Sun Communities Inc.

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Sun Communities Inc.

31700 Middlebelt Road, Suite 145
Farmington Hills, Michigan 48334
U.S.A.
Telephone: (248) 932-3100
Fax: (248) 932-3072
Web site: http://www.suncommunities.com

Public Company
Incorporated: 1985
Employees: 513
Sales: $151.3 million (2000)
Stock Exchanges: New York
Ticker Symbol: SUI
NAIC: 52593 Real Estate Investment Trusts

Sun Communities Inc. operates as a real estate investment trust (REIT) that owns, operates, and develops manufactured housing communities. In 2001, the company had over 110 communities with over 39,000 developed sites and nearly 5,000 sites available for development. Sun’s manufactured communities typically maintain an occupancy level of nearly 95 percent and have an average monthly rent of $288 per site. The firm operates in 15 states with the majority of sites in Michigan, Florida, Indiana, Ohio, and Texas.

Origins and the Escalating Popularity of the REIT

Milton M. Shiffman began investing in real estate in 1964. Working at the time as a doctor, Shiffman was involved in the development, acquisition, and construction of commercial property in his spare time. In 1975, he established the predecessor to Sun Communities Inc.

In 1981, Shiffman retired from his medical practice to concentrate fully on his growing company. He and his son, Gary A. Shiffman, began focusing on acquiring and then either expanding or renovating manufactured housing communities. In 1985, the pair incorporated the firm in order to pursue further growth options.

During the late 1980s, however, the real estate industry began to experience a decline. In fact, by the early 1990s, commercial property values dropped from between 30 and 50 percent. As a consequence, the Shiffmans began toying with the idea of launching a real estate investment trust. Congress created the REIT in 1960 to enable small investors to take a stake in large real estate investments. REITs were designed to pool the resources of many investors into a single entity that was focused on producing income through commercial real estate ownership and finance. Ninety percent of a REIT’s taxable income was then paid out to its shareholders each year.

REITs did not become popular until the early 1990s, however, because of certain tax and ownership restrictions. At first, a REIT could only own real estate, but the Tax Reform Act of 1986 laid the groundwork for change and enabled a REIT to own, operate, and even finance income-producing real estate. The Act also restricted the use of real estate investments as tax shelters. When REITs were created, laws in the U.S. allowed taxpayers to take significant interest and depreciation deductions that reduced their taxable income. REITs on the other hand, were based on creating taxable income. Up until the Reform Act—which limited the amount an investor could deduct on their taxes—REITs had difficulty securing capital because many investors looked for tax-sheltering investment opportunities.

During the early 1990s, many private real estate companies began utilizing the REIT structure to gain capital. At the same time, investors also began to eye the commercial real estate industry as a lucrative investment and were confident that the market would recover from the troubles of the 1980s.

Going Public as a REIT: 1993

The Shiffman’s followed suit and in December 1993 took Sun Communities Inc. public as a REIT, offering 5.7 million common shares. At the time of the initial public offering (IPO), the company operated 31 manufactured communities with 9,036 sites in six states.

Sun Communities began expanding rapidly after its IPO, which raised $145.8 million. In January 1994, it acquired Timberline Estates, a manufactured community with 296 sites located near Grand Rapids, Michigan. In March, the firm purchased Meadow Lake Estates for $12 million, increasing the number of its Michigan-based holdings to twelve.

By July of that year, Sun had acquired seven more communities and set plans in motion to sell an additional 3.5 million shares of its common stock. Chateau Properties Inc., a competing REIT based in Clinton Township, Michigan, took notice of Sun’s activities. According to Crain’s Detroit Business, Jeffrey Kellogg, CEO of the competitor, “speculated that Sun Communities maybe figured out they’re not big enough and wanted to hurry up and grow while REITs are still popular with investors.” Kellogg also stated in the 1994 article that there was “a certain amount of do-it-while-you-can philosophy” among REITs.

That philosophy certainly held true for Sun, who by the end of 1994 had the best-performing stock among manufactured housing REITs—Chateau Properties’ stock was second in the ranking. In its first year of operating as a public REIT, Sun had acquired 15 properties for $92 million, and had expanded into Florida and St. Louis, Missouri. It also secured revenues of $32.3 million, and net income of $7.8 million.

Expansion and Acquisition: Mid- to Late 1990s

Sun continued to expand in 1995, adding 3,900 new sites to its arsenal. In April of that year, the firm acquired Scio Farms of Ann Arbor, Michigan, for $23.6 million. At the time, Scio—with 853 sites—was the largest single community that Sun had ever acquired. Sun then went on to purchase Kensington Meadows, also located in Michigan. The company funded the deal through the issuance of 51,678 operating partnership units (O.P. Units). This was the company’s fifth purchase using O.P Units. In a 1995 company press release, president Gary Shiffman explained the benefits of the units, stating, “The issuance of O.P. units creates opportunities to acquire quality communities that would not otherwise be available because of tax ramifications to the seller. In addition, Sun has the ability to fund acquisitions without the costs associated with raising equity in the public marketplace.”

During the mid-1990s, manufactured housing was the fastest-growing segment of the U.S. real estate industry. Investors were encouraged by their financial planners to buy shares in manufactured housing REITs, leaving Sun well positioned for continued growth. In fact, by the close of 1995, Sun had acquired two new communities in Florida and as well as two in Austin, Texas, which was considered the fastest growing area in the state in terms of population and job creation. Revenues for the year increased by 39 percent to $45.1 million, while net income reached $11.7 million.

Sun became involved in significant merger activity in 1996. In March of that year, the company announced plans to purchase 25 new manufactured housing communities from Aspen Enterprises Ltd. The $226 million deal increased Sun’s holdings by nearly 60 percent, secured the company’s hold on the Michigan market, and expanded the firm’s reach in both the Florida and Arizona markets.

Acting as a white knight, Sun made an $380 million stock offer for competitor Chateau Properties in August 1996. Two days before Sun’s bid, Chateau had received a hostile $387 million cash bid from Manufactured Home Communities Inc. (MHC). At the time of the offers, Chateau had plans in the works to merge with ROC Communities Inc. A merger of Sun and Chateau however, would secure Sun’s position as the largest community owner in the United States, as well as rescue Chateau from the MCH bid—Chateau management felt a deal with MCH would not be beneficial for the firm.

While many analysts felt that both companies had offered too much for the Chateau—Sun’s bid was the highest tax-free offer—the firms argued that it was a lucrative opportunity to get a step ahead of competition in the industry. During the mid-1990s, the industry was filled with companies that owned a relatively small amount of communities. In fact, “manufactured housing companies say they have no choice but to acquire each other because it is getting harder to find large groups of property for sale,” reported The New York Times in August 1996.

The bids made by both Sun and MHC also marked the first unsolicited offers made among manufactured housing REITs. In the end though, Chateau opted to merge with ROC. The deal created the largest manufactured home community REIT in the United States.

Despite its failed attempt to acquire its largest competitor, Sun continued to expand and, by the end of 1996, operated 79 communities. Its revenue increased again, reaching $73.2 million, up 62 percent over the previous year. The company’s net income also rose to $18.6 million.

The firm continued its acquisition strategy in 1997, with the purchase of nine communities from Park Realty Inc. for approximately $93 million. The deal strengthened Sun’s foothold in the Southwest, Indiana, and Florida. Throughout the year, Sun acquired a total of 14 communities and developed 917 new sites. Through its Sun Home Services subsidiary, the company also sold 548 new homes and was involved in the resale brokerage of 555 additional homes. Sun also spun off Bingham Financial Services Corp. in 1997 as a financial services firm that offered financing and insurance to Sun’s residents.

Company Perspectives:

Sun Communities is committed to being the premier provider of quality community lifestyles by offering individualized housing and residential services. We aspire to be the industry leader in meeting the unique wants and needs of our customers. We dedicate ourselves to excellence by acting with integrity and honesty, exploring new revenue sources, emphasizing caring and fairness, encouraging the entrepreneurial spirit, providing accountability through specialization, and fostering teamwork.

Revenues continued to grow in 1998, reaching $120.6 million. The company acquired ten communities that year, bringing its holdings to 106 communities. During 1999, Sun partnered with Champion Development Corp., a subsidiary of Champion Enterprises Inc., to develop manufactured housing communities in new growth markets. Operating under the name SunChamp, the venture developed nine communities in Texas, North Carolina, Indiana, and Ohio during its first year of business. Sun also purchased nine existing communities and developed 1,125 new sites. Revenue for the year increased by 12 percent over 1998 and the firm’s funds from operations (FFO) grew by 9.1 percent per share.

Continued Success in an Unstable Market

During its first six years of operating as a public REIT, Sun experienced good fortune. The company’s earnings grew at an average annual growth rate of 10 percent. Its acquisition record was strong, homesite demand was high, and finance companies eased up on lending restrictions, allowing more people to finance homes. In fact, homes were selling at a record pace and according to the company, nearly 20 million people in the United States lived in manufactured housing, representing eight percent of the American population.

During 2000, however, the manufactured housing industry began to experience a decline. Finance companies had set credit standards too low during the 1990s and were now stuck with unpaid loans as well as repossessed homes. Many lenders then raised credit qualifications, leaving many buyers unable to obtain home loans. With the flood of repossessed homes on the market, sales of new homes began to falter and the number of new manufactured home buyers dropped.

While Sun’s growth slowed during 2000, the company still recorded positive revenues of $134.4 million and net income of $29.1 million. The firm acquired three new communities that year and developed 751 new sites. It sold five slow growth communities in Florida as part of its strategy to focus on those communities with stronger earnings potential. Sun also launched its “Residents First” program, which was designed to improve its customer relations, reduce turnover in communities, attract new residents, and create demand for Sun properties. Founder Milton M. Shiffman died that year while son Gary remained at the helm of Sun as chairman and CEO.

Even as the manufactured home market remained unstable in 2001, Sun’s future continued to look promising. The company’s favorable occupancy levels and low tenant turnover coupled with a strong balance sheet left it well positioned for future growth. Shiffman commented in the company’s 2000 annual report, “When the economic wind shifts from your back into your face, you must work harder and smarter to achieve your objectives.” Sun management pledged to do just that in order to secure the firm’s position as a leading owner and operator of manufactured housing communities.

Principal Subsidiaries

SCF Manager Inc.; SCN Manager Inc.; Sun Acquiring Inc.; Sun Florida QRS Inc.; Sun Houston QRS Inc.; Sun QRS Inc.; Sun Texas QRS Inc.; Sun Communities Operating Limited Partnership.

Principal Competitors

Chateau Communities Inc.; Manufactured Home Communities Inc.

Key Dates:

1975:: Milton M. Shiffman begins acquiring manufactured housing communities.
1981:: Shiffman retires from his medical practice to concentrate fully on his growing company.
1985:: The company incorporates in order to expand further.
1993:: The firm goes public as Sun Communities Inc.
1994:: Sun has the best-performing stock among manufactured housing REITs.
1996:: The company purchases 25 new manufactured housing communities from Aspen Enterprises Ltd.
1997:: Nine communities are acquired from Park Realty Inc.
1999:: Sun partners with Champion Development Corp. to develop manufactured housing communities in new growth markets.
2000:: The company launches its “Residents First” program.