Sun Communities Inc (SUI) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Sun Communities third-quarter 2015 earnings conference call on October 27, 2015. 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 the forward-looking statements are based on reasonable assumption, the Company can provide no assurance that its expectation [will not change]. 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 current 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, and Karen Dearing, Chief Financial Officer.

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 afternoon and welcome to Sun's third-quarter conference call. The third quarter was a busy and productive one for us as we continued to execute on our long-term strategic growth plan as well as actively managing and strengthening our balance sheet.

Today we reported funds from operations of $61.5 million or $1.05 per share for the third quarter of 2015 compared to $42.1 million or $0.97 per share in the third quarter of 2014. For the 9 months of 2015, funds from operations were $158.5 million or $2.83 per share compared to $113.2 million or $2.72 per share. These results exclude certain items as detailed in today's press release.

Revenues for the 9 months ended September 30, 2015, increased to $506.5 million from $362.3 million for the same period in 2014. Revenues for the third quarter were $185.4 million, an increase of $54.8 million from $136.6 million reported for the same period ended in 2014, an increase of 42%.

We are pleased to announce another strong quarter of operating results. And first, we will review our total portfolio. At September 30, 2015, total portfolio occupancy was 93.7% as compared to 92.5% at September 30, 2014. Revenue-producing sites increased by 1,357 for the 9 months ended September 30. Occupancy has grown in each of the last 7 years and currently, all of our major markets, with the exception of Indiana, are above occupancy of 92%.

Net operating income for the Company has increased by 50% and 47% for the quarter and year to date, respectively, when compared to the same periods last year. Continuing to support our acquisition emphasis, as our operations team does an excellent job of both integrating new communities and maximizing revenue growth.

Let's turn to a review of the major drivers of our third-quarter results. Our same property portfolio consists of 174 communities, which are 95% occupied at the end of third quarter, an increase over September 30 of last year of 150 basis points.

For the quarter, revenues increased by 7.4% and expenses increased by 3.7%, resulting in strong same property NOI growth of 9.1%. Same site NOI growth for the 9 months ended September 30, 2015, is 9.2% and includes increases in revenues of 7.5% and expense growth of 3.6%.

The strong operational performance is occurring in both our manufactured housing communities and our RV resorts. And what I would like to do is break that down a little bit, but continue with these same property results.

RV revenues increased by 8.5% for the same site properties for the third quarter when compared to the same quarter of 2014. The increase in revenue for the 9 months ended September 30, 2015, was 9.7%. Our ongoing marketing efforts continue to stimulate demand, bringing new and repeat guests for our vacation destination locations, as evidenced by a 370-basis-point increase in occupancy and a 5.2% increase in the average daily rates for the year-over-year nine-month results.

The RV industry has had momentum over the last six years, posting positive growth in RV shipments. This is a great time for the RV industry and we are receiving the benefits as seen in our increased same site transient revenues of $19.9 million for the 9 months ended September 30, 2015, up 9.1% from the same period last year.

We have also seen increases in extension nights of 10.1%, comparing 9 months ended 2015 to 2014, translating to an increase of 47.1% in Sun's extension night revenue. Additionally, our transient sites produced revenue growth of 7.5% over the three key summer holidays when compared to the prior year.

Demographics for the industry continue to be positive, with 11,000 Baby Boomers turning 50 years of age every day. In addition, as consumer confidence is increasing, consumers are spending more on travel and leisure. In the past 5 years, we have increased RV communities by 28 and RV revenues have grown by over 45% and now represent over 17% of income from properties. We continue to feel that this is not only a complementary business to our manufactured housing operations, but a lucrative business long term.

And now, turning to our manufactured housing portfolio, same property revenues increased by 6.6% for the third quarter when compared by the same period last year, which is due to increased occupancy by 150 basis points and rent increases of 3.3%. The increased demand for our product is further demonstrated by a 6.4% year-over-year increase in applications to live in our same site properties, and our increased home and broker sales, which I will touch on in a moment.

So what I would like to do now is turned to Sun Home Services and home sales. For the total manufactured housing portfolio, new home sales were 60 for the quarter as compared to 26 for the same quarter in 2014. New home sales were 191 for the 9 months ended September 30, 2015, as compared to 80 for the same period in 2014.

For the total manufactured housing portfolio, new and preowned home sales in the third quarter were 626 as compared to 524 in the third quarter of 2014. For the 9-month period, total home sales were 1,745, an increase of 23.4% from the same period in 2014.

Brokered home sales in the portfolio for the 9 months were 959 sales. This is more than double the number of brokered sales in the same period of 2014. The strength in growth of our brokered residential resales is a positive metric indicating continued renewed demand in manufactured home ownership.

It is also an excellent indication of the sticky nature of Sun's revenue stream and steady cash flow that we reference as characteristic of our business model. There is no interruption in the rental stream when a home sells in place. Additionally, many of these brokered sales replace the advanced age population in our senior communities when and as they require assisted medical or other types of care and must leave the community.

Now I would like to turn for a brief update on our expansions. We added over 400 expansion sites in Texas, where we continue to see high demand. Excluding currently vacant newly completed expansion sites, Texas is at 97.6% occupancy.

We continue to see consistent fill rates in the range of five to eight sites per month in our expansions. And in 2016, we anticipate adding approximately 1,150 expansion sites in 13 communities across 5 states.

And now turning to our external growth through acquisitions, during the quarter, we purchased three high quality recreational vehicle resorts. Closing on two of the three properties took place at the end of July 2015. The resorts contain 794 developed sites and approximately 290 sites available for future expansion. With this new acquisition, we have assembled a total of three high quality RV properties in the desirable vacation destination of Ocean City, Maryland.

In mid-August 2015, we purchased an RV property located in Crystal River, Florida, which contains 391 sites. The Company funded these 3 acquisitions with cash for a total of $76.1 million.

In 2015, excluding the ALL transaction, we have now acquired 8 manufactured home communities and 4 RV communities, including 4 age-restricted communities for just over $400 million. The acquisition pipeline is solid and we are currently reviewing a steady stream of both manufactured housing and RV resorts, focusing on our core acquisition strategy and filtering for high demand locations based on geographic destinations for RV, and solid fundamentals in demographics such as job growth, housing demand, alternative housing pricing, and retirement destination for manufactured housing.

With regard to both manufactured housing and RV, management also seeks to identify and find value-added opportunities for outsized returns, strategies that play strong to our expansion experience and expertise as well as our ability to accelerate occupancy to vacant sites.

During the quarter, we also sold 3 manufactured home communities and associated homes and notes for $32.5 million. These communities are comprised of roughly 900 sites. Two of the communities were located in Ohio and one was located in Michigan.

Subsequent to the quarter end, we sold three additional manufactured home communities, all located in Indiana, for $36.1 million. These sales reduce our holdings in Indiana from approximately 8% to 6% of our total portfolio and will improve total occupancy by about 60 basis points. These two transactions complete the six-property sale disclosed in our second-quarter earnings call.

Total dispositions over the last two years, in accordance with our asset management initiatives, total 17 manufactured housing communities for gross proceeds of $147 million. Seven of the communities were located in Michigan, six in Indiana, three in Ohio, and one in Nevada.

In addition to our operational and asset management achievements, we are actively evaluating opportunities and completing proactive steps to continuously improve our balance sheet. On August 19, 2015, we replaced our line of credit, increasing the facility to $450 million from $350 million.

The line also has a built-in accordion feature allowing for up to $300 million in additional borrowings upon the satisfaction of certain conditions. The new facility has a four-year term with two six-month extension options and contains lower interest rate spreads and fees when compared to our prior facility.

In August 2015, we entered into an agreement to borrow $87 million in mortgage debt that will be secured by 5 communities at an interest rate of 4.06% for a term of 25 years. In September 2015, we finished the first closing of $51.2 million secured by 4 communities and a second closing for $35.8 million is scheduled to close in December 2015.

Also in August, we repurchased approximately 4.1 million of the 6.5% Series A-4 preferred shares used to acquire the ALL portfolio. After the repurchase, there are approximately 2.3 million Series A preferred shares outstanding.

We utilized our ATM program during the quarter to sell about 608,000 shares of common stock for approximately $40.8 million. The proceeds were used to pay down our line of credit, which we utilized to repurchase the Series A-4 preferred shares.

We have narrowed our guidance for full-year 2015 FFO, excluding certain items, to $3.65 to $3.69 per share. This includes all acquisitions and dispositions completed through today and no prospective transactions. Please refer to today's press release for additional information.

And at this time, Karen and I would be pleased to address any questions.

(Operator Instructions) Nick Joseph, Citigroup.

This is actually John here with Nick. Going back to the acquisition pipeline, you mentioned a steady flow of opportunities. Could you give a little more color on that in terms of are these more one-off deals, portfolio deals, and what is the general mix of RV versus MH assets?

Yes. I think that as we filter through the pipeline, it is pretty similar to what we have experienced and shared on the past calls., where in general, most of what we are continuing to review are what we refer to as high quality, high opportunity single assets or small- to medium-size portfolios, anywhere from 5 to 12 communities. And I would say the mix is about half and half: half manufactured housing and half RV.

We've also shared with shareholders and the analyst community that our intention is to bring RV communities to represent something around 22% to 24% of the overall portfolio.

Okay. That's helpful. And then how would you go about funding future acquisitions?

I think that what Sun has done successfully is to be able to explore and structure opportunities to acquire acquisitions that might not otherwise be available with the Company's securities. Structured so that it is a win-win for both the Company and the seller of the properties as well as continue to acquire for cash.

We have the new credit facility available to us and of course, we are committed to keeping the net neutral basis intact on our balance sheet right now. And when we can acquire on accretive basis, we would look to the market to support those acquisitions.

Okay. Thank you. And then final question: on dispositions, you just did three in Q3, and then three here in October. Do you have a cap rate on those?

We do. I can take a look for you. The 3 properties that we announced today -- so last quarter -- had an average cap rate of 6.25. And for the 6 sold in 2015, they averaged right around a 6.5 cap rate.

(Operator Instructions) Jana Galan, Bank of America Merrill Lynch.

You did some good work on your balance sheet this quarter. I was curious what the plans were to address the 2016 debt maturities?

Jana, I think, as we have done with our 2015 debt, we are really proactively looking at alternatives on the $191 million of debt that is coming due in 2016. We have got $85 million of it that matures in July 1, and has a open prepayment penalty beginning on January 1. That is secured by 8 properties.

There is another 3 properties that have $48 million of debt on it that -- they mature in August. And that prepayment window is in February. And a single property has $54 million. So we are looking at our current capital needs, looking at our financing sources, including the GSEs and life companies. We're seeing very strong nice interest rates from those companies.

And whether or not we are going to repay or refinance the debt will really be determined after we look at our 2016 budgets and our cash needs there and a consideration of each of the capital alternatives. In the marketplace now, we are looking at borrowing rates on 10-year debt around 4% to 4.25%.

Thank you. And maybe just if there is any updates on the chattel lending front that you have been hearing? Anything from the FHFA?

I think, like those who are following it, we are hearing the general discussion that there is an expectation that the Federal Housing Finance Agency is expecting to issue a proposal soon. But we have [assumed to us] has been a long time coming so that we are not certain that anything will happen in the near term.

But we are optimistic that because the GSE's charter requires that they make a market for all forms of housing, this will eventually have a positive impact pn our residents and on Sun and other communities. But we just have to wait to see what movement takes place and really what the restrictions and regulations would look like in order to determine how it can positively affect our business. So nothing new, really, to report.

Ryan Burke, Green Street Advisors.

Gary, you mentioned on the first-quarter call that John McLaren was touring three banks that were potentially interested in entering chattel lending. Is there any movement on that front? I guess I am curious in the level of interest, even if Fannie and Freddie do not enter the space.

So all I can say at this time is that there is -- that interest continues in ongoing dialogue and it has been very, very positive. We have identified one particular opportunity in source. And John, along with the group from the Company, and Ron Klein, one of our Board members, who has vast expertise in financing, have been working closely to try and put together an actual structured opportunity that would be now one of three or four different sources that we have access to. So hopefully if that goes forward, we will be able to share it on the next conference call.

Okay. And it sounds like this is something where you would be bringing a third party in and it would be an arrangement that is unique to Sun? Or is it something where this third party would be opening up lending arrangements on a wider base?

Initially, I believe it will be set up uniquely to Sun, but structured so that it could be open to a wider base. And the particular parties involved are looking to expand their ability to acquire manufactured homes and to service and process them for their business venture.

Thank you. And Karen, on the balance sheet, it looks like the book value of rental homes decreased by about 10% this quarter. What caused that?

Book value of rental homes.

I am looking at the rental homes and improvement line item on the balance sheet.

Yes. So we have sold in rental homes with the dispositions. So over the year, we have, I don't know -- I think sold around 400 of those homes. And there will be more coming off with the acquisition -- or the disposition that occurred in October. So that is there. And then there is 600 rental homes sales. More specifically than that, I would have to look a little bit further for you.

Okay. But no meaningful change in the perceived value of those individual rental homes themselves I guess is what I am looking for.

Oh. No. No.

Paul Adornato, BMO Capital Markets.

Gary, with the portfolio now in the mid-90%s in terms of occupancy, was wondering if you could talk a little bit about pricing power. I don't know if I remember a time when the portfolio has been so highly occupied. So could you talk about pricing power, perhaps segment by segment?

Yes. It is a really great question, Paul, and I think it addresses what we are trying to address looking out into 2016 and 2017. So that we can certainly continue to provide guidance and the type of growth we have been experiencing over the last four or five years.

Obviously, higher demands and occupancy equal higher rental rates. And as we look at it here, similar annual RPS growth that we have experienced is going to equal similar NOI contributions and FFO growth. So finally, we look at how we can determine that continued RPS growth and we look at our current portfolio occupancy of around 93% and look at Texas, for example, that is above 97%. So it growing 100 basis points or 200 basis points in occupancy a year.

We can look out a couple years and feel pretty comfortable with the growth that we have internally. But we also look to our expansion sites because similar increasing expansion growth as what we have been experiencing will also equal similar RPS growth. And it is the RPS that grows the outsized growth that we are experiencing now.

And so I think while we are preparing our budgets and looking forward to sharing 2016 guidance with the marketplace, we have two great opportunities. We have the ability to increase and seek good solid rental increases because of higher demand and occupancy and we have a sufficient amount of sites in our portfolio before we hit optimum occupancy. And with the 1,100 expansion sites coming onstream in 2016, a great opportunity to improve and increase RPSs from the expansion side.

So that is where we see this kind of continued growth going through 2016 and we look forward to sharing that with the market when we present guidance.

Thanks. Just a couple of related questions. What percentage of your portfolio is subject to rent controls, either by the municipality or by the charter of the property?

Yes, Paul, a small piece of it -- of the portfolio is CPI sort of related. I think the last time I looked at it was just after the Berger acquisition and it is around 14% to 15% of the portfolio. And a significant piece of those pieces have strong floors of between 3% to 5% rent increases.

Okay. Great. And another one: given the health of the industry overall, do you see any greenfield developments out there?

I think, Paul, nothing significant. We have the one greenfield development in Paso Robles that we shared on a call about a year ago that we acquired, rezoned, and under construction to build about 300 RV sites in an area where we have 2 other highly occupied RV communities in California. And see it as a great opportunity to enter the market at a cost that is far better than having to acquire out there.

And I think that as a company that has its roots in development, we would look for one to two development communities per year as kind of the max of any development exposure that we would take. But again, we would look for sites that are AAA in location and that we couldn't otherwise penetrate or acquire acquisitions then to be able to go and develop anything.

Okay. Great. And finally, just on the RV side, was wondering if you could give us kind of a longer-term picture of supply and demand. How many new sites do you think have been added industrywide? And what about the installed base that you have seen?

Well, obviously, it is pretty anecdotal, because unfortunately, similar to the manufactured housing industry, there just are not great national metrics or indexes of communities and sites that are out there. But frequently, what we refer to as kind of that 9 million to 1 million demand ratio, where there is 9 million RVs to be said to be out there in the US market and about 1 million recognized RV communities. So those fundamentals, I think, are what really drive the strength in our RV resorts and other RV resorts.

And then if you consider that there are an awful lot of high-end RVs out there that can only power up and pull into certain kind of RV communities that can't go into the functionally obsolete communities, the demand gets even stronger. So I don't see any new greenfield development taking place out there in any way that would impact or satisfy the demands that are out there.

So what we do see and what we share with the market that we are very focused on is repositioning functionally obsolete RV communities, even when we can go in there and scrape them to the ground, so to speak, for their location and for their entitlement. All the way up to what we did in the Morgan properties, which is go in there and just rehabilitate the communities and add all new facilities to what they already have.

So nothing much that I see that will change the fundamentals. Nothing much that I am aware of on the new development side. But I do think those are the type of opportunities that we are looking for, whether it be one or two new developments in the right locations or continued rehabilitation or renovation, if you will, repositioning of existing, older, more tired communities is what we have to look at in front of us.

Drew Babin, Robert W. Baird.

I wanted to start off with a modeling question going forward. The Series A convertible preferreds, is there potential that the remainder of that could be a repurchase next year? Or is that something you are looking at?

Yes. That is not in the -- it is not under consideration right now, Drew.

Okay. Shifting gears, just looking at your same property rate and occupancy growth in 3Q, getting slightly over 3 on rates and about 150 bps on occupancy, adding those together doesn't quite get to the 6.6% same property revenue growth.

The variance there, is the whole -- so does the year-over-year 16% increase in site rent included in income from real property from the rental properties? Is that whole 16% year-over-year increase baked into the same property NOI print -- or the same property revenue print for 3Q? That whole absolute number?

Oh. Let me try to answer the question, maybe, if I understand your question correctly. Just looking at sort of what is making up the same site revenue growth performance. I will look at it from a nine-months basis because that is what I have in front of me, Drew.

But yes, the rental program is a piece of our outsized growth. It is about 170 basis points of our revenue increase. But beyond that, we also have our weighted average rent increase of 3.3%. We have got increases in our transient portfolio, along with occupancy gains and rent increases in our seasonal and annual RV sites. And we are also benefiting from additional fees and charges that a lot of the RV communities have within their fee structures.

So it's all of these things, along with occupancy increases that are driving the revenue growth in the same site portfolio.

Okay. I guess to clarify my question. On page 10 of the supplemental, it breaks out the site rent included in income from real property that come from the rental homes, that number in 3Q 2015 versus 3Q 2014 increased by over 16%.

Is that whole 16% number factor into the same property print or is that somehow converted into a same property metric? Or do you essentially just look at -- because the --.

That is total portfolio in the rental program summary. That is total portfolio. So -- but a portion of that -- and a significant portion of that -- will go to the same site portfolio. And that is the 170 basis points that I talked about.

Okay. That's helpful. And then on your balance sheet, leverage, although it improved a bit between 2Q and 3Q, is still relatively elevated versus a year ago. As you go forward into next year, are you comfortable with your current leverage level or would you ideally like to kind of bring that down a bit as time goes on?

We have talked about leverage several times on these calls and we really are targeting net debt to EBITDA below 7 times.

Yes, you're right. When you look at trailing 12, it does look a bit elevated. Certainly, the EBITDA for a trailing 12 period don't include all the acquisition EBITDA that we have. So when we pro forma it forward, based on forecasted EBITDA, we will end the year somewhere around 7.1 net debt to EBITDA and would look to decrease that in a minor way in the near term.

Okay. And just one last follow-up on the rental program. Can you break out the amount, ignoring the rental units that were sold with the properties in 3Q, what was the new investment in rental homes during 3Q?

I don't have the investment dollars in front of me because the table includes -- it is a whole year. And it includes also rental homes that we purchased with our acquisitions. So there is some amount of investment included there. So to get you a more specific number, I would have to do something after the call.

Todd Stender, Wells Fargo.

Gary, just to go back to the Paso Robles RV park, since this is a new concept for you and for us in terms of dealing with new construction, how do you measure the success of lease up in RV? I mean, not that we are used to MH lease up, but just kind of a natural lease up period with new homebuyers.

And I know this is built near one of your existing RV parks. So maybe it is just a benefit from spillover, but how do you look at that?

Well, first of all, we do look at it as a total benefit for spillover from -- it's Wine Country and I forget the name of the Vines that are the two other communities there that during peak season, we continue to struggle to meet the demand. So that gave us the initiative to try and grow out in that area. And also strategically, as we have shared, we would like to get a bigger foothold in the West.

So what we look to do is reach what we look for, basically a 12% IRR upon stabilization, which is generally 5 years from the period of time that we construct. In this case, Paso Robles, we see it happening in between about 3 1/2 and 4 years out.

So I can't address what I would call the absorption because I don't have anything in front of me. But the modeling that the ops department did in that area led us to conclude that we could successfully do that and get a comfortable return on investment of between 8% to 9% at stabilization.

Okay. That's very helpful. And this might be for Karen. Can you just talk about what went into the decision to repurchase the convertible preferreds? It looked like it was bought back at a pretty rich premium. Just seeing if it was your choice or was that the investors?

You can answer that. I can't. I think that was a decision that I bought to Karen's attention in that we saw it as a expensive instrument originally to allow us to acquire the ALL portfolio. The reason I was concerned about it and Karen and I discussed it with our Board is with I think over 6 million outstanding shares at the time, we were concerned that that overhang was going to come out there and felt that if we could bring it in on a basis that was neutral or better -- and we believe it was slightly better than neutral -- we feel that it was the best interest in the shareholders.

And the fact that we knew that we could put it back out -- the same security -- at about 100 basis points lower than where we issued it, collectively with a few other thoughts, that was my approach and Karen and trying to buy back at that time.

And did that ultimately contribute to the narrowing of guidance? It looks like you took off the high end of the range of $372 million. You issued equity to redeem -- well, to pay off the line. Is that all kind of part of the math behind that?

As far as the narrowing, we just went from a $0.10 to $0.05 range with the same midpoint. So really, the preferred impact was probably positive, and we had other items going on, dispositions, that would have had negatives. But we didn't really change guidance between second -- after second-quarter earnings and now. Just simply narrowed the range.

It appears there are no further questions at this time. Mr. Shiffman, I would like to turn the conference back to you for any additional or closing remarks.

I appreciate everyone's participation today, and Karen and I and all management continues to make itself available for any follow-up questions. Thank you.

That does conclude the Sun Communities 2015 third-quarter conference call. Thank you.