Sun Communities Inc (SUI) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thanks for standing by and welcome to the Sun Communities second quarters 2012 earnings conference call on the 26th of July, 2012.

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 to time in the Company's periodic filings with the SEC. The Company undertakes no obligation to advice 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.

Good morning. Today we reported funds from operations of $23.1 million or $0.78 per share for the second quarter of 2012, compared to $17.5 million or $0.74 in the second quarter of 2011.

For the six months of 2012, FFO was $49 million or $1.68 per share compared to $36.5 million or a $1.57 per share in the first half of '11. These results exclude transaction costs related to acquisition activity in all fields.

Revenues for the first six months increased by 20% from $138 million in 2011 to $165.5 million in 2012.

And now we'll turn to the portfolio, during the first six months of 2012, revenue producing sites increased by 704, of which 433 are in a same-site portfolio and 271 are in acquired communities.

The occupancy in the same-site portfolio has increased from 84.5% to 86.6% in the last year. We will discuss the performance of our Kentland portfolio acquisition later in our comments.

Home sales hit a record of 885 in the six months of 2012 compared to 719 last year for an increase of 19%. Wile applications continue to drive leasing and home sales as they ran an annual rate of over 26,000 or 500 per week.

Comparing to the same six-month period year over year, applications had increased 16%. And the same-site portfolio, revenues grew by 5% in the first six months while expenses increased by 1.1% and NOI growth hit 6.6%.

Now I'd like to turn to our expansions. And as of June 30th, we have 4,846 sites in Texas. There are 40 vacant sites in the entire state and the communities are now 99.2% occupied. We will be opening three expansions in the third quarter and one in October, adding 452 sites available for occupancy in Texas. These newly constructed expansions will provide us with a supply of homes -- a supply of home sites to meet the strong demand while we proceed to prepare additional expansions to bring on stream in 2013.

And turning to our Kentland portfolio in Michigan, the Kentland portfolio of over 5,000 sites located on the west side of the state close at the end of June 2011. And since that time, we have added 408 revenue producing sites increasing occupancy from 82.2% at acquisition to just under 90% at June 30, 2012. We expect occupancy to approach 95% by the end of 2012. This performance is stronger and has taken place more rapidly than our pro forma and budget's forecast.

In the first six months of 2012, Michigan added 457 [sites] of occupancy with 231 being in the Kentland portfolio and 43 sites in the Cider Mill Crossings community acquisition which we acquired in October 2011. The remaining growth in occupancy of 183 sites compares to an increase of 142 occupied sites from the first half of 2011.

Demand is strong throughout the state, as Michigan is currently ranked sixth amongst all states in terms of economic growth according to recently published US Bureau of Economic Analysis. In addition, unemployment, which was 14.2% in 2009, has shrunk to 8.4% currently. The business and economic climate has improved dramatically and really is reflecting the strong continued demand for affordable housing in Michigan.

And I'd like to review acquisitions. We currently have a large pipeline. There are in various stages of negotiation and due diligence and it is the largest pipeline that we've seen in the last 20 years. We're focused on expanding our geographic footprint, taking advantage of opportunities to lever management strengths and increasing and expanding the scope of our RV business platform. To that end, the company acquired Blazing Star at 260 sites RV community in San Antonio located next to a Six Flags resort for approximately $7.1 million. In place NOI is approximately $570,000.

Additionally this morning, we announced two executed letters of intent related to a high-quality portfolio of seven manufactured housing communities with 4,350 sites and approximate occupancy of 87%. These assets are extremely well located in and around Oakland, Macomb, and Lane counties that are actually within a 10 to 15-mile radius of our home office. Five communities will be acquired outright and two communities were Sun will provide mezzanine financing and will assume management and operations on behalf of the owners of those communities.

At this time, I'll turn it over to Karen to provide an update on the balance sheet.

Good morning. As noted in some of Gary's comments, we are very pleased with our current performance, the improvements we've made to our balance sheet and the positive, long-term growth, our recent acquisitions and anticipated transactions are expected to provide.

When comparing our current balance sheet to recent periods, we've reduced debt to total capitalization to 50% from 60%, improved our debt to EBITDA ratio from debt of 9.9 times EBITDA to a projected 7.8 times EBITDA by year end; reduced our line of credit balance by approximately $100 million; and improved our payout ratio from 90% in 2011 to an estimated 85% in 2012. We have proactively managed our debt maturities, increasing our weighted average maturity from 4.9 years in June of 2011 to 6.9 years currently.

Our most significant upcoming debt maturity is $175 million due in 2014. And the NOI of these properties have increased by over 16.5% since they were originally financed. In addition to the above, we've successfully completed a $163 million equity offering of 4.6 million shares.

Our strong year-to-date performance has absorbed all of the dilution from this offering and all prospective growth from our acquisitions and core portfolio will add to bottom line FFO growth. Through the long-term growth potential provided by our recently closed and shortly anticipated transactions, we foresee excellent opportunities for strong future FFO accretion.

In our press release, we updated FFO guidance to $3.20 to $3.27 per share. Guidance does not include the effect of any potential transactions. Our business has a seasonal component for RV revenue and certain summer time expenses, which generally cost revenues to be the highest in first and fourth quarters and expenses to be the highest in second and third quarters.

We expect third quarter FFO to be our lowest quarter of the year and fourth quarter FFO to be slightly higher than the $0.81 achieved in Q4 of 2011. And now, Gary, Jeff and I would be happy to take your comments and questions.

Thank you. (Operator Instructions). Thank you. Our first question comes from Paul Adornato from BMO. Please go ahead with your question.

Thanks very much. Karen, with respect to guidance in the $3.20 to $3.27 range, are there any acquisition costs included?

Not for any future transactions, Paul.

Not for future transactions. And so there's none at all in that number?

Correct.

Okay. I was wondering if you could then tell us now what kind of assumptions would get us to the low end and to the high end of that range.

Well, let's see what can I tell you? The guidance that we put out at the original beginning of the year is substantially unchanged. We were still expecting site rent increases to be about 3%. Our occupancy, revenue producing sites, our expectations are just a bit higher than what we originally anticipated.

Same-site portfolio will be a little bit stronger NOI growth than what we had originally anticipated. Home sales are expected to be about the same. G&A. G&A, we are forecasting running a little bit higher than $19.1 million G&A guidance we previously provided. And that's partially due to about $450,000 of one-time expenses related to severance cost and also some legal expenses associated with contracts that we had with a cable provider that went bankrupt. And the other increases are primarily related to performance-based compensation due to our strong operating performance. So right now we're projecting G&A cost for the year to approximate about $20 million.

Okay. Thanks, that's helpful. And with respect to the acquisitions, I was wondering if you could comment on the potential economics, what sort of cap rates might we expect?

Sure. I think obviously good question, Paul. I think that we are in fact quite far long in the process of acquisitions that we shared this morning. And because we're so far long, we expect to be in a position very shortly where we can share that specific data, but that will be in a very near term.

Okay. And maybe just perhaps a little bit more color on the portfolio. Are the seven properties coming from a single entity?

They are coming from two different entities. One of them is a family-related entity where they were built and developed by the family. And in fact as I indicated, all seven of the properties are properties that I have watched my entire career, and they are what I would consider the premier properties in the metro Detroit area. And one of the properties is in fact from a different third party.

Okay. And in the release you've mentioned that the high occupancies are reflective of the fact that there have been very few rent increases. I was wondering, like what the plan would be of -- would you expect to potentially implement some rent increases and then see a dip in occupancy or --?

I think that they are substantially below market, anywhere from $50 to $70, whereby we think that we can increase the rents substantially and slightly above our average increases in the portfolio and not impact occupancy at all.

Okay.

The key with these assets obviously is their location, like with all real estate. That's all for the overall quality of how they were constructed and the makeup and the credit profiles of the residents there, and the fact that the rents haven't been touched most of them in four years.

Okay. And are there expansions of possibilities at any of the properties?

There are no expansion possibilities, but one of the communities is a more recent all double section community and has 150 new sites that have not been filled up and that's in the vacancy that we gave you.

Just one last question, do you think that you'll implement a rent-to-own program in these properties?

Yes. I think that there is very limited to no rent to own in these properties, and probably about 7 to 8 occupancy points to be gained. So we were mostly focused on sales and we will have some limited rent to own probably.

And if we look at how well we did in Kentland where actually not only as good as an example, we're able to get it above market rental increases in our Kentland portfolio and increased the occupancy almost 10 points in an 18-month period of time. So I think we will bring this up to a very, very high occupancy mostly with sales, but with some limited rental program.

Okay, great. Thank you very much.

Thanks. Our next question comes from Jana Galan from Bank of America Merrill Lynch. Go ahead with your question.

Hi this is [Jane] for Jana. I apologize if I missed this, but did you provide the cap rates for the acquisitions you announced?

We didn't. What I said is that we are in fact very far along in these transactions -- excuse me. And I expect to be able to provide that specific information very near term.

Okay, great. Then can you provide maybe some color generally along what kind of cap rate trends you've been seeing in terms of the properties that are out there?

Sure. I think that what I've shared for most of the time when I've held this position in the company is that in our industry, we have not seen great deal of fluctuation in cap rates over the years. In large due to the stability of cash flow in our industry. Obviously we did have a very difficult period of time from '90 to about 2000 to 2006.

And our industry was in competition with [place-held] housing and lack of financing, but even through that period of time, you see a range of a low of around of six cap rate and a high of around nine cap rate in our industry, depending upon the fact that it is age restrictive community. And the Sunbelt you most typically will see at the low end of that range. And obviously non-age restricted at the high end depending upon the quality and the location of the community.

And I would expect that everything that we're looking is right in the middle of that range.

Great, thank you. And for the potential acquisition opportunities that you're also looking at, what regions of a country are you seeing more opportunities? And are there any specific regions that you're targeting?

Yes. I think that we're obviously not shying away from the areas that we have operations in such as the Midwest, Southeast and the Texas-Colorado area. We are looking at both the West coast and the East coast and looking to expand our geographic footprint. And we are finding additional opportunity, mostly in the small portfolio range of what we saw today, which is anywhere from three to nine communities. And we are definitely focused on both manufactured housing and looking to expand the footprint of our RV business.

Great, thank you so much.

Thank you. Our next question comes from Andy McCulloch from Green Street Advisors. Please go ahead with your question.

Hi. Good morning. This is Ryan Burke along with Andy McCulloch. A few questions from our end, just first couple continuing with the acquisition. Regarding the five acquisition assets in Michigan in particular, can you give us a feel for how many of these homes are currently rentals?

Yes. There are no rentals in those communities.

No rentals currently. And you mentioned obviously that rents in those communities are below market. Can you get a sort of side-by-side comparison of how the rent in those communities currently are versus your current other Michigan assets?

I don't know, Karen, do you have -- I think, Ryan, we have to get back to you on that.

Okay, understood. Moving over just a couple of quick questions on the home sales throughout the quarter, can you give us a feel for what percentage perhaps of those homes were bought using financing? And of this number, how many were financed by Sun either directly or indirectly?

So generally our home sales, about 90% of the home sales are financed by third parties or ourselves. Another portion of it is cash, there are certain cash sales that go on.

Okay. Is there any breakup possible or just the clean third party financing and Sun financing of those 90%?

It's predominantly third-party financing.

It's third-party financing with Sun does have some liability with our recourse, yes.

Yes, with some recourse.

Great. And can you give us a feel for what sort of financing in terms you're seeing in general?

With regards to the channeling?

Yes.

I think things have actually improved, continue to improve slightly. We are seeing basically 15 to 20-year amortization with about 10% down. And depending upon credit quality, I'd say about 8.75 to 9.75 range right now.

Great. That's very helpful and that is all for me. Thank you.

Thank you. Our next question comes from Todd Stender from Wells Fargo Securities. Please go ahead with your question.

Hi. Good morning guys. I'm just looking at the San Antonio RV community it sounded like you're around an 8 cap rate going in. Is that fair?

I think if you do that math, yes.

And in a dedicated community like that, is there any opportunity to add MH to that?

I think in fact it's not something we had looked at, but we are looking at the potential of expanding the RV community itself because of close proximity to the attraction there.

And what kind of expansion would you have there?

It depends on the availability of the land and the developing that we could get. And I think it's just too premature for me to really know that because I know the guys who work in Operations, they--.

Sure. And just going to the mezzanine loan, it maybe too premature, but do you have any pricing around that or duration of the loan for us?

Yes. I think our intention is to share that very near term with everybody. So there's a little bit early on that, but I hope it will be very shortly.

Okay. Does it sound more like you'll lend the money for a very short term and then the present owners trying to refinance?

I don't think that that's the intention. I think its part of the overall package to be able to require these properties. And we have done it in the past, the principal owners are elderly and retiring. And when we've provided this type of lending in the past, it frequently has led to us have the inside track on acquiring the properties. That would be our eventual goal.

Okay. Anything in place like a purchase option or right of first refusal?

No, nothing.

Okay, thanks. And just last piece, how are you looking at your capital allocation for the second half in dealing where the CapEx stands right now and also towards the dividend?

CapEx was projected to be about 8.4% (sic—corrected below) for recurring capital expenditures and we anticipate that to be right in line.

Thanks. And any input on where the dividend stands?

Well, I'm sorry, Todd. Gary just corrected me, I said 8.4%, it's $8.4 million, sorry.

Okay.

Todd, what was your question on the dividend?

And on the dividend, just seeing where your allocations stand at mid year here? You're making acquisitions probably pretty good clarity on when stuff is going to close. How do you think you're at the dividend right now?

Obviously it's a frequently asked question of -- to us and to other companies, but I think we continue to pretty much review it on a quarterly basis. Obviously with the board, as I shared before we're looking towards the 80% payout ratio to be kind of a historical figure for us to begin to talk about increasing the dividend so we are nearing that level.

But I would also suggest the acquisition activity is such that the overall desire is for us to see the size and the magnitude of these acquisitions over the really third quarter and perhaps into the beginning of the fourth quarter. And we should be in a position to again review that.

Okay. Thank you very much.

Thank you. Our next question comes from Jeffrey Lau from Sidoti & Company. Please go ahead with your questions.

Hi, good morning. Just a follow-up question on the acquisitions, you guys think it's -- in all likelihood you'll be doing another just offering this year or will those, I guess, acquisitions be funded by current, I guess lines in cash?

Well I'd say a few comments that the magnitude of the acquisitions are such that we have entered discussions for a facility to allow us to move forward if we still elect on the pipeline of acquisitions. But our desire is first and foremost to acquire properties and acquisitions that will be accretive even at a neutral basis, which is how we want to look at it going forward.

Okay, great.

Thank you. (Operator Instructions). Thank you. We have a follow-up question from Paul Adornato. Please go ahead with your questions, sir.

Thanks. Gary, given your extent of experience over the years in kind of pioneering the rent-to-own program, I have kind of a question coming out of left field and that is looking at the single family market, obviously there has been some activity among those that are looking to capitalize on that opportunity buying single family homes and renting them to individuals.

I was wondering if you have thought about that business not either within or without of the company, but if you have any ideas on the viability of the rent-on-own in the single family market?

It's a good question, Paul. I think that if you go back to four or five years at the height of the meltdown, the single family residential in sub prime and everyone -- saying everyone was very concerned on how that overhang of foreclosures might manifest itself in competitive rental units entering the market and competing with our manufactured housing.

They've never materialized. I think mostly because the skill, a vast difference between a $45,000 manufactured home in the Midwest and $120,000 [site go] home. So we didn't see that competition. With regard the fast forwarding now, I think that type of business is more suited to a individual entrepreneur. There are just no economies of scale and too much fragmentation when you don't have a concentrated, consolidated geographic area.

And we've got to run around whether it'd be repairs and our maintenance or rent collections and all the issues you would have to that type of fragmentation. So it's not something I think that we have considered at this point.

Okay. Thanks for the insight.

Sure.

(Operator Instructions). Thank you. We have no further questions at this time. Please continue with any further points you wish to raise?

Thank you, Operator. And I like to just conclude by saying that things are very positive with regard to leasing sales, operating budgets, recurring capital improvements to maintain the asset quality as well as our systems, our smoothly functioning integrated with the management personnel.

And we definitely look forward to strong finisher of 2012. I'm speaking to everybody near term or next quarter. Thank you.

Thank you ladies and gentlemen. That concludes today's Sun Communities Second Quarter 2012 conference call. Thank you for your participation. You may now disconnect.