Document


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 March 31, 2018.
 
or

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

Commission file number 1-12616

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

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

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

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

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section to Section 13(a) of the Exchange Act. [ ]

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 April 17, 2018:  80,086,174



INDEX

 
 
 
 
Consolidated Financial Statements:
 
 
Consolidated Balance Sheets as of March 31, 2018 (Unaudited) and December 31, 2017
 
Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017 (Unaudited)
 
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017 (Unaudited)
 
Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2018 (Unaudited)
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (Unaudited)
 
 
 
 
 
 
 
Exhibit Index






PART I – FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited - dollars in thousands, except per share amounts)
 
(unaudited) 
 March 31, 2018
 
December 31, 2017
ASSETS
 
 
 
Land
$
1,114,609

 
$
1,107,838

Land improvements and buildings
5,128,186

 
5,102,014

Rental homes and improvements
538,672

 
528,074

Furniture, fixtures and equipment
148,197

 
144,953

Investment property
6,929,664

 
6,882,879

Accumulated depreciation
(1,287,010
)
 
(1,237,525
)
Investment property, net (including $49,943 and $50,193 for consolidated variable interest entities at March 31, 2018 and December 31, 2017; see Note 7)
5,642,654

 
5,645,354

Cash and cash equivalents
15,153

 
10,127

Inventory of manufactured homes
36,311

 
30,430

Notes and other receivables, net
193,851

 
163,496

Collateralized receivables, net
123,155

 
128,246

Other assets, net (including $1,453 and $1,659 for consolidated variable interest entities at March 31, 2018 and December 31, 2017; see Note 7)
138,529

 
134,304

TOTAL ASSETS
$
6,149,653

 
$
6,111,957

LIABILITIES
 
 
 
Mortgage loans payable (including $41,756 and $41,970 for consolidated variable interest entities at March 31, 2018 and December 31, 2017; see Note 7)
$
2,826,225

 
$
2,867,356

Secured borrowings on collateralized receivables
124,077

 
129,182

Preferred OP units - mandatorily redeemable
37,338

 
41,443

Lines of credit
141,800

 
41,257

Distributions payable
58,663

 
55,225

Other liabilities (including $1,326 and $1,468 for consolidated variable interest entities at March 31, 2018 and December 31, 2017; see Note 7)
282,993

 
270,741

TOTAL LIABILITIES
3,471,096

 
3,405,204

Commitments and contingencies

 

Series A-4 preferred stock, $0.01 par value. Issued and outstanding: 1,085 shares at March 31, 2018 and December 31, 2017
32,414

 
32,414

Series A-4 preferred OP units
10,492

 
10,652

STOCKHOLDERS' EQUITY
 
 
 
Common stock, $0.01 par value. Authorized: 180,000 shares; Issued and outstanding: 79,885 shares at March 31, 2018 and 79,679 shares at December 31, 2017
799

 
797

Additional paid-in capital
3,759,066

 
3,758,533

Accumulated other comprehensive income (loss)
(670
)
 
1,102

Distributions in excess of accumulated earnings
(1,187,563
)
 
(1,162,001
)
Total Sun Communities, Inc. stockholders' equity
2,571,632

 
2,598,431

Noncontrolling interests
 
 
 
Common and preferred OP units
59,268

 
60,971

Consolidated variable interest entities
4,751

 
4,285

Total noncontrolling interests
64,019

 
65,256

TOTAL STOCKHOLDERS' EQUITY
2,635,651

 
2,663,687

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
6,149,653

 
$
6,111,957

See accompanying Notes to Consolidated Financial Statements.

1



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - dollars in thousands, except per share amounts)

 
Three Months Ended March 31,
 
2018
 
2017
REVENUES
 
 
 
Income from real property
$
197,211

 
$
183,054

Revenue from home sales
34,900

 
27,263

Rental home revenue
13,020

 
12,339

Ancillary revenues
6,568

 
6,219

Interest
5,316

 
4,646

Brokerage commissions and other revenues, net
901

 
879

Total revenues
257,916

 
234,400

EXPENSES
 
 
 
Property operating and maintenance
51,630

 
47,166

Real estate taxes
13,836

 
13,143

Cost of home sales
26,571

 
20,883

Rental home operating and maintenance
5,170

 
5,102

Ancillary expenses
5,266

 
4,668

Home selling expenses
3,290

 
3,111

General and administrative
19,931

 
17,932

Transaction costs

 
2,386

Catastrophic weather related charges, net
(2,213
)
 
87

Depreciation and amortization
66,437

 
62,766

Loss on extinguishment of debt
196

 
466

Interest
31,138

 
31,322

Interest on mandatorily redeemable preferred OP units
619

 
784

Total expenses
221,871

 
209,816

Income before other items
36,045

 
24,584

Other (expense) / income, net
(2,617
)
 
839

Current tax expense
(174
)
 
(178
)
Deferred tax benefit
347

 
300

Net income
33,601


25,545

Less: Preferred return to preferred OP units
(1,080
)
 
(1,174
)
Less: Amounts attributable to noncontrolling interests
(2,094
)
 
(1,088
)
Net income attributable to Sun Communities, Inc.
30,427


23,283

Less: Preferred stock distributions
(441
)
 
(2,179
)
Net income attributable to Sun Communities, Inc. common stockholders
$
29,986


$
21,104

Weighted average common shares outstanding:
 
 
 
Basic
78,855

 
72,677

Diluted
79,464

 
73,120

Earnings per share (Refer to Note 13):
 

 
 
Basic
$
0.38

 
$
0.29

Diluted
$
0.38

 
$
0.29


See accompanying Notes to Consolidated Financial Statements.

2



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited - dollars in thousands)

 
Three Months Ended March 31,
 
2018
 
2017
Net income
$
33,601

 
$
25,545

Foreign currency translation adjustment
(1,861
)
 
584

Total comprehensive income
31,740

 
26,129

Less: Comprehensive income attributable to noncontrolling interests
2,005

 
1,121

Comprehensive income attributable to Sun Communities, Inc.
$
29,735

 
$
25,008



See accompanying Notes to Consolidated Financial Statements.



3



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited - dollars in thousands)

 
Common
Stock
Additional Paid-in Capital
Distributions in Excess of Accumulated Earnings
Accumulated Other Comprehensive Income / (Loss)
Non-controlling Interests
Total Stockholders’ Equity
Balance at December 31, 2017
$
797

$
3,758,533

$
(1,162,001
)
$
1,102

$
65,256

$
2,663,687

Share-based compensation - issuances net of amortization and forfeitures
2

191

90



283

Conversion of OP units

342



(283
)
59

Foreign currency translation



(1,772
)
(89
)
(1,861
)
Net income


31,507


2,023

33,530

Distributions


(57,159
)

(2,888
)
(60,047
)
Balance at March 31, 2018
$
799

$
3,759,066

$
(1,187,563
)
$
(670
)
$
64,019

$
2,635,651



See accompanying Notes to Consolidated Financial Statements.



4



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - dollars in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
$
80,905

 
$
69,208

INVESTING ACTIVITIES:
 
 
 
Investment in properties
(68,524
)
 
(61,431
)
Acquisitions of properties, net of cash acquired
(2,384
)
 
(13,000
)
Proceeds from dispositions of assets and depreciated homes, net
5,312

 
2,898

Purchases of notes receivable
(893
)
 
(447
)
Repayments of notes and other receivables
679

 
317

Other investing activities
(2,708
)
 

NET CASH USED FOR INVESTING ACTIVITIES
(68,518
)
 
(71,663
)
FINANCING ACTIVITIES:
 
 
 
Issuance and costs of common stock, OP units, and preferred OP units, net
(3,296
)
 
20,549

Redemption of Series B-3 preferred OP units
(4,105
)
 

Borrowings on lines of credit
302,355

 
235,454

Payments on lines of credit
(201,853
)
 
(157,237
)
Proceeds from issuance of other debt

 
3,108

Payments on other debt
(38,883
)
 
(42,296
)
Prepayment penalty on debt
(196
)
 
(466
)
Distributions to stockholders, OP unit holders, and preferred OP unit holders
(56,881
)
 
(53,447
)
Payments for deferred financing costs
(605
)
 
(1,803
)
Other financing activities
(5,000
)
 

NET CASH PROVIDED BY FINANCING ACTIVITIES
(8,464
)
 
3,862

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(8
)
 
(10
)
Net change in cash, cash equivalents and restricted cash
3,915

 
1,397

Cash, cash equivalents and restricted cash, beginning of period
23,509

 
25,313

Cash, cash equivalents and restricted cash, end of period
$
27,424

 
$
26,710



 
Three Months Ended March 31,
 
2018
 
2017
SUPPLEMENTAL INFORMATION:
 
 
 
Cash paid for interest (net of capitalized interest of $1,184 and $638 respectively)
$
30,402

 
$
30,637

Cash paid for interest on mandatorily redeemable debt
$
619

 
$
784

Cash paid for income taxes
$
135

 
$
116

Noncash investing and financing activities:
 
 
 
Reduction in secured borrowing balance
$
5,105

 
$
5,914

Change in distributions declared and outstanding
$
3,337

 
$
859

Conversion of common and preferred OP units
$
342

 
$
959

Conversion of Series A-4 preferred stock
$

 
$
1,348


See accompanying Notes to Consolidated Financial Statements.


5

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



1.      Basis of Presentation

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”) and Sun Home Services, Inc. (“SHS”) are referred to herein as the “Company,” “us,” “we,” and “our.”

We follow accounting standards set by the Financial Accounting Standards Board (“FASB”). FASB sets generally accepted accounting principles (“GAAP”), which we follow to ensure that we consistently report our financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (“ASC”).

These unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and in accordance with GAAP. Pursuant to the SEC rules and regulations we present interim disclosures and certain information and footnote disclosures as required. Accordingly, the unaudited Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying unaudited Consolidated Financial Statements reflect, in the opinion of management, all adjustments, including adjustments of a normal and recurring nature, necessary for a fair presentation of the interim financial statements. All intercompany transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period financial statements in order to conform to current period presentation.

The results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the SEC on February 22, 2018 (the “2017 Annual Report”). These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our 2017 Annual Report.

2. Revenue
        
Disaggregation of Revenue

The following table disaggregates our revenue by major source (in thousands):
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
REVENUE
 
 
 
 
 
 
 
 
 
 
 
Income from real property
$
197,211

 
$

 
$
197,211

 
$
183,054

 
$

 
$
183,054

Revenue from home sales

 
34,900

 
34,900

 

 
27,263

 
27,263

Rental home revenue

 
13,020

 
13,020

 

 
12,339

 
12,339

Ancillary revenues
6,568

 

 
6,568

 
6,219

 

 
6,219

Interest
5,316

 

 
5,316

 
4,646

 

 
4,646

Brokerage commissions and other revenues, net
960

 
(59
)
 
901

 
879

 

 
879

Total revenue
$
210,055

 
$
47,861

 
$
257,916

 
$
194,798

 
$
39,602

 
$
234,400


Revenue Recognition Policies and Performance Obligations
On January 1, 2018, we adopted FASB Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers” and the other related ASUs and amendments to the codification (collectively “ASC 606”). The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. A five-step transactional analysis is required to determine how and when to recognize revenue. ASC 606 applies to all contracts with customers, except those that are within the scope of other topics in the FASB accounting standards codification.

6




As a real estate owner and operator, the majority of our revenue is derived from site and home leases that are accounted for pursuant to ASC 840 “Leases.” For transactions in the scope of ASC 606, we recognize revenue when control of goods or services transfers to the customer, in the amount that we expect to receive for the transfer of goods or provision of services. The adoption of ASC 606 did not result in any change to our accounting policies for revenue recognition. Accordingly, retrospective application to prior periods or a cumulative catch-up adjustment was unnecessary.
Income from real property - Residents in our communities lease the site on which their home is located, and either own or lease their home. Lease revenues for sites and homes fall under the scope of ASC 840, and are accounted for as operating leases with straight-line recognition. Resident leases are generally for one-year or month-to-month terms, and are renewable by mutual agreement from us and the resident, or in some cases, as provided by jurisdictional statute. Non-lease components of our site lease contracts, which are primarily provision of utility services, are accounted for with the site lease as a single lease under ASC 840. Additionally, we include collections of real estate taxes from residents within Income from real property.
Revenue from home sales - Our taxable REIT subsidiary, SHS, sells manufactured homes (“MH”) to current and prospective residents in our communities. Prior to adoption of ASC 606, we recognized revenue for home sales pursuant to ASC 605 “Revenue Recognition,” as manufactured homes are tangible personal property that can be located on any land parcel. Manufactured homes are not permanent fixtures or improvements to the underlying real estate, and were therefore not considered to be subject to the guidance in ASC 360-20 “Real Estate Sales” by the Company. In accordance with the core principle of ASC 606, we recognize revenue from home sales at the time of closing when control of the home transfers to the customer. After closing of the sale transaction, we have no remaining performance obligation.
Rental home revenue - is comprised of rental agreements whereby we lease homes to residents in our communities. We account for these revenues under ASC 840.
Ancillary revenues - are primarily composed of proceeds from restaurant, golf, merchandise and other activities at our RV communities. Revenues are recognized at point of sale when control of the good or service transfers to the customer and our performance obligation is satisfied. Sales and other taxes that we collect concurrent with revenue-producing activities are excluded from transaction price.
Interest income - is earned primarily on our notes and collateralized receivables, which includes installment loans for manufactured homes purchased by the Company from loan originators and transferred loans that previously did not meet the requirements for sale accounting. Interest income on these receivables is accrued based on the unpaid principal balances of the underlying loans on a level yield basis over the life of the loans. Interest income is not in the scope of ASC 606. Refer to notes 4, “Collateralized Receivables and Transfers of Financial Assets” and 5, “Notes and Other Receivables” for additional information.
Broker commissions and other revenues, net - is primarily comprised of brokerage commissions for sales of manufactured homes, where we act as agent and arrange for a third party to transfer a manufactured home to a customer within one of our communities. Brokerage commission revenues are recognized on a net basis at closing, when the transaction is completed and our performance obligations have been fulfilled. Loan loss reserve expenses for our collateralized receivables and notes receivables are also included herein. Refer to notes 4, “Collateralized Receivables and Transfers of Financial Assets” and 5, “Notes and Other Receivables” for additional information regarding our loan loss reserves.

Contract Balances

As of March 31, 2018 and December 31, 2017, we had $28.6 million and $13.8 million respectively of receivables from contracts with customers. Receivables from contracts with customers are presented as a component of Notes and other receivables on our Consolidated Balance Sheets. These receivables represent balances owed to us for previously completed performance obligations for sales of manufactured homes. Due to the nature of our revenue from contacts with customers, we do not have material contract assets or liabilities that fall under the scope of ASC 606.

3.      Real Estate Acquisitions

2018 Acquisitions

There were no community acquisitions during the three months ended March 31, 2018.

2017 Acquisitions

In December 2017, we acquired Colony in the Wood (“Colony in the Wood”), an age-restricted MH community with 383 sites located in Port Orange, Florida.

7

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



In November 2017, we acquired Emerald Coast RV Beach Resort (“Emerald Coast”), an MH and recreational vehicle (“RV”) community with 201 sites located in Panama City Beach, Florida.

In September 2017, we acquired three age-restricted MH communities: Lazy J Ranch (“Lazy J Ranch”), with 220 sites in Arcata, California; Ocean West (“Ocean West”), with 130 sites in McKinleyville, California; and Caliente Sands (“Caliente Sands”), with 118 sites in Cathedral City, California.

In July 2017, we acquired Pismo Dunes RV Resort (“Pismo Dunes”), an age-restricted RV community with 331 sites located in Pismo Beach, California.

In June 2017, we acquired Arbor Woods (“Arbor Woods”), a MH community with 458 sites located in Superior Township, Michigan.

In May 2017, we acquired Sunset Lakes RV Resort (“Sunset Lakes”), a RV resort with 498 sites located in Hillsdale, Illinois.

In March 2017, we acquired Far Horizons 49er Village RV Resort Inc. (“49er Village”), a RV resort with 328 sites located in Plymouth, California.

The following table summarizes the amounts of assets acquired net of liabilities assumed at the acquisition date and the consideration paid for the acquisitions completed in 2017 (in thousands):
At Acquisition Date
 
Colony in the Wood
 
Emerald Coast
 
Lazy J Ranch
 
Ocean West
 
Caliente Sands
 
Pismo Dunes
 
Arbor Woods
 
Sunset Lakes
 
49er Village
 
Total
Investment in property
 
$
31,818

 
$
19,400

 
$
13,938

 
$
9,453

 
$
8,640

 
$
21,260

 
$
15,725

 
$
7,835

 
$
12,890

 
$
140,959

Notes receivable
 

 

 

 

 

 

 
23

 

 

 
23

Inventory of manufactured homes
 

 

 
2

 

 
21

 

 
465

 

 

 
488

In-place leases and other tangible assets
 
660

 
100

 
360

 
220

 
210

 
660

 
730

 
210

 
110

 
3,260

Total identifiable assets acquired net of liabilities assumed
 
$
32,478


$
19,500


$
14,300


$
9,673


$
8,871


$
21,920

 
$
16,943

 
$
8,045

 
$
13,000

 
$
144,730

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consideration
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
32,478

 
$
19,500

 
$
14,300

 
$
5,081

 
$
8,871

 
$

 
$
14,943

 
$
8,045

 
$
13,000

 
116,218

Equity
 

 

 

 

 

 
26,410

 
2,000

 

 

 
28,410

Liabilities assumed
 

 

 

 
4,592

 

 
510

 

 

 

 
5,102

Cash proceeds from seller
 

 

 

 

 

 
(5,000
)
 

 

 

 
(5,000
)
Total consideration
 
$
32,478


$
19,500


$
14,300

 
$
9,673

 
$
8,871

 
$
21,920

 
$
16,943

 
$
8,045

 
$
13,000

 
$
144,730


Also in 2017, we acquired an undeveloped parcel of land, on which we will construct Carolina Pines RV Resort (“Carolina Pines” formerly known as Bear Lake), near Myrtle Beach, South Carolina, for $5.9 million. This land parcel has been entitled and zoned to build an 841 site RV resort.

Transaction costs of $2.4 million were incurred for the three months ended March 31, 2017. These costs are presented as Transaction costs in our Consolidated Statements of Operations. Beginning January 1, 2018, we expect that substantially all of our property acquisitions will be considered asset acquisitions. Accordingly, direct acquisition related costs will be capitalized as part of the purchase price. Acquisitions costs that do not meet the criteria for capitalization will be expensed as incurred and presented as

8

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


General and administrative costs in our Consolidated Statements of Operations. Refer to Note 16, “Recent Accounting Pronouncements,” for additional information.

Dispositions

There were no property dispositions during the three months ended March 31, 2018 or the year ended December 31, 2017.

4.      Collateralized Receivables and Transfers of Financial Assets

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

In the event of a note default and subsequent repossession of a manufactured home by the unrelated entity, the terms of the agreement require us to repurchase the manufactured home. Default is defined as the failure to repay the installment note receivable according to contractual terms. The repurchase price is calculated as a percentage of the outstanding principal balance of the collateralized receivable, plus any outstanding late fees, accrued interest, legal fees, and escrow advances associated with the installment note receivable. The percentage used to determine the repurchase price of the outstanding principal balance on the installment note receivable is based on the number of payments made on the note. In general, the repurchase price is determined as follows:
Number of Payments
Repurchase Percentage
Fewer than or equal to 15
100
%
Greater than 15 but fewer than 64
90
%
Equal to or greater than 64 but fewer than 120
65
%
120 or more
50
%

The transferred assets have been classified as Collateralized receivables, net and the cash proceeds received from these transactions have been classified as Secured borrowings on collateralized receivables within the Consolidated Balance Sheets. The balance of the collateralized receivables was $123.2 million (net of allowance of $0.9 million) and $128.2 million (net of allowance of $0.9 million) as of March 31, 2018 and December 31, 2017, respectively. The receivables have a weighted average interest rate and maturity of 10.0 percent and 15.1 years as of March 31, 2018, and 10.0 percent and 15.3 years as of December 31, 2017.

The outstanding balance on the secured borrowing was $124.1 million and $129.2 million as of March 31, 2018 and December 31, 2017, respectively.

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 $2.8 million and $3.3 million for the three months ended March 31, 2018 and 2017, respectively.


9

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


The balances of the collateralized receivables and secured borrowings fluctuate. The balances increase as additional notes receivable are transferred and exchanged for cash proceeds. The balances are reduced as the related collateralized receivables are collected from the customers, or as the underlying collateral is repurchased. The change in the aggregate gross principal balance of the collateralized receivables is as follows (in thousands):
 
Three Months Ended March 31, 2018
Beginning balance
$
129,182

Principal payments and payoffs from our customers
(2,557
)
Principal reduction from repurchased homes
(2,548
)
Total activity
(5,105
)
Ending balance
$
124,077


The following table sets forth the allowance for the collateralized receivables as of March 31, 2018 (in thousands):
 
Three Months Ended March 31, 2018
Beginning balance
$
(936
)
Lower of cost or market write-downs
313

Increase to reserve balance
(299
)
Total activity
14

Ending balance
$
(922
)

5.      Notes and Other Receivables

The following table sets forth certain information regarding notes and other receivables (in thousands):
 
 
March 31, 2018
 
December 31, 2017
Installment notes receivable on manufactured homes, net
 
$
124,738

 
$
115,797

Other receivables, net
 
69,113

 
47,699

Total notes and other receivables, net
 
$
193,851

 
$
163,496


Installment Notes Receivable on Manufactured Homes

The installment notes of $124.7 million (net of allowance of $0.4 million) and $115.8 million (net of allowance of $0.4 million) as of March 31, 2018 and December 31, 2017, respectively, are collateralized by manufactured homes. The notes represent financing provided by us to purchasers of manufactured homes primarily located in our communities and require monthly principal and interest payments. The notes have a net weighted average interest rate (net of servicing costs) and maturity of 8.0 percent and 17.2 years as of March 31, 2018, and 8.2 percent and 17.2 years as of December 31, 2017, respectively.

The change in the aggregate gross principal balance of the installment notes receivable is as follows (in thousands):
 
Three Months Ended March 31, 2018
Beginning balance
$
116,174

Financed sales of manufactured homes
12,842

Principal payments and payoffs from our customers
(1,912
)
Principal reduction from repossessed homes
(1,935
)
Total activity
8,995

Ending balance
$
125,169



10

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


Allowance for Losses for Installment Notes Receivable

The following table sets forth the allowance change for the installment notes receivable as follows (in thousands):
 
Three Months Ended March 31, 2018
Beginning balance
$
(377
)
Lower of cost or market write-downs
175

Increase to reserve balance
(229
)
Total activity
(54
)
Ending balance
$
(431
)

Other Receivables

As of March 31, 2018, other receivables were comprised of amounts due from: residents for rent, and water and sewer usage of $12.5 million (net of allowance of $1.2 million); home sale proceeds of $28.6 million; and insurance and other receivables of $28.0 million. As of December 31, 2017, other receivables were comprised of amounts due from: residents for rent, and water and sewer usage of $7.0 million (net of allowance of $1.5 million); home sale proceeds of $13.8 million; and insurance and other receivables of $26.9 million.

6.
Intangible Assets

Our intangible assets include ground leases, in-place leases, franchise fees and other intangible assets. These intangible assets are recorded in Other assets, net on the Consolidated Balance Sheets.

The gross carrying amounts, and accumulated amortization are as follows (in thousands):
 
 
 
 
March 31, 2018
 
December 31, 2017
Intangible Asset
 
Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Ground leases
 
8-57 years
 
$
32,165

 
$
(1,632
)
 
$
32,165

 
$
(1,409
)
In-place leases
 
7 years
 
101,365

 
(49,066
)
 
100,843

 
(45,576
)
Franchise fees and other intangible assets
 
15 years
 
1,880

 
(1,470
)
 
1,880

 
(1,451
)
Total
 
 
 
$
135,410

 
$
(52,168
)
 
$
134,888

 
$
(48,436
)

Total amortization expenses related to the intangible assets are as follows (in thousands):
 
 
Three Months Ended 
 March 31,
Intangible Asset
 
2018
 
2017
 
2016
Ground leases
 
$
223

 
$
257

 
$

In-place leases
 
3,490

 
3,416

 
2,153

Franchise fees and other intangible assets
 
19

 
129

 
129

Total
 
$
3,732

 
$
3,802

 
$
2,282


We anticipate amortization expense for our intangible assets to be as follows for the next five years (in thousands):
 
Year
 
Remainder of 2018
 
2019
 
2020
 
2021
 
2022
Estimated expense
$
10,786

 
$
13,685

 
$
11,957

 
$
11,565

 
$
6,964



11

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



7.      Consolidated Variable Interest Entities

We consolidate Rudgate Village SPE, LLC; Rudgate Clinton SPE, LLC; and Rudgate Clinton Estates SPE, LLC (collectively, “Rudgate”) as a variable interest entity (“VIE”). We evaluated our arrangement with this property under the guidance set forth in FASB ASC Topic 810 “Consolidation.” We concluded that Rudgate qualified as a VIE where we are the primary beneficiary, as we have power to direct the significant activities, absorb the significant losses and receive the significant benefits from the entity.

The following table summarizes the assets and liabilities included in our Consolidated Balance Sheets after eliminations (in thousands):
 
March 31, 2018
 
December 31, 2017
ASSETS
 
 
 
Investment property, net
$
49,943

 
$
50,193

Other assets
1,453

 
1,659

   Total Assets
$
51,396

 
$
51,852

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Debt
$
41,756

 
$
41,970

Other liabilities
1,326

 
1,468

Noncontrolling interests
4,751

 
4,285

   Total Liabilities and Stockholders’ Equity
$
47,833

 
$
47,723


Investment property, net and other assets related to the consolidated VIEs comprised approximately 0.8 percent of our consolidated total assets at March 31, 2018 and December 31, 2017. Debt and other liabilities comprised approximately 1.2 percent of our consolidated total liabilities at March 31, 2018 and December 31, 2017. Noncontrolling interests related to the consolidated VIEs, on an absolute basis, comprised less than 1.0 percent of our consolidated total equity at March 31, 2018 and at December 31, 2017.

8.      Debt and Lines of Credit

The following table sets forth certain information regarding debt including premiums, discounts and deferred financing costs (in thousands):
 
Carrying Amount
 
Weighted Average
Years to Maturity
 
Weighted Average
Interest Rates
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
Collateralized term loans - Life Companies
$
1,038,459

 
$
1,044,246

 
13.7
 
13.9
 
3.9
%
 
3.9
%
Collateralized term loans - FNMA
994,605

 
1,026,014

 
5.5
 
5.6
 
4.4
%
 
4.4
%
Collateralized term loans - CMBS
408,251

 
410,747

 
4.8
 
5.0
 
5.1
%
 
5.1
%
Collateralized term loans - FMCC
384,910

 
386,349

 
6.6
 
6.9
 
3.9
%
 
3.9
%
Secured borrowings
124,077

 
129,182

 
15.1
 
15.3
 
10.0
%
 
10.0
%
Lines of credit
141,800

 
41,257

 
3.0
 
3.1
 
3.0
%
 
2.8
%
Preferred OP units - mandatorily redeemable
37,338

 
41,443

 
5.4
 
5.0
 
6.6
%
 
6.7
%
Total debt
$
3,129,440

 
$
3,079,238

 
8.5
 
8.9
 
4.5
%
 
4.5
%


12

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


Collateralized Term Loans

During the three months ended March 31, 2018, we repaid four collateralized term loans totaling $24.4 million with a weighted average interest rate of 6.36 percent, releasing three encumbered communities. The loans were due to mature on March 1, 2019. We recognized a loss on extinguishment of debt of $0.2 million as a result of the repayment transactions.

In December 2017, we defeased a $38.6 million collateralized term loan with a 5.25 percent fixed interest rate that was due to mature on June 1, 2022. As a result of the transaction we recognized a loss on extinguishment of debt of $5.2 million in our Consolidated Statements of Operations. Concurrent with the defeasance, we entered into a new $100.0 million collateralized term loan, encumbered by the same property, with a 4.25 percent fixed rate of interest and 30-year term.

In September 2017, in connection with the Ocean West acquisition, we assumed a $4.6 million collateralized term loan with Fannie Mae, with an interest rate of 4.34 percent and a remaining term of 9.8 years.

In June 2017, we entered into a $77.0 million collateralized term loan which bears interest at a rate of 4.16 percent amortizing over a 25-year term. We also repaid a $3.9 million collateralized term loan with an interest rate of 6.54 percent that was due to mature on August 31, 2017. As a result of the repayment transaction, we recognized a loss on extinguishment of debt of $0.3 million in our Consolidated Statements of Operations.

During the first quarter of 2017, we defeased an $18.9 million collateralized term loan with an interest rate of 6.49 percent that was due to mature on August 1, 2017, releasing one encumbered community. As a result of the transaction, we recognized a loss on extinguishment of debt of $0.5 million in our Consolidated Statements of Operations. In addition, we repaid a $10.0 million collateralized term loan with an interest rate of 5.57 percent that was due to mature on May 1, 2017, releasing an additional encumbered community.

The collateralized term loans totaling $2.8 billion as of March 31, 2018, are secured by 187 properties comprised of 74,630 sites representing approximately $3.3 billion of net book value.

Secured Borrowing

See Note 4, “Collateralized Receivables and Transfers of Financial Assets,” for information regarding our collateralized receivables and secured borrowing transactions.

Preferred OP Units

Preferred OP units at March 31, 2018 and December 31, 2017 include $34.7 million of Aspen preferred OP units issued by the Operating Partnership. As of March 31, 2018, these units are convertible indirectly into 463,652 shares of our common stock. Subject to certain limitations, at any time prior to January 1, 2024, the holder of each Aspen preferred OP unit at its option may convert such Aspen preferred OP unit into: (a) if the market price of our common stock is $68.00 per share or less, 0.397 common OP units; or (b) if the market price of our common stock is greater than $68.00 per share, the number of common OP units is determined by dividing (i) the sum of (A) $27.00 plus (B) 25 percent of the amount by which the market price of our common stock exceeds $68.00 per share, by (ii) the per-share market price of our common stock. The current preferred distribution rate is 6.5 percent. On January 2, 2024, we are required to redeem all Aspen preferred OP units that have not been converted to common OP units.

Preferred OP units also include $2.7 million and $6.7 million at March 31, 2018 and December 31, 2017, respectively, of Series B-3 preferred OP units, which are not convertible. During the three months ended March 31, 2018, we redeemed 41,051 of the Series B-3 preferred OP units at an average redemption price per unit, which included accrued and unpaid distributions, of $100.065753. In the aggregate, we paid $4.1 million to redeem these units.

Subject to certain limitations, (a) during the 90-day period beginning on each of the tenth through fifteenth anniversaries of the issue date of the applicable Series B-3 preferred OP units, (b) at any time after the fifteenth anniversary of the issue date of the applicable Series B-3 preferred OP units, or (c) after our receipt of notice of the death of the electing holder of a Series B-3 preferred OP unit, each holder of Series B-3 preferred OP units may require us to redeem such holder's Series B-3 preferred OP units at the redemption price of $100.00 per unit. In addition, at any time after the fifteenth anniversary of the issue date of the applicable Series B-3 preferred OP units we may redeem, at our option, all of the Series B-3 preferred OP units of any holder thereof at the redemption price of $100.00 per unit.

13

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



Lines of Credit

In April 2017, we amended and restated our credit agreement (the “A&R Credit Agreement”) with Citibank, N.A. (“Citibank”) and certain other lenders. Pursuant to the A&R Credit Agreement, we have a senior revolving credit facility with Citibank and certain other lenders in the amount of $650.0 million, comprised of a $550.0 million revolving loan and a $100.0 million term loan (the “A&R Facility”). The A&R Credit Agreement has a four-year term ending April 25, 2021, which can be extended for two additional six-month periods at our option, subject to the satisfaction of certain conditions as defined in the credit agreement. The A&R Credit Agreement also provides for, subject to the satisfaction of certain conditions, additional commitments in an amount not to exceed $350.0 million. If additional borrowings are made pursuant to any such additional commitments, the aggregate borrowing limit under the Facility may be increased up to $1.0 billion.

The A&R Facility bears interest at a floating rate based on the Eurodollar rate plus a margin that is determined based on our leverage ratio calculated in accordance with the A&R Credit Agreement, which margin can range from 1.35 percent to 2.20 percent for the revolving loan and 1.30 percent to 2.15 percent for the term loan. As of March 31, 2018, the margin on our leverage ratio was 1.35 percent and 1.30 percent on the revolving and term loans, respectively. We had $40.0 million in borrowings on the revolving loan and $100.0 million in borrowings on the term loan, totaling $140.0 million as of March 31, 2018, with a weighted average interest rate of 3.0 percent.

The A&R Facility replaced our $450.0 million credit facility (the “Previous Facility”), which was scheduled to mature on August 19, 2019. The A&R Facility provides, and the Previous Facility provided, us with the ability to issue letters of credit. Our issuance of letters of credit does not increase our borrowings outstanding under our line of credit, but does reduce the borrowing amount available. At March 31, 2018 and December 31, 2017, approximately $1.3 million of availability was used to back standby letters of credit.

We have a $12.0 million manufactured home floor plan facility renewable indefinitely until our lender provides us at least a twelve month notice of their intent to terminate the agreement. The interest rate is 100 basis points over the greater of the prime rate as quoted in the Wall Street Journal on the first business day of each month or 6.0 percent. At March 31, 2018, the effective interest rate was 7.0 percent. The outstanding balance was $2.3 million as of March 31, 2018 and $4.0 million as of December 31, 2017.

Covenants

Pursuant to the terms of the A&R Facility, we are subject to various financial and other covenants. The most restrictive of our debt agreements place limitations on secured borrowings and contain minimum fixed charge coverage, leverage, distribution, and net worth requirements. At March 31, 2018, we were in compliance with all covenants.

In addition, certain of our subsidiary borrowers own properties that secure loans. These subsidiaries are consolidated within our accompanying Consolidated Financial Statements, however, each of these subsidiaries’ assets and credit are not available to satisfy the debts and other obligations of the Company, any of its other subsidiaries or any other person or entity.

9.      Equity and Mezzanine Securities

Public Equity Offerings

In May 2017, we closed an underwritten registered public offering of 4,830,000 shares of common stock at a gross price of $86.00 per share. Proceeds from the offering were $408.9 million after deducting expenses related to the offering, which were used to repay borrowings outstanding under the revolving loan under our A&R Facility, fund acquisitions, working capital and general corporate purposes.

At the Market Offering Sales Agreement

In July 2017, we entered into a new at the market offering sales agreement (the “Sales Agreement”) with BMO Capital Markets Corp., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Robert W. Baird & Co. Incorporated, Fifth Third Securities, Inc., RBC Capital Markets, LLC, BTIG, LLC, Jefferies LLC, Credit Suisse Securities (USA) LLC and Samuel A. Ramirez & Company, Inc. (each, a “Sales Agent;” collectively, the “Sales Agents”), whereby we may offer and sell shares of our common stock, having an aggregate offering price of up to $450.0 million, from time to time through the Sales Agents. The Sales Agents are entitled to compensation in an agreed amount not to exceed 2.0 percent of the gross price per share for any shares sold from time to time under the Sales Agreement.

14

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



Concurrent with entry into the Sales Agreement, we terminated our previous sales agreement dated June 17, 2015, with BMO Capital Markets Corp., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., (the “Prior Agreement”). The Prior Agreement had an aggregate offering price of up to $250.0 million. We did not incur any penalties in connection with termination of the Prior Agreement.

There were no issuances of common stock under the Sales Agreement during the three months ended March 31, 2018. Refer to Note 18, “Subsequent Events,” for additional information regarding issuances of common stock under the Sales Agreement after March 31, 2018.

Issuances of common stock under the Sales Agreement during 2017 were as follows:
Quarter Ended
 
Common Stock Issued
 
Weighted Average Sales Price
 
Net Proceeds (in Millions)
December 31, 2017
 
321,800

 
$
93.33

 
$
29.7


Issuances of common stock under the Prior Agreement during 2017 were as follows:
Quarter Ended
 
Common Stock Issued
 
Weighted Average Sales Price
 
Net Proceeds (in Millions)
June 30, 2017
 
400,000

 
$
85.01

 
$
33.6

March 31, 2017
 
280,502

 
$
76.47

 
$
21.2


Issuance of Common Stock and Common OP Units

In July 2017, we issued 298,900 shares of common stock totaling $26.4 million in connection with the acquisition of Pismo Dunes.

In June 2017, we issued a total of 23,311 common OP units for total consideration of $2.0 million in connection with acquisition activity during the three months ended June 30, 2017.

Conversions

Subject to certain limitations, holders can convert certain series of stock and OP units to shares of our common stock at any time. Below is the activity of conversions during the three months ended March 31, 2018 and 2017:
 
 
 
Three Months Ended 
 March 31, 2018
 
Three Months Ended 
 March 31, 2017
Series
 
Conversion Rate
Units/Shares Converted
Common Stock
 
Units/Shares Converted
Common Stock
Common OP unit
 
1

6,777

6,777

 
8,579

8,579

Series A-1 preferred OP unit
 
2.439

3,700

9,023

 
5,425

13,230

Series A-4 preferred OP unit
 
0.4444

2,373

1,054

 
2,000

888

Series A-4 preferred stock
 
0.4444



 
45,153

20,068

Series C preferred OP unit
 
1.11



 
4,993

5,539


Dividends

Dividend distributions for the three months ended March 31, 2018 were as follows:
Dividend
 
Record Date
Payment Date
Distribution per Share
Total Distribution (thousands)
Common Stock, Common OP units and Restricted Stock
 
3/29/2018
4/16/2018
$
0.71

$
56,014

Series A-4 Preferred Stock
 
3/16/2018
4/2/2018
$
0.40625

$
441



15

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


Redemptions

If certain change of control transactions occur or if our common stock ceases to be listed or quoted on an exchange or quotation system, then at any time after November 26, 2019, we or the holders of shares of Series A-4 preferred stock and Series A-4 preferred OP units may cause all or any of those shares or units to be redeemed for cash at a redemption price equal to the sum of (i) the greater of (x) the amount that the redeemed shares of Series A-4 preferred stock and Series A-4 preferred OP units would have received in such transaction if they had been converted into shares of our common stock immediately prior to such transaction, or (y) $25.00 per share, plus (ii) any accrued and unpaid distributions thereon to, but not including, the redemption date.

In November 2017, we redeemed all of the outstanding shares of our 7.125% Series A Cumulative Redeemable Preferred Stock. Holders received a cash payment of $25.14349 per share which included accrued and unpaid dividends. In the aggregate, we paid $85.5 million to redeem all of the 3,400,000 outstanding shares.

In June 2017, we redeemed 438,448 shares of Series A-4 Cumulative Convertible Preferred Stock and 200,000 shares of Series A-4 preferred OP units from Green Courte Real Estate Partners III, LLC, GCP Fund III REIT LLC and GCP Fund III Ancillary Holding, LLC (collectively, the “Green Courte Entities”) for total consideration of $24.7 million. Accrued dividends totaling $0.2 million were also paid in connection with the redemptions. The Green Courte Entities were the sellers of the American Land Lease portfolio which we acquired in 2014 and 2015.

Repurchase Program

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 the three months ended March 31, 2018 or 2017. There is no expiration date specified for the buyback program.


16

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


10.      Share-Based Compensation

As of March 31, 2018, we have two share-based compensation plans; the Sun Communities, Inc. 2015 Equity Incentive Plan (“2015 Equity Incentive Plan”) and the First Amended and Restated 2004 Non-Employee Director Option Plan (“2004 Non-Employee Director Option Plan”). We believe granting equity awards will provide certain executives, key employees and directors additional incentives to promote our financial success, and promote employee and director retention by providing an opportunity to acquire or increase the direct proprietary interest of those individuals in our operations and future.

The following table shows details on grants of equity awards during the three months ended March 31, 2018:
Grant Period
 
Type
 
Plan
 
Shares Granted
 
Grant Date Fair Value Per Share
 
Vesting Type
 
Vesting Anniversary
 
Percentage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
Key Employees
 
2015 Equity Incentive Plan
 
16,500

 
$
88.30

(1)
Time Based
 
2nd
 
35.0
%
 
 
 
 
 
 
 
 
 
 
 
 
3rd
 
35.0
%
 
 
 
 
 
 
 
 
 
 
 
 
4th
 
20.0
%
 
 
 
 
 
 
 
 
 
 
 
 
5th
 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
6th
 
5.0
%
2018
 
Key Employees
 
2015 Equity Incentive Plan
 
44,600

 
$
85.29

(1)
Time Based
 
20.0% annually over 5 years
2018
 
Executive Officers
 
2015 Equity Incentive Plan
 
60,000

 
$
87.24

(1)
Time Based
 
20.0% annually over 5 years
2018
 
Executive Officers
 
2015 Equity Incentive Plan
 
90,000

 
$
65.24

(2)
Market Condition
 
3rd
 
100.0
%
2018
 
Directors
 
2004 Non-Employee Director Option Plan
 
16,800

 
$
85.28

(1)
Time Based
 
3rd
 
100.0
%
(1) The fair value of the grants were determined by using the closing price of our common stock on the dates the shares were issued.
(2) Share-based compensation for restricted stock awards with market conditions is measured based on an estimate of shares expected to vest. We estimate the fair value of share-based compensation for restricted stock with market conditions using a Monte Carlo simulation. At the grant date our common stock price was $87.24. Based on the Monte Carlo simulation we expect 74.8% of the 90,000 shares to vest.

Options

During the three months ended March 31, 2017, 1,500 shares of common stock were issued in connection with the exercise of stock options with net proceeds of $0.1 million. There were no stock option exercises during the three months ended March 31, 2018.

Vesting

The vesting requirements for 93,647 restricted shares granted to our executives, directors and employees were satisfied during the three months ended March 31, 2018.

11.     Segment Reporting

We group our operating segments into reportable segments that provide similar products and services. Each operating segment has discrete financial information evaluated regularly by our chief operating decision maker in evaluating and assessing performance. We have two reportable segments: (i) Real Property Operations and (ii) Home Sales and Rentals. The Real Property Operations segment owns, operates, develops, or has an interest in a portfolio of MH and RV communities, and is in the business of acquiring, operating, and expanding MH and RV communities. The Home Sales and Rentals segment offers MH and RV park model sales and leasing services to tenants and prospective tenants of our communities.

Transactions between our segments are eliminated in consolidation. Transient RV revenue is included in the Real Property Operations segment revenues and is expected to approximate $85.5 million annually. This transient RV revenue was recognized 25.8 percent in the first quarter, and is expected to be recognized 20.6 percent, 37.4 percent, and 16.2 percent in the second, third, and fourth quarters, respectively. Transient revenue was $78.0 million for the year ended December 31, 2017. We recognized 27.2 percent in the first quarter, 20.1 percent in the second quarter, 36.9 percent in the third quarter, and 15.8 percent in the fourth quarter.

17

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



A presentation of segment financial information is summarized as follows (in thousands):
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Revenues
$
203,779

 
$
47,920

 
$
251,699

 
$
189,273

 
$
39,602

 
$
228,875

Operating expenses/Cost of sales
70,732

 
31,741

 
102,473

 
64,977

 
25,985

 
90,962

Net operating income/Gross profit
133,047

 
16,179

 
149,226

 
124,296

 
13,617

 
137,913

Adjustments to arrive at net income / (loss):
 
 
 
 
 
 
 
 
 
 
 
Interest and other revenues, net
6,276

 
(59
)
 
6,217

 
5,525

 

 
5,525

Home selling expenses

 
(3,290
)
 
(3,290
)
 

 
(3,111
)
 
(3,111
)
General and administrative
(17,187
)
 
(2,744
)
 
(19,931
)
 
(15,721
)
 
(2,211
)
 
(17,932
)
Transaction costs

 

 

 
(2,411
)
 
25

 
(2,386
)
Depreciation and amortization
(50,508
)
 
(15,929
)
 
(66,437
)
 
(47,330
)
 
(15,436
)
 
(62,766
)
Extinguishment of debt
(196
)
 

 
(196
)
 
(466
)
 

 
(466
)
Interest
(31,134
)
 
(4
)
 
(31,138
)
 
(31,319
)
 
(3
)
 
(31,322
)
Interest on mandatorily redeemable preferred OP units
(619
)
 

 
(619
)
 
(784
)
 

 
(784
)
Catastrophic weather related charges, net
2,357

 
(144
)
 
2,213

 
(87
)
 

 
(87
)
Other (expense) / income, net
(2,616
)
 
(1
)
 
(2,617
)
 
631

 
208

 
839

Current tax expense
(96
)
 
(78
)
 
(174
)
 
(123
)
 
(55
)
 
(178
)
Deferred tax benefit
347

 

 
347

 
300

 

 
300

Net income / (loss)
39,671

 
(6,070
)
 
33,601

 
32,511

 
(6,966
)
 
25,545

Less:  Preferred return to preferred OP units
1,080

 

 
1,080

 
1,174

 

 
1,174

Less:  Amounts attributable to noncontrolling interests
2,400

 
(306
)
 
2,094

 
1,483

 
(395
)
 
1,088

Net income / (loss) attributable to Sun Communities, Inc.
36,191

 
(5,764
)
 
30,427

 
29,854

 
(6,571
)
 
23,283

Less: Preferred stock distributions
441

 

 
441

 
2,179

 

 
2,179

Net income / (loss) attributable to Sun Communities, Inc. common stockholders
$
35,750

 
$
(5,764
)
 
$
29,986

 
$
27,675

 
$
(6,571
)
 
$
21,104



 
March 31, 2018
 
December 31, 2017
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
 
Real Property Operations
 
Home Sales and Rentals
 
Consolidated
Identifiable assets:
 
 
 
 
 
 
 
 
 
 
 
Investment property, net
$
5,162,460

 
$
480,194

 
$
5,642,654

 
$
5,172,521

 
$
472,833

 
$
5,645,354

Cash and cash equivalents
(1,483
)
 
16,636

 
15,153

 
(7,649
)
 
17,776

 
10,127

Inventory of manufactured homes

 
36,311

 
36,311

 

 
30,430

 
30,430

Notes and other receivables, net
177,247

 
16,604

 
193,851

 
149,798

 
13,698

 
163,496

Collateralized receivables, net
123,155

 

 
123,155

 
128,246

 

 
128,246

Other assets, net
133,489

 
5,040

 
138,529

 
130,455

 
3,849

 
134,304

Total assets
$
5,594,868

 
$
554,785

 
$
6,149,653

 
$
5,573,371

 
$
538,586

 
$
6,111,957



18

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


12.     Income Taxes

We have elected to be taxed as a real estate investment trust (“REIT”) pursuant to Section 856(c) of the Internal Revenue Code of 1986, as amended (“Code”). In order for us to qualify as a REIT, at least 95 percent of our gross income in any year must be derived from qualifying sources. In addition, a REIT must distribute annually at least 90 percent of its REIT taxable income (calculated without any deduction for dividends paid and excluding capital gain) to its stockholders and meet other tests.

Qualification as a REIT involves the satisfaction of numerous requirements (on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. In addition, frequent changes occur in the area of REIT taxation which requires us to continually monitor our tax status. We analyzed the various REIT tests and confirmed that we continued to qualify as a REIT for the quarter ended March 31, 2018.

As a REIT, we generally will not be subject to United States (“U.S.”) federal income taxes at the corporate level on the ordinary taxable income we distribute to our stockholders as dividends. If we fail to qualify as a REIT in any taxable year, our taxable income could be subject to U.S. federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if we qualify as a REIT, we may be subject to certain state and local income taxes as well as U.S. federal income and excise taxes on our undistributed income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state, and local income taxes. The Company is also subject to local income taxes in Canada as a result of the acquisition of Carefree in 2016. We do not provide for withholding taxes on our undistributed earnings from our Canadian subsidiaries as they are reinvested and will continue to be reinvested indefinitely outside of the U.S.

Our taxable REIT subsidiaries are subject to U.S. federal income taxes as well as state and local income and franchise taxes. In addition, our Canadian subsidiaries are subject to income tax in Canada.

Deferred tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. Deferred tax assets are reduced, if necessary, by a valuation allowance to the amount where realization is more likely than not assured after considering all available evidence. Our temporary differences primarily relate to net operating loss carryforwards, depreciation and basis differences between tax and U.S. GAAP on our Canadian investments. Generally, full valuation allowances are recorded against almost all U.S. federal deferred tax assets. Deferred tax liabilities of $21.6 million (Canada) and $0.1 million (U.S.) have been recorded in relation to corporate entities and included in “Other liabilities” in our Consolidated Balance Sheets as of March 31, 2018. There were no U.S. federal deferred tax assets or liabilities included in our Consolidated Balance sheets as of December 31, 2017.

We had no unrecognized tax benefits as of March 31, 2018 and 2017. We do not expect significant changes in tax positions that would result in unrecognized tax benefits within one year of March 31, 2018.

We recorded a current tax expense for federal, state, and Canadian income taxes of approximately $0.2 million for the three months ended March 31, 2018 and 2017.

We recorded $0.3 million of deferred tax benefit in our Consolidated Statements of Operations for the three months ended March 31, 2018 and March 31, 2017.

In 2017, SHS underwent an audit by the Internal Revenue Service for the 2015 tax year. Upon conclusion of the audit, no adjustment was required.



19

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


13.     Earnings Per Share

We have outstanding stock options, unvested restricted common shares, and Series A-4 Preferred Stock, and our Operating Partnership has: outstanding common OP units; Series A-1 preferred OP units; Series A-3 preferred OP units; Series A-4 preferred OP units; Series C preferred OP units; and Aspen preferred OP Units, which, if converted or exercised, may impact dilution.

Computations of basic and diluted earnings / (loss) per share were as follows (in thousands, except per share data):
 
 
Three Months Ended March 31,
Numerator
 
2018
 
2017
Net income attributable to common stockholders
 
$
29,986

 
$
21,104

Allocation to restricted stock awards
 
(303
)
 
(253
)
Basic earnings: Net income attributable to common stockholders after allocation
 
29,683

 
20,851

Allocation to restricted stock awards
 
303

 
253

Diluted earnings: Net income attributable to common stockholders after allocation
 
$
29,986

 
$
21,104

 
 
 
 
 
Denominator
 
 
 
 
Weighted average common shares outstanding
 
78,855

 
72,677

Add: dilutive stock options
 
2

 
2

Add: dilutive restricted stock
 
607

 
441

Diluted weighted average common shares and securities
 
79,464

 
73,120

Earnings per share available to common stockholders after allocation:
 
 
 
 
Basic
 
$
0.38

 
$
0.29

Diluted
 
$
0.38

 
$
0.29


We have excluded certain securities from the computation of diluted earnings per share because the inclusion of these securities would have been anti-dilutive for the periods presented. The following table presents the outstanding securities that were excluded from the computation of diluted earnings per share as of March 31, 2018 and 2017 (in thousands):
 
 
As of March 31,
 
 
2018
 
2017
Common OP units
 
2,739

 
2,750

Series A-1 preferred OP units
 
342

 
362

Series A-3 preferred OP units
 
40

 
40

Series A-4 preferred OP units
 
422

 
632

Series A-4 preferred stock
 
1,085

 
1,637

Series C preferred OP units
 
316

 
328

Aspen preferred OP units
 
1,284

 
1,284

Total securities
 
6,228

 
7,033



20

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


14.     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 caps are used to accomplish this objective. We do not enter into derivative instruments for speculative purposes nor do we have any swaps in a hedging arrangement.

The following table provides the terms of our interest rate derivative contracts that were in effect as of March 31, 2018:
Type
 
Purpose
 
Effective Date
 
Maturity Date
 
 Notional
 (in millions)
 
Based on
 
Variable Rate
 
Cap Rate
 
Spread
 
Effective Fixed Rate
Cap
 
Cap Floating Rate
 
4/1/2015
 
4/1/2018
 
$
150.1

 
3 Month LIBOR
 
3.5640%
 
9.0000%
 
—%
 
N/A
Cap
 
Cap Floating Rate
 
10/3/2016
 
5/1/2023
 
$
9.6

 
3 Month LIBOR
 
4.3640%
 
11.0200%
 
—%
 
N/A

During the three months ended March 31, 2018, we entered into an interest rate derivative contract, effective April 1, 2018, that replaced the contracted that expired on April 1, 2018 in the table above. The new contract is a floating rate cap that matures on April 1, 2021, with a notional amount $142.9 million and cap rate of 20.93 percent.

In accordance with ASC Topic 815, “Derivatives and Hedging, derivative instruments are recorded at fair value in Other assets, net or Other liabilities on the Consolidated Balance Sheets. As of March 31, 2018 and December 31, 2017, the fair value of our derivatives was zero.

 
15.     Fair Value of Financial Instruments

Our financial instruments consist primarily of cash and cash equivalents, accounts and notes receivable, accounts payable, derivative instruments, and debt.

ASC Topic 820 “Fair Value Measurements and Disclosures,” requires disclosure regarding determination of fair value for assets and liabilities and establishes a hierarchy under which these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumption. This hierarchy requires the use of observable market data when available. These two types of inputs have created the following fair value hierarchy:

Level 1—Quoted unadjusted prices for identical instruments in active markets;

Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The following methods and assumptions were used in order to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Derivative Instruments

The derivative instruments held by us are interest rate cap agreements for which quoted market prices are indirectly available. For those derivatives, we use model-derived valuations in which all significant inputs and significant value drivers are observable in active markets provided by brokers or dealers to determine the fair value of derivative instruments on a recurring basis (Level 2). Refer to Note 14, “Derivative Instruments and Hedging Activities.”

Installment Notes Receivable on Manufactured Homes

The net carrying value of the installment notes receivable on manufactured homes estimates the fair value as the interest rates in the portfolio are comparable to current prevailing market rates (Level 2). Refer to Note 5, “Notes and Other Receivables.”

21

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


Long-Term Debt and Lines of Credit

The fair value of long-term debt (excluding the secured borrowing) is based on the estimates of management and on rates currently quoted, rates currently prevailing for comparable loans, and instruments of comparable maturities (Level 2). Refer to Note 8, “Debt and Lines of Credit.”

Collateralized Receivables and Secured Borrowings

The fair value of these financial instruments offset each other as our collateralized receivables represent a transfer of financial assets and the cash proceeds received from these transactions have been classified as a secured borrowing on the Consolidated Balance Sheets. The net carrying value of the collateralized receivables estimates the fair value as the interest rates in the portfolio are comparable to current prevailing market rates (Level 2). Refer to Note 4, “Collateralized Receivables and Transfers of Financial Assets.”

Financial Liabilities

We estimate the fair value of our contingent consideration liability based on discounting of future cash flows using market interest rates and adjusting for non-performance risk over the remaining term of the liability (Level 2).

Other Financial Instruments

The carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate their fair market values due to the short-term nature of these instruments.

The table below sets forth our financial assets and liabilities that required disclosure of fair value on a recurring basis as of March 31, 2018. The table presents the carrying values and fair values of our financial instruments as of March 31, 2018 and December 31, 2017, that were measured using the valuation techniques described above (in thousands). The table excludes other financial instruments such as cash and cash equivalents, accounts receivable, and accounts payable as the carrying values associated with these instruments approximate fair value since their maturities are less than one year.
 
 
March 31, 2018
 
December 31, 2017
Financial assets
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Installment notes receivable on manufactured homes, net
 
$
124,738

 
$
124,738

 
$
115,797

 
$
115,797

Collateralized receivables, net
 
123,155

 
123,155

 
128,246

 
128,246

Financial liabilities
 
 
 
 
 
 
 
 
Debt (excluding secured borrowings)
 
$
2,863,563

 
$
2,641,997

 
$
2,908,799

 
$
2,726,770

Secured borrowings
 
124,077

 
124,077

 
129,182

 
129,182

Lines of credit
 
141,800

 
141,800

 
41,257

 
41,257

Other liabilities (contingent consideration)
 
7,069

 
7,069

 
6,976

 
6,976


16.     Recent Accounting Pronouncements

Recent Accounting Pronouncements - Adopted

On January 1, 2018, we adopted ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).” Refer to Note 2, “Revenue” for information regarding our adoption of this guidance.

On January 1, 2018 we adopted ASU 2017-09 “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This update provided clarity and reduced both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation - Stock Compensation, regarding a change to the terms or conditions of a share-based payment award. There was no initial impact that resulted from adoption of this guidance; it will be applied should a modification occur.

On January 1, 2018, we adopted ASU 2017-01 “Business Combinations (Topic 805): Clarifying the Definition of a Business.” This update clarified the definition of a business with the objective of adding guidance to assist entities with evaluating whether

22

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


transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation.

Under previous guidance, substantially all of our property acquisitions were accounted for as business combinations with identifiable assets and liabilities measured at fair value, and acquisition related costs expensed as incurred and reported as Transaction costs in our Consolidations Statements of Operations.

With the adoption of ASU 2017-01, we expect that substantially all of our future property acquisitions will be accounted for as asset acquisitions. We will allocate the purchase price of these properties on a relative fair value basis and capitalize direct acquisition related costs as part of the purchase price. Acquisitions costs that do not meet the criteria to be capitalized will be expensed as incurred and presented as General and administrative costs in our Consolidated Statements of Operations.

On January 1, 2018, we adopted ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash.” This update required inclusion of restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.

Our restricted cash consists of amounts primarily held in deposit for tax, insurance and repair escrows held by lenders in accordance with certain debt agreements. Restricted cash is included as a component of Other assets, net on the Consolidated Balance Sheets. Changes in restricted cash are reported in our Consolidated Statements of Cash Flows as operating, investing or financing activities based on the nature of the underlying activity.

The following table reconciles our beginning-of-period and end-of-period balances of cash, cash equivalents and restricted cash for the periods shown (in thousands):
 
 
March 31, 2018
 
December 31, 2017
 
March 31, 2017
 
December 31, 2016
Cash and cash equivalents
 
$
15,153

 
$
10,127

 
$
10,919

 
$
8,164

Restricted cash
 
12,271

 
13,382

 
15,791

 
17,149

Cash, cash equivalents and restricted cash
 
$
27,424

 
$
23,509

 
$
26,710

 
$
25,313


Recent Accounting Pronouncements - Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are in the initial phases of evaluating how this guidance will impact our accounting policies regarding assessment of, and allowance for, loan losses.

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” The core principle of this update is that a lessee should recognize the assets and liabilities that arise from leases while the accounting by a lessor is largely unchanged from that applied under previous GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Our income from real property and rental home revenue streams is derived from rental agreements where we are the lessor. As noted above, the lessor accounting model is largely unchanged by this update. We are the lessee in other arrangements, primarily for our executive offices, ground leases at five communities, and certain equipment. We are currently evaluating our inventory of such leases to determine which will require recognition of right of use assets and corresponding lease liabilities, and the related disclosure requirements thereto. We intend to adopt the practical expedients associated with this guidance.

17.    Commitments and Contingencies

Legal Proceedings

We are involved in various legal proceedings arising in the ordinary course of business. All such proceedings, taken together, are not expected to have a material adverse impact on our results of operations or financial condition.


23

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


Catastrophic Weather Related Estimates

In September 2017, our communities in Florida and Georgia sustained damages from Hurricane Irma. The table below sets forth estimated losses (in millions). Future changes to estimated losses will be recognized in the period(s) in which they are determined.
 
Damages(1)
 
Impaired Assets - Florida Keys
 
Total
Total estimated losses - December 31, 2017
$
21.3

 
$
10.4

 
$
31.7

Change in estimated losses
3.8

 

 
3.8

Total estimated losses - March 31, 2018
$
25.1

 
$
10.4

 
$
35.5


(1) Damages losses are comprised primarily by tree and debris removal, common area repairs and minor flooding.

We maintain property, casualty, flood and business interruption insurance for our community portfolio, subject to customary deductibles and limits. The table below sets forth estimated insurance recoveries (in millions). Actual insurance recoveries could vary significantly from our estimates. Future changes to estimated insurance recoveries will be recognized in the period(s) in which they are determined.
 
Three Months Ended March 31, 2018
 
Damages(1)
 
Loss of Earnings
 
Redevelopment Costs in Excess of Impairment Charges
 
Total
Total estimated insurance receivable - December 31, 2017
$
23.7

 
$

 
$

 
$
23.7

Change in estimated insurance recoveries
6.0

 

 

 
6.0

Advances from insurer
(5.0
)
 

 

 
(5.0
)
Total estimated insurance receivable - March 31, 2018
$
24.7

 
$

 
$

 
$
24.7


Changes in estimated insurance recoveries for damages during the three months ended March 31, 2018, were primarily the result of incremental losses where deductibles were previously met. Additionally, previous recovery estimates were refined as damage losses were attributed to specific asset deductible categories. The change in estimated losses and changes in estimated insurance recoveries during the three months ended March 31, 2018, resulted in a net favorable adjustment of $2.2 million to Catastrophic weather related charges, net in our Consolidated Statements of Operations.

We are actively working with our insurer on claims for lost earnings and redevelopment costs greater than the asset impairment charge for the three Florida Keys communities. The three impaired Florida Keys communities will require redevelopment followed by a tenant lease-up period. As such, we currently cannot estimate a date when operating results will be restored to pre-hurricane levels. Our business interruption insurance policy provides for up to 60 months of coverage from the date of restoration.

18.    Subsequent Events

In April 2018, we issued 220,000 shares of common stock through our At-the-Market equity sales program at a weighted average price of $91.31 per share. Net proceeds from the sales were $19.8 million.

We have evaluated our Consolidated Financial Statements for subsequent events through the date that this Form 10-Q was issued.

24




ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes filed herewith, along with our 2017 Annual Report. Capitalized terms are used as defined elsewhere in this Quarterly Report on Form 10-Q.

OVERVIEW

We are a fully integrated, self-administered and self-managed REIT. As of March 31, 2018, we owned and operated or had an interest in a portfolio of 350 developed properties located in 29 states throughout the U.S. and one province in Canada, including 230 MH communities, 89 RV communities, and 31 properties containing both MH and RV sites.

We have been in the business of acquiring, operating, developing, and expanding MH and RV communities since 1975. We lease individual sites with utility access for placement of manufactured homes and RVs to our customers. We are also engaged through SHS in the marketing, selling, and leasing of new and pre-owned homes to current and future residents in our communities. The operations of SHS support and enhance our occupancy levels, property performance, and cash flows.

SIGNIFICANT ACCOUNTING POLICIES

We have identified significant accounting policies that, as a result of the judgments, uncertainties, and complexities of the underlying accounting standards and operations involved could result in material changes to our financial condition or results of operations under different conditions or using different assumptions. Details regarding significant accounting policies are described fully in our 2017 Annual Report.

NON-GAAP FINANCIAL MEASURES

In addition to the results reported in accordance with GAAP in our “Results of Operations” below, we have provided information regarding net operating income (“NOI”) and funds from operations (“FFO”) as supplemental performance measures. We believe NOI and FFO are appropriate measures given their wide use by and relevance to investors and analysts following the real estate industry. NOI provides a measure of rental operations and does not factor in depreciation, amortization and non-property specific expenses such as general and administrative expenses. FFO, reflecting the assumption that real estate values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation/amortization of real estate assets. In addition, NOI and FFO are commonly used in various ratios, pricing multiples/yields and returns and valuation calculations used to measure financial position, performance and value.

NOI is derived from revenues minus property operating expenses and real estate taxes. NOI is a non-GAAP financial measure that we believe is helpful to investors as a supplemental measure of operating performance because it is an indicator of the return on property investment, and provides a method of comparing property performance over time. We use NOI as a key measure when evaluating performance and growth of particular properties and/or groups of properties. The principal limitation of NOI is that it excludes depreciation, amortization, interest expense and non-property specific expenses such as general and administrative expenses, all of which are significant costs. Therefore, NOI is a measure of the operating performance of our properties rather than of the Company overall.

We believe that GAAP net income (loss) is the most directly comparable measure to NOI. NOI should not be considered to be an alternative to GAAP net income (loss) as an indication of our financial performance or GAAP cash flow from operating activities as a measure of our liquidity; nor is it indicative of funds available for our cash needs, including our ability to make cash distributions. Because of the inclusion of items such as interest, depreciation, and amortization, the use of GAAP net income (loss) as a performance measure is limited as these items may not accurately reflect the actual change in market value of a property, in the case of depreciation and in the case of interest, may not necessarily be linked to the operating performance of a real estate asset, as it is often incurred at a parent company level and not at a property level.

FFO is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as GAAP net income (loss), excluding gains (or losses) from sales of depreciable operating property, plus real estate-related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO is a non-GAAP financial measure that management believes is a useful supplemental measure of our operating performance. By excluding gains and losses related to sales of previously depreciated operating real estate assets, impairment and excluding real estate asset depreciation and amortization (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO provides

25




a performance measure that, when compared period-over-period, reflects the impact to operations from trends in occupancy rates, rental rates, and operating costs, providing perspective not readily apparent from GAAP net income (loss). Management believes the use of FFO has been beneficial in improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. We also use FFO excluding certain gain and loss items that management considers unrelated to the operational and financial performance of our core business (“Core FFO”). We believe that Core FFO provides enhanced comparability for investor evaluations of period-over-period results.

We believe that GAAP net income (loss) is the most directly comparable measure to FFO. The principal limitation of FFO is that it does not replace GAAP net income (loss) as a performance measure or GAAP cash flow from operations as a liquidity measure. Because FFO excludes significant economic components of GAAP net income (loss) including depreciation and amortization, FFO should be used as a supplement to GAAP net income (loss) and not as an alternative to it. Further, FFO is not intended as a measure of a REIT’s ability to meet debt principal repayments and other cash requirements, nor as a measure of working capital. FFO is calculated in accordance with our interpretation of standards established by NAREIT, which may not be comparable to FFO reported by other REITs that interpret the NAREIT definition differently.





26




RESULTS OF OPERATIONS

We report operating results under two segments: Real Property Operations and Home Sales and Rentals. The Real Property Operations segment owns, operates, develops, or has an interest in, a portfolio of MH and RV communities throughout the U.S. and in Canada, and is in the business of acquiring, operating, and expanding MH and RV communities. The Home Sales and Rentals segment offers MH and RV park model sales and leasing services to tenants and prospective tenants of our communities. We evaluate segment operating performance based on NOI and gross profit. Refer to Note 11, “Segment Reporting,” in our accompanying Consolidated Financial Statements for additional information.

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

SUMMARY STATEMENTS OF OPERATIONS

The following table summarizes our consolidated financial results and reconciles net income to NOI for the three months ended March 31, 2018 and 2017 (in thousands):
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Net income attributable to Sun Communities, Inc., common stockholders:
 
$
29,986

 
$
21,104

Other revenues
 
(6,217
)
 
(5,525
)
Home selling expenses
 
3,290

 
3,111

General and administrative
 
19,931

 
17,932

Transaction costs
 

 
2,386

Depreciation and amortization
 
66,437

 
62,766

Extinguishment of debt
 
196

 
466

Interest expense
 
31,757

 
32,106

Catastrophic weather related charges, net
 
(2,213
)
 
87

Other (expense) / income, net
 
2,617

 
(839
)
Current tax expense
 
174

 
178

Deferred tax benefit
 
(347
)
 
(300
)
Preferred return to preferred OP units
 
1,080

 
1,174

Amounts attributable to noncontrolling interests
 
2,094

 
1,088

Preferred stock distributions
 
441

 
2,179

NOI / Gross profit
 
$
149,226


$
137,913