Sun Communities - Q2 2013

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to the Sun Communities Second Quarter 2013 Earnings Conference Call on the 25th of July, 2013. At this time, management would like me to inform you that certain statements made during this conference, 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 the SEC. The company undertakes no obligations 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 presentation, all parties will be in a listen-only mode, and after the presentation, there will be an opportunity to ask questions. If you would like to ask a question, please press star one on your telephone. 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 $27 million, or $0.69 per share, for the second quarter of 2013, compared to $23.1 million, or $0.78 per share, in the second quarter of 2012. For the six months of 2013, $58.7 million, or $1.62 per share, compared to $49 million, or $1.68 per share, in the first half of 2012. These results exclude transaction costs related to acquisition activity in all periods. Revenues for the six months increased by 23% from $165 million in 2012 to $203 million in 2013. Now, we will turn to a review of the portfolio. During the first six months of 2013, revenue-producing sites increased by 1,115, of which 848 are in our same-site portfolio and 267 are increases in our communities acquired in 2012 and 2013.

The increase of 1,115 sites exceeds the entire increase in occupied sites for the year 2012. At the end of 2010, occupancy in Michigan, our largest market, was 79%. Today, it is 87.4%, and at the current rate of occupancy growth, will reach 95% in a little over two years. Michigan continues to be a strong and profitable market for us. Florida, Texas, and Colorado comprise nearly 17,000 sites and are already at or above 95% occupancy levels. Taken as a whole, at current rates of fill, our entire manufactured home portfolio will reach 95% occupancy in a little over 2.5 years. When we achieve 95% occupancy, our annual purchases of homes will decline significantly, as we will only need to replace homes which move out. Nearly half of those move-outs will be replaced by move-ins from dealers and relocations.

The remainders will come from new home buys, which will be financed by sales from our existing portfolio of rental homes. At that point, annual home purchases will move from being a capital-intensive activity to self-financing activity. In the same-site portfolio, revenues grew by 4.9% while expenses increased by 3.4%, resulting in an increase in NOI of 5.5%. The occupancy in the same-site portfolio increased from 86.8% to 88.6% in the last year as a result of an increase in occupied sites of 1,401. Home sales through the first six months were 946, an all-time high, and compared to 858 through June 2012. Applications to buy or rent homes in our communities surpassed 15,000 for the six months, an increase of 15% from 2012. We continue to experience growth in demand throughout all regions of the portfolio. Expansions of existing communities are progressing on plan.

River Ranch of Austin, a Texas community, opened 228 sites in August of 2012 and has filled at a rate of 13 per month, leaving 86 sites to fill at the end of June. Two other Texas communities opened 218 sites in February 2013 and are filling at seven to eight sites each per month, with about 149 sites left to fill. An additional 566 sites will open in the last half of 2013 in Texas, Ohio, and North Carolina. Approximately 330 sites under construction and in the 2013 budget won't be completed until the first quarter of 2014. Looking ahead to 2014, not including the 330 sites that are delayed from 2013, we expect to open 770 new expansion sites in the first half in Texas and Colorado. These sites are all in strong markets, with mid-90s occupancy, continuing demand, and profitable pricing models.

Within the last year or so, we have spent approximately $300 million on acquisitions, expanding our recreational vehicle portfolio business. A significant focus on these purchases has been in the Midwest and Northeast corridors. Previously, our RV business was centered in the South, predominantly in Florida and Texas, with the result that its high season ran from November through April. The prime season for our Midwest and Northeast communities is from May through October, thus turning our once-seasonal snowbird business into a year-round platform. This allows us to leverage resources to promote that growth. Since the acquisition first quarter of the 10 Morgan RV properties located on the East Coast, approximately 60% of the capital improvement plan has been completed in an effort to completely reposition these communities.

This includes repair and/or replacement of all common areas, infrastructure, buildings, and amenities, as well as the addition of many new attractive and marquee-type features and amenities. The response by returning and new visitors has been extremely positive, and we expect the word-of-mouth effect to continue to build and result in increased revenue gains. Annual leases in these 10 properties, an area of management focus, have increased by nearly 100 in June, the first month of operations, and is a direct result of customers seeing the capital improvements and new management in place. We are pleased with yearly results from these communities and believe the substantial investment and efforts made to date will continue to build value and generate above-average RV revenue growth in the range of 7%-9% over the next several years.

While the communities are being repositioned to prime-time vacation opportunities, substantial resources are also being committed to identifying and communicating with prospective residents to earn their interest and their commitment. The Sun RV Resorts website was recently launched and, through proprietary online software, allows our guests to book, fully complete, and confirm their own reservations directly on the website 24 hours a day, seven days a week. Profiles for vacation rental cottages are completely set up on traffic-generating websites. Community personnel are trained and incentivized to ensure an enjoyable stay for our guests, to include them and to induce them to extend their stays and to book their next reservation in the existing or following season. Social media is also being employed. Facebook pages have been established for each individual community in keeping with the individual spirit and theme of each resort.

We believe these and other social media efforts will strengthen occupancy through online content generation and the word-of-mouth effect. Our RV call center, which has been relocated from Florida to our Southfield, Michigan, office, also acts as an extension of our hours of operation with a goal that no calls go unanswered and maximize the opportunity to solicit and confirm reservations. The company acquired two additional recreational vehicle communities during the second quarter in New Jersey and New York, totaling 827 sites for an aggregate purchase price of approximately $29 million. During the second quarter, we arranged a new senior secured revolving credit facility of $350 million, with an accordion feature allowing up to an additional $250 million in borrowings. The four-year facility includes an option to extend for one year and replaces our previous $150 million revolving line.

The company's leverage has continued to decline, as measured by various debt and coverage ratios. To note a few: EBITDA over interest from 2.5 to 2.8 in one year, net debt over enterprise value from 49%-40% in a year, and net debt over gross assets from 62%-52% in one year. Debt over EBITDA from 9.9 in June 2011 to 8.2 in June 2012 and currently at 7.4. The company affirms guidance of $3.19-$3.29 per share and provides guidance of $0.82-$0.85 per share for the third quarter. Guidance includes acquisitions through June 30th, 2013, and the add-back of related acquisition expenses, but no prospective acquisitions or equity offerings are included. At this time, we turn it back over to you, the Operator, for questions and answers.

Operator (participant)

Thank you very much. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you do have a question today, please press the star followed by the one on your push button telephone. You may also decline from the polling process at any time by pressing the star followed by the two. And as a reminder, if you are on speakerphone, you'll need to lift the handset first before making your selection. And our first question does come from the line of Jana Galan with Bank of America.

Jana Galan (Equity Research Analyst)

Thank you. Good morning. I wanted to follow up on your comments of the RV business now kind of creating a year-round platform, given the locations, and maybe if we could talk a little bit about FFO in second quarter and your guidance for third quarter and how you see this seasonally playing out and what could be your stronger quarters?

Gary Shiffman (Chairman and CEO)

Yeah. I guess I would share with everyone we're very pleased on what we view as now a year-round business, which gives us a little bit of rounding from quarter to quarter and takes off some of the seasonality that we've experienced due to the snowbird RV business that we had in the South for six of the 12 months. So I think you'll see pretty much evenness throughout the year.

Karen Dearing (EVP and CFO)

As we move towards incorporating Morgan, I think historically the company would have seen Q1 and Q4 as our highest quarters, and the second and third quarter were coming after that. With the inclusion of Morgan, what you'll see is the first quarter and the third quarter will be our highest quarters, and then the fourth quarter and second quarter will tend to be our lowest quarter. You've got the northern RV communities not operating fully yet. The southern communities kind of dropping off in highest expenses in the second quarter related to our MH portfolio. So yeah, I think there might be some modeling seasonality adjustments that need to be made, particularly in what was on the street for the second quarter and what's on the street for the third quarter.

Jana Galan (Equity Research Analyst)

Perfect. That's very helpful. Thank you.

Operator (participant)

Our next question does come from the line of David Harris with Imperial Capital.

David Harris (Managing Director)

I was never been away. I have a question on the expansion sites. Would you characterize these expansion sites more in the senior category, or are we talking more all-age?

Gary Shiffman (Chairman and CEO)

They'd be all-age communities. Very limited. Only one community is senior.

David Harris (Managing Director)

Okay. Are we still talking of time to fully lease these? I know you gave your monthly lease-up rates. Are we still talking about 18 months typically, given the size of your expansions?

Gary Shiffman (Chairman and CEO)

We model these out in an absorption of six to eight per month, so you could multiply that times the amount of sites, and they tend to be anywhere from 100-150 sites in size, roughly.

David Harris (Managing Director)

Okay. So the project you referred to that's leasing up, I think it was the first one you referred to at 13. Obviously, that's going much faster than you pro forma it.

Gary Shiffman (Chairman and CEO)

Yes.

Karen Dearing (EVP and CFO)

Yeah. That's in Texas. That's a River Ranch in Texas. It's going better than pro forma.

David Harris (Managing Director)

Okay. Okay. And then, excuse me, going back on subject, you probably addressed over several quarters, but the dividend has not been changed for an extended period of time. I think you made reference to potentially reviewing that in due course. Is the board likely to be looking at that this year, or do you think it would be more of a 2014 event?

Gary Shiffman (Chairman and CEO)

I think I've shared on our other calls that while it's reviewed each quarter, the board is intending to look at it after first quarter 2014.

David Harris (Managing Director)

Okay. All right. Very good. Thank you.

Operator (participant)

Ladies and gentlemen, if there are any additional questions, please press the star followed by the one at this time. Again, as a reminder, if you're on speakerphone, you'll need to lift the handset first before making your selection. Our next question does come from the line of Josh Patinkin with BMO Capital Markets.

Josh Patinkin (Managing Director of Equity Research)

Hi. Good morning. I'm curious to know what you guys thought about the Michigan MH portfolio that ELS brought to market this last quarter.

Gary Shiffman (Chairman and CEO)

Sure, Josh. I think that we've looked at it extensively. From time to time, we had dialogue regarding it. We're very familiar with the assets, a lot of them in our backyard, and there are high points to that portfolio and low points depending upon the actual locations and the conditions of the communities. So other than that, I saw the purchase price, the total amount of the communities, but I'm not familiar very much with the details on how it breaks down.

Josh Patinkin (Managing Director of Equity Research)

Okay. And then 9% cap rate, is that indicative, you think, of your Michigan assets, or how would you characterize that?

Gary Shiffman (Chairman and CEO)

No. I think that I would, again, I don't know the details. Cap rates can be tough to determine on whether they're trailing periods, forward periods, current periods, what is also included in them. But I think that that cap rate is indicative of the fact that there are some tough hurdles to overcome in that portfolio. There are some occupancies that are in the 50%-60% level and some challenging regional demographics. And then there are some quality properties in there that, with the right investment, could turn around and do very, very well. So that's tough for me to comment on what a cap rate should or shouldn't be on that portfolio.

Josh Patinkin (Managing Director of Equity Research)

Okay. Looking at the RV business and the platform that you mentioned you're investing in, I'm curious to know how much is booked online versus how much is booked on the web, I'm sorry, at the call center?

Gary Shiffman (Chairman and CEO)

I think that we're probably just one month into it, and I know I don't have that information.

Karen Dearing (EVP and CFO)

Yeah. Josh, we do track the information. I just don't know the answer to that, so I can follow up with you.

Josh Patinkin (Managing Director of Equity Research)

Okay. At the start, you're just one month in. What do you think the effects on occupancy could be over time?

Gary Shiffman (Chairman and CEO)

I think that overall, I shared within the comments that, in particular the Morgan portfolio, we're looking for revenue growth. It's a factor of both repositioning and investing in the properties and the platform, whether it be the online, the social media, the restructuring of our business, and anticipating growth of 7%-9% in revenue for the next three to five years there.

Josh Patinkin (Managing Director of Equity Research)

Okay. Great.

Gary Shiffman (Chairman and CEO)

So we think it's a good investment. Go ahead.

Josh Patinkin (Managing Director of Equity Research)

Sure. Thank you for that, color. And lastly, Indiana, you mentioned on the last call that the market conditions were improving there. Has that continued through the second quarter?

Karen Dearing (EVP and CFO)

Yes, Josh. We're still seeing very stronger growth in Indiana. I think it's the—how do I want to say this? The revenue-producing sites of our total that were produced in Indiana is about 16% of our gain year to date. That's about double what we saw last year.

Josh Patinkin (Managing Director of Equity Research)

Great. Thank you very much.

Operator (participant)

Our next question is a follow-up question from the line of David Harris with Imperial Capital.

David Harris (Managing Director)

Yeah. Hi again. I have a question on the mortgage market. You don't have much debt maturing this year, but there's a little coming next year. You've got some debt out with Fannie, yes, Fannie, I think. Could you just talk about the appetite for lending from the insurance companies and other participants in the marketplace, and also if there's much of a difference in the rates they're talking about compared to the GSEs?

Gary Shiffman (Chairman and CEO)

Well, I'll speak to the current state of affairs with the mortgage debt and the other available debt out there. It's remained. The appetite has been very strong. We receive both incoming calls and have our pulse on the market out there, and there's no shortage of available lenders in our segment. And I know that there is certain debt we are now looking ahead at, and I'll let Karen touch on what those maturities are.

Karen Dearing (EVP and CFO)

The portfolio that we have been spending a bit of time on is $185 million that comes up. I think it's July of next year. So we're spending significant time looking at all sorts of lending sources, whether it be life or whether it be commercial banks, the MBS. So we're looking at all of those markets.

David Harris (Managing Director)

Is there much of a spread between the terms, Karen?

Karen Dearing (EVP and CFO)

I think rates, from what I've heard, rates in the life companies are about 100 basis points lower than what we're seeing in other areas. But I.

Gary Shiffman (Chairman and CEO)

No, I haven't seen much change at this time either. So what we've been able to accomplish in the last year seems like we can still accomplish today.

David Harris (Managing Director)

Should we think of rates moving up comparable to the move that we've seen on the residential side? We're kind of 100 basis points up, perhaps, from the low point on the longer-term debt that you might be looking at?

Gary Shiffman (Chairman and CEO)

I think, to be quite candid with you, I think we'll be able to answer that better after we get the term sheets on the debt we're pricing right now.

David Harris (Managing Director)

Okay. You're actively doing that now, so you'd probably do this ahead of the actual maturity date on that debt you were referring to for next year?

Karen Dearing (EVP and CFO)

There's an early prepayment. I mean, we can prepay January 1st, I believe, six-month window on that debt.

David Harris (Managing Director)

Could you lock rates today around these discussions, or do you have to really wait until?

Karen Dearing (EVP and CFO)

Yes.

David Harris (Managing Director)

You could. Okay. At a price.

Karen Dearing (EVP and CFO)

Absolutely.

David Harris (Managing Director)

All right. Very good. Thank you.

Operator (participant)

Ladies and gentlemen, if there are any additional questions, please press the star followed by the one at this time. At this time, I'm not showing any further questions. I would like to turn the call back over to Mr. Shiffman for any closing comments.

Gary Shiffman (Chairman and CEO)

Sure. I just want to thank everyone for their participation. As always, Karen and I and Jeff are available to follow up on any calls, and we look forward to, again, having the conference call after next quarter is completed. Thank you.

Operator (participant)

Thank you very much. Ladies and gentlemen, this will conclude the Sun Communities 2013 Second Quarter Earnings Conference Call. We thank you for your participation on today's call. You may now disconnect your lines at this time.