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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004.
OR
[ ] Transition pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 1-12616
SUN COMMUNITIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland 38-2730780
(State of Incorporation) (I.R.S. Employer Identification No.)
27777 Franklin Rd.
Suite 200
Southfield, Michigan 48034
(Address of Principal Executive Offices) (Zip Code)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of shares of Common Stock, $.01 par value per share, outstanding
as of June 30, 2004: 18,989,572
SUN COMMUNITIES, INC.
INDEX
PAGES
PART I
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets as of June 30, 2004 and
December 31, 2003 3
Consolidated Statements of Operations for the periods
ended June 30, 2004 and 2003 4
Consolidated Statements of Comprehensive Income (Loss) for the periods
ended June 30, 2004 and 2003 5
Consolidated Statements of Cash Flows for the periods
ended June 30, 2004 and 2003 6
Notes to Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 25
PART II
Item 2.(e) Changes in Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 26
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, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 and DECEMBER 31, 2003
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
ASSETS
Investment in rental property, net $ 1,076,884 $ 1,010,484
Cash and cash equivalents 106,117 24,058
Inventory of manufactured homes 18,599 17,236
Investment in and advances to affiliate 50,160 50,667
Notes and other receivables 41,586 74,828
Other assets 51,837 44,301
----------- -----------
Total assets $ 1,345,183 $ 1,221,574
=========== ===========
LIABILITIES
Line of credit $ - $ 99,000
Debt 976,816 674,328
Other liabilities 26,207 24,833
----------- -----------
Total liabilities 1,003,023 798,161
----------- -----------
Minority interests 86,871 96,803
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000 shares
authorized, none issued - -
Common stock, $.01 par value, 100,000 shares
authorized, 19,461 and 19,192 issued
in 2004 and 2003, respectively 195 192
Paid-in capital 454,734 446,211
Officer's notes (10,136) (10,299)
Unearned compensation (13,717) (7,337)
Accumulated comprehensive earnings 80 (1,294)
Distributions in excess of accumulated earnings (160,196) (94,479)
Treasury stock, at cost, 472 and 202 shares in
2004 and 2003, respectively (15,671) (6,384)
----------- -----------
Total stockholders' equity 255,289 326,610
----------- -----------
Total liabilities and stockholders' equity $ 1,345,183 $ 1,221,574
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements
3
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 2004 AND 2003
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2004 2003 2004 2003
--------- -------- --------- --------
REVENUES
Income from rental property $ 40,501 $ 39,361 $ 83,369 $ 80,374
Revenue from home sales 6,082 5,601 10,056 9,715
Ancillary revenues, net 519 435 1,116 876
Interest and other income 1,685 3,164 3,807 5,562
--------- -------- --------- --------
Total revenues 48,787 48,561 98,348 96,527
--------- -------- --------- --------
COSTS AND EXPENSES
Property operating and maintenance 10,068 9,447 20,296 19,549
Cost of home sales 5,137 3,543 8,262 6,186
Real estate taxes 3,353 2,932 6,519 5,869
General and administrative - rental property 2,640 2,504 5,446 4,877
General and administrative - home sales 1,631 1,598 3,061 3,011
Depreciation and amortization 10,806 10,838 22,089 21,450
Extinguishment of debt 51,643 - 51,643 -
Deferred financing costs related to extinguished debt 5,557 - 5,557 -
Interest 10,100 10,484 19,365 19,307
--------- -------- --------- --------
Total expenses 100,935 41,346 142,238 80,249
--------- -------- --------- --------
Income (loss) before equity income (loss) from
affiliate, discontinued operations, and
minority interests (52,148) 7,215 (43,890) 16,278
Equity income (loss) from affiliate 100 (251) 300 (314)
--------- -------- --------- --------
Income (loss) from continuing operations before
minority interests (52,048) 6,964 (43,590) 15,964
Less income (loss) allocated to minority interests:
Preferred OP Units 2,184 2,133 4,363 4,261
Common OP Units (6,331) 605 (5,622) 1,468
--------- -------- --------- --------
Income (loss) from continuing operations (47,901) 4,226 (42,331) 10,235
Income from discontinued operations - 313 - 647
--------- -------- --------- --------
Net income (loss) $ (47,901) $ 4,539 $ (42,331) $ 10,882
========= ======== ========= ========
Weighted average common shares outstanding:
Basic 18,639 17,902 18,670 17,846
========= ======== ========= ========
Diluted 18,639 18,091 18,670 18,000
========= ======== ========= ========
Basic earnings (loss) per share:
Continuing operations $ (2.57) $ 0.23 $ (2.27) $ 0.57
Discontinued operations - 0.02 - 0.04
--------- -------- --------- --------
Net income (loss) $ (2.57) $ 0.25 $ (2.27) $ 0.61
========= ======== ========= ========
Diluted earnings (loss) per share:
Continuing operations $ (2.57) $ 0.23 $ (2.27) $ 0.56
Discontinued operations - 0.02 - 0.04
--------- -------- --------- --------
Net income (loss) $ (2.57) $ 0.25 $ (2.27) $ 0.60
========= ======== ========= ========
The accompanying notes are an integral part of the consolidated
financial statements.
4
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE PERIODS ENDED JUNE 30, 2004 AND 2003
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
2004 2003 2004 2003
-------- ------- -------- --------
Net income (loss) $(47,901) $ 4,539 $(42,331) $ 10,882
Unrealized income (loss) on interest rate swaps 2,857 (1,942) 1,374 (2,381)
-------- ------- -------- --------
Comprehensive income (loss) $(45,044) $ 2,597 $(40,957) $ 8,501
======== ======= ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
5
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (42,331) $ 10,882
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Income (loss) allocated to minority interests (5,622) 1,468
Income from discontinued operations allocated to minority interests - 92
Depreciation and amortization 22,732 21,450
Depreciation allocated to income from discontinued operations - 315
Amortization of deferred financing costs 804 699
Extinguishment of debt 51,643 -
Write off of deferred financing costs related to extinguished debt 5,557 -
Equity (income) loss from affiliate (300) 314
Increase in inventory and other assets (11,550) (4,347)
Increase in accounts payable and other liabilities 1,374 1,016
--------- ---------
Net cash provided by operating activities 22,307 31,889
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in rental properties (90,996) (14,139)
Investment in and advances to affiliate 689 (21,815)
Proceeds from sale of installment loans on manufactured homes 12,325 -
Decrease (increase) in notes receivable and officers' notes, net 21,280 (707)
--------- ---------
Net cash used in investing activities (56,702) (36,661)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and OP units, net 7,487 6,300
Borrowings (repayments) on line of credit, net (99,000) 12,000
Payments to redeem notes payable and other debt (423,081) (137,931)
Proceeds from notes payable and other debt 673,580 150,000
Payments for deferred financing costs (6,895) (1,953)
Treasury stock purchases (9,287) -
Distributions (26,350) (24,605)
--------- ---------
Net cash provided by financing activities 116,454 3,811
--------- ---------
Net (decrease) increase in cash and cash equivalents 82,059 (961)
Cash and cash equivalents, beginning of period 24,058 2,664
--------- ---------
Cash and cash equivalents, end of period $ 106,117 $ 1,703
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest including capitalized amounts of $294 and $1,029 for
the six months ended June 30, 2004 and 2003, respectively $ 23,289 $ 16,453
Noncash investing and financing activities:
Debt assumed for rental properties $ 30 $ -
Issuance of partnership units to retire capitalized lease obligations $ 4,725 $ 4,170
Unrealized gains (losses) on interest rate swaps $ 1,374 $ (2,381)
The accompanying notes are an integral part of the consolidated
financial statements.
6
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
These unaudited condensed consolidated financial statements of Sun
Communities, Inc., a Maryland corporation, (the "Company") and all
majority-owned and controlled subsidiaries including Sun Communities
Operating Limited Partnership (the "Operating Partnership"), SunChamp LLC
("SunChamp"), and Sun Home Services, Inc. ("SHS"), 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, 2003. 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.
2. RENTAL PROPERTY:
The following summarizes rental property (amounts in thousands):
JUNE 30, DECEMBER 31,
2004 2003
----------- -----------
Land $ 110,354 $ 104,541
Land improvements and buildings 1,125,521 1,048,576
Furniture, fixtures, and equipment 32,670 33,080
Land held for future development 34,318 31,409
Property under development 1,959 2,799
----------- -----------
1,304,822 1,220,405
Less accumulated depreciation (227,938) (209,921)
----------- -----------
Rental property, net $ 1,076,884 $ 1,010,484
=========== ===========
The Company acquired 5 properties for $66 million during the second
quarter of 2004 consisting of 1,414 developed sites and an additional 570
sites available for development. The properties were acquired for cash and
the assumption of $23 million of debt, which was immediately retired.
7
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. NOTES AND OTHER RECEIVABLES:
The following table sets forth certain information regarding notes and
other receivables (amounts in thousands):
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
Mortgage and other notes receivable, with interest payable at a
weighted average interest rate of 6.72%, maturing at various
dates through August 2008, substantially collateralized by
manufactured home communities $18,500 $41,736
Installment loans on manufactured homes with interest payable
monthly at a weighted average interest rate and maturity of
7.28% and 10 years, respectively. 14,052 24,802
Other receivables 9,034 8,290
------- -------
$41,586 $74,828
======= =======
At June 30, 2004, the maturities of mortgages and other notes receivable
are approximately as follows: 2006-$3.8 million; 2008-$14.7 million. In
February 2004, $12.3 million of the installment loans collateralized by
manufactured homes were sold at book value (which approximated fair value)
to Origen Financial, Inc. ("Origen, Inc."). Mortgage and other notes
receivable of $24.0 million were repaid during the second quarter of 2004.
Officer's notes, presented as a reduction to stockholders' equity in the
balance sheet, are 10 year, LIBOR + 1.75% notes, with a minimum and
maximum interest rate of 6% and 9%, respectively, collateralized by
352,206 shares of the Company's common stock and 127,794 OP Units with
substantial personal recourse. The notes become due in three equal
installments on each of December 2008, 2009 and 2010.
4. INVESTMENT IN AND ADVANCES TO AFFILIATE:
Origen, Inc. is a real estate investment trust in the business of
originating, acquiring and servicing manufactured home loans. In October
2003, the Company purchased 5,000,000 shares of common stock of Origen,
Inc. for $50 million. The Company owns 19.9% of Origen, Inc. at June 30,
2004 and its investment is accounted for using the equity method of
accounting. Equity earnings recorded through June 30, 2004 are an estimate
of the Company's portion of the anticipated earnings of Origen, Inc.
through June 30, 2004, based on publicly available information.
8
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. DEBT:
The following table sets forth certain information regarding debt (amounts
in thousands):
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
Collateralized term loan, 7.010%, due September 9, 2007 $ 41,195 $ 41,547
Collateralized term loans - CMBS, 4.931-5.32%, due July 1, 2011-2016 496,030 -
Collateralized term loans - FNMA, of which $77.4M is variable,due 2014
at the Company's option, interest at 3.22 - 5.37% and 3.244%
at June 30, 2004 and December 31, 2003, respectively 329,612 152,363
Redeemable preferred OP units, average interest 7.046%,
redeemable at various dates through January 2, 2014 62,873 58,148
Senior notes, 6.770%, due May 14, 2005 5,017 350,000
Capitalized lease obligation, 5.510%, matured in January, 2004 - 9,606
Mortgage notes, other 42,089 62,664
-------- --------
$976,816 $674,328
======== ========
The collateralized term loans totaling $866.8 million at June 30, 2004 are
secured by 93 properties comprising approximately 34,921 sites. The
mortgage notes are collateralized by 12 communities comprising
approximately 3,863 sites. A capitalized lease obligation matured as of
January 1, 2004 and was paid by the issuance of 47,250 Preferred OP Units,
cash of approximately $1.2 and the assumption of approximately $4.2
million of debt, which was immediately retired.
On April 15, 2004, the Company tendered for its $350 million of
outstanding unsecured notes, of which 98.6% were tendered and
extinguished. This transaction resulted in the payment of $51.6 million of
debt extinguishment costs including pre-payment penalties and fees
associated with the tender offer. The purchase of these notes and payment
of the related costs was funded through secured financing transactions, as
noted below.
During the quarter, the Company completed financings totaling $733 million
consisting of Collateralized Mortgaged Back Securities (CMBS) of $496
million and additional FNMA financing of $237 million. As of June 30,
2004, $60 million of the additional FNMA financing was undrawn. The $673
million of new debt has a weighted average interest rate of 4.99% and a
duration slightly in excess of 10 years. The proceeds from the financings
were used to redeem $345 million of unsecured debt, payoff the Company's
$99 million unsecured line of credit, pay debt extinguishment costs of
$51.6 million and repay approximately $20 million of mortgage notes.
9
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. INTEREST AND OTHER INCOME:
The components of other income are as follows for the periods ended June
30, 2004 and 2003 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
2004 2003 2004 2003
------- ------ ------ -------
Interest income $ 1,470 $2,938 $3,249 $ 5,191
Brokerage commissions 235 198 508 412
Other income (loss) (20) 28 50 (41)
------- ------ ------ -------
$ 1,685 $3,164 $3,807 $ 5,562
======= ====== ====== =======
7. SEGMENT REPORTING (AMOUNTS IN THOUSANDS):
The consolidated operations of the Company can be segmented into
manufactured home sales and property operations segments. Following is a
presentation of selected financial information:
THREE MONTHS ENDED JUNE 30, 2004 SIX MONTHS ENDED JUNE 30, 2004
------------------------------------- ----------------------------------------
PROPERTY MANUFACTURED PROPERTY MANUFACTURED
OPERATIONS HOME SALES COMBINED OPERATIONS HOME SALES COMBINED
---------- ------------ -------- ---------- ------------ --------
Revenues $ 40,501 $ 6,082 $ 46,583 $ 83,369 $ 10,056 $ 93,425
Operating expenses/Cost of sales 13,421 5,137 18,558 26,815 8,262 35,077
-------- ------- -------- -------- -------- --------
Net operating income (1)/Gross profit 27,080 945 28,025 56,554 1,794 58,348
Adjustments to arrive at net loss:
Other revenues 1,682 522 2,204 3,616 1,307 4,923
Selling, general and administrative (2,640) (1,631) (4,271) (5,446) (3,061) (8,507)
Depreciation and amortization (10,506) (300) (10,806) (21,449) (640) (22,089)
Interest expense (10,071) (29) (10,100) (19,313) (52) (19,365)
Debt extinguishment costs (51,643) - (51,643) (51,643) - (51,643)
Deferred financing costs related to
extinguished debt (5,557) - (5,557) (5,557) - (5,557)
Equity income from affiliate 100 - 100 300 - 300
(Income) loss allocated to minority interest 4,147 - 4,147 1,259 - 1,259
-------- ------- -------- -------- -------- --------
Net loss $(47,408) $ (493) $(47,901) $(41,679) $ (652) $(42,331)
======== ======= ======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2003 SIX MONTHS ENDED JUNE 30, 2003
------------------------------------- ----------------------------------------
PROPERTY MANUFACTURED PROPERTY MANUFACTURED
OPERATIONS HOME SALES COMBINED OPERATIONS HOME SALES COMBINED
---------- ------------ -------- ---------- ------------ --------
Revenues $ 39,361 $ 5,601 $ 44,962 $ 80,374 $ 9,715 $ 90,089
Operating expenses 12,379 3,543 15,922 25,418 6,186 31,604
-------- ------- -------- -------- ------- --------
Net operating income (1)/Gross profit 26,982 2,058 29,040 54,956 3,529 58,485
Adjustments to arrive at net loss:
Other revenues 1,911 1,688 3,599 3,096 3,342 6,438
Selling, general and administrative (2,504) (1,598) (4,102) (4,877) (3,011) (7,888)
Depreciation and amortization (10,613) (225) (10,838) (20,999) (451) (21,450)
Interest expense (10,446) (38) (10,484) (19,206) (101) (19,307)
Equity loss from affiliate (251) - (251) (314) - (314)
Income allocated to minority interest (2,738) - (2,738) (5,729) - (5,729)
Income from discontinued operations 313 - 313 647 - 647
-------- ------- -------- -------- ------- --------
Net income $ 2,654 $ 1,885 $ 4,539 $ 7,574 $ 3,308 $ 10,882
======== ======= ======== ======== ======= ========
(1) 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.
10
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SEGMENT REPORTING (AMOUNTS IN THOUSANDS), CONTINUED:
SELECTED BALANCE SHEET DATA JUNE 30, 2004 DECEMBER 31, 2003
------------------------------------ -----------------------------------------
PROPERTY MANUFACTURED PROPERTY MANUFACTURED
OPERATIONS HOME SALES COMBINED OPERATIONS HOME SALES COMBINED
--------- ------------ ---------- ---------- ------------ ----------
Identifiable assets:
Investment in rental property, net $1,038,286 $ 38,598 $1,076,884 $ 980,149 $30,335 $1,010,484
Cash and cash equivalents 106,264 (147) 106,117 24,043 15 24,058
Inventory of manufactured homes - 18,599 18,599 - 17,236 17,236
Investments in and advances to affiliate 50,160 - 50,160 50,667 - 50,667
Notes and other receivables 39,690 1,896 41,586 61,534 13,294 74,828
Other assets 49,206 2,631 51,837 41,613 2,688 44,301
---------- -------- ---------- ---------- ------- ----------
Total assets $1,283,606 $ 61,577 $1,345,183 $1,158,006 $63,568 $1,221,574
========== ======== ========== ========== ======= ==========
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (IN THOUSANDS):
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 have the effect of fixing interest rates relative to a
portion of 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 six month
period ended June 30, 2004 totals a negative $0.5 million.
SFAS No. 133, the "Accounting for Derivative Instruments and Hedging
Activities," requires all derivative instruments to be carried at fair
value on the balance sheet. The fair value of the instruments approximates
zero at June 30, 2004 and a liability of $0.9 million as of December 31,
2003.
These valuation adjustments will only be realized if the Company
terminates the swaps prior to maturity. If held to maturity, the valuation
adjustments will approximate zero.
11
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. STOCK OPTIONS (IN THOUSANDS):
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", net income (loss) and earnings (loss) per share would have
been presented as follows for the periods ended June 30, 2004 and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- --------------------------
2004 2003 2004 2003
--------- ------- --------- ----------
Net income (loss), as reported $ (47,901) $ 4,539 $ (42,331) $ 10,882
Stock-based compensation expense under fair value method (10) (59) (29) (180)
--------- ------- --------- ----------
Pro forma net income (loss) $ (47,911) $ 4,480 $ (42,360) $ 10,702
========= ======= ========= ==========
Earnings (loss) per share (Basic), as reported $ (2.57) $ 0.25 $ (2.27) $ 0.61
========= ======= ========= ==========
Earnings (loss) per share (Basic), pro forma $ (2.57) $ 0.25 $ (2.27) $ 0.60
========= ======= ========= ==========
Earnings (loss) per share (Diluted), as reported $ (2.57) $ 0.25 $ (2.27) $ 0.60
========= ======= ========= ==========
Earnings (loss) per share (Diluted), pro forma $ (2.57) $ 0.25 $ (2.27) $ 0.59
========= ======= ========= ==========
Stock options issued during the second quarter of 2004 were valued using
the Binomial model rather than the Black-Scholes-Merton formula. The
difference in valuation between the two methods was not material .
10. EARNINGS (LOSS) PER SHARE (IN THOUSANDS):
For the periods ended June 30, 2004 and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- ------- -------- -------
Earnings (loss) used for basic and diluted
earnings (loss) per share:
Continuing operations $(47,901) $ 4,226 $(42,331) $10,235
======== ======= ======== =======
Discontinued operations $ - $ 313 $ - $ 647
======== ======= ======== =======
Weighted average shares used for basic
earnings (loss) per share 18,639 17,902 18,670 17,846
Dilutive securities:
Stock options and other - 189 - 154
-------- ------- -------- -------
Diluted weighted average shares 18,639 18,091 18,670 18,000
======== ======= ======== =======
12
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. EARNINGS PER SHARE (IN THOUSANDS), CONTINUED:
Diluted earnings per share reflect the potential dilution that would occur
if dilutive securities were exercised or converted into common stock. The
calculation of both basic and diluted earnings per share for the three and
six month periods ending June 30, 2004 is based upon weighted average
shares prior to dilution, as the effect of including potentially dilutive
securities in the calculation during these periods would be anti-dilutive.
The Company also has the following potentially convertible securities
which, if converted, may impact dilution:
- -------------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES NUMBER OF UNITS ISSUED CONVERSION FEATURES
- -------------------------------------------------------------------------------------------------------------
Series A Preferred OP Units 1,325,275 Convertible to common stock at $68 per share/unit.
Mandatorily redeemable on 01/02/2014
- -------------------------------------------------------------------------------------------------------------
Series B Preferred OP Units 35,637 On each of May 1, 2003, 2004, 2005, and 2006,
holder may exchange Units for shares of common
stock at exchange rate of 2.272727 ($44 per share)
shares of common stock for each Series B
Preferred Unit.
- -------------------------------------------------------------------------------------------------------------
Series B-2 Preferred OP Units 100,000 Convertible into Common OP Units after
01/31/2005 at $45 per share/unit.
- -------------------------------------------------------------------------------------------------------------
11. RECENT ACCOUNTING PRONOUNCEMENTS:
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued
a proposed Statement, Share-Based Payment an Amendment of FASB Statements
No. 123 and APB No. 95, that addresses the accounting for share-based
payment transactions in which an enterprise receives employee services in
exchange for (a) equity instruments of the enterprise or (b) liabilities
that are based on the fair value of the enterprise's equity instruments or
that may be settled by the issuance of such equity instruments. Under the
FASB's proposal, all forms of share-based payments to employees, including
employee stock options, would be treated the same as other forms of
compensation by recognizing the related cost in the income statement. The
expense of the award would generally be measured at fair value at the
grant date. Current accounting guidance requires that the expense relating
to so-called fixed plan employee stock options only be disclosed in the
footnotes to the financial statements. The proposed Statement would
eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees. The
Company has not assessed the impact of the proposed statement on its
financial statements.
13
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 its results of operations or
financial condition.
14
SUN COMMUNITIES, INC.
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 2003 Annual Report
filed with the Securities and Exchange Commission on Form 10-K. During the six
months ended June 30, 2004, 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 three months ended June 30, 2004 and 2003
For the three months ended June 30, 2004, income from continuing operations
before minority interest decreased by $59.0 million from $7.0 million to a loss
of $52.0 million, when compared to the three months ended June 30, 2003. The
decrease was due to increased expenses of $2.4 million, debt extinguishment
costs of $51.6 million, and deferred financing costs related to the extinguished
debt of $5.6 million, offset by increased revenues of $0.2 million and increased
equity income from affiliates of $0.4 million as described in more detail below.
Income from rental property increased by $1.1 million from $39.4 million to
$40.5 million, or 2.8 percent, due primarily to rent increases and other
community revenues.
Interest and other income decreased by $1.5 million from $3.2 million to $1.7
million, or 46.8 percent, due primarily to a decrease in interest earning notes
and receivables.
The increase in revenue from home sales and increase in ancillary revenues
relate to operations of the manufactured home sales segment which is discussed
in detail below.
Property operating and maintenance expenses increased by $0.7 million from $9.4
million to $10.1 million, or 7.4 percent. The increase was due to increases in
utility costs ($0.1 million), repair and maintenance expense ($0.2 million),
payroll expense ($0.2 million), property and casualty insurance ($0.1 million),
and other miscellaneous expenses ($0.1 million).
Real estate taxes increased by $0.5 million from $2.9 million to $3.4 million,
or 17.2 percent, due primarily to increases in assessments and tax rates.
15
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS, CONTINUED:
General and administrative expenses for rental property increased by $0.1
million from $2.5 million to $2.6 million, or 4.0 percent, primarily due to an
increase in systems training costs.
Debt extinguishment costs of $51.6 million includes prepayment penalties, fees
and other costs associated with redeeming $345.0 million of unsecured notes.
Deferred financing costs related to these notes and other debt repaid with the
proceeds from $733.0 million of new secured financing were expensed.
Interest expense decreased by $0.4 million from $10.5 million to $10.1 million,
or 3.8 percent, primarily due to a change in valuation of derivative contracts.
Equity income from affiliates of $0.1 million represents an estimate of the
Company's prorata interest in the operations of Origen, Inc. for the three
months ended June 30, 2004.
The cost of home sales increase of $1.6 million is discussed in detail below.
Sun Home Services
The following table summarizes certain financial and statistical data for Sun
Home Services for the three months ended June 30, 2004 and 2003:
THREE MONTHS ENDED JUNE 30, INCREASE/
2004 2003 (DECREASE) PERCENT CHANGE
------ ------ ---------- --------------
New home sales revenues $3,174 $4,733 $(1,559) -32.9%
Cost of sales 2,611 2,976 (365) -12.3%
------ ------ ------- -----
Gross profit 563 1,757 (1,194) -68.0%
====== ====== ======= =====
Pre-owned home sales revenues $2,908 $ 868 $ 2,040 235.0%
Cost of sales 2,526 567 1,959 345.5%
------ ------ ------- -----
Gross profit 382 301 81 26.9%
====== ====== ======= =====
Ancillary revenue, net $ 519 $ 435 $ 84 19.3%
====== ====== ======= =====
Home sales volumes:
New homes 52 85 (33) -38.8%
Pre-owned homes 126 50 76 152.0%
16
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS, CONTINUED:
Sun Home Services
The margin on new home sales has declined due to consumer demand shifting to
pre-owned homes which are available in substantial quantities. This shift in
demand was more than offset by the supply of pre-owned homes, thereby reducing
margins.
The margin on pre-owned home sales has declined as a result of a management
strategy to reduce the inventory of pre-owned homes and increase revenue
producing sites.
The increase in ancillary revenue, net, is primarily due to increased activity
in the Company's rental home program.
Comparison of the six months ended June 30, 2004 and 2003
For the six months ended June 30, 2004, income from continuing operations before
minority interest decreased by $59.6 million from $16.0 million to a loss of
$43.6 million, when compared to the six months ended June 30, 2003. The decrease
was due to increased expenses of $4.8 million, debt extinguishment costs of
$51.6 million, and deferred financing costs related to the extinguished debt of
$5.6 million, offset by increased revenues of $1.8 million and increased equity
income from affiliates of $0.6 million as described in more detail below.
Income from rental property increased by $3.0 million from $80.4 million to
$83.4 million, or 3.7 percent, due to rent increases and other community
revenues, and an increase in seasonal recreational vehicle revenue during the
first quarter of 2004.
Interest and other income decreased by $1.8 million from $5.6 million to $3.8
million, or 32.1 percent, due primarily to a decrease in interest earning notes
and receivables.
The increase in revenue from home sales and increase in ancillary revenues
relate to operations of the manufactured home sales segment which is discussed
in detail below.
Property operating and maintenance expenses increased by $0.8 million from $19.5
million to $20.3 million, or 4.1 percent. The increase was due to increases in
utility costs ($0.2 million), repair and maintenance expense ($0.2 million),
payroll expense ($0.2 million), and miscellaneous other expenses ($0.2 million).
Real estate taxes increased by $0.6 million from $5.9 million to $6.5 million,
or 10.2 percent, due primarily to increases in assessments and tax rates.
17
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS, CONTINUED:
General and administrative expenses for rental property increased by $0.5
million from $4.9 million to $5.4 million, primarily due to training costs
related to the Company's systems conversion and costs related to compliance with
the Sarbanes-Oxley Act.
Depreciation and amortization increased by $0.6 million from $21.5 million to
$22.1 million, or 2.8 percent, due to additional investment in rental property.
Debt extinguishment costs of $51.6 million includes prepayment penalties, fees
and other costs associated with extinguishing $345.0 million of unsecured notes.
Deferred financing costs related to these notes and other debt repaid with the
proceeds from $733.0 million of new secured financing were expensed.
Equity income from affiliates of $0.3 million represents an estimate of the
Company's prorata interest in the operations of Origen, Inc. for the six months
ended June 30, 2004.
The remaining cost of home sales increase of $2.1 million is discussed in detail
below.
Sun Home Services
The following table summarizes certain financial and statistical data for Sun
Home Services for the six months ended June 30, 2004 and 2003:
SIX MONTHS ENDED JUNE 30, INCREASE/
2004 2003 (DECREASE) PERCENT CHANGE
------ ------ ---------- --------------
New home sales revenues $5,537 $8,213 $(2,676) -32.6%
Cost of sales 4,420 5,282 (862) -16.3%
------ ------ ------- -----
Gross profit 1,117 2,931 (1,814) -61.9%
====== ====== ======= =====
Pre-owned home sales revenues $4,519 $1,502 $ 3,017 200.9%
Cost of sales 3,842 904 2,938 325.0%
------ ------ ------- -----
Gross profit 677 598 79 13.2%
====== ====== ======= =====
Ancillary revenue, net $1,116 $ 876 $ 240 27.4%
====== ====== ======= =====
Home sales volumes:
New homes 97 157 (60) -38.2%
Pre-owned homes 208 91 117 128.6%
The margin on new home sales has declined due to consumer demand shifting to
pre-owned homes which are available in substantial quantities. This shift in
demand was more than offset by the supply of pre-owned homes, thereby reducing
margins.
The margin on pre-owned home sales has declined as a result of a management
strategy to reduce the inventory of pre-owned homes and increase revenue
producing sites.
The increase in ancillary revenue, net, is primarily due to increased activity
in the Company's rental home program.
18
SUN COMMUNITIES, INC.
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, 2004 and 2003. The "Same Property" data represents
information regarding the operation of communities owned as of January 1, 2003
and June 30, 2004. Site, occupancy, and rent data for those communities is
presented as of the last day of each period presented. The "Total Portfolio"
column differs from the "Same Property" column by including financial and
statistical information for new development and acquisition communities.
SAME PROPERTY TOTAL PORTFOLIO
------------------------ ------------------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands) (in thousands)
Income from rental property $74,008 $71,475 $83,369 $80,374
------- ------- ------- -------
Property operating expenses:
Property operating and maintenance 14,227 14,059 20,296 19,549
Real estate taxes 5,727 5,422 6,519 5,869
------- ------- ------- -------
Property operating expenses 19,954 19,481 26,815 25,418
------- ------- ------- -------
Property net operating income (2) $54,054 $51,994 $56,554 $54,956
======= ======= ======= =======
Number of properties 108 108 132 130
Developed sites 39,719 39,740 45,302 44,520
Occupied sites 34,873 35,613 38,371 38,714
Occupancy % 89.1%(3) 91.3% (3) 85.5% (3) 88.1% (3)
Weighted Average monthly rent per site $ 339 (3) $ 324 (3) $ 339 (3) $ 324 (3)
Sites available for development 1,529 2,001 7,409 7,050
Sites planned for development in next year 61 8 61 8
(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.
(3) Occupancy % and weighted average rent relates to manufactured housing
sites, excluding recreational vehicle sites.
On a same property basis, property net operating income increased by $2.1
million from $52.0 million to $54.1 million, or 4.0 percent. Income from
property increased by $2.5 million from $71.5 million to $74.0 million, or 3.5
percent, due primarily to increases in rents including water and property tax
pass through. Property operating expenses increased by $0.5 million from $19.5
million to $20.0 million, or 2.6 percent, due primarily to increases in real
estate taxes and utility expenses.
19
SUN COMMUNITIES, INC.
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 stockholders and the
unitholders of the Operating Partnership, 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 through a line of credit
expected to close in the third quarter of 2004. The Company considers its
ability to generate cash from operations (anticipated to be approximately $50 to
$60 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 its
stockholders to maintain qualification as a REIT in accordance with the Internal
Revenue Code and make distributions to the Operating Partnership's unitholders.
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 2004. 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 substantial amounts in the acquisition of
properties during the remainder of 2004, depending upon a number of factors. The
Company will finance these investments using the proceeds from its secured
financing transactions and through the assumption of existing debt on the
properties.
Cash and cash equivalents increased by $82.0 million to $106.1 million at June
30, 2004 compared to $24.1 million at December 31, 2003. Net cash provided by
operating activities decreased by $9.6 million to $22.3 million for the six
months ended June 30, 2004 compared to $31.9 million for the six months ended
June 30, 2003.
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, 2003.
20
SUN COMMUNITIES, INC.
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 Operating
Partnership unit redemptions through the collateralization of a significant
portion of its Properties. From time to time, the Company may also issue shares
of its capital stock, issue equity units in the Operating Partnership or sell
selected assets. During the quarter the Company closed on $733 million of
secured financing, in two separate transactions, of which $60.0 million remains
undrawn. Proceeds from these transactions were used to retire $345.0 million of
unsecured notes, pay the related costs of the debt retirement, repay the
Company's existing line of credit, acquire additional properties, and repurchase
the Company's outstanding equity securities. 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, 2003. If
the Company is unable obtain additional debt or equity financing on acceptable
terms, the Company's business, results of operations and financial condition
will be adversely impacted.
At June 30, 2004, the Company's debt to total market capitalization approximated
53.2 percent (assuming conversion of all Common OP Units to shares of common
stock). The debt has a weighted average maturity of approximately 9.2 years and
a weighted average interest rate of 5.0 percent.
Capital expenditures for the six months ended June 30, 2004 and 2003 included
recurring capital expenditures of $3.0 million and $2.7 million, respectively.
Net cash used in investing activities increased by $20.0 million to $56.7
million for the six months ended June 30, 2004 compared to $36.7 million used in
investing activities for the six months ended June 30, 2003. This increase was
due to a $12.3 million sale of notes receivable to Origen, Inc., a $22.5 million
decrease in investment in and advances to an affiliate, and a $22.0 million
decrease in notes receivable and officers' notes, net, offset by a $76.8 million
increase in rental property investment activities.
Net cash provided by financing activities increased by $112.6 million to $116.4
million for the six months ended June 30, 2004 from $3.8 million for the six
months ended June 30, 2003. This increase was primarily due to a $238.4 million
increase in proceeds from notes payable and other debt, net, a $1.2 million
increase of proceeds from issuance of common stock, offset by a $111.0 million
increase in repayments on the line of credit, a $1.8 million increase in
distributions, a $4.9 million increase in payments for deferred financing costs,
and a $9.3 million increase in treasury stock purchase activities, representing
270,200 shares under a one million share buy back authorization.
21
SUN COMMUNITIES, INC.
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 net income to FFO for the
periods ended June 30, 2004 and 2003 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- ------- -------- -------
Net income (loss) $(47,901) $ 4,539 $(42,331) $10,882
Adjustments:
Depreciation and amortization 11,073 10,600 21,914 21,109
Valuation adjustment(4) 889 461 482 675
Allocation of SunChamp losses(5) - 1,087 300 1,937
Income allocated to minority interest (6,331) 650 (5,622) 1,560
-------- ------- -------- -------
Funds from operations $(42,270) $17,337 $(25,257) $36,163
======== ======= ======== =======
Weighted average common shares/OP Units outstanding:
Basic 21,112 20,427 21,144 20,384
======== ======= ======== =======
Diluted 21,112 20,616 21,144 20,538
======== ======= ======== =======
FFO per weighted average Common Share/OP
Unit - Basic $ (2.00) $ 0.85 $ (1.19) $ 1.77
======== ======= ======== =======
FFO per weighted average Common Share/OP
Unit - Diluted $ (2.00) $ 0.84 $ (1.19) $ 1.76
======== ======= ======== =======
(4) 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 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.
(5) 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.
22
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT
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 will be subject to the safe
harbors created thereby. For this purpose, any statements contained in this
filing that relate to prospective events or developments are deemed to be
forward-looking statements. Words such as "believes," "forecasts,"
"anticipates," "intends," "plans," "expects," "may", "will" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements reflect the Company's current views with respect to
future events and financial performance, but involve known and unknown risks and
uncertainties, both general and specific to the matters discussed in this
filing. These risks and uncertainties may cause the actual results of the
Company to be materially different from any future results expressed or implied
by such forward looking statements. Such risks and uncertainties include the
national, regional and local economic climates, the ability to maintain rental
rates and occupancy levels, competitive market forces, changes in market rates
of interest, the ability of manufactured home buyers to obtain financing, the
level of repossessions by manufactured home lenders and those referenced under
the headings entitled "Factors That May Affect Future Results" or "Risk Factors"
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003 and the Company's filings with the Securities and Exchange
Commission. The forward-looking statements contained in this Form 10-Q speak
only as of the date hereof and the Company expressly disclaims any obligation to
provide public updates, revisions or amendments to any forward-looking
statements made herein to reflect changes in the Company's expectations of
future events.
23
SUN COMMUNITIES, INC.
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 $81.2 million and $176.1 million as of
June 30, 2004 and 2003, 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, 2004 and 2003, the Company believes its interest expense
would have increased or decreased by approximately $2.5 million and $2.5 million
based on the $245.9 million and $246.7 million average balance outstanding under
the Company's variable rate debt facilities for the six months ended June 30,
2004 and 2003, respectively.
Additionally, the Company had $14.7 million and $30.6 million LIBOR based
variable rate mortgage and other notes receivables as of June 30, 2004 and 2003,
respectively. If LIBOR increased or decreased by 1.0 percent during the six
months ended June 30, 2004 and 2003, the Company believes interest income would
have increased or decreased by approximately $0.2 million and $0.3 million based
on the $24.0 million and $28.8 million average balance outstanding on all
variable rate notes receivable for the six months ended June 30, 2004 and 2003,
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.
24
SUN COMMUNITIES, INC.
ITEM 4. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of the Company's
management, including the 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,
2004, that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
25
SUN COMMUNITIES, INC.
PART II
ITEM 2. (e) - CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company announced a program to purchase up to 1,000,000 shares of its common
stock on January 2, 2003. The results of this stock repurchase program for the
three months ended June 30, 2004 are as follows:
TOTAL NUMBER OF
SHARES PURCHASED AS MAXIMUM NUMBER OF
AVERAGE PART OF PUBLICLY SHARES THAT MAY YET BE
TOTAL NUMBER OF PRICE PAID ANNOUNCED PLANS OR PURCHASED UNDER THE
PERIOD SHARES PURCHASED PER SHARE PROGRAMS PLANS OR PROGRAMS
- -----------------------------------------------------------------------------------------------------
04/01/04 to 04/30/04 - - - 1,000,000
- -----------------------------------------------------------------------------------------------------
05/01/04 to 05/31/04 264,100 $ 35.20 264,100 735,900
- -----------------------------------------------------------------------------------------------------
06/01/04 to 06/30/04 6,100 $ 37.04 6,100 729,800
- -----------------------------------------------------------------------------------------------------
Total 270,200 $ 35.25 270,200 729,800
- -----------------------------------------------------------------------------------------------------
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 20, 2004, the Company held its Annual Meeting of Shareholders. The
following matters were voted upon at the meeting:
(a) The election of two directors to serve until the 2007 Annual Meeting of
Shareholders or until their respective successors shall be elected and shall
qualify. The results of the election appear below:
% OF SHARES % OF SHARES
NOMINEES FOR VOTING AGAINST VOTING WITHHELD
-------- --- ------ ------- ------ --------
Clunet R. Lewis 17,023,541 95.5 -0- -0- 796,730
Arthur A. Weiss 17,127,286 96.1 -0- -0- 692,985
(b) The approval of the Sun Communities, Inc., 2004 Non-Employee Director
Option Plan. The results of the vote appear below:
% OF SHARES % OF SHARES
FOR VOTING AGAINST VOTING NO VOTE ABSTAIN
--- ------ ------- ------ --------- -------
14,568,456 94.2 901,440 5.8 2,232,668 117,706
26
SUN COMMUNITIES, INC.
PART II, CONTINUED
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 15, 2004, filed to report that the Company launched a
tender offer to purchase any or all of the $350 million principal amount of its
outstanding unsecured notes.
Form 8-K, dated July 28, 2004, furnished for the purpose of reporting, under
Item-12-Results of Operations and Financial Condition, the Company's 2004 second
quarter earnings and results of operations.
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 6, 2004
SUN COMMUNITIES, INC.
BY: /s/ Jeffrey P. Jorissen
------------------------------------------------
Jeffrey P. Jorissen, Chief Financial Officer
and Secretary
(Duly authorized officer and principal
financial officer)
28
SUN COMMUNITIES, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Form of Loan Agreement dated June 9, 2004 by and among Sun
Candlewick LLC, Sun Silver Star LLC and Aspen-Holland Estates,
LLC, as Borrowers, and Bank of America, N.A., as Lender.
10.2 Schedule identifying substantially identical agreements to Exhibit
10.1.
10.3 Form of Loan Agreement dated June 9, 2004 by and between Sun Pool
8 LLC, as Borrower, and Bank of America, N.A., as Lender.
10.4 Schedule identifying substantially identical agreements to Exhibit
10.3.
10.5 Form of Loan Agreement dated June 9, 2004 by and between Sun
Continental Estates LLC as Borrower, and Bank of America, N.A., as
Lender.
10.6 Schedule identifying substantially identical agreements to Exhibit
10.5.
10.7 Form of Loan Agreement dated June 9, 2004 by and between Sun
Indian Creek LLC, as Borrower, and Bank of America, N.A., as
Lender.
10.8 Schedule identifying substantially identical agreements to Exhibit
10.8.
10.9 Amended And Restated Master Credit Facility Agreement dated April
28, 2004 by and among Sun Secured Financing LLC, Aspen Ft. Collins
Limited Partnership, Sun Secured Financing Houston Limited
Partnership, Sun Communities Finance, LLC, Sun Holly Forest LLC,
Sun Saddle Oak LLC, as Borrowers, and Arcs Commercial Mortgage
Co., L.P., as Lender.
10.9.1 Appendix I (definitions) to Amended And Restated Master Credit
Facility Agreement dated April 28, 2004 by and among Sun Secured
Financing LLC, Aspen Ft. Collins Limited Partnership, Sun Secured
Financing Houston Limited Partnership, Sun Communities Finance,
LLC, Sun Holly Forest LLC, Sun Saddle Oak LLC, as Borrowers, and
Arcs Commercial Mortgage Co., L.P., as Lender.
10.10 Fixed Facility Note dated April 5, 2004 made by Sun Secured
Financing LLC, Aspen - Ft. Collins Limited Partnership and Sun
Secured Financing Houston Limited Partnership, in favor of Arcs
Commercial Mortgage Co., L.P., in the original principal amount of
$77,362,500.
10.11 Fixed Facility Note dated April 28, 2004 made by Sun Secured
Financing LLC, Sun Secured Financing Houston Limited Partnership,
Aspen - Ft. Collins Limited Partnership, Sun Communities Finance
LLC, Sun Holly Forest LLC and Sun Saddle Oak LLC, in favor of Arcs
Commercial Mortgage Co., L.P., in the original principal amount of
$100,000,000.
29
SUN COMMUNITIES, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.12 Variable Facility Note dated April 28, 2004 made by Sun Secured
Financing LLC, Sun Secured Financing Houston Limited Partnership,
Aspen - Ft. Collins Limited Partnership, Sun Communities Finance
LLC, Sun Holly Forest LLC and Sun Saddle Oak LLC, in favor of Arcs
Commercial Mortgage Co., L.P., in the original principal amount of
$60,275,000.
10.13 Fourth Amended and Restated Variable Facility Note dated April 28,
2004 made by Sun Secured Financing LLC, Sun Secured Financing
Houston Limited Partnership, Aspen - Ft. Collins Limited
Partnership, Sun Communities Finance LLC, Sun Holly Forest LLC and
Sun Saddle Oak LLC, in favor of Arcs Commercial Mortgage Co.,
L.P., in the original principal amount of $152,362,500.
31.1 Certification of Chief Executive Officer 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 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 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
30