Sun Communities, Inc. - 10-Q Summary (Period Ended September 30, 2008)
Business Context and Reporting Period
Sun Communities, Inc. is a self-administered Real Estate Investment Trust (REIT) owning, operating, and developing manufactured housing communities in the midwestern and southeastern United States. As of September 30, 2008, the company operated 136 properties with 47,608 developed sites. This report covers the quarterly and nine-month periods ended September 30, 2008.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $61.4 million | $191.9 million |
| Net Loss | $(5.5) million | $(16.0) million |
| Loss Per Share (Basic/Diluted) | $(0.30) | $(0.88) |
| Funds From Operations (FFO) | $11.3 million | $27.1 million |
| Adjusted FFO (excl. Origen loss) | $12.8 million | $41.2 million |
| Cash Flow from Operations | N/A | $37.5 million |
| Total Debt | $1.14 billion | $1.14 billion |
| Lines of Credit Outstanding | $71.9 million | $71.9 million |
| Cash and Equivalents | $6.8 million | $6.8 million |
| Stockholders' Equity (Deficit) | $(28.2) million | $(28.2) million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 7.1% for the quarter and 8.6% for the nine-month period compared to 2007. Real property income rose 2.6% (quarter) and 2.4% (nine months) due to rent increases. Home sales revenue surged 43.6% (quarter) and 36.0% (nine months) driven by higher unit sales volumes.
- Net Loss Improvement: Despite a net loss, the loss narrowed significantly. The quarterly loss decreased from $5.0 million to $3.1 million, and the nine-month loss decreased from $8.2 million to $2.5 million compared to the prior year.
- Investment Losses: The company recorded a significant equity loss from its affiliate, Origen Financial, Inc. ($1.5 million for the quarter; $14.0 million for the nine months), due to Origen's suspension of loan originations and asset disposition plans. This included an other-than-temporary impairment loss of $8.1 million for the nine-month period.
- Debt Structure: Total debt increased to $1.14 billion from $1.10 billion year-over-year. This includes a new $25.6 million secured borrowing related to the transfer of installment loans, which was accounted for as a secured borrowing rather than a sale.
- Same Property NOI: Net Operating Income (NOI) for same properties increased 5.0% for the quarter and 2.7% for the nine-month period, reflecting improved occupancy and rental rates.
Guidance, Outlook, and Risks
- Liquidity: The company maintains $47.3 million in availability on its $115 million unsecured revolving line of credit. Management believes current resources are adequate to meet operating requirements and debt obligations, with no significant debt maturities until July 2011.
- Market Risks: Management highlights the sub-prime credit crisis and general economic uncertainty as primary risks, specifically regarding the availability and cost of credit. While the company has mitigated near-term refinancing risk, future borrowing could be more difficult or expensive.
- Legal Proceedings: The company is defending against a lawsuit by T.J. Holdings, LLC alleging wrongful deprivation of economic opportunities (claims of $13 million plus punitive damages). The case is currently in arbitration. Additionally, a prior SEC inquiry regarding accounting practices resulted in a settlement with former executives, ending the company's indemnification obligations.
- Dividends: The company paid cash dividends of $0.63 per share for the quarter and $1.89 per share for the nine-month period to maintain REIT qualification.
Investor Verification Checklist
- Origen Financial Exposure: Verify the current status of the $6.5 million investment in Origen Financial and the potential for further impairment losses given Origen's asset disposition plan.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically debt service coverage and leverage ratios, given the high debt-to-market capitalization ratio of approximately 74.7%.
- Home Sales Volume: Assess the sustainability of the 31-40% increase in home sales volume, as this segment is sensitive to consumer financing availability.
- Equity Deficit: Review the drivers of the stockholders' equity deficit of $(28.2) million, primarily caused by distributions in excess of accumulated earnings and the recent net losses.
- Interest Rate Sensitivity: Evaluate the impact of potential interest rate hikes on the $222.8 million of variable-rate debt, noting the company's use of interest rate swaps and caps.