Sun Communities Inc (SUI) 2011 Q3 法說會逐字稿

Welcome to the Sun Communities third-quarter 2011 earnings conference call on October 25, 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, Operator, and good morning. Today we reported funds from operations of $18.6 million or $0.75 per share for the third quarter of 2011 compared to $14.8 million or $0.69 per share for the third quarter of 2010. For the first nine months of 2011 FFO was $55.1 million or $2.32 per share compared to $46.5 million or $2.19 per share for the first nine months of 2010. These results exclude certain items as noted in the table on the press release.

I'd like to start off by emphasizing it has been a milestone year for Sun Communities. Simply stated, we have greatly strengthened our balance sheet with dramatically extended and balanced debt maturities while experiencing consistently rising demand for sites in our communities. To top it off, we have assimilated our largest acquisition in 15 years while currently reviewing substantial additional acquisition opportunity.

The momentum from our strongly growing occupancy and the accretion from our 2011 acquisitions promises a strong 2012 and we still have one quarter to go. Specifically in the third quarter we entered into a new revolving credit facility to replace our expiring $115 million line of credit.

The new agreement is for $130 million with an accordion feature allowing for up to $20 million in additional borrowings for an aggregate of $150 million. The facility's term is three years with an option to extend for one additional year.

This is the final major credit market achievement of the year for the Company. Previously we have reported on the various favorable refinancing and maturity extensions. The next significant debt maturity is in July 2014 when a 10-year secured financing matures.

Occupancy continues to surge with an increase in same property occupied sites of 629 for nine months, a full 23% ahead of this time last year. Additionally, our recent acquisition, Kentland, which closed in late June 2011, added 103 sites of occupancy in the quarter, a much stronger performance than forecast.

One of our expansions opened in Austin, Texas the first week in September. By September 30, 17 sites were filled, again, far stronger than our forecast of six per month. And in a moment I'll summarize the expansion activity currently taking place at the Company.

Occupancy gains of 732 for the nine months were strong across the portfolio. Michigan added 317 sites, Texas added 154 sites, Colorado added 113, Indiana added 80 and Ohio added 34. This represents the strongest occupancy growth in the nine-month period in our history.

While some periods in the '90s had higher gains, they were the result of extremely loose underwriting standards and most of those gains were a lose rate as the homes were foreclosed on throughout the early 2000s. These currently reported gains are based on extensive and proven underwriting standards and reflect performance that has taken place in our portfolio since they were implemented over five years ago.

Portfolio occupancy is at 85.4% at September 30. As the 2012 budgeting process moves forward it is the current expectation that portfolio occupancy will approach 90% by the end of 2013. Same site performance reflects those strong occupancy gains. Revenue grew by 3.4% for the nine months while expenses increased by 1.8% and NOI grew by 4.2%.

Occupancy improvements drive revenue growth above the average annual rental increase of 2.5% to 3%. The modest expense growth reflects strong operational and budgetary controls. As occupancy continues to gain momentum we should continue to see strong same site performance.

Home sales within the portfolio also remain strong; they should approximate 1,450 this year, an increase of 5% over 2011 and more than doubling the 712 homes sold in 2007 for a compounded annual growth rate of over 18%. The cash proceeds from home sales are generating about $25 million annually which is then reinvested by the Company in homes generating additional occupancy.

While we can't discuss the specifics, potential acquisitions remained very, very strong. We can note that we are looking at more opportunities than at any time previously. The opportunities all play to our strengths -- strong operational and sales management teams refined and well-developed systems, a proven rental program which has filled numerous communities, and experience across the spectrum of communities with overall quality and geography.

This marks our seventh consecutive quarter of growth in occupancy during which we have added nearly 1,300 residents. The annual revenue increase resulting from these gains approximates $6 million annually. Occupancy growth in 2012 should rival the growth we have generated over the last seven quarters. The growth in same site net operating income for the nine months is the strongest since 2002.

The average NOI growth over these 10 years has been 2.8% for the first nine months compared to 4.2% in 2011 and this is a result of the momentum being built from steadily increasing occupancy levels throughout the portfolio.

We had the strongest quarter for applications to live in our communities in third quarter 2011 with a total of over 6,600, up over 20% from the last quarter and 5% year over year. This demand is filling our communities while providing us with the opportunity for the significant rate increases in our rental program which hasn't taken place for the last several years and will take place this coming year.

As noted previously, our expansions are filling ahead of projection and we will bring about 450 additional sites on stream in the next 12 months at four of our communities and our strongest markets. These expansions are taking place in communities that are fully occupied and have strong demand for additional sites. The land is zoned and permitted with significant up-front cost incurred years ago. The return on the expansions, including the acquisition of related homes, approximates an unlevered return of 10%.

In closing, we expect the trends reviewed today will generate solid internal growth. In addition, substantial long-term accretiveness should be enhanced resulting from acquisition opportunities, purchasing off of existing NOI, but allowing us to purchase what we refer to as vacant sites for free and then filling those sites up. At this time Karen, myself and Jeff would be available for questions, operator.

(Operator Instructions). Paul Adornato.

Gary, I was wondering if you could talk a little bit about the transaction market since you seem optimistic that there might be more acquisitions out there. Who are the sellers? Is it mom-and-pop's who might be capital constrained? And who else is looking to buy in this environment?

Sure. I think that what we've found is we've been seeing one- and two-offs that have now cycled through the banking process on the cap rate basis.

Okay. And related to that last comment, you mentioned also a goal of achieving 90% occupancy by the end of 2013. I was wondering kind of what are the constraints to perhaps making that goal sooner. Is it capital required to invest in new homes, is it personnel on your side, or do you feel like you're meeting the demand in a reasonable fashion?

Paul, that's an interesting question because there's a bit of irony in it. I think the simple factor is that in some of our strongest markets our communities are filling up. So the ability to reach a higher occupancy sooner would be enhanced if those strong communities were -- had more sites to fill up.

So we have to look towards expansion in those communities that we can and many of them we have that ground all set to go, but it takes all said and done anywhere from 12 to 18 months. In addition, obviously the markets that are filling fastest, as they fill the next markets are filling a little bit slower. So that's timing involved.

Thanks very much, appreciate it.

Stephen Mead.

Gary, two questions. You made good progress in terms of the cash flow relative to the dividend. What needs to happen for the Company to resume dividend growth? And then the increase in activity in the fourth quarter, historically what contributes to that?

Well, taking your first question with regard to the dividend, I think we have made great progress after a difficult period of time when we refinanced the whole balance sheet, I think in 2004, where our payout ratio did exceed 100%. And we slowly brought it down and we anticipate it dropping below 90% before the Board reviews it and they typically review it each quarter when we get together.

And as we continue to make steady progress we'll be able to reflect the Board's position on increasing the dividend. So that is something that remains in the Board's hands and it's reviewed each quarter. With regard to fourth quarter, if you could be a little more specific on what you were referring to I could address it?

Well, if you look at sort of FO comparisons, fourth quarter versus third quarter on a historic basis, there's a fairly significant jump in FFO in the fourth quarter. I was just trying to get a sense of what contributes to that.

Steve, normally you'll see in the fourth quarter our RV business pop back in again and our property operating and maintenance expenses decrease. So generally you'll see our first quarter as our strongest, fourth as our second strongest and second and third kind of go back and forth.

All right, thanks.

Todd Stender.

Just looking at your expansion opportunities, you mentioned there's 450. Can you tell us what markets they're going into?

Sure. I think that there's many more opportunities other than the 450. Do we know the exact amount of expansion sites that we have?

I think there's 5 -- over 5,000.

There's over 5,000 sites within the portfolio. But the 450 is what we're actually currently in the process of bringing to market. And I believe the two areas are Texas and Colorado.

The four that we're planning for next year are -- they're all in Texas. There's one in Houston, two in San Antonio and one in Austin.

We do actually have our 2013 expansions under review right now and it looks as if they'll be pretty similar, but they will also open up into Colorado.

Is there anything holding you back from expanding in Florida? I just looked on the trends and your occupancies have been so strong they're pushing 99%. Any thoughts around Florida in particular?

I think that the expansion you're seeing a result of land that we actually own, okay, and that is zoned and permitted and in the Florida marketplace there is, other than at Water Oak, there is very little land that we currently have for expansion or development.

Okay, thanks. And Gary, you mentioned the 10% unlevered return. How does that shape up or compare to your historical numbers or how you kind of look at that on a return basis?

Sure, I think that it's a little -- pretty similar in that we have a little expense related to having to go through the rental home program and then go ahead and sell the rental home. So we have to buy a home and put it on the site and bear a little bit of the carry cost of that home.

But at the same time we're looking at decreased development costs at around $25,000 on average. We're going back 10 years ago, these sites all in were costing us probably about $35,000, so about a $10,000 savings. A lot of that is due to incremental infrastructure that was put in place and paid for 10 or more years ago. So more is dropping to the bottom line because those dollars don't have to be put out today.

Okay. And using your equity shelf you issued shares in the quarter. How do you look at the cost of equity when you're going to issue shares? Is it the share price relative to your estimate of NAV or how should we think of that?

I think that what we've been most focused on is the debt leverage and how we compare to the rest of the REIT world. So we're looking over a period of time to steadily reduce debt and kind of looking at a blended cost of -- or an overall cost of equity and debt as we look at the acquisition opportunities to kind of accomplish two things -- bring future growth into the Company and do it on a basis where at the same time we can slowly reduce debt to a lower level.

But I don't think we have any specific plan that is in place right now that isn't tied to acquisition or expansion growth or needs that we have within the Company to make sure that the debt or leverage or ratios don't change from where we're at right now. In fact, we're trying to bring them down. So I don't know if that answers your question or not, but that's pretty much how we're looking at it internally.

Okay. And just the final question just on that topic. Bringing your leverage down it's kind of in the mid to upper 50% range now. Can we think about that heading more towards 50%, is there an internal target?

Yes, I think we're being viewed closer to 65% now.

Yes.

And I think the goal is to bring it down from the 65% and it's something we've discussed on the call for the last year, year and a half as we've used the ATM program when we've needed cash for the acquisitions and for the home sales program as well as the expansions.

So there's nothing I would expect to change radically, but slowly ratcheting down the overall debt level is something we'd like to achieve. And so if we go out for an acquisition now it would have less than 65% leverage when we were done with it and in some cases we'll start out with those acquisitions if we do close on them at less than 65%.

Okay, thank you.

(Operator Instructions). Andrew McCulloch.

On the acquisition opportunities you're seeing, can you expand on what type of product that is, age qualified, all age resort or RV?

I would say it is an absolute blend of all three, probably more adult than we've seen (technical difficulty) restricted than we've seen in a while. Some of it on the western part of the country which I think will bring us good geographic diversity as we're not real heavy in that area. But clearly it has been across all three spectrums that you mentioned.

And then can you talk a little bit about interest from homebuyers on the margin? We know our renter demand is real strong, but are there any markets where you're seeing buyer demand come back?

I think just as a part of our home sales, buyer demand is certainly there and it's what's causing us to be able to recirculate our capital into a growing rental program and allow us to look at taking advantage of what we refer to as the empty sites in the new acquisitions. Even in Kentland where they were -- what was the occupancy when we bought Kentland?

76%.

76%? We are selling homes in Michigan into those communities. So I think the advantage right now is just the affordability factor and the fact that traditional site built housing for purchase is somewhat closed. But albeit the home sales overall in the country through -- as reported by the manufacturers are still hovering in the 40,000, 50,000 unit level. So far, far down from where they were in the late '90s.

But we're getting our share of home sales and I think, as I reported earlier, it's over 20% quarter over quarter last year and roughly up 5% for the year. So things are positive and we anticipate that that trend will continue because there really is nowhere else for the home buyer at that level to qualify or turn to buy a home even when you consider the foreclosures that are available to them with their base income. I think there will be strong trends as we continue across our portfolio.

Do you have an expectation of when you think home sales will be large enough to start shrinking your rental program?

That's a good question. I think that home sales are -- the rental program is a function of how fast we want to fill up occupancy. I think that if we grew rentals a little bit slower at this point and took out our opportunities both in expansion and in our acquisitions you would start to see the rental program slowly shrinking.

It's strictly a factor of our model now using the rental program, go ahead and expand the properties and to acquire new properties. And the cycle is pretty simple; we look at putting in at any given property, new property 50%-60% rentals and the rest are direct sales. And then we take those rentals and hopefully resell them back to the consumer over a four-year period of time. So our expansion models kind of show us renting to go up and then converting those into sales over a four-year period of time after that.

Great, thanks for that. One last modeling question. On the expansion sites, is the added income from those sites included in your same-store results?

Yes, it is.

Great, thank you very much.

(Operator Instructions). [Pendel Sanjoost].

Just a couple quick ones here. First on G&A up materially year over year here. The driver there, what was that? Was it related to the closing of the Kentland portfolio?

No, I think last year -- it's actually last year's G&A was a little bit down. There was a reversal of a tax accrual that we had to do in last year. So you're seeing -- it looks like a bigger variance than it actually is. But if you're looking out into the end of the year where we're going to be, if I remember our forecast right it's about -- it's a little less than the average for the three quarters.

And then on the expansion plan for next year, the 450, what is the assumed cost per site, the development cost there? And can you give us some more color on the planned funding, especially as your line starts to creep up here?

Well, the costs I indicated were roughly $23,000 to $25,000 on average per site. And I think as it stands right now internally we see ourselves being able to fund that in part whether off our line or there's a certain amount of paper and notes that we're in the process of selling as well within the Company that we think will generate sufficient funds along with, if needed, our ATM program.

Okay. And then on the rental home activity, the purchases there. Profit margin continued to be squeezed, it's down I think 12% from this time last year. How much further are you willing to sacrifice margins here for volume?

I think it's if you hit on a big internal debate that takes place -- a healthy debate between Sun Home Services, our rental, and sales agency and operations. But I think that our overall goal is the sale of homes. So I think that there is a willingness to bring the capital back in full circle and sacrifice the margins when necessary.

If I'm understanding your question right, then be able to use that capital and put another home in the community. So recycling that capital and eventually reducing the rental program over probably what will be a long term now would be priority number one, not the margins.

And one last one, given your thoughts on the increasing amount of acquisition opportunities you're seeing out there, can you give us some updated thoughts on potential disposition candidates within your portfolio today, where those might be and any sense of -- I mean assuming the pricing would maybe fall at the higher end of the range, the cap rate range you provided earlier?

Sure. I think that we carefully try to follow an asset management process. We have identified six communities that we would like to put in the disposition bin. But in doing so I think we're going to wait for the 2012 budget to be completed. It will be completed mid-December, Karen?

Yes.

Mid-December. And at that time if we do tend to move forward with any dispositions we would do so at that time and we also expect to provide guidance at that time. So I think both issues will be addressed then.

Fair enough. Thank you very much.

Thank you. And there are no further questions at this time. I would now like to turn the call back over to Mr. Shiffman for closing remarks.

Well, thank you, Operator. I'd like to thank everybody for participating today. As always, Jeff, Karen and myself are all available for any follow-up. And as we go into fourth quarter we look forward to speaking either prior to or during our next quarterly remarks. Thank you.

Ladies and gentlemen, this concludes the Sun Communities third-quarter 2011 earnings conference call. You may now disconnect. Thank you for using ATT conferencing.