SUN COMMUNITIES INC quarterly report, Q2 FY2022

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Business context and reporting period

Sun Communities, Inc. is a REIT operating manufactured-home (MH) communities, recreational-vehicle (RV) resorts and marinas. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022. At quarter-end, the company owned or held an interest in 661 properties across the U.S., Canada, the U.K. and Puerto Rico.

Financial performance and position

  • Revenue: Second-quarter revenue was $814.3 million, up 34.8% from $603.9 million; first-half revenue was $1.363 billion, up 30.3%. Growth included newly acquired properties, notably Park Holidays.
  • Profit and per-share results: Second-quarter net income attributable to common shareholders was $74.0 million ($0.61 per diluted share), compared with $110.8 million ($0.98) a year earlier. First-half results were $74.7 million ($0.63 per diluted share), versus $135.6 million ($1.22). Lower marketable-securities remeasurement results were a major factor.
  • Property operations: Non-GAAP NOI was $374.7 million for the quarter, up 23.4%, and $636.6 million for the first half, up 21.5%. Same-property MH/RV NOI increased 3.6% in the quarter and 5.5% in the first half; same-property Marina NOI rose 7.1% and 5.0%, respectively. Quarterly MH/RV blended occupancy was 98.0% for the same-property portfolio.
  • FFO: Diluted FFO per share was $1.95 for the quarter, versus $1.70; Core FFO per share was $2.02, versus $1.80. First-half diluted FFO was $3.24 per share and Core FFO was $3.37, compared with $2.94 and $3.08, respectively. These are non-GAAP measures.
  • Cash flow and investment: First-half operating cash flow was $496.7 million, versus $470.7 million. Investing used $2.476 billion, including $1.904 billion for acquisitions and a $195.3 million acquisition deposit; financing provided $2.092 billion. Cash, cash equivalents and restricted cash ended at $184.7 million, including $169.7 million unrestricted cash.
  • Debt and liquidity: Total debt was $6.931 billion, versus $5.672 billion at year-end 2021. Weighted-average debt interest was 3.369% and weighted-average maturity was 7.9 years. The company reported $2.3 billion of remaining Senior Credit Facility capacity and compliance with debt covenants. Variable-rate debt was approximately $1.7 billion.
  • Balance sheet: Total assets were $16.398 billion and total liabilities $8.566 billion at June 30, 2022, compared with $13.494 billion and $6.475 billion, respectively, at December 31, 2021.

Material changes versus the prior comparable period

  • Park Holidays was acquired on April 8 for enterprise value of £950 million (approximately $1.2 billion). The acquisition added 53 U.K. properties to the reported portfolio; purchase-price allocations remained subject to finalization. The U.K. operations contributed $40.5 million of NOI from acquisition through June 30.
  • The company also acquired other MH communities and marinas. First-half property acquisition cash outlays were substantially higher than in 2021, and acquisition-related business-combination expense rose to $15.5 million from $1.0 million.
  • First-half marketable-securities remeasurement was a $66.8 million loss, versus a $31.2 million gain in 2021. This non-operating swing materially affected GAAP earnings. The company also reported a $13.3 million gain on property dispositions.
  • Interest expense increased to $55.3 million for the quarter and $100.5 million for the first half, up 46.7% and 30.2%, respectively, as debt balances increased. A $600 million 10-year note issuance carried a 4.2% coupon; treasury-lock proceeds reduced its stated effective rate to approximately 3.6%.
  • First-half same-property MH/RV operating expenses increased 9.7%, exceeding revenue growth of 6.8%; management attributed NOI growth principally to rent increases and, in RV, conversions of transient sites to annual sites. The Rental Program’s first-half NOI declined 12.4%, principally due to fewer occupied rental homes.

Outlook, commentary and risks

Management described continued acquisition, development and expansion activity and expects to fund liquidity needs through operating cash flow, available cash, credit facilities, and debt and equity markets. The filing provides no clear numerical earnings or FFO guidance. Management stated that it was in covenant compliance and did not anticipate difficulty meeting covenants in the near term.

Key disclosed risks include higher interest rates and operating costs, capital-market access and refinancing, acquisition integration, occupancy and rental-rate performance, foreign-exchange movements, and severe weather. RV and Marina operations are seasonal. A 1% change in rates on the reported average variable-rate balances would have changed first-half interest expense by approximately $6.8 million. A 10% strengthening of the U.S. dollar against the Canadian dollar, Australian dollar and pound sterling was estimated to reduce equity by $115.9 million at June 30.

Subsequent events included a $190 million marina acquisition, two California RV resorts classified as held for sale, and additional equity and interest-rate hedging transactions. Management said disclosure controls were effective; Park Holidays was excluded from the internal-control-over-financial-reporting assessment during its first year following acquisition. Ordinary-course legal proceedings were not expected to have a material adverse effect.

Important facts for investors to verify

  1. How much reported revenue and NOI growth reflects same-property performance versus acquisitions, especially Park Holidays and the expanded Marina portfolio.
  2. The drivers and potential persistence of the large marketable-securities losses, and their effect on GAAP earnings relative to FFO and Core FFO.
  3. Debt funding costs, remaining credit-facility availability, floating-rate exposure, maturities and covenant headroom as rates and financing conditions change.
  4. Whether operating-cost growth, rental-home occupancy declines and seasonal demand affect margins and cash generation in subsequent periods.
  5. Integration progress and final purchase accounting for Park Holidays, as well as foreign-currency, tax and long-dated lease-liability exposures associated with international operations.