UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For the fiscal year ended December 31, 2007
OR
|
|
2008
Commission File No.file number 1-12616
SUN COMMUNITIES, INC.
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)Charter)
|
| 38-2730780 |
(State of Incorporation) | (I.R.S. Employer | |
27777 Franklin Rd. | ||
Suite 200 | ||
Southfield, Michigan | 48034 | |
(Address of Principal Executive Offices) | (Zip Code) |
27777 Franklin Road
Suite 200
Southfield, Michigan 48034
(248) 208-2500 |
(Address of principal executive offices andRegistrant’s telephone number)number, including area code)
Common Stock, Par Value $0.01 per Share | New York Stock Exchange | |
Securities Registered Pursuant to Section 12(b) of the |
| Name of each exchange on which
|
Securities Registered Pursuant to Section 12(g) of the Act: None |
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes[ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes[ ] | No [ X ] |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes[ ] | No [ X ] |
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
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).
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes[ ] | No [ X ] |
As of June 30, 2007,2008, the aggregate market value of the Registrant’s stock held by non-affiliates was approximately $482,500,000$299,178,000 (computed by reference to the closing sales price of the Registrant’s common stock as of June 30, 2007)2008). For this computation, the Registrant has excluded the market value of all shares of common stock reported as beneficially owned by executive officers and directors of the Registrant; such exclusion shall not be deemed to constitute an admission that any such person is an affiliate of the Registrant.
AsNumber of shares of Common Stock, $0.01 par value per share, outstanding as of March 1, 2008, there were 18,355,930 shares of the Registrant’s common stock issued and outstanding.2, 2009: 18,509,130
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant’s definitive Proxy Statement to be filed for its 20082009 Annual Meeting of Shareholders or filed as an amendment to the Form 10-K are incorporated by reference into Part III of this Report.
1
As used in this report, “Company”, “Us”, “We”, “Our” and similar terms means Sun Communities, Inc., a Maryland corporation, and one or more of its subsidiaries (including the Operating Partnership (as defined below)).
Safe Harbor StatementTable of Contents
This Form 10-K contains various “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements will be subject to the safe harbors created thereby. For this purpose, any statements contained in this filing that relate to prospective events or developments are deemed to be forward-looking statements. Words such as “believes,” “forecasts,” “anticipates,” “intends,” “plans,” “expects,” “may,” “will,” “could,” “should,” “estimates,” approximate,” “guidance” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect the Company’s current views with respect to future events and financial performance, but involve known and unknown risks and uncertainties, both general and specific to the matters discussed in this filing. These risks and uncertainties may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward looking statements. Such risks and uncertainties include the national, regional and local economic climates, the ability to maintain rental rates and occupancy levels, competitive market forces, changes in market rates of interest, the ability of manufactured home buyers to obtain financing, the level of repossessions by manufactured home lenders and those risks and uncertainties referenced under the headings entitled “Risk Factors” contained in this Form 10-K and the Company’s filings with the Securities and Exchange Commission. The forward-looking statements contained in this Form 10-K speak only as of the date hereof and the Company expressly disclaims any obligation to provide public updates, revisions or amendments to any forward-looking statements made herein to reflect changes in the Company’s expectations of future events.
Item | Description | Page | ||
Part I. | ||||
3 | ||||
7 | ||||
16 | ||||
16 | ||||
22 | ||||
22 | ||||
Part II. | ||||
23 | ||||
25 | ||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26 | |||
43 | ||||
43 | ||||
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 43 | |||
44 | ||||
44 | ||||
Part III. | ||||
Item 10. | Directors and Executive Officers of the Registrant | 45 | ||
Item 11. | Executive Compensation | 45 | ||
Item 12. | Security Ownership of Certain Beneficial Owners and Management | 45 | ||
Item 13. | Certain Relationships and Related Transactions | 45 | ||
Item 14. | Principal Accountant Fees and Services | 45 | ||
Part IV. | ||||
47 |
PART I
GeneralGENERAL
Sun Communities, Inc., a Maryland corporation, together with the Sun Communities Operating Limited Partnership, a Michigan limited partnership (the “Operating Partnership”) and other consolidated subsidiaries (the “Subsidiaries”) are referred to herein as the “Company”, “us”, “we”, and “our”. We are a self-administered and self-managed real estate investment trust or REIT. (“REIT”).
We own, operate, and develop manufactured housing communities concentrated in the midwestern, southern, and southeastern United States. We are a fully integrated real estate company which, together with our affiliates and predecessors, have been in the business of acquiring, operating, and expanding manufactured housing communities since 1975. As of December 31, 2007,2008, we owned and operated a portfolio of 136 properties located in eighteen18 states (the “Properties” or “Property”), including 124 manufactured housing communities, four4 recreational vehicle communities, and eight8 properties containing both manufactured housing and recreational vehicle sites. As of December 31, 2007,2008, the Properties contained an aggregate of 47,60747,613 developed sites comprised of 42,26642,299 developed manufactured home sites, and 5,3413,107 permanent recreational vehicle sites, 2,207 seasonal recreational vehicle sites, and an additional 6,5886,081 manufactured home sites suitable for development. In orderWe lease individual parcels of land (“sites”) with utility access for placement of manufactured homes (“MHs”) and recreational vehicles (“RVs”) to enhance property performanceour customers. The Properties are designed to offer affordable housing to individuals and cash flow, the Company,families, while also providing certain amenities.
We are engaged through a taxable subsidiary, Sun Home Services, Inc., a Michigan corporation (“SHS”), actively markets, sellsin the marketing, selling, and leasesleasing of new and pre-owned manufactured homes for placementto current and future residents in our communities. The operations of SHS support and enhance the Properties.Company’s occupancy levels, property performance, and cash flows.
Our executive and principal property management office is located at 27777 Franklin Road, Suite 200, Southfield, Michigan 48034 and our telephone number is (248) 208-2500. We have regional property management offices located in Austin, Texas; Dayton, Ohio; Grand Rapids, Michigan; Elkhart, Indiana; and Orlando, Florida, and we employed an aggregate of 646644 people as of December 31, 2007.2008.
Our website address iswww.suncommunities.comand we make available, free of charge, on or through our website all of our periodic reports, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as soon as reasonably practicable after we file such reports with the Securities and Exchange Commission.
Recent DevelopmentsRECENT DEVELOPMENTS
Change in Management
|
As announced on February 6, 2008, the Company appointed Karen J. Dearing, who has served as the Company’s Corporate Controller since 2002, as the Company’s Chief Financial Officer, and John B. McLaren, previously Senior Vice President of Home Sales and Leasing, as Chief Operating Officer. Ms. Dearing and Mr. McLaren succeed Jeffrey P. Jorissen, former Chief Financial Officer, and Brian W. Fannon, former Chief Operating Officer. Mr. Jorissen remains with the Company as Director of Corporate Development. Mr. Fannon’s retirement from the Company was effective as of July 31, 2008.
Investment in Affiliate
In October 2003, the Company purchased 5,000,000 shares of common stock of Origen Financial, Inc. (“Origen”). The Company owns approximately 19% of Origen as of December 31, 2008, and its investment is accounted for using the equity method of accounting.
Origen was a publicly traded real estate investment trust that originated and serviced manufactured home loans. In March 2008, Origen announced that conditions in the credit markets had adversely impacted Origen’s business and financial condition. In response, Origen suspended loan originations and took steps to right-size its work force. Following this announcement, Origen executed its asset disposition and management plan and sold $176 million of unsecuritized loans, and its servicing and origination platforms. In December 2008, Origen voluntarily delisted its common stock from the NASDAQ Global Market and deregistered its common stock under the Securities and Exchange Act of 1934. Currently, Origen is actively managing its residual interests in securitized loans, whole loans, and bond holdings which provide continuing cash flows for the organization.
RECENT DEVELOPMENTS, CONTINUED
The Company recorded a total loss from affiliate of $16.5 million for the year ended December 31, 2008. This includes the Company’s estimate of its portion of the anticipated loss from Origen of $6.9 million, and an other than temporary impairment loss of $9.6 million.
Debt
The Company completed a $27.0 million financing with Bank of America (formally LaSalle Bank Midwest) in June 2008. The loan has a three year term, with a two year extension at the Company’s option. The loan is secured by four properties. The terms of the loan require interest only payments for the first year, with the remainder of the term being amortized based on a 30 year table. The interest rate is 205 basis points over LIBOR, or Prime plus 25 basis points (3.5% at December 31, 2008). Prime means for any month, the prevailing “prime rate” as quoted in the Wall Street Journal on last day of such calendar month. The proceeds from the financing were used to repay an existing mortgage note of $4.3 million with the remainder used to pay down the Company’s lines of credit.
The Company completed various transactions involving its installment notes secured by manufactured homes during 2008. The Company received $27.5 million of cash proceeds in exchange for relinquishing its right, title and interest in the installment notes. The Company is subject to certain recourse provisions requiring the Company to purchase the underlying homes collateralizing such notes in the event of a note default and subsequent repossession of the home. The Company accounted for this transaction as a transfer of financial assets. The transferred assets have been classified as collateralized receivables and the cash received from this transaction has been classified as a secured borrowing in the consolidated balance sheet. Additional information is included in Note 3 of the Company’s Notes to Consolidated Financial Statements included herein.
Investment in Property
Rental property is recorded at cost, less accumulated depreciation. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews the carrying value of long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate a possible impairment. An impairment loss is recognized when a long-lived asset’s carrying value is not recoverable and exceeds estimated fair value. The estimated fair value of long lived assets was calculated based on discounted future cash flows associated with the asset and any potential disposition proceeds for a given asset. Forecasting cash flows requires assumptions about such variables as the estimated holding period, rental rates, occupancy and operating expenses during the holding period, as well as disposition proceeds. Management determined certain impairment reviews were required as of December 31, 2008, as decisions were made to limit development of certain assets. Due to local economic conditions, estimated costs to develop and low estimated return on investment the Company determined to limit development in three development communities. The properties are located in Michigan, Nevada and North Carolina. Each had considerable up front development costs. A fourth property, located in Indiana, was found to be impaired based on its negative cash flows and management's estimate of continued negative cash flows. The Company also made a decision to stop providing cable television service at various communities as the business line could not provide the return on investment to justify the capital investment required to keep up with the technological advances in the offered product. As a result of the impairment analysis, the Company recognized non-cash impairment charges of $13.1million.
STRUCTURE OF THE COMPANY
In 1993, Sun Communities, Inc. contributed its net assets to the Operating Partnership in exchange for the sole general partner interest in the Operating Partnership and the majority of all the Operating Partnership’s initial capital. We substantially conduct our operations through the Operating Partnership. The Operating Partnership is structured as an umbrella partnership REIT, or UPREIT, and owns, either directly or indirectly through Subsidiaries, all of our assets. This UPREIT structure enables us to comply with certain complex requirements under the Federal tax rules and regulations applicable to REITs, and to acquire manufactured housing communities in transactions that defer some or all of the sellers’ tax consequences. The financial results of the Operating Partnership and the Subsidiaries are consolidated in the Company’s consolidated financial statements. The financial results include certain activities that do not necessarily qualify as REIT activities under the Internal Revenue Code of 1986, as amended (the “Code”). The Company has formed taxable REIT subsidiaries, as defined in the Code, to engage in such activities. We use taxable REIT subsidiaries to offer certain services to our residents and engage in activities that would not otherwise be permitted under the REIT rules if provided directly by us or by the Operating Partnership. The taxable REIT subsidiaries include our home sales business, SHS, which provides manufactured home sales, leasing and other services to current and prospective tenants of the Properties.
We do not own all the interests in the Operating Partnership. Interests in the Operating Partnership held by limited partners other than Sun Communities, Inc. are referred to as “OP Units”. The holders of Common OP Units receive distributions in an amount equal to the dividends paid to holders of our common stock. As of December 31, 2008, the Operating Partnership had a total of approximately 20.7 million units outstanding. We held approximately 18.5 million shares, or 89.4% of the interests (not including preferred limited partnership interests) in the Operating Partnership.
THE MANUFACTURED HOUSING COMMUNITY
A manufactured housing community is a residential subdivision designed and improved with sites for the placement of manufactured homes and related improvements and amenities. Manufactured homes are detached, single-family homes which are produced off-site by manufacturers and installed on sites within the community. Manufactured homes are available in a wide array of designs, providing owners with a level of customization generally unavailable in other forms of multifamily housing.
Modern manufactured housing communities, such as the Properties, contain improvements similar to other garden-style residential developments, including centralized entrances, paved streets, curbs and gutters, and parkways. In addition, these communities also often provide a number of amenities, such as a clubhouse, a swimming pool, shuffleboard courts, tennis courts, and laundry facilities.
The owner of each home on our Properties leases the site on which the home is located. We own the underlying land, utility connections, streets, lighting, driveways, common area amenities and other capital improvements and are responsible for enforcement of community guidelines and maintenance. Some of the Properties provide water and sewer service through public or private utilities, while others provide these services to residents from on-site facilities. Each owner within our Properties is responsible for the maintenance of the home and leased site. As a result, capital expenditure needs tend to be less significant relative to multi-family rental apartment complexes.
PROPERTY MANAGEMENT
Our property management strategy emphasizes intensive, hands-on management by dedicated, on-site district and community managers. We believe that this on-site focus enables us to continually monitor and address tenant concerns, the performance of competitive properties and local market conditions. Of the 644 Company employees, approximately 535 are located on-site as property managers, support staff, or maintenance personnel.
Throughout most of 2008, our community managers were overseen by John B. McLaren, Chief Operating Officer, who has 13 years of manufactured housing and related financing experience, 3 Senior Vice Presidents of Operations and 12 Regional Vice Presidents. In addition, the Regional Vice Presidents are responsible for semi-annual market surveys of competitive communities, interaction with local manufactured home dealers and regular property inspections.
Each district or community manager performs regular inspections in order to continually monitor the Property’s physical condition and provides managers with the opportunity to understand and effectively address tenant concerns. In addition to a district or community manager, each district or property has an on-site maintenance personnel and management support staff. We hold periodic training sessions for all property management personnel to ensure that management policies are implemented effectively and professionally.
HOME SALES AND LEASING
SHS is engaged in the marketing, selling, and leasing of new and pre-owned homes to current and future residents in our communities. Since tenants often purchase a home already on-site within a community, such services enhance occupancy and property performance. Additionally, because many of the homes on the Properties are sold through SHS, better control of home quality in our communities can be maintained than if sales services were conducted solely through third-party brokers. SHS also leases homes to prospective tenants. At December 31, 2008, SHS had 5,517 occupied leased homes in its portfolio. Homes for this rental program are purchased at discounted rates from finance companies that hold repossessed homes within the Company’s communities. New homes are purchased as necessary to supplement these repossessed home purchases. Leases associated with the rental program are, in general, one year leases. This program requires intensive management of costs associated with repair and refurbishment of these homes as the tenants vacate and the homes are re-leased, similar to apartment rentals. The Company has added repair and service supervisors in areas with high concentrations of rental homes to aggressively pursue cost containment programs. The program is a strategic response to capture the value inherent in the purchase of substantially discounted repossessed homes in the Company’s communities. Applications to rent homes in our Properties number over 14,000 per year, providing a significant “resident boarding” system allowing us to market purchasing a home to the best applicants and to rent to the remainder of approved applicants. Through the rental program we are able to demonstrate our product and lifestyle to the renters, while monitoring their payment history and converting qualified renters to owners.
REGULATIONS AND INSURANCE
General
Manufactured housing community properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities such as swimming pools, clubhouses and other common areas. We believe that each Property has the necessary operating permits and approvals.
Insurance
Our management believes that the Properties are covered by adequate fire, flood, property and business interruption insurance provided by reputable companies with commercially reasonable deductibles and limits. We maintain a blanket policy that covers all of our Properties. We have obtained title insurance insuring fee title to the Properties in an aggregate amount which we believe to be adequate. Claims made to our insurance carriers that are determined to be recoverable are classified in other receivables as incurred. Insurance proceeds received in excess of the net book value of damaged or impaired capital assets are recorded in income in the period received.
SITE LEASES OR USAGE RIGHTS
The typical lease we enter into with a tenant for the rental of a manufactured home site is month-to-month or year-to-year, renewable upon the consent of both parties, or, in some instances, as provided by statute. In some cases (mainly in Florida), leases are for one-year terms, with up to ten renewal options exercisable by the tenant, with rent adjusted for increases in the consumer price index. Generally, market rate adjustments are made on an annual basis. These leases are cancelable for non-payment of rent, violation of community rules and regulations or other specified defaults. During the past five years, on average 3.1 percent of the homes in our communities have been removed by their owners and 7.3 percent of the homes have been sold by their owners to a new owner who then assumes rental obligations as a community resident. The cost to move a home is approximately $4,000 to $10,000. The above experience can be summarized as follows: the average resident remains in our communities for approximately fourteen years, while the average home, which gives rise to the rental stream, remains in our communities for approximately thirty two years.
At Properties zoned for RV use, our customers have short-term (“seasonal”) usage rights or long-term (“permanent”) usage rights. The seasonal RV customers typically prepay for their stay or leave deposits to reserve a site for the following year. Many of these RV customers do not live full time on the Property.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains various “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements will be subject to the safe harbors created thereby. For this purpose, any statements contained in this filing that relate to prospective events or developments are deemed to be forward-looking statements. Words such as “believes,” “forecasts,” “anticipates,” “intends,” “plans,” “expects,” “may”, “will” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect the Company’s current views with respect to future events and financial performance, but involve known and unknown risks and uncertainties, both general and specific to the matters discussed in this filing. These risks and uncertainties may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward looking statements. Such risks and uncertainties include the national, regional and local economic climates, the ability to maintain rental rates and occupancy levels, competitive market forces, changes in market rates of interest, the ability of manufactured home buyers to obtain financing, the level of repossessions by manufactured home lenders and those risks and uncertainties referenced under the headings entitled “Risk Factors” contained in this Form 10-K and the Company’s filings with the Securities and Exchange Commission. The forward-looking statements contained in this Form 10-K speak only as of the date hereof and the Company expressly disclaims any obligation to provide public updates, revisions or amendments to any forward-looking statements made herein to reflect changes in the Company’s expectations of future events.
|
|
Our prospects are subject to certain uncertainties and risks. Our future results could differ materially from current results, and our actual results could differ materially from those projected in forward-looking statements as a result of certain risk factors. These risk factors include, but are not limited to, those set forth below, other one-time events, and important factors disclosed previously and from time to time in other Company filings with the Securities and Exchange Commission. This report contains certain forward-looking statements.
REAL ESTATE RISKS
General economic conditions and the concentration of our properties in Michigan, Florida, Indiana, and Texas may affect our ability to generate sufficient revenue.
The market and economic conditions in our current markets generally, and specifically in metropolitan areas of our current markets, may significantly affect manufactured home occupancy or rental rates. Occupancy and rental rates, in turn, may significantly affect our revenues, and if our communities do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay or refinance our debt obligations could be adversely affected. We derived significant amounts of rental income for the period ended December 31, 2008 from properties located in Michigan, Florida, Indiana, and Texas. As of December 31, 2008, 47 of our 136 Properties, or approximately 30% of developed sites, are located in Michigan; 19 Properties, or approximately 21% of developed sites, are located in Florida; 18 Properties, or approximately 14% of developed sites, are located in Indiana; and 17 Properties, or approximately 11% of developed site are located in Texas. As a result of the geographic concentration of our Properties in Michigan, Florida, Indiana, and Texas, we are exposed to the risks of downturns in the local economy or other local real estate market conditions which could adversely affect occupancy rates, rental rates and property values of properties in these markets.
The following factors, among others, may adversely affect the revenues generated by our communities:
the national and local economic climate which may be adversely impacted by, among other factors, plant closings and industry slowdowns;
local real estate market conditions such as the oversupply of manufactured housing sites or a reduction in demand for manufactured housing sites in an area;
the number of repossessed homes in a particular market;
the lack of an established dealer network;
the rental market which may limit the extent to which rents may be increased to meet increased expenses without decreasing occupancy rates;
the perceptions by prospective tenants of the safety, convenience and attractiveness of the Properties and the neighborhoods where they are located;
zoning or other regulatory restrictions;
competition from other available manufactured housing sites and alternative forms of housing (such as apartment buildings and site-built single-family homes);
our ability to provide adequate management, maintenance and insurance;
increased operating costs, including insurance premiums, real estate taxes and utilities; or
the enactment of rent control laws or laws taxing the owners of manufactured homes.
REAL ESTATE RISKS, CONTINUED
Our income would also be adversely affected if tenants were unable to pay rent or if sites were unable to be rented on favorable terms. If we were unable to promptly relet or renew the leases for a significant number of the sites, or if the rental rates upon such renewal or reletting were significantly lower than expected rates, then our business and results of operations could be adversely affected. In addition, certain expenditures associated with each Property (such as real estate taxes and maintenance costs) generally are not reduced when circumstances cause a reduction in income from the Property. Furthermore, real estate investments are relatively illiquid and, therefore, will tend to limit our ability to vary our portfolio promptly in response to changes in economic or other conditions.
Competition affects occupancy levels and rents which could adversely affect our revenues.
All of our Properties are located in developed areas that include other manufactured housing community properties. The number of competitive manufactured housing community properties in a particular area could have a material adverse effect on our ability to lease sites and increase rents charged at our Properties or at any newly acquired properties. We may be competing with others with greater resources and whose officers and directors have more experience than our officers and directors. In addition, other forms of multi-family residential properties, such as private and federally funded or assisted multi-family housing projects and single-family housing, provide housing alternatives to potential tenants of manufactured housing communities.
Our ability to sell or lease manufactured homes may be affected by various factors, which may in turn adversely affect our profitability.
SHS is engaged in the marketing, selling, and leasing of new and pre-owned homes to current and future residents in our communities. The market for the sale and lease of manufactured homes may be adversely affected by the following factors:
downturns in economic conditions which adversely impact the housing market;
an oversupply of, or a reduced demand for, manufactured homes;
the difficulty facing potential purchasers in obtaining affordable financing as a result of heightened lending criteria; and
an increase or decrease in the rate of manufactured home repossessions which provide aggressively priced competition to new manufactured home sales.
Any of the above listed factors could adversely impact our rate of manufactured home sales and leases, which would result in a decrease in profitability.
Increases in taxes and regulatory compliance costs may reduce our revenue.
Costs resulting from changes in real estate laws, income taxes, service or other taxes, generally are not passed through to tenants under leases and may adversely affect our funds from operations and our ability to pay or refinance our debt. Similarly, changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures, which would adversely affect our business and results of operations.
REAL ESTATE RISKS, CONTINUED
We may not be able to integrate or finance our development activities.
From time to time, we engage in the construction and development of new communities, and may continue to engage in the development and construction business in the future. Our development and construction business may be exposed to the following risks which are in addition to those risks associated with the ownership and operation of established manufactured housing communities:
we may not be able to obtain financing with favorable terms for community development which may make us unable to proceed with the development;
we may be unable to obtain, or face delays in obtaining, necessary zoning, building and other governmental permits and authorizations, which could result in increased costs and delays, and even require us to abandon development of the community entirely if we are unable to obtain such permits or authorizations;
we may abandon development opportunities that we have already begun to explore and as a result we may not recover expenses already incurred in connection with exploring such development opportunities;
we may be unable to complete construction and lease-up of a community on schedule resulting in increased debt service expense and construction costs;
we may incur construction and development costs for a community which exceed our original estimates due to increased materials, labor or other costs, which could make completion of the community uneconomical and we may not be able to increase rents to compensate for the increase in development costs which may impact our profitability;
we may be unable to secure long-term financing on completion of development resulting in increased debt service and lower profitability; and
occupancy rates and rents at a newly developed community may fluctuate depending on several factors, including market and economic conditions, which may result in the community not being profitable.
If any of the above occurred, our business and results of operations could be adversely affected.
We may not be able to integrate or finance our acquisitions and our acquisitions may not perform as expected.
We acquire and intend to continue to acquire manufactured housing communities on a select basis. Our acquisition activities and their success are subject to the following risks:
we may be unable to acquire a desired property because of competition from other well capitalized real estate investors, including both publicly traded real estate investment trusts and institutional investment funds;
even if we enter into an acquisition agreement for a property, it is usually subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction, which may not be satisfied;
even if we are able to acquire a desired property, competition from other real estate investors may significantly increase the purchase price;
we may be unable to finance acquisitions on favorable terms;
acquired properties may fail to perform as expected;
acquired properties may be located in new markets where we face risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with local governmental and permitting procedures; and
we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations.
If any of the above occurred, our business and results of operations could be adversely affected.
REAL ESTATE RISKS, CONTINUED
In addition, we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were to be asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle it, which could adversely affect our cash flow.
Rent control legislation may harm our ability to increase rents.
State and local rent control laws in certain jurisdictions may limit our ability to increase rents and to recover increases in operating expenses and the costs of capital improvements. Enactment of such laws has been considered from time to time in other jurisdictions. Certain Properties are located, and we may purchase additional properties, in markets that are either subject to rent control or in which rent-limiting legislation exists or may be enacted.
We may be subject to environmental liability.
Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous substances at, on, under or in such property. Such laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner’s ability to sell or rent such property, to borrow using such property as collateral or to develop such property. Persons who arrange for the disposal or treatment of hazardous substances also may be liable for the costs of removal or remediation of such substances at a disposal or treatment facility owned or operated by another person. In addition, certain environmental laws impose liability for the management and disposal of asbestos-containing materials and for the release of such materials into the air. These laws may provide for third parties to seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials. In connection with the ownership, operation, management, and development of real properties, we may be considered an owner or operator of such properties and, therefore, are potentially liable for removal or remediation costs, and also may be liable for governmental fines and injuries to persons and property. When we arrange for the treatment or disposal of hazardous substances at landfills or other facilities owned by other persons, we may be liable for the removal or remediation costs at such facilities.
All of the Properties have been subject to a Phase I or similar environmental audit (which involves general inspections without soil sampling or ground water analysis) completed by independent environmental consultants. These environmental audits have not revealed any significant environmental liability that would have a material adverse effect on our business. These audits cannot reflect conditions arising after the studies were completed, and no assurances can be given that existing environmental studies reveal all environmental liabilities, that any prior owner or operator of a property or neighboring owner or operator did not create any material environmental condition not known to us, or that a material environmental condition does not otherwise exist as to any one or more Properties.
Losses in excess of our insurance coverage or uninsured losses could adversely affect our cash flow.
We maintain comprehensive liability, fire, flood (where appropriate), extended coverage, and rental loss insurance on the Properties with policy specifications, limits, and deductibles which are customarily carried for similar properties. As a result of market conditions in the insurance industry, we carry a $250,000 deductible on our liability insurance. Certain types of losses, however, may be either uninsurable or not economically insurable, such as losses due to earthquakes, riots, or acts of war. In the event an uninsured loss occurs, we could lose both our investment in and anticipated profits and cash flow from the affected property. Any loss would adversely affect our ability to repay our debt.
FINANCING AND INVESTMENT RISKS
Our significant amount of debt could limit our operational flexibility or otherwise adversely affect our financial condition.
We have a significant amount of debt. As of December 31, 2008, we had approximately $1.2 billion of total debt outstanding, consisting of approximately $1.1 billion in debt that is collateralized by mortgage liens on 105 of the Properties (the “Mortgage Debt”) and secured by collateralized receivables, $4.6 million is collateralized by liens on manufactured homes, and $135.2 million in unsecured debt. If we fail to meet our obligations under the Mortgage Debt, the lender would be entitled to foreclose on all or some of the Properties securing such debt which could have a material adverse effect on us and our ability to make expected distributions, and could threaten our continued viability.
We are subject to the risks normally associated with debt financing, including the following risks:
our cash flow may be insufficient to meet required payments of principal and interest, or require us to dedicate a substantial portion of our cash flow to pay our debt and the interest associated with our debt rather than to other areas of our business;
our existing indebtedness may limit our operating flexibility due to financial and other restrictive covenants, including restrictions on incurring additional debt;
it may be more difficult for us to obtain additional financing in the future for our operations, working capital requirements, capital expenditures, debt service or other general requirements;
we may be more vulnerable in the event of adverse economic and industry conditions or a downturn in our business;
we may be placed at a competitive disadvantage compared to our competitors that have less debt; and
we may not be able to refinance at all or on favorable terms, as our debt matures.
If any of the above risks occurred, our financial condition and results of operations could be materially adversely affected.
We may be able to incur substantially more debt, which would increase the risks associated with our substantial leverage.
Despite our current indebtedness levels, we may still be able to incur substantially more debt in the future. If new debt is added to our current debt levels, an even greater portion of our cash flow will be needed to satisfy our debt service obligations. As a result, the related risks that we now face could intensify and increase the risk of a default on our indebtedness.
Our equity investment in Origen Financial, Inc. may subject us to certain risks.
In October 2003, the Company purchased 5,000,000 shares of common stock of Origen Financial, Inc. (“Origen”). The Company owns approximately 19% of Origen as of December 31, 2008, and its investment is accounted for using the equity method of accounting.
Origen was a publicly traded real estate investment trust that originated and serviced manufactured home loans. In March 2008, Origen announced that conditions in the credit markets had adversely impacted Origen’s business and financial condition. In response, Origen suspended loan originations and took steps to right-size its work force. Following this announcement, Origen executed an asset disposition and management plan and sold $176 million of unsecuritized loans, and its servicing and origination platforms. In December 2008, Origen voluntarily delisted its common stock from the NASDAQ Global Market and deregistered its common stock under the Securities and Exchange Act of 1934. Currently, Origen is actively managing its residual interests in securitized loans, whole loans, and bond holdings which provide continuing cash flows for the organization.
If Origen’s business and financial condition do not perform as expected, our investment in Origen may result in additional other than temporary impairment charges and financial condition and results of operations could be materially adversely affected.
Modern manufactured housing communities, such as the Properties, contain improvements similar to other garden-style residential developments, including centralized entrances, paved streets, curbs and gutters, and parkways. In addition, these communities also often provide a number of amenities, such as a clubhouse, a swimming pool, shuffleboard courts, tennis courts, laundry facilities and cable television service.
The owner of each home on our Properties leases the site on which the home is located. We own the underlying land, utility connections, streets, lighting, driveways, common area amenities and other capital improvements and are responsible for enforcement of community guidelines and maintenance. Some of the Properties provide water and sewer service through public or private utilities, while others provide these services to residents from on-site facilities. Each owner within our Properties is responsible for the maintenance of the home and leased site. As a result, capital expenditure needs tend to be less significant, relative to multi-family rental apartment complexes.
Property Management
Our property management strategy emphasizes intensive, hands-on management by dedicated, on-site district and community managers. We believe that this on-site focus enables us to continually monitor and address tenant concerns, the performance of competitive properties and local market conditions. Of the 646 Company employees, approximately 537 are located on-site as property managers, support staff, or maintenance personnel.
Throughout 2007, our community managers were overseen by Brian W. Fannon, Chief Operating Officer, who has 38 years of property management experience, three Senior Vice Presidents of Operations and thirteen Regional Vice Presidents. In addition, the Regional Vice Presidents are responsible for semi-annual market surveys of competitive communities, interaction with local manufactured home dealers and regular property inspections. In February 2008, Mr. Fannon was named President of the Company and was succeeded as Chief Operating Officer by John B. McLaren.
Each district or community manager performs regular inspections in order to continually monitor the Property’s physical condition and provides managers with the opportunity to understand and effectively address tenant concerns. In addition to a district or community manager, each district or property has an on-site maintenance personnel and management support staff. We hold periodic training sessions for all property management personnel to ensure that management policies are implemented effectively and professionally.
5
Home Sales and Leasing
SHS is in the manufactured home market offering manufactured home sales and leasing services to tenants and prospective tenants of our communities. Since tenants often purchase a home already on-site within a community, such services enhance occupancy and property performance. Additionally, because many of the homes on the Properties are sold through SHS, better control of home quality in our communities can be maintained than if sales services were conducted solely through third-party brokers. In recent years SHS also began leasing homes to prospective tenants. At December 31, 2007, SHS had 5,328 occupied leased homes in its portfolio. Homes for this rental program are purchased at discounted rates from finance companies that hold repossessed homes within the Company’s communities. New homes are purchased as necessary to supplement these repossessed home purchases. Leases associated with the rental program are, in general, one year leases. This program requires intensive management of costs associated with repair and refurbishment of these homes as the tenants vacate and the homes are re-leased, similar to apartment rentals. The Company has added Repair and Service Supervisors in areas with high concentrations of rental homes to aggressively pursue cost containment programs. The program is a strategic response to capture the value inherent in the purchase of substantially discounted repossessed homes in the Company’s communities. The growth of the leasing program has slowed as new repossessions appear to have peaked. Additional reductions in the leasing program may occur as rental homes are sold.
Regulations and Insurance
General.Manufactured housing community properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities such as swimming pools, clubhouses and other common areas. We believe that each Property has the necessary operating permits and approvals.
Insurance.Our management believes that the Properties are covered by adequate fire, flood, property and business interruption insurance provided by reputable companies with commercially reasonable deductibles and limits. We maintain a blanket policy that covers all of our Properties. We have obtained title insurance insuring fee title to the Properties in an aggregate amount which we believe to be adequate.
6
Corporate Governance
We have implemented the following corporate governance initiatives to address certain legal requirements promulgated under the Sarbanes-Oxley Act of 2002, as well as the New York Stock Exchange corporate governance listing standards:
Our Board of Directors has determined that each member of the Audit Committee (Clunet R. Lewis, Robert H. Naftaly and Stephanie W. Bergeron), qualify as “audit committee financial experts” as such term is defined under Item 401 of Regulation S-K. Mr. Lewis, Mr. Naftaly and Ms. Bergeron are “independent” as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
Our Audit Committee adopted our Audit and Non-Audit Services Pre-Approval Policy, which sets forth the procedures and the conditions pursuant to which permissible services to be performed by our independent public accountants may be pre-approved.
Our Board of Directors adopted a Financial Code of Ethics for Senior Financial Officers, which governs the conduct of our senior financial officers. A copy of this code is available on our website atwww.suncommunities.comunder the heading “Investor Relations”, “Officers and Directors” and subheading “Governance Documents” and is also available in print to any stockholder upon written request addressed to Investor Relations, Sun Communities, Inc., 27777 Franklin Road, Suite 200, Southfield, Michigan 48034.
Our Board of Directors established and adopted charters for each of its Audit, Compensation and Nominating and Corporate Governance Committees. Each committee is comprised of three (3) independent directors. A copy of each of these charters is available on our website atwww.suncommunities.comunder the heading “Investor Relations”, “Officers and Directors” and subheading “Governance Documents” and is also available in print to any stockholder upon written request addressed to Investor Relations, Sun Communities, Inc., 27777 Franklin Road, Suite 200, Southfield, Michigan 48034.
Our Board of Directors adopted a Code of Business Conduct and Ethics, which governs business decisions made and actions taken by our directors, officers and employees. A copy of this code is available on our website atwww.suncommunities.comunder the heading “Investor Relations”, “Officers and Directors” and subheading “Governance Documents” and is also available in print to any stockholder upon written request addressed to Investor Relations, Sun Communities, Inc., 27777 Franklin Road, Suite 200, Southfield, Michigan 48034.
Our Board of Directors adopted Corporate Governance Guidelines, a copy of which is available on our website atwww.suncommunities.comunder the heading “Investor Relations”, “Officers and Directors” and subheading “Governance Documents” and is also available in print to any stockholder upon written request addressed to Investor Relations, Sun Communities, Inc., 27777 Franklin Road, Suite 200, Southfield, Michigan 48034.
7
|
|
Risk Factors
Our prospects are subject to certain uncertainties and risks. Our future results could differ materially from current results, and our actual results could differ materially from those projected in forward-looking statements as a result of certain risk factors. These risk factors include, but are not limited to, those set forth below, other one-time events, and important factors disclosed previously and from time to time in other Company filings with the Securities and Exchange Commission. This report contains certain forward-looking statements.
Real Estate Risks
General economic conditions and the concentration of our properties in Michigan, Florida, and Indiana may affect our ability to generate sufficient revenue.
The market and economic conditions in our current markets generally, and specifically in metropolitan areas of our current markets, may significantly affect manufactured home occupancy or rental rates. Occupancy and rental rates, in turn, may significantly affect our revenues, and if our communities do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay or refinance our debt obligations could be adversely affected. We derived significant amounts of rental income for the period ended December 31, 2007 from properties located in Michigan, Florida, and Indiana. As of December 31, 2007, 47 of our 136 Properties, or approximately 30% of developed sites, are located in Michigan, 19 Properties, or approximately 21% of developed sites, are located in Florida, and 18 Properties, or approximately 14% of developed sites, are located in Indiana. As a result of the geographic concentration of our Properties in Michigan, Florida, and Indiana, we are exposed to the risks of downturns in the local economy or other local real estate market conditions which could adversely affect occupancy rates, rental rates and property values of properties in these markets.
The following factors, among others, may adversely affect the revenues generated by our communities:
the national and local economic climate which may be adversely impacted by, among other factors, plant closings and industry slowdowns;
local real estate market conditions such as the oversupply of manufactured housing sites or a reduction in demand for manufactured housing sites in an area;
the number of repossessed homes in a particular market;
the lack of an established dealer network;
the rental market which may limit the extent to which rents may be increased to meet increased expenses without decreasing occupancy rates;
the perceptions by prospective tenants of the safety, convenience and attractiveness of the Properties and the neighborhoods where they are located;
8
zoning or other regulatory restrictions;
competition from other available manufactured housing sites and alternative forms of housing (such as apartment buildings and site-built single-family homes);
our ability to provide adequate management, maintenance and insurance;
increased operating costs, including insurance premiums, real estate taxes and utilities; or
the enactment of rent control laws or laws taxing the owners of manufactured homes.
Our income would also be adversely affected if tenants were unable to pay rent or if sites were unable to be rented on favorable terms. If we were unable to promptly relet or renew the leases for a significant number of the sites, or if the rental rates upon such renewal or reletting were significantly lower than expected rates, then our business and results of operations could be adversely affected. In addition, certain expenditures associated with each equity investment (such as real estate taxes and maintenance costs) generally are not reduced when circumstances cause a reduction in income from the investment. Furthermore, real estate investments are relatively illiquid and, therefore, will tend to limit our ability to vary our portfolio promptly in response to changes in economic or other conditions.
Competition affects occupancy levels and rents which could adversely affect our revenues.
All of our Properties are located in developed areas that include other manufactured housing community properties. The number of competitive manufactured housing community properties in a particular area could have a material adverse effect on our ability to lease sites and increase rents charged at our Properties or at any newly acquired properties. We may be competing with others with greater resources and whose officers and directors have more experience than our officers and directors. In addition, other forms of multi-family residential properties, such as private and federally funded or assisted multi-family housing projects and single-family housing, provide housing alternatives to potential tenants of manufactured housing communities.
Our ability to sell or lease manufactured homes may be affected by various factors, which may in turn adversely affect our profitability.
SHS is in the manufactured home market offering manufactured home sales and leasing services to tenants and prospective tenants of our communities. The market for the sale and lease of manufactured homes may be adversely affected by the following factors:
downturns in economic conditions which adversely impact the housing market;
an oversupply of, or a reduced demand for, manufactured homes;
the difficulty facing potential purchasers in obtaining affordable financing as a result of heightened lending criteria; and
an increase or decrease in the rate of manufactured home repossessions which provide aggressively priced competition to new manufactured home sales.
9
Any of the above listed factors could adversely impact our rate of manufactured home sales and leases, which would result in a decrease in profitability.
Increases in taxes and regulatory compliance costs may reduce our revenue.
Costs resulting from changes in real estate laws, income taxes, service or other taxes, generally are not passed through to tenants under leases and may adversely affect our funds from operations and our ability to pay or refinance our debt. Similarly, changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures, which would adversely affect our business and results of operations.
We may not be able to integrate or finance our development activities.
From time to time, we engage in the construction and development of new communities, and may continue to engage in the development and construction business in the future. Our development and construction business may be exposed to the following risks which are in addition to those risks associated with the ownership and operation of established manufactured housing communities:
we may not be able to obtain financing with favorable terms for community development which may make us unable to proceed with the development;
we may be unable to obtain, or face delays in obtaining, necessary zoning, building and other governmental permits and authorizations, which could result in increased costs and delays, and even require us to abandon development of the community entirely if we are unable to obtain such permits or authorizations;
we may abandon development opportunities that we have already begun to explore and as a result we may not recover expenses already incurred in connection with exploring such development opportunities;
we may be unable to complete construction and lease-up of a community on schedule resulting in increased debt service expense and construction costs;
we may incur construction and development costs for a community which exceed our original estimates due to increased materials, labor or other costs, which could make completion of the community uneconomical and we may not be able to increase rents to compensate for the increase in development costs which may impact our profitability;
we may be unable to secure long-term financing on completion of development resulting in increased debt service and lower profitability; and
occupancy rates and rents at a newly developed community may fluctuate depending on several factors, including market and economic conditions, which may result in the community not being profitable.
If any of the above occurred, our business and results of operations could be adversely affected.
10
We may not be able to integrate or finance our acquisitions and our acquisitions may not perform as expected.
We acquire and intend to continue to acquire manufactured housing communities on a select basis. Our acquisition activities and their success are subject to the following risks:
we may be unable to acquire a desired property because of competition from other well capitalized real estate investors, including both publicly traded real estate investment trusts and institutional investment funds;
even if we enter into an acquisition agreement for a property, it is usually subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction, which may not be satisfied;
even if we are able to acquire a desired property, competition from other real estate investors may significantly increase the purchase price;
we may be unable to finance acquisitions on favorable terms;
acquired properties may fail to perform as expected;
acquired properties may be located in new markets where we face risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with local governmental and permitting procedures; and
we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations.
If any of the above occurred, our business and results of operations could be adversely affected.
In addition, we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were to be asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle it, which could adversely affect our cash flow.
Rent control legislation may harm our ability to increase rents.
State and local rent control laws in certain jurisdictions may limit our ability to increase rents and to recover increases in operating expenses and the costs of capital improvements. Enactment of such laws has been considered from time to time in other jurisdictions. Certain Properties are located, and we may purchase additional properties, in markets that are either subject to rent control or in which rent-limiting legislation exists or may be enacted.
11
We may be subject to environmental liability.
Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous substances at, on, under or in such property. Such laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner’s ability to sell or rent such property, to borrow using such property as collateral or to develop such property. Persons who arrange for the disposal or treatment of hazardous substances also may be liable for the costs of removal or remediation of such substances at a disposal or treatment facility owned or operated by another person. In addition, certain environmental laws impose liability for the management and disposal of asbestos-containing materials and for the release of such materials into the air. These laws may provide for third parties to seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials. In connection with the ownership, operation, management, and development of real properties, we may be considered an owner or operator of such properties and, therefore, are potentially liable for removal or remediation costs, and also may be liable for governmental fines and injuries to persons and property. When we arrange for the treatment or disposal of hazardous substances at landfills or other facilities owned by other persons, we may be liable for the removal or remediation costs at such facilities.
All of the Properties have been subject to a Phase I or similar environmental audit (which involves general inspections without soil sampling or ground water analysis) completed by independent environmental consultants. These environmental audits have not revealed any significant environmental liability that would have a material adverse effect on our business. These audits cannot reflect conditions arising after the studies were completed, and no assurances can be given that existing environmental studies reveal all environmental liabilities, that any prior owner or operator of a property or neighboring owner or operator did not create any material environmental condition not known to us, or that a material environmental condition does not otherwise exist as to any one or more Properties.
Losses in excess of our insurance coverage or uninsured losses could adversely affect our cash flow.
We maintain comprehensive liability, fire, flood (where appropriate), extended coverage, and rental loss insurance on the Properties with policy specifications, limits, and deductibles which are customarily carried for similar properties. As a result of market conditions in the insurance industry, we carry a $250,000 deductible on our liability insurance. Certain types of losses, however, may be either uninsurable or not economically insurable, such as losses due to earthquakes, riots, or acts of war. In the event an uninsured loss occurs, we could lose both our investment in and anticipated profits and cash flow from the affected property. Any loss would adversely affect our ability to repay our debt.
12
Financing and Investment Risks
Our significant amount of debt could limit our operational flexibility or otherwise adversely affect our financial condition.
We have a significant amount of debt. As of December 31, 2007, we had approximately $1.2 billion of total debt outstanding, consisting of approximately $1.1 billion in debt that is collateralized by mortgage liens on 103 of the Properties (the “Mortgage Debt”), and approximately $135.2 million in unsecured debt. If we fail to meet our obligations under the Mortgage Debt, the lender would be entitled to foreclose on all or some of the Properties securing such debt which could have a material adverse effect on us and our ability to make expected distributions, and could threaten our continued viability.
We are subject to the risks normally associated with debt financing, including the following risks:
our cash flow may be insufficient to meet required payments of principal and interest, or require us to dedicate a substantial portion of our cash flow to pay our debt and the interest associated with our debt rather than to other areas of our business;
our existing indebtedness may limit our operating flexibility due to financial and other restrictive covenants, including restrictions on incurring additional debt;
it may be more difficult for us to obtain additional financing in the future for our operations, working capital requirements, capital expenditures, debt service or other general requirements;
we may be more vulnerable in the event of adverse economic and industry conditions or a downturn in our business;
we may be placed at a competitive disadvantage compared to our competitors that have less debt; and
we may not be able to re-finance at all or on favorable terms, as our debt matures.
If any of the above risks occurred, our financial condition and results of operations could be materially adversely affected.
We may be able to incur substantially more debt which would increase the risks associated with our substantial leverage.
Despite our current indebtedness levels, we may still be able to incur substantially more debt in the future. If new debt is added to our current debt levels, an even greater portion of our cash flow will be needed to satisfy our debt service obligations. As a result, the related risks that we now face could intensify and increase the risk of a default on our indebtedness.
13
Our equity investment in Origen Financial, Inc., may subject us to certain risks.
In October 2003, we purchased 5,000,000 shares of common stock of Origen Financial Inc, (“Origen”), (representing approximately 19% of the issued and outstanding shares of common stock as of December 31, 2007) for $50 million. Origen is a publicly traded real estate investment trust in the business of originating and servicing manufactured home loans. Our equity investment in Origen is subject to all of the risks associated with Origen’s business, including the availability of credit to fund new loans and for the periodic securitization of pools of loans that were previously originated. On March 13, 2008, Origen announced that the deterioration of the credit markets has adversely impacted Origen’s business and financial condition to the extent that it cannot continue to operate in the manner that it has previously conducted itself, which may have a material adverse effect on the value of our investment in Origen.. The Company recorded an impairment to the carrying value in its investment in Origen of $1.9 million and $18.0 million at December 31, 2007 and 2006, respectively. Additional information is included under “Recent Developments-Investment in Affiliate” and in Footnote 1.g. to our consolidated financial statements included herein.
The financial condition and solvency of our borrowers and the market value of our properties may adversely affect our investments in real estate, installment and other loans.
As of December 31, 2007, we had outstanding approximately $30.6 million in installment loans to owners of manufactured homes. These installment loans are collateralized by the manufactured homes. We may invest in additional mortgages and installment loans in the future. By virtue of our investment in the mortgages and the loans, we are subject to the following risks of such investment:
the borrowers may not be able to make debt service payments or pay principal when due;
the value of property securing the mortgages and loans may be less than the amounts owed; and
interest rates payable on the mortgages and loans may be lower than our cost of funds.
If any of the above occurred, our business and results of operations could be adversely affected.
14
Tax Risks
We may suffer adverse tax consequences and be unable to attract capital if we fail to qualify as a REIT.
We believe that since our taxable year ended December 31, 1994, we have been organized and operated, and intend to continue to operate, so as to qualify for taxation as a REIT under the Internal Revenue Code (“Code”). Although we believe that we have been and will continue to be organized and have operated and will continue to operate so as to qualify for taxation as a REIT, we cannot assure you that we have been or will continue to be organized or operated in a manner to so qualify or remain so qualified. Qualification as a REIT involves the satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. In addition, frequent changes occur in the area of REIT taxation, which require the Company continually to monitor its tax status.
If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Moreover, unless entitled to relief under certain statutory provisions, we also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. This treatment would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability to us for the years involved. In addition, distributions to stockholders would no longer be required to be made. Even if we qualify for and maintain our REIT status, we will be subject to certain federal, state and local taxes on our property and certain of our operations.
We intend for the Operating Partnership to qualify as a partnership, but we cannot guarantee that it will qualify.
We believe that the Operating Partnership has been organized as a partnership and will qualify for treatment as such under the Code. However, if the Operating Partnership is deemed to be a “publicly traded partnership,” it will be treated as a corporation instead of a partnership for federal income tax purposes unless at least 90% of its income is qualifying income as defined in the Code. The income requirements applicable to REITs and the definition of “qualifying income” for purposes of this 90% test are similar in most respects. Qualifying income for the 90% test generally includes passive income, such as specified types of real property rents, dividends and interest. We believe that the Operating Partnership would meet this 90% test, but we cannot guarantee that it would. If the Operating Partnership were to be taxed as a corporation, it would incur substantial tax liabilities, we would fail to qualify as a REIT for federal income tax purposes, and our ability to raise additional capital could be significantly impaired.
Our ability to accumulate cash is restricted due to certain REIT distribution requirements.
In order to qualify as a REIT, we must distribute to our stockholders at least 90% of our REIT taxable income (calculated without any deduction for dividends paid and excluding net capital gain) and to avoid federal income taxation, our distributions must not be less than 100% of our REIT taxable income, including capital gains. As a result of the distribution requirements, we do not expect to accumulate significant amounts of cash. Accordingly, these distributions could significantly reduce the cash available to us in subsequent periods to fund our operations and future growth.
15
Business Risks
Some of our directors and officers may have conflicts of interest with respect to certain related party transactions and other business interests.
FINANCING AND INVESTMENT RISKS, CONTINUED The Company recorded losses from our investment in Origen of $16.5 million, $8.0 million, and $16.6 million for the years ended December 31, 2008, 2007, and 2006, respectively. These losses are comprised of: 1) other than temporary charges to the carrying value of the Origen investment; and 2) our equity allocation of the anticipated losses from Origen. The components of the loss associated with our investment in Origen are summarized as follows (in thousands): Years Ended December 31, 2008 2007 2006 Equity income (loss) from Origen affiliate $ (6,851 ) $ (6,099 ) $ 1,417 Other than temporary impairment charges (9,619 ) (1,870 ) (18,000 ) Total loss from Origen affiliate $ (16,470 ) $ (7,969 ) $ (16,583 ) Additional information is included under “Recent Developments-Investment in Affiliate” and in Note 1 of the Company’s Notes to Consolidated Financial Statements included herein. The financial condition and solvency of our borrowers may adversely affect our installment and other loans. As of December 31, 2008, we had outstanding approximately $47.4 million, net of reserves, in installment notes receivable from owners of manufactured homes. These installment notes receivable are collateralized by the manufactured homes. We may invest in additional mortgages and installment notes receivable in the future. By virtue of our investment in the mortgages and the notes receivable, we are subject to the following risks of such investment: the borrowers may not be able to make debt service payments or pay principal when due; the value of property securing the mortgages and installment notes receivable may be less than the amounts owed; and interest rates payable on the mortgages and installment notes receivable may be lower than our cost of funds. If any of the above occurred, our business and results of operations could be adversely affected. TAX RISKS We may suffer adverse tax consequences and be unable to attract capital if we fail to qualify as a REIT. We believe that since our taxable year ended December 31, 1994, we have been organized and operated, and intend to continue to operate, so as to qualify for taxation as a REIT under the Internal Revenue Code (“Code”). Although we believe that we have been and will continue to be organized and have operated and will continue to operate so as to qualify for taxation as a REIT, we cannot assure you that we have been or will continue to be organized or operated in a manner to so qualify or remain so qualified. Qualification as a REIT involves the satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. In addition, frequent changes occur in the area of REIT taxation, which require the Company continually to monitor its tax status. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Moreover, unless entitled to relief under certain statutory provisions, we also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. This treatment would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability to us for the years involved. In addition, distributions to stockholders would no longer be required to be made. Even if we qualify for and maintain our REIT status, we will be subject to certain federal, state and local taxes on our property and certain of our operations. TAX RISKS, CONTINUED We intend for the Operating Partnership to qualify as a partnership, but we cannot guarantee that it will qualify. We believe that the Operating Partnership has been organized as a partnership and will qualify for treatment as such under the Code. However, if the Operating Partnership is deemed to be a “publicly traded partnership,” it will be treated as a corporation instead of a partnership for federal income tax purposes unless at least 90% of its income is qualifying income as defined in the Code. The income requirements applicable to REITs and the definition of “qualifying income” for purposes of this 90% test are similar in most respects. Qualifying income for the 90% test generally includes passive income, such as specified types of real property rents, dividends and interest. We believe that the Operating Partnership would meet this 90% test, but we cannot guarantee that it would. If the Operating Partnership were to be taxed as a corporation, it would incur substantial tax liabilities, we would fail to qualify as a REIT for federal income tax purposes, and our ability to raise additional capital could be significantly impaired. Our ability to accumulate cash may be restricted due to certain REIT distribution requirements. In order to qualify as a REIT, we must distribute to our stockholders at least 90% of our REIT taxable income (calculated without any deduction for dividends paid and excluding net capital gain) and to avoid federal income taxation, our distributions must not be less than 100% of our REIT taxable income, including capital gains. As a result of the distribution requirements, we do not expect to accumulate significant amounts of cash. Accordingly, these distributions could significantly reduce the cash available to us in subsequent periods to fund our operations and future growth. BUSINESS RISKS Some of our directors and officers may have conflicts of interest with respect to certain related party transactions and other business interests. Ownership of Origen. In the 2003 recapitalization of Origen Financial, Inc., (“Origen”), the Company purchased 5,000,000 shares of Origen common stock for $50.0 million and Shiffman Origen LLC (which is owned by the Milton M. Shiffman Spouse’s Marital Trust, Gary A. Shiffman (the Company’s Chief Executive Officer), and members of Mr. Shiffman’s family) purchased 1,025,000 shares of Origen common stock for approximately $10.3 million. Gary A. Shiffman is a member of the board of directors of Origen and Arthur A. Weiss, a director of the Company, is a trustee of the Milton M. Shiffman Spouse’s Marital Trust. Accordingly, in all transactions involving Origen, Mr. Shiffman and/or Mr. Weiss may have a conflict of interest with respect to their respective obligations as an officer and/or director of the Company. The following are the current transactions and agreements involving Origen which may present a conflict of interest for Mr. Shiffman and/or Mr. Weiss: The Company previously had a loan servicing agreement with Origen Servicing, Inc., a wholly-owned subsidiary of Origen, which serviced our portfolio of manufactured home loans. Origen agreed to fund loans that met the Company’s underwriting guidelines and then transfer those loans to the Company pursuant to a Loan Origination, Sale and Purchase Agreement. The Company paid Origen a fee of $550 per loan pursuant to a Loan Origination, Sale and Purchase Agreement which totaled approximately $0.2 million during 2008 and 2007. The Company purchased loans, at par, from Origen which totaled approximately $12.4 million and $13.3 million during 2008 and 2007, respectively. The Company also purchased $0.6 million and $1.2 million of repossessed manufactured homes located within its communities that were owned by Origen during 2008 and 2007, respectively. With the sale of Origen’s servicing platform assets to Green Tree Servicing LLC, we engaged a different entity to continue the servicing of the manufactured home loans. In order to transfer the manufactured home loan servicing contract to a different service provider, we paid Origen a fee of $0.3 million. BUSINESS RISKS, CONTINUED In addition to the transactions with Origen and the LLC described above, Mr. Shiffman and his affiliates and/ or Mr. Weiss have entered into the following transactions with the Company: • Legal CounselDuring 2008, Jaffe, Raitt, Heuer, & Weiss, Professional Corporation (“JRH&W”) acted as the Company’s general counsel and represented the Company in various matters. Arthur A. Weiss, a director of the Company, is the Chairman of the Board of Directors and a shareholder of such firm. The Company incurred legal fees and expenses of approximately $1.0 million in 2008 and 2007 and approximately $1.3 million in 2006, in connection with services rendered by JRH&W. • Lease of Executive Offices.Gary A. Shiffman, together with certain family members, indirectly owns a 21 percent equity interest in American Center LLC, the entity from which we lease office space for our principal executive offices. Arthur A. Weiss owns a 0.75 percent indirect interest in American Center LLC. This lease was for an initial term of five years, beginning May 1, 2003, with the right to extend the lease for an additional five year term. On July 30, 2007, the Company exercised its option to extend its lease for its executive offices. The extension was for a period of five years commencing on May 1, 2008. On August 8, 2008, the Company modified its lease agreement to extend the term of the lease until August 31, 2015, with an option to renew for an additional five years. The base rent for the extended term through August 31, 2015, will continue to be the same as the rent payable as of the current term. The current annual base rent under the current lease is $21.25 per square foot (gross). Mr. Shiffman and Mr. Weiss may have a conflict of interest with respect to their • Tax Consequences Upon Sale of We rely on key management. We are dependent on the efforts of our executive officers, particularly Gary A. Shiffman, John B. McLaren, Karen J. Dearing and Jonathan M. Colman (together, the “Senior Officers”). The loss of services of one or more of our executive officers could have a temporary adverse effect on our operations. We do not currently maintain or contemplate obtaining any “key-man” life insurance on the Senior Officers. Certain provisions in our governing documents may make it difficult for a third-party to acquire us. 9.8% Ownership Limit. The 9.8% ownership limit, as well as our ability to issue additional shares of common stock or shares of other stock (which may have rights and preferences over the common stock), may discourage a change of control of the Company and may also: (1) deter tender offers for the common stock, which offers may be advantageous to stockholders; and (2) limit the opportunity for stockholders to receive a premium for their common stock that might otherwise exist if an investor were attempting to assemble a block of common stock in excess of 9.8% of the outstanding shares of the Company or otherwise effect a change of control of the Company. Staggered Board. Our Board of Directors has been divided into three classes of directors. The term of one class will expire each year. Directors for each class will be chosen for a three-year term upon the expiration of such class’s term, and the directors in the other two classes will continue in office. The staggered terms for directors may affect the stockholders’ ability to change control of the Company even if a change in control were in the stockholders’ interest. Preferred Stock. Our charter authorizes the Board of Directors to issue up to 10,000,000 shares of preferred stock and to establish the preferences and rights (including the right to vote and the right to convert into shares of common stock) of any shares issued. The power to issue preferred stock could have the effect of delaying or preventing a change in control of the Company even if a change in control were in the stockholders’ interest. BUSINESS RISKS, CONTINUED Rights Plan.We adopted a stockholders’ rights plan in 2008 that provides our stockholders (other than a stockholder attempting to acquire a 15% or greater interest in the Company) with the right to purchase stock in the Company at a discount in the event any person attempts to acquire a 15% or greater interest in the Company. Because this plan could make it more expensive for a person to acquire a controlling interest in the Company, it could have the effect of delaying or preventing a change in control of the Company even if a change in control were in the stockholders’ interest. Changes in our investment and financing policies may be made without stockholder approval. Our investment and financing policies, and our policies with respect to certain other activities, including our growth, debt, capitalization, distributions, REIT status, and operating policies, are determined by our Board of Directors. Although the Board of Directors has no present intention to do so, these policies may be amended or revised from time to time at the discretion of the Board of Directors without notice to or a vote of our stockholders. Accordingly, stockholders may not have control over changes in our policies and changes in our policies may not fully serve the interests of all stockholders. Substantial sales of our common stock could cause our stock price to fall. Sales of a substantial number of shares of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for shares. As of December 31, 2008, up to approximately 2.7 million shares of our common stock may be issued in the future to the limited partners of the Operating Partnership in exchange for their common limited partnership interests (“Common OP Units”) and preferred limited partnership interests (“Preferred OP Units”). These Preferred OP Units are convertible into common shares at a price of $68 per share. The limited partners may sell such shares pursuant to registration rights or an available exemption from registration. Also, in 2009, Water Oak, Ltd., a former owner of one of the Properties, will be issued Common OP Units with a value of approximately $1,250,000. In addition, as of December 31, 2008, options to purchase 205,906 shares of our common stock were outstanding under our 1993 Employee Stock Option Plan, our 1993 Non-Employee Director Stock Option Plan, our 2004 Non-Employee Director Option Plan, and our Long-Term Incentive Plan (the “Plans”). No prediction can be made regarding the effect that future sales of shares of our common stock will have on the market price of shares. An increase in interest rates may have an adverse effect on the price of our common stock. One of the factors that may influence the price of our common stock in the public market will be the annual distributions to stockholders relative to the prevailing market price of the common stock. An increase in market interest rates may tend to make the common stock less attractive relative to other investments, which could adversely affect the market price of our common stock. The current volatility in economic conditions and the financial markets may adversely affect our industry, business and financial performance. The capital and credit markets have been experiencing, and continue to experience, extreme volatility and disruption. In recent months, the volatility and disruption have reached unprecedented levels. In many cases, the markets have exerted downward pressure on stock prices and credit capacity for certain issuers. In response to these developments, the U.S. government has taken, and may take further, steps designed to stabilize markets generally and strengthen financial institutions in particular. The impact, if any, that these financial market events or these governmental actions might have on us and our business is uncertain and cannot be estimated at this time. The other risk factors presented in this Form 10-K discuss some of the principal risks inherent in our business, including liquidity risks, operational risks, and credit risks, among others. The current upheaval in financial markets has accentuated each of these risks and magnified their potential effect on us. At the same time, there appears to be a general weakening of the U.S. economy and the economies of many other countries. If these economic developments continue to worsen, there could be an adverse impact on our access to capital, stock price and our operating results. None. As of December 31, 2008, the Properties consisted of 124 manufactured housing communities, 4 recreational vehicle communities, and 8 properties containing both manufactured housing and recreational vehicle sites located in 18 states concentrated in the midwestern, southern, and southeastern United States. As of December 31, 2008, the Properties contained 47,613 developed sites comprised of 42,299 developed manufactured home sites, 3,107 permanent recreational vehicle sites, 2,207 seasonal recreational vehicle sites, and an additional 6,081 manufactured home sites suitable for development. Most of the Properties include amenities oriented toward family and retirement living. Of the 136 Properties, 69 have more than 300 developed manufactured home sites; with the largest having 995 developed manufactured home sites. As of December 31, 2008, the Properties had an occupancy rate of 81.9 percent excluding recreational vehicle sites. Since January 1, 2008, the Properties have averaged an aggregate annual turnover of homes (where the home is moved out of the community) of approximately 2.7 percent and an average annual turnover of residents (where the resident-owned home is sold and remains within the community, typically without interruption of rental income) of approximately 5.8 percent. The average renewal rate for residents in the Company’s rental program was 53.6 percent for the year ended December 31, 2008. We believe that our Properties’ high amenity levels contribute to low turnover and generally high occupancy rates. All of the Properties provide residents with attractive amenities with most offering a clubhouse, a swimming pool, and laundry facilities. Many Properties offer additional amenities such as sauna/whirlpool spas, tennis, shuffleboard and basketball courts and/or exercise rooms. We have concentrated our communities within certain geographic areas in order to achieve economies of scale in management and operation. The Properties are principally concentrated in the midwestern, southern, and southeastern United States. We believe that geographic diversification helps to insulate the portfolio from regional economic influences. The following tables set forth certain information relating to the properties owned as of December 31, 2008. The occupancy percentage relates only to manufactured home sites (“MH Sites”). Due to the seasonal nature of recreational vehicle sites (“RV Sites”), the occupancy percentage excludes impact of RV Sites. Developed MH Sites as of RV Sites as of Occupancy as of Occupancy as of Occupancy as of Property City State 12/31/08 12/31/08 12/31/08(1) 12/31/07(1) 12/31/06(1) MIDWEST Michigan Academy/West Pointe (1) Canton MI 441 — 88% 91% 94% Allendale Meadows Mobile Village Allendale MI 352 — 73% 78% 81% Alpine Meadows Mobile Village Grand Rapids MI 403 — 84% 85% 87% Bedford Hills Mobile Village Battle Creek MI 339 — 74% 78% 79% Brentwood Mobile Village Kentwood MI 195 — 92% 92% 95% Byron Center Mobile Village Byron Center MI 143 — 93% 88% 91% Candlewick Court Owosso MI 211 — 84% 85% 87% College Park Estates Canton MI 230 — 73% 74% 74% Continental Estates Davison MI 385 — 37% 43% 49% Continental North Davison MI 474 — 54% 54% 58% Country Acres Mobile Village Cadillac MI 182 — 86% 90% 88% Country Meadows Mobile Village Flat Rock MI 577 — 91% 89% 91% Countryside Village Perry MI 359 — 71% 80% 81% Creekwood Meadows Burton MI 336 — 61% 64% 63% Cutler Estates Mobile Village Grand Rapids MI 259 — 84% 84% 83% Davison East Davison MI 190 — 45% 52% 63% Falcon Pointe(6) East Lansing MI 142 — 18% (6) 18% (6) 19% (6) Fisherman’s Cove Flint MI 162 — 80% 83% 80% Grand Mobile Estates Grand Rapids MI 230 — 75% 77% 79% Hamlin(3) Webberville MI 209 — 74% (3) 75% (3) 75% (3) Holly Village/Hawaiian Gardens (1) Holly MI 425 — 97% 97% 97% Hunters Glen(6) Wayland MI 280 — 48% (6) 46% (6) 43% (6) Kensington Meadows Lansing MI 290 — 81% 80% 81% Kings Court Mobile Village Traverse City MI 639 — 98% 97% 97% Knollwood Estates Allendale MI 161 — 87% 88% 91% Lafayette Place Metro Detroit MI 254 — 64% 68% 77% Lakeview Ypsilanti MI 392 — 89% 91% 91% Lincoln Estates Holland MI 191 — 94% 94% 96% Meadow Lake Estates White Lake MI 425 — 81% 87% 88% Meadowbrook Estates Monroe MI 453 — 94% 94% 93% Presidential Estates Mobile Village Hudsonville MI 364 — 80% 83% 85% Richmond Place Metro Detroit MI 117 — 77% 84% 95% Developed MH Sites as of RV Sites as of Occupancy as of Occupancy as of Occupancy as of Property City State 12/31/08 12/31/08 12/31/08(2) 12/31/07(2) 12/31/06(2) MIDWEST Michigan, continued River Haven Village Grand Haven MI 721 — 59% 63% 66% Scio Farms Estates Ann Arbor MI 913 — 96% 93% 95% Sheffield Estates Auburn Hills MI 228 — 99% 99% 97% Sherman Oaks Jackson MI 366 — 73% 77% 78% St. Clair Place Metro Detroit MI 100 — 76% 80% 88% Sunset Ridge(6) Portland Township MI 190 — 93% (6) 87% (6) 82% (6) Timberline Estates Grand Rapids MI 296 — 79% 80% 80% Town & Country Mobile Village Traverse City MI 192 — 100% 99% 100% Village Trails(3) Howard City MI 100 — 79% (3) 76% (3) 73% (3) White Lake Mobile Home Village White Lake MI 315 — 97% 95% 96% White Oak Estates Mt. Morris MI 480 — 71% 74% 78% Windham Hills Estates(3) Jackson MI 402 — 66% (3) 69% (3) 69% (3) Woodhaven Place Metro Detroit MI 220 — 95% 95% 94% Michigan Total 14,333 — 79% 80% 82% Indiana Brookside Mobile Home Village Goshen IN 570 — 59% 66% 67% Carrington Pointe(3) Ft. Wayne IN 320 — 76% (3) 72% (3) 71% (3) Clear Water Mobile Village South Bend IN 227 — 72% 72% 75% Cobus Green Mobile Home Park Elkhart IN 386 — 62% 66% 69% Deerfield Run(3) Anderson IN 175 — 65% (3) 67% (3) 61% (3) Four Seasons Elkhart IN 218 — 83% 92% 88% Holiday Mobile Home Village Elkhart IN 326 — 79% 85% 88% Liberty Farms Valparaiso IN 220 — 98% 100% 97% Maplewood Lawrence IN 207 — 78% 81% 88% Meadows Nappanee IN 330 — 50% 52% 59% Pebble Creek(6) (7) Greenwood IN 258 — 88% (6) 85% (6) 81% (6) Pine Hills Middlebury IN 129 — 78% 87% 84% Roxbury Park Goshen IN 398 — 86% 87% 88% Timberbrook Bristol IN 567 — 53% 58% 59% Valley Brook Indianapolis IN 799 — 54% 59% 63% West Glen Village Indianapolis IN 552 — 74% 78% 86% Woodlake Estates Ft. Wayne IN 338 — 45% 48% 51% Woods Edge Mobile Village(3) West Lafayette IN 598 — 54% (3) 53% (3) 58% (3) Indiana Total 6,618 — 66% 69% 71% Developed MH Sites as of RV Sites as of Occupancy as of Occupancy as of Occupancy as of Property City State 12/31/08 12/31/08 12/31/08(2) 12/31/07(2) 12/31/06(2) MIDWEST Ohio Apple Creek Manufactured Home Community and Self Storage Amelia OH 176 — 86% 84% 87% Byrne Hill Village Toledo OH 236 — 86% 90% 92% Catalina Middletown OH 462 — 63% 65% 67% East Fork(6) (7) Batavia OH 215 — 89% (6) 89% (6) 86% (6) Oakwood Village Miamisburg OH 511 — 84% 83% 84% Orchard Lake Milford OH 147 — 97% 99% 97% Westbrook Senior Village Toledo OH 112 — 100% 99% 99% Westbrook Village Toledo OH 344 — 97% 96% 96% Willowbrook Place Toledo OH 266 — 94% 95% 95% Woodside Terrace Holland OH 439 — 82% 84% 87% Worthington Arms Lewis Center OH 224 — 95% 96% 94% OhioTotal 3,132 — 85% 86% 86% SOUTH Texas Boulder Ridge(6) Pflugerville TX 527 — 69% (6) 65% (6) 62% (6) Branch Creek Estates Austin TX 392 — 100% 99% 97% Casa del Valle(2) (5) Alamo TX 117 284 98% 99% 100% Chisholm Point Estates Pflugerville TX 416 — 95% 89% 84% Comal Farms(6) (7) New Braunfels TX 349 — 73% (6) 67% (6) 62% (6) Kenwood RV and Mobile Home Plaza(2) (5) LaFeria TX 39 241 100% 100% 100% Oak Crest(6) Austin TX 335 — 70% (6) 61% (6) 53% (6) Pecan Branch(6) Georgetown TX 69 — 84% (6) 73% (6) 55% (6) Pine Trace(6) Houston TX 420 — 71% (6) 68% (6) 67% (6) River Ranch(6) (7) Austin TX 121 — 96% (6) 88% (6) 74% (6) River Ridge(6) Austin TX 337 — 94% (6) 83% (6) 74% (6) Saddle Brook(6) Austin TX 265 — 63% (6) 61% (6) 57% (6) Snow to Sun(2) (5) Weslaco TX 181 305 100% 100% 100% Stonebridge(6) (7) San Antonio TX 338 — 88% (6) 84% (6) 76% (6) Summit Ridge(6) (7) Converse TX 250 — 95% (6) 87% (6) 81% (6) Sunset Ridge(6) (7) Kyle TX 170 — 98% (6) 92% (6) 84% (6) Woodlake Trails(6) (7) San Antonio TX 134 — 96% (6) 94% (6) 94% (6) Texas Total 4,460 830 84% 79% 74% Developed MH Sites as of RV Sites as of Occupancy as of Occupancy as of Occupancy as of Property City State 12/31/08 12/31/08 12/31/08(2) 12/31/07(2) 12/31/06(2) SOUTHEAST Florida Arbor Terrace RV Park (4) Bradenton FL — 395 n/a (4) n/a (4) n/a (4) Ariana Village Mobile Home Park Lakeland FL 208 — 92% 91% 90% Buttonwood Bay(2) (5) Sebring FL 407 533 100% 100% 100% Gold Coaster(2) (5) Homestead FL 415 130 99% 99% 99% Groves RV Resort(4) Ft. Myers FL — 285 n/a (4) n/a (4) n/a (4) Holly Forest Estates Holly Hill FL 402 — 100% 100% 100% Indian Creek Park(2) (5) Ft. Myers Beach FL 353 1,106 100% 100% 100% Island Lakes Merritt Island FL 301 — 100% 100% 100% Kings Lake Debary FL 245 — 99% 100% 100% Lake Juliana Landings Auburndale FL 274 — 98% 96% 95% Lake San Marino RV Park(4) Naples FL — 411 n/a (4) n/a (4) n/a (4) Meadowbrook Village Tampa FL 257 — 100% 99% 100% Orange Tree Village Orange City FL 246 — 100% 100% 100% Royal Country Miami FL 864 — 100% 100% 99% Saddle Oak Club Ocala FL 376 — 100% 100% 100% Siesta Bay RV Park(4) Ft. Myers Beach FL — 798 n/a (4) n/a (4) n/a (4) Silver Star Mobile Village Orlando FL 406 — 99% 99% 99% Tampa East(2) (5) Tampa FL 31 669 100% 100% 97% Water Oak Country Club Estates Lady Lake FL 995 — 99% 100% 100% Florida Total 5,780 4,327 99% 99% 99% Developed MH Sites as of RV Sites as of Occupancy as of Occupancy as of Occupancy as of Property City State 12/31/08 12/31/08 12/31/08(2) 12/31/07(2) 12/31/06(2) OTHER Autumn Ridge Ankeny IA 413 — 99% 99% 98% Bell Crossing(3) Clarksville TN 239 — 60% (3) 52% (3) 54% (3) Candlelight Village Chicago Heights IL 309 — 92% 91% 93% Cave Creek(6) Evans CO 289 — 69% (6) 68% (6) 68% (6) Countryside Atlanta Lawrenceville GA 271 — 99% 97% 96% Countryside Gwinnett Buford GA 331 — 96% 93% 89% Countryside Lake Lanier Buford GA 548 — 83% 83% 82% Creekside(6) (7) Reidsville NC 46 — 67% (6) 63% (6) 72% (6) Desert View Village(6) West Wendover NV 93 — 48% (6) 50% (6) 48% (6) Eagle Crest(6) Firestone CO 318 — 86% (6) 80% (6) 75% (6) Edwardsville Edwardsville KS 634 — 68% 68% 71% Forest Meadows Philomath OR 75 — 99% 99% 93% Glen Laurel(6) (7) Concord NC 260 — 47% (6) 44% (6) 36% (6) High Pointe Frederica DE 411 — 93% 97% 97% Meadowbrook(6) (7) Charlotte NC 177 — 92% (6) 98% (6) 94% (6) North Point Estates(6) Pueblo CO 108 — 51% (6) 43% (6) 44% (6) Pheasant Ridge Lancaster PA 553 — 100% 100% 100% Pin Oak Parc O’Fallon MO 502 — 88% 88% 88% Pine Ridge Petersburg VA 245 — 97% 92% 94% Sea Air(2) (5) Rehoboth Beach DE 370 157 98% 98% 100% Southfork Belton MO 477 — 71% 70% 72% Sun Villa Estates Reno NV 324 — 99% 100% 100% Timber Ridge Ft. Collins CO 585 — 88% 86% 88% Woodland Park Estates Eugene OR 398 — 99% 98% 95% Other Total 7,976 157 85% 84% 84% TOTAL / AVERAGE 42,299 5,314 82% 82% 83% (1) Properties have two licenses but operate as one community. (2) Occupancy percentage relates to manufactured housing sites only. Percentage calculated by dividing revenue producing MH sites by developed MH sites. A revenue producing MH site is defined as a manufactured home site that is occupied by a paying resident. A developed MH site is defined as an adequate sized parcel of land that has road and utility access which is zoned and licensed (if required) for use as a manufactured home site. (3) Occupancy in these properties reflects the fact that these communities are in a lease-up phase following an expansion. (4) Property contains recreational vehicle sites only. (5) Property contains both manufactured home and recreational vehicle sites. (6) Occupancy in these properties reflects the fact that these communities are newly developed from the ground up. (7) This Property is owned by an affiliate of Sunchamp LLC, an entity in which the Company owns approximately a 78.5 percent equity interest as of December 31, 2008. On April 9, 2003, T.J. Holdings, LLC (“TJ Holdings”), a member of Sun/Forest, LLC (“Sun/Forest”) (which, in turn, owns an equity interest in SunChamp LLC), (“SunChamp”), filed a complaint against the Company, SunChamp, certain other affiliates of the Company and two directors of Sun Communities, Inc. in the Superior Court of Guilford County, North Carolina. The complaint alleges that the defendants wrongfully deprived the plaintiff of economic opportunities that they took for themselves in contravention of duties allegedly owed to the plaintiff and purports to claim damages of $13.0 million plus an unspecified amount for punitive damages. The Company believes the complaint and the claims threatened therein have no merit and will defend it vigorously. These proceedings were stayed by the Superior Court of Guilford County, North Carolina in 2004 pending final determination by the Circuit Court of Oakland County, Michigan as to whether the dispute should be submitted to arbitration and the conclusion of all appeals therefrom. On March 13, 2007, the Michigan Court of Appeals issued an order compelling arbitration of all claims brought in the North Carolina case. TJ Holdings has filed an application for review in the Michigan Supreme Court which has been denied and, accordingly, the North Carolina case is permanently stayed. TJ Holdings has now filed an arbitration demand in Southfield, Michigan based on the same claims. The Company intends to vigorously defend against the allegations. As announced on February 27, 2006, the U.S. Securities and Exchange Commission (the “SEC”) completed its inquiry regarding the Company’s accounting for its SunChamp investment during 2000, 2001 and 2002, and the Company and the SEC entered into an agreed-upon Administrative Order (the “Order”). The Order required that the Company cease and desist from violations of certain non intent-based provisions of the federal securities laws, without admitting or denying any such violations. On February 27, 2006, the SEC filed a civil action against the Company’s Chief Executive Officer, its then (and now former as of February 2008) Chief Financial Officer and a former controller in the United States District Court for the Eastern District of Michigan alleging various claims generally consistent with the SEC’s findings set forth in the Order. On July 21, 2008, the U.S. District Court for the Eastern District of Michigan approved a settlement whereby the SEC dismissed its civil lawsuit against the Company's Chairman and Chief Executive Officer, and the Company's former Controller. The SEC concurrently reached a settlement with the Company's former Chief Financial Officer, who remains with the Company as a senior advisor to management. This action by the SEC and the court will end the Company's associated indemnification obligations for legal fees and costs to defend this lawsuit. The Company is involved in various other 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. There were no matters submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2008. PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock has been listed on the New York Stock Exchange (“NYSE”) since December 8, 1993, under the symbol “SUI”. On March 2, 2009, the closing sales price of the common stock was $8.03 and the common stock was held by 284 holders of record. The following table sets forth the high and low sales prices per share for the common stock for the periods indicated as reported by the NYSE and the distributions per share paid by the Company with respect to each period. Year Ended December 31, 2008 High Low Distributions 1st Quarter $ 22.29 $ 17.64 $ 0.63 2nd Quarter 21.47 17.93 0.63 3rd Quarter 21.25 16.47 0.63 4th Quarter 20.78 8.42 0.63 Year Ended December 31, 2007 High Low Distributions 1st Quarter $ 32.91 $ 29.52 $ 0.63 2nd Quarter 31.76 29.00 0.63 3rd Quarter 31.55 25.65 0.63 4th Quarter 32.01 20.64 0.63 Securities Authorized for Issuance Under Equity Compensation Plans The following table reflects information about the securities authorized for issuance under the Company’s equity compensation plans as of December 31, 2008. Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under (a) (b) (c) Equity compensation plans approved by shareholders 168,201 $ 30.39 171,018 Equity compensation plans not approved by shareholders (1) 37,705 32.75 — Total 205,906 $ 30.82 171,018 (1) On May 29, 1997, the Company established a Long Term Incentive Plan (the “LTIP”) pursuant to which all full-time salaried and full-time commission only employees of the Company, excluding the Company’s officers, were entitled to receive options to purchase shares of the Company’s common stock at $32.75 per share (i.e., the average of the highest and lowest selling prices for the common stock on May 29, 1997), on January 31, 2002. In accordance with the terms of the LTIP, (a) the Company granted the eligible participants options to purchase 167,918 shares of common stock; and (b) each eligible participant received an option to purchase a number of shares of common stock Issuer Purchases of Equity Securities In November 2004, the Company was authorized to repurchase up to 1,000,000 shares of its common stock by its Board of Directors. The Company has 400,000 common shares remaining in the repurchase program. No common shares have been repurchased during 2008. Recent Sales of Unregistered Securities In March 2008, the Operating Partnership issued 60,967 Common OP Units to Water Oak, Ltd. In 2008, the Company issued 114,380 shares of its common stock upon conversion of 114,380 OP units. All of the above partnership units and shares of common stock were issued in private placements in reliance on Section 4(2) of the Securities Act of 1933, as amended, including Regulation D promulgated there under. No underwriters were used in connection with any of such issuances. Performance Graph Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the Common Stock against the cumulative total return of a broad market index composed of all issuers listed on the New York Stock Exchange and an industry index comprised of eighteen publicly traded residential real estate investment trusts, for the five year period ending on December 31, 2008. This line graph assumes a $100 investment on December 31, 2003, a reinvestment of dividends and actual increase of the market value of the Company’s Common Stock relative to an initial investment of $100. The comparisons in this table are required by the SEC and are not intended to forecast or be indicative of possible future performance of the Company’s Common Stock. 2003 2004 2005 2006 2007 2008 Sun Communities, Inc. 100.00 110.92 92.83 103.28 72.95 56.33 Hemscott Industry Group – REIT Residential 100.00 132.69 146.13 201.88 149.47 113.59 NYSE Market Index 100.00 112.92 122.25 143.23 150.88 94.76 The information included under the heading “Performance Graph” is not to be treated as “soliciting material” or as “filed” with the SEC, and is not incorporated by reference into any filing by the company under the Securities Act of 1933 or the Securities Exchange Act of 1934 that is made on, before or after the date of filing of this Annual Report on Form 10-K. Year Ended December 31, 2008 2007 2006 2005 2004(a) (In thousands, except for share related and other data) OPERATING DATA: Revenues $ 255,047 $ 235,956 $ 227,778 $ 211,964 $ 204,543 Loss from continuing operations (34,448 ) (16,643 ) (25,257 ) (6,276 ) (40,605 ) Net loss (34,448 ) (16,643 ) (24,968 ) (5,452 ) (40,468 ) Loss from continuing operations per share: Basic $ (1.90 ) $ (0.93 ) $ (1.44 ) $ (0.35 ) $ (2.22 ) Diluted (1.90 ) (0.93 ) (1.44 ) (0.35 ) (2.22 ) Distributions per common share $ 2.52 $ 2.52 $ 2.52 $ 2.50 $ 2.44 BALANCE SHEET DATA: Investment property, before accumulated depreciation $ 1,539,623 $ 1,538,426 $ 1,512,762 $ 1,458,122 $ 1,380,553 Total assets 1,206,999 1,245,823 1,289,739 1,320,536 1,403,167 Total debt and lines of credit 1,229,571 1,187,675 1,166,850 1,123,468 1,078,442 Stockholders’ equity (deficit) (59,882 ) 21,047 79,197 143,257 211,746 OTHER FINANCIAL DATA: Net operating income (NOI) (b) from: Real property operations $ 129,821 $ 126,168 $ 123,550 $ 118,721 $ 111,848 Home sales and home rentals 12,051 9,734 8,466 6,304 4,720 Funds from operations (FFO) (c) 26,501 45,439 34,560 51,313 (3,295 ) FFO (c) per weighted average Common Share/OP Unit: Basic $ 1.30 $ 2.25 $ 1.74 $ 2.54 $ (0.16 ) Diluted 1.29 2.24 1.72 2.54 (0.16 ) OTHER DATA (at end of period): Total properties 136 136 136 135 136 Total sites 47,613 47,607 47,606 47,385 46,856 Ownership of Origen. In October, 2003, the Company purchased 5,000,000 shares of Origen common stock for $50 million and Shiffman Origen LLC (which is owned by the Milton M. Shiffman Spouse’s Marital Trust, Gary A. Shiffman (the Company’s Chief Executive Officer), and members of Mr. Shiffman’s family) purchased 1,025,000 shares of Origen common stock for $10.25respective obligations as an officer and/or director of the Company. The following are the current transactionsCompany and agreements involving Origen which may present a conflict oftheir ownership interest for Mr. Shiffman or Mr. Weiss:in American Center LLC.Origen Servicing Inc., a wholly owned subsidiary of Origen, services approximately $30.6 million of manufactured home loans for the Company as of December 31, 2007, for an annual servicing fee of 100 to 150 basis points of the outstanding principal balance of the loans pursuant to a Loan Servicing Agreement.Origen has agreed to fund loans that meet the Company’s underwriting guidelines and then transfer those loans at par to the Company pursuant to a Loan Origination, Sale and Purchase Agreement. During 2007 and 2006, the Company purchased $13.3 million and $7.9 million of these loans, respectively.The Company purchases certain repossessed manufactured houses owned by Origen located in its manufactured housing communities. The Company purchased approximately $1.1 million and $1.2 million of repossessed homes from Origen during 2007 and 2006. This program allows the Company to retain homes for resale and rent in its communities.As noted above, Origen services manufactured home loans for the Company under a Loan Servicing Agreement. Certain loans may, from time to time, be sold to Origen. For loans that are made below published rates, the Company will pay Origen the interest differential between market rates and the rate paid by the borrower for any such loans sold to Origen. In 2006, the Company sold a portfolio of installment loans on manufactured homes totaling approximately $4.1 million to a wholly-owned subsidiary of Origen Financial, Inc. for 100.5 percent of the principal balance for loans that were 89 days or less delinquent and 100 percent of the principal balance for loans that were 90 days or more delinquent. The Company recognized a gain on the sale of these notes of $0.02 million.Properties.Properties. Gary A. Shiffman holds limited partnership interests in the Operating Partnership which were received in connection with the contribution of 24 properties (four of which have been sold) from partnerships previously affiliated with him (the “Sun Partnerships”). Prior to any redemption of these limited partnership interests for our common stock, Mr. Shiffman will have tax consequences different from those of us and our public stockholders on the sale of any of the Sun Partnerships. Therefore, Mr. Shiffman and the Company may have different objectives regarding the appropriate pricing and timing of any sale of those properties.16Lease of Executive OfficesGary A. Shiffman, together with certain family members, indirectly owns approximately a 21 percent equity interest in American Center LLC, the entity from which we lease office space for our principal executive offices. Arthur A. Weiss owns a 0.75 percent indirect interest in American Center LLC. This lease was for an initial term of five years, beginning May 1, 2003, with the right to extend the lease for an additional five year term. On July 30, 2007 the Company exercised its option to extend its lease for its executive offices. The extension is for a period of five years commencing on May 1, 2008. The base rent for the option term will continue to be the same as the rent payable at the end of the current term. The current annual base rent under the current lease is $21.50 per square foot (gross). Mr. Shiffman and Mr. Weiss may have a conflict of interest with respect to their obligations as an officer and/or director of the Company and their ownership interest in American Center LLC.We rely on key management.We are dependent on the efforts of our executive officers, particularly Gary A. Shiffman, Brian W. Fannon, John B. McLaren, Karen J. Dearing and Jonathan M. Colman (together, the “Senior Officers”). As disclosed under “Legal Proceedings,” the SEC has initiated civil action against three of our employees, including Mr. Shiffman, with respect to our accounting of the SunChamp LLC, (“SunChamp”), investment during 2000, 2001 and 2002. The defense of this civil action may divert the time and attention of these employees, be costly to the Company and/or result in the loss of services, or change in duties, of one or more of these employees. The loss of services of one or more of our executive officers could have a temporary adverse effect on our operations. We do not currently maintain or contemplate obtaining any “key-man” life insurance on the Senior Officers.Certain provisions in our governing documents may make it difficult for a third-party to acquire us.9.8% Ownership Limit.In order to qualify and maintain our qualification as a REIT, not more than 50% of the outstanding shares of our capital stock may be owned, directly or indirectly, by five or fewer individuals. Thus, ownership of more than 9.8% of our outstanding shares of common stock by any single stockholder has been restricted, with certain exceptions, for the purpose of maintaining our qualification as a REIT under the Code. Such restrictions in our charter do not apply to Gary Shiffman, the Milton M. Shiffman Spouse’s Marital Trust and the Estate of Robert B. Bayer.
equity compensation plans (excluding securities reflected in column a)by any single stockholder has been restricted, with certain exceptions, forequal to the purposeproduct of maintaining our qualification as a REIT under the Code. Such restrictions in our charter do not apply to Gary Shiffman, the Milton M. Shiffman Spouse’s Marital Trust167,918 and the Estate of Robert B. Bayer.The 9.8% ownership limit, as well as our ability to issue additional shares of common stock or shares of other stock (which may have rightsquotient derived by dividing such participant’s total compensation during the period beginning on January 1, 1997 and preferences over the common stock), may discourage a change of control of the Company and may also: (1) deter tender offers for the common stock, which offers may be advantageous to stockholders; and (2) limit the opportunity for stockholders to receive a premium for their common stock that might otherwise exist if an investor were attempting to assemble a block of common stock in excess of 9.8% of the outstanding shares of the Company or otherwise effect a change of control of the Company.Staggered Board.Our Board of Directors has been divided into three classes of directors. The term of one class will expire each year. Directors for each class will be chosen for a three-year term upon the expiration of such class’s term, and the directors in the other two classes will continue in office. The staggered terms for directors may affect the stockholders’ ability to change control of the Company even if a change in control were in the stockholders’ interest.17Preferred Stock.Our charter authorizes the Board of Directors to issue up to 10,000,000 shares of preferred stock and to establish the preferences and rights (including the right to vote and the right to convert into shares of common stock) of any shares issued. The power to issue preferred stock could have the effect of delaying or preventing a change in control of the Company even if a change in control were in the stockholders’ interest.Rights Plan.We adopted a stockholders’ rights plan in 1998 that provides our stockholders (other than a stockholder attempting to acquire a 15% or greater interest in the Company) with the right to purchase stock in the Company at a discount in the event any person attempts to acquire a 15% or greater interest in the Company. Because this plan could make it more expensive for a person to acquire a controlling interest in the Company, it could have the effect of delaying or preventing a change in control of the Company even if a change in control were in the stockholders’ interest. The rights will expire at the close of businessending on June 8, 2008, unless earlier redeemed or exchangedDecember 31, 2001 (the “Award Period”) by the Company.Changes in our investment and financing policies may be made without stockholder approval.Our investment and financing policies, and our policies with respect to certain other activities, including our growth, debt, capitalization, distributions, REIT status, and operating policies, are determined by our Boardaggregate compensation of Directors. Although the Board of Directors has no present intention to do so, these policies may be amended or revised from time to time at the discretion of the Board of Directors without notice to or a vote of our stockholders. Accordingly, stockholders may not have control over changes in our policies and changes in our policies may not fully serve the interests of all stockholders.Substantial sales of our common stock could cause our stock price to fall.Sales of a substantial number of shares of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for shares. As of December 31, 2007, up to approximately 2,828,000 shares of our common stock may be issued in the future to the limited partners of the Operating Partnership in exchange for their Common or Convertible Preferred OP Units. The Preferred OP Units are convertible at $68. The limited partners may sell such shares pursuant to registration rights or an available exemption from registration. In 2008 and 2009, Water Oak, Ltd., a former owner of one of the Properties, may be issued Common OP Units with a value of approximately $1,250,000. In addition, as of December 31, 2007, options to purchase 286,137 shares of our common stock were outstanding under our 1993 Employee Stock Option Plan, our 1993 Non-Employee Director Stock Option Plan and our Long-Term Incentive Plan (the “Plans”). No prediction can be made regarding the effect that future sales of shares of our common stock will have on the market price of shares.An increase in interest rates may have an adverse effect on the price of our common stock.One of the factors that may influence the price of our common stock in the public market will be the annual distributions to stockholders relative to the prevailing market price of the common stock. An increase in market interest rates may tend to make the common stock less attractive relative to other investments, which could adversely affect the market price of our common stock.18ITEM 1B.UNRESOLVED STAFF COMMENTSOn July 13, 2006, the Company received a comment letter from the SEC with respect to its Form 10-Q for the quarter ended March 31, 2006. The Company has responded to the comments and has not received any further communication from the SEC on this matter. The Company believes it has appropriately addressed all of the issues raised byeligible participants during the SEC in the comment letter and considers the matter resolved.Award Period.ITEM 2.PROPERTIES
General. As of December 31, 2007, the Properties consisted of 124 manufactured housing communities, four recreational vehicle communities, and eight properties containing both manufactured housing and recreational vehicle sites located in eighteen states concentrated in the midwestern and southeastern United States. As of December 31, 2007, the Properties contained 47,607 developed sites comprised of 42,266 developed manufactured home sites, 5,341 recreational vehicle sites and an additional 6,588 manufactured home sites suitable for development. Most of the Properties include amenities oriented toward family and retirement living. Of the 136 Properties, 69 have more than 300 developed manufactured home sites, with the largest having 979 developed manufactured home sites.(a)
As of December 31, 2007, the Properties had an occupancy rate of 84 percent in stabilized communities and 71 percent in development communities and the aggregate occupancy rate was 82 percent excluding recreational vehicle sites. Since January 1, 2007, the Properties have averaged an aggregate annual turnover of homes (where the home is moved out of the community) of approximately 3.2 percent and an average annual turnover of residents (where the resident-owned home is sold and remains within the community, typically without interruption of rental income) of approximately 6.5 percent. The average renewal rate for residents in the Company’s rental program was approximately 50 percentOperating data for the year ended December 31, 2007.
We believe that our Properties’ high amenity levels contribute to low turnover and generally high occupancy rates. All of the Properties provide residents with attractive amenities with most offering a clubhouse, a swimming pool, laundry facilities and cable television service. Many Properties offer additional amenities such as sauna/whirlpool spas, tennis, shuffleboard and basketball courts and/or exercise rooms.
We have concentrated our communities within certain geographic areas in order to achieve economies of scale in management and operation. The Properties are principally concentrated in the midwestern and southeastern United States. We believe that geographic diversification helps to insulate the portfolio from regional economic influences.
19
The following table sets forth certain information relating to the properties owned or financed as of December 31, 2007:
| Developed | Occupancy | Occupancy | Occupancy |
| Sites as of | as of | as of | as of |
Property and Location | 12/31/2007 | 12/31/07(1) | 12/31/06(1) | 12/31/05(1) |
|
|
|
|
|
MIDWEST |
|
|
|
|
Michigan |
|
|
|
|
Academy/West Pointe | 441 | 91% | 94% | 98% |
Canton, MI |
|
|
|
|
Allendale Meadows Mobile Village | 352 | 78% | 81% | 84% |
Allendale, MI |
|
|
|
|
Alpine Meadows Mobile Village | 403 | 85% | 87% | 94% |
Grand Rapids, MI |
|
|
|
|
Bedford Hills Mobile Village | 339 | 78% | 79% | 85% |
Battle Creek, MI |
|
|
|
|
Brentwood Mobile Village | 195 | 92% | 95% | 92% |
Kentwood, MI |
|
|
|
|
Byron Center Mobile Village | 143 | 88% | 91% | 96% |
Byron Center, MI |
|
|
|
|
Candlewick Court | 211 | 85% | 87% | 89% |
Owosso, MI |
|
|
|
|
College Park Estates | 230 | 74% | 74% | 77% |
Canton, MI |
|
|
|
|
Continental Estates | 385 | 43% | 49% | 54% |
Davison, MI |
|
|
|
|
Continental North | 474 | 54% | 58% | 59% |
Davison, MI |
|
|
|
|
Country Acres Mobile Village | 182 | 90% | 88% | 91% |
Cadillac, MI |
|
|
|
|
Country Meadows Mobile Village | 577 | 89% | 91% | 92% |
Flat Rock, MI |
|
|
|
|
Countryside Village | 359 | 80% | 81% | 89% |
Perry, MI |
|
|
|
|
Creekwood Meadows | 336 | 64% | 63% | 67% |
Burton, MI |
|
|
|
|
Cutler Estates Mobile Village | 259 | 84% | 83% | 91% |
Grand Rapids, MI |
|
|
|
|
Davison East | 190 | 52% | 63% | 67% |
Davison, MI |
|
|
|
|
Falcon Pointe(6) | 142 | 18%(6) | 19%(6) | 19%(6) |
East Lansing, MI |
|
|
|
|
Fisherman’s Cove | 162 | 83% | 80% | 86% |
Flint, MI |
|
|
|
|
Grand Mobile Estates | 230 | 77% | 79% | 85% |
Grand Rapids, MI |
|
|
|
|
Hamlin(3) | 209 | 75%(3) | 75%(3) | 78%(3) |
Webberville, MI |
|
|
|
|
Holly Village/Hawaiian Gardens | 425 | 97% | 97% | 99% |
Holly, MI |
|
|
|
|
Hunters Glen(6) | 280 | 46%(6) | 43%(6) | 46%(6) |
Wayland, MI |
|
|
|
|
Kensington Meadows | 290 | 80% | 81% | 88% |
Lansing, MI |
|
|
|
|
Kings Court Mobile Village | 639 | 97% | 97% | 98% |
Traverse City, MI |
|
|
|
|
20
| Developed | Occupancy | Occupancy | Occupancy |
| Sites as of | as of | as of | as of |
Property and Location | 12/31/2007 | 12/31/07(1) | 12/31/06(1) | 12/31/05(1) |
|
|
|
|
|
Knollwood Estates | 161 | 88% | 91% | 88% |
Allendale, MI |
|
|
|
|
Lafayette Place | 254 | 68% | 77% | 85% |
Metro Detroit, MI |
|
|
|
|
Lakeview | 392 | 91% | 91% | 91% |
Ypsilanti, MI |
|
|
|
|
Lincoln Estates | 191 | 94% | 96% | 99% |
Holland, MI |
|
|
|
|
Meadow Lake Estates | 425 | 87% | 88% | 91% |
White Lake, MI |
|
|
|
|
Meadowbrook Estates | 453 | 94% | 93% | 93% |
Monroe, MI |
|
|
|
|
Presidential Estates Mobile Village | 364 | 83% | 85% | 87% |
Hudsonville, MI |
|
|
|
|
Richmond Place | 117 | 84% | 95% | 97% |
Metro Detroit, MI |
|
|
|
|
River Haven Village | 721 | 63% | 66% | 68% |
Grand Haven, MI |
|
|
|
|
Scio Farms Estates | 913 | 93% | 95% | 96% |
Ann Arbor, MI |
|
|
|
|
Sheffield Estates | 228 | 99% | 97% | n/a(2) |
Auburn Hills, MI |
|
|
|
|
Sherman Oaks | 366 | 77% | 78% | 83% |
Jackson, MI |
|
|
|
|
St. Clair Place | 100 | 80% | 88% | 94% |
Metro Detroit, MI |
|
|
|
|
Sunset Ridge(6) | 190 | 87%(6) | 82%(6) | 75%(6) |
Portland Township, MI |
|
|
|
|
Timberline Estates | 296 | 80% | 80% | 87% |
Grand Rapids, MI |
|
|
|
|
Town & Country Mobile Village | 192 | 99% | 100% | 98% |
Traverse City, MI |
|
|
|
|
Village Trails(3) | 100 | 76%(3) | 73%(3) | 72%(3) |
Howard City, MI |
|
|
|
|
White Lake Mobile Home Village | 315 | 95% | 96% | 97% |
White Lake, MI |
|
|
|
|
White Oak Estates | 480 | 74% | 78% | 81% |
Mt. Morris, MI |
|
|
|
|
Windham Hills Estates(3) | 402 | 69%(3) | 69%(3) | 72%(3) |
Jackson, MI |
|
|
|
|
Woodhaven Place | 220 | 95% | 94% | 96% |
Metro Detroit, MI |
|
|
|
|
Michigan Total | 14,333 | 80% | 82% | 84% |
|
|
|
|
|
Indiana |
|
|
|
|
Brookside Mobile Home Village | 570 | 66% | 67% | 73% |
Goshen, IN |
|
|
|
|
Carrington Pointe(3) | 320 | 72%(3) | 71%(3) | 72%(3) |
Ft. Wayne, IN |
|
|
|
|
21
| Developed | Occupancy | Occupancy | Occupancy |
| Sites as of | as of | as of | as of |
Property and Location | 12/31/2007 | 12/31/07(1) | 12/31/06(1) | 12/31/05(1) |
|
|
|
|
|
Clear Water Mobile Village | 227 | 72% | 75% | 78% |
South Bend, IN |
|
|
|
|
Cobus Green Mobile Home Park | 386 | 66% | 69% | 71% |
Elkhart, IN |
|
|
|
|
Deerfield Run(3) | 175 | 67%(3) | 61%(3) | 67%(3) |
Anderson, IN |
|
|
|
|
Four Seasons | 218 | 92% | 88% | 92% |
Elkhart, IN |
|
|
|
|
Holiday Mobile Home Village | 326 | 85% | 88% | 91% |
Elkhart, IN |
|
|
|
|
Liberty Farms | 220 | 100% | 97% | 97% |
Valparaiso, IN |
|
|
|
|
Maplewood | 207 | 81% | 88% | 79% |
Lawrence, IN |
|
|
|
|
Meadows | 330 | 52% | 59% | 69% |
Nappanee, IN |
|
|
|
|
Pebble Creek(6) (7) | 258 | 85%(6) | 81%(6) | 78%(6) |
Greenwood, IN |
|
|
|
|
Pine Hills | 129 | 87% | 84% | 88% |
Middlebury, IN |
|
|
|
|
Roxbury Park | 398 | 87% | 88% | 92% |
Goshen, IN |
|
|
|
|
Timberbrook | 567 | 58% | 59% | 67% |
Bristol, IN |
|
|
|
|
Valley Brook | 799 | 59% | 63% | 69% |
Indianapolis, IN |
|
|
|
|
West Glen Village | 552 | 78% | 86% | 88% |
Indianapolis, IN |
|
|
|
|
Woodlake Estates | 338 | 48% | 51% | 52% |
Ft. Wayne, IN |
|
|
|
|
Woods Edge Mobile Village(3) | 598 | 53%(3) | 58%(3) | 58%(3) |
West Lafayette, IN |
|
|
|
|
Indiana Total | 6,618 | 69% | 71% | 75% |
|
|
|
|
|
OTHER |
|
|
|
|
Apple Creek Manufactured Home | 176 | 84% | 87% | 90% |
Amelia, OH |
|
|
|
|
Autumn Ridge | 413 | 99% | 98% | 97% |
Ankeny, IA |
|
|
|
|
Bell Crossing(3) | 239 | 52%(3) | 54%(3) | 47%(3) |
Clarksville, TN |
|
|
|
|
Boulder Ridge(6) | 527 | 65%(6) | 62%(6) | 65%(6) |
Pflugerville, TX |
|
|
|
|
Branch Creek Estates | 392 | 99% | 97% | 96% |
Austin, TX |
|
|
|
|
Byrne Hill Village | 236 | 90% | 92% | 98% |
Toledo, OH |
|
|
|
|
Candlelight Village | 309 | 91% | 93% | 94% |
Chicago Heights, IL |
|
|
|
|
22
| Developed | Occupancy | Occupancy | Occupancy |
| Sites as of | as of | as of | as of |
Property and Location | 12/31/2007 | 12/31/07(1) | 12/31/06(1) | 12/31/05(1) |
|
|
|
|
|
Casa del Valle(1) (5) | 117/401 | 99% | 100% | 98% |
Alamo, TX |
|
|
|
|
Catalina | 462 | 65% | 67% | 68% |
Middletown, OH |
|
|
|
|
Cave Creek(6) | 289 | 68%(6) | 68%(6) | 67%(6) |
Evans, CO |
|
|
|
|
Chisholm Point Estates | 416 | 89% | 84% | 84% |
Pflugerville, TX |
|
|
|
|
Comal Farms(6) (7) | 349 | 67%(6) | 62%(6) | 56%(6) |
New Braunfels, TX |
|
|
|
|
Countryside Atlanta | 271 | 97% | 96% | 96% |
Lawrenceville, GA |
|
|
|
|
Countryside Gwinnett | 331 | 93% | 89% | 90% |
Buford, GA |
|
|
|
|
Countryside Lake Lanier | 548 | 83% | 82% | 81% |
Buford, GA |
|
|
|
|
Creekside(6) (7) | 46 | 63%(6) | 72%(6) | 76%(6) |
Reidsville, NC |
|
|
|
|
Desert View Village(6) | 93 | 50%(6) | 48%(6) | 50%(6) |
West Wendover, NV |
|
|
|
|
Eagle Crest(6) | 318 | 80%(6) | 75%(6) | 71%(6) |
Firestone, CO |
|
|
|
|
East Fork(6) (7) | 215 | 89%(6) | 86%(6) | 93%(6) |
Batavia, OH |
|
|
|
|
Edwardsville | 634 | 68% | 71% | 74% |
Edwardsville, KS |
|
|
|
|
Forest Meadows | 75 | 99% | 93% | 93% |
Philomath, OR |
|
|
|
|
Glen Laurel(6) (7) | 261 | 44%(6) | 36%(6) | 31%(6) |
Concord, NC |
|
|
|
|
High Pointe | 411 | 97% | 97% | 94% |
Frederica, DE |
|
|
|
|
Kenwood RV and Mobile Home Plaza(1) (5) | 40/280 | 100% | 100% | 100% |
LaFeria, TX |
|
|
|
|
Meadowbrook(6) (7) | 177 | 98%(6) | 94%(6) | 90%(6) |
Charlotte, NC |
|
|
|
|
North Point Estates(6) | 108 | 43%(6) | 44%(6) | 37%(6) |
Pueblo, CO |
|
|
|
|
Oak Crest(6) | 335 | 61%(6) | 53%(6) | 57%(6) |
Austin, TX |
|
|
|
|
Oakwood Village | 511 | 83% | 84% | 83% |
Miamisburg, OH |
|
|
|
|
Orchard Lake | 147 | 99% | 97% | 97% |
Milford, OH |
|
|
|
|
Pecan Branch(6) | 69 | 73%(6) | 55%(6) | 51%(6) |
Georgetown, TX |
|
|
|
|
Pheasant Ridge | 553 | 100% | 100% | 100% |
Lancaster, PA |
|
|
|
|
Pin Oak Parc | 502 | 88% | 88% | 88% |
O’Fallon, MO |
|
|
|
|
23
| Developed | Occupancy | Occupancy | Occupancy |
| Sites as of | as of | as of | as of |
Property and Location | 12/31/2007 | 12/31/07(1) | 12/31/06(1) | 12/31/05(1) |
|
|
|
|
|
Pine Ridge | 245 | 92% | 94% | 94% |
Petersburg, VA |
|
|
|
|
Pine Trace(6) | 420 | 68%(6) | 67%(6) | 74%(6) |
Houston, TX |
|
|
|
|
River Ranch(6) (7) | 121 | 88%(6) | 74%(6) | 60%(6) |
Austin, TX |
|
|
|
|
River Ridge(6) | 337 | 83%(6) | 74%(6) | 76%(6) |
Austin, TX |
|
|
|
|
Saddle Brook(6) | 261 | 61%(6) | 57%(6) | 46%(6) |
Austin, TX |
|
|
|
|
Sea Air(1) (5) | 370/527 | 98% | 100% | 100% |
Rehoboth Beach, DE |
|
|
|
|
Snow to Sun(1) (5) | 180/488 | 100% | 100% | 99% |
Weslaco, TX |
|
|
|
|
Southfork | 477 | 70% | 72% | 75% |
Belton, MO |
|
|
|
|
Stonebridge(6) (7) | 340 | 84%(6) | 76%(6) | 74%(6) |
San Antonio, TX |
|
|
|
|
Summit Ridge(6) (7) | 252 | 87%(6) | 81%(6) | 73%(6) |
Converse, TX |
|
|
|
|
Sunset Ridge(6) (7) | 170 | 92%(6) | 84%(6) | 79%(6) |
Kyle, TX |
|
|
|
|
Sun Villa Estates | 324 | 100% | 100% | 100% |
Reno, NV |
|
|
|
|
Timber Ridge | 585 | 86% | 88% | 90% |
Ft. Collins, CO |
|
|
|
|
Westbrook Village | 344 | 96% | 96% | 96% |
Toledo, OH |
|
|
|
|
Westbrook Senior Village | 112 | 99% | 99% | 100% |
Toledo, OH |
|
|
|
|
Willowbrook Place | 266 | 95% | 95% | 97% |
Toledo, OH |
|
|
|
|
Woodlake Trails(6) (7) | 134 | 94%(6) | 94%(6) | 93%(6) |
San Antonio, TX |
|
|
|
|
Woodland Park Estates | 399 | 98% | 95% | 93% |
Eugene, OR |
|
|
|
|
Woodside Terrace | 439 | 84% | 87% | 93% |
Holland, OH |
|
|
|
|
Worthington Arms | 224 | 96% | 94% | 95% |
Lewis Center, OH |
|
|
|
|
Other Total | 16,559 | 83% | 82% | 82% |
|
|
|
|
|
SOUTHEAST |
|
|
|
|
Florida |
|
|
|
|
Arbor Terrace RV Park | 389 | n/a(4) | n/a(4) | n/a(4) |
Bradenton, FL |
|
|
|
|
Ariana Village Mobile Home Park | 208 | 91% | 90% | 89% |
Lakeland, FL |
|
|
|
|
Buttonwood Bay(1) (5) | 407/940 | 100% | 100% | 100% |
Sebring, FL |
|
|
|
|
24
| Developed | Occupancy | Occupancy | Occupancy |
| Sites as of | as of | as of | as of |
Property and Location | 12/31/2007 | 12/31/07(1) | 12/31/06(1) | 12/31/05(1) |
|
|
|
|
|
Gold Coaster(1) (5) | 396/546 | 99% | 99% | 98% |
Homestead, FL |
|
|
|
|
Groves RV Resort | 287 | n/a(4) | n/a(4) | n/a(4) |
Ft. Myers, FL |
|
|
|
|
Holly Forest Estates | 402 | 100% | 100% | 100% |
Holly Hill, FL |
|
|
|
|
Indian Creek Park(1) (5) | 353/1470 | 100% | 100% | 100% |
Ft. Myers Beach, FL |
|
|
|
|
Island Lakes | 301 | 100% | 100% | 100% |
Merritt Island, FL |
|
|
|
|
Kings Lake | 245 | 100% | 100% | 100% |
Debary, FL |
|
|
|
|
Lake Juliana Landings | 274 | 96% | 95% | 91% |
Auburndale, FL |
|
|
|
|
Lake San Marino RV Park | 410 | n/a(4) | n/a(4) | n/a(4) |
Naples, FL |
|
|
|
|
Meadowbrook Village | 257 | 99% | 100% | 99% |
Tampa, FL |
|
|
|
|
Orange Tree Village | 246 | 100% | 100% | 99% |
Orange City, FL |
|
|
|
|
Royal Country | 864 | 100% | 99% | 100% |
Miami, FL |
|
|
|
|
Saddle Oak Club | 376 | 100% | 100% | 100% |
Ocala, FL |
|
|
|
|
Siesta Bay RV Park | 798 | n/a(4) | n/a(4) | n/a(4) |
Ft. Myers Beach, FL |
|
|
|
|
Silver Star Mobile Village | 406 | 99% | 99% | 99% |
Orlando, FL |
|
|
|
|
Tampa East(1) (5) | 31/699 | 100% | 97% | 97% |
Tampa, FL |
|
|
|
|
Water Oak Country Club Estates | 979 | 100% | 100% | 98% |
Lady Lake, FL |
|
|
|
|
Florida Total | 10,097 | 99% | 99% | 98% |
|
|
|
|
|
TOTAL/AVERAGE | 47,607 | 82% | 83% | 84% |
TOTAL STABILIZED COMMUNITIES | 42,277 | 84% | 85% | 87% |
TOTAL DEVELOPMENT COMMUNITIES | 5,330 | 71% | 66% | 64% |
|
|
|
|
|
(1) Occupancy percentage relates to manufactured housing sites, excluding recreational vehicle sites. | ||||
(2) Acquired 2006. | ||||
(3) Occupancy in these properties reflects the fact that these communities are in a lease-up phase | ||||
(4) This Property contains only recreational vehicle sites. | ||||
(5) This Property contains recreational vehicle sites. | ||||
(6) Occupancy in these properties reflects the fact that these communities are newly developed | ||||
(7) This Property is owned by an affiliate of Sunchamp LLC, an entity in which the Company owns |
25
Leases.The typical lease we enter into with a tenant for the rental of a site is month-to-month or year-to-year, renewable upon the consent of both parties, or, in some instances, as provided by statute. In some cases, leases are for one-year terms, with up to ten renewal options exercisable by the tenant, with rent adjusted for increases in the consumer price index. These leases are cancelable for non-payment of rent, violation of community rules and regulations or other specified defaults. During the past five years, on average 3.4 percent of the homes in our communities have been removed by their owners and 7.6 percent of the homes have been sold by their owners to a new owner who then assumes rental obligations as a community resident. The small percentage of homes removed from our communities is impacted by the $4,000 to $10,000 cost to move a home. The above experience can be summarized as follows: the average resident remains in our communities for approximately thirteen years, while the average home, which gives rise to the rental stream, remains in our communities for approximately twenty nine years. See “Regulations and Insurance.”
|
|
On April 9, 2003, T.J. Holdings, LLC (“TJ Holdings”), a member of Sun/Forest, LLC (“Sun/Forest”) (which, in turn, owns an equity interest in SunChamp LLC), (“SunChamp”), filed a complaint against the Company, SunChamp, certain other affiliates of the Company and two directors of Sun Communities, Inc. in the Superior Court of Guilford County, North Carolina. The complaint alleges that the defendants wrongfully deprived the plaintiff of economic opportunities that they took for themselves in contravention of duties allegedly owed to the plaintiff and purports to claim damages of $13.0 million plus an unspecified amount for punitive damages. The Company believes the complaint and the claims threatened therein have no merit and will defend it vigorously. These proceedings were stayed by the Superior Court of Guilford County, North Carolina in 2004 pending final determination by the Circuit Court of Oakland County, Michigan as to whether the dispute should be submitted to arbitration and the conclusion of all appeals therefrom. On March 13, 2007, the Michigan Court of Appeals issued an order compelling arbitration of all claims brought in the North Carolina case. TJ Holdings has filed an application for review in the Michigan Supreme Court which has been denied and, accordingly, the North Carolina case is permanently stayed. TJ Holdings has now filed an arbitration demand in Southfield, Michigan based on the same claims. The Company intends to vigorously defend against the allegations.
As announced on February 27, 2006, the U.S. Securities and Exchange Commission (the “SEC”) completed its inquiry regarding the Company’s accounting for its SunChamp investment during 2000, 2001 and 2002, and the Company and the SEC entered into an agreed-upon Administrative Order (the “Order”). The Order required that the Company cease and desist from violations of certain non intent-based provisions of the federal securities laws, without admitting or denying any such violations.
On February 27, 2006, the SEC filed a civil action against the Company’s Chief Executive Officer, its then (and now former as of February 2008) Chief Financial Officer and a former controller in the United States District Court for the Eastern District of Michigan alleging various claims generally consistent with the SEC’s findings set forth in the Order. The discovery stage of this action has closed, and the parties are awaiting decisions on dispositive motions. The Company continues to indemnify such employees for all costs and expenses incurred in connection with such civil action.
26
The Company is involved in various other 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.
|
|
Not applicable
PART II
|
|
Market Information
Our common stock has been listed on the New York Stock Exchange (“NYSE”) since December 8, 1993, under the symbol “SUI.” On February 29, 2008, the closing sales price of the common stock was $20.38 and the common stock was held by 305 holders of record. The following table sets forth the high and low closing sales prices per share for the common stock for the periods indicated as reported by the NYSE and the distributions per share paid by the Company with respect to each period.
|
| High |
| Low |
| Distribution |
| |||
Fiscal Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
First Quarter of 2007 |
| $ | 32.64 |
| $ | 29.70 |
| $ | 0.63 |
|
Second Quarter of 2007 |
|
| 31.28 |
|
| 29.36 |
|
| 0.63 |
|
Third Quarter of 2007 |
|
| 31.25 |
|
| 26.38 |
|
| 0.63 |
|
Fourth Quarter of 2007 |
|
| 31.65 |
|
| 20.96 |
|
| 0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
First Quarter of 2006 |
| $ | 36.71 |
| $ | 31.32 |
| $ | 0.63 |
|
Second Quarter of 2006 |
|
| 34.31 |
|
| 30.57 |
|
| 0.63 |
|
Third Quarter of 2006 |
|
| 33.12 |
|
| 31.01 |
|
| 0.63 |
|
Fourth Quarter of 2006 |
|
| 35.34 |
|
| 31.81 |
|
| 0.63 |
|
27
Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the Common Stock against the cumulative total return of a broad market index composed of all issuers listed on the New York Stock Exchange and an industry index comprised of twenty publicly traded residential real estate investment trusts, for the five year period ending on December 31, 2007. This line graph assumes a $100 investment on December 31, 2002, a reinvestment of dividends and actual increase of the market value of the Company’s Common Stock relative to an initial investment of $100. The comparisons in this table are required by the SEC and are not intended to forecast or be indicative of possible future performance of the Company’s Common Stock.
|
| 2002 |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| 2007 |
|
SUN COMMUNITIES, INC. |
| 100.00 |
| 112.70 |
| 125.01 |
| 104.62 |
| 116.40 |
| 82.22 |
|
HEMSCOTT GROUP INDEX |
| 100.00 |
| 126.44 |
| 167.77 |
| 184.77 |
| 255.26 |
| 189.00 |
|
NYSE MARKET INDEX |
| 100.00 |
| 129.55 |
| 146.29 |
| 158.37 |
| 185.55 |
| 195.46 |
|
Recent Sales of Unregistered Securities
On March 31, 2007, the Operating Partnership issued and immediately redeemed 30,898 Common Operating Partnership Units, (“OP Units”), from Water Oak, Ltd. for an aggregate purchase price of $961,540.
All of the above partnership units and shares of common stock were issued in private placements in reliance on Section 4(2) of the Securities Act of 1933, as amended, including Regulation D promulgated there under. No underwriters were used in connection with any of such issuances.
28
Equity Compensation Plan Information
The following table reflects information about the securities authorized for issuance under the Company’s equity compensation plans as of December 31, 2007.
|
| (a) |
| (b) |
| (c) |
| |
Plan Category |
| Number of |
| Weighted-average |
| Number of securities |
| |
Equity compensation |
| 245,751 |
| $ | 32.07 |
| 113,481 |
|
Equity compensation |
| 40,386 |
| $ | 32.75 |
| — |
|
TOTAL |
| 286,137 |
|
|
|
| 113,481 |
|
|
|
29
|
|
|
| Year Ended December 31, |
| |||||||||||||
|
| 2007 |
| 2006 |
| 2005 |
| 2004(a) |
| 2003(a) |
| |||||
|
| (In thousands except for per share and other data) |
| |||||||||||||
OPERATING DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | 235,956 |
| $ | 227,778 |
| $ | 211,964 |
| $ | 204,543 |
| $ | 194,586 |
|
Income (loss) from continuing operations |
| $ | (16,643 | ) | $ | (25,257 | ) | $ | (6,276 | ) | $ | (40,605 | ) | $ | 13,702 |
|
Net income (loss) |
| $ | (16,643 | ) | $ | (24,968 | ) | $ | (5,452 | ) | $ | (40,468 | ) | $ | 23,714 |
|
Income (loss) from continuing operations per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.93 | ) | $ | (1.44 | ) | $ | (0.35 | ) | $ | (2.22 | ) | $ | 0.75 |
|
Diluted |
| $ | (0.93 | ) | $ | (1.44 | ) | $ | (0.35 | ) | $ | (2.22 | ) | $ | 0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions per common share |
| $ | 2.52 |
| $ | 2.52 |
| $ | 2.50 |
| $ | 2.44 |
| $ | 2.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment property, before accumulated depreciation |
| $ | 1,538,426 |
| $ | 1,512,762 |
| $ | 1,458,122 |
| $ | 1,380,553 |
| $ | 1,220,405 |
|
Total assets |
| $ | 1,245,823 |
| $ | 1,289,739 |
| $ | 1,320,536 |
| $ | 1,403,167 |
| $ | 1,221,574 |
|
Total debt |
| $ | 1,187,675 |
| $ | 1,166,850 |
|
| 1,123,468 |
| $ | 1,078,442 |
| $ | 773,328 |
|
Stockholders’ equity |
| $ | 21,047 |
| $ | 79,197 |
| $ | 143,257 |
| $ | 211,746 |
| $ | 326,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER FINANCIAL DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (b) from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real property operations |
| $ | 126,168 |
| $ | 123,550 |
| $ | 118,721 |
| $ | 111,848 |
| $ | 107,306 |
|
Home sales and home rentals |
| $ | 9,734 |
| $ | 8,466 |
| $ | 6,304 |
| $ | 4,720 |
| $ | 6,898 |
|
Funds from operations (FFO) (c) |
| $ | 45,439 |
| $ | 34,560 |
| $ | 51,313 |
| $ | (3,295 | ) | $ | 65,525 |
|
FFO per weighted average Common Share/OP Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 2.25 |
| $ | 1.74 |
| $ | 2.54 |
| $ | (0.16 | ) | $ | 3.16 |
|
Diluted |
| $ | 2.24 |
| $ | 1.72 |
| $ | 2.54 |
| $ | (0.16 | ) | $ | 3.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER DATA (at end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total properties |
|
| 136 |
|
| 136 |
|
| 135 |
|
| 136 |
|
| 127 |
|
Total sites |
|
| 47,607 |
|
| 47,606 |
|
| 47,385 |
|
| 46,856 |
|
| 43,875 |
|
(a) Operating data for the years ended December 31, 2004 and 2003, have been restated to reflect the reclassifications required under SFAS No. 144 for the properties sold in 2005.
| (b) |
|
(c) | Refer to Item 7, Supplemental Measures, contained in the
|
EXECUTIVE SUMMARY
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 thereto elsewhere herein.
The Company is a fully integrated, self-administered and self-managed REIT which owns, operates, and develops manufactured housing communities concentrated in the midwestern, southern, and southeastern United States. As of December 31, 2008, the Company owned and operated a portfolio of 136 developed properties located in 18 states, including 124 manufactured housing communities, 4 recreational vehicle communities, and 8 properties containing both manufactured housing and recreational vehicle sites.
Since the year 2000, the operations of manufactured homebuilders, dealers, and the companies that finance the purchase of the homes have experienced severe losses and substantial volatility. New home shipments have declined from approximately 373,000 in 1998 to approximately 82,000 in 2008. The decline was largely due to the turmoil in the financing side of the industry as lenders experienced substantial losses arising from defaults on poorly underwritten loans in the mid to late 1990s and beyond. As a result of the losses, the lenders experienced liquidity constraints and significantly tightened underwriting standards, thus reducing the demand for new homes.
The Company experienced a decline of occupancy from 95% in 2000 to 81.9% at December 31, 2008. This pattern of loss has significantly slowed in recent years as occupancy was 82.5% at the end of 2006. In addition to the conditions described above, this occupancy decline is also attributable to the attraction of our traditional customer base to single-family homes due to the substantial easing of underwriting qualifications for applicants which abruptly ended in 2007 - 2008.
A national survey of 71 major markets and over 368,000 sites noted an average occupancy of 82.7%, only slightly above that of the Company. From that it would appear that the Company's geographic distribution results in an occupancy little different from that determined by a national survey.
The Company's primary product is to supply affordable housing to the marketplace. Homes are available for rent or purchase. Monthly cost per square foot ranges from $0.50 to $0.80. This represents, at the low end, a 1,000 square foot home sited on a 4,000 to 5,000 foot site and includes the home and the site rent. The Company's communities currently have over 30,000 resident/owners of their homes and over 5,500 resident/renters. There are nearly 1,000 homes in inventory available to rent. The Company also has over 7,000 vacant sites available for occupancy. The difficult economy will cause some loss of occupancy due to unemployment, but it will also return our traditional customer as well as others who must seek economical housing options of which the Company have a substantial supply.
The Company also sells homes. These homes can be purchased by customers from our inventory of new and preowned product or through custom orders submitted to manufacturers. The Company offers excellent value on these sales as there are approximately 3,000 homes available for sale which were (and still are being) purchased from lenders at deeply discounted prices. Home sales grew from 712 in 2007 to 965 in 2008 and are expected to grow again in 2009. The Company's sales expect to benefit from the 10% tax credit available to qualifying homebuyers as well as from marketing initiatives which are regularly being developed.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing these financial statements, management has made its best estimate and judgment of certain amounts included in the financial statements. Nevertheless, actual results may differ from these estimates under different assumptions or conditions. Management believes the following significant accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:
Impairment of Long-Lived Assets and Investment in Affiliates
Rental property is recorded at cost, less accumulated depreciation. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews the carrying value of long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate a possible impairment. An impairment loss is recognized when a long-lived asset’s carrying value is not recoverable and exceeds estimated fair value. The estimated fair value of long lived assets was calculated based on discounted future cash flows associated with the asset and any potential disposition proceeds for a given asset. Forecasting cash flows requires assumptions about such variables as the estimated holding period, rental rates, occupancy and operating expenses during the holding period, as well as disposition proceeds. Management determined certain impairment reviews were required as of December 31, 2008, as decisions were made to limit development of certain assets. Due to local economic conditions, estimated costs to develop and low estimated return on investment the Company determined to limit development in three development communities. The properties are located in Michigan, Nevada and North Carolina. Each had considerable up front development costs. A fourth property, located in Indiana, was found to be impaired based on its negative cash flows and management's estimate of continued negative cash flows. The Company also made a decision to stop providing cable television service at various communities as the business line could not provide the return on investment to justify the capital investment required to keep up with the technological advances in the offered product. As a result of the impairment analysis, the Company recognized non-cash impairment charges of $13.1million.
The Company owns an approximate 19.0 percent investment in an affiliate that is reported under the equity method of accounting. Management performs an analysis to determine if the investment has experienced an other than temporary decline in value. Numerous factors are evaluated in accordance with published GAAP and SEC staff guidance. Changes in the facts and circumstances evaluated, future adverse changes in market conditions or operating results of the affiliate may affect management’s analysis.
Notes and Accounts Receivable
The Company evaluates the recoverability of its receivables whenever events occur or there are changes in circumstances such that management believes it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan and lease agreements. Receivables related to community rents are reserved when the Company believes that collection is less than probable, which is generally after a resident balance reaches 60 to 90 days past due. The Company reserves for estimated repairs to homes which collateralize its installment notes receivable based upon an estimate of annual foreclosures and historical costs of repair in excess of the anticipated sales price.
Depreciation and amortization
Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets. Useful lives are 30 years for land improvements and buildings, 10 years for rental homes, 7 to 15 years for furniture, fixtures and equipment, and 7 years for intangible assets.
Revenue Recognition
Rental income attributable to site and home leases is recorded on a straight-line basis when earned from tenants. Leases entered into by tenants generally range from month-to-month to two years and are renewable by mutual agreement of the Company and the resident or, in some cases, as provided by state statute. Revenue from the sale of manufactured homes is recognized upon transfer of title at the closing of the sales transaction. Interest income on notes receivable is recorded on a level yield basis over the life of the notes.
Capitalized Costs
The Company capitalizes certain costs incurred in connection with the development, redevelopment, capital enhancement and leasing of its properties. Management is required to use professional judgment in determining whether such costs meet the criteria for immediate expense or capitalization. The amounts are dependent on the volume and timing of such activities and the costs associated with such activities. Maintenance, repairs and minor improvements to properties are expensed when incurred. Renovations and improvements to properties are capitalized and depreciated over their estimated useful lives and construction costs related to the development of new community or expansion sites are capitalized until the property is substantially complete. Costs incurred to renovate repossessed homes for the Company’s rental program are capitalized and costs incurred to refurbish the homes at turnover and repair the homes while occupied are expensed. Certain expenditures to dealers and residents related to obtaining lessees in our communities are capitalized and amortized over a seven year period based on the anticipated term of occupancy of a resident. Costs associated with implementing the Company’s computer systems are capitalized and amortized over the estimated useful lives of the related software and hardware.
Derivative Instruments and Hedging Activities
At December 31, 2008, the Company had two interest rate swaps and an interest rate cap agreement to offset interest rate risk. The Company entered into two additional swap agreements in late December 2008 and February 2009 which become effective on January 2, 2009 and February 13, 2009, respectively. The Company does not enter into derivative transactions for speculative purposes. The Company adjusts its balance sheet on a quarterly basis to reflect current fair market value of its derivatives. Changes in the fair value of derivatives are recorded each period in earnings or comprehensive income, as appropriate. The ineffective portion of the hedge is immediately recognized in earnings to the extent that the change in value of a derivative does not perfectly offset the change in value of the instrument being hedged. The unrealized gains and losses held in accumulated other comprehensive income will be reclassified to earnings over time and occurs when the hedged items are also recognized in earnings. The Company uses standard market conventions to determine the fair values of derivative instruments, including the quoted market prices or quotes from brokers or dealers for the same or similar instruments. All methods of assessing fair value result in a general approximation of value and such value may never actually be realized.
Income Taxes
The Company has elected to be taxed as a REIT as defined under Section 856(c) of the Internal Revenue Code of 1986, as amended. In order for the Company to qualify as a REIT, at least ninety-five percent (95%) of the Company’s gross income in any year must be derived from qualifying sources. As a REIT, the Company generally will not be subject to U.S. federal income taxes at the corporate level if it distributes at least ninety percent (90%) of its REIT ordinary taxable income to its stockholders, which it fully intends to do. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. The Company remains subject to certain state and local taxes on its income and property as well as Federal income and excise taxes on its undistributed income.
The Company is subject to certain state taxes that are considered income taxes and has certain subsidiaries that are taxed as regular corporations. Deferred tax assets or liabilities are recognized for temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements and net operating loss carry forwards. Deferred tax assets and liabilities are measured using currently enacted tax rates. A valuation allowance is established if based on available evidence it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Impairment of Long-Lived Assets and Investment in Affiliates. Rental property is recorded at cost, less accumulated depreciation. The Company measures the recoverability of its assets in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long Lived Assets.” If such assets were deemed to be impaired as a result of this measurement evaluation, the impairment that would be recognized is the amount by which the carrying amount of the asset exceeds fair value as determined on a discounted net cash flow basis. Assets are tested for impairment every three years or more frequently whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Circumstances that may prompt a test of recoverability may include a significant decrease in anticipated market price, an adverse change to the extent or manner in which an asset may be used or in its physical condition or other such events that may significantly change the value of the long-lived asset.
The Company owns an approximate 19 percent investment in an affiliate that is reported under the equity method of accounting. Management performs an analysis to determine if the investment has experienced an other than temporary decline in value. Numerous factors are evaluated in accordance with published GAAP and SEC staff guidance. Changes in the facts and circumstances evaluated, future adverse changes in market conditions or operating results of the affiliate may affect management’s analysis.
32
Notes and Accounts Receivable. The Company evaluates the recoverability of its receivables whenever events occur or there are changes in circumstances such that management believes it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan and lease agreements. Receivables related to community rents are reserved when the Company believes that collection is less than probable, which is generally after a resident balance reaches 60 to 90 days past due. The Company reserves for estimated repairs to homes which collateralize its installment notes receivable based upon an estimate of annual foreclosures and historical costs of repair.
Depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. Useful lives are 30 years for land improvements and buildings, 10 years for rental homes, 7 to 15 years for furniture, fixtures and equipment, and 7 years for intangible assets.
Revenue Recognition. Rental income attributable to site and home leases is recorded on a straight-line basis when earned from tenants. Leases entered into by tenants generally range from month-to-month to two years and are renewable by mutual agreement of the Company and the resident or, in some cases, as provided by state statute. Revenue from the sale of manufactured homes is recognized upon transfer of title at the closing of the sales transaction.
Capitalized Costs. The Company capitalizes certain costs (including interest and other costs) incurred in connection with the development, redevelopment, capital enhancement and leasing of its properties. Management is required to use professional judgment in determining whether such costs meet the criteria for immediate expense or capitalization. The amounts are dependent on the volume and timing of such activities and the costs associated with such activities. Maintenance, repairs and minor improvements to properties are expensed when incurred. Renovations and improvements to properties are capitalized and depreciated over their estimated useful lives and construction costs related to the development of new community or expansion sites are capitalized until the property is substantially complete. Costs incurred to renovate repossessed homes for the Company’s rental program are capitalized and costs incurred to refurbish the homes at turnover and repair the homes while occupied are expensed. Certain expenditures to dealers and residents related to obtaining lessees in our communities are capitalized and amortized over a seven year period based on the anticipated term of occupancy of a resident. Costs associated with implementing the Company’s computer systems are capitalized and amortized over the estimated useful lives of the related software and hardware.
Derivative Instruments and Hedging Activities. The Company currently has two interest rate swaps and an interest rate cap agreement to offset interest rate risk. The Company does not enter into derivative transactions for speculative purposes. The Company adjusts its balance sheet on an ongoing quarterly basis to reflect current fair market value of its derivatives. Changes in the fair value of derivatives are recorded each period in earnings or comprehensive income, as appropriate. The ineffective portion of the hedge is immediately recognized in earnings to the extent that the change in value of a derivative does not perfectly offset the change in value of the instrument being hedged. The unrealized gains and losses held in accumulated other comprehensive income will be reclassified to earnings over time and occurs when the hedged items are also recognized in earnings. The Company uses standard market conventions to determine the fair values of derivative instruments, including the quoted market prices or quotes from brokers or dealers for the same or similar instruments. All methods of assessing fair value result in a general approximation of value and such value may never actually be realized.
33
Income Taxes. The Company has elected to be taxed as a REIT as defined under Section 856(c) of the Internal Revenue Code of 1986, as amended. In order for the Company to qualify as a REIT, at least ninety-five percent (95%) of the Company’s gross income in any year must be derived from qualifying sources. As a REIT, the Company generally will not be subject to U.S. federal income taxes at the corporate level if it distributes at least ninety percent (90%) of its REIT ordinary taxable income to its stockholders, which it fully intends to do. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. The Company remains subject to certain state and local taxes on its income and property as well as Federal income and excise taxes on its undistributed income.
The Company is subject to certain state taxes that are considered income taxes and has certain subsidiaries that are taxed as regular corporations. Deferred tax assets or liabilities are recognized for temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements and net operating loss carry forwards. Deferred tax assets and liabilities are measured using currently enacted tax rates. A valuation allowance is established if based on available evidence it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Results of Operations
Comparison of year ended December 31, 2007, to year ended December 31, 2006
For the year ended December 31, 2007, loss from operations decreased by $9.7 million, from a loss of $28.5 million in 2006 to a loss of $18.8 million in 2007. The decrease in loss was due to increased revenues of $8.2 million and a decrease in loss from affiliate of $8.6 million, offset by increased expenses of $7.1 million, as described in more detail below.
Income from real property increased by $3.9 million, from $187.5 million to $191.4 million, or 2.0 percent, due to rent increases ($3.1 million) and other community revenues ($0.8 million).
Revenue from home sales increased by $2.7 million, from $20.2 million to $22.9 million, or 13.4 percent. The Company sold 712 manufactured homes during the year ended December 31, 2007 as compared to 492 sales during 2006. Additional revenue resulted from the substantial increase in the number of homes sold but was partially offset by a 21.8 percent decrease in average sales price as higher priced Florida home sales lagged and consumer demand shifted to pre-owned homes.
Rental home revenue increased by $4.0 million, from $14.8 million to $18.8 million, or 27.0 percent. The number of tenants in the Company’s rental program increased from 4,576 at December 31, 2006 to 5,328 at December 31, 2007, resulting in additional revenue of approximately $2.9 million. The remainder of the increase resulted from an increase in the average rental rate per home from $686 per month at December 31, 2006 to $718 per month at December 31, 2007.
Ancillary revenues, net, increased by $0.1 million, from $0.4 million to $0.5 million, due to an increase in commissions from the brokerage of insurance policies.
34
Interest income decreased by $0.8 million, from $3.7 million to $2.9 million, or 21.6 percent, primarily due to the repayment of a $13.5 million mortgage note receivable by the borrower on March 1, 2007.
Other income decreased by $1.6 million, from income of $1.0 million to loss of $0.6 million, due to a decrease in brokerage commissions of $0.4 million, an increase in loss realized on the disposal of assets and land of $0.6 million, a decrease in proceeds from the settlement of a lawsuit which is included in 2006 Other Income of $0.4 million, and a decrease in other miscellaneous operating income $0.2 million.
Property operating and maintenance expenses increased by $0.8 million, from $48.1 million to $48.9 million, or 1.7 percent. The increase was due to the cost of the Company’s biennial convention ($0.2 million), an increase in legal expenses ($0.2 million), an increase in property and casualty insurance costs ($0.2 million), an increase in utility expenses ($0.3 million), and an increase in cable expense ($0.1 million) offset by a decrease in supply and repair costs ($0.2 million).
Real estate taxes increased by $0.5 million, from $15.9 million to $16.4 million, or 3.1 percent, due to increases in assessments and tax rates.
Cost of home sales increased by $2.5 million, from $15.7 million to $18.2 million, or 15.9 percent due primarily to the increase in the number of homes sold. The Company sold 712 manufactured homes during the year ended December 31, 2007 as compared to 492 sales during 2006. Gross profit margins decreased from 22.4 percent in 2006 to 20.6 percent in 2007 due primarily to a decrease in profit margin on sales of new homes.
Rental home operating and maintenance increased by $2.9 million, from $10.9 million to $13.8 million, due primarily to an increase in the number of tenants in the Company’s rental program. Additional information regarding the Company’s rental program is contained in the table below.
General and administrative expenses for real property decreased by $1.8 million, from $16.4 million to $14.6 million, due to a reduction of deferred compensation expenses of $2.1 million and a reduction in consulting fees of $0.3 million offset by an increase in salary, wage and incentive costs of $0.6 million. The reduction in deferred compensation expense includes the $1.4 million effect of the reversal in 2007 of $0.7 million of expenses recognized in 2006 related to performance-based restricted and phantom stock awards, because the Company determined that it was improbable that the performance criteria would be achieved.
General and administrative expenses for home sales and rentals decreased by $0.4 million, from $6.5 million to $6.1 million, or 6.2 percent due primarily to an decrease in payroll and benefits.
Depreciation and amortization increased by $2.2 million, from $60.3 million to $62.5 million, or 3.6 percent, due primarily to an increase in the total rental home portfolio.
Debt extinguishment expenses in 2006 of $0.5 million include defeasance fees and other costs associated with extinguishing $45.0 million of secured notes. Deferred financing costs of $0.2 million related to this debt were expensed in 2006.
35
Interest expense, including interest on mandatorily redeemable debt, increased by $0.4 million, from $65.1 million to $65.5 million, or 0.6 percent.
Provision for state income tax is discussed in detail in Footnote 10, Income Taxes.
Included in Equity loss from affiliate is an impairment to the carrying value of Origen of $1.9 million and $18.0 million in 2007 and 2006, respectively. Also, included in equity loss from affiliate in 2007 is an $8.0 million loss attributable to the Company’s portion of Origen’s goodwill and investment impairment charges of $32.3 million and $9.2 million, respectively.
Comparison of year ended December 31, 2006, to year ended December 31, 2005
For the year ended December 31, 2006, loss from operations increased by $22.4 million from a loss of $6.1 million in 2005 to a loss of $28.5 million in 2006. The increase in loss was due to increased expenses of $22.5 million and increased loss from affiliate of $15.7 million, offset by increased revenues of $15.8 million as described in more detail below.
Income from real property increased by $7.4 million, from $180.1 million to $187.5 million, or 4.1 percent, due to property acquisitions ($1.6 million), rent increases ($5.0 million) and other community revenues ($0.8 million).
Revenue from home sales increased by $1.8 million, from $18.4 million to $20.2 million, or 9.8 percent. The Company sold 492 manufactured homes during the year ended December 31, 2006 as compared to 425 sales during 2005. Additional revenue resulted from the increase in the number of homes sold and was partially offset by a 4.9 percent decrease in average sales price as consumer demand shifted to pre-owned homes.
Rental home revenue increased by $5.8 million, from $9.1 million to $14.9 million, or 63.7 percent. The number of tenants in the Company’s rental program increased from 3,711 at December 31, 2005 to 4,576 at December 31, 2006, resulting in additional revenue of approximately $4.2 million. The remainder of the increase resulted from an increase in the average rental rate per home from $643 per month at December 31, 2005 to $686 per month at December 31, 2006.
Ancillary revenues, net, decreased by $0.3 million, from $0.7 million to $0.4 million, due to a non-refundable option payment received in 2005 ($0.2 million) and increased golf course management fees ($0.2 million) offset by an increase in other miscellaneous ancillary revenues ($0.1 million).
Interest income decreased by $0.6 million, from $4.3 million to $3.7 million, or 14.0 percent, due primarily to a decrease in interest earned on the Company’s short-term investments which were sold during 2006.
Other income increased by $1.7 million, from a loss of $(0.7) million to income of $1.0 million, due to an increase in brokerage commissions ($0.1 million), a decrease in unsuccessful acquisition expenses ($0.5 million), proceeds from a lawsuit settlement ($0.4 million) and an increase in other miscellaneous operating income ($0.7 million).
36
Property operating and maintenance expenses increased by $1.9 million, from $46.2 million to $48.1 million, or 4.1 percent. The increase was due to acquisitions ($0.5 million), increases in utility costs ($1.5 million) and payroll and health insurance costs ($0.5 million), partially offset by decreases in repair and maintenance ($0.3 million) and miscellaneous other expenses ($0.3 million).
Real estate taxes increased by $0.7 million, from $15.2 million to $15.9 million, or 4.6 percent, due to acquisitions ($0.2 million) and increases in assessments and tax rates ($0.5 million).
Cost of home sales increased by $1.8 million, from $13.9 million to $15.7 million, or 12.9 percent due primarily to the increase in the number of homes sold. The Company sold 492 manufactured homes during the year ended December 31, 2006 as compared to 425 sales during 2005. Gross profit margins decreased from 24.6 percent in 2005 to 22.4 percent in 2006 due to increased sales of pre-owned homes at lower margins.
Rental home operating and maintenance increased by $3.6 million, from $7.3 million to $10.9 million, due primarily to an increase in the number of tenants in the Company’s rental program. Additional information regarding the Company’s rental program is contained in the table below.
General and administrative expenses for real property increased by $1.9 million, from $14.5 million to $16.4 million, due to an increase in payroll and benefits ($1.8 million), state and local taxes ($0.2 million), directors fee ($0.1 million) and audit and accounting fees ($0.2 million). The payroll and benefit increase includes the accrual of annual performance based bonus incentives ($0.5 million) and recognition of expense related to performance-based restricted and phantom stock awards ($0.7 million). These increases were offset by a decrease in legal fees of $0.4 million.
General and administrative expenses for home sales and rentals increased by $0.2 million, from $6.3 million to $6.5 million, or 3.2 percent due primarily to an increase in payroll and benefits.
Depreciation and amortization increased by $6.0 million, from $54.3 million to $60.3 million, or 11.0 percent, due primarily to an increase in the total rental home portfolio.
Debt extinguishment expense of $0.5 million includes defeasance fees and other costs associated with extinguishing $45.0 million of secured notes. Deferred financing costs of $0.2 million related to this debt were expensed.
Interest expense, including interest on mandatorily redeemable debt, increased by $5.1 million, from $60.0 million to $65.1 million, or 8.5 percent. Average debt increased by 4.0 percent and the remainder of the increase is due to higher variable rates.
Included in Equity loss from affiliate in 2006 is an $18.0 million impairment to the carrying value of Origen.
37
Same Property Information
The following table reflects the Same Property financial information for the periods ended December 31, 2007 and 2006. The “Same Property” data represents information regarding the operation of communities owned as of January 1, 2006, and December 31, 2007.
|
| Three Months Ended |
| Twelve Months Ended |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
|
| (in thousands) |
| (in thousands) |
| ||||||||
Income from real property |
| $ | 46,287 |
| $ | 45,373 |
| $ | 182,826 |
| $ | 179,342 |
|
Property operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and maintenance (1) |
|
| 9,179 |
|
| 8,950 |
|
| 37,359 |
|
| 36,982 |
|
Real estate taxes |
|
| 3,973 |
|
| 4,012 |
|
| 16,272 |
|
| 15,781 |
|
Property operating expenses |
|
| 13,152 |
|
| 12,962 |
|
| 53,631 |
|
| 52,763 |
|
Real property net operating income (2) |
| $ | 33,135 |
| $ | 32,411 |
| $ | 129,195 |
| $ | 126,579 |
|
Same property occupancy, site, and rent information at December 31, 2007 and 2006:
|
| 2007 |
| 2006 |
| ||
Number of properties |
|
| 135 |
|
| 135 |
|
Developed sites |
|
| 47,465 |
|
| 47,464 |
|
Occupied sites (3) |
|
| 37,733 |
|
| 37,879 |
|
Occupancy % (4) |
|
| 82.4 | % |
| 82.7 | % |
Weighted average monthly rent per site (4) |
| $ | 382 |
| $ | 368 |
|
Sites available for development |
|
| 6,090 |
|
| 6,315 |
|
Sites planned for development in next year |
|
| 10 |
|
| 25 |
|
(1) Amounts are reported net of recovery of water and sewer utility expenses.
(2) Investors in and analysts following the real estate industry utilize net operating income (“NOI”) as a supplemental performance measure. NOI is derived from revenues (determined in accordance with GAAP) minus property operating expenses and real estate taxes (determined in accordance with GAAP). NOI does not represent cash generated from operating activities in accordance with GAAP and should not be considered to be an alternative to net income (determined in accordance with GAAP) as an indication of the Company’s financial performance or to be an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company’s liquidity; nor is it indicative of funds available for the Company’s cash needs, including its ability to make cash distributions. The Company believes that net income is the most directly comparable GAAP measurement to net operating income. Net income includes interest and depreciation and amortization which often have no effect on the market value of a property and therefore limit its use as a performance measure. In addition, such expenses are often incurred at a parent company level and therefore are not necessarily linked to the performance of a real estate asset. The Company believes that net operating income is helpful to investors as a measure of operating performance because it is an indicator of the return on property investment, and provides a method of comparing property performance over time. The Company uses NOI as a key management tool when evaluating performance and growth of particular properties and/or groups of properties. The principal limitation of NOI is that it excludes depreciation, amortization and non-property specific expenses such as general and administrative expenses, all of which are significant costs, and therefore, NOI is a measure of the operating performance of the properties of the Company rather than of the Company overall.
(3) Occupied sites include manufactured housing and permanent recreational vehicle sites, and exclude seasonal recreational vehicle sites.
|
|
38
On a same property basis, real property net operating income increased by $2.6 million from $126.6 million for the year ended December 31, 2006, to $129.2 million for the year ended December 31, 2007, or 2.1 percent. Income from real property increased by $3.5 million from $179.3 million to $182.8 million, or 1.9 percent, due primarily to increases in rents including water and property tax pass through. Property operating expenses increased by $0.8 million from $52.8 million to $53.6 million, or 1.6 percent, due to increases in real estate taxes ($0.5 million), and other expenses ($0.3 million).
Rental Program
The following table reflects additional information regarding the Company’s rental program for the years ended December 31, 2007, 2006 and 2005:
|
| Year Ended December 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (in thousands except for *) |
| |||||||
Rental home revenue |
| $ | 18,840 |
| $ | 14,849 |
| $ | 9,080 |
|
Site rent included in Income from real property |
|
| 21,704 |
|
| 18,819 |
|
| 12,277 |
|
Rental program revenue |
|
| 40,544 |
|
| 33,668 |
|
| 21,357 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
Payroll and commissions |
|
| 2,459 |
|
| 1,804 |
|
| 1,758 |
|
Repairs and refurbishment |
|
| 6,526 |
|
| 4,938 |
|
| 3,190 |
|
Taxes and insurance |
|
| 2,366 |
|
| 2,506 |
|
| 1,022 |
|
Other |
|
| 2,479 |
|
| 1,679 |
|
| 1,330 |
|
Rental program operating and maintenance |
|
| 13,830 |
|
| 10,927 |
|
| 7,300 |
|
Net operating income (1) |
| $ | 26,714 |
| $ | 22,741 |
| $ | 14,057 |
|
|
|
|
|
|
|
|
|
|
|
|
Number of occupied rentals, end of period* |
|
| 5,328 |
|
| 4,576 |
|
| 3,711 |
|
Cost of occupied rental homes |
| $ | 161,057 |
| $ | 135,861 |
| $ | 109,214 |
|
Weighted average monthly rental rate per home and site* |
| $ | 718 |
| $ | 686 |
| $ | 643 |
|
(1)See Note (2) following Same Property Information on page 38.
Net operating income from the rental program increased $4.0 million from $22.7 million in 2006 to $26.7 million in 2007 as a result of a $6.9 million increase in revenue offset by a $2.9 million increase in expenses. Revenues increased due to an increase in the weighted average monthly rental rate and an increase in the number of leased rental homes. Expenses were also impacted by the increase in the number of leased rental homes. A comparison of the year ended 2006 to the year ended 2005 results in similar increases in net operating income, revenue and expenses for the same reasons as noted in the comparison of the year ended 2007 to the year ended 2006.
39
Liquidity and Capital Resources
The Company’s principal liquidity demands have historically been, and are expected to continue to be, distributions to the Company’s stockholders and the unitholders of the Operating Partnership, capital improvements of properties, the purchase of new and pre-owned homes, property acquisitions, development and expansion of properties, and debt repayment.
The Company expects to meet its short-term liquidity requirements through its working capital provided by operating activities and through its $155.0 million lines of credit. The Company considers these resources to be adequate to meet all operating requirements, including recurring capital improvements, routinely amortizing debt and other normally recurring expenditures of a capital nature, pay dividends to its stockholders to maintain qualification as a REIT in accordance with the Internal Revenue Code and make distributions to the Operating Partnership’s unitholders.
The Company continuously seeks acquisition opportunities that meet the Company’s criteria for acquisition. Should such investment opportunities arise in 2008, the Company will finance the acquisitions though the temporary use of its lines of credit until permanent secured financing can be arranged, through the assumption of existing debt on the properties or the issuance of certain equity securities.
The Company has also invested approximately $24.2 million during 2007 in the acquisition of homes primarily intended for its rental program. Expenditures for 2008 will be dependent upon the condition of the markets for repossessions and new home sales as well as rental homes.
Cash and cash equivalents increased by $2.2 million to $5.4 million at December 31, 2007, compared to $3.2 million at December 31, 2006. Net cash provided by operating activities increased by $3.3 million to $49.6 million for the year ended December 31, 2007, compared to $46.3 million for the year ended December 31, 2006.
The Company’s net cash flows provided by operating activities may be adversely impacted by, among other things: (a) the market and economic conditions in the Company’s markets generally, and specifically in metropolitan areas of the Company’s current markets; (b) lower occupancy rates of the Properties; (c) increased operating costs, including insurance premiums, real estate taxes and utilities, that cannot be passed on to the Company’s tenants; and (d) decreased sales or rentals of manufactured homes. See “Risk Factors.”
The Company has an unsecured line of credit facility with a maximum borrowing amount of $115 million, subject to certain borrowing base calculations, which bears interest at LIBOR + 1.65 percent (6.55 percent at December 31, 2007) and matures on October 1, 2010, with a one-year optional extension. The outstanding balance on the line of credit at December 31, 2007, was $85.4 million. In addition, $3.4 million of availability was used to back standby letters of credit leaving a maximum of $26.2 million available to be drawn under the facility based on the December 31, 2007, calculation of borrowing base. The line of credit facility contains various leverage, debt service coverage, net worth maintenance and other customary covenants all of which the Company was in compliance with at December 31, 2007.
40
The sub-prime credit crisis and ensuing decline in credit availability have caused turmoil in US and foreign markets. Many industries with no direct involvement with sub-prime lending, securitizations, home building or mortgages have suffered share price declines as economic uncertainty has derailed investor confidence. While many of the fundamentals of the Company, and manufactured housing industry, have been improving over recent years, the Company’s share price has suffered in the turbulent stock market of the past six months. For the Company, the most relevant consequence of this financial turmoil is the uncertainty of the availability of credit. With minimal debt maturities of $4.3 million and $16.0 million in 2008 and 2009, respectively, the Company believes this risk is significantly mitigated.
The Company’s primary long-term liquidity needs are principal payments on outstanding indebtedness. At December 31, 2007, the Company’s outstanding contractual obligations were as follows:
|
|
|
| Payments Due By Period |
| |||||||||||
|
|
|
| (in thousands) |
| |||||||||||
Contractual Cash Obligations |
| Total Due |
| 1 year |
| 2-3 years |
| 4-5 years |
| After 5 years |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized term loan - FNMA |
| $ | 381,587 |
| $ | 3,936 |
| $ | 8,504 |
| $ | 9,337 |
| $ | 359,810 |
|
Collateralized term loan - B of A |
|
| 486,063 |
|
| 7,156 |
|
| 15,620 |
|
| 117,882 |
|
| 345,405 |
|
Mortgage notes, other |
|
| 184,875 |
|
| 4,902 |
|
| 12,339 |
|
| 15,768 |
|
| 151,866 |
|
Lines of credit |
|
| 85,703 |
|
| — |
|
| 85,703 |
|
| — |
|
| — |
|
Redeemable Preferred OP Units |
|
| 49,447 |
|
| — |
|
| 8,940 |
|
| 4,725 |
|
| 35,782 |
|
Operating leases |
|
| 3,350 |
|
| 686 |
|
| 1,332 |
|
| 1,332 |
|
| — |
|
|
| $ | 1,191,025 |
| $ | 16,680 |
| $ | 132,438 |
| $ | 149,044 |
| $ | 892,863 |
|
Interest expense is a material cash requirement of the Company and is expected to be in excess of $66.1 million for 2008, $64.8 million for 2009, $63.1 million for 2010, $60.3 million for 2011 and $55.7 million for 2012, based on the current debt levels, rates and maturities.
The Company anticipates meeting its long-term liquidity requirements, such as scheduled debt maturities, large property acquisitions, and Operating Partnership unit redemptions through the collateralization of its Properties. The Company currently has 33 unencumbered Properties with an estimated market value of $222.0 million, some of which support the borrowing base for the Company’s $115.0 million unsecured line of credit which has $88.8 million outstanding at December 31, 2007. From time to time, the Company may also issue shares of its capital stock or preferred stock, issue equity units in the Operating Partnership or sell selected assets. The ability of the Company to finance its long-term liquidity requirements in such manner will be affected by numerous economic factors affecting the manufactured housing community industry at the time, including the availability and cost of mortgage debt, the financial condition of the Company, the operating history of the Properties, the state of the debt and equity markets, and the general national, regional and local economic conditions. If it were to become necessary for the Company to approach the credit markets, the current volatility in the credit markets could make borrowing more expensive. See “Risk Factors”. If the Company is unable to obtain additional debt or equity financing on acceptable terms, the Company’s business, results of operations and financial condition will be adversely impacted.
41
At December 31, 2007, the Company’s debt to total capitalization approximated 73.1 percent (assuming conversion of all Common OP Units to shares of common stock). The debt has a weighted average maturity of approximately 6.4 years and a weighted average interest rate of 5.4 percent.
Capital expenditures for the years ended December 31, 2007 and 2006 included recurring capital expenditures of $7.3 million and $6.9 million, respectively.
Net cash used in investing activities was $20.8 million for the year ended December 31, 2007, compared to $38.0 million in the prior year. The difference is due to increased repayments of notes receivables and officer’s notes, net, of $13.2 million and decreased investment in rental properties of $8.2 million, offset by decreased proceeds from loans sold to Origen of $4.2 million.
Net cash used in financing activities was $26.6 million for the year ended December 31, 2007, compared to $11.0 million in the prior year. The difference is primarily due to a decrease in payments to redeem common stock and OP units of $1.1 million , a decrease in payments to retire preferred operating partnership units of $3.7 million, a decrease in payments for deferred financing costs of $0.5 million, and a decrease in distributions of $2.7 million offset by a decrease in borrowings on the line of credit of $13.8 million, a decrease in net proceeds from notes payable and other debt of $7.4 million and a decrease in net proceeds from option exercises of $2.4 million.
Inflation
Most of the leases allow for periodic rent increases which provide the Company with the opportunity to achieve increases in rental income as each lease expires. Such types of leases generally minimize the risk of inflation to the Company.
Recent Accounting Pronouncements
In September 2006,Accounting standards adopted in the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishesyear ended December 31, 2008 did not have a common definition for fair valuematerial impact on the Company’s results of operations or financial condition. Accounting standards to be applied to US GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 was originally effective for fiscal years beginningadopted after November 15, 2007, however in February,the year ended December 31, 2008 the FASB agreed to (a) defer the effective date in Statement 157 for one year for certain nonfinancial assets and non financial liabilities, except those that are recognizedmay or disclosed at fair value in the financial statements on a recurring basis (at least annually), and (b) remove certain leasing transactions form the scope of Statement 157. The Company does not believe SFAS 157 will have a material impact on its financial position andthe Company’s results of operations.
42
Recent Accounting Pronouncements, continued:
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” (SFAS 159). This statement permits, but does not require, entities to measure certain financial instruments and other assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected should be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company did not elect the fair value option on January 1, 2008 and does not believe SFAS 159 will have an impact on its results from operations or financial position.condition are discussed below:
In December 2007 the FASB issued Statement No. 141R (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R will significantly change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Statement 141R will change the accounting treatment for certain specific acquisition related items and also includes a substantial number of new disclosure requirements. The Company will apply SFAS 141R prospectively to business combinations for which the acquisition date is on or after January 1, 2009.
In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements-AnStatements, an Amendment of ARB No. 51” (“SFAS 160”)., which amends Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements”, to establish new standards that will govern the accounting for and reporting of noncontrolling interests in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Also, SFAS 160 establishes new accounting and reporting standards for therequires that: (1) noncontrolling interest, in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrollingpreviously referred to as minority interest, in a subsidiary (minority interest) is an ownership interest in the consolidated entity that should be reported as part of equity in the consolidated financial statements and separately from the parent company’s equity. This statement also requires consolidated net incomestatements; (2) losses be allocated to be reported at amounts that include the amounts attributable to the parent and the noncontrolling interest and requires disclosure,even when such allocation might result in a deficit balance, reducing the losses attributed to the controlling interest; (3) changes in ownership interests be treated as equity transactions if control is maintained; (4) upon a loss of control, any gain or loss on the face of the consolidated statement of operations, the amounts of consolidated net income attributable to the parentinterest sold be recognized in earnings; and (5) the noncontrolling interest.interest’s share be recorded at the fair value of net assets acquired, plus its share of goodwill. SFAS 160 is effective on a prospective basis for business combinations for which the acquisition date is on or after the first annual reporting periodfiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.2008, except for the presentation and disclosure requirements, which will be applied retrospectively. The Company does not believeexpects the adoption of SFAS 160 willto have a material impact on the presentation of minority interest.
In May 2008 the FASB ratified FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which requires issuers of convertible debt securities within its scope to separate these securities into a debt component and an equity component, resulting in the debt component being recorded at fair value without consideration given to the conversion feature. Issuance costs are also allocated between the debt and equity components. FSP APB 14-1 will require that convertible debt within its scope reflect a company’s nonconvertible debt borrowing rate when interest expense is recognized. FSP APB 14-1 is effective fiscal years and interim periods beginning after December 15, 2008, and shall be applied retrospectively to all prior periods. The Company is evaluating the impact FSP No. APB 14-1 will have on our results of operations and financial condition.
SUPPLEMENTAL MEASURES
In addition to the results reported in accordance with accounting principles generally accepted in the United States (GAAP), we have provided information regarding Net Operating Income (“NOI”) in the following tables. NOI is derived from revenues (determined in accordance with GAAP) minus property operating expenses and real estate taxes (determined in accordance with GAAP). We use NOI as the primary basis to evaluate the performance of our operations. A reconciliation of NOI to Net loss is included in “Results of Operations” below.
The Company believes that NOI is helpful to investors and analysts as a measure of operating performance because it is an indicator of the return on property investment, and provides a method of comparing property performance over time. The Company uses NOI as a key management tool when evaluating performance and growth of particular properties and/or groups of properties. The principal limitation of NOI is that it excludes depreciation, amortization, interest expense, and non-property specific expenses such as general and administrative expenses, all of which are significant costs, and therefore, NOI is a measure of the operating performance of the properties of the Company rather than of the Company overall. The Company believes that these costs included in net income (loss) often have no effect on the market value of a property and therefore limit its use as a performance measure. In addition, such expenses are often incurred at a parent company level and therefore are not necessarily linked to the performance of a real estate asset.
NOI should not be considered a substitute for the reported results prepared in accordance with GAAP. NOI should not be considered as an alternative to net income as an indicator of our financial performance, or to cash flows as a measure of liquidity; nor is it indicative of funds available for the Company’s cash needs, including its ability to make cash distributions. NOI, as determined and presented by the Company, may not be comparable to related or similarly titled measures reported by other companies.
The Company also provides information regarding Funds From Operations (“FFO”). A definition of FFO and a reconciliation of Net loss to FFO are included in the presentation of FFO in “Results of Operations” following the “Comparison of the Years ended December 31, 2007 and 2006”.
RESULTS OF OPERATIONS
The Company reports operating results under two segments: Real Property Operations, and Home Sales and Rentals. The Real Property Operations segment owns, operates, and develops manufactured housing communities concentrated in the midwestern, southern, and southeastern United States and is in the business of acquiring, operating and expanding manufactured housing communities. The Home Sales and Rentals segment offers manufactured home sales and leasing services to tenants and prospective tenants of our communities. The Company evaluates segment operating performance based on NOI.
The accounting policies of the segments are the same as those applied in the consolidated financial statements, except for the use of NOI. The Company may allocate certain common costs, primarily corporate functions, between the segments differently than the Company would for stand alone financial information prepared in accordance with GAAP. These allocated costs include expenses for shared services such as information technology, finance, communications, legal and human resources. The Company does not allocate interest expense and certain other corporate costs not directly associated with the segments’ NOI.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2008 and 2007
REAL PROPERTY OPERATIONS - TOTAL PORTFOLIO
The following tables reflect certain financial and statistical information for all properties owned and operated during the years ended December 31, 2008 and 2007.
|
| Years Ended December 31, |
| |||||||||
|
| 2008 |
| 2007 |
| Change |
| % Change |
| |||
Financial Information |
| (in thousands) |
|
|
| |||||||
Income from real property |
| $ | 196,206 |
| $ | 191,427 |
| $ | 4,779 |
| 2.5 | % |
Property operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and benefits |
|
| 15,054 |
|
| 14,037 |
|
| 1,017 |
| 7.2 | % |
Legal, taxes and insurance |
|
| 2,996 |
|
| 3,687 |
|
| (691 | ) | -18.7 | % |
Utilities |
|
| 21,151 |
|
| 20,409 |
|
| 742 |
| 3.6 | % |
Supplies and repair |
|
| 6,843 |
|
| 6,699 |
|
| 144 |
| 2.1 | % |
Other |
|
| 4,359 |
|
| 4,061 |
|
| 298 |
| 7.3 | % |
Real estate taxes |
|
| 15,982 |
|
| 16,366 |
|
| (384 | ) | -2.3 | % |
Property operating expenses |
|
| 66,385 |
|
| 65,259 |
|
| 1,126 |
| 1.7 | % |
Real property net operating income |
| $ | 129,821 |
| $ | 126,168 |
| $ | 3,653 |
| 2.9 | % |
|
|
| Years Ended December 31, |
| ||||||
Statistical Information |
|
| 2008 |
|
| 2007 |
|
| Change |
|
Number of properties |
|
| 136 |
|
| 136 |
|
| — |
|
Developed sites |
|
| 47,613 |
|
| 47,607 |
|
| 6 |
|
Occupied sites (1) |
|
| 37,711 |
|
| 37,758 |
|
| (47 | ) |
Occupancy % (2) |
|
| 81.9% |
|
| 82.2% |
|
| -0.3 | % |
Weighted average monthly rent per site (2) |
| $ | 393 |
| $ | 382 |
| $ | 11 |
|
Sites available for development |
|
| 6,081 |
|
| 6,588 |
|
| (507 | ) |
(1) | Occupied sites include manufactured housing and permanent recreational vehicle sites, and exclude seasonal recreational vehicle sites. |
(2) | Occupancy % and weighted average rent relates only to manufactured housing sites, and excludes permanent and seasonal recreational vehicle sites. |
In the past few years there have been signs of recovery in our industry, such as lower repossessions. In the earlier part of the decade this industry has faced challenging times due to poor lending practices of the manufactured home lenders from the 90’s, coupled with reduced new home shipments, and the non-existence of a dealer network. The Company has continued to show positive growth year over year in real property net operating income. NOI increased by $3.6 million from $126.2 million to $129.8 million, or 2.9 percent. Management believes while not recession proof, our resistance to recessionary forces is derived from our industry providing affordable housing in the face of economic crisis.
The growth in income from real property of $4.8 million is due to a weighted average rental rate increase of 2.9 percent that resulted in increased manufactured home rental income (net of vacancies and rent discounts) of $2.7 million, increased income from our recreational vehicle portfolio of $0.9 million and increased miscellaneous other property revenues of $1.2 million. The $1.2 million increase in miscellaneous other property revenues can be primarily attributed to revenues from rubbish collection, water and sewer re-billing, late fees and returned check fees.
The growth in real property operating expenses of $1.1 million was due to several factors. Payroll and benefit costs increased by $1.0 million due to the Company’s annual merit wage increase and associated payroll taxes, and increased health insurance costs. Utility costs related to water and rubbish removal charges increased $0.7 million (both of which are re-billed to the resident and correspondingly increased income from real property as mentioned above). Supply and repair costs related to community maintenance increased by $0.2 million. Legal fees related to delinquency and other property matters decreased by $0.4 million. Property and casualty insurance decreased by $0.3 million due to a decrease in reserves for current claims and favorable settlement of prior claims. This benefit was completely offset by increased other expenses related to administrative costs such as postage, advertising, etc. of $0.3 million. Real estate taxes decreased by $0.4 million due to an adjustment to accrued real estate taxes due to refunds of tax appeals, principally in the states of Michigan and Texas.
REAL PROPERTY OPERATIONS - SAME SITE
The following table reflects certain financial and statistical information for particular properties owned and operated for the same period in both years for the years ended December 31, 2008 and 2007. A key management tool the Company uses when evaluating performance and growth of particular properties is a comparison of Same Site communities. The Same Site data may change from time-to-time depending on acquisitions, dispositions, management discretion, significant transactions, or unique situations.
|
| Years Ended December 31, |
| |||||||||
|
| 2008 |
| 2007 |
| Change |
| % Change |
| |||
Financial Information |
| (in thousands) |
|
|
| |||||||
Income from real property (1) |
| $ | 186,972 |
| $ | 182,826 |
| $ | 4,146 |
| 2.3 | % |
Property operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and benefits |
|
| 15,048 |
|
| 14,030 |
|
| 1,018 |
| 7.3 | % |
Legal, taxes, & insurance |
|
| 2,985 |
|
| 3,673 |
|
| (688 | ) | -18.7 | % |
Utilities (1) |
|
| 11,367 |
|
| 11,155 |
|
| 212 |
| 1.9 | % |
Supplies and repair |
|
| 6,823 |
|
| 6,671 |
|
| 152 |
| 2.3 | % |
Other |
|
| 2,033 |
|
| 1,813 |
|
| 220 |
| 12.1 | % |
Real estate taxes |
|
| 15,899 |
|
| 16,273 |
|
| (374 | ) | -2.3 | % |
Property operating expenses |
|
| 54,155 |
|
| 53,615 |
|
| 540 |
| 1.0 | % |
Real property net operating income |
| $ | 132,817 |
| $ | 129,211 |
| $ | 3,606 |
| 2.8 | % |
|
| Years Ended December 31, |
| |||||||
Statistical Information |
| 2008 |
| 2007 |
| Change |
| |||
Number of properties |
|
| 135 |
|
| 135 |
|
| — |
|
Developed sites |
|
| 47,471 |
|
| 47,465 |
|
| 6 |
|
Occupied sites (2) |
|
| 37,686 |
|
| 37,733 |
|
| (47 | ) |
Occupancy % (3) |
|
| 82.1% |
|
| 82.4% |
|
| -0.3 | % |
Weighted average monthly rent per site (3) |
|
| 393 |
|
| 382 |
|
| 11 |
|
Sites available for development |
|
| 5,583 |
|
| 6,090 |
|
| (507 | ) |
(1) | Amounts are reported net of recovery for water and sewer utility expenses. |
(2) | Occupied sites include manufactured housing and permanent recreational vehicle sites, and exclude seasonal recreational vehicle sites. |
(3) | Occupancy % and weighted average rent relates only to manufactured housing sites, and excludes permanent and seasonal recreational vehicle sites. |
As indicated above this is an analytical measure used by management to determine the growth of our communities on a year over year basis that may have items classified differently than our GAAP statements.
43The primary differences between our total portfolio and same site portfolio are the reclassification of water and sewer expense from utilities to income from real property to reflect the recovery net of expenses and the inclusion of 135, rather than 136, Properties in the same site portfolio.
Other:HOME SALES AND RENTALS
FundsAs discussed in the "Overview" in "Management’s Discussion and Analysis", the Company acquires repossessed manufactured homes (generally, that are within its communities) from operations (“FFO”)lenders at substantial discounts. The Company leases or sells these value priced homes to current and prospective residents. The Company also purchases new homes to lease and sell to current and prospective residents. The programs the Company has established for its customers to lease or buy new and used homes have helped to prevent additional occupancy loss and have contributed to the Company’s continued NOI growth even during turbulent industry and economic conditions.
The following table reflects certain financial and statistical information for the Company’s Rental Program for the years ended December 31, 2008 and 2007.
|
| Years Ended December 31, |
| |||||||||
|
| 2008 |
| 2007 |
| Change |
| % Change |
| |||
Financial Information |
| (in thousands, except for *) |
|
|
| |||||||
Rental home revenue |
| $ | 20,533 |
| $ | 18,840 |
| $ | 1,693 |
| 9.0 | % |
Site rent from Rental Program (1) |
|
| 24,537 |
|
| 21,704 |
|
| 2,833 |
| 13.1 | % |
Rental program revenue |
|
| 45,070 |
|
| 40,544 |
|
| 4,526 |
| 11.2 | % |
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and commissions |
|
| 2,008 |
|
| 2,459 |
|
| (451 | ) | -18.3 | % |
Repairs and refurbishment |
|
| 7,419 |
|
| 6,526 |
|
| 893 |
| 13.7 | % |
Taxes and insurance |
|
| 2,802 |
|
| 2,366 |
|
| 436 |
| 18.4 | % |
Marketing and other |
|
| 3,444 |
|
| 2,479 |
|
| 965 |
| 38.9 | % |
Rental program operating and maintenance |
|
| 15,673 |
|
| 13,830 |
|
| 1,843 |
| 13.3 | % |
Net operating income |
| $ | 29,397 |
| $ | 26,714 |
| $ | 2,683 |
| 10.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Statistical Information |
|
|
|
|
|
|
|
|
|
|
|
|
Number of occupied rentals, end of period* |
|
| 5,517 |
|
| 5,328 |
|
| 189 |
| 3.5 | % |
Investment in occupied rental homes |
| $ | 170,521 |
| $ | 161,057 |
| $ | 9,464 |
| 5.9 | % |
Number of sold rental homes* |
|
| 596 |
|
| 363 |
|
| 233 |
| 64.2 | % |
Weighted average monthly rental rate* |
| $ | 736 |
| $ | 718 |
| $ | 18 |
| 2.5 | % |
(1) | The renter’s monthly payment includes the site rent and an amount attributable to the leasing of the home. The site rent is reflected in the Real Property Operations segment. For purposes of management analysis, the site rent is included in the Rental Program revenue to evaluate the growth and performance of the Rental Program. |
Net operating income from the rental program increased $2.7 million from $26.7 million to $29.4 million, or 10.0 percent as a result of a $4.5 million increase in revenue partially offset by a $1.8 million increase in expenses. Revenues increased due to the increase in the number of leased homes in the Company’s Rental Program and due to the increase in average rental rates (as indicated in the table above). Certain expenses increase as the number of homes in the rental program increase. These expenses include personal property tax, use tax, repair costs, and refurbishment costs. Although total refurbishment costs increased by $0.7 million, the average refurbishment cost per move out (costs incurred to prepare a previously leased home for a new occupant) declined 0.7 percent from $1,605 in 2007 to $1,593 in 2008. Commissions decreased by $0.5 million due to a realignment of the commission plan that prorates the commission if the full lease term was not completed. Marketing and other costs increased primarily due to an increase in advertising and promotion costs of $0.5 million and an increase in bad debt expense of $0.4 million.
The rental program has proven to be an effective response to the adverse factors that the Company faced during the industry downturn and now draws more than 14,000 applications per year to live in the Properties. The program has replaced the independent dealer network, a majority of which were forced to go out of business during the early part of the decade, which formerly directed potential residents to our properties.
The following table reflects certain financial and statistical information for the Company’s Home Sales program for the years ended December 31, 2008 and 2007.
|
| Years Ended December 31, |
| |||||||||
|
| 2008 |
| 2007 |
| Change |
| % Change |
| |||
Financial Information |
| (in thousands, except for statistical information) |
|
|
| |||||||
New home sales |
| $ | 8,652 |
| $ | 6,056 |
| $ | 2,596 |
| 42.9 | % |
Pre-owned home sales |
|
| 22,825 |
|
| 16,849 |
|
| 5,976 |
| 35.5 | % |
Revenue from homes sales |
|
| 31,477 |
|
| 22,905 |
|
| 8,572 |
| 37.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
New home cost of sales |
|
| 7,690 |
|
| 4,928 |
|
| 2,762 |
| 56.0 | % |
Pre-owned home cost of sales |
|
| 16,596 |
|
| 13,253 |
|
| 3,343 |
| 25.2 | % |
Cost of home sales |
|
| 24,286 |
|
| 18,181 |
|
| 6,105 |
| 33.6 | % |
Net operating income / Gross Profit |
| $ | 7,191 |
| $ | 4,724 |
| $ | 2,467 |
| 52.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit – new homes |
| $ | 962 |
| $ | 1,128 |
| $ | (166 | ) | -14.7 | % |
Gross margin % – new homes |
|
| 11.1 | % |
| 18.6 | % |
|
|
| -7.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit – pre-owned homes |
| $ | 6,229 |
| $ | 3,596 |
| $ | 2,633 |
| 73.2 | % |
Gross margin % – pre-owned homes |
|
| 27.3 | % |
| 21.3 | % |
|
|
| 6.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Statistical Information |
|
|
|
|
|
|
|
|
|
|
|
|
Home sales volume: |
|
|
|
|
|
|
|
|
|
|
|
|
New home sales |
|
| 122 |
|
| 76 |
|
| 46 |
| 60.5 | % |
Pre-owned home sales |
|
| 843 |
|
| 636 |
|
| 207 |
| 32.5 | % |
Total homes sold |
|
| 965 |
|
| 712 |
|
| 253 |
| 35.5 | % |
Gross profit from home sales increased by $2.5 million, or 52.2%, as the Company sold 253 more homes than in 2007. Gross profit from pre-owned home sales increased by $2.6 million while gross profit from new home sales declined by $0.2 million.
Pre-owned home sales include the sale of homes that have been utilized in the Company’s rental program. The cost basis of a rental home is depreciated and therefore, the gross profit margin on the sale of these homes increases the longer the home has been in the rental program. An increase in the volume of rental home sales is the primary reason for the overall increase in pre-owned home sales and therefore the principal contributor to the increase in gross profit on pre-owned home sales.
While the number of new home sales increased by 60.5 percent, gross profit decreased by 14.7 percent. The selling price of new homes in the Florida market was reduced to facilitate sales during this period of declining demand as potential buyers, worried about dwindling retirement and investment funds, were hesitant to purchase. The increase in new home sale volume was due, primarily, to an increase in sales of Signature Homes. A new product line for the Company, Signature Homes, have a contemporary design that compares favorably to the “feel” of a stick built residential home. The increase in gross profit from Signature Home sales was more than offset by the decline in gross profit from the sale of new homes in Florida.
OTHER INCOME STATEMENT ITEMS
Other revenuesinclude other income (loss), interest income, and ancillary revenues, net. Other revenues increased by $4.0 million, from $2.8 million to $6.8 million, or 142.9 percent. This increase was due to a gain on sale of undeveloped land of $3.3 million, increased interest income of $1.0 million, offset partially by a fee paid to Origen of $0.3 million in connection with the transfer of the manufactured home loan servicing contract to a new service provider. The increase in interest income was primarily due to the additional installment notes receivable recognized in association with the transfer of financial assets that are recorded as collateralized receivables in the consolidated balance sheet. The interest income on these collateralized receivables is offset by the same amount of interest expense recognized on the secured debt recorded in association with this transaction. See Note 3 – Secured Borrowing and Collateralized Receivables for additional information.
General and administrativecosts increased by $2.4 million, from $20.7 million to $23.1 million, or 11.6 percent due to increased salary, benefit, and other compensation costs of $2.7 million (including severance costs of $0.9 million associated with the retirement of the Company’s former President), increased advertising costs of $0.3 million, partially offset by decreases in the Michigan single business tax of $0.5 million and other costs of $0.1 million. The Michigan single business tax was replaced by the Michigan business tax and is now recorded as an income tax rather than a general and administrative expense.
Depreciation and amortizationcosts increased by $2.5 million, from $62.5 million to $65.0 million, or 4.0 percent primarily due to the additional homes added to the Company’s investment property for use in the Company’s Rental Program.
Interest expenseon debt, including interest on mandatorily redeemable debt, decreased by $1.3 million, from $65.5 million to $64.2 million, or 2.0 percent due to a reduction in expense of approximately $2.4 million related to lower interest rates charged on variable rate debt, offset by an increase in fixed rate debt interest expense of $1.1 million. The increase in fixed rate debt expense is primarily due to the Company’s additional secured debt recognized in association with the transfer of financial assets that was recorded as a secured borrowing in the consolidated balance sheet (and is offset by the same amount of interest income recorded on collateralized receivables in relation to this transaction). See Note 3 – Secured Borrowing and Collateralized Receivables in the Company’s Notes to Consolidated Financial Statements included herein.
Equity losses from affiliatesincreased by $8.5 million, from $8.0 million to $16.5 million, or 106.3 percent due to increased other than temporary charges to the carrying value of the Origen investment of $7.7 million, and increased equity allocation of the estimated losses from affiliates of $0.8 million.
Provision for state income taxesdecreased by $0.5 million, from $0.8 million to $0.3 million, or 62.5 percent due to a change in the effective tax rate used to calculate the deferred tax liability related to the Michigan Business Tax.
Minority interestchanged by $2.9 million, from income of $2.1 million to expense of $0.8 million since the Company’s operating losses are no longer allocated to the minority interest partners, and distributions of $1.4 million were recorded as expense. See Note 14 in the Notes to Consolidated Statements for additional information.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2007 and 2006
REAL PROPERTY OPERATIONS - TOTAL PORTFOLIO
The following tables reflect certain financial and statistical information for all properties owned and operated during the years ended December 31, 2007 and 2006.
|
| Years Ended December 31, |
| |||||||||
|
| 2007 |
| 2006 |
| Change |
| % Change |
| |||
Financial Information |
| (in thousands) |
|
|
| |||||||
Income from real property |
| $ | 191,427 |
| $ | 187,535 |
| $ | 3,892 |
| 2.1 | % |
Property operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and benefits |
|
| 14,037 |
|
| 14,014 |
|
| 23 |
| 0.2 | % |
Legal, taxes and insurance |
|
| 3,687 |
|
| 3,268 |
|
| 419 |
| 12.8 | % |
Utilities |
|
| 20,409 |
|
| 20,138 |
|
| 271 |
| 1.3 | % |
Supplies and repair |
|
| 6,699 |
|
| 6,946 |
|
| (247 | ) | -3.6 | % |
Other |
|
| 4,061 |
|
| 3,759 |
|
| 302 |
| 8.0 | % |
Real estate taxes |
|
| 16,366 |
|
| 15,860 |
|
| 506 |
| 3.2 | % |
Property operating expenses |
|
| 65,259 |
|
| 63,985 |
|
| 1,274 |
| 2.0 | % |
Real property net operating income |
| $ | 126,168 |
| $ | 123,550 |
| $ | 2,618 |
| 2.1 | % |
|
|
| Years Ended December 31, |
| ||||||
Statistical Information |
|
| 2007 |
|
| 2006 |
|
| Change |
|
Number of properties |
|
| 136 |
|
| 136 |
|
| — |
|
Developed sites |
|
| 47,607 |
|
| 47,606 |
|
| 1 |
|
Occupied sites (1) |
|
| 37,758 |
|
| 37,906 |
|
| (148 | ) |
Occupancy % (2) |
|
| 82.2% |
|
| 82.5% |
|
| -0.3 | % |
Weighted average monthly rent per site (2) |
| $ | 382 |
| $ | 368 |
| $ | 14 |
|
Sites available for development |
|
| 6,588 |
|
| 6,813 |
|
| (225 | ) |
(1) | Occupied sites include manufactured housing and permanent recreational vehicle sites, and exclude seasonal recreational vehicle sites. |
(2) | Occupancy % and weighted average rent relates only to manufactured housing sites, and excludes permanent and seasonal recreational vehicle sites. |
The growth in income from real property of $3.9 million was due to a weighted average rental rate increase of 3.8 percent that resulted in increased manufactured home rental income (net of vacancies and rent discounts) of $2.7 million, increased income from our recreational vehicle portfolio of $1.0 million and increased miscellaneous other property revenues of $0.2 million. The $0.2 million increase in miscellaneous other property revenues can be primarily attributed to revenues from rubbish collection, and water and sewer re-billing.
The growth in real property operating expenses of $1.3 million was due to several factors. Legal fees related to delinquency and other property matters increased by $0.2 million. Property and casualty insurance increased $0.2 million due to increased reserve estimates for current claims. Utility costs related to water and rubbish removal charges increased $0.3 million (both of which are re-billed to the resident and correspondingly increased income from real property as mentioned above). Supply and repair costs related to community maintenance decreased by $0.2 million. This benefit was completely offset by increased other expenses related to administrative costs such as postage, advertising, etc. of $0.3 million. Real estate taxes increased by $0.5 million due to increased property assessments.
REAL PROPERTY OPERATIONS - SAME SITE
The following table reflects certain financial and statistical information for particular properties owned and operated for the same period in both years for the years ended December 31, 2007 and 2006. A key management tool the Company uses when evaluating performance and growth of particular properties is a comparison of Same Site communities. At the beginning of every year, the Company establishes certain criteria to define the Same Site property portfolio. The Same Site data may change from time-to-time depending on acquisitions, dispositions, management discretion, significant transactions, or unique situations.
|
| Years Ended December 31, |
| |||||||||
|
| 2007 |
| 2006 |
| Change |
| % Change |
| |||
Financial Information |
| (in thousands) |
|
|
| |||||||
Income from real property (1) |
| $ | 182,826 |
| $ | 179,342 |
| $ | 3,484 |
| 1.9 | % |
Property operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and benefits |
|
| 14,030 |
|
| 14,000 |
|
| 30 |
| 0.2 | % |
Legal, taxes, & insurance |
|
| 3,673 |
|
| 3,255 |
|
| 418 |
| 12.8 | % |
Utilities (1) |
|
| 11,155 |
|
| 11,242 |
|
| (87 | ) | -0.8 | % |
Supplies and repair |
|
| 6,671 |
|
| 6,930 |
|
| (259 | ) | -3.7 | % |
Other |
|
| 1,813 |
|
| 1,614 |
|
| 199 |
| 12.3 | % |
Real estate taxes |
|
| 16,273 |
|
| 15,781 |
|
| 492 |
| 3.1 | % |
Property operating expenses |
|
| 53,615 |
|
| 52,822 |
|
| 793 |
| 1.5 | % |
Real property net operating income |
| $ | 129,211 |
| $ | 126,520 |
| $ | 2,691 |
| 2.1 | % |
|
| Years Ended December 31, |
| |||||||
Statistical Information |
| 2007 |
| 2006 |
| Change |
| |||
Number of properties |
|
| 135 |
|
| 135 |
|
| — |
|
Developed sites |
|
| 47,465 |
|
| 47,464 |
|
| 1 |
|
Occupied sites (2) |
|
| 37,733 |
|
| 37,879 |
|
| (146 | ) |
Occupancy % (3) |
|
| 82.4% |
|
| 82.7% |
|
| -0.3 | % |
Weighted average monthly rent per site (3) |
|
| 382 |
|
| 368 |
|
| 14 |
|
Sites available for development |
|
| 6,090 |
|
| 6,315 |
|
| (225 | ) |
(1) | Amounts are reported net of recovery for water and sewer utility expenses. |
(2) | Occupied sites include manufactured housing and permanent recreational vehicle sites, and exclude seasonal recreational vehicle sites. |
(3) | Occupancy % and weighted average rent relates only to manufactured housing sites, and excludes permanent and seasonal recreational vehicle sites. |
As indicated above this is an analytical measure used by management to determine the growth of our communities on a year over year basis that may have items classified differently than our GAAP statements.
The primary differences between our total portfolio and same site portfolio are the reclassification of water and sewer expense from utilities to income from real property to reflect the recovery net of expenses and the inclusion of 135, rather than 136, Properties in the same site portfolio.
HOME SALES AND RENTALS
As discussed in the "Overview" in "Managements' Discussion and Analysis", the Company acquires repossessed manufactured homes (that are within its communities) from lenders at substantial discounts. The Company leases or sells the value priced homes to current and prospective residents. The Company also purchases new homes to lease and sell to current and prospective residents. The programs the Company has established for its customers to lease or buy new and used homes has resulted in relatively stable occupancy levels and continued NOI growth even as industry conditions have been volatile.
The following table reflects certain financial and statistical information for the Company’s Rental Program for the years ended December 31, 2007 and 2006.
|
| Years Ended December 31, |
| |||||||||
|
| 2007 |
| 2006 |
| Change |
| % Change |
| |||
Financial Information |
| (in thousands, except for *) |
|
|
| |||||||
Rental home revenue |
| $ | 18,840 |
| $ | 14,849 |
| $ | 3,991 |
| 26.9 | % |
Site rent from Rental Program (1) |
|
| 21,704 |
|
| 18,819 |
|
| 2,885 |
| 15.3 | % |
Rental program revenue |
|
| 40,544 |
|
| 33,668 |
|
| 6,876 |
| 20.4 | % |
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and commissions |
|
| 2,459 |
|
| 1,804 |
|
| 655 |
| 36.3 | % |
Repairs and refurbishment |
|
| 6,526 |
|
| 4,938 |
|
| 1,588 |
| 32.2 | % |
Taxes and insurance |
|
| 2,366 |
|
| 2,506 |
|
| (140 | ) | -5.6 | % |
Marketing and other |
|
| 2,479 |
|
| 1,679 |
|
| 800 |
| 47.6 | % |
Rental program operating and maintenance |
|
| 13,830 |
|
| 10,927 |
|
| 2,903 |
| 26.6 | % |
Net operating income |
| $ | 26,714 |
| $ | 22,741 |
| $ | 3,973 |
| 17.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Statistical Information |
|
|
|
|
|
|
|
|
|
|
|
|
Number of occupied rentals, end of period* |
|
| 5,328 |
|
| 4,576 |
|
| 752 |
| 16.4 | % |
Investment in occupied rental homes |
| $ | 161,057 |
| $ | 135,861 |
| $ | 25,196 |
| 18.5 | % |
Number of sold rental homes* |
|
| 363 |
|
| 170 |
|
| 193 |
| 113.5 | % |
Weighted average monthly rental rate* |
| $ | 718 |
| $ | 686 |
| $ | 32 |
| 4.7 | % |
(1) | The renter’s monthly payment includes the site rent and an amount attributable to the leasing of the home. The site rent is reflected in the Real Property Operations segment. For purposes of management analysis, the site rent is included in the Rental Program revenue to evaluate the growth and performance of the Rental Program. |
Net operating income from the rental program increased $4.0 million from $22.7 million to $26.7 million, or 17.5 percent as a result of a $6.9 million increase in revenue partially offset by a $2.9 million increase in expenses. Revenues increased due to the increase in the number of leased homes in the Company’s Rental Program and due to the increase in average rental rates (as indicated in the table above). Commissions increased due an increase in the number of new and renewed leases on which commissions were paid. Total repair and refurbishment costs increased due to an increase in the number of homes in the program. However, the average refurbishment cost per move out (costs incurred to prepare a previously leased home for a new occupant) declined by 2.4 percent from $1,644 in 2006 to $1,605 in 2008. Generally taxes increase as the number of homes in the rental program increase, however, taxes declined in 2007 due to successful appeals of personal property tax assessments. Marketing and other costs increased primarily due to an increase in bad debt expense of $0.6 million and an increase in utility and other expenses of $0.2 million.
The following table reflects certain financial and statistical information for the Company’s Home Sales program for the years ended December 31, 2007 and 2006.
|
| Years Ended December 31, |
| |||||||||
|
| 2007 |
| 2006 |
| Change |
| % Change |
| |||
Financial Information |
| (in thousands, except for statistical information) |
|
|
| |||||||
New home sales |
| $ | 6,056 |
| $ | 10,626 |
| $ | (4,570 | ) | -43.0 | % |
Pre-owned home sales |
|
| 16,849 |
|
| 9,618 |
|
| 7,231 |
| 75.2 | % |
Revenue from homes sales |
|
| 22,905 |
|
| 20,244 |
|
| 2,661 |
| 13.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
New home cost of sales |
|
| 4,928 |
|
| 7,994 |
|
| (3,066 | ) | -38.4 | % |
Pre-owned home cost of sales |
|
| 13,253 |
|
| 7,706 |
|
| 5,547 |
| 72.0 | % |
Cost of home sales |
|
| 18,181 |
|
| 15,700 |
|
| 2,481 |
| 15.8 | % |
Net operating income / Gross Profit |
| $ | 4,724 |
| $ | 4,544 |
| $ | 180 |
| 4.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit – new homes |
| $ | 1,128 |
| $ | 2,632 |
| $ | (1,504 | ) | -57.1 | % |
Gross margin % – new homes |
|
| 18.6 | % |
| 24.8 | % |
|
|
| -6.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit – pre-owned homes |
| $ | 3,596 |
| $ | 1,912 |
| $ | 1,684 |
| 88.1 | % |
Gross margin % – pre-owned homes |
|
| 21.3 | % |
| 19.9 | % |
|
|
| 1.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Statistical Information |
|
|
|
|
|
|
|
|
|
|
|
|
Home sales volume: |
|
|
|
|
|
|
|
|
|
|
|
|
New home sales |
|
| 76 |
|
| 121 |
|
| (45 | ) | -37.2 | % |
Pre-owned home sales |
|
| 636 |
|
| 371 |
|
| 265 |
| 71.4 | % |
Total homes sold |
|
| 712 |
|
| 492 |
|
| 220 |
| 44.7 | % |
Gross profit from home sales increased by $0.2 million, or 4.0 percent. Gross profit from pre-owned home sales increased by $1.7 million while gross profit from new home sales declined by $1.5 million.
Pre-owned home sales include the sale of homes that have been utilized in the Company’s rental program. The cost basis of a rental home is depreciated and therefore, the gross profit margin on the sale of these homes increases the longer the home has been in the rental program. An increase in the volume of rental home sales is the primary reason for the overall increase in pre-owned home sales and therefore the principal contributor to the increase in gross profit on pre-owned home sales.
The decline in new home sales profit was due to a 37.2 percent decline in sales volume and a 9.3 percent decline in average selling price primarily in our Florida market.
OTHER INCOME STATEMENT ITEMS
Other revenuesinclude other income (loss), interest income, and ancillary revenues, net. Other revenues decreased by $2.4 million, from $5.2 million to $2.8 million, or 46.2 percent, due to decreased brokerage commissions of $0.4 million, decreased interest income of $0.8 million due to repayment in March 2007 on a $13.5 million mortgage note receivable, increased losses realized on dispositions of assets and land of $0.6 million, reduced income realized on a one-time gain in 2006 from a lawsuit settlement of $0.4 million, and other reductions to other income of $0.2 million.
General and administrativecosts decreased by $2.2 million, from $22.9 million to $20.7 million, or 9.6 percent due to reduced deferred compensation costs of $2.1 million, and reduced consulting fees of $0.3 million offset by increased salary and benefit costs of $0.2 million. The reduction in deferred compensation relates to the reversal of performance-based restricted and phantom stock award charges when the Company determined that it was improbable that the performance criteria would be achieved.
Depreciation and amortizationcosts increased by $2.2 million, from $60.3 million to $62.5 million, or 3.6 percent due to primarily due to the additional homes added to the Company’s investment property for use in the Company’s Rental Program.
Debt extinguishmentcosts include defeasance fees and other costs of $0.5 million associated with extinguishing $45.0 million of secured notes. Deferred financing costs of $0.2 million related to this debt were expensed in 2006.
Interest expenseincreased by $0.4 million, from $65.1 million to $65.5 million, or 0.6 percent due to increased interest rates charged on variable rate debt.
Equity losses from affiliatesdecreased by $8.6 million, from $16.6 million to $8.0 million, or 51.8 percent due to decreased other than temporary impairment charges of $16.1 million, offset by an increase of $7.5 million in the Company’s share of Origen’s reported loss.
Provision for state income taxeswas $0.8 million in 2007 due to changes in Michigan and Texas state income tax laws. There was no provision for state income taxes in 2006.
Minority interestchanged by $1.1 million, from income of $3.2 million to $2.1 million due to a decrease in the Company’s reported loss, resulting in a decrease in the amount allocated to the minority interest partners.
The following is a summary of the Company’s consolidated financial results which were discussed in more detail in the preceding paragraphs:
|
| Years Ended December 31, |
| |||||||
|
| 2008 |
| 2007 |
| 2006 |
| |||
|
| (in thousands) |
| |||||||
Revenues |
| $ | 248,216 |
| $ | 233,172 |
| $ | 222,628 |
|
Operating expenses/Cost of sales |
|
| 106,344 |
|
| 97,270 |
|
| 90,612 |
|
Net operating income/ Gross profit |
|
| 141,872 |
|
| 135,902 |
|
| 132,016 |
|
Adjustments to arrive at net loss: |
|
|
|
|
|
|
|
|
|
|
Other revenues |
|
| 6,831 |
|
| 2,784 |
|
| 5,150 |
|
General and administrative |
|
| (23,152 | ) |
| (20,703 | ) |
| (22,950 | ) |
Depreciation and amortization |
|
| (64,998 | ) |
| (62,478 | ) |
| (60,300 | ) |
Asset impairment charges |
|
| (13,171 | ) |
| — |
|
| — |
|
Fees and other costs associated with extinguishment of debt |
|
| — |
|
| — |
|
| (720 | ) |
Interest expense |
|
| (64,157 | ) |
| (65,540 | ) |
| (65,118 | ) |
Provision for state income tax |
|
| (336 | ) |
| (768 | ) |
| — |
|
Equity loss from affiliates |
|
| (16,498 | ) |
| (7,969 | ) |
| (16,583 | ) |
Minority interest |
|
| (839 | ) |
| 2,129 |
|
| 3,248 |
|
Loss before cumulative effect of change in accounting principle |
|
| (34,448 | ) |
| (16,643 | ) |
| (25,257 | ) |
Cumulative effect of change in accounting principle |
|
| — |
|
| — |
|
| 289 |
|
Net loss |
| $ | (34,448 | ) | $ | (16,643 | ) | $ | (24,968 | ) |
The Company provides information regarding FFO as a supplemental measure of operating performance. FFO is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as net income (computed in accordance with generally accepted accounting principles)GAAP), 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 managementDue to the variety among owners of identical assets in similar condition (based on historical cost accounting and useful life estimates), the Company believes is a useful supplemental measure of the Company’s operating performance. Management generally considers FFO to be a useful measure for reviewing comparative operating and financial performance because, by excluding gains and losses related to sales of previously depreciated operating real estate assets, 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 a better indicator of the Company’s operating performance. FFO is a useful supplemental measure of the Company’s operating performance measure that, when compared year over year,because it reflects the impact to operations from trends in occupancy rates, rental rates and operating costs, providing perspective not readily apparent from net income. Management, believes that the investment community and banking institutions routinely use of FFO, has been beneficialtogether with other measures, to measure operating performance in improving the understanding of operating results of REITs among the investing publicour industry. Further, management uses FFO for planning and making comparisons of REIT operating results more meaningful.forecasting future periods.
Because FFO excludes significant economic components of net income including depreciation and amortization, FFO should be used as an adjunct to net income and not as an alternative to net income. The principal limitation of FFO is that it does not represent cash flow from operations as defined by GAAP and is a supplemental measure of performance that does not replace net income as a measure of performance or net cash provided by operating activities as a measure of liquidity. In addition, 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 only provides investors with an additional performance measure. Other REITS may use different methods for calculating FFO and, accordingly, the Company’s FFO may not be comparable to other REITs.
The following table reconciles net loss to FFO and calculates FFO data for both basic and diluted purposes for the years ended December 31, 2008, 2007, and 2006 2005 (in thousands):
SUN COMMUNITIES, INC.
RECONCILIATION OF NET LOSS TO FUNDS FROM OPERATIONS
(Amounts in thousands, except for per share/OP unit amounts)
| 2007 |
|
|
| 2006 |
|
|
| 2005 |
| 2008 |
|
|
| 2007 |
|
|
| 2006 |
| ||||||
Net loss | $ | (16,643 | ) | (1 | ) | $ | (24,968 | ) | (1 | ) | $ | (5,452 | ) | $ | (34,448 | ) | (1 | ) | $ | (16,643 | ) | (1 | ) | $ | (24,968 | ) (1) |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| 64,615 |
|
|
|
| 62,837 |
|
|
|
| 56,902 |
|
| 66,892 |
|
|
|
| 64,615 |
|
|
|
| 62,837 |
|
Valuation adjustment (2) |
| (248 | ) |
|
|
| (280 | ) |
|
|
| 430 |
|
| — |
|
|
|
| (248 | ) |
|
|
| (280 | ) |
Provision (benefit) for state income tax (3) |
| (402 | ) |
|
|
| 585 |
|
|
|
| — |
| |||||||||||||
(Gain) loss on disposition of assets, net |
| (741 | ) |
|
|
| 219 |
|
|
|
| 156 |
|
| (3,044 | ) |
|
|
| (741 | ) |
|
|
| 219 |
|
Provision for state income tax (3) |
| 585 |
|
|
|
| — |
|
|
|
| — |
| |||||||||||||
Loss allocated to common minority interests |
| (2,129 | ) |
|
|
| (3,248 | ) |
|
|
| (723 | ) | |||||||||||||
Gain on sale of undeveloped land |
| (3,336 | ) |
|
|
| — |
|
|
|
| — |
| |||||||||||||
Minority interest distribution (loss allocation) |
| 839 |
|
|
|
| (2,129 | ) |
|
|
| (3,248 | ) | |||||||||||||
Funds from operations (FFO) | $ | 45,439 |
|
|
| $ | 34,560 |
|
|
| $ | 51,313 |
| $ | 26,501 |
|
|
| $ | 45,439 |
|
|
| $ | 34,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO - Continuing Operations | $ | 45,439 |
|
|
| $ | 34,560 |
|
|
| $ | 51,141 |
| |||||||||||||
FFO - Discontinued Operations | $ | — |
|
|
| $ | — |
|
|
| $ | 172 |
| |||||||||||||
Weighted average common shares/OP Units outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 20,240 |
|
|
|
| 19,958 |
|
|
|
| 20,121 |
|
| 20,463 |
|
|
|
| 20,240 |
|
|
|
| 19,958 |
|
Diluted |
| 20,346 |
|
|
|
| 20,129 |
|
|
|
| 20,253 |
|
| 20,508 |
|
|
|
| 20,346 |
|
|
|
| 20,129 |
|
Continuing Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
FFO per weighted average Common Share/OP Unit - Basic | $ | 2.25 |
|
|
| $ | 1.74 |
|
|
| $ | 2.53 |
| $ | 1.30 |
|
|
| $ | 2.25 |
|
|
| $ | 1.74 |
|
FFO per weighted average Common Share/OP Unit - Diluted | $ | 2.24 |
|
|
| $ | 1.72 |
|
|
| $ | 2.53 |
| $ | 1.29 |
|
|
| $ | 2.24 |
|
|
| $ | 1.72 |
|
Discontinued Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
FFO per weighted average Common Share/OP Unit - Basic | $ | — |
|
|
| $ | — |
|
|
| $ | 0.01 |
| |||||||||||||
FFO per weighted average Common Share/OP Unit - Diluted | $ | — |
|
|
| $ | — |
|
|
| $ | 0.01 |
| |||||||||||||
Total Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
FFO per weighted average Common Share/OP Unit - Basic | $ | 2.25 |
|
|
| $ | 1.74 |
|
|
| $ | 2.54 |
| |||||||||||||
FFO per weighted average Common Share/OP Unit - Diluted | $ | 2.24 |
|
|
| $ | 1.72 |
|
|
| $ | 2.54 |
|
(1) | Net loss for the years ended December 31, 2008, 2007, and 2006 included reductions to the carrying value of the Company’s investment in affiliate (Origen) of $9.6 million, $1.9 million and $18.0 million, respectively. Net loss for the year ended December 31, 2008 also included equity loss from affiliate (Origen) of $6.5 million, non-cash asset impairment charges of $13.1 million and severance charges related to the retirement of one of the Company’s officers of $0.9 million. The table below is adjusted to exclude the above mentioned amounts: |
|
| 2008 |
| 2007 |
| 2006 |
| |||
Net loss as reported |
| $ | (34,448 | ) | $ | (16,643 | ) | $ | (24,968 | ) |
Equity loss/impairments from affiliate adjustment |
|
| 16,470 |
|
| 9,829 |
|
| 18,000 |
|
Asset impairment charge |
|
| 13,171 |
|
| — |
|
| — |
|
Severance expense |
|
| 888 |
|
| — |
|
| — |
|
Adjustment to loss allocated to common minority interest |
|
| (1,514 | ) |
| (1,113 | ) |
| (2,065 | ) |
Adjusted net loss |
| $ | (5,433 | ) | $ | (7,927 | ) | $ | (9,033 | ) |
Depreciation and amortization |
|
| 66,892 |
|
| 64,615 |
|
| 62,837 |
|
Valuation adjustment (2) |
|
| — |
|
| (248 | ) |
| (280 | ) |
Gain on sale of undeveloped land |
|
| (3,336 | ) |
| — |
|
| — |
|
(Gain) loss on disposition of assets, net |
|
| (3,044 | ) |
| (741 | ) |
| 219 |
|
Provision (benefit) for state income tax (3) |
|
| (402 | ) |
| 585 |
|
| — |
|
Minority interest distribution (loss allocation) |
|
| 2,353 |
|
| (1,016 | ) |
| (1,183 | ) |
Adjusted Funds from operations (FFO) |
| $ | 57,030 |
| $ | 55,268 |
| $ | 52,560 |
|
Adjusted FFO per weighted avg. Common Share/OP Unit - Diluted |
| $ | 2.78 |
| $ | 2.72 |
| $ | 2.61 |
|
(2) | The Company had an interest rate swap, which matured in July 2007, which was not eligible for hedge accounting. Accordingly, the valuation adjustment (the theoretical non-cash profit or loss if the swap contract were to be terminated at the balance sheet date) was recorded in interest expense. If held to maturity the net cumulative valuation adjustment would approximate zero. The Company had no intention of terminating the swap prior to maturity and therefore excluded the valuation adjustment from FFO so as not to distort this comparative measure. |
(3) | The tax provision for the year ended December 31, 2007 represents potential taxes payable on the sale of company assets related to the enactment of the Michigan Business Tax. These taxes do not impact Funds from Operations and would be payable from prospective proceeds of such sales. The tax benefit for the year ended December 31, 2008 represents the reversal of this tax provision. |
INFLATION
Most of the leases allow for periodic rent increases which provide the Company with the opportunity to achieve increases in rental income as each lease expires. Such types of leases generally minimize the risk of inflation to the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s principal liquidity demands have historically been, and are expected to continue to be, distributions to the Company’s stockholders and the unitholders of the Operating Partnership, capital improvements of properties, the purchase of new and pre-owned homes, property acquisitions, development and expansion of properties, and debt repayment.
The Company expects to meet its short-term liquidity requirements through its working capital provided by operating activities and through borrowings on its line of credit. The Company considers these resources to be adequate to meet all operating requirements, including recurring capital improvements, routinely amortizing debt and other normally recurring expenditures of a capital nature, payment of dividends to its stockholders to maintain qualification as a REIT in accordance with the Internal Revenue Code and payment of distributions to the Operating Partnership’s unitholders. Due to the limited amount of taxable income that the Company has reported for the past few years, dividend payments to shareholders have been largely discretionary rather than required to maintain qualification as a REIT.
From time to time, the Company evaluates acquisition opportunities that meet the Company’s criteria for acquisition. Should such investment opportunities arise in 2009, the Company will finance the acquisitions though secured financing, the assumption of existing debt on the properties or the issuance of certain equity securities. The difficulty in obtaining financing in the current credit markets may make the acquisition of properties unlikely.
The Company has invested approximately $25.6 million related to the acquisition of homes intended for its rental program during the year ended December 31, 2008. Expenditures for 2009 will be dependent upon the condition of the markets for repossessions and new home sales, as well as rental homes. The Company had a $40.0 million floor plan line of credit which matured on March 1, 2009. It was replaced by a $10.0 million floor plan facility. The Company’s ability to purchase homes for sale or rent may be limited by cash received from third party financing of its home sales, available floor plan financing and working capital available on its unsecured line of credit.
Cash and cash equivalents increased by $0.8 million from $5.4 million at December 31, 2007, to $6.2 million at December 31, 2008. Net cash provided by operating activities decreased by $8.9 million to $43.1 million for the year ended December 31, 2008, from $52.0 million for the year ended December 31, 2007.
The Company’s net cash flows provided by operating activities may be adversely impacted by, among other things: (a) the market and economic conditions in the Company’s current markets generally, and specifically in metropolitan areas of the Company’s current markets; (b) lower occupancy and rental rates of the Company’s properties (the “Properties”); (c) increased operating costs, such as wage and benefit costs, insurance premiums, real estate taxes and utilities, that cannot be passed on to the Company’s tenants; (d) decreased sales of manufactured homes and (e) current volatility in economic conditions and the financial markets. See “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008
The Company has 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 at December 31, 2008 and 2007 was $85.8 million and $85.4 million, respectively. In addition, $3.3 million and $3.4 million of availability was used to back standby letters of credit as of December 31, 2008 and 2007. Borrowings under the line of credit bear an interest rate of LIBOR plus 165 basis points, or Prime plus 40 basis points. The Company has the option to borrow at either rate. The weighted average interest rate on the outstanding borrowings was 2.66 percent as of December 31, 2008. The borrowings under the line of credit mature October 1, 2011, assuming an election of a one-year extension that is available at the Company’s discretion. As of December 31, 2008, $25.9 million was available to be drawn under the facility based on the calculation of the borrowing base. During 2008, the highest balance on the line of credit was $97.1 million leaving $14.5 million of available credit during this peak period. Although the unsecured revolving line of credit is a committed facility, the financial failure of one or more of the participating financial institutions may reduce the amount of available credit for use by the Company. During 2008, two of the participating banks in the Company’s line of credit faced financial difficulties and were purchased by other banks. No disruption in the Company’s availability of credit occurred.
LIQUIDITY AND CAPITAL RESOURCES, continued:
The line of credit facility contains various leverage, debt service coverage, net worth maintenance and other customary covenants all of which the Company was in compliance with as of December 31, 2008. The most limiting covenants contained in the line of credit are the distribution coverage and debt service coverage ratios. The distribution coverage covenant requires that distributions be no more than 92 percent of the Company’s funds from operations. The debt service coverage covenant requires a minimum ratio of 1.45:1. As of December 31, 2008, the distribution coverage was 82.61 percent and the debt service coverage was 1.72:1.
The sub-prime credit crisis and ensuing decline in credit availability have caused turmoil in US and foreign markets. Many industries with no direct involvement with sub-prime lending, securitizations, home building or mortgages have suffered share price declines as economic uncertainty has derailed investor confidence. While many of the fundamentals of the Company, and manufactured housing industry, have been improving over recent years, the Company’s share price has suffered. For the Company, the most relevant consequence of this financial turmoil is the uncertainty of the availability of new secured credit, floor plan financing, credit for refinancing properties and the limited credit availability on its current unsecured line of credit. The Company believes this risk is somewhat mitigated because the Company has adequate working capital provided by operating activities as noted above and the Company has only limited debt maturities until July 2011. Specifically, the Company’s debt maturities (excluding normal amortization payments and assuming the election of certain extension provisions which are at the discretion of the Company) for 2009 through 2011 are as follows:
2009 | $12.2 million and any balance outstanding on the floor plan facility |
2010 | $0.8 million |
2011 | $103.7 million and any balance outstanding on the unsecured line of credit |
The Company anticipates meeting its long-term liquidity requirements, such as scheduled debt maturities, large property acquisitions, and Operating Partnership unit redemptions through the collateralization of its properties. The Company currently has 31 unencumbered Properties with an estimated market value of $206.7 million, 28 of which support the borrowing base for the Company’s $115.0 million unsecured line of credit. As of December 31, 2008, the borrowing base was in excess of $115.0 million by $9.4 million, which would allow the Company to remove properties from the borrowing base at its discretion for collateralization. From time to time, the Company may also issue shares of its capital stock or preferred stock, issue equity units in the Operating Partnership or sell selected assets. The ability of the Company to finance its long-term liquidity requirements in such a manner will be affected by numerous economic factors affecting the manufactured housing community industry at the time, including the availability and cost of mortgage debt, the financial condition of the Company, the operating history of the Properties, the state of the debt and equity markets, and the general national, regional and local economic conditions. If it were to become necessary for the Company to approach the credit markets, the current volatility in the credit markets could make borrowing more difficult to secure and more expensive. See “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. If the Company is unable to obtain additional debt or equity financing on acceptable terms, the Company’s business, results of operations and financial condition would be adversely impacted.
The Company’s primary long-term liquidity needs are principal payments on outstanding indebtedness. At December 31, 2008, the Company’s outstanding contractual obligations, including interest expense, were as follows:
|
|
|
| Payments Due By Period |
| |||||||||||
|
|
|
| (In thousands) |
| |||||||||||
Contractual Cash Obligations |
| Total Due |
| 1 year |
| 2-3 years |
| 4-5 years |
| After 5 years |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized term loan - FNMA |
| $ | 377,651 |
| $ | 4,150 |
| $ | 8,920 |
| $ | 9,795 |
| $ | 354,786 |
|
Collateralized term loan - B of A |
|
| 478,907 |
|
| 7,608 |
|
| 119,156 |
|
| 13,891 |
|
| 338,252 |
|
Mortgage notes, other |
|
| 206,936 |
|
| 11,955 |
|
| 2,607 |
|
| 43,553 |
|
| 148,821 |
|
Lines of credit |
|
| 90,419 |
|
| 4,619 |
|
| 85,800 |
|
| — |
|
| — |
|
Redeemable preferred OP units |
|
| 49,447 |
|
| 970 |
|
| 825 |
|
| 7,645 |
|
| 40,007 |
|
Secured debt |
|
| 26,211 |
|
| 1,116 |
|
| 2,565 |
|
| 2,986 |
|
| 19,544 |
|
Total principal payments |
|
| 1,229,571 |
|
| 30,418 |
|
| 219,873 |
|
| 77,870 |
|
| 901,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (1) |
|
| 350,824 |
|
| 62,491 |
|
| 118,449 |
|
| 101,691 |
|
| 68,193 |
|
Operating leases |
|
| 4,662 |
|
| 666 |
|
| 1,332 |
|
| 1,332 |
|
| 1,332 |
|
Total contractual obligations |
| $ | 1,585,057 |
| $ | 93,575 |
| $ | 339,654 |
| $ | 180,893 |
| $ | 970,935 |
|
(1) Net lossThe Company’s contractual cash obligation related to interest expense is calculated based on the current debt levels, rates and maturities as of December 31, 2008, and actual payments required in future periods may be different than the amounts included above.
LIQUIDITY AND CAPITAL RESOURCES, continued:
As of December 31, 2008, the Company’s debt to total market capitalization approximated 80.9 percent (assuming conversion of all Common Operating Partnership Units to shares of common stock). The debt has a weighted average maturity of approximately 5.7 years and a weighted average interest rate of 5.06 percent.
Capital expenditures for the years ended December 31, 2008 and 2007 and 2006 includes a $1.9included recurring capital expenditures of $7.7 million and $18.0 million reduction in the carrying value of the Company’s investment in affiliate (Origen), respectively. Also, included in equity loss from affiliate in 2007 is an $8.0 million loss attributable to the Company’s portion of Origen’s goodwill and investment impairment charges of $32.3 million and $9.2$7.3 million, respectively. The table belowCompany is adjustedcommitted to exclude the above mentioned amounts:
|
| December 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
Net loss as reported |
| $ | (16,643 | ) | $ | (24,968 | ) |
Equity loss from affiliate adjustments - Sun: |
|
|
|
|
|
|
|
Investment in Origen other than temporary impairment |
|
| 1,870 |
|
| 18,000 |
|
Equity loss from affiliate adjustments - Origen: |
|
|
|
|
|
|
|
Goodwill impairment |
|
| 6,197 |
|
| — |
|
Investment impairment |
|
| 1,762 |
|
| — |
|
Adjustment to loss allocated to common minority interest |
|
| (1,113 | ) |
| (2,065 | ) |
Adjusted net loss |
| $ | (7,927 | ) | $ | (9,033 | ) |
Depreciation and amortization |
|
| 64,615 |
|
| 62,837 |
|
Valuation adjustment |
|
| (248 | ) |
| (280 | ) |
(Gain) loss on disposition of assets, net |
|
| (741 | ) |
| 219 |
|
Provision for state income tax |
|
| 585 |
|
| — |
|
Loss allocated to common minority interests |
|
| (1,016 | ) |
| (1,183 | ) |
Adjusted Funds from operations (FFO) |
| $ | 55,268 |
| $ | 52,560 |
|
Adjusted FFO per weighted avg. Common Share/OP Unit - Diluted |
| $ | 2.72 |
| $ | 2.61 |
|
continued upkeep of its Properties and therefore does not expect a significant decline in this recurring capital expenditure during 2009.
45
Other, continued:Net cash used in investing activities was $31.3 million for the year ended December 31, 2008, compared to $23.2 million for the year ended December 31, 2007. The difference is due to a $12.1 million decrease in cash received from the payoff of notes receivable, increased investment in property of $1.2 million and an investment in a new affiliate of $0.5 million, offset by an increase in proceeds from the sale of vacant land and other assets of $5.7 million.
(2)Net cash used in financing activities was $11.1 million for the year ended December 31, 2008, compared to $26.6 million for the year ended December 31, 2007. The Company currently has two interest rate swapsdifference is due to a $14.7 million increase in proceeds received from issuances of debt, a $5.4 million increase in net borrowings on lines of credit, a $4.5 million decrease in payments to retire preferred operating partnership units, and a decrease in payments for deferred financing costs of $0.5 million; offset by an increase in repayments on notes payable and other debt of $3.6 million, and increased distributions of $5.8 million, and an interest rate cap agreement. The valuation adjustment reflectsincrease in funds used for the theoretical noncash profitredemption of common stock and loss were those hedging transactions terminated at the balance sheet date. As the Company has no expectationOperating Partnership Units of terminating the transactions prior to maturity, the net of these noncash valuation adjustments will be zero at the various maturities. As any imperfection related to hedging correlation in these swaps is reflected currently in cash as interest, the valuation adjustments reflect volatility that would distort the comparative measurement of FFO and on a net basis approximate zero. Accordingly, the valuation adjustments are excluded from FFO. The valuation adjustment is included in interest expense.
(3) This tax provision represents potential future taxes payable on sale of company assets. It does not impact Funds From Operations and would be payable from prospective proceeds of such sales.
46
$0.2 million.
The Company’s principal market risk exposure is interest rate risk. The Company mitigates this risk by maintaining prudent amounts of leverage, minimizing capital costs and interest expense while continuously evaluating all available debt and equity resources and following established risk management policies and procedures, which include the periodic use of derivatives. The Company’s primary strategy in entering into derivative contracts is to minimize the variability that changes in interest rates could have on its future cash flows. The Company generally employs derivative instruments that effectively convert a portion of its variable rate debt to fixed rate debt. The Company does not enter into derivative instruments for speculative purposes.
The Company had entered into three separate interest rate swap agreements and an interest rate cap agreement. One of the swap agreements fixes $25$25.0 million of variable rate borrowings at 4.84 percent through July 2009, another of the swap agreements fixes $25$25.0 million of variable rate borrowings at 5.28 percent through July 2012 and the third swap agreement, which matured in July 2007, had a notional amount of $25$25.0 million and an effective fixed rate of 3.88 percent. The interest rate cap agreement has a cap rate of 9.999.9 percent, a notional amount of $152.4 million and a termination date of April 28, 2009. Each of the Company’s current derivative contracts is based upon 90-day LIBOR. In addition, the Company entered into an interest rate swap agreement in December 2008 that becomes effective January 2, 2009. The new swap agreement fixes $20.0 million of variable rate borrowings at 2.73 percent through January 2014 and is based upon 90-day LIBOR. The Company also entered into an interest rate swap agreement in February 2009 that is effective February 13, 2009. The new swap agreement fixes $25.0 million of variable rate borrowing at 3.62 percent through February 2011 and is based upon 30-day LIBOR.
The Company’s remaining variable rate debt totals $209.6$241.4 million and $184.1$209.6 million as of December 31, 20072008 and 2006,2007, respectively, which bears interest at Prime, various LIBOR or Fannie Mae Discounted Mortgage Backed Securities (“DMBS”) rates. If Prime, LIBOR, or DMBS increased or decreased by 1.0 percent during the years ended December 31, 20072008 and 2006,2007, the Company believes its interest expense would have increased or decreased by approximately $1.7$2.2 million and $1.9$1.7 million, respectively, based on the $173.8$221.7 million and $192.4$173.8 million average balance outstanding under the Company’s variable rate debt facilities for the year ended December 31, 2008 and 2007, and 2006, respectively. A portion of the Company’s variable debt is floating on Fannie Mae’s discount mortgage-backed securities rate (“DMBS”). If Fannie Mae is unable to sell this security in the market, Fannie Mae will hold the paper but may charge a higher rate than the prior market rate resulting in higher interest expense.
Financial statements and supplementary data are filed herewith under Item 15.
Not applicableNone.
Evaluation of Disclosure Controls and Procedures
The Company’s management is responsible for establishing and maintaining disclosure controls and procedures as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, Gary A. Shiffman, and Chief Financial Officer, Karen J. Dearing, the Company evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2007.2008. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2007,2008, to ensure that information the Company is required to disclose in its filings with the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Design and Evaluation of Internal Control Over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company has included a report of management’s assessment of the design and effectiveness of its internal controls as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2007.2008. The Company’s independent registered public accounting firm also attested to, and reported on, the effectiveness of internal control over financial reporting. Management’s report and the independent registered public accounting firm’s attestation report are included in the Company’s 20072008 financial statements under the captions entitled “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm” and are incorporated herein by reference..
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the quarterly period ended December 31, 20072008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Not applicableNone.
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required byItems 10, 11, 12, 13, and 14 this item may be filed as an amendment to the Form 10-K or will be includedpresented in the Company’s proxy statement for its 2007 Annual Meeting2009 annual meeting of Shareholders,stockholders and is incorporated herein by reference.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this item may be filed as an amendment to the Form 10-K or will be presented in the Company’s proxy statement for its 2009 annual meeting of stockholders and is incorporated herein by reference.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this item may be filed as an amendment to the Form 10-K or will be presented in the Company’s proxy statement for its 2009 annual meeting of stockholders and is incorporated herein by reference.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this item may be filed as an amendment to the Form 10-K or will be presented in the Company’s proxy statement for its 2009 annual meeting of stockholders and is incorporate herein by reference.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item may be filed as an amendment to the Form 10-K or will be presented in the Company’s proxy statement for its 2009 annual meeting of stockholders and is incorporated herein by reference.
PART IV
| The following documents are filed herewith as part of this Form 10-K:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
SUN COMMUNITIES, INC. INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles; provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material adverse effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
Grant Thornton LLP, an independent registered public accounting firm, has issued an attestation report on the Company’s internal control over financial reporting as of December 31,
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders Sun Communities, Inc.
We have audited Sun Communities, Inc. and subsidiaries’ internal control over financial reporting as of December 31,
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Sun Communities, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31,
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sun Communities, Inc. and subsidiaries as of December 31,
/s/ GRANT THORNTON LLP GRANT THORNTON LLP
Southfield, Michigan March
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders Sun Communities, Inc.
We have audited the accompanying consolidated balance sheets of Sun Communities, Inc. and subsidiaries as of December 31,
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sun Communities, Inc. and subsidiaries as of December 31,
As discussed in Note 6 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standard No. 123(R), “Share-Based Payments”, effective January 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sun Communities Inc. and subsidiaries’ internal control over financial reporting as of December 31,
/s/ GRANT THORNTON LLP GRANT THORNTON LLP
Southfield, Michigan March CONSOLIDATED BALANCE SHEETS
(
The accompanying notes are an integral part of the consolidated financial statements
F-5 CONSOLIDATED STATEMENTS OF OPERATIONS
(
The accompanying notes are an integral part of the consolidated financial statements
F-6 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS (In thousands, except per share amounts)
The accompanying notes are an integral part of the consolidated financial statements CONSOLIDATED STATEMENTS OF CASH FLOWS
(
The accompanying notes are an integral part of the consolidated financial statements
Business Sun Communities, Inc. (the “Company”) is a real estate investment trust (“REIT”) which owns and operates 136 manufactured housing communities at December 31, 2008, located in 18 states concentrated principally in the Midwest, South, and Southeast comprising 47,613 developed sites and 6,081 sites suitable for development.
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
The minority interests include
Preferred OP Units (“POP Units”) of $49.4 million,
The Company periodically receives offers from interested parties to purchase certain of its properties. These offers may be the result of an active program initiated by the Company to sell the property, or from an unsolicited offer to purchase the property. The typical sale process involves a significant negotiation and due diligence period between the Company and the potential purchaser. As the intent of this process is to determine if there are items that would cause the purchaser to be unwilling to purchase or the Company unwilling to sell, it is not unusual for such potential offers of sale/purchase to be withdrawn as such issues arise. The Company classifies assets as “held for sale” when it is probable, in its opinion, that a sale transaction will be completed within one year. This typically occurs when all significant contingencies surrounding the closing have been resolved, which often corresponds with the closing date.
The Company allocates the purchase price of properties to net tangible and identified intangible assets acquired based on their fair values in accordance with the provisions of SFAS No. 141, “Business Combinations”. In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including analysis of recently acquired and existing comparable properties in our portfolio, other market data and independent appraisals if obtained in connection with the acquisition or financing of the respective property. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets (including in-place leases) acquired.
Depreciation Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets. Useful lives are 30 years for land improvements and buildings, 10 years for rental homes, 7 to 15 years for furniture, fixtures and equipment, and 7 years for intangible assets.
The Company Notes and Accounts Receivable Notes and accounts receivable are stated at their outstanding balance reduced by allowance for uncollectible accounts. The Company evaluates the recoverability of its receivables whenever events occur or there are changes in circumstances such that management believes it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan and lease agreements. The ability to collect the notes is measured based on current and historical information and events. When making this evaluation, numerous factors are considered including: length of delinquency, estimated costs to lease or sell, and the Company’s repossession history. For installment notes and collateralized receivables, the Company reserves for the excess of the cost of repossession (principal balance at time of repossession plus estimated cost of repair) over 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 the Company’s estimated annual future repossessions to create the allowance for installment notes and collateralized receivables. For receivables relating to community rents, the Company reserves for receivables when it believes collection is less than probable, which is generally after a resident balance reaches 60 to 90 days past due. Share-Based Compensation The Company adopted SFAS 123(R), “Share-Based Payment” effective January 1, 2006 using the “modified prospective” method permitted by SFAS 123(R) in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. Investments in Affiliates – Origen Financial, Inc. In October 2003, the Company purchased 5,000,000 shares of common stock of Origen Financial, Inc. (“Origen”). The Company owns approximately 19% of Origen as of December 31, 2008, and its investment is accounted for using the equity method of accounting. As of December 31, 2008, the Company’s investment in Origen had a market value of approximately $3.0 million based on a quoted market closing price of $0.59 per share from the “Pink Sheet Electronic OTC Trading System”. Origen was a publicly traded real estate investment trust that originated and serviced manufactured home loans. In March 2008, Origen announced that conditions in the credit markets had adversely impacted Origen’s business and financial condition. In response, Origen suspended loan originations and took steps to right-size its work force. Following this announcement, Origen executed its asset disposition and management plan and sold $176 million of unsecuritized loans, and its servicing and origination platform. In December 2008, Origen voluntarily delisted its common stock from the NASDAQ Global Market and deregistered its common stock under the Securities and Exchange Act of 1934. Currently, Origen is actively managing its residual interests in securitized loans, whole loans, and bond holdings which provide continuing cash flows for the organization. The Company considered the provisions of Accounting Principles Bulletin No. 18, “The Equity Method of Accounting for Investments in Common Stock”, and
The length of The financial condition and near-term prospects of Origen,
The intent and ability of the Company to retain its investment in Origen for a period of time sufficient to allow for any anticipated recovery in market value, The condition and trend of the economic cycle, Origen’s financial performance and projections Trends in the general market, Origen’s capital strength and liquidity, and Origen’s dividend payment record.
The Company also considered various indicators of fair value, including multiples of book value, multiples of EBITDA, book value, tangible book value, estimated cash flows and market price. As a result of its analysis, the Company
Summarized estimated consolidated financial information of Origen at December 31, 2008, 2007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other Capitalized The Company capitalizes certain costs
The carrying values of cash and cash equivalents, escrows, receivables, accounts payable, accrued expenses and other assets and liabilities are reasonable estimates of their fair values because of the shorter maturities of these instruments. The fair value of the Company’s long-term indebtedness, which is based on the estimates of management and on rates currently quoted and rates currently prevailing for comparable loans and instruments of comparable maturities, is greater than the carrying value by approximately
The swap agreements were effective April 2003, and have the effect of fixing interest rates relative to a collateralized term loan due to Fannie Mae. One swap fixes $25 million of variable rate borrowings at 4.84 percent through July 2009. The second swap matures in July 2012, with an effective fixed rate of 5.28 percent and a notional amount of $25 million. The interest rate cap agreement has a cap rate of
The Company has designated the two swaps and the interest rate cap as cash flow hedges for accounting purposes. The changes in the value of these hedges are reflected in accumulated other comprehensive
In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
These valuation adjustments will only be realized if the Company terminates the swaps prior to maturity. This is not the intent of the Company and, therefore, the net of valuation adjustments through the various maturity dates will approximate zero. From time to time, the Company is required to provide cash collateral for its swaps. At December 31,
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising costs are expensed as incurred.
Certain 2006 and 2007 amounts have been reclassified to conform to the 2008 financial statement presentation. Such reclassifications had no effect on results of operations as originally presented.
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes including the depreciable lives and recoverability of real estate assets and other capitalized costs, and the assumption of interest rates for present value calculations. These estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict and are often beyond management’s control. As a result, actual amounts may differ from these estimates.
2.
The following table sets forth certain information regarding investment property (in thousands):
Land improvements and buildings consist primarily of infrastructure, roads, landscaping, clubhouses, maintenance buildings and amenities.
During SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2008, the Company completed various transactions involving its installment notes. The Company has received a total of $27.5 million of cash proceeds in exchange for relinquishing its right, title and interest in the installment notes. The Company is subject to certain recourse provisions requiring the Company to purchase the underlying homes collateralizing such notes, in the event of a note default and subsequent repossession of the home.
FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 140”) sets forth the criteria that must be met for control over transferred assets to be considered to have been surrendered, which includes, amongst other things: (1) the transferred assets have been isolated from the transferor, including put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When a company transfers financial assets and fails any one of the SFAS 140 criteria, the company is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. The determination about whether the isolation criteria of SFAS 140 have been met to support a conclusion regarding surrender of control is largely a matter of law. As such, the evidence required for testing whether or not the first criteria of SFAS 140 has been satisfied requires a legal "true sale" opinion analyzing the treatment of the transfer under state laws as if the Company was a debtor under the bankruptcy code. A "true sale" legal opinion includes several legally relevant factors, including the nature of retained interests in the loans sold. Legal opinions as to a "true sale" are never absolute and unconditional, but contain qualifications based on the inherent equitable powers of a bankruptcy court, as well as the unsettled state of the common law. It was the intent of both parties for these transactions to qualify for sale accounting under SFAS 140 and the terms of the agreements clearly stipulate that the Company has no further obligations or rights with respect to the control, management, administration, servicing, or collection of the installment notes. In addition, the transferee has obtained the right to pledge or exchange the installment notes. For federal tax purposes, the Company treats the transfers of loans which do not qualify as “true sales” under SFAS 140, as sales. Notwithstanding these facts, the Company was unable to satisfy the first criteria for sale accounting treatment under SFAS 140 and therefore, the Company has recorded these transactions as a transfer of financial assets. The transferred assets have been classified as collateralized receivables and the cash proceeds received from these transactions have been classified as a secured borrowing in the consolidated balance sheet. The collateralized receivables earn interest income and the secured borrowings accrue borrowing costs at the same interest rates. The amount of interest income and expense recognized was $1.3 million for the year ended December 31, 2008. The collateralized receivables and secured borrowings are reduced as the related installment notes are collected from the customers. The balance of the collateralized receivables was $26.1 million, net of a loan loss provision of $0.1 million as of December 31, 2008. The outstanding balance on the secured borrowing was $26.2 million as of December 31, 2008.
In
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.
The following table sets forth certain information regarding notes and other receivables
The installment
The reduction in the aggregate principal balance of Collateralized receivables of $1.4 million during 2008 is due to the following items:
Principal payments and payoffs from the Company’s customers - $0.8 million. Repurchase of the underlying collateral (manufactured homes) - $0.5 million. Establishment of allowance for losses - $0.1 million. Other receivables were comprised of amounts due from residents of $1.6 million (net of allowance of $0.3 million), home sale proceeds of $3.7 million, and employee loan of $0.5 million, insurance proceeds of $0.3 million, and rebates and other receivables of $4.0 million as of December 31, 2008. Other receivables were comprised of amounts due from residents of $1.7 million (net of allowance of $0.3 million), home sale proceeds of $1.1 million, insurance proceeds of $0.3 million, and rebates and other receivables of $3.3 million as of December 31, 2007.
Officer’s notes, presented as a reduction to stockholders’ equity in the balance sheet, are 10 year, LIBOR + 1.75% notes, with a minimum and maximum interest rate of 6% and 9%, respectively. The
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The officer’s personal liability on the secured promissory notes is limited to all accrued interest on such notes plus fifty percent (50%) of the deficiency, if any, after application of the proceeds from the sale of the secured shares and/or the secured units to the then outstanding principal balance of the promissory notes. Based on the Company’s $14.00 closing share price as of December 31, 2008, the value of secured shares and secured OP units total approximately $5.0 million. The unsecured notes are fully recourse to the officer.
The reduction in the aggregate principal balance of these notes was
5. Debt and Lines of Credit
The following table sets forth certain information regarding debt (in thousands):
The collateralized term loans totaling $856.6 million as of December 31, 2008, are secured by 87 properties comprising of 31,163 sites representing approximately $558.0 million of net book value. The mortgage notes totaling $206.9 million as of December 31, 2008, are collateralized by 18 communities comprising of 6,427 sites representing approximately $178.3 million of net book value. SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has an unsecured revolving line of credit facility with a maximum borrowing capacity of
The Company completed a financing of $27.0 million
The Company had $13.7 million of Series B-3 Preferred OP Units that were redeemable at various dates from December 1, 2009 through January 1, 2011. In Subsequent to year end, the Company redeemed
In April
In January 2007, the Company completed financings of $17.5 million and $20.0 million at interest rates of 5.842 percent and 5.825 percent, respectively. The loans are secured by two properties comprising of 781 sites representing approximately $18.2 million of net book value and have interest only payments for a term of 10 years. The proceeds from both financings were used to pay down the Company’s revolving line of credit. As of December 31,
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The most restrictive of
6.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised December 2004), Share-Based Payment (“SFAS 123(R)”). SFAS 123(R) replaces FASB Statement No. 123 (“Statement 123”), Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees. SFAS 123(R) requires compensation costs related to share-based payment transactions be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or the liability instruments issued. In addition, liability awards will be remeasured each reporting period.
The Company adopted SFAS 123(R) effective January 1, 2006, using the “modified prospective” method permitted by SFAS 123(R) in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
The Company awards restricted stock and options to its employees under its Second Amended and Restated Stock Option Plan (the “Plan”). The Plan provides for the issuance of options, stock appreciation rights, restricted stock and other stock based awards. The Company believes that the awards better align the interests of its employees with those of its shareholders and has provided these incentives to attract and retain executive officers and key employees. The Company has 205,906 securities to be issued upon exercise of outstanding options, and 81,018 remaining securities authorized for future issuance under the Company’s equity compensation plans as of December 31, 2008.
Restricted Stock The Company’s primary share-based compensation is restricted stock. The following table summarizes the Company’s restricted stock activity for the year ended December 31, 2008:
The remaining compensation expense to be recognized associated with the
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Performance-Based Restricted Stock
At December 31, 2006, the Company had 93,750 shares performance-based restricted stock which was to be awarded based on the compounded annual growth rate of the Company’s per share funds from operations (“FFO”) as determined by comparing the per share FFO for the year ended December 31, 2009, with the per share FFO for the year ended December 31, 2005. The Company needed to achieve compounded annual growth of at least 5 percent for the recipients to receive any amount of the award and at least 9 percent to receive the entire share award.
During the fourth quarter of 2007, the Company determined that the performance targets were not probable of being
Options
At December 31,
The Company issues new shares at the time of share option exercise (or share unit conversion). Option awards have not been granted in the years ended December 31, 2008, 2007, and 2006. The options that had been granted in prior years fully vested in 2006 and the Company has not recognized any compensation expense for these options in the years ended December 31, 2008 and 2007. The Company recognized compensation expense of approximately $0.3 million in the year ended December 31, 2006. The following table summarizes the Company’s option activity during
Phantom Liability Awards
At December 31, The value of the awards is remeasured at each reporting date. As the Company’s stock price rises, the phantom liability awards increase in value, along with the associated compensation expense. Accordingly, as the Company’s stock price declines, the phantom liability awards decrease in value, along with the associated compensation expense. The Company’s stock price has been subject to market volatility, and the stock price has declined since the awards were initially granted. This has resulted in a reduced compensation expense for the Company for the phantom liability awards. SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2008 and 2007, the Company recognized an immaterial amount of compensation expense related to these phantom awards. For the year ended December 31 2006, the Company recorded compensation expense of approximately $0.1 million related to these phantom awards. The following table summarizes the phantom liability award activity for the year ended December 31, 2008:
At December 31, 2006, the Company had 18,750 unvested performance-based phantom
During the fourth quarter of 2007, the Company determined that the performance targets were not probable of being
Director Option Awards
The Company has a 1993 and a 2004 Non-Employee Director Option Plan (“Director Plans”) which each authorize the issuance of 100,000 options to non-employee directors. In July 2008, the Company issued 10,500 director options under its 2004 Non-Employee Director Option Plan. There The
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Directors’ option activity for the year ended December 31, 2008:
The compensation expense associated with the Directors’ option was not significant for the years ended December 31, 2008, 2007,
7.
The Plan enhances the ability of
The The rights are redeemable for $.001 per right at the
In November 2004, the Company was authorized to repurchase up to 1,000,000 shares of its common stock by its Board of Directors.
In October 1996, as last amended in March 2002, the Securities and Exchange Commission declared effective the Company’s shelf registration statement on Form S-3 for the proposed offering, from time to time, of up to $300 million of our common stock, preferred stock and debt securities. The registration statement expired December 31, 2008. In addition to such debt securities, preferred stock and other common stock the Company may
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of other income are summarized as follows (in thousands):
The consolidated operations of the Company can be segmented into real property operations segments and home sales and
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10.
The Company has elected to be taxed as a real estate investment trust (“REIT”) as defined under Section 856(c) of the Internal Revenue Code of 1986, as amended. In order for the Company to qualify as a REIT, at least ninety-five percent (95%) of the Company’s gross income in any year must be derived from qualifying sources. In addition, a REIT must distribute at least ninety percent (90%) of its REIT ordinary taxable income to its stockholders.
Qualification as a REIT involves the satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within the Company’s control. In addition, frequent changes occur in the area of REIT taxation which requires the Company to continually monitor its tax status. The Company analyzed the various REIT tests and confirmed that it continued to qualify as a REIT for the year ended December 31, SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a REIT, the Company generally will not be subject to U.S. federal income taxes at the corporate level on the ordinary taxable income it distributes to its stockholders as dividends. If the Company fails to qualify as a REIT in any taxable year, its taxable income will be subject to U.S. federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if the Company qualifies as a REIT, it may be subject to certain state and local income taxes and to U.S. federal income and excise taxes on its undistributed income.
For income tax purposes, distributions paid to common stockholders consist of ordinary income, capital gains, and return of capital. For the years ended December 31, 2008, 2007,
SHS is subject to U.S. federal income taxes. Deferred taxes reflect the estimated future tax effect of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effect of temporary differences that give rise to a significant portion of the deferred tax assets at December 31 are as follows (in thousands):
SHS has net operating loss carry forwards of approximately
On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). The Company previously had accounted for tax contingencies in accordance with FASB Statement
In July 2007, the State of Michigan signed into law the Michigan Business Tax Act, replacing the Michigan single business tax with a combined business income tax and modified gross receipts tax. These new taxes
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Texas Margin Tax was enacted into law in May, 2006 and became effective in 2007 for calendar year taxpayers. For purposes of SFAS 109, this tax is also properly reflected as an income tax for financial reporting purposes.
Total state income tax expense reported in the financial statements for
As noted, the Company and its subsidiaries are subject to income taxes in the U.S. and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. Federal, State and Local, examinations by tax authorities before 2003.
The Company’s policy is to report penalties and tax-related interest expense as a component of income tax expense. As of the date of adoption of FIN 48, no interest or penalty associated with any unrecognized tax benefit was accrued, nor was any interest or penalty recognized during the year ended December 31,
11.
The Company has outstanding stock options, unvested restricted shares and convertible Preferred OP units which if converted or exercised may impact dilution. The following is a reconciliation of the number of shares used in the calculation of basic and diluted earnings per share (amounts in thousands).
Due to the fact that the Company has reported a net loss for
The figures above represent the total number of potentially dilutive securities,
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12.
The following is a condensed summary of the Company’s unaudited quarterly
13. Fair Value The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The derivative instruments held by the Company are interest rate swaps and cap agreements for which quoted market prices are not readily available. For those derivatives, the Company uses model-derived valuations in SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories: Level 1—Quoted unadjusted prices for 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 observable inputs and significant value drivers are observable in active markets. Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable, including assumptions developed by the Company
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All of the fair values of the Company’s derivative instruments were based on level 2 inputs as described above. The table below presents the recorded amount of financial liabilities measured at fair value on a recurring basis as of December 31, 2008. The Company does not have any material financial assets that were required to be measured at fair value on a recurring basis at December 31, 2008.
The minority interest in the Company consists of approximately 2.3 million Common Operating Partnership Units (“OP Units”). The net equity position of the OP Units declined below zero due to accumulated distributions in excess of accumulated earnings (losses). In accordance with the guidance in EITF No. 95-7, “Implementation Issues Related to the Treatment of Minority Interests in Certain Real Estate Investment Trusts”, the Company has recognized the net equity position as a zero balance within the consolidated balance sheet as of December 31, 2008 since there is no legal obligation for the unit holders to restore deficit capital accounts. Since the losses allocated to the minority interests have exceeded their net equity basis, the Company can no longer allocate losses to the minority interest partners. As long as the net equity position of the minority interest partners is less than zero, the distributions made to the minority interest partners are charged to the Company’s consolidated statement of operations. Distributions made to the minority partners in excess of accumulated losses were $0.8 million for the year ended December 31, 2008.
Accounting Standards Adopted in the Year Ended December 31, 2008
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” The Company adopted the provisions of SFAS 157 as of January 1, 2008 for financial instruments. Although the adoption of SFAS 157 did not materially impact the Company’s financial position or results of operations, we are now required to provide additional disclosures as part of our consolidated financial statements. See Note 13 for additional information. In February 2008, the FASB issued Staff Position No. FAS 157-2 which provides for a one-year deferral of the effective date of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We will apply the provisions of FAS 157 to non-financial assets and liabilities beginning on January 1, 2009. The Company does not
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”), the objective of which is to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernment entities. Prior to the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles” (“SAS 69”). SAS 69 has been criticized because it is not directed to the entity, but directed to the entity’s independent public accountants. SFAS 162 addresses these issues by establishing that the GAAP hierarchy should be directed to entities because it is the entity (not its independent public accountants) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 was effective 60 days following the Securities and Exchange Commission’s approval on September 16, 2008, of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The adoption of SFAS 162 did not impact our results from operations or financial position. In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”). FSP FAS 157-3 clarifies the application of SFAS 157 in an inactive market. The FASB also issued a joint press release with the Office of the Chief Accountant of the SEC on September 30, 2008 that addresses similar guidance to what is contained in FSP FAS 157-3. The guidance in these two releases clarifies that observable transactions in inactive markets may not be indicative of fair value, and in such instances, the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates may provide a better estimate of an asset’s fair value. FSP FAS 157-3 was effective upon its issuance, including prior periods for which financial statements have not been issued. The adoption of FSP FAS 157-3 did not impact our results from operations or financial position. Accounting Standards to be Adopted After the Year Ended December 31, 2008
In December 2007, the FASB issued Statement No. 141R (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R will significantly change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions.
In December 2007 the FASB issued
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. FSP FAS 142-3 is intended to improve the consistency between the useful life of an intangible asset determined under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other U.S. generally accepted accounting principles. The FSP is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008, and is to be applied prospectively to intangible assets acquired after the effective date. The Company will apply FSP FAS 142-3 prospectively to intangible assets for which the acquisition date is on or after January 1, 2009. Disclosure requirements are to be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. In May 2008 the FASB ratified FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which requires issuers of convertible debt securities within its scope to separate these securities into a debt component and an equity component, resulting in the debt component being recorded at fair value without consideration given to the conversion feature. Issuance costs are also allocated between the debt and equity components. FSP APB 14-1 will require that convertible debt within its scope reflect a company’s nonconvertible debt borrowing rate when interest expense is recognized. FSP APB 14-1 is effective fiscal years and interim periods beginning after December 15, 2008, and shall be applied retrospectively to all prior periods. The Company is evaluating the impact FSP No. APB 14-1 will have on our results of operations and financial condition. In June 2008, the FASB issued FSP No. Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of earnings per share under the two-class method described in SFAS No. 128, “Earnings Per Share”. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and requires all presented prior-period earnings per share data to be adjusted retrospectively. The adoption of FSP EITF 03-6-1 is not expected to have a material impact on our results of operations or financial condition. In November 2008, the Emerging Issues Task Force issued EITF No. 08-6, “Equity Method Investment Accounting Considerations” (“EITF 08-6)” that addresses how the initial carrying value of an equity method investment should be determined, how an impairment assessment of an underlying indefinite-lived intangible asset of an equity method investment should be performed, how an equity method investee’s issuance of shares should be accounted for, and how to account for a change in an investment from the equity method to the cost method. EITF 08-6 is effective for fiscal years and interim periods beginning after December 15, 2008 and will be applied prospectively. Earlier application is prohibited. The Company does not expect the adoption of EITF 08-6 to have a material impact on our results of operations or financial condition. In December 2008, the FASB issued FSP FAS No. 140-4 and FIN No. 46R-8, “Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities: An Amendment to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FSP FAS 140-4 and FIN 46R-8”). FSP FAS 140-4 and FIN 46R-8 require public entities to provide additional disclosures about transfers of financial assets. It also amends FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, to require public enterprises to provide additional disclosures about their involvement with VIEs. Additionally, this FSP requires certain disclosures to be provided by a public enterprise that is a sponsor that has a variable interest in a VIE and an enterprise that holds a significant variable interest in a QSPE but was not the transferor of financial assets to the QSPE. The disclosures are intended to provide greater transparency to financial statement users about a transferor’s continuing involvement with transferred financial assets and enterprise’s involvement with VIEs. FSP FAS 140-4 and FIN 46R-8 are effective for the first reporting period ending after December 15, 2008. Because FSP FAS 140 140-4 and FIN 46R-8 impact the disclosure (and not the accounting treatment) for transferred financial assets and consolidation of VIES, the adoption of this FSP will not have an impact on our results of operations or financial condition.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 9, 2003, T.J. Holdings, LLC (“TJ Holdings”), a member of Sun/Forest, LLC (“Sun/Forest”) (which, in turn, owns an equity interest in SunChamp LLC), (“SunChamp”), filed a complaint against the Company, SunChamp, certain other affiliates of the Company and two directors of Sun Communities, Inc. in the Superior Court of Guilford County, North Carolina. The complaint alleges that the defendants wrongfully deprived the plaintiff of economic opportunities that they took for themselves in contravention of duties allegedly owed to the plaintiff and purports to claim damages of $13.0 million plus an unspecified amount for punitive damages. The Company believes the complaint and the claims threatened therein have no merit and will defend it vigorously. These proceedings were stayed by the Superior Court of Guilford County, North Carolina in 2004 pending final determination by the Circuit Court of Oakland County, Michigan as to whether the dispute should be submitted to arbitration and the conclusion of all appeals therefrom. On March 13, 2007, the Michigan Court of Appeals issued an order compelling arbitration of all claims brought in the North Carolina case. TJ Holdings has filed an application for review in the Michigan Supreme Court which has been denied and, accordingly, the North Carolina case is permanently stayed. TJ Holdings has now filed an arbitration demand in Southfield, Michigan based on the same claims. The Company intends to vigorously defend against the allegations.
As announced on February 27, 2006, the U.S. Securities and Exchange Commission (the “SEC”) completed its inquiry regarding the Company’s accounting for its SunChamp investment during 2000, 2001 and 2002, and the Company and the SEC entered into an agreed-upon Administrative Order (the “Order”). The Order required that the Company cease and desist from violations of certain non intent-based provisions of the federal securities laws, without admitting or denying any such violations.
On February 27, 2006, the SEC filed a civil action against the Company’s Chief Executive Officer, its then (and now former as of February 2008) Chief Financial Officer and a former controller in the United States District Court for the Eastern District of Michigan alleging various claims generally consistent with the SEC’s findings set forth in the Order. On July 21, 2008, the U.S. District Court for the Eastern District of
The Company is involved in various other 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.
The Company and its affiliates have entered into the following transactions with Investment in Origen.In 2003, the Company purchased 5,000,000 shares of Origen common stock for $50 million and Shiffman Origen LLC (which is owned by the Milton M. Shiffman Spouse’s Marital Trust, Gary A. Shiffman (the Company’s Chief Executive Officer), and members of Mr. Shiffman’s family) purchased 1,025,000 shares of Origen common stock for $10.3 million. Gary A. Shiffman is a member of the board of directors of Origen and Arthur A. Weiss, a director of the Company, is a trustee of the Milton M. Shiffman Spouse’s Marital Trust. Board Membership.Gary A. Shiffman, the Chairman and Chief Executive Officer of the Company, is a board member of Origen. Loan Servicing Agreement. Origen Servicing, Inc., a wholly-owned subsidiary of Origen, serviced approximately $30.6 million in manufactured home loans for the Company as of December 31, 2007. The Company paid Origen Servicing, Inc. an annual servicing fee of 100 to 150 basis points of the outstanding principal balance of the loans pursuant to a Loan Servicing Agreement which totaled approximately $0.4 million and $0.3 million during 2007 and 2006, respectively. With the sale of Origen’s servicing platform assets to Green Tree Servicing LLC during 2008, the Company engaged a different entity to continue the servicing of the manufactured home loans. In order to transfer the manufactured home loan servicing contract to a different service provider the Company paid Origen a fee of $0.3 million in 2008.
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase of Repossessed Manufactured Homes. The Company purchased certain repossessed manufactured houses owned by Origen located in its manufactured housing communities. The Company purchased approximately $0.6 million and $1.2 million of repossessed homes from Origen during 2008 and 2007, respectively. This program allowed the Company to retain houses for resale and rent in its communities.
The Company and its affiliates have entered into the following transactions with Origen Financial Services, LLC (the “LLC”): Investment in LLC. The Company entered into an agreement with four unrelated companies (“Members”) to form a new limited liability company. The Company contributed cash of $0.5 million towards the formation of the limited liability company. The LLC purchased the origination platform of Origen. The purpose of the venture is to originate manufactured housing installment contracts for its Members. The Company will account for its investment in the LLC using the equity method of accounting. Loan Origination, Sale and Purchase Agreement. The LLC had agreed to fund loans that met the Company’s underwriting guidelines and then transfer those loans to the Company pursuant to a Loan Origination, Sale and Purchase Agreement. The Company paid the LLC a fee of $550 per loan pursuant to a Loan Origination, Sale and Purchase Agreement which totaled approximately $0.1 million during 2008. During 2008, the Company purchased, at par, $7.4 million of these loans.
In addition to the transactions with Origen described above, Mr. Shiffman and his affiliates and/or Mr. Weiss have entered into the following transactions with the Company:
Legal Counsel. During 2008, Jaffe, Raitt, Heuer, & Weiss, Professional Corporation (“JRH&W”) acted as the Company’s general counsel and represented the Company in various matters. Arthur A. Weiss, a director of the Company, is the Chairman of the Board of Directors and a shareholder of such firm. The Company incurred legal fees and expenses of approximately $1.0 million in 2008 and 2007, and approximately $1.3 million in 2006, in connection with services rendered by JRH&W. Lease of Executive Offices. Gary A. Shiffman, together with certain family members, indirectly owns approximately a 21 percent equity interest in American Center LLC, the entity from which we lease office space for our principal executive offices. Arthur A. Weiss owns a 0.75 percent indirect interest in American Center LLC. This lease was for an initial term of five years, beginning May 1, 2003, with the right to extend the lease for an additional five year term. On July 30, 2007, the Company exercised its option to extend its lease for its executive offices. The extension was for a period of five years commencing on May 1, 2008. On August 8, 2008, the Company modified its lease agreement to extend the term of the lease until August 31, 2015, with an option to renew for an additional five years. The base rent for the extended term through August 31, 2015, will continue to be the same as the rent payable as of the current term. The current annual base rent under the current lease is $21.25 per square foot (gross). The Company’s annual rent expense associated with the lease of the executive offices was approximately $0.6 million for each the years ended December 31, 2008, 2007, and 2006. The Company’s future annual rent expense will remain approximately $0.6 million through 2015. Mr. Shiffman may have a conflict of interest with respect to his obligations as an officer and/or director of the Company and his ownership interest in American Center LLC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax Consequences Upon Sale of Properties.Gary A. Shiffman holds limited partnership interests in the Operating Partnership which were received in connection with the contribution of 24 properties (four of which have been sold) from partnerships previously affiliated with him (the “Sun Partnerships”). Prior to any redemption of these limited partnership interests for our common stock, Mr. Shiffman will have tax consequences different from those of us and our public stockholders on the sale of any of the Sun Partnerships. Therefore, Mr. Shiffman and the Company may have different objectives regarding the appropriate pricing and timing of any sale of those properties. 18. Subsequent Events In March 2009, the Company entered into a one year, auto renewing, $10.0 million floor plan facility that allows for draws on new home purchases and bears interest at the greater of 7.0 percent or Prime plus 100 basis points. Prime means for any month, the prevailing “prime rate” as quoted in the Wall Street Journal on first business day of such calendar month. This facility replaced the Company’s $40.0 million floor plan line of credit
SUN COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION, SCHEDULE III DECEMBER 31, (amounts in thousands)
SUN COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION, SCHEDULE III DECEMBER 31, (amounts in thousands)
SUN COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION, SCHEDULE III DECEMBER 31, (amounts in thousands)
SUN COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION, SCHEDULE III DECEMBER 31, 2008 (amounts in thousands)
A These communities collateralize B These communities collateralize C These communities collateralize (1) The initial cost for this property is included in the initial cost reported for Continental Estates.
SUN COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED
The change in investment property for the years ended December 31, 2008, 2007,
The change in accumulated depreciation for the years ended December 31, 2008, 2007,
|