sui093010_10q.htm



 
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, 2010.
 
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 [   ]  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 September 30, 2010:  19,598,872






 
 
 
 
 

 

SUN COMMUNITIES, INC.

INDEX

   
Pages
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited):
 
 
 
Consolidated Balance Sheets ─ September 30, 2010 and  December 31, 2009
 
3
 
Consolidated Statements of Operations ─ Periods Ended September 30, 2010 and 2009
 
4
 
Consolidated Statements of Comprehensive Loss ─ Periods Ended September 30, 2010 and 2009
 
5
 
Consolidated Statement of Stockholders’ Deficit ─ Nine Months Ended September 30, 2010
 
5
 
Consolidated Statements of Cash Flows ─ Nine Months Ended September 30, 2010 and 2009
 
6
 
Notes to Consolidated Financial Statements
 
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
23
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
39
Item 4.
Controls and Procedures
 
40
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
 
41
Item 1A.
Risk Factors
 
41
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds 
 
41
Item 6.
Exhibits
 
42
 
Signatures
 
43








 
2

 

SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
 (In thousands, except per share amounts)

   
(Unaudited)
       
   
September 30, 2010
   
December 31, 2009
 
ASSETS
           
Investment property, net
 
$
1,037,085
   
$
1,064,305
 
Cash and cash equivalents
   
4,706
     
4,496
 
Inventory of manufactured homes
   
2,243
     
3,934
 
Investment in affiliates
   
-
     
1,646
 
Notes and other receivables
   
85,682
     
74,030
 
Other assets
   
34,346
     
32,954
 
TOTAL ASSETS
 
$
1,164,062
   
$
1,181,365
 
                 
                 
LIABILITIES
               
Debt
 
$
1,164,759
   
$
1,159,442
 
Lines of credit
   
91,910
     
94,465
 
Other liabilities
   
38,433
     
38,766
 
TOTAL LIABILITIES
   
1,295,102
     
1,292,673
 
                 
Commitments and contingencies
               
                 
STOCKHOLDERS’ DEFICIT
               
Preferred stock, $0.01 par value, 10,000 shares authorized, none issued
 
$
-
   
$
-
 
        Common stock, $0.01 par value, 90,000 shares authorized   (September 30, 2010 and December 31, 2009, 21,401 and 20,635 shares issued respectively)
   
214
     
206
 
Additional paid-in capital
   
485,999
     
463,811
 
Officer's notes
   
(2,912
)
   
(5,028
)
Accumulated other comprehensive loss
   
(2,772
)
   
(1,858
)
Distributions in excess of accumulated earnings
   
(536,866
)
   
(498,370
)
Treasury stock, at cost  (September 30, 2010 and December 31, 2009, 1,802 shares)
   
(63,600
)
   
(63,600
)
Total Sun Communities, Inc. stockholders' deficit
   
(119,937
)
   
(104,839
)
Noncontrolling interests
   
(11,103
)
   
(6,469
)
TOTAL STOCKHOLDERS’ DEFICIT
   
(131,040
)
   
(111,308
)
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
$
1,164,062
   
$
1,181,365
 



See accompanying Notes to Consolidated Financial Statements.










 
3

 
 
 

SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
 (In thousands, except per share amounts)
(Unaudited)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
REVENUES
                       
Income from real property
 
$
50,169
   
$
48,597
   
$
152,124
   
$
148,093
 
Revenue from home sales
   
7,324
     
8,433
     
24,959
     
24,112
 
Rental home revenue
   
5,135
     
5,062
     
15,266
     
15,449
 
Ancillary revenues, net
   
35
     
4
     
369
     
261
 
Interest
   
2,036
     
1,554
     
5,805
     
4,194
 
Other loss, net
   
(654
)
   
(258
)
   
(748
)
   
(161
)
Total revenues
   
64,045
     
63,392
     
197,775
     
191,948
 
                                 
COSTS AND EXPENSES
                               
Property operating and maintenance
   
13,942
     
13,249
     
40,087
     
38,641
 
Real estate taxes
   
3,813
     
3,848
     
12,176
     
12,150
 
Cost of home sales
   
5,320
     
6,046
     
18,797
     
17,313
 
Rental home operating and maintenance
   
4,164
     
3,864
     
11,381
     
12,423
 
General and administrative - real property
   
3,408
     
3,687
     
12,525
     
12,753
 
General and administrative - home sales and rentals
   
1,873
     
1,890
     
5,659
     
5,532
 
Georgia flood damage
   
-
     
800
     
-
     
800
 
Depreciation and amortization
   
16,468
     
15,841
     
49,445
     
47,960
 
Interest
   
15,668
     
15,109
     
46,228
     
44,093
 
Interest on mandatorily redeemable debt
   
826
     
839
     
2,462
     
2,509
 
Total expenses
   
65,482
     
65,173
     
198,760
     
194,174
 
                                 
Loss before income taxes and equity loss from affiliates
   
(1,437
)
   
(1,781
)
   
(985
)
   
(2,226
)
Provision for state income taxes
   
(143
)
   
(103
)
   
(404
)
   
(382
)
Equity loss from affiliates
   
(69
)
   
(854
)
   
(1,646
)
   
(1,344
)
Loss from continuing operations
   
(1,649
)
   
(2,738
)
   
(3,035
)
   
(3,952
)
Income (loss) from discontinued operations
   
-
     
177
     
-
     
(155
)
Net loss
   
(1,649
)
   
(2,561
)
   
(3,035
)
   
(4,107
)
Less: amounts attributable to noncontrolling interests
   
(246
)
   
(526
)
   
(520
)
   
(690
)
Net loss attributable to Sun Communities, Inc. common stockholders
 
$
(1,403
)
 
$
(2,035
)
 
$
(2,515
)
 
$
(3,417
)
                                 
Amounts attributable to Sun Communities, Inc. common stockholders:
                               
Loss from continuing operations, net of state income taxes
 
$
(1,403
)
 
$
(2,193
)
 
$
(2,515
)
 
$
(3,278
)
Income (loss) from discontinued operations, net of state income taxes
   
-
     
158
     
-
     
(139
)
Net loss attributable to Sun Communities, Inc. common stockholders
 
$
(1,403
)
 
$
(2,035
)
 
$
(2,515
)
 
$
(3,417
)
                                 
Weighted average common shares outstanding:
                               
Basic
   
19,323
     
18,513
     
19,006
     
18,437
 
Diluted
   
19,323
     
18,513
     
19,006
     
18,437
 
                                 
Basic and diluted loss per share:
                               
Continuing operations
 
$
(0.07
)
 
$
(0.12
)
 
$
(0.13
)
 
$
(0.18
)
Discontinued operations
   
-
     
0.01
     
-
     
(0.01
)
Basic and diluted loss per share
 
$
(0.07
)
 
$
(0.11
)
 
$
(0.13
)
 
$
(0.19
)



See accompanying Notes to Consolidated Financial Statements.

 
4

 
 
 

SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
 (In thousands)
(Unaudited)
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net loss
  $ (1,649 )   $ (2,561 )   $ (3,035 )   $ (4,107 )
Unrealized gain (loss) on interest rate swaps
    (261 )     (494 )     (1,018 )     832  
Total comprehensive loss
    (1,910 )     (3,055 )     (4,053 )     (3,275 )
Less: amounts attributable to noncontrolling interests
    (273 )     (324 )     (624 )     (347 )
Comprehensive loss attributable to Sun Communities, Inc. common stockholders
  $ (1,637 )   $ (2,731 )   $ (3,429 )   $ (2,928 )


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
 (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, 2009
 
$
206
   
$
463,811
   
$
(5,028
)
 
$
(1,858
)
 
$
(498,370
)
 
$
(63,600
)
 
$
(104,839
)
 
$
(6,469
)
 
$
(111,308
)
Issuance of common stock from exercise of options, net
   
-
     
48
     
-
     
-
     
-
     
-
     
48
     
-
     
48
 
Issuance and associated costs of common stock, net
   
8
     
20,678
     
-
     
-
     
-
     
-
     
20,686
     
-
     
20,686
 
Stock-based compensation - amortization and forfeitures
   
-
     
1,462
     
-
     
-
     
49
     
-
     
1,511
     
-
     
1,511
 
Net loss
   
-
     
-
     
-
     
-
     
(2,515
)
   
-
     
(2,515
)
   
(520
)
   
(3,035
)
Unrealized loss on interest rate swaps and cap
   
-
     
-
     
-
     
(914
)
   
-
     
-
     
(914
)
   
(104
)
   
(1,018
)
Repayment of officer's notes
   
-
     
-
     
2,116
     
-
     
-
     
-
     
2,116
     
-
     
2,116
 
Cash distributions declared of $1.89 per share
   
-
     
-
     
-
     
-
     
(36,030
)
   
-
     
(36,030
)
   
(4,010
)
   
(40,040
)
Balance as of September 30, 2010
 
$
214
   
$
485,999
   
$
(2,912
)
 
$
(2,772
)
 
$
(536,866
)
 
$
(63,600
)
 
$
(119,937
)
 
$
(11,103
)
 
$
(131,040
)


See accompanying Notes to Consolidated Financial Statements.




 
5

 
 
 

SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (In thousands)
(Unaudited)

   
Nine Months Ended September 30,
 
   
2010
   
2009
 
OPERATING ACTIVITIES:
           
Net loss
 
$
(3,035
)
 
$
(4,107
)
Less: Loss from discontinued operations, net of tax
   
-
     
(155
)
Loss from continuing operations
   
(3,035
)
   
(3,952
)
Adjustments to reconcile loss from continuing operations to net cash provided by operating activities:
 
Gain from land disposition
   
-
     
(90
)
Gain on disposal of other assets and depreciated homes, net
   
(2,145
)
   
(3,643
)
Loss (gain) on valuation of derivative instruments
   
16
     
(5
)
Stock compensation expense
   
1,593
     
2,335
 
Depreciation and amortization
   
51,248
     
49,796
 
Amortization of deferred financing costs
   
1,248
     
1,228
 
Equity loss from affiliates, net
   
1,646
     
1,344
 
Change in notes receivable from financed sales of inventory homes, net of repayments
   
(3,343
)
   
(3,036
)
Change in inventory, other assets and other receivables, net
   
(877
)
   
(2,200
)
Change in accounts payable and other liabilities
   
(4,316
)
   
3,119
 
Net cash provided by operating activities of continuing operations
   
42,035
     
44,896
 
Net cash used for operating activities of discontinued operations
   
-
     
(438
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
42,035
     
44,458
 
                 
INVESTING ACTIVITIES:
               
Investment in properties
   
(34,255
)
   
(30,321
)
Proceeds related to disposition of land
   
-
     
172
 
Proceeds related to disposition of other assets and depreciated homes, net
   
691
     
455
 
Reduction of notes receivable and officer's notes, net
   
3,223
     
4,566
 
NET CASH USED FOR INVESTING ACTIVITIES
   
(30,341
)
   
(25,128
)
                 
FINANCING ACTIVITIES:
               
Issuance and associated costs of common stock and OP units, net
   
20,686
     
1,509
 
Net proceeds from stock option exercise
   
48
     
-
 
Borrowings on lines of credit
   
103,773
     
106,197
 
Payments on lines of credit
   
(106,328
)
   
(107,733
)
Payments to retire preferred operating partnership units
   
(925
)
   
-
 
Proceeds from issuance of other debt
   
21,877
     
40,231
 
Payments on other debt
   
(10,407
)
   
(20,891
)
Payments for deferred financing costs
   
(168
)
   
(477
)
Distributions to stockholders and OP unit holders
   
(40,040
)
   
(39,249
)
NET CASH USED FOR FINANCING ACTIVITIES
   
(11,484
)
   
(20,413
)
                 
Net increase (decrease) in cash and cash equivalents
   
210
     
(1,083
)
Cash and cash equivalents, beginning of period
   
4,496
     
6,162
 
Cash and cash equivalents, end of period
 
$
4,706
   
$
5,079
 
                 
SUPPLEMENTAL INFORMATION:
               
Cash paid for interest
 
$
39,959
   
$
39,545
 
Cash paid for interest on mandatorily redeemable debt
 
$
2,462
   
$
2,509
 
Cash paid for state income taxes
 
$
492
   
$
526
 
Noncash investing and financing activities:
               
Unrealized gain (loss) on interest rate swaps
 
$
(1,018
)
 
$
832
 
Reduction in secured borrowing balance
 
$
5,228
   
$
2,846
 


See accompanying Notes 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 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, 2009 as filed with the SEC on March 11, 2010, as amended on March 30, 2010 (the “2009 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.

We completed the sale of our cable television services business during the third quarter ended September 30, 2009.  The cable television services business has been classified 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 2009 Annual Report.

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

2. Discontinued Operations
 
In the third quarter of 2009, we sold our investments in certain land improvements and equipment that provided cable television services to certain communities within the Real Property Operations segment.  Cash proceeds from this sale were $0.3 million, resulting in a net gain on sale of $0.1 million. The results of the cable television service business for the prior periods have been presented as a discontinued operation in the Consolidated Financial Statements.

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

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Total revenues
 
$
-
   
$
268
   
$
-
   
$
623
 
Total expenses
   
-
     
(91
)
   
-
     
(778
)
Income (loss) from discontinued operations
   
-
     
177
     
-
     
(155
)
Less:  amounts attributable to noncontrolling interest
   
-
     
19
     
-
     
(16
)
Income (loss) from discontinued operations attributable to Sun Communities, Inc. common stockholders
 
$
-
   
$
158
   
$
-
   
$
(139
)

 

 
7

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


3.  
Investment Property

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

   
September 30, 2010
   
December 31, 2009
 
Land
 
$
116,363
   
$
116,266
 
Land improvements and buildings
   
1,189,587
     
1,183,613
 
Rental homes and improvements
   
204,727
     
203,435
 
Furniture, fixtures, and equipment
   
36,131
     
35,400
 
Land held for future development
   
26,889
     
26,986
 
Investment property
   
1,573,697
     
1,565,700
 
Accumulated depreciation
   
(536,612
)
   
(501,395
)
 Investment property, net
 
$
1,037,085
   
$
1,064,305
 

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

In September 2009, a flood caused substantial damage to our property, Countryside Village of Atlanta, located in Lawrenceville, Georgia.  We have comprehensive insurance coverage for both property damage and business interruption, subject to deductibles and certain limitations.  We recorded a charge of $0.8 million associated with the flooding in the third quarter of 2009.  This charge represents our deductible, net of expected insurance recoveries for the replacement of assets that exceed the net book value of assets damaged in the flood.  The claim remains under review.

4.  
Transfers of Financial Assets

We have completed various transactions involving our installment notes and during 2010 we have received a total of $21.9 million of cash proceeds, including $6.3 million which was transferred at par value as a lump sum transaction in May 2010, in exchange for relinquishing our right, title and interest in the installment notes. 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.  The recourse provisions are considered to be a form of continuing involvement, and we have recorded these transactions as a transfer of financial assets.

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. 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, 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
%

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 7) within the Consolidated Balance Sheets.  The balance of the collateralized receivables was $68.8 million (net of allowance of $0.2 million) and $52.2 million (net of allowance of $0.2 million) as of September 30, 2010 and December 31, 2009, respectively.  The outstanding balance on the secured borrowing was $69.0 million and $52.4 million as of September 30, 2010 and December 31, 2009, respectively.

 
8

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


4.  
Transfers of Financial Assets, continued

The balances of the collateralized receivables and secured borrowings fluctuate.  The balances increase as additional installment notes are transferred and exchanged for cash proceeds.  The balances are reduced as the related installment notes 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):

Beginning balance as of December 31, 2009
 
$
52,368
 
Financed sales of manufactured homes
   
21,878
 
Principal payments and payoffs from our customers
   
(2,485
)
Repurchases
   
(2,743
)
Total activity
   
16,650
 
Ending balance as of  September 30, 2010
 
$
69,018
 

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 $1.8 million and $1.2 million for the three months ended September 30, 2010 and 2009, respectively.  The amount of interest income and expense recognized was $5.0 million and $2.8 million for the nine months ended September 30, 2010 and 2009, respectively.  

5.  
Notes and Other Receivables

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

   
September 30, 2010
   
December 31, 2009
 
Installment notes receivable on manufactured homes, net
 
$
8,847
   
$
12,627
 
Collateralized receivables, net (see Note 4)
   
68,795
     
52,201
 
Other receivables, net
   
8,040
     
9,202
 
Total notes and other receivables, net
 
$
85,682
   
$
74,030
 

Installment Notes Receivable on Manufactured Homes

The installment notes of $8.8 million (net of allowance of $0.1 million) and $12.6 million (net of allowance of $0.1 million) as of September 30, 2010 and December 31, 2009, respectively, are collateralized by manufactured homes. The notes represent financing provided by us to purchasers of manufactured homes generally located in our communities and require monthly principal and interest payments.  The notes have a net weighted average interest rate and maturity of 6.7 percent and 11.0 years as of September 30, 2010, and 7.4 percent and 12.4 years as of December 31, 2009.

Collateralized Receivables

Certain transactions involving our installment notes were recorded as a transfer of financial assets (see Note 4) and classified as collateralized receivables.  The receivables have a balance of $68.8 million (net of allowance of $0.2 million) and $52.2 million (net of allowance of $0.2 million) as of September 30, 2010 and December 31, 2009, respectively.  The receivables have a net weighted average interest rate and maturity of 11.3 percent and 13.5 years as of September 30, 2010, and 10.9 percent and 13.8 years as of December 31, 2009.

Allowance for Losses for Collateralized and Installment Notes Receivable

We are generally able to recover our investment in uncollectible notes receivable by repurchasing the homes that collateralized these notes receivable and then selling or leasing these homes to potential residents in our communities. Although our experience supports a high recovery rate for repossessed homes, we believe there is some degree of uncertainty about recoverability of our investment in these repossessed homes.  We have established a loan loss reserve to record our estimated unrecoverable costs associated with these repossessed homes.  We estimate our unrecoverable costs to be the repurchase price plus repair and remarketing costs that exceed the estimated selling price of the home being repossessed.  A historical average of this excess cost is calculated based on prior repossessions and applied to our estimated annual future repossessions to create the allowance for installment notes and collateralized receivables.  The allowance for losses for collateralized and installment notes receivable was approximately $0.3 million as of September 30, 2010 and December 31, 2009.




 
9

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


5.  
Notes and Other Receivables, continued

Other Receivables

Other receivables were comprised of amounts due from residents for rent and water usage of $1.6 million (net of allowance of $0.4 million), home sale proceeds of $2.7 million, insurance receivables of $0.9 million, and rebates and other receivables of $2.8 million as of September 30, 2010.  Other receivables were comprised of amounts due from residents for rent and water usage of $1.5 million (net of allowance of $0.2 million), home sale proceeds of $3.4 million, an employee loan of $0.5 million, insurance receivables of $0.9 million, and rebates and other receivables of $2.9 million as of December 31, 2009. 

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 September 30, 2010 and December 31, 2009 (in thousands except for common stock and OP units):

   
September 30, 2010
   
December 31, 2009
 
         
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
 
$
337
     
20,705
     
-
   
$
581
     
35,756
     
-
 
Secured - $6.6 million
   
1,708
     
45,974
     
33,075
     
2,952
     
79,395
     
57,118
 
Secured - $1.0 million
   
265
     
24,476
     
-
     
457
     
42,268
     
-
 
Subtotal secured notes
   
2,310
     
91,155
     
33,075
     
3,990
     
157,419
     
57,118
 
                                                 
Unsecured - $1.0 million
   
265
     
-
     
-
     
457
     
-
     
-
 
Unsecured - $1.3 million
   
337
     
-
     
-
     
581
     
-
     
-
 
Subtotal unsecured notes
   
602
     
-
     
-
     
1,038
     
-
     
-
 
Total promissory notes
 
$
2,912
     
91,155
     
33,075
   
$
5,028
     
157,419
     
57,118
 


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 common stock and secured OP Units total approximately $3.8 million based on the closing price of our shares on the New York Stock Exchange of $30.70 as of September 30, 2010. The unsecured notes are fully recourse to the officer.

Total interest received was insignificant for the three months ended September 30, 2010 and $0.1 million for the three months ended September 30, 2009. Total interest received was $0.1 million and $0.2 million for the nine months ended September 30, 2010 and 2009, respectively.  The reduction in the aggregate principal balance of these notes was $2.1 million and $3.2 million for the nine months ended September 30, 2010 and 2009, respectively. The terms of the officer’s notes require that any remaining balance is due on December 31, 2010.

6.  
Investment in Affiliates

Origen Financial, LLC. (“LLC”)

In August 2008, we entered into an agreement with four unrelated companies (“Members”) to form a new limited liability company.  We contributed cash of approximately $0.5 million toward the formation of the LLC.  The LLC purchased the origination platform of Origen Financial, Inc. (“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.  





 
10

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



6.  
Investment in Affiliates, continued

As of September 30, 2010, we had an ownership interest in the LLC of 25 percent.  In December 2009, we concluded that our investment in the LLC was not recoverable due to operating losses, liquidity concerns, and declining revenue trends and recorded an other than temporary impairment charge to reduce the carrying value of our investment to zero.  Equity accounting is suspended in periods when the recognition of equity losses would reduce the carrying value of our investment below zero and also because we are not obligated to provide additional funding to the LLC.  In the event the LLC reports net income in future periods, we will resume application of the equity method only after our share of the LLC’s net income equals or exceeds the share of net losses not recognized during the period in which equity accounting was suspended.  We recorded a loss associated with our equity allocation of the LLC’s financial results for the three months ended September 30, 2010 which completely offset the insignificant amount of income we recorded in the three months ended June 30, 2010.  The carrying value of our investment in the LLC was zero as of September 30, 2010.  Our equity allocation of the LLC’s losses was insignificant for the three months ended September 30, 2009 and $0.1 million for the nine months ended September 30, 2009.

Origen

In October 2003, we purchased 5,000,000 shares of common stock of Origen. As of September 30, 2010, we had an ownership interest in Origen of approximately 19 percent, and the carrying value of our investment was zero.  Our investment in Origen had a market value of approximately $9.1 million based on a quoted market closing price of $1.82 per share from the “Pink Sheet Electronic OTC Trading System” as of September 30, 2010.

Our equity allocations of the anticipated losses from Origen were an insignificant amount for the three months ended September 30, 2010 and $1.6 million nine months ended September 30, 2010.  Equity accounting is suspended in periods when the recognition of equity losses would reduce the carrying value of our investment below zero and also because we are not obligated to provide additional funding to Origen.  In the event Origen reports net income in future periods, we will resume application of the equity method only after our share of Origen’s net income equals or exceeds the share of net losses not recognized during the period in which equity accounting was suspended.
 
 
Our equity allocation for 2010 is based on estimated revenue and expense amounts included in the table below.  These unaudited revenue and expense amounts represent actual results through August 2010 and estimated September 2010 results.  The Origen results for the nine months ended September 30, 2010 include an adjustment for the difference between the actual June 2010 results and estimated June 2010 results previously reported. We recorded our equity allocation of the reported losses from Origen of $0.8 million and $1.2 million for the three and nine months ended September 30, 2009, respectively.

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

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues
 
$
18,917
   
$
19,791
   
$
56,981
   
$
62,538
 
Expenses
   
(22,144
)
   
(24,119
)
   
(68,185
)
   
(68,810
)
Net loss
 
$
(3,227
)
 
$
(4,328
)
 
$
(11,204
)
 
$
(6,272
)


7.  
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
 
   
September 30, 2010
   
December 31, 2009
   
September 30, 2010
   
December 31, 2009
   
September 30, 2010
   
December 31, 2009
 
Collateralized term loans - CMBS
  $ 465,344     $ 471,299       3.8       4.6       5.1 %     5.1 %
Collateralized term loans - FNMA
    370,260       373,501       3.7       4.4       4.1 %     4.1 %
Preferred OP Units
    48,022       48,947       10.5       3.7       6.9 %     6.8 %
Secured borrowing (see Note 4)
    69,018       52,368       13.5       13.8       11.3 %     10.9 %
Mortgage notes, other
    212,115       213,327       4.9       5.6       5.2 %     5.2 %
Total debt
  $ 1,164,759     $ 1,159,442       4.8       5.1       5.3 %     5.1 %


 
11

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


7.  
Debt and Lines of Credit, continued

Collateralized Term Loans

The collateralized term loans totaling $835.6 million as of September 30, 2010, are secured by 87 properties comprised of 31,272 sites representing approximately $524.0 million of net book value.

Preferred OP Units

We redeemed $0.9 million and $0.5 million of Series B-3 Preferred OP Units in the nine months ended September 30, 2010 and 2009, respectively.

Our Operating Partnership had $35.8 million of convertible Preferred OP Units that were redeemable January 1, 2014.  In February 2010, our Operating Partnership completed a ten year extension on the redemption date associated with the $35.8 million convertible Preferred OP Units.  The Preferred OP Units provided for an annual preferred rate that was the greater of the 10 year U.S. Treasury bond yield in effect as of January 2nd each calendar year plus a spread of 239 basis points, or 6.5 percent, but no greater than 8.6 percent. In connection with the extension, the maximum annual preferred rate on the Preferred OP Units was increased to 9.0 percent from 8.6 percent.  These Preferred OP Units are convertible into 526,212 common shares based on a conversion price of $68 per share.

Secured Borrowing

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

Mortgage Notes

The mortgage notes totaling $212.1 million as of September 30, 2010, are collateralized by 19 communities comprised of 6,394 sites representing approximately $178.0 million of net book value.

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 was $78.8 million and $89.1 million as of September 30, 2010 and December 31, 2009, respectively. In addition, $4.0 million of availability was used to back standby letters of credit as of September 30, 2010 and December 31, 2009. 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.  The weighted average interest rate on the outstanding borrowings was 1.9 percent as of September 30, 2010.  The borrowings under the line of credit mature October 1, 2011. As of September 30, 2010 and December 31, 2009, $32.2 million and $21.9 million, respectively, were available to be drawn under the facility based on the calculation of the borrowing base at each date.

In May 2010, we entered into 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 agreement has a maximum 10 year term that can be prepaid partially or in full at our option any time before the maturity date without penalty.  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 interest rate for the first 5 years is Prime plus 200 basis points, with a minimum rate of 5.5 percent and a maximum rate of 9.0 percent (effective rate 5.5 percent at September 30, 2010); and thereafter at a fixed rate of 5.15 percent over the 5-year U.S. Treasury rate in effect on May 1, 2015. Prime shall mean the prime rate published in the Wall Street Journal adjusted the first day of each calendar month.  The outstanding balance was $9.0 million as of September 30, 2010 and was collateralized by 522 rental homes with a net book value of $18.0 million.

In March 2009, we entered into a $10.0 million manufactured home floor plan facility. The floor plan facility initially had a committed term of one year. In February 2010, the floor plan facility was renewed 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 rate 7.0 percent at September 30, 2010).  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 $4.1 million and $5.4 million as of September 30, 2010 and December 31, 2009, respectively.

 
12

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


7.  
Debt and Lines of Credit, continued

As of September 30, 2010, 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
   
2010
   
2011
   
2012
   
2013
   
2014
   
After 5 years
 
Lines of credit
 
$
91,910
   
$
-
   
$
82,910
   
$
-
   
$
-
   
$
-
   
$
9,000
 
Mortgage loans payable:
                                                       
Maturities
   
988,027
     
-
     
103,708
     
31,577
     
26,818
     
480,894
     
345,030
 
Principal amortization
   
59,692
     
3,632
     
13,887
     
13,040
     
13,260
     
8,457
     
7,416
 
Preferred OP Units
   
48,022
     
370
     
-
     
4,300
     
3,345
     
4,225
     
35,782
 
Secured borrowing
   
69,018
     
647
     
2,764
     
3,070
     
3,349
     
3,664
     
55,524
 
Total
 
$
1,256,669
   
$
4,649
   
$
203,269
   
$
51,987
   
$
46,772
   
$
497,240
   
$
452,752
 

The most restrictive of our debt agreements place limitations on secured and unsecured borrowings and contain minimum fixed charge coverage, leverage, distribution and net worth requirements. As of September 30, 2010, we were in compliance with all covenants.


8.  
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 under this buyback program during 2010 or 2009.  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 2010, holders of Common OP Units converted 32,699 units to common stock.

The vesting requirements for 52,273 restricted shares granted to our employees were satisfied during the nine months ended September 30, 2010.

Our shelf registration statement on Form S-3 for a proposed offering of up to $300.0 million of our common stock, preferred stock and debt securities was declared effective with the SEC in May 2009.  We entered into a sales agreement to issue and sell up to 1,600,000 shares of common stock from time to time pursuant to our effective shelf registration statement on Form S-3.  Sales under the agreement commenced during the third quarter of 2009.  We issued 736,800 shares of common stock during the nine months ended September 30, 2010.  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 $29.14.  During the nine months ended September 30, 2010, we received net proceeds of approximately $21.0 million related to the issuance of common stock.  The proceeds were used to pay down our unsecured line of credit. We issued an additional 100,000 shares of common stock at a weighted average sale price of $31.29 and received additional net proceeds of $3.1 million subsequent to September 30, 2010.  We have 663,200 shares remaining and we may continue to sell shares of common stock under this program from time to time based on market conditions, although we are not under any obligation to sell shares.

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 $100,000,000 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.  No common shares were purchased under this agreement as of September 30, 2010.


 
13

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

8.  
Equity Transactions, continued

Cash dividends of $0.63 and $1.89 per share were declared for the three and nine months ended September 30, 2010, respectively.  Cash payments for aggregate dividends, distributions and dividend equivalents made to common stockholders, common OP unitholders, and restricted stockholders were $13.5 million and $40.0 million for three and nine months ended September 30, 2010, respectively.  On October 22, 2010, aggregate dividends, distributions and dividend equivalents of $13.7 million were made to common stockholders, common OP unitholders, and restricted stockholders of record on October 12, 2010.

9.  
Share-Based Compensation

On August 30, 2010, we issued 5,000 shares of restricted stock to a key employee under the 2009 Equity Plan. The awards vest ratably over a six year period beginning on the third anniversary of the grant date, and have a fair value of $28.31 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 nine months ended September 30, 2010, 1,890 shares of common stock were issued in connection with the exercise of stock options and the net proceeds we received were less than $0.1 million.

On July 28, 2010, we issued 10,500 director options under our 2004 Non-Employee Director Option Plan.  The weighted average fair value of the options issued is estimated on the date of the grant using the Binomial (lattice) option pricing model, with the following weighted average assumptions used for the grants in the period indicated:

   
July 2010 Award
 
Estimated fair value per share of options granted:
 
$
6.93
 
Assumptions:
       
Annualized dividend yield
   
8.50
%
Common stock price volatility
   
40.77
%
Risk-free rate of return
   
2.40
%
Expected option terms (in years)
   
7.3
 


10.  
Other Loss

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

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Brokerage commissions
 
$
80
   
$
107
   
$
354
   
$
380
 
Gain on sale of land
   
-
     
94
     
-
     
90
 
Loss on disposition of assets, net
   
(664
)
   
(454
)
   
(1,210
)
   
(565
)
Other, net
   
(70
)
   
(5
)
   
108
     
(66
)
Total other loss, net
 
$
(654
)
 
$
(258
)
 
$
(748
)
 
$
(161
)

 

 
14

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


11.  
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 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 September 30, 2010
   
Three Months Ended September 30, 2009
 
   
Real
 Property Operations
   
Home
Sales and
 Home Rentals
   
Consolidated
   
Real
 Property Operations
   
Home
Sales and
 Home Rentals
   
Consolidated
 
Revenues
 
$
50,169
   
$
12,459
   
$
62,628
   
$
48,597
   
$
13,495
   
$
62,092
 
Operating expenses/Cost of sales
   
17,755
     
9,484
     
27,239
     
17,097
     
9,910
     
27,007
 
Net operating income/Gross profit
   
32,414
     
2,975
     
35,389
     
31,500
     
3,585
     
35,085
 
Adjustments to arrive at net income (loss):
                                               
Other revenues (loss)
   
1,455
     
(38
)
   
1,417
     
1,308
     
(8
)
   
1,300
 
General and administrative
   
(3,408
)
   
(1,873
)
   
(5,281
)
   
(3,687
)
   
(1,890
)
   
(5,577
)
Georgia flood damage
   
     
-
     
     
(800
)
   
-
     
(800
)
Depreciation and amortization
   
(11,154
)
   
(5,314
)
   
(16,468
)
   
(11,045
)
   
(4,796
)
   
(15,841
)
Interest expense
   
(16,304
)
   
(190
)
   
(16,494
)
   
(15,876
)
   
(72
)
   
(15,948
)
Equity loss from affiliates, net
   
(19
)
   
(50
)
   
(69
)
   
(836
)
   
(18
)
   
(854
)
Provision for state income tax
   
(143
)
   
-
     
(143
)
   
(103
)
   
-
     
(103
)
Income (loss) from continuing operations
   
2,841
     
(4,490
)
   
(1,649
)
   
461
     
(3,199
)
   
(2,738
)
Income from discontinued operations
   
-
     
-
     
-
     
177
     
-
     
177
 
Net income (loss)
   
2,841
     
(4,490
)
   
(1,649
)
   
638
     
(3,199
)
   
(2,561
)
        Less:  Net income (loss) attributable to noncontrolling interest
   
197
     
(443
)
   
(246
)
   
(189
)
   
(337
)
   
(526
)
    Net income (loss) attributable to Sun Communities, Inc.
 
$
2,644
   
$
(4,047
)
 
$
(1,403
)
 
$
827
   
$
(2,862
)
 
$
(2,035
)

   
Nine Months Ended September 30, 2010
   
Nine Months Ended September 30, 2009
 
   
Real
 Property Operations
   
Home
Sales and
 Home Rentals
   
Consolidated
   
Real
 Property Operations
   
Home
Sales and
 Home Rentals
   
Consolidated
 
Revenues
 
$
152,124
   
$
40,225
   
$
192,349
   
$
148,093
   
$
39,561
   
$
187,654
 
Operating expenses/Cost of sales
   
52,263
     
30,178
     
82,441
     
50,791
     
29,736
     
80,527
 
Net operating income/Gross profit
   
99,861
     
10,047
     
109,908
     
97,302
     
9,825
     
107,127
 
Adjustments to arrive at net income (loss):
                                               
Other revenues
   
5,157
     
269
     
5,426
     
4,046
     
248
     
4,294
 
General and administrative
   
(12,525
)
   
(5,659
)
   
(18,184
)
   
(12,753
)
   
(5,532
)
   
(18,285
)
Georgia flood damage
   
-
     
-
     
-
     
(800
)
   
-
     
(800
)
Depreciation and amortization
   
(33,565
)
   
(15,880
)
   
(49,445
)
   
(33,318
)
   
(14,642
)
   
(47,960
)
Interest expense
   
(48,264
)
   
(426
)
   
(48,690
)
   
(46,379
)
   
(223
)
   
(46,602
)
Equity loss from affiliates, net
   
(1,646
)
   
-
     
(1,646
)
   
(1,211
)
   
(133
)
   
(1,344
)
Provision for state income tax
   
(404
)
   
-
     
(404
)
   
(382
)
   
-
     
(382
)
Income (loss) from continuing operations
   
8,614
     
(11,649
)
   
(3,035
)
   
6,505
     
(10,457
)
   
(3,952
)
Loss from discontinued operations
   
-
     
-
     
-
     
(155
)
   
-
     
(155
)
Net income (loss)
   
8,614
     
(11,649
)
   
(3,035
)
   
6,350
     
(10,457
)
   
(4,107
)
        Less:  Net income (loss) attributable to noncontrolling interest
   
649
     
(1,169
)
   
(520
)
   
418
     
(1,108
)
   
(690
)
    Net income (loss) attributable to Sun Communities, Inc.
 
$
7,965
   
$
(10,480
)
 
$
(2,515
)
 
$
5,932
   
$
(9,349
)
 
$
(3,417
)



 
15

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


11.  
Segment Reporting, continued

   
September 30, 2010
   
December 31, 2009
 
   
Real
 Property Operations
   
Home
Sales and
Home Rentals
   
Consolidated
   
Real
 Property Operations
   
Home
Sales and
Home Rentals
   
Consolidated
 
Identifiable assets:
                                   
Investment property, net
 
$
898,635
   
$
138,450
   
$
1,037,085
   
$
922,094
   
$
142,211
   
$
1,064,305
 
Cash and cash equivalents
   
4,291
     
415
     
4,706
     
4,616
     
(120
)
   
4,496
 
Inventory of manufactured homes
   
-
     
2,243
     
2,243
     
-
     
3,934
     
3,934
 
Investment in affiliate
   
-
     
-
     
-
     
1,646
     
-
     
1,646
 
Notes and other receivables
   
81,934
     
3,748
     
85,682
     
69,625
     
4,405
     
74,030
 
Other assets
   
32,089
     
2,257
     
34,346
     
30,624
     
2,330
     
32,954
 
Total assets
 
$
1,016,949
   
$
147,113
   
$
1,164,062
   
$
1,028,605
   
$
152,760
   
$
1,181,365
 


12.  
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 September 30, 2010, we had four derivative contracts consisting of three interest rate swap agreements with a total notional amount of $70.0 million and an interest rate cap agreement with a notional amount of $152.4 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.

The following table provides the terms of our interest rate derivative contracts that were in effect as of September 30, 2010:

Type
 
 Purpose
 
 Effective Date
 
 Maturity Date
 
 Notional
 (in millions)
 
 Based on
 
Variable Rate
 
 Fixed Rate
 
 Spread
 
 Effective Fixed Rate
Swap
 
Floating to Fixed Rate
 
09/04/02
 
07/03/12
 
25.0
 
3 Month LIBOR
 
0.5336%
 
4.7000%
 
2.0000%
 
6.7000%
Swap
 
Floating to Fixed Rate
 
01/02/09
 
01/02/14
 
20.0
 
3 Month LIBOR
 
0.5339%
 
2.1450%
 
2.0000%
 
4.1450%
Swap
 
Floating to Fixed Rate
 
02/13/09
 
02/13/11
 
25.0
 
1 Month LIBOR
 
0.2573%
 
1.5700%
 
2.0500%
 
3.6200%
Cap
 
Cap Floating Rate
 
04/28/09
 
05/01/12
 
152.4
 
3 Month LIBOR
 
0.2894%
 
11.0000%
 
0.0000%
 
N/A

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, the ineffective portion is recorded in interest expense. Hedges that receive designated hedge accounting treatment are evaluated for effectiveness at the time that they are designated as well as through the hedging period.

We have recorded the fair value of our derivative instruments designated as cash flow hedges on the balance sheet. See Note 15 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 September 30, 2010 and December 31, 2009 (in thousands):

 
Asset Derivatives
 
Liability Derivatives
 
 
 Balance Sheet Location
 
Fair Value
 
 Balance Sheet Location
 
Fair Value
 
Derivatives designated as hedging instruments
   
September 30, 2010
   
December 31, 2009
     
September 30, 2010
   
December 31, 2009
 
Interest rate swaps and cap agreement
 Other assets
 
$
-
   
$
379
 
 Other liabilities
 
$
2,778
   
$
2,123
 
Total derivatives designated as hedging instruments