SUI: Q3 2023 Update. Strong Quarter, Guidance Up and Guidance Down?

Note: SUI is one of my larger positions. I see it as a great long-term holding. Solid management and strong long-term growth in AFFO per share. Sooner or later, the bulls on SUI will triumph again.

Great quarter, in my opinion. May confuse some investors. Good and bad elements. The good factors were more important than the bad. Core FFO is less relevant than same property NOI.

Core FFO guidance for 2023 is down 1% for Sun Communities (SUI). Bad.

The reasons are due to currency exchange with the pound and a situation with a particular note owned by SUI. These are good reasons.

They are “good” reasons because they represent non-recurring issues. We always treat currency exchange fluctuations as nonrecurring.

The note was for $361.1 million. It had a 12.4% rate. The borrower failed to pay at maturity, but the collateral was a first-priority interest in 3 real estate properties (and other lower-value interests).   The properties will be listed for auction. SUI may bid on them as well. Either way, SUI is first in line for proceeds from the sale.

How relevant is this note to SUI? The total value of $361.1 million is a bit less than $3 per share of SUI. If the properties were determined to be utterly worthless (not realistic), it would still only represent $3 per share. I would expect a significant recovery. I can’t guarantee that, but SUI was expecting to be repaid at maturity rather than the borrower defaulting.

So why does that mess with Core FFO?

Well, SUI was expecting the principal to be repaired at the end of July. That would’ve reduced their short-term borrowings. They had about $1 billion outstanding on a revolving credit facility in USD at about a 6% interest rate. If they had received $361.1 million and used it to pay down the revolver at 6% around August 1^st, it would’ve reduced interest expense. If they have that amount outstanding for 5 months while the situation is resolved (hypothetically), it would cost them an extra $9 million in interest expense. That comes out to about $.07 per share. If this is resolved by the end of the year, it would have roughly zero impact on 2024 results. A one-time drag of about $.07 per share? I couldn’t care less. That’s a reasonably tight bid-ask spread!

On the positive side, even though that could cost them the full $.07 per share, they still only lowered guidance by $.07. Remember, there was also weakness in exchange rates. What is offsetting that?