Business context and reporting period
Sun Communities, Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. The REIT owns, operates and develops manufactured-housing (MH) and recreational-vehicle (RV) communities, and also sells and rents manufactured homes. At year-end, it operated 217 properties in 29 states, with 79,554 developed sites and approximately 7,000 additional MH sites suitable for development.
Financial and operating performance
| Metric | 2014 | 2013 | Change or context |
|---|---|---|---|
| Total revenue | $471.7 million | $415.2 million | Up 13.6% |
| Net income | $33.2 million | $20.1 million | Company-wide; includes material gains noted below |
| Net income attributable to common stockholders | $22.4 million; $0.54 per diluted share | $10.6 million; $0.31 per diluted share | Up from prior year |
| Net cash from operating activities | $133.3 million | $114.7 million | Up $18.6 million |
| Net cash used in investing activities | $550.7 million | $352.4 million | Higher acquisition investment |
| Net cash from financing activities | $496.1 million | $213.0 million | Supported by equity offerings and debt activity |
| Real-property NOI | $232.5 million | $203.2 million | Up 14.4% |
| Same-site real-property NOI | $206.7 million | $191.9 million | Up 7.7% |
| FFO excluding certain items, fully diluted | $3.37 per share | $3.22 per share | Up 4.7%; non-GAAP measure |
Portfolio occupancy, excluding transient RV sites, rose to 92.6% from 89.7%; same-site occupancy increased to 93.2% from 91.5%. Same-site average monthly site rent was $456, up from $442. The annual common distribution declared increased to $2.60 per share from $2.52.
At December 31, 2014, total debt and lines of credit were approximately $1.832 billion, cash and cash equivalents were $83.5 million, and stockholders’ equity was $940.2 million. Debt had a weighted-average maturity of about 7.5 years and a weighted-average interest rate of 5.1%. The $350 million secured revolving facility had no borrowings outstanding; approximately $346.8 million remained available after letters of credit. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue rose 13.6%, while real-property NOI increased 14.4%; management attributed total portfolio NOI growth to acquisitions and same-site improvement.
- Same-site site-rent revenue benefited from 3.2% weighted-average rent increases and more occupied sites. Same-site operating expenses rose 4.1%, including higher repair, utility and other costs.
- Home sales NOI/gross profit declined 7.9% to $13.4 million, despite a slight increase in total homes sold, primarily because pre-owned home profit fell. Rental Program NOI increased 20.0% to $70.2 million, alongside growth in occupied rental homes to 10,973.
- The company acquired six RV communities and completed the first closing of the Green Courte acquisition in November 2014. It also sold 10 MH communities and recorded a $17.7 million gain.
- Two public common-stock offerings generated approximately $562.9 million in net proceeds. Year-end common shares outstanding were 48.6 million, compared with 36.1 million a year earlier.
Outlook, commentary, risks and unusual items
- Management planned to build more than 800 expansion sites in 2015, following 374 sites added in 2014. No formal earnings guidance is provided in the supplied filing text.
- The Green Courte transaction was announced at a purchase price of approximately $1.3 billion and closed in two stages; the second closing for 26 communities occurred in January 2015. Management cited potential occupancy and rent growth, while warning that integration, performance and financing risks could prevent expected benefits. The 2015 securities issued in connection with the acquisition were expected to dilute earnings and FFO per share.
- The company expected a separate acquisition of six Orlando-area MH communities, with approximately 3,150 sites, to close in the second quarter of 2015, subject to due diligence, lender consent and other customary conditions.
- 2014 results included $18.3 million of transaction costs, primarily related to Green Courte; a $17.7 million property-disposition gain; a $4.5 million settlement gain related to a prior RV acquisition; and a $0.8 million impairment charge on a Texas community. These items affect comparison of reported earnings with underlying operations.
- In the fourth quarter, the company identified and corrected historical accrual errors related mainly to real estate taxes, deferred revenue and utilities. The cumulative correction was approximately $13.5 million; management deemed the prior-period errors immaterial and revised prior balance-sheet information. A separate $3.2 million revision to a property-sale gain was recorded in Q4; management said it was not material to the second- or fourth-quarter statements. Q4 reported a $13.1 million loss attributable to common stockholders, or $0.27 per diluted share.
- Key risks include roughly $1.8 billion of debt, refinancing and interest-rate exposure, geographic concentration (especially Michigan and Florida), acquisition integration and financing, occupancy and rent trends, manufactured-home buyer financing, operating-cost increases, and maintaining REIT qualification. The filing reports ordinary-course litigation is not expected to materially affect results or financial condition.
- Independent auditors issued unqualified opinions on the financial statements and internal controls; management also concluded internal controls were effective as of year-end.
Most important facts for investors to verify
- Review the full audited statements and notes, especially the $13.5 million accrual correction and the Q4 gain revision, including their presentation and effects on comparability.
- Assess whether Green Courte’s acquired communities deliver the expected occupancy, rent and operating results, and quantify the effect of acquisition-related equity issuance on per-share measures.
- Verify debt maturities, secured-property exposure, revolver availability, covenant headroom and refinancing assumptions against the debt notes and subsequent-event disclosures.
- Track same-site occupancy, rent growth, expenses and the performance of the expanding rental-home and RV businesses.
- Distinguish recurring operating performance from transaction costs, disposition and settlement gains, impairment charges, and non-GAAP NOI and FFO measures.