SUN COMMUNITIES INC quarterly report, Q3 FY2014

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Sun Communities, Inc. — Q3 2014 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2014. Sun Communities is a REIT operating manufactured-home (MH) and recreational-vehicle (RV) communities and a home sales and rentals business. At quarter-end, it owned and operated 184 properties in 27 states.

Financial performance and operating metrics

  • Revenue: Q3 revenue was $125.4 million, up 17.0% from $107.2 million. Nine-month revenue was $352.0 million, up 13.5% from $310.3 million.
  • Net income and EPS: Q3 net income attributable to common stockholders was $22.7 million, or $0.54 per diluted share, versus $3.7 million, or $0.10, in Q3 2013. Nine-month results were $35.4 million, or $0.89 per diluted share, versus $10.5 million, or $0.31.
  • Important earnings context: 2014 results included net gains on property dispositions of $13.6 million in Q3 and $14.5 million for the nine-month period; there were no such gains in the comparable 2013 periods.
  • NOI: Real Property Operations NOI rose 20.0% in Q3 to $60.2 million and 14.6% for nine months to $173.3 million. Same-site NOI increased 9.2% in Q3 and 8.2% for nine months. Management attributed growth to rent increases, higher occupancy, and acquisitions.
  • Occupancy and rents: Portfolio occupancy was 92.5%, versus 89.6% a year earlier. Same-site occupancy was 92.9%, versus 91.4%. Average monthly site rent across the portfolio was $447, up from $435.
  • Home sales and rentals: Rental Program NOI increased 15.6% in Q3 and 20.1% for nine months. Home-sales gross profit declined 14.9% in Q3 and 13.5% for nine months, primarily reflecting lower pre-owned home prices and margins.
  • FFO: Diluted FFO was $39.7 million, or $0.91 per share, in Q3 and $108.9 million, or $2.59, for nine months. FFO excluding certain items was $42.1 million, or $0.96, and $113.2 million, or $2.69, respectively. These are non-GAAP supplemental measures.
  • Cash flow: Nine-month operating cash flow was $109.3 million, compared with $94.3 million in 2013. Investing used $248.6 million and financing provided $393.8 million. Ending cash was $259.2 million, up from $4.8 million at year-end 2013.
  • Debt and liquidity: Debt totaled $1.394 billion, with a 5.2% weighted-average interest rate and 7.4-year weighted-average maturity. The $350 million revolving facility had no borrowings at quarter-end, with approximately $346.8 million available after letters of credit. The company reported compliance with debt covenants.
  • Margins and distributions: Same-site property NOI margin was approximately 70.0% in Q3 2014, versus 68.2% in Q3 2013 (NOI divided by same-site real-property income). Quarterly common distributions were $0.65 per share, compared with $0.63 a year earlier.

Material changes versus the prior period

  • Growth reflected both same-site improvement and portfolio expansion: Q3 total-portfolio Real Property NOI increased $10.0 million, including $5.8 million from acquired properties and $4.2 million from same-site properties.
  • The company acquired six RV communities with approximately 2,500 sites and sold ten MH communities with approximately 3,300 sites during the first nine months.
  • Two common-stock offerings generated net proceeds of approximately $348.9 million in September and $214.0 million in March/April. Shares outstanding increased to 48.0 million at September 30, from 36.1 million at December 31, 2013.
  • Debt increased from $1.311 billion at year-end, while the revolving-credit balance fell from approximately $178.1 million to zero. The company also added mortgage financing and repaid certain loans.

Outlook, risks, and unusual items

  • Pending Green Courte acquisition: Agreements cover 59 MH communities with more than 19,000 sites. Stated consideration is approximately $1.32 billion, including assumption of about $560 million of debt, cash, common equity/OP units, and $175 million of newly created convertible preferred securities. Closings were anticipated in two stages, subject to diligence, loan assumption approvals, third-party consents, and other customary conditions; completion and timing were not assured. The company had paid a $50 million deposit, which could be forfeited under specified circumstances.
  • Management said it expects to fund liquidity needs through operating cash flow, available cash, credit facilities, and debt or equity issuance. It continued to pursue acquisitions and development, subject to market conditions; the filing provides no formal earnings or revenue guidance.
  • Risks highlighted include potential increases in interest rates, volatile debt and equity markets, refinancing and acquisition execution, occupancy and rent changes, higher operating costs, home-buyer financing, and REIT qualification. A 1% change in Prime or LIBOR was estimated to change interest expense by about $2.4 million based on the stated variable-rate debt exposure.
  • A $0.8 million impairment was recorded for a La Feria, Texas MH/RV community following weaker operating performance. Transaction costs rose, primarily due to the pending Green Courte deal.
  • After quarter-end, an October settlement related to prior RV-community acquisitions was expected to produce an approximately $4.5 million gain in Q4 2014. Management said ordinary-course legal proceedings were not expected to have a material adverse effect; it reported no material change to previously disclosed risk factors.

Most important facts for investors to verify

  • Whether and when the Green Courte acquisition closed, its final financing and equity terms, and the resulting leverage and dilution.
  • How much reported earnings growth was recurring: separate the $14.5 million nine-month property-disposition gain, acquisitions, and transaction costs from operating trends.
  • Whether same-site occupancy, rent growth, and NOI gains continued, and whether operating-cost inflation pressured margins.
  • Whether home-rental growth can be sustained and whether pre-owned home sales margins stabilize.
  • Debt maturities, variable-rate exposure, covenant headroom, and available liquidity after acquisition funding and distributions.
  • Actual realization and accounting treatment of the post-quarter $4.5 million settlement gain.