SUN COMMUNITIES INC quarterly report, Q2 FY2023

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Sun Communities, Inc. — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023; unaudited. Sun Communities is a REIT operating manufactured-home (MH) and recreational-vehicle (RV) communities and marinas. At quarter-end, it reported 671 developed properties in the U.S., U.K. and Canada.

Key financial results

  • Q2 revenue: $863.5 million, up 6.0% from $814.3 million. Real-property revenue rose to $526.2 million from $488.1 million; home-sale revenue declined to $122.6 million from $142.7 million.
  • Q2 earnings: Net income attributable to common shareholders was $89.8 million, or $0.72 per diluted share, versus $74.0 million, or $0.61, a year earlier. For the first half, revenue increased 11.1% to $1.515 billion, while attributable net income fell 20.1% to $59.7 million and diluted EPS fell to $0.48 from $0.63.
  • Operating performance: Q2 total portfolio NOI was $378.2 million, up 0.9%; first-half NOI was $658.6 million, up 3.5%. Same-property NOI increased 6.3% in Q2 and 6.5% for the first half. Q2 same-property NOI growth was 5.7% in MH, 3.2% in RV and 11.9% in marinas.
  • FFO: Q2 FFO per diluted share was $1.95, unchanged year over year; Core FFO was $1.96 versus $2.02. First-half FFO per diluted share was $3.09 versus $3.24, and Core FFO was $3.19 versus $3.37. These are non-GAAP measures.
  • Margins and occupancy: Q2 total home-sales NOI margin was 33.8%, down from 34.9%. Same-property MH occupancy was 96.9% and annual RV occupancy 100.0%; adjusted blended occupancy for those portfolios was 98.7%, up from 97.0%.
  • Cash flow and capital spending: First-half operating cash flow was $449.9 million, down from $532.0 million. Investing cash use was $581.8 million, including $564.7 million of property investment and capital expenditures. Financing provided $109.4 million. Cash, cash equivalents and restricted cash ended at $68.7 million.
  • Debt and liquidity: Total debt was $7.614 billion, up from $7.197 billion at year-end 2022; weighted-average interest rate was 4.02% and weighted-average maturity 7.1 years. Management reported $49.0 million of unrestricted cash, $2.1 billion of remaining Senior Credit Facility capacity and 517 unencumbered properties. More than 82% of debt was fixed-rate, including hedges. The company reported compliance with debt covenants.

Material changes and management commentary

  • Q2 property performance improved, but higher costs and interest expense weighed on results. Interest expense increased 43.2% in Q2 and 55.0% for the first half, reflecting higher debt balances and rates. First-half operating cash flow also declined, primarily due to higher interest expense.
  • Home-sales performance was mixed: North American unit sales fell 30.0% in Q2, while U.K. sales volume increased. Q2 total home-sales NOI declined 16.9%; management cited weaker North American sales volume and lower U.K. average selling prices.
  • Marketable-securities remeasurement was volatile: a $5.8 million Q2 gain compared with a $32.3 million loss in Q2 2022; the first-half result remained a $14.1 million loss. These items affected GAAP earnings.
  • The company issued $400 million of 5.7% senior notes due 2033 and used the net proceeds to repay credit-facility borrowings. Hedging reduced the notes’ effective rate to 5.5%. Current market conditions and higher rates may make future financing more costly or less available.
  • During the first half, the company acquired an MH community and a marina for approximately $107 million, acquired land for potential development, and continued expansion and development spending. Management cited nearly 15,720 MH and RV sites suitable for future development.

Outlook, risks and unusual items

  • The filing provides no clear numerical earnings or FFO guidance. Management says it intends to pursue acquisitions, development and expansion selectively, subject to market conditions and underwriting criteria.
  • Hurricane Ian affected three Fort Myers-area properties comprising about 2,500 sites. Estimated insurance recoveries were $58.3 million at June 30, 2023; estimates may change. Three Fort Myers RV communities require redevelopment and lease-up, and management could not estimate when operating results would return to pre-hurricane levels. Expected lost-earnings and redevelopment recoveries had not been recognized in earnings.
  • A $6.3 million impairment was recorded on a Maine MH community classified as held for sale. A U.K. MH community with 730 sites was also classified as held for sale, with an anticipated sale for approximately $240 million in the form of a note receivable. Both sales were expected to close in Q3 2023.
  • Notes receivable from developers and operators totaled $462.4 million. This included a $358.5 million fully drawn operator loan at a 12.2% net weighted-average rate; its maturity was extended from May 31 to July 31, 2023. The filing identifies counterparty performance and valuation assumptions as relevant risks.
  • Other principal risks include interest-rate and refinancing exposure, inflation and operating-cost increases, foreign-currency movements, occupancy and rental-rate changes, insurance costs, natural disasters, capital-market access, and maintaining REIT status. Management reported no material change to the risk factors in its 2022 Form 10-K.

Investor verification priorities

  • Review subsequent filings for repayment, further extension or other resolution of the $358.5 million operator loan and the related counterparty exposure.
  • Track insurance recoveries, redevelopment costs and operating recovery at the Hurricane Ian-affected communities.
  • Confirm whether the Maine and U.K. property sales closed on expected terms, including the collectability and terms of the U.K. sale note.
  • Assess whether same-property NOI growth and occupancy can offset higher financing, insurance, tax and operating costs.
  • Compare future GAAP earnings with FFO/Core FFO and monitor debt balances, floating-rate exposure, maturities, facility availability and covenant headroom.