Business Context and Reporting Period
Company: Sun Communities, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Sun Communities is a self-administered Real Estate Investment Trust (REIT) owning, operating, and developing manufactured housing communities concentrated in the midwestern and southeastern United States. As of December 31, 2007, the portfolio consisted of 136 properties (124 manufactured housing, 4 RV, 8 mixed) across 18 states, containing 47,607 developed sites. The company also operates Sun Home Services (SHS) to sell and lease manufactured homes within its communities.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Total Revenues | $235,956,000 | $227,778,000 |
| Net Loss | $(16,643,000) | $(24,968,000) |
| Funds From Operations (FFO) | $45,439,000 | $34,560,000 |
| FFO Per Share (Diluted) | $2.24 | $1.72 |
| Net Operating Income (Real Property) | $126,168,000 | $123,550,000 |
| Total Debt | $1,187,675,000 | $1,166,850,000 |
| Cash and Cash Equivalents | $5,415,000 | $3,183,000 |
| Stockholders' Equity | $21,047,000 | $79,197,000 |
| Occupancy Rate (Aggregate) | 82% | 83% |
Material Changes vs. Prior Period
- Net Loss Improvement: Net loss decreased by approximately $8.3 million compared to 2006, driven by an $8.2 million increase in revenues and an $8.6 million decrease in equity loss from affiliates, partially offset by a $7.1 million increase in expenses.
- Revenue Growth: Total revenues increased 3.6%. Real property income rose 2.0% due to rent increases. Rental home revenue surged 27.0% as the rental program expanded to 5,328 homes (from 4,576 in 2006).
- Home Sales: Revenue from home sales increased 13.4% due to a higher volume of units sold (712 vs. 492), though average sales prices declined 21.8% as demand shifted to pre-owned homes.
- Equity Loss from Affiliate: The loss from the investment in Origen Financial, Inc. decreased significantly from $16.6 million in 2006 to $8.0 million in 2007. This included a $1.9 million impairment charge in 2007 (compared to $18.0 million in 2006) and an $8.0 million share of Origen's goodwill and investment impairments.
- Stockholders' Equity Decline: Equity dropped from $79.2 million to $21.0 million, primarily due to the net loss and distributions in excess of accumulated earnings.
Guidance, Outlook, Risks, and Unusual Items
- Management Commentary: Management expects a gradually improving leasing environment but does not anticipate a rapid or strong recovery in operations. The company continues to acquire repossessed homes at discounts to maintain occupancy and generate rental income.
- Origen Financial Risk: A significant risk factor is the company's 19% investment in Origen Financial, Inc. In March 2008 (subsequent to year-end), Origen suspended loan originations due to credit market conditions and is assessing potential asset sales or a sale of the entire company. This poses a material risk to the value of Sun Communities' investment.
- Debt and Liquidity: Total debt is approximately $1.2 billion. The company has an unsecured line of credit of $115 million with $85.4 million outstanding. Management believes liquidity is adequate to meet obligations, noting minimal debt maturities in 2008 ($4.3 million) and 2009 ($16.0 million).
- Legal Proceedings: The company is defending against a civil action filed by the SEC against its CEO, former CFO, and former controller regarding accounting for a SunChamp investment (2000-2002). The company continues to indemnify these employees.
- Management Changes: In February 2008, Karen J. Dearing was appointed CFO and John B. McLaren was appointed COO, succeeding Jeffrey P. Jorissen and Brian W. Fannon.
Investor Verification Checklist
- Origen Investment Status: Verify the current valuation and solvency of Origen Financial, Inc., given its March 2008 suspension of operations and potential for further impairment charges.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly leverage and debt service coverage ratios, given the high debt load ($1.2B) and low equity base ($21M).
- Rental Program Economics: Assess the profitability and capital expenditure requirements of the expanding rental home program (5,328 units), which drives revenue but increases operating costs.
- SEC Litigation Outcome: Monitor the status of the SEC civil action against senior management and potential financial or reputational impacts.
- Occupancy Trends: Track occupancy rates in key markets (Michigan, Florida, Indiana), which represent over 65% of developed sites, to gauge sensitivity to regional economic downturns.