Sun Communities, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. Amounts are U.S. dollars unless noted.
Business context
Sun Communities is a self-managed REIT that owns, operates, develops and expands manufactured housing (MH) and recreational vehicle (RV) communities, and sells and leases homes through its taxable subsidiary. At year-end, it had interests in 422 properties across 33 U.S. states and Ontario, with 141,293 developed sites and approximately 10,300 additional sites suitable for development. Portfolio occupancy was 96.4%, excluding transient RV sites.
Financial and operating results
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $1,264.0 million | $1,126.8 million | Up 12.2% |
| Net income | $177.4 million | $120.2 million | Up 47.6% |
| Net income attributable to common stockholders | $160.3 million | $105.5 million | Up 51.9% |
| Diluted earnings per share | $1.80 | $1.29 | Up 39.5% |
| Core FFO per diluted share and OP unit | $4.92 | $4.58 | Up 7.4% |
| Real Property NOI | $597.4 million | $533.3 million | Up 12.0% |
| Same Community NOI | $558.3 million | $520.3 million* | Up 7.3%* |
*Management’s comparable-period presentation reports 7.3% Same Community NOI growth; the filing presents differing prior-year same-community figures across tables because the portfolio cohort and presentation differ. Verify the applicable definition and reconciliation.
- Same Community operating growth was attributed primarily to higher property income, rent increases and occupancy. Company-reported total portfolio occupancy rose to 96.4% from 96.1%; Same Community occupancy was reported at 98.4%.
- Cash distributions declared per common share increased to $3.00 from $2.84. The fourth-quarter 2019 distribution was $0.75 per share.
- Home sales revenue was $181.9 million, up 9.6%; total home sales volume declined 5.2% to 3,439. Home-sales NOI/gross profit rose 11.4% to $47.6 million.
- Rental Program NOI increased 8.8% to $104.4 million. Occupied rental homes reached 11,325, and the weighted-average monthly rental rate rose 5.1% to $997.
Cash flow, debt and liquidity
- Cash provided by operations was $476.7 million, versus $363.1 million in 2018. Investing used $1,010.5 million, principally reflecting property acquisitions and investment in properties; financing provided $505.9 million.
- Cash, cash equivalents and restricted cash declined by $27.4 million to $34.8 million at year-end.
- Total debt was $3.434 billion, compared with $3.124 billion a year earlier. Debt had a weighted-average interest rate of 4.0% and weighted-average maturity of 11.1 years. Management reported net debt to enterprise value of approximately 19.0% on its stated conversion assumptions.
- Debt included approximately $3.181 billion of mortgage loans and $183.9 million of line-of-credit borrowings, as well as mandatorily redeemable preferred interests. Mortgage debt was secured by 188 properties. The company reported compliance with its credit-facility covenants.
- The $650 million revolving facility had $123.6 million drawn at year-end; letters of credit used approximately $2.8 million of availability. The filing identifies 234 unencumbered properties, some of which support borrowing bases.
Material changes and unusual items
- Sun acquired 47 communities, reported at approximately $815.2 million in the business discussion, and completed 1,230 expansion sites plus approximately 1,100 sites at ground-up developments and a redevelopment. The acquisition note separately reports 44 community acquisitions and total consideration of approximately $853.7 million; see investor checks below.
- Growth in total Real Property NOI included contributions from both same-community operations and recently acquired properties. The company also issued common shares in connection with the Jensen Portfolio acquisition and issued Series D preferred OP units for another acquisition.
- Net income included a $34.2 million gain from remeasurement of marketable securities, compared with a $3.6 million loss in 2018. Debt extinguishment losses increased to $16.5 million from $1.2 million, primarily due to prepayment penalties. These items affect the interpretation of GAAP earnings relative to recurring operating performance.
- The company adopted lease accounting standard ASC 842 in 2019; the filing describes the effect on the income statement as immaterial. It also derecognized previously reported collateralized receivables after concluding a transfer qualified for sale accounting, recording a $0.6 million gain.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Acquisition accounting and investment-property impairment assessments were identified as critical audit matters; no property impairment was identified in 2019.
Outlook, commentary and risks
- Management expected to construct 550–750 ground-up development sites and 1,000–1,200 expansion sites in 2020, and described continued interest in acquisitions and development. These are plans, not guarantees.
- Key risks include the concentration of properties and revenue in Florida, Michigan, Texas and California; severe weather and other uninsured losses; seasonal RV demand; local economic or competitive pressures; rent-control or regulatory changes; and the ability of manufactured-home purchasers to obtain financing.
- Financial risks include refinancing and access to capital, substantial debt and covenant compliance, variable-rate exposure and LIBOR transition, and foreign-currency movements affecting Canadian and Australian investments. A 1% change in Prime or LIBOR was estimated to change 2019 interest expense by approximately $2.6 million based on average variable-rate borrowings.
- Other risks include successful integration and performance of acquisitions and developments, environmental liabilities, cybersecurity incidents, maintaining REIT qualification, joint-venture exposures and potential conflicts in related-party arrangements. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Reconcile the reported 47 communities and approximately $815.2 million of acquisitions with the acquisition footnote’s 44 acquisitions and approximately $853.7 million of consideration; determine the scope and accounting behind each figure.
- Review the Same Community NOI comparison and cohort definitions: the filing reports 7.3% growth but presents differing 2018 comparison amounts in separate sections.
- Assess recurring earnings apart from the $34.2 million securities gain and $16.5 million debt-extinguishment loss; compare GAAP EPS with FFO and Core FFO, which are non-GAAP measures.
- Examine debt maturities, secured collateral, variable-rate exposure, facility availability and covenant headroom, particularly alongside planned acquisitions, development spending and distributions.
- Track occupancy, rent growth, expenses and lease-up at recently acquired or developing properties, as well as weather exposure and the concentration of assets in key states.