Sun Communities - Q4 2011
February 23, 2012
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by, and welcome to the Sun Communities Fourth Quarter 2011 Earnings Conference Call on the 23rd of February 2012. At this time, management would now 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 meanings 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 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. If you have a question, please press the star followed by the one. If you would like to withdraw your question, please press the star followed by the two. If you are using speaker equipment, you may need to lift the handset before making your selection. I would now like to turn the conference over to Gary Shiffman. Please go ahead, sir.
Gary Shiffman (Chairman and CEO)
Thank you, operator, and good morning, everyone. Today, we reported funds from operations of $20.1 million or $0.81 per share for the fourth quarter of 2011, compared to $17.2 million or $0.78 per share for the fourth quarter of 2010. For the year 2011, FFO was $75.3 million or $3.13 per share, compared to $63.6 million or $2.97 per share for 2010. These results exclude certain items, as noted in a table in the press release. 2011 was a breakout year for Sun.
Performance of our core portfolio, rapidly leasing expansions and fully integrated acquisitions formed a trio of growth generators effectively executed by our experienced management team to produce results not seen in many cases in over a decade. Along with achieving FFO per share growth of 5.4%, the highest FFO growth achieved in a decade, we are pleased to report the following additional achievements of 2011 and projected information for 2012. Revenue-producing sites in our core portfolio increased by 732 during the year, bringing same-site occupancy to 85.8%, an increase of 130 basis points from 2010. Budgeted same-site occupancy for 2012 approximates 87%.
Additionally, our recent acquisitions exceeded our pro formas and added 160 sites of occupancy, bringing the total gain in revenue-producing sites to 892, or the largest gain in sites that we've seen in the portfolio since 1999. We note the current gains were achieved without the benefit of the robust dealer network, which existed back in 1999. We continue to see occupancy increases in our major markets, including the Midwest, which gained nearly 50% of the reported 2,011 gained sites, and in Colorado and Texas, which added another 43% of the gained sites.
In 2012, we expect to add 1,154 sites to occupancy, which would bring total portfolio occupancy to 87%, a 170 basis point increase over 2011, with the expectation that 2013 occupancy should approach 90%. Driven by leasing in our acquisitions and expansions, which contain nearly half of the projected 2012 site gain, budgeted occupancy gains in the Midwest approximate 70% of our gains, while Texas and Colorado add another 25%. As originally projected, our 2011 weighted average rent increase was 2.7%. The 2012 budget includes an increase of 3%.
Unlike any other real estate asset class, we've been able to increase rents on average between 2% and 4.5% in each of the past 25 years of our private and public existence, really providing an unparalleled stability of income through all types of economic cycles and demonstrating a pricing power nearly unique among real estate classes. Turning to our same-site portfolio, revenue grew this year 3%, while expenses grew a modest 1.6%, generating NOI growth of 3.6%, or the highest percentage of growth in over 5 years. Fueled by cumulative occupancy gains and consistent rent increases, same-site NOI growth is projected at 6.2% for 2012.
Applications to live in our communities grew to nearly 23,500 in 2011, or an increase of approximately 7% over the prior year. We ended the year with just over 7,000 occupied rental homes, and we expect to add an additional 600 occupied homes to the program in 2012. Consistent with our strategy, over 60% of the 2012 growth in the rental program is located in acquisition and expansion communities. In our core portfolio, growth is slowing as communities reach greater than 95% occupancy and begin selling themselves out of the rental program. For 2011, home sales totaled 1,439, an increase of 4.7% over the prior year.
Although total home sales were lower than budgeted, we were able to make up some of the lost income through higher-than-budgeted gross profit. For 2012, home sales are projected to increase by nearly 22% for a total of 1,750 sales. We've enhanced our business platform for home sales by aligning main office support with specific regions for all types of sales, essentially applying our successful approach to the rental conversions to both new and non-rental pre-owned home sales. We believe this centralized approach and realignment will allow us to capture more sales through targeted and multifaceted follow-up. In turn, this will also allow our on-site staff to spend additional time accelerating and generating new occupancy gains due to the stronger demand we've experienced over these last few years.
We continue to successfully convert renters to owners at a rate of 12%-14% per year, as 789 rental homes were actually sold during 2011. Our 2012 budget includes the conversion of 924 renters to owners, an increase of approximately 17%. Our Austin, Texas, expansion of 178 sites opened in mid-September and had occupancy of 45 sites by year-end. The expansion is budgeted to be full by the end of 2012. At the same time, our Colorado expansion of 124 sites has less than a dozen vacant sites, and we expect them to all be leased by the end of first quarter.
We have started or are in the process of starting construction on 452 expansion sites in Texas, where occupancies are high and demand remains strong. Construction is expected to be complete on 332 of those sites by the end of third quarter and the remaining 120 sites in the fourth quarter. In 2011, we purchased 23 communities and have purchased another 3 communities after year-end for a total purchase price of $200 million. Our last year of acquisitions of this magnitude was 1996. These acquisitions are initially accretive and also provide long-term growth opportunities through both occupancy improvements and rental increases. We continue to see an active pipeline of acquisition opportunities and are, in fact, completing due diligence on large and small portfolios, as well as several single communities.
Although our guidance does not include a pro forma acquisition, we are optimistic we will be able to utilize our available liquidity to complete additional acquisitions with similar growth potential during 2012. During 2011, we were also very active in balance sheet improvement, including two CMBS transactions totaling $139 million, which extended debt maturities in both 2011 and 2012, the renewal and expansion of our revolving line of credit, negotiating an extension of our entire $367 million Fannie Mae facility from 2014 and 2015 to the year 2023, and accessing secured debt for our acquisitions.
These transactions extended the weighted average maturity of our total debt from 4.4 years when we began 2011 to over 7 years at the end of 2011, and we believe are indicative of the capital market's endorsement of our balance sheet management. Today, our mortgage debt maturities for the next two years are $16.8 million and $33.8 million. With additional focus on deleveraging the company, we completed a follow-on offering of $163.3 million last month. The 4.6 million share sale resulted in $156 million of net proceeds.
$123.5 million were used to pay down our lines of credit, and $25 million of that was used for 2012 acquisitions or the closing of the three communities I referred to prior. The offering improved our debt to EBITDA multiple from 9.8x at year-end to a pro forma multiple of 8.9. And based on projected EBITDA and debt levels, we expect the multiple to further improve to 7.9 by the end of 2012. While we strongly believe the proven stability of our cash flows support higher leverage levels than other real estate classes, we continue to look for opportunities to gradually reduce leverage while balancing capital needs to fund our stated growth strategies.
In summary, we're achieving results from our core portfolio that have not been attained in numerous years, and we are supplementing that growth with successful expansions and acquisitions, allowing management to leverage its personnel, systems, and leasing capabilities that are in place. We have strengthened our balance sheet, made progress on deleveraging, and provided our shareholders with one of the highest total returns on investment in the equity REIT universe. As noted from the metrics shared above, we expect 2012 to be another great year. Projected increase in NOI and EBITDA of over 13% and 16% support FFO per share of $3.57-$3.63, prior to the $0.38 dilution from our January equity offering.
Inclusive of that dilution, we expect FFO to be in the range of $3.17-$3.27 per share. At the midpoint of guidance, our payout ratio after reduction of $8.4 million of recurring capital expenditures and based on an annual dividend rate of $2.52, will approximate 86%. At this time, both Karen and I are available to answer any questions.
Operator (participant)
Thank you. We will now begin the question and answer session. As a reminder, if you have a question, please press the star followed by the one on your touchtone phone. If you would like to withdraw your question, press the star followed by the two. If you are using speaker equipment, you will need to lift the handset before making your selection. Our first question comes from the line of Jana Galan. Please go ahead.
Jana Galan (Analyst)
Thank you. Good morning.
Karen Dearing (CFO)
Good morning.
Jana Galan (Analyst)
Can you let us know how you're thinking about expenses for the same property portfolio in 2012?
Karen Dearing (CFO)
You know, we normally don't split the NOI growth in 2012 between revenues and expenses. But in general, I would say that it's a slight reduction from where they ended up in 2011.
Jana Galan (Analyst)
Thanks. And then I was just curious if, kind of year to date, have you noticed any increased competition from site-built homes in any of your markets?
Gary Shiffman (Chairman and CEO)
No, I think that much of what we shared over the industry's difficulties over the last 10 years is the competition that was generated from site-built was primarily due to the subprime lending and the credit bubble that existed for such a period of time. Even the overhang of the foreclosures and repossessions in the site-built world did not have much effect on our business and our portfolio, just because of the differentiation of an average home in our portfolio costing $45,000-$50,000 as compared to any discounted site-built housing. That ongoing affordability differential, if you will, is probably what's fueling the demand that we've seen increasing over the last 3 years or so, since the subprime and other financing hasn't been available in the site-built world.
It's really a positive thing for us, and we have not seen direct competition from it.
Jana Galan (Analyst)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Paul Adornato with BMO Capital Markets. Please go ahead.
Paul Adornato (Analyst)
Hi, thanks. Good morning. Was wondering if you could tell us a little bit about the trend that you're seeing in terms of the credit quality of both the renters and those buying homes within the portfolio?
Gary Shiffman (Chairman and CEO)
Yeah, I think I comment, Paul, it pretty much mirrors a lot of the remarks I just made. The affordability factor of manufactured housing is kind of playing strong right now into the lack of financing that previously existed in site-built housing. So I think it's creating a bigger universal pool, if you will, for the manufactured housing, certainly as it relates to our portfolio, and that we are seeing through stronger demand pretty much the same, if not slightly improving trends towards approval, with slightly, and I underscore the word slightly, improved credit ratings. So I think that as a trend, we'll continue to see.
I think that we see the return of a customer that never should have been in site-built housing, because they really didn't qualify for it under proper underwriting and today's underwriting standards. So that will probably continue to reflect in a slightly improved profile of credit that we see in our communities.
Karen Dearing (CFO)
And Paul?
Paul Adornato (Analyst)
Yeah.
Karen Dearing (CFO)
If we look at it from like a delinquency standpoint, we've seen no measurable increase in delinquencies. They've stayed stable across the year, as has bad debt as a percentage of revenue. It's in total, it's still about 130 basis points.
Paul Adornato (Analyst)
... Okay, and so you're seeing that the chattel financing is available to incoming residents, and is that in abundance from third-party sources?
Gary Shiffman (Chairman and CEO)
Abundance would not be the correct statement. No, it is still quite limited. I think the vast majority of all of the sales that we're doing are financed internally by Sun and then sold off to third parties, or they're funded in wet paper with third parties where we have arrangements. We estimate about 12%-14% of the sales are actually financed by third parties, and about another 7%-10% are actually bought with cash.
Paul Adornato (Analyst)
Okay. And then switching to your comments on leverage, I appreciate all the color there, and also the outlook for acquisitions that you've got some in the due diligence pipeline. So at the end of the year, if you expect to be at a lower leverage metrics, we should expect additional equity to come in conjunction with any additional acquisitions in 2012?
Gary Shiffman (Chairman and CEO)
I think that's a very good question. It's something that we are going to watch and weigh very, very carefully based on the acquisition pipeline that we have and balancing the acquisitions and the accretiveness for our shareholders against what we want to accomplish with the balance sheet. As everyone's aware, Sun has been a company that's been very, very patient. We believe that the balance sheet and the industry can handle stronger leverage. So, we really took our time, and rather than having to raise equity at times, we were able to wait till our share price improved and take advantage of that.
So I think that, how we look at that over the year, Paul, although we have intimated that we will continue to look at reducing leverage, will depend a lot on what happens with acquisition and the timing of what's going on in the marketplace.
Paul Adornato (Analyst)
Mm-hmm. Okay, appreciate that. And just one more item. You talked a little bit about providing additional sales support out to the out in the field. Was wondering if there are any G&A implications of providing perhaps a little bit more or different type of sales support?
Karen Dearing (CFO)
No, we basically repurposed the individuals around the organization to support that new initiative. And really, what we're talking about, Paul, is we successfully implemented this type of main office support for rental home conversions, where we have individuals here who are focused on particular regions in the country, and we've kind of spread that successful model out to other sources of business, whether it's pre-owned home sales, new home sales, relocations, and things like that.
Paul Adornato (Analyst)
Okay, great. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Steven Mead with Anchor Capital Advisors. Please go ahead.
Steven Mead (Analyst)
Yeah, if I could just ask this question. If you look at how you started the year in terms of the relationship of, whatever kind of number you look at in terms of cash flow available for the dividend, and then what you exited 2011 at in terms of that relationship, and a little bit of color as to, where you have to get to, to become a company with a sort of predictable growing dividend stream.
Gary Shiffman (Chairman and CEO)
I'm just missing the question at the end there. Is it, where do we think we have to get to, or what are-
Steven Mead (Analyst)
I was just wondering, do you have a sense of kind of like how much-
Gary Shiffman (Chairman and CEO)
Sure
Steven Mead (Analyst)
... of a cushion between the cash flow available for dividend-
Gary Shiffman (Chairman and CEO)
Sure
Steven Mead (Analyst)
and the dividend?
Gary Shiffman (Chairman and CEO)
I, I-
Steven Mead (Analyst)
The idea that once you start to increase your dividend, you have to have a business model that supports, you know, a continuation of that growth with the dividend.
Gary Shiffman (Chairman and CEO)
Yeah. So I, I think we've shared with the market before. First of all, the board reviews the dividend periodically, and certainly on a quarterly basis once the board gets together. And there has been a philosophy historically, although it changed when we restructured our balance sheet in 2004. Prior to that, there was a policy of payout ratio as it approached or dipped below 80%, there was typically a dividend increase that was pretty much comparable to CPI.
So, the board had been inclined to raise dividends, such as the fact that there'd be an increase similar to the CPI index, and at the same time, retain enough internal retain enough of the earnings to fuel growth within the company at the same time. So I would suspect, and I've shared with the market, that the board will continue to look closer and closer to the dividend, and that we're coming off a period of time from 2004, where we went from a being an unsecured borrower to a secured borrower. We were ahead of our payout over 100% until two years ago, gradually bringing that down. And I think towards 80%, the policy will be looked at a lot harder.
Steven Mead (Analyst)
... Mm-hmm. Do you have a, can you provide kind of like, where you began 2011 and where you exited 2011 in terms of that relationship?
Gary Shiffman (Chairman and CEO)
In terms of the Payout Ratio?
Steven Mead (Analyst)
Yeah.
Gary Shiffman (Chairman and CEO)
Do you have that, Karen?
Karen Dearing (CFO)
Just from a payout ratio percentage, we ended the year at 90%, and last year, I believe we were right around 94%.
Steven Mead (Analyst)
Mm-hmm. And then if I could ask, in terms of the initiatives that you took in 2011, in terms of expenses, you know, are there some that were sort of one time in nature that won't occur in 2012 or, or not?
Karen Dearing (CFO)
I think one-time expenses that we see in GNA. We do see about $1 million of nonrecurring kind of one-time expenses that are in GNA for 2011. They're related to some software implementation costs and consulting costs that we had, as well as some bonuses.
Gary Shiffman (Chairman and CEO)
Are you talking about within the company or on a same-site basis?
Steven Mead (Analyst)
Oh, just overall. No, that's what I-
Gary Shiffman (Chairman and CEO)
Okay. I just wanted to make sure we answered the question for you, Ray. Okay.
Steven Mead (Analyst)
No, no, no. It was just... That's helpful. And, as I looked at the metrics and your guidance, if you achieve the metrics, I was wondering why the growth on FFO just wasn't a little bit higher than what is implied in the range today.
Gary Shiffman (Chairman and CEO)
I think that there are no one-time-
Karen Dearing (CFO)
Besides the ones that I, you know, that I talked about, no.
Steven Mead (Analyst)
Okay. Okay. Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Andrew McCulloch with Green Street Advisors. Please go ahead.
Andrew McCulloch (Analyst)
Hi, good morning. Can you talk about the cap rates on the six RV communities you purchased in December and February, and maybe provide some color on how you valued the, the permanent sites versus the seasonal ones?
Gary Shiffman (Chairman and CEO)
Yeah, I think that, I think we shared with the marketplace, that this was a particular situation where we were not talking a lot about cap rates because there was, divisiveness between the ownership, on the seller side, and we didn't want to, get into a situation where, one group of owners was looking at, cap rate to the other. But I think overall, we'd share with the marketplace on this particular group, as they're now all closed, all six of them, it's right around an 8.2 cap rate. And we're very, very pleased with those particular acquisitions because, it's tough to get things in the Florida marketplace, as we know.
They really enhance the geographic footprint that we have and the existing sales entity that works for us, the telemarketing in our existing communities there overlaps, and it also allows us to feed into these communities from our existing communities. So, we're very pleased that we were able to make that acquisition. I think we have a good upside on the rents as they are slightly under market as compared to the rents and all the competition, both inside our portfolio and outside in that particular area. So, we're excited about finally getting to close the last three, which literally took place as we announced last week.
Andrew McCulloch (Analyst)
Any, any color on how you valued the permanent versus seasonal sites? Or maybe, you know, just generally talk about how much income the permanent sites generate versus the seasonal ones.
Gary Shiffman (Chairman and CEO)
Yeah, I don't think I have the breakdown of that. If you wanna get back to, Karen on that, I'm sure she can provide some color on that, and, we'll get it from her acquisitions group. But, we just basically value the property as we would any other property, which is, you know, applying, the cap rate or applying the, cost of capital to the, current NOI, and, then looking at growth by either improving or increasing occupancy, or raising the rents, or operating the communities more efficient. But we don't, we don't break it out, between, one site to the other, permanent or, not.
Andrew McCulloch (Analyst)
Okay. And then I think on three of those RV properties, there was 7% debt. What rate do you think you could achieve if you were to refinance that today into kind of new 10-year money? And would that rate be materially different from what you could get on a core MH property?
Gary Shiffman (Chairman and CEO)
I'm gonna say that we're looking at debt in the 5%-5.5% range right now. I don't have... Karen, do you know where the debt was on those properties, or what the rate is?
Karen Dearing (CFO)
It's at 7.
Andrew McCulloch (Analyst)
You could get 5.5 on a high-quality RV property and a core MH, assuming high occupancy, the same rate?
Gary Shiffman (Chairman and CEO)
In Florida.
Andrew McCulloch (Analyst)
In Florida, okay.
Gary Shiffman (Chairman and CEO)
Yeah.
Andrew McCulloch (Analyst)
How much would that change in some of your Midwest MSAs?
Gary Shiffman (Chairman and CEO)
Generally, RV communities will have a higher debt or a higher interest rate than manufactured housing communities. We've been very, very fortunate through a lot of our banking relationships to be able to keep it very tight, but that spread could range anywhere from 20-75 basis points.
Andrew McCulloch (Analyst)
... Okay, and then, on the guidance, is it possible for you to tell us what your same-unit NOI growth would be for 2012, absent any gains from the rental program, and expansion activity?
Gary Shiffman (Chairman and CEO)
I'm sorry, could you repeat that question?
Andrew McCulloch (Analyst)
Yeah. So could you tell us, you have 6.2% NOI growth for the same, I think, same property portfolio in 2012. What would that be if you weren't getting any site gains from the rental program or your expansion activities?
Gary Shiffman (Chairman and CEO)
It's tough. I guess the way we look at it, I mean, a rough rule of thumb, if you're gonna have, we have revenue increase of 3%, the expense increase 2%-
It's gonna yield five something. I don't think we have enough information to be able to give you that difference, but I think if you wanna get back to Karen on that, you can take a look at factoring out expansions.
Karen Dearing (CFO)
I think if we just look at occupancy as another point of reference, I think there's 452 expansion sites being added, and there's 118 RPS is gained from those.
Gary Shiffman (Chairman and CEO)
I don't think you're seeing a lot of growth-
Karen Dearing (CFO)
I don't think it's not significant.
Gary Shiffman (Chairman and CEO)
I think a majority of growth on same site increase and rental increase and control of expense factors. So I think it's not driven from expansions. Now, any acquisitions that we were able to generate accretive in excess of what we've already closed in, I think would have a dramatic impact.
Karen Dearing (CFO)
If you did 100, 100 sites is generally about $500,000 of revenue. Expansions are almost all revenue. There's no additional expenses associated with them. So the 118 sites gained in the expansions, it'd be a little over $500,000.
Andrew McCulloch (Analyst)
Okay, great. One last question on guidance. Sorry, if I missed this. Did you give interest expense guidance, or can you?
Karen Dearing (CFO)
No, we did not give interest expense guidance of the... But it's included in the guidances, interest rate that was in place as of 1/1, with no variable rate increase.
Andrew McCulloch (Analyst)
Okay, great. Thank you very much.
Operator (participant)
Thank you. And once again, ladies and gentlemen, if there are any additional questions, please press the star followed by the one at this time. As a reminder, if you are using speaker equipment, you will need to lift the handset before making your selection. And we have a follow-up question from the line of Paul Adornato with BMO Capital Markets. Please go ahead.
Paul Adornato (Analyst)
Yes. Hey, Gary, could you just tell us how you think about the mix of property types between RV, all age, and age restricted?
Gary Shiffman (Chairman and CEO)
Sure. I think that we shared it with the market before that, certainly between all age and age restricted, they seem to run in cycles. During more difficult economic times, you've got more stability in the age restricted. You have a lot of retirees and fewer people moving out. Generally, especially when they're in resort areas, they're usually moving out because of health, not so much because of job or other regional economic circumstances. At the same time, when those communities are more tied to CPI and indexes that aren't increasing as fast as the growth in the rest of the economy, we tend to experience higher growth in our all-age communities, where we can pass on larger rental increases, and we're not restricted to CPI.
So we believe a good balance is good over the long period of time for our shareholders. Secondly, with regard to RVs, RVs have been, I think, very strong generators of growth throughout the period of time that we've owned them, which has been about the last 12 years or so. I think that the RV owner-operator tends to be a bit younger in profile and more active than the age-restricted resident, and therefore, it's a nice step to market to the RV homebuyer to move into a manufactured housing community. Right now, RVs represent somewhere between 15% and 20% of the portfolio, and I would expect that to probably not change too dramatically.
Paul Adornato (Analyst)
Okay, thanks very much. And, just maybe one more item, with respect to the overall industry. When you guys have been very successful in the rent-to-own program, I was wondering how, you know, just the smaller operators are dealing with the lack of a dealer network. Are they participating in any sort of rent-to-own? Have they, you know, how are they filling their communities in this kind of new age of the industry?
Gary Shiffman (Chairman and CEO)
Sure. I think it's a great question, Paul, and I think it really underscores the opportunity that Sun has right now. I think I shared in a lot of the discussion around our recent equity offering. The cost to regain occupancy today is just far too expensive. It just takes more capital than the small owner-operators have. I think even the regional syndicators that have medium-sized portfolios, they've entered into the lease-to-own programs, but without access to public capital and other forms of capital, it's very, very difficult for them to run the program as long as it takes to buy the homes, to increase the occupancy, and then to turn around and sell the homes after carrying the paper on their balance sheets.
And I think, quite frankly, that's what's driving a lot of the acquisition opportunity to Sun. It's those portfolios, it's those owners and operators that have been in the lease-to-own business a little bit, but can't regain the occupancy that they're looking for because they don't have the capital. So, whether it be something like Kentland or a smaller one-off or a couple of communities, I think those are the types of things that we're looking at. And then we also have developed just basically a machine to be able to process, underwrite, rent, and then sell these homes. And a lot of investment and a lot of experience goes into that form.
For us, buying and having those opportunities of getting a solid community that's accretive right up front on cash flow and having the vacancies as our upside, kind of plays right into the sweet spot of what we're looking for.
Karen Dearing (CFO)
Mm-hmm. Okay, great. Thanks very much.
Operator (participant)
Thank you. Our next question comes from the line of Taylor Schimkat with KBW. Please go ahead.
Taylor Schimkat (Analyst)
Good morning. Just thinking about converting the renters to owners, what proportion of your home sales are coming from homes that Sun has acquired as new versus used? And I guess, said another way, are you seeing similar demand to acquire new rental homes versus used rental homes?
Gary Shiffman (Chairman and CEO)
New rental. It's new rental, or do you mean, new homes versus new or used rentals?
Taylor Schimkat (Analyst)
Right.
Gary Shiffman (Chairman and CEO)
Or do you mean new versus used within the rental program?
Taylor Schimkat (Analyst)
Within the rental program, the homes that Sun acquired as new homes and put into the rental program, how are you seeing interest in acquiring those newer homes versus the ones that were acquired, and I think it's generally out of foreclosure?
Gary Shiffman (Chairman and CEO)
Yeah. Yeah, no, I think it's strictly a case of price point and value.
Taylor Schimkat (Analyst)
Mm-hmm.
Gary Shiffman (Chairman and CEO)
I think there's no differentiation. I'd share with you that probably our residents and all of us would prefer new over used, but it really comes down to credit and value. I think oftentimes, the value that's greatest is on those homes that we've been able to buy deeply discounted as repos. I don't think there's a difference, and I don't think we track that difference specifically.
Karen Dearing (CFO)
I don't have it in front of me.
Gary Shiffman (Chairman and CEO)
Versus used.
Taylor Schimkat (Analyst)
And has there been any change in repo volume lately?
Gary Shiffman (Chairman and CEO)
I think it's been rock steady for three years now, dropping down to the same levels it was pre-2000, Gary?
Karen Dearing (CFO)
Repos on homes or repos that are in our portfolio?
Taylor Schimkat (Analyst)
repos that are pulled into the rental program.
Karen Dearing (CFO)
Oh, those are. It's been about the same for the past several years and-
Gary Shiffman (Chairman and CEO)
Yeah
Karen Dearing (CFO)
... down to kind of, pre-distress time period, maybe 600-700 a year.
Gary Shiffman (Chairman and CEO)
Yeah. It's been the same for, 3, 4 years now. It hasn't varied very much.
Taylor Schimkat (Analyst)
Okay, thanks. Then, could you talk a bit more about the geographies where you're seeing attractive acquisition opportunities today?
Gary Shiffman (Chairman and CEO)
I think we're seeing it across the spectrum of the country. Sun does not and is not looking deeply into the West Coast, but just about everywhere else across the country. I think that we continue to see a lot of opportunity in the Midwest. The fact of the matter is, because of the rental program and the interest in buying communities that have a solid base of occupancy to work from, a good NOI, and accretive opportunity, and the ability to fill the vacant sites, we can create the greatest returns for our shareholders, both short and long term, by filling and buying communities with vacancy. That will tend to take place more in the Midwest areas of Texas.
We are looking at areas of Florida, where there has been a retreat of occupancy or more vacancy over the last 10 years, or new communities that didn't have the third-party dealerships to fill up. But there is no particular area, and I think, as I've said before, we'll focus on really solid fundamentals within the community for our shareholders and the growth more than we will going outside a region we're comfortable in.
Taylor Schimkat (Analyst)
Okay. Given your outlook on slightly lower year-over-year expenses, I think that's what I heard, if that was correct. What line items are you sort of seeing the most savings in?
Karen Dearing (CFO)
I am looking for that at the moment, Taylor. I don't know if I have that in front of me, because we don't generally, as I said, we don't generally give out that information. My guess would be, we would be seeing it in utilities based on kind of increased revenue on water and sewer.
Taylor Schimkat (Analyst)
Okay.
Karen Dearing (CFO)
Increased recoveries.
Taylor Schimkat (Analyst)
... Okay. And then lastly, I'm not sure if I missed this, but did you talk about the $1.4 million impairment charge? What drove that in the quarter?
Karen Dearing (CFO)
The $1.4 million impairment charge is on one community in North Carolina. It's in a difficult economic area, and unfortunately, we are being unallowed, not allowed to bring rental homes into that community to support occupancy.
Taylor Schimkat (Analyst)
Is that driven by some state regulation or local regulation? Is that-
Karen Dearing (CFO)
It's a local municipality issue.
Taylor Schimkat (Analyst)
You think that's a one-off issue there?
Karen Dearing (CFO)
Yes.
Taylor Schimkat (Analyst)
Okay. All right. Thanks so much.
Operator (participant)
Thank you. Once again, ladies and gentlemen, if you wish to ask a question, please press the star followed by the one at this time. We have a follow-up question from the line of Steven Mead with Anchor Capital Advisors. Please go ahead.
Steven Mead (Analyst)
Yeah, I just was wondering, and you've touched on it, but the increase in occupancy in 2012, in terms of what you were guiding towards, was a pretty, I mean, it's a, that's a good increase. And I just was wondering, in terms of the issue of, say, retention of existing people in the homes versus what you're seeing in terms of new applications and just a little bit of sort of what contributes to that increase in occupancy.
Karen Dearing (CFO)
The increase in occupancy from a total portfolio basis is strongly in the same-site, about 55% of it is in the same-site portfolio. Another 34% of it is in acquisitions, and about 10% of it is in expansion.
Gary Shiffman (Chairman and CEO)
I think it's strictly driven by demand.
Steven Mead (Analyst)
Okay. But, I mean, are you seeing, you know, a move- are you seeing better retention in terms of, holding on to the base and, thus, sort of lower turnover that you're dealing with or,
Gary Shiffman (Chairman and CEO)
I think, I think to answer your question, I think we're seeing no change whatsoever. It's not a matter of better retention. Retention is the same. The repos have been the same, in the portfolio for the last four years, as I indicated.
Steven Mead (Analyst)
Yeah. Yeah.
Gary Shiffman (Chairman and CEO)
So, demand is stronger. Applications have been increasing significantly year after year. I think it's driven a lot by the affordability factor, the lack of the ability to get into site-built housing for much of this population. And I would tend to suggest in the Midwest, in particular, as we see, I think greater stabilization, greater, I won't say job growth, but job security.
Steven Mead (Analyst)
Yeah.
Gary Shiffman (Chairman and CEO)
Certainly in the automotive area, there is a move from the sidelines of not wanting to commit or not wanting to buy or make a change that is fueling the growth. So I think it's a situation where demand is up and all other metrics are pretty equal.
Steven Mead (Analyst)
Okay, thanks.
Operator (participant)
Thank you, and I'm showing no further questions. Please continue with any closing remarks.
Gary Shiffman (Chairman and CEO)
Well, at this time, on behalf of the company, Karen and I would like to thank all of you for participating on this call. We certainly look forward to 2012 as the metrics continue to indicate we should have continued growth. We're both available for any questions that anyone might have separately from this phone call. Thank you.
Operator (participant)
Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. You may now disconnect.