Sun Communities, Inc. — 2012 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2012; it is not a standalone fourth-quarter filing. Sun is a self-managed REIT focused on manufactured-housing and recreational-vehicle communities, with a home sales and rental business. At year-end, it owned and operated 173 properties in 19 states, with 63,697 developed sites. Portfolio occupancy, excluding transient RV sites, was 87.3%.
Financial and operating performance
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $339.6 million | $289.2 million |
| Net income attributable to common stockholders | $5.0 million; $0.18 diluted EPS | $(1.1) million; $(0.05) diluted EPS |
| Net operating cash flow | $87.3 million | $63.3 million |
| FFO, excluding certain items (non-GAAP) | $96.7 million; $3.19 diluted per share | $75.3 million; $3.13 diluted per share |
| Total assets | $1.754 billion | $1.368 billion |
| Total debt and lines of credit | $1.454 billion | $1.397 billion |
| Cash and cash equivalents | $29.5 million | $5.9 million |
Real Property NOI was $167.7 million, up 14.2%; same-site NOI rose 5.5% to $147.8 million. Same-site real-property revenue grew 4.5%, including average rental-rate increases of 2.8%, while same-site property operating expenses increased 2.2%. Rental Program NOI increased 23.9% to $47.1 million, and home-sales gross profit rose 49.1% to $10.2 million. The filing cautions that NOI and FFO are supplemental, non-GAAP measures and are not substitutes for net income or cash flow.
Fourth-quarter results included revenue of $91.0 million and a $1.4 million loss attributable to common stockholders, or $(0.05) per share. The filing does not provide a clear standalone Q4 cash-flow figure.
Changes versus the prior comparable period
- Revenue increased 17.4%, while common-stockholder net income turned positive from a loss; reported diluted EPS improved from $(0.05) to $0.18.
- FFO excluding certain items per diluted share increased 1.9%, from $3.13 to $3.19, while total FFO per diluted share was $3.05 versus $3.06.
- Occupancy increased to 87.3% from 85.3% for the total portfolio; same-site occupancy rose to 86.7% from 85.8%.
- Sun acquired 14 properties during 2012. The acquisitions contributed $13.0 million of the $20.8 million increase in total real-property NOI; same-site properties contributed $7.8 million.
- Two common-stock offerings generated approximately $289.7 million net, and a preferred-stock offering generated approximately $82.2 million net. Total stockholders’ equity moved from a $100.7 million deficit to $213.0 million of equity.
- Common dividends were $2.52 per share in 2012, compared with $3.15 declared in 2011. Quarterly 2012 distributions were $0.63 per share.
Liquidity, debt, outlook and risks
- Year-end debt had a weighted-average interest rate of 5.2% and weighted-average maturity of 6.8 years. Approximately $106.6 million of principal payments were due within one year under the contractual-obligations presentation.
- The $150 million secured revolving facility had no outstanding balance at year-end; approximately $146 million was available after letters of credit. Sun reported compliance with debt covenants. Its fixed-charge coverage ratio was 1.68 against a 1.45 minimum, and leverage was 55.3% against a 70% maximum.
- Management planned to construct approximately 1,300–1,400 additional sites in 2013, primarily in Texas and Colorado, and said it would continue selective acquisitions and expansions. It expected to meet longer-term liquidity needs through operating cash flow, available facilities, debt or equity issuance, and property collateralization. No numerical earnings or FFO guidance is provided in the supplied filing text.
- On February 8, 2013, Sun acquired ten RV communities for $112.8 million. A competing party, MHC, challenged rights relating to the properties and sought specific performance. Sun said it believed the claims lacked merit and intended to defend them; indemnification from the sellers has limits and may not cover lost future income or business opportunity. Sun included the properties’ expected performance in its earnings guidance.
- Key stated risks include substantial leverage and refinancing needs, interest-rate exposure, concentration in Michigan, Florida, Indiana and Texas, occupancy and rent pressures, manufactured-home financing and repossessions, acquisition and development execution, environmental or uninsured losses, and maintaining REIT qualification. Management noted continuing uncertainty in economic and credit markets.
Sun used an interest-rate swap and two caps to manage rate exposure. Variable-rate debt was $222.4 million at year-end; the filing estimates a 1 percentage-point rate change would affect annual interest expense by approximately $2.4 million based on average variable-rate balances.
Important facts for investors to verify
- Review the audited financial statements and reconcile GAAP net income, diluted EPS, FFO, and FFO excluding certain items; the latter measures exclude specified items and are not cash-flow measures.
- Track the MHC litigation, indemnity protections, and the acquired RV communities’ actual operating contribution.
- Examine debt maturities, refinancing plans, covenant headroom, and available borrowing capacity, including the effect of acquisitions and subsequent financing.
- Test whether occupancy, same-site rent growth, and cost control sustain NOI growth, and whether planned development sites achieve lease-up and returns.
- Assess Rental Program credit, repair, refurbishment and repossession exposure, including the separate Talmer Bank arrangement, which includes home repurchase obligations subject to a $10 million principal cap.
- Consider dilution and distribution priorities from common and preferred securities, OP units and future equity issuance; confirm the Board’s future common-dividend decisions.