Sun Communities, Inc. - Q1 2009 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2009. Sun Communities, Inc. is a self-administered Real Estate Investment Trust (REIT) that owns, operates, and develops manufactured housing communities. As of the reporting date, the company owned 136 properties across 18 states, comprising 47,605 developed sites. The company operates through two primary segments: Real Property Operations and Home Sales and Rentals.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $65.3 million | $64.8 million |
| Net Income (Loss) Attributable to Sun Communities | $0.9 million | ($3.1 million) |
| Funds From Operations (FFO) | $16.3 million | $11.0 million |
| Net Cash Provided by Operating Activities | $15.7 million | $11.9 million |
| Total Debt | $1.14 billion | $1.14 billion |
| Cash and Cash Equivalents | $6.6 million | $5.0 million |
| Stockholders' Deficit | ($68.7 million) | ($59.9 million) |
| Occupancy Rate | 82.2% | 82.2% |
| Weighted Avg. Monthly Rent | $397 | $385 |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $0.9 million for Q1 2009, a significant improvement from a net loss of $3.1 million in Q1 2008. This shift was largely driven by the elimination of a $4.8 million equity loss from an affiliate (Origen Financial) recorded in the prior year.
- Revenue Growth: Total revenues increased slightly by 0.8%. Real property income rose 1.3% due to a 3.0% increase in weighted average rental rates. Home sales revenue remained flat, with a 46.4% decline in new home sales offset by a 21.1% increase in pre-owned home sales.
- Expense Management: Interest expense decreased by 6.8% ($1.1 million) due to lower rates on variable debt, partially offset by increased fixed-rate debt costs. Operating expenses for the rental program increased 30.9% due to higher repair, refurbishment, and commission costs associated with program expansion.
- Accounting Changes: The company adopted SFAS 160 (Noncontrolling Interests) and FSP EITF 03-6-1 (Participating Securities) in Q1 2009. These changes altered the presentation of noncontrolling interest and the calculation of earnings per share.
Outlook, Risks, and Contingencies
- Liquidity and Debt: The company maintains an unsecured revolving line of credit with $115.0 million capacity; $28.7 million was available as of March 31, 2009. Management notes that the sub-prime credit crisis has created uncertainty regarding the availability and cost of new secured credit and refinancing.
- Debt Maturities: Significant debt maturities are scheduled for 2011 ($103.7 million) and 2012 ($18.4 million), excluding normal amortization. The company plans to meet long-term liquidity needs through property collateralization or equity issuance.
- Legal Proceedings: The company is defending against a complaint filed by T.J. Holdings, LLC, alleging wrongful deprivation of economic opportunities with claimed damages of $13.0 million plus punitive damages. The case is currently in arbitration.
- Market Risks: Primary risks include interest rate fluctuations (mitigated by $95 million in interest rate swaps and a $152.4 million cap), economic conditions affecting occupancy and rental rates, and the ability of home buyers to obtain financing.
Investor Verification Checklist
- Verify the sustainability of the $4.8 million improvement in net income driven by the reversal of the Origen Financial affiliate loss.
- Review the company's ability to refinance the $103.7 million debt maturing in 2011 given current credit market volatility.
- Monitor the impact of the 30.9% increase in rental program operating expenses on future margins as the program expands.
- Assess the status of the $13.0 million legal claim by T.J. Holdings and potential liability exposure.
- Confirm the company's compliance with REIT distribution requirements and the adequacy of FFO to cover the $0.63 per share dividend.