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, 2009.

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)

 

(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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (Check one):

 

Large accelerated filer [   ]

Accelerated filer [ X ]

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, 2009: 18,607,686

 

 

 

 

 

 

 


SUN COMMUNITIES, INC.

 

INDEX

 

 

 

Pages

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited):

 

 

Consolidated Balance Sheets ─ June 30, 2009 and  December 31, 2008

 

3

 

Consolidated Statements of Operations ─ Periods Ended June 30, 2009 and 2008

4

 

Consolidated Statements of Comprehensive Loss ─ Periods Ended June 30, 2009 and 2008

5

 

Consolidated Statement of Stockholders’ Deficit ─ Six Months Ended June 30, 2009

5

 

Consolidated Statements of Cash Flows ─ Six Months Ended June 30, 2009 and 2008

6

 

Notes to Consolidated Financial Statements

7

Item 2.

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

27

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

45

Item 4.

Controls and Procedures

46

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 4.

Submission of Matters to a Vote of Security Holders

47

Item 6.

Exhibits

47

 

Signatures

48

 

 

 

 

2

 


 

SUN COMMUNITIES, INC.

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2009 AND DECEMBER 31, 2008

(In thousands, except per share amounts)

 

 

 

(Unaudited)

June 30,
2009

 

December 31,
2008

 

ASSETS

 

 

 

 

 

 

 

Investment property, net

 

$

1,080,973

 

$

1,099,020

 

Cash and cash equivalents

 

 

4,625

 

 

6,162

 

Inventory of manufactured homes

 

 

3,426

 

 

3,342

 

Investment in affiliates

 

 

3,282

 

 

3,772

 

Notes and other receivables

 

 

64,818

 

 

57,481

 

Other assets

 

 

35,106

 

 

37,152

 

Assets of discontinued operations

 

 

19

 

 

70

 

TOTAL ASSETS

 

$

1,192,249

 

$

1,206,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Debt

 

$

1,150,198

 

$

1,139,152

 

Lines of credit

 

 

84,322

 

 

90,419

 

Other liabilities

 

 

39,276

 

 

37,240

 

Liabilities of discontinued operations

 

 

78

 

 

70

 

TOTAL LIABILITIES

 

$

1,273,874

 

$

1,266,881

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

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

 

$

 

$

 

Common stock, $.01 par value, 90,000 shares authorized (June 30, 2009 and December 31, 2008, 20,409 and 20,313 shares issued respectively)

 

 

204

 

 

203

 

Additional paid-in capital

 

 

461,441

 

 

459,847

 

Officer's notes

 

 

(5,296

)

 

(8,334

)

Accumulated other comprehensive loss

 

 

(1,666

)

 

(2,851

)

Distributions in excess of accumulated earnings

 

 

(469,928

)

 

(445,147

)

Treasury stock, at cost (June 30, 2009 and December 31, 2008, 1,802 shares)

 

 

(63,600

)

 

(63,600

)

Total Sun Communities, Inc. stockholders' deficit

 

 

(78,845

)

 

(59,882

)

Noncontrolling interest

 

 

(2,780

)

 

 

TOTAL STOCKHOLDERS’ DEFICIT

 

 

(81,625

)

 

(59,882

)

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

1,192,249

 

$

1,206,999

 

 

 

 

See accompanying notes to Consolidated Financial Statements.

 

 

 

 

3

 


SUN COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE PERIODS ENDED JUNE 30, 2009 AND 2008

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from real property

 

$

48,497

 

$

47,655

 

$

99,496

 

$

98,004

 

Revenue from home sales

 

 

8,218

 

 

8,768

 

 

15,679

 

 

16,271

 

Rental home revenue

 

 

5,187

 

 

5,136

 

 

10,387

 

 

10,132

 

Ancillary revenues, net

 

 

62

 

 

88

 

 

257

 

 

314

 

Interest

 

 

1,368

 

 

807

 

 

2,640

 

 

1,612

 

Other income (loss)

 

 

(60

)

 

2,829

 

 

97

 

 

3,700

 

Total revenues

 

 

63,272

 

 

65,283

 

 

128,556

 

 

130,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating and maintenance

 

 

12,787

 

 

12,314

 

 

25,392

 

 

24,388

 

Real estate taxes

 

 

4,118

 

 

4,170

 

 

8,302

 

 

8,339

 

Cost of home sales

 

 

5,844

 

 

6,981

 

 

11,267

 

 

12,820

 

Rental home operating and maintenance

 

 

4,022

 

 

3,965

 

 

8,559

 

 

7,431

 

General and administrative - real property

 

 

4,900

 

 

4,697

 

 

9,066

 

 

8,855

 

General and administrative - home sales and rentals

 

 

1,816

 

 

1,715

 

 

3,642

 

 

3,327

 

Depreciation and amortization

 

 

15,915

 

 

16,211

 

 

32,119

 

 

32,072

 

Interest

 

 

14,739

 

 

14,570

 

 

28,984

 

 

29,950

 

Interest on mandatorily redeemable debt

 

 

835

 

 

844

 

 

1,670

 

 

1,688

 

Total expenses

 

 

64,976

 

 

65,467

 

 

129,001

 

 

128,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes and equity loss from affiliates

 

 

(1,704

)

 

(184

)

 

(445

)

 

1,163

 

Benefit (provision) for state income tax

 

 

(146

)

 

(128

)

 

(279

)

 

107

 

Equity loss from affiliates

 

 

(517

)

 

(7,720

)

 

(490

)

 

(12,550

)

Loss from continuing operations

 

 

(2,367

)

 

(8,032

)

 

(1,214

)

 

(11,280

)

Loss from discontinued operations

 

 

(160

)

 

(270

)

 

(332

)

 

(511

)

Net loss

 

 

(2,527

)

 

(8,302

)

 

(1,546

)

 

(11,791

)

Less: Loss attributable to noncontrolling interest

 

 

(268

)

 

(934

)

 

(164

)

 

(1,328

)

Net loss attributable to Sun Communities, Inc.

 

$

(2,259

)

$

(7,368

)

$

(1,382

)

$

(10,463

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

18,469

 

 

18,162

 

 

18,399

 

 

18,119

 

Diluted

 

 

18,469

 

 

18,162

 

 

18,399

 

 

18,119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.11

)

$

(0.39

)

$

(0.05

)

$

(0.55

)

Discontinued operations

 

 

(0.01

)

 

(0.02

)

 

(0.02

)

 

(0.03

)

Basic and diluted loss per share

 

$

(0.12

)

$

(0.41

)

$

(0.07

)

$

(0.58

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash 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 OPERATIONS, CONTINUED

FOR THE PERIODS ENDED JUNE 30, 2009 AND 2008

(In thousands)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Amounts attributable to Sun Communities, Inc. common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations, net of state income taxes

 

$

(2,116

)

$

(7,129

)

$

(1,085

)

$

(10,010

)

Loss from discontinued operations, net of state income taxes

 

 

(143

)

 

(239

)

 

(297

)

 

(453

)

Loss attributable to Sun Communities, Inc.

 

$

(2,259

)

$

(7,368

)

$

(1,382

)

$

(10,463

)

 

 

SUN COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE PERIODS ENDED JUNE 30, 2009 AND 2008

(In thousands)

(Unaudited)

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net loss

 

$

(2,527

)

$

(8,302

)

$

(1,546

)

$

(11,791

)

Unrealized gain (loss) on interest rate swaps

 

 

1,330

 

 

1,348

 

 

1,326

 

 

(68

)

Total comprehensive loss

 

 

(1,197

)

 

(6,954

)

 

(220

)

 

(11,859

)

Less: Comprehensive loss attributable to the noncontrolling interest

 

 

(127

)

 

(783

)

 

(23

)

 

(1,337

)

Comprehensive loss attributable to Sun Communities, Inc.

 

$

(1,070

)

$

(6,171

)

$

(197

)

$

(10,522

)

 

SUN COMMUNITIES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2009

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Common stock

 

Additional paid-in capital

 

Officer's notes

 

Accumulated other comprehensive loss

 

Distributions in excess of accumulated earnings

 

Treasury stock

 

Total Sun Communities stockholders' deficit

 

Non

controlling interest

 

Total stockholders’ deficit

 

Balance as of December 31, 2008

 

$

203

 

$

459,847

 

$

(8,334

)

$

(2,851

)

$

(445,147

)

$

(63,600

)

$

(59,882

)

$

 

$

(59,882

)

Issuance of common stock, net

 

 

1

 

 

(378

)

 

 

 

 

 

 

 

 

 

(377

)

 

 

 

(377

)

Stock-based compensation - amortization and forfeitures

 

 

 

 

1,972

 

 

 

 

 

 

(7

)

 

 

 

1,965

 

 

 

 

1,965

 

Repayment of officer's notes

 

 

 

 

 

 

3,038

 

 

 

 

 

 

 

 

3,038

 

 

 

 

3,038

 

Net loss

 

 

 

 

 

 

 

 

 

 

(1,382

)

 

 

 

(1,382

)

 

(164

)

 

(1,546

)

Unrealized gain on interest rate swaps

 

 

 

 

 

 

 

 

1,185

 

 

 

 

 

 

1,185

 

 

141

 

 

1,326

 

Cash distributions declared of $1.26 per share

 

 

 

 

 

 

 

 

 

 

(23,392

)

 

 

 

(23,392

)

 

(2,757

)

 

(26,149

)

Balance as of June 30, 2009

 

$

204

 

$

461,441

 

$

(5,296

)

$

(1,666

)

$

(469,928

)

$

(63,600

)

$

(78,845

)

$

(2,780

)

$

(81,625

)

 

 

 

See accompanying notes to Consolidated Financial Statements.

 

 

5

 


 

SUN COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

June 30,

 

 

 

2009

 

2008

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net loss

 

$

(1,546

)

$

(11,791

)

Less: Loss from discontinued operations, net of tax

 

 

(332

)

 

(511

)

Loss from continuing operations

 

 

(1,214

)

 

(11,280

)

Adjustments to reconcile loss from continuing operations to net cash provided by operating activities:

 

 

 

 

 

 

 

Loss (gain) from land disposition

 

 

4

 

 

(3,303

)

Gain on disposal of other assets and depreciated homes, net

 

 

(2,695

)

 

(1,966

)

Gain on valuation of derivative instruments

 

 

(12

)

 

(2

)

Stock compensation expense

 

 

1,986

 

 

1,354

 

Depreciation and amortization

 

 

34,319

 

 

34,095

 

Amortization of deferred financing costs

 

 

796

 

 

749

 

Equity loss from affiliates

 

 

490

 

 

12,550

 

Change in notes receivables from financed sales of inventory homes, net of repayments

 

 

(1,716

)

 

(1,696

)

Change in inventory, other assets and other receivables, net

 

 

(248

)

 

(2,894

)

Change in accounts payable and other liabilities

 

 

2,904

 

 

4,093

 

Net cash provided by operating activities of continuing operations

 

 

34,614

 

 

31,700

 

Net cash used for operating activities of discontinued operations

 

 

(273

)

 

(222

)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

34,341

 

 

31,478

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Investment in properties

 

 

(18,132

)

 

(20,031

)

Proceeds related to disposition of land

 

 

9

 

 

6,461

 

Proceeds (financing) related to disposition of other assets and depreciated homes, net

 

 

167

 

 

(160

)

Payment of notes receivable and officer's notes, net

 

 

4,132

 

 

1,187

 

NET CASH USED FOR INVESTING ACTIVITIES

 

 

(13,824

)

 

(12,543

)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Redemption of common stock and OP units, net

 

 

(377

)

 

(360

)

Borrowings on lines of credit

 

 

80,456

 

 

49,544

 

Payments on lines of credit

 

 

(86,553

)

 

(59,749

)

Proceeds from issuance of notes payable and other debt

 

 

31,111

 

 

27,000

 

Payments on notes payable and other debt

 

 

(20,065

)

 

(10,112

)

Payments for deferred financing costs

 

 

(477

)

 

(308

)

Distributions to stockholders and OP unit holders

 

 

(26,149

)

 

(26,052

)

NET CASH USED FOR FINANCING ACTIVITIES

 

 

(22,054

)

 

(20,037

)

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(1,537

)

 

(1,102

)

Cash and cash equivalents, beginning of period

 

 

6,162

 

 

5,415

 

Cash and cash equivalents, end of period

 

$

4,625

 

$

4,313

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest

 

$

25,970

 

$

28,248

 

Cash paid for interest on mandatorily redeemable debt

 

$

1,670

 

$

1,740

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

Unrealized gain (loss) on interest rate swaps

 

$

1,326

 

$

(68

)

 

See accompanying to Consolidated Financial Statements.

 

6

 


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 majority-owned or wholly-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, 2008 as filed with the SEC on March 13, 2009, as amended on March 30, 2009 (the “2008 Annual Report”).

 

Reference in this report to Sun Communities, Inc., “we”, “our” and “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.

 

Our cable television services are held for sale and presented as discontinued operations in the Consolidated Financial Statements and related notes. See Note 2 for additional information.

 

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 2008 Annual Report, with the exception of the impact of our adoption in the first quarter of 2009 of Statement of Financial Accounting Standards (SFAS) No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”) and FASB Staff Position Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP EITF 03-6-1”). See Recent Accounting Pronouncements in Note 16 for further information on our adoption of SFAS 160 and FSP EITF 03-6-1.

 

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

 

7

 


SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.

Discontinued Operations

 

We have investments in certain land improvements and equipment that provide cable television services to certain communities within the Real Property Operations segment. In December 2008, we determined that the cable television assets could not provide the necessary return on investment to justify the capital investment required to keep up with the technological advances in the offered product. In the fourth quarter of fiscal 2008, we announced our intention to exit the cable television service business and recorded a $4.1 million impairment charge on the cable television assets. This impairment charge was recognized in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).

 

SFAS 144 also provides criteria to evaluate if a component of an entity is deemed to be held for sale and eligible for presentation as a discontinued operation. We are under contract to sell and exit the cable television services business within the next six months, the cable television services business is reported as a discontinued operation in the Consolidated Financial Statements for all periods presented.

 

The following tables set forth certain summarized financial information of the discontinued operation (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Total revenues

 

$

172

 

$

191

 

$

355

 

$

395

 

Total expenses

 

 

(332

)

 

(461

)

 

(687

)

 

(906

)

Loss from discontinued operations

 

 

(160

)

 

(270

)

 

(332

)

 

(511

)

Less: Loss attributable to noncontrolling interest

 

 

(17

)

 

(31

)

 

(35

)

 

(58

)

Loss from discontinued operations attributable to Sun Communities, Inc common stockholders

 

$

(143

)

$

(239

)

$

(297

)

$

(453

)

 

 

 

June 30, 2009

 

December 31, 2008

 

ASSETS

 

 

 

 

 

Accounts receivable, net

 

$

19

 

$

16

 

Other assets

 

 

 

 

54

 

Total assets

 

$

19

 

$

70

 

LIABILITIES

 

 

 

 

 

 

 

Accounts payable

 

$

22

 

$

16

 

Deferred income

 

 

34

 

 

38

 

Other liabilities

 

 

22

 

 

16

 

Total liabilities

 

$

78

 

$

70

 

 

3.

Investment Property

 

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

 

 

 

June 30,
2009

 

December 31,
2008

 

Land

 

$

116,279

 

$

116,292

 

Land improvements and buildings

 

 

1,182,359

 

 

1,177,362

 

Rental homes and improvements

 

 

198,233

 

 

194,649

 

Furniture, fixtures, and equipment

 

 

34,230

 

 

34,050

 

Land held for future development

 

 

26,986

 

 

26,986

 

Investment property

 

 

1,558,087

 

 

1,549,339

 

Less: Accumulated depreciation

 

 

(477,114

)

 

(450,319

)

Investment property, net

 

$

1,080,973

 

$

1,099,020

 

 

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

 

8

 


SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.

Secured Borrowing and Collateralized Receivables

 

We have completed various transactions involving our installment notes since the third quarter of fiscal 2008. We have received a total of $40.1 million of cash proceeds in exchange for relinquishing our right, title and interest in the installment notes. 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.

 

FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 140”) sets forth the criteria that must be met for control over transferred assets to be considered to have been surrendered, which includes, amongst other things: (1) the transferred assets have been isolated from the transferor, including put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When a company transfers financial assets and fails any one of the SFAS 140 criteria, the company is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. The determination about whether the isolation criteria of SFAS 140 have been met to support a conclusion regarding surrender of control is largely a matter of law. As such, the evidence required for testing whether or not the first criteria of SFAS 140 has been satisfied requires a legal "true sale" opinion analyzing the treatment of the transfer under state laws as if we were a debtor under the bankruptcy code. A "true sale" legal opinion includes several legally relevant factors, including the nature of retained interests in the loans sold. Legal opinions as to a "true sale" are never absolute and unconditional, but contain qualifications based on the inherent equitable powers of a bankruptcy court, as well as the unsettled state of the common law.

 

It was the intent of both parties for these transactions to qualify for sale accounting under SFAS 140 and the terms of the agreements clearly stipulate that we have no further obligations or rights with respect to the control, management, administration, servicing, or collection of the installment notes. In addition, the transferee has obtained the right to pledge or exchange the installment notes. For federal tax purposes, we treat the transfers of loans which do not qualify as “true sales” under SFAS 140, as sales.

 

Notwithstanding these facts, we were unable to satisfy the first criteria for sale accounting treatment under SFAS 140 and therefore, we have recorded these transactions as a transfer of financial assets. The transferred assets have been classified as collateralized receivables and the cash proceeds received from these transactions have been classified as a secured borrowing in the Consolidated Balance Sheets.

 

The collateralized receivables earn interest income and the secured borrowings accrue borrowing costs at the same interest rates. The amount of interest income and expense recognized was $0.9 million and $1.6 million for the three and six months ended June 30, 2009, respectively. The collateralized receivables and secured borrowings are reduced as the related installment notes are collected from the customers. The balance of the collateralized receivables was $36.4 million, net of a loan loss provision of $0.1 million as of June 30, 2009. The balance of the collateralized receivables was $26.1 million, net of a loan loss provision of $0.1 million as of December 31, 2008. The outstanding balance on the secured borrowing was $36.5 million and $26.2 million as of June 30, 2009 and December 31, 2008, respectively.

 

In the event of note default, and subsequent repossession of a manufactured home, 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. If default on the installment note results in repossession of the home, the home is repurchased. The repurchase price is calculated as a percentage of the outstanding principal balance of the installment note, 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, based on the number of payments made since the loan origination date, the repurchase price is determined as follows:

 

Number of Payments

 

Recourse %

 

Less than or equal to 15

 

100

%

Greater than 15 but less than 64

 

90

%

64 or more

 

65

%

 

 

9

 


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,

2009

 

December 31,

2008

 

Installment notes receivable on manufactured homes, net

$

20,146

 

$

21,232

 

Collateralized receivables, net (see Note 4)

 

36,412

 

 

26,159

 

Other receivables, net

 

8,260

 

 

10,090

 

Total notes and other receivables, net

$

64,818

 

$

57,481

 

 

Installment Notes Receivable on Manufactured Homes

 

The installment notes of $20.1 million and $21.2 million as of June 30, 2009 and December 31, 2008, respectively, are collateralized by manufactured homes. The installment notes are presented net of allowance for losses of $0.1 million as of June 30, 2009 and December 31, 2008. The installment notes represent financing provided by us to purchasers of manufactured homes located in our communities. The installment notes receivable have interest payable monthly at a net weighted average interest rate and a maturity of 7.8 percent and 13.1 years and 7.6 percent and 13.8 years at June 30, 2009 and December 31, 2008, respectively.

 

Collateralized Receivables

 

We have completed various transactions involving our installment notes since the third quarter of fiscal 2008. We have received a total of $40.1 million of cash proceeds in exchange for relinquishing our right, title and interest in the installment notes. These transactions were recorded as a transfer of financial assets. The transferred assets have been classified as collateralized receivables with a net balance of $36.4 million and $26.1 million as of June 30, 2009 and December 31, 2008, respectively. The collateralized receivables are presented net of allowance for losses of $0.1 million as of June 30, 2009 and December 31, 2008. The collateralized receivables have interest payable monthly at a weighted average interest rate and maturity of 10.7 percent and 13.7 years and 10.1 percent and 14.0 years, as of June 30, 2009 and December 31, 2008, respectively. See Note 4 for additional information.

 

The net increase of $10.3 million during 2009 in the aggregate gross principal balance of the collateralized receivables is as follows (in thousands):

 

Beginning balance as of December 31, 2008

 

$

26,211

 

 

 

 

 

 

Financed sales of manufactured homes

 

 

12,570

 

Principal payments and payoffs from our customers

 

 

(1,156

)

Repurchases

 

 

(1,084

)

Total activity

 

 

10,330

 

 

 

 

 

 

Ending balance as of June 30, 2009

 

$

36,541

 

 

Other Receivables

 

Other receivables were comprised of amounts due from residents of $1.3 million (net of allowance of $0.2 million), home sale proceeds of $3.7 million, an employee loan of $0.5 million, insurance proceeds of $0.1 million, and rebates and other receivables of $2.7 million as of June 30, 2009. Other receivables were comprised of amounts due from residents of $1.6 million (net of allowance of $0.3 million), home sale proceeds of $3.7 million, an employee loan of $0.5 million, insurance proceeds of $0.3 million, and rebates and other receivables of $4.0 million as of December 31, 2008.

 

10

 


SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.

Notes and Other Receivables, continued

 

Officer’s Notes

 

Officer’s notes, presented as a portion of the stockholders’ deficit in the balance sheet, are 10 year, LIBOR + 1.75% notes, with a minimum and maximum interest rate of 6% and 9%, respectively. The following table sets forth certain information regarding officer’s notes as of June 30, 2009 and December 31, 2008 (in thousands except for shares and units):

 

 

 

June 30,

2009

 

December 31,

2008

 

 

 

 

 

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

 

$

612

 

37,661

 

 

$

963

 

59,263

 

 

Secured - $6.6 million

 

 

3,110

 

83,625

 

60,161

 

 

4,894

 

131,591

 

94,669

 

Secured - $1.0 million

 

 

481

 

44,520

 

 

 

757

 

70,057

 

 

Subtotal secured notes

 

 

4,203

 

165,806

 

60,161

 

 

6,614

 

260,911

 

94,669

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured - $1.0 million

 

 

481

 

 

 

 

757

 

 

 

Unsecured - $1.3 million

 

 

612

 

 

 

 

963

 

 

 

Subtotal unsecured notes

 

 

1,093

 

 

 

 

1,720

 

 

 

Total promissory notes

 

$

5,296

 

165,806

 

60,161

 

$

8,334

 

260,911

 

94,669

 

 

The officer’s personal liability on the secured promissory notes is limited to all accrued interest on such notes plus fifty percent 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 value of secured shares and secured OP Units total approximately $3.1 million based on the closing price of our shares on the New York Stock Exchange of $13.78 as of June 30, 2009. The unsecured notes are fully recourse to the officer.

 

Total interest received was $0.1 million for the three months ended June 30, 2009 and 2008. Total interest received was $0.2 million and $0.3 million for the six months ended June 30, 2009 and 2008, respectively.

 

The reduction in the aggregate principal balance of these notes was $3.0 million and $0.2 million for the six months ended June 30, 2009 and 2008, respectively. The notes are due in two remaining installments on December 31, 2009 and 2010.

 

6.

Investment in Affiliates

 

In October 2003, we purchased 5,000,000 shares of common stock of Origen Financial, Inc. (“Origen”). We own approximately 19 percent of Origen as of June 30, 2009, and our investment is accounted for using the equity method of accounting. As of June 30, 2009, our investment in Origen had a market value of approximately $4.5 million based on a quoted market closing price of $0.90 per share from the “Pink Sheet Electronic OTC Trading System”.

 

We recorded our equity allocation of the reported losses from Origen of $0.5 million and $7.7 million for the three months ended June 30, 2009 and 2008, respectively. We recorded our equity allocation of the reported losses from Origen of $0.4 million and $12.6 million for the six months ended June 30, 2009 and 2008, respectively.

 

11

 


SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6.

Investment in Affiliates



 

Summarized consolidated financial information of Origen at June 30, 2009 and 2008 is presented below before elimination of inter-company transactions (amounts in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues

 

$

21,042

 

$

21,211

 

$

42,747

 

$

45,730

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

23,499

 

 

26,262

 

 

44,691

 

 

56,237

 

Loss on sale of loans

 

 

 

 

718

 

 

 

 

22,377

 

Investment impairment

 

 

 

 

11

 

 

 

 

11

 

Loss from continuing operations

 

 

(2,457

)

 

(5,780

)

 

(1,944

)

 

(32,895

)

Income from discontinued operations

 

 

 

 

1,006

 

 

 

 

3,129

 

Net loss

 

$

(2,457

)

$

(4,774

)

$

(1,944

)

$

(29,766

)

 

In August 2008, we entered into an agreement with four unrelated companies (“Members”) to form a new limited liability company, Origen Financial Services, LLC (the “LLC”). We contributed cash of $0.5 million toward the formation of the limited liability company. The LLC purchased the origination platform of Origen. The purpose of the venture is to originate manufactured housing installment contracts for its Members thereby eliminating the need for us to become licensed to originate loans in each of the 18 states in which we do business. We own 25.0 percent of the LLC as of June 30, 2009, and the investment is accounted for using the equity method of accounting. We recorded an insignificant amount of losses associated with our equity allocation of the LLC’s financial results for the three months ended June 30, 2009. We recorded losses of $0.1 million associated with our equity allocation of the LLC’s financial results for the six months ended June 30, 2009.

 

7.

Debt and Lines of Credit

 

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

 

 

 

June 30,

2009

 

December 31,

2008

 

Collateralized term loans - CMBS, due July 1, 2011-2016 interest at 4.9-5.3% as of June 30, 2009 and December 31, 2008.

 

$

475,118

 

$

478,907

 

Collateralized term loans - FNMA, due May 1, 2014 and January 1, 2015, interest at 3.9 – 5.2% and 4.5 - 5.2% as of June 30, 2009 and December 31, 2008, respectively.

 

 

375,590

 

 

377,651

 

Preferred OP Units, redeemable at various dates from December 1, 2009 through January 5, 2014, average interest at 6.8% as of June 30, 2009 and December 31, 2008.

 

 

48,947

 

 

49,447

 

Secured borrowing, maturing at various dates from May 30, 2010 through April 25, 2030, average interest at 10.7% and 10.1% as of June 30, 2009 and December 31, 2008, respectively (see Note 4).

 

 

36,541

 

 

26,211

 

Mortgage notes, other, maturing at various dates from April 1, 2012 through May 1, 2017, average interest at 5.3% and 5.4% as of June 30, 2009 and December 31, 2008, respectively.

 

 

214,002

 

 

206,936

 

Total debt

 

$

1,150,198

 

$

1,139,152

 

 

12

 


SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.

Debt and Lines of Credit, continued



 

Collateralized Term Loans

 

The collateralized term loans totaling $850.7 million as of June 30, 2009, are secured by 87 properties comprising of 31,199 sites representing approximately $547.8 million of net book value.

 

We recently exercised our option to extend the due date of approximately $152.4 million of secured, variable rate borrowings to May 1, 2014. In connection with this extension, the lender increased the facility fee resulting in an increase of the effective interest rate on the borrowings, which resulted in higher interest expense. We do not believe that the lender had the right to increase the facility fee and have reserved all of our rights with respect to the increased fee. We are considering all of our available remedies to challenge the validity of the increased fee.

 

Preferred OP Units

 

Our Operating Partnership had $13.7 million of Series B-3 Preferred OP Units that were redeemable at various dates from December 1, 2009 through January 1, 2011. In October 2008, our Operating Partnership completed a three year extension on the redemption dates for $11.9 million of these units; the remaining $1.8 million of these units mature in accordance with the original agreement.

 

In January 2009, we redeemed $0.5 million of the $1.8 million of the Series B-3 Preferred OP Units.

 

Secured Borrowing

 

Since the third quarter of fiscal 2008, we have completed various transactions involving our installment notes. These transactions were recorded as a transfer of financial assets, and the cash proceeds related to these transactions were recorded as a secured borrowing. See Note 4 for additional information regarding our collateralized receivables and secured borrowing transactions.

 

Mortgage Notes

 

The mortgage notes totaling $214.0 million as of June 30, 2009, are collateralized by 19 communities comprising of 6,390 sites representing approximately $184.8 million of net book value.

 

During the quarter, we completed a financing of $18.5 million with Bank of America. The loan has a three year term. The interest rate is 400 basis points over LIBOR, with a minimum rate of 5.0 percent (5.0 percent at June 30, 2009). Proceeds of $11.2 million were used to repay mortgage notes that matured during the quarter. The remaining proceeds were used to pay down our unsecured line of credit.

 

In June 2008, we completed a financing of $27.0 million with Bank of America (formally LaSalle Bank Midwest). The loan has a three year term, with a two year extension at our option. The terms of the loan require interest only payments for the first year, with the remainder of the term being amortized based on a 30 year table. The interest rate is 205 basis points over LIBOR, or prime plus 25 basis points (2.4 percent at June 30, 2009). The proceeds from the financing were used to repay an existing mortgage note of $4.3 million with the remainder used to pay down our lines of credit.

 

Lines of Credit

 

We have an unsecured revolving line of credit facility with a maximum borrowing capacity of $115.0 million, subject to certain borrowing base calculations. The outstanding balance on the line of credit as of June 30, 2009 and December 31, 2008 was $81.2 million and $85.8 million, respectively. In addition, $3.3 million of availability was used to back standby letters of credit as of June 30, 2009 and December 31, 2008. Borrowings under the line of credit bear an interest rate of LIBOR plus 165 basis points, or prime plus 40 basis points at our option. Prime means for any month, the prevailing “prime rate” as quoted in the Wall Street Journal on last day of such calendar month. The weighted average interest rate on the outstanding borrowings was 2.0 percent as of June 30, 2009. The borrowings under the line of credit mature October 1, 2011 assuming the election of a one year extension that is available at our discretion. As of June 30, 2009 and December 31, 2008, $30.5 million and $25.9 million, respectively, were available to be drawn under the facility based on the calculation of the borrowing base at each date.

 

In March 2009, we entered into a $10.0 million manufactured home floor plan facility. The floor plan facility has a committed term of one year; thereafter, advances are discretionary and terms are subject to change. The interest rate is 100 basis points over the greater of prime or 6.0 percent (7.0 percent at June 30, 2009). The outstanding balance as of June 30, 2009 was $3.1 million.

 

13

 


SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

7.

Debt and Lines of Credit, continued

 

Our $40.0 million floor plan facility matured on March 1, 2009. As of December 31, 2008, the outstanding balance on the floor plan was $4.6 million.

 

As of June 30, 2009, 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

 

Remainder of 2009

 

2010

 

2011

 

2012

 

2013

 

After 5 years

 

Lines of credit

 

$

84,322

 

$

 

$

3,140

 

$

81,182

 

$

 

$

 

$

 

Mortgage loans payable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturities

 

 

988,095

 

 

 

 

 

 

103,708

 

 

31,623

 

 

26,788

 

 

825,976

 

Principal amortization

 

 

76,615

 

 

6,595

 

 

14,053

 

 

13,859

 

 

13,024

 

 

13,228

 

 

15,856

 

Preferred OP Units

 

 

48,947

 

 

470

 

 

825

 

 

 

 

4,300

 

 

3,345

 

 

40,007

 

Secured borrowing

 

 

36,541

 

 

710

 

 

1,528

 

 

1,681

 

 

1,849

 

 

1,958

 

 

28,815

 

Total

 

$

1,234,520

 

$

7,775

 

$

19,546

 

$

200,430

 

$

50,796

 

$

45,319

 

$

910,654

 

 

The most restrictive of our debt agreements place limitations on secured and unsecured borrowings and contain minimum debt service coverage, leverage, distribution and net worth requirements. As of June 30, 2009, we were in compliance with all covenants.

 

8.

Stockholders’ Deficit

 

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 2009 or 2008.

 

In March 2009, our Operating Partnership issued 110,444 Common OP Units to Water Oak, Ltd which were immediately converted to common stock. In May 2009, a holder of Common OP Units converted 1,824 units to common stock.

 

The vesting requirements for 56,515 restricted shares granted to our employees were satisfied during the six months ended June 30, 2009.

 

Our shelf registration for up to $300.0 million of common stock, preferred stock and debt securities expired December 31, 2008. In March 2009, we filed a new shelf registration statement on Form S-3 with the SEC to replace the previous shelf registration for a proposed offering of up to $300.0 million of our common stock, preferred stock and debt securities. The SEC declared the new shelf registration effective in May 2009.

 

9.

Other Income

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Brokerage commissions

 

$

138

 

$

168

 

$

273

 

$

360

 

Gain (loss) on sale of land

 

 

(4

)

 

2,604

 

 

(4

)

 

3,303

 

Gain (loss) on disposition of assets, net

 

 

(128

)

 

74

 

 

(111

)

 

87

 

Other, net

 

 

(66

)

 

(17

)

 

(61

)

 

(50

)

Total other income (loss)

 

$

(60

)

$

2,829

 

$

97

 

$

3,700

 

 

 

14

 


SUN COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

10.

Segment Reporting

 

Our consolidated operations can be segmented into Real Property Operations and Home Sales and Rentals. Transactions between our segments are recorded at cost. Seasonal recreational vehicle revenue is included in Real Property Operations’ revenues and is approximately $5.5 million annually. This seasonal revenue is recognized approximately 50% in the first quarter, 6.5% in both the second and third quarters and 37% 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, 2009

 

Six Months Ended June 30, 2009

 

 

 

Real Property Operations

 

Home Sales and Home Rentals

 

Consolidated

 

Real Property Operations

 

Home Sales and Home Rentals

 

Consolidated

 

Revenues

 

$

48,497

 

$

13,405

 

$

61,902

 

$

99,496

 

$

26,066

 

$

125,562

 

Operating expenses/Cost of sales

 

 

16,905

 

 

9,866

 

 

26,771

 

 

33,694

 

 

19,826

 

 

53,520

 

Net operating income/gross profit

 

 

31,592

 

 

3,539