Sun Communities, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. Sun is a REIT owning, operating and developing manufactured-housing and RV communities. At quarter-end it operated 183 properties in 24 states, with 67,431 developed sites.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior year-end |
|---|---|---|
| Total revenue | $103.4 million | $83.1 million |
| Net income | $8.3 million | $6.4 million |
| Net income attributable to common stockholders | $5.7 million; $0.19 per diluted share | $5.4 million; $0.21 per diluted share |
| Operating cash flow | $27.6 million | $21.1 million |
| Cash and cash equivalents | $61.0 million | $29.5 million at Dec. 31, 2012 |
| Total debt | $1,356.6 million | $1,423.7 million at Dec. 31, 2012 |
| Total assets | $1,913.8 million | $1,754.1 million at Dec. 31, 2012 |
Real Property NOI rose 23.0% to $53.4 million; same-site NOI increased 5.6% to $45.4 million. Same-site occupancy was 88.0%, up from 86.1%, and average manufactured-home site rent increased to $437 per month from $425. Rental Program NOI grew 22.7% to $14.1 million. Home-sales gross profit increased 65.2% to $3.0 million; the pre-owned-home gross margin was 24.4%, versus 20.2%.
Net cash used in investing activities was $142.3 million, primarily reflecting acquisitions, property investment and a note-receivable item associated with acquired properties. Financing activities provided $146.2 million, including proceeds from equity issuance. The common dividend was $0.63 per share, unchanged from Q1 2012.
Material changes and drivers
- Revenue increased 24.4%, with $15.1 million of Q1 revenue and $6.0 million of net income reported from the acquisitions described in the filing. Management attributed $7.6 million of total-portfolio NOI growth to acquired properties and $2.4 million to same-site properties.
- In February, Sun acquired ten RV communities comprising approximately 3,700 sites; the filing describes a purchase price of approximately $112.8 million, subject to adjustments. It recorded a $10.0 million contingent asset tied to the seller’s covenant regarding the properties’ 2012 revenue.
- In March, Sun issued 5.75 million common shares at $45.25 per share, receiving $249.5 million net. Proceeds were partly used to repay debt, with remaining proceeds intended for acquisitions and general corporate purposes.
- Common-stockholder net income rose, but diluted EPS declined to $0.19 from $0.21. The 2013 results included $1.5 million of Series A preferred distributions and a larger weighted-average common share count.
- Debt decreased by $67.1 million from year-end. The weighted-average debt interest rate was 5.3% and weighted-average maturity was 6.9 years at March 31.
Liquidity, outlook and risks
Sun reported $146.0 million available under its existing $150 million secured revolving facility after $4.0 million of letters of credit; it had no balance outstanding on that facility at quarter-end. The company had commitments for a proposed $300 million revolving facility, potentially expandable to $600 million, but closing depended on definitive documentation and other conditions, and was not assured. Management expected to fund liquidity needs through operating cash flows, cash, credit facilities, and debt or equity issuance, and intended to continue evaluating acquisitions and development opportunities. The filing provides no quantified earnings or FFO guidance.
Key risks include financing and refinancing access, interest-rate and capital-market volatility, acquisition execution and integration, occupancy and rent levels, operating-cost inflation, home-buyer financing availability, and maintaining REIT status and debt-covenant compliance. Sun said it was compliant with debt covenants at March 31. A 1 percentage-point change in rates was estimated to change interest expense by approximately $0.7 million based on the stated variable-debt exposure and average balances.
Sun disclosed litigation concerning competing claims to the Morgan RV Properties. The company said it believed the claims were without merit and intended to defend itself; a hearing on its motion for partial summary disposition was scheduled for June 5, 2013. The sellers and certain affiliates agreed to indemnify Sun for specified claims, subject to stated exclusions and the indemnity’s terms. Other ordinary-course legal proceedings were not expected to have a material adverse impact.
Important facts for investors to verify
- Whether the $10.0 million acquisition-related contingent asset is collected and whether final purchase-price allocations change.
- Resolution and potential financial or operational consequences of the Morgan RV Properties litigation and the scope and collectability of seller indemnification.
- Completion and final terms of the proposed revolving credit facility, as well as scheduled debt maturities and refinancing availability.
- Whether same-site occupancy, rent growth and NOI trends continue, and how acquisition-driven growth compares with organic performance.
- The effect of common and preferred equity issuance, preferred distributions and dilution on per-share results and future distributions.
NOI and FFO are supplemental, non-GAAP measures; the company cautions that they are not substitutes for GAAP net income or operating cash flow and may not be comparable with similarly titled measures at other companies.