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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 SEPTEMBER 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 September 30, 2004: 18,296,204
SUN COMMUNITIES, INC.
INDEX
PAGES
-----
PART I
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003 3
Consolidated Statements of Operations for the periods
ended September 30, 2004 and 2003 4
Consolidated Statements of Comprehensive Income (Loss) for the periods
ended September 30, 2004 and 2003 5
Consolidated Statements of Cash Flows for the periods
ended September 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 15-24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 26
PART II
Item 2.(c) Changes in Securities and Use of Proceeds 27
Item 6. Exhibits required by Item 601 of Regulation S-K 27
Signatures 28
2
SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
ASSETS
Investment in rental property, net $ 1,088,970 $ 1,010,484
Cash and cash equivalents 69,181 24,058
Inventory of manufactured homes 21,352 17,236
Investment in and advances to affiliate 50,810 50,667
Notes and other receivables 44,940 74,828
Other assets 56,105 44,301
--------------- ---------------
Total assets $ 1,331,358 $ 1,221,574
=============== ===============
LIABILITIES
Line of credit $ - $ 99,000
Debt 999,793 674,328
Other liabilities 30,015 24,833
--------------- ---------------
Total liabilities 1,029,808 798,161
--------------- ---------------
Minority interests 85,311 96,803
--------------- ---------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000 shares
authorized, none issued - -
Common stock, $.01 par value, 100,000 shares
authorized, 19,495 and 19,192 issued
in 2004 and 2003, respectively 195 192
Paid-in capital 455,248 446,211
Officer's notes (9,884) (10,299)
Unearned compensation (13,104) (7,337)
Accumulated comprehensive earnings (1,536) (1,294)
Distributions in excess of accumulated earnings (171,214) (94,479)
Treasury stock, at cost, 1,199 and 202 shares
in 2004 and 2003, respectively (43,466) (6,384)
--------------- ---------------
Total stockholders' equity 216,239 326,610
--------------- ---------------
Total liabilities and stockholders' equity $ 1,331,358 $ 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 SEPTEMBER 30, 2004 AND 2003
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
REVENUES
Income from rental property $ 40,960 $ 39,090 $ 124,329 $ 119,465
Revenue from home sales 4,837 4,357 14,893 14,072
Ancillary revenues, net 394 341 1,510 1,217
Interest and other income 1,937 3,769 5,744 9,331
------------ ------------ ------------ ------------
Total revenues 48,128 47,557 146,476 144,085
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Property operating and maintenance 10,738 10,091 31,034 29,640
Cost of home sales 3,812 3,282 12,074 9,468
Real estate taxes 3,520 2,937 10,039 8,805
General and administrative - rental property 3,173 2,581 8,619 7,458
General and administrative - home sales 1,413 1,353 4,474 4,364
Depreciation and amortization 10,987 11,036 33,076 32,486
Interest 11,812 7,377 31,177 26,684
Extinguishment of debt - - 51,643 -
Deferred financing costs related to extinguished debt - - 5,557 -
Florida storm damage 600 - 600 -
------------ ------------ ------------ ------------
Total expenses 46,055 38,657 188,293 118,905
------------ ------------ ------------ ------------
Income (loss) before equity income (loss) from affiliate,
discontinued operations, and minority interests 2,073 8,900 (41,817) 25,180
Equity income (loss) from affiliate 749 140 1,049 (174)
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
minority interests 2,822 9,040 (40,768) 25,006
Less income (loss) allocated to minority interests:
Preferred OP Units 2,192 2,136 6,555 6,397
Common OP Units 76 816 (5,546) 2,284
------------ ------------ ------------ ------------
Income (loss) from continuing operations 554 6,088 (41,777) 16,325
Income from discontinued operations - 333 - 978
------------ ------------ ------------ ------------
Net income (loss) $ 554 $ 6,421 $ (41,777) $ 17,303
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 18,100 18,504 18,480 18,065
============ ============ ============ ============
Diluted 18,246 18,683 18,480 18,220
============ ============ ============ ============
Basic earnings (loss) per share:
Continuing operations $ 0.03 $ 0.33 $ (2.26) $ 0.91
Discontinued operations - 0.02 - 0.05
------------ ------------ ------------ ------------
Net income (loss) $ 0.03 $ 0.35 $ (2.26) $ 0.96
============ ============ ============ ============
Diluted earnings (loss) per share:
Continuing operations $ 0.03 $ 0.32 $ (2.26) $ 0.90
Discontinued operations - 0.02 - 0.05
------------ ------------ ------------ ------------
Net income (loss) $ 0.03 $ 0.34 $ (2.26) $ 0.95
============ ============ ============ ============
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 SEPTEMBER 30, 2004 AND 2003
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ---------------------
2004 2003 2004 2003
------- ------- --------- ---------
Net income (loss) $ 554 $ 6,421 $(41,777) $ 17,303
Unrealized income (loss) on interest rate swaps (1,616) 2,033 (242) (347)
======= ======= ======== ========
Comprehensive income (loss) $(1,062) $ 8,454 $(42,019) $ 16,956
======= ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements
5
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (41,777) $ 17,303
Adjustments to reconcile net (loss) income to cash provided by operating activities:
Income (loss) allocated to minority interests (5,546) 2,284
Income from discontinued operations allocated to minority interests - 136
Depreciation and amortization 34,399 32,486
Amortization of deferred financing costs 1,403 1,101
Extinguishment of debt 51,643 -
Write off of deferred financing costs related to extinguished debt 5,557 -
Equity (income) loss from affiliate (1,049) 174
Increase in inventory and other assets (14,307) (9,554)
Increase in accounts payable and other liabilities 5,182 308
--------- ---------
Net cash provided by operating activities 35,505 44,238
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in rental properties (118,392) (20,143)
Investment in and advances to affiliate 988 (50,004)
Proceeds from sale of installment loans on manufactured homes to Origen 12,463 61,994
Purchase of installment loans on manufactured homes from Origen - (74,206)
Decrease in notes receivable and officers' notes, net 17,840 10,095
--------- ---------
Net cash used in investing activities (87,101) (72,264)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and OP units, net 7,927 25,210
Borrowings (repayments) on line of credit, net (99,000) 39,500
Payments to redeem notes payable and other debt (422,289) (133,432)
Proceeds from notes payable and other debt 696,064 150,000
Payments for deferred financing costs (9,498) (1,995)
Treasury stock purchases (37,082) -
Distributions (39,403) (36,737)
--------- ---------
Net cash provided by financing activities 96,719 42,546
--------- ---------
Net increase in cash and cash equivalents 45,123 14,520
Cash and cash equivalents, beginning of period 24,058 2,664
--------- ---------
Cash and cash equivalents, end of period $ 69,181 $ 17,184
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest including capitalized amounts of $341 and $1,623 for
the nine months ended September 30, 2004 and 2003, respectively $ 35,085 $ 24,343
Noncash investing and financing activities:
Issuance of partnership units to retire capitalized lease obligations $ 4,725 $ 4,170
Unrealized losses on interest rate swaps $ 241 $ 347
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):
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
Land $ 111,513 $ 104,541
Land improvements and buildings 1,144,930 1,048,576
Furniture, fixtures, and equipment 33,683 33,080
Land held for future development 34,318 31,409
Property under development 2,141 2,799
----------- -----------
1,326,585 1,220,405
Less accumulated depreciation (237,615) (209,921)
----------- -----------
Rental property, net $ 1,088,970 $ 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.
During the third quarter of 2004, the Company acquired one manufactured
housing community for $11.6 million consisting of 392 developed sites. The
property was acquired for cash.
Three communities located in northeast Atlanta, GA were purchased
subsequent to quarter end comprising 1150 developed sites. The properties
were purchased for $27.0 million cash and the assumption of $16.0 million
of debt.
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):
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
Mortgage and other notes receivable, with interest payable at a
weighted average interest rate of 7.08%, maturing at various
dates through August 2008, substantially collateralized by
manufactured home communities $ 18,499 $ 41,736
Installment loans on manufactured homes with interest payable
monthly at a weighted average interest rate and maturity of
7.0% and 10 years, respectively. 15,182 24,802
Other receivables 11,259 8,290
------------ ------------
$ 44,940 $ 74,828
============ ============
At September 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 approximately 20% of Origen, Inc.
at September 30, 2004 and its investment is accounted for using the equity
method of accounting. Equity earnings recorded through September 30, 2004
are an estimate of the Company's portion of the anticipated earnings of
Origen, Inc. through September 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):
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
Collateralized term loan, 7.010%, due September 9, 2007 $ 41,017 $ 41,547
Collateralized term loans - CMBS, 4.931-5.320%, due July 1, 2011-2016 496,031 -
Collateralized term loans - FNMA, of which $77.4M is variable, due 2014
at the Company's option, interest at 3.406 - 4.705% and 3.244%
at September 30, 2004 and December 31, 2003, respectively 329,254 152,363
Redeemable preferred OP units, average interest 6.795%,
redeemable at various dates through January 2, 2014 62,123 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 66,351 62,664
------------- -------------
$ 999,793 $ 674,328
============= =============
The collateralized term loans totaling $866.3 million at September 30,
2004 are secured by 93 properties comprising approximately 34,307 sites.
The mortgage notes are collateralized by 12 communities comprising
approximately 3,815 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.
In a prior 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 September 30,
2004, $60 million of the additional FNMA financing remains undrawn.
On September 30, 2004, the Company closed on a $90.0 million unsecured
revolving line of credit bearing interest at LIBOR + 1.75%. Subsequent to
quarter end, the line of credit was expanded an additional $25.0 million
to a total of $115.0 million. The entire $115.0 million remains available
for use.
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
September 30, 2004 and 2003 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Interest income $ 1,744 $ 3,548 $ 4,993 $ 8,739
Brokerage commissions 209 174 717 586
Other income (loss) (16) 47 34 6
---------- ---------- ---------- ----------
$ 1,937 $ 3,769 $ 5,744 $ 9,331
========== ========== ========== ==========
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 SEPTEMBER 30, 2004 NINE MONTHS ENDED SEPTEMBER 30, 2004
------------------------------------- ------------------------------------
PROPERTY MANUFACTURED PROPERTY MANUFACTURED
OPERATIONS HOME SALES COMBINED OPERATIONS HOME SALES COMBINED
---------- ---------- -------- ---------- ---------- --------
Revenues $ 40,960 $ 4,837 $ 45,797 $ 124,329 $ 14,893 $ 139,222
Operating expenses/Cost of sales 14,258 3,812 18,070 41,073 12,074 53,147
---------- ---------- ---------- ---------- ---------- ----------
Net operating income (1)/Gross profit 26,702 1,025 27,727 83,256 2,819 86,075
Adjustments to arrive at net loss:
Other revenues 1,931 400 2,331 5,547 1,707 7,254
Selling, general and administrative (3,173) (1,413) (4,586) (8,619) (4,474) (13,093)
Depreciation and amortization (10,598) (389) (10,987) (32,047) (1,029) (33,076)
Interest expense (11,772) (40) (11,812) (31,085) (92) (31,177)
Debt extinguishment costs - - - (51,643) - (51,643)
Deferred financing costs related to extinguished debt - - - (5,557) - (5,557)
Florida storm damage (600) - (600) (600) - (600)
Equity income from affiliate 749 - 749 1,049 - 1,049
Income allocated to minority interest (2,268) - (2,268) (1,009) - (1,009)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $ 971 $ (417) $ 554 $ (40,708) $ (1,069) $ (41,777)
========== ========== ========== ========== ========== ==========
THREE MONTHS ENDED SEPTEMBER 30, 2003 NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------- ------------------------------------
PROPERTY MANUFACTURED PROPERTY MANUFACTURED
OPERATIONS HOME SALES COMBINED OPERATIONS HOME SALES COMBINED
---------- ---------- -------- ---------- ------------ --------
Revenues $ 39,090 $ 4,357 $ 43,447 $ 119,465 $ 14,072 $ 133,537
Operating expenses 13,028 3,282 16,310 38,445 9,468 47,913
---------- ---------- ---------- ---------- ---------- ----------
Net operating income (1)/Gross profit 26,062 1,075 27,137 81,020 4,604 85,624
Adjustments to arrive at net loss:
Other revenues 1,871 2,239 4,110 4,967 5,581 10,548
Selling, general and administrative (2,581) (1,353) (3,934) (7,458) (4,364) (11,822)
Depreciation and amortization (10,737) (299) (11,036) (31,736) (750) (32,486)
Interest expense (7,353) (24) (7,377) (26,559) (125) (26,684)
Equity income (loss) from affiliate 140 - 140 (174) - (174)
Income allocated to minority interest (2,952) - (2,952) (8,681) - (8,681)
Income from discontinued operations 333 - 333 978 - 978
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 4,783 $ 1,638 $ 6,421 $ 12,357 $ 4,946 $ 17,303
========== ========== ========== ========== ========== ==========
(1) Investors in and analysts following the real estate industry utilize net
operating income ("NOI") as a supplemental performance measure. NOI is derived
from revenues (determined in accordance with GAAP) minus property operating
expenses and real estate taxes (determined in accordance with GAAP). NOI does
not represent cash generated from operating activities in accordance with GAAP
and should not be considered to be an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to be an alternative to cash flow from operating activities (determined in
accordance with
10
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SEGMENT REPORTING (AMOUNTS IN THOUSANDS), CONTINUED:
GAAP) as a measure of the Company's liquidity; nor is it indicative of funds
available for the Company's cash needs, including its ability to make cash
distributions. The Company believes that net income is the most directly
comparable GAAP measurement to net operating income. Because of the
inclusion of items such as interest, depreciation and amortization, the use
of net income as a performance measure is limited as these items may not
accurately reflect the actual change in market value of a property, in the
case of depreciation and in the case of interest, may not necessarily be
linked to the operating performance of a real estate asset, as it is often
incurred at a parent company level and not at a property level. The Company
believes that net operating income is helpful to investors as a measure of
operating performance because it is an indicator of the return on property
investment, and provides a method of comparing property performance over
time. The Company uses NOI as a key management tool when evaluating
performance and growth of particular properties and/or groups of properties.
The principal limitation of NOI is that it excludes depreciation,
amortization and non-property specific expenses such as general and
administrative expenses, all of which are significant costs, and therefore,
NOI is a measure of the operating performance of the properties of the
Company rather than of the Company overall.
SEPTEMBER 30, 2004 DECEMBER 31, 2003
-------------------------------------- ------------------------------------
PROPERTY MANUFACTURED PROPERTY MANUFACTURED
SELECTED BALANCE SHEET DATA OPERATIONS HOME SALES COMBINED OPERATIONS HOME SALES COMBINED
- --------------------------- ---------- ----------- ---------- ---------- ---------- ----------
Identifiable assets:
Investment in rental property, net $1,046,275 $ 42,695 $1,088,970 $ 980,149 $ 30,335 $1,010,484
Cash and cash equivalents 69,285 (104) 69,181 24,043 15 24,058
Inventory of manufactured homes - 21,352 21,352 - 17,236 17,236
Investments in and advances to affiliate 50,810 - 50,810 50,667 - 50,667
Notes and other receivables 43,389 1,551 44,940 61,534 13,294 74,828
Other assets 53,366 2,739 56,105 41,613 2,688 44,301
---------- ----------- ---------- ---------- ---------- ----------
Total assets $1,263,125 $ 68,233 $1,331,358 $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
11
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (IN THOUSANDS), CONTINUED:
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, 2004 totals a negative $0.3
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 a
liability of $1.4 million and $0.9 million as of September 30, 2004 and
December 31, 2003, respectively.
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.
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 September 30, 2004 and 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income (loss), as reported $ 554 $ 6,421 $ (41,777) $ 17,303
Stock-based compensation expense under fair value method (17) (47) (46) (227)
---------- ---------- ---------- ----------
Pro forma net income (loss) $ 537 $ 6,374 $ (41,823) $ 17,076
========== ========== ========== ==========
Earnings (loss) per share (Basic), as reported $ 0.03 $ 0.35 $ (2.26) $ 0.96
========== ========== ========== ==========
Earnings (loss) per share (Basic), pro forma $ 0.03 $ 0.34 $ (2.26) $ 0.95
========== ========== ========== ==========
Earnings (loss) per share (Diluted), as reported $ 0.03 $ 0.34 $ (2.26) $ 0.95
========== ========== ========== ==========
Earnings (loss) per share (Diluted), pro forma $ 0.03 $ 0.34 $ (2.26) $ 0.94
========== ========== ========== ==========
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.
12
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. EARNINGS (LOSS) PER SHARE (IN THOUSANDS):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2004 2003 2004 2003
------- ------- -------- -------
Earnings (loss) used for basic and diluted earnings (loss) per share:
Continuing operations $ 554 $ 6,088 $(41,777) $16,325
======= ======= ======== =======
Discontinued operations $ - $ 333 $ - $ 978
======= ======= ======== =======
Weighted average shares used for basic earnings (loss) per share 18,100 18,504 18,480 18,065
Dilutive securities:
Stock options and other 146 179 - 155
------- ------- -------- -------
Diluted weighted average shares 18,246 18,683 18,480 18,220
======= ======= ======== =======
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 nine months
ending September 30, 2004 is based upon weighted average shares prior to
dilution, as the effect of including potentially dilutive securities in the
calculation during this period would be anti-dilutive.
The Company also has the following potentially convertible securities which,
if converted, may impact dilution:
NUMBER OF
CONVERTIBLE SECURITIES 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, 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.
13
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 for options granted after June 15,
2005. The Company has not assessed the impact of the proposed statement on
its financial statements.
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 nine
months ended September 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 September 30, 2004 and 2003
For the three months ended September 30, 2004, income from continuing operations
before minority interest decreased by $6.2 million from $9.0 million to $2.8
million, when compared to the three months ended September 30, 2003. The
decrease was due to increased expenses of $6.8 million, costs related to Florida
storm damage of $0.6 million, offset by increased revenues of $0.6 million and
increased equity income from affiliates of $0.6 million as described in more
detail below.
Income from rental property increased by $1.9 million from $39.1 million to
$41.0 million, or 4.9 percent, due primarily to acquisitions made during the
nine months ended September 30, 2004, rent increases, and other community
revenues.
Interest and other income decreased by $1.9 million from $3.8 million to $1.9
million, or 50.0 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 $0.6 million from $10.1
million to $10.7 million, or 5.9 percent. The increase was due to increases in
utility costs ($0.2 million), payroll expense ($0.3 million), and other
miscellaneous expenses ($0.1 million).
Real estate taxes increased by $0.6 million from $2.9 million to $3.5 million,
or 20.7 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 $0.6
million from $2.6 million to $3.2 million, or 23.0 percent, due to an increase
in payroll and severance costs ($0.3 million), systems training costs ($0.1
million), and other miscellaneous expenses ($0.2 million).
Interest expense increased by $4.4 million from $7.4 million to $11.8 million,
or 59.5 percent, primarily due to increased debt levels somewhat offset by lower
interest rates.
Equity income from affiliate (Origen, Inc.) of $0.7 million in the quarter
represents an estimate of the Company's pro-rata share of earnings for the nine
months ended September 30, 2004 less amounts previously recognized.
The cost of home sales increase of $0.5 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 September 30, 2004 and 2003:
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE/ PERCENT
2004 2003 (DECREASE) CHANGE
------- ------ --------- ------
New home sales revenues $2,613 $2,300 $ 313 13.6%
Cost of sales 1,950 1,713 237 13.8%
------ ------ ------ ------
Gross profit 663 587 76 12.9%
====== ====== ====== ======
Pre-owned home sales revenues $2,224 $2,057 $ 167 8.1%
Cost of sales 1,862 1,569 293 18.7%
------ ------ ------ ------
Gross profit 362 488 (126) - 25.8%
====== ====== ====== ======
Ancillary revenue, net $ 394 $ 341 $ 53 15.5%
====== ====== ====== ======
Home sales volumes:
New homes 42 41 1 2.4%
Pre-owned homes 100 109 (9) - 8.3%
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 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 nine months ended September 30, 2004 and 2003
For the nine months ended September 30, 2004, income from continuing operations
before minority interest decreased by $65.8 million from $25.0 million to a loss
of $40.8 million, when compared to the nine months ended September 30, 2003. The
decrease was due to increased expenses of $11.6 million, debt extinguishment
costs of $51.6 million, deferred financing costs related to the extinguished
debt of $5.6 million, and Florida storm damage of $0.6 million, offset by
increased revenues of $2.4 million and increased equity income from affiliates
of $1.2 million as described in more detail below.
Income from rental property increased by $4.8 million from $119.5 million to
$124.3 million, or 4.0 percent, due to property acquisitions, rent increases,
and other community revenues.
Interest and other income decreased by $3.6 million from $9.3 million to $5.7
million, or 38.7 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 $1.4 million from $29.6
million to $31.0 million, or 4.7 percent. The increase was due to increases in
utility costs ($0.6 million), repair and maintenance expense ($0.1 million),
payroll expense ($0.3 million), advertising costs ($0.1 million), and
miscellaneous other expenses ($0.3 million).
Real estate taxes increased by $1.2 million from $8.8 million to $10.0 million,
or 13.6 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 $1.2
million from $7.5 million to $8.6 million, primarily due to training costs
related to the Company's systems conversion and payroll costs.
Depreciation and amortization increased by $0.6 million from $32.5 million to
$33.1 million, or 1.8 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 affiliate of $1.0 million represents an estimate of the
Company's prorata interest in the operations of Origen, Inc. for the nine months
ended September 30, 2004.
The remaining cost of home sales increase of $2.6 million is discussed in detail
below.
Sun Home Services
The following table summarizes certain financial and statistical data for Sun
Home Services for the nine months ended September 30, 2004 and 2003:
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ PERCENT
2004 2003 (DECREASE) CHANGE
------- ------- --------- ------
New home sales revenues $ 8,150 $10,513 $(2,363) - 22.5%
Cost of sales 6,370 6,995 (625) - 8.9%
------- ------- ------- ------
Gross profit 1,780 3,518 (1,738) - 49.4%
======= ======= ======= ======
Pre-owned home sales revenues $ 6,743 $ 3,559 $ 3,184 89.5%
Cost of sales 5,704 2,473 3,231 130.7%
------- ------- ------- ------
Gross profit 1,039 1,086 (47) - 4.3%
======= ======= ======= ======
Ancillary revenue, net $ 1,510 $ 1,217 $ 293 24.1%
======= ======= ======= ======
Home sales volumes:
New homes 139 198 (59) - 29.8%
Pre-owned homes 308 200 108 54.0%
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 nine months ended September 30, 2004 and 2003. The "Same Property" data
represents information regarding the operation of communities owned as of
January 1, 2003 and September 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 $109,736 $106,069 $124,329 $119,465
-------- -------- -------- --------
Property operating expenses:
Property operating and maintenance 21,630 21,127 31,034 29,640
Real estate taxes 8,716 8,133 10,039 8,805
-------- -------- -------- --------
Property operating expenses 30,346 29,260 41,073 38,445
-------- -------- -------- --------
Property net operating income (2) $ 79,390 $ 76,809 $ 83,256 $ 81,020
======== ======== ======== ========
Number of properties 108 108 133 130
Developed sites 39,706 39,744 45,726 44,542
Occupied sites 34,605 35,315 38,449 38,399
Occupancy % 88.4%(3) 90.4%(3) 84.7%(3) 87.2%(3)
Weighted Average monthly rent per site $ 342 (3) $ 326 (3) $ 340 (3) $ 327 (3)
Sites available for development 1,521 1,931 7,355 6,960
Sites planned for development in next year 5 5 5 5
(2) Investors in and analysts following the real estate industry utilize net
operating income ("NOI") as a supplemental performance measure. NOI is
derived from revenues (determined in accordance with GAAP) minus property
operating expenses and real estate taxes (determined in accordance with
GAAP). NOI does not represent cash generated from operating activities in
accordance with GAAP and should not be considered to be an alternative to
net income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to be an alternative to cash flow from
operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity; nor is it indicative of funds available for the
Company's cash needs, including its ability to make cash distributions. The
Company believes that net income is the most directly comparable GAAP
measurement to net operating income. Because of the inclusion of items such
as interest, depreciation and amortization, the use of net income as a
performance measure is limited as these items may not accurately reflect the
actual change in market value of a property, in the case of depreciation and
in the case of interest, may not necessarily be linked to the operating
performance of a real estate asset, as it is often incurred at a parent
company level and not at a property level. The Company believes that net
operating income is helpful to investors as a measure of operating
performance because it is an indicator of the return on property investment,
and provides a method of comparing property performance over time. The
Company uses NOI as a key management tool when evaluating performance and
growth of particular properties and/or groups of properties. The principal
limitation of NOI is that it excludes depreciation, amortization and
non-property specific expenses such as general and administrative expenses,
all of which are significant costs, and therefore, NOI is a measure of the
operating performance of the properties of the Company rather than of the
Company overall.
(3) Occupancy % and weighted average rent relates to manufactured housing sites,
excluding recreational vehicle sites.
19
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAME PROPERTY INFORMATION, CONTINUED
On a same property basis, property net operating income increased by $2.6
million from $76.8 million to $79.4 million, or 3.4 percent. Income from
property increased by $3.6 million from $106.1 million to $109.7 million, or 3.4
percent, due primarily to increases in rents including water and property tax
pass through. Property operating expenses increased by $1.0 million from $29.3
million to $30.3 million, or 3.4 percent, due primarily to increases in real
estate taxes and utility expenses.
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, the purchase of new
and pre-owned homes and debt repayment.
The Company expects to meet its short-term liquidity requirements through its
working capital provided by operating activities and through its $115.0 million
line of credit. 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 $45.1 million to $69.2 million at
September 30, 2004 compared to $24.1 million at December 31, 2003. Net cash
provided by operating activities decreased by $8.7 million to $35.5 million for
the nine months ended September 30, 2004 compared to $44.2 million for the nine
months ended September 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. 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 September 30, 2004, the Company's debt to total market capitalization
approximated 53.6 percent (assuming conversion of all Common OP Units to shares
of common stock). The debt has a weighted average maturity of approximately 8.8
years and a weighted average interest rate of 5.0 percent.
Capital expenditures for the nine months ended September 30, 2004 and 2003
included recurring capital expenditures of $4.9 million and $4.7 million,
respectively.
Net cash used in investing activities increased by $14.8 million to $87.1
million for the nine months ended September 30, 2004 compared to $72.3 million
used in investing activities for the nine months ended September 30, 2003. This
increase was due to a $98.2 million increase in rental property investment
activities and a $49.5 million decrease in sale of notes receivable to Origen,
Inc., offset by a $51.0 million decrease in investment in and advances to an
affiliate, a $74.2 million decrease in purchases of installments loans from
Origen, Inc., and a $7.7 million decrease in notes receivable and officers'
notes, net.
Net cash provided by financing activities increased by $54.2 million to $96.7
million for the nine months ended September 30, 2004 from $42.5 million for the
nine months ended September 30, 2003. This increase was primarily due to a
$257.3 million increase in proceeds from notes payable and other debt, net,
offset by a $17.3 million decrease of proceeds from issuance of common stock,
$138.5 million increase in repayments on the line of credit, a $2.7 million
increase in distributions, a $7.5 million increase in payments for deferred
financing costs, and a $37.1 million increase in treasury stock purchase
activities, representing 1,000,000 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:
Funds from operations ("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 depreciable operating property, plus real estate-related depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint ventures. FFO is a non-GAAP financial measure that management believes is
a useful supplemental measure of the Company's operating performance. Management
generally considers FFO to be a useful measure for reviewing comparative
operating and financial performance because, by excluding gains and losses
related to sales of previously depreciated operating real estate assets and
excluding real estate asset depreciation and amortization (which can vary among
owners of identical assets in similar condition based on historical cost
accounting and useful life estimates), FFO provides a performance measure that,
when compared year over year, reflects the impact to operations from trends in
occupancy rates, rental rates and operating costs, providing perspective not
readily apparent from net income. Management believes that the use of FFO has
been beneficial in improving the understanding of operating results of REITs
among the investing public and making comparisons of REIT operating results more
meaningful.
Because FFO excludes significant economic components of net income including
depreciation and amortization, FFO should be used as an adjunct to net income
and not as an alternative to net income. The principal limitation of FFO is that
it does not represent cash flow from operations as defined by GAAP 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. FFO only provides investors with an additional performance
measure that, when combined with measures computed in accordance with GAAP such
as net income, cash flow from operating activities, investing activities and
financing activities, provide investors with an indication of the Company's
ability to service debt and to fund acquisitions and other expenditures. Other
REITS may use different methods for calculating FFO and, accordingly, the
Company's FFO may not be comparable to other REITs.
The following table reconciles net income to FFO and calculates FFO data for
both basic and diluted purposes for the periods ended September 30, 2004 and
2003 (in thousands):
22
SUN COMMUNITIES, INC.
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,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss) $ 554 $ 6,421 $(41,777) $ 17,303
Adjustments:
Depreciation and amortization 11,195 10,708 33,109 31,817
Valuation adjustment(4) (180) (1,949) 302 (1,274)
Allocation of SunChamp losses(5) - 1,221 300 3,158
Income allocated to minority interest 76 860 (5,546) 2,420
-------- -------- --------- --------
Funds from operations $ 11,645 $ 17,261 $(13,612) $ 53,424
======== ======== ========= ========
FFO - Continuing Operations $ 11,645 $ 16,775 $(13,612) $ 51,886
======== ======== ========= ========
FFO - Discontinued Operations $ - $ 486 $ 0 $ 1,538
======== ======== ========= ========
Weighted average common shares/OP Units outstanding:
Basic 20,574 20,989 20,954 20,586
======== ======== ========= ========
Diluted 20,720 21,168 20,954 20,741
======== ======== ========= ========
Continuing Operations:
FFO per weighted average Common Share/OP Unit - Basic $ 0.57 $ 0.80 $ (0.65) $ 2.52
======== ======== ========= ========
FFO per weighted average Common Share/OP Unit - Diluted $ 0.56 $ 0.79 $ (0.65) $ 2.50
======== ======== ========= ========
Discontinued Operations:
FFO per weighted average Common Share/OP Unit - Basic $ - $ 0.02 $ - $ 0.08
======== ======== ========= ========
FFO per weighted average Common Share/OP Unit - Diluted $ - $ 0.03 $ - $ 0.08
======== ======== ========= ========
Total Operations:
FFO per weighted average Common Share/OP Unit - Basic $ 0.57 $ 0.82 $ (0.65) $ 2.60
======== ======== ========= ========
FFO per weighted average Common Share/OP Unit - Diluted $ 0.56 $ 0.82 $ (0.65) $ 2.58
======== ======== ========= ========
(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 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 imperfection related to hedging
correlation in these swaps is reflected currently in cash as interest, the
valuation adjustments reflect volatility that would distort the comparative
measurement of FFO and on a net basis approximate zero. Accordingly, 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 (based on SunChamp as a stand-alone entity) 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 from SunChamp as a stand-alone entity under
generally accepted accounting principles are effectively reallocated to the
note for purposes of calculating Funds from Operations. A situation such as
this is not contemplated in the NAREIT definition of FFO due to the unique
circumstances of the transaction. Although not comparable to the precise
NAREIT definition, the Company believes the inclusion of this item in its
calculation of FFO to be appropriate as noted above.
23
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.
24
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 $105.6 million and $207.7 million as of
September 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 nine months ended September 30, 2004 and 2003, the Company believes its
interest expense would have increased or decreased by approximately $1.9 million
and $2.3 million based on the $190.9 million and $228.0 million average balance
outstanding under the Company's variable rate debt facilities for the nine
months ended September 30, 2004 and 2003, respectively.
Additionally, the Company had $14.7 million and $31.6 million LIBOR based
variable rate mortgage and other notes receivables as of September 30, 2004 and
2003, respectively. If LIBOR increased or decreased by 1.0 percent during the
nine months ended September 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 $20.9 million and $29.6 million average balance outstanding
on all variable rate notes receivable for the nine months ended September 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.
25
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
September 30, 2004, that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over
financial reporting.
26
SUN COMMUNITIES, INC.
PART II
ITEM 2. (c) - 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 September 30, 2004 are as follows:
TOTAL NUMBER OF
SHARES PURCHASED AS
AVERAGE PART OF PUBLICLY MAXIMUM NUMBER OF SHARES THAT
TOTAL NUMBER OF PRICE PAID ANNOUNCED PLANS OR MAY YET BE PURCHASED UNDER THE
PERIOD SHARES PURCHASED PER SHARE PROGRAMS PLANS OR PROGRAMS
------ ---------------- --------- -------------------- -------------------------------
07/01/04-07/31/04 260,400 $ 37.69 260,400 469,400
08/01/04-08/31/04 389,000 $ 38.11 389,000 80,400
09/01/04-09/30/04 80,400 $ 38.25 80,400 -
------- -------- ------- -------
Total 729,800 $ 37.98 729,800 -
------- -------- ------- -------
ITEM 6. - EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
See the attached Exhibit Index.
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: November 5, 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 Credit Agreement, dated September 30, 2004, among the Company, the Operating
Partnership, Standard Federal Bank National Association, LaSalle Bank National
Association and other lenders.
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.
29