Business context and reporting period
Sun Communities, Inc. is a self-managed REIT that owns, operates, develops and expands manufactured-home (MH) and recreational-vehicle (RV) communities, and sells and rents homes. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; comparisons are with the same periods in 2016. At quarter-end, the company owned or had an interest in 348 properties across 29 U.S. states and one Canadian province.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $268.2 million | $249.7 million | $740.5 million | $615.1 million |
| Net income | $29.0 million | $23.2 million | $71.5 million | $30.0 million |
| Net income attributable to common stockholders | $24.1 million | $18.9 million | $57.6 million | $19.0 million |
| Diluted earnings per share | $0.31 | $0.27 | $0.76 | $0.30 |
| Operating cash flow | — | $223.3 million | $190.3 million |
For the nine months, net cash used in investing was $267.7 million (versus $1.54 billion in 2016), and net cash provided by financing was $173.4 million (versus $1.38 billion). Cash rose to $137.4 million at September 30 from $8.2 million at year-end 2016.
At quarter-end, mortgage loans payable were $2.823 billion; total debt as presented in the debt note, including secured borrowings and mandatorily redeemable preferred OP units, was $3.003 billion. Debt had a weighted-average interest rate of 4.6% and weighted-average maturity of 8.4 years. The $650 million credit facility had no borrowings outstanding; $3.8 million of capacity supported standby letters of credit. The company reported $156 unencumbered properties, including 61 in the facility borrowing base, and compliance with debt covenants. Net debt to enterprise value was approximately 28.3% using management’s stated conversion assumption.
Property operations remained strong: Q3 same-community real-property NOI grew 7.7% to $101.8 million, while total-portfolio real-property NOI rose 9.7% to $126.0 million. Same-community blended MH/RV occupancy was 97.2%, up from the adjusted 95.6%; total-portfolio occupancy was 96.2%. Total-portfolio monthly base rent per site was $507, compared with $491 a year earlier. Q3 home-sales gross profit fell 12.7% to $8.1 million, principally reflecting lower pre-owned home sales volume and margins. The filing does not provide a consolidated GAAP operating margin figure.
Material changes versus the prior comparable period
- Revenue increased 7.4% in Q3 and 20.4% for the nine-month period. Management attributes substantial year-to-date growth to acquisitions, including the 2016 Carefree portfolio; 2017 acquisitions contributed $4.5 million of revenue in the first nine months.
- Nine-month real-property NOI increased 22.1% overall, of which $47.0 million was attributed to newly acquired properties and $18.5 million to same communities. Same-community NOI growth reflected higher occupancy, rents and other revenue, partly offset by higher property costs.
- Nine-month operating cash flow increased by $33.1 million. Investing cash outflow was much lower than in 2016, when the Carefree acquisition drove significant spending.
- Common equity issuance materially expanded the capital base: the company completed a May offering of 4.83 million shares and had 79.3 million common shares outstanding at September 30, versus 73.2 million at December 31, 2016. It also entered a new at-the-market program permitting up to $450 million of additional common-stock sales.
- Interest expense increased 8.0% for the nine months, reflecting debt associated with prior-period acquisition financing, while Q3 interest expense declined 5.0% year over year following repayment of credit-facility borrowings.
Outlook, commentary, risks and unusual items
No specific earnings or FFO guidance is provided in the supplied filing. Management intends to continue evaluating acquisitions and development opportunities and expects to fund liquidity needs through operating cash flow, cash, its credit facility, and debt or equity issuance. It planned to use cash on hand to redeem all 3.4 million Series A preferred shares on November 14, 2017, for approximately $85.5 million. The filing also reports that the rights agreement (“poison pill”) expired on October 4, 2017.
Hurricane Irma affected 121 Florida communities and three in Georgia. The company recorded $23.1 million of gross damage and impairment charges, partly offset by estimated insurance recoveries of $15.3 million, resulting in a net $7.8 million charge in Q3. Additional insurance recoveries for lost revenue and redevelopment costs could not yet be estimated. Other unusual items included a $3.4 million Q3 foreign-currency translation gain included in other income, and $0.8 million of year-to-date debt-extinguishment losses.
Key stated risks include occupancy and rent pressure, rising operating costs, interest rates and refinancing, access to capital, acquisition and development execution, foreign-exchange movements, natural disasters, REIT qualification, and manufactured-home buyer financing and repossessions. A 1 percentage-point change in Prime or LIBOR was estimated to change nine-month interest expense by approximately $1.9 million, based on the average variable-rate debt balance cited by the company. Ordinary-course legal proceedings were not expected to have a material adverse effect; management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Track the extent and timing of Hurricane Irma repairs, insurance recoveries, revenue effects and redevelopment at the affected Florida Keys communities.
- Separate same-community operating growth from acquisition-driven growth, and assess whether occupancy and rent trends persist as the portfolio expands.
- Review debt maturities, variable-rate exposure, covenant headroom and the availability and conditions attached to the credit facility.
- Assess the effect of common-stock issuance and the potential use of the $450 million at-the-market program on per-share results and ownership dilution.
- Confirm the completion and funding impact of the planned $85.5 million Series A preferred-stock redemption.
- Monitor home-sales volume and pre-owned home margins, as well as the growth and credit performance of manufactured-home installment receivables.