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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-12616
SUN COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
STATE OF MARYLAND 38-2730780
State of Incorporation I.R.S. Employer I.D. No.
27777 FRANKLIN ROAD
SUITE 200
SOUTHFIELD, MICHIGAN 48034
(248) 208-2500
(Address of principal executive offices and telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ ]
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 Act).
Yes X No
--- ---
As of June 30, 2004, the aggregate market value of the Registrant's stock
held by non-affiliates was approximately $615,000,000 (computed by
reference to the closing sales price of the Registrant's common stock as of June
30, 2004). For this computation, the Registrant has excluded the market value of
all shares of common stock reported as beneficially owned by executive officers
and directors of the Registrant; such exclusion shall not be deemed to
constitute an admission that any such person is an affiliate of the Registrant.
As of March 1, 2005, there were 18,422,518 shares of the Registrant's
common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement to be filed for
its 2005 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Report.
As used in this report, "Company", "Us", "We", "Our" and similar terms
means Sun Communities, Inc., a Maryland corporation, and one or more of its
subsidiaries (including the Operating Partnership (as defined below)).
PART I
ITEM 1. BUSINESS
GENERAL
We are a self-administered and self-managed real estate investment
trust, or REIT. We own, operate, develop and finance manufactured housing
communities concentrated in the midwestern and southeastern United States. We
are a fully integrated real estate company which, together with our affiliates
and predecessors, have been in the business of acquiring, operating and
expanding manufactured housing communities since 1975. As of December 31, 2004,
we owned and operated a portfolio of 136 properties located in eighteen states
(the "Properties"), including 124 manufactured housing communities, five
recreational vehicle communities, and seven properties containing both
manufactured housing and recreational vehicle sites. As of December 31, 2004,
the Properties contained an aggregate of 46,856 developed sites comprised of
41,875 developed manufactured home sites and 4,981 recreational vehicle sites
and an additional 7,277 manufactured home sites suitable for development. In
order to enhance property performance and cash flow, the Company, through Sun
Home Services, Inc., a Michigan corporation ("SHS"), actively markets, sells and
leases new and pre-owned manufactured homes for placement in the Properties.
Our executive and principal property management office is located at
27777 Franklin Road, Suite 200, Southfield, Michigan 48034 and our telephone
number is (248) 208-2500. We have regional property management offices located
in Austin, Texas; Dayton, Ohio; Grand Rapids, Michigan; Elkhart, Indiana; and
Orlando, Florida, and we employed an aggregate of 642 people as of December 31,
2004.
Our website address is www.suncommunities.com and we make available,
free of charge, on or through our website all of our periodic reports, including
our annual report on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K, as soon as reasonably practicable after we file such
reports with the Securities and Exchange Commission.
RECENT DEVELOPMENTS
Recapitalization. The most significant financial event of 2004 was the
restructuring of the Company's capital and operating debt. The Company completed
$734 million of secured debt financings with an average term approximating 10
years and a weighted average interest rate of approximately 5%. The Company also
secured a new $115 million revolving line of credit at LIBOR + 1.75%. The
Company used approximately $440 million of proceeds from the secured debt
financings to retire existing debt. The Company also incurred extinguishment
costs of approximately $57 million in these transactions. Of the remaining $237
million, the Company used $100 million to acquire communities and $37 million
for repurchases of the Company's stock. The Company expects to use the remaining
proceeds to finance some combination of additional property purchases,
additional stock repurchases, and the retirement of Series A Perpetual Preferred
Operating Partnership Units ("PPOP Units").
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Acquisitions. During 2004 the Company acquired nine manufactured
housing communities comprising approximately 2950 developed and 570 undeveloped
sites. The aggregate purchase price was $120.4 million and included the
assumption of approximately $34.3 million in debt. Three of the communities are
in northeast Atlanta, four are located in Michigan and the remaining properties
are located in Colorado and Texas.
STRUCTURE OF THE COMPANY
Structured as an umbrella partnership REIT, or UPREIT, Sun Communities
Operating Limited Partnership, a Michigan limited partnership (the "Operating
Partnership"), is the entity through which we conduct substantially all of our
operations, and which owns, either directly or indirectly through subsidiaries,
all of our assets (the subsidiaries, collectively with the Operating
Partnership, the "Subsidiaries"). This UPREIT structure enables us to comply
with certain complex requirements under the Federal tax rules and regulations
applicable to REITs, and to acquire manufactured housing communities in
transactions that defer some or all of the sellers' tax consequences. We are the
sole general partner of, and, as of December 31, 2004, held approximately 88.2%
of the interests (not including preferred limited partnership interests) in, the
Operating Partnership. The Subsidiaries also include SHS, which provides
manufactured home sales and other services to current and prospective tenants of
the Properties.
THE MANUFACTURED HOUSING COMMUNITY INDUSTRY
A manufactured housing community is a residential subdivision designed
and improved with sites for the placement of manufactured homes and related
improvements and amenities. Manufactured homes are detached, single-family homes
which are produced off-site by manufacturers and installed on sites within the
community. Manufactured homes are available in a wide array of designs,
providing owners with a level of customization generally unavailable in other
forms of multifamily housing.
Modern manufactured housing communities, such as the Properties,
contain improvements similar to other garden-style residential developments,
including centralized entrances, paved streets, curbs and gutters, and parkways.
In addition, these communities also often provide a number of amenities, such as
a clubhouse, a swimming pool, shuffleboard courts, tennis courts, laundry
facilities and cable television service.
The owner of each home on our Properties leases the site on which the
home is located. We own the underlying land, utility connections, streets,
lighting, driveways, common area amenities and other capital improvements and
are responsible for enforcement of community guidelines and maintenance. Some of
the Properties provide water and sewer service through public or private
utilities, while others provide these services to residents from on-site
facilities. Each owner within our Properties is responsible for the maintenance
of the home and leased site. As a result, capital expenditure needs tend to be
less significant, relative to multi-family rental apartment complexes.
PROPERTY MANAGEMENT
Our property management strategy emphasizes intensive, hands-on
management by dedicated, on-site district and community managers. We believe
that this on-site focus enables us to continually monitor and address tenant
concerns, the performance of competitive properties
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and local market conditions. Of the 642 Company employees, 545 are located
on-site as property managers, support staff, or maintenance personnel.
Our community managers are overseen by Brian W. Fannon, Chief Operating
Officer, who has 35 years of property management experience, three Senior Vice
Presidents of Operations and seventeen Regional Vice Presidents. In addition,
the Regional Vice Presidents are responsible for semi-annual market surveys of
competitive communities, interaction with local manufactured home dealers and
regular property inspections.
Each district or community manager performs regular inspections in
order to continually monitor the Property's physical condition and provides
managers with the opportunity to understand and effectively address tenant
concerns. In addition to a district or community manager, each district or
property has an on-site maintenance personnel and management support staff. We
hold periodic training sessions for all property management personnel to ensure
that management policies are implemented effectively and professionally.
HOME SALES AND LEASING
SHS offers manufactured home sales services to tenants and prospective
tenants of our Properties. Since tenants often purchase a home already on-site
within a community, such services enhance occupancy and property performance.
Additionally, because many of the homes on the Properties are sold through SHS,
better control of home quality in our communities can be maintained than if
sales services were conducted solely through third-party brokers. SHS also
leases homes to prospective tenants.
REGULATIONS AND INSURANCE
General. Manufactured housing community properties are subject to
various laws, ordinances and regulations, including regulations relating to
recreational facilities such as swimming pools, clubhouses and other common
areas. We believe that each Property has the necessary operating permits and
approvals.
Insurance. Our management believes that the Properties are covered by
adequate fire, flood, property and business interruption insurance provided by
reputable companies with commercially reasonable deductibles and limits. We
maintain a blanket policy that covers all of our Properties. We have obtained
title insurance insuring fee title to the Properties in an aggregate amount
which we believe to be adequate.
CORPORATE GOVERNANCE
We have implemented the following corporate governance initiatives to
address certain legal requirements promulgated under the Sarbanes-Oxley Act of
2002, as well as the recently adopted New York Stock Exchange corporate
governance listing standards:
o Our Board of Directors determined that Paul D. Lapides, the
Chairman of the Audit Committee, qualifies as an "audit
committee financial expert" as such term is defined under Item
401 of Regulation S-K. Mr. Lapides is "independent" as that
term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Exchange Act.
4
o Our Audit Committee adopted our Audit and Non-Audit Services
Pre-Approval Policy, which sets forth the procedures and the
conditions pursuant to which permissible services to be
performed by our independent public accountants may be
pre-approved.
o Our Board of Directors adopted a Financial Code of Ethics for
Senior Financial Officers, which governs the conduct of our
senior financial officers. A copy of this code is available on
our website at www.suncommunities.com under the heading
"Investor Relations", "Officers and Directors" and subheading
"Governance Documents" and is also available in print to any
stockholder upon written request addressed to Investor
Relations, Sun Communities, Inc., 27777 Franklin Road, Suite
200, Southfield, Michigan 48034.
o Our Board of Directors established and adopted charters for
each of its Audit, Compensation and Nominating and Corporate
Governance Committees. Each committee is comprised of three
(3) independent directors. A copy of each of these charters is
available on our website at www.suncommunities.com under the
heading "Investor Relations", "Officers and Directors" and
subheading "Governance Documents" and is also available in
print to any stockholder upon written request addressed to
Investor Relations, Sun Communities, Inc., 27777 Franklin
Road, Suite 200, Southfield, Michigan 48034.
o Our Board of Directors adopted a Code of Business Conduct and
Ethics, which governs business decisions made and actions
taken by our directors, officers and employees. A copy of this
code is available on our website at www.suncommunities.com
under the heading "Investor Relations", "Officers and
Directors" and subheading "Governance Documents" and is also
available in print to any stockholder upon written request
addressed to Investor Relations, Sun Communities, Inc., 27777
Franklin Road, Suite 200, Southfield, Michigan 48034.
o Our Board of Directors adopted Corporate Governance
Guidelines, a copy of which is available on our website at
www.suncommunities.com under the heading "Investor Relations",
"Officers and Directors" and subheading "Governance Documents"
and is also available in print to any stockholder upon written
request addressed to Investor Relations, Sun Communities,
Inc., 27777 Franklin Road, Suite 200, Southfield, Michigan
48034.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our prospects are subject to certain uncertainties and risks. Our
future results could differ materially from current results, and our actual
results could differ materially from those projected in forward-looking
statements as a result of certain risk factors. These risk factors include, but
are not limited to, those set forth below, other one-time events, and important
factors disclosed previously and from time to time in other Company filings with
the Securities and Exchange Commission. This report contains certain
forward-looking statements.
5
REAL ESTATE RISKS
General economic conditions and the concentration of our properties in Michigan,
Florida, and Indiana may affect our ability to generate sufficient revenue.
The market and economic conditions in our current markets generally,
and specifically in metropolitan areas of our current markets, may significantly
affect manufactured home occupancy or rental rates. Occupancy and rental rates,
in turn, may significantly affect our revenues, and if our communities do not
generate revenues sufficient to meet our operating expenses, including debt
service and capital expenditures, our cash flow and ability to pay or refinance
our debt obligations could be adversely affected. We derived significant amounts
of rental income for the period ended December 31, 2004 from properties located
in Michigan, Florida, and Indiana. As of December 31, 2004, 46 of our 136
Properties, or approximately 30% of developed sites, are located in Michigan, 20
Properties, or approximately 21% of developed sites, are located in Florida, and
18 Properties, or approximately 14% of developed sites, are located in Indiana.
As a result of the geographic concentration of our Properties in Michigan,
Florida, and Indiana, we are exposed to the risks of downturns in the local
economy or other local real estate market conditions which could adversely
affect occupancy rates, rental rates and property values of properties in these
markets.
The following factors, among others, may adversely affect the revenues
generated by our communities:
o the national and local economic climate which may be adversely
impacted by, among other factors, plant closings and industry
slowdowns;
o local real estate market conditions such as the oversupply of
manufactured housing sites or a reduction in demand for
manufactured housing sites in an area;
o the number of repossessed homes in a particular market;
o the rental market which may limit the extent to which rents
may be increased to meet increased expenses without decreasing
occupancy rates;
o the perceptions by prospective tenants of the safety,
convenience and attractiveness of the Properties and the
neighborhoods where they are located;
o zoning or other regulatory restrictions;
o competition from other available manufactured housing sites
and alternative forms of housing (such as apartment buildings
and site-built single-family homes);
o our ability to provide adequate management, maintenance and
insurance;
o increased operating costs, including insurance premiums, real
estate taxes and utilities; or
o the enactment of rent control laws or laws taxing the owners
of manufactured homes.
Our income would also be adversely affected if tenants were unable to
pay rent or if sites were unable to be rented on favorable terms. If we were
unable to promptly relet or renew the
6
leases for a significant number of the sites, or if the rental rates upon such
renewal or reletting were significantly lower than expected rates, then our
business and results of operations could be adversely affected. In addition,
certain expenditures associated with each equity investment (such as real estate
taxes and maintenance costs) generally are not reduced when circumstances cause
a reduction in income from the investment. Furthermore, real estate investments
are relatively illiquid and, therefore, will tend to limit our ability to vary
our portfolio promptly in response to changes in economic or other conditions.
Competition affects occupancy levels and rents which could adversely affect our
revenues.
All of our Properties are located in developed areas that include other
manufactured housing community properties. The number of competitive
manufactured housing community properties in a particular area could have a
material adverse effect on our ability to lease sites and on rents charged at
our Properties or at any newly acquired properties. We may be competing with
others with greater resources and whose officers and directors have more
experience than our officers and directors. In addition, other forms of
multi-family residential properties, such as private and federally funded or
assisted multi-family housing projects and single-family housing, provide
housing alternatives to potential tenants of manufactured housing communities.
Our ability to sell manufactured homes may be affected by various factors, which
may in turn adversely affect our profitability.
SHS is in the manufactured home sales market offering manufactured home
sales services to tenants and prospective tenants of our communities. The market
for the sale of manufactured homes may be adversely affected by the following
factors:
o downturns in economic conditions which adversely impact the
housing market;
o an oversupply of, or a reduced demand for, manufactured homes;
o the difficulty facing potential purchasers in obtaining
affordable financing as a result of heightened lending
criteria; and
o an increase in the rate of manufactured home repossessions
which provide aggressively priced competition to new
manufactured home sales.
Any of the above listed factors could adversely impact our rate of
manufactured home sales, which would result in a decrease in profitability.
Increases in taxes and regulatory compliance costs may reduce our revenue.
Costs resulting from changes in real estate tax laws generally may be
passed through to tenants and will not affect us. Increases in income, service
or other taxes, however, generally are not passed through to tenants under
leases and may adversely affect our funds from operations and our ability to pay
or refinance our debt. Similarly, changes in laws increasing the potential
liability for environmental conditions existing on properties or increasing the
restrictions on discharges or other conditions may result in significant
unanticipated expenditures, which would adversely affect our business and
results of operations.
7
We may not be able to integrate or finance our development activities.
We are engaged in the construction and development of new communities,
and intend to continue in the development and construction business in the
future. Our development and construction business may be exposed to the
following risks which are in addition to those risks associated with the
ownership and operation of established manufactured housing communities:
o we may not be able to obtain financing with favorable terms
for community development which may make us unable to proceed
with the development;
o we may be unable to obtain, or face delays in obtaining,
necessary zoning, building and other governmental permits and
authorizations, which could result in increased costs and
delays, and even require us to abandon development of the
community entirely if we are unable to obtain such permits or
authorizations;
o we may abandon development opportunities that we have already
begun to explore and as a result we may not recover expenses
already incurred in connection with exploring such development
opportunities;
o we may be unable to complete construction and lease-up of a
community on schedule resulting in increased debt service
expense and construction costs;
o we may incur construction and development costs for a
community which exceed our original estimates due to increased
materials, labor or other costs, which could make completion
of the community uneconomical and we may not be able to
increase rents to compensate for the increase in development
costs which may impact our profitability;
o we may be unable to secure long-term financing on completion
of development resulting in increased debt service and lower
profitability; and
o occupancy rates and rents at a newly developed community may
fluctuate depending on several factors, including market and
economic conditions, which may result in the community not
being profitable.
If any of the above occurred, our business and results of operations could be
adversely affected.
We may not be able to integrate or finance our acquisitions and our acquisitions
may not perform as expected.
We acquire and intend to continue to acquire manufactured housing
communities on a select basis. Our acquisition activities and their success are
subject to the following risks:
o we may be unable to acquire a desired property because of
competition from other well capitalized real estate investors,
including both publicly traded real estate investment trusts
and institutional investment funds;
8
o even if we enter into an acquisition agreement for a property,
it is usually subject to customary conditions to closing,
including completion of due diligence investigations to our
satisfaction, which may not be satisfied;
o even if we are able to acquire a desired property, competition
from other real estate investors may significantly increase
the purchase price;
o we may be unable to finance acquisitions on favorable terms;
o acquired properties may fail to perform as expected;
o acquired properties may be located in new markets where we
face risks associated with a lack of market knowledge or
understanding of the local economy, lack of business
relationships in the area and unfamiliarity with local
governmental and permitting procedures; and
o we may be unable to quickly and efficiently integrate new
acquisitions, particularly acquisitions of portfolios of
properties, into our existing operations.
If any of the above occurred, our business and results of operations could be
adversely affected.
In addition, we may acquire properties subject to liabilities and
without any recourse, or with only limited recourse, with respect to unknown
liabilities. As a result, if a liability were to be asserted against us based
upon ownership of those properties, we might have to pay substantial sums to
settle it, which could adversely affect our cash flow.
Rent control legislation may harm our ability to increase rents.
State and local rent control laws in certain jurisdictions may limit
our ability to increase rents and to recover increases in operating expenses and
the costs of capital improvements. Enactment of such laws has been considered
from time to time in other jurisdictions. Certain Properties are located, and we
may purchase additional properties, in markets that are either subject to rent
control or in which rent-limiting legislation exists or may be enacted.
We may be subject to environmental liability.
Under various federal, state and local laws, ordinances and
regulations, an owner or operator of real estate is liable for the costs of
removal or remediation of certain hazardous substances at, on, under or in such
property. Such laws often impose such liability without regard to whether the
owner knew of, or was responsible for, the presence of such hazardous
substances. The presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner's ability to sell or
rent such property, to borrow using such property as collateral or to develop
such property. Persons who arrange for the disposal or treatment of hazardous
substances also may be liable for the costs of removal or remediation of such
substances at a disposal or treatment facility owned or operated by another
person. In addition, certain environmental laws impose liability for the
management and disposal of asbestos-containing materials and for the release of
such materials into the air. These laws may provide for third parties to seek
recovery from owners or operators of real properties for personal injury
associated with asbestos-containing materials. In connection with the
9
ownership, operation, management, and development of real properties, we may be
considered an owner or operator of such properties and, therefore, are
potentially liable for removal or remediation costs, and also may be liable for
governmental fines and injuries to persons and property. When we arrange for the
treatment or disposal of hazardous substances at landfills or other facilities
owned by other persons, we may be liable for the removal or remediation costs at
such facilities.
All of the Properties have been subject to a Phase I or similar
environmental audit (which involves general inspections without soil sampling or
ground water analysis) completed by independent environmental consultants. These
environmental audits have not revealed any significant environmental liability
that would have a material adverse effect on our business. These audits cannot
reflect conditions arising after the studies were completed, and no assurances
can be given that existing environmental studies reveal all environmental
liabilities, that any prior owner or operator of a property or neighboring owner
or operator did not create any material environmental condition not known to us,
or that a material environmental condition does not otherwise exist as to any
one or more Properties.
Losses in excess of our insurance coverage or uninsured losses could adversely
affect our cash flow.
We maintain comprehensive liability, fire, flood (where appropriate),
extended coverage, and rental loss insurance on the Properties with policy
specifications, limits, and deductibles which are customarily carried for
similar properties. As a result of market conditions in the insurance industry,
we decided to carry a large deductible on our liability insurance. Certain types
of losses, however, may be either uninsurable or not economically insurable,
such as losses due to earthquakes, riots, or acts of war. In the event an
uninsured loss occurs, we could lose both our investment in and anticipated
profits and cash flow from the affected property. Any loss would adversely
affect our ability to repay our debt.
10
FINANCING AND INVESTMENT RISKS
Our significant amount of debt could limit our operational flexibility or
otherwise adversely affect our financial condition.
We have a significant amount of debt. As of December 31, 2004, we had
approximately $1.08 billion of total debt outstanding, consisting of
approximately $1.01 billion in collateralized debt that is collateralized by
mortgage liens on 110 of the Properties and new home inventory (the "Mortgage
Debt"), and approximately $67.1 million in unsecured debt. If we fail to meet
our obligations under the Mortgage Debt, the lender would be entitled to
foreclose on all or some of the Properties securing such debt which could have a
material adverse effect on us and our ability to make expected distributions,
and could threaten our continued viability.
We are subject to the risks normally associated with debt financing,
including the following risks:
o our cash flow may be insufficient to meet required payments of
principal and interest, or require us to dedicate a
substantial portion of our cash flow to pay our debt and the
interest associated with our debt rather than to other areas
of our business;
o our existing indebtedness may limit our operating flexibility
due to financial and other restrictive covenants, including
restrictions on incurring additional debt;
o it may be more difficult for us to obtain additional financing
in the future for our operations, working capital
requirements, capital expenditures, debt service or other
general requirements;
o we may be more vulnerable in the event of adverse economic and
industry conditions or a downturn in our business; and
o we may be placed at a competitive disadvantage compared to our
competitors that have less debt.
If any of the above risks occurred, our financial condition and results
of operations could be materially adversely affected.
We may be able to incur substantially more debt which would increase the risks
associated with our substantial leverage.
Despite our current indebtedness levels, we may still be able to incur
substantially more debt in the future. If new debt is added to our current debt
levels, an even greater portion of our cash flow will be needed to satisfy our
debt service obligations. As a result, the related risks that we now face could
intensify and increase the risk of a default on our indebtedness.
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Our equity investment in Origen Financial, Inc., may subject us to certain
risks.
In October 2003, Origen Financial, LLC completed a $150 million
recapitalization. In this transaction, we purchased 5,000,000 shares of common
stock (representing approximately 20% of the issued and outstanding shares of
common stock as of December 31, 2004) of Origen Financial, Inc. ("Origen") for
$50 million. Origen is a publicly traded real estate investment trust in the
business of originating, acquiring and servicing manufactured home loans. Our
equity investment in Origen is subject to all of the risks associated with
Origen's business, including the risks associated with the manufactured housing
finance industry. The failure of Origen to achieve its development and operating
goals could have a material adverse effect on the value of our investment in
Origen.
The financial condition and solvency of our borrowers and the market value of
our properties may adversely affect our investments in real estate, installment
and other loans.
As of December 31, 2004, we had an investment of approximately $18.5
million in real estate loans to several entities and Properties, some of which
are secured by a first lien on the underlying property, and others which are
secured loans subordinate to the primary lender. Also, as of December 31, 2004,
we had outstanding approximately $16.4 million in installment loans to owners of
manufactured homes. These installment loans are collateralized by the
manufactured homes. We may invest in additional mortgages and installment loans
in the future. By virtue of our investment in the mortgages and the loans, we
are subject to the following risks of such investment:
o the borrowers may not be able to make debt service payments or
pay principal when due;
o the value of property securing the mortgages and loans may be
less than the amounts owed; and
o interest rates payable on the mortgages and loans may be lower
than our cost of funds.
If any of the above occurred, our business and results of operations could be
adversely affected.
12
TAX RISKS
We may suffer adverse tax consequences and be unable to attract capital if we
fail to qualify as a REIT.
We believe that since our taxable year ended December 31, 1994, we have
been organized and operated, and intend to continue to operate, so as to qualify
for taxation as a REIT under the Internal Revenue Code ("Code"). Although we
believe that we have been and will continue to be organized and have operated
and will continue to operate so as to qualify for taxation as a REIT, we cannot
assure you that we have been or will continue to be organized or operated in a
manner to so qualify or remain so qualified. Qualification as a REIT involves
the satisfaction of numerous requirements (some on an annual and quarterly
basis) established under highly technical and complex Code provisions for which
there are only limited judicial or administrative interpretations, and involves
the determination of various factual matters and circumstances not entirely
within our control. In addition, frequent changes occur in the area of REIT
taxation, which require the Company continually to monitor its tax status.
If we fail to qualify as a REIT in any taxable year, we would be
subject to federal income tax (including any applicable alternative minimum tax)
on our taxable income at regular corporate rates. Moreover, unless entitled to
relief under certain statutory provisions, we also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. This treatment would reduce our net earnings available
for investment or distribution to stockholders because of the additional tax
liability to us for the years involved. In addition, distributions to
stockholders would no longer be required to be made. Even if we qualify for and
maintain our REIT status, we will be subject to certain federal, state and local
taxes on our property and certain of our operations.
We intend for the Operating Partnership to qualify as a partnership, but we
cannot guarantee that it will qualify.
We believe that the Operating Partnership has been organized as a
partnership and will qualify for treatment as such under the Code. However, if
the Operating Partnership is deemed to be a "publicly traded partnership," it
will be treated as a corporation instead of a partnership for federal income tax
purposes unless at least 90% of its income is qualifying income as defined in
the Code. The income requirements applicable to REITs and the definition of
"qualifying income" for purposes of this 90% test are similar in most respects.
Qualifying income for the 90% test generally includes passive income, such as
specified types of real property rents, dividends and interest. We believe that
the Operating Partnership would meet this 90% test, but we cannot guarantee that
it would. If the Operating Partnership were to be taxed as a corporation, it
would incur substantial tax liabilities, we would fail to qualify as a REIT for
federal income tax purposes, and our ability to raise additional capital could
be significantly impaired.
Our ability to accumulate cash is restricted due to certain REIT distribution
requirements.
In order to qualify as a REIT, we must distribute to our stockholders
at least 90% of our REIT taxable income (calculated without any deduction for
dividends paid and excluding net capital gain) and to avoid federal income
taxation, our distributions must not be less than 100% of our REIT taxable
income, including capital gains. As a result of the distribution requirements,
we do not expect to accumulate significant amounts of cash. Accordingly, these
distributions could significantly reduce the cash available to us in subsequent
periods to fund our operations and future growth.
13
BUSINESS RISKS
Some of our directors and officers may have conflicts of interest with respect
to certain related party transactions and other business interests.
Ownership of Origen. In the 2003 recapitalization of Origen Financial,
Inc., the Company purchased 5,000,000 shares of Origen common stock for $50
million and Shiffman Origen LLC (which is owned by the Estate of Milton M.
Shiffman, Gary A. Shiffman (the Company's Chief Executive Officer), and members
of Mr. Shiffman's family) purchased 1,025,000 shares of Origen common stock for
$10.25 million. Gary A. Shiffman is a member of the board of directors of Origen
and Arthur A. Weiss, a director of the Company, is a personal representative of
the Estate of Milton M. Shiffman.
Accordingly, in all transactions involving Origen, Mr. Shiffman and/or
Mr. Weiss may have a conflict of interest with respect to their respective
obligations as an officer and/or director of the Company. The following are the
current transactions and agreements involving Origen which may present a
conflict of interest for Mr. Shiffman or Mr. Weiss:
o Origen services approximately $16.0 million of manufactured
home loans for the Company as of December 31, 2004 for an
annual servicing fee of approximately 1.25% of the outstanding
principal balance of the loans.
o The Company has agreed to provide Origen (along with certain
other major lenders) certain concessions on manufactured homes
that Origen repossesses in its communities. These concessions
may include rent abatement for the first 12 months that a
repossessed home is held for sale and abatement of the
commission that the Company would earn if it brokers such
sale.
o Certain loans under the Company's Home Buying Made Easy
program are originated and serviced by Origen. Loans under
this program may, from time to time, be sold to Origen.
Because these loans are made below published rates, if the
Company sells any of these loans to Origen, the Company will
pay Origen the interest differential between market rates and
the rates paid by the borrowers for any such loans.
Tax Consequences Upon Sale of Properties. Gary A. Shiffman holds
limited partnership interests in the Operating Partnership which were received
in connection with the contribution of 24 properties (four of which have been
sold) from partnerships previously affiliated with him (the "Sun Partnerships").
Prior to any redemption of these limited partnership interests for our common
stock, Mr. Shiffman will have tax consequences different from those of us and
our public stockholders on the sale of any of the Sun Partnerships. Therefore,
Mr. Shiffman and the Company may have different objectives regarding the
appropriate pricing and timing of any sale of those properties.
Lease of Executive Offices. Gary A. Shiffman, together with certain
family members, indirectly owns approximately a 21% equity interest in American
Center LLC, the entity from which we lease office space for our principal
executive offices. This lease is for an initial term of five years and we have
the right to extend the lease for an additional five year term. The annual base
rent under this lease begins at $19.25 per square foot (gross) for the first
lease year and increases $0.50 per square foot for each successive year of the
initial term. Mr. Shiffman
14
may have a conflict of interest with respect to his obligations as an officer
and/or director of the Company and his ownership interest in American Center.
We rely on key management.
We are dependent on the efforts of our executive officers, particularly
Gary A. Shiffman, Jeffrey P. Jorissen, Brian W. Fannon and Jonathan M. Colman
(together, the "Senior Officers"). The loss of services of one or more of our
executive officers could have a temporary adverse effect on our operations. We
do not currently maintain or contemplate obtaining any "key-man" life insurance
on the Senior Officers.
Certain provisions in our governing documents may make it difficult for a
third-party to acquire us.
9.8% Ownership Limit. In order to qualify and maintain our
qualification as a REIT, not more than 50% of the outstanding shares of our
capital stock may be owned, directly or indirectly, by five or fewer
individuals. Thus, ownership of more than 9.8% of our outstanding shares of
common stock by any single stockholder has been restricted, with certain
exceptions, for the purpose of maintaining our qualification as a REIT under the
Code. Such restrictions in our charter do not apply to Gary Shiffman, the Estate
of Milton M. Shiffman and the Estate of Robert B. Bayer.
The 9.8% ownership limit, as well as our ability to issue additional
shares of common stock or shares of other stock (which may have rights and
preferences over the common stock), may discourage a change of control of the
Company and may also: (1) deter tender offers for the common stock, which offers
may be advantageous to stockholders; and (2) limit the opportunity for
stockholders to receive a premium for their common stock that might otherwise
exist if an investor were attempting to assemble a block of common stock in
excess of 9.8% of the outstanding shares of the Company or otherwise effect a
change of control of the Company.
Staggered Board. Our Board of Directors has been divided into three
classes of directors. The term of one class will expire each year. Directors for
each class will be chosen for a three-year term upon the expiration of such
class's term, and the directors in the other two classes will continue in
office. The staggered terms for directors may affect the stockholders' ability
to change control of the Company even if a change in control were in the
stockholders' interest.
Preferred Stock. Our charter authorizes the Board of Directors to issue
up to 10,000,000 shares of preferred stock and to establish the preferences and
rights (including the right to vote and the right to convert into shares of
common stock) of any shares issued. The power to issue preferred stock could
have the effect of delaying or preventing a change in control of the Company
even if a change in control were in the stockholders' interest.
Rights Plan. We adopted a stockholders' rights plan in 1998 that
provides our stockholders (other than a stockholder attempting to acquire a 15%
or greater interest in the Company) with the right to purchase stock in the
Company at a discount in the event any person attempts to acquire a 15% or
greater interest in the Company. Because this plan could make it more expensive
for a person to acquire a controlling interest in the Company, it could have the
effect of delaying or preventing a change in control of the Company even if a
change in control were in the stockholders' interest.
15
Changes in our investment and financing policies may be made without stockholder
approval.
Our investment and financing policies, and our policies with respect to
certain other activities, including our growth, debt, capitalization,
distributions, REIT status, and operating policies, are determined by our Board
of Directors. Although the Board of Directors has no present intention to do so,
these policies may be amended or revised from time to time at the discretion of
the Board of Directors without notice to or a vote of our stockholders.
Accordingly, stockholders may not have control over changes in our policies and
changes in our policies may not fully serve the interests of all stockholders.
Substantial sales of our common stock could cause our stock price to fall.
Sales of a substantial number of shares of our common stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices for shares. As of December 31, 2004, up to 3,200,000 shares of our common
stock may be issued in the future to the limited partners of the Operating
Partnership in exchange for their Common or Convertible Preferred OP Units.
These Preferred OP Units are convertible at prices ranging from $44 to $68. The
limited partners may sell such shares pursuant to registration rights or an
available exemption from registration. Also, Water Oak, Ltd., a former owner of
one of the Properties, may be issued Common OP Units with a value of
approximately $1,000,000 annually through 2007. In 2008 and 2009, Water Oak,
Ltd. may be issued Common OP Units with a value of approximately $1,200,000. In
addition, as of December 31, 2004, options to purchase 696,380 shares of our
common stock were outstanding under our 1993 Employee Stock Option Plan, our
1993 Non-Employee Director Stock Option Plan and our Long-Term Incentive Plan
(the "Plans"). No prediction can be made regarding the effect that future sales
of shares of our common stock will have on the market price of shares
An increase in interest rates may have an adverse effect on the price of our
common stock.
One of the factors that may influence the price of our common stock in
the public market will be the annual distributions to stockholders relative to
the prevailing market price of the common stock. An increase in market interest
rates may tend to make the common stock less attractive relative to other
investments, which could adversely affect the market price of our common stock.
16
ITEM 2. PROPERTIES
General. As of December 31, 2004, the Properties consisted of 124
manufactured housing communities, five recreational vehicle communities, and
seven properties containing both manufactured housing and recreational vehicle
sites located in eighteen states concentrated in the midwestern and southeastern
United States. As of December 31, 2004, the Properties contained 46,856
developed sites comprised of 41,875 developed manufactured home sites and 4,981
recreational vehicle sites and an additional 7,277 manufactured home sites
suitable for development. Most of the Properties include amenities oriented
towards family and retirement living. Of the 136 Properties, 67 have more than
300 developed manufactured home sites, with the largest having 913 developed
manufactured home sites.
As of December 31, 2004, the Properties had an occupancy rate of 87
percent in stabilized communities and 58 percent in development communities and
the aggregate occupancy rate was 84 percent excluding recreational vehicle
sites. Since January 1, 2004, the Properties have averaged an aggregate annual
turnover of homes (where the home is moved out of the community) of
approximately 3.3 percent and an average annual turnover of residents (where the
home is sold and remains within the community, typically without interruption of
rental income) of approximately 8.0 percent.
We believe that our Properties' high amenity levels contribute to low
turnover and generally high occupancy rates. All of the Properties provide
residents with attractive amenities with most offering a clubhouse, a swimming
pool, laundry facilities and cable television service. Many Properties offer
additional amenities such as sauna/whirlpool spas, tennis, shuffleboard and
basketball courts and/or exercise rooms.
We have tried to concentrate our communities within certain geographic
areas in order to achieve economies of scale in management and operation. The
Properties are principally concentrated in the midwestern and southeastern
United States. We believe that geographic diversification will help insulate the
portfolio from regional economic influences.
The following table sets forth certain information relating to the
properties owned as of December 31, 2004:
DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY
SITES AS OF AS OF AS OF AS OF
PROPERTY AND LOCATION 12/31/2004 12/31/02(1) 12/31/03(1) 12/31/04(1)
--------------------- ---------- ----------- ----------- -----------
MIDWEST
MICHIGAN
Academy/West Pointe 441 98% 96% 95%
Canton, MI
Allendale Meadows Mobile Village 352 93% 88% 85%
Allendale, MI
Alpine Meadows Mobile Village 403 96% 94% 91%
Grand Rapids, MI
Bedford Hills Mobile Village 339 95% 91% 86%
Battle Creek, MI
Brentwood Mobile Village 195 96% 94% 94%
Kentwood, MI
17
DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY
SITES AS OF AS OF AS OF AS OF
PROPERTY AND LOCATION 12/31/2004 12/31/02(1) 12/31/03(1) 12/31/04(1)
--------------------- ---------- ----------- ----------- -----------
Byron Center Mobile Village 143 98% 95% 97%
Byron Center, MI
Candlewick Court Manufactured Housing Community 211 97% 93% 88%
Owosso, MI
College Park Estates Manufactured Housing Community 230 92% 85% 79%
Canton, MI
Continental Estates Manufactured Housing Community 385 79% 70% 63%
Davison, MI
Continental North Manufactured Housing Community 474 84% 75% 67%
Davison, MI
Country Acres Mobile Village 182 95% 93% 95%
Cadillac, MI
Country Meadows Mobile Village 577 98% 94% 94%
Flat Rock, MI
Countryside Village Manufactured Housing Community 359 96% 91% 92%
Perry, MI
Creekwood Meadows Mobile Home Park 336 85% 74% 72%
Burton, MI
Cutler Estates Mobile Village 259 96% 90% 92%
Grand Rapids, MI
Davison East Manufactured Housing Community 190 88% 81% 73%
Davison, MI
Falcon Pointe (8) 102 (2) 26%(8) 22%(8)
East Lansing, MI
Fisherman's Cove Manufactured Housing Community 162 94% 90% 90%
Flint, MI
Grand Mobile Estates 230 95% 89% 80%
Grand Rapids, MI
Hamlin Manufactured Housing Community (4) 170 85%(4) 88%(4) 91%(4)
Webberville, MI
Holly Village/Hawaiian Gardens 425 (3) (3) 98%
Holly, MI
Hunters Glen (8) 280 (3) (3) 44%(8)
Wayland, MI
Kensington Meadows Mobile Home Park 290 92% 84% 82%
Lansing, MI
Kings Court Mobile Village 639 98% 97% 97%
Traverse City, MI
Knollwood Estates 161 94% 89% 84%
Allendale, MI
Lafayette Place 254 98% 96% 92%
Metro Detroit, MI
Lakeview 392 (3) (3) 91%
Ypsilanti, MI
Lincoln Estates Mobile Home Park 191 95% 95% 95%
Holland, MI
Meadow Lake Estates Manufactured Housing Community 425 97% 93% 92%
White Lake, MI
Meadowbrook Estates Manufactured Housing Community 453 97% 96% 94%
Monroe, MI
Presidential Estates Mobile Village 364 95% 89% 89%
Hudsonville, MI
Richmond Place 117 100% 100% 97%
Metro Detroit, MI
River Haven Village 721 79% 77% 70%
Grand Haven, MI
Scio Farms Estates 913 99% 98% 98%
Ann Arbor, MI
Sherman Oaks Manufactured Housing Community 366 94% 88% 88%
Jackson, MI
St. Clair Place 100 99% 98% 97%
Metro Detroit, MI
Sunset Ridge (8) 190 45%(8) 71%(8) 64%(8)
Portland Township, MI
18
DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY
SITES AS OF AS OF AS OF AS OF
PROPERTY AND LOCATION 12/31/2004 12/31/02(1) 12/31/03(1) 12/31/04(1)
--------------------- ---------- ----------- ----------- -----------
Timberline Estates Manufactured Housing Community 296 94% 90% 86%
Grand Rapids, MI
Town & Country Mobile Village 192 99% 99% 98%
Traverse City, MI
Village Trails 100 80% 71% 78%
Howard City, MI
White Lake Mobile Home Village (4) 315 96%(4) 96%(4) 95%(4)
White Lake, MI
White Oak Estates 480 86% 84% 80%
Mt. Morris, MI
Windham Hills Estates (4) 402 82%(4) 73%(4) 72%(4)
Jackson, MI
Woodhaven Place 220 98% 98% 96%
--- --- --- ---
Metro Detroit, MI
MICHIGAN TOTAl 14,026 92% 88% 86%
====== === === ===
INDIANA
Brookside Mobile Home Village 570 88% 81% 73%
Goshen, IN
Carrington Pointe 320 81% 78% 76%
Ft. Wayne, IN
Clear Water Mobile Village 227 86% 78% 77%
South Bend, IN
Cobus Green Mobile Home Park 386 81% 75% 72%
Elkhart, IN
Deerfield Run Manufactured Home Community (4) 175 73%(4) 73%(4) 68%(4)
Anderson, IN
Four Seasons Mobile Home Park 218 95% 94% 94%
Elkhart, IN
Holiday Mobile Home Village 326 95% 93% 91%
Elkhart, IN
Liberty Farms Communities 220 99% 98% 97%
Valparaiso, IN
Maplewood Mobile Home Park 207 97% 88% 83%
Lawrence, IN
Meadows Mobile Home Park 330 85% 79% 73%
Nappanee, IN
Pebble Creek(8) (9) 258 76%(8) 79%(8) 76%(8)
Greenwood, IN
Pine Hills Mobile Home Subdivision 129 95% 84% 80%
Middlebury, IN
Roxbury Park 398 94% 94% 93%
Goshen, IN
Timberbrook Mobile Home Park 567 84% 75% 75%
Bristol, IN
Valley Brook Mobile Home Park 799 88% 85% 75%
Indianapolis, IN
West Glen Village Mobile Home Park 552 96% 88% 87%
Indianapolis, IN
Woodlake Estates (4) 338 72%(4) 62%(4) 60%(4)
Ft. Wayne, IN
Woods Edge Mobile Village (4) 598 74%(4) 71%(4) 66%(4)
--- ------ ------ ------
West Lafayette, IN
INDIANA TOTAL 6,618 86% 81% 78%
===== === === ===
19
DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY
SITES AS OF AS OF AS OF AS OF
PROPERTY AND LOCATION 12/31/2004 12/31/02(1) 12/31/03(1) 12/31/04(1)
--------------------- ---------- ----------- ----------- -----------
OTHER
Apple Creek Manufactured Home Community and Self Storage 176 94% 93% 88%
Cincinnati, OH
Autumn Ridge Mobile Home Park 413 98% 98% 98%
Ankeny, IA
Bell Crossing Manufactured Home Community (4) 239 41%(4) 33%(4) 44%(4)
Clarksville, TN
Boulder Ridge (4) 527 85%(4) 69%(4) 59%(4)
Pflugerville, TX
Branch Creek Estates 392 98% 95% 94%
Austin, TX
Byrne Hill Village Manufactured Home Community 236 96% 100% 98%
Toledo, OH
Candlelight Village Mobile Home Park 309 95% 93% 93%
Chicago Heights, IL
Casa del Valle (1) (7) 116/400 100% 100% 97%
Alamo, TX
Catalina Mobile Home Park 462 83% 73% 70%
Middletown, OH
Cave Creek 289 (3) (3) 63%
Evans, CO
Chisholm Point Estates 416 94% 89% 86%
Pflugerville, TX
Comal Farms (8) (9) 349 43%(8) 48%(8) 48%(8)
New Braunfels, TX
Countryside Atlanta 271 (3) (3) 94%
Lawrenceville, GA
Countryside Gwinnett 331 (3) (3) 88%
Buford, GA
Countryside Lake Lanier 548 (3) (3) 80%
Buford, GA
Creekside (8) (9) 46 66%(8) 72%(8) 78%(8)
Reidsville, NC
Desert View Village (8) 93 40%(8) 48%(8) 52%(8)
West Wendover, NV
Eagle Crest (8) 318 97%(8) 62%(8) 66%(8)
Firestone, CO
East Fork (8) (9) 197 88%(8) 79%(8) 77%(8)
Batavia, OH
Edwardsville Mobile Home Park 634 92% 84% 79%
Edwardsville, KS
Forest Meadows 76 92% 91% 83%
Philomath, OR
Glen Laurel (8) (9) 261 18%(8) 25%(8) 26%(8)
Concord, NC
High Pointe 411 95% 93% 90%
Frederica, DE
Kenwood RV and Mobile Home Plaza (1) (7) 36/289 100% 100% 100%
LaFeria, TX
Meadowbrook (8) (9) 177 80%(8) 76%(8) 74%(8)
Charlotte, NC
North Point Estates (8) 108 50%(8) 35%(8) 34%(8)
Pueblo, CO
Oak Crest (8) 335 84%(8) 63%(8) 51%(8)
Austin, TX
Oakwood Village (4) 511 74%(4) 77%(4) 78%(4)
Dayton, OH
Orchard Lake Manufactured Home Community 147 97% 97% 97%
Cincinnati, OH
Pecan Branch (8) 69 74%(8) 83%(8) 61%(8)
Williamson County, TX
20
DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY
SITES AS OF AS OF AS OF AS OF
PROPERTY AND LOCATION 12/31/2004 12/31/02(1) 12/31/03(1) 12/31/04(1)
--------------------- ---------- ----------- ----------- -----------
Pheasant Ridge 553 99% 100% 100%
Manor Township, PA
Pin Oak Parc Mobile Home Park 502 97% 95% 94%
O'Fallon, MO
Pine Ridge Mobile Home Park 245 95% 94% 91%
Petersburg, VA
Pine Trace 420 (3) (3) 71%
Houston, TX
River Ranch (8) (9) 121 (8) 15%(8) 27%(8)
Austin, TX
River Ridge (8) 337 89%(8) 85%(8) 77%(8)
Austin, TX
Saddle Brook (8) 258 39%(8) 40%(8) 37%(8)
Austin, TX
Sea Air (1) (7) 370/527 100% 99% 97%
Rehoboth Beach, DE
Snow to Sun (1) (7) 179/489 99% 100% 100%
Weslaco, TX
Southfork Mobile Home Park 477 90% 84% 76%
Belton, MO
Stonebridge (8) (9) 340 83%(8) 59%(8) 61%(8)
San Antonio, TX
Summit Ridge (8) (9) 252 91%(8) 56%(8) 65%(8)
Converse, TX
Sunset Ridge (8) (9) 172 71%(8) 69%(8) 73%(8)
Kyle TX
Sun Villa Estates 324 99% 99% 99%
Reno, NV
Timber Ridge Mobile Home Park 585 98% 97% 94%
Ft. Collins, CO
Westbrook Village (6) 344 97% 93% 92%
Toledo, OH
Westbrook Senior Village 112 99% 99% 100%
Toledo, OH
Willowbrook Place 266 98% 96% 96%
Toledo, OH
Woodlake Trails (8) (9) 134 44%(8) 79%(8) 87%(8)
San Antonio, TX
Woodland Park Estates 399 94% 92% 89%
Eugene, OR
Woodside Terrace Manufactured Home Community 439 96% 95% 93%
Holland, OH
Worthington Arms Mobile Home Park 224 96% 96% 92%
--- --- --- ---
Delaware, OH
OTHER TOTAL 16,550 86% 81% 75%
====== === === ===
SOUTHEAST
FLORIDA
Arbor Terrace RV Park 395 (5) (5) (5)
Bradenton, FL
Ariana Village Mobile Home Park 208 88% 88% 87%
Lakeland, FL
Bonita Lake Resort 165 (5) (5) (5)
Bonita Springs, FL
Buttonwood Bay (1) (7) 407/942 100% 100% 100%
Sebring, FL
21
DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY
SITES AS OF AS OF AS OF AS OF
PROPERTY AND LOCATION 12/31/2004 12/31/02(1) 12/31/03(1) 12/31/04(1)
--------------------- ---------- ----------- ----------- -----------
Gold Coaster Manufactured Home Community (1) (7) 338/545 98% 100% 100%
Florida City, FL
Groves RV Resort 297 (5) (5) (5)
Lee County, FL
Holly Forest Estates 402 100% 100% 100%
Holly Hill, FL
Indian Creek Park (1) (7) 353/1,500 100% 100% 100%
Ft. Myers Beach, FL
Island Lakes Mobile Home Park 301 100% 100% 100%
Merritt Island, FL
Kings Lake Mobile Home Park 245 100% 100% 100%
Debary, FL
Lake Juliana Landings Mobile Home Park 278 77% 81% 86%
Auburndale, FL
Lake San Marino RV Park 411 (5) (5) (5)
Naples, FL
Leesburg Landing 95 69% 73% 76%
Lake County, FL
Meadowbrook Village Mobile Home Park 257 99% 98% 100%
Tampa, FL
Orange Tree Village Mobile Home Park 246 100% 100% 100%
Orange City, FL
Royal Country Mobile Home Park 864 100% 100% 100%
Miami, FL
Saddle Oak Club Mobile Home Park 376 100% 100% 100%
Ocala, FL
Siesta Bay RV Park 820 (5) (5) (5)
Ft. Myers Beach, FL
Silver Star Mobile Village 407 99% 98% 98%
Orlando, FL
Water Oak Country Club Estates/Water Oak Mobile Home
Park 908 100% 100% 100%
Lady Lake, FL --- ---- ---- ----
Florida Total 9,662 97% 98% 98%
===== === === ===
TOTAL/AVERAGE 46,856 90% 86% 84%
====== === === ===
TOTAL STABILIZED COMMUNITIES 41,585 92% 89% 87%
====== === === ===
TOTAL DEVELOPMENT COMMUNITIES 5,271 65% 59% 58%
===== === === ===
(1) OCCUPANCY PERCENTAGE RELATES TO MANUFACTURED HOUSING SITES, EXCLUDING
RECREATIONAL VEHICLE SITES. DATA PRESENTED MH SITES/TOTAL SITES.
(2) ACQUIRED 2003.
(3) ACQUIRED 2004.
(4) OCCUPANCY IN THESE PROPERTIES REFLECTS THE FACT THAT THESE COMMUNITIES
ARE IN A LEASE-UP PHASE FOLLOWING AN EXPANSION.
(5) THIS PROPERTY CONTAINS ONLY RECREATIONAL VEHICLE SITES.
(6) THE COMPANY FORMERLY LEASED THIS PROPERTY AND THE COMPANY PURCHASED
THIS PROPERTY IN JANUARY 2004.
(7) THIS PROPERTY CONTAINS RECREATIONAL VEHICLE SITES.
(8) OCCUPANCY IN THESE PROPERTIES REFLECTS THE FACT THAT THESE COMMUNITIES
ARE NEWLY DEVELOPED FROM THE GROUND UP.
(9) THIS PROPERTY IS OWNED BY AN AFFILIATE OF SUNCHAMP LLC, AN ENTITY IN
WHICH THE COMPANY OWNS APPROXIMATELY A 68.5 PERCENT EQUITY INTEREST AS
OF DECEMBER 31, 2004.
22
Leases. The typical lease we enter into with a tenant for the rental of
a site is month-to-month or year-to-year, renewable upon the consent of both
parties, or, in some instances, as provided by statute. In some cases, leases
are for one-year terms, with up to ten renewal options exercisable by the
tenant, with rent adjusted for increases in the consumer price index. These
leases are cancelable for non-payment of rent, violation of community rules and
regulations or other specified defaults. During the past five years, on average
3.3 percent of the homes in our communities have been removed by their owners
and 7.7 percent of the homes have been sold by their owners to a new owner who
then assumes rental obligations as a community resident. The small percentage of
homes removed from our communities is impacted by the $3,000 to $8,000 cost to
move a home. The above experience can be summarized as follows: the average
resident remains in our communities for approximately thirteen years, while the
average home, which gives rise to the rental stream, remains in our communities
for approximately thirty years. See "Regulations and Insurance."
ITEM 3. LEGAL PROCEEDINGS
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 current
status is that the proceedings in North Carolina have been stayed pending final
determination in Michigan as to whether the dispute should be submitted to
arbitration.
The Company is involved in various other legal proceedings arising
in the ordinary course of business. All such proceedings, taken together, are
not expected to have a material adverse impact on our results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
23
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our common stock has been listed on the New York Stock Exchange
("NYSE") since December 8, 1993 under the symbol "SUI." On March 1, 2005, the
closing sales price of the common stock was $36.09 and the common stock was held
by approximately 612 holders of record. The following table sets forth the high
and low closing sales prices per share for the common stock for the periods
indicated as reported by the NYSE and the distributions per share paid by the
Company with respect to each such period.
High Low Distribution
----- ---- ------------
FISCAL YEAR ENDED DECEMBER 31, 2003
First Quarter of 2003 37.92 32.87 0.58
Second Quarter of 2003 40.46 35.75 0.61
Third Quarter of 2003 41.00 37.56 0.61
Fourth Quarter of 2003 40.65 35.78 0.61
FISCAL YEAR ENDED DECEMBER 31, 2004
First Quarter of 2004 42.82 37.86 0.61
Second Quarter of 2004 42.90 33.30 0.61
Third Quarter of 2004 39.92 35.75 0.61
Fourth Quarter of 2004 40.76 37.86 0.61
RECENT SALES OF UNREGISTERED SECURITIES
On January 5, 2004 the Operating Partnership issued 47,250 Series B-3
Preferred Units to the members of Westbrook Co., Ltd, paid approximately $1.2
million in cash and assumed approximately $4.2 million of debt, which was
immediately retired, in exchange for property with a net agreed upon value of
$10.1 million. Holders of the Series B-3 Units may require the Company to redeem
the Series B-3 Units (a) within the ninety (90) day period following each of the
fifth, sixth, seventh, eighth, ninth and tenth anniversaries of the issuance
date, (b) in the event of the death of a holder, and (c) at any time after the
tenth anniversary. The redemption price is $100 per Series B-3 Unit. The
Operating Partnership has the right to redeem the Series B-3 Units at any time
after the tenth anniversary. On August 24, 2004, the Operating Partnership
redeemed 7,500 Series B-3 Preferred Units for an aggregate purchase price of
$750,000
On May 23, 2004, the Operating Partnership redeemed 26,650 Common
Operating Partnership Units from a single holder for an aggregate purchase price
of $961,540.
In 2004, the Company issued 6,300 shares of its common stock upon
conversion of 6,300 partnership units.
All of the above partnership units and shares of common stock were
issued in private placements in reliance on Section 4(2) of the Securities Act
of 1933, as amended, including Regulation D promulgated thereunder. No
underwriters were used in connection with any of such issuances.
24
The Board of Directors authorized a program to purchase up to 1,000,000
shares of the Company's common stock on November 15, 2004. No repurchases were
performed under this program during the fourth quarter of 2004.
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL NUMBER OF
SHARES PURCHASED AS MAXIMUM NUMBER OF
AVERAGE PER PART OF PUBLICLY SHARES THAT MAY YET BE
TOTAL NUMBER OF PRICE PAID ANNOUNCED PLANS PURCHASED UNDER THE
PERIOD SHARES PURCHASED SHARE OR PROGRAMS PLANS OR PROGRAMS
- ----------------------------------------------------------------------------------------------------------------------------
10/01/2004-10/31/2004 - $ - - -
- ----------------------------------------------------------------------------------------------------------------------------
11/01/2004-11/30/2004 - $ - - 1,000,000
- ----------------------------------------------------------------------------------------------------------------------------
12/01/2004-12/31/2004 - $ - - 1,000,000
- ----------------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLAN INFORMATION
The following table reflects information about the securities
authorized for issuance under the Company's equity compensation plans as of
December 31, 2004.
- ------------------------------------------------------------------------------------------------
(a) (b) (c)
- ------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
TO BE ISSUED UPON EXERCISE PRICE EQUITY COMPENSATION
EXERCISE OF OF OUTSTANDING PLANS (EXCLUDING
OUTSTANDING OPTIONS, OPTIONS, WARRANTS SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS COLUMN A)
- ------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
shareholders 641,251 $29.97 98,000
- ------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by
shareholders (1) 55,129 $32.75 0
- ------------------------------------------------------------------------------------------------
TOTAL 696,380 98,000
- ------------------------------------------------------------------------------------------------
(1) On May 29, 1997, the Company established a Long Term Incentive Plan
(the "LTIP") pursuant to which all full-time salaried and full-time
commission only employees of the Company, excluding the Company's
officers, were entitled to receive options to purchase shares of the
Company's common stock at $32.75 per share (i.e., the average of the
highest and lowest selling prices for the common stock on May 29,
1997), on January 31, 2002. In accordance with the terms of the LTIP,
(a) the Company granted the eligible participants options to purchase
167,918 shares of common stock; and (b) each eligible participant
received an option to purchase a number of shares of common stock equal
to the product of 167,918 and the quotient derived by dividing such
participant's total compensation during the period beginning on January
1, 1997 and ending on December 31, 2001 (the "Award Period") by the
aggregate compensation of all of the eligible participants during the
Award Period.
25
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
2004 (c) 2003 (c) 2002 (b) 2001 (b) 2000 (b)
--------- --------- --------- --------- ---------
(In thousands except for per share and other data)
REVENUES
Income from rental property $ 167,835 $ 159,115 $ 149,875 $ 136,969 $ 129,279
Revenues from home sales 17,837 19,516 -- -- --
Ancillary service revenues, net 1,735 1,791 -- -- --
Interest 6,633 11,354 7,990 10,305 9,386
Gain on sale of land 5,879 -- -- -- --
Other income 934 676 2,304 3,695 4,112
--------- --------- --------- --------- ---------
Total revenues 200,853 192,452 160,169 150,969 142,777
COSTS AND EXPENSES
Property operating and maintenance 41,819 39,837 33,751 29,258 27,832
Cost of home sales 14,383 13,879 -- -- --
Real estate taxes 13,817 11,746 10,217 9,162 8,768
General and administrative 21,239 16,563 7,722 7,373 7,013
Depreciation and amortization 45,395 44,120 37,900 32,716 29,900
Interest 48,243 38,738 32,375 31,016 29,651
Extinguishment of debt 51,643 -- -- -- --
Deferred financing costs related
to extinguished debt 5,557 -- -- -- --
Impairment charge -- 4,932 -- -- --
--------- --------- --------- ---------
Total expenses 242,096 169,815 121,965 109,525 103,164
Equity income (loss) from affiliates (151) 667 (16,627)(a) 131 607
--------- --------- --------- --------- ---------
Income (loss) from operations (41,394) 23,304 21,577 41,575 40,220
Less income (loss) allocated to minority
interest: (926) 9,562 9,605 13,150 12,837
Income (loss) from continuing operations (40,468) 13,742 11,972 28,425 27,383
Income from discontinued operations -- 9,972 1,620 5,485 5,911
--------- --------- --------- --------- ---------
Net income (loss) $ (40,468) $ 23,714 $ 13,592 $ 33,910 $ 33,294
========= ========= ========= ========= =========
Weighted average common shares outstanding:
Basic 18,318 18,206 17,595 17,258 17,304
========= ========= ========= ========= =========
Diluted 18,318 18,345 17,781 17,440 17,390
========= ========= ========= ========= =========
Basic earnings (loss) per share:
Continuing operations $ (2.21) $ 0.75 $ 0.68 $ 1.64 $ 1.58
Discontinued operations -- 0.55 0.09 0.32 0.34
--------- --------- --------- --------- ---------
Net income (loss) $ (2.21) $ 1.30 $ 0.77 $ 1.96 $ 1.92
========= ========= ========= ========= =========
Diluted earnings (loss) per share:
Continuing operations $ (2.21) $ 0.75 $ 0.67 $ 1.63 $ 1.57
Discontinued operations -- 0.54 0.09 0.31 0.34
--------- --------- --------- --------- ---------
Net income (loss) $ (2.21) $ 1.29 $ 0.76 $ 1.94 $ 1.91
========= ========= ========= ========= =========
Distributions per common share $ 2.44 $ 2.41 $ 2.29 $ 2.18 $ 2.10
========= ========= ========= ========= =========
26
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(In thousands except for per share and other data)
BALANCE SHEET DATA:
Rental property, before accumulated $1,382,541 $1,220,405 $1,174,837 $ 969,936 $ 867,377
depreciation
Total assets $1,403,167 $1,221,574 $1,163,976 $ 994,449 $ 966,628
Total debt $1,078,442 $ 773,328 $ 667,373 $ 495,198 $ 464,508
Stockholders' equity $ 211,746 $ 326,610 $ 319,532 $ 329,641 $ 336,034
OTHER DATA (AT END OF PERIOD):
Total properties 136 127 129 116 109
Total Sites 46,856 43,875 43,959 40,544 38,282
(a) Included in equity income (loss) from affiliates in 2002 is a $13.6
million valuation adjustment of the Company's investment in Origen.
(b) Revenues and expenses for the years ended December 31, 2002, 2001, and
2000 have been restated to reflect the reclassifications required under
SFAS No. 144 for the four properties sold in 2003.
(c) Selected financial data for 2004 and 2003 includes amounts from SHS
which was consolidated during 2003.
27
ITEM 7. 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 notes thereto elsewhere herein.
The Company is a fully integrated, self-administered and self-managed
REIT which owns, operates, develops and finances manufactured housing
communities concentrated in the midwestern and southeastern United States. As of
December 31, 2004, the Company owned and operated a portfolio of 136 developed
properties located in eighteen states, including 124 manufactured housing
communities, five recreational vehicle communities, and seven properties
containing both manufactured housing and recreational vehicle sites.
The Company completed a significant restructuring of its capital and
operating debt during 2004. Secured debt financings of $734 million with average
terms approximating 10 years and weighted average interest rates of
approximately 5.0% were concluded, as well as the successful negotiation of a
new $115 million revolving line of credit at LIBOR + 1.75%. Proceeds from the
secured financings were used to retire existing debt, acquire communities, and
repurchase the Company's stock. The Company has also provided the required
notice to retire $50 million of 8.875% PPOP Units during the first quarter of
2005 and is authorized to repurchase up to 1 million additional shares of its
stock.
During 2004 the Company acquired nine manufactured housing communities
comprising approximately 2950 developed and 570 undeveloped sites. The aggregate
purchase price was $120.4 million and included the assumption of approximately
$34.3 million in debt. Three of the communities are in northeast Atlanta, four
are located in Michigan and the remaining properties are located in Colorado and
Texas.
In recent years the operations of manufactured homebuilders, dealers,
and the companies that finance the purchase of the homes have experienced severe
losses and substantial volatility. New home shipments have declined from
approximately 373,000 in 1998 to approximately 131,000 in 2004. The decline was
largely due to the turmoil in the financing side of the industry as lenders
experienced substantial losses arising from defaults on poorly underwritten
loans in the mid to late 1990s and beyond. As a result of the losses, the
lenders experienced liquidity constraints and significantly tightened
underwriting standards thus reducing the demand for new homes.
These trends appear to be abating as several large home manufacturers
are reporting operating income and the volume of repossessed homes in the market
place appears to be declining. Newly repossessed homes are also declining as the
reinforcing effects of tightened underwriting standards and reduced new home
financing volumes impact the industry.
28
The effect of these trends on the Company has been to reduce
occupancies in our portfolio as the demand of tenants for sites in our
communities has declined for the above-stated reasons. The rate of leasing in
our new community developments has likewise slowed. Despite these trends, the
Company's same property portfolio has consistently reflected growth in net
operating income evidencing the revenue and operating stability long associated
with the business of owning and operating manufactured housing communities.
While the problems which directly impacted the manufacturers, dealers,
and lenders appear to be bottoming, the Company does not expect a rapid or
strong recovery in its operations. The Company expects a gradually improving
leasing environment in its portfolio.
As a result of these industry conditions, a large quantity of homes
repossessed by lenders have become available for purchase at discounts of up to
50% and more from original cost or loan amount. The Company has made every
effort to acquire these value-priced homes especially as the alternative would
likely be the removal of the homes from the community. Such removal would create
total dependence on the sale of a new home to fill the site. As new home
shipments have declined by nearly two thirds from their peak in 1998 to current
levels, such dependence would leave the Company vulnerable to a recovery in new
home shipments as its primary method to improve occupancy.
The Company intends to sell these value-priced homes to residents over
time. In the meantime it is most economical to rent the homes. At December 31,
2004, the Company had approximately 2,000 homes rented in its communities which
comprise over 46,000 sites. All renters are subject to underwriting criteria.
The Company expects to continue to acquire homes from lenders as long as the
pricing of the homes remains compelling. The Company is actively developing
programs for its renters and others to acquire these homes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. In preparing these financial statements,
management has made its best estimates and judgment of certain amounts included
in the financial statements. Nevertheless, actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following significant accounting policies,
among others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements:
Impairment of Long-Lived Assets. Rental property is recorded at cost,
less accumulated depreciation. The Company measures the recoverability of its
assets in accordance with the Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long Lived
Assets." If such assets were deemed to be impaired as a result of this
measurement, the impairment that would be recognized is measured by the amount
by which the carrying amount of the asset exceeds the fair value of the asset as
determined on a
29
discounted net cash flow basis. Assets are tested for impairment whenever events
or changes in circumstances indicate that its carrying amount may not be
recoverable. Circumstances that may prompt a test of recoverability may include
a significant decrease in anticipated market price, an adverse change to the
extent or manner in which an asset may be used or in its physical condition or
other such events that may significantly change the value of the long-lived
asset.
Notes Receivable. The Company evaluates the recoverability of its notes
receivable whenever events occur or there are changes in circumstances such that
management believes it is probable that it will be unable to collect all amounts
due according to the contractual terms of the loan agreement. The loan is then
measured based on the present value of the expected future cash flow discounted
at the loan's effective interest rate or the fair value of the collateral if the
loan is collateral dependent.
Depreciation. Depreciation is computed on a straight-line basis over
the estimated useful lives of the assets. Useful lives are 30 years for land
improvements and buildings and 7 to 15 years for furniture, fixtures and
equipment.
Revenue Recognition. Rental income attributable to leases is recorded
on a straight-line basis when earned from tenants. Leases entered into by
tenants generally range from month-to-month to one year and are renewable by
mutual agreement of the Company and the resident or, in some cases, as provided
by state statute. Revenue from the sale of manufactured homes is recognized upon
transfer of title at the closing of the sales transaction. The Company offers,
through its Home Buying Made Easy program, retail installment contracts at
interest rates of 4.99 to 7.99 percent to qualified buyers of homes within its
communities. The Company amortizes the interest discount from current market
rates related to this program into income over the term of the note. The Company
also bifurcates the discounted present value of the interest differential
between the home sale and the anticipated rental revenue as required by Emerging
Issues Task Force 00-21 "Revenue Arrangements with Multiple Deliverables". The
differential allocated to the home sale is recognized as a reduction of revenue
from the sale of the home and the differential allocated to future rental
revenue is amortized as rental discount over the term of the loan.
Capitalized Costs. The Company capitalizes certain costs (including
interest and other costs) incurred in connection with the development,
redevelopment, capital enhancement and leasing of its properties. Management is
required to use professional judgment in determining whether such costs meet the
criteria for immediate expense or capitalization. The amounts are dependent on
the volume and timing of such activities and the costs associated with such
activities. Maintenance, repairs and minor improvements to properties are
expensed when incurred. Renovations and improvements to properties are
capitalized and depreciated over their estimated useful lives and construction
costs related to the development of new community or expansion sites are
capitalized until the property is substantially complete. Certain expenditures
to dealers and residents related to obtaining lessees in our communities are
capitalized and amortized over a seven year period. Costs associated with
implementing the Company's computer systems are capitalized and amortized over
the estimated useful lives of the related software and hardware.
30
Derivative Instruments and Hedging Activities. The Company has entered
into three interest rate swap agreements to offset interest rate risk. The
Company does not enter into derivative transactions for speculative purposes.
The Company adjusts its balance sheet on an ongoing quarterly basis to reflect
current fair market value of its derivatives. Changes in the fair value of
derivatives are recorded each period in earnings or comprehensive income, as
appropriate. The ineffective portion of the hedge is immediately recognized in
earnings to the extent that the change in value of a derivative does not
perfectly offset the change in value of the instrument being hedged. The
unrealized gains and losses held in accumulated other comprehensive income will
be reclassified to earnings over time and occurs when the hedged items are also
recognized in earnings. The Company uses standard market conventions to
determine the fair values of derivative instruments, including the quoted market
prices or quotes from brokers or dealers for the same or similar instruments.
All methods of assessing fair value result in a general approximation of value
and such value may never actually be realized.
Income Taxes. The Company has elected to be taxed as a REIT as defined
under Section 856(c) of the Internal Revenue Code of 1986, as amended. In order
for the Company to qualify as a REIT, at least ninety-five percent (95%) of the
Company's gross income in any year must be derived from qualifying sources. As a
REIT, the Company generally will not be subject to U.S. Federal income taxes at
the corporate level if it distributes at least ninety percent (90%) of its REIT
ordinary taxable income to its stockholders, which it fully intends to do. If
the Company fails to qualify as a REIT in any taxable year, the Company will be
subject to Federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates. The Company remains subject to
certain state and local taxes on its income and property as well as Federal
income and excise taxes on its undistributed income.
31
RESULTS OF OPERATIONS
Comparison of year ended December 31, 2004 to year ended December 31, 2003
For the year ended December 31, 2004, income from operations decreased
by $64.7 million from income of $23.3 million to a loss of $(41.4) million, when
compared to the year ended December 31, 2003. The decrease was due to increased
expenses of $14.5 million, debt extinguishment costs of $51.6 million, deferred
financing costs related to the extinguished debt of $5.6 million, Florida storm
damage of $0.6 million, and decreased equity income from affiliate of $0.8
million, offset by increased revenues of $8.4 million as described in more
detail below.
Income from rental property increased by $8.7 million from $159.1
million to $167.8 million, or 5.5 percent, due to property acquisitions, rent
increases, and other community revenues.
Interest income, including income from Origen, decreased by $4.8
million from $11.4 million to $6.6 million, or 42.1 percent, due primarily to a
decrease in interest earning notes and receivables.
Other operating income increased by $0.2 million from $0.7 million to
$0.9 million, due primarily to increase in brokerage commissions.
The decrease in revenue from home sales and increase in gain on sale of
land relate to operations of the manufactured home sales which is discussed in
detail below.
Property operating and maintenance expenses increased by $2.0 million
from $39.8 million to $41.8 million, or 5.0 percent. The increase was due to
increases in utility costs ($0.7 million), payroll expense ($0.5 million),
repair and maintenance expense ($0.2 million), insurance expense ($0.3 million),
and miscellaneous other expenses ($0.3 million).
Real estate taxes increased by $2.1 million from $11.7 million to $13.8
million, or 17.9 percent due to acquisitions made in 2004 ($0.7 million) and
increases in assessments and tax rates ($1.4 million).
General and administrative expenses for rental property increased by
$2.0 million from $10.5 million to $12.5 million, due to compensation expenses
($0.7 million), Michigan Single Business tax ($0.3 million), system conversion
costs ($0.4 million), Sarbanes-Oxley Act compliance costs ($0.3 million), and
miscellaneous other expenses ($0.3 million).
Depreciation and amortization increased by $1.3 million from $44.1
million to $45.4 million, or 2.9 percent, due primarily to additional investment
in rental property.
Interest expense increased by $9.5 million from $38.7 million to $48.2
million, or 24.5 percent, due to increased debt levels somewhat offset by lower
interest rates and the reclassification of dividends paid on Preferred Operating
Partnership Units ("POP Units") as interest expense pursuant to the adoption of
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liability and Equity"
("SFAS 150").
32
Debt extinguishment expense 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 were expensed.
Sun Home Services
The following table summarizes certain financial and statistical data
for Sun Home Services for the years ended December 31, 2004 and 2003:
Increase/
2004 2003 (Decrease) Percent Change
------- ------- ---------- --------------
New home sales revenues $ 9,941 $13,169 $(3,228) -24.5%
Cost of sales 7,609 9,159 (1,550) -16.9%
------- ------- ------- ------
Gross profit 2,332 4,010 (1,678) -41.8%
======= ======= ======= ======
Pre-owned home sales revenues $ 7,896 $ 6,347 $ 1,549 24.4%
Cost of sales 6,774 4,720 2,054 43.5%
------- ------- ------- ------
Gross profit 1,122 1,627 (505) -31.0%
======= ======= ======= ======
Ancillary revenue, net $ 1,735 $ 1,791 $ (56) -3.1%
======= ======= ======= ======
Home sales volumes:
New homes 169 257 (88) -34.2%
Pre-owned homes 368 283 85 30.0%
New home sales declined by 34.2 percent, while revenues and costs of
sales declined by 24.5 and 16.9 percent, respectively, resulting in lower gross
profit due to competition from value-priced pre-owned homes. Pre-owned home unit
sales increased by 30.0 percent while revenues and cost of sales increased by
24.4 percent and 43.5 percent, respectively. Gross profit declined by 31.0
percent on pre-owned homes in response to a management strategy to reduce sales
price to generate additional sales.
Comparison of year ended December 31, 2003 to year ended December 31, 2002
For the year ended December 31, 2003, income from operations increased
by $1.7 million from $21.6 million to $23.3 million, when compared to the year
ended December 31, 2002. The increase was due to increased revenues of $32.3
million and increased results from affiliates of $17.3 million partially offset
by increased expenses of $47.9 million. The year 2003 included SHS on a
consolidated basis as discussed below.
Income from rental property increased by $9.2 million from $149.9
million to $159.1 million, or 6.2 percent, due to rent increases and other
community revenues ($3.4 million) and acquisitions ($5.8 million).
Interest income, including income from Origen, increased by $3.4
million from $8.0 million to $11.4 million, or 42.1 percent, due principally to
larger outstanding balances of notes and investments at higher rates of
interest.
33
Other operating income decreased by $1.6 million from $2.3 million to
$0.7 million, due primarily to reduced development fee income.
The remaining revenue increases of $21.3 million relate to the
consolidation of Sun Home Services which is discussed in detail below.
Property operating and maintenance expenses increased by $6.1 million
from $33.7 million to $39.8 million, or 18.0 percent. The increase was primarily
due to increases in utility costs ($1.8 million) and increases in repair and
maintenance expenses ($1.3 million). Acquisitions during 2002 and the
consolidation of SunChamp properties accounted for the remaining increase of
$3.0 million.
Real estate taxes increased by $1.5 million from $10.2 million to $11.7
million, or 15.0 percent due to acquisitions made in 2002 ($0.7 million) and
increases in assessments and tax rate ($0.8 million).
General and administrative expenses increased by $8.9 million from $7.7
million to $16.6 million, due to the consolidation of Sun Home Services ($6.0
million), professional fees ($0.4 million), expenses related to office
relocation ($0.2 million), Michigan Single Business tax ($0.2 million),
compensation expenses, including benefits, primarily related to the SunChamp
acquisition and a systems conversion ($1.7 million), and assorted other minor
increases ($0.4 million).
Depreciation and amortization increased by $6.2 million from $37.9
million to $44.1 million, or 16.4 percent, due primarily to the consolidation of
Sun Home Services ($1.0 million) and additional investment in rental property.
Interest expense increased by $6.3 million from $32.4 million to $38.7
million, or 19.4 percent, due to increased debt levels partially offset by lower
interest rates ($1.5 million), the reclassification of dividends paid on POP
Units as interest expense pursuant to the adoption of SFAS 150 ($2.0 million),
decreased capitalized interest ($0.8 million), an increase in financing costs
($0.6 million), and an increase in interest rates related to fixing rates on
$75.0 million of debt ($2.7 million). These increases were partially offset by
$1.3 million of income related primarily to the change in market value of an
interest rate swap contract that does not qualify for hedge accounting.
The $4.9 million impairment charge relates to a reduction in the book
value of a new community development due to the impracticality of future phase
construction.
Equity income from affiliates of $0.7 million represents the Company's
one-third interest in the operations of Origen for its initial operating period
after a recapitalization in October, 2003.
The remaining expense increase of $13.9 million relates to the
consolidation of Sun Home Services which is discussed in detail below.
34
Sun Home Services
Prior to January 1, 2003, the results of operations of Sun Home
Services were accounted for using the equity method and reported as a single
line item called equity in income from affiliates. As the Company is the primary
beneficiary of the results of operations of Sun Home Services, it is appropriate
to consolidate Sun Home Services at December 31, 2003. This has no effect on
previously reported net income. In the table below, the year 2002 is presented
as if SHS was consolidated ("Proforma") as of December 31, 2002 for comparative
purposes.
The following table summarizes certain financial and statistical data
for Sun Home Services for the years ended December 31, 2003 and 2002:
Increase/
2003 2002 (Decrease) Percent Change
------- ------- ----------- ----------------
(Pro Forma)
New home sales revenues $13,169 $15,890 $(2,721) -17.1%
Cost of sales 9,159 12,907 (3,748) -29.0%
------- ------- ------- -----
Gross profit 4,010 2,983 1,027 34.4%
======= ======= ======= =====
Pre-owned home sales revenues $ 6,347 $ 3,214 $ 3,133 97.5%
Cost of sales 4,720 2,586 2,134 82.5%
------- ------- ------- -----
Gross profit 1,627 628 999 159.1%
======= ======= ======= =====
Ancillary revenue, net $ 1,791 $ 457 $ 1,334 291.9%
======= ======= ======= =====
Home sales volumes:
New homes 257 286 (29) -10.1%
Pre-owned homes 283 174 109 62.6%
New home sales declined by 10.1 percent, while revenues and costs of
sales declined by 17.1 and 29.0 percent, respectively. Gross profit increased by
34.4 percent as cost of sales declined by more than revenues due to the purchase
of new homes at a substantial discount. Pre-owned home unit sales increased by
62.6 percent while revenues and cost of sales increased by 97.5 percent and 82.5
percent, respectively. Gross profit increased by 159.1 percent as revenues grew
more than cost of sales due to strong demand for the value in pre-owned homes.
The increase in ancillary revenue, net, is primarily due to increased
activity in the Company's rental home program.
35
SAME PROPERTY INFORMATION
The following table reflects property-level financial information as of
and for the years ended December 31, 2004 and 2003. The "Same Property" data
represents information regarding the operation of communities owned as of
January 1, 2003 and December 31, 2004. Site, occupancy, and rent data for those
communities is presented as of the last day of each period presented. The "Total
Portfolio" column differentiates from the "Same Property" column by including
financial information for properties acquired after January 1, 2003 and new
development communities.
SAME PROPERTY TOTAL PORTFOLIO
--------------------------- ---------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(in thousands) (in thousands)
Income from rental property $ 146,797 $ 141,130 $ 167,835 $ 159,115
---------- ---------- ---------- ----------
Property operating expenses:
Property operating and maintenance 28,603 28,334 41,819 39,837
Real estate taxes 11,905 10,843 13,817 11,746
---------- ---------- ---------- ----------
Property operating expenses 40,508 39,177 55,636 51,583
---------- ---------- ---------- ----------
Property net operating income (1) $ 106,289 $ 101,953 $ 112,199 $ 107,532
========== ========== ========== ==========
Number of properties 108 108 136 127
Developed sites 39,686 39,746 46,856 43,875
Occupied sites 34,272 34,958 39,040 37,394
Occupancy % 87.4% (2) 89.4% (2) 83.8% (2) 86.1% (2)
Weighted Average monthly rent per site $ 345 (2) $ 329 (2) $ 342 (2) $ 328 (2)
Sites available for development 1,521 1,545 7,277 6,756
Sites planned for development in next year 57 30 208 258
(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 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. Net income
includes interest and depreciation and amortization which often have no effect
on the market value of a property and therefore limit its use as a performance
measure. In addition, such expenses are often incurred at a parent company level
and therefore are not necessarily linked to the performance of a real estate
asset. 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.
(2) Occupancy % and weighted average rent relates to manufactured housing sites,
excluding recreational vehicle sites.
36
On a same property basis, property net operating income increased by
$4.3 million from $102.0 million to $106.3 million, or 4.2 percent. Income from
property increased by $5.7 million from $141.1 million to $146.8 million, or 4.0
percent, due primarily to increases in rents including water and property tax
pass through.
Property operating expenses increased by $1.3 million from $39.2 million
to $40.5 million, or 3.3 percent, due to increases in real estate taxes ($1.1
million), utilities and other ($0.2 million).
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 these resources 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 $2 to $5 million in
developments consisting of expansions to existing communities and the
development of new communities during 2005. 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 2005, depending upon a number of factors,
including the availability of high-quality properties that meet the Company's
criteria for acquisition. The Company will finance these investments using the
proceeds from its secured financing transactions, the temporary use of its line
of credit until permanent secured financing can be arranged and through the
assumption of existing debt on the properties.
Cash and cash equivalents increased by $28.5 million to $52.6 million at
December 31, 2004 compared to $24.1 million at December 31, 2003. Net cash
provided by operating activities decreased by $4.8 million to $57.8 million for
the year ended December 31, 2004 compared to $62.6 million for the year ended
December 31, 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 markets; (b) lower occupancy rates of 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 or rentals of manufactured homes. See "Factors that May
Affect Future Results."
As previously discussed, the Company completed a significant
restructuring of its capital
37
and operating debt during 2004. The Company securitized an additional 74 of its
136 Properties providing significant proceeds for the repayment of existing
higher rate debt, property acquisitions and stock repurchases.
During 2004 the Company acquired nine manufactured housing communities
with an aggregate purchase price of $120.4 million. The properties were
purchased with cash provided from secured financing transactions and the
assumption of approximately $34.3 million in debt.
The Company has a $115 million unsecured line of credit facility, which
bears interest at LIBOR + 1.75% and matures in September 2007, with a one-year
optional extension. At December 31, 2004, $1.3 million of availability was used
to back standby letters of credit and $113.7 million was available to be drawn
under the facility. The line of credit facility contains various leverage, debt
service coverage, net worth maintenance and other customary covenants all of
which the Company was in compliance with at December 31, 2004.
The Company's primary long-term liquidity needs are principal payments
on outstanding indebtedness. At December 31, 2004, the Company's outstanding
contractual obligations were as follows:
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
-------------------------------------------------------------------------------
CONTRACTUAL CASH OBLIGATIONS TOTAL DUE 1 YEAR 2-3 YEARS 4-5 YEARS AFTER 5 YEARS
---------- ---------- ---------- ---------- -------------
Collateralized term loan $ 40,837 $ 757 $ 40,080 $ -- $ --
Collateralized term loan - FNMA 389,154 1,531 6,149 7,993 373,481
Collateralized term loan - B of A 496,031 -- 8,709 15,851 471,471
Senior notes 5,017 5,017 -- -- --
Mortgage notes, other 85,280 13,432 48,635 18,452 4,761
Redeemable Preferred OP Units 62,123 -- 12,675 -- 49,448
---------- ---------- ---------- ---------- ----------
$1,078,442 $ 20,737 $ 116,248 $ 42,296 $ 899,161
========== ========== ========== ========== ==========
Interest expense is a material cash requirement of the Company. The
Company's projected interest expense is $57.9 million, $56.3 million, $61.9
million, $62.8 million, and $61.3 million for the years 2005, 2006, 2007, 2008,
and 2009, respectively.
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". If the Company is unable to obtain
additional debt or equity financing on acceptable terms, the Company's business,
results of operations and financial condition will be adversely impacted.
38
At December 31, 2004, the Company's debt to total market capitalization
approximated 54.8 percent (assuming conversion of all Common OP Units to shares
of common stock). The debt has a weighted average maturity of approximately 8.5
years and a weighted average interest rate of 5.1 percent.
Capital expenditures for the years ended December 31, 2004 and 2003
included recurring capital expenditures of $6.6 million (excluding $0.4 million
related to a software conversion) and $6.5 million (excluding $1.7 million
related to a main office relocation and $3.4 million related to software
conversion), respectively.
Net cash used in investing activities was $152.2 million for the year
ended December 31, 2004 compared to $58.2 million in the prior year. The
difference is due to: increased investment in rental properties of $97.7
million; increased short-term investments of $45.0 million; decreased proceeds
from property and land disposition of $14.2 million; decreased repayments of
notes receivables and officer's notes, net of $11.7 million; offset by a
reduction in investment in and advances to affiliate of $49.1 million, and
increased net proceeds from loans sold to and purchased from Origen of $25.5
million.
Net cash provided by financing activities was $122.9 million for the
year ended December 31, 2004, compared to $17.0 million in the prior year. The
difference is primarily due to changes in net proceeds from notes payable and
other debt, inclusive of repayments on line of credit, of $177.0 million, offset
by increased distributions of $1.9 million, changes in net proceeds from common
stock issuance of $25.2 million, increased payments of deferred financing costs
of $6.8 million, and treasury stock purchases of $37.2 million.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the year ended
December 31, 2004 was less than 1:1. The earnings deficiency required to bring
the ratio to 1:1 is $46.1 million. The Company's ratio of earnings to fixed
charges for the years ended December 31, 2003 and 2002 was 1.29:1 and 1.68:1,
respectively.
INFLATION
Most of the leases allow for periodic rent increases which provide the
Company with the opportunity to achieve increases in rental income as each lease
expires. Such types of leases generally minimize the risk of inflation to the
Company.
39
SAFE HARBOR STATEMENT
This Form 10-K 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 Form 10-K that relate to prospective events or developments are deemed to
be forward-looking statements. Words such as "believes," "forecasts,"
"anticipates," "intends," "plans," "expects," "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 Form 10-K. 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 this Form 10-K and the Company's filings with the Securities and
Exchange Commission. The forward-looking statements contained in this Form 10-K
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
Share-Based Payment Statement No. 123(R), 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 statement, all forms of share-based payments to employees,
including employee stock options, must 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 Statement eliminates 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. We will be
required to apply SFAS No. 123(R) as of the first interim reporting period that
begins after June 15, 2005, and we plan to adopt it using the
modified-prospective method, effective July 1, 2005. The Company is currently
evaluating the impact of this standard on its results of operations and
financial position.
40
OTHER
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. 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 years ended December 31, 2004, 2003,
2002 (in thousands):
41
SUN COMMUNITIES, INC.
RECONCILIATION OF NET INCOME TO FUND FROM OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE/OP UNIT AMOUNTS)
2004 2003 2002
-------- -------- --------
Net income (loss) $(40,468) $ 23,714 $ 13,592
Adjustments:
Depreciation and amortization 45,589 43,458 38,262
Valuation adjustment (1) 528 (879) 449
Allocation of SunChamp losses (2) 300 4,548 1,315
(Gain) loss on dispositions, net (3,880) (8,590) 13,612
Income (loss) allocated to common minority interests (5,364) 3,274 2,003
--------- --------- --------
Funds from operations (FFO) $ (3,295) $ 65,525 $ 69,233
FFO - Continuing Operations $ (3,295) $ 63,605 $ 67,055
========= ========= ========
FFO - Discontinued Operations $ -- $ 1,920 $ 2,178
========= ========= ========
Weighted average common shares/OP Units outstanding:
Basic 20,792 20,717 20,177
========= ========= ========
Diluted 20,792 20,856 20,363
========= ========= ========
Continuing Operations:
FFO per weighted average Common Share/OP Unit - Basic $ (0.16) $ 3.07 $ 3.32
========= ========= ========
FFO per weighted average Common Share/OP Unit - Diluted $ (0.16) $ 3.05 $ 3.29
========= ========= ========
Discontinued Operations:
FFO per weighted average Common Share/OP Unit - Basic $ -- $ 0.09 $ 0.11
========= ========= ========
FFO per weighted average Common Share/OP Unit - Diluted $ -- $ 0.09 $ 0.11
========= ========= ========
Total Operations:
FFO per weighted average Common Share/OP Unit - Basic $ (0.16) $ 3.16 $ 3.43
========= ========= ========
FFO per weighted average Common Share/OP Unit - Diluted $ (0.16) $ 3.14 $ 3.40
========= ========= ========
(1)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 FFO. The valuation adjustment is included in
interest expense.
(2)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 FFO. 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.
42
ITEM 7A. 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 has entered into three separate interest rate swap
agreements and an interest rate cap agreement. One of the swap agreements fixes
$25 million of variable rate borrowings at 4.93 percent for the period April
2003 through July 2009, another of the 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.
The Company's remaining variable rate debt totals $108.5 million as of
December 31, 2004 which bears interest at Prime, various LIBOR or FNMA
Discounted Mortgage Backed Securities ("DMBS") rates. If Prime, LIBOR, or DMBS
increased or decreased by 1.0 percent during the years ended December 31, 2004
and 2003, the Company believes its interest expense would have increased or
decreased by approximately $1.7 million and $2.2 million, respectively, based on
the $169.5 million and $219.8 million average balance outstanding under the
Company's variable rate debt facilities for the year ended December 31, 2004 and
2003, respectively.
Additionally, the Company had $14.7 million and $32.1 million LIBOR
based variable rate mortgage and other notes receivable as of December 31, 2004
and 2003. If LIBOR increased or decreased by 1.0 percent during the years ended
December 31, 2004 and 2003, the Company believes interest income would have
increased or decreased by approximately $0.19 million and $0.30 million,
respectively, based on the $19.3 million and $30.2 million average balance
outstanding on all variable rate notes receivable for the year ended December
31, 2004 and 2003, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are filed herewith under
Item 15.
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
We have previously reported the information required by this item in a
current report on Form 8-K initially filed with the SEC on July 14, 2003, as
amended by Form 8-K/A filed with the SEC on July 15, 2003.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management is responsible for establishing and
maintaining disclosure controls and procedures as defined in the rules
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer, Gary A. Shiffman,
and Chief Financial Officer, Jeffrey P. Jorissen, the Company evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of December 31, 2004. 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 as of December 31,
2004 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.
DESIGN AND EVALUATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company
has included a report of management's assessment of the design and effectiveness
of its internal controls as part of this Annual Report on Form 10-K for the
fiscal year ended December 31, 2004. The Company's independent registered public
accounting firm also attested to, and reported on, management's assessment of
the effectiveness of internal control over financial reporting. Management's
report and the independent registered public accounting firm's attestation
report are included in the Company's 2004 financial statements under the
captions entitled "Management's Report on Internal Control Over Financial
Reporting" and "Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting" and are incorporated herein by
reference.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no significant changes in the Company's internal control
over financial reporting during the quarterly period ended December 31, 2004
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
44
PART III
The information required by ITEMS 10, 11, 12, 13, AND 14 will be
included in the Company's proxy statement for its 2005 Annual Meeting of
Shareholders, and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed herewith as part of this
Form 10-K:
(1) A list of the financial statements required to be filed as
a part of this Form 10-K is shown in the "Index to the Consolidated Financial
Statements and Financial Statement Schedule" filed herewith.
(2) A list of the financial statement schedules required to be
filed as a part of this Form 10-K is shown in the "Index to the Consolidated
Financial Statements and Financial Statement Schedule" filed herewith.
(3) A list of the exhibits required by Item 601 of Regulation
S-K to be filed as a part of this Form 10-K is shown on the "Exhibit Index"
filed herewith.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 15, 2005
SUN COMMUNITIES, INC., a
Maryland corporation
By: /s/ Gary A. Shiffman
---------------------------------------------
Gary A. Shiffman, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ Gary A. Shiffman Chief Executive Officer, President and March 15, 2005
- --------------------------- Chairman of the Board of Directors
Gary A. Shiffman
/s/ Jeffrey P. Jorissen Executive Vice President, Chief Financial March 15, 2005
- --------------------------- Officer, Treasurer, Secretary and
Jeffrey P. Jorissen Principal Accounting Officer
/s/ Paul D. Lapides Director March 15, 2005
- ---------------------------
Paul D. Lapides
/s/ Ted J. Simon Director March 15, 2005
- ---------------------------
Ted J. Simon
/s/ Clunet R. Lewis Director March 15, 2005
- ---------------------------
Clunet R. Lewis
/s/ Ronald L. Piasecki Director March 15, 2005
- ---------------------------
Ronald L. Piasecki
/s/ Arthur A. Weiss Director March 15, 2005
- ---------------------------
Arthur A. Weiss
46
EXHIBIT LIST
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
-------- ----------- ------
2.1 Form of Sun Communities, Inc.'s Common Stock Certificate (1)
3.1 Amended and Restated Articles of Incorporation of Sun Communities, Inc (1)
3.2 Bylaws of Sun Communities, Inc. (2)
4.1 Indenture, dated as of April 24, 1996, among Sun Communities, Inc., Sun (3)
Communities Operating Limited Partnership (the "Operating Partnership") and
Bankers Trust Company, as Trustee
4.2 Form of Note for the 2001 Notes (3)
4.3 Form of Note for the 2003 Notes (3)
4.4 First Supplemental Indenture, dated as of August 20, 1997, by and between the (7)
Operating Partnership and Bankers Trust Company, as Trustee
4.5 Form of Medium-Term Note (Floating Rate) (7)
4.6 Form of Medium-Term Note (Fixed Rate) (7)
4.7 Articles Supplementary of Board of Directors of Sun Communities, Inc. (9)
Designating a Series of Preferred Stock and Fixing Distribution and other
Rights in such Series
4.8 Articles Supplementary of Board of Directors of Sun Communities, Inc. (11)
Designating a Series of Preferred Stock
10.1 Second Amended and Restated Agreement of Limited Partnership of Sun Communities (6)
Operating Limited Partnership
10.2 Second Amended and Restated 1993 Stock Option Plan (10)
10.3 Amended and Restated 1993 Non-Employee Director Stock Option Plan (6)
10.4 Form of Stock Option Agreement between Sun Communities, Inc. and certain (1)
directors, officers and other individuals#
10.5 Form of Non-Employee Director Stock Option Agreement between Sun Communities, (4)
Inc. and certain directors#
10.6 Form of Restricted Stock Award Agreement# (19)
10.7 Amended and Restated Loan Agreement between Sun Communities Funding Limited (7)
Partnership and Lehman Brothers Holdings Inc.
10.8 Amended and Restated Loan Agreement among Miami Lakes Venture Associates, Sun (7)
Communities Funding Limited Partnership and Lehman Brothers Holdings Inc.
10.9 Form of Indemnification Agreement between each officer and director of Sun (7)
Communities, Inc. and Sun Communities, Inc.
10.10 Loan Agreement among the Operating Partnership, Sea Breeze Limited Partnership (7)
and High Point Associates, LP.
10.11 Option Agreement by and between the Operating Partnership and Sea Breeze (7)
Limited Partnership
10.12 Option Agreement by and between the Operating Partnership and High Point (7)
Associates, LP
10.13 Stock Pledge Agreement between Gary A. Shiffman and the Operating Partnership (5)
for 94,570 shares of Common Stock
10.14 Stock Pledge Agreement between Gary A. Shiffman and the Operating Partnership (5)
for 305,430 shares of Common Stock
10.15 Stock Pledge Agreement between Gary A. Shiffman and the Operating Partnership (7)
with respect to 80,000 shares of Common Stock
10.16 Employment Agreement between Sun Communities, Inc. and Gary A. Shiffman, dated (17)
as of January 1, 2005#
10.17 Employment Agreement between Sun Communities, Inc. and Jeffrey P. Jorissen, (17)
dated as of January 1, 2005#
47
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
-------- ----------- ------
10.18 Employment Agreement by and between Brian W. Fannon and Sun Communities, Inc., (17)
dated as of January 1, 2005#
10.19 Long Term Incentive Plan (7)
10.20 Sun Communities, Inc. 1998 Stock Purchase Plan# (9)
10.21 Facility and Guaranty Agreement among Sun Communities, Inc., the Operating (9)
Partnership, Certain Subsidiary Guarantors and First National Bank of Chicago,
dated December 10, 1998
10.22 Rights Agreement between Sun Communities, Inc. and State Street Bank and Trust (8)
Company, dated April 24, 1998
10.23 Contribution Agreement, dated as of September 29, 1999, by and among Sun (11)
Communities, Inc., the Operating Partnership, Belcrest Realty Corporation and
Belair Real Estate Corporation
10.24 One Hundred Third Amendment to Second Amended and Restated Limited Partnership (11)
Agreement of the Operating Partnership
10.25 One Hundred Eleventh Amendment to Second Amended and Restated Limited (12)
Partnership Agreement of the Operating Partnership
10.26 One Hundred Thirty-Sixth Amendment to Second Amended and Restated Limited (12)
Partnership Agreement of the Operating Partnership
10.27 One Hundred Forty-Fifth Amendment to Second Amended and Restated Limited (12)
Partnership Agreement of the Operating Partnership
10.28 One Hundred Seventy-Second Amendment to Second Amended and Restated Limited (19)
Partnership Agreement of the Operating Partnership
10.29 Restricted Stock Award Agreement between Sun Communities, Inc. and Gary A. (19)
Shiffman, dated May 10, 2004#
10.30 First Amendment to Restricted Stock Award Agreement between Sun Communities, (19)
Inc., and Gary A. Shiffman#
10.31 Restricted Stock Award Agreement between Sun Communities, Inc. and Jeffrey P. (19)
Jorissen, dated May 10, 2004#
10.32 First Amendment to Restricted Stock Award Agreement between Sun Communities, (19)
Inc. and Jeffrey P. Jorissen#
10.33 Form of Loan Agreement dated June 9, 2004 by and among Sun Candlewick LLC, Sun (15)
Silver Star LLC and Aspen-Holland Estates, LLC, as Borrowers, and Bank of
America, N.A., as Lender
10.34 Schedule identifying substantially identical agreements to Exhibit 10.33 (15)
10.35 Form of Loan Agreement dated June 9, 2004 by and between Sun Pool 8 LLC, as (15)
Borrower, and Bank of America, N.A., as Lender
10.36 Schedule identifying substantially identical agreements to Exhibit 10.35 (15)
10.37 Form of Loan Agreement dated June 9, 2004 by and between Sun Continental (15)
Estates LLC as Borrower, and Bank of America, N.A., as Lender
10.38 Schedule identifying substantially identical agreements to Exhibit 10.37 (15)
10.39 Form of Loan Agreement dated June 9, 2004 by and between Sun Indian Creek LLC, (15)
as Borrower, and Bank of America, N.A., as Lender
10.40 Schedule identifying substantially identical agreements to Exhibit 10.39 (15)
10.41 Amended And Restated Master Credit Facility Agreement dated April 28, 2004 by (15)
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
48
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
-------- ----------- ------
10.42 Appendix I (definitions) to Amended And Restated Master Credit Facility (15)
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
10.43 Fixed Facility Note dated April 5, 2004 made by Sun Secured Financing LLC, (15)
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
10.44 Fixed Facility Note dated April 28, 2004 made by Sun Secured Financing LLC, Sun (15)
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
10.45 Variable Facility Note dated April 28, 2004 made by Sun Secured Financing LLC, (15)
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
10.46 Fourth Amended and Restated Variable Facility Note dated April 28, 2004 made by (15)
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
10.47 Credit Agreement, dated September 30, 2004, among the Company, the Operating (16)
Partnership, Standard Federal Bank National Association, LaSalle Bank National
Association and other lenders
10.48 Second Amended and Restated Promissory Note (Secured), dated as of July 15, (13)
2002, made by Gary A. Shiffman in favor of the Operating Partnership
10.49 First Amended and Restated Promissory Note (Unsecured), dated as of July 15, (13)
2002, made by Gary A. Shiffman in favor of the Operating Partnership
10.50 First Amended and Restated Promissory Note (Secured), dated as of July 15, (13)
2002, made by Gary A. Shiffman in favor of the Operating Partnership
10.51 Second Amended and Restated Promissory Note (Unsecured), dated as of July 15, (13)
2002, made by Gary A. Shiffman in favor of the Operating Partnership
10.52 Second Amended and Restated Promissory Note (Secured), dated as of July 15, (13)
2002, made by Gary A. Shiffman in favor of the Operating Partnership
10.53 Lease, dated November 1, 2002, by and between the Operating Partnership as (14)
Tenant and American Center LLC as Landlord
10.54 Concurrent Private Placement Agreement dated October 8, 2003 among Sun OFI, (18)
Inc., Origen Financial, Inc., and the Purchasers (as defined therein)
49
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
-------- ----------- ------
10.55 Registration Rights Agreement dated as of October 8, 2003 among Sun OFI, Inc., (18)
Origen Financial, Inc., Lehman Brothers Inc., on behalf of itself and as agent
for the investors listed on Schedule A thereto and those persons listed on
Schedule B thereto
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio Earnings to (19)
Combined Fixed Charges and Preferred Dividends
21.1 List of Subsidiaries of Sun Communities, Inc. (19)
23.1 Consent of PricewaterhouseCoopers LLP (19)
23.2 Consent of Grant Thornton LLP (19)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the (19)
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the (19)
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant (19)
to Section 906 of the Sarbanes-Oxley Act of 2002
- -------------------
(1) Incorporated by reference to Sun Communities, Inc.'s Registration
Statement No. 33-69340.
(2) Incorporated by reference to Sun Communities, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1995.
(3) Incorporated by reference to Sun Communities, Inc.'s Current Report on
Form 8-K dated April 24, 1996.
(4) Incorporated by reference to Sun Communities, Inc.'s Registration
Statement No. 33-80972.
(5) Incorporated by reference to Sun Communities, Inc.'s Quarterly Report
on Form 10-K for the quarter ended September 30, 1995.
(6) Incorporated by reference to Sun Communities, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1996.
(7) Incorporated by reference to Sun Communities, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1997.
(8) Incorporated by reference to Sun Communities, Inc.'s Current Report on
Form 8-A dated May 27, 1998.
(9) Incorporated by reference to Sun Communities, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998.
(10) Incorporated by reference to Sun Communities, Inc.'s Proxy Statement,
dated April 20, 1999
(11) Incorporated by reference to Sun Communities, Inc.'s Current Report on
Form 8-K dated October 14, 1999.
(12) Incorporated by reference to Sun Communities, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 2001.
(13) Incorporated by reference to Sun Communities, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002.
50
(14) Incorporated by reference to Sun Communities, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 2002, as amended.
(15) Incorporated by reference to Sun Communities, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2004.
(16) Incorporated by reference to Sun Communities, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2004.
(17) Incorporated by reference to Sun Communities, Inc.'s Current Report on
Form 8-K dated February 23, 2005.
(18) Incorporated by reference to Origen Financial, Inc.'s Registration
Statement on Form S-11, No. 333-112516
(19) Filed herewith.
# Management contract or compensatory plan or arrangement.
51
SUN COMMUNITIES, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
PAGE
Management's Report on Internal Control Over Financial Reporting F-2
Report of Independent Registered Public Accounting Firm on Internal Control F-3 - F-4
Over Financial Reporting - Grant Thornton LLP
Report of Independent Registered Public Accounting Firm - Grant Thornton LLP F-5
Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP F-6
Financial Statements:
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-7
Consolidated Statements of Operations
for the Years Ended December 31, 2004, 2003 and 2002 F-8
Consolidated Statements of Comprehensive Income (Loss)
for the Years Ended December 31, 2004, 2003 and 2002 F-9
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 2004, 2003 and 2002 F-10
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2004, 2003 and 2002 F-11
Notes to Consolidated Financial Statements F-12 - F-32
Schedule III - Real Estate and Accumulated Depreciation F-33 - F-37
F-1
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of
1934, as amended. The Company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
o pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
o provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements
in accordance with generally accepted accounting
principles;
o provide reasonable assurance that receipts and expenditures
of the Company are being made only in accordance with
authorization of management and directors of the Company;
and
o provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition
of the Company's assets that could have a material adverse
effect on the financial statements.
All internal control systems, no matter how well designed, have inherent
limitations and can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. Even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Management assessed the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004. In making this assessment,
management used the criteria for effective internal control over financial
reporting set forth in "Internal Control - Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management determined that, as of December 31, 2004, the Company's
internal control over financial reporting was effective to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles.
Grant Thornton LLP, independent registered public accounting firm, who
audited and reported on the financial statements of the Company included in this
report as of and for the year ended December 31, 2004 and 2003, has issued an
attestation report on management's assessment of internal control over financial
reporting.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Board of Directors and Stockholders
Sun Communities, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Sun
Communities, Inc. and subsidiaries (the Company) maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of
F-3
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Sun Communities, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, comprehensive income, changes in
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 2004, and our report dated March 15, 2005, expressed an
unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Southfield, Michigan
March 15, 2005
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Sun Communities, Inc.
We have audited the accompanying consolidated balance sheets of Sun Communities,
Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity, and cash flows for each of the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sun Communities,
Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the two years then ended in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No. 46(R),
"Consolidation of Variable Interest Entities" and Statement of Financial
Accounting Standards No. 150 "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" during 2003.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule III is presented
for the purposes of additional analysis and is not a required part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Sun
Communities, Inc. and subsidiaries' internal control over financial reporting as
of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 15,
2005, expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Southfield, Michigan
March 15, 2005
F-5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Sun Communities, Inc.:
In our opinion, based on our audit and the report of other auditors, the
consolidated statements of operations, comprehensive income, stockholders'
equity and cash flows for the year ended December 31, 2002 present fairly, in
all material respects, the results of operations and cash flows of Sun
Communities, Inc. and its subsidiaries (the "Company") for the year ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. We did not audit the financial
statements of Origen Financial, L.L.C., an investee of the Company, which
financial statements reflect total revenues of $20,385,000 for the period ended
December 31, 2002. Those statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for Origen Financial. L.L.C., is based solely
on the report of the other auditors. We conducted our audit of these statements
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
Detroit, Michigan
March 12, 2003 except for Note 3 as to
which the date is March 12, 2004
F-6
SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(AMOUNTS IN THOUSANDS)
2004 2003
----------- -----------
ASSETS
Investment in rental property, net $ 1,133,873 $ 1,010,484
Cash and cash equivalents 52,586 24,058
Short-term Investments 44,975 --
Inventory of manufactured homes 25,964 17,236
Investment in affiliate 48,360 50,667
Notes and other receivables 45,037 74,828
Other assets 52,372 44,301
----------- -----------
Total assets $ 1,403,167 $ 1,221,574
=========== ===========
LIABILITIES
Line of credit $ -- $ 99,000
Debt 1,078,442 674,328
Other liabilities 31,936 24,833
----------- -----------
Total liabilities 1,110,378 798,161
----------- -----------
Minority interests 81,043 96,803
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 100,000 shares
authorized, 19,626 and 19,192 issued
in 2004 and 2003, respectively 196 192
Paid-in capital 462,522 446,211
Officer's notes (9,798) (10,299)
Unearned compensation (15,557) (7,337)
Accumulated comprehensive earnings (959) (1,294)
Distributions in excess of accumulated earnings (181,073) (94,479)
Treasury stock, at cost, 1,202 and 202 shares
in 2004 and 2003, respectively (43,585) (6,384)
----------- -----------
Total stockholders' equity 211,746 326,610
----------- -----------
Total liabilities and stockholders' equity $ 1,403,167 $ 1,221,574
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements
F-7
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
2004 2003 2002
--------- --------- ---------
REVENUES
Income from rental property $ 167,835 $ 159,115 $ 149,875
Revenues from home sales 17,837 19,516 --
Ancillary revenues, net 1,735 1,791 --
Interest 6,633 7,434 6,169
Income from Origen, net, principally interest -- 3,920 1,821
Gain on sale of land 5,879 -- --
Other income 934 676 2,304
--------- --------- ---------
Total revenues 200,853 192,452 160,169
COSTS AND EXPENSES
Property operating and maintenance 41,819 39,837 33,751
Cost of home sales 14,383 13,879 --
Real estate taxes 13,817 11,746 10,217
General and administrative - rental property 12,559 10,536 7,722
General and administrative - home sales 8,080 6,027 --
Depreciation and amortization 45,395 44,120 37,900
Interest 48,243 38,738 32,375
Extinguishment of debt 51,643 -- --
Deferred financing costs related to extinguished debt 5,557 -- --
Impairment charge -- 4,932 --
Florida storm damage 600 -- --
--------- --------- ---------
Total expenses 242,096 169,815 121,965
Equity income (loss) from affiliates (151) 667 (16,627)
--------- --------- ---------
Income (loss) from operations (41,394) 23,304 21,577
Less income (loss) allocated to minority interest:
Preferred OP Units 4,438 6,479 7,803
Common OP Units (5,364) 3,083 1,802
--------- --------- ---------
Income (loss) from continuing operations (40,468) 13,742 11,972
Income from discontinued operations -- 9,972 1,620
--------- --------- ---------
Net income (loss) $ (40,468) $ 23,714 $ 13,592
========= ========= =========
Weighted average common shares outstanding:
Basic 18,318 18,206 17,595
========= ========= =========
Diluted 18,318 18,345 17,781
========= ========= =========
Basic earnings (loss) per share:
Continuing operations $ (2.21) $ 0.75 $ 0.68
Discontinued operations -- 0.55 0.09
--------- --------- ---------
Net income (loss) $ (2.21) $ 1.30 $ 0.77
========= ========= =========
Diluted earnings (loss) per share:
Continuing operations $ (2.21) $ 0.75 $ 0.67
Discontinued operations -- 0.54 0.09
--------- --------- ---------
Net income (loss) $ (2.21) $ 1.29 $ 0.76
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements
F-8
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
2004 2003 2002
-------- -------- --------
Net income (loss) $(40,468) $ 23,714 $ 13,592
Unrealized income (loss) on interest rate swaps 335 557 (1,851)
-------- -------- --------
Comprehensive income (loss) $(40,133) $ 24,271 $ 11,741
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements
F-9
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
ACCUMULATED DISTRIBUTIONS
OTHER IN EXCESS OF
COMMON PAID-IN UNEARNED COMPREHENSIVE ACCUMULATED TREASURY OFFICERS' TOTAL
STOCK CAPITAL COMPENSATION LOSS EARNINGS STOCK NOTES EQUITY
-------- -------- ------------ ------------- ------------- -------- -------- --------
Balance, January 1, 2002 $ 178 $399,789 $ (6,999) $ -- $ (45,939) $ (6,384) $(11,004) $329,641
Issuance of common stock, net 5 17,406 (2,767) 14,644
Amortization 1,144 1,144
Repayment of officers' notes 301 301
Reclassification and conversion
of minority interest 3,488 3,488
Net income 13,592 13,592
Unrealized loss on interest
rate swaps (1,851) (1,851)
Cash distributions declared of
$2.29 per share (41,427) (41,427)
-------- -------- -------- ------- --------- -------- -------- --------
Balance, December 31, 2002 183 420,683 (8,622) (1,851) (73,774) (6,384) (10,703) $319,532
Issuance of common stock, net 9 27,640 27,649
Amortization 1,285 1,285
Repayment of officers' notes 404 404
Reclassification and conversion
of minority interest (2,112) (2,112)
Net income 23,714 23,714
Unrealized income on interest
rate swaps 557 557
Cash distributions declared of
$2.41 per share (44,419) (44,419)
-------- -------- -------- ------- --------- -------- -------- --------
Balance, December 31, 2003 192 446,211 (7,337) (1,294) (94,479) (6,384) (10,299) $326,610
Issuance of common stock, net 4 13,455 (10,331) 3,128
Amortization 2,111 2,111
Repayment of officer's notes 501 501
Treasury stock purchased,
1,000 shares (37,201) (37,201)
Reclassification and conversion
of minority interest 2,856 2,856
Net loss (40,468) (40,468)
Unrealized income on interest
rate swaps 335 335
Cash distributions declared of
$2.44 per share (46,126) (46,126)
-------- -------- -------- ------- --------- -------- -------- --------
Balance, December 31, 2004 $ 196 $462,522 $(15,557) $ (959) $(181,073) $(43,585) $ (9,798) $211,746
======== ======== ======== ======= ========= ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements
F-10
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
2004 2003 2002
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (40,468) $ 23,714 $ 13,592
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Income (loss) allocated to minority interests (5,364) 3,083 1,802
Income from discontinued operations allocated to minority interests -- 191 243
Gain from property and land dispositions, net (5,879) (3,658) (361)
Depreciation and amortization 49,510 44,120 37,900
Depreciation allocated to income from discontinued operations -- 347 675
Amortization of deferred financing costs 2,160 1,835 1,231
Reduction in book value of investments -- -- 13,881
Extinguishment of debt 51,643 -- --
Write off of deferred financing costs related to extinguished debt 5,557 -- --
Equity (income) loss from affiliates 151 (667) 16,627
Increase in inventory and other assets (6,591) (5,550) (15,973)
Increase (decrease) in accounts payable and other liabilities 7,103 (814) (2,031)
--------- --------- ---------
Net cash provided by operating activities 57,822 62,601 67,586
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in rental properties (147,965) (50,310) (87,283)
Purchase of short-term investments (106,975) -- --
Proceeds from sales of short-term investments 62,000 -- --
Proceeds related to property and land dispositions 8,257 22,499 3,288
Distributions from (investment in and advances to) affiliates 2,238 (46,945) (68,409)
Proceeds from sale of installment loans on manufactured homes to Origen 13,289 61,994 --
Purchase of installment loans on manufactured homes from Origen -- (74,206) --
Decrease (increase) in notes receivable and officers' notes, net 17,003 28,747 (33,096)
--------- --------- ---------
Net cash used in investing activities (152,153) (58,221) (185,500)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and OP units, net 1,033 26,222 13,801
Borrowings (repayments) on line of credit, net (99,000) 36,000 (30,000)
Payments to redeem notes payable and other debt (426,224) (143,774) (18,488)
Proceeds from notes payable and other debt 744,462 150,000 200,363
Payments for deferred financing costs (9,091) (2,281) (2,914)
Treasury stock purchases (37,201) -- --
Distributions (51,120) (49,153) (46,771)
--------- --------- ---------
Net cash provided by financing activities 122,859 17,014 115,991
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 28,528 21,394 (1,923)
Cash and cash equivalents, beginning of period 24,058 2,664 4,587
--------- --------- ---------
Cash and cash equivalents, end of period $ 52,586 $ 24,058 $ 2,664
========= ========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest including capitalized amounts of $380, $2,082 and $2,915
in 2004, 2003 and 2002, respectively $ 50,413 $ 37,802 $ 34,830
Noncash investing and financing activities:
Debt assumed for rental properties $ 34,186 $ 2,288 $ 20,653
Issuance of partnership units for rental properties -- -- $ 4,500
Issuance of partnership units to retire capitalized lease obligations $ 4,725 $ 4,170 $ 5,520
Unrealized gains (losses) on interest rate swaps $ 335 $ 557 $ (1,851)
The accompanying notes are an integral part of the consolidated financial
statements
F-11
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. BUSINESS: Sun Communities, Inc. (the "Company") is a real estate
investment trust ("REIT") which owns and operates 136 manufactured
housing communities at December 31, 2004 located in eighteen states
concentrated principally in the Midwest and Southeast comprising
approximately 46,856 developed sites and approximately 7,277 sites
suitable for development.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
b. PRINCIPLES OF CONSOLIDATION: The accompanying financial statements
include the accounts of the Company and all majority-owned and controlled
subsidiaries including Sun Communities Operating Limited Partnership (the
"Operating Partnership") SunChamp LLC ("SunChamp"), and effective
December 31, 2003, Sun Home Services, Inc. ("SHS"). SHS is consolidated
beginning in 2003 in accordance with Financial Interpretation No. 46(R),
"Consolidation of Variable Interest Entities". The Company owns 100
percent of the outstanding capital stock of SHS. With total assets of
approximately $92.2 million, SHS actively markets, sells and leases new
and pre-owned manufactured homes for placement in the Company's
properties. SHS has a floorplan line of credit of approximately $8.5
million which is collateralized by $8.5 million of new homes held in
inventory and which is guaranteed by the Company.
The minority interests include 2.5 million Common Operating Partnership
Units ("OP Units") which are convertible into an equivalent number of
shares of the Company's common stock. Such conversion would have no
effect on earnings per share since the allocation of earnings to an OP
Unit is equivalent to earnings allocated to a share of common stock. The
minority interests are adjusted to their relative ownership interest
whenever OP Units or common stock are issued, converted or retired by
reclassification to/from paid-in capital.
Included in minority interests at December 31, 2004 and 2003 are 2
million Series A Perpetual Preferred OP Units ("PPOP Units") issued at
$25 per unit in September 1999 bearing an annual coupon rate of 8.875
percent. The PPOP Units may be called under certain conditions by the
Company at par on or after September 29, 2004, have no stated maturity or
mandatory redemption and are convertible into preferred stock under
certain circumstances. The Company has issued the required notice to
retire these PPOP Units in the first quarter of 2005.
$62.1 million and $58.1 million of Preferred OP Units ("POP Units"),
which are mandatorily redeemable, are included in debt at December 31,
2004 and 2003, respectively, pursuant to the adoption of Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liability
F-12
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
b. PRINCIPLES OF CONSOLIDATION, CONTINUED:
and Equity". These POP Units pay dividends at rates ranging from 6.0
percent to 7.6 percent and mature between 2006 and 2014. Of these POP
Units, $43.8 million are convertible into shares of the Company's common
stock or OP Units at conversion prices ranging from $44 to $68 per unit.
The maximum amount that the Company is required to pay to redeem its POP
Units is $62.1 million and, if converted, approximately 707,000 shares of
the Company's capital stock or OP Units would be issued.
Of the $62.1 million POP Units included in debt at December 31, 2004,
$4.7 and $4.2 million were issued during 2004 and 2003, respectively, in
connection with property acquisitions. These POP Units pay dividends at
7.625% and mature on May 15, 2010.
c. RENTAL PROPERTY: Rental property is recorded at cost, less accumulated
depreciation. The Company measures the recoverability of its assets in
accordance with the Statement of Financial Accounting Standards No. 144
("SFAS 144"), "Accounting for the Impairment or Disposal of Long Lived
Assets." If such assets were deemed to be impaired as a result of this
measurement, the impairment that would be recognized is measured by the
amount by which the carrying amount of the asset exceeds the fair value
of the asset as determined on a discounted net cash flow basis. Assets
are tested for impairment whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. Circumstances
that may prompt a test of recoverability may include a significant
decrease in anticipated market price, an adverse change to the extent or
manner in which an asset may be used or in its physical condition or
other such events that may significantly change the value of the
long-lived asset.
The Company, periodically, receives offers for the sale of one of its
properties. These offers may be the result of an active program initiated
by the Company to sell the property, or from an unsolicited offer to
purchase the property. The typical sale process involves a significant
negotiation and due diligence period between the Company and the
potential purchaser. As the intent of this process is to determine if
there are items that would cause the purchaser to be unwilling to
purchase or the Company unwilling to sell, it is not unusual for such
potential offers of sale/purchase to be withdrawn as such issues arise.
The Company classifies assets as "held for sale" when it is probable, in
its opinion, that a sale transaction will be completed within one year.
Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets. Useful lives are 30 years for land
improvements and buildings and 7 to 15 years for furniture, fixtures and
equipment.
F-13
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
d. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments with an initial maturity of three months or less to be cash
and cash equivalents.
e. SHORT-TERM INVESTMENTS: The Company's short-term investments consist of
investments in auction rate securities with contractual maturities of up
to 30 years. These auction rate securities have interest re-set dates
that occur every 7 to 28 days and can be actively marketed at ongoing
auctions that occur every 7 to 28 days. Auction rate securities are
classified as available-for-sale and are reported on the balance sheet at
par value, which approximates market value. Consequently, interest rate
movements do not affect the balance sheet valuation of these investments.
f. NOTES AND ACCOUNTS RECEIVABLE: The Company evaluates the recoverability
of its receivables whenever events occur or there are changes in
circumstances such that management believes it is probable that it will
be unable to collect all amounts due according to the contractual terms
of the loan and lease agreements. The collectibility of loans is measured
based on the present value of the expected future cash flow discounted at
the loan's effective interest rate or the fair value of the collateral if
the loan is collateral dependent. The reserve for uncollectible accounts
receivable from residents was $0.15 million at December 31, 2004 and
2003.
g. STOCK OPTIONS: The company accounts for its stock options using the
intrinsic value method contained in APB Opinion No. 25. "Accounting for
Stock Issued to Employees." If the Company had accounted for awards using
the method 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 years ended December
31, 2004, 2003 and 2002 (amounts in thousands, except for per share
data):
2004 2003 2002
-------- ------- -------
Net income (loss), as reported $(40,468) $23,714 $13,592
Stock-based compensation expense under fair value method (62) (274) (478)
-------- ------- -------
Pro forma net income (loss) $(40,530) $23,440 $13,114
======== ======= =======
Earnings (loss) per share (Basic), as reported $ (2.21) $ 1.30 $ 0.77
======== ======= =======
Earnings (loss) per share (Basic), pro forma $ (2.21) $ 1.29 $ 0.75
======== ======= =======
Earnings (loss) per share (Diluted), as reported $ (2.21) $ 1.29 $ 0.76
======== ======= =======
Earnings (loss) per share (Diluted), pro forma $ (2.21) $ 1.28 $ 0.74
======== ======= =======
F-14
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
h. INVESTMENTS IN AND ADVANCES TO AFFILIATES: During the period from
December 2001 to October 2003, the Company owned approximately a thirty
percent equity interest in Origen Financial L.L.C., a company engaged in
the business of originating, acquiring and servicing manufactured home
loans. The Company wrote-off its $13.6 million investment in Origen
Financial L.L.C. at December 31, 2002 because of severely deteriorated
industry conditions marked by the bankruptcies of two competing
manufactured home lenders, the closure of the securitization marketplace,
and the resultant liquidity squeeze impacting Origen Financial L.L.C.
In October 2003, Origen Financial, Inc. ("Origen"), a real estate
investment trust, was formed to be the sole member of Origen Financial
L.L.C. In connection with the formation and capitalization of Origen, all
of the members of Origen Financial L.L.C., including the Company,
contributed all of their respective membership interests and warrants to
purchase membership interests in Origen Financial L.L.C. to Origen. None
of the members of Origen Financial L.L.C. (including the Company)
received any monetary consideration or shares of common stock in Origen
in exchange for their contributed membership interests and warrants in
Origen Financial, L.L.C.
In addition, in October 2003, the Company purchased 5,000,000 shares of
common stock of Origen for $50 million and other investors contributed
$100 million to Origen, resulting in an initial $150 million
capitalization of Origen. The Company determined that this investment was
reasonable and prudent because it resulted in a stabilized and
well-financed Origen, allowing Origen to finance its operations from
traditional sources of warehouse financing and access to the
securitization marketplace. This investment occurred at a time that the
Company believed the manufactured home finance industry was beginning to
rebound as interest rates stabilized, the two bankrupt manufactured home
lenders were emerging from bankruptcy and new entrants dedicated to
financing manufactured homes buoyed the industry.
Origen has raised approximately an additional $80 million since October
2003 and is now a public company with demonstrated access to the capital
markets. As of December 31, 2004, the Company's 5,000,000 shares of
Origen common stock represented approximately 20% of the issued and
outstanding shares of the capital stock of Origen. The Company's
investment in Origen has a market value of $37.4 million at December 31,
2004 and is accounted for using the equity method of accounting. During
the year the Company received $2.2 million in dividends from Origen.
Management has no plans to dispose of this investment in the foreseeable
future and believes the difference between the carrying value of Origen
is not other than temporary.
F-15
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
h. INVESTMENTS IN AND ADVANCES TO AFFILIATES, CONTINUED:
Summarized combined financial information of Origen at December 31, 2004
and 2003 and Origen Financial L.L.C. and SHS at December 31, 2002 is
presented below before elimination of intercompany transactions. Also
presented is summarized financial information for Origen Financial L.L.C.
for the period January 1, 2003 to October 7, 2003. This is presented for
informational purposes as the company wrote off its investment in Origen
Financial L.L.C. in December of 2002. SHS was consolidated in the
Company's financial statements as of December 31, 2003.
ORIGEN
2004 ORIGEN FINANCIAL LLC ORIGEN ORIGEN FINANCIAL LLC SHS
(Unaudited) 01/01/03-10/07/03 10/08/03-12/31/03 2002 2002
----------- -------------------- ----------------- -------------------- ---------
Loans receivable, net $ 564,931 $ 279,300 $ 368,509 $ 173,764 $ 33,560
Other assets 119,279 47,903 76,033 53,984 41,220
--------- --------- --------- --------- ---------
Total assets $ 684,210 $ 327,203 $ 444,542 $ 227,748 $ 74,780
========= ========= ========= ========= =========
Notes payable $ 435,761 $ 273,186 $ 277,441 $ 54,946 $ 85,361
Advances under repurchase agreements 20,153 -- -- 141,085 --
Other liabilities 23,167 22,345 24,312 21,413 8,634
--------- --------- --------- --------- ---------
Total liabilities 479,081 295,531 301,753 217,444 93,995
--------- --------- --------- --------- ---------
Preferred interests in subsidiary -- 45,617 -- -- --
Equity (deficit) 205,129 (13,945) 142,789 10,304 (19,215)
--------- --------- --------- --------- ---------
Total liabilities and equity $ 684,210 $ 327,203 $ 444,542 $ 227,748 $ 74,780
========= ========= ========= ========= =========
Revenues $ 54,782 $ 23,755 $ 10,657 $ 20,385 $ 22,516
Expenses 56,554 47,683 8,691 49,572 24,704
Loss from equity investee -- -- -- -- (15,295)
--------- --------- --------- --------- ---------
Net income (loss) $ (1,772) $ (23,928) $ 1,966 $ (29,187) $ (17,483)
========= ========= ========= ========= =========
Sun's equity income (loss) $ (151) $ -- $ 667 $ -- $ (16,627)
========= ========= ========= ========= =========
F-16
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
i. REVENUE RECOGNITION: Rental income attributable to leases is recorded on
a straight-line basis when earned from tenants. Leases entered into by
tenants generally range from month-to-month to one year and are renewable
by mutual agreement of the Company and resident or, in some cases, as
provided by state statute. Revenue from the sale of manufactured homes is
recognized upon transfer of title at the closing of the sales
transaction. The Company offers, through its Home Buying Made Easy
program, retail installment contracts at interest rates of 4.99 to 7.99
percent to qualified buyers of homes within its communities. Currently,
the Company holds 202 loans under this program totaling $6.6 million. The
Company amortizes the interest discount from current market rates related
to this program into income over the term of the note. The Company also
bifurcates the discounted present value of the interest differential
between the home sale and the anticipated rental revenue as required by
Emerging Issues Task Force 00-21 "Revenue Arrangements with Multiple
Deliverables". The differential allocated to the home sale is recognized
as a reduction of revenue from the sale of the home and the differential
allocated to future rental revenue is amortized as rental discount over
the term of the loan.
j. OTHER CAPITALIZED COSTS: The Company capitalizes certain costs (including
interest and other costs) incurred in connection with the development,
redevelopment, capital enhancement and leasing of its properties.
Management is required to use professional judgment in determining
whether such costs meet the criteria for immediate expense or
capitalization. The amounts are dependent on the volume and timing of
such activities and the costs associated with such activities.
Maintenance, repairs and minor improvements to properties are expensed
when incurred. Renovations and improvements to properties are capitalized
and depreciated over their estimated useful lives and construction costs
related to the development of new community or expansion sites are
capitalized until the property is substantially complete. Certain
expenditures to dealers and residents related to obtaining lessees in our
communities are capitalized, as intangible assets, and are amortized over
a seven year period based on the anticipated term of occupancy of a
resident. Costs associated with implementing the Company's new computer
systems are capitalized and amortized over the estimated useful lives of
the related software and hardware.
k. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of cash and cash
equivalents, escrows, receivables, accounts payable, accrued expenses and
other assets and liabilities are reasonable estimates of their fair
values because of the shorter maturities of these instruments. The fair
value of the Company's long-term indebtedness, which is based on the
estimates of management and on rates currently quoted and rates currently
prevailing for comparable loans and instruments of comparable maturities,
is less than the carrying value by approximately $23.6 million and $28.0
million at December 31, 2004 and 2003, respectively. Potential expenses
that would be incurred in an actual sale or settlement are not taken into
consideration.
l. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: The Company has entered
into four derivative contracts consisting of three interest rate swap
agreements and an interest rate cap agreement. The Company's primary
strategy in entering into derivative contracts is
F-17
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
l. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, CONTINUED: to minimize the
variability that changes in interest rates could have on its future cash
flows.
The Company generally employs derivative instruments that effectively
convert a portion of its variable rate debt to fixed rate debt and to cap
the maximum interest rate on its variable rate borrowings. The Company
does not enter into derivative instruments for speculative purposes.
The swap agreements were effective April 2003, and have the effect of
fixing interest rates relative to a collateralized term loan due to FNMA.
One swap matures in July 2009, with an effective fixed rate of 4.93
percent. A second swap matures in July 2012, with an effective fixed rate
of 5.37 percent. The third swap matures in July 2007, with an effective
fixed rate of 3.97 percent. The third swap is effective as long as 90-day
LIBOR is 7 percent or lower. The three swaps have an aggregate notional
amount of $75.0 million. The interest rate cap agreement has a cap rate
of 9.49 percent, a notional amount of $152.4 million and a termination
date of April 03, 2006. Each of the Company's derivative contracts is
based upon 90-day LIBOR.
The Company has designated the first two swaps and the interest rate cap
as cash flow hedges for accounting purposes. The changes in the value of
these hedges are reflected in other comprehensive income/loss on the
balance sheet. 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 year ended December 31, 2004
and 2003 totals negative $0.5 million and positive $0.9 million,
respectively.
In accordance with SFAS No. 133, the "Accounting for Derivative
Instruments and Hedging Activities," which requires all derivative
instruments to be carried at fair value on the balance sheet, the Company
has recorded a liability of $1.1 and $0.9 million as of December 31, 2004
and December 31, 2003, respectively.
These valuation adjustments will only be realized if the Company
terminates the swaps prior to maturity. This is not the intent of the
Company and, therefore, the net of valuation adjustments through the
various maturity dates will approximate zero.
m. DEFERRED TAX ASSETS: The Company has certain subsidiaries that are taxed
as regular corporations. Deferred tax assets or liabilities are
recognized for temporary differences between the tax bases of non-REIT
assets and liabilities and their carrying amounts in the financial
statements and net operating loss carryforwards. Deferred tax assets and
liabilities are measured using currently enacted tax rates. A valuation
allowance is established if based on the insight of available evidence,
it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
n. INVENTORY: Inventory of manufactured homes is stated at lower of specific
cost or market.
F-18
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
o. RECLASSIFICATIONS: Certain 2003 and 2002 amounts have been reclassified
to conform to the 2004 financial statement presentation. Such
reclassifications had no effect on results of operations as originally
presented.
p. USE OF ESTIMATES: The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes including the
depreciable lives and recoverability of real estate assets and the
assumption of interest rates for present value calculations. These
estimates involve judgments with respect to, among other things, future
economic factors that are difficult to predict and are often beyond
management's control. As a result, actual amounts may differ from these
estimates.
2. RENTAL PROPERTY (AMOUNTS IN THOUSANDS):
AT DECEMBER 31,
-----------------------------
2004 2003
----------- -----------
Land $ 116,187 $ 104,541
Land improvements and buildings 1,196,671 1,048,576
Furniture, fixtures, and equipment 35,002 33,080
Land held for future development 31,652 31,409
In place leases 1,988 --
Property under development 1,041 2,799
----------- -----------
1,382,541 1,220,405
Less accumulated depreciation (248,668) (209,921)
----------- -----------
Rental property, net $ 1,133,873 $ 1,010,484
=========== ===========
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, rental homes, maintenance buildings and amenities.
Included in rental property at December 31, 2003 are net carrying amounts
related to capitalized leases of $9.6 million.
During 2004, the Company acquired six stabilized communities, comprising
1,967 developed sites, for $69.4 million consisting of cash of approximately
$53 million and assumption of debt of approximately $16.4 million and three
development communities, comprising 989 developed sites and 570 sites
available for development, for $51.0 million consisting of cash of
approximately $33.1 million and assumption of debt of approximately $17.9
million. During 2003, the Company acquired one development community
comprised of 62 developed sites and 180 sites available for development for
$4.5 million. These transactions have been accounted for as purchases, and
the statements of operations include the operations of the acquired
communities from the dates of their respective acquisitions.
F-19
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
3. DISPOSITION OF PROPERTIES:
In 2002, the Company sold one manufactured home community for cash of
approximately $3.3 million. In 2003 the Company sold four manufactured home
communities for gross proceeds of approximately $24.8 million. In 2004 the
Company sold undeveloped commercial land for $8.8 million resulting in a gain
of approximately $5.9 million.
In accordance with FAS 144, effective for financial statements issued for all
fiscal years beginning after December 15, 2001, results of operations and
gain/(loss) in sales of real estate for properties with identifiable cash
flows sold subsequent to December 31, 2001 are reflected in the Consolidated
Statements of Operations as income from discontinued operations for all
periods presented. Below is a summary of the results of operations of sold
properties through their respective disposition dates (in thousands):
SUMMARY STATEMENT OF OPERATIONS
DISPOSED PROPERTIES
------------------------------
2004 2003 2002
------ ------- -------
Income from rental property $ -- $ 2,763 $ 3,034
Property operating and maintenance expenses -- (533) (495)
Real estate taxes -- (310) (361)
Depreciation and amortization -- (347) (674)
------ ------- -------
Income from operations -- 1,573 1,504
Income allocated to common OP units -- (191) (243)
Gain on sale of discontinued operations -- 8,590 359
------ ------- -------
Income from discontinued operations $ -- $ 9,972 $ 1,620
====== ======= =======
F-20
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
4. NOTES AND OTHER RECEIVABLES (AMOUNTS IN THOUSANDS):
AT DECEMBER 31,
-----------------------
2004 2003
------- -------
Mortgage and other notes receivable, with interest payable at a
weighted average interest rate of 7.49%, maturing at various
dates through August 2008, substantially collateralized by $18,499 $41,736
manufactured home communities
Installment loans on manufactured homes with interest payable
monthly at a weighted average interest rate and maturity of
6.41% and 10 years, respectively 16,447 24,802
Other receivables 10,091 8,290
------- -------
$45,037 $74,828
======= =======
At December 31, 2004, the maturities of mortgage notes and other receivables
are approximately as follows: 2006 - $3.8 and 2008 - $14.7 million. During
2004, $13.3 million of the installment loans collateralized by manufactured
homes were sold at book value (which approximated fair value) to Origen.
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 at December 31, 2004 with
substantial personal recourse. The notes become due in three equal
installments on each of December 31, 2008, 2009 and 2010. Reductions in the
principal balance of these notes were $0.5 million and $0.2 million for the
years 2004 and 2003, respectively.
F-21
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
5. DEBT AND LINE OF CREDIT (AMOUNTS IN THOUSANDS):
The following table sets forth certain information regarding debt:
AT DECEMBER 31,
----------------------------
2004 2003
---------- ----------
Collateralized term loan, 7.01%, due September 9, 2007 $ 40,837 $ 41,547
Collateralized term loans - CMBS, 4.93-5.32%, due July 1, 2011-2016 496,031 --
Collateralized term loans - FNMA, of which $77.4M is variable, due
May 1, 2014 and January 1, 2015 at the Company's option, interest at
3.58 - 5.2% and 3.24% at December 31, 2004 and December 31, 2003,
respectively 389,154 152,363
Preferred OP units, redeemable at various dates through
January 2, 2014, average interest at 6.79% and 7.0%
at December 31, 2004 and December 31, 2003, respectively 62,123 58,148
Senior notes, 6.77%, due May 14, 2005 5,017 350,000
Capitalized lease obligation, 5.51%, matured in January, 2004 -- 9,606
Mortgage notes, other 85,280 62,664
---------- ----------
$1,078,442 $ 674,328
========== ==========
The collateralized term loans totaling $926.0 million at December 31, 2004
are secured by 95 properties comprising approximately 34,339 sites
representing approximately $678.6 million of net book value. The mortgage
notes are collateralized by 15 communities comprising approximately 4,965
sites representing approximately $158.8 million of net book value. 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 million
and the assumption of approximately $4.2 million of debt, which was
immediately retired.
During 2004 the Company completed financings totaling $734 million consisting
of Collateralized Mortgaged Back Securities (CMBS) of $496 million and
additional FNMA financing of $238 million. The Company used approximately
$440 million of proceeds from these financing transactions to retire existing
debt. The Company also incurred extinguishment costs of approximately $57
million in these transactions. Proceeds were also used to acquire communities
and to repurchase $37 million of the Company's stock.
Also during 2004, the Company closed on a $115.0 million unsecured revolving
line of credit bearing interest at LIBOR + 1.75%. At December 31, 2004, $1.3
million of availability was used to back standby letters of credit and $113.7
million remains available to be drawn under the facility.
At December 31, 2004, the total of maturities and amortization of debt during
the next five years are approximately as follows: 2005 - $20.7 million; 2006
- $59.0 million; 2007 - $57.3 million; 2008 - $18.3 million, 2009 - $24.0
million and $899.1 million thereafter.
F-22
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
6. STOCK OPTIONS:
Data pertaining to stock option plans are as follows:
2004 2003 2002
-------------- ------------- -------------
Options outstanding, January 1 810,751 975,767 1,090,794
Options granted 52,200 - 7,500
Option price $34.25-$35.44 N/A $34.92
Options exercised 155,907 154,179 97,665
Option price $22.00-$34.25 $20.13-$35.39 $20.13-$35.39
Options forfeited 10,664 10,837 24,862
Option price $27.03-$34.25 $27.03-$32.75 $27.03-$32.75
Options outstanding, December 31 696,380 (a) 810,751 975,767
Option price $26.50-$35.44 $20-$35.39 $20-$35.39
Options exercisable, December 31 663,830 (a) 765,168 834,249
(a) There are 696,380 and 663,830 options outstanding and exercisable,
respectively, with exercise prices ranging from $26.50 - $35.44 with a
weighted average life of 3.5 years related to the outstanding options.
The weighted average exercise price for these outstanding and exercisable
options is $30.19 and $29.97, respectively.
At December 31, 2004, 98,000 shares of common stock were available for the
granting of options to directors. Directors' options generally vest over a
three-year period and may be exercised for 10 years after date of grant. In
addition, the Company established a Long-Term Incentive Plan in 1997 for
certain employees granting 167,918 options (of which 55,129 remain
outstanding), which became exercisable in equal installments in 2002-2004.
The Company has opted to measure compensation cost utilizing the intrinsic
value method contained in APB Opinion No. 25. "Accounting for Stock Issued to
Employees.". The fair value of each option grant was estimated as of the date
of grant with the following assumptions for options granted:
2004 2003 2002
----------------------- ---- -----
DIRECTORS' EMPLOYEES'
---------- ----------
Estimated fair value per share of options granted during year: $ 3.64 (2) $ 2.49 (2) N/A $ 4.42 (1)
Assumptions:
Annualized dividend yield 6.8% 6.8% N/A 5.9%
Common stock price volatility 16.97% (3) 16.5% (5) N/A 16.4%
Risk-free rate of return 4.33% (4) 3.18% (6) N/A 5.3%
Expected option term (in years) 7 3 N/A 7
(1) 2002 based on valuation as of April 2001 using Black-Scholes-Merton
(closed-form) option-pricing model.
(2) 2004 based on valuation as of May 2004 using Binomial (lattice)
option-pricing model.
(3) Volatility of SUI common stock for the seven years ending May 20, 2004,
the grant date.
(4) Yield of ten-year US Treasury bond as of May 20, 2004, the grant date.
(5) Volatility of SUI common stock for the three years ending May 10, 2004,
the grant date.
(6) Yield of seven-year US Treasury bond as of May 10, 2004, the grant date.
F-23
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
7. STOCKHOLDERS' EQUITY:
In April 1998, the Company declared a dividend of one Preferred Stock
Purchase Right ("Right") for each outstanding share of common stock. The
Rights are not presently exercisable. Each Right entitles the holder, upon
the occurrence of certain specified events, including a material change in
the ownership of the Company, to purchase preferred stock and common stock,
from the Company and/or from another person into which the Company is
merged or which acquires control of the Company.
The Rights may be generally redeemed by the Company at a price of $0.01 per
Right or approximately $0.2 million in total. The Rights expire on June 8,
2008.
In November of 2004, the Company was authorized to repurchase up to
1,000,000 shares of its common stock by its Board of Directors. No
repurchases were made pursuant to this program during the fourth quarter of
2004.
In May of 2004, the Company issued 176,650 restricted stock awards at
$34.25 per share to officers and certain employees which are being
amortized over their ten year vesting schedule. An additional 125,000
shares of restricted stock were issued to officers at $34.25 per share, 25
percent of which vest in three years and 75 percent of which are subject to
certain performance based criteria. Compensation cost recognized in income
for all restricted stock awards was $1.9 million, $1.3 million and $1.1
million in 2004, 2003 and 2002, respectively.
8. OTHER INCOME (LOSS) (AMOUNTS IN THOUSANDS):
The components of other income are as follows for the years ended December
31, 2004, 2003 and 2002:
2004 2003 2002
------- ------- -------
Development fee -- -- 1,425
Brokerage commissions 935 754 834
Other income (loss) (1) (78) 45
------- ------- -------
$ 934 $ 676 $ 2,304
======= ======= =======
F-24
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
9. 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 financial information for the years ended December 31, 2004
and 2003.
YEAR ENDED DECEMBER 31, 2004
-------------------------------------------
PROPERTY MANUFACTURED
OPERATIONS HOME SALES COMBINED
---------- ------------- ---------
Revenues $ 167,835 $ 17,837 $ 185,672
Operating expenses/Cost of sales 55,636 14,383 70,019
--------- --------- ---------
Net operating income (1)/Gross profit 112,199 3,454 115,653
Adjustments to arrive at net income (loss):
Other revenues 7,084 8,097 15,181
General and administrative (12,559) (8,080) (20,639)
Depreciation and amortization (43,923) (1,472) (45,395)
Interest expense (48,074) (169) (48,243)
Debt extinguishment costs (51,643) -- (51,643)
Deferred financing costs related to extinguished debt (5,557) -- (5,557)
Florida storm damage (600) -- (600)
Equity income (loss) from affiliate (151) -- (151)
Loss allocated to minority interest 926 -- 926
--------- --------- ---------
Net income (loss) $ (42,298) $ 1,830 $ (40,468)
========= ========= =========
YEAR ENDED DECEMBER 31, 2003
-------------------------------------------
PROPERTY MANUFACTURED
OPERATIONS HOME SALES COMBINED
---------- ------------- ---------
Revenues $ 159,115 $ 19,516 $ 178,631
Operating expenses 51,583 13,879 65,462
--------- --------- ---------
Net operating income (1)/Gross profit 107,532 5,637 113,169
Adjustments to arrive at net income:
Other revenues 7,175 6,646 13,821
General and administrative (10,536) (6,027) (16,563)
Depreciation and amortization (43,165) (955) (44,120)
Interest expense (38,588) (150) (38,738)
Impairment charge (4,932) -- (4,932)
Equity income from affiliate 667 -- 667
Income allocated to minority interest (9,562) -- (9,562)
Income from discontinued operations 9,972 -- 9,972
--------- --------- ---------
Net income $ 18,563 $ 5,151 $ 23,714
========= ========= =========
(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 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. Net income
includes interest and depreciation and amortization which often have no effect
on the market value of a property and therefore limit its use as a performance
measure. In addition, such expenses are often incurred at a parent company level
and therefore are not necessarily linked to the performance of a real estate
asset. 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.
F-25
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
9. SEGMENT REPORTING (AMOUNTS IN THOUSANDS), CONTINUED:
SELECTED BALANCE SHEET DATA DECEMBER 31, 2004 DECEMBER 31, 2003
------------------------------------- ------------------------------------
PROPERTY MANUFACTURED PROPERTY MANUFACTURED
OPERATIONS HOME SALES COMBINED OPERATIONS HOME SALES COMBINED
---------- ------------ ---------- ---------- ------------ ----------
Identifiable assets:
Investment in rental property, net $1,081,561 $ 52,312 $1,133,873 $ 980,149 $ 30,335 $1,010,484
Cash and cash equivalents 98,235 (674) 97,561 24,043 15 24,058
Inventory of manufactured homes -- 25,964 25,964 -- 17,236 17,236
Investments in and advances to affiliate 48,360 -- 48,360 50,667 -- 50,667
Notes and other receivables 31,574 13,463 45,037 61,534 13,294 74,828
Other assets 51,201 1,171 52,372 41,613 2,688 44,301
---------- ---------- ---------- ---------- ---------- ----------
Total assets $1,310,931 $ 92,236 $1,403,167 $1,158,006 $ 63,568 $1,221,574
========== ========== ========== ========== ========== ==========
10. INCOME TAXES (AMOUNTS IN THOUSANDS):
The Company has elected to be taxed as a real estate investment trust
("REIT") as defined under Section 856(c) of the Internal Revenue Code of
1986, as amended. In order for the Company to qualify as a REIT, at least
ninety-five percent (95%) of the Company's gross income in any year must be
derived from qualifying sources. In addition, a REIT must distribute at
least ninety percent (90%) of its REIT ordinary taxable income to its
stockholders.
Qualification as a REIT involves the satisfaction of numerous requirements
(some on an annual and quarterly basis) established under highly technical
and complex Code provisions for which there are only limited judicial or
administrative interpretations, and involves the determination of various
factual matters and circumstances not entirely within the Company's control.
In addition frequent changes occur in the area of REIT taxation which
require the Company to continually monitor its tax status.
As a REIT, the Company generally will not be subject to U.S. Federal income
taxes at the corporate level on the ordinary taxable income it distributes
to its stockholders as dividends. If the Company fails to qualify as a REIT
in any taxable year, its taxable income will be subject to U.S. Federal
income tax at regular corporate rates (including any applicable alternative
minimum tax). Even if the Company qualifies as a REIT, it may be subject to
certain state and local income taxes and to U.S. Federal income and excise
taxes on its undistributed income.
F-26
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
10. INCOME TAXES (AMOUNTS IN THOUSANDS), CONTINUED:
Dividend payout on taxable income available to common stockholders for the
years ended December 31, 2004, 2003 and 2002:
2004 2003 2002
------- ------- -------
Taxable income available to
common stockholders $ 0 $ 0 $ 6,046
Less tax gain on disposition of properties -- -- --
------- ------- -------
Taxable operating income available to
common stockholders $ 0 $ 0 $ 6,046
======= ======= =======
Total distributions paid to common stockholders $46,126 $44,419 $41,427
======= ======= =======
For income tax purposes, distributions paid to common stockholders consist
of ordinary income, capital gains, and return of capital. For the years
ended December 31, 2004, 2003 and 2002, distributions paid per share were
taxable as follows:
2004 2003 2002
-------------------- -------------------- --------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ---------- ------ ----------
Ordinary Income $ -- 0.0% $ 0.65 27.1% $ 1.54 67.1%
Return of capital 2.44 100.0% 1.76 72.9% 0.75 32.9%
------ ----- ------ ----- ------ -----
$ 2.44 100.0% $ 2.41 100.0% $ 2.29 100.0%
SHS is subject to U.S. Federal income taxes. Deferred taxes reflect the
estimated future tax effect of temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. SHS has net operating loss
carryforwards of approximately $18.1 million at December 31, 2004. A
deferred asset of approximately $1.0 million, net of a valuation allowance
of $5.2 million, is included in other assets in the consolidated balance
sheet as of December 31, 2004. SHS's losses will begin to expire in 2011
through 2022 if not offset by future taxable income. Management believes its
deferred tax asset will be realized but realization is continuously subject
to an assessment as to recoverability in the future. Tax expense was $1.0
million and $0.3 million for the years ending December 31, 2004 and 2003,
respectively and is included in General and administrative - home sales.
F-27
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
11. EARNINGS (LOSS) PER SHARE (AMOUNTS IN THOUSANDS):
2004 2003 2002
-------- -------- --------
Earnings (loss) used for basic and diluted earnings
(loss) per share computation:
Continuing operations $(40,468) $ 13,742 $ 11,972
======== ======== ========
Discontinued operations $ -- $ 9,972 $ 1,620
======== ======== ========
Total shares used for basic earnings (loss) per share 18,318 18,206 17,595
Dilutive securities:
Stock options and other -- 139 186
-------- -------- --------
Total weighted average shares used for diluted
earnings (loss) per share computation 18,318 18,345 17,781
======== ======== ========
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 year
ending December 31, 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.
- --------------------------------------------------------------------------------
F-28
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
12. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following unaudited quarterly amounts are in thousands, except for per
share amounts:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
2004
Total revenues $49,561 $ 48,787 $48,128 $54,377
Total expenses $42,372(a) $102,010(a) $47,137(a) $50,577(a)
Net income (loss) $ 5,570 $(47,901) $ 554 $ 1,309
Weighted average common shares outstanding 18,702 18,639 18,100 17,832
Earnings (loss) per common share-basic $ 0.30 $ (2.57) $ 0.03 $ 0.07
2003
Total revenues $47,966 $ 48,561 $47,557 $48,368
Total expenses $38,903 $ 41,346 $39,685(a) $49,881(a)
Net income $ 6,343 $ 4,539 $ 6,421 $ 6,411
Weighted average common shares outstanding 17,789 17,902 18,504 18,628
Earnings per common share-basic $ 0.36 $ 0.25 $ 0.35 $ 0.34
(a) Certain amounts were reclassified from income (loss) allocated to
minority interest-Preferred OP Units to Interest expense pursuant to
the requirements of SFAS 150, and therefore cause the amounts in this
table to differ from the amounts presented in our previously filed 2004
Forms 10-Q. Total expenses have increased $1,069, $1,075, $1,082,
$1,068, $1,028 and $1,030 for the quarters ended March 31, June 30,
September 30, December 31, 2004 and September 30 and December 31, 2003,
respectively.
13. RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2004, the Financial Accounting Standards Board (FASB) issued
Share-Based Payment Statement No. 123(R), 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 statement, all forms of share-based payments
to employees, including employee stock options, must 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 Statement
eliminates 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. We will be required to apply SFAS No.
123(R) as of the first interim reporting period that begins after June 15,
2005, and we plan to adopt it using the modified-prospective method,
effective July 1, 2005. The Company is currently evaluating the impact of
this standard on its results of operations and financial position.
F-29
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
14. 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 current status is
that the proceedings in North Carolina have been stayed pending final
determination in Michigan as to whether the dispute should be submitted to
arbitration.
The Company is involved in various other legal proceedings arising in the
ordinary course of business. All such proceedings, taken together, are not
expected to have a material adverse impact on our results of operations or
financial condition.
15. RELATED PARTY TRANSACTIONS:
The Company and its affiliates have entered into the following
transactions with Origen and its predecessor, Origen Financial, L.L.C.,
during 2003 and 2004:
- Capital Investment in Origen. As described in Note 1, in 2003 the
Company acquired 5,000,000 shares of common stock in Origen in a
private placement transaction at $10 per share. In addition,
Shiffman Origen LLC (100 percent of which is owned by the Estate of
Milton M. Shiffman, Gary A. Shiffman and members of his family),
acquired 1,025,000 shares of common stock of Origen at $10 per
share.
- Loan Servicing Agreement. Origen Servicing, Inc., a wholly-owned
subsidiary of Origen, services approximately $16.0 million in
manufactured home loans for the Company as of December 31, 2004.
The Company pays Origen Servicing, Inc. an annual servicing fee of
approximately 1.25 percent of the outstanding principal balance of
the loans which totaled approximately $0.2 million and $0.2 million
during 2004 and 2003, respectively.
- Board Membership. Gary A. Shiffman, the Chairman and Chief
Executive Officer of the Company, is a board member of Origen.
- Remarketing Alliance Program. The Company had agreed to provide
Origen certain concessions on manufactured homes that Origen
repossesses in its communities. These concessions may include rent
abatement for the first 12 months that a repossessed home, owned by
Origen, is held for sale and abatement of the commission that the
Company would earn if it brokers such sale. The Company also abates
rent for other major lenders who own repossessed homes in its
communities. The Company may also assist with coordinating the
refurbishment and marketing of the home. The fair value of these
abatements amounted to approximately $250,000 and $65,000 during
2004 and 2003, respectively.
F-30
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
15. RELATED PARTY TRANSACTIONS, CONTINUED:
- Home Buying Made Easy Program. Certain loans under the Company's
Home Buying Made Easy (HBME) program are originated and serviced by
Origen. Loans under this program may, from time to time, be sold to
Origen. Loans under this program may, from time to time, be sold to
Origen. As these loans are made below published rates, the Company
will pay Origen the interest differential between market rates and
the rate paid by the borrower for any such loans sold to Origen.
HBME loans totaling $1.6 million were sold and interest
differential of approximately $70,000 paid to Origen, Inc. in 2004.
- Preferred Membership Interests. During 2003, the Company purchased
$20.5 million in preferred membership interests of Origen
Securitization Company, LLC as an interim financing measure until
Origen's securitization financing arrangement with Citigroup could
be finalized. The investment was recorded at cost which
approximated market value, earned an 11% distribution preference
and was redeemed on October 8, 2003. No gain or loss was recorded
on the transaction.
- Master Loan Purchase Agreement. In June 2003, the Company and
Origen Financial, L.L.C. entered into a master loan purchase
agreement under which the Company from time to time could purchase
from Origen Financial L.L.C. manufactured home loans at a purchase
price equal to the book value of the loans (the "Sun Purchase
Price"), plus accrued and unpaid interest. During 2003, the Company
purchased approximately $74.2 million of manufactured home loans
from Origen Financial, L.L.C. under the master loan purchase
agreement. The loans were subsequently sold back to Origen
Financial, L.L.C. at 100.10% of the Sun Purchase Price plus accrued
and unpaid interest on the loans. Both the purchase and the sale
were made at book value, which approximated fair market value, and
no gain or loss was recorded on the transactions. These
transactions were interim financing transactions and the master
loan purchase agreement was terminated in October of 2003.
In addition to the transactions with Origen described above, Mr. Shiffman
and his affiliates have entered into the following transactions with the
Company:
- Related Party Lease. The Company leases its executive offices in
Southfield, Michigan from an entity in which Mr. Shiffman and
certain of his affiliates beneficially own approximately a 21
percent interest. Rent paid during 2004 and 2003 was approximately
$52,000 per month.
- Tax Consequences Upon Sale of Properties. Gary Shiffman holds
limited partnership interests in the Operating Partnership which
were received in connection with the contribution of 24 properties
from partnerships previously affiliated with him (the "Sun
Partnerships"). Prior to any redemption of these limited
partnership interests for the Company's common stock, Mr. Shiffman
will have tax consequences different from those of the Company and
the Company's public stockholders on the sale of any of the Sun
Partnerships. Four of the properties have been sold to date.
F-31
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
16. SUBSEQUENT EVENTS:
The Company issued the required notice to retire $50 million of PPOP Units
in the first quarter of 2005.
In March 2005, the Company acquired a property located near Tampa, FL for
approximately $7.3 million comprised of 697 recreational vehicle sites and
31 manufactured home sites.
F-32
SUN COMMUNITIES, INC. SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31. 2004
(AMOUNT IN THOUSANDS)
COST CAPITALIZED SUBSEQUENT
INITIAL COST TO COMPANY TO ACQUISITION IMPROVEMENTS
-------------------------- ---------------------------
PROPERTY NAME LOCATION ENCUMBRANCE LAND B & F LAND B & F
- ------------------------- --------------------- --------------- ----------- ------------ ---------- -----------
Academy/Westpoint Canton, MI A 1,485 14,278 - 212
Allendale Allendale, MI A 366 3,684 - 3,895
Alpine Grand Rapids, MI D 729 6,692 - 3,768
Apple Creek Amelia, OH C 543 5,480 - 267
Arbor Terrace Brandenton, FL D 456 4,410 - 562
Ariana Village Lakeland, FL D 240 2,195 - 616
Autumn Ridge Ankeny, IO A 890 8,054 - 897
Bedford Hills Battle Creek, MI B 1,265 11,562 - 561
Bell Crossing Clarksville, TN - 717 1,916 - 3,749
Bonita Lake Bonita Springs, FL D 285 2,641 - 340
Boulder Ridge Pflugerville, TX A 1,000 500 3,324 17,138
Branch Creek Austin, TX A 796 3,716 - 5,419
Brentwood Kentwood, MI D 385 3,592 - 340
Brookside Village Goshen, IN A 260 1,080 386 7,554
Buttonwood Bay Sebring, FL D 1,952 18,294 - 2,384
Byrne Hill Village Toledo, OH D 383 3,903 - 507
Byron Center Byron Center, MI D 253 2,402 - 209
Candlelight Village Chicago Heights, IL D 600 5,623 - 905
Candlewick Court Owosso, MI D 125 1,900 132 1,190
Carrington Pointe Ft. Wayne, IN A 1,076 3,632 - 4,480
Casa Del Valle Alamo, TX D 246 2,316 - 574
Catalina Middletown, OH D 653 5,858 - 1,456
Cave Creek Evans, CO 8,331 2,241 15,343 - 1,857
Chisholm Point Pflugerville, TX A 609 5,286 - 2,955
Clearwater Village South Bend, IN A 80 1,270 61 1,960
Cobus Green Elkhart, IN - 762 7,037 - 805
College Park Estates Canton, MI - 75 800 174 4,910
Comal Farms New Braunfels, TX - 1,455 1,732 - 4,511
Continental Estates Davison, MI D 1,625 16,581 150 1,917
Continental North (1) Davison, MI D (1) (1) - 3,918
Country Acres Cadillac, MI D 380 3,495 - 412
Country Meadows Flat Rock, MI A 924 7,583 296 10,082
Countryside Atlanta Lawrenceville, GA 3,355 1,274 11,475 - -
Countryside Gwinnett Buford, GA 4,793 1,124 10,117 - -
Countryside Lake Lanier Buford, GA 8,148 1,916 17,249 - -
Countryside Village Perry, MI B 275 3,920 185 2,238
Creekside Reidsville, NC - 350 1,423 - 3,085
Creekwood Meadows Burton, MI D 808 2,043 404 6,676
Cutler Estates Grand Rapids, MI B 749 6,941 - 491
Davison East (1) Davison, MI D (1) (1) - 77
GROSS AMOUNT CARRIED AT
DECEMBER 31, 2004
-------------------------------------------
DATE OF
ACCUMULATED CONSTRUCTION (C)
PROPERTY NAME LAND B & F TOTAL DEPRECIATION ACQUISITION (A)
- ------------------------- ----------- ------------- ------------ ----------------- ----------------
Academy/Westpoint 1,485 14,711 16,196 2,195 2000(A)
Allendale 366 7,579 7,945 1,921 1996(A)
Alpine 729 10,460 11,189 2,602 1996(A)
Apple Creek 543 5,747 6,290 1,006 1999(A)
Arbor Terrace 456 4,972 5,428 1,387 1996(A)
Ariana Village 240 2,811 3,051 934 1994(A)
Autumn Ridge 890 8,951 9,841 2,403 1996(A)
Bedford Hills 1,265 12,123 13,388 3,431 1996(A)
Bell Crossing 717 5,665 6,382 812 1999(A)
Bonita Lake 285 2,981 3,266 829 1996(A)
Boulder Ridge 4,324 17,638 21,962 2,825 1998(C)
Branch Creek 796 9,135 9,931 2,362 1995(A)
Brentwood 385 3,932 4,317 1,134 1996(A)
Brookside Village 646 8,634 9,280 2,419 1985(A)
Buttonwood Bay 1,952 20,678 22,630 2,331 2001(A)
Byrne Hill Village 383 4,410 4,793 806 1999(A)
Byron Center 253 2,611 2,864 745 1996(A)
Candlelight Village 600 6,528 7,128 1,809 1996(A)
Candlewick Court 257 3,090 3,347 1,070 1985(A)
Carrington Pointe 1,076 8,112 9,188 1,708 1997(A)
Casa Del Valle 246 2,890 3,136 765 1997(A)
Catalina 653 7,314 7,967 2,495 1993(A)
Cave Creek 2,241 17,200 19,441 270 2004(A)
Chisholm Point 609 8,241 8,850 2,251 1995(A)
Clearwater Village 141 3,230 3,371 1,020 1986(A)
Cobus Green 762 7,842 8,604 2,843 1993(A)
College Park Estates 249 5,710 5,959 1,879 1978(A)
Comal Farms 1,455 6,243 7,698 666 2000(A&C)
Continental Estates 1,775 18,498 20,273 4,778 1996(A)
Continental North (1) - 3,918 3,918 1,131 1996(A)
Country Acres 380 3,907 4,287 1,081 1996(A)
Country Meadows 1,220 17,665 18,885 5,048 1994(A)
Countryside Atlanta 1,274 11,475 12,749 209 2004(A)
Countryside Gwinnett 1,124 10,117 11,241 190 2004(A)
Countryside Lake Lanier 1,916 17,249 19,165 315 2004(A)
Countryside Village 460 6,158 6,618 2,056 1987(A)
Creekside 350 4,508 4,858 525 2000(A&C)
Creekwood Meadows 1,212 8,719 9,931 1,824 1997(C)
Cutler Estates 749 7,432 8,181 2,083 1996(A)
Davison East (1) - 77 77 3 1996(A)
F-33
SUN COMMUNITIES, INC. SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31. 2004
(AMOUNT IN THOUSANDS)
COST CAPITALIZED SUBSEQUENT
INITIAL COST TO COMPANY TO ACQUISITION IMPROVEMENTS
-------------------------- ---------------------------
PROPERTY NAME LOCATION ENCUMBRANCE LAND B & F LAND B & F
- ------------------------- --------------------- --------------- ----------- ------------ ---------- -----------
Deerfield Run Anderson, MI 1,700 990 1,607 - 3,367
Desert View Village West Wendover, NV - 1,119 - - 1,708
Eagle Crest Firestone, CO A 2,015 150 - 26,217
East Fork Batavia, OH - 1,280 6,302 - 4,675
Edwardsville Edwardsville, KS B 425 8,805 541 2,923
Falcon Pointe East Lansing, MI 2,288 450 4,049 - 698
Fisherman's Cove Flint, MI D 380 3,438 - 662
Forest Meadows Philomath, OR D 1,031 2,050 - 261
Four Seasons Elkhart, IN D 500 4,811 - 57
Glen Laurel Concord, NC - 1,641 453 - 6,887
Goldcoaster Homestead, FL D 446 4,234 172 2,025
Grand Grand Rapids, MI D 374 3,587 - 274
Groves Ft. Myers, FL D 249 2,396 - 801
Hamlin Webberville, MI D 125 1,675 536 4,391
High Point Frederika, DE - 898 7,031 - 1,235
Holiday Village Elkhart, IN A 100 3,207 143 1,296
Holly / Hawaiian Gardens Holly, MI D 1,514 13,596 - -
Holly Forest Holly Hill, FL A 920 8,376 - 445
Hunters Glen Wayland, MI 5,301 1,102 11,926 - -
Indian Creek Ft. Myers Beach, FL D 3,832 34,660 - 2,358
Island Lake Merritt Island, FL D 700 6,431 - 389
Kensington Meadows Lansing, MI A 250 2,699 - 3,694
Kenwood La Feria, TX - 145 1,842 - 87
King's Court Traverse City, MI A 1,473 13,782 - 1,712
King's Lake Debary, FL D 280 2,542 - 2,313
Knollwood Estates Allendale, MI 2,611 400 4,061 - 36
Lafayette Place Warren, MI D 669 5,979 - 962
Lake Juliana Auburndale, FL D 335 2,848 - 1,126
Lake San Marino Naples, FL D 650 5,760 - 642
Lakeview Ypsilanti, MI - 1,156 10,903 - -
Leesburg Landing Leesburg, FL - 50 429 921 502
Liberty Farms Valparaiso, IN D 66 1,201 116 2,153
Lincoln Estates Holland, MI D 455 4,201 - 579
Maplewood Mobile Lawrence, IN D 275 2,122 - 1,125
GROSS AMOUNT CARRIED AT
DECEMBER 31, 2004
-------------------------------------------
DATE OF
ACCUMULATED CONSTRUCTION (C)
PROPERTY NAME LAND B & F TOTAL DEPRECIATION ACQUISITION (A)
- ------------------------- ----------- ------------- ------------ ----------------- ----------------
Deerfield Run 990 4,974 5,964 736 1999(A)
Desert View Village 1,119 1,708 2,827 673 1998(C)
Eagle Crest 2,015 26,367 28,382 2,179 1998(C)
East Fork 1,280 10,977 12,257 1,264 2000(A&C)
Edwardsville 966 11,728 12,694 3,931 1987(A)
Falcon Pointe 450 4,747 5,197 211 2003(A)
Fisherman's Cove 380 4,100 4,480 1,453 1993(A)
Forest Meadows 1,031 2,311 3,342 392 1999(A)
Four Seasons 500 4,868 5,368 756 2000(A)
Glen Laurel 1,641 7,340 8,981 568 2001(A&C)
Goldcoaster 618 6,259 6,877 1,493 1997(A)
Grand 374 3,861 4,235 987 1996(A)
Groves 249 3,197 3,446 841 1997(A)
Hamlin 661 6,066 6,727 1,067 1984(A)
High Point 898 8,266 9,164 1,035 1997(A)
Holiday Village 243 4,503 4,746 1,609 1986(A)
Holly / Hawaiian Gardens 1,514 13,597 15,111 232 2004(A)
Holly Forest 920 8,821 9,741 2,214 1997(A)
Hunters Glen 1,102 11,926 13,028 262 2004(A)
Indian Creek 3,832 37,018 40,850 10,518 1996(A)
Island Lake 700 6,820 7,520 2,160 1995(A)
Kensington Meadows 250 6,393 6,643 1,696 1995(A)
Kenwood 145 1,929 2,074 376 1999(A)
King's Court 1,473 15,494 16,967 4,349 1996(A)
King's Lake 280 4,855 5,135 1,448 1994(A)
Knollwood Estates 400 4,097 4,497 485 2001(A)
Lafayette Place 669 6,941 7,610 1,508 1998(A)
Lake Juliana 335 3,974 4,309 1,254 1994(A)
Lake San Marino 650 6,402 7,052 1,827 1996(A)
Lakeview 1,156 10,903 12,059 192 2004(A)
Leesburg Landing 971 931 1,902 247 1996(A)
Liberty Farms 182 3,354 3,536 1,102 1985(A)
Lincoln Estates 455 4,780 5,235 1,328 1996(A)
Maplewood Mobile 275 3,247 3,522 1,073 1989(A)
F-34
SUN COMMUNITIES, INC. SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31. 2004
(AMOUNT IN THOUSANDS)
COST CAPITALIZED SUBSEQUENT
INITIAL COST TO COMPANY TO ACQUISITION IMPROVEMENTS
-------------------------- ---------------------------
PROPERTY NAME LOCATION ENCUMBRANCE LAND B & F LAND B & F
- ------------------------- --------------------- --------------- ----------- ------------ ---------- -----------
Meadow Lake Estates White Lake, MI A 1,188 11,498 127 2,039
Meadowbrook Charlotte, NC - 1,310 6,570 - (1,246)
Meadowbrook Estates Monroe, MI D 431 3,320 379 6,189
Meadowbrook Village Tampa, FL D 519 4,728 - 4,693
Meadows Nappanee, IN D 287 2,300 - 2,638
North Point Estates Pueblo, CO - 1,582 3,027 1 2,798
Oak Crest Austin, TX - 4,311 12,611 - 507
Oakwood Village Miamisburg, OH A 1,964 6,401 - 6,918
Orange Tree Orange City, FL D 283 2,530 15 836
Orchard Lake Milford, OH C 395 4,025 - 116
Pebble Creek Greenwood, IN - 1,030 5,074 - 3,454
Pecan Branch Georgetown, TX - 1,379 - 331 4,387
Pheasant Ridge Lancaster, PA D 2,044 19,279 - 88
Pin Oak Parc St. Louis, MO A 1,038 3,250 467 5,007
Pine Hills Middlebury, IN - 72 544 60 1,827
Pine Ridge Petersburg, VA D 405 2,397 - 1,429
Pine Trace Houston, TX 8,925 2,907 17,169 - -
Presidential Hudsonville, MI A 680 6,314 - 1,388
Richmond Richmond, MI D 501 2,040 - 502
River Haven Grand Haven, MI 9,397 1,800 16,967 - 381
River Ranch Austin, TX - 4,690 843 - 7,042
River Ridge Austin, TX - 3,201 15,090 - 330
Roxbury Goshen, IN A 1,057 9,870 1 196
Royal Country Miami, FL B 2,290 20,758 - 1,085
Saddle Oak Club Ocala, FL A 730 6,743 - 856
Saddlebrook San Marcos, TX - 1,703 11,843 - 529
Scio Farms Ann Arbor, MI D 2,300 22,659 - 4,199
Sea Air Rehoboth Beach, DE 4,193 1,207 10,179 - 1,074
Sherman Oaks Jackson, FL B 200 2,400 240 4,181
Siesta Bay Ft. Myers Beach, FL D 2,051 18,549 - 1,103
Silver Star Orlando, FL D 1,022 9,306 - 532
Snow to Sun Weslaco, TX D 190 2,143 15 1,011
Southfork Belton, MO D 1,000 9,011 - 1,618
St. Clair Place St. Clair, MI D 501 2,029 - 394
GROSS AMOUNT CARRIED AT
DECEMBER 31, 2004
-------------------------------------------
DATE OF
ACCUMULATED CONSTRUCTION (C)
PROPERTY NAME LAND B & F TOTAL DEPRECIATION ACQUISITION (A)
- ------------------------- ----------- ------------- ------------ ----------------- ----------------
Meadow Lake Estates 1,315 13,537 14,852 4,919 1994(A)
Meadowbrook 1,310 5,324 6,634 1,290 2000(A&C)
Meadowbrook Estates 810 9,509 10,319 3,326 1986(A)
Meadowbrook Village 519 9,421 9,940 1,861 1994(A)
Meadows 287 4,938 5,225 1,600 1987(A)
North Point Estates 1,583 5,825 7,408 613 2001(C)
Oak Crest 4,311 13,118 17,429 1,116 2002(A)
Oakwood Village 1,964 13,319 15,283 2,451 1998(A)
Orange Tree 298 3,366 3,664 1,096 1994(A)
Orchard Lake 395 4,141 4,536 829 1999(A)
Pebble Creek 1,030 8,528 9,558 1,227 2000(A&C)
Pecan Branch 1,710 4,387 6,097 410 1999(C)
Pheasant Ridge 2,044 19,367 21,411 1,656 2002(A)
Pin Oak Parc 1,505 8,257 9,762 2,147 1994(A)
Pine Hills 132 2,371 2,503 790 1980(A)
Pine Ridge 405 3,826 4,231 1,305 1986(A)
Pine Trace 2,907 17,169 20,076 292 2004(A)
Presidential 680 7,702 8,382 2,148 1996(A)
Richmond 501 2,542 3,043 560 1998(A)
River Haven 1,800 17,348 19,148 2,113 2001(A)
River Ranch 4,690 7,885 12,575 392 2000(A&C)
River Ridge 3,201 15,420 18,621 1,444 2002(A)
Roxbury 1,058 10,066 11,124 1,180 2001(A)
Royal Country 2,290 21,843 24,133 7,976 1994(A)
Saddle Oak Club 730 7,599 8,329 2,547 1995(A)
Saddlebrook 1,703 12,372 14,075 1,049 2002(A)
Scio Farms 2,300 26,858 29,158 8,121 1995(A)
Sea Air 1,207 11,253 12,460 1,396 1997(A)
Sherman Oaks 440 6,581 7,021 2,213 1986(A)
Siesta Bay 2,051 19,652 21,703 5,617 1996(A)
Silver Star 1,022 9,838 10,860 2,814 1996(A)
Snow to Sun 205 3,154 3,359 782 1997(A)
Southfork 1,000 10,629 11,629 2,269 1997(A)
St. Clair Place 501 2,423 2,924 651 1998(A)
F-35
SUN COMMUNITIES, INC. SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31. 2004
(AMOUNT IN THOUSANDS)
COST CAPITALIZED SUBSEQUENT
INITIAL COST TO COMPANY TO ACQUISITION IMPROVEMENTS
-------------------------- ---------------------------
PROPERTY NAME LOCATION ENCUMBRANCE LAND B & F LAND B & F
- ------------------------- --------------------- --------------- ----------- ------------ ---------- -----------
Stonebridge San Antonio, TX - 2,515 2,096 - 5,268
Stonebridge Richfield Twp., MI - 2,044 - 2,111 -
Summit Ridge Converse, TX - 2,615 2,092 - 5,568
Sun Villa Reno, NV 6,460 2,385 11,773 - 999
Sunset Ridge Kyle, TX - 2,190 2,775 - 5,115
Sunset Ridge Portland, MI - 2,044 - - 12,508
Timber Ridge Ft. Collins, CO A 990 9,231 - 1,522
Timberbrook Bristol, IN B 490 3,400 101 5,491
Timberline Estates Grand Rapids, MI A 535 4,867 - 802
Town and Country Traverse City, MI D 406 3,736 - 309
Valley Brook Indianapolis, IN A 150 3,500 1,277 9,367
Village Trails Howard City, MI D 988 1,472 - 746
Water Oak Lady Lake, FL A 2,503 17,478 170 6,813
West Glen Village Indianapolis, IN D 1,100 10,028 - 1,315
Westbrook Toledo, OH A 1,110 10,462 - 1,030
Westbrook Senior Toledo, OH A 355 3,295 - 383
White Lake White Lake, MI A 672 6,179 - 4,775
White Oak Mt. Morris, MI A 782 7,245 112 3,753
Willowbrook Toledo, OH A 781 7,054 - 846
Windham Hills Jackson, MI A 2,673 2,364 - 7,936
Woodhaven Place Woodhaven, MI A 501 4,541 - 1,051
Woodlake Estates Yoder, IN D 632 3,674 - 2,788
Woodlake Trails San Antonio, TX - 1,186 287 160 3,392
Woodland Park Estates Eugene, OR 6,702 1,592 14,398 - 493
Woods Edge West Lafayette, IN D 100 2,600 3 8,037
Woodside Terrace Holland, OH A 1,064 9,625 - 1,650
Worthington Arms Lewis Center, OH A 376 2,624 - 1,505
Corporate Headquarters Southfield, MI - - - - 7,617
Sun Homes Various - - - 704 54,674 (3)
----------- ------------ ---------- -----------
134,694 831,439 13,815 402,371
=========== ============ ========== ===========
GROSS AMOUNT CARRIED AT
DECEMBER 31, 2004
-------------------------------------------
DATE OF
ACCUMULATED CONSTRUCTION (C)
PROPERTY NAME LAND B & F TOTAL DEPRECIATION ACQUISITION (A)
- ------------------------- ----------- ------------- ------------ ----------------- ----------------
Stonebridge 2,515 7,364 9,879 839 2000(A&C)
Stonebridge 4,155 - 4,155 - 1998(C)
Summit Ridge 2,615 7,660 10,275 899 2000(A&C)
Sun Villa 2,385 12,772 15,157 2,673 1998(A)
Sunset Ridge 2,190 7,890 10,080 1,040 2000(A&C)
Sunset Ridge 2,044 12,508 14,552 1,258 1998(C)
Timber Ridge 990 10,753 11,743 2,967 1996(A)
Timberbrook 591 8,891 9,482 2,936 1987(A)
Timberline Estates 535 5,669 6,204 1,927 1994(A)
Town and Country 406 4,045 4,451 1,179 1996(A)
Valley Brook 1,427 12,867 14,294 4,146 1989(A)
Village Trails 988 2,218 3,206 467 1998(A)
Water Oak 2,673 24,291 26,964 7,846 1993(A)
West Glen Village 1,100 11,343 12,443 3,791 1994(A)
Westbrook 1,110 11,492 12,602 2,152 1999(A)
Westbrook Senior 355 3,678 4,033 428 2001(A)
White Lake 672 10,954 11,626 2,284 1997(A)
White Oak 894 10,998 11,892 2,525 1997(A)
Willowbrook 781 7,900 8,681 1,659 1997(A)
Windham Hills 2,673 10,300 12,973 1,824 1998(A)
Woodhaven Place 501 5,592 6,093 1,183 1998(A)
Woodlake Estates 632 6,462 7,094 1,226 1998(A)
Woodlake Trails 1,346 3,679 5,025 433 2000(A&C)
Woodland Park Estates 1,592 14,891 16,483 3,256 1998(A)
Woods Edge 103 10,637 10,740 2,626 1985(A)
Woodside Terrace 1,064 11,275 12,339 2,757 1997(A)
Worthington Arms 376 4,129 4,505 1,394 1990(A)
Corporate Headquarters - 7,617 7,617 2,061 Various
Sun Homes 704 54,674 55,378 3,065 Various
----------- ------------- ------------ ----------------
148,509 (2) 1,234,032 1,382,541 248,668
=========== ============= ============ ================
A These communities collateralize $389.2 million of secured debt.
B These communities collateralize $40.8 million of secured debt.
C These communities collateralize $4.5 million of secured debt.
D These communities collateralize $496 million of secured debt.
(1) The initial cost for this property is included in the initial cost reported
for Continental Estates.
(2) Includes $1.93 million of land classified in Property under development
(3) Includes $51.5 million of manufactured homes leased to residents in various
communities
F-36
SUN COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED
DECEMBER 31, 2004
(amounts in thousands)
The change in investment in real estate for the years ended December 31, 2004,
2003 and 2002 is as follows:
2004 2003 2002
----------- ----------- -----------
Balance, beginning of year $ 1,220,405 $ 1,174,837 $ 953,656
Community and land acquisitions, including
immediate improvements 118,222 4,514 69,801
Community expansion and development 11,606 14,426 25,355
Improvements, other 56,756 49,186 129,741
Dispositions and other (24,448) (22,558) (3,716)
----------- ----------- -----------
Balance, end of year $ 1,382,541 $ 1,220,405 $ 1,174,837
=========== =========== ===========
The change in accumulated depreciation for the years ended December 31, 2004,
2003 and 2002 is as follows:
2004 2003 2002
----------- ----------- -----------
Balance, beginning of year $ 209,921 $ 175,477 $ 140,322
Depreciation for the period 40,859 39,072 36,196
Dispositions and other (2,112) (4,628) (1,041)
----------- ----------- -----------
Balance, end of year $ 248,668 $ 209,921 $ 175,477
=========== =========== ===========
F-37
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.6 Form of Restricted Stock Award Agreement#
10.28 One Hundred Seventy-Second Amendment to Second Amended and
Restated Limited Partnership Agreement of the Operating
Partnership
10.29 Restricted Stock Award Agreement between Sun Communities, Inc. and
Gary A. Shiffman, dated May 10, 2004#
10.30 First Amendment to Restricted Stock Award Agreement between Sun
Communities, Inc., and Gary A. Shiffman#
10.31 Restricted Stock Award Agreement between Sun Communities, Inc. and
Jeffrey P. Jorissen, dated May 10, 2004#
10.32 First Amendment to Restricted Stock Award Agreement between Sun
Communities, Inc. and Jeffrey P. Jorissen#
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio
Earnings to Combined Fixed Charges and Preferred Dividends
21.1 List of Subsidiaries of Sun Communities, Inc.
23.1 Consent of PriceWaterhouseCoopers LLP
23.2 Consent of Grant Thornton LLP
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002