Business Context and Reporting Period
Company: Sun Communities, Inc. (SUI)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
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, 2002, the portfolio consisted of 129 properties in 17 states, comprising 43,959 developed sites (38,832 manufactured home sites and 5,127 RV sites) and 7,642 sites suitable for development. The company also operates Sun Home Services, Inc. (SHS), which sells manufactured homes to residents.
Key Financial Metrics
| Metric | 2002 | 2001 |
|---|---|---|
| Total Revenues | $162.3 million | $153.1 million |
| Net Income | $13.6 million | $33.9 million |
| Funds From Operations (FFO) | $69.2 million | $68.1 million |
| Net Cash Provided by Operating Activities | $51.0 million | $65.9 million |
| Total Debt Outstanding | $667.4 million | $495.2 million |
| Stockholders' Equity | $319.5 million | $329.6 million |
| Weighted Average Shares (Basic) | 17.6 million | 17.3 million |
| Distributions per Share | $2.29 | $2.18 |
Occupancy Rates: Aggregate occupancy was 90.0% (excluding RV sites). Stabilized communities were 92.4% occupied, while development communities were 64.8% occupied.
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased by approximately 60% to $13.6 million from $33.9 million in 2001. This was primarily driven by a $13.6 million write-off of the company's equity investment in Origen Financial, L.L.C., and increased expenses.
- Revenue Growth: Total revenues increased 6.0% to $162.3 million. Income from property rose 9.3% to $151.6 million due to rent increases and acquisitions.
- Expense Increases: Total expenses rose 11.2% to $122.6 million. Interest expense increased by $1.4 million due to financing additional investments, partially offset by lower rates on variable debt. Depreciation and amortization increased by $5.2 million.
- Debt Expansion: Total debt increased by $172.2 million to $667.4 million, reflecting a new $152.4 million collateralized term loan and increased borrowings to fund acquisitions and development.
- Acquisitions: The company acquired four communities in 2002 for approximately $69.9 million and purchased a controlling interest (59%) in SunChamp LLC, a joint venture developing 11 new communities.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items
- Origen Write-off: The company wrote off its remaining $13.6 million equity investment in Origen Financial, L.L.C., citing impairment due to the deteriorating manufactured housing finance industry, excessive repossession inventory, and the bankruptcy of industry peers (Oakwood Homes, Conseco).
- Legal Proceedings: On March 21, 2003, the company received an unfiled complaint from T.J. Holdings, LLC alleging wrongful deprivation of economic opportunities, claiming $13.0 million in damages plus punitive damages. Management intends to defend vigorously.
Outlook and Guidance
- 2003 Investment Plans: Management plans to invest $5–$10 million in development and $40–$60 million in property acquisitions in 2003.
- Debt Maturities: Significant debt maturities include a $48.0 million bridge loan and $85.0 million in senior notes due in April and May 2003, respectively. The company expects to refinance these via additional senior unsecured debt.
- Liquidity: The company maintains an $85 million unsecured line of credit (increased to $105 million post-year-end) with $22 million available at year-end.
Risks
- Origen Credit Facility: The company provides a $58.0 million credit facility to Origen. While not currently impaired, the facility is subordinate to senior debt, and Origen's liquidity is constrained by the asset-backed securitization market.
- Geographic Concentration: Approximately 34% of properties are in Michigan and 16% in Florida, exposing the company to regional economic downturns.
- REIT Qualification: Failure to maintain REIT status would subject the company to corporate income taxes.
Investor Verification Checklist
- Origen Exposure: Verify the current status of the $33.6 million outstanding advances to Origen Financial and the likelihood of future write-offs.
- Debt Refinancing: Confirm the company's ability to refinance the $133 million in debt maturing in early 2003 given market conditions.
- Legal Contingency: Monitor the status of the unfiled $13 million lawsuit from T.J. Holdings, LLC.
- Occupancy Trends: Track occupancy rates in development communities (currently 64.8%) versus stabilized communities (92.4%) to assess lease-up performance.
- FFO vs. Net Income: Note the divergence between Net Income ($13.6M) and FFO ($69.2M) due to the non-cash Origen write-off and depreciation.