SUI

Business Context and Reporting Period

Company: Sun Communities, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2003
Business Overview: The Company owns and operates manufactured housing communities. As of March 31, 2003, it held 129 operating properties with 44,125 developed sites. The Company is a Maryland corporation and an accelerated filer.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 8.8% to $44.7 million, driven by a 6.6% increase in property income ($41.8 million) due to 2002 acquisitions and rent increases.
• Profitability Decline: Net income decreased 21.8% to $6.3 million. Income before minority interests dropped 13.8% to $9.4 million due to a $5.2 million increase in expenses outpacing revenue growth.
• Expense Increases:
  • Property operating and maintenance expenses rose 21.4% to $10.2 million, attributed to severe winter repair costs, higher insurance, and utility costs.
  • Interest expense increased 12.8% to $8.8 million due to higher outstanding debt levels.
  • Depreciation and amortization increased 18.7% to $10.8 million.
• Same Property Performance: On a same-property basis, Net Operating Income (NOI) increased 2.7% to $26.5 million. Occupancy for the total portfolio declined to 89.3% from 93.5% in the prior year.
• Cash Flow: Net cash provided by operating activities decreased $3.3 million to $15.6 million, primarily due to changes in accounts payable and other liabilities.

Guidance, Outlook, and Risks

• Capital Allocation: Management plans to invest $5 million to $10 million annually in development and $40 million to $60 million in property acquisitions for 2003, financed by operating cash flows and the line of credit.
• Debt Refinancing: Subsequent to March 31, 2003, the Company issued $150 million of 5.75% senior notes due 2010 to retire $133 million in maturing debt (bridge loan and senior notes) and pay down the line of credit.
• Liquidity: The Company maintains a $105 million unsecured line of credit with $28.5 million available as of March 31, 2003. Management expects operating cash flows of approximately $70 million annually to be adequate for operations and distributions.
• Legal Contingency: On April 9, 2003, T.J. Holdings, LLC filed a complaint alleging wrongful deprivation of economic opportunities, claiming $13.0 million plus punitive damages. The Company intends to defend vigorously, asserting the claims lack merit.
• Regulatory Risk: The Company is assessing the impact of FASB Interpretation No. 46 (FIN 46) regarding the consolidation of Variable Interest Entities (VIEs), specifically affiliates Sun Home Services and Origen Financial.
• Interest Rate Risk: The Company has significant variable rate debt ($297.4 million). A 1% increase in LIBOR would increase interest expense by approximately $3.0 million. The Company utilizes interest rate swaps and caps to mitigate this risk.

Investor Verification Checklist

• Debt Maturities: Verify the successful refinancing of the $48 million bridge loan and $85 million senior notes maturing in April/May 2003, which were addressed via a subsequent $150 million private placement.
• Occupancy Trends: Monitor the decline in total portfolio occupancy (89.3% vs 93.5% prior year) and its impact on future revenue growth.
• Legal Exposure: Track the status of the $13 million lawsuit filed by T.J. Holdings, LLC.
• Accounting Changes: Review the Company's assessment of FIN 46 regarding potential consolidation of affiliates (SHS and Origen) in the third quarter of 2003.
• Guaranty Compliance: Confirm continued compliance with the $22.7 million guaranty for director/employee loans, which relies on the Company's compliance with its line of credit covenants.