Sun Communities, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2019. Sun Communities is a REIT operating manufactured-housing (MH) and recreational-vehicle (RV) communities, with home sales and rentals. At quarter-end it owned or held interests in 389 properties across 32 U.S. states and one Canadian province.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $362.4 million | $323.4 million | $962.2 million | $852.8 million |
| Net income | $64.5 million | $51.7 million | $146.7 million | $109.5 million |
| Net income attributable to common stockholders | $57.0 million | $46.1 million | $131.7 million | $96.5 million |
| Diluted EPS | $0.63 | $0.56 | $1.50 | $1.19 |
| Operating cash flow | — | $398.3 million | $301.2 million | |
| Net cash used in investing | — | $(799.3) million | $(545.1) million |
- Revenue rose 12.1% in Q3 and 12.8% for the nine-month period. Real-property income, the largest revenue source, increased 11.7% and 11.8%, respectively.
- Real Property Operations NOI increased 12.9% in Q3 and 12.2% year to date. Same-community NOI grew 7.2% in both periods. Management attributed same-community growth primarily to higher occupancy and rents, partly offset by higher operating costs.
- At September 30, same-community blended MH and annual-RV occupancy was 98.3%, versus 96.2% a year earlier; monthly base rent per site was $551, up from $527.
- Core FFO per diluted share, a non-GAAP measure, was $1.46 in Q3 versus $1.35, and $3.83 for nine months versus $3.56. The filing cautions that FFO is supplemental and not a substitute for GAAP results or cash flow.
- Cash and cash equivalents were $26.2 million; cash, cash equivalents and restricted cash totaled $41.7 million, down from $62.3 million at December 31, 2018.
- Total debt as presented in the debt note was $3.27 billion, including $2.97 billion of mortgage loans, $140.6 million of credit-line borrowings, and $93.7 million of secured borrowings. Weighted-average debt maturity was 9.8 years and weighted-average interest rate 4.3%. Management reported net debt to enterprise value of approximately 18.7%.
Material changes and unusual items
- Growth reflected acquisitions and expansion as well as same-community performance. Nine-month property acquisitions totaled $420.3 million in consideration and added 4,825 sites, plus 109 development sites. Acquired properties contributed $26.9 million of revenue and $11.2 million of net income during the nine months.
- Q3 and nine-month results included marketable-securities remeasurement gains of $12.7 million and $16.5 million, respectively. These gains increased GAAP earnings but are market-value changes, not property operating performance.
- Debt refinancing generated a $12.8 million Q3 loss on extinguishment; the nine-month loss was $13.5 million. The company issued a $250 million, ten-year loan at 2.925% and repaid a $134 million loan bearing 4.30%.
- In May, Sun completed a common-stock offering that generated $452.1 million net proceeds, used to repay revolving-credit borrowings. Common shares outstanding increased to 90.7 million at September 30 from 86.4 million at year-end 2018.
- New-home sales revenue rose 20.3% in Q3, while pre-owned home sales volume fell 10.4%. Total home-sale volume declined 6.7% in Q3.
Outlook, liquidity, risks and contingencies
- The filing provides no specific earnings or FFO guidance. Management said it intends to pursue acquisitions, development and expansion, funded through operating cash flow, available cash, debt and equity financing, and property collateralization.
- The amended senior credit facility totals $750 million, comprising a $650 million revolver and an undrawn $100 million term loan. Revolver borrowings were $137 million; the facility permits potential additional commitments, subject to conditions. The company reported compliance with debt covenants at quarter-end.
- Expansion and development spending was $203.9 million for the first nine months, compared with $96.2 million in 2018, reflecting ground-up development and redevelopment. Total cash used for investing increased to $799.3 million.
- The Jensen Portfolio agreement contemplated acquisition of 31 MH communities for $343.6 million, partly using $274.8 million of common shares. Closing was expected by October 31, 2019, subject to customary conditions and third-party consents; the company warned it might not close or produce anticipated benefits. The filing does not establish that the acquisition had closed by the report date.
- Principal risks cited include occupancy or rent declines, rising wages, insurance, taxes and utilities, acquisition and development execution, refinancing and capital-market access, interest and foreign-exchange movements, natural disasters, and manufactured-home buyer financing and repossessions. Management said ordinary-course legal proceedings were not expected to materially harm results or financial condition.
- Interest-rate sensitivity: a 1 percentage-point change in Prime or LIBOR was estimated to change nine-month interest expense by approximately $2.0 million, based on average variable-rate debt balances. A 10% strengthening of the U.S. dollar against the Canadian and Australian dollars was estimated to reduce equity by $17.0 million at quarter-end.
- The company affirmed its REIT qualification and reported effective disclosure controls. It adopted the new lease standard in 2019; management described the income-statement impact as immaterial. The expected impact of the upcoming credit-loss standard was still being evaluated.
Investor verification points
- Reconcile reported GAAP earnings with the marketable-securities gains, debt-extinguishment charges, and Core FFO adjustments.
- Review acquisition-related dilution, including the May equity offering and the proposed Jensen Portfolio share consideration, and confirm the Jensen transaction’s eventual closing and performance.
- Assess the sustainability of same-community occupancy, rent increases and NOI growth against rising operating expenses.
- Evaluate the funding of development and acquisition spending, cash availability, revolving-credit capacity, debt maturities and covenant headroom.
- Monitor home-sale volumes, receivable collections and repossessions, as well as foreign-currency and severe-weather exposure.