Aug 2, 2015
Executives
Gary Shiffman - CEO Karen Dearing - CFO
Analysts
Nick Joseph - Citi Jeff Spector - Bank of America Drew Babin - Robert W. Baird Todd Stender - Wells Fargo Dave Bragg - Green Street Advisors
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Sun Communities second quarter 2015 earnings conference call on July 30th, 2015. At this time, management would like me to inform you that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning 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 this morning's press release and from time to time in the company's periodic filings with the SEC.
The company undertakes obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release. Having said that, I'd like to introduce management with us today, Gary Shiffman, Chairman and Chief Executive Officer and Karen Dearing, Chief Financial Officer.
Throughout today's recorded presentation all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions.
[Operator instructions] I would now like to turn the conference over to Gary Shiffman. Please go ahead, sir.
Gary Shiffman
Thank you, Angela and good morning. Today we reported funds from operations of $52 million or $0.87 per share for the second quarter of 2015 compared with $34.7 million or $0.79 per share in the second quarter of 2014.
The six months of 2015 funds from operations were $100.4 million or $1.76 per share compared to $72.9 million or $1.74 per share. These results exclude certain items as detailed in today's press release.
Revenues for the six months ended June 30, 2015, increased to $321.1 million from $231.6 million in the six months ended June 30, 2014. Revenues for the three months increased to $165.9 million from $118.5 million in a similar 2014 period.
Now turning to our review of the portfolio. During the first six months of 2015, revenue producing sites increased by 999 as compared to an increase of 987 sites in the first six months of 2014.
Total portfolio occupancy increased to 93.5% at June 30, 2015 compared to 91%, June 30, 2014. And now reviewing same-property performance in the same-site portfolio of 177 properties, revenues grew by 8.2% while expenses increased by 6.8% resulting in an increase in NOI of 8.8% for the three months ended June 30, 2015.
NOI growth of 8.7% for the six months ended June 30, 2015 was driven by increases in revenues of 7.4% and expenses of 4.6%. Same-site occupancy increased to 94.6% at June 30, 2015 compared to 93.1% as of the prior-year June 30.
Reviewing just the RV portfolio performance, RV revenues increased by 12.6% for the same-site properties for the second quarter 2015 over second quarter 2014 and by 11.4% for year-to-date 2015 over year-to-date 2014. The strong growth is attributable to increased daily rates and occupancy of our transient sites, strong demand for vacation rental cabins, and additional conversions of transient guests to seasonal annual guests.
In Memorial Day and 4th July weekends, our northern resorts contributed strong year-over-year revenue growth at 10.4% and 8.1% respectively. Our resorts continued to reap the benefit of increased traffic due to our best-in-class amenities, and strong marketing outreach to our social and online media strategy, and ultimately an extraordinary guest experience at our resorts, as evidenced by unusually high net promoter scores of program put in place to monitor customer service and satisfaction.
If we turn to home sales, primarily driven by increased demand in our Florida and Arizona age-restricted communities, new home sales have increased by over 140% quarter-over-quarter and year-to-date 2015 over year-to-date 2014. New home sales were 131 for the six months ended June 30, 2015 as compared to 54 for the same period in 2014.
Total home sales in the second quarter were 576 compared to 521 in the second quarter of 2014. For the six months, current-year home sales were 1,119 compared to 890 in the first six months of 2014.
On a same-site basis, the average selling price for the new homes sold during the first six months of 2015 was $91,122, an increase of 8.1% from 84,310 during the same period in 2014. The increase in average selling price for pre-owned homes was 10.3% or $26,529 as compared to $24,046 for the first half of 2015 and 2014 respectively.
Additionally, our brokerage sales have also increased by about 6.2% year-to-date. Applications to live in Sun Communities increased by over 14% to nearly 24,000 in the first half of 2015.
On a same-site basis year-to-date applications also increased and were up by over 7% from the same period last year. We feel that both the increased retail pricing we're experiencing and the continued increase in applications continue to indicate the positive demand and trends for the increase in demand for affordable housing.
If we take a quick look at reviewing acquisitions to-date, in addition to the six Florida properties acquired in April, the company also purchased an age restricted manufactured housing community located near Myrtle Beach, South Carolina consisting of 419 sites and zone land for 276 expansion sites and a high-end RV community in Austin, Texas comprised of 241 sites of which 51% of the residents reside in the community, year-round. The two communities ground for expansion and associated manufactured home inventory were all acquired on an all-cash basis for approximately $59.7 million.
The company has also entered into agreements to acquire 3 RV communities containing approximately 1,185 developed sites inclusive of land for potential expansion of up to 300 additional sites for an aggregate purchase price of $76.2 million. Although subject to customary closing conditions, we have completed due diligence and expect to close on the three communities in August 2015.
The company has also signed an agreement to sell six of its Midwest manufactured housing community comprised of approximately 2,200 sites. Net proceeds will approximate $68 million and although still subject to customary closing conditions, the company has received a significant non-refundable deposit.
The sale of one Michigan and two Ohio properties is expected to be completed in mid-August. The remaining three properties located in Indiana are expected to close in mid-October.
We have completed 109 expansion sites in Texas during the first six months of the year and expect to complete an additional 576 sites, and three Texas communities and one California community before year-end. The demand in expansion communities remains strong and the company anticipates completing an additional 1,700 sites and 18 communities by the end of 2016.
Turning to a quick review of the balance sheet. We've received a commitment letter from certain lenders for a new $450 million senior unsecured revolving credit facility to replace the current $350 million facility.
The facility is subject to negotiation and execution of definitive agreements and is expected to close in August 2015. Also, during the quarter the company deceased $70.6 million of debt, which had a maturity date of July 1, 2016.
The transaction unencumbered 10 communities of which six are identified as potential disposition properties. As discussed in today's press release, we entered into an agreement with certain of the holders of our 6.5% Series A4 convertible preferred shares to allow the holders to sell their shares to us for $30.90 plus accrued and unpaid distributions.
The holders' right to sell their shares to us remain open until August 10, 2015. The privately negotiated offer is intended to eliminate potential market overhang and is expected to be accretive.
FFO per fully-diluted share, excluding certain items, is expected to approximate $3.62 to $3.72 per share for the year and $1.03 to $1.05 per share for the third quarter. Our guidance includes an increase in projected same-site NOI growth from 7.9% to 9.6%, the anticipated acquisition of 3 RV communities and disposition of six manufactured housing communities.
The repurchase of series A4 preferred shares is not included in revised guidance, as the company has no indication of how many shareholders will execute their sale right. Please see our press release for other items adjusted in the computation of FFO and additional detailed information regarding guidance assumptions that have been revised from those provided in February of this year.
At this time, operator both Karen and I would be pleased to answer any questions.
Operator
[Operator Instructions] We will take our first question from Nick Joseph with Citi.
Nick Joseph
Can you provide the cap rates for the acquisitions and dispositions in our contract and then in general, where you're seeing cap rates across MH and RV today?
Gary Shiffman
Well, Nick, I'd suggest that -- as we talked about before, we have seen compression in both MH and RV. Generally things had historically been in a 6 to 8 cap rate range for the type of higher quality properties that we've now been acquiring and we continue to see probably 50 basis point compression from there.
So, it's a 5.5% to 7.5% range and the properties for the disposition and the potential acquisitions all of which I shared with you, we'd like to defer any discussion of cap rate until those have actually closed. For those acquisitions, that we have already closed in the second quarter, they range from a cap rate of about 5.8% to about 6.4%.
Nick Joseph
And then I'm curious of what the role of development will play in your future growth?
Gary Shiffman
So, I think our expectation is that we would like to have 2 to 3 ground up developments within areas that we actually operate where we can identify continued high demand and we're not available supply leasable sites either RV or manufactured housing to meet that demand. So, we had identified in our last call, acquisition of a parcel of land in California to construct the 350-site RV community, which construction will probably start sometime late 2016.
We're always looking for land to acquire to expand our existing communities and we continue to look at land to develop new communities that pace as I said, something that we'll share with the market in 2016, 2017 and 2018 but we're looking at our strategic planning assets developing two to three new communities in those future years along with the acquisitions, dispositions, and our expansions.
Nick Joseph
And then for those two to three, what's the targeted stabilized yields, I guess I'm trying to compare it to the 5.5% and 7.5% you are just quoting on transaction?
Gary Shiffman
We tried to target for unlevered IRRs of between 10% and 12% in a five to seven-year period of time on the new development and construction.
Nick Joseph
And what's the IRR on acquisitions today?
Gary Shiffman
The acquisitions when we are looking for an increase of about 200 basis points to 250 basis points in a three to five-year period of time after we acquire the new acquisitions and I don't have and then levered IRR to be able to compare to with me on hand here but I'd be glad to share with you because I do have it available to us.
Nick Joseph
And then just finally on leverage, it looks like levels have trended up over the past few quarters, how does today's leverage levels compare with your target level?
Karen Dearing
Nick, there is a bit of a tick-up, certainly that's on a trailing-12 level. If you were to look at net debt-to-EBITDA at the end of the year, we are looking to be below 7 times net debt to EBITDA and that's a comfortable level for us to remain at the low 7 times net debt-to-EBITDA.
Operator
And we will now go to Jeff Spector with Bank of America.
Jeff Spector
I just wanted to confirm on the cap rate question. It sounded like you quoted range of maybe what you're seeing out there today, the 6% to 8% range, but also it maybe the 5.5% to 5.75% but then these deals were 5.8% to 6.4%.
Can you just clarify your comments, please?
Gary Shiffman
Jeff, if you could, I'm sorry, I want to make sure, I answer the question correctly. Could you repeat the question?
Jeff Spector
What is the cap rate range that you quoted on the additional acquisitions you did the two, for $59.7 million, could you give an approximate range for those two acquisitions?
Gary Shiffman
For the ones we've closed down or the ones, for the ones that we're going to close on. The range I gave was 5.8% to 6.4% for what has already been closed second quarter.
And I gave no range for any pending acquisitions that have not yet closed or dispositions that have not yet closed.
Jeff Spector
And then when you quote, you said something I though 5.5% to 5.75%, what was that cap rate for? What was that describing?
Gary Shiffman
So I had said 5.5% to 5.75%, sort of 50 basis point compression that we've seen over the last 12 months to 24 months from what had historically been 6% to 8% cap rate range that we were used to, in general for acquisitions of high-quality manufactured housing communities.
Jeff Spector
Okay, thank you, that helps. And then, just a question on the home sales, you mentioned Florida, Arizona driving those results, clearly impressive number in the quarter.
Can you talk a little bit more about what you're seeing in those markets to customer, any change or you know, it is the same profile, but it just seems stronger demand with the improving economy, improving housing market.
Gary Shiffman
Yes, I think we're seeing a couple of things that have been taking place over the few years, since we've seen the strength in both sales and pricing, the stronger demand for affordability is driven by the lack of the type of lending that was available pre-2008. So, it's driving more customers who were previously being qualified for site-build housing and no longer are to affordable housing.
And secondly, an improving economy and continued increase in portfolio size in Arizona and in Florida. In particular, we're seeing sales of higher-priced houses and all cash payments for those houses.
So positive trends to where we're identifying and strategically trying to increase the company's holdings. So all three of them are factors why we are seeing housing sales and the increased pricing and we think that all translate into increased profits of these trends increase, continue in 2016 on the home sales.
Operator
And we will now go to Drew Babin with Robert W. Baird.
Drew Babin
Good morning, a clarification on the series A preferred, could that be potentially convertible into common stock or is it cash only?
Karen Dearing
The agreement is in for our cash only.
Drew Babin
Okay.
Karen Dearing
These shares are convertible into common right now.
Drew Babin
Right, okay. And then, second of all, your G&A expense for the quarter, can you break down the items in there that might not be considered corporate overhead, property management expense, selling expenses, things like that?
Karen Dearing
Drew, I don't have a breakdown of that in front of me but I can you follow up with you on that later on.
Drew Babin
Okay, thank you, that's all I got.
Operator
[Operator Instructions] We will now go to Todd Stender with Wells Fargo.
Todd Stender
Thanks, can we just hear a little bit more about the Orlando portfolio acquisition? It seems highly occupied, I guess we are used to seeing you acquired low occupancy, and then really drive results and create value.
Just wanted to hear, maybe what the profile is of the community and maybe you talk about the in-place rents.
Gary Shiffman
So, are we talking about the further the six-step properties?
Todd Stender
Yes, thanks.
Gary Shiffman
Yeah, so I think that what they are is really well-located high immanentized communities, run along with full golf course, and the occupancies tend to be higher, but because of their locations, we do believe we have opportunity on the upside of rent and one of them or two of them came with expansion sites, good solid prospectuses, which was governed -- increases in rent in Florida and I think that is a part of realigning the disposition to take funds and redeploy them in areas where we think we will have longer-term growth. Those properties were very appealing to us.
We had a long-term relationship with the seller of over 20 years I mean had bought several properties from them 20 years ago, and we were able to take advantage of the issuance of favorable operating partnership units to actually acquire the equity interest the seller has, so I'm not what you would typically see because we don't have vacancy or severely under market rents but a good opportunity for continued growth. The expansion sites, which we hope to, start construction in 2016, and good geographic placement [indiscernible] where we see continued strong growth in our market, Florida that we've been experiencing for 10 years now.
Todd Stender
Thanks for that Gary, and then can you speak to these specific expansion opportunities. And then, just in general when you do buy properties do they come zoned and entitled and how much visibility do you have to actually monetize and create value there?
Gary Shiffman
So they are all zoned and entitled and the properties at high-demand and occupancy. So that we would go right into development.
I think we've shared with the market that we anticipate 12% to 14% returns on our expansion sites in large are due to the fact that all the fixed expenses, community managers, personnel, staff already exist in the communities, so where we can expand existing communities, we generally see high returns. And that's true throughout the entire portfolio, and certainly as we are expected to burn through as many as 1,700 expansion sites in 2016 and 2017.
We are always looking to acquire properties and land that can allow us to expand the communities because it's very profitable for us. So, I mean this and also the properties that we have under contract and discussed earlier that we anticipate closing in August, we also look to expand those communities as well.
Todd Stender
Thanks, and then, can we just get an update on, maybe you can speak to the renter profile, if there are any data points that you can highlight, if anything has changed, from here, maybe about credit scores, length of stay, propensity to eventually buy their home anything, any updates on the renters?
Gary Shiffman
I think obviously, as we see 6% to 10% increases in prices whether it be new home sales and/or pre-owned homes. It's an indication to us that there is a strengthening market.
To convert our renters into owners, I'd remind everybody that the average stay of a homeowner at our community is about just over 13 years now. So, when we convert a renter, we do get the benefit of having them in that home for 13 years.
The average amortization of mortgage and homes in our community is 15 years now. So, with a 13-year stay that's matching up very, very nicely.
We have been converting renters into homeowners on average on an annual basis for the last six years at right around 10% and some of the things that we're seeing are that in our communities I've shared in the past, we expect the rental units to go down as we reach full occupancy and we're in fact starting to see that now. Rental units in Texas communities where we're at virtually full occupancy, other than a newly expanded properties are down 6% from last June.
And in Colorado, where we've been full an extra year longer than Texas, except for expanded communities, rental units are now down 37% from where they were this time June of last year. We would expect those trends to continue, as we've shared strategically, we view the rental program as an excellent tool now to accelerate growth for the shareholders, as we acquire communities with vacancies as we expand our communities, so that's primarily where we'll be using the tool.
We have a little bit to go, maybe a 150 basis points until Michigan reaches but we consider full occupancy, which is right around 95% and certainly we have a ways to go in Indiana. So those are the areas we'll be focusing most of our attention to rental programs and we believe in 2016, you'll see the redeployment of capital from the rental markets such as Texas and Colorado being used more in Michigan as we fill it up in Indiana, which I think will indicate less and less growth in the rental program in the future.
I think one other point that I'd point out that when we look at our rental program in 2014, excluding any rentals related to the AOL acquisition, we see a decrease or reduction of about 23% and our rental program growth over 2014, on that same property basis. So, I think we'll be able to share with the market these continued trends throughout 2016 and late 2015.
Todd Stender
Any interest to stay on that theme. Is there any change in your budgeting for new home inventory that you're bringing out to rent, has that changed since year-end and how you're looking out for the second half of the year?
Gary Shiffman
I think guidance still has the kind of the same.
Karen Dearing
It has the same amount of increase in rental units.
Gary Shiffman
So there is no change. I think that the changes that we're talking about our segment just take place.
We've been talking about for many quarters now but we really are actually seeing them happen in Texas and Colorado. And I think that where you'll see the real changes to any addition in the rental program will take place in 2016, whereas I said that we primarily focused on vacancies related to acquisitions or expansions
Operator
We will now go to Dave Bragg with Green Street Advisors.
Dave Bragg
First one is Gary, you said its solid results in acquired communities and your guidance relative to the beginning of the year is helpful but you've added in some communities there. Can you talk a little bit or hopefully quantify how Green Courte is performing relative to expectations?
Karen Dearing
Green Courte is performing quite well, Dave, I would say that you're correct. We did increase guidance for our acquisition portfolio adding in the properties.
I think its six properties or five properties that we didn't have in it previously, Green Courte portfolio is performing well. There have been some unexpected first-year expenses being incurred there for the trending taking minor repairs that we did not anticipate in our original guidance.
Gary Shiffman
I think it's fair to say -- it would be, we would be performing above budget. But we did get in there and incurred these expenses and thought it was important to demonstrate to the residents that Sun is looking after their communities and therefore is in their best interest, so performing ahead of budget, I think on revenues, home sales and operations and that amount was sort of soaked up by the first year expenses.
Dave Bragg
Okay, that's helpful. Thank you.
Earlier on the call Karen, you were asked about leverage, you said the target of under 7 is what you're shooting for, last call you said, you were a little more specific, you said 6, has anything changed there or you're just talking about in more vague terms.
Karen Dearing
I think in general we always kind of discuss being below 7x net debt-to-EBITDA, we have some updated projections and from what I can see right now, Dave, net debt to EBITDA would be between 6.5 to 6.8 by the end of the year.
Dave Bragg
Okay, thank you. And the last question just relates to the disclosure, which really longs operating expenses altogether, can you help us think about the margins, operating margins that you achieved in the image business relative to our e-business?
Karen Dearing
Overall, I would say that they perform pretty similarly, RV has a little bit higher expense factor because of all of the activities associated with them. So, in a range if we're on average around 35% expense, RVs may be 38%, 40%.
Operator
It appears that there are no other questions at this time. Mr.
Shiffman, I'd like to turn the conference back to you for any additional or closing remarks.
Gary Shiffman
At this time, I'd like to just thank everyone for participating in the call. As usual Karen, myself and all members of management are available for any follow-up questions.
And we certainly look forward to sharing results after the third quarter is completed. Thank you, operator.
Operator
This concludes the Sun Communities' 2015 second quarter earnings conference call. Thank you for your participation.