SUN COMMUNITIES INC quarterly report, Q3 FY2011

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Sun Communities, Inc. — Q3 2011 Form 10-Q

Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2011, compared with the same 2010 periods. Sun is a REIT operating manufactured-home and RV communities, with home sales and rentals as a complementary business. At quarter-end it owned 155 properties in 18 states, with 53,713 developed sites.

Financial performance and condition

  • Revenue: Third-quarter revenue was $74.7 million, up 15.5%; nine-month revenue was $212.7 million, up 6.9%. Real-property income rose 16.1% in Q3 and 8.0% year to date.
  • Profit: Q3 net loss was $21,000; loss attributable to common stockholders was $373,000, or $0.02 per share, versus a $1.4 million common-stockholder loss in Q3 2010. Nine-month net income was $1.6 million, with $1.1 million attributable to common stockholders, or $0.05 per diluted share; the comparable 2010 common-stockholder loss was $2.5 million, or $0.13 per share.
  • Cash flow and investment: Nine-month operating cash flow was $46.4 million, up from $42.0 million. Investing used $111.5 million, including $51.5 million for acquisitions and $61.7 million for property investment. Financing provided $61.5 million. Cash declined $3.7 million to $4.7 million.
  • Operating performance: Q3 total-portfolio real-property NOI increased 15.4% to $37.4 million; same-site NOI rose 4.7% to $34.0 million. Nine-month total-portfolio NOI rose 8.0% to $107.8 million; same-site NOI rose 4.2% to $104.0 million. Same-site occupancy was 85.6%, versus 84.5%, and average monthly manufactured-home site rent was $423, versus $412.
  • Home operations: Rental Program NOI increased 16.6% in Q3 to $9.5 million and 11.7% year to date to $28.1 million. Home-sales gross profit fell 12.3% in Q3 and 14.8% year to date, primarily as pre-owned home margins declined to 22.2% from 27.9% in Q3 and to 21.7% from 25.4% year to date.
  • FFO/AFFO: Diluted FFO per share was $0.74 in Q3 and $2.27 for nine months, compared with $0.69 and $2.15. Diluted AFFO per share was $0.75 and $2.32, versus $0.69 and $2.19, respectively. These are non-GAAP supplemental measures, not cash-flow or liquidity measures.
  • Distributions: Common dividends were $0.63 per share for Q3 and $1.89 for nine months, unchanged from 2010.
  • Debt and liquidity: Debt was $1.252 billion and lines of credit were $104.3 million at September 30; combined, $1.356 billion. Debt’s reported weighted-average rate was 5.2%; management reported a 7.3-year weighted-average maturity and debt-to-market-capitalization of approximately 61.9%. Cash was $4.7 million. The $130 million secured revolver had $35.5 million available under its borrowing base; the reported outstanding balance was $90.5 million, with $4.0 million of availability used for letters of credit. The company reported compliance with debt covenants.

Material changes versus the prior period

  • Acquired 18 Kentland communities in Michigan (5,437 sites) and Orange City RV Resort in Florida (525 sites), adding 19 properties overall. Acquired properties contributed $6.3 million revenue and $1.2 million net income from acquisition dates through September 30. Acquisitions also increased depreciation, interest expense and related costs.
  • Same-site occupancy and rents improved, while property operating expenses increased more slowly than revenue for the nine-month period. Revenue growth also reflected the acquired communities.
  • Issued common shares and Series A-1 preferred OP units to support financing and acquisitions. The preferred units issued for Kentland totaled $45.5 million, carry a 5.1% preferred return for two years and 6.0% thereafter, and are convertible after December 31, 2013.
  • Net income improved from a nine-month loss in 2010, aided in part by $1.7 million of affiliate dividend income versus a $1.6 million affiliate loss in 2010, and lower reported state-tax expense. Acquisition costs of $1.5 million were recorded in 2011.

Outlook, commentary, risks and unusual items

  • No specific earnings or operating guidance is provided. Management expects short-term liquidity from operating cash flow and credit lines and anticipates meeting longer-term needs through debt or equity issuance, property collateralization, or asset sales. It continues to evaluate acquisitions.
  • Management identified economic and financial-market conditions, occupancy and rent levels, operating-cost inflation, manufactured-home sales and buyer financing as risks to cash flow. It also noted tighter credit markets could make borrowing more difficult or costly. A 1% change in relevant rates was estimated to change interest expense by approximately $1.8 million, based on average variable-rate debt balances for the nine-month period.
  • A new $130 million secured revolving facility replaced the prior $115 million facility; it matures October 1, 2015, assuming the available one-year extension. A settlement with Fannie Mae and PNC is expected to permit an option to extend a $367 million facility from 2014 to 2023, subject to conditions and underwriting criteria. The settlement reduced interest expense by $1.3 million through September 30, 2011; the litigation dismissal depends on the agreement becoming effective.
  • The company disclosed that its 401(k) plan had purchased company shares that were not registered. It intends to file a registration statement offering rescission to affected purchasers; management did not expect a material financial impact. Other ordinary-course legal proceedings were not expected to have a material adverse impact.
  • Management confirmed REIT qualification for the quarter and reported effective disclosure controls. The filing states there were no material changes to previously disclosed risk factors.

Important facts for investors to verify

  • How much of reported growth reflects acquisitions versus sustained same-site occupancy, rent increases and cost control.
  • Debt availability and covenant headroom, the substantial 2014 debt maturities, and whether the proposed maturity extension and its conditions are completed.
  • Whether lower pre-owned home margins continue and whether home-sale volumes support the Rental Program’s capital needs.
  • The potential dilution and distribution claims associated with common-share issuance and convertible preferred OP units.
  • The progress and ultimate cost, if any, of the 401(k) share-rescission process and the effective date of the credit-facility settlement.