Sun Communities, Inc. — Q2 2021 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Sun Communities is a REIT operating manufactured-home (MH) communities, recreational-vehicle (RV) resorts and marinas. At quarter-end it operated or held an interest in 569 properties across 39 U.S. states and one Canadian province. Safe Harbor’s marina business, acquired in 2020, is now reported as a third segment; prior-period segment information was recast.
Financial performance and position
- Revenue: Q2 revenue was $603.9 million, up 99% from $303.3 million; first-half revenue was $1.046 billion, up 71% from $613.6 million. Growth reflects acquisitions, including Safe Harbor, and recovery in RV transient activity against COVID-affected 2020 comparisons.
- Profit and EPS: Q2 net income attributable to common stockholders was $110.8 million ($0.98 per diluted share), versus $58.9 million ($0.61) a year earlier. First-half attributable income was $135.6 million ($1.22 per diluted share), versus $42.8 million ($0.45). Q2 included a $27.5 million gain from remeasurement of marketable securities; first-half included a $31.2 million gain. These fair-value gains can be volatile.
- Operating performance: Q2 NOI, a non-GAAP measure, was $303.7 million versus $169.5 million; first-half NOI was $524.1 million versus $345.8 million. Same-community NOI grew 21.6% in Q2 and 11.8% in the first half. Management attributed much of RV growth to transient revenue rebounding from resort closures or delayed openings in 2020. MH same-community monthly base rent per site increased 3.1% and occupancy improved 1.6 percentage points in the first half, per management’s explanation.
- Home sales: Q2 home-sales revenue rose 112% to $81.8 million; home-sales NOI increased 256% to $23.1 million. Total home-sale volume rose 89.5%, with stronger new and pre-owned sales.
- Cash flow: First-half operating cash flow was $470.7 million, up from $302.0 million. Investing used $865.5 million, primarily reflecting property investment and $593.3 million of acquisitions, net of cash acquired. Financing provided $421.5 million. Cash, cash equivalents and restricted cash ended at $119.6 million; management reported unrestricted cash of approximately $103.5 million.
- Debt and liquidity: Total debt was $4.31 billion, down from $4.76 billion at December 31, 2020; weighted-average interest rate was 3.519% and weighted-average maturity 10.4 years. In June, the company issued $600 million of 2.70% notes due 2031 and replaced prior credit facilities with a $2.0 billion revolving facility. It reported about $1.8 billion of remaining facility capacity and compliance with debt covenants.
- Balance sheet and capital: Total assets were $12.04 billion, versus $11.21 billion at year-end 2020; total stockholders’ equity was $6.66 billion. The company completed a $1.1 billion common-stock offering during the first half to fund acquisitions and reduce borrowings. Common shares outstanding increased from 107.6 million at year-end to 115.9 million at June 30.
Material changes versus the prior comparable period
- Results reflect a substantially expanded portfolio, including the 2020 Safe Harbor acquisition and 2021 acquisitions totaling 4,469 sites, wet slips and dry-storage spaces during the first half.
- RV transient revenue and marina activity benefited from reopening and seasonal demand compared with pandemic-affected 2020 results. The company said more than 40 RV resorts had been closed or opened late in the prior-year comparison period.
- Operating costs also increased: Q2 depreciation and amortization rose 44.9%, general and administrative expense rose 70.1%, and interest expense rose 19.9%. Management cited acquisitions and higher wages and incentives among the drivers.
- Debt declined overall while the company refinanced facilities, issued long-term notes and raised equity. Q2 included an $8.1 million loss on extinguishment of debt, mainly related to termination of Safe Harbor’s prior facility.
Outlook, risks and unusual items
- The filing does not provide a specific quantitative earnings or FFO forecast. Management said it intends to pursue acquisition, development and expansion opportunities, subject to market conditions, and expects to meet long-term liquidity needs through operating cash flow, cash, credit capacity and debt or equity issuance.
- COVID-19 effects remain uncertain; the U.S.–Canada recreational travel border remained closed at June 30, 2021. Management noted no government regulations then prevented operations at its properties.
- RV and marina results are seasonal. Management expected most annual RV transient revenue to be recognized in the third quarter and marina revenue to vary by season; actual timing may differ.
- Key risks include occupancy and rental-rate pressure, higher operating costs, interest-rate and refinancing exposure, capital-market access, acquisition integration, currency movements, natural disasters, manufactured-home financing conditions and maintaining REIT status. A 1% change in applicable variable rates was estimated to change first-half interest expense by approximately $5.8 million based on average variable-rate balances.
- Legal proceedings in the ordinary course were not expected to have a material adverse effect. The company reported covenant compliance and effective disclosure controls. Safe Harbor, representing approximately 26% of total assets and 24% of Q2 revenue, was excluded from the company’s internal-control-over-financial-reporting assessment during the permitted post-acquisition period.
- Subsequent to quarter-end, the company reported acquisitions with total purchase prices of $247.6 million and sold two MH communities for $67.5 million.
Important facts for investors to verify
- How much of revenue, NOI and earnings growth reflects same-community operating improvement versus acquisitions, seasonality and recovery from pandemic-affected comparisons.
- The recurring contribution to earnings and cash flow from marina operations, and the sustainability of RV transient demand and home-sales margins.
- Debt availability, refinancing costs, variable-rate exposure and covenant headroom after acquisitions and the new credit agreement.
- The impact of equity issuance and potential conversion of OP units and preferred units on per-share results and ownership dilution.
- Whether marketable-securities fair-value gains, acquisition costs and debt-extinguishment charges are affecting comparisons of reported earnings with underlying operating performance.
- Progress integrating Safe Harbor into internal controls, as well as subsequent acquisition and disposition activity and related funding needs.