Sun Communities Inc (SUI) 2002 Q1 法說會逐字稿

Good morning to everyone. The Q1 results, as announced prior to the opening in the market today, were funds from operations of $18.1 million or $0.90 per share compared to $17.1 million or $0.85 per share in 2001. That income in Q1 was $8.1 million or $0.46 per share compared to $11.1 million or $0.54 per share in 2001. That income in 2001 included a gain of asset dispositions of $3.5 million or $0.17 per share. Revenues in Q1 of 2002 were $40.7 million compared to $39 million for Q1 last year. For the first time in a while highlights for the quarter are really centred on acquisitions. Since the middle of December we have acquired three communities amounting to 1, 830 sites for $56 million. These communities are of the highest available quality in the industry and present solid growth opportunities for the company. Buttonwood Bay, which was acquired in Q4 of 2001, is a 941-site community in Florida with 407 manufactured housing sites and 534 RV sites. It is a 5 - star community, which further strengthens our RV presence. It is an excellent location for work within our existing portfolio. Pheasant Ridge in Lancaster, Pennsylvania, is also a 5 - Star community with 552 sites and it marks our first entry into the state of Pennsylvania.

Both Buttonwood and Pheasant Ridge average an eight cap rate and they should really benefit financially from the professional management at Sun Communities. We would deem the rent in both locations at present to be at the low end of the market. A third acquisition, River Ridge, is located in Austin, Texas where we have a strong presence. We have 337 sites, which will complete their initial lease up through the end of 2002. This community was actually acquired pursuant to our right of first refusal as the developer for the Trident Group and their manufacturing housing properties. Furthermore, I would add that currently we, unlike some of our competitors, are finding the acquisition opportunities very good. We have several additional large attractive opportunities that are actually at various stages of negotiation and due diligence at this particular time. The portfolio, on the same site basis, which includes 102 of our 117 communities, in Q1 revenues grew by 4.8% and expenses by 2.3%. This resulted in a pretty solid NY growth of 5.7%, which is basically in the middle of our forecast range for 2002. In occupancy in that same site portfolio revenue is 94.4% as compared to 95.5% in Q1 2001 but in fact is actually up from 94% from 31 December 2001.

On the leasing side, there was a strengthening in Q1 with the sale of 450 growth sites compared to 275 for the same period in 2001. We also added net residence of 154 in the quarter in comparison to the 29 in the prior year's Q1. At our primary leasing centres, including all dealers, 175 new homes were sold in 2002 compared to 153 in 2001. With regard to the credit and to our portfolio, our delinquencies are currently at their lowest levels for 12 months at $1 million. I believe this is very reflective of the hard work and sound financial and operation management and systems. Therefore, I give credit to our operation department. The number of repossessed homes grew by about 10 in the quarter to 592. As such we do not see a substantial increase at this level. Our credit costs remain substantially self-financing as the Lacies [phonetic] left the bad debt and the related legal expenses, netting a loss of about $43,000 for the quarter. The two weak points for Q1 were the Sun Home Services, our affiliate or 95% subsidiary that sells and brokers new homes, which lost $156,000 in Q1 and generated only 72 new home sales, which is about 23 homes less than the same period last year. We have discussed this situation during our last three or four conference calls.

Margins remain depressed, competition from the Reapo [phonetic] market is still strong and available financing is limited. We continue, as the company's management group, to remain focused on minimizing these losses in the organisation, while we continue to allow Sun Home Services to serve through the overall portfolio in continuing to fill vacant sites. Origen completed a successful loans securitization in March 2002. While Origen has not released their numbers, and while we believe they are profitable, in the difficult market conditions, we estimate from the unreleased information that we have reduced our participation by about $0.02 - $0.03 per share from what we were looking for. In summary, at this time we expect the weakness from Sun Home Services and Origen to be offset by the stronger than anticipated level of acquisitions. The core portfolio continues to perform as planned and we remain comfortable with earning guidance of 356 to 364 per share. At this point Jeff and I would be pleased to respond to any questions. JORDAN SANDLER, SALOMON SMITH BARNEY: How do you see the lending business in the manufacture home industry and do you anticipate this to be the greatest risk to earnings going forward?

I think that the lending business is been in disarray for over two years now. There has been a lot of exiting in the business, which we have discussed. We recently announced that Champion Home Builders actually acquired one of the platforms and will be in the lending business. We think that is a positive sign. There is a lot of opportunistic sniffing right now from some of the bigger financial service companies. We really believe the verdict is still out on Conseco. They have done a lot of restructuring. However, I am not certain whether they can ever overcome the bad lending practices that have hurt them so deeply over the last four or five years. The answer is that we are continuing to monitor the situation very carefully. I think in the absence of some of the other lenders, we are looking for a little bit better performance from Origen and the availability of more quality loans available to the company and our participation with that process. However, Origen has still struggled by the dynamics on the exit in the securitization market place because of the poor performance brought on by the bad lending practices. In summary, we are watching it very cautiously. It is an excellent question. I think that it has had an impact as the pendulum has swung too far in the opposite direction to provide credit that is tighter than it needs to be out there.

It has an effect of slowing down the absorption in our portfolio. However, there is still a level of credit worthiness, which is being financed out there. Much of this is being financed by more traditional sources, such as banks as they step in with their big balance sheets and portfolio loans so that they do not have to depend on the securitization market. We are carefully watching what affect it will have in the future. For our particular budgets in both 2001 and 2002 we factored in much slower absorption, we ratcheted down our expansion and development. Primarily, this is a result of there being less lending available to the residents who are potential customers of those new sites.

In terms of Origen, do you still have a $12.5 million line of credit out to them and what is the outstanding amount at this time?

At the end of the quarter the outstanding amount was $2 million. This line of credit runs until the end of December this year when it will expire.

On the fill rate, the 154 net lease through April. Do you see that as a good run rate for the rest of the year?

I am going to let Jeff refer to the budget. It is not where we would like it to be. We still feel comfortable in the sense that it falls within our budget. However, clearly, it is far below what historical numbers would have been.

That is an important question. One of the problems with most of the clients in the industry that we have had experience with is that the volatility mix projection is exceedingly risky. Last year we had 29 resident sites in Q1 and we ended the year at 214. The rate more than doubled. We would be pleased if the 154 were in fact experienced at the same rate. If we were to get 600 or 700 for the year that would be a very pleasant result, in line with our optimistic site of our forecast.

It was not really a smooth fill rate of say 50 a month through Q1. It was more volatile than that?

I do not actually have the fill rate by month. It was pretty steady based on home sales and some of the other statistics that we do have. It was pretty constant during the quarter. However, we have seen in the past where maybe 80 homes will be moved into our communities in one month, and then the next month it will be 57 and then the next month it will be 110. For well over a year and half now we are not seeing smooth numbers, which allow for a reasonable basis for projection.

Finally, you mentioned acquisitions and that you had completed $37 million worth of acquisitions in 2002. I know that you said you were budgeting for $40 million last quarter but that you were aiming for the $60 million or so that you did last year. Have you changed that outlook, is the figure going to be around the $60 million or more mark?

Our budget was set for the $40 - $60 million range with our target being closer to $60 million rather than $40 million this year. The remarks that I made should reflect that we have a considerable amount of pleasing acquisition opportunities out there at present, and, if the due diligence reflects what we expect in the numbers and the physical condition of the properties and we were to proceed, then we would definitely exceed that top end of the range fairly rapidly. LEWIS FORD, MERRILL LYNCH: I have a couple of questions to follow on from what Jordan was asking. Where do you see these opportunities and are you sourcing them similar to your recent Texas deal or are they open to the general market place?

Interestingly enough, I was reading one of our competitors' remarks yesterday and they seem to be having a much tougher time on the acquisition front. I would not characterize the market conditions in the same manner. I would characterize market conditions from the opposing viewpoint. Chateau obviously has a set of problems that they are working through right now. They have more or less stated that, while they will not walk away from an acquisition, they are not intensively in the market. I do not know for a fact, if that is the reason for all of what we are seeing right now but certainly this seems to be part of it. The third thing that I would mention is that in some of these larger opportunities that we are looking at right now these are ongoing relationships that both I and the company have had for many years. In at least two of those instances we have done significant transactions since going public with them. They have either created new portfolios, developed additional properties or are now taking a look at selling the remaining pieces of their particular assets.

We appreciate that the fill rate is volatile but is it changing because of the changing mix in your properties? Is it the recent acquisitions that are driving the fill or is it the same store that is driving the fill.

Same store was up roughly four-tenths of a point from December until the end of March, which is approximately half of those 154 net sites. The rest would be principally in our expansion and development side of the business. Certain markets remain attractive and strong, while other markets are weak. Obviously, our expansion and developments are focusing primarily in the former where there is demand.

I would say that none of the [indiscernible] or any type of new communities have not really been around. Two of the three communities that we mentioned are basically 100% occupied.

Regarding the acquisitions that you have done, are you able to fine-tune the timing of completion of those deals during the quarter?

You can assume that River Ridge was for the entire quarter and Pheasant Ridge from 1 March 2002.

Regarding your debt, the interest rate on your mortgage note has come down during the quarter. What led to that?

Mortgage loans payable went down by approximately $8 million from December to March. I do not have the specifics but from interpreting page eight of the supplemental data package apparently something came due higher.

So, It was not the role over but more of an expiry. Line of credit has grown; it is a nice low rate today. Are you looking at locking rates, what are your plans there?

We are well along in the process of a secured financing piece, which would refinance the line of credit. The drop rate of our line of credit expires 30 June 2002. We are at a fairly advanced stage with our bank group on negotiating a new line of credit.

What do you see happening with spreads these days for the secured market?

These are fanny [phonetic] made deals or it is a fanny [phonetic] made transaction. The spreads are quite attractive. They are probably 30 - 40 bases points better than what we would experience in the unsecured market.

Other incomes showed a bit of a change this quarter. What has happened there?

As we promised that would change. The primary differences are in interest and that is going to be driven by a reduction of mortgage notes and other receivables on our balance sheet, which was $123 million last March and is $86 million now. Some of the interest-bearing assets have moved into investment and into advances to affiliates but primarily into a reduction of interest earning assets. Last year, for most of the year, we had $40 - $45 million interest earning to Origen and this year that number is in the $2 to $8 - $10 million range. MELISSA SEEPLE, LEHMANN BROTHERS: Following on from the acquisitions that you talked about, can you comment on the cap on acquisitions that you have pending that you are doing due diligence on?

We are finding that everything that we are looking at is roughly between the eight and the eight and a half cap rate. There are communities substantially below that do not even hit our debt and do not justify us to do any work on them. Once the acquisition is in the eight to eight and half cap rate range it is more important for us to look at what type of operating efficiencies we could put in, where the rents are in the market place, what opportunities we have for increasing the rents substantially and where we can separately [indiscernible] water and sewer. Generally, what we are looking to do is sift through those acquisitions opportunities and find the ones that we can substantially increase the cash flows fairly rapidly. They are all in the eight to eight and half cap range. There are no family communities or old age communities that are any quality at all above that and have not been so for years in the market place. That is pretty much where we are focused.

Overall, are you seeing any increase in the willingness for the lenders suspected dispositions of their discounts yet? I think that they are still kind of resisting at the end of last year. Has that changed at all?

I think that we are seeing a lot of flexibility with everyone with the exception of Conseco. This leaves me with great concern. On the one hand, I recognise what they are trying to accomplish and I know that they have to manage the losses and the recovery rate; on the other hand how much of that can you keep swallowing before you blow up. A lot of equity swaps and a lot of refinancing is being done which I am concerned will come back and re - enter the market place in six months, a year or two years. Therefore, we have not seen any change. We are still working with GreenPoint and several others that have been fair with their discounts but Conseco is still pretty much holding out on their discount.

Finally, in the trend in the home sales for the rest of the year do you see Q1 trending up towards the end of the year or are things going to continue for the rest of 2002 and then pick up in 2003?

I think clearly that [indiscernible] that we are behind in home sales. In home sales we are fighting two things: shear numbers and reduced margins. We are not seeing the profitability that we saw two or three years ago in that part of the company. Presently we are operating to enhance our portfolio. That is the profit centre.

We are entering the primary new home sales centre. The cycle for the next six months, from 1 April until 1 October when the majority of the sales take place. Therefore, it is a little early to make any predictions as to how that is going to go. However, we are hopeful that the unit volume will pick up.

I have a follow up question on dispositions. You mentioned that there was a disposition during the quarter but we have not discussed that yet. Could you comment on this aspect?

That was a small community of about 130 sites in Florida that was sold in.