Sun Communities Inc (SUI) 2006 Q3 法說會逐字稿

Please stand by for welcome to the Sun Communities third quarter 2006 earnings results. [OPERATOR INSTRUCTIONS].

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 files with the SEC. The Company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release.

Having said that, I'd like to introduce management with us today. Mr. Gary Shiffman, Chairman and Chief Executive Officer, and Mr. JefF Jorissen, Chief Financial Officer. Thank you, gentlemen, you may begin.

Thank you. Good morning, third quarter earnings as announced prior to the opening of the market today, were fund from operations of $11.8 million or $0.59 per share, compared to $10.5 million or $ .52 per share in 2005. Net loss for the third quarter was $3.9 million, or $0.22 per share, compared to $3.7 million, or $0.21 per share in '05. Revenues in the third quarter were $55 million, compared to$ 53.3 million in the previous year.

For the 133 communities owned throughout 2005 and '06, total revenues increased 3.3% for the three months ended September 30, '06, and expenses increased 4.9%, resulting in an increase of net operating income of 2.6%. For the 9 months ended September 30th, '06, revenues increased by 3.6%, expenses by 2.4%, while NOI increased by 4%. Same property occupancy in the manufactured housing site decreased from 83.9% at September 30, '05, to 83.7% at September 30, 2006.

At this time, I will direct my comments to strategy which we are following curing during this period of transition in our industry that we spoke of on the last call. This involves the rental program, repossessions, and occupancy. For five years or so, we've been experiencing a severe wave of occupancy losses due to the recognition by lenders of what we refer to as their credit buoys. we have managed through this period by seizing opportunity to retain homes in our communities, by buying repo homes at 30 to 40% of replacement cost, thereby capturing value for the company and for our residents.

We have now rented over 4600 homes. Last quarter, we noted that significant and continuing decline in the number of new repossessions occurring in our communities, two full quarters earlier than anticipated, more than management this budgeted for '06. In that call, we discussed that while this is great news in the first major step necessary for an industry recovery, it would have an impact on the rental program and occupancy as we transition from growing the rental program to winding it down over the next five or so years.

The rental program's growth has slowed, due to the reduced availability of relatively new homes at value prices. We acquired about 90 repo homes per month in 2005, compared to 65 per month for the first three quarters of 2006, and only 35 in the month of October. So there are less repos flowing into our portfolio, giving us less repos to acquire and less growth in the rental program by acquiring those repo homes. What effect have these dynamics had on occupancy in the portfolio? In the first three quarters of 2005, we increased occupancy by over 1500 sites, due to rentals. In 2006, the comparable number is 947, a decline of 562, which relates directly to the 600 fewer homes we have acquired for rentals in 2006.

At the same time, the number of new repos in our portfolio has declined by 300 through the 9 months of 2005, so in summary, rentals have contributed 562 fewer sites to occupancy, while repos have declined by 300, so the net effect of these two factors on occupancy is a negative 252, which approximates the difference between occupancy in the first nine months of '06 as compared to '05. It's reasonable to expect some modest increasing in the number of rentals and some further decrease in repossessions. However, it's critical as we indicated that we begin to see growth in new home shipments and sales, as I noted last quarter, is likely to be a gradual process of transition. During this period, we expect to experience some modest loss of occupancy. It is our intent to offset the economics of these occupancy declines with increased rates on the rental homes, increased sales of the rental homes.

Each $1 of monthly rent increases across the rental home portfolio is equivalent to the annual rent from the leasing of about 14 new sites. The average monthly rental on to the program has increased by $44 per month over the last 12 months to $678 at the end of September 30th, 2006. Additionally, these rental increases help our sales efforts in converting these rental homes into sales to third parties by providing more of an economic advantage to purchase over rent. In other words, the monthly payments are lower to own than to rent. The conversion of a rental home to an owner-occupied home has the economic effect of an additional occupied site through return on capital and cost savings related to repair, maintenance, taxes, insurance, and leasing commissions. So to summarize these economic effects, a $25 per month increase in home rental rates generates revenue equivalent to the leasing of about 350 sites in our portfolio. At the same time, the sale of 300 rental homes generates net cash equivalent to leasing of an additional 300 sites in the portfolio.

Therefore, we will be focusing on raising rental rates on our rental homes and selling those homes to recognize the economic equivalent of leasing 650 sites or more to more than offset any economic, any economic occupancy erosion that may occur during the period it takes for new home shipments and sales to recover. Based on all of this, we have updated earnings and we expect to be in the range of $2.68 to $2.74 after absorbing $0.06 to the FTC and other non-recurring items and $.06 related to deferred compensation. As discussed on previous conference calls, and just above, management budgeted the continuation of high levels of repossessions throughout 2006, concluding that every loan that could go repo would go repo before the end of three could recover. At the beginning of the year, we had not for seen the rapid turn around of the repo situation and we believe the recovery is in progress.

At this time, Jeff and I would be glad to answer any questions.

[OPERATOR INSTRUCTIONS]. Our first question is from John Stewart with Credit Suisse.

Thank you. Gary, you talked about the impact of this transition back away from the rental program, you know, and said it's been a five-year process. Now over the next five years we will be unwinding it. How long is this revenue impact that we are talking about going to persist? Is that going to play out over five years or we will work through it in a shorter time frame?

I think we work through it as soon as we build up a little bit demand for new home sales, and now that the heavy overhang of repossessions is gone away and more normalized and as we put fewer and fewer rental homes out into our portfolio, and as we increase rental rates, we drive the pressure to continue to buy our inventory of homes, and I think we think that plays into a little build-up of demand for new homes as you begin to get a customer who says for x amount of dollars, I would rather have a new home than a used ohm. I think we talked about an improvement in new home sales as is a little bit more pressure. Interest rate, I think that's taken place, pressure on interest rates. We've yet to see an increase in new homes. I think there will be a lag with that that will take place, so I think that we're defining it as anywhere from 6 to 12 months before we begin to see a little bit of a change in the new home sales which I think will eradicate any of the erosion we are talking about now in income.

Thank you. And Jeff, can you kind of walk us through the change of the guidance, specifically -- obviously you are talking about $0.12 of charges, but I'm not entirely clear how much of that was previously included in the guidance, how much is new. Looked like there may have been $0.01 of impairment charges, can you help us reconcile of downward revision to guidance?

I would say none of the $0.12 was in the original guidance, we never put any of the SEC-related legal into the guidance, because we don't know what it will be from quarter to quarter, and the other $0.06 of deferred comp was not in the guidance either, so that's $0.12. Some of the other things I suppose is the increased interest rate, rates have probably, this quarter alone cost about $750,000 of interest expense increase, so I'd say, interest expense which apparently, or from what you read, maybe these interest rates have peaked and they will begin to either stabilize or recede a bit, which would be helpful. I'd say those are probably, that's probably more than covers the reduction in guidance from what I think was a 287 lower range before, that gets you down to 267.

Okay. Just two quick follow up convention, and I'll yield the floor, given the downward guidance, is the FFO hurdle, the 6% compound annual growth rate that you're accruing for, is it likely you will hit that, presumably if you are still taking that charge, and then likewise, speaking to the $0.06 SEC charges, can you you give us any update on the Wells notices?

The first one is a lot easier to answer, we still expect to be at least in the 5 to 6% range through the term ending with calendar 2009. There's really not anything substantive to add in terms of developments to the Wells Notice. There's a tentative schedule that calls for an actual hearing of the charges, , I guess, sometime in November of next year, so it's like with most litigation, it kind of limps along.

Okay. Thank you.

Thank you. Our next question is from Jonathan Litt from Citigroup.

Hi, this is Skyler Cho with Jonathan Litt. I just have a question with regard to home sales, what do you view as a sustainable run rate for home sales?

I think that if we look through total year to date in '06, we had 414 home sales throughout the community, the enter portfolio, which is approximately total of the amount that took place all of '05, so we're crossing over that level earlier than we anticipated this year, primarily due to the changes that we have been referencing which is the decrease in repos and the emphasis in home sales. We have been running at a combined rate of , well, for the last four months, we've sold right around 150 homes, so if you annualize that number to 450, I think that that is the current run rate on, and we look to increase that probably by 200 or more homes over '06, and -- takes it up to about 200, beyond that each year, so at the end of a five-year program, you see we've made quite a significant reduction which is our goal on the rental inventory of about 4600 homes right at this time.

Okay. And what was the profit on homes sold in 3Q relative to the undepreciated cost spaces?

In terms of the rental homes, we continue to sell them at sales prices in excess of their original cost.

Any ballpark as to how much that would be?

Well, let's see here. It's approximately a thousand to, about $1400 more than the original cost of the homes.

Okay, and I just have one final question, and that's pertaining to interest and other income. I guess should we assume that the return to 1-H run rate?

I'm sorry, you are breaking up there.

I'm sorry, with regard to interest and other income, should this return to the run rate we saw in the first half of the year?

It should be close. Might be a little slower in Q4 relative to the first half. First half did have as we indicated 200,000-dollar option which was non-refundable, which expired and became income, and also litigate settle of 400,000 so those, you know, are unlikely to be repetitive events. They occurred in the first half.

Okay. Thank you.

Thank you. Our next question is from Craig Leupold with Green Street Advisors.

This is Mark Berry. I wanted to ask, did you have any sense on the repos that are still occurring, how far upside down some of these homeowners might be in terms of the value of the asset versus their liability?

I don't think either one of us do, it's something we check with the operational group, I know group of you guys are coming down next month and that's a question we could have prepared for, but I don't sense there's anything different taking place in the repos now other than the probably age of the homes is somewhat older and I can't, I can't attest to how upside down they are -- I could gather some information for you.

Probably more of a finance company, lender company question because they are the ones who are going to know exactly what the individual has owing on his loan and the approximate value of the home when they foreclose as opposed to our business.

Are you guys originating any mortgages in your communities? And if so, what type of rates would you be seeing either for your mortgages, or other finance company mortgages?

I think when you look at total home sales in the portfolio, we have budgeted about $1.2 million a quarter where we are actually internally taking our LPP or rental homes and converting them into sales and that recommends about one-third of all the homes being sold in the portfolio and at the same time, as we originate loans in a season, we are, we haven't been fortunate to be able to get some interest in selling those homes and receivables last quarter, I think we reported the sales of $4 million worth of notes that we had on our books were sold and we've got several parties looking at notes now that are, they have a minimum interest rate of 9.99%. And an average term of about 15 years. So there's more and more interest on the paper now.

What type of down payment would that lender be requiring?

We are requiring a 10% down payment, but you can, there's bids on that paper from anywhere from no down payment to greater than 10%. Obviously, -- power bids depending on how they rate them.

Do you see yourself growing the finance, the mortgage origination business and to some extent becoming a conduit for these lenders?

No. I think our investment in origin has gotten us deep enough into the lending business, and we would leave it to those experts, but I think that our view is in converting a rental home to a third-party sale economically, we are in no different shape than renting the home and carrying it on our books and selling it, but cash flow wise, as we discussed before, we are a lot further ahead in that we don't have to repair, refer, pay the taxes, on those homes, and it's something that we'll use to facilitate of sale of those homes whenever necessary.

Okay. Have you been booking profits on the sale of those mortgages through the P&L?

For GAAP income, the income is the difference between the sales price and the depreciated book value of the property, for FFO , because we add depreciation back on these homes for purposes of ffo, we also deduct from FFO the depreciation on the homes, so in effect, we reduce the gains for the amount of accumulated depreciation on the rental homes that we have added back in the past. So there's no, what I'm trying to say, it, what we are doing is not double counting.

Thanks. Glad to hear it. Wanted to ask about rent increases on turnovers, what kind of renewal ratio, now that you are further into the rental program, what kind of renewal ratio are you seeing?

I think we were seeing ratios as high as 57% at the beginning of the year, and currently hovering right around 48%. I think that, I would express to everybody that I can't speak for other companies. This company has, management has so focused on the strategic plan of getting into the rental program and getting out that there is a slight tightening the credit taking place in our rental program right now, because we need to generate homes that can be sold, which is our end goal, not just to existing renters but people walking in the door who are potentially coming in to rent, so the renewal rate is down almost 8, 9 basis points. We keep better credit worthy people in the rental homes, we get rid of the people at the margin, but we generate more of an inventory to sell off to the buyer that's walking in the door now.

Last question is as you push rates on the rental homes, are you able to do it both for new leases and renewals or do you generally just, is it renewals that you are pushing?

It's both, it's both.

Yeah.

Okay. Thanks, guys.

Thank you. Our next question is from Stephen Rodriguez with Lehman Brothers.

Good morning, gentlemen. Quick math question on your FFO page. When you look at your FFO and divide it, are you using basic or diluted to calculate our $0.59?

It turns out to be the same in this particular quarter.

But I mean, because when I do my math, after I enter night model, I'm getting $0.58 when I do the math on the page, I'm getting 58.

What happens, the way it works is you take the 9-month and you get a number for the 9 months, and back out what's been reported in the first two quarters, and that becomes the third quarter. Because you have some variables in terms of outstanding numbers of shares that move around, and they can cause a little $0.005 or enough to round to a $0.01 kind of --

That's what's going on. That makes sense. And another question on your rental, home rental program. Earlier, you guys gave guidance of around $3 million in net home rental revenues. I see you guys have approximately hit that in the first three quarters. Should it tail off dramatically in the fourth quarter?

-- Rental home revenue?

Correct.

No, it should be, I would expect it to continue to show some growth.

Okay.

And as we are pushing the rents, early in the conversation, we are not only enhancing the sales aspect of the program, but we are recovering much of the economics from putting pressure and a little bit of a decline in occupancy because we are not growing the rental program, but we are still experiencing 300 repos or so in the portfolio.

Okay. Great, thank you very much.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is from Dan Boyle with Schwerin Boyle.

Hi, gentlemen. My question relates to at one point you are contemplating perhaps selling certain communities that had high vacancies, and I think maybe you spent some money to get outside advice on that possibility and I was wondering what the status of that was.

Yeah, a good question. I think it's a group of properties that are directly related to automotive, midwest, michigan, indiana, and ohio, that we've been carefully watching over the last 24 months I would say, and I think that earlier in the year, I had mentioned that at this particular time, with what we saw happening in the cycle, it made most sense for us to work through the rental program, to enhance the values that we think would be more achievable, 12-24 month out after we had a better understanding, what Ford, GM, and the automotive world were going to do.

There was a lot of talk of bankruptcy as you know, 6 to 9 months ago in the marketplace, and the interest in maximizing the value is still there. There are no properties that we would not consider available for those who approached us, and the only thing that I think we are doing right now is strategically on target to manage those properties, create the best or maximize the NOIs so when we do put them on the marketplace, we can capitalize. There certainly has not been any real deterioration in those properties, what we see is a $44 rental increase in many of those properties has in fact increased some of the FFO and perhaps one could argue they are more valuable today than they were nine months ago.

So we continue to watch them, and at the appropriate time, they are on our asset management list, and, I would expect to see some disposition of those properties at the proper time, but I think with what's happening right now, as we discussed in the cycle, I think, I anticipate it only to get better, not worse on those properties, short-term.

Fair enough. Who was it that you hired out of curiosity? I know the dollars weren't much but --

I think that we, we certainly had enough large shareholders that we travelled through the market and tagged and identified properties within certain radiuses of every GM, Ford and Chrysler plant in the area, those are the properties that we looked at very carefully and hiring specifically like that, I think that relates to some of the strategic work that we did earlier in the year that we announced, we had a one-time cost, and it was part of that process analysis was done.

Okay. I'm curious, not that I'm recommending it, but I'm wondering what your thinking is on the private market value of the whole company, I mean, we are at this extraordinary point in time where real estate values are very high in terms of cap rates and so forth, it almost seems like like the appreciation has passed by this sector for maybe legitimate reasons or maybe not legitimate reasons, I'm wondering if you think there's a meaningful disconnect between what the private market might consider Sun Communities to be worth and what the public market values it at.

I can tell you the board nor I have not re buffed any private offers that have come in the door, so that when there's a big enough disconnect, I would suspect that people chase undervalued assets and portfolios and businesses, but nothing like that has happened at this time. I think that the difficulty and challenges and expertise required to manage through the challenges in Sun's portfolio, certainly with the regional economics of the midwest are such that without, there aren't a lot of groups I think that might feel comfortable or might set higher values without having that expertise and management out there, and none have stepped forward and if they would, I'm sure that they would be fully explored.

Thanks a lot. I appreciate it. And you know, from my point of view, I think holding tight, if you think there's a turn, is the right thing to do. So good luck.

Thank you.

Thank you. Our next follow up question is from John stewart with credit Suisse.

Hi, thank you. Gary, the 2.6% NOI growth number you referenced is that same store or is that portfolio wide?

Same store.

Okay. What is that look look like if you strip out the 11 problem assets?

I don't think I would have that for you, John, and 11 problem assets has probably shifted down to 9 at this particular point, as we have seen some improvement in two of them, slow improvement, but Jeff, you think there's much difference --

It's not something you can guess about, you would want to actually go through and do the analysis, so we don't have that information at hand.

Okay. Maybe we could follow up off-line. Thank you.

Gentlemen, there are no further questions at this time.

Thank you, and we look forward to reporting our progress at the end of fourth quarter.

Thank you, sir, this concludes today's conference call. Thank you all for your participation, you may disconnect your lines at this time. Have a wonderful day.