SUN COMMUNITIES INC annual report, FY2018

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Sun Communities, Inc. — 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018; filed February 21, 2019. Sun Communities is a REIT operating manufactured-home (MH) and recreational-vehicle (RV) communities, with a related home sales and rentals business.

Business context and portfolio

  • Owned, operated, or held an interest in 371 properties across 31 U.S. states and Ontario, up from 350 properties in 2017. The portfolio comprised 230 MH communities, 110 RV communities, and 31 mixed communities.
  • Properties contained 128,454 developed sites, including 84,428 MH sites, 24,535 annual RV sites, and 19,491 transient RV sites; approximately 11,300 additional sites were suitable for development.
  • Year-end blended occupancy was 96.1%, excluding transient RV sites, versus 95.8% in 2017. Same-community occupancy was 98.0%, excluding recently completed vacant expansion sites.

Financial performance and liquidity

  • Revenue: $1.127 billion, up 14.7% from $982.6 million in 2017. Real-property income was $826.0 million; home sales revenue was $166.0 million.
  • Profit: Net income was $120.2 million versus $81.8 million; net income attributable to common stockholders was $105.5 million versus $65.0 million. Diluted EPS was $1.29 versus $0.85. Net margin was approximately 10.7% (net income divided by total revenue).
  • REIT operating measures: Same-community NOI grew 6.7% to $512.4 million; total-portfolio real-property NOI rose 11.2% to $533.3 million. Core FFO was $4.58 per diluted share and OP unit, up 9.8% from $4.17.
  • Cash flow: Operating cash flow was $363.1 million, compared with $258.0 million. Investing activities used $733.7 million, including $320.3 million for property acquisitions and $389.4 million of investment in properties. Financing activities provided $409.9 million. Cash, cash equivalents, and restricted cash ended at $62.3 million, up from $23.5 million.
  • Debt and leverage: Total debt was $3.124 billion, versus $3.079 billion; total liabilities were $3.479 billion. Debt carried a 4.5% weighted-average interest rate and 9.0-year weighted-average maturity. Net debt to enterprise value was approximately 25.2% under the company’s stated conversion assumptions.
  • Liquidity: The company had $128.0 million drawn on its revolving credit facility and was in compliance with its covenants. It reported a 31.3% leverage ratio against a maximum of 65.0%, and a 2.95 fixed-charge coverage ratio against a minimum of 1.40. The board declared common distributions of $2.84 per share for 2018, versus $2.68 in 2017.

Material changes versus 2017

  • Same-community real-property income rose 6.1%; management attributed growth mainly to a 2.2% occupancy increase and a 4.1% increase in total monthly base rent per site. Property operating expenses increased 4.9%.
  • Acquired 20 communities for total consideration of $349.1 million, adding 4,882 sites and 1,166 expansion sites. Total properties increased by 21 year over year.
  • Expanded or developed approximately 1,300 sites at 13 communities at a cost of $56.7 million. Home sales increased 10.6% to 3,629; home-sales gross profit rose 32.2% to $42.7 million.
  • Issued 5.06 million common shares in a September 2018 offering, generating $499.9 million net proceeds, primarily used to repay credit-facility borrowings. Year-end common shares outstanding were 86.4 million, compared with 79.7 million a year earlier.
  • Interest expense increased 2.0% to $132.8 million, while transaction costs fell to $0.5 million from $9.8 million and net catastrophic-weather charges fell to $0.1 million from $8.4 million. The company recorded an $8.4 million foreign-currency translation loss in earnings, compared with a $5.9 million gain in 2017.

Outlook, risks, and unusual items

  • Management expected to construct more than 1,600 expansion sites in 2019, supported by its stated inventory of approximately 11,300 sites suitable for development. No specific earnings or revenue guidance is provided in the filing text.
  • After year-end, the company acquired seven communities for $324.7 million, containing 2,956 MH sites and 612 RV sites. It also completed a $265.0 million, 25-year loan at 4.17% and repaid a $187.9 million loan.
  • Hurricane Irma-related damage continued to affect three Florida Keys communities. The company reported an $18.7 million estimated insurance receivable at year-end and stated that it could not estimate when operations at the impaired communities would return to pre-hurricane levels.
  • Key disclosed risks include high geographic concentration in Florida and Michigan; natural disasters and potential uninsured losses; occupancy, rent and manufactured-home financing sensitivity; acquisition and development execution; interest-rate, refinancing and covenant risks; foreign-exchange exposure; and maintaining REIT qualification. The company had approximately $3.1 billion of debt, including about $2.8 billion secured by mortgages on 185 properties.
  • Legal proceedings in the ordinary course were not expected to have a material adverse effect. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

  • Review the acquisition and expansion pipeline, including lease-up progress on recently completed sites and the 2019 development plan.
  • Assess same-community rent and occupancy growth against rising utility, tax, insurance, and other operating costs.
  • Examine debt maturities, refinancing needs, variable-rate exposure, and available revolver capacity; confirm covenant headroom.
  • Track insurance recoveries, redevelopment costs, and operating recovery at the Florida Keys properties affected by Hurricane Irma.
  • Reconcile reported GAAP earnings with FFO/Core FFO and review equity issuance and dilution, preferred obligations, and the sustainability of distributions.