Sun Communities, Inc. (SUI) Q3 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Sun Communities third quarter 2014 earnings conference call on the 30th of October 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 Jeff Jorissen, director of corporate development. [Operator Instructions] I would now like to turn the conference over to Gary Shiffman. Please go ahead, sir.

Good morning, and thank you, operator. Today we reported funds from operations of $42.1 million or $0.96 per share for the third quarter of 2014, compared to $31.2 million or $0.82 per share in the third quarter of 2013. For the nine months of ’14, FFO was $113.2 million or $2.69 per share, compared to $90.9 million or $2.44 per share in the nine months of 2013. These results excluded transaction costs related to acquisition activity in all periods. Revenues for the nine months increased by 13.5% to $352 million in 2014, from $310 million in 2013. This has been a very significant quarter for the company as highlighted by the following: the execution of a definitive agreement for the acquisition of the American Land Lease portfolio, which when closed adds 59 high-quality communities in desirable markets and nearly 20,000 sites to the company’s portfolio while increasing our total enterprise value by one-third to over $5 billion. On the other hand, we’ve sold six Midwest communities in the quarter, bringing the total dispositions to ten for the year. We also realized nearly $350 million of proceeds from the sale of equity as we continue to closely manage our leverage. And while all this was going on, operations and sales were performing at the very highest level. Same-site NOI increased by 9.2% and we added 428 revenue producing sites. We also have sold 80 new homes during 2014, an increase of 50% from the 2013 new home sales of 53 through nine months. FFO per share grew by 17% for the quarter over 2013, and 10% for the nine months over the 2013 period. And now I’d like to turn to a portfolio review, starting quarter occupancy. During the first nine months of 2014, revenue producing sites increased by 1,415, compared to 1,312 site in the first nine months of 2013. For the quarter, occupancy increased by 428 sites, compared to 197 the prior year. In the same site portfolio of 163 communities, revenues increased by 6.6% in the first nine months, while expenses increased by 3%, resulting in an NOI increase of 8.2%. For the quarter, expenses increased at a slower rate and NOI increased by 9.2%. Same-site occupancy is at 92.9%, compared to 91.4% in the prior year. Home sales for the first nine months were 1,414 compared to 1,433 in 2013, which is the all-time nine-month record. Home sales are fully recovered from the first quarter, which was impacted by weather and new administrative requirements. Rental home sales, which are included in total home sales, were 562 and 689 for the respective nine-month periods. We also received over 26,000 applications to live in our communities through the three quarters, an increase of 13% from 2013. We’re on track to complete 405 expansion sites by the end of 2014, and have been experiencing high demand and absorption rates at the high end of our pro formas. We have an additional 850 sites planned for development in 2015, with expansions planned in Texas, Georgia, Maryland, and California. The Texas expansion of 98 sites, which opened April 1, 2014, has been filling at the rate of 12 sites per month. The Colorado expansion of 158 sites, which opened July 1, 2014, has been filling at the rate of nine sites per month. And now, what I’d like to do is turn to our RV business. Since the fourth quarter of 2011, we’ve acquired 29 RV resorts in 14 different states across the country. As of September 30, the portfolio consists of 44 properties and represents approximately 25% of our total sites. Further, the 18,000 sites are distributed almost equally between north and south resorts, with 8,000 in the north and 10,000 in the south. This balance provides a platform for our marketing and sales teams to be fully effective throughout the year. Now that 25 of the RV communities have been incorporated into the same-site data, we thought it would be a good time to highlight their performance. For the three and nine months ended September 30, 2014, same-site revenues inclusive of annual and seasonal revenue, which is recognized the same as manufactured housing, plus transient revenue, increased by 7.4% and 6.8%, both representing higher rates than the entire same-site portfolio. Transient revenue in our northern resorts owned over the three summer holidays - Memorial Day, Independence Day, and Labor Day - increased by 22% over the prior year, demonstrating the strong appeal to vacationers who wish to be confident of a high-quality and special experience. The call center implemented at the beginning of 2013 to support our RV communities is beginning to make a significant impact. So far in 2014, we received over 100,000 incoming calls, emails, and web chats, which is up 131% from 2013. Reservations made through the call center have increased from 11,000 to 23,000, and the average revenue per reservation increased from $294 to $338. We continue to strengthen our presence and offering on the web and in social media. Guidance for the remainder of 2014 assumes the completion of the acquisition of the first 34 American Land Lease properties in mid-November 2014, excludes transaction and debt extinguishment costs, and includes dilution from our recent equity offering. FFO per fully diluted share is expected to be $0.67 to $0.71 for the fourth quarter, bringing 2014 full year guidance to $3.36 to $3.40. Additional information regarding updated guidance can be found in today’s press release. We know that there’s a lot of interest in our 2015 guidance in light of all the activity this year. We look forward to closing the first group of American Land Lease communities, completing next year’s budgeting process, and providing 2015 guidance as soon as possible. And at this time, operator, we’d like to open it up for any questions.

[Operator instructions.] And we will take our first question from Paul Adornato with BMO Capital Markets.

Appreciate all of the color on the same-store performance. I was wondering if I could just drill down on that a little bit more. Gary, could you tell us, on the same-store portfolio, what regions of the country might be doing a little bit better? And also, which buckets? That is, the family or the retiree portfolios?

I think the color that we can give you is pretty similar to what we’ve discussed in the past. I think we’re seeing strength as we reach full occupancy. Certainly in Texas, Colorado. Approaching nearly full occupancy in Michigan, full in Florida and most of the East Coast. And still lagging behind in Indiana. A couple of recent dispositions relate to that area, and we’ll continue to look for the potential dispositions, perhaps, in that area that’s lagging behind as well.

And looking at the ALL portfolio, thanks for providing some information on that. Was wondering, do you know what the same-store might look like with that portfolio?

It won’t be in the same store portfolio until 2016 and 2017, so I don’t have that information.

And you said you have 26,000 rental applications that relates to how many rental openings? I guess what I’m looking for is how many applications per opening do you have?

We’ve got 92.5% occupancy in our total portfolio, with developed sites of about 61,000. That’s 7.5%.

So those are for rental. You have 26,000 rental applications for how many rental sites?

Those applications are for all of our sites, both our rental portfolio and for our same-site portfolio. So basically, our applications are about five to one for any of the sites that we have available. And then we have the turnover from the rental program that occurs, that’s available also.

And our next question is from Dave Bragg with Green Street Advisors.

Gary, it was interesting that in the press release, the lone quote attributed to you was about incremental acquisitions opportunities. Can you talk about that outlook more, including whether or not there are portfolio opportunities out there?

Yeah, I can share with you that the pipeline, as I indicated, remains strong. It’s very similar to what it has been for the last 12 months and the last 18 months. We’re hoping to share guidance in the near term without acquisitions, which we typically don’t provide in guidance, but also give you a sense of the pipeline and our expectations for the year. I would say, barring ALL or the American Land Lease portfolio, in 2014, at the beginning of the year, we estimated approximately $200 million of acquisitions based on the average of the two previous years, and I would share with you that’s the approximate pipeline that we’re sitting with right now.

If a portfolio opportunity of much greater size than that were to emerge, is the organization prepared to integrate that at the same time as Green Courte, or would you hold off?

I think it would depend on the specific opportunities to be able to answer you correctly on that. I’d say two things that we clearly recognize, that it’s one thing to ink an acquisition, it’s another thing to integrate it. I would turn to our portfolios, whether they be the [unintelligible], the Rudgate, just about anything over the last five years that we’ve acquired we’ve integrated very, very smoothly, in particular the manufactured housing integrates very, very nicely into our system. And the one thing that’s taking place that’d I’d share with those people on the call and those people I’ve spoken to is that the Sun management and operations team, the finance team, the HR team, began working on the integration immediately after the transaction was announced. They meet formally, in every department, on a weekly basis. They meet informally doing their work. And in fact, we have all of the ALL staff coming in for training over the next two weeks in advance of closing. So we’re very encouraged by what we’re seeing so far. We have the same software, so time will tell. And this was a long way of saying that I would expect to be in a position to continue to acquire other opportunities that made sense for the company, shortly after we’re in a position to say that we’ve comfortably integrated ALL.

One more topic for you. There’s been a lot written and discussed lately about changes at FHFA and Fannie and Freddie that could spur increased home ownership and that’s primarily concentrated on single family homes. But what changed might you expect or hope to realistically see to spur the ownership of manufactured homes, both age-restricted and all age?

Well, I don’t want to be negative by any means, but I’m now going on 30 years in the industry and Sun’s been public for just 20 years. And throughout all that discussion with Fannie and Freddie and the other government sponsored programs that are chartered to provide support to affordable housing, it’s still very challenging for me to point to them making a real positive step into that area. I think that most of it right now is focused around changes to the underlying characteristics of approval for site built. But I certainly would like to be optimistic and hopeful that there are some things that will cover and benefit the affordable side of things. I just can’t point to them right now.

We will now take our next question from Jana Galen from Bank of America.

Thank you for the metrics on same-store revenue growth in your RV portfolio. Last quarter, you had provided same-store NOI, and I was wondering if you happened to have that breakout.

No, we don’t break out NOI between RV. Most of RV is so similar to MH that we don’t break it down to NOIs.

Also, you had mentioned on this call doing potential disposition beyond the ten that you’ve already closed, possibly in Indiana. Just wondering if you have any timing and potential proceeds.

I think that we’ll be able to share that on our next call, when we are able to issue guidance. At this time in the company, we’re just completing our 2015 property budgets, and then we will go into a review of assets and those that are under discussion for disposition will kind of surface, and the management team will be able to share that information as soon as it’s completed.

And we now have a follow up question from Paul Adornato with BMO Capital Markets.

Gary, you mentioned that the web has become an increasingly important marketing tool for you guys. And from looking at another highly fragmented sector, namely self-storage, those operators report that the web has really, really become a very, very strong driver of growth and of market share gains for that group. Do you think it’s as strong for your industry? I guess another way to ask the question is, do your customers use the web extensively?

That’s a great question, and what I think I’d share with you is that I personally was quite surprised to see the activity that takes place on the web, and the wide spectrum of our residents that actually use it. I think there are some proprietary things that Sun has done to encourage and benefit what we’re doing on the web. And to your point, I think that investment and focus on how we generate additional online business is really a large part of what we’ll be looking at for 2015. So we are very focused on it and our expectations are that it will continue to be a very important and fundamental piece to expanding the business.

Paul, just to put some numbers to it, over 50% of our applications of those 26,000 applications come in through the web.

Do you also look at what competitors are doing and kind of compare and see what they’re up to?

We do. I’d like to think that we’re on the cutting edge, if you will, of some of the things that we will be able to roll out in 2015. For us, the actual online sign up was probably first in the field, where it’s more than leaving a message and we’ll get back to you. People can actually drive right to make their reservations, get their confirmation on the web, and not have to really talk to an individual at Sun Communities. That’s where we’ve seen an increase in usage through 2014.

And thank you for your questions.