Sun Communities, Inc. — Q2 2019 Form 10-Q
Business context and period. This unaudited report covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. 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 382 properties across 31 U.S. states and one Canadian province.
Key financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $312.4 million | $271.4 million | $599.8 million | $529.4 million |
| Net income | $45.1 million | $24.2 million | $82.2 million | $57.8 million |
| Net income attributable to common stockholders | $40.4 million | $20.4 million | $74.7 million | $50.4 million |
| Diluted EPS | $0.46 | $0.25 | $0.86 | $0.63 |
| NOI / home-sales gross profit, non-GAAP | $171.4 million | $148.0 million | $335.8 million | $297.1 million |
| Core FFO per diluted share, non-GAAP | $1.18 | $1.07 | $2.36 | $2.21 |
| Cash provided by operating activities | — | $259.8 million | $198.7 million |
Q2 revenue increased 15.1%, common-stockholder income 97.9%, and diluted EPS 84.0% year over year. For the first half, revenue rose 13.3%, common-stockholder income 48.3%, and diluted EPS 36.5%. The filing attributes growth principally to property operations and acquisitions; Q2 same-community NOI increased 7.2%, supported by higher occupancy and rents. Total-portfolio blended MH and annual RV occupancy was 96.6%; same-community occupancy was 98.2% under the company’s stated methodology.
Balance sheet, debt and liquidity
- Total assets were $7.22 billion and total liabilities were $3.54 billion at June 30, 2019. Cash and cash equivalents were $28.7 million; cash, cash equivalents and restricted cash totaled $46.0 million.
- Reported total debt, including secured borrowings and mandatorily redeemable preferred interests, was $3.11 billion, versus $3.12 billion at year-end 2018. Weighted-average debt maturity was 9.9 years and weighted-average interest rate was 4.4%. Net debt to enterprise value was approximately 20.2%, using the company’s stated conversion assumption for specified units.
- The May 2019 credit agreement provides a $650 million revolving facility and an undrawn $100 million term loan, with conditional capacity to increase the facility. Revolver borrowings were $71.0 million; the separate manufactured-home floor-plan facility had $5.1 million outstanding. The company reported covenant compliance.
- First-half cash flow included $570.5 million used in investing and $294.0 million provided by financing. Investment-property spending was $262.9 million and property acquisitions, net of cash acquired, were $308.2 million.
- A May public offering generated $452.1 million after expenses; proceeds were used to repay revolving borrowings. The company paid $134.0 million in distributions during the first half.
Material changes and operating developments
- First-half real-property NOI rose 11.8% to $288.0 million; same-community NOI grew 7.2% to $274.8 million. Same-community base rent per site increased 4.5% year over year, while occupancy improved.
- Home-sales gross profit increased 24.4% in the first half to $23.1 million. Pre-owned home gross profit grew 27.1%; new-home gross margin declined to 12.8% from 13.7%.
- The company acquired communities totaling 3,877 sites in the first half, with preliminary acquisition consideration of $348.2 million. It also opened 281 sites at Carolina Pines RV Resort. After quarter-end, it acquired a Louisiana RV resort for $23.5 million.
- Common shares outstanding increased to 90.7 million from 86.4 million at year-end 2018, reflecting equity issuance and conversions.
Outlook, risks and unusual items
- The filing provides no specific full-year earnings or FFO guidance. Management said it intends to pursue acquisitions, development and expansion subject to market conditions, and expects to address long-term liquidity needs through operating cash flow, debt and equity financing, and property collateralization. Transient RV revenue was expected to approximate $132 million annually, with substantial seasonality.
- Management identified risks including economic and capital-market conditions, acquisition execution, refinancing and financing availability, interest rates, foreign-currency movements, occupancy and rents, operating costs, manufactured-home financing and repossessions, natural disasters, and maintaining REIT status. The filing reported no material changes to previously disclosed risk factors.
- Q2 includes $3.6 million of marketable-securities remeasurement income in the statements of operations; the six-month amount is $3.9 million. However, MD&A describes the remeasurement as a loss, while the statement presentation and the increase in the reported securities carrying value indicate income. This inconsistency should be checked against the original filing.
- First-half catastrophic-weather charges were $1.0 million, compared with a $2.2 million net benefit in 2018, reflecting a prior-period insurance-recovery estimate adjustment. The company reported ordinary-course legal proceedings not expected to have a material adverse effect.
- The company disclosed a potential conflict of interest related to leasing its executive offices from an entity in which the CEO/Chairman and certain directors have ownership interests.
Investor verification points
- Reconcile the marketable-securities remeasurement sign and description between the financial statements and MD&A.
- Review the composition and availability of debt facilities, maturities, variable-rate exposure, covenants and restricted cash; assess refinancing and acquisition funding needs.
- Evaluate same-community occupancy, rent growth and expense trends separately from acquisition-driven growth, and consider the seasonal pattern of transient RV revenue.
- Assess share-count growth and dilution, including outstanding convertible units and the effect of equity financing on per-share results.
- Review preliminary acquisition accounting, development spending, the post-quarter acquisition, and the disclosed related-party office lease.