Sun Communities - Q2 2012
July 26, 2012
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by, and welcome to Sun Communities' Second Quarter 2012 Earnings Conference Call on the 26th of July, 2012. At this time, management would like me to inform you that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. Factors and risks that could cause actual results to differ materially from expectations are detailed in this morning's press release form, and from time to time, in the company's periodic filings with 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 any participant would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, please press the star followed by the two. I would now like to turn the conference over to Gary Shiffman. Please go ahead, sir.
Gary Shiffman (Chairman and CEO)
Good morning. Today, we reported funds from operations of $23.1 million or $0.78 per share for the second quarter of 2012, compared to $17.5 million or $0.74 in the second quarter of 2011. For the six months of 2012, FFO was $49 million or $1.68 per share, compared to $36.5 million or $1.57 per share in the first half of 2011. These results exclude transaction costs related to acquisition activity in all periods. Revenues for the first six months increased by 20% from $138 million in 2011 to $165.5 million in 2012. Now we'll turn to the portfolio.
During the first six months of 2012, revenue-producing sites increased by 704, of which 433 are in our same-site portfolio and 271 are in acquired communities. The occupancy in the same-site portfolio has increased from 84.5% to 86.6% in the last year. We will discuss the performance of our Kentland portfolio acquisition later in our comments. Home sales hit a record of 885 in the six months of 2012, compared to 719 last year, for an increase of 19%, while applications continue to drive leasing and home sales, as they are at an annual rate of over 26,000 or 500 per week. Comparing to the same six-month period year-over-year, applications have increased 16%.
In the same site portfolio, revenues grew by 5% in the first six months, while expenses increased by 1.1% and NOI growth hit 6.6%. Now, I'd like to turn to our expansions, and as of June 30th, we have 4,846 sites in Texas. There are 40 vacant sites in the entire state, and the communities are now 99.2% occupied. We will be opening 3 expansions in the third quarter and 1 in October, adding 452 sites available for occupancy in Texas. These newly constructed expansions will provide us with a supply of homes, a supply of home sites to meet the strong demand while we proceed to prepare additional expansions to bring on stream in 2013.
In turning to our Kentland portfolio and Michigan, the Kentland portfolio of over 5,000 sites located on the west side of the state closed at the end of June 2011, and since that time, we have added 408 revenue-producing sites, increasing occupancy from 82.2% at acquisition to just under 90% at June 30th, 2012. We expect occupancy to approach 95% by the end of 2012. This performance is stronger and has taken place more rapidly than our pro forma and budgets forecast.
In the first six months of 2012, Michigan added 457 sites of occupancy, with 231 being in the Kentland portfolio and 43 sites in the Cider Mill Crossings community acquisition, which we acquired in October 2011. The remaining growth in occupancy of 183 sites compares to an increase of 142 occupied sites in the first half of 2011. Demand is strong throughout the state, as Michigan is currently ranked sixth amongst all states in terms of economic growth, according to the recently published U.S. Bureau of Economic Analysis. In addition, unemployment, which was 14.2% in 2009, has shrunk to 8.4% currently.
The business and economic climate has improved dramatically and really is reflected in the strong continued demand for affordable housing in Michigan. I'd like to review acquisitions. We currently have a large pipeline that are in various stages of negotiation and due diligence. And it is the largest pipeline that we've seen in the last 20 years. We're focused on expanding our geographic footprint, taking advantage of opportunities to lever management strengths, and increasing and expanding the scope of our RV business platform. To that end, the company acquired Blazing Star, 260-site RV community in San Antonio, located next to a Six Flags resort, for approximately $7.1 million. In place, NOI is approximately $570,000.
Additionally, this morning, we announced two executed letters of intent related to a high-quality portfolio of 7 manufactured housing communities with 4,350 sites and approximate occupancy of 87%. These assets are extremely well located in and around Oakland, Macomb, and Wayne Counties, and are actually within a 10-15 mile radius of our home office. Five communities will be acquired outright and two communities, where Sun will provide mezzanine financing and will assume management and operations on behalf of the owners of those communities. At this time, I turn it over to Karen to provide an update on the balance sheet.
Karen Dearing (CFO)
Good morning. As noted in some of Gary's comments, we are very pleased with our current performance, the improvements we've made to our balance sheet, and the positive long-term growth our recent acquisitions and anticipated transactions are expected to provide. When comparing our current balance sheet to recent periods, we've reduced debt to total capitalization to 50% from 60%, improved our debt to EBITDA ratio from debt of 9.9 times EBITDA to a projected 7.8 times EBITDA by year-end, reduced our line of credit balance by approximately $100 million, and improved our payout ratio from 90% in 2011 to an estimated 85% in 2012.
We have proactively managed our debt maturities, increasing our weighted average maturity from 4.9 years in June 2011 to 6.9 years currently. Our most significant upcoming debt maturity is $175 million, due in 2014, and the NOI of these properties has increased by over 16.5% since they were originally financed. In addition to the above, we've successfully completed a $163 million equity offering of 4.6 million shares. Our strong year-to-date performance has absorbed all of the dilution from this offering, and all prospective growth from our acquisitions and core portfolio will add to bottom line FFO growth. Through the long-term growth potential provided by our recently closed and shortly anticipated transactions, we foresee excellent opportunities for strong future FFO accretion.
In our press release, we updated FFO guidance to $3.20-$3.27 per share. Guidance does not include the effect of any potential transactions. Our business has a seasonal component for RV revenue and certain summertime expenses, which generally cause revenues to be the highest in first and fourth quarters, and expenses to be the highest in second and third quarters. We expect third quarter FFO to be our lowest quarter of the year and fourth quarter FFO to be slightly higher than the $0.81 achieved in Q4 of 2011. And now, Gary, Jeff, and I would be happy to take your comments and questions.
Operator (participant)
Thank you. If any participant would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, please press the star followed by the two. Your questions will be pulled in the order they are received. There will be a short pause while participants register for a question. Thank you. Our first question comes from Paul Adornato from BMO. Please go ahead with your question.
Paul Adornato (Analyst)
Thanks very much. Karen, with respect to guidance, in the $3.20-$3.27 range, are there any acquisition costs included?
Karen Dearing (CFO)
Not for any future transactions, Paul.
Paul Adornato (Analyst)
Not for future transactions. And so, there's none at all in that number?
Karen Dearing (CFO)
Correct.
Paul Adornato (Analyst)
Okay. Was wondering if you could then tell us, you know, what kind of assumptions would get us to the low end and to the high end of that range?
Karen Dearing (CFO)
Well, let's see. What can I tell you? Our guidance—the guidance that we put out at the original beginning of the year is substantially unchanged, and we're still expecting site rent increases to be about 3%. Our occupancy, revenue-producing site expectations are just a bit higher than what we originally anticipated. Same-site portfolio will be a little bit stronger NOI growth than what we had originally anticipated. Home sales are expected to be about the same.
G&A, our forecast is running a little bit higher than the $19.1 million G&A guidance we previously provided, and that's partially due to about $450,000 of one-time expenses related to severance costs and also some legal expenses associated with contracts that we had with a cable provider that went bankrupt. And the other increases are primarily related to performance-based compensation due to our strong operating performance. So, right now, we're projecting G&A costs for the year to approximate about $20 million.
Paul Adornato (Analyst)
Mm-hmm. Okay. Thanks. That's helpful. With respect to the acquisitions, I was wondering if you could comment on the potential economics. What sort of cap rates might we expect?
Gary Shiffman (Chairman and CEO)
Sure. I think, obviously, a good question, Paul. I think that we are, in fact, quite far along in the process of the acquisitions that we shared this morning, and because we're so far along, we expect to be in a position very shortly where we can share that specific data, but that will be in the very near term.
Paul Adornato (Analyst)
Okay. And, maybe just to perhaps a little bit more color on the portfolio. Are they the seven properties coming all from a single entity?
Gary Shiffman (Chairman and CEO)
They're coming from two different entities. One of them is a family-related entity, where they were built and developed by the family. In fact, as I indicated, all seven of the properties are properties that I have watched my entire career, and they are what I would consider the premier properties in the Metro Detroit area. One of the properties is, in fact, from a different third party.
Paul Adornato (Analyst)
Mm-hmm. Okay. And, in the release, you mentioned that the high occupancies are reflective of the fact that there have been very few rent increases. I was wondering, you know, like, what the plan would be... You know, would you expect to potentially implement some rent increases and then see a dip in occupancy, or?
Gary Shiffman (Chairman and CEO)
I think that they are substantially below market, anywhere from $50-$70.
Paul Adornato (Analyst)
Mm-hmm.
Gary Shiffman (Chairman and CEO)
Whereby we think that we can increase the rents substantially, and slightly above our average increases in the portfolio and not impact occupancy at all.
Paul Adornato (Analyst)
Okay.
Gary Shiffman (Chairman and CEO)
The key to these assets obviously is their location, like with all real estate. It's also the overall quality of how they were constructed and the makeup and the credit profile of the residents there, and the fact that the rents haven't been touched, most of them, in four years.
Paul Adornato (Analyst)
Okay. And, are there expansion possibilities at any of the properties?
Gary Shiffman (Chairman and CEO)
There are no expansion possibilities, but one of the communities is a more recent double section community and has 150 new sites that have not been filled up, and that's in the vacancy that we gave you.
Paul Adornato (Analyst)
Mm-hmm. And do you... just one last question. Do you think that you'll implement a rent-to-own program in these properties?
Gary Shiffman (Chairman and CEO)
Yeah, I think that there is very limited to no rent-to-own in these properties, and probably about seven, eight occupancy points to be gained. So, we will mostly focus on sales, and we will have some limited rent to own, probably. And if we look at how well we did in Kentland, we're actually not only in a good example, we're able to get above market rental increases in the Kentland portfolio and increase the occupancy almost 10 points in an 18-month period of time. So, I think we will bring these up to a very, very high occupancy, mostly with sale, but with some limited rental program.
Paul Adornato (Analyst)
Mm-hmm. Okay, great. Thank you very much.
Gary Shiffman (Chairman and CEO)
Mm-hmm.
Operator (participant)
Thank you. Our next question comes from Jana Galan from Bank of America Merrill Lynch. Go ahead with your question.
Speaker 7
Hi, this is Jane for Jana. I apologize if I missed this, but, did you provide the cap rates for the acquisitions you announced?
Gary Shiffman (Chairman and CEO)
We didn't. What I said is that we are, in fact, very far along in these transactions. Excuse me. And I expect to be able to provide that specific information very near term.
Speaker 7
Okay, great. Then, can you provide maybe some color generally along what kind of cap rate trends you've been seeing in terms of, the properties that are out there?
Gary Shiffman (Chairman and CEO)
Sure. I think that, what I've shared for, most of the time, while I've held this position in the company, is that, in our industry, we have not seen a great deal of fluctuation in cap rates over the years, in large part due to the, stability of cash flow, in our industry. Obviously, we did have a very difficult period of time, from 1990 to about 2000 to 2006 in our industry, with the competition of cyclical housing and lack of financing. But even through that period of time, you see a range of a low of around 6 cap rate and a high of around 9 cap rate in our industry, depending upon, the fact if it is, age-restricted community.
In the Sun Belt, you most typically will see at the low end of that range, and obviously, non-age restricted at the high end, depending upon the quality and the location of the community. I would expect that everything that we're looking is right in the middle of that range.
Speaker 7
Great, thank you. And for the potential acquisition opportunity that you're also looking at, what regions of the country are you seeing more opportunities? And are there any specific regions that you're targeting?
Gary Shiffman (Chairman and CEO)
Yeah, I think that, while we're obviously not shying away from the areas that we have operations in, such as the Midwest, Southeast, and the Texas-Colorado area, we are looking at both the West Coast and the East Coast, and looking to expand our geographic footprint. And we are finding additional opportunity, mostly in the small portfolio range of what we saw today, which is anywhere from 3-9 communities. And we are definitely focused on both manufactured housing and looking to expand the footprint of our RV business.
Speaker 7
Great, thank you so much.
Operator (participant)
Thank you. Our next question comes from Andy McCulloch from Green Street Advisors. Please go ahead with your question.
Ryan Burke (Analyst)
Hi, good morning. This is Ryan Burke, along with Andy McCulloch. A few questions from our end, just first couple continuing with the acquisitions. Regarding the five acquisition assets in Michigan in particular, can you give us a feel for how many of those homes are currently rentals?
Gary Shiffman (Chairman and CEO)
Yeah. There are no rentals in those communities.
Ryan Burke (Analyst)
No rentals currently. And you mentioned obviously, that rents in those communities are below market. Can you give us sort of a side-by-side comparison of how the rents in those communities currently are versus your current other Michigan assets?
Gary Shiffman (Chairman and CEO)
I don't know, Karen, do you have... I think, Ryan, we'd have to get back to you on that.
Ryan Burke (Analyst)
Okay, understood.
Moving over, just a couple quick questions on the home sales throughout the quarter. Can you give us a feel for what percentage, perhaps, of those homes were bought using financing? And of this number, how many were financed by Sun, either directly or indirectly?
Karen Dearing (CFO)
Generally, our home sales, about 90% of the home sales are financed by third parties or ourselves. Another portion of it is cash. There's certain cash sales that go on.
Ryan Burke (Analyst)
Okay. Is, is there any breakup possible, just between third-party financing and Sun financing of those 90%?
Karen Dearing (CFO)
It's predominantly third-party financing.
Gary Shiffman (Chairman and CEO)
Yeah, third-party financing with Sun does have liability-
Karen Dearing (CFO)
With our-
Gary Shiffman (Chairman and CEO)
Yeah.
Karen Dearing (CFO)
Yeah, with some recourse.
Ryan Burke (Analyst)
Great. And can you give us a feel for what, sort of financing terms you're seeing in general?
Gary Shiffman (Chairman and CEO)
With regard to the chattel loan?
Ryan Burke (Analyst)
With regard to... Yeah.
Gary Shiffman (Chairman and CEO)
I think things have actually improved and continue to improve slightly. We are seeing basically 15 to 20-year amortization with about 10% down, and depending upon credit quality, I'd say about a 8.75%-9.75% range right now.
Ryan Burke (Analyst)
Great. That's very helpful. That is all for me. Thank you.
Operator (participant)
Thank you. Our next question comes from Todd Stender, from Wells Fargo Securities. Please go ahead with your question.
Todd Stender (Analyst)
Hi, good morning, guys. Just looking at the San Antonio RV community, it sounded like you're around an eight cap rate going in. So is that fair?
Gary Shiffman (Chairman and CEO)
I think if you do that math, yes.
Todd Stender (Analyst)
You know, in a dedicated community like that, is there any opportunity to add MH to that?
Gary Shiffman (Chairman and CEO)
I think, in fact, it's not something we have looked at, but we are looking at the potential of expanding the RV community itself because of the close proximity to the attraction there.
Todd Stender (Analyst)
What kind of expansion would you have there?
Gary Shiffman (Chairman and CEO)
It depends on the availability of the land and zoning that we could get, and I think it's just too premature for me to really know that, because I know the guys are looking at the operations team.
Todd Stender (Analyst)
Sure. Just going to the mezzanine loan, it may be too premature, but do you have any pricing around that or duration of the loan for us?
Gary Shiffman (Chairman and CEO)
Yeah, I think, our intention is to share that very near term with everybody. So it is a little bit early on that, but I hope it will be very shortly.
Todd Stender (Analyst)
Okay. Does it sound more like you'll, you'll lend the money for a very short term, and then the present owner is trying to refinance?
Gary Shiffman (Chairman and CEO)
I don't think that that's the intention. I think it's part of the overall package to be able to acquire these properties, and we have done it in the past. The principal owners are elderly and retiring, and when we've provided this type of lending in the past, it frequently has led to us to have the inside track on acquiring the properties. That would be our eventual goal.
Todd Stender (Analyst)
Okay. Anything in place, like a purchase option or right of first refusal?
Gary Shiffman (Chairman and CEO)
No, nothing.
Todd Stender (Analyst)
Okay, thanks. And just last piece, how are you looking at your capital allocation for the second half? You know, and also address the dividend.
Karen Dearing (CFO)
CapEx was projected to be about 8.4% for recurring capital expenditures, and we anticipate that to be right in line.
Todd Stender (Analyst)
Thanks. And any input on where the dividend stands?
Karen Dearing (CFO)
I'm sorry, Todd. Gary just corrected me. I said 8.4%. It's $8.4 million. Sorry.
Gary Shiffman (Chairman and CEO)
Todd, what was your question on the dividend?
Todd Stender (Analyst)
On the dividend, just seeing where your allocation stands at, you know, at midyear here. You're making acquisitions, probably pretty good clarity on when stuff's gonna close. How are you thinking about the dividend right now?
Gary Shiffman (Chairman and CEO)
You know, obviously, it's a frequently asked question to us and to other companies. But I think we continue to pretty much review it on a quarterly basis. Obviously, with the board, as I shared before, we're looking towards an 80% payout ratio to be a kind of a historical figure for us to begin to talk about increasing the dividend. So we are nearing that level. But I would also suggest the acquisition activity is such that the overall desire is for us to see the size and the magnitude of these acquisitions over the really third quarter and perhaps into the beginning of the fourth quarter. And we should be in a position to again review that.
Todd Stender (Analyst)
Okay, thank you very much.
Gary Shiffman (Chairman and CEO)
Mm-hmm.
Operator (participant)
Thanks. So our next question comes from Jeff Lau from Sidoti & Company. Please go ahead with your question.
Jeff Lau (Analyst)
Hi, good morning. Just a follow-up question on the acquisitions. Do you guys think it's, in all likelihood, you'll be doing another, I guess, offering this year? Or will those, I guess, acquisitions be funded by current, I guess, lines in cash?
Gary Shiffman (Chairman and CEO)
Well, I'd say a few comments, that the magnitude of the acquisitions are such that we have entered discussions for a facility to allow us to move forward, if we so elect on, on the pipeline of acquisitions. But our desire is first and foremost to acquire properties and acquisitions that will be accretive, even at a debt neutral basis, which is how we want to look at them going forward.
Jeff Lau (Analyst)
Great. Great.
Operator (participant)
Thank you. As a reminder, if any participant would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, please press the star followed by the two. Thank you. We have a follow-up question from Paul Adornato. Please go ahead with your question, sir.
Paul Adornato (Analyst)
Thanks. Gary, given your extensive experience over the years in kind of pioneering the rent-to-own program, I have kind of a question coming out of left field, and that is, looking at the single-family market, obviously, there's been some activity among those that are looking to capitalize on that opportunity, buying single-family homes and renting them to individuals. I was wondering if you had, you know, thought about that business, not either, you know, within or without of the company, but if you had any ideas on the viability of a rent-to-own in the single-family market?
Gary Shiffman (Chairman and CEO)
Yeah, you know, it's a good question, Paul. I think that, if you go back four or five years, at the height of, the meltdown of single-family residential and subprime and everyone saying everyone was very concerned on how that overhang of foreclosures might manifest itself in, competitive, rental units entering the market and competing with our manufactured housing. It never materialized, I think, mostly because there's still a vast difference between a $45,000 manufactured home in the Midwest and a $120,000 site-built home. So we didn't see that competition. With regard to fast-forwarding now, I think that type of business is more suited to a individual entrepreneur. There's just no economies of scale and too much fragmentation when you don't have a concentrated, consolidated geographic area.
We've got to run around, whether it be repairs or maintenance or rent collections and all the issues you would have with that type of fragmentation. So it's not something I think that we have considered at this point.
Paul Adornato (Analyst)
Okay, thanks for the insight.
Gary Shiffman (Chairman and CEO)
Sure.
Operator (participant)
As a reminder, if you would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, please press the star followed by the two. Thank you. We appear to have no further questions at this time. Please continue with any further points you wish to raise.
Gary Shiffman (Chairman and CEO)
Thank you, operator, and I'd like to just conclude by saying that, things are very positive, with regard to leasing sales, operating budgets, recurring capital improvements to maintain the asset quality, as well as our systems are, smoothly functioning, integrated with the management personnel. And, we definitely look forward to a strong finish of, 2012 and speaking to, everybody, near term or, next quarter. Thank you.
Operator (participant)
Thank you, ladies and gentlemen. That concludes today's Sun Communities second quarter 2012 conference call. Thank you for your participation. You may now disconnect.