Q3 2020 Sun Communities Inc Earnings Call

[music].

Thank you for joining us today for Sun communities third quarter 2020, <unk> earnings Conference call.

At this time all participants are in a listen only mode.

Question and answer session will be getting after the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

Please note. This conference is being recorded I would now like to turn the conference over to your host Gary Shiffman, Chairman and executive Chief Executive Officer. Thank you you may begin thank you.

Thank you operator, good morning, and thank you for joining us today as we discuss our third quarter results and provide an update on the continuing impact of COVID-19.

We hope that you and your families are staying healthy and managing through this challenging time.

We're now in our seventh month of navigating the pandemic and we're pleased to share that our performance continues to exceed our expectations.

Our commitment to the safety of our residents guests and team members remains our top priority and we are balancing this responsibility with her pledged to the labor Sun signature service throughout our communities I'm resorts.

In addition to the solid performance delivered in our manufactured housing and RV portfolios. We're excited to further expand and enhance our platform with the pending acquisition of Safe Harbor Marina.

Safe Harbor brings a high quality rental revenue stream.

This diversity in terms of geography and customer base.

That is expected to further enhance sons earnings growth potential over the long term.

We are pleased with our results for the third quarter.

<unk> portfolio continued to build reservation momentum on a week over week basis and manufactured housing continues to see increased demand given the need for affordable housing.

We outperformed the initial expectations discussed during our second quarter earnings call in July primarily due to the strong performance of our transient RV business and related ancillary income generated at our resorts.

Our third quarter forecast guided to a net reduction due to the impact from the virus of up to $15 million from our original budget.

As the quarter progressed, we continued to perform better than forecast expectations, and ultimately outperform that forecast by approximately $20 million.

Her being proved to be a preferred method of vacationing across the country due in large part to the ability for travelers to drive to have more safely vacation and our resorts enjoying the outdoor lifestyle, while remaining socially distance.

Our reported core FFO per share was $1.60 for the third quarter, 9.6% ahead of last year.

The 5.5% same community NOI growth delivered in the third quarter.

Scores, the resiliency of our platform and the demand for our product.

In the quarter, we grew same community occupancy 200 basis points to 98.8%.

Additionally, during the third quarter, we deployed approximately $205 million and the acquisition of two manufactured housing communities and five RV resorts totaling approximately 2500 developed sites and an additional 109 expansion sites.

The majority of these acquisitions came to us through our long standing industry relationships.

Our pipeline of single assets small portfolios of manufactured housing and RV is as full as ever.

So it just continues to see the benefits of the transaction with Sun given certainty of execution.

Tax department strategies, and the knowledge that Sun will improve and continue managing these assets to the best possible standards.

We also completed the construction of approximately 685 sites across or expansions ground up and redevelopment projects, bringing total development sites delivered for the year to almost 1200 11 communities and resorts in nine states.

On September 29, we announced the pending acquisition of Safe Harbor Marina for $2.1 billion.

This acquisition will serve to expand our loyal customer base diversify our geographic footprint and add incremental revenue streams, which we believe will strengthen our ability to generate industry leading growth over the long term.

We're very excited about safe Harbor Marina and look forward to welcoming the entire safe Harbor team to the Sun family.

We anticipate that this acquisition will close at the end of this month.

We have not lost sight of the potential impact of the virus and the hardship that has accompanied the pandemic across the country.

Overall, we believe that Sun has been a net beneficiary as a consequence of customer behavior, the demand for homes and the safety of our vacation properties.

As we have said in the prior two quarters, we did not know the duration or the ultimate impact on the economy or our operations.

Thus far we have proven our ability to navigate the environment and successfully execute our business strategy.

Well the pandemic and her team has worked tirelessly to serve our residents and gas and produce the results. We are discussing with you today.

The team has demonstrated an ability to adapt.

While maintaining sound high customer service standards that are central to the business.

I would like to thank each one of our team members for going above and beyond and contributing to our outstanding result.

I will now turn the call over to John to discuss our operational results in more detail.

Uh huh.

Thank you Gary are real.

Our results <unk> third quarter speaks to the resilience of our platform as we outperformed our forecasted expectations across all of our revenue streams.

From a total portfolio perspective, we gained 776 revenue producing sites, a 1.3% increase boosting total occupancy to 97.2% up 50 basis points from last year.

This now brings our year to date revenue producing solid gains to approximately 1900 30 sites, putting us within striking distance of achieving our original Rps game budget for 2020.

The demand for our community some resorts is stronger than ever and.

Manufactured housing revenue producing solid gains totaled 1400 sites or 72% of total sales gains year to date.

910 of these gains were in manufactured housing expansion communities.

The balance of the Rps gains were 530 sites came from conversions of transient RV sites Daniel leases.

Our same community portfolio in Hawaii for the third quarter rose, 5.5%, resulting from 5.4% increase in revenues and a 5.2% increase in operating expenses, which included 1.1 million a P. P related expenses.

Adjusting for our P.P. expense same committee and why growth would have been 6.2%.

Our weighted average rental rate increase was 3.6% for the portfolio with manufactured housing at 3.2% annual RV at 5.5%.

Same community manufactured housing revenues increased by 5.4% driven by the discussed 3.2% rental rate increase and occupancy gains over the last 12 months.

Same community annual RV revenues increased by 3.6% and transient RV revenues rose by 5%.

On the expense side, while we no longer have team members on furlough, we did have payroll savings due to delayed hiring for seasonal positions.

Our rental program continues to perform well in the quarter, we had a 9% increase in applications to rent a home from Sun and our rental home renewal rate was 67% consistent with renewal trends experienced during the second quarter.

These renewal rates are 10% better than historical averages.

For the quarter total applications to live in a subcommittee inclusive of sales rose 12% year over year.

Moving to recollection manufactured housing and RV collections continued to be strong with M. H at approximately 97% and RV at approximately 98%.

Once the day collections for October are consistent with historical results.

These strong collection figures underscore the fundamental strength and stability of our balanced portfolio of manufactured housing and RV communities.

With regard to home sales in the third quarter, we sold 710 homes compared to 906 homes last year.

We had less pre owned inventory to sell as a result of higher renewal rates and longer resident tenure.

New home sales revenue grew 20% and our gross margin expanded 3.5% in the quarter to 18.7%.

This was driven by a 29% increase in our average new home price of $153000.

New home sales many of which are in our ground up developments and expansions are concentrated in Colorado, Florida, and South Carolina and have higher than average new home prices in gross sales margins.

Interesting to note our brokered home sales are up 37% in the quarter, indicating continued strong demand in our communities, which has also contributed to less inventory for sale.

Our RV business, particularly our transient RV business experience heightened demand supporting our thesis about travel preferences during the pandemic.

We experienced a consistent build them weekly demand with record visits to our websites and calls to our reservation centers anecdote.

Anecdotally, our Instagram following has grown fourfold over the last four months.

As previously discussed we saw an acceleration in the recovery of our transient RV business throughout the summer once stay at home restrictions were lifted in our communities.

To demonstrate the velocity of the recovery recall, the third quarter, starting with the fourth of July weekend, where our same community transient RV revenues were down approximately 5% on a year over year basis as travel had just started to pick up.

Fast forward to Labor day, our revenues were up 5.4% on a year over year basis.

Transient RV revenues for the month of September ended up being 32% better than our original budget.

This strength is carrying into the fourth quarter and we are anticipating a high single digit revenue increase over last year.

We remain optimistic in our demand outlook, given the increasing popularity of RV vacationing.

Our experience thus far with the impact the pandemic has reinforced our confidence in the durability of our cash flows and the strength of our portfolio and our strategy.

I would now like to turn the call over to Karen to discuss our financial results and balance sheet care.

Thank you John I will.

I will be reviewing our financial results followed by a discussion of our balance sheet, our capital markets activities and our expectations for the fourth quarter.

For the quarter ended September Thirtyth 2020, we reported $1.60 cents per share in core funds from operations as compared to $1.46 last year.

During the third quarter, we acquired seven properties for approximately $205 million.

The acquisitions are comprised of two manufactured home communities with approximately 1200 sites and five RV resorts with approximately 1300 sites and just over 100 sites available for expansion.

The properties are located in California, Florida, Michigan and Texas.

As previously communicated on September 29, we announced the acquisition of Safe Harbor worry you know for $2.1 billion, including the assumption of approximately $800 million of unsecured debt.

We intend to run the safe Harbor as a wholly owned subsidiary of Sun, retaining the existing management team and its infrastructure.

The acquisition is expected to close on October Thirtyth.

To support the Safe Harbor investment and maintain a flexible balance sheet on September Thirtyth, we launched an equity offering for 5.6 million shares.

Due to strong demand.

Offering was subsequently upsized to 9.2 million shares, including the Greenshoe, which allowed us to raise approximately $1.3 billion.

As of the end of the third quarter, we had $102.4 million of unrestricted cash on hand, and 3.3 billion in debt outstanding with a weighted average interest rate of 3.86% and a weighted average maturity of 11.4 years.

Our net debt to trailing 12 month recurring EBITDA ratio at September Thirtyth was five times.

[noise], a pandemic and its financial and operational implications continued to be a fluid situation. However, with that said and with the expectation that current operational conditions continue we are providing a forecast range for fourth quarter core FFO per share.

Based on our current estimates, we anticipate core FFO for the fourth quarter to be between one dollar an eight cents and $1.12 cents per share.

When added to our actual results for the first three quarters. It implies a core FFO per share range of $5.02 to $5.06 for 2020.

This forecast range includes but is not limited to the latest revenue expectations for our transient RV portfolio. The estimated two month contribution from safe Harbor, and the impact of our equity raises and other financing activities.

It does not include any prospective acquisitions, our capital markets activities.

Thank you for joining US today. This concludes our prepared remarks, we would like to open the call now for questions operator.

Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tell indicate your line isn't the question kill you May Press Star two if he would like to remove your question.

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We'll pause for one moment to poll for questions.

Our first question.

We'll be with Nick Joseph with Citigroup. Please proceed.

Thanks, and appreciate you providing.

Our guidance.

The two months of the Safe Harbor that will hit the fourth quarter I think previously you've talked about a 6.7% year one cap rate.

I Wonder if you could walk through the seasonality of that particularly for the winter months November December.

The year and how that's six seven.

The four quarters.

Sure Nick.

So yeah. We are obviously were highly active in the pursuit of industry leading results. So we realize there are a lot of moving parts to creating NFL estimates.

Train cold it impact pluses and minuses got contributions from acquisitions share count changes from equity raises seasonality I'm just to name a few of the items going into that high speed Blender.

For the Safe Harbor portfolio there.

There is seasonality in it so based on our underwritten EBITDA.

The fourth quarter, typically contributes about 16% to 18% full year EBITDA, rather than a pro rata 25%.

November and December for the month, it'll be in our portfolio and 2020 plus months contributed 78% of EBITDA.

Full year for full year since safe Harbor is just in the process of creating near 2021 budget as are we provide some quarterly seasonality based on our underwriting.

So their seasonality is similar to our MH and RV portfolio, but it's even more heavily weighted to Q3 and Q2.

So seasonality is generally in Q1, 15% to 17% of EBITDA.

Due to 30% to 32% Q3, 35% to 37% and Q4 is 16% to 18%.

And so we you know we're busy putting together a 2021 information and we look forward to providing some additional information on that seasonality when we provide our 2021 guidance.

Thank you that's very helpful. And then just on the transient RV given the travel restrictions of Canada, how big of a risk you see that and what's the ability.

Right now do you think the backfill with any sort of domestic demand [noise].

And Nick it's Josh Good morning, well I think the first obvious thing is.

They ought to come down and get out of the cold. Okay. There's no question.

I think the you know a lot of people are focused on whether or not the border open but I think it's important to kind of break it out into kind of two parts.

John first real is a transient business and looking back on sort of our seasonality on that yeah.

Canadian guests only represent about 5% of our yearly transient budget [noise].

And and so when you look at like Q4 that represents less than a percent of that but with snowbird season comment as you.

As you might expect we have been working on executing our plans and campaigns for months. Okay that helps secure any potential softness that may come in demand inclusive of having elevated campaigns segmentation targeted and more U.S. guests.

At this point in time I can tell you I'm very comfortable with the Proactiveness. The team has had a strategy we've employed over the last four months to offset any potential Canadian business decline domestically.

With respect to annual which is the other component of that.

Really I mean their homes or in our communities and then like I said, they want to come down another winter homes, we spoke with many of them. They still plan to come down in effect, you know somebody might come sooner <unk> to enjoy the winner warrants and I think that I think it's important to note also that our annual guests are all under lease contracts or their homes look in our communities.

And we have developed and implemented a number of strategies to help support a those folks that may not be able to come down at least as early to say, while we could see some shifts where maybe some of those annual EPS might come down maybe they can't come down December maybe they can't come down to January but maybe they come down in February March April and stay a little longer as well.

So all in all I feel very confident with what we're doing from a marketing a strategic perspective to no recapture any potential offset we might.

Thank you.

Yep.

Our next question is from John Kim with BMO capital markets. Please proceed.

Thank you. Good morning, you had a very strong growth in third quarter fourth quarter.

<unk> is basically flat year over year and John You mentioned, you had high single digit growth expectations in rvs for the fourth quarter. So I'm wondering why the fourth quarter guidance was relatively modest.

Oh, I think it's primarily due to the expectations of the safe Harbor.

The safe Harbor contribution as I mentioned, a little bit earlier on when I look at the the rest of the portfolio Exempting Safe Harbor.

Between the I think the ERP.

No I think the partial year contribution from our acquisitions, along with the expected transient RV and vacation rental and ancillary contributions that will be very strong along with higher even broker commissions are those items are basically offsetting any sort of negative called the impact that we might have to.

Manufactured housing Rance, you know based on delayed or lowered rent increases annual RV impacts, our even our home sales impacts.

Okay, I mean, I mean third quarter was up almost 10% year over year. So.

And that's a core business I would assume a lot of that would carry over into the fourth quarter.

So is that really the ancillary revenue that's going to come down or I can't imagine pay Barbara alone is going to bring on that growth.

For the remainder of the year.

There's there's not an anticipation that ancillary will be a negative to the fourth quarter.

Okay.

I think your commentary uncovered an earlier remarks, there there are a lot of pieces going into a fourth quarter and beyond a post safe Harbor So oh.

We do look forward to closing the transaction at the end of the month and being able to share guidance, but sharing the seasonality.

There is a.

Is I hope it would be very helpful. As you build your models, but the.

Sensitivity of fourth quarter is a absolutely lowest ER and the RV transient as well so its represents about 15% so.

So it's not going to be a strong so it wasn't third quarter.

Hi, just overall is Q4 is lower for.

For the core portfolio based on our own internal seasonality and the way transient.

The transient business impacts that.

Back in September you gave a the booking a indication of four bookings up 20% in transient RV I was wondering if you had that same figure for the next couple of months.

Yeah, I mean, [noise] October was solidly up year over year and like we mentioned in the prepared remarks, I mean, we do expect the high single digit growth for Q4, I mean, that's that's about the best out what I can give you for the fourth quarter at this point in time.

No, but I would say that you know looking out beyond that.

You know again, that's something that we really need to include when we release guidance here in the fourth quarter.

Okay. I was wondering if you could quantify your Indian.

And customer that's your percentage.

RV revenue either.

For the year or predicted <unk> fourth quarter and first quarter.

Yeah Yep annual represents about Canadians, representing about 7.6% of annual revenue.

And Transocean is 5.1.

From Canada.

Got it okay. Thank you.

Thank you.

Yep.

Our next question is from Josh Dennerlein with Bank of America. Please proceed.

Yeah, Hey, guys I'm curious.

Curious on what you expect to do maybe on a forward basis as far as Marina acquisitions.

I think it's safe hazard standards tend to read acquisitions a year in the last two years, just curious kind of what your early thoughts are there.

[noise], Yeah, I think from a capital allocation perspective on the Marina side initial expectations are in a 200 to 300 million dollar range.

And just looking forward for the company overall I think.

We're going to continue to deploy capital in the MH and RV space.

Uh-huh, although it's getting tougher and our long term relationships, our tax advantageous structures and our trusted name recognition really continues to bear fruit for acquisition opportunities evidenced by Oh.

Over $300 million in acquisitions, so far this year and we have a very robust pipeline out an outside of the large portfolio transactions weve been able to typically deploy between 250 and 300 billion in acquisitions per year and besides that we'll continue to deploy our long term growth capital.

Expansions and development [noise].

Thanks, Karen let me maybe one follow up when you guys are underwriting or maybe when you're thinking about your capital budget.

What kind of cap.

Capex was <unk>.

You under Reagan too.

Then a wider.

Just thrown out a number there to see what you guys. How do you guys think.

How do you guys think about it and how might that compare to any gerardi.

Yes, it's a very very similar I think that when we sat down and did our underwriting and as Baxter shared on some of our early calls when we announced the deal.

Interestingly enough when you divide their entire capex on a per slip basis.

It was approximately $250 per site.

Karen's correcting me and it was 250, there's 250 and it's interesting that are ours as you know between 250 and $300 now that you have 300 sites, so pretty close to what we experienced.

So very similar to our industry and I think it just Uh huh.

Again underpins how much similarity there are certainly there are differences between the marino's the customers the business but.

But the core funded a month metals as we've talked about supply demand all the things that MH and RV are known for somewhere and then working through the Capex. It was a pleasant surprise for us to see it varies somewhere to our existing core business.

Great. Thanks, Eric.

Our next question is from John Lewis, He with Green Street Advisors. Please proceed.

Great. Good morning, Thanks for the time, John as you've gone and reinstated a their rental increases on the N.H. side can you give us a sense for kind of the average rate you're sending out today and and how that may differ around that average by markets <unk>, what's the loan once the high looking like.

Yeah as I think we might have shared this before but you know we have temporarily halted our rent increases in the spring I think you know and in response to the Unprecedent impact of Cove. It well, we reinstated those increases we elected to do it at a lower rate to both aid and supporting our our law.

Resonant soon to better secure occupancy in long term system business for all stakeholders. So I think right now, we're right about where averaging 3.2% and.

And Oh, we expect.

We would expect that to finish out 2020 at about 3% John.

Okay, Okay within the portfolio, what's kinda, what's the what's the weakest market our rental rates falling anywhere.

No I mean, there's nothing that really stands out John no I mean, we've got because of the demand that we've got throughout the country.

We've applied it on a pretty consistent basis throughout the portfolio.

Okay, Thanks, and last one for me.

I guess for anybody trying to wrap my head around the environment environmental risk for some of the marinas, maybe namely that the lake focused marinas and less about the economy, but more you know floods and droughts and the like historically have there been Uh huh.

Since you've acquired in recent years, where just the boating season is largely gone because of environmental factors and revenue on it seems just how do you. How do you think through the volatility associated with the environmental impacts on some of the marinas.

He has carried John that's a good question and then a question that we are really spend time on and diligence on during our underwriting of both safe Harbor and the other marine opportunities that we've looked at over the last four years or so and I think that one of the things that attracted us to.

Safe Harbor was their outlook on what they are inclined to want to bring into their platform and what they are inclined not to want to or exclude from their acquisition horizons and.

And we got a I'm comfortable with the fact that the current portfolio in the acquisition objectives take into account as best they can both historical indications of whatever happened.

Mostly title wise as well as droughts.

And they are focused on the big water opportunities and the coastal opportunities certainly there is a future climate risk throughout the race.

The rain ran a business at all assets. However, you look at.

Look at a those risk with regard to.

Hurricanes tornadoes storms floods title issues, but the existing portfolio, we feel has really been scrutinized and and selected well so to the best of our underwriting ability. We think it's the best the best Marino's to own insulated.

As much as possible from the environmental issues.

Okay and in recent years, how many assets.

How many assets if any have lost a considerable amount of just to add a year.

On a year to the environmental issues have there been any.

There there are none that I'm aware of that being said I'm. There have been adjustments made to docs and things like that fixed stocks are now floating docks and that capital has been invested in areas, where they've seen the benefit to putting the floating docks. It then.

And as an industry comment I think that's the way of the future. If you will where the fix moorings become less and less frequent than the floating moorings, which interestingly enough much of it is done with a floating.

Floating concrete a lot of areas injected into that concrete and I think.

I think that's the forward direction or most marinas.

Okay. Thanks for the time.

Our next question is from Samir Khanal with Evercore ISI. Please proceed.

Yeah. Good morning, everyone, Hey, Gary just curious if you can give some color around the ancillary revenue side. It was very strong in the quarter.

I mean is there are you getting I mean, what sort of boosting that number is it sort of the younger age covert and kind of how should.

How should we think about that sort of over the next 12 months considering that you know the.

Safe Harbor as well so you know I think it's about a 10% component to it the ancillary revenue as well.

Yet smears, John Hey, you know what I think it's primarily as a result of the reservation activity that we've had we've just simply had more people coming to our resorts, which drives that ancillary business at the same time inclusive vacation rental inclusive of attachment vacation rental.

Okay, and you think it's sustainable as we kind of think about sort of modeling 21 and numbers at this point the kind of the growth you're seeing.

Yes.

Okay. That's it for me thanks, so much.

Thank you Matt.

This concludes our question and answer session I would like to turn the conference back over to management for closing remarks.

Well, we thank you again for joining us today and Oh, we believe.

We believe Sun has demonstrated its durability and resiliency during these challenging times.

We look forward to sharing additional information with you and guidance on our fourth quarter call. Thank you.

Be safe.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and have a pleasant day.