Sun Communities Inc (SUI) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Sun Communities' First Quarter 2012 Earnings Conference Call on the 26 of April, 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 meanings 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 filing 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'd like to introduce management with us today, Gary Shiffman, Chairman and Chief Executive Officer; and Karen Dearing, Chief Financial Officer; and Jeff Jorissen, Director of the 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 Mr. Gary Shiffman. Please go ahead, sir.

Thank you, operator, and good morning. Today, we reported funds from operations of $25.9 million, or $0.90 per share for the first quarter of 2012, compared to $19 million, or $0.83 per share for the first quarter of 2011. These results exclude acquisition-related cost incurred in each of the referenced quarter.

Revenues increased to $83.1 million in the first quarter of 2012 compared to $69.7 million in the first quarter of 2011. It was another excellent quarter for the company as our performance metrics continued to meet or exceed expectation.

And I will discuss a few of the most significant drivers of growth and then spend some time focusing on our markets and acquisition strategy.

Revenue producing sites in our same property portfolio increased by 147 sites in the first quarter of 2011, increasing occupancy from 84.8% to 86.1%. An additional 147 revenue producing sites were added in recently acquired communities which are not yet included in the same property portfolio. So, in total, we added 294 residents in this year's first quarter compared to 143 in 2011's first quarter.

In our same site portfolio, revenues grew by 5.3% while expenses increased by 0.3%. NOI increased by 7.3% as compared to 4.2% and 1.7% in the first quarter of 2011 and 2010 respectively. NOI is also benefiting significantly from the continued momentum of quarterly occupancy gains.

Home sales topped 400 for the first time in any quarter, improving strongly from the 357 sales in the first quarter of 2011. Applications continued to drive occupancy and sales as nearly 6,600 people applied to live in our communities in the first quarter. This represents an annual rate of over 26,000, almost 3,000 more applications than in 2011.

And now what I'd like to do is review our market. And as measured by revenues, approximately 85% of our business consists of open communities appealing to initial homemakers and those seeking affordable housing. It was a business segment which suffered most during the last decade as the industry recovers from its underwriting excesses and combated the now defunct single-family credit bubble.

The same property NOI growth for this segment which include age restricted in RV communities has nearly doubled from 2.7% in 2010 to 5.2% in 2011 as well as the first quarter of 2012. As rental increases have been relatively consistent over the years, this improved NOI performance is attributable to both greater stability of the existing occupancy and resurgent demand for our product in the all age or open segment of America.

Narrowing the focus to our Midwest portfolio, which are 100% open communities. Our focus on same property NOI growth by region reveals an even stronger market recovery. The NOI generated by Michigan, Indiana and Ohio which is how we define our Midwest portfolio grew by 0.2% from 2009 to 2010.

That growth increased 14-fold to 2.9% from 2010 to 2011 and comparing the first quarter of 2012 to the year 2011, growth of an additional 50% brings NOI growth to 4.5%. Again, the above results are strongly supported by occupancy trends. Our Midwest same property portfolio accounted for 27% of the occupancy gains in 2010 and 39% in 2011. In the first quarter of 2012, the same property Midwest portfolio supplied 49% of the occupancy gains. And that really grows to 75% when we consider residents added to our recent Michigan Kentland acquisition.

Rental increases are also a major contribution to growth, a 3% rental increase and 45,000 occupied sites approximates $7 million per year. And as we look at these markets, we identify three major markets in the company's portfolio. Florida, with 12,500 sites, is notable for its stability and predictability - predictable and reliable growth. Florida's MH communities are essentially fully upside, and the RV communities present opportunities of scale and market penetration to achieve greater seasonal occupancies.

Texas and Colorado, we'll have over 7,300 sites by the end of the year, as several expansions come on line. Since 12/31/07, these strong markets have added over 1,500 sites growing to an occupancy which currently exceeds 96%. There are over 3,000 additional sites available for development in Texas and Colorado in future years.

The Midwest portfolio with 29,500 sites was the hardest hit by industry and national downturn, while Florida, Texas and Colorado were primarily responsible for the company's growth over the last few years. It is, in fact, the Midwest market which is now driving our growth and will likely continue current trends noted above due to the availability of quality sites and strong locations and the bottoming of the economic cycle in this region.

We are now benefiting from significantly improving performance of all three of our major markets, which are the primary generators of internal growth. In general, there are also regrowth opportunities presented by acquisitions and expansions. As discussed on prior calls, the company has had a solid pipeline of acquisitions under review. We're also under various stages of expansions in seven communities in Texas, Oregon, and Colorado, where the communities are all full, and demand remains strong.

Today, I thought I'd share with you the following examples to present some of the basic modeling that we look at. Purchasing a fully stabilized community, generating $800,000 of NOI and an 8% cap rate with revenue expense growth estimated at 3% per year. The $10 million investment will be generating an unlevered return of approximately 9.3% after five years. The assumptions relative to expansion assume the development of land already zoned and owned by Sun. They involve constructing of sites, purchasing and renting homes to fill the expansions and then selling the rental homes and thereby recouping the capital investment.

The investment on expansion will be generating an unlevered return of approximately 11.75% five years after construction is completed. This return is over 25% greater than the return on the purchase stabilized community that we just reviewed.

Now consider the acquisition of a 67% occupied community. The assumptions here are a bit more intricate and include the use of the rental homes to initially fill the community as well as the 9% cap rate at purchase due to the lower occupancy and assumed deferred maintenance and the need for capital improvement.

The investment will be generating an approximate unlevered return of 12.5% after five years, more than 30% better than the return on the stabilized community. The lower the initial occupancy or the greater the available vacancies to match up against absorption and demand, the better the return will be.

Our focus is a balanced approach to all three of these growth opportunities with a current emphasis on the acquisition of communities with potential for solid occupancy growth. We own zoned land for expansions in our strongest markets and are active in developing those sites where occupancy is now [thought full], and as I said demand remains strong. We believe these opportunities are becoming available because our owners cannot afford the cost of recapturing or regaining lost occupancy and there is very little or limited third party help from street dealers today.

The rental program is profitable and critical to any community owner who wishes to maintain and build occupancy. Our experience with the program provides us with a capability to drive occupancy and cash flow in our expansions and the - our acquisitions. We apply the same underwriting standards and background checks to rental applicants as we do to potential homebuyers. And we're looking for solid rental residents who have the capacity to eventually become our residents and own the home. As a result, less than 50% of rental applications to live in our communities are actually approved.

Our average return on capital in the rental program exceeds 15% after considering a vacancy factor in all direct rental expenses. Manufactured homes today are built to last, very similar to site-built housing. And it's not unusual for an older or newer community to have a number of 30 and 40-year-old homes which are neat and well maintained.

Our rental homes undergo a thorough refreshening and refurbishing upon each lease term to restore them to like new, all of which is expensed. It is because of this program to maintain asset quality that our homes retain their value during the average of seven years that our home is in the program before it's sold.

Upon the sale of rental home, the owner then pays site rent that approximates $5,000 on average annually, and we have received all or a substantial portion of the capital we had invested in the home. The goal of the rental program is to fill sites where residents reside for 14 years on average and the home remains in the community, generating a revenue stream for 30 to 40 years. We also benefit from being relieved of all maintenance costs on the homes upon sale. It's the success of this program which allows us to aggressively expand our communities and seek to buy communities with opportunities to increase occupancies, which in turn enhance and accelerate growth.

So let us now turn to the [2000] acquisition of the Kentland portfolio in West Michigan and the role the rental program has played as it relates to that acquisition. Kentland consists of 18 communities comprised of 5,200 sites in Western Michigan. When we acquired the Kentland portfolio, it was approximately 80% occupied and had no rental program. By utilizing the rental program and our pro-formas -- by utilizing the rental programs, our pro-formas projected the occupancy to increase to 92% within three years and NOI growth of about $3.5 million.

That objective for increased occupancy was broken down by year for the first three years at 240 sites, 248 sites, and a 94 site increase in occupancy totaling 542 sites. I'm pleased to announce that in the first nine months of ownership, we have added 289 sites of occupancy equal to 53% of our three-year objective. A fill at the rate of 32 sites per month means that each month we are adding $150,000 of annual revenue, nearly all of which translates into funds from operation.

So, in summary, our primary markets are exhibiting strong internal growth from both rental and occupancy increases. Our expansions and acquisitions are outperforming pro-formas due to strong demand and we are looking at numerous acquisitions which meet our criteria.

With regard to FFO, we reaffirm guidance of $3.17 to $3.27 per diluted share and we'd note, as with prior years, our first quarter FFO is expected to be as strong as due to seasonal RV revenues which are primarily recognized in the first and fourth quarter.

And at this time, myself, Karen and Jeff would be pleased to take any questions.

Thank you, sir. (Operator Instructions). Paul Adornato.

Hi, this is Paul Adornato from BMO Capital Markets. First, just a follow up on the seasonality comment. I was wondering if you could quantify the seasonality that the company currently experiences in the fourth and first quarter as compared to the rest of the year.

Sure, Paul. We have about $29 million in RV revenues and $10 million of that is seasonal and that seasonal revenue is recognized about 45% in Q1, 24% in Q4 and 18% in Q2 and 13% in Q3.

Okay, great. Thanks. And looking at operating expenses, were very low this quarter. I was wondering what kind of operating expense growth we might expect or what would be a good run rate to use?

I would -- good question, Paul. I would say that, yes, our operating expenses for same site were a bit lower than what was expected for the first quarter. And if I look forward, I would expect that the NOI, total NOI growth for the remainder of the year each quarter would be less than the 7.3% that we experienced this year.

Okay. And finally, you talked about getting more and more applications for the rental program. I was wondering if you could provide an update as to the conversion rate of renters to buyers over time, if that -- if you've seen that as a better conversion rate over time.

That conversion rate has been between 12% and 15% a year.

And that remains steady?

Yes.

Okay. Great. Thank you.

Todd Stender.

Hi, Wells Fargo. Thank you. First question, can we get a little more information on the three Florida RV communities you purchased in the first quarter? Maybe just [if you] include occupancy give us some rates maybe and then pricing, maybe how you look at this on a cap rate basis or price per site?

Sure, I think you're going a little bit back on our memory only because the acquisition closed in two parts. The first part was three communities in fourth quarter, and the three remaining communities, first quarter of this year. Karen do you have anything (inaudible)?

The portfolio has about 1,100 RV sites significant portion of which were seasonal RVs. So I think there's (inaudible).

It's like 40% permanent.

40% permanent. Okay.

That's seasonal, and I'm going back on my notes and I did just find something that was right around an 8.5% cap rate.

Okay. And just in terms of the loan, you guys -- you -- there's a $19 million loan that came along with that. Can you just give us the terms, if there's a maturity date coming up on that?

That loan is at -- the five-year loan, it comes up in December of 2016, and it's 2.74% I believe, Todd.

Okay. Thank you. And the proceeds, have you finished allocating the proceeds from the January equity offering? Or is there anything left that might impact maybe the results for this year, any dilution?

No.

No, none that have been modeled into guidance.

Okay. And thank you. And regarding the Kentland portfolio, can you just maybe go into some of the drivers behind the better than expected top line and NOI growth? What's really contributing to that?

Sure. I think we have shared the concept of a lot of what's taking place in our Midwest portfolio, the bottoming out of the economy, if you will. The like of those that didn't have jobs, seems generally to be over, the uncertainty of expenditures and commitment to want to stay in the area, has resided, so there's a stronger than ever demand for the affordability feature, if you will, in the Midwest we're finding. And making the home inventory available through the rental program has just surprised us as how rapid and how strong the growth has been, and then probably going to allow us to accelerate rents in the area a little bit faster than anticipated.

Okay. And final question, can you just go into maybe some of the seasonality of your CapEx? Is the -- the first quarter number looked a little light, can we expect that quarterly run rate to ramp up as the year progresses?

Yes, you'll generally see CapEx increasing most significantly in the third quarter. But we would -- I would say, as a run rate, we gave guidance of about $8.4 million and we would expect that to come in at that dollar amount by the end of the year.

Okay. Thank you.

(Operator Instructions). Jeff Lau.

Hi, good morning, Sidoti & Company. The first question was touching on the G&A how it kind of dropped a little bit this quarter. I guess you guys talked about guidance, reaffirming guidance is the G&A I guess, real property is still expected to be around $19 million this year?

Yes, it is. I would expect it -- the remainder of what hasn't been incurred through March 31st to be pretty ratable over the three quarters.

Okay. And then I guess everything else since you're maintaining or reaffirming guidance, I guess, in terms of home sales and occupancy still remains the same?

Correct.

Okay. Thanks.

Thank you. (Operator Instructions). Thank you, there appear to be no further questions at this time. Please continue.

Thank you, operator. And thank you everyone who joined us today. We look forward to reporting results after the next quarter. And as always, both Karen, myself and Jeff are available at the company for any further follow-up. Thank you.

That concludes the Sun Communities First Quarter 2012 Earnings Conference Call. Thank you for participating. You may now disconnect.