Sun Communities, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report. Sun Communities is a self-managed REIT that owns, operates, and develops manufactured-housing (MH) and recreational-vehicle (RV) communities, with a related manufactured-home sales and rental business.
Business context and portfolio
At year-end, the company operated 231 properties in 30 states, with 88,612 developed sites and approximately 7,181 additional sites suitable for development. Portfolio occupancy, excluding transient RV sites, was 95.0%. Florida and Michigan represented approximately 30.5% and 27.2% of developed sites, respectively.
Financial and operating performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $674.7 million | $484.3 million |
| Net income attributable to common stockholders | $137.3 million | $22.4 million |
| Diluted earnings per share | $2.52 | $0.54 |
| Funds from operations (FFO), excluding certain items, per diluted share | $3.63 | $3.37 |
| Same-site real property NOI | $220.5 million | $202.1 million |
| Cash provided by operating activities | $182.3 million | $133.3 million |
| Cash and cash equivalents at year-end | $45.1 million | $83.5 million |
| Total debt and lines of credit | $2.345 billion | $1.832 billion |
Revenue increased 39.3%, reflecting acquisitions and higher same-site rents and occupancy. Same-site NOI rose 9.1%; same-site occupancy increased to 95.9% from 93.2%, and monthly base rent per site rose 3.3%. Home sales reached a record 2,483, up 26.3%; home-sales gross profit was $20.8 million, up 55.2%. Rental Program NOI increased 18.5% to $83.2 million.
GAAP earnings included a $125.4 million net gain on property dispositions, compared with $17.7 million in 2014. The gain materially contributed to the increase in reported net income: income before other gains and selected items was much lower than the headline net income suggests. FFO excluding certain items, a non-GAAP measure, rose 7.7% per diluted share. Common distributions were $2.60 per share, unchanged from 2014.
Liquidity, debt, and capital allocation
Net cash used in investing activities was $413.2 million, primarily reflecting property acquisitions and investment in properties; financing activities provided $192.5 million. Year-end cash declined by $38.4 million. The company completed a $233.1 million net common-stock offering and used part of the proceeds to reduce revolving borrowings and support future investment.
Debt totaled approximately $2.32 billion before the separately reported $25.0 million credit-facility balance. The debt portfolio had a weighted-average interest rate of 5.0% and weighted-average maturity of 8.4 years. The amended $450 million facility comprised a $392 million revolver and $58 million term loan; $25 million was drawn at year-end, and $3.4 million of capacity supported letters of credit. The company reported compliance with debt covenants. It also had 73 unencumbered properties with estimated market value of $963.4 million.
Contractual obligations totaled $3.12 billion including estimated interest; $276.2 million was scheduled within one year. Management identified scheduled debt maturities, distributions, acquisitions, and property investment as principal liquidity needs.
Material changes, outlook, and risks
- Completed 38 acquisitions, including the final phase of the $1.3 billion American Land Lease portfolio purchase; acquired 34 MH and four RV communities. Sold 20 communities for $224.5 million gross proceeds, recording the $125.4 million net gain.
- Expanded 646 sites at four properties for approximately $17.5 million and expected to construct more than 1,000 additional sites in 2016. Management also intended to pursue selective acquisitions; no explicit 2016 earnings or FFO guidance is provided in the supplied filing text.
- Management cited continued same-site rent and occupancy growth and strong home sales, while noting uncertainty in economic and capital markets. It expected recurring capital expenditures not to decline in 2016.
- Key risks include property and income concentration in Florida and Michigan, economic or competitive pressure on occupancy and rents, acquisition and development execution, refinancing and interest-rate exposure, operating-cost increases, natural disasters, environmental liabilities, and maintaining REIT qualification. Rent-control and manufactured-home financing conditions may also affect results.
- Variable-rate debt was $183.3 million at year-end; management estimated a 1 percentage-point rate change would affect annual interest expense by approximately $2.2 million based on average variable-rate balances. Two interest-rate caps were in place.
- Legal proceedings in the ordinary course were not expected to have a material adverse effect. No material off-balance-sheet arrangements were reported. The filing identified related-party relationships, including executive-office leasing and legal services, for investor review.
Important facts for investors to verify
- How much of the sharp GAAP earnings increase reflects disposition gains and other unusual items, versus recurring property operations; reconcile this with FFO and same-site NOI.
- The final acquisition financing, integration results, and realized occupancy and rent growth of the American Land Lease portfolio and other 2015 acquisitions.
- Debt maturities, refinancing plans, covenant headroom, and available liquidity, including the timing and use of disposition proceeds held in escrow.
- Whether the planned 2016 development pipeline can be delivered and leased as expected, and the capital required to support it.
- Exposure to Florida and Michigan markets, variable interest rates, and potential changes in occupancy, operating costs, or manufactured-home financing conditions.