Sun Communities Inc (SUI) 2005 Q2 法說會逐字稿

Good morning, ladies and gentleman, and welcome to the Sun Communities second quarter 2005 earnings result conference call. At this time, all participants are on a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. 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 cause actual results to different materially from expectations are detailed in this morning's press release and from time to time, the Company's periodic filing with the SEC. The Company undertakes no obligations to revise or update any forward-looking statements to reflect events or circumstances after the date of this release.

Having said that, I'd like to introduce management with us today. Mr. Gary Shiffman, Chairman and Chief Executive Officer of Sun Communities, Incorporated, and Mr. Jeff Jorissen, Chief Financial Officer of Sun Communities, Incorporated. Thank you, gentleman. You may begin.

Good Morning. Second quarter earnings, as announced prior to the opening of the market today, were funds from operations of $12.6 million or $0.62 per share compared to $14.9 million or $0.70 per share in 2004, excluding costs related the Company's recapitalization. Net loss in the second quarter was $0.8 million or $0.04 per share, compared to net income of $9.3 million or $0.50 per share in '04, again, excluding costs related to the Company's recapitalization.

Revenues for the second quarter of 2005 were $51.3 million, compared to $48.9 million in 2004.

And now we can turn to the portfolio review. Rental increases for the first two quarters were on budget and resulted in a weighted average increase year-to-date of approximately 4%, comprising 69% of our manufactured housings price. A performance of our same property portfolio improved as expected, doubling the NY growth-rate of 1.3% for first quarter, to 2.6% growth-rate in quarter 2. This was the result of a revenue gain of 4% and an expenses increase of 7.7%. Property, operating and maintenance expenses have increased at 3% rate for the first 6 months of 2005.

We have leased 394 net sites in our manufactured housing portfolio in the first 6 months, compared to a loss of 21 sites through June 30, 2004. And our budgeted target for net leased sites in 2005 is 450, so we are about 88% of the way to the goal during the first 6 months.

The current portfolio net fill-rate of 2.1 sites per day would result in an increase of about 750 sites for the complete year. As part of management's strategic plans discussed in prior calls, Sun has been purchasing all of the value priced repossessed homes in our portfolio for both the rental program and for resale by Sun Home Services. The shift in strategy was made to adapt to the massive repossession overhang created by poor lending practices and the stiff competition by site-built housing, due in large part to the low interest-rate environment.

The plan called for the ability to continue to create growth for our shareholders over the next 5 years, while working through the industry challenges that have been present since 2000.

The rate of new repossessions remains at near levels of recent years, so it hasn't changed very much. There are 453 repossessed homes in our portfolio that are owned by lenders which is, in fact, the lowest level in years. This is a result of our purchase of value-priced repossessed homes that I just spoke about and the removal from the portfolio of homes by lenders.

We have rented approximately 1,100 homes in the first 6 months of 2005, resulting in a total of slightly over 3,000 rental homes. These homes have largely been supplied from the purchase of value-priced homes, have been repossessed by the lenders that we have just spoke about and the weighted average rent has increased by 7% from the level at the beginning of the year.

The second phase of management's plan, which is to slowly sell off these rental homes, has just begun this past quarter. We have spent 6 months developing an internal telemarketing plan, staffing for sales and working on third-party and lender programs that will convert the rental homes into sales to lessees or new residents. This process for sales will take place over the next 5 years, as the vast overhang of repos diminishes, new manufactured housing sales increase and put price pressure on new houses and site built homes become less affordable, in part because of higher interest rates. It is then that we expect the affordability and value created by these opportunistic purchases of our inventory for sale will come into play as we sell these homes.

512 homes have been sold in our communities in the first 6 months, with 210 of them sold by Sun Homes Services. This includes 38 rental homes that have been sold to the lessees, with 27 of them incurring as a result of our telesales effort, which began operations in second quarter. One-half of the 27 closed has been in the last 4 weeks, an encouraging sign for this new program that we have implemented.

As most of you know, the other day we issued a press release announcing an inquiry by the SEC. Due to the proximity in time between the Well's notice and our earnings call today, we felt that it was important to give our stockholders and the market enough information to evaluate the basis for the SEC proceedings. We're not trying to argue our position in press releases or on this call, or through other public announcements. We will try to work through the issues with the SEC staff and we hope to resolve them as quickly as we can in a cooperative way.

We've had the good fortune to have an extremely qualified, independent and engaged audit committee that has monitored our response to this inquiry from the very beginning. The audit committee and our board decided the best course for the Company was to voluntarily and fully cooperate with the inquiry. Accordingly, we have strived to provide all of the files, agreements, documents and other information requested. Our officers, investors and Sun Champ and others have voluntarily given testimony, provided documents, access to emails and generally cooperated in every way requested by the SEC staff.

As I understand the SEC's position at this time, the alleged violations relate to accounting decisions during 2000, 2001 and 2002, primarily with respect to our Sun Champ investment. This is an ongoing matter that we are trying to resolve, and we are limited on what we can say about substantive matters. But one thing I can say is that the Sun Champ accounting involved complex issues and the Sun Champ accounting was fully exposed to our auditors during their reviews and audits of our financial statements.

As we noted in our press release, the largest financial impact between our reported results and what the SEC staff believes to be appropriate, would occur if we were required to allocate no (inaudible) portion of Sun Champ loses to the investors who purchased over $13 million of interest from Sun.

We believe that the inquiry and SEC staff's interest in Sun Champ stems from a complaint by one of our four investors in the Sun Champ properties. As the industry turned down in late 1999 and 2000, this investor had remorse over his investment and wanted to be taken out of it. We felt that we could not treat him any differently than the other investors, and he brought civil action against the Company and some individuals, which have not been successful. This investor had complete access to Sun Champ's financial information prior to investments. In fact, he was a Vice President of Sales at Champion and involved with them as a day to day operator of the Sun Champ properties.

Again, I would suggest to everyone that we are not trying to present our position publicly. We will try to work through the issues with the SEC staff and we hope to resolve them as quickly as we can in a cooperative way. Further, we have addressed that we believe the main focus of the SEC inquiry. We are not commenting on other aspects which we have said do not have a quantitatively material impact on the Company's operating results or our financial position.

And at this time, we would be pleased to take any questions that you might have for us.

Ladies and gentleman, at this time, we'll be conducting a question and answer session. [Operator Instructions]. Our first question comes from Jordan Sadlar with Smith Barney. Please state your question.

Hi. It's actually Ted Neltzer here with Jordan. Total property revenues were down $1.8 million sequentially. How much of this was attributable to the RV revenues declining seasonally and where should we expect the RV revenues to turn for the rest of the year?

That would be substantially due to the near total absence of seasonal RV revenues in Q2. Q3 is usually about the same as Q2 in terms of seasonal RV revenue, and in Q4 it begins to show a pickup.

What, like a million bucks, 500,000?

In Q1?

In the fourth quarter.

It would be for ending $800,000 to the million range.

Okay. (Inaudible) you spoke that you were getting very close or hit your target of increasing the lease sites of 450, but then in the quarter, a little bit lower. Can you just give a little more clearer on what happened in June?

I think that we made few arrangements to actually acquire at a very value oriented purchase price some repossessions that were previously revenue producing and just the fluctuation of specific timing of the marketplace when we captured the data. From week to week, we can have swings as much as 15, 25.

Since you are 88% of the way to your target in the first half, what's the thought process of maintaining the 450 of these sites as a full year target?

I think that we don't attempt to go in and change our budgets internally, and the type of guidance that we provided because of our recapitalization is more like long-term 5 year guidance. And there is nothing publicly at this time that we would change with regard to our expectations. But we're certainly encouraged that if we were to continue on this run rate, we would have positive results from the increased occupancy.

Your rental home inventory increased by $19 million from the first quarter. How many homes did you purchase and what was the average price?

In the first half, we purchased a total of about 1,200 homes. And let's see here, the average price of all the homes in the rental pool at the end of quarter 2 is $31,100.

I'm just trying to get a little bit more color on the 38 rental homes that you sold. What was the average selling price and how does that compare to your cost on the investment?

These homes have been sold at very modest margins, not much above our cost, as the objective is not so much to make money on the homes, is to convert renters into owners.

Is that a depreciated cost on margin also or is that on an economic basis?

That's on an economic basis.

Okay. And a little bit of info on the Florida assets sales. Was that one off sale or should we expect more similar sales in the pipeline?

I think they were two very small communities, one a 65 site manufactured housing community and one a very small -- what we would consider a functionally obsolete RV community. It was just regular asset management.

What was the cap rate on those sales?

I don't think we have those with us and I think we would have to get back with you.

Okay. And then the last question is just on Hurricane Dennis and if you've done any preliminary work on any damage on the [inaudible] as your asset?

We've had no damage reported at this time regarding the hurricane.

Okay. Thank you very much.

Our next question comes from Richard Pouloley with ADT Investments. Please state your question.

Hey, guys. I have a couple of questions. First, thanks for the color on the proceedings on the Wells notice and I was just curious if you could clear something up. The three other buyers of the Sun Champ investment, could you characterize them? Are they also affiliated with Champion? Is this to be perceived potentially by the SEC as something that wasn't necessarily arms' length because these people were affiliated with that organization? Could we have a follow-up there?

Yes, I think that I would state that to the best of our belief, they were four arms' length transactions. These are high net worth individuals, all of them involved in manufactured housing in one form or another, development, ownership, construction.

None of them affiliated with Sun in any way?

No, none of them affiliated with Sun. One of them was the group that actually did third party construction; the other one involved in owning their own manufactured housing communities, and I guess I would state that affiliation with Champion in any way, shape or form has absolutely nothing to do with the investigation.

Okay. My other question related to this is -- -and I'm taking, unfortunately, experience from another REIT that's dealing with the SEC now. Have they indicated at all that they would like to extend what they're looking at while they're visiting with you all into other areas, not necessarily that they're saying that there is anything wrong, but while there they have the opportunity to do a top to bottom review?

Well, I think the good news, if there is any, is that in a very, very broad investigation that we believe most likely was prompted by this disgruntled investor, where they began to focus and we began to provide just about every document that was available to us within that period of time from the Company, they have clearly indicated to us that they've narrowed their focus to this particular issue and made their comments on these issues and have invited a response from us on these specific issues at this time.

Okay. So when you say, "documents," you're -- I don't want to call them them an area of concern, but the one area that some people have raised with you all in the past has been [Bigum] Financial. Have they looked at that and at this point, taken a pass? I'm not trying to insinuate that there is anything wrong there, but I'm just trying to get a context of what they looked at -- all documents with respect of Champion, Sun Champ JV, or all documents with respect to all filings that Sun has done in that time period?

I can't speak on their entire process because they don't share anything of it with us. However, towards the end of the process, as we kept in contact with them, they shared with us and our third party professionals, that the only thing that they were looking at after the entire investigation was the matter of the isolated incidents that were in the Wells notice. I do know for a fact that they were given all audited files supplied by all auditors since the beginning of time, or I should say, certainly during this period by the Company.

Great. Okay. I have one other question, and I think you addressed it. I just couldn't write fast enough. The increase in rental homes this quarter, how much of that offset the decrease in, I guess, leased sites by the people who owned the house on top of the pad?

Well, I think that approximately -- we get an actual turnover of homes out, roughly around 3, 3.5%, historically, new homes actually move out. So, maybe 40, 45% would be of the move-outs would be -- let's see if we had 4 times 4 --

Because I noticed that your occupancy was flat over the quarter, but your -- the people that moved out, the number in the supplemental, if I'm reading it correctly, the pace accelerated from the first quarter and I'm just curious if you're backfilling those vacancies on the pads with rental customers.

You say occupancy was flat, but actually, I mean, the supplemental data, the new community developments added to about 145 sites in the quarter, and, I guess, the statewides, there was a property sale and a property buy, so it's a little hard to compare March with June.

Yes. So on a same-store basis, if you looked at those communities that weren't affected, what happened because it's hard to get a read from when the apples and oranges come in.

Well, it's always in the footnotes, of course. On Page 12 on the Statement of Operations, we did indicate that the occupancy of the same property portfolio on January 1, 2005 was 85% and at June 30th, 85.6%, which reflects some of those increased -- most of those increased net leased sites would be in the same property portfolio.

That was December 31st through March 30st?

Yes, it's from 12/31 to 6/30.

Right. I was questioning what transpired between the March and June ending. Do you have that data available?

I don't have the March supplemental data or same property in front of me.

Okay. Thank you.

[Operator Instructions]. Our next question comes from Dave Rogers, with eBank Capital Markets. Please state your question.

Yes, the first question is for Jeff. In terms of the repossessed homes, you said -- I think you gave us a total number, or maybe Gary gave us a total number of 453 at the end of the quarter. What was the new repo incursion, excluding any of the home purchases you may have made during the quarter?

Well, the repos ran -- the annual number, oddly enough, for 2003 and 2004 was 1,369 new repos in each of those years, and the rate in the first half of the year is slightly lower than that rate.

How much? I mean, is it 10% or just a feeling there?

Well, slightly would be, maybe in the 5 -- I mean, it kind of -- the rate varies, obviously, every week when we get our weekly report, but I think 5% to 10% below that would be a safe range for estimating the rate of repos in 5 to 10% below the prior year levels in 2005.

Did you do any new home purchases during the quarter or were these all the sales -- or all the purchases, were those all about the used rentals?

The purchases during this quarter were about almost 50/50 between repossessed homes and new homes.

Do you have what that data was and how it broke down on a per-price basis? I think you gave us a price per home on a rental, but do you have the new stuff?

The new homes would be in the $35,000 range and the used homes would be in the low $20s, the pre-owned. So the pre-owned would be low $20's and the new would be around $35,000, on average.

I just want to understand because if you get 1,200 rental home purchases in the first half, that would only be the used portion or are you adding new to that as well?

Depends on the individual market. If there are markets where there is demand for rental homes, but there's no supply of repossessed homes, and to meet the demand in some of those markets, we have put new homes into the rental pool.

In the leased home sales, or the home sales to the lessees that you have mentioned -- I know it was a small size -- where was the financing coming from those sales?

Third party.

All third party?

Yes.

Dave Rogers. Okay. Do you know what types of rates they're getting on that?

Rates vary widely depending upon credit and areas and down payments and things like that, but I think for the most part where we're selling to lessees that aren't the seller credit, they're probably in the 8% to 11% range.

What was the total home sale revenue? I know in the supplement, you kind of have the gross margin. What was the total revenue for home sales?

I don't have that number at my hand, but I can get that to you, Dave.

Okay. One detail question. What was the end of the period share count, Jeff?

Weighted average, I think, is like 20 -- weighted average, fully diluted is, I think, if that's what you're looking for, is like 20,000 -- 20,350,000. I think that's in the (inaudible) .

Well, I know that was in -- I just want the end of the period, the June 30 number.

Okay. Well, that should be on the balance sheet here. It's not in the supplemental data -- oh, yes, it is. On the very bottom of the supplemental data on the balance sheet, 2,461,000 OP units and 18,218,000 shares which would be 20,679,000.

All right, sorry I missed that. So then what was the -- I should back into the average amount of repossessions that you did or, I'm sorry, repurchases that you did during the quarter. What was the average price?

The average price in the second quarter was $35.47.

My last question is, could you kind of run through the expense categories line by line? I guess you could skip to the real estate taxes in terms of your same property year over year. How much of the increase is there because it seemed to be a fairly large same community expense increase. How much of those increases might be related to home sale or home leasing activity and how much is just due to higher base operations?

Well, the payroll, which is up .3% for the 6 months, but was up 6.2% in second quarter, what we believe that is, is essentially seasonal payroll that took place in Q2, that had been -- that might have been a little later than what we would normally have expected. Repairs and maintenance is another item of timing, depending on when the weather breaks in the Midwest and when the work gets done. The other is a large percent, but in dollar terms, I think it's around $320 or $330,000. Half of that is because we have an annual meeting of all of our community managers every other -- we have a meeting every other year of our community managers and that meeting was in June this year. So about half of that increase in other is attributable to that.

Okay. Then just a comment on your -- or a question on your payroll. If payroll was added later this year than last year, I guess I'm just wondering, did you bring more people on board?

Well, it's a function of the Midwest and how the weather breaks and when the people come. So, it probably was that this was expected to occur in March, but for whatever reason, they didn't get on board until April, which skews the comparison then somewhat with the prior year --

All right Thanks.

-- and perhaps some additional people.

Thank you.

Our next question comes from Dan Ferris, with AG Edwards. Please state your question.

Good Morning. Just a couple of quick questions here. Of the 24 new development communities that you guys have, the cost associated with those, are those being expensed or capitalized?

Expense as relative to our development communities?

Yes.

The only -- let's see. There are no operating expenses that are being capitalized in the new development communities, and there is precious little capitalized interest. Capitalized interest for the quarter was less than $25,000.

Okay. Then in terms of incentives or concessions dealing with either the renters who are trying to get in or trying to get them to buy new homes, what are you guys doing as far as incentives and concessions?

I think that there is a market survey that we've done recently that has led us to believe that we are very, very competitive with MultiFamily and that's, I think,why we've been getting the leasing activity that we're getting. We have not had to resort to any of the similar type promotions that MultiFamily has done. We may decide to waive a security deposit in some of our softer Midwest markets. That's really been the extent of it. If we see an inventory in a particular area not moving or not renting, we might adjust the rental price, or we found that overall, as we indicated; we're moving the rental prices up. So there are not a lot of promotional programs in place that I can see.

What about for home buyers?

Home buyers, I think that when we put together our programs that we're working on right now with third party lenders, we're not able to offer a lot of promotions because they take that into account in underwriting the credit. The only thing I'm aware of is somebody might get a $25 or $50 reduction in rent for the first year, second year or third year, but nothing of any great magnitude at all.

Okay. So that year, reduction of rent if they were on the home buying program?

Correct.

Okay. And then lastly, what's the current occupancy of your guys' rental portfolio and do you have a demographics on your renters? How many of those are not American citizens?

Well, I can speak to the latter part. We are right now in the process of doing our demographic research. We have not focused on ethnic groups or Hispanic groups, as some of the others have. I'm sure that we will learn that a good portion of our renters fall into the same categories that would fall into much of MultiFamily. But what we're doing right now and what we're most interested in, is we've got a year's basis of data where we can compare FICO scores, which we look at and qualify the renters with from day one. We're going to track those as compared to turnover as compared to repairs that have to be done on the houses, refurbishment, so we can distinguish if there is anything that indicates to us that there is, in effect, a credit score to quality of the renter, and in fact, the ability to convert that renter over into a sale. So other than that, that's all we're looking to track right now.

Okay. But you don't have an occupancy number for us?

Well, there's 3,057 homes current at the end of the quarter that are rented, and then there's about -- and we always have inventories of new and pre-owned for direct sale or for rent. So, there's another, roughly, 800 new and pre-owned homes in our 135 communities that are available for most -- are available in some communities strictly for sale and in other communities for sale or rent.

Okay. That's all I have. Thank you.

Our next question comes from Alexander Goldfarb from Lehman Brothers. Please state your question.

Good Morning. Going back to the share buyback, I missed how many shares you bought back in the program and then also, how many you've bought back currently under the existing million share program.

Through the second quarter, we have acquired approximately 200,000 shares.

The next question is actually two just line items. One, were there any catchups or adjustments made with regards to Origin and are there any further hurricane recoveries or expenses that we should expect?

I think we're done with the 2004 hurricanes, so we shouldn't expect to see any more pluses or minuses emanating from that event. I've forgotten the other question...

Origin catchup.

Oh, Origin. Well, of necessity, each quarter, we make an estimate as to what Origin's results will be, so this quarter has that estimate for Q2 and the adjustment to actual for Q1 in it because they report sometime after we do.

Can you share with us the adjustment or your estimate?

Of course not. They're a separate public company and they have to release their own earnings to the marketplace. We can't do that for them.

Okay.

If I give you a number and somebody says, "Well, you've got 20%, we multiply it by 5," all of a sudden we've released Origin's earnings to the marketplace, which we don't think is a good idea.

No, I agree with you Jeff. I just thought I'd ask.

All right.

The next question is, just going to the rental program, last quarter I believe you had 2,400 sites rented and now you're up to about 3,100. That's close to a 30% increase. How big do you envision this program getting?

I think that -- I don't know if it's fourth quarter or prior, when management sat down and strategically made the decision to move and shift and acquire all the value oriented repos, as opposed to allowing them to leave the communities, we developed a 7 to 8 year model that had us acquiring and renting up to 4,000 units. We believe that number will be between 3 or 4,000 and we're sort of closing in around it within the third year of that program, which basically, would be next year from our point of view. Since we've gotten more deeply in the rental units, we see the lines crossing over where we're beginning to sell more units and we buy units. I think we've seen just a little bit of an acceleration on that. We want to be cautiously optimistic about the next two quarters. We think we may be two quarters ahead or so of our longer term plan and then for the next 4 or 5 years, we see ourselves selling and converting these rentals into sales, as I indicated in my comments before.

Right. But I guess my question really is, there's been a sharp jump in rentals. What I'm wondering is, is there sort of a natural point of resistance where you guys won't rent anymore, versus the point of the practicality of running parks and not wanting to have half of it being empty, so you decide to rent it just to keep spaces filled and that sort of becomes self-fulfilling.

I think our current plans call for a maximum of 4,000, as I indicated.

Okay. So 4,000 is the limit?

Yes.

Okay. Final question is, just taking a look at your [FAD] coverage, the dividend -- I mean the quarter, the dividend was above -- it was not covered. Looking out to this year, it looks like it may not be covered. Can you share with us just your views on how the board looks at the dividend relative to [FAD]?

Well, we expect that our earnings -- the FFO will certainly cover it by the end of the year when we look at the entire year, and as we achieve our earnings guidance over the next few years, there's no question but that we see FFO and then accordingly, obviously, [FAD] follows FFO, once again, covering the dividend comfortably. I don't think the dividend -- the dividend increase of $0.08 this year was down from $0.12 in the preceding year or two on an annual basis, and I expect that you will continue to see the boards focus on dividend coverage and on restoring the kind of coverage that we had in prior years.

Okay. You were saying for this year, if I heard you right, that FFO will cover the dividend, but that's not necessarily [FAD]?

I agree.

Okay. Thank you.

Our next question comes from Eric Wyman with Sheran Boyle Capital Management. Please state your question.

Can you comment on the coverage of rental increases going on the next few years and whether you think it'll be in that 4% range? Thanks.

I think that we historically have felt comfortable that the 4% range has been achievable prior to becoming public and for the 11 years that we've been public now, it's been achievable. We think that the majority of our properties are kind of middle to the upper end of the rental envelope as compared to our competition. We've always been a leader in capital expenditure and improvement to our communities. We've reinvested in them and I think that that's the key component that allows us to expect to get those rental increases in the future.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to the host to conclude.

At this time, I just would like to thank everyone for assisting us in working through the issues that we're dealing with as a company. We try to make sure that we leave you with the impression that while these are significant things to work through with the SEC, they are being worked on, in large part, through the audit committee and through our third party consultants and professionals, allowing us to continue to operate the business. And I'm pleased with the modest and cautious optimism that we have for the balance of the year as far as performance goes. We will, of course, keep the market and shareholders fully informed as we work together with the SEC on concluding their investigation. Thank you.

Thank you. This concludes today's conference. Thank you, all, for your participation.