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, 2018.
 
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 19, 2018:  81,081,896



INDEX

 
 
 
 
Consolidated Financial Statements:
 
 
Consolidated Balance Sheets as of June 30, 2018 (Unaudited) and December 31, 2017
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)
 
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)
 
Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2018 (Unaudited)
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (Unaudited)
 
 
 
 
 
 
 
Exhibit Index






PART I – FINANCIAL INFORMATION
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited - in thousands, except per share amounts)
 
(unaudited) 
 June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Land
$
1,131,956

 
$
1,107,838

Land improvements and buildings
5,484,388

 
5,102,014

Rental homes and improvements
551,840

 
528,074

Furniture, fixtures and equipment
162,961

 
144,953

Investment property
7,331,145

 
6,882,879

Accumulated depreciation
(1,337,567
)
 
(1,237,525
)
Investment property, net (including $307,397 and $50,193 for consolidated variable interest entities at June 30, 2018 and December 31, 2017; see Note 8)
5,993,578

 
5,645,354

Cash and cash equivalents
20,046

 
10,127

Inventory of manufactured homes
38,298

 
30,430

Notes and other receivables, net
176,755

 
163,496

Collateralized receivables, net
117,314

 
128,246

Other assets, net (including $6,844 and $1,659 for consolidated variable interest entities at June 30, 2018 and December 31, 2017; see Note 8)
146,357

 
134,304

TOTAL ASSETS
$
6,492,348

 
$
6,111,957

LIABILITIES
 
 
 
Mortgage loans payable (including $44,561 and $41,970 for consolidated variable interest entities at June 30, 2018 and December 31, 2017; see Note 8)
$
2,636,847

 
$
2,867,356

Secured borrowings on collateralized receivables
118,242

 
129,182

Preferred Equity - Sun NG RV Resorts LLC - mandatorily redeemable (fully attributable to consolidated variable interest entities at June 30, 2018; See Note 8)
35,277

 

Preferred OP units - mandatorily redeemable
37,338

 
41,443

Lines of credit
536,377

 
41,257

Distributions payable
59,364

 
55,225

Advanced reservation deposits and rent
161,192

 
132,205

Other liabilities (including $16,957 and $1,468 for consolidated variable interest entities at June 30, 2018 and December 31, 2017; see Note 8)
151,984

 
138,536

TOTAL LIABILITIES
3,736,621

 
3,405,204

Commitments and contingencies

 

Series A-4 preferred stock, $0.01 par value. Issued and outstanding: 1,063 shares at June 30, 2018 and 1,085 shares at December 31, 2017
31,739

 
32,414

Series A-4 preferred OP units
10,137

 
10,652

Equity Interests - NG Sun LLC (fully attributable to consolidated variable interest entities at June 30, 2018; See Note 8)
21,869

 

STOCKHOLDERS' EQUITY
 
 
 
Common stock, $0.01 par value. Authorized: 180,000 shares; Issued and outstanding: 80,891 shares at June 30, 2018 and 79,679 shares at December 31, 2017
809

 
797

Additional paid-in capital
3,854,057

 
3,758,533

Accumulated other comprehensive (loss) / income
(2,184
)
 
1,102

Distributions in excess of accumulated earnings
(1,223,394
)
 
(1,162,001
)
Total Sun Communities, Inc. stockholders' equity
2,629,288

 
2,598,431

Noncontrolling interests
 
 
 
Common and preferred OP units
56,820

 
60,971

Consolidated variable interest entities
5,874

 
4,285

Total noncontrolling interests
62,694

 
65,256

TOTAL STOCKHOLDERS' EQUITY
2,691,982

 
2,663,687

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
6,492,348

 
$
6,111,957

See accompanying Notes to Consolidated Financial Statements.

1



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,
 
2018
 
2017
 
2018
 
2017
REVENUES
 
 
 
 
 
 
 
Income from real property
$
198,670

 
$
179,461

 
$
395,881

 
$
362,515

Revenue from home sales
41,217

 
30,859

 
76,117

 
58,122

Rental home revenue
13,348

 
12,678

 
26,368

 
25,017

Ancillary revenues
12,031

 
8,850

 
18,599

 
15,069

Interest
5,277

 
5,043

 
10,593

 
9,689

Brokerage commissions and other revenues, net
883

 
1,008

 
1,784

 
1,887

Total revenues
271,426

 
237,899

 
529,342

 
472,299

EXPENSES
 
 
 
 
 
 
 
Property operating and maintenance
58,691

 
53,446

 
110,321

 
100,612

Real estate taxes
14,076

 
13,126

 
27,912

 
26,269

Cost of home sales
30,932

 
22,022

 
57,503

 
42,905

Rental home operating and maintenance
5,268

 
4,944

 
10,438

 
10,046

Ancillary expenses
8,241

 
7,148

 
13,624

 
11,909

Home selling expenses
3,986

 
2,990

 
7,276

 
6,101

General and administrative
21,442

 
19,899

 
41,199

 
37,738

Transaction costs
57

 
2,437

 
114

 
4,823

Catastrophic weather related charges, net
53

 
281

 
(2,160
)
 
368

Depreciation and amortization
67,773

 
62,721

 
134,210

 
125,487

Loss on extinguishment of debt
1,522

 
293

 
1,718

 
759

Interest
32,260

 
32,358

 
63,398

 
63,680

Interest on mandatorily redeemable preferred OP units / equity
790

 
787

 
1,409

 
1,571

Total expenses
245,091

 
222,452

 
466,962

 
432,268

Income before other items
26,335

 
15,447

 
62,380

 
40,031

Other (expense) / income, net
(1,828
)
 
1,156

 
(4,445
)
 
1,995

Current tax (expense) / benefit
(225
)
 
7

 
(399
)
 
(171
)
Deferred tax (expense) / benefit
(112
)
 
364

 
235

 
664

Net income
24,170


16,974

 
57,771

 
42,519

Less: Preferred return to preferred OP units / equity
(1,103
)
 
(1,196
)
 
(2,183
)
 
(2,370
)
Less: Amounts attributable to noncontrolling interests
(2,227
)
 
(1,315
)
 
(4,321
)
 
(2,403
)
Net income attributable to Sun Communities, Inc.
20,840


14,463


51,267


37,746

Less: Preferred stock distribution
(432
)
 
(2,099
)
 
(873
)
 
(4,278
)
Net income attributable to Sun Communities, Inc. common stockholders
$
20,408


$
12,364

 
$
50,394

 
$
33,468

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
79,612

 
74,678

 
79,233

 
73,677

Diluted
80,116

 
75,154

 
79,905

 
74,272

Earnings per share (Refer to Note 14):
 

 
 
 
 

 
 
Basic
$
0.25

 
$
0.16

 
$
0.63

 
$
0.45

Diluted
$
0.25

 
$
0.16

 
$
0.63

 
$
0.45

See accompanying Notes to Consolidated Financial Statements.

2



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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
24,170

 
$
16,974

 
$
57,771

 
$
42,519

Foreign currency translation adjustment
(1,594
)
 
1,745

 
(3,455
)
 
2,329

Total comprehensive income
22,576

 
18,719

 
54,316

 
44,848

Less: Comprehensive income attributable to noncontrolling interests
2,147

 
1,411

 
4,152

 
2,532

Comprehensive income attributable to Sun Communities, Inc.
$
20,429

 
$
17,308

 
$
50,164

 
$
42,316



See accompanying Notes to Consolidated Financial Statements.



3



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(Unaudited - dollars in thousands)

 
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, 2017
$
797

$
3,758,533

$
(1,162,001
)
$
1,102

$
65,256

$
2,663,687

Issuance of common stock and common OP units, net
12

85,957




85,969

Conversion of OP units


1,120



(827
)
293

Conversion of Series A-4 preferred stock

675




675

Share-based compensation - amortization and forfeitures

7,772

181



7,953

Foreign currency translation



(3,286
)
(169
)
(3,455
)
Net income


53,450


4,202

57,652

Distributions


(115,024
)

(5,768
)
(120,792
)
Balance at June 30, 2018
$
809

$
3,854,057

$
(1,223,394
)
$
(2,184
)
$
62,694

$
2,691,982



See accompanying Notes to Consolidated Financial Statements.



4



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - dollars in thousands)
 
Six Months Ended June 30,
 
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
$
198,682

 
$
156,626

INVESTING ACTIVITIES:
 
 
 
Investment in properties
(157,863
)
 
(131,137
)
Acquisitions of properties, net of cash acquired
(260,426
)
 
(39,887
)
Proceeds from dispositions of assets and depreciated homes, net
18,776

 
3,458

Issuance of notes and other receivables
(213
)
 
(503
)
Repayments of notes and other receivables
1,478

 
943

Investment in affiliates
(9,243
)
 

NET CASH USED FOR INVESTING ACTIVITIES
(407,491
)
 
(167,126
)
FINANCING ACTIVITIES:
 
 
 
Issuance and costs of common stock, OP units, and preferred OP units, net
85,969

 
459,292

Redemption of Series B-3 preferred OP units
(4,105
)
 

Borrowings on lines of credit
1,041,876

 
572,109

Payments on lines of credit
(546,839
)
 
(672,019
)
Proceeds from issuance of other debt

 
83,848

Payments on other debt
(229,844
)
 
(58,860
)
Prepayment penalty on debt
(1,718
)
 
(759
)
Redemption of Series A-4 preferred stock and OP units

 
(24,698
)
Distributions to stockholders, OP unit holders, and preferred OP unit holders
(117,054
)
 
(108,093
)
Payments for deferred financing costs
(602
)
 
(3,486
)
Other financing activities
(5,330
)
 

NET CASH PROVIDED BY FINANCING ACTIVITIES
222,353

 
247,334

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(252
)
 
111

Net change in cash, cash equivalents and restricted cash
13,292

 
236,945

Cash, cash equivalents and restricted cash, beginning of period
23,509

 
25,313

Cash, cash equivalents and restricted cash, end of period
$
36,801

 
$
262,258

 
Six Months Ended June 30,
 
2018
 
2017
SUPPLEMENTAL INFORMATION:
 
 
 
Cash paid for interest (net of capitalized interest of $2,205 and $1,266 respectively)
$
62,648

 
$
61,709

Cash paid for interest on mandatorily redeemable debt
$
1,399

 
$
1,571

Cash paid for income taxes
$
680

 
$
350

Noncash investing and financing activities:
 
 
 
Reduction in secured borrowing balance
$
10,940

 
$
11,830

Change in distributions declared and outstanding
$
4,106

 
$
4,320

Conversion of common and preferred OP units
$
1,120

 
$
1,074

Conversion of Series A-4 preferred stock
$
675

 
$
4,720

Acquisitions - Common stock and OP units issued
$

 
$
2,000

Acquisitions - Equity Interests - NG Sun LLC
$
21,869

 
$

Acquisitions - Preferred Equity - Sun NG RV Resorts LLC
$
35,277

 
$

Acquisitions - debt assumed
$
3,012

 
$

See accompanying Notes to Consolidated Financial Statements.

5

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, 2017 as filed with the SEC on February 22, 2018 (the “2017 Annual Report”). These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our 2017 Annual Report.

2. Revenue
        
Disaggregation of Revenue

The following tables disaggregates our revenue by major source (in thousands):
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
REVENUE
 
 
 
 
 
 
 
 
 
 
 
Income from real property
$
198,670

 
$

 
$
198,670

 
$
179,461

 
$

 
$
179,461

Revenue from home sales

 
41,217

 
41,217

 

 
30,859

 
30,859

Rental home revenue

 
13,348

 
13,348

 

 
12,678

 
12,678

Ancillary revenues
12,031

 

 
12,031

 
8,850

 

 
8,850

Interest
5,277

 

 
5,277

 
5,043

 

 
5,043

Brokerage commissions and other revenues, net
883

 

 
883

 
1,008

 

 
1,008

Total revenue
$
216,861

 
$
54,565

 
$
271,426

 
$
194,362

 
$
43,537

 
$
237,899



6




 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
REVENUE
 
 
 
 
 
 
 
 
 
 
 
Income from real property
$
395,881

 
$

 
$
395,881

 
$
362,515

 
$

 
$
362,515

Revenue from home sales

 
76,117

 
76,117

 

 
58,122

 
58,122

Rental home revenue

 
26,368

 
26,368

 

 
25,017

 
25,017

Ancillary revenues
18,599

 

 
18,599

 
15,069

 

 
15,069

Interest
10,593

 

 
10,593

 
9,689

 

 
9,689

Brokerage commissions and other revenues, net
1,784

 

 
1,784

 
1,887

 

 
1,887

Total revenue
$
426,857

 
$
102,485

 
$
529,342

 
$
389,160

 
$
83,139

 
$
472,299


Revenue Recognition Policies and Performance Obligations
On January 1, 2018, we adopted FASB Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers” and the other related ASUs and amendments to the codification (collectively “ASC 606”). The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. A five-step transactional analysis is required to determine how and when to recognize revenue. ASC 606 applies to all contracts with customers, except those that are within the scope of other topics in the FASB accounting standards codification.
As a real estate owner and operator, the majority of our revenue is derived from site and home leases that are accounted for pursuant to ASC 840 “Leases.” For transactions in the scope of ASC 606, we recognize revenue when control of goods or services transfers to the customer, in the amount that we expect to receive for the transfer of goods or provision of services. The adoption of ASC 606 did not result in any change to our accounting policies for revenue recognition. Accordingly, retrospective application to prior periods or a cumulative catch-up adjustment was unnecessary.
Income from real property - Residents in our communities lease the site on which their home is located, and either own or lease their home. Lease revenues for sites and homes fall under the scope of ASC 840, and are accounted for as operating leases with straight-line recognition. Resident leases are generally for one-year or month-to-month terms, and are renewable by mutual agreement from us and the resident, or in some cases, as provided by jurisdictional statute. Non-lease components of our site lease contracts, which are primarily provision of utility services, are accounted for with the site lease as a single lease under ASC 840. Additionally, we include collections of real estate taxes from residents within Income from real property.
Revenue from home sales - Our taxable REIT subsidiary, SHS, sells manufactured homes (“MH”) to current and prospective residents in our communities. Prior to adoption of ASC 606, we recognized revenue for home sales pursuant to ASC 605 “Revenue Recognition,” as manufactured homes are tangible personal property that can be located on any land parcel. Manufactured homes are not permanent fixtures or improvements to the underlying real estate, and were therefore not considered to be subject to the guidance in ASC 360-20 “Real Estate Sales” by the Company. In accordance with the core principle of ASC 606, we recognize revenue from home sales at the time of closing when control of the home transfers to the customer. After closing of the sale transaction, we have no remaining performance obligation.
Rental home revenue - is comprised of rental agreements whereby we lease homes to residents in our communities. We account for these revenues under ASC 840.
Ancillary revenues - are primarily composed of proceeds from restaurant, golf, merchandise and other activities at our recreational vehicle (“RV”) communities. Revenues are recognized at point of sale when control of the good or service transfers to the customer and our performance obligation is satisfied. Sales and other taxes that we collect concurrent with revenue-producing activities are excluded from transaction price.
Interest income - is earned primarily on our notes and collateralized receivables, which includes installment loans for manufactured homes purchased by the Company from loan originators and transferred loans that previously did not meet the requirements for sale accounting. Interest income on these receivables is accrued based on the unpaid principal balances of the underlying loans on a level yield basis over the life of the loans. Interest income is not in the scope of ASC 606. Refer to Notes 4, “Collateralized Receivables and Transfers of Financial Assets” and 5, “Notes and Other Receivables” for additional information.

7




Broker commissions and other revenues, net - is primarily comprised of brokerage commissions for sales of manufactured homes, where we act as agent and arrange for a third-party to transfer a manufactured home to a customer within one of our communities. Brokerage commission revenues are recognized on a net basis at closing, when the transaction is completed and our performance obligations have been fulfilled. Loan loss reserve expenses for our collateralized receivables and notes receivables are also included herein. Refer to Notes 4, “Collateralized Receivables and Transfers of Financial Assets” and 5, “Notes and Other Receivables” for additional information regarding our loan loss reserves.

Contract Balances

As of June 30, 2018 and December 31, 2017, we had $18.2 million and $13.8 million, respectively, of receivables from contracts with customers. Receivables from contracts with customers are presented as a component of Notes and other receivables on our Consolidated Balance Sheets. These receivables represent balances owed to us for previously completed performance obligations for sales of manufactured homes. Due to the nature of our revenue from contacts with customers, we do not have material contract assets or liabilities that fall under the scope of ASC 606.

3.      Real Estate Acquisitions

2018 Acquisitions

Effective June 1, 2018, the Company acquired a majority interest in Sun NG RV Resorts LLC (“Sun NG Resorts”), which is comprised of ten RV resorts and one ground up RV development with 2,700 RV sites and an additional 940 sites available for development. The Company purchased an 80 percent interest in Sun NG Resorts for $61.6 million through Sun NG LLC; the remaining 20 percent interest of $15.4 million is held by NG Sun LLC, an unrelated third-party. Sun paid additional consideration of $123.3 million, consisting of a $1.8 million preferred equity investment and a $121.5 million temporary loan to Sun NG Resorts. Refer to Note 8, “Consolidated Variable Interest Entities,” Note 9, “Debt and Lines of Credit,” and Note 10, “Equity and Mezzanine Securities” for additional information.

In June 2018, we acquired Silver Creek RV Resort (“Silver Creek”), a RV community with 264 sites located in Mears, Michigan.

In June 2018, we acquired four Highway West RV Resorts (“Highway West”) in Coos Bay, Oregon, Salt Lake City, Utah and two resorts in Moab, Utah with 536 RV sites.

In May 2018, we acquired Compass RV Resort (“Compass”), a RV community with 175 sites located in St. Augustine, Florida.

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 2018 (in thousands):
At Acquisition Date
 
Sun NG Resorts
 
Silver Creek
 
Highway West
 
Compass
 
Total
Investment in property
 
$
256,800

 
$
7,250

 
$
36,500

 
$
13,930

 
$
314,480

In-place leases and other tangible assets
 

 

 

 
70

 
70

Debt assumed
 
(3,012
)
 

 

 

 
(3,012
)
Other liabilities, net
 
(11,990
)
 

 

 

 
(11,990
)
Total identifiable assets acquired net of liabilities assumed
 
$
241,798


$
7,250


$
36,500


$
14,000

 
$
299,548

 
 
 
 
 
 
 
 
 
 
 
Consideration
 
 
 
 
 
 
 
 
 
 
Cash
 
$
184,625

 
$
7,250

 
$
36,500

 
$
14,000

 
$
242,375

Preferred Equity - Sun NG Resorts
 
35,277

 

 

 

 
35,277

Equity Interests - NG Sun LLC
 
21,896

 

 

 

 
21,896

Total consideration
 
$
241,798

 
$
7,250

 
$
36,500

 
$
14,000

 
$
299,548


Additionally, during the three months ended June 30, 2018, we acquired an undeveloped parcel of land, on which we plan to construct River Run Ranch (“River Run”), in Granby, Colorado, for approximately $5.3 million. This land parcel has been entitled and zoned to build a 1,144 site MH and RV resort.

8

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



Refer to Note 18, “Subsequent Events,” for information regarding real estate acquisition activity after June 30, 2018.

The total amount of revenues and net income included in the Consolidated Statements of Operations for the three and six months ended June 30, 2018 related to the acquisitions completed in 2018 are set forth in the following table (in thousands):

 
 
Three Months Ended 
 June 30, 2018
 
Six Months Ended 
 June 30, 2018
 
 
(unaudited)
 
(unaudited)
Total revenues
 
$
7,116

 
$
7,116

Net income
 
$
3,827

 
$
3,827


The following unaudited pro forma financial information presents the results of our operations for the three and six months ended June 30, 2018 and 2017, as if the properties acquired in 2018 had been acquired on January 1, 2017. 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 acquisition been consummated on January 1, 2017 (in thousands, except per-share data):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
(unaudited)
 
(unaudited)
 
 
2018
 
2017
 
2018
 
2017
Total revenues
 
$
275,526

 
$
247,560

 
$
535,688

 
$
484,207

Net income attributable to Sun Communities, Inc. common stockholders
 
$
27,561

 
$
24,239

 
$
47,583

 
$
34,023

Net income per share attributable to Sun Communities, Inc. common stockholders - basic
 
$
0.35

 
$
0.32

 
$
0.60

 
$
0.46

Net income per share attributable to Sun Communities, Inc. common stockholders - diluted
 
$
0.34

 
$
0.32

 
$
0.60

 
$
0.46


2017 Acquisitions

In December 2017, we acquired Colony in the Wood (“Colony in the Wood”), an age-restricted MH community with 383 sites located in Port Orange, Florida.

In November 2017, we acquired Emerald Coast RV Beach Resort (“Emerald Coast”), an MH and RV community with 201 sites located in Panama City Beach, Florida.

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

In July 2017, we acquired Pismo Dunes RV Resort (“Pismo Dunes”), an age-restricted 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.


9

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
 
Colony in the Wood
 
Emerald Coast
 
Lazy J Ranch
 
Ocean West
 
Caliente Sands
 
Pismo Dunes
 
Arbor Woods
 
Sunset Lakes
 
49er Village
 
Total
Investment in property
 
$
31,818

 
$
19,400

 
$
13,938

 
$
9,453

 
$
8,640

 
$
21,260

 
$
15,725

 
$
7,835

 
$
12,890

 
$
140,959

Notes receivable
 

 

 

 

 

 

 
23

 

 

 
23

Inventory of manufactured homes
 

 

 
2

 

 
21

 

 
465

 

 

 
488

In-place leases and other tangible assets
 
660

 
100

 
360

 
220

 
210

 
660

 
730

 
210

 
110

 
3,260

Total identifiable assets acquired net of liabilities assumed
 
$
32,478


$
19,500

 
$
14,300


$
9,673


$
8,871


$
21,920

 
$
16,943

 
$
8,045

 
$
13,000

 
$
144,730

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consideration
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
32,478

 
$
19,500

 
$
14,300

 
$
5,081

 
$
8,871

 
$

 
$
14,943

 
$
8,045

 
$
13,000

 
$
116,218

Equity
 

 

 

 

 

 
26,410

 
2,000

 

 

 
28,410

Liabilities assumed
 

 

 

 
4,592

 

 
510

 

 

 

 
5,102

Cash proceeds from seller
 

 

 

 

 

 
(5,000
)
 

 

 

 
(5,000
)
Total consideration
 
$
32,478


$
19,500

 
$
14,300

 
$
9,673

 
$
8,871

 
$
21,920

 
$
16,943

 
$
8,045

 
$
13,000

 
$
144,730


Also in 2017, we acquired an undeveloped parcel of land, on which we will construct Carolina Pines RV Resort (“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 an 841 site RV resort.

Dispositions

There were no property dispositions during the six months ended June 30, 2018 or the year ended December 31, 2017.

4.      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:

10

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


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 $117.3 million (net of allowance of $0.9 million) and $128.2 million (net of allowance of $0.9 million) as of June 30, 2018 and December 31, 2017, respectively. The receivables have a weighted average interest rate and maturity of 10.0 percent and 14.5 years as of June 30, 2018, and 10.0 percent and 15.3 years as of December 31, 2017.

The outstanding balance on the secured borrowing was $118.2 million and $129.2 million as of June 30, 2018 and December 31, 2017, 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 $2.9 million and $3.3 million for the three months ended June 30, 2018 and 2017, respectively, and $5.7 million and $6.6 million for the six months ended June 30, 2018 and 2017, respectively.

The balances of the collateralized receivables and secured borrowings 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, 2018
Beginning balance
$
129,182

Principal payments and payoffs from our customers
(5,866
)
Principal reduction from repurchased homes
(5,074
)
Total activity
(10,940
)
Ending balance
$
118,242


The following table sets forth the allowance for the collateralized receivables as of June 30, 2018 (in thousands):
 
Six Months Ended 
 June 30, 2018
Beginning balance
$
(936
)
Lower of cost or market write-downs
539

Increase to reserve balance
(531
)
Total activity
8

Ending balance
$
(928
)
5.      Notes and Other Receivables

The following table sets forth certain information regarding notes and other receivables (in thousands):
 
 
June 30, 2018
 
December 31, 2017
Installment notes receivable on manufactured homes, net
 
$
122,051

 
$
115,797

Other receivables, net
 
54,704

 
47,699

Total notes and other receivables, net
 
$
176,755

 
$
163,496


Installment Notes Receivable on Manufactured Homes

Our investment in installment notes of $122.1 million (net of allowance of $0.5 million) and $115.8 million (net of allowance of $0.4 million) as of June 30, 2018 and December 31, 2017, respectively, are collateralized by manufactured homes. The notes represent financing to purchasers of manufactured homes primarily located in our communities and require monthly principal and

11

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


interest payments. The notes have a net weighted average interest rate (net of servicing costs) and maturity of 8.0 percent and 17.1 years as of June 30, 2018, and 8.2 percent and 17.2 years as of December 31, 2017, respectively.

The change in the aggregate gross principal balance of the installment notes receivable is as follows (in thousands):
 
Six Months Ended 
 June 30, 2018
Beginning balance
$
116,174

Investment in installment notes
13,890

Principal payments and payoffs from customers
(4,010
)
Principal reduction from repossessed homes
(3,476
)
Total activity
6,404

Ending balance
$
122,578


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, 2018
Beginning balance
$
(377
)
Lower of cost or market write-downs
357

Increase to reserve balance
(507
)
Total activity
(150
)
Ending balance
$
(527
)

Other Receivables

As of June 30, 2018, other receivables were comprised of amounts due from: residents for rent and water and sewer usage of $6.5 million (net of allowance of $1.4 million); home sale proceeds of $18.2 million; and insurance and other receivables of $30.0 million. As of December 31, 2017, other receivables were comprised of amounts due from: residents for rent and water and sewer usage of $7.0 million (net of allowance of $1.5 million); home sale proceeds of $13.8 million; and insurance and other receivables of $26.9 million.

6.
Intangible Assets

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

During the three months ended June 30, 2018, we acquired 50 percent of a land parcel that was previously subject to a ground lease at one of our California communities for $8.0 million. As a result of the transaction, we wrote off $1.1 million of the gross carrying amount of the ground lease intangible and $0.3 million of the related accumulated amortization. The $0.8 million net write off is included within the Property operating and maintenance expenses in our Consolidated Statements of Operations for the three months ended June 30, 2018.

The gross carrying amounts, and accumulated amortization are as follows (in thousands):
 
 
 
 
June 30, 2018
 
December 31, 2017
Intangible Asset
 
Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Ground leases
 
8-57 years
 
$
31,060

 
$
(1,567
)
 
$
32,165

 
$
(1,409
)
In-place leases
 
7 years
 
101,275

 
(52,561
)
 
100,843

 
(45,576
)
Franchise fees and other intangible assets
 
15 years
 
1,885

 
(1,489
)
 
1,880

 
(1,451
)
Total
 
 
 
$
134,220

 
$
(55,617
)
 
$
134,888

 
$
(48,436
)

12





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
 
2018
 
2017
 
2018
 
2017
Ground leases
 
$
223

 
$
257

 
$
445

 
$
514

In-place leases
 
3,345

 
3,428

 
6,690

 
6,844

Franchise fees and other intangible assets
 
19

 
129

 
38

 
258

Total
 
$
3,587

 
$
3,814

 
$
7,173

 
$
7,616


We anticipate amortization expense for our intangible assets to be as follows for the next five years (in thousands):
 
Year
 
Remainder of 2018
 
2019
 
2020
 
2021
 
2022
Estimated expense
$
6,903

 
$
13,547

 
$
11,819

 
$
11,427

 
$
6,826



13

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



7.      Investment in Affiliates

GTSC LLC (“GTSC”)

In February 2018, the Company became a noncontrolling member of GTSC. GTSC engages in acquiring, holding and selling loans secured, directly or indirectly, by manufactured homes located in communities of Sun Communities. At June 30, 2018, we had a 40 percent ownership interest in GTSC. The remaining 60 percent interest is owned by an unrelated third-party. We account for our interest in GTSC under the equity method of accounting as prescribed by ASC 323 “Investments - Equity Method and Joint Ventures.” Based on the power and economics criteria under the variable interest entity (“VIE”) model in ASC 810, we are not the primary beneficiary of GTSC. During the six months ended June 30, 2018, there was $0.1 million net loss in Brokerage commissions and other revenues, net on the Consolidated Statement of Operations related to our ownership interest. Our investment in GTSC as of June 30, 2018, is $9.2 million and recorded within Other assets, net on the Consolidated Balance Sheet.


8.      Consolidated Variable Interest Entities

Effective June 1, 2018, we acquired an 80 percent equity interest in Sun NG Resorts, consisting of 10 operating RV resorts and one RV ground up development. We consolidate Sun NG Resorts under the guidance set forth in FASB ASC Topic 810 “Consolidation.” We concluded that Sun NG Resorts is a variable interest entity 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. Refer to Note 3, “Real Estate Acquisitions,” Note 9, “Debt and Lines of Credit,” and Note 10, “Equity and Mezzanine Securities” for additional information.

We consolidate Rudgate Village SPE, LLC; Rudgate Clinton SPE, LLC; and Rudgate Clinton Estates SPE, LLC (collectively, “Rudgate”) as a 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.

The following table summarizes the assets and liabilities included in our Consolidated Balance Sheets after eliminations (in thousands):
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Investment property, net
$
307,397

 
$
50,193

Other assets, net
6,844

 
1,659

   TOTAL ASSETS
314,241

 
51,852

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Debt
44,561

 
41,970

Preferred Equity - Sun NG Resorts - mandatorily redeemable
35,277

 

Other liabilities
16,956

 
1,468

   TOTAL LIABILITIES
96,794

 
43,438

Equity Interests - NG Sun LLC
21,896

 

Noncontrolling interests
5,874

 
4,285

   TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
124,564

 
$
47,723


Investment property, net and other assets, net related to the consolidated VIEs comprised approximately 4.8 percent and 0.8 percent of our consolidated total assets at June 30, 2018 and December 31, 2017, respectively. Debt, Preferred Equity and other liabilities comprised approximately 2.6 percent and 1.2 percent of our consolidated total liabilities at June 30, 2018 and December 31, 2017, respectively. Equity Interests and Noncontrolling interests related to the consolidated VIEs, on an absolute basis, comprised approximately 1.0 percent and less than 1.0 percent of our consolidated total equity at June 30, 2018 and at December 31, 2017, respectively.

9.      Debt and Lines of Credit


14

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


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, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Collateralized term loans - Life Companies
$
1,032,616

 
$
1,044,246

 
13.4
 
13.9
 
3.9
%
 
3.9
%
Collateralized term loans - FNMA
811,209

 
1,026,014

 
5.5
 
5.6
 
4.5
%
 
4.4
%
Collateralized term loans - CMBS
409,495

 
410,747

 
4.5
 
5.0
 
5.1
%
 
5.1
%
Collateralized term loans - FMCC
383,527

 
386,349

 
6.4
 
6.9
 
3.9
%
 
3.9
%
Secured borrowings
118,242

 
129,182

 
14.9
 
15.3
 
10.0
%
 
10.0
%
Lines of credit
536,377

 
41,257

 
2.8
 
3.1
 
3.3
%
 
2.8
%
Preferred Equity - Sun NG Resorts - mandatorily redeemable
35,277

 

 
4.3
 
0.0
 
6.0
%
 
%
Preferred OP units - mandatorily redeemable
37,338

 
41,443

 
5.1
 
5.0
 
6.6
%
 
6.7
%
Total debt
$
3,364,081

 
$
3,079,238

 
7.8
 
8.9
 
4.4
%
 
4.5
%

Collateralized Term Loans

During the three months ended June 30, 2018 we repaid three collateralized term loans totaling $177.7 million with a weighted average interest rate of 4.53 percent, releasing 11 encumbered communities. One loan was due to mature on August 1, 2018 and two loans were due to mature on May 1, 2023. We recognized a loss on extinguishment of debt of $1.5 million as a result of the repayment transaction. Refer to Note 18, “Subsequent Events,” for additional information regarding collateralized term loan activity after June 30, 2018.

During the three months ended March 31, 2018, we repaid four collateralized term loans totaling $24.4 million with a weighted average interest rate of 6.36 percent, releasing three encumbered communities. The loans were due to mature on March 1, 2019. We recognized a loss on extinguishment of debt of $0.2 million as a result of the repayment transactions.

In December 2017, we defeased a $38.6 million collateralized term loan with a 5.25 percent fixed interest rate that was due to mature on June 1, 2022. As a result of the transaction we recognized a loss on extinguishment of debt of $5.2 million in our Consolidated Statements of Operations. Concurrent with the defeasance, we entered into a new $100.0 million collateralized term loan, encumbered by the same property, with a 4.25 percent fixed rate of interest and 30-year term.

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-year 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.

The collateralized term loans totaling $2.6 billion as of June 30, 2018, are secured by 177 properties comprised of 70,214 sites representing approximately $3.2 billion of net book value.


15

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


Secured Borrowing

See Note 4, “Collateralized Receivables and Transfers of Financial Assets,” for information regarding our collateralized receivables and secured borrowing transactions.

Preferred OP Units

Preferred OP units at June 30, 2018 and December 31, 2017 include $34.7 million of Aspen preferred OP units issued by the Operating Partnership. As of June 30, 2018, these units are convertible indirectly into 453,281 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.

Preferred OP units also include $2.7 million and $6.7 million at June 30, 2018 and December 31, 2017, respectively, of Series B-3 preferred OP units, which are not convertible. During the six months ended June 30, 2018, we redeemed 41,051 of the Series B-3 preferred OP units at an average redemption price per unit, which included accrued and unpaid distributions, of $100.065753. In the aggregate, we paid $4.1 million to redeem these units.

Subject to certain limitations, (a) during the 90-day period beginning on each of the tenth through fifteenth anniversaries of the issue date of the applicable Series B-3 preferred OP units, (b) at any time after the fifteenth anniversary of the issue date of the applicable Series B-3 preferred OP units, or (c) after our receipt of notice of the death of the electing holder of a Series B-3 preferred OP unit, each holder of Series B-3 preferred OP units may require us to redeem such holder's Series B-3 preferred OP units at the redemption price of $100.00 per unit. In addition, at any time after the fifteenth anniversary of the issue date of the applicable Series B-3 preferred OP units we may redeem, at our option, all of the Series B-3 preferred OP units of any holder thereof at the redemption price of $100.00 per unit.

Preferred Equity - Sun NG Resorts - mandatorily redeemable

In June 2018, in connection with the investment in Sun NG Resorts, $35.3 million of mandatorily redeemable Preferred Equity (“Preferred Equity - Sun NG Resorts”) was purchased by unrelated third parties. The Preferred Equity - Sun NG Resorts carries a preferred rate of return of 6.0 percent per annum. The Preferred Equity - Sun NG Resorts has a seven-year term and can be redeemed in the fourth quarter of 2022 at the holders’ option. The Preferred Equity - Sun NG Resorts as of June 30, 2018 was $35.3 million. Refer to Note 3, “Real Estate Acquisitions,” Note 8, “Consolidated Variable Interest Entities,” and Note 10, “Equity and Mezzanine Securities” for additional information.

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 A&R 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 A&R 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 A&R 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, 2018, the margin based on our leverage ratio was 1.35 percent and 1.30 percent on the revolving and term loans, respectively. We had $434.0 million in borrowings on the revolving loan and $100.0 million in borrowings on the term loan, totaling $534.0 million as of June 30, 2018, with a weighted average interest rate of 3.33 percent.


16

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


The A&R Facility replaced our $450.0 million credit facility (the “Previous Facility”), which was scheduled to mature on August 19, 2019. 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, 2018 and December 31, 2017, approximately $1.9 million and $1.3 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, 2018, the effective interest rate was 7.0 percent. The outstanding balance was $2.8 million as of June 30, 2018 and $4.0 million as of December 31, 2017.

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, 2018, 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.

10.      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, which were used to repay borrowings outstanding under the revolving loan under our A&R Facility, fund acquisitions, working capital and general corporate purposes.

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. Through June 30, 2018, we have sold shares of our common stock for gross proceeds of $123.8 million under the Sales Agreement.

Issuances of common stock under the Sales Agreement during 2018 were as follows:
Year to Date
 
Common Stock Issued
 
Weighted Average Sales Price
 
Net Proceeds (in Millions)
June 30, 2018
 
1,008,699

 
$
92.98

 
$
92.6


Refer to Note 18, “Subsequent Events” for additional information regarding issuances of common stock activity after June 30, 2018.

Equity Interests - NG Sun LLC

In June 2018, in connection with the investment in Sun NG Resorts, unrelated third parties purchased $6.5 million of Series B preferred equity interests and $15.4 million of common equity interest (herein jointly referred to as “Equity Interest - NG Sun LLC”). The Series B preferred equity Interests carry a preferred return at a rate that, at any time, is equal to the interest rate on Sun NG Resorts indebtedness at such time. The current rate of return is 5.0 percent. The Equity Interests - NG Sun LLC do not

17

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


have a fixed maturity date and can be redeemed in the fourth quarter of 2022 at the holders option. Refer to Note 3, “Real Estate Acquisitions,” Note 8, “Consolidated Variable Interest Entities,” and Note 9, “Debt and Lines of Credit” for additional information.

Issuance of Common Stock and Common OP Units

In July 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 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. Below is the activity of conversions during the six months ended June 30, 2018 and 2017:
 
 
 
Six Months Ended 
 June 30, 2018
 
Six Months Ended 
 June 30, 2017
Series
 
Conversion Rate
Units/Shares Converted
Common Stock
 
Units/Shares Converted
Common Stock
Common OP unit
 
1

14,828

14,828

 
11,979

11,979

Series A-1 preferred OP unit
 
2.439

8,700

21,217

 
5,825

14,205

Series A-4 preferred OP unit
 
0.4444

11,792

5,240

 
5,000

2,220

Series A-4 preferred stock
 
0.4444

22,576

10,033

 
158,036

70,238

Series C preferred OP unit
 
1.11

1,919

2,130

 
4,993

5,539


Cash Distributions

Cash Distributions for the three months ended June 30, 2018 were as follows:
Cash Distributions
 
Record Date
Payment Date
Distribution per Share
Total Distribution (thousands)
Common Stock, Common OP units and Restricted Stock
 
6/29/2018
7/16/2018
$
0.71

$
59,372

Series A-4 Preferred Stock
 
6/18/2018
7/2/2018
$
0.40625

$
432


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 November 2017, we redeemed all of the outstanding shares of our 7.125% Series A Cumulative Redeemable Preferred Stock. Holders received a cash payment of $25.14349 per share which included accrued and unpaid dividends. In the aggregate, we paid $85.5 million to redeem all of the 3,400,000 outstanding shares.

In June 2017, we redeemed 438,448 shares of Series A-4 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 were the sellers of the American Land Lease portfolio which we acquired in 2014 and 2015.

Repurchase Program


18

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


In November 2004, our Board of Directors authorized us to repurchase up to 1,000,000 shares of our common stock. We have 400,000 common shares remaining in the repurchase program. No common shares were repurchased during the six months ended June 30, 2018 or 2017. There is no expiration date specified for the buyback program.

11.      Share-Based Compensation

As of June 30, 2018, we had 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”). We believe granting equity awards will provide certain executives, key employees and directors additional incentives to promote our financial success, and promote employee and director retention by providing an opportunity to acquire or increase the direct proprietary interest of those individuals in our operations and future.

The following table shows details on grants of equity awards during the six months ended June 30, 2018:
Grant Period
 
Type
 
Plan
 
Shares Granted
 
Grant Date Fair Value Per Share
 
Vesting Type
 
Vesting Anniversary
 
Percentage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
Key Employees
 
2015 Equity Incentive Plan
 
16,500

 
$
88.30

(1)
Time Based
 
2nd
 
35.0
%
 
 
 
 
 
 
 
 
 
 
 
 
3rd
 
35.0
%
 
 
 
 
 
 
 
 
 
 
 
 
4th
 
20.0
%
 
 
 
 
 
 
 
 
 
 
 
 
5th
 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
6th
 
5.0
%
2018
 
Key Employees
 
2015 Equity Incentive Plan
 
44,600

 
$
85.29

(1)
Time Based
 
20.0% annually over 5 years
2018
 
Executive Officers
 
2015 Equity Incentive Plan
 
60,000

 
$
87.24

(1)
Time Based
 
20.0% annually over 5 years
2018
 
Executive Officers
 
2015 Equity Incentive Plan
 
90,000

 
$
65.24

(2)
Market Condition
 
3rd
 
100.0
%
2018
 
Directors
 
2004 Non-Employee Director Option Plan
 
16,800

 
$
85.28

(1)
Time Based
 
3rd
 
100.0
%
(1) The fair value of the grants were determined by using the closing price of our common stock on the dates the shares were issued.
(2) Share-based compensation for restricted stock awards with market 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. At the grant date our common stock price was $87.24. Based on the Monte Carlo simulation we expect 74.8% of the 90,000 shares to vest.

Vesting

The vesting requirements for 173,993 restricted shares granted to our executives, directors and employees were satisfied during the six months ended June 30, 2018.

12.     Segment Reporting

We group our operating segments into reportable segments that provide similar products and services. Each operating segment has discrete financial information evaluated regularly by 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 $106.5 million annually. This transient RV revenue was recognized 20.7 percent and 20.3 percent in the first and second quarters, respectively, and is expected to be recognized at 41.9 percent and 17.1 percent in the third and fourth quarters, respectively. Transient revenue was $78.0 million for the year ended December 31, 2017. We recognized 27.2 percent in the first quarter, 20.1 percent in the second quarter, 36.9 percent in the third quarter, and 15.8 percent in the fourth quarter.

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

19

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


 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Revenues
$
210,701

 
$
54,565

 
$
265,266

 
$
188,311

 
$
43,537

 
$
231,848

Operating expenses/Cost of sales
81,008

 
36,200

 
117,208

 
73,720

 
26,966

 
100,686

Net operating income/Gross profit
129,693

 
18,365

 
148,058

 
114,591

 
16,571

 
131,162

Adjustments to arrive at net income / (loss):
 
 
 
 
 
 
 
 
 
 
 
Interest and other revenues, net
6,160

 

 
6,160

 
6,051

 

 
6,051

Home selling expenses

 
(3,986
)
 
(3,986
)
 

 
(2,990
)
 
(2,990
)
General and administrative
(18,543
)
 
(2,899
)
 
(21,442
)
 
(17,684
)
 
(2,215
)
 
(19,899
)
Transaction costs
(57
)
 

 
(57
)
 
(2,437
)
 

 
(2,437
)
Depreciation and amortization
(50,811
)
 
(16,962
)
 
(67,773
)
 
(48,189
)
 
(14,532
)
 
(62,721
)
Loss on extinguishment of debt
(1,522
)
 

 
(1,522
)
 
(293
)
 

 
(293
)
Interest
(32,254
)
 
(6
)
 
(32,260
)
 
(32,353
)
 
(5
)
 
(32,358
)
Interest on mandatorily redeemable preferred OP units / equity
(790
)
 

 
(790
)
 
(787
)
 

 
(787
)
Catastrophic weather related charges, net
22

 
(75
)
 
(53
)
 
(270
)
 
(11
)
 
(281
)
Other income, net
(1,829
)
 
1

 
(1,828
)
 
1,365

 
(209
)
 
1,156

Current tax (expense) / benefit
(135
)
 
(90
)
 
(225
)
 
58

 
(51
)
 
7

Deferred tax (expense) / benefit
(112
)
 

 
(112
)
 
364

 

 
364

Net income / (loss)
29,822

 
(5,652
)
 
24,170

 
20,416

 
(3,442
)
 
16,974

Less:  Preferred return to preferred OP units
1,103

 

 
1,103

 
1,196

 

 
1,196

Less:  Amounts attributable to noncontrolling interests
2,509

 
(282
)
 
2,227

 
1,501

 
(186
)
 
1,315

Net income / (loss) attributable to Sun Communities, Inc.
26,210

 
(5,370
)
 
20,840

 
17,719

 
(3,256
)
 
14,463

Less: Preferred stock distributions
432

 

 
432

 
2,099

 

 
2,099

Net income / (loss) attributable to Sun Communities, Inc. common stockholders
$
25,778

 
$
(5,370
)
 
$
20,408

 
$
15,620

 
$
(3,256
)
 
$
12,364







20

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


 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Revenues
$
414,480

 
$
102,485

 
$
516,965

 
$
377,584

 
$
83,139

 
$
460,723

Operating expenses/Cost of sales
151,857

 
67,941

 
219,798

 
138,790

 
52,951

 
191,741

Net operating income/Gross profit
262,623

 
34,544

 
297,167

 
238,794

 
30,188

 
268,982

Adjustments to arrive at net income / (loss):
 
 
 
 
 
 
 
 
 
 
 
Interest and other revenues, net
12,377

 

 
12,377

 
11,576

 

 
11,576

Home selling expenses

 
(7,276
)
 
(7,276
)
 

 
(6,101
)
 
(6,101
)
General and administrative
(35,673
)
 
(5,526
)
 
(41,199
)
 
(33,405
)
 
(4,333
)
 
(37,738
)
Transaction costs
(114
)
 

 
(114
)
 
(4,848
)
 
25

 
(4,823
)
Depreciation and amortization
(101,319
)
 
(32,891
)
 
(134,210
)
 
(95,519
)
 
(29,968
)
 
(125,487
)
Loss on extinguishment of debt
(1,718