<PAGE> 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 SEPTEMBER 30, 1999.
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:
17,433,258 shares of Common Stock, $.01 par value as of October 26, 1999
Page 1 of 19
<PAGE> 2
SUN COMMUNITIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGES
-----
PART I
- ------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 3
Consolidated Statements of Income for the Periods
Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-17
PART II
Item 2.(c) Changes in Securities and Use of Proceeds 18
Item 6.(a) Exhibits required by Item 601 of Regulation S-K 18
Item 6.(b) Reports on Form 8-K 18
Signatures 19
</TABLE>
2
<PAGE> 3
SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1999 1998
--------------- -------------
<S> <C> <C>
Investment in rental property, net $ 770,848 $ 732,212
Cash and cash equivalents 15,974 9,646
Investment in and advances to affiliate 9,623 11,316
Notes receivable 65,914 41,459
Other assets 35,197 26,806
--------------- -------------
Total assets $ 897,556 $ 821,439
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Line of credit $ 38,000 $ 26,000
Debt 350,192 339,164
Accounts payable and accrued expenses 23,015 12,637
Deposits and other liabilities 8,573 12,051
--------------- -------------
Total liabilities 419,780 389,852
--------------- -------------
Minority interests 141,030 91,223
--------------- -------------
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; 17,433 and 17,256 issued and
outstanding in 1999 and 1998, respectively 174 172
Paid-in capital 390,382 389,448
Officers' notes (11,452) (11,609)
Unearned compensation (4,979) (5,302)
Distributions in excess of accumulated earnings (37,379) (32,345)
--------------- -------------
Total stockholders' equity 336,746 340,364
--------------- -------------
Total liabilities and stockholders'
equity $ 897,556 $ 821,439
=============== =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE> 4
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Income from property $ 31,310 $ 28,294 $ 93,251 $ 85,180
Other income 2,680 2,109 6,258 4,466
------------ ----------- ----------- -----------
Total revenues 33,990 30,403 99,509 89,646
------------ ----------- ----------- -----------
Expenses:
Property operating and maintenance 7,118 6,544 20,407 19,095
Real estate taxes 2,255 2,122 6,666 6,502
Property management 713 646 1,970 1,658
General and administrative 890 771 2,752 2,468
Depreciation and amortization 7,277 6,115 21,294 18,121
Interest 7,010 6,178 20,028 17,808
------------ ----------- ----------- -----------
Total expenses 25,263 22,376 73,117 65,652
------------ ----------- ----------- -----------
Income before minority interests and other 8,727 8,027 26,392 23,994
Other, net -- 2,093 -- 3,030
------------ ----------- ----------- -----------
Income before minority interests 8,727 10,120 26,392 27,024
Less income allocated to minority interests:
Preferred OP Units 627 627 1,879 1,879
Common OP Units 1,115 1,083 3,429 2,931
------------ ----------- ----------- -----------
Net income $ 6,985 $ 8,410 $ 21,084 $ 22,214
============ =========== =========== ===========
Earnings per common share:
Basic $ 0.41 $ 0.50 $ 1.23 $ 1.32
============ =========== =========== ===========
Diluted $ 0.40 $ 0.49 $ 1.21 $ 1.30
============ =========== =========== ===========
Weighted average common shares
outstanding - basic 17,223 16,900 17,165 16,816
============ =========== =========== ===========
Distributions declared per common
share outstanding $ 0.51 $ 0.49 $ 1.02 $ 1.47
============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE> 5
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 21,084 $ 22,214
Adjustments to reconcile net income to net
cash provided by operating activities:
Income allocated to minority interests 3,429 2,931
Other, net -- (3,030)
Depreciation and amortization 21,294 18,121
Amortization of deferred financing costs 658 491
Increase in other assets (9,713) (4,355)
Increase in accounts payable and other liabilities 6,900 10,281
------------- ------------
Net cash provided by operating activities 43,652 46,653
------------- ------------
Cash flows from investing activities:
Investment in rental properties (57,963) (80,755)
Investment in and advances to affiliate 1,693 (1,755)
Proceeds related to asset sales 12,534 20,773
Investments in notes receivable, net (24,298) (14,145)
------------- ------------
Net cash used in investing activities (68,034) (75,882)
------------- ------------
Cash flows from financing activities:
Borrowings on line of credit, net 12,000 4,000
Repayments on notes payable and other debt (1,277) (708)
Proceeds from notes payable -- 65,000
Net proceeds from issuance of common stock
and operating partnership units 51,726 1,337
Distributions (30,352) (27,660)
Payments for deferred financing costs (1,387) (2,770)
------------- ------------
Net cash provided by financing activities 30,710 39,199
------------- ------------
Net increase in cash and cash equivalents 6,328 9,970
Cash and cash equivalents, beginning of period 9,646 2,198
------------- ------------
Cash and cash equivalents, end of period $ 15,974 $ 12,168
============= ============
Supplemental Information:
Debt assumed for rental properties $ 1,700 $ 18,356
Capitalized lease obligation for rental properties $ 10,605 $ 9,479
OP units issued for rental properties $ -- $ 1,704
Common stock issued as unearned compensation $ $ 5,631
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
5
<PAGE> 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, 1998. 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., is entitled to 95 percent of the operating cash flow,
and accounts for its investment utilizing the equity method of accounting.
The common stock is owned by three officers of the Company who are entitled
to receive 5 percent of the operating cash flow.
2. RENTAL PROPERTY:
The following summarizes rental property (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ---------------
<S> <C> <C>
Land $ 76,888 $ 71,930
Land improvements and buildings 725,981 679,755
Furniture, fixtures, equipment 16,938 15,209
Land held for future development 19,386 26,511
Property under development 21,693 9,747
------------- ---------------
860,886 803,152
Accumulated depreciation 90,038 70,940
------------- ---------------
Rental property, net $ 770,848 $ 732,212
============= ===============
</TABLE>
Through September 30, 1999, the cost of acquisitions totaled approximately
$29.3 million for five existing communities comprised of 1,085 developed
sites and 301 development sites and $8.2 million for two development
communities planned for approximately 1,238 sites.
6
<PAGE> 7
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. NOTES RECEIVABLE:
Notes receivable consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Mortgage notes receivable with minimum monthly interest payments
at 7%, maturing June 30, 2012, collateralized by
manufactured housing/ recreational vehicle communities
located in Dover, DE. (a) $ 15,093 $ 15,093
Note receivable, bears interest at LIBOR
+ 2.35% and payable on demand 25,148 10,774
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. 19,861 5,339
Notes receivable, other, various interest rates
ranging from 6% to 9.5% or
prime + 1.5%, various maturity dates
through December 31, 2003. 1,812 1,853
Mortgage note receivable, bears interest at 13%
payable on demand. -- 4,400
------------ -----------
$ 65,914 $ 41,459
============ ===========
</TABLE>
(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
<PAGE> 8
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DEBT:
The following table sets forth certain information regarding debt (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Collateralized term loan, interest at 7.01%,
due September 9, 2007 $ 44,054 $ 44,425
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 36,746 26,542
Mortgage notes, other 19,392 18,197
----------- -----------
$ 350,192 $ 339,164
=========== ===========
</TABLE>
The Company had $87 million available to borrow under its line of credit at
September 30, 1999. Effective July 1, 1999, the Company increased its line
of credit facility from $100 million to $125 million and extended the
maturity date to January 1, 2003. Borrowings under the line of credit bear
interest at the rate of LIBOR plus 1.05%.
5. MINORITY INTERESTS:
Minority interests include 2,703,340 and 2,815,440 Common OP Units in Sun
Communities Operating Limited Parnership (the "Operating Parnership") at
September 30, 1999 and December 31, 1998, respectively, and 1,325,275
Convertible Preferred Operating Partnership Units ("POP Units") at
September 30, 1999 and December 31, 1998. Additionally, through the
Operating Partnership, the Company issued 2,000,000 Series A Preferred
Operating Partnership Units for $50 million on September 29, 1999.
6. OTHER INCOME:
The components of other income are as follows for the periods ended
September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Interest and other $ 1,912 $ 1,323 $ 4,640 $ 2,986
Income from affiliate 768 786 1,618 1,480
---------- ---------- ---------- ----------
$ 2,680 $ 2,109 $ 6,258 $ 4,466
========== ========== ========== ==========
</TABLE>
8
<PAGE> 9
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EARNINGS PER SHARE:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings used for basic and diluted earnings per
share computation $ 6,985 $ 8,410 $ 21,084 $ 22,214
========== ========== ========== ==========
Total shares used for basic earnings per share 17,223 16,900 17,165 16,816
Dilutive securities, principally stock options 177 140 161 167
---------- ---------- ---------- ----------
Total shares used for diluted earnings per share
computation 17,400 17,040 17,326 16,983
========== ========== ========== ==========
</TABLE>
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 1999 and 1998.
9
<PAGE> 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 nine months ended September 30, 1999 and 1998
For the nine months ended September 30, 1999, income before minority interests
and other, net, increased by 10.0 percent from $24.0 million to $26.4 million,
when compared to the nine months ended September 30, 1998. The increase was due
to increased revenues of $9.9 million while expenses increased by $7.5 million.
Income from property increased by $8.1 million from $85.2 million to $93.3
million, or 9.5 percent, due to acquisitions ($3.0 million), rent increases
($3.2 million), lease up of manufactured home sites ($1.2 million) and other
community revenues ($0.7 million).
Other income increased by $1.8 million from $4.5 million to $6.3 million due
primarily to a $1.7 million increase in interest and other income.
Property operating and maintenance expenses increased by $1.3 million from $19.1
million to $20.4 million, or 6.9 percent, due primarily to acquisitions and
timing.
Real estate taxes increased by $0.2 million from $6.5 million to $6.7 million,
or 2.5 percent, due to acquisitions.
Property management expenses increased by $0.3 million from $1.7 million to $2.0
million representing 2.1 percent and 1.9 percent of income from property in 1999
and 1998, respectively.
General and administrative expenses increased by $0.3 million from $2.5 million
to $2.8 million, or 11.5 percent, due primarily to increased staffing to manage
the growth of the Company. General and administrative expenses as a percentage
of income from property remained constant at 2.9 percent in both periods.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased by $7.8 million from $59.9 million to $67.7 million. EBITDA as a
percent of revenues increased to 68.1 percent in 1999 compared to 66.8 percent
in 1998.
Depreciation and amortization increased by $3.2 million from $18.1 million to
$21.3 million or 17.5 percent due primarily to acquisitions of communities in
1999 and 1998.
10
<PAGE> 11
SUN COMMUNITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS CONTINUED
Interest expense increased by $2.2 million from $17.8 million to $20.0 million,
or 12.5 percent, primarily due to increased average debt outstanding.
Other, net of $3.0 million in 1998 represents a gain from the disposition of
certain assets.
Comparison of the three months ended September 30, 1999 and 1998
For the three months ended September 30, 1999, income before minority interests
and other, net, increased by 8.7 percent from $8.0 million to $8.7 million, when
compared to the three months ended September 30, 1998. The increase was due to
increased revenues of $3.6 million while expenses increased by $2.9 million.
Income from property increased by $3.0 million from $28.3 million to $31.3
million, or 10.7 percent, due to acquisitions ($0.8 million), rent increases
($1.1 million), lease up of manufactured home sites ($0.5 million) and increases
in rents and other community revenues ($0.6 million).
Other income increased by $0.6 million from $2.1 million to $2.7 million due
primarily to an increase in interest and other income.
Property operating and maintenance expenses increased by $0.6 million from $6.5
million to $7.1 million, or 8.8 percent, primarily due to acquisitions and
timing.
Real estate taxes increased by $0.1 million from $2.1 million to $2.2 million
due to acquisitions.
Property management expenses increased by $0.1 million from $0.6 million to $0.7
million, representing 2.3 percent of income from property in both 1999 and 1998.
General and administrative expenses increased by $0.1 million from $0.8 million
to $0.9 million, or 15.4 percent, due primarily to increased staffing to manage
the growth of the Company. General and administrative expenses as a percentage
of income from property increased slightly from 2.7 percent in 1998 to 2.8
percent in 1999.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased by $2.7 million from $20.3 million to $23.0 million. EBITDA as a
percent of revenues increased to 67.7 percent in 1999 compared to 66.8 percent
in 1998.
Depreciation and amortization increased by $1.2 million from $6.1 million to
$7.3 million, or 19.0 percent, due primarily to acquisitions of communities in
1999 and 1998.
11
<PAGE> 12
SUN COMMUNITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS CONTINUED
Interest expense increased by $0.8 million from $6.2 million to $7.0 million, or
13.5 percent, primarily due to increased average debt outstanding.
Other, net of $2.1 million in 1998 represents a gain from the disposition of
certain assets.
SAME PROPERTY INFORMATION
The following table reflects property-level financial information as of and for
the nine months ended September 30, 1999 and 1998. The "Same Property" data
represents information regarding the operation of communities owned as of
January 1, 1998 and September 30, 1999. 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 1999 and 1998.
<TABLE>
<CAPTION>
SAME PROPERTY TOTAL PORTFOLIO
--------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income from property $ 65,834 $ 61,903 $ 93,251 $ 85,180
---------- ---------- ---------- ----------
Property operating expenses:
Property operating and maintenance 12,031 11,832 20,407 19,095
Real estate taxes 5,081 5,199 6,666 6,502
---------- ---------- ---------- ----------
Property operating expenses 17,112 17,031 27,073 25,597
---------- ---------- ---------- ----------
Property EBITDA $ 48,722 $ 44,872 $ 66,178 $ 59,583
========== ========== ========== ==========
Number of operating properties 79 79 110 104
Developed sites 27,458 26,965 39,336 36,956
Occupied sites 26,280 25,633 36,325 33,484
Occupancy % 95.7%(1) 95.1%(1) 94.7%(1) 95.2%(1)
Weighted average monthly rent per site $ 275 (1) $ 264 (1) $ 276 (1) $ 267 (1)
Sites available for development 1,228 1,789 6,500 5,854
Sites planned for development in current year 136 374 550 1,220
</TABLE>
(1) Occupancy % and weighted average rent relates to manufactured housing sites,
excluding recreational vehicle sites.
On a same property basis, property revenues increased by $3.9 million from $61.9
million to $65.8 million, or 6.4 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
September 30, 1999 compared to September 30, 1998.
Property operating expenses increased by $0.1 million from $17.0 million to
$17.1 million or 0.5 percent, due to increased occupancies and costs. Property
EBITDA increased by $3.8 million from $44.9 million to $48.7 million, or 8.6
percent.
12
<PAGE> 13
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 $6.3 million to $16.0 million at
September 30, 1999 compared to $9.7 million at December 31, 1998 because cash
provided by operating and financing activities exceeded cash used in investing
activities.
Net cash provided by operating activities decreased by $3.0 million to $43.7
million for the nine months ended September 30, 1999 compared to $46.7 million
for the same period in 1998. This decrease was primarily due to other assets
increasing by $5.4 million and accounts payable and other liabilities, including
distributions, decreasing by $3.4 million offset by a $5.6 million increase in
income before minority interests, depreciation and amortization and other.
Net cash used in investing activities decreased by $7.9 million to $68.0 million
from $75.9 million due to a $14.6 million decrease in rental property
acquisition activities, net of proceeds from asset sales, and a $3.5 million
decrease in investments in and advances to affiliates, offset by an increase of
$10.2 million used to finance notes receivable.
Net cash provided by financing activities decreased by $8.5 million to $30.7
million for the nine months ended September 30, 1999 compared to $39.2 million
for the same period in 1998. This decrease was primarily because $63.6 million
of notes payable, net of deferred financing costs, were issued in 1998 and none
issued in 1999, and distributions increasing by $2.7 million offset by $50.4
million of additional proceeds from common stock and operating partnership units
and increased borrowings on the line of credit of $8.0 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 1.05% and is due January 1, 2003. See "Special Note
Regarding Forward-Looking Statements."
On September 29, 1999, through the Operating Partnership, the Company completed
a private placement of 2,000,000 Series A Preferred Units to institutional
investors in exchange for a capital contribution of $50 million. Series A
Preferred Units, which may be called by the Company at par on or after September
29, 2004, have no stated maturity or mandatory redemption and pay a cumulative,
quarterly dividend at an annualized rate of 9.125%. The Series A Preferred Units
are convertible into preferred stock under certain circumstances. The Company
used the proceeds from such private placement to reduce outstanding indebtedness
under its revolving credit facility.
At September 30, 1999, the Company's debt to total market capitalization
approximated 33% (assuming conversion of all Common and Preferred OP Units to
shares of common stock), with a weighted average maturity of approximately 5.5
years and a weighted average interest rate of 7.0%.
13
<PAGE> 14
SUN COMMUNITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES CONTINUED
Recurring capital expenditures approximated $4.6 million for the nine months
ended September 30, 1999, including $0.4 million for additional space and
related costs at corporate headquarters.
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 periods ended September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income before allocation to
minority interest $ 8,727 $ 8,027 $ 26,392 $ 23,994
Add depreciation and amortization, net
of corporate office depreciation 7,217 6,073 21,114 17,995
Deduct distribution to Preferred OP Units (627) (627) (1,879) (1,879)
--------- ---------- ----------- ----------
Funds from operations $ 15,317 $ 13,473 $ 45,627 $ 40,110
========= ========== =========== ==========
Weighted average OP Units outstanding
used for basic FFO per share/unit 19,971 19,075 19,957 19,048
Dilutive securities:
Stock options and awards 177 140 161 167
Convertible preferred OP Units 1,202 1,268 1,220 1,230
--------- ---------- ----------- ----------
Weighted average OP Units used for
diluted FFO per share/unit 21,350 20,483 21,338 20,445
========= ========== =========== ==========
FFO, per share/unit:
Basic $ 0.77 $ 0.71 $ 2.29 $ 2.11
========= ========== =========== ==========
Diluted $ 0.75 $ 0.69 $ 2.23 $ 2.05
========= ========== =========== ==========
</TABLE>
14
<PAGE> 15
SUN COMMUNITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER CONTINUED:
Year 2000 Update
The Year 2000 ("Y2K") issue concerns the inability of computerized information
systems and non-information systems to accurately calculate, store or use a date
after 1999. This could result in computer system failures or miscalculations
causing disruptions of operations.
In 1997, the Company implemented a corporate-wide Y2K program to minimize any
such disruption caused by the failures of its own internal systems or those of
its business supply chain. In the first phase of the project, the Company
reviewed its inventory of computer hardware and software, and other devices with
embedded microprocessors. The Company also discussed its software applications
and internal operational programs with its current information systems' vendors.
Finally, in this assessment phase, key members of the business supply chain were
contacted and interviewed regarding their awareness of the Y2K problem and the
status of their own Y2K project. The first phase was completed on schedule and
all key members of the Company's business supply chain reported that they were
aware of the Y2K problem and were in the process of readying for the Y2K issue.
In the second phase of the project, all systems found to be Y2K non-compliant
were upgraded, fixed, replaced and tested. The second phase was also completed
on schedule in December 1998. The Company believes that as a result of this
Implementation/Testing phase, its applications and programs will properly
recognize calendar dates beginning in the year 2000. The Company plans to
continue monitoring Y2K communications from its software vendors and anticipates
that some vendors will recommend further patches/upgrades and testing.
In the third and final phase of the Y2K program, the Company surveyed its
material third-party service providers, such as its banks, payroll processor,
stock transfer agent and telecommunications provider. The purpose of the survey
is to follow-up on the status of their Y2K compliance efforts and assess what
effect their possible non-compliance might have on the Company. In addition, the
Company discussed with its material vendors the possibility of any interface
difficulties and/or electrical or mechanical problems relating to the Y2K issue
which may affect properties owned or operated by the Company. The third phase
was completed on schedule in April 1999. While all surveyed vendors reported
that they were aware of the Y2K issue and were scheduled to have all systems
remedied before December 31, 1999, most vendors were reluctant to guarantee that
their Y2K issues would not adversely affect the operations of the Company. The
Company has therefore developed contingency plans for all important business
functions dependent on members of its business supply chain.
The Company believes that its expenditures for assessing its Y2K issues, though
difficult to quantify, to date have not been material because the Company's Y2K
evaluation has been conducted by its own personnel or by its vendors in
connection with their servicing operations. The Company received a third-party
assessment of its Y2K program methodology and has addressed the recommendations
that were deemed appropriate by the Company. The Company is not aware of any
other Y2K related conditions that it believes would likely require material
expenditures in the future. See "Special Note Regarding Forward-Looking
Statements.
15
<PAGE> 16
SUN COMMUNITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER CONTINUED:
Year 2000 Update, Continued
Based on its current information, the Company believes that the risk posed by
any foreseeable Y2K related problem with its internal systems and the systems at
its properties (including both information and non-information systems) or with
its vendors is minimal. Y2K related problems with the Company's software
applications and internal operational programs or with the electrical or
mechanical systems at its properties are unlikely to cause more than minor
disruptions in the Company's operations. The Company believes that the risk
posed by Y2K related problems for certain third-party service providers is
marginally greater, though, based on its current information, the Company does
not believe any such problems would have a material effect on its operations.
Any Y2K related problems at these third-party service providers could delay the
processing of financial transactions or payroll and could disrupt the Company's
internal and external communications.
While the Company believes that it will be Y2K capable by December 31, 1999,
there can be no assurance that the Company has been or will be successful in
identifying and assessing Y2K issues, or that, to the extent identified, the
Company's efforts to resolve such issues will be effective such that Y2K issues
will not have a material adverse effect on the Company's business, financial
condition, or results of operation.
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 August 31, 1999 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.
16
<PAGE> 17
SUN COMMUNITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER CONTINUED:
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 is effective for the
fiscal quarters after June 15, 2000. The Company has no derivative instruments
at September 30, 1999.
17
<PAGE> 18
SUN COMMUNITIES, INC.
PART II
ITEM 2.(C) - CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 29, 1999, through the Operating Partnership, the Company completed
a private placement of 2 million Series A Preferred Units to institutional
investors in exchange for a capital contribution of $50 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
ITEM 6.(A) - EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
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.
18
<PAGE> 19
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: November 5, 1999
SUN COMMUNITIES, INC.
BY: /s/ Jeffrey P. Jorissen
--------------------------------------------------
Jeffrey P. Jorissen, Chief Financial Officer
and Secretary
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,623
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 860,886
<DEPRECIATION> 90,038
<TOTAL-ASSETS> 897,556
<CURRENT-LIABILITIES> 38,000
<BONDS> 350,192
0
0
<COMMON> 174
<OTHER-SE> 336,572
<TOTAL-LIABILITY-AND-EQUITY> 897,556
<SALES> 0
<TOTAL-REVENUES> 99,509
<CGS> 0
<TOTAL-COSTS> 29,043
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,028
<INCOME-PRETAX> 26,392
<INCOME-TAX> 0
<INCOME-CONTINUING> 26,392
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,084
<EPS-BASIC> 1.23
<EPS-DILUTED> 1.21
</TABLE>
