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 June 30, 2017.
 
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, a smaller reporting company or an emerging growth company. (Check one):

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section to Section 13(a) of the Exchange Act. [ ]

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 July 20, 2017:  78,998,639



INDEX

 
 
 
 
Consolidated Financial Statements:
 
 
Consolidated Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)
 
Consolidated Statements of Comprehensive Income / (Loss) for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)
 
Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2017 (Unaudited)
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (Unaudited)
 
 
 
 
 
 
 
Exhibit Index



2



PART I – FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited - dollars in thousands, except per share amounts)
 
(unaudited) 
 June 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Land
$
1,066,792

 
$
1,051,536

Land improvements and buildings
4,934,110

 
4,825,043

Rental homes and improvements
507,362

 
489,633

Furniture, fixtures and equipment
137,546

 
130,127

Investment property
6,645,810

 
6,496,339

Accumulated depreciation
(1,128,671
)
 
(1,026,858
)
Investment property, net (including $51,060 and $88,987 for consolidated variable interest entities at June 30, 2017 and December 31, 2016; see Note 6)
5,517,139

 
5,469,481

Cash and cash equivalents
241,646

 
8,164

Inventory of manufactured homes
25,582

 
21,632

Notes and other receivables, net
110,499

 
81,179

Collateralized receivables, net
138,696

 
143,870

Other assets, net (including $2,067 and $3,054 for consolidated variable interest entities at June 30, 2017 and December 31, 2016; see Note 6)
145,151

 
146,450

TOTAL ASSETS
$
6,178,713

 
$
5,870,776

LIABILITIES
 
 
 
Mortgage loans payable (including $42,375 and $62,111 for consolidated variable interest entities at June 30, 2017 and December 31, 2016; see Note 6)
$
2,832,819

 
$
2,819,567

Secured borrowings on collateralized receivables
139,496

 
144,477

Preferred OP units - mandatorily redeemable
45,903

 
45,903

Lines of credit
435

 
100,095

Distributions payable
56,283

 
51,896

Other liabilities (including $1,629 and $1,998 for consolidated variable interest entities at June 30, 2017 and December 31, 2016; see Note 6)
298,759

 
279,667

TOTAL LIABILITIES
3,373,695

 
3,441,605

Commitments and contingencies

 

Series A-4 preferred stock, $0.01 par value. Issued and outstanding: 1,085 shares at June 30, 2017 and 1,681 shares at December 31, 2016
32,414

 
50,227

Series A-4 preferred OP units
11,051

 
16,717

STOCKHOLDERS’ EQUITY
 
 
 
Series A preferred stock, $0.01 par value. Issued and outstanding: 3,400 shares at June 30, 2017 and December 31, 2016
34

 
34

Common stock, $0.01 par value. Authorized: 180,000 shares;
Issued and outstanding: 78,987 shares at June 30, 2017 and 73,206 shares at December 31, 2016
790

 
732

Additional paid-in capital
3,780,599

 
3,321,441

Accumulated other comprehensive loss
(981
)
 
(3,181
)
Distributions in excess of accumulated earnings
(1,089,428
)
 
(1,023,415
)
Total Sun Communities, Inc. stockholders' equity
2,691,014

 
2,295,611

Noncontrolling interests:
 
 
 
Common and preferred OP units
67,135

 
69,598

Consolidated variable interest entities
3,404

 
(2,982
)
Total noncontrolling interests
70,539

 
66,616

TOTAL STOCKHOLDERS’ EQUITY
2,761,553

 
2,362,227

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
6,178,713

 
$
5,870,776

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,
 
2017
 
2016
 
2017
 
2016
REVENUES
 
 
 
 
 
 
 
Income from real property
$
179,461

 
$
140,001

 
$
362,515

 
$
269,236

Revenue from home sales
30,859

 
26,039

 
58,122

 
50,776

Rental home revenue
12,678

 
11,957

 
25,017

 
23,665

Ancillary revenues
8,850

 
7,383

 
15,069

 
11,996

Interest
5,043

 
4,672

 
9,689

 
8,617

Brokerage commissions and other revenues, net
1,008

 
747

 
1,887

 
1,153

Total revenues
237,899

 
190,799

 
472,299

 
365,443

EXPENSES
 
 
 
 
 
 
 
Property operating and maintenance
53,446

 
37,067

 
100,612

 
68,268

Real estate taxes
13,126

 
10,153

 
26,269

 
19,738

Cost of home sales
22,022

 
18,684

 
42,905

 
36,868

Rental home operating and maintenance
4,944

 
5,411

 
10,046

 
11,287

Ancillary expenses
7,058

 
5,599

 
11,726

 
9,248

Home selling expenses
2,990

 
2,460

 
6,101

 
4,597

General and administrative
19,989

 
16,543

 
37,921

 
30,335

Transaction costs
2,437

 
20,979

 
4,823

 
23,700

Depreciation and amortization
62,721

 
49,670

 
125,487

 
98,082

Extinguishment of debt
293

 

 
759

 

Interest
32,358

 
28,428

 
63,680

 
54,722

Interest on mandatorily redeemable preferred OP units
787

 
787

 
1,571

 
1,574

Total expenses
222,171

 
195,781

 
431,900

 
358,419

Income / (loss) before other items
15,728

 
(4,982
)
 
40,399

 
7,024

Other income, net
875

 

 
1,627

 

Current tax benefit / (expense)
7

 
(56
)
 
(171
)
 
(284
)
Deferred tax benefit
364

 

 
664

 

Net income / (loss)
16,974

 
(5,038
)
 
42,519

 
6,740

Less:  Preferred return to preferred OP units
(1,196
)
 
(1,263
)
 
(2,370
)
 
(2,536
)
Less:  Amounts attributable to noncontrolling interests
(1,315
)
 
695

 
(2,403
)
 
419

Net income / (loss) attributable to Sun Communities, Inc.
14,463


(5,606
)
 
37,746

 
4,623

Less: Preferred stock distributions
(2,099
)
 
(2,197
)
 
(4,278
)
 
(4,551
)
Net income / (loss) attributable to Sun Communities, Inc. common stockholders
$
12,364


$
(7,803
)
 
$
33,468

 
$
72

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
74,678

 
64,757

 
73,677

 
61,247

Diluted
75,154

 
64,757

 
74,272

 
61,673

Earnings per share (See Note 12):
 

 
 
 
 
 
 
Basic
$
0.16

 
$
(0.12
)
 
$
0.45

 
$
0.00

Diluted
$
0.16

 
$
(0.12
)
 
$
0.45

 
$
0.00



See accompanying Notes to Consolidated Financial Statements.


4




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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income / (loss)
$
16,974

 
$
(5,038
)
 
$
42,519

 
$
6,740

Foreign currency translation adjustment
1,745

 
1

 
2,329

 
1

Total comprehensive income / (loss)
18,719

 
(5,037
)
 
44,848

 
6,741

Less: Comprehensive income / (loss) attributable to noncontrolling interests
1,411

 
(695
)
 
2,532

 
(419
)
Comprehensive income / (loss) attributable to Sun Communities, Inc.
$
17,308

 
$
(4,342
)
 
$
42,316

 
$
7,160



See accompanying Notes to Consolidated Financial Statements.



5



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2017
(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 loss
Non-controlling Interests
Total Stockholders' Equity
Balance at December 31, 2016
$
34

$
732

$
3,321,441

$
(1,023,415
)
$
(3,181
)
$
66,616

$
2,362,227

Issuance of common stock from exercise of options, net


45




45

Issuance of OP units and common stock, net

57

459,190



2,001

461,248

Conversion of OP units


1,074



(944
)
130

Conversion of Series A-4 preferred stock

1

4,719




4,720

Redemption of Series A-4 preferred stock


(3,867
)



(3,867
)
Redemption of Series A-4 OP units


(2,571
)



(2,571
)
Share-based compensation - amortization and forfeitures


6,769

148



6,917

Acquisition of noncontrolling interests


(6,201
)


6,101

(100
)
Foreign currency exchange




2,200

129

2,329

Net income



40,116


2,274

42,390

Distributions



(106,277
)

(5,638
)
(111,915
)
Balance at June 30, 2017
$
34

$
790

$
3,780,599

$
(1,089,428
)
$
(981
)
$
70,539

$
2,761,553



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,
 
2017
 
2016
 
 
 
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
$
153,163

 
$
129,048

INVESTING ACTIVITIES:
 
 
 
Investment in properties
(131,137
)
 
(97,435
)
Acquisitions of properties, net of cash acquired
(39,887
)
 
(1,461,663
)
Proceeds from dispositions of assets and depreciated homes, net
3,458

 
4,729

Proceeds from disposition of properties

 
88,696

Issuance of notes and other receivables
(503
)
 
(3,488
)
Repayments of notes and other receivables
943

 
546

NET CASH USED FOR INVESTING ACTIVITIES
(167,126
)
 
(1,468,615
)
FINANCING ACTIVITIES:
 
 
 
Issuance and associated costs of common stock, OP units, and preferred OP units, net
459,247

 
418,764

Net proceeds from stock option exercise
45

 
149

Borrowings on lines of credit
572,109

 
398,913

Payments on lines of credit
(672,019
)
 
(65,913
)
Proceeds from issuance of other debt
83,848

 
755,913

Payments on other debt
(58,860
)
 
(68,668
)
Prepayment penalty on debt
(759
)
 

Redemption of Series A-4 preferred stock and OP units
(24,698
)
 

Distributions to stockholders, OP unit holders, and preferred OP unit holders
(108,093
)
 
(90,810
)
Payments for deferred financing costs
(3,486
)
 
(22,426
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
247,334

 
1,325,922

Effect of exchange rate changes on cash and cash equivalents
111

 

Net change in cash and cash equivalents
233,482

 
(13,645
)
Cash and cash equivalents, beginning of period
8,164

 
45,086

Cash and cash equivalents, end of period
$
241,646

 
$
31,441


 
Six Months Ended June 30,
 
2017
 
2016
SUPPLEMENTAL INFORMATION:
 
 
 
Cash paid for interest (net of capitalized interest of $1,266 and $185 respectively)
$
61,709

 
$
56,058

Cash paid for interest on mandatorily redeemable debt
$
1,571

 
$
1,574

Cash paid for income taxes
$
350

 
$
426

Noncash investing and financing activities:
 
 
 
Reduction in secured borrowing balance
$
11,830

 
$
9,285

Change in distributions declared and outstanding
$
4,320

 
$
6,659

Conversion of common and preferred OP units
$
1,074

 
$
990

Conversion of Series A-4 preferred stock
$
4,720

 
$
11,503

Noncash investing and financing activities at the date of acquisition:
 
 
 
Acquisitions - Common stock and OP units issued
$
2,000

 
$
225,000

Acquisitions - other assets
$

 
$
37,847


See accompanying Notes to Consolidated Financial Statements.


7

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 ("ASC").

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 period 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, 2016 as filed with the SEC on February 23, 2017 (the “2016 Annual Report”). These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our 2016 Annual Report.

2.      Real Estate Acquisitions

2017 Acquisitions

In June 2017, we acquired Arbor Woods (“Arbor Woods”), a manufactured home ("MH") community with 458 sites located in Superior Township, Michigan.

In May 2017, we acquired Sunset Lakes RV Resort (“Sunset Lakes”), a recreational vehicle ("RV") resort with 489 sites located in Hillsdale, Illinois.

In March 2017, we acquired Far Horizons 49er Village RV Resort Inc. (“49er Village”), a RV resort with 328 sites located in Plymouth, California.

The following table summarizes the amounts of assets acquired net of liabilities assumed at the acquisition date and the consideration paid for the acquisitions completed in 2017 (in thousands):
At Acquisition Date
 
Arbor Woods (1)
 
Sunset Lakes (1)
 
49er Village (1)
 
Total
Investment in property
 
$
15,725

 
$
7,835

 
$
12,890

 
$
36,450

Notes receivable
 
23

 

 

 
23

Inventory of manufactured homes
 
465

 

 

 
465

In-place leases
 
730

 
210

 
110

 
1,050

Total identifiable assets acquired net of liabilities assumed
 
$
16,943

 
$
8,045

 
$
13,000

 
$
37,988

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consideration
 
 
 
 
 
 
 
 
Cash
 
$
14,943

 
$
8,045

 
$
13,000

 
35,988

Equity
 
2,000

 

 

 
2,000

Total cash and equity
 
$
16,943

 
$
8,045

 
$
13,000

 
$
37,988

(1) The purchase price allocations for Arbor Woods, Sunset Lakes, and 49er Village are preliminary and may be adjusted as final costs and valuations are determined.


8

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


The amount of total revenues and net income included in the Consolidated Statements of Operations for the three and six months ended June 30, 2017 related to the acquisitions completed in 2017 are set forth in the following table (in thousands):
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
 
(unaudited)
 
(unaudited)
Total revenues
$
1,288

 
$
1,315

Net income
$
500

 
$
483


The following unaudited pro forma financial information presents the results of our operations for the three and six months ended June 30, 2017 and 2016, as if the properties had been acquired on January 1, 2016. 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, 2016 (in thousands, except per-share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
(unaudited)
 
(unaudited)
 
2017
 
2016
 
2017
 
2016
Total revenues
$
239,197

 
$
193,022

 
$
474,085

 
$
368,260

Net income / (loss) attributable to Sun Communities, Inc. common stockholders
$
12,642

 
$
(7,402
)
 
$
33,839

 
$
586

Net income / (loss) per share attributable to Sun Communities, Inc. common stockholders - basic
$
0.18

 
$
(0.14
)
 
$
0.46

 
$
0.01

Net income / (loss) per share attributable to Sun Communities, Inc. common stockholders - diluted
$
0.18

 
$
(0.14
)
 
$
0.46

 
$
0.01


Additionally, during the three months ended June 30, 2017, we acquired an undeveloped parcel of land (“Bear Lake”), near Myrtle Beach, South Carolina, for $5.9 million. This land parcel has been entitled and zoned to build a 775 site RV resort.

Transaction costs of $2.4 million and $21.0 million have been incurred for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, transactions costs were $4.8 million and $23.7 million, respectively. These costs are presented as “Transaction costs” in our Consolidated Statements of Operations.

2016 Acquisitions

In June 2016, we acquired all of the issued and outstanding shares of common stock of Carefree Communities Inc. (“Carefree”) through the Operating Partnership for an aggregate purchase price of $1.68 billion. Carefree owned 103 MH and RV communities, comprising over 27,000 sites.

At the closing, we issued 3,329,880 shares of common stock at $67.57 per share (or $225.0 million in common stock) to the seller and the Operating Partnership paid the balance of the purchase price in cash. Approximately $1.0 billion of the cash payment was applied simultaneously to repay debt on the properties owned by Carefree. The Operating Partnership funded the cash portion of the purchase price in part with proceeds from debt financings as described in Note 7, “Debt and Lines of Credit” and net proceeds of $385.4 million from an underwritten public offering of 6,037,500 shares of common stock at a price of $66.50 per share in March 2016.


9

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


We have allocated the “investment in property" balances for Carefree to the respective balance sheet line items upon completion of a purchase price allocation in accordance with the FASB ASC Topic 805 - Business Combinations, as set forth in the table below (in thousands):
At Acquisition Date
 
Carefree
Investment in property
 
$
1,670,981

Ground leases
 
33,270

In-place leases
 
35,010

Deferred tax liability
 
(23,637
)
Other liabilities
 
(15,665
)
Inventory of manufactured homes
 
13,521

Below market lease
 
(29,340
)
Total identifiable assets acquired and liabilities assumed
 
$
1,684,140

 
 
 
Consideration
 


Cash and equity
 
$
1,684,140


Additionally, during 2016, we acquired seven RV resorts and one MH community for total consideration of $89.7 million. We added 1,677 sites in six states as a result of these acquisitions.

The amount of revenue and net income included in the Consolidated Statements of Operations for the three and six months ended June 30, 2017 related to the Carefree acquisition and other acquisitions completed during 2016 is set forth in the following table (in thousands):
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
 
(unaudited)
 
(unaudited)
Revenue
$
47,321

 
$
100,987

Net income
$
3,182

 
$
13,026





 





10

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 fewer than 64
 
90
%
Equal to or greater than 64 but fewer 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 $138.7 million (net of allowance of $0.8 million) and $143.9 million (net of allowance of $0.6 million) as of June 30, 2017 and December 31, 2016, respectively. The receivables have a weighted average interest rate and maturity of 10.0 percent and 15.6 years as of June 30, 2017, and 10.0 percent and 15.7 years as of December 31, 2016.

The outstanding balance on the secured borrowing was $139.5 million and $144.5 million as of June 30, 2017 and December 31, 2016, 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 $3.3 million and $3.4 million for the three months ended June 30, 2017 and 2016, respectively, and $6.6 million and $6.8 million for the six months ended June 30, 2017 and 2016, 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, 2017
Beginning balance
$
144,477

Financed sales of manufactured homes
6,849

Principal payments and payoffs from our customers
(5,799
)
Principal reduction from repurchased homes
(6,031
)
Total activity
(4,981
)
Ending balance
$
139,496



11

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


The following table sets forth the allowance for the collateralized receivables as of June 30, 2017 (in thousands):
 
Six Months Ended
 
June 30, 2017
Beginning balance
$
(607
)
Lower of cost or market write-downs
515

Increase to reserve balance
(708
)
Total activity
(193
)
Ending balance
$
(800
)

4.      Notes and Other Receivables

The following table sets forth certain information regarding notes and other receivables (in thousands):
 
 
June 30, 2017
 
December 31, 2016
Installment notes receivable on manufactured homes, net
 
$
82,792

 
$
59,320

Other receivables, net
 
27,707

 
21,859

Total notes and other receivables, net
 
$
110,499

 
$
81,179


Installment Notes Receivable on Manufactured Homes

The installment notes of $82.8 million (net of allowance of $0.2 million) and $59.3 million (net of allowance of $0.2 million) as of June 30, 2017 and December 31, 2016, 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 8.2 percent and 16.7 years as of June 30, 2017, and 8.3 percent and 16.0 years as of December 31, 2016.

The change in the aggregate gross principal balance of the installment notes receivable is as follows (in thousands):
 
Six Months Ended
 
June 30, 2017
Beginning balance
$
59,524

Financed sales of manufactured homes
26,870

Acquired notes
23

Principal payments and payoffs from our customers
(2,441
)
Principal reduction from repossessed homes
(1,006
)
Total activity
23,446

Ending balance
$
82,970


Allowance for Losses for Installment Notes Receivable

The following table sets forth the allowance change for the installment notes receivable as follows (in thousands):
 
Six Months Ended
 
June 30, 2017
Beginning balance
$
(205
)
Lower of cost or market write-downs
85

Increase to reserve balance
(58
)
Total activity
27

Ending balance
$
(178
)

Other Receivables


12

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


As of June 30, 2017, other receivables were comprised of amounts due from: residents for rent, and water and sewer usage of $8.0 million (net of allowance of $1.5 million); home sale proceeds of $14.4 million; insurance receivables of $3.7 million; and other receivables of $1.6 million. As of December 31, 2016, other receivables were comprised of amounts due from: residents for rent, and water and sewer usage of $6.0 million (net of allowance of $1.5 million); home sale proceeds of $11.6 million; insurance receivables of $2.3 million; and other receivables of $2.0 million.

5.
Intangible Assets

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

The gross carrying amounts, and accumulated amortization are as follows (in thousands):
 
 
 
 
June 30, 2017
 
December 31, 2016
Intangible Asset
 
Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Ground leases
 
8-57 years
 
$
33,270

 
$
(1,114
)
 
$
33,270

 
$
(600
)
In-place leases
 
7 years
 
99,535

 
(38,663
)
 
98,235

 
(31,796
)
Franchise fees and other intangible assets
 
15 years
 
1,880

 
(1,413
)
 
1,880

 
(1,155
)
Total
 
 
 
$
134,685

 
$
(41,190
)
 
$
133,385

 
$
(33,551
)

Total amortization expenses related to the intangible assets are as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Intangible Asset
 
2017
 
2016
 
2017
 
2016
Ground leases
 
$
257

 
$

 
$
514

 
$

In-place leases
 
3,428

 
2,165

 
6,844

 
4,318

Franchise fees and other intangible assets
 
129

 
129

 
258

 
258

Total
 
$
3,814

 
$
2,294

 
$
7,616

 
$
4,576


We anticipate amortization expense for our intangible assets to be as follows for the next five years (in thousands):
 
Year
 
Remainder of 2017
 
2018
 
2019
 
2020
 
2021
Estimated expense
$
7,650

 
$
14,482

 
$
13,566

 
$
11,838

 
$
11,446


6.      Consolidated Variable Interest Entities

We consolidate Rudgate Village SPE, LLC; Rudgate Clinton SPE, LLC; and Rudgate Clinton Estates SPE, LLC (collectively, “Rudgate”) as a variable interest entity ("VIE"). We evaluated our arrangement with this property under the guidance set forth in FASB ASC Topic 810 “Consolidation.” We concluded that Rudgate qualified as a VIE where we are the primary beneficiary, as we have power to direct the significant activities, absorb the significant losses and receive the significant benefits from the entity.

During the three months ended June 30, 2017, we acquired the noncontrolling equity interests in Wildwood Mobile Home Park ("Wildwood") held by third parties for total consideration of $0.1 million. Prior to this acquisition, we consolidated Wildwood as a VIE. The acquisition resulted in the Company owning a 100.0 percent controlling interest in Wildwood, and was deemed a VIE reconsideration event. We concluded that Wildwood was no longer a VIE.


13

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


The following table summarizes the assets and liabilities included in our Consolidated Balance Sheets after eliminations (in thousands):
 
June 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Investment property, net
$
51,060

 
$
88,987

Other assets
2,067

 
3,054

   Total Assets
$
53,127

 
$
92,041

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Debt
$
42,375

 
$
62,111

Other liabilities
1,629

 
1,998

Noncontrolling interests
3,404

 
(2,982
)
   Total Liabilities and Stockholders' Equity
$
47,408

 
$
61,127


Investment property, net and other assets related to the consolidated VIEs comprised approximately 0.9 percent and 1.6 percent of our consolidated total assets at June 30, 2017 and December 31, 2016, respectively. Debt and other liabilities comprised approximately 1.3 percent and 1.9 percent of our consolidated total liabilities at June 30, 2017 and December 31, 2016, respectively. Noncontrolling interests related to the consolidated VIEs comprised less than 1.0 percent of our consolidated total stockholder's equity at June 30, 2017 and December 31, 2016.

7.      Debt and Lines of Credit

The following table sets forth certain information regarding debt including premiums, discounts and deferred financing costs (in thousands):
 
Carrying Amount
 
Weighted Average
Years to Maturity
 
Weighted Average
Interest Rates
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
Collateralized term loans - FNMA
$
1,034,261

 
$
1,046,803

 
6.1
 
6.6
 
4.4
%
 
4.3
%
Collateralized term loans - Life Companies
955,251

 
888,705

 
12.7
 
12.2
 
3.9
%
 
3.9
%
Collateralized term loans - CMBS
454,231

 
492,294

 
5.5
 
5.6
 
5.1
%
 
5.2
%
Collateralized term loans - FMCC
389,076

 
391,765

 
7.4
 
7.9
 
3.9
%
 
3.9
%
Secured borrowings
139,496

 
144,477

 
15.6
 
15.7
 
10.0
%
 
10.0
%
Lines of credit
435

 
100,095

 
1.0
 
3.6
 
%
 
2.1
%
Preferred OP units - mandatorily redeemable
45,903

 
45,903

 
5.0
 
5.4
 
6.9
%
 
6.9
%
Total debt
$
3,018,653

 
$
3,110,042

 
8.7
 
8.5
 
4.6
%
 
4.5
%

Collateralized Term Loans

In June 2017, we entered into a $77.0 million collateralized term loan which bears interest at a rate of 4.16 percent amortizing over a 25 term. We also repaid a $3.9 million collateralized term loan with an interest rate of 6.54 percent that was due to mature on August 31, 2017. As a result of the repayment transaction, we recognized a loss on extinguishment of debt of $0.3 million in our Consolidated Statements of Operations.

During the first quarter of 2017, we defeased an $18.9 million collateralized term loan with an interest rate of 6.49 percent that was due to mature on August 1, 2017, releasing one encumbered community. As a result of the transaction, we recognized a loss on extinguishment of debt of $0.5 million in our Consolidated Statements of Operations. In addition, we repaid a $10.0 million collateralized term loan with an interest rate of 5.57 percent that was due to mature on May 1, 2017, releasing an additional encumbered community.


14

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


During the fourth quarter of 2016, we repaid a total of $79.1 million aggregate principal of collateralized term loans that were due to mature during 2017, releasing 10 encumbered communities. Also in the fourth quarter of 2016, we entered into a promissory note for $58.5 million that bears interest at a rate of 3.33 percent and has a seven-year term. The repayment of the note is interest only for the entire term.

In September 2016, 15 subsidiaries of the Operating Partnership each entered into a promissory note for total borrowings of $139.0 million with PNC Bank, as lender (the "Freddie Mac Financing"). Five of the notes totaling $70.2 million bear interest at a rate of 3.93 percent and have ten-year terms. The remaining ten notes totaling $68.8 million bear interest at a rate of 3.75 percent and have seven-year terms. The Freddie Mac Financing provides for principal and interest payments to be amortized over 30 years.
  
Proceeds from the Freddie Mac Financing described above and the underwritten registered public equity offering in September 2016 described in Note 8, "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 (refer to Lines of Credit below for additional information regarding the A&R Facility).

In June 2016, 17 subsidiaries of the Operating Partnership entered into a Master Credit Facility Agreement with Regions Bank, as lender. Pursuant to 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 percent and the $38.0 million term loan bears interest at 3.67 percent for a blended rate of 3.69 percent. 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 3.53 percent 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 percent 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 percent and is secured by a mortgage encumbering one RV community. The MH and RV communities noted above that secure the NML Financing were acquired as part of the Carefree transaction (See Note 2, "Real Estate Acquisitions").

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.

Proceeds from the Fannie Mae Financing and NML Financing were primarily used to fund the cash portion of the Carefree acquisition (See Note 2, "Real Estate Acquisitions").

The collateralized term loans totaling $2.8 billion as of June 30, 2017, are secured by 191 properties comprised of 75,962 sites representing approximately $3.4 billion of net book value.

Secured Borrowing

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


15

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


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 June 30, 2017, are convertible indirectly into 464,552 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 percent 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 percent. 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 April 2017, we amended and restated our credit agreement (the “A&R Credit Agreement”) with Citibank, N.A. ("Citibank") and certain other lenders. Pursuant to the A&R Credit Agreement, we have a senior revolving credit facility with Citibank and certain other lenders in the amount of $650.0 million, comprised of a $550.0 million revolving loan and a $100.0 million term loan (the “A&R Facility”). The A&R Credit Agreement has a four-year term ending April 25, 2021, 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 $350.0 million. If additional borrowings are made pursuant to any such additional commitments, the aggregate borrowing limit under the Facility may be increased up to $1.0 billion.

The A&R 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 margin can range from 1.35 percent to 2.20 percent for the revolving loan and 1.30 percent to 2.15 percent for the term loan. As of June 30, 2017, the margin on our leverage ratio was 1.35 percent and 1.30 percent on the revolving and term loans, respectively. We had no borrowings on the revolving loan or term loan as of June 30, 2017, as total borrowings of $229.0 million were repaid with proceeds from our public equity offering during the quarter ended June 30, 2017. We may borrow up to $100.0 million on the term loan on or before September 30, 2017. Refer to Note 8, "Equity and Mezzanine Securities" for additional information.

The A&R Facility replaced our $450.0 million credit facility (the "Previous Facility"), which was scheduled to mature on August 19, 2019. At the time of the closing of the A&R Facility, there were $220.8 million in borrowings under the Previous Facility. At December 31, 2016, under the Previous Facility, we had $42.3 million in borrowings on the revolving loan and $58.0 million in borrowings on the term loan totaling $100.3 million with a weighted average interest rate of 2.14 percent.

The A&R Facility provides, and the Previous Facility provided, 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 June 30, 2017 and December 31, 2016, approximately $3.8 million and $4.6 million, respectively, of availability was used to back standby letters of credit.

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 percent. At June 30, 2017, the effective interest rate was 7.0 percent. The outstanding balance was $0.4 million and $2.8 million as of June 30, 2017 and December 31, 2016, respectively.

Covenants

Pursuant to the terms of the A&R 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 June 30, 2017, we were in compliance with all covenants.

In addition, certain of our subsidiary borrowers own properties that secure loans. These subsidiaries are consolidated within our accompanying Consolidated Financial Statements, however, each of these subsidiaries' assets and credit are not available to satisfy the debts and other obligations of the Company, any of its other subsidiaries or any other person or entity.



16

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


8.      Equity and Mezzanine Securities

Public Equity Offerings

In May 2017, we closed an underwritten registered public offering of 4,830,000 shares of common stock at a gross price of $86.00 per share. Proceeds from the offering were $408.9 million after deducting expenses related to the offering. We utilized proceeds from the offering to fully repay borrowings outstanding on our senior revolving credit facility, redeem certain preferred securities, and fund an acquisition. We intend to utilize the remaining proceeds to fund possible future acquisitions and for working capital and general corporate purposes.

In September 2016, we closed an underwritten registered public offering of 3,737,500 shares of common stock at a gross price of $76.50 per share. Proceeds from the offering were $283.6 million after deducting expenses related to the offering, which were used to repay borrowings outstanding on the revolving loan under our senior revolving credit facility.

In June 2016, at the closing of the Carefree acquisition, we issued the seller 3,329,880 shares of our common stock at an issuance price of $67.57 per share or $225.0 million in common stock.

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 of $385.4 million after deducting discounts and expenses related to the offering, were used to fund a portion of the purchase price for Carefree.

At-the-Market Offering Sales Agreement

We maintain an agreement with BMO Capital Markets Corp., Merrill Lynch, Pierce, Fenner and Smith Incorporated and Citigroup Global Markets Inc. (each, a "Sales Agent") whereby 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 (the "Sales Agreement"). Each Sales Agent is entitled to compensation in an agreed amount not to exceed 2.0 percent of the gross price per share for any shares sold through it from time to time under the Sales Agreement.

Sales of common stock under our At-the-Market sales program during 2017 were as follows:
Quarter Ended
 
Common Stock Issued
Weighted Average Sales Price
Net Proceeds ($ millions)
June 30, 2017
 
400,000

$
85.01

$
33.6

March 31, 2017
 
280,502

$
76.47

$
21.2


Issuance of Common OP Units

In June 2017, we issued a total of 23,311 common OP units for total consideration of $2.0 million in connection with acquisition activity during the three months ended June 30, 2017.

Conversions

Subject to certain limitations, holders can convert certain series of stock and OP units to shares of our common stock at any time. Conversions during the six month periods ended June 30, 2017 and 2016 were as follows:
 
 
 
Six Months Ended June 30, 2017
 
Six Months Ended June 30, 2016
Series
 
Conversion Rate
Units/Shares
Common Stock
 
Units/Shares
Common Stock
Common OP unit
 
1

11,979

11,979

 


Series A-1 preferred OP unit
 
2.439

5,825

14,205

 
9,730

23,729

Series A-4 preferred OP unit
 
0.4444

5,000

2,220

 
7,000

3,110

Series A-4 preferred stock
 
0.4444

158,036

70,238

 


Series C preferred OP unit
 
1.11

4,993

5,539

 



Dividends


17

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


Dividend distributions for the three months ended June 30, 2017 were as follows:
Dividend
 
Record Date
Payment Date
Distribution per Share
Total Distribution (millions)
Common Stock, Common OP units and Restricted Stock
 
6/30/2017
7/17/2017
$
0.67

$
51.2

Series A Preferred Stock
 
6/30/2017
7/17/2017
$
0.4453125

$
1.5

Series A-4 Preferred Stock
 
6/16/2017
6/30/2017
$
0.40625

$
0.4


Redemptions

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 June 2017, we redeemed 438,448 shares of Series A-4 Cumulative Convertible Preferred Stock and 200,000 shares of Series A-4 preferred OP units from Green Courte Real Estate Partners III, LLC, GCP Fund III REIT LLC and GCP Fund III Ancillary Holding, LLC (collectively, the "Green Courte Entities") for total consideration of $24.7 million. Accrued dividends totaling $0.2 million were also paid in connection with the redemptions. The Green Courte Entities and other affiliates were the sellers of the American Land Lease portfolio which we acquired in 2014 and 2015.

Repurchase Program

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 six months ended June 30, 2017 or 2016. There is no expiration date specified for the buyback program.

9.      Share-Based Compensation

We have two share-based compensation plans; the Sun Communities, Inc. 2015 Equity Incentive Plan (“2015 Equity Incentive Plan”) and the First Amended and Restated 2004 Non-Employee Director Option Plan (“2004 Non-Employee Director Option Plan”). During the three months ended June 30, 2017 and the three months ended March 31, 2017, shares were granted as follows:

18

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


Grant Period
 
Type
 
Plan
 
Shares Granted
 
Grant Date Fair Value Per Share
 
Vesting Type
 
Vesting Anniversary
 
Percentage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Q2 2017
 
Key Employees
 
2015 Equity Incentive Plan
 
2,500

 
$
84.18

(1) 
Time Based
 
April 24, 2019
 
35.0
%
 
 
 
 
 
 
 
 
 
 
 
 
April 24, 2020
 
35.0
%
 
 
 
 
 
 
 
 
 
 
 
 
April 24, 2021
 
20.0
%
 
 
 
 
 
 
 
 
 
 
 
 
April 24, 2022
 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
April 24, 2023
 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Q1 2017
 
Executive Officers
 
2015 Equity Incentive Plan
 
100,000

 
$
79.30

(2) 
Time Based
 
March 14, 2020
 
20.0
%
 
 
 
 
 
 
 
 
 
 
 
 
March 14, 2021
 
30.0
%
 
 
 
 
 
 
 
 
 
 
 
 
March 14, 2022
 
35.0
%
 
 
 
 
 
 
 
 
 
 
 
 
March 14, 2023
 
10.0
%
 
 
 
 
 
 
 
 
 
 
 
 
March 14, 2024
 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Q1 2017
 
Executive Officers
 
2015 Equity Incentive Plan
 
100,000

 
$
79.30

(2) 
Market & Performance Conditions
 
Multiple tranches through March 2022
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Q1 2017
 
Directors
 
2004 Non-Employee Director Option Plan
 
15,600

 
$
79.02

(1) 
Time Based
 
February 8, 2020
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) The fair value of the grant was determined by using the closing price of our common stock on the date the shares were issued.
(2) 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 six months ended June 30, 2017 and 2016, 1,500 and 9,349 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 175,746 restricted shares granted to our executives and employees were satisfied during the six months ended June 30, 2017.

10.     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, develops, or has an interest in a portfolio of MH and RV communities, and is in the business of acquiring, operating, and expanding MH and RV communities. The Home Sales and Rentals segment offers MH and RV park model 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 $77.4 million annually. This transient RV revenue was recognized 27.3 percent and 20.3 percent in the first and second quarters, respectively, and is expected to be 36.6 percent and 15.8 percent in the third and fourth quarters, respectively. In 2016, transient revenue was $58.2 million. We recognized 17.5 percent in the first quarter, 18.7 percent in the second quarter, 45.2 percent in the third quarter, and 18.6 percent in the fourth quarter.


19

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


A presentation of segment financial information is summarized as follows (in thousands):
 
Three Months Ended June 30, 2017
 
Three Months Ended June 30, 2016
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Revenues
$
188,311

 
$
43,537

 
$
231,848

 
$
147,384

 
$
37,996

 
$
185,380

Operating expenses/Cost of sales
73,630

 
26,966

 
100,596

 
52,819

 
24,095

 
76,914

Net operating income/Gross profit
114,681

 
16,571

 
131,252

 
94,565

 
13,901

 
108,466

Adjustments to arrive at net income / (loss):
 
 
 
 
 
 
 
 
 
 
 
Interest and other revenues, net
6,051

 

 
6,051

 
5,419

 

 
5,419

Home selling expenses

 
(2,990
)
 
(2,990
)
 

 
(2,460
)
 
(2,460
)
General and administrative
(17,684
)
 
(2,305
)
 
(19,989
)
 
(14,217
)
 
(2,326
)
 
(16,543
)
Transaction costs
(2,437
)
 

 
(2,437
)
 
(21,098
)
 
119

 
(20,979
)
Depreciation and amortization
(48,189
)
 
(14,532
)
 
(62,721
)
 
(35,586
)
 
(14,084
)
 
(49,670
)
Extinguishment of debt
(293
)
 

 
(293
)
 

 

 

Interest
(32,353
)
 
(5
)
 
(32,358
)
 
(28,426
)
 
(2
)
 
(28,428
)
Interest on mandatorily redeemable preferred OP units
(787
)
 

 
(787
)
 
(787
)
 

 
(787
)
Other income, net
1,095

 
(220
)
 
875

 

 

 

Current tax expense
58

 
(51
)
 
7

 
(16
)
 
(40
)
 
(56
)
Deferred tax benefit
364

 

 
364

 

 

 

Net income / (loss)
20,506

 
(3,532
)
 
16,974

 
(146
)
 
(4,892
)
 
(5,038
)
Less:  Preferred return to preferred OP units
1,196

 

 
1,196

 
1,263

 

 
1,263

Less:  Amounts attributable to noncontrolling interests
1,506

 
(191
)
 
1,315

 
(374
)
 
(321
)
 
(695
)
Net income / (loss) attributable to Sun Communities, Inc.
17,804

 
(3,341
)
 
14,463

 
(1,035
)
 
(4,571
)
 
(5,606
)
Less: Preferred stock distributions
2,099

 

 
2,099

 
2,197

 

 
2,197

Net income / (loss) attributable to Sun Communities, Inc. common stockholders
$
15,705

 
$
(3,341
)
 
$
12,364

 
$
(3,232
)
 
$
(4,571
)
 
$
(7,803
)


20

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


 
Six Months Ended June 30, 2017
 
Six Months Ended June 30, 2016
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Revenues
$
377,584

 
$
83,139

 
$
460,723

 
$
281,232

 
$
74,441

 
$
355,673

Operating expenses/Cost of sales
138,607

 
52,951

 
191,558

 
97,254

 
48,155

 
145,409

Net operating income/Gross profit
238,977

 
30,188

 
269,165

 
183,978

 
26,286

 
210,264

Adjustments to arrive at net income / (loss):
 
 
 
 
 
 
 
 
 
 
 
Interest and other revenues, net
11,576

 

 
11,576

 
9,770

 

 
9,770

Home selling expenses

 
(6,101
)
 
(6,101
)
 

 
(4,597
)
 
(4,597
)
General and administrative
(33,405
)
 
(4,516
)
 
(37,921
)
 
(25,991
)
 
(4,344
)
 
(30,335
)
Transaction costs
(4,848
)
 
25

 
(4,823
)
 
(23,819
)
 
119

 
(23,700
)
Depreciation and amortization
(95,519
)
 
(29,968
)
 
(125,487
)
 
(70,973
)
 
(27,109
)
 
(98,082
)
Extinguishment of debt
(759
)
 

 
(759
)
 

 

 

Interest
(63,672
)
 
(8
)
 
(63,680
)
 
(54,715
)
 
(7
)
 
(54,722
)
Interest on mandatorily redeemable preferred OP units
(1,571
)
 

 
(1,571
)
 
(1,574
)
 

 
(1,574
)
Other expenses, net
1,639

 
(12
)
 
1,627

 

 

 

Current tax expense
(65
)
 
(106
)
 
(171
)
 
(203
)
 
(81
)
 
(284
)
Deferred tax expense
664

 

 
664

 

 

 

Net income / (loss)
53,017

 
(10,498
)
 
42,519

 
16,473

 
(9,733
)
 
6,740

Less:  Preferred return to preferred OP units
2,370

 

 
2,370

 
2,536

 

 
2,536

Less:  Amounts attributable to noncontrolling interests
2,989

 
(586
)
 
2,403

 
259

 
(678
)
 
(419
)
Net income / (loss) attributable to Sun Communities, Inc.
47,658

 
(9,912
)
 
37,746

 
13,678

 
(9,055
)
 
4,623

Less: Preferred stock distributions
4,278

 

 
4,278

 
4,551

 

 
4,551

Net income / (loss) attributable to Sun Communities, Inc. common stockholders
$
43,380

 
$
(9,912
)
 
$
33,468

 
$
9,127

 
$
(9,055
)
 
$
72


 
June 30, 2017
 
December 31, 2016
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Identifiable assets:
 
 
 
 
 
 
 
 
 
 
 
Investment property, net
$
5,057,937

 
$
459,202

 
$
5,517,139

 
$
5,019,165

 
$
450,316

 
$
5,469,481

Cash and cash equivalents
235,860

 
5,786

 
241,646

 
3,705

 
4,459

 
8,164

Inventory of manufactured homes

 
25,582

 
25,582

 

 
21,632

 
21,632

Notes and other receivables, net
97,362

 
13,137

 
110,499

 
68,901

 
12,278

 
81,179

Collateralized receivables, net
138,696

 

 
138,696

 
143,870

 

 
143,870

Other assets, net
141,213

 
3,938

 
145,151

 
143,650

 
2,800

 
146,450

Total assets
$
5,671,068

 
$
507,645

 
$
6,178,713

 
$
5,379,291

 
$
491,485

 
$
5,870,776



11.     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, as amended (“Code”). In order for us to qualify as a REIT, at least 95 percent of our gross income in any year must be derived from qualifying sources. In addition, a REIT must distribute annually at least 90 percent of its REIT taxable income (calculated without any deduction for dividends paid and excluding capital gain) to its stockholders and meet other tests.

21

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



Qualification as a REIT involves the satisfaction of numerous requirements (on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are 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, 2017.

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 as well as U.S. federal income and excise taxes on our undistributed income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state, and local income taxes. The Company is also subject to local income taxes in Canada as a result of the acquisition of Carefree in 2016. We do not provide for withholding taxes on our undistributed earnings from our Canadian subsidiaries as they are reinvested and will continue to be reinvested indefinitely outside of the U.S.

Our taxable REIT subsidiaries are subject to U.S. federal income taxes as well as state and local income and franchise taxes. In addition, our Canadian subsidiaries are subject to income tax in Canada.

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, depreciation and basis differences between tax and U.S. GAAP on our Canadian investments. Generally, full valuation allowances are recorded against all U.S. federal deferred tax assets. For Canadian purposes, a deferred tax liability of $21.7 million has been recorded in relation to a corporate entity and included in “Other liabilities” in our Consolidated Balance Sheets as of June 30, 2017. There are no U.S. federal deferred tax assets or liabilities included in our Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016.

We had no unrecognized tax benefits as of June 30, 2017 and 2016. We do not expect significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of June 30, 2017.

We recorded a current tax benefit for federal, state, and Canadian income taxes of $7 thousand, and current tax expense of $0.1 million for the three months ended June 30, 2017 and 2016, respectively, and $0.2 million and $0.3 million for the six months ended June 30, 2017 and 2016, respectively.

We recorded $0.4 million and $0.7 million of deferred tax benefit in our Consolidated Statements of Operations for the three months and six months ended June 30, 2017, respectively. There was no deferred tax benefit or expense recorded for the three months or six months ended June 30, 2016.

SHS is currently under audit by the Internal Revenue Service for the tax year 2015.


22

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


12.     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 / (loss) per share were as follows (in thousands, except per share data):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Numerator
 
2017
 
2016
 
2017
 
2016
Net income / (loss) attributable to common stockholders
 
$
12,364

 
$
(7,803
)
 
$
33,468

 
$
72

Allocation to restricted stock awards
 
(9
)
 
242

 
(267
)
 
179

Basic earnings: Net income / (loss) attributable to common stockholders after allocation
 
12,355

 
(7,561
)
 
33,201

 
251

Allocation to restricted stock awards
 
9

 
(242
)
 
267

 
(179
)
Diluted earnings: Net income / (loss) attributable to common stockholders after allocation
 
$
12,364

 
$
(7,803
)
 
$
33,468

 
$
72

 
 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
74,678

 
64,757

 
73,677

 
61,247

Add: dilutive stock options
 
2

 

 
2

 
9

Add: dilutive restricted stock
 
474

 

 
593

 
417

Diluted weighted average common shares and securities
 
75,154

 
64,757

 
74,272

 
61,673

Earnings / (loss) per share available to common stockholders after allocation:
 
 
 
 
 
 
 
 
Basic
 
$
0.16

 
$
(0.12
)
 
$
0.45

 
$
0.00

Diluted
 
$
0.16

 
$
(0.12
)
 
$
0.45

 
$
0.00


We have 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, 2017 and 2016 (in thousands):
 
 
As of June 30,
 
 
2017
 
2016
Common OP units