Sun Communities Inc (SUI) 2002 Q2 法說會逐字稿

Good morning, my name is [Michelle], and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Sun Community second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press the * and the #1 on your telephone keypad. If you would like to withdraw your question, press the pound key. At this time, management would like me to inform you that certain statements made during this conference call, which are not historical facts maybe forward-looking statements within the meaning of the Private Securities Litigation Reforms Act of 1995. All [INAUDIBLE] by way of expectations are quite [INAUDIBLE] forward-looking statements are based on reasonable assumptions. The company can't 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 and accompanied periodic filings with the SEC. The company undertakes no obligation to revise or update any forward-looking statements whether as a result of event or circumstances after the date of this release. Having said that, I would like to introduce management with us today, Mr. Gary Shiffman, Chief Executive Officer and Chairman, Mr. Jeff Jorissen, Chief Financial Officer. Mr. Shiffman, you may begin your conference.

Thank and good morning. Second quarter earnings as announced prior to the opening of the market today were funds from operations of 17.3 million or $0.85 per share compared to 17 million or $0.85 per share in 2001. Income in the second quarter was 7 million or $0.39 per share compared to 8.3 million or $0.48 per share in 2001. Net income in 2001 included a gain on asset dispositions of 0.8 million or $0.04 per share. Revenues in the second quarter of 2002 were 39.2 million compared to 38.1 million for the second quarter of 2001. As we have stated on numerous occasions since our earnings conference call in July 2001, we expect greater volatility in other income components especially related to income from affiliates. This volatility disrupted the earning flow of four nearly equal quarters of FFO per share for each year. While consensus expectations for quarterly results have generally not taken into account, they projected for roughly equal quarters; the volatility exists in the second quarter.

The change in loss from affiliates from quarter 1 to quarter 2 accounts for $0.04 of the $0.05 reduction in funds from operation per share between quarters. The first [INAUDIBLE] explanation for the decrease in FFO per share is that community operations are performing according to our historical standards and this is certainly true of the performance of our same property portfolio consisting of 103 of our 117 communities. The second quarter was a near mere image of the first quarter. Revenues were up 4.8%, expenses up 2.1%, and net operating income growing by 5.7%. Another measure of our property performance is the increase in EBITDA from 57.8% in 2001 to 68.2% in 2002 excluding other income and affiliates results. A few general comments before discussing affiliate results in detail. First, the balance sheet. Traditionally, we have had very little secured debt. This is changing in 2002 due to the highly intrinsic characteristics including rate of a [INAUDIBLE] program available to our asset sector. We closed round about $100 million in the second quarter and expect to close the remainder of the $150 million facility in the third quarter. The credit contained fixed or variable rate options, pricing more favorable than either [our] line of credit or the unsecured debt market, substantial flexibility related to substitutability of collateral, conversion from variable to fixed rate, the right to remove collateral and [NOI] growth and even eliminate revolver feature. Beyond that, we are considering consolidating existing secured debt into the [INAUDIBLE] facility. One fully drawn, we do not anticipate the aggregate amount of our secured debt to change much other than through property transactions.

We have also put our new three-year unsecured line of credit in place at $85 million with [accordion] feature to $125 million at a rate of [live work] plus 85 basis points with a one-year extension available at our options. We deemed it appropriate to raise the equity to beyond the above-described financing. Accordingly, since March, we have issued 332,000 shares of common stock at an average price of $41.10. For this we got onto a program, which allows the company to establish the price enquiry to be sold on a daily basis. The 13.2 million as opposed to maintenance of our financial ratio and our existing investment grade rating, so there were no change made resulting from the secured debt. Second, industry conditions as measured by the shipment and sale of new manufactured homes remained below expectations. Through May 2002, shipments were down 2.6% from 2001. Projections in the recent Champion Enterprises press release forecast the year to be up by as much as 7%, further the indicated projections of repossessions of approximately 90,000 in 2002. This would indicate total repossessions in 2002 equal the experience of 2001. Anticipated reduction in repossession does not seem to have materialized negatively [INAUDIBLE] new home sales throughout the industry and at Sun Home Services.

Now, let's proceed to take a closer look at the three components of loss from affiliates. First, Sun Home Services as I just mentioned. As recently as 1999, Sun Home Services sold 648 new homes and generated an annual contribution of approximately 1.7 million or about 8 plus 10 per share. Sun Home Services have sold 144 new homes in the first six months of 2002 compared to 225 in the first half of 2001. Although, the margins have been reasonable, the share reduction and quantity of new home sales has caused Sun Home Services to be unprofitable. The loss from Sun Home Services for the six months aggregated just over 500,000 or $2.5 a share. As you may recall, we have invested in personnel to enhance and strengthen the capacity of Sun Home Services, the benefit from what we thought would be improving sales environment that has not materialized. We are actively re-sizing Sun Home Services by the current market conditions and reviewing all aspects of the operations. Secondly, SunChamp is a joint venture between Champion Enterprises, the largest manufacturer of homes and Sun to develop [INAUDIBLE] homes and lease sites in 11 newly developed communities. The initial business plan was for Sun to lever off the strength of Champion, the largest manufacturer and [INAUDIBLE] internationally. The [INAUDIBLE] pro forma as industry conditions and the company's restructuring and for Champion's ability to direct buyers from their [dealership] into their communities.

While Sun's ownership entrusted below 20% of equities, we have adopted equity accounting to recognize our share of the operating results. The loss has amounted to $0.01 per share for the first two quarters and we expect to approximate $0.01 or $0.02 per share in the second half of 2002. Third, a 30% ownership interest and origin is accounted for on the equity method. The nature of Origin business is that the profitability is dependent upon loan securitization that occurs generally twice a year. The other quarters report a loss and that securitization will likely occur in the fourth quarter, but those second and third quarters are unlikely to be profitable. Perhaps the most perplexing aspect of this downturn in the shipment and sales of new homes now that we believe this is the fourth year, is the absolute essence of trends that I spoke about just before several of our calls. A few solid months followed by a return to weakness. The link left by poor mending practices led not only to a rare [INAUDIBLE] available on affordable financing today but continued to trail repossession that were not increasing, had not been further eliminated. Until such time as those companies continuing to manage their balance sheet, [INAUDIBLE] the marketplace of the remaining levels of regrowth so I cannot capitalize on the additional sources of profitability currently existing in its portfolio. The consistency in quality of earnings in the core portfolio continued to yield positive results even during the most difficult of industry times. However, the contribution from other income such as Sun Home Services has not been presented here remains the focal point as senior management plan for the second half of 2002. At this time, Jeff and I would be pleased to address any questions.

At this time, I would like to remind everyone in order to ask a question, please press *1 and then #1 on your telephone keypad. We will pause for just a moment to compile the q-and-a roster.

Your first question comes from [Rick Anderson] with Salomon Smith Barney.

[JORDAN SADLER]: Hi guys, this is actually [Jordan Sadler] here with Rich. Just a question regarding your capital expenditures on your initial supplement on page 25. I guess you talked about the revenue producing portion and you described that it is capital [project] already progressing or generating activities, stable, [INAUDIBLE] etc. Curious as to what the special capital project might be, what the other portion would be?

[GARY A. SHIFFMAN]: While for instance, if the community were to request the swimming pool where in fact currently they do not have a swimming pool, and we would say you know, sure we will open a swimming pool, but there is going to be a adjustment in rent for that. These things don't happen very often but they have happened in the past and it could happen in the future, so that would be an example, usually it has been an expansion, I think it would [INAUDIBLE] package in the community at resident request and of course they are going to end up paying for that.

[JORDAN SADLER]: Right, now I guess the lot modification portion, where would you classify something like new entrants or additional fitness center or just a re-landscaping, something that others might consider?

[GARY A. SHIFFMAN]: Fairly, we believe that that would fall into the recurrent capital expenditure and would not be revenue producing. I think that we made that distinction very early on and [INAUDIBLE] as a public company and as clearly stated on the records that we believe that items like that are more items of deferred maintenance and when we get beyond the expense items, then you will get into refurbishing common areas that exists [INAUDIBLE] those types of things, those are more in nature for us in the recurring aspect of revenue producing for us as strictly new items and particularly focusing on the [shed]. If we were in telecommunications or something like that which we are not, except when we are offering high-speed cable assets now with our television investment that we made in about nine communities now. Those clearly are what we consider revenue producing under [distinction] is very clear for us. It is not that we furbish them with our existing facilities.

[JORDAN SADLER]: Okay, is the 1.5 million as you reported this quarter a good run rate, into the high relative for last June and maybe the last quarter?

[GARY A. SHIFFMAN]: For the six months, we are at $62 per site, last year wrapped up at a $119 per site and it could be within 10% or 15% of those numbers depending on the timing of the program and probably now and then there is something I expect to [INAUDIBLE] that we need to take care off.

[JORDAN SADLER]: Okay. Would you also provide a little bit more color on Origin in the lending business in general, has it picked up in terms of opportunity for you guys?

[GARY A. SHIFFMAN]: Jordan, I think that all of us in the industry would clearly point to the last available financing and the affordable financing as one of the most difficult and challenging factor in the growth of our portfolio and in particular and development. Origin continues to be one of what I think are only three functioning manufactured home finance companies out there today, the other two being [Consaco and Chace and Consaco] certainly has a host of challenges facing it at this particular time. If you would to look at Sun Home Services sales and break them down on a monthly basis which we do, you would find that about 50% of new home sales are being financed by what we refer to as cash, that means the buyer comes to the table, not necessarily with cash, but their own means of financing through their own bank or their own resources. Of the other 50% that are being financed by the other three finance companies, about 50% of the homes being sold at Sun Home Services are effecting finance by Origin. So it is a very good component that allows us in what has been a very disappointing sales market to continue at least selling at the levels that we are selling.

I think that clearly the turbulent market sooner or later the recognition of the opportunity will catch the eye of other people who enter the market. I think some of that is taking place now, but I think that we all know there is so much volatility going on in corporate America right now. Some of that far shakes out. I don't know that I would forecast any immediate entry into the marketplace, so Origin for us and the survival of [Consaco] and others is in our best interests.

[JORDAN SADLER]: How does that 60% of the 50% stack up against [INAUDIBLE] a year ago.

[GARY A. SHIFFMAN]: I think what we had a year ago was [INAUDIBLE] [CIT] was in the business, [INAUDIBLE] was in the business, and [CIT] was acquired by Champion and will be running the Champion press forum and if successful, I am sure will be extended to others out in the marketplace, but the sheer volume of how the reduction if you will exit from the marketplace has caused Origin's percentage to increase and the balance of the 40% is pretty much divided between [Consaco and Chace]. So quite frankly what we found is that [Chace] goes after a higher level of credit than [Consaco]. I think I am not speaking on behalf of Origin, but the market will find the credit quality of Origin is much higher than [Consaco] as well and others in the industry.

I think that one of the benefits that is happening is the credit profile in the portfolio at Sun has been improving for three or four years. I think that clearly we had mentioned four years ago at the beginning of the difficulties of credit that we implemented. There was no longer enough to assume that some who were looking for financing, they could come in to us, communities. So, we take much more stringent care and effort to approve them whether they approve for finance or not, we have had the elimination of a lot of weak credit. We implemented what we called elimination of [INAUDIBLE] program where companies were just putting a weaker credit to [repose] homes just to improve their balance sheets and that is taking place. If they threatened to pull their homes and we don't want to buy their homes, they pull their homes out of the community. I think we have enough with a much stronger credit profile and we look forward to the day when the securitization and other [exit] strategies are stronger so that more people will go on to finance field.

[JORDAN SADLER]: Okay. Would you say Origin to sum it up, their market share has increased by what sort of pattern from a year ago?

[GARY A. SHIFFMAN]: I would say probably a year ago, the market share probably increased by 20,25% but the market share is a lower number...

[JORDAN SADLER]: Right, I understand that. I guess the question is this is sustainable, that market share level as ..., but one of the questions related to home sales and services, I guess, can you discuss, I guess give me a little bit more color where the sales take place more [INAUDIBLE]? This may be a little bit [INAUDIBLE].

[GARY A. SHIFFMAN]: I think that what we typically expect and as closing remarks that indicate that while we are not changing guidance at this particular time, there are things that we are looking for at the second half that will be reflected by exactly what takes place sales-wise and lease supplies during the second half. Traditionally, last two quarters were our strongest selling seasons, Florida in particular being the fourth quarter, a little bit more heavily weighted, the midwest family communities are predominantly third quarter into the first half of fourth quarter, people setting up for schools and things like that might be in place by certainly the end of September. So, we are very, very cautious about how we are viewing third and fourth quarter as to whether or not, it will pick up and have to make some very serious decisions because we did hear Sun Home Services division for increased sales. To give you some examples, we set our sales budget at what we consider at the 2001 level of Sun Home sales. First quarter, we saw similar comparison 2001 to 2002 at new home sales, yet they dropped dramatically in the second quarter.

We are seeing already some increase in those sales but the fluctuations, it is just too hard to really go out and make any prediction. However, we would historically expect third and fourth quarter sales to be stronger than first or second quarter sales.

[JORDAN SADLER]: So it is 358 number for 2002 that is still a good number [INAUDIBLE].

[GARY A. SHIFFMAN]: I think our guidance is 356 to 364 and I think we are going to suggest and be with it, but right now I just indicated that we are looking at about maybe $0.03 dilution for the year and SunChamp coming forward on an equity basis and a [INAUDIBLE] of Sun Home Services for the first half of $2.5. Again entering what is usually the strong part of the selling season, so I would only indicate that the essence of trend leaves us cautious with regard to adjusting guidance in one direction or the other and I think we will have a better sense of what will be taking place in the third quarter selling season.

[JORDAN SADLER]: Okay, and in terms of occupancy trends and then which characterize occupancies that way as well?

[GARY A. SHIFFMAN]: I [INAUDIBLE] occupancies. In terms of occupancy, I think the same property gives us the best picture of that and the occupancy from June 2001 to June 2002 declined by from 95.4 to 93.9 or 150 basis points, a 100 of those basis points are because we opened more sites in the portfolio and 50 of those of basis points are because of increase in vacancies which in fact numbered 112 increased vacancies from June 2001 to June 2002, 0.5% of the same property portfolio or sites manufactured home sites.

So you know the trend with occupancy is not growing and probably vacancies are increasing, but they are increasing very modestly at an annual rate of 112, [INAUDIBLE] for instance is free, pretty insignificant when you come through it at all, although it is needless to say, we could have 112 more people than 112 fewer people.

[JORDAN SADLER]: Right, what have you done with same store basis, what did you not do...

[GARY A. SHIFFMAN]: That was the same store ..

[JORDAN SADLER]: Okay, I understand, I'm sorry, I spoke to the [INAUDIBLE]. That is the end of my questions. Thank you guys.

[GARY A. SHIFFMAN]: Thank you.

Your next question comes from [Milton Port] of Merrill Lynch.

[MILTON PORT]: Good morning, gentlemen. You are pointing to the lack of available and affordable financing as being one of the problems. Are you tracking customer visits at all, do have a sense whether the demand for homes have changed and so the demand is there, but people just can't just get financing, and are you measuring that?

[GARY A. SHIFFMAN]: I think we do obviously set our services department to review phone calls, and the offices, they refer to on a weekly and a monthly basis. I would suggest year to year, while we have the variability in the trend month to month, we are this year very similar to last year and I think that the hesitancy from year-over-year traffic that is the same is caused by the interest rate still being higher where they used to be anywhere from 200 to 250 basis points above [INAUDIBLE] housing rates are still in the 11,12,13% range although they are coming down slightly and manufactured housings, it is one of the biggest obstacles that we are still facing in keeping the same sales up based on the same traffic. So, that is one of the big things. Even if we were to operate with the existing finance companies that were out there, most important feature would be getting the rate down.

[MILTON PORT]: Okay, thank you. Acquisitions, you have telegraphed that you have $46 million of acquisition under diligence. Could you talk a little bit about those?

[GARY A. SHIFFMAN]: I think that we are deeply into due diligent process of [INAUDIBLE] acquisitions team is out there. They are located in New York and they are two very large communities, capital rate is around 8% although that has affected due diligence, they are verifying right now and it is part of our ongoing asset management where we are trying to measure the low growth properties and showing up low growth properties and trying to acquire properties with higher growth potential. Properties that perhaps I have not been [INAUDIBLE] below our market rent potential or in this particular phase as substantial additional zone land available for future acquisition are comfortable with the transactions as part of the price.

[MILTON PORT]: And when you talk about your 8 capital rate, you are not attributing any purchase price to that additional land?

[GARY A. SHIFFMAN]: That is correct.

[MILTON PORT]: Okay, good. Now [INAUDIBLE], you talked about 40-60 million in acquisitions during the day, this deal, which gets you over 80 is something that is changed in your thinking?

[GARY A. SHIFFMAN]: No, I think if you go back to our conference call and probably last press release, I indicated that I thought that this [INAUDIBLE] what we had already acquired in first quarter is this year would be the year that we surpassed our budget and I think I gave some indication that I thought that it would be another $40-50 million than we had under contract, but couldn't be certain that we will be closing at, I would reiterate that as they get into the numbers then we see variances of that company would be due diligence, there is no [INAUDIBLE] negotiating that takes place and depending upon the cooperation and flexibility you really never know which [INAUDIBLE].

[MILTON PORT]: Okay and thank you. The last question, advances [INAUDIBLE] has gone up $17 or $18 million during the quarter. Can you let us know which area that was invested in?

[GARY A. SHIFFMAN]: Part of that is the line of credit for one year revolver which we extended to bring them on flash Origin and the re-capitalization of Origin in December of last year and we just [INAUDIBLE] first quarter and it is about 12.5 [INAUDIBLE] quarter.

[MILTON PORT]: What [INAUDIBLE] number?

[GARY A. SHIFFMAN]: That is 11%.

[MILTON PORT]: All right, thank you.

At this time, there are no further questions.

At this time, Jeff and I would like to thank everybody for participating in the conference call and we look forward to our next conference call and again we will have a good sense of where we think the second half will wind up. Thank you.

Thank you. This concludes today's Sun Community second quarter conference. You may now disconnect.