Sun Communities, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Sun Communities is a REIT operating manufactured home (MH) and recreational vehicle (RV) communities and marinas. At quarter-end, it owned or held an interest in 671 developed properties in the U.S., U.K. and Canada.
Financial performance and key metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $651.2 million | $548.5 million |
| Net income (loss) | $(32.9) million | $1.5 million |
| Net income (loss) attributable to common shareholders | $(30.1) million; $(0.24) per diluted share | $0.7 million; $0.01 per diluted share |
| Property NOI | $280.4 million | $261.9 million |
| Core FFO attributable to common shareholders and dilutive securities | $158.0 million; $1.23 per diluted share | $162.8 million; $1.34 per diluted share |
| Cash provided by operating activities | $194.5 million | $225.7 million |
Revenue increased 18.7%, while property NOI rose 7.1%. Same-property NOI increased 6.7% to $242.6 million. Same-property monthly base rent rose 5.4% for MH sites and 8.4% for annual RV sites; adjusted blended MH/RV occupancy was 98.6%, up from 96.7%. Core FFO per share declined 8.2%.
The GAAP loss reflected, among other items, a $19.9 million loss on remeasurement of marketable securities, higher interest expense, foreign-currency losses and a loss on property dispositions. The securities remeasurement loss was smaller than the $34.5 million loss in the prior-year quarter.
Cash flow, debt and liquidity
- Cash and restricted cash totaled $74.8 million at March 31, 2023, including $57.4 million of unrestricted cash. The company reported $2.2 billion of remaining Senior Credit Facility capacity.
- Total debt carrying value was $7.462 billion, up from $7.197 billion at year-end 2022. Weighted-average interest rate was 3.91%, weighted-average maturity was 7.4 years, and about 84% of debt was fixed-rate financing, including hedges.
- The company issued $400 million of 5.7% senior notes due 2033 and used the net proceeds to repay credit-facility borrowings. Hedges reduced the notes’ effective rate to 5.5%. Interest expense increased 69.5% year over year to $76.6 million.
- Operating cash flow decreased 13.8%. Investing activities used $321.9 million, including $301.8 million for property investment; financing activities provided $111.6 million. Capital expenditures and related activities totaled $301.8 million.
- The company was in compliance with debt covenants at quarter-end and reported net debt to enterprise value of 28.9%.
Material changes and operating developments
- MH same-property NOI increased 5.0%, RV increased 4.4%, and marina increased 15.1%. The marina comparison benefited from higher non-transient real-property revenue.
- Total home-sales revenue rose 33.4% to $86.3 million, including U.K. sales following acquisitions. North American home-sales NOI fell 43.6%, reflecting lower pre-owned sales volume and gross margins.
- Q1 acquisitions included an MH community and a marina for total consideration of approximately $107 million, largely funded with OP units, including $100 million of Series K preferred OP units for the marina acquisition. The company also bought three land parcels for $34.9 million and reported nearly 1,250 potential development sites.
- Two U.K. land parcels were sold for $111.5 million, primarily through an operator note receivable. Separately, the company agreed to sell a U.K. MH community for approximately $240 million in the form of a note receivable; the assets and liabilities were classified as held for sale at quarter-end.
Outlook, risks and unusual items
The filing provides no clear numerical full-year earnings or operating guidance. Management intends to continue evaluating acquisitions, development and expansion opportunities, while noting that higher interest rates may increase financing costs. It expects to fund liquidity needs through operating cash flow, available cash, credit facilities and debt or equity markets, subject to market conditions.
Hurricane Ian damaged three Fort Myers-area properties comprising about 2,500 sites. Estimated insurance receivables were $63.5 million at quarter-end, and $13.5 million of insurance recoveries were received during Q1. The company says claim estimates may change and cannot estimate when the three affected RV communities will return to pre-storm operating levels; redevelopment and subsequent lease-up are required. It reported $1.0 million of net catastrophic-event charges in Q1, including marina storm damage partly offset by recoveries.
Other risks cited include interest-rate and refinancing exposure, inflation and operating-cost increases, foreign-currency movements, occupancy and rent levels, insurance costs, capital-market access, acquisition execution and natural disasters. The filing reports no material change to the risk factors in the 2022 annual report. Management stated that disclosure controls were effective and that it was in compliance with covenants.
Important facts for investors to verify
- Progress, timing and collectability of the approximately $240 million note consideration for the U.K. community sale, and repayment of the short-term U.K. operator note due May 31, 2023.
- Insurance claim outcomes and the recovery timeline for Hurricane Ian-affected properties, including potential changes to the $63.5 million receivable estimate.
- Whether same-property NOI growth and occupancy can offset higher interest, insurance, tax and operating costs, and the decline in Core FFO per share.
- Debt refinancing and interest-rate exposure, including the variable-rate facility balance, remaining capacity and upcoming facility maturities.
- The quality and sustainability of reported results given fair-value remeasurement losses, acquisition-related costs, home-sales variability and substantial capital expenditures.