SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004.
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 Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
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 March 31, 2004: 19,049,499
SUN COMMUNITIES, INC.
INDEX
PAGES
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PART I
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets as of March 31, 2004 and
December 31, 2003 3
Consolidated Statements of Income for the three months
ended March 31, 2004 and 2003 4
Consolidated Statements of Comprehensive Income for the three
months ended March 31, 2004 and 2003 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and 2003 6
Notes to Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 24
PART II
Item 2.(A) Changes in Securities and Use of Proceeds 25
Item 6.(A) Exhibits required by Item 601 of Regulation S-K 25
Item 6.(B) Reports on Form 8-K 25
Signatures 26
2
SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 and DECEMBER 31, 2003
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
2004 2003
----------- -----------
ASSETS
Investment in rental property, net $ 1,006,253 $ 1,010,484
Cash and cash equivalents 25,588 24,058
Inventory of manufactured homes 21,109 17,236
Investment in and advances to affiliate 50,460 50,667
Notes and other receivables 63,960 74,828
Other assets 46,361 44,301
----------- -----------
Total assets $ 1,213,731 $ 1,221,574
=========== ===========
LIABILITIES
Line of credit $ 97,000 $ 99,000
Debt 668,946 674,328
Other liabilities 31,015 24,833
----------- -----------
Total liabilities 796,961 798,161
----------- -----------
Minority interests 95,842 96,803
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000 shares - -
authorized, none issued
Common stock, $.01 par value, 100,000 shares
authorized, 19,251 and 19,192 issued
in 2004 and 2003, respectively 192 192
Paid-in capital 447,546 446,211
Officer's notes (10,136) (10,299)
Unearned compensation (7,016) (7,337)
Accumulated comprehensive earnings (2,777) (1,294)
Distributions in excess of accumulated earnings (100,497) (94,479)
Treasury stock, at cost, 202 shares (6,384) (6,384)
----------- -----------
Total stockholders' equity 320,928 326,610
----------- -----------
Total liabilities and stockholders' equity $ 1,213,731 $ 1,221,574
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
3
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
2004 2003
----------- -----------
REVENUES
Income from rental property $ 42,868 $ 41,013
Revenue from home sales 3,974 4,114
Ancillary revenues, net 597 441
Interest and other income 2,122 2,398
----------- -----------
Total revenues 49,561 47,966
----------- -----------
COSTS AND EXPENSES
Property operating and maintenance 10,228 10,102
Cost of home sales 3,125 2,643
Real estate taxes 3,166 2,937
Selling, general and administrative 4,236 3,786
Depreciation and amortization 11,283 10,612
Interest 9,265 8,823
----------- -----------
Total expenses 41,303 38,903
----------- -----------
Income before equity income (loss) from affiliate,
discontinued operations, and minority interests 8,258 9,063
Equity income (loss) from affiliate 200 (63)
----------- -----------
Income from continuing operations before 8,458 9,000
minority interests
Less income allocated to minority interests:
Preferred OP Units 2,179 2,128
Common OP Units 709 863
----------- -----------
Income from continuing operations 5,570 6,009
Income from discontinued operations - 334
----------- -----------
Net income $ 5,570 $ 6,343
=========== ===========
Weighted average common shares outstanding:
Basic 18,702 17,789
=========== ===========
Diluted 18,864 17,915
=========== ===========
Basic earnings per share:
Continuing operations $ 0.30 $ 0.34
Discontinued operations - 0.02
----------- -----------
Net income $ 0.30 $ 0.36
=========== ===========
Diluted earnings per share:
Continuing operations $ 0.30 $ 0.33
Discontinued operations - 0.02
----------- -----------
Net income $ 0.30 $ 0.35
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
4
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
2004 2003
-------- --------
Net income $ 5,570 $ 6,343
Unrealized loss on interest rate swaps (1,483) (439)
------- -------
Comprehensive income $ 4,087 $ 5,904
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
5
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
2004 2003
--------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,570 $ 6,343
Adjustments to reconcile net income to cash provided by operating activities:
Income allocated to minority interests 709 863
Income from discontinued operations allocated to minority interests - 47
Depreciation and amortization 11,283 10,612
Depreciation allocated to income from discontinued operations - 157
Amortization of deferred financing costs 483 318
Equity (income) loss from affiliate (200) 63
Increase in inventory and other assets (4,907) (1,745)
Increase (decrease) in accounts payable and other liabilities 6,182 (971)
--------- -------
Net cash provided by operating activities 19,120 15,687
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in rental properties (9,379) (6,708)
Investment in and advances to affiliate 489 (5,000)
Sale of installment loans on manufactured homes 12,325 -
Increase in notes receivable and officers' notes, net (1,294) (368)
--------- -------
Net cash provided by (used in) investing activities 2,141 (12,076)
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and OP units, net 1,312 -
Borrowings (repayments) on line of credit, net (2,000) 13,500
Repayments on notes payable and other debt, net (5,428) (4,370)
Payments for deferred financing costs (518) (83)
Distributions (13,097) (11,983)
--------- -------
Net cash used in financing activities (19,731) (2,936)
--------- -------
Net increase in cash and cash equivalents 1,530 675
Cash and cash equivalents, beginning of period 24,058 2,664
--------- -------
Cash and cash equivalents, end of period $ 25,588 $ 3,339
========= =======
SUPPLEMENTAL INFORMATION:
Cash paid for interest including capitalized amounts of $216 and $664 for
the three months ended March 31, 2004 and 2003, respectively $ 7,271 $ 7,371
Noncash investing and financing activities:
Issuance of partnership units to retire capitalized lease obligations $ 4,725 $ 4,170
Unrealized (losses) on interest rate swaps $ (1,483) $ (439)
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, 2003. 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 with current period presentation.
2. RENTAL PROPERTY:
The following summarizes rental property (amounts in thousands):
MARCH 31, DECEMBER 31,
2004 2003
----------- -----------
Land $ 104,548 $ 104,541
Land improvements and buildings 1,054,164 1,048,576
Furniture, fixtures, and equipment 32,881 33,080
Land held for future development 32,360 31,409
Property under development 1,538 2,799
----------- -----------
1,225,491 1,220,405
Less accumulated depreciation (219,238) (209,921)
----------- -----------
Rental property, net $ 1,006,253 $ 1,010,484
=========== ===========
7
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. NOTES AND OTHER RECEIVABLES:
The following table sets forth certain information regarding notes and
other receivables (amounts in thousands):
MARCH 31, DECEMBER 31,
2004 2003
---------- ------------
Mortgage and other notes
receivable, primarily with minimum
monthly interest payments at based
floating rat proximately LIBOR +
3.0%, maturing at various dates
through August 2008, substantially
collateralized by manufactured home
communities $ 42,466 $ 41,736
Installment loans on manufactured
homes with interest payable monthly
at a weighted average 12,232 interest rate 12,232 24,802
and maturity 24,802 8.2% and 20 years, respectively 9,262 8,290
---------- ------------
Other receivables $ 63,960 $ 74,828
========== ============
At March 31, 2004, the maturities of mortgages and other notes receivable
are approximately as follows: 2004-$24 million; 2006-$3.8 million;
2008-$14.7 million. In February 2004, $12.3 million of the installment
loans collateralized by manufactured homes were sold at book value to
Origen Financial, Inc. ("Origen, Inc.").
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.
4. INVESTMENT IN AND ADVANCES TO AFFILIATE:
Origen, Inc. 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 (representing
approximately 33% of the issued and outstanding shares of common stock as
of December 31, 2003) of Origen, Inc. for $50 million. The Company's
investment in Origen, Inc. is accounted for using the equity method of
accounting. Equity earnings recorded during the first quarter of 2004 are
an estimate of the Company's portion of the anticipated first quarter
earnings of Origen, Inc.
8
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. DEBT:
The following table sets forth certain information regarding debt (amounts
in thousands):
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Callable/redeemable notes, interest at 6.770%, due May 14, $ 65,000 $ 65,000
2015, callable/redeemable May 16, 2005
Senior notes, interest at 6.970%, due December 3, 2007 35,000 35,000
Senior notes, interest at 8.200%, due August 15, 2008 100,000 100,000
Senior notes, interest at 5.750%, due April 15, 2010 150,000 150,000
Collateralized term loan due to FNMA, due May 2007, with a 152,363 152,363
weighted average interest rate of 3.252% and 3.244% at March 31, 2004 and
December 31, 2003, respectively, convertible to a 5 to 10 year fixed rate
loan
Collateralized term loan, interest at 7.010%, due September 9, 41,375 41,547
2007
Redeemable preferred OP units, average interest at 7.046%, 62,873 58,148
redeemable at various dates through January 2, 2014
Capitalized lease obligation, interest at 5.510%, matured on - 9,606
January 1, 2004
Mortgage notes, other 62,335 62,664
--------- ------------
$ 668,946 $ 674,328
========= ============
The collateralized term loans totaling $193.7 million at March 31, 2004
are secured by 22 properties comprising approximately 10,600 sites. The
mortgage notes are collateralized by 13 communities comprising
approximately 3,660 sites. A capitalized lease obligation matured as of
January 1, 2004 and was paid by the issuance of 47,250 Preferred OP Units,
cash of approximately $1.2 and the assumption of approximately $4.2
million of debt, which was immediately retired.
The initial term of the variable rate FNMA debt is five years. The Company
has the option to extend such variable rate borrowings for an additional
five years and/or convert them to fixed rate borrowings with a term of
five or ten years, provided that in no event can the term of the
borrowings exceed fifteen years.
The Company has a $105 million unsecured line of credit of which $8
million was available to be drawn at March 31, 2004. Borrowings under the
line of credit bear interest at the rate of LIBOR plus 0.85% and mature
July 2, 2005 with a one-year extension at the Company's option. The
average interest rate of outstanding borrowings under the line of credit
at March 31, 2004 was 1.94 percent.
Additional information regarding the Company's debt is contained in Note
13, Subsequent Events.
9
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. INTEREST AND OTHER INCOME:
The components of other income are as follows for the three months ended
March 31, 2004 and 2003 (in thousands):
2004 2003
------- --------
Interest income $ 1,779 $ 2,193
Brokerage commissions 273 214
Other income (loss) 70 (9)
------- --------
$ 2,122 $ 2,398
======= ========
7. 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 financial information for the three months ended March 31,
2004:
PROPERTY MANUFACTURED
OPERATIONS HOME SALES COMBINED
----------- ------------ -----------
Revenues $ 42,868 $ 3,974 $ 46,842
Operating expenses 13,394 3,125 16,519
----------- ------------ -----------
Net operating income (3)/Gross profit 29,474 849 30,323
Adjustments to arrive at net income:
Other revenues 1,934 785 2,719
Selling, general and administrative (2,806) (1,430) (4,236)
Depreciation and amortization (10,943) (340) (11,283)
Interest expense (9,242) (23) (9,265)
Equity income from affiliate 200 - 200
Income allocated to minority interest (2,888) - (2,888)
----------- -------- -----------
Net income (loss) $ 5,729 $ (159) $ 5,570
=========== ======== ===========
Capital expenditures $ 3,138(1) $ 2,390 (2) $ 5,528
Identifiable assets:
Investment in rental property, net $ 973,743 $ 32,510 $ 1,006,253
Cash and cash equivalents 26,168 (580) 25,588
Inventory of manufactured homes - 21,109 21,109
Investments in and advances to affiliate 50,460 - 50,460
Notes and other receivables 62,545 1,415 63,960
Other assets 43,934 2,427 46,361
----------- -------- -----------
Total assets $ 1,156,850 $ 56,881 $ 1,213,731
=========== ======== ===========
(1) Capital expenditures of the Property Operations segment consist of lot
modifications, recurring projects, revenue producing projects, and
expenditures for acquisitions and expansions, net of asset disposal.
(2) Capital expenditures of the Manufactured Home Sales segment consist
primarily of acquisitions of rental homes.
(3) Investors in and analysts following the real estate industry utilize net
operating income ("NOI") as a supplemental performance measure. The
Company considers NOI, given its wide use by and relevance to investors
and analysts, an appropriate supplemental measure to net income because
NOI provides a measure of rental operations and does not factor in
depreciation/amortization and non-property specific expenses such as
general and administrative expenses.
10
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
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
collateralized term loan due to FNMA. One swap matures in July 2009, with
an effective fixed rate of 4.93 percent. A second swap matures in July
2012, with an effective fixed rate of 5.37 percent. The third swap matures
in July 2007, with an effective fixed rate of 3.97 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. 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 for the three
month period ended March 31, 2004 totals a positive $0.4 million.
In accordance with SFAS No. 133, the "Accounting for Derivative
Instruments and Hedging Activities," which requires all derivative
instruments to be carried at fair value on the balance sheet, the Company
has recorded a liability of $1.9 million and $0.9 million as of March 31,
2004 and December 31, 2003, respectively.
These valuation adjustments will only be realized if the Company
terminates the swaps prior to maturity. If held to maturity, the valuation
adjustments will approximate zero.
11
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. STOCK OPTIONS:
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 and earnings per share would have been presented
as follows for the three months ended March 31, 2004 and 2003:
2004 2003
-------- --------
Net income, as reported $ 5,570 $ 6,343
Stock-based compensation expense under fair value method (19) (121)
-------- --------
Pro forma net income $ 5,551 $ 6,222
======== ========
Earnings per share (Basic), as reported $ 0.30 $ 0.36
======== ========
Earnings per share (Basic), pro forma $ 0.30 $ 0.35
======== ========
Earnings per share (Diluted), as reported $ 0.30 $ 0.35
======== ========
Earnings per share (Diluted), pro forma $ 0.29 $ 0.35
======== ========
10. EARNINGS PER SHARE (IN THOUSANDS):
For the three months ended March 31, 2004 and 2003:
2004 2003
-------- --------
Earnings used for basic and diluted earnings per share:
Continuing operations $ 5,570 $ 6,009
======== ========
Discontinued operations $ - $ 334
======== ========
Weighted average shares used for basic earnings per share 18,702 17,789
Dilutive securities:
Stock options and other 162 126
-------- --------
Weighted average shares used for diluted
earnings per share 18,864 17,915
======== ========
Diluted earnings per share reflect the potential dilution that would occur if
dilutive securities were exercised or converted into common stock.
12
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. RECENT ACCOUNTING PRONOUNCEMENTS:
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued
a proposed Statement, Share-Based Payment an Amendment of FASB Statements
No. 123 and APB No. 95, 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 proposal, all forms of share-based payments to employees, including
employee stock options, would 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 proposed Statement would
eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees.
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), 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 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.
13. SUBSEQUENT EVENTS:
Subsequent to quarter end the Company announced its plan to initiate a
tender offer for all of its $350 million of unsecured notes. The tender
offer was completed on May 5, 2004 resulting in the Company's purchase of
approximately $345 million in unsecured notes. In connection with the
tender offer, the Company paid approximately $398 million in satisfaction
of the outstanding principal amounts, a premium to par and associated
fees.
On April 29, 2004, the Company closed on $237 million of additional
secured financing with Fannie Mae. This amount is in addition to the
existing $152 million of secured debt with Fannie Mae. Approximately $175
million of the additional funding was used to pay amounts associated with
the tender offer. Approximately $60 million remains undrawn pending future
uses. The term of the additional Fannie Mae funding is nine years bearing
interest at a weighted average rate of approximately 4.62%, with an option
by the Company to extend the loan for a tenth year at an interest rate of
LIBOR plus 240 basis points. The Fannie Mae loan is secured by
manufactured housing communities owned by the Operating Partnership or its
affiliates.
13
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. SUBSEQUENT EVENTS, CONTINUED:
In addition, the Company has secured a commitment for a collateralized
mortgage backed securities transaction with Bank of America CMBS Capital
Markets, totaling up to $500 million (the "CMBS Loan"). The CMBS Loan will
be secured by manufactured housing communities owned by the Operating
Partnership and its affiliates. The CMBS Loan consists of three traunches:
$100 million with a seven-year term, $200 million with a ten-year term and
$180 million with a twelve-year term. The CMBS Loan has an average blended
interest rate of 4.98%. The Company expects to close on the CMBS loans
within the next forty five (45) days. The Company has entered into
agreements to effectively fix the interest rates on substantially all of
the CMBS Loan.
The Company also closed on a $450 million bridge loan from Bank of
America, N.A. as interim financing until the CMBS Loan closes. Proceeds
from the bridge loan were used to repay the Company's existing credit
facility and to retire the unsecured notes as discussed above.
Approximately $115 million of the bridge loan facility remains undrawn.
The Company plans to use the remaining proceeds of these financing
transactions to acquire additional properties, to repurchase the Company's
outstanding stock and for general corporate purposes. The Company is
currently negotiating a new revolving line of credit.
14
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 result of operations under different conditions or
using different assumptions. Details regarding the Company's significant
accounting policies are described fully in the Company's 2003 Annual Report
filed with the Securities and Exchange Commission on Form 10-K. During the three
months ended March 31, 2004, there have been no material changes to the
Company's significant accounting policies that impacted the Company's financial
condition or results of operations.
RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 2004 and 2003
For the three months ended March 31, 2004, income from continuing operations
before minority interest decreased by $0.5 million from $9.0 million to $8.5
million, when compared to the three months ended March 31, 2003. The decrease
was due to increased revenues of $1.6 million and increased equity income from
affiliates of $0.3 million offset by increased expenses of $2.4 million as
described in more detail below.
Income from rental property increased by $1.9 million from $41.0 million to
$42.9 million, or 4.6 percent, due to rent increases, other community revenues,
and an increase in seasonal recreational vehicle revenue during the first
quarter of 2004.
Interest and other income decreased by $0.3 million from $2.4 million to $2.1
million, or 12.5 percent, due primarily to a decrease in interest earning notes
and receivables.
The decrease in revenue from home sales and increase in ancillary revenues
relate to operations of the manufactured home sales segment which is discussed
in detail below.
Property operating and maintenance expenses increased by $0.1 million from $10.1
million to $10.2 million, or 1.0 percent, due to increases in utility expenses.
15
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS, CONTINUED:
Real estate taxes increased by $0.3 million from $2.9 million to $3.2 million,
or 10.3 percent, due primarily to increases in assessments and tax rates.
Selling, general, and administrative expenses increased by $0.4 million from
$3.8 million to $4.2 million, due to an increase in compensation expense,
including benefits, primarily related to the systems conversion and compliance
with the Sarbanes-Oxley Act.
Depreciation and amortization increased by $0.7 million from $10.6 million to
$11.3 million, or 6.6 percent, due primarily to additional investment in rental
property.
Interest expense increased by $0.5 million from $8.8 million to $9.3 million, or
5.7 percent, due to increased debt levels somewhat offset by lower interest
rates ($0.9 million), a decrease in capitalized interest ($0.2 million), and
reduced by a positive valuation adjustment related to a swap to fix interest
rates in the current period ($0.6 million).
Equity income from affiliates of $0.2 million represents an estimate of the
Company's one-third interest in the operations of Origen, Inc. for the three
months ended March 31, 2004.
The remaining cost of home sales increase of $0.5 million is discussed in detail
below.
Sun Home Services
The following table summarizes certain financial and statistical data for Sun
Home Services for the three months ended March 31, 2004 and 2003:
Three Months Ended March 31, Increase/
2004 2003 (Decrease) Percent Change
---------- ------------- ---------- --------------
New home sales revenues $ 2,363 $ 3,480 $ (1,117) -32.1%
Cost of sales 1,809 2,306 (497) -21.6%
---------- ------------- ---------- --------------
Gross profit 554 1,174 (620) -52.8%
========== ============= ========== ==============
Pre-owned home sales revenues $ 1,611 $ 634 $ 977 154.1%
Cost of sales 1,316 337 979 290.5%
---------- ------------- ---------- --------------
Gross profit 295 297 (2) -0.7%
========== ============= ========== ==============
Ancillary revenue, net $ 597 $ 441 $ 156 35.4%
========== ============= ========== ==============
Home sales volumes:
New homes 45 72 (27) -37.5%
Pre-owned homes 82 41 41 100.0%
16
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS, CONTINUED:
Sun Home Services
The margin on new homes has declined due to consumer demand shifting to
pre-owned homes which are available in substantial quantities. This shift in
demand was more than offset by the supply of pre-owned homes, thereby reducing
margins.
The increase in ancillary revenue, net, is primarily due to increased activity
in the Company's rental home program.
17
w
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS, CONTINUED:
SAME PROPERTY INFORMATION
The following table reflects property-level financial information as of and for
the three months ended March 31, 2004 and 2003. The "Same Property" data
represents information regarding the operation of communities owned as of
January 1, 2003 and March 31, 2004. 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
------------------------------------ ----------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ---------------
(in thousands) (in thousands)
Income from rental property $ 38,351 $ 36,929 $ 42,868 $ 41,013
----------- ----------- ----------- ----------
Property operating expenses:
Property operating and maintenance 7,378 7,438 10,228 10,102
Real estate taxes 2,858 2,711 3,166 2,937
----------- ----------- ----------- ----------
Property operating expenses 10,236 10,149 13,394 13,039
----------- ----------- ----------- ----------
Property net operating income (3) $ 28,115 $ 26,780 $ 29,474 $ 27,974
=========== =========== =========== ==========
Number of properties 108 108 127 125
Developed sites 39,746 39,744 43,912 43,394
Occupied sites 34,975 35,748 37,439 38,173
Occupancy % 89.3% (4) 91.6% (4) 86.1% (4) 89.2% (4)
Weighted Average monthly rent per site $ 335 (4) $ 321 (4) $ 335 (4) $ 321 (4)
available for development 1,538 2,015 6,848 7,463
planned for development in next year 23 96 69 172
(3) Investors in and analysts following the real estate industry utilize net
operating income ("NOI") as a supplemental performance measure. The Company
considers NOI, given its wide use by and relevance to investors and
analysts, an appropriate supplemental measure to net income because NOI
provides a measure of rental operations and does not factor in
depreciation/amortization and non-property specific expenses such as general
and administrative expenses.
(4) Occupancy % and weighted average rent relates to manufactured housing sites,
excluding recreational vehicle sites.
On a same property basis, property net operating income increased by $1.3
million from $26.8 million to $28.1 million, or 5.0 percent. Income from
property increased by $1.5 million from $36.9 million to $38.4 million, or 4.0
percent, due primarily to increases in rents including water and property tax
pass through. Property operating expenses increased by $0.1 million from $10.1
million to $10.2 million, or 1.0 percent, due primarily to increases in real
estate taxes, repair and maintenance, and payroll.
18
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, property acquisitions, development and
expansion of properties, capital improvements of properties and debt repayment.
The Company expects to meet its short-term liquidity requirements through its
working capital provided by operating activities and its line of credit, as
described below. The Company considers its ability to generate cash from
operations (anticipated to be approximately $60 million annually) 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 plans to invest approximately $5 to $10 million in developments
consisting of expansions to existing communities and the development of new
communities during 2004. The Company expects to finance these investments by
using net cash flows provided by operating activities and by drawing upon its
line of credit.
Furthermore, the Company may acquire approximately $360 million of properties in
2004, depending upon a number of factors. The Company will finance these
investments using the proceeds from anticipated secured financing transactions
as discussed in further detail below and through the assumption of existing debt
on the properties.
Cash and cash equivalents increased by $1.5 million to $25.6 million at March
31, 2004 compared to $24.1 million at December 31, 2003. Net cash provided by
operating activities increased by $3.4 million to $19.1 million for the three
months ended March 31, 2004 compared to $15.7 million for the three months ended
March 31, 2003. The increase resulted primarily from increase in accounts
payable and other liabilities, offset by decrease in net income and increase in
other assets.
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" in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.
The Company had a $105.0 million line of credit at March 31, 2004 with an
average interest rate of 1.94 percent, $97.0 million outstanding and $8.0
million available to be drawn under the facility. The line of credit facility
contained various leverage, debt service coverage, net worth maintenance and
other customary
19
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES CONTINUED:
covenants all of which the Company was in compliance with at March 31, 2004.
Subsequent to quarter end, the Company repaid the line of credit and replaced it
with a bridge loan bearing interest at LIBOR plus 1.0 percent and maturing in
May of 2004. The Company intends to negotiate and announce terms of a new
revolving line of credit in the coming months.
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 equity
units in the Operating Partnership or sell selected assets. The Company has
obtained commitments for secured financing totaling up to $740.0 million.
Proceeds from these transactions will be used to retire $350.0 million of
unsecured notes, pay the related costs of this debt retirement, repay the
Company's existing line of credit, acquire additional properties, repurchase the
Company's outstanding equity securities and for general corporate purposes. 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" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003. If the Company is unable to close these secured financings or
obtain additional debt or equity financing on acceptable terms, the Company's
business, results of operations and financial condition will be impacted.
At March 31, 2004, the Company's debt to total market capitalization
approximated 44.2 percent (assuming conversion of all Common OP Units to shares
of common stock). The debt has a weighted average maturity of approximately 5.0
years and a weighted average interest rate of 5.4 percent.
Capital expenditures for the three months ended March 31, 2004 and 2003 included
recurring capital expenditures of $1.1 million and $1.0 million, respectively.
Net cash provided by investing activities increased by $14.2 million to $2.1
million for the three months ended March 31, 2004 compared to $12.1 million used
in investing activities for the three months ended March 31, 2003. This increase
was due to a $12.3 million sale of notes receivable to Origen, Inc. and a $5.5
million decrease in investment in and advances to an affiliate, offset by a $0.9
million increase in notes receivable and officers' notes, net, and a $2.7
million increase in rental property investment activities.
Net cash used in financing activities increased by $16.8 million to $19.7
million for the quarter ended March 31, 2004 from $2.9 million used in financing
activities for the three months ended March 31, 2003. This increase was
primarily due to a $15.5 million increase in repayments on the line of credit, a
$1.1 million increase in repayments on notes payable and other debt, net, a $1.1
million increase in distributions, and a $0.4 million increase in payments for
deferred financing costs, offset by a $1.3 million increase of proceeds from
issuance of common stock.
20
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUPPLEMENTAL MEASURE:
Investors in and analysts following the real estate industry utilize funds from
operations ("FFO") as a supplemental performance measure. While the Company
believes net income (as defined by generally accepted accounting principles) is
the most appropriate measure, it considers FFO, given its wide use by and
relevance to investors and analysts, an appropriate supplemental measure. 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 property, plus rental
property depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Industry analysts consider FFO to be an
appropriate supplemental measure of the operating performance of an equity REIT
primarily because the computation of FFO excludes historical cost depreciation
as an expense and thereby facilitates the comparison of REITs which have
different cost bases in their assets. Historical cost accounting for real estate
assets implicitly assumes that the value of real estate assets diminishes
predictably over time, whereas real estate values have instead historically
risen or fallen based upon market conditions. FFO does not represent cash flow
from operations as defined by generally accepted accounting principles 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. The following table reconciles net income to FFO for the
periods ended March 31, 2004 and 2003 (in thousands):
2004 2003
-------- --------
Net income $ 5,570 $ 6,343
Adjustments:
Depreciation and amortization 10,841 10,509
Valuation adjustment(6) (407) 214
Allocation of SunChamp losses(7) 300 850
Income allocated to common minority interests 709 910
-------- --------
Funds from operations (FFO) $ 17,013 $ 18,826
======== ========
Weighted average common shares/OP Units outstanding:
Basic 21,175 20,342
======== ========
Diluted 21,337 20,468
======== ========
FFO per weighted average Common Share/OP Unit - Basic 0.80 0.93
======== ========
FFO per weighted average Common Share/OP Unit - Diluted 0.80 0.92
======== ========
(6) 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 any imperfections related to hedging correlation in these
swaps is reflected currently in cash as interest, the valuation
adjustments are excluded from funds from operations. The valuation
adjustment is included in interest expense.
(7) 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 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 under
generally accepted accounting principles are effectively reallocated to
the note for purposes of calculating funds from operations. At March 31,
2004, there is no remaining balance on the SunChamp note.
21
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," "will" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements reflect the Company's current views with respect to future events and
financial performance, but involve known and unknown risks and uncertainties,
both general and specific to the matters discussed in this filing. These risks
and uncertainties may cause the actual results of the Company to be materially
different from any future results expressed or implied by such forward looking
statements. Such risks and uncertainties include the national, regional and
local economic climates, the ability to maintain rental rates and occupancy
levels, competitive market forces, changes in market rates of interest, the
ability of manufactured home buyers to obtain financing, the level of
repossessions by manufactured home lenders and those 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, 2003 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.
22
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 $197.1 million and $303.3 million as of
March 31, 2004 and 2003, respectively, which bears interest at various
LIBOR/DMBS rates. If LIBOR/DMBS increased or decreased by 1.00 percent during
the three months ended March 31, 2004 and 2003, the Company believes its
interest expense would have increased or decreased by approximately $2.0 million
and $ 3.1 million based on the $204.9 million and $307.5 million average balance
outstanding under the Company's variable rate debt facilities for the three
months ended March 31, 2004 and 2003, respectively.
Additionally, the Company had $32.4 million and $28.1 million LIBOR based
variable rate mortgage and other notes receivables as of March, 2004 and 2003,
respectively. If LIBOR increased or decreased by 1.0 percent during the three
months ended March 31, 2004 and 2003, the Company believes interest income would
have increased or decreased by approximately $0.3 million and $0.3 million based
on the $32.3 million and $27.8 million average balance outstanding on all
variable rate notes receivable for the three months ended March 31, 2004 and
2003, respectively.
The Company has entered into three separate interest rate swap agreements and an
interest rate cap agreement. One of these swap agreements fixes $25 million of
variable rate borrowings at 4.93 percent for the period April 2003 through July
2009, another of these swap agreements fixes $25 million of variable rate
borrowings at 5.37 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 3.97 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, 2006. Each of the Company's derivative contracts
is based upon 90-day LIBOR.
23
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 significant changes in the Company's internal
control over financial reporting during the quarterly period ended
March 31, 2004, that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over
financial reporting.
24
SUN COMMUNITIES, INC.
PART II
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 2004, the Company issued an aggregate of
6,300 shares of its common stock upon exchange of an aggregate of 6,300 OP Units
of the Operating Partnership. All of these shares of common stock were issued in
private placements in reliance on Section 4(2) of the Securities Act of 1933, as
amended, including Regulation D promulgated thereunder. No underwriters were
used in connection with any of such issuances.
ITEM 6.(A) - EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
See the attached Exhibit Index.
ITEM 6.(B) - REPORTS ON FORM 8-K
Form 8-K, dated February 19, 2004, furnished for the purpose of reporting, under
Item-12-Results of Operations and Financial Condition, Sun's 2003 fourth quarter
and fiscal year ended December 31, 2003 earnings and results of operations.
Form 8-K, dated April 15, 2004, filed to report that the Company launched a
tender offer to purchase any or all of the $350 million principal amount of its
outstanding unsecured notes.
25
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: May 10, 2004
SUN COMMUNITIES, INC.
BY: /s/ Jeffrey P. Jorissen
-------------------------------------------
Jeffrey P. Jorissen, Chief Financial
Officer and Secretary
(Duly authorized officer and principal
financial officer)
26
SUN COMMUNITIES, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------
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.
32.0 Certification pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.