SEC Filing | Sun Communities

1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000. OR |_| Transition pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 COMMISSION FILE NUMBER 1-2616 SUN COMMUNITIES, INC. (Exact Name of Registrant as Specified in its Charter) Maryland 38-2730780 (State of Incorporation) (I.R.S. Employer Identification No.) 31700 Middlebelt Road Suite 145 Farmington Hills, Michigan 48334 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (248) 932-3100 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 [ ] 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: 17,499,437 shares of Common Stock, $.01 par value as of April 28, 2000 Page 1 of 17

2 SUN COMMUNITIES, INC. INDEX -------- PAGES ----- PART I - ------ Item 1. Financial Statements: Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3 Consolidated Statements of Income for the Three Months Ended March 31, 2000 and 1999 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999 5 Notes to Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 PART II Item 6.(a) Exhibits required by Item 601 of Regulation S-K 15 Item 6.(b) Reports on Form 8-K 15 Signatures 16 2

3 SUN COMMUNITIES, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2000 AND DECEMBER 31, 1999 (IN THOUSANDS) -------- ASSETS 2000 1999 --------------- ------------- Investment in rental property, net $ 756,665 $ 755,138 Cash and cash equivalents 12,549 11,330 Notes and other receivables 95,062 93,428 Investment in and advances to affiliates 37,382 18,841 Other assets 26,188 25,295 --------------- ------------- Total assets $ 927,846 $ 904,032 =============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Line of credit $ 70,000 $ 47,000 Debt 353,854 354,564 Accounts payable and accrued expenses 19,607 17,616 Deposits and other liabilities 9,594 8,660 --------------- ------------- Total liabilities 453,055 427,840 --------------- ------------- Minority interests 137,619 137,834 --------------- ------------- Stockholders' equity: Preferred stock, $.01 par value, 10,000 shares authorized; no shares issued and outstanding -- -- Common stock, $.01 par value, 100,000 shares authorized; 17,498 and 17,459 issued and outstanding in 2000 and 1999, respectively 175 174 Paid-in capital 393,392 393,360 Officers' notes (11,286) (11,452) Unearned compensation (5,304) (5,459) Distributions in excess of accumulated earnings (39,805) (38,265) ---------------- ------------- Total stockholders' equity 337,172 338,358 --------------- ------------- Total liabilities and stockholders' equity $ 927,846 $ 904,032 =============== ============= The accompanying notes are an integral part of the consolidated financial statements. 3

4 SUN COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (IN THOUSANDS EXCEPT FOR PER SHARE DATA) -------- 2000 1999 ----------- ----------- Revenues: Income from property $ 33,129 $ 31,374 Other income 2,751 1,705 ----------- ----------- Total revenues 35,880 33,079 ----------- ----------- Expenses: Property operating and maintenance 7,172 6,849 Real estate taxes 2,247 2,205 Property management 740 611 General and administrative 1,051 910 Depreciation and amortization 7,546 6,882 Interest 6,694 6,684 ----------- ----------- Total expenses 25,450 24,141 ----------- ----------- Income before minority interests 10,430 8,938 Less income allocated to minority interests: Preferred OP Units 1,915 626 Common OP Units 1,158 1,177 ----------- ----------- Net income $ 7,357 $ 7,135 =========== =========== Earnings per common share: Basic $ 0.43 $ 0.42 =========== =========== Diluted $ 0.42 $ 0.41 =========== =========== Weighted average common shares outstanding - basic 17,286 17,113 =========== =========== Distributions declared per common share outstanding $ 0.51 $ 0.51 =========== =========== The accompanying notes are an integral part of the consolidated financial statements. 4

5 SUN COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (IN THOUSANDS) -------- 2000 1999 ------------- ------------ Cash flows from operating activities: Net income $ 7,357 $ 7,135 Adjustments to reconcile net income to net cash provided by operating activities: Income allocated to minority interests 1,158 1,177 Depreciation and amortization 7,546 6,882 Amortization of deferred financing costs 201 196 Increase in other assets (1,843) (910) Increase in accounts payable and other liabilities 2,925 2,986 ------------- ------------ Net cash provided by operating activities 17,344 17,466 ------------- ------------ Cash flows from investing activities: Investment in rental properties (8,090) (14,337) Investment in and advances to affiliate (18,541) (2,305) Investments in notes receivable, net (1,468) (21,953) -------------- ------------ Net cash used in investing activities (28,099) (38,595) -------------- ------------ Cash flows from financing activities: Borrowings on line of credit, net 23,000 24,000 Repayments on notes payable and other debt (710) (684) Net proceeds from issuance of common stock and operating partnership units 33 15 Distributions (10,270) (9,830) Payments for deferred financing costs (79) (21) -------------- ------------ Net cash provided by financing activities 11,974 13,480 ------------- ------------ Net increase (decrease) in cash and cash equivalents 1,219 (7,649) Cash and cash equivalents, beginning of period 11,330 9,588 ------------- ------------ Cash and cash equivalents, end of period $ 12,549 $ 1,939 ============= ============ Supplemental Information: Debt assumed for rental properties $ -- $ 1,700 Capitalized lease obligation for rental properties $ -- $ 10,605 The accompanying notes are an integral part of the consolidated financial statements 5

6 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------- 1. BASIS OF PRESENTATION: These unaudited condensed consolidated financial statements of Sun Communities, Inc., a Maryland Corporation, (the "Company"), have been prepared pursuant to the Securities and Exchange Commission ("SEC") rules and regulations and should be read in conjunction with the financial statements and notes thereto of the Company as of December 31, 1999. 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 the prior period financial statements to conform with current period presentation. The Company owns 100 percent of the preferred stock of an affiliate, Sun Home Services, Inc. ("Sun Homes"), is entitled to 95 percent of the operating cash flow of Sun Homes, and accounts for its investment utilizing the equity method of accounting. The common stock is owned by two officers of the Company and the estate of a former officer of the Company who are entitled to receive 5 percent of the operating cash flow. As of March 31, 2000, "SunChamp", a 50 percent controlled joint venture of the Company and Champion Enterprises, Inc., owns ten communities under initial development. The Company accounts for its investment utilizing the equity method of accounting. 2. RENTAL PROPERTY: The following summarizes rental property (in thousands): March 31, December 31, 2000 1999 ------------- ----------------- Land $ 76,120 $ 76,069 Land improvements and buildings 724,106 720,662 Furniture, fixtures, equipment 17,291 16,943 Land held for future development 16,668 17,046 Property under development 21,601 16,976 ------------- ----------------- 855,786 847,696 Accumulated depreciation 99,121 92,558 ------------- ----------------- Rental property, net $ 756,665 $ 755,138 ============= ================= 6

7 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------- 3. NOTES RECEIVABLE: Notes receivable consisted of the following (in thousands): March 31, December 31, 2000 1999 --------- ------------ Mortgage notes receivable with minimum monthly interest payments at 7%, maturing June 30, 2012, collateralized by two communities (a) $ 15,093 $ 15,093 Note receivable, bears interest at LIBOR + 2.35% and payable on demand 40,847 40,794 Note receivable, bears interest at 9.75% and matures September 2005 4,000 4,000 Installment loans on manufactured homes with interest payable monthly at a weighted average interest rate and maturity of 11% and 21 years, respectively. 18,200 18,635 Notes receivable, other, various interest rates ranging from 6% to 9.5% or prime + 1.5%, various maturity dates through December 31, 2003. 1,562 1,562 Other receivables 15,360 13,344 --------- ------------ $ 95,062 $ 93,428 ========= ============ (a) The stated interest rate is 12%. The excess of the interest earned at the stated rate over the pay rate is recognized upon receipt of payment. Officers' notes which are presented in stockholders' equity are 10 year, LIBOR + 1.75% notes, with a minimum and maximum interest rate of 6% and 9%, respectively, collateralized by 366,206 shares of the Company's common stock and 127,794 OP Units with substantial personal recourse. 7

8 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------- 4. DEBT: The following table sets forth certain information regarding debt (in thousands): March 31, December 31, 2000 1999 --------- ------------ Collateralized term loan, interest at 7.01%, due September 9, 2007 $ 43,797 $ 43,927 Senior notes, interest at 7.375%, due May 1, 2001 65,000 65,000 Senior notes, interest at 7.625%, due May 1, 2003 85,000 85,000 Senior notes, interest at 6.97%, due December 3, 2007 35,000 35,000 Callable/redeemable notes, interest at 6.77%, due May 14, 2015, callable/redeemable May 16, 2005 65,000 65,000 Capitalized lease obligations, interest ranging from 5.5% to 6.3%, due March 2001 through January 2004 36,474 36,620 Mortgage notes, other 23,583 24,017 --------- ------------ $ 353,854 $ 354,564 ========= ============ The Company had $55 million available to borrow under its $125 million line of credit at March 31, 2000. Borrowings under the line of credit bear interest at the rate of LIBOR plus 1.0% and mature January 1, 2003. 5. MINORITY INTERESTS: Minority interests include 2,699,000 and 2,703,000 Common OP Units in Sun Communities Operating Limited Partnership (the "Operating Partnership") at March 31, 2000 and December 31, 1999, respectively. Additionally, minority interests include 1,325,275 Convertible Preferred Operating Partnership Units ("POP Units") and 2,000,000 Series A Perpetual Preferred Operating Partnership Units ("PPOP Units") at March 31, 2000 and December 31, 1999. 6. OTHER INCOME: The components of other income are as follows for the periods ended March 31, 2000 and 1999 (in thousands): 2000 1999 ---------- ------------ Interest and other $ 2,832 $ 1,388 Income (loss) from affiliate (81) 317 ---------- ------------ $ 2,751 $ 1,705 ========== ============ 8

9 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------- 7. EARNINGS PER SHARE (IN THOUSANDS): For the Three Months Ended March 31, 2000 1999 --------- ---------- Earnings used for basic and diluted earnings per share computation $ 7,357 $ 7,135 ========= ========== Total shares used for basic earnings per share 17,286 17,113 Dilutive securities, principally stock options 59 124 --------- ---------- Total shares used for diluted earnings per share computation 17,345 17,237 ========= ========== Diluted earnings per share reflect the potential dilution that would occur if securities were exercised or converted into common stock. Convertible POP Units are excluded from the computations as their inclusion would have an antidilutive effect on earnings per share in 2000 and 1999. 9

10 SUN COMMUNITIES, INC. 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. RESULTS OF OPERATIONS Comparison of the three months ended March 31, 2000 and 1999 For the three months ended March 31, 2000, income before minority interests increased by 16.7 percent from $8.9 million to $10.4 million, when compared to the three months ended March 31, 1999. The increase was due to increased revenues of $2.8 million while expenses increased by $1.3 million. Income from property increased by $1.7 million from $31.4 million to $33.1 million, or 5.6 percent, due primarily to rent increases and other community revenues ($1.8 million), lease up of manufactured home sites including new developments ($0.7 million), and acquisitions ($0.6 million), offset by a revenue reduction of $1.3 million due to the sale of four communities during 1999. Other income increased by $1.0 million from $1.7 million to $2.7 million due primarily to a $1.4 million increase in interest and other income offset by a reduction of $0.4 million of income from affiliates. Property operating and maintenance expenses increased by $0.3 million from $6.9 million to $7.2 million, or 4.7 percent, due primarily to acquisitions and timing. Real estate taxes remained constant at $2.2 million for both periods. Property management expenses increased by $0.1 million from $0.6 million to $0.7 million representing 2.2 percent and 1.9 percent of income from property in 2000 and 1999, respectively. General and administrative expenses increased by $0.1 million from $0.9 million to $1.0 million, representing 2.9 percent and 2.8 percent of total revenues in 2000 and 1999, respectively. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased by $2.2 million from $22.5 million to $24.7 million. EBITDA as a percent of revenues increased to 68.8 percent in 2000 compared to 68.0 percent in 1999. Depreciation and amortization increased by $0.7 million from $6.9 million to $7.6 million, or 9.6 percent due primarily to acquisitions and development of communities in 1999. Interest expense remained constant at $6.7 million for both periods. 10

11 SUN COMMUNITIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------- SAME PROPERTY INFORMATION The following table reflects property-level financial information as of and for the three months ended March 31, 2000 and 1999. The "Same Property" data represents information regarding the operation of communities owned as of January 1, 1999 and March 31, 2000. Site, occupancy, and rent data for those communities is presented as of the last day of each period presented. The table includes sites where the Company is providing financing and managing the properties. Such amounts relate to the total portfolio data and include 923 sites in 2000 and 1999. SAME PROPERTY TOTAL PORTFOLIO ------------------------ ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Income from property $ 24,739 $ 23,394 $ 33,129 $ 31,374 ---------- ---------- ---------- ---------- Property operating expenses: Property operating and maintenance 4,472 4,263 7,172 6,849 Real estate taxes 1,935 1,776 2,247 2,205 ---------- ---------- ---------- ---------- Property operating expenses 6,407 6,039 9,419 9,054 ---------- ---------- ---------- ---------- Property EBITDA $ 18,332 $ 17,355 $ 23,710 $ 22,320 ========== ========== ========== ========== Number of operating properties 88 88 116(2) 107 Developed sites 29,995 29,409 39,463(2) 38,240 Occupied sites 28,552 27,905 35,636 35.427 Occupancy % 95.2% 94.9% 95.1%(1) 94.9%(1) Weighted average monthly rent per site $ 285 $ 272 $ 282(1) $ 272(1) Sites available for development 1,715 2,212 9,955(3) 8,478 Sites planned for development in current year 278 641 1,992(3) 2,327 (1) Occupancy % and weighted average rent relates to manufactured housing sites, excluding recreational vehicle sites and sites owned through joint ventures. (2) Includes 7 communities and 1,150 develop sites owned through joint ventures. (3) Includes 4,017 sites available for development and 641 sites planned for development owned through joint ventures. On a same property basis, property revenues increased by $1.3 million from $23.4 million to $24.7 million, or 5.7 percent, due primarily to increases in rents and occupancy related charges including water and property tax pass through. Also contributing to revenue growth was the increase of 647 leased sites at March 31, 2000 compared to March 31, 1999. Property operating expenses increased by $0.4 million from $6.0 million to $6.4 million or 6.1 percent, due to increased occupancies and costs. Property EBITDA increased by $1.0 million from $17.3 million to $18.3 million, or 5.6 percent. 11

12 SUN COMMUNITIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------- LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased by $1.2 million to $12.5 million at March 31, 2000 compared to $11.3 million at December 31, 1999 because cash provided by operating and financing activities exceeded cash used in investing activities. Net cash provided by operating activities decreased by $0.1 million to $17.3 million for the three months ended March 31, 2000 compared to $17.4 million for the same period in 1999. This decrease was primarily due to other assets increasing by $0.9 million offset by a $0.9 million increase in income before minority interests and depreciation and amortization. Net cash used in investing activities decreased by $10.5 million to $28.1 million from $38.6 million primarily due to a reduction of $ 20.5 million used to finance notes receivable and a $6.2 million decrease in rental property acquisition activities offset by a $16.2 million increase in investments in and advances to affiliates. Net cash provided by financing activities decreased by $1.5 million to $12.0 million for the three months ended March 31, 2000 compared to $13.5 million for the same period in 1999. This decrease was primarily because of a $1.0 million reduction in borrowings on the line of credit and distributions increasing by $0.4 million. The Company expects to meet its short-term liquidity requirements generally through its working capital provided by operating activities. The Company expects to meet certain long-term liquidity requirements such as scheduled debt maturities and property acquisitions through the issuance of equity or debt securities, or interests in the Operating Partnership. The Company considers these sources to be adequate and anticipates they will continue to be adequate to meet operating requirements, capital improvements, investment in development, and payment of distributions by the Company in accordance with REIT requirements in both the short and long term. The Company may also meet these short-term and long-term requirements by utilizing its $125 million line of credit which bears interest at LIBOR plus 1.0% and is due January 1, 2003. See "Special Note Regarding Forward-Looking Statements." At March 31, 2000, the Company's debt to total market capitalization approximated 38.1% (assuming conversion of all Common and Preferred OP Units to shares of common stock), with a weighted average maturity of approximately 4.9 years and a weighted average interest rate of 7.1%. Recurring capital expenditures approximated $1.0 million for the three months ended March 31, 2000. 12

13 SUN COMMUNITIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------- OTHER 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 debt restructuring and sales of property, plus 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 calculates FFO for the three months ended March 31, 2000 and 1999 (in thousands): 2000 1999 ---------- ---------- Net income available to common shareholders $ 7,357 $ 7,135 Add: Minority interest in earnings to common OP Unit holders 1,158 1,177 Depreciation and amortization, net of corporate office depreciation 7,481 6,822 ---------- ---------- Funds from operations $ 15,996 $ 15,134 ========== ========== Weighted average OP Units outstanding used for basic FFO per share/unit 20,006 19,937 Dilutive securities: Stock options and awards 59 124 Convertible preferred OP Units -- 1,280 ---------- ---------- Weighted average OP Units used for diluted FFO per share/unit 20,065 21,341 ========== ========== FFO, per share/unit: Basic $ 0.80 $ 0.76 ========== ========== Diluted $ 0.80 $ 0.74 ========== ========== 13

14 SUN COMMUNITIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------- OTHER CONTINUED: Year 2000 Update In February 2000, the Company officially concluded its Year 2000 compliance program as no events had occurred that significantly affected either the Company's operation or its financial statements. Special Note Regarding Forward-Looking Statements 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 be subject to the safe harbors created thereby. The words "may", "will", "expect", "believe", "anticipate", "should", "estimate", and similar expressions identify forward-looking statements. These forward-looking statements reflect the Company's current views with respect to future events and financial performance, but are based upon current assumptions regarding the Company's operations, future results and prospects, and are subject to many uncertainties and factors relating to the Company's operations and business environment which may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking statements. Please see the section entitled "Risk Factors" of the Company's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on February 15, 2000 for a list of uncertainties and factors. Such factors include, but are not limited to, the following: (i) changes in the general economic climate; (ii) increased competition in the geographic areas in which the Company owns and operates manufactured housing communities; (iii) changes in government laws and regulations affecting manufactured housing communities; and (iv) the ability of the Company to continue to identify, negotiate and acquire manufactured housing communities and/or vacant land which may be developed into manufactured housing communities on terms favorable to the Company. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. Recent Accounting Pronouncements In June 1998, FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. This statement will be effective January 1, 2001. There is no effect from the application of SFAS 133 on the earnings and financial position of the Company as the Company had no derivative instruments at March 31, 2000 and December 31, 1999. 14

15 SUN COMMUNITIES, INC. PART II ITEM 6.(A) - EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K EXHIBIT NO. DESCRIPTION ----------- ----------- 27 Financial Data Schedule ITEM 6.(B) - REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the period covered by this Form 10-Q. 15

16 SIGNATURES Pursuant to the requirements of the Securities and 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 12, 2000 SUN COMMUNITIES, INC. BY: /s/ Jeffrey P. Jorissen ------------------------------------------------------- Jeffrey P. Jorissen, Chief Financial Officer and Secretary 16

17 SUN COMMUNITIES, INC. EXHIBIT INDEX PAGE FILED NUMBER EXHIBIT NO. DESCRIPTION HEREWITH HEREIN - ----------- ----------- -------- ------ 27 Financial Data Schedule X 17

5 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 12,549 0 0 0 0 0 855,786 99,121 927,846 0 0 0 0 175 336,997 927,846 0 35,880 0 9,419 0 0 6,694 10,430 0 10,430 0 0 0 7,357 0.43 0.42