Sun Communities Inc (SUI) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Sun Communities Fourth Quarter 2010 Earnings Conference Call on the 24th of February, 2011. At this time management would like me to inform you that certain statements made during this conference call which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reforms Act of 1995.

Although the Company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can provide no assurance that its expectations will be achieved. Factors and risks that could cause actual results to differ materially from expectations are detailed in this morning's press release form and from time to time in the Company's periodic filings with the SEC. The Company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release.

Having said that, I'd like to introduce management with us today, Gary Shiffman, Chairman and Chief Executive Officer, Karen Dearing, Chief Financial Officer, and Jeff Jorissen, Director of Corporate Development.

Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. I would now like to turn the conference over to Mr. Gary Shiffman. Please go ahead sir.

Thank you operator, and good morning. This morning we reported funds from operations of $17.2 million or $0.78 per share for the fourth quarter of 2010 compared to $16.2 million or $0.77 per share for the fourth quarter of 2009. For the year FFO was $63.6 million or $2.97 per share compared to $59.5 million or $2.86 per share for 2009, representing growth of 3.85%. The results are adjusted as noted in the table attached to the press release.

And now I'd like to turn to the highlights of the quarter and the year-end at the Company, and I'd start off by saying first and foremost 2010 was a great year for occupancy. We increased revenue-producing sites by 563 for the year, gaining sites in each quarter and in each major market of the Company.

For those who have been following us for a number of years, you're probably aware that the second half of the year has usually led to a loss of occupied sites. In 2010, we gained 129 sites in the second half of the year. The annual gain was the best since 1999, and the fourth quarter was our best since 2001. We're pleased that the 2010 performance is back to similar levels achieved in those years prior to the industry challenges brought on in 2000.

I can also share with you that it is much more enjoyable to manage a company with a solidly growing occupancy and to once again begin levering the depth of management experience, quality of systems that exist at Sun to generate positive occupancy growth.

The strong occupancy growth also creates additional opportunity for us to selectively expand communities by adding sites in our strongest markets. The first expansion opened with 124 sites in September in a community in Colorado. The community has been filling at a rate of six sites per month with a stretch goal of filling the remaining sites in 2011.

In addition, this August we plan to open 178 new expansion sites in Austin, Texas at a community, which is now 100% occupied and an additional 98 expansion sites in Houston at a community which is 99% occupied. Two additional expansions comprising 226 sites in Texas at communities with full occupancy and now in the initial stages of construction planning for tentative openings in March 2012.

I'd just like to add that the land for all of these expansion sites exists within the current Sun portfolio, had been previously zoned and entitled, and in some cases are partially developed.

Another measure of improving portfolio performance is the same property growth. Our 2010 guidance was based on NOI growth of 1.9%. The actual NOI growth for the year was 3.1% with a fourth quarter generating a very strong 4.5%.

We've also been seeking opportunistic acquisitions as we've discussed from time to time, especially communities with vacant sites, which we acquire at minimum cost and would be primarily filled through our home rental program. Again, this presents additional opportunity to lever the Company's staff and system.

We are currently completing final due diligence on the potential acquisition of a solid portfolio of 20 communities. These communities are approximately 76% occupied and include 1,000 vacant sites, which will neatly mesh with our existing communities and ability to fill sites through our rental program.

We recently disclosed the sale of equity with the intent to use the proceeds to partially finance this acquisition and/or pay down our line of credit. It's expected that the remainder of the consideration for this acquisition will be in the form of assumed debt and the issuance of preferred operating partnership units.

As this acquisition has not yet been completed, 2011 guidance does not include any accretion from this transaction. However, it does include $0.12 of dilution from the above-referenced equity rate.

The rental program has been and remains an integral part of our strategy for the filling of our communities, expansions, and opportunistic acquisitions as they become available. In 2010 the rental program was the primary reason that nearly 22,000 people applied to live in our communities with over 5,000 ultimately buying or renting a home. As a basis of comparison, in 2006 there were a little over 10,000 applications resulting in approximately 3,300 new residents.

Applications have been growing at a compounded rate of over 20% for the past four years. In 2010, over 4,000 new leases were executed for rental. This provides prospective homebuyers with the opportunity to experience the community lifestyle and presents us with 4,000 new sales opportunities each year as we convert renters to homeowners.

As a reminder, the economics of the rental program are as follows. We earn 14% on investment in rental homes after considering the interest costs. Once we've recovered capital through the sale of the home, the return approximates 35%. If we finance the home purchases through the use of equity, the results are still accretive either as rentals or as owner-occupied homes.

We have about $104 million of debt maturing in July. Management has continued to work on early refinancing of this debt as we've discussed on other and previous phone calls. Recent appraisals obtained on the same eleven communities in the pool applied against conservative current underwriting standards indicate more than sufficient proceeds to replace the existing debt.

The other major financing project this year is to renew our $115 million line of credit, which matures in October. We have received a term sheet and are currently in discussions with our banker to renew this line of credit.

During 2010 we sold 1,375 homes, nearly 25% more than we sold in the prior year. Nearly all these sales were of pre-owned homes which were currently or previously in the rental program. The sales marked the final stage of the application, close, rent, and sell process. The nearly 1,400 new homeowners represent 3% of our total residents who based on 2010 statistics will reside in our portfolio for over 13 years.

And finally, our press release noted 2011 FFO guidance of $2.95 to $3.03 per fully-diluted share and is driven by the following key components. Weighted average site rent increase of 2.7%, revenue-producing sites increasing by 560 sites, same property NOI growth of 3.6%, 1,600 home sales, and as indicated before approximately $0.12 of dilution from the $30 million equity raise in January.

Additional information on guidance may be found in the press release. However, at the midpoint of guidance our payout ratio will approximate 94% when compared to our 2010 dividend of $2.52.

And at this point, operator, I would turn it back over to you for any questions.

Thank you, sir. (Operator Instructions). The first question comes from Andrew McCulloch of Green Street Advisors. Please go ahead with your question.

Oh God.

Andrew? Did we lose you?

For Andy today, but I just had a question on the acquisition. You know, do you guys expect that acquisition to be accretive immediately, or do you think you're going to need to grow occupancies to make it accretive?

As you can tell from the remarks, we had hoped to have closed the acquisition by this phone call so we could share more details with you. We're excited to do so, we're just in very final stages of diligence and hopefully we'll be able to -- shortly be able to announce that acquisition.

But I would indicate that the expectation is that it would be accretive immediately and any additional accretiveness would come from filling the vacant sites.

Is there any way you guys can give us a general idea of the -- a cost-per-site estimate for the acquisitions?

I wish we could, but those negotiations are still ongoing.

Okay. Thanks guys.

Yes.

The next question comes from William Acheson. Please go ahead with your question.

Yes. Hi gentlemen. What sort of IRR hurdle do you have on your acquisition program unlevered?

I think that the best way that we could look at this, Bill, and I want to be cautious because of the pending acquisition and give out as much information is that cap rates have been pretty consistent. This one is styled with the assumption of debt of a low 5% range with preferred operating partnership covering the difference between the small amounts of equity.

The anticipation is that our shareholders will be pleasantly pleased with the initial accretiveness and the potential for ongoing accretiveness.

Okay, Gary. Not to press you too much here, but you say cap rates have been pretty consistent.

Yes.

They've been consistent at what level?

For those deals that are getting done, and as you know I recently read your remarks that there's a definite void in comparables out there, but we are still seeing cap rates from the southern age-restricted in the low sixes to what I would call the mid or upper eights for all-age communities. And then of course there's everything in between.

But it's pretty much one of the reasons I think acquisitions have not been more forthcoming as there hasn't been as much fluctuation and adjustment in manufactured housing as perhaps there have been over the last two years in other forms of real estate.

Okay. I'll deal with that.

Sure. Hopefully we'll be able to get back to all the shareholders and the analysts very shortly on the transaction.

It makes a big difference in terms of your numbers, I've got to tell you. Issuing $30 million worth of equity and not nailing down the acquisition, it makes a big difference.

What sort of probability should we assign to that?

I'd really be hesitant to that. I would simply say that I would hope to be able to have an announcement within the next two weeks.

Okay. How about first quarter effective weather? It didn't seem to affect margins an awful lot in the fourth quarter, but how do you expect it's going to affect margins in the first quarter in terms of sales, in terms of expense margins, et cetera?

That's a great question, and I just reviewed that with operations yesterday in anticipation of the remarks and the press release that we were putting forward. They felt very comfortable that we're on budget on all aspects. We do the vast majority of our plowing and snow removal in-house with our in-house staff, so while they're working harder and there might be a few more expenses related to fuel and gas and things like that, we don't think it will have any major effect.

Okay. Okay. You guys are kind of out of consensus there with respect to the [apartment] in any case. There was a big jump in occupied rental homes. But if you just use the mid-quarter convention for rent rates, it looks like the rent rate is just about flat with the third quarter, which is out of consensus if you're renting residential space.

And I know you say in your remarks that you're going to keep the rent rates kind of flat going forward, but it's like why is that? I'm just curious.

So if I'm understanding the question right, you're talking about an increase in rental occupied units even though the rent's flat, why isn't it reflecting more?

If you look at every other type of residential space that's being rented, rents are going up sequentially, they're going up year-over-year, and you've kind of just flat lined.

On the rental homes you're referring to?

Yes, sir.

That's pretty intentional as we're approaching basically a thousand conversions a year now, which our long-term goal is to take these renters and convert them into home owners because our returns get a lot more accretive. We're pretty flat at this point on the rent. Are we showing a $10 increase or -- ?

About a $10 increase. About 1%.

Okay, we're showing about a $10 rent increase for the 2011 budget. But we're really trying to capture as many rentals on a competitive basis as possible to convert them into home owners, which is just a much more profitable business for us.

We hit the lowest point of vacant rental homes historically in the portfolio -- do we have that number?

It was around 435 at the end of December. That would be four -- there'd be about 6,100 occupied and about 435 or 50 unoccupied.

So that number has been more like 800 or 900 at yearend over the last couple of years. So I think what you're seeing is just a very competitive rent strategy to A, keep as many homes occupied as possible so we drive the overall rent, but at the same time keep them low enough so that we're competitive with multi-family.

Okay. Last question. The CMBS debt coming due, being renegotiated. What sort of interest rate is on it now, and can you say what you expect it to be going forward?

I can say this, it would be our expectation to have an announcement next week.

Okay.

I know that doesn't help anyone building their model now or reviewing the Company, and again if you go back to my last conference call, we have targets for end of first quarter for many of our things on our balance sheet, and this call just coming a little bit shy of that. It doesn't enable me to share all that information with everybody, and we're anxious to do so.

Karen, what's our current --?

4.9%.

Okay, so we're at 4.9% on the current $104 million.

Okay. Thank you guys. I appreciate it.

The next question comes from Mark Lutenski of BMO Capital Markets. Please go ahead.

Hi. Good morning. I'm wondering if you could discuss the decision to issue equity of $30 million I guess ahead of time of that acquisition.

Sure. I think there are two long-term or mid-term goals within the Company. Certainly the Company has been at the higher end of leverage as compared to how many [wreaths] have delevered over the last few years.

I think that the decision was made that mid-term to long-term the Company will look to delever a little bit. I think that we had the good fortune as a Company to have solid securitized debt with terms that were typically out to 2014, 2016, and 2017, plus $104 million due this coming year. And it didn't cause us to have to raise equity when our prices were much, much lower when other companies did raise that equity.

So the first issuance that we did in 2010 was to shore up the balance sheet, and it was done at a $30-plus price. And the most recent equity that you're asking about, the decision was made by the Board with guidance and discussion regarding the acquisition and wanting to know that we absolutely could make a firm offer on this acquisition so that we could be in a lead position to tie it up. And we needed that equity, and we understood that if that acquisition does not close, it'll be utilized to bring down debt levels on the balance sheet and put the balance sheet in a good position.

And the fact that we are going into what we believe is a growing period for the Company in occupancy and FFO, we just thought the timing was right based on where the share price was.

So what is your target leverage level? Where would you ideally like to be?

Well, a couple things have happened. Certainly we'd like to point to the fact that after a long period of having a 102% to 103% payout based on FFO, we've brought that into what we believe will be a low 90s range for this year. And I think we want to continue focusing on reducing our payout ratio and at the same time bringing our debt down probably three to five percentage points.

Mark, if you think -- I think our debt to EBITDA is about -- over nine times right now, maybe nine and a half times. We're looking at bringing that down sub-eight to mid-sevens over the next three years with some EBITDA growth and other capital sources.

Okay. Sorry to make you repeat yourself. Could you tell me again what the application volume was during the quarter?

Sure.

During the quarter or the year?

The quarter please.

Sure. Year was 22,000, and the quarter total -- sorry, I have to add up the numbers.

About 4,700.

About 4,700.

And have you seen a change in credit quality of the applicants?

No, I don't think so.

Okay.

We haven't changed our credit standards at all, so they're still operating at the same level. Where we've seen a large increase is in applications over the internet, and we've also noted that the closing ratio is a little bit lower in the applications over the internet.

Okay. Got it. All right, thank you.

The next question comes from Haendel St. Juste of KBW. Please go ahead with your question.

Hey. Good morning. I have a few quick ones. Could you guys speak to your decision to double down in the Midwest via this pending portfolio acquisition? Does that speak to perhaps lack of broader acquisition opportunities out there or can you be a little bit more specific on what's so compelling about this potential portfolio here?

I'm trying to recall if we said it was Midwest or not. But in the event that we did, I think that -- I think this is just an excellent opportunity and really the interest to us is that we're able to lever everything in our rental home program, all the systems, all the personnel, and have very minimal increased cost to run the communities.

I think that we are looking at a number of other opportunities, and when we look at where the greatest value we can create for the shareholders and some areas that aren't of interest and are much more difficulty for other companies to operate in, so I think this one just so happened that it made much more sense for us than anyone else.

Okay. Can you give us also some updated development costs and return expectations for the two planned expansions for later in the year?

I think we are actually in the process of preparing that right now, and if you want to contact Karen or Jeff direct by mid next week we'll be able to share some of that with you. We only have the first pricing for the first Colorado transaction we did, and it came in at around $23,000 a site as compared to sites that were $35,000 to $39,000 when we last developed in what was 1999 actually.

Okay. I'll be sure to follow up.

Yes.

A couple of quick ones here. Can you talk a bit -- I know it's still a little early here with the line of credit, but can you give us an early indication of potential sizing and also any thoughts on the pricing?

The expectation is that the sizing will remain the same. The pricing currently, Karen, is --?

165 over Libor.

165 over Libor. We are looking at a range of let's call it 250 to 325 over in the discussions that we're having. And I think the budget actually reflects a renewal for three months, October on. So guidance reflects the anticipated increase.

Okay. And one last one here. Just given your secured financing strategy, I just was curious if you'd like to share any thoughts on the government housing reform potential and the impact that it might have on how you finance and operate your business going forward?

I think if you're referring to how they're going to require loans being made? Is that what you're referring to?

I think he's --. Are you referring to the potential of Fannie Mae and Freddie exiting the lending market?

Yes. Exactly. Just thoughts on what your views are currently in terms of interpreting the initial guidelines and also how that might impact your business, your balance sheet potentially.

Well interestingly enough I think it will make us more competitive because we don't rely on Fannie or Freddie -- if we're talking shadow loans now? Or we're talking about --?

I think corporate.

Corporate loans? I think that -- we are now in mediation with Fannie, and we hope to -- an element of our loan as we've discussed in previous conversations, and I've spent a good deal of time in that mediation very recently.

I'd be reluctant to comment too much on my thoughts other than that we are making positive progress as a Company with our dispute with them, and how or what their programs look like in the future are something that I'm not prepared or willing to comment on at this time. A, I just don't know enough about them, and I've been pretty consumed in trying to resolve our differences with them.

All right guys. Well thank you for that.

Sure. Sorry.

That's all I had.

(Operator Instructions). We have a follow-up question from Mr. William Acheson. Please go ahead with your question sir.

Hey, Gary. One quick one here. You indicated that it would be an accretive acquisition in the 8-K that you filed. If I just won $158 million through my model, assume the left over debt and preferred operating in this are the same rate as your existing debt, that would indicate that the cap rate would have to be about 7.25% just to be FFO per share neutral. Am I on the right track here?

I would not argue with your model except for the fact that a lot circulates around the interest rate associated with the preferred operating partnership unit.

Okay. Even if I jumped that up to 7.25% it wouldn't have that much of an affect. Okay. Thank you.

Sure. Sure.

There appears to be no further questions. Please continue with any other points you wish to raise.

Okay. I would just close by sharing with everyone again there are an awful lot of things from a timing standpoint that the Company is anxious to share with the market. We're unable to do so by short periods of time that we hope we will be able to get on the phone with everybody again and put out more information.

And if it seems that the Company is not answering some of the questions it's only because in negotiating everything that we have going on right now we're at the point where it's necessary to wait until we have completion so that we can give accurate and final details to everyone.

We look forward to doing that very shortly, and we thank everybody for participating on the call today. And we welcome any direct calls from anyone to either Karen, myself, or Jeff. Thank you.

This concludes the Fourth Quarter Earnings Conference Call. Thank you for participating. You may now disconnect.