Sun Communities Inc (SUI) 2002 Q3 法說會逐字稿

Ladies and Gentlemen, 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 believe the expectations reflected in any forward-looking statements are based on reasonable assumptions. The company can provide no assurance that it's 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 periodical filing with the SCC.

The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release.

Having said that, I would like to introduce management with us today, Mr. Gary Shiffman, Chairman and Chief Executive Officer. Mr. Jeff Jorissen, Chief Financial Officer. Gentlemen you may begin.

Good morning, third quarter earnings as announced prior to the opening of the market today, with funds from operations of 16.7 million or 0.82 per share, compared to 17.2 million or 0.85 per share in 2001.

Income from continuing operations in third quarter was 5.8 million or 0.32 per share compared to 7.9 million or 0.45 per share in '01.

Revenues in third quarter of 2002 were 39.4 million compared to 38.2 million for the third quarter of '01.

And today I would like to start out with comments by stating that the corner stone attributes of our business of owning and managing manufactured-housing communities remain very much intact at Sun. Nothing stands out more dramatically than the resilience of cash flows and their growth even in some of the toughest times ever experienced by the broader manufactured-housing industry, that includes manufactures retailers and lenders and this strengths at the company is due to several factors which I would like to cover briefly.

The average annual turn over where a home actually leaves the community resulting in an interruption of cash flows stream still remains at right around three percent. The waited average annual rental increases to date approximate five percent or $15 per month, and that remains very consistent with our estimates for '03.

Now I know a predictable recurring KFFs for about $200 per site per year has remained consistent with management position that one must reinvest capital to sustain four to five percent annual increases.

This has maintained the quality of our communities the value of the resident's homes and no deferred maintenance providing what we have long suggested as long term shareholder value.

Strong operating margins have improved each year as the increases in exceed the increases in related operating expenses with Corp portfolio NOI growth remaining a strong 5.4 percent.

And high occupancy rates driven by the low turnover and the affordability, which I'm going to talk a little bit more about shortly. The cash flow strength combined with the prudence Stuart ship have benefited all of the different levels within the company.

A research analyst that published a piece last week that we received treated dividends as a fixed charge rating since fixed charge coverage of the strongest and their coverage universe of about 30 companies excluding gains and losses.

And now what I'd like to do is to draft a series of issues that are often stated as having serious negative impacts on our industry and on Sun keeping in mind that each competitor may experience a different result from their portfolios or from their operating strategies.

The first one is that occupancy is deteriorating. When we looked at 40 I'm sorry 84 manufactured housing communities which we have owned since 1998. The number of occupied sites since September 30th 2002 is 1,015 higher than the number of sites since September 30th 1998.

Meanwhile our occupancy percentage has declined from 95.8 percent to 93.8 percent and that increase is due to more sites having been brought on stream to meet demands.

It did not result from a of residents from our communities and if we were to measure from September 2000 analysis shows a loss of 113 residents or approximately 40 basis point in our occupancies.

When we look at the 103 communities comprising the same property portfolio at September 30th '02 and compared to September 30th '01 we find the following:

The occupancy of the manufactured housing sites have declined from 94.9 to 93.8 percent but the number of residents actually increased by seven in those communities.

The decline in the occupancy percentage is due to more sites having been brought on line to meet the demand. So the conclusion at Sun the primary cause of reporting lower overall occupancy percentages is that newly developed sites leasing at rates slower than the base occupancy percentage.

And not because there is a widespread loss of residents. In fact Sun has more residents in the 84 communities now then in 1998.

Second comment I would make regarding financing being unavailable. Manufactures will ship right around 180,000 homes this year and it's estimated that the over all level of new home inventories would be drawn down by about 25 thousand units this year, resulting in total new home demand of about 200 thousand homes for '02.

In addition approximately 100 thousand repossessions would be absorbed by the market place. The annual demand is approximately equal to 85 percent of the average annual demand for manufactured homes for the last 10 years and all of those homes have been financed.

So financing although currently expensive and not as readily available is still available today. So what are we really saying, it's just a poor credit risk is not being financed is what is the difference between today and what was taking place two years ago and three years ago.

The demand for new homes have dropped by more then 50 percent and our leasing rates in developments reflect that. But I'll talk about that in a moment. Does anyone have interests to stretch credit to fight those scores in the 500's below 600's again. That would continue to wave a repose that we would suggest no, we don't think that's logical.

Origin with finances manufactured housing buyers and in which Sun has an investment as a term loan portfolio the support to fight those score on average in excess of 707, a score which all of us I think would be comfortable with at that level.

And with again serve anyone if that average were to drop down to the low 600's and we don't believe so. So I don't mean to suggest that the presence of additional mansional leaders focused on manufactured housing is not necessary and we do encourage it. It would be good for the industry and for our customers in residents.

We believe that it will begin - we will begin to see interests by opportunities leaders again as the quality of loan product currently being originated it covers more fully appreciated profit opportunity always attracts interests and we believe that is taking place in the market today.

So I can conclude with financing is available but not to poor credits today and it's properly a good thing. Our industry would be better served if there were a stronger focus on supporting solutions. Making it less costly then repeating the false margin as financing is not available today.

First thing I wanted to touch on is the customers that are going off the site to build housing and discuss that competitive difference and the question that we ask around here to answer the question is OK which customers are going over there?

If our existing residents make that choice they would sell their home to a new resident and move out into a site built home which is properly the goal of most of our residents.

It has no effect on Sun as a result of that decision however. In addition that desire to move to site built housing would be reflected in the number of resales of homes that are communities. The figures show that percentage of resales in our portfolio have actually from 9-30 O1 levels and from year 2000 levels.

Any increased demand for site build housing is not coming from our existing residents. Though it most be the customer that disappeared when industry shipments went from 373 thousand in 1998 to 180 thousand this year. We don't believe so.

The bulk of those customers have been shut out of any market to purchase any home because of their poor credit standards and we think that it is unlikely that they have moved on to site build housing with 500 to 600 scores which are the stores that are not being financed to date. That were being financed historically.

We do in the normal course of our business loss some residents to site build homes and for those who can't afford the transition it's normal especially in low interest rate environments. But for the vast majority Americans the price differential between a site built home and a manufactured home means that their only affordable means of home ownership will continue to be a manufactured home.

It's this affordability factor that will continue to create a strong demand. Residents lost to site build homes are a pretty small piece of the roughly 50 percent decline in the rate of fill in newly developed sites.

And the final thing I wanted to touch on is that manufactured housing is loosing its edge on affordability. Yes the industry did take it's eye of the ball when credit was available to anybody as we've discussed and therefore pricing of the homes and the packages were oversold to the residents and that inflationary - credit inflationary period.

I earlier made the point that 2002 end demands - our home demand is greater than 80 percent of the average annual demand for the last 10 years. So given everything including the slowdown in the overall economy demand is holding up pretty well. Further our resale's are actually down in 2002 compared to prior years. So our existing residents are not showing signs of preferring housing alternatives our being able to afford housing alternatives.

If you consider the following an average manufactured home sold in 2000 - in the year 2000 had 15,005 square feet at a price of $46,500 with a 10 percent down payment, a 20 year loan and a 13 percent interest rate, with rent of $310 per month the total cost of $795 per month and that's on a 5,000 - 6,000 square foot home site within a community with an amenity package that likely includes a pool, play area and club house and we believe that's pretty darned affordable by today's standards.

While their will always be isolated markets - alternative housing opportunities that are competitive. We believe and I've said before that for most Americans in most markets the competitive edge a manufactured housing remains and that's going to continue the demand as it is the affordable housing of choice still today against site build housing multi family and other choices that are out there.

Sun has made a couple of announces recently regarding Sun Champ and , I'd like to address the concept that Sun is increasing development risks at a weak point of the cycle. This arises I think from the fact that we have reported those in negotiations to require the five properties which we are currently the developer and manager pursuing to a first right of a refusal and that we have now announced that we've required the interests in the Sun Champ joint venture.

And Sun Champ we require the construction loan at 89 percent of power from and acquired Champion's interests for a long term note at 3.42 percent interest rate resulting in our temporary increase in our ownership percentage in Sun Champ and there are two issues embedded in that statement and I'd like to deal with them one at a time.

Sun is increasing it's development risk, I think the development risk in these properties is long past the tried and acquisition should be equate in 2003 at current rates of leasing which what I'm reflecting any increase in what so ever for the coming year and that's after the net cash investment is financed, the Sun Champ properties are leasing at the annual rate of about 500 sites and are expected to generate positive net operating income of about $2 million in 2003.

So the overall result of the two transactions is that we own or personally own 16 communities leasing at about 675 sites per year and again that's at current leasing rates which translates into annual revenue increase of nearly $2.5 million.

The second thing that we've wanted to point to you that what is suggested that this is the weak point in the cycle, we wouldn't deny that we recently updated our development model and our supplemental data on our web site to reflect current leasing rental and current costs data.

The IRR is just under 13 percent, not high enough to make the risk award of new development attractive but with first and second phases filling today and given long term expectations and equities which are sited at some where around seven percent and year treasuries at some where around four percent at 13 percent IRR after the development risk is removed, we think there's not at all bad.

And again I would just recall everyone's attention to the fact that the IRR is achieved at leasing and rental rates reflecting this very point in the cycle today. So the conclusion that we would suggest is that development risk within the company has not increased and returns are acceptable even given the reduced leasing expectations due to the issues that exist out there today. Budgets within the company have been submitted and will be finalized within the next two to three weeks and at that time we will provide earnings guidance to everybody and at this time Jeff and I would be pleased to respond to any questions.

Ladies and gentlemen if you do have a question for any of the moderators simply depress the one key on your touch tone telephone, that is to ask a question please depress the one key on your touch tone telephone.

Your first question comes from with Lehman Brothers.

Ah hi this is calling here with David. Just a few quick questions. First on the sale of the loan would that be included in the affiliate line.

Yes.

OK and in terms of looking at the Sun home services is it reasonable that in the fourth quarter there would be a turnaround just looking over the first quarter, second quarter, third quarter, the losses seem to be accelerating.

Well actually they accelerated from first to second, they mitigated a little in Q3, Q4 is usually not as strong sales quarter from Thanksgiving on, for actually kind of housing so we wouldn't expect to see any significant improvement in Q4.

OK well then because it was about 200,000 loss then about a million in this quarter it was about 1.4 million so if you could help me understand a break down between the loan and brokerage businesses.

Well of the million five affiliate line item for the third quarter it would break down roughly 70 percent origin, 16/17 percent sun homes services and the rest on ...

OK and so OK and so you feel comfortable that that will close in the fourth.

We expect it to yes.

OK and then just in terms of following up on what you said about development back in your October 1, press release you made reference to the number of potential sites in the sun entity of the total of 4,800 and your intention of developing 2,300 by the year end, currently you've developed and occupied 1,100, is the 2,300 number still on track and then if so just looking at your current absorption the difference there would be about three years and the total of the 4,800 sites would be close to nine years of absorption.

Well, there will be 2,300 sites developed by the end of the year. There are currently probably less than 400 sites to be finished by the end of the year and there are 1,100 still down it should be close to 1,200 by the end of the year.

You know we're dealing with averages here, some of these communities their first base is full, I mean we would not be building developed - we would not be developing sites if the demand were not about to be filled by the existing available sites. So I mean we're not creating a two or three year demand or supply situation.

Basically, throughout the company, development is shut off with the exception of the odd community where absorption is so great that the demand for development is still there.

And David has a question.

I have a question following up on the note on the press release on the . My question is what would be an on going levels going forward say in 2003 because if you take a look at the numbers is that maybe worth that we get at this quarter would be three cents a share. What can we expect in 2003 in terms of profitability or lack of profitability for going forward.

I think that we can only speak on behalf of what we know is public with regard to what shares with his share holders but I think the way that we have explained it is that they look for two secure tapes two secure or two loan sales a year usually first quarter and fourth quarter. Operations are loosing money there operating losses been consolidated into the .

Yes.

Lying during the two quarter when there not selling loans and the profits should be booked in two quarters when they are selling loans. They are due to go for a or a loan sale forth quarter. They have approximately today $126 million of originated loans with an average cycled score of 707 a turn is less than 20 years now it's 50 over 51 percent of the portfolio as a term less than 20 years and he waited average term of the portfolio is down from 28 years where it was a year ago to 23 years so the over all quality with what there producing we think should command a little bit of a premium in the market place. The difficulty is with regard to what happens with and how that placed with the market place and I know that is in the market at this particular time exploring the as well as a number of offers to buy the whole loans.

OK.

Against that fourth quarter we will be able to discuss those profits when they are available to us and we will be out.

And then one last question on this issue if the is successful in Q four and you said like a Q one in a Q four out look then there will be another follow on that will be Q one or Q two next year.

You know it's a matter of timing when they sell all their loans they have to the loans so sort of speak when the empty the bucket if the buckets emptied in November and there organizations are between 20 and 30 million a month and they need a $100 million to do a or whole loan sale that's really what sets the timing.

So the issue do that arithmetic was probably would be next year probably be a Q two event rather than a Q one event would be a reasonable assumption for us.

It wouldn't be unlikely.

OK thank you.

Your next question comes from with .

Good morning guys.

Good morning.

Just got a quick question on the $5.8 million discounted purchase available through the purchase of a loan. How will you guys record that or that and then will that be included in FFL?

Usually the accounting for a discount would be accreted to principle over the term of the loan in which case because it's a discount it would be reflected in income on a monthly basis over the remaining life of the construction loan. Which therefore you know would be an FFL item.

And that would be in the affiliate one?

Yes it would well actually the entire Sun venture is likely to be consolidated at 12.31 because we had not received, we didn't have operating control as our press release discusses today at September 30th it's not consolidated on those numbers but in talking with our auditors it seems very likely that we will be consolidating Sun Champ which you know we'll just have to see how that works.

But that would obviously take it out of the equity item and it would be spread across on a broad basis the entire financial statements.

So just to get a little bit more color based on the current schedule of the loans. How much would you expect to realize in Q4 and then in '03 of the 5.8?

Well I think.

Would you say evenly would be a good assumption and if I said 580,000 a quarter?

Evenly would be a reasonably assumption.

OK and that's over like that next 10 quarters or so right.

That's correct.

Three and a half years. OK. And then just could you back to origin for a second could you give us a little like a hypetical perhaps on the economics of the securitization. How that would contribute to the bottom line I mean it could be hypothetical it doesn't have to be exactly what's going to happen?

for our ownership position.

Well let's assume you know it's a market issue. What comes to us is 30 percent of there results and then that's taxable income maybe not today or but eventually and then it's tax effected by a corporate rate. So the net effect to us is there result times 30 percent.

That that I understand just sorry to interrupt. I mean on origins profit and loss statement I mean how are they, what are the economics as far as what is the spread that they are clipping on next to securitization?

Well I guess I'm really not.

Yeah I don't know that we would want speculates or would be in a position to speculate.

How about a hypothetical based on previous securitizations does that?

I mean it's a function of what the market places are willing to pay in the quality to port folio and how it's rated by SMP & Moodies. Historically origin has received very, very high marks.

Probably had the lowest residuals of anyone other than Vanderbilt and has followed slightly behind Vanderbilt cost of capital one of the securitizations came out and we would probably expect to be within a 100 basis points of what Vanderbilt is able to achieve in the market place so that might be a good place to start.

OK.. Where do you guys recognize the interest income from the loan to origin? Is that in other income?

That is in other income.

And is that about 350,000 in the quarter, or?

That's probably a reasonable guess, yes.

It's just 11 percent?

Yes.

That's 12.5 million. I mean would you be able to provide an estimate - well forget it, I'll move on. Did you provide an estimate on the acquisition of on the acquisition yet, or that nowhere near?

Still in negotiation, so that would be premature at this point.

OK. And then one last - in the press release I think it was 30 to 40 sites per month was the sell rate.

Right.

I think that you were saying. Is that the sell rate that we're continuing to see in October?

It's continuing at roughly 3.5 to four sites per community, per month in the and portfolios.

OK. That's it for my questions. Thank you guys.

Ladies and gentlemen, if you do have a question for any of the moderators, please do press the one key on your touch-tone telephone. That is the one key on your touch-tone telephone to ask a question.

Your next questions come from with .

Hi Gary, hi Jeff.

Hi.

Can you guys talk a little bit about where rental delinquencies are running at? And also repossessed homes, and homes purchased by Sun year to-date?

OK. Let's take them. I'll take them in an order, if I miss one I'm sure you'll remind me.

OK. Repos today stand at 584, and our portfolio at the end of last year just as a point of reference, they were 582. So repos tend - while there's a lot of turnover within that number, the aggregate number hasn't changed much.

Delinquencies are up from say last year-end by about three or four percent to $1.5 million. I think more importantly the way we look at this stuff is to look at our net credit loss or gain, and by that I mean we'll take the late fee's and the fee's, we'll subtract our bad debts and our legal expense. And in the third quarter that netted to a loss of $83,000 which, you know, would relate to say of 16 plus million, or revenues or 39 million. So on a net basis it's not too significant.

So I don't - did I get all the questions?

The last - the third point was how many homes has Sun purchased year to-date? I think it was maybe 44 as of mid-year. I'm wondering if that number had changed at all?

We have done very little purchasing of - are you talking about purchasing of repo homes in our communities?

Yes.

Yeah. We have done very little of that in the third quarter. Just - it's always a function of the pricing that's available to us, and you know, we're not going to stretch to buy them.

But there is a lot of wait and see out there with regard to what happens with and their repossessions. And on their pricing they're still maintaining pricing that we believe is too high in the market place for their repossessions. So when they're more reasonable we do have the capacity and desire to buy more of the homes.

Thank you.

Your next question comes from with Merrill Lynch.

All right good morning gentlemen. The site count in your portfolio pre your release hasn't changed much from June 30th but the book value of properties has gone up about 12 million.

I'm wondering if you've been cycling through properties at all that I've missed.

I think that the of you question has alluded my analysis to this point so I'll have to call you back and give you the detail of the 12 million and what's gone on.

OK

I'll make a note and give you a call later.

OK, thank you. On Sun champ what purchase what percentage of the joint venture did you purchase from champion.

Roughly 25 percent we were at which was their ownership percentage in terms of capital dollars so we were around 20 before and I think it's 45 now.

OK. And are there changes in management of the joint venture coming with your purchase.

Yes.

OK. And what impact might that have on your income.

Well in the initial October 1 press release we indicated that we are going to have certain costs involved in winding down certain redundant administrative facilities and people. Not nice to call people redundant but the reality is so that'll be some extra cost issues as we work through that which was one of the reasons why guidance was adjusted or modified at that point in time.

And then they will be totally in our world and in our system we have to of course report to the other equity interests the other 55 percent so you know they'll still be a current force and a distinct unit but it will be managed as an part of our company.

Ok and were there any of those winding down costs recorded during the third quarter.

No.

Ok. The interest rate on the note to champion on the purchase is that a fixed rate.

Yes it is.

Ok your new home your homes sales of 124 for the third quarter could you give us a split between new and used.

The new is 84 and the used is 40.

OK that's it for me thank you.

I'll get back to you.

OK thanks.

You have a follow up question from from Salomon Smith Barney.

: One more guys. Just on origin is there are you guys comfortable with your investment. In origin I think you guys have a 30 percent interest or so. Long term will you continue to maintain that interest.

I think that we're comfortable with the investment. I said before that I viewed it step one and the step program that is in place to assure financing be available to Sun and to the industry which supports the business that we're in and we also I think I also stated in last conference call that origin is currently in discussion with a number of investment opportunities and I would expect its first quarter next year that there'll be additional investment in the form of equity or debt that would value the company at a higher value than when Sun made its equity investment and I think that it is one of the last remaining originators of this kind of paper that's clean out there today and it's getting a lot of attention by those people who are interested in answering into the market place. So yes we are comfortable yes we will look over a long period of time to reduce our exposure to it. We've been committed to that. It's been a multi step process. We've taken the first one and we're looking to take the second one.

And how bout with the regard to the loan to them. Is it the same sort of thing or is that a shorter term?

I think it's the same type of thing you know there are several opportunities with where the available returns today on interest versus the coupon on this paper has gotten a lot of attention by a lot of different sources who are considering replacing some of some debt in or adding to it.

OK. Thank you.

Your next question comes from with A.G Edwards.

Hi. I have a couple of questions with regarding to . I believe you mentioned that in terms of the projections you're looking at was it $2 million in for 2003 ?

That was Sun tan.

OK.

Two million have been in 2003.

Is that the current run rated or does that the assumed the current rate of leasing out vacant sites.

It assumes that the current leasing experience projected throughout next year.

OK. Do you have an projection for the properties?

Not beyond that we believe it will be a creed of net of the financing costs to buy it.

OK.

So the negotiations are being completed right now.

OK. And when would we expect to hear something in terms of sometime in the fourth quarter.

Definitely - one way or another in Q4.

OK. Can you kind of go through your policy on the rent own and how many homes that you're renting right now?

I think we have had the same rent own program as a public company since '93 and for 10 years before that as a private company. We acquire repossessions generally at peak discounts trying and rent goes out probably in a range of 495 to 695 for the home and the rent. And give the resident an opportunity to build equity based on a percentage of his payment being applicable to the eventual purchase of the home and we've got a couple hundred of those at any given time in the property maybe as high as 300 today in the overall portfolio.

Ok. So you haven't deviated from your historical strategy?

No. I would love the opportunity to buy another 150 repossessions and this is a very profitable way of increasing occupancy within the communities.

OK. The last question is Jeff can you kind of walk us through the increase in the notes in other receivables that we saw in the third quarter?

The substance of that is going to be the the purchase of the note.

OK.

So I think that's properly going to be like just about the entire you know that's going to be it was about 40 well gross it was 52 million, so that takes just about the entire increase.

OK. Great, thank you.

Your next question comes form Louie Forbes with Merrill Lynch.

Hi again one quick follow up what was the capitalize interest during the quarter?

Capitalize interest during the quarter was 732 thousand.

OK. Great, thank you very much.

Gentlemen there are no questions at this time.

We would like to just thank everybody for participating and Jeff and I are both available in the office today. Thanks.

If you'd like to make a call, please hang up and try again. If you need help hang up and then dial your operator. Thank you.

.