Business context and reporting period
Sun Communities, Inc. is a REIT that owns, operates, develops and acquires manufactured housing (MH) and recreational vehicle (RV) communities, with a home sales and rental business. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020. At quarter-end, the company reported 432 properties across 32 U.S. states and one Canadian province.
Financial results and position
Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
- Third quarter: Revenue was $400.5 million, up 10.5% year over year. Net income attributable to common stockholders was $81.2 million versus $57.0 million; diluted EPS was $0.83 versus $0.63. Total NOI/gross profit, a non-GAAP measure, was $221.7 million versus $196.7 million.
- First nine months: Revenue was $1,014.1 million, up 5.4%. Net income attributable to common stockholders was $124.0 million versus $131.7 million; diluted EPS was $1.29 versus $1.49. NOI/gross profit was $573.8 million versus $532.4 million.
- Property operations: Third-quarter same-community NOI rose 5.5% to $159.4 million; nine-month same-community NOI rose 4.6% to $449.3 million. Management attributed growth to higher rents and occupancy. Total portfolio MH and annual RV blended occupancy was 97.2% at quarter-end.
- Cash flow: Nine-month operating cash flow was $464.5 million, up from $398.3 million. Investing used $665.7 million and financing provided $282.0 million. Cash, cash equivalents and restricted cash ended at $115.5 million, including $102.4 million of unrestricted cash reported in MD&A.
- Debt and liquidity: Total debt was $3.34 billion at September 30, down from $3.43 billion at year-end 2019; weighted average interest rate was 3.86% and weighted average maturity 11.4 years. The company reported $28.1 million drawn on its revolver and approximately $719 million of remaining capacity. It was in compliance with debt covenants.
- Other metrics: Total assets were $8.34 billion and total stockholders’ equity was $4.43 billion. The quarterly common distribution was $0.79 per share.
Material changes versus prior comparable periods
- Third-quarter real property revenue rose 13.2%; portfolio growth contributed, including acquisitions. Real Property NOI increased 12.5% for the total portfolio, while same-community NOI increased 5.5%.
- Third-quarter home sales revenue fell 4.3% and home-sales gross profit fell 15.3%, reflecting lower pre-owned home sales volume and margins. New-home gross profit increased 47.3%.
- For the nine months, net income attributable to common stockholders and EPS declined despite higher revenue and NOI. Results included lower gains from marketable securities, fair-value losses on notes receivable and an equity-method investment, and higher depreciation; debt-extinguishment losses were lower than in 2019.
- Third-quarter results included a $5.6 million gain on a property disposition and a $4.7 million foreign-currency translation gain. The nine-month period included a $2.6 million marketable-securities remeasurement loss, a $2.3 million notes-receivable remeasurement loss and a $1.5 million loss on remeasurement of a nonconsolidated investment.
Outlook, risks and unusual items
- No full-year numerical earnings or operating guidance is provided. Management said demand and applications at communities had increased; short-term RV demand benefited from travelers seeking drive-to and outdoor vacations. All MH communities and RV resorts were open, although government restrictions could limit amenities.
- The COVID-19 hardship program deferred $4.4 million of April and May rent for about 4% of residents; more than 40% had been repaid by September 30. Rent increases, paused temporarily, had resumed. Management cautioned that the pandemic’s ultimate effects on operations, rent collection, asset values and estimates remained uncertain.
- The company signed a merger agreement to acquire Safe Harbor Marinas for approximately $2.1 billion, subject to closing conditions and third-party consents. At the filing date, the company expected closing by October 30, 2020; completion was not assured. The transaction was expected to add approximately $808 million of debt. The company planned to fund an estimated $1.17 billion cash component using proceeds from forward-settling a 9.2-million-share offering; expected net proceeds were approximately $1.23 billion if physically settled. The offering had closed October 5, but proceeds had not initially been received.
- Management identified risks around merger completion, integration, assumed debt, marina operating experience, consents and the possibility of acquiring certain properties without the ability to operate them. Other stated risks include COVID-19, interest rates, refinancing and capital availability, foreign exchange, weather, insurance, regulation and environmental liabilities.
- Subsequent to quarter-end, the company entered into a $260 million, 12-year secured loan at a fixed 2.64% rate. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the Safe Harbor merger closed as expected, the final cash consideration and debt assumed, and the status and operating rights of properties requiring third-party consents.
- Whether forward sale agreements were physically settled and the resulting cash proceeds and share dilution.
- Rent collection and repayment progress for deferred hardship-program balances, alongside occupancy, rent growth and RV demand as pandemic conditions evolve.
- Debt covenant headroom, revolver availability, upcoming maturities and financing needs after acquisitions and development spending.
- Underlying performance apart from acquisitions and noncash or market-driven items; NOI and FFO/Core FFO are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.