Sun Communities, Inc.
Q4 2014 Earnings Call Transcript

Published: 24 Feb 2015

[Operator:]

Ladies and gentlemen, thank you for standing-by and welcome to the Sun Communities Fourth Quarter 2014 Earnings Conference Call on the 24th 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 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. The 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; 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. [Operator Instructions] I would now like to turn the conference over to Gary Shiffman. Please go ahead, sir.

[Gary Shiffman:]

Thank you, operator and good morning. Today we reported funds from operations of 35.2 million or $0.69 per share for the fourth quarter of 2014, compared to 30.7 million or $0.78 per share in the fourth quarter of 2013. For the year FFO was 148.4 million or $3.37 per share, compared to 121.5 million or $3.22 per share for 2013. These results exclude certain items as detailed in today’s press release. Revenues for 2014 increased by 13.6% from 415.2 million in 2013 to 471.7 million in 2014. And now turning to the portfolio for an overview, the fourth quarter operating results reflect continued positive trends in key aspects of the portfolio. This is our fifth consecutive year of increased annual occupancy growth, fifth consecutive year of increasing same-site NOI growth and ninth consecutive year of home sales growth. Turning to occupancy, during the fourth quarter of 2014 we added 475 revenue producing sites bringing the total annual increase to 1,890 compared to 1,885 in 2013, setting again a historic high for the Company. Total portfolio occupancy was 92.6% at year-end. Guidance for 2015 includes occupancy improvement of 2,100 sites which will bring portfolio occupancy to approximately 94% at the end of 2015. In the same-site portfolio of 163 communities, NOI growth for the quarter was 6.2% bringing the total NOI growth for the year to 7.7% the highest annual same-site NOI growth achieved since 1999. For the year revenues grew by 6.6% while expenses increased by 4.1%. Same-site occupancy increased by 1.7% from 91.5% at December 31, 2013 to 93.2% at December 31, 2014, the 2015 same property portfolio guidance is based on 177 communities and revenues are expected to increase by 6.3% with an expense increase of 2.6% resulting in NOI growth of 7.9%. During 2014, 1,966 homes were sold as compared to 1,929 in 2013. This record number of home sales was the result of a 32.9% increase in new home sales. At the same time, we received over 34,000 applications to live in our communities in 2014 again an increase of 12% from ’13 applications, included in this increase in the applications is a same-site year-over-year increase of 10%. The guidance for 2015 projects, an 18% increase in the number of home sales to 2,300 for the year, including 214 new and 2,086 pre-owned home sales nearly a two-fold increase in new home sales and a 13% increase in pre-owned home sales. Now turning for a review of the RV performance, we continue to increase the number of annual and seasonal residents in our RV communities, as well as maximizing occupancies and rental rates in our transient and vacation rental sites. Revenue growth for the annual seasonal contracts in the same-site portfolio was 10% for the quarter and 7.2% for the year. Revenue per available site in the same-site portfolio grew 11.4% for the quarter and 10% for the year. Our call center continues to handle increasing call volumes receiving just under 100,000 calls in 2014 and increasing the average revenue per reservation of the call center by 5% from $338 per reservation in 2013 to $355 per reservation in 2014. Our Internet digital presence continues to get stronger demonstrated by our year-over-year increases, page views have increased by 144%, Internet sessions have increased by 127% and unique online users have increased by just over 100% all of which has translated in a year-over-year increase of 170% and revenue generated from digital related RV activities. Guidance for 2015 projects an increase of 8% in RV revenue. And now I’d like to turn to our expansion activity with 7,600 sites owned and zoned for either MH or RV expansion, we continue to add incremental growth to the portfolio by utilizing our development experience in the high occupancy, high demand communities. Over the past three years, we’ve added nearly 1,400 sites to the portfolio 375 of which were added in 2014. We continue to experience high demand in our expansions with absorption rates averaging over nine sites per month. Plans for 2015 include developing approximately 800 expansion sites in eight communities located in Texas, California, Ohio and Maryland. Five are manufactured housing communities, four of which are 95% occupancy with strong continued demand and the fifth is currently filling up the recent expansion sites brought online in 2014. The remaining three expansion properties, our RV communities where we have an opportunity to satisfy an increasing demand. On a special note is our acquisition activity during 2014. The 59 community American Land Lease portfolio acquisition was completed in two stages; one in November of last year and the final stage on January 6, 2015. During the second half of 2014, a cross-functional team of Sun staff members met regularly to examine all aspects of the integration in American Land Lease portfolio. This included technology systems, hiring the team managers, data conversion, licensing and permitting, training, marketing, home sales and numerous other details to develop timeline and migration plans to seamlessly integrate the properties and their staff into the Sun portfolio. We’re very pleased to report that the properties are up and running in all of our systems and business is strong. Our disciplined approach to on-boarding properties and people created immediate positive momentum in the property performance indicated by RPS gains of 51 and home sales of 61 within the first two and a half months of ownership. 2015 expectations for the portfolio include NOI growth of 45% and year-end 2015 occupancy of 92% up from 90%. In addition to the American Land Lease acquisition, we also acquired an additional eight RV communities for approximately 192 million during the year. In December, we announced the intention to acquire six additional high quality communities in the second quarter of 2015. The $257.6 million Berger acquisition includes 3,150 developed sites with occupancy of 96% and includes 380 sites available for expansion. 60% of the developed sites are in age restricted communities with the addition of these properties we will have increased the size of age restricted portfolio from 10% to 12% over the last year and increased our presence in the highly sought after Florida market. In 2014, we sold 10 properties primarily located in Michigan and Indiana for proceeds of over 75 million, an additional Indiana manufactured housing community containing 798 sites with an approximate occupancy of 50% was put under contract in 2014 but due to seller financing and delays did not close until January 2015. Proceeds from the sale of this community were $18 million. No prospective dispositions are included in 2015 guidance although we continue to actively evaluate the portfolio for potential future dispositions in 2015 seeking to redeploy capital to properties and locations providing greater future returns to our shareholders. Driven by the continued strong performance of same-site portfolio and accretive acquisitions, we expect 2015 FFO per share to be in the range of $3.53 to $3.63 at the midpoint of guidance this reflects an increase of 6.2% in FFO per share. FFO per share for the first quarter of 2015 is expected to be $0.84 to $0.86 per share, included in guidance is a $5.5 million manufactured housing community acquisition expected to close within the next few weeks and the previously mentioned Berger portfolio acquisition. No other prospective dispositions are in guidance or no other acquisitions are in guidance. Additional information on 2015’s guidance including estimates of other income, ancillary revenues, the expected performance of non-same-site communities and the seasonality of transient RV revenues can be found in today’s press release. And at this time, operator, I would turn it over for Q&A.

[Operator:]

Thank you. [Operator Instructions] And we’ll take our first question from Jana Galen with Bank of America Merrill Lynch.

[Jana Galen:]

I was wondering if you could provide some comments on the current size of the potential acquisition pipeline and whether it’s MH or RV?

[Gary Shiffman:]

So Jana I would say that it stays pretty steady with what has been traditional in a environment like this there always seems to be right around 100 million of acquisition in the pipeline. And I would say that it is a pretty even mix between RV and manufactured housing. And there is a lot of inbound traffic I think that there has been a lot of no variety to the extent that some has been in the market as strong as it has been for acquisitions. So we expect it to continue we will be focused for the next six months on integrating the ALL’s transaction as well as the Berger transaction, so it wouldn’t surprise me if there was a slowdown for the next six months as we assimilate properties.

[Jana Galen:]

And it looks like on the Berger acquisition you have the financing plans in place, I guess you know anything extra that you do throughout the year how are you thinking about funding that and is that where you see potentially dispositions coming into play?

[Gary Shiffman:]

Yes, I think that’s an excellent question and comment. I think I would share with the market the purpose of the ATM was to pretty much match fund the cash needs for Berger about $31 million to close that transaction. The Company has previously committed to pretty much a debt neutral approach to future acquisitions after we did a lot of work to reposition our balance sheet. After the close of the ALL transaction, we were slightly more levered and I think that we will continue to look for that pretty much neutral approach for acquisitions and I think that we’re in pretty good shape with cash on-hand, but have the intention of maintaining that neutrality.

[Operator:]

[Operator Instructions] And we’ll take our next question from Paul Adornato with BMO Capital Markets.

[Paul Adornato:]

Sorry if I missed this but with respect to the rent increase in guidance 3.4%, I was wondering if you could perhaps break that down by property type RV versus age-restricted et cetera, is it slanted one way or the other?

[Gary Shiffman:]

I think that Paul it’s Gary and what we’ve shared with the market is that we anticipate RV revenue for 2015…

[Karen Dearing:]

Revenue is expected to be up about 8%, but the accessible frontload rent increase is just occupancy increases, but I would say that it's split pretty evenly the RV maybe a bit higher than the MH portfolio, but I wouldn’t say it is a significant difference Paul.

[Paul Adornato:]

And I guess related to that as well, now that occupancy is increasing nicely in various properties I was wondering if you’ll be pushing rates a little bit more or anticipate pushing rates a little bit more either in those properties or and again certain portions of the portfolio as occupancy increases?

[Gary Shiffman:]

Well, I think again Paul it is something that we have shared historically with the marketplaces that when you look at our historical operations we have been able to gain significant momentum in our rental increases at periods where we’re at mid-90s occupancy. I think that in looking at 2014 we slowly begun to push our rental rates in many of the communities where we have that occupancy and with the anticipation that we’ll be at 94 occupancy by the end of 2015 we would expect to see the ability to get more aggressive with the rental rates in 2016 beyond what we’re already experiencing. So I do think that is something that we will be able to implement by close of this year. And also…

[Paul Adornato:]

Yes.

[Gary Shiffman:]

And then one of the things that’s important to understand that it is more to generally rental increases have to be notified 90 days in advance of them taking place and the vast majority of them are notified so they can take place in January and so, I think about 50% of our rental increases for 2015 are already in place by first quarter. So, again as we go through the year I am looking forward to being able to share that growth in 2015.

[Paul Adornato:]

And just related to that notification are there rent restrictions or rent controls on any of the properties in the combined portfolio that is your legacy as well as American Land Lease?

[Gary Shiffman:]

Yes, in our overall portfolio there are no rental restrictions with regard to Florida there is what we referenced as Chapter 723 which provides the information of how rent will increase in a prospectus for the resident before they move in. So it is not rent controlled except for the fact that such things as notice that you’ll be tied to CPI or CPI plus a certain percentage or the higher or lower of CPI or another increase things like that exist in our Florida all age restricted communities and many of them are defined just as market rent and other than that I only know of one other community where there is some limits of rent increases but nothing that would not allow us to get our normal rental increases.

[Operator:]

And we’ll take our next question from Nick Joseph with Citigroup.

[Nick Joseph:]

I just want to touch on the rental program for a minute, so it looks like your NOI from rental program in 2014 increased by 11.8 million, can you break that down between the benefit from the $74 million incremental spend versus kind of a same-store number from your end of 2013 portfolio?

[Karen Dearing:]

I do not have that type of breakdown for you Nick.

[Nick Joseph:]

But could you walk through I guess how you think about that incremental spend in terms of an IRR, so basically what the average home price for rental you acquire what your growth rate assumptions are how or long the hold period is and kind of the terminal value at the end?

[Karen Dearing:]

How we look at that rental program is really on this basis when you look at the average market rents for those homes at $825 a month average cost for a home let's say it's $40,000, you just take out 10% for vacancy during the year or $820 and you take out $200 of monthly rental expenses you net around $525 a month you're going to be able little over $6,000 annually for that home and on that $40,000 home you have about a 16% return.

[Michael Bilerman:]

I guess I am curious, why don’t you guys it is Michael Bilerman. How come you can't provide the breakdown of same-store NOI with and without the rental program and what contribution it is it seems like it's a big part of your earnings stream and same-store or what how can you not have those numbers available?

[Karen Dearing:]

I just don’t have those numbers available for you right at this time.

[Michael Bilerman:]

But it’s a big piece same-store growth as of the portfolio?

[Karen Dearing:]

You can see in our rental table each quarter, you can see the amount of site rent that is applicable to the rental program so you can see a total number. We have not provided that between same-site and non-same-site.

[Nick Joseph:]

No is the benefit from that $72 million incremental investment in 2014 does that hit the same-store pool?

[Karen Dearing:]

Some of it does, a majority of it does although we have been growing this rental program and a lot of it is based on growing it in expansions and acquisitions, so and in core portfolio where we haven’t reached 95% occupancy. So yes some of that the benefit of that additional spend is in same-site and some of it is in the non-same-site acquisition portfolio.

[Nick Joseph:]

I know it must be very helpful to have the financial details and if you want to provide it next week at our conference, that's fine, and I do think that active disclosure in terms of items related to same-store in terms of the breakdown core versus rental given that fact you aren’t putting this capital in and it’s truly not a same-store operating, it’s a rental program, it’s not a lease program where you own a home, so I think it just needs to be disclosed.

[Karen Dearing:]

We thank you for the suggestion.

[Gary Shiffman:]

I think for those interested on a little color on what's happening in the rental program, by year-end ’14 we have actually reached what we referred to as an inflection point in the overall rental program whereby generally intend to use the rental program to accelerate occupancy and our acquisitions and our expansions and we do in fact and are seeing the expectation that there is a steady decrease in the core portfolio. We’re seeing that for 2015 as we laid out the budgets for those properties that have generally reached full occupancy of the 87 core properties, 30 are actually budgeted to applying in the rental program in 2015 in about 35 properties and nearly every core and expansion community in Texas and Colorado is expected to reduce their rental program in ’15 exclusives of expansions that we’re doing there. And then even in the 38 of the acquisition communities that we bought since June of ’11, they’re now showing full occupancy rental programs in 2015 of those communities for 2015 are scheduled for significant decline. So I think that we’ve utilized the program for many-many years. We no longer defend it because it has been an excellent program to enhance shareholder return and accelerate a growth, but true to form as we have been trying to demonstrate is that as those communities do fill up the rental program will decline in the full communities, but we will use it to accelerate growth in the ALL portfolio and where we can do expansions. And in other portfolios where we can buy vacancy based on existing cap rates and as we have shared in our presentations before accelerate same-site NOI growth.

[Operator:]

[Operator Instructions] And we’ll a question from Ryan Burke with Green Street Advisors.

[Ryan Burke:]

You’re finding some success on the use of OP units as an acquisition currency, do you view the recent OP deals more as isolated in finance or are we seeing a shift towards potential sellers becoming more aware and also more desired of OP unit deals?

[Gary Shiffman:]

Ryan it is Gary. I think that we don’t see a shift. I would suggest that Sun has a history of using OP units and the preferred operating partnership units which I think goes all the way back to us using in the first time 20 years ago and one of the things that we’re seeing as we maintain relationships and the Berger transaction is a perfect example. We issued OP units on a purchase of two properties to those same sellers 20 years ago. They were very satisfied with how the OP units have performed for them and fast forwarding to this Berger transaction which is basically the balance of the portfolio. Their first request was to take the OP units and American Land Lease a little bit similar. I think that there has been some recognition of the transformation of the platform at Sun. The improved balance sheet the success of growing to a very-very challenging period i.e. I think good management and good systems. So in looking at the valuation there has been more interest and it hasn’t acquired much sales from us to be able to use the OP units and other similar tools to acquire the properties, but I don’t see a general shift on what’s going on.

[Ryan Burke:]

And what types of things you do on the ground in terms of educating owners of manufactured home properties on OP units, I’d assumed there is a fair amount of owners out there that perhaps wouldn’t sell due to the tax effect but if they knew about OP units they may be more willing to, do you have people out on the ground doing certain types of things?

[Gary Shiffman:]

Yes, so I think the way that we manage it is because each instance is different and can get quite complicated due to tax matters in the state planning, generally our acquisitions team goes out there and then in the process of talking to a potential seller discuss the tax ramifications and determine the complexity and then we really do bring it back to our third-party experts who have been with the company for over 20 years and they have structured many of these and when if it comes either a phone call or a sit down meeting to discuss the individual aspects of what one seller might need and to try and create a tax solution for those needs. So the general acquisitions team does not get too deep into it, but they are aware of the action on the tools that we have to discuss with them.

[Ryan Burke:]

And one separate question on the composition of home sales, do you have in front of you the percentage breakout of the 2014 home sales that were in all age versus age restricted communities and do you have a similar breakout for what you expect for 2015?

[Gary Shiffman:]

We don’t that is something we can share with the market, I think that we’ve gone from 10% to 25% in all age in the last 12 to 18 months or so we haven’t broken impart like that and we’ll be happy to do so, generally we’ve shared before age restricted communities tend to have much lowered turnover, higher occupancy because of vacancies is usually related to health or in some cases death. So unless we’re buying vacancies new home sales in age restricted communities are probably much lower just due to the fact that the amount of available sites is much lower because occupancies are higher than our core portfolio.

[Operator:]

And we have no further questions in queue. Thank you for your questions and I would now like to turn the call back to Mr. Shiffman for closing remarks.

[Gary Shiffman:]

Thank you operator and I would just conclude by saying, we appreciate everyone participating on this call both Karen and I and others are always available for any follow-up questions and we certainly look forward to sharing with you our results next quarter.

[Operator:]

This concludes the Sun Communities 2014 fourth quarter conference call. Thank you.