Sun Communities(US:SUI)2024-08-01 19:14Part I – FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents Sun Communities, Inc.'s unaudited consolidated financial statements, including balance sheets, income statements, and cash flows, for the period ended June 30, 2024 Consolidated Balance Sheets The balance sheet shows total assets increased to $17.01 billion, liabilities to $9.78 billion, and equity decreased to $6.97 billion Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $17,011.1 | $16,940.7 | | Investment property, net | $14,464.7 | $14,443.6 | | Cash, cash equivalents and restricted cash | $104.2 | $42.7 | | Total Liabilities | $9,781.6 | $9,506.8 | | Total Debt (Mortgage & Unsecured) | $7,798.5 | $7,721.5 | | Total Shareholders' Equity | $6,969.8 | $7,173.0 | Consolidated Statements of Operations Q2 2024 total revenues were $864.0 million, with net income of $52.1 million, a significant improvement from a $207.6 million loss in Q2 2023 due to a prior-year goodwill impairment Statement of Operations Summary (in millions, except per share data) | Metric | Q2 2024 | Q2 2023 (Restated) | YTD 2024 | YTD 2023 (Restated) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $864.0 | $863.4 | $1,535.3 | $1,514.6 | | Real property | $551.4 | $526.0 | $1,028.3 | $967.6 | | Home sales | $107.5 | $122.6 | $176.4 | $208.9 | | Total Expenses | $804.8 | $1,084.2 | $1,525.6 | $1,752.8 | | Goodwill impairment | $— | $309.7 | $— | $325.1 | | Net Income / (Loss) Attributable to SUI | $52.1 | ($207.6) | $24.7 | ($252.5) | | Diluted EPS | $0.42 | ($1.68) | $0.20 | ($2.04) | Consolidated Statements of Cash Flows Net cash from operations increased to $553.8 million, while investing activities used less cash at $319.9 million, and financing activities shifted to a $172.1 million use Cash Flow Summary (in millions) | Activity | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net Cash Provided By Operating Activities | $553.8 | $449.9 | | Net Cash Used For Investing Activities | ($319.9) | ($581.8) | | Net Cash Provided By / (Used For) Financing Activities | ($172.1) | $109.4 | | Net change in cash | $61.5 | ($21.7) | | Cash, End of Period | $104.2 | $68.7 | Notes to Consolidated Financial Statements The notes detail accounting policies, segment changes, acquisitions, debt structure, legal proceedings, and material weaknesses in internal controls related to impairment testing - Effective Q1 2024, the company expanded its organizational structure to four reportable segments: Manufactured Home (MH), Recreational Vehicle (RV), Marinas, and United Kingdom (UK); prior period amounts have been recast to conform to this new structure1886 - In H1 2024, the company acquired three marina properties for an aggregate of $12.0 million and disposed of three MH properties, generating net cash proceeds of $57.1 million2529 - In March 2024, the company terminated its $1.15 billion term loan facility, settling the outstanding $1.1 billion by increasing borrowings under its revolving credit facility, which resulted in a $0.6 million loss on extinguishment of debt65 - The company is a defendant in a consolidated class action antitrust lawsuit alleging that it and other large MH operators shared non-public information to artificially inflate site rents; the company believes the allegations are without merit135 - Subsequent to the quarter end, in July 2024, the company sold seven MH properties for a gross sale price of $262.6 million, receiving net cash of approximately $171.0 million151 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Same Property NOI growth across four segments, highlighting a strategic shift towards debt reduction and reduced development amid higher interest rates, while maintaining strong liquidity Results of Operations Total Portfolio Real Property NOI increased, with North American Same Property NOI growing 3.6% in Q2, driven by MH and UK segments, while RV and home sales NOI declined North America Same Property NOI % Change (Q2 2024 vs Q2 2023) | Segment | Revenue % Change | Expense % Change | NOI % Change | | :--- | :--- | :--- | :--- | | MH | 7.2% | 9.2% | 6.4% | | RV | (0.7)% | 4.0% | (4.6)% | | Marina | 5.5% | 4.2% | 6.1% | | Total | 4.4% | 6.0% | 3.6% | UK Same Property NOI % Change (Q2 2024 vs Q2 2023, Constant Currency) | Metric | % Change | | :--- | :--- | | Total Operating Revenues | 4.9% | | Total Operating Expenses | 0.5% | | Real Property NOI | 9.3% | - The decrease in RV segment NOI was primarily driven by a 12.0% decrease in transient revenue, partially offset by an 11.0% increase in non-transient (annual) revenue as sites were converted190 - Total home sales NOI decreased by 15.2% in Q2 2024, driven by an 8.9% decrease in MH sales volume and a 13.0% decrease in the average selling price for UK homes195 Liquidity and Capital Resources The company prioritizes debt reduction and reduced development amid higher interest rates, maintaining strong liquidity with $89.1 million cash and $1.3 billion available on its credit facility, while remaining compliant with debt covenants - The company's strategy has shifted to prioritize debt reduction as the primary use of free cash flow and proceeds from asset sales, given the sustained higher interest rate environment213 - Capital expenditures for the first six months of 2024 totaled $333.2 million, a significant decrease from $564.7 million in the same period of 2023, reflecting reduced spending on acquisitions, development, and the rental program216 Financial Covenant Compliance (as of June 30, 2024) | Covenant | Requirement | Actual | | :--- | :--- | :--- | | Maximum leverage ratio | <65.0% | 33.9% | | Minimum fixed charge coverage ratio | >1.40 | 2.90 | | Maximum secured leverage ratio | <40.0% | 12.7% | | Unencumbered total asset value to total unsecured debt | ≥150.0% | 337.6% | Quantitative and Qualitative Disclosures about Market Risk The company faces interest rate, foreign currency, and capital market risks, with a 1% variable rate increase impacting interest expense by $4.7 million and a 10% USD strengthening reducing equity by $82.7 million - A hypothetical 1.0% increase in variable interest rates would have increased interest expense by $4.7 million for the six months ended June 30, 2024245 - A 10.0% strengthening of the U.S. dollar against the Pound sterling, Canadian dollar, and Australian dollar would have reduced total shareholder's equity by $82.7 million as of June 30, 2024246 Controls and Procedures Management concluded disclosure controls and procedures were not effective as of June 30, 2024, due to two material weaknesses in internal control over financial reporting related to UK segment impairment testing, with a remediation plan underway - The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2024250 - The ineffectiveness is due to two material weaknesses related to impairment testing for the UK reporting segment: one for goodwill and another for long-lived assets251 - A remediation plan is being implemented, focusing on more rigorous policies, enhanced training, and involvement of additional stakeholders in impairment reviews252 Part II – OTHER INFORMATION Legal Proceedings The company is a defendant in a class action antitrust lawsuit alleging sharing of non-public information to inflate manufactured home site rents, which it believes is without merit - The company is a defendant in a putative class action complaint alleging violation of federal antitrust laws by sharing sensitive information to maintain artificially high site rents for manufactured homes135254 - The company is unable to estimate a range of loss but believes the plaintiffs' allegations are without merit and intends to defend against them vigorously136 Risk Factors No material changes have occurred to the risk factors previously disclosed in the 2023 Annual Report on Form 10-K - No material changes have been made to the risk factors disclosed in the 2023 Annual Report on Form 10-K255 Unregistered Sales of Equity Securities and Use of Proceeds In Q2 2024, 22,995 shares of common stock were issued via private placements from OP unit conversions, and 10,954 shares were withheld for employee tax obligations - In Q2 2024, various OP unit holders converted their securities into a total of 22,995 shares of common stock in private placements257 - The company withheld 10,954 shares of common stock from employees to cover tax obligations on vesting restricted stock awards during Q2 2024258 Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and Interactive Data Files (XBRL), incorporating key corporate governance documents by reference - The filing includes CEO and CFO certifications as required by Sections 302 and 906 of the Sarbanes-Oxley Act260 - Interactive Data Files (XBRL) are included with the filing to provide financial data in a structured format260