Sun Communities, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Sun Communities is a REIT operating manufactured housing (MH), recreational vehicle (RV), marina and UK holiday-park properties. At quarter-end, it had interests in 665 developed properties across the U.S., Canada and the UK. Financial statements are unaudited; Q1 2023 comparatives were restated where applicable.
Key financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $671.3 million | $651.2 million | +3.1% |
| Net loss | $25.5 million | $48.3 million | Loss narrowed |
| Net loss attributable to common shareholders | $27.4 million; $0.22 per diluted share | $44.9 million; $0.36 per diluted share | Loss narrowed |
| Net operating income (NOI, non-GAAP) | $304.9 million | $280.6 million | +8.7% |
| Core FFO (non-GAAP) | $153.4 million; $1.19 per diluted share | $158.0 million; $1.23 per diluted share | Down 2.9%; per share down 3.3% |
| Cash from operating activities | $242.5 million | $194.5 million | +$48.0 million |
Real-property NOI was $285.9 million, up 12.4%. North American same-property real-property NOI rose 7.9%; UK same-property NOI increased 44.5%. At quarter-end, MH and annual RV occupancy was 96.5% across the portfolio. Cash, cash equivalents and restricted cash totaled $132.5 million; unrestricted cash was $118.9 million.
Debt, liquidity and distributions
- Total debt was $7.872 billion, compared with $7.777 billion at December 31, 2023. Weighted-average interest rate was 4.21%, with 6.8 years weighted-average maturity; approximately 89% of debt was fixed-rate, including hedges.
- Senior unsecured notes increased by $500 million following a January issuance of 5.5% notes due 2029. The company terminated its $1.15 billion term-loan facility in March and shifted the outstanding borrowing to its revolving facility. Revolver capacity was $3.05 billion, with $1.3 billion remaining available at quarter-end.
- The company reported compliance with debt covenants. Net debt to enterprise value was 31.7%. It declared a quarterly distribution of $0.94 per share.
- Cash used for investing was $127.1 million, versus $321.9 million in Q1 2023; financing used $25.4 million, versus $111.6 million provided in the prior-year quarter. Capital expenditures and related activities were $160.6 million, down from $301.8 million.
Material changes and notable items
- Home-sales revenue declined 20.2% to $68.9 million and home-sales NOI fell 28.3% to $17.0 million. MH homes sold fell 44.5%; UK homes sold increased 5.4%. Combined home-sales NOI margin declined to 24.7% from 27.5%.
- General and administrative expense rose 22.5% to $78.5 million, and interest expense increased 17.1% to $89.7 million. Management cited higher debt and interest costs, along with transaction-related costs and UK payroll costs.
- The 2023 comparative was restated to record a $15.4 million non-cash goodwill impairment for the UK Park Holidays business. No goodwill impairment was recorded in Q1 2024. The company also recorded $20.7 million of asset impairments in Q1 2024.
- Q1 2024 results included $7.2 million of catastrophic-event charges, a $5.2 million gain from remeasurement of an investment in a nonconsolidated affiliate, and a $10.3 million marina litigation-settlement gain included in other income. The company sold two MH communities for $51.7 million in cash and reported a $6.2 million gain on the sale.
- The company changed to four reportable segments by separating UK communities from its prior structure; prior segment amounts were recast, with no effect on prior-period net income, equity or cash flows.
Outlook, risks and controls
- No numerical full-year earnings or FFO guidance is provided in the supplied filing text. Management expects 2024 rental-rate growth to exceed headline inflation, with occupancy gains and expense management supporting organic cash-flow growth.
- Management says it is prioritizing debt reduction using operating free cash flow and selective asset-sale proceeds, and reducing development activity. Acquisitions and development will be selective given higher interest rates and challenging capital markets.
- Key risks include higher interest rates, refinancing and capital-market access, inflation and operating costs, insurance premiums, occupancy and rent trends, home sales, foreign-currency movements and natural disasters. Management estimated a 1% change in relevant rates would change Q1 interest expense by approximately $2.4 million.
- The company is defending a consolidated MH lot-rent antitrust class action alleging information-sharing to maintain artificially high rents. It says the allegations are without merit but cannot estimate a loss range; an adverse outcome could materially affect results.
- Hurricane Ian-related estimated property-insurance receivables were $52.8 million. Business-interruption recoveries had not been recognized in Q1, and the company cannot estimate when affected communities will return to pre-hurricane operating levels. New Hampshire flooding also led to $4.7 million of incremental Q1 impairment, cleanup and debris-removal charges.
- Disclosure controls were deemed ineffective as of March 31, 2024. Material weaknesses related to review controls for UK goodwill impairment remained unremediated; management also identified a long-lived-asset impairment review-control weakness after quarter-end. The company said the latter did not cause a material misstatement and is implementing a remediation plan.
Important facts for investors to verify
- Review the reconciliation and definitions of NOI, FFO and Core FFO, and assess why Core FFO declined despite higher NOI and improved operating cash flow.
- Track home-sales volumes and margins, UK occupancy and impairment assessments, and the effects of seasonal RV and marina operations.
- Monitor debt balances, variable-rate exposure, refinancing needs, revolver availability and progress toward management’s stated debt-reduction priority.
- Follow the antitrust litigation, insurance recovery estimates and hurricane/flood-related restoration costs and operating impacts.
- Assess remediation of the internal-control weaknesses and the reliability of impairment valuation processes, particularly for UK assets.