Sun Communities, Inc. 2011 10-K Summary
Business Context and Reporting Period
Sun Communities, Inc. is a self-administered and self-managed Real Estate Investment Trust (REIT) focused on acquiring, operating, developing, and expanding manufactured housing and recreational vehicle (RV) communities. The reporting period covers the fiscal year ended December 31, 2011. As of year-end, the Company owned and operated 159 properties across 18 states, comprising 54,811 developed sites (47,935 manufactured home sites and 6,876 RV sites).
Key Financial Metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Total Revenues | $289.2 million | $266.0 million |
| Net Loss (GAAP) | $(1.1) million | $(2.9) million |
| Funds From Operations (FFO) | $72.3 million | $62.8 million |
| FFO-Adjusted | $75.3 million | $63.6 million |
| Net Operating Income (NOI) | $159.8 million | $148.2 million |
| Total Debt & Lines of Credit | $1.40 billion | $1.26 billion |
| Weighted Average Interest Rate | 5.1% | 5.3% |
| Occupancy Rate (excl. seasonal RV) | 85.3% | 84.3% |
| Cash Dividends Declared per Share | $3.15 | $2.52 |
Material Changes vs. Prior Period
- Acquisitions: The Company significantly expanded its portfolio in 2011, acquiring 23 properties (18 manufactured housing and 5 RV communities) including the Kentland Communities portfolio (18 communities, 5,434 sites) and several Florida RV resorts. This drove a 9.3% increase in total revenues.
- Same-Site Performance: Same-site Real Property NOI increased 3.6% to $140.1 million, driven by a 2.7% increase in average rental rates and improved occupancy (85.8% vs. 84.5% in 2010).
- Home Sales: While total home sales volume increased to 1,439 units (from 1,375 in 2010), the NOI from home sales decreased 13.3% to $6.9 million due to reduced profit margins on pre-owned homes.
- Debt Structure: Total debt increased by approximately $139 million to fund acquisitions. The Company settled litigation with Fannie Mae and PNC Bank, resulting in a $1.7 million reduction in interest expense and an extension of the credit facility maturity to 2023.
- Equity: The Company raised approximately $58.8 million in net proceeds through "at-the-market" sales and a purchase agreement with REIT Opportunity, Ltd. during the year.
Guidance, Outlook, and Risks
- Outlook: Management anticipates selling approximately 1,750 homes in 2012. The Company expects to continue increasing rents at or near historical levels (2.2% to 3.3% annually) and maintaining occupancy growth.
- Liquidity: The Company maintains a $130 million senior secured revolving credit facility with $18.5 million available as of year-end. In January 2012, the Company closed a $156 million public equity offering to repay debt and fund further acquisitions.
- Risks:
- Geographic Concentration: Significant exposure to economic conditions in Michigan (37% of sites), Florida (21%), Indiana (12%), and Texas (10%).
- Debt Refinancing: With $1.4 billion in debt, the Company faces risks related to refinancing maturing debt in a constrained credit market.
- REIT Status: Failure to maintain REIT qualification would subject the Company to corporate income taxes.
- Interest Rates: Exposure to variable rate debt, though partially hedged with interest rate swaps and caps.
Key Facts for Investor Verification
- Debt Covenants: Verify continued compliance with the maximum leverage ratio (70% of total asset value) and minimum fixed charge coverage ratio (1.45:1) under the revolving credit facility.
- Acquisition Integration: Monitor the performance of the 23 properties acquired in 2011, particularly the Kentland portfolio, to ensure they meet projected NOI targets.
- Home Sales Margins: Track the gross margin on pre-owned home sales, which declined in 2011, to assess the sustainability of the home sales segment profitability.
- Equity Dilution: Note the significant equity issuances in late 2011 and early 2012 (including the $156 million offering) and their impact on shares outstanding and per-share metrics.
- Legal Settlements: Confirm the full implementation of the Fannie Mae/PNC settlement terms regarding facility fees and maturity extensions.