Sun Communities, Inc. - Q2 2009 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Sun Communities, Inc., a self-administered Real Estate Investment Trust (REIT) owning and operating manufactured housing communities. The report covers the quarterly period ended June 30, 2009, and the six months ended June 30, 2009. As of the reporting date, the company owned 136 properties with 47,594 developed sites across 18 states.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2009 |
Balance Sheet June 30, 2009 |
|---|---|---|---|
| Total Revenues | $63.3 million | $128.6 million | N/A |
| Net Loss (GAAP) | $(2.5) million | $(1.5) million | N/A |
| Net Loss Attributable to Sun Communities | $(2.3) million | $(1.4) million | N/A |
| Funds From Operations (FFO) | $12.5 million | $28.8 million | N/A |
| Net Operating Income (NOI) | $35.1 million | $72.0 million | N/A |
| Cash and Equivalents | N/A | N/A | $4.6 million |
| Total Debt | N/A | N/A | $1.15 billion |
| Lines of Credit Outstanding | N/A | N/A | $84.3 million |
| Stockholders' Deficit | N/A | N/A | $(81.6) million |
Material Changes vs. Prior Period
- Revenue: Total revenues decreased slightly by 3.1% for the six months ended June 30, 2009, compared to the prior year, primarily due to a reduction in gains from land sales and other asset dispositions which were significant in 2008.
- Net Loss: The net loss attributable to Sun Communities improved significantly, narrowing from $(10.5) million in the first half of 2008 to $(1.4) million in the first half of 2009. This improvement was largely driven by a reduction in equity losses from affiliates (Origen Financial, Inc.), which decreased from $(12.6) million to $(0.5) million.
- NOI: Net Operating Income increased by 0.8% to $72.0 million for the six-month period, driven by a 3.0% increase in average rental rates and higher occupancy levels.
- Home Sales: While new home sales volume declined by 52.1%, pre-owned home sales volume increased by 15.2%, resulting in an overall 27.8% increase in gross profit from home sales due to improved margins on pre-owned units.
Guidance, Outlook, and Risks
- Liquidity: The company maintains an unsecured revolving line of credit with a $115.0 million capacity, with $30.5 million available as of June 30, 2009. Management expects to meet short-term liquidity needs through operating cash flows and borrowings.
- Debt Maturities: Significant debt maturities are scheduled for 2011 ($103.7 million) and 2012 ($35.9 million). The company has 30 unencumbered properties with an estimated market value of $198.3 million available for potential collateralization.
- Market Risks: The filing highlights risks associated with the sub-prime credit crisis, including uncertainty in obtaining new secured credit and refinancing. Interest rate risk is managed through derivative instruments (swaps and caps) covering approximately $247.4 million of notional debt.
- Discontinued Operations: The company is exiting its cable television service business, which is reported as a discontinued operation. A $4.1 million impairment charge was recorded in late 2008.
- Accounting Changes: The company adopted SFAS 160 in 2009, which changed the presentation of noncontrolling interests, resulting in a deficit balance for noncontrolling interest on the balance sheet.
Investor Verification Checklist
- Verify the sustainability of the 3.0% rental rate increase and 82.4% occupancy rate in the current economic climate.
- Review the debt maturity schedule, specifically the $103.7 million due in 2011, and assess refinancing options given current credit market volatility.
- Monitor the equity loss from affiliates (Origen Financial) to ensure the significant improvement from 2008 is not a one-time anomaly.
- Assess the impact of the stockholders' deficit of $(81.6) million on the company's ability to raise equity capital.
- Confirm compliance with debt covenants, specifically the 1.69:1 debt service coverage ratio and 85.5% distribution coverage.