Sun Communities, Inc. — Q2 2013 Form 10-Q
Business context and period: Unaudited quarterly report for the three and six months ended June 30, 2013. Sun is a REIT owning, operating and developing manufactured-housing and RV communities, with home sales and rentals. At quarter-end, it operated 185 properties in 25 states.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $100.2 million | $82.2 million | $203.1 million | $165.1 million |
| Net income | $3.3 million | $2.5 million | $11.5 million | $8.9 million |
| Net income attributable to common stockholders | $1.0 million | $1.7 million | $6.8 million | $7.0 million |
| Diluted EPS | $0.03 | $0.06 | $0.20 | $0.27 |
| FFO per diluted share | $0.66 | $0.77 | $1.56 | $1.66 |
| FFO per diluted share, excluding specified items | $0.69 | $0.78 | $1.62 | $1.68 |
- Q2 total portfolio real-property NOI increased 21.0% to $47.7 million; same-site real-property NOI increased 5.5% to $41.5 million. For the first half, total and same-site real-property NOI rose 22.0% and 5.5%, respectively.
- At June 30, occupancy was 89.2% across the total portfolio, up 2.4 percentage points year over year; same-site occupancy was 88.6%, up 1.8 points. Same-site manufactured-housing site rents rose 3.2% on average, according to management.
- Q2 Rental Program NOI rose 26.3% to $15.0 million; Home Sales NOI/gross profit rose 54.6% to $3.8 million. Growth in pre-owned home sales and profit was a key contributor.
- First-half operating cash flow was $60.4 million versus $43.5 million. Investing used $220.7 million, mainly for acquisitions, property investment and rental homes; financing provided $137.2 million. Cash declined from $29.5 million at year-end to $6.5 million.
- Total debt was $1.353 billion and lines of credit were $18.3 million at June 30, versus debt of $1.424 billion and lines of credit of $29.8 million at December 31, 2012. Debt carried a 5.3% weighted-average interest rate and 6.7-year weighted-average maturity. Total assets were $1.917 billion; total equity was $439.1 million.
- The new $350 million revolving facility had $14.2 million drawn and approximately $331.8 million available, after letters of credit. The company reported compliance with debt covenants; reported leverage, fixed-charge coverage and dividend payout ratios were within stated covenant limits.
Material changes and unusual items
- Revenue and NOI growth reflected acquisitions as well as same-site gains. During the first half, Sun acquired 12 RV communities with approximately 4,500 sites, including the Morgan RV Properties, Jellystone and Big Timber Lake.
- In March, Sun issued 5.75 million common shares at $45.25 per share, generating net proceeds of $249.5 million. Proceeds were used partly to repay debt, with the remainder intended for acquisitions, working capital and general corporate purposes. The larger share base and $3.0 million of Series A preferred distributions reduced common-stockholder earnings despite higher reported net income.
- Sun replaced its prior $150 million revolver with a $350 million facility maturing in May 2017, with a one-year extension option and a potential $250 million accordion, subject to conditions. It also extended $151.4 million of FNMA debt to May 2023.
- Acquisition-related costs increased to $1.1 million in Q2 and $2.2 million for the first half. First-half FFO increased in total, but FFO per diluted share declined year over year.
Outlook, risks and contingencies
- No specific earnings or FFO guidance was provided. Management said it intends to pursue acquisitions and development opportunities subject to market conditions, and expects to meet liquidity needs using operating cash flow, cash, credit facilities and debt or equity issuance.
- Management cited soft GDP growth, possible interest-rate increases and volatility in credit and capital markets. Other stated risks include acquisition execution and integration, refinancing and financing availability, occupancy and rental rates, operating-cost inflation, manufactured-home buyer financing, competition, natural disasters, and maintaining REIT status.
- Variable-rate debt was reported at $181.1 million. Management estimated a 1 percentage-point change in Prime or LIBOR would change interest expense by approximately $1.2 million, based on average variable-rate balances.
- A $5.0 million note receivable was past due and in default at June 30; the borrower was current on interest charges, and Sun was considering remedies or an extension. Management recorded no allowance.
- Litigation over the Morgan RV acquisition remained pending, with trial scheduled for December 2, 2013. Sun said it believed the claims were without merit; seller indemnities cover specified claims, but exclude lost future revenue, business reputation or opportunity.
- A contingent asset of $10.0 million was recorded in connection with the Morgan RV acquisition, based on a probability-weighted estimate related to a seller covenant on 2012 revenue. The filing also describes home-loan repurchase exposure under a separate Talmer Bank agreement, capped at $10.0 million of outstanding principal; there had been no transactions under that agreement by quarter-end.
Important facts for investors to verify
- Whether same-site occupancy, rent increases and NOI growth persist, and how much future growth depends on acquisitions.
- Cash availability and funding needs given low quarter-end cash, ongoing distributions and planned acquisitions and rental-home investment.
- Debt maturities, variable-rate exposure, covenant headroom and the terms and availability of the new revolving facility.
- The collectability and resolution of the defaulted $5.0 million note, the Morgan acquisition contingent asset, and the MHC litigation and related indemnity.
- How common-share issuance, preferred distributions and potentially dilutive OP units affect per-share FFO and common-stockholder returns.