Sun Communities, Inc. — Q3 2013 Form 10-Q
Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2013. Sun Communities is a REIT that owns, operates, and develops manufactured-housing and RV communities, and also sells and rents manufactured homes. At quarter-end, it operated 185 properties in 25 states, with 68,269 developed sites.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $107.2 million | $83.0 million | $310.3 million | $248.2 million |
| Net income | $6.0 million | Loss of $0.3 million | $17.5 million | $8.6 million |
| Net income attributable to common stockholders | $3.7 million | Loss of $0.7 million | $10.5 million | $6.4 million |
| Diluted earnings per share | $0.10 | Loss of $0.02 | $0.31 | $0.24 |
| FFO per diluted share | $0.80 | $0.68 | $2.36 | $2.34 |
| Cash flow from operations | — | $94.3 million | $57.9 million |
- Operating performance: Q3 total-portfolio Real Property NOI rose 25.4% to $50.2 million; same-site Real Property NOI increased 5.1% to $41.7 million. Same-site occupancy was 88.8%, versus 87.2% a year earlier. For nine months, same-site NOI rose 5.4% to $128.6 million.
- Home activities: Nine-month Rental Program NOI increased 25.5% to $43.6 million, and Home Sales gross profit rose 55.3% to $10.8 million. Growth reflected more rental homes and stronger pre-owned home sales.
- Margins and costs: Q3 home-sales gross margin was 28.2% for pre-owned homes and 19.2% for new homes. Depreciation and amortization and interest expense increased year over year, reflecting acquisitions, rental-home investment, and financing costs.
- Balance sheet and debt: At September 30, assets were $1.937 billion, total liabilities $1.517 billion, and total equity $419.7 million. Debt was $1.353 billion, with $54.8 million in lines of credit; debt had a 5.3% weighted-average interest rate and 6.5-year weighted-average maturity. Cash was $5.0 million, down from $29.5 million at year-end 2012.
- Liquidity: The company reported $94.3 million of operating cash flow and $270.3 million of investing outflows for the first nine months. Its $350 million revolving facility had about $51.7 million drawn and approximately $294.3 million available after letters of credit. Management reported compliance with debt covenants; leverage ratio was 45.1% against a maximum of 68.5%, and fixed-charge coverage was 2.23 against a minimum of 1.40.
Material changes versus the prior comparable period
- Revenue grew 29.1% in Q3 and 25.0% for the nine-month period. Portfolio expansion contributed materially: the company acquired 12 RV communities with approximately 4,500 sites during the first nine months; acquired properties contributed $11.7 million of revenue and $2.9 million of net income for that period.
- Q3 net income improved from a small loss to a profit. Nine-month common-stockholder earnings increased, while diluted EPS rose more modestly, from $0.24 to $0.31, amid a larger share count.
- In March, the company issued 5.75 million common shares, raising $249.5 million net. It used part of the proceeds to reduce debt and the remainder for acquisitions, working capital, and general corporate purposes. Common shares outstanding increased to 36.1 million from 29.8 million at year-end 2012.
- Same-site occupancy improved 1.6 percentage points, and average monthly manufactured-home site rent for same-site communities increased from $431 to $443. Same-site operating expenses rose 3.6% for the first nine months, below the 4.9% rise in same-site property revenue.
- Cash from operations increased, but investing outflows also rose, reflecting property investment, acquisitions, and rental-home purchases. The company replaced its $150 million revolver with a $350 million facility maturing in May 2017, with a one-year extension option.
Outlook, risks, contingencies, and unusual items
- No specific earnings, FFO, or other numerical guidance was provided. Management said it would continue evaluating acquisitions and development opportunities and expects to meet long-term liquidity needs through operating cash flow, available credit, and debt or equity financing.
- Management highlighted risks from economic and capital-market volatility, rising interest rates and operating costs, refinancing and access to capital, occupancy and rental rates, home sales and buyer financing, acquisitions, natural disasters, and maintaining REIT status. A 1% change in Prime or LIBOR was estimated to change interest expense by approximately $1.7 million based on the reported variable-rate exposure.
- Interest-rate hedges included a $20 million swap fixing borrowing costs through January 2014 and caps on $162.4 million of notional debt. The company stated the hedges were highly effective and not used for speculation.
- Transferred manufactured-home receivables remain on the balance sheet because recourse provisions prevented sale accounting; the related secured borrowing was $107.2 million. The company may have to repurchase homes after certain borrower defaults. A separate Talmer Bank arrangement carried a maximum $10 million exposure; no loans had been made under it as of September 30, 2013.
- A September settlement resolved claims relating to the Morgan RV Properties; the company released rights to another RV community and received reimbursement and additional consideration. The filing states ordinary-course legal proceedings are not expected to have a material adverse effect.
- The company declared a $0.63-per-share quarterly common dividend and reported continued REIT qualification for the quarter. Its $0.4453-per-share Series A preferred dividend and the preferred stock’s senior claim on earnings are also relevant to common-stockholder returns.
Important facts for investors to verify
- How much of revenue and NOI growth reflects acquisitions versus durable same-site rent, occupancy, and cost trends.
- Rental-home investment returns, including depreciation, repair costs, bad debts, and the cash required to expand the program.
- Debt maturities, floating-rate exposure, borrowing-base availability, covenant headroom, and the company’s capacity to refinance or fund further acquisitions.
- The dilution and distribution effects of the common-share offering, preferred stock, and potentially convertible OP units.
- Final purchase-price allocations for 2013 acquisitions, the collectability and recourse exposure of home receivables, and the status or extension of the Talmer agreement.
- Whether cash generation supports dividends, capital spending, and planned investment; FFO is a supplemental measure and is not a substitute for GAAP cash flow or liquidity.