Business context and reporting period
Sun Communities, Inc. (NYSE: SUI) is a REIT operating manufactured housing (MH), recreational vehicle (RV) communities and marinas. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023. The company reported 670 developed properties across the U.S., U.K. and Canada.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $983.2 million | $932.6 million | $2,497.9 million | $2,295.4 million |
| Net income | $180.4 million | $177.0 million | $245.0 million | $259.8 million |
| Net income attributable to SUI common shareholders | $163.1 million | $162.6 million | $222.8 million | $237.3 million |
| Diluted EPS | $1.31 | $1.32 | $1.79 | $1.97 |
| Core FFO per diluted share | $2.57 | $2.65 | $5.76 | $6.04 |
| Net cash provided by operating activities | Not presented for quarter | Not presented for quarter | $672.9 million | $689.8 million |
Q3 total revenue rose 5.4%, while common-shareholder net income was nearly unchanged and diluted EPS edged down. For the first nine months, revenue grew 8.8%, but common-shareholder net income fell about 6% and diluted EPS fell about 9%. Nine-month NOI, a non-GAAP property performance measure, increased 2.3% to $1,116.6 million; Q3 NOI rose 0.6% to $458.0 million.
Same-property real estate NOI increased 6.7% in Q3 and 6.6% for the nine-month period. As of September 30, same-property MH and annual RV occupancy was 97.0% and 100%, respectively; monthly base rent per site increased 6.1% for MH and 8.8% for RV.
At September 30, total assets were $17.6 billion, total debt was $7.665 billion, and cash, cash equivalents and restricted cash were $62.0 million, including $46.0 million of unrestricted cash. Debt had a weighted-average interest rate of 4.13% and weighted-average maturity of 6.8 years. The company reported $2.0 billion of remaining Senior Credit Facility capacity and compliance with its financial covenants.
For the first nine months, investing cash outflow was $817.8 million, primarily reflecting $790.3 million of property investment and $51.4 million of acquisitions, net of cash acquired. Financing cash inflow was $116.3 million. Distributions paid totaled $355.2 million. The quarterly common-stock distribution declared was $0.93 per share.
Material changes versus prior comparable periods
- Q3 interest expense rose 36.3% to $84.1 million; nine-month interest expense rose 47.9% to $239.9 million. Management attributed the increase to higher debt and interest rates.
- Home sales revenue declined 21.8% in Q3 and 8.8% for the nine months. Total home-sales NOI fell 31.3% in Q3 and 17.2% for the nine months, with lower sales volumes and, in the U.K., lower average selling prices contributing.
- Nine-month operating cash flow declined $16.9 million, which management attributed mainly to increased interest expense, partly offset by improved same-property operations.
- Nine-month capital investment in properties increased to $790.3 million from $656.6 million. Acquisition spending was substantially lower than in 2022, when major acquisitions drove investing cash outflows.
- Senior unsecured debt increased, including a $400 million 5.7% note issuance in January 2023. Total debt increased from $7.197 billion at year-end 2022 to $7.665 billion.
Outlook, commentary, risks and unusual items
- Management expects 2024 rental-rate growth to exceed headline inflation and intends to prioritize expense management and reduction of variable-rate debt. It is pulling back on development and capital spending, except for ongoing and strategic projects. No specific earnings or FFO guidance is provided in the filing.
- Interest-rate exposure remains material: more than 82% of debt was fixed-rate, including hedges, but management said higher rates could adversely affect results. A 1-percentage-point change in rates would change nine-month interest expense by an estimated $10.4 million, based on average variable-rate debt.
- A $361.1 million U.K. operator loan was past its July 31, 2023 maturity and remained due at quarter-end. SUI appointed receivers over real estate collateral on September 29 and expected marketing to begin in Q4. The filing reports no fair-value adjustment to developer/operator notes during the nine months; recovery and collateral outcomes remain important uncertainties.
- Several putative class actions allege that SUI and other manufactured-housing operators shared competitively sensitive information to maintain artificially high site rents. SUI disputes the allegations; it cannot estimate a potential loss, and an adverse outcome could be material.
- Hurricane Ian-related communities remained under redevelopment, and management could not estimate when operations would return to pre-storm levels. At quarter-end, estimated property-insurance receivables were $52.2 million; SUI also recognized $12.9 million of business-interruption recoveries in Q3. Estimates and actual recoveries may differ.
- Sandy Bay, a U.K. community with 730 sites, remained classified as held for sale despite its sale contract ending; reported assets were $259.1 million and liabilities $63.1 million. The filing also reports a $6.3 million impairment on an MH community sold in August.
- After quarter-end, SUI sold its Ingenia Communities Group stake for net proceeds of $102.5 million, with an estimated $9.0 million realized loss, and used proceeds to reduce credit-facility borrowings. It also arranged $252.8 million of new fixed-rate mortgage loans at 6.49%, using proceeds to repay $117.8 million of 2023 maturities and reduce facility borrowings.
Important facts for investors to verify
- Progress and ultimate recoveries on the overdue $361.1 million U.K. operator loan, including receiver marketing, collateral value and any credit-bid decision.
- Case developments and potential financial exposure from the MH site-rent antitrust litigation.
- Cash generation after elevated interest costs, capital spending and distributions, alongside the company’s planned reduction of variable-rate debt.
- Occupancy, rent growth and property expense trends, particularly insurance costs and performance of hurricane-affected communities.
- Home-sales volume and margins, and execution of the stated pullback in development and capital spending.
- Completion and financial impact of post-quarter debt refinancing and the use of Ingenia sale proceeds.