Business context and reporting period
Sun Communities, Inc. is a self-managed REIT that owns and operates manufactured housing (MH) and recreational vehicle (RV) communities and sells and rents manufactured homes. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the same 2018 quarter. At quarter-end, the company owned or held an interest in 379 properties across 31 U.S. states and one Canadian province.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / prior period |
|---|---|---|
| Total revenue | $287.3 million | $258.0 million; up 11.4% |
| Net income | $37.1 million | $33.6 million |
| Net income attributable to common stockholders | $34.3 million; $0.40 diluted EPS | $30.0 million; $0.38 diluted EPS |
| Same-community real property NOI | $141.3 million; up 7.2% | $131.7 million |
| Core FFO per diluted share | $1.18 | $1.14 |
| Cash provided by operating activities | $103.1 million | $80.9 million |
| Cash, cash equivalents and restricted cash | $34.2 million at March 31 | $62.3 million at December 31, 2018 |
| Total debt as presented in debt note | $3.45 billion; weighted average rate 4.4%, maturity 9.3 years | $3.12 billion at December 31, 2018 |
Real property revenue increased 9.9% across the total portfolio. Same-community occupancy was 98.2% for MH and annual RV sites, versus 96.1% a year earlier; same-community monthly base rent per site rose to $541 from $519. These occupancy measures exclude transient RV sites.
Investing activities used $392.5 million, mainly reflecting $279.3 million of cash for property acquisitions and $114.8 million invested in properties. Financing activities provided $261.1 million. Mortgage loans payable were $2.88 billion and lines of credit were $396.5 million at quarter-end. The revolving facility was $550 million, with $393 million drawn; the filing reports covenant compliance and a 33.0% leverage ratio against a maximum of 65%.
Material changes versus the prior comparable period
- Revenue increased 11.4%; same-community real property NOI rose 7.2%, with management citing higher occupancy and rents, partly offset by higher property expenses.
- Net income attributable to common stockholders increased to $34.3 million from $30.0 million, while diluted EPS rose to $0.40 from $0.38.
- Operating cash flow increased by $22.2 million. Investing cash outflow rose substantially, principally because of acquisitions: six communities with 3,568 sites were acquired during the quarter for total consideration of $325.6 million, including $51.9 million in Series D preferred OP units.
- Interest expense rose 10.6% to $35.1 million, attributed primarily to higher mortgage debt and a higher average line-of-credit balance. Depreciation and amortization rose 15.2%, mainly due to acquisitions and development.
- Home-sales revenue grew 13.5%, although total homes sold declined 4.7%; reported gross profit increased 24.2%. Rental Program NOI increased 8.1%.
Outlook, commentary, risks and unusual items
The filing provides no specific annual earnings or FFO guidance. Management expects to continue pursuing acquisitions, development and expansion, funded through operating cash flow, available cash, debt and equity financing. Management states it expects to meet long-term liquidity needs through these sources and property collateralization, but access and cost depend on capital markets and operating conditions.
- Management identified risks including economic and real estate market conditions, occupancy and rental rates, operating-cost inflation, acquisitions and development execution, refinancing and covenant compliance, capital availability, manufactured-home financing and repossessions, natural disasters, foreign exchange, and REIT qualification.
- The company reported a $2.0 million foreign-currency translation gain within other income, compared with a $2.5 million loss in the prior-year quarter. A $0.9 million increase in dividend income from marketable securities and $0.4 million of Hurricane Irma business-interruption insurance proceeds also contributed to higher brokerage and other revenues.
- Weather-related charges were $0.8 million in Q1 2019, compared with a $2.2 million favorable net adjustment in Q1 2018 related to Hurricane Irma recovery estimates. The company also recorded a $0.7 million loss on debt extinguishment after refinancing and repaying a term loan.
- Variable-rate debt was $396.5 million at March 31, 2019. The filing warns that LIBOR’s planned phaseout could raise borrowing costs; a 1 percentage-point change in Prime or LIBOR was estimated to change quarterly interest expense by about $0.7 million at the reported average variable-debt balance.
- Ordinary-course legal proceedings were not expected to materially affect results or financial condition. The filing reported no material changes to previously disclosed risk factors other than the added LIBOR discussion. A subsequent acquisition of an RV community in New Hampshire for $2.7 million was disclosed.
Important facts for investors to verify
- Assess whether same-community occupancy, rent growth and NOI gains persist, and distinguish annual-site occupancy from seasonal transient RV performance.
- Review acquisition returns and integration, development spending, and the preliminary purchase-price allocations for the 2019 acquisitions.
- Track leverage, revolving-credit availability, refinancing needs, interest-rate exposure and LIBOR replacement provisions; confirm continued covenant compliance.
- Evaluate how recurring cash generation supports distributions and capital spending, given the quarter’s substantial investing outflow and lower ending cash balance.
- Separate core operating performance from FX movements, securities income, insurance recoveries and other nonrecurring items; FFO and Core FFO are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.