Sun Communities, Inc. — 2022 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated. Sun Communities is a REIT operating manufactured-home (MH) and recreational-vehicle (RV) communities and marinas. At quarter-end, it owned or held interests in 662 properties across the U.S., U.K., Ontario, Canada, and Puerto Rico.
Financial performance
- Revenue: Third-quarter revenue was $932.6, up 36.3% from $684.3 a year earlier. Nine-month revenue was $2,295.4, up 32.7% from $1,730.2. Growth reflected acquisitions, including Park Holidays, as well as existing-property performance.
- Profit and EPS: Third-quarter net income attributable to common shareholders was $162.6, down from $231.7; diluted EPS was $1.32 versus $2.00. Nine-month common-shareholder income was $237.3 versus $367.3; diluted EPS was $1.97 versus $3.27. Prior-year results included substantially larger property-disposition gains, while 2022 included losses on marketable securities remeasurement.
- Property operations: Company-wide NOI, a non-GAAP measure, was $455.2 for the quarter, up 31.4%, and $1,091.8 for nine months, up 25.4%. Same-property MH and RV NOI rose 6.4% for the quarter and 5.8% for nine months; same-property Marina NOI rose 9.6% and 6.8%, respectively. Core FFO per share was $2.65 for the quarter versus $2.11, and $6.04 for nine months versus $5.20. These supplemental measures are not substitutes for GAAP earnings or cash flow.
- Cash flow and investment: Nine-month operating cash flow was $654.5, nearly flat with $656.0 in 2021. Investing activities used $2,740.8, including $2,140.5 for acquisitions and $656.6 of property investment. Financing activities provided $2,130.8. Cash, cash equivalents and restricted cash ended at $112.0; management reported $101.1 of unrestricted cash.
- Debt and liquidity: Total debt was $6,711.0, versus $5,671.8 at year-end 2021; weighted-average interest rate was 3.374% and weighted-average maturity was 8.8 years. Approximately $1.4 billion was variable-rate debt. The amended Senior Credit Facility totaled $4.2 billion; $2.0 billion of capacity remained at quarter-end. The company reported net debt to enterprise value of 27.5% and compliance with its debt covenants.
- Capital and distributions: The company issued $600 million of 4.2% senior notes due 2032 and raised equity proceeds, primarily using proceeds to repay credit-facility borrowings. A quarterly distribution of $0.88 per share was declared.
Material changes and unusual items
- In April, Sun Communities completed its acquisition of Park Holidays, a U.K. holiday-park operator, at an enterprise value of £950 million (approximately $1.2 billion). Acquisitions completed in the first nine months added 22,242 sites, slips, and storage spaces. Purchase-price allocations remained preliminary for certain acquisitions.
- Hurricane Ian damaged properties, particularly three Fort Myers-area RV properties with approximately 2,500 sites, and marina infrastructure. The company recorded $29.9 of asset impairment and estimated $17.7 of insurance recoveries, resulting in a $12.2 net charge. No insurance recovery had been received by September 30; final losses and recoveries may differ materially.
- Marketable-securities remeasurement produced a $7.2 third-quarter loss and a $74.0 nine-month loss, compared with gains of $12.0 and $43.2 in the respective 2021 periods. Foreign-currency exchange gains were $14.9 for the quarter and $21.7 for nine months.
- Interest expense rose 58.2% in the quarter and 39.6% for nine months, reflecting higher debt balances and interest rates. General and administrative expense also increased, partly due to Park Holidays and higher wages and incentives.
- Home sales were weaker: third-quarter home-sales revenue excluding U.K. home sales fell 17.9%, and total sales volume declined 37.7%. Rental Program NOI fell 10.6% for the quarter, primarily because fewer rental homes were occupied.
Outlook, risks, and contingencies
The filing provides no clear numeric full-year earnings or operating guidance. Management said it intends to continue evaluating acquisitions, development, and expansion opportunities and expects to meet liquidity needs through operating cash flow, cash, its credit facility, and debt or equity financing. It also disclosed planned fixed-rate mortgage financings expected to provide approximately $310 million before year-end, with proceeds intended to repay credit-facility borrowings.
Management cited potential pressure from higher interest rates, inflation, operating costs, insurance premiums, real estate taxes, currency fluctuations, capital-market volatility, and the availability and cost of financing. Other risks include occupancy and rental-rate changes, acquisition integration, natural disasters, REIT qualification, and refinancing and covenant requirements. The company said ordinary-course legal proceedings were not expected to materially adversely affect results or financial condition. Management concluded disclosure controls were effective; Park Holidays’ operations were excluded from the internal-control assessment during the permitted post-acquisition period.
Important facts for investors to verify
- Actual Hurricane Ian insurance recoveries, repair costs, business-interruption losses, and the final impairment charge.
- Debt maturities, variable-rate exposure, financing costs, remaining credit-facility capacity, and continued covenant compliance.
- Park Holidays’ contribution to results, integration progress, and final acquisition accounting and goodwill assumptions.
- Whether same-property rent and occupancy trends offset cost inflation, and whether home-sales and Rental Program declines persist.
- The effects of marketable-security valuation changes and foreign-exchange movements on reported earnings and equity.