Sun Communities, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This annual filing includes fourth-quarter results; it is not a standalone quarterly report.
Business context
Sun Communities is a self-managed REIT focused on owning, operating, acquiring, and developing manufactured-housing (MH) and recreational-vehicle (RV) communities. At year-end, it operated 188 properties in 26 states, with 69,789 developed sites and approximately 6,300 additional MH sites suitable for development. Its other operating segment sells and rents manufactured homes.
Financial and operating highlights
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $415.2 million | $339.0 million |
| Net income attributable to common stockholders | $10.6 million; $0.31 per diluted share | $5.0 million; $0.18 per diluted share |
| Real-property NOI | $203.2 million | $167.7 million |
| Same-site real-property NOI | $173.7 million | $164.0 million |
| FFO excluding certain items, fully diluted | $3.22 per share | $3.19 per share |
| Cash flow from operating activities | $114.7 million | $87.3 million |
| Cash and cash equivalents at year-end | $4.8 million | $29.5 million |
| Total debt and lines of credit | $1.493 billion | $1.454 billion |
| Total assets | $1.999 billion | $1.755 billion |
| Total stockholders’ equity | $397.1 million | $213.0 million |
Portfolio occupancy, excluding transient RV sites, was 89.7%, up from 87.3%; same-site occupancy increased to 88.9% from 87.1%. MH weighted-average monthly site rent was $443, up from $434. Home sales reached a reported high of 1,929, up 10.7%. The Rental Program had 9,726 occupied homes, up 19.9%; its NOI increased 24.2% to $58.5 million. Home-sales gross profit rose 42.3% to $14.6 million.
Fourth-quarter revenue was $105.0 million and net income attributable to common stockholders was $82,000, compared with $90.8 million revenue and a $1.4 million common-stockholder loss in fourth-quarter 2012.
Operating cash flow rose, while investing activities used $352.4 million and financing activities provided $213.0 million. The year-end cash balance fell by $24.8 million. Common distributions declared were $2.52 per share for 2013, unchanged from 2012; the filing reports that 65.4% of 2013 distributions were classified for tax purposes as return of capital.
Material changes and financing
- Completed acquisitions of 15 properties—one MH community and 14 RV communities—for approximately $175.1 million. Acquired properties contributed $60.1 million of 2013 revenue and $5.9 million of net income, according to the filing.
- Issued 5.75 million common shares in March 2013, generating approximately $249.5 million net proceeds. The enlarged share count is relevant to per-share comparisons.
- Replaced its $150 million revolving facility with a $350 million senior secured revolver maturing May 2017, with a one-year extension option and a possible $250 million accordion. At year-end, $178.1 million was drawn and approximately $169.2 million was available, subject to borrowing-base calculations.
- Refinanced loans with two term loans totaling approximately $141.5 million, maturing in 2024. Total debt had a reported weighted-average interest rate of 5.0% and weighted-average maturity of 7.2 years.
- Net debt to enterprise value was approximately 45.8%, using management’s stated assumption that specified OP units convert to common shares. The filing lists $46.2 million of principal payments due within one year and $378.5 million due in one to three years.
Outlook, risks, and unusual items
- Management expected to develop approximately 800 additional sites in 2014, primarily in Texas and Colorado, and reported expanding 784 sites in 2013. It described acquisition opportunities as active and intended to pursue selective acquisitions. No specific 2014 earnings or FFO guidance is provided in the supplied filing text.
- Key operating risks include economic and real-estate conditions, occupancy and rent levels, competition, home-buyer financing and repossessions, development and acquisition execution, rising expenses, and concentration in Michigan, Florida, Indiana, and Texas. These four states represented a substantial portion of developed sites.
- Interest-rate exposure is material: $344.0 million of variable-rate debt was reported at year-end. Management estimated a 1 percentage-point rate change would affect annual interest expense by approximately $2.4 million based on the stated average variable-debt balance. Derivatives included a $20 million swap that matured January 2014 and two interest-rate caps.
- REIT status depends on compliance with complex tax and distribution requirements. The company reported compliance with debt covenants and effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
- The TJ Holdings settlement includes a possible one-time increase in the claimant’s ownership interest in Sun/Forest if all SunChamp properties are sold or refinanced. Management said such a transaction was not probable and did not expect a material adverse effect. Other ordinary-course litigation was not expected to be material.
- Related-party matters include office leases from an entity partly owned by the CEO and his family, legal fees paid to a firm chaired by a director, and the company’s investment and business relationships with Origen. These arrangements may create conflicts of interest.
- After year-end, the company acquired four RV communities for aggregate stated prices of approximately $105.7 million and obtained a $99 million mortgage loan in January 2014. These are subsequent events, not 2013 operating results.
Important facts for investors to verify
- Reconcile reported GAAP earnings with NOI and FFO, which are supplemental, non-GAAP performance measures; assess the impact of acquisitions, depreciation, and acquisition costs.
- Review the 2013 equity issuance and potential dilution from convertible OP units, preferred units, and equity plans when evaluating per-share growth.
- Confirm revolver availability, borrowing-base constraints, debt maturities, covenant headroom, and refinancing needs; year-end cash was $4.8 million.
- Track same-site occupancy, rent increases, operating-cost growth, and home-rental credit, refurbishment, and bad-debt trends.
- Assess geographic concentration, planned development and acquisition spending, and the performance of recently acquired RV properties.
- Review related-party transactions and the contingent Sun/Forest ownership provision, and confirm the terms and accounting for post-year-end acquisitions and financing.