Sun Communities, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Sun Communities is a REIT operating manufactured-home and recreational-vehicle communities, with home sales and rentals as a second business segment. At quarter-end it owned 337 properties in 29 U.S. states and one Canadian province, up from 251 properties a year earlier, primarily following the Carefree acquisition.
Financial and operating performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $190.8 million | $165.9 million | $365.4 million | $321.1 million |
| Net income (loss) | $(5.0) million | $18.5 million | $6.7 million | $30.7 million |
| Net income (loss) attributable to common stockholders | $(7.8) million | $12.3 million | $0.1 million | $19.2 million |
| GAAP diluted EPS | $(0.12) | $0.23 | $0.00 | $0.36 |
| Operating cash flow | Not separately stated | Not separately stated | $129.0 million | $92.4 million |
- Q2 revenue rose 15.0%; six-month revenue rose 13.8%. Q2 income from real property increased 11.3% to $140.0 million.
- Same-community real-property NOI increased 6.9% in Q2 and 6.6% for the first half. Q2 same-community occupancy rose 2.5 percentage points to 96.4%; weighted average site rents increased 3.2% year over year.
- Q2 home-sales revenue increased 39.0% and gross profit rose 46.2%, mainly reflecting greater pre-owned home sales volume and higher selling prices. First-half home-sales gross profit rose 49.4%; new-home gross margin declined to 13.2% from 17.4%.
- Q2 results included $21.0 million of transaction costs, compared with $2.0 million a year earlier. Depreciation and amortization rose 19.9% and interest expense rose 6.1%. These costs contributed to the GAAP quarterly loss despite stronger property operations.
- Management-reported FFO excluding certain items, a non-GAAP measure, was $0.85 per diluted share in Q2 versus $0.87; first-half FFO excluding certain items was $1.75 versus $1.76. Reported FFO per diluted share was $0.54 and $0.91 for Q2 2016 and 2015, respectively.
Balance sheet, debt and liquidity
- At June 30, 2016, total assets were $5.82 billion, cash and cash equivalents $31.4 million, and total stockholders’ equity $2.11 billion.
- Debt disclosure totaled $2.98 billion, including $2.79 billion of mortgage loans, $357.7 million drawn on lines of credit, and $144.7 million of secured borrowings on collateralized receivables; the debt table also includes mandatorily redeemable preferred OP units. The debt portfolio’s weighted average interest rate was 4.7% and weighted average maturity was 8.8 years.
- The $450 million revolving credit facility had $358 million outstanding, including its $58 million term loan; $4.2 million of capacity supported letters of credit. The company reported compliance with covenants. Net debt to enterprise value was approximately 36.6%.
- First-half investing cash outflow was $1.47 billion, principally reflecting $1.46 billion of property acquisitions. Financing cash inflow was $1.33 billion, including debt and equity proceeds. Cash declined $13.6 million from year-end 2015.
Material changes, outlook and risks
- On June 9, 2016, the company acquired Carefree Communities for $1.68 billion, adding 103 manufactured-home and RV communities with more than 27,000 sites. Carefree contributed $9.1 million of reported revenue and $4.8 million of net income after closing. The purchase-price allocation remained preliminary.
- The acquisition was financed with cash, a $225 million stock issuance to the seller, a March public equity offering that generated $385.4 million net, and new property financings, including $338 million of Fannie Mae loans and $405 million of Northwestern Mutual loans.
- Management intends to pursue acquisitions and development opportunities and expects recurring capital expenditures not to decline in 2016. It described liquidity sources as operating cash flow, cash balances, credit facilities, and debt or equity offerings. No specific full-year earnings guidance is provided in the filing.
- Management estimated 2016 transient RV revenue at approximately $60.2 million, versus $39.7 million in 2015, and noted significant seasonal concentration in the third quarter.
- Risks include integrating Carefree and achieving expected benefits—the company cautioned that accretion is not assured—along with acquisition financing and capital-market availability, interest rates, operating-cost increases, occupancy and rental-rate changes, manufactured-home financing and sales, and REIT qualification. Ordinary-course legal proceedings were not expected to materially affect results or financial condition.
Important facts for investors to verify
- Final Carefree purchase-price allocation, integration costs, operating performance and contribution to earnings; reported results include only the post-acquisition period.
- Whether same-community occupancy, rent growth and NOI gains persist, and how property-tax and other expense increases affect margins.
- Debt and liquidity after the acquisition, including revolver availability, refinancing needs, covenant headroom and exposure to floating rates. A 1% rate movement was estimated to change interest expense by about $1.2 million based on the stated average variable-rate debt balance.
- The sustainability and comparability of FFO excluding certain items, particularly given elevated acquisition transaction costs; reconcile this non-GAAP measure with GAAP results and cash flow.
- Home-sales volume and margins, rental-home occupancy, and the seasonal timing assumptions behind the transient RV revenue estimate.