Sun Communities - Q4 2010
February 24, 2011
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by, and welcome to the Sun Communities Fourth Quarter 2010 earnings conference call on the 24th of February, 2011. 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. I would now like to turn the conference over to Mr. Gary Shiffman. Please go ahead, sir.
Gary Shiffman (Chairman and CEO)
Thank you, operator, and good morning. Morning, we reported funds from operations of $17.2 million, or $0.78 per share for the fourth quarter of 2010, compared to $16.2 million or $0.77 per share for the fourth quarter of 2009. For the year, FFO was $63.6 million, or $2.97 per share, compared to $59.5 million or $2.86 per share for 2009, representing growth of 3.85%. The results are adjusted, as noted in a table attached to the press release. And now I'd like to turn to the highlights, of the, quarter and the year-end at the company. And I'd start out by saying, first and foremost, 2010 was a great year for occupancy.
We increased revenue-producing sites by 563 for the year, gaining sites in each quarter and in each major market of the company. For those who have been following us for a number of years, you're probably aware that the second half of the year has usually led to a loss of occupied sites. In 2010, we gained 129 sites in the second half of the year. The annual gain was the best since 1999, and the fourth quarter was our best since 2001. We're pleased that the 2010 performance is back to similar levels achieved in those years prior to the industry challenges brought on in 2000.
I can also share with you that it is much more enjoyable to manage a company with a solidly growing occupancy and to once again begin levering the depth of management experience, quality of systems that exist at Sun to generate positive occupancy growth. The strong occupancy growth also creates additional opportunity for us to selectively expand communities by adding sites in our strongest markets. The first expansion opened with 124 sites in September in a community in Colorado. The community has been filling at a rate of six sites per month, with a stretch goal of filling the remaining sites in 2011.
In addition, this August, we plan to open 178 new expansion sites in Austin, Texas, at a community which is now 100% occupied, and an additional 98 expansion sites in Houston at a community which is 99% occupied. Two additional expansions, comprising 226 sites in Texas at communities with full occupancy, are now in the initial stages of construction planning for tentative openings in March 2012. And I'd just like to add that the land for all of these expansion sites exist within the current Sun portfolio, have been previously zoned and entitled, and in some cases are partially developed. Another measure of improving portfolio performance is the same property growth. Our 2010 guidance was based on NOI growth of 1.9%.
The actual NOI growth for the year was 3.1%, with the fourth quarter generating a very strong 4.5%. We've also been seeking opportunistic acquisitions, as we've discussed from time to time, especially communities with vacant sites, which we acquire at minimum cost and would be primarily filled through our home rental program. Again, this presents additional opportunity to lever the company's staff and systems. We are currently completing final due diligence on the potential acquisition of a solid portfolio of 20 communities. These communities are approximately 76% occupied and include 1,000 vacant sites, which will neatly mesh with our existing communities and ability to fill sites through our rental program.... We originally disclosed the sale of equity with the intent to use the proceeds to partially finance this acquisition and/or pay down our line of credit.
It's expected that the remainder of the consideration for this acquisition will be in the form of assumed debt and the issuance of preferred operating partnership units. As this acquisition has not yet been completed, 2011 guidance does not include any accretion from this transaction. However, it does include $0.12 of dilution from the above-referenced equity raise. The rental program has been and remains an integral part of our strategy for the filling of our communities, expansions, and opportunistic acquisitions as they become available. In 2010, the rental program was the primary reason that nearly 22,000 people applied to live in our communities, with over 5,000 ultimately buying or renting a home. As a basis of comparison, in 2006, there were a little over 10,000 applications, resulting in approximately 3,300 new residents.
Applications have been growing at a compounded rate of over 20% for the past 4 years. In 2010, over 4,000 new leases were executed for rentals. This provides prospective homebuyers with the opportunity to experience the community lifestyle and presents us with 4,000 new sales opportunities each year as we convert renters to homeowners. As a reminder, the economics of the rental program are as follows: We earn 14% on our investment in rental homes after considering the interest cost. Once we've recovered capital through the sale of the home, the return approximates, approximates 35%. If we finance the home purchases through the use of equity, the results are still accretive, either as rentals or as owner-occupied homes. We have about $104 million of debt maturing in July.
Management has continued to work on early refinancing of this debt, as we've discussed on other and previous phone calls. Recent appraisals obtained on the same 11 communities in the pool applied against conservative current underwriting standards indicate more than sufficient proceeds to replace the existing debt. The other major financing project this year is to renew our $115 million line of credit, which matures in October. We have received the term sheet and are currently in discussions with our bank group to renew this line of credit. During 2010, we sold 1,375 homes, nearly 25% more than we sold in the prior year. Nearly all these sales were of pre-owned homes, which were currently or previously in the rental program. The sales marked the final stage of the application, close, rent, and sell process.
The nearly 1,400 new homeowners represent 3% of our total residents, who, based on 2010 statistics, will reside in our portfolio for over 13 years. Finally, our press release noted 2011 FFO guidance of $2.95-$3.03 per fully diluted share and is driven by the following key components: weighted average site rent increase of 2.7%, revenue-producing sites increasing by 560 sites, same property NOI growth of 3.6%, 1,600 home sales, and as indicated before, approximately $0.12 of dilution from the $30 million equity raise in January. Additional information on guidance may be found in the press release.
However, at the midpoint of guidance, our payout ratio will be approximate 94% when compared to our 2010 dividend of $2.52. At this point, operator, I would turn it back over to you for any questions.
Operator (participant)
Thank you, sir. If any participant would like to ask a question, please press the star followed by the 1 on your telephone. If you wish to cancel this request, please press the star followed by the 2. Your questions will be polled in the order they are received. There will be a short pause while participants register for questions. The first question comes from Andrew McCulloch of Green Street Advisors. Please go ahead with your question.
Gary Shiffman (Chairman and CEO)
Andrew, can you hear me?
Speaker 7
For Andy today. But just had a question on the acquisition. You know, do you guys expect that acquisition to be accretive immediately, or do you think you're gonna need to grow occupancies, too, to make it accretive?
Gary Shiffman (Chairman and CEO)
...As you can tell from the remarks, we had hoped to have closed the acquisition by this phone call, so we could share more details with you. We're excited to do so. We're just in very final stages of diligence, and hopefully we'll be able to shortly be able to announce that acquisition. But I would indicate that the expectation is there would be accretive immediately, and any additional accretiveness would come from filling the vacant sites.
Speaker 7
Is there any way you guys can give us a general idea of the, you know, cost per site estimate for the acquisitions?
Gary Shiffman (Chairman and CEO)
I wish we could, but those negotiations are still ongoing.
Speaker 7
Okay, thanks, guys.
Gary Shiffman (Chairman and CEO)
Mm-hmm.
Operator (participant)
The next question comes from William Acheson. Please go ahead with your question.
Speaker 6
Yeah. Hi, gentlemen. What sort of IRR hurdle do you have on your acquisition program? On leverage.
Gary Shiffman (Chairman and CEO)
You know, I think that the best way that we could look at that, Bill, and I want to be cautious because of the pending acquisition-
Speaker 6
Sure.
Gary Shiffman (Chairman and CEO)
-give out much information, is that, cap rates have been pretty consistent. This one is styled with assumption of debt at, the low 5% range, with, preferred operating partnership, but covering the difference between the small amount of equity and, the anticipation is that, our shareholders will be pleasantly, pleased with the, initial, accretiveness and, and the potential for ongoing accretiveness.
Speaker 6
Okay, Gary, not to press you too much here, but you say cap rates have been pretty consistent.
Gary Shiffman (Chairman and CEO)
Yeah, uh-
Speaker 6
They've been consistent at what level?
Gary Shiffman (Chairman and CEO)
As for those deals that are getting done, and as you know, I recently read your remarks that there's a definite void in comparables out there. But, you know, we are still seeing cap rates from the 55+ age-restricted in the low 6s to what I would call the mid- or upper 8s for all-age communities. And then, of course, you know, there's everything in between. But, that's pretty much one of the reasons I think acquisitions have not been more forthcoming, is that there hasn't been as much fluctuation and adjustment in manufactured housing as perhaps there have been over the last two years in other forms of real estate.
Speaker 6
Okay. Okay. I'll deal with that.
Gary Shiffman (Chairman and CEO)
Sure. Hopefully, we'll be able to get back to all the shareholders and the analysts very shortly on the transaction.
Speaker 6
It makes a big difference in terms of your numbers. I got to tell you. Issuing $30 million worth of equity and not, you know, paying down the acquisition makes a big difference. What sort of probability should we assign to that?
Gary Shiffman (Chairman and CEO)
I'd really be hesitant to that. I would simply say that I would hope to be able to have an announcement within the next two weeks.
Speaker 6
Okay. How about first quarter effect of weather? It didn't seem to affect the margins an awful lot in the fourth quarter, but, I mean, how do you expect it's going to affect margins in the first quarter in terms of sales, in terms of expense margins, et cetera?
Gary Shiffman (Chairman and CEO)
You know, it's a great question, and I just reviewed that with operations yesterday in anticipation of the remarks in the press release that we were putting forward. They felt very comfortable that we're on budget on all aspects. We do the vast majority of our plowing and snow removal in-house with our in-house staff. So while they're working harder and there might be a few more expenses related to fuel and gas and things like that, we don't think it will have any major effect.
Speaker 6
Okay. Okay. You guys are kind of out of consensus there with respect to the apartments indication. There was a big jump in occupied rental homes. But if you just use the mid-quarter convention for rent rates, it looks like the rent rate is just about flat with the third quarter, which is out of consensus if you're renting residential space. And I know you say in your remarks that you're going to keep the rent rates kind of flat going forward, but it's like, why is that? I'm just curious.
Gary Shiffman (Chairman and CEO)
So if I'm understanding the question right, you're talking about an increase in rental occupied units, even though the rent's flat, why isn't it reflecting more?
Speaker 6
If you look at every other type of residential space that's being rented, rents are going up sequentially. They're going up year-over-year, and you're kind of, you know, just, you know, flatlining.
Gary Shiffman (Chairman and CEO)
On the rental homes, you're referring to?
Speaker 6
Yes, sir.
Gary Shiffman (Chairman and CEO)
That's pretty intentional. As we're approaching basically 1,000 conversions a year now, which our long-term goal is to take these renters and convert them into homeowners, so their returns get a lot more accretive. We're pretty flat at this point on the rent. Are we showing a $10 increase or?
Jeff Jorissen (Director of Corporate Development)
Mental budget.
Karen Dearing (CFO)
...About a $10 increase.
Jeff Jorissen (Director of Corporate Development)
Fourteen.
Karen Dearing (CFO)
About 1%. Mm-hmm.
Gary Shiffman (Chairman and CEO)
We're showing about a $10 rent increase for 2011 budget. But, we're really trying to capture as many rentals on a competitive basis as possible to convert them into homeowners, which is just a much more profitable business for us. We hit the lowest point of vacant rental homes, historically in the portfolio. Do we have that number?
Jeff Jorissen (Director of Corporate Development)
It was around 435 at the end of December.
Gary Shiffman (Chairman and CEO)
Out of how many homes?
Jeff Jorissen (Director of Corporate Development)
That would be 4... There'd be about 6,100 occupied and about 435 or 50 unoccupied.
Gary Shiffman (Chairman and CEO)
So that number has been more like 800-900 at year-end over the last couple of years. So I think what you're seeing is just a very competitive rent and a strategy to keep as many homes occupied as possible, so we drive the overall rent, but at the same time keep them low enough so that we're competitive with multifamily.
Speaker 6
Okay, last question. The CMBS debt coming to being renegotiated, what sort of interest rate is on it now, and can you say what you expect it to be going forward?
Gary Shiffman (Chairman and CEO)
I can say this: It would be our expectation to have an announcement next week.
Speaker 6
Okay.
Gary Shiffman (Chairman and CEO)
I, I know that doesn't help anyone building their model now, or reviewing the company. And, and again, if you go back to my last conference call, we have targets for end of first quarter for many of our things on our balance sheet. And this call just coming a little bit shy of that. It doesn't enable me to share all that information with everybody, and, and we're anxious to do so. I think, Karen, what's our current,
Karen Dearing (CFO)
4.9%.
Gary Shiffman (Chairman and CEO)
Okay, so we're at 4.9% on the current $104 million.
Speaker 6
Okay. Thank you, guys. I appreciate it.
Operator (participant)
The next question comes from Mark Lutenski of BMO Capital Markets. Please go ahead.
Mark Lutenski (Research Analyst)
Hi, good morning. I was wondering if you could discuss the decision to issue equity of $30 million, I guess, ahead of time of that acquisition.
Gary Shiffman (Chairman and CEO)
Sure. I think there are two long-term or midterm goals within the company. Certainly, the company has been at the higher end of leverage as compared to how many REITs have delevered over the last few years. I think that the decision was made that midterm to long term, the company will look to delever a little bit. I think that we had the good fortune as a company to have solid securitized debt with terms that were, you know, typically out to 14, 16 and 17, plus the $104 million due this coming year. And it didn't cause us to have to raise equity when our prices were much, much lower, when other companies did raise that equity.
So, the first issuance that we did in 2010 was to shore up the balance sheet, and it was done, you know, at a $30-plus price. The most recent equity that you're asking about, the decision was made by the board and, with the guidance and discussion, regarding the acquisition and wanting to know that we absolutely could make a firm offer on this acquisition, so that we could be in a lead position to tie it up. We needed that equity, and we understood that if that acquisition does not close, it'll be utilized to bring down debt levels on the balance sheet and put the balance sheet in a good position.
The fact that we are going into what we believe is a growing period for the company and occupancy in FFO, we just thought the timing was right based on where the share price was.
Mark Lutenski (Research Analyst)
So, what is your, I guess, target leverage level, or would you ideally like to be?
Gary Shiffman (Chairman and CEO)
Well, a couple things have happened. Certainly, we'd like to point to the fact that, after a long period of, having a 102, 103% payout, based on FFO, we've brought that into, what we believe will be a low 90s range for this year. And, I think we want to continue focusing on reducing our payout ratio and at the same time, bringing our debt down probably, 3-5 percentage points.
Karen Dearing (CFO)
I think, Mark, if you think, I think our debt to EBITDA is about over 9 and 9 times right now, maybe 9.5 times. We're looking at bringing that down sub 8 and at 7 over the next 3 years with some EBITDA growth, and you know, other capital sources.
Mark Lutenski (Research Analyst)
Okay. Sorry to make you repeat yourself. Could you, could you tell me again what the application volume was during the quarter?
Gary Shiffman (Chairman and CEO)
Sure.
Karen Dearing (CFO)
During the quarter or the year?
Mark Lutenski (Research Analyst)
The quarter, please.
Karen Dearing (CFO)
The year was 22,000, and the quarter total... Sorry, I have to add up the numbers. 36.
Gary Shiffman (Chairman and CEO)
About 4,700.
Karen Dearing (CFO)
Forty-seven hundred.
Mark Lutenski (Research Analyst)
Have you seen any change in the credit quality of the applicants?
Karen Dearing (CFO)
...No, I don't, I don't think so. Okay.
Gary Shiffman (Chairman and CEO)
We haven't changed our credit standards at all, so they're still operating at the same level. Where we've seen a large increase is in applications over the internet. And we've also noted that the closing ratio is a little bit lower in the applications over the internet.
Mark Lutenski (Research Analyst)
Okay, got it. All right, thank you.
Operator (participant)
The next question comes from Haendel St. Juste of KBW. Please go ahead with your question.
Haendel St. Juste (Equity Research Analyst)
Hey, good, good morning. I had a few quick ones. Could you guys speak to your decision to double down in the Midwest via this pending portfolio acquisition? Does that speak to perhaps, lack of broader acquisition opportunities out there, or can you be a little bit more specific on what's so compelling about this potential portfolio here?
Gary Shiffman (Chairman and CEO)
I'm trying to recall if we said it was Midwest or not, but in the event that we did, I think that this is just an excellent opportunity. And really, the interest to us is that we're able to leverage everything in our rental home program, all the systems, all the personnel, and have very minimal increased cost to run the communities. I think that we are looking at a number of other opportunities, and when we look at where the greatest value we can create for the shareholders is in some areas that aren't of interest and are much more difficult for other companies to operate in. So I think this one just so happened that it made much more sense for us than anyone else.
Haendel St. Juste (Equity Research Analyst)
Okay. Can you give us also some updated development costs and return expectations for the two planned expansions for later in the year?
Gary Shiffman (Chairman and CEO)
I think we are actually in the process of preparing that right now. And if you want to contact Karen or Jeff direct by mid-next week, we'll be able to share some of that with you. We only have the first pricing for the first Colorado transaction we did, and it came in at around $23,000 a site as compared to sites that were $35,000-$39,000 when we last developed in what was 1999, actually.
Haendel St. Juste (Equity Research Analyst)
Okay, I'll be sure to follow up.
Gary Shiffman (Chairman and CEO)
Yeah.
Haendel St. Juste (Equity Research Analyst)
Couple quick ones here. Can you talk a bit. I know it's still a little early here with the line of credit, but can you give us an early indication of potential sizing and also any, any thoughts on the pricing?
Gary Shiffman (Chairman and CEO)
Yeah, the expectation is that the sizing will remain the same. The pricing currently, Karen, is-
Karen Dearing (CFO)
165 over LIBOR.
Gary Shiffman (Chairman and CEO)
165 over LIBOR. We are looking at a range of, let's call it 250-325 over-
Haendel St. Juste (Equity Research Analyst)
Mm-hmm
Gary Shiffman (Chairman and CEO)
... in the discussions that we're having. And, I think the budget, actually reflects, the renewal in for three months, October on.
Karen Dearing (CFO)
Mm-hmm.
Gary Shiffman (Chairman and CEO)
So guidance reflects the anticipated increase.
Haendel St. Juste (Equity Research Analyst)
Okay. And one last one here. Just, given your secure financing strategist, was curious if you'd like to share any thoughts on the government housing reform potential and the impact that it might have on how you finance and operate your business going forward?
Gary Shiffman (Chairman and CEO)
Well, I think, if you're referring to the how they're going to require loans being made, is that what you're referring?
Jeff Jorissen (Director of Corporate Development)
Are you referring to the potential of Fannie Mae and Freddie Mac exiting the lending market?
Haendel St. Juste (Equity Research Analyst)
Yeah, yeah, just exactly. Just thoughts on what your views are currently in terms of interpreting the initial guidelines and also, you know, how that might impact your business, your balance sheet, potentially?
Gary Shiffman (Chairman and CEO)
Well, interestingly enough, I, you know, I think it will make us more competitive because we don't rely on Fannie or Freddie. If we're talking chattel loans, now? Or we're talking about,
Jeff Jorissen (Director of Corporate Development)
I think corporate.
Gary Shiffman (Chairman and CEO)
Corporate loans?
Jeff Jorissen (Director of Corporate Development)
Mm-hmm.
Gary Shiffman (Chairman and CEO)
I think that we are now in mediation with Fannie, and we hope to amend an element of our loan, as we've discussed in previous conversations, and I've spent a good deal of time in that mediation very recently. I'd be reluctant to comment too much on my thoughts, other than that we are making positive progress as a company with our dispute with them. And how or what their programs look like in the future are something that I'm not prepared or willing to comment on at this time. I just don't know enough about them, and I've been pretty consumed in trying to resolve our differences with them.
Haendel St. Juste (Equity Research Analyst)
All right, guys. Well, thank you for that.
Gary Shiffman (Chairman and CEO)
Sure.
Haendel St. Juste (Equity Research Analyst)
That's all I have.
Gary Shiffman (Chairman and CEO)
Sorry.
Haendel St. Juste (Equity Research Analyst)
Yep.
Operator (participant)
...Once again, if you would like to ask a question, please press the star followed by the one on your telephone. To cancel this request, please press the star followed by the two. We have a follow-up question from Mr. William Acheson. Please go ahead with your question, sir.
Speaker 6
Hey, guy, one quick one here. You indicated that it would be an accretive acquisition in the 8-K that you filed. If I just run $158 million through my model, assume the leftover debt and preferred operating units are the same rate as your existing debt, that would indicate that the cap rate would have to be about 7.25% just to be FFO per share neutral. Am I on the right track here?
Gary Shiffman (Chairman and CEO)
I would not argue with your model, except for the fact that a lot circulates around the interest rate associated with the preferred operating partnership unit.
Speaker 6
Okay. I mean, even if I jump that up to 7.25%, it wouldn't have that much of an effect. Okay. Thank you.
Gary Shiffman (Chairman and CEO)
Sure. Sure.
Operator (participant)
There appear to be no further questions. Please continue with any other points you wish to raise.
Gary Shiffman (Chairman and CEO)
Okay. I would just close by sharing with everyone again. There are an awful lot of things from a timing standpoint that the company is anxious to share with the market. We're unable to do so by short periods of time that we hope we will be able to get on the phone with everybody again and put out more information. And if it seems that the company is not answering some of the questions, it's only because in negotiating everything that we have going on right now, we're at the point where it's necessary to wait until we have completion so that we can give accurate and final details to everyone. We look forward to doing that very shortly, and we thank everybody for participating on the call today.
We welcome any direct calls from anyone.