Sun Communities Inc (SUI) 2006 Q2 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Sun Communities second-quarter 2006 earnings results. At this time all participants are in a listen-only mode. A brief question-and-answer session will 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 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 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 Inc. and Mr. Jeff Jorissen, Chief Financial Officer of Sun Communities Inc. Thank you, gentlemen. You may begin.

Thank you and good morning. Second-quarter earnings as announced prior to the opening of the market today were funds from operations of $13.1 million or $0.65 per share compared to $12.6 million or $0.62 per share in 2005. Net loss in the quarter was $1.7 million or $0.10 per share compared to a net loss of $0.8 million or $0.04 per share in '05. And revenues in the second quarter of 2006 were $58.9 million compared to $51.8 million in '05.

And we turn to a portfolio review now. Rental increases have been implemented for over 25,000 of our occupied sites in the first half of 2006. The weighted average increase of 3.8% is basically right on budget for our 2006 plan. We have leased 194 manufactured housing sites in the first half which is also on track to achieve our full-year budget of 296 net manufactured housing sites for the year.

The number of homes which we have rented in the portfolio stands at 4600 an increase of 385 sites in the second quarter. Monthly rent for the home and the site average $665 at June 30, '06, an increase of 8.7% from June 30, 2005. And lease renewals are averaging 50.3% for the first half of 2006 compared to 53.8% for the corresponding 2005 period. We sold 61 rental homes in the second quarter bringing the first half total to 80 compared to 38 in the first half of 2005.

Our same site portfolio of 133 communities achieved a revenue increase of 3.4% with expense increases of 2.1%. The result is a 4% increase in net operating income. Occupancy in that same site portfolio also increased from 83.9% at December 31, '05 to 84.4% at June 30, 2006.

We purchased 394 repos for our rental program in the first half of 2006 which compares to 609 in the first half of '05, a decline of approximately 35%. Additionally, the Company purchased 50 fewer repos in the second quarter than the first quarter, a reduction of about 23%.

During the second quarter, the Company incurred professional fees related to the SEC process equivalent to approximately $0.01 per share and as you recall we intend to advise on these phone calls exactly what those fees are each quarter as we recognize them.

The increase in general and administrative in the second quarter over the prior year is primarily attributable to an initial accrual under the Company's five-year incentive stock award program initiated in January '05. It was determined in this quarter that it is now likely that the Company will achieve at least the minimum threshold of 5% to 6% compounded annual growth in FFO from the beginning of 2005 through the period 2009. The amount of $526,000 accrued in the quarter represents 30% of the likely incentive on a time-elapsed basis.

Now what I would like to do is spend a little bit of time talking about the trends that I referred to in today's press release. We've as I stated and very restrained to avoid identifying temporary lifts as trends, we believe that there is now sufficient evidence of meaningful durations to state the following. The credit quality in the portfolio is dramatically improved and continues to improve. The number of repos in our portfolio at June 30, 2006 is nearing traditional levels of about 80 basis points of what total occupied states sites are. The number of new repos has declined for three consecutive quarters by a total of just under 36%.

And these conclusions are supported by the following. When we talk about credit quality, our average monthly delinquencies as a percent of monthly income from the properties were 6% in 1999. It peaked at slightly over 10% in '02 and '03 and in the following three years has dropped to 9%, 8% and 7% for the first half of 2006. So this nearly completes what we believe a return to traditional levels.

It's worth noting that this trend that's taken place as we have hit the highest levels of occupancy in our rental program, so I think it is also a result of running each resident through the Company's F&I approval process and I give a lot of credit to our operations in Sun Home Services for doing an excellent job in the underwriting.

When we talk about the number of repos, our average monthly repos as a percent of occupied sites was about .8% in 1999. It peaked at about 2% in 2002 and 2003 which were the toughest parts of this downturn in our industry cycle. And in the following three years it has trended down to about 1.1% in the first half of 2006 which we believe nearly completes the return to traditional levels.

When we talk about the number of new repos, as I previously mentioned, the number of new repos in our portfolio has declined for three consecutive quarters to just under 36%. The quarterly average of new repos was 342 for 2003 and the year 2004 increasing to around 358 repos in 2005. The average for the first half of 2006 is 275 with a second-quarter average ending at around 248.

So what is the effect of these trends on the Company? The growth of the rental program should finally slow dramatically as the supply of value priced repos available to purchase continues to decline and the reduction in these new repos will significantly reduce the loss of occupied sites in the portfolio due to the repossessions.

New home sales for the industry should also benefit by the reduced competition from repossessed homes but I would stress that this is likely to be a very gradual process as change comes slowly and it will also require the redevelopment of a dealer network which was decimated due to the reduction of new home shipments from over 370,000 in 1998 to the 130,000 level of recent years. And I might also add that those recent levels also include increased shipments up 10,000 to 20,000 units in '05 and '06 as a result of the FEMA hurricane purchases.

At this time the primary focus of the Company shifts and will continue to be placed on the sale of our rental homes. A component of this focus will be to continually and aggressively increase our rental rates to create a more compelling economic story for our customer to buy the home as opposed to rent the home. We'll also strengthen the ability of Sun Home Services, our in-house dealer, to sell new and preowned homes to supplant the loss of effected dealers' networks as I just discussed in a select number of our markets.

The Company guidance for 2006 is for FFO from 287 to 295, excluding non-recurring professional fees related to the SEC matter which we will disclose on a quarterly basis and third-party expenses related to the strategic review that took place by the Board in the first quarter. The Company is not revising guidance at this time and we will watch closely as these trends evolve that we've just discussed and both Jeff and I would be available now and after this call for any questions that you might have.

(OPERATOR INSTRUCTIONS) Jonathan Litt with Citigroup.

Hi, it's Craig Melcher here with John. First question is on the rental program, it's at 4600 this quarter, what do you think it's going to need to go to in order to hit your goal of the net leased sites of 296 for the full year?

Jeff, do you have the number -- what's in our budget for '06?

I think we are looking probably at about another 300 or 400; it might be about 5000 by the end of the year in order to net the additional roughly 100 [M8] sites that we need to hit our target for the year.

When you suggest that you are trying to raise the rents in order to make it more compelling relative to the buyer to buy the home, where do you think those rents are now in the rent verses own decision versus where they need to be to make the option really compelling for these current renters to be owners?

I think that we discussed in our phone calls, Craig, that we are at about $0.55, $0.57 per square foot right which is pretty competitive in most markets against multifamily and other forms of housing they might choose. We've had about 8.5% increase over the same period last year and if we go back two quarters we had a 13% increase for the previous year over the period prior to that. So I think we still have the ability to increase the rents significantly. And I think that as part of our program and I will comment more on it I'm sure to convert these homes from renters to owners, we will target pressing our rents to a level that is up 15%, 10% to 15% below other competitive forms of housing basically multifamily in those particular markets. So we do pretty thorough rental studies of the multi-family in the market and we will increase the rents to get closer to those ranges.

How much do you think you need to push them to get to that range?

I don't have a direct answer for you on that. I think that there are enough surveys out there generally provided census on multifamily that's broken down by regions and marketplaces that one would say you know certainly there is another 10% to 20% that we think we can slowly push in there. But we've also got to delicately balance the fact that the point that we want to make to everyone in the press release or on the phone call is the great news is I think we've finally come to the end of the repos. It is pretty clear to us, at least to more per traditional levels. It is pretty much true that every repo that was underwritten during the bad credit underwriting period of the late '90s, early 2000 and '01 has blown through the marketplace right now. So that is great news in trying to restore traditional levels within the industry.

However, as Jeff indicated and I indicated in the press release, we were expecting the level of repos to not burn off before year end although I think I've shared with everyone that was a concern. So therefore we will probably not reach the full level of our budgeted rentals because we will not be able to acquire the budgeted amount of the repos we would have otherwise been acquiring if they were unavailable. That is great news and it is also a little bit of news of caution in that there will be a careful adjustments of these rents so that we don't create sufficient vacancies to negatively impact our number but do create enough pressure to continue to positively impact the sales and conversion of these rental homes and to bring back the capital that we've invested in these rental homes back to the Company so that we can redeploy it.

And last question on the rental program is what was the average purchase price for the repo-ed homes you bought during the quarter? And also what was the sales price on the rental homes that you sold during the quarter?

Those are good questions. A good question is one that you don't have the answer for at the tip of your fingers. We have continued to sell, the 80 homes we sold at about a little bit over $30,000 each -- let me just check that out. Yes, about $32,000 each, those are 80 homes in the first half of the year. And that is a couple of thousand dollars probably over and above the original cost of those homes.

In terms of the purchase price of the repossessed homes, I can give you an estimate that that is still running in the low 20s because we won't buy them if they are not reasonably priced. But that is more of a recalled estimate than a hard number from data that I'm looking at.

Thank you.

Paul Adornato with BMO Capital Markets.

Good morning. I was wondering if you could talk about the cost and availability of insurance for potential residents especially in the Gulf region?

Well, I think that while I certainly read some of our competitor's comments related to insurance, we have not seen either from a liability standpoint at the Company level any dramatic changes in the overall average cost of our insurance above and beyond the inflationary pressures that have been taking place. In the Florida market and the areas that are wind related to the hurricanes, I think that what we have found that there has been an increase of somewhere between 10% and 14% to our customers and we've gotten deeply involved in actually referring and brokering the insurance to those customers through a couple of big underwriters, insurance underwriters that we are working with right now. So there has not been an overly dramatic experience from our standpoint in those areas.

Most of our sites to least really in the portfolio are fairly well removed from the Gulf area as well. I mean they are in Texas and Colorado and the Midwest, not to say that we don't have plenty of residents in Florida but those are currently residents and there is very few sites relatively speaking in Florida that need to be rented out. So it doesn't really serve as a deterrent to our attraction of residents.

And do you think that your inexperience is different from the market?

I might have misunderstood your question. Were you talking about the people we rent to or the people --?

Yes. I was talking about potential residents, about the ability to finance a new home that they just bought and want to put into your communities.

I did understand it at the beginning. No, we have not found it as any deterrent in the coastal areas where we are at. So in fact, Florida, as many of you are aware despite the condo and single-family residential slowdown or correction in those areas, are still performing very, very well for us. And it is one of the few regions where we do make net revenue producing positive gains as opposed to having to use a rental program in there. So sales are pretty much as they've been in the last few years there.

Okay. And what about the ability to pass through utilities? Could you just remind us of what percentage is kind of billed back to residents and if you are considering attempting to pass through more utility costs?

I think at this time the part that I can answer is that basically all utilities that can be billed back -- that is sewer, water, are billed back in Florida. It is by lease agreement where trash, taxes and other passthroughs get pushed through there. So there is no expectation on my part that operations could pass through anything that would significantly impact our numbers at this time.

Okay. And other expenses line item decreased in percentage terms pretty significantly? Could you talk about that?

You are looking at the same site?

Yes.

Primarily that is because every other year we have a companywide meeting of our operations personnel. And last year was the year we had a meeting and this year is the year we don't have the meeting. So that is probably worth approximately 150 -- round numbers $150,000 of that decrease. And other items in that category that have decreased are good news -- is legal fees related to delinquencies and to a lesser extent advertising in the portfolio is down a little bit year-over-year.

Okay. And finally I know it's a Board decision but what is management's feeling regarding the [FAD] coverage of the dividend?

Well, if you take our FFO, not look at the share number but actually look at the raw dollar and subtract the dividends, you will find that a spread on FFO over the dividend is growing from about $1.5 million in the first half of last year to approximately $2.5 million this year. Of course this is not a FAD basis. So we've increased that spread by 1 million in the first half so it would be reasonable to increase it by another 1 million in the second. So in our guidance we had indicated that by the end of the year we thought we had would be around 95%, 96%, the dividend as a percentage of FAD and we are gaining on it.

Okay. And finally what are your CapEx assumptions per site this year?

We expect it to approximate 125 to $130. It is $69 in the first half; first half has a little bit less winter than the second half. So you know it is within the realms of expectation which would be an aggregate dollar amount of about $6 million for recurring CapEx for the year.

Okay, thank you.

John Stewart with Credit Suisse.

Jeff, I just wanted to be clear. Is the LTIP accrual included in your guidance?

Actually you mean the five-year incentive plan?

Yes.

It wasn't initially because we didn't know if we'd be accruing it this year. But it is absorbed into the guidance at this point in time. So it is not an exclusionary item.

Okay. Are you going to accrue any more in the second half or is this it?

Well, if things were to -- if the judgment that we would be in the 5% to 6% compounded range were to be sustained over the make six months, I think the quarterly accrual would be about $80,000. What would happen if the judgment were that the growth is going to accelerate then the accruals could be larger than that on a catch-up basis to a higher level. But of course that would only happen if we began to see growth instead of in the 5% to 6% range to the 6% to 7% or 7% to 8% range over the period. And my guess is that we would not make any determination on that until we've seen next year's budget which would be in Q4 some time.

Okay. And I know the SEC charges are not included in the guidance. But can you give us a sense for what you think the total cost for that will be for the full year?

Well, if [passed] is prolog, it ran about $0.01 in each of the first two quarters.

So you think it's reasonable that that run rate will continue?

Well, if passed is prolog, yes.

Can you give us any color or update on the civil action?

Well, the process -- the SEC filed their complaints, the individuals have filed their responses to the enforcement division and I think they are now -- the process is to move into negotiations on how discovery will proceed. So I guess you'd say it's in a relatively quiet period until -- and of course we have a lot more discovery because we've given every piece of paper generated for the last six years to the SEC. But we haven't gotten many of their sheets of paper. So most of the discovery will be our gaining a better understanding of their positions on the various matters.

Do you have any sense for timing?

Not really.

Okay.

It will move at the pace of most litigation.

Right. Lastly can you give us any update on your thought process as far as asset sales on the underperforming communities you've talk about?

Yes, I think what we've talked about before is the careful evaluation of some of our more challenging properties where we might wish to redeploy the capital. And I think first quarter when we first started identifying some of these trends, we said that we were pretty cautious but optimistic that we might be seeing some improvement within the portfolio especially in the challenged areas. And based on that, it's a matter of continuing to develop a strategic plan that says that we can maximize the opportunity and really maximize the proceeds from the sale of any property.

I think that the goal right now is to stay focused on the program we've just discussed which is converting the rentals into sales and looking at the positive impacts that they might have on proceeds in the selected properties that we are reviewing. We've got one or two parties that are reviewing maybe half a dozen properties. And there is nothing at this time really beyond that that is taking place.

Okay. Last question. I know you mentioned that the charge for the strategic review that you undertook was excluded from guidance. But my question is, do you anticipate any more costs like that in the rest of the year?

I think that that particular review related to onetime costs and there are no costs that I could say or predict or foresee in the future. But everyone is aware of what is going out there in the world with regard to companies doing different things. And if any change were to be made or any expectation of any expenses related to something like that were to take place you can be sure we would disclose them immediately to the marketplace. So there is nothing that I foresee right now that I would be able to disclose.

Okay, thanks a lot.

Art Havener with A. G. Edwards.

Thank you. Of the 4600 renters you have, can you break it down between how many are in Michigan versus Indiana?

Jeff, do you have that with you?

I do not have that. And I don't have a solid basis to make an estimate. So we'd have to supply that later, Art.

Do you want it by region or by state, Art?

I was more curious about the individual states. Can we assume that each -- these two states combined represent the majority of the 4600?

I think Michigan -- no -- I would say that Michigan, Indiana and Texas represent the greatest percentage. But beyond that we'd want to look at the exact numbers that we don't have in front of us.

Okay. Well I would be interested in kind of getting a breakdown if you'd have it.

We'd be happy to get back to you with that.

Would you have a kind of a rough estimate between the number of renters in your development portfolio versus the stabilized portfolio?

The answer to that is the same.

Okay. And just so I'm clear, your intention is to convert a lot of these renters into homeowners. Is that correct?

That is correct.

How and who would be the primary source to finance those -- that process?

I think that we certainly intend to use third-party lenders whenever they are available. Banco Popular out there, U.S. Bank Corp., a number of them have just entered into the space. I know our F&I Department has just signed agreements with Banco Popular as recently as last week. Origin and other local banks are available to us so that is the first course of action. We also intend to continue our programs of internal financing as we discussed in the past. We do that on a limited basis. We're currently negotiating the sale of 4 to $5 million of our existing loans at par or higher which will allow us to recycle that capital. And I expect that to take place in the next couple of weeks.

With the quality of our internal controls and the operations on rental departments as we discussed earlier, we think that selectively moving some of our investment from homes to notes is significantly beneficial and really doesn't cause us to incur any further risk. So converting a renter to an owner in a case where we do underwrite them and finance them saves us a lot of expenses related to repairs, commissions and other items and doesn't put us at any greater risk. And where we do that as we get paid down, as we collect interest rates that are now 9.95% or greater, we feel that we will be in a better position than continuing to rent these homes.

Just out of curiosity, do you still have that homebuying made easy program where you eat 3% of the mortgage payments?

No, I don't think we've had that for quite some time. All of our rents are now market rents. What we found during that period of time and that is why we did and shared with the marketplace, we did so few of them even at a low subsidized interest rate, it did not cause us to have sufficient firepower to compete against those who wish to buy in cycled housing and take advantage of the ARMs and negative amortization product that was out there at that particular time.

Okay, I have a big picture question. Is there any update on the U.S. Census Bureau stopped tracking the HUD shipments? And if they do, how bad could that be for the whole HUD business? In your opinion?

I don't have an update with you. I discussed it with Brian, our Chief Operating Officer, who many of you know and I know you are acquainted with, Art. And he would probably be the right individual for anyone interested in an update to talk to about that. He sits as Chairman of the Michigan Manufactured Housing Commission and former Board member of MHI and he is in contact with HUD. And another one you might wish to talk to is I know all the folks up at Origin, Ron Klein, the CEO up there just came from a one-week meeting with HUD. So they would be more up-to-date than I am right now.

Okay. And, Jeff, back to the CapEx issue. Looking at last year's CapEx run rate I guess what we should expect is about half of the run rate in the Q3 and Q4 of last year going forward for this year to meet your numbers?

Last year we hit -- yes -- so there was about $100 -- there's $163 for all of last year and we're in the $125 to $130 mode this year.

Yes, I'm just trying to get the seasonality because it looks like you ran at about $2.2 million per quarter last year and to reach your $6 million this year, it has to fall off pretty significant.

I've got 7,702,000 for the year 2005 recurring CapEx and we've incurred about 3.3 in the first half of this year. So I would expect we'll incur -- and there is always stuff that -- you can budget a certain amount of CapEx but if the place needs some CapEx because something happens you obviously expend the CapEx. So I would expect that we would be in the 6 to 6.2 range maybe by the end of the year. So another $3 million at least roughly in the second half.

Okay. Did you buy some OP Units back in the quarter or any shares?

I think some OP Units matured in the quarter and let's see -- the balance sheet, the number is a little smaller, it's at $9 million of OP Units matured in the quarter and were retired.

Okay, but you didn't buy any stock back or anything?

No.

Okay and the last question, on the secured debt that you announced what is securitizing that debt?

Three properties.

And I guess why are you drawing down the balance in August versus now?

Well it is because it's not ready to be -- it couldn't be closed at this point in time. The documentation and paperwork wasn't together to allow for a closing.

I think there is some existing debt that precluded the payment until that time on one of the properties which is in Atlanta. So rather than suffer the prepayment or defeasance, we were able to structure it with a bifurcated closing.

Okay, thank you.

Dave Rodgers with RBC Capital Markets.

Gary, you talked a little bit about some increases in third-party lending. How long do you think there is the delay between the increase in third-party lending to the increase in the retail network dealerships that really it would impact your business positively?

Well, recognizing I have no real basis to speculate on other than a gut level feeling based on experience and being in the business out there, I think that we are looking at a six to twelve-month delay. Okay? And really starting to see the first real traction out there between the elimination of the repos that compete with new housing; between the sensitivity of interest rates going up and taking a little bit of bite out of cycled housing; between weakness and concern over spending by the individuals who would be our customers out there who will seek out more affordable housing. So we're kind of in a cycle where are there is not enough retailers out there. You have to build up. There has to be a little bit of pent-up demand for the new homes, someone then has to step toward and say I'm going to open up a shop on the corner. Somebody has to step forward, well if you open it up we want to lend on it.

So like most cycles they seem to take place somewhere below the surface as they are changing and then you kind of wake up one day and you realize boy things have really changed over the last period of time. So, Dave, we are six months ahead of where I thought we'd be with the repos. And like I said before, that is the good news. The tough news is for us as a Company we've got to bridge that gap before that demand builds up and we start to see some positive gain.

It's important to remember that the only way we fill a vacant site or increase a net revenue producing site is when a new home comes into the community. And that is really what we've got to look out towards and I'm sure that's the genesis for your question. I'd say it's a six- to twelve-month period before we really start seeing some new homes moving back into the community.

That is fair. What about -- do you have a sense for the third-party lenders, what their willingness is to lend on some of the used rental homes that are within your portfolio? Have you had those discussions and how comfortable would they be with your estimate or an investment of LTV on those loans?

Yes, I think a lot of them do their own appraisals, a lot of them look to the NADA appraisals that are done nationally for manufactured housing. And I would say that there is absolutely total interest by all the lenders we're dealing with to lend on the pre-owned homes. Where that wasn't the case five, six, seven years ago. It wasn't the case three or four years ago. But I think what was fair basically is very accelerated amortizations, real downpayments and real value when you are looking at homes that are 15, 17, $18 a square foot that are in the 20 to $40,000 range.

Things lenders have to make sure that they are applying for is the servicing of such a small loan. It is something that I think was overlooked historically. So they've got to price adjust in their spreads to provide for servicing loans of that small of a principal balance. But I don't think there will be any hesitation on the used side as long as somebody can be underwritten on a FICO score.

Have you done any work on the tenants in your portfolio currently to indicate to you guys where a good sales price might be? In other words do you have any minimum price that you are really shooting for to avoid stepping on the toes of your existing homeowners trying to sell over the next couple of years as you unwind the program?

Yes, that is a great question. I think that to share with you the briefest details of the first step of what we are trying to do right now, we've taken at the 500 oldest, okay, homes that are in the rental program and we are developing -- this was ahead of my managers even getting the info today, more or less a red tag program. So those homes are typically going to be sold in the $10,000 to $20,000 range an we think those are kind of magic numbers. When you can produce something to a renter and say hey, if you buy this thing and put 10% down and we can get you financed either independently or through us and your payment is 50 or $75 less than your rent, it's a very compelling story. And because of the price point of those homes, we think it has the least impact on our existing revenues. So that is step one.

And as we go through that hopefully some of this demand I discussed will build up, some more higher priced homes will come into play, new homes will start to appear sporadically throughout the portfolio an existing residents will start to feel better about the product that they are living in.

Was there any external financing on the used home sales in the first half of the year or was it all Sun financed?

I'd say it's a combination; I don't have the breakdown for you. I think the majority probably started to base test these properties. And I think it was four selected areas where we tightened up the rental program and promoted these sale of new homes. It was probably I don't know the waiting but probably half and half.

Fair enough. Last question. You talked about making the appropriate investments I think in Sun Home Services to help unwind that business. What additional costs would that include that you don't have there r today? And do you expect any negative impact from that?

I'm not sure which comments you are referring to. But I'll just answer the question without recollection of the comments you are referring to. I think the investment that we made in developing the telephone solicitation process where we can telephonically contact these residents as generally was made last year and developed last year and is being implemented now. We're beta testing an investment in a telephone call center where it will be a 1-800 number that sets up appointments and then filters those through from a central point to the regional locations in their communities to set up the apartment. That is third party so there will be an investment of about $60,000 initially and as much as $300,000 to $400,000 a year if we do implement that.

Additional staff that will focus on converting these residents both at the main office and possibly on-site. And then as we develop specific sales centers within the some of our communities especially the communities that are stronger, it will be the investment in those sales centers.

Now those numbers included in your guidance as part of unwinding the rental business?

You know, I think that they would have been part of '07 as we moved more into that process, that they are not in our budget for '06 because they are six months ahead of the curve. But in us sitting down and analyzing where we are at this particular point and what we are experiencing trend wise as I indicated in my closing remarks, that we don't see a need to change guidance at this time. But obviously we will be monitoring it extremely closely.

Thanks, Gary.

David Harris with Lehman Brothers.

Good afternoon, everyone. This is [Stephen Rodriguez] actually. One quick question about your interest in other income line. Pretty much over the quarter it popped almost 80% per se. I was wondering if you could speak further about it? I know you consolidate interest and other income. Last quarter it was separated out. So is it one versus the other and if it is other income, what specifically in other income is it?

Are you speaking of the increase from Q1 to Q2 of this year?

No, year-over-year, quarter over quarter, year-over-year.

The year-over-year represents net -- an improvement in the results of net asset disposal of about $400,000; increased brokerage income of approximately $100,000; and then the remainder is a result of a gain contingency on a litigation where we received settlement and Origin and other items, which for the reason we often cite regarding maintaining Origins, the integrity of their reporting I can't really break that number down more specifically than the 800. So those are the three pieces of the increase of approximately 1.3 million year-over-year.

Okay so we have 4, 1, and the remainder is the gain contingency and then Origin?

And other.

And other. Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Craig Leupold with Green Street Advisers.

Good morning. Gary, you mentioned that you guys are in the midst of negotiating the sale of 4 to $5 million of loans. And you suggested that it would be a part of better. Given the increase in interest rates that has taken place since you've originated those, I'm guessing that they are fairly high coupon loans. Could you give us a sense as to where those are?

Yes, they are all in the 9 to 10 range and obviously the rate busters and home buying made easy that we subsidized aren't going to be part of that just because the adjustment would mean that at this time we'd be selling them at a discount and we're not ready to do that.

Okay. On home purchases by renters, the conversion of renters to homeowners what kind of rates are you offering when you are doing it on Sun's balance sheet?

We're basically at 9.95 at the existing program with probably a .25 basis point increase to take place on any loan that is applied for 60 days from now. So that program is good for 60 days.

Okay. And typically speaking, from a credit quality standpoint or a FICO score standpoint, how does your rental pool compare to a new potential homebuyer coming off the street?

I would say that there are a lot of variables in that, Craig, but it would be safe to assume that we are 20 to 50 basis points lower than what would typically get approved at Origin for example and Origin as an example of a company that has the probably the highest credit criteria of any lenders that are out there now.

Okay.

Part of the difference though is that we are familiar with and know the renter that we are trying to convert in terms of their payment history and how they've maintained the home during their residency which of course is an unknown when you are dealing with a guy off the street.

Have you seen any I guess contraction in the difference between mortgage interest rates on a site-built home versus those available in the market from an Origin or any other traditional lender in the manufactured housing space? Much of the issue has been the affordability gap has been kind of wiped out through -- and a new mortgage product -- zero money down type stuff. I'm wondering from a rat prospective, are you seeing any change in the difference?

If I understood your question correctly, and correct me if I'm not addressing it, I think that we've definitely seen some additional interest because of that compression or increase on the site-built side coupled with all the other factors that we've talk to. There is some buzzing around. There are articles that you read in the paper that indicate these same things that we're talking about that the more affordable factor could come into play, with the differential or increase in what's taking place in site-built mortgages, the elimination of the zero down, some of the crazy ARMs and negative AMs that have taken place. And so if I'm addressing your question, it would take another quarter for us to really I think be able to address it with any clear experience, if you would.

Okay. On the operating expense side, you guys have done an outstanding job relative to either your competitors and/or folks in the multi-family space in terms of holding expenses down. What are some of the things you are doing there? Do you feel any pressures? I mean to keep expenses at a 2% level -- I guess but kudos to you but also fairly surprising given the backdrop of what is going on in other areas.

Sure. I think that -- two quick comments, one of them directed to you and Green Street. You know for years the Company has stood on a platform that says you've got to continue investing in the properties each and every single year. And we've been criticized for a long, long time going back three years, five years, certainly seven or ten years ago why are our properties and capital expenditures and expenses higher at the property level? And I think that we've been pretty consistent and that investment continues to pay off for us. I think that we will maintain a range of $125 to $150 or $160 per site over a given five-year period of time. I think this year we just caught a little bit of break on what has been spent.

The pressure that we do continue to have on the expense side is on the lot modifications where we thought we would be completely out of them at this time based on the quality of what we've done in the past. Because of the repossessions and what's taken place in the last few years, that is one area where we've had to invest more than we would have expected to. But I think it is just -- I can issue anyone who wishes to go through the properties, which we all do as senior management, that there is no deferral of maintenance taking place. We just caught a good period of time here for the last couple of years.

Okay. And then on page 8, the rental home program summary, your other expenses dropped fairly significantly, $600,000, going from the first quarter to the second quarter. What does that relate to? Is that a temporary reduction or was there something unusual in the first quarter?

I'm going to have to look at that one for you, Craig.

Okay. I will get back with you, Jeff.

Okay.

And then the two questions I guess. First is on the RV business, I know previously you guys were guiding to kind of $4.8 million for seasonal RVs for the year. Any change in that guidance? Are you seeing anything given higher gas prices and such that might be affecting that business?

Interestingly enough we haven't. And we've been watching it very, very closely. You know with weather-related and other things as we've discussed before, you usually see the result of it in the following year. Bad weather, people don't make the reservations, they have second thoughts about coming next year. It will be interesting to see if gas prices stay the way it is and everything else is status quo in the economy, if it has an impact next year. But as of this date, much to our surprise, okay, things have been pretty much as we expected them. And you know we are in the slowest part of the season right now.

Okay, great. That's helpful. Last question. A while back, Gary, you had talked about the possible sale of some excess land in Austin and some other areas. Can you give us any kind of update as to where that stands?

Yes, it pretty much stands at the same place. We have a couple of pieces that have gone through due diligence. One of them, the purchaser didn't get the financing they were looking at because of the increase in rates. Another one fell through for other areas. We just listed three segments of expansions with a broker in the Austin area, a new broker. And we've got a new contract on a third piece which should be signed sometime next week that is about a $6 million sale of some property. But that is subject to due diligence as well. I guess the best response for you is that we are working them continuously. But nothing has materialized as of this date.

Okay. So I'm guessing that in any gains on those land sales are not in your guidance at this point?

That is correct.

Thank you.

Art Havener with A.G. Edwards.

Thanks. Can you how me understand what exactly triggered the accrual of the incentive plan, the five-year incentive plan? What happened in the second quarter?

Well, it's a matter of looking at the likelihood of the future. So the first quarter of $0.73, which was flat with the prior year, second quarter is $0.03 or $0.04 over the prior year. The improvement in the items that Gary mentioned in his prepared comments and in the press release begin to develop the confidence -- well it's two things -- the confidence level that we will get to that 5% to 6% over those period of years and also therefore the requirement to consider the accrual at that point in time under GAAP.

So it's I guess the confidence in the future is the simple answer because obviously the growth is all in the future. And present in the future.

Okay. Do you have a run rate for on the income statement for the rental revenue, the net rental revenue line item?

I think you can't derive that from the table on page 8 in the supplemental. Revenue, the net revenue grew 84% in the six-month period, 70% and the three-month period. It is probably reasonable given the lack of supply that fortuitously, the lack of supply of a lot of repos to buy that that rent will -- that rental rate will be subject to two factors. One will be the reduced number of -- reduced growth in the number of repos rented offset in part at least by aggressively higher rents.

Okay. Over time should this number go down as you convert the renters to homeowners?

Well, I mean if you increase the rent per month by $10, just call it 5000 units, you picked up $600,000. One renter who becomes a buyer takes on a net basis about maybe $3000 of rent out of the line item. So I think it will continue to increase for some period of time essentially due to rate.

Okay. The last question. Of the 669 resident move outs that you reported on page 12, how many of those are homeowners or does that just represent just pure homeowners?

A move out is defined as the home -- maybe we'll change the heading sometime -- but it is when the home actually leaves the community which is in the move outs down below where you can see a quite a history range from 2.4% to 3.9% over the last ten years.

Okay, can you break out the amount of homeowners that have moved out of your portfolio versus --?

Those are homeowners. Oh, homeowners?

Yes.

No. That would -- we just don't gather the data because it is a matter at pretty much of indifference to us if John Doe sells his home to Mary Smith as long as Mary has got a reasonable credit and is approved. So we don't track resident resales which do not -- which are not brokered by us. We track homes moving out and we track our broker transactions.

Okay.

Gentlemen, there are no further questions at this time.

Well we certainly appreciate everyone's participation on the phone call. And we look forward to third-quarter's conference call and providing everyone with further information on how the Company and the industry is progressing. Thank you.

This concludes today's teleconference. Thank you for your participation.