Sun Communities - Q3 2015
October 27, 2015
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by, and welcome to the Sun Communities Third Quarter 2015 Earnings Conference Call on the 27th of October, 2015. At this time, management would like me to inform you that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in its 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... Actual results 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 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, and Karen Dearing, Chief Financial Officer. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. That will be star one on your telephone keypad. 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 afternoon, and welcome to Sun's third quarter conference call. The third quarter was a busy and productive one for us as we continued to execute on our long-term strategic growth plan, as well as actively managing and strengthening our balance sheet. Today, we reported funds from operations of $61.5 million or $1.05 per share for the third quarter of 2015, compared to $42.1 million or $0.97 per share in the third quarter of 2014. For the nine months of 2015, funds from operations were $158.5 million or $2.83 per share, compared to $113.2 million or $2.72 per share. These results exclude certain items as detailed in today's press release.
Revenues for the nine months ended September 30th, 2015, increased to $506.5 million from $362.3 million for the same period in 2014. Revenues for the third quarter were $185.4 million, an increase of $54.8 million from $136.6 million reported for the same period ended in 2014, an increase of 42%. We're pleased to announce another strong quarter of operating results, and first, we will review our total portfolio. At September 30th, 2015, total portfolio occupancy was 93.7%, as compared to 92.5% at September 30th, 2014. Revenue-producing sites increased by 1,357 for the nine months ended September 30th.
Occupancy has grown in each of the last 7 years, and currently, all of our major markets, with the exception of Indiana, are above occupancy of 92%. Net operating income for the company has increased by 50% and 47% for the quarter and year to date, respectively, when compared to the same period as last year. Continuing to support our acquisition emphasis as our operations team does an excellent job of both integrating new communities and maximizing revenue growth. Let's turn to a review of the major drivers of our third quarter results. Our same property portfolio consists of 174 communities, which are 95% occupied at the end of third quarter, an increase over September 30th of last year of 150 basis points.
For the quarter, revenues increased by 7.4% and expenses increased by 3.7%, resulting in strong same property NOI growth of 9.1%. Same-site NOI growth for the nine months ended September 30th, 2015, is 9.2% and includes increases in revenues of 7.5% and expense growth of 3.6%. The strong operational performance is occurring in both our manufactured housing communities and our RV resorts. And what I'd like to do is break that down a little bit, but continue with the same property results. RV revenues increased by 8.5% for the same site properties for the third quarter when compared to the same quarter of 2014.
The increase in revenue for the 9 months ended September 30th, 2015, was 9.7%. Our ongoing marketing efforts continue to stimulate demand, bringing new and repeat guests to our vacation destination locations, as evidenced by a 370 basis point increase in occupancy and a 5.2% increase in average daily rates for the year-over-year 9-month results. The RV industry has had momentum over the last 6 years, posting positive growth in RV shipments.... This is a great time for the RV industry, and we are receiving the benefits, as seen in our increased same-site transient revenues of $19.9 million for the 9 months ended September 30th, 2015, up 9.1% from the same period last year.
We've also seen increases in extension nights of 10.1%, comparing nine months ended 2015 to 2014, translating to an increase of 47.1% in Sun's extension night revenue. Additionally, our transient sites produced revenue growth of 7.5% over the three key summer holidays when compared to the prior year. Demographics for the industry continue to be positive, with 11,000 baby boomers turning 50 years of age every day. In addition, as consumer confidence is increasing, consumers are spending more on travel and leisure. In the past 5 years, we've increased RV communities by 28, and RV revenues have grown by over 45% and now represent over 17% of income from properties. We continue to feel that this is not only a complementary business to our manufactured housing operations, but a lucrative business long term.
Now, turning to our manufactured housing portfolio, same-property revenues increased by 6.6% for the third quarter when compared by the same period last year, which is due to increased occupancy by 150 basis points and rent increases of 3.3%. The increased demand for our product is further demonstrated by a 6.4% year-over-year increase in applications to live in our same-site properties, and our increased home and broker sales, which I'll touch on in a moment. What I'd like to do now is turn to Sun Home Services and Home Sales. For the total manufactured housing portfolio, new home sales were 60 for the quarter, as compared to 26 for the same quarter in 2014.
New home sales were 191 for the nine months ended September 30th, 2015, as compared to 80 for the same period in 2014. For the total manufactured housing portfolio, new and pre-owned home sales in the third quarter were 626, as compared to 524 in the third quarter of 2014. For the nine-month period, total home sales were 1,745, an increase of 23.4% from the same period in 2014. Brokered home sales in the portfolio for the nine months were 959 sales. This is more than double the number of brokered sales in the same period of 2014. The strength and growth of our brokered residential resales is a positive metric indicating continued renewed demand in manufactured home ownership.
It's also an excellent indication of the sticky nature of Sun's revenue stream and steady cash flow that we reference as characteristic of our business model. There's no interruption in the rental stream when a home sells in place. Additionally, many of these brokered sales replace the advanced age population in our senior communities when and as they require assisted medical or other types of care and must leave the community. Now, I'd like to turn for a brief update on our expansions. We added over 400 expansion sites in Texas, where we continue to see high demand. Excluding currently vacant, newly completed expansion sites, Texas is at 97.6% occupancy.
We continue to see consistent fill rates in the range of 5-8 sites per month in our expansions, and in 2016, we anticipate adding approximately 1,150 expansion sites in 13 communities across five states. Now turning to our external growth through acquisitions. During the quarter, we purchased three high-quality recreational vehicle resorts. Closing on two of the three properties took place at the end of July 2015. The resorts contain 794 developed sites and approximately 290 sites available for future expansion. With this new acquisition, we have assembled a total of three high-quality RV properties in the desirable vacation destination of Ocean City, Maryland. In mid-August 2015, we purchased an RV property located in Crystal River, Florida, which contains 391 sites.
The company funded these three acquisitions with cash for a total of $76.1 million. In 2015, excluding the ALL transaction, we have now acquired eight manufactured home communities and four RV communities, including four age-restricted communities, for just over $400 million. The acquisition pipeline is solid, and we are currently reviewing a steady stream of both manufactured housing and RV resorts, focusing on our core acquisition strategy and filtering for high-demand locations based on geographic destinations for RV and solid fundamentals and demographics, such as job growth, housing demand, alternative housing pricing, and retirement destination for manufactured housing. With regard to both manufactured housing and RV, management also seeks to identify and find value-added opportunities for outsized returns, strategies that play strong to our expansion experience and expertise, as well as our ability to accelerate occupancy to vacant sites.
During the quarter, we also sold 3 manufactured home communities and associated homes and notes for $32.5 million. These communities are comprised of roughly 900 sites. Two of the communities were located in Ohio, and one was located in Michigan. Subsequent to the quarter end, we sold 3 additional manufactured home communities, all located in Indiana, for $36.1 million. These sales reduce our holdings in Indiana from approximately 8% to 6% of our total portfolio and will improve total occupancy by about 60 basis points. These two transactions complete the six property sale disclosed in our second quarter earnings call. Total dispositions over the last two years, in accordance with our asset management initiatives, total 17 manufactured housing communities for gross proceeds of $147 million. Seven of the communities were located in Michigan, six in Indiana, three in Ohio, and one in Nevada.
In addition to our operational and asset management achievements, we are actively evaluating opportunities and completing proactive steps to continuously improve our balance sheet. On` August 19th, 2015, we replaced our line of credit, increasing the facility to $450 million from $350 million. The line also has a built-in accordion feature, allowing for up to $300 million in additional borrowings upon the satisfaction of certain conditions. The new facility has a 4-year term, with two 6-month extension options, and contains lower interest rate spreads and fees when compared to our prior facility. In August 2015, we entered into an agreement to borrow $87 million in mortgage debt that will be secured by 5 communities and an interest rate of 4.06% for a term of 25 years.
In September 2015, we finished the first closing of $51.2 million, secured by four communities, and the second closing for $35.8 million is scheduled to close in December of 2015. Also, in August, we repurchased approximately 4.1 million of the 6.5% Series A4 Preferred Shares used to acquire the ALL portfolio. After the repurchase, there are approximately 2.3 million Series A Preferred Shares outstanding. We utilized our ATM program during the quarter to sell about 608,000 shares of common stock for approximately $40.8 million. The proceeds were used to pay down our line of credit, which we utilized to repurchase the Series A4 Preferred Shares. We have narrowed our guidance for full year 2015 FFO, excluding certain items, to $3.65-$3.69 per share.
This includes all acquisitions and dispositions completed through today and no prospective transactions. Please refer to today's press release for additional information. At this time, Karen and I would be pleased to address any questions.
Operator (participant)
Thank you. If you would like to ask a question, signal by pressing star one on your telephone pad. If you're using a speakerphone, make sure your mute function is turned off so that it doesn't interrupt our equipment. Again, press star one to ask a question. I'll just take a moment to allow everyone an opportunity to submit their questions. We'll take our first question from Nick Joseph with Citi.
John Kim (Equity Research Analyst)
Great, thanks. This is actually John here with Nick. Going back to the acquisition pipeline, you mentioned a steady flow of opportunities. Could you give a little more color on that, I guess, in terms of these more one-off deals, portfolio deals, and what I guess is the general mix of RV versus MH assets?
Gary Shiffman (Chairman and CEO)
Yeah, I think that, as we filter through the pipeline, it's pretty similar to what we've experienced and shared on the past calls, where, in general, most of what we're continuing to review are what we refer to as high quality, high opportunity, single assets or small to medium-sized portfolios, anywhere from 5 to 12 communities. And I'd say the mix is about half and half, half manufactured housing and half RV. We've also shared with shareholders and the analyst community that our intention is to bring RV communities to represent something around 20 to 22 to 24% of the overall portfolio.
John Kim (Equity Research Analyst)
Okay, that's helpful. And then how would you go about funding future acquisitions?
Gary Shiffman (Chairman and CEO)
I think that what Sun has done successfully is to be able to explore and structure opportunities to acquire acquisitions that might not otherwise be available with the company's securities structured so that it's a win-win for both the company and the seller of the properties, as well as continue to acquire for cash. We have the new credit facility available to us, and of course, we're committed to keeping the net neutral basis intact on our balance sheet right now. And when we can acquire on accretive basis, we would look to the market to support those acquisitions.
John Kim (Equity Research Analyst)
Okay. Thank you. And then final question, on the dispositions, you just said three in 3Q and then three here in October. Do you have a cap rate on those?
Gary Shiffman (Chairman and CEO)
We do. I can take a look for you. The three properties that we announced today, so, sold last quarter, had an average cap rate of 6.25. For the six sold in 2015, they averaged right around 6.5%—a 6.5 cap rate.
John Kim (Equity Research Analyst)
All right, perfect. Thanks for the help.
Gary Shiffman (Chairman and CEO)
Mm-hmm.
Operator (participant)
Once again, that is star one on your telephone keypad to ask a question. We'll go next to Jana Galan with Bank of America Merrill Lynch.
Jana Galan (Equity Research Associate)
Thank you. You did some good work on your balance sheet this quarter. I was curious, what the plans were to address the 2016 debt maturities?
Karen Dearing (CFO)
Jana, I think as we've done with our 2015 debt, we are really proactively looking at alternatives on the $191 million of debt that's coming due in 2016. We've got $85 million of it that matures in July 1 and has an open prepayment penalty beginning on January 1st, and that's secured by eight properties. There's another three properties that have $48 million of debt on it, that they mature in August, and that prepayment window is in February, and a single property that's $54 million. So, we are looking at our current capital needs, looking at our financing sources, including the GSEs and life companies. We're seeing very strong nice interest rates from those companies.
And, whether or not we're going to repay or refinance the debt, will really be determined after we look at our 2016 budgets and our cash needs there, and, consideration of each of the capital alternatives. So, in the marketplace now, we're looking at borrowing rates on 10-year debt at around 4%-4.25%.
Jana Galan (Equity Research Associate)
Thank you. Maybe just if there's any updates on the chattel lending front that you've been hearing, anything from the FHFA?
Gary Shiffman (Chairman and CEO)
I think like, like, those who are following it, you know, we're hearing the general discussion that there's an expectation that the Federal Housing Finance Agency is expecting to issue a proposal soon. But, we've assumed also has, has been a long time coming, so that, we're not certain that, anything will happen in the near term. But we are optimistic that, because the GSE's charter requires that they make a market for all forms of housing, this will eventually have a positive impact on our residents and on, Sun and other, communities. But we just have to wait to see what movement takes place and really what the restrictions and regulations would look like in order to, determine, how it can positively infect-- affect our business.
Nothing new, really, to report.
Jana Galan (Equity Research Associate)
Thank you.
Operator (participant)
We'll go next to Ryan Burke with Green Street Advisors.
Ryan Burke (Senior Equity Research Analyst)
Thank you. Gary, you mentioned on the first quarter call that John McLaren was touring three banks that were potentially interested in entering chattel lending. Is there any movement on that front? I guess I'm curious in the level of interest, even if Fannie and Freddie do not enter the space.
Gary Shiffman (Chairman and CEO)
So all I can say at this time is that that interest continues in ongoing dialogue and it has been very, very positive. We have identified one particular opportunity in source, and John along with a group from the company, and Ron Klein, one of our board members, who has vast expertise in financing, have been working closely to try and put together an actual structured opportunity that would be now one of three or four different sources that we have access to. So hopefully, if that goes forward, we'll be able to share it on the next conference call.
Ryan Burke (Senior Equity Research Analyst)
Okay. And it sounds like this is something where you would be bringing a third party in, and it would be an arrangement that is unique to Sun, or is it something where this third party would be opening up lending arrangements on a wider base?
Gary Shiffman (Chairman and CEO)
Initially, I believe it will be set up uniquely to Sun, but structured so that it can be open to a wider base. And the particular parties involved are looking to expand their ability to acquire manufactured homes and to service and process them for their business venture.
Ryan Burke (Senior Equity Research Analyst)
Thank you. Karen, on the balance sheet, it looks like the book value of rental homes decreased by about 10% this quarter. What caused that?
Karen Dearing (CFO)
Value of rental homes,
Ryan Burke (Senior Equity Research Analyst)
I'm looking at the, yeah, rental homes and improvement line item on the balance sheet.
Karen Dearing (CFO)
Yeah. So we have sold, you know, rental homes with the disposition. So over the year, we've, I think, sold around 400 of those homes. And there'll be more coming off with the acquisition or the disposition that occurred in October. So that's there. And then there's, you know, 600 rental homes sales. More specifically than that, I would have to look a little bit further for you.
Ryan Burke (Senior Equity Research Analyst)
Okay. But, but no, no meaningful change in the perceived value of those individual rental homes themselves, I guess, is what I'm, what I'm looking for.
Karen Dearing (CFO)
Oh, no, no.
Ryan Burke (Senior Equity Research Analyst)
Okay. Okay, that, that is all for me. Thank you.
Gary Shiffman (Chairman and CEO)
Thank you.
Operator (participant)
We'll go next to Paul Adornato with BMO Capital Markets.
Paul Adornato (Managing Director and Senior REIT Analyst)
Hi, good afternoon. Gary, with the portfolio now in the mid-90s in terms of occupancy, was wondering if you could talk a little bit about pricing power. I don't know if I remember, you know, a time when the portfolio has been so highly occupied. So, could you talk about pricing power, perhaps, segment by segment?
Gary Shiffman (Chairman and CEO)
Yeah. It's a really great question, Paul, and I think it addresses what we're trying to address looking out into 2016 and 2017, so that we can certainly continue to provide guidance in the type of growth we've been experiencing over the last four or five years. Obviously, higher demands and occupancy equal higher rental rates. And as we look at it here, similar annual RPS growth that we've experienced is gonna equal similar NOI contributions and FFO growth.
So finally, we look at how we can determine that continued RPS growth, and we look at our current portfolio occupancy of around 93% and look at Texas, for example, that's above 97%, so we're growing 100 or 200 basis points in occupancy a year. We can look out a couple of years and feel pretty comfortable with the growth that we have internally. But we also look to our expansion sites because similar increasing expansion growth as what we've been experiencing will also equal similar RPS growth, and it is the RPS that grows the outsized growth that we're experiencing now.
So I think, while we are preparing our budgets and looking forward to sharing 2016 guidance with the marketplace, we have two great opportunities. We have the ability to increase and seek good, solid rental increases because of higher demand and occupancy, and we have a sufficient amount of sites in our portfolio before we hit optimum occupancy. And with the 1,100 expansion sites coming on stream in 2016, a great opportunity to improve and increase RPSs from the expansion site. So that's where we see this kind of continued growth going through 2016, and we look forward to sharing that with the market when we present guidance.
Paul Adornato (Managing Director and Senior REIT Analyst)
Thanks. Just a couple of related questions. What percentage of your portfolio is subject to rent controls, either by the municipality or by the charter of the property?
Karen Dearing (CFO)
... Paul, a small piece of it, of the portfolio is CPI sort of related. I think, the last time I looked at it was just after the Burger acquisition, and it's around 14%-15% of the portfolio, and a significant piece of those leases have strong floors of between 3%-5% rent increases.
Paul Adornato (Managing Director and Senior REIT Analyst)
Okay, great. And another one, given the health of the industry overall, do you see any greenfield developments out there?
Gary Shiffman (Chairman and CEO)
So I think, Paul, nothing significant. We have the one greenfield development in Paso Robles that we shared on a call about a year ago, that we acquired, rezoned and under construction to build about 300 RV sites in an area where we have two other highly occupied RV communities in California. And see it as a great opportunity to enter the market at a cost that's far better than having to acquire out there. And I think that, as a company that has its roots in development, we would look for 1-2 development communities per year as kind of the max of any development exposure that we would take.
But again, we would look for sites that are triple-A in location, and that we couldn't otherwise penetrate or acquire acquisitions then to be able to go and develop anything.
Paul Adornato (Managing Director and Senior REIT Analyst)
Okay, great. And, finally, just on the RV side, was wondering if you could give us a kind of a longer-term picture of supply and demand. How many, you know, new sites do you think have been added industry-wide? And, what about the installed base that you've seen?
Gary Shiffman (Chairman and CEO)
Well, this obviously is pretty anecdotal because unfortunately, similar to the manufactured housing industry, there just aren't great national metrics or indexes of communities and sites that are out there. But frequently, what we refer to as kind of that 9 million-1 million demand ratio, where there's 9 million RVs to be said to be out there in the U.S. market and about 1 million recognized RV communities. So those fundamentals, I think, are what really drive the strength in our RV resorts and other RV resorts.
And then if you consider that, there are an awful lot of high-end RVs out there that can only power up and pull into certain kind of RV communities, they can't go into the functionally obsolete communities, the demand gets even stronger. So, I don't see any new greenfield development taking place out there in any way that would impact or satisfy the demands that are out there.
So, what we do see and what we share with the market that we're very focused on is repositioning functionally obsolete RV communities, even when we can go in there and scrape them to the ground, so to speak, for their location and for their entitlement, all the way up to what we did in the Morgan properties, which is go in there and just rehabilitate the communities and add all new facilities to what they already have. So nothing much that I see that will change the fundamentals.
Nothing much that I'm aware of on the new development side, but I do think those are the type of opportunities that we're looking for, whether it be one or two new developments in the right locations, or continued rehabilitation or renovation, if you will, repositioning of existing, older, more tired communities, is what we have to look at in front of us.
Paul Adornato (Managing Director and Senior REIT Analyst)
Thank you so much.
Gary Shiffman (Chairman and CEO)
Thank you.
Operator (participant)
We'll go next to Drew Babin with Robert W. Baird.
Drew Babin (Senior Research Analyst)
Good afternoon. Wanted to start off with a modeling question going forward. The Series A convertible preferreds, is there potential that the remainder of that could be repurchased next year? Or is that something you're looking at?
Karen Dearing (CFO)
Yeah, that's not in the... It's not under consideration right now, Drew.
Drew Babin (Senior Research Analyst)
Okay. Shifting gears, just looking at your same-Property rate and occupancy growth in 3Q, you know, getting slightly over 3 on rates and about 150 BPS on occupancy, you know, adding those together doesn't quite get to the 6.6 same-Property revenue growth. The variance there is the whole... So there's a year-over-year 16% increase in site rent included in income from real property from the rental properties. Is that whole 16% year-over-year increase baked into the same-Property NOI print or the same-Property revenue print for 3Q? The whole absolute number.
Karen Dearing (CFO)
Wow! I'm... Let me try to answer the question, maybe in a, if I understand your question correctly, just looking at sort of what's, what's making up the same site revenue growth performance.
... I'll look at it from a nine-month basis because that's what I have in front of me, Drew. But so yes, the rental program is a piece of our outsized growth. It's about 170 basis points of our revenue increase. But beyond that, we've also have our weighted average rent increase of 3.3%. We've got increases in our transient portfolio, along with occupancy gains, and rent increases in our seasonal and annual RV sites. And we're also benefiting from additional fees and charges that a lot of the RV communities have within their fee structure. So it's kind of all of these things, along with occupancy increases, that are driving the revenue growth in the same-site portfolio.
Drew Babin (Senior Research Analyst)
Okay. I, I guess to clarify my question, on page ten of the supplemental, it breaks out the site rent included in income from real property, that they come from the rental homes. That number, in 3Q15 versus 3Q14 increased by over 16%. Does that whole 16% number factor into the same-property print, or is that somehow converted into a same-property metric? Or do you essentially just look at-
Karen Dearing (CFO)
That-
Drew Babin (Senior Research Analyst)
Because the
Karen Dearing (CFO)
That is total portfolio in the rental program summary. That's total portfolio. So a portion of that, and a significant portion of that, will go to the same-site portfolio, and that's the 150-170 basis points that I talked about.
Drew Babin (Senior Research Analyst)
Okay. That's helpful. And then on your balance sheet, you know, leverage, although it improved a bit between 2Q and 3Q, is still relatively elevated versus a year ago. As you go forward in the next year, are you comfortable with your current leverage level, or would you ideally like to kind of bring that down a bit as time goes on?
Karen Dearing (CFO)
We've talked about leverage several times on these calls, and we really are targeting net debt to EBITDA below 7x. Yes, you're right. When you look at trailing twelve, it does look a bit elevated. Certainly, the EBITDA for a trailing-twelve period don't include all the acquisition EBITDA that we have. So when we pro forma it forward based on forecasted EBITDA, we will end the year somewhere around 7.1 net debt to EBITDA, and we'll look to decrease that, you know, in a minor way in the near term.
Drew Babin (Senior Research Analyst)
Okay. And, just one last follow-up on the rental program. Can you break out the amount, ignoring the, the rental, units that were sold with the properties in 3Q? What was the new investment in rental homes during 3Q?
Karen Dearing (CFO)
I don't have the investment dollars in front of me that... 'Cause the table includes, it's a whole year, and it's includes also rental homes that we purchased with our acquisitions, so there's some amount of investment included there. So to get you a more specific number, I'd have to do something after the call.
Drew Babin (Senior Research Analyst)
Okay. That's helpful. Thank you.
Karen Dearing (CFO)
Mm-hmm.
Operator (participant)
We'll go next to Todd Stender with Wells Fargo.
Todd Stender (Managing Director and Senior Equity REIT Analyst)
Hey, thanks. Gary, just to go back to the Paso Robles RV park, since this is a new concept for you and for us in terms of dealing with new construction, how do you measure the success of lease-up in RV? I mean, not that we're used to MH lease-up, but it's kind of a natural lease-up period with new home buyers. And I know this is built near one of your existing RV parks, so maybe it's just a benefit from spillover, but how do you kind of look at that?
Gary Shiffman (Chairman and CEO)
Well, first of all, we do look at it as a total benefit for spillover from it. It's Wine Country, and I forget the name of the Vines that are the two other communities there that during the peak season, we continue to struggle to meet the demand. So that gave us the initiative to try and grow out in that area. And also, strategically, as we've shared, we'd like to get a bigger foothold in the West. So what we look to do is reach what we look for, basically a 12% IRR upon stabilization, which is generally 5 years from the period of time that we construct. In this case, Paso Robles, we see it happening in between about 3.5-4 years out.
So I can't address what I would call the absorption, because I don't have anything in front of me. But the modeling that the ops department did in that area led us to conclude that we could successfully do that and get a comfortable return on investment of between 8%-9% at stabilization.
Todd Stender (Managing Director and Senior Equity REIT Analyst)
Okay, that's very helpful. This might be for Karen. Can you just talk about what went into the decision to repurchase the convertible preferreds? It looked like it was bought back at a pretty rich premium. Just seeing if it was your choice, or was that the investors?
Gary Shiffman (Chairman and CEO)
You can answer that, Karen. I think that that was a decision that I brought to Karen's attention, and that we saw it as an expensive instrument originally to allow us to acquire the ALL portfolio. The reason I was concerned about it, and Karen and I discussed it with our board, is, with, I think, over 6 million outstanding shares at the time, we were concerned that that overhang was gonna come out there and felt that, if we could bring it in on a basis that was neutral or better, and we believe it was slightly better than neutral, we feel that it was the best interest of the shareholders.
And the fact that we knew that we could put it back out the same security at about 100 basis points lower than where we issued it, collectively, with a few other thoughts, that was my approach and Karen and trying to buy back it at that time.
Todd Stender (Managing Director and Senior Equity REIT Analyst)
Did that ultimately contribute to the narrowing of guidance? Looks like you took off the high end of the range of $3.72. You issued equity to redeem—well, to pay off the line. Is that all kind of part of the math behind that?
Karen Dearing (CFO)
You know, as far as the narrowing, we just went from a $0.10-$0.05 range with the same midpoint. So it would really, the preferred impact was probably positive, and we had other items going on, dispositions that would've had negatives. But we didn't really change guidance between second quarter earnings and now, just simply narrowed the range.
Todd Stender (Managing Director and Senior Equity REIT Analyst)
Got it. Thank you.
Operator (participant)
It appears there are no further questions at this time. Mr. Shiffman, I'd like to turn the conference back to you for any additional or closing remarks.
Gary Shiffman (Chairman and CEO)
I appreciate everyone's participation today, and Karen and I, and all of management is continues to make itself available for any follow-up questions. Thank you.