Sun Communities Inc (SUI) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Sun Communities first quarter 2006 earnings results conference call. [OPERATOR INSTRUCTIONS] At this time, management would like me to inform that you certain statements made during this conference call, which 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 expectations reflected in any form in these statements are based on reasonable assumptions, the Company can provide no assure that its expectations will be achieved. Factors and risks that could cause actual results to differ materially from expectations are detailed in this morning's press release and from time to time 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 the release.

Having said that, I would like to introduce management with us, 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, gentlemen. You may begin.

Good morning. First quarter earnings,, as announced prior to the opening of the market today, were funds from operations of $15.1 million, or $0.76 cents per share, compared to $14.9 million or $0.73 cents per share in 2005. Net loss for the first quarter was $0.4 million or $0.02 per share, compared to net income of $0.7 million or $0.04 per share in the prior year. And revenues for the first quarter were $56.4 million, compared to $52.5 million for the first quarter of '05. During the first quarter, the Company incurred approximately $190,000 of professional fees related to the SEC inquiry, which was settled by the Company without fines or restatement. Pursuant to indemnification agreements, the Company will continue to incur professional fees for the Company employees involved with the SEC inquiry. In addition, the Company incurred $360,000 of expenses related to an evaluation of strategic alternatives. Such costs are not expected to be recurring.

At this time, I will review with everyone the first quarter portfolio performance. We leased 136 net sites in the portfolio in the first quarter, which represents significant progress towards our full-year leasing budget of 296 net manufactured housing sites. The weighted average rental increase in the first quarter, affecting approximately 18,400 of our occupied sites, was 3.62%, which approximates our budget for '06. The number of homes which we have rented in the portfolio stands at 4,215, an increase of 504 rentals in the first quarter. Rents are up nearly 10% year-over-year, while the renewal rate has increased to 64% in the first quarter, from about 49% for the year 2005. In the first quarter of 2006, we sold 19 rental homes, compared to 12 in the first quarter of 2005, and we have now sold a total of 108 homes, which had been rentals, at an aggregate amount, while exceeding their original cost.

Our same-site portfolio of 133 communities achieved a revenue increase of 3.9%, while limited expense increases were 0.2% for the quarter, and result was a strong 5.4% growth net operating income. Occupancy increased from 83.9% at December 31st, '05 to about 84.3% in the current quarter. Delinquencies declined by $400,000 or 28% since year end, to what actually is the lowest level since April 2002, and this reduction has taken place while revenues from our rental home program now account for nearly 15% of total revenues. And we attribute this to our stringent underwriting of each renter, which is then supported by our operations and diligent collections efforts. So this credit result translates into what we believe is a large population of qualified home buyers that now exist in our rental pool.

At the end of Q1, the number of repossessed homes in our community stood at 452. This is the lowest level since August 2001. And in the first quarter, we acquired 222 repo homes, a decrease of about 34% from 337 that were acquired in the first quarter of 2005. I think that this is reflective of the declining availability of the value priced repossessed homes, which we have looked towards to indicate the beginning of, perhaps, a potential recovery in the portfolio. In the first three months, we lost 302 sites due to repossession, compared to 362 sites in the first quarter of '05, a decline of nearly 17%, and, again, this positive trend has continued through April. At this time, we are comfortable affirming our previously issued guidance for 2006 FFO, in a range from 287 -- I'm sorry, $2.87 per share to $2.95 per share. We are continuing to carefully review asset management, and the potential disposition of various properties in the portfolio. Management's approach has been to the process to be very thorough, very thoughtful. It is ongoing and it is somewhat fluid at this time, with some of the things that we are seeing in the portfolio.

In summary, several positive indicators do seem to have emerged this first quarter, which could be signalling what we believe may be a slow and steady recovery. They were the declining number in rate of repos, the reduced availability of repo homes for purchase, and the substantial reduction in delinquencies in the portfolio, coupled with our same property growth leaves us to state that we are pleased with first quarter, and cautiously optimistic, as we enter into second quarter and the balance of 2006.

And at this time, Jeff Jorissen and myself would be pleased to answer any questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Jon Litt with CitiGroup.

Hi, this is Craig [Muncer] here with Jon Litt and John Stewart. Could you give us a little bit more color on the strategic alternative cost in the first quarter?

Sure. I think that while it has been customary for this Company not to speculate or comment on rumors, there certainly were enough rumors out in the marketplace. Certainly, we addressed those by discussing with everyone that the board continues careful evaluation and, in fact, put in a formal evaluation of strategic alternatives on behalf of the shareholders of the Company. I think the end result was one that led, through the process, that simply reinforced the board's support of the Company's existing operating strategy and therefore, there is no expectation at this time for those to be recurring costs related to the third-party consultants that were utilized in evaluating that strategy.

Okay. And can you talk a little bit about your liquidity, at this point? There was $90 million [inaudible] line at the end of the quarter, which is about $25 million of availability. What's your financing plans for the balance of the year?

Well, we actually have two lines in place. 115, which line has been available for a year and a half or so, and we also closed on an additional $40 million line, I think it was shortly after of quarter end. So, we actually have $155 million of capacity at this point in time.

Okay. And should we expect any asset sales to close this year?

I think that we have a -- as also part of our strategic thinking and evaluation of alternatives that the Company -- and at the suggestion of many shareholders -- really taking a very, very hard look at exposure to the [rust belt] and have gone through a long process that has included the valuation of existing financing, what's involved in the sale of certain assets without specifically identifying those assets, rating those assets, all the way through to the opportunistic concept that says that, if we're seeing some strength, you know, in some of what were considered the weaker assets, maybe there would be opportunity to acquire at advantageous prices weaker assets in the region. And I think that it is difficult for us to forecast what expectations should be for this coming year, as far as dispositions in the portfolio. But we would want to make the point very clear that we have looked at everything from dispositions of a complete segment, a regional area, to individual select communities, and that is an ongoing process. And it's further complicated by the fact that we are starting to see some definite slowdown, as I reported earlier, and some of the characteristics that would have identified certain properties for sale sooner than later. So it will be a process that we will continue to report on a quarterly basis, if not more recent, if anything were there to report to all of you.

Are there any sales under contract at this point?

There are no sales under contract at this point, with the exception of the fact there are several parcels of land under contract or under review or being negotiated under contract, which would be the non-revenue-producing expansion and development of land that we've discussed from time to time that we are trying to market at this time.

Are any of those land sales in guidance?

No.

And the last question is, on the interest and other income in the quarter, I think that's down significantly from the fourth quarter. Can you explain what is going on there?

That would be, principally, additional draws on the line of credit.

On the interest and other income, the income side.

Oh, I'm sorry. Well, I really have the comparison from Q1 of last year to Q1 of this year, so I would -- I'd have to get back to you on the inc -- on the change from Q4 to Q1.

Oh, how was it year-over-year?

It increased by $200,000 from Q1 of '05 to Q1 of '06.

Okay.

And that was -- you know, there were like four or five items impacting that. The most significant, reduction and other income was a reduction in interest income and -- and improvement in the results of our brokerage business, and fewer fail -- lower costs and failed acquisitions and improved results at origin.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] Gentlemen, I'm receiving no further questions at this time. Oh, excuse me, you just had one pop in from James Paco, with Paco Capital Management.

Yes, hi. Question. I missed first part of the call, but I was wondering if you could talk about the non-revenue producing land that you're looking to potentially sell or you may have people looking at them. What kind of values are you looking at in terms of these assets you are looking to maybe dispose of?

I don't think I have the numbers or --

Are they significant or are you talking, you know --

I would say that there are three properties, one of which is under contract right now for approximately $2.2 million, and the other two properties combined would be about a total of $10 million.

Okay. And I see on the rental program, you sold 108 homes out of, I guess, a total of 4,215, is that accurate or 4,215 are rented?

4,215 are rented and we sold 89 rental homes -- or homes to renters in '05 and 19 in the first quarter of '06.

Is there -- is there any way -- you've obviously made a point that you're looking for good quality renters there that could potentially be homeowners.

Correct.

How are you pursuing that --

Well --

-- to make them homeowners.

Well, I mean, first of all, a lot of -- a number of these people, they have to demonstrate reliable payment pattern in terms of their rent over a 12-month period. They have to, in effect -- not only do we underwrite them, but then they have to become seasoned and we have to consider them reliable. And then the sales effort is really driven by a conference call or a call center here, which reaches out to people that we see as qualified to buy, and then bringing them -- trying to change their mentality from that of renters to that of buyers, and we're seeing improved results in that area.

I mean, because you can only go so far with that program. It's obviously a short-term strategy, but you are not in the business of rentals.

That's absolutely -- I think that if you step back a little bit further to the strategic plan that we laid out, which really was a ten-year strategic plan, it looked at buying the homes for a five-year period of time, at which time the intersection of sales would start to be greater than the purchases. And I think that our shareholders will see that take place over the next 12 months.

Yes.

I think it's also reflective in the fact that there are just flat out fewer and fewer repos coming into the portfolio, and fewer that we can buy opportunistically. And as those fundamental changes of supply and demand switch over, I think that we will capture some of the value in the repos that we acquired. But by no means is it a fast process. It's a process that we expect to take place over the next five years.

A process. And just to get a better understanding. You said you're getting good prices when you buy these repos. What kind of prices you talking about, as a percentage of replacement cost?

Well, we are buying a double wide at a per square foot cost, renovated and ready and habitable at about $16 to $17 a square foot.

Sounds like a good deal.

That's exactly why we are buying them. New, they are going to be more like $30, $35 a square foot, plus they have to be transported, plus they have to be set up, which is probably another, no, $5,000, $6,000 per home, which would amount to say, another, $4, $5 square foot.

You can pass the savings on to these -- the new buyers.

Exactly. As we indicated many times, it's not our intent to make windfall profits on the homes, it's really to convert renters into permanent residents.

When do you think you can speed that process up? I know you spoke briefly about it. Are you -- do you have a plan in place to kind of speed that up so you can start collecting and getting some of your capital back?

Yes, I think that, as I indicated, it's strategic and it's over a period of time, and the fundmentals of supply and demand have to change ever so slightly, so that the effort that we can put in gear, that the telemarketing that Jeff referred to, which is all set to go, can make more sense. Right now it's a difficult balance to attract a renter to become a home buyer because we have so many rental opportunities of good value available. As we wind those rental opportunities down, which is part of the plan, and we will selectively choose communities beginning probably third and fourth quarter of this year, where we stop making the rentals available and force those individuals to make a decision to buy, we will slowly start seeing, you know, a stronger push by the Company to convert into the sales and away from the rentals. But when you've got 4,500 rentals -- and our expectation they certainly will go up by another 500 -- it's going to be a long period of time of selling off those homes.

All right. Last question, I don't know if you commented on your Origin investment, but how do you stand there?

I think that we're anticipating the release of their numbers very shortly. And when we reflect back on what they were able to achieve last year, and factor out the one-time issues of hurricane, weather-related adjustments and assume that their numbers are equal to or better than last year, or subject to the pressure from interest rates, we're -- we're anxiously awaiting to see what their performance will look like and we'll see it the same time as everybody else.

All right. Thank you.

Our next question is from [Jedd Newthorpe] of Silverstone Capital.

Hi, I'm curious -- hello?

Yes.

I'm curious with regards to the $360 of weighted average rent per site, does that include home renters and homeowners, or is it only homeowners?

That's all residents, whether they're renters or owners. That's the site rent component, of course. The actual rent they pay, as you can see in the table on the rental home, is more like, I believe, $654, which includes rent for the home and the site.

And a quick question on expenses. When I look at your expenses per site, that are significantly below where other properties have come up for auction and, potentially where your publicly-traded competitor is, as well, your numbers are superior. And I'm curious to what you attribute this superior operating expense control. Is it a mix issue, or is it just that you're sort of far more focused than, potentially, the smaller operators, the mom and pops out there?

I think, certainly, we do have the economies of scale. I think the margins this Company has enjoyed for the last 13, 14 years as a public company have been at the high end. I think with regard to how we're able to reduce expenses and bring the greatest amount of the revenue down to the bottom line, I think that we saw some extraordinary expense controls this last quarter, resulting in a very strong same-site growth. For the year, I think in our guidance, we had talked about NOI same-site of 3.9%, with about 3.33% average revenue increase, and right around 2% expense pressure. And I -- you know, I think it will probably more likely average out to that, with seasonality and overlapping time issues over the year. So this particular quarter, looked especially good.

And I'm curious with regards to the disposition activity, do you expect to dispose of properties that are sort of above your weighted average NOI margins, in the low 70s, or do you there'll be communities below the NOI margins? And then a follow-up to that would be, do you see opportunities over a longer term to purchase communities that have NOI margins in the 50's ,potentially, and improve them as you have with your portfolio, as a whole?

Well, I think I will take them one at a time. I think with regard to dispositions, there is a multitude of decision-making process that goes into place that would probably indirectly sometimes relate to the margins of the property, but more specifically, relate to the long-term growth and enhancement of value for the shareholders that would determine whether or not a company would be kept or put up for sale.

And the second component, I think that one of the things this Company has done well is improved operating margins and reduced expenses better than the single operators. And we've always tried to acquire properties where we can improve on the margins and, in fact, this last quarter we did a one-off transaction, called Sheffield Estates in Auburn Hills, Michigan, where basically we were able to buy it at an eight cap rate. Oakland County, Michigan, has not had a rental increase in two years and it has not had a separate metering for water. So after we do that, we would expect a great deal of improvement there, as well.

Those are hard to come by, and I follow up both questions by saying that it would be correct to assume that this Company will be very, very myopically focused on filling its existing vacant sites and reducing its rental program over the next five years. That doesn't mean we're not in the market for acquisitions, but it means that the priority that we are focusing on is our existing portfolio. And where we had the opportunity to do an acquisition, either one off or as a portfolio or a group, being able to improve on the margins is always important to us.

Okay. Thank you.

Our next question is from Ben Lynch with LaSalle Investment Management.

Good morning. Jeff, could you break apart the other income line item components for us?

Sure. At least I can up to a point. Interest income is -- it was a little more than half.

Okay.

And then the rest -- the other half is brokerage, other income, income from affiliates and a couple of other items.

How much was the brokerage in the quarter.

Well, if I get too specific, you're going to be able to isolate the origin results, and we can't lead you quite to their results until they lead the marketplace with their results.

Okay. Okay. That's fine. Can you give us a level of repos in the fourth quarter, so we can look at that sequential movement?

Sure the number of repos in Q4 were -- oh, here it is. 452 at the end of March.

At the end of March. That's a fourth quarter number, though?

Oh, I'm sorry. The fourth quarter was -- the end of December was 536.

For that quarter.

At the end of the quarter. This is -- you said -- I thought you asked for the number of repos.

I'm thinking for the ones that were actually taken out of the portfolio. I think you mentioned that you lost into the quarter 302 properties to repos.

Yes, we did.

So those -- and the way I'm thinking about that, is those are actual ones that came out. The occupancy was lost during the quarter. And I'm curious how many were lost in the fourth quarter?

That's a good question. You know what that means, when somebody does asks a good question, that means you don't have the answer at our fingertips.

Maybe I can follow up with you after the call.

That will work.

And then, just quickly, on -- finally on page 12, when you're doing the net lease sites, that does not include the repos or the rental sites, correct?

Well, if it -- if a repo -- if a repo had a resident in it yesterday and it goes -- if a home had a resident in it yesterday and it goes repo today, at the he net loss site.

Okay, so that would be in there.

And if a home is vacant today and a renter moves in and paying site and home rent tomorrow, that's a net lease sight. So, they're both in there. One is a negative, one is a positive.

Okay. Perfect. Thank you very much.

Gentlemen, I'm showing no further questions in queue at this time.

At this time, we'd like to thank everyone for participating on the first quarter analyst conference call. As I indicated earlier, we look forward to reporting on second quarter and are cautiously optimistic that, perhaps, we are seeing a little bit of a slow recovery within the portfolio, and look forward to reporting on more of it. Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.