10-Q 1 k80692e10vq.txt QUARTERLY REPORT 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, 2003. 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.) 27777 Franklin Road Suite 200 Southfield, Michigan 48034 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (248) 208-2500 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 [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP INDEX

2 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2003 AND DECEMBER 31, 2002 (AMOUNTS IN THOUSANDS) (UNAUDITED)

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, 2003 AND 2002 (AMOUNTS IN THOUSANDS, EXCEPT PER OP UNIT AMOUNTS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated financial statements. 4 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE PERIODS ENDED SEPTEMBER 30, 2003 AND 2002 (AMOUNTS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated financial statements. 5 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (AMOUNTS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated financial statements. 6 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 consolidated financial statements and notes thereto of the Company included in the Annual Report on Form 10-K for the year ended December 31, 2002. The following notes to consolidated financial statements present interim disclosures as required by the SEC. The accompanying consolidated financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. Certain reclassifications have been made to prior periods' financial statements in order to conform with current period presentation. 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, 2003 is identical to the accompanying Company balance sheet, except as follows:

7 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. RENTAL PROPERTY: The following summarizes rental property (amounts in thousands):

During the nine months ended September 30, 2003, the Company did not acquire any rental properties. 3. PROPERTIES HELD FOR DISPOSITION: Assets held for disposition are carried at the lower of book value or fair value less cost to sell the assets. Consistent with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", income from discontinued operations, for all periods presented, includes the results of operations of "Properties Held for Disposition". The following summarizes the results of operations of the properties held for disposition under SFAS No. 144 for the periods ended September 30, 2003 and 2002 (dollars in thousands):

As of September 30, 2003, net assets of properties held for disposition consisted of the following (in thousands): Rental Property, net of depreciation $ 12,788 Notes and other receivables 50 Other assets 335 Accounts payable and accrued expenses (60) Other liabilities (182) -------- Properties held for disposition, net $ 12,931 ========

8 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. NOTES AND OTHER RECEIVABLES: The following table sets forth certain information regarding notes and other receivables (amounts in thousands):

At September 30, 2003, the maturities of mortgages and other notes receivables are approximately as follows: 2004-$22.6 million; 2006-$3.8 million; 2008-$14.7 million. 5. INVESTMENTS IN AND ADVANCES TO AFFILIATES: Sun Home Services, Inc. ("SHS") sells and rents homes in our communities, manages a golf course, and provides activities and other services and facilities for our residents. The Company owns one hundred percent (100%) of the outstanding preferred stock of SHS, is entitled to ninety-five percent (95%) of the operating cash flow, and accounts for its investment utilizing the equity method of accounting. The common stock is owned by one officer of Sun and the estate of a former officer of Sun who collectively are entitled to receive five percent (5%) of the operating cash flow. The Company, through SHS, and two other participants (one unaffiliated and one affiliated with Gary Shiffman, Sun's Chief Executive Officer and President) provided financing to Origen Financial, L.L.C. ("Origen") through September 30, 2003. Origen's business is to provide loans to the purchasers of manufactured homes. The financing consisted of a $48 million line of credit and a $10 million term loan of which the Company's commitment was $35.5 million ($35.0 million and $33.6 million was outstanding as of September 30, 2003 and December 31, 2002, respectively). Subsequent to quarter end, the Company's line of credit and term loan to Origen was repaid in full after Origen was recapitalized. The Company invested $50 million in Origen's parent, Origen Financial, Inc. 9 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. INVESTMENTS IN AND ADVANCES TO AFFILIATES, CONTINUED: ("Origen, Inc."), and agreed to sell Origen, Inc. various interests in manufactured home loans previously acquired from Origen. The Company's investment in Origen, Inc. approximates a one third ownership interest which will be accounted for using the equity method of accounting for periods ending after September 30, 2003. Summarized combined financial information of the Company's equity investments for the nine months ended September 30, 2003 in SHS and Origen, are presented below before elimination of intercompany transactions (in thousands). Pursuant to the write-off of the Company's equity investment in Origen during 2002, the Operating Partnership's equity income from affiliates reflects only the Company's share of SHS income. Revenues $ 48,558 Expenses 70,986 -------- Net loss $(22,428) ======== Equity income from affiliates $ 592 ========

10 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. DEBT: The following table sets forth certain information regarding debt (amounts in thousands):

11 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. DEBT, CONTINUED: The Company entered into a $25 million loan facility in September of 2003. The loan bears interest at 2.04% and is due December 24, 2003. In April 2003 the Company issued $150 million of 5.75 percent senior notes, due April 15, 2010, and used the proceeds from the offering to retire the bridge loan of $48 million and senior notes of $85 million which matured on April 30 and May 1, 2003, respectively. The remaining $15 million of net proceeds was used to pay down the Company's line of credit. The collateralized term loans totaling $194,079 at September 30, 2003 are secured by 22 properties comprising approximately 10,600 sites. The capitalized lease obligation and mortgage notes are collateralized by 12 communities comprising approximately 3,900 sites. At the lease expiration date of the capitalized lease, January 2004, the Company has the right and intends to purchase the property for the amount of the then outstanding lease obligation. A capitalized lease obligation matured on January 1, 2003 and was paid by the issuance of 41,700 Preferred OP Units, cash of approximately $860,000 and the assumption of approximately $1,570,000 of debt, which was immediately retired. 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/or convert them 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 a $105 million unsecured line of credit of which $2.5 million was available to be drawn at September 30, 2003. 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 extension at the Company's option. The average interest rate of outstanding borrowings under the line of credit at September 30, 2003 was 1.97 percent. The Company is the guarantor of $22.6 million in personal bank loans maturing in 2004, made to directors, employees and consultants to purchase the stock of Sun and OP units pursuant to the Company's Stock Purchase Plan. No compensation expense was recognized in respect to the guarantees as the fair value thereof was not material nor have there been any defaults. 7. OTHER INCOME: The components of other income are as follows for the periods ended September 30, 2003 and 2002 (in thousands):

12 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: The Company has entered into four derivative contracts consisting of three interest rate swap agreements and an interest rate cap agreement. 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 and to cap the maximum interest rate on its variable rate borrowings. The Company does not enter into derivative instruments for speculative purposes. The swap agreements were effective April 2003, and have the effect of fixing interest rates relative to a collateralized term loan due to FNMA. One swap matures in July 2009, with an effective fixed rate of 4.93 percent. A second swap matures in July 2012, with an effective fixed rate of 5.37 percent. The third swap matures in July 2007, with an effective fixed rate of 3.97 percent. The third swap is effective as long as 90-day LIBOR is 7 percent or lower. The three swaps have an aggregate notional amount of $75.0 million. The interest rate cap agreement has a cap rate of 9.49 percent, a notional amount of $152.4 million and a termination date of April 03, 2006. Each of the Company's derivative contracts is based upon 90-day LIBOR. The Company has designated the first two swaps and the interest rate cap as cash flow hedges for accounting purposes. These three 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, whether positive or negative, is reflected as a component of interest expense. The valuation adjustment for the nine month period ended September 30, 2003 totals a positive $1.2 million. In accordance with SFAS No. 133, the "Accounting for Derivative Instruments and Hedging Activities," which requires all derivative instruments to be carried at fair value on the balance sheet, the Company has recorded a liability of $1.4 million and $2.3 million as of September 30, 2003 and December 31, 2002, respectively. 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. 9. STOCK OPTIONS: The Company accounts for its stock options using the intrinsic value method contained in APB Opinion No. 25. "Accounting for Stock Issued to Employees." If the Company had accounted for options using the methods contained in FASB Statement No. 123, "Accounting for Stock-Based Compensation", earnings attributable to OP Units and earnings per OP Unit would have been presented as follows for the periods ended September 30, 2003 and 2002: 13 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. STOCK OPTIONS, CONTINUED:

10. 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. 11. RECENT ACCOUNTING PRONOUNCEMENTS: In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" which establishes standards for how financial instruments that have characteristics of both liabilities and equity instruments should be classified on the balance sheet. The requirements of SFAS 150 generally outline that financial instruments that give the issuer a choice of settling an obligation with a variable number of securities or settling an obligation with a transfer of assets or any mandatorily redeemable security should be classified as a liability on the balance sheet. Upon adoption of SFAS 150 on July 1, 2003 the Company reclassified mandatorily redeemable preferred operating partnership units of $58.1 million and $53.9 million as of September 30, 2003 and December 31, 2002, respectively, from minority interest into debt. The reclassification had no effect on the Company's compliance with the covenant requirements of its credit agreements. 14 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 11. RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED: In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statements No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. In addition, all provisions of this Statement should be applied prospectively. The provisions of this Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The adoption of this Statement did not have a significant impact on the financial position or results of the operations of the Company. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." The objective of this interpretation is to provide guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, non-controlling interests and results of operations of a VIE need to be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the VIE's expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The provisions of this interpretation apply to the end of the first interim period or annual period ending after December 15, 2003 (i.e., December 31, 2003) to VIEs in which a company holds a variable interest that it acquired before February 1, 2003. Pursuant to FIN 46, the Company intends to consolidate SHS in its financial reporting beginning December 31, 2003. The Company currently reports all of the operating results of SHS in its equity income from affiliates. Therefore, the consolidation will have no significant impact on the financial condition or results of operations of the Company. Due to the recently completed equity financing of Origen, which reduced the Company's exposure to Origen's potential income/losses to less than a majority, the Company will not be required to consolidate Origen or Origen, Inc. under the provisions of FIN 46. 12. CONTINGENCIES On April 9, 2003, T.J. Holdings, LLC ("TJ Holdings"), a member of Sun/Forest, LLC ("Sun/Forest") (which, in turn, owns an equity interest in SunChamp LLC), filed a complaint against the Company, SunChamp LLC, certain other affiliates of the Company and two directors of Sun Communities, Inc. in the Superior Court of Guilford County, North Carolina. The complaint alleges that the defendants wrongfully deprived the plaintiff of economic opportunities that they took for themselves in contravention of duties allegedly owed to the plaintiff and purports to claim damages of $13.0 million plus an unspecified amount for punitive damages. The Company believes the complaint and the claims threatened therein have no merit and will defend it vigorously. The Company is involved in various other legal proceedings arising in the ordinary course of business. All such proceedings, taken together, are not expected to have a material adverse impact on our results of operations or financial condition. 15 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP ITEM 2. 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 judgments, 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 2002 Annual Report filed with the Securities and Exchange Commission on Form 10-K. During the three and nine months ended September 30, 2003, 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 nine months ended September 30, 2003 and 2002 For the nine months ended September 30, 2003, income before distribution to Preferred OP Units and discontinued operations decreased by 11.6 percent from $28.3 million to $25.0 million, when compared to the nine months ended September 30, 2002. The decrease was due to increased revenues of $9.2 million and increased equity income of $3.2 million offset by increased expenses of $15.7 million as described in more detail below. Income from property increased by $6.5 million from $113.0 million to $119.5 million, or 5.7 percent, due to acquisitions made during the prior year whose partial year income affects comparability ($4.8 million) and rent increases and other community revenues ($1.7 million). Equity income from affiliates increased by $3.2 million to an income of $0.6 million due primarily to increased profitability and volume of home sales and that the prior period included $2.0 million of losses from Origen. Other income increased by $2.7 million from $7.2 million to $9.9 million due primarily to an increase in interest income. Property operating and maintenance expenses increased by $4.8 million from $24.8 million to $29.6 million, or 19.4 percent. The increase was due to the expansion of cable TV services ($0.3 million), increase in property and casualty insurance costs ($0.4 million), increases in utility costs ($0.9 million), and increases in repair and maintenance expenses ($1.0 million). Acquisitions made during 2002 and the consolidation of SunChamp properties accounted for the remaining increase of $2.3 million. 16 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS, CONTINUED: Real estate taxes increased by $1.3 million from $7.5 million to $8.8 million, or 17.3 percent, due to acquisitions made during 2002 ($0.7 million) and increases in assessments and tax rates ($0.7 million). General and administrative expenses including property management increased by $2.0 million from $5.5 million to $7.5 million, or 36.4 percent, due primarily to increased audit and legal fees ($0.2 million), expenses related to our office relocation ($0.2 million), increased Michigan Single Business taxes ($0.4 million), additional staffing related to the SunChamp acquisition ($0.7 million) and assorted other minor increases ($0.5 million). Depreciation and amortization increased by $4.8 million from $27.7 million to $32.5 million, or 17.3 percent, due primarily to additional investment in rental property. Interest expense increased by $2.7 million from $23.8 million to $26.5 million, or 11.3 percent, due to increased debt levels somewhat offset by lower interest rates ($3.8 million), a decrease in capitalized interest ($0.7 million), and reduced by a positive valuation adjustment related to a swap to fix interest rates in the current period ($1.8 million). Comparison of the three months ended September 30, 2003 and 2002 For the three months ended September 30, 2003, income before distribution to Preferred OP Units and discontinued operations increased by 9.7 percent from $8.2 million to $9.0 million, when compared to the three months ended September 30, 2002. The increase was due to increased revenues and equity income of $4.2 million offset by increased expenses of $3.4 million as described in more detail below. Income from property increased by $1.4 million from $37.7 million to $39.1 million, or 3.7 percent, due primarily to acquisitions made during the prior year whose partial year income affects comparability. Equity income from affiliates increased by $1.5 million to income of $0.03 million due primarily to increased profitability and volume of home sales and that the prior period included $1.3 million of losses from Origen. Other income increased by $1.3 million from $2.6 million to $3.9 million, due primarily to an increase in interest income. Property operating and maintenance expenses increased by $1.4 million from $8.7 million to $10.1 million, or 16.1 percent. The increase was due to increases in utility costs ($0.2 million) and increase in repair and maintenance expense ($0.3 million). Acquisitions made during 2002 and consolidation of SunChamp properties accounted for the remaining $0.9 million of the increase. 17 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS, CONTINUED: Real estate taxes increased by $0.4 million from $2.5 million to $2.9 million, or 16.0 percent, due to acquisitions made during 2002 ($0.2 million) and increases in assessments and tax rates ($0.2 million). General and administrative expenses including property management increased by $0.9 million from $1.7 million to $2.6 million, or 52.9 percent, due primarily to increased professional fees ($0.2 million), the relocation of our offices ($0.1 million), increased Michigan Single Business tax ($0.1 million), additional staffing related to the SunChamp acquisition and the Company's software conversion ($0.3 million), and assorted other increases ($0.2 million). Depreciation and amortization increased by $1.5 million from $9.5 million to $11.0 million, or 15.8 percent, due primarily to additional investment in rental property. Interest expense decreased by $0.9 million from $8.3 million to 7.4 million, or 10.8 percent. This decrease is comprised of a combination of increased expenses due to increased debt levels, somewhat offset by lower interest rates, ($1.5 million) and decreased expenses due to a positive valuation adjustment related to a swap to fix interest rates ($2.4 million). 18 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAME PROPERTY INFORMATION The following table reflects property-level financial information as of and for the nine months ended September 30, 2003 and 2002. The "Same Property" data represents information regarding the operation of communities owned as of January 1, 2002 and September 30, 2003. 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 and statistical information for new development and acquisition communities.

(1) Occupancy % and weighted average rent relates to manufactured housing sites, excluding recreational vehicle sites. (2) Investors in and analysts following the real estate industry utilize net operating income ("NOI") as a supplemental performance measure. The Company considers NOI, given its wide use by and relevance to investors and analysts, an appropriate supplemental measure to net income because NOI provides a measure of rental operations and does not factor in depreciation/amortization and non-property specific expenses such as general and administrative expenses. On a same property basis, property net operating income increased by $0.4 million from $74.9 million to $75.3 million, or 0.5 percent. Income from property increased by $2.7 million from $101 million to $103.7 million, or 2.7 percent, due primarily to increases in rents including water and property tax pass through. Property operating expenses increased by $1.7 million from $18.6 million to $20.3 million, or 9.0 percent, due primarily to increases in real estate taxes, repair and maintenance, and payroll. The Company anticipates rental rate increases and expense containment to continue to offset any decrease in same property net operating income due to potential future occupancy decline. 19 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP ITEM 2. 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 the Company's unitholders and Sun's stockholders, 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 $65 to $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, make distributions to its unitholders and pay dividends to Sun's stockholders to maintain its qualification as a REIT in accordance with the Internal Revenue Code. The Company plans to invest approximately $5 to $10 million in developments consisting of expansions to existing communities and the development of new communities during 2003. 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 may invest in the range of $20 to $40 million in the acquisition of properties in 2003, depending upon market conditions. The Company would finance these investments by using net cash flows provided by operating activities and by drawing upon its line of credit. Cash and cash equivalents increased by $14.5 million to $17.1 million at September 30, 2003 compared to $2.6 million at December 31, 2002 primarily due to timing of the receipt of proceeds from a loan sale. Net cash provided by operating activities decreased by $5.8 million to $44.1 million for the nine months ended September 30, 2003 compared to $49.9 million for the nine months ended September 30, 2002. 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 Company's properties (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 "Factors That May Affect Future Results" in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. 20 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES, CONTINUED: In 2003, the Company increased its existing line of credit to a $105 million facility, which matures in July 2005, with a one-year optional extension. At September 30, 2003, the average interest rate of outstanding borrowings under the line of credit was 1.97 percent with $102.5 million outstanding and $2.5 million available to be drawn under the 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, 2003. The Company's primary long-term liquidity needs are principal payments on outstanding indebtedness. At September 30, 2003, the Company's outstanding contractual obligations were as follows: CONTRACTUAL CASH OBLIGATIONS

(3) The Company is the guarantor of $22.6 million in personal bank loans which is not reflected in the balance sheet, 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 Company's Stock 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. (4) 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. 21 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP ITEM 2. 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, and OP unit redemptions 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 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, nearly $1.0 billion from the sale of Sun common stock, the sale of OP units in the Company and the issuance of secured and unsecured debt securities. In addition, at September 30, 2003, ninety-four 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 "Factors That May Affect Future Results" in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. 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, 2003, the Company's debt to total market capitalization approximated 46 percent. The debt has a weighted average maturity of approximately 5.4 years and a weighted average interest rate of 5.4 percent. Capital expenditures for the nine months ended September 30, 2003 and 2002 included recurring capital expenditures of $4.7 million and $4.9 million, respectively. Net cash used in investing activities decreased by $64.3 million to $72.1 million compared to $136.4 million used in investing activities for the nine months ended September 30, 2002. This decrease was due to a $53.3 million decrease in rental property investment activities, a $43.1 million decrease in investment in notes receivable, net, offset by a $3.3 million decrease in proceeds related to property dispositions and an increase of $28.8 million in investment in and advances to affiliates. Net cash provided by financing activities decreased by $41.4 million to $42.5 million from $83.9 million provided by financing activities for the nine months ended September 30, 2002. This decrease was primarily due to proceeds from notes payable and other debt decreasing by $107.4 million, a $1.9 million increase in distributions, offset by a $57.5 million increase in borrowings on line of credit, and a $10.4 million increase of proceeds from issuance of common stock of Sun. 22 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUPPLEMENTAL MEASURE: Investors in and analysts following the real estate industry utilize funds from operations ("FFO") as a supplemental performance measure. While the Company believes net income (as defined by generally accepted accounting principles) is the most appropriate measure, it considers FFO, given its wide use by and relevance to investors and analysts, an appropriate supplemental measure. 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 reconciles earnings attributable to OP Units less earnings allocated to limited partners to FFO for the periods ended September 30, 2003 and 2002 (in thousands):

23 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUPPLEMENTAL MEASURE, CONTINUED:

5) The Company entered into three interest rate swaps and an interest rate cap agreement. The valuation adjustment reflects the theoretical noncash profit and loss were those hedging transactions terminated at the balance sheet date. As the Company has no expectation of terminating the transactions prior to maturity, the net of these noncash 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. (6) The Company acquired the equity interest of another investor in SunChamp in December 2002. Consideration consisted of a long-term note payable at net book value. Although the adjustment for the allocation of the SunChamp losses is not reflected in the accompanying financial statements, management believes that it is appropriate to provide for this adjustment because the Company's payment obligations with respect to the note are subordinate in all respects to the return of the members' equity (including the gross book value of the acquired equity) plus a preferred return. As a result, the losses that are allocated to the Company under generally accepted accounting principles are effectively reallocated to the note for purposes of calculating Funds from Operations. 24 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP 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 "Factors That May Affect Future Results" in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. 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. 25 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP 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. The Company's variable rate debt totals $205.2 million and $221.2 million as of September 30, 2003 and 2002, respectively, which bears interest at various LIBOR/DMBS rates. If LIBOR/DMBS increased or decreased by 1.00 percent during the nine months ended September 30, 2003 and 2002, the Company believes its interest expense would have increased or decreased by approximately $2.2 million and $1.1 million based on the $222.9 million and $106.6 million average balance outstanding under the Company's variable rate debt facilities for the nine months ended September 30, 2003 and 2002, respectively. Additionally, the Company had $31.6 million and $39.2 million LIBOR based variable rate mortgage and other notes receivables as of September 30, 2003 and 2002, respectively. If LIBOR increased or decreased by 1.0 percent during the nine months ended September 30, 2003 and 2002, the Company believes interest income would have increased or decreased by approximately $0.3 million and $0.4 million based on the $29.6 million and $37.0 million average balance outstanding on all variable rate notes receivables for the nine months ended September 30, 2003 and 2002, respectively. The Company has entered into three separate interest rate swap agreements and an interest rate cap agreement. One of these swap agreements fixes $25 million of variable rate borrowings at 4.93 percent for the period April 2003 through July 2009, another of these swap agreements fixes $25 million of variable rate borrowings at 5.37 percent for the period April 2003 through July 2012 and the third swap agreement, which is only effective for so long as 90-day LIBOR is 7 percent or less, fixes $25 million of variable rate borrowings at 3.97 percent for the period April 2003 through July 2007. The interest rate cap agreement has a cap rate of 9.49 percent, a notional amount of $152.4 million and a termination date of April 13, 2006. Each of the Company's derivative contracts is based upon 90-day LIBOR. 26 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP ITEM 4. CONTROLS AND PROCEDURES (a) Under the supervision and with the participation of the Company's management, including Sun's Chief Executive Officer, Gary A. Shiffman, and Chief Financial Officer, Jeffrey P. Jorissen, the Company evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report, pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, Sun's Chief Executive Officer and Chief Financial Officer concluded that 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 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 Sun's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. (b) There have been no significant changes in the Company's internal control over financial reporting during the quarterly period ended September 30, 2003, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 27 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 Form 8-K, dated July 8, 2003, filed to report that the Company engaged Grant Thornton LLP as its independent auditor. Form 8-K, dated August 6, 2003, furnished for the purpose of reporting, under Item 12 - Results of Operations and Financial Condition, Sun's 2003 second quarter earnings and results of operations. Form 8-K, dated September 2, 2003, filed to report that Origen intended to raise capital and the potential uses of such proceeds. 28 SIGNATURES Pursuant to the requirements 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. Dated: November 13, 2003 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) 29 SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 31.1 Certification of Chief Executive Officer of Sun pursuant to Securities Exchange Act Rules 13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer of Sun pursuant to Securities Exchange Act Rules 13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.0 Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP 10-Q