Sun Communities, Inc. (SUI) Earnings Call Transcript & Summary

Hi, everyone. This is John Kim. We're ready to go. This is John Kim at BMO Capital Markets. It is my pleasure to moderate this presentation at the virtual NAREIT for Sun Communities, a leading owner and operator of manufactured housing and RV communities in the U.S., Canada and more recently, Australia. With us today, we have Gary Shiffman, Chairman and CEO; John McLaren, President and COO; Karen Dearing, CFO and Executive Vice President; and Fernando Castro-Caratini, Senior Vice President, Finance and Capital Markets. At this point, I will pass it off to Gary for some prepared remarks, and then we'll go into Q&A. Gary?

Thanks, John, and thanks for joining us, everybody, today. Hopefully, you're safe and sound. Sun Communities -- are you hearing me okay there? Sun Communities is the leading owner and operator of manufactured housing and recreational vehicle resorts in North America. We currently own 425 communities and RV resorts with over 142,000 sites in the United States and Canada. We've been in the business since 1975 and a public company since 1993. We are cycle tested and pride ourselves on creating value at all points of a business cycle. Our company provides superior quality, well-amenitized, high-value living and vacationing options. Our portfolio is currently 96% occupied and has posted consistent same community growth between 7% and 9% for the last decade and has exceeded the average same-store NOI growth for REITs by 190 basis points since 1998. We create value for our shareholders by consistently executing our 4 core capital allocation initiatives. First, the consistent reinvestment in our operating properties supports high current occupancy rates. Second, accretive acquisition of operating properties whose performance can be further enhanced as they are integrated onto the Sun platform. We have purchased in excess of $5.7 billion in communities since 2010. Third, site expansion within our own existing communities and resorts where we can drive highly accretive returns for new sites. And finally, selective ground-up development of premier resorts and communities in highly desirable areas. We target 3 to 5 new development starts per year. With respect to the current environment, we believe that even in times of uncertainty or disruption, Sun's portfolio is well positioned for strong relative growth vis-à-vis its peers. Sun provides a high quality, affordable housing and vacationing option that has historically demonstrated stability and resilience during an economic downturn and a stronger earlier bounce back through recovery as the macro economy improves. At this time, John, if you don't mind, we'll turn it over for you for questions.

Sure. Thanks, Gary. So can you provide an update? I saw your presentation that came out this morning on the May occupancy and rent collections. It looks like it improved from April. If you could just elaborate on that, please.

Sorry. The question was May rent collections, John?

Operations update.

Okay.

Yes.

So I'll give you sort of an overall update for May, John. We're really pleased with the results that we've had in May, which are very similar to April in terms of rent collections and very much in line with what we expect in any given month when you look at it against the prior year. I think one of the things that really helped facilitate that was the proactive stance that we took early on in the pandemic with the hardship program, which really, I think in April, we were just about $2 million for each of the months as what we had reported during our earnings call. So it's really waned off a lot. I mean the bottom line is the 80 -- over 85% of the hardships that have been provided happened in April, and they're really, really maybe about $600,000 of additional in May. I think what's also interesting to that, as we illustrate in the investor presentation, is that over 1/3 of the residents that are in the program have already started making prepayments. And if you remember, the way the program works, it was for April and May rent, and it was deferred. And they don't begin -- they're not required to begin making payments until July 1 over -- and from that point, 12 equal installments from July 1 forward. So it's really great to see that over 1/3 of the residents have already started making their prepayments, having received stimulus money and in some cases, getting employment back and those sorts of things. And it represents about 14% of the total deferred rent amount. So we're making some good progress there. Couple of other important points in the second quarter. Like we shared in the investor presentation, we gained 240 revenue-producing sites of occupancy in April and May, so quarter-to-date through May, mainly driven by MH. And just as a basis of comparison, that's against 300 sites that we had gained in the first quarter of 2020. So we are seeing -- we have seen an uptick in traffic with respect to applications that live in our communities for the month of May are up 20% from -- versus last May. Much of that is coming through in the form of rental home apps, but there is still a fairly large amount of home sale apps that are coming through as well, which, as we shared before, we have done a lot of virtual tours and those sorts of things with inventory that we have available to sell in our community. Not all cases -- I mean things are really just beginning to open up and so in not all cases have we been able to show homes to people that come to our communities where stay-at-home mandates are still in effect, but the virtual tours have made a difference. And it's, of course, building up the pipeline as things continue to open up and ease up. So that's kind of -- that's a little bit of the summary on the MH side, John. Flipping over to -- if you want me to go ahead and get into RV, I can do that or if you have another question, I can wait for that. It's up to you.

Well, let's go to RV. I saw that your RV revenue was down 39% over Memorial Day, and I just wanted to know how that compared versus your projections. I think you were saying trends in RV may be down $10 million in the second quarter.

Yes. I'd say that -- I mean, as of the end of April, we feel like the projections that we put out there during our quarterly call are still where we feel things are in that range. I mean it's interesting with Memorial Day weekend, and I had shared this a couple of times over the course of today, it's like take Michigan, for example, where they had pushed out their stay-at-home order until June 12. Well, that changed actually effective today where we thought we weren't going to be able to take in any transient reservations until the 12th if it happened on the 12th, we just weren't even sure. And actually, we can do it effective today. And I think my point with that is, I think, that there are some other states and locations that kind of pushed it out past Memorial Day because, I think, they were a little concerned about too many people getting together. Even though we believe that our asset class, and we've seen it demonstrated over and over again through this crisis, promote social distancing because people come in their own RVs, they can stay on their own sites, they can stay within their site. So it's -- you can do that with this particular asset class. So I think, to some extent, that impacted Memorial Day because in places where we were open. I had the opportunity to go to a couple of our RV resorts leading up to Memorial Day just to see how the team was doing and how we were preparing in terms of all of our amenities and things like that where we could open, and we were pretty full other than the fact that -- for places that were closed. So again, I think it speaks to the demand that's out there. And as people get out, they're going to want to get out, especially in the outdoors. As far as the resorts themselves are concerned, we had shared during the earnings call that 44 of our RV resorts had delayed openings or were closed. As of right now, we have 27 of those that have come back with no limitations to any sort of booking, whether it's an annual guest or a transient guest. We have opened up amenities in those communities as well where stores are available for guests to go in and purchase things, of course, with social distancing and in many cases, limitations to the number of guests that are coming in. We've got a number of different water parks that are now open. Many pools are open and things like that. So we're starting to see a lot of movement. We do have 18 of our communities as of today that are only open to our annual guests, and those are really primarily located in Ontario, Canada right now, which we expect, that will open up in mid-June as well. So finally, the only other thing I'd add is that we are seeing a pretty dramatic uptick in reservations, bookings that have happened over the last couple of weeks. And I think what's sort of an interesting point to illustrate what I mean is that when you look out, specifically over the last 3 to 5 days of bookings that have happened for transient guests, we are running very close to 2019 levels on those bookings. But we still have 18 resorts that can't even accept bookings, okay, for transient right now. So I mean what that tells me is this, the demand that's there, even though you've got 18 resorts that can't take the bookings, that it's actually -- you could argue that it's running a little bit ahead of pace, okay, when you look at it in the aggregate. So again, very hopeful, very optimistic in terms of what I -- as things continue to open up, as the mandates continue to ease, that we should see a good return of our guests back to our resorts.

There's been a lot of press on RV as the way to travel and the Wall Street Journal titled their article 'Covid Campers'. Historically, new RV sales didn't really correlate with occupancy necessarily for you guys. But I was just wondering is it different this time. Can you see occupancy, especially in transient side but maybe even on seasonal, increase year-over-year, just given the amount of interest in this way of traveling?

Yes. It's Gary speaking. I think that speaking on behalf of the entire management team, we're very excited. May marked the largest increase in RV sales in most retailers' history. And we anticipate that those RVers will just increase an already short supply of high-quality leasable sites, like those that Sun has against overcapacity of RVs that are registered on the road. Additionally, these RVers, we think, will be looking for alternative ways to vacation, safer ways to vacation, as John said, socially distant ways, self-contained domiciles. You don't have to get into an airport, you don't have to get into a bus, you don't have to get into a lobby to check-in. So we're really excited to get the last of our communities opened. When we talk about the 18 communities, most of which are in Ontario, they only represent about 1,000 total sites. So it's a very small base, but we do want to get those opened up. And we think that the demand for transient in the very near term could exceed where it's been in the past.

And John, if you recall, you mentioned potential occupancy, stronger occupancies, but there's also the potential for stronger rate growth on the transient side as well. If you recall, our -- for the last couple of years, our transient growth in the same community portfolio has been in the low single digits. And that's despite less site nights because of our transient RV site to annual site conversions being site night reductions of -- in the high single digits 9% -- about 9% last year, pointing to rate growth of 10% or higher last year. So there's the potential for both higher occupancy and higher rate growth, given the increased demand.

Given the RV sectors resiliency through this pandemic and potentially more development and acquisition opportunities, does this change at all your view of what the weighting of RVs can be within Sun's portfolio?

I think that we have to be very thoughtful and thorough in our evaluation. We look to convert 5% to 10% on an annual basis from transient to annual. I think one of the things to focus on that annual revenue collection for May was 99% for those communities that were open on the annual side. So very, very sticky, strong rent. On the transient, I would say, with a history of 25 years as a public company and at least 10 years as a private company, a single thing that influenced transient traffic was not fuel prices, it really was weather. The average transient resident is traveling and able to make a decision knowing that it's going to be cold and rainy one weekend and cancel. And then knowing it's going to be sunny and beautiful the next weekend, we might get a pickup of reservations. So the pandemic aside, we've never really experienced significant change in our occupancies or reservations. That has all been changed now by the pandemic, and we do have to think carefully about our ratio of transient to annual. But that being said, all these new RVers are looking to travel. That's the beauty. The beauty is you can pick up and you can be in an RV community for 1 day, 3 days, 5 days or a week, and you can drive 250 miles down the road and be somewhere else. And that's the style and the lifestyle that the RVers like. So we'll have to really keep a good balance and also functionally change the way we think about things, more paperless registration, more online registration, all the things that will create an easier, safer, transient environment.

Gary, you, I guess, bucked the trend a little bit in April by raising $655 million of equity, or I should say, you started a trend. What is the timing of potential acquisitions that you see? And are there more sellers looking to sell communities in this market?

It's a great question. And obviously, we wanted to access the capital marketplace to give us a fixed-in locked capital cost of growth capital. We shared with the marketplace at that time that we are seeing additional opportunity. And I don't want to deviate at all from the core discipline that we have, and that is to buy communities that are accretive. But our goals are that they have to be well located, like any real estate. But most importantly, we have to see the opportunity to generate outsized growth for our shareholders as we open up our same-site community growth has been in the 7% to 9% range. And I think that it's very, very important that we acquire communities that have that same potential growth characteristic. It might be the availability to expand them, to apply professional management from John's operational team, it might be below market rents, it might be economies of scale, a whole host of things, and that's what we're targeted on. That being said, our recently released deck or update this morning, if reviewed closely, would show the addition of our first new community and that is a single asset, 372 sites, well located in California, probably bought 100 basis points above where we would have expected to buy it on a cap rate basis as recently as 6 months ago. We used a combination of cash OP units priced at $151 and POP units. So we've structured that to deferred taxes for the seller, which is a great advantage that the REITs have. And in our pipeline right now is quite a bit of those single-type assets. Additionally, as I mentioned previously, a few smaller-type portfolios. And I would expect that it would take about 6 to 8 months to deploy the capital. That's not assuming there would be any leverage on the capital.

On the transaction that you discussed, why do you think pricing changed in the last few months?

It's a relationship asset. I'd add the following color for those looking to understand what's happening in the marketplace. I think like most acquirers, particularly the big public funds and well-capitalized companies, early in the pandemic, everybody took a step back, conserving capital, watching very closely, very carefully. I think for most of us, we continue to be a little bit more cautious in adjusting how we value and underwrite properties. That being said, I don't think there's been a wide contraction of the cap rates. I think that there was a transaction today that Sun lost that traded in the high 3s. So there still is a lot of appetite for the dividend stability of manufactured housing. We talked about 99% collections on annual RV. The same is true for manufactured housing for both April and May. By the 25th, which is when we reported, we were at 99% and actually at 100% by the end of each of the monthly periods of time. So there is still a lot of capital chasing, a limited supply of manufactured housing in RV communities. But it is the relationships and it is the bucket of opportunities that we didn't expect to come to the marketplace. The first one I just shared with you, and I would say we have several more under due diligence at this time.

Just switching over to developments. Have you resumed your development program as far as both the expansions of existing communities as well as ground-up developments?

Yes. John, we have added, not all, but some projects back to our plan for 2020. Just to remind everybody that we really -- you look at what we've done over the last 3 years, particularly on the expansion side, where, I think, in 2017, we built 2,100 sites, another 1,200 in '18 and another 1,200, I believe, in 2019. So as we've shared before, it's kind of like we like to run a year, 1.5 years ahead of our needs in so far as site availability is concerned. So we kind of walked into this with -- having some room to work with there. And it's -- as we've gone through and added projects and remobilized in cases where it made sense and prioritizing which ones make the most sense where we think we can grow the fastest and lease-up the quickest, we have released those and have those going. On the ground-up side, still very much a lot of activity in terms of a number of different projects that are at various stages in the entitlement process. As recently as last Thursday, I was in a meeting with a city in a neighborhood group out West, my first Zoom meeting that I've ever had, a development meeting or entitlement meeting with the neighborhood. Typically, in that situation, you might have maybe 10 or 20 neighbors that would show up either in support; in most cases, an opposition to what you're doing. In this meeting, we had 100, okay, because it was pretty easy to go to and join the Zoom call. But it was -- one of the interesting things about that particular meeting was the level of support offered by the city and where -- I mean, they were virtually and virtually answering questions that the neighbors were asking because they're well organized, they have a mission to resolve their affordable housing issues within the city and they want to get it done. So I think the prospects are very high, and I think there's some opportunity that happens there. And I also think that Sun is in a very unique position in the industry whereby we have completed projects. And so what we show in these meetings are no longer renderings, okay? We're showing them actual projects that we've completed. And if you believe a picture says a thousand words, they see it. It's different than looking at a conceptual drawing. And so again, it's not -- I don't want to go too far and say I think it's helping the process, but it's still 1.5 year, 2-year process to get through to get the entitlements done. So still got a lot moving in that direction.

John, it seems like a lot of states are dealing with affordable housing as an issue. And I know you guys have been active on these developments. But do you see this really gaining ground, especially with what's happened this year, but also the last few years, just housing affordability being top of mind for a lot of policymakers?

I think there's potential for that to happen, for sure. I mean one of the other interesting things that's happened over the course of the projects that we've done is, frankly, for the first time in my career, I've had township supervisors offer to advocate on our behalf in other parts of the country we were going to, to tell them the story. And that like never happens. And so we've put together some materials as a part of our standard presentation that we give to basically say, call so and so, call this township supervisor, call this person, tell them what -- they'll tell you what we did. And so -- but again, I think it's a little bit unique to us. And because we've -- our roots are in development. We've been doing it for 40-plus years. We've built an awful lot of sites over the course of Sun's history. But to answer your question, I'm very hopeful that it will become easier to do.

Great. If we could turn to Australia and your investment in joint venture, Ingenia. Where do you think Ingenia is in terms of consolidation with the Australia market? And is that more interesting to you or the development projects, just the preferred way to grow?

Well, I think it's definitely interesting to us from a standpoint that they're very early in the stage of manufactured housing developments. They have an excellent management team, an excellent development team and an excellent Board, which I partake on. And what we found is that they have been operating on a very profitable basis with a potentially very large pool of demand as the 1% of the population turns age 60 or greater on an annual basis there. There is a common theme where the home owners have built up tremendous amount of equity, and they need to free up that equity for their retirement spending. So there's an inclination to sell their primary home, that many of them owned for more than 20 years, built that equity up, free that equity, acquire a manufactured home. And at the same time, the government incentivizes them to do it by providing the rental subsidy at the community. So it's been very, very profitable for the last 2, 3 years over at Ingenia. It's resulted in an awful lot of stock appreciation as a result of that. And recently, they did their largest equity offering. Sun participated to maintain its pro rata interest in the stock, which is about 10%. And we're just kind of studying hard and working through our first 2 joint venture developments. And really, over the next 12 months, it'll tell a lot as to what our next steps would be there.

It looks like we're running at full time. Maybe if I could just ask one last question. I think I know the answer to this, but I'll ask it anyway. Any thoughts on potentially being included in S&P 500? It looks like there will be some changes to the index. And if you do get included, does that change anything about how you look at acquisitions or growth going forward?

Yes. I think we don't get to self-invite ourselves in there or we certainly would be making that call. We do think we're a likely candidate, appropriately sized and of meaningful makeup in the industry and the asset class is an affordable housing feature, so we look forward to that possibility.

And John, there's the potential for that to drive additional demand for the stock just given the rebalancing from a fund standpoint.

Okay. On that note, I want to thank Gary, John, Karen and Fernando for presenting today at NAREIT. Stay safe, and have a good rest of NAREIT. Thank you.

Thank you.

You, too, John. Thank you, everyone.