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, 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 October 17, 2017:  79,342,536



INDEX

 
 
 
 
Consolidated Financial Statements:
 
 
Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)
 
Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2017 (Unaudited)
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 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) 
 September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Land
$
1,079,708

 
$
1,051,536

Land improvements and buildings
5,024,937

 
4,825,043

Rental homes and improvements
516,618

 
489,633

Furniture, fixtures and equipment
140,894

 
130,127

Investment property
6,762,157

 
6,496,339

Accumulated depreciation
(1,188,332
)
 
(1,026,858
)
Investment property, net (including $50,655 and $88,987 for consolidated variable interest entities at September 30, 2017 and December 31, 2016; see Note 6)
5,573,825

 
5,469,481

Cash and cash equivalents
137,448

 
8,164

Inventory of manufactured homes
25,741

 
21,632

Notes and other receivables, net
145,760

 
81,179

Collateralized receivables, net
134,015

 
143,870

Other assets, net (including $1,638 and $3,054 for consolidated variable interest entities at September 30, 2017 and December 31, 2016; see Note 6)
141,047

 
146,450

TOTAL ASSETS
$
6,157,836

 
$
5,870,776

LIABILITIES
 
 
 
Mortgage loans payable (including $42,177 and $62,111 for consolidated variable interest entities at September 30, 2017 and December 31, 2016; see Note 6)
$
2,822,640

 
$
2,819,567

Secured borrowings on collateralized receivables
134,884

 
144,477

Preferred OP units - mandatorily redeemable
45,903

 
45,903

Lines of credit

 
100,095

Distributions payable
56,520

 
51,896

Other liabilities (including $1,258 and $1,998 for consolidated variable interest entities at September 30, 2017 and December 31, 2016; see Note 6)
291,074

 
279,667

TOTAL LIABILITIES
3,351,021

 
3,441,605

Commitments and contingencies

 

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

 
50,227

Series A-4 preferred OP units
10,832

 
16,717

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

 
34

Common stock, $0.01 par value. Authorized: 180,000 shares;
Issued and outstanding: 79,341 shares at September 30, 2017 and 73,206 shares at December 31, 2016
793

 
732

Additional paid-in capital
3,810,930

 
3,321,441

Accumulated other comprehensive income (loss)
1,531

 
(3,181
)
Distributions in excess of accumulated earnings
(1,117,228
)
 
(1,023,415
)
Total Sun Communities, Inc. stockholders’ equity
2,696,060

 
2,295,611

Noncontrolling interests:
 
 
 
Common and preferred OP units
63,668

 
69,598

Consolidated variable interest entities
3,841

 
(2,982
)
Total noncontrolling interests
67,509

 
66,616

TOTAL STOCKHOLDERS’ EQUITY
2,763,569

 
2,362,227

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
6,157,836

 
$
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 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
REVENUES
 
 
 
 
 
 
 
Income from real property
$
198,263

 
$
184,324

 
$
560,778

 
$
453,560

Revenue from home sales
33,197

 
31,211

 
91,319

 
81,987

Rental home revenue
12,757

 
12,031

 
37,774

 
35,696

Ancillary revenues
17,017

 
16,446

 
32,086

 
28,442

Interest
5,920

 
4,705

 
15,609

 
13,322

Brokerage commissions and other revenues, net
1,091

 
984

 
2,978

 
2,137

Total revenues
268,245

 
249,701

 
740,544

 
615,144

EXPENSES
 
 
 
 
 
 
 
Property operating and maintenance
59,249

 
57,089

 
159,861

 
125,357

Real estate taxes
13,053

 
12,384

 
39,322

 
32,122

Cost of home sales
25,094

 
21,935

 
67,999

 
58,803

Rental home operating and maintenance
6,775

 
6,350

 
16,821

 
17,637

Ancillary expenses
9,993

 
9,449

 
21,719

 
18,697

Home selling expenses
3,290

 
2,643

 
9,391

 
7,240

General and administrative
18,267

 
16,575

 
56,188

 
46,910

Transaction costs
2,167

 
4,191

 
6,990

 
27,891

Depreciation and amortization
64,232

 
61,483

 
189,719

 
159,565

Extinguishment of debt

 

 
759

 

Interest
32,085

 
33,800

 
95,765

 
88,522

Interest on mandatorily redeemable preferred OP units
790

 
789

 
2,361

 
2,363

Total expenses
234,995

 
226,688

 
666,895

 
585,107

Income before other items
33,250

 
23,013

 
73,649

 
30,037

Catastrophic weather related charges
(7,756
)
 

 
(8,124
)
 

Other income, net
3,345

 

 
5,340

 

Current tax benefit / (expense)
38

 
(283
)
 
(133
)
 
(567
)
Deferred tax benefit
81

 

 
745

 

Income from affiliate transactions

 
500

 

 
500

Net income
28,958

 
23,230

 
71,477

 
29,970

Less:  Preferred return to preferred OP units
(1,112
)
 
(1,257
)
 
(3,482
)
 
(3,793
)
Less:  Amounts attributable to noncontrolling interests
(1,776
)
 
(879
)
 
(4,179
)
 
(460
)
Net income attributable to Sun Communities, Inc.
26,070


21,094


63,816


25,717

Less: Preferred stock distributions
(1,955
)
 
(2,197
)
 
(6,233
)
 
(6,748
)
Net income attributable to Sun Communities, Inc. common stockholders
$
24,115


$
18,897

 
$
57,583

 
$
18,969

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
78,369

 
68,655

 
75,234

 
63,716

Diluted
78,808

 
69,069

 
75,846

 
64,146

Earnings per share (See Note 12):
 

 
 
 
 

 
 
Basic
$
0.31

 
$
0.27

 
$
0.76

 
$
0.30

Diluted
$
0.31

 
$
0.27

 
$
0.76

 
$
0.30


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,
 
2017
 
2016
 
2017
 
2016
Net income
$
28,958

 
$
23,230

 
$
71,477

 
$
29,970

Foreign currency translation adjustment
2,648

 
(5,227
)
 
4,977

 
(5,226
)
Total comprehensive income
31,606

 
18,003

 
76,454

 
24,744

Less: Comprehensive income attributable to noncontrolling interests
1,912

 
553

 
4,444

 
110

Comprehensive income attributable to Sun Communities, Inc.
$
29,694

 
$
17,450

 
$
72,010

 
$
24,634



See accompanying Notes to Consolidated Financial Statements.



5



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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 Income / (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 and common OP units, net

59

484,499



2,001

486,559

Conversion of OP units

1

3,240



(3,008
)
233

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


9,670

223



9,893

Acquisition of noncontrolling interests


(6,201
)


6,101

(100
)
Foreign currency exchange




4,712

265

4,977

Net income



67,298


3,991

71,289

Distributions



(161,334
)

(8,457
)
(169,791
)
Balance at September 30, 2017
$
34

$
793

$
3,810,930

$
(1,117,228
)
$
1,531

$
67,509

$
2,763,569



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,
 
2017
 
2016
OPERATING ACTIVITIES:
 
 
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
$
223,348

 
$
190,279

INVESTING ACTIVITIES:
 
 
 
Investment in properties
(203,233
)
 
(159,923
)
Acquisitions of properties, net of cash acquired
(70,328
)
 
(1,473,368
)
Proceeds from affiliate transactions

 
500

Proceeds from dispositions of assets and depreciated homes, net
6,592

 
3,755

Proceeds from disposition of properties

 
88,696

Issuance of notes and other receivables
(2,480
)
 
(1,411
)
Repayments of notes and other receivables
1,764

 
852

NET CASH USED FOR INVESTING ACTIVITIES
(267,685
)
 
(1,540,899
)
FINANCING ACTIVITIES:
 
 
 
Issuance and associated costs of common stock, OP units, and preferred OP units, net
457,638

 
748,959

Net proceeds from stock option exercise

 
149

Borrowings on lines of credit
575,351

 
474,738

Payments on lines of credit
(675,695
)
 
(441,738
)
Proceeds from issuance of other debt
85,081

 
900,781

Payments on other debt
(72,024
)
 
(141,490
)
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
(165,937
)
 
(141,018
)
Payments for deferred financing costs
(5,589
)
 
(24,911
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
173,368

 
1,375,470

Effect of exchange rate changes on cash and cash equivalents
253

 
(107
)
Net change in cash and cash equivalents
129,284

 
24,743

Cash and cash equivalents, beginning of period
8,164

 
45,086

Cash and cash equivalents, end of period
$
137,448

 
$
69,829



 
Nine Months Ended September 30,
 
2017
 
2016
SUPPLEMENTAL INFORMATION:
 
 
 
Cash paid for interest (net of capitalized interest of $1,981 and $378 respectively)
$
92,362

 
$
91,346

Cash paid for interest on mandatorily redeemable debt
$
2,361

 
$
2,363

Cash (refunds) paid for income taxes
$
(53
)
 
$
612

Noncash investing and financing activities:
 
 
 
Reduction in secured borrowing balance
$
17,674

 
$
14,718

Change in distributions declared and outstanding
$
4,527

 
$
9,527

Conversion of common and preferred OP units
$
3,240

 
$
2,033

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
$
28,410

 
$
225,000

Acquisitions - debt assumed
$
4,592

 
$

Acquisitions - receivable due from seller
$
5,000

 
$

Acquisitions - contingent consideration liability
$

 
$
9,830


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 September 2017, we acquired three age-restricted manufactured home (“MH”) communities: Lazy J Ranch, with 220 sites in Arcata, California; Ocean West, with 130 sites in McKinleyville, California; and Caliente Sands, with 118 sites in Cathedral City, California.

In July 2017, we acquired Pismo Dunes RV Resort (“Pismo Dunes”), an age-restricted recreational vehicle (“RV”) community with 331 sites located in Pismo Beach, California.

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

In May 2017, we acquired Sunset Lakes RV Resort (“Sunset Lakes”), a RV resort with 498 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.

8

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



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
 
Lazy J Ranch (1)
 
Ocean West (1)
 
Caliente Sands (1)
 
Pismo Dunes (1)
 
Arbor Woods (1)
 
Sunset Lakes (1)
 
49er Village (1)
 
Total
Investment in property
 
$
14,300

 
$
9,673

 
$
8,850

 
$
21,260

 
$
15,725

 
$
7,835

 
$
12,890

 
$
90,533

Notes receivable
 

 

 

 

 
23

 

 

 
23

Inventory of manufactured homes
 

 

 
21

 

 
465

 

 

 
486

In-place leases
 

 

 

 
660

 
730

 
210

 
110

 
1,710

Total identifiable assets acquired net of liabilities assumed
 
$
14,300


$
9,673


$
8,871


$
21,920

 
$
16,943

 
$
8,045

 
$
13,000

 
$
92,752

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consideration
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
14,300

 
$
5,081

 
$
8,871

 
$

 
$
14,943

 
$
8,045

 
$
13,000

 
64,240

Equity
 

 

 

 
26,410

 
2,000

 

 

 
28,410

Liabilities assumed
 

 
4,592

 

 
510

 

 

 

 
5,102

Receivable due from seller
 

 

 

 
(5,000
)
 

 

 

 
(5,000
)
Total consideration
 
$
14,300

 
$
9,673

 
$
8,871

 
$
21,920

 
$
16,943

 
$
8,045

 
$
13,000

 
$
92,752

(1) The purchase price allocations for Lazy J Ranch, Ocean West, Caliente Sands, Pismo Dunes, Arbor Woods, Sunset Lakes, and 49er Village are preliminary and may be adjusted as final costs and valuations are determined.

The amount of total revenues and net income included in the Consolidated Statements of Operations for the three and nine months ended September 30, 2017 related to the acquisitions completed in 2017 are set forth in the following table (in thousands):
 
Three Months Ended 
 September 30, 2017
 
Nine Months Ended 
 September 30, 2017
 
(unaudited)
 
(unaudited)
Total revenues
$
3,178

 
$
4,493

Net income
$
935

 
$
1,418


The following unaudited pro forma financial information presents the results of our operations for the three and nine months ended September 30, 2017 and 2016, as if the properties acquired in 2017 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 September 30,
 
Nine Months Ended September 30,
 
(unaudited)
 
(unaudited)
 
2017
 
2016
 
2017
 
2016
Total revenues
$
272,214

 
$
255,580

 
$
746,299

 
$
623,840

Net income attributable to Sun Communities, Inc. common stockholders
$
25,337

 
$
20,660

 
$
59,176

 
$
21,246

Net income per share attributable to Sun Communities, Inc. common stockholders - basic
$
0.32

 
$
0.30

 
$
0.79

 
$
0.33

Net income per share attributable to Sun Communities, Inc. common stockholders - diluted
$
0.32

 
$
0.30

 
$
0.78

 
$
0.33



9

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


Additionally, during the three months ended June 30, 2017, we acquired Carolina Pines RV Resort, an undeveloped parcel of land (“Carolina Pines” formerly known as 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 $2.2 million and $4.2 million have been incurred for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, transactions costs were $7.0 million and $27.9 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.

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 nine months ended September 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 
 September 30, 2017
 
Nine Months Ended 
 September 30, 2017
 
(unaudited)
 
(unaudited)
Revenue
$
55,034

 
$
156,021

Net income
$
3,987

 
$
17,013





10

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


3.      Collateralized Receivables and Transfers of Financial Assets

We previously 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 $134.0 million (net of allowance of $0.9 million) and $143.9 million (net of allowance of $0.6 million) as of September 30, 2017 and December 31, 2016, respectively. The receivables have a weighted average interest rate and maturity of 10.0 percent and 15.5 years as of September 30, 2017, and 10.0 percent and 15.7 years as of December 31, 2016.

The outstanding balance on the secured borrowing was $134.9 million and $144.5 million as of September 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 $3.5 million for the three months ended September 30, 2017 and 2016, respectively, and $9.9 million and $10.3 million for the nine months ended September 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):
 
Nine Months Ended
 
September 30, 2017
Beginning balance
$
144,477

Financed sales of manufactured homes
8,081

Principal payments and payoffs from our customers
(9,233
)
Principal reduction from repurchased homes
(8,441
)
Total activity
(9,593
)
Ending balance
$
134,884



11

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


The following table sets forth the allowance for the collateralized receivables as of September 30, 2017 (in thousands):
 
Nine Months Ended
 
September 30, 2017
Beginning balance
$
(607
)
Lower of cost or market write-downs
699

Increase to reserve balance
(961
)
Total activity
(262
)
Ending balance
$
(869
)


4.      Notes and Other Receivables

The following table sets forth certain information regarding notes and other receivables (in thousands):
 
 
September 30, 2017
 
December 31, 2016
Installment notes receivable on manufactured homes, net
 
$
97,990

 
$
59,320

Other receivables, net
 
47,770

 
21,859

Total notes and other receivables, net
 
$
145,760

 
$
81,179


Installment Notes Receivable on Manufactured Homes

The installment notes of $98.0 million (net of allowance of $0.2 million) and $59.3 million (net of allowance of $0.2 million) as of September 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 17.0 years as of September 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):
 
Nine Months Ended
 
September 30, 2017
Beginning balance
$
59,525

Financed sales of manufactured homes
44,711

Acquired notes
23

Principal payments and payoffs from our customers
(4,465
)
Principal reduction from repossessed homes
(1,593
)
Total activity
38,676

Ending balance
$
98,201


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, 2017
Beginning balance
$
(205
)
Lower of cost or market write-downs
97

Increase to reserve balance
(103
)
Total activity
(6
)
Ending balance
$
(211
)



12

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


Other Receivables

As of September 30, 2017, other receivables were comprised of amounts due from: residents for rent, and water and sewer usage of $7.2 million (net of allowance of $1.4 million); home sale proceeds of $13.1 million; insurance receivables of $19.1 million; $5.0 million due from the sellers of Pismo Dunes (refer to Note 2, “Real Estate Acquisitions” for additional information); and other receivables of $3.4 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):
 
 
 
 
September 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

 
$
(1,371
)
 
$
33,270

 
$
(600
)
In-place leases
 
7 years
 
99,954

 
(42,090
)
 
98,235

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

 
(1,432
)
 
1,880

 
(1,155
)
Total
 
 
 
$
135,104

 
$
(44,893
)
 
$
133,385

 
$
(33,551
)

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

 
$
368

 
$
771

 
$
368

In-place leases
 
3,478

 
3,824

 
10,322

 
8,142

Franchise fees and other intangible assets
 
19

 
129

 
277

 
387

Total
 
$
3,754

 
$
4,321

 
$
11,370

 
$
8,897


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
$
3,819

 
$
14,514

 
$
13,598

 
$
11,870

 
$
11,478


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):
 
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Investment property, net
$
50,655

 
$
88,987

Other assets
1,638

 
3,054

   Total Assets
$
52,293

 
$
92,041

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Debt
$
42,177

 
$
62,111

Other liabilities
1,258

 
1,998

Noncontrolling interests
3,841

 
(2,982
)
   Total Liabilities and Stockholders’ Equity
$
47,276

 
$
61,127


Investment property, net and other assets related to the consolidated VIEs comprised approximately 0.8 percent and 1.6 percent of our consolidated total assets at September 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 September 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 September 30, 2017 and less than 1.0 percent at 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
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
Collateralized term loans - FNMA
$
1,032,621

 
$
1,046,803

 
5.8
 
6.6
 
4.4
%
 
4.3
%
Collateralized term loans - Life Companies
949,970

 
888,705

 
12.5
 
12.2
 
3.9
%
 
3.9
%
Collateralized term loans - CMBS
452,311

 
492,294

 
5.2
 
5.6
 
5.1
%
 
5.2
%
Collateralized term loans - FMCC
387,738

 
391,765

 
7.1
 
7.9
 
3.9
%
 
3.9
%
Secured borrowings
134,884

 
144,477

 
15.5
 
15.7
 
10.0
%
 
10.0
%
Lines of credit

 
100,095

 
0.0
 
3.6
 
%
 
2.1
%
Preferred OP units - mandatorily redeemable
45,903

 
45,903

 
4.8
 
5.4
 
6.9
%
 
6.9
%
Total debt
$
3,003,427

 
$
3,110,042

 
8.4
 
8.5
 
4.6
%
 
4.5
%

Collateralized Term Loans

In September 2017, in connection with the Ocean West acquisition, we assumed a $4.6 million collateralized term loan with Fannie Mae, with an interest rate of 4.34 percent and a remaining term of 9.8 years.

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.


14

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


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.

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.

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. Refer to Note 2, “Real Estate Acquisitions” for additional information.

The collateralized term loans totaling $2.8 billion as of September 30, 2017, are secured by 192 properties comprised of 76,078 sites representing approximately $3.4 billion of net book value.


15

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


Secured Borrowing

See Note 3, “Collateralized Receivables and Transfers of Financial Assets,” for 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, 2017, are convertible indirectly into 468,923 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 September 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 September 30, 2017. We may borrow up to $100.0 million on the term loan on or before June 1, 2018.

The A&R Facility replaced our $450.0 million credit facility (the “Previous Facility”), which was scheduled to mature on August 19, 2019. 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 September 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 September 30, 2017, the effective interest rate was 7.0 percent. The outstanding balance was zero as of September 30, 2017 and $2.8 million as of December 31, 2016.

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 September 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 acquisition activities. We intend to utilize the remaining proceeds to fund possible future acquisitions, redeem preferred stock 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

In July 2017, we entered into a new at the market offering sales agreement (the “Sales Agreement”) with BMO Capital Markets Corp., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Robert W. Baird & Co. Incorporated, Fifth Third Securities, Inc., RBC Capital Markets, LLC, BTIG, LLC, Jefferies LLC, Credit Suisse Securities (USA) LLC and Samuel A. Ramirez & Company, Inc. (each, a “Sales Agent;” collectively, the “Sales Agents”), whereby we may offer and sell shares of our common stock, having an aggregate offering price of up to $450.0 million, from time to time through the Sales Agents. The Sales Agents are entitled to compensation in an agreed amount not to exceed 2.0 percent of the gross price per share for any shares sold from time to time under the Sales Agreement.

Concurrent with entry into the Sales Agreement, our prior agreement dated June 17, 2015, with BMO Capital Markets Corp., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., (the “Prior Agreement”) was terminated. The Prior Agreement had an aggregate offering price of up to $250.0 million. We did not incur any penalties in connection with termination of the Prior Agreement.

Issuances of common stock under the Prior Agreement 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 Stock and Common OP Units

In September 2017, we issued 298,900 shares of common stock totaling $26.4 million in connection with the acquisition of Pismo Dunes.

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.

17

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



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 nine month periods ended September 30, 2017 and 2016 were as follows:
 
 
 
Nine Months Ended 
 September 30, 2017
 
Nine Months Ended 
 September 30, 2016
Series
 
Conversion Rate
Units/Shares Converted
Common Stock
 
Units/Shares Converted
Common Stock
Common OP unit
 
1

25,238

25,238

 
24,896

24,896

Series A-1 preferred OP unit
 
2.439

18,319

44,676

 
11,490

28,021

Series A-4 preferred OP unit
 
0.4444

9,000

3,996

 
12,389

5,505

Series A-4 preferred stock
 
0.4444

158,036

70,238

 
385,242

171,218

Series C preferred OP unit
 
1.11

16,806

18,651

 
7,000

7,768


Dividends

Dividend distributions for the quarter ended September 30, 2017 were as follows:
Dividend
 
Record Date
Payment Date
Distribution per Share
Total Distribution (thousands)
Common Stock, Common OP units and Restricted Stock
 
9/29/2017
10/16/2017
$
0.67

$
55,006

Series A Preferred Stock
 
9/29/2017
10/16/2017
$
0.4453125

$
441

Series A-4 Preferred Stock
 
9/15/2017
10/2/2017
$
0.40625

$
1,514


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


18

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


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 nine months ended September 30, 2017, shares were granted as follows:
Grant Period
 
Type
 
Plan
 
Shares Granted
 
Grant Date Fair Value Per Share
 
Vesting Type
 
Vesting Anniversary
 
Percentage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Q3 2017
 
Directors
 
2004 Non-Employee Director Option Plan
 
1,300

 
$
87.11

(1) 
Time Based
 
August 11, 2020
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 nine months ended September 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 were $0.1 million.

The vesting requirements for 186,771 restricted shares granted to our executives, directors and employees were satisfied during the nine months ended September 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 $77.8 million annually. This transient RV revenue was recognized 27.2 percent, 20.2 percent, and 36.9 percent in the first, second, and third quarters, respectively, and is expected to be 15.7 percent in the fourth quarter. 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 September 30, 2017
 
Three Months Ended September 30, 2016
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Revenues
$
215,280

 
$
45,954

 
$
261,234

 
$
200,770

 
$
43,242

 
$
244,012

Operating expenses/Cost of sales
82,295

 
31,869

 
114,164

 
78,922

 
28,285

 
107,207

Net operating income/Gross profit
132,985

 
14,085

 
147,070

 
121,848

 
14,957

 
136,805

Adjustments to arrive at net income / (loss):
 
 
 
 
 
 
 
 
 
 
 
Interest and other revenues, net
7,011

 

 
7,011

 
5,689

 

 
5,689

Home selling expenses

 
(3,290
)
 
(3,290
)
 

 
(2,643
)
 
(2,643
)
General and administrative
(15,677
)
 
(2,590
)
 
(18,267
)
 
(14,309
)
 
(2,266
)
 
(16,575
)
Transaction costs
(2,153
)
 
(14
)
 
(2,167
)
 
(4,171
)
 
(20
)
 
(4,191
)
Depreciation and amortization
(48,624
)
 
(15,608
)
 
(64,232
)
 
(47,323
)
 
(14,160
)
 
(61,483
)
Interest
(32,082
)
 
(3
)
 
(32,085
)
 
(33,797
)
 
(3
)
 
(33,800
)
Interest on mandatorily redeemable preferred OP units
(790
)
 

 
(790
)
 
(789
)
 

 
(789
)
Catastrophic weather related charges
(7,718
)
 
(38
)
 
(7,756
)
 

 

 

Other income, net
3,345

 

 
3,345

 

 

 

Current tax benefit / (expense)
210

 
(172
)
 
38

 
(242
)
 
(41
)
 
(283
)
Deferred tax benefit
81

 

 
81

 

 

 

Income from affiliate transactions

 

 

 
500

 

 
500

Net income / (loss)
36,588

 
(7,630
)
 
28,958

 
27,406

 
(4,176
)
 
23,230

Less:  Preferred return to preferred OP units
1,112

 

 
1,112

 
1,257

 

 
1,257

Less:  Amounts attributable to noncontrolling interests
2,174

 
(398
)
 
1,776

 
1,133

 
(254
)
 
879

Net income / (loss) attributable to Sun Communities, Inc.
33,302

 
(7,232
)
 
26,070

 
25,016

 
(3,922
)
 
21,094

Less: Preferred stock distributions
1,955

 

 
1,955

 
2,197

 

 
2,197

Net income / (loss) attributable to Sun Communities, Inc. common stockholders
$
31,347

 
$
(7,232
)
 
$
24,115

 
$
22,819

 
$
(3,922
)
 
$
18,897



20

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


 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Revenues
$
592,864

 
$
129,093

 
$
721,957

 
$
482,002

 
$
117,683

 
$
599,685

Operating expenses/Cost of sales
220,902

 
84,820

 
305,722

 
176,176

 
76,440

 
252,616

Net operating income/Gross profit
371,962

 
44,273

 
416,235

 
305,826

 
41,243

 
347,069

Adjustments to arrive at net income / (loss):
 
 
 
 
 
 
 
 
 
 
 
Interest and other revenues, net
18,587

 

 
18,587

 
15,459

 

 
15,459

Home selling expenses

 
(9,391
)
 
(9,391
)
 

 
(7,240
)
 
(7,240
)
General and administrative
(49,082
)
 
(7,106
)
 
(56,188
)
 
(40,300
)
 
(6,610
)
 
(46,910
)
Transaction costs
(7,001
)
 
11

 
(6,990
)
 
(27,990
)
 
99

 
(27,891
)
Depreciation and amortization
(144,143
)
 
(45,576
)
 
(189,719
)
 
(118,296
)
 
(41,269
)
 
(159,565
)
Extinguishment of debt
(759
)
 

 
(759
)
 

 

 

Interest
(95,754
)
 
(11
)
 
(95,765
)
 
(88,512
)
 
(10
)
 
(88,522
)
Interest on mandatorily redeemable preferred OP units
(2,361
)
 

 
(2,361
)
 
(2,363
)
 

 
(2,363
)
Catastrophic weather related charges
(8,075
)
 
(49
)
 
(8,124
)
 

 

 

Other income, net
5,341

 
(1
)
 
5,340

 

 

 

Current tax expense
145

 
(278
)
 
(133
)
 
(445
)
 
(122
)
 
(567
)
Deferred tax benefit
745

 

 
745

 

 

 

Income from affiliate transactions

 

 

 
500

 

 
500

Net income / (loss)
89,605

 
(18,128
)
 
71,477

 
43,879

 
(13,909
)
 
29,970

Less:  Preferred return to preferred OP units
3,482

 

 
3,482

 
3,793

 

 
3,793

Less:  Amounts attributable to noncontrolling interests
5,163

 
(984
)
 
4,179

 
1,392

 
(932
)
 
460

Net income / (loss) attributable to Sun Communities, Inc.
80,960

 
(17,144
)
 
63,816

 
38,694

 
(12,977
)
 
25,717

Less: Preferred stock distributions
6,233

 

 
6,233

 
6,748

 

 
6,748

Net income / (loss) attributable to Sun Communities, Inc. common stockholders
$
74,727

 
$
(17,144
)
 
$
57,583

 
$
31,946

 
$
(12,977
)
 
$
18,969


 
September 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
$
5,112,302

 
$
461,523

 
$
5,573,825

 
$
5,019,165

 
$
450,316

 
$
5,469,481

Cash and cash equivalents
124,434

 
13,014

 
137,448

 
3,705

 
4,459

 
8,164

Inventory of manufactured homes

 
25,741

 
25,741

 

 
21,632

 
21,632

Notes and other receivables, net
132,748

 
13,012

 
145,760

 
68,901

 
12,278

 
81,179

Collateralized receivables, net