Sun Communities, Inc. — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2014, compared with the same 2013 period. Sun Communities is a REIT owning, operating and developing manufactured-housing (MH) and recreational-vehicle (RV) communities, with home sales and rentals as a second business segment. At quarter-end, it owned 192 properties in 27 states, with 71,891 developed sites.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Total revenue | $111.2 million | $102.9 million |
| Net income | $10.9 million | $8.3 million |
| Net income attributable to common stockholders | $7.8 million; diluted EPS $0.21 | $5.7 million; diluted EPS $0.19 |
| FFO / diluted FFO per share | $37.5 million / $0.93 | $30.7 million / $0.90 |
| FFO excluding certain items / diluted per share | $38.3 million / $0.95 | $31.7 million / $0.93 |
| Net cash from operating activities | $44.7 million | $27.6 million |
| Net cash used in investing activities | $138.7 million | $142.3 million |
| Cash and cash equivalents | $9.3 million | $4.8 million at Dec. 31, 2013 |
| Total debt | $1,408.4 million | $1,311.4 million at Dec. 31, 2013 |
| Total assets / total equity | $2,108.2 million / $565.8 million | $1,999.2 million / $397.1 million at Dec. 31, 2013 |
Real Property Operations NOI increased 9.2% to $58.3 million; same-site NOI increased 6.6% to $56.2 million. Same-site occupancy rose to 89.9% from 88.6%, and average monthly rent per site increased to $445 from $432. The company declared common distributions of $0.65 per share, versus $0.63 a year earlier.
Material changes versus the prior period
- Revenue grew 8.0%, while common-stockholder net income rose 36.6%; diluted EPS increased from $0.19 to $0.21. Average diluted common shares increased to 37.2 million from 30.8 million.
- Same-site real-property revenue increased 6.8%, supported by higher occupied sites and rent increases; property expenses rose 7.2%, including higher utilities and weather-related repairs.
- Rental Program NOI increased 24.5% to $17.3 million, alongside a 17.3% increase in occupied rentals. Home sales NOI/gross profit fell 25.2% to $2.3 million, principally as pre-owned home sales volume declined.
- Cash from operations increased $17.0 million. Investing outflows remained substantial, including $104.1 million for four RV community acquisitions. Financing cash flow was $98.5 million, compared with $146.2 million.
- Debt increased overall, but revolving-facility borrowings declined to approximately $15.0 million from $178.1 million at year-end. The company issued 4.2 million common shares in March; net offering proceeds were $214.0 million, including $27.6 million received after quarter-end.
Outlook, commentary and risks
- Management stated it expects to pursue acquisitions, development and expansions, and anticipates funding liquidity needs through operating cash flow, cash, credit facilities and debt or equity issuance. The filing provides no specific earnings or FFO guidance.
- Four RV communities acquired during the quarter had approximately 1,918 sites in total. An additional 127-site RV resort was acquired in April for approximately $4.4 million.
- Management reported compliance with debt covenants. The $350 million secured revolving facility had approximately $333 million available at March 31, after borrowings and letters of credit; its maturity is May 2017, with a conditional one-year extension option. Debt had a 7.3-year weighted-average maturity and 5.1% weighted-average interest rate.
- Interest-rate exposure is a key market risk. Remaining variable-rate debt was $252.2 million; management estimated a 1 percentage-point rate change would alter interest expense by approximately $1.0 million, based on average variable-rate balances. The filing also identifies capital-market access, refinancing, acquisition integration, occupancy and rent levels, operating-cost inflation, homebuyer financing and REIT qualification as risks.
- Transient RV revenue is seasonal; management expected approximately $28.9 million for 2014, with quarterly recognition weighted toward Q3. This is an expectation, not a guarantee.
- Operating cash flow and NOI are supplemental indicators and do not replace GAAP earnings or cash-flow measures. FFO excludes significant expenses, including depreciation, and is not a measure of cash available for distributions or debt repayment.
Important facts for investors to verify
- Reconcile the common-share offering proceeds and post-quarter greenshoe exercise with the debt repayment and reported quarter-end facility balance.
- Assess whether same-site occupancy, rents and NOI growth persist, particularly given rising property expenses and seasonal RV revenue.
- Review acquisition performance and integration, including final purchase-price allocations for the four 2014 acquisitions, which were preliminary.
- Monitor variable-rate exposure, facility availability, debt maturities and covenant headroom; the company depends on continued access to financing for acquisitions and long-term liquidity.
- Evaluate rental-home growth against its higher repair, refurbishment, tax and insurance costs, and the decline in pre-owned home sales volume.
- Consider contingent exposure under the historical TJ Holdings settlement: a potential increased ownership interest in Sun/Forest properties could arise if all SunChamp properties are sold or refinanced. Management said such an event was not probable and was not expected to have a material adverse impact.