Sun Communities Inc (SUI) 2007 Q1 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the Sun Communities First Quarter 2007 Earnings Results Conference Call. (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 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's its expectations will be achieved. Factors and risks that could cause actually results to differ materially from the 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 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. Gary Shiffman, Chairman and Chief Executive Officer, Jeff Jorissen, Chief Financial Officer, and Karen Dearing, Corporate Controller. Thank you ladies and gentlemen, you may begin.

Good morning and welcome to the first quarter conference call. First quarter earnings as announced this morning were funds from operations of $15.5 million or $0.76 per share, compared to $14.6 million or $0.73 per share in 2006. Net income for the quarter was $50,000, compared to net loss of $0.9 million or $0.05 per share in 2006. Revenues for the first quarter were $60.8 million, compared to $55.8 million in the prior year.

And at this time I'd like to turn to the portfolio and discuss its performance for the first quarter. We leased 144 net sites in our manufactured housing portfolio and this compares to 136 net leased sites in the first quarter of 2006. The weighted average rental increase in the first quarter was 3.7%, which is basically right at our budget for the year. 18,700 occupied sites receive rental increases, or just about one half of our occupied portfolio. And as we've discussed in the past the balance of the rental increases take place pretty ratably over the next three quarters.

The number of homes of which we've rented in the portfolio stands that 4,860, which is an increase of 284 rentals in the quarter. This compares to an increase of 504 rentals in the first quarter of 2006, and we think reflects the decreasing growth in the rental program at Sun. Rents are up 6.7%, compared to March of 2006 to an average monthly rent of $697.

During the first quarter we sold 87 homes from our rental portfolio, as compared to 19 homes that we sold in the prior year's first quarter, and you might recall it was last year that we really implemented the conversion sales program of selling the rental homes during the year. Each sale of previously rented home, as we've discussed, saves us nearly $2800 per year in operating expenses for that rental home. This includes savings of repairs, commissions, the down time that it's not leased, and taxes.

In addition if we finance the home, which are currently doing about 90% of the time, we earn an additional $2400 at the average interest rate of 9.95%. The benefit, therefore, is approximately $3,900 after considering attributing some cost to marketing.

Delinquencies over the 30 days on these financed homes were 2.7% at March 31, 2007, as compares to 3.4% on December 31, 2006. So, we continue to track and do very well collecting the payments on these converted sales.

Our same site portfolio, 135 communities achieved revenue increase of 2.6%, while expenses increased by 3.4%, resulting in a 2.2% increase in overall and NOI. The revenue increase reflects the full effect of the loss of about 508 revenue producing sites during the second half of 2006, as we've discussed in previous calls.

Two-thirds of the expense increase was due to property tax and property and casualty insurance. And during the same period of time in the same site portfolio occupancy increased by 40 basis points from 12-31-06 to 83.1% at March 31, 2007. Delinquencies have declined to levels not seen since 2000, while revenues have increased substantially including the rental program which really didn't exist in 2000.

Likewise, the number of repos in our communities has declined to 301 at the end of the first quarter versus a monthly average of 313 repos during the year of 2000. So, we've really come a long way over these last seven years.

In the first three months of 2007 we lost 215 sites due to repositions, compared to 302 in the first quarter of 2006, and 362 in the first quarter of '05. Again, it represents a reduction of nearly 30% from '06, and from 41% of levels in '05. And this trend has been pretty consistent now for the last four to five quarters.

During the first quarter we also sold a total of 185 new and used homes, compared to 71 in the first quarter of 2006. And to begin to summarize what's taking place in the portfolio, performance is gradually improving across the board with a declining reliance on the rental program. The challenge remains to attract sufficient volumes of home buyers in the general absence of a revitalize dealer network.

And some indication through recent metrics, that I'll get to in a moment, continue to show the tension between the lack of available third-party buyers and what's taking place throughout the industry. Recent metrics with regard to declines in month-over-month and year-over-year shipments of new manufactured homes have remained unchanged, unfortunately, with some estimates forecasting 2007 total shipments for the year will be below 100,000.

While I think the bottom has yet to be called, it is my opinion that while some slight declines may still take place in shipments, the lack of built-up manufacturing housing inventories by third-party dealers, very few of which exist, or within the communities themselves, will lead to a near-term stabilization of shipment levels. So, I don't know if we've called the bottom yet, but I do believe we are very close to the bottom.

Applications, we think provide some preliminary indications of progress and we can take a look at what's happening within Sun's portfolio. Applications to rent homes have increased from 2,214 in the first quarter of '06 to 2,929 in the first quarter of '07, or an increase of just over 32%. Applications to purchase a rental home, and this is also subject to the marketing that we're doing, have increased from 92 in the first quarter of '06 to 213 in '07, an increase of 132%. And finally, applications to buy new and pre-owned home have increased from 160 the first quarter of 2006, to 283 in '07, an increase of about 77%.

I would suggest that some of the patterns as reflected in these metrics are shifting slightly and we do believe can be considered positive. However, the tension between breaking out of the rental program, which only sustains occupancy, and selling new homes into the communities which actually increases net revenue producing sites, is where management is fully focused now and continues to face the biggest challenges as we look for a correction in our industry.

Our expectation is for a slow, but steady improvement creating demand by slowly weaning off of the rental program, and slowly creating greater demand for new, affordable home purchasing. And at this time Jeff, myself, and Karen are available for any of your questions.

++ q-and-a

Thank you ladies and gentlemen. At this time will be conducting a question and answer session. (Operator Instructions). Our first question is from the line of Jon Litt with Citigroup, Inc. Please proceed with your question.

Good morning, this is Skyler Cho calling with Jon Litt. I just have a couple of questions for you. The first of which is, what do think is a good target for G&A for the full year for the rental property?

I think you can -- it's probably going to be a little stronger than the first quarter going forward. I actually don't have the quarterly G&A budget in front of me, but I would annualize the first quarter and a little to it, and I could be a little more precise, if you want to call me back a little later.

Okay. And my second question is regarding net leased sites there is a positive 144 net leased site number for 1Q, how is that expected to trend for the full year 2007?

Well, it's budgeted to replicate our 2006 experience, which ended up in a loss of sites, which I think we indicated in our earnings guidance, we were expecting to lose several hundred sites during the course of this year and roughly in the order of last year. So, if the budget-- if we're to hit budget, that would trend down. Obviously, it's not our goal to lose sites, so we are addressing what we call "the second half weakness" in net sites. With a lot of initiatives in an effort to at least hold our occupancy stable from whatever the June 30 level is. So, the budget would say we're going to lose sites, management's intention is, of course, is not to lose sites.

So, you're stand pat on the full year expectation, I think it was maybe 500?

Yes, we're not going to change the budget just because of the first quarter. The first quarter is the same as it was last year, effect the net leased sites, last year we ended up losing about 500 sites. So, we don't see, based on the quants, we don't see any reason to change a budget or to change a projection, but we sure as heck are going to do our best to make sure that we exceed budget.

Okay. And would you be willing to give us some color on how the markets are doing, with respect to net leased sites?

Divisional markets?

Yes.

Well, in the supplemental data you do have a by state. So that you can see, for instance, I'm looking at it right now, Michigan gained 6 sites, Florida gained 16, Indiana gained 7, Ohio lost 8, Texas gained 27, and the other states gained 7. So, it was kind of spread fairly equally throughout the portfolio.

Okay, thank you very much.

Thank you. Our next question is from the line of Paul Adornato of BMO Capital Markets. Please proceed with your question.

Hi, good morning. I was wondering if you could talk about the credit quality of the rent to own folks, those that have converted and bought their homes. What's been the credit experience so far?

I think one of the things that differentiates Sun's program, Paul, is that the residents are underwritten from the time that they rent the home in our S&I programs, so it's a consistent policy of following FICO from when they are a renter, to when we like to think they are a seasoned prospect of converting them over to home sales, So, about a one year period of time they are tracked, they are given points basically for timely payments, there are given points for an increase in their FICO scores, and they are given the opportunity to through a cash deposit upgrade from one home to another home.

So, as we go through the process and follow it they're on about a 9.95% to a 9.9% interest rate today. It's a 15 year amortization, in the case of most homes. Some of them, depending on the principal balance, are lower than 15 years, they can get as low as 10 years if it's an older home and the principal balance is below $20,000, we have a faster amortization. And the FICO score waivers depending on the down payment from roughly 625 on to 710 is the scale of the loans that are done currently. I couldn't give you an average point, but if you want call me I can give you more color on that.

It's one of things we are going to start tracking on the calls, in our press releases, as we increase the conversion from renter to home, we were to provide a little more visibility on what that credit quality looks like and we will be selling our first group of loans of that credit quality within the next 30 days or so.

Okay, and so based on your experience so far, do think a change in underwriting standards is warranted, meaning if you have very high quality folks would you be willing to lower the standards a little bit to fill up more, or maybe the talk about that tradeoff love it?

I think they are probably pretty relaxed as it is because our view is that financially as we went over the numbers before, it is in the Company's best interest to convert these homes. We do better economically in the short in than the long term. And if these people could currently apply for third-party credit on their credit scorecard we would welcome that because we would prefer not to be caring the paper. But, the relax credit standards that we use will not, at this time, without least 6 to 18 months seasoning make them salable for a least [power] in the open marketplace.

And Paul, as Gary said in his comments, the over 30 day delinquency on these transactions has declined from 3.4% to 2.7% from 12-31 to 3-31. So, they are performing pretty well.

Okay. And the 9.95% interest-rate offered to this pool, how does that compare to the market rates that they might be able to get?

I think for somebody in the bucket of 650 and above credit score can see roughly 9%, 8.9% right now with a 5% to 10% down payment.

Okay. Great, thank you.

Thank you. Our next question is from the line of Richard Schuster with [Rebecca Asset Management]. Please proceed with your to question.

Yes, a couple of questions, and I apologize, I might be naive and I'm new to the story. But, with the performance improving, especially in the rental applications, how long does that usually translate into improved business for you, what kind of lag is there normally?

Well, Richard I just want to point out there when you look at the fundamentals, the rental program is kind of a strategic move to create further erosion in occupancy. So, to the extent that there's greater demand in the rental program all we're doing is maintaining occupancy, we are not increasing it.

No, I understand, but it must have some impact on the other side of the business?

Okay, I think that what we've shared with our shareholders when we looked out longer term on our rental program, as we continue to increase the rents, and I think the requested that they have been increased almost 7% from the first quarter last year to the first quarter this year, we put pressure on the comparison rent versus own, and that is how we're able to drive a lot of these renters in seeing the value of purchasing.

So, that's one component. As we dry up the available pool of rental units and there aren't as many to choose from, obviously that's another reason to buy a new home. And I think internally, that's all that we can accomplish. Externally, as we discussed before, I think it's a good thing for industry to see the challenges created by the sub prime lending. They were historically a large part of the pool of buyers for manufactured homes and communities, and while I could not share that we're seeing a mad rush to buy our housing, we are seeing increased interest, and that what were looking to capitalize moving for.

So, the best answer I have for you is the one I described is, there is a tension that exists right now, a fine tension between operating to full capacity in our rental program, and trying to stress the rental program enough to create interest to buy new homes. And a as the overall industry inventory declines through continued reduced of shipments of homes, if demand is there to the sub prime buyers, or other buyers, the demand will obviously create the opportunity for third-party retail centers to open up again.

And the second question is, I think at the end of last year you lowered the FFO guidance for '07, if remember correctly? Is that right?

I don't think we had '07 guidance out, we just matched it to '06. And we pretty much--we had five-year guidance out.

Our guidance was for FFO 266 to 272 a share in 2007. And there had been previously no specific '07 guidance.

Okay, here's the question, to the extent that the industry starts coming back, and you start utilizing the assets as they should be and we are out of this five or six year downturn, what is the FFO potential utilizing these assets to their full extent?

Well, if you consider that we have roughly 7,000 vacant sites in the portfolio, and let's say you leased up 5,000 of them, and the monthly rent is 350, so the annual rent is a little over 4,000 a site, 4,000 times 5,000, I believe, is $20 million before any incremental expenses, which would be $1.00 a share.

So, the incremental FFO could be $0.50 or $0.75 higher as the industry starts turning?

No, I would correct that. Not as it starts turning, when--

When, not as, when, and hopefully we're seeing a bottom now and only time will tell.

And our business has always been characterized as a business where you hit a lot of singles. It's not like the office market where they hit home runs. We have to lease--that's 5,000 net leases or home sales to have to occur over period of time, so it's not something that happened in the short term.

Terrific guys, thank you very much.

Thank you. Our next question is from the line of John Stewart with Credit Suisse. Please proceed with your question.

Thank you. Gary, just judging by your comments, it sounds like you're pretty close to on track as far at the 2007 budget goes, but can you speak to where you-- what your thoughts are about the guidance range as we sit here today?

Yes, I think I'm going to be very cautious about it. Last year we reduced guidance on two different occasions, primarily due to the fall off of the second half syndrome that this Company has been experiencing for the last few years. We have very strong momentum first and second quarter. Two years ago I think we've pretty much were neutral on occupancy, net increased occupancy maybe 90 sites up.

The two years previous to that we were several hundred sites down for the year and while we're anticipating a positive year last year we lost 508 sites by the end of the year basically, much of it in the fourth quarter in the third quarter where things just slowed down unexpectedly, and external effects were somewhat outside of our control. So, what Jeff said earlier, and what we discuss with management is 2007 budget is pretty identical and mirrors 2006 budget and these are my comments in the press release today.

So, it predicts a similar loss of a total of 500 net sites. We are at budget or above budget in each case right now. The question for us is can we sustain that increase over budget third and fourth quarter? If we can, obviously were going to significantly beat our guidance, if we can't then we feel quite comfortable that will fall right in the range of guidance. So, a lot is yet to be determined. I think we're looking at the real good quarter to give you a little bit better understanding second quarter. I think that on much of the occupancy gains that we have gotten were late into the quarter so, we have to see what gets sustained or the next few months.

That's helpful, thank you. Are there any one time charges that you are aware of that we should be aware of?

There's a $0.01 relative to the legal and accounting related to the FCC in the first quarter, as was in the first quarter of the prior year.

Okay, and along those lines can get any update on the Wells Notices.

Of course not. I'm just kidding. It's still grinding its way through the legal process of discovery, and there's really nothing signal to report.

Okay. Lastly, Gary can you give us a sense for how you're thinking about external growth and potentially--calling the portfolio, at one point you talked about listing a few communities for sale, and given some of the signs of stabilization we're seeing, what your current thoughts?

Well, first of all, my current thoughts with everything as they are cautious. We're cautiously optimistic on many, many levels. The long-awaited reduction of the repossessions has taken place; we've seen how it effected us last year. While one is there is 5 years later the we wanted, it's 6 to 12 months earlier than we finally expected.

So, we've had a pretty big transitional period within the Company to focus on a change dynamic, focus on conversion of the sale, monitoring the rental program, and as we head forward with regard to monitoring the outlook, I think, ironically, we have opened up a lot of different doors, which include-- there are communities that look like if we meet budget for '07 and go into '08 they could be fuller sooner than anticipated. What do we do about that? What do we do about the disposition of assets that you're referring to?

I think that the best answer that I can have for you, John, is that were just kind of watching quarter to quarter getting ready to implement a lot of the plans that we have had on the back burner. So, it's a little early for me to be able to respond to you. I can tell you that the communities in Flint, Michigan, some of them in other parts of the rust belt they are flat out, holding their own in their rental program.

So, we suggested to everyone those will be ones that we might look for disposition first. There are others that we felt that we could manage through the challenging times. And I think that might be happening right now we can look for a disposition at a future date and therefore maximize the return to the shareholder. So, if you ask me that question in each of the next quarterly calls, I think I'll be in a position to respond to you more intelligently.

Okay. Just lastly, what are your thoughts about share repurchase with the stock under $30?

I think we have a board meeting coming up, with the shareholder meeting in one week. So, that is something that is visited at each board meeting and that will be something that will be on the agenda just like it always is.

Can you remind us what your current authorization is?

Last authorization was 1 million shares and we had used about 200,000 of that million shares.

Okay, thank you.

Thank you. Our next question comes from Paul Adornato with BMO Capital Markets. Please proceed with your question.

Hi, just one follow-up. Did you say that you put through, on the rent increases that you did put through, was the increase 3.7%? Did I catch that?

That's on the manufactured housing sites, correct. The other rental increase I talked about was the rental increase on the rental homes, it was 6.7%

On the manufactured home site, did you get any push back on that more than previous years, or what's been kind of the reaction?

I would say it's no different than any other year. The last thing I said is we've always had a policy on matching we invest back into the community and with rare exception, we don't get too much push back.

Thanks.

Thank you. Our next question is from the line of Steven Rodriguez with Lehman Brothers. Please proceed with your question.

Hi, a follow up on the disposition talk. You mentioned there were a few properties, but what do you re--the money into acquisitions, or you say maximize shareholder value, was that money that you pay out in one-time dividends? What are your thoughts on that?

Steven and if I understand your question right--

Use of proceeds from the possible disposition?

I think what we have talked about before, and obviously we think the stock is undervalued today, and so that the potential. We're looking at several acquisitions as discussed on the last phone call, we hope to have to have some updated information by the time second quarter rolls around.

And on the credit facility, I think those are the types of use at this particular time. We continue to strive to bring down dividends against earnings, so our payout ratio can be reduced. So, I think it would be internal use of that capital.

What are some of the cap rates you are seeing out there on the acquisition?

I'll tell you, I'm not seeing a lot of fluctuation on the cap rates. They are strong and aggressive and the growth parts of the country. Basically, 6 to 7 cap rates, and the rest of the country certainly did acquire something in the 7 to 8 cap rate area.

Okay, and a question on your guidance. It seems like since you're cautiously optimistic, this 266 to 272 is more of a baseline. Are there any significant catalysts out there that could bring your earnings or FFO below that range?

I think that there are none that we would point to that if they wouldn't be, that if they happened, they wouldn't be considered unusual. Certainly, we watched closely the effects of the rust belt and the automotive industry with a concentration as strong as ours in the Midwest. But, when we consider the baseline, I think the difference between making budget and beating budget for this Company will be how well we do over the last two quarters in maintaining the gain in revenue producing sites that we're able to obtain the first two quarters.

Okay, thank you.

Thank you. Our next questions from the line of John [Barning] with Equity Strategies. Please proceed with your question.

Good morning, can you tell us what the average age of your loan portfolio is, the notes receivable that you have on your balance sheet?

I don't think we can sitting here. I think that is something we could get you John, but my estimate would be three to five years. Anything that we have before that has been sold off.

I'd guess it would be around the three to four year range, nothing more than that.

Okay. Now you've planed, you said earlier that it takes 16 to 18 months of seasoning--

Six to 18.

Six to 18, okay. Why not sell all of the loans that sort of reach that seasoning level for cash for additional investment?

That's an excellent question. I think that one of the things that we've determined or learned as we've created this rental program, and the sales of the rental program, is that our initial thoughts were that we had to low interest rates, 499 and 599 rates, that compared very favorably with FICO housing. We originated maybe 5 million shares? Karen do you know the exact breakdown? Some of the earlier loans are at low interest rates. What we found along the way is that the interest rate didn't matter as much as the all in monthly payment was.

So, in many cases since that point, and more recently we just decided all loans would be at 995 for the very purpose of what you're talking about so that as soon as they are seasoned, they can be sold off, or if the FICO score is high enough, they can immediately be sold off. Many of the loans that are six to 18 months old right now, would struggle to gather par in a liquidation or a sale, because of the interest-rate. Yes, the interest rate is just to low. So they're going to gather something below par.

On the other hand, as we mix them with higher interest rate, we can look to get out at par on average for the whole pool. And that's what we are trying to do. Those tapes are run for us up at Origin.

It's about nine to 10 million of the portfolio.

About nine to 10 million is subpar interest-rate.

Okay, so those loans, you'll be holding for, I guess, indefinitely.

We will be holding them for until they pay off, or until such time as we can mix them in with homes that will average out--loans that will average out at par.

I see. So at what point did you go to the 995 interest rate?

About a year ago? Before that, as Karen just indicated, that we've got about $7-8 million worth of low interest loans. The balance of about our reasonable interest rates that start approaching eight and nine. But, we concluded that when we really ramped up the conversion program that we were going to have all loans at 995 for this very purpose.

Okay. So, as the program continues to ramp up, you anticipate increasing your balance of notes receivable, or loans receivable?

We have about 20 million or so, 23 million notes receivable right now. As I indicated before, we are currently discussing a sale of some of those notes. And it's economically beneficial to convert as many of the rental homes as it can to sales, to seasonal those loans.

So, I would say for the next three to five years as we ramp up the liquidation of the rental homes and the sales, that balance will go up, but the same time will be working very hard to manage it for sales the best we can.

Right. Okay, so you've got about 150 million invested in your rental program. You'll be effectively moving those assets from PP&E to loans receivable, and hopefully out the door for cash?

That's correct.

Okay. So, how long do think it will expect to take to liquidate the majority rental homes?

I think the end of five years, is something we discussed were rolled out this program a few years ago, we would have about 2000 rental homes still left in the portfolio. The composition of those are primarily the ones that I spoke of earlier. A Flint, Michigan community that might be 50% rental home right now, I see nothing in it's future to expect that it would be anything but a rental home community.

Okay, great. And can you talk about home sales activity in April?

We can't really because we haven't discussed it with the market at large. But, I think that we can say that it reflects at least what we've been seeing in the first quarter.

Alright, great. Thank you.

(Operator Instructions). Ladies and gentlemen there are no further questions at this time.

Okay. I would just like to conclude by thanking everyone for participating in our first quarter call. Jeff, myself, and [Karen Dearing] are available if you have any further questions. And we look forward to our second quarter announcements.

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