SUN COMMUNITIES, INC. The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes, along with our 2019 Annual Report.
OVERVIEW
We are a fully integrated, self-administered and self-managed REIT. As ofSeptember 30, 2020 , we owned and operated or held an interest in a portfolio of 432 developed properties located in 32 states throughout theU.S. and one province inCanada , including 268 MH communities, 130 RV communities, and 34 properties containing both MH and RV sites. We have been in the business of acquiring, operating, developing and expanding MH and RV communities since 1975. We lease individual sites with utility access for placement of manufactured homes and RVs to our customers. We are also engaged through SHS in the marketing, selling and leasing of new and pre-owned homes to current and future residents in our communities. The operations of SHS support and enhance our occupancy levels, property performance, and cash flows.
COVID-19 IMPACT
As of
We continue to provide essential services using social distancing techniques and minimal contact. To promote social distancing, we are encouraging our residents to use our online rent payment portals and other payment methods. We have instituted numerous health and safety measures at our communities and our Main Office to keep team members safe. These measures include infrared thermometers at entrances to monitor team members' temperatures, increased cleaning and sanitation of shared spaces and social distancing protocols throughout our footprint. We closely monitor and track orders by federal, state and local authorities and hold regular status calls with our operations and Main Office leadership teams. We have implemented and continue to encourage remote working arrangements, wherever possible, to keep our team members safe and to do our part to promote social distancing. We are experiencing more traffic at our communities as would be expected with the lifting of shelter-in-place mandates and other travel restrictions and are receiving more applications to live in our communities than in the prior year. Demand for short term RV sites has increased as travelers seek drive-to vacation destinations where they have more control over their personal accommodations and are able to enjoy outdoor, socially distanced activities. We provided a temporary hardship program to those residents who have been economically disadvantaged as a result of COVID-19 for the months of April and May. This hardship program deferred the payment of April and May rent over 12 months, commencing onJuly 1, 2020 . When the program ended in June, we had provided deferred relief of$4.4 million to approximately 4 percent of residents in our communities, including owner occupied sites and rental home sites. As ofSeptember 30, 2020 , over 40 percent of the hardship program funds had been repaid. We halted increases to our monthly rental rates for a period of time but have now resumed our rent increase process.
All of our RV resorts are currently open; however indoor and outdoor activities are limited to what government regulations permit, and to encourage social distancing.
We remain committed to assisting individuals who are in the process of leasing a site or purchasing a home, while maintaining health and safety protocols including following strict social distancing. Virtual viewings of homes are being utilized to avoid or minimize contact.
SIGNIFICANT ACCOUNTING POLICIES
We have identified significant accounting policies that, as a result of the
judgments, uncertainties and complexities of the underlying accounting standards
and operations involved could result in material changes to our financial
condition or results of operations under different conditions or using different
assumptions. Details regarding significant accounting policies are described
fully in our 2019 Annual Report.
34
--------------------------------------------------------------------------------
SUN COMMUNITIES, INC. NON-GAAP FINANCIAL MEASURES
In addition to the results reported in accordance with GAAP in our "Results of
Operations" below, we have provided information regarding net operating income
("NOI") and funds from operations ("FFO") as supplemental performance measures.
We believe NOI and FFO are appropriate measures given their wide use by and
relevance to investors and analysts following the real estate industry. NOI
provides a measure of rental operations and does not factor in depreciation,
amortization and non-property specific expenses such as general and
administrative expenses. FFO, reflecting the assumption that real estate values
rise or fall with market conditions, principally adjusts for the effects of GAAP
depreciation / amortization of real estate assets. In addition, NOI and FFO are
commonly used in various ratios, pricing multiples / yields and returns and
valuation calculations used to measure financial position, performance and
value.
NOI is derived from revenues minus property operating expenses and real estate
taxes. NOI is a non-GAAP financial measure that we believe is helpful to
investors as a supplemental measure of operating performance because it is an
indicator of the return on property investment and provides a method of
comparing property performance over time. We use NOI as a key measure when
evaluating performance and growth of particular properties and / or groups of
properties. The principal limitation of NOI is that it excludes depreciation,
amortization, interest expense and non-property specific expenses such as
general and administrative expenses, all of which are significant costs.
Therefore, NOI is a measure of the operating performance of our properties
rather than of the Company overall.
We believe that GAAP net income (loss) is the most directly comparable measure
to NOI. NOI should not be considered to be an alternative to GAAP net income
(loss) as an indication of our financial performance or GAAP cash flow from
operating activities as a measure of our liquidity; nor is it indicative of
funds available for our cash needs, including our ability to make cash
distributions. Because of the inclusion of items such as interest, depreciation
and amortization, the use of GAAP net income (loss) as a performance measure is
limited as these items may not accurately reflect the actual change in market
value of a property, in the case of depreciation and in the case of interest,
may not necessarily be linked to the operating performance of a real estate
asset, as it is often incurred at a parent company level and not at a property
level.
FFO is defined by the National Association of Real Estate Investment Trusts
("NAREIT") as GAAP net income (loss), excluding gains (or losses) from sales of
depreciable operating property, plus real estate related depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. FFO is a non-GAAP financial measure that management believes is a
useful supplemental measure of our operating performance. By excluding gains and
losses related to sales of previously depreciated operating real estate assets,
impairment and excluding real estate asset depreciation and amortization (which
can vary among owners of identical assets in similar condition based on
historical cost accounting and useful life estimates), FFO provides a
performance measure that, when compared period-over-period, reflects the impact
to operations from trends in occupancy rates, rental rates, and operating costs,
providing perspective not readily apparent from GAAP net income (loss).
Management believes the use of FFO has been beneficial in improving the
understanding of operating results of REITs among the investing public and
making comparisons of REIT operating results more meaningful. We also use FFO
excluding certain gain and loss items that management considers unrelated to the
operational and financial performance of our core business ("Core FFO"). We
believe that Core FFO provides enhanced comparability for investor evaluations
of period-over-period results.
We believe that GAAP net income (loss) is the most directly comparable measure
to FFO. The principal limitation of FFO is that it does not replace GAAP net
income (loss) as a performance measure or GAAP cash flow from operations as a
liquidity measure. Because FFO excludes significant economic components of GAAP
net income (loss) including depreciation and amortization, FFO should be used as
a supplement to GAAP net income (loss) and not as an alternative to it. Further,
FFO is not intended as a measure of a REIT's ability to meet debt principal
repayments and other cash requirements, nor as a measure of working capital. FFO
is calculated in accordance with our interpretation of standards established by
NAREIT, which may not be comparable to FFO reported by other REITs that
interpret the NAREIT definition differently.
35
--------------------------------------------------------------------------------
SUN COMMUNITIES, INC. RESULTS OF OPERATIONS
We report operating results under two segments: Real Property Operations and Home Sales and Rentals. The Real Property Operations segment owns, operates, develops, or has an interest in, a portfolio of MH and RV communities throughout theU.S. and inCanada , and is in the business of acquiring, operating, and expanding MH and RV communities.The Home Sales and Rentals segment offers MH and RV park model sales and leasing services to tenants and prospective tenants of our communities. We evaluate segment operating performance based on NOI and gross profit. Refer to Note 11, "Segment Reporting," in our accompanying Consolidated Financial Statements for additional information.
Summary Statements of Operations
The extent to which the COVID-19 pandemic impacts our operations, financial condition and financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. The uncertainty of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic. The following tables reconcile the Net income attributable toSun Communities, Inc. common stockholders to NOI and summarize our consolidated financial results for the three and nine months endedSeptember 30, 2020 and 2019 (in thousands): Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2020 2019 2020 2019 Net Income Attributable to Sun Communities, Inc. Common Stockholders$ 81,204 $ 57,002 $ 124,028 $ 131,718 Interest income (2,624) (4,770) (7,609) (14,489) Brokerage commissions and other revenues, net (5,881) (5,002) (13,068) (11,190) Home selling expenses 3,652 3,972 10,508 10,922 General and administrative expenses 27,243 22,946 79,493 68,530 Catastrophic weather-related charges, net 14 341 54 1,302 Depreciation and amortization 88,499 76,532 259,453 229,241 Loss on extinguishment of debt (see Note 8) - 12,755 5,209 13,478 Interest expense 30,214 32,219 94,058 99,894 Interest on mandatorily redeemable preferred OP units / equity 1,047 1,216 3,130 3,491 (Gain) / loss on remeasurement of marketable securities (see Note 14) (1,492) (12,661) 2,636 (16,548) (Gain) / loss on foreign currency translation (4,664) 3,046 2,441 (35) Gain on disposition of property (5,595) - (5,595) - Other expense, net 2,524 1,362 3,378 1,524 Loss on remeasurement of notes receivable (see Note 4) 445 - 2,311 - Income from nonconsolidated affiliates (see Note 6) (1,204) (513) (1,348) (1,380) Loss on remeasurement of investment in nonconsolidated affiliates (see Note 6) 446 - 1,505 - Current tax benefit / (expense) (see Note 12) (107) 420 462 906 Deferred tax benefit / (expense (see Note 12) (562) 349 (804) 36 Preferred return to preferred OP units / equity 1,645 1,599 4,799 4,640 Income attributable to noncontrolling interests 6,907 5,422 8,806 9,048 Preferred stock distribution - 428 - 1,288 NOI / Gross Profit$ 221,711 $ 196,663 $ 573,847 $ 532,376 36
--------------------------------------------------------------------------------
SUN COMMUNITIES, INC.
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2020 2019 2020 2019
Real Property NOI $ 176,284 $ 156,669 $ 481,393 $ 440,543
Home Sales NOI / Gross Profit 11,425 13,487 31,329 36,635
Rental Program NOI 29,323 25,270 86,182 77,700
Ancillary NOI / Gross Profit 23,780 18,507 30,642 28,824
Site rent from Rental Program (included in
Real Property NOI) (1) (19,101) (17,270) (55,699) (51,326)
NOI / Gross Profit $ 221,711 $
196,663
(1) The renter's monthly payment includes the site rent and an amount attributable to the home lease. The site rent is reflected in Real Property Operations' segment revenue. For purposes of management analysis, site rent is included in Rental Program revenue to evaluate the incremental revenue gains associated with the implementation of the Rental Program and to assess the overall growth and performance of the Rental Program and financial impact on our operations.
Comparison of the Three and Nine Months Ended
Real Property Operations - Total Portfolio
The following tables reflect certain financial and other information for our Total Portfolio as of and for the three and nine months endedSeptember 30, 2020 and 2019 (in thousands, except for statistical information): Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2020 2019 Change % Change 2020 2019 Change % Change Financial Information Income from real property$ 284,373 $ 251,163 $ 33,210 13.2 %$ 753,642 $ 689,890 $ 63,752 9.2 % Property operating expenses Payroll and benefits 27,961 25,425 2,536 10.0 % 70,014 66,393 3,621 5.5 % Legal, taxes, and insurance 2,631 2,968 (337) (11.4) % 8,470 7,716 754 9.8 % Utilities 34,723 29,384 5,339 18.2 % 85,030 77,462 7,568 9.8 % Supplies and repairs 12,490 10,966 1,524 13.9 % 29,094 27,049 2,045 7.6 % Other(1) 12,842 10,352 2,490 24.1 % 27,300 24,272 3,028 12.5 % Real estate taxes 17,442 15,399 2,043 13.3 % 52,341 46,455 5,886 12.7 % Property operating expenses 108,089 94,494 13,595 14.4 % 272,249 249,347 22,902 9.2 % Real Property NOI$ 176,284 $ 156,669 $ 19,615 12.5 %$ 481,393 $ 440,543 $ 40,850 9.3 %
(1) Includes COVID-19 personal protective equipment expense of
As of
September 30, 2020 September 30, 2019 Change
Other Information
Number of properties 432 389 43
MH occupancy 96.4 %
RV occupancy 100.0 %
MH & RV blended occupancy (1) 97.2 % 96.7 % 0.5 %
Sites available for development 10,130 10,557 (427)
Monthly base rent per site - MH $ 586 $ 574 $ 12
Monthly base rent per site - RV (2) $ 444 $ 421 (3) $ 23
Monthly base rent per site - Total $ 554 $ 539 (3) $ 15
(1) Overall occupancy percentage includes MH and annual RV sites and excludes
transient RV sites.
(2) Monthly base rent pertains to annual RV sites and excludes transient RV
sites.
(3) Canadian currency figures included within the three and nine months ended
September 30, 2020 have been translated at 2020 average exchange rates.
37
--------------------------------------------------------------------------------
SUN COMMUNITIES, INC.
The $19.6 million increase in Real Property NOI consists of $8.3 million from
Same Communities as detailed below and $11.3 million from recently acquired
properties in the three months ended September 30, 2020 as compared to the same
period in 2019.
The $40.9 million increase in Real Property NOI consists of $19.6 million from
Same Communities as detailed below and $21.3 million from recently acquired
properties in the nine months ended September 30, 2020 as compared to the same
period in 2019.
Real Property Operations - Same Communities
A key management tool used when evaluating performance and growth of our properties is a comparison of our Same Communities. The Same Communities data includes all properties which we have owned and operated continuously sinceJanuary 1, 2019 , exclusive of properties recently completed or under construction, and other properties as determined by management.The Same Community data may change from time-to-time depending on acquisitions, dispositions, management discretion, significant transactions or unique situations. In order to evaluate the growth of the Same Communities, management has classified certain items differently than our GAAP statements. The reclassification difference between our GAAP statements and ourSame Community portfolio is the reclassification of water and sewer revenues from income from real property to utilities. A significant portion of our utility charges are re-billed to our residents. The following tables reflect certain financial and other information for our Same Communities as of and for the three and nine months endedSeptember 30, 2020 and 2019 (in thousands, except for statistical information). Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2020 2019 Change % Change 2020 2019 Change % Change
Financial Information
Income from real property
5.4 % $ 661,984 $ 642,809 $ 19,175 3.0 %
Property operating expenses
Payroll and benefits 23,720 23,642 78 0.3 % 60,457 63,255 (2,798) (4.4) %
Legal, taxes, and insurance 2,385 2,829 (444) (15.7) % 7,690 7,432 258 3.5 %
Utilities 21,269 19,102 2,167 11.3 % 49,814 49,290 524 1.1 %
Supplies and repairs 10,920 10,617 303 2.9 % 25,223 26,227 (1,004) (3.8) %
Other (1) 9,774 8,626 1,148 13.3 % 21,607 21,276 331 1.6 %
Real estate taxes 15,937 15,066 871 5.8 % 47,920 45,610 2,310 5.1 %
Property operating expenses 84,005 79,882 4,123 5.2 % 212,711 213,090 (379) (0.2) %
Real Property NOI $ 159,368 $ 151,101 $ 8,267 5.5 % $ 449,273 $ 429,719 $ 19,554 4.6 %
(1) Includes COVID-19 personal protective equipment expense of
As of
September 30, 2020 September 30, 2019 Change
Other Information
Number of properties 366 366 -
MH occupancy 97.2 %
RV occupancy 100.0 %
MH & RV blended occupancy (1) 97.8 %
Adjusted MH occupancy (2) 98.4 %
RV occupancy (2) 100.0 %
Adjusted MH & RV blended occupancy (1) (2) 98.8 % 96.8 % 2.0 %
Monthly base rent per site - MH $ 594 $ 576 $ 18
Monthly base rent per site - RV (3) $ 444 $ 420 $ 24
Monthly base rent per site - Total $ 559 $ 539 $ 20
(1) The occupancy percentage for 2019 has been adjusted to reflect incremental
growth period-over-period from filled MH expansion sites and the conversion of
transient RV sites to annual RV sites.
(2) The adjusted occupancy percentage includes MH and annual RV sites and
excludes recently completed but vacant expansion sites and transient RV sites.
(3) Monthly base rent pertains to annual RV sites and excludes transient RV
sites.
38
--------------------------------------------------------------------------------
SUN COMMUNITIES, INC.
The amounts in the table above reflect constant currency for comparative
purposes. Canadian currency figures included within the three and nine months
ended September 30, 2019 have been translated at 2020 average exchange rates. We
have reclassified water and sewer revenues of $10.1 million and $8.9 million for
the three months ended September 30, 2020 and 2019, and $28.4 million and $25.8
million for the nine months ended September 30, 2020 and 2019, respectively, to
reflect the utility expenses associated with our Same Community portfolio net of
recovery.
For the three months ended September 30, 2020 and 2019, the $8.3 million , or 5.5
percent growth in NOI is primarily due to an increase in Income from real
property of $12.4 million , or 5.4 percent, partially offset by an increase in
Property operating expenses of $4.1 million , or 5.2 percent. Income from real
property increased due to a 3.6 percent increase in total monthly base rent per
site when compared to the same period in 2019, and a 2.0 percent increase in
occupancy. The increase in Property operating expenses was primarily
attributable to increases in utilities, real estate taxes and COVID-19 personal
protective equipment expense.
For the nine months ended September 30, 2020 and 2019, the $19.6 million or 4.6
percent growth in NOI is primarily due to an increase in Income from real
property of $19.2 million , or 3.0 percent, and a $0.4 million , or 0.2 percent,
decrease in Property operating expenses. Income from real property increased due
to a 3.6 percent increase in total monthly base rent per site when compared to
the same period in 2019, and a 2.0 percent increase in occupancy. The decrease
in Property operating expenses was primarily attributable to decreases in
payroll and benefits and supplies and repair costs, all of which were impacted
by COVID-19 business operation restrictions, partially offset by increases in
real estate taxes.
39
--------------------------------------------------------------------------------
SUN COMMUNITIES, INC.Home Sales Summary
We purchase new homes and acquire pre-owned and repossessed manufactured homes, generally located within our communities, from lenders, dealers, and former residents to sell or lease to current and prospective residents.
The following table reflects certain financial and statistical information for our Home Sales Program for the three and nine months endedSeptember 30, 2020 and 2019 (in thousands, except for average selling prices and statistical information): Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2020 2019 Change % Change 2020 2019 Change % Change Financial Information New Homes New home sales$ 23,734 $ 19,775 $ 3,959 20.0 %$ 58,536 $ 51,860 $ 6,676 12.9 % New home cost of sales 19,294 16,761 2,533 15.1 % 47,611 44,740 2,871 6.4 % NOI / Gross Profit - new homes$ 4,440 $ 3,014 $ 1,426 47.3 %$ 10,925 $ 7,120 $ 3,805 53.4 % Gross margin % - new homes 18.7 % 15.2 % 3.5 % 18.7 % 13.7 % 5.0 % Average selling price - new homes$ 153,123 $ 118,413 $ 34,710 29.3 %$ 141,391 $ 120,325 $ 21,066 17.5 % Pre-owned Homes Pre-owned home sales$ 23,928 $ 30,030 $ (6,102) (20.3) %$ 68,243 $ 84,805 $ (16,562) (19.5) % Pre-owned home cost of sales 16,943 19,557 (2,614) (13.4) % 47,839 55,290 (7,451) (13.5) % NOI / Gross Profit - pre-owned homes$ 6,985 $ 10,473 $ (3,488) (33.3) %$ 20,404 $ 29,515 $ (9,111) (30.9) % Gross margin % - pre-owned homes 29.2 % 34.9 % (5.7) % 29.9 % 34.8 % (4.9) % Average selling price - pre-owned homes$ 43,114 $ 40,636 $ 2,478 6.1 %$ 40,864 $ 38,548 $ 2,316 6.0 % Total Home Sales Revenue from home sales 47,662 49,805 (2,143) (4.3) % 126,779 136,665 (9,886) (7.2) % Cost of home sales 36,237 36,318 (81) (0.2) % 95,450 100,030 (4,580) (4.6) % NOI / Gross Profit - home sales$ 11,425 $ 13,487 $ (2,062) (15.3) %$ 31,329 $ 36,635 $ (5,306) (14.5) % Statistical Information New home sales volume 155 167 (12) (7.2) % 414 431 (17) (3.9) % Pre-owned home sales volume 555 739 (184) (24.9) % 1,670 2,200 (530) (24.1) % Total home sales volume 710 906 (196) (21.6) % 2,084 2,631 (547) (20.8) % Gross Profit -New Homes For the three months endedSeptember 30, 2020 , the$1.4 million , or 47.3 percent increase in gross profit is primarily the result of a 29.3 percent increase in the new home average selling price which drove a 3.5 percent increase in new home sales gross margin, as compared to the same period in 2019. For the nine months endedSeptember 30, 2020 , the$3.8 million , or 53.4 percent increase in gross profit is primarily the result of a 17.5 percent increase in the new home average selling price which drove a 5.0 percent increase in new home sales gross margin, as compared to the same period in 2019. Gross Profit - Pre-owned Homes For the three months endedSeptember 30, 2020 , the$3.5 million or 33.3 percent decrease in gross profit is primarily the result of a 24.9 percent decrease in pre-owned home sales volume coupled with a 5.7 percent decrease in pre-owned homes gross margin, as compared to the same period in 2019. For the nine months endedSeptember 30, 2020 , the$9.1 million or 30.9 percent decrease in gross profit is primarily the result of a 24.1 percent decrease in pre-owned home sales volume coupled with 4.9 percent decrease in pre-owned homes gross margin, as compared to the same period in 2019. 40 -------------------------------------------------------------------------------- SUN COMMUNITIES, INC.
Rental Program Summary
The following table reflects certain financial and other information for our Rental Program as of and for the three and nine months endedSeptember 30, 2020 and 2019 (in thousands, except for statistical information): Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2020 2019 Change % Change 2020 2019 Change % Change Financial Information Revenues Rental home revenue$ 16,171 $ 14,444 $ 1,727 12.0 %$ 46,611 $ 42,827 $ 3,784 8.8 % Site rent from Rental Program (1) 19,101 17,270 1,831 10.6 % 55,699 51,326 4,373 8.5 % Rental Program revenue 35,272 31,714 3,558 11.2 % 102,310 94,153 8,157 8.7 %
Expenses
Repairs and refurbishment 3,414 4,080 (666) (16.3) % 8,623 9,317 (694) (7.4) % Taxes and insurance 2,059 1,940 119 6.1 % 6,078 5,631 447 7.9 % Other 476 424 52 12.3 % 1,427 1,505 (78) (5.2) % Rental Program operating and maintenance 5,949 6,444 (495) (7.7) % 16,128 16,453 (325) (2.0) % Rental Program NOI$ 29,323 $ 25,270 $ 4,053 16.0 %$ 86,182 $ 77,700 $ 8,482 10.9 % Other Information Number of sold rental homes 225 317 (92) (29.0) % 581 859 (278) (32.4) % Number of occupied rentals, end of period 11,729 11,170 559 5.0 % Investment in occupied rental homes, end of period$ 625,922 $ 570,053 $ 55,869 9.8 % Weighted average monthly rental rate, end of period$ 1,032 $ 987 $ 45 4.6 % (1) The renter's monthly payment includes the site rent and an amount attributable to the home lease. The site rent is reflected in Real Property Operations' segment revenue. For purposes of management analysis, site rent is included in Rental Program revenue to evaluate the incremental revenue gains associated with the implementation of the Rental Program, and to assess the overall growth and performance of the Rental Program and financial impact on our operations. Rental Program NOI increased$4.1 million , or 16.0 percent for the three months endedSeptember 30, 2020 as compared to the same period in 2019. The increase is primarily due to an increase in Rental Program revenue of$3.6 million , or 11.2 percent, in addition to a$0.5 million or 7.7 percent decrease in expenses. Rental Program NOI increased$8.5 million , or 10.9 percent for the nine months endedSeptember 30, 2020 as compared to the same period in 2019. The increase is primarily due to an increase in Rental Program revenue of$8.2 million , or 8.7 percent. The increase in revenue is partially attributable to a 4.6 percent increase in the weighted average monthly rental rate and a 5.0 percent increase in the number of occupied rentals in the nine months endedSeptember 30, 2020 as compared to the same period in 2019. 41
--------------------------------------------------------------------------------
© Edgar Online, source
