally, in July and August 2014, we borrowed the aggregate amount of $63.5 million under five mortgage loans from Ladder Capital Finance, LLC ("Ladder"). The loans have a ten year term and a blended annual interest rate of 4.56%. The proceeds of the loans were used to pay down a portion of our senior secured line of credit.

In January 2014, we and four of our subsidiaries borrowed the aggregate amount of $99.0 million under four mortgage loans (each, an “Individual Loan” and, together, the “Loan”) from The Northwestern Mutual Life Insurance Company (“NM”) pursuant to a Master Loan Agreement with NM. Each Individual Loan accrues interest at a rate of 4.20% and matures on February 13, 2026. We and each of the four borrowers have guaranteed the Loan. The proceeds of the Loan were used to repay a portion of our senior secured line of credit.

The collateralized term loans totaling $1.1 billion as of September 30, 2014, are secured by 101 properties comprised of 39,997 sites representing approximately $746.0 million of net book value.

Aspen Preferred OP Units

The Aspen preferred OP units issued by the Operating Partnership are convertible into 526,212 shares of the Company's common stock 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 September 2014, we paid in full the $13.5 million mortgage agreement secured by Cave Creek and Pine Trace. We also paid off the $2.4 million mortgage agreement secured by Brookside Village upon maturity.

In August 2014, we paid in full the entire $6.5 million mortgage agreement secured by Sheffield Estates upon maturity.

The mortgage notes totaling $118.0 million as of September 30, 2014, are collateralized by 14 properties comprised of 6,659 sites representing approximately $194.1 million of net book value.

Lines of Credit

We have a senior secured revolving credit facility with Citibank, N.A. and certain other lenders in the amount of $350.0 million (the "Facility"). 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, 2014, the margin was 1.65%. At September 30, 2014 we had no amount outstanding under the Facility and at December 31, 2013, we had approximately $178.1 million outstanding under the Facility. At September 30, 2014 and December 31, 2013, approximately $3.2 million and $2.7 million, respectively, 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.

We also have a $20.0 million secured line of credit agreement collateralized by a portion of our rental home portfolio. The net book value of the rental homes pledged as security for the loan must meet or exceed 200% of the outstanding loan balance. The



17

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


9.      Debt and Lines of Credit, continued

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 both September 30, 2014 and December 31, 2013, the effective interest rate was 5.5%, and there was no amount outstanding.

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, 2014, the effective interest rate was 7.0%.  The outstanding balance was zero and $3.3 million at September 30, 2014 and December 31, 2013, 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, 2014, we were in compliance with all covenants.

10.      Equity Transactions

In September 2014, we closed an underwritten registered public offering of 6,900,000 shares of common stock at a price of $50.60 per share, which includes 900,000 shares sold to the underwriter pursuant to the full exercise of its option to purchase additional shares. Net proceeds from the offering were approximately $348.9 million after deducting expenses related to the offering. We intend to use the majority of the net proceeds of the offering to fund the cash portion of the purchase price for the previously-announced acquisition of MH communities from the Green Courte Entities (see Note 2) and use the remainder of the net proceeds from the offering to repay borrowings outstanding under the Facility. The consummation of the acquisition is subject to certain confirmatory diligence and customary closing conditions, including obtaining third party consents. If for any reason the acquisition is not consummated, we intend to use the net proceeds from the offering to repay borrowings outstanding under the Facility, fund possible future acquisitions of properties and for working capital and general corporate purposes.

In March 2014, we closed an underwritten registered public offering of 4,200,000 shares of common stock at a price of $44.45 per share, and in April 2014, the underwriters exercised their option to purchase an additional 630,000 shares of common stock at a price of $44.45 less the declared dividend of $0.65 per share. Net proceeds from the offering were $214.0 million after deducting underwriting discounts and the expenses related to the offering. We used the net proceeds of the offering to repay borrowings outstanding under the Facility, for acquisitions of properties and for working capital and general corporate purposes.

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 the nine months ended September 30, 2014 or 2013.  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 nine months ended September 30, 2014 and 2013, there were no common OP units converted to shares of common stock.

Subject to certain limitations, Series A-1 preferred OP unit holders may convert their Series A-1 preferred OP units to shares of our common stock at any time. During the nine months ended September 30, 2014, holders of Series A-1 preferred OP units converted 18,773 units to 45,785 shares of common stock. No such units were converted during the nine months ended September 30, 2013.

Cash distributions of $0.65 per share were declared for the quarter ended September 30, 2014. On October 17, 2014, cash payments of approximately $32.6 million for aggregate distributions were made to common stockholders, common OP unitholders and restricted stockholders of record as of September 30, 2014. In addition, cash distributions of $0.4453 per share were declared on the Company's Series A cumulative redeemable preferred stock. On October 15, 2014, cash payments of approximately $1.5 million for aggregate distributions were made to Series A cumulative redeemable preferred stockholders of record as of October 1, 2014.


18

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


11.      Share-Based Compensation

In July 2014, the Company and Gary A. Shiffman (the Company's Chairman and Chief Executive Officer) entered into an Amended and Restated Restricted Stock Award Agreement, which amended and restated in its entirety the Restricted Stock Award Agreement dated June 20, 2013 between the Company and Mr. Shiffman. Under the original stock award agreement, the Company granted Mr. Shiffman 250,000 restricted shares of the Company's common stock, of which 175,000 restricted shares were awarded in respect of the performance of Mr. Shiffman and the Company over the prior three years and 75,000 restricted shares were awarded to induce Mr. Shiffman to execute a new five-year employment agreement. All of these restricted shares were scheduled to vest over time through June 2020. The restated stock award agreement amended the vesting schedule of the restricted shares, of which 100,000 restricted shares are now subject to performance vesting and the remaining 150,000 shares will vest over time through June 2020.

In July 2014, we granted 3,500 shares of restricted stock to an employee under our Sun Communities Inc. Equity Incentive Plan ("2009 Equity Plan"). The restricted shares had a fair value of $50.09 per share and will vest as follows: July 2, 2017: 35%; July 2, 2018: 35%; July 2, 2019: 20%; July 2, 2020: 5%; July 2, 2021: 5%. The fair value was determined by using the closing share price of our common stock on the date the shares were issued.

In June 2014, we granted 20,250 shares of restricted stock to employees under our 2009 Equity Plan. The restricted shares had a fair value of $49.84 per share and will vest as follows: June 30, 2017: 35%; June 30, 2018: 35%; June 30, 2019: 20%; June 30, 2020: 5%; June 30, 2021: 5%. The fair value was determined by using the closing share price of our common stock on the date the shares were issued.

In June 2014, we also granted 50,000 shares of restricted stock to our executive officers under our 2009 Equity Plan. The restricted shares had a fair value of $49.84 per share and will vest as follows: June 30, 2018: 20%; June 30, 2019: 30%; June 30, 2020: 35%; June 30, 2021: 10%; June 30, 2022: 5%. The fair value was determined by using the closing share price of our common stock on the date the shares were issued.

In February 2014, we granted 16,000 shares of restricted stock to an executive officer and a key employee under our 2009 Equity Plan. The restricted shares had a fair value of $48.01 per share and will vest as follows: February 12, 2018: 20%; February 12, 2019: 30%; February 12, 2020: 35%; February 12, 2021: 10%; February 12, 2022: 5%. The fair value was determined by using the closing share price of our common stock on the date the shares were issued.

In February 2014, we granted 14,000 shares of restricted stock to our directors under our First Amended and Restated 2004 Non-Employee Director Option Plan. The awards vest on February 12, 2017, and had a fair value of $48.01 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, 2014, 4,904 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 54,863 restricted shares granted to our executives and employees were satisfied during the nine months ended September 30, 2014.


19

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


12.     Segment Reporting

We group our operating segments into reportable segments that provide similar products and services. Each operating segment has discrete financial information evaluated regularly by the Company's chief operating decision maker in evaluating and assessing performance. We have two reportable segments: (i) Real Property Operations and (ii) Home Sales and Rentals. The Real Property Operations segment owns, operates, and develops MH communities and RV communities and is in the business of acquiring, operating, and expanding MH and RV communities.  The Home Sales and Rentals segment offers manufactured home sales and leasing services to tenants and prospective tenants of our communities. 

Transactions between our segments are eliminated in consolidation.  Transient RV revenue is included in Real Property Operations’ revenues and is expected to approximate $31.7 million annually. This transient revenue was recognized 25.2%, 18.2% and 43.2% in the first, second and third quarters, respectively, and is expected to be recognized 13.4% in the fourth quarter of 2014. In 2013, transient revenue was $17.4 million and was recognized 40.0% in the first quarter, 15.0% in the second quarter, 30.0% in the third quarter and 15.0% in the fourth quarter.

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

 
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Revenues
$
94,245

 
$
23,742

 
$
117,987

 
$
80,158

 
$
22,590

 
$
102,748

Operating expenses/Cost of sales
34,035

 
16,756

 
50,791

 
29,981

 
15,665

 
45,646

Net operating income/Gross profit
60,210

 
6,986

 
67,196

 
50,177

 
6,925

 
57,102

Adjustments to arrive at net income (loss):
 
 
 
 
 
 
 
 
 
 
 
Ancillary, interest and other income, net
7,448

 

 
7,448

 
4,453

 

 
4,453

General and administrative
(6,971
)
 
(2,313
)
 
(9,284
)
 
(5,927
)
 
(2,227
)
 
(8,154
)
Transaction costs
(2,399
)
 

 
(2,399
)
 
(619
)
 

 
(619
)
Depreciation and amortization
(18,522
)
 
(11,395
)
 
(29,917
)
 
(19,551
)
 
(9,239
)
 
(28,790
)
Asset impairment charge
(837
)
 

 
(837
)
 

 

 

Interest
(18,614
)
 
(5
)
 
(18,619
)
 
(17,819
)
 
(4
)
 
(17,823
)
Interest on mandatorily redeemable debt
(808
)
 

 
(808
)
 
(809
)
 

 
(809
)
Gain (loss) on disposition of properties, net
14,949

 
(1,318
)
 
13,631

 

 

 

Distributions from affiliate
400

 

 
400

 
700

 

 
700

Provision for state income taxes
(69
)
 

 
(69
)
 
(90
)
 

 
(90
)
Net income (loss)
34,787

 
(8,045
)
 
26,742

 
10,515

 
(4,545
)
 
5,970

Less:  Preferred return to A-1 preferred OP units
661

 

 
661

 
690

 

 
690

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

 

 
45

 
45

 

 
45

Less:  Amounts attributable to noncontrolling interests
2,442

 
(591
)
 
1,851

 
272

 
(300
)
 
(28
)
Net income (loss) attributable to Sun Communities, Inc.
31,639

 
(7,454
)
 
24,185

 
9,508

 
(4,245
)
 
5,263

Less: Series A preferred stock distributions
1,514

 

 
1,514

 
1,514

 

 
1,514

Net income (loss) attributable to Sun Communities, Inc. common stockholders
$
30,125

 
$
(7,454
)
 
$
22,671

 
$
7,994

 
$
(4,245
)
 
$
3,749







20

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



12.     Segment Reporting, continued

 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Revenues
$
267,847

 
$
67,813

 
$
335,660

 
$
234,969

 
$
63,983

 
$
298,952

Operating expenses/Cost of sales
94,505

 
46,168

 
140,673

 
83,739

 
43,612

 
127,351

Net operating income/Gross profit
173,342

 
21,645

 
194,987

 
151,230

 
20,371

 
171,601

Adjustments to arrive at net income (loss):
 
 
 
 
 
 
 
 
 
 
 
Ancillary, interest and other income, net
16,343

 

 
16,343

 
11,312

 

 
11,312

General and administrative
(23,177
)
 
(7,932
)
 
(31,109
)
 
(19,086
)
 
(7,473
)
 
(26,559
)
Transaction costs
(4,255
)
 
(8
)
 
(4,263
)
 
(2,769
)
 

 
(2,769
)
Depreciation and amortization
(55,591
)
 
(33,260
)
 
(88,851
)
 
(53,757
)
 
(26,359
)
 
(80,116
)
Asset impairment charge
(837
)
 

 
(837
)
 

 

 

Interest
(54,135
)
 
(14
)
 
(54,149
)
 
(54,555
)
 
(333
)
 
(54,888
)
Interest on mandatorily redeemable debt
(2,417
)
 

 
(2,417
)
 
(2,430
)
 

 
(2,430
)
Gain on disposition of properties, net
14,302

 
214

 
14,516

 

 

 

Distributions from affiliate
1,200

 

 
1,200

 
1,550

 

 
1,550

Provision for state income taxes
(207
)
 

 
(207
)
 
(186
)
 

 
(186
)
Net income (loss)
64,568

 
(19,355
)
 
45,213

 
31,309

 
(13,794
)
 
17,515

Less:  Preferred return to A-1 preferred OP units
1,997

 

 
1,997

 
1,909

 

 
1,909

Less: Preferred return to A-3 preferred OP units
136

 

 
136

 
121

 

 
121

Less:  Amounts attributable to noncontrolling interests
4,564

 
(1,471
)
 
3,093

 
1,503

 
(1,088
)
 
415

Net income (loss) attributable to Sun Communities, Inc.
57,871

 
(17,884
)
 
39,987

 
27,776

 
(12,706
)
 
15,070

Less: Series A preferred stock distributions
4,542

 

 
4,542

 
4,542

 

 
4,542

Net income (loss) attributable to Sun Communities, Inc. common stockholders
$
53,329

 
$
(17,884
)
 
$
35,445

 
$
23,234

 
$
(12,706
)
 
$
10,528


 
September 30, 2014
 
December 31, 2013
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Identifiable assets:
 
 
 
 
 
 
 
 
 
 
 
Investment property, net
$
1,548,807

 
$
335,825

 
$
1,884,632

 
$
1,460,628

 
$
294,424

 
$
1,755,052

Cash and cash equivalents
259,555

 
(403
)
 
259,152

 
5,336

 
(583
)
 
4,753

Inventory of manufactured homes

 
5,480

 
5,480

 

 
5,810

 
5,810

Notes and other receivables, net
158,386

 
9,955

 
168,341

 
154,524

 
10,161

 
164,685

Other assets
109,118

 
4,074

 
113,192

 
64,342

 
4,594

 
68,936

Total assets
$
2,075,866

 
$
354,931

 
$
2,430,797

 
$
1,684,830

 
$
314,406

 
$
1,999,236



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, 2014.

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, 2014 and December 31, 2013.

We had no unrecognized tax benefits as of September 30, 2014 and 2013. We expect no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of September 30, 2014.

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 three months ended September 30, 2014 and 2013, and $0.2 million for the nine months ended September 30, 2014 and 2013.
 

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 outstanding 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, will 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
 
2014
 
2013
 
2014
 
2013
Net income attributable to common stockholders
 
$
22,671

 
$
3,749

 
$
35,445

 
$
10,528

Denominator
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
41,023

 
35,499

 
39,283

 
33,802

Weighted average unvested restricted stock outstanding
 
687

 
629

 
660

 
461

Basic weighted average common shares and unvested restricted stock outstanding
 
41,710

 
36,128

 
39,943

 
34,263

Add: dilutive securities
 
12

 
15

 
16

 
16

Diluted weighted average common shares and securities
 
41,722

 
36,143

 
39,959

 
34,279

Earnings per share available to common stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.54

 
$
0.10

 
$
0.89

 
$
0.31

Diluted
 
$
0.54

 
$
0.10

 
$
0.89

 
$
0.31


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 outstanding securities that were excluded from the computation of diluted earnings per share as of September 30, 2014 and 2013 (amounts in thousands):
 
 
As of September 30,
 
 
2014
 
2013
Common OP units
 
2,069

 
2,069

Series A-1 preferred OP units
 
437

 
455

Series A-3 preferred OP units
 
40

 
40

Aspen preferred OP units
 
1,325

 
1,325

Total securities
 
3,871

 
3,889





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. 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, 2014:
Type
 
Purpose
 
Effective Date
 
Maturity Date
 
 Notional
 (in millions)
 
Based on
 
Variable Rate
 
Fixed Rate
 
Spread
 
Effective Fixed Rate
Cap
 
Cap Floating Rate
 
4/1/2012
 
4/1/2015
 
$
152.4

 
3 Month LIBOR
 
0.2310%
 
11.2650%
 
—%
 
N/A
Cap
 
Cap Floating Rate
 
10/3/2011
 
10/3/2016
 
$
10.0

 
3 Month LIBOR
 
0.2310%
 
11.0200%
 
—%
 
N/A

In January 2014, our interest rate swap agreement with a notional amount of $20.0 million expired. We did not enter into a new interest rate swap agreement.

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, 2014 and December 31, 2013 (in thousands):

 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments
 
 
September 30, 2014
 
December 31, 2013
 
 
 
September 30, 2014
 
December 31, 2013
Interest rate swaps and cap agreement
Other assets
 
$

 
$

 
Other liabilities
 
$

 
$
97

Total derivatives designated as hedging instruments
 
 
$

 
$

 
 
 
$

 
$
97


These valuation adjustments will only be realized under certain situations. For example, if we terminate contracts prior to maturity or if derivatives fail to qualify for hedge accounting, we would need to amortize amounts currently included in accumulated other comprehensive income into interest expense over the terms of the derivative contracts.  We did not terminate our swap prior to maturity, and it did not fail to qualify for hedge accounting; therefore, the net of valuation adjustments through the maturity date approximated zero.

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, 2014 and 2013 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)
 
 
Three Months Ended September 30,
 
 
 
Three Months Ended September 30,
 
 
2014
 
2013
 
 
 
2014
 
2013
Interest rate swaps and cap agreement
 
$

 
$
89

 
Interest expense
 
$

 
$

Total
 
$

 
$
89

 
Total
 
$

 
$




24

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


15.     Derivative Instruments and Hedging Activities, continued

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)
 
 
Nine Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
 
 
2014
 
2013
Interest rate swaps and cap agreement
 
$
97

 
$
266

 
Interest expense
 
$

 
$

Total
 
$
97

 
$
266

 
Total
 
$

 
$


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 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 received designated hedge accounting treatment are evaluated for effectiveness at the time that they are designated as well as through the hedging period. No gain or loss was recognized in the consolidated financial
statements related to hedge ineffectiveness or to amounts excluded from effectiveness testing on our cash flow hedge during the three and nine months ended September 30, 2014 and 2013.

Certain of our derivative instruments contain provisions that require us to provide ongoing collateralization on derivative instruments in a liability position.  As of December 31, 2013, we had collateral deposits recorded in other assets of approximately $0.7 million. As of September 30, 2014, we had no such deposits recorded.
 
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 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 (Level 2). See Note 15 for Derivative Instruments.

Installment Notes on Manufactured Homes
The net carrying value of the installment notes on manufactured homes estimates the fair value as the interest rates in the portfolio are comparable to current prevailing market rates (Level 2). See Note 5 for Installment Notes.

25

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


16.    Fair Value of Financial Instruments, continued

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 (Level 2). See Note 9 for Long-Term Debt and Lines of Credit.

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 estimates the fair value as the interest rates in the portfolio are comparable to current prevailing market rates (Level 2). See Note 4 for Collateralized Receivables and Secured Borrowing.

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, 2014 and December 31, 2013 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.