Sun Communities Inc (SUI) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by. Welcome to the Sun Communities first-quarter 2016 earnings conference call on April 26, 2016.

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 companies 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 there will be an opportunity to ask questions

Good morning and thank you for joining our first quarter earnings conference call. Thus far 2016 is proving to be another excellent year for Sun Communities.

As we continue to successfully execute on both our organic and external growth strategies. Our team delivered a strong operational quarter on a year-over-year basis with same community NOI growing in the high single digits same-site rental rate growth of 3.4%. A 25th consecutive quarter of occupancy growth and a 41% increase in new NPO and home sales.

At the same time, the team continued the pursuit of one off acquisitions, hitting one manufactured housing and one RV community during the quarter, while also underwriting and negotiating the recently announced pending acquisition of Carefree. We are particularly excited about the Carefree acquisition, as it further improves the quality of our already best-in class portfolio. It increases our presence in key high barrier prime coastal markets, including Florida and California and also expands our age restricted communities to 33% of our total communities from the current 25%.

From a growth perspective Carefree adds approximately 3000 expansion sites, an increase of 42%, to current expansion site inventory. In short, this transaction reinforces our prominent position in the industry and upon the close of Carefree, Sun will control and operate an extraordinarily high quality manufactured home and RV community portfolio.

For the quarter, FFO of $0.90 per share, reflects our strong operational performance as we grew both rate and occupancy. These results were somewhat offset by the dilution from our strategic disposition in the fourth quarter and the impact of two sequential quarter equity offerings. Both of the offerings, were transacted above NAV and have supplied Sun with the capital to pursue transformational growth opportunities.

We believe the opportunity to acquire high-caliber properties and efficient large transactions is now limited. And that our incremental external growth opportunities are more likely to be smaller in scale and highly targeted to deepen our presence in key markets along with site expansions and selective green field development.

Before I turn the call over to Karen to discuss our results in more detail, I wanted to give you a brief update on Carefree. We've made significant progress on the debt financings for the acquisition and are achieving a better cost and term structure then we initially underwrote.

We are on track to close the transaction in or before July and are deeply into the integration process applying our proven practices and procedures. Were holding proactive meetings for the Carefree management team to facilitate streamline onboarding of both communities and financial reporting.

We are aligning a regional Vice President property assignments to strategically include a mix of Carefree and Sun properties and team members to promote and facilitate the most effective assimilation of two platforms. Additionally, we are already focusing on the integration of web and digital marketing platforms to assure that our systems are all linked and ready to capture both reservations and sales, day one.

We are extremely excited to fully onboard Carefree and resume our sector leading earnings growth once we have accretively deployed our equity capital. And with that, I'll turn the call over to Karen.

For the first-quarter ended March 31, 2016, we delivered funds from operations of $56 million, up 11.5% from the prior-year quarter or $0.90 per share. Our reported FFO excludes certain items detailed in today's press release. Revenues for the first quarter rose by 12.5% to $174.6 million, an increase of $19.4 million over the same period in 2015.

The growth in revenues reflects the solid performance across all of our segments, the effectiveness of our organic growth initiatives, as well as realizing benefits of the Sun platform, as we completed the integration of properties acquired last year. We were able to achieve robust revenue growth even as our total number of communities and developed sites decreased year-over-year due to our recent disposition.

Our developed site number decreased slightly by 93 basis points, while total portfolio occupancy increased by 260 basis points to 95.5%. Taking a look at our same community performance, for these 219 communities revenues increased by 6.6%. Which was primarily comprised of a 3.4% weighted average rent increase, and a 250 basis point increase in occupancy from the prior year. Same community NOI was up 6.4% compared to the first-quarter of 2015.

Expense growth of 7.2% for the quarter was slightly elevated due to higher-than-expected medical claims in our self-insured health plan and adjustments made to real estate taxes for certain updated assessments. Our exceptional operational performance is consistent across both our MH amenities and RV resorts.

In our manufactured housing portfolio same community revenues grew by 6.3%, driven by a 210 basis point improvement in occupancy and rent increases of 3.4%. Demand to live in our communities remains strong with applications up 6% year-over-year for our same communities.

Total same community RV revenues also increased by 6.3%. Comprised of an 8.3% increase in annual seasonal revenues and a 3.8% increase in transient revenues. These results are right in line with our budgeted growth expectations in both of these categories of RV revenue.

The RV industry is experiencing continued growth driven by consumers preference for the RV lifestyle and innovative RV design. Our call center reservations are up nearly 6% year-over-year and net revenue booked through our call center is up 11.5% compared to Q1 2015. Our summer reservations are trending strongly as we are 40% reserved for our expected transient revenues and are ahead of where we were at the same time last year.

The outreach to new and prospective guests through our social media campaigns continues to go and is driving significant traffic to our website as visits to sunrvresorts.com, are up 9.5% as compared to March 2015.

Another driver of our results is home sales, with total combined home sales for the first quarter of 2016 of 765 units. An increase of 40.9% from the prior year.

Pre-owned home sales increased to 699 of from 477 in 2015, while new home sales were 66 for the quarter. The average selling price of our homes also continued to increase, with an average home sales price of almost $83,000 for new homes and $27,500 for preowned homes, up 4.3% and 13.5% respectively.

The rental program which provides an effective way to deliver occupied expansion sites and introduces new homebuyers to our product also produced sound results. In the first quarter weighted average rent increased by 3.7% compared to the prior year.

We also moved 294 homes out of the rental program as a result of sales, for an increase of 113 rental conversion sales as compared to Q1 2015. Occupied rental homes declined by 3.1% for March 31, 2015 to approximately 10,800 sites as a result of the home sales I just mentioned along with it the disposition of our Indiana prop fourth quarter.

On a sequential basis, rental homes increased by 130 homes, nearly all increase was an acquired property that have yet to achieve full occupancy. Now I'd like to turn to our transaction activity and balance sheet.

We began 2016 by continuing to enhance our portfolio supported by capital markets activity. During the quarter, we acquired one manufactured housing and one RV community, comprised of 740 sites for $37.8 million. The communities are located in Texas and Michigan and were funded with cash from 1031 exchange proceeds related to dispositions completed in November of 2015, leaving $87.1 million in escrow.

Additionally, as Gary discussed, in March we announced the acquisition of the Carefree portfolio. The purchase price of $1.68 billion provides for funds to assume approximately $1 million of debt, issue the sellers $225 million in common stock at an issuance price of $67.57 per share and pay the remainder in cash.

In conjunction with this transaction, we completed an equity offering at the end of March in which we sold just over 6 million shares of stock at a price of $66.50 per share. We are very pleased with the investor reception of this offering which was both upsized and significantly over subscribed. Due to our intent to lock in our cost of capital relative to the anticipated closing of the transaction, we expect a quarterly impact from the offering of approximately $0.08 share until we deploy the capital.

We intend to replace the $1 billion in short-term debt that we're assuming with new debt. And we have already rate locked approximately $850 million at attractive interest rates with a weighted average maturity of 10.3 years. We'll provide more details when the transaction is complete.

Our balance sheet continues to be a source of strength. At March 31, 2016 we had $392 million of capacity on our line of credit and a $410 million in unrestricted cash due to the end of quarter capital markets activity in anticipation of the Carefree transaction. And $87.1 million of restricted cash on the balance sheet as a result of the assets sold in November 2015.

We ended the quarter with an interest coverage ratio of three times and a net debt to trailing 12 month EBITDA ratio of 5.5 times which was down from 6.6 times at the end of 2015 due to the additional cash on hand. Debt maturities remaining for the balance of 2016 amount to $107 million and we are exploring various refinance opportunities. And now turning to guidance.

At this time we're maintaining our annual guidance range for 2016 which we provided in the 2015 year-end release. For the second quarter, we anticipate FFO in the range of $0.79 to $0.81 per diluted share.

The second quarter guidance incorporates the impact of the equity transaction that we completed at the end of Q1, but does not consider the impact of any transactions that had not yet been completed including the Carefree acquisition. We anticipate this transaction will close by July and after it is complete, we will provide you an update on our outlook for the year including the impact of the recent capital markets activity as well as these assets.

And with that I would like to turn the call back to the operator to begin the question-and-answer session.

(Operator Instructions)

Our first question comes from the line of Jana Galan with Bank of America Merrill Lynch.

Thank you good morning. I was wondering if you could provide a little color on what the acquisition pipeline looks like now? I know you mentioned smaller deals but if you could comment on quality and pricing.

And then bigger picture once Carefree closes, are you pretty much at your target allocations between MH versus RV and age restricted versus all age communities?

Good question. I will take them from the pipeline first and then move forward.

Obviously this is a very large transaction that we have to integrate so we're going to be very cautious moving forward with regard to taking on any additional acquisitions. We do have a pipeline currently, that is similar to the pipeline and size and quality as we have discussed over the quarters the last few years. We did close on two properties this past quarter for about $39 million or Karen is it $37 million (multiple speakers). Were able to be very, very selective what we are seeing in our pipeline and what we're underwriting and how we're going to approach our acquisitions moving forward.

So we'll focus on the integration and creating value in the Carefree portfolio, I would say over the next 6 plus months. But at the same time we will selectively continue to review high-quality strategic acquisitions on a onesie and twosie basis. With regard to our cap rate very little has changed its the 6% to 7% cap rate range that we are seeing out there with 50 basis points to 75 basis points variance depending upon the quality of the individual assets.

We'll pretty much continue in the acquisition team business as usual being very, very selective.

And on your allocation between MH and RV and the age restricted and all-age going forward?

Sure. I think our targeted allocation was about 25% RV, 75% manufactured housing. We are probably within a few hundred basis points from being there post Carefree.

So right now strategically that will be our target going forward.

Thank you. I appreciate Karen's comments on the RV results in the quarter, I know in the press release you mentioned converting RV transient sites to annual leases. Is that a trend you expect to continue going forward?

Yes we do, Jana. We have been very successful in doing that over the past couple of years.

Last year, if I recall correctly, probably around 400 to 500 sites were converted from transient to annual. And in our expectations for this year and guidance we would assume a similar sort of conversion from transient to annual.

Thank you.

Our next question comes from the line of Nick Joseph with Citigroup.

Thanks. What is the going in year one cap rate for the Carefree acquisition? And then can you talk about the opportunities for upside from putting Carefree onto the Sun platform?

Sure let me go to your cap rate question first. So the cap rate that we can discuss is based on the pro forma trailing 12 months, all-in information that is in the 8-K that was filed when we announced the transaction and that is a (technical difficulties) cap rate.

We look at this going forward, on a (technical difficulties) NOI growth that we can get to kind of expand that cap rate or the first 3 years to 4 years. And with this transaction as sort of a melding of everything that we have been successful with, with all of our other acquisitions. So in this case there is occupancy gain. (technical difficulties)

Total portfolio is 97% but MH 94% and we expect 45% of our committees running at 98% occupancy or greater. We think we've got some occupancy gain growth from there. There is great gain to occur.

Their RV average rents are lower than ours. Certainly benefits of scale, but there are certain key things that our core strength, that transient annual conversion, the implementation of our rental program, vacation rental cottage rental program, and the home sales and home brokerage business. All of those are our core strengths and we will be seeking to utilize those to increase the value in these properties also.

And besides that even future growth you've got all of the 3000 expansion sites that are available also. All of those sort of mix together to make the portfolio perform very, very well and achieve the growth expectations that we set out when we do our acquisitions.

Thanks for the color on that. And then what is the rate on that $850 million of debt and what was originally underwritten.

(multiple speakers) We're actually not discussing the rates on the debt prior to closing of the transaction.

Let me discuss it this way. When we talked about the deal, we thought we could replace their short-term variable rate debt that was at 3.7%. We thought we could fix it, with 10 year to 12 year debt near that rate and expect -- based on the indicative prices that we had received at that time and we have not changed those expectations.

Okay. Maybe I missed it, I thought in your opening comments you said that the $850 million of debt was at a lower rate than what you had originally underwritten.

That is correct.

Okay. And then after the Carefree acquisition is completed what percentage of the pro forma portfolio would you consider non-core?

I don't think that there's a specific percentage that we consider non-core. I think we shared with those investors that we talked to during the equity raise that we haven't been approached by a number of other interested parties and acquiring portions of the portfolio, and we will address those discussions over the next few months.

Not meaning to imply that there is any intended strategy to dispose of any of the properties but certainly we will look at all interest and make the best determination as we wrap our hands around the existing portfolio. So as it stands right now we think that the majority -- the vast majority, all of the properties fit within our core strengths and strategically fit certainly within our markets.

Thanks. And then just finally on the same-store expense growth, it sounds like it was more driven by unanticipated expenses, more so than timing. So do you think you will still be within the full-year guidance of 3.3% to 4.3%?

Nick, I would say that they really are more timing related then one time. We are self-insured for medical claims and so we are responsible for the claims as they are incurred. We estimate off of prior year and it is really just a function of when those claims come in, so we are a little bit higher in Q1 and then what we had expected and then to even out through the rest of the year.

And the other piece is really real estate taxes are same community guidance included a 6% to 6.3% increase in real estate taxes. That increase really included many estimates from potential changes that could occur in assessments.

We are about $230,000 outside of our range of guidance during the quarter. But so many of the assessments are still outstanding and they may or may not have an increase. So we will just have to continue to evaluate that as the year progresses.

But truly both of the amounts appear to be timing at this point in time so we wouldn't make a change to our expectation of same site expense growth.

Thanks.

Our next question comes from the line of Drew Babin, with Robert W Baird.

The variance between the $850 million of debt that's locked in with a fixed rate agreement and the debt assumed with the Carefree deal that extra $150 million plus the variance there, is that debt that for modeling purposes we should assume is deceased one way or another? Or is there a plan to essentially refinance that debt in a separate transaction?

The debt will be deceased and we will go on our line.

Okay. And then secondly just on the property tax increases, what plans are in place, or what is some standard procedure for appealing tax deficits? Is it something that is ongoing from year-to-year. It sounds as if Sun's always fighting and I guess if you could talk about those percentage of them that are appealed and then the percentage of them that are adjusted following the appeal.

We are very aggressive with real estate tax appeals. We appeal I want to say 99% of significant real estate tax increases.

Over the years we have been very successful within those appeals. I would estimate 60% to 70% success rate on those appeals.

Okay. And then one question that is a bit of a housekeeping question, with the remaining 10/31 proceeds, could they theoretically be deployed to fund the Carefree transaction? Or that need to be a separate smaller acquisition?

No, they will be released in May.

Okay.

And (multiple speakers) they will be used for the Carefree acquisition Drew.

Okay. Makes sense. Thank you very much.

Our next question comes from the line of Paul Adornato, with BMO Capital Markets.

You mentioned that cost savings were coming in a little bit better than what you had underwritten. Was wondering if these provide a little bit more detail there.

I think we were discussing it in terms of debt, Paul when we underwrote it at a particular estimated debt then we had indicative pricing and that was a bit better than what our initial underwriting was.

Okay so is on the debt side and not on the operational side?

Correct.

And I was just wondering, in terms of the expansion portfolio, how fluid is that number? That is, if you have a really good property can you always find extra room for additional sites? And what would be kind of the upper limits of expansion, if you will?

I don't think what we have what we consider an upper limit. It is always supply and demand as we have shared with the market before we will start an expansion and invest in it there has to be full occupancy with continued strong demand.

That full occupancy as Karen indicated, for all practical purposes, in today's Sun portfolio is that levels of 97%, 98% occupancy and above. In fact what we shared last quarter was 104 communities were at 97% and above and to-date at the end of the quarter, 119 communities are 97% and above and of those 119, 83 were at 98% and above and today they are 102 that are 98% and above.

It is at that level of occupancy that we kick in gear on the expansions. And I would say that there is no real cap on how much we would expand if we had the entitled ground to do so. We would just be expanding in small sizes of about 100 sites at a time so that we never got too far ahead of ourselves.

Okay, and you mentioned entitlements. Do you have to go back and get additional entitlements or do they entitlements generally already exist?

So, in the expansion sites that we are talking about, the entitlements exist. But as with our entitlements as time goes by their requirements to go and make sure current approvals, current requirements are similar to what the entitlements provided.

So you always have to allow for a three to nine month period of time before you can actually start construction on something that is been entitled a long time ago and much of the expansion sites in the Carefree portfolio have been entitled quite a few years ago.

And finally just on the rental home program. Do the rental homes appeal more to one demographic? Is that age-restricted or all-age? Where does the rental home program work best?

I think it works in all aspects of our manufactured housing communities. I think that much of the industry and our competitors have used it both in age-restricted and all-age for similar purposes.

And what it does as we have shared before if it takes a nonrevenue producing site and creates revenue that wouldn't otherwise be there if operated properly, you can then go ahead and convert that renter into an owner. And recapture the capital invested in that rental home. It is part of the reason that we think our occupancies in our communities are now 97%, 98%, 99% because the renters do convert and there is no loss of revenue or loss of occupancy when they convert.

And we find that similar both in age-restricted and all-age. So not much difference from that standpoint.

Okay. Great. Thank you.

Our next question comes from the line of Jason Belcher, with Wells Fargo.

Hello. I am sorry if I missed this but can you please remind me what is the percentage of age-restricted communities in the portfolio?

Age-restricted is 25% of the (multiple speakers) Sun portfolio. It will go to 33% when the Carefree portfolio is added.

Got you, thank you. On the social media front, can you talk a little bit about what you guys are doing there to drive traffic and usage and maybe, comment on any new initiatives that you might have underway?

I think what we do share is that web, social, digital, mobile, and traditional marketing all help to really generate the leads into our call center. And that is the key driving component for us is to capture that lead and then to act upon it.

About 42% of our reservations are being generated online right now. And as far as what we have campaign-wise this coming season, there are a number of programs that really focus on converting transient RV residence into seasonal annual residence.

So that we have a park-and-play program about to begin in May where we try and encourage increase in length of stay, and eventually increase from transient to seasonal. So that will be our focus this coming year.

Great. Thanks a lot.

Our next question comes from the line of Ryan Burke, with Green Street Advisors.

Can you please provide some insight on the current appetite is from Fannie and Freddie in terms of lending at the property level? And perhaps just a little bit on what that means for the refinancing opportunity at Carefree?

Sure. We have been actively engaged with both Fannie and Freddie in relation to the Carefree acquisition, also Life companies. So we have significant appetite from the lenders with respect to lending on this portfolio. I think they are focused on the very high-quality assets and on the quality borrowers.

And I would say there's a very strong appetite from Fannie and Freddie on lending in the portfolio including Freddie's doing the lending on the RV side but for the RV's that have significant amount of annual RV sites.

Okay would you say it is better or worse, or sort of unchanged from say, two years ago?

I would say at this time for most favored buyers it is better. And as Karen indicated earlier, we were quite pleasantly surprised with the interest exhibited by all three of the lenders types that she discussed. And it allowed us to aggressively bid out the segments of the Carefree debt and tranches. And I think we could share with you that between Freddie, Fannie, and Life companies that is where we have locked in our race to move forward on the refinancing.

Okay. And then in regards to what sounds like a potential disposition or joint venture opportunity off of some of our assets what is the general profile of asset that you are talking here?

I think it has been varied. I wouldn't want to lead anyone to believe that there is an imminent JV or anything like that. But I would share that there is discussion and most of it is coming from other bidders in the process with Carefree who remain interested, especially certain financial funds.

And some of it is coming from [severance] both in Canada and outside North America. And for Sun we will just cautiously approach that strategy and if the proposed structure is something that we think makes sense for the shareholders than we would certainly execute on it.

But there is no specific profile of what the categories of those segments of the portfolio might look like. Just expressed interest in investing in the segment and seeing if Sun would be interested in proceeding engaged, with continued management of those properties.

And is there interest in both portions of the Carefree portfolio plus portions of the legacy Sun portfolio?

Yes.

Okay. And then last question just on same-store operating results for the quarter. How did the Greencourt or the roll into the Greencourt portfolio same-store pool top same-store revenue and expense growth for the quarter?

I think the Greencourt portfolio in its earlier stage in our platform and under our operations. So it performed a little bit -- if I look at it on an annual basis expectation is that portfolio will perform a bit lower than what our core portfolio would do. And we would expect that it would grow to what the rest of the remaining portfolio would have as far as growth the longer that it is under our platform and in our operations.

Does that speak towards the current operating environment for age-restricted versus all-age or is that more so in integration thing from your end would you say?

It is really integration. (multiple speakers) It is performing to our expectations. And what we shared with Carefree going forward is that it will perform equal to if not stronger than our core portfolio over the next three years as we integrate it. And the same is true I think with regard to the AOL portfolio to our platform out through 3 years to 4 years out and continued to perform similar to the core portfolio.

Greencourt is performing as we budget at (multiple speakers) and underwrote it. So there is nothing that is a surprise to us. It is just spending the first year integrating it is a challenge. That is behind us.

I think one of the things that is interesting about the AOL portfolio when we talk to the operators the operational team about it is that they no longer segregated as a separate portfolio and consider it as part of as the core portfolio in Sun. So, it is getting harder and harder to extract how it is running as compared to the core portfolio. It will just be integrated with our same-site portfolio.

Okay. So it sounds like the property tax increase that we saw from the quarter was sort of more broadly based across the entire portfolio as opposed to anything specific with Greencourt.

Yes and in fact I notice in our competitor, we have seen real estate tax increases in Colorado specifically and the majority of that tax increase is related to Colorado properties. And I also would share that in any underwriting we do a very, very thorough job investigating down at the county all the way down to a municipal level. We have been doing this for many, many years.

We do underwrite for increases in real estate taxes where we can expect them. And as Karen indicated when we're going through this entire year after acquiring really $1.07 billion in 2015, roughly, including a full Greencourt. You'll have some ups and downs and hopefully we will have some estimates are we provided for increases and those increases won't materialize.

Okay. Thank you.

There are no further questions at this time. This concludes today's teleconference. Thank you for your participation and you may disconnect lines at this time.