Sun Communities - Q1 2013
April 25, 2013
Transcript
Operator (participant)
Gentlemen, thank you for standing by, and welcome to the Sun Communities First Quarter 2013 Earnings Conference Call on the 25th of April, 2013. At this time, management would like me to inform you that certain statements made during this conference call, which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. Factors and risks that could cause actual results to differ materially from expectations are detailed in the morning's press release, Form [audio distortion] from time to time in the company's periodic filings with SEC.
The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release. Having said that, I'd like to introduce management with us today, Gary Shiffman, Chairman and Chief Executive Officer, Karen Dearing, Chief Financial Officer, and Jeff Jorissen, Director of Corporate Development. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If you have a question, please press star followed by the one on your touchtone phone. If you'd like to withdraw your question from the queue at any time, please press the star followed by the two. If you're using speaker equipment, it may be necessary to lift your handset before making your selection. I would now like to turn the conference over to Gary Shiffman. Please go ahead, sir.
Gary Shiffman (Chairman and CEO)
Thank you, operator, and good morning. Today we reported funds from operations of $31.7 million or $0.93 per share for the first quarter of 2013, compared to $25.9 million or $0.90 per share for the first quarter of 2012. These results exclude acquisition-related costs incurred in each of the referenced quarters. Revenues increased to $103.4 million in the first quarter of 2013, compared to $83.1 million in the first quarter of 2012. As we have been and are in a period of significant and rapid growth, as well as change of the company, we thought it would be helpful and evident by reviewing the following measures, comparing current data with the end of 2010.
Number of communities has increased by 48% or 35% to 184. We are now in 25 states compared to 17, and a large portion of this growth represents recreational vehicle communities, which supported our rebranding of Sun RV Resorts, which is our commitment to excellence in service and vacation experience for our guests. The number of home sites has increased by nearly 20,000 or 42%, and this is roughly equal to adding a small city of 50,000 residents. The equity market capitalization has nearly tripled to about $2 billion, and both EBITDA and real property operations NOI will reflect growth in excess of 50% from 2010. While that growth has been assimilated, it's important to note, the momentum of positive earnings measures and the metrics has continued, and continues to set new thresholds of performance.
Turning to year-over-year first quarter comparative data, revenue-producing sites for first quarter increased by 621, which is more than twice the rate of the first quarter of 2012. Occupancy improvements occurred in all of our markets, including Indiana, which experienced the best quarter for occupancy improvement in many years. Occupancy in Indiana improved by nearly 2%, as 110 revenue-producing sites were added in the first quarter. Indiana, prior to this quarter, has been challenging thus far through the recovery of our economic cycle. Now, it presents a strong growth opportunity with over 2,000 vacant sites. We've introduced a new mid-market product into select Indiana communities for sale and lease, and it's being received very well. We plan to introduce the product into additional communities in Indiana during the second quarter.
Focusing in on same-site data for the quarter, revenue in the same-site portfolio increased by 4.9%, while expenses increased by 3.2%, resulting in NOI growth of 5.6%. Occupancy in the same-site portfolio of 159 communities has increased to 88% from 86.1% at March 31st, 2012, an increase of 1,506 sites. Home sales were 466 in the first quarter, an increase of 16% from the 401 homes sold in the same quarter in the prior year. Approximately 50% of these sales represent a transaction with renters.
As a general reference, since the economic downturn in 2008, the compounded annual growth rate in first-quarter applications to live in Sun Communities has been 13%. Applications to live in our communities continue to surge, with growth of 15% from 2012 to nearly 7,600 for this quarter. It is this demand which is generating gains in occupancy and home sales, and these increases in applications also provide the impetus for us to bring on over 1,100 expansion sites this year, in communities with full occupancy and continued strong demand. The majority of these expansions in seven communities are expected to be completed late this year. The improvement of our balance sheet metrics has been as dramatic as the growth and performance described above. These are also compared to 2010.
EBITDA to interest coverage improved by 43% from 2.1x-3x. EBITDA to interest and preferred coverage improved 35% from 2x-2.7x. Net debt to enterprise value improved by 38% from 63% to 39%. Net debt to gross assets improved 32% from 73% to 50%, and our weighted average debt maturity increased to 57% from 4.4 years to 6.9 years. At quarter end, we had $60 million of cash on hand and $300 million of additional liquidity, assuming the expected closing of our expanded secured line of credit in May.
I believe the above accomplishments result in a Sun transformed by growth, balance sheet management, and our operating performance and occupancy, home sales, property performance, and the successful assimilation of our acquisitions. While one cannot, with confidence, predict acquisition opportunities which may arise, it is our primary objective to enhance the bottom line of performance of our existing portfolio, as we move through 2013 and into 2014 with acquisitions. Turning to guidance as stated in the press release, we affirm 2013 FFO guidance of $3.09-$3.29 per share, and provide guidance of $0.58-$0.71 per share for the second quarter. Guidance includes acquisitions through March 31st, 2013, and the add-back of related acquisition costs. No prospective acquisitions of equity offerings are included. At this time, I would turn it over for questions and answers. Operator, if you're there?
Operator (participant)
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. As a reminder, if you have a question, please press the star followed by the one on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using speaker equipment, you'll need to lift the handset before making your selection. One moment, please for our first question. Our first question comes rom the line of [Jeff Lau with Citi]. Please go ahead.
Speaker 5
Hi, good morning. Looked like a pretty solid quarter. My only question was regarding the dividend, and if there's any insight on I guess the possibility of giving that a little bit of an increase.
Gary Shiffman (Chairman and CEO)
Yeah, I think we share with everyone when asked, that it certainly is something the board reviews on a continual basis. In, I think our last call, I did share the fact that with the recent capital improvements to our balance sheet, the equity raises and the preferred, that the board intends to look towards a policy of a dividend increase perhaps later in this year, provided that the payout ratio reaches the achieved levels that are anticipated.
Speaker 5
What is that? Is there a target there?
Gary Shiffman (Chairman and CEO)
There is a target there. It is a target that we share with the marketplaces below 80%.
Speaker 5
All right. Thanks.
Operator (participant)
Once again, ladies and gentlemen, if there are any other questions, please press the star followed by the one at this time. Stand by for our next question. Our next question comes from the line of Jana Galan with Bank of America. Please go ahead.
Speaker 6
Hi, this is Jane from Bank of America on behalf of Jana. We were just curious, you know, with the subsequent RV acquisition in April, you know, why guidance wasn't adjusted for that, or you know, is the impact not expected to be that large for the year?
Karen Dearing (CFO)
Yeah. Jane, that acquisition which we did a week ago, it was a very small acquisition, and it would have very little impact on Q2 and it fits within the range of guidance for the year.
Speaker 6
Great. Thank you.
Operator (participant)
Our next question comes from the line of Ryan Burke with Green Street Advisors. Please go ahead.
Ryan Burke (Analyst)
Hi, good morning. Hoping you can provide a little bit of color on the loan funding agreement that was announced with Talmer Bank. In particular, any key differences from the other means that buyers have to obtain financing, and also the type of progress that you've seen since its inception.
Karen Dearing (CFO)
The Talmer financing, could you repeat your first question again?
Ryan Burke (Analyst)
Yeah, just in particular, if there are any key differences from the other means that buyers of your communities have to obtain financing, any benefits to Sun?
Karen Dearing (CFO)
Okay. I'm sorry, Ryan. There aren't any key differences in that agreement. It was a $10 million agreement for properties located in Michigan, and there's been no lending on that agreement at this time.
Ryan Burke (Analyst)
Okay. The capacity of that agreement is actually $10 million.
Karen Dearing (CFO)
Yes, it is.
Ryan Burke (Analyst)
There's no plans to expand that?
Karen Dearing (CFO)
Yes, correct.
Ryan Burke (Analyst)
Okay, thank you.
Operator (participant)
Our next question comes from the line of Josh Patinkin with BMO Capital Markets. Please go ahead.
Paul Adornato (Analyst)
Oh, hi. This is Paul Adornato here with Josh. Hey, Gary, sorry if I missed this, but could you say what is driving the improvements in the Indiana portfolio?
Gary Shiffman (Chairman and CEO)
I think that it's an area in the Midwest that has lagged a little bit in recovery, and as we were watching Ford Motor Company and others post, you know, continued record-breaking North American profitability, I think that we are seeing a very nice and healthy recovery in the Midwest. I think it's trickling down to parts that have been slower to recover, such as Indiana. I think it's been bolstered by a new product that we've developed, is a home that has some proprietary structural changes without giving up any of the features that exist in the normal homes that we acquire.
It allows us to pass down a 5%-7% price point that has been very reduced price point to the purchaser. It's been very well received, and we tried it selectively in a handful of communities and we will be rolling it out in a much bigger way throughout Indiana. We think while we've seen the rest of the portfolio, first in Colorado and then in Texas, a recovery followed by a strong recovery that we've had in mid-Michigan over the last 12 months, Indiana has lagged behind. For the first time, we're seeing increased demand, and expect to be able to start making some progress filling the 2,000 vacant sites that exist out there.
Paul Adornato (Analyst)
Okay, thanks. If you could provide a little bit more color on one line that came out of the press release, and that was, I think you referred to improving the bottom line in 2013 and 2014. Is that referring to the integration of the new properties?
Gary Shiffman (Chairman and CEO)
Yeah, I think there's a lot of repositioning to take place, a lot of capital investment that's going into some of the communities, the rollout of the new Sun RV platform, the ability to market now from north to south, all that integration will take place over the next 12-18 months. I think what it will do is enhance the existing opportunities that we have in the new acquisitions, and some of the existing properties we own.
Paul Adornato (Analyst)
Okay. With respect to the CapEx then, has all of that been accounted for with respect to the acquisition cost?
Karen Dearing (CFO)
Yes, Paul. When we do our acquisitions, we evaluate the properties for bringing the communities up to our standards and the CapEx is included in our evaluation of the properties.
Paul Adornato (Analyst)
Okay, thank you.
Operator (participant)
Our next question comes from the line of Mike Dale with Davenport. Please go ahead.
Speaker 7
Good morning. Two quick questions. The occupancy trend is nice. It's up to 88%. Can you remind us what our highest occupancy company-wide level has ever been, or is there a practical limit to what that number ends up being?
Gary Shiffman (Chairman and CEO)
I think, Mike historically, that range has been in the 94%-96% occupancy. At around 96%, we consider the communities basically full because there is always a bit of turnover. At 96%, we generally believe we can accomplish stronger increases in rental, and revenue growth by nature of balancing the demand to the ideal occupancy.
Speaker 7
I guess that leads me to my next question. If I figured it right, your same-store rental increase was year-over-year about 2.8%. Is that increase benefiting, and I know it would have been there at least a year, but from some of the properties you've acquired say in the last two, two and a half years, or is that fairly indicative of across the board, what we're averaging?
Karen Dearing (CFO)
I think our guidance, Mike for same-site is 3%. Actually, no, guidance overall for the whole portfolio is about a 3% increase. Most of the properties that went into same-site, the majority of them were the Kentland Portfolio that was in Michigan. I think that would be a fairly typical increase of around 3%.
Speaker 7
Is there any concern, I mean, apartment buildings are being built in a lot of places at a pace we haven't seen in a while, any thought that that is getting to be a more competitive factor than in recent years?
Gary Shiffman (Chairman and CEO)
We don't believe so. I think we've really created a model that generally shows that we are able to deliver about 50% more space on a sq ft basis at 40% reduced cost as compared to multifamily. If I remember, the national figure was about $0.92 per sq ft on average monthly for multifamily, and I think was it in the 50s when we did our calculation for our portfolio? We can get you that exact data, but I think it was somewhere between $0.56-$0.58 per sq ft. The average on the sq ft was 900 sq ft to multifamily, as compared to just under 1,400 sq ft in our communities. Yeah.
Speaker 7
Looking at this half full, given the big increases we've seen in apartment rents, that spread, that value proposition I assume has actually gotten better in the last couple of years. Would that be true?
Gary Shiffman (Chairman and CEO)
I think it has. It certainly has against site-built. I think coming off of occupancies that were in the low 80s, we believe it won't be that far out in the future that we will be in the 90% occupancies. We would expect as we approach that 94% level, if you will, that we should be getting stronger revenue increases on a same-site basis, all right.
Speaker 7
Thank you.
Operator (participant)
Ladies and gentlemen, this concludes the Sun Communities' First Quarter 2013 Conference Call. You may now disconnect. Thank you for using ACT Conferencing.