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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 of 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003.
OR
[ ] Transition pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
COMMISSION FILE NUMBER 333-2522-01
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in its Charter)
Michigan 38-3144240
(State of Organization) (I.R.S. Employer Identification No.)
27777 Franklin Road
Suite 200
Southfield, Michigan 48034
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (248) 208-2500
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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
INDEX
PAGES
-----
PART I
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets as of June 30, 2003 and
December 31, 2002 3
Consolidated Statements of Income for the periods
ended June 30, 2003 and 2002 4
Consolidated Statements of Comprehensive Income for the periods
ended June 30, 2003 and 2002 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 26
PART II
Item 5. Other Information 27
Item 6.(a) Exhibits required by Item 601 of Regulation S-K 27
Item 6.(b) Reports on Form 8-K 27
Signatures 28
2
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
ASSETS
Investment in rental property, net $ 995,420 $ 999,360
Cash and cash equivalents 1,703 2,664
Notes and other receivables 59,727 58,929
Investments in and advances to affiliates 88,719 67,719
Other assets 38,107 37,904
----------- -----------
Total assets $ 1,183,676 $ 1,166,576
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Line of credit $ 75,000 $ 63,000
Debt 612,272 604,373
Accounts payable and accrued expenses 16,888 16,120
Deposits and other liabilities 8,709 8,461
----------- -----------
Total liabilities 712,869 691,954
----------- -----------
Series B Cumulative Preferred Operating Partnership Units
("Series B Units"), mandatorily redeemable, 279 and 237
issued and outstanding for 2003 and 2002, respectively 22,365 18,195
Preferred Operating Partnership Units ("POP Units"), convertible,
redeemable, 1,326 issued and outstanding 35,783 35,783
Partners' Capital
Series A Perpetual Preferred Operating Partnership Units
("Series A Units"), unlimited authorized, 2,000 issued and
outstanding 50,000 50,000
Operating Partnership Units ("OP Units"), unlimited authorized; 20,867 and
20,662 issued and outstanding for 2003 and 2002, respectively
General partner 328,358 332,605
Limited partner 46,512 48,512
Accumulated other comprehensive loss (4,231) (1,851)
Unearned compensation (7,980) (8,622)
----------- -----------
Total partners' capital 412,659 420,644
----------- -----------
Total liabilities and partners' capital $ 1,183,676 $ 1,166,576
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
3
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
REVENUES:
Income from property $ 40,121 $ 38,060 $ 81,876 $ 76,740
Other income 3,035 2,189 5,977 4,599
-------- -------- -------- --------
Total revenues 43,156 40,249 87,853 81,339
-------- -------- -------- --------
EXPENSES:
Property operating and maintenance 9,603 7,940 19,820 16,291
Real estate taxes 3,020 2,582 6,046 5,134
Property management 703 557 1,457 1,315
General and administrative 1,801 1,151 3,420 2,470
Depreciation and amortization 10,996 9,355 21,765 18,468
Interest 10,447 7,722 19,207 15,568
-------- -------- -------- --------
Total expenses 36,570 29,307 71,715 59,246
-------- -------- -------- --------
Income before equity income (loss) from affiliates,
distribution to Preferred OP Units and discontinued
operations 6,586 10,942 16,138 22,093
Equity income (loss) from affiliates 736 (960) 565 (1,182)
-------- -------- -------- --------
Income before distribution to Preferred OP Units and
discontinued operations 7,322 9,982 16,703 20,911
Less distribution to Preferred OP Units (2,133) (1,947) (4,261) (3,866)
-------- -------- -------- --------
Income from continuing operations 5,189 8,035 12,442 17,045
Income from discontinued operations -- -- -- 322
-------- -------- -------- --------
Earnings attributable to OP Units $ 5,189 $ 8,035 $ 12,442 $ 17,367
======== ======== ======== ========
Earnings attributable to:
Continuing operations:
General partner $ 4,539 $ 7,002 $ 10,882 $ 14,836
Limited partner 650 1,033 1,560 2,209
Discontinued operations:
General partner -- -- -- 280
Limited partner -- -- -- 42
-------- -------- -------- --------
$ 5,189 $ 8,035 $ 12,442 $ 17,367
======== ======== ======== ========
Basic earnings per OP Unit outstanding:
Continuing operations $ 0.25 $ 0.40 $ 0.61 $ 0.85
Discontinued operations -- -- -- 0.02
-------- -------- -------- --------
Earnings attributable to OP Units $ 0.25 $ 0.40 $ 0.61 $ 0.87
======== ======== ======== ========
Diluted earnings per OP Unit outstanding:
Continuing operations $ 0.25 $ 0.39 $ 0.61 $ 0.84
Discontinued operations -- -- -- 0.02
-------- -------- -------- --------
Earnings attributable to OP Units $ 0.25 $ 0.39 $ 0.61 $ 0.86
======== ======== ======== ========
Weighted average OP Units outstanding:
Basic 20,427 20,133 20,384 20,027
======== ======== ======== ========
Diluted 20,616 20,377 20,538 20,255
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
4
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
------- ------- ------- -------
Earnings attributable to OP Units $ 5,189 8,035 12,442 17,367
Unrealized losses on interest rate swaps (1,942) -- (2,381) --
------- ------- ------- -------
Comprehensive income 3,247 8,035 10,061 17,367
======= ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
5
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Earnings attributable to OP Units $ 12,442 $ 17,367
Adjustments to reconcile net income to cash provided by
operating activities:
Operating income included in discontinued operations -- 11
Income from discontinued operations -- (322)
Depreciation and amortization 21,765 18,468
Amortization of deferred financing costs 699 554
Increase in other assets (4,347) (5,334)
Increase in accounts payable and other liabilities 1,016 220
--------- ---------
Net cash provided by operating activities 31,575 30,964
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in rental properties (14,139) (58,479)
Proceeds related to property dispositions -- 3,288
Investment in notes receivable, net (798) --
Investment in and advances to affiliates (21,501) (10,296)
Repayments of notes receivable, net -- 9,120
--------- ---------
Net cash used in investing activities (36,438) (56,367)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions 6,391 13,842
Borrowings (repayments) on line of credit, net 12,000 (45,000)
Proceeds from other notes payable and debt 150,000 101,760
Repayments on notes payable and other debt (137,931) (14,662)
Payments for deferred financing costs (1,953) (1,193)
Distributions (24,605) (22,851)
--------- ---------
Net cash provided by financing activities 3,902 31,896
--------- ---------
Net (decrease) increase in cash and cash equivalents (961) 6,493
Cash and cash equivalents, beginning of period 2,664 4,587
--------- ---------
Cash and cash equivalents, end of period $ 1,703 $ 11,080
========= =========
SUPPLEMENTAL INFORMATION
Cash paid for interest including capitalized amounts of $665 and
$675 for the six months ended June 30, 2003 and 2002, respectively $ 16,453 $ 16,086
Noncash investing and financing activities:
Issuance of partnership units to retire capitalized lease obligations $ 4,170 $ --
Unrealized losses on interest rate swaps $ 2,381 $ --
Preferred OP Units issued for rental properties $ -- $ 6,813
Debt assumed for rental properties $ -- $ 4,500
The accompanying notes are an integral part of the consolidated financial
statements.
6
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
These unaudited condensed consolidated financial statements of Sun
Communities Operating Limited Partnership (the "Company"), have been
prepared pursuant to the Securities and Exchange Commission ("SEC") rules
and regulations and should be read in conjunction with the consolidated
financial statements and notes thereto of the Company included in the
Annual Report on Form 10-K for the year ended December 31, 2002. The
following notes to consolidated financial statements present interim
disclosures as required by the SEC. The accompanying consolidated financial
statements reflect, in the opinion of management, all adjustments necessary
for a fair presentation of the interim financial statements. All such
adjustments are of a normal and recurring nature.
Sun Communities, Inc. ("Sun"), a self-administered and self-managed REIT
with no independent operations of its own, is the sole general partner of
the Company. As general partner, Sun has unilateral control and complete
responsibility for management of the Company. The balance sheet of Sun as
of June 30, 2003 is identical to the accompanying Company balance sheet,
except as follows:
AS PRESENTED HEREIN ADJUSTMENTS SUN COMMUNITIES, INC.
JUNE 30, 2003 (IN THOUSANDS) JUNE 30, 2003
----------------- ----------------- -----------------
Notes and other receivables $ 59,727 $ (2,600) $ 57,127
================= ================= =================
Total assets $ 1,183,676 $ (2,600) $ 1,181,076
================= ================= =================
Minority interests $ -- $ 154,660 $ 154,660
================= ================= =================
Series B Units $ 22,365 $ (22,365) $ --
================= ================= =================
POP Units $ 35,783 $ (35,783) $ --
================= ================= =================
Series A Units 50,000 (50,000) --
General partner 328,358 (328,358) --
Limited partners 46,512 (46,512) --
Common stock -- 186 186
Additional paid-in capital -- 427,027 427,027
Distributions in excess of -- (84,459) (84,459)
accumulated earnings
Officers' notes -- (10,612) (10,612)
Unearned compensation (7,980) -- (7,980)
Accumulated other comprehensive loss (4,231) -- (4,231)
Treasury stock -- (6,384) (6,384)
----------------- ----------------- -----------------
Partners' capital/Stockholders'
equity $ 412,659 $ (99,112) $ 313,547
================= ================= =================
Total liabilities and partners'
capital/Stockholders' equity $ 1,183,676 $ (2,600) $ 1,181,076
================= ================= =================
7
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. INVESTMENTS IN AND ADVANCES TO AFFILIATES:
Sun Home Services, Inc. ("SHS") sells and rents homes in our communities,
manages a golf course, and provides activities and other services and
facilities for our residents. The Company owns one hundred percent (100%)
of the outstanding preferred stock of SHS, is entitled to ninety-five
percent (95%) of the operating cash flow, and accounts for its investment
utilizing the equity method of accounting. The common stock is owned by one
officer of Sun and the estate of a former officer of Sun who collectively
are entitled to receive five percent (5%) of the operating cash flow.
In December 2001, the Company, through SHS, made a $15 million equity
investment in a newly formed company Origen Financial, L.L.C. ("Origen"), a
successor to Bingham Financial Services Corporation, whose business is to
finance the purchase of manufactured homes. As a result of this equity
investment, the Company owns approximately a thirty percent (30%) interest
in Origen. The Company wrote-off its remaining equity investment in Origen
during 2002.
Through Sun Home Services, the Company and two other participants (one
unaffiliated and one affiliated with Gary A. Shiffman, the Company's Chief
Executive Officer and President) continue to provide financing to Origen
and are subject to the risks of being a lender. These risks include the
risks relating to borrower delinquency and default and the adequacy of the
collateral for such loans. This financing consists of a $48 million line of
credit and a $10 million term loan of which the Company's commitment is
$35.5 million ($35.1 million and $33.6 million was outstanding as of June
30, 2003 and December 31, 2002, respectively). The line bears interest at a
per annum rate equal to 700 basis points over LIBOR, with a minimum
interest rate of 11 percent and a maximum interest rate of 15 percent. Of
the Company's $35.5 million participation, $18 million is subordinate in
all respects to the first $40.0 million funded under the facility by the
three participants. This line of credit is collateralized by a security
interest in Origen's assets, which is subordinate in all respects to all
institutional indebtedness of Origen.
Summarized combined financial information of the Company's equity
investments for the six months ended June 30, 2003 in SHS and Origen, are
presented below before elimination of intercompany transactions. Pursuant
to the write-off of the Company's equity investment in Origen during 2002,
equity income from affiliates reflects only the Company's share of SHS
income.
Revenues $ 31,434
Expenses 39,195
--------
Net loss $ (7,761)
========
Equity income from affiliates $ 565
========
8
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. RENTAL PROPERTY:
The following summarizes rental property (amounts in thousands):
JUNE 30, DECEMBER 31,
2003 2002
----------- -----------
Land $ 104,816 $ 101,926
Land improvements and buildings 1,022,560 999,540
Furniture, fixtures, and equipment 26,800 26,277
Land held for future development 32,103 34,573
Property under development 2,616 12,521
----------- -----------
1,188,895 1,174,837
Accumulated depreciation (193,475) (175,477)
----------- -----------
Rental property, net $ 995,420 $ 999,360
=========== ===========
During the six months ended June 30, 2003, the Company did not acquire any
rental properties.
9
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. NOTES AND OTHER RECEIVABLES (AMOUNTS IN THOUSANDS):
The following tables set forth certain information regarding notes and
other receivables (amounts in thousands):
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
Mortgage and other notes receivable, primarily with minimum monthly
interest payments at LIBOR based floating rates of approximately
LIBOR + 3.0%, maturing at various dates through August 2008,
substantially collateralized by manufactured home communities. $ 40,182 $ 38,420
Installment loans on manufactured homes with interest payable
monthly at a weighted average interest rate and maturity of 8.2%
and 20 years, respectively. 11,179 11,633
Other receivables 5,766 6,276
Two notes of an officer of Sun, both of which (i) bear interest at
LIBOR + 1.75%, with a minimum and maximum interest rate of 6% and 9%,
respectively, and (ii) become due in three equal installments on each of
December 31, 2008, 2009 and 2010 (with certain prepayment obligations); and
one of which is limited in recourse to 40,000 shares of Sun's common stock
and 50% of any deficiency after application of the proceeds of the sale of
such shares. 2,600 2,600
------------ ------------
$ 59,727 $ 58,929
============ ============
At June 30, 2003, the maturities of mortgages and other notes receivables
are approximately as follows: 2003-$1.4 million; 2004-$20.2 million;
2006-$3.8 million; 2008-and after $14.8 million.
10
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. DEBT:
The following table sets forth certain information regarding debt (in
thousands):
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
Callable/redeemable notes, interest at 6.77%, due May
14, 2015, callable/redeemable May 16, 2005 $ 65,000 $ 65,000
Senior notes, interest at 6.97%, due December 3, 2007 35,000 35,000
Senior notes, interest at 8.20%, due August 15, 2008 100,000 100,000
Senior notes, interest at 5.75%, due April 15, 2010 150,000 --
Bridge loan, at variable interest rate (2.617% at
December 31, 2002), matured April 30, 2003 -- 48,000
Senior notes, interest at 7.625%, matured May 1, 2003 -- 85,000
Collateralized term loan, due to FNMA, with a
weighted average interest rate of 3.16% and 2.17%
at June 30, 2003 and December 31, 2002,
respectively, due May 2007, convertible to a 5 to 10
year fixed rate loan 152,363 152,363
Collateralized term loan, interest at 7.01%, due
September 9, 2007 41,883 42,206
Capitalized lease obligations, interest at 5.51%, due
January 1, 2004 9,739 16,438
Mortgage notes, other 58,287 60,366
------------ ------------
$ 612,272 $ 604,373
============ ============
The collateralized term loans totaling $194,246 at June 30, 2003 are
secured by 22 properties comprising approximately 10,600 sites. The
capitalized lease obligations and mortgage notes are collateralized by 12
communities comprising approximately 3,900 sites. At the lease expiration
date of the capitalized leases the Company has the right and intends to
purchase the properties for the amount of the then outstanding lease
obligation. One of the capitalized lease obligations matured on January 1,
2003 and was paid by the issuance of 41,700 Preferred OP Units, cash of
approximately $860,000 and the assumption of approximately $1,570,000 of
debt, which was immediately retired.
The initial term of the variable rate FNMA debt is five years. The Company
has the option to extend such variable rate borrowings for an additional
five years and/or convert them to fixed rate borrowings with a term of five
or ten years, provided that in no event can the term of the borrowings
exceed fifteen years.
The Company has a $105 million unsecured line of credit of which $30.0
million was available to be drawn at June 30, 2003. Borrowings under the
line of credit bear interest at the rate of LIBOR plus 0.85% and mature
July 2, 2005 with a one-year extension at the Company's option. The average
interest rate of outstanding borrowings under the line of credit at June
30, 2003 was 1.96 percent.
11
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. DEBT, CONTINUED:
In April 2003 the Company issued $150 million of 5.75 percent senior notes,
due April 15, 2010, and used the proceeds from the offering to retire the
bridge loan of $48 million and senior notes of $85 million due on April 30
and May 1, 2003, respectively. The remaining $15 million of net proceeds
was used to pay down the Company's line of credit.
The Company is the guarantor of $22.7 million in personal bank loans
maturing in 2004, made to directors, employees and consultants to purchase
common stock of Sun and OP units pursuant to the Company's Stock Purchase
Plan. No compensation expense was recognized in respect to the guarantees
as the fair value thereof was not material nor have there been any
defaults.
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
The Company has entered into four derivative contracts consisting of three
interest rate swap agreements and an interest rate cap agreement. The
Company's primary strategy in entering into derivative contracts is to
minimize the variability that changes in interest rates could have on its
future cash flows. The Company generally employs derivative instruments
that effectively convert a portion of its variable rate debt to fixed rate
debt and to cap the maximum interest rate on its variable rate borrowings.
The Company does not enter into derivative instruments for speculative
purposes.
The swap agreements are effective April 2003, and have the effect of fixing
interest rates relative to a collateralized term loan due to FNMA. One swap
matures in July 2009, with an effective fixed rate of 4.93 percent. A
second swap matures in July 2012, with an effective fixed rate of 5.37
percent. The third swap matures in July 2007, with an effective fixed rate
of 3.97 percent. The third swap is effective as long as 90-day LIBOR is 7
percent or lower. The interest rate cap agreement has a cap rate of 9.49
percent, a notional amount of $152.4 million and a termination date of
April 03, 2006. Each of the Company's derivative contracts are based upon
90-day LIBOR.
The Company has designated the first two swaps and the interest rate cap as
cash flow hedges for accounting purposes. These three hedges were highly
effective and had minimal effect on income. The third swap does not qualify
as a hedge for accounting purposes and, accordingly, the entire change in
valuation of $0.7 million is reflected as a component of interest expense
in the statements of income for the six months ended June 30, 2003.
In accordance with SFAS No. 133, the "Accounting for Derivative Instruments
and Hedging Activities," which requires all derivative instruments to be
carried at fair value on the balance sheet, the Company has recorded a
liability of $5.4 million and $2.3 million as of June 30, 2003 and December
31, 2002, respectively.
These valuation adjustments will only be realized if the Company terminates
the swaps prior to maturity. This is not the intent of the Company and,
therefore, the net of valuation adjustments through the various maturity
dates will approximate zero.
12
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. OTHER INCOME:
The components of other income are as follows for the periods ended June
30, 2003 and 2002 (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
2003 2002 2003 2002
------ ------ ------ ------
Interest Income $2,894 $1,473 $5,657 $3,221
Other Income 141 716 320 1,378
------ ------ ------ ------
$3,035 $2,189 $5,977 $4,599
====== ====== ====== ======
8. STOCK OPTIONS:
The Company accounts for its stock options using the intrinsic value method
contained in APB Opinion No. 25. "Accounting for Stock Issued to
Employees." If the Company had accounted for options using the methods
contained in FASB Statement No. 123, "Accounting for Stock-Based
Compensation", earnings attributable to OP Units and earnings per OP Unit
would have been presented as follows for the periods ended June 30, 2003
and 2002:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Earnings attributable to OP Units, as reported $ 5,189 $ 8,035 $ 12,442 $ 17,367
Additional compensation expense under fair value method (59) (123) (180) (232)
-------- -------- -------- --------
Pro forma earnings attributable to OP Units $ 5,130 $ 7,912 $ 12,262 $ 17,135
======== ======== ======== ========
Earnings per OP Unit (Basic), as reported $ 0.25 $ 0.40 $ 0.61 $ 0.87
======== ======== ======== ========
Earnings per OP Unit (Basic), pro forma $ 0.25 $ 0.39 $ 0.60 $ 0.86
======== ======== ======== ========
Earnings per OP Unit (Diluted), as reported $ 0.25 $ 0.39 $ 0.61 $ 0.86
======== ======== ======== ========
Earnings per OP Unit (Diluted), pro forma $ 0.25 $ 0.39 $ 0.60 $ 0.85
======== ======== ======== ========
13
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. EARNINGS PER OP UNIT (IN THOUSANDS):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
2003 2002 2003 2002
------- ------- ------- -------
Earnings used for basic and diluted
earnings per OP Unit computation $ 5,189 $ 8,035 $12,442 $17,367
======= ======= ======= =======
Total units used for basic earnings per OP Unit 20,427 20,133 20,384 20,027
Dilutive securities:
Stock options and other 189 244 154 228
------- ------- ------- -------
Total units used for diluted earnings per
OP unit computation 20,616 20,377 20,538 20,255
======= ======= ======= =======
Diluted earnings per OP unit reflect the potential dilution that would
occur if securities were exercised or converted into OP units.
10. RECENT ACCOUNTING PRONOUNCEMENTS:
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities
and Equity" which establishes standards for how financial instruments that
have characteristics of both liabilities and equity instruments should be
classified on the balance sheet. The requirements of SFAS No. 150 generally
outline that financial instruments that give the issuer a choice of
settling an obligation with a variable number of securities or settling an
obligation with a transfer of assets or any mandatorily redeemable security
should be classified as a liability on the balance sheet. Upon adoption of
SFAS 150 on July 1, 2003 the Company will reclassify $58.1 million of
mandatorily redeemable preferred operating partnership units currently
classified as Series B Units and PDP Units in the Company's balance sheet
into debt. The reclassification will have no effect on the Company's
compliance with the covenant requirements of its credit agreements.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
FASB Statements No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. In addition, all provisions of this Statement should be
applied prospectively. The provisions of this Statement that relate to
Statement 133 Implementation Issues that have been effective for fiscal
quarters that began prior to June 15, 2003, should continue to be applied
in accordance with their respective effective dates. The adoption of this
Statement will not have a significant impact on the financial position or
results of the operations of the Company.
14
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED:
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." The objective of this
interpretation is to provide guidance on how to identify a variable
interest entity ("VIE") and determine when the assets, liabilities,
non-controlling interests and results of operations of a VIE need to be
included in a company's consolidated financial statements. A company that
holds variable interests in an entity will need to consolidate the entity
if the company's interest in the VIE is such that the company will absorb a
majority of the VIE's expected losses and/or receive a majority of the
VIE's expected residual returns, if they occur. FIN 46 also requires
additional disclosures by primary beneficiaries and other significant
variable interest holders. The provisions of this interpretation apply in
the first interim period beginning after June 15, 2003 (i.e., third quarter
of 2003) to VIEs in which a company holds a variable interest that it
acquired before February 1, 2003. Pursuant to FIN 46, the Company intends
to consolidate SHS in its financial reporting beginning July 1, 2003. The
Company will also be required to consolidate Origen beginning July 1, 2003
in accordance with FIN 46 if the Company maintains its current equity and
debt positions in Origen. If, however, Origen completes a financing
transaction or other recapitalization event which results in reducing the
Company's exposure to Origen's potential losses to less than a majority,
the Company may not be required to consolidate Origen in accordance with
FIN 46.
11. CONTINGENCIES
On April 9, 2003, T.J. Holdings, LLC ("TJ Holdings"), a member of
Sun/Forest, LLC ("Sun/Forest") (which, in turn, owns an equity interest in
SunChamp LLC), filed a complaint against the Company, SunChamp LLC, certain
other affiliates of the Company and two directors of Sun Communities, Inc.
in the Superior Court of Guilford County, North Carolina. The complaint
alleges that the defendants wrongfully deprived the plaintiff of economic
opportunities that they took for themselves in contravention of duties
allegedly owed to the plaintiff and purports to claim damages of $13.0
million plus an unspecified amount for punitive damages. The Company
believes the complaint and the claims threatened therein have no merit and
will defend it vigorously.
The Company is involved in various other legal proceedings arising in the
ordinary course of business. All such proceedings, taken together, are not
expected to have a material adverse impact on our results of operations or
financial condition.
15
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the consolidated financial condition
and results of operations should be read in conjunction with the consolidated
financial statements and the notes thereto. Capitalized terms are used as
defined elsewhere in this Form 10-Q.
SIGNIFICANT ACCOUNTING POLICIES
The Company had identified significant accounting policies that, as a result of
the judgments, uncertainties, uniqueness and complexities of the underlying
accounting standards and operations involved, could result in material changes
to its financial condition or result of operations under different conditions or
using different assumptions. Details regarding the Company's significant
accounting policies are described fully in the Company's 2002 Annual Report
filed with the Securities and Exchange Commission on Form 10-K. During the three
and six months ended June 30, 2003, there have been no material changes to the
Company's significant accounting policies that impacted the Company's financial
condition or results of operations.
RESULTS OF OPERATIONS
Comparison of the six months ended June 30, 2003 and 2002
For the six months ended June 30, 2003, income before distribution to Preferred
OP Units and discontinued operations decreased by 20.1 percent from $20.9
million to $16.7 million, when compared to the six months ended June 30, 2002.
The decrease was due to increased revenues and equity income of $8.3 million
offset by increased expenses of $12.5 million as described in more detail below.
Income from property increased by $5.2 million from $76.7 million to $81.9
million, or 6.8 percent, due to acquisitions made during the prior year whose
partial year income affects comparability ($3.5 million) and rent increases and
other community revenues ($1.7 million).
Equity income from affiliates increased by $1.7 million to an income of $0.6
million due primarily to increased profitability and volume of home sales and
that the prior period included $0.5 million of losses from Origen and $0.2
million of losses from SunChamp, which is now consolidated. Other income
increased by $1.4 million from $4.6 million to $6.0 million due primarily to an
increase in interest income.
Property operating and maintenance expenses increased by $3.5 million from $16.3
million to $19.8 million, or 21.5 percent. The increase was due to the expansion
of cable TV services ($0.2 million), increase in property and casualty insurance
costs ($0.2 million), increase in employee benefits costs ($0.2 million),
increases in utility costs ($0.5 million), and increases in repair and
maintenance expenses ($0.5 million). Acquisitions made during 2002 and the
consolidation of SunChamp properties accounted for $1.7 million of the remaining
increase of $1.9 million.
16
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS, CONTINUED:
Real estate taxes increased by $0.9 million from $5.1 million to $6.0 million,
or 17.6 percent, due to acquisitions made during 2002 ($0.4 million) and
increases in assessments and tax rates ($0.5 million).
General and administrative expenses including property management increased by
$1.1 million from $3.8 million to $4.9 million, or 28.9 percent, due primarily
to the relocation of our offices ($0.2 million), increased Michigan Single
Business taxes ($0.3 million), additional staffing related to the SunChamp
acquisition ($0.3 million) and assorted other minor increases ($0.3 million).
Depreciation and amortization increased by $3.3 million from $18.5 million to
$21.8 million, or 17.8 percent, due primarily to additional investment in rental
property.
Interest expense increased by $3.6 million from $15.6 million to $19.2 million,
or 23.1 percent, due to reduced capitalized interest ($0.5 million), a valuation
adjustment related to a swap to fix interest rates in the current period ($0.7
million), with the remainder due to increased debt levels somewhat offset by
lower interest rates.
Comparison of the three months ended June 30, 2003 and 2002
For the three months ended June 30, 2003, income before distribution to
Preferred OP Units and discontinued operations decreased by 27.0 percent from
$10.0 million to $7.3 million, when compared to the three months ended June 30,
2002. The decrease was due to increased revenues and equity income of $4.6
million offset by increased expenses of $7.3 million as described in more detail
below.
Income from property increased by $2.0 million from $38.1 million to $40.1
million, or 5.2 percent, due primarily to acquisitions made during the prior
year whose partial year income affects comparability.
Equity income from affiliates increased by $1.7 million to income of $0.7
million due primarily to increased profitability and volume of home sales and
that the prior period included $0.5 million of losses from Origen. Other income
increased by $0.8 million from $2.2 million to $3.0 million, due primarily to an
increase in interest income.
Property operating and maintenance expenses increased by $1.7 million from $7.9
million to $9.6 million, or 21.5 percent. The increase was due to the expansion
of cable TV services ($0.1 million), increases in utility costs ($0.2 million),
and increase in repair and maintenance expense ($0.3 million). Acquisitions made
during 2002 and consolidation of SunChamp properties accounted for the remaining
$1.1 million of the increase.
17
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS, CONTINUED:
Real estate taxes increased by $0.4 million from $2.6 million to $3.0 million,
or 15.4 percent, due to acquisitions made during 2002 ($0.2 million) and
increases in assessments and tax rates ($0.2 million).
General and administrative expenses including property management increased by
$0.8 million from $1.7 million to $2.5 million, or 47.1 percent, due primarily
to the relocation of our offices ($0.2 million), increased Michigan Single
Business tax ($0.1 million), additional staffing related to the SunChamp
acquisition ($0.3 million), and assorted other increases ($0.3 million).
Depreciation and amortization increased by $1.6 million from $9.4 million to
$11.0 million, or 17.0 percent, due primarily to additional investment in rental
property.
Interest expense increased by $2.7 million from $7.7 million to 10.4 million, or
35.1 percent, due to reduced capitalized interest ($0.5 million), a valuation
adjustment related to a swap to fix interest rates in the current period ($0.5
million), with the remainder due to increased debt levels somewhat offset by
lower interest rates.
18
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SAME PROPERTY INFORMATION
The following table reflects property-level financial information as of and for
the six months ended June 30, 2003 and 2002. The "Same Property" data represents
information regarding the operation of communities owned as of January 1, 2002
and June 30, 2003. Site, occupancy, and rent data for those communities is
presented as of the last day of each period presented. The "Total Portfolio"
column differentiates from the "Same Property" column by including financial and
statistical information for new development and acquisition communities.
SAME PROPERTY TOTAL PORTFOLIO
------------------------ ------------------------
2003 2002 2003 2002
------- ------- ------- -------
Income from property $69,907 $67,877 $81,876 $76,740
------- ------- ------- -------
Property operating expenses:
Property operating and maintenance 13,422 12,150 19,820 16,291
Real estate taxes 5,467 4,990 6,046 5,134
------- ------- ------- -------
Property operating expenses 18,889 17,140 25,866 21,425
------- ------- ------- -------
Property net operating income(2) $51,018 $50,737 $56,010 $55,315
======= ======= ======= =======
Number of operating properties 109 109 130 117
Developed sites 38,980 38,915 44,520 41,405
Occupied sites 34,844 35,667 38,714 37,816
Occupancy % 91.0%(1) 93.6%(1) 88.1%(1) 93.1%(1)
Weighted average monthly rent per site $ 324 (1) $ 310 (1) $ 324 (1) $ 310 (1)
Sites available for development 2,001 2,107 7,050 4,268
Sites planned for development in current year 8 78 8 433
(1) Occupancy % and weighted average rent relates to manufactured housing
sites, excluding recreational vehicle sites.
(2) Investors in and analysts following the real estate industry utilize net
operating income ("NOI") as a supplemental performance measure. The Company
considers NOI, given its wide use by and relevance to investors and
analysts, an appropriate supplemental measure to net income because NOI
provides a measure of rental operations and does not factor in
depreciation/amortization and non-property specific expenses such as
general and administrative expenses.
On a same property basis, property net operating income increased by $0.3
million from $50.7 million to $51.0 million, or 0.6 percent. Income from
property increased by $2.0 million from $67.9 million to $69.9 million, or 3.0
percent, due primarily to increases in rents including water and property tax
pass through. Property operating expenses increased by $1.8 million from $17.1
million to $18.9 million, or 10.2 percent, due primarily to increases in real
estate taxes, repair and maintenance and payroll.
19
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity demands have historically been, and are
expected to continue to be, distributions to the Company's unitholders and Sun's
stockholders, property acquisitions, development and expansion of properties,
capital contributions to affiliates, capital improvements of properties and debt
repayment.
The Company expects to meet its short-term liquidity requirements through its
working capital provided by operating activities and its line of credit, as
described below. The Company considers its ability to generate cash from
operations (anticipated to be approximately $70 million annually) to be adequate
to meet all operating requirements, including recurring capital improvements,
routinely amortizing debt and other normally recurring expenditures of a capital
nature, pay dividends to Sun's stockholders to maintain Sun's qualification as a
REIT in accordance with the Internal Revenue Code and make distributions to the
Company's unitholders.
The Company plans to invest approximately $5 million to $10 million annually in
developments consisting of expansions to existing communities and the
development of new communities. The Company expects to finance these investments
by using net cash flows provided by operating activities and by drawing upon its
line of credit.
Furthermore, the Company may to invest in the range of $20 million to $40
million in the acquisition of properties in 2003, depending upon market
conditions. The Company would to finance these investments by using net cash
flows provided by operating activities and by drawing upon its line of credit.
Cash and cash equivalents decreased by $0.9 million to $1.7 million at June 30,
2003 compared to $2.6 million at December 31, 2002 because cash used in
investing activities exceeded cash provided by operating and financing
activities. Net cash provided by operating activities increased by $0.6 million
to $31.6 million for the six months ended June 30, 2003 compared to $31.0
million for the six months ended June 30, 2002.
The Company's net cash flows provided by operating activities may be adversely
impacted by, among other things: (a) the market and economic conditions in the
Company's current markets generally, and specifically in metropolitan areas of
the Company's current markets; (b) lower occupancy and rental rates of the
Company's properties (the "Properties"); (c) increased operating costs,
including insurance premiums, real estate taxes and utilities, that cannot be
passed on to the Company's tenants; and (d) decreased sales of manufactured
homes. See "Factors That May Affect Future Results" in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
In 2003, the Company increased its existing line of credit to an $105 million
facility, which matures in July 2005, with a one-year optional extension. At
June 30, 2003, the average interest rate of outstanding borrowings under the
line of credit was 1.96 percent with $75.0 million outstanding and $30.0 million
available to be drawn under the facility. The line of credit facility contains
various leverage, debt service coverage, net worth maintenance and other
customary covenants all of which the Company was in compliance with at June 30,
2003.
20
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED:
The Company's primary long-term liquidity needs are principal payments on
outstanding indebtedness. At June 30, 2003, the Company's outstanding
contractual obligations were as follows:
TOTAL AFTER
CONTRACTUAL CASH OBLIGATIONS(3) DUE 1 YEAR 2-3 YEARS 4-5 YEARS 5 YEARS
-------- -------- --------- --------- --------
Line of credit $ 75,000 $ -- $ 75,000 $ -- $ --
Collateralized term loan 41,883 682 1,516 39,685 --
Collateralized term loan - FNMA 152,363 -- -- -- 152,363
Senior notes 350,000 -- 65,000 35,000 250,000(4)
Mortgage notes, other 58,288 9,319 20,946 3,398 24,625
Capitalized lease obligations 9,739 9,739 -- -- --
Redeemable Preferred OP Units 58,147 -- 8,175 14,190 35,782
-------- -------- -------- -------- --------
$745,420 $ 19,740 $170,637 $ 92,273 $462,770
======== ======== ======== ======== ========
(3) The Company is the guarantor of $22.9 million in personal bank loans which
is not reflected in the balance sheet, maturing in 2004, made to the
Company's directors, employees and consultants for the purpose of
purchasing shares of Company common stock or Operating Partnership OP Units
pursuant to the Company's Stock Purchase Plan. The Company is obligated
under the Guaranty only in the event that one or more of the borrowers
cannot repay their loan when due.
(4) The provisions of the callable/redeemable $65 million notes are such that
the maturity date will likely be 2005 if the 10 year Treasury rate is
greater than 5.7% on May 16, 2005. The maturity is reflected in the above
table based on that assumption.
21
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED:
The Company anticipates meeting its long-term liquidity requirements, such as
scheduled debt maturities, large property acquisitions, OP unit redemptions and
potential additional capital contributions to affiliates (see Note 2 Investments
in and Advances to Affiliates), through the issuance of debt or equity
securities, including equity units in the Company, or from selective asset
sales. The Company has maintained investment grade ratings with Moody's Investor
Service and Standard & Poor's, which facilitates access to the senior unsecured
debt market. Since 1993, the Company has raised, in the aggregate, nearly $1.0
billion from the sale of Sun common stock, the sale of OP units in the Company
and the issuance of secured and unsecured debt securities. In addition, at June
30, 2003, ninety-four of the Properties were unencumbered by debt, therefore,
providing substantial financial flexibility. The ability of the Company to
finance its long-term liquidity requirements in such manner will be affected by
numerous economic factors affecting the manufactured housing community industry
at the time, including the availability and cost of mortgage debt, the financial
condition of the Company, the operating history of the Properties, the state of
the debt and equity markets, and the general national, regional and local
economic conditions. See "Factors That May Affect Future Results" in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002. If
the Company is unable to obtain additional equity or debt financing on
acceptable terms, the Company's business, results of operations and financial
condition will be harmed.
At June 30, 2003, the Company's debt to total market capitalization approximated
42.5 percent. The debt has a weighted average maturity of approximately 5.6
years and a weighted average interest rate of 5.4 percent.
Capital expenditures for the six months ended June 30, 2003 and 2002 included
recurring capital expenditures of $2.7 million and $2.6 million, respectively.
Net cash used in investing activities decreased by $20.0 million to $36.4
million compared to $56.4 million provided by investing activities for the six
months ended June 30, 2002. This decrease was due to a $44.4 million decrease in
rental property acquisition activities, offset by a $3.3 million decrease in
proceeds related to property dispositions, an increase of $0.8 in investment in
notes receivable, an increase of $11.2 million in investment in and advances to
affiliates and a $9.1 million decrease in repayments of and investment in notes
receivable, net.
Net cash provided by financing activities decreased by $28.0 million to $3.9
million from $31.9 million used in financing activities for the six months ended
June 30, 2002. This decrease was primarily due to increase of borrowings on line
of credit by $57.0 million, a $48.2 million increase of proceeds from notes
payable and other debt, offset by capital contributions decreasing by $7.5
million, repayments on notes payable and other debt increasing by $123.3
million, a $1.7 million increase in distributions, and $0.7 million increase in
payments for deferred financing costs.
22
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SUPPLEMENTAL MEASURE
Investors in and analysts following the real estate industry utilize funds from
operations ("FFO") as a supplemental performance measure. While the Company
believes net income (as defined by generally accepted accounting principles) is
the most appropriate measure, it considers FFO, given its wide use by and
relevance to investors and analysts, an appropriate supplemental measure. FFO is
defined by the National Association of Real Estate Investment Trusts ("NAREIT")
as net income (computed in accordance with generally accepted accounting
principles) excluding gains (or losses) from sales of property, plus rental
property depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Industry analysts consider FFO to be an
appropriate supplemental measure of the operating performance of an equity REIT
primarily because the computation of FFO excludes historical cost depreciation
as an expense and thereby facilitates the comparison of REITs which have
different cost bases in their assets. Historical cost accounting for real estate
assets implicitly assumes that the value of real estate assets diminishes
predictably over time, whereas real estate values have instead historically
risen or fallen based upon market conditions. FFO does not represent cash flow
from operations as defined by generally accepted accounting principles and is a
supplemental measure of performance that does not replace net income as a
measure of performance or net cash provided by operating activities as a measure
of liquidity. In addition, FFO is not intended as a measure of a REIT's ability
to meet debt principal repayments and other cash requirements, nor as a measure
of working capital. The following table reconciles earnings attributable to OP
Units less earnings allocated to Limited Partners to FFO for the periods ended
June 30, 2003 and 2002 (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- -----------------------
2003 2002 2003 2002
------- ------- ------- --------
Earnings attributable to OP Units less earnings
allocated to Limited Partners $ 4,539 $ 7,002 $10,882 $ 15,116
Adjustments:
Depreciation 10,600 9,283 21,109 18,324
Valuation Adjustment(5) 461 -- 675 --
Allocation of SunChamp losses(6) 1,087 -- 1,937 --
Income allocated to Common OP units 650 1,033 1,560 2,209
Gain on sale of properties -- -- -- (269)
------- ------- ------- --------
Funds From Operations (FFO) $17,337 $17,318 $36,163 $ 35,380
======= ======= ======= ========
Weighted average common shares/OP units outstanding:
Basic 20,427 20,133 20,384 20,027
======= ======= ======= ========
Diluted 20,616 20,377 20,538 20,255
======= ======= ======= ========
23
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SUPPLEMENTAL MEASURE, CONTINUED:
(5) The Company entered into three interest rate swaps and an interest rate cap
agreement. The valuation adjustment reflects the theoretical noncash profit and
loss were those hedging transactions terminated at the balance sheet date. As
the Company has no expectation of terminating the transactions prior to
maturity, the net of these noncash valuation adjustments will be zero at the
various maturities. As any imperfections related to hedging correlation in these
swaps is reflected currently in cash as interest, the valuation adjustments are
excluded from Funds From Operations. The valuation adjustment is included in
interest expense.
(6) The Company acquired the equity interest of another investor in SunChamp in
December 2002. Consideration consisted of a long-term note payable at net book
value. Although the adjustment for the allocation of the SunChamp losses is not
reflected in the accompanying financial statements, management believes that it
is appropriate to provide for this adjustment because the Company's payment
obligations with respect to the note are subordinate in all respects to the
return of the members' equity (including the gross book value of the acquired
equity) plus a preferred return. As a result, the losses that are allocated to
the Company under generally accepted accounting principles are effectively
reallocated to the note for purposes of calculating Funds from Operations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains various "forward-looking statements" within the meaning
of the Securities Act of 1933 and the Securities Exchange Act of 1934, and the
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. The words "may", "will", "expect", "believe",
"anticipate", "should", "estimate", and similar expressions identify
forward-looking statements. These forward-looking statements reflect the
Company's current views with respect to future events and financial performance,
but are based upon current assumptions regarding the Company's operations,
future results and prospects, and are subject to many uncertainties and factors
relating to the Company's operations and business environment which may cause
the actual results of the Company to be materially different from any future
results expressed or implied by such forward-looking statements. Please see the
section entitled "Factors That May Affect Future Results" in the Company's
Annual report on Form 10-K for the year ended December 31, 2002 for a list of
uncertainties and factors.
Such factors include, but are not limited to, the following: (i) changes in the
general economic climate; (ii) increased competition in the geographic areas in
which the Company owns and operates manufactured housing communities; (iii)
changes in government laws and regulations affecting manufactured housing
communities; and (iv) the ability of the Company to continue to identify,
negotiate and acquire manufactured housing communities and/or vacant land which
may be developed into manufactured housing communities on terms favorable to the
Company. The Company undertakes no obligation to publicly update or revise any
forward-looking statements whether as a result of new information, future
events, or otherwise.
24
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's principal market risk exposure is interest rate risk. The Company
mitigates this risk by maintaining prudent amounts of leverage, minimizing
capital costs and interest expense while continuously evaluating all available
debt and equity resources and following established risk management policies and
procedures, which include the periodic use of derivatives. The Company's primary
strategy in entering into derivative contracts is to minimize the variability
that changes in interest rates could have on its future cash flows. The Company
generally employs derivative instruments that effectively convert a portion of
its variable rate debt to fixed rate debt. The Company does not enter into
derivative instruments for speculative purposes.
The Company's variable rate debt totals $172.8 million and $54.8 million as of
June 30, 2003 and 2002, respectively, which bears interest at various LIBOR/DMBS
rates. If LIBOR/DMBS increased or decreased by 1.00 percent during the six
months ended June 30, 2003 and 2002, the Company believes its interest expense
would have increased or decreased by approximately $2.4 million and $1.1 million
based on the $240.7 million and $114.3 million average balance outstanding under
the Company's variable rate debt facilities for the six months ended June 30,
2003 and 2002, respectively.
Additionally, the Company had $30.6 million and $38.1 million LIBOR based
variable rate mortgage and other notes receivables as of June 30, 2003 and 2002,
respectively. If LIBOR increased or decreased by 1.0 percent during the six
months ended June 30, 2003 and 2002, the Company believes interest income would
have increased or decreased by approximately $0.3 million and $0.4 million based
on the $28.8 million and $36.2 million average balance outstanding on all
variable rate notes receivables for the six months ended June 30, 2003 and 2002,
respectively.
The Company has entered into three separate interest rate swap agreements and an
interest rate cap agreement. One of these swap agreements fixes $25 million of
variable rate borrowings at 4.93 percent for the period April 2003 through July
2009, another of these swap agreements fixes $25 million of variable rate
borrowings at 5.37 percent for the period April 2003 through July 2012 and the
third swap agreement, which is only effective for so long as 90-day LIBOR is 7
percent or less, fixes $25 million of variable rate borrowings at 3.97 percent
for the period April 2003 through July 2007. The interest rate cap agreement has
a cap rate of 9.49 percent, a notional amount of $152.4 million and a
termination date of April 13, 2006. Each of the Company's derivative contracts
are based upon 90-day LIBOR.
25
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
ITEM 4. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of the Company's
management, including Sun's Chief Executive Officer, Gary A. Shiffman, and
Chief Financial Officer, Jeffrey P. Jorissen, the Company evaluated the
effectiveness of the design and operation of the Company's disclosure
controls and procedures as of the end of the period covered by this
quarterly report, pursuant to Rule 13a-15 of the Securities Exchange Act of
1934 (the "Exchange Act"). Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective to ensure that
information the Company is required to disclose in its filings with the
Securities and Exchange Commission under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the Commission's rules and forms, and to ensure that information required
to be disclosed by the Company in the reports that it files under the
Exchange Act is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer,
as appropriate to allow timely decisions regarding required disclosure.
(b) There have been no significant changes in the Company's internal control
over financial reporting during the quarterly period ended June 30, 2003,
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
26
PART II
ITEM 5. - OTHER INFORMATION
In June 2003, the Company entered into an Agreement for Purchase and Sale of
Manufactured Home Loans ("Agreement") pursuant to which it can elect, from time
to time, to purchase and hold up to $50.0 million principal amount of
manufactured home loans from Origen at a purchase price equal to the book value
of such loans, as reflected on Origen's books and records, plus accrued and
unpaid interest on such loans. Origen services any loans the Company acquires
under this agreement and the Company pays Origen an annual servicing fee of
1.25% of the outstanding principal balance of these loans. The Company has
purchased loans from Origen under the Agreement and sold loans to Origen under a
separate agreement. At July 31, 2003, the Company had a portfolio of
approximately $25.0 million in principal amount of loans purchased under the
Agreement. As partial consideration for the repurchase by Origen of certain
loans purchased by the Company under the Agreement, Origen issued to the Company
preferred equity interests in Origen's special purpose entity that holds
residual securitization interests. These preferred equity interests had a value
of approximately $7.3 million at the time of issuance.
ITEM 6.(A) - EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
See the attached Exhibit Index.
ITEM 6.(B) - REPORTS ON FORM 8-K
Form 8-K, dated April 11, 2003, filed on April 14, 2003 for the purpose of
reporting the Company's sale of $150 million of its 5.75% senior unsecured notes
due April 15, 2010.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2003
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
BY: Sun Communities, Inc., its General Partner
BY: /s/ Jeffrey P. Jorissen
-----------------------------------------------------
Jeffrey P. Jorissen, Chief Financial Officer
and Secretary of Sun Communities, Inc.
(Duly authorized officer and principal
financial officer)
28
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
31.1 Certification of Chief Executive Officer of Sun
pursuant to Securities Exchange Act Rules
13a-14(a)/15(d)-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer of Sun
pursuant to Securities Exchange Act Rules
13a-14(a)/15(d)-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.0 Certification pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
29