SUI 2015.06.30 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 June 30, 2015.
 
or

[    ] TRANSITION PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission file number 1-12616

SUN COMMUNITIES, INC.
(Exact Name of Registrant as Specified in its Charter)


Maryland
 
38-2730780
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
27777 Franklin Rd.
 
 
Suite 200
 
 
Southfield, Michigan
 
48034
(Address of Principal Executive Offices)
 
(Zip Code)

(248) 208-2500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X ]  No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [ X  ]  No [   ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (Check one):

Large accelerated filer [ X ]
Accelerated filer [ ]
Non-accelerated filer [   ]
Smaller reporting company [   ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]  No [ X ]


Number of shares of Common Stock, $0.01 par value per share, outstanding as of June 30, 2015:  53,782,595





INDEX

 
 
 
 
Financial Statements:
 
 
Consolidated Balance Sheets as of June 30, 2015 (Unaudited) and December 31, 2014
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014 (Unaudited)
 
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014 (Unaudited)
 
Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2015 (Unaudited)
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (Unaudited)
 
 
 
 
 
Item 5.
 



2



PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

 
(unaudited) 
 June 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Investment property, net (including $92,687 and $94,230 for consolidated variable interest entities at June 30, 2015 and December 31, 2014; see Note 8)
$
3,716,141

 
$
2,568,164

Cash and cash equivalents
11,930

 
83,459

Inventory of manufactured homes
10,246

 
8,860

Notes and other receivables, net
188,036

 
174,857

Other assets, net
106,496

 
102,352

TOTAL ASSETS
$
4,032,849

 
$
2,937,692

LIABILITIES
 
 
 
Debt (including $64,968 and $65,849 for consolidated variable interest entities at June 30, 2015 and December 31, 2014; see Note 8)
$
2,343,821

 
$
1,826,293

Lines of credit
37,742

 
5,794

Other liabilities
235,508

 
165,453

TOTAL LIABILITIES
2,617,071

 
1,997,540

Commitments and contingencies

 

Series A-4 preferred stock, $0.01 par value. Issued and outstanding: 6,365 shares at June 30, 2015 and 483 shares at December 31, 2014
190,079

 
13,610

Series A-4 preferred OP units
24,155

 
18,722

STOCKHOLDERS’ EQUITY
 
 
 
Series A preferred stock, $0.01 par value. Issued and outstanding: 3,400 shares at June 30, 2015 and December 31, 2014
34

 
34

Common stock, $0.01 par value. Authorized: 90,000 shares;
Issued and outstanding: 53,783 shares at June 30, 2015 and 48,573 shares at December 31, 2014
538

 
486

Additional paid-in capital
2,038,229

 
1,741,154

Distributions in excess of accumulated earnings
(911,628
)
 
(863,545
)
Total Sun Communities, Inc. stockholders' equity
1,127,173

 
878,129

Noncontrolling interests:
 
 
 
Common and preferred OP units
75,356

 
30,107

Consolidated variable interest entities
(985
)
 
(416
)
Total noncontrolling interests
74,371

 
29,691

TOTAL STOCKHOLDERS’ EQUITY
1,201,544

 
907,820

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
4,032,849

 
$
2,937,692




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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
REVENUES
 
 
 
 
 
 
 
Income from real property
$
125,833

 
$
86,105

 
$
245,358

 
$
173,602

Revenue from home sales
18,734

 
14,813

 
35,568

 
24,936

Rental home revenue
11,495

 
9,733

 
22,624

 
19,135

Ancillary revenues
5,254

 
4,254

 
8,445

 
6,690

Interest
3,893

 
3,526

 
7,877

 
6,880

Brokerage commissions and other income, net
729

 
95

 
1,266

 
382

Total revenues
165,938

 
118,526

 
321,138

 
231,625

COSTS AND EXPENSES
 
 
 
 
 
 
 
Property operating and maintenance
34,507

 
25,193

 
63,721

 
48,382

Real estate taxes
8,796

 
6,079

 
17,511

 
12,088

Cost of home sales
13,702

 
11,100

 
26,259

 
18,948

Rental home operating and maintenance
5,479

 
5,213

 
11,084

 
10,464

Ancillary expenses
4,149

 
3,139

 
6,695

 
5,057

General and administrative - real property
10,486

 
8,393

 
20,316

 
16,206

General and administrative - home sales and rentals
3,957

 
3,119

 
7,445

 
5,618

Transaction costs
2,037

 
1,104

 
11,486

 
1,864

Depreciation and amortization
41,411

 
30,045

 
85,412

 
58,934

Extinguishment of debt
2,800

 

 
2,800

 

Interest
26,751

 
17,940

 
52,140

 
35,530

Interest on mandatorily redeemable debt
787

 
806

 
1,639

 
1,609

Total expenses
154,862

 
112,131

 
306,508

 
214,700

Income before other gains (losses)
11,076

 
6,395

 
14,630

 
16,925

(Loss) gain on disposition of properties, net
(13
)
 
885

 
8,756

 
885

Provision for state income taxes
(77
)
 
(70
)
 
(152
)
 
(139
)
Distributions from affiliate
7,500

 
400

 
7,500

 
800

Net income
18,486

 
7,610

 
30,734

 
18,471

Less:  Preferred return to Series A-1 preferred OP units
622

 
664

 
1,253

 
1,336

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

 
46

 
91

 
91

Less:  Preferred return to Series A-4 preferred OP units
353

 

 
706

 

Less: Preferred return to Series C preferred OP units
340

 

 
340

 

Less:  Amounts attributable to noncontrolling interests
743


458


1,007

 
1,242

Net income attributable to Sun Communities, Inc.
16,382

 
6,442

 
27,337

 
15,802

Less: Preferred stock distributions
4,088

 
1,514

 
8,174

 
3,028

Net income attributable to Sun Communities, Inc. common stockholders
$
12,294

 
$
4,928

 
$
19,163

 
$
12,774

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
52,846

 
40,331

 
52,672

 
38,413

Diluted
53,237

 
40,546

 
53,060

 
38,631

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.23

 
$
0.12

 
$
0.36

 
$
0.33

Diluted
$
0.23

 
$
0.12

 
$
0.36

 
$
0.33



See accompanying Notes to Consolidated Financial Statements.




4



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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
18,486

 
$
7,610

 
$
30,734

 
$
18,471

Unrealized gain on interest rate swaps

 

 

 
97

Total comprehensive income
18,486

 
7,610

 
30,734

 
18,568

Less: Comprehensive income attributable to the noncontrolling interests
743

 
458

 
1,007

 
1,250

Comprehensive income attributable to Sun Communities, Inc.
$
17,743

 
$
7,152

 
$
29,727

 
$
17,318



See accompanying Notes to Consolidated Financial Statements.









































5



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2015
(Unaudited - dollars in thousands)

 
7.125% Series A Cumulative Redeemable Preferred Stock
 
Common
Stock
 
Additional Paid-in Capital
 
Distributions in Excess of Accumulated Earnings
 
Non-controlling Interests
 
Total Stockholders' Equity
Balance at December 31, 2014
$
34

 
$
486

 
$
1,741,154

 
$
(863,545
)
 
$
29,691

 
$
907,820

Issuance of common stock from exercise of options, net

 

 
71

 

 

 
71

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

 
52

 
293,764

 

 
49,113

 
342,929

Share-based compensation - amortization and forfeitures

 

 
3,240

 
96

 

 
3,336

Net income

 

 

 
29,727

 
867

 
30,594

Distributions

 

 

 
(77,906
)
 
(5,300
)
 
(83,206
)
Balance at June 30, 2015
$
34

 
$
538

 
$
2,038,229

 
$
(911,628
)
 
$
74,371

 
$
1,201,544



See accompanying Notes to Consolidated Financial Statements.






























6



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - dollars in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
OPERATING ACTIVITIES:
 
 
 
Net income
$
30,734

 
$
18,471

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on disposition of assets
(3,539
)
 
(2,514
)
Gain on disposition of properties, net
(8,756
)
 
(885
)
Share-based compensation
3,336

 
2,223

Depreciation and amortization
85,499

 
59,302

Amortization of below market lease intangible
(2,374
)
 

Amortization of debt premium intangible
(5,478
)
 

Amortization of deferred financing costs
857

 
567

Distributions from affiliate
(7,500
)
 
(800
)
Change in notes receivable from financed sales of inventory homes, net of repayments
(3,137
)
 
(7,401
)
Change in inventory, other assets and other receivables, net
(8,986
)
 
(2,269
)
Change in other liabilities
11,737

 
10,419

NET CASH PROVIDED BY OPERATING ACTIVITIES
92,393

 
77,113

INVESTING ACTIVITIES:
 
 
 
Investment in properties
(94,327
)
 
(84,036
)
Acquisitions of properties
(237,395
)
 
(137,376
)
Payments for deposits on acquisitions
(925
)
 

Proceeds related to affiliate dividend distribution
7,500

 
800

Proceeds related to disposition of land

 
221

Proceeds related to disposition of assets and depreciated homes, net
2,864

 
4,697

Proceeds related to the disposition of properties
17,282

 
15,298

Issuance of notes and other receivables
(556
)
 
(1,487
)
Repayments of notes and other receivables
705

 
5,114

NET CASH USED FOR INVESTING ACTIVITIES
(304,852
)
 
(196,769
)
FINANCING ACTIVITIES:
 
 
 
Issuance and associated costs of common stock, OP units, and preferred OP units, net
36,858

 
213,802

Net proceeds from stock option exercise
71

 
127

Distributions to stockholders, OP unit holders, and preferred OP unit holders
(80,141
)
 
(56,156
)
Borrowings on lines of credit
57,985

 
213,922

Payments on lines of credit
(26,036
)
 
(356,844
)
Proceeds from issuance of other debt
265,134

 
114,666

Payments on other debt
(114,091
)
 
(8,178
)
Proceeds received from return of prepaid deferred financing costs
5,032

 
2,384

Payments for deferred financing costs
(3,882
)
 
(1,200
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
140,930

 
122,523

Net change in cash and cash equivalents
(71,529
)
 
2,867

Cash and cash equivalents, beginning of period
83,459

 
4,753

Cash and cash equivalents, end of period
$
11,930

 
$
7,620


See accompanying Notes to Consolidated Financial Statements.













7



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - dollars in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
SUPPLEMENTAL INFORMATION:
 
 
 
Cash paid for interest (net of capitalized interest of $464 and $678, respectively)
$
47,019

 
$
28,148

Cash paid for interest on mandatorily redeemable debt
$
1,642

 
$
1,609

Cash paid for state income taxes
$
200

 
$
292

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

 
$
97

Reduction in secured borrowing balance
$
8,079

 
$
10,515

Change in distributions declared and outstanding
$
3,771

 
$
4,034

Conversion of Series A-1 preferred OP units
$
3,788

 
$
1,707

 Settlement of membership interest
$
180

 
$

Noncash investing and financing activities at the date of acquisition:
 
 
 
Acquisitions - Series A-4 preferred OP units issued
$
1,000

 
$

Acquisitions - Series A-4 preferred stock issued
$
175,613

 
$

Acquisitions - Common stock and OP units issued
$
278,953

 
$

Acquisitions - Series C preferred OP units issued
$
33,154

 
$

Acquisitions - debt assumed
$
377,666

 
$


See accompanying Notes to Consolidated Financial Statements.


8

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, 2014 as filed with the SEC on March 2, 2015 (the “2014 Annual Report”). These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our 2014 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.







9

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


2.      Real Estate Acquisitions and Dispositions

Green Courte
First Phase
During the fourth quarter of 2014, we completed the first phase of the acquisition of the Green Courte properties. We acquired 32 manufactured housing ("MH") communities with over 9,000 developed sites in 11 states. Included in the total consideration paid for the first phase was the issuance of 361,797 shares of common stock, 501,130 common OP units, 483,317 shares of Series A-4 Preferred Stock and 669,449 Series A-4 preferred OP units.
Second Phase
In January 2015, we completed the final closing of the acquisition of the Green Courte properties. We acquired the remaining 26 communities comprised of over 10,000 sites. Included in the total consideration paid for the second phase was the issuance of 4,377,073 shares of common stock and 5,847,234 shares of Series A-4 Preferred Stock.
The following tables summarize the fair value of the assets acquired and liabilities assumed at the acquisition dates and the consideration paid (in thousands):
At Acquisition Date
 
First Phase (1)
 
Second Phase (1)
 
Total
Investment in property
 
$
656,543

 
$
818,109

 
$
1,474,652

Notes receivable
 
5,189

 
850

 
6,039

Other (liabilities) assets
 
(1,705
)
 
7,405

 
5,700

In-place leases and other intangible assets
 
12,870

 
15,460

 
28,330

Below market lease intangible
 
(10,820
)
 
(54,580
)
 
(65,400
)
Assumed debt
 
(199,300
)
 
(201,466
)
 
(400,766
)
Total identifiable assets and liabilities assumed
 
$
462,777

 
$
585,778

 
$
1,048,555

 
 
 
 
 
 
 
Consideration
 
 
 
 
 
 
Common OP units (2)
 
$
24,064

 
$

 
$
24,064

Series A-4 preferred OP units (3)
 
18,852

 
1,000

 
19,852

Common stock
 
20,427

 
259,133

 
279,560

Series A-4 preferred stock (3)
 
13,697

 
175,527

 
189,224

Consideration from new mortgages
 
100,700

 
90,794

 
191,494

Cash consideration transferred
 
285,037

 
59,324

 
344,361

Total consideration transferred
 
$
462,777

 
$
585,778

 
$
1,048,555

(1) The purchase price allocations for the first and second closings are preliminary and may be adjusted as final costs and final valuations are determined.

(2) To estimate the fair value of the common OP units at the valuation date, we utilized the market approach, observing public price of our common stock.

(3) To estimate the fair value of the Series A-4 preferred OP units and the Series A-4 Preferred Stock at the valuation date, we utilized an income approach. Under this approach, we used the Binomial Lattice Method.













10

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


2.      Real Estate Acquisitions and Dispositions, continued

The amount of revenue and net income included in the consolidated statements of operations related to the Green Courte properties for the three and six months ended June 30, 2015 is set forth in the following table (in thousands):

 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
 
(unaudited)
 
(unaudited)
Revenue
$
34,436

 
$
68,471

Net income
$
7,153

 
$
9,266


Other Acquisitions
In May 2015, we acquired La Hacienda RV Resort ("La Hacienda"), a RV resort with 241 sites located in Austin, Texas. We also acquired Lakeside Crossing, a MH community with 419 sites and expansion potential of nearly 300 sites, located near Myrtle Beach, South Carolina.
In April 2015, we completed the previously announced Berger acquisition of six MH communities with over 3,130 developed sites and expansion potential of approximately 380 sites. Included in the total consideration paid was 371,808 common OP units and 340,206 newly created Series C Preferred Units.

In March 2015, we acquired Meadowlands Gibraltar ("Meadowlands"), a MH community with 321 sites located in Gibraltar, Michigan.
The following tables summarize the amounts of the assets acquired and liabilities assumed at the acquisition date and the consideration paid for the acquisition completed in 2015 (in thousands):

At Acquisition Date
 
Meadowlands (1)
 
Berger (1)
 
Lakeside Crossing (1)
 
La Hacienda (1)
 
Total
Investment in property
 
$
8,313

 
$
268,026

 
$
35,438

 
$
25,895

 
$
337,672

Inventory of manufactured homes
 
285

 

 

 

 
285

In-place leases and other intangible assets
 
270

 
5,040

 
520

 
1,380

 
7,210

Below market lease intangible
 

 
(7,840
)
 
(3,440
)
 

 
(11,280
)
Assumed debt
 
(6,318
)
 
(169,882
)
 

 

 
(176,200
)
Total identifiable assets and liabilities assumed
 
$
2,550


$
95,344

 
$
32,518

 
$
27,275

 
$
157,687

 
 
 
 
 
 
 
 
 
 
 
Consideration
 
 
 
 
 
 
 
 
 
 
Common OP units
 
$

 
$
19,650

 
$

 
$

 
$
19,650

Series C preferred OP units
 

 
33,154

 

 

 
33,154

Note payable
 
2,377

 

 

 

 
2,377

Cash consideration transferred
 
173

 
42,540

 
32,518

 
27,275

 
102,506

Total consideration transferred
 
$
2,550

 
$
95,344

 
$
32,518

 
$
27,275

 
$
157,687


(1) The purchase price allocations for Meadowlands, Berger, Lakeside Crossing and La Hacienda are preliminary and may be adjusted as final costs and final valuations are determined.









11

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


2.      Real Estate Acquisitions and Dispositions, continued

The amount of revenue and net income included in the consolidated statements of operations related to the acquisitions above (excluding Green Courte) for the three and six months ended June 30, 2015 is set forth in the following table (in thousands):

 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
 
(unaudited)
 
(unaudited)
Revenue
$
6,677

 
$
6,712

Net income
$
804

 
$
812


The following unaudited pro forma financial information presents the results of our operations for the three and six months ended June 30, 2015 and 2014 as if the properties were acquired on January 1, 2014. 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, 2014 (in thousands, except per-share data).

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
(unaudited)
 
(unaudited)
 
2015
 
2014
 
2015
 
2014
Total revenues
$
166,451

 
$
152,030

 
$
328,155

 
$
298,743

Net income attributable to Sun Communities, Inc. common stockholders
$
14,262

 
$
10,693

 
$
43,724

 
$
20,559

Net income per share attributable to Sun Communities, Inc. common stockholders - basic
$
0.27

 
$
0.27

 
$
0.83

 
$
0.54

Net income per share attributable to Sun Communities, Inc. common stockholders - diluted
$
0.27

 
$
0.26

 
$
0.82

 
$
0.51


Transaction costs of approximately $2.0 million and $1.1 million and $11.5 million and $1.9 million have been incurred for the three and six months ended June 30, 2015 and 2014, respectively, and are presented as “Transaction costs” in our consolidated statements of operations.

Dispositions

During January 2015, we completed the sale of Valley Brook, a MH community located in Indiana. Pursuant to Accounting Standards Update ("ASU") 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" ("ASU 2014-08"), the disposal of the community does not qualify for presentation as a discontinued operation, as the sale does not have a major impact on our operations and financial results and does not represent a strategic shift. Additionally, the community is not considered an individually significant component and therefore does not qualify for presentation as a discontinued operation. A gain of $8.8 million is recorded in "Gain on disposition of properties, net" in our consolidated statements of operations.


12

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


3.      Investment Property

The following table sets forth certain information regarding investment property (in thousands):
 
 
June 30, 2015
 
December 31, 2014
Land
 
$
438,675

 
$
309,386

Land improvements and buildings
 
3,491,999

 
2,471,436

Rental homes and improvements
 
522,548

 
477,554

Furniture, fixtures, and equipment
 
96,366

 
81,586

Land held for future development
 
23,659

 
23,955

Investment property
 
4,573,247

 
3,363,917

Accumulated depreciation
 
(857,106
)
 
(795,753
)
Investment property, net
 
$
3,716,141

 
$
2,568,164


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

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


13

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 %
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 $133.1 million (net of allowance of $0.6 million) and $123.0 million (net of allowance of $0.7 million) as of June 30, 2015 and December 31, 2014, respectively.  The outstanding balance on the secured borrowing was $133.7 million and $123.7 million as of June 30, 2015 and December 31, 2014, respectively.

The balances of the collateralized receivables and secured borrowings fluctuate. The balances increase as additional notes receivable are transferred and exchanged for cash proceeds. The balances are reduced as the related collateralized receivables are collected from the customers, or as the underlying collateral is repurchased. The change in the aggregate gross principal balance of the collateralized receivables is as follows (in thousands):

 
Six Months Ended
 
June 30, 2015
Beginning balance
$
123,650

Financed sales of manufactured homes
18,175

Principal payments and payoffs from our customers
(3,857
)
Principal reduction from repurchased homes
(4,222
)
Total activity
10,096

Ending balance
$
133,746


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 $3.3 million and $2.9 million and $6.3 million and $5.6 million for the three and six months ended June 30, 2015 and 2014, respectively.  



14

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


5.      Notes and Other Receivables

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

 
 
June 30, 2015
 
December 31, 2014
Installment notes receivable on manufactured homes, net
 
$
24,023

 
$
25,884

Collateralized receivables, net (see Note 4)
 
133,133

 
122,962

Other receivables, net
 
30,880

 
26,011

Total notes and other receivables, net
 
$
188,036

 
$
174,857


Installment Notes Receivable on Manufactured Homes

The installment notes of $24.0 million (net of allowance of $0.1 million) and $25.9 million (net of allowance of $0.1 million) as of June 30, 2015 and December 31, 2014, 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 10.2 years as of June 30, 2015, and 8.7% and 10.4 years as of December 31, 2014.

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

 
Six Months Ended
 
June 30, 2015
Beginning balance
$
26,024

Financed sales of manufactured homes
472

Acquired notes (see Note 2)
850

Principal payments and payoffs from our customers
(2,278
)
Principal reduction from repossessed homes
(894
)
Total activity
(1,850
)
Ending balance
$
24,174


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 $133.1 million (net of allowance of $0.6 million) and $123.0 million (net of allowance of $0.7 million) as of June 30, 2015 and December 31, 2014, respectively.  The receivables have a weighted average interest rate and maturity of 10.3% and 15.0 years as of June 30, 2015, and 10.4% and 14.6 years as of December 31, 2014.

Allowance for Losses for Collateralized and Installment Notes Receivable

The following table sets forth the allowance for collateralized and installment notes receivable as of June 30, 2015 (in thousands):

 
Six Months Ended
 
June 30, 2015
Beginning balance
$
(828
)
Lower of cost or market write-downs
127

Increase to reserve balance
(64
)
Total activity
63

Ending balance
$
(765
)



15

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


5.      Notes and Other Receivables, continued

Other Receivables

As of June 30, 2015, other receivables were comprised of amounts due from residents for rent and water and sewer usage of $5.3 million (net of allowance of $1.1 million), home sale proceeds of $8.1 million, insurance receivables of $0.8 million, insurance settlement of $4.5 million, rebates and other receivables of $10.0 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 in year three is indexed to 7.87% plus the one year Federal Reserve treasury constant maturity date for the remainder of the loan. The note 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, 2014, other receivables were comprised of amounts due from residents for rent and water and sewer usage of $4.9 million (net of allowance of $1.0 million), home sale proceeds of $7.4 million, insurance receivables of $1.0 million, insurance settlement of $3.7 million, rebates and other receivables of $6.8 million and a note receivable of $2.2 million.

In April 2015, a $40.2 million note was repaid in conjunction with the acquisition of the six MH communities acquired (see Note 2). The note bore interest at 9.6% per annum and was secured by certain assets of the principals of the seller.

6.
Intangible Assets

Our intangible assets include in-place leases from acquisitions, franchise fees and other intangible assets. 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):
 
 
 
 
June 30, 2015
 
December 31, 2014
Intangible Asset
 
Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
In-place leases
 
7 years
 
$
63,101

 
$
(15,786
)
 
$
41,511

 
$
(12,107
)
Franchise fees and other intangible assets
 
15 years
 
1,864

 
(364
)
 
764

 
(106
)
Total
 
 
 
$
64,965

 
$
(16,150
)
 
$
42,275

 
$
(12,213
)

During 2015, in connection with our acquisitions, we purchased in-place leases and other intangible assets valued at approximately $22.7 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 June 30,
 
Six Months Ended June 30,
Intangible Asset
 
2015
 
2014
 
2015
 
2014
In-place leases
 
$
1,780

 
$
891

 
$
3,679

 
$
1,782

Franchise fees
 
129

 
8

 
258

 
38

Total
 
$
1,909

 
$
899

 
$
3,937

 
$
1,820









16

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


7.      Investment in Affiliates

Origen Financial Services, LLC (“OFS LLC”)

At June 30, 2015 and December 31, 2014, 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%. We had suspended equity accounting for this investment as the carrying value of our investment was zero. In January 2015, Origen completed the sale of substantially all of its assets to an affiliate of GoldenTree Asset Management LP and has announced its intention to dissolve and liquidate. During the second quarter of 2015, and as disclosed in a press release on March 30, 2015, Origen made an initial distribution of $1.50 per share to its stockholders of record as of April 13, 2015, retaining approximately $6.2 million for expected dissolution and wind down costs and expenses and contingencies. Depending on the actual cost of estimated wind down expenses, Origen may make one or more additional interim distributions of excess cash to stockholders prior to completing liquidation. Upon completion of liquidation, Origen will distribute remaining cash, if any, to stockholders. During the three months ended June 30, 2015, we received an initial distribution of $7.5 million from Origen.

8.      Consolidated Variable Interest Entities

Variable interest entities ("VIEs") that are consolidated include Rudgate Village SPE, LLC, Rudgate Clinton SPE, LLC, Rudgate Clinton Estates SPE, LLC (the “Rudgate Borrowers”) and Wildwood Village Mobile Home Park ("Wildwood"). We evaluated our arrangements with these properties under the guidance set forth in FASB ASC Topic 810, Consolidation. We concluded that the Rudgate Borrowers and Wildwood qualify as VIEs as we are the primary beneficiary and hold controlling financial interests 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):

 
June 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Investment property, net
$
92,687

 
$
94,230

Other assets
4,296

 
4,400

   Total Assets
$
96,983

 
$
98,630

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Debt
$
64,968

 
$
65,849

Other liabilities
17,043

 
10,442

Noncontrolling interests
(985
)
 
(416
)
   Total Liabilities and Stockholders' Equity
$
81,026

 
$
75,875


Investment property, net and other assets related to the consolidated VIEs comprised approximately 2.4% and 3.4% of our consolidated total assets and debt and other liabilities comprised approximately 3.0% and 3.8% of our consolidated total liabilities at June 30, 2015 and December 31, 2014, respectively. Noncontrolling interest related to the consolidated VIEs comprised less than 1.0% of our consolidated total equity at June 30, 2015 and December 31, 2014.


17

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


9.      Debt and Lines of Credit

The following table sets forth certain information regarding debt (in thousands):
 
Principal
Outstanding
 
Weighted Average
Years to Maturity
 
Weighted Average
Interest Rates
 
June 30, 2015
 
December 31, 2014
 
June 30, 2015
 
December 31, 2014
 
June 30, 2015
 
December 31, 2014
Collateralized term loans - FNMA
$
801,670

 
$
492,800

 
6.3
 
7.1
 
4.6
%
 
4.0
%
Collateralized term loans - FMCC
197,418

 
152,462

 
9.5
 
9.9
 
4.0
%
 
4.0
%
Collateralized term loans - Life Companies
420,659

 
204,638

 
12.7
 
10.9
 
4.1
%
 
4.3
%
Collateralized term loans - CMBS
744,425

 
806,840

 
5.3
 
5.4
 
5.3
%
 
5.3
%
Preferred OP units
45,903

 
45,903

 
6.5
 
6.8
 
6.9
%
 
6.9
%
Secured Borrowing
133,746

 
123,650

 
15.3
 
14.6
 
10.3
%
 
10.4
%
Total debt
$
2,343,821

 
$
1,826,293

 
7.9
 
7.5
 
5.1
%
 
5.1
%

Collateralized Term Loans

In January 2015, in relation to the acquisition of the Green Courte properties (see Note 2), we refinanced approximately $90.8 million of mortgage debt on 10 of the communities (resulting in proceeds of $112.3 million) at a weighted average interest rate of 3.87% per annum and a weighted average term of 14.1 years. We also assumed approximately $201.4 million of mortgage debt at a weighted average interest rate of 5.74% and a weighted average remaining term of 6.3 years.

In March 2015, in relation to the acquisition of Meadowlands (see Note 2), we assumed a $6.3 million mortgage with an interest rate of 6.5% and a remaining term of 6.5 years. Also, in relation to this acquisition, we entered into a note with the seller for $2.4 million that bears no interest but is payable in three equal yearly installments beginning in March 2016.

In April 2015, in relation to the acquisition of the Berger properties (see Note 2), we assumed debt with a fair market value of $169.9 million on the communities with a weighted average interest rate of 5.17% and a weighted average remaining term of 6.3 years.

In May 2015, we defeased a total of $70.6 million aggregate principal amount of collateralized term loans with an interest rate of 5.32% that were due to mature on July 1, 2016, releasing 10 communities. As a result of the transaction we recognized a loss on debt extinguishment of $2.8 million that is reflected in our consolidated statement of operations.

The collateralized term loans totaling $2.2 billion as of June 30, 2015, are secured by 168 properties comprised of 59,451 sites representing approximately $2.6 billion of net book value.

Preferred OP Units

Included in Preferred OP units is $34.7 million of Aspen preferred OP units issued by the Operating Partnership which are convertible into 509,676 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 distribution rate is 6.5%.

Secured Borrowing

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

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


18

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


9.      Debt and Lines of Credit, continued

bears interest at a floating rate based on the Eurodollar rate plus a margin that is determined based on our leverage ratio calculated in accordance with the credit agreement, which can range from 1.65% to 2.90%. Based on our calculation of the leverage ratio as of June 30, 2015, the margin was 1.70%. We had $33.1 million outstanding as of June 30, 2015, with an effective interest rate of 2.71%, and no amount outstanding as of December 31, 2014 under the Facility. At June 30, 2015 and December 31, 2014, approximately $3.2 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.

We have a $12.0 million manufactured home floor plan facility renewable indefinitely until our lender provides us a twelve month notice of their intent to terminate the agreement. The interest rate is 100 basis points over the greater of the prime rate as quoted in the Wall Street Journal on the first business day of each month or 6.0%. At June 30, 2015, the effective interest rate was 7.0%.  The outstanding balance was $4.6 million and $5.8 million at June 30, 2015 and December 31, 2014, respectively.

Covenants

The most restrictive of our debt agreements place limitations on secured borrowings and contain minimum fixed charge coverage, leverage, distribution and net worth requirements. At June 30, 2015, we were in compliance with all covenants.

10.      Equity and Mezzanine Securities

In June 2015, we issued to GCP Fund III Ancillary Holding, LLC (i) 25,664 shares of common stock at an issuance price of $50.00 per share or $1,283,200 in the aggregate, and (ii) 34,219 shares of 6.50% Series A-4 Cumulative Convertible Preferred Stock at an issuance price of $25.00 per share, or $855,475 in the aggregate. All of these common shares and preferred shares were issued for cash consideration pursuant to the terms of a Subscription Agreement, dated July 30, 2014 , as amended, among the Company, Green Court Real Estate Partners III, LLC, and certain other parties. The parties have agreed that no additional securities are issuable under the Subscription Agreement.

Also in June 2015, we entered into an At the Market Offering Sales Agreement (the "Sales Agreement") with BMO Capital Markets Corp., Merrill Lynch, Pierce, Fenner and Smith Incorporated and Citigroup Global Markets Inc. (collectively, the "Sales Agents"). Pursuant to the Sales Agreement, we may offer and sell shares of our common stock, having an aggregate offering price of up to $250.0 million, from time to time through the Sales Agents. Each Sales Agent is entitled to compensation in an agreed amount not to exceed 2.0% of the gross sales price per share for any shares sold through it from time to time under the Sales Agreement. Concurrently, the At the Market Offering Sales Agreement dated May 10, 2012, as amended among the Company, the Partnership, BMO Capital Markets Corp. and Liquidnet, Inc., was terminated. In the three months ended June 30, 2015, we issued 26,200 common shares under the Sales Agreement, at a sales price of $65.15 for net proceeds of $1.7 million.

Prior to the termination of the At the Market Offering Sales Agreement dated May 10, 2012, in the three months ended March 31, 2015, 342,011 shares of common stock were issued at the prevailing market price of our common stock at the time of each sale with a weighted average sale price of $63.94, and we received net proceeds of approximately $21.5 million.

In April 2015, in connection with the Berger acquisition, we issued 371,808 common OP units at an issuance price of $61.00 per share and 340,206 newly created Series C preferred OP units at an issuance price of $100.00 per share. The Series C preferred OP unit holders receive a preferred return of 4.0% per year from the closing until the second anniversary of the date of issuance, 4.5% per year during the following three years, and 5.0% per year thereafter. At the holder’s option, each Series C preferred OP unit will be exchangeable into 1.11 shares of the Company’s common stock and holders of Series C preferred OP units do not have any voting or consent rights.

In January 2015, in connection with the Green Courte second closing, we issued 4,377,073 shares of common stock at an issuance price of $50.00 per share and 5,847,234 shares of Series A-4 Preferred Stock at an issuance price of $25.00 per share. The Series A-4 Preferred Stock holders receive a preferred return of 6.5%. In addition, one of the Green Courte Partners funds purchased 150,000 shares of our common stock and 200,000 Series A-4 preferred OP units for an aggregate purchase price of $12.5 million.




19

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


10.      Equity and Mezzanine Securities, continued

If certain change of control transactions occur or if our common stock ceases to be listed or quoted on an exchange or quotation system, then at any time after November 26, 2019, we or the holders of shares of Series A-4 Preferred Stock and Series A-4 preferred OP units may cause all or any of those shares or units to be redeemed for cash at a redemption price equal to the sum of (i) the greater of (x) the amount that the redeemed shares of Series A-4 Preferred Stock and Series A-4 preferred OP units would have received in such transaction if they had been converted into shares of our common stock immediately prior to such transaction, or (y)$25.00 per share, plus (ii) any accrued and unpaid distributions thereon to, but not including, the redemption date. The Series A-4 preferred OP units are inclusive of its pro-rata share of net income of $0.1 million and distributions of $0.7 million for the six months ended June 30, 2015.

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 six months ended June 30, 2015 or 2014.  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 six months ended June 30, 2015, there were 17,500 common OP units converted to shares of common stock.
No such units were converted during the six months ended June 30, 2014.

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 six months ended June 30, 2015 and 2014, holders of Series A-1 preferred OP units converted 37,885 units into 92,398 shares of common stock, and 17,075 units into 41,645 shares of common stock, respectively.

Cash distributions of $0.65 per share were declared for the quarter ended June 30, 2015. On July 17, 2015, cash payments of approximately $36.9 million for aggregate distributions were made to common stockholders, common OP unit holders and restricted stockholders of record as of June 30, 2015. Cash distributions of $0.4453 per share were declared on the Company's Series A cumulative redeemable preferred stock for the quarter ended June 30, 2015. On July 15, 2015, cash payments of approximately $1.5 million for aggregate distributions were made to Series A cumulative redeemable preferred stockholders of record as of July
1, 2015. In addition, cash distributions of $0.4062 per share were declared on the Company's Series A-4 Preferred Stock for the quarter ended June 30, 2015. On June 30, 2015, cash payments of approximately $2.6 million were made to Series A-4 Preferred Stock holders of record as of June 19, 2015.

11.      Share-Based Compensation

In May 2015, we granted 25,000 shares of restricted stock to an executive officer under our Sun Communities, Inc. Equity Incentive Plan ("2009 Equity Plan"). The shares had a fair value of $62.94 per share and will vest as follows: May 19, 2018: 35%; May 19, 2019: 35%; May 19, 2020: 20%; May 19, 2021: 5%; and May 19, 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 April 2015, we granted 145,000 shares of restricted stock to our executive officers under our 2009 Equity Plan. The shares had a fair value of $63.81 per share. Half of the shares are subject to time vesting as follows: April 14, 2018: 20%; April 14, 2019: 30%; April 14, 2020: 35%; April 14, 2021: 10%; and April 14, 2022: 5%. The remaining 72,500 shares are subject to market and performance conditions which vest over time through April 2020. Share-based compensation for restricted stock awards with performance conditions is measured based on an estimate of shares expected to vest. We estimate the fair value of share-based compensation for restricted stock with market conditions using a Monte Carlo simulation.

In February 2015, we granted 19,800 shares of restricted stock to our non-employee directors under our First Amended and Restated 2004 Non-Employee Director Option Plan. The awards vest on February 11, 2018, and had a fair value of $65.87 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 January 2015, we granted 1,000 shares of restricted stock to key employees under our 2009 Equity Plan. The restricted shares had a fair value of $65.48 per share and will vest as follows: January 8, 2018: 35%; January 8, 2019: 35%; January 8, 2020: 20%;
January 8, 2021: 5%; and January 8, 2022: 5%. The fair value was determined by using the closing share price of our common stock on the date the shares were issued.

During the six months ended June 30, 2015 and 2014, 4,084 and 4,904 shares of common stock, respectively, were issued in connection with the exercise of stock options, and the net proceeds received during both periods were $0.1 million.


20

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


11.      Share-Based Compensation, continued

The vesting requirements for 50,040 restricted shares granted to our executives and employees were satisfied during the six months ended June 30, 2015.


21

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 $35.8 million annually. This transient revenue was recognized 24.5% and 19.2% in the first and second quarters, respectively, and is expected to be recognized 42.6% in the third quarter and 13.7% in the fourth quarter of 2015. In 2014, transient revenue was $31.6 million and was recognized 25.3% in the first quarter, 18.3% in the second quarter, 43.3% in the third quarter and 13.1% in the fourth quarter.

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

 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Revenues
$
131,087

 
$
30,229

 
$
161,316

 
$
90,359

 
$
24,546

 
$
114,905

Operating expenses/Cost of sales
47,449

 
19,184

 
66,633

 
34,411

 
16,313

 
50,724

Net operating income/Gross profit
83,638

 
11,045

 
94,683

 
55,948

 
8,233

 
64,181

Adjustments to arrive at net income (loss):
 
 
 
 
 
 
 
 
 
 
 
Interest and other income, net
4,584

 
38

 
4,622

 
3,621

 

 
3,621

General and administrative
(10,486
)
 
(3,957
)
 
(14,443
)
 
(8,393
)
 
(3,119
)
 
(11,512
)
Transaction costs
(2,037
)
 

 
(2,037
)
 
(1,104
)
 

 
(1,104
)
Depreciation and amortization
(28,142
)
 
(13,269
)
 
(41,411
)
 
(18,713
)
 
(11,332
)
 
(30,045
)
Extinguishment of debt
(2,800
)


 
(2,800
)
 

 

 

Interest
(26,746
)
 
(5
)
 
(26,751
)
 
(17,933
)
 
(7
)
 
(17,940
)
Interest on mandatorily redeemable debt
(787
)
 

 
(787
)
 
(806
)
 

 
(806
)
(Loss) gain on disposition of properties, net
(2
)
 
(11
)
 
(13
)
 
(647
)
 
1,532

 
885

Distributions from affiliate
7,500

 

 
7,500

 
400

 

 
400

Provision for state income taxes
(52
)
 
(25
)
 
(77
)
 
(69
)
 
(1
)
 
(70
)
Net income (loss)
24,670

 
(6,184
)
 
18,486

 
12,304

 
(4,694
)
 
7,610

Less:  Preferred return to A-1 preferred OP units
622

 

 
622

 
664

 

 
664

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

 

 
46

 
46

 

 
46

Less: Preferred return to A-4 preferred OP units
353

 

 
353

 

 

 

Less: Preferred return to Series C preferred OP units
340

 

 
340

 

 

 

Less:  Amounts attributable to noncontrolling interests
1,261

 
(518
)
 
743

 
797

 
(339
)
 
458

Net income (loss) attributable to Sun Communities, Inc.
22,048

 
(5,666
)
 
16,382

 
10,797

 
(4,355
)
 
6,442

Less: Preferred stock distributions
4,088

 

 
4,088

 
1,514

 

 
1,514

Net income (loss) attributable to Sun Communities, Inc. common stockholders
$
17,960

 
$
(5,666
)
 
$
12,294

 
$
9,283

 
$
(4,355
)
 
$
4,928



22

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


12.     Segment Reporting, continued

 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Revenues
$
253,803

 
$
58,192

 
$
311,995

 
$
180,292

 
$
44,071

 
$
224,363

Operating expenses/Cost of sales
87,924

 
37,346

 
125,270

 
65,527

 
29,412

 
94,939

Net operating income/Gross profit
165,879

 
20,846

 
186,725

 
114,765

 
14,659

 
129,424

Adjustments to arrive at net income (loss):
 
 
 
 
 
 
 
 
 
 
 
Interest and other income, net
9,105

 
38

 
9,143

 
7,262

 

 
7,262

General and administrative
(20,316
)
 
(7,445
)
 
(27,761
)
 
(16,206
)
 
(5,618
)
 
(21,824
)
Transaction costs
(11,486
)
 

 
(11,486
)
 
(1,856
)
 
(8
)
 
(1,864
)
Depreciation and amortization
(59,639
)
 
(25,773
)
 
(85,412
)
 
(37,069
)
 
(21,865
)
 
(58,934
)
Extinguishment of debt
(2,800
)
 

 
(2,800
)
 

 

 

Interest
(52,133
)
 
(7
)
 
(52,140
)
 
(35,521
)
 
(9
)
 
(35,530
)
Interest on mandatorily redeemable debt
(1,639
)
 

 
(1,639
)
 
(1,609
)
 

 
(1,609
)
Gain (loss) on disposition of properties, net
9,477

 
(721
)
 
8,756

 
(647
)
 
1,532

 
885

Distributions from affiliate
7,500

 

 
7,500

 
800

 

 
800

Provision for state income taxes
(101
)
 
(51
)
 
(152
)
 
(138
)
 
(1
)
 
(139
)
Net income (loss)
43,847

 
(13,113
)
 
30,734

 
29,781

 
(11,310
)
 
18,471

Less:  Preferred return to A-1 preferred OP units
1,253

 

 
1,253

 
1,336

 

 
1,336

Less: Preferred return to A-3 preferred OP units
91

 

 
91

 
91

 

 
91

Less: Preferred return to A-4 preferred OP units
706

 

 
706

 

 

 

Less: Preferred return to Series C preferred OP units
340

 

 
340

 

 

 

Less:  Amounts attributable to noncontrolling interests
2,021

 
(1,014
)
 
1,007

 
2,122

 
(880
)
 
1,242

Net income (loss) attributable to Sun Communities, Inc.
39,436

 
(12,099
)
 
27,337

 
26,232

 
(10,430
)
 
15,802

Less: Preferred stock distributions
8,174

 

 
8,174

 
3,028

 

 
3,028

Net income (loss) attributable to Sun Communities, Inc. common stockholders
$
31,262

 
$
(12,099
)
 
$
19,163

 
$
23,204

 
$
(10,430
)
 
$
12,774


 
June 30, 2015
 
December 31, 2014
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Identifiable assets:
 
 
 
 
 
 
 
 
 
 
 
Investment property, net
$
3,299,538

 
$
416,603

 
$
3,716,141

 
$
2,207,526

 
$
360,638

 
$
2,568,164

Cash and cash equivalents
11,496

 
434

 
11,930

 
81,864

 
1,595

 
83,459

Inventory of manufactured homes

 
10,246

 
10,246

 

 
8,860

 
8,860

Notes and other receivables, net
175,951

 
12,085

 
188,036

 
163,713

 
11,144

 
174,857

Other assets
101,161

 
5,335

 
106,496

 
97,485

 
4,867

 
102,352

Total assets
$
3,588,146

 
$
444,703

 
$
4,032,849

 
$
2,550,588

 
$
387,104

 
$
2,937,692



23

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”) pursuant to 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 (i.e., some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. In addition, frequent changes occur in the area of REIT taxation which requires us to continually monitor our tax status. We analyzed the various REIT tests and confirmed that we continued to qualify as a REIT for the quarter ended June 30, 2015.

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

SHS, our taxable REIT subsidiary, is subject to U.S. federal income taxes. Our deferred tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. Deferred tax assets are reduced, if necessary, by a valuation allowance to the amount where realization is more likely than not assured after considering all available evidence. Our temporary differences primarily relate to net operating loss carryforwards and depreciation. A federal deferred tax asset of $1.0 million is included in other assets in our consolidated balance sheets as of June 30, 2015 and December 31, 2014.

We had no unrecognized tax benefits as of June 30, 2015 and 2014. We expect no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of June 30, 2015.

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 June 30, 2015 and the three and six months ended June 30, 2014, and $0.2 million for the six months ended June 30, 2015.

SHS is currently under examination by the Internal Revenue Service ("IRS") for tax year 2013. To date, we have not received any formal notices of proposed adjustments from the IRS related to this or any other examination periods.

 

24

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


14.     Earnings Per Share

We have outstanding stock options, unvested restricted shares and Series A-4 Preferred Stock, and our Operating Partnership has outstanding common OP units, convertible Series A-1 preferred OP units, Series A-3 preferred OP units, Series A-4 preferred OP units, Series C preferred OP units and Aspen preferred OP Units, which, if converted or exercised, may impact dilution. 

Computations of basic and diluted earnings per share from continuing operations were as follows (in thousands, except per share data):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Numerator
 
2015
 
2014
 
2015
 
2014
Net income attributable to common stockholders
 
$
12,294

 
$
4,928

 
$
19,163

 
$
12,774

Allocation of income to restricted stock awards
 
(146
)
 
(122
)
 
(180
)
 
(235
)
Net income attributable to common stockholders after allocation
 
12,148

 
4,806

 
18,983

 
12,539

Allocation of income to restricted stock awards
 
146

 
122

 
180

 
235

Diluted earnings: net income attributable to common stockholders after allocation
 
$
12,294

 
$
4,928

 
$
19,163

 
$
12,774

Denominator
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
52,846

 
40,331

 
52,672

 
38,413

Add: dilutive stock options
 
12

 
14

 
14

 
15

Add: dilutive restricted stock
 
379

 
201

 
374

 
203

Diluted weighted average common shares and securities
 
53,237

 
40,546

 
53,060

 
38,631

Earnings per share available to common stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.23

 
$
0.12

 
$
0.36

 
$
0.33

Diluted
 
$
0.23

 
$
0.12

 
$
0.36

 
$
0.33


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 June 30, 2015 and 2014 (amounts in thousands):
 
 
As of June 30,
 
 
2015
 
2014
Common OP units
 
2,916

 
2,069

Series A-1 preferred OP units
 
391

 
438

Series A-3 preferred OP units
 
40

 
40

Series A-4 preferred OP units
 
869

 

Series A-4 Preferred Stock
 
6,365

 

Series C preferred OP units
 
340

 

Aspen preferred OP units
 
1,284

 
1,325

Total securities
 
12,205

 
3,872





25

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 caps are used to accomplish this objective. We do not enter into derivative instruments for speculative purposes nor do we have any swaps in a hedging arrangement.

The following table provides the terms of our interest rate derivative contracts that were in effect as of June 30, 2015:
Type
 
Purpose
 
Effective Date
 
Maturity Date
 
 Notional
 (in millions)
 
Based on
 
Variable Rate
 
Fixed Rate
 
Spread
 
Effective Fixed Rate
Cap
 
Cap Floating Rate
 
4/1/2015
 
4/1/2018
 
$
150.1

 
3 Month LIBOR
 
0.2708%
 
9.0000%
 
—%
 
N/A
Cap
 
Cap Floating Rate
 
10/3/2011
 
10/3/2016
 
$
10.0

 
3 Month LIBOR
 
0.2708%
 
11.0200%
 
—%
 
N/A

In accordance with ASC Topic 815, Derivatives and Hedging, derivative instruments are recorded at fair value within Other assets or Other liabilities on the balance sheet. As of June 30, 2015 and December 31, 2014, the fair value of the derivatives was zero.

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.