Sun Communities, Inc. 2010 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: Sun Communities, Inc. (SUI)
Reporting Period: Fiscal year ended December 31, 2010
Business Model: A self-administered and self-managed Real Estate Investment Trust (REIT) owning, operating, and developing manufactured housing communities and recreational vehicle (RV) parks. The company leases land sites to residents and operates a taxable subsidiary, Sun Home Services (SHS), for home sales and rentals.
Portfolio: As of December 31, 2010, the company owned 136 properties in 18 states, comprising 47,683 developed sites (42,442 manufactured home sites, 3,209 permanent RV sites, and 2,032 seasonal RV sites).
Occupancy: 84.3% (excluding seasonal RV sites).
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Revenues | $263.1 million | $256.6 million |
| Net Loss (GAAP) | $(2.9) million | $(6.3) million |
| Funds From Operations (FFO) | $62.7 million | $55.9 million |
| Adjusted FFO | $63.6 million | $59.5 million |
| Net Operating Income (NOI) | $148.2 million | $144.5 million |
| Total Debt | $1.26 billion | $1.25 billion |
| Cash and Equivalents | $8.4 million | $4.5 million |
| Distributions per Share | $2.52 | $2.52 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 2.5% to $263.1 million, driven by a 2.5% increase in real property income due to rental rate increases (2.6%) and higher occupancy.
- Profitability: Net loss improved significantly from $(6.3) million in 2009 to $(2.9) million in 2010. This improvement was aided by a reduction in equity losses from affiliates (Origen Financial) and the absence of the $0.8 million Georgia flood damage charge recorded in 2009.
- NOI Performance: Real Property NOI increased 3.1% to $135.2 million. Rental Program NOI increased 9.0% to $33.7 million due to increased resident participation. Home Sales NOI decreased 14.3% to $7.9 million due to lower profit margins on pre-owned homes.
- Debt Structure: Total debt remained relatively stable. The company entered into a $20.0 million secured line of credit in May 2010 (balance $9.0 million) and a $100 million equity purchase agreement with REIT Opportunity, Ltd. in August 2010 (no shares purchased by year-end).
Guidance, Outlook, and Risks
Management Commentary:
- Outlook: Management anticipates selling approximately 1,600 homes in 2011. The company is focused on refinancing $115.0 million in unsecured revolving credit and $104.0 million in secured debt maturing in 2011.
- Capital Markets: While credit markets are improving, terms remain restrictive compared to pre-recession levels. The company has 30 unencumbered properties with an estimated market value of $212.1 million available to support borrowing bases.
- Equity: Subsequent to year-end, the company sold 915,827 shares under the REIT Opportunity agreement for net proceeds of approximately $30.0 million.
Key Risks:
- Geographic Concentration: Significant exposure to economic downturns in Michigan (30% of sites), Florida (21%), Indiana (14%), and Texas (11%).
- Debt Maturity: Approximately $189.2 million in debt matures in 2011, including the unsecured line of credit.
- REIT Status: Failure to qualify as a REIT would subject the company to corporate income taxes.
- Related Party Transactions: Conflicts of interest exist regarding the CEO's ownership in Origen Financial and the lease of executive offices from an entity partially owned by the CEO and a director.
Investor Verification Checklist
- Debt Refinancing: Verify the company's ability to refinance the $189.2 million in debt maturing in 2011 given current credit market conditions.
- Equity Losses: Monitor the financial health of Origen Financial, Inc., as equity losses from this affiliate significantly impacted GAAP net income in prior years.
- Occupancy Trends: Track occupancy rates in key markets (Michigan, Florida) to ensure they remain resilient against local economic conditions.
- Home Sales Margins: Review the gross margin trends for pre-owned home sales, which declined in 2010 due to pricing strategies to increase volume.
- Legal Proceedings: Monitor the status of the lawsuit against ARCS Commercial Mortgage Co. regarding variable facility fees.