Sun Communities Inc (SUI) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Sun Communities fourth quarter 2003 earnings result conference call. At this time, all participants are in a listen-only mode. A brief question and answer session well follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

At this time, management would like me to inform you that certain statements made during this conference call which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. Factors and risks that could actual results to differ materially from expectations are detailed in this morning's press release and from time to time in the Company's periodic filings with the SEC. The Company undertakes 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 of Sun Communities Inc. and Mr. Jeff Jorissen, Chief Financial Officer of Sun Communities Inc.. Thank you, gentlemen, you may begin.

Thank you, Donna and good morning. This morning, we reported funds from operations of 17 million for the fourth quarter to 70.5 million for the year ended December 31st, 2003, compared to 17.1 million and 69.2 million for the comparable 2002 period. On a diluted per share basis, FFO of 80 cents for the fourth quarter and 3.38 for the year ended December 31st '03 compared to 84 cents and $3.40 for the prior year. Total revenue increased to 39.7 million for the fourth quarter and 159.1 million for the year ended December 31st '03, compared to 36.9 million and 149.9 million in the comparable 2002 period.

2003 was a difficult year marked by the liquidation of inventories of repossessed homes, which has finally been approached realistically by lenders; the resultant increase in vacancies, and much higher expense growth in our portfolio than we have been accustomed to. There is, however, every reason to expect that these events are largely behind us and the industry and that 2004 could be the linkage between the bad news of the past and the good news of the future for Sun.

Let's look at some of the data. New home shipments in 2003 were approximately 130,000, which was the lowest level in over 25 years. In fact, 2003 shipments were about 50 percent of shipments in 1980. This level is down 65 percent from the peak shipments of the period of 1988, 1999. The inventory of new homes at retailers approached 50,000 units, which is down 50 percent from the peak of the cycle and also at a low point in the last 25 years. And most importantly, there are solid signs of the inventory of repossessed homes is finally burning off. Lenders, especially Conseco and Greentree, and Oakwood finally faced reality in September 2002 and began realistically addressing their repo issues and reduced prices to move the homes into strong hands (ph) that would make payment and keep them off the market. This action, as many of you know, followed years of what we referred to as loss mitigation measures, which might better be described as avoiding reality. These actions have extended the cycle by the past two years, and (indiscernible) loss of occupancy in 2003 resulted primarily from these actions.

With respect to the repos (ph) in 2004 will be 33 percent lower than in 2003 at a level of about 60,000 units. If one were to put a trendline on repos, one might see that the rate at the beginning of 2003 was at 150,000, dropping to a rate of around 90,000 by the ended by the end of 2003, and to the rate of around 30,000 at the end of 2004. The net 30,000 rate may be very close to what an ongoing experience (ph) should approximate.

Sun's response to the cycle has included the following, as we have discussed in (indiscernible) conference call. We have eliminated development of new communities and sites. In 1999, we developed nearly 1400 sites; in 2003, the number was less than 100. Sun has tightened acquisition standards pending the bottom of the repossession cycle. We have found that there has been little point in buying a community with an unsustainable net operating income due to the prospective continued foreclosures and repossession repossessions brought on by the uncertainties in the industry over the last few years. We have acquired repossessed homes for resale or rental, which preclude (ph) their removal from the community, and the reasons for this are as follows. They have been priced at a substantial discount to the market and that discount in turn creates real equity value for the new prospective buyer. If these homes were removed, there would be a $4000 or more set-up cost for a new home, which is already embedded into the cost of the home that is sitting in our community, so that cost is saved by saving that home. Retention of the pre-owned home reduces our reliance on the new home sales markets, which had also been deeply depressed from competition of repos to fill sites. We believe that we'll be able to convert and in fact are doing so now, many of these rentals into owned homes as sales and job growth improve because of the quality and desirability of our communities and the value pricing of these homes as they are bought during the downturn in the cycle.

Homebuying Made Easy program resulted in the sale of 75 homes in 2003, the loans had above-average cycle (indiscernible) (technical difficulty) downpayments more than 12 percent and less than 15 year terms, which means equity is building up rapidly on these value-oriented homes. Meanwhile, the home cost and site rental to the resident on a combined basis averaged 40 cents per square foot per month, thus creating excellent long-term residence building up solid equity in their homes and, therefore, creating further appreciation in our communities.

In 2003, Sun lost just under 900 manufactured housing sites and occupancy. 95 percent of these lost sites were in 33 of our communities, or as we refer to it, an example of the new 95/25 (ph) rule. The remaining 75 percent of our communities approximated breakeven in occupancy. Of the 900 sites, about 200 of those sites were vacant sites leased by manufacturers or dealers who had reserved those sites for new home sales. And as their leases matured and burned off, they were not renewed, but represent loss revenue but not lost residence in our communities. At the end of 2003, there remained only 32 sites being pre-leased by manufacturers.

Revealing Sun's position as we enter 2004, the economic consensuses for job growth, slight interest rate pressure and a pickup in inflation, all of which we believe will bode well for our industry and for Sun. On the acquisition side, we now see some positive industry changes, improved community fundamentals which we are experiencing now, and as previously discussed, management is seeking acquisition opportunities where we can lever off Sun's existing management, personnel and skills. And as we move forward for this coming year, Sun possesses substantial operating leverage in the following areas -- over 5000 developed sites available for occupancy, an additional 7700 sites zoned and ready for development when warranted in the future, a supply of value-priced, pre-owned homes available for sale, the personnel and systems infrastructure already in place to manage and leverage this growth, and a major sales and training initiative campaign that is taking place currently to prepare our site personnel for this turn of what we believe, we will see in the industry this coming year.

And at this time, both Jeff and will answer any questions.

(OPERATOR INSTRUCTIONS). Alexander Goldfarb, Lehman Brothers.

Thank you. Good morning. First, if you can just touch on the pending acquisition or potential acquisition involving PMI? Are these assets one, encumbered; and two, MHC put out a press release yesterday which seems to be discussing the same set of assets. So are these in fact the same set of assets?

In principle, these are the same assets and Property Management Asset Inc., or PAMI, is the majority equity owner. Sun entered into a purchase agreement with PAMI to acquire approximate 26 communities or 10,586 developed sites, mostly recreational vehicle sites. There is a dispute that has taken place between PAMI, the majority equity owner and a minority owner. It appears that MHC announced that they had entered into agreement or were financing the minority owner to acquire these interests on the majority owner. There was a buy/sell mechanism that PAMI feels is quite clear and addresses this issue and is in fact answering a position in court to resolve this, has entered one pleading (ph) this past week and will do so with more pleadings this coming week. And they believe very clearly that they have the right to go ahead and complete the transaction with Sun Communities. However, there is now certainty ever, as you all now, with what could come out of litigation. And we are therefore cautiously optimistic that we will acquire these properties. However, there is no certainty.

Okay. So the minority, is that MHC, or that's a third party that MHC is involved with?

I think that is a third party. The dispute is between the majority partner PAMI and the minority partner and MHC has claimed that they have an agreement with the minority partner to acquire these properties. Sun has no connection, or no affiliation with the dispute or no obligation to defend itself in any way at this time regarding the dispute. It's a dispute among partners and I think it is as simple as the minority partner extended its option on a buy/sell to the majority partner and the majority partner said that they would elect to exercise their right to buy properties at the sites that were set forth by the minority partner.

Okay. So if I understand correctly, if everything goes, if PAMI wins and Sun completes this, then Sun would be buying out PAMI's interest, PAMI would be acquiring the minority interest. So at the end of the day, Sun would own 100 percent of the entity, correct?

That is correct.

Okay. And have you disclosed the price?

The price is not disclosed. The terms are not disclosed. There has been a lot of dialogue and discussion with securities and our counsel as to disclosures. As you know in the past, Sun has always tried to err on the over-disclosure side. And because of the uncertainty of the litigation that is taking place a now, some of this will (technical difficulty) as a matter of court record, and we would advise to put forth this limited disclosure and not to discuss any of the terms.

Okay. And is any of this encumbered?

The properties do have a certain amount of that on them, but it is prepayable and a certain amount of debt that is not prepayable.

Okay. But those amounts have had not been disclosed?

They have not been disclosed to the market at this time.

The next question is -- if you can just take a stab at the portfolio, can you remind us what percent is all age, what percent is age-restricted, and what percent is our REVPAR, and what percent are rental homes?

In the current portfolio ?

Yes.

Jeff, I'll let you take a stab at that.

Well, if we look at, let's see, in the supplemental data, we've got about 40,000 develop sites that are MH sites and about, rough numbers, 5000 REVPAR sites, of which 2000 are seasonal. So 2000 seasonal out of roughly 45,000 sites is somewhere around 45 percent seasonal sites. Rental homes would come in at about 2 to 3 percent of the total sites. Retirees, the literature in the industry says that roughly 25 percent of all MH sites represent retirees in place. So if you added that to our ad hoc (ph) communities, you probably get to maybe a 35 percent to 40 percent resident base. If you just looked at communities designated retirement, we probably have 10 or 12, maybe 15 of those in the portfolio, mostly of course Florida. So it's kind of a broad demographic overview of the portfolio.

So rough numbers, it sounds like 75 percent is all age, 25 percent age-restricted?

I think my age restricted in terms of a resident base came in at around 35 or 40 percent, but we won't quibble about 10 percentage points.

Okay. That is fine, so 65/35. The origin dividend -- was there any booked in Q4 and if you could just walk us through where this would be booked.

Well, as of 12/31, we owned one-third interest in Origen, and that means that we account for Origen on the equity basis of accounting, which means we pick up one-third of their actual earnings in the period in which they earn them. And then when the dividend comes through, that is not reflected in earnings, it's actually reflected as a reduction of your investment. Because when you record your equity income, you increase your investment; when you get the dividend, you decrease your investment.

Correct. Okay. So was there anything booked in Q4?

Of course. One-third of their income for that period.

Okay. Which was how much?

That would be in the line called "equity income launch from affiliates in three months ended December 31, 2003," which came out to be $667,000.

Okay. So that equity income line is just a pure Origen line?

In the fourth quarter of '03, it is. And I guess in the 12 months, as well. Obviously the prior year, there were some other things in there.

Okay. So what can we expect in full year '04?

Well, you would have to ask that of Origen.

Okay.

I think there's a little update at Origen. They completed dated the first manufactured, (technical difficulty) securitization approximately 30 days ago, first one since spring of '02, so it was approximately $250 million and an all-in cost of capital of 5.2 percent. They were very pleased with the executions, demand was very, very high because of the quality of assets. And it actually funded and closed last week. And last Friday, they actually filed with the SEC, a registration for an IPO. And I think with regard to forecasting or giving any kind of guidance because they are a private company at this particular time, the advice that they're putting out is that they are on track to basically meet their projection.

Okay. And if they are successful in going IPO, would Sun be looking at selling at its stake?

Again, my commitment to the board and the shareholders has been to continue to reduce the exposure to Origen. And depending upon the lockup and the registrations involve, if they were a successful IPO, or other capital events, we would look over the proper period of time to reduce that exposure.

Okay. Just my final question, I appreciate your time. The NOI guidance that you put out at the end of January was for 3-1/2 percent growth. Looking at how your portfolio performed in '03, are you still sticking by this NOI assumption?

Yes, because if you look at the quarter, the biggest problem in the same property portfolio, I mean certainly there was some erosion in revenue growth due to vacancies generated by repossessions. But if you look at the expense growth by quarter, you'll see that it was 9.9, 10.6, 7.1 and 5.1, going from Q1 through Q4. SO the expense growth has been increasingly contained since mid-2003 and we expect that to continue. So we think with the expense growth of 4 percent or less and the revenue growth of 3.5, that we will hit that NOI growth at the same property portfolio.

Thank you.

Jordan Sadler, Smith Communities (ph).

On Origen, Jeff, if I'm doing the math right, the 667, which is I guess your share of the income for the quarter, that implies a roughly 5 percent yield on your investment? Is that about right?

Well, let's see. 667, that would be about right. And of course, they were not, they were not public for the entire quarter, I think they launched the first 8-10 days of the quarter, so it was an 80-day period as opposed to a 90-day period. And the other side of it is, is if you're familiar with the nature of their operations, they are in a ramp-up mode as they generate more originations in production, they generate more of a positive spread between their interest income and interest expense, which is in fact what their projections look like. So --

We'll probably see a pop in Q1 because they have that they got securitization off --

Well, my understanding is that they will be accounting for that as a financing, not a gain on sale, gimmicky accounting kind of stuff of the old days of the finance companies. (multiple speakers)

If that does take place, the leverage is in place, and therefore, if executed properly, the profitability should increase.

Okay. So your yield could go back up to -- I think originally you had anticipated that this would offset -- your investment of $50 million would offset the interest income that you lost from converting (indiscernible)?

That would be correct on an annual basis.

So, a 10 percent or 11 percent yield seems like it's possible?

Yes.

Just a follow-up on a couple of Alexander's questions. On the rentals, you worked through a percentage. Do you know what the number of rentals in the portfolio are?

Just under 1200.

1200. And then on the retirement communities, you said there's 10, 12, or 15 -- you meant number of communities, so I would assume that is 10 percent of your portfolio, roughly?

Yes. It's 10 or 12 communities, mostly Florida, that are retirement communities.

Okay. And then on the PAMI transaction, I don't want to push you guys where you don't want to go in terms of talking about it, I understand the litigation. Just curious about the nature of those assets. All are RV parks? Is that right? Is it 100 percent RV? Because I guess it seems to me that MHC is disclosing them as sort of a different asset class, a park model, or home, if you will.

I think that they are predominantly recreational vehicles with a small percentage of manufactured housing. But when you look at a recreational vehicle component, you have two components that we refer to as the "permanent home," which actually are RV homes that people get tired of taking back and forth or there park models, or just small manufactured homes that for all practical purposes never go anywhere. And then you have the seasonal and daily breakup where people are coming in and out of the community all season long. And the mix is approximately 50 percent what we refer to as permanent 50 percent, that would be the daily and the seasonal and the weekly. It is a mix of both, which is identical to the roughly 5000 sites that we currently have in our portfolio.

Okay. And I guess just walking through some of the math that they disclosed, I think they mentioned a $69 million payment for the equity, which assuming 50 percent leverage, which is probably even more leverage, it's a minimum of about $140, $150 million transaction. Is my math sort of pencil (ph)?

I think that we can comment about the structure that they have in place with the minority partner. It sounds to me like -- if $59 million is the equity, the rest has to come from somewhere.

I guess I'm trying to get the total volume, the total size of the transaction. Does that sort of, math sort of work? (multiple speakers) 50 percent leverage or 60 percent leverage?

Yes.

Okay. And then where does the interest income associated with the Homebuying Made Easy program, or the interest expense associated with the Homebuying Made Easy program shall up now, Jeff?

We have those loans still on our own books, so there is no expense associated, no interest expense associated with those. That would only occur if and when we were to transfer or sell those at par to Origen, and then we would be paying them the interest differential.

And that's 75 loans or so?

Yes, 75 loans, roughly 2.2, 2.3 million principal balance at the end of year.

Like a 6 percent blended rate?

That's about right.

And that shows up in interest and other income, I would assume?

Exactly.

The other question is -- how many repos do you have in the portfolio right now? And how is that spread? I know the number of repos generally goes down, but what has your experience been like?

Well, last year, to give the comparison, we had 650, of which 337 were Greentree/Oakwood. This year, we have --

And that's Q4 '02 (ph) you're referring to?

That was 12/02. And at 12/03, we have 643, of which 264 are Greentree/Oakwood. And for the quarters this year, it's been 648, 609, 671, and 643. So it has been pretty consistent.

And pretty flat. And I noticed just in your disclosure that you're no longer providing the gross leased sites. Do you have that number available for the year?

The gross lease sites --

Yes. You provided moveouts and net, but they don't --

We streamlined, as you may have noticed, parts of the supplemental data simply because with the move-up of the filing requirements, we just needed to conserve some time and energy from some of these matters. We probably have that number, which I can get for you.

Okay. I guess I was sort of working back towards this Homebuying Made Easy program. How do you view the success of this program? Do you think it's going well? Do you think it will be expanded in the next couple of quarters, or what?

I think our view is it's running at approximately 50 percent of the pace that we would like to see it running at. I would emphasize again that when we first disclosed it, it was just meant to be one of numerous tools that we put in place to get through the challenging period our industry as hat. And we would like to see it running about double. One of the issues is, the average FICO scores are 715 and above, and the question is -- should we be providing more flexibility in those FICO scores, and that's what we're looking at right now. There are new lenders that have entered into the marketplace, U.S. Bank, Fannie Mae on the non-channel side. But I think we will see some easing and more availability of credit. And eventually our Homebuying Made Easy program is something that could go by the wayside.

And the Fannie Mae program has gotten some lip service recently, but that really isn't going to impact you or will it?

That does not impact us, except for indirectly through our investment in Origen.

And then maybe cleaning up some of the repos that are out there.

Correct.

Okay. And that I guess lastly I would like to delve into Sun Champ a little bit and how that entity is performing. Firstly, what is your combined ownership as of right now? Is it still 59 percent as it was at the end of '02?

I think it has moved into, because as we fund capital into Sun Champ for developing and completing additional sites to meet demand, that has moved up into, probably into the middle 60 percent, at this point in time.

Okay. And what is the average occupancy of those 11 --

Well, that would be probably not a real meaningful number. I tell you, 11 of them are included in the operating statistics in the supplemental data under "new community development." And so you probably are not going to be able -- which is on my page 16 -- you figure it's about 58 percent of developed sites on average, you know, you're not going to be far off. Sun Champ last year generated about 1.6 million of NOI for the company, and the budget this year is in the low 2 million, 2.2 range.

In aggregate?

That's NOI from Sun Champ.

Right. Is that the full entity, or just your 60 percent share?

That is 100 percent.

Okay. And the budget for '04 is --

That was it, in the low 2 million range, 2.2.

Okay. And what is the expected ramp, in terms of leasing from that entity? I'm not sure how many sites you're expected to lease?

Well in the guidance, we said we expect to lease about 400 sites in our new community development portfolio, and that comprises about -- I believe it is 20 properties -- 21 properties.

An extra 10 percent of occupancy.

It's about that 20 -- we think we're pretty conservative. We're looking at net adds of say 20 sites, 20 residents per new community development for the year.

Okay. And then I guess, what would be the remaining discount on the mortgages related to those Conseco mortgages that you bought at a discount on that entity?

Well, that will expire around middle of '05. That's when those loans all mature at and that will be the and of the amortization of the discount.

So you still are booking about 5 to 600,000 a quarter?

Correct.

Gains. And that will go away in '05?

Yes.

Okay. Thank you, guys.

Art Havener, A.G. Edwards.

Hi. Good morning. I have a question regarding the loss of occupancy. In the second half of this year, it looks like the trend has accelerated versus the first half. First, can you kind of address that, is that a seasonality issue?

I don't think it's necessarily seasonality, it tends to be driven by the actions, in that case of our portfolio, principally of Conseco (ph), or Green Tree (ph) rather than, and Oakwood (ph), as they actually address the repos that are in their securitizations, and recognized that those deals are defaulted and those people are gone. That is the end of the rentals stream, and that is another vacancy in our world. So, I think it really has to do with the accelerating liquidation by them of their repossessions.

I would agree with that, Art, I think that when we focus the middle of (indiscernible) it's the last rush, if you will, recognition that they are not paying any more rent on foreclosed houses. And in fact, for the first time they are recognizing their foreclosure rapidly as opposed to systematically as they were historically.

Okay, do you have any data that would suggest this trend is continuing into the first quarter? And would you have the year-to-date occupancy figures?

No, we don't have any of that at this point in time. What we do know is, in the month of February we will have nearly twice as many applications for rental that we had in any given month in 2003.

So, it is not like we necessarily want to become a rental machine. But when you have that kind of growth in activity in the communities, it begins to become an encouraging sign in terms of business activity -- some of those folks are going to be converted to buyers, some of those folks are going to be rejected, of course, as they always are. But the jump in numbers is certainly significant. And, of course, the other side of that is they will turn vacant homes into revenue-producing sites.

What is driving the increase in rentals? Are you advertising that?

There is nothing new or different taking place. This February then November or February of last year. It looks like, honest to goodness business activity. The stealth recovery.

Okay. You mentioned that you have about 1,200 rental homes in your portfolio right now.

Yes.

Can you give me what, kind of, a dollar investment you have into those homes and what lease rate or percentage of those are rented?

Those are all rented. Those 1,200 homes, are about $30 million.

Okay, I might misunderstand this, but if they are all rented, what are you going to do with these people that are coming in looking for rentals?

Well, we have used homes for sale that we can converted into rental. And-or we always have the opportunity to acquire additional repossessed homes from the lenders.

The turnover is roughly 40, 50 percent.

Just like apartments.

Okay. I have one more question on Origen. Did you include a contribution to your FFO guidance for 2004? From Origen?

Yes.

Okay, but it is just not broken out?

No. If they were to break that out, we would be tying the world what Origen results are, or might be telling the world what Origen results might be for 2004. Given that they have got filings with the SEC and so forth, we have just determined that that would not be prudent.

Okay. And one more question. I might be mistaken, but did you omit your NAV (ph) calculation this quarter?

We have suspended the presentation of NVA in the supplemental data.

Any reason?

Well, we have done it for a number of years, so that everybody who follows us can be pretty familiar with how we see the methodology. And it seems not to have caught on with anybody else in the industry, and given the increasing pressures of filing -- the 10-K this year is due on March 15th instead of March 31st; and the tightening on the quarterly cues, to get this information into the Securities and Exchange Commission more quickly, we have just had to make a few cuts and that is one of them.

Okay. Thank you.

Paul Adornato, Cobblestone Research.

Thanks very much. Just a few follow-up questions. First on PAMI, did you incur any legal fees?

The only legal fees that we incurred had to do with the negotiations of purchase agreement.

Okay. Is there any kind of breakout fee that you might be liable for? Or any other financial exposure if the deal does not happen?

There would be none out of the ordinary.

Okay. And on your rental portfolio, you've got 1,200 now, where would you see that see that in the next year?

I think we see a pretty much at a position give or take 10 or 15 percent in any direction.

As I indicated earlier, we are on it intensive sales training program, whereby our staff is being taught how to take advantage of the value that has been created in these used homes and rental homes and now convert them into permanent tenants by selling (indiscernible) to them. I don't see any great fluctuation from the levels that we are at right now.

And when a new resident comes in, they pretty much segregated into kind of rent-to-own, or pure rental? Or do they -- could status change over time? Could you give a little color about, just, how conversion might take place?

I think that the prospective resident comes in and is prequalified, based on their income in their needs in their dialogue with salespersons, or the manager. Determined what it is they're looking for. And then what they're looking for is matched up to that prequalification, and they would go into -- all of our rental program is basically an LPP (ph) program, there's a certain percentage of their first-year payment that would be applicable to the purchase price of the home at the end of the year. There's no differentiation made there.

Then, after the resident has a history of a history of a year or two years in the community, there is a model that is run, and a system where they are approached, and perhaps shown how they can save money by buying a home over continuing to rent that home. And that's pretty much how it takes place.

It is not a huge component of our portfolio, and I would suggest, (indiscernible) have (indiscernible) question of (indiscernible) or their model, but I think the simple differentiation between the business plan at Sun and (indiscernible) is a business model right now that is based around that rental program. For Sun, the rental program is like the home Buying Made Easy -- it is just one of the many tools that we have to create shareholder value.

Okay. Thank you.

David Ronco, RBC.

Hi, guys, I’m here with Jay Luc (ph). Know pending acquisition wasn't included in your previous '04 guidance. I wondered if, excluding acquisition, when you issued the guidance, do you, given what has happened just thus this year, do have a bias towards the low end or the high end? And then I wondered, I know kind of a broad question -- but I wondered if you could talk about whether, what you would need to do, I guess, to get to the high end? And then what kind of deterioration I guess, in fundamentals we'd have to see, if you ended up on the (indiscernible)?

Well, I guess both of us can answer this. I mean, I think there's acquisition spread of 20 to $40 million -- we are aggressively seeking external growth from acquisitions right now. And one of the ways to reach the higher end of guidance is to hit the higher end of acquisitions. And get some positive spread out of the acquisitions -- obviously, they're earlier in year, the longer they will be. And, Jeff, I'll let you talk about occupancy and what was based into the guidance numbers, and how that might or might not affect the low or high end.

The guidance calls for stabilized communities being stable. And the new community developments adding 400 sites during year. So, I would say that the guidance is aimed principally at the midpoint of, or -- what is the right word -- the attributes that support the guidance are based on midpoint of the guidance. So to the extent that the attributes are stronger, we should move closer to the higher end, and of course, aided by acquisitions. Similarly, if occupancy has deteriorated from the pro forma or the estimates, it would be lower.

Okay. Thanks a lot.

David Shulman, Lehman Brothers.

Good morning, just a quick question on the rental homes. You said they were valued around $30 million, 2 to 3 million a year of depreciation would be associated with those assets?

The lifes of the assets are individually determined, based on the age of the home and the condition of the home. So the depreciation -- we are not using a ten-year life, no, we are using more like a thirty-year life with a half-year depreciation in the year of acquisition and/or disposition.

So it would be about $1 million a year, something like that, of depreciation (indiscernible)?

Approximately on that order, yes.

About. I am not asking for the exact number.

Yes.

Maybe about $1 million a year of depreciation?

Yes.

Okay. Thank you.

Thank you. Richard Paoli, ABP Investments.

Hey, guys. Just one point of clarification, on the equity income line. Is that a all-cash number,? Essentially the origin number -- or is there some type of an additional adjustment for FFO to get a little more of an FFO number?

That is one-third of their net income. I don't believe they have much to adjust to FFO. Certainly they don't have much in the way -- they don't have any real estate depreciation, for instance, for sure. So that is -- represents one-third of their income for the period and that's non-cash until we receive the dividend.

Right. Okay -- use cash and FFO ubiquitously. In terms of -- is there an FFO adjustment in your -- I don't see it here on the table -- in terms of that, where it is just not a significant number?

Well, we think most of it will be converted to cash shortly with the payment of the dividend. But no, there is no adjustment of that number to convert it to a cash number in the table.

Okay. And then the other question is -- in your outlook you've addressed it, but G&A was up a lot last year, fourth quarter to fourth quarter, I think it's on the magnitude of 30 percent or so. Could you just walk through what the major components of that are?

And in your guidance, that you issued a couple weeks ago, it sounded like you were looking for a $900,000 or so increase over this year, and I'm not sure if you mean a run rate from the fourth quarter or the full year '03 number?

Okay. The primary drivers of higher G&A this year compared to last year, would be Sarbanes-Oxley, probably 100,000, our office move --- about 150,000. Systems conversion, primarily personnel costs, but also training expenses of about 60 to 70,000; professional fees, which are legal and audit, are about 400,000 higher; the Michigan single business tax is about 200,000 higher; and the Sun Champ G&A is up about 500,000 over last year. The increases that we mentioned -- and we would expect G&A growth to return to, what I would call, more normal levels of around 5 percent. Because we are looking at ways to reduce our G&A and have in fact implemented several of those recently, which effect will be seen more significantly as the year wears on.

And then, these two items are in fact, increase items that we wanted to include in the guidance.

So -- long-winded answer, but the answer is -- it's very similar to the answer on property, operating and maintenance expenses in the same property portfolio. Our growth returning to more normal levels from this point forward.

Okay. So that 900,000, we should kind of look at the fourth quarter as a run rate and then add on from that?

I think that is correct.

Okay. Thank you.

Alexander Goldfarb, Lehman Brothers.

Thank you. Just a few quick follow-ups. First of all, the Origen -- or not, I'm sorry -- the Home Buying Made Easy loans, you are currently keeping them on your books. When do you expect to transfer them to Origen, and when does the process become one that they automatically go there, that they don't stay on your books?

That process is taking place right now. I think Origen has been focused on its recapitalization, its securitization, getting the level from the rating agencies, and at the same time, transferring these loans, doing an acquisition of a portfolio of loans and several other acquisitions that they're looking at right now. So I think it is just a priority thing. And from the paperwork I have seen that's happening right now --

Okay, so in the first quarter, so we should see the switchover and then we would see the reduction of rental income on Sun's books, correct?

That's right.

The acquisitions, going back to the stuff Jordan was talking about, it sounds like it is 140 million, plus or minus, but adjusting for financing and assuming sort of like a 7/8 (ph) cap rate, sounds like it might be somewhere in the neighborhood of 20 cents annual benefit to Sun? Is that correct?

I think all that we would say at this time is that we think it would be significantly accretive to Sun. But in the interest of sparing everybody the time, energy and effort and the uncertainty of litigation, we've been asked not to really get into the capital structure replacing (ph) the term of the transaction.

Okay.

(multiple speakers) fully willing to do that as soon as there's some clarity on the litigation.

Okay. Thank you. And finally, CapEx of -- I think in the back of a supplemental, you say it's about a site. Can you discuss the difference in CapEx for rental homes versus the regular properties?

The difference in CapEx for rental homes. The rental homes are not included in the recurring CapEx number, as indicated I think and a in the last sentence under No E (ph), because those are at Sun Home Services, these are the CapEx of the communities. So this includes what we have always reported as what I would call community CapEx, as opposed to the homes CapEx. The bulk of the CapEx on homes, I mean we are averaging about -- I wouldn't call it CapEx -- we are averaging about $900 of refurbishment costs per turned over home. And so, they are expensed when they are incurred. So there is not much in the way of CapEx on homes, except that when we buy them initially, from a finance company and if you’ve got to put in a new carpet or if you have some major cleanup, fix-up stuff, that would get capitalized into the basis of the home.

Okay. But the homes you're buying, they are around like 20,000 a home or so?

Well, they are around $12 a square foot, in that range. And then added to that cost, it depends on the condition of the home. So if it needs new appliances, they are going to get capitalized in the home.

Okay, so basically it's a turn?

And then the expenses are, the refurbishment expenses are averaging $900 a turn.

Okay. Thank you.

Thank you. At this time, we're showing no further questions in queue. I would like to turn the floor back over to management for any additional or closing comment.

Sun Communities management thanks you for participating on our conference call. Both Jeff and I will be available to respond to any other questions. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.