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 September 30, 2007.

 

OR

 

o Transition pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission file number 1-12616

 

SUN COMMUNITIES, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Maryland

38-2730780

(State of Incorporation)

(I.R.S. Employer Identification No.)

27777 Franklin Rd.

 

Suite 200

 

Southfield, Michigan

48034

(Address of Principal Executive Offices)

(Zip Code)

 

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

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[ X ]  No [ ]

 

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

 

Large accelerated filer [ ]

Accelerated filer [ X ]

Non-accelerated filer [ ]

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Number of shares of Common Stock, $.01 par value per share, outstanding

as of September 30, 2007: 18,249,610

 

 

SUN COMMUNITIES, INC.

 

INDEX

 

 

 

Pages

PART I

 

 

Item 1

Financial Statements (Unaudited):

 

 

Consolidated Balance Sheets as of September 30, 2007 and
     December 31, 2006

 


3

 

Consolidated Statements of Operations for the three and nine months
     ended September 30, 2007 and 2006


4

 

Consolidated Statements of Comprehensive Loss for the three and nine
     months ended September 30, 2007 and 2006


5

 

Consolidated Statement of Stockholders’ Equity for the nine months
     ended September 30, 2007


5

 

Consolidated Statements of Cash Flows for the nine months
     ended September 30, 2007 and 2006


6

 

Notes to Consolidated Financial Statements

7-17

Item 2

Management’s Discussion and Analysis of Financial
     Condition and Results of Operations


18-28

Item 3

Quantitative and Qualitative Disclosures about Market Risk

29

Item 4

Controls and Procedures

30

PART II

 

 

Item 6

Exhibits required by Item 601 of Regulation S-K

31

 

Signatures

32

 

 

2

SUN COMMUNITIES, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2007 AND DECEMBER 31, 2006

(amounts in thousands)

 

 

 

(Unaudited)
September 30,
2007

 

December 31,
2006

 

ASSETS

 

 

 

 

 

 

Investment property, net

$

1,137,184

 

$

1,161,649

 

Cash and cash equivalents

 

3,809

 

 

3,183

 

Inventory of manufactured homes

 

13,230

 

 

12,082

 

Investment in affiliate

 

29,850

 

 

29,319

 

Notes and other receivables

 

39,191

 

 

41,407

 

Other assets

 

37,840

 

 

42,099

 

 

 

 

 

 

 

 

Total assets

$

1,261,104

 

$

1,289,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Debt

$

1,102,580

 

$

1,080,450

 

Lines of credit

 

76,016

 

 

86,400

 

Other liabilities

 

33,069

 

 

31,301

 

 

 

 

 

 

 

 

Total liabilities

 

1,211,665

 

 

1,198,151

 

 

 

 

 

 

 

 

Minority interest

 

6,203

 

 

12,391

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Preferred stock, $.01 par value, 10,000 shares
authorized, none issued

$

 

$

 

Common stock, $.01 par value, 90,000 shares
authorized, 20,145 and 20,028 issued
in 2007 and 2006, respectively

 

201

 

 

200

 

Additional paid-in capital

 

458,099

 

 

452,882

 

Officer's notes

 

(8,826

)

 

(9,083

)

Accumulated other comprehensive income

 

180

 

 

820

 

Distributions in excess of accumulated earnings

 

(342,818

)

 

(302,022

)

Treasury stock, at cost, 1,802 shares in 2007 and 2006

 

(63,600

)

 

(63,600

)

 

 

 

 

 

 

 

Total stockholders' equity

 

43,236

 

 

79,197

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

$

1,261,104

 

$

1,289,739

 

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

3

SUN COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE PERIODS ENDED SEPTEMBER 30, 2007 AND 2006

(amounts in thousands except for per share data)

(unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from real property

 

$

46,381

 

$

45,680

 

$

142,043

 

$

139,340

 

Revenue from home sales

 

 

5,492

 

 

4,783

 

 

17,847

 

 

15,330

 

Rental home revenue

 

 

4,331

 

 

3,658

 

 

12,891

 

 

10,224

 

Ancillary revenues, net

 

 

4

 

 

(16

)

 

355

 

 

284

 

Interest

 

 

686

 

 

1,244

 

 

2,142

 

 

2,916

 

Other income (loss)

 

 

(432

)

 

(644

)

 

(526

)

 

816

 

Total revenues

 

 

56,462

 

 

54,705

 

 

174,752

 

 

168,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating and maintenance

 

 

12,408

 

 

12,349

 

 

35,823

 

 

35,448

 

Real estate taxes

 

 

4,174

 

 

4,031

 

 

12,369

 

 

11,828

 

Cost of home sales

 

 

4,408

 

 

3,749

 

 

14,164

 

 

11,952

 

Rental home operating and maintenance

 

 

3,096

 

 

2,586

 

 

8,960

 

 

7,080

 

General and administrative - real property

 

 

3,734

 

 

3,426

 

 

11,931

 

 

12,825

 

General and administrative - home sales and rentals

 

 

1,462

 

 

1,633

 

 

4,440

 

 

4,907

 

Depreciation and amortization

 

 

15,512

 

 

15,072

 

 

46,444

 

 

44,835

 

Interest

 

 

15,783

 

 

15,623

 

 

46,164

 

 

45,598

 

Interest on mandatorily redeemable debt

 

 

896

 

 

935

 

 

2,705

 

 

3,010

 

Total expenses

 

 

61,473

 

 

59,404

 

 

183,000

 

 

177,483

 

Equity income from affiliate

 

 

583

 

 

300

 

 

1,431

 

 

967

 

Provision for state income tax

 

 

500

 

 

 

 

500

 

 

 

Loss from operations

 

 

(4,928

)

 

(4,399

)

 

(7,317

)

 

(7,606

)

Less loss allocated to minority interest

 

 

(560

)

 

(510

)

 

(832

)

 

(851

)

Loss before cumulative effect of change in accounting principle

 

 

(4,368

)

 

(3,889

)

 

(6,485

)

 

(6,755

)

Cumulative effect of change in accounting principle

 

 

 

 

 

 

 

 

289

 

Net loss

 

$

(4,368

)

$

(3,889

)

$

(6,485

)

$

(6,466

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,962

 

 

17,655

 

 

17,909

 

 

17,601

 

Diluted

 

 

17,962

 

 

17,655

 

 

17,909

 

 

17,601

 

Basic and diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before cumulative effect of change in accounting principle

 

$

(0.24

)

$

(0.22

)

$

(0.36

)

$

(0.39

)

Cumulative effect of change in accounting principle

 

 

 

 

 

 

 

 

0.02

 

Net loss

 

$

(0.24

)

$

(0.22

)

$

(0.36

)

$

(0.37

)

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

4

SUN COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE PERIODS ENDED SEPTEMBER 30, 2007 AND 2006

(amounts in thousands)

(unaudited)

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net loss

 

$

(4,368

)

$

(3,889

)

$

(6,485

)

$

(6,466

)

Unrealized income (loss) on interest rate swaps

 

 

(1,042

)

 

(1,133

)

 

(640

)

 

289

 

Comprehensive loss

 

$

(5,410

)

$

(5,022

)

$

(7,125

)

$

(6,177

)

 

 

 

 

SUN COMMUNITIES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007

(amounts in thousands)

(unaudited)

 

 

 

Common
Stock

 

Additional
Paid-in
Capital

 

Officer's
Notes

 

Accumulated
Comprehensive
Earnings

 

Distributions
in Excess of
Accumulated
Earnings

 

Treasury
Stock

 

Total Equity

 

Balance, December 31, 2006

$

200

 

$

452,882

 

$

(9,083

)

$

820

 

$

(302,022

)

$

(63,600

)

$

79,197

 

Issuance of common stock, net

 

1

 

 

3,547

 

 

 

 

 

 

(3,845

)

 

 

 

(297

)

Exercise of stock options

 

 

 

38

 

 

 

 

 

 

 

 

 

 

38

 

Stock-based compensation -
amortization and forfeitures

 

 

 

1,632

 

 

 

 

 

 

64

 

 

 

 

1,696

 

Repayment of officer's notes

 

 

 

 

 

257

 

 

 

 

 

 

 

 

257

 

Net loss

 

 

 

 

 

 

 

 

 

(6,485

)

 

 

 

(6,485

)

Unrealized loss on interest rate swaps

 

 

 

 

 

 

 

(640

)

 

 

 

 

 

(640

)

Cash distributions declared of $1.89
per share

 

 

 

 

 

 

 

 

 

(30,530

)

 

 

 

(30,530

)

Balance, September 30, 2007

$

201

 

$

458,099

 

$

(8,826

)

$

180

 

$

(342,818

)

$

(63,600

)

$

43,236

 

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

5

SUN COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(amounts in thousands)

(unaudited)

 

 

 

 

2007

 

2006

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss

 

$

(6,485

)

$

(6,466

)

Adjustments to reconcile net loss to cash provided by operating activities:

 

 

 

 

 

 

 

Loss allocated to minority interests

 

 

(832

)

 

(851

)

Gain on valuation of derivative instruments

 

 

(250

)

 

(165

)

Stock compensation expense, net of cumulative effect of change in accounting principle

 

 

1,798

 

 

2,465

 

Depreciation and amortization

 

 

48,935

 

 

47,188

 

Amortization of deferred financing costs

 

 

1,066

 

 

1,285

 

Distributions from affiliate

 

 

900

 

 

300

 

Equity income from affiliate

 

 

(1,431

)

 

(967

)

Increase in notes receivable from sale of homes

 

 

(7,427

)

 

(3,721

)

Decrease (increase) in inventory, other assets and other receivables, net

 

 

(5,949

)

 

5,667

 

Increase (decrease) in accounts payable and other liabilities

 

 

1,666

 

 

(2,752

)

Net cash provided by operating activities

 

 

31,991

 

 

41,983

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Investment in rental properties

 

 

(19,239

)

 

(46,330

)

Proceeds from sale of installment loans on manufactured homes to Origen

 

 

 

 

4,226

 

Decrease in notes receivable and officer's notes

 

 

13,077

 

 

272

 

Net cash used in investing activities

 

 

(6,162

)

 

(41,832

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Redemption of common stock and OP units

 

 

(1,259

)

 

(1,335

)

Proceeds from option exercise

 

 

38

 

 

2,151

 

Borrowings on lines of credit

 

 

81,998

 

 

113,287

 

Repayments on lines of credit

 

 

(92,382

)

 

(96,015

)

Payments to retire preferred operating partnership units

 

 

(4,500

)

 

(8,175

)

Payments to redeem notes payable and other debt

 

 

(10,916

)

 

(22,020

)

Proceeds from notes payable and other debt

 

 

37,500

 

 

48,100

 

Payments for deferred financing costs

 

 

(804

)

 

(685

)

Distributions

 

 

(34,878

)

 

(37,292

)

Net cash used in financing activities

 

 

(25,203

)

 

(1,984

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

626

 

 

(1,833

)

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

 

3,183

 

 

5,880

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

3,809

 

$

4,047

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest

 

$

44,808

 

$

45,086

 

Cash paid for interest on mandatorily redeemable debt

 

$

2,677

 

$

2,998

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

Debt assumed for rental properties

 

$

 

$

4,500

 

Unrealized gain (loss) on interest rate swaps

 

$

(640

)

$

289

 

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

6

SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.

Basis of Presentation:

 

These unaudited consolidated financial statements of Sun Communities, Inc., a Maryland corporation, (the “Company”) and all majority-owned and controlled subsidiaries including Sun Communities Operating Limited Partnership (the “Operating Partnership”), SunChamp LLC (“SunChamp”), and Sun Home Services, Inc. (“SHS”), have been prepared pursuant to the Securities and Exchange Commission (“SEC”) rules and regulations and should be read in conjunction with the consolidated financial statements and accompanying notes of the Company included in Annual Report on Form 10-K for the year ended December 31, 2006. The following notes to consolidated financial statements present interim disclosures as required by the SEC. The accompanying consolidated financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. Certain reclassifications have been made to prior periods’ financial statements in order to conform to current period presentation.

 

2.

Investment Property:

 

The following summarizes investment property (amounts in thousands):

 

 

 

 

(Unaudited)
September 30,
2007

 

December 31,
2006

 

Land

 

$

117,309

 

$

117,563

 

Land improvements and buildings

 

 

1,181,939

 

 

1,175,045

 

Rental homes and improvements

 

 

161,873

 

 

151,843

 

Furniture, fixtures, and equipment

 

 

36,234

 

 

37,229

 

Land held for future development

 

 

30,199

 

 

31,082

 

 

 

 

1,527,554

 

 

1,512,762

 

Less accumulated depreciation

 

 

(390,370

)

 

(351,113

)

Investment property, net

 

$

1,137,184

 

$

1,161,649

 

 

 

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

 

7

SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

3.

Notes and Other Receivables:

 

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

 

 

 

 

September 30,
2007

 

December 31,
2006

 

Mortgage note receivable, with a weighted average interest
rate of 7.92% at December 31, 2006, collateralized
by a manufactured home community.

 

$

 

$

13,532

 

Installment loans on manufactured homes with interest payable
monthly at a weighted average interest rate and maturity of
7.4% and 13.4 years and 6.7% and 13.7 years at September 30,
2007, and December 31, 2006, respectively.

 

 

28,675

 

 

20,537

 

Other receivables, net of allowance for losses of $0.2 and $0.3
million at September 30, 2007, and December 31, 2006,
respectively.

 

 

10,516

 

 

7,338

 

 

 

$

39,191

 

$

41,407

 

 

 

On March 1, 2007, the $13.5 million mortgage note receivable was repaid by the borrower.

 

The installment loans on manufactured homes totaling $28.7 and $20.5 million at September 30, 2007 and December 31, 2006, respectively, are presented net of allowance for losses of $0.2 million for each period.

 

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. The notes become due in three installments on each of December 31, 2008, 2009 and 2010. The following table sets forth certain information regarding officer’s notes as of September 30, 2007, and December 31, 2006 (in thousands except for shares and units):

 

 

 

 

At September 30, 2007

 

At December 31, 2006

 

 

 

 

 

Secured by

 

 

 

Secured by

 

Promissory Notes

 

Outstanding
Principal
Balance

 

Common
Stock

 

Common
OP Units

 

Outstanding
Principal
Balance

 

Common
Stock

 

Common
OP Units

 

Secured - $1.3 million

 

$

1,020

 

62,763

 

 

$

1,050

 

64,586

 

 

Secured - $6.6 million

 

 

5,182

 

139,362

 

100,259

 

 

5,332

 

143,409

 

103,170

 

Secured - $1.0 million

 

 

802

 

74,194

 

 

 

826

 

76,348

 

 

Unsecured - $1.0 million

 

 

802

 

 

 

 

826

 

 

 

Unsecured - $1.3 million

 

 

1,020

 

 

 

 

1,049

 

 

 

 

 

$

8,826

 

276,319

 

100,259

 

$

9,083

 

284,343

 

103,170

 

 

 

8

SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

3.

Notes and Other Receivables, continued:

 

The officer’s personal liability on the secured promissory notes is limited to all accrued interest on such notes plus fifty percent (50%) of the deficiency, if any, after application of the proceeds from the sale of the secured shares and/or the secured units to the then outstanding principal balance of the promissory notes. The unsecured notes are fully recourse to the officer.

 

The reduction in the aggregate principal balance of these notes was $0.3 million for the nine months ended September 30, 2007 and 2006.

 

4.

Investment in Affiliate:

 

Origen Financial, Inc. (“Origen”) is a real estate investment trust in the business of originating, acquiring and servicing manufactured home loans. In October 2003, the Company purchased 5,000,000 shares of common stock of Origen for $50 million. In December of 2006, the Company recognized an $18.0 million impairment of the carrying value of its equity investment in Origen. The Company owns approximately 19% of Origen at September 30, 2007, and its investment is accounted for using the equity method of accounting. Equity earnings recorded through September 30, 2007, reflect the Company’s estimate of its portion of the anticipated earnings of Origen for the period ending September 30, 2007, and the Company’s adjustments for estimates made in prior quarters based on the actual reported results of Origen for such prior quarters.

 

5.

Debt:

 

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

 

 

 

 

September 30,
2007

 

December 31,
2006

 

Collateralized term loans - CMBS, 4.93-5.32%, due July 1, 2011-2016

 

$

487,829

 

$

492,749

 

Collateralized term loans - FNMA, of which $102.4M is variable, due
April 28, 2014 and January 1, 2015, at the Company’s option, interest at
4.71 - 5.53% at September 30, 2007, and 4.51-5.24% at December 31, 2006.

 

 

382,552

 

 

385,299

 

Preferred OP units, redeemable at various dates through
January 2, 2014, average interest at 7.2% at June 30, 2007, and
6.9% at December 31, 2006.

 

 

49,447

 

 

53,947

 

Mortgage notes, other, maturing at various dates through May 1, 2017,
average interest at 6.1% at September 30, 2007, and 6.2% at
December 31, 2006.

 

 

182,752

 

 

148,455

 

 

 

$

1,102,580

 

$

1,080,450

 

 

The collateralized term loans totaling $870.4 million at September 30, 2007, are secured by 87 properties comprising approximately 31,089 sites representing approximately $583.0 million of net book value. The mortgage notes totaling $182.8 million at September 30, 2007, are collateralized by 16 communities comprising approximately 5,873 sites representing approximately $170.0 million of net book value.

 

9

SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

5.

Debt, continued:

 

The Company has an unsecured revolving line of credit with a maximum borrowing capacity of $115 million bearing interest at LIBOR + 1.65% (6.85% at September 30, 2007). The outstanding balance on the line of credit at September 30, 2007, was $72.2 million. In addition, $3.4 million of availability was used to back standby letters of credit leaving a maximum of $39.4 million available to be drawn under the facility. The line of credit matures on October 1, 2010 with a one year option to extend.

 

In March of 2006, SHS closed on a $40.0 million floor plan facility that allows for draws on new and pre-owned home purchases and on the Company’s portfolio of rental homes. At September 30, 2007, the outstanding balance was $3.8 million.

 

In January of 2007, the Company completed financings of $17.5 million and $20.0 million at interest rates of 5.842 percent and 5.825 percent, respectively. The loans are secured by two properties and have interest only payments for a term of 10 years. The proceeds from both financings were used to pay down the Company’s revolving line of credit.

 

In February of 2007, the Company redeemed $4.5 million of Preferred OP units.

 

In April of 2007, the Company extended $15.8 million of debt with an original maturity date of April 1, 2007. The transaction extended the maturity date of the debt until April 1, 2012, and reduced the spread over LIBOR by 0.25 percent. As part of the transaction the Company paid down the principal balance of the debt by $1.0 million. The transaction was accounted for as a modification of debt.

 

At September 30, 2007, the total of maturities and amortization of debt and lines of credit during the next five years, are as follows:

 

 

 

 

 

Maturities and Amortization By Period
(in thousands)

 

 

 

Total Due

 

Oct 2007 -
Sep 2008

 

Oct 2008 -
Sep 2009

 

Oct 2009 -
Sep 2010

 

Oct 2010 -
Sep 2011

 

Oct 2011 -
Sep 2012

 

After
5 years

 

Debt

 

$

1,102,580

 

$

15,898

 

$

25,685

 

$

21,657

 

$

121,461

 

$

26,502

 

$

891,377

 

Lines of credit

 

 

76,016

 

 

 

 

3,816

 

 

 

 

72,200

 

 

 

 

 

 

 

$

1,178,596

 

$

15,898

 

$

29,501

 

$

21,657

 

$

193,661

 

$

26,502

 

$

891,377

 

 

The most restrictive of the Company’s debt agreements place limitations on secured and unsecured borrowings and contain minimum debt service coverage, leverage, distribution and net worth requirements. At September 30, 2007, and December 31, 2006, the Company was in compliance with all covenants.

 

10

SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

6.

Share-Based Compensation:

 

In May of 2007, the Company issued 10,500 director options under its 2004 Non-Employee Director Option Plan. The weighted average fair value of the options issued is estimated on the date of grant using the Binomial (lattice) option pricing model, with the following weighted average assumptions used for the grants for the period indicated:

 

 

 

May 2007
award

 

Estimated fair value per share of options granted:

 

$

2.66

 

Assumptions:

 

 

 

 

Annualized dividend yield

 

 

8.43

%

Common stock price volatility

 

 

17.24

%

Risk-free rate of return

 

 

4.76

%

Expected option term (in years)

 

 

7.3

 

 

The following table summarizes the Director option activity for the nine months ended September 30, 2007:

 

 

 

Number of
shares

 

Weighted
Average
Exercise Price
(per common share)

 

Weighted
Average
Contractual
Term
(in years)

 

Aggregate
Intrinsic
Value
(in 000's)

 

Options outstanding at January 1, 2007

 

79,500

 

$

34.22

 

 

 

 

 

 

Granted

 

10,500

 

$

29.91

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

Canceled

 

 

 

 

 

 

 

 

 

 

Options outstanding at September 30, 2007

 

90,000

 

$

33.71

 

4.1

 

$

265

 

Options vested and expected to vest

 

90,000

 

$

33.71

 

4.1

 

$

265

 

Options exercisable at September 30, 2007

 

72,000

 

$

34.30

 

2.8

 

$

217

 

 

7.

Other Income (Loss):

 

The components of other income (loss) are as follows for the periods ended September 30, 2007 and 2006 (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Brokerage commissions

 

$

168

 

$

212

 

$

541

 

$

881

 

Disposal of assets

 

 

(724

)

 

(774

)

 

(1,193

)

 

(682

)

Lawsuit settlement

 

 

 

 

(17

)

 

 

 

399

 

Other

 

 

124

 

 

(65

)

 

126

 

 

218

 

 

 

$

(432

)

$

(644

)

$

(526

)

$

816

 

 

 

11

SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

8.

Segment Reporting (amounts in thousands):

 

The consolidated operations of the Company can be segmented into home sales and home rentals, and real property operations segments. Following is a presentation of selected financial information:

 

 

 

Three months ended September 30, 2007

 

Nine months ended September 30, 2007

 

 

 

Real
Property
Operations

 

 

 

Home Sales
and Home
Rentals

 

Consolidated

 

Real
Property
Operations

 

 

 

Home Sales
and Home
Rentals

 

Consolidated

 

Revenues

 

$

46,381

 

(2

)

$

9,823

 

$

56,204

 

$

142,043

 

(2

)

$

30,738

 

$

172,781

 

Operating expenses/Cost of sales

 

 

16,582

 

 

 

 

7,504

 

 

24,086

 

 

48,192

 

 

 

 

23,124

 

 

71,316

 

Net operating income (1)/Gross profit

 

 

29,799

 

 

 

 

2,319

 

 

32,118

 

 

93,851

 

 

 

 

7,614

 

 

101,465

 

Adjustments to arrive at net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other revenues

 

 

281

 

 

 

 

(23

)

 

258

 

 

1,683

 

 

 

 

288

 

 

1,971

 

General and administrative

 

 

(3,734

)

 

 

 

(1,462

)

 

(5,196

)

 

(11,931

)

 

 

 

(4,440

)

 

(16,371

)

Depreciation and amortization

 

 

(11,281

)

 

 

 

(4,231

)

 

(15,512

)

 

(34,093

)

 

 

 

(12,351

)

 

(46,444

)

Interest expense

 

 

(16,629

)

 

 

 

(50

)

 

(16,679

)

 

(48,745

)

 

 

 

(124

)

 

(48,869

)

Equity income from affiliate

 

 

583

 

 

 

 

 

 

583

 

 

1,431

 

 

 

 

 

 

1,431

 

Provision for state income tax

 

 

(500

)

 

 

 

 

 

(500

)

 

(500

)

 

 

 

 

 

(500

)

Loss allocated to minority interest

 

 

560

 

 

 

 

 

 

560

 

 

832

 

 

 

 

 

 

832

 

Net income (loss)

 

$

(921

)

 

 

$

(3,447

)

$

(4,368

)

$

2,528

 

 

 

$

(9,013

)

$

(6,485

)

 

 

 

Three months ended September 30, 2006

 

Nine months ended September 30, 2006

 

 

 

Real
Property
Operations

 

 

 

Home Sales
and Home
Rentals

 

Consolidated

 

Real
Property
Operations

 

 

 

Home Sales
and Home
Rentals

 

Consolidated

 

Revenues

 

$

45,680

 

(2

)

$

8,441

 

$

54,121

 

$

139,340

 

(2

)

$

25,554

 

$

164,894

 

Operating expenses/Cost of sales

 

 

16,380

 

 

 

 

6,335

 

 

22,715

 

 

47,276

 

 

 

 

19,032

 

 

66,308

 

Net operating income (1)/Gross profit

 

 

29,300

 

 

 

 

2,106

 

 

31,406

 

 

92,064

 

 

 

 

6,522

 

 

98,586

 

Adjustments to arrive at net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other revenues

 

 

549

 

 

 

 

35

 

 

584

 

 

3,426

 

 

 

 

590

 

 

4,016

 

General and administrative

 

 

(3,426

)

 

 

 

(1,633

)

 

(5,059

)

 

(12,825

)

 

 

 

(4,907

)

 

(17,732

)

Depreciation and amortization

 

 

(11,234

)

 

 

 

(3,838

)

 

(15,072

)

 

(34,034

)

 

 

 

(10,801

)

 

(44,835

)

Interest expense

 

 

(16,446

)

 

 

 

(112

)

 

(16,558

)

 

(48,287

)

 

 

 

(321

)

 

(48,608

)

Equity income from affiliate

 

 

300

 

 

 

 

 

 

300

 

 

967

 

 

 

 

 

 

967

 

Loss allocated to minority interest

 

 

510

 

 

 

 

 

 

510

 

 

851

 

 

 

 

 

 

851

 

Income (loss) before cumulative effect of
change in accounting principle

 

$

(447

)

 

 

$

(3,442

)

$

(3,889

)

$

2,162

 

 

 

$

(8,917

)

$

(6,755

)

Cumulative effect of change in accounting
principle

 

 

 

 

 

 

 

 

 

 

289

 

 

 

 

 

 

289

 

Net income (loss)

 

$

(447

)

 

 

$

(3,442

)

$

(3,889

)

$

2,451

 

 

 

$

(8,917

)

$

(6,466

)

 

 

(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) Seasonal recreational vehicle revenue is included in Property Operations revenues and is approximately $5.3 million annually. This seasonal revenue is recognized approximately 53% in the first quarter, 7% in both the second and third quarters and 33% in the fourth quarter of each fiscal year.

 

12

SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

8.

Segment Reporting (amounts in thousands), continued: