Sun Communities Inc (SUI) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Sun Communities first quarter 2014 earnings conference call on the 30th of April, 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 assumption, 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. Mr. Gary Shiffman, Chairman and Chief Executive Officer, Ms. Karen Dearing, Chief Financial Officer, and Mr. 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 call over to Mr. Gary Shiffman. Please go ahead, sir.

Thank you Operator, and good morning. Today we reported funds from operations of $38.3 million, or $0.95 per share for the first quarter of 2014, compared to $31.7 million, or $0.93 per share for the first quarter in 2013. These results exclude acquisition related costs incurred in each of the references quarters. Revenues increased to $111.2 million in the first quarter of 2014 compared to $102.9 million in the first quarter of 2013. The year 2013 was our 20th full year as a public company. Prior to the initial public offerings, we owned 24 manufactured housing communities comprising just over 6,500 sites.

Today we own 193 communities comprising more than 72,000 sites in 27 states, including nearly 40 RV communities. The size and scope of the activities that have grown are even more emphasized when we consider that today we include sophisticated marketing programs, processing 30,000 applications for occupancy a year, and managing home sales and rental programs among other things. While the Company's enterprise value now exceeds $3 billion up from less than $200 million at the IPO, the attributes that undergird our success are unchanged from those we have cited in our initial public offering road show.

First and foremost, affordability. This is the basis for the demand for occupancy in our communities. The average manufactured home has nearly 50% more square feet at a 40% lower cost per-square-foot than the national average for a comparable apartment. The economic advantage extends to single family housing which costs about 3.5 times the cost of a manufactured home. And that's excluding the land. While the down payment and operating costs of a single family home are substantially larger in dollar terms, there's no better measure of the impact of affordability on demand than the recurring annual increases in applications to live in our communities.

The stability of revenues is another key attribute. The site of rents for our residents have increased by an average 3% to 4% for over 20 years. This pricing power exists because of the quality of our asset management, and the cost of moving a home. Only an average 3% of our residents have moved their home out of our communities during the last 20 years. In addition, same property net operating income has increased every year in our public company history. We were characterized as Recession-resistant at the time of our IPO, and that assessment has been fulfilled over the ensuing two decades.

As we are largely a landownership business, our CapEx is low relative to other asset classes. Our CapEx which approximates 3.5% of revenues is significantly lower than multi-family at 8.8%, student housing 4.8%, self storage 4.7%, and the overall average of 5.8% for REITs. While the amount is not large, we consider it crucial to reinvest in the properties to maintain quality and curbside appeal.

In 1993 we told prospective investors that this industry possesses strong, long-term prospects for acquisitions because of the highly fragmented nature of ownership. After purchasing nearly 200 communities, that statement remains true, and the same is true of recreational vehicle community ownership, where we've been focusing our attention and efforts in recent years. Similar to manufactured home affordability attributes, the value proposition and RV is affordable vacationing, and attractive acquisition opportunities come to our attention with frequency.

Obtaining zoning has long been a daunting obstacle to the development of manufactured housing communities and it remains so. To this barrier has added to the decline and shipments of homes and the loss of thousands of dealers which has substantially raised the economic barrier to entry. New developments of communities are very rare. Supply of new sites is perhaps more constrained now than at any other time, and we are fortunate to own over 6,000 zoned and entitled sites for development adjacent to our communities, to serve as additional sources of growth. As we enter 2014, the 20-year total return to our shareholders has been 863%, which places us 18th in the equity REIT universe, a ten-year ranking places us 28th, while we are in 8th place over the last five years.

And at this time, I would like to turn our attention to a portfolio review of the first quarter. Occupancy increased by 560 sites in the first quarter. On track for the annual budgeted increase in occupancy of approximately 1,900 sites. Total portfolio occupancy increased to 90.2%. Applications to live in our community has increased by over 5% to nearly 8,000, despite the adverse weather conditions during the first quarter in several of our markets. Same property revenues increased by 6.8% in the quarter, while expenses increased by 7.2% generating a 6.6% increase in net operating income. Nearly half of the expense increase resulted from the weather's effect during the first quarter on repairs, snow removal, and utility costs.

Occupancy for the same site portfolio increased to 89.9% in the quarter from 88.6% in the 2013 quarter. Home sales totaled 369 for the quarter compared to 466 homes sold during the first quarter of 2013. The impact of home sales in the quarter was related to weather, new legislative provisions requiring modifications to application and processing, as well as closing requirements which were resolved by the middle of March. The Company has made no revisions to its previously provided guidance of 2,200 annual home sales. Expansions continue to lease up successfully, with the most recently completed communities located in Texas, North Carolina, and Ohio, filling at an average rate of 7-plus sites per month. We expect to complete building approximately 800 additional sites in Texas and Colorado by the end of 2014. The Company is also pleased to note that the Board of Directors increased the quarterly dividend to $0.65 starting in this quarter.

And now I would like to provide an updated guidance. 2014 full year FFO guidance has been revised to reflect the effect of our recent equity offering, community acquisitions completed through April 30, 2014,the potential dispositions of 11 communities, and certain operating results through March 31st, 2014. FFO per fully diluted share excluding acquisition related costs is expected to approximate $3.33 to $3.43 per share for the year, and $0.74 to $0.76 per share for the second quarter. No prospective acquisitions or prospective acquisition-related costs are included in guidance. And today's press release contains additional detailed information recording guidance assumptions that have been revised from those originally provided in January of this year.

And at this time, Operator, we would like to open it up for questions and answers.

Thank you, Mr. Shiffman. Ladies and gentlemen, 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.

Great, thanks. Just starting on the dispositions. Can you give more color on the timing, expected total pricing, expected cap rates for them?

I think that the pricing and cap rates are pretty reflective of what has been very high demand for manufactured housing communities in general. As well as the fact that the specific 11 communities have been maintained to the same high standard of all our properties and contain no deferred maintenance or CapEx expenditures as you might find in the general marketplace today.

We've executed a purchase agreement on one of those properties, so far and it's under due diligence, and are currently exchanging final draft and negotiating through purchase agreements on six other of the properties. So other than to say the expected proceeds should we execute on disposition of all 11 communities should be in the range of $65 million to $75 million.

Great, thanks. And kind of the expected cap rate on all 11 I have guess if you put them all together?

I think everyone would have to interpolate backwards at this point, until we're a little further along in having the purchase agreements completed.

Okay, thanks. So then you touch on the financing market right now for MH and RV properties what you're seeing there?

Yes, I think we're seeing high demand to finance communities, and we've seen it from probably 4.25 to 5.25 on a fixed rate basis for one-offs, and under typical terms we would expect to find in the marketplace today, but there are an abundance of choices that one can make to go to find financing today. I think that's one of the main reasons we thought it would be a good time to begin a disposition program, and take some of the proceeds and redeploy them in areas that we think will be less management intensive for us, and we can get higher growth for the return on the investment.

I guess the flip of that is if you find it more difficult to actually source acquisitions given how much I have guess private demand you've seen in the space, and how strong the financing market is?

I think that there is greater demand out there today, and we are seeing competition, but that competition is generally coming for a different quality of asset. And hence the opportunity that we're trying to take advantage of is that aggressive pricing in the marketplace for that asset. For the assets that Sun has been focused on and for the type of value creation, where we're well capitalized and have the ability to utilize our rental program, and creating inventory for for-sale product within our properties, we're not seeing as strong competition and demand. So we're pretty much acquiring the same as we have been for the last three or more years now, cap rates being very much the same, and we've been able to take advantage of expanding our geographic footprint as we have shared before, and creating growth opportunities through buying properties with vacancy and opportunity, that I think some of the other investors don't have the capital to pursue, or the systems for that matter to pursue.

Thanks.

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

Thank you, good morning. Going back to the disposition, planned dispositions, how did you decide on these properties, and are you trying to lower exposure to certain markets?

I think that we do, we have an asset management group that reviews all of our properties quarterly, and Jana, as I just briefly indicated, I think that this was an opportunity to identify these 11 properties which are in very, very good shape, and I think very desirable to the demand out there in the market, but they are communities that will require a little bit greater management focus and resources, where we could redeploy similar or the same dollars, and I think it's better growth opportunity in new acquisitions with our capital that will be returned to us, regardless of whether it's in the Midwest, or elsewhere in the country.

Thank you. And I just had a question on the components of the revenue growth this quarter. It was very impressive, and I think we got 3.2% was guided to, in terms of increase in site rent, you this 130 basis points increase in occupancy, and a 1% increase in rental home rates. So it was primarily driven by transient revenues?

Yes. We had an outperformance in our transient revenue in the RV portfolio, and also some additional miscellaneous income related to fees.

Thank you.

Our next question comes from the line of Ryan Burke with Green Street Advisors. Please go ahead.

Good morning. Hoping you can provide some color on the entrance of Freddie Mac to the space? In particular is there any difference in the benefit to Sun, versus the benefit to say some of your smaller private operators that you compete against?

Isn't this a benefit on the financing of the homes, or the communities that you're referencing, right?

The communities

The communities. I think that on the community side, the aggressive lending that's out there right now I think benefits everybody. I mean we're financed heavily through Fannie programs and our own portfolio, and I don't see the competitiveness, if you will, of where rates are, terms and leverage changing that much to make any difference in general in the playing field of acquisition.

Thank you. And switching over to the rental program, you provided some very insightful color on the last call in regards to type of property that you're ramping that program up in, and the type of property that you expect to see a decline in that program. Can you provide an update just in terms of where your currently stand? Has there been any change in view from that perspective?

Ryan, I think that as you mentioned, we have talked in the past about where we're reaching total portfolio occupancy in excess of 90%, that we're seeing declines in that rental program at that stabilized occupancy. When I looked back at the last 12 months, 30% of the communities in which we operate a rental program had occupied rental declines. I think that's very consistent with the number that we, the percentage that we have budgeted for declines in 2014. Colorado had 75% of those communities are declining, in Texas 60% of the communities are declining. The ones that aren't declining are the Texas communities where we've had recent expansions, and those are continuing to fill. Michigan had about 20% of the rental communities declining over the past 12 months. So we're seeing exactly what we said, and continuing to utilize that program to, in markets where communities have not achieved that 93% to 94% occupancy, and again in the acquisition and expansion communities.

Got it. Thank you very much. Last question just on the legislation that you mentioned, that impacted home sales for the quarter. Sound like it's been resolved, but if you could just provide a little bit more color on what that was, and how it impacted your operations, and what we can expect moving forward?

Sure. I think that the language requirement said we were referencing, basically had to do with purchaser's rights and those requirements really had nothing to do with Sun, but the ultimate take-out lender that needed to legally understand more the DOT Brink regulations, and took them some time to really finalize the language that we then had to incorporate with regard to the borrower's rights into our contract form, and I suggest with you that by the time it got completed by the end of the March, not much language actually changed, but it was a necessary and required exercise that we just had to be patient with.

Okay. Thank you very much. That's all for me.

We have a question from the line of Paul Adornato with BMO Capital Markets. Please go ahead.

Yes, thanks. It looks like you had a very healthy profit per home sale of over $6,000, and I remember way back when you kind of ran the program primarily to increase occupancy, and not necessarily to make a profit, and so was wondering how you're thinking about that trade-off that is perhaps if you offered the homes at a lower price point, you would be able to sell more of them, and increase the rental income stream? So maybe you could give a little color how that's shaping up?

I think that you're exactly right, Paul. We entered the rental home process, and the process of buying repossessions as a defensive move way back in 2000, and that defensive move has sort of turned into a component of our business model. And we always felt that when we were buying homes on a basis far below replacement cost that two things would happen. We would creating value for the first time for the home buyer by buying them at prices that we feel will at least maintain their equity if not appreciate, and we're certainly seeing a lot of that with the increased profitability on the used home side, and then the new home side, we are not looking to make a profit, but we have certainly looked at others who have been utilizing the homes and sustaining certain losses to maintain occupancy. I think there is an opportunity for us, if you will, to evaluate the homes that we actually do have on the books and determine how we want it approach the next couple of years from a standpoint of occupancy growth versus profit on the selling of those homes.

I think for right now, I would share with the broader market thatwe're really looking to gain 92% to 94% occupancy in our overall portfolio, and at that time, historically in the business we have found we can get more aggressive with both sales prices and rental increases. So I don't think we'll be looking to maximize further profits on the sale of homes until we do hit that 92% to 94% occupancy rate.

Okay, great. That's helpful. And I was wondering if you could comment on the overall fragmentation of the industry, just I guess related to the aggressive acquisition market? I know there's a lot of private equity players out there, and so if you were to look at the universe of institutional quality properties, what percent is owned by institutional investors? That is private equity plus the public companies?

I would suggest that if you were to talk about institutional quality, there are basically just the two public companies that would fit in that category, and then some portions of some other private companies. But the vast majority of property turning over today, and the interest that's been focused by the financial funds, I would not personally consider institutional quality. So while I don't have an exact percentage for you, I would say that it's far lower than 10% held by the two public companies. And much of it is still held in private developer ownership fragmentation that we referred to earlier, and that our competitors refer to in our universe. So there are no large portfolios of institutional property that we feel will be coming to the market in the near future, so that everything has to be done on a onesy and twosy basis to be able to get that quality of a property, and I think there's also the opportunity for some limited development, and development I think today of onesies and twosies and we'll also offer some opportunity in the future for companies searching for that institutional quality property.

Okay, great. And just one final question. You guys perhaps have the best kind of long-term perspective on both the family oriented communities as well as the age restricted, and so I was wondering if you could give us your assessment of the outlook for fundamentals in both sides of the business?

I think I'll start and if Karen has anything to add. I think that we've always shared with the investment community and our shareholders, the concept that while all age communities hold a very large component over 50% of what we would call senior residents that qualify for age-restricted communities, the non-age-restricted communities I think tend to perform even better in growing economic environment, and I think that perhaps in more challenging economic environments, some of the age age-restricted communities tend to perform slightly better. That I think our personal point-of-view at Sun is that we expect and are starting to see the results as we posted and reported today, that the economies in and around our all-age communities are doing well, creating strong demand for the affordability of manufactured housing. So we think for the foreseeable future, that the all-age communities will certainly outperform in revenue increases on an annual basis, due to the fact that age-restricted communities are much more tied to CPI and other indexes that are very low right now.

Okay. Great. Thank you very much.

Our next question comes from the line of Paula Poskon with Robert D Baird.

Thanks, good morning everyone. Just to follow-up on the operational fundamentals broadly speaking. I'm just curious anecdotally, what types of trends are you seeing in terms of residents moving in versus residents moving out? And in the context of is it job growth that's driving new people to move into your markets? Is it down-sizing baby boomers, and conversely, what are the drivers that make people decide to leave?

I'll share with you what we found in our different markets. Certainly when we talk about the Midwest and the scenario we're seeing very solid performance right now. Fundamentally coming out of the issues related to what we'll call the Great Recession in 2008, the restructuring of the automotive world, that obviously has a big influence in the Midwest. With all of that stabilization, there is a down-size I think in much of the population that did shift for necessity of jobs, and other things. But the uncertainty for those people who did have jobs in the Midwest and the environment, especially related to auto has been lifted. Automotive is creating profit. Those profits have a good trickle-down effect. Employees are given a bonus. Those on the sidelines feel secure with their job positions in our opinion, so therefore in the Midwest, we're seeing people move off the sidelines, more secure with greater down payments and more money, and moving into our communities.

When we get to other areas of the country as Karen indicated, in Texas and Colorado, aside from our expansions, we're virtually fully occupied. And I think much of that is related to job growth and the high demand in those marketplaces, as there was a shift of employment base as well. So Florida we've stayed pretty steady and fundamentally, while the economy is still not fully recovered, I think the concept of job growth and more security for those who are employed right now, has made greater opportunity and probably a greater need and demand for the affordability aspect of manufactured housing, and I think that is why the concept of understanding the stability of the revenues in our industry is being talked about a lot again, as we reach full occupancy in many of our marketplaces.

I just think good, solid fundamental economics as far as the shift from downsizing to smaller dwellings, I think we have discussed in the past, I think there are two fundamental changes that are happening. People who are moving to retirement areas, instead of disposing of residences, they're at least maintaining often a smaller residence in their area that they're coming from, and taking up secondary residency, sometimes in the form of manufactured housing. And other in their retirement markets, but they don't exit completely like they used to.

And on the downsizing thing, in the all-age communities, we still appeal to both ends of the market, first-time home buyers, single parents who are raising families and need the affordability feature of entree into homeownership, and then on the downsizing where as I said people are moving into sun belts and more retirement communities, but want to maintain a secondary residence. We are finding stronger demand in selling a site built home, but maintaining a manufactured home in the Midwest in particular.

That's very helpful perspective. Thank you. And just one last question. Across the portfolio, what would you estimate the opportunity set is for continued expansion and redevelopment?

Karen, do you have the states where we're focused on?

States as far as expansion?

Yes.

We have 6,000 sites available for development. If that's what you're asking, Paula. And let's see, 35% of them are from Michigan, and 38% of them are in Texas. We have started, obviously been very active in Texas and will continue in Texas, and as Michigan moves to greater occupancies, I bet 88.6 now. As it reaches further, we'll start looking at individual communities just to start expanding there in the future.

Alright. Thanks very much. That's all I have.

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

Yes, thanks, good morning everybody. Gary, I wonder how much you deliberated on the issuance of equity at a price below that you issued 12 months previously?

I think the choice for equity came out of a commitment that we made to the market to accept the dilution over the last few years on behalf of the shareholder to reduce leverage. Our ratios today are at the best point and highest efficient of I think almost any time that I recall, but certainly in the last 10 to 12 years. So we have repositioned the balance sheet, brought down leverage I think in a slow methodical way, took advantage of the pricing and the demand in the marketplace to do so. But at the same time made the commitment to those same shareholders that we would not lever back up.

And so the debate really was in offering the equity, were we offering the equity on the basis that we were going to be able to take that capital and create greater growth for the shareholder by using the proceeds primarily for acquisitions. And the acquisitions that we made, we announced previously fit that category. I share with the market that we look for 15% to 20% growth in NOI within a 24-month period of time of acquiring those acquisitions, and when you run the accretion to the shareholder both mid-term, call it 24 months, and long-term out there, it was an easy decision for us to go out and issue the equity.

Did you get any pushback from any shareholders in this regard?

I would say that this equity offering based on performance over the last few years, there was no pushback, no.

Okay. And did internal considerations of NAV play any part in your thinking about the price at which you would be willing to issue equity?

Sure. I think that it always has to play a part in it. And while we don't publish our own NAV anymore, we do look very careful at what our view internally is, and I think that the utilization of this capital definitely warranted the issuance of the equity.

We're all wettened fingers in the area of NAVs I think anyway. Okay. Thank you for the answers.

Our next question comes from the line of Todd Stender with Wells Fargo. Please go ahead.

Hi, thanks. Just including the impact of the new equity into your guidance, it just seems 2014 guidance is still pretty conservative. You include the impact of the asset sales but no acquisitions. Does a lot have to do with timing? Is that kind of why you incorporate the $0.05 to $0.06 impact?

As far as the not inclusion of acquisitions, Todd, it's difficult, it depends on what you're buying. If you're buying MH or you're buying RV. It depends on whether you're buying northern season or southern season, and when the majority of revenues come in. So timing of the acquisition, and the type of acquisition that you're doing really impacts what we would be able to put out there for guidance. So that is whywe don't include potential acquisitions in guidance.

Okay. And any mortgages on these, on the assets you're selling, just looking at the potential positive balance sheet impact that you can factor in?

We have been working over the past couple of years restructuring our debt and to unencumber certain assets. The majority of these assets are unencumbered.

Okay, thanks. And then just when you look at the renters converting to new homeowners, how much flexibility is in that number? Just kind of getting a sense of how much that can change throughout the year? Does the current interest rate environment have to kind of stay the way it is right now, and do you expect the bulk of this activity to what we would think of as the spring selling season, so call it Q2 and into Q3?

I don't think we've experienced a lot of seasonality. I think we've shared with the marketplace. We've converted on average I think around 11% annually, and it just doesn't seem to change that much. I think that aside from the remarks we already shared regarding weather, and some difficulties in getting our contracts amended for the new legislation on lending, one of the things that did impact us in the quarter is the focus and attention to keeping our affected communities that were affected by the weather, safe, manageable, roads clear, things like that, probably took a little bit of focus off of the conversions, and the ability of our staff and team to convert. In talking to them, because we want to really have good insight, the best insight we can and reissuing guidance.

Everyone felt pretty comfortable that anything that was lost will probably reflect in a little bit of pent-up demand going into the spring season. So we're comfortable that the numbers will be the same. And we don't see a lot of seasonality. It's funny. I think we do see a lot of growth actually toward the end of the year in the winter season, as people are trying to wrap things up year end, and perhaps making more move from renters to homeowners, but it isn't anything to point to.

Okay. Thank you very much.

Our next question comes from the line of David Rooney, private investor. Please go ahead.

Yes, my questions relate to your proposed dispositions of the communities. The first is, do you expect to recognize a material taxable gain with respect to the dispositions? And if yes, will you attempt to defer these gains with Section 1031 exchanges, and if no, will this have a material impact on the portion of your dividend which is return of capital?

I think that by nature, by the nature of the fact as a REIT, we would not have any taxes to pay on these gains. We would not have to look at any exchanges, or anything like that. I think that when you, and I'll step out a little bit. When you get a little deeper into the year end assessment of return of capital versus distributions, there are some implications, but I'll leave that to Karen and the accounting department. We will not pay any taxes on the gains on the sales of these communities.

But my question is, how will it impact my taxability of the dividend?

The capital gains would flow through, and I would like Karen to address anything else on it.

I don't have an estimate of what that capital gain would be to share with you at this time, David.

Thank you.

Sorry for not answering that correctly.

(Operator Instructions). Our next question comes from the line of Chris Pearson with Davenport and Company. Please go ahead.

Hey guys. Thanks for taking my question.

Sure.

I was just wondering if you could elaborate a bit on the positive trends you're seeing in the transient revenue, I guess just talk a bit about what surprised you relative to your expectations this quarter?And then I guess I'm wondering if that level of revenue growth is also baked into your guidance, or if that could be an additional source of upside throughout the year?Thank you.

I think that transient revenue growth is a function of all of the marketing efforts that we have in place. The call center that we have in place, the websites that reach out of to individuals proactively, through many markets, or many media. We're trying to reach consumers, follow-up with individual who have stayed with us previously, extend stays of individuals who are currently with us, and would like to stay a little bit longer. So we're very proactive on all of those fronts. That is with all of the marketing initiatives that we've been working on as we've gone further and further into the recreational vehicle business, and so it's certainly is helping in the transient side.

It's helping in the vacation rentals, where we are finding strong demand for cottage rentals within our communities. And it's also helping us with moving, actually helping on the annual seasonal side too, in that we are finding more individuals moving from transient to seasonal annual stays with us. So all of those positives are an outcome of the marketing efforts that we have put in place. And we have included the positive of the transient revenue increase in our guidance going forward.

I would now like to turn the conference back to Mr. Shiffman for any closing remarks. Please go ahead, sir.

I'll conclude it there, and we look forward to our next quarterly earnings announcement and call, and in the meantime, at any time please feel free to reach out to Karen, myself or Jeff, and the Company. Thank you, Operator.

Thank you, sir. Ladies and gentlemen, this conclude the Sun Communities first quarter 2014 earnings conference call. Thank you for your participation. You may now disconnect.