Business Context and Reporting Period
Sun Communities, Inc. is a self-administered and self-managed Real Estate Investment Trust (REIT) that owns, operates, and develops manufactured housing communities. As of September 30, 2010, the company operated 136 properties across 18 states, comprising 47,579 developed sites. This filing covers the quarterly period ended September 30, 2010, and the nine months ended on that date.
Key Financial Metrics
Revenue and Profitability (Nine Months Ended Sept 30, 2010):
- Total Revenues: $197.8 million (up from $191.9 million in the prior year).
- Net Loss: $3.0 million (compared to a net loss of $4.1 million in the prior year).
- Net Loss Attributable to Common Stockholders: $2.5 million ($0.13 per share).
- Funds From Operations (FFO): $45.6 million ($2.15 per share).
- Net Operating Income (NOI): Real Property NOI was $99.9 million; Rental Program NOI was $25.2 million.
Cash Flow and Liquidity:
- Cash and Cash Equivalents: $4.7 million as of September 30, 2010.
- Net Cash Provided by Operating Activities: $42.0 million.
- Net Cash Used for Investing Activities: $30.3 million (primarily property investments).
- Net Cash Used for Financing Activities: $11.5 million.
Debt and Capital Structure:
- Total Debt: $1.165 billion.
- Lines of Credit Outstanding: $91.9 million (with $32.2 million available).
- Stockholders' Deficit: $(131.0) million.
- Weighted Average Interest Rate on Debt: 5.3%.
Material Changes Versus Prior Period
Revenue Growth: Total revenues increased by 3.0% year-over-year. Real property income rose due to rental rate increases and higher occupancy (84.5% vs. 83.5%). Home sales revenue increased slightly, driven by a 38.4% increase in pre-owned home sales volume, though new home sales volume declined significantly.
Expense Management: Net loss improved primarily due to the absence of a $0.8 million Georgia flood damage charge recorded in the prior year. General and administrative costs decreased slightly. However, interest expense increased by 4.5% due to higher secured borrowing arrangements and facility fees.
Asset Base: Investment property, net, decreased to $1.037 billion from $1.064 billion due to depreciation. The company recorded a $1.6 million equity loss from affiliates, primarily related to Origen Financial, LLC.
Guidance, Outlook, and Risks
Management Commentary: Management highlights the effectiveness of the Rental Program in stabilizing occupancy and recycling capital. The company continues to focus on same-site revenue growth through rental rate increases. No specific forward-looking financial guidance was provided in this filing.
Liquidity and Capital Resources: The company expects to meet immediate needs through operating cash flows and its $115.0 million unsecured revolving line of credit. A significant portion of debt matures in 2011 ($103.7 million plus line of credit balance), requiring refinancing or extension.
Risks and Contingencies:
- Debt Maturity: Significant debt maturities in 2011 and 2014 create refinancing risk in a volatile credit market.
- Interest Rate Risk: The company has $240.1 million in variable rate debt. A 1% increase in rates would increase interest expense by approximately $1.8 million annually.
- Legal Proceedings: The company settled a lawsuit with TJ Holdings for $360,000. A dispute regarding variable facility fees with ARCS Commercial Mortgage Co. remains ongoing.
- Equity Investments: The investment in Origen Financial, LLC has been written down to zero, and equity accounting is suspended until losses are recovered.
Investor Verification Checklist
- Verify the status of the $115.0 million unsecured line of credit maturing October 1, 2011, and the company's refinancing plans.
- Monitor the occupancy rates and rental rate growth in the "Same Site" portfolio to confirm organic revenue trends.
- Review the progress of the ongoing litigation regarding variable facility fees with ARCS Commercial Mortgage Co.
- Assess the impact of the $1.6 million equity loss from affiliates and the potential for further write-downs.
- Confirm the company's ability to maintain REIT qualification given the stockholders' deficit and distribution requirements.