Sun Communities, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated results. The company is a REIT focused on manufactured-housing and RV communities, with home sales and rentals as a supporting business.
Financial performance and key metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $68.3 million | $66.7 million | $138.0 million | $134.3 million |
| Net income (loss) | $(1.0) million | $(2.8) million | $1.6 million | $(1.4) million |
| Net income (loss) attributable to common shareholders | $(0.9) million | $(2.4) million | $1.5 million | $(1.1) million |
| Basic and diluted EPS | $(0.04) | $(0.13) | $0.07 | $(0.06) |
| Operating cash flow | Not separately presented for quarter | $30.7 million | $31.5 million | |
| Cash and cash equivalents | — | $4.0 million at June 30 | $8.4 million at Dec. 31, 2010 |
Q2 real-property NOI rose 4.6% to $34.2 million; same-site real-property NOI increased 3.6% to $33.8 million. Six-month same-site NOI rose 3.9% to $70.1 million. Rental Program NOI increased 9.8% in Q2 and 9.4% for the first half. By contrast, Q2 home-sales gross profit fell 26.2% to $1.7 million as volumes and margins declined. These NOI and FFO measures are supplemental, non-GAAP measures; management cautions they are not substitutes for GAAP earnings or cash flow.
Diluted FFO per share was $0.71 in Q2 and $1.53 for the first half, versus $0.62 and $1.46, respectively, in 2010. Diluted AFFO per share was $0.74 and $1.57, versus $0.66 and $1.50. Cash dividends were $0.63 per common share for Q2 and $1.26 for the first half, unchanged year over year.
At June 30, total assets were $1.323 billion; investment property, net, was $1.167 billion. Balance-sheet debt was $1.255 billion, with lines of credit of $88.3 million presented separately. Total liabilities were $1.388 billion and total stockholders’ deficit was $65.4 million. The reported weighted-average interest rate on total debt was 5.0%, with a weighted-average maturity of 7.7 years. The company reported debt to total market capitalization of approximately 60.4%.
Material changes versus the prior comparable period
- Revenue increased 2.3% in Q2 and 2.8% for the first half. Same-site occupancy was 85.3%, up 1.0 percentage point year over year; average monthly manufactured-home site rent was $420, up from $409.
- The portfolio grew from 136 to 155 properties year over year. In May and June, the company acquired Orange City RV Resort and Kentland Communities, adding 19 properties overall and 5,934 developed sites. The preliminary purchase-price allocation included $137.6 million of property, $52.4 million of assumed debt and $45.5 million of preferred OP units.
- Q2 common-shareholder loss narrowed to $0.9 million from $2.4 million. For the first half, the company reported $1.5 million of common-shareholder income compared with a $1.1 million loss.
- First-half investing cash use increased to $89.0 million from $17.8 million, primarily reflecting acquisitions and higher property investment. Financing cash flow was $53.9 million provided, compared with $12.5 million used in the prior-year period.
- Total debt rose from $1.164 billion at year-end 2010 to $1.255 billion at June 30, 2011. The company issued common stock and preferred OP units and entered into or assumed additional property-secured financing.
Outlook, management commentary and risks
- No numerical earnings or operating guidance was provided. Management said it would continue to assess acquisition opportunities and expected recurring property capital expenditures to remain significant.
- Management expected short-term liquidity needs to be met with operating cash flow and credit facilities, and long-term needs through debt or equity issuance, property collateralization, or asset sales. It reported compliance with debt covenants at June 30.
- The unsecured revolving credit facility had a $115 million maximum capacity, $71.4 million outstanding, $39.6 million available under the borrowing base, and a stated maturity of October 1, 2011. The company was evaluating renewal, replacement or amendment and warned that failure to refinance could materially reduce borrowing capacity and adversely affect its business and financial condition.
- Separately, a July 2011 settlement of litigation concerning the $367 million PNC/Fannie Mae facility gave the company an option to extend that facility’s maturity from 2014 to 2023, subject to underwriting criteria, and reduced the facility fee. The filing reports a $0.8 million Q2 interest-expense reduction, half attributable to Q1.
- Interest-rate exposure remains material: variable-rate debt was $265.6 million at June 30. Management estimated a 1 percentage-point rate change would alter six-month interest expense by approximately $1.2 million, based on average variable-rate borrowings.
- Key operating risks cited include economic conditions, occupancy and rental-rate pressure, rising wages, insurance, property taxes and utilities, manufactured-home sales and buyer financing, and tighter or more expensive credit. Rent concessions partly offset rental-rate and occupancy gains.
- Other notable items: $1.4 million of acquisition-related costs in the first half; a $0.4 million Q2 state-tax benefit related to Michigan tax-law changes; and a $77.5 million secured borrowing associated with transferred installment-note receivables, with repurchase obligations if underlying homes are repossessed. The company said ordinary-course legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether the October 2011 unsecured revolver was renewed, replaced or refinanced, and the resulting cost, capacity and covenants.
- Whether the PNC/Fannie Mae facility extension option was exercised and whether its underwriting conditions were met.
- Acquisition performance and final purchase-price allocation for Kentland and Orange City, including assumed debt and preferred OP unit terms.
- Whether same-site occupancy and rent growth can continue while concessions and property operating costs remain controlled.
- Home-sales volume and margins, and the cash recovery and repurchase exposure tied to installment-note receivables.
- Reconciliation of non-GAAP NOI, FFO and AFFO trends with GAAP earnings, operating cash flow, distributions and the company’s substantial debt burden.