Sun Communities, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Sun Communities is a REIT operating manufactured housing (MH) communities, recreational vehicle (RV) communities and marinas in the U.S., UK and Canada.
Business context and performance
At year-end, the company owned or held interests in 669 properties with 227,541 developed sites, including 353 MH communities, 182 RV communities and 134 marinas. It acquired Park Holidays in the UK in April 2022, among other purchases, materially expanding its portfolio.
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $2.970 billion | $2.273 billion |
| Net income attributable to common shareholders | $242.0 million | $380.2 million |
| Basic and diluted EPS | $2.00 | $3.36 |
| Core FFO per diluted share and OP unit | $7.35 | $6.51 |
| Constant-currency Core FFO per diluted share and OP unit | $7.44 | $6.51 |
| Total real-property NOI | $1.167 billion | $1.003 billion |
| Cash from operating activities | $734.9 million | $753.6 million |
Revenue rose 30.7%, while real-property NOI increased 16.4%. Same-property NOI grew 5.4% for MH and RV and 7.7% for marinas. Adjusted same-property MH/RV occupancy increased to 98.6% from 96.8%; total-portfolio MH/RV occupancy was 95.9%, down from 97.4%, reflecting portfolio mix and acquisitions. Average monthly base rent was $630 per MH site and $544 per annual RV site.
Cash flow, debt and liquidity
- Operating cash flow decreased $18.7 million year over year. Investing activities used $3.063 billion, largely reflecting acquisitions; financing activities provided $2.349 billion.
- Capital expenditures totaled $921.0 million, including $261.8 million for expansion and development and $73.8 million in recurring expenditures.
- Year-end debt was approximately $7.2 billion; about 77% was fixed-rate and 23% floating-rate, including hedges. Weighted-average interest rate was 3.75%, with 7.4 years’ weighted-average maturity. Interest expense increased 44.9% to $229.8 million.
- Unrestricted cash was $72.8 million and remaining capacity on the $4.2 billion revolving and term credit facility was $1.9 billion. The company reported compliance with debt covenants; its fixed-charge coverage ratio was 3.82 against a 1.40 minimum.
Changes, unusual items and outlook
- Common-shareholder net income fell despite higher revenue. Notable comparisons included a $53.4 million loss on marketable securities remeasurement versus a $33.5 million gain in 2021, and a $12.2 million property-disposition gain versus $108.1 million in 2021. Higher interest, depreciation and G&A also weighed on results.
- The Park Holidays acquisition contributed $353.6 million of 2022 revenue and $13.8 million of net income from its acquisition-date consolidation through year-end. The company reported $24.7 million of business-combination expense.
- Hurricane Ian damaged Florida properties. The company recorded $72.2 million of related debris, repair and impairment charges, partially offset by estimated insurance recoveries; the filing reported $17.5 million of total net catastrophic-event charges for 2022. It had received $3.5 million of Ian-related insurance recoveries by February 21, 2023; actual recoveries and costs could differ from estimates.
- Management expects to continue evaluating acquisitions, development and expansion, but says higher interest rates may make funding more expensive. The filing text does not provide a clear numerical 2023 earnings or FFO guidance value. The company’s stated climate goals include carbon neutrality by 2035 and net-zero emissions by 2045.
- Subsequent events include a $400 million unsecured note issuance in January 2023 at 5.7% stated interest (5.5% effective after hedging). Also, $217.6 million of notes receivable that matured in December 2022 had their maturity extended to May 31, 2023.
Risks and contingencies: Key exposures include interest-rate and refinancing risk, acquisition integration and financing, inflation and operating-cost increases, seasonal RV and marina demand, geographic concentration, severe weather and climate impacts, insurance limits, foreign-currency movements and REIT qualification. The company disclosed ordinary-course legal proceedings that it did not expect to materially affect results or financial condition. Management and the auditor reported effective internal controls; the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether Core FFO growth translates into durable same-property rent and NOI growth, given the gap between same-property and total-portfolio occupancy.
- Collection and repayment of the $217.6 million extended-maturity notes receivable, and the credit quality and collateral supporting developer/operator loans.
- Final Hurricane Ian repair costs, insurance recoveries and the timing of property recovery.
- Debt maturities, floating-rate exposure, refinancing costs and capacity to fund planned acquisitions and capital spending while maintaining covenant headroom.
- Park Holidays’ post-acquisition performance, integration, UK currency exposure and the accounting estimates underlying acquisition valuations and goodwill.