Sun Communities, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; interim financial statements are unaudited. Sun Communities is a REIT focused on manufactured housing and RV communities, with a home sales and rental business. At quarter-end, it operated 164 properties across 18 states, with 57,191 developed sites.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $83.1m | $74.7m | $248.6m | $212.7m |
| Net income (loss) | $(0.3)m | $(0.0)m | $8.6m | $1.6m |
| Net income (loss) attributable to common stockholders | $(0.7)m | $(0.4)m | $6.4m | $1.1m |
| Diluted EPS | $(0.02) | $(0.02) | $0.24 | $0.05 |
| Funds from operations (FFO), diluted | $20.7m | $18.5m | $69.1m | $53.6m |
| FFO per diluted share | $0.68 | $0.74 | $2.34 | $2.27 |
Q3 total revenue rose 11.2%; nine-month revenue rose 16.9%. Nine-month operating cash flow was $57.9m, up from $44.5m. Investing activities used $151.3m, mainly for property investment and acquisitions; financing activities provided $126.3m. Cash ended the period at $38.7m, versus $5.9m at year-end 2011.
Real Property NOI increased 7.0% to $40.0m in Q3 and 13.9% to $122.8m for nine months. Same-site NOI grew 4.4% and 5.9%, respectively. Same-site occupancy was 86.8%, up from 85.7% a year earlier; average manufactured-home site rent increased 3.0%. Rental Program NOI rose 20.5% in Q3 and 23.7% for nine months. Home sales gross profit increased 51.9% in Q3 and 33.0% year to date.
Balance sheet, debt and liquidity
At September 30, total assets were $1.50bn and total liabilities were $1.35bn; total equity was $152.8m, compared with a $100.7m deficit at December 31, 2011. Debt was $1.269bn, with an additional $3.0m outstanding on lines of credit. Debt had a 5.3% weighted-average interest rate and 7.0-year weighted-average maturity. Debt to total market capitalization was approximately 47.5%.
The revolving facility had no borrowings outstanding and $126.0m of borrowing-base availability, with $4.0m reserved for letters of credit. The company reported compliance with debt covenants at September 30. Nine-month recurring capital expenditures were $6.3m. The quarterly dividend was $0.63 per share, unchanged from 2011.
Material changes and notable items
- Acquisitions in 2012 included three Florida RV resorts, a San Antonio RV community and a Michigan manufactured housing community. Acquired properties contributed $25.6m of revenue and $2.6m of net income for the first nine months.
- Two common-stock offerings and at-the-market sales generated substantial equity proceeds. The January and September offerings raised net proceeds of $156.0m and $132.0m; proceeds were used principally to repay debt and fund acquisitions. The share count increased materially.
- Debt was broadly stable year over year, but revolving-line balances fell sharply from $129.0m at December 31, 2011 to $3.0m at September 30, 2012. Management attributed the improvement in cash and liquidity in part to equity issuance and operating cash flow.
- After quarter-end, lenders waived a debt-service-coverage covenant for certain Florida properties through December 31, 2012, modified the covenant for the following quarter, and the company paid down $6.0m of the facility. The Operating Partnership agreed to provide a full repayment guaranty until compliance is achieved for three consecutive quarters. The filing states this facility’s earlier covenant noncompliance did not constitute an event of default.
- Post-quarter transactions included an October acquisition of Rainbow RV Resort for $8.5m and agreements for Michigan and Arizona property acquisitions, subject to stated conditions. The Michigan transactions also included a proposed mezzanine loan with an estimated 24% annual interest rate.
Outlook, risks and contingencies
No specific earnings or FFO guidance was provided. Management said it expected short-term liquidity needs to be met by operating cash flow and available borrowing capacity, and anticipated funding longer-term needs through debt or equity issuance and property collateralization. It continued to evaluate acquisitions.
Management highlighted economic and financial-market uncertainty, financing availability and cost, interest-rate changes, occupancy and rent levels, property operating costs, and manufactured-home sales and buyer financing as risks. A 1% change in Prime or LIBOR was estimated to change interest expense by approximately $1.9m based on the stated average variable-rate debt balance. The company used interest-rate swaps and caps for risk management, not speculation. Ordinary-course legal proceedings were not expected to have a material adverse effect. The filing reported no material changes to the risk factors in the 2011 annual report.
Key facts for investors to verify
- Whether the Florida properties meet the amended debt-service-coverage covenant and the effect of the expanded guaranty and principal paydown.
- Acquisition closing status, funding and integration for the announced Michigan and Arizona transactions, as well as the acquired properties’ contribution to results.
- How much of revenue and NOI growth reflects same-site performance versus acquisitions and expansion of the home rental program.
- Cash available after distributions, recurring capital spending, rental-home investment and planned acquisitions; FFO is a supplemental measure, not operating cash flow.
- Potential dilution and per-share effects from equity issuance and convertible operating partnership units.