Business context and reporting period
Sun Communities, Inc. is a self-managed REIT that owns, operates, develops and expands manufactured-housing (MH) and recreational-vehicle (RV) communities, and sells and rents homes. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018. At quarter-end, the company held interests in 370 properties across 31 U.S. states and one Canadian province.
Financial results and key metrics
Dollar amounts are in millions unless stated otherwise.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $323.5 | $268.2 | $852.9 | $740.5 |
| Net income | $51.7 | $29.0 | $109.5 | $71.5 |
| Net income attributable to common stockholders | $46.1 | $24.1 | $96.5 | $57.6 |
| Diluted EPS | $0.56 | $0.31 | $1.19 | $0.76 |
| Net cash from operating activities | — | — | $301.2 | $226.1 |
| NOI / gross profit (non-GAAP) | $175.8 | $147.0 | $473.1 | $416.0 |
| Core FFO per diluted share (non-GAAP) | $1.35 | $1.13 | $3.56 | $3.19 |
- Q3 revenue increased 20.6%; common-stockholder net income rose 91.0%. Nine-month revenue increased 15.2%, and common-stockholder net income rose 67.5%.
- Q3 same-community real-property NOI grew 6.2%, on 6.3% higher real-property income and 6.6% higher property operating expenses. Management attributed revenue growth chiefly to 2.2% higher occupancy and a 4.0% increase in monthly base rent per site. Nine-month same-community NOI also grew 6.2%.
- Q3 total-portfolio real-property NOI increased 14.1%; management attributed $10.0 million of the $17.7 million increase to acquisitions. For the nine months, real-property NOI grew 11.0%, including $17.5 million from acquired properties.
- Home-sale revenue rose 39.0% in Q3 and 33.9% for the nine months. Q3 homes sold increased 20.6%; new-home gross margin declined to 13.1% from 15.8%, while pre-owned-home margin increased to 34.6% from 28.3%.
- At September 30, cash and cash equivalents were $113.6 million; cash, cash equivalents and restricted cash totaled $129.1 million. Operating cash flow was $301.2 million, investing cash outflow $545.1 million and financing cash inflow $349.6 million for the nine months.
- Total debt, including secured borrowings and mandatorily redeemable preferred instruments, was $3.005 billion, versus $3.079 billion at year-end 2017. Weighted-average debt maturity was 9.4 years and weighted-average interest rate 4.5%. Mortgage loans payable were $2.819 billion. The $550 million revolving facility had no borrowings at quarter-end; approximately $4.2 million of capacity supported letters of credit. Management reported compliance with debt covenants.
- Total assets were $6.654 billion and total liabilities $3.367 billion. The company reported net debt to enterprise value of approximately 23.9% using the specified assumed conversions.
Material changes and notable items
- The company acquired communities totaling 4,506 sites and 1,166 development sites during 2018, including the Sun NG RV Resorts investment. Acquisitions completed in 2018 contributed $26.3 million of Q3 revenue and $7.5 million of Q3 net income.
- A September public offering of 5.06 million common shares generated $499.9 million net proceeds, used to repay revolving and term-loan borrowings; remaining proceeds were intended for acquisitions, working capital and general corporate purposes. The offering increased the common share count.
- Hurricane Irma estimates produced a $2.0 million net gain for the first nine months of 2018, compared with $8.1 million of net charges in the comparable 2017 period. The company reported a $16.2 million estimated insurance receivable at quarter-end. Three impaired Florida Keys communities require redevelopment and lease-up; management could not estimate when operating results would return to pre-hurricane levels.
- Debt extinguishment losses were $2.7 million for the nine months, including costs associated with loan repayments. Results also include foreign-currency effects; nine-month other expense was $3.2 million versus $5.3 million of other income in 2017.
- Adoption of the new revenue standard did not change revenue recognition policies. A change in acquisition accounting guidance means substantially all future property acquisitions are expected to be treated as asset acquisitions, with qualifying direct costs capitalized.
Outlook, commentary and risks
No numerical earnings or FFO guidance is provided in the supplied filing text. Management said it expects to continue evaluating acquisitions and development opportunities and anticipates meeting long-term liquidity needs through operating cash flows, available cash, debt or equity issuance, and property collateralization. The filing identifies risks including occupancy and rental-rate pressure, rising interest and operating costs, acquisition and development execution, access to financing and refinancing, capital-market volatility, currency fluctuations, natural disasters, manufactured-home buyer financing and REIT qualification. The company said ordinary-course legal proceedings were not expected, taken together, to materially adversely affect results or financial condition.
Important facts for investors to verify
- How much of reported growth and FFO improvement is attributable to same-community operations versus acquisitions, home sales, seasonality and nonrecurring items.
- The return, integration and financing assumptions for 2018 acquisitions, particularly Sun NG RV Resorts, including related preferred interests and redemption or purchase options.
- Remaining proceeds and dilution effects from the public offering and at-the-market share issuance program.
- Actual Hurricane Irma insurance recoveries, redevelopment costs and timing of the Florida Keys communities’ return to operations.
- Debt maturities, interest-rate exposure, covenant headroom and continued access to debt and equity markets; management cautions that financing could become more difficult or expensive.
- Non-GAAP NOI, FFO and Core FFO reconciliations and definitions; these measures are supplemental and do not replace GAAP earnings or operating cash flow.