Business context and reporting period
Sun Communities, Inc. is a self-managed REIT operating manufactured-housing (MH) and recreational-vehicle (RV) communities, plus manufactured-home sales and rentals. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the same period in 2015. At quarter-end, it owned 233 properties in 29 states; overall occupancy was 95.5%.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $174.6 million | $155.2 million; up 12.5% |
| Net income | $11.8 million | $12.2 million |
| Net income attributable to common stockholders | $7.9 million; $0.14 per diluted share | $6.9 million; $0.13 per diluted share |
| Real Property NOI | $88.4 million | $81.6 million; up 8.4% |
| Same Community NOI | $83.0 million | $78.0 million; up 6.4% |
| Operating cash flow | $50.9 million | $40.9 million |
| Investing cash flow | $(45.3) million | $(212.2) million |
| Financing cash flow | $359.6 million | $212.6 million |
FFO per fully diluted share was $0.86 versus $0.73; FFO excluding certain items was $0.90 in both periods. Management cautions that FFO and NOI are supplemental, non-GAAP measures, not substitutes for net income or operating cash flow.
At March 31, cash and cash equivalents were $410.4 million, compared with $45.1 million at year-end 2015. Total liabilities were $2.59 billion and total equity was $1.89 billion. Reported total debt was $2.30 billion, including $2.11 billion of mortgage loans, $143.7 million of secured borrowings on collateralized receivables, and $58.1 million of credit-facility borrowings. Debt had a weighted-average maturity of 8.2 years and weighted-average interest rate of 5.1%. Net debt to enterprise value was approximately 27.7%. The company reported compliance with debt covenants; its facility leverage ratio was 38.3% against a maximum of 65%, and fixed-charge coverage was 2.39 against a minimum of 1.40.
Material changes versus the prior comparable period
- Revenue growth reflected higher real-property income and home sales. Same Community occupancy increased to 96.1% from 93.6%; monthly base rent per site rose to $481 from $465. Management attributed same-community revenue growth mainly to occupancy gains, a 3.4% increase in weighted-average rental rates, and higher transient RV and other revenue.
- Home-sale revenue increased 46.9% to $24.7 million, with homes sold up 40.9% to 765. Pre-owned home gross profit rose, while new-home gross profit fell 40.8% and its margin declined to 11.4% from 20.1%.
- Common-stockholder earnings and EPS improved despite lower consolidated net income. Q1 2015 included an $8.8 million property-disposition gain; Q1 2016 had no such gain. Transaction costs declined to $2.7 million from $9.4 million, while depreciation and amortization, G&A, and interest expense increased.
- Operating cash flow increased by $10.0 million. Investing outflows were substantially lower, principally because Q1 2015 included significant acquisition spending. Financing cash flow included approximately $385.4 million net proceeds from a common-stock offering.
Outlook, commentary, risks and unusual items
- The company signed an agreement to acquire Carefree Communities for approximately $1.7 billion, with closing anticipated by July 9, 2016, subject to customary conditions, including third-party consents. Carefree owns 103 MH and RV communities. Sun raised approximately $385.4 million net through a 6,037,500-share offering to fund part of the purchase price; if the deal does not close, proceeds may be used for debt repayment, acquisitions, working capital, or general corporate purposes.
- If completed, the acquisition was expected to add approximately $1.0 billion of debt. Management warned that the transaction may not close, may not deliver anticipated benefits or be accretive, and could divert management attention or expose the company to integration and undisclosed-liability risks.
- Management expects to continue pursuing acquisitions and development, and plans to fund liquidity needs through cash, operating cash flows, credit facilities, and debt or equity issuance. No company-wide earnings or FFO guidance is provided. Management estimated transient RV revenue at approximately $49.1 million annually, with significant seasonal concentration in the third quarter.
- Key exposures include interest-rate and capital-market volatility, refinancing and liquidity needs, occupancy and rental rates, operating costs including taxes and insurance, home-sale demand and financing, acquisitions, natural disasters, REIT qualification, and covenant compliance. A 1% change in Prime or LIBOR was estimated to change interest expense by about $0.5 million based on the period-end variable-debt exposure described.
- Interest-rate caps covered $160.1 million of notional exposure. Ordinary-course legal proceedings were not expected to have a material adverse effect. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether Carefree closes on schedule and at the stated terms, and the final financing mix, assumed debt, and integration results.
- Whether occupancy, rents, and same-community NOI growth persist, particularly as operating expenses and property taxes rise.
- Whether home-sale volumes and pre-owned margins are sustainable, and whether new-home profitability recovers.
- How cash balances and leverage change after applying offering proceeds and completing the planned acquisition; confirm debt maturities, borrowing availability, and covenant headroom.
- How much of reported earnings and FFO growth reflects recurring operations versus transaction costs, disposition gains in the prior year, and changes in share count.
- Whether seasonality in transient RV revenue and the company’s capital-market assumptions affect full-year operating cash flow and distributions.