SUN COMMUNITIES INC annual report, FY2016

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Sun Communities, Inc. — 2016 Form 10-K

Business context and reporting period

Reports the fiscal year ended December 31, 2016; this is an annual filing, not a standalone fourth-quarter report. Sun Communities is a self-managed REIT that owns and operates manufactured-housing (MH) and recreational-vehicle (RV) communities, and sells and rents homes through its taxable subsidiary. At year-end it owned, operated, or held interests in 341 properties across 29 U.S. states and Ontario, with 117,376 developed sites and approximately 10,616 additional sites suitable for development.

Financial and operating performance

  • Revenue: $833.8 million, up 23.6% from $674.7 million in 2015.
  • GAAP earnings: Net income attributable to common stockholders was $17.4 million, or $0.26 diluted EPS, versus $137.3 million, or $2.52, in 2015. The prior-year result included $125.4 million in gains on property dispositions; 2016 recorded no property-disposition gain.
  • Operating measures: Total real-property NOI was $403.3 million, up 20.2%; same-community NOI rose 7.1% to $332.9 million. Same-community occupancy increased to 96.6% from 94.7%, and same-community monthly base rent per site rose 3.2% to $489.
  • FFO: FFO excluding certain items was $266.1 million, or $3.79 per diluted share and OP unit, up 4.4% per share from $3.63. This is a non-GAAP measure, not cash flow or GAAP earnings.
  • Home sales and rentals: The company sold a record 3,172 homes, up 27.8%. Home-sales NOI/gross profit rose 44.7% to $30.1 million. New-home gross margin declined to 13.5% from 16.2%; pre-owned margin increased to 32.6% from 29.9%. The rental program had 10,733 occupied homes at year-end.
  • Cash flow and investment: Operating cash flow was $238.7 million, compared with $182.3 million in 2015. Investing used $1.615 billion, principally reflecting the Carefree acquisition; financing provided $1.339 billion. Cash and equivalents fell to $8.2 million from $45.1 million.
  • Debt and equity: Reported total debt and lines of credit were $3.110 billion, versus $2.336 billion. Debt had a weighted-average interest rate of 4.5% and maturity of 8.5 years. Total assets were $5.871 billion and stockholders’ equity was $2.362 billion.
  • Distributions: Common distributions were $2.60 per share for 2016, unchanged from 2015. The fourth-quarter common distribution was $0.65 per share.

Material changes and significant transactions

  • In June 2016, the company acquired Carefree Communities for approximately $1.684 billion, adding 103 communities and more than 27,000 sites, primarily in coastal markets, Florida, California, and Ontario. Carefree contributed $97.8 million of revenue and $9.1 million of net income after acquisition during 2016.
  • The company also acquired eight other communities for approximately $89.7 million. Portfolio size increased from 231 properties at year-end 2015 to 341 at year-end 2016. Florida became the largest market, representing 36.5% of sites.
  • Two public common-stock offerings generated approximately $670 million net; the company also issued $225 million of common stock to the Carefree seller. New debt and equity helped fund the acquisition. Interest expense increased 10.3% to $122.3 million, while transaction costs rose to $31.9 million from $17.8 million.
  • Fourth-quarter 2016 revenue was $218.6 million. Common stockholders had a quarterly loss of $1.6 million, or $0.02 per diluted share, compared with income of $89.4 million, or $1.56, in fourth-quarter 2015; the prior quarter included substantial disposition gains.

Liquidity, outlook, risks, and unusual items

  • The $450 million senior credit facility had $100.3 million outstanding at year-end, including $42.3 million on the revolving loan and a $58.0 million term loan. The company reported compliance with its financial covenants. Cash was limited, and funding needs include acquisitions, development, capital expenditures, distributions, and debt repayment.
  • Management expected to construct more than 2,200 additional sites in 2017 and planned to continue evaluating acquisitions and development opportunities. The filing does not provide a clear numerical 2017 revenue or earnings forecast.
  • Key risks include geographic concentration, especially in Florida and Michigan; occupancy and rent pressures; acquisition integration and financing; debt refinancing and interest-rate exposure; natural disasters; Canadian-dollar movements; manufactured-home buyer financing and repossessions; regulatory or rent-control changes; and maintaining REIT qualification. A 1% change in Prime or LIBOR was estimated to affect annual interest expense by approximately $3.0 million at year-end debt levels.
  • 2016 unusual items included $5.0 million of foreign-exchange losses, $1.2 million of hurricane-related costs, and a $0.5 million bargain-purchase gain. The acquired Sunset Beach property carried contingent consideration of $10.0 million at year-end; the payment is formula-driven and uncapped, and may change materially.
  • Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls. Ordinary-course legal proceedings were not expected to have a material adverse effect.

Most important facts for investors to verify

  • Carefree’s post-acquisition operating contribution, integration progress, and purchase-price allocation, which was preliminary.
  • Whether same-community rent, occupancy, and NOI growth can continue, and the performance of newly acquired properties and planned site expansions.
  • Debt maturities, refinancing access, covenant headroom, variable-rate exposure, and liquidity after acquisition-related funding.
  • The reconciliation of GAAP earnings to FFO excluding certain items, including which acquisition and other costs management excludes.
  • The eventual Sunset Beach contingent payment and the impact of Canadian currency movements and hurricane-related risks.
  • Related-party matters, including the executive-office lease from an entity partly owned by the CEO and directors, and approximately $8.0 million in 2016 legal fees to a firm whose shareholder and chairman is a director.