Business context and reporting period
Sun Communities, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2015. The REIT owns and operates manufactured housing (MH) and recreational vehicle (RV) communities and sells and rents manufactured homes. At quarter-end it operated 251 properties in 30 states, with 93,718 developed sites.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $185.4 million | $130.6 million | $506.5 million | $362.3 million |
| Net income | $39.7 million | $26.7 million | $70.4 million | $45.2 million |
| Net income attributable to common stockholders | $28.8 million | $22.7 million | $47.9 million | $35.4 million |
| Diluted EPS | $0.54 | $0.55 | $0.90 | $0.85 |
| Operating cash flow | Not separately reported for the quarter | $146.8 million | $109.3 million |
- Growth reflected acquisitions as well as stronger existing-property performance. Same-site real-property NOI increased 9.1% in Q3 and 9.2% for the nine-month period. Same-site occupancy was 95.0%, up from 93.5%; same-site weighted average monthly site rent rose 3.1% year over year.
- Q3 total-portfolio real-property NOI increased 50.0% to $90.3 million; management attributed $25.0 million of the increase to net acquisitions and $4.9 million to same-site properties. For the nine months, real-property NOI rose 46.8% to $254.4 million.
- Rental Program NOI increased 20.1% to $20.6 million in Q3; occupied rental homes rose 13.1% to 11,443. Home-sales gross profit increased 65.4% to $5.6 million, with higher sales volume and pre-owned-home margins contributing.
- Q3 net income included an $18.2 million gain on property dispositions. Common earnings also included $4.3 million of Series A-4 preferred-stock redemption costs. Nine-month results included $26.9 million of property-disposition gains, $13.2 million of transaction costs, a $2.8 million debt-extinguishment loss, and a $7.5 million distribution from affiliate Origen.
- At September 30, cash was $23.9 million, down from $83.5 million at year-end 2014. Total liabilities were $2.79 billion. Reported total debt was $2.39 billion, including mortgage debt, secured borrowings, and mandatorily redeemable preferred OP units. Debt had a weighted-average interest rate of 5.1% and maturity of 8.1 years.
- The amended $450 million credit facility had $167 million outstanding, including $142 million revolving and $25 million term borrowings; the revolving rate was 1.66%. The company reported compliance with its covenants, a 42.7% leverage ratio against a 65% maximum, and 81 unencumbered properties with estimated market value of $945.8 million.
- Net cash used in investing was $403.2 million, principally reflecting $309.3 million of property acquisitions and $148.7 million of property investment. Financing provided $196.9 million. The company declared a $0.65-per-share common distribution for Q3.
Material changes, outlook, and risks
- The company completed the second phase of the Green Courte portfolio acquisition in January and made other 2015 acquisitions, including the Berger portfolio and several MH and RV communities. It reported 34 MH and four RV communities acquired during the first nine months, with approximately 15,600 sites; four MH communities with approximately 1,700 sites were disposed of.
- Management said it expects to continue pursuing acquisitions, development, and expansion, subject to market conditions. It expects to fund liquidity needs through operating cash flow, available cash, credit facilities, and debt or equity issuance. No specific earnings or FFO guidance was provided. Transient RV revenue was expected to approximate $39.3 million annually, with 15.0% expected in Q4 2015.
- Key risks cited include economic and capital-market volatility, access to financing and refinancing, interest-rate increases, acquisition integration, occupancy and rent levels, operating-cost inflation, manufactured-home financing and repossessions, natural disasters, and continued REIT qualification. A 1 percentage-point change in Prime or LIBOR was estimated to change interest expense by approximately $2.2 million based on the disclosed variable-debt balance and sensitivity assumptions.
- Two interest-rate caps covered $160.1 million of notional principal. Legal proceedings were not expected to have a material adverse effect. A taxable subsidiary was under IRS examination for 2013; no proposed adjustments had been received. Management reported no material Hurricane Joaquin damage and effective disclosure controls.
- After quarter-end, the company sold three Indiana MH communities with approximately 1,250 sites for $36.1 million.
Important facts for investors to verify
- How much of revenue and NOI growth reflects acquisitions versus sustainable same-site growth, and the contribution and financing terms of acquired properties.
- Whether acquisition-related depreciation, interest expense, transaction costs, and dilution will constrain common earnings and cash available for distributions; reported Q3 diluted EPS declined year over year despite higher net income.
- Debt maturities, floating-rate exposure, actual availability under the credit facility, and covenant headroom as acquisitions and capital spending continue.
- The composition and durability of property-disposition gains, the Origen distribution, and other unusual items included in reported results.
- Whether rental-home growth, home-sale margins, occupancy, and rent increases persist, and the cash requirements for rental-home purchases and property upkeep.