Sun Communities Inc (SUI) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Sun Communities fourth quarter earnings release conference call.

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 expectation reflects in any forward-looking statements are based on reasonable assumptions of the company can provide no assurance that this expectation will be achieved. Factors and risks could cause actual results to differ materially from expectations are detailed in the morning press release from time to time in the company's periodic filing with the SEC. The company undertakes no responsibility 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, chair and chief executive officer, Jeff Jorissen, chief financial officer.

Please go ahead with your conference.

Thank you and good morning.

This morning the company reported funds from operations of 17.1 million for the fourth quarter and 69.2 million for the year ended December 31, '02, compared to 16.8 million and 68.1 million for the comparable periods of 2001. On a diluted per share basis, FFO of 84 cents for the fourth quarter and 340 for the year ended December 2002 compared to 84 cents and 339 for the prior year periods. Total revenue increased 40.5 million for the fourth quarter and 162.3 million for the year ended '02 compared to 38.4 million and 153.1 million in the comparable '01 periods.

At this time what I would like to do at year end is spend some time reviewing the previous year '02 and then we will discuss guidance for '03. In looking at an industry overview in retrospect, the industry about us, the manufacturers, retailers, lending institutions, the securitization marketplace has been in a perfect storm scenario. Everything that could go wrong and many management decisions, easy credit, expansion of manufacturing facilities, purchase of retailers, et cetera, played into that storm.

To review some numbers, shipments of new homes at 373,000 in 1998 were 168,000 in 2002, and are weak so far this year with hope by the manufacturers that they will strengthen through the year. Repossessions are expected to remain near 100,000 for 2003 with a wild card being the business plans of Oakwood and Conseco as they emerge from bankruptcy.

In our view, 2003 looks to be deja vu all over again. There is some evidence that a meaningful liquidation of repo inventories may be finally underway. On November 4, 2002, Sun acquired a bulk package of homes at a cost of approximately $20 per square foot. A January 20, 2003 bulk purchase of homes was acquired at about eight dollars per square foot. If this trend continues, I point to two things: First, the repo purged clear market of these competitive products for new home sales may very well be underway, and once underway will take place in a relatively short period of time as there is no shortage of bargain buyers at steeply discounted prices.

Secondly, our occupancy should strengthen as existing and prospective repos are priced to sell to qualified residents especially as demand for affordable housing increases in difficult economic times. My experience in the late 80s and early 90s leads me to believe that buyers will include retailers with capital, community operators, farmers and light industry operations often in need of migrant worker and inexpensive employee housing, as well as individuals for not only primary dwellings but for use as second homes on vacation acreage, all looking to take advantage of bargain pricing.

As we look at core portfolio performance, the same property portfolio of 103 communities continues its record of solid performance with revenues, operating expenses and net operating income increasing by 4.7% for the year. Occupancy declined by 369 revenue producing sites, resulting in occupancy of 92.2%. Excluding the addition of 266 sites to the portfolio, occupancy would have been 93% for the year.

Revenues increased primarily due to weighted average rental increases of 4.9% for 2002. Operating expenses increased from the nine-month rate of 3.1% due primarily to the timing of repairs and maintenance and by an increase in workers' compensation reserves. The increase in operating expenses for 2002 exclusive of the increase in workers' compensation reserves was 3.9%.

Noteworthy is that net operating margins on the same property portfolio remained at 73.7% for 2002, suffering no erosion in this difficult environment. Entire portfolio occupancy for manufactured housing sites and stabilized communities at December 31, 2002, was 92.4% compared to 93.8% at the end of 2001. Of this decrease in occupancy, 337 sites or two thirds of the decrease is due to the cessation of rental payments on Conseco and Oakwood repossessions, which the company is counting as vacant sites until such time as the bankruptcy plan is known. These sites hold the promise of occupancy increases, particularly if the business plans of lenders are focused on moving their repo inventory into strong hands -- the residents -- by discounting the homes to sell permanently as previously discussed.

Now, let's penetrate more deeply into the occupancy figures. The next figures include all six Trident (ph) and ten Sun Champ (ph) communities for 2002 basically on a pro forma basis. Occupancy in development and expansion communities increased by a total of 855 sites in 2002. The remainder of the portfolio lost 177 net residents for a portfolio net gain of 678 sites for the year. When the 337 Conseco and Oakwood repo home sites which were formerly revenue producing are factored in as vacancies now, the total net gain occupancy for the year was 341. Of the reduction of revenue producing sites of 514 in our stabilized communities, two thirds are in 12 communities within five states. Twelve communities with five in Indiana, three in Michigan, one each in Kansas, Missouri, Oregon and Texas. The remaining one-third, or 170 lost sites are in 63 communities averaging a loss of about three sites each for the year.

As I previously stated during recessionary periods, we historically have seen drops in occupancy of up to 300 basis points in stabilized portfolio and while we continue positive absorption in newly developed sites, the rates generally also tend to slow down.

So summarizing the key indicators would be as following -- as follows -- overall on a pro forma basis, net occupancy for the year was a positive 341 sites. Second, of the 514 revenue producing sites that were lost in stabilized communities, 337 of those sites are Oakwood and Conseco repos that we are now considering vacant. Third, 60% of the lost sites are in 12 communities in six states, with very modest concentration in a few markets in Indiana and Michigan. And finally, positive thinking continues to occur in our development and expansion portfolio.

Sharing with you occupancy initiatives, they've taken two forms in '02 and moving forward into '03. Strategic new partnerships with manufacturers and lenders have been a big, big focus of management. I'll discuss those shortly under the Sun Home Service initiatives. Secondly, the strengthening of credit standards clearly removed up to 200,000 manufactured home buyers from what was the artificially inflated marketplace while greatly enhancing the credit worthiness of the current new buyers in the marketplace. The principal housing alternatives to these 200,000 people became the apartment market or other rental situations.

Manufactured housing has a number of advantages over apartments as rentals. The homes are quieter with no shared wall space. They are more private and children have a yard to play in, and the capital investment for an acquirer or operator of this space is one-third as much as an apartment. Drawing from senior management's experience running rental and rent to own programs during times of limited financing or recession, which is most recently in the late '80s, early '90s, we have in the past successfully stabilized and even increased overall occupancies in most communities using these kinds of programs. This type of program must be managed intensively from the approval process. Currently 60% of applicants are rejected. To the periodic home inspections, to the renewals or evictions and eventually converting these rentals into sales.

Thus far at Sun we have rented just under 600 homes in the portfolio with an average cost of under $19,000 per acquired home, consisting of about 60% used homes. We receive full market rent as well as an initial 5% return on the investment. The 5% represents return in a start up year this past year with partial year net revenues compared to total home costs.

We expect that as this year progresses, our management experience and procedures will continue to improve profitability and overall occupancy while at the same time maintaining the overall quality and credit profile of our residents.

Reviewing credit issues -- bad debts and tenant receivables approximated 70 basis points of income from property in 2002, up from about just under 60 basis points in 2001. The differential in dollars amounts to less than $200,000, or less than one cent per share. On a net basis, including legal and court costs, offsetting late fees, the net cost of bad debts in 2002 was slightly less than two cents per share. Bad debt write off net of legal and court costs and late fees rose to 154,000 in quarter four '02 versus 136,000 in fourth quarter '01.

So our collection policies are stringently enforced with no easy payment plans or delays in pursuing court dates or evictions. The 28,000-dollar differential year-over-year is indicative of tight internal policy and procedures that should yield no unexpected surprises. Repossessions in the portfolio which are paying rent number 313 at December 31, and are owned by 57 different lending institutions, and this is in fact the positive side from seeing some resolution to the Conseco-Oakwood bankruptcies.

Reviewing development programs for this coming year, as we noted above, most of our lease sites are being generated by our development and expansion activities. We currently have a sufficient supply of these sites in our available markets and expect to commence very limited development in 2003. This will be met only where there isn't demand in those markets where existing phases are completely full.

Now let's discuss operations of equity investees. Sun Home Services sales had a very challenging year in 2002, as their new home sales declined from 438 to 286 and used home sales from 327 to 174. Reflective of reduced new home retail sales throughout the country, due to the current industry and environment as we've discussed, losses approximated $650,000 for 2002 and are expected to show modest improvement in 2003.

For 2003, management has continued its strategic plan to reduce the scale of Sun Home Services, its sales force, overhead and inventory. Sun Home Service operations are restricted to communities with minor in fill, sites not located near a dealer network that can support the turnover in those communities. In the development and expansion properties, we have formed brand new working relationships and signed all new arrangements with four of the largest national manufacturers. Together they currently own and operate 700 of the nation's successful sales operations which overlap approximately 80% of our communities and provide for various innovative programs that we structured to further increase absorption in our communities.

Given today's tight credit market for manufactured housing buyers, closer alignment with these companies, some of which have access to their own channel financing as well as their own national marketing programs, provides Sun with greater potential to fill our sites with less capital investment and reduction of potential Sun Home Services losses. Within the next 60 days, these four manufacturers will invest in the cost of opening 11 new sales centers in our communities, with plans currently underway to expand additional sales facilities by them and other of our communities.

Secondly, Sun owns approximately 59% of Sun Champ as of December 31, 2002. Its balance sheet is consolidated in the financial statements. Operations are consolidated on an equity basis as consolidation only became appropriate in December 2002 when Sun purchased the Champion interest. Senior management felt strongly for numerous reasons that it would be in the best interest of our shareholders to take full control from our joint venture partner, Champion Enterprises, over the completion of the 11 communities.

At December 31, 2002, we had invested about $70 million in the NOI for 2003, approximately $1.8 million. So it is dilutive as one would expect in the early development activity. Two major transactions, however, have enhanced the economics of Sun Champ significantly. In late September, we acquired the construction loans on Sun Champ from the troubled Conseco finance company at an 11% discount of nearly $5.8 million, which will be amortized to income over the then remaining two and a half-year life of the loans. This was an opportunistic move to take advantage of a troubled company that has since filed bankruptcy.

Secondly, in December Sun acquired Champion's ownership interest in Sun Champ for a $6.2 million note which is subordinated to the return of equity in Sun Champ. This note is effectively a first lost piece with a face value eroding as Sun absorbs and has absorbed losses through the development phase including interest and depreciation charges. The $1.3 million reduction in the note to date is reflected in the FFO payable that is reflected in today's press release.

The result of these two transactions is the capture of $12 million of value for Sun in the Sun Champ joint venture. These communities are modern, well located and of the highest quality in the country. While to date they have not performed up to original pro formas, obviously reflective of industry conditions, they have averaged absorption of 3.5 homes per community per month for 2002.

Third, Origen (ph) has been conducting a high quality business in the very heart of what I refer to as the perfect storm. Buffeted by lenders exiting the industry, jettisoning repossession inventory, driving down recovery rates by bankruptcies of Oakwood and Conseco, by the undermining of the securitization marketplace by the poor performance of Oakwood and Conseco portfolios, Origen's origination of quality loans has been unable to stem the tide of negativism. The current portfolio they have developed has a weighted average coupon of 10.4% loan to value of 87%, and average debt and housing ratios of 34.2% and 18.1% respectively. Most importantly, the weighted average FICO (ph) score is 710 and nearly 60% of the paper has amortization terms of less than 20 years while less than 5% of their originations represents repo refis.

This is a strong portfolio and represents corrective action of lenders errant underwriting practices necessary to generate quality manufactured housing loans. High credit score, shorter amortization, higher down payment, and lower mark-ups on invoice. It was against the existing bleak background that Sun reluctantly determined to mitigate market concerns about our investment in Origen and conservatively write down our remaining investment, equity investment of the $13.9 million. This decision is based on a worst case scenario as prepared by the management of Origen which does not fully deplete their existing equity.

We are hopeful that the current adverse conditions will abate and Origen will become a profitable national lender dedicated to our industry.

Turning to 2003 earnings guidance, as we look to this year, we expect our same property portfolio of 114 communities to experience stable occupancy and net operating income growth of 4.5%. Our expansion and development portfolio is forecast to add 700 net occupied sites in 2003. For the entire portfolio, we expect a weighted average annual rental increase of 4.5%, of which 50% takes or has taken place in the first quarter. For 2003, the addition of 17 new community developments with the acquisition of Trident and Sun Champ will add substantially to net lease sites, but adversely impact margins at their current early stages of occupancy. These sites as filled will create solid future growth as the incremental income accumulates and they become steadily accretive.

The 2003 outlook is for continued solid performance and FFO growth in our entire portfolio of 7.4%. Management believes strongly that the company should take full advantage of the current interest rate environment to create long-term value for its shareholders. You will note that in the table provided in today's press release, it includes $3.2 million of increased costs, interest costs, as a result of turning out $140 million or about 50% of our floating rate debt. We believe this to be a prudent decision with the attractive long-term rates available today and the virtual certainty that short-term rates must ultimately rise.

Adjusting for the additional interest costs, our 2003 FFO guidance is for growth in the range of 2 to 4%. There are, of course, additional factors weighing in on 2003 which management will continue to monitor closely -- the business plan for the new Conseco and new Oakwood relative to repossessions, will they purge them from the marketplace once and for all, or will they continue past practices which simply deferred the problems? Will the new home sales and financing picture show gradual improvement as the year plays out? If it does, it would have a positive impact on Sun's performance. Will job growth return to the economy? And of course, international issues of terrorism and war and their impact on the economy and confidence.

At this time, Jeff and I would be glad to respond to your questions.

Operator?

Yes, sir.

We are ready for questions now.

Ladies and gentlemen, at this time if you have a question, please press the one key on your touch tone telephone. If your question has been answered and you would like to remove your telephone from the queue, press the pound key.

First question is from Paul Adorna (ph) with Mercury (ph) Partners.

Good morning. Have you had any communications with Conseco since they announced the sale of their consumer financing businesses last week?

On the Sun side of things we have been constantly following the Conseco bankruptcy and transactions and been in close contact with Origen, who is intimately involved in a number of different levels on the Conseco transaction, as there is $23 billion worth of servicing there. Conseco -- sorry, Origen has the servicing platform.

What I can report today is the fact that there have been some waves in the final approval of court blessing the appointed plan of the purchase of the assets that was delayed from last Thursday to yesterday, and as of yesterday at five clock, I heard that the court's approval was delayed through today. I have not heard any final approval yet. When that approval is forthcoming and assuming the plan that was initially presented last week is the plan that is approved, we will understand better what opportunities Sun will have with regard to the repossessions -- that 337 repossessions in our communities -- as well as what further financing will be available and what their business plan will be. But as of right now, they have not made that public.

And any communication with either of the two entities that were bidding for that business?

There have been at least three meetings that previously took place between management here and management in Origen with those groups, and the general role that we could play again was dependent upon the outcome of the court's rulings.

And the way it's currently proposed, what entity will own the homes and maybe you could clarify just how the businesses were parted?

Well, at this time the 337 repossessions that are in our communities are counted as vacancies in our occupancy number. They are actually owned by the court on behalf of Conseco. They would belong to the successful bidder and we have made numerous proposals on how we would be willing to either acquire those homes or allow them to keep those homes in our communities, but nothing more than that has been discussed at this time.

Okay. Just one more question and that is, would you expect that you would at least start to receive rental payments once the sale has taken place?

I would -- it would be my expectation it would be in their best interests to liquidate those homes. I think that's part of their plan and based into the bidding process of what they paid for the assets. So while it's not impossible that they would resume some form of rent, I would guess they would look for a certain period of free time to keep those homes in there and try and retail, which would maximize the value or the recoveries on those homes. But I think it would be most likely that they would liquidate those homes for a low liquidation value and focus on the growth of the remainder of their assets.

Okay. Thank you very much.

Your next question is coming from Jordan Sadler (ph) from Salomon Smith Barney.

It's I had a couple of questions. First regarding next year's net lease sites. I know you're saying flat occupancy on the stabilized portfolio. What is that comprised of? How many sites will you actually fill? How many additional Conseco sort of Oakwood repos that go directly on cessation of rent, so to speak, would you anticipate?

The stabilized portfolio includes 106 communities. Actually shows up on page 21. Well, I've got a printed copy of the sub-data, but it's in the property summary. So it would be flat -- approximately flat or stable occupancy relative to those 106 communities, and then in the 19 communities that we classify as new community development we are looking for about 700 additional sites. You can see from the earnings guidance that we've taken out the Conseco/Oakwood sites substantially from 2003 revenues. And if in fact they continue the trend of pricing, we could actually end up with a positive situation as they move their existing and to-come repos into long-term -- into the hands of long-term residents.

That's the existing Conseco and Oakwood repos, right, the 337 that you took out? Did you take any additional repos related to Oakwood and Conseco?

We heard that in January Conseco sold 4200 repos and got 3200 new repos. Conseco continues to harvest 100 repos a day out of the securitizations, at least that's the case in January.

How many did they sell?

Sold 4200, and they got 3200, which partially explains why the prices at which they are liquidating appear to be undergoing serious decline, which is, of course, much to our benefit.

And how would those 3200 or 100 a day translate? What would they translate into in Sun's portfolio?

Who knows?

Is that 20 a month for you guys? You know what I'm saying? You took 337 out of the portfolio now. And you're assuming flat occupancy. Are you assuming the lease, additional leased sites in the stabilized portfolio is going to be something like 20 a month to offset the ones that are going to continue to become, be repoed by Conseco and Oakwood?

Effectively, yeah. We've obviously eaten 337 sites in our occupancy and we expect that with the slashing of prices, that going forward it will be a net zero sum game.

Okay.

Of course, that also is -- the wild card there is what happens to rent on new repos once they emerge from bankruptcy. That will be subject probably to a negotiation between us and Conseco.

All right. But that 20 a month number, would that be a reasonable number to assume?

That's as good a number as probably --

I think in operations preparing their budgets and having ten years of experience with repossessions, they clearly do a good job in understanding their communities, what their turnover is going to be in the form of repos, move outs, and move ins, and when they are looking for flat occupancy, that is definitely factored in there.

Okay. And with regard to the -- you have 600 or so manufactured homes rented within the portfolio at this point. Could you just walk us through the typical monthly rent and how you arrive at the 5% incremental income on investment?

Well, let's say they have a rental payment of 600 bucks a month.

That includes the lot rent plus the home?

That's their total payment. The lot rent goes to the community. That leaves them let's say with 300 bucks on the house.

Right.

And then the 5% is that 300 bucks less the cost of managing that home. So there's some repairs and maintenance and reserves for that kind of stuff, which are -- you know, and then for bad debts of course is also deducted. Anything that we don't actually collect and/or if we have to evict people, those legal and court costs are in there. You come down to the net number remaining relative to the rental of the home. That number then is the numerator. The denominator is the cost of the home and bingo, you've got 5%.

Is that Sun Home Services? Which entity is renting?

That's Sun Home Services.

Okay. And then just on the Sun Champ mortgage that you bought, the first mortgages, how much income did you recognize from marking those loans to market in the fourth quarter?

We didn't actually mark them to market?

How much matured?

They didn't mature either. There's a $5.8 million discount on the Sun Champ construction loan. We bought 52 million of construction loans for $46 million. That $6 million will be amortized radibly (ph) over 30 months, which is the remaining life of those loans. It will run at about 200 grand a month from October 1 of 2002.

Five eighty for 10 quarters, or something like that, 580,000?

Approximately.

Okay. Then just the -- what are your expected stabilized yields on the Sun Champ developments? The 11 Sun Champ developments?

I think that the IRR calcs that we did -- I have John in here who is going to pass me the sheet. IRR calculations range from 17% to 21% upon absorption of 95% of the developed sites.

Okay. And the expected stabilization dates, when do they range from?

They range from approximately four years from now to eight years from now.

Okay. And just, could you explain the timing of, and the workers' compensation reserves and what that was related to, that significant increase?

People fall down.

People fall down.

That's an oversimplification. But employees, you know, they fall off the ladder or they lift something and they don't bend their knees like mom and dad told them to do.

Right. Did you have significantly larger number of people falling down in the fourth quarter?

I think we are talking about three or four claims that over a period of time finally matured into a number that was appropriate for income statement recognition. I mean, this is not like an epidemic of 200 people falling off ladders. This is one guy who inhaled fumes and another guy that fell off the ladder. It's just the typical workers' compensation stuff.

I would classify it as very typical stuff that all seem to fall in one period of time and we were able to also settle and get very close to settling a lot of different things that were going on there.

So a lot of that is one-time related? That goes away in the first quarter?

They get to fall down once. Just kidding, but you never know. You never can predict.

Sort of, though. I mean, that's the nature of the claims.

At 12/31 are fully reserved.

Lastly, in early January I think you announced the Trident, that you completed the Trident acquisition. I thought it was three properties that you announced in Texas?

Correct.

Had you acquired three others earlier than that during the fourth quarter?

No, we are continuing to negotiate relative to the remainder of the Trident portfolio and expect those negotiations to conclude presently.

Okay. There were a total of six that you guys were helping them develop and three of them you already own and the other three you expect to own this quarter or so? Is that an accurate depiction?

Yes, sir.

Thank you, guys.

Your next question is coming from Alexander Goldfarb (ph) with Lehman Brothers.

Good morning. Just first off, the percent breakout of your portfolio of all age versus senior is what?

If you look at specifically designated all age retirement communities, it's probably in the 10% range. But you know, as we always point out when that question is raised, the national surveys tell you that 25% of all the folks who live in manufactured home communities are retire res. If the focus of the question is aimed at determining the relative rental stability of some component of our portfolio, then 25% is going to be a lot better number to use than 10%.

Okay, okay. And looking forward to '03, any dispositions or acquisitions factored in?

No.

I think that we do have a disposition program and there are six identified communities, but the goal is always to put that money back to work in new acquisitions. And what we are -- this is Gary speaking. What we are looking at right now from an asset management standpoint is similar to the early '90s, '92, '93, '94. We were able to buy acquisitions that had vacant sites to them at cap rates based on the existing cash flow. So for those of you who have been with the company for awhile, our plan was that we were basically buying the vacancies for free. I think we will be taking a look at that again in '03 as we look to sell stabilized less growth oriented communities off of existing cap rates and translate that cash flow into communities that have the same kind of return but the upside of the vacant sites that we won't be paying for.

And with the Conseco/Oakwood situation, I know right now you said that there's 337. Are you anticipating more from that in '03?

I think that we anticipate in our budgets for '03, our operating budgets on a property by property basis -- regional, onsite and VPs -- estimate of what historical turnover would be in the form of repossessions, move-outs, move-ins. They basically are already counted in their numbers which we feel will be a flat occupancy.

So you don't expect any more to the 337 number?

We expect more repossessions, but we expect them at a level where they will maintain stable occupancy as opposed to a growing occupancy that we've experienced for the last seven or eight years.

Okay. On your refinance and the fixed interest, I know in the third quarter you had about 220 and now you are going to fix about 140. But it said that you are refinancing some stuff. Can you sort of walk through what you are refinancing and what you are fixing?

Absolutely. We have three floating to fix swaps aggregating $75 million which will become effective in April, which effectively fixes half of the $150 million Fannie May financings that we did last year. That gets you 75. We have $85 million of bonds maturing on May 1 of this year and we expect to refinance them in a bond offering that will be in the range, which will range up to 150 million. If in fact it's at the $150 million level, that 65 million difference between the 85 that is refied and the 150 will go to pay down the short-term borrowings at floating interest rates. So the 75 on the swaps and the 65 difference between the 150 and the 85 gets you to 140.

Basically the 150 depends on investor interest?

Yes.

Okay. And then that would be done at fixed rates?

Yes.

Okay. And going on to the Sun Home Services line, that line seems to sort of jump around quarter to quarter. I notice this quarter it was only 107,000 lost. Last time it was 1.4 million. For '03 what would be your expectations for the year? And is that front half loaded? Back half? Is it sort of even?

Well, we are -- Sun Homes in the aggregate lost 650,000 odd dollars in 2002.

Right.

In 2003 we expect that loss to narrow. I mean, if we are wildly optimistic we will say they will be profitable. But we are not quite that optimistic. It may be a loss in the two to four range and it will be, it would, at that level, you may as well have some ratability because it's not going to be a highly volatile factor, we don't think.

Okay. What was the delta between Q3 and Q4?

On Sun Home Services?

Yes. Why it went from negative 1.4 million to just basically 100,000 loss?

Sun Home Services lost in Q3 250 grand. Now, the 1.4 million includes the other equity investees, so that's not all Sun Home Services. So it was a 250 loss in Q3 and a $26,000 profit, which probably also included some bonus accrual reversals and things like that. So it was 250 loss in Q3, 26 profit in Q4, and a 630 to 640, something like that, loss for the year.

Okay, okay. And moving towards Origen, what is the current status with the credit line? And -- yes, first off, what is the current status of the credit line?

Well, I think 30 million.

Thirty-two or 33 million at year end.

Thirty-two -

That they've drawn?

Pardon me?

They've drawn 32 million?

At the end of the year, correct. I think that they will be announcing within the next several weeks a $200 million sale of the loans. The securitization market -- bottom line is S&P levels on their origination showed the premium of what they have originated. Moody's, the woman up there, Pamela, goofed up, has basically said that she has been burned too much by Conseco and Oakwood and the others and will not apply any better levels than the existing levels on the pools that are performing so poorly in the marketplace today until Origen can show some signs of seasoning and historical differentiation from those pools.

So Origen has been working on a, what I consider a very good plan to A, extricate Sun from its credit facility sometime, I hope, before the end of the second quarter. That's the request of Sun's board of directors. And is looking at a $100 million equity raise both on a private level and a public level and is into a serious dialogue with respect to that. And what I would state is the fact that everybody is circling, looking at the opportunity of manufactured housing financing again, but nobody wants to make a move until such time as they know what is happening with Conseco in bankruptcy.

It's kind of a wait and see attitude. I am very pleased with the progress they are making over in Origen. It has not been fast enough. If you were to draw on my 20 years of experience to just tell you instinctively who good residents are and who pay back the homes, they are people who have legitimate credit standards, work history, real down payments, and loan amortizations of less than 20 years so that they are building up equity and not upside down from the start. Those are the type of loans they are doing right now. They just can't get any premium out there for those loans because the market right now is so singed and burned on the pools that previously have been created. Their plan calls from having a larger balance sheet to stem the period of time for the market to adjust and for them to become profitable -- whether that's three months, six months or 12 months has yet to be seen.

Okay. So if I understand correctly, currently out of the 35.5 million credit line that Sun has extended, 32 million has been drawn. Sometime in the next few weeks or months, there is an anticipated $200 million loan sale from Origen and then there's a potential that Origen may raise 100 million in equity; is that correct?

The only thing I would correct, the loan sale is not a few weeks or a few months.

It's a few weeks.

Equity plan is something that they are working on by the end of the second quarter.

What would be the contribution to earnings from that sale to Sun?

Well, Sun has written off its equity in Origen.

Okay.

So we -- if they have profits from this point on, and it turns around just like that, I guess we would be restoring a fair amount of our equity. I mean, fair amount, it could be in the 70-digit numbers. At this point in time Origen still has equity left on its balance sheet. If that equity grows, we would then look at whether or not it's appropriate -- of course, in consultation with our auditors as to what all these modern rules are. But presumably if they became profitable from this point forward we would begin to pick up income from this point forward.

So you wrote off the book equity but you still have quote unquote equity in it?

We still have that stock certificate.

Okay. And if for whatever reason that didn't happen, and -- or going forward, would you either continue to extend credit if the loan sale did not happen or -- and/or going forward would you extend the credit line again?

The board of directors of Sun Communities, I mentioned this on my list, set as a goal for the second quarter of this year, to be removed from the credit it is extending to Origen.

This would be it for credit extension?

That is certainly the plan right now.

Okay, thank you.

Your next question comes from Art Havener (ph) with A.G. Edwards.

Sticking with Origen real quick, are you saying that we should expect a loss to be recognized from this portfolio sale?

No.

So we are expecting just basically to break even on the loans? Is that it -

Well, our equity written down -- I can't say whether Origen will or won't. It wouldn't be my place to report on that company's profitability or losses. I am not aware of it.

I didn't know if the writing down of the equity had any kind of correlation to what we should expect, I guess is what I'm getting at.

No.

Can you help us understand how much contribution Origen is providing to the earnings statement right now?

It's in the form of, of course, interest income which I believe is around 11% and like I say, a $30 million balance which is about what it was at the end of the year. That would be 3.3 million a year or a little over 250 a month.

Okay. Now, do you -

Income, which of course is financed off the line. That's gross. You have to, you know, subtract maybe 20% of that to get the net.

Okay. Now, do you have this factored into your guidance? I guess I didn't see it in the guidance.

Yes, we do.

Okay. Can you help us, what is the current inventory in Sun Home Services of the homes that you own?

Current inventory of homes held per sale is about $10 million.

What was it before you started purchasing the Conseco homes?

Well, let's see here. In January of 2001 it was 9.4 million. And for all of 2001 it averaged 10.2 million. And for all of 2002 it averaged 12.7 million. And it's currently 10.6 million. So it's trended maybe, well, 10.6 is 2 million below the 2002 average.

So the absolute inventory has been depleting?

What is happening in this environment is that the guys in the sales side are reducing our new home inventory and adding to the used home inventory, which is, of course, at much more attractive prices to the customer base. So what you see is, you know, one new home might equal three used homes. You are not really seeing an increase in the dollar value just because we are buying these used homes.

Okay. Is there any need to go back and try to revalue the homes that you previously owned? Only because you are buying the new homes at such a steep discount?

An excellent question. At 12/31 we have 176 new homes in our entire portfolio. And 81 of them are in 29 communities that have fewer than three repos and 28 are -- sorry, 53 are in new community developments and expansions. So 75% of our new homes are in, I wouldn't call it exactly repo free, but repo minimal environments. So we have 28 new homes in communities which have more than three repos in it. I would see that as probably primary exposure relative to erosion of the new home value, versus the focus of Brian and our COO/sales leader is to move those 28 homes out, sell them and not -- we are being very, very conservative in ordering new homes as we watch what is going on with these repos and where they are going on.

Our new home inventory is the lowest it has been in seven years. And I think we worked very closely looking at it with Sun Home Services, Brian and the auditors. And didn't feel there was any need at all to create any kind of reserve at the level it's set and where the homes are placed.

Great. With respect to the NOI margin, you mentioned it's about 73% currently. Factoring in the Trident and Sun Champ, can you give us kind of a run rate that we should expect it to go to at the end of the first quarter that we can kind of work our way up from?

Of the 73.7 that's the core portfolio -- the core portfolio, I think, is going from 103 communities to 114 communities next year. So I think the margin -- because these are being new communities, new to the company, won't be in the same property portfolio. So I would expect those margins to either be stable or maybe to improve a little bit.

In terms of Sun Champ, and Trident, I mean, they are going to operate at margins that might average 50% NOI margins, given their stages of development. I must confess that I have not added those two numbers together on a first quarter basis at this point in time, but the answer is clearly going to be that as we indicated today and in Gary's comments, that the margins will go down a bit.

Okay. You gave us -- at least they are operating around 50% now, is what you are suggesting?

Your next question comes from Richard Peoli (ph) with ABP Investments.

Hi, guys. Just a couple quick questions. One, with the Sun Champ transaction, how would you say your risk has changed there? Seems now you consolidated everything. What is -- what type of added risk are you taking on, being 59% owner now?

Yes, Gary. I'll speak from an operating standpoint and let Jeff speak financially. We view it as greatly diminishing the risk. This is another case of getting involved in a joint venture and we weren't the operating and managing partner of those communities and feel very much like we have done the right thing for our shareholders, bringing them completely in house. So we have full control over them right now. Our senior management and property level management is just turning around the properties to operate at the Sun levels. A lot of opportunity for things like separately metering the water and sewer which hasn't taken place in there yet. Creating the synergistic opportunities with other manufacturers and retailers that didn't exist when Champion was actually the operating partner an wanted to sell the homes in there. Finally, clears up any question with regard to the viability of our partner being able to fund its obligations, short and long-term, on the continued operation and development of those communities. So from our standpoint we are very happy to have those under our control right now.

How about the financial risk?

Well, if you look at these, there's about 1155 residents in the ten open Sun Champ communities at the end of the year. These aren't the kind of places where you drive by and see three homes spotted in 100-acre field or whatever it is. These communities are building market presence and generate NOI of about a million eight. As we indicated in the comments, the leasing that is taking place in this industry, the net positive leasing is taking place in the new development and expansions of existing communities and the new development communities. Somebody the other day characterized it as a stronger market in effect for new cars than used cars. This is actually, we are looking to this portfolio to provide leasing growth for us over the next few years as it has in fact over the last couple. Obviously, we are now the guy that writes the checks because Champion isn't there to write a check at our side. So I mean, in effect we're the pocket book for these, but these are at the level generating NOI.

Just seems that you doubled down in an environment where the market is a wash in sites and I think it seems like the Conseco/Oakwood thing is going to shake more stuff loose.

Well, again, Gary's comments, we actually have captured like $12 million of value out of the Sun Champ deal in the last -- in two transactions. Once again, those are the communities that are leasing up.

Right. My next question refers to a comment you made for your outlook. You said you look for 700 net occupied sites. There was some discussion earlier, but I couldn't follow how you get to that 700 net occupied site number and -

We had two numbers, Rich. We had one for what we call the stabilized portfolio where we said that occupancy would be approximately stable for next year. We said in the new development and expansion communities which I believe is 19 or 20 communities, we are looking for 700 sites to be added. Last year, had we owned all those communities, which we didn't because six are Trident and ten or 11 are Sun Champ, had we owned those communities, there would have been 805 sites added. We actually, 700 we actually cut back from the 2002 aggregate pro forma experiences.

By 100 or so?

150, yes.

Okay. You think that's, you know, fair? It's stable in the core? I mean, that's been kind of the heart of the issue here is that you -- are there any more Bank of Americas to be dropped by people in your portfolio at this point?

I don't think there are. There are 57 different lending institutions that own the remaining couple hundred of rye pos in there. They are typically banks and things like that. So it's spread out so I don't think there would be a ticking time bomb. My question is, are there any time Bombs with some of the manufacturers out there and whether they can for go the difficult times until these repos wash out of the marketplace. But I don't think there's any other lender that is a ticking time bomb.

Any chance these guys get cute and stop paying rent because of the Conseco situation and say, you know what, we're not going to pay rent now on these that are repoed and we want you to work with us?

If they did, a couple hundred, they would be getting eviction notices. Let's just look at a typical bank for a second. They are not equipped in any way, shape, or form to be able to know what to do with a home like that. Which plays into a lot of problems, you know,. People originated loans in this industry and forgot they have to service them after they originate them. So I don't see that as really an issue.

Okay. I have one final question. I guess on page three the, you know, your guidance here, you have a 25-cent increase from, I guess, property operations and then the thing that kind of confuses me is the 16-cent addition of allocation of Sun Champ losses. What is that exactly? Maybe I'm a little rusty on things, but I can't figure out what that 16 plus is.

Well, what it is, and I think there's a footnote, too, to the FFO reconciliation which describes it when we bought the Champion interest out of Sun Champ, we paid for it with a $6.2 million long-term note payable which is subordinated to the return of all of our equity and all of our preferred returns. So if you think about that, that subordination of that note, it effectively becomes a first loss piece to absorb the losses of Sun Champ. In fact, it is the same as if Champion had left their equity in the deal and said that it is there to absorb losses that would otherwise be allocated to Sun Communities. Because if we absorb 6.2 million of losses and in the aggregate preferred returns, if they exceed 6.2 million over any kind of period of time, there will be no payment due to Champion enterprises under note. That note will erode in value over time as it absorbs losses that otherwise would have been absorbed in Sun Champ by the Sun interest. You are going to see that loan value go to zero. That's what it is. It's fairly complicated. But that's -- and note two, I think, will help you. Anybody online who wants further clarification on that is free to give me a call.

Let me ask you a question. The total amount of that note is 6.8 million? Is that what you said?

6.2.

6.2. Where are you now in terms of eroding that. What happens if you get to the point where the losses exceed 6.2? There's no more back stop there?

That's right. We have, that note which was 6.2 on October 1 is actually 4.9 because a million .3 of it eroded commune cumulatively in 2002 and we see another million plus eroding in 2003 and then we will see what goes on with the rest. Yet it is also important to bear in mind when we talk about return of equity, subordinated to return of equity this is after interest and depreciation charges. So you know, 70 million of property will throw off 3 million of depreciation a year as well. All of that is absorbed first by Champion before Sun has to absorb any of those losses under the terms of the note.

But you think you're safe for this year in terms of still getting the protection from that first loss piece?

Absolutely.

Okay, thanks for the time.

Sure.

Ladies and gentlemen, again at this time if you have any questions please press the one key on your touch tone phone. If your question has been answered and you would like to remove yourself from the queue, please press the pound key.

Your next question is coming from Art Havener with A.G. Edwards.

I just had one follow-up. Given the big discount in your NAV, has there been any strategy to revisit a share repurchase?

I think there has been. We received authorization from the board and some clients, and the board has the quarterly meeting coming up this next weekend. It is an agenda item on the board.

Do you suspect you would be much more aggressive? The current discount is about 20%.

I think that it would be logical to be more aggressive at this point with that kind of discount.

Thank you very much.

Mr. Shiffman, there are no more questions at this time.

At this time we would like to thank everyone for participating and look forward to our next analyst conference call.