Sun Communities, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited results. Sun Communities is a REIT operating manufactured-home (MH) communities, RV resorts and marinas. At quarter-end, it owned or held interests in 584 properties across the U.S., Canada and Puerto Rico. The filing reports three segments; prior-period segment results were recast.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $684.3 million | $400.5 million | $1,730.2 million | $1,014.1 million |
| Net income attributable to common stockholders | $231.8 million | $81.2 million | $367.3 million | $124.0 million |
| Diluted EPS | $2.00 | $0.83 | $3.27 | $1.29 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $656.0 million | $464.5 million |
| Net operating income (NOI, non-GAAP) | $346.2 million | $218.3 million | $870.4 million | $564.1 million |
| Core FFO per diluted share (non-GAAP) | $2.11 | $1.60 | $5.20 | $3.94 |
Revenue growth reflected acquisitions, including Safe Harbor, stronger same-community performance and increased home sales. Nine-month same-community NOI rose 12.1%; Q3 rose 12.4%. RV same-community NOI increased 32.8% in the nine-month period, with management citing higher transient and vacation-rental traffic and COVID-related closures in the 2020 comparison. MH same-community NOI increased 4.3%, supported by rent and occupancy gains. Same-community blended occupancy was 98.1% at quarter-end, and monthly base rent per site was $588, up $21 from the prior-year figure.
Q3 home-sales revenue increased 70.2% to $81.1 million, and home-sales NOI rose 216.0% to $24.5 million. New-home gross margin was 17.7%, versus 18.7%; pre-owned-home margin was 48.0%, versus 29.2%. Marina operations contributed $64.5 million of Q3 NOI; marina results include properties acquired in 2020 and 2021.
Cash flow, debt and liquidity
- Nine-month investing cash outflow was $1.36 billion, including $1.10 billion of property acquisitions and $476.5 million of property investment. Financing cash inflow was $700.4 million, including equity issuance and debt activity. Cash, cash equivalents and restricted cash ended at $85.6 million; unrestricted cash was approximately $71.6 million.
- Total debt was $4.69 billion at September 30, 2021, down from $4.76 billion at December 31, 2020. Weighted-average interest rate was 3.303% and weighted-average maturity was 9.6 years. Debt included $3.40 billion secured and $1.29 billion unsecured. Interest expense for nine months was $116.2 million, compared with $94.1 million.
- The $2.0 billion revolving credit facility had $589.5 million drawn and approximately $1.4 billion of remaining capacity. The company reported 392 unencumbered properties, a 17.1% net-debt-to-enterprise-value ratio, and compliance with debt covenants.
- In June, the company issued $600 million of 2.7% senior notes due 2031 and used proceeds to repay credit-line borrowings. After quarter-end, it issued a further $450 million of 2.3% notes due 2028 and $150 million of 2.7% notes due 2031; proceeds were used to repay the line of credit.
Material changes, outlook and risks
Net income growth included substantial non-operating gains: nine-month property disposition gains were $108.1 million, compared with $5.6 million in 2020; marketable-security remeasurement produced a $43.2 million gain, versus a $2.6 million loss. These items mean GAAP earnings growth should be considered alongside NOI and FFO. The company sold six MH communities during Q3 for $162.1 million in total and recognized $108.1 million of gains for the nine-month period.
The company acquired properties representing 11,706 sites, wet slips and dry-storage spaces during the first nine months and sold 1,814 MH sites. The 2021 acquisitions included marina, RV and MH assets; acquisition activity and the Safe Harbor business contributed to higher depreciation, G&A and interest expense. Common-equity offerings generated approximately $1.08 billion in net proceeds during the first half, funding acquisitions and debt repayment and increasing shares outstanding.
No specific full-year financial guidance is provided in the supplied filing text. Management said it intends to pursue acquisitions and development subject to market conditions and expects to meet long-term liquidity needs through operating cash flow and access to debt and equity markets. It cautioned that COVID-19 effects remain uncertain; RV and marina activity is seasonal; and results may be affected by occupancy and rent trends, operating-cost inflation, interest rates, foreign exchange, capital-market access, acquisition integration and natural disasters. The company reported no material change to previously disclosed risk factors. Ordinary-course legal proceedings were not expected to materially adversely affect results or financial condition.
Other items to monitor include $38.97 million of contingent consideration liabilities, an estimated liability related to potential termination of certain ground leases, and Level 3 fair-value estimates that rely on significant unobservable inputs. Management reported disclosure controls were effective, but excluded Safe Harbor from its internal-control assessment during the first year after acquisition; integration was expected to be completed in Q4 2021. Variable-rate debt was $624.8 million; the filing estimates a 1% rate change would affect nine-month interest expense by approximately $7.1 million based on average variable-rate balances.
Key facts for investors to verify
- How much of reported earnings and FFO growth is attributable to recurring operations versus property-sale and marketable-security gains.
- Whether same-community rent, occupancy and NOI gains persist, particularly given RV and marina seasonality and the unusually weak 2020 comparison.
- Acquisition returns and integration progress, including Safe Harbor controls and the effect of acquisitions on expenses, leverage and per-share results.
- Debt capacity and refinancing exposure, including the impact of floating rates and the use of post-quarter note proceeds to repay credit-line borrowings.
- The degree of potential dilution from equity issuance and convertible or redeemable OP units, and the assumptions behind contingent consideration and other Level 3 valuations.