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Sun Communities Inc
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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Communities First Quarter 2019 Earnings Conference Call.
At this time, management would like me to inform you that certain statements made during this conference 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 yesterday's press release 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 would like to introduce management with us today.
Gary Shiffman, Chairman and Chief Executive Officer; John McLaren, President and Chief Operating Officer; and Karen Dearing, Chief Financial Officer. After their remarks, there will be an opportunity to ask questions.
I would now turn the call over to Gary Shiffman, Chairman and Chief Executive Officer. Mr. Shiffman you may begin.
Good morning, and thank you for joining us on our first quarter 2019 earnings conference call. Strong performance in the first quarter has laid a solid foundation for the balance of 2019. Core FFO for the quarter was $1.18 per share ahead of the top-end of our guidance range and a 3.5% increase over first quarter 2018.
Looking across our operations, contributions were very strong from our manufactured housing and RV platforms, home sales and our rental program. The quarter's performance included strong same community NOI growth of 7.2% and the benefit from the incremental contributions of the investments we made and the expansion sites we've delivered over the last 12 months.
Our outperformance allows us to increase full-year core FFO per share guidance by $0.03 at the midpoint to a range of $4.80 to $4.88. We have also revised same community NOI growth guidance to a range of 6.4% to 7%.
As we shared with you on our year-end call, Sun has been active on the acquisition front having completed approximately $325 million of investments in seven operating communities in the first quarter. These investments are comprised for roughly 3600 sites with 83% of these sites in manufactured housing communities.
Our pipeline of opportunity remains full with prospects in both manufactured housing and RV resource and we are carefully vetting these potential investments. We believe that our long-term relationships in the industry, the ability to bring management, development, and expansion expertise, enter efficient tax structuring capabilities provide us with an advantage in sourcing opportunities.
Sun's portfolio continues to deliver strong results. Total occupancy rose to 96.4% at the end of first quarter from 95.8% in the first quarter of 2018. Demand for our communities is robust as reflected by the strong pace of applications, continued occupancy gains and home sales volume.
Before turning the call over to John and Karen, I want to take a moment to reflect on Sun's history and operating philosophy in the manufactured housing and RV resort industry.
We have been a trusted provider of affordable housing and vacationing solutions for nearly 45 years as a private and public company. That trust was earned because we have always approached this business as a long-term proposition given that Sun is our livelihood. We value our residents and guests and pride ourselves in the value we deliver through the reinvestment in our communities and world class customer service.
It is this attention to service and reinvestment that has differentiated Sun as a viable housing and vacationing option for many individuals and families across the U.S. and Canada as well as a sustainable long-term investment vehicle for our shareholders.
As we progress through 2019, we will continue to seek to execute on our four core investments strategies which are the investment in our existing portfolio; the acquisition of operating properties; the construction of expansion sites adjacent to our operating communities; and allocating capital to select ground up developments all to drive sustained industry leading results.
I will now turn the call over to John and Karen to discuss the results in detail. John?
Thanks, Gary. Sun delivered excellent operational results for the first quarter with strong contributions from each of our business lines. The largest of these is the contribution from our same community portfolio which delivered 6% revenue growth driven by a 4.2% annualized increase in monthly rental rate and a 210 basis point gain in same communities occupancy on an adjusted basis.
Drilling down further in the same community revenue, manufacture housing revenues rose 5.9% with annual RV revenue gaining 10.5% and transient RV revenues growing by 1.7% with the inclusion of recently delivered but still vacant sites, total same community occupancy is 96.4% with manufactured housing at 95.4%.
Topline performance and favorable expense growth as compared to last year drove our same community NOI increase of 7.2% for the quarter. Total portfolio occupancy rose by 60 basis points to 96.4% at March 31st, 2019, driven by the addition of 2555 revenue producing sites over the last 12 months, including the addition of 571 site gains during the first quarter.
Of the first quarter gains, 43% or approximately 250 sites were in our manufactured housing expansion communities. We also converted 165 transient RV sites to annual leases.
One element of Sun's ability to generate incremental occupancy opportunities stems from the construction of expansion sites and communities that are near capacity with strong consumer demand. In the quarter, we completed the construction of the first 67 vacant expansion sites across three manufactured home communities and are on pace to add 1200 to 1400 expansion sites in 19 communities for the year.
We also expect to deliver an additional 800 to 1,000 sites from our ground up development projects by the year end.
With respect to home sales, we continue to see sustained demand. In the quarter we sold roughly 800 homes with an increase in new home sales volume of approximately 18%.
The strong demand for new homes was concentrated in Florida, Michigan, Texas and Arizona which accounted for 77% of sales. Our new home sales margins came in better than expected at 14.5% for the first quarter as compared to 12.9% for 2018's full-year new home sales. In addition to Sun's home sales business, we provide and operate a brokerage resale business that assists our residents in selling their home.
The brokerage business has seen a 20% average increase in sales volume over the last three years providing price stability and flexibility for our residents. From 2016 through 2018, it's important to know some brokered homes have had an average price increase of almost 12% demonstrating the value that is created through our continual reinvestment into our communities. This trend has continued in 2019.
Regarding our ground up developments construction at Carolina Pines in Myrtle Beach South Carolina and River Run Ranch in Granby Colorado is progressing well and we expect to deliver approximately 600 sites by the end of the second quarter. We have already started taken online and call center reservations for these communities for the summer season.
We are very pleased with our first quarter results and with our positioning which allows us to deliver an excellent product to our residents and guests which in turn drives shareholder value. With that I'll turn the call over to Karen to discuss our financial results. Karen?
Thanks, John. Sun reported $1.18 of core FFO per share for the quarter ended March 31st 2019 ahead of the top end of previously provided quarterly guidance and a 3.5% increase over the first quarter of 2018.
This out performance was driven in part by strong annual and transient RV revenue growth as well as the net contribution from home sales driven by better than expected sales margins as discussed earlier. We anticipate that some of the outperformance experienced in the first quarter may reverse over the rest of the year due to the timing of certain property operating, maintenance and corporate level expenses.
These expectations are reflected in our updated guidance which we will discuss shortly. As Gary referenced earlier, our investment pipeline is quite active. We have invested $325 million across seven operating properties and continue to underwrite additional opportunities.
Given our consistent focus on enhancing our balance sheet flexibility, we believe we are well positioned to fund prospective investment activity. We closed the quarter with $22 million of unrestricted cash on hand and we are currently in discussions with our relationship banks to recast and upsize our revolving line of credit.
Total debt outstanding for the quarter was $3.4 billion with a weighted average interest rate of 4.39%. At quarter end, the company's net debt to trailing 12-month EBITDA ratio was 6.0 times. Our leverage ratio is 5.6 times on a pro forma basis reflecting the impact from a full year of EBITDA contribution from our recent acquisitions.
Looking at our debt maturity schedule, the company has no material debt coming due until 2021. With that said we will continue to look for financing opportunities to further enhance our liquidity and extend or improve our debt profile and balance sheet flexibility.
Moving on to guidance. We are raising our annual core FFO guidance per share for the year to a range of $4.80 to $4.88. This increase reflects the out performance in the quarter offset by expense timing over the rest of 2019 as previously mentioned. We are also revising our same community NOI growth guidance to a range of 6.4% to 7%.
As is our practice, our guidance does not include the impact of prospective acquisitions or capital markets activities which may be included in analyst estimates.
This concludes our prepared remarks. We would like to open up the call to questions. Operator?
Thank you. The floor is open for questions. [Operator Instructions] Our first question is coming from Nick Joseph of Citigroup. Please go ahead.
Thanks. Maybe just started on the update and strong NOI growth guidance. Can you walk through what the assumptions are for same-store revenue and same-store expenses?
Sure, Nick. So, as I mentioned a little bit, we didn't have higher than anticipated RV revenues and lower than anticipated utility supply and repair real-estate taxes and other general operating expenses. On the expense side we believe some of these items are simply timing and that they'll be incurred in future quarters.
So, that being said, we increase the midpoint of the same community guidance by 10 basis points. What that does, it reflects a decrease to the range of total operating expense growth to approximately 4.2% to 4.9%. Original guidance had that at 4.4% to 5.3% and our revenue growth expectations were essentially unchanged.
Thanks. And then, maybe just on occupancy for the portfolio overall, it's high but if you look at the individual states there's a bifurcation between a handful of that are very high and three specifically Texas, Arizona, and Indiana that are below the average and have been for the trailing five quarters.
Is there an opportunity in those three states to raise occupancy or is there a structural issue with those states?
Texas is really about expansions and the filling up of expansions; we've been doing a lot of expansions in that state. And I'm sorry Nick, what were the other two states?
Arizona and Indiana.
Yes. Arizona had one of the recent acquisition in Arizona had a little bit lower occupancy than our total portfolio. So, it pulled occupancy down there and there was also an expansion significant expansion at a property in Arizona also.
Indiana?
Indiana.
Yes Nick, this is John. Indiana, we actually from the end of the year to March 31st we actually saw an occupancy increase in Indiana. We had seen a little bit of a decline in 2018 much as a result of a couple of expansions there as well and now they're picking up steam when we're seeing that growth.
Thank you.
Yes.
Thank you. Our next question is coming from John Kim of BMO Capital Markets. Please go ahead with your question.
Thank you. I guess rent control has been permeating in the media mostly in multifamily but even John Oliver talked about mobile home communities on his HBO show recently. So, I'm wondering, are you sensing any discussion in your markets about rent control in your community?
I think we could probably, I'll respond to a time where obviously very sensitive to some of the materials and articles and John Oliver stories. So, we watch them very closely. We talk about it internally and there's nothing that we could point to that’s only different today than it's been in the past.
So, unfortunate. There are a few bad apples and to paint the entire industry the way it's being painted and a few negative related issues to those personalities in the industry.
And some of the things that are taking place is the industry is attracting so much capital driving the cap rates so low and we'd speculate that that is causing some of those new entrants to the industry to try and push up their returns and their investments, fast track as I indicated in my initial remarks.
It's a long-term investment for Sun as we look at communities and we look at creating value for the shareholders. So, we are sensitive to rent control but there is nothing that we would point to rate now that we are aware of.
And on the cap rate discussion, what are you seeing today in some of your markets and how that compare to cap rates maybe four months ago?
Yes. I think as I've shared and this is Gary speaking again. Last few conference calls, we've seen that tightening and compression kind of a retail level but that level is pretty surprising to us. Seeing things straight to the first time in coastal areas with the sub-4% handle on it.
We see it off and on. And we are all pretty aware of how many financial institutions' rents and other platforms have been created over the last three four years probably attracted the fundamentals that Sun and its competitors are full aware about there.
So, they've driven down cap rates and they've been pretty much at this level for I'd say last 12 to 18 months. And as I also share that cap rate is the first thing that we're looking at but it's not the last thing that we're looking at.
We're really trying to determinate Sun based on the purchase price, what kind of value can we drive over a one three and five year period of time through the obvious expense reductions, repositioning of the properties, filling vacancies, professional management, etcetera.
So, we've been able and I expect that we will continue to be able to source accretive acquisition opportunities but it is very competitive out there. And we do rely more on relationships. When we go to the auctions, we don’t quite compete at the levels some of the other funds are at but we are very competitive throughout the industry both manufactured housing and RV.
Gary, on the sub-4% cap rate transactions, are they other communities and specific markets or are they sizeable communities?
Yes, we're seeing it mostly in California, mid-to-large sized communities. Some of it a little bit, in certain areas of Florida and some of it in certain areas of Arizona and certainly some of it in the North West. But they tend to be mid-to-large communities.
I think one of the benefits that Sun has is a strong history in the last five to 10 years of acquiring properties from sellers who actually do feel a responsibility to their residence. They've had long-term ownership of the assets and how we've demonstrated the investment in those communities we've acquired in professional management and as John like to say the absolute emphasis on customer service. It has helped us a lot and that's why our pipeline is full.
It's mostly from inbound calls wanting to understand what it might look like if they would sell their properties to Sun.
My final question is on new home sales which increased significantly this quarter. I realize that demographics and financing options are major drivers. But I was wondering if obsolescence could be a major driver for home sales for you going forward?
I'm sorry John, you broke up a little bit. We heard obsolescence and then lost you there.
Or basically if obsolescence could be a driver of home sales going forward, if you're tracking the average age of your homes and if there is a sweet spot where when your home sales could increase?
Yes John, this is John. I think that the bottom line for us is that the demand for homes in our communities continues to grow and as you've seen over the last few years.
And we think that it's really more a direct result of the as Gary's talked about many times to continue on investment in our communities plus the overall repositioning strategy that takes place and at the time that we acquire communities that come into our portfolio and the sales know-how of our teams in terms of the product selection pricing in volume.
In balancing all that, we've got a lot of experience and expertise in doing that that's been able to balance that through and really what's the more paramount to all that is as we said many times is the experience that our residents have in our communities. That relationship really builds what we think is the greatest salesforce which you could have to support your brand and be advocates for your brand.
So, we get a fair amount of referral business into our communities which has led to that increase and interest in new home sales. And on top of that, what we're seeing in terms of product selection is concerned is our consumers the level of spec that they want in homes has changed versus a couple of years ago, well that's really grown.
And we've been successful in past in the majority of this on in the former house pricing along the way.
Yes. I would only add, John, that we offer affordability at all different levels, the entry level and perhaps some homes are for that and then the new homes that John's indicating are crossing retail price line that we haven’t seen in a long period of time.
So, it seems like we're working well against both ends of the model. So, we don’t see functional obsolescence per say but we will see a home that cost 20% 30% 40% less 10, 15, years ago as appealing to one group and the newer homes with the higher specs appealing to a different group.
Thank you.
Thank you. Our next question is coming from Drew Babin of Baird. Please go ahead with your question.
Gary, good morning.
Good morning, Drew.
A question on page 19 in the supplemental the breakout of CapEx. It looks like expansion and development spending just year-to-date is higher than tax fee or run rates. Obviously, as you've talked about there's lots of opportunity there but I was just curious whether that sort of $50 million number would be a good quarterly run rate for the rest of the year or whether there's kind of a -- what the amount of spending in 1Q?
Drew, that $51 million is in line with well our expectations were for the quarter. And annualizing that to around $200 million is an expectation for development and expansion spend for the year.
Okay, that's helpful. And then, or have you Karen, one more question on the balance sheet. Any more large secured loans expected for this year, will they be opportunistic or up-financing type opportunities like the one executed in the first quarter?
Well, we don’t have any significant debt maturities coming up until 2021 but just looking at funding overall and our balance sheet positioning. With our pro forma net debt to recurring EBITDA at 5.6 times and we have comfort and I think we've discussed before operating at a leverage in the low sixes.
We do have capacity to secure additional debt funding, we have a significant portfolio on encumbered properties and very strong relations and interest from lenders. So, it's a possibility but ultimately we have a lot of flexibility that will depend on the transaction pipeline overall capital need and we'll just look at all the sources that we have available.
Okay great, that's all from me. Thank you.
Thank you. Our next question is coming from John Pawlowski of Green Street Advisors. Please go ahead.
Thanks. First question's on the strategy in Canada. I guess in the next three to five years, are you most likely to grow, shrink or exit Canada?
Well, we've been pretty pleased with Canada's performance. So, our plan would be to continue to grow it, John.
Any sense for size?
Yes, I think that will depend upon the acquisition opportunity. I can tell you that our Sherkston Shores and like Gary is approaching with the most recent expansion, 2000 sites. We're now looking at surrounding land there because we can't really meet with the demand.
And I would suggest that it would be nice to think that we could double the size of our Canadian business in a reasonable period of time. Otherwise, we would look for selected disposition.
Okay, makes sense. And then, just in terms of opportunistic acquisitions at the portfolio level, when you look across the top 10 private operator list, I know a few of them have recapped in recent years but if you were if you are going to make a bet, how many of these top 10 operators you think could hit the market as the portfolios could change hand in the next happen in near term.
Again, it's Gary. Like our competitor, we're always looking to be able to expand through the acquisition of a quality portfolio. There obviously are only a handful of high quality portfolios that would be of interest to us. There have been several portfolios as everyone's aware that have transacted but not fit the profile of us or our competitor.
So, with that handful, we'll carefully watch them. There's none that I'm aware of that will be coming to the market near-term. One thing that we are finding though that might influence that over a period of time is that with a little bit of the market volatility that's come and gone over this last 12 month period of time, sensitivity to what may or may not happen with interest rates, the length of the economic run.
We are in more dialogues with high quality owners of properties that might be one or two or three type community owner operators that hadn’t previously been considering a sale. But I think in a lot of cases due to the market circumstances I just described, the age what's happening generally generationally with the management.
We're able to really review opportunities that weren’t in front of us a year ago but they are one reason to this.
Yes, understood, makes sense. Thank you.
Uh-huh.
Thank you. Our next question is coming from Samir Khanal of Evercore ISI. Please go ahead with your question.
Hey, good morning guys. So Gary, what's the update on your Australian joint venture at this point, just trying to understand some of the opportunity set that you see possibly for this year?
Sure. We will be breaking ground late this quarter on our first joint venture. It's in a place called Burpengary, it's about 40 miles, 40 minutes north of Brisbane and what they call the way to their sunshine coast which is a really fast growing retirement corridor. It's a 131 approved and developed sites for 46 some are redeveloped but the purchase for 131 is $12.1 million.
There are a 102 additional sites requiring approvals that we'll be paying just under $6 million for. So, we hope by the end of this quarter or fairly third quarter to actually be moving homes and selling homes onto that first group of 46 sites that are developed. And then, we do have a second JV site identified and we would expect to acquire it and be in the ground very late this year.
So, we look forward to really updating everybody when we've closed and put a shovel on the ground, started moving in houses in Burpengary.
Got it. Okay, thanks for the color. I guess my second question is around the operating expense side. Just sort of maybe you can talk generally about sort of the pressures you're seeing kind of on the real-estate. Are the property taxes side, 6% you did was better than sort of what you're forecasting.
So, maybe just a color around kind of what you're seeing on real-estate assessments and maybe property taxes?
Yes. As you noted the real-estate tax expense growth in the same community was lower than what we expected. It's pretty early in the year when it comes to getting in your tax assessments, so we do see this a potential pull over, so with that benefit.
As we do continue to see pressure on our assessments in several states including Florida, including Texas and we do so much expansion work and real-estate taxes are impacted by the completion of construction and expansion sites also.
Got it. I guess my final one is on the acquisition side. You did over 300 and $300 million in 2018, you've already done $320 million in 1Q. I guess what does that opportunity set look like for the remainder of the year. I mean, you've talked about sort of additional opportunities you're looking at.
I mean, how should we think about that?
Well, we can't forecast exactly what we think will happen within the pipeline but I think we can share that our equity raise from 2018 leaves us with capacity to move forward comfortably. And I think that you will see something that looks like the $100 million to $200 million range that we feel we will be able to close on over a maybe 12 month period of time.
But it's hard to tell what that choppiness will look like on the closing side from quarter-to-quarter. And I guess if we understood it better, we could include it in forecast and guidance but we're just going to have to wait till we actually close them.
Okay. Thanks, so much.
Uh-huh.
Thank you. Your next question is coming from Wes Golladay of RBC Capital Markets. Please go ahead with your question.
Hey, good morning everyone. Can you tell us how the transient segment is performing excluding the conversions I guess comparable to larger RevPAR maybe a RevPAS in this case?
Hi Wes, this is John. I can tell you that when we talked about in our prepared remarks we saw 1.7% growth in transient in Q1. This is really a reflection of the seasonality associated with our revenue stream. And we would expect it to be a little bit lower in Q1 because the revenue generated is in southern resorts which have the highest concentration in annual residence.
Looking out forward, we expect to achieve our guidance growth rate of 2.9% to 3.0% for 2019 transient, even with them fewer transient sites available to lease as a result of the success we had in the transient guest annual lease conversion that you mentioned. Got that RevPAR?
We don’t have our -- we don’t have the RevPAR right in front of us.
Okay.
But I think we could probably follow-up with turning and I will get that later.
Yes, okay. Yes, fantastic. Okay, and then my next question would be for development starts in North America this year has or for the next 12 months, how many do you plan to do and then we'll this would be between RV and manufacturing?
I think we see three that I can refer to right now new developments and then actually split one is a RV community, one is a strictly a manufactured housing community; one in California and one in Colorado; and then a third one that we're looking at on the East Coast which would be a hybrid both manufactured housing and RV in one new development.
Okay, thank you very much.
Uh-huh.
Thank you. Our next question is coming from Todd Stender of Wells Fargo. Please go ahead with your question.
Hi, thanks. Just to follow-up on the new home sales. I guess, think there's two questions tucked in here. The price points, now that we're seeing they're well in excess of a 100,000. Can you speak at one how residents are financing these higher prices?
And then two, this affordability among these type tenants who can pay these kind of prices. When I look at your base rents going up 4.1% just suggest that folks can afford rising rents and higher prices. Maybe could you just talk about this kind of dynamic you're seeing?
Yes, I think that with respect to the pricing itself, again it goes back to sort of what consumers are wanting first and foremost is driving a little bit of that. And it does vary geographically where we've got for example we talked about this couple of years ago with the repositioning of a particular community called Ocean Breeze in Jensen Beach, Florida.
These are homes that would typically be on stilts because they're right on the water and so they're going to be a little bit higher priced. But we have to look at that relative to the market and what surrounds you. Okay, when you think in terms of what affordability is.
We might be selling a house there as an example for $150,000, $160,000, $170,000 where everything around us is selling $300,000, $400,000, $500,000. So, within that specific geographic area, or I could say that pretty much in every market that we're in. we are in a sweet spot of affordable housing.
So, relative to everything else, that's what makes it work. And then if you don’t mind, just one more time on the second part of your question I’d appreciate?
Sure, thanks John. The monthly rents are up 4.1%. So, you're obviously having your occupancies are extraordinarily high, it allows you to push rate, totally understand that, but it's still affordable housing at the end of the day. But maybe your answer regarding affordability kind of points to that and push rate in some of these markets.
Yes. It's all relative within the given market, it's basically what it blows down to which is why we carefully look at that on an individual property basis whenever we're going through that rent increase process.
Alright, that's helpful. And just, my final question just to stick with you John. You gave some new supply numbers. When you talk about this split between expansion and ground up for 2019, can you give those numbers again?
The guidance numbers?
Yes, please.
Yes. So, the guidance numbers for expansion was 1200 to 1400 side and for ground up was 800 to a 1000.
And any internal rate of returns or yield expectations split between those two?
Yes, sure. I think that in an underwriting model for the new development side of things we look for something in the very high single digits and levered internal rate of return. And we are generally pretty comfortable that we're targeting in but that's on a three-year four-year stabilization with RV communities.
And approximately a five-year stabilization and manufactured housing communities when we think of 300 site communities and the cases of what we have under development right now, these communities are closer to a 1000 or greater than a 1000 sites. Each one they'll be fully developed out.
So, we still feel pretty comfortable with the way we're thinking through. And modelling things and having to time down some of the takedowns of future phases in order to hit those hurdles. So, we're not going in there building everything at once, we're kind of carefully phasing on one phase at a time. And the expansion side, Karen you want to share?
Typically on a four to eight per month sale on a typical 100 to a 150 site expansion we're looking at five year unlevered IRRs in the 11% to 14% range.
Great, thank you.
Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments.
We just, I like to thank everybody for participating today and we look forward to sharing our earnings next quarter. Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time. And have a wonderful day!