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

Hello, everyone. I'm Wes Golladay from Baird. Welcome to the Sun Communities presentation featuring Gary Shiffman, Chief -- Chairman and Chief Executive Officer. [Operator Instructions] But let's begin with Gary providing a quick overview of Sun.

Thank you, Wes, and I hope you can hear me.

I can.

Thank you, everyone, for joining us today. As a brief introduction, Sun Communities was founded over 40 years ago and became a publicly traded real estate investment trust over 25 years ago. We've grown to be the premier owner, operator of manufactured housing communities, recreational vehicle resorts and marinas. Our portfolio is comprised of over 560 properties with over 151,000 manufactured housing and RV sites, and nearly 39,000 marina wet slips and dry racks throughout the U.S.A. and Canada. And I'd like to share with everyone as we get started, business remains very strong in all 3 business platforms, where manufactured housing is benefiting from an increased demand for obtainability and affordable housing. The RV business is experiencing strong demand overall, especially on the transient side, which I'll talk about in a moment. And the RV business, like the marina business, has had kind of a silver lining as related to COVID that due to the unfortunate situation, the desire to go outdoors, to be outdoors during this period of the pandemic, has been strong, and we even had pent-up demand as we moved forward. So we're seeing very, very positive results from both RV and MH as the opportunity for our RV-ers and boaters come to the resorts and the marinas. One example that I'll discuss is that in our RV business, transient revenue above forecast, as we last reported, was about 20% ahead. Today, it's running up 24% for the second quarter. And for the third quarter last time, we discussed that it was about 5% ahead. Today, it's running 10% ahead. So good solid strength and these comparisons speak very favorable as to what we can expect the balance of the year. For Memorial Day weekend, we look at our 3-day holiday weekends each year and report them to our stakeholders as kind of a bellwether of how things are going. And I'm pleased to share the comparison from this last Memorial Day over a week ago to comparison of 2019 that I think gives us some sense of what's taken place. Revenues for the 3-day weekend over those 2 periods were up a total of 40%. But what's interesting aside from the 40% is the breakdown of that. 70% of that increase is coming from increase of rates and the 30% remaining was from increased occupancy and the average rental increase was in excess of 6%. So very, very solid performance to date. That information was issued in our investor package that was updated yesterday on Sun's website, and I urge everybody to take a look at more information that's provided in that presentation. And with that, Wes, I'd turn it over to you for any Q&A.

Yes. Thanks, Gary. Before diving into the operating segments, can we talk about the senior management of Sun? And are you building a deep bench?

Sure. I think one of the great differentiators and I'd like to think there are a few of them that maybe we'll get a chance to talk about today, is senior management team, I think is the leading management team in the industry hands down. The fact of the matter, sitting in the room is a combined experience right now with my 4 senior staff in excess of 100 years. Our roots in the industry have all been in manufactured housing. Our Chief Operating Officer, has been in manufactured housing for more than 20 years. Our Chief Financial Officer has been in the manufactured housing and RV business for more than 20 years. And I myself have been in it more than 20 years, less than 40 years. So combined effort. And then Fernando who helped to coordinate this meeting has covered manufactured housing industry and RV industry broadly as his role as an investment banker and then when he came to the company a little under 5 years ago. So deep, deep strength. And then I think what we like to do is mentor the staff and create that deep bench so that we sort of say we're all replaceable. There is some redundancy here. And I think that that's very, very important. And it served us well as we have historically outperformed all other competitors on a performance basis and as we continue to do so and look to do so going forward.

Okay. Let's dive into the manufactured housing segment. Can you talk about your customer base there? And how [ good ] is your outlook for demand?

So it's a great question. Manufactured housing business is just an outstanding place to be as we're all aware, our site-built housing prices have increased recently, the price of lumber, the price of materials to build a home, some say as much as 20%, 25% impact on single built family homes that were averaging median around $300,000 and probably have gone up from there. It compares to an average manufactured home that cost about $80,000, $85,000 on average across the country. In Sun's portfolio, the average cost of a manufactured home is about $145,000 as last reported. So what we're seeing is increased demand for an already short supply of quality, leasable sites in Sun's portfolio. So as we look to expand through acquisition, we also look to expand through development because the continued pressures on homeownership, make manufactured housing the only affordable option for the majority of Americans today. So we see a great opportunity to grow through continued acquisition but more importantly, through continued new development where we can develop new communities at an unlevered IRR in the high single-digit range versus buying them in a low, low single-digit cap rate range.

Got it. And can you talk about maybe the internal growth prospects when you look at rate, occupancy gain and expansions?

Yes. So in the existing portfolio, we like to say that for more than 30 years as a public and private company, we have always had a rental increase within 2% to 4%, sometimes exceeding it. But we've never had a 12-month rolling period where NOI hasn't increased over the previous 12 months. So even in periods of time of inflation or CPI well below 1%, we've been able to get that 2% to 4% rental increase. So it really speaks to the cash flow stability of our business, the recession resistance coming out of great financial crisis, coming out of pandemic, always positive growth, always positive rental growth. So that's the core internal KPI that we can look at. Aside from that is occupancy growth. Today, over 70 -- 170 of our -- I'm sorry, 70% of our communities are over 98% occupied. So again, strong, strong demand that can further push the rental growth metrics as we move forward. And then through acquisitions and the experience of not only our deep bench in operations, but our fundamental technology and our platform, our economies of scale, we're able to squeeze and create additional incremental growth, buying properties below market rents with some occupants -- with some vacancy that we can fill up. They are all avenues that allow us to create outsized growth for our shareholders as we do each year.

Got it. And what is your estimate of industry supply? And why is it so low?

So there are no good national metrics to indicate what industry supply is, but supply is very, very limited. I don't know of 5 manufactured housing communities built in this country in the last 5 years and maybe a handful more of recreational vehicle resorts being built and then you get to marinas, which was one of the attractive aspects of marinas. If there was anything harder to entitle or develop the manufactured housing, Sun found it in marinas. The environmental impact, the difficulty, the shortage of being able to get uplands on the waterfront just make it virtually impossible to create a new marina today. And if you were to find a site that would work, it would take 7 to 10 years to go through all the environmental and coastal processes. So very, very limited supply, which really speak to the compressed cap rates, the attraction to so many to invest in these assets because you've got a combination of low CapEx, good cash flow stability, a shortage of supply and no new supply coming on site. So it's kind of an interesting 3 asset categories for those reasons.

Then one of the things Sun does is invest a lot in their properties. What does this do for you in your tenant base?

I think that, again, one of the great differentiators that our operations team brings to the way we operate is the fact that we reinvest into our communities. And I can't underscore the importance of that. It's very, very important as we do -- very apparent as we do property tours and people have the opportunity to tour our properties and our competitors. By reinvesting in the communities, you secure the underlying value of the homes and the appreciation of those homes in the community. So when those homeowners go to sell their homes, they get the highest values as opposed to prospective buyer coming in and selecting one community over the other because it looks better because it's better maintained because it has better amenities. So the single thing that I would point to that we do differently is continue to apply that capital investment and make sure that our rental increases are at a level that's consistent with the investment that we make. We say that we invest almost 60% of any given rental increase back into the community, and we've done that historically, and that's, I think, another great differentiator from some of our competition.

I was not aware of that. That's very good. Maybe we'll switch now over to the RV segment. Can you talk about how that customer is evolving? We've always typically thought of it maybe as just baby boomers, but it looks like demand is broadening there.

Yes. Just incredible. I can share with the audience that I took my own first personal RV trip during the pandemic, and I had an absolute blast. The RV business, we've always thought of as an affordable vacation. It compares very favorable to getting on an airplane, getting on a cruise from an economic standpoint, especially when it comes to a family. So there's the economics. There's the adventure side of it. We like to think of it almost as pioneering. You leave your home. Most destinations for RV-ers are within a 3-hour range of their home. So it's easy travel. And you're in control. You're in control of where you stop, what route you take. And it's an absolutely fun adventure. You're self-contained during the pandemic, the kind of good fortune in our industry in an otherwise very bad time, you're driving your RV and you're in your self-contained dwelling. You don't have to go into a lobby and check in, you don't have to go into an elevator, you don't have to go into a common hall or a bedroom that's been used by someone else. And that is why this past year has been so unusually strong, including RV sales, which so far this year, we're hearing are up as much as 40% year-over-year. That's why our -- the demand and where we're seeing the strength right now in the portfolio has been in the RV portfolio, similar to the marina business where people are just running to be out in the fresh air. So the RV leaves you the opportunity to eat in one of our restaurants, to enjoy one of our amenities, heavily amenitized resorts or to just head outdoors and sit by the camp fire, hike through the trails, swim in the water, all the different things that are more of a natural setting than we get in the urban environment and they allow for a lot of what we think of as destressing, leaving the stress behind, and we'd like to think that everyone who leaves after a stay in a Sun RV resort leaves a happier, better person.

Makes sense. Maybe you can finish up the RV segment with talking about the levers you have to drive internal growth. Maybe touch upon your expansion opportunities and conversions.

Sure. So expansion overall, we have about 7,500 fully owned and zoned expansion sites in our entire portfolio. I'm not sure what the exact split is in RV, manufactured housing. But when we talk about the RV resorts, the returns we get are 12% to 14% IRRs when we expand the community and it's our greatest return on capital. And it's basically because all the fixed prices -- fixed costs are in place. The clubhouse is there, the amenities are there, the staff is there, the management staff, the maintenance staff. So great returns. We do about 1,000 expansions a year at these kind of returns both in MH and RV, probably split pretty evenly. So we always maintain that inventory of zoned entitled land to be able to expand our RV reserves.

And then maybe moving over to the marinas segment. It's a lot more affluent than your affordable living, affordable vacation that you have in the MH and the RV segment. So I guess, what really drove you into this space?

So that's a great question and one we enjoy sharing with our current shareholders, analysts and prospective shareholders. I think the similarities are uncanny if you will. The amount of boaters, registered vessels that are out there are about 13 million in the United States today. And the supply of wet and dry slips is about 1 million. So you've got a 13 million demand against a 1 million supply, obviously, a great business environment. Likewise, in the RV business, you've got an estimated 12 million registered RVs in America today, with less than 1 million leasable RV sites. And of those 1 million RV sites, only about half of them will hold a modern RV today and are equipped with all utilities. Some of them are in state and national parks where they don't have water hookup or sewer hookup or electric hookup. So again, you've got similar characteristics of supply and demand. Manufactured housing, we know the supply-demand issues there. All 3 categories, the marina very simply put, harder than anything we've seen to get new supply. I already mentioned that. So limited new supply and tremendous growth in boating as it becomes a more and more popular activity, leisure activity and obviously, the great boom of wanting to be outdoors, wanting to socially separate yourself and have the freedom to have time has benefited the growth in marina business. The last thing I'd point to is the fact that it is a very unconsolidated mom-and-pop business. There have been no platforms. So in deciding that it fit really well as the third business line for Sun Communities, we were attracted to really the country's largest owner operator of marinas in that Safe Harbor. We were in an ongoing dialogue with them off and on for about a 4-year period of time. And we're very pleased when they reached out 7, 8 months ago to see if we could structure a transaction. Great interest by Sun, very big interest in Safe Harbor's management, not only because of the reputation, but because of the ability to combine with Sun and be able to use its public securities in order to create tax deferred transactions for mom-and-pop sellers, who otherwise would have so much recapture, but couldn't afford to recognize the value of their marinas and do -- and actually transact the sale. So we actually were able to complete our first transaction about 45 days after closing on Safe Harbor and use Sun's securities to get that deal done, which otherwise wouldn't have been able to get done. So very, very similar. It does have somewhat of a higher average income and net worth than our other segments of business. But other than that, operates very similarly.

Maybe sticking with acquisitions. You have 3 product lines you can invest in. Where are you seeing the best opportunities at the moment?

Well, whenever we can, a manufactured housing community is of great interest, just because there's no new supply and such heavy demand. That being said, the best financial opportunity for current return and short-term growth as well as long term would be the marina business, just because it's so fragmented, there is a lack of consolidation that's taken place there and just tremendous opportunity to acquire properties at expanded cap rates, somewhere in the 6% to 9% cap rate range, where manufactured housing is trading sub-3% cap to 4% cap. And we're really excited about the marina opportunity that's in front of us.

Got you. And then you kind of touched upon your OP Unit opportunities within -- for the sellers. How often does this come into play where you win a deal because you had the OP Units and the private companies did not?

So I would say in manufactured and RV business probably accounted for roughly 20% of key acquisitions that we would not have otherwise gotten. And in the marina business, of the approximately 7 or 8 marinas that we've acquired, it was used in 1. And that was a very large one, the Rybovich; 2 marinas in West Palm Beach, absolute institutional quality marinas bought from the Huizenga family, who owned Blockbuster, Waste Management and AutoNation, I think, at one time. Because of their tax implications, they would have not been able to transact the sale of Rybovich, but for the tax deferred security. So they took half of their equity in the form of Sun OP Units and POP units combination. And that's the first one we've done. We're talking to 2 or 3 other marina owner operators. It does take a bit of sophistication and time to understand the securities. So that's really the steps as being able to educate their professionals, their accountants, their tax advisers and the actual owners to understand what those securities look like and what the options that are available to them. So I think we'll continue to see a lot more of it. But it's going to take a few more months to be able to educate everybody.

Got it. And maybe can you talk about the developments that you're looking to do? How many are you doing right now? And I guess, what is the goal to build the pipeline, too?

So again, a great differentiator. Sun's roots are in the form of developing new communities and expanding them, going back 35-plus years. So we have been focusing on bringing 2 to 3 new developments online each year for the last 3 to 4 years. As we've seen, the consolidation of the manufactured housing and RV resort industry take place harder and harder to grow through acquisition. So the economics are such that when we can build a community to a high single-digit return IRR once stabilized, versus buying something at a 3% cap rate, we're very much inclined to want to be able to develop. That being said, the great bottleneck is the nimbyism, the ability to entitle raw land to allow for a manufactured housing community or RV resort. It's just that not a my backyard image of a old trailer park that we've got to get over. And we work very, very hard, and we're having some success. So for the last 3 years, we brought 7 new ground-up developments online. We've been doing about $150 million to $200 million worth of new development a year expansions and ground-up development. This year, in our estimates, we have approximately $300 million of combined development for 2021. And we will look to double that to $500 million to $600 million over the next 18 months. And then in the next 3 to 5 years, we look to double that again. So we'd go from about 1,500 total sites this year to maybe 3,000 next year and hopefully 6,000 sites the year after. And it's hard to move the needle too much with the size of the portfolio through new development. But at that level of 6,000 sites, it will be very accretive to our shareholders, and we think that it speaks to the long-term opportunity of continuing the outsized growth at Sun. So it's a big important part of our future story.

Got you. Gary, we got a minute here. Can you maybe talk real quickly about the average site rent, including the housing rent and how that compares to owning the house, renting an apartment?

It's a great point to kind of finish the commentary up with. Obviously, we compare very, very favorably. On the comparison to renting to an apartment, we give about 25% more space dollar for dollar at more than 50% less cost. So the average all-in rental cost is right around $1,100 in one of our communities. That's for the home and the site rack. And again, 25% more space, 50% less the cost than the comparative apartments in that area. Additionally, what do you get? You get to pull up on your driveway, right up to your house. You get to bring your groceries right into your laundry room. So all the conveniences of a home, you don't have to hassle with the apartment. So a strong part of our business. And then the comparison to site-built housing, the best comparison I could give is that the average cost of one of our homes in our communities would be 2x the annual salary -- combined salary of one of our residents as compared to close to 7x today the average cost of a site-built home with the average combined median income of the home. So great cost advantage there as well. So very, very competitive. And the delta difference just doesn't close because site-built housing gets more and more expensive as the percent of cost of that housing increases, both manufactured home and a site-built home, the actual absolute dollar difference on the homes is much smaller of an increase in a manufactured home than a site-built home.

We'll finish there, Gary. Thank you very much.

Okay. Thank you all for attending. Appreciate it.