Sun Communities Inc (SUI) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Sun Communities third quarter 2013 earnings conference call on the 29th of October 2013. At this time, management would like 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 1985. Although the Company believes that 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 mornings 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 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. (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 $32.1 million or $0.82 per sharefor the third quarter of 2013. Compared to $21.5 million or $0.71 per share in the third quarter of 2012. For the nine months of 2013, FFO was $90.9 million or $2.44 per share, compared to $70.5 million or $2.39 per share in the nine months of 2012. All these results exclude transaction costs related to acquisition activity in all periods.

Revenues for the nine months increased by 25%, from $240 million in 2012, to $310 million in 2013. And at this time, I'd like to review the portfolio. During the first nine months of 2013, revenue producing sites increased by 1,312 as compared to an increase in 975 sites in the nine months in 2012. All that occupancy gain or of the occupancy gain of 1312 residents 983 were in our same site portfolio, while 329 were in our recent acquisitions.

The occupancy improvement in recently acquired properties reflects the success of our strategy to acquire high quality, well located communities, based on end place NOI, that includes vacancies or other market attributes that the Company can take further advantage of, such as below market rents, and absence of capital by sellers to maintain or improve the community. By filling these vacancies and investing capital to reposition them, we are able to accelerate the growth in that operating income in many of our acquired communities.

Portfolio occupancy is at 89.6% at September 30th, and is expected to exceed 90% by year end, and approach 93% by the end of 2014. At that time, the existing portfolio will have effectively achieved full occupancy. As occupancy growth requires the investment in new homes in our communities, the activity will subside to a level necessary to sustain portfolio occupancy, at around 93%.

It is expected that the sales of the rental homes will significantly exceed rental new home purchases, at that time and the proceeds from sales will exceed the capital needed for any home purchases. The only prospective need for significant new home purchases for these rental programs would be due to expansions or the purchase of what we refer to as free vacant sites and community acquisitions, both of which represent sources of strong earnings growth.

Now, we turn to the same site portfolio of 159 communities. Revenues increased by 4.9% in the first nine months. While expenses increased by 3.6% resulting in a 5.4% increase in NOIs These same site occupancy increases from 87.2%, to 88.8% from September 2012, to 2013.

Home sales for the first nine months were 1,433, an all time high in some communities. This compares to 1,253 homes sold during the nine months ended September 2012. Applications to buy or rent homes in our communities exceeded 23,000 for the nine months an increase of over 15% from 2012. Nearly 100 potential residents are applying for occupancy or purchase of a home across the portfolio every single day.

Reviewing our expansions of existing communities, they continue on plan. We currently have 1,230 sites under development in the communities, with 470 to be opened in the fourth quarter, and the remaining 760 opening in 2014. Expansions are always scheduled in our communities with strong demand profiles and nearly full occupancies. While expansions are concentrated in extremely strong Texas market, nearly a third of the sites will open in Ohio, North Carolina, and Colorado, where demand remains exceedingly strong. Due to strength of these markets, rental homes placed in these communities, we expect to command premium pricing.

Turning to our acquisitions, the Company currently has approximately $160 million of manufactured housing and RV communities under various stages of agreement and in advanced due diligence. Approximately $135 million of these communities will increase the Company's footprint, on the east and west coasts as we shared as our focus strategic growth areas. Closing is expected on several communities late fourth quarter and early in 2014.

On a separate note, the Company recently settled all claims arising out of the litigation that it commenced against the affiliate of Equity LifeStyle Propertieswith respect to our recently acquired Morgan RVproperties, and in connection with that settlement, the Company and ELS completely and fully released each other from any and all plans associated with the Morgan RV acquisition. With this behind us, we will continue to move forward with the repositioning and capital investment required for the success of these acquired properties.

Although 2013 results were impacted by a slight delay in beginning the capital improvement project, we are gaining traction, in seasonal business, and expect that this increase in seasonal contracts along with currently booked future reservations and the positive response expressed by returning GAAP will create mid teen revenue growth in this portfolio in 2014. We are currently in the process of refinancing our July 1st 2014 debt maturity of approximately $170 million. The window for prepayment without cost begins January 1st, 2014. And we expect to pay off this maturing debt at that time, with financing transactions of ten, and 12 years, whose indicative pricing based on current rates is approximately 50 to 85 basis points below the in-place interest rate on this debt.

The completion of these transactions will extend the weighted average maturity of our debt, from 6.5 years to ten years.

We tightened our 2013 FFOguidance to $3.19to $3.23 per diluted share and expect the fourth quarter to approximate $0.75 to $0.79 per diluted share excluding acquisition related expenses and subsequently closed acquisitions. We expect to provide 2014 guidance before the end of this year. At this time operator, we will turn it back over for questions and answers.

Thank you, sir. (Operator Instructions) Our first question is from the line of Jana Galan, from Bank of America Merrill Lynch. Please go ahead.

Thank you, good morning. I was curious with your $160 million potential acquisition pipeline, if you can give us some detail on what percent is RVversus MH, and how you plan to fund it.

The approximate break down is a 40% MH, 60% RV. We are very pleased that the RV communities that are currently under acquisition contain anywhere from 60% to 90% seasonal. RVsso very, very stable established RVrevenue should be in place at the time that we take them over. I think that we've tended for the most part to fund these with a combination of their existing debt. And draw off of our credit facility, or directly to our credit facility if there is no debt in place.

Thank you, and then maybe more broadly if you can comment on what you are seeing on the market in terms of cap rates.

Sure. You know, when that question comes up, certainly I have shared with the market, and many others in this industry as there doesn't seem to be much change in the cap rate through long periods of time in manufactured housing. We have seen some compression in the RV world of maybe about 100 basis points of compression in cap rates from where it was a few years ago. Everything that we're looking at acquiring that I mentioned and that we put in our press release is between seven and eight cap rate.

Thank you, and then maybe just following up on the timing of the 2014 guidance. Are you just waiting to get more clarity on the closing of the deals and maybe the terms for your debt refi? Or is there something else that you are waiting to see how it plays out?

Jana, we are in the middle of doing our budget process right now. So still kind of looking at that and then we'll have a little bit more clarity on those acquisitions as time goes by.

Great, thank you very much.

Our next question is from the line of Michael Bilerman with Citigroup, please go ahead.

Great, thanks. It's actually Nick Joseph here with Michael. Sticking with the acquisition pipeline, how large of a shadow pipe line is there behind the current acquisition pipeline?

I think that we were quite specific to only indicate the pipeline that we have actually either under letter of intent or purchase agreement. And the pipeline probably beyond that is about 100% equal to that amount.

Okay, thank you. And then in terms of refinancing next year's debt, can you talk about the demand you have seen so far from lenders, and how much all-in rates have moved since you began discussions given the increase in the tenure?

I think that -- and Karen can add to this if she wishes -- we have seen a very strong appetite both on a [securitized] basis from bank balance sheet and from Life Company, and so the bidding and competitive process has been very aggressive, and we're very pleased at how tight the pricing has come in. And then more recently, we've seen after a little bit of a rise in the tenure, over the last five or six days a reduction of those rates and I think we're looking to take advantage of that knowing what we are trying to accomplish for the first quarter refinancing of the debt that we discussed.

Nick just more specifically, that is at a 5.05% rate right now. Piece of that refinancing is locked in at 4.2%. And indicative pricing on the other transaction is around 4.55%.

Okay, great, thanks.

Uh-huh.

(Operator Instructions)The next question is from the line of David Harris with Imperial Capital, Please go ahead.

Hi, good morning, all. Maybe I missed this but it looks like expense property operating expenses took quite a jump in the quarter. Was there something seasonal, or is this reflecting rather more the change in the composition of the portfolio over recent years?

Well, if you -- on a same site basis, David, we were in line with guidance on our top line revenue. On our expenses, we missed guidance on expenses by about $270,000 for the quarter, and about $550,000 were up for the year. And those misses in same site are primarily related to additional payroll costs and additional cost of some health benefits. We had some tough claim year this year, we have had three years of very strong claim years on our self-insured plan, and this year we just had a few larger claims so we don't expect these to continue.

But the payroll is going to be more of a permanent feature, isn't it?

Yes, payroll will likely continue.

And then CapEx took a big jump up again, is that seasonal? Because I'm looking at these third quarter last year, which you very helpfully provide for us, and it was at a much lower level, I mean is that more related to activity in the quarter and we can expect it to tail off? Or again is that reflecting a rather more higher run rate than we've had in previous years?

That's reflecting a one time project that we put into place this year. We allocated between $3.5 millionand $4.5 million for a significant road improvement in some of our communities.

Okay.

(Multiple speakers) the Midwest while we have a solid CapEx program, it had been probably 10, 15 years before we really did anything significant with our Midwest roads and I think that it was desired to put them back into position for the next ten or 15 years. (multiple speakers)

Again, I ask the question, is that -- should we assume a higher run rate than you have been running at in the past? Obviously, these are very low levels, but it does rather impact ones thinking about perhaps the dividend.

No, I wouldn't expect -- it is a one time event we are talking about. We have been running $150 to $165 a site and we'll continue to do that.

Okay then looping it back and just repeating that question for you, perhaps Gary, this doesn't impact in any way on the thoughts around the dividend?

No, it doesn't. What I've shared with the marketplace, is the board anticipates right after the first of the year, right after our next board meeting to review the dividend policy, and historically, at around an 80% pay out ratio. We have looked to increase the dividend, I think that that would be a discussion that will take place, and based on where the pay out ratio is we'll share that information right after the next board meeting.

Okay, and that would be what with your fourth quarter earnings most likely?

Yes.

Terrific, thank you.

(Operator Instructions)Our next question is from the line of Paula Poskin with Robert W Baird.

Thank you. Good morning, everyone.

Good morning, Paula.

I see the trends in Michigan are quite improving occupancy up significantly, year over year, and the pre-own home sales. What are you seeing just anecdotally there in the regional economy? And what gives you a belief that that will continue?

I think anecdotally for those of us living in the Midwest, and particularly in metropolitan Detroit, we are seeing that secret resurgence with the rest of the country isn't quite experiencing or seeing. We have attributed a lot of it to the restructuring of the automotive world, taking away the uncertainty over the last few years and the hesitancy to spend on the sidelines, we are seeing the increase in all assets from -- it's difficult for usto get additional office space. Multi-family is in the high occupancy again.

Retail is in demand, light industrial, there are cranes out here again, so we're seeing a strong resurgence in Michigan. I think if you tied a little bit further to what we are looking at in Indiana, which is slow, steady growth, we are starting to see a little bit more activity in manufactured housing, in RV manufacturing, tick up and some of the mothball factories they are now talking about opening this year, so as we continue to concentrate our efforts in Indiana, I think we will -- which has been the one area that's lagged most for us. We expect to see slow steady growth. Site-built housing I think I have shared a few articles in Michigan that have been in the Wall Street Journal, where the inventory of quality used site-built homes doesn't -- that overhang is gone.

The average home is staying on less than seven days today on the multi listsand the desirable locations and we are seeing prices bid up above the asking price. So it is just very very good timing in Michigan right now. And I think if you couple that with the fact that there is has been no development in any asset class over the last five, six years, we anticipate seeing strong demand for less affordable housing.

Great, thanks very much.

Our next question is from the line of Dave Brad with Green Street Advisors. Please go ahead

Good morning. As it relates to the announced acquisition plans can you talk about the decision process to fund them with debt as opposed to equity?

I think we have shared generally with the marketplace that long term we look to be debt neutral on our balance sheet since 2011. We had raised $635 million in both common equity and preferred stocks. And it's our goal to be less leveraged going forward than we were historically. So I think we will certainly look to take advantage of the low interest rates right now. And when we talk about keeping the same leverage, if we can demonstrate to the marketplace the right accretiveness from the acquisitions, they will be funded by a combination long term of what we hope will be low cost debt. And future equity in the marketplace.

Thank you.

There are no further questions at this time, I'd now like to turn the call back over to Mr. Shiffman for closing remarks.

I think that we are very pleased with the progress that we have been making so far, we are very pleased with strategically what we have been able to accomplish in repositioning the portfolio. And we look forward to sharing both results of fourth quarter, and 2014 guidance on our next call or sooner. Thank you.

Ladies and gentlemen, that does conclude the Sun Communities third quarter 2013 earnings conference call. Thank you for your participation, you may now disconnect.