ITEM 1. BUSINESS
GENERAL
Sun Communities, Inc. (the "Company") owns, operates and finances manufactured housing communities concentrated in the midwestern and southeastern United States. The Company is a fully integrated real estate company which, together with its affiliates and predecessors, has been in the business of acquiring, operating and expanding manufactured housing communities since 1975. At December 31, 1999, the Company owned and operated or financed a portfolio of 111 developed properties located in sixteen states (the "Properties"), including 94 manufactured housing communities, 5 recreational vehicle communities, and 12 properties containing both manufactured housing and recreational vehicle sites. At December 31, 1999, the Properties contained an aggregate of 33,950 developed manufactured home sites, approximately 7,350 manufactured home sites suitable for development and approximately 4,650 recreational vehicle sites. In order to enhance property performance and cash flow, the Company, through Sun Home Services, Inc., a Michigan corporation ("Home Services" or "SHS"), actively markets and sells new and used manufactured homes for placement in the Properties.
The Company made an election to be taxed as a REIT for federal income tax purposes commencing with the calendar year beginning January 1, 1994, and is self-administered and self-managed.
The Company's executive and principal property management office is located at 31700 Middlebelt Road, Suite 145, Farmington Hills, Michigan 48334 and its telephone number is (248) 932-3100. The Company has regional property management offices located in Elkhart, Indiana, and Tampa, Florida. The Company, which is a Maryland corporation, employed 639 people as of December 31, 1999.
STRUCTURE OF THE COMPANY
The operations of the Company are carried on through certain subsidiaries (the "Subsidiaries"), including Sun Communities Operating Limited Partnership, a Michigan limited partnership (the "Operating Partnership") which, among other things, enables the Company to comply with certain complex requirements under the Federal tax rules and regulations applicable to REITs. The Company established the Operating Partnership to allow the Company to acquire manufactured housing communities in transactions that defer some or all of the sellers' tax consequences. Substantially all of the Company's assets are held by or through the Operating Partnership, of which the Company is the sole general partner, and wholly-owned subsidiaries of the Company. In addition to the Operating Partnership, the Subsidiaries include Home Services, which provides manufactured home sales and other services to current and prospective tenants of the Properties. The Operating Partnership owns 100% of the non-voting preferred stock of Home Services, which entitles the Operating Partnership to 95% of the cash flow from operating activities of Home Services. The voting common stock of Home Services is currently owned by Gary A. Shiffman and Jeffrey P. Jorissen, executive officers of the Company, and the Estate of Milton M. Shiffman, a former executive officer of the Company, entitling them to the remaining 5% of such cash flow from operating activities. Sun Water Oak Golf, Inc. ("Sun Golf") is a wholly-owned subsidiary of Home Services. Sun Golf was organized to own and operate the golf course, restaurant and related facilities located on the Water Oak Property that were acquired in November 1994.
THE MANUFACTURED HOUSING COMMUNITY INDUSTRY
A manufactured housing community is a residential subdivision designed and improved with sites for the placement of manufactured homes and related improvements and amenities. Manufactured homes are detached, single-family homes which are produced off-site by manufacturers and installed on sites within the community. Manufactured homes are available in a wide array of designs, providing owners with a level of customization generally unavailable in other forms of multi-family housing.
Modern manufactured housing communities, such as the Properties, contain improvements similar to other garden-style residential developments, including centralized entrances, paved streets, curbs and gutters, and parkways. In addition, these communities also often provide a number of amenities, such as a clubhouse, a swimming pool, shuffleboard courts, tennis courts, laundry facilities and cable television service.
The owner of each home in the Company's communities leases the site on which the home is located. The Company owns the underlying land, utility connections, streets, lighting, driveways, common area amenities and other capital improvements and is responsible for enforcement of community guidelines and maintenance. Some communities provide water and sewer service through public or private utilities, while others provide these services to residents from on-site facilities. Each owner within the Company's communities is responsible for the maintenance of his home and leased site. As a result, capital expenditure needs tend to be less significant, relative to multi-family rental apartment complexes.
PROPERTY MANAGEMENT
The Company's property management strategy emphasizes intensive, hands-on management by dedicated, on-site community managers. The Company believes that this on-site focus enables it to continually monitor and address tenant concerns, the performance of competitive properties and local market conditions. Of the Company's 639 employees, 577 are located on-site as property managers, support staff, or maintenance personnel.
The Company's community managers are overseen by Brian W. Fannon, Senior Vice President and Chief Operating Officer, who has 30 years of property management experience, two Senior Vice Presidents, four Regional Vice Presidents and fourteen Regional Property Managers. In addition, the Regional Property Managers are responsible for semi-annual market surveys of competitive communities, interaction with local manufactured home dealers and regular property inspections.
Each community manager performs regular inspections in order to continually monitor the property's physical condition and provides managers with the opportunity to understand and effectively address tenant concerns. In addition to a community manager, each property has an on-site maintenance person and management support staff. The Company holds periodic training sessions for all property management personnel to ensure that management policies are implemented effectively and professionally.
HOME SALES
Home Services offers manufactured home sales services to tenants and prospective tenants in the Company's communities. Since tenants often purchase a home already on-site within a community, such services enhance occupancy and property performance. Additionally, because many of the homes in the Properties are sold through Home Services, better control of home quality in the Company's communities can be maintained than if sales services were conducted solely through third-party brokers.
COMPETITION
All of the Properties are located in developed areas that include other manufactured housing community properties. The number of competitive manufactured housing community properties in a particular area could have a material effect on the Company's ability to lease sites and on rents charged at the Properties or at any newly acquired properties. The Company may be competing with others that have greater resources than the Company and whose officers and directors have more experience than the Company's officers and directors. In addition, other forms of multi-family residential properties, such as private and federally funded or assisted multi-family housing and single-family housing, provide housing alternatives to potential tenants of manufactured housing communities.
REGULATIONS AND INSURANCE
General. Manufactured housing community properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities such as swimming pools, clubhouses and other common areas. The Company believes that each Property has the necessary operating permits and approvals.
Americans with Disabilities Act ("ADA"). The Properties and any newly acquired manufactured housing communities must comply with the ADA. The ADA has separate compliance requirements for "public accommodations" and "commercial facilities," but generally requires that public facilities such as clubhouses, pools and recreation areas be made accessible to people with disabilities. Compliance with ADA requirements could require removal of access barriers and other capital improvements at the Company's properties. Noncompliance could result in imposition of fines or an award of damages to private litigants. The Company does not believe the ADA will have a material adverse impact on the Company's results of operations. If required property improvements involve a greater expenditure than the Company currently anticipates, or if the improvements must be made on a more accelerated basis than it anticipates, the Company's ability to make expected distributions could be adversely affected. The Company believes that its competitors face similar costs to comply with the requirements of the ADA.
Rent Control Legislation. State and local rent control laws in certain jurisdictions limit the Company's ability to increase rents and to recover increases in operating expenses and the costs of capital improvements. Enactment of such laws has been considered from time to time in other jurisdictions. The Company presently expects to continue to operate manufactured housing community properties, and may purchase additional properties, in markets that are either subject to rent control or in which rent-limiting legislation exists or may be enacted. For example, 25 of the Properties are located in Florida, which has enacted a law which provides that a majority of tenants in a manufactured housing community may require that a proposed increase in site rental rates, reduction in services or utilities or change in the community's rules and regulations be submitted for formal mediation or arbitration if they believe that the proposal is unreasonable.
Insurance. Management believes that the Properties are covered by adequate fire, flood, property and business interruption insurance provided by reputable companies and with commercially reasonable deductibles and limits. The Company maintains a blanket policy that covers all of the Properties. The Company has obtained title insurance insuring fee title to the Properties in an aggregate amount which the Company believes to be adequate.
ITEM 2.
ITEM 2. PROPERTIES
General. At December 31, 1999, the Properties consisted of 94 manufactured housing communities, 5 recreational vehicle communities, and 12 properties containing both manufactured
housing and recreational vehicle sites located in sixteen states concentrated in the midwestern and southeastern United States. At December 31, 1999, the Properties contained 33,950 developed manufactured home sites, approximately 7,350 manufactured home sites suitable for development and approximately 4,650 recreational vehicle sites. In addition, at December 31, 1999, the Company owned seven undeveloped properties on which the Company plans to develop approximately 3,400 manufactured home sites. Most of the Properties include amenities oriented towards family and retirement living. Of the 111 Properties, 51 have more than 300 developed manufactured home sites, with the largest having 913 developed manufactured home sites.
The Properties had an aggregate occupancy rate of 94.0% as of December 31, 1999, excluding recreational vehicle sites. Since January 1, 1999, the Properties have averaged an aggregate annual turnover of homes (where the home is moved out of the community) of approximately 3.1% and an average annual turnover of residents (where the home is sold and remains within the community, typically without interruption of rental income) of approximately 8.5%.
The Company believes that its Properties' high amenity levels contribute to low turnover and generally high occupancy rates. All of the Properties provide residents with attractive amenities with most offering a clubhouse, a swimming pool, laundry facilities and cable television service. Many Properties offer additional amenities such as sauna/whirlpool spas, tennis, shuffleboard and basketball courts and/or exercise rooms.
The Company has sought to concentrate its communities within certain geographic areas in order to achieve economies of scale in management and operation. The Properties are principally concentrated in the midwestern and southeastern United States. The Company has identified Florida as a key market in which to expand its existing operations in the southeast because of Florida's stable tenant base, relatively low cost of living and attractive acquisition opportunities. Additionally, the Company's midwestern operations serve as a source of prospective tenants for the Florida Properties, which are generally oriented towards retirement living. Nevertheless, because the Company believes that geographic diversification will help insulate the portfolio from regional economic influences, the Company is also interested in expanding its operations in the western United States.
The following table sets forth certain information relating to the Properties owned or financed as of December 31, 1999:
(1) Occupancy percentage relates to manufactured housing sites, excluding recreational vehicle sites.
(2) This Property is owned by a joint venture in which the Operating Partnership owns or controls a 50% interest.
(3) Acquired in 1999.
(4) Acquired in 1998.
(5) Occupancy in these Properties reflects the fact that these communities are in their initial lease-up phase following an expansion or ground up development.
(6) This Property contains only recreational vehicle sites.
(7) The Company leases this Property. The Company has the option to purchase the Property upon the expiration of the lease. If the Company does not exercise its option to purchase, the lessor has the right to cause the Company to purchase the Property at the expiration of the lease at the option price.
(8) This Property contains recreational vehicle sites.
(9) This Property is financed and managed by the Company.
Leases. The typical lease entered into between a tenant and the Company for the rental of a site is month-to-month or year-to-year, renewable upon the consent of both parties, or, in some instances, as provided by statute. In some cases, leases are for one-year terms, with up to ten renewal options exercisable by the tenant, with rent adjusted for increases in the consumer price index. These leases are cancelable for non-payment of rent, violation of community rules and regulations or other specified defaults. See "Regulations and Insurance."
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising in the ordinary course of business. All such proceedings, taken together, are not expected to have a material adverse impact on the Company's results of operations or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock has been listed on the New York Stock Exchange ("NYSE") since December 8, 1993 under the symbol "SUI." On March 6, 2000, the closing sales price of the Common Stock was $29.00 and the Common Stock was held by approximately 1,110 holders of record. The following table sets forth the high and low closing sales prices per share for the Common Stock for the periods indicated as reported by the NYSE and the distributions paid by the Company with respect to each such period.
RECENT SALES OF UNREGISTERED SECURITIES
In 1997, the Operating Partnership issued an aggregate of 38,021 units ("OP Units") to certain sellers in exchange for property. In 1998, the Operating Partnership issued an aggregate of 90,704 OP Units to certain sellers in exchange for property. On December 15, 1998, pursuant to the terms of the Company's 1998 Stock Purchase Plan, the Operating Partnership issued an aggregate of 679,025 OP Units to certain officers, directors and consultants of the Company and its subsidiaries for a purchase price of $31.75 per OP Unit. In 1999, the Operating Partnership issued an aggregate 27,606 OP Units to a seller in exchange for property. On September 29, 1999, the Operating Partnership issued an aggregate of 2,000,000 Series A Cumulative Redeemable Perpetual Preferred Units to Belcrest Realty Corporation and Belair Real Estate Corporation for an aggregate of $50 million.
In 1997, the Company issued an aggregate of 41,621 shares of Common Stock upon conversion of an aggregate of 41,621 OP Units. In 1998, the Company issued an aggregate of 312,870 shares of Common Stock upon conversion of an aggregate of 312,870 OP Units. On June 5, 1998, the Company issued, as compensation, an aggregate of 165,000 shares of Common Stock to certain of its officers, which shares are restricted by the terms of certain Restricted Stock Award Agreements. On December 15, 1998, pursuant to the terms of the Company's 1998 Stock Purchase Plan, the Company issued an aggregate of 122,600 shares of Common Stock to certain employees and consultants of the Company and its subsidiaries for a purchase price of $31.75 per share. In 1999, the Company issued an aggregate of 139,706 shares of Common Stock upon conversion of an aggregate of 139,706 OP Units.
All of the above OP Units and shares of Common Stock were issued in private placements in reliance on Section 4(2) of the Securities Act of 1933, as amended, including Regulation D promulgated thereunder. No underwriters were used in connection with any of such issuances.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SUN COMMUNITIES, INC.
(1) The distribution of $.445 per share for the fourth quarter of 1995 was declared and paid in January 1996, and accordingly, is not included in the $1.335. (2) See the Consolidated Financial Statements of the Company included elsewhere herein.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & 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 notes thereto.
RESULTS OF OPERATIONS
Comparison of year ended December 31, 1999 to year ended December 31, 1998
For the year ended December 31, 1999, income before other, net and minority interests increased by $5.2 million from $31.4 million to $36.6 million, when compared to the year ended December 31, 1998. The increase was due to increased revenues of $14.4 million while expenses increased by $9.2 million.
Income from property increased by $11.1 million from $114.3 million to $125.4 million, or 9.7 percent, due to acquisitions ($4.0 million), rent increases ($4.1 million), lease up of manufactured home sites ($1.7 million) and other community revenues ($1.3 million).
Income from affiliate decreased $0.5 million from $2.2 million to $1.7 million due to the Company no longer providing floorplan financing of the model home inventories of Sun Home Services ("SHS").
Other income increased by $3.7 million from $3.6 million to $7.3 million due primarily to a $2.7 million increase in interest income.
Property operating and maintenance expenses increased by $1.7 million from $25.6 million to $27.3 million, or 6.4 percent, due primarily to acquisitions ($1.0 million).
Real estate taxes increased by $0.2 million from $8.7 million to $8.9 million, or 1.8 percent, due primarily to the acquired communities.
Property management expenses increased by $0.3 million from $2.3 million to $2.6 million, or 16.3 percent, representing 2.1 percent and 2.0 percent of income from property in 1999 and 1998, respectively.
General and administrative expenses increased by $0.4 million from $3.3 million to $3.7 million, or 10.3 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.
Interest expense increased by $3.1 million from $23.7 million to $26.8 million due primarily to investments in rental property and notes receivable. Included in interest is amortization of deferred finance costs of $0.9 million and $0.7 million in 1999 and 1998, respectively.
Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased by $11.8 million from $80.1 million to $91.9 million. EBITDA as a percent of revenues increased to 68.4 percent in 1999 compared to 66.7 percent in 1998.
Depreciation and amortization expense increased by $3.6 million from $25.0 million to $28.6 million due primarily to the acquisition and development of communities in 1999 and 1998.
Comparison of year ended December 31, 1998 to year ended December 31, 1997
For the year ended December 31, 1998, income before other, net and minority interests increased by $3.5 million from $27.9 million to $31.4 million, when compared to the year ended December 31, 1997. The increase was due to increased revenues of $23.9 million while expenses increased by $20.4 million.
Income from property increased by $21.1 million from $93.2 million to $114.3 million due primarily to the acquisition of 10 communities comprising approximately 2,100 developed sites during 1998 and 14 communities comprising approximately 5,200 developed sites during 1997.
Income from affiliate increased $1.0 million from $1.2 million to $2.2 million due primarily to increased sales of homes by SHS.
Other income increased by $1.8 million from $1.8 million to $3.6 million primarily due to a $1.1 million increase in interest income.
Property operating and maintenance expenses increased by $4.5 million from $21.1 million to $25.6 million, or 21.5 percent, due primarily to the acquired communities.
Real estate taxes increased by $1.2 million from $7.5 million to $8.7 million, or 16.7 percent, due primarily to the acquired communities.
Property management expenses increased by $0.4 million from $1.9 million to $2.3 million, or 19.2 percent, representing 2.0 percent of income from property in 1998 and 1997.
General and administrative expenses increased by $0.7 million from $2.6 million to $3.3 million, or 27.6 percent, due primarily to additional staff and facilities as a result of the Company's growth.
Interest expense increased by $9.3 million from $14.4 million to $23.7 million due primarily to investments in rental property. Included in interest is amortization of deferred finance costs of $0.7 million and $0.2 million in 1998 and 1997, respectively.
EBITDA increased by $17.1 million from $63.0 million to $80.1 million. EBITDA as a percent of revenues was 66.7 percent compared to 65.6 percent in 1997.
Depreciation and amortization expense increased by $4.3 million from $20.7 million to $25.0 million due primarily to the acquisition of communities in 1998 and 1997.
SAME PROPERTY INFORMATION
The following table reflects property-level financial information as of and for the years ended December 31, 1999 and 1998. The "Same Property" data represents information regarding the operation of communities owned as of January 1, 1998 and December 31, 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 938 sites in 1999 and 924 sites in 1998.
(1) Occupancy % and weighted average rent relates to manufactured housing sites, excluding recreational vehicle sites.
(2) Includes two communities and 390 developed sites owned through a joint venture.
(3) Includes 1,138 and 717 sites available for development in 1999 and 1998, respectively, and 322 sites planned for development owned through a joint venture.
On a same property basis, property revenues increased by $5.2 million from $81.9 million to $87.1 million, or 6.3 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 546 leased sites at December 31, 1999 compared to December 31, 1998.
Property operating expenses increased by $0.4 million from $22.4 million to $22.8 million, or 1.7 percent, due to increased occupancies and costs. Property EBITDA increased by $4.8 million from $59.5 million to $64.3 million, or 8.1 percent.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1.7 million to $11.4 million at December 31, 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 increased by $8.2 million to $61.4 million for the year ended December 31, 1999 compared to $53.2 million for the year ended December 31, 1998. This increase was primarily due to income before minority interests, depreciation and amortization and other, net increasing by $6.7 million and other assets decreasing by $6.4 million, offset by accounts payable and other liabilities decreasing by $5.0 million.
Net cash used in investing activities decreased by $16.1 million to $90.3 million from $106.4 million due to a $29.2 million decrease in rental property acquisition activities and an increase of $15.9 in proceeds related to asset sales, offset by an increase of $29.1 million used to finance notes receivable.
Net cash provided by financing activities decreased by $30.1 million to $30.5 million for the year ended December 31, 1999 compared to $60.6 million for the year ended December 31, 1998. This decrease was primarily because $65.0 million of notes payable were issued in 1998 and none issued in 1999 and distributions increasing by $3.5 million offset by $26.1 million of additional proceeds from common stock and operating partnership units and increased borrowings on the line of credit of $12.0 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 1.0 percent 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 million Series A Perpetual 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 8.875 percent. 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 December 31, 1999, the Company's debt to total market capitalization approximated 34.7 percent (assuming conversion of all Common and Preferred OP Units to shares of common stock), with a weighted average maturity of approximately 5.3 years and a weighted average interest rate of 7.12 percent.
Capital expenditures for 1999 included recurring capital expenditures of $5.9 million including $0.4 million for additional space and related costs at corporate headquarters and revenue producing capital expenditures of $1.1 million which principally consisted of water metering programs.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the years ended December 31, 1999, 1998, and 1997 was 1.96:1, 2.04:1, and 2.40:1 respectively.
INFLATION
Most of the leases allow for periodic rent increases which provide the Company with the opportunity to achieve increases in rental income as each lease expires. Such types of leases generally minimize the risk of inflation to the Company.
SAFE HARBOR STATEMENT
This Form 10-K 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.
YEAR 2000 UPDATE
The Year 2000 ("Y2K") issue concerns the inability of computerized information systems to accurately calculate, store and process data using a date after 1999.
The Company's Y2K compliance program consisted of three phases, (i) inventory and assessment, (ii) upgrade, replacement and testing, and (iii) assurance from material third-party service providers and vendors, all of which were successfully completed prior to December 31, 1999. In February 2000, the Company officially concluded its Y2K compliance program as no events had occurred that significantly affected either the Company's operations or its financial statements.
The Company believes that its expenditures for assessing Y2K issues, though difficult to quantify, have not been material as the Company's Y2K evaluation has been conducted primarily by its own personnel or by its vendors in connection with their servicing agreements.
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 adopted 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 has no derivative instruments at December 31, 1999.
OTHER
Industry analysts consider funds from operations ("FFO") to be an appropriate measure of the performance of an equity REIT. It is defined as income before minority interests plus non-cash items such as depreciation and amortization. FFO should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity.
The following table presents FFO for each of the quarters during 1999, 1998 and 1997:
Diluted FFO per unit reflects the potential dilution that would occur if securities were exercised or converted into OP Units. For purposes of calculating diluted FFO per OP Unit, $2,505 would be added to FFO in 1999, 1998 and 1997.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's principle market risk exposure is interest rate risk. The Company's exposure to market risk for changes in interest rates relates primarily to refinancing long-term fixed rate obligations, the opportunity cost of fixed rate obligations in a falling interest rate environment and its variable rate line of credit. The Company primarily enters into debt obligations to support general corporate purposes including acquisitions, capital improvements and working capital needs.
The table below presents principal, interest and related weighted average interest rates by year of maturity (in thousands):
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are filed herewith under Item 14
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in the Company's independent public accountants during the past two fiscal years.
PART III
The information required by ITEMS 10, 11, 12 AND 13 will be included in the Company's proxy statement for its 2000 Annual Meeting of Shareholders, and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed herewith as part of this Form 10-K:
(1) A list of the financial statements required to be filed as a part of this Form 10-K is shown in the "Index to the Consolidated Financial Statements and Financial Statement Schedule" filed herewith.
(2) A list of the financial statement schedules required to be filed as a part of this Form 10-K is shown in the "Index to the Consolidated Financial Statements and Financial Statement Schedule" filed herewith.
(3) A list of the exhibits required by Item 601 of Regulation S-K to be filed as a part of this Form 10-K is shown on the "Exhibit Index" filed herewith.
(b) Reports on Form 8-K
On October 15, 1999, the Company filed a Form 8-K. This Form 8-K, dated October 14, 1999, reported the Operating Partnership's issuance of an aggregate of 2,000,000 Series A Cumulative Redeemable Perpetual Preferred Units to Belcrest Realty Corporation and Belair Real Estate Corporation for $50 million in the aggregate.
SUN COMMUNITIES, INC. INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Sun Communities, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Sun Communities, Inc. (the "Company") at December 31, 1999 and December 31, 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Detroit, Michigan February 11, 2000
SUN COMMUNITIES, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 1999 AND 1998 (AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
The accompanying notes are an integral part of the consolidated financial statements.
SUN COMMUNITIES, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
The accompanying notes are an integral part of the consolidated financial statement
SUN COMMUNITIES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
The accompanying notes are an integral part of the consolidated financial statements.
SUN COMMUNITIES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (AMOUNTS IN THOUSANDS)
The accompanying notes are an integral part of the consolidated financial statements.
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: A. BUSINESS: Sun Communities, Inc. and its subsidiaries (the "Company") is a real estate investment trust ("REIT") which owns and operates or finances 111 manufactured housing communities located in 16 states concentrated principally in the Midwest and Southeast comprising approximately 38,600 developed sites and approximately 7,350 sites suitable for development. The Company, which has elected to be taxed under Section 856(c) of the Internal Revenue Code of 1986, generally will not be subject to federal or state income taxes to the extent it distributes its REIT taxable income to its stockholders.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
B. PRINCIPLES OF CONSOLIDATION: The accompanying financial statements include the accounts of the Company and all majority-owned and controlled subsidiaries. The minority interests include Common Operating Partnership Units ("OP Units") which are convertible into an equivalent number of shares of the Company's common stock. Such conversion would have no effect on earnings per share since the allocation of earnings to an OP Unit is equivalent to earnings allocated to a share of common stock. Of the 20.2 million OP Units outstanding, the Company owns 17.5 million or 86.6 percent. The minority interests are adjusted to their relative ownership interest whenever OP Units or common stock are issued, converted or retired by reclassification to/from paid-in capital.
Included in minority interests at December 31, 1999 are 2 million Series A Perpetual Preferred OP Units ("PPOP Units") issued at $25 per unit in September 1999 bearing an annual coupon rate of 8.875 percent. The PPOP Units may be called by the Company at par on or after September 29, 2004, have no stated maturity or mandatory redemption and are convertible into preferred stock under certain circumstances.
Also included in minority interests are 1.3 million Preferred OP Units ("POP Units") issued at $27 per unit bearing an annual cumulative dividend of $1.89 and redeemable at par or convertible in June, 2002. The POP Units are convertible one-for-one into OP Units at prices up to $31.50 per share. At prices above $31.50 per share, the POP Units are convertible into OP Units based on a formula the numerator of which is $31.50 plus 25 percent of stock price appreciation above $36 per share. The denominator is the then stock price. Had conversion occurred at the December 31, 1999 stock price of $32.188, the 1.325 million POP Units would have converted into 1.297 million OP Units.
C. RENTAL PROPERTY: Rental property is recorded at the lower of cost, less accumulated depreciation or fair value. Management evaluates the recoverability of its investment in rental property whenever events or changes in circumstances such as recent operating results, expected net operating cash flow and plans for future operations indicate that full asset recoverability is questionable.
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 and 7 to 15 years for furniture, fixtures and equipment.
Expenditures for ordinary maintenance and repairs are charged to operations as incurred and significant renovations and improvements, which improve and/or extend the useful life of the asset, are capitalized and depreciated over their estimated useful lives. Construction costs related to new community or expansion sites development including interest are capitalized until the property is open for occupancy.
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
D. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments with an initial maturity of three months or less to be cash and cash equivalents.
E. INVESTMENTS IN AND ADVANCES TO AFFILIATES: Sun Home Services ("SHS") provides home sales and other services to current and prospective tenants. The Company owns 100 percent of the outstanding preferred stock of SHS, 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. Included in other assets at December 31, 1999 and 1998 is $6.4 million and $11.3 million, respectively, related to the Company's investment in SHS.
On December 31, 1999, "SunChamp", a 50 percent controlled joint venture of the Company and Champion Enterprises, Inc., acquired three communities under initial development. The Company intends to account for its investment utilizing the equity method of accounting.
F. REVENUE RECOGNITION: Rental income attributable to leases is recorded on a straight-line basis when earned from tenants. Leases entered into by tenants generally range from month-to-month to one year and are renewable by mutual agreement of the Company and resident or, in some cases, as provided by statute.
G. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of financial instruments which includes cash and cash investments, mortgages and notes receivable and debt approximates fair value.
H. TAX STATUS OF DIVIDENDS: Approximately 19.4, 19.8, and 31.2 percent of the distributions paid in 1999, 1998, and 1997, respectively, represent a return of capital. The distributions paid included a 16.6 and 14.6 percent capital gain in 1999 and 1998, respectively.
I. CASH FLOW HEDGES: The company has periodically entered into hedge transactions to lock-in the basic interest cost of financing acquisitions. The gain or loss on such hedges is amortized as an adjustment to interest expense over the term of the related financing.
J. RECLASSIFICATIONS: Certain 1998 and 1997 amounts have been reclassified to conform with the 1999 financial statement presentation. Such reclassifications have no effect on results of operations as originally presented.
2. RENTAL PROPERTY (AMOUNTS IN THOUSANDS):
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1999, 1998 AND 1997
2. RENTAL PROPERTY, CONTINUED:
Land improvements and buildings consist primarily of infrastructure, roads, landscaping, clubhouses, maintenance buildings and amenities. Included in rental property at December 31, 1999 and 1998 are net carrying amounts related to capitalized leases of $40.8 million and $29.8 million, respectively.
During 1999, the Company acquired nine manufactured housing communities comprising 1,624 developed sites and 534 sites suitable for development for $37.1 million and five development communities comprising 2,046 sites, some of which are partially developed, for $13.1 million. During 1998, the Company acquired ten communities comprising 2,100 developed sites and 1,000 sites suitable for development for $65.5 million and eight development communities comprising 3,650 sites for $20.1 million. These transactions have been accounted for as purchases, and the statements of income include the operations of the acquired communities from the dates of their respective acquisitions. In conjunction with a prior year acquisition, the Company is obligated to issue $10.2 million of OP Units over the expected lease-up of the community through 2009 based on the per unit price of the OP Units on each annual date.
3. NOTES AND OTHER RECEIVABLES (AMOUNTS IN THOUSANDS):
(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.
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1999, 1998 AND 1997
3. NOTES AND OTHER RECEIVABLES, CONTINUED:
Officers' notes 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. Interest income of $0.8 million, $0.9 million and $0.8 million has been recognized in 1999, 1998 and 1997, respectively.
4. DEBT (AMOUNTS IN THOUSANDS):
The Company has a $125 million unsecured line of credit at LIBOR plus 1.0% maturing in January 2003, of which $78 million was available at December 31, 1999. The average interest rate of outstanding borrowings at December 31, 1999 was 6.68%.
The term loan is collateralized by seven communities comprising approximately 3,400 sites. The capitalized lease obligations and mortgage notes are collateralized by fifteen communities comprising approximately 3,850 sites. $27.1 million of the capitalized lease obligations are convertible into OP units at prices ranging from $35 to $40 per OP Unit. Annual payments under capitalized lease obligations range from $1.3 million to $1.4 million during their terms.
At December 31, 1999, the maturities of debt, excluding the line of credit, during the next five years are approximately as follows: 2000 - $2.1 million; 2001 - $76.4 million; 2002 - $17.4 million; 2003 - $133.5 million; and 2004 - $11.9 million.
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997
5. STOCK OPTIONS:
Data pertaining to stock option plans are as follows:
(a) There are 273,400 options outstanding and exercisable, respectively, which range from $20.00 - $27.99 with a weighted average life of 5.0 years related to the outstanding options. The weighted average exercise price for these outstanding and exercisable options is $22.81. There are 844,600 and 436,433 options outstanding and exercisable, respectively, which range from $28.00 - $35.99 with a weighted average life of 6.0 years related to the outstanding options. The weighted average exercise price for these outstanding and exercisable options is $30.96 and $29.96, respectively.
At December 31, 1999, 512,875 shares of common stock were available for the granting of options. Options are granted at fair value and generally vest over a two-year period and may be exercised for 10 years after date of grant. The stock option plans provide for the grant of up to 2,116,000 options. In addition, the Company established a Long-Term Incentive Plan for certain employees granting up to 240,000 options in 1997, which become exercisable in equal installments in 2002-2004 based on corporate profit performance.
The Company has opted to measure compensation cost utilizing the intrinsic value method. The fair value of each option grant was estimated as of the date of grant using the Black-Scholes option-pricing model with the following assumptions for options granted
If compensation cost for stock option grants had been recognized based on the fair value at the grant date, this would have resulted in net income of $28.8 million, $25.8 million and $21.9 million and basic net income per share of $1.68, $1.53 and $1.36 in 1999, 1998 and 1997, respectively.
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997
6. STOCKHOLDERS' EQUITY:
In April 1998, the Company declared a dividend of one Preferred Stock Purchase Right (Right) for each outstanding share of common stock. The Rights are not presently exercisable. Each Right entitles the holder, upon the occurrence of certain specified events, including a material change in the ownership of the Company, to purchase preferred stock and common stock, from the Company and/or from another person into which the Company is merged or which acquires control of the Company. The Rights may be generally redeemed by the Company at a price of $0.01 per Right. The Rights expire on June 8, 2008.
In December 1999, and June 1998, the Company issued stock awards of 24,000 and 165,000 restricted shares, respectively, to officers and certain employees which are being amortized over their five to ten year vesting period.
In December 1998, the Company issued common stock and OP units aggregating $25.5 million to directors, employees and consultants. The purchase was financed by personal bank loans guaranteed by the Company until January 2004.
7. EARNINGS PER SHARE (AMOUNTS IN THOUSANDS):
Diluted earnings per share reflect the potential dilution that would occur if dilutive securities were exercised or converted into common stock. Convertible POP Units are excluded from the computations as their inclusion would have an anti-dilutive effect on earnings per share in 1999, 1998 and 1997.
8. QUARTERLY FINANCIAL DATA (UNAUDITED): The following unaudited quarterly amounts are in thousands, except for per share amounts:
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997
8. QUARTERLY FINANCIAL DATA (UNAUDITED) CONTINUED:
(a) Operating income is defined as total revenues less property operating and maintenance expense, real estate tax expense, property management, and general and administrative expenses. Operating income is a measure of the performance of the operations of the properties before the effects of depreciation, amortization and interest expense. Operating income is not necessarily an indication of the performance of the Company or a measure of liquidity.
(b) Other, net consists principally of net gains (losses) on the sale/dispositions of depreciated properties.
SUN COMMUNITIES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS)
SUN COMMUNITIES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS)
SUN COMMUNITIES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS)
SUN COMMUNITIES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS)
(1) These communities collateralize $43.9 million of term debt. (2) These communities are financed by $36.6 million of collateralized lease obligations. (3) These communities collateralize $4.8 million of mortgage debt. (4) These communities collateralize $3.9 million of mortgage debt. (5) Includes $8.3 million of land in property under development in Footnote 2 "Rental Property" to the Company's Consolidated Financial Statements included elsewhere herein. (6) Includes $16.7 million of property under development in Footnote 2 "Rental Property" to the Company's Consolidated Financial Statements included elsewhere herein.
SUN COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED SCHEDULE III DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS)
The change in investment in real estate for the years ended December 31, 1999, 1998 and 1997 is as follows:
The change in accumulated depreciation for the years ended December 31, 1999, 1998 and 1997 is as follows:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 20, 2000
SUN COMMUNITIES, INC.
By /s/ Gary A. Shiffman ----------------------------------- Gary A. Shiffman, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
- -----------------------
(1) Incorporated by reference to Sun Communities, Inc.'s Registration Statement No. 33-69340.
(2) Incorporated by reference to Sun Communities, Inc.'s Current Report on Form 8-K dated March 20, 1996.
(3) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995.
(4) Incorporated by reference to Sun Communities, Inc.'s Current Report on Form 8-K dated April 24, 1996.
(5) Incorporated by reference to Sun Communities, Inc.'s Registration Statement No. 33-80972.
(6) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994.
(7) Incorporated by reference to Sun Communities, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.
(8) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996.
(9) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997.
(10) Incorporated by reference to Sun Communities, Inc.'s Current Report on Form 8-K dated April 24, 1998.
(11) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998.
(12) Incorporated by reference to Sun Communities, Inc.'s Proxy Statement, dated April 20, 1999
(13) Incorporated by reference to Sun Communities, Inc.'s Current Report on Form 8-K dated October 14, 1999.
(14) Filed herewith.
# Management contract or compensatory plan or arrangement required to be identified by Form 10-K Item 14.