SUN COMMUNITIES INC annual report, FY2020

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Sun Communities, Inc. — 2020 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2020. Although the request references Q4, this is an annual filing; selected fourth-quarter results are noted below. Amounts are in U.S. dollars unless stated otherwise.

Business context

Sun Communities is a REIT owning and operating manufactured housing (MH) communities, recreational vehicle (RV) resorts, and, following its October 2020 acquisition of Safe Harbor, marinas. At year-end, it held interests in 552 properties across 39 U.S. states and Ontario, with 188,176 developed sites, slips, and storage spaces. The portfolio included 106 marinas with 38,881 wet slips and dry storage spaces.

Financial and operating highlights

  • Revenue: $1.398 billion, up 10.6% from $1.264 billion in 2019. Real property income increased 12.6% to $1.031 billion; home-sale revenue fell 3.4% to $175.7 million.
  • Profit and earnings: Net income was $147.5 million, down from $177.4 million. Net income attributable to common stockholders was $131.6 million versus $160.3 million; diluted EPS was $1.34 versus $1.80.
  • FFO: Core FFO was $5.09 per diluted share and OP unit, up 3.5% from $4.92. Reported FFO was $4.83 per diluted share, compared with $4.75. These are non-GAAP measures.
  • NOI and occupancy: Total real-property NOI was $649.2 million, up 10.7%; same-community NOI was $592.8 million, up 4.0%. Same-community occupancy reached 98.8%, versus 98.4%; portfolio MH and annual-RV occupancy was 97.3%, versus 96.4%.
  • Home sales and rentals: Total homes sold declined 16.7% to 2,866, while rental homes occupied at year-end increased 3.8% to 11,752. New-home gross margin improved to 17.8% from 14.2%; pre-owned margin declined to 30.9% from 33.9%.
  • Cash flow: Operating cash flow was $548.9 million, up from $476.7 million. Investing cash outflow was $2.487 billion, largely reflecting acquisitions; financing cash inflow was $2.001 billion. Cash, cash equivalents, and restricted cash totaled $98.3 million at year-end, including $83.0 million unrestricted cash.
  • Debt and liquidity: Total debt was $4.757 billion, compared with $3.434 billion a year earlier. Total assets were $11.207 billion and total liabilities $5.315 billion. Debt carried a 3.37% weighted-average interest rate and 9.4-year weighted-average maturity; net debt to enterprise value was approximately 21.4%. Remaining capacity on the company and Safe Harbor credit lines was approximately $1.355 billion. The company reported compliance with its debt covenants.
  • Distributions: Cash distributions declared were $3.16 per common share for 2020; the fourth-quarter declaration was $0.79 per share.

Material changes versus 2019

  • Safe Harbor was acquired in October for approximately $2.0 billion, adding a marina business and materially expanding the company’s balance sheet. Safe Harbor contributed $47.3 million of 2020 revenue and an $8.5 million net loss for the post-acquisition period included in the filing.
  • The company reported total 2020 acquisitions of approximately $3.0 billion, including 24 MH/RV properties and 106 marinas. Acquisition-related business-combination expense was $23.0 million.
  • Revenue and real-property NOI grew, supported by acquisitions and same-community performance; however, GAAP net income and diluted EPS declined. The filing cites lower gains on remeasurement of marketable securities, higher depreciation and acquisition costs among the year-over-year factors.
  • Debt rose by approximately $1.323 billion, while common equity offerings generated substantial funding. The company raised net proceeds of approximately $633 million in May and $1.2 billion in October; the October proceeds principally funded Safe Harbor.

Outlook, risks, and unusual items

  • Management expected to construct or expand 1,150–1,600 MH/RV sites in 2021, drawing on approximately 10,000 developable sites. The filing does not provide earnings or FFO guidance.
  • Management said COVID-19 operating restrictions remained at certain California properties at year-end, while demand and traffic improved as restrictions eased. The company deferred $4.4 million of rent for approximately 4% of residents under a temporary hardship program; management stated this affected payment timing, not total contractual rent due. Rent increases, temporarily halted, had resumed.
  • Key risks include continuing pandemic effects, seasonal and economic sensitivity in RV and marina operations, geographic concentration, weather and climate exposure, acquisition integration and development risks, and the ability to refinance debt and maintain covenant compliance. The marina business also brings permitting, dredging, specialized-asset, and integration risks.
  • Approximately $1.2 billion was outstanding under Safe Harbor’s floating-rate credit facility. The company also flagged LIBOR transition risk for certain borrowings. Safe Harbor’s acquired operations, representing approximately 23% of year-end assets and 3% of 2020 revenue, were excluded from the company’s 2020 internal-control assessment during the first year after acquisition.
  • Unusual reported items included $23.0 million of business-combination expense, a $5.6 million gain on the sale of a Montana community, and fair-value remeasurement items. No investment-property impairments were identified in 2020 after further review of 18 properties.

Important facts for investors to verify

  • Review the full-year and fourth-quarter results alongside the acquisition timing and Safe Harbor’s stand-alone contribution; Q4 revenue was $384.3 million and common-stockholder net income was $7.6 million, or $0.07 per diluted share.
  • Reconcile GAAP net income and cash flow with NOI, FFO, and Core FFO, including the company’s non-GAAP definitions and adjustments.
  • Assess Safe Harbor integration, marina operating performance, acquired goodwill and intangibles, and the final purchase-price allocations, which were preliminary for certain acquisitions.
  • Evaluate debt maturities, floating-rate exposure, available credit capacity, covenants, refinancing needs, and the substantial acquisition-related increase in leverage.
  • Monitor rent collection, occupancy, rent growth, same-community NOI, home-sale trends, and progress against the 2021 development target, particularly under changing pandemic and seasonal conditions.