SUN COMMUNITIES INC quarterly report, Q1 FY2018

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Business context and reporting period

Sun Communities, Inc. is a REIT operating manufactured housing (MH) and recreational vehicle (RV) communities, with manufactured-home sales and rentals. This unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the same period in 2017. At quarter-end, the company owned or had an interest in 350 properties across 29 U.S. states and one Canadian province.

Financial results and key metrics

Unless otherwise noted, dollar amounts are in millions.

  • Revenue: $257.9, up 10.0% from $234.4. Real-property income was $197.2, up 7.7%; home-sale revenue was $34.9, up 28.0%; rental-home revenue was $13.0, up 5.5%.
  • Profit and earnings: Net income was $33.6 versus $25.5. Net income attributable to common stockholders was $30.0 versus $21.1; diluted EPS was $0.38 versus $0.29. Common-stockholder net margin was approximately 11.6% versus 9.0%.
  • Operating performance: Real Property NOI was $131.7, up 7.3%; same-community NOI was $130.0, up 5.3%. Management-reported FFO per diluted share was $1.14 versus $1.07; Core FFO per diluted share was $1.14 versus $1.10. These are non-GAAP measures.
  • Margins: Real Property NOI was approximately 66.8% of real-property income, compared with 67.0% in 2017. Home-sales gross profit was $8.3, up 30.6%, with an overall home-sales gross margin of approximately 23.9% versus 23.4%.
  • Cash flow: Operating activities provided $80.9, up from $69.2. Investing activities used $68.5 versus $71.7; financing activities used $8.5 versus providing $3.9. Cash, cash equivalents and restricted cash totaled $27.4 at quarter-end, including $15.2 of cash and cash equivalents.
  • Debt and liquidity: Total debt as presented in the debt note was $3.129 billion, including $2.826 billion of mortgage loans, $141.8 million of lines of credit, and $124.1 million of secured borrowings on collateralized receivables. Weighted-average debt maturity was 8.5 years and weighted-average interest rate was 4.5%. Net debt to enterprise value was approximately 28.8%. The $650 million credit facility had $140 million drawn; the company reported compliance with its debt covenants.
  • Other balance-sheet items: Total assets were $6.150 billion and total liabilities were $3.471 billion at March 31, 2018. Distributions declared for common shares, OP units and restricted stock were $0.71 per share/unit.

Material changes versus the prior period

  • Same-community occupancy increased to 97.6% from 95.4%; blended monthly base rent per site rose to $521 from $502. Same-community NOI growth reflected higher occupancy and rent, partly offset by property operating expenses rising 6.6%.
  • Across the total portfolio, blended MH and annual-RV occupancy was 95.8% versus 95.9%. Monthly base rent per site rose to $522 from $503. Total-portfolio Real Property NOI growth included $2.5 million from newly acquired properties and $6.5 million from same communities.
  • Home-sales gross profit increased to $8.3 million from $6.4 million. Total homes sold rose 1.3% to 837; new-home sales increased, while pre-owned volume declined slightly.
  • General and administrative expense rose 11.1% to $19.9 million, partly due to legal, tax and insurance costs and technology and efficiency initiatives. Depreciation and amortization rose 5.8% to $66.4 million, reflecting prior acquisitions and development.
  • There were no community acquisitions in the quarter. Property investment expenditures were $68.5 million, including development, expansion and other property investment.
  • Operating cash flow increased by $11.7 million. Total debt increased from $3.079 billion at December 31, 2017, while mortgage loans payable declined by approximately $41.1 million and line-of-credit borrowings increased by approximately $100.5 million.

Outlook, management commentary, risks and unusual items

  • Management intends to pursue acquisitions, development and expansion subject to market conditions, using operating cash flow, available cash, debt and equity financing. No formal earnings or full-year financial guidance is provided in the filing.
  • Management expected transient RV revenue to be approximately $85.5 million for 2018, with 25.8% recognized in the first quarter and the largest share expected in the third quarter. This is seasonal and is a management estimate, not a guarantee.
  • Hurricane Irma-related estimated losses stood at $35.5 million at March 31, 2018, while estimated insurance receivables were $24.7 million after $5.0 million of insurer advances. The quarter included a $2.2 million net favorable adjustment to weather-related charges. Three impaired Florida Keys communities require redevelopment and lease-up; management could not estimate when operating results would return to pre-hurricane levels. Recovery estimates may change.
  • Other expense included a $2.5 million foreign-currency translation loss, compared with a $0.8 million gain in the prior-year quarter. The company also reported a $0.2 million loss on extinguishment of debt.
  • The company adopted ASC 606 with no change to its revenue-recognition policies. New acquisition-accounting guidance means management expects substantially all future property acquisitions to be accounted for as asset acquisitions, with eligible direct costs capitalized.
  • Key risks cited include occupancy and rent pressure, rising operating costs and interest rates, access to capital and refinancing, currency movements, natural disasters, manufactured-home buyer financing and maintaining REIT qualification. The company reported no material change to the risk factors in its 2017 Form 10-K. Ordinary-course legal proceedings were not expected to have a material adverse effect.
  • After quarter-end, the company sold 220,000 common shares through its at-the-market program for net proceeds of $19.8 million.

Important facts for investors to verify

  1. Confirm the sustainability of same-community NOI growth, rent increases and occupancy, and monitor the cost increases in utilities, insurance, taxes and repairs.
  2. Review Hurricane Irma loss and insurance-recovery estimates, including the status of Florida Keys redevelopment, lease-up and business-interruption claims.
  3. Track debt maturities, variable-rate exposure, credit-facility availability, covenant headroom and the effect of future borrowing or equity issuance on leverage and per-share results.
  4. Assess the quality and cash conversion of reported earnings, including the distinction between GAAP earnings, management’s non-GAAP FFO/Core FFO measures and cash flow.
  5. Monitor home-sales margins and receivables, including installment-note credit losses, repossessions and the company’s continuing repurchase obligations related to transferred collateralized receivables.