Sun Communities Inc (SUI) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Sun Communities first-quarter 2011 earnings conference call on the 28th of April, 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 Reform 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. (Operator Instructions).

I would now like to turn the conference over to Gary Shiffman. Please go ahead, sir.

Thank you and good morning. This morning we reported funds from operations of $19 million or $0.83 per share for the first quarter of 2011, compared to $17.7 million or $0.84 per share for the first quarter of 2010. These results exclude certain items as noted in the table to the press release.

The first-quarter FFO per share of $0.83 includes the impact of $0.08 per share of dilution from the sale to equity since April of 2010. On an annual basis, FFO continues to build momentum. The growth from 2008 to 2009 was 2.9%, which increased to 3.8% from '09 to 2010. Including the accretion from the portfolio purchase yet to be closed, 2011 FFO per-share growth may approximate 5% to 6% prior to any acquisition costs.

And now I'd like to turn to a review of the portfolio performance for this last quarter. Occupancy grew by 143 residents in the quarter, with increases throughout the Midwest market as well as Texas and Colorado.

Our Texas communities comprising over 4,700 sites are now 95.6% occupied, compared to 90.8% a year ago. We're responding to this demand by adding 178 new sites to River Ridge in Austin, Texas, and 98 new sites to Pine Trace in Houston. Both communities have reached occupancies in excess of 98%.

Additionally, plans for expansions at two to four Texas communities with similar full occupancy levels are now taking place. These plans call for expansion of up to 450 new sites over the next 9 to 12 months, provided that current occupancy and demand continue.

The expansion of 124 home sites that opened in September 2010 in Colorado, while budgeted to fill at a rate of 50 per year, is now running nearly 50% ahead of budget, with indications of continued strong demand.

The rental program currently comprises over 6,200 residents. And the weighted average of monthly rental rates has increased by $6, from $735 at the end of 2010 to $741 per month at the end of the first quarter. On an annual basis, the $6 of monthly increase for the quarter equates to nearly $450,000 of additional revenue.

As we experience increased occupancy, we will be carefully monitoring the strong demand for affordable housing against the constrained supply to identify opportunities for continued rate increase.

Home sales continued on a strong growth track, increasing by nearly 10% over the first quarter of 2010 to 357. The increase in home sales is a further indicator of the demand to live in the Sun Communities and a measure of our success in converting home renters into homeowners. Over 5,500 applications were received in the quarter, which serves as the basis for the sales activity.

The increase in home sales is also important because the capital generated is reinvested in the purchase of new or pre-owned homes, which generate additional revenue streams, thus recycling the original invested capital and maximizing its contribution to earnings performance.

The same-site results were strong, as revenue growth of 3.1% supported by expense containment resulted in growth in net operating income for the quarter of 4.2%. The strong revenue growth reflected the contribution of occupancy gains, in addition to the regular annual rental increases. Revenue growth in the first quarter of 2010 was 1.4%, and 2.5% for the entire 2010 year, so we are certainly off to a very good start the first quarter.

The acquisition of 5,490 home sites in 19 communities in western Michigan, for approximately $140 million, has been previously announced. This will be our largest acquisition since 1996 and will complement our existing base of communities and staff in the Grand Rapids market. The financing for the acquisition includes a substantial equity component of approximately $62 million and is accretive to our existing 2011 guidance by $0.24 to $0.28 on a first full-year basis.

A trend which has now extended over the past five years in the portfolio is the nearly 40% decrease in both the number of residents selling their homes in our communities as well as those residents moving their homes out of our communities. The average resident tenancy has increased from 8.5 years to 13.5 years since 2005. The reduction in home move-outs carries a strong economic benefit to the Company, and the trend speaks well of the qualitative attributes of living in the Sun community.

One beneficiary of our growth has been our dividend payout ratio, which is defined as FFO less recurring capital expenditures. After several years of exceeding a 100% payout ratio, we expect the ratio to approximate 94% based on the midpoint of current guidance, and less than 90% post-portfolio acquisition.

Our balance sheet has also been substantially strengthened by two recent events. The $104 million of 2011 maturing CMBS debt has been refinanced utilizing the same property pool, with a new maturity of 2021. In addition, as previously announced, the maturity date of an additional $367 million of debt, originally due in 2014, may be extended to 2023 if the preliminary agreement entered into with Fannie Mae and PNC Bank reaches final approval.

The effect of these events is to extend the weighted-average maturity date of our CMBS and mortgage debt from September 2014 to November 2018, thus more than doubling the weighted-average term from 3.5 years to 7.6 years.

The Company is currently negotiating terms for the renewal of our line of credit, which expires in October of this year. I'm pleased that the current lending environment continues to support more favorable terms than when this process initially started.

Management intends to update guidance post-closing of the aforementioned portfolio acquisition. And at this time, both Karen, Jeff, and myself are available for any questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of Todd Stender with Wells Fargo Securities. Please go ahead.

Hi, good morning, everybody. My first question had to do with using OP units as part of the funding for your new deal. The fact that you have a publicly traded stock, did that help you win this deal?

Yes, Todd, it absolutely did. I think for estate planning purposes and treatment of taxation, it was very beneficial. I think that the preferred operating partnership units in particular were of great appeal because they carried both a interest rate and a convertible feature at approximately $41, so it definitely helped us in this transaction.

The interest rate that it paid on those, is that going to be in the form of a quarterly dividend?

Yes.

Okay, and when are those convertible? Is there some restricted period?

I believe there's a three-year restriction on the conversion. Until 2013.

Okay, thank you. And the new deal -- I think, Gary, you mentioned your FFO payout ratio gets into the 90% range, post-acquisition. Is there any assumption of a raise in dividend in that, or that's a static dividend?

I think that, post-dividend, we expect it to get into the upper 80s. It's currently mid to low 90s at midpoint. But I think that the Board continues to review all the different aspects of the balance sheet and FFO, and will make any decisions on the dividend on a quarterly basis.

Okay, just switching gears. I think typically you try to discount your rent relative to apartments, particularly just in reference to what market you're looking at. Where's that discount now? I think it was in the 10% range historically.

I think it is in the 10% to 20% range, depending upon the market, and currently anywhere from a low of $0.52 a square foot per month to about $0.64 per square foot a month.

Okay, thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Chris Van Ens with Green Street Advisors. Please go ahead.

Good morning. Regarding the CMBS deals you guys did, if you'd chosen not to use CMBS, what kind of rates and terms on the debt could you get from banks or insurance companies, do you think?

I think that from the insurance companies, they were probably a good 75 basis points higher. And the size of the bank debt was such that it wasn't easy to get a bank to consider putting that amount on its balance sheet.

Okay.

So didn't really have any direct discussion on that level.

Okay, but you think that that market is pretty much wide open again? You could go back and tap that anytime you want now, as far as CMBS?

We are currently doing so.

Okay. Switching gears a little bit, your public peer indicated that it was looking to potentially expand its rental home program by tapping third-party equity. Have you had any conversations with money partners about funding your program, or are you looking into doing anything like that?

I think that we have looked into it in more challenging times, but currently we have various arrangements where the vast majority of the sales that we do are third-party table funded.

Okay. That helps. Thanks, guys, that's it for me.

Thank you. (Operator Instructions). And our next question is a follow-up question from the line of Todd Stender with Wells Fargo Securities. Please go ahead.

Hi, thanks, just one last one. Probably, Karen, this is for you. Where are your pre-owned home inventories coming from, the ones that you're selling? Are they from the banks? Just want to see where they're sourced from.

They're sourced both from repossessions in the portfolio from lenders --

Is the break --?

-- and from new homes.

And from new homes. What do you think the breakdown is now versus, say, 12, 18 months ago?

It's --

It's still running very close to 50/50. In 2010, it was probably 52/48, with 52% being pre-owned homes that we acquired in our portfolio.

Okay, that's helpful. Thank you.

Thank you, and there are no further questions in the queue. I would like to turn the call back to management for any closing remarks at this time.

Well, we'd certainly like to thank everyone for participating on the call. Karen, Jeff, myself are available in the office for any follow-up. And we look forward to reporting additional information as it's available and we can make it in the marketplace. So thank you.

Thank you. Ladies and gentlemen, this concludes the Sun Communities first-quarter 2011 earnings conference call. We thank you for your participation. You may now disconnect.