Sun Communities Inc (SUI) 2011 Q2 法說會逐字稿

Welcome to the Sun Communities Second Quarter 2011 Earnings Conference Call on July 28, 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 that expectations reflected in any forward-looking statements are based on reasonable assumptions, the company provides no assurance that these 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 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 would like to introduce management with us today; Gary Shiffman, Chairman and Chief Executive Officer; and Karen Dearing, Chief Financial Officer.

Throughout today's recording 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, operator, and good morning everyone. Today we reported funds from operations of $17.5 million or $0.74 per share for the second quarter of 2011 compared to $14 million or $0.66 per share for the second quarter of 2010. For the first six months of 2011, FFO was $36.5 million or $1.57 per share, compared to the $31.7 million or $1.50 per share in the first half of 2010.

These results include approximately $0.01 of contribution from our acquisitions and a $0.04 adjustment for a reduction in fees to Fannie Mae of which $0.02 relates to first quarter. No acquisition costs and other items is noted in the table in the press release.

Turning to our core portfolio, occupancy grew by 287 residents in the quarter, an increase of nearly 50% from the second quarter of 2010, and by 430 residents for the first half of the year. The quarterly growth represents the largest revenue-producing site increase in a single quarter since the first quarter of 2005. Anticipated RPS growth is now running at nearly three times the entire cumulative RPS growth achieved during the 2005 to 2010 period.

Same site occupancy of 85.3% reflects a 1% increase in occupancy in the past 12 months and bodes well for the attainment of portfolio occupancy levels of over 90% in the next three to five years.

The rental program currently comprises over 6,400 residents and the weighted average monthly rental rate has increased by $12 from $735 at the end of 2010 to $747 per month at the end of second quarter.

We continue to receive applications at an estimated annual rate in excess of 22,000. The strong continued flow of applications are our best indication of increased demand for both our rental and sales programs.

Our sales remained strong. During the first six months of the year, we sold 719 homes as compared to 732 home sales in the first six months of 2010. Home sales for the quarter were 362 as compared to 407 for the second quarter of 2010, a decline of approximately 11%.

Our home sales budget and forecast for the entire year anticipates significant year-over-year sales for the second half of the year, resulting in overall year-over-year home sales growth of approximately 10%.

We continue to also successfully convert home renters into homeowners as we have sold 416 rental homes during the first six months of the year, an increase of 6% from the prior year.

Turning to same site results for the second quarter, they reflect another quarter of significant growth as net operating income increase by 3.6%, bringing NOI growth for the year to 3.9%. Strong revenue growth of 3.3% reflects the contribution of both occupancy gains and a 2.7% annual rental increase.

Halfway through this year, we are now ahead of our year-to-date budgeted targets for NOI growth. The second quarter FFO per share of $0.74 represents quarter-over-prior-year-quarter growth of about 12%. On an annual basis, we've been growing FFO per share at an average of 3.2% from 2005 to 2010. In 2010, FFO grew 3.8%, which was above the five-year average as momentum from RPS gains from 2009 and 2010 began to have an impact. This growth was accomplished predominantly through annual rental increases and occupancy gains in our core portfolio.

Including the accretion from the acquisitions just closed, 2011 FFO per-share growth may approximate 5% to 6% prior to acquisition costs. We expect stronger FFO growth when the impact of our planned expansion and the full year of accretion from our acquisitions are included.

Our first expansion in nearly a decade resulted in Firestone, Colorado, in third quarter of the last year. The lease-up for this 124-site expansion has been six per month, which actually exceeds the pro forma lease-up rate by about 50%.

We are currently planning for the expansion of six of our Texas communities, which are at or nearly at 100% occupancy. We expect to complete over 725 sites in the next 12 to 24 months.

If we were to assume a lease-up rate of 3 per month, a typical 100-site expansion produces unlevered returns of approximately 9% when fully occupied. This translates to about $0.02 of accretion. Given the 725 planned expansion sites, we would expect about $0.14 of accretion. Of the over 6,200 sites available for development, over half are located in our Texas and Colorado markets.

During the second quarter, we acquired a total of 19 communities. In May, we acquired a recreational vehicle community, or an RV community, in Orange City, Florida containing 525 developed sites for about $6.5 million in cash. The property was later financed as a part of a larger debt transaction.

In late June, we completed the Kentland acquisition, inclusive of 18 communities, 291 homes and a portfolio of notes receivable, for a total of approximately $143 million. The community contained approximately 5,490 sites. The transaction included the assumption of $52.4 million of debt, the payout of $24.8 million of existing debt and the issuance of $45.5 million of Convertible Preferred Operating Partnership Units.

The payoff of the existing debt was largely financed by $22.9 million of new debt placed on five Kentland properties and the Orange City RV community.

These acquisitions are estimated to be accretive to our existing 2011 guidance by approximately $0.10 to $0.13 excluding acquisition costs. We continue to look at acquisition opportunities and currently have executed on a letter of intent on a community located in Texas.

And along with implementing strategies for incremental internal and external growth, we've also been working diligently on transactions to strengthen our balance sheet.

As of January 1, 2011, we had $695.5 million of mortgage debt maturities coming due in the next five years. Exclusive of acquisition financing activity, the refinancing transactions that have been completed to date have decreased the amounts due in the next five years by $473.8 million to $221.7 million. And we accomplished this through the following transactions.

During the quarter, we completed a $23.6 million CMBS financing transaction, which replaced currently existing debt on three properties scheduled to mature in 2012 and extended that debt to a maturity of 2021.

In July, we reached a final agreement with Fannie Mae and PNC Bank to settle the litigation we commenced concerning certain fees charged on a $152.4 million variable rate facility. Among other things, the terms of the agreement provides us the option to extend our entire $367 million facility until the year 2023, subject to certain underwriting criteria. Previously, the facility had maturity dates of 2014 and 2015. So the effect of these transactions, along with the $115 million CMBS financing we completed in the first quarter, more than doubled our weighted average maturity on mortgage debt from 3.7 years to 7.6 years.

The settlement with Fannie Mae also provided for a reduction in the facility fee charge on our variable facility, the effect of which lowered the interest expense for the first six months of this year by approximately $840,000.

The final piece of 2011 maturing debt is a $115 million line of credit. We have been working diligently on the renewal of this and are optimistic about our ability to renew the $115 million line and terms that are comparable to the current market.

Further strengthening our balance sheet is the issuance of nearly $110 million of equity and the issuance of Convertible Preferred Operating Partnership Units during the last 12 months.

Based on performance year-to-date and accretion from our acquisitions, we're revising 2011 FFO guidance to $3.10 to $3.16 per share, excluding acquisition costs. At the midpoint of revised guidance, our payout ratio is anticipated to be approximately 90%.

And at this time, both Karen and I would be pleased to answer any questions.

Thank you. (Operator Instructions) Our first question is from the line of Stephen Mead. Please go ahead.

Yes, good morning.

Good morning, Stephen.

If I could just -- can you talk a little bit about when you talk about the accretion from the acquisition, what assumptions you're making in terms of what the profile of those properties are today and which you can manage them too? I mean does that accretion include certain assumptions about that? And then I had just a general question. As I look at the different occupancy levels across your different states and also your acquisition in Michigan -- Michigan has the lowest occupancy. But I was wondering how much of variation there is in net interest -- not net interest margin -- but net operating margin as you increase the occupancy?

Okay. So taking your first question, I think we shared on previous calls that the Kentland transaction we feel will be very accretive for growth to the shareholders based on the fact that the previous owners had limited capacity for capital investment for the rental program. And basically, there were no rentals in the community. And they're a part of our strategy to grow FFO. We anticipate operating a rental home program in many of those communities as well as continued sales efforts, which they've been very successful at within those communities.

So we have basically taken the previous historical NOI, placed our anticipated rental increases for the coming year into our model. It shows no significant growth for the first six months. And in the second half of our model year, we show about an increase in occupancy of three sites per community for about 14 of those communities going forward. So a 90%-plus occupancy rate has been achieved.

And that's pretty similar to our experience with our Michigan portfolio. In Michigan, as we've shared previously on our calls, we have been experiencing a very rapid occupancy growth, similar to Texas where we're also strong because of the strong demand for affordable housing. And we attribute much of that in Michigan to uncertainty of what was taking place in the automotive world. Having gone away over the last couple years, with the stabilization of the job market, those who lost jobs in Michigan area and have moved, or were reticent about spending because of the uncertainty, that seems to have stabilized into the rates of customers that are leasing sites from us. And I think that our expectation is that will continue based on everything we're seeing right now.

Stephen, if I can just add, if you look at our revenue-producing site growth for six months of the year, 50% of that revenue-producing site growth has occurred in Michigan, Indiana and Ohio. So we feel pretty strongly about the occupancy increases we can gain in that portfolio.

And the variability of margin or profitability across the different states in term of -- if I look at Indiana with a 67% occupancy and Michigan with 81% -- (inaudible -- multiple speakers)?

I don't really have that information by state. What we -- how we look at the portfolio really is that many of our operating expenses are fixed really. And when you add sites, you're just adding incremental revenue. When we do projections, we put potentially a 10% increase in expenses based on that revenue. But in general, the expenses to run a community, to have personnel on site isn't going to change if you're adding sites or adding occupancy.

I would say a good rule of thumb is we look for roughly around 85% incremental starts to drop to bottom line (inaudible). 10% to 15% is about what we anticipate from selling sites both on an expansion side and that's where you get the 15%, because things like insurance and other fixed costs might go up slightly, but the overall fixed costs of management and personnel at the property are all in place.

Okay. I'll turn it back and then I'll ask other questions later.

Sure.

Thank you. And the next question is from the line of Paul Adornato. Please go ahead.

I was wondering if you could talk about the home sales that you expect for the rest of the year? Down year-to-date, but you expect still a very healthy increase year-over-year. What's the dynamic at work there?

Well, I think the only reason we're down to date April-to-April were the only selling months. And if you remember, last year April ended the big home-buying incentive the government had. So I think we attribute it to that. But every other month basically this year has been to budget or above last year. Based on the applications that are coming in and the orders on hand, I think we have anticipate approximately -- I don't know what this number is --.

Total sales?

Yes.

1,525.

1,525 sites for the year, and then a re-forecast that was done as recently as last week, Paul, all operations are comfortable with that.

Okay. And do you expect them to be balanced between new home sales and rental home sales?

I don't have the updated amount.

The sales will generally be pre-owned home sales, which are inclusive of both the rental homes and regular pre-owned homes. The new home sales have been not very significant over the past several years, and we wouldn't expect that to change.

How is that number? Is it 800 to 900 roughly or --?

865 of them are rental homes, Paul.

Okay, great. That's the number I was interested in. And then looking at the rental business, if you were to look at the rental applications with the terms of the gross number of applications coming in as well as the credit quality of the applicants, could you just talk about those trends and what you're seeing among the folks that are looking to rent?

Yes, I'd simply say that we have always underwritten our renters as buyers in our [F&I] department. And it's something that has helped us successfully navigate through a difficult process of being in the rental business. So we see a pretty steady progress we've seen over the last couple of years as we've seen improvements, and not a whole lot has changed there.

Of the over 20,000 applications we get in, the vast majority are for rentals. And so we've always looked at that as our ticket if you will, to take those qualified buyers and move them into homeownership and show them how it can be much more cost-effective for them. So nothing has changed too much except for 75% of all the applications coming are for rental.

And what's your acceptance rate of those applications?

It's about 50%, Paul, it's been running that over the past several years.

And no change in your underwriting criteria, that is using the same cut off, if you will?

No change in the underwriting criteria.

Okay. Thank you.

Out of the 50%, how many actually of those close in?

I don't have that sheet in front of me.

I think about half of the 50%, around 25% to 30% actually do go through closings that are actually approved.

Okay. Got it, yes. Thank you.

(Operator Instructions): The next question is from the line of Andrew McCulloch. Please go ahead.

Hi. Good morning, guys. This is Chris Van Ens for Andy. First question. With the settlements of the Fannie litigation, are you guys still tapped out with them or are they willing to lend more to you moving forward?

I think that we have an excellent relationship with them. I think that it was recognized that the litigation was over something that quite honestly was out of their hands at the time Fannie Mae was going through what they were going through. So the mediation, the settlement was very reasonably discussed around the table. Subsequent to debt settlement there was Fannie Mae debt in on the Kentland acquisition. And that exceeded everything they'd put on us before. And our expectation is Fannie will continue to work with us going forward, and we will take advantage of any opportunity of debt though them.

Okay. And then secondly, you guys have been pretty aggressively tapping the CMBS market over the past two quarters. Are you guys still in that market and have you seen spreads start to gap out at all?

We are not in that market right now. I think we've completed the transactions that we needed to complete. Again, our focus right now is on the renewal line of credit. And in between our first CMBS and our second, we have got a little bit widening of spreads and then we saw them back in just towards closing. So I'm not current at this particular time on where they're at.

Okay. Thank you. That's all from me.

Thank you. The next question is a follow-up from the line of Stephen Mead. Please go ahead.

Yes, I'm just looking at the page 12 of the supplement, and the question was on move-outs, what the seasonal pattern of move-outs is. And those have been trending very well, but you had basically 400 move-outs as of June 30, which compares favorable to last year on an annualized basis. But I was wondering just seasonally how does that tend to work for you?

On what page are you at?

Page 12 of the supplement, operating statistics, the move-out column.

I don't think we have -- hold on a sec.

Steven, I don't think that we see a significant seasonality in those move-outs. I don't have that information in front of me. If you would like to follow up with a call with me --.

No, no. I was just wondering if you could look right into the second half of the year. You're trending very favorably in a number of service areas as a company. I didn't mean to kind of suggest that --?

We have, Steven -- and I'm taking a moment to get to the page here. We have had historical seasonality in the second half, where we've had more move-outs than the first half. That seems to have stemmed last year. That was totally diminishing of the second half bloom as we call it here. They are anticipating a much stronger second half and then expect to anticipating a strong fourth quarter. Fourth quarter was always the most challenging quarter for us. So I think that we are not anticipating much seasonality. In fact, we are anticipating growth through the end of the year.

And then just going back from a corporate standpoint, looking at the growth of the portfolio now in terms of new investments, improvement of the existing portfolio from a cash flow standpoint, at what point would you be in a position to start to increase the dividend?

I think there certainly have been a lot of goals that we've had for the last few years, starting with our refinancing, from being an unsecured borrower to secured borrower. We were at a payout ratio above 100%, and we are there for a few more years than we would have liked.

Now, as we stated in the guidance, we anticipate at the midpoint to be at right around 90%. The Board reviews the dividend policy each quarter. It would be our expectation that they will continually -- or continue to review that. And they have had a previous policy of increasing dividend about equal to CPI. But I would expect that that will take place at some time as the dividend begins -- the payout ratio begins to decrease below 90%. But I don't know exactly what point that would be.

And then what are you seeing in terms of just the financing of the purchase of manufactured housings in terms of -- any movement in terms of securitizing manufactured housing mortgages or -- what's going on in that space?

I would tell you that we see very little. There is always a lot of discussion about a lot of different deals and different ways of wrapping and insuring some securitizations, but we have not seen much change across the entire portfolio.

What about the availability of credit to a purchaser of a manufactured house at this point?

I think it's very, very limited. I think for those -- certainly that have their nest eggs or have great credit and they have savings in the bank, they can go to their traditional sources. And for the balance of those, there is a handful of companies that are still in the business and still brokering on behalf of other third-parties, but nothing has changed at all. It's just -- there is no new financing that I'm aware of in the market right now.

Okay.

(Operator Instructions) And I'm showing that there are no further questions at this time. I will turn it back over to management for any closing remarks.

Well, certainly on behalf of the entire staff of Sun Communities, we appreciate your participation. Both Karen and I are available for any follow-up questions. And we certainly look forward to reporting on third quarter. Thank you.

Ladies and gentlemen, this concludes the Sun Communities' second quarter 2011 earnings conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 and enter the access code of 4453012. Thank you for your participation and you may now disconnect.