================================================================================
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 JUNE 30, 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 registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the Registrant 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 June 30, 2006: 18,072,765
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SUN COMMUNITIES, INC.
INDEX
PAGES
-----
PART I
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005 3
Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005 4
Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2006 and 2005 5
Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 6
Notes to Consolidated Financial Statements 7-21
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22-32
Item 3. Quantitative and Qualitative Disclosures about Market Risk 33
Item 4. Controls and Procedures 34
PART II
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits required by Item 601 of Regulation S-K 35
Signatures 36
2
SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2006 AND DECEMBER 31, 2005
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2006 2005
------------- ------------
ASSETS
Investment in rental property, net $ 1,173,752 $ 1,161,820
Cash and cash equivalents 5,156 5,880
Inventory of manufactured homes 15,076 17,105
Investment in affiliate 46,868 46,352
Notes and other receivables 44,494 41,134
Other assets 44,448 48,245
------------- ------------
Total assets $ 1,329,794 $ 1,320,536
============= ============
LIABILITIES
Debt $ 1,038,212 $ 1,050,168
Lines of credit 119,234 73,300
Other liabilities 32,457 32,267
------------- ------------
Total liabilities 1,189,903 1,155,735
------------- ------------
Minority interest 17,074 21,544
------------- ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000 shares authorized, none issued $ - $ -
Common stock, $.01 par value, 90,000 shares authorized, 19,875 and
19,814 issued in 2006 and 2005, respectively 199 198
Additional paid-in capital 450,483 460,568
Officer's notes (9,246) (9,427)
Unearned compensation - (13,187)
Accumulated comprehensive earnings 1,954 532
Distributions in excess of accumulated earnings (256,973) (231,827)
Treasury stock, at cost, 1,802 shares in 2006 and 2005 (63,600) (63,600)
------------- ------------
Total stockholders' equity 122,817 143,257
------------- ------------
Total liabilities and stockholders' equity $ 1,329,794 $ 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 PERIODS ENDED JUNE 30, 2006 AND 2005
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -------------------------
2006 2005 2006 2005
--------- -------- --------- --------
REVENUES
Income from rental property $ 45,587 $ 43,945 $ 93,660 $ 89,394
Revenue from home sales 7,291 4,380 10,547 8,128
Rental home revenue 3,813 2,115 7,142 3,632
Ancillary revenues, net 31 104 300 570
Interest 844 1,114 1,672 2,712
Other income (loss) 991 (48) 1,460 (216)
--------- -------- --------- --------
Total revenues 58,557 51,610 114,781 104,220
COSTS AND EXPENSES
Property operating and maintenance 11,714 11,479 23,099 22,444
Real estate taxes 3,903 3,800 7,797 7,572
Cost of home sales 5,806 3,583 8,203 5,988
Rental home operating and maintenance 2,565 1,480 5,178 2,965
General and administrative - rental property 4,269 3,600 9,399 7,105
General and administrative - home sales and rentals 1,600 1,509 3,166 3,049
Depreciation and amortization 14,785 13,461 29,763 26,486
Interest 15,250 13,538 29,975 27,173
Interest on mandatorily redeemable debt 986 1,080 2,075 2,147
Florida storm damage recovery - (55) - (555)
--------- -------- --------- --------
Total expenses 60,878 53,475 118,655 104,374
Equity income from affiliate 386 222 667 105
--------- -------- --------- --------
Loss from operations (1,935) (1,643) (3,207) (49)
Less income (loss) allocated to minority interest:
Preferred OP Units - - - 961
Common OP Units (226) (200) (341) (123)
--------- -------- --------- --------
Loss from continuing operations (1,709) (1,443) (2,866) (887)
Income from discontinued operations - 693 - 824
--------- -------- --------- --------
Loss before cumulative effect of change in
accounting principle (1,709) (750) (2,866) (63)
Cumulative effect of change in accounting principle - - 289 -
--------- -------- --------- --------
Net loss $ (1,709) $ (750) $ (2,577) $ (63)
========= ======== ========= ========
Weighted average common shares outstanding:
Basic 17,615 17,731 17,574 17,789
========= ======== ========= ========
Diluted 17,615 17,731 17,574 17,789
========= ======== ========= ========
Basic and diluted earnings (loss) per share:
Continuing operations $ (0.10) $ (0.08) $ (0.17) $ (0.05)
Discontinued operations - 0.04 - 0.05
--------- -------- --------- --------
Loss before cumulative effect of change in
accounting principle (0.10) (0.04) (0.17) (0.00)
Cumulative effect of change in accounting principle - - 0.02 -
--------- -------- --------- --------
Net loss $ (0.10) $ (0.04) $ (0.15) $ (0.00)
========= ======== ========= ========
The accompanying notes are an integral part of the consolidated
financial statements
4
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE PERIODS ENDED JUNE 30, 2006 AND 2005
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
2006 2005 2006 2005
-------- -------- -------- ------
Net loss $ (1,709) $ (750) $ (2,577) $ (63)
Unrealized income (loss) on interest rate swaps 578 (1,250) 1,422 (76)
-------- -------- -------- ------
Comprehensive loss $ (1,131) $ (2,000) $ (1,155) $ (139)
======== ======== ======== ======
The accompanying notes are an integral part of the consolidated
financial statements
5
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(AMOUNTS IN THOUSANDS)
2006 2005
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,577) $ (63)
Adjustments to reconcile net loss to cash provided by operating activities:
Loss allocated to minority interests (341) (9)
Gain from property dispositions - (828)
Loss on valuation of derivative instruments 22 206
Stock compensation expense, net of cumulative effect of change in accounting principle 1,995 1,071
Depreciation and amortization 31,325 29,088
Amortization of deferred financing costs 872 1,040
Distributions from affiliate 150 500
Equity income from affiliate (667) (105)
Increase in notes receivable from sale of inventory (2,836) -
Decrease in inventory, other assets and other receivables, net 2,070 1,763
Increase (decrease) in accounts payable and other liabilities 20 (1,432)
--------- ---------
Net cash provided by operating activities 30,033 31,231
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in rental properties (35,471) (54,814)
Purchase of short-term investments - (84,875)
Proceeds from sale of short-term investments - 129,850
Proceeds related to property dispositions - 3,867
Decrease in notes receivable and officer's notes, net 716 1,656
--------- ---------
Net cash used in investing activities (34,755) (4,316)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of common stock and OP units (1,332) (2,198)
Proceeds from option exercise 1,630 90
Borrowings on lines of credit, net 45,934 23,900
Payments to retire preferred operating partnership units (8,175) (50,000)
Payments to redeem notes payable and other debt (8,327) (15,701)
Payments for deferred financing costs (255) (35)
Treasury stock purchases - (7,076)
Distributions (25,477) (25,089)
--------- ---------
Net cash provided by (used in) financing activities 3,998 (76,109)
--------- ---------
Net decrease in cash and cash equivalents (724) (49,194)
Cash and cash equivalents, beginning of period 5,880 52,586
--------- ---------
Cash and cash equivalents, end of period $ 5,156 $ 3,392
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest including capitalized amounts of $32 and $35
for the six months ended June 30, 2006 and 2005, respectively $ 29,664 $ 26,215
Cash paid for interest on mandatorily redeemable debt $ 2,062 $ 2,136
Noncash investing and financing activities:
Debt assumed for rental properties $ 4,500 $ -
Unrealized gain (loss) on interest rate swaps $ 1,422 $ (76)
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, 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 to 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.
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. The effect of this estimate of future
forfeitures is 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. For the six months ended June 30, 2006, the
cumulative effect of adopting SFAS 123(R) was an increase in loss from
operations of $0.05 million, an increase in loss from continuing
operations of $0.04 million, a decrease in net loss of $0.2 million and
an increase of $0.01 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 commencing January 1, 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 and six month periods ended June 30, 2005 was as follows
(amounts in thousands except for per share data):
THREE MONTHS SIX MONTHS
------------ ----------
Net loss, as reported $ (750) $ (63)
Stock based compensation expense included in net income as reported $ 571 $ 1,071
Stock-based compensation expense under fair value method (585) (1,099)
------------ ----------
Pro forma net loss $ (764) $ (91)
============ ==========
Earnings (loss) per share (Basic and Diluted), as reported $ (0.04) $ (0.00)
============ ==========
Earnings (loss) per share (Basic and Diluted), pro forma $ (0.04) $ (0.01)
============ ==========
Total compensation cost recorded for share-based compensation was $1.0
million and $0.6 million for the three months ended June 30, 2006 and
2005, respectively. Total compensation cost recorded for share-based
compensation for the six months ended June 30, 2006 and 2005 was $2.3
million and $1.1 million, respectively. Included in the compensation cost
for the three and six months ended June 30, 2006 was $0.02 and $0.04
million, respectively, 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 restricted stock and options to its employees under its
Second Amended and Restated Stock Option Plan (the "Plan"). The Plan
provides for the issuance of options, stock appreciation rights,
restricted stock and other stock based awards. 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
six months ended June 30, 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 June 30, 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 June 30, 2006 is approximately
$7.6 million. That expense is expected to be recognized $0.7 million in
the remainder of 2006, $1.7 million in 2007, $1.3 million in 2008, $2.3
million in 2009 and $1.6 million thereafter. For the six months ended June
30, 2006, the Company recognized $1.4 million of compensation expense
related to its outstanding restricted stock. Recipients receive dividend
payments on the shares of restricted stock. The total fair value of shares
vested during the six months ended June 30, 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 with aggregate
fair value of $3.3 million which may 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% in order for
the recipients 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 six months ended June
30, 2006, compensation expense of $0.4 million was recognized for the
performance-based restricted shares based on an estimated vesting of
46.67% of the shares on March 1, 2010.
OPTIONS
At June 30, 2006, the Company had 535,091 options outstanding and
exercisable under the Plan. For the six months ended June 30, 2006, the
Company recognized $0.03 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 six months of 2006:
WEIGHTED
AVERAGE AGGREGATE
WEIGHTED AVERAGE CONTRACTUAL INTRINSIC
NUMBER OF EXERCISE PRICE 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
Forfeited (4,667) $ 33.73
--------
Options outstanding at June 30, 2006 535,091 $ 29.90 2.1 $ 1,347
========
Options vested and exercisable at June 30, 2006 535,091 $ 29.90 2.1 $ 1,347
========
9
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SHARE BASED COMPENSATION, CONTINUED;
The aggregate intrinsic value of options exercised during the six months
ended June 30, 2006 was $0.2 million. For options exercised during the
first six months of 2005, the aggregate intrinsic value is immaterial.
PHANTOM AWARDS
At June 30, 2006, the Company had 22,500 unvested phantom liability awards
with an aggregate fair value of $0.7 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 $0.6 million. For the six months ended June 30, 2006, the
Company recognized $0.1 million of compensation expense related to these
phantom awards. Awards of 13,000 shares were granted and no shares were
vested, exercised or forfeited during the six months of 2006. The awards
are remeasured at each reporting date.
At June 30, 2006, the Company had 18,750 unvested phantom
performance-based liability awards with an aggregate fair value of $0.6
million. The phantom performance-based awards pay cash bonuses per vested
share equal to the average of the highest and lowest selling price 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% in order for the recipients to receive any amount of the
award and at least 9% to receive the entire share award. The Company
recognizes expense related to phantom performance-based liability awards
based on an estimate of the number of phantom performance-based shares
that will ultimately vest. For the six months ended June 30, 2006,
compensation expense of $0.08 million was recognized for the phantom
performance-based liability awards based on an estimated vesting of 46.67%
of the award on March 1, 2010.
10
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SHARE BASED COMPENSATION, CONTINUED;
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 June 30, 2006, the Company had 84,000 options
awarded under the Director Plan and a successor plan. Of these, 15,000 are
unvested of which 7,500, 5,000, and 2,500 shares will vest in the second
quarter of 2007, 2008 and 2009, respectively. The remaining unrecognized
expense related to these options is $0.04 million which will be recognized
over the weighted average remaining vesting period of 1.6 years. For the
six months ended June 30, 2006, the Company recognized $0.02 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:
SIX MONTHS ENDED JUNE 30, 2006 SIX MONTHS
------------------------------ ENDED
MARCH 2006 MAY 2006 JUNE 30,
AWARD AWARD 2005
---------- --------- ----------
Estimated fair value per share of options granted during year: $ 3.59 $ 2.31 N/A
Assumptions:
Annualized dividend yield 7.19% 8.20% N/A
Common stock price volatility 17.04% 17.05% N/A
Risk-free rate of return 4.68% 5.05% N/A
Expected option term (in years) 7.5 7.5 N/A
The following table summarizes the Director option activity for the six
months ended June 30, 2006:
WEIGHTED
AVERAGE AGGREGATE
WEIGHTED AVERAGE CONTRACTUAL INTRINSIC
NUMBER OF EXERCISE PRICE TERM VALUE
SHARES (PER COMMON SHARE) (IN YEARS) (IN 000'S)
--------- ------------------ ----------- ----------
Options outstanding at January 1, 2006 71,500 $ 33.63
Granted 15,000 $ 33.84
Exercised (2,500) $ 26.50
Canceled --
-------
Options outstanding at June 30, 2006 84,000 $ 33.88 4.4 $ 246
=======
Options vested and expected to vest 84,000 $ 33.88 4.4 $ 246
=======
Options exercisable at June 30, 2006 69,000 $ 33.87 3.3 $ 202
=======
11
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. RENTAL PROPERTY:
The following summarizes rental property (amounts in thousands):
(UNAUDITED)
JUNE 30, DECEMBER 31,
2006 2005
----------- ------------
Land $ 117,561 $ 116,738
Land improvements and buildings 1,170,006 1,156,612
Rental homes and improvements 142,413 117,314
Furniture, fixtures, and equipment 36,191 36,120
Land held for future development 31,082 31,082
Property under development -- 256
----------- -----------
1,497,253 1,458,122
Less accumulated depreciation (323,501) (296,302)
----------- -----------
Rental property, net $ 1,173,752 $ 1,161,820
=========== ===========
During the first quarter of 2006, the Company acquired one manufactured
home community located in Oakland County, Michigan for a total purchase
price of $7.8 million, with occupancy of approximately 95%. The
transaction included the assumption of $4.5 million of debt.
The Company allocates the purchase price of properties to net tangible and
identified intangible assets acquired based on their fair values in
accordance with the provisions of SFAS No. 141. In making estimates of
fair values for purposes of allocating purchase price, the Company
utilizes a number of sources, including analysis of recently acquired and
existing comparable properties in our portfolio, independent appraisals if
obtained in connection with the acquisition or financing of the respective
property, and other market data. The Company also considers information
obtained about each property as a result of its pre-acquisition due
diligence, marketing and leasing activities in estimating the fair value
of the tangible and intangible assets (including in-place leases)
acquired.
Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets. Useful lives are 30 years for land
improvements and buildings, 10 years for rental homes, 7 to 15 years for
furniture, fixtures and equipment, and 7 years for intangible assets.
12
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. NOTES AND OTHER RECEIVABLES:
The following table sets forth certain information regarding notes and
other receivables (amounts in thousands):
JUNE 30, DECEMBER 31,
2006 2005
---------- ------------
Mortgage note receivable, with interest payable at a weighted
average interest rate of 7.55% and 6.63% at
June 30, 2006 and December 31, 2005, respectively,
maturing in August 2008, collateralized by a manufactured
home community. $ 13,532 $ 13,532
Installment loans on manufactured homes with interest payable
monthly at a weighted average interest rate and maturity of
6.57% and 10 years, respectively, net of allowance for
losses of $0.1 and $0.2 million, at June 30, 2006 and
December 31, 2005, respectively. 21,989 19,688
Other receivables, net of allowance for losses of $0.3 million
at June 30, 2006 and December 31, 2005. 8,973 7,914
---------- ----------
$ 44,494 $ 41,134
========== ==========
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. Reduction in the
principal balance of these notes was $0.2 million for the six months ended
June 30, 2006 and 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
June 30, 2006 and its investment is accounted for using the equity method
of accounting. Because both the Company and Origen are public companies,
information about Origen's actual quarterly earnings may not be received
prior to the Company's quarterly filing. As a result, equity earnings
recorded through June 30, 2006 reflect the Company's estimate of its
portion of the anticipated earnings of Origen for the periods ending June
30, 2006 and the Company's adjustments for estimates made in prior
quarters based on the actual reported results of Origen for such prior
quarters.
13
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. DEBT:
The following table sets forth certain information regarding debt (amounts
in thousands):
JUNE 30, DECEMBER 31,
2006 2005
---------- ------------
Collateralized term loan, 7.01%, due September 9, 2007 $ 39,681 $ 40,079
Collateralized term loans - CMBS, 4.93-5.32%, due July 1, 2011-2016 494,511 494,511
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 4.51 -
5.2% at June 30, 2006 and December 31, 2005. 386,723 387,624
Preferred OP units, redeemable at various dates through
January 2, 2014, average interest at 6.9% at June 30, 2006 and December 31,
2005. 53,947 62,123
Mortgage notes, other 63,350 65,831
---------- ------------
$1,038,212 $ 1,050,168
========== ============
The collateralized term loans totaling $920.9 million at June 30, 2006 are
secured by 94 properties comprising approximately 34,163 sites
representing approximately $659.9 million of net book value. The mortgage
notes are collateralized by 14 communities comprising approximately 4,543
sites representing approximately $144.8 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%. The
outstanding balance on the line of credit at June 30, 2006 was $106.0
million. In addition, $3.4 million of availability was used to back
standby letters of credit, and a maximum of $5.6 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 June 30, 2006 the outstanding
balance on the floorplan was $13.2 million.
During the quarter, the Company redeemed $8.2 million of Preferred OP
units.
At June 30, 2006, the total of maturities and amortization of debt during
the next five years are approximately as follows: 2007 - $48.6 million;
2008 - $50.9 million; 2009 - $30.5 million, 2010 - $22.1 million; 2011 -
$18.6 million and $867.5 million thereafter.
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 June 30, 2006 and
2005, all covenants were met.
14
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
June 30, 2006 and 2005 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2006 2005 2006 2005
------- ------- ------- -------
Brokerage commissions $ 336 $ 289 $ 669 $ 523
Disposal of assets 60 (315) 92 (362)
Unsuccessful acquisition expenditures (1) (9) (18) (355)
Lawsuit settlement 416 -- 416 --
Other 180 (13) 301 (22)
------- ------- ------- -------
$ 991 $ (48) $ 1,460 $ (216)
======= ======= ======= =======
15
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 JUNE 30, 2006 SIX MONTHS ENDED JUNE 30, 2006
-------------------------------------- -----------------------------------
MANUFACTURED MANUFACTURED
PROPERTY HOME SALES PROPERTY HOME SALES
OPERATIONS AND RENTALS CONSOLIDATED OPERATIONS AND RENTALS CONSOLIDATED
----------- ----------- ------------ ---------- ----------- ------------
Revenues $ 45,587(2) $ 11,104 $ 56,691 $ 93,660 $ 17,689 $ 111,349
Operating expenses/Cost of sales 15,617 8,371 23,988 30,896 13,381 44,277
--------- --------- --------- --------- --------- ---------
Net operating income (1)/Gross profit 29,970 2,733 32,703 62,764 4,308 67,072
Adjustments to arrive at net income (loss):
Other revenues 1,584 282 1,866 2,877 555 3,432
General and administrative (4,269) (1,600) (5,869) (9,399) (3,166) (12,565)
Depreciation and amortization (11,297) (3,488) (14,785) (22,800) (6,963) (29,763)
Interest expense (16,037) (199) (16,236) (31,841) (209) (32,050)
Equity income from affiliate 386 -- 386 667 -- 667
Loss allocated to minority interest 226 -- 226 341 -- 341
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations $ 563 $ (2,272) $ (1,709) $ 2,609 $ (5,475) $ (2,866)
Cumulative effect of change in accounting
principal -- -- -- 289 -- 289
Net income (loss ) --------- --------- --------- --------- --------- ---------
$ 563 $ (2,272) $ (1,709) $ 2,898 $ (5,475) $ (2,577)
========= ========= ========= ========= ========= =========
THREE MONTHS ENDED JUNE 30, 2006 SIX MONTHS ENDED JUNE 30, 2006
--------------------------------------- -----------------------------------
MANUFACTURED MANUFACTURED
PROPERTY HOME SALES PROPERTY HOME SALES
OPERATIONS AND RENTALS CONSOLIDATED OPERATIONS AND RENTALS CONSOLIDATED
----------- ----------- ------------ ---------- ----------- ------------
Revenues $ 43,945(2) $ 6,495 $ 50,440 $ 89,394(2) $ 11,760 $ 101,154
Operating expenses/Cost of sales 15,279 5,063 20,342 30,016 8,953 38,969
-------- --------- ---------- --------- --------- ---------
Net operating income (1)/Gross profit 28,666 1,432 30,098 59,378 2,807 62,185
Adjustments to arrive at net income (loss):
Other revenues 809 361 1,170 1,969 1,097 3,066
General and administrative (3,600) (1,509) (5,109) (7,105) (3,049) (10,154)
Depreciation and amortization (11,161) (2,300) (13,461) (22,427) (4,059) (26,486)
Interest expense (14,533) (85) (14,618) (29,155) (165) (29,320)
Florida storm damage recovery 55 -- 55 555 -- 555
Equity income from affiliate 222 -- 222 105 -- 105
(Income) loss allocated to minority interest 200 -- 200 (838) -- (838)
-------- --------- ---------- --------- --------- ---------
Income (loss) from continuing operations $ 658 $ (2,101) $ (1,443) $ 2,482 $ (3,369) $ (887)
Income from discontinued operations 687 6 693 818 6 824
-------- --------- ---------- --------- --------- ---------
Net income (loss ) $ 1,345 $ (2,095) $ (750) $ 3,300 $ (3,363) $ (63)
======== ========= ========== ========= ========= =========
----------
(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 $4.8 million annually. This seasonal revenue
is recognized approximately 60% in the first quarter, 5% in both the
second and third quarters and 30% in the fourth quarter of each fiscal
year.
16
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. SEGMENT REPORTING (AMOUNTS IN THOUSANDS), CONTINUED:
SELECTED BALANCE SHEET DATA JUNE 30, 2006 DECEMBER 31, 2005
------------------------------------- -------------------------------------
MANUFACTURED PROPERTY
PROPERTY HOME SALES OPERATIONS MANUFACTURED
OPERATIONS AND RENTALS CONSOLIDATED AND RENTALS HOME SALES CONSOLIDATED
---------- ------------ ------------ ----------- ------------ ------------
Identifiable assets:
Investment in rental property, net $ 1,045,870 $ 127,882 $ 1,173,752 $ 1,052,603 $ 109,217 $ 1,161,820
Cash and cash equivalents 5,140 16 5,156 6,125 (245) 5,880
Inventory of manufactured homes -- 15,076 15,076 -- 17,105 17,105
Investments in and advances to affiliate 46,868 -- 46,868 46,352 -- 46,352
Notes and other receivables 37,122 7,372 44,494 34,460 6,674 41,134
Other assets 43,308 1,140 44,448 47,129 1,116 48,245
----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 1,178,308 $ 151,486 $ 1,329,794 $ 1,186,669 $ 133,867 $ 1,320,536
=========== =========== =========== =========== =========== ===========
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 4.84 percent. A second swap
matures in July 2012, with an effective fixed rate of 5.28 percent. The
third swap matures in July 2007, with an effective fixed rate of 3.88
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 matured on April 3, 2006 and was
replaced with a new interest rate cap agreement that has a cap rate of
11.79 percent, a notional amount of $152.4 million and a termination date
of May 29, 2007. 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 $0.02 million and
$0.2 million for the six months ended June 30, 2006 and 2005,
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
an asset of $1.4 million and less than $0.01 million as of June 30, 2006
and December 31, 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.
17
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 SFAS 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):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2006 2005 2006 2005
-------- -------- -------- --------
Income from rental property $ -- $ 75 $ -- $ 407
Revenue from home sales -- 94 -- 96
Ancillary revenues, net and other income (loss) -- -- -- 3
Property operating and maintenance expenses -- (69) -- (170)
Cost of home sales -- (86) -- (89)
Real estate taxes -- (8) -- (24)
Selling, general and administrative expenses -- (3) -- (6)
Depreciation and amortization -- (19) -- (62)
Interest expense -- (23) -- (45)
-------- -------- -------- --------
Income (loss) from operations -- (39) -- 110
Gain on sale of properties -- 828 -- 828
Income allocated to common OP units -- (96) -- (114)
-------- -------- -------- --------
Income from discontinued operations $ -- $ 693 $ -- $ 824
======== ======== ======== ========
18
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. EARNINGS (LOSS) PER SHARE (IN THOUSANDS):
For the periods ended June 30, 2006 and 2005:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
Earnings (loss) used for basic and diluted earnings (loss) per share:
Continuing operations $ (1,709) $ (1,443) $ (2,866) $ (887)
======== ======== ======== ========
Discontinued operations $ -- $ 693 $ -- $ 824
======== ======== ======== ========
Weighted average shares used for basic earnings (loss) per share 17,615 17,731 17,574 17,789
Dilutive securities:
Stock options and other -- -- -- --
-------- -------- -------- --------
Diluted weighted average shares 17,615 17,731 17,574 17,789
======== ======== ======== ========
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 three and
six month periods ending June 30, 2006 and 2005 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.
The Company also has the following potentially convertible securities
which, if converted, may impact dilution:
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 January 2, 2014
Series B-2 Preferred OP Units 100,000 Convertible into Common OP Units after January 31, 2005
at $45 per share/unit.
19
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. COMMITMENTS AND CONTINGENCIES:
On June 2, 2006, the Company entered into a rate lock agreement with ARCS
Commercial Mortgage Co, LP. The Company paid a rate lock deposit of
$962,000 to lock the interest rate of 6.159 percent for a period of 75
days for $48.1 million in principal. The Company entered into the rate
lock to secure mortgage debt financing for three communities. The mortgage
debt was funded in two draws on July 12 and August 1, 2006.
On April 9, 2003, T.J. Holdings, LLC ("TJ Holdings"), a member of
Sun/Forest, LLC ("Sun/Forest") (which, in turn, owns an equity interest in
SunChamp LLC), ("SunChamp"), filed a complaint against the Company,
SunChamp, certain other affiliates of the Company and two directors of Sun
Communities, Inc. in the Superior Court of Guilford County, North
Carolina. The complaint alleges that the defendants wrongfully deprived
the plaintiff of economic opportunities that they took for themselves in
contravention of duties allegedly owed to the plaintiff and purports to
claim damages of $13.0 million plus an unspecified amount for punitive
damages. The Company believes the complaint and the claims threatened
therein have no merit and will defend it vigorously. These proceedings
were stayed by the Superior Court of Guilford County, North Carolina in
2004 pending final determination by the Circuit Court of Oakland County,
Michigan as to whether the dispute should be submitted to arbitration and
the conclusion of all appeals therefrom. On 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.
On February 27, 2006, the United States Securities and Exchange Commission
(the "SEC") filed a civil action against the Company's Chief Executive
Officer, Chief Financial Officer and a former controller in the United
States District Court for the Eastern District of Michigan alleging
various claims generally consistent with the SEC's findings set forth in
the Administrative Order, entered February 27, 2006, with respect to the
Company's accounting for its SunChamp investment during 2000, 2001 and
2002. The Company continues to indemnify such employees for all costs and
expenses incurred in connection with such civil action.
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.
20
13. SUBSEQUENT EVENTS:
Subsequent to quarter end, the Company closed on financing of $48.1
million which is secured by three properties. The debt carries an
annual interest rate of 6.16 percent and requires interest-only
payments for 10 years. The mortgage debt generated total net proceeds
to the Company of $33.9 million.
14. RECENT ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006 the Financial Accounting Standards Board issued
interpretation (FIN 48), Accounting for uncertainty in Income Taxes --
an interpretation of FASB Statement No. 109. FIN 48 prescribes a
consistent recognition threshold and measurement standard, as well as
clear criteria for subsequently recognizing, derecognizing and
measuring tax positions for financial statement purposes. FIN 48 also
requires expanded disclosure with respect to the uncertainty of income
taxes. FIN 48 is effective for fiscal years beginning after December
15, 2006 and must therefore be adopted by the Company for its fiscal
year ended December 31, 2007. Management is currently evaluating the
impact of FIN 48.
21
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 2005 Annual Report
filed with the Securities and Exchange Commission on Form 10-K. During the six
months ended June 30, 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 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. Two awards of 7,500 options each were made
to the Company's non-employee directors during the six months ended June 30,
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.
22
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 June 30, 2006 and 2005
For the three months ended June 30, 2006, loss from operations increased by $0.3
million from $(1.6) million to $(1.9) million, when compared to the three months
ended June 30, 2005. The increased loss was due to increased expenses of $7.4
million, offset by increased revenues of $6.9 million and increased equity
income from affiliate of $0.2 million as described in more detail below.
Income from rental property increased by $1.7 million from $43.9 million to
$45.6 million, or 3.9 percent, due to acquisitions ($0.3 million) and rent
increases and other community revenues ($1.4 million).
Revenues from home sales increased by $2.9 million from $4.4 million to $7.3
million, or 66.0 percent. The Company sold 160 manufactured homes during the
second quarter of 2006 as compared to 99 sales during the same period in 2005.
Rental home revenue increased by $1.7 million from $2.1 million to $3.8 million.
The number of tenants in the Company's rental program increased from 3,057 at
June 30, 2005 to 4,600 at June 30, 2006, resulting in additional revenue of
approximately $1.2 million. The remainder of the increase resulted from an
increase in the average rental rate per home from $612 per month at June 30,
2005 to $665 per month at June 30, 2006.
Ancillary revenues, net decreased by approximately $0.1 million due primarily to
an increase in golf course management fees.
Interest income decreased by $0.3 million from $1.1 million to $0.8 million, or
27.3 percent, due primarily to a reduction in the amount of interest earned on
the Company's short-term investments and the payoff of interest earning notes
and receivables by the borrowers.
Other income increased by $1.0 million from a loss of less than $(0.1) million
to income of $1.0 million due primarily to a decrease in the loss associated
with the disposition of miscellaneous assets, and a $0.4 million lawsuit
settlement payment.
Property operating and maintenance expenses increased by $0.2 million from $11.5
million to $11.7 million, or 1.7 percent. The increase was due primarily to
increases in utility costs.
Real estate taxes increased by $0.1 million due to increases in assessments and
tax rates.
Cost of home sales increased by $2.2 million from $3.6 million to $5.8 million,
or 61 percent due to the increase in the number of homes sold. The Company sold
160 manufactured homes during the second quarter of 2006 as compared to 99 sales
during the same period in 2005.
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 tenants in the Company's rental program.
23
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS, CONTINUED:
General and administrative expenses for rental property increased by $0.7
million from $3.6 million to $4.3 million, or 19.4 percent. General and
administrative expenses for home sales and rentals increased by $0.1 million
from $1.5 million to $1.6 million, or 6.7 percent. The increases are primarily
attributable to increases in payroll and benefits that include the accrual of
annual performance based incentives and initial recognition of expense related
to performance-based awards under the Company's 5-year incentive stock award
program.
Depreciation and amortization increased by $1.3 million from $13.5 million to
$14.8 million, or 9.6 percent, due primarily to an increase in the total rental
home portfolio.
Interest expense increased by $1.7 million from $13.5 million to $15.2 million,
or 12.6 percent, primarily due to increased debt levels and increased interest
rates on variable rate debt.
Comparison of the six months ended June 30, 2006 and 2005
For the six months ended June 30, 2006, loss from operations before minority
interest increased by $3.1 million from a loss of less than $(0.1) million to a
loss of $(3.2) million, when compared to the six months ended June 30, 2005. The
increase was due to increased expenses of $14.3 million, partially offset by
increased revenues of $10.6 million and increased equity income from affiliate
of $0.6 million as described in more detail below.
Income from rental property increased by $4.3 million from $89.4 million to
$93.7 million, or 4.8 percent, due to acquisitions ($1.0 million) and rent
increases and other community revenues ($3.3 million). Rental increases have
been implemented for over 25,000 of the Company's occupied sites in the first
half of 2006.
Revenues from home sales increased by $2.4 million from $8.1 million to $10.5
million, or 29.6 percent. The Company sold 231 manufactured homes during the six
months ended June 30, 2006 as compared to 210 sales during the same period in
2005. The increase in the number of homes sold resulted in additional revenue of
approximately $1.0 million. The remainder of the increase resulted from an
increase in the average selling price per home.
Rental home revenue increased by $3.5 million from $3.6 million to $7.1 million.
The number of tenants in the Company's rental program increased from 3,057 at
June 30, 2005 to 4,600 at June 30, 2006, resulting in additional revenue of
approximately $2.5 million. The remainder of the increase resulted from an
increase in the average rental rate per home from $612 per month at June 30,
2005 to $665 per month at June 30, 2006.
Ancillary revenues, net, decreased by $0.3 million from $0.6 million to $0.3
million due to a non-refundable option payment received in 2005 ($0.2 million)
and increased golf course management fees ($0.1 million).
Interest income decreased by $1.0 million from $2.7 million to $1.7 million, or
37.0 percent, due primarily to a decrease in interest earned on the Company's
short-term investments and a decrease in the amount of interest earning notes
and receivables.
Other income increased by $1.7 million from a loss of $(0.2) million to income
of $1.5 million due to an increase in brokerage commissions ($0.2 million), a
decrease in a loss associated with disposition of miscellaneous assets ($0.5
million), a decrease in unsuccessful acquisition expenses ($0.3 million),
proceeds from a lawsuit settlement ($0.4 million) and an increase in other
miscellaneous operating income ($0.3 million).
24
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 $0.7 million from $22.4
million to $23.1 million, or 3.1 percent. The increase was due to acquisitions
($0.4 million), increases in utility costs ($0.8 million) and payroll expense
($0.2 million), partially offset by decreases in repair and maintenance ($0.2
million) and other miscellaneous expenses ($0.5 million).
Real estate taxes increased by $0.2 million from $7.6 million to $7.8 million,
or 2.6 percent, due to acquisitions ($0.1 million) and increases in assessments
and tax rates ($0.1 million).
Cost of home sales increased by $2.2 million from $6.0 million to $8.2 million,
or 36.7 percent due to the increase in the number of homes sold. The Company
sold 231 manufactured homes in the first half of 2006 compared to 210 sales of
the first half of 2005. The increase in the number of homes sold resulted in
additional costs of approximately $0.7 million. The remainder of the increase
resulted from an increase in the average cost per home. Gross profit margins
decreased from 26.3 percent in 2005 to 22.2 percent in 2006 due to increased
sales of pre-owned homes at lower margins partially offset by improved margins
on new home sales.
Rental home operating and maintenance expense increased by $2.2 million from
$3.0 million to $5.2 million, or 73.3 percent due primarily to an increase in
the number of tenants in the Company's rental program.
General and administrative expenses for rental property increased by $2.3
million from $7.1 million to $9.4 million, or 32.4 percent, due to an increase
in payroll and benefits ($1.8 million) that includes the accrual of annual
performance based bonus incentives and initial recognition of expense related to
performance-based restricted and phantom stock awards, an increase in
expenditures related to a review of the Company's strategic alternatives ($0.4
million) and professional fees related to the SEC investigation ($0.1 million).
General and administrative expenses for home sales and rentals increased by $0.1
million from $3.0 million to $3.1 million, or 3.3 percent due primarily to an
increase in payroll and commissions.
Depreciation and amortization increased by $3.3 million from $26.5 million to
$29.8 million, or 12.5 percent, due primarily to an increase in the total rental
home portfolio.
Interest expense increased by $2.7 million from $29.3 million to $32.0 million,
or 9.2 percent, primarily due to increased debt levels.
SAME PROPERTY INFORMATION
The following table reflects property-level financial information as of and for
the six months ended June 30, 2006 and 2005. The "Same Property" data represents
information regarding the operation of communities owned as of January 1, 2005
and June 30, 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.
25
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS, CONTINUED:
SAME PROPERTY TOTAL PORTFOLIO
----------------------- ----------------------
2006 2005 2006 2005
--------- -------- -------- --------
(in thousands) (in thousands)
Income from rental property $ 88,481 $ 85,325 $ 93,660 $ 89,394
--------- -------- -------- --------
Property operating expenses:
Property operating and maintenance 17,695 17,547 23,099 22,444
Real estate taxes 7,596 7,456 7,797 7,572
--------- -------- -------- --------
Property operating expenses 25,291 25,003 30,896 30,016
--------- -------- -------- --------
Property net operating income (1) $ 63,190 $ 60,322 $ 62,764 $ 59,378
========= ======== ======== ========
Number of properties 133 133 136 135
Developed sites 46,530 46,477 47,598 47,318
Occupied sites 38,201 (2) 38,281 (2) 38,604 (2) 38,474 (2)
Occupancy % 84.4%(3) 84.8%(3) 84.2%(3) 84.6%(3)
Weighted average monthly rent per site $ 363 (3) $ 349 (3) $ 362 (3) $ 349 (3)
Sites available for development 6,328 6,494 6,826 7,094
Sites planned for development in next year 11 222 11 222
----------
(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.
26
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS, CONTINUED:
On a same property basis, property net operating income increased by $2.9
million from $60.3 million to $63.2 million, or 4.8 percent. Income from rental
property increased by $3.2 million from $85.3 million to $88.5 million, or 3.7
percent, due primarily to increases in rents including water and property tax
pass through. Property operating expenses increased by $0.3 million from $25.0
million to $25.3 million, or 1.2 percent, due primarily to increases in real
estate taxes and utilities costs.
RENTAL PROGRAM
The following tables reflect additional information regarding the
Company's rental program for the periods ended and as of June 30, 2006 and 2005:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2006 2005 2006 2005
-------- -------- --------- --------
Rental home revenue $ 3,813 $ 2,115 $ 7,142 $ 3,632
Site rent included in Income from rental property 4,696 2,892 8,882 5,099
-------- -------- --------- --------
Rental program revenue 8,509 5,007 16,024 8,731
Expenses
Payroll and commissions 547 399 1,022 826
Repairs and refurbishment 1,034 609 1,991 1,150
Taxes and insurance 624 267 1,218 548
Other 360 205 947 441
-------- -------- --------- --------
Rental program operating and maintenance 2,565 1,480 5,178 2,965
-------- -------- --------- --------
Net operating income (1) $ 5,944 $ 3,527 $ 10,846 $ 5,766
======== ======== ========= ========
----------
(1) See Note (1) following Same Property Information
OCCUPIED RENTAL HOMES INFORMATION (IN THOUSANDS EXCEPT FOR *):
2006 2005
--------- ---------
Number of occupied rentals, end of period* 4,600 3,057
Cost of occupied rental homes $ 135,301 $ 88,290
Weighted average monthly rental rate* $ 665 $ 612
Net operating income from the rental program increased $2.4 million from $3.5
million to $5.9 million in the second quarter of 2006 as a result of a $3.5
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 an increase in the number of leased rental homes. Expenses were also
impacted by the increase in the number of leased rental homes.
27
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, its $115.0 million line of
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 $1.4 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 $1.0 - $1.5 million for such costs during
the remainder of 2006. The Company expects to finance these investments by using
net cash flows provided by operating activities and by drawing upon its lines of
credit.
The Company has invested $7.8 million ($3.3 million cash and $4.5 million in
assumed debt) in the acquisition of properties during 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 $25.1 million during the first half
of 2006 in homes primarily intended for its rental program. Expenditures for the
reminder of 2006 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 $0.7 million from $5.9 million at
December 31, 2005 to $5.2 million at June 30, 2006. Net cash provided by
operating activities decreased by $1.2 million to $30.0 million for the six
months ended June 30, 2006 compared to $31.2 million for the six months ended
June 30, 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 "Risk Factors " in the Company's Annual Report on Form 10-K for the
year ended December 31, 2005.
28
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 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 "Risk Factors" in the Company's
Annual Report on Form 10-K for the year ended December 31, 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 June 30, 2006, the Company's debt to total market capitalization approximated
63.6 percent (assuming conversion of all Common OP Units to shares of common
stock). The debt has a weighted average maturity of approximately 6.7 years and
a weighted average interest rate of 5.5 percent.
Capital expenditures for the six months ended June 30, 2006 and 2005 included
recurring capital expenditures of $3.3 million for both periods.
Net cash used in investing activities increased by $30.5 million to $34.8
million for the six months ended June 30, 2006 compared to $4.3 million for the
six months ended June 30, 2005. This increase was due to a $45.0 million
decrease in net proceeds from sale of short-term investments, a $3.9 million
decrease in proceeds related to property dispositions and a $0.9 million
decrease in notes receivable and officers' notes, net, offset by decreased
investment in rental property of $19.3 million.
Net cash provided by financing activities increased by $80.1 million to $4.0
million provided by financing activities for the six months ended June 30, 2006
compared to $76.1 million used in financing activities for the six months ended
June 30, 2005. This increase was primarily due to a $41.8 million decrease in
payments to retire preferred operating partnership units, an increase of $22.0
million in borrowings on lines of credit, a $7.1 million reduction in funds used
to purchase Company stock, a $7.4 million reduction in payments made to redeem
notes payable and other debt, a $0.9 million decrease in payments to redeem
common stock and OP units and a $1.5 million increase in proceeds from option
exercises, offset by an increase in distributions of $0.4 million and an
increase in payments for deferred financing costs of $0.2 million.
29
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 June 30, 2006 and 2005 (in
thousands):
30
SUN COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUPPLEMENTAL MEASURE, CONTINUED:
SUN COMMUNITIES, INC.
RECONCILIATION OF NET LOSS TO FUNDS FROM OPERATIONS
(Amounts in thousands, except per share/OP unit amounts) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
2006 2005 2006 2005
---------- -------- -------- --------
Net loss $ (1,709) $ (750) $ (2,577) $ (63)
Adjustments:
Depreciation and amortization 15,002 14,100 30,590 27,764
Valuation adjustment(1) (22) (153) 21 206
(Gain) loss on disposition of assets, net 102 (513) 70 (466)
Loss allocated to minority interest (226) (104) (341) (9)
---------- -------- -------- --------
Funds from operations (FFO) $ 13,147 $ 12,580 $ 27,763 $ 27,432
========== ======== ======== ========
FFO - Continuing Operations $ 13,147 $ 12,600 $ 27,763 $ 27,260
========== ======== ======== ========
FFO - Discontinued Operations $ -- $ (20) $ -- $ 172
========== ======== ======== ========
Weighted average common shares/OP Units outstanding:
Basic 19,937 20,193 19,897 20,256
========== ======== ======== ========
Diluted 20,116 20,352 20,092 20,420
========== ======== ======== ========
Continuing Operations:
FFO per weighted average common share/OP Unit - Basic $ 0.66 $ 0.62 $ 1.40 $ 1.34
========== ======== ======== ========
FFO per weighted average common share/OP Unit - Diluted $ 0.65 $ 0.62 $ 1.38 $ 1.34
========== ======== ======== ========
Discontinued Operations:
FFO per weighted average common share/OP Unit - Basic $ -- $ -- $ -- $ 0.01
========== ======== ======== ========
FFO per weighted average common share/OP Unit - Diluted $ -- $ -- $ -- $ 0.01
========== ======== ======== ========
Total Operations:
FFO per weighted average common share/OP Unit - Basic $ 0.66 $ 0.62 $ 1.40 $ 1.35
========== ======== ======== ========
FFO per weighted average common share/OP Unit - Diluted $ 0.65 $ 0.62 $ 1.38 $ 1.35
========== ======== ======== ========
----------
(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.
31
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 and those risks and
uncertainties referenced under the headings entitled "Risk Factors" contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 2005
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.
32
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 $217.0 million and $124.9 million as of
June 30, 2006 and 2005, 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 six months ended June 30, 2006 and 2005, the Company believes its
interest expense would have increased or decreased by approximately $1.9 million
and $1.1 million based on the $194.0 million and $111.5 million average balance
outstanding under the Company's variable rate debt facilities for the six months
ended June 30, 2006 and 2005, respectively.
Additionally, the Company had $13.5 million and $14.7 million LIBOR based
variable rate mortgage and other notes receivables as of June 30, 2006 and 2005,
respectively. If LIBOR increased or decreased by 1.0 percent during the six
months ended June 30, 2006 and 2005, the Company believes interest income would
have increased or decreased by approximately $0.1 million and $0.1 million based
on the $13.5 million and $14.7 million average balance outstanding on all
variable rate notes receivable for the six months ended June 30, 2006 and 2005,
respectively.
The Company has entered into three separate interest rate swap agreements and an
interest rate cap agreement. One of the swap agreements fixes $25 million of
variable rate borrowings at 4.84 percent through July 2009, another of the swap
agreements fixes $25 million of variable rate borrowings at 5.28 percent 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 3.88 percent through July 2007. The interest rate cap agreement has a cap
rate of 11.79 percent, a notional amount of $152.4 million and a termination
date of May 29, 2007. Each of the Company's derivative contracts is based upon
90-day LIBOR.
33
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 June 30, 2006,
that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
34
SUN COMMUNITIES, INC.
PART II
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 25, 2006, the Company held its Annual Meeting of Shareholders. The
following matters were voted upon at the meeting:
(a) The election of two directors to serve until the 2009 Annual Meeting
of Shareholders or until their respective successors shall be elected and shall
qualify. The results of the election appear below:
% of Shares
Nominees For Voting Withheld
--------------- ---------- ----------- --------
Ted J. Simon 15,043,382 95.58 694,668
Paul D. Lapides 14,885,159 94.58 852,861
ITEM 6. - EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
See the attached Exhibit Index.
35
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: August 7, 2006
SUN COMMUNITIES, INC.
BY: /s/ Jeffrey P. Jorissen
--------------------------------------------
Jeffrey P. Jorissen, Chief Financial Officer
and Secretary
(Duly authorized officer and principal
financial officer)
36
SUN COMMUNITIES, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------
10.1 Promissory Note, dated July 10, 2006, by Sun Villa MHC LLC
in favor of ARCS Commercial Mortgage Co., LP in the original
principal amount of $18,300,000.00.
10.2 Promissory Note, dated July 10, 2006, by Sun Countryside
Atlanta LLC in favor of ARCS Commercial Mortgage Co., LP in
the original principal amount of $12,950,000.00.
10.3 Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing, dated July 10, 2006, by Sun Villa MHC LLC in
favor of First American Title Insurance Company, trustee,
for the benefit of ARCS Commercial Mortgage Co., LP.
10.4 Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing, dated July 10, 2006, by Sun Countryside
Atlanta LLC in favor of ARCS Commercial Mortgage Co., LP.
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.
37