UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011.2012.
 
or

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


Commission file number 1-12616

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


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

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

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

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

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]  No [ X ]


Number of shares of Common Stock, $0.01 par value per share, outstanding
as of September 30, 2011:  21,703,287



2012
:  29,733,864






SUN COMMUNITIES, INC.

INDEX

  Pages
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited):
 
 
, 2011
 
 
 
5
 
Consolidated Statements of Cash Flows ─ Nine Months Ended September 30, 2011 and 2010
6
 
7
Item 2.
 
24
Item 3.
 
40
Item 4.
 
40
PART II – OTHER INFORMATION
 
Item 1.
 
41
Item 1A.
 
41
Item 2.

41
Item 6.
 
42
 
 
43








2



PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 20112012 AND DECEMBER 31, 20102011
 (In(In thousands, except per share amounts)

  (Unaudited)    
  September 30, 2011  December 31, 2010 
ASSETS      
Investment property, net
 
$
1,169,414
  
$
1,032,326
 
Cash and cash equivalents
  
4,741
   
8,420
 
Inventory of manufactured homes
  
3,862
   
2,309
 
Notes and other receivables
  
105,065
   
88,807
 
Other assets
  
45,541
   
30,829
 
TOTAL ASSETS
 
$
1,328,623
  
$
1,162,691
 
         
         
LIABILITIES
        
Debt
 
$
1,252,132
  
$
1,163,612
 
Lines of credit
  
104,333
   
94,527
 
Other liabilities
  
44,573
   
36,936
 
TOTAL LIABILITIES
 
$
1,401,038
  
$
1,295,075
 
         
Commitments and contingencies
        
         
STOCKHOLDERS’ DEFICIT
        
Preferred stock, $0.01 par value, 10,000 shares authorized, none issued
 
$
-
  
$
-
 
        Common stock, $0.01 par value, 90,000 shares authorized   (September 30, 2011 and December 31, 2010, 23,505 and 21,716 shares issued respectively)
  
235
   
217
 
Additional paid-in capital
  
551,926
   
495,331
 
Accumulated other comprehensive loss
  
(1,641
)
  
(2,226
)
Distributions in excess of accumulated earnings
  
(588,338
)
  
(549,625
)
Treasury stock, at cost  (September 30, 2011 and December 31, 2010, 1,802 shares)
  
(63,600
)
  
(63,600
)
Total Sun Communities, Inc. stockholders' deficit
  
(101,418
)
  
(119,903
)
Noncontrolling interests:
        
Preferred OP units
  
45,548
   
-
 
Common OP units
  
(16,545
)
  
(12,481
)
         
TOTAL STOCKHOLDERS’ DEFICIT
  
(72,415
)
  
(132,384
)
         
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
$
1,328,623
  
$
1,162,691
 
 (Unaudited) September 30, 2012 December 31, 2011
ASSETS   
Investment property, net$1,278,127
 $1,196,606
Cash and cash equivalents38,724
 5,857
Inventory of manufactured homes5,672
 5,832
Notes and other receivables128,178
 114,884
Other assets50,525
 44,795
TOTAL ASSETS$1,501,226
 $1,367,974
LIABILITIES   
Debt$1,268,672
 $1,268,191
Lines of credit2,988
 129,034
Other liabilities76,749
 71,404
TOTAL LIABILITIES$1,348,409
 $1,468,629
Commitments and contingencies
 
STOCKHOLDERS’ EQUITY (DEFICIT)   
Preferred stock, $0.01 par value, 10,000 shares authorized, none issued
 
Common stock, $0.01 par value, 90,000 shares authorized   (September 30, 2012 and December 31, 2011, 31,536 and 23,612 shares issued, respectively)315
 236
Additional paid-in capital857,809
 555,981
Accumulated other comprehensive loss(696) (1,273)
Distributions in excess of accumulated earnings(663,579) (617,953)
Treasury stock, at cost  (September 30, 2012 and December 31, 2011, 1,802 shares)(63,600) (63,600)
Total Sun Communities, Inc. stockholders' equity (deficit)130,249
 (126,609)
Noncontrolling interests:   
A-1 preferred OP units45,548
 45,548
Common OP units(22,980) (19,594)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)152,817
 (100,655)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)$1,501,226
 $1,367,974



See accompanying Notes to Consolidated Financial Statements.










3



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 20112012 AND 20102011
 (In(In thousands, except per share amounts)
(Unaudited)

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2011  2010�� 2011  2010 
REVENUES            
Income from real property
 
$
58,251
  
$
50,169
  
$
164,351
  
$
152,124
 
Revenue from home sales
  
8,115
   
7,324
   
24,496
   
24,959
 
Rental home revenue
  
5,650
   
5,135
   
16,407
   
15,266
 
Ancillary revenues, net
  
31
   
35
   
434
   
369
 
Interest
  
2,430
   
2,036
   
6,789
   
5,805
 
Other income, net
  
246
   
10
   
222
   
462
 
Total revenues
  
74,723
   
64,709
   
212,699
   
198,985
 
                 
COSTS AND EXPENSES
                
Property operating and maintenance
  
16,354
   
13,942
   
43,806
   
40,087
 
Real estate taxes
  
4,504
   
3,813
   
12,717
   
12,176
 
Cost of home sales
  
6,357
   
5,320
   
19,249
   
18,797
 
Rental home operating and maintenance
  
4,253
   
4,164
   
11,680
   
11,381
 
General and administrative - real property
  
5,138
   
3,408
   
14,449
   
12,525
 
General and administrative - home sales and rentals
  
2,109
   
1,873
   
6,034
   
5,659
 
Acquisition related costs
  
121
   
-
   
1,521
   
-
 
Depreciation and amortization
  
18,748
   
17,132
   
53,548
   
50,655
 
Interest
  
16,626
   
15,668
   
47,257
   
46,228
 
Interest on mandatorily redeemable debt
  
834
   
826
   
2,489
   
2,462
 
Total expenses
  
75,044
   
66,146
   
212,750
   
199,970
 
                 
Loss before income taxes and equity income (loss) from affiliates
  
(321
)
  
(1,437
)
  
(51
)
  
(985
)
Provision for state income taxes
  
(150
)
  
(143
)
  
(22
)
  
(404
)
Equity income (loss) from affiliates
  
450
   
(69
)
  
1,650
   
(1,646
)
Net (loss) income
  
(21
)
  
(1,649
)
  
1,577
   
(3,035
)
Less:  Preferred return to preferred OP units
  
585
   
-
   
636
   
-
 
Less:  Amounts attributable to common noncontrolling interests
  
(233
)
  
(246
)
  
(196
)
  
(520
)
Net (loss) income attributable to Sun Communities, Inc. common stockholders
 
$
(373
)
 
$
(1,403
)
 
$
1,137
  
$
(2,515
)
                 
Weighted average common shares outstanding:
                
Basic
  
21,366
   
19,323
   
21,039
   
19,006
 
Diluted
  
21,366
   
19,323
   
23,343
   
19,006
 
                 
(Loss) earnings per share:
                
Basic
 
$
(0.02
)
 
$
(0.07
)
 
$
0.05
  
$
(0.13
)
Diluted
 
$
(0.02
)
 
$
(0.07
)
 
$
0.05
  
$
(0.13
)
                 
Cash dividends per common share:
 
$
0.63
  
$
0.63
  
$
1.89
  
$
1.89
 
 Three Months Ended September 30, Nine Months Ended September 30,
 2012 2011 2012 2011
REVENUES       
Income from real property$63,015
 $58,251
 188,818
 164,351
Revenue from home sales10,461
 8,115
 31,513
 24,496
Rental home revenue6,712
 5,650
 19,514
 16,407
Ancillary revenues, net(6) 31
 349
 434
Interest2,847
 2,430
 7,907
 6,789
Other income, net95
 246
 530
 222
Total revenues83,124
 74,723
 248,631
 212,699
COSTS AND EXPENSES       
Property operating and maintenance18,067
 16,354
 51,261
 43,806
Real estate taxes4,933
 4,504
 14,741
 12,717
Cost of home sales7,791
 6,357
 24,535
 19,249
Rental home operating and maintenance5,118
 4,253
 13,090
 11,680
General and administrative - real property5,165
 5,138
 15,405
 14,449
General and administrative - home sales and rentals2,011
 2,109
 6,458
 6,034
Acquisition related costs847
 121
 1,434
 1,521
Depreciation and amortization22,092
 18,748
 63,027
 53,548
Interest17,066
 16,626
 50,644
 47,257
Interest on mandatorily redeemable debt825
 834
 2,499
 2,489
Total expenses83,915
 75,044
 243,094
 212,750
Income (loss) before income taxes and distributions from affiliates(791) (321) 5,537
 (51)
Provision for state income taxes(84) (150) (190) (22)
Distributions from affiliate600
 450
 3,250
 1,650
Net income (loss)(275) (21) 8,597
 1,577
Less:  Preferred return to A-1 preferred OP units586
 585
 1,744
 636
Less:  Amounts attributable to noncontrolling interests(211) (233) 463
 (196)
Net income (loss) attributable to Sun Communities, Inc. common stockholders$(650) $(373) 6,390
 1,137
Weighted average common shares outstanding:       
Basic26,938
 21,366
 26,427
 21,260
Diluted26,938
 21,366
 26,444
 23,343
Earnings (loss) per share:       
Basic$(0.02) $(0.02) $0.24
 $0.05
Diluted$(0.02) $(0.02) $0.24
 $0.05
        
Dividends per common share:$0.63
 $0.63
 $1.89
 $1.89
        


See accompanying Notes to Consolidated Financial Statements.


4



SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE PERIODS ENDED SEPTEMBER 30, 20112012 AND 20102011
 (In(In thousands)
(Unaudited)

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2011  2010  2011  2010 
Net (loss) income
 
$
(21
)
 
$
(1,649
)
 
$
1,577
  
$
(3,035
)
Unrealized gain (loss) on interest rate swaps
  
222
   
(261
)
  
644
   
(1,018
)
Total comprehensive income (loss)
  
201
   
(1,910
)
  
2,221
   
(4,053
)
Less: Comprehensive loss attributable to the noncontrolling interests
  
(212
)
  
(273
)
  
(137
)
  
(624
)
Comprehensive income (loss) attributable to Sun Communities, Inc. common stockholders
 
$
413
  
$
(1,637
)
 
$
2,358
  
$
(3,429
)
 Three Months Ended September 30, Nine Months Ended September 30,
 2012 2011 2012 2011
Net income (loss)$(275) $(21) $8,597
 $1,577
Unrealized gain on interest rate swaps44
 222
 643
 644
Total comprehensive income (loss)(231) 201
 9,240
 2,221
Less: Comprehensive income (loss) attributable to the noncontrolling interests(206) (212) 529
 (137)
Comprehensive income (loss) attributable to Sun Communities, Inc. common stockholders$(25) $413
 $8,711
 $2,358


See accompanying Notes to Consolidated Financial Statements.


5


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICITEQUITY (DEFICIT)
FOR THE NINE MONTHS ENDEDSEPTEMBER 30, 20112012
 (In(In thousands)
(Unaudited)

  Common Stock  Additional Paid-in Capital  Accumulated Other Comprehensive Loss  Distributions in Excess of Accumulated Earnings  Treasury Stock  Total Sun Communities Stockholders' Deficit  Non-controlling Interest  Total Stockholders' Deficit 
Balance as of December 31, 2010
 
$
217
  
$
495,331
  
$
(2,226
)
 
$
(549,625
)
 
$
(63,600
)
 
$
(119,903
)
 
$
(12,481
)
 
$
(132,384
)
Issuance of common stock from exercise of options, net
  
-
   
716
   
-
   
-
   
-
   
716
   
-
   
716
 
Issuance and associated costs of common stock, net
  
18
   
54,715
   
-
   
-
   
-
   
54,733
   
-
   
54,733
 
Issuance of preferred OP units
  
-
   
-
   
-
   
-
   
-
   
-
   
45,548
   
45,548
 
Share-based compensation - amortization and forfeitures
  
-
   
1,164
   
-
   
57
   
-
   
1,221
   
-
   
1,221
 
Net income (loss)
  
-
   
-
   
-
   
1,773
   
-
   
1,773
   
(196
)
  
1,577
 
Unrealized gain on interest rate swaps
  
-
   
-
   
585
   
-
   
-
   
585
   
59
   
644
 
Cash distributions
  
-
   
-
   
-
   
(40,543
)
  
-
   
(40,543
)
  
(3,927
)
  
(44,470
)
Balance as of September 30, 2011
 
$
235
  
$
551,926
  
$
(1,641
)
 
$
(588,338
)
 
$
(63,600
)
 
$
(101,418
)
 
$
29,003
  
$
(72,415
)
 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Distributions in Excess of Accumulated Earnings Treasury Stock Total Sun Communities Stockholders' Equity (Deficit) Non-controlling Interest Total Stockholders' Equity (Deficit)
Balance as of December 31, 2011$236
 $555,981
 $(1,273) $(617,953) $(63,600) $(126,609) $25,954
 $(100,655)
Issuance of common stock from exercise of options, net
 149
 
 
 
 149
 
 149
Issuance and associated costs of common stock, net79
 300,714
 
 
 
 300,793
 
 300,793
Share-based compensation - amortization and forfeitures
 965
 
 67
 
 1,032
 
 1,032
Net income
 
 
 6,390
 
 6,390
 463
 6,853
Unrealized gain on interest rate swaps
 
 577
 
 
 577
 66
 643
Cash distributions
 
 
 (47,269) 
 (47,269) (3,915) (51,184)
Distributions declared
 
 
 (4,814) 
 (4,814) 
 (4,814)
Balance as of September 30, 2012$315
 $857,809
 $(696) $(663,579) $(63,600) $130,249
 $22,568
 $152,817



See accompanying Notes to Consolidated Financial Statements.




6

5


SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDEDSEPTEMBER 30, 20112012 AND 20102011
 (In(In thousands)
(Unaudited)

 Nine Months Ended September 30, Nine Months Ended September 30,
 2011 2010 2012 2011
OPERATING ACTIVITIES:        
Net income (loss)
 
$
1,577
 
$
(3,035
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
     
(Gain) loss on valuation of derivative instruments
 
(7
)
 
16
 
Net income$8,597
 $1,577
Adjustments to reconcile net income to net cash provided by operating activities:   
Gain from land disposition(87) 
Gain on valuation of derivative instruments(4) (7)
Stock compensation expense
 
1,273
 
1,593
 1,070
 1,273
Depreciation and amortization
 
52,819
 
49,103
 61,144
 52,819
Amortization of deferred financing costs
 
1,289
 
1,248
 1,252
 1,289
Equity loss from affiliates, net
 
-
 
1,646
 
Distributions from affiliate(3,250) (1,650)
Change in notes receivable from financed sales of inventory homes, net of repayments
 
(3,876
)
 
(3,343
)
(6,466) (3,876)
Change in inventory, other assets and other receivables, net
 
(6,642
)
 
(877
)
1,892
 (6,652)
Change in accounts payable and other liabilities
  
(74
)
  
(4,316
)
(6,221) (313)
NET CASH PROVIDED BY OPERATING ACTIVITIES
  
46,359
  
42,035
 57,927
 44,460
     
INVESTING ACTIVITIES:
        
Investment in properties
 
(61,725
)
 
(34,255
)
(90,331) (61,725)
Acquisitions
 
(51,503
)
 
-
 (59,734) (51,503)
Proceeds related to affiliate dividend distribution3,250
 1,650
Proceeds related to disposition of land172
 
Proceeds related to disposition of assets and depreciated homes, net
 
494
 
691
 1,355
 2,530
Reduction of notes receivable and officer's notes, net
  
1,232
  
3,223
 
NET CASH USED FOR INVESTING ACTIVITIES
  
(111,502
)
  
(30,341
)
     
Increase in notes receivable, net(6,054) (555)
NET CASH USED IN INVESTING ACTIVITIES(151,342) (109,603)
FINANCING ACTIVITIES:
        
Issuance and associated costs of common stock, OP units, and preferred OP units, net
 
54,733
 
20,686
 300,793
 54,733
Net proceeds from stock option exercise
 
716
 
48
 149
 716
Distributions to stockholders, OP unit holders, and preferred OP unit holders
 
(44,470
)
 
(40,040
)
(52,928) (44,470)
Payments to retire preferred OP units
 
-
 
(925
)
Borrowings on lines of credit
 
150,018
 
103,773
 149,511
 150,018
Payments on lines of credit
 
(140,212
)
 
(106,328
)
(275,557) (140,212)
Proceeds from issuance of other debt
 
177,459
 
21,877
 83,427
 177,459
Payments on other debt
 
(133,484
)
 
(10,407
)
(77,804) (133,484)
Payments for deferred financing costs
  
(3,296
)
  
(168
)
(1,309) (3,296)
NET CASH PROVIDED (USED) FOR FINANCING ACTIVITIES
  
61,464
  
(11,484
)
     
Net (decrease) increase in cash and cash equivalents
 
(3,679
)
 
210
 
NET CASH PROVIDED BY FINANCING ACTIVITIES126,282
 61,464
Net increase (decrease) in cash and cash equivalents32,867
 (3,679)
Cash and cash equivalents, beginning of period
  
8,420
  
4,496
 5,857
 8,420
Cash and cash equivalents, end of period
 
$
4,741
 
$
4,706
 $38,724
 $4,741
     
SUPPLEMENTAL INFORMATION:
        
Cash paid for interest
 
$
41,496
 
$
39,959
 $42,834
 $41,496
Cash paid for interest on mandatorily redeemable debt
 
$
2,491
 
$
2,462
 $2,499
 $2,491
Cash paid for state income taxes
 
$
539
 
$
492
 $320
 $539
Noncash investing and financing activities:
        
Unrealized gain (loss) on interest rate swaps
 
$
644
 
$
(1,018
)
Unrealized gain on interest rate swaps$643
 $644
Reduction in secured borrowing balance
 
$
7,853
 
$
5,228
 $9,246
 $7,853
Acquisitions - preferred OP units issued
 
$
45,548
 
$
-
 
Change in dividends declared and outstanding$4,814
 $
Noncash investing and financing activities at the date of acquisition:   
Acquisitions - A-1 preferred OP units issued$
 $45,548
Acquisitions - debt assumed
 
$
52,398
 
$
-
 $4,104
 $52,398
Acquisitions - other noncash consideration
 
$
1,343
 
$
-
 
Acquisitions - other liabilities$
 $1,343

See accompanying Notes to Consolidated Financial Statements.


7
6

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



1.      Basis of Presentation

These unaudited interim Consolidated Financial Statements of Sun Communities, Inc., a Maryland corporation, and all wholly-owned or majority-owned  and controlled subsidiaries, including Sun Communities Operating Limited Partnership (the “Operating Partnership”), SunChamp LLC (“SunChamp”), and Sun Home Services, Inc. (“SHS”), have been prepared pursuant to the Securities and Exchange Commission (“SEC”) rules and regulations and in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 20102011 as filed with the SEC on February 24, 2011,23, 2012, as amended on March 31, 201123, 2012 (the “20102011 Annual Report”).

Reference in this report to Sun Communities, Inc., “we”, “our”, “us” and the “Company” refer to Sun Communities, Inc. and its subsidiaries, unless the context indicates otherwise.

The accompanying Consolidated Financial Statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature.

The following Notes to Consolidated Financial Statements present interim disclosures as required by the SEC. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our 20102011 Annual Report.

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

2.2.      Real Estate Acquisitions

2012 Activity:
In June 2011,February 2012, we closed onacquired Three Lakes RV Resort, Blueberry Hill RV Resort and Grand Lake Estates (collectively, the acquisition of Kentland Communities (“Kentland”“Additional Florida Properties”), comprising 17one of which is located in Hudson, Florida, one of which is located in Bushnell, Florida and one of which is located in Orange Lake, Florida, comprised of 1,114 RV sites in the aggregate.

In July 2012, we acquired Texas Blazing Star RV, Ltd ("Blazing Star"), a recreational vehicle community with 260 sites located in San Antonio, Texas.

In July 2012, we also acquired Northville Crossing Venture L.L.C.("Northville Crossing"), a manufacturing housing community with 756 sites located in Northville, Michigan.
Subsequent to quarter end on October 22, 2012 we acquired Rainbow RV Resort, an RV community, with approximately 500 sites located in Frostproof, Florida for a purchase price of $8.5 million of cash.
Also subsequent to quarter end, on October 3, 2012 we entered into a contribution agreement with Rudgate Silver Springs Company, L.L.C., Rudgate West Company Limited Partnership, Rudgate East Company Limited Partnership, Rudgate East Company II Limited Partnership and Rudgate Hunters Crossing, LLC to purchase four manufactured home communities(the "Rudgate Acquisition Properties") with approximately 1,996 sites located in southeast Michigan for a purchase price of $70.8 million, subject to certain adjustments, comprised of approximately $15.5 million in assumed debt and $55.3 million in cash. We also entered into a commitment letter with Rudgate Village Company Limited Partnership, Rudgate Clinton Company Limited Partnership and Rudgate Clinton Estates L.L.C. to provide a mezzanine loan on two manufactured home communities (the "Rudgate Managed Properties") located in southeast Michigan with approximately 1,598 sites. The mezzanine loan will be for an amount equal to the difference between $60.7 millionand 1the amount of the net proceeds received by the borrowers upon the closing of the senior loan from a third party, plus certain closing costs. The amount of the mezzanine loan is estimated to be approximately $14.8 million. The unpaid principal owing under the mezzanine loan will bear interest at a rate of 24% per annum and the minimum cash payment rate on the accrued interest will be 2% per annum. Interest will be payable monthly. Interest that accrues but is not paid currently will be paid-in-kind under a separate note. All principal and interest due under the mezzanine loan will be due on the tenth anniversary of the closing. The mezzanine loan will be non-recourse to the borrowers, subject to certain carveouts, and may not be prepaid for seven years, and then only is prepayable upon the payment of certain fees. The closing of these transactions is subject to the consent of the holder of the debt to be assumed, the closing of the senior loan and the satisfaction of customary closing conditions. If these contingencies are satisfied, we expect these transactions to close no later than November 15, 2012. We anticipate we will consolidate all of these properties as variable interest entities.

8

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


2.      Real Estate Acquisitions, continued

Subsequent to quarter end on October 22, 2012, we entered into a Limited Liability Company Interests Assignment Agreement with PCGRV, LLC and Keith Amigos, Inc.(collectively the “Sellers”). Under this agreement, the Sellers will sell to us 100% of the membership interests of a limited liability company that owns a manufactured housing and recreational vehicle community.  The 18 communities acquired arecommunity located in western MichiganCasa Grande, Arizona. The community contains 283 manufactured home sites, 1,580 recreational vehicle sites and comprise 5,437 developedexpansion potential of approximately 550 manufactured housing or 990 recreational vehicle sites. We believeThe aggregate purchase price for the community is $85.4 million, including the indirect assumption of approximately $42.0 million in mortgage debt secured by the community with the remainder to be paid in cash, subject to certain prorations and adjustments. In addition to paying the purchase price, at the closing we will pay the Sellers $2.6 million to reimburse them for certain construction costs the Sellers incurred in connection with the development of Kentland complements our existing portfoliothe community. At the closing, we will acquire all of the manufactured homes located in the community that are owned by an affiliate of the Sellers. The purchase price for these homes will be paid in cash and enhances our long-term growth opportunities.will be equal to $0.8 million, subject to certain adjustments, plus the amount necessary to pay off the floorplan financing on certain of the homes. The closing of the acquisition is subject to the consent of the holder of the debt to be assumed and the satisfaction of customary closing conditions.  If these contingencies are satisfied, we expect the acquisition to close no later than December 31, 2012.

2011 Activity:
In May 2011, we acquired Orange City RV Resort (“Orange City”), a Florida recreational vehicleRV community comprising 525 developed sites.  We believe the addition ofsites located in Orange City, to our portfolio creates an excellent growth opportunity as well as creating a new recreational vehicle presence for us geographically.Florida.  

In June 2011, we closed on the acquisition of Kentland Communities (“Kentland”), comprised of 17 manufactured home communities and one recreational vehicle community.  The 18 acquired communities are located in western Michigan and comprised of 5,434 developed sites.  

In November 2011, we acquired Cider Mill Crossings (“Cider Mill”), a Michigan manufactured home community with 262 developed sites through an auction. Cider Mill is located in Fenton, Michigan.

In December 2011, we acquired three Florida RV communities, Club Naples RV Resort, Kountree RV Resort, and North Lake RV Resort (collectively the “Florida Properties”), two of which are in Naples, Florida and one of which is in Moore Haven, Florida, comprised of 740 developed sites.

Acquisition related costs of approximately $1.5$1.4 million and $1.5 million have been incurred as offor the nine months ended September 30,2012 and 2011, respectively, and are presented as “Acquisition related costs” in our Consolidated Statements of Operations.

During the third quarter of 2011, we completed the purchase price allocation for the Kentland and Orange City acquisitions made duringCity. In the secondfirst quarter of 2011. Some2012 some of the amounts previously estimated have changed during the measurement period.changed. The changes in estimates included an increase in investment property of $0.1 million, an increase in in-place leases of $0.1 million, an increasea decrease in other assets of $0.2$0.8 million an increase in other liabilities of $0.3 million, and a decrease in assumed debt of $0.1 million, and an increase in cash consideration of $0.2 million.$0.8 million for the Florida Properties. The measurement period adjustments represent updates made to the purchase price allocation based on revisions applied to valuation estimates subsequent to the quarter of acquisition andescrow amount required for the initial accounting.Additional Florida Properties which is reflected in the purchase price allocation for the Additional Florida Properties. There were no significant adjustments to our Consolidated Statements of Operations.

At an auction on September 28, 2011, we successfully bid $0.4 millionThe purchase price allocations for a manufactured home community containing approximately 250 sites in Tyrone Township, MI purchased fromCider Mill, the State of Michigan.  We anticipateFlorida Properties, the deed willAdditional Florida Properties, Blazing Star, and Northville Crossing is preliminary and may be transferredadjusted as final costs and we will take control of operations in November 2011.final valuations are determined.















9
7

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



2.      Real Estate Acquisitions, continued

The following table summarizes the final amounts of the assets acquired and liabilities assumed recognized at the acquisition dates and the consideration paid for Kentland and Orange City:the acquisitions above (in thousands):

At Acquisition Date   
Kentland Orange City
Cider Mill
Florida Properties Addtl Florida Properties Blazing Star Northville CrossingTotal
Investment in property
 
$
137,688
 
$131,228
 $6,460
 $2,088
 $24,027
 $25,384
 $6,913
 $30,814
$226,914
Inventory of manufactured homes
 
1,150
 
1,150
 
 
 36
 112
 220
 187
1,705
Notes
 
3,542
  3,542
 
 
 
 
 
 1,169
4,711
In-place leases
 
9,210
 
9,200
 10
 
 190
 180
 
 260
9,840
Other assets
 
1,269
 
1,269
 
 
 97
 
 193
 
1,559
Other liabilities
 
(2,067
)

(2,067) 
 (1,678) (1,237) (1,194) (179) (221)(6,576)
Assumed debt
  
(52,398
)

(52,398) 
 
 
 
 (4,104) 
(56,502)
   
 
   
  

    

Total identifiable assets and liabilities assumed
 
$
98,394
 
$91,924
 $6,470

$410

$23,113

$24,482
 $3,043
 $32,209
$181,651
                 
                 
Consideration
     








   

 

 
    







  


    
Cash
 $
29,916
 
POP units
 
45,548
 
Cash (1)
 $27,383
 $2,533
 $410
 $6,113
 $24,482
 $3,043
 $32,209
$96,173
A-1 preferred OP units
45,548
 
 
 
 
 
 
45,548
New debt proceeds
  
22,930
  18,993
 3,937
 
 17,000
 
 
 
39,930
   



  

  
     

Fair value of total consideration transferred
 
$
98,394
 
$91,924

$6,470

$410

$23,113

$24,482
 $3.043
 $32,209
$181,651

(1) Subsequent to the acquisition, on March 30, 2012, the Additional Florida Properties were encumbered with a $19.0 million loan through Bank of America and The PrivateBank. On September 28, 2012, Northville Crossing was encumbered with a $21.7 million loan through PNC Bank, National Association. (See Note 8)

As of September 30, 2011,2012, the total residual value of the acquired in-place leases above is $8.9 million.$8.2 million. The amortization period is 7 years.

The results of operations of Kentland and Orange Citythe acquisitions detailed above are included in the Consolidated Statements of Operations beginning on their respective acquisition dates of June 2011 and May 2011, respectively.dates. The following unaudited pro forma financial information presents the results of our operations for the nine months ended September 30, 20112012 and 20102011 as if the properties were acquired on January 1, 2010.2010 for those communities acquired in 2011 and January 1, 2011 for those that were acquired in 2012. The unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of either the results of operations that would have actually occurred had these transactions occurred on January 1, 2010 or the future results of operations (in thousands, except per-share data).(1)
 Nine Months Ended September 30,
 (unaudited)
 2012 2011
Total revenues$251,702
 $233,617
Net income attributable to Sun Communities, Inc. shareholders7,675
 6,387
Net income per share attributable to Sun Communities, Inc. shareholders - basic0.29
 0.30
Net income per share attributable to Sun Communities, Inc. shareholders - diluted0.29
 0.30

  Nine Months Ended 
  September 30, 
  2011  2010 
Total revenues
 
$
224,978
  
$
217,751
 
Net income (loss) attributable to Sun Communities, Inc. shareholders
 
$
2,797
  
$
(549
)
Net income (loss) per share attributable to Sun Communities, Inc. shareholders - basic
  
0.13
   
(0.03
)
Net income (loss) per share attributable to Sun Communities, Inc. shareholders - diluted
  
0.12
   
(0.03
)
(1) Below are nonrecurring expenses that have been adjusted for the pro forma results above:
(a) The sellers had management fees of $0.8 million for the nine months ended September 30,2011 that have been excluded from above as these fees will not continue going forward.
(b) Transaction costs related to the acquisitions are not expected to have a continuing impact and therefore have been excluded from 2012 and included in 2011 for acquisitions completed in 2012, and excluded from 2011 and included in 2010 for acquisitions completed in 2011.

10

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


2.      Real Estate Acquisitions, continued


The amount of Kentland and Orange City’s revenue and net income included in the Consolidated Statements of Operations for the nine months ended September 30, 20112012 for the acquisitions detailed above is set forth in the following table:table (in thousands):

  Revenue  Net Income 
Actual from acquisition date to September 30, 2011
 
$
6,312
  
$
1,199
 
 Revenue Net Income
Nine Months Ended September 30, 2012$25,624
 $2,566



8

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

3.3.      Investment Property

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

  September 30, 2011  December 31, 2010 
Land
 
$
125,201
  
$
116,837
 
Land improvements and buildings
  
1,330,311
   
1,190,761
 
Rental homes and improvements
  
235,270
   
209,824
 
Furniture, fixtures, and equipment
  
37,390
   
36,716
 
Land held for future development
  
25,702
   
26,406
 
Investment property
  
1,753,874
   
1,580,544
 
Accumulated depreciation
  
(584,460
)
  
(548,218
)
Investment property, net
 
$
1,169,414
  
$
1,032,326
 
  September 30, 2012 December 31, 2011
Land $156,361
 $140,230
Land improvements and buildings 1,406,738
 1,342,325
Rental homes and improvements 287,985
 246,245
Furniture, fixtures, and equipment 43,768
 41,172
Land held for future development 24,727
 24,633
Investment property 1,919,579
 1,794,605
Accumulated depreciation (641,452) (597,999)
Investment property, net $1,278,127
 $1,196,606

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

See Note 2 for details on recent acquisitions.


4.
11

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


4.      Transfers of Financial Assets

We have completed various transactions with an unrelated entity involving our installment notes andreceivable during 20112012 under which we have received a total of $15.9$18.6 million of cash proceeds in exchange for relinquishing our right, title and interest in the installment notes.certain notes receivable. We have no further obligations or rights with respect to the control, management, administration, servicing, or collection of the installment notes.

However, we are subject to certain repurchase obligationsrecourse provisions requiring us to purchase the underlying homes collateralizing such notes, in the event of a note default and subsequent repossession of the home.home by the unrelated entity. The repurchaserecourse provisions are considered to be a form of continuing involvement, and we have recordedtherefore these transactionstransferred loans did not meet the requirements for sale accounting. We continue to recognize these transferred loans on our balance sheet and refer to them as collateralized receivables as a transfer of financial assets. The proceeds from the transfer have been recognized as a secured borrowing.

In the event of note default, and subsequent repossession of a manufactured home by the unrelated entity, the terms of the agreement require us to repurchase the manufactured home. Default is defined as the failure to repay the installment note according to contractual terms. The repurchase price is calculated as a percentage of the outstanding principal balance of the installment note,collateralized receivable, plus any outstanding late fees, accrued interest, legal fees, and escrow advances associated with the installment note.  The percentage used to determine the repurchase price of the outstanding principal balance on the installment note is based on the number of payments made on the note. In general, the repurchase price is determined as follows:

Number of Payments Repurchase %
Less than or equal to 15
 100
100
%
Greater than 15 but less than 64
 90
90
%
Equal to or greater than 64 but less than 120
 65
65
%
120 or more
 50
50
%

The transferred assets have been classified as collateralized receivables in Notes and Other Receivables (see Note 5) and the cash proceeds received from these transactions have been classified as a secured borrowing in Debt and Lines of Credit (see Note 7)8) within the Consolidated Balance Sheets. The balance of the collateralized receivables was $78.8$90.5 million (net of allowance of $0.5 million)$0.5 million ) and $71.0$81.2 million (net of allowance of $0.2 million)$0.5 million) as of September 30, 20112012 and December 31, 2010,2011, respectively.  The outstanding balance on the secured borrowing was $79.3$91.1 million and $71.3$81.7 million as of September 30, 20112012 and December 31, 2010,2011, respectively.


9

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


4.Transfers of Financial Assets, continued

The balances of the collateralized receivables and secured borrowings fluctuate. The balances increase as additional installment notes receivable are transferred and exchanged for cash proceeds. The balances are reduced as the related installment notescollateralized receivables are collected from the customers, or as the underlying collateral is repurchased. The change in the aggregate gross principal balance of the collateralized receivables is as follows (in thousands):

Beginning balance as of December 31, 2010
 
$
71,278
 
Financed sales of manufactured homes
  
15,851
 
Principal payments and payoffs from our customers
  
(3,288
)
Repurchases
  
(4,565
)
Total activity
  
7,998
 
Ending balance as of  September 30, 2011
 
$
79,276
 
 Nine Months Ended Year Ended
 September 30, 2012 December 31, 2011
Beginning balance$81,682
 $71,278
Financed sales of manufactured homes18,634
 21,509
Principal payments and payoffs from our customers(4,148) (4,425)
Principal reduction from repurchased homes(5,099) (6,680)
Total activity9,387
 10,404
Ending balance$91,069
 $81,682

The collateralized receivables earn interest income and the secured borrowings accrue interest expense at the same interest rates. The amount of interest income and expense recognized was $2.1$6.8 million and $1.8$6.1 million for the three months ended September 30, 2011 and 2010, respectively.  The amount of interest income and expense recognized was $6.1 million and $5.0 million for the nine months ended September 30, 20112012 and 2010,2011, respectively.  


5.
12

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


5.      Notes and Other Receivables

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

  September 30, 2011  December 31, 2010 
Installment notes receivable on manufactured homes, net
 
$
13,671
  
$
9,420
 
Collateralized receivables, net (see Note 4)
  
78,822
   
71,020
 
Other receivables, net
  
12,572
   
8,367
 
Total notes and other receivables
 
$
105,065
  
$
88,807
 
  September 30, 2012 December 31, 2011
Installment notes receivable on manufactured homes, net $17,505
 $13,417
Collateralized receivables, net (see Note 4) 90,538
 81,176
Other receivables, net 20,135
 20,291
Total notes and other receivables $128,178
 $114,884

Installment Notes Receivable on Manufactured Homes

The installment notes of $13.7$17.5 million (net of allowance of $0.1 million)$0.1 million) and $9.4$13.4 million (net of allowance of $0.1 million)$0.1 million) as of September 30, 20112012 and December 31, 2010,2011, respectively, are collateralized by manufactured homes. The notes represent financing provided by us to purchasers of manufactured homes generallyprimarily located in our communities and require monthly principal and interest payments. This also includes the notes receivable that were purchased in the Kentland acquisition.and Northville acquisitions. See Note 2 for more information. The notes have a net weighted average interest rate and maturity of 7.88.5 percent and 10.211.4 years as of September 30, 2011,2012, and 7.07.9 percent and 11.110.3 years as of December 31, 2010.2011.

The change in the aggregate gross principal balance of the installment notes is as follows (in thousands):

Beginning balance as of December 31, 2010
 
$
9,466
 
Financed sales of manufactured homes
  
2,566
 
Acquired notes (see Note 2)
  
3,542
 
Principal payments and payoffs from our customers
  
(1,099
)
Repurchases
  
(703
)
Total activity
  
4,306
 
Ending balance as of  September 30, 2011
 
$
13,772
 



10

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


5.Notes and Other Receivables, continued
 Nine Months Ended Year Ended
 September 30, 2012 December 31, 2011
Beginning balance$13,545
 $9,466
Financed sales of manufactured homes4,951
 3,362
Acquired notes (see Note 2)1,169
 3,542
Principal payments and payoffs from our customers(1,601) (1,728)
Principal reduction from repossessed homes(474) (1,097)
Total activity4,045
 4,079
Ending balance$17,590
 $13,545

Collateralized Receivables

Certain transactions involving our installmentCollateralized receivables represent notes receivable that were recorded astransferred to a transfer of financial assetsthird party, but did not meet the requirements for sale accounting (see Note 4) and classified as collateralized receivables.. The receivables have a balance of $78.8$90.5 million (net of allowance of $0.5 million)$0.5 million) and $71.0$81.2 million (net(net of allowance of $0.2 million)$0.5 million ) as of September 30, 20112012 and December 31, 2010,2011, respectively.  The receivables have a net weighted average interest rate and maturity of 11.211.1 percent and 13.213.1 years as of September 30, 2011,2012, and 11.311.2 percent and 13.413.2 years as of December 31, 2010.2011.

Allowance for Losses for Collateralized and Installment Notes Receivable

We are generally able to recover our investment in uncollectible notes receivable by repurchasing the homes that collateralized these notes receivable and then selling or leasing these homes to potential residents in our communities.  Although our experience supports a high recovery rate for repossessed homes, we believe there is some degree of uncertainty about recoverability of our investment in these repossessed homes.  When an account becomes 60 days delinquent, we stop accruing interest on the account.  We have established a loan loss reserve to record our estimated unrecoverable costs associated with these repossessed homes.  We estimate our unrecoverable costs to be the repurchase price plus repair and remarketing costs that exceed the estimated selling price of the home being repossessed.  A historical average of this excess cost is calculated based on prior repossessions and applied to our estimated annual future repossessions to create the allowance for installment notes and collateralized receivables.  The allowance for losses for collateralized and installment notes receivable was approximately $0.6$0.6 million and $0.3 million as of September 30, 20112012 and December 31, 2010, respectively.2011.

 Nine Months Ended Year Ended
 September 30, 2012 December 31, 2011
Beginning balance$(635) $(303)
Lower of cost or market write-downs139
 84
Increase to reserve balance(120) (416)
Total activity19
 (332)
Ending balance$(616) $(635)

13

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


5.      Notes and Other Receivables, continued

Other Receivables

Other receivables were comprisedAs of amounts due from residents for rent and water usage of $2.0 million (net of allowance of $0.3 million), home sale proceeds of $3.3 million, insurance receivables of $1.0 million, and rebates and other receivables of $6.3 million as of September 30, 2011.  As of December 31, 2010,2012 other receivables were comprised of amounts due from residents for rent and water and sewer usage of $1.8$3.3 million (net of allowance of $0.4 million)$0.4 million), home sale proceeds of $2.7$4.4 million, insurance receivables of $0.8$1.3 million, insurance settlement of $3.7 million, rebates and other receivables of $2.4 million and a note receivable of $5.0 million. The note, which was loaned to the principals of the Florida Properties, bears interest at LIBOR plus 475 basis points, matures on January 31, 2013 and is secured by all of the equity interests in entities that own four RV communities. As of December 31, 2011 other receivables were comprised of amounts due from residents for rent and water and sewer usage of $3.0 million (net of allowance of $0.4 million), home sale proceeds of $3.3 million, insurance receivables of $0.8 million, rebates receivable in association of FNMA agreement of $4.9 million, insurance settlement of $3.7 million, note receivable related to Kentland acquisition of $0.9 million (see Note 2), and rebates and other receivables of $3.1 million. $3.7 million.

6.Intangibles

Our intangible assets are in-place leases from acquisitions and capitalized costs in relation to leasing costs. These intangible assets are recorded within Other Assets on the Consolidated Balance Sheets. They are amortized over a seven year amortization period. The gross carrying amount is $24.3 million and $25.3 million at September 30, 2012 and December 31, 2011, respectively. The accumulated amortization is $10.9 million and $10.8 million at September 30, 2012 and December 31, 2011, respectively. Aggregate net amortization expense related to intangible assets was $0.7 million and $1.0 million for the three months ended September 30,2012 and 2011, respectively. Aggregate net amortization expense related to intangible assets was $2.4 million and $1.9 million for the nine months ended September 30,2012 and 2011, respectively.

7.      Investment in Affiliates

Origen Financial Services, LLC (“OFS LLC”)

At September 30, 20112012 and 2010,2011, we had a 22.9 and 25.0 percent ownership interest respectively, in OFS LLC, an entity formed to originate manufactured housing installment contracts.  We have suspended equity accounting as the carrying value of our investment is zero.zero.

Origen Financial, Inc. (“Origen”)

WeThrough Sun OFI, LLC, a taxable REIT subsidiary, we own 5,000,000 shares of common stock of Origen which approximates an ownership interest of 19 percent.percent. Although it is no longer originating or servicing loans, Origen continues to manage an existing portfolio of manufactured home loans and asset backed securities. We have suspended equity accounting for this investment as the carrying value of our investment is zero.zero. We do, however, receive income from dividend payments.distributions on our investment.  Per Origen's earnings release dated June 5, 2012, the dividend payment was funded through normal operations and the proceeds from the termination of their interest rate swap. Our investment in Origen had a market value of approximately $7.0$6.5 million based on a quoted market closing price of $1.40$1.30 per share from the “Pink Sheet Electronic OTC Trading System”“OTC Pink Marketplace” as of September 30, 2011.

11

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


6.Investment in Affiliates, continued
28,
2012.

The unaudited revenue and expense amounts in the table below represent actual results through August 20112012 and estimatedbudgeted September 20112012 results.

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

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2011  2010  2011  2010 
Revenues
 
$
16,649
  
$
18,395
  
$
51,215
  
$
56,546
 
Expenses
  
(19,028
)
  
(21,300
)
  
(59,891
)
  
(68,731
)
Net loss
 
$
(2,379
)
 
$
(2,905
)
 
$
(8,676
)
 
$
(12,185
)
 Three Months Ended September 30, Nine Months Ended September 30,
 (unaudited) (unaudited)
 2012 2011 2012 2011
Revenues$14,228
 $16,649
 $50,608
 $51,215
Expenses(16,619) (19,028) (52,427) (59,891)
Net loss$(2,391) $(2,379) $(1,819) $(8,676)


7.
14

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


8.      Debt and Lines of Credit

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

 
Principal
Outstanding
 
Weighted Average
Years to Maturity
 
Weighted Average
Interest Rates
 
Principal
Outstanding
 
Weighted Average
Years to Maturity
 
Weighted Average
Interest Rates
 September 30, 2011 December 31, 2010 September 30, 2011 December 31, 2010 September 30, 2011 December 31, 2010 September 30, 2012 December 31, 2011 September 30, 2012 December 31, 2011 September 30, 2012 December 31, 2011
Collateralized term loans - CMBS
 
$
468,034
 
$
463,286
 
5.1
 
3.6
 
5.3
%
 
5.1
%
$648,761
 $629,229
 4.5
 5.0
 5.4% 5.5%
Collateralized term loans - FNMA
 
365,749
 
369,147
 
11.6
 
3.4
 
3.6
%
 
4.1
%
371,034
 364,581
 10.6
 11.3
 3.8% 3.6%
Preferred OP Units
 
48,322
 
48,322
 
9.5
 
10.2
 
6.9
%
 
6.9
%
Aspen and Series B-3 preferred OP Units47,822
 48,822
 8.6
 9.2
 6.9% 6.9%
Secured borrowing (see Note 4)
 
79,276
 
71,278
 
13.2
 
13.4
 
11.2
%
 
11.3
%
91,069
 81,682
 13.0
 13.2
 11.1% 11.2%
Mortgage notes, other
  
290,751
  
211,579
  
4.6
  
4.6
  
5.0
%
  
4.8
%
109,986
 143,877
 3.7
 3.2
 4.0% 3.8%
Total debt
 
$
1,252,132
 
$
1,163,612
  
7.6
  
4.6
  
5.2
%
  
5.3
%
$1,268,672
 $1,268,191
 7.0
 7.3
 5.3% 5.2%

Collateralized Term Loans

On March 1, 2011,In July 2012, we completedassumed a collateralized mortgage backed security “CMBS”"CMBS" agreement with a principal balance of $4.1 million, as a result of the Blazing Star acquisition (See Note 2 for acquisition details), which has a weighted average maturity of 3.2 years and bears an interest rate of 5.64%.

In September 2012, we completed a secured debt agreement with PNC Bank, National Association for $21.7 million bearing an interest rate of 3.89% and a maturity date of October 1, 2022. This loan is secured by the newly acquired Northville Crossing property (See Note 2 for acquisition details).

In March, 2011, we completed a CMBS financing with JPMorgan Chase Bank, National Association for $115.0$115.0 million bearing an interest rate of 5.837% and a maturity date of March 1, 2021.2021. This loan is secured by 11 properties. The loan refinanced $104.8$104.8 million of CMBS debt which was scheduled to mature in July 2011 and was collateralized using the same property pool.

The collateralized term loans totaling $833.8In May 2011, we completed a refinancing agreement with Bank of America N.A., for $23.6 million as. This debt bears an interest rate of September 30, 2011, are5.38% and has a maturity of June 1, 2021. This loan is secured by 87 properties comprisedthree properties. The loan refinanced $17.9 million of 31,372 sites representing approximately $504.9 million of net book value.debt which was scheduled to mature in June 2012 and was collateralized using the same property pool.

In July 2011, we reached an agreement with the Fannie Mae (“FNMA”) and PNC Bank, National Association, regarding the settlement of the litigation we commenced in November 2009 over certain fees charged when the variable rate loan facility was extended in April 2009.   Except for certain transitional provisions, the2009. The agreement will becomebecame effective January 3, 2012 if certain conditions are met.  The and the litigation will be dismissed when all the terms of the agreement become effective.was dismissed. In accordance with the terms of the agreement, we have the option to extend the maturity date of our entire $367.0$367.0 million credit facility with PNC Bank and FNMA from 2014 to 2023, subject to compliance with certain underwriting criteria. This agreement also provided a reduction in the facility fee charged on our variable rate facility for 2011. In addition we drew a $10.0 million variable rate facility, which matures on May 1, 2023 and provides for interest-only payments until May 1, 2014, after which principal and interest payments will be due based on a 30-year amortization.  The interest rate for the effect of which reduced interest expense by $1.3$10.0 million thru September 30, 2011.  See Note 17 for variable rate facility is equal to the 90-day LIBOR index, plus an investor spread equal to 95 basis points, plus a more detailed description of the agreement.variable facility fee equal to 172 basis points through maturity.

Preferred OP UnitsThe collateralized term loans totaling $1.0 billion as of September 30, 2012, are secured by 98 properties comprised of 35,928 sites representing approximately $607.4 million of net book value.

We redeemed $0.9 million ofAspen preferred OP Units and Series B-3 Preferredpreferred OP Units in the nine months ended September 30, 2010.units

In February 2010, our Operating Partnership completed a ten year extension on the redemption date associated with the $35.8 million convertible PreferredThe Aspen preferred OP Units to January 1, 2024.  In connection with the extension, the maximum annual preferred rate on the Preferred OP Units was increased to 9.0 percent from 8.6 percent.  These Preferred OP Unitsunits are convertible into 526,212 common shares based on a conversion price of $68$68 per share.share with a redemption date of January 1, 2024. The current preferred rate is 6.5 percent.

We redeemed $1.0 million of Series B-3 preferred OP units in May 2012.

Secured Borrowing

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


15
12

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


7.8.      Debt and Lines of Credit, continued

Mortgage Notes

In March 2012, we paid off $2.7 million mortgage agreement secured by a manufactured housing community in Belmont, Michigan which was due to mature on April 1, 2012.

In June 2012, we completed a variable refinancing agreement with Bank of America N.A., for $14.1 million. This debt bears an interest rate of LIBOR plus a 2.0% margin (effective rate at September 30, 2012 was 2.22%) and has a maturity of September 1, 2016, assuming the election of the two successive one-year extensions. The loan is secured by two properties and refinanced $14.0 million of debt which matured in June 2012.

In September 2012, we paid off approximately $25.0 million mortgage agreement secured by four properties which was due to mature on June 20, 2013.

In June 2011, we assumed secured debt with a principal balance $52.4of $52.4 million, as a result of the Kentland acquisition (see Note 2 for acquisition details) that has a weighted average maturity of 4.4 years and weighted average annual rate of 5.7%2). This secured debt was recorded at fair value on the date of the acquisition.acquisition which was equal to the assumed principal balance. This debt is secured by 12 properties. The weighted average maturity is 3.7 years and the weighted average annual variable interest rate of 5.61%.

In June 2011, we also entered into a $22.9$22.9 million variable financing agreement with Bank of America N.A., to fund the Kentland acquisitionand Orange City acquisitions (see Note 2 for acquisition details).  The agreement has a weighted average maturity of 3.7 years and weighted average annual rate of 3.1%2). The debt was collateralized by 6six properties – 5five Kentland properties and Orange City.

On February 1, 2012, we paid off $4.5 million of this agreement which was collateralized by Orange City. In MaySeptember 2012, we paid off the remaining approximately $18.1 million mortgage agreement which was due to mature on June 1, 2015.

In December 2011, we also completedentered into a refinancing$17.0 million variable financing agreement for $23.6with Bank of America, N.A. and The Private Bank. In March 2012, we amended and restated the variable financing agreement with Bank of America, N.A. and The PrivateBank which added an additional $19.0 million bearing an , the "36.0 Million Facility." The debt is collateralized by all six of the properties acquired in the Florida Properties and Additional Florida Properties acquisitions (see Note 2). The weighted average maturity is 4.2 years with the weighted average annual variable interest rate of 5.38% and a maturity2.72%. As of June 1, 2021.30, 2012, we were not in compliance with the debt service coverage ratio due to our subsidiaries that own the Florida Properties and the Additional Florida Properties. This non-compliance did not result in an Event of Default under the $36.0 Million Facility. On October 4, 2012, we entered into a loan is secured by 3 properties.  The loan refinanced $17.9 million ofmodification agreement with the lenders, pursuant to which the lenders waived compliance with the debt which was scheduled to mature in Juneservice coverage ratio covenant through December 31, 2012 and was collateralized usingmodified the same property pool.covenant for the quarter ending March 31, 2013.  As a condition to the loan modification, until we are in compliance with the debt service coverage ratio covenant for three consecutive quarters, the Operating Partnership agreed to remove the limitation on their guaranty and to provide full guaranty of repayment of the indebtedness. On October 4, 2012, pursuant to the loan modification agreement, we also paid down $6.0 million of the outstanding principal of the $36.0 Million Facility.

The mortgage notes totaling $290.8$110.0 million as of September 30, 2011,2012, are collateralized by 3722 properties comprised of 11,8436,112 sites representing approximately $305.5$191.6 million of net book value.

















16

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


8.      Debt and Lines of Credit, continued

Lines of Credit

On In September 28, 2011, we entered into a senior secured revolving credit facility with Bank of America, N.A., and certain other lenders in the amount of $130.0$130.0 million (the "Facility"), which replacesreplaced our $115.0$115.0 million revolving line of credit.  The Facility is secured by a first priority lien on all of our equity interests in each entity that owns all or a portion of the properties constituting the borrowing base and collateral assignments of our senior and mezzanine debt positions in certain borrowing base properties. The Facility has a built inbuilt-in accordion feature allowing up to $20.0$20.0 million in additional borrowings and a one-yearone-year extension option, both at our discretion. The Facility matures on October 1, 2015, assuming the election of the extension. The Facility will bearbears interest at a floating rate based on Eurodollar plus a margin that is determined based on our leverage ratio calculated in accordance with the Facility, which can range from 2.25% to 2.95%. Based on our currentcalculation of the leverage ratio as of September 30, 2012, the margin will be 2.75%is 2.25%. The outstanding balance on the line of credit was $90.5zero and $107.5 million and $81.0 million as of September 30, 20112012 and December 31, 2010,2011, respectively. In addition, $4.0$4.0 million of availability was used to back standby letters of credit as of September 30, 20112012 and December 31, 2010.  The weighted average interest rate on the outstanding borrowings was 3.0 percent as2011. As of September 30, 2011.  As of September 30, 20112012 and December 31, 2010, $35.52011, $126.0 million and $30.0$18.5 million, respectively, were available to be drawn under the facility based on the calculation of the borrowing base at each date.

In May 2010, we entered intoWe have a $20.0$20.0 million secured line of credit agreement collateralized by a portion of our rental home portfolio. The net book value of the rental homes pledged as security for the loan must meet or exceed 200 percent of the outstanding loan balance.  The agreement has a maximum 10 year term that can be prepaid partially or in full at our option any time before the maturity date without penalty. The terms of the agreement require interest only payments for the first 5 years, with the remainder of the term being amortized based on a 10 year term. The interest rate for the first 5 years is Prime plus 200 basis points with a minimum rate of 5.5 percent and a maximum rate of 9.0 percent (effective rate 5.5 percent atpercent. At September 30, 2011); and thereafter at a fixed2012, the effective interest rate of 5.15is 5.5 percent over the 5-year U.S. Treasury rate in effect on May 1, 2015.. Prime shall mean the prime rate published in the Wall Street Journaladjusted the first day of each calendar month. The outstanding balance was $9.0 millionzero as of September 30, 2011 and 2012. The outstanding balance was $16.0 million as of December 31, 2010 and was collateralized by 521 and 522 rental homes with a net book value of $18.1 million and $18.0 million, respectively.2011.

In March 2009, we entered intoWe have a $10.0$12.0 million manufactured home floor plan facility that was increased to $12.0 million in the second quarter of 2011. The floor plan facility initially had a committed term of one year. In February 2010, the floor plan facility was renewedrenewable indefinitely until our lender provides us 12 month notice of their intent to terminate the agreement. The interest rate is 100 basis points over the greater of Prime or 6.0 percent (effective
rate 7.0 percent at September 30, 2011)2012).  Prime means the prevailing “prime rate” as quoted in the Wall Street Journal on the first business day of each month. The outstanding balance was $4.8$3.0 million and $4.5$5.5 million as of September 30, 20112012 and December 31, 2010,2011, respectively.


13

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

7.      Debt and Lines of Credit, continued

As of September 30, 2011, assuming the election of certain extension provisions,2012, the total of maturities and amortization of debt and lines of credit during the next five years, are as follows (in thousands):

 Maturities and Amortization By Year Maturities and Amortization By Year
 Total Due Oct 2011 - Dec 2011 2012 2013 2014 2015 After 5 years Total Due Oct 2012 - Dec 2012 2013 2014 2015 2016 After 5 years
Lines of credit
 
$
104,333
 
$
-
 
$
4,833
 
$
-
 
$
-
 
$
90,500
 
$
9,000
 $2,988
 $
 $2,988
 $
 $
 $
 $
Mortgage loans payable:
                            
Maturities
 
991,624
 
-
 
16,784
 
33,761
 
188,208
 
24,879
 
727,992
 980,248
 
 9,241
 185,754
 3,834
 312,585
 468,834
Principal amortization
 
132,910
 
3,707
 
16,523
 
17,040
 
15,196
 
13,314
 
67,130
 149,533
 4,376
 17,978
 17,943
 17,579
 16,070
 75,587
Preferred OP Units
 
48,322
 
370
 
4,300
 
3,645
 
4,225
 
-
 
35,782
 
Aspen and Series B-3 preferred OP units47,822
 3,670
 4,145
 4,225
 
 
 35,782
Secured borrowing
  
79,276
  
793
  
3,389
  
3,715
  
4,067
  
4,504
  
62,808
 91,069
 963
 4,068
 4,466
 4,945
 5,479
 71,148
Total
 
$
1,356,465
 
$
4,870
 
$
45,829
 
$
58,161
 
$
211,696
 
$
133,197
 
$
902,712
 $1,271,660
 $9,009
 $38,420
 $212,388
 $26,358
 $334,134
 $651,351

The most restrictive of our debt agreements place limitations on secured borrowings and contain minimum fixed charge coverage, leverage, distribution and net worth requirements. As of September 30, 2011,2012, we were in compliance with all covenants.

8.9.      Equity Transactions

In November 2004, our BoardJanuary 2012, we closed an underwritten registered public offering of Directors authorized us to repurchase up to 1,000,000 shares of our common stock.  We have 400,000 common shares remaining in the repurchase program.  No common shares were repurchased during 2011 or 2010.  There is no expiration date specified for the buyback program.

Common OP Unit holders can convert their Common OP units into an equivalent number of4,600,000 shares of common stock at any time.  During 2011, holdersa price of Common OP Units converted 10,249 units$35.50 per share. The net proceeds from the offering were $156.0 million after deducting the expenses related to common stock.the offering. The net proceeds of the offering were used to repay $123.5 million of outstanding debt, to fund $25.0 million of the purchase price of the Additional Florida Properties (See Note 2 for additional information), which were subsequently encumbered with a loan of $19.0 million and the remainder of the proceeds were used for general corporate purpose.

17

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


9.      Equity Transactions, continued

The vesting requirements for 20,412 restricted shares grantedOn May 10, 2012 pursuant to our employees were satisfied during the nine months ended September 30, 2011.

Oura shelf registration statement on Form S-3, for a proposed offering of up to $300.0 millionwe registered with the SEC the sale of our common stock, preferred stock, and debt securities, warrants and units consisting of two or more of the aforementioned securities. This shelf registration statement was declared effective with the SECupon filing and replaced our previous shelf registration statement which was scheduled to expire in May 2009.  We2012.
On May 10, 2012 we entered into aan "at-the-market" sales agreement with BMO Capital Markets Corp and Liquidnet Inc. to issue and sell up to 1,600,000 shares of common stock from time to time pursuant to our effective shelf registration statement on Form S-3.  Sales under the agreement commenced during the third quarter of 2009 and we completed the final sale in May 2011.  On May 31, 2011, we entered into an amendment to the sales agreement pursuant to our effective shelf registration statement on Form S-3.  Our board of directors authorizedtime. The current authorization allows for the sale of our common stock up to an additional 1,600,000 shares after May 2011 under the sales agreement.  We issued 680,184aggregate amount of $100 million. There were 252,833 shares of common stock during the nine months ended sold through September 30, 2011.2012. The shares of common stock were sold at the prevailing market price of our common stock at the time of each sale with a weighted average sale price of $37.52.  Through September 30, 2011,$46.07 and we received net proceeds of approximately $25.0$11.5 million related to the issuance of common stock..  The proceeds were used to pay down our line of credit.
In September 2012, we closed an underwritten registered public offering of 3,000,000 shares of common stock at a price of $44.06 per share. The net proceeds from the offering were $132.0 million after deducting the underwriting discounts and expenses related to the offering. We used the net proceeds of the offering to repay $78.0 million of our senior secured revolving credit facility and we used $43.1 million to repay single mortgages secured by nine communities. We expect to use any remaining net proceeds of the offering to fund potential future acquisitions of properties and for working capital and general corporate purposes.

In November 2004, our Board of Directors authorized us to repurchase up to 1,000,000 shares of our common stock.  We have 400,000 common shares remaining in the repurchase program.  No common shares were repurchased during 2012 or 2011.  There is no expiration date specified for the buyback program.
Common OP Unit holders can convert their Common OP units into an equivalent number of shares of common stock at any time.  During the nine months ended September 30,2012 and 2011, holders of Common OP Units converted 2,000 and 10,249 units, respectively to common stock.

Under our previous shelf registration statement on Form S-3 we had an "at-the-market" sales agreement to issue and sell shares
of common stock. We issued 40,524 shares of common stock from January 1, 2012 through May 9, 2012, when the sales agreement was terminated.  The shares of common stock were sold at the prevailing market price of our common stock at the time of each sale with a weighted average sale price of $37.22 and we received net proceeds of approximately $1.5 million.  The proceeds were used to pay down our line of credit.

On August 6, 2010, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with REIT Opportunity, Ltd. (“REIT Ltd.”), which provides that, upon the terms and subject to the conditions set forth in the Purchase Agreement, REIT Ltd. is committed to purchase up to the lesser of $100,000,000$100 million of our common stock, or 3,889,493 shares of our common stock, which is equal to one share less than twenty percent of our issued and outstanding shares of common stock on the effective date of the Purchase Agreement.  From time to time over the two year term of the Purchase Agreement, and at our sole discretion, we may present REIT Ltd. with draw down notices to purchase our common stock.  Any and all issuances of shares of common stock to REIT Ltd. pursuant to the Purchase Agreement will be registered on our effective shelf registration statement on Form S-3.  OnIn January, 5, 2011 we sold 915,827 shares of common stock at a weighted average sale price of $32.76$32.76 and received net proceeds of $30.0 million.$30.0 million.  The funds were used to pay down our line of credit.


14

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

8.      Equity Transactions, continued The Purchase Agreement expired September 1, 2012.

In June 2011, we issued $45.5$45.5 million of Series A-1 preferred operating partnership (“PreferredA-1 preferred OP”) units as a result of the Kentland acquisition (see Note 2 for details)2).  PreferredA-1 preferred OP unit holders can convert the PreferredA-1 preferred OP units into shares of common stock at any time after December 31, 2013 based on a conversion price of $41$41 per share with $100$100 par value.  These Series A-1 Preferredpreferred OP units are convertible, but not redeemable.  The Series A-1 Preferredpreferred OP unit holders receive a preferred return of 5.1% until June 23, 2013 and 6.0% thereafter.

In August 2011, we discovered that we did not register with the SEC shares of our common stock purchased in the open market by our 401(k) plan for the first two yearsbenefit of participants in the plan.  We eliminated the option to purchase our common stock in the plan in September 2011 and 6.0% thereafter.the last purchase made through the plan was on September 16, 2011. As disclosed in our prior SEC filings, we considered filing a registration statement on Form S-3 offering to rescind the purchase of shares of our common stock by persons who acquired such shares through our 401(k) plan from September 16, 2010 through September 16, 2011. During that period, the plan purchased a total of 3,301 shares of our common stock for the benefit of a total of 85 participants. We determined that our potential liability, if any, with respect to shares of our common stock purchased during the applicable period was not material to us. Based on this and the expense of conducting a rescission offer, we determined not to conduct a rescission offer.



18

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


9.      Equity Transactions, continued

Cash dividends of $0.63 per share were declared for the quarter ended September 30, 2012. On October 21, 2011,19, 2012 cash payments of approximately $20.0 million for aggregate dividends, distributions and dividend equivalents of $15.0 million were made to common stockholders, common OP unitholders, and restricted stockholders of record onas of October 13, 2011.10, 2012.

9.10.      Share-Based Compensation

In February 2012, we granted 15,000 shares of restricted stock to our executive officers under the 2009 Equity Plan. The awards vest ratably over an eight year period beginning on the fourth anniversary of the grant date, and have a fair value of $40.80 per share. The fair value was determined by using the closing share price of our common stock on the date the grant was issued.

In July 2012, we granted 9,600 shares of restricted stock to our directors under our First Amended and Restated 2004 Non-Employee Director Option Plan. The awards vest on July 19, 2015, and upon grant had a fair value of $46.30 per share. The fair value was determined by using the closing share price of our common stock on the date the grant was issued.

During the nine months ended September 30, 2011, 30,1602012, 7,678 shares of common stock were issued in connection with the exercise of stock options and the net proceeds received were $0.7 million.$0.1 million.

On July 27, 2011, we issued 10,500 director options underThe vesting requirements for 8,750 restricted shares granted to our 2004 Non-Employee Director Option Plan.  The weighted average fair value ofemployees were satisfied during the options issued is estimated on the date of the grant using the Binomial (lattice) option pricing model, with the following weighted average assumptions used for the grants in the period indicated:nine months ended September 30,2012.

  July 2011 Award 
Estimated fair value per share of options granted
 
$
9.70
 
Assumptions:
    
Annualized dividend yield
  
6.70
%
Common stock price volatility
  
45.20
%
Risk-free rate of return
  
1.52
%
Expected option terms (in years)
  
5.0
 


10.11.      Other Income

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

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2011  2010  2011  2010 
Brokerage commissions
 
$
102
  
$
80
  
$
396
  
$
354
 
Other income (loss), net
  
144
   
(70
)
  
(174
)
  
108
 
Total other income, net
 
$
246
  
$
10
  
$
222
  
$
462
 
 Three Months Ended September 30, Nine Months Ended September 30,
 2012 2011 2012 2011
Brokerage commissions$147
 $102
 $476
 $396
Other income (loss), net(52) 144
 54
 (174)
Total other income (loss), net$95
 $246
 $530
 $222


19

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


12.Segment Reporting

 11.    Segment Reporting

Our consolidated operations can be segmented into Real Property Operations and Home Sales and Rentals.  Transactions between our segments are eliminated in consolidation.  Seasonal recreational vehicleRV revenue is included in Real Property Operations’ revenues and is approximately $5.5$9.8 million annually. This seasonal revenue is recognized approximately 49%46% in the first quarter, 6.5%13% in both the second, 13% in the third quarter and third quarters and 38%28% in the fourth quarter of each fiscal year.

15

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


A presentation of segment financial information is summarized as follows (amounts in thousands):

  Three Months Ended September 30, 2011  Three Months Ended September 30, 2010 
  Real Property Operations  Home Sales and Home Rentals  Consolidated  Real Property Operations  Home Sales and Home Rentals  Consolidated 
Revenues
 
$
58,251
  
$
13,765
  
$
72,016
  
$
50,169
  
$
12,459
  
$
62,628
 
Operating expenses/Cost of sales
  
20,858
   
10,610
   
31,468
   
17,755
   
9,484
   
27,239
 
Net operating income/Gross profit
  
37,393
   
3,155
   
40,548
   
32,414
   
2,975
   
35,389
 
Adjustments to arrive at net income (loss):
                        
Other revenues
  
2,676
   
31
   
2,707
   
2,046
   
35
   
2,081
 
General and administrative
  
(5,138
)
  
(2,109
)
  
(7,247
)
  
(3,408
)
  
(1,873
)
  
(5,281
)
Acquisition related costs
  
(121
)
  
-
   
(121
)
  
-
   
-
   
-
 
Depreciation and amortization
  
(12,869
)
  
(5,879
)
  
(18,748
)
  
(11,745
)
  
(5,387
)
  
(17,132
)
Interest expense
  
(17,226
)
  
(234
)
  
(17,460
)
  
(16,304
)
  
(190
)
  
(16,494
)
Equity income (loss) from affiliates, net
  
450
   
-
   
450
   
(19
)
  
(50
)
  
(69
)
Provision for state income tax
  
(150
)
  
-
   
(150
)
  
(143
)
  
-
   
(143
)
Net income (loss)
  
5,015
   
(5,036
)
  
(21
)
  
2,841
   
(4,490
)
  
(1,649
)
Less:  Preferred return to preferred OP units
  
585
   
-
   
585
   
-
   
-
   
-
 
Less:  Net income (loss) attributable to noncontrolling interests
  
213
   
(446
)
  
(233
)
  
197
   
(443
)
  
(246
)
Net income (loss) attributable to Sun Communities, Inc.
 
$
4,217
  
$
(4,590
)
 
$
(373
)
 
$
2,644
  
$
(4,047
)
 
$
(1,403
)
 Three Months Ended September 30, 2012 Three Months Ended September 30, 2011
 Real Property Operations Home Sales and Home Rentals Consolidated Real Property Operations Home Sales and Home Rentals Consolidated
Revenues$63,015
 $17,173
 $80,188
 $58,251
 $13,765
 $72,016
Operating expenses/Cost of sales23,000
 12,909
 35,909
 20,858
 10,610
 31,468
Net operating income/Gross profit40,015
 4,264
 44,279
 37,393
 3,155
 40,548
Adjustments to arrive at net income (loss):           
Other revenues2,942
 (6) 2,936
 2,676
 31
 2,707
General and administrative(5,165) (2,011) (7,176) (5,138) (2,109) (7,247)
Acquisition related costs(847) 
 (847) (121) 
 (121)
Depreciation and amortization(14,760) (7,332) (22,092) (12,869) (5,879) (18,748)
Interest expense(17,885) (6) (17,891) (17,226) (234) (17,460)
Distributions from affiliate600
 
 600
 450
 
 450
Provision for state income tax(84) 
 (84) (150) 
 (150)
Net income (loss)4,816
 (5,091) (275) 5,015
 (5,036) (21)
Less:  Preferred return to A-1 preferred OP units586
 
 586
 585
 
 585
Less:  Net income (loss) attributable to noncontrolling interests328
 (539) (211) 213
 (446) (233)
Net income (loss) attributable to Sun Communities, Inc.$3,902
 $(4,552) $(650) $4,217
 $(4,590) $(373)






















20
16

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



11.      12.Segment Reporting, continued
 Nine Months Ended September 30, 2012 Nine Months Ended September 30, 2011
 Real Property Operations Home Sales and Home Rentals Consolidated Real Property Operations Home Sales and Home Rentals Consolidated
Revenues$188,818
 $51,027
 $239,845
 $164,351
 $40,903
 $205,254
Operating expenses/Cost of sales66,002
 37,625
 103,627
 56,523
 30,929
 87,452
Net operating income/Gross profit122,816
 13,402
 136,218
 107,828
 9,974
 117,802
Adjustments to arrive at net income (loss):           
Other revenues8,437
 349
 8,786
 7,011
 434
 7,445
General and administrative(15,405) (6,458) (21,863) (14,449) (6,034) (20,483)
Acquisition related costs(1,434) 
 (1,434) (1,521) 
 (1,521)
Depreciation and amortization(41,798) (21,229) (63,027) (36,452) (17,096) (53,548)
Interest expense(53,051) (92) (53,143) (49,029) (717) (49,746)
Distributions from affiliate3,250
 
 3,250
 1,650
 
 1,650
Provision for state income tax(190) 
 (190) (22) 
 (22)
Net income (loss)22,625
 (14,028) 8,597
 15,016
 (13,439) 1,577
Less:  Preferred return to A-1 preferred OP units1,744
 
 1,744
 636
 
 636
Less:  Net income (loss) attributable to noncontrolling interests1,985
 (1,522) 463
 1,011
 (1,207) (196)
Net income (loss) attributable to Sun Communities, Inc.$18,896
 $(12,506) $6,390
 $13,369
 $(12,232) $1,137

  Nine Months Ended September 30, 2011  Nine Months Ended September 30, 2010 
  Real Property Operations  Home Sales and Home Rentals  Consolidated  Real Property Operations  Home Sales and Home Rentals  Consolidated 
Revenues
 
$
164,351
  
$
40,903
  
$
205,254
  
$
152,124
  
$
40,225
  
$
192,349
 
Operating expenses/Cost of sales
  
56,523
   
30,929
   
87,452
   
52,263
   
30,178
   
82,441
 
Net operating income/Gross profit
  
107,828
   
9,974
   
117,802
   
99,861
   
10,047
   
109,908
 
Adjustments to arrive at net income (loss):
                        
Other revenues
  
7,011
   
434
   
7,445
   
6,267
   
369
   
6,636
 
General and administrative
  
(14,449
)
  
(6,034
)
  
(20,483
)
  
(12,525
)
  
(5,659
)
  
(18,184
)
Acquisition related costs
  
(1,521
)
  
-
   
(1,521
)
  
-
   
-
   
-
 
Depreciation and amortization
  
(36,452
)
  
(17,096
)
  
(53,548
)
  
(34,675
)
  
(15,980
)
  
(50,655
)
Interest expense
  
(49,029
)
  
(717
)
  
(49,746
)
  
(48,264
)
  
(426
)
  
(48,690
)
Equity income (loss) from affiliates, net
  
1,650
   
-
   
1,650
   
(1,646
)
  
-
   
(1,646
)
Provision for state income tax
  
(22
)
  
-
   
(22
)
  
(404
)
  
-
   
(404
)
Net income (loss)
  
15,016
   
(13,439
)
  
1,577
   
8,614
   
(11,649
)
  
(3,035
)
Less:  Preferred return to preferred OP units
  
636
   
-
   
636
   
-
   
-
   
-
 
Less:  Net income (loss) attributable to noncontrolling interests
  
1,011
   
(1,207
)
  
(196
)
  
649
   
(1,169
)
  
(520
)
Net income (loss) attributable to Sun Communities, Inc.
 
$
13,369
  
$
(12,232
)
 
$
1,137
  
$
7,965
  
$
(10,480
)
 
$
(2,515
)
 September 30, 2012 December 31, 2011
 Real Property Operations Home Sales and Home Rentals Consolidated Real Property Operations Home Sales and Home Rentals Consolidated
Identifiable assets:           
Investment property, net$1,077,173
 $200,954
 $1,278,127
 $1,028,575
 $168,031
 $1,196,606
Cash and cash equivalents39,181
 (457) 38,724
 5,972
 (115) 5,857
Inventory of manufactured homes
 5,672
 5,672
 
 5,832
 5,832
Notes and other receivables121,404
 6,774
 128,178
 109,436
 5,448
 114,884
Other assets44,991
 5,534
 50,525
 41,843
 2,952
 44,795
Total assets$1,282,749
 $218,477
 $1,501,226
 $1,185,826
 $182,148
 $1,367,974

  September 30, 2011  December 31, 2010 
  Real Property Operations  Home Sales and Home Rentals  Consolidated  Real Property Operations  Home Sales and Home Rentals  Consolidated 
Identifiable assets:                  
Investment property, net
 
$
1,009,116
  
$
160,298
   
1,169,414
  
$
890,867
  
$
141,459
  
$
1,032,326
 
Cash and cash equivalents
  
4,997
   
(256
)
  
4,741
   
8,385
   
35
   
8,420
 
Inventory of manufactured homes
  
-
   
3,862
   
3,862
   
-
   
2,309
   
2,309
 
Notes and other receivables
  
99,812
   
5,253
   
105,065
   
84,932
   
3,875
   
88,807
 
Other assets
  
42,844
   
2,697
   
45,541
   
28,408
   
2,421
   
30,829
 
Total assets
 
$
1,156,769
  
$
171,854
  
$
1,328,623
  
$
1,012,592
  
$
150,099
  
$
1,162,691
 

12.Derivative Instruments and Hedging Activities
13.Derivative Instruments and Hedging Activities

Our objective in using interest rate derivatives is to manage exposure to interest rate movements thereby minimizing the effect of interest rate changes and the effect it could have on future cash flows. Interest rate swaps and caps are used to accomplish this objective. We require hedging derivative instruments to be highly effective in reducing the risk exposure that they are designated to hedge. We formally designate any instrument that meets these hedging criteria as a hedge at the inception of the derivative contract.

As of September 30, 2011,2012, we had three derivative contracts consisting of twoone interest rate swap agreements with a notional amount of $20.0 million and two interest rate cap agreements with a total notional amount of $45.0$162.4 million and an interest rate cap agreement with a notional amount of $152.4 million.. We generally employ derivative instruments that effectively convert a portion of our variable rate debt to fixed rate debt and to cap the maximum interest rate on certain variable rate borrowings. We do not enter into derivative instruments for speculative purposes.


21

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


13.Derivative Instruments and Hedging Activities, continued

The following table provides the terms of our interestrate derivative contracts that were in effect as of September 30, 2011:2012:

Type  Purpose  Effective Date  Maturity Date 
 Notional
 (in millions)
  Based on  Variable Rate  Fixed Rate  Spread  Effective Fixed Rate
Swap
 
Floating to Fixed Rate
 
09/04/02
 
07/03/12
 
               25.0
 
3 Month LIBOR
 
0.2458%
 
4.7000%
 
0.9000%
 
5.6000%
Swap
 
Floating to Fixed Rate
 
01/02/09
 
01/02/14
 
               20.0
 
3 Month LIBOR
 
0.2458%
 
2.1450%
 
0.9000%
 
3.0450%
Cap
 
Cap Floating Rate
 
04/28/09
 
05/01/12
 
             152.4
 
3 Month LIBOR
 
0.3680%
 
11.0000%
 
0.0000%
 
N/A


17

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


12.Derivative Instruments and Hedging Activities, continued
Type Purpose Effective Date Maturity Date 
 Notional
 (in millions)
 Based on Variable Rate Fixed Rate Spread Effective Fixed Rate
Swap Floating to Fixed Rate 1/1/2009 1/1/2014 20.0
 3 Month LIBOR 0.4606% 2.1450% 1.8700% 4.0200%
Cap Cap Floating Rate 4/1/2012 4/1/2015 152.4
 3 Month LIBOR 0.3600% 11.2650% —% N/A
Cap Cap Floating Rate 10/3/2011 10/3/2016 10.0
 3 Month LIBOR 0.3600% 11.0200% —% N/A

OurGenerally, our financial derivative instruments are designated and qualify as cash flow hedges and the effective portion of the gain or loss on such hedges are reported as a component of accumulated other comprehensive income (loss) in our Consolidated Balance Sheets. To the extent that the hedging relationship is not effective or do not qualify as a cash flow hedge, the ineffective portion is recorded in interest expense. Hedges that received designated hedge accounting treatment are evaluated for effectiveness at the time that they are designated as well as through the hedging period.

In accordance with ASC Topic 815, Derivatives and Hedging, we have recorded the fair value of our derivative instruments designated as cash flow hedges on the balance sheet. See Note 1516 for information on the determination of fair value for the derivative instruments.  The following table summarizes the fair value of derivative instruments included in our Consolidated Balance Sheets as of September 30, 20112012 and December 31, 20102011 (in thousands):

 Asset Derivatives Liability Derivatives 
  Balance Sheet Location Fair Value  Balance Sheet Location Fair Value 
Derivatives designated as hedging instruments  September 30, 2011  December 31, 2010   September 30, 2011  December 31, 2010 
Interest rate swaps and cap agreement
 Other assets
 
$
-
  
$
-
 
Other liabilities
 
$
1,514
  
$
2,166
 
Total derivatives designated as hedging instruments
  
$
-
  
$
-
   
$
1,514
  
$
2,166
 
 Asset Derivatives Liability Derivatives
 Balance Sheet Location Fair Value Balance Sheet Location Fair Value
Derivatives designated as hedging instruments  September 30, 2012 December 31, 2011   September 30, 2012 December 31, 2011
Interest rate swaps and cap agreementOther assets $
 $
 Other liabilities 459
 1,106
Total derivatives designated as hedging instruments  $
 $
   459
 1,106

These valuation adjustments will only be realized under certain situations. For example, if we terminate the swaps prior to maturity or if the derivatives fail to qualify for hedge accounting, then we would need to amortize amounts currently included in other comprehensive income (loss) into interest expense over the terms of the derivative contracts.  We do not intend to terminate the swaps prior to maturity and, therefore, the net of valuation adjustments through the various maturity dates will approximate zero, unless the derivatives fail to qualify for hedge accounting.

Our hedges were highly effective and had minimal effect on income.  The following table summarizes the impact of derivative instruments for the threenine months ended September 30, 20112012 and 20102011 as recorded in the Consolidated Statements of Operations (in thousands):
Derivatives in
cash flow hedging
 
Amount of Gain or
(Loss) Recognized in
OCI (Effective Portion)
 Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
  Nine Months Ended September 30,   Nine Months Ended September 30,   Nine Months Ended September 30,
  2012 2011   2012 2011   2012 2011
Interest rate swaps and cap agreement $643
 $644
 Interest expense $
 $
 Interest expense $3
 $7
Total $643
 $644
 Total $
 $
 Total $3
 $7

Derivatives in
cash flow hedging
 
Amount of Gain or
(Loss) Recognized in
OCI (Effective Portion)
  Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)  Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) 
  
Three Months Ended
September 30,
   
Three Months Ended
September 30,
   
Three Months Ended
September 30,
 
  2011  2010   2011  2010   2011  2010 
Interest rate swaps and cap agreement
 
$
222
  
$
(261
)
 Interest expense
 
$
-
  
$
-
 
 Interest expense
 
$
2
  
$
(3
)
Total
 
$
222
  
$
(261
)
 Total
 
$
-
  
$
-
 
 Total
 
$
2
  
$
(3
)



18

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


12.Derivative Instruments and Hedging Activities, continued

The following table summarizes the impact of derivative instruments for the nine months ended September 30, 2011 and 2010 as recorded in the Consolidated Statements of Operations (in thousands):

Derivatives in
cash flow hedging
 Amount of Gain or (Loss) Recognized in OCI (Effective Portion)  Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)  Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) 
  Nine Months Ended September 30,   Nine Months Ended September 30,   Nine Months Ended September 30, 
  2011  2010   2011  2010   2011  2010 
Interest rate swaps and cap agreement
 
$
644
  
$
(1,018
)
 Interest expense
 
$
-
  
$
-
 
 Interest expense
 
$
7
  
$
(16
)
Total
 
$
644
  
$
(1,018
)
 Total
 
$
-
  
$
-
 
 Total
 
$
7
  
$
(16
)

Certain of our derivative instruments contain provisions that require us to provide ongoing collateralization on derivative instruments in a liability position.  As of September 30, 20112012 and December 31, 2010,2011, we had collateral deposits recorded in other assets of approximately $3.1$1.2 million and $3.8$3.1 million, respectively.


13.Income Taxes
22

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


14.   Income Taxes

We have elected to be taxed as a real estate investment trust (“REIT”) as defined under Section 856(c) of the Internal Revenue Code of 1986 (“Code”), as amended. In order for us to qualify as a REIT, at least ninety-five percent (95%) of our 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 our control. In addition, frequent changes occur in the area of REIT taxation which requires us to continually monitor our tax status. We analyzed the various REIT tests and confirmed that we continued to qualify as a REIT for the quarter ended September 30, 2011.2012.

As a REIT, we generally will not be subject to U.S. federal income taxes at the corporate level on the ordinary taxable income we distribute to our stockholders as dividends. If we fail to qualify as a REIT in any taxable year, our taxable income could be subject to U.S. federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if we qualify as a REIT, we may be subject to certain state and local income taxes and to U.S. federal income and excise taxes on our undistributed income.

SHS, our taxable REIT subsidiary, is subject to U.S. federal income taxes. Our deferred tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. Deferred tax assets are reduced, if necessary, by a valuation allowance to the amount where realization is more likely than not assured after considering all available evidence. Our temporary differences primarily relate to net operating loss carryforwards and depreciation. A federal deferred tax asset of $1.0$1.0 million is included in other assets in our Consolidated Balance Sheets as of September 30, 20112012 and December 31, 2010.2011.

We had no unrecognized tax benefits as of September 30, 20112012 and 2010.2011. We expect no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of September 30, 2011.2012.

We classify certain state taxes as income taxes for financial reporting purposes.  We record the Michigan Business Tax and Texas Margin Tax as income taxestax in our financial statements. In 2011 we were also subject to Michigan Business Tax that was replaced in May 2011 by a Corporate Income Tax. We believe that we will not have any corporate income tax liability under the new law. We recorded a provision for state income taxes of approximately $0.2$0.2 million and $0.1$0.1 million for the three months ended September 30, 2011 and 2010, respectively.  We recorded a provision for state income taxes of approximately $0.1 million and $0.4 million for the nine months ended September 30,2012 and 2011, and 2010, respectively.

On May 25, 2011, a new Michigan corporate income tax regime was enacted.  The enactment of this legislation and reporting periods will vary, but the impact of the change was required to be reported in the quarter or period end that included May 2011.  The impact of the enactment on our tax provision was a $0.4 million benefit during the quarter ended June 30, 2011 due to the elimination of the Michigan Business Tax with the new legislation enactment.  No deferred tax liability is recorded in relation to the Texas Margin Tax as of September 30, 2011 and December 31, 2010.

23
19

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



13.Income Taxes, continued

We and our 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, we are no longer subject to U.S. Federal, State and Local, examinations by tax authorities before 2007.

Our policy is to report income tax penalties and income tax related interest expense as a component of income tax expense.  No interest or penalty associated with any unrecognized income tax benefit or provision was accrued, nor was any income tax related interest or penalty recognized during the nine months ended September 30, 2011.

14.(Loss) Earnings Per Share
15.   Earnings (Loss) Per Share

We have outstanding stock options and unvested restricted shares, and our Operating Partnership has Common OP Units, convertible A-1 preferred OP units and convertible PreferredAspen preferred OP Units, which if converted or exercised, may impact dilution.  Although our unvested restricted shares qualify as participating securities, we do not include them in the computation of basic earnings (loss) per share under the two-class method in periods we report net losses, as the result would be anti-dilutive.

Computations of basic and diluted (loss) earnings per share from continuing operations were as follows (in thousands, except per share data):

 Three Months Ended Nine Months Ended 
 September 30, September 30, Three Months Ended September 30, Nine Months Ended September 30,
Numerator 2011 2010 2011 2010 2012 2011 2012 2011
Basic (loss) earnings: net (loss) income attributable to common stockholders
 
$
(373
)
 
$
(1,403
)
 
$
1,137
 
$
(2,515
)
Add: amounts attributable to common noncontrolling interest
  
-
  
-
  
112
  
-
 
Diluted (loss) earnings: net (loss) income available to common stockholders and unitholders
 
$
(373
)
 
$
(1,403
)
 
$
1,249
 
$
(2,515
)
         
Basic earnings: net income (loss) attributable to common stockholders$(650) $(373) $6,390
 $1,137
Add: amounts attributable to common noncontrolling interests
 
 
 112
Diluted earnings: net income (loss) available to common stockholders and unitholders$(650) $(373) $6,390
 $1,249
Denominator
                
Weighted average common shares outstanding
 
21,366
 
19,323
 
21,039
 
19,006
 26,938
 21,366
 26,145
 21,039
Weighted average unvested restricted stock outstanding
  
-
  
-
  
221
  
-
 
 
 282
 221
Basic weighted average common shares and unvested restricted stock outstanding
 
21,366
 
19,323
 
21,260
 
19,006
 26,938
 21,366
 26,427
 21,260
Add: dilutive securities
  
-
  
-
  
2,083
  
-
 
 
 17
 2,083
Diluted weighted average common shares and securities
  
21,366
  
19,323
  
23,343
  
19,006
 26,938
 21,366
 26,444
 23,343
         
(Loss) earnings per share available to common stockholders:
         
Earnings (loss) per share available to common stockholders:       
Basic
 
$
(0.02
)
 
$
(0.07
)
 
$
0.05
 
$
(0.13
)
$(0.02) $(0.02) $0.24
 $0.05
Diluted
 
$
(0.02
)
 
$
(0.07
)
 
$
0.05
 
$
(0.13
)
$(0.02) $(0.02) $0.24
 $0.05

We excluded certain securities from the computation of diluted (loss) earnings per share because the inclusion of these securities would have been anti-dilutive for the periods presented.  The following table presents the number of outstanding potentially dilutive securities that were excluded from the computation of diluted (loss) earnings per share for the three and nine months ended September 30, 20112012 and 20102011 (amounts in thousands):

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2011  2010  2011  2010 
Stock options
  
88
   
150
   
-
   
150
 
Unvested restricted stock
  
276
   
140
   
-
   
140
 
Common OP units
  
2,072
   
2,107
   
-
   
2,107
 
Preferred OP units
  
1,111
   
-
   
1,111
   
-
 
Convertible preferred OP units
  
526
   
526
   
526
   
526
 
Total securities
  
4,073
   
2,923
   
1,637
   
2,923
 
  Three Months Ended September 30, Nine Months Ended September 30,
  2012 2011 2012 2011
Stock options 57
 88
 
 
Unvested restricted stock 289
 276
 
 
Common OP units 2,070
 2,072
 2,071
 
A-1 preferred OP units 1,111
 1,111
 1,111
 1,111
Aspen preferred OP units 526
 526
 526
 526
Total securities 4,053
 4,073
 3,708
 1,637

The figures above represent the total number of potentially dilutive securities, and do not necessarily reflect the incremental impact to the number of diluted weighted average shares outstanding that would be computed if the impact to us had been dilutive to the calculation of earnings per share available to common stockholders.


24
20

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



15.Fair Value of Financial Instruments
16.   Fair Value of Financial Instruments

Our financial instruments consist primarily of cash and cash equivalents, accounts and notes receivable, accounts payable, derivative instruments, and debt. We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

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

Installment Notes on Manufactured Homes
The net carrying value of the installment notes on manufactured homes reasonably estimates the fair value of the underlying collateral (manufactured home) which would be placed into service for use in our Rental Program or held for sale.

Long Term Debt and Lines of Credit
The fair value of long term debt (excluding the secured borrowing) is based on the estimates of management and on rates currently quoted and rates currently prevailing for comparable loans and instruments of comparable maturities.

Collateralized Receivables and Secured Borrowing
The fair value of these financial instruments offset each other as our collateralized receivables represent a transfer of financial assets and the cash proceeds received from these transactions have been classified as a secured borrowing in the Consolidated Balance Sheets.

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

The table below sets forth our financial assets and liabilities that required disclosure of their fair values on a recurring basis as of September 30, 2011.  The table presents the carrying values and fair values of our financial instruments as of September 30, 2011 and December 31, 2010 that were measured using the valuation techniques described above. The table excludes other financial instruments such as cash and cash equivalents, accounts receivable, and accounts payable because the carrying values associated with these instruments approximate fair value since their maturities are less than one year.

  September 30, 2011  December 31, 2010 
Financial assets Carrying Value  
Fair
Value
  Carrying Value  
Fair
Value
 
Derivative instruments
 
$
-
  
$
-
  
$
-
  
$
-
 
Installment notes on manufactured homes, net
  
13,671
   
13,671
   
9,420
   
9,420
 
Collateralized receivables, net
  
78,822
   
78,822
   
71,020
   
71,020
 
                 
Financial liabilities
                
Derivative instruments
 
$
1,514
  
$
1,514
  
$
2,166
  
$
2,166
 
Long term debt (excluding secured borrowing)
  
1,172,855
   
1,156,403
   
1,092,335
   
1,098,519
 
Secured borrowing
  
79,276
   
79,276
   
71,278
   
71,278
 
Lines of credit
  
104,333
   
104,333
   
94,527
   
94,527
 

ASC Topic 820, Fair Value Measurements and Disclosures, establishes guidance fair value hierarchy established by FASB guidance 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 identical instruments in active markets.

Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all 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 us.

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

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

Installment Notes on Manufactured Homes
The net carrying value of the installment notes on manufactured homes estimates the fair value as the interest rates in the portfolio are comparable to current prevailing market rates.

Long Term Debt and Lines of Credit
The fair value of long term debt (excluding the secured borrowing) is based on the estimates of management and on rates currently quoted and rates currently prevailing for comparable loans and instruments of comparable maturities.

Collateralized Receivables and Secured Borrowing
The fair value of these financial instruments offset each other as our collateralized receivables represent a transfer of financial assets and the cash proceeds received from these transactions have been classified as a secured borrowing in the Consolidated Balance Sheets. The net carrying value of the collateralized receivables estimates the fair value as the interest rates in the portfolio are comparable to current prevailing market rates.

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

The table below sets forth our financial assets and liabilities that required disclosure of their fair values on a recurring basis as of September 30, 2012.  The table presents the carrying values and fair values of our financial instruments as of September 30, 2012 and December 31, 2011 that were measured using the valuation techniques described above. The table excludes other financial instruments such as cash and cash equivalents, accounts receivable, and accounts payable because the carrying values associated with these instruments approximate fair value since their maturities are less than one year.








25
21

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



16.   Fair Value of Financial Instruments, continued
15.Fair Value of Financial Instruments, continued
 September 30, 2012 December 31, 2011
Financial assetsCarrying Value Fair Value Carrying Value Fair Value
Installment notes on manufactured homes, net17,505
 17,505
 13,417
 13,417
Collateralized receivables, net90,538
 90,538
 81,176
 81,176
Financial liabilities       
Derivative instruments459
 459
 1,106
 1,106
Long term debt (excluding secured borrowing)1,177,603
 1,191,786
 1,186,509
 1,175,261
Secured borrowing91,069
 91,069
 81,682
 81,682
Lines of credit2,988
 2,988
 129,034
 129,034

The table below sets forth, by level, our financial assets and liabilities that were required to be carried at fair value in the Consolidated Balance Sheets as of September 30, 2011.

Assets Total Fair Value  Level 1  Level 2  Level 3 
Derivative instruments
 
$
-
  
$
-
  
$
-
  
$
-
 
Total assets
 
$
-
  
$
-
  
$
-
  
$
-
 
                 
Liabilities
                
Derivative instruments
 
$
1,514
  
$
-
  
$
1,514
  
$
-
 
Total liabilities
 
$
1,514
  
$
-
  
$
1,514
  
$
-
 


16.17.Recent Accounting Pronouncements

Accounting Updates to be AdoptedPronouncements

In April 2011, the FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements” (ASU 2011-03) which amends ASC Topic 860, Transfers and Servicing.  The updated guidance in ASC Topic 860 removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The updated guidance in ASC Topic 860 is effective for the first interim or annual period beginning on or after December 15, 2011.  Early adoption iswas not permitted.  We are currently evaluating theThe adoption of this guidance did not have any impact of ASU 2011-03 on our results of operations or financial condition and disclosure requirements.condition.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04) which amends ASC Topic 820, Fair Value Measurement.  The updated guidance in ASC Topic 820 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.   The updated guidance in ASC Topic 820 is effective during interim and annual periodperiods beginning after December 15, 2011.  Early adoption iswas not permitted.  We are currently evaluating the impact of ASU 2011-04 on our results of operations, financial condition and disclosure requirements.  We will apply the provisions of these accounting standards after the effective date.

Accounting Updates Adopted in 2011

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (ASU 2011-05) which amends ASC Topic 220, Comprehensive Income.  The updated guidance in ASC Topic 220 gives an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.   The updated guidance in ASC Topic 220 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of this guidance did not have any impact on our results of operations or financial condition.


22

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

17.Commitments and Contingencies
18.   Commitments and Contingencies

On or about November 19, 2009, we, Sun Secured Financing LLC, Aspen-Ft. Collins Limited Partnership, Sun Secured Financing Houston Limited Partnership, Sun Communities Finance, LLC, Sun Holly Forest LLC and Sun Saddle Oak LLC (collectively, the “Plaintiffs”) filed suit against ARCS Commercial Mortgage Co., L.P., PNC ARCS, LLC, and the Federal National Mortgage Association (collectively, the “Defendants”) in the United States District Court for the District of Columbia as Case No. 1:09-cv-02162. The essence of the dispute was whether the terms of a commercial credit facility permitted Defendants to increase the Variable Facility Fee applicable to the outstanding variable rate loans in conjunction with an extension of the credit facility (and, if so, whether the Defendants properly exercised that right).  On March 31, 2011, the parties entered into an Agreement and Release, pursuant to which the parties agreed to stay the litigation. As part of the settlement, the Borrowers, PNC Bank, National Association (as successor in interest to ARCS Commercial Mortgage Co., L.P., and PNC ARCS, LLC), and Fannie Mae agreed to enter into a Second Amended and Restated Master Credit Facility Agreement (the “Restated Credit Agreement”) which will amend and restate in its entirety the current credit agreement. The Restated Credit Agreement was executed on July 27, 2011 and, except for certain provisions relating to the transition from the Master Credit Facility Agreement currently in effect to the Restated Credit Agreement, will become effective January 3, 2012 if certain conditions are met. In accordance with the terms of the Restated Credit Agreement, the Plaintiffs have the option to extend the maturity date of the entire $367.0 million credit facility with the Defendants from 2014 to 2023, subject to compliance with certain underwriting criteria. The Restated Credit Agreement also provided a reduction in the facility fee charged on the variable rate facility, the effect of which reduced interest expense by $1.3 million thru September 30, 2011. Under the settlement agreement, the suit will be dismissed when all of the terms of the Restated Credit Agreement become effective.

On June 4, 2010 we settled all of the claims arising out of the litigation filed in 20032004 by TJ Holdings, LLC in the Superior Court of Guilford County, North Carolina and the associated arbitration proceeding commenced by TJ Holdings in Southfield, Michigan. Under the terms of the settlement agreement, in which neither party admitted any liability whatsoever, we paid TJ Holdings $360,000.$360,000. In addition, pursuant to this settlement, TJ Holdings’ percentage ownership interest in Sun/Forest, LLC will be increased on a one time basis, in the event of a sale or refinance of all of the SunchampSunChamp Properties, to between 9.03% and 28.99% depending on our average closing stock price as reported by the NYSE during the 30 days preceding the sale or refinance of all the SunchampSunChamp Properties. Once this percentage ownership interest has been adjusted, there will be no further adjustments from subsequent sales or refinances of the SunchampSunChamp Properties. The likelihood of a sale or refinancing of all of the SunChamp properties is not probable andas these properties continue to see growth potential nor do we have a need to refinance all of the properties, so we do not expect it to have a material adverse impact if any on our results of operations or financial condition.

We recently discovered that we did not register with the SEC shares of our common stock purchased in the open market by our 401(k) plan for the benefit of participants in the plan.  We intend to file a registration statement on Form S-3 offering to rescind the purchase of shares of our common stock by persons who acquired such shares through our 401(k) plan from September 16, 2010 through September 15, 2011.  We do not expect this to have a material adverse effect on our financial position, results of operations or cash flows.

We are 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.




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23

SUN COMMUNITIES, INC.


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


The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and the notes thereto, along with our 20102011 Annual Report. Capitalized terms are used as defined elsewhere in this Form 10-Q.

OVERVIEW

We are a self-administered and self-managed real estate investment trust, or REIT. We own, operate, and develop manufactured housing communities concentrated in the midwestern, southern, and southeastern United States. We are fully integrated real estate companies which, together with our affiliates and predecessors, have been in the business of acquiring, operating, and expanding manufactured housing communities since 1975. As of September 30, 2011,2012, we owned and operated a portfolio of 155164 properties located in 18 states (the “Properties” or “Property”), including 140142 manufactured housing communities, 512 recreational vehicle communities, and 10 properties containing both manufactured housing and recreational vehicle sites. As of September 30, 2011,2012, the Properties contained an aggregate of 53,71357,191 developed sites comprised of 47,57448,947 developed manufactured home sites and 6,1398,244 recreational vehicle ("RV") sites (“RV”) and approximately 6,200 manufactured home sites suitable for development. We lease individual parcels of land (“sites”) with utility access for placement of manufactured homes and recreational vehicles to our customers.  The Properties are designed to offer affordable housing to individuals and families, while also providing certain amenities.

We are engaged through a taxable subsidiary, SHS, in the marketing, selling, and leasing of new and pre-owned homes to current and future residents in our communities. The operations of SHS support and enhance our occupancy levels, property performance, and cash flows.

SIGNIFICANT ACCOUNTING POLICIES

We have identified significant accounting policies that, as a result of the judgments, uncertainties, and complexities of the underlying accounting standards and operations involved could result in material changes to our financial condition or results of operations under different conditions or using different assumptions. Details regarding significant accounting policies are described fully in our 20102011 Annual Report.

SUPPLEMENTAL MEASURES

In addition to the results reported in accordance with GAAP, we have provided information regarding Net Operating Income (“NOI”) in the following tables. NOI is derived from revenues minus property operating expenses and real estate taxes. We use NOI as the primary basis to evaluate the performance of our operations. A reconciliation of NOI to net lossincome attributable to Sun Communities, Inc. is included in “Results of Operations” below.

We believe 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, which provides a method of comparing property performance over time. We use 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 our properties rather than of the Company overall.  We believe that these costs included in net income (loss) often have no effect on the market value of our 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 (loss) as an indicator of our financial performance, or to cash flows as a measure of liquidity; nor is it indicative of funds available for our cash needs, including our ability to make cash distributions.  NOI, as determined and presented by us, may not be comparable to related or similarly titled measures reported by other companies.

We also provide information regarding Funds From Operations (“FFO”).  A definition of FFO and a reconciliation of FFO to net (loss) income are included in the presentation of FFO in “Results of Operations” following the “Comparison of the Nine Months endedEnded September 30, 20112012 and 2010”2011.


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SUN COMMUNITIES, INC.

RESULTS OF OPERATIONS

We report operating results under two segments: Real Property Operations and Home Sales and Rentals.  The Real Property Operations segment owns, operates, and develops manufactured housing communities and RV communities concentrated in the midwestern, southern, and southeastern United States and is in the business of acquiring, operating, and expanding manufactured housing and RV communities.  The Home Sales and Rentals segment offers manufactured home sales and leasing services to tenants and prospective tenants of our communities.  We evaluate segment operating performance based on NOI and Gross Profit.

The accounting policies of the segments are the same as those applied in the Consolidated Financial Statements, except for the use of NOI. We may allocate certain common costs, primarily corporate functions, between the segments differently than we 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. We do not allocate interest expense and certain other corporate costs not directly associated with the segments’ NOI and Gross Profit.

COMPARISON OF THE THREE MONTHS ENDEDSEPTEMBER 30, 20112012 AND 20102011

REAL PROPERTY OPERATIONS – TOTAL PORTFOLIO

The following tables reflect certain financial and other information for our Total Portfolio as of and for the three months ended September 30, 20112012 and 2010:2011:
  Three Months Ended 
  September 30, 
 Financial Information (in thousands) 2011  2010  Change  % Change 
 Income from Real Property
 
$
58,251
  
$
50,169
  
$
8,082
   
16.1
%
 Property operating expenses:
                
 Payroll and benefits
  
4,850
   
4,289
   
561
   
13.1
%
 Legal, taxes, & insurance
  
780
   
759
   
21
   
2.8
%
 Utilities
  
6,475
   
5,548
   
927
   
16.7
%
 Supplies and repair
  
2,865
   
2,350
   
515
   
21.9
%
 Other
  
1,384
   
996
   
388
   
39.0
%
 Real estate taxes
  
4,504
   
3,813
   
691
   
18.1
%
 Property operating expenses
  
20,858
   
17,755
   
3,103
   
17.5
%
 Real Property NOI
 
$
37,393
  
$
32,414
  
$
4,979
   
15.4
%
 Three Months Ended September 30,
Financial Information (in thousands)2012 2011 Change % Change
Income from Real Property$63,015
 $58,251
 $4,764
 8.2%
Property operating expenses:       
Payroll and benefits5,008
 4,621
 387
 8.4%
Legal, taxes, & insurance886
 780
 106
 13.6%
Utilities7,453
 6,475
 978
 15.1%
Supplies and repair2,928
 2,865
 63
 2.2%
Other1,792
 1,613
 179
 11.1%
Real estate taxes4,933
 4,504
 429
 9.5%
Property operating expenses23,000
 20,858
 2,142
 10.3%
Real Property NOI$40,015
 $37,393
 $2,622
 7.0%

  As of September 30, 
 Other Information 2011  2010  Change 
 Number of properties
  
155
   
136
   
19
 
 Developed sites
  
53,713
   
47,579
   
6,134
 
 Occupied sites (1)
  
43,638
   
38,445
   
5,193
 
 Occupancy % (1)
  
85.4
%
  
84.5
%
  
1.0
%
 Weighted average monthly rent per site (2)
 
$
419
  
$
412
  
$
7
 
 Sites available for development
  
6,237
   
6,072
   
165
 
 As of September 30,
Other Information2012 2011 Change
Number of properties164
 155
 9
Developed sites57,191
 53,713
 3,478
Occupied sites (1) (2)
45,958
 43,638
 2,320
Occupancy % (1)
86.8% 85.4% 1.4%
Weighted average monthly site rent - MH (3)
$431
 $419
 $12
Weighted average monthly site rent - Permanent RV (3)
$410
 $414
 $(4)
Sites available for development6,217
 6,237
 (20)

(1)  
Occupied sites and occupancy % include manufactured housing and permanent RV sites and exclude seasonal RV sites.
(2)
Occupied sites include 4,474 sites acquired during 2011 and 779 sites acquired in 2012.
(3)
Weighted average rent pertains to manufactured housing and permanent recreational vehicle sites and excludeexcludes seasonal recreational vehicle sites.
(2)
Average rent relates only to manufactured housing sites, and excludes permanent and seasonal recreational vehicle sites.

Real Property NOI increased by $5.0$2.6 million, from $32.4$37.4 million to $37.4$40.0 million or 15.4 percent.7.0 percent. The growth in NOI is primarily due to $3.5$1.1 million from the newly acquired properties and $1.5$1.5 million from the same site properties as detailed below.


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SUN COMMUNITIES, INC.


REAL PROPERTY OPERATIONS - SAME SITE

A key management tool we useused when evaluating performance and growth of our properties is a comparison of Same Site communities. Same Site communities consist of properties owned and operated for the same period in both years for the three months ended September 30, 20112012 and 2010.2011.  The Same Site data may change from time-to-time depending on acquisitions, dispositions, management discretion, significant transactions, or unique situations.

In order to evaluate the growth of the Same Site communities, management has classified certain items differently than our GAAP statements.  The reclassification difference between our GAAP statements and our Same Site portfolio is the reclassification of water and sewer revenues from income from real property to utilities.  A significant portion of our utility charges are re-billed to our residents.   We reclassify these amounts to reflect the utility expenses associated with our Same Site portfolio net of recovery.

The following tables reflect certain financial and other information for our Same Site communities as of and for the three months ended September 30, 20112012 and 2010:2011:
  Three Months Ended 
  September 30, 
 Financial Information (in thousands) 2011  2010  Change  % Change 
 Income from Real Property
 
$
49,094
  
$
47,242
  
$
1,852
   
3.9
%
 Property operating expenses:
                
 Payroll and benefits
  
4,303
   
4,289
   
14
   
0.3
%
 Legal, taxes, & insurance
  
685
   
759
   
(74
)
  
-9.8
%
 Utilities
  
2,488
   
2,620
   
(132
)
  
-5.0
%
 Supplies and repair
  
2,532
   
2,350
   
182
   
7.7
%
 Other
  
1,232
   
997
   
235
   
23.6
%
 Real estate taxes
  
3,902
   
3,813
   
89
   
2.3
%
 Property operating expenses
  
15,142
   
14,828
   
314
   
2.1
%
 Real Property NOI
 
$
33,952
  
$
32,414
  
$
1,538
   
4.7
%
 Three Months Ended September 30,
Financial Information (in thousands)2012 2011 Change % Change
Income from Real Property$51,060
 $49,094
 $1,966
 4.0 %
Property operating expenses:       
Payroll and benefits4,082
 4,074
 8
 0.2 %
Legal, taxes, & insurance750
 685
 65
 9.5 %
Utilities2,775
 2,488
 287
 11.5 %
Supplies and repair2,471
 2,532
 (61) (2.4)%
Other1,553
 1,461
 92
 6.3 %
Real estate taxes3,999
 3,902
 97
 2.5 %
Property operating expenses15,630
 15,142
 488
 3.2 %
Real Property NOI$35,430
 $33,952
 $1,478
 4.4 %
 As of September 30,
Other Information2012 2011 Change
Number of properties136
 136
 
Developed sites48,096
 47,751
 345
Occupied sites (1)
39,835
 39,127
 708
Occupancy % (1) (2)
86.8% 85.7% 1.1%
Weighted average monthly rent per site - MH (3)
$435
 $423
 $12
Weighted average monthly rent per site - Permanent RV (3)
$438
 $426
 12
Sites available for development5,021
 5,439
 (418)


  As of September 30, 
 Other Information 2011  2010  Change 
 Number of properties
  
136
   
136
   
-
 
 Developed sites
  
47,761
   
47,579
   
182
 
 Occupied sites (1)
  
39,127
   
38,445
   
682
 
 Occupancy % (1)
  
85.6
%
  
84.5
%
  
1.1
%
 Weighted average monthly rent per site (2)
 
$
423
  
$
412
  
$
11
 
 Sites available for development
  
5,439
   
5,574
   
(135
)

(1)  
Occupied sites and occupancy % include manufactured housing and permanent RV sites, and exclude seasonal RV sites.
(2)
Occupancy % excludes recently completed but vacant expansion sites.
(3)
Weighted average rent pertains to manufactured housing and permanent recreational vehicle sites and excludeexcludes seasonal recreational vehicle sites.
(2)
Average rent relates only to manufactured housing sites, and excludes permanent and seasonal recreational vehicle sites.


Real Property NOI increased by $1.5$1.5 million, from $32.4$33.9 million to $33.9$35.4 million, or 4.7 percent.4.4 percent. The growth in NOI is primarily due to increased revenues of $1.8$2.0 million slightly offset by increased expenses of $0.3 million.a $0.5 million increase in expenses.

Income from real property revenue consists of manufactured home and recreational vehicle site rent, and miscellaneous other property revenues.  Income from real property revenues increased $1.9$2.0 million, from $47.2$49.1 million to $49.1$51.1 million, or 3.94.0 percent.  The growth in income from real property was due to a combination of factors.  Revenue from our manufactured home and recreational vehicle portfolio increased by $1.8$2.1 million due to average rental rate increases of 2.83.0 percent and the increased number of occupied home sites and was partially offset by rent concessions offered to new residents and current residents who convert from home renters to home owners.  Additionally, we had increased miscellaneous other property revenues of $0.1 million due to revenue realized on cable television royalties and increased resident fees collected.

Property operating expenses increased $0.5 million, from $15.1 million to $15.6 million, or 3.2 percent. Utilities increased $0.3 million from $14.8 milliondue to $15.1 million, or 2.1 percent.  Supplyincreased water, sewer and repairselectric expenses. Real estate taxes increased $0.1 million. Other expenses increased $0.2 million primarily due to tree, lawn and landscaping expenses, sewer repairs and gasoline expense.  Other property operating expenses increased by $0.2$0.1 million primarily due to increased resident relation costs, bank service chargesrelations expenses and bad debt expense.  These increases weregeneral office expenses partially offset by $0.1 million increase in water/sewer recoveries.

decreased bad debt expense and decreased advertising expense.

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SUN COMMUNITIES, INC.

HOME SALES AND RENTALS
HOME SALES AND RENTALS

We acquire pre-owned and repossessed manufactured homes generally located within our communities from lenders and dealers at substantial discounts.  We lease or sell these value priced homes to current and prospective residents.  We also purchase new homes to lease and sell to current and prospective residents.  

The following table reflects certain financial and other information for our Rental Program as of and for the three months ended September 30, 20112012 and 20102011 (in thousands, except for certain items marked with *):

  Three Months Ended 
  September 30, 
 Financial Information 2011  2010  Change  % Change 
 Rental home revenue
 
$
5,650
  
$
5,135
  
$
515
   
10.0
%
 Site rent from Rental Program (1)
  
8,090
   
7,164
   
926
   
12.9
%
 Rental Program revenue
  
13,740
   
12,299
   
1,441
   
11.7
%
 Expenses
                
 Commissions
  
485
   
453
   
32
   
7.1
%
 Repairs and refurbishment
  
2,154
   
2,122
   
32
   
1.5
%
 Taxes and insurance
  
755
   
807
   
(52
)
  
-6.4
%
 Marketing and other
  
859
   
782
   
77
   
9.8
%
 Rental Program operating and maintenance
  
4,253
   
4,164
   
89
   
2.1
%
 Rental Program NOI
 
$
9,487
  
$
8,135
  
$
1,352
   
16.6
%
                 
 Other Information
                
 Number of occupied rentals, end of period*
  
6,737
   
5,998
   
739
   
12.3
%
 Investment in occupied rental homes
 
$
224,794
  
$
193,324
  
$
31,470
   
16.3
%
 Number of sold rental homes*
  
180
   
193
   
(13
)
  
-6.7
%
 Weighted average monthly rental rate*
 
$
752
  
$
731
  
$
21
   
2.9
%
 Three Months Ended September 30,
Financial Information2012 2011 Change % Change
Rental home revenue$6,712
 $5,650
 $1,062
 18.8%
Site rent from Rental Program (1)
9,837
 8,090
 1,747
 21.6%
Rental Program revenue16,549
 13,740
 2,809
 20.4%
Expenses       
Commissions569
 485
 84
 17.3%
Repairs and refurbishment2,689
 2,154
 535
 24.8%
Taxes and insurance876
 755
 121
 16.0%
Marketing and other984
 859
 125
 14.6%
Rental Program operating and maintenance5,118
 4,253
 865
 20.3%
Rental Program NOI$11,431
 $9,487
 $1,944
 20.5%
Other Information       
Number of occupied rentals, end of period*7,930
 6,737
 1,193
 17.7%
Investment in occupied rental homes$276,300
 $224,794
 $51,506
 22.9%
Number of sold rental homes*209
 180
 29
 16.1%
Weighted average monthly rental rate*$773
 $752
 $21
 2.8%

(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 incremental revenue gains associated with implementation of the Rental Program, and assess the overall growth and performance of the Rental Program and financial impact to our operations.

Rental Program NOI increased $1.4$1.9 million from $8.1$9.5 million to $9.5$11.4 million, or 16.620.5 percent, due to increased revenues of approximately $1.4$2.8 million primarily, offset by increased expenses of $0.9 million. Revenues increased $2.8 million due to the increased number of residents participating in the Rental Program and from increased monthly rental rates.rates as indicated in the table above.

Operating and maintenance expenses increased by $0.9 million from $4.2 million to $5.1 million or 20.3 percent. Commissions increased $0.1 million, repairs costs on occupied home rentals increased $0.1 million, refurbishment costs for occupant turnover increased $0.4 million, bad debt expense increased by $0.1 million, and taxes and insurance increased $0.1 million. These costs increased primarily due to an increase in the number of homes in the program. Gross margin has remained consistent.



30
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SUN COMMUNITIES, INC.


The following table reflects certain financial and statistical information for our Home Sales Program for the three months ended September 30, 20112012 and 20102011 (in thousands, except for statistical information):
  Three Months Ended 
  September 30, 
 Financial Information 2011  2010  Change  % Change 
 New home sales
 
$
729
  
$
244
  
$
485
   
198.8
%
 Pre-owned home sales
  
7,386
   
7,080
   
306
   
4.3
%
 Revenue from homes sales
  
8,115
   
7,324
   
791
   
10.8
%
                 
 New home cost of sales
  
610
   
217
   
393
   
181.1
%
 Pre-owned home cost of sales
  
5,747
   
5,103
   
644
   
12.6
%
 Cost of home sales
  
6,357
   
5,320
   
1,037
   
19.5
%
                 
 NOI / Gross profit
 
$
1,758
  
$
2,004
  
$
(246
)
  
-12.3
%
                 
 Gross profit – new homes
  
119
   
27
   
92
   
340.7
%
 Gross margin % – new homes
  
16.3
%
  
11.1
%
      
5.2
%
                 
 Gross profit – pre-owned homes
  
1,639
   
1,977
   
(338
)
  
-17.1
%
 Gross margin % – pre-owned homes
  
22.2
%
  
27.9
%
      
-5.7
%
                 
 Statistical Information
                
 Home sales volume:
                
 New home sales
  
9
   
3
   
6
   
200.0
%
 Pre-owned home sales
  
358
   
340
   
18
   
5.3
%
 Total homes sold
  
367
   
343
   
24
   
7.0
%
 Three Months Ended September 30,
Financial Information2012 2011 Change % Change
New home sales$1,244
 $729
 $515
 70.6%
Pre-owned home sales9,217
 7,386
 1,831
 24.8%
Revenue from homes sales10,461
 8,115
 2,346
 28.9%
New home cost of sales1,041
 610
 431
 70.7%
Pre-owned home cost of sales6,750
 5,747
 1,003
 17.5%
Cost of home sales7,791
 6,357
 1,434
 22.6%
NOI / Gross profit$2,670
 $1,758
 $912
 51.9%
        
Gross profit – new homes203
 119
 84
 70.6%
Gross margin % – new homes16.3% 16.3% % %
Gross profit – pre-owned homes2,467
 1,639
 828
 50.5%
Gross margin % – pre-owned homes26.8% 22.2% 4.6% 20.7%
        
Statistical Information       
Home sales volume:       
New home sales16
 9
 7
 77.8%
Pre-owned home sales379
 358
 21
 5.9%
Total homes sold395
 367
 28
 7.6%


Home Sales NOI decreased by $0.3increased $0.9 million, from $2.0$1.8 million to $1.7$2.7 million, or 12.351.9 percent due to reduced profit margins on pre-owned homes, partially offset by the increase in the number of homes sold.

. The gross profit on new home sales increased from $0.1 million to $0.2 milliondue to the increase in the number of home sales and an increased gross margin on those sales.volume as shown above. The gross profit on pre-owned homeshome sales decreasedincreased from $1.6 million to $2.5 million due to a decreased gross margin of 5.7 percent from 27.9 percent to 22.2 percent.   We decreased the average margin of our pre-owned homes to stimulateincreased margins and sales thereby accelerating the recycling of capital invested in inventory and the Rental Program.  Approximately 90 percent of these home sales are financed by third party lenders or are paid for in cash.



volumes.



31
28

SUN COMMUNITIES, INC.


OTHER INCOME STATEMENT ITEMS

Other revenues include other income, interest income, and ancillary revenues, net.  Other revenues increased by $0.6$0.2 million, from $2.1$2.7 million to $2.7$2.9 million, or 28.67.4 percent.  This was primarily due to an increase in interest income of $0.3$0.2 million from collateralized receivables, a $0.2$0.1 million increase in interest from installment note receivables, and a $0.1 million decrease in loan loss reserve.miscellaneous other income.

Real Property general and administrativecosts increased by $1.7 million, from $3.4 million to $5.1 million, or 50.0 percent due to an increase in legal expenses of $0.3 million, an increase in payroll expenses of $1.1 million and an increase of $0.3 million in other expenses related to training and employee retention. The payroll expense increase is due to increased accrued bonuses of $0.5 million, an increase in share-based compensation amortization of $0.4 million, and a $0.2 million increase in wages from annual increases.remained fairly consistent.

Home Sales and Rentals general and administrativecosts increased by $0.2decreased $0.1 million, from $1.9$2.1 million to $2.1$2.0 million, or 10.54.8 percent, due to increased salary, commissionutility and bonus costs of $0.3 million.advertising expenses.

Acquisition related costs increased by $0.1$0.7 million. See Note 2These costs have been incurred for additional information.both completed and potential acquisitions.

Depreciation and amortization costs increased by $1.6$3.3 million, from $17.1$18.7 million to $18.7$22.0 million, or 9.417.6 percent, due to increased depreciation on investment property for use in our Rental Program of $1.3 million and increased other depreciation and amortization of $2.0 million primarily attributabledue to the newly acquired properties.properties (See Note 2).

Interest expense on debt, including interest on mandatorily redeemable debt, increased by $1.0$0.4 million, from $16.5$17.5 million to $17.5$17.9 million, or 6.12.3 percent, due to an increase in expense associated with our secured borrowing arrangements of $0.3$0.2 million, and an increase of $0.7$0.3 million in our mortgage interest due to interest expense for the debt associated with the acquired properties – see(see Note 2.2) and a higher rate on our FNMA debt, and an increase of $0.1 million in other interest, offset by a decrease in interest on our lines of credit of $0.2 million. 

Equity income (loss)Distributions from affiliatesaffiliate increased by $0.5$0.2 million, from a loss of $0.1$0.4 million to income of $0.4 million due to the suspension of$0.6 million. We suspended equity accounting in 2010 on our affiliate, Origen, as our investment balance is zero.  The income recorded in 2012 and 2011 is dividend income.


The following table is a summary of our consolidated financial results which were discussed in more detail in the preceding paragraphs (in thousands):


 Three Months Ended 
 September 30,  Three Months Ended September 30,
 2011 2010  2012 2011
Real Property NOI
 
$
37,393
 
$
32,414
  $40,015
 $37,393
Rental Program NOI
 
9,487
 
8,135
  11,431
 9,487
Home Sales NOI/Gross Profit
 
1,758
 
2,004
  2,670
 1,758
Site rent from Rental Program (included in Real Property NOI)
  
(8,090
)
  
(7,164
)
 (9,837) (8,090)
NOI/Gross profit
 
40,548
 
35,389
  44,279
 40,548
Adjustments to arrive at net loss:
     
Adjustments to arrive at net income (loss):    
Other revenues
 
2,707
 
2,081
  2,936
 2,707
General and administrative
 
(7,247
)
 
(5,281
)
 (7,176) (7,247)
Acquisition related costs
 
(121
)
 
-
  (847) (121)
Depreciation and amortization
 
(18,748
)
 
(17,132
)
 (22,092) (18,748)
Interest expense
 
(17,460
)
 
(16,494
)
 (17,891) (17,460)
Provision for state income taxes
 
(150
)
 
(143
)
 (84) (150)
Equity income (loss) from affiliates, net
  
450
  
(69
)
Net loss
 
(21
)
 
(1,649
)
Less: preferred return to preferred OP units
 
585
 
-
 
Less: amounts attributable to common noncontrolling interests
  
(233
)
  
(246
)
Net loss attributable to Sun Communities, Inc. common stockholders
 
$
(373
)
 
$
(1,403
)
Distributions from affiliate 600
 450
Net income (loss) (275) (21)
Less: preferred return to A-1 preferred OP units 586
 585
Less: amounts attributable to noncontrolling interests (211) (233)
Net income (loss) attributable to Sun Communities, Inc. common stockholders $(650) $(373)

32
29

SUN COMMUNITIES, INC.


COMPARISON OF THE NINE MONTHS ENDEDSEPTEMBER 30, 20112012 AND 20102011

REAL PROPERTY OPERATIONS – TOTAL PORTFOLIO

The following tables reflect certain financial and other information for our Total Portfolio as of and for the nine months ended September 30, 20112012 and 2010:2011:
  Nine Months Ended 
  September 30, 
 Financial Information (in thousands) 2011  2010  Change  % Change 
 Income from Real Property
 
$
164,351
  
$
152,124
  
$
12,227
   
8.0
%
 Property operating expenses:
                
 Payroll and benefits
  
12,941
   
12,045
   
896
   
7.4
%
 Legal, taxes, & insurance
  
2,331
   
2,136
   
195
   
9.1
%
 Utilities
  
18,566
   
17,313
   
1,253
   
7.2
%
 Supplies and repair
  
6,601
   
5,953
   
648
   
10.9
%
 Other
  
3,367
   
2,640
   
727
   
27.5
%
 Real estate taxes
  
12,717
   
12,176
   
541
   
4.4
%
 Property operating expenses
  
56,523
   
52,263
   
4,260
   
8.2
%
 Real Property NOI
 
$
107,828
  
$
99,861
  
$
7,967
   
8.0
%
 Nine Months Ended September 30,
Financial Information (in thousands)2012 2011 Change % Change
Income from Real Property$188,818
 $164,351
 $24,467
 14.9 %
Property operating expenses:       
Payroll and benefits14,322
 12,341
 1,981
 16.1 %
Legal, taxes, & insurance2,318
 2,331
 (13) (0.6)%
Utilities21,966
 18,566
 3,400
 18.3 %
Supplies and repair7,816
 6,601
 1,215
 18.4 %
Other4,839
 3,967
 872
 22.0 %
Real estate taxes14,741
 12,717
 2,024
 15.9 %
Property operating expenses66,002
 56,523
 9,479
 16.8 %
Real Property NOI$122,816
 $107,828
 $14,988
 13.9 %

          
  As of September 30, 
 Other Information 2011  2010  Change 
 Number of properties
  
155
   
136
   
19
 
 Developed sites
  
53,713
   
47,579
   
6,134
 
 Occupied sites (1)
  
43,638
   
38,445
   
5,193
 
 Occupancy % (1)
  
85.4
%
  
84.5
%
  
1.0
%
 Weighted average monthly rent per site (2)
 
$
419
  
$
412
  
$
7
 
 Sites available for development
  
6,237
   
6,072
   
165
 
 As of September 30,
Other Information2012 2011 Change
Number of properties164
 155
 9
Developed sites57,191
 53,713
 3,478
Occupied sites (1) (2)
45,958
 43,638
 2,320
Occupancy % (1)
86.8% 85.4% 1.4%
Weighted average monthly site rent - MH (3)
$431
 $419
 $12
Weighted average monthly site rent - Permanent RV (3)
$410
 $414
 (4)
Sites available for development6,217
 6,237
 (20)


(1)  
Occupied sites and occupancy % include manufactured housing and permanent RV sites, and exclude seasonal RV sites.
(2)
Occupied sites include 4,474 sites acquired during 2011 and 779 sites acquired in 2012.
(3)
Weighted average rent pertains to manufactured housing and permanent recreational vehicle sites and excludeexcludes seasonal recreational vehicle sites.
(2)
Average rent relates only to manufactured housing sites, and excludes permanent and seasonal recreational vehicle sites.


Real Property NOI increased by $8.0$15.0 million, from $99.9$107.8 million to $107.9$122.8 million or 8.013.9 percent. The growth in NOI is primarily due to $3.9$8.9 million from the newly acquired properties and $4.1$6.1 million from the same site properties as detailed below.




33
30

SUN COMMUNITIES, INC.


REAL PROPERTY OPERATIONS - SAME SITE

A key management tool we useused when evaluating performance and growth of our properties is a comparison of Same Site communities. Same Site communities consist of properties owned and operated for the same period in both years for the nine months ended September 30, 20112012 and 2010.2011.  The Same Site data may change from time-to-time depending on acquisitions, dispositions, management discretion, significant transactions, or unique situations.

In order to evaluate the growth of the Same Site communities, management has classified certain items differently than our GAAP statements. The reclassification difference between our GAAP statements and our Same Site portfolio is the reclassification of water and sewer revenues from income from real property to utilities.  A significant portion of our utility charges are re-billed to our residents. We reclassify these amounts to reflect the utility expenses associated with our Same Site portfolio net of recovery.

The following tables reflect certain financial and other information for our Same Site communities as of and for the nine months ended September 30, 20112012 and 2010:2011:

 Nine Months Ended 
 September 30, Nine Months Ended September 30,
Financial Information (in thousands) 2011 2010 Change % Change 2012 2011 Change % Change
Income from Real Property
 
$
148,557
 
$
143,603
 
$
4,954
 
3.4
%
$155,475
 $148,557
 $6,918
 4.7 %
Property operating expenses:
                
Payroll and benefits
 
12,367
 
12,045
 
322
 
2.7
%
11,831
 11,767
 64
 0.5 %
Legal, taxes, & insurance
 
2,227
 
2,136
 
91
 
4.3
%
1,935
 2,227
 (292) (13.1)%
Utilities
 
8,403
 
8,792
 
(389
)
 
-4.4
%
8,545
 8,403
 142
 1.7 %
Supplies and repair
 
6,258
 
5,953
 
305
 
5.1
%
6,642
 6,258
 384
 6.1 %
Other
 
3,202
 
2,640
 
562
 
21.3
%
4,253
 3,802
 451
 11.9 %
Real estate taxes
  
12,056
  
12,176
  
(120
)
  
-1.0
%
12,123
 12,056
 67
 0.6 %
Property operating expenses
  
44,513
  
43,742
  
771
  
1.8
%
45,329
 44,513
 816
 1.8 %
Real Property NOI
 
$
104,044
 
$
99,861
 
$
4,183
  
4.2
%
$110,146
 $104,044
 $6,102
 5.9 %


 As of September 30,
Other Information2012 2011 Change
Number of properties136
 136
 
Developed sites48,096
 47,751
 345
Occupied sites (1)
39,835
 39,127
 708
Occupancy % (1) (2)
86.8% 85.7% 1.1%
Weighted average monthly rent per site - MH (3)
$435
 $423
 $12
Weighted average monthly rent per site - Permanent RV (3)
$438
 $426
 12
Sites available for development5,021
 5,439
 (418)
  As of September 30, 
 Other Information 2011  2010  Change 
 Number of properties
  
136
   
136
   
-
 
 Developed sites
  
47,761
   
47,579
   
182
 
 Occupied sites (1)
  
39,127
   
38,445
   
682
 
 Occupancy % (1)
  
85.6
%
  
84.5
%
  
1.1
%
 Weighted average monthly rent per site (2)
 
$
423
  
$
412
  
$
11
 
 Sites available for development
  
5,439
   
5,574
   
(135
)

(1)  
Occupied sites and occupancy % include manufactured housing and permanent RV sites, and exclude seasonal RV sites.
(2)
Occupancy % excludes recently completed but vacant expansion sites.
(3)
Weighted average rent pertains to manufactured housing and permanent recreational vehicle sites and excludeexcludes seasonal recreational vehicle sites.
(2)
Average rent relates only to manufactured housing sites, and excludes permanent and seasonal recreational vehicle sites.


Real Property NOI increased by $4.1$6.1 million, from $99.9$104.0 million to $104.0$110.1 million, or 4.25.9 percent. The growth in NOI is primarily due to increased revenues of $4.9$6.9 million partially offset by increased expenses ofan $0.8 million.million increase in expenses.

Income from real property revenue consists of manufactured home and recreational vehicle site rent, and miscellaneous other property revenues.  Income from real property revenues increased $4.9$6.9 million, from $143.6$148.6 million to $148.5$155.5 million, or 3.44.7 percent.  The growth in income from real property was due to a combination of factors.  Revenue from our manufactured home and recreational vehicle portfolio increased by $4.5$7.4 million due to average rental rate increases of 2.83.0 percent and due to the increased number of occupied home sites and was partially offset by rent concessions offered to new residents and current residents who convert from home renters to home owners.  Additionally, we had increased miscellaneous other property revenues of $0.4decreased $0.5 million due to revenue realized ona decrease in cable television royalties and increased resident fees collected.utility income offset by an increase in other charges and fees.

Property operating expenses increased $0.8 million, from $43.7$44.5 million to $44.6$45.3 million, or 1.8 percent. The $0.3Supplies and repairs increased $0.4 million change in payroll and benefits isprimarily due to a $0.4 million increase in wagesincreased lawn services and acommunity maintenance expenses. Real estate taxes increased $0.1 million decrease in benefit costs.  Legal, taxes and insurancemillion. Utilities expenses increased by $0.1 million primarily due to increased property insurance costs.  Supplies and repaircable expenses. Other expenses increased by $0.3$0.5 million primarily due to increased landscape maintenance, sewer repairs, community maintenanceoperational meeting expenses, general office expenses, security service expenses and gasoline costs.  Other property operating expenses increased by $0.6 million due to increased resident relation, advertising, bad debt and bank service charges.relations expenses. These costsincreases were partially offset by increased water and sewer recoveries of $0.2a $0.3 million a decrease in various utility expenses of $0.2 million and decreased real estate taxes of $0.1 million.property insurance expenses.

34
31

SUN COMMUNITIES, INC.

HOME SALES AND RENTALS
HOME SALES AND RENTALS

We acquire pre-owned and repossessed manufactured homes generally located within our communities from lenders and dealers at substantial discounts.  We lease or sell these value priced homes to current and prospective residents.  We also purchase new homes to lease and sell to current and prospective residents.  

The following table reflects certain financial and other information for our Rental Program as of and for the nine months ended September 30, 20112012 and 20102011 (in thousands, except for certain items marked with *):

  Nine Months Ended 
  September 30, 
 Financial Information 2011  2010  Change  % Change 
 Rental home revenue
 
$
16,407
  
$
15,266
  
$
1,141
   
7.5
%
 Site rent from Rental Program (1)
  
23,407
   
21,298
   
2,109
   
9.9
%
 Rental Program revenue
  
39,814
   
36,564
   
3,250
   
8.9
%
 Expenses
                
 Commissions
  
1,429
   
1,391
   
38
   
2.7
%
 Repairs and refurbishment
  
5,745
   
5,470
   
275
   
5.0
%
 Taxes and insurance
  
2,306
   
2,402
   
(96
)
  
-4.0
%
 Marketing and other
  
2,200
   
2,118
   
82
   
3.9
%
 Rental Program operating and maintenance
  
11,680
   
11,381
   
299
   
2.6
%
 Rental Program NOI
 
$
28,134
  
$
25,183
  
$
2,951
   
11.7
%
                 
 Other Information
                
 Number of occupied rentals, end of period*
  
6,737
   
5,998
   
739
   
12.3
%
 Investment in occupied rental homes
 
$
224,794
  
$
193,324
  
$
31,470
   
16.3
%
 Number of sold rental homes*
  
596
   
585
   
11
   
1.9
%
 Weighted average monthly rental rate*
 
$
752
  
$
731
  
$
21
   
2.9
%
 Nine Months Ended September 30,
Financial Information2012 2011 Change % Change
Rental home revenue$19,514
 $16,407
 $3,107
 18.9%
Site rent from Rental Program (1)
28,364
 23,407
 4,957
 21.2%
Rental Program revenue47,878
 39,814
 8,064
 20.3%
Expenses       
Commissions1,647
 1,429
 218
 15.3%
Repairs and refurbishment6,568
 5,745
 823
 14.3%
Taxes and insurance2,509
 2,306
 203
 8.8%
Marketing and other2,366
 2,200
 166
 7.5%
Rental Program operating and maintenance13,090
 11,680
 1,410
 12.1%
Rental Program NOI$34,788
 $28,134
 $6,654
 23.7%
Other Information       
Number of occupied rentals, end of period*7,930
 6,737
 1,193
 17.7%
Investment in occupied rental homes$276,300
 $224,794
 $51,506
 22.9%
Number of sold rental homes*678
 596
 82
 13.8%
Weighted average monthly rental rate*$773
 $752
 $21
 2.8%


(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 incremental revenue gains associated with implementation of the Rental Program, and assess the overall growth and performance of the Rental Program and financial impact to our operations.

Rental Program NOI increased $3.0$6.7 million from $25.2$28.1 million to $28.2$34.8 million, or 11.723.7 percent, due to increased revenues of approximately $3.3$8.1 million and, offset by increased expenses of approximately $0.3$1.4 million. Revenues increased$8.1 million primarily due to the increased number of residents participating in the Rental Program and from increased monthly rental rates.rates as indicated in the table above.

The increase in operating and maintenance expenses of $0.3$1.4 million was primarily due to several factors.  Commissions increased spending for repairs and refurbishment driven by$0.2 million due to the increased number of new leases. Refurbishment costs for occupant turnover increased $0.3 million, repairs costs on occupied home rentals increased $0.5 million, personal property and use taxes increased $0.2 million due to the additional homes and occupants in the Rental Program.program, and bad debt expenses increased $0.2 million.



35
32

SUN COMMUNITIES, INC.


The following table reflects certain financial and statistical information for our Home Sales Program for the nine months ended September 30, 20112012 and 20102011 (in thousands, except for statistical information):
 Nine Months Ended September 30,
Financial Information2012 2011 Change % Change
New home sales$3,878
 $1,460
 $2,418
 > 100%
Pre-owned home sales27,635
 23,036
 4,599
 20.0 %
Revenue from homes sales31,513
 24,496
 7,017
 28.6 %
New home cost of sales3,312
 1,215
 2,097
 > 100%
Pre-owned home cost of sales21,223
 18,034
 3,189
 17.7 %
Cost of home sales24,535
 19,249
 5,286
 27.5 %
NOI / Gross profit$6,978
 $5,247
 $1,731
 33.0 %
        
Gross profit – new homes566
 245
 321
 > 100%
Gross margin % – new homes14.6% 16.8% (2.2)% (19.8)%
Gross profit – pre-owned homes6,412
 5,002
 1,410
 28.2 %
Gross margin % – pre-owned homes23.2% 21.7% 1.5 % (0.5)%
        
Statistical Information       
Home sales volume:       
New home sales54
 19
 35
 > 100%
Pre-owned home sales1,199
 1,067
 132
 12.4 %
Total homes sold1,253
 1,086
 167
 15.4 %

  Nine Months Ended 
  September 30, 
 Financial Information 2011  2010  Change  % Change 
 New home sales
 
$
1,460
  
$
1,904
  
$
(444
)
  
-23.3
%
 Pre-owned home sales
  
23,036
   
23,055
   
(19
)
  
-0.1
%
 Revenue from homes sales
  
24,496
   
24,959
   
(463
)
  
-1.9
%
                 
 New home cost of sales
  
1,215
   
1,595
   
(380
)
  
-23.8
%
 Pre-owned home cost of sales
  
18,034
   
17,202
   
832
   
4.8
%
 Cost of home sales
  
19,249
   
18,797
   
452
   
2.4
%
                 
 NOI / Gross profit
 
$
5,247
  
$
6,162
  
$
(915
)
  
-14.8
%
                 
 Gross profit – new homes
  
245
   
309
   
(64
)
  
-20.7
%
 Gross margin % – new homes
  
16.8
%
  
16.2
%
      
0.6
%
                 
 Gross profit – pre-owned homes
  
5,002
   
5,853
   
(851
)
  
-14.5
%
 Gross margin % – pre-owned homes
  
21.7
%
  
25.4
%
      
-3.7
%
                 
 Statistical Information
                
 Home sales volume:
                
 New home sales
  
19
   
29
   
(10
)
  
-34.5
%
 Pre-owned home sales
  
1,067
   
1,046
   
21
   
2.0
%
 Total homes sold
  
1,086
   
1,075
   
11
   
1.0
%

Home Sales NOI decreased by $1.0increased $1.7 million, from $6.2$5.3 million to $5.2$7.0 million, or 14.833.0 percent primarily due. Due to reduced profit margins on pre-owned homes.

Theincreased sales volume the gross profit on new home sales decreased dueincreased from $0.2 million to a decline in sales volume.  The$0.6 million and the gross marginprofit on pre-owned home sales decreased 3.7 percentincreased from 25.4 percent$5.0 million to 21.7 percent.  We decreased the average margin of our pre-owned homes to stimulate sales thereby accelerating the recycling of capital invested in inventory and the Rental Program.  Approximately 90 percent of these home sales are financed by third party lenders or are paid for in cash.$6.4 million.



36
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SUN COMMUNITIES, INC.


OTHER INCOME STATEMENT ITEMS

Other revenues include other income, interest income, and ancillary revenues, net.  Other revenues increased by $0.8$1.3 million, from $6.6$7.5 million to $7.4$8.8 million, or 12.117.3 percent.  This was primarily due to an increase in interest income of $1.1$0.7 million on ourfrom collateralized receivables, partially offset by ana $0.3 million increase in interest income from installment note receivables, a $0.1 million increase from gain on sale of land, a $0.2 million decrease in the adjustment to our loan loss reserve, ofand a $0.1 million increase in management fees and a decrease inother miscellaneous income of $0.2 million.income.

Real Property general and administrativecosts increased by $1.9$1.0 million, from $12.5$14.4 million to $14.4$15.4 million, or 15.26.9 percent, due to increased wagesan increase in training and bonuses of $0.8 million, employee relationrecruiting expenses of $0.2$0.3 million, training and travel expensean increase of $0.1 million in each of the following categories; travel, software support and maintenance costs, licenses and dues, rent and various miscellaneous expenses and an increase of $0.3 million in payroll due to severance payments, additional staff and increased tax expensewages. These increases were partially offset by a decrease in corporate insurance of $0.7$0.1 million. Tax expense in the nine months ended September 30, 2010 included a $0.7 million reversal of a state tax provision recorded in December of 2009 and the nine months ended September 30, 2011 does not contain such a reversal.

Home Sales and Rentals general and administrativecosts increased by $0.4$0.5 million, from $5.7$6.0 million to $6.1$6.5 million, or 7.08.3 percent, due to increased salary, bonus,commission and commissionbonus costs.

Acquisition related costs increased to $1.5 million.  See Note 2 decreased $0.1 million.These costs have been incurred for additional information.both completed and potential acquisitions.

Depreciation and amortization costs increased by $2.9$9.5 million, from $50.7$53.5 million to $53.6$63.0 million, or 5.717.8 percent, due to increased depreciation on investment property for use in our Rental Program of $1.1$3.8 million and increased other depreciation and amortization of $1.8$5.7 million partiallyprimarily due to the newly acquired properties (See Note 2).

Interest expense on debt, including interest on mandatorily redeemable debt, increased by $1.1$3.4 million, from $48.7$49.7 million to $49.8$53.1 million, or 2.36.8 percent due to increasedan increase in expense associated with our secured borrowing arrangements of $1.1$0.7 million, an increase of $3.5 million in our mortgage interest of $0.4 milliondue to debt associated with the acquired properties (see Note 2) and a $1.0higher rate on our FNMA debt and an increase of $0.1 million increase due to the debt related to acquisitions (see Note 2).  This wasin amortized financing costs, offset by a $1.3 million reductiondecrease in interest expense primarily due to the settlement with FNMA (see Note 7).on our lines of credit of $0.9 million. 

Equity income (loss)Distributions from affiliatesaffiliate increased by $3.3$1.6 million, from a loss of $1.6$1.7 million to income of $1.7 million due to the suspension of$3.3 million. We suspended equity accounting in 2010 on our affiliate, Origen, as our investment balance is zero.  The income recorded in 2012 and 2011 is dividend income.


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SUN COMMUNITIES, INC.

The following table is a summary of our consolidated financial results which were discussed in more detail in the preceding paragraphs (in thousands):

 Nine Months Ended 
 September 30,  Nine Months Ended September 30,
 2011 2010  2012 2011
Real Property NOI
 
$
107,828
 
$
99,861
  $122,816
 $107,828
Rental Program NOI
 
28,134
 
25,183
  34,788
 28,134
Home Sales NOI/Gross Profit
 
5,247
 
6,162
  6,978
 5,247
Site rent from Rental Program (included in Real Property NOI)
  
(23,407
)
  
(21,298
)
 (28,364) (23,407)
NOI/Gross profit
 
117,802
 
109,908
  136,218
 117,802
Adjustments to arrive at net income (loss):
     
Adjustments to arrive at net income:    
Other revenues
 
7,445
 
6,636
  8,786
 7,445
General and administrative
 
(20,483
)
 
(18,184
)
 (21,863) (20,483)
Acquisition related costs
 
(1,521
)
 
-
  (1,434) (1,521)
Depreciation and amortization
 
(53,548
)
 
(50,655
)
 (63,027) (53,548)
Interest expense
 
(49,746
)
 
(48,690
)
 (53,143) (49,746)
Provision for state income taxes
 
(22
)
 
(404
)
 (190) (22)
Equity income (loss) from affiliates, net
  
1,650
  
(1,646
)
Net income (loss)
 
1,577
 
(3,035
)
Less: preferred return to preferred OP units
 
636
 
-
 
Less: amounts attributable to common noncontrolling interests
  
(196
)
  
(520
)
Net income (loss) attributable to Sun Communities, Inc. common stockholders
 
$
1,137
 
$
(2,515
)
Distributions from affiliate 3,250
 1,650
Net income 8,597
 1,577
Less: preferred return to A-1 preferred OP units 1,744
 636
Less: amounts attributable to noncontrolling interests 463
 (196)
Net income attributable to Sun Communities, Inc. common stockholders $6,390
 $1,137


38
34

SUN COMMUNITIES, INC.

FUNDS FROM OPERATIONS

We provide information regarding FFO as a supplemental measure of operating performance.  FFO is defined by the National Association of Real Estate Investment Trusts (“NAREIT”)NAREIT as net income (loss) (computed in accordance 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. Due to the variety among owners of identical assets in similar condition (based on historical cost accounting and useful life estimates), we believe excluding gains and losses related to sales of previously depreciated operating real estate assets, impairment and excluding real estate asset depreciation and amortization, provides a better indicator of our operating performance.  FFO is a useful supplemental measure of our operating performance 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 (loss).  Management believes that the use of FFO has been beneficial in improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. Management, the investment community, and banking institutions routinely use FFO, together with other measures, to measure operating performance in our industry. Further, management uses FFO for planning and forecasting future periods.

Because FFO excludes significant economic components of net income (loss) including depreciation and amortization, FFO should be used as an adjunct to net income (loss) and not as an alternative to net income (loss). 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 (loss) 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. Management also uses an Adjusted Funds from Operations (“AFFO”) non-GAAP financial measure,FFO is compiled in accordance with its interpretation of standards established by NAREIT, which excludes certain gain and loss items that management considers unrelated to the operational and financial performance of our core business. We believe that AFFO provides investors with another financial measure of our operating performance that is more comparable when evaluating period over period results.  Other REITs may use different methods for calculating FFO and AFFO and, accordingly, our FFO and AFFO may not be comparable to FFO reported by other REITs.REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently.




35

SUN COMMUNITIES, INC.


The following table reconciles net income (loss) income to FFO and AFFO, and calculates FFO and AFFO data for diluted purposes for the periods ended September 30, 20112012, and 20102011 (in thousands, except for per share amounts)thousands):

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2011  2010  2011  2010 
 Net (loss) income attributable to Sun Communities, Inc. common stockholders
 
$
(373
)
 
$
(1,403
)
 
$
1,137
  
$
(2,515
)
 Adjustments:
                
 Preferred return to preferred OP units
  
585
   
-
   
636
   
-
 
 Amounts attributable to common noncontrolling interests
  
(233
)
  
(246
)
  
(196
)
  
(520
)
 Depreciation and amortization
  
19,109
   
17,609
   
54,576
   
51,997
 
 Gain on disposition of assets, net
  
(629
)
  
(1,154
)
  
(2,147
)
  
(3,355
)
 Funds from operations ("FFO")
 
$
18,459
  
$
14,806
  
$
54,006
  
$
45,607
 
 Adjustments:
                
 Michigan Business tax reversal
  
-
   
-
   
-
   
(740
)
 Equity affiliate adjustment (1)
  
-
   
19
   
-
   
1,646
 
 Acquisition related costs
  
121
   
-
   
1,521
   
-
 
 Benefit for state income taxes (2)
  
-
   
-
   
(407
)
  
(24
)
  Adjusted funds from operations ("AFFO")
 
$
18,580
  
$
14,825
  
$
55,120
  
$
46,489
 
                 
 Weighted average common shares outstanding:
  
21,366
   
19,323
   
21,039
   
19,006
 
 Add:
                
 OP units
  
2,072
   
2,108
   
2,076
   
2,120
 
 Restricted stock
  
278
   
139
   
221
   
158
 
 Common stock issuable upon conversion of preferred OP units
  
1,111
   
-
   
403
   
-
 
 Common stock issuable upon conversion of stock options
  
14
   
11
   
7
   
7
 
 Weighted average common shares outstanding - diluted (FFO and AFFO)
  
24,841
   
21,581
   
23,746
   
21,291
 
                 
 Funds from operations per share - diluted
 
$
0.74
  
$
0.69
  
$
2.27
  
$
2.15
 
 Adjusted funds from operations per share - diluted
 
$
0.75
  
$
0.69
  
$
2.32
  
$
2.19
 
 Three Months Ended September 30, Nine Months Ended September 30,
 2012 2011 2012 2011
Net income (loss) attributable to Sun Communities, Inc. common stockholders$(650) $(373) $6,390
 $1,137
Adjustments:       
Preferred return to A-1 preferred OP units586
 585
 1,744
 636
Amounts attributable to noncontrolling interests(211) (233) 463
 (196)
Depreciation and amortization22,365
 19,109
 63,798
 54,576
Benefit for state income taxes (1)

 
 
 (407)
Gain on disposition of assets, net(1,427) (629) (3,324) (2,147)
Funds from operations ("FFO")$20,663
 $18,459
 $69,071
 $53,599
Adjustments:       
Acquisition related costs847
 121
 1,434
 1,521
 Funds from operations excluding acquisition costs$21,510
 $18,580
 $70,505
 $55,120
        
Weighted average common shares outstanding:26,938
 21,366
 26,145
 21,039
Add:       
OP Units2,070
 2,072
 2,071
 2,076
Restricted stock289
 278
 282
 221
Common stock issuable upon conversion of A-1 preferred OP units1,111
 1,111
 1,111
 403
Common stock issuable upon conversion of stock options18
 14
 17
 7
Weighted average common shares outstanding - fully diluted30,426
 24,841
 29,626
 23,746
        
Funds from operations per share - fully diluted$0.68
 $0.74
 $2.34
 $2.27
Funds from operations per share excluding acquisition costs - fully diluted$0.71
 $0.75
 $2.39
 $2.32

  (1)
This amount represents our equity loss from affiliates in 2010. Origen declared cash dividends of $0.5 and $1.7 million for the three and nine months ended September 30, 2011, respectively, which remain in FFO and AFFO.(1)

  (2)The state income tax benefit for the periodsperiod ended September 30, 2011 and 2010 represents the reversal of the Michigan Business Tax provisionexpense previously recorded.excluded from FFO in a prior period.





39
36

SUN COMMUNITIES, INC.


LIQUIDITY AND CAPITAL RESOURCES

Our principal liquidity demands have historically been, and are expected to continue to be, distributions to our 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.

We expect to meet our short-term liquidity requirements through working capital provided by operating activities and through borrowings on our lines of credit. We consider these resources to be adequate to meet our operating requirements, including recurring capital improvements, routinely amortizing debt and other normally recurring expenditures of a capital nature, payment of dividends to our stockholders to maintain qualification as a REIT in accordance with the Code, and payment of distributions to our Operating Partnership’s unitholders.

We closed on twocompleted four acquisitions in 2011 in which we acquired 1923 properties in total, 1718 manufactured housing communities and 25 recreational vehicle communities. We have completed four acquisitions in 2012 in which we acquired four recreational vehicle communities and one manufactured housing community. See Note 2 for details on the acquisitions.acquisitions and Note 8 for related debt transactions.  We will continue to evaluate acquisition opportunities that meet our criteria for acquisition. Should additional investment opportunities arise in 2011,2012, we willintend to finance the acquisitions through secured financing, debt and/or equity venture capital,financings, the assumption of existing debt on the properties or the issuance of certain equity securities.

During the nine months ended September 30, 2011,2012, we have invested $25.7$39.4 million in the acquisition of homes intended for the Rental Program net of proceeds from third party financing from homes sales.  Expenditures for 20112012 will be dependent upon the condition of the markets for repossessions and new home sales, as well as rental homes. We finance new home purchases with a $12.0$12.0 million floor plan facility. Our ability to purchase homes for sale or rent may be limited by cash received from third party financing of our home sales, available floor plan financing and working capital available on our secured lines of credit.

Cash and cash equivalents decreasedincreased by $3.7$32.9 million from $8.4$5.9 million as of December 31, 2010,2011, to $4.7$38.7 million as of September 30, 2011.2012. Net cash provided by operating activities from continuing operations increased by $4.3$13.4 million from $42.0$44.5 million for the nine months ended September 30, 20102011 to $46.3$57.9 million for the nine months ended September 30, 2011.2012.

Our net cash flows provided by operating activities from continuing operations may be adversely impacted by, among other things: (a) the market and economic conditions in our current markets generally, and specifically in metropolitan areas of our current markets; (b) lower occupancy and rental rates of our properties; (c) increased operating costs, such as wage and benefit costs, insurance premiums, real estate taxes and utilities, that cannot be passed on to our tenants; (d) decreased sales of manufactured homes and (e) current volatility in economic conditions and the financial markets.  See “Risk Factors” in our 20102011 Annual Report.

We have a secured revolving line of credit facility with a maximum borrowing capacity of $130.0$130.0 million, subject to certain borrowing base calculations. As of September 30, 2012, we did not have an outstanding balance on the line of credit. The outstanding balance on the line of credit as of September 30, 2011 and December 31, 20102011 was $90.5$107.5 million and $81.0. We used $4.0 million respectively. In addition, $4.0 million of availability was used to back standby letters of credit as of September 30, 20112012 and December 31, 2010.2011. Borrowings under the line of credit bear a floating interest rate based on Eurodollar plus a margin that is determined based on our leverage ratio calculated in accordance with the line of credit agreement, which can range from 2.25% to 2.95%.  The effective weighted average interest rate on the outstanding borrowings was 3.0 percent asAs of September 30, 2011. As of September 30, 2011, $35.52012, $126.0 million was available to be drawn under the facility based on the calculation of the borrowing base.  During 2011,2012, the highest balance on the line of credit was $91.8 million.$107.5 million.  The borrowings under the line of credit mature October 1, 2015, assuming the election of a one year extension that is available at our discretion.discretion, subject to certain conditions. Although the secured 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 us.

The line of credit facility contains various leverage, fixed charge coverage, net worth maintenance and other customary covenants all of which we were in compliance with as of September 30, 2011.2012. The most limiting covenants contained in the line of credit are the maximum leverage ratio and minimum fixed charge coverage ratios. The maximum leverage ratio covenant requires that total indebtedness be no more than 70 percent of total asset value as defined in the terms of the line of credit agreement.  The minimum fixed charge coverage ratio covenant requires a minimum ratio of 1.45:1.  As of September 30, 2011,2012, the leverage ratio was 61.4 percent53.6% and the fixed charge coverage ratio was 1.86:2.02:1.







40
37

SUN COMMUNITIES, INC.


The slowAlthough the U.S. economy has started to recover from the global financial crisis and recession, the conservative lending environmentrate of recovery has been much slower than anticipated. Forecasts for economic growth over the next year have generally resultedbeen downsized, due in a reduction of the availability of financing and higher borrowing costs. Although base interest rates have generally decreased relative to their levels priorlarge part to the disruptionsrecent turbulence in the financialUS and global markets. While bank earnings and liquidity are on the rebound, the potential of significant future credit losses clouds the lending outlook. Credit availability has improved, but the turbulence in the markets the tighteningcause capital markets and credit availability to wax and wane unpredictably making certainty of credit markets has affected the credit risk spreads charged over base interest rates on, and the availabilityaccess to specific forms of mortgage loan financing.capital products tenuous. For us, this is the most relevant consequence of financial market volatility. We believe this risk is somewhat mitigated because we are able to utilize various forms of capital to fund our operations making availability to one specific form of capital less vital and have adequate working capital provided by operating activities as noted above. Specifically, our debt maturities (excluding normal amortization payments and assuming the election of certain extension provisions which are at our discretion) for 2011 through 2015 are as follows:

2011$0.4 million
2012$25.9 million inclusive of the balance outstanding on the floor plan facility
2013$37.4 million
2014$192.4 million
2015$115.4 million inclusive of the balance outstanding on the secured line of credit

We anticipate meeting our long-term liquidity requirements, such as scheduled debt maturities, large property acquisitions, and Operating Partnership unit redemptions through the issuance of certain debt or equity securities and/or the collateralization of our properties. We currently have 3143 unencumbered properties with an estimated market value of $230.4$338.4 million most, 29 of whichthese properties support the borrowing base for our $130.0$130.0 million secured line of credit.  From time to time, we may also issue shares of our capital stock or preferred stock, issue equity units in our Operating Partnership, utilizeobtain debt and/or equity venture capital,financing, or sell selected assets. Our ability to finance our 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, our financial condition, the operating history of the properties, the state of the debt and equity markets, and the general national, regional, and local economic conditions. When it becomes necessary for us to approach the credit markets, the volatility in those  markets could make borrowing more difficult to secure, more expensive, or effectively unavailable.  See “Risk Factors” in Item 1A of our 20102011 Annual Report.  If we are unable to obtain additional debt or equity financing on acceptable terms, our business, results of operations and financial condition would be adversely impacted.

As of September 30, 2011,2012, our debt to total market capitalization approximated 61.947.5 percent (assuming conversion of all Common Operating Partnership Units to shares of common stock). TheOur debt has a weighted average maturity of approximately 7.36.9 years and a weighted average interest rate of 5.1 percent.5.3 percent.

Capital expenditures for the nine months ended September 30, 20112012 and 20102011 included recurring capital expenditures of $5.4$6.3 million and $5.0$5.4 million, respectively. We are committed to the continued upkeep of our Properties and therefore do not expect a significant decline in our recurring capital expenditures during 2011.2012.

Net cash used forin investing activities was $111.5$151.3 million for the nine months ended September 30, 2011,2012, compared to $30.3$109.6 million for the nine months ended September 30, 2010.2011. The difference is primarily due to increased acquisitions of $51.5$8.2 million increased investment in property of $27.5 million primarily due to homes purchased intended for the Rental Program, a reduction of cash from notes receivable and officer note of $2.0 million due to payoff of the officer note in 2010, and(see Note 2), a decrease in proceeds from the disposition of homes, assets and assetsland of $0.2$1.0 million, an increase in notes receivable of $5.5 million, and increased investment in property of $28.6 million, largely due to homes purchased for the Rental Program primarily in the acquired communities and expansion projects, offset by an increase in proceeds from affiliate dividend distribution of $1.6 million.  See Note 2 for details on the acquisition.

Net cash provided by financing activities was $61.5$126.3 million for the nine months ended September 30, 2011,2012, compared to net cash used of $11.5$61.5 million for the nine months ended September 30, 2010.2011. The difference is due to increased net proceeds received from the issuance of additional shares of $34.0$246.1 million increasedand decreased payments of deferred financing costs of $2.0 million, partially offset by decreased net borrowings on the line of credit of $135.8 million, decreased proceeds from issuance of other debt net of repayments on other debt of $32.5$38.4 million, due to the refinancings described in Note 7, increased net borrowings on the line of credit of $12.4 million and decreased payments to retire preferred operating partnership units of $0.9 million, partially offset by increased payments of deferred financing costs of $3.1 million and increased distributions to our stockholders and OP unitholders of $4.4$8.5 million due to the issuanceand decreased net proceeds for stock option exercise of additional shares.


$0.6 million.



41
38

SUN COMMUNITIES, INC.


FORWARD-LOOKING STATEMENTS
 
This Form 10-Q contains various “forward-looking statements” within the meaning of the Securities Act of 1933, as amended, and the United States Securities Exchange Act of 1934, as amended and we intend that such forward-looking statements will be subject to the safe harbors created thereby. Forward-looking statements can be identified by words such as “believes,” “forecasts,” “anticipates,” “intends,” “plans,” “expects,” “may”, “will,” “guidance,” “could,” “should,” “estimates,” “approximate,” and similar expressions in this Form 10-Q that predict or indicate future events and trends and that do not report historical matters. These forward-looking statements reflect our current views with respect to future events and financial performance, but involve known and unknown risks and uncertainties, and other factors, some of which are beyond our control.  These risks, uncertainties, and other factors may cause our actual results 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 our 20102011 Annual Report, and our other periodic filings with the SEC. The forward-looking statements contained in this Quarterly Report on Form 10-Q speak only as of the date hereof and we expressly disclaim any obligation to provide public updates, revisions or amendments to any forward-looking statements made herein to reflect changes in our assumptions, expectations of future events, or trends.



42
39

SUN COMMUNITIES, INC.


ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our principal market risk exposure is interest rate risk. We mitigate 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. Our primary strategy in entering into derivative contracts is to minimize the variability interest rate changes could have on our future cash flows. We generally employ derivative instruments that effectively convert a portion of our variable rate debt to fixed rate debt. We do not enter into derivative instruments for speculative purposes.

We have three derivative contracts consisting of one interest rate swap agreement with a notional amount of $20.0 million, and two interest rate swapcap agreements with a total notional amount of $45.0$162.4 million and an interest rate cap agreement with a notional amount of $152.4 million as of September 30, 2011.2012. The first swap agreement fixes $25.0$20.0 million of variable rate borrowings at 5.604.02 percent through July 2012.January 2014. The second swap agreement fixes $20.0 million of variable rate borrowings at 3.04 percent through January 2014. We have anfirst interest cap agreement withhas a cap rate of 11.011.27 percent, a notional amount of $152.4 million, and a termination date of April 2015.  The second interest cap agreement has a cap rate of 11.02 percent, a notional amount of $152.4$10.0 million and a termination date of May 1, 2012.  Each of these derivative contracts is based upon 90-day LIBOR.through October 2016.

Our remaining variable rate debt totals $281.3$202.0 million and $240.1$281.3 million as of September 30, 20112012 and 2010,2011, respectively, which bear interest at Prime or various LIBOR or Fannie Mae Discounted Mortgage Backed Securities (“DMBS”) rates. If Prime LIBOR, or DMBSLIBOR increased or decreased by 1.0 percent during the nine months ended September 30, 20112012 and 2010,2011, we believe our interest expense would have increased or decreased by approximately $1.8$1.9 million based on the $245.3$250.3 million and $243.9$245.3 million average balances outstanding under our variable rate debt facilities for the nine months ended September 30, 20112012 and 2010, respectively.  A portion of our variable debt is floating on DMBS rates.  If the credit markets tighten, and there are fewer or no buyers of this security, the interest rate may be negatively impacted resulting in higher interest expense.2011.

ITEM 4.  CONTROLS AND PROCEDURES

(a)Under the supervision and with the participation of our management, including the Chief Executive Officer, Gary A. Shiffman, and Chief Financial Officer, Karen J. Dearing, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report, pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective to ensure that information we are required to disclose in our filings with the SEC under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that information we are required to disclose in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b)
There have been no changes in our internal control over financial reporting during the quarterly period ended September 30, 20112012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

See Note 1718 of the Consolidated Financial Statements contained herein.

ITEM 1A.  RISK FACTORS

You should review our 20102011 Annual Report, which contains a detailed description of risk factors that may materially affect our business, financial condition, or results of operations.  There are no material changes to the disclosure on these matters set forth in the 20102011 Annual Report.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

In November 2004, the Board of Directors authorized us to repurchase up to 1,000,000 shares of our common stock.  We have 400,000 common shares remaining in the repurchase program.  No common shares were repurchased under this buyback program during the nine months ended September 30, 2011.2012.  There is no expiration date specified for the buyback program.

Recent Sales of Unregistered Securities

Holders of our Common OP Units have converted 10,2492,000 units to common stock during 2011, no units of which were converted during the threenine months ended September 30, 2011.

On June 23, 2011, our Operating Partnership issued 455,476 Series A-1 Preferred Operating Partnership (“Preferred OP”) units in connection with our acquisition of 17 manufactured home communities and 1 recreational vehicle community from certain entities controlled by Kentland Corporation, Wilbur A. Lettinga, William B. Lettinga and Michael Lettinga. See Note 2 of the Consolidated Financial Statements contained herein for other consideration paid in the transaction.  The Series A-1 Preferred OP units are convertible, but not redeemable.  The holders of the Series A-1 Preferred OP units can convert the Preferred OP units into shares of common stock at any time after December 31, 2013 based on a conversion price of $41 per share with $100 par value.  The Series A-1 Preferred OP unit holders receive a preferred return of 5.1% for the first two years and 6.0% thereafter.2012.

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.

Use of Proceeds from Sales of Registered SecuritiesITEM 5. OTHER INFORMATION

Pursuant to our Registration Statement on Form S-3 (Commission File No. 333-158623) declared effective by the SEC on May 14, 2009 we issued 680,184 shares of common stock during the nine months ended September 30, 2011.  The weighted average price of the issued shares was $37.52 and we received net proceeds of approximately $25.0 million which were used to pay down our line of credit.Acquisition Agreement

On August 6, 2010,October 22, 2012, we entered into a Common Stock PurchaseLimited Liability Company Interests Assignment Agreement (the “Purchase Agreement”“Agreement”) with REIT Opportunity, Ltd. (“REIT Ltd.”PCGRV, LLC and Keith Amigos, Inc.(collectively the “Sellers”), which provides. Under the Agreement, the Sellers will sell to us 100% of the membership interests of a limited liability company that uponowns a manufactured housing and recreational vehicle community located in Casa Grande, Arizona (the "Arizona Property"). The community contains 283 manufactured home sites, 1,580 recreational vehicle sites and expansion potential of approximately 550 manufactured housing or 990 recreational vehicle sites. The aggregate purchase price for the termscommunities is $85.4 million, including the indirect assumption of approximately $42.0 million in mortgage debt secured by the community with the remainder paid in cash, subject to certain pro rations and adjustments. In addition to paying the purchase price, at the closing we will pay the Sellers $2.6 million to reimburse them for certain construction costs the Sellers incurred in connection with the development of the community.

At the closing, we will acquire all of the manufactured homes located in the community that are owned by an affiliate of the Sellers. The purchase price for these homes will be paid in cash and will be equal to $750,000, subject to certain adjustments, plus the amount necessary to pay off the floorplan financing on certain of the homes.

The closing of the acquisition is subject to the conditions set forthconsent of the holder of the debt to be assumed and the satisfaction of customary closing conditions.  If these contingencies are satisfied, we expect the acquisition to close no later than December 31, 2012.

The foregoing description is qualified in its entirety by reference to the Agreement, which is attached hereto as Exhibit 2.3 and which is incorporated by reference herein. The schedules and exhibits to the Agreement have not been filed with Exhibit 2.3 because such schedules and exhibits do not contain information which is material to an investment decision or which is not otherwise disclosed in the PurchaseAgreement. The Agreement REIT Ltd. is committedcontains a list briefly identifying the contents of all omitted schedules and exhibits. We hereby agree to purchase upfurnish supplementally a copy of any such omitted schedule or exhibit to the lesser of $100,000,000 of our common stock , or 3,889,493 shares of our common stock, which is equal to one share less than twenty percent of our issuedSecurities and outstanding shares of common stock on the effective date of the Purchase Agreement.  From time to time over the two year term of the Purchase Agreement, and at our sole discretion, we may present REIT Ltd. with draw down notices to purchase our common stock.  Any and all issuances of shares of common stock to REIT Ltd. pursuant to the Purchase Agreement will be registered on our effective shelf registration statement on Form S-3.  On January 5, 2011 we sold 915,827 shares of common stock at a weighted average sale price of $32.76 and received net proceeds of $30.0 million.  The funds were used to pay down our line of credit. Exchange Commission upon request.


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ITEM 6.  EXHIBITS
 
 Exhibit No. DescriptionMethod of Filing
10.1 Second Amended and Restated Master Credit Facility Agreement dated July 27, 2011, among Sun Secured Financing LLC, Aspen-Ft. Collins Limited Partnership, Sun Secured Financing Houston Limited Partnership, Sun Communities Finance, LLC, Sun Holly Forest LLC, Sun Saddle Oak LLC, PNC Bank, National Association and Fannie Mae(1)
10.2 
Credit Agreement dated September 28, 2011, among Sun Communities Operating Limited Partnership, as Borrower, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Merrill, Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger and Sole Book Manager and Fifth Third Bank, as Syndication Agent
 
(2)
10.3 First Amendment to Second Amended and Restated Master Credit Facility Agreement dated October 3, 2011, among Sun Secured Financing LLC, Aspen-Ft. Collins Limited Partnership, Sun Secured Financing Houston Limited Partnership, Sun Communities Finance, LLC, Sun Holly Forest LLC, Sun Saddle Oak LLC, PNC Bank, National Association and Fannie Mae(3)
31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)
31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(3)
101(4) The following Sun Communities, Inc. financial information for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Comprehensive (Loss) Income (unaudited), (iv) Consolidated Statements of Stockholders’ Deficit (unaudited), (v) Consolidated Statements of Cash Flows (unaudited) and (vi) Notes to Consolidated Financial Statements (unaudited)(3)
Exhibit No. DescriptionMethod of Filing
2.1 Agreement of Sale dated July 27, 2012 between Northville Crossing Venture L.L.C. and Sun Northville Crossing LLC(1)
2.2 Contribution Agreement dated October 3, 2012, among Sun Communities Operating Limited Partnership, Rudgate Silver Springs Company, L.L.C., Rudgate West Company Limited Partnership, Rudgate East Company Limited Partnership, Rudgate East Company II Limited Partnership and Rudgate Hunters Crossing, LLC(2)
2.3 
Limited Liability Company Interests Assignment Agreement dated October 22, 2012, among Sun Communities Operating Limited Partnership, PCGRV, LLC and Keith Amigos, Inc.
(4)
10.1 First Amended and Restated 2004 Non-Employee Director Option Plan#(3)
10.2 Loan commitment letter dated October 3, 2012, among Sun Rudgate Lender LLC, Rudgate Village Company Limited Partnership, Rudgate Clinton Company Limited Partnership and Rudgate Clinton Estates L.L.C and certain guarantors named therein(2)
10.3 Second Loan Modification Agreement dated October 4, 2012, among  Sun Blueberry Hill LLC, Sun Grand Lake LLC, Sun Three Lakes LLC, Sun Club Naples LLC, Sun Naples Gardens LLC, Sun North Lake Estates LLC, Bank of America, N.A. and The PrivateBank and Trust Company(4)
31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(4)
31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(4)
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(4)
101(5)

 The following Sun Communities, Inc. financial information for the quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited), (v) Consolidated Statements of Cash Flows (unaudited) and (vi) Notes to Consolidated Financial Statements (unaudited).(4)

(1)Incorporated by reference to Sun Communities, Inc.’s's Current Report on Form 8-K dated July 27, 20112012.
(2)Incorporated by reference to Sun Communities, Inc.’s's Current Report on Form 8-K dated September 28, 2011October 3, 2012.
(3)Incorporated by reference to Sun Communities, Inc.'s Current Report on Form 8-K dated July 19, 2012.
(4)Filed herewith.
(4)  
(5)Users of this data are advised that pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
ons.
        
#    Management contract or compensatory plan or arrangement


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SIGNATURES


Pursuant to the requirements 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.



  
SUN COMMUNITIES, INC.
Dated: October 25, 20112012By:
/s/ Karen J. Dearing
  
Karen J. Dearing, Chief Financial Officer and Secretary
(Duly authorized officer and principal financial officer)



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EXHIBIT INDEX

Exhibit No. DescriptionMethod of Filing
2.1 Agreement of Sale dated July 27, 2012 between Northville Crossing Venture L.L.C. and Sun Northville Crossing LLC(1)
2.2 Contribution Agreement dated October 3, 2012, among Sun Communities Operating Limited Partnership, Rudgate Silver Springs Company, L.L.C., Rudgate West Company Limited Partnership, Rudgate East Company Limited Partnership, Rudgate East Company II Limited Partnership and Rudgate Hunters Crossing, LLC(2)
2.3 
Limited Liability Company Interests Assignment Agreement dated October 22, 2012, among Sun Communities Operating Limited Partnership, PCGRV, LLC and Keith Amigos, Inc.
(4)
10.1 First Amended and Restated 2004 Non-Employee Director Option Plan#(3)
10.2 Loan commitment letter dated October 3, 2012, among Sun Rudgate Lender LLC, Rudgate Village Company Limited Partnership, Rudgate Clinton Company Limited Partnership and Rudgate Clinton Estates L.L.C and certain guarantors named therein(2)
10.3 Second Loan Modification Agreement dated October 4, 2012, among  Sun Blueberry Hill LLC, Sun Grand Lake LLC, Sun Three Lakes LLC, Sun Club Naples LLC, Sun Naples Gardens LLC, Sun North Lake Estates LLC, Bank of America, N.A. and The PrivateBank and Trust Company(4)
31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(4)
31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(4)
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(4)
101(5)

 The following Sun Communities, Inc. financial information for the quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited), (v) Consolidated Statements of Cash Flows (unaudited) and (vi) Notes to Consolidated Financial Statements (unaudited).(4)

(1)Incorporated by reference to Sun Communities, Inc.'s Current Report on Form 8-K dated July 27, 2012.
(2)Incorporated by reference to Sun Communities, Inc.'s Current Report on Form 8-K dated October 3, 2012.
(3)Incorporated by reference to Sun Communities, Inc.'s Current Report on Form 8-K dated July 19, 2012.
(4)Filed herewith.
(5)Users of this data are advised that pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
ons.
        
#    Management contract or compensatory plan or arrangement
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