Sun Communities, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Sun Communities is a REIT operating manufactured-home (MH) and recreational-vehicle (RV) communities, with home sales and rentals. At quarter-end it owned or had an interest in 344 properties across 29 U.S. states and one Canadian province.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $237.9 | $190.8 | $472.3 | $365.4 |
| Net income (loss) attributable to common stockholders | $12.4 | ($7.8) | $33.5 | $0.1 |
| Basic and diluted EPS | $0.16 | ($0.12) | $0.45 | $0.00 |
| NOI / gross profit (non-GAAP) | $131.3 | $108.5 | $269.2 | $210.3 |
| FFO per diluted share, excluding certain items (non-GAAP) | $0.96 | $0.85 | $2.06 | $1.75 |
| Cash provided by operating activities | — | $153.2 | $129.0 |
Q2 revenue rose 24.7%; six-month revenue rose 29.2%. Six-month common-stockholder income increased substantially from near break-even. NOI/gross profit increased 21.0% in Q2 and 28.0% for the first half. Management’s same-community real-property NOI grew 6.1% in Q2 and 6.4% for six months; occupancy was 97.2% for same communities, up 1.6 percentage points year over year. Same-community rent per site increased 3.4%.
Balance sheet, debt and liquidity
- At June 30, 2017: total assets were $6.18 billion, total liabilities $3.37 billion, and stockholders’ equity $2.76 billion.
- Cash and cash equivalents were $241.6 million, versus $8.2 million at December 31, 2016. Operating cash flow was $153.2 million; investing activities used $167.1 million; financing activities provided $247.3 million during the first half.
- Reported total debt was $3.02 billion, with a weighted-average interest rate of 4.6% and weighted-average maturity of 8.7 years. Mortgage loans payable were $2.83 billion; secured borrowings on collateralized receivables were $139.5 million.
- The amended $650 million credit facility comprised a $550 million revolver and $100 million term loan. No revolver or term-loan borrowings were outstanding at quarter-end; $3.8 million of availability backed letters of credit. The facility allows additional commitments, subject to conditions, up to $1.0 billion total.
- Management reported covenant compliance. At quarter-end, leverage ratio was 35.2% against a maximum of 65%, fixed-charge coverage was 2.53 against a minimum of 1.40, and dividend payout ratio was 64.1% against a maximum of 95%. Net debt to enterprise value was approximately 27.2%.
Material changes and notable items
- Three community acquisitions added 1,275 sites; the company also bought entitled land near Myrtle Beach for a planned 775-site RV resort. 2017 acquisition consideration for the three communities totaled approximately $38.0 million. The filing attributes $14.8 million of Q2 and $43.2 million of first-half total-portfolio real-property NOI growth to newly acquired properties.
- The May public offering of 4.83 million common shares generated $408.9 million net proceeds. Proceeds were used to repay revolving-credit borrowings, redeem preferred securities and fund an acquisition; remaining proceeds were intended for potential acquisitions, working capital and general corporate purposes. The company also sold shares through its at-the-market program.
- Q2 transaction costs fell to $2.4 million from $21.0 million, and first-half costs to $4.8 million from $23.7 million, mainly because the prior-year period included the Carefree acquisition. Depreciation and amortization increased, as did interest expense, reflecting acquisitions and related financing.
- Other income included foreign-currency translation gains, partly offset by contingent-liability remeasurement and hurricane-related costs. First-half debt-extinguishment charges were $0.8 million. A $0.7 million deferred tax benefit was recorded for Canadian operations.
- Home-sales revenue grew 14.5% in the first half, while home-sales gross profit grew 9.4%; management noted lower margins on some older homes acquired in a recent portfolio transaction. Rental-program NOI increased 8.6%, partly reflecting lower repair and refurbishment costs.
Outlook, commentary and risks
The filing provides no specific full-year earnings or FFO guidance. Management said it expects to pursue acquisition, development and expansion opportunities, subject to market conditions, and plans to meet liquidity needs through operating cash flow, cash, credit facilities, debt and equity issuance, or property collateralization. The company anticipated meeting long-term liquidity requirements but noted that financing availability and cost depend on capital markets and economic conditions.
Key risks discussed include occupancy or rent declines; rising wages, utilities, insurance and property taxes; interest-rate and refinancing risk; capital-market volatility; acquisition and development execution; Canadian currency movements; natural disasters; manufactured-home buyer financing and repossessions; and maintaining REIT status. The company had $154.8 million of remaining variable-rate debt; it estimated a 1 percentage-point rate movement would change first-half interest expense by approximately $1.5 million, based on average variable-rate borrowings. Ordinary-course legal proceedings were not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Reconcile reported revenue and segment presentations: the consolidated income statement reports $237.9 million of Q2 revenue, while the segment table reports $231.8 million before separately presented interest and other revenue.
- Assess how much NOI and revenue growth reflects acquisitions versus same-community performance, and whether same-community occupancy, rents and expense trends persist.
- Review the use of equity-offering proceeds, dilution from share issuance and convertible securities, and the effect of distributions on cash available for reinvestment.
- Evaluate debt maturities, variable-rate exposure, covenant headroom and financing needs for planned acquisitions and development.
- Consider the quality and sustainability of reported earnings and non-GAAP NOI/FFO, including acquisition costs, depreciation, currency gains, tax benefits and home-sale margins.