Sun Communities, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The company is a REIT that owns and operates manufactured-housing (MH) and recreational-vehicle (RV) communities and sells and rents manufactured homes. At quarter-end it reported 251 properties across 30 states. Dollar amounts below are in millions unless stated otherwise.
Financial performance and operating metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $165.9 | $118.5 | $321.1 | $231.6 |
| Net income | $18.5 | $7.6 | $30.7 | $18.5 |
| Net income attributable to common stockholders | $12.3 | $4.9 | $19.2 | $12.8 |
| Diluted EPS | $0.23 | $0.12 | $0.36 | $0.33 |
| Operating cash flow | — | — | $92.4 | $77.1 |
- Q2 revenue increased 40%; six-month revenue increased 39%. Growth largely reflected acquisitions, including the completion of the Green Courte acquisition in January 2015.
- Same-site real-property NOI rose 8.8% in Q2 and 8.7% for the six months. Management attributed growth to higher occupancy and rents, partly offset by increased operating expenses.
- Total-portfolio occupancy was 93.5%, compared with 91.0% a year earlier; same-site occupancy was 94.6%, compared with 93.1%. Average monthly site rent across the total portfolio was $465, up from $444.
- Rental Program NOI increased 19.6% in both the quarter and six-month period. Home-sales gross profit rose 35.5% in Q2 and 55.5% for the six months.
- FFO per diluted share, a non-GAAP measure, was $0.91 in Q2 versus $0.77; adjusted FFO per diluted share excluding certain items was $0.87 versus $0.79. For the six months, those measures were $1.65 versus $1.70 and $1.76 versus $1.74, respectively.
Balance sheet, cash flow and liquidity
- Total assets were $4.03 billion at June 30, up from $2.94 billion at year-end 2014; net investment property was $3.72 billion, up from $2.57 billion.
- Debt was $2.34 billion, compared with $1.83 billion at year-end; lines of credit were $37.7 million. Debt’s weighted-average interest rate was 5.1% and weighted-average maturity was 7.9 years. Net debt to enterprise value was approximately 38% on the company’s stated conversion assumptions.
- Cash fell to $11.9 million from $83.5 million. Six-month operating cash flow of $92.4 million was more than offset by $304.9 million of investing outflows, principally property acquisitions and investment in properties; financing provided $140.9 million.
- The $350 million secured revolving facility had $33.1 million drawn and approximately $313.7 million available after letters of credit. The company reported compliance with debt covenants. It also reported 83 unencumbered properties with estimated market value of $857.2 million.
- Cash distributions declared for Q2 were $0.65 per common share. The company expects to fund liquidity needs through operating cash flow, cash, credit facilities, and debt and equity financing.
Material changes, outlook and risks
- The company acquired 34 MH communities and one RV community with approximately 14,300 sites during the first half, including Green Courte and Berger properties; it sold one MH community. Acquisition-related revenue and operating scale materially affected year-over-year comparisons.
- Acquisitions were funded through cash, assumed and new debt, common equity and preferred securities. Common shares outstanding increased to 53.8 million from 48.6 million at December 31, 2014, creating potential dilution alongside additional convertible securities.
- Q2 results included a $7.5 million distribution from affiliate Origen, which is liquidating; an $8.8 million gain on disposition of a property in the six-month period; $11.5 million of first-half transaction costs; and a $2.8 million loss on extinguishment of debt from defeasing $70.6 million of loans.
- No specific earnings or FFO guidance was provided. Management said it intends to pursue acquisitions and development opportunities and expects ongoing property upkeep; recurring capital expenditures were $7.7 million in the first half, and the company did not expect them to decline in 2015.
- Management identified risks including economic and capital-market volatility, acquisition execution and integration, refinancing and liquidity needs, interest-rate increases, higher operating costs and taxes, occupancy and rent weakness, manufactured-home financing and REIT qualification. A 1% change in Prime or LIBOR was estimated to change interest expense by about $1.7 million based on the reported variable-rate debt balance.
- As a subsequent event, on July 29 the company agreed to repurchase, at holders’ election, up to 5,926,322 Series A-4 preferred shares at $31.08 per share through August 10. This potential cash requirement is significant relative to reported quarter-end cash. The filing reported no material change to previously disclosed risk factors; ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- How much of revenue and NOI growth is sustainable same-site performance versus acquired properties, and how the acquired communities perform relative to expectations.
- The funding and balance-sheet effect of the Series A-4 preferred-share repurchase election, including the number of shares tendered and any resulting liquidity needs.
- Debt maturities, refinancing terms, covenant headroom and exposure to floating interest rates, as debt and interest expense increased substantially.
- Whether operating cash generation and available financing can support acquisitions, capital spending and distributions while cash remains low.
- How acquisition and transaction costs, the Origen distribution, property-sale gains and preferred securities affect recurring earnings and per-share results; compare GAAP results with the company’s non-GAAP FFO measures.