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

I'm Dennerlein, Bank of America Senior Analyst covering the manufactured house REITs. I'm pleased to be joined by Gary Shiffman, Sun Communities' Chairman and Chief Executive Officer. Gary has been a Director and Executive Officer since Sun's inception in 1993. Gary has been actively involved in the management, acquisition, construction and development of manufactured housing communities and has developed an extensive network of industry relationships over the past 30 years. With that, I would like to hand it over to Gary to provide a brief overview of Sun Communities. Gary?

Thanks, Josh, and thanks, everybody, for attending today. Quick recap of third quarter and a little bit of an update of where we are today. Demand for manufactured housing and our RV Resorts remains very, very strong. As we discussed, third quarter, we gained over 750 revenue-producing sites, same community NOI growth was 5.5%, rent collections remained very strong and remained directly in line with 2019. No change to bad debt, right around 70 basis points of revenue which is within a couple of basis points of our 10-year average. Renewal rates in our rental homes are running ahead of last year by about 10%. And we continue to attract a bit from multifamily when you consider being in manufactured home, means you can pull right up to the house. You have your backyard, you don't have to go through common spaces, elevators or anything like that. So a little bit of the wind at the back with heightened demand on the manufactured housing side, the strength in our transient RV, as we shared with you, September was 30% above the previous September, and it remains strong as we finish our northern season. With a positive trend year-over-year through September -- through October, I'm sorry, and into November. And then, of course, recently, 2.5 weeks ago, we closed on our Safe Harbor transaction, and we're very pleased to have Baxter, the CEO; and Gavin, the Chief Financial Officer from Safe Harbor with us today, along with Karen, Fernando and John from the company. And Josh, I would turn it back over to you.

Yes. Thanks, Gary. Can you touch base on internal growth, you've had an incredible track record of internal growth. What has driven that performance historically? And can that historical growth rate be sustained going forward?

So we can talk a little bit about the levers, but dealing with the latter part of your question first, as we enter the budget time of the year for us, and we really look forward to providing guidance after fourth quarter. We look back 5 years. And on average, same community growth was right around 7%. And what we strive to do is look out 5 years and be able to provide similar core same community growth to that by using the following levers. First of all, internally, we have our rental rate increases. They've averaged 2% to 4% for the last 27 years really as a public company and for the years behind that. So first level is rental increase. We have occupancy growth growing somewhere between 200 to 250 basis points a year internally, as we've done for the last 7, 10 years. The conversion of transient RVs to annualize RVs gives us about a 40% to 60% increase in revenue on an annual basis. And then we have the expansions where we've been delivering probably on average about 1,200 to 1,500 sites a year, year in and year out. And we get our greatest returns on expanding existing communities because the fixed costs are in place. So we look for basically a 12% to 14% return on our expansions. And we have right around 7,000 expansion sites in our inventory that are zoned and ready to construct. So as we look out over the future, we will continue growing with those levers. So internally, that's pretty much what you can expect on the manufactured housing and RV side of things.

Fundamentals have been incredibly strong during COVID. How do you think that carries over into a post COVID world?

So I think it's a great question. I think, fundamentally, when you consider we're in the affordable housing and vacationing business, they play strong in all economies. We've talked before about the recession resistance, certainly in the great financial crisis. Coming out of that, we exhibited some of our strongest growth. And in large part, it is the affordability characteristics. So in good times and tough economic times, affordable housing and vacationing attracts a large pool of customers, residents and guests. What we see into the COVID period of time is what I shared in my opening remarks, somewhat surprising as in March, we didn't know if we were going to collect any rents in April as we all entered this COVID period of time. But reality is the strength that we've exhibited, the desire to stay into the manufactured home, the continued demand and applications, as I talked about some coming out of multifamily, some coming out of other areas of housing, has really created strong collections and continued high growth in occupancy. On the RV side, we've seen the wind at our back as after the period of time when the state at home was lifted, there was a great pent-up demand to get out to the outdoors, to experience our RVs, to experience camping for everything that is known to be. Now how does that play out post COVID? We know that the great barriers to manufactured housing, much of our portfolio is at 97% or greater occupancy. So we expect to see continued demand, basically 50% more space in a manufactured home at 25% less of the cost, bodes very well for the future of our demand. And then when we get on to the RV side, we have a couple of different things. For the first time, the strong demand. Did I get those backwards, Karen, I'm looking at chart, was it? Okay. Strong demand on the RV side, as people want to get outdoors and camp, we're getting a whole fresh new set of guests in our RV communities. And obviously, the RV sales are booming, especially to the younger demographic. And we're seeing, as I said, a 30% pickup in September for transient. What happens moving forward post COVID, obviously, there will be people returning to using aircraft, going other forms of vacationing, perhaps cruising again, we will lose some of that strong demand, but we will maintain a stronger demand that existed before because of the qualities of what they're experiencing in the RV world. Another interesting factor is a number of companies that are mimicking the Airbnb aspect of residential housing are now offering that concept in over 13 million registered RVs across the country. Concept is that many people only use their RVs a week or 2 or 3 a year. And if you don't use them and they're sitting in storage or your backyard, why not rent them? If incrementally, they're successful in renting some of those RVs, there will just be far greater demand for the sites that we have at some communities. So I think, through COVID and post COVID, we'll continue to see strength both in manufactured and our RV sites.

A big part of your story is finding accretive acquisitions to kind of compound that internal growth. How is it that, that Sun is able to source transactions given elevated competition for MH and RV?