Business context and reporting period
Sun Communities, Inc. is a self-managed REIT that owns, operates, develops and expands manufactured-housing (MH) and recreational-vehicle (RV) communities, and sells and rents homes. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018. At quarter-end, the company reported interests in 367 properties across 31 U.S. states and one Canadian province.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $271.4 million | $237.9 million | $529.3 million | $472.3 million |
| Net income attributable to common stockholders | $20.4 million | $12.4 million | $50.4 million | $33.5 million |
| Diluted EPS | $0.25 | $0.16 | $0.63 | $0.45 |
| NOI / gross profit, non-GAAP | $148.1 million | $131.2 million | $297.2 million | $269.0 million |
| Core FFO per diluted share, non-GAAP | $1.07 | $0.96 | $2.21 | $2.06 |
| Cash provided by operating activities | Not separately stated by quarter | $198.7 million | $156.6 million |
Q2 revenue rose 14.1% and common-stockholder net income rose 65.1% year over year. For the first half, revenue increased 12.1% and common-stockholder net income increased 50.6%. First-half real-property NOI was $257.6 million, up 9.3%; same-community real-property NOI grew 6.2%, reflecting 2.0% higher occupancy and 4.0% higher monthly base rent per site, partly offset by higher operating costs.
At June 30, total assets were $6.49 billion and total liabilities were $3.74 billion. Reported total debt was $3.36 billion, including $536.4 million of lines of credit; weighted-average debt maturity was 7.8 years and weighted-average interest rate was 4.4%. Cash and cash equivalents were $20.0 million, plus $16.8 million of restricted cash. The $650 million revolving/term facility had $534 million outstanding; the company stated it was in compliance with its debt covenants. Net debt to enterprise value was reported at approximately 28.6%.
Material changes versus prior comparable period
- Q2 real-property income increased 10.7%; total-portfolio real-property NOI increased 11.5%, including $4.8 million of growth from acquired properties. Same-community NOI increased 7.2%.
- Home-sale revenue rose 33.6% in Q2, with total homes sold increasing 17.7%; home-sales gross profit increased 16.4%. New-home and pre-owned-home gross margins declined year over year in Q2.
- First-half operating cash flow increased $42.1 million. Investing cash outflow increased to $407.5 million from $167.1 million, primarily reflecting acquisitions and property investment.
- Debt and lines of credit increased from year-end in aggregate as the company funded acquisitions and repaid/refinanced debt. Lines of credit rose to $536.4 million from $41.3 million; mortgage loans payable declined to $2.64 billion from $2.87 billion.
Outlook, risks, contingencies and unusual items
- Management intends to pursue acquisitions, development and expansion, funding needs through operating cash flow, available cash, credit facilities and debt or equity issuance. The filing provides no explicit full-year earnings or FFO guidance. Management estimated approximately $106.5 million of annual transient RV revenue, with material seasonal concentration.
- In June, Sun acquired an 80% interest in Sun NG RV Resorts, comprising ten operating resorts and one development, and acquired other RV properties. The acquired 2018 properties contributed $7.1 million of revenue and $3.8 million of net income in the reported period. Subsequent events included a $228 million, 4.10% fixed-rate, 20-year term loan and further equity issuance.
- Hurricane Irma claims remained uncertain: estimated insurance receivable was $22.1 million at June 30. The company said it could not estimate when three impaired Florida Keys communities would return to pre-hurricane operating levels; recovery depends on redevelopment, lease-up and insurance claims.
- Q2 included a $1.5 million loss on debt extinguishment. First-half results included a $2.2 million net hurricane-related gain and a $4.2 million foreign-currency translation loss. A ground-lease intangible write-off of $0.8 million was recorded in property operating expense.
- Key stated risks include acquisition and financing execution, debt refinancing and interest-rate exposure, occupancy and rental rates, higher operating costs and taxes, natural disasters, Canadian currency movements, manufactured-home buyer financing and maintaining REIT status. A 1-percentage-point rate change was estimated to affect first-half interest expense by approximately $1.4 million based on average variable-rate borrowings.
- Ordinary-course legal proceedings were not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile acquisition-related NOI growth and same-community performance with the effects of property costs, home sales and seasonal RV revenue.
- Review debt maturities, floating-rate exposure, remaining credit availability and the effect of continued acquisition funding on leverage and dilution.
- Track Hurricane Irma insurance recoveries, Florida Keys redevelopment and the timing of restored operations.
- Assess home-sales volumes and gross margins, and whether rent increases continue to outpace operating-cost growth.
- Evaluate non-GAAP NOI, FFO and Core FFO alongside GAAP earnings and cash flows; the company cautions that these measures are not substitutes for GAAP results or liquidity measures.