Business Context and Reporting Period
Sun Communities, Inc. is a self-managed REIT focused on manufactured housing (MH) and recreational vehicle (RV) communities, with home sales and rentals as a complementary business. This unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the same quarter of 2014.
At quarter-end, the company owned 243 developed properties in 29 states, with 89,320 developed sites. During the quarter it acquired 27 MH communities with approximately 10,400 sites, including the second closing of the Green Courte acquisition and Meadowlands, and sold one community.
Financial and Operating Highlights
| Metric | Q1 2015 | Q1 2014 or comparison |
|---|---|---|
| Total revenue | $152.7 million | $111.2 million; up 37.3% |
| Net income | $12.2 million | $10.9 million |
| Net income attributable to common stockholders | $6.9 million; $0.13 diluted EPS | $7.8 million; $0.21 diluted EPS |
| Net cash from operating activities | $40.9 million | $44.7 million |
| Cash and cash equivalents | $124.9 million at March 31 | $83.5 million at December 31, 2014 |
| Total debt | $2.25 billion | $1.83 billion at December 31, 2014 |
| Debt weighted-average interest rate and maturity | 5.1%; 8.0 years | 5.1%; 7.5 years at December 31, 2014 |
| FFO / fully diluted FFO per share | $40.8 million / $0.73 | $37.5 million / $0.93 |
| FFO excluding certain items / fully diluted per share | $50.2 million / $0.90 | $38.3 million / $0.95 |
Real Property Operations NOI was $81.6 million, up 40.0%; management attributed $18.5 million of the increase to acquired properties and $4.8 million to same-site properties. Same-site NOI rose 8.6%, occupancy increased to 94.0% from 92.5%, and average monthly site rent for the same-site portfolio rose to $456 from $441.
Rental Program NOI increased 19.7% to $20.7 million, reflecting more occupied rental homes and higher average rents. Home sales revenue grew 66.3% to $16.8 million, and home-sales gross profit increased 88.0% to $4.3 million.
Cash used in investing activities was $212.2 million, primarily reflecting acquisitions and $40.2 million of notes receivable issued in connection with a later acquisition. Financing activities provided $212.6 million. Total assets were $3.84 billion, compared with $2.94 billion at year-end 2014; the increase primarily reflects acquisitions and related financing.
Material Changes Versus the Prior Period
- Revenue and property NOI increased substantially, largely because the portfolio expanded through acquisitions; same-site NOI and occupancy also improved.
- Common-stockholder net income declined 12.4% and diluted EPS fell from $0.21 to $0.13. Results included $9.4 million of transaction costs, compared with $0.8 million a year earlier, and a $8.8 million gain on a property sale. Higher preferred distributions and a larger share count also affected common-stockholder results.
- FFO increased, but fully diluted FFO per share declined to $0.73 from $0.93, reflecting the larger diluted share base. FFO excluding transaction costs increased to $50.2 million, while its per-share measure declined to $0.90 from $0.95.
- Debt increased by approximately $422 million from year-end, primarily in connection with acquisitions. The company issued common and Series A-4 preferred securities as part of the Green Courte second closing.
Outlook, Risks and Unusual Items
Management said it intends to pursue acquisitions, development and expansion opportunities subject to market conditions, and expects to fund liquidity needs through operating cash flow, cash balances, credit facilities, and debt or equity issuance. It did not provide specific earnings or FFO guidance. Management does not expect recurring capital expenditures to decline in 2015.
The $350 million senior secured revolving facility had no borrowings outstanding at quarter-end; approximately $347.4 million was available after letters of credit. The company reported compliance with debt covenants. It also reported 71 unencumbered properties with an estimated market value of $707.3 million. A 1% change in Prime or LIBOR was estimated to change interest expense by approximately $0.4 million based on quarter-end variable-rate exposure.
Risks highlighted include economic and capital-market volatility, acquisition execution and integration, refinancing and financing availability, interest-rate changes, occupancy and rental-rate trends, operating-cost increases, manufactured-home sales and buyer financing, and maintaining REIT status. The company reported no material changes to the risk factors in its 2014 Form 10-K. Ordinary-course legal proceedings were not expected to have a material adverse effect. Management reported effective disclosure controls.
Unusual and subsequent items include the first-quarter sale of Valley Brook, which generated an $8.8 million gain, and the April 2015 completion of a $256.2 million acquisition of six MH communities. The latter included assumed mortgage debt of $157.3 million and preferred operating partnership units. A $40.2 million note receivable issued in connection with that acquisition was repaid at closing.
Important Facts for Investors to Verify
- How much of revenue and NOI growth is attributable to acquired properties versus sustainable same-site performance, and how preliminary acquisition accounting may change.
- Whether FFO per share can recover as acquisition benefits emerge, given dilution and the gap between GAAP earnings and supplemental FFO measures.
- Debt maturities, refinancing terms, interest-rate exposure and covenant headroom as acquisition-related leverage increases.
- Credit quality and recourse exposure associated with manufactured-home installment notes and collateralized receivables; the latter were accounted for as secured borrowings rather than sales.
- The ongoing effect of transaction costs, preferred distributions and future acquisitions on common-stockholder earnings, cash flow and distributions.