Sun Communities, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing; selected quarterly information also reports fourth-quarter results. Sun is a self-managed REIT that owns, operates, develops, and expands manufactured housing (MH) and recreational vehicle (RV) communities, and sells and rents homes through a taxable subsidiary.
Business context
At year-end, Sun owned, operated, or held an interest in 350 properties across 29 U.S. states and Ontario, with 121,892 developed sites and approximately 9,600 additional sites suitable for development. The portfolio comprised 230 MH communities, 89 RV communities, and 31 mixed communities. Overall occupancy, excluding transient RV sites, was 95.8%.
Key financial and operating metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $982.6 million | $833.8 million |
| Net income attributable to common stockholders | $65.0 million | $17.4 million |
| Diluted earnings per share | $0.85 | $0.26 |
| FFO per diluted share and OP unit | $3.95 | $3.22 |
| Core FFO per diluted share and OP unit | $4.17 | $3.79 |
| Total portfolio NOI | $479.7 million | $403.3 million |
| Same Community NOI | $382.2 million | $357.6 million |
| Cash provided by operating activities | $261.8 million | $238.7 million in cash flow statement |
| Total debt | $3.079 billion | $3.110 billion |
| Cash and cash equivalents at year-end | $10.1 million | $8.2 million |
Fourth-quarter 2017 revenue was $242.0 million and net income attributable to common stockholders was $7.4 million, or $0.09 per diluted share. For the comparable 2016 quarter, revenue was $218.6 million and common-stockholder net income was a loss of $1.6 million, or $0.02 per diluted share.
Same Community occupancy reached 97.3%, excluding approximately 1,800 recently completed vacant expansion sites. Same Community NOI grew 6.9%, supported by 1.9 percentage points of occupancy growth and a 3.6% increase in monthly base rent per site. Portfolio monthly base rent per site was $512, up from $495. Home sales totaled 3,282, up 3.5%; occupied rental homes increased to 11,074.
Changes versus the prior comparable period
- Revenue increased 17.9% year over year. Total portfolio NOI rose 18.9%; $51.7 million of the increase came from recently acquired properties and $24.6 million from Same Community properties.
- Core FFO per share and OP unit rose 10.0%. Common-stockholder net income increased substantially from 2016, when transaction costs were elevated and reported quarterly results included losses in the second and fourth quarters.
- Debt declined modestly, while management reported a net debt leverage ratio of 6.3 at year-end, down from 7.5 a year earlier.
- Sun acquired nine communities for approximately $144.7 million and invested in an entitled site for an 841-site RV resort. It completed more than 2,100 expansion sites in 26 communities.
- Operating cash flow increased. Investing cash outflow was $401.6 million, versus $1.615 billion in 2016, when acquisition activity was substantially larger.
Liquidity, debt, and capital allocation
Total debt was approximately $3.08 billion, including $2.87 billion of mortgage loans, $129.2 million of secured borrowings on collateralized receivables, $41.3 million of line-of-credit borrowings, and $41.4 million of mandatorily redeemable preferred OP units. Debt had a weighted-average interest rate of 4.5% and weighted-average maturity of 8.9 years. Approximately $94.1 million of principal payments were scheduled within one year under the contractual-obligations schedule.
The amended revolving credit facility and term loan totaled $650 million, with $37.8 million drawn on the revolving loan at year-end; the facility matures in April 2021, subject to extension options. Sun reported compliance with its debt covenants and 160 unencumbered properties, 61 of which supported the credit facility borrowing base. Net debt to enterprise value was approximately 28.2%, assuming conversion of specified OP units.
Operating cash flow was $261.8 million, investing activities used $401.6 million, and financing activities provided $141.6 million. Year-end cash was $10.1 million. Sun raised $408.9 million net from a common-stock offering in 2017, principally to repay revolving borrowings and support acquisitions and general corporate purposes. Common distributions declared were $2.68 per share for 2017; the board retains discretion over future distributions.
Outlook, management commentary, and risks
- Management expected to construct more than 1,700 additional expansion sites in 2018 and planned to continue evaluating acquisitions and development opportunities, subject to market conditions. No specific earnings or FFO guidance is provided in the supplied filing text.
- Hurricane Irma affected 121 Florida and three Georgia communities. Sun recognized $31.7 million of gross costs, including $10.4 million of asset impairments at three Florida Keys communities, partly offset by estimated insurance recoveries of $23.7 million. The reported net weather-related charge was approximately $8.0 million to $8.4 million, depending on the presentation. No recoveries had been received at year-end; Sun received $5.0 million in February 2018. The Florida Keys properties required redevelopment and lease-up, and management could not estimate when results would return to pre-hurricane levels.
- Other notable 2017 items included a $6.0 million loss on debt extinguishment, $9.8 million of transaction costs, and $9.0 million of net other income, including foreign-currency translation gains and a contingent-liability remeasurement gain.
- Principal risks include substantial leverage and refinancing needs, interest-rate increases, reliance on capital markets, geographic concentration in Florida, Michigan, Texas, and California, natural disasters, operating-cost increases, competition, rent regulation, manufactured-home financing and repossessions, Canadian-dollar exposure, and maintaining REIT qualification. Sun also described uncertainty in interpreting the Tax Cuts and Jobs Act enacted in December 2017.
- Sun reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Reconcile the cash-flow figures: MD&A cites 2016 operating cash flow of $237.6 million, while the consolidated cash-flow statement reports $238.7 million.
- Review the full audited statements and notes for debt maturities, secured-property concentration, covenant headroom, and refinancing exposure; the filing reports substantial property-level secured debt.
- Track Hurricane Irma insurance recoveries, redevelopment spending, and occupancy and earnings recovery at the Florida Keys communities.
- Assess the sustainability of NOI and Core FFO growth, including the contributions from acquisitions, rent increases, occupancy, expansion sites, and home sales.
- Consider dilution and capital needs from the 2017 equity issuance, the remaining at-the-market offering authorization, convertible securities, and OP units.
- Evaluate the impact of the Tax Act and future tax guidance on the REIT, taxable subsidiaries, and shareholder distributions; the filing notes unresolved interpretive issues.