Business Context and Reporting Period
Company: Sun Communities, Inc. (SUI)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Sun Communities is a self-administered and self-managed Real Estate Investment Trust (REIT) owning, operating, and developing manufactured housing communities. As of December 31, 2008, the portfolio consisted of 136 properties in 18 states, comprising 47,613 developed sites (42,299 manufactured home sites, 3,107 permanent RV sites, 2,207 seasonal RV sites) and 6,081 sites suitable for development. The company also operates a taxable subsidiary, Sun Home Services, Inc., for marketing, selling, and leasing homes.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenues | $255.0 million | $236.0 million |
| Net Loss | $(34.4) million | $(16.6) million |
| Funds From Operations (FFO) | $26.5 million | $45.4 million |
| FFO Per Share (Diluted) | $1.29 | $2.24 |
| Net Operating Income (NOI) | $141.9 million | $135.9 million |
| Total Debt & Lines of Credit | $1,229.6 million | $1,187.7 million |
| Stockholders' Equity | $(59.9) million (Deficit) | $21.0 million |
| Cash and Cash Equivalents | $6.2 million | $5.4 million |
| Occupancy Rate (MH Sites) | 81.9% | 82.2% |
Material Changes vs. Prior Period
- Net Loss Deterioration: Net loss more than doubled from $16.6 million in 2007 to $34.4 million in 2008. This was primarily driven by significant non-cash charges.
- Impairment Charges: The company recognized $13.1 million in non-cash asset impairment charges. This included write-downs on three development communities (Michigan, Nevada, North Carolina) due to low estimated returns and one property in Indiana due to negative cash flows. Additionally, cable television service was discontinued at various communities.
- Affiliate Losses: Losses from the investment in Origen Financial, Inc. increased to $16.5 million in 2008 (up from $8.0 million in 2007). This included a $9.6 million other-than-temporary impairment charge and a $6.9 million equity allocation of anticipated losses.
- Revenue Growth: Despite the net loss, total revenues increased 8.1% to $255.0 million. Real property NOI grew 2.9% to $129.8 million, driven by a 2.9% increase in weighted average rental rates.
- Home Sales: Home sales volume increased 35.5% to 965 units. Gross profit from home sales rose 52.2% to $7.2 million, largely due to increased sales of pre-owned homes from the rental program.
Guidance, Outlook, Risks, and Unusual Items
- Management Commentary: Management notes that while the industry faces challenges from the credit crisis and economic downturn, the company's focus on affordable housing provides some resistance to recessionary forces. Occupancy has stabilized compared to previous years.
- Unusual Items:
- Origen Investment: Origen Financial, Inc. (19% ownership) delisted from NASDAQ in December 2008 and suspended loan originations. The company recorded significant impairment charges related to this affiliate.
- Debt Restructuring: The company completed a $27.0 million financing with Bank of America in June 2008. Additionally, $27.5 million of installment notes were transferred to a third party; however, due to recourse provisions, these were accounted for as a secured borrowing rather than a sale.
- Risks and Contingencies:
- Geographic Concentration: Significant exposure to Michigan (30% of sites), Florida (21%), Indiana (14%), and Texas (11%). Downturns in these local economies could materially impact occupancy and rental rates.
- Debt Levels: Total debt approximates $1.2 billion. The company faces risks regarding refinancing in volatile credit markets, though it has limited debt maturities until 2011.
- Legal Proceedings: An arbitration demand was filed by T.J. Holdings, LLC, claiming $13.0 million in damages. The company intends to defend vigorously. A prior SEC inquiry regarding accounting for SunChamp investment was settled in July 2008.
Investor Verification Checklist
- Debt Maturities: Verify the company's ability to refinance or repay the $103.7 million in debt maturing in 2011 and the $85.8 million outstanding on the unsecured line of credit.
- Origen Exposure: Monitor the residual value and cash flow potential of the Origen Financial, Inc. investment, given its delisting and suspension of operations.
- Occupancy Trends: Track occupancy rates in key markets (Michigan, Florida) to ensure they do not decline further below the 81.9% year-end 2008 level.
- Impairment Reversal: Assess whether the $13.1 million impairment charge was a one-time event or indicative of broader portfolio valuation issues.
- Dividend Coverage: Confirm that Funds From Operations (FFO) of $26.5 million remain sufficient to cover the $2.52 per share annual distribution ($46.3 million total), noting that distributions exceeded FFO in 2008.