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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 SEPTEMBER 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 September 30, 2003 and
December 31, 2002 3
Consolidated Statements of Income for the periods
ended September 30, 2003 and 2002 4
Consolidated Statements of Comprehensive Income for the periods
ended September 30, 2003 and 2002 5
Consolidated Statements of Cash Flows for the nine months
ended September 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 16-25
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 27
PART II
Item 6.(a) Exhibits required by Item 601 of Regulation S-K 28
Item 6.(b) Reports on Form 8-K 28
Signatures 29
2
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
ASSETS
Investment in rental property, net $ 979,655 $ 999,360
Properties held for disposition, net 12,931 -
Cash and cash equivalents 17,184 2,664
Notes and other receivables 61,166 58,929
Investments in and advances to affiliates 116,724 67,719
Other assets 43,567 37,904
----------- -----------
Total assets $ 1,231,227 $ 1,166,576
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Line of credit $ 102,500 $ 63,000
Debt 674,919 658,351
Accounts payable and accrued expenses 17,770 16,120
Deposits and other liabilities 7,119 8,461
----------- -----------
Total liabilities 802,308 745,932
----------- -----------
Partners' Capital:
Series A Perpetual Preferred Operating Partnership
Units ("Series A Units"), unlimited 50,000 50,000
authorized, 2,000 issued and outstanding
Operating Partnership Units ("OP Units"), unlimited
authorized; 21,086 and 20,662 issued and
outstanding for 2003 and 2002, respectively:
General partner 343,126 332,605
Limited partner 45,649 48,512
Accumulated other comprehensive loss (2,198) (1,851)
Unearned compensation (7,658) (8,622)
----------- -----------
Total partners' capital 428,919 420,644
----------- -----------
Total liabilities and partners' capital $ 1,231,227 $ 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
FOR THE PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(AMOUNTS IN THOUSANDS, EXCEPT PER OP UNIT AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
2003 2002 2003 2002
REVENUES:
Income from property $ 39,090 $ 37,732 $ 119,465 $ 112,974
Other income 3,920 2,595 9,897 7,194
--------- --------- --------- ---------
Total revenues 43,010 40,327 129,362 120,168
--------- --------- --------- ---------
EXPENSES:
Property operating and maintenance 10,091 8,691 29,640 24,772
Real estate taxes 2,937 2,496 8,805 7,458
Property management 683 541 2,140 1,856
General and administrative 1,898 1,130 5,318 3,600
Depreciation and amortization 11,036 9,505 32,486 27,661
Interest 7,352 8,266 26,559 23,834
--------- --------- --------- ---------
Total expenses 33,997 30,629 104,948 89,181
--------- --------- --------- ---------
Income before equity income (loss) from affiliates,
distribution to Preferred OP Units, and discontinued
operations 9,013 9,698 24,414 30,987
Equity income (loss) from affiliates 27 (1,457) 592 (2,639)
--------- --------- --------- ---------
Income before distribution to Preferred OP Units and
discontinued operations 9,040 8,241 25,006 28,348
Less distribution to Preferred OP Units 2,136 1,951 6,397 5,817
--------- --------- --------- ---------
Income from continuing operations 6,904 6,290 18,609 22,531
Income from discontinued operations 378 358 1,114 1,484
--------- --------- --------- ---------
Earnings attributable to OP Units $ 7,282 $ 6,648 $ 19,723 $ 24,015
========= ========= ========= =========
Earnings attributable to:
Continuing operations:
General partner $ 6,088 $ 5,489 $ 16,325 $ 19,629
Limited partner 816 801 2,284 2,902
Discontinued operations:
General partner 333 313 978 1,289
Limited partner 45 45 136 195
--------- --------- --------- ---------
$ 7,282 $ 6,648 $ 19,723 $ 24,015
========= ========= ========= =========
Weighted average OP Units outstanding:
Basic 20,989 20,323 20,586 20,126
========= ========= ========= =========
Diluted 21,168 20,505 20,741 20,331
========= ========= ========= =========
Basic earnings per OP Unit:
Continuing operations $ 0.33 $ 0.31 $ 0.91 $ 1.12
Discontinued operations 0.02 0.02 0.05 0.07
--------- --------- --------- ---------
Earnings attributable to OP Units $ 0.35 $ 0.33 $ 0.96 $ 1.19
========= ========= ========= =========
Diluted earnings per OP Unit:
Continuing operations $ 0.32 $ 0.30 $ 0.90 $ 1.11
Discontinued operations 0.02 0.02 0.05 0.07
--------- --------- --------- ---------
Earnings attributable to OP Units $ 0.34 $ 0.32 $ 0.95 $ 1.18
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
4
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Earnings attributable to OP Units $ 7,282 $ 6,648 $ 19,723 $ 24,015
Unrealized losses on interest rate swaps 2,033 (1,344) (347) (1,344)
-------- -------- -------- --------
Comprehensive income 9,315 5,304 19,376 22,671
======== ======== ======== ========
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 NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings attributable to OP Units $ 19,723 $ 24,015
Adjustments to reconcile earnings attributable to OP Units to cash
provided by operating activities:
Gain on sale of discontinued operations - (311)
Depreciation and amortization 32,486 28,129
Amortization of deferred financing costs 1,101 882
Increase in other assets (9,554) (1,389)
Increase (decrease) in accounts payable and other liabilities 308 (1,461)
--------- ---------
Net cash provided by operating activities 44,064 49,865
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in rental properties (20,143) (73,410)
Proceeds related to property dispositions - 3,288
Investment in and advances to affiliates (49,830) (21,050)
Increase in notes receivable, net (2,237) (45,256)
--------- ---------
Net cash used in investing activities (72,210) (136,428)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions 25,330 14,746
Borrowings (repayments) on line of credit, net 39,500 (18,000)
Proceeds from notes payable and other debt, net 16,568 124,012
Payments for deferred financing costs (1,995) (2,047)
Distributions (36,737) (34,787)
--------- ---------
Net cash provided by financing activities 42,666 83,924
--------- ---------
Net increase (decrease) in cash and cash equivalents 14,520 (2,639)
Cash and cash equivalents, beginning of period 2,664 4,587
--------- ---------
Cash and cash equivalents, end of period $ 17,184 $ 1,948
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest including capitalized amounts of $1,623 and $2,299
for the nine months ended September 30, 2003 and 2002, respectively $ 24,343 $ 24,817
Noncash investing and financing activities:
Properties held for disposition, net $ 12,931 $ -
Debt assumed for rental properties $ - $ 6,813
Issuance of partnership units for rental properties $ - $ 4,500
Issuance of partnership units to retire capitalized lease obligations $ 4,170 $ -
OP Units issued as unearned compensation, net $ - $ 2,767
Issuance of OP Units pursuant to dividend reinvestment plan $ 696 $ -
Unrealized losses on interest rate swaps $ 347 $ 1,344
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. Certain reclassifications
have been made to prior periods' financial statements in order to conform
with current period presentation.
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 September 30, 2003 is identical to the accompanying Company balance
sheet, except as follows:
AS PRESENTED HEREIN SUN COMMUNITIES, INC.
SEPTEMBER 30, ADJUSTMENTS SEPTEMBER 30,
2003 (IN THOUSANDS) 2003
------------------- -------------- --------------------
Notes and other receivables $ 61,166 $ (2,600) $ 58,566
=========== =========== ===========
Total assets $ 1,231,227 $ (2,600) $ 1,228,627
=========== =========== ===========
Minority interests $ - $ 95,649 $ 95,649
=========== =========== ===========
Series A units 50,000 (50,000) -
General partner 343,126 (343,126) -
Limited partners 45,649 (45,649) -
Common stock - 191 191
Additional paid-in capital - 446,651 446,651
Officers' notes - (10,583) (10,583)
Unearned compensation (7,658) - (7,658)
Accumulated other comprehensive loss (2,198) - (2,198)
Distributions in excess of accumulated
earnings - (89,349) (89,349)
Treasury stock - (6,384) (6,384)
----------- ----------- -----------
Partners' capital/stockholders' equity 428,919 (98,249) 330,670
=========== =========== ===========
Total liabilities and partners' capital/stockholders' equity 1,231,227 (2,600) 1,228,627
=========== =========== ===========
7
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. RENTAL PROPERTY:
The following summarizes rental property (amounts in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------- -----------
Land $ 103,401 $ 101,926
Land Improvements and buildings 1,014,268 999,540
Furniture, fixtures, and equipment 25,878 26,277
Land held for future development 32,103 34,573
Property under development 2,288 12,521
----------- -----------
1,177,938 1,174,837
Accumulated depreciation (198,283) (175,477)
----------- -----------
Rental property, net $ 979,655 $ 999,360
=========== ===========
During the nine months ended September 30, 2003, the Company did not
acquire any rental properties.
3. PROPERTIES HELD FOR DISPOSITION:
Assets held for disposition are carried at the lower of book value or fair
value less cost to sell the assets. Consistent with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", income
from discontinued operations, for all periods presented, includes the
results of operations of "Properties Held for Disposition". The following
summarizes the results of operations of the properties held for disposition
under SFAS No. 144 for the periods ended September 30, 2003 and 2002
(dollars in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2003 2002 2003 2002
------- ------- ------- -------
Income from property $ 759 $ 752 $ 2,259 $ 2,250
Property operating and maintenance expenses (184) (152) (456) (362)
Real estate taxes (89) (86) (266) (258)
Depreciation and amortization (108) (156) (423) (468)
Gain on sale of properties - - - 322
------- ------- ------- -------
Income from discontinued operations $ 378 $ 358 $ 1,114 $ 1,484
======= ======= ======= =======
As of September 30, 2003, net assets of properties held for disposition
consisted of the following (in thousands):
Rental Property, net of depreciation $ 12,788
Notes and other receivables 50
Other assets 335
Accounts payable and accrued expenses (60)
Other liabilities (182)
--------
Properties held for disposition, net $ 12,931
========
8
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. NOTES AND OTHER RECEIVABLES:
The following table sets forth certain information regarding notes and
other receivables (amounts in thousands):
SEPTEMBER 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 $41,149 $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 10,883 11,633
Other receivables 6,534 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
80,000 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
------- -------
$61,166 $58,929
======= =======
At September 30, 2003, the maturities of mortgages and other notes
receivables are approximately as follows: 2004-$22.6 million; 2006-$3.8
million; 2008-$14.7 million.
5. 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.
The Company, through SHS, and two other participants (one unaffiliated and
one affiliated with Gary Shiffman, Sun's Chief Executive Officer and
President) provided financing to Origen Financial, L.L.C. ("Origen")
through September 30, 2003. Origen's business is to provide loans to the
purchasers of manufactured homes. The financing consisted of a $48 million
line of credit and a $10 million term loan of which the Company's
commitment was $35.5 million ($35.0 million and $33.6 million was
outstanding as of September 30, 2003 and December 31, 2002, respectively).
Subsequent to quarter end, the Company's line of credit and term loan to
Origen was repaid in full after Origen was recapitalized. The Company
invested $50 million in Origen's parent, Origen Financial, Inc.
9
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. INVESTMENTS IN AND ADVANCES TO AFFILIATES, CONTINUED:
("Origen, Inc."), and agreed to sell Origen, Inc. various interests in
manufactured home loans previously acquired from Origen. The Company's
investment in Origen, Inc. approximates a one third ownership interest
which will be accounted for using the equity method of accounting for
periods ending after September 30, 2003.
Summarized combined financial information of the Company's equity
investments for the nine months ended September 30, 2003 in SHS and Origen,
are presented below before elimination of intercompany transactions (in
thousands). Pursuant to the write-off of the Company's equity investment in
Origen during 2002, the Operating Partnership's equity income from
affiliates reflects only the Company's share of SHS income.
Revenues $ 48,558
Expenses 70,986
--------
Net loss $(22,428)
========
Equity income from affiliates $ 592
========
10
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. DEBT:
The following table sets forth certain information regarding debt
(amounts in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Note payable, interest at 2.040%, due December 24, 2003 $ 5,000 $ -
Callable/redeemable notes, interest at 6.770%, due
May 14, 2015, callable/redeemable May 16, 2005 65,000 65,000
Senior notes, interest at 6.970%, due December 3, 2007 35,000 35,000
Senior notes, interest at 8.200%, due August 15, 2008 100,000 100,000
Senior notes, interest at 5.750%, 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, due
May 2007, with a weighted average interest rate of
3.161 percent and 2.17 percent at September 30,
2003 and December 31, 2002, respectively,
convertible to a 5 to 10 year fixed rate loan 152,363 152,363
Collateralized term loan, interest at 7.010%, due
September 9, 2007 41,716 42,206
Series B Cumulative Preferred Operating Partnership Units
with a weighted average interest rate of 7.12 percent,
redeemable at various dates through May 15, 2010 22,365 18,195
Preferred Operating Partnership Units
interest at 7.0 percent, redeemable January 1, 2014 35,783 35,783
Capitalized lease obligations, interest at 5.510%, due
January 1, 2004 9,673 16,438
Mortgage notes, other 58,019 60,366
--------- --------
$674,919 $658,351
========= ========
11
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. DEBT, CONTINUED:
The Company entered into a $25 million loan facility in September of 2003.
The loan bears interest at 2.04% and is due December 24, 2003.
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 which matured 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 collateralized term loans totaling $194,079 at September 30, 2003 are
secured by 22 properties comprising approximately 10,600 sites. The
capitalized lease obligation and mortgage notes are collateralized by 12
communities comprising approximately 3,900 sites. At the lease expiration
date of the capitalized lease, January 2004, the Company has the right and
intends to purchase the property for the amount of the then outstanding
lease obligation. A capitalized lease obligation 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 $2.5
million was available to be drawn at September 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
September 30, 2003 was 1.97 percent.
The Company is the guarantor of $22.6 million in personal bank loans
maturing in 2004, made to directors, employees and consultants to purchase
the 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.
7. OTHER INCOME:
The components of other income are as follows for the periods ended
September 30, 2003 and 2002 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
Interest income $3,714 $1,866 $9,370 $5,086
Other income 206 729 527 2,108
------ ------ ------ ------
$3,920 $2,595 $9,897 $7,194
====== ====== ====== ======
12
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. 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 were 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 three swaps have an aggregate notional
amount of $75.0 million. 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 is 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, whether positive or negative, is reflected as a component of
interest expense. The valuation adjustment for the nine month period ended
September 30, 2003 totals a positive $1.2 million.
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 $1.4 million and $2.3 million as of September 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.
9. 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 September 30,
2003 and 2002:
13
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. STOCK OPTIONS, CONTINUED:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- --------------------------
2003 2002 2003 2002
------- ------- -------- ----------
Earnings attributable to OP Units, as reported $ 7,282 $ 6,648 $ 19,723 $ 24,015
Additional compensation expense under fair value method (47) (123) (227) (355)
------- ------- -------- ----------
Pro forma earnings attributable to OP Units $ 7,235 $ 6,525 $ 19,496 $ 23,660
======= ======= ======== ==========
Earnings per OP Unit (Basic), as reported $ 0.35 $ 0.33 $ 0.96 $ 1.19
======= ======= ======== ==========
Earnings per OP Unit (Basic), pro forma $ 0.34 $ 0.32 $ 0.95 $ 1.18
======= ======= ======== ==========
Earnings per OP Unit (Diluted), as reported $ 0.34 $ 0.32 $ 0.95 $ 1.18
======= ======= ======== ==========
Earnings per OP Unit (Diluted), pro forma $ 0.34 $ 0.32 $ 0.94 $ 1.16
======= ======= ======== ==========
10. EARNINGS PER OP UNIT (IN THOUSANDS):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- -------
Earnings used for basic and diluted
earnings per OP Unit computation $ 7,282 $ 6,648 $19,723 $24,015
======= ======= ======= =======
Total units used for basic earnings per OP Unit 20,989 20,323 20,586 20,126
Dilutive securities: 179 182 155 205
------- ------- ------- -------
Total units used for diluted earnings per
OP unit computation 21,168 20,505 20,741 20,331
======= ======= ======= =======
Diluted earnings per OP unit reflect the potential dilution that would
occur if securities were exercised or converted into OP units.
11. 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 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 reclassified mandatorily redeemable preferred
operating partnership units of $58.1 million and $53.9 million as of
September 30, 2003 and December 31, 2002, respectively, from minority
interest into debt. The reclassification had no effect on the Company's
compliance with the covenant requirements of its credit agreements.
14
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED:
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 did not have a significant impact on the financial position or
results of the operations of the Company.
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 to
the end of the first interim period or annual period ending after December
15, 2003 (i.e., December 31, 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 December 31, 2003. The Company currently reports all of the
operating results of SHS in its equity income from affiliates. Therefore,
the consolidation will have no significant impact on the financial
condition or results of operations of the Company. Due to the recently
completed equity financing of Origen, which reduced the Company's exposure
to Origen's potential income/losses to less than a majority, the Company
will not be required to consolidate Origen or Origen, Inc. under the
provisions of FIN 46.
12. 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 nine months ended September 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 nine months ended September 30, 2003 and 2002
For the nine months ended September 30, 2003, income before distribution to
Preferred OP Units and discontinued operations decreased by 11.6 percent from
$28.3 million to $25.0 million, when compared to the nine months ended September
30, 2002. The decrease was due to increased revenues of $9.2 million and
increased equity income of $3.2 million offset by increased expenses of $15.7
million as described in more detail below.
Income from property increased by $6.5 million from $113.0 million to $119.5
million, or 5.7 percent, due to acquisitions made during the prior year whose
partial year income affects comparability ($4.8 million) and rent increases and
other community revenues ($1.7 million).
Equity income from affiliates increased by $3.2 million to an income of $0.6
million due primarily to increased profitability and volume of home sales and
that the prior period included $2.0 million of losses from Origen. Other income
increased by $2.7 million from $7.2 million to $9.9 million due primarily to an
increase in interest income.
Property operating and maintenance expenses increased by $4.8 million from $24.8
million to $29.6 million, or 19.4 percent. The increase was due to the expansion
of cable TV services ($0.3 million), increase in property and casualty insurance
costs ($0.4 million), increases in utility costs ($0.9 million), and increases
in repair and maintenance expenses ($1.0 million). Acquisitions made during 2002
and the consolidation of SunChamp properties accounted for the remaining
increase of $2.3 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 $1.3 million from $7.5 million to $8.8 million,
or 17.3 percent, due to acquisitions made during 2002 ($0.7 million) and
increases in assessments and tax rates ($0.7 million).
General and administrative expenses including property management increased by
$2.0 million from $5.5 million to $7.5 million, or 36.4 percent, due primarily
to increased audit and legal fees ($0.2 million), expenses related to our office
relocation ($0.2 million), increased Michigan Single Business taxes ($0.4
million), additional staffing related to the SunChamp acquisition ($0.7 million)
and assorted other minor increases ($0.5 million).
Depreciation and amortization increased by $4.8 million from $27.7 million to
$32.5 million, or 17.3 percent, due primarily to additional investment in rental
property.
Interest expense increased by $2.7 million from $23.8 million to $26.5 million,
or 11.3 percent, due to increased debt levels somewhat offset by lower interest
rates ($3.8 million), a decrease in capitalized interest ($0.7 million), and
reduced by a positive valuation adjustment related to a swap to fix interest
rates in the current period ($1.8 million).
Comparison of the three months ended September 30, 2003 and 2002
For the three months ended September 30, 2003, income before distribution to
Preferred OP Units and discontinued operations increased by 9.7 percent from
$8.2 million to $9.0 million, when compared to the three months ended September
30, 2002. The increase was due to increased revenues and equity income of $4.2
million offset by increased expenses of $3.4 million as described in more detail
below.
Income from property increased by $1.4 million from $37.7 million to $39.1
million, or 3.7 percent, due primarily to acquisitions made during the prior
year whose partial year income affects comparability.
Equity income from affiliates increased by $1.5 million to income of $0.03
million due primarily to increased profitability and volume of home sales and
that the prior period included $1.3 million of losses from Origen. Other income
increased by $1.3 million from $2.6 million to $3.9 million, due primarily to an
increase in interest income.
Property operating and maintenance expenses increased by $1.4 million from $8.7
million to $10.1 million, or 16.1 percent. The increase was due to 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 $0.9 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 $2.5 million to $2.9 million,
or 16.0 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
$0.9 million from $1.7 million to $2.6 million, or 52.9 percent, due primarily
to increased professional fees ($0.2 million), the relocation of our offices
($0.1 million), increased Michigan Single Business tax ($0.1 million),
additional staffing related to the SunChamp acquisition and the Company's
software conversion ($0.3 million), and assorted other increases ($0.2 million).
Depreciation and amortization increased by $1.5 million from $9.5 million to
$11.0 million, or 15.8 percent, due primarily to additional investment in rental
property.
Interest expense decreased by $0.9 million from $8.3 million to 7.4 million, or
10.8 percent. This decrease is comprised of a combination of increased expenses
due to increased debt levels, somewhat offset by lower interest rates, ($1.5
million) and decreased expenses due to a positive valuation adjustment related
to a swap to fix interest rates ($2.4 million).
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 nine months ended September 30, 2003 and 2002. The "Same Property" data
represents information regarding the operation of communities owned as of
January 1, 2002 and September 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 $ 103,719 $ 100,995 $ 119,465 $ 112,974
--------------- --------------- --------------- ---------------
Property operating expenses:
Property operating and maintenance 20,257 18,592 29,640 24,772
Real estate taxes 8,200 7,484 8,805 7,458
--------------- --------------- --------------- ---------------
Property operating expenses 28,457 26,076 38,445 32,230
--------------- --------------- --------------- ---------------
Property net operating income(2) $ 75,262 $ 74,919 $ 81,020 $ 80,744
=============== =============== =============== ===============
Number of operating properties 109 109 130 117
Developed sites 38,984 38,904 44,542 41,394
Occupied sites 34,543 35,656 38,399 37,835
Occupancy % 90.1% (1) 93.6% (1) 87.2% (1) 93.2% (1)
Weighted average monthly rent per site $ 327 (1) $ 314 (1) $ 327 (1) $ 313 (1)
Sites available for development 1,931 2,097 6,960 4,258
Sites in development 5 77 5 229
(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 $0.4
million from $74.9 million to $75.3 million, or 0.5 percent. Income from
property increased by $2.7 million from $101 million to $103.7 million, or 2.7
percent, due primarily to increases in rents including water and property tax
pass through. Property operating expenses increased by $1.7 million from $18.6
million to $20.3 million, or 9.0 percent, due primarily to increases in real
estate taxes, repair and maintenance, and payroll. The Company anticipates
rental rate increases and expense containment to continue to offset any decrease
in same property net operating income due to potential future occupancy decline.
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 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 $65 to $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, make distributions to its unitholders and pay
dividends to Sun's stockholders to maintain its qualification as a REIT in
accordance with the Internal Revenue Code.
The Company plans to invest approximately $5 to $10 million in developments
consisting of expansions to existing communities and the development of new
communities during 2003. 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 invest in the range of $20 to $40 million in the
acquisition of properties in 2003, depending upon market conditions. The Company
would finance these investments by using net cash flows provided by operating
activities and by drawing upon its line of credit.
Cash and cash equivalents increased by $14.5 million to $17.1 million at
September 30, 2003 compared to $2.6 million at December 31, 2002 primarily due
to timing of the receipt of proceeds from a loan sale. Net cash provided by
operating activities decreased by $5.8 million to $44.1 million for the nine
months ended September 30, 2003 compared to $49.9 million for the nine months
ended September 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.
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:
In 2003, the Company increased its existing line of credit to a $105 million
facility, which matures in July 2005, with a one-year optional extension. At
September 30, 2003, the average interest rate of outstanding borrowings under
the line of credit was 1.97 percent with $102.5 million outstanding and $2.5
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
September 30, 2003.
The Company's primary long-term liquidity needs are principal payments on
outstanding indebtedness. At September 30, 2003, the Company's outstanding
contractual obligations were as follows:
CONTRACTUAL CASH OBLIGATIONS
CONTRACTUAL CASH OBLIGATIONS(3) TOTAL DUE 1 YEAR 2-3 YEARS 4-5 YEARS AFTER 5 YEARS
-------- -------- -------- -------- --------
Line of credit $102,500 $ - $102,500 $ - $ -
Collateralized term loan 41,717 694 1,542 39,481 -
Collateralized term loan - FNMA 152,363 - - - 152,363
Note payable 5,000 5,000 - - -
Senior notes 350,000 - 65,000(4) 135,000 150,000
Mortgage notes, other 58,019 2,528 27,649 11,178 16,664
Capitalized lease obligations 9,672 9,672 - - -
Redeemable Preferred OP Units 58,148 - 8,175 4,500 45,473
-------- -------- -------- -------- --------
$777,419 $ 17,894 $204,866 $190,159 $364,500
======== ======== ======== ======== ========
(3) The Company is the guarantor of $22.6 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 Sun's common stock or Company 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, and OP unit redemptions
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 September 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 September 30, 2003, the Company's debt to total market capitalization
approximated 46 percent. The debt has a weighted average maturity of
approximately 5.4 years and a weighted average interest rate of 5.4 percent.
Capital expenditures for the nine months ended September 30, 2003 and 2002
included recurring capital expenditures of $4.7 million and $4.9 million,
respectively.
Net cash used in investing activities decreased by $64.3 million to $72.1
million compared to $136.4 million used in investing activities for the nine
months ended September 30, 2002. This decrease was due to a $53.3 million
decrease in rental property investment activities, a $43.1 million decrease in
investment in notes receivable, net, offset by a $3.3 million decrease in
proceeds related to property dispositions and an increase of $28.8 million in
investment in and advances to affiliates.
Net cash provided by financing activities decreased by $41.4 million to $42.5
million from $83.9 million provided by financing activities for the nine months
ended September 30, 2002. This decrease was primarily due to proceeds from notes
payable and other debt decreasing by $107.4 million, a $1.9 million increase in
distributions, offset by a $57.5 million increase in borrowings on line of
credit, and a $10.4 million increase of proceeds from issuance of common stock
of Sun.
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
September 30, 2003 and 2002 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Earnings attributable to OP Units less earnings allocated to $ 6,421 $ 5,802 $ 17,303 $ 20,918
limited partners
Adjustments:
Depreciation of rental property 10,708 9,589 31,817 27,913
Valuation adjustment(5) (1,949) 487 (1,274) 487
Allocation of SunChamp losses(6) 1,221 - 3,158 -
Income allocated to minority interest 860 846 2,420 3,055
(Gain) on sale of properties - - - (269)
-------- -------- -------- --------
Funds from operations $ 17,261 $ 16,724 $ 53,424 $ 52,104
======== ======== ======== ========
FFO from continuing operations $ 16,775 $ 16,211 $ 51,886 $ 50,464
======== ======== ======== ========
FFO from discontinued operations $ 486 $ 513 $ 1,538 $ 1,640
======== ======== ======== ========
23
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SUPPLEMENTAL MEASURE, CONTINUED:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
Weighted average common shares/OP Units outstanding:
Basic 20,989 20,323 20,586 20,126
======= ======= ======= =======
Diluted 21,168 20,505 20,741 20,331
======= ======= ======= =======
Continuing Operations:
FFO per weighted average Common Share/OP Unit - Basic $ 0.80 $ 0.80 $ 2.52 $ 2.51
======= ======= ======= =======
FFO per weighted average Common Share/OP Unit - Diluted $ 0.79 $ 0.79 $ 2.50 $ 2.48
======= ======= ======= =======
Discontinued Operations:
FFO per weighted average Common Share/OP Unit - Basic $ 0.02 $ 0.02 $ 0.08 $ 0.08
======= ======= ======= =======
FFO per weighted average Common Share/OP Unit - Diluted $ 0.03 $ 0.03 $ 0.08 $ 0.08
======= ======= ======= =======
Total Operations:
FFO per weighted average Common Share/OP Unit - Basic $ 0.82 $ 0.82 $ 2.60 $ 2.59
======= ======= ======= =======
FFO per weighted average Common Share/OP Unit - Diluted $ 0.82 $ 0.82 $ 2.58 $ 2.56
======= ======= ======= =======
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.
24
SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP
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.
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.
25
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 $205.2 million and $221.2 million as of
September 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 nine months ended September 30, 2003 and 2002, the Company believes its
interest expense would have increased or decreased by approximately $2.2 million
and $1.1 million based on the $222.9 million and $106.6 million average balance
outstanding under the Company's variable rate debt facilities for the nine
months ended September 30, 2003 and 2002, respectively.
Additionally, the Company had $31.6 million and $39.2 million LIBOR based
variable rate mortgage and other notes receivables as of September 30, 2003 and
2002, respectively. If LIBOR increased or decreased by 1.0 percent during the
nine months ended September 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 $29.6 million and $37.0 million average balance outstanding
on all variable rate notes receivables for the nine months ended September 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
is based upon 90-day LIBOR.
26
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, Sun'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 Sun's 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 September 30,
2003, that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
27
PART II
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 July 8, 2003, filed to report that the Company engaged Grant
Thornton LLP as its independent auditor.
Form 8-K, dated August 6, 2003, furnished for the purpose of reporting, under
Item 12 - Results of Operations and Financial Condition, Sun's 2003 second
quarter earnings and results of operations.
Form 8-K, dated September 2, 2003, filed to report that Origen intended to raise
capital and the potential uses of such proceeds.
28
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: November 13, 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)
29
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.