Sun Communities Inc (SUI) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Sun Communities third-quarter 2012 earnings conference call on the October 25, 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 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 would 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 $21.5 million, or $0.71 per share for the third quarter of 2012, compared to $18.6 million, or $0.75, in the third quarter of 2011. For the nine months of 2012, FFO was $70.5 million, or $2.39 per share, compared to $55.1 million, or $2.32 per share, in the similar period in the prior year.

The results exclude transaction costs related to acquisition activity in all periods. Revenues for the nine months increased by 17% from $212.7 million in 2011 to $248.6 million in 2012.

The quick summary of the portfolio review for the quarter and year-to-date is that everything is going exceptionally well at the Company. Occupancy in the first nine months of 2012 has increased by 975 sites. This is nearly 100 more occupied sites than we added in the entire 2011 year.

Total portfolio occupancy increased 150 basis points from 85.3% at the end of 2011 to 86.8% currently, including the addition of 218 newly developed, but vacant, sights from our expansion. Adjusting for these sites would bring our total portfolio occupancy to 87.1%. At our average rent each site is approximately $5,000 of annual revenue for the 30 or so years the home remains in our community.

A number of our markets and communities with high occupancy and zoned land are being actively developed as expansions. Texas, with 98% occupancy at June 30, 2012, has opened 234 expansion sites with an additional 1,000 sites to be added in eight Texas communities during the next 12 months. Colorado, currently nearing 97% occupancy, will open 160 sites over the next year and nearly 300 more sites will open in essentially full communities in North Carolina and Ohio.

Woodlake in San Antonio and River Ranch in Austin, Texas, both opened in September 2012 and gained 14 and 28 sites, respectively, in their first partial month. In the aggregate expansions will add and supply about 1,500 additional sites in our strongest markets over the next year.

Home sales continue to set new records at 1,253 for the nine months. This is running about 15% ahead of our 2011 performance, which to date has been the Company's best year for home sales. Over 50% of the sales represent the conversion of renters into owners and we continue to turn about 12% to 14% of our renters at the beginning of the year into owners.

Growth in occupancy and home sales is a direct result of the traffic in our communities and is reflected in the applications. We have over 20,000 applications through September compared to nearly 18,000 the same time last year, and third quarter applications exceeded 7,000.

This is the demand that results in strong occupancy and growing home sales in our communities. Applications have been steadily increasing year over year for the last five years and continue to reflect the increasing demand for affordable manufactured housing.

Same-site growth in revenue continues at nearly 5% top line, while growth in net operating income for the nine months is just below 6%. This, of course, is due to the annual rental increases which so far this year are averaging 3% and the occupancy growth as I just discussed.

At this time what I would ask is that Karen briefly highlight some of the balance sheet items.

Okay, so first I would like to talk a bit about dilution. So dilution has exacted a cost in FFO per share this year as we have issued about 8 million shares to strongly position the Company for growth through acquisitions and expansions. And I will share some of the facts about that impact of the equity offerings.

As I said, our shares outstanding have increased by nearly 8 million as we have raised approximately $300 million through the offering. This has increased our available liquidity from $51 million at 9/30/2011 to over $200 million at 9/30/2012. Certainly this substantially increases our ability to respond quickly to acquisition opportunities.

During the past year our outstanding debt has declined from $1.356 billion to $1.272 billion. Our debt to total market capitalization percentage has declined from 62% to 48% and our debt to gross asset percentage has declined from 71% to 59%.

Our EBITDA to interest ratio has improved from 2.2 to 2.6 times, and our EBITDA to debt ratio has improved to 7.7 from 9.6 in 2011. In addition, we have also continued to improve our payout ratio with an expectation that it will be in the low to mid 80%s this year.

We expect that our FFO per share will return to solid period-over-period growth as we deploy our liquidity for acquisitions and investments. Our recently announced acquisition and financing of the Rudgate portfolio will deploy approximately $70 million of liquidity at favorable returns.

In addition, we continue to see many attractive acquisition opportunities. We believe our acquisition pipeline remains full as the cost of rebuilding occupancy requires capital that current owners do not have or are not able to access. This problem is then compounded by maturing debt, new underwriting standards, and lower NOI to underwriting for refinancings due to the vacancies in those communities.

To summarize, business begins with demand and the demand for our product continues to be strong and growing. As we meet that demand we continue to exhibit the pricing power which has driven our growth and profitability over time and through the most difficult times. And meeting that demand requires more sites and opportunities for residents. We are accomplishing this through the expansions we discussed and the acquisitions that are in our pipeline right now.

And we have not lost sight of the need to manage our balance sheet and leverage which continues to strengthen as we go through what we refer to as a transformative time at the Company. Karen, Jeff, and myself would be pleased to answer any questions, operator.

(Operator Instructions) Andrew McCulloch.

Good morning. You guys spent a lot of attention in your press release on the RV business. Is there anything you see happening in the RV business that makes it more attractive to you today than it has been in the past, or is that just kind of the product you are seeing come to market?

I think that it is a combination of the two. I think that there are statistics showing that there is a lack of quality opportunities for the owners of RVs to actually find locations near the attractions that they want to be at. So in our strategic way of looking at acquisitions we are looking to be at those places the RV travelers want to be at. So placing special focus on that.

RVs, like the manufactured housing business, we believe are coming off of a long slump and we expect to see a continuation of the growth of RVs being sold this coming year. So that was how it, I think, strategically improved the economies of scale that we have in place in our southern communities so that we can put to work the staff and the systems that really are only fully engaged December through May, April/May in the South. They can being fully engaged as we expand our northern footprint.

So I think it is a combination of increased demand and lack of good opportunity to have us focused on kind of expanding that part of our business.

Thanks. Then on the $400 million in acquisition guidance that you talk about, can you give a little more color on whether that is mostly RV or mostly MH, and are there any specific markets you are targeting?

I think that I would comment that we are definitely looking to expand our geographic footprint. The Company is heavily weighted in the Midwest, southern Florida, Texas, Colorado. We are looking a little bit more towards the West and more towards the Northeast.

It would include equal representation in manufactured housing as RV. But I would also emphasized in our press release we are looking to expand what is roughly around 10% of rental revenues coming or the revenues coming from RVs now to roughly right around 20% short term. So we have a strong focus on RVs for the near term.

Great. Just one more question on the balance sheet. You guys made some very good strides recently in improving your balance sheet metrics and prudently used equity that was trading well above NAB to do it. Do you have any plans to continue to improve balance sheet metrics next year, or are you kind of where you want to be?

Karen can add anything, but I think we have shared with the marketplace that we are pretty much where we expect to be. The large amount of acquisitions, we expect them to be both accretive and debt neutral as we set our parameters. I think that leaves us in a position, as Karen shared, with about $200 million of current capacity on our balance sheet. If acquisitions go beyond that then we will have to take a look at what they warrant to maintain a debt neutral and accretive position.

Great, thank you.

Jana Galan.

Thank you, good morning. Following up on the plans to increase RV income, is 20% kind of adequate to get the scale that you would like or would you want to grow that even further longer term?

I think that is pretty adequate to get us to where we are anticipating strategically.

Okay, thanks, Karen. Then just a quick question on more accounting. There is a gain on dispositions of assets and I was curious if you sold any communities or sites. Or is this referring to home sales? It's about $1.4 million in the quarter.

Is that -- Jana, are you looking at our FFO table? Is that where you are seeing that?

Yes.

That is a combination of sale of just operating assets or actually the net book value of operating assets that have been replaced and also the gain on sale of the rental homes.

Thank you very much for the clarification.

Jeff Lau.

I just had a question I guess in terms of historically, I don't know if this was discussed in the past, but in terms of Indiana what keeps that state or that region more or less in terms of the occupancy, I guess, compared to your overall portfolio?

Jeff, that is a very good question and while it has been some time since we have discussed it, we have what we call the one-two punch there. It is a double hit.

Obviously the Midwest is still recovering from the strong recession. In particular, Michigan I think is outpacing many other areas in the Midwest that were deeply hit. But what happens in Indiana it was also the absolute centerpiece of manufactured housing manufacturers.

When we saw manufacturing dip from about a delivery of 370,000 homes in 1999 to what has been averaging 45,000 homes over the last couple years that manufacturing, that job market just absolutely dried up. Especially in Goshen, South Bend, and other southern areas of Indiana. And that has impacted, actually, occupancy in Indiana.

I will tell you that it has been slower than other parts of the Midwest to recover is a large part of what is going on there as a result of what we just discussed, but we are starting to see an actual bottoming out there. The inventory of competitive housing seems to be drying up. The rental rates on multi-family seem to have stabilized and occupancies are increasing.

So I think we will start to see a lift in Indiana, but it is a much slower lift. It certainly would be buoyed by either increased manufacturing taking place in our industry or other industries in that Indiana market.

Okay, thanks. And, Texas, the sites that -- I guess the additional sites through the expansion, how are those coming along? Are those being filled? Are they still sitting kind of empty? How are those looking?

They are looking very, very good. As we develop these sites, I would share with everybody we are very cautious to make sure that that there is not only high occupancy existing but continued strong demand as a backlog. We only open -- we are doing very small expansions at any given community so there is not too much exposure.

We pro forma the fill up of absorption at four to six per community, and we have been averaging somewhere around eight per month. As I shared with you, in the two communities that we opened in September, the first partial month, we were two to three times what we expected in the normal monthly absorption. So we are feeling very, very good about the expansions.

What is certainly good there is that this expansion ground has been dormant for probably close to 12 to 14 years now. We have paid for it, we have paid the cost of entitlement and zoning, and in some cases much of the front end loaded development costs are in place. So, as we fill these sites, the incremental revenue strongly drops to the bottom line.

It is nice to be able to share with the market that we anticipate opening 1,500 new sites over the next 12 months.

Great, thanks.

Paul Adornato.

Thanks, good morning. Given the improvement in the balance sheet and given the continued success of the home rental business, was wondering if it were possible or if you were considering increasing investment in the rental business.

That is a good question, Paul. I think that we have shared with the market the strategy that on a same-site basis we would like as much as possible to be able to increase the purchase of new rentals by the amount of the conversion of home sales and redeploy that money in those communities. To the extent that we expand communities or acquire communities with vacancy that is where we will continue investing more in the rental program.

It's kind of the same basis. When we can buy a really quality community at a cap rate based on the existing NOI and get vacant sites that we kind of refer to as free with the acquisition based on the cap rate, we can then use the rental program to fill those vacant sights. Then slowly convert those renters into owners at a rate of, as we said, about 10% to 12% per year.

Okay. Are you meeting all demand, all qualified demand I should say, with respect to the home rental business, or are you having to turn people away?

I would say that from what Karen and I know meeting with operations basically weekly on the rental program as we review purchases against sales and authorize budget spends, you will have areas that are continuing to show high growth and high demand, such as Texas. And we are not meeting all that demand right now, obviously, with 97%, 98% occupancy.

So the expansions will help us with that and we believe it will also help us with next year's rental revenue growth rates. It is a balancing act of not deploying capital that will stay idle in rentals and making sure it kind of meets the demand. So we are pretty balanced with the exception of what would normally come up in unusual demands month to month.

Okay, thanks. Just looking, I mean given the kind of stabilization of the all-age community business was wondering if you are noticing an increase in institutional interest in this market? Be it either more capital or more players looking for acquisitions out there.

I think that I would share with you that while our acquisition pipeline is very, very strong and I believe we are comfortable with our growth opportunities near term, there is definitely institutional capital out there today recognizing, I think, the stability of cash flow from our industry, recognizing some of the opportunities there by the low cost of debt and leverage today and obviously the fact that the capital marketplaces are strong offering capital.

While we have not encountered anything head to head with anybody in particular that I would point to, I am aware of transactions that are taking place out there. And they're probably more aggressive as a result of that institutional capital being out there.

Okay, thanks. That is helpful. Just one more question with respect to the customer experience. Has there been a better financing environment for customers looking to get into the product?

I would say that there is an improving environment out there and there is a lot of dialogue and discussion taking place with financial institutions that we are having at the Company. We would expect at least two new financing sources, one of them a very traditional banking group and the other one a finance company, that have put forth structures and interest in entering into the financing.

So I think it is going to continue to improve, but putting that in reference where there has been almost minimal or no improvement over the last 12 years, any improvement is a big improvement at this point.

Okay. And just to be clear, the two new sources would be to help customers in general, not just ones at your properties?

That is correct.

Great. Thank you very much.

(Operator Instructions) Andrew McCulloch.

Just one follow-up on the rental program. You have been in this business for a while now. As you are selling the rental homes do you notice any trends in which houses buyers are actually buying? Meaning are they buying the new houses in your inventory or the more discounted older inventory?

Andy, the sales of these homes are really pretty proportional to the vintage years of the homes in that rental portfolio. So that it's not like they are just buying the 2000 and more recent vintage homes; they are also buying the 1990 homes in the same portion that they exist in our portfolio. Because we have monitored that pretty closely to make sure that that is occurring in that fashion and that we are not building up a rental portfolio of very old homes.

Great, thank you.

[Michael Biel].

In terms of -- you mentioned the pipeline and obviously we have made a lot of property acquisitions. Can you talk about the going in cap rates we are paying versus sort of a longer-term historical range of those?

I guess what I am getting at is these look attractive certainly relative to current interest rates, and you mentioned the free spots, but worrying a bit at some point where debt matures in the future and there won't be near the spread we are getting today.

Sure. I think we have got to be cautious in all asset classes, obviously, with what you just pointed out. I continue to share my thoughts on this particular industry probably even more so than many other asset classes, but the cap rates just have not changed a lot.

I have been in the industry for, I don't know what it is now, 30-plus years. You see that same range of the bottom end right around a fixed cap rate for the institutional quality communities, those that are high amenitized and desirable locations. And you see it up to 9% cap rates in all-age communities that are older, have less amenities, and probably some functional obsolescence.

The only change that I see to that is, as Paul or someone else on the call pointed out, from time to time some form of institutional or other money will chase a certain property type or portfolio and must have more patient or a lower hurdle in their returns. But overall, between us and our competitors I think you would hear a similar scenario.

We don't see a lot of cap rate compression and we don't see a lot of cap rate expansion. You could get to areas, like we talked about Indiana, that have just been sluggish for 10 years or other areas that have fundamental issues in their housing market or their job markets and then you will see an increase in a cap rate. But generally things don't change a lot.

Everything that we are seeing that we are very interested is in that midpoint, probably of the low 7%s. It will be slightly below that the better the quality and slightly higher than that the more the challenges with the property.

The only other thing I would add in there, for everyone's benefit, is that we will seek properties that either have a lot of deferred maintenance or that we feel we can put some capital improvements in and might pay a higher cap rate for some opportunity that we see. But other than that I have shared my thoughts with you.

Two other quick things. What sort of average same-site rental growth would you sort of hope to see over the next couple years? And then what sort of payout ratio coverage to FIFO do we have to get at before we consider a dividend increase or distribution?

Well, with regard to same-site rent increases, we have been right around 3% for the past three years and I would expect to continue at that level into the future.

Even with the apartment rents pretty robust.

Certainly we take a look at -- every year it is a community by community look at what the market rates are, what the competitors rates are. Certainly if we can push them higher we will.

The difference between our sector and the apartments is that during bad times apartment rents will be crashed and drop significantly. We have never had to reduce rents in our portfolio irrespective of the economic times, so we look for annual increases in the 2.5% to 4.5% range depending on the particular community. We don't have the crashing of rents during adverse economic times like the apartments have.

The only thing that I would add to that; when we look at occupancy and we suggested that we believe our occupancy will approach or just exceed 90% in the upcoming year, I think that we have a history at around 94% occupancy, as Jeff was indicating, as I look back. We are able to begin to push our rental increases at that upper end that he suggested.

Some of it is also tied to CPI in some of our portfolio. Not a lot of it, but certainly in the retirement it is tied to more CPI growth.

Thank you. Then on the distribution coverage, where we might get to feeling comfortable to bump it?

Sure. I think that we have always shared that the Board reviews the dividend policy, basically on a quarterly basis, but certainly at the end of each year in particular, and has shared kind of the concept that low 80% is an area where historically they have viewed increasing the dividend.

I think that the impact of all of the balance sheet items that Karen shared earlier, especially with regard to the equity that was raised this year, the decision was made to reduce leverage, to increase liquidity, and to solidify the balance sheet. There was some cost to a potential dividend that most likely would have taken place were the dilution not there for the shares that were issued.

Hopefully next year. Thank you.

We would like to be able to commit to that.

Thank you.

Thank you.

There appear to be no further questions. Please continue.

Well, we would like to thank you for participating on our third-quarter call. We hope fourth quarter will be another positive quarter and look forward to the next call. As always, Karen, myself, and Jeff are available if anyone would like to follow up with us. Thank you.

This concludes the third-quarter 2012 earnings conference call. Thank you for participating. You may now disconnect.