Sun Communities - Q4 2013
February 20, 2014
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by and welcome to the Sun Communities Fourth Quarter 2013 earnings conference call on the 20th of February, 2014. 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 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, Karen Dearing, Chief Financial Officer, and Jeffrey Jorissen, Director of Corporate Development. Throughout today's 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 on your touch-tone phone. Press star zero for operator assistance at any time. For participants using speaker equipment, it may be necessary to pick up your 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 and good morning. Today we reported funds from operations of $30.6 million or $0.78 per share for the fourth quarter of 2013, compared to $26.2 million or $0.80 per share in the fourth quarter of 2012. For the year, FFO was $121.5 million or $3.22 per share, compared to $96.7 million or $3.19 per share in 2012. These results exclude transaction costs incurred in connection with acquisition activity. Revenues for 2013 increased 22% from $339 million in 2012 to $415.2 million in 2013. Now, turning to a review of the portfolio, during 2013, revenue-producing sites increased by 1,885 compared to 1,069 in 2012 and the original 2013 guidance of approximately 1,500 sites. The 2013 increase nearly equals the increase of the two prior years combined, each of which represented a historic high for occupancy improvement.
Guidance for 2014 occupancy improvement of 1,900 sites will bring portfolio occupancy to approximately 92% by the end of 2014. Turning to same property performance, the same property portfolio of 159 communities, revenues grew by 5.1% in 2013 while expenses increased by 3.2%, resulting in NOI growth of 5.9%. The 2014 same property portfolio guidance is based on 173 communities, and revenues are expected to increase by 5.9% while expenses increased by 3.2%, resulting in NOI growth of 7.1%. Same site occupancy increased from 87.1% at December 31, 2012, to 88.9% at December 31st, 2013. Turning to home sales, during 2013, 1,929 homes were sold compared to 1,742 in 2012, an increase of approximately 11%. The guidance for 2014 projects home sales to increase by 14% to approximately 2,200. Rental home sales approximate 50% of home sales for each of the periods noted.
Applications, which are a prime measure of customer demand for our affordable housing product, continue to surge. For 2013, we took 30,700 applications to live in our communities, an increase of nearly 18% from the 26,100 in 2012. Expansion of sites and communities is experiencing strong demand and continues to be on plan. We expect to add approximately 765 sites in six communities in our Texas and Colorado markets where occupancies are virtually full. The fill rate is estimated at six to eight sites per month, so when all six expansions are open, they will be filling at an aggregate rate of over 40 sites per month. This is anticipated to be an annual experience over the next several years as we build out our inventory of existing expansion sites.
I'd also like to note that we have also been selectively acquiring communities that have additional expansion opportunity and/or entitled and zoned land for expansion. With that, I'd like to focus a little bit on our acquisitions. In the last six weeks of 2013, we bought three communities for approximately $40 million. In 2014, we have bought an additional four communities for $106 million. Six of the communities are recreational vehicle communities, and one is a manufactured housing community. We now have communities in 27 states expanding our geographic footprint in many desirable destination locations along both coasts. These communities are very high quality and, together with other recent acquisitions, represent many of the premier communities that are in our portfolio. Where necessary, we've been able to reposition RV communities through capital investment and upgrades of management systems and practices that should create accelerated growth.
These recent acquisitions perfectly fit our acquisition model, which is to focus acquisition efforts on the highest quality RV communities, which have latent earnings power, and our manufactured housing communities, which present the opportunity for growth through occupancy improvement, a capability we have demonstrated frequently over the last few years. Demand for sites and RV communities is also a function of the increase of shipments of recreational vehicles, which are expected to increase by approximately 6% in 2014, marking the fifth consecutive annual increase in shipments. Also, the aging of the nation's population is a positive, as adults over 55 years of age account for over 40% of total demand for RV parks. Finally, I just add that we have a full pipeline of acquisition opportunities which fit our model criteria of quality, location, geographic diversity, and potential for earnings growth.
Our Debt-to-EBITDA multiple is projected to be 6.9 by the end of 2014, down from 9.8 in 2011. In December and January, we refinanced approximately $240 million of debt at attractive long-term rates. Our debt maturities for 2014 and 2015 are $11.5 million and $56.3 million, respectively. We anticipate that the company's FFO per share for the year 2014 will be in the range of $3.52-$3.62 per share. At the midpoint of guidance, this reflects an increase of 11% per share and a strong increase in profitability, provided the basis for an increase in our annual dividend from $2.52-$2.60. At this time, management will be pleased to take any questions, Operator.
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 touch-tone phone. To withdraw your question, please press star followed by the two. If you're using speaker equipment, it may be necessary to lift the handset before making your selection. Our first question comes from the line of Nick Joseph with Citigroup. Please go ahead.
Nick Joseph (Global Head of Real Estate Research and Head of US Real Estate and Lodging Research Team)
The cap rates on the acquisitions, if you could break that down between the six RV communities and the 1 MH community?
Gary Shiffman (Chairman and CEO)
I don't have them broken down, Nick, but they average together about 7.2% cap or 7.2 cap. I think that one thing that I'd point out to everybody is that when we look at cap rates, we look at the cap rates based on the trailing 12 months and without any adjustments to the sellers' operating financials. So one of the things that I think is causing some of the accelerated growth opportunity for us is to be able to get into those communities, whether it's reposition them or fill occupancy, and really get a lot of growth increase both in NOI and return on investment that we look at after we're comfortable with the cap rate and the quality of the existing community.
Nick Joseph (Global Head of Real Estate Research and Head of US Real Estate and Lodging Research Team)
Okay. Thanks. And then in your remark in the release, you mentioned the substantial pipeline of acquisition opportunities. Can you talk about the size of that pipeline and break it down, I guess, between RV and MH? Will it mostly be RVs?
Gary Shiffman (Chairman and CEO)
I think that we're still strategically looking to grow our RV communities so that we can have good movement and good marketing between the various communities and hence whether they're north and south on either coast or a little bit of Midwest down to warmer weather for the snowbirds. We'll continue to focus on the RVs, but last year we bought about $185 million of communities. In 2012, about $315 million, and in 2011, about $175 million. With the fact that we have 106 already acquired in the first 45 days of the year, I would expect to be at the higher end of those numbers.
Nick Joseph (Global Head of Real Estate Research and Head of US Real Estate and Lodging Research Team)
Great. Thanks.
Gary Shiffman (Chairman and CEO)
Yep.
Operator (participant)
Our next question comes from the line of Jana Galan with Bank of America Merrill Lynch. Please go ahead.
Jana Galan (Director)
Thank you. Good morning.
Gary Shiffman (Chairman and CEO)
Morning.
Karen Dearing (CFO)
Good morning.
Jana Galan (Director)
I wanted to clarify if the guidance, does it currently not include the $56 million of acquisitions you closed in February?
Karen Dearing (CFO)
Yes, Jana, it does not include those additional acquisitions. We're still looking at the ultimate long-term financing on those, and we'll look to revise guidance once we have a little bit better picture of that.
Jana Galan (Director)
Thank you. And then on the acquisitions that closed in January, I think that from the January press release to your earnings press release, there was an increase in the purchase price by a little over $4 million. I was curious, are you adding kind of your expectations for CapEx there or kind of what drove the change?
Karen Dearing (CFO)
The difference, Jana, is primarily in some homes and notes that we purchased that weren't in the original purchase price dollar amount.
Jana Galan (Director)
Thank you. And then just one more on expenses. I was curious, what is in the other category that drove the year-over-year decrease?
Karen Dearing (CFO)
Could you be a little bit more specific on that, Jana?
Same property.
It's the same property.
Jana Galan (Director)
Okay.
Karen Dearing (CFO)
It's the same site.
Jana Galan (Director)
Sorry.
Karen Dearing (CFO)
Yeah.
Jana Galan (Director)
I thought you had the same four expenses.
Karen Dearing (CFO)
Other expenses for the quarter, that's a decrease of about $300,000.
Jana Galan (Director)
Yes.
Karen Dearing (CFO)
That's primarily a decrease in advertising costs.
Jana Galan (Director)
Thank you.
Operator (participant)
Our next question comes from the line of Ryan Burke with Green Street Advisors. Please go ahead.
Ryan Burke (Analyst)
Hi. Good morning. Just continuing the last question, is that decrease in advertising costs something that we should expect going forward, or was it more of a one-time decrease?
Karen Dearing (CFO)
I think that is something that will be a one-time decrease.
Ryan Burke (Analyst)
Okay. Great. Thanks. And then just on your guidance, if you could just elaborate on what you're seeing on the ground that is driving the strong projection of occupancy gain for the year and perhaps just provide an update on how that affects your thinking on the rental program?
Gary Shiffman (Chairman and CEO)
Well, I think that occupancy is getting to be a function of the strong growth in applications. We've shared, I think, in the past, certainly our thoughts on the success of the rental program to be used as a tool to fill up what would otherwise be vacancy. And I think we also indicated on the last call that the growth in the rental program from this point further would mostly be related to expansions and acquisitions as in places like Texas and Colorado. How many communities, Karen? They're decreasing or as a percent?
Karen Dearing (CFO)
Yeah. If you're looking at the rental program and looking into 2014 guidance, we're really seeing in that rental program about 28% of our communities are projecting a decline. In Texas, about half of the rental program communities are budgeted decline. Colorado, as Gary mentioned, another full occupancy state is three of four communities. And also, we're looking at declines in Michigan in about 19 communities where they're primarily the Kentland portfolio that's at full occupancy now, the portfolio that we purchased in June of 2011.
Gary Shiffman (Chairman and CEO)
The applications result in both sales and the rentals, and they help us accelerate the growth. So I think that accelerated occupancy and same-site growth goes hand in hand with the success of that program.
Karen Dearing (CFO)
I think it also just look at occupancy gains. Ryan, Michigan, Indiana, Ohio are still driving 50% of occupancy gains. I'm sorry. Michigan is about 45% of that. We are continuing to project. We have some room there in occupancy, so we'll continue to have gains there. And Indiana, I think it gained about 290 basis points in 2013, so we'll see some additional gains there.
Ryan Burke (Analyst)
Great. Thanks for the insight. That's definitely helpful. Just going back to the 18% increase in applications, I assume that's a total portfolio number. Do you happen to have more of a same-store number in front of you by chance?
Gary Shiffman (Chairman and CEO)
I do, just in case someone asked that question. It's about 13.5%.
Ryan Burke (Analyst)
Okay. Great. Thank you very much.
Gary Shiffman (Chairman and CEO)
Sure.
Operator (participant)
Our next question comes from the line of Phil DeFelice with Wells Fargo Securities. Please go ahead.
Phil DeFelice (Equity Research Analyst)
Good morning.
Gary Shiffman (Chairman and CEO)
Morning.
Phil DeFelice (Equity Research Analyst)
Just as a reminder, do you include the rental occupancy in your overall occupancy stats? And is it included in your same-store NOI numbers as well?
Karen Dearing (CFO)
Yes. The rental program occupancy is included in our total portfolio and our same-site occupancy. The rental program is about 17% of total occupancy.
Phil DeFelice (Equity Research Analyst)
Okay. Thank you. Just to stay on that theme, what is the average life of stay for renters in your communities currently?
Karen Dearing (CFO)
In the rental program, we have about, I think it's about a 65% renewal rate. And so it's about two years.
Phil DeFelice (Equity Research Analyst)
Okay. And what are your expectations for recurring CapEx per site in the coming year? It looks like you took it up a bit in 2013, and we're just wondering about the pace around 2014.
Karen Dearing (CFO)
I think we talked about it in an earlier call that we did do about $4 million of one-time road improvements, particularly in our Midwest portfolio in 2013. Guidance has about $11.5 million or $160 per site in it for 2014.
Nick Joseph (Global Head of Real Estate Research and Head of US Real Estate and Lodging Research Team)
Great. That's helpful. Thanks a lot.
Operator (participant)
Our next question comes from the line of David Harris with Imperial Capital. Please go ahead.
David Harris (Analyst)
Hi. Good morning. Good to see the dividend increase. Gary, I wonder if you could share with us the factors that you and the board consider when setting the growth rate and also what factors you think might be relevant in that consideration as we go forward?
Gary Shiffman (Chairman and CEO)
I think that the board looked carefully at the fact that the last dividend increase, I believe, was 2005. Before that, we had a policy basically looking for a payout ratio of 80% or so as a trigger point. When we were at that level, which we are again today, we generally had a board that was looking to balance the cost of capital and the use of the capital by the company versus increasing the dividend. The policy generally was to increase it at a level around CPI. I think that there was a lot of discussion with the board of directors looking at the same types of things and where we are right now and the potential for putting capital to work as well as growing the dividend for the shareholders.
After discussion, this being the first increase of dividend that we've had in such a long period of time, we had come to that agreement in principle that it's a good place to start, and we would hope that based on the continued growth that we're expecting to see, that there would be more of it as we examine it in the future.
David Harris (Analyst)
Well, just to elaborate on that, there's a big difference between CPI and what the 80% ratio would get us to. Is it something sort of is it reasonable to think it's going to be something down the middle? I mean, I know you don't want to get ahead of a board decision here, but is that a fair assessment as we sit here today?
Gary Shiffman (Chairman and CEO)
I wouldn't forecast anything out into the future as where it would or wouldn't be, but the discussion really triggered around putting the retained earnings to work. As I discussed, we do have a lot of acquisition opportunity. We have been committed to being pretty debt neutral moving forward with the balance sheet. I think it was the right message to our shareholders that we did want to increase the dividend, but that's the amount that the board felt comfortable doing at that time.
David Harris (Analyst)
Okay. Now, you talked about the expansion. Maybe I missed this. You'll forgive me. Did you talk about the dollars expended in 2013 on around expansions and what you might be looking to spend this year?
Karen Dearing (CFO)
Expansion capital expenditures were, I think, about $18 million in 2013. We would expect a similar number in 2014.
David Harris (Analyst)
Okay. And here's another question for you, Karen. I think you are sticking by your first quarter guidance of $0.92-$0.94 per share that was issued in mid to late January. We've had an awful lot of snow since then. I mean, is there a question that we should be thinking about some higher snow removal costs at the very least on the expense line?
Gary Shiffman (Chairman and CEO)
That's an excellent question. Two very mild winters might have caused us to decide to pay by the snowfall, and then something like this takes place and we're bombarded by a very snowy winter. But there's nothing that I'm aware of that would be significant with regard to snowfall. I think that I've been watching closely with the ops department as to the effect on applications. And I will share with you that the cold weather doesn't serve to advance the applications like we would like, but I really, at this particular time, on a quarterly basis, would not expect to see any significant changes due to the weather.
David Harris (Analyst)
Yeah. You understand where my question is motivated from, the number of days and hours I've spent shoveling my drive, so.
Gary Shiffman (Chairman and CEO)
Yeah. I'll ask.
David Harris (Analyst)
All right, guys. Thank you.
Operator (participant)
As a reminder, ladies and gentlemen, if you would like to ask a question, please press star followed by the one. Our next question comes from the line of Tom Lesnick with Robert Baird. Please go ahead.
Tom Lesnick (Analyst)
Good morning. I'm standing in for Paula. It looks like legal taxes and insurance went up pretty significantly year-over-year. How do you expect that trend to continue into 2014?
Karen Dearing (CFO)
I think legal costs, that increase in the quarter, Tom, is about 50% legal costs and 50% property and casualty reserve. I don't expect there to be a significant increase in that year over 2013 and 2014.
Tom Lesnick (Analyst)
Okay. And then just looking at G&A, real property G&A sequentially, it got a little bit of a bump there. How should we be thinking about that run rate going forward?
Karen Dearing (CFO)
I think that if you looked at the quarter, it's up about $2.2 million. Excluding deferred compensation, amortization, it's up about $1.6 million. That's primarily salaries, wages, and some incentives. I think what our G&A is showing is that while we definitely do a great job of leveraging our team members and our systems, we really did have to make an incremental investment in our support staff and system. Realizing that we've increased our properties by 40% in the past couple of years, the number of employees in the field have increased by about 60%. And transactional accounts just really continue to climb. Things just such as invoice processing are up 60%. So I think we're confident we've made the appropriate investments in our staffing, and we're making the investments in technology to gain efficiencies in our workflow.
I think that with the guidance that we have out there for 2014, we really are confident we've provided the scalability in our admin staff to support the acquisitions going forward.
Tom Lesnick (Analyst)
All right. Great. That's very helpful. Thank you.
Operator (participant)
I'm showing no more questions at this time. If we'd like to, oh, we have one more question from the line of Joshua Plasket with BMO Capital Markets. Please go ahead.
Joshua Plasket (Managing Director)
Good morning, everyone. Building on the G&A discussion, I'm curious to understand what kind of incremental investments you've made in your online reservation system and call center for the additional RV communities. Where are most of the RV reservations made today? Is it a variety of sources, or is it increasingly moving to the web?
Gary Shiffman (Chairman and CEO)
That's an interesting question, Josh, because with the increase in G&A and, as Karen shared, with the influx of all the additional work by the growth of the company, it's something that I have been watching from the same standpoint. There has been a significant portion of the investment to develop online web presence where the reservation can actually be made fully automated, so there is no need to actually speak to a person. We have seen growth in online reservations, mind you, on a very small base of several hundred% since it's been implemented approximately two and a half months ago. I think the investment in social media is a good part of the technology being put in place.
The balance of it is that while we were only six months in the RV business, as we've shared, because we were in the south, we've now expanded to a northern presence, which is the opposite season. While we're levering the systems and the personnel, in large part, what we've had to do is put in enough support staff to be scalable for the additional acquisitions. So, am I asking the same question of management, what to expect with regard to G&A? Because certainly, we would like it to become a lower percentage of our asset value. I am quite confident that the growth that's taking place now will be most of what's in place for the next couple of years. So I wouldn't expect it to keep going.
Joshua Plasket (Managing Director)
Okay. Interesting. You mentioned that your online system has been up for a few months now. Do the people that you buy these RV communities from have any functionality along those lines? What do you think you can do with revenue at those communities just based on this greater interface with the customer?
Gary Shiffman (Chairman and CEO)
So I would invite you to call, or I'll have our Chief Operating Officer who's intimately involved with the growth rates and the expectations and the budgeting. But I can share with you that their expectations are for high growth online. Additionally, one of the things I left off is that we moved our call center from Florida up to our home office so we could have more oversight, and it's now more central to all of our communities that we've acquired in the RV business. So that call center investment is also in place, up and running, and incrementally seems to be reason for a lot of the double-digit growth we're anticipating for 2014 reservations. But if you want, I'd invite you to reach out to John McLaren, and he could give you exact expectations.
Joshua Plasket (Managing Director)
Okay. I appreciate it. Thank you.
Gary Shiffman (Chairman and CEO)
Okay.
Operator (participant)
We have no more questions at this time. I would like to turn the conference back over to Mr. Shiffman for closing remarks. Please go ahead.
Gary Shiffman (Chairman and CEO)
Well, I'd like to thank everyone for participating. I feel that we really are proud and pleased to have presented the results for year-end and looking forward to reporting results each of the quarters in 2014. As usual, if you have any questions for Karen, myself, or anyone else at the company, we're available at any time. We'll wind it up right there, and I hope that the snow slows down a little bit for everybody on the East Coast. Thank you.
Operator (participant)
Thank you, sir. This now concludes the Sun Communities' 2013 fourth quarter conference call. Thank you for your participation.