Sun Communities, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The unaudited statements cover Sun Communities, a self-managed REIT operating manufactured-housing (MH) and recreational-vehicle (RV) communities, plus manufactured-home sales and rentals. Unless indicated otherwise, figures below are in U.S. dollars.
Business context and operating performance
At quarter-end, the company owned and operated 190 developed properties in 27 states: 157 MH communities, 24 RV communities and 9 mixed MH/RV properties. It reported 71,680 developed sites and 91.0% occupancy for MH and annual RV sites, up from 89.2% a year earlier. Same-site occupancy was 91.3%, versus 90.0%.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $115.4 million | $100.2 million | $226.6 million | $203.1 million |
| Net income | $7.6 million | $3.3 million | $18.5 million | $11.5 million |
| Net income attributable to common stockholders | $4.9 million | $1.0 million | $12.8 million | $6.8 million |
| Diluted EPS | $0.12 | $0.03 | $0.33 | $0.20 |
| Real Property NOI | $54.8 million | $47.7 million | $113.1 million | $101.1 million |
| FFO per diluted share | $0.76 | $0.66 | $1.69 | $1.56 |
| FFO per diluted share, excluding certain items | $0.78 | $0.69 | $1.73 | $1.62 |
Real Property NOI increased 15.0% in Q2 and 12.0% for the first half. Same-site Real Property NOI grew 8.5% in Q2 and 7.6% for the first half. Management attributed same-site growth chiefly to higher occupancy and rents; weighted-average total monthly site rent increased to $448 from $435 for same-site properties.
Cash flow, debt and liquidity
- Six-month operating cash flow was $77.1 million, up from $60.4 million. Investing used $196.8 million, primarily reflecting $137.4 million of property acquisitions and $84.0 million of property investment. Financing provided $122.5 million.
- Cash was $7.6 million at June 30, 2014. Debt was $1.407 billion and lines of credit were $38.5 million. Debt weighted-average interest rate was 5.1%, with approximately 7.1 years weighted-average maturity. Management reported net debt plus preferred stock at approximately 40.8% of enterprise value.
- The $350 million revolving facility had $31.9 million drawn; approximately $316.1 million remained available after letters of credit. The company reported compliance with debt covenants. Facility covenant measures included a 41.8% leverage ratio against a 68.5% maximum and fixed-charge coverage of 2.37 against a 1.40 minimum.
- In March and April, the company issued 4.83 million common shares at $44.45 per share, generating approximately $214 million net proceeds. Proceeds were used to repay revolver borrowings, fund acquisitions and for general corporate purposes. Common shares outstanding rose to approximately 41.1 million from 36.1 million at year-end 2013.
- Common distributions were $0.65 per share for Q2, compared with $0.63 a year earlier. Six-month distributions were $1.30 per share versus $1.26.
Material changes and unusual items
- The company acquired six RV communities with approximately 2,500 sites for total cash consideration of $137.4 million. The acquired properties contributed $5.0 million of Q2 revenue and $2.9 million of Q2 net income, as reported in the acquisition note.
- Four MH communities were sold in June for proceeds reported at $15.3 million; the company recorded a $0.9 million gain. The company early adopted guidance that did not require discontinued-operations presentation for these disposals.
- Rental Program NOI rose 20.6% in Q2 and 22.4% in the first half, supported by growth in occupied rental homes. Home Sales gross profit declined 2.7% in Q2 and 12.7% in the first half, primarily reflecting weaker pre-owned home sales profit.
- Q2 revenue included a $1.0 million increase in vacation-rental income within ancillary revenue. Depreciation and amortization increased 15.3% in Q2, mainly due to acquisitions and rental/vacation homes; general and administrative expense also increased.
Outlook, commentary and risks
The filing provides no formal earnings or full-year financial guidance. Management said it intends to pursue suitable acquisitions and development while focusing on positive operating cash flow, appropriate leverage and overhead control. It expected approximately $31.7 million of 2014 transient RV revenue, with significant seasonality and the largest share anticipated in Q3.
Management identified potential pressure from rising interest rates, volatile debt and equity markets, economic conditions, lower occupancy or rents, and operating-cost increases that cannot be passed through to residents. Other cited risks include acquisition execution, refinancing and capital availability, manufactured-home sales and buyer financing, weather and natural disasters, and maintaining REIT status. A 1 percentage-point change in Prime or LIBOR was estimated to change interest expense by approximately $1.7 million based on the stated average variable-rate debt balance.
The company said it remained in compliance with covenants and expected ordinary-course litigation, considered together, not to have a material adverse impact. A previously settled dispute includes a contingent partner ownership adjustment if all SunChamp properties are sold or refinanced; management said such an event was not probable and did not expect a material adverse effect. Subsequent to quarter-end, the company entered into a $26.9 million, 10-year loan at 4.57%, using proceeds to reduce its revolver balance.
Important facts for investors to verify
- Whether same-site rent and occupancy gains continue, and whether property-cost growth—especially utilities, repairs and insurance—remains controlled.
- Whether acquisition contributions and the RV portfolio’s seasonal revenue expectations are realized; assess the impact of acquisition financing and share issuance on per-share results.
- Debt maturity, variable-rate exposure, covenant headroom and continued access to the revolving facility and capital markets.
- Rental-home repair, refurbishment and insurance costs, and the trend in pre-owned home sales volumes, prices and margins.
- The sustainability of distributions relative to operating cash flow and investment requirements. FFO is a supplemental, non-GAAP measure and is not a substitute for cash flow or funds available for distributions.
- Any developments in the SunChamp contingent ownership provision, legal proceedings, or the company’s REIT qualification.