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, 2005.MARCH 31, 2006.
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)
Registrant's telephone number, including area code: (248) 208-2500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an
accelerated filer, (as
defined in Rule 12b-2 of the Exchange Act). Yesor a non-accelerated filer. (Check one):
Large accelerated filer [ ] Accelerated filer [X] NoNon-accelerated filer [ ]
Indicate by check mark whether the registrantRegistrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of shares of Common Stock, $.01 par value per share, outstanding
as of September 30, 2005: 18,213,841March 31, 2006: 18,069,335
SUN COMMUNITIES, INC.
INDEX
PAGES
-----
PART I
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets as of September 30, 2005March 31, 2006 and
December 31, 20042005 3
Consolidated Statements of Operations for the periodsthree months
ended September 30,March 31, 2006 and 2005 and 2004 4
Consolidated Statements of Comprehensive LossIncome (Loss) for
the periodsthree months ended September 30,March 31, 2006 and 2005 and 2004 5
Consolidated Statements of Cash Flows for the ninethree months
ended September 30,March 31, 2006 and 2005 and 2004 6
Notes to Consolidated Financial Statements 7-157-19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-2420-28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 2529
Item 4. Controls and Procedures 2630
PART II
Item 2.(c) Changes in(a) Unregistered Sales of Equity Securities and Use of Proceeds 2731
Item 6. Exhibits required by Item 601 of Regulation S-K 2731
Signatures 2832
2
SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005MARCH 31, 2006 AND DECEMBER 31, 20042005
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2006 2005
2004
----------- ----------------------
ASSETS
Investment in rental property, net $1,160,270 $1,131,956$1,171,621 $1,161,820
Cash and cash equivalents 4,284 52,586
Short-term investments -- 44,9755,608 5,880
Inventory of manufactured homes 19,947 25,96416,400 17,105
Investment in affiliate 46,518 48,36046,632 46,352
Notes and other receivables 39,526 45,03740,993 41,134
Other assets 49,200 54,28946,450 48,245
---------- ----------
Total assets $1,319,745 $1,403,167$1,327,704 $1,320,536
========== ==========
LIABILITIES
Debt $1,051,128 $1,078,442$1,053,702 $1,050,168
Line of credit 53,200 --90,300 73,300
Other liabilities 30,525 31,93630,593 32,267
---------- ----------
Total liabilities 1,134,853 1,110,3781,174,595 1,155,735
---------- ----------
Minority interests 19,398 81,043interest 18,805 21,544
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000 shares
authorized, none issued $ -- $ --
Common stock, $.01 par value, 90,000 shares
authorized, 19,81619,871 and 19,62619,814 issued in 2006 and
2005, and 2004, respectively 199 198
196
Paid-inAdditional paid-in capital 464,616 462,522449,628 460,568
Officer's notes (9,522) (9,798)(9,335) (9,427)
Unearned compensation (13,659) (15,557)-- (13,187)
Accumulated comprehensive earnings (loss) 115 (959)1,376 532
Distributions in excess of accumulated earnings (loss) (218,780) (181,073)(243,964) (231,827)
Treasury stock, at cost, 1,602 and 1,2021,802 shares in 2006 and 2005 and 2004, respectively (57,474) (43,585)(63,600) (63,600)
---------- ----------
Total stockholders' equity 165,494 211,746134,304 143,257
---------- ----------
Total liabilities and stockholders' equity $1,319,745 $1,403,167$1,327,704 $1,320,536
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements
3
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODSTHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2006 AND 2005 AND 2004
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------2006 2005 2004 2005 2004
------- -------
-------- --------
REVENUES
Income from rental property $44,022 $40,852 $133,416 $123,805
Revenue$48,073 $45,449
Revenues from home sales 6,008 4,786 14,136 14,7233,256 3,748
Rental revenues, net 660 351 1,327 1,138home revenue 3,329 1,517
Ancillary revenues, net 36 38 606 364269 466
Interest 863 1,744 3,575 4,993828 1,598
Other income (loss) (195) 118 (411) 671469 (168)
------- -------
-------- --------
Total revenues 51,394 47,889 152,649 145,69456,224 52,610
COSTS AND EXPENSES
Property operating and maintenance 11,722 10,687 34,166 30,82911,385 10,965
Real estate taxes 3,894 3,772
Cost of home sales 4,784 3,771 10,772 11,928
Real estate taxes 3,801 3,504 11,373 9,9912,397 2,405
Rental home operating and maintenance 2,613 1,485
General and administrative - rental property 3,630 3,098 10,735 8,5395,130 3,505
General and administrative - home sales and rentals 1,826 1,410 4,875 4,4651,566 1,540
Depreciation and amortization 13,525 10,944 40,011 32,946
Extinguishment of14,978 13,025
Interest 14,725 13,635
Interest on mandatorily redeemable debt -- -- -- 51,643
Deferred financing costs related to extinguished debt -- -- -- 5,557
Interest 15,179 12,873 44,499 34,3761,089 1,067
Florida storm damage (recovery)recovery -- 600 (555) 600(500)
------- -------
-------- --------
Total expenses 54,467 46,887 155,876 190,87457,777 50,899
Equity income (loss) from affiliate (1,147) 749 (1,042) 1,049281 (117)
------- ------- -------- --------
Income (loss) from operations (4,220) 1,751 (4,269) (44,131)(1,272) 1,594
Less income (loss) allocated to minority interest:
Preferred OP Units -- 1,109 961 3,328
Common OP Units (495)(115) 77
(618) (5,562)
------- ------- -------- --------
Income (loss) from continuing operations (3,725) 565 (4,612) (41,897)(1,157) 556
Income (loss) from discontinued operations -- (11) 824 120131
------- -------
-------- --------Income (loss) before cumulative effect of change in
accounting principle (1,157) 687
Cumulative effect of change in accounting principle 289 --
------- -------
Net income (loss) $(3,725) $ 554(868) $ (3,788) $(41,777)687
======= ======= ======== ========
Weighted average common shares outstanding:
Basic 17,746 18,100 17,775 18,48017,534 17,848
======= =======
======== ========
Diluted 17,746 18,246 17,775 18,48017,534 17,950
======= ======= ======== ========
Basic earnings (loss) per share:
ContinuingIncome (loss) per share from continuing operations $ (0.21)(0.07) $ 0.03
$ (0.26) $ (2.27)
DiscontinuedIncome per share from discontinued operations -- 0.00 0.05 0.01
------- -------
-------- --------Income (loss) per share before cumulative effect of
change in accounting principle (0.07) 0.04
Income per share from cumulative effect of change
in accounting principle 0.02 0.00
------- -------
Net income (loss) per share - basic $ (0.21)(0.05) $ 0.03 $ (0.21) $ (2.26)0.04
======= ======= ======== ========
Diluted earnings (loss) per share:
ContinuingIncome (loss) per share from continuing operations $ (0.21)(0.07) $ 0.03
$ (0.26) $ (2.27)
DiscontinuedIncome per share from discontinued operations -- 0.00 0.05 0.01
------- -------
-------- --------Income (loss) per share before cumulative effect of
change in accounting principle (0.07) 0.04
Income per share from cumulative effect of change
in accounting principle 0.02 0.00
------- -------
Net income (loss) per share - diluted $ (0.21)(0.05) $ 0.03 $ (0.21) $ (2.26)0.04
======= ======= ======== ========
The accompanying notes are an integral part of the
consolidated financial statements
4
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME (LOSS)
FOR THE PERIODSTHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2006 AND 2005 AND 2004
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------2006 2005
2004 2005 2004
------- ------- ------- ------------- ------
Net income (loss) $(3,725)$(868) $ 554 $(3,788) $(41,777)687
Unrealized income (loss) on interest rate swaps 1,150 (1,616) 1,074 (242)
------- ------- ------- --------844 1,174
----- ------
Comprehensive loss $(2,575) $(1,062) $(2,714) $(42,019)
======= ======= ======= ========income (loss) $ (24) $1,861
===== ======
The accompanying notes are an integral part of the
consolidated financial statements
5
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2006 AND 2005 AND 2004
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
2006 2005
2004
-------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net lossincome (loss) $ (3,788)(868) $ (41,777)687
Adjustments to reconcile net lossincome (loss) to cash
provided by operating activities:
LossIncome (loss) allocated to minority interests (618) (5,562)
Income from discontinued operations allocated to minority interests 114 16
Gain from property dispositions (828) --(115) 95
Loss on valuation of derivative instruments 43 359
Stock compensation expense, net of cumulative
effect of change in accounting principle in 2006 1,060 476
Depreciation and amortization 43,764 34,269
Depreciation allocated to income from discontinued operations 62 13015,754 14,290
Amortization of deferred financing costs 1,489 1,403
Extinguishment454 498
Equity (income) loss from affiliates (281) 117
Increase in notes receivable from sale of debtinventory (274) --
51,643
Deferred financing costs related to extinguished debt -- 5,557
Equity loss (income) from affiliate 1,042 (1,049)
Decrease (increase) in inventory and other assets 5,444 (7,189)
Increase (decrease)1,307 7,897
Decrease in accounts payable and other liabilities (1,411) 5,182(1,698) (1,650)
-------- -----------------
Net cash provided by operating activities 45,270 42,62315,382 22,769
-------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in rental properties (73,043) (118,392)(19,426) (31,757)
Purchase of short-term investments -- (84,875) (62,000)
Proceeds from sale of short-term investments 129,850 56,000
Proceeds related to property dispositions 3,867 -- Distributions from affiliate 800 988
Proceeds from sale of installment loans on manufactured homes to Origen -- 12,463124,850
Decrease in notes receivable and officer'sofficers' notes, net 5,787 17,840374 919
-------- -----------------
Net cash used in(used in) provided by investing activities (17,614) (93,101)(19,052) 9,137
-------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance (redemption) of common stock and OP
units (2,190) 809(1,323) (2,129)
Proceeds from option exercise 1,564 19
Borrowings (repayments) on line of credit, net 53,200 (99,000)17,000 --
Payments to retire Perpetual Preferred Operating
Partnership Units -- (50,000) --
Payments to redeem notes payable and other debt (33,386) (422,289)
Proceeds from notes payable and other debt 6,025 696,064(1,013) (4,667)
Payments for deferred financing costs (35) (9,498)
Purchases of Company(105) (12)
Treasury stock (13,889) (37,082)purchases -- (2,435)
Distributions (35,683) (39,403)(12,725) (12,485)
-------- -----------------
Net cash provided by (used in) financing activities (75,958) 89,6013,398 (71,709)
-------- -----------------
Net increase (decrease)decrease in cash and cash equivalents (48,302) 39,123(272) (39,803)
Cash and cash equivalents, beginning of period 5,880 52,586
24,058
-------- -----------------
Cash and cash equivalents, end of period $ 4,2845,608 $ 63,18112,783
======== =================
SUPPLEMENTAL INFORMATION:
Cash paid for interest including capitalized amounts of
$53$17 and $341$19 for the ninethree months ended September 30,March 31, 2006
and 2005, and 2004, respectively $ 43,28214,489 $ 38,31112,781
Cash paid for interest on mandatorily redeemable debt $ 1,077 $ 1,057
Noncash investing and financing activities:
Issuance of partnership units to retire capitalized lease obligations $ -- $ 4,725
Debt assumed for rental properties $ 4,500 $ --
$ 300
Unrealized gains (losses)gain on interest rate swaps $ 1,074844 $ (242)1,174
The accompanying notes are an integral part of the
consolidated financial statements
6
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
These unaudited condensed consolidated financial statements of Sun
Communities, Inc., a Maryland corporation, (the "Company") and all
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 should be read in conjunction with the consolidated
financial statements and notes thereto of the Company included in the
Annual Report on Form 10-K for the year ended December 31, 2004.2005. The
following notes to consolidated financial statements present interim
disclosures as required by the SEC. 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. Certain reclassifications
have been made to prior periods' financial statements in order to conform
withto current period presentation.
2. SHARE-BASED COMPENSATION:
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 (revised December 2004), Share-Based Payment ("SFAS
123(R)"). SFAS 123(R) replaces FASB Statement No. 123 ("Statement 123"),
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25
("APB 25"), Accounting for Stock Issued to Employees. SFAS 123(R) requires
compensation costs related to share-based payment transactions be
recognized in the financial statements. With limited exceptions, the amount
of compensation cost will be measured based on the grant-date fair value of
the equity or the liability instruments issued. In addition, liability
awards will be remeasured each reporting period. SFAS 123(R) is effective
as of the beginning of the first annual reporting period that begins after
June 15, 2005.
The Company adopted SFAS 123(R) effective January 1, 2006 using the
"modified prospective" method permitted by SFAS 123(R) in which
compensation cost is recognized beginning with the effective date (a) based
on the requirements of SFAS 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements of Statement 123
for all awards granted to employees prior to the effective date of SFAS
123(R) that remain unvested on the effective date. Prior to the adoption of
SFAS 123(R), forfeitures were recognized as they occurred. Upon adopting
SFAS 123(R), an estimate of future forfeitures is incorporated into the
determination of compensation cost for restricted stock grants and stock
options. This effect relates to the reversal of previously recorded
compensation expense on restricted stock grants that were not vested at
January 1, 2006 and are now expected to be forfeited. The cumulative effect
of adopting SFAS 123(R) for the 3 months ending March 31, 2006 was an
increase of $0.3 million in net income, and an increase of $0.02 in both
basic and diluted earnings per share.
Under the provisions of SFAS 123(R), the recognition of aggregate deferred
compensation as a component of equity is no longer permitted. Therefore,
the amount of deferred compensation that had been in "Unearned
compensation" was eliminated against "Additional paid-in capital" in the
Company's Consolidated Balance Sheet at March 31, 2006.
7
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SHARE-BASED COMPENSATION, CONTINUED;
The modified prospective method of SFAS 123(R) does not require prior
periods to be restated to reflect the amount of compensation cost that
would have been reflected in the financial statements. The effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of Statement 123 to stock-based compensation for the
three months ended March 31, 2005 was as follows (amounts in thousands
except for per share data):
2005
-------
Net income (loss), as reported $ 687
Stock-based compensation expense included in net income as reported 476
Stock-based compensation expense under fair value method (490)
-------
Pro forma net income (loss) $ 673
=======
Earnings (loss) per share (Basic), as reported $ 0.04
=======
Earnings (loss) per share (Basic), pro forma $ 0.04
=======
Earnings (loss) per share (Diluted), as reported $ 0.04
=======
Earnings (loss) per share (Diluted), pro forma $ 0.04
=======
Total compensation cost recorded for stock-based compensation was $1.3
million and $0.5 million for the three months ended March 31, 2006 and
2005, respectively. Included in the compensation cost for the three months
ended March 31, 2006 was $0.02 million related to stock options that were
granted prior to the adoption of SFAS 123(R), which are being recognized
over the remaining vesting period.
The Company awards share-based compensation under its Second Amended and
Restated Stock Option Plan (the "Plan"). The Plan provides for the issuance
of options, stock appreciation rights, restricted stock and other stock
based awards. No further awards may be granted under the Plan at this time.
The Company believes that the awards better align the interests of its
employees with those of its shareholders and has provided these incentives
to attract and retain executive officers and key employees.
RESTRICTED STOCK
The Company's primary share-based compensation is restricted stock. The
following table summarizes the Company's restricted stock activity for the
first three months of 2006:
WEIGHTED
AVERAGE GRANT
NUMBER OF SHARES DATE FAIR VALUE
---------------- ---------------
Nonvested restricted shares at January 1, 2006 417,275 $34.91
Granted --
Vested (54,597) $33.41
Forfeited --
-------
Nonvested restricted shares at March 31, 2006 362,678 $35.14
=======
8
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SHARE-BASED COMPENSATION, CONTINUED;
The remaining compensation expense to be recognized associated with the
362,678 restricted shares outstanding at March 31, 2006 is approximately
$8.0 million. That expense is expected to be recognized $1.0 million in the
remainder of 2006, $1.8 million in 2007, $1.3 million in 2008, $2.4 million
in 2009 and $1.5 million thereafter. For the three months ended March 31,
2006, the Company recognized $1.1 million of compensation expense related
to its outstanding restricted stock. Recipients receive dividend payments
on the shares of restricted stock prior to vesting. The total fair value of
shares vested during the three months ended March 31, 2006 and 2005 was
$1.8 million and $1.7 million, respectively.
PERFORMANCE-BASED RESTRICTED STOCK
The Company has 93,750 performance-based restricted shares which will vest
on March 1, 2010. The number of shares that will vest will be determined
based on the compounded annual growth rate of the Company's per share funds
from operations ("FFO") as determined by comparing the per share FFO for
the year ended December 31, 2009 with the per share FFO for the year ended
December 31, 2005. The Company must achieve compounded annual growth of at
least 5% to receive any amount of the award and at least 9% to receive the
entire share award. The Company recognizes expense related to
performance-based restricted shares based on an estimate of the number of
restricted shares that will ultimately vest. For the three months ended
March 31, 2006, no compensation expense was recognized for the
performance-based restricted shares.
OPTIONS
At March 31, 2006, the Company had 537,358 options outstanding under the
Plan. Of these, 9,525 are unvested and will vest in the second quarter of
2006. The remaining unrecognized expense related to these options is $0.01
million. For the three months ended March 31, 2006, the Company recognized
$0.02 million of compensation expense related to its outstanding options.
No awards were granted in 2006 or 2005. The Black-Scholes option pricing
model was used to value options until 2004 at which time the Company
changed to the use of the Binomial option pricing model. The Company issues
new shares at the time of share option exercise (or share unit conversion).
The following table summarizes the Company's option activity for the first
three months of 2006:
AGGREGATE
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE INTRINSIC
OF EXERCISE PRICE CONTRACTUAL TERM VALUE
SHARES (PER COMMON SHARE) (IN YEARS) (IN 000'S)
------- ------------------ ---------------- ----------
Options outstanding at January 1, 2006 614,839 $29.73
Granted --
Exercised (75,081) $28.24
Canceled (2,400) $34.25
-------
Options outstanding at March 31, 2006 537,358 $29.92 2.2 $1,353
=======
Options vested and expected to vest as of
March 31, 2006 537,358 $29.92 2.2 $1,353
======= -------
Options exercisable at March 31, 2006 527,833 $29.84 2.0 $1,330
=======
9
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SHARE BASED COMPENSATION, CONTINUED;
The aggregate intrinsic value of options exercised during the three months
ended March 31, 2006 was $0.2 million. For options exercised during the
first quarter of 2005, the aggregate intrinsic value is immaterial.
PHANTOM AWARDS
At March 31, 2006, the Company had 9,500 unvested phantom liability awards
with an aggregate fair value of $0.3 million. The phantom awards pay cash
bonuses per share equal to the amount of dividend paid per share of common
stock. The awards vest (cash bonus is paid) in varying amounts until 2014.
The remaining unrecognized expense related to these phantom liability
awards is $0.3 million. For the three months ended March 31, 2006, the
Company recognized $0.05 million of compensation expense related to these
phantom awards. No awards were granted, vested, exercised or forfeited
during the first three month of 2006. The awards are remeasured at each
reporting date.
At March 31, 2006, the Company had 18,750 unvested phantom
performance-based liability awards with an aggregate fair value of $0.7
million. See PERFORMANCE-BASED RESTRICTED STOCK for a discussion of the
terms of vesting (cash bonus paid) for these phantom performance-based
liability awards.
DIRECTOR OPTION AWARDS
The Company also has a 2004 Non-Employee Director Option Plan ("Director
Plan") which authorizes the issuance of up to 100,000 options to
non-employee directors. At March 31, 2006, the Company had 79,000 options
awarded under the Director Plan and a successor plan. Of these, 12,500 are
unvested of which 40% will vest in the second quarter of both 2006 and
2007, with the remaining 20% vesting in the second quarter of 2008. The
remaining unrecognized expense related to these options is $0.04 million
which will be recognized over the weighted average remaining vesting period
of 1 year. For the three months ended March 31, 2006, the Company
recognized $0.01 million of compensation expense related to these director
options. The fair value of the options issued is estimated on the date of
grant using the Binomial (lattice) option pricing model, with the following
assumptions used for the grants for the period indicated:
THREE MONTHS
ENDED
MARCH 31,
-------------
2006 2005
------ ----
Estimated fair value per share of options granted during year: $ 3.59 N/A
Assumptions:
Annualized dividend yield 7.19% N/A
Common stock price volatility 17.04% N/A
Risk-free rate of return 4.68% N/A
Expected option term (in years) 7.5 N/A
10
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SHARE BASED COMPENSATION, CONTINUED;
The following table summarizes the Director option activity for the first
three months of 2006:
WEIGHTED AVERAGE WEIGHTED AVERAGE AGGREGATE
NUMBER OF EXERCISE PRICE CONTRACTUAL TERM INTRINSIC VALUE
SHARES (PER COMMON SHARE) (IN YEARS) (IN 000'S)
--------- ------------------ ---------------- ---------------
Options outstanding at January 1, 2006 71,500 $33.63
Granted 7,500 $35.05
Exercised --
Canceled --
------
Options outstanding at March 31, 2006 79,000 $33.76 4.0 $234
======
Options vested and expected to vest as of
March 31, 2006 79,000 $33.76 4.0 $234
======
Options exercisable at March 31, 2006 66,500 $33.49 3.1 $198
======
3. RENTAL PROPERTY:
The following summarizes rental property (amounts in thousands):
SEPTEMBER 30,(UNAUDITED)
MARCH 31, DECEMBER 31,
2006 2005
2004
------------------------ ------------
Land $ 116,568117,516 $ 116,187116,738
Land improvements and buildings 1,155,431 1,145,1311,166,159 1,156,612
Rental homes and improvements 103,746 51,540130,451 117,314
Furniture, fixtures, and equipment 35,626 35,00236,187 36,120
Land held for future development 30,778 31,65231,082 31,082
Property under development 1,465 1,041347 256
---------- ----------
1,443,614 1,380,5531,481,742 1,458,122
Less accumulated depreciation (283,344) (248,597)(310,121) (296,302)
---------- ----------
Rental property, net $1,160,270 $1,131,956$1,171,621 $1,161,820
========== ==========
During the first quarter of 2005,2006, the Company acquired one property located
near Tampa, FL for approximately $7.3 million comprised of 697 recreational
vehicle sites and 31 manufactured
home sites. The property was acquiredcommunity located in Oakland County, Michigan for cash.
During the first quartera total purchase
price of 2005, the Company prospectively adopted a
change in the estimated service lives of homes in its rental program to 10
years. The effect of this change in estimate for the three and nine months
ended September 30, 2005 is a decrease in net income and income from
operations$7.8 million, with occupancy of approximately $1.895%. The transaction
included the assumption of $4.5 million and $4.7 million, respectively,
and a decrease in earnings per share of approximately $0.10 and $0.26 per
share, respectively.
7debt.
11
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3.4. NOTES AND OTHER RECEIVABLES:
The following table sets forth certain information regarding notes and
other receivables (amounts in thousands):
SEPTEMBER 30,MARCH 31, DECEMBER 31,
2006 2005
2004
---------------------- ------------
Mortgage and other notesnote receivable, with interest payable at a weighted
average interest rate of 6.08%7.09% and 7.49%6.63% at
September 30, 2005March 31, 2006 and December 31, 2004,2005, respectively,
maturing at various dates throughin August 2008, substantially
collateralized by a manufactured
home communitiescommunity. $13,532 $18,499$13,532
Installment loans on manufactured homes with interest payable
monthly at a weighted average interest rate and maturity of
6.08%6.17% and 10 years, respectively 19,112 16,447respectively. 19,680 19,688
Other receivables, 6,882 10,091net of allowance for losses of $0.3
million, at March 31, 2006 and December 31, 2005. 7,781 7,914
------- -------
$39,526 $45,037$40,993 $41,134
======= =======
Notes receivable totaling approximately $5.0 million were repaid in advance
of their maturity dates. The remaining mortgage of $13.5 million is due on
May 1, 2008.
Officer's notes, presented as a reduction to stockholders' equity in the
balance sheet, are 10 year, LIBOR + 1.75% notes, with a minimum and maximum
interest rate of 6% and 9%, respectively, collateralized by 352,206 shares
of the Company's common stock and 127,794 OP Units with substantial
personal recourse. The notes become due in three equal installments on each
of December 2008, 2009 and 2010. ReductionsReduction in the principal balance of
these notes were $0.3 million and $0.4was $0.1 million for the ninethree months ended September 30, 2005March 31, 2006 and
2004, respectively.
4.2005.
5. INVESTMENT IN AFFILIATE:
Origen Financial, Inc. ("Origen") is a real estate investment trust in the
business of originating, acquiring and servicing manufactured home loans.
In October 2003, the Company purchased 5,000,000 shares of common stock of
Origen for $50 million. The Company owns approximately 20% of Origen at
September 30, 2005March 31, 2006 and its investment is accounted for using the equity method
of accounting. Because both the Company is an accelerated filer and Origen isare public companies,
information about Origen's actual quarterly earnings may not an accelerated filer,be received
prior to the Company's periodic filings with the
SEC are due prior to those of Origen.quarterly filing. As a result, equity earnings
recorded through September 30, 2005March 31, 2006 reflect the Company's estimate of its
portion of the anticipated earnings of Origen for the periods ending September 30,
2005March
31 and the Company's adjustments for estimates made in prior quarters based
on the actual reported results of Origen for such prior quarters.
812
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5.6. DEBT:
The following table sets forth certain information regarding debt (amounts
in thousands):
SEPTEMBER 30,MARCH 31, DECEMBER 31,
2006 2005
2004
----------------------- ------------
Collateralized term loan, 7.01%, due September 9, 2007 $ 40,27439,882 $ 40,83740,079
Collateralized term loans - CMBS, 4.93-5.32%, due July 1, 2011-2016 494,511 496,031494,511
Collateralized term loans - FNMA, of which $77.4M is variable, due
May 1, 2014 and January 1, 2015 at the Company's option, interest
at 4.34 - 5.2% and 3.584.51 - 5.2% at September 30, 2005March 31, 2006 and December 31, 2004, respectively 388,016 389,1542005. 387,214 387,624
Preferred OP units, redeemable at various dates through
January 2, 2014, average interest at 6.98%7.1 % and 6.8%6.9%
at September 30, 2005March 31, 2006 and December 31, 2004,2005, respectively 62,123 62,123
Senior notes, 6.77%, matured May 16, 2005 -- 5,017
Mortgage notes, other 66,204 85,28069,972 65,831
---------- ----------
$1,051,128 $1,078,442$1,053,702 $1,050,168
========== ==========
The collateralized term loans totaling $922.8$921.6 million at September 30, 2005March 31, 2006 are
secured by 94 properties comprising approximately 34,35234,132 sites representing
approximately $674.4$664.4 million of net book value. The mortgage notes are
collateralized by 1415 communities comprising approximately 4,6974,821 sites
representing approximately $155.5$159.1 million of net book value.
The Company has an unsecured revolving line of credit with a maximum
borrowing capacity of $115 million bearing interest at LIBOR + 1.75%. DuringThe
outstanding balance on the nine months ended September 30, 2005, the Company borrowed $53.2line of credit at March 31, 2006 was $90.3
million. In addition, $3.3$3.4 million of availability was used to back standby
letters of credit, and a maximum of $58.5$21.3 million remains available to be
drawn under the facility.
In March of 2006, the Company closed on a $40.0 million floor plan facility
that allows for draws on new and pre-owned home purchases and on the
Company's portfolio of rental homes. At September 30, 2005,March 31, 2006 the facility
remained undrawn.
At March 31, 2006, the total of maturities and amortization of debt during
the next five years are approximately as follows: 2006 - $19.3
million; 2007 - $88.5$40.8 million;
2008 - $16.9 million,$71.1 million; 2009 - $25.8 million;$19.1 million, 2010 - $22.2$28.9 million; 2011 -
$17.8 million and $878.4$876.0 million thereafter.
6.The most restrictive of these debt agreements place limitations on secured
and unsecured borrowings and contain minimum debt service coverage,
leverage, distribution and net worth requirements. At March 31, 2006 and
2005, all covenants were met.
13
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. OTHER INCOME (LOSS):
The components of other income (loss) are as follows for the periods ended
September 30,March 31, 2006 and 2005 and 2004 (in thousands):
THREE MONTHS
NINE MONTHS
ENDED
ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------MARCH 31,
------------
2006 2005
2004 2005 2004
----- ----- --------- -----
Brokerage commissions $333 $ 232 $209 $ 706 $717234
Disposal of assets (365) (15) (727) (8)32 (47)
Unsuccessful acquisition expenditures (5) (74) (360) (80)(17) (346)
Other income (loss) (57) (2) (30) 42
-----121 (9)
---- -----
----
$(195) $118 $(411) $671
=====$469 $(168)
==== ===== ====
914
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7.8. SEGMENT REPORTING (AMOUNTS IN THOUSANDS):
The consolidated operations of the Company can be segmented into
manufactured home sales and property operations segments. Following is a
presentation of selected financial information:
THREE MONTHS ENDED SEPTEMBER 30, 2005 NINE MONTHS ENDED SEPTEMBER 30, 2005
------------------------------------- ------------------------------------
PROPERTYMARCH 31, 2006
----------------------------------------
MANUFACTURED
PROPERTY MANUFACTURED
OPERATIONS HOME SALES
COMBINED OPERATIONS HOME SALES COMBINED
----------AND RENTALS CONSOLIDATED
-------- ------------ -------- ---------- ------------
--------
Revenues $ 44,022(2)48,073(2) $ 6,0086,585 $ 50,030 $133,416(2) $14,136 $147,55254,658
Operating expenses/Cost of sales 15,523 4,784 20,307 45,539 10,772 56,311
-------- ------- --------15,279 5,010 20,289
-------- ------- --------
Net operating income (1)/Gross profit 28,499 1,224 29,723 87,877 3,364 91,24132,794 1,575 34,369
Adjustments to arrive at net income (loss):
Rental revenues -- 2,549 2,549 -- 6,181 6,181
Operating expenses - rental -- (1,889) (1,889) -- (4,854) (4,854)
Other revenues 524 180 704 2,493 1,277 3,770
Selling, general1,293 273 1,566
General and administrative (3,630) (1,826) (5,456) (10,735) (4,875) (15,610)(5,130) (1,566) (6,696)
Depreciation and amortization (10,903) (2,622) (13,525) (33,330) (6,681) (40,011)(11,503) (3,475) (14,978)
Interest expense (15,100) (79) (15,179) (44,255) (244) (44,499)
Florida storm (damage) recovery -- -- -- 555 -- 555(15,804) (10) (15,814)
Equity income (loss) from affiliate (1,147)281 -- (1,147) (1,042) -- (1,042)
(Income) loss281
Loss allocated to minority interest 495115 -- 495 (343) -- (343)115
-------- ------- --------
-------- ------- --------
Net incomeIncome (loss) from continuing operationsbefore cumulative
change in accounting principle $ (1,262) $(2,463)2,046 $(3,203) $ (3,725) $ 1,220 $(5,832) $ (4,612)(1,157)
Income from discontinued operationscumulative change in
accounting principle 289 -- -- -- 818 6 824
-------- ------- --------289
-------- ------- --------
Net income (loss) $ (1,262) $(2,463)2,335 $(3,203) $ (3,725) $ 2,038 $(5,826) $ (3,788)
======== ======= ========(868)
======== ======= ========
THREE MONTHS ENDED SEPTEMBER 30, 2004 NINE MONTHS ENDED SEPTEMBER 30, 2004
------------------------------------- ------------------------------------
PROPERTYMARCH 31, 2005
----------------------------------------
MANUFACTURED
PROPERTY MANUFACTURED
OPERATIONS HOME SALES
COMBINED OPERATIONS HOME SALES COMBINED
----------AND RENTALS CONSOLIDATED
-------- ------------ -------- ---------- ------------
--------
Revenues $ 40,852(2)45,449(2) $ 4,7865,265 $ 45,638 $123,805(2) $14,723 $138,52850,714
Operating expenses/Cost of sales 14,191 3,771 17,962 40,820 11,928 52,748
-------- ------- --------14,737 3,890 18,627
-------- ------- --------
Net operating income (1)/Gross profit 26,661 1,015 27,676 82,985 2,795 85,78030,712 1,375 32,087
Adjustments to arrive at net income (loss):
Rental revenues -- 1,186 1,186 -- 3,277 3,277
Operating expenses - rental -- (835) (835) -- (2,139) (2,139)
Other revenues 1,856 44 1,900 5,467 561 6,028
Selling, general1,160 736 1,896
General and administrative (3,098) (1,410) (4,508) (8,539) (4,465) (13,004)(3,505) (1,540) (5,045)
Depreciation and amortization (10,555) (389) (10,944) (31,917) (1,029) (32,946)(11,266) (1,759) (13,025)
Interest expense (12,833) (40) (12,873) (34,284) (92) (34,376)
Debt extinguishment costs -- -- -- (51,643) -- (51,643)
Deferred financing costs related to
extinguished debt -- -- -- (5,557) -- (5,557)(14,622) (80) (14,702)
Florida storm damage (600)recovery 500 -- (600) (600) -- (600)500
Equity incomeloss from affiliate 749(117) -- 749 1,049 -- 1,049
(Income) loss(117)
Income allocated to minority interest (1,186)(1,038) -- (1,186) 2,234 -- 2,234(1,038)
-------- ------- --------
-------- ------- --------
Net incomeIncome (loss) from continuing
operations $ 9941,824 $(1,268) $ (429) $ 565 $(40,805) $(1,092) $(41,897)556
Income (loss) from discontinued operations (23) 12 (11) 97 23 120
-------- ------- --------131 0 131
-------- ------- --------
Net income (loss) $ 9711,955 $(1,268) $ (417) $ 554 $(40,708) $(1,069) $(41,777)
======== ======= ========687
======== ======= ========
(1) Investors in and analysts following the real estate industry utilize net
operating income ("NOI") as a supplemental performance measure. NOI is
derived from revenues (determined in accordance with GAAP) minus property
operating expenses and real estate taxes (determined in accordance with
GAAP). NOI does not represent cash generated from operating activities in
accordance with GAAP and should not be considered to be an alternative to
net income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to be an alternative to cash flow from
operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity; nor is it indicative of funds available for the
Company's cash needs, including its ability to make cash distributions. The
Company believes that net income is the most directly comparable GAAP
measurement to net operating income. Net income includes interest and
depreciation and amortization which often have no effect on the market
value of a property and therefore limit its use as a performance measure.
In addition, such expenses are often incurred at a parent company level and
therefore are not necessarily linked to the performance of a real estate
asset. The Company believes that net operating income is helpful to
investors as a measure of operating performance because it is an indicator
of the return on property investment, and provides a method of comparing
property performance over time. The Company uses NOI as a key management
tool when evaluating performance and growth of particular properties and/or
groups of properties. The principal limitation of NOI is that it excludes
depreciation, amortization and non-property specific expenses such as
general and administrative expenses, all of which are significant costs,
and therefore, NOI is a measure of the operating performance of the
properties of the Company rather than of the Company overall.
(2) Seasonal recreational vehicle revenue is included in Property Operations
revenues and is approximately $4.0$4.8 million annually. This seasonal revenue
is recognized approximately 70%60% in the first quarter, 5% in both the second
and third quarters and 20%30% in the fourth quarter of each fiscal year.
1015
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7.8. SEGMENT REPORTING (AMOUNTS IN THOUSANDS), CONTINUED:
SELECTED BALANCE SHEET DATA
SEPTEMBER 30, 2005MARCH 31, 2006 DECEMBER 31, 2004
-------------------------------------- --------------------------------------
PROPERTY2005
---------------------------------------- ----------------------------------------
MANUFACTURED MANUFACTURED
PROPERTY MANUFACTURED
OPERATIONS HOME SALES COMBINED OPERATIONSPROPERTY HOME SALES
COMBINEDOPERATIONS AND RENTALS CONSOLIDATED OPERATIONS AND RENTALS CONSOLIDATED
---------- ------------ ---------------------- ---------- ------------ ----------------------
Identifiable assets:
Investment in rental property, net $1,061,798 $ 98,472 $1,160,270 $1,079,644 $52,312 $1,131,956$1,052,516 $119,105 $1,171,621 $1,052,603 $109,217 $1,161,820
Cash and cash equivalents 4,4945,818 (210) 4,284 53,260 (674) 52,586
Short-term investments -- -- -- 44,975 -- 44,9755,608 6,125 (245) 5,880
Inventory of manufactured homes -- 19,947 19,94716,400 16,400 -- 25,964 25,96417,105 17,105
Investments in and advances to affiliate 46,51846,632 -- 46,518 48,36046,632 46,352 -- 48,36046,352
Notes and other receivables 32,594 6,932 39,526 31,574 13,463 45,03734,523 6,470 40,993 34,356 6,778 41,134
Other assets 48,096 1,104 49,200 53,118 1,171 54,28945,278 1,172 46,450 47,129 1,116 48,245
---------- -------- ---------- ---------- --------------- ----------
Total assets $1,193,500 $126,245 $1,319,745 $1,310,931 $92,236 $1,403,167$1,184,767 $142,937 $1,327,704 $1,186,565 $133,971 $1,320,536
========== ======== ========== ========== =============== ==========
8.9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (IN THOUSANDS):
The Company has entered into four derivative contracts consisting of three
interest rate swap agreements and an interest rate cap agreement. The
Company's primary strategy in entering into derivative contracts is to
minimize the variability that changes in interest rates could have on its
future cash flows. The Company generally employs derivative instruments
that effectively convert a portion of its variable rate debt to fixed rate
debt and to cap the maximum interest rate on its variable rate borrowings.
The Company does not enter into derivative instruments for speculative
purposes.
The swap agreements have the effect of fixing interest rates relative to a
portion of a collateralized term loan due to FNMA. One swap matures in July
2009, with an effective fixed rate of 4.934.84 percent. A second swap matures
in July 2012, with an effective fixed rate of 5.375.28 percent. The third swap
matures in July 2007, with an effective fixed rate of 3.973.88 percent. The
third swap is effective as long as 90-day LIBOR is 7 percent or lower. The
three swaps have an aggregate notional amount of $75.0 million. The
interest rate cap agreement has a cap rate of 9.49 percent, a notional
amount of $152.4 million and a termination date of April 03, 2006. Each of
the Company's derivative contracts is based upon 90-day LIBOR.
The Company has designated the first two swaps and the interest rate cap as
cash flow hedges for accounting purposes. The changes in the value of these
hedges are reflected in other comprehensive income/loss on the balance
sheet. These three hedges were highly effective and had minimal effect on
income. The third swap does not qualify as a hedge for accounting purposes
and, accordingly, the entire change in valuation, whether positive or
negative, is reflected as a component of interest expense. The valuation
adjustment totals approximately $0.04 million and $0.4 million for the
ninethree months ended September 30,March 31, 2006 and 2005, and 2004 totals
negative $0.4 million and negative $0.3 million, respectively.
SFAS No. 133, the "Accounting for Derivative Instruments and Hedging
Activities," requires all derivative instruments to be carried at fair
value on the balance sheet. The fair value of the instruments approximates
a liabilityan asset of $0.4$0.8 million and $1.1less than $0.1 million as of September 30, 2005March 31, 2006
and December 31, 2004,2005, respectively.
These valuation adjustments will only be realized if the Company terminates
the swaps prior to maturity. This is not the intent of the Company and,
therefore, the net of valuation adjustments through the various maturity
dates will approximate zero.
1116
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. STOCK OPTIONS (IN THOUSANDS):
The Company accounts for its stock options using the intrinsic value method
contained in APB Opinion No. 25. "Accounting for Stock Issued to Employees." If
the Company had accounted for options using the methods contained in FASB
Statement No. 123, "Accounting for Stock-Based Compensation", net income (loss)
and earnings (loss) per share would have been presented as follows for the
periods ended September 30, 2005 and 2004:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ------------------
2005 2004 2005 2004
------- ----- ------- --------
Net income (loss), as reported $(3,725) $ 554 $(3,788) $(41,777)
Stock-based compensation expense under fair value method (14) (17) (42) (46)
------- ----- ------- --------
Pro forma net income (loss) $(3,739) $ 537 $(3,830) $(41,823)
======= ===== ======= ========
Earnings (loss) per share (Basic and Diluted), as reported $ (0.21) $0.03 $ (0.21) $ (2.26)
======= ===== ======= ========
Earnings (loss) per share (Basic and Diluted), pro forma $ (0.21) $0.03 $ (0.22) $ (2.26)
======= ===== ======= ========
Stock options issued after April 30, 2004 were valued using the Binomial model
rather than the Black-Scholes-Merton formula. The difference in valuation
between the two methods was not material.
10. DISPOSITION OF PROPERTIES:
During the second quarter of 2005, the Company sold two properties located
in Florida comprised of 96 manufactured housing sites and 165 recreational
vehicle sites for a combined sales price of $5.7 million. These
transactions resulted in a $0.8 million gain.
In accordance with FASSFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" effective for financial statements issued for all fiscal
years beginning after December 15, 2001, results of operations and
gain/(loss) on sales of real estate for properties with identifiable cash
flows sold subsequent to December 31, 2001 are reflected in the
Consolidated Statements of Operations as income from discontinued
operations for all periods presented. Below is a summary of the results of
operations of sold properties through their respective disposition dates
(in thousands):
12
SUMMARY STATEMENT
OF OPERATIONS
-----------------
2006 2005
---- -----
Income from rental property $-- $ 332
Revenue from home sales -- 2
Rental home revenue -- 4
Ancillary revenues, net -- 1
Other loss -- (1)
Property operating and maintenance -- (102)
Real estate taxes -- (16)
Cost of home sales -- (2)
Depreciation and amortization -- (43)
Interest and general and administrative -- (26)
--- -----
Income from operations -- 149
Income allocated to common OP units -- (18)
--- -----
Income from discontinued operations $-- $ 131
=== =====
17
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. DISPOSITION OF PROPERTIES, CONTINUED:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------
2005 2004 2005 2004
----- ----- ----- -----
Income from rental property $-- $108 $ 407 $ 524
Revenue from home sales -- 51 96 170
Ancillary and rental revenues, net and other income (loss) -- 5 3 8
Property operating and maintenance expenses -- (51) (170) (205)
Cost of home sales -- (41) (89) (146)
Real estate taxes -- (16) (24) (48)
Selling, general and administrative expenses -- (3) (6) (9)
Depreciation and amortization -- (43) (62) (130)
Interest expense -- (22) (45) (28)
--- ---- ----- -----
Income (loss) from operations -- (12) 110 136
Gain on sale of properties -- -- 828 --
(Income) loss allocated to common OP units -- 1 (114) (16)
--- ---- ----- -----
Income (loss) from discontinued operations $-- $(11) $ 824 $ 120
=== ==== ===== =====
11. EARNINGS (LOSS) PER SHARE (IN THOUSANDS):
For the periods ended September 30, 2005March 31, 2006 and 2004:2005:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------2006 2005 2004 2005 2004
------- -------
------- --------
Earnings (loss) used for basic and diluted
earnings (loss) per share:share computation:
Continuing operations $(3,725) $ 565 $(4,612) $(41,897)(868) $ 556
======= ======= ======= ========
Discontinued operations $ -- $ (11) $ 824 $ 120131
======= =======
======= ========
Weighted averageTotal shares used for basic earnings (loss) per share 17,746 18,100 17,775 18,48017,534 17,848
Dilutive securities:
Stock options and other -- 146 -- --102
------- -------
------- --------
DilutedTotal weighted average shares 17,746 18,246 17,775 18,480used for diluted
earnings (loss) per share computation 17,534 17,950
======= ======= ======= ========
Diluted earnings per share reflect the potential dilution that would occur
if dilutive securities were exercised or converted into common stock. The
calculation of both basic and diluted earnings per share for the ninethree
month periodsperiod ending September 30, 2005 and 2004 and for the three months ended
September 30, 2005March 31, 2006 is based upon weighted average shares
prior to dilution, as the effect of including potentially dilutive
securities in the calculation during these periods would be anti-dilutive.
13
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. EARNINGS (LOSS) PER SHARE (IN THOUSANDS), CONTINUED:
The Company also has the following potentially convertible securities
which, if converted, may impact dilution:
CONVERTIBLE SECURITIES NUMBER OF
CONVERTIBLE SECURITIES UNITS ISSUED CONVERSION FEATURES
- ----------------------------- ------------ ------------------------------------------------------- ---------------------- -------------------
Series A Preferred OP Units 1,325,275 Convertible to common stock at $68 per share/unit. Mandatorily
redeemable on 01/02/January 2, 2014
Series B Preferred OP Units 35,637 On each of May 1, 2004, 2005, and 2006, holder may exchange Units
for shares of common stock at exchange rate of 2.272727 ($44 per
share) shares of common stock for each Series B Preferred Unit.
Series B-2 Preferred OP Units 100,000 Convertible into Common OP Units after 01/31/January 31, 2005 at $45 per
share/unit.
12. RECENT ACCOUNTING PRONOUNCEMENTS:
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS
No. 154, "Accounting Changes and Error Corrections, a Replacement of APB
Opinion No. 20 and FASB Statement No. 3" ("SFAS No. 154"). SFAS No. 154
provides guidance on the accounting for and reporting of accounting changes
and error corrections, and is effective for fiscal years beginning after
December 15, 2005. Early adoption is permitted. SFAS No. 154 is not
expected to have a material impact on the Company's consolidated financial
statements.
In December 2004, the FASB issued Share-Based Payment Statement No. 123(R),
that addresses the accounting for share-based payment transactions in which
an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. Under the FASB's statement, all forms
of share-based payments to employees, including employee stock options,
must be treated the same as other forms of compensation by recognizing the
related cost in the income statement. The expense of the award would
generally be measured at fair value at the grant date. Current accounting
guidance requires that the expense relating to so-called fixed plan
employee stock options only be disclosed in the footnotes to the financial
statements. The Statement eliminates the ability to account for share-based
compensation transactions using APB Opinion No. 25, Accounting for Stock
Issued to Employees for options granted after June 15, 2005. On April 14,
2005, the SEC announced it would permit companies to implement statement
123(R) at the beginning of their next fiscal year. The Company plans to
adopt the new rules reflected in statement 123(R) using the
modified-prospective method, effective January 1, 2006. The Company is
currently evaluating the impact of this standard on its results of
operations and financial position.
1418
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13.12. CONTINGENCIES:
On April 9, 2003, T.J. Holdings, LLC ("TJ Holdings"), a member of
Sun/Forest, LLC ("Sun/Forest") (which, in turn, owns an equity interest in
SunChamp LLC), ("SunChamp"), filed a complaint against the Company,
SunChamp, LLC, certain other affiliates of the Company and two directors of Sun
Communities, Inc. in the Superior Court of Guilford County, North Carolina.
The complaint alleges that the defendants wrongfully deprived the plaintiff
of economic opportunities that they took for themselves in contravention of
duties allegedly owed to the plaintiff and purports to claim damages of
$13.0 million plus an unspecified amount for punitive damages. The Company
believes the complaint and the claims threatened therein have no merit and
will defend it vigorously. The current status is thatThese proceedings were stayed by the proceedings inSuperior
Court of Guilford County, North Carolina have been stayedin 2004 pending final
determination inby the Circuit Court of Oakland County, Michigan as to
whether the dispute should be submitted to arbitration.arbitration and the conclusion
of all appeals therefrom. On April 4, 2005, the Oakland County Circuit
Court issued a final order compelling arbitration for certain claims
brought in the North Carolina case but denying arbitration for certain
other claims in the North Carolina case. Shortly thereafter, the Company
appealed this decision with respect to the claims for which the court
denied arbitration and such appeal is currently pending in the Michigan
Court of Appeals.
As previously disclosed, the Company, the Chief Executive Officer, the
Chief Financial Officer and certain of its employees havea former controller received "Wells Notices"
from the staff of the U.S. Securities and Exchange Commission (SEC) in
connection with a non-public inquiry regarding the Company. The inquiry by
the SEC was commenced in January 2004 with a request for information and
legal, accounting and other documentation generally regarding the Company's
investment in SunChamp, LLC, the operation of SunChamp, the Company's accounting
for SunChamp and other transactions related to SunChamp. Under the SEC's procedures, the Wells Notices indicate
that the staff has made a preliminary decision to recommend that the
Commission bring a civil action against the Company and certain of its
employees. The SEC Staff has
informed the Company that the major focus of the Staff's inquiry and the primary bases for its preliminary conclusion
to recommend action, relaterelates to
the Company's accounting for the SunChamp investment during 2000, 2001 and
2002.
AtAs announced on February 27, 2006 the directionSEC accepted the Company's offer to
resolve the SEC's inquiry regarding the Company's financial statements for
2000, 2001 and with
supervision2002, and entered the agreed-upon administrative Order. As
disclosed in the Company's press release dated February 13, 2006, the Order
requires that the Company cease and desist from violations of certain non
intent-based provisions of the Audit Committee,federal securities laws, without admitting
or denying any such violations. The Order further requires that the Company
has cooperated
fullyemploy an independent consultant to evaluate internal controls and
financial reporting procedures as they relate to the Company's accounting
for its ownership interest in SunChamp. The Order does not impose any
monetary penalties, nor do the terms of the Order require the Company to
restate any of its prior financial statements.
The Order relates only to the Company and does not address any actions
relating to the three Company employees that received Wells Notices, as
disclosed in the Company's press releases dated July 19, 2005, and
September 14, 2005. On February 27, 2006, the SEC filed a civil action
against the three employees in the United States District Court for the
Eastern District of Michigan alleging various claims generally consistent
with the SECSEC's findings set forth in respect of its investigation.the Order.
The Company is involved in various other legal proceedings arising in the
ordinary course of business. All such proceedings, taken together, are not
expected to have a material adverse impact on our results of operations or
financial condition.
14. SUBSEQUENT EVENTS:
The Company owns a portfolio of nineteen communities in Florida comprising
of over 10,000 sites. Subsequent to September 30, 2005 Hurricane Wilma
destroyed five owner-occupied homes and one permanent recreational vehicle.
The aggregate amount of damages before any recovery from insurance is
expected to approximate $600,000. Most of the damage relates to debris,
largely trees, and signs, fencing, awnings, and carports.
1519
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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. Capitalized terms are used as
defined elsewhere in this Form 10-Q.
SIGNIFICANT ACCOUNTING POLICIES
The Company had identified significant accounting policies that, as a result of
the judgments, uncertainties, uniqueness and complexities of the underlying
accounting standards and operations involved could result in material changes to
its financial condition or results of operations under different conditions or
using different assumptions. Details regarding the Company's significant
accounting policies are described fully in the Company's 20042005 Annual Report
filed with the Securities and Exchange Commission on Form 10-K. During the ninethree
months ended September 30, 2005,March 31, 2006, there have been no material changes to the
Company's significant accounting policies that impacted the Company's financial
condition or results of operations.operations except for the adoption of Financial
Accounting Standards Board ("FASB") Statement No. 123 (revised December 2004),
Share-Based Payment ("SFAS 123(R)").
In December 2004, FASB issued SFAS 123(R). SFAS 123(R) replaces FASB Statement
No. 123 ("Statement 123"), Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25 ("APB 25"), Accounting for Stock Issued to
Employees. SFAS 123(R) requires compensation costs related to share-based
payment transactions be recognized in the financial statements. The Company
adopted SFAS 123(R) effective January 1, 2006 using the "modified prospective"
method. Therefore, prior period statements have not been restated. Under this
method, in addition to reflecting compensation expense for new-share based
awards, expense is also recognized to reflect the remaining service period of
awards that had been included in pro-forma disclosures in prior periods.
With the adoption of SFAS 123(R), the Company is required to record the fair
value of stock-based compensation awards as an expense. In order to determine
the fair value of stock options on the grant date, the Company applies the
Binomial (lattice) option-pricing model. Inherent in this model are assumptions
related to expected stock-price volatility, option life, risk-free interest rate
and dividend yield. While the risk-free rate and dividend yield are less
subjective assumptions, typically based on factual data derived from public
sources, the expected stock-price volatility and option life assumptions require
a greater level of judgment which make them critical accounting estimates.
The Company uses an expected stock-price volatility assumption that is based on
historical implied volatilities of the underlying stock which is obtained from
public data sources. With regard to the weighted-average option life assumption,
the Company considers the exercise behavior of past grants and models the
pattern of aggregate exercises. Patterns are determined on specific criteria of
the aggregate pool of optionees. The Company uses the resources of an outside
consultant for valuing its options. An award of 7,500 options was made to the
Company's non-employee directors during the first quarter of 2006.
Performance-based awards vest based upon the achievement of certain performance
conditions and the Company makes its best estimate as to the ultimate
achievement of such performance conditions.
20
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the three months ended September 30,March 31, 2006 and 2005 and 2004
For the three months ended September 30, 2005,March 31, 2006, income from operations before
minority interest decreased by $6.0$2.9 million from $1.8$1.6 million to a loss of
$(4.2)$(1.3) million, when compared to the three months ended September 30, 2004.March 31, 2005. The
decrease was due to increased expenses of $7.6$6.9 million, offset by increased
revenues of $3.5$3.6 million and decreasedincreased equity income from affiliate of $1.9$0.4
million as described in more detail below.
Income from rental property increased by $3.1$2.7 million from $40.9$45.4 million to
$44.0$48.1 million, or 7.65.9 percent, due to acquisitions ($1.50.8 million) and rent
increases and other community revenues ($1.61.9 million).
Revenues from home sales increaseddecreased by $1.2$0.4 million from $4.8$3.7 million to $6.0$3.3
million, or 25.0 percent. The decline10.8 percent primarily due to the change in the number of new versus
pre-owned homes sold and the overall decrease in the number of homes sold was more than
offsetduring
the first quarter of 2006 (71 sales) as compared to the first quarter of 2005
(111 sales).
Rental home revenue increased by $1.8 million from $1.5 million to $3.3 million
due to increases in the average sales prices.
Rental revenues, net increased by $0.3 million from $0.4 million to $0.7 million
due primarily to increasedrental rate per home and the number of tenants
in the Company's rental program.
Interest income decreased by $0.8 million from $1.7$1.6 million to $0.9$0.8 million, or
47.150.0 percent, due primarily to a reduction in the amount of short-term
investments and the payoff of interest earning notes and receivables by the
borrowers.
Other income decreasedincreased by $0.3$0.7 million from $0.1 million to a loss of $0.2$(0.2) million to income
of $0.5 million due primarily to an increase in brokerage commissions of $0.1
million, a loss associated with disposition$0.2 million non-refundable option payment received and a $0.5
million decrease in unsuccessful acquisition expenditures.
Property operating and maintenance expenses increased by $0.4 million from $11.0
million to $11.4 million, or 3.6 percent. The increase was due to property
acquisitions ($0.3 million) and other expenses ($0.1 million).
Rental home operating and maintenance expense increased by $1.1 million from
$1.5 million to $2.6 million, or 73.3 percent due primarily to an increase in
the number of miscellaneous assets.
16tenants in the Company's rental program.
General and administrative expenses for rental property increased by $1.6
million from $3.5 million to $5.1 million, or 45.7 percent, due to expenditures
related to a review of the Company's strategic alternatives, the accrual of
annual performance based incentives, an increase in the amount of share-based
compensation expense related to a significant vesting of shares and increased
Michigan taxes.
Depreciation and amortization increased by $2.0 million from $13.0 million to
$15.0 million, or 15.4 percent, due primarily to an increase in the total rental
home portfolio.
Interest expense increased by $1.1 million from $13.6 million to $14.7 million,
or 8.1 percent, primarily due to increased debt levels and increased interest
rates on variable rate debt.
The cumulative effect of change in accounting principle is a result of the
recognition of expected forfeitures on restricted stock grants that are not
vested at January 1, 2006.
21
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS, CONTINUED:
Property operating and maintenance expenses increased by $1.0 million from $10.7
million to $11.7 million, or 9.3 percent. The increase was due to property
acquisitions ($0.6 million), increases in utility costs ($0.2 million), payroll
expense ($0.1 million), and repair and maintenance expense ($0.1 million).
Cost of home sales increased by $1.0 million from $3.8 million to $4.8 million,
or 26.3 percent. The decline in the number of homes sold was more than offset by
increases in average cost of homes. Overall home sales gross margins increased
from $1.0 to $1.2 million, or 20.0 percent.
Real estate taxes increased by $0.3 million from $3.5 million to $3.8 million,
or 8.6 percent, due primarily to increases in assessments and tax rates.
General and administrative expenses for rental property increased by $0.5
million from $3.1 million to $3.6 million, or 16.1 percent, due primarily to an
increase in legal costs related to the previously disclosed SEC inquiry.
General and administrative expenses for home sales increased by $0.4 million
from $1.4 million to $1.8 million, or 28.6 percent, due to increases in income
tax expense ($0.3 million) and other miscellaneous expenses ($0.1 million).
Depreciation and amortization increased by $2.6 million from $10.9 million to $
13.5 million, or 23.9 percent, due primarily to a change in estimated useful
lives of homes utilized in the Company's rental program and an increase in the
total rental home portfolio. The change in estimated useful lives was
prospectively adopted during the first quarter of 2005.
Interest expense increased by $2.3 million from $12.9 million to $15.2 million,
or 17.8 percent, primarily due to increased debt levels somewhat offset by lower
interest rates.
Comparison of the nine months ended September 30, 2005 and 2004
For the nine months ended September 30, 2005, income from operations before
minority interest decreased by $17.4 million from $13.1 million to a loss of
$(4.3) million, when compared to the nine months ended September 30, 2004
(excluding $57.2 million of costs incurred in 2004 and associated with the
extinguishment of $345 million of unsecured debt). The decrease was due to
increased expenses of $22.2 million, decreased equity income from affiliate of
$2.1 million, offset by increased revenues of $6.9 million as described in more
detail below.
Income from rental property increased by $9.6 million from $123.8 million to
$133.4 million, or 7.8 percent, due to acquisitions ($4.6 million) and rent
increases and other community revenues ($5.0 million).
Revenues from home sales decreased by $0.6 million from $14.7 million to $14.1
million, or 4.1 percent, due primarily to a decline in the number of homes sold
somewhat offset by increases in home sales prices.
17
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS, CONTINUED:
Rental revenues, net increased by $0.2 million from $1.1 million to $1.3 million
due primarily to increased number of tenants in the Company's rental program.
Ancillary revenues, net, increased by $0.2 million from $0.4 million to $0.6
million due primarily to a broker fee received in relation to a property
acquisition by an unrelated third party.
Interest income decreased by $1.4 million from $5.0 million to $3.6 million, or
28.0 percent, due primarily to a decrease in interest earning notes and
receivables.
Other income decreased by $1.1 million from $0.7 million to a loss of
$(0.4) million due to a loss associated with disposition of miscellaneous assets
($0.7 million), an increase in expenditures on unsuccessful acquisitions ($0.3
million), and miscellaneous expenses ($0.1 million).
Property operating and maintenance expenses increased by $3.4 million from
$30.8 million to $34.2 million, or 11.0 percent. The increase was due to
property acquisitions ($1.7 million), increases in utility costs ($0.4
million), payroll expense ($0.3 million), repair and maintenance expenses ($0.4
million), seminars and conventions costs related to the Company's biennial
conference for its community managers ($0.2 million), cable TV costs ($0.3
million), and other miscellaneous expenses ($0.1 million).
Cost of home sales decreased by $1.1 million from $11.9 million to $10.8
million, or 9.2 percent, due primarily to a decline in the number of homes sold.
Overall home sales gross margins increased from $2.8 to $3.3 million, or 17.9
percent.
Real estate taxes increased by $1.4 million from $10.0 million to $11.4 million,
or 14.0 percent, due primarily to increases in assessments and tax rates.
General and administrative expenses for rental property increased by $2.2
million from $8.5 million to $10.7 million, or 25.9 percent, due to an increase
in payroll, benefits, and consulting expenses ($1.2 million) and legal costs
($1.0 million).
General and administrative expenses for home sales increased by $0.4 million
from $4.5 million to $4.9 million, or 8.9 percent, due primarily to increases
in income tax expense.
Depreciation and amortization increased by $7.1 million from $32.9 million to
$40.0 million, or 21.6 percent, due primarily to change in estimated useful
lives of homes utilized in the Company's rental program and an increase in the
total rental home portfolio. The change in estimated useful lives was
prospectively adopted during the first quarter of 2005.
Interest expense increased by $10.1 million from $34.4 million to $44.5 million,
or 29.4 percent, primarily due to increased debt levels somewhat offset by lower
interest rates.
The settlement of the Company's insurance claim relating to the Florida
hurricanes of 2004 resulted in the elimination of the Company's previously
recorded reserve for losses of $0.6 million.
18
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAME PROPERTY INFORMATION
The following table reflects property-level financial information as of and for
the ninethree months ended September 30, 2005March 31, 2006 and 2004.2005. The "Same Property" data
represents information regarding the operation of communities owned as of
January 1, 20042005 and September 30, 2005.March 31, 2006. Site, occupancy, and rent data for those
communities is presented as of the last day of each period presented. The "Total
Portfolio" column differs from the "Same Property" column by including financial
and statistical information for new development and acquisition communities.
SAME PROPERTY TOTAL PORTFOLIO
---------------------- ------------------------------------------ --------------------
2006 2005 20042006 2005
2004
-------- -------- -------- --------------- ------- ------- -------
(in thousands) (in thousands)
Income from rental property $118,443 $115,061 $133,416 $123,805
-------- -------- -------- --------$45,069 $43,358 $48,073 $45,449
Property operating expenses:
Property operating and maintenance 24,156 23,651 34,166 30,8298,557 8,600 11,385 10,965
Real estate taxes 10,008 9,439 11,373 9,991
-------- -------- -------- --------3,798 3,728 3,894 3,772
------- ------- ------- -------
Property operating expenses 34,164 33,090 45,539 40,820
-------- -------- -------- --------12,355 12,328 15,279 14,737
------- ------- ------- -------
Property net operating income(1) $ 84,279 $ 81,971 $ 87,877 $ 82,985
======== ======== ======== ========$32,714 $31,030 $32,794 $30,712
======= ======= ======= =======
Number of properties 121 121 135 133 133 136 137
Developed sites 42,867 42,896 47,326 45,72646,516 46,488 47,584 47,617
Occupied sites 35,361 35,561 38,318 37,42938,132(2) 38,177(2) 38,539(2) 38,479(2)
Occupancy % 85.2%(2) 85.9%(2)84.3%(3) 84.6%(3) 84.2%(2) 84.7%(2)(3) 84.4%(3)
Weighted Average monthly rent per site $ 353(2)360(3) $ 340(2)347(3) $ 352(2)360(3) $ 339(2)347(3)
Sites available for development 5,420 5,446 7,080 7,3556,359 6,501 6,857 7,237
Sites planned for development in next year 112 5 112 541 208 41 208
(1) Investors in and analysts following the real estate industry utilize net
operating income ("NOI") as a supplemental performance measure. NOI is
derived from revenues (determined in accordance with GAAP) minus property
operating expenses and real estate taxes (determined in accordance with
GAAP). NOI does not represent cash generated from operating activities in
accordance with GAAP and should not be considered to be an alternative to
net income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to be an alternative to cash flow from
operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity; nor is it indicative of funds available for the
Company's cash needs, including its ability to make cash distributions. The
Company believes that net income is the most directly comparable GAAP
measurement to net operating income. Net income includes interest and
depreciation and amortization which often have no effect on the market
value of a property and therefore limit its use as a performance measure.
In addition, such expenses are often incurred at a parent company level and
therefore are not necessarily linked to the performance of a real estate
asset. The Company believes that net operating income is helpful to
investors as a measure of operating performance because it is an indicator
of the return on property investment, and provides a method of comparing
property performance over time. The Company uses NOI as a key management
tool when evaluating performance and growth of particular properties and/or
groups of properties. The principal limitation of NOI is that it excludes
depreciation, amortization and non-property specific expenses such as
general and administrative expenses, all of which are significant costs,
and therefore, NOI is a measure of the operating performance of the
properties of the Company rather than of the Company overall.
(2) Occupied sites include manufactured housing and permanent recreational
vehicle sites, and exclude seasonal recreational vehicle sites.
(3) Occupancy % and weighted average rent relates to manufactured housing
sites, excluding recreational vehicle sites.
1922
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAME PROPERTY INFORMATION, CONTINUEDRESULTS OF OPERATIONS, CONTINUED:
On a same property basis, property net operating income increased by $2.3$1.7
million from $82.0$31.0 million to $84.3$32.7 million, or 2.85.4 percent. Income from rental
property increased by $3.3$1.7 million from $115.1$43.4 million to $118.4$45.1 million, or 2.93.9
percent, due primarily to increases in rents including water and property tax
pass through. Property operating expenses increased by $1.1$0.02 million from $33.1$12.33
million to $34.2$12.35 million, or 3.30.2 percent, due primarily to increases in real
estate taxestaxes.
RENTAL PROGRAM
The following table reflects additional information regarding the Company's
rental program for the three months ended March 31, 2006 and repair2005:
THREE MONTHS ENDED MARCH 31,
----------------------------
2006 2005
-------- -------
(in thousands except for *)
Rental home revenue $ 3,329 $ 1,517
Site rent included in Income from rental property 4,186 2,207
-------- -------
Rental program revenue 7,515 3,724
Expenses
Payroll and commissions 475 427
Repairs and refurbishment 957 541
Taxes and insurance 594 281
Other 587 236
-------- -------
Rental program operating and maintenance 2,613 1,485
-------- -------
Net operating income(1) $ 4,902 $ 2,239
======== =======
Number of occupied rentals, end of period* 4,215 2,536
Cost of occupied rental homes $124,007 $70,033
Weighted average monthly rental rate* $ 653 $ 594
(1) See Note (1) following Same Property Information.
Net operating income from the rental program increased $2.7 million from
$2.2 million to $4.9 million in the first quarter of 2006 as a result of a $3.8
million increase in revenue offset by a $1.1 million increase in expenses.
Revenues increased due to an increase in the weighted average monthly rental
rate and maintenance expenses.an increase in the number of leased rental homes. Expenses were also
impacted by the increase in the number of leased rental homes.
23
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity demands have historically been, and are
expected to continue to be, distributions to the Company's stockholders and the
unitholders of the Operating Partnership, capital improvements of properties,
the purchase of new and pre-owned homes, property acquisitions, development and
expansion of properties, and debt repayment.
The Company expects to meet its short-term liquidity requirements through its
working capital provided by operating activities, and through its $115.0 million line of
credit.credit and its $40.0 million floor plan. The Company considers these resources
to be adequate to meet all operating requirements, including recurring capital
improvements, routinely amortizing debt and other normally recurring
expenditures of a capital nature, pay dividends to its stockholders to maintain
qualification as a REIT in accordance with the Internal Revenue Code and make
distributions to the Operating Partnership's unitholders.
The Company has invested approximately $3.3$0.7 million in its development
communities consisting primarily of costs necessary to complete home site
improvements such as driveways, sidewalks, piers, pads and runners and
anticipates investing an additional $1.2$1.0 - $1.5 million for such costs during
the remainder of 2005. the2006. The Company expects to finance these investments by using
net cash flows provided by operating activities and by drawing upon its line of
credit.
The Company has invested $7.3$7.8 million in the acquisition of properties during
2005.2006. Although substantial acquisitions are not anticipated prior to year end,
the Company continuously seeks acquisition opportunities that meet the Company's
criteria for acquisition. Should such investment opportunities arise the Company
will finance the acquisitions though the temporary use of its line of credit
until permanent secured financing can be arranged, through the assumption of
existing debt on the properties or the issuance of certain equity securities.
The Company has also invested approximately $46$13.2 million induring the acquisitionfirst
quarter of 2006 in homes primarily intended for its rental program. Expenditures
for the reminder of 20052006 will be dependent upon the condition of the markets for
repossessions and new home sales as well as rental homes.
Cash and cash equivalents decreased by $48.3$0.3 million to $4.3 million at
September 30, 2005 compared to $52.6from $5.9 million at
December 31, 2004.2005 to $5.6 million at March 31, 2006. Net cash provided by
operating activities increaseddecreased by $2.7$7.1 million to $45.3$15.7 million for the ninethree
months ended September 30, 2005March 31, 2006 compared to $42.6$22.8 million for the ninethree months ended
September 30, 2004.
20
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES CONTINUED:March 31, 2005.
The Company's net cash flows provided by operating activities may be adversely
impacted by, among other things: (a) the market and economic conditions in the
Company's current markets generally, and specifically in metropolitan areas of
the Company's current markets; (b) lower occupancy and rental rates of the
Company's properties (the "Properties"); (c) increased operating costs,
including insurance premiums, real estate taxes and utilities, that cannot be
passed on to the Company's tenants; and (d) decreased sales of manufactured
homes. See "Factors That May Affect Future Results""Risk Factors " in the Company's Annual Report on Form 10-K for the
year ended December 31, 2004.2005.
24
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES CONTINUED:
The Company anticipates meeting its long-term liquidity requirements, such as
scheduled debt maturities, large property acquisitions, and Operating
Partnership unit redemptions through the collateralization of a significant
portion of its properties.
From time to time, the Company may also issue shares of its capital stock, issue
equity units in the Operating Partnership or sell selected assets. The ability
of the Company to finance its long-term liquidity requirements in such manner
will be affected by numerous economic factors affecting the manufactured housing
community industry at the time, including the availability and cost of mortgage
debt, the financial condition of the Company, the operating history of the
Properties, the state of the debt and equity markets, and the general national,
regional and local economic conditions. See "Factors That May Affect Future Results""Risk Factors" in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004.2005. If the Company
is unable obtain additional debt or equity financing on acceptable terms, the
Company's business, results of operations and financial condition will be
adversely impacted.
At September 30, 2005,March 31, 2006, the Company's debt to total market capitalization
approximated 62.161.4 percent (assuming conversion of all Common OP Units to shares
of common stock). The debt has a weighted average maturity of approximately 8.17.0
years and a weighted average interest rate of 5.25.4 percent.
Capital expenditures for the ninethree months ended September 30,March 31, 2006 and 2005 and 2004 included
recurring capital expenditures of $5.5$1.4 million and $4.9$1.4 million, respectively.
Net cash used in investing activities decreasedincreased by $75.5$28.4 million to $(17.6)
million for the nine months ended September 30, 2005 compared to $(93.1)$19.3
million used in investing activities for the ninethree months ended September 30, 2004.March 31, 2006
compared to $9.1 million provided by investing activities for the three months
ended March 31, 2005. This decreaseincrease was due to a $51.0$39.9 million increasedecrease in net
proceeds from sale of short-term investments decreased investment in rental property of $45.3and a $0.8 million a $3.9 million increase in proceeds related to property dispositions,
offset by a $0.2 million decrease in distribution from affiliate, a $12.0 decrease in
notes receivable and officers' notes, net, and a $12.5 million
decreaseoffset by decreased investment in
proceeds from salesrental property of installments loans to Origen.$12.3 million.
Net cash used inprovided by financing activities increased by $165.6$75.1 million to $(76.0)
million for the nine months ended September 30, 2005 when compared to $89.6$3.4
million provided by financing activities for the ninethree months ended September 30,
2004.March 31,
2006 compared to $71.7 million used in financing activities for the three months
ended March 31, 2005. This increase was primarily due to a $149.0$50.0 million
decrease in net
proceeds from notes payable and other debt, inclusive of borrowings on line of
credit, payments of $50.0 million to retire Perpetual Preferred Operating Partnership Units,
and a $3.0$2.4 million decreasereduction in funds used to purchase Company stock, a $3.6 million
reduction in payments made to redeem notes payable, an increase of proceeds from
issuance of common stock and OP units net and option exercises of $2.4 million, and an
increase of $17.0 million in borrowings on a line of credit, offset by a $9.5an
increase in distributions of $0.2 million decreaseand an increase in payments for
deferred financing costs a $23.2 million decrease in purchases of Company stock under a
one million share buy back authorization, and a $3.7 million decrease in
distributions.
21$0.1 million.
25
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUPPLEMENTAL MEASURE:
Funds from operations ("FFO") is defined by the National Association of
Real Estate Investment Trusts ("NAREIT") as net income (computed in accordance
with generally accepted accounting principles), excluding gains (or losses) from
sales of depreciable operating property, plus real estate-related depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint ventures. FFO is a non-GAAP financial measure that management believes is
a useful supplemental measure of the Company's operating performance. Management
generally considers FFO to be a useful measure for reviewing comparative
operating and financial performance because, by excluding gains and losses
related to sales of previously depreciated operating real estate assets and
excluding real estate asset depreciation and amortization (which can vary among
owners of identical assets in similar condition based on historical cost
accounting and useful life estimates), FFO provides a performance measure that,
when compared year over year, reflects the impact to operations from trends in
occupancy rates, rental rates and operating costs, providing perspective not
readily apparent from net income. Management believes that the 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.
Because FFO excludes significant economic components of net income
including depreciation and amortization, FFO should be used as an adjunct to net
income and not as an alternative to net income. The principal limitation of FFO
is that it does not represent cash flow from operations as defined by GAAP and
is a supplemental measure of performance that does not replace net income as a
measure of performance or net cash provided by operating activities as a measure
of liquidity. In addition, FFO is not intended as a measure of a REIT's ability
to meet debt principal repayments and other cash requirements, nor as a measure
of working capital. FFO only provides investors with an additional performance
measure. Other REITS may use different methods for calculating FFO and,
accordingly, the Company's FFO may not be comparable to other REITs.
The following table reconciles net income to FFO and calculates both basic and
diluted FFO per share for the periods ended September 30,March 31, 2006 and 2005 and 2004 (in
thousands):
2226
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUPPLEMENTAL MEASURE, CONTINUED:
RECONCILIATION OF NET INCOME (LOSS) TO FUNDS FROM OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(AMOUNTS IN THOUSANDS, EXEPTEXCEPT PER SHARE/OP UNIT AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------2006 2005 2004 2005 2004
------- -------
------- --------
Net income (loss) $(3,725) $ 554 $(3,788) $(41,777)(868) $ 687
Adjustments:
Depreciation and amortization 14,166 11,195 41,930 33,10915,588 13,664
Valuation adjustment(1) 194 (180) 400 302
Allocation of SunChamp losses(2) -- -- -- 30043 359
(Gain) loss on disposition of assets, net 365 (101)(32) 47
Income (loss) allocated to minority interest (495) 76 (504) (5,546)(115) 95
------- ------- ------- --------
Funds from operations (FFO) $10,505 $11,645 $37,937 $(13,612)$14,616 $14,852
======= ======= ======= ========
FFO - Continuing Operations $10,505 $11,614 $37,765 $(13,878)$14,616 $14,660
======= ======= ======= ========
FFO - Discontinued Operations $ -- $ 31 $ 172 $ 266192
======= ======= ======= ========
Weighted average common shares/OP Units outstanding:
Basic 20,103 20,574 20,205 20,95419,857 20,319
======= =======
======= ========
Diluted 20,242 20,720 20,357 20,95420,007 20,421
======= ======= ======= ========
Continuing Operations:
FFO per weighted average Common Share/OP Unit - Basic $ 0.520.74 $ 0.56 $ 1.87 $ (0.66)0.72
======= ======= ======= ========
FFO per weighted average Common Share/OP Unit - Diluted $ 0.520.73 $ 0.56 $ 1.86 $ (0.66)0.72
======= ======= ======= ========
Discontinued Operations:
FFO per weighted average Common Share/OP Unit - Basic $ -- $ 0.01
$ 0.01 $ 0.01
======= ======= ======= ========
FFO per weighted average Common Share/OP Unit - Diluted $ -- $ 0.00 $ 0.01 $ 0.01
======= ======= ======= ========
Total Operations:
FFO per weighted average Common Share/OP Unit - Basic $ 0.520.74 $ 0.57 $ 1.88 $ (0.65)0.73
======= ======= ======= ========
FFO per weighted average Common Share/OP Unit - Diluted $ 0.520.73 $ 0.56 $ 1.87 $ (0.65)0.73
======= ======= ======= ========
(1) The Company entered into three interest rate swaps and an interest rate cap
agreement. The valuation adjustment reflects the theoretical noncash profit
and loss were those hedging transactions terminated at the balance sheet
date. As the Company has no expectation of terminating the transactions
prior to maturity, the net of these noncash valuation adjustments will be
zero at the various maturities. As any imperfection related to hedging
correlation in these swaps is reflected currently in cash as interest, the
valuation adjustments reflect volatility that would distort the comparative
measurement of FFO and on a net basis approximate zero. Accordingly, the
valuation adjustments are excluded from FFO. The valuation adjustment is
included in interest expense.
(2) The Company acquired the equity interest of another investor in SunChamp in
December 2002. Consideration consisted of a long-term note payable at net
book value. Although the adjustment for the allocation of the SunChamp
losses (based on SunChamp as a stand-alone entity) is not reflected in the
accompanying financial statements, management believes that it is
appropriate to provide for this adjustment because the Company's payment
obligations with respect to the note are subordinate in all respects to the
return of the members' equity (including the gross book value of the
acquired equity) plus a preferred return. As a result, the losses that are
allocated to the Company from SunChamp as a stand-alone entity under
generally accepted accounting principles are effectively reallocated to the
note for purposes of calculating FFO. A situation such as this is not
contemplated in the NAREIT definition of FFO due to the unique
circumstances of the transaction. Although not comparable to the precise
NAREIT definition, the Company believes the inclusion of this item in its
calculation of FFO to be appropriate as noted above.
2327
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT
This Form 10-Q contains various "forward-looking statements" within the meaning
of the Securities Act of 1933 and the Securities Exchange Act of 1934, and the
Company intends that such forward-looking statements will be subject to the safe
harbors created thereby. For this purpose, any statements contained in this
filing that relate to prospective events or developments are deemed to be
forward-looking statements. Words such as "believes," "forecasts,"
"anticipates," "intends," "plans," "expects," "may", "will" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements reflect the Company's current views with respect to
future events and financial performance, but involve known and unknown risks and
uncertainties, both general and specific to the matters discussed in this
filing. These risks and uncertainties may cause the actual results of the
Company to be materially different from any future results expressed or implied
by such forward looking statements. Such risks and uncertainties include the
national, regional and local economic climates, the ability to maintain rental
rates and occupancy levels, competitive market forces, changes in market rates
of interest, the ability of manufactured home buyers to obtain financing, the
level of repossessions by manufactured home lenders the outcome of the ongoing
SEC investigation and those risks and
uncertainties referenced under the headings entitled "Factors That May Affect Future Results" or "Risk Factors" contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 20042005
and the Company's filings with the Securities and Exchange Commission. The
forward-looking statements contained in this Form 10-Q speak only as of the date
hereof and the Company expressly disclaims any obligation to provide public
updates, revisions or amendments to any forward-looking statements made herein
to reflect changes in the Company's expectations of future events.
2428
SUN COMMUNITIES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's principal market risk exposure is interest rate risk. The Company
mitigates this risk by maintaining prudent amounts of leverage, minimizing
capital costs and interest expense while continuously evaluating all available
debt and equity resources and following established risk management policies and
procedures, which include the periodic use of derivatives. The Company's primary
strategy in entering into derivative contracts is to minimize the variability
that changes in interest rates could have on its future cash flows. The Company
generally employs derivative instruments that effectively convert a portion of
its variable rate debt to fixed rate debt. The Company does not enter into
derivative instruments for speculative purposes.
The Company's variable rate debt totals $146.7$188.2 million and $105.6$104.7 million as of
September 30,March 31, 2006 and 2005, and 2004, respectively, which bears interest at various Prime and
LIBOR/DMBS rates. If Prime or LIBOR/DMBS increased or decreased by 1.00 percent
during the ninethree months ended September 30,March 31, 2006 and 2005, and 2004, the Company believes its
interest expense would have increased or decreased by approximately $1.2$1.8 million
and $1.9$1.1 million based on the $121.1$182.1 million and $190.9$107.2 million average balance
outstanding under the Company's variable rate debt facilities for the ninethree
months ended September 30,March 31, 2006 and 2005, and 2004, respectively.
Additionally, the Company had $13.5 million and $14.7 million LIBOR based
variable rate mortgage and other notes receivables as of September 30,March 31, 2006 and
2005, and
2004, respectively. If LIBOR increased or decreased by 1.0 percent during the
ninethree months ended September 30,March 31, 2006 and 2005, and 2004, the Company believes interest income
would have increased or decreased by approximately $0.1 million and $0.2$0.1 million
based on the $14.3$13.5 million and $20.9$14.7 million average balance outstanding on all
variable rate notes receivable for the ninethree months ended September 30,March 31, 2006 and
2005, and 2004, respectively.
The Company has entered into three separate interest rate swap agreements and an
interest rate cap agreement. One of thesethe swap agreements fixes $25 million of
variable rate borrowings at 4.934.84 percent for the period April 2003 through July 2009, another of thesethe swap
agreements fixes $25 million of variable rate borrowings at 5.375.28 percent for the period April 2003 through
July 2012 and the third swap agreement, which is only effective for so long as
90-day LIBOR is 7 percent or less, fixes $25 million of variable rate borrowings
at 3.973.88 percent
for the period April 2003 through July 2007. The interest rate cap agreement has a cap
rate of 9.49 percent, a notional amount of $152.4 million and a termination date
of April 13,3, 2006. Each of the Company's derivative contracts is based upon
90-day LIBOR.
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SUN COMMUNITIES, INC.
ITEM 4. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of the Company's
management, including the Chief Executive Officer, Gary A. Shiffman,
and Chief Financial Officer, Jeffrey P. Jorissen, the Company
evaluated the effectiveness of the design and operation of the
Company's 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, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective to ensure that information the Company is
required to disclose in its filings with the Securities and Exchange
Commission under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Commission's
rules and forms, and to ensure that information required to be
disclosed by the Company in the reports that it files under the
Exchange Act is accumulated and communicated to the Company's
management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding
required disclosure.
(b) There have been no changes in the Company's internal control over
financial reporting during the quarterly period ended September 30,
2005,March 31, 2006,
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
2630
SUN COMMUNITIES, INC.
PART II
ITEM 2. (C)(A) - CHANGES INUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The BoardDuring the quarter ended March 31, 2006, the Company issued an aggregate of
Directors authorized a program to purchase up to 1,000,0007,133 shares of the Company'sits common stock upon exchange of an aggregate of 7,133 OP Units
of the Operating Partnership. These shares of common stock were issued in a
private placement in reliance on November 15, 2004. The resultsSection 4(2) of this stock
repurchase program for the three months ended September 30, 2005 areSecurities Act of 1933, as
follows:
TOTAL NUMBER OF SHARES
PURCHASED AS PART OF MAXIMUM NUMBER OF SHARES THAT
TOTAL NUMBER OF AVERAGE PRICE PUBLICLY ANNOUNCED PLANS MAY YET BE PURCHASED UNDER THE
PERIOD SHARES PURCHASED PAID PER SHARE OR PROGRAMS PLANS OR PROGRAMS
- ----------------- ---------------- -------------- ------------------------ ------------------------------
07/01/05-07/31/05 16,600 $34.64 16,600 783,400
08/01/05-08/31/05 183,400 183,400 600,000
09/01/05-09/30/05 -- $ -- -- 600,000
Total 200,000 $34.11 200,000 600,000
amended, including Regulation D promulgated thereunder. No underwriters were
used in connection with such issuance.
ITEM 6. - EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
See the attached Exhibit Index.
2731
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.
Dated: November 9, 2005May 10, 2006
SUN COMMUNITIES, INC.
By:BY: /s/ Jeffrey P. Jorissen
------------------------------------
Jeffrey P. Jorissen, Chief Financial
Officer and Secretary
(Duly authorized officer and
principal financial officer)
2832
SUN COMMUNITIES, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Agreement for Wholesale Financing, dated March 1, 2006, between
Sun Home Services, Inc. and Textron Financial Corporation
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.
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.
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
2933