Document


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, 2016.
 
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, 2016:  73,026,504




INDEX

 
 
 
 
Financial Statements:
 
 
Consolidated Balance Sheets as of September 30, 2016 (Unaudited) and December 31, 2015
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)
 
Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2016 (Unaudited)
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)
 
 
 
 
 
 



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, 2016
 
December 31, 2015
ASSETS
 
 
 
Land
$
1,072,964

 
$
451,340

Land improvements and buildings
4,682,920

 
3,535,909

Rental homes and improvements
485,340

 
460,480

Furniture, fixtures and equipment
125,603

 
102,746

Land held for future development
23,497

 
23,047

Investment property
6,390,324

 
4,573,522

Accumulated depreciation
(977,486
)
 
(852,407
)
Investment property, net (including $89,772 and $92,009 for consolidated variable interest entities at September 30, 2016 and December 31, 2015; see Note 7)
5,412,838

 
3,721,115

Cash and cash equivalents
69,829

 
45,086

Inventory of manufactured homes
24,147

 
14,828

Notes and other receivables, net
87,856

 
47,972

Collateralized receivables, net
143,888

 
139,768

Other assets, net (including $2,857 and $3,823 for consolidated variable interest entities at September 30, 2016 and December 31, 2015; see Note 7)
166,148

 
213,030

TOTAL ASSETS
$
5,904,706

 
$
4,181,799

LIABILITIES
 
 
 
Mortgage loans payable (including $62,567 and $64,082 for consolidated variable interest entities at September 30, 2016 and December 31, 2015; see Note 7)
$
2,854,831

 
$
2,125,267

Secured borrowings on collateralized receivables
144,522

 
140,440

Preferred OP units - mandatorily redeemable
45,903

 
45,903

Lines of credit
57,737

 
24,687

Distributions payable
51,100

 
41,265

Other liabilities (including $4,180 and $4,091 for consolidated variable interest entities at September 30, 2016 and December 31, 2015; see Note 7)
275,650

 
184,859

TOTAL LIABILITIES
3,429,743

 
2,562,421

Commitments and contingencies

 

Series A-4 preferred stock, $0.01 par value. Issued and outstanding: 1,682 shares at September 30, 2016 and 2,067 shares at December 31, 2015
50,227

 
61,732

Series A-4 preferred OP units
19,906

 
21,065

STOCKHOLDERS’ EQUITY
 
 
 
Series A preferred stock, $0.01 par value. Issued and outstanding: 3,400 shares at September 30, 2016 and December 31, 2015
34

 
34

Common stock, $0.01 par value. Authorized: 180,000 shares;
Issued and outstanding: 73,027 shares at September 30, 2016 and 58,395 shares at December 31, 2015
730

 
584

Additional paid-in capital
3,313,905

 
2,319,314

Accumulated other comprehensive loss
(4,876
)
 

Distributions in excess of accumulated earnings
(975,511
)
 
(864,122
)
Total Sun Communities, Inc. stockholders' equity
2,334,282

 
1,455,810

Noncontrolling interests:
 
 
 
Common and preferred OP units
73,284

 
82,538

Consolidated variable interest entities
(2,736
)
 
(1,767
)
Total noncontrolling interests
70,548

 
80,771

TOTAL STOCKHOLDERS’ EQUITY
2,404,830

 
1,536,581

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
5,904,706

 
$
4,181,799

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,
 
2016
 
2015
 
2016
 
2015
REVENUES
 
 
 
 
 
 
 
Income from real property
$
184,324

 
$
137,548

 
$
453,560

 
$
382,906

Revenue from home sales
31,211

 
18,991

 
81,987

 
54,559

Rental home revenue
12,031

 
11,856

 
35,696

 
34,480

Ancillary revenues
16,446

 
12,511

 
28,442

 
20,956

Interest
4,705

 
3,987

 
13,322

 
11,864

Brokerage commissions and other income, net
984

 
462

 
2,137

 
1,728

Total revenues
249,701

 
185,355

 
615,144

 
506,493

COSTS AND EXPENSES
 
 
 
 
 
 
 
Property operating and maintenance
57,089

 
38,716

 
125,357

 
102,437

Real estate taxes
12,384

 
8,520

 
32,122

 
26,031

Cost of home sales
21,935

 
13,386

 
58,803

 
39,645

Rental home operating and maintenance
6,350

 
7,031

 
17,637

 
18,115

Ancillary expenses
8,539

 
6,936

 
17,248

 
13,631

Home selling expenses
3,553

 
1,910

 
8,689

 
5,397

General and administrative
16,575

 
12,670

 
46,910

 
36,944

Transaction costs
4,191

 
1,664

 
27,891

 
13,150

Depreciation and amortization
61,483

 
44,695

 
159,565

 
130,107

Extinguishment of debt

 

 

 
2,800

Interest
33,800

 
27,453

 
88,522

 
79,593

Interest on mandatorily redeemable preferred OP units
789

 
790

 
2,363

 
2,429

Total expenses
226,688

 
163,771

 
585,107

 
470,279

Income before other items
23,013

 
21,584

 
30,037

 
36,214

Gain on disposition of properties, net

 
18,190

 

 
26,946

Provision for income taxes
(283
)
 
(77
)
 
(567
)
 
(229
)
Income from affiliate transactions
500

 

 
500

 
7,500

Net income
23,230

 
39,697

 
29,970

 
70,431

Less:  Preferred return to preferred OP units
1,257

 
1,302

 
3,793

 
3,692

Less:  Amounts attributable to noncontrolling interests
879

 
2,125

 
460

 
3,132

Net income attributable to Sun Communities, Inc.
21,094

 
36,270

 
25,717

 
63,607

Less: Preferred stock distributions
2,197

 
3,179

 
6,748

 
11,353

Less: Preferred stock redemption costs

 
4,328

 

 
4,328

Net income attributable to Sun Communities, Inc. common stockholders
$
18,897

 
$
28,763

 
$
18,969

 
$
47,926

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
68,655

 
53,220

 
63,716

 
52,855

Diluted
69,069

 
53,665

 
64,146

 
53,271

Earnings per share (See Note 13):
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.53

 
$
0.30

 
$
0.90

Diluted
$
0.27

 
$
0.53

 
$
0.30

 
$
0.90



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,
 
2016
 
2015
 
2016
 
2015
Net income / comprehensive income
$
23,230

 
$
39,697

 
$
29,970

 
$
70,431

Foreign currency translation adjustment
(5,227
)
 

 
(5,226
)
 

Total comprehensive income
18,003

 
39,697

 
24,744

 
70,431

Less: Comprehensive income attributable to the noncontrolling interests
553

 
2,125

 
110

 
3,132

Comprehensive income attributable to Sun Communities, Inc.
$
17,450

 
$
37,572

 
$
24,634

 
$
67,299



See accompanying Notes to Consolidated Financial Statements.



5



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(Unaudited - dollars in thousands)

 
7.125% Series A Cumulative Redeemable Preferred Stock
Common
Stock
Additional Paid-in Capital
Distributions in Excess of Accumulated Earnings
Accumulated other comprehensive income
Non-controlling Interests
Total Stockholders' Equity
Balance at December 31, 2015
$
34

$
584

$
2,319,314

$
(864,122
)
$

$
80,771

$
1,536,581

Issuance of common stock from exercise of options, net


149




149

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

144

975,850



(1,693
)
974,301

Conversion of Series A-4 preferred stock


11,503




11,503

Share-based compensation - amortization and forfeitures

2

7,089

187



7,278

Foreign currency exchange




(4,876
)
(350
)
(5,226
)
Net income



29,510


364

29,874

Distributions



(141,086
)

(8,544
)
(149,630
)
Balance at September 30, 2016
$
34

$
730

$
3,313,905

$
(975,511
)
$
(4,876
)
$
70,548

$
2,404,830



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,
 
2016
 
2015
OPERATING ACTIVITIES:
 
 
 
Net income
$
29,970

 
$
70,431

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on disposition of assets
(9,400
)
 
(4,664
)
Gain on disposition of properties, net

 
(26,946
)
Share-based compensation
7,278

 
5,234

Depreciation and amortization
157,721

 
129,094

Amortization of below market lease
(4,644
)
 
(3,724
)
Amortization of debt premium
(7,436
)
 
(7,985
)
Amortization of deferred financing costs
1,609

 
1,410

Amortization of ground lease intangibles
368

 

Income from affiliate transactions
(500
)
 
(7,500
)
Change in notes receivable from financed sales of inventory homes, net of repayments
(22,996
)
 
(4,636
)
Change in inventory, other assets and other receivables, net
14,817

 
(17,530
)
Change in other liabilities
23,492

 
13,594

NET CASH PROVIDED BY OPERATING ACTIVITIES
190,279

 
146,778

INVESTING ACTIVITIES:
 
 
 
Investment in properties
(159,923
)
 
(148,655
)
Acquisitions of properties, net of cash acquired
(1,473,368
)
 
(309,275
)
Payments for deposits on acquisitions

 
(2,208
)
Proceeds related to affiliate transactions
500

 
7,500

Proceeds related to disposition of assets and depreciated homes, net
3,755

 
4,849

Proceeds related to disposition of properties
88,696

 
45,488

Issuance of notes and other receivables
(1,411
)
 
(727
)
Payment for membership interest

 
(1,390
)
Repayments of notes and other receivables
852

 
1,213

NET CASH USED FOR INVESTING ACTIVITIES
(1,540,899
)
 
(403,205
)
FINANCING ACTIVITIES:
 
 
 
Issuance and associated costs of common stock, OP units, and preferred OP units, net
748,959

 
77,306

Net proceeds from stock option exercise
149

 
71

Borrowings on lines of credit
474,738

 
394,428

Payments on lines of credit
(441,738
)
 
(233,222
)
Proceeds from issuance of other debt
900,781

 
326,689

Payments on other debt
(141,490
)
 
(121,247
)
Proceeds received from return of prepaid deferred financing costs

 
6,852

Redemption of Series A-4 Preferred Stock

 
(121,445
)
Distributions to stockholders, OP unit holders, and preferred OP unit holders
(141,018
)
 
(121,468
)
Preferred stock redemption costs

 
(4,328
)
Payments for deferred financing costs
(24,911
)
 
(6,751
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
1,375,470

 
196,885

Effect of exchange rate changes on cash and cash equivalents
(107
)
 

Net change in cash and cash equivalents
24,743

 
(59,542
)
Cash and cash equivalents, beginning of period
45,086

 
83,459

Cash and cash equivalents, end of period
$
69,829

 
$
23,917


See accompanying Notes to Consolidated Financial Statements.

7



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - dollars in thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
SUPPLEMENTAL INFORMATION:
 
 
 
Cash paid for interest (net of capitalized interest of $378 and $464, respectively)
$
91,346

 
$
77,673

Cash paid for interest on mandatorily redeemable debt
$
2,363

 
$
2,620

Cash paid for income taxes
$
612

 
$
310

Noncash investing and financing activities:
 
 
 
Reduction in secured borrowing balance
$
14,718

 
$
13,243

Change in distributions declared and outstanding
$
9,527

 
$
4,264

Conversion of Series A-4 Preferred Stock
$
11,503

 
$

Conversion of common and preferred OP units
$
2,033

 
$
7,020

 Settlement of membership interest
$

 
$
3,498

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
$
225,000

 
$
278,955

Acquisitions - Series C preferred OP units issued
$

 
$
33,154

Acquisitions - debt assumed
$

 
$
377,666

Acquisitions - contingent consideration liability
$
9,830

 
$


See accompanying Notes to Consolidated Financial Statements.


8

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



1.      Basis of Presentation

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”) and Sun Home Services, Inc. (“SHS”) are referred to herein as the "Company," "us," "we," and "our".

We follow accounting standards set by the Financial Accounting Standards Board ("FASB"). FASB sets generally accepted accounting principles ("GAAP"), which we follow to ensure that we consistently report our financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification.

These unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and in accordance with GAAP. Pursuant to the SEC rules and regulations we present interim disclosures and certain information and footnote disclosures as required. Accordingly, the unaudited Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying unaudited 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. All intercompany transactions have been eliminated in consolidation. 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 unaudited 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, 2015 as filed with the SEC on February 23, 2016 (the “2015 Annual Report”). These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our 2015 Annual Report.


2.      Real Estate Acquisitions

Carefree Acquisition

On June 9, 2016, pursuant to a Stock Purchase Agreement dated March 22, 2016, the Company through the Operating Partnership acquired from Carefree Communities Intermediate Holdings, L.L.C. (the "Seller") all of the issued and outstanding shares of common stock of Carefree Communities Inc. ("Carefree Communities") or ("Carefree"). Carefree Communities directly or indirectly owned 103 manufactured home (“MH”) and recreational vehicle (“RV”) communities, comprising over 27,000 sites.

The aggregate purchase price for the acquisition was $1.68 billion. At the closing, the Company issued the Seller 3,329,880 shares of its common stock (the "Acquisition Shares") at an issuance price of $67.57 per share (or $225.0 million in common stock), and the Operating Partnership paid the balance of the purchase price, or $1.455 billion, in cash. Approximately $1.0 billion of the cash payment was applied simultaneously to pay off debt on the properties owned by Carefree Communities. The Operating Partnership funded the cash portion of the purchase price in part with the proceeds of the Fannie Mae financing and the Northwestern Mutual Life Insurance Company financing described in Note 8, "Debt and Lines of Credit".

On March 30, 2016, we closed on an underwritten public offering of 6,037,500 shares of common stock at a price of $66.50 per share.   The net proceeds from the offering of $385.4 million were used to fund a portion of the purchase price for the acquisition of the Carefree Communities.

During the three months ended September 30, 2016, the Company allocated the "investment in property" balances for Carefree Communities to the respective balance sheet line items upon preliminary completion of a purchase price allocation in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 805 - Business Combinations.


9

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


At Acquisition Date
 
Carefree
Investment in property
 
$
1,626,289

Ground leases
 
38,010

In-place leases
 
34,660

Inventory
 
13,731

Below market lease
 
(28,550
)
Total identifiable assets acquired and liabilities assumed (1)
 
$
1,684,140

 
 
 
Consideration
 


Cash and equity
 
$
1,684,140


(1) The purchase price allocations for Carefree is preliminary and will 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, 2016 related to the Carefree acquisition completed in 2016 is set forth in the following table (in thousands):

 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
 
(unaudited)
 
(unaudited)
Revenue
$
39,960

 
$
49,067

Net income
$
6,183

 
$
10,968


Other Acquisitions

In September 2016, we acquired Petoskey RV Resort ("Petoskey"), a RV resort with 78 sites located in Petoskey, Michigan.

In August 2016, we acquired Sunset Beach Resort ("Sunset Beach") in Cape Charles, Virginia. The sellers of Sunset Beach were engaged by the Company to continue to operate and maintain the property.  Beginning January 1, 2022, the Company has the option to remove the sellers as operators via a payment based on certain operating performance metrics.  Accordingly, total consideration of $27.8 million as of September 30, 2016 includes a contingent consideration liability of $9.8 million.

The contingent consideration liability represents the present value of the contingent payment estimated at acquisition closing, based on projected future operating performance metrics.  The contingent payment is formula-driven, and not capped.  The contingent consideration liability will be re-measured at each reporting date, with changes in fair value adjusted through earnings, until the contingency is resolved.  The final contingent payment could be materially different from the initial estimate. 

In June 2016, we acquired Pecan Park RV Resort ("Pecan Park"), a RV resort with 183 sites located in Jacksonville, Florida.

In March 2016, we acquired Hill Country Cottage and RV Resort ("Hill Country"), a RV resort with 353 sites located in New Braunfels, Texas.

In March 2016, we acquired Kimberly Estates, a MH community with 387 sites located in Frenchtown Township, Michigan.

10

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


The following tables summarize the amounts of the assets acquired and liabilities assumed at the acquisition dates and the consideration paid for the acquisition completed in 2016 (in thousands):

At Acquisition Date
 
Petoskey (2)
 
Sunset Beach (2)(3)
 
Pecan Park (2)
 
Hill Country (2)
 
Kimberly Estates (2)
 
Total
Investment in property
 
$
3,500

 
$
27,830

 
$
7,000

 
$
29,990

 
$
7,313

 
$
75,633

Inventory of manufactured homes
 

 

 

 

 
97

 
97

In-place leases and other intangible assets
 

 

 

 
10

 
340

 
350

Total identifiable assets acquired and liabilities assumed
 
$
3,500

 
$
27,830

 
$
7,000

 
$
30,000

 
$
7,750

 
$
76,080

 
 
 
 
 
 
 
 
 
 
 
 
 
Consideration
 
 
 
 
 
 
 
 
 
 
 
 
Cash, proceeds from prior dispositions held in escrow, or contingent liability
 
$
3,500

 
$
27,830

 
$
7,000

 
$
30,000

 
$
7,750

 
$
76,080


(2) The purchase price allocations for Petoskey, Sunset Beach, Pecan Park, Hill Country, and Kimberly Estates are preliminary and may be adjusted as final costs and final valuations are determined.
(3) Sunset Beach consideration includes a $9.8 million contingent consideration liability.

The amount of revenue and net income included in the Consolidated Statements of Operations for the three and nine months ended September 30, 2016 related to the acquisitions other than Carefree completed in 2016 is set forth in the following table (in thousands):

 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
 
(unaudited)
 
(unaudited)
Revenue
$
2,616

 
$
5,119

Net income
$
893

 
$
1,621


The following unaudited pro forma financial information presents the results of our operations for the three and nine months ended September 30, 2016 and 2015 as if the properties were acquired on January 1, 2015. 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, 2015 (in thousands, except per-share data).
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
(unaudited)
 
(unaudited)
 
2016
 
2015
 
2016
 
2015
Total revenues
$
250,096

 
$
228,221

 
$
689,878

 
$
635,092

Net income attributable to Sun Communities, Inc. common stockholders
$
18,790

 
$
43,061

 
$
39,576

 
$
90,821

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

 
$
0.81

 
$
0.62

 
$
1.72

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

 
$
0.80

 
$
0.62

 
$
1.70


Transaction costs of $27.9 million and $13.2 million have been incurred for the nine months ended September 30, 2016 and 2015, respectively, and are presented as “Transaction costs” in our Consolidated Statements of Operations.


11

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


3.      Collateralized Receivables and 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 receivable. 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 a 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 receivable 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 receivable.  The percentage used to determine the repurchase price of the outstanding principal balance on the installment note receivable is based on the number of payments made on the note. In general, the repurchase price is determined as follows:

Number of Payments
 
Repurchase Percentage
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, net" and the cash proceeds received from these transactions have been classified as "Secured borrowings on collateralized receivables" within the Consolidated Balance Sheets. The balance of the collateralized receivables was $143.9 million (net of allowance of $0.6 million) and $139.8 million (net of allowance of $0.7 million) as of September 30, 2016 and December 31, 2015, respectively. The receivables have a weighted average interest rate and maturity of 10.1% and 15.8 years as of September 30, 2016, and 10.2% and 15.6 years as of December 31, 2015.

The outstanding balance on the secured borrowing was $144.5 million and $140.4 million as of September 30, 2016 and December 31, 2015, respectively.

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 $3.5 million and $3.3 million for the three months ended September 30, 2016 and 2015, respectively, and $10.3 million and $9.6 million for the nine months ended September 30, 2016 and 2015, 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, 2016
Beginning balance
$
140,440

Financed sales of manufactured homes
18,800

Principal payments and payoffs from our customers
(9,185
)
Principal reduction from repurchased homes
(5,533
)
Total activity
4,082

Ending balance
$
144,522



12

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


The following table sets forth the allowance for the collateralized receivables as of September 30, 2016 (in thousands):

 
Nine Months Ended
 
September 30, 2016
Beginning balance
$
(672
)
Lower of cost or market write-downs
470

Increase to reserve balance
(432
)
Total activity
38

Ending balance
$
(634
)

4.      Notes and Other Receivables

The following table sets forth certain information regarding notes and other receivables (in thousands):
 
 
September 30, 2016
 
December 31, 2015
Installment notes receivable on manufactured homes, net
 
$
51,251

 
$
20,418

Other receivables, net
 
36,605

 
27,554

Total notes and other receivables, net
 
$
87,856

 
$
47,972


Installment Notes Receivable on Manufactured Homes

The installment notes of $51.3 million (net of allowance of $0.2 million) and $20.4 million (net of allowance of $0.2 million) as of September 30, 2016 and December 31, 2015, 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 (net of servicing costs) and maturity of 9.3% and 15.7 years as of September 30, 2016, and 8.6% and 10.0 years as of December 31, 2015. The increase in weighted average maturity from 10.0 years to 15.7 years is the result of a shift to longer maturities in our financed sales of manufactured homes in 2016, as well as our acquired notes having longer maturities than our previous average. 
  

The change in the aggregate gross principal balance of the installment notes receivable is as follows (in thousands):
 
Nine Months Ended
 
September 30, 2016
Beginning balance
$
20,610

Financed sales of manufactured homes
31,775

Acquired notes
3,521

Principal payments and payoffs from our customers
(3,466
)
Principal reduction from repossessed homes
(1,038
)
Total activity
30,792

Ending balance
$
51,402



13

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


Allowance for Losses for Installment Notes Receivable

The following table sets forth the allowance change for the installment notes receivable as follows (in thousands):

 
Nine Months Ended
 
September 30, 2016
Beginning balance
$
(192
)
Lower of cost or market write-downs
48

Increase to reserve balance
(7
)
Total activity
41

Ending balance
$
(151
)



Other Receivables

As of September 30, 2016, other receivables were comprised of amounts due from: residents for rent, and water and sewer usage of $5.9 million (net of allowance of $1.6 million); home sale proceeds of $17.0 million; insurance receivables of $0.8 million; rebates and other receivables of $5.5 million; and promissory notes receivable of $7.3 million. The promissory notes receivable have maturities on or before December 31, 2016. As of December 31, 2015, other receivables were comprised of amounts due from: residents for rent, and water and sewer usage of $4.7 million (net of allowance of $0.9 million); home sale proceeds of $10.5 million; insurance receivables of $1.2 million; insurance settlement of $3.7 million; rebates and other receivables of $5.3 million; and a promissory note receivable of $2.2 million.

5.
Intangible Assets

Our intangible assets include ground leases and in-place leases from acquisitions, franchise fees, and other intangible assets. These intangible assets are recorded in "Other assets, net" on the Consolidated Balance Sheets.

During the third quarter, as part of the Carefree acquisition purchase price allocation, we recorded $38.0 million of intangible assets associated with ground leases. These ground leases relate to 5 communities where contractual base rents are below market rents and therefore give rise to future economic benefits over the remaining lease terms.

The gross carrying amounts, and accumulated amortization are as follows (in thousands):

 
 
 
 
September 30, 2016
 
December 31, 2015
Intangible Asset
 
Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Ground leases
 
8-57 years
 
$
38,010

 
$
(368
)
 
$

 
$

In-place leases
 
7 years
 
97,829

 
(28,386
)
 
62,981

 
(20,245
)
Franchise fees and other intangible assets
 
15 years
 
1,864

 
(1,009
)
 
1,864

 
(622
)
Total
 
 
 
$
137,703

 
$
(29,763
)
 
$
64,845

 
$
(20,867
)

14

SUN COMMUNITIES, INC.



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
 
2016
 
2015
 
2016
 
2015
Ground leases
 
$
368

 
$

 
$
368

 
$

In-place leases
 
3,824

 
2,341

 
8,142

 
6,020

Franchise fees and other intangible assets
 
129

 
129

 
387

 
387

Total
 
$
4,321

 
$
2,470

 
$
8,897

 
$
6,407


Based on the gross carrying amount of intangible assets as of September 30, 2016, the estimated future amortization expense for the next five years was as follows (in thousands):
Remainder of 2016
$
3,856

2017
15,200

2018
14,322

2019
13,405

2020
11,678




6.      Investment in Affiliates

Origen Financial Services, LLC (“OFS LLC”)

At September 30, 2016 and December 31, 2015, 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 owned 5,000,000 shares of common stock in Origen, which approximated an ownership interest of 19.3%. 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 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. During the second quarter of 2015, we received an initial distribution of $7.5 million from Origen. During the third quarter of 2016, we sold all 5,000,000 shares of common stock in Origen to an unrelated party for aggregate proceeds of $0.5 million.


15

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


7.      Consolidated Variable Interest Entities

In 2016, the Company adopted Accounting Standards Update (“ASU”) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The Company evaluated the application of ASU No. 2015-02 and concluded that no change was required to its accounting of its interests in less than wholly owned joint ventures, however, the Operating Partnership now meets the criteria as a variable interest entity ("VIE"). The Company’s significant asset is its investment in the Operating Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership.

Other 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 Accounting Standard Codification ("ASC") 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 have been made (in thousands):

 
September 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Investment property, net
$
89,772

 
$
92,009

Other assets
2,857

 
3,823

   Total Assets
$
92,629

 
$
95,832

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Debt
$
62,567

 
$
64,082

Other liabilities
4,180

 
4,091

Noncontrolling interests
(2,736
)
 
(1,767
)
   Total Liabilities and Stockholders' Equity
$
64,011

 
$
66,406


Investment property, net and other assets related to the consolidated VIEs comprised approximately 1.6% and 2.3% of our consolidated total assets at September 30, 2016 and December 31, 2015, respectively. Debt and other liabilities comprised approximately 1.9% and 2.5% of our consolidated total liabilities at September 30, 2016 and December 31, 2015, respectively. Noncontrolling interests related to the consolidated VIEs comprised less than 1.0% of our consolidated total equity at September 30, 2016 and December 31, 2015.


16

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


8.      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, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
Collateralized term loans - CMBS
$
531,366

 
$
642,429

 
5.4
 
5.3
 
5.2
%
 
5.3
%
Collateralized term loans - FNMA
1,095,397

 
791,304

 
6.6
 
5.8
 
4.4
%
 
4.6
%
Collateralized term loans - Life Companies
894,009

 
502,555

 
12.4
 
14.4
 
3.8
%
 
4.1
%
Collateralized term loans - FMCC
334,059

 
197,418

 
8.3
 
9.0
 
4.0
%
 
4.0
%
Secured borrowing
144,522

 
140,440

 
15.7
 
15.6
 
10.1
%
 
10.2
%
Preferred OP units - mandatorily redeemable
45,903

 
45,903

 
5.5
 
6.1
 
6.9
%
 
6.9
%
Total debt
$
3,045,256

 
$
2,320,049

 
8.7
 
8.4
 
4.6
%
 
5.0
%

As of September 30, 2016, the aggregate annual contractual maturities and principal amortization of our debt and lines of credit were as follows (in thousands):
Remainder of 2016
$
16,426

2017
153,955

2018
108,753

2019
125,187

2020
178,112

2021 and thereafter
2,498,470


Collateralized Term Loans

In September 2016, 15 subsidiaries of the Operating Partnership entered into 15 different promissory notes totaling $139.0 million with PNC Bank, as lender (the "Freddie Mac Financing"). Five of the loans totaling $70.2 million bear interest at a rate of 3.930% and have ten-year terms. The remaining ten loans totaling $68.8 million bear interest at a rate of 3.750% and have seven-year terms. The Freddie Mac Financing provides for principal and interest payments to be amortized over 30 years.

In September 2016, proceeds from the Freddie Mac Financing described above and the underwritten registered public equity offering described in Note 9, "Equity and Mezzanine Securities" were utilized to repay $62.1 million in mortgage loans and $300.0 million on our revolving loan under our senior revolving credit facility.

In June 2016, 17 subsidiaries of the Operating Partnership entered into a Master Credit Facility Agreement (the "Fannie Mae Credit Agreement") with Regions Bank, as lender. Pursuant to the Fannie Mae Credit Agreement, Regions Bank loaned a total of $338.0 million under a senior secured credit facility, comprised of two ten-year term loans in the amount of $300.0 million and $38.0 million, respectively (collectively the "Fannie Mae Financing"). The $300.0 million term loan bears interest at 3.69% per year and the $38.0 million term loan bears interest at 3.67% per year for a blended rate of 3.69% per year. The Fannie Mae Financing provides for principal and interest payments to be amortized over 30 years.

The Fannie Mae Financing is secured by mortgages encumbering 17 MH communities comprised of real and personal property owned by the borrowers. Additionally, the Company and the Operating Partnership have provided a guaranty of the non-recourse carve-out obligations of the borrowers under the Fannie Mae Financing.

Additionally, in June 2016, three subsidiaries of the Operating Partnership entered into mortgage loan documents (the "NML Loan Documents") with The Northwestern Mutual Life Insurance Company ("NML"). Pursuant to the NML Loan Documents, NML made three portfolio loans to the subsidiary borrowers in the aggregate amount of $405.0 million. NML loaned $162.0 million under a ten-year term loan to two of the subsidiary borrowers (the "Portfolio A Loan"). The Portfolio A Loan bears interest at

17

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


3.53% per year and is secured by deeds of trust encumbering seven MH communities and one RV community. NML also loaned $163.0 million under a 12-year term loan (the "Portfolio B Loan") to one subsidiary which is also a borrower under the Portfolio A Loan. The Portfolio B Loan bears interest at 3.71% per year and is secured by deeds of trust and a ground lease encumbering eight MH communities. NML also loaned $80.0 million under a 12-year term loan (the "Portfolio C Loan" and, collectively, with the Portfolio A Loan and the Portfolio B Loan, the "NML Financing") to one subsidiary borrower. The Portfolio C Loan bears interest at 3.71% per year and is secured by a mortgage encumbering one RV community. All of the MH and RV communities that secure the NML Financing were acquired as part of the Carefree Communities acquisition (See Note 2).

The NML Financing is generally non-recourse, however, the borrowers under the NML Financing and the Operating Partnership are responsible for certain customary non-recourse carveouts. In addition, the NML Financing will be fully recourse to the subsidiary borrowers and the Operating Partnership if: (a) the borrowers violate the prohibition on transfer covenants set forth in the loan documents; or (b) a voluntary bankruptcy proceedings is commenced by the borrowers or an involuntary bankruptcy, liquidation, receivership or similar proceeding has commenced against the borrowers and remains undismissed for a period of 90 days.

In March 2015, in relation to the acquisition of Meadowlands, 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 payable with the seller for $2.4 million that bears no interest but is payable in three equal yearly installments beginning in March 2016. During the first half of 2016, we paid the first of the yearly installments of $0.8 million.

The collateralized term loans totaling $2.9 billion as of September 30, 2016, are secured by 202 properties comprised of 79,369 sites representing approximately $3.5 billion of net book value.

Secured Borrowing

See Note 3, "Collateralized Receivables and Transfers of Financial Assets", for additional information regarding our collateralized receivables and secured borrowing transactions.

Preferred OP Units

Included in preferred OP units is $34.7 million of Aspen preferred OP units issued by the Operating Partnership which, as of September 30, 2016, are convertible indirectly into 482,265 shares of our common stock. Subject to certain limitations, at any time prior to January 1, 2024, the holder of each Aspen preferred OP unit at its option may convert such Aspen preferred OP unit into: (a) if the market price of our common stock is $68.00 per share or less, 0.397 common OP units; or (b) if the market price of our common stock is greater than $68.00 per share, the number of common OP units is determined by dividing (i) the sum of (A) $27.00 plus (B) 25% of the amount by which the market price of our common stock exceeds $68.00 per share, by (ii) the per-share market price of our common stock. The current preferred distribution rate is 6.5%. On January 2, 2024, we are required to redeem all Aspen preferred OP units that have not been converted to common OP units.

Lines of Credit

In August, 2015, we amended and restated our senior revolving credit facility with Citibank, N.A. and certain other lenders in the amount of $450.0 million, comprised of a $392.0 million revolving loan and a $58.0 million term loan (the "Facility"). The Facility has a four year term ending August 19, 2019, which can be extended for two additional six-month periods 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 $300.0 million. If additional borrowings are made pursuant to any such additional commitments, the aggregate borrowing limit under the Facility may be increased up to $750.0 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 1.40% to 2.25% for the revolving loan and 1.35% to 2.20% for the term loan. As of September 30, 2016, the margin on our leverage ratio was 1.40% and 1.35% on the revolving and term loans, respectively. We had no borrowings on the revolving loan and $58.0 million on the term loan totaling$58.0 million in borrowings as of September 30, 2016, with a weighted average interest rate of 1.93%. As of December 31, 2015 we had no borrowings on the revolving loan and $25.0 million in borrowings on the term loan totaling $25.0 million in borrowings.

The Facility provides us with the ability to issue letters of credit. Our issuance of letters of credit does not increase our borrowings outstanding under our line of credit, but does reduce the borrowing amount available. At September 30, 2016 and December 31, 2015, approximately $3.6 million and $3.4 million, respectively, of availability was used to back standby letters of credit.


18

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


We have a $12.0 million manufactured home floor plan facility renewable indefinitely until our lender provides us at least 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, 2016, the effective interest rate was 7.0%.  At September 30, 2016 and December 31, 2015, there was no outstanding balance.

Covenants

Pursuant to the terms of the Facility, we are subject to various financial and other 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, 2016, we were in compliance with all covenants.

9.      Equity and Mezzanine Securities

In September 2016, we closed an underwritten registered public offering of 3,737,500 shares of common stock at a net price of $75.89 per share. Proceeds from the offering were approximately $283.6 million after deducting expenses related to the offering, which were used to repay borrowings outstanding under the revolving loan under our senior revolving credit facility.

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 price per share for any shares sold through it from time to time under the Sales Agreement.

During the third quarter of 2016, 620,828 shares of common stock were issued under the Sales Agreement at the prevailing market price of our common stock at the time of each sale with a weighted average sales price of $76.81 per share. We received net proceeds totaling $47.1 million. During the nine months ended September 30, 2016, 1,105,828 shares were issued under the Sales Agreement at a weighted average share price of $74.64 per share for net proceeds totaling $81.5 million.

In June 2016, at the closing of the Carefree acquisition, the Company issued the Seller 3,329,880 shares of its common stock at an issuance price of $67.57 per share or $225.0 million in common stock. Refer to Note 2, "Real Estate Acquisitions".

In March 2016, we closed an underwritten registered public offering of 6,037,500 shares of common stock at a price of $66.50 per share. Net proceeds from the offering were approximately $385.4 million after deducting discounts and expenses related to the offering, which we used to fund a portion of the purchase price for the acquisition of Carefree Communities.

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.

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 under this buyback program during the nine months ended September 30, 2016 or 2015. There is no expiration date specified for the buyback program.

Subject to certain limitations, 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, 2016 and 2015, there were 24,896 and 99,406 common OP units converted to shares of common stock, respectively.

Subject to certain limitations, Series A-1 preferred OP unit holders may convert each Series A-1 preferred OP units to approximately 2.439 shares of our common stock at any time. During the nine months ended September 30, 2016 and 2015, holders of Series A-1 preferred OP units converted 11,490 units into 28,021 shares of common stock, and 39,817 units into 97,109 shares of common stock, respectively.

Subject to certain limitations, Series A-4 preferred OP unit holders may convert each Series A-4 preferred OP units to approximately 0.444 shares of our common stock at any time. During the nine months ended September 30, 2016, and 2015 holders of Series

19

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


A-4 preferred OP units converted 12,389 units into 5,505 shares of common stock, and 109,414 units into 48,627 shares of common stock, respectively.

Subject to certain limitations, Series C preferred OP unit holders may convert each Series C preferred OP units to 1.11 shares of our common stock at any time. During the nine months ended September 30, 2016 holders of Series C preferred OP units converted 7,000 units into 7,768 shares of common stock. There were no conversions of Series C preferred OP units during the nine months ended September 30, 2015.

Cash distributions of $0.65 per share were declared for the quarter ended September 30, 2016. On October 17, 2016, cash payments of approximately $49.3 million for aggregate distributions were made to common stockholders, common OP unit holders and restricted stockholders of record as of September 30, 2016. Cash distributions of $0.45 per share were declared on our Series A cumulative redeemable preferred stock for the quarter ended September 30, 2016. On October 17, 2016, cash payments of approximately $1.5 million for aggregate distributions were made to Series A cumulative redeemable preferred stockholders of record as of September 30, 2016. In addition, cash distributions of $0.41 per share were declared on our Series A-4 Preferred Stock for the quarter ended September 30, 2016. On September 30, 2016, cash payments of approximately $0.7 million were made to Series A-4 Preferred Stock stockholders of record as of September 16, 2016.

10.      Share-Based Compensation

During the three months ended June 30, 2016, we granted 76,000 shares of restricted stock to key employees under the Sun Communities Inc. 2015 Equity Incentive Plan. The shares had a fair value of $69.53 per share and will vest as follows: April 18, 2019: 35%; April 18, 2020: 35%; April 18, 2021: 20%; April 18, 2022: 5%; and April 18, 2023: 5%. The fair value of issued grants was determined by using the closing price of our common stock on the date the shares were issued.

During the three months ended March 31, 2016, we granted 16,800 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 March 15, 2019, and had a fair value of $69.45 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 three months ended March 31, 2016, we granted 130,000 shares of restricted stock to our executive officers under the Sun Communities, Inc. 2015 Equity Incentive Plan. The shares had a fair value of $69.25 per share. Half of the shares will vest as follows: March 20, 2019: 20%; March 20, 2020, 30%; March 20, 2021, 35%; March 20, 2022, 10%; and March 20, 2023, 5%. The remaining 65,000 shares are subject to market and performance conditions with multiple tranches that vest through March 2022. 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.

During the nine months ended September 30, 2016 and 2015, 9,349 and 4,084 shares of common stock, respectively, were issued in connection with the exercise of stock options, and the net proceeds received during both periods was $0.1 million.

The vesting requirements for 158,340 restricted shares granted to our executives and employees were satisfied during the nine months ended September 30, 2016.


20

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


11.     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 our 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 the Real Property Operations segment revenues and is expected to approximate $59.2 million annually. In 2016, we recognized 17.1%, 18.4%, and 44.4% during the first, second, and third quarters, respectively. We expect to recognize 20.1% during the fourth quarter of 2016. In 2015, transient revenue was $39.7 million. We recognized 22.5% in the first quarter, 17.7% in the second quarter, 45.2% in the third quarter, and 14.6% in the fourth quarter.

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

 
Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2015
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Revenues
$
200,770

 
$
43,242

 
$
244,012

 
$
150,059

 
$
30,847

 
$
180,906

Operating expenses/Cost of sales
78,012

 
28,285

 
106,297

 
54,172

19,184

20,417

 
74,589

Net operating income/Gross profit
122,758

 
14,957

 
137,715

 
95,887

 
10,430

 
106,317

Adjustments to arrive at net income (loss):
 
 
 
 
 
 
 
 
 
 
 
Interest and other income, net
5,689

 

 
5,689

 
4,449

 

 
4,449

Home selling expenses

 
(3,553
)
 
(3,553
)
 

 
(1,910
)
 
(1,910
)
General and administrative
(14,309
)
 
(2,266
)
 
(16,575
)
 
(10,735
)
 
(1,935
)
 
(12,670
)
Transaction costs
(4,171
)
 
(20
)
 
(4,191
)
 
(1,664
)
 

 
(1,664
)
Depreciation and amortization
(47,323
)
 
(14,160
)
 
(61,483
)
 
(31,352
)
 
(13,343
)
 
(44,695
)
Interest
(33,797
)
 
(3
)
 
(33,800
)
 
(27,434
)
 
(19
)
 
(27,453
)
Interest on mandatorily redeemable preferred OP units
(789
)
 

 
(789
)
 
(790
)
 

 
(790
)
Gain on disposition of properties, net



 

 
13,415

 
4,775

 
18,190

Provision for income taxes
(242
)
 
(41
)
 
(283
)
 
(51
)
 
(26
)
 
(77
)
Income from affiliate transactions
500

 

 
500

 

 

 

Net income (loss)
28,316

 
(5,086
)
 
23,230

 
41,725

 
(2,028
)
 
39,697

Less:  Preferred return to preferred OP units
1,257

 

 
1,257

 
1,302

 

 
1,302

Less:  Amounts attributable to noncontrolling interests
1,192

 
(313
)
 
879

 
2,295

 
(170
)
 
2,125

Net income (loss) attributable to Sun Communities, Inc.
25,867

 
(4,773
)
 
21,094

 
38,128

 
(1,858
)
 
36,270

Less: Preferred stock distributions
2,197

 

 
2,197

 
3,179

 

 
3,179

Less: Preferred stock redemption costs

 

 

 
4,328

 

 
4,328

Net income (loss) attributable to Sun Communities, Inc. common stockholders
$
23,670

 
$
(4,773
)
 
$
18,897

 
$
30,621

 
$
(1,858
)
 
$
28,763







21

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



 
Nine Months Ended September 30, 2016
 
Nine Months Ended September 30, 2015
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Revenues
$
482,002

 
$
117,683

 
$
599,685

 
$
403,862

 
$
89,039

 
$
492,901

Operating expenses/Cost of sales
174,727


76,440

 
251,167

 
142,096

 
57,763

 
199,859

Net operating income/Gross profit
307,275

 
41,243

 
348,518

 
261,766

 
31,276

 
293,042

Adjustments to arrive at net income (loss):
 
 
 
 
 
 
 
 
 
 
 
Interest and other income, net
15,459

 

 
15,459

 
13,554

 
38

 
13,592

Home selling expenses

 
(8,689
)
 
(8,689
)
 

 
(5,397
)
 
(5,397
)
General and administrative
(40,300
)
 
(6,610
)
 
(46,910
)
 
(31,051
)
 
(5,893
)
 
(36,944
)
Transaction costs
(27,990
)
 
99

 
(27,891
)
 
(13,150
)
 

 
(13,150
)
Depreciation and amortization
(118,296
)
 
(41,269
)
 
(159,565
)
 
(90,991
)
 
(39,116
)
 
(130,107
)
Extinguishment of debt

 

 

 
(2,800
)
 

 
(2,800
)
Interest
(88,512
)
 
(10
)
 
(88,522
)
 
(79,567
)
 
(26
)
 
(79,593
)
Interest on mandatorily redeemable preferred OP units
(2,363
)
 

 
(2,363
)
 
(2,429
)
 

 
(2,429
)
Gain on disposition of properties, net

 

 

 
22,892

 
4,054

 
26,946

Provision for income taxes
(445
)
 
(122
)
 
(567
)
 
(152
)
 
(77
)
 
(229
)
Income from affiliate transactions
500

 

 
500

 
7,500

 

 
7,500

Net income (loss)
45,328

 
(15,358
)
 
29,970

 
85,572

 
(15,141
)
 
70,431

Less:  Preferred return to preferred OP units
3,793

 

 
3,793

 
3,692

 

 
3,692

Less:  Amounts attributable to noncontrolling interests
1,489

 
(1,029
)
 
460

 
4,316

 
(1,184
)
 
3,132

Net income (loss) attributable to Sun Communities, Inc.
40,046

 
(14,329
)
 
25,717

 
77,564

 
(13,957
)
 
63,607

Less: Preferred stock distributions
6,748

 

 
6,748

 
11,353

 

 
11,353

Less: Preferred stock redemption costs

 

 

 
4,328

 

 
4,328

Net income (loss) attributable to Sun Communities, Inc. common stockholders
$
33,298

 
$
(14,329
)
 
$
18,969

 
$
61,883

 
$
(13,957
)
 
$
47,926



 
September 30, 2016
 
December 31, 2015
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Identifiable assets:
 
 
 
 
 
 
 
 
 
 
 
Investment property, net
$
4,965,843

 
$
446,995

 
$
5,412,838

 
$
3,303,287

 
$
417,828

 
$
3,721,115

Cash and cash equivalents
64,131

 
5,698

 
69,829

 
44,150

 
936

 
45,086

Inventory of manufactured homes

 
24,147

 
24,147

 

 
14,828

 
14,828

Notes and other receivables, net
70,056

 
17,800

 
87,856

 
34,258

 
13,714

 
47,972

Collateralized receivables, net
143,888

 

 
143,888

 
139,768

 

 
139,768

Other assets, net
163,120

 
3,028

 
166,148

 
209,957

 
3,073

 
213,030

Total assets
$
5,407,038

 
$
497,668

 
$
5,904,706

 
$
3,731,420

 
$
450,379

 
$
4,181,799




22

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


12.     Income Taxes

We have each 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 95% of our gross income in any year must be derived from qualifying sources. In addition, a REIT must distribute annually at least 90% of its REIT ordinary taxable income to its stockholders and meet other tests.

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, 2016.

As a REIT, we generally will not be subject to United States ("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, U.S. federal income taxes and excise taxes on our undistributed income.

Our various taxable REIT subsidiaries are subject to U.S. federal income taxes. Due to the Carefree acquisition, certain of our properties are also subject to Canadian 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. Full valuation allowances are generally recorded against all U.S. federal deferred tax assets. For Canadian purposes, a minimal amount of deferred tax asset is recorded in relation to a corporate entity and included in “Other assets, net” in our Consolidated Balance Sheets as of September 30, 2016. No federal deferred tax asset is included in "Other assets, net," in our Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015.

We had no unrecognized tax benefits as of September 30, 2016 and 2015. We expect no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of September 30, 2016.

We recorded a provision for federal, state, and Canadian income taxes of approximately $0.3 million and $0.1 million for the three months ended September 30, 2016, and 2015, respectively, and $0.6 million and $0.2 million for the nine months ended September 30, 2016 and 2015, respectively.


23

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


13.     Earnings Per Share

We have outstanding stock options, unvested restricted common shares, Series A Preferred Stock, and Series A-4 Preferred Stock, and our Operating Partnership has: outstanding common OP units; 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 were as follows (in thousands, except per share data):

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Numerator
 
2016
 
2015
 
2016
 
2015
Net income (loss) attributable to common stockholders
 
$
18,897

 
$
28,763

 
$
18,969

 
$
47,926

Allocation of income (loss) to restricted stock awards
 
(135
)
 
(381
)
 
(22
)
 
(541
)
Net income (loss) attributable to common stockholders after allocation
 
18,762

 
28,382

 
18,947

 
47,385

Allocation of income (loss) to restricted stock awards
 
135

 
381

 
22

 
541

Diluted earnings: net income (loss) attributable to common stockholders after allocation
 
$
18,897

 
$
28,763

 
$
18,969

 
$
47,926

 
 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
68,655

 
53,220

 
63,716

 
52,855

Add: dilutive stock options
 
8

 
14

 
10

 
16

Add: dilutive restricted stock
 
406

 
431

 
420

 
400

Diluted weighted average common shares and securities
 
69,069

 
53,665

 
64,146

 
53,271

Earnings per share available to common stockholders after allocation:
 
 
 
 
 
 
 
 
Basic
 
$
0.27

 
$
0.53

 
$
0.30

 
$
0.90

Diluted
 
$
0.27

 
$
0.53

 
$
0.30

 
$
0.90


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, 2016 and 2015 (amounts in thousands):

 
 
As of September 30,
 
 
2016
 
2015
Common OP units
 
2,838

 
2,863

Series A-1 preferred OP units
 
376

 
389

Series A-3 preferred OP units
 
40

 
40

Series A-4 preferred OP units
 
743

 
760

Series A-4 Preferred Stock
 
1,682

 
2,298

Series C preferred OP units
 
333

 
340

Aspen preferred OP units
 
1,284

 
1,284

Total securities
 
7,296

 
7,974



24

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


14.     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 September 30, 2016:

Type
 
Purpose
 
Effective Date
 
Maturity Date
 
 Notional
 (in millions)
 
Based on
 
Variable Rate
 
Cap Rate
 
Spread
 
Effective Fixed Rate
Cap
 
Cap Floating Rate
 
4/1/2015
 
4/1/2018
 
$
150.1

 
3 Month LIBOR
 
2.5240%
 
9.0000%
 
—%
 
N/A
Cap
 
Cap Floating Rate
 
10/3/2011
 
10/3/2016
 
$
10.0

 
3 Month LIBOR
 
3.3240%
 
11.0200%
 
—%
 
N/A

In accordance with ASC Topic 815, "Derivatives and Hedging" ("ASC 815"), derivative instruments are recorded at fair value in "Other assets, net" or "Other liabilities" on the Consolidated Balance Sheet. As of September 30, 2016 and December 31, 2015, the fair value of the derivatives was zero.



15.     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" ("ASC 820"), requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy under which these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumption. This hierarchy requires the use of observable market data when available. These two types of inputs have created the following fair value hierarchy:

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 significant inputs and significant value drivers are observable in active markets; and

Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

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 in order 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 significant inputs and significant value drivers are observable in active markets provided by brokers or dealers to determine the fair value of derivative instruments on a recurring basis (Level 2). See Note 14, "Derivative Instruments and Hedging Activities".

Installment Notes Receivable on Manufactured Homes
The net carrying value of the installment notes receivable on manufactured homes estimates the fair value as the interest rates in the portfolio are comparable to current prevailing market rates (Level 2). Refer to Note 4, "Notes and Other Receivables".
 
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, rates currently prevailing for comparable loans, and instruments of comparable maturities (Level 2). Refer to Note 8, "Debt and Lines of Credit".

25

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



Collateralized Receivables and Secured Borrowings
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 on 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 3, "Collateralized Receivables and Transfers of Financial Assets".

Financial Liabilities
We estimate the fair value of our contingent consideration liability based on discounting of future cash flows using market interest rates and adjusting for non-performance risk over the remaining term of the liability (Level 2).

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 as of September 30, 2016. The table presents the carrying values and fair values of our financial instruments as of September 30, 2016 and December 31, 2015 that were measured using the valuation techniques described above (in thousands). 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.
 
 
September 30, 2016
 
December 31, 2015
Financial assets
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Installment notes receivable on manufactured homes, net
 
$
51,251

 
$
51,251

 
$
20,418

 
$
20,418

Collateralized receivables, net
 
$
143,888

 
$
143,888

 
$
139,768

 
$
139,768

Financial liabilities
 
 
 
 
 
 
 
 
Debt (excluding secured borrowings)
 
$
2,900,734

 
$
3,026,470

 
$
2,179,609

 
$
2,181,790

Secured borrowing
 
$
144,522

 
$
144,522

 
$
140,440

 
$
140,440

Lines of credit
 
$
57,737

 
$
56,248

 
$
24,687

 
$
23,062

Other liabilities (contingent consideration)
 
$
9,830

 
$
9,830

 
$

 
$


16.     Recent Accounting Pronouncements

In October 2016, the FASB issued ASU 2016-16 "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory". This update requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The Company is currently evaluating the impact of the adoption of this ASU.

In August 2016, the FASB issued ASU 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments". This update addresses eight specific cash flow issues with the objective of reducing existing diversity in practice. The guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The Company is currently evaluating the impact of the adoption of this ASU.

In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement