Sun Communities Inc (SUI) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Sun Communities fourth-quarter 2011 earnings conference call on the 23rd of February 2012.

At this time management would now 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 SEC. The Company undertakes no obligation to advise or update any forward-looking statement for 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 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, everyone.

Today we reported funds from operations of $20.1 million, or $0.81 per share, for the fourth quarter of 2011 compared to $17.2 million, or $0.78 per share, for the fourth quarter of 2010. For the year 2011 FFO was $75.3 million, or $3.13 per share, compared to $63.6 million, or $2.97 per share, for 2010. These results exclude certain items as noted in the table in the press release.

2011 was a breakout year for Sun. Performance of our core portfolio, rapidly leasing expansions, and fully integrated acquisitions formed a trio of growth generators effectively executed by our experienced management team to produce results not seen in many cases in over a decade. Along with achieving FFO per share growth of 5.4%, the highest FFO growth achieved in a decade, we are pleased to report the following additional achievements of 2011 and projected information for 2012.

Revenue producing sites in our core portfolio increased by 732 during the year, bringing same site occupancy to 85.8%, an increase of 130 basis points from 2010. Budgeted same-site occupancy for 2012 approximates 87%. Additionally, our recent acquisitions exceeded our pro formas and added 160 sites of occupancy, bringing the total gain in revenue producing sites to 892, or the largest gain in sites that we have seen in the portfolio since 1999.

We note the current gains were achieved without the benefit of the robust dealer network which existed back in 1999. We continue to see occupancy increases in our major markets including the Midwest, which gained nearly 50% of the recorded 2011 gained sites, and in Colorado and Texas, which added another 43% of the gained sites.

In 2012 we expect to add 1,154 sites to occupancy which would bring total portfolio occupancy to 87%, a 170 basis point increase over 2011, with the expectation that 2013 occupancy should approach 90%. Driven by leasing and our acquisitions and expansions, which contain nearly half of the projected 2012 site gain, budgeted occupancy gains in the Midwest approximate 70% of our gains while Texas and Colorado add another 25%.

As originally projected, our 2011 weighted average rent increase was 2.7%. The 2012 budget includes an increase of 3%. Unlike any other real estate asset class, we have been able to increase rents on average between 2% and 4.5% in each of the past 25 years of our private and public existence, really providing an unparalleled stability of income through all types of economic cycles and demonstrating a pricing power nearly unique among real estate classes.

Turning to our same-site portfolio, revenue grew this year 3% while expenses grew a modest 1.6% generating NOI growth of 3.6% or the highest percentage of growth in over five years. Fueled by cumulative occupancy gains and consistent rent increases, same site NOI growth is projected at 6.2% for 2012.

Applications to live in our communities grew to nearly 23,500 in 2011 or an increase of approximately 7% over the prior year. We ended the year with just over 7,000 occupied rental homes and we expect to add an additional 600 occupied homes to the program in 2012. Consistent with our strategy, over 60% of the 2012 growth in the rental program is located in acquisition and expansion communities. In our core portfolio, growth is slowing as communities reach greater than 95% occupancy and begin selling themselves out of the rental program.

For 2011 homes sales totaled 1,439, an increase of 4.7% over the prior year. And although total home sales were lower than budgeted, we were able to make up some of the lost income through higher than budgeted gross profit. For 2012, home sales are projected to increase by nearly 22% for a total of 1,750 sales.

We have enhanced our business platform for home sales by aligning main office support with specific regions for all types of sales. Essentially applying our successful approach to the rental conversions to both new and non-rental pre-owned home sales. We believe this centralized approach and realignment will allow us to capture more sales through targeted and multifaceted follow up. In turn, this will also allow our on-site staff to spend additional time accelerating and generating new occupancy gains due to the stronger demand we have experienced over these last few years.

We continue to successfully convert renters to owners at a rate of 12% to 14% per year as 789 rental homes were actually sold during 2011. Our 2012 budget includes the conversion of 924 renters to owners, an increase of approximately 17%.

Our Austin, Texas, expansion of 178 sites opened in mid-September and had occupancy of 45 sites by year-end. The expansion is budgeted to be full by the end of 2012. At the same time our Colorado expansion of 124 sites has less than a dozen vacant sites and we expect them to all be leased by the end of first quarter.

We have started or are in the process of starting construction on 452 expansion sites in Texas where occupancies are high and demand remains strong. Construction is expected to be complete on 332 of those sites by the end of the third quarter and the remaining 120 sites in the fourth quarter.

In 2011 we purchased 23 communities and have purchased another three communities after year-end for a total purchase price of $200 million. Our last year of acquisitions of this magnitude was 1996. These acquisitions are initially accretive and also provide long-term growth opportunities through both occupancy improvements and rental increases.

We continue to see an active pipeline of acquisition opportunities and are, in fact, completing due diligence on large and small portfolios as well as several single communities. Although our guidance does not include a pro forma acquisition, we are optimistic we will be able to utilize our available liquidity to complete additional acquisitions with similar growth potential during 2012.

During 2011 we were also very active in balance sheet improvement, including two CMBS transactions totaling $139 million which extended debt maturities in both 2011 and 2012. The renewal and expansion of our revolving line of credit, negotiating an extension of our entire $367 million Fannie Mae facility from 2014 and 2105 to the year 2023, and accessing secured debt for our acquisitions. These transactions extended the weighted average maturity of our total debt from 4.4 years when we began 2011 to over seven years at the end of 2011 and We believe are indicative of the capital market's endorsement of our balance sheet management.

Today, our mortgage debt maturities for the next two years are $16.8 million and $33.8 million.

With additional focus on deleveraging the Company, we completed a follow-on offering of $163.3 million last month. The 4.6 million share sale resulted in $156 million of net proceeds. $123.5 million were used to pay down our lines of credit and $25 million of that was used for 2012 acquisitions or the closing of the three communities I referred to prior.

The offering improved our debt-to-EBITDA multiple from 9.8 times at year-end to a pro forma multiple of 8.9, and based on projected EBITDA and debt levels we expect the multiple to further improve to 7.9 by the end of 2012. While we strongly believe the proven stability of our cash flows support higher leverage levels than other real estate classes, we continue to look for opportunities to gradually reduce leverage while balancing capital needs to fund our stated growth strategies.

In summary, we are achieving results from our core portfolio that have not been attained in numerous years and we are supplementing that growth with successful expansions and acquisitions, allowing management to leverage its personnel systems and leasing capabilities that are in place. We have strengthened our balance sheet, made progress on deleveraging, and provided our shareholders with one of the highest total returns on investment in the equity REIT universe.

As noted from the metrics shared above, we expect 2012 to be another great year. Projected increase in NOI and EBITDA of over 13% and 16% support FFO per share of $3.57 to $3.63 prior to the $0.38 dilution from our January equity offering. Inclusive of that dilution, we expect FFO to be in the range of $3.17 to $3.27 per share. At the midpoint of guidance our payout ratio after reduction of $8.4 million of recurring capital expenditures and based on an annual dividend rate of $2.52 will approximate 86%.

At this time both Karen and I are available to answer any questions.

(Operator Instructions) Jana Galan.

Thank you. Good morning. Can you let us know how you are thinking about expenses for the same-property portfolio in 2012?

We normally don't split the NOI growth in 2012 between revenues and expenses, but in general I would say that it's a slight reduction from where they ended up in 2011.

Thanks. Then I was just curious if kind of year-to-date have you noticed any increased competition from site built homes in any of your markets?

No, I think that much of what we shared over the industry's difficulties over the last 10 years is the competition that was generated from site built was primarily due to the subprime lending and the credit bubble that existed for such a period of time. Even the overhang of the foreclosures and repossessions in the site built world did not have much effect on our business and our portfolio just because of the differentiation of an average home in our portfolio costing $45,000, $50,000 as compared to any discounted site built housing.

And that ongoing affordability differential, if you will, is probably what is fueling the demand that we have seen increasing over the past three years or so since the subprime and other financing hasn't been available in the site built world. So it's really any positive thing for us and we have not seen direct competition from it.

Thank you.

Paul Adornato, BMO Capital Markets.

Thanks, good morning. Was wondering if you could tell us a little bit about the trend that you are seeing in terms of the credit quality of both the renters and those buying homes within the portfolio.

I think I can comment, Paul. It pretty much mirrors a lot of the remarks I just made. The affordability factor of manufactured housing is kind of playing strong right now into the lack of financing that previously existed in site built housing, so I think it's creating a bigger universal pool if you will.

For the manufactured housing, certainly as it relates to our portfolio in that we are seeing through stronger demand pretty much the same, if not slightly improving, trends towards approval with slightly -- and I underscore the word slightly -- improved credit ratings. So I think that is a trend we will continue to see.

I think that we see the return of a customer that never should have been in site built housing because they really didn't qualify for it under proper underwriting and today's underwriting standards. So that will probably continue to reflect in a slightly improved profile of credit that we see in our communities.

Paul, if you look at it from like a delinquency standpoint, we have seen no measurable increase in delinquencies. They have stayed stable across the year, as has bad debt as a percentage of revenue. In total it's still about 130 basis points.

And so you are seeing that channel financing is available to incoming residents; is that in abundance from third-party sources?

Abundance would not be the correct statement. No, it's still quite limited. I think the vast majority of all of the sales that we are doing are financed internally by Sun and then sold off to third parties or they are funded in wet paper with third parties where we have arrangements. We estimate about 12% to 14% of the sales are actually financed by third parties and about another 7% to 10% are actually bought with cash.

Okay. Then switching to your comments on leverage, appreciate all the color there and also the outlook for acquisitions that you have got some in the due diligence pipeline. So at the end of the year, if you expect to be at lower leverage metrics, we should expect additional equity to come in conjunction with any additional acquisitions in 2012?

I think that that is a very good question. It's something that we are going to watch and weigh very, very carefully based on the acquisition pipeline that we have and balancing the acquisitions and the accretive (technical difficulty) shareholders against what we want to accomplish with the balance sheet.

As everyone is aware, Sun has been a company that has been very, very patient. We believe that the balance sheet and the industry can handle stronger leverage, so we really took our time and rather than having to raise equity at times we were able to wait until our share price improved and take advantage of that.

So I think that how we look at that over the year, Paul, although we have intimated that we will continue to look at reducing leverage will depend a lot on what happens with acquisition and the timing of what is going on in the marketplace.

Okay, appreciate that. Just one more item. You talked a little bit about providing additional sales support out to the -- out in the field. Was wondering if there are any G&A implications of providing perhaps a little bit more or different type of sales support?

No, we basically repurposed individuals around the organization to support that new initiative. Really what we are talking about, Paul, is we successfully implemented this type of main office support for rental home conversions where we have individuals here who are focused on particular regions in the country. And we have kind of spread that successful model out to other sources of business, whether it's pre-owned home sales, new home sales, relocations, and things like that.

Okay, great. Thank you.

Stephen Mead, Anchor Capital Advisors.

If I could just ask this question. If you look at how you started the year in terms of the relationship of whatever kind of number you look at in terms of cash flow available for the dividend and then what you exited 2011 at in terms of that relationship, and a little bit of color as to where you have to get to to become a company with a predictable growing dividend stream.

I am just missing the question at the end there. Is it where do we think we have to or what --?

I was just wondering, do you have a sense of kind of like how much of a cushion between the cash flow available for dividend and the dividend. The idea that once you start to increase your dividend you have to have a business model that supports a continuation of that growth of the dividend.

Yes. I think we have shared with the market before -- first of all, the Board reviews the dividend periodically and certainly on a quarterly basis when the Board gets together. There has been a philosophy historically, although it changed when we restructured our balance sheet in 2004.

Prior to that there was a policy of payout ratio as it approached or dipped below 80% there was typically a dividend increase that was pretty much comparable to CPI. So the Board had been inclined to raise dividend such to the effect that there would be an increase similar to the CPI Index and at the same time retain enough internal -- retain enough of the earnings to fuel growth within the Company at the same time.

So I would suspect, and I have shared with the market, that the Board will continue to look closer and closer to the dividend and that we are coming off a period of time from 2004 where we went from being an unsecured borrower to a secured borrower. We were ahead of our payout, over 100%, until two years ago. Gradually bringing that down, I think towards 80%, the policy will be looked at a lot harder.

Can you provide where you began 2011 and where you exited 2011 in terms of that relationship?

In terms of the payout ratio?

Yes.

Do you have that, Karen?

Just from a payout ratio percentage, we ended the year at 90% and last year I believe we were right around 94%.

Then if I could ask, in terms of the initiatives that you took in 2011, in terms of expenses are there some that were sort of one-time in nature that won't occur in 2012 or not?

I think one-time expenses that we see in G&A there is a -- we do see about $1 million of nonrecurring kind of one-time expenses that are in G&A for 2011. They are related to some software implementation costs and consulting costs that we had, as well as bonuses.

Are you talking about within the Company or on a same-site basis?

Overall (multiple speakers).

Okay, I just wanted to make sure we answered the question for you.

That is helpful. As I looked at the metrics in your guidance, if you achieve the metrics I was wondering why the growth on FFO just wasn't a little bit higher than what is implied in the range today.

I think that there are no one-time --

Besides the ones that I talked about, no.

Okay, okay.

Thanks.

Andrew McCulloch, Green Street Advisors.

Good morning. Could you talk about the cap rates on the six RV communities you purchased in December and February and maybe provide some color on how you valued the permanent sites versus the seasonal ones?

Yes, I think we shared with the marketplace that this was a particular situation where we were not talking a lot about cap rates because there was divisiveness between the ownership on the seller side and we didn't want to get into a situation where one group of owners was looking at cap rates of the other. But I think overall we would share with the marketplace on this particular group, as they are now all closed, all six of them, right around an [8.2%] cap rate.

We are very, very pleased with those particular acquisitions because it's tough to get things in the Florida marketplace as we know. They really enhanced the geographic footprint that we have and the existing sales entity that works for us. The telemarketing in our existing communities there overlaps and it also allows us to feed into these communities from our existing communities. So we are very pleased that we were able to make that acquisition.

I think we have good upside on the rents as they are slightly under market as compared to the rents in all the competition, both inside our portfolio and outside in that particular area. So we are excited about finally getting to close the last three which, literally, took place as we announced last week.

Any color on how you valued the permanent versus seasonal sites, or just maybe generally talk about how much income the permanent sites generate versus seasonal ones?

I don't think I have the breakdown of that. If you want to get back to Karen on that I am sure she can provide some color on that; we will get it from our acquisitions group.

But we just basically value the property as we would any other property, which is applying the cap rate or applying the cost of capital to the current NOI and then looking at growth by either improving or increasing occupancy or raising the rents or operating the communities more efficient. But we don't break it out between one site to the other, permanent or not.

Okay. Then I think on three of those RV properties there was 7% debt. What rate do you think you could achieve if you were to refinance that today into kind of new 10-year money and would that rate be materially different for what you could get on a core MH property?

I am going to say that we are looking at that in the 5% to 5.5% range right now, and I don't have -- Karen, do you know where debt was on those properties, what the rate is?

It's at 7%.

You could give 5.5 on a high-quality RV property and a core MH, assuming high occupancy (technical difficulty) same rate?

In Florida.

In Florida, okay. How much would that change in some of your Midwest MSAs?

Generally, RV communities will have a higher debt or a higher interest rate than manufactured housing communities. We have been very, very fortunate through a lot of our banking relationships to be able to keep it very tight, but that spread could range anywhere from 20 to 75 basis points.

Okay. Then, on the guidance, is it possible for you to tell us what you are seeing NOI growth would be for 2012 absent any gains from the rental program and expansion activity?

I am sorry, could you repeat that question?

So could you tell us -- you have 6.2% NOI growth for the same-property portfolio in 2012. What would that be if you weren't getting any site gains from the rental program or your expansion activities?

It's a tough one. I guess the way we look at it -- a rough of thumb, if you are going to have -- we have revenue increase of [3%], expense increase 2% it's going to yield 5%-something. I don't think we have enough information to be able to give you that difference, but I think if you want to get back to Karen on that you can take a look at factoring out expansions.

I think if we just look at occupancy as another point of reference I think there is 452 expansion sites being added and then there is 118 RPSs gained from those.

I don't think you are seeing a lot of growth but

It's not significant.

-- I think you are seeing a majority of growth on same-site increase and rental increase and control of expense of factors. So it's not driven from expansions.

Now any acquisitions that we were able to generate accretive in excess of what we have already closed in I think would have a dramatic impact.

And if you did 100 sites is generally about $500,000 of revenue. Expansions are almost all revenue; there is no additional expenses associated with them so the 118 sites gained in the expansions it would be a little over $500,000.

Okay, great. Then one last question on guidance, sorry if I missed this. Did you give interest expense guidance or can you?

No, we did not give interest expense guidance, but it's included in the guidance's interest rate that was in place as of 1/1 with no variable rate increase.

Okay, great. Thank you very much.

(Operator Instructions) Paul Adornato, BMO Capital Markets.

Gary, could you just tell us how you think about the mix of property types between RV, all age, and age restricted?

Sure. I think that we shared it with the market before that certainly between all age and age restricted they seem to run in cycles. During more difficult economic times you have got more stability in the age restricted. You have a lot of retirees and fewer people moving out generally, especially when there are in resort areas. They are usually moving out because of health, not so much because of job or other regional economic circumstances.

At the same time, when those communities are more tied to CPI and indexes that aren't increasing as fast as the growth in the rest of the economy we tend to experience higher growth in our all age communities where we can pass on larger rental increases and we are not restricted to CPI. So we believe a good balance is good over the long period of time for our shareholders.

Secondly, with regard to RVs, RVs have been I think very strong generators of growth throughout the period of time that we have owned them which has been about the last 12 years or so. I think that the RV owner/operator tends to be a bit younger in profile and more active than the age-restricted resident and, therefore, it's a nice step to market to the RV homebuyer to move into a manufactured housing community. Right now RVs represent somewhere between 15% and 20% of the portfolio and I would expect that to probably not change too dramatically.

Okay. Thanks very much. Just maybe one more item with respect to the overall industry, you guys have been very successful in the rent-to-own program. Was wondering how just the small operators are dealing with lack of a dealer network. Are they participating in any sort of rent-to-own? How are they filling their communities in this kind new age of the industry?

Sure. I think it's a great question, Paula, and I think it really underscores the opportunity that Sun has right now. I think I shared in a lot of the discussion around our recent equity offering the cost to regain occupancy today is just far too expensive. It just takes more capital than the small owner/operators have.

I think even the regional syndicators that have medium-sized portfolios they have entered into the lease-to-own program, but without access to public capital and other forms of capital it's very, very difficult for them to run the program as long as it takes to buy the homes, to increase the occupancy, and then to turn around and sell the homes after carrying the paper on their balance sheets.

And I think, quite frankly, that is what is driving a lot of the acquisition opportunity to Sun. It's those portfolios. It's those owners and operators that have been in the lease-to-own business a little bit but can't regain the occupancy that they are looking for because they don't have the capital.

So whether it be something like Kentland or a smaller one-off or a couple of communities, I think those are the types of things that we are looking at. Then we also have developed just basically a machine to be able to process, underwrite, rent and then sell these homes. A lot of investment and a lot of experience goes into that form.

For us buying and having those opportunities of getting a solid community that is accretive right up front on cash flow and having the vacancies as our upside kind of plays right into the sweet spot of what we are looking for.

Okay, great. Thanks very much.

[Taylor Schimkat], KBW.

Good morning. Just thinking about converting the renters to owners, what proportion of your home sales are coming from homes that Sun has acquired as new versus used? I guess put another way, are you seeing similar demand to acquire new rental homes versus used rental homes?

New rental or do you mean new homes versus new or used rentals or do you mean new versus used within the rental program?

Within the rental program, the homes that Sun acquired as new homes and put into the rental program. How are you seeing interest in acquiring those newer homes versus the ones that were acquired and I think it's generally out of foreclosure?

I think it's strictly a case of price point and value. I think there is no differentiation. I share with you that probably our residents and all of us would prefer new over used, but it really comes down to credit and value. I think oftentimes the value that is greatest is on those homes that we have been able to buy deeply discounted as repos. I don't think there is a difference and I don't think we have tracked that difference specifically --

I don't have it in front of me.

-- versus used.

And has there been any change in repo volume lately?

It has been rock steady for three years now dropping down to the same level it was pre-2000, Karen?

Repos on homes or repos that are in our portfolio?

Repos that are pulled into the rental program.

Those are -- it has been about the same for the past several years and down to kind of pre-distressed time period, maybe 600 to 700 a year.

Yes, it has been the same for three, four years now. It hasn't varied very much.

Okay, thanks. Then could you talk a bit more about the geographies where you are seeing attractive acquisition opportunities today?

I think we are seeing it across the spectrum of the country. Sun does not and is not looking deeply into the West Coast, but just about everywhere else across the country. I think that we see -- continue to see a lot of opportunity in the Midwest.

The fact of the matter is, because of the rental program and the interest in buying communities that have solid base of occupancy to work from, good NOI, an accretive opportunity, and the ability to fill the vacant sites, we can create the greatest returns for our shareholders, both short and long term, by filling and buying communities with vacancy. That will tend to take place more in the Midwest, areas of Texas.

We are looking at areas of Florida where there has been a retreat of occupancy, or more vacancy, over the last 10 years or new communities that didn't have the third-party dealerships to fill up. But there is no particular area and I think, as I have said before, we will focus on really solid fundamentals within the community for our shareholders and the growth more than we will going outside a region we are comfortable in.

Okay. And given your outlook on slightly lower year-over-year expenses -- I think that is what I heard if that was correct -- what line items are you seeing the most savings in?

I am looking for that at the moment, Taylor, I don't know if I have that in front of me because we don't generally -- as I said, we don't generally give out that information. My guess would be we would be seeing it in utilities based on kind of increased revenue on water and sewer, increased recoveries.

Okay. And then lastly, I am not sure if I missed this, but did you talk about the $1.4 million impairment charge, what drove that in the quarter?

The $1.4 million impairment charge is on one community in North Carolina. It's a difficult economic area and, unfortunately, we are being unallowed, not allowed to bring rental homes into that community to support occupancy.

Is that driven by some state regulation or local regulation?

It's a local municipality issue.

And you think that is a one-off issue there?

Yes.

Okay. All right, thanks so much.

(Operator Instructions) Stephen Mead, Anchor Capital Advisors.

Just was wondering, and you have touched on it, but the increase in occupancy in 2012 in terms of what you were guiding towards was a pretty, I mean that is a good increase. And I just was wondering in terms of the issue of, say, retention of existing people in the homes versus what you are seeing in terms of new applications and just a little bit of sort of what contributes to that increase in occupancy.

The increase in occupancy from a total portfolio basis is strongly in the same-site. About 55% of it is in the same-site portfolio, another 34% of it is in acquisitions, and about 10% of it is in expansion.

I think it's strictly driven by demand.

But are you seeing a move -- are you seeing better retention in terms of holding onto the base and thus sort of lower turnover that you are dealing with? Or --?

I think -- to answer your question, I think we are seeing no change whatsoever. It's not a matter of better retention. The retention is the same. The repos have been the same in the portfolio for the last four years, as I indicated.

So demand is stronger, applications have been increasing significantly year after year. I think it's driven a lot by the affordability factor, the lack of the ability to get into site built housing for much of this population.

And I would tend to suggest in the Midwest in particular, as we see, I think, greater stabilization, greater -- I won't say job growth but job security, certainly in the automotive area there is a move from the sidelines of not wanting to commit or not wanting to buy or make a change that is fueling the growth. So I think it's a situation where demand is up and all other metrics are pretty equal.

Okay, thanks.

Thank you and I am showing no further questions. Please continue with any closing remarks.

Well, at this time, on behalf of the Company, Karen and I would like to thank all of you for participating on this call. We certainly look forward to 2012. As the metrics continue to indicate, we should have continued growth.

We are both available for in the questions that anyone might have separately from this phone call. Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. You may now disconnect.