Sun Communities, Inc. — Q2 2020 Form 10-Q
Business context and period. This unaudited report covers the quarter and six months ended June 30, 2020, compared with 2019. Sun Communities is a REIT that owns and operates manufactured housing (MH) and recreational vehicle (RV) communities and sells and rents manufactured homes. At quarter-end it held interests in 426 properties across 33 U.S. states and one Canadian province.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $303.3m | $312.4m | $613.6m | $599.8m |
| Net income attributable to common stockholders | $58.9m | $40.4m | $42.8m | $74.7m |
| Diluted EPS | $0.61 | $0.46 | $0.45 | $0.86 |
| Operating cash flow | — | — | $302.0m | $259.8m |
| Net cash used in investing | — | — | $368.1m | $570.5m |
| Net cash from financing | — | — | $420.7m | $294.0m |
All dollar amounts are U.S. dollars. Revenue and net income attributable to common stockholders are GAAP measures. Q2 consolidated NOI/gross profit, a non-GAAP measure, was $172.3m versus $171.3m; real property NOI was $148.6m, up 4.6%. Same-community real property NOI increased 1.4% in Q2 and 4.0% for the first half. Quarter-end blended MH and annual RV occupancy was 97.3% for the total portfolio; same-community adjusted occupancy was 98.7%.
At June 30, total assets were $8.35bn, total liabilities $3.85bn, and stockholders’ equity $4.42bn. Mortgage debt was $3.21bn and lines of credit were $115.4m; total debt as presented in the debt note was $3.39bn, including mandatorily redeemable preferred obligations. Debt had a 3.9% weighted-average interest rate and 11.6-year weighted-average maturity. The company reported $373.5m of unrestricted cash, approximately $683m of remaining line-of-credit capacity, and 151 unencumbered properties valued at approximately $2.8bn that could support mortgage borrowing. It was in compliance with debt covenants.
Six-month capital spending included $127.1m for expansion and development, $14.2m for lot modifications, and $9.1m for recurring capital expenditures. Cash, cash equivalents and restricted cash ended the period at $389.2m.
Material changes versus the prior comparable period
- Q2 revenue declined 2.9%, while first-half revenue rose 2.3%. Real property income grew, but Q2 home-sale revenue fell 18.4% and ancillary revenue fell 37.3% year over year.
- Q2 net income attributable to common stockholders increased to $58.9m, but included a $24.5m gain on remeasurement of marketable securities and a $10.4m foreign-currency translation gain. For the first half, net income fell to $42.8m, including marketable-securities and foreign-currency remeasurement losses.
- First-half Core FFO per diluted share, a non-GAAP measure, was $2.34 versus $2.36; Q2 was $1.12 versus $1.18. The filing cautions that non-GAAP measures are supplemental and may not be comparable across REITs.
- New-home gross profit improved, but lower pre-owned home sales volume and margin reduced total home-sales gross profit: Q2 home-sales gross profit declined 27.0% to $9.3m.
- The May common-stock offering raised $633.1m net. The company used proceeds to repay revolving borrowings and reported 98.3m common shares outstanding at June 30, up from 93.2m at year-end 2019.
Outlook, commentary, risks and unusual items
The company provided no specific full-year financial guidance. Management said the pandemic’s full effect was uncertain and depended on its duration, containment measures, and economic consequences. All MH communities and RV resorts were open at quarter-end, though government restrictions limited some RV activities. Management reported lower community traffic and fewer transient RV reservations, while noting continued move-in demand and expecting fewer move-outs; eviction restrictions could create a backlog of anticipated move-outs when bans end.
Sun provided a temporary April–May rent-hardship program: $4.4m of rent was deferred for approximately 4% of residents, with about 12% repaid by June 30. Deferred payments were scheduled over 12 months starting July 1. The company also waived certain fees, deferred some rent increases, reduced or postponed non-essential spending, and furloughed team members; more than 80% of those furloughed had returned by quarter-end. Board and executive base compensation was waived for Q2 and restored July 1.
Key risks include further COVID-19 effects on rent collections, occupancy, home sales and RV travel; economic and capital-market volatility; refinancing and financing availability; interest-rate and foreign-exchange movements; operating costs, real estate taxes and insurance; and natural disasters. A 1% change in Prime or LIBOR was estimated to change six-month interest expense by approximately $1.5m based on average variable-rate borrowings. Management reported no material change to previously disclosed risk factors. Ordinary-course legal proceedings were not expected to materially adversely affect results or financial condition.
Unusual and subsequent items: first-half debt-extinguishment losses were $5.2m, primarily related to debt prepayment penalties. The company acquired 1,024 sites in four communities during the first half. After quarter-end, it acquired a 421-site Jacksonville RV community for $34.0m and completed the sale of a 226-site Montana MH community for $13.0m.
Important facts for investors to verify
- How rent deferrals, collections, eviction restrictions and any later move-out backlog affected occupancy and cash receipts after June 30.
- How much of Q2 earnings came from recurring operations versus fair-value and foreign-currency gains, and the reversals reflected in first-half results.
- Whether RV travel restrictions, reduced ancillary activity and home-sale volume continued to weigh on revenue and NOI.
- Use of remaining equity-offering proceeds, ongoing share dilution, debt maturities, line availability and covenant headroom.
- Whether reported NOI and FFO trends persist, considering their non-GAAP definitions and the filing’s stated limitations.