XNYS:SUI Sun Communities Inc Quarterly Report 10-Q Filing - 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012.
 
or

[    ] TRANSITION PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission file number 1-12616

SUN COMMUNITIES, INC.
(Exact Name of Registrant as Specified in its Charter)


Maryland
 
38-2730780
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
27777 Franklin Rd.
 
 
Suite 200
 
 
Southfield, Michigan
 
48034
(Address of Principal Executive Offices)
 
(Zip Code)

(248) 208-2500
(Registrant’s telephone number, including area code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [ X  ]  No [   ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (Check one):

Large accelerated filer [ X ]
Accelerated filer [ ]
Non-accelerated filer [   ]
Smaller reporting company [   ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]  No [ X ]


Number of shares of Common Stock, $0.01 par value per share, outstanding
as of June 30, 2012:  26,471,431




SUN COMMUNITIES, INC.

INDEX

 
 
Pages
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited): 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II – OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 6.
 



2


PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2012 AND DECEMBER 31, 2011
(In thousands, except per share amounts)

 
(Unaudited) June 30, 2012
 
December 31, 2011
ASSETS
 
 
 
Investment property, net
$
1,236,337

 
$
1,196,606

Cash and cash equivalents
4,499

 
5,857

Inventory of manufactured homes
4,396

 
5,832

Notes and other receivables
121,908

 
114,884

Other assets
45,179

 
44,795

TOTAL ASSETS
$
1,412,319

 
$
1,367,974

LIABILITIES
 
 
 
Debt
$
1,286,156

 
$
1,268,191

Lines of credit
24,631

 
129,034

Other liabilities
71,673

 
71,404

TOTAL LIABILITIES
$
1,382,460

 
$
1,468,629

Commitments and contingencies

 

STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
Preferred stock, $0.01 par value, 10,000 shares authorized, none issued

 

Common stock, $0.01 par value, 90,000 shares authorized   (June 30, 2012 and December 31, 2011, 28,273 and 23,612 shares issued, respectively)
283

 
236

Additional paid-in capital
714,052

 
555,981

Accumulated other comprehensive loss
(735
)
 
(1,273
)
Distributions in excess of accumulated earnings
(644,220
)
 
(617,953
)
Treasury stock, at cost  (June 30, 2012 and December 31, 2011, 1,802 shares)
(63,600
)
 
(63,600
)
Total Sun Communities, Inc. stockholders' equity (deficit)
5,780

 
(126,609
)
Noncontrolling interests:
 
 
 
A-1 preferred OP units
45,548

 
45,548

Common OP units
(21,469
)
 
(19,594
)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)
29,859

 
(100,655
)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
$
1,412,319

 
$
1,367,974




See accompanying Notes to Consolidated Financial Statements.


3


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 2012 AND 2011
(In thousands, except per share amounts)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
REVENUES
 
 
 
 
 
 
 
Income from real property
$
61,507

 
$
52,264

 
125,803

 
106,100

Revenue from home sales
11,439

 
8,146

 
21,052

 
16,381

Rental home revenue
6,511

 
5,427

 
12,802

 
10,757

Ancillary revenues, net
92

 
109

 
355

 
403

Interest
2,655

 
2,291

 
5,060

 
4,359

Other income (loss), net
175

 
25

 
435

 
(24
)
Total revenues
82,379

 
68,262

 
165,507

 
137,976

COSTS AND EXPENSES
 
 
 
 
 
 
 
Property operating and maintenance
17,168

 
13,994

 
33,194

 
27,452

Real estate taxes
4,936

 
4,098

 
9,808

 
8,213

Cost of home sales
8,971

 
6,401

 
16,744

 
12,892

Rental home operating and maintenance
4,148

 
3,754

 
7,972

 
7,427

General and administrative - real property
5,182

 
4,833

 
10,240

 
9,311

General and administrative - home sales and rentals
2,238

 
1,952

 
4,447

 
3,925

Acquisition related costs
423

 
1,151

 
587

 
1,400

Depreciation and amortization
21,067

 
18,121

 
40,935

 
34,800

Interest
16,781

 
15,225

 
33,578

 
30,631

Interest on mandatorily redeemable debt
833

 
829

 
1,674

 
1,655

Total expenses
81,747

 
70,358

 
159,179

 
137,706

Income (loss) before income taxes and distributions from affiliates
632

 
(2,096
)
 
6,328

 
270

(Provision) benefit for state income taxes
(53
)
 
259

 
(106
)
 
128

Distributions from affiliates
1,900

 
850

 
2,650

 
1,200

Net income (loss)
2,479

 
(987
)
 
8,872

 
1,598

Less:  Preferred return to A-1 preferred OP units
579

 
51

 
1,158

 
51

Less:  Amounts attributable to noncontrolling interests
237

 
(148
)
 
674

 
37

Net income (loss) attributable to Sun Communities, Inc. common stockholders
$
1,663

 
$
(890
)
 
7,040

 
1,510

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
26,469

 
21,090

 
26,028

 
21,068

Diluted
26,485

 
21,090

 
26,045

 
23,146

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.06

 
$
(0.04
)
 
$
0.27

 
$
0.07

Diluted
$
0.06

 
$
(0.04
)
 
$
0.27

 
$
0.07

 
 
 
 
 
 
 
 
Dividends per common share:
$
0.63

 
$
0.63

 
$
1.26

 
$
1.26

 
 
 
 
 
 
 
 


See accompanying Notes to Consolidated Financial Statements.


4


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE PERIODS ENDED JUNE 30, 2012 AND 2011
(In thousands)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Net income (loss)
$
2,479

 
$
(987
)
 
$
8,872

 
$
1,598

Unrealized gain on interest rate swaps
343

 
19

 
599

 
422

Total comprehensive income (loss)
2,822

 
(968
)
 
9,471

 
2,020

Less: Comprehensive income (loss) attributable to the noncontrolling interests
274

 
(147
)
 
735

 
75

Comprehensive income (loss) attributable to Sun Communities, Inc. common stockholders
$
2,548

 
$
(821
)
 
$
8,736

 
$
1,945


See accompanying Notes to Consolidated Financial Statements.


5


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2012
(In thousands)
(Unaudited)

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive (Loss) Income
 
Distributions in Excess of Accumulated Earnings
 
Treasury Stock
 
Total Sun Communities Stockholders' Equity (Deficit)
 
Non-controlling Interest
 
Total Stockholders' Equity (Deficit)
Balance as of December 31, 2011
$
236

 
$
555,981

 
$
(1,273
)
 
$
(617,953
)
 
$
(63,600
)
 
$
(126,609
)
 
$
25,954

 
$
(100,655
)
Issuance of common stock from exercise of options, net

 
149

 

 

 

 
149

 

 
149

Issuance and associated costs of common stock, net
47

 
157,296

 

 

 

 
157,343

 

 
157,343

Share-based compensation - amortization and forfeitures

 
626

 

 
44

 

 
670

 

 
670

Net income

 

 

 
7,040

 

 
7,040

 
674

 
7,714

Unrealized gain on interest rate swaps

 

 
538

 

 

 
538

 
61

 
599

Cash distributions

 

 

 
(30,416
)
 

 
(30,416
)
 
(2,610
)
 
(33,026
)
Distributions declared

 

 

 
(2,935
)
 

 
(2,935
)
 

 
(2,935
)
Balance as of June 30, 2012
$
283

 
$
714,052

 
$
(735
)
 
$
(644,220
)
 
$
(63,600
)
 
$
5,780

 
$
24,079

 
$
29,859




See accompanying Notes to Consolidated Financial Statements.


6


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2012
 
2011
OPERATING ACTIVITIES:
 
 
 
Net income
$
8,872

 
$
1,598

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain from land disposition
(87
)
 

Gain on valuation of derivative instruments
(4
)
 
(5
)
Stock compensation expense
688

 
634

Depreciation and amortization
40,010

 
34,218

Amortization of deferred financing costs
813

 
936

Distributions from affiliates
(2,650
)
 
(1,200
)
Change in notes receivable from financed sales of inventory homes, net of repayments
(4,435
)
 
(2,581
)
Change in inventory, other assets and other receivables, net
4,729

 
(7,102
)
Change in accounts payable and other liabilities
(4,452
)
 
2,593

NET CASH PROVIDED BY OPERATING ACTIVITIES
43,484

 
29,091

INVESTING ACTIVITIES:
 
 
 
Investment in properties
(60,930
)
 
(39,507
)
Acquisitions
(24,482
)
 
(50,858
)
Proceeds related to affiliate dividend distribution
2,650

 
1,200

Proceeds related to disposition of land
172

 

Proceeds related to disposition of assets and depreciated homes, net
1,211

 
2,313

Increase in notes receivable, net
(5,736
)
 
(551
)
NET CASH USED IN INVESTING ACTIVITIES
(87,115
)
 
(87,403
)
FINANCING ACTIVITIES:
 
 
 
Issuance and associated costs of common stock, OP units, and preferred OP units, net
157,343

 
47,097

Net proceeds from stock option exercise
149

 
690

Distributions to stockholders, OP unit holders, and preferred OP unit holders
(34,184
)
 
(29,009
)
Borrowings on lines of credit
71,635

 
101,400

Payments on lines of credit
(176,038
)
 
(107,602
)
Proceeds from issuance of other debt
54,567

 
172,483

Payments on other debt
(30,521
)
 
(129,221
)
Payments for deferred financing costs
(678
)
 
(1,939
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
42,273

 
53,899

Net decrease in cash and cash equivalents
(1,358
)
 
(4,413
)
Cash and cash equivalents, beginning of period
5,857

 
8,420

Cash and cash equivalents, end of period
$
4,499

 
$
4,007

SUPPLEMENTAL INFORMATION:
 
 
 
Cash paid for interest
$
28,519

 
$
25,441

Cash paid for interest on mandatorily redeemable debt
$
1,677

 
$
1,657

Cash paid for state income taxes
$
320

 
$
359

Noncash investing and financing activities:
 
 
 
Unrealized gain on interest rate swaps
$
599

 
$
422

Reduction in secured borrowing balance
$
6,081

 
$
4,739

Change in dividends declared and outstanding
$
2,935

 
$

Noncash investing and financing activities at the date of acquisition:
 
 
 
Acquisitions - A-1 preferred OP units issued
$

 
$
45,548

Acquisitions - debt assumed
$

 
$
52,449

Acquisitions - other liabilities
$

 
$
1,833


See accompanying Notes to Consolidated Financial Statements.

7

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1.      Basis of Presentation

These unaudited interim Consolidated Financial Statements of Sun Communities, Inc., a Maryland corporation, and all wholly-owned or majority-owned  and controlled subsidiaries, including Sun Communities Operating Limited Partnership (the “Operating Partnership”), SunChamp LLC (“SunChamp”), and Sun Home Services, Inc. (“SHS”), have been prepared pursuant to the Securities and Exchange Commission (“SEC”) rules and regulations and in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC on February 24, 2012, as amended on March 23, 2012 (the “2011 Annual Report”).

Reference in this report to Sun Communities, Inc., “we”, “our”, “us” and the “Company” refer to Sun Communities, Inc. and its subsidiaries, unless the context indicates otherwise.

The accompanying Consolidated Financial Statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature.

The following Notes to Consolidated Financial Statements present interim disclosures as required by the SEC. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our 2011 Annual Report.

Certain reclassifications have been made to prior periods’ financial statements in order to conform to current period presentation.

2.      Real Estate Acquisitions

In May 2011, we acquired Orange City RV Resort (“Orange City”), a Florida recreational vehicle community comprising 525 developed sites.  In June 2011, we closed on the acquisition of Kentland Communities (“Kentland”), comprising 17 manufactured home communities and one recreational vehicle community.  The 18 communities acquired are located in western Michigan and comprise 5,434 developed sites.  In November 2011, we acquired Cider Mill Crossings (“Cider Mill”), a Michigan manufactured home community comprising 262 developed sites through an auction. In December 2011, we acquired three Florida RV communities, Club Naples RV Resort, Kountree RV Resort, and North Lake RV Resort (collectively the “Florida Properties”), two of which are in Naples, Florida and one of which is in Moore Haven, Florida, comprised of 740 developed sites. These acquisitions complement our existing portfolio and create both short-term and long-term growth opportunities.

In February 2012, we acquired three additional Florida RV communities, Three Lakes RV Resort, Blueberry Hill RV Resort and Grand Lake Estates (collectively, the “Additional Florida Properties”), one of which is located in Hudson, Florida, one of which is located in Bushnell, Florida and one of which is located in Orange Lake, Florida, comprised of 1,114 RV sites in the aggregate. We believe this portfolio provides for growth from both rental increases and through improved seasonal occupancy.

On July 24, 2012 we acquired Blazing Star, a recreational vehicle community with 260 sites located in San Antonio, Texas, for a purchase price of $7.1 million, comprised of $4.1 million of assumed debt and $3.0 million of cash.
Acquisition related costs of approximately $0.6 million and $1.4 million have been incurred for the six months ended June 30, 2012 and 2011, respectively, and are presented as “Acquisition related costs” in our Consolidated Statements of Operations.

During the third quarter of 2011, we completed the purchase price allocation for Kentland and Orange City. In the first quarter of 2012 some of the amounts previously estimated changed. The changes in estimates included a decrease in other assets of $0.8 million and a decrease in cash consideration of $0.8 million for the Florida Properties. The measurement period adjustments represent updates made to the purchase price allocation based on the escrow amount required for the Additional Florida Properties which is reflected in the purchase price allocation for the Additional Florida Properties. There were no significant adjustments to our Consolidated Statements of Operations.

The purchase price allocation for Cider Mill, the Florida Properties, and the Additional Florida Properties is preliminary and may be adjusted as final costs and final valuations are determined.




8

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


2.      Real Estate Acquisitions, continued

The following table summarizes the amounts of the assets acquired and liabilities assumed recognized at the acquisition dates and the consideration paid for Kentland, Orange City, Cider Mill, the Florida Properties, and the Additional Florida Properties (in thousands):
At Acquisition Date
 
Kentland
 
Orange City
 
Cider Mill
 
Florida Properties
 
Addtl Florida Properties
 
Total
Investment in property
 
$
131,228

 
$
6,460

 
$
2,088

 
$
24,027

 
$
25,384

 
$
189,187

Inventory of manufactured homes
 
1,150

 

 

 
36

 
112

 
1,298

Notes
 
3,542

 

 

 

 

 
3,542

In-place leases
 
9,200

 
10

 

 
190

 
180

 
9,580

Other assets
 
1,269

 

 

 
97

 

 
1,366

Other liabilities
 
(2,067
)
 

 
(1,678
)
 
(1,237
)
 
(1,194
)
 
(6,176
)
Assumed debt
 
(52,398
)
 

 

 

 

 
(52,398
)
 
 
 

 
 

 
 

 
 

 
 

 
 

Total identifiable assets and liabilities assumed
 
$
91,924

 
$
6,470

 
$
410

 
$
23,113

 
$
24,482

 
$
146,399

 
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 

 
 

 
 

 
 

 
 

 
 

 Consideration
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 

 
 

 
 

 
 

 
 

 
 

Cash (1)
 
$
27,383

 
$
2,533

 
$
410

 
$
6,113

 
$
24,482

 
$
60,921

A-1 preferred OP units
 
45,548

 

 

 

 

 
45,548

New debt proceeds
 
18,993

 
3,937

 

 
17,000

 

 
39,930

 
 
 

 
 

 
 

 
 

 
 

 
 

Fair value of total consideration transferred
 
$
91,924

 
$
6,470

 
$
410

 
$
23,113

 
$
24,482

 
$
146,399


(1) Subsequent to the acquisition, on March 30, 2012, the Additional Florida Properties were encumbered with a $19.0 million loan through Bank of America and The PrivateBank (See Note 8).

As of June 30, 2012, the total residual value of the acquired in-place leases above is $8.2 million. The amortization period is 7 years.

The results of operations of Kentland, Orange City, Cider Mill, the Florida Properties, and the Additional Florida Properties are included in the Consolidated Statements of Operations beginning on their acquisition dates of June 2011, May 2011, November 2011, December 2011, and February 2012, respectively. The following unaudited pro forma financial information presents the results of our operations for the six months ended June 30, 2012 and 2011 as if the properties were acquired on January 1, 2010 for those communities acquired in 2011 and January 1, 2011 for those that were acquired in 2012. The unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of either the results of operations that would have actually occurred or the future results of operations (in thousands, except per-share data). (1) 
 
Six Months Ended June 30,
 
(unaudited)
 
2012
 
2011
Total revenues
$
165,999

 
$
153,739

Net income attributable to Sun Communities, Inc. shareholders
$
7,335

 
$
4,606

Net income per share attributable to Sun Communities, Inc. shareholders - basic
0.28

 
0.22

Net income per share attributable to Sun Communities, Inc. shareholders - diluted
0.28

 
0.20


(1) Below are nonrecurring expenses that have been adjusted for the pro forma results above:
(a) The sellers had management fees of $0.7 million for the six months ended June 30, 2011 that have been excluded from above as these fees will not continue going forward.
(b) Transaction costs related to the acquisitions are not expected to have a continuing impact and therefore have been excluded from 2012 and included in 2011.

9

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


2.      Real Estate Acquisitions, continued

The amount of Kentland's, Orange City's, Cider Mill's, the Florida Properties', and the Additional Florida Properties' revenue and net income included in the Consolidated Statements of Operations for the six months ended June 30, 2012 is set forth in the following table (in thousands):

 
Revenue
 
Net Income
Six Months Ended June 30, 2012
$
16,162

 
$
2,034


3.      Investment Property

The following table sets forth certain information regarding investment property (in thousands):

 
 
June 30, 2012
 
December 31, 2011
Land
 
$
153,397

 
$
140,230

Land improvements and buildings
 
1,364,660

 
1,342,325

Rental homes and improvements
 
276,991

 
246,245

Furniture, fixtures, and equipment
 
42,394

 
41,172

Land held for future development
 
25,606

 
24,633

Investment property
 
1,863,048

 
1,794,605

Accumulated depreciation
 
(626,711
)
 
(597,999
)
Investment property, net
 
$
1,236,337

 
$
1,196,606


Land improvements and buildings consist primarily of infrastructure, roads, landscaping, clubhouses, maintenance buildings and amenities.

See Note 2 for details on recent acquisitions.

4.      Transfers of Financial Assets

We completed various transactions with an unrelated entity involving our notes receivable during 2012 under which we received a total of $11.5 million of cash proceeds in exchange for relinquishing our right, title and interest in certain notes receivable. We have no further obligations or rights with respect to the control, management, administration, servicing, or collection of the installment notes. However, we are subject to certain recourse provisions requiring us to purchase the underlying homes collateralizing such notes, in the event of a note default and subsequent repossession of the home by the unrelated entity. The recourse provisions are considered to be a form of continuing involvement, and therefore these transferred loans did not meet the requirements for sale accounting. We continue to recognize these transferred loans on our balance sheet and refer to them as collateralized receivables as a transfer of financial assets. The proceeds from the transfer have been recognized as a secured borrowing.

In the event of note default, and subsequent repossession of a manufactured home by the unrelated entity, the terms of the agreement require us to repurchase the manufactured home. Default is defined as the failure to repay the installment note according to contractual terms. The repurchase price is calculated as a percentage of the outstanding principal balance of the collateralized receivable, plus any outstanding late fees, accrued interest, legal fees, and escrow advances associated with the installment note.  The percentage used to determine the repurchase price of the outstanding principal balance on the installment note is based on the number of payments made on the note. In general, the repurchase price is determined as follows:

Number of Payments
 
Repurchase %
Less than or equal to 15
 
100
%
Greater than 15 but less than 64
 
90
%
Equal to or greater than 64 but less than 120
 
65
%
120 or more
 
50
%

10

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



The transferred assets have been classified as collateralized receivables in Notes and Other Receivables (see Note 5) and the cash proceeds received from these transactions have been classified as a secured borrowing in Debt (see Note 8) within the Consolidated Balance Sheets. The balance of the collateralized receivables was $86.5 million (net of allowance of $0.5 million ) and $81.2 million (net of allowance of $0.5 million) as of June 30, 2012 and December 31, 2011, respectively.  The outstanding balance on the secured borrowing was $87.1 million and $81.7 million as of June 30, 2012 and December 31, 2011, respectively.

The balances of the collateralized receivables and secured borrowings fluctuate. The balances increase as additional notes receivable are transferred and exchanged for cash proceeds. The balances are reduced as the related collateralized receivables are collected from the customers, or as the underlying collateral is repurchased. The change in the aggregate gross principal balance of the collateralized receivables is as follows (in thousands):

 
Six Months Ended
 
Year Ended
 
June 30, 2012
 
December 31, 2011
Beginning balance
$
81,682

 
$
71,278

Financed sales of manufactured homes
11,467

 
21,509

Principal payments and payoffs from our customers
(2,671
)
 
(4,425
)
Principal reduction from repurchased homes
(3,409
)
 
(6,680
)
Total activity
5,387

 
10,404

Ending balance
$
87,069

 
$
81,682


The collateralized receivables earn interest income and the secured borrowings accrue interest expense at the same interest rates. The amount of interest income and expense recognized was $4.4 million and $4.0 million for the six months ended June 30, 2012 and 2011, respectively.  

11

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


5.      Notes and Other Receivables

The following table sets forth certain information regarding notes and other receivables (in thousands):

 
 
June 30, 2012
 
December 31, 2011
Installment notes receivable on manufactured homes, net
 
$
15,034

 
$
13,417

Collateralized receivables, net (see Note 4)
 
86,539

 
81,176

Other receivables, net
 
20,335

 
20,291

Total notes and other receivables
 
$
121,908

 
$
114,884


Installment Notes Receivable on Manufactured Homes

The installment notes of $15.0 million (net of allowance of $0.1 million) and $13.4 million (net of allowance of $0.1 million) as of June 30, 2012 and December 31, 2011, respectively, are collateralized by manufactured homes. The notes represent financing provided by us to purchasers of manufactured homes primarily located in our communities and require monthly principal and interest payments. This also includes the notes receivable that were purchased in the Kentland acquisition. See Note 2 for more information. The notes have a net weighted average interest rate and maturity of 8.2 percent and 10.8 years as of June 30, 2012, and 7.9 percent and 10.3 years as of December 31, 2011.

The change in the aggregate gross principal balance of the installment notes is as follows (in thousands):

 
Six Months Ended
 
Year Ended
 
June 30, 2012
 
December 31, 2011
Beginning balance
$
13,545

 
$
9,466

Financed sales of manufactured homes
3,054

 
3,362

Acquired notes (see Note 2)

 
3,542

Principal payments and payoffs from our customers
(1,114
)
 
(1,728
)
Principal reduction from repossessed homes
(345
)
 
(1,097
)
Total activity
1,595

 
4,079

Ending balance
$
15,140

 
$
13,545


Collateralized Receivables

Collateralized receivables represent notes receivable that were transferred to a third party, but did not meet the requirements for sale accounting (see Note 4). The receivables have a balance of $86.5 million (net of allowance of $0.5 million) and $81.2 million(net of allowance of $0.5 million ) as of June 30, 2012 and December 31, 2011, respectively.  The receivables have a net weighted average interest rate and maturity of 11.1 percent and 13.1 years as of June 30, 2012, and 11.2 percent and 13.2 years as of December 31, 2011.

Allowance for Losses for Collateralized and Installment Notes Receivable

The allowance for losses for collateralized and installment notes receivable was $0.6 million as of June 30, 2012 and December 31, 2011.

 
Six Months Ended
 
Year Ended
 
June 30, 2012
 
December 31, 2011
Beginning balance
$
(635
)
 
$
(303
)
Lower of cost or market write-downs
60

 
84

Increase to reserve balance
(62
)
 
(416
)
Total activity
(2
)
 
(332
)
Ending balance
$
(637
)
 
$
(635
)

12

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


5.      Notes and Other Receivables, continued

Other Receivables

As of June 30, 2012 other receivables were comprised of amounts due from residents for rent and water and sewer usage of $2.9 million (net of allowance of $0.3 million), home sale proceeds of $5.2 million, insurance receivables of $1.1 million, insurance settlement (see Note 3) of $3.7 million, rebates and other receivables of $2.4 million and a note receivable of $5.0 million loaned to the principals of the Florida Properties which bears interest at LIBOR plus 475 basis points, matures on January 31, 2013 and is secured by the equity interests in four of their RV communities. As of December 31, 2011 other receivables were comprised of amounts due from residents for rent and water and sewer usage of $3.0 million (net of allowance of $0.4 million), home sale proceeds of $3.3 million, insurance receivables of $0.8 million, rebates receivable in association of FNMA agreement of $4.9 million, insurance settlement of $3.7 million, note receivable related to Kentland acquisition of $0.9 million (see Note 2), and rebates and other receivables of $3.7 million.

6.
Intangibles

Our intangible assets are in-place leases from acquisitions and capitalized costs in relation to leasing costs. These intangible assets are recorded within Other Assets on the Consolidated Balance Sheets. They are amortized over a seven year amortization period. The gross carrying amount is $23.7 million and $25.3 million at June 30, 2012 and December 31, 2011, respectively. The accumulated amortization is $11.4 million and $10.8 million at June 30, 2012 and December 31, 2011, respectively. Aggregate net amortization expense related to intangible assets was $0.7 million and $0.5 million for the three months ended June 30, 2012 and 2011, respectively. Aggregate net amortization expense related to intangible assets was $1.7 million and $1.0 million for the six months ended June 30, 2012 and 2011, respectively.

7.      Investment in Affiliates

Origen Financial Services, LLC (“OFS LLC”)

At June 30, 2012 and 2011, we had a 22.9 percent ownership interest in OFS LLC, an entity formed to originate manufactured housing installment contracts.  We have suspended equity accounting as the carrying value of our investment is zero.

Origen Financial, Inc. (“Origen”)

Through Sun OFI, LLC, a taxable REIT subsidiary, we own 5,000,000 shares of common stock of Origen which approximates an ownership interest of 19 percent. Although it is no longer originating or servicing loans, Origen continues to manage an existing portfolio of manufactured home loans and asset backed securities. We have suspended equity accounting for this investment as the carrying value of our investment is zero. We do, however, receive income from dividend distributions on our investment.  Our investment in Origen had a market value of approximately $7.0 million based on a quoted market closing price of $1.40 per share from the “Pink Sheet Electronic OTC Trading System” as of June 29, 2012.

The unaudited revenue and expense amounts in the table below represent actual results through May 2012 and budgeted June 2012 results.

The following table sets forth certain summarized unaudited financial information for Origen (amounts in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
(unaudited)
 
(unaudited)
 
2012
 
2011
 
2012
 
2011
Revenues
$
14,982

 
$
17,109

 
$
31,275

 
$
34,838

Expenses
(18,010
)
 
(20,866
)
 
(30,737
)
 
(41,954
)
Net loss
$
(3,028
)
 
$
(3,757
)
 
$
538

 
$
(7,116
)


13

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


8.      Debt and Lines of Credit

The following table sets forth certain information regarding debt (in thousands):

 
Principal
Outstanding
 
Weighted Average
Years to Maturity
 
Weighted Average
Interest Rates
 
June 30, 2012
 
December 31, 2011
 
June 30, 2012
 
December 31, 2011
 
June 30, 2012
 
December 31, 2011
Collateralized term loans - CMBS
$
625,060

 
$
629,229

 
4.5

 
5.0

 
5.5
%
 
5.5
%
Collateralized term loans - FNMA
372,224

 
364,581

 
10.8

 
11.3

 
4.2
%
 
3.6
%
Aspen and Series B-3 preferred OP Units
47,822

 
48,822

 
8.8

 
9.2

 
6.9
%
 
6.9
%
Secured borrowing (see Note 4)
87,069

 
81,682

 
13.0

 
13.2

 
11.1
%
 
11.2
%
Mortgage notes, other
153,981

 
143,877

 
3.4

 
3.2

 
3.7
%
 
3.8
%
Total debt
$
1,286,156

 
$
1,268,191

 
7.0

 
7.3

 
5.3
%
 
5.2
%

Collateralized Term Loans

In March, 2011, we completed a collateralized mortgage backed security “CMBS” financing with JPMorgan Chase Bank, National Association for $115.0 million bearing an interest rate of 5.837% and a maturity date of March 1, 2021. This loan is secured by 11 properties. The loan refinanced $104.8 million of CMBS debt which was scheduled to mature in July 2011 and was collateralized using the same property pool.

In May 2011, we completed a refinancing agreement with Bank of America N.A., for $23.6 million. This debt bears an interest rate of 5.38% and has a maturity of June 1, 2021. This loan is secured by three properties. The loan refinanced $17.9 million of debt which was scheduled to mature in June 2012 and was collateralized using the same property pool.

In July 2011, we reached an agreement with Fannie Mae (“FNMA”) and PNC Bank, National Association, regarding the settlement of the litigation we commenced in November 2009 over certain fees charged when the variable rate loan facility was extended in April 2009. The agreement became effective January 3, 2012 and the litigation was dismissed. In accordance with the terms of the agreement, we have the option to extend the maturity date of our entire $367.0 million credit facility with PNC Bank and FNMA from 2014 to 2023, subject to compliance with certain underwriting criteria. This agreement also provided a reduction in the facility fee charged on our variable rate facility for 2011. In addition we drew a $10.0 million variable rate facility, which matures on May 1, 2023 and provides for interest-only payments until May 1, 2014, after which principal and interest payments will be due based on a 30-year amortization.  The interest rate for the $10.0 million variable rate facility is equal to the 90-day LIBOR index, plus an investor spread equal to 95 basis points, plus a variable facility fee equal to 172 basis points through maturity.

The collateralized term loans totaling $1.0 billion as of June 30, 2012, are secured by 96 properties comprised of 35,107 sites representing approximately $574.8 million of net book value.

Aspen preferred OP Units and Series B-3 preferred OP units

The Aspen preferred OP units are convertible into 526,212 common shares based on a conversion price of $68 per share with a redemption date of January 1, 2024. The minimum and maximum annual preferred rate is 6.5 percent and 9.0 percent, respectively. The current preferred rate is 6.5 percent.

We redeemed $1.0 million of Series B-3 preferred OP units in May 2012.

Secured Borrowing

See Note 4 for additional information regarding our collateralized receivables and secured borrowing transactions.

Mortgage Notes

In June 2011, we assumed secured debt with a principal balance of $52.4 million, as a result of the Kentland acquisition (see Note 2 for acquisition details), that had a weighted average maturity of 4.4 years and weighted average annual interest rate of 5.70% at the date of acquisition. This secured debt was recorded at fair value on the date of the acquisition which was equal to the assumed

14

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


8.      Debt and Lines of Credit, continued

principal balance. This debt is secured by 12 properties. The current weighted average maturity is 3.9 years with the current weighted average annual variable interest rate of 5.61%.

In June 2011, we entered into a $22.9 million variable financing agreement with Bank of America N.A., to fund the Kentland and Orange City acquisition (see Note 2 for acquisition details). The agreement has a weighted average maturity of 3.7 years and weighted average annual variable interest rate of 3.10% at the date of acquisition. The debt was collateralized by six properties – five Kentland properties and Orange City. On February 1, 2012, we paid off $4.5 million of this agreement which was collateralized by Orange City. The current weighted average maturity is 2.9 years with the current weighted average annual variable interest rate of 3.10%.

In December 2011, we entered into a $17.0 million variable financing agreement with Bank of America, N.A. and The Private Bank to fund the Florida Properties acquisition (see Note 2 for acquisition details). The agreement has a weighted average maturity of 5.0 years and had an effective interest rate of 2.78% at the date of acquisition. The debt was collateralized by all three of the properties acquired in the Florida Properties acquisition. The current weighted average maturity is 4.5 years with the current weighted average annual variable interest rate of 2.75%.

In March 2012, we entered into an amended and restated variable financing agreement with Bank of America, N.A. and The PrivateBank which added an additional $19.0 million to the December 2011 variable financing agreement, the "36.0 Million Facility." The agreement has a weighted average maturity of 4.7 years and had an effective interest rate of 2.74% at the date of acquisition. The debt is collateralized by the three properties acquired in the Additional Florida Properties acquisition.

In March 2012, we paid off the entire $2.7 million mortgage agreement secured by Leisure Village which was due to mature on April 1, 2012.

In June 2012, we completed a variable refinancing agreement with Bank of America N.A., for $14.1 million. This debt bears an interest rate of LIBOR plus a 2.0% margin (effective rate at June 30, 2012 was 2.25%) and has a maturity of September 1, 2016, assuming the election of the two successive one-year extensions. The loan is secured by two properties and refinanced $14.0 million of debt which matured in June 2012.

The mortgage notes totaling $154.0 million as of June 30, 2012, are collateralized by 31 properties comprised of 8,160 sites representing approximately $256.3 million of net book value.

Lines of Credit

In September 2011, we entered into a senior secured revolving credit facility with Bank of America, N.A., and certain other lenders in the amount of $130.0 million (the "Facility"), which replaced our $115.0 million revolving line of credit.  The Facility is secured by a first priority lien on all of our equity interests in each entity that owns all or a portion of the properties constituting the borrowing base and collateral assignments of our senior and mezzanine debt positions in certain borrowing base properties. The Facility has a built-in accordion feature allowing up to $20.0 million in additional borrowings and a one-year extension option, both at our discretion. The Facility matures on October 1, 2015, assuming the election of the extension. The Facility bears interest at a floating rate based on Eurodollar plus a margin that is determined based on our leverage ratio calculated in accordance with the Facility, which can range from 2.25% to 2.95%. Based on our calculation of the leverage ratio as of June 30, 2012, the margin is 2.50% . The outstanding balance on the line of credit was $20.1 million and $107.5 million as of June 30, 2012 and December 31, 2011, respectively. In addition, $4.0 million of availability was used to back standby letters of credit as of June 30, 2012 and December 31, 2011. As of June 30, 2012 and December 31, 2011, $105.9 million and $18.5 million, respectively, were available to be drawn under the facility based on the calculation of the borrowing base at each date.

We have a $20.0 million secured line of credit agreement collateralized by a portion of our rental home portfolio. The net book value of the rental homes pledged as security for the loan must meet or exceed 200 percent of the outstanding loan balance. The terms of the agreement require interest only payments for the first 5 years, with the remainder of the term being amortized based on a 10 year term. The current effective interest rate is Prime plus 200 basis points, or 5.5 percent at June 30, 2012. Prime shall mean the prime rate published in the Wall Street Journal adjusted the first day of each calendar month. The outstanding balance was zero as of June 30, 2012. The outstanding balance was $16.0 million as of December 31, 2011.

We have a $12.0 million manufactured home floor plan facility renewable indefinitely until our lender provides us 12 month notice of their intent to terminate the agreement. The interest rate is 100 basis points over the greater of Prime or 6.0 percent (effective

15

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


8.      Debt and Lines of Credit, continued

rate 7.0 percent at June 30, 2012).  Prime means the prevailing “prime rate” as quoted in the Wall Street Journal on the first business day of each month. The outstanding balance was $4.5 million and $5.5 million as of June 30, 2012 and December 31, 2011, respectively.

As of June 30, 2012, the total of maturities and amortization of debt and lines of credit during the next five years, are as follows (in thousands):

 
Maturities and Amortization By Year
 
Total Due
 
Jul 2012 - Dec 2012
 
2013
 
2014
 
2015
 
2016
 
After 5 years
Lines of credit
$
24,631

 
$

 
$
4,531

 
$

 
$
20,100

 
$

 
$

Mortgage loans payable:
 
 
 
 
 
 
 
 
 
 
 
 
 
Maturities
1,001,931

 

 
33,762

 
185,754

 
16,622

 
312,585

 
453,208

Principal amortization
149,334

 
8,746

 
18,240

 
17,899

 
17,182

 
15,492

 
71,775

Aspen and Series B-3 preferred OP units
47,822

 
3,670

 
4,145

 
4,225

 

 

 
35,782

Secured borrowing
87,069

 
1,849

 
3,953

 
4,329

 
4,792

 
5,310

 
66,836

Total
$
1,310,787

 
$
14,265

 
$
64,631

 
$
212,207

 
$
58,696

 
$
333,387

 
$
627,601


The most restrictive of our debt agreements place limitations on secured borrowings and contain minimum fixed charge coverage, leverage, distribution and net worth requirements. As of June 30, 2012, we were in compliance with all covenants except that our subsidiaries that own the Florida Properties and the Additional Florida Properties were not in compliance with the debt service coverage ratio contained in the $36.0 Million Facility. There is no Event of Default under the $36.0 Million Facility. We have requested a waiver of such covenant for a specified period of time and, if we are unable to obtain such waiver, we intend to comply with this covenant by voluntarily paying down a portion of the $36.0 Million Facility in accordance with the loan agreement.

9.      Equity Transactions

In November 2004, our Board of Directors authorized us to repurchase up to 1,000,000 shares of our common stock.  We have 400,000 common shares remaining in the repurchase program.  No common shares were repurchased during 2012 or 2011.  There is no expiration date specified for the buyback program.
 
Common OP Unit holders can convert their Common OP units into an equivalent number of shares of common stock at any time.  During the six months ended June 30, 2012 and 2011, holders of Common OP Units converted 2,000 and 10,249 units, respectively to common stock.

On May 10, 2012 pursuant to a shelf registration statement on Form S-3, we registered with the SEC the sale of our common stock, preferred stock, debt securities, warrants and units consisting of two or more of the aforementioned securities. This shelf registration statement was effective upon filing and replaced our previous shelf registration statement which was scheduled to expire in May 2012.
On May 10, 2012 we entered into an "at-the-market" sales agreement with BMO Capital Markets Corp and Liquidnet Inc. to issue and sell shares of common stock from time to time. The current authorization allows for the sale of our common stock up to an aggregate amount of $100 million. There were no shares of common stock sold through June 30, 2012.
In January 2012, we closed an underwritten registered public offering of 4,600,000 shares of common stock at a price of $35.50 per share. The net proceeds from the offering were $156.0 million after deducting the underwriting discounts and expenses related to the offering. We used the net proceeds of the offering to repay $123.5 million of outstanding debt and we used $25.0 million to fund a portion of the Additional Florida Properties (See Note 2 for additional information), which were subsequently encumbered with a loan of $19.0 million. We expect to use any remaining net proceeds of the offering to fund possible future acquisitions of properties and for working capital and general corporate purposes.

Under our previous shelf registration statement on Form S-3 we had an "at-the-market" sales agreement to issue and sell shares

16

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


9.      Equity Transactions, continued

of common stock from time to time. We issued 40,524 shares of common stock from January 1, 2012 through May 9, 2012, when the sales agreement was terminated.  The shares of common stock were sold at the prevailing market price of our common stock at the time of each sale with a weighted average sale price of $37.22 and we received net proceeds of approximately $1.5 million.  The proceeds were used to pay down our line of credit.


On August 6, 2010, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with REIT Opportunity, Ltd. (“REIT Ltd.”), which provides that, upon the terms and subject to the conditions set forth in the Purchase Agreement, REIT Ltd. is committed to purchase up to the lesser of $100 million of our common stock, or 3,889,493 shares of our common stock, which is equal to one share less than twenty percent of our issued and outstanding shares of common stock on the effective date of the Purchase Agreement.  From time to time over the two year term of the Purchase Agreement, and at our sole discretion, we may present REIT Ltd. with draw down notices to purchase our common stock.  Any and all issuances of shares of common stock
to REIT Ltd. pursuant to the Purchase Agreement will be registered on our effective shelf registration statement on Form S-3.  In January, 2011 we sold 915,827 shares of common stock at a weighted average sale price of $32.76 and received net proceeds of $30.0 million.  The funds were used to pay down our line of credit.

In June 2011, we issued $45.5 million of Series A-1 preferred operating partnership (“A-1 preferred OP”) units as a result of the Kentland acquisition (see Note 2 for details).  A-1 preferred OP unit holders can convert the A-1 preferred OP units into shares of common stock at any time after December 31, 2013 based on a conversion price of $41 per share with $100 par value.  These A-1 preferred OP units are convertible, but not redeemable.  The A-1 preferred OP unit holders receive a preferred return of 5.1% until June 23, 2013 and 6.0% thereafter.

In August 2011, we discovered that we did not register with the SEC shares of our common stock purchased in the open market by our 401(k) plan for the benefit of participants in the plan.  We eliminated the option to purchase our common stock in the plan in September 2011 and the last purchase made through the plan was on September 16, 2011. As disclosed in our prior SEC filings, we considered filing a registration statement on Form S-3 offering to rescind the purchase of shares of our common stock by persons who acquired such shares through our 401(k) plan from September 16, 2010 through September 16, 2011. During that period, the plan purchased a total of 3,301 shares of our common stock for the benefit of a total of 85 participants. If a rescission offer were conducted, we would offer to repurchase shares of our common stock purchased through the 401(k) plan during the one year period ended September 16, 2011, but only if such shares either (i) were subsequently sold at a loss, or (ii) were purchased at a price higher than the market price of our common stock at the end of the rescission offer period, and are still held by the plan participant. To the best of our knowledge no shares purchased during the applicable period have subsequently been sold at a loss. Based on the recent and current market price of our common stock, we believe our potential liability, if any, with respect to shares of our common stock purchased during the applicable period and still held by plan participants is not material to us. In fact, if we were to conduct a rescission offer today, we do not believe we would have any liability unless the market price of our common stock at the end of the rescission offer period were less than $39.28 per share, which is the highest price paid for purchases of shares by plan participants during the applicable period. Based on these facts and given the expense of conducting a rescission offer, we have determined not to conduct a rescission offer.

Cash dividends of $0.63 per share were declared for the quarter ended June 30, 2012. On July 20, 2012 cash payments of approximately $18.0 million for aggregate dividends, distributions and dividend equivalents were made to common stockholders, common OP unitholders, and restricted stockholders of record as of July 10, 2012.

10.      Share-Based Compensation

In February 2012, we granted 15,000 shares of restricted stock to our executive officers under the 2009 Equity Plan. The awards vest ratably over an eight year period beginning on the fourth anniversary of the grant date, and have a fair value of $40.80 per share. The fair value was determined by using the closing share price of our common stock on the date the grant was issued.

During the six months ended June 30, 2012, 7,678 shares of common stock were issued in connection with the exercise of stock options and the net proceeds received were $0.1 million.

The vesting requirements for 8,750 restricted shares granted to our employees were satisfied during the six months ended June 30, 2012.


17

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


11.      Other Income

The components of other income are summarized as follows (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Brokerage commissions
$
124

 
$
146

 
$
329

 
$
294

Other income (loss), net
51

 
(121
)
 
106

 
(318
)
Total other income (loss), net
$
175

 
$
25

 
$
435

 
$
(24
)

12.    Segment Reporting

Our consolidated operations can be segmented into Real Property Operations and Home Sales and Rentals.  Transactions between our segments are eliminated in consolidation.  Seasonal RV revenue is included in Real Property Operations’ revenues and is approximately $9.4 million annually. This seasonal revenue is recognized 48% in the first quarter, 13% in the second, 13% in the third quarter and 26% in the fourth quarter of each fiscal year.

A presentation of segment financial information is summarized as follows (amounts in thousands):

 
Three Months Ended June 30, 2012
 
Three Months Ended June 30, 2011
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
Revenues
$
61,507

 
$
17,950

 
$
79,457

 
$
52,264

 
$
13,573

 
$
65,837

Operating expenses/Cost of sales
22,104

 
13,119

 
35,223

 
18,092

 
10,155

 
28,247

Net operating income/Gross profit
39,403

 
4,831

 
44,234

 
34,172

 
3,418

 
37,590

Adjustments to arrive at net income (loss):
 
 
 
 
 
 
 
 
 
 
 
Other revenues
2,830

 
92

 
2,922

 
2,316

 
109

 
2,425

General and administrative
(5,182
)
 
(2,238
)
 
(7,420
)
 
(4,833
)
 
(1,952
)
 
(6,785
)
Acquisition related costs
(423
)
 

 
(423
)
 
(1,151
)
 

 
(1,151
)
Depreciation and amortization
(14,077
)
 
(6,990
)
 
(21,067
)
 
(12,462
)
 
(5,659
)
 
(18,121
)
Interest expense
(17,605
)
 
(9
)
 
(17,614
)
 
(15,781
)
 
(273
)
 
(16,054
)
Distributions from affiliates, net
1,900

 

 
1,900

 
850

 

 
850

Provision for state income tax
(53
)
 

 
(53
)
 
259

 

 
259

Net income (loss)
6,793

 
(4,314
)
 
2,479

 
3,370

 
(4,357
)
 
(987
)
Less:  Preferred return to A-1 preferred OP units
579

 

 
579

 
51

 

 
51

Less:  Net income (loss) attributable to noncontrolling interests
800

 
(563
)
 
237

 
243

 
(391
)
 
(148
)
Net income (loss) attributable to Sun Communities, Inc.
$
5,414

 
$
(3,751
)
 
$
1,663

 
$
3,076

 
$
(3,966
)
 
$
(890
)











18

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



12.    Segment Reporting, continued
 
Six Months Ended June 30, 2012
 
Six Months Ended June 30, 2011
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
Revenues
$
125,803

 
$
33,854

 
$
159,657

 
$
106,100

 
$
27,138

 
$
133,238

Operating expenses/Cost of sales
43,002

 
24,716

 
67,718

 
35,665

 
20,319

 
55,984

Net operating income/Gross profit
82,801

 
9,138

 
91,939

 
70,435

 
6,819

 
77,254

Adjustments to arrive at net income (loss):
 
 
 
 
 
 
 
 
 
 
 
Other revenues
5,495

 
355

 
5,850

 
4,335

 
403

 
4,738

General and administrative
(10,240
)
 
(4,447
)
 
(14,687
)
 
(9,311
)
 
(3,925
)
 
(13,236
)
Acquisition related costs
(587
)
 

 
(587
)
 
(1,400
)
 

 
(1,400
)
Depreciation and amortization
(27,038
)
 
(13,897
)
 
(40,935
)
 
(23,583
)
 
(11,217
)
 
(34,800
)
Interest expense
(35,166
)
 
(86
)
 
(35,252
)
 
(31,803
)
 
(483
)
 
(32,286
)
Distributions from affiliates, net
2,650

 

 
2,650

 
1,200

 

 
1,200

Provision for state income tax
(106
)
 

 
(106
)
 
128

 

 
128

Net income (loss)
17,809

 
(8,937
)
 
8,872

 
10,001

 
(8,403
)
 
1,598

Less:  Preferred return to A-1 preferred OP units
1,158

 

 
1,158

 
51

 

 
51

Less:  Net income (loss) attributable to noncontrolling interests
1,657

 
(983
)
 
674

 
798

 
(761
)
 
37

Net income (loss) attributable to Sun Communities, Inc.
$
14,994

 
$
(7,954
)
 
$
7,040

 
$
9,152

 
$
(7,642
)
 
$
1,510


 
June 30, 2012
 
December 31, 2011
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Home Rentals
 
Consolidated
Identifiable assets:
 
 
 
 
 
 
 
 
 
 
 
Investment property, net
$
1,042,754

 
$
193,583

 
$
1,236,337

 
$
1,028,575

 
$
168,031

 
$
1,196,606

Cash and cash equivalents
5,096

 
(597
)
 
4,499

 
5,972

 
(115
)
 
5,857

Inventory of manufactured homes

 
4,396

 
4,396

 

 
5,832

 
5,832

Notes and other receivables
114,667

 
7,241

 
121,908

 
109,436

 
5,448

 
114,884

Other assets
41,479

 
3,700

 
45,179

 
41,843

 
2,952

 
44,795

Total assets
$
1,203,996

 
$
208,323

 
$
1,412,319

 
$
1,185,826

 
$
182,148

 
$
1,367,974


13.    Derivative Instruments and Hedging Activities

Our objective in using interest rate derivatives is to manage exposure to interest rate movements thereby minimizing the effect of interest rate changes and the effect it could have on future cash flows. Interest rate swaps and caps are used to accomplish this objective. We require hedging derivative instruments to be highly effective in reducing the risk exposure that they are designated to hedge. We formally designate any instrument that meets these hedging criteria as a hedge at the inception of the derivative contract.

As of June 30, 2012, we had four derivative contracts consisting of two interest rate swap agreements with a total notional amount of $45.0 million and two interest rate cap agreements with a notional amount of $162.4 million. We generally employ derivative instruments that effectively convert a portion of our variable rate debt to fixed rate debt and to cap the maximum interest rate on certain variable rate borrowings. We do not enter into derivative instruments for speculative purposes.

19

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


13.    Derivative Instruments and Hedging Activities, continued

The following table provides the terms of our interest rate derivative contracts that were in effect as of June 30, 2012:

Type
 
Purpose
 
Effective Date
 
Maturity Date
 
 Notional
 (in millions)
 
Based on
 
Variable Rate
 
Fixed Rate
 
Spread
 
Effective Fixed Rate
Swap
 
Floating to Fixed Rate
 
9/1/2002
 
7/1/2012
 
25.0

 
3 Month LIBOR
 
0.4682%
 
4.7000%
 
1.8700%
 
6.5700%
Swap
 
Floating to Fixed Rate
 
1/1/2009
 
1/1/2014
 
20.0

 
3 Month LIBOR
 
0.4682%
 
2.1450%
 
1.8700%
 
4.0150%
Cap
 
Cap Floating Rate
 
4/1/2012
 
4/1/2015
 
152.4

 
3 Month LIBOR
 
0.4600%
 
11.2650%
 
—%
 
N/A
Cap
 
Cap Floating Rate
 
10/3/2011
 
10/3/2016
 
10.0

 
3 Month LIBOR
 
0.4600%
 
11.0200%
 
—%
 
N/A

Subsequent to June 30, 2012 the $25.0 million interest swap described in the above table matured and was not replaced.

Generally, our financial derivative instruments are designated and qualify as cash flow hedges and the effective portion of the gain or loss on such hedges are reported as a component of accumulated other comprehensive income (loss) in our Consolidated Balance Sheets. To the extent that the hedging relationship is not effective or do not qualify as a cash flow hedge, the ineffective portion is recorded in interest expense. Hedges that received designated hedge accounting treatment are evaluated for effectiveness at the time that they are designated as well as through the hedging period.

In accordance with ASC Topic 815, Derivatives and Hedging, we have recorded the fair value of our derivative instruments designated as cash flow hedges on the balance sheet. See Note 16 for information on the determination of fair value for the derivative instruments.  The following table summarizes the fair value of derivative instruments included in our Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 (in thousands):

 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments
 
 
June 30, 2012
 
December 31, 2011
 
 
 
June 30, 2012
 
December 31, 2011
Interest rate swaps and cap agreement
Other assets
 
$

 
$

 
Other liabilities
 
503

 
1,106

Total derivatives designated as hedging instruments
 
 
$

 
$

 
 
 
503

 
1,106


These valuation adjustments will only be realized under certain situations. For example, if we terminate the swaps prior to maturity or if the derivatives fail to qualify for hedge accounting, we would need to amortize amounts currently included in other comprehensive income (loss) into interest expense over the terms of the derivative contracts.  We do not intend to terminate the swaps prior to maturity and, therefore, the net of valuation adjustments through the various maturity dates will approximate zero, unless the derivatives fail to qualify for hedge accounting.

Our hedges were highly effective and had minimal effect on income.  The following table summarizes the impact of derivative instruments for the six months ended June 30, 2012 and 2011 as recorded in the Consolidated Statements of Operations (in thousands):
Derivatives in
cash flow hedging
 
Amount of Gain or
(Loss) Recognized in
OCI (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
 
Six Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
2012
 
2011
 
 
 
2012
 
2011
 
 
 
2012
 
2011
Interest rate swaps and cap agreement
 
$
599

 
$
422

 
Interest expense
 
$

 
$

 
Interest expense
 
$
3

 
$
5

Total
 
$
599

 
$
422

 
Total
 
$

 
$

 
Total
 
$
3

 
$
5




20

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


13.    Derivative Instruments and Hedging Activities, continued

Certain of our derivative instruments contain provisions that require us to provide ongoing collateralization on derivative instruments in a liability position.  As of June 30, 2012 and December 31, 2011, we had collateral deposits recorded in other assets of approximately $2.0 million and $3.1 million, respectively.

14.    Income Taxes

We have elected to be taxed as a real estate investment trust (“REIT”) as defined under Section 856(c) of the Internal Revenue Code of 1986 (“Code”), as amended. In order for us to qualify as a REIT, at least ninety-five percent (95%) of our 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 our control. In addition, frequent changes occur in the area of REIT taxation which requires us to continually monitor our tax status. We analyzed the various REIT tests and confirmed that we continued to qualify as a REIT for the quarter ended June 30, 2012.

As a REIT, we generally will not be subject to U.S. federal income taxes at the corporate level on the ordinary taxable income we distribute to our stockholders as dividends. If we fail to qualify as a REIT in any taxable year, our taxable income could be subject to U.S. federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if we qualify as a REIT, we may be subject to certain state and local income taxes and to U.S. federal income and excise taxes on our undistributed income.

SHS, our taxable REIT subsidiary, is subject to U.S. federal income taxes. Our deferred tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. Deferred tax assets are reduced, if necessary, by a valuation allowance to the amount where realization is more likely than not assured after considering all available evidence. Our temporary differences primarily relate to net operating loss carryforwards and depreciation. A federal deferred tax asset of $1.0 million is included in other assets in our Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011.

We had no unrecognized tax benefits as of June 30, 2012 and 2011. We expect no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of June 30, 2012.

We classify certain state taxes as income taxes for financial reporting purposes.  We record Texas Margin Tax as income taxes in our financial statements. In 2011 we were also subject to Michigan Business Tax that was replaced in May 2011 by a Corporate Income Tax. We believe that we will not have any corporate income tax liability under the new law. We recorded a provision for state income taxes of approximately $0.1 million for the six months ended June 30, 2012 and a benefit of approximately $0.1 million for the six months ended June 30, 2011.
 

21

SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


15.    Earnings (Loss) Per Share

We have outstanding stock options and unvested restricted shares, and our Operating Partnership has Common OP Units, convertible A-1 preferred OP units and Aspen Preferred OP Units, which if converted or exercised, may impact dilution.  Although our unvested restricted shares qualify as participating securities, we do not include them in the computation of basic earnings (loss) per share under the two-class method in periods we report net losses, as the result would be anti-dilutive.

Computations of basic and diluted earnings per share from continuing operations were as follows (in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Numerator
2012
 
2011
 
2012
 
2011
Basic earnings: net income (loss) attributable to common stockholders
$
1,663

 
$
(890
)
 
$
7,040

 
$
1,510

Add: amounts attributable to common noncontrolling interests

 

 

 
37

Diluted earnings: net income (loss) available to common stockholders and unitholders
$
1,663

 
$
(890
)
 
$
7,040

 
$
1,547

Denominator
 
 
 
 
 
 
 
Weighted average common shares outstanding
26,188

 
21,090

 
25,749

 
20,875

Weighted average unvested restricted stock outstanding
281

 

 
279

 
193

Basic weighted average common shares and unvested restricted stock outstanding
26,469

 
21,090

 
26,028

 
21,068

Add: dilutive securities
16

 

 
17

 
2,078

Diluted weighted average common shares and securities
26,485

 
21,090

 
26,045

 
23,146

Earnings (loss) per share available to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.06

 
$
(0.04
)
 
$
0.27

 
$
0.07

Diluted
$
0.06

 
$
(0.04
)
 
$
0.27

 
$
0.07


We excluded certain securities from the computation of diluted earnings per share because the inclusion of these securities would have been anti-dilutive for the periods presented.  The following table presents the number of outstanding potentially dilutive securities that were excluded from the computation of diluted earnings per share for the six months ended June 30, 2012 and 2011 (amounts in thousands):

 
 
Six Months Ended June 30,
 
 
2012
 
2011
Stock options
 
57

 
78

Common OP units
 
2,070

 

A-1 preferred OP units
 
1,111