10-Q 1 k72428e10vq.txt FORM 10-Q FOR QUARTER ENDING SEPTEMBER 30, 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002. OR [ ] Transition pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 COMMISSION FILE NUMBER 333-2522-01 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP (Exact Name of Registrant as Specified in its Charter) Michigan 38-3144240 (State of Organization) (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 [ ] Page 1 of 27 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP INDEX

2 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2002 AND DECEMBER 31, 2001 (IN THOUSANDS)

The accompanying notes are an integral part of the consolidated financial statements. 3 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS ENDED SEPTEMBER 30, 2002 AND 2001 (IN THOUSANDS, EXCEPT FOR PER UNIT DATA) ------

The accompanying notes are an integral part of the consolidated financial statements. 4 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (IN THOUSANDS)

The accompanying notes are an integral part of the consolidated financial statements 5 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: These unaudited condensed consolidated financial statements of Sun Communities Operating Limited Partnership (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, 2001. 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. Sun Communities, Inc. ("Sun"), a self-administered and self-managed REIT with no independent operations of its own, is the sole general partner of the Company. As general partner, Sun has unilateral control and complete responsibility for management of the Company. The balance sheet of Sun as of September 30, 2002 is identical to the accompanying Company balance sheet, except as follows:

6 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO AFFILIATES: Sun Home Services, Inc. ("SHS") provides home sales and other services to current and prospective tenants. Through the Operating Partnership, the Company owns 100 percent of the outstanding preferred stock of SHS, and is entitled to ninety-five percent (95%) of the operating cash flow. The common stock is owned by one officer of the Company and the estate of a former officer of the Company who collectively are entitled to receive five percent (5%) of the operating cash flow. Through SHS, the Company owns approximately a thirty percent (30%) (i.e., $15 million) interest in Origen Financial LLC ("Origen"), which company holds all of the operating assets of Bingham Financial Services Corporation ("BFSC") and its subsidiaries. BFSC owns approximately a twenty percent (20%) interest in Origen and the Company (together with the other investors in Origen) has certain rights to purchase its pro-rata share of BFSC's interest in Origen at fair value. The Company and another unaffiliated lender provide a $35 million secured line of credit to Origen. The line of credit matures December 31, 2002 and is fully drawn at September 30, 2002. Pursuant to the terms of the participation agreement between the Company and the other lender, the Company's commitment is to loan up to $20 million to Origen under the line of credit and the other lender is committed to loan up to $15 million to Origen under the line of credit. The parties participate pari-passu in the first $30 million advanced under the line of credit with additional fundings subordinated to the first $30 million. Also included in Investment in and Advances to Affiliates is the Company's investment in and advances to SunChamp LLC, a development entity comprising eleven new communities. On October 15, 2002, the Company entered into a preliminary agreement to acquire the ownership interest of Champion Enterprises in SunChamp for approximately $5.5 million. Upon closing, the Company will own approximately 45% of SunChamp. The Company owned 19.3% of SunChamp at September 30, 2002. All of these investments are accounted for utilizing the equity method of accounting. 7 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. RENTAL PROPERTY: The following summarizes rental property (in thousands):

During the nine months ended September 30, 2002, the Company acquired two communities totaling 889 sites for approximately $37 million. In January 2002, in conjunction with a property acquisition, the Company issued 100,000 Series B-2 Preferred OP Units that bear interest at the rate of 6.0 percent per annum for the first five years and 7.0 percent per annum thereafter. The Series B-2 Preferred Units are convertible into Common OP Units in January 2005 at $45 per unit and redeemable at $45 per unit in January 2007 and, upon certain circumstances, at times thereafter. In October 2001, the FASB issued FAS Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. During the first quarter of 2002, the Company sold one property with a net book value of approximately $2.9 million resulting in a gain of approximately $0.4 million. The adoption of this statement requires all dispositions of properties to be disclosed as discontinued operations in the period in which they occur and prior periods to be reclassified to conform with the current period presentation. At December 31, 2001, this property was classified as held for use. 8 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. NOTES AND OTHER RECEIVABLES (AMOUNTS IN THOUSANDS):

At September 30, 2002 the maturities of mortgage and other notes receivables are approximately as follows: 2003-$1.5 million; 2004-$20.3 million; 2005-$52.8 million; 2006-$3.8 million; 2007 and after-$29.8 million. 9 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. DEBT: The following table sets forth certain information regarding debt (in thousands):

The initial term of the variable rate FNMA debt is five years, the Company has the option to extend such variable rate borrowings for an additional five years and the Company has the option to convert such variable rate borrowings to fixed rate borrowings with a term of five or ten years, provided that in no event can the term of the borrowings exceed fifteen years. The Company has entered into three derivative contracts. The Company's primary strategy in entering into derivative contracts is to minimize the variability that changes in interest rates could have on its future cash flows. The Company generally employs derivative instruments that effectively convert a portion of its variable rate debt to fixed rate debt. The Company does not enter into derivative instruments for speculative purposes. The Company has entered into three equal interest rate swap agreements for an aggregate notional amount of $75 million. The agreements are effective April 2003, and have the effect of fixing interest rates relative to the FNMA debt. One swap matures in July 2009, with an effective fixed rate of 4.93%. A second swap matures in July 2012, with an effective fixed rate of 5.37%. The third swap matures in July 2007, with an effective fixed rate of 3.97%. The third swap is effective as long as LIBOR is 7% or lower. The Company has designated the first two swaps as cash flow hedges for accounting purposes. These two hedges were highly effective and had minimal effect on income. The third swap does not qualify as a hedge for accounting purposes and, accordingly, the entire change in valuation of $0.486 million is reflected as a component of interest expense in the statements of income. All three interest rate swaps totaling a liability of $1.8 million are recorded in notes and other receivables on the balance sheet as of September 30, 2002. These valuation adjustments will only be realized if the Company terminates the swaps prior to maturity. This is not the intent of the Company and, therefore, the net of valuation adjustments through the various maturity dates will approximate zero. In July 2002, the Company refinanced its existing line of credit to an $85 million facility. The Company had $10 million of this refinanced facility available to borrow at September 30, 2002. Borrowings under the line of credit bear interest at the rate of LIBOR plus 0.85% and mature July 2, 2005 with a one-year optional extension. 10 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. OTHER INCOME: The components of other income are as follows for the periods ended September 30, 2002 and 2001 (in thousands):

7. EARNINGS PER OP UNIT (IN THOUSANDS):

Diluted earnings per OP unit reflect the potential dilution that would occur if securities were exercised or converted into OP units. 8. NEW ACCOUNTING PRONOUNCEMENTS: In May 2002, the FASB issued SFAS 145, Rescission of FAS Nos. 4, 44 and 64, Amendment of FAS 13, and Technical Corrections as of April 2002. The provisions of this Statement related to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions related to Statement 13 shall be effective for transactions occurring after May 15, 2002, with early application encouraged. All other provisions of this Statement shall be effective for financial statements issued on or after May 15, 2002, with early application encouraged. Adoption of this statement did not have a significant impact on the financial position or results of operations of the Company. In July 2002, the FASB issued FAS Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the statement include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of this statement is not expected to have a significant impact on the financial position or results of operations of the Company. 11 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP 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. SIGNIFICANT ACCOUNTING POLICIES The Company had identified significant accounting policies that, as a result of the judgements, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved, could result in material changes to its financial condition or result of operations under different conditions or using different assumptions. Details regarding the Company's significant accounting policies are described fully in the Company's 2001 Annual Report filed with the Securities and Exchange Commission on Form 10-K. During the three and nine months ended September 30, 2002, there have been no material changes to the Company's significant accounting policies that impacted the Company's financial condition or results of operations. RESULTS OF OPERATIONS Comparison of the three months ended September 30, 2002 and 2001 ---------------------------------------------------------------- For the three months ended September 30, 2002, income before gain from property dispositions, net and distribution to Preferred OP Units decreased by 23.0 percent from $11.2 million to $8.6 million, when compared to the three months ended September 30, 2001. The decrease was due to increased revenues of $1.2 million offset by increased expenses of $3.7 million as described in more detail below. Income from property increased by $3.8 million from $34.4 million to $38.2 million, or 10.9 percent, due to acquisitions ($3.3 million) and rent increases and other community revenues ($0.5 million). Income from affiliates decreased by $1.9 million to a loss of $1.5 million due to losses at affiliates caused principally by reduced new home sales at SHS and reduced loan originations and loan loss provisions at Origen. Other income decreased by $0.7 million from $3.4 million to $2.7 million due primarily to a decrease in interest income. Property operating and maintenance expenses increased by $1.0 million from $7.6 million to $8.6 million, or 13.8 percent, primarily due to acquisitions ($0.4 million). Real estate taxes increased by $0.3 million from $2.3 million to $2.6 million due to acquisitions ($0.1 million) and changes in certain assessments. Property management expenses decreased by $0.1 million representing 1.4 percent and 1.9 percent of income from property in 2002 and 2001, respectively. General and administrative expenses decreased by $0.1 million, from $1.2 million to $1.1 million, representing 3.0 percent and 3.4 percent of total revenues in 2002 and 2001, respectively. 12 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comparison of the three months ended September 30, 2002 and 2001, continued --------------------------------------------------------------------------- Earnings before interest, taxes, depreciation and amortization ("EBITDA", an alternative financial performance measure that may not be comparable to similarly titled measures reported by other companies, defined as total revenues less property operating and maintenance, real estate taxes, property management, and general and administrative expenses) remained constant at $26.5 million. EBITDA as a percent of revenues was 67.3 percent in 2002 compared to 69.4 percent in 2001. Depreciation and amortization increased by $1.6 million from $8.1 million to $9.7 million, or 18.9 percent, due primarily to the net additional investment in rental properties. Interest expense increased by $1.1 million from $7.2 million to $8.3 million, or 15.2 percent, due primarily to an increase in outstanding debt. Comparison of the nine months ended September 30, 2002 and 2001 --------------------------------------------------------------- For the nine months ended September 30, 2002, income before gain from property dispositions, net and distribution to Preferred OP Units decreased by 11.5 percent from $33.4 million to $29.5 million, when compared to the nine months ended September 30, 2001. The decrease was due to increased revenues of $3.8 million offset by increased expenses of $7.7 million as described in more detail below. Income from property increased by $10.8 million from $103.5 million to $114.3 million, or 10.4 percent, due to acquisitions (5.3 million) and rent increases and other community revenues ($5.5 million). Income from affiliates decreased from $0.6 million to a loss of $2.6 million due to losses at affiliates caused principally by reduced new home sales at SHS and reduced loan originations and loan loss provisions at Origen. Other income decreased by $3.8 million from $11.3 million to $7.5 million due primarily to a decrease in interest income. Property operating and maintenance expenses increased by $2.6 million from $21.9 million to $24.5 million, or 11.9 percent, primarily due to acquisitions ($1.5 million). Real estate taxes increased by $0.8 million from $6.9 million to $7.7 million due to acquisitions ($0.35 million) and changes in certain assessments. Property management expenses decreased by $0.2 million from $2.1 million to $1.9 million representing 1.6 percent and 2.0 percent of income from property in 2002 and 2001, respectively. General and administrative expenses increased by $0.1 million from $3.5 million to $3.6 million, representing 3.0 percent and 3.0 percent of total revenues in 2002 and 2001, respectively. 13 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS, CONTINUED: EBITDA increased by $0.6 million from $80.9 million to $81.5 million. EBITDA as a percent of revenues was 68.4 percent in 2002 compared to 70.2 percent in 2001. Depreciation and amortization increased by $4.0 million from $24.1 million to $28.1 million, or 16.6 percent, due primarily to the net additional investment in rental properties. Interest expense increased by $0.3 million from $23.5 million to $23.8 million, or 1.4 percent. The nine months ended September 30, 2001 also included a $4.3 million gain from property disposition, net. SAME PROPERTY INFORMATION The following table reflects property-level financial information as of and for the nine months ended September 30, 2002 and 2001. The "Same Property" data represents information regarding the operation of communities owned as of January 1, 2001 and September 30, 2002. Site, occupancy, and rent data for those communities is presented as of the last day of each period presented. The "Total Portfolio" column differentiates from the "Same Property" column by including financial information for managed but not owned communities, new development and acquisition communities.

(1) Occupancy % and weighted average rent relates to manufactured housing sites, excluding recreational vehicle sites. On a same property basis, property EBITDA increased by $3.6 million from $67.8 million to $71.4 million, or 5.4 percent. Property revenues increased by $4.4 million from $92.0 million to $96.4 million, or 4.8 percent, due primarily to increases in rents including water and property tax pass through. Property operating expenses increased by $0.7 million from $24.2 million to $24.9 million due primarily to increases in real estate taxes and payroll. 14 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company's principal liquidity demands have historically been, and are expected to continue to be, distributions to Sun's stockholders and the Company's unitholders, property acquisitions, development and expansion of properties, capital improvements of properties and debt repayment. The Company expects to meet its short-term liquidity requirements through its working capital provided by operating activities and its line of credit, as described below. The Company considers its ability to generate cash from operations (anticipated to be approximately $70 million annually) to be adequate to meet all operating requirements, including recurring capital improvements, routinely amortizing debt and other normally recurring expenditures of a capital nature, pay distributions to Sun's stockholders to maintain Sun's qualification as a REIT in accordance with the Internal Revenue Code and make distributions to the Operating Partnership's unitholders. The Company plans to invest approximately $25 to $30 million annually in developments consisting of expansions to existing communities and the development of new communities. The Company expects to finance these investments by using net cash flows provided by operating activities and by drawing upon its line of credit. Furthermore, the Company expects to invest in the range of $40 to $60 million in the acquisition of properties in 2002, depending upon market conditions. The Company plans to finance these investments by using net cash flows provided by operating activities and by drawing upon its line of credit. Cash and cash equivalents decreased by $2.7 million to $1.9 million at September 30, 2002 compared to $4.6 million at December 31, 2001 because cash used in investing activities exceeded cash provided by operating activities and financing activities. Net cash provided by operating activities decreased by $5.5 million to $49.9 million for the nine months ended September 30, 2002 compared to $55.4 million for the nine months ended September 30, 2001. This decrease was primarily due to accounts payable and other liabilities decreasing by $5.3 million and other assets increasing by $0.7 million offset by an increase in earnings attributed to OP Units before depreciation and amortization, gain from property dispositions, net and discontinued operations of $0.5 million. The Company's net cash flows provided by operating activities may be adversely impacted by, among other things: (a) the market and economic conditions in the Company's current markets generally, and specifically in metropolitan areas of the Company's current markets; (b) lower occupancy and rental rates of the Properties; (c) increased operating costs, including insurance premiums, real estate taxes and utilities, that cannot be passed on to the Company's tenants; and (d) decreased sales of manufactured homes. See "Risk Factors" in Sun's Registration Statement on S-3, Amendment No. 1 (Registration No. 333-96769). 15 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES, CONTINUED: In 2002, the Company closed on a $139.4 million collateralized five year variable rate (2.5% at September 30, 2002) debt facility with an option to extend an additional five years at a variable rate debt facility, which is convertible to a five to ten year fixed rate loan but not to exceed a total term of fifteen years. In July 2002, the Company refinanced its existing line of credit to an $85 million facility which matures in July 2005, with a one year optional extension. At September 30, 2002, the average interest rate of outstanding borrowings under the line of credit was 2.66%, with $75 million outstanding and $10 million available to be drawn under the refinanced facility. The line of credit facility contains various leverage, debt service coverage, net worth maintenance and other customary covenants all of which the Company was in compliance with at September 30, 2002. In 1998, certain directors, employees and consultants of the Company purchased approximately $25.5 million of newly issued shares of common stock of Sun and common OP Units in the Company in accordance with the Sun's 1998 Stock Purchase Plan (the "Purchase Plan"). The participants in the Purchase Plan financed these purchases by obtaining personal loans from Bank One, N.A. (the "Bank") and the Company guaranteed the repayment of all such loans. The participants have agreed to fully indemnify the Company against all liabilities arising under such guaranty (the "Guaranty") (the principal balance of which was approximately $22.7 million at September 30, 2002), which reimbursement obligations are secured by approximately 654,000 OP Units valued at approximately $22.2 million (based on the closing sales price of the Sun's common stock on November 7, 2002). The Guaranty contains, among other usual commercial provisions, financial covenants in respect of the Company. These covenants were initially designed to be identical in all material respects with the financial covenants imposed on the Company under its line of credit facility. Since 1998, as the covenants in the Company's then applicable line of credit facility changed, the Guaranty has also been similarly amended to remain consistent. In July 2002, the Company entered into a replacement line of credit facility; however, conforming amendments to the Guaranty were not made, resulting in differing and inconsistent financial covenants in the line of credit facility as compared to the Guaranty. As a consequence, as of September 30, 2002, the Company was not in compliance with certain of the financial covenants contained in the Guaranty (the "Differing Financial Covenants"). Because this was not the intention of the parties, the Bank has agreed in writing that it would not declare a default, or accelerate the indebtedness due, under the Guaranty solely as a result of the Company's non-compliance with the Differing Financial Covenants contained in the Guaranty so long as the Company remains in compliance with all of the terms and conditions of its line of credit facility. 16 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES, CONTINUED: The Company's primary long-term liquidity needs are principal payments on outstanding indebtedness. At September 30, 2002, the Company's outstanding contractual obligations were as follows:

(1) As noted above, the Company is the guarantor of $22.7 million in personal bank loans, maturing in 2004, made to the Company's directors, employees and consultants for the purpose of purchasing shares of Sun's common stock or Company OP Units pursuant to the Purchase Plan. The Company is obligated under the Guaranty only in the event that one or more of the borrowers cannot repay their loan when due. This contingent liability is not reflected on the Company's balance sheet. (2) The provisions of the callable/redeemable $65 million notes are such that the maturity date will likely be 2005 if the 10 year Treasury rate is greater than 5.7 % on May 16, 2005. The maturity is reflected in the above table based on that assumption. 17 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES, CONTINUED: The Company anticipates meeting its long-term liquidity requirements, such as scheduled debt maturities, large property acquisitions, Operating Partnership unit redemptions, and potential additional capital contributions to affiliates (see Footnote 2 Investments in and Advances to Affiliates), through the issuance of debt or equity securities, including equity units in the Company, or from selective asset sales. The Company has maintained investment grade ratings with Fitch ICBA, Moody's Investor Service and Standard & Poor's, which facilitates access to the senior unsecured debt market. Since 1993, the Company has raised, in the aggregate, $276.6 million from the sale of shares of Sun's common stock (including 332,000 shares of common stock sold during the nine months ended September 30, 2002 at an average price of $41 raising $13.2 million in capital contributions), $93.3 million from the sale of OP units in the Company and $569 million from the issuance of secured and unsecured debt securities. In addition, at September 30, 2002, eighty-two of the Properties were unencumbered by debt, therefore, providing substantial financial flexibility. The ability of the Company to finance its long-term liquidity requirements in such manner will be affected by numerous economic factors affecting the manufactured housing community industry at the time, including the availability and cost of mortgage debt, the financial condition of the Company, the operating history of the Properties, the state of the debt and equity markets, and the general national, regional and local economic conditions. See "Risk Factors" in Sun's Registration Statement on S-3, Amendment No. 1 (Registration No. 333-96769). If the Company is unable to obtain additional equity or debt financing on acceptable terms, the Company's business, results of operations and financial condition will be harmed. At September 30, 2002, the Company's debt to total market capitalization approximated 41.4 percent (assuming conversion of all Common OP Units to shares of common stock). The debt has a weighted average maturity of approximately 5.1 years and a weighted average interest rate of 5.6 percent. Capital expenditures for the nine months ended September 30, 2002 and 2001 included recurring capital expenditures of $4.9 million and $3.7 million, respectively. Net cash used in investing activities increased by $104.0 million to $136.4 million compared to $32.4 million provided by investing activities for the nine months ended September 30, 2001. This increase was due to a $20.2 million increase in rental property, acquisition activities, repayments from financing notes receivable, net decreasing by $53.8 million, a $14.0 million decrease in proceeds related to property dispositions and an increase of $16.0 million in investment in and advances to affiliates. Net cash provided by financing activities increased by $121.5 million to $83.9 million from $37.6 million used in financing activities for the nine months ended September 30, 2001. This increase was primarily due to proceeds from notes payable, net of deferred financing costs, of $137.4 million, a $60.7 million reduction of repayments on notes payable and other debt and proceeds from capital contributions increasing by $20.3 million net of capital withdrawals, offset by a $95.0 million increase in repayments on line of credit, net and a $1.9 million increase in distributions. 18 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER Funds from operations ("FFO") is defined by the National Association of Real Estate Investment Trusts ("NAREIT") as net income (computed in accordance with generally accepted accounting principles) excluding gains (or losses) from sales of property, plus rental property 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 both basic and diluted purposes for the periods ended September 30, 2002 and 2001 (in thousands):

(1) The Company entered into interest rate swaps for an aggregate of $75 million, thereby substantially fixing for periods of 5 to 7 years rates which were formerly floating. The valuation adjustment reflects the theoretical non-cash profit and loss were those swaps terminated at the balance sheet date. As the Company has no expectation of terminating the swaps prior to maturity, the net of these non-cash valuation adjustments will be zero at the various maturities. As any imperfections related to hedging correlation in these swaps is reflected currently in cash as interest, the valuation adjustments are excluded from Funds From Operations. The valuation adjustment is included in interest expense. 19 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER , CONTINUED: 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 Sun's S-3, Amendment No. 1 (Registration No. 333-96769) 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. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") approved Statement of Financial Accounting Standards ("SFAS") 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires, among other things, that the purchase method of accounting for business combinations be used for all business combinations initiated after September 30, 2001. SFAS 142 addresses the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 requires, among other things, that goodwill and other indefinite-lived intangible assets no longer be amortized and that such assets be tested for impairment at least annually. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The adoption of these statements did not have a significant impact on the financial position or results of operations of the Company. 20 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER , CONTINUED: Recent Accounting Pronouncements, continued: In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion).The provisions of this SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The provisions of this standard generally are to be applied prospectively. The adoption of this statement requires all dispositions of properties to be disclosed as discontinued operations in the period in which they occur and prior periods to be reclassified to conform with the current period presentation. The Company sold one property in the first quarter, which has been presented accordingly. This implementation of the statement did not have any other material effect on the Company. In May 2002, the FASB issued SFAS 145, Rescission of FAS Nos. 4, 44 and 64, Amendment of FAS 13, and Technical Corrections as of April 2002. The provisions of this Statement related to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. The other provisions related to Statement 13 shall be effective for transactions occurring after May 15, 2002, with early application encouraged, All provisions of this Statement shall be effective for financial statements issued on or after May 15, 2002, with early application encouraged. Adoption of this statement did not have a significant impact on the financial position or results of operations of the Company. In July 2002, the FASB issued FAS Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the statement include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of this statement is not expected to have a significant impact on the financial position or results of operations of the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's principal market risk exposure is interest rate risk. The Company mitigates this risk by maintaining prudent amounts of leverage, minimizing capital costs and interest expense while continuously evaluating all available debt and equity resources and following established risk management policies and procedures, which include the periodic use of derivatives. The Company's primary strategy in entering into derivative contracts is to minimize the variability that changes in interest rates could have on its future cash flows. The Company generally employs derivative instruments that effectively convert a portion of its variable rate debt to fixed rate debt. The Company does not enter into derivative instruments for speculative purposes. 21 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK CONTINUED: The Company's variable rate debt totals $221.2 million as of September 30, 2002 which bears interest at various LIBOR/DMBS rates. If LIBOR/DMBS increased or decreased by 1.0 percent during the nine months ended September 30, 2002 and 2001, the Company believes its interest expense would have increased or decreased by approximately $1.4 million and $0.6 million based on the $143.6 million and $56.1 million average balance outstanding under the Company's variable rate debt facilities for the nine months ended September 30, 2002 and 2001, respectively. Additionally, the Company had $129.1 million and $90.2 million LIBOR based variable rate mortgage and other notes receivables as of September 30, 2002 and 2001. If LIBOR increased or decreased by 1.0 percent during the nine months ended September 2002 and 2001, the Company believes interest income would have increased or decreased by approximately $0.7 million and $0.9 million based on the $74.1 million and $90.6 million average balance outstanding on all variable rate notes receivables for the nine months ended September 30, 2002 and 2001, respectively. In September 2002, the Company entered into three separate interest rate swap agreements, effectively fixing, in the aggregate, $75 million of the Company's variable rate borrowings for a period commencing April 2003. One of these swap agreements fixes $25 million of variable rate borrowings at 4.93% for the period April 2003 through July 2009, another of these swap agreements fixes $25 million of variable rate borrowings at 5.37% for the period April 2003 through July 2012 and the third swap agreement, which is only effective for so long as LIBOR is 7% or less, fixes $25 million of variable rate borrowings at 3.97% for the period April 2003 through July 2007. ITEM 4. CONTROLS AND PROCEDURES (a) Sun's Chief Executive Officer, Gary A. Shiffman, and Sun's Chief Financial Officer, Jeffrey P. Jorissen, evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days of filing this quarterly report (the "Evaluation Date"), and concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective to ensure that information the Company is required to disclose in its filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. (b) There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date, including any corrective actions with regard to significant deficiencies and material weaknesses. 22 PART II ITEM 6.(A) - EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K. See the attached Exhibit Index. 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. 23 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 19, 2002 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP BY: Sun Communities, Inc., its General Partner BY: /s/ Jeffrey P. Jorissen ------------------------------------------------- Jeffrey P. Jorissen, Chief Financial Officer and Secretary of Sun Communities,Inc. (Duly authorized officer and principal financial officer) 24 CERTIFICATIONS (As Adopted Under Section 302 of the Sarbanes-Oxley Act of 2002) I, Gary A. Shiffman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Sun Communities Operating Limited Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 19, 2002 /s/ Gary A. Shiffman -------------------------------------------- Gary A. Shiffman, Chief Executive Officer, of Sun Communities, Inc., the General Partner 25 CERTIFICATIONS (As Adopted Under Section 302 of the Sarbanes-Oxley Act of 2002) I, Jeffrey P. Jorissen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Sun Communities Operating Limited Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 19, 2002 /s/ Jeffrey P. Jorissen --------------------------------------- Jeffrey P. Jorissen, Chief Financial Officer, of Sun Communities, Inc., the General Partner 26 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP EXHIBIT INDEX

------------------------------------------ (1) Incorporated by reference to Sun Communities, Inc.'s Report on Form 10-Q for the period ended September 30, 2002, No. 1-12616. 27

SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP 10-Q