Sun Communities Inc (SUI) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Sun Communities' fourth quarter 2013 earnings conference call, on the 20th of February, 2014.

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 revise 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 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 and good morning. Today we reported funds from operations of $30.6 million or $0.78 per share for the fourth quarter of 2013, compared to $26.2 million or $0.80 per share in the fourth quarter of 2012.

For the year, FFO was $121.5 million or $3.22 per share compared to $96.7 million or $3.19 per share in 2012. These results exclude transaction costs incurred in connection with acquisition activity. Revenues for 2013 increased 22% from $339 million in 2012 to $415.2 million in 2013.

Now, turning to a review of the portfolio, during 2013, revenue-producing sites increased by 1,885 compared to 1,069 in 2012 and the original 2013 guidance of approximately 1,500 sites. The 2013 increase nearly equals the increase of the two prior years combined, each of which represented a historic high for occupancy improvement. Guidance for 2014 occupancy improvement of 1,900 sites will bring portfolio occupancy to approximately 92% by the end of 2014.

And turning to same property performance, the same property portfolio of 159 communities, revenues grew by 5.1% in 2013, while expenses increased by 3.2%, resulting in NOI growth of 5.9%. The 2014 same property portfolio guidance is based on 173 communities. And revenues are expected to increase by 5.9% while expenses increase by 3.2%, resulting in NOI growth of 7.1%. Same site occupancy increased from 87.1% at December 31st, 2012 to 88.9% at December 31st, 2013.

Turning to home sales during 2013, 1,929 homes were sold compared to 1,742 in 2012, an increase of approximately 11%. The guidance for 2014 projects home sales to increase by 14% to approximately 2,200. Rental home sales approximate 50% of home sales for each of the periods noted.

Applications, which are a prime measure of customer demand for our affordable housing product, continue to surge. For 2013, we took 30,700 applications to live in our communities, an increase of nearly 18% from the 26,100 in 2012.

Expansion of sites in communities is experiencing strong demand and continues to be on plan. We expect to add approximately 765 sites in six communities in our Texas and Colorado markets where occupancies are virtually full. The fill rate is estimated at six to eight sites per month. So when all six expansions are open, they will be filling at an aggregate rate of over 40 sites per month. And this is anticipated to be an annual experience over the next several years as we build out our inventory of existing expansion sites.

I would also like to note that we have also been selectively acquiring communities that have additional expansion opportunity and/or entitled and zoned land for expansion. With that I would like to focus a little bit on our acquisitions.

In the last six weeks of 2013, we bought three communities for approximately $40 million. In 2014, we bought an additional four communities for $106 million. Six of the communities are recreational vehicle communities and one is a manufactured housing community. We now have communities in 27 states, expanding our geographic footprint in many desirable destination locations along both coasts.

These communities are very high quality, and together with other recent acquisitions, represent many of the premier communities that are in our portfolio. Where necessary, we have been able to reposition RV communities through capital investment and upgrades to management systems and practices that should create accelerated growth.

These recent acquisitions perfectly fit our acquisition model, which is to focus acquisition efforts on the highest quality RV communities which have latent earnings power, and our manufactured housing communities which present the opportunity for growth through occupancy improvement, a capability we have demonstrated frequently over the last few years. Demand for sites in RV communities is also a function of the increase of shipments of recreational vehicles, which are expected to increase by approximately 6% in 2014, marking the fifth consecutive annual increase in shipments. Also, the aging of the nation's population is a positive, as adults over 55 years of age account for over 40% of total demand for RV parks.

Finally, I'd just add that we have a full pipeline of acquisition opportunities which fit our model criteria of quality, location, geographic diversity and potential for earnings growth.

Our debt to EBITDA multiple is projected to be 6.9 by the end of 2014, down from 9.8 in 2011. And in December and January, we refinanced approximately $240 million of debt at attractive long-term rates. Our debt maturities for 2014 and 2015 are $11.5 million and $56.3 million, respectively.

We anticipate that the Company's FFO per share for the year 2014 will be in the range of $3.52 to $3.62 per share. At the midpoint of guidance, this reflects an increase of 11% per share, and a strong increase in profitability provided the basis for an increase in our annual dividend from $2.52 to $2.60.

And at this time, management would be pleased to take any questions, operator.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of Nick Joseph with Citigroup. Please go ahead.

What are the cap rates on the acquisitions? If you could break that down between the six RV communities and the one MH community?

I don't have them broken down, Nick, but they average together about 7.2% or 7.2 cap. I think that one thing that I point out to everybody is that when we look at cap rates, we look at the cap rates based on the trailing 12 months and without any adjustments to the seller's operating financials. So one of the things that I think is causing some of the accelerated growth opportunity for us is to be able to get into those communities, whether it is reposition them or fill occupancy and really get a lot of growth increase, both in NOI and a return on investment that we look at after we are comfortable with the cap rate and the quality of the existing community.

Okay, thanks. And then in your remark in the release, you mentioned the substantial pipeline of acquisition opportunities. Could you talk about the size of that pipeline and break it down, I guess, between RV and MH? Will it be mostly RV's?

I think that we are still strategically looking to grow our RV communities, so that we can have good movement and good marketing between the various communities. And hence whether they are north and south, on either coast, or a little bit of Midwest, down to warmer weather for the snowbirds, we will continue to focus on the RV's. But last year we bought about $185 million of communities. In 2012, about $315 million. And in 2011, about $175 million. With the fact that we have $106 million already acquired in the first 45 days of the year, I would expect to be at the higher end of those numbers.

Great, thanks.

Yes.

Our next question comes from the line of Jana Galan with Bank of America Merrill Lynch. Please go ahead.

I wanted to clarify the guidance, does it currently not include the $56 million of acquisitions you closed in February?

Yes, Jana, it does not include those additional acquisitions. We are still looking at the ultimate long-term financing on those. And we will look to revise guidance once we have a little better picture of that.

Thank you. And then on the acquisitions that closed in January, I think that from the January press release to your earnings press release, there was an increase in the purchase price by a little over $4 million. I was curious, are you adding your expectations for CapEx there or what drove the change?

The difference, Jana, is primarily in the -- some homes and notes that we purchased that weren't in the original purchase price dollar amount.

Thank you. And then just one more on expenses. I was curious what is in the other category that drove the year-over-year decrease?

Could you be a little more specific on that, Jana? (multiple speakers) Are you looking at same site -- ?

Sorry, (multiple speakers) other expenses.

Other expenses in -- for the quarter?

Yes.

That is a decrease of about $300,000?

Yes.

That is primarily a decrease in advertising costs.

Thank you.

And our next question comes from the line of Ryan Burke with Green Street Advisers. Please go ahead.

Just continuing the last question, is that decrease in advertising costs something that we should expect going forward? Or was it more of a one-time decrease?

I think that is something that will be a one-time decrease.

Okay, great. Thanks. And then just on your guidance, if you could just elaborate on what you are seeing on the ground that is driving the strong projection of occupancy gain for the year? And perhaps just provide an update on how that affects your thinking on the rental program?

Well, I think that occupancy is getting to be a function of the strong growth and applications that we have shared, I think, in the past. Certainly our thoughts on the success of the rental program would be used as a tool to fill up what would otherwise be a vacancy. And I think we also indicated on the last call that the growth in the rental program from this point further, would mostly be related to expansions and acquisitions as in places like, Texas, and Colorado.

Do you know how many communities, Karen, they are decreasing or as a percent?

Yes, if you are looking at the rental program and looking into 2014 guidance, we are really seeing in that rental program about 28% of our communities are projecting a decline. In Texas, about half of the rental program communities are budgeted decline. Colorado, as Gary mentioned, another full occupancy state is three or four communities. And also we're looking at the declines in Michigan in about 19 communities, where -- that are primarily the Ketlin portfolio that is at full occupancy now, the portfolio that we purchased in June of 2011.

So the applications result in both sales and the rentals, and they help us accelerate the growth. So I think that accelerated occupancy and same site growth goes hand in hand with the success of that program.

And I think also when you just look at occupancy gains, Ryan, Michigan, Indiana and Ohio are still driving 50% of occupancy gains. Michigan is about 45% of that, we are continuing to project. We have some room there in occupancy, so we will continue to have gains there. In Indiana, I think it gained about 290 basis points in 2013, so we will see some additional gains there.

Great. Thanks for the insight. That is definitely helpful. Just going back to the 18% increase in applications. I assume that is a total portfolio number. Do you happen to have more of a same store number in front of you, by chance?

I do, just in case someone asked that question. It is about 13.5%.

Okay. Great. Thank you very much.

Sure.

And our next question comes from the line of Phil DeFelice with Wells Fargo Securities. Please go ahead.

Just as a reminder, do you include the rental occupancy in your overall occupancy stats? And is it included in your same store NOI numbers as well?

Yes. The rental program occupancy is included in our total portfolio and our same site occupancy, and the rental program is about 17% of total occupancy.

Okay, thank you. And just to stay on that theme, what is the average length of stay for renters in your communities, currently?

In the rental program? We have about a -- I think it's about a 65% renewal rate. So it is about two years.

Okay. And what are your expectations for recurring CapEx per site in the coming year? Looks like you took it up a bit in 2013. And was just wondering about the pace in now 2014?

I think we talked about it in an earlier call that we did do about $4 million of one-time road improvements, particularly in our Midwest portfolio in 2013. So -- and guidance has about $11.5 million or $160 per site in it for 2014.

Great. That is helpful. Thanks a lot.

And our next question comes from the line of David Harris with Imperial Capital. Please go ahead.

Good to see the dividend increase. Gary, I wonder if you could share with us the factors that you and the Board consider when setting the growth rate? And also what factors you think might be relevant in that consideration as we go forward?

Well, I think that the Board looked carefully at the fact that the last dividend increase, I believe, was 2005. And before that we had a policy basically looking for a payout ratio of 80% or so as a trigger point. And when we were at that level, which we are again today, we generally had a Board that was looking to balance the cost of capital and the use of the capital by the Company versus increasing the dividend. And the policy generally was to increase it at a level around CPI.

And I think that there was a lot of discussion with the Board of Directors looking at the same types of things and where we are right now, and the potential for putting capital to work, as well as growing the dividend for the shareholders. And after discussion, this being the first increase of the dividend that we have had in such a long period of time, we had come to that agreement in principle that it is a good place to start. And we would hope that based on the continued growth that we are expecting to see, that there would be more of it as we examine it in the future.

Well, just to elaborate on that, there is a big difference between CPI and what your -- the 80% ratio would get us to. Is it something sort of -- is it reasonable to think it's going to be something down the middle? I mean, I know you don't want to get ahead of the Board decision here, but is that a fair assessment as we sit here today?

I wouldn't forecast anything out into the future as to where it would or wouldn't be. But the discussion really triggered around putting the retained earnings to work. As I discussed, we do have a lot of acquisition opportunity. We are and have been committed to being pretty debt neutral moving forward with the balance sheet. So I think it was the right message to our shareholders that we did want to increase the dividend. But that is the amount that the Board felt comfortable doing at that time.

Okay. Now, you talked about the expansion. Maybe I missed this, if you will forgive me. Did you talk about the dollars expended in 2013 around expansions and what you might be looking to spend this year?

Expansion capital expenditures were, I think, about $18 million in 2013, and we would expect a similar number in 2014.

Okay. And here is another question for you, Karen, I think. You are sticking by your first quarter guidance of $0.92 to $0.94 a share that was issued in mid to late January. We've had an awful lot of snow since then. I mean, is there a question that we should be thinking about some higher snow removal costs, at the very least, on the expense line?

That is an excellent question. Two very mild winters might have caused us to decide to pay by the snowfall, and then something like this takes place and we are bombarded by a very snowy winter. But there is nothing that I'm aware of that would be significant with regard to snowfall. I think that I have been watching closely with the ops department as to the effect on applications. And I will share with you that the cold weather doesn't serve to advance the applications like we would like. But I really, at this particular time, on a quarterly basis, would not expect to see any significant changes due to the weather.

You understand where my question is motivated from, it is the number of days and hours I spent shoveling my drive, so. (laughter)

We all have.

All right, guys, thank you.

(Operator Instructions). And our next question comes from the line of Tom Lesnick with Robert Baird. Please go ahead.

Good morning. I'm standing in for Paula. Looks like legal taxes and insurance was up pretty significantly year-over-year. How do you expect that trend to continue into 2014?

I think legal costs -- that increase in the quarter, Tom, is about 50% legal costs, and 50% property and casualty reserve. I don't expect there to be a significant increase in that year-over-year from 2013 and 2014.

Okay. And then just looking at G&A, real property G&A, sequentially. It looked -- got a little bit of a bump there. How should we be thinking about that run rate going forward?

I think that if you look at the quarter, it is up about $2.2 million. Excluding deferred compensation amortization, it is up about $1.6 million. It's primarily salaries, wages and some incentives.

I think what our G&A is showing is that while we definitely do a great job of leveraging our team members in our system, we really did have to make an incremental investment in our support staff and systems, realizing that we increased our properties by 40% in the past couple of years. The number of employees in the field have increased by about 60%. And the transactional counts just really continue to climb. Things such as invoice processing are up 60%.

So, I think we are confident we've made the appropriate investments in our staffing. And we are doing -- making the investments in technology to gain efficiencies in our work flow. So I think that with the guidance that we have out there for 2014, we really are confident we provided the scalability in our admin staff to support the acquisitions going forward.

All right, great. That's very helpful, thank you.

I'm showing no more questions at this time. I would like to -- oh, we have one more question from the line of Josh Patinkin with BMO Capital Markets. Please go ahead.

Building on the G&A discussion, I'm curious to understand what kind of incremental investments you've made in your online reservation system and call center for the additional RV communities? And where are most of the RV reservations made today? Is it a variety of sources or is it increasingly moving to the Web?

That is an interesting question, Josh, because with the increase in G&A, and as Karen shared, with the influx of all of the additional work by the growth of the Company, it is something that I have been watching from the same standpoint. There has been a significant portion of the investment to develop online Web presence, where the reservation can actually be made fully automated, so there is no need to actually speak to a person. We have seen growth in online reservations, mind you, on a very small base, of several hundred percent since it has been implemented, approximately two and one-half months ago. I think the investment in social media is a good part of the technology being put in place.

And the balance of it is that while we were only six months in the RV business, as we have shared, because we were in the south, we have now expanded to a northern presence, which is the opposite season. And while we are levering the systems and the personnel, in large part what we have had to do is put in enough support staff to be scalable for the additional acquisitions. So in my asking the same question of management, what to expect with regard to G&A -- because certainly we would like it to become a lower percentage of our asset value. I am quite confident that the growth that is taking place now will be most of what is in place for the next couple of years. So I wouldn't expect it to keep going.

Okay. Interesting. And you mentioned that your online system has been up for a few months now. And do the people that you buy these RV communities from have any functionality along those lines? And what do you think you can do with revenue at those communities, just based on this greater interface with the customer?

So I would invite you to call -- or I will have our Chief Operating Officer, who is intimately involved with the growth rates and the expectations in the budgeting. But I can share with you that their expectations are for high growth online.

Additionally, one of the things I left off is that we moved our call center from Florida up to our home office so we could have more oversight. And it is now more central to all of our communities that we've acquired in the RV business. So that call center investment is also in place, made up and running. And incrementally, seems to be reason for a lot of the double-digit growth we are anticipating for 2014 reservations.

But if you want, I would invite you to reach out to John McLaren and he could give you exact expectations.

Okay. I appreciate it. Thank you.

Okay.

And we have no more questions at this time. I would like to turn the conference back over to Mr. Shiffman for closing remarks. Please go ahead.

Well, I would like to thank everyone for participating. We feel that we really are proud and pleased to have presented the results for year end and looking forward to reporting results in each of the quarters in 2014.

As usual, if you have any questions for Karen and myself or anyone else at the Company, we are available at any time. And we'll wind it up right there. And I hope that the snow slows down a little bit for everybody on the East Coast. Thank you.

Thank you, sir. This now concludes the Sun Communities 2013 fourth quarter conference call. Thank you for your participation. And you may now hang up.