Sun Communities, Inc. Q1 2011 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2011. Sun Communities, Inc. is a self-administered Real Estate Investment Trust (REIT) that owns, operates, and develops manufactured housing and recreational vehicle (RV) communities. As of the reporting date, the company operated 136 properties across 18 states, comprising 47,684 developed sites.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $69.6 million | $67.4 million |
| Net Income (GAAP) | $2.6 million | $1.5 million |
| Net Income Attributable to Common Stockholders | $2.4 million | $1.3 million |
| Funds From Operations (FFO) | $18.8 million | $17.6 million |
| Net Cash Provided by Operating Activities | $16.7 million | $16.8 million |
| Total Debt | $1.173 billion | $1.164 billion |
| Cash and Cash Equivalents | $4.9 million | $8.1 million |
| Occupancy Rate | 84.6% | 83.9% |
| Weighted Avg. Monthly Rent | $418 | $407 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 3.2% year-over-year, driven by a 3.1% increase in real property income and a 2.5% increase in home sales revenue.
- Profitability: Net income attributable to common stockholders rose 79.5% to $2.4 million, primarily due to a swing in equity income from affiliates (from a $0.8 million loss in 2010 to $0.4 million income in 2011) and improved operating margins.
- Segment Performance:
- Real Property Operations: Net Operating Income (NOI) increased 4.2% to $36.3 million, aided by a 2.7% increase in average rental rates and higher occupancy.
- Home Sales: Pre-owned home sales volume increased 14.8%, while new home sales volume dropped 93.3%. Gross margin on pre-owned homes decreased slightly to 21.0%.
- Liquidity: Cash and cash equivalents decreased by $3.6 million to $4.9 million. The company reduced its unsecured line of credit balance from $81.0 million to $48.0 million using proceeds from equity issuances.
Outlook, Risks, and Unusual Items
- Acquisition Activity: In April 2011, the company entered an agreement to acquire 19 communities in western Michigan for approximately $140 million, subject to closing conditions. Funding will involve debt assumption, preferred OP units, and cash.
- Debt Maturities: A significant portion of debt ($368 million) maturing in 2014 is expected to be extended to 2023 following a preliminary settlement with Fannie Mae. The unsecured revolving line of credit matures on October 1, 2011, and the company is evaluating renewal options.
- Legal Proceedings: The company reached a preliminary settlement regarding a dispute with ARCS Commercial Mortgage Co. and Fannie Mae over variable facility fees. A prior litigation with TJ Holdings was settled in June 2010 for $360,000.
- Dividends: Cash dividends declared were $0.63 per share for the quarter.
- Risk Factors: The company faces risks related to interest rate fluctuations, credit market volatility, and the ability to refinance debt. The filing notes that if the revolving credit facility is not renewed, borrowing capacity would be immediately reduced by $115 million.
Investor Verification Checklist
- Debt Refinancing: Verify the status of the $115 million unsecured line of credit maturing in October 2011 and the finalization of the Fannie Mae extension.
- Acquisition Closing: Confirm the closing of the $140 million western Michigan acquisition and the specific terms of the funding mix.
- Occupancy Trends: Monitor the sustainability of the 84.6% occupancy rate and the 2.7% rental rate increase in the context of broader economic conditions.
- Home Sales Mix: Assess the impact of the sharp decline in new home sales volume on future gross margins and capital recycling.
- Legal Settlements: Track the final approval of the ARCS/Fannie Mae settlement to ensure no unexpected costs arise.