Sun Communities, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results; financial amounts below are in U.S. dollars. Sun Communities is a REIT operating manufactured-home (MH) and recreational-vehicle (RV) communities and home sales and rental programs.
Business context and material developments
At quarter-end, the company owned or held an interest in 339 developed properties across 29 U.S. states and one Canadian province. The portfolio included 227 MH communities, 86 RV communities and 26 combined MH/RV properties. In June, Sun acquired Carefree Communities, which owned 103 communities and more than 27,000 sites, for approximately $1.68 billion. The company also acquired five smaller properties during 2016.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $249.7 million | $185.4 million | $615.1 million | $506.5 million |
| Net income | $23.2 million | $39.7 million | $30.0 million | $70.4 million |
| Net income attributable to common stockholders | $18.9 million | $28.8 million | $19.0 million | $47.9 million |
| Diluted EPS | $0.27 | $0.53 | $0.30 | $0.90 |
| Cash from operating activities | Not presented by quarter | Not presented by quarter | $190.3 million | $146.8 million |
| Cash used for investing activities | Not presented by quarter | Not presented by quarter | $1,540.9 million | $403.2 million |
| Cash from financing activities | Not presented by quarter | Not presented by quarter | $1,375.5 million | $196.9 million |
Property and operating measures: Q3 total-portfolio Real Property NOI increased 27.2% to $114.9 million, including $19.6 million from acquired properties net of dispositions and $4.9 million from same communities. Same-community NOI rose 6.0% to $86.6 million, supported by 5.9% revenue growth, 2.2 percentage points higher occupancy and a 3.6% increase in weighted average rental rates. Overall occupancy was 96.2%, versus 93.7% a year earlier. Nine-month same-community NOI increased 6.4% to $249.9 million.
Q3 home-sales revenue rose 64.3% to $31.2 million and gross profit increased 65.5% to $9.3 million, as total homes sold increased 43.0%. For the nine months, home-sales revenue rose 50.3% and gross profit increased 55.5%. New-home gross margin declined to 14.5% from 17.1% year to date; pre-owned-home margin increased to 32.9% from 31.2%.
FFO: Fully diluted FFO per share was $1.06 in Q3 versus $0.95; FFO per share excluding specified items was $1.13 versus $1.05. For the nine months, those measures were $2.47 versus $2.60 and $2.89 versus $2.83, respectively. FFO is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
Balance sheet, debt and liquidity
- At September 30, 2016, total assets were $5.90 billion, cash and cash equivalents were $69.8 million, total liabilities were $3.43 billion and total stockholders’ equity was $2.40 billion.
- Total debt as defined in the debt note was $3.05 billion, including $2.85 billion of mortgage loans, $144.5 million of secured borrowings on collateralized receivables and $45.9 million of mandatorily redeemable preferred OP units. Lines of credit were $57.7 million. Debt had a 4.6% weighted-average interest rate and 8.7-year weighted-average maturity.
- The company reported a 39.9% leverage ratio against a 65.0% maximum covenant, fixed-charge coverage of 2.49 against a 1.40 minimum, and compliance with its covenants. It reported 140 unencumbered properties; 56 supported the borrowing base for its $450 million credit facility.
- Nine-month investing outflows were principally driven by the Carefree acquisition. Funding included common-stock offerings, issuance of shares to the Carefree seller, and new mortgage financing. Operating cash flow increased $43.5 million year over year; cash ended the period at $69.8 million, up from $45.1 million at December 31, 2015.
Changes, outlook and risks
Revenue growth primarily reflects acquisitions, including Carefree, as well as same-community growth and higher home sales. GAAP common earnings and EPS declined year over year: the prior-year periods included property-disposition gains, while 2016 included higher transaction costs, depreciation, interest and general and administrative expense, plus increased shares outstanding. Nine-month transaction costs were $27.9 million versus $13.2 million. Management reported no numerical full-year earnings or FFO guidance in the provided filing text. It intends to continue evaluating acquisitions, development and expansion opportunities and expects liquidity needs to be met through operating cash flow, cash, credit facilities and debt or equity financing.
Key risks include acquisition integration and financing, refinancing and capital-market availability, interest-rate changes, occupancy and rental-rate pressure, rising operating costs and real estate taxes, manufactured-home sales and buyer financing, natural disasters, and maintaining REIT status. The company’s stated market-risk sensitivity was approximately $2.4 million of annual interest expense for a 1 percentage-point change in rates, based on variable-rate debt balances. An estimated $9.8 million contingent consideration liability for Sunset Beach is uncapped and will be remeasured; the final payment could differ materially. October’s Hurricane Matthew caused no material damage, according to the company. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Carefree’s acquired communities meet expected operating and integration targets, and how much reported growth reflects acquisitions versus same-community performance.
- Whether same-community occupancy, rental rates and NOI growth persist, and how property taxes, utilities, payroll and other expenses affect margins.
- Debt maturities, floating-rate exposure, covenant headroom and the availability and cost of refinancing or additional financing.
- Home-sales volumes and margins, rental-home occupancy and the credit quality and performance of manufactured-home receivables.
- The final purchase-price allocations and future fair-value changes for acquisition-related contingent consideration; also distinguish reported GAAP earnings and cash flow from non-GAAP NOI and FFO.