Sun Communities Inc (SUI) 2007 Q3 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Sun Communities third quarter 2007 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 [those] 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 obligation to advise or update any forward-looking statements to reflected events or circumstances after the date of this release.

Having said that, I would like to introduce management with us today -- Gary Shiffman, Chairman and Chief Executive Officer; Jeff Jorissen, Chief Financial Officer; and [Karen Dearing], Corporate Controller. Mr. Shiffman, you may begin.

Thank you and good morning. Third-quarter earnings as announced prior to the market opening today were funds from operations of $11.8 million or $0.58 per share compared to $11.8 million or $0.59 per share in '06. For the nine months, funds from operations were $41 million or $2.02 per share compared to $39.5 million or $1.97 per share in 2006.

At this time, we would like to review the portfolio with you. Rental increases have been implemented for nearly 33,000 of our occupied sites through the first nine months of '07. The weighted average increase for these sites is 3.6% or just slightly higher than the 2007 budget of 3.5%. Through September 30, 2007, occupied manufactured housing sites have declined by 65. This represents a loss of 160 sites in Q3 '07 compared to a loss of 263 sites in Q3 '06 or an improvement of about 40%. These site losses are concentrated in a few Midwest communities. Two communities have accounted for more than the net loss sites year-to-date and 15 communities accounted for the 160 net sites lost Q3 of '07. We continue to manage aggressively to counter and/or mitigate the historical second half loss of sites that we have discussed in prior calls, and we do feel good about the progress and improvement that we made third quarter.

The net operating income of community operations increased by just under $600,000 over third quarter of '06 while the operating income of the home rental operations increased by just over $160,000. Together, these account for a third quarter year-over-year improvement of $762,000 or approximately $0.04 per share.

The number of homes rented in our communities increased by 108 in third quarter to 5134, while the number of rental homes sold was 90 for the quarter and 281 for the nine months, which compares to a total of 131 in the first nine months of '06.

Rental rates for the homes have increased by 5.6% over the last year to an average of $716 per month at September 30, '07. Repos have continued to decline and are running at slightly less than 30% below '06 levels and nearly 50% below '05 levels. Similar declines have reduced the existing number of repos in our community to a level of 248 at September 30, 2007.

Our same-site portfolio generated a 2% increase in net operating income for the nine months, consisting of a 1.9% increase in revenues and a 1.7 increase in expenses. Occupancy declined from 82.7% at December 31 to 82.5% at September 30 in '07. Rental applications are running 50% ahead of third quarter of '06, while applications to buy the rental homes are running nearly 50% ahead of the '06 quarter. Applications for the purchase of other new and preowned homes declined from 310 in 2006 to 176 in 2007. In Florida, both new home sales as well as profitability of sales has fallen short of our budget, so we've seen a slowdown in Florida.

I think for those of you who were on the call last quarter, we noted that we have been working with manufacturers of our product, or manufactured homes, to design a new and more attractive product. These homes highlight front entrances, nine-foot ceilings, drywall and really a dedication to quality and distinguishing features which we think compete very favorably with comparable sized new site-built homes. Side built homes.

We ordered and took delivery of seven prototypes and placed them in five Midwest communities. All of those have sold after we released them. And really based on those results and additional refinements that we've made to the homes after each prototype was delivered, we have ordered 40 additional Signature homes to be placed in 16 of our Midwest communities.

As of today, 23 of those homes are delivered and being set up and all models should be delivered, set up and ready to show by mid-December where we will roll out the Signature program. The program really was designed in part to attract those who are now shut out of the site-built home market, and in that regard we've entered into discussions with various real estate brokerage firms to familiarize them with a product and to provide them with really another source of commission for their customers who can no longer get approved for the typical site-built housing, but who can be approved for our Signature product which is priced in the 45 to $65,000 range.

So to summarize, the portfolio fundamentals relating to existing repos and incoming new repos have returned and continue to operate really at levels of normalized operations, a vast stabilized improvement for the past six years. Sales of homes in our rental program have been above budget and trending positively as we convert renters into owners, and rental rates and overall occupancy in our rental program remains strong.

Regional economics in the Midwest continued to impact growth of occupancy and further increases of NOI in two different ways. Costs associated with the seasonality in the second half related to increased turnover in the rental homes and the lack of new home sales that really generate gains from increased net revenue-producing sites. I remind everybody, keeping our rentals full does not increase revenue producing sites. Bringing a new home into the community does increase our revenue-producing sites and it's what we are looking to do with our Signature program. So while management continues to aggressively battle what has been historical fourth-quarter seasonality, which is the turnover in the rental program I just referred to, we will also be focused on growing the initial success of new home sales in the Midwest with our Signature home sales programs as we rolled that out. The quality and value proposition created in partnership with our manufacturers we believe should compete very favorably with site-built product that is once again out of the reach of our typical customer. Each of these sales would represent a net new positive revenue-producing site starting when we roll this out in the fourth quarter.

At this time, both Jeff, I and Karen would be available for questions.

(OPERATOR INSTRUCTIONS). Jonathan Litt, Citi.

This is Skyler Cho calling with Jonathan Litt. Could you give us a breakdown of what was in other income? It looks like there may have been some kind of a loss due to a disposition of assets.

There's always a loss of disposition in and assets in that line item. Last year, that number was -- last year in the third quarter, that number was $844,000, and this year it's $1,118,000. That is generally assets at the community level that are disposed or traded in, in the normal course of business.

And I guess this number has kind of bounced around quite a bit, so what kind of contribution should we expect in 4Q and I guess going forward into 2008?

We don't have our 2008 budget done, but the set the primary item of stability, or the two items that tend to be recurring in this category are brokerage revenues which are down this year because of the slowdown in activity in Florida because people can't sell their homes up north and therefore they're not buying in Florida, and asset disposals. Other things are dramatically less predictable, like last year in Q3 we had -- or in the nine months, we had a lawsuit settlement. So it will be -- it's the odds and ends. So not all of this stuff is susceptible to prediction or budget.

I guess my other question is about guidance. Do you think that the range of 266 to 272 is still achievable, given that FFO was $0.58, you would need maybe $0.64 to hit the low end?

Yes, I think that we would feel very comfortable affirming that guidance.

Paul Adornato, BMO Capital Markets.

I was wondering if you could talk about the two communities that accounted for the bulk of the moveouts -- what was happening there? Is it close to an auto plant or other economic factor?

Sure. There are two communities around Indianapolis and I think that that definitely is Rust Belt related where we have seen some layoffs and job-related repossessions and needs in lieu of that exist in those two communities and they are grouped very close to each other. We think we are through the worst of them, but they definitely have had an impact this year.

Is there any action that you could take in order to ameliorate the situation in those two communities, work with the tenants in any certain way, or is it really a tough situation for them?

I think that certainly, there's always action that we can take. I think that when we refer to what we're trying to accomplish this year, I would remind everyone on the call that in looking at occupancy for 2007, we made the decision to reflect the occupancy trends of actual in 2006. So our '07 budgets reflect a negative occupancy with roughly 500 sites. So everything that management has been focused on has been reversing that trend so that we would be more favorable to our budget. I think that we did a successful job in the third quarter by improving the lost sites by about 40% year-over-year and losses in our rental program. And I think we look to do that in the fourth quarter where we really can have a positive impact on our budget. When we get to these two communities because they made up roughly all of the 60 lost sites, there's an awful lot of focus on how we can work with the residents in there to make sure that we're doing the best job we can, whether it be by working with them on a payment plan or by working with them to move from one type of home to another type of home. But I think what you see is in large part the reflection of a give-back of some older homes where again, once again the amount of money that they owed on those homes was greater than the actual value of those homes in today's market and they have to recirculate in the form of repossessions or in the form of rentals for us to make any progress there.

Okay. Looking at the Signature program, the homes that you have already sold, those prototypes, did they occur in the third quarter or was that fourth quarter activity?

I think that five of those homes closed in the third quarter and two of those are due to close right now, actually, fourth quarter. And interestingly enough, while we had been prepared to finance this program, the sale of some of the homes in this program to jump start, if you will, the understanding of the value proposition of buying one of these homes, four of the five homes that sold so far were financed by third-party financing and either one or two of the additional homes to be closed are also third-party financing. So we have been very pleased at the fact that the third-party financing has stepped in and these people have qualified for it.

And those third-party lenders, have they financed the product traditionally? Are they manufactured home lenders?

I cannot answer that positively. I'm looking at some data on all the sales homes. Actually, it's a combination -- one, two, three traditional sources that I could identify that are Vanderbilt, Triad, one origin. And the other ones, one looks to be cash, which we don't know if that is a local bank or not, so that's the best information I could provide.

You talked about reaching out to the traditional brokerage community. Has traditional brokerage ever sold the products before?

I think that the answer to that is basically no. There have been an occasional broker that over my 30 years that might specialize in brokering used homes in a specific community, usually an upscale community. But it's definitely not the norm and there has never been any real significant participation in a program like this. So I think that we have approached two, basically one regional, large regional, and one national brokerage firm and have been working, and there is interest on both sides of the potential whereby we can bring them a commission of 2 to $4000 that they would not otherwise be able to have. And we can gain a marketing vehicle to a customer who may want to look at a $175,000 similar site-built home but can no longer get qualified for that and obviously should not have been with some of the sub-prime lending that took place. And now, that broker can bring them to this new product and say, I know you never thought about a manufactured home, but I think you're going to be pleasantly surprised, let's drive over there. That's the kind of stuff.

And are there any licensing issues or other kind of structural issues that might prohibit them from participating?

None that I am aware of that we have encountered so far. I would comment that we really picked our toughest market first, which is the Midwest market to roll this program out, because we think there is so much value to the customer out there. We are not marking these homes up. We are strictly interested in supporting the interest of new homebuyers in our communities again, and therefore the value proposition that they are paying for these homes we think will attract them. And based on the limited success initially and getting ready for this program, we would look to roll it out in the rest of our portfolio first quarter.

Any thoughts on volumes going forward, or is it too early to --?

I think it's too early. I think that we'd like to share those with everyone based on the experience that we have in the fourth quarter and the homes are actually set up and after we have marketed and done some promotion on them and hopefully brought in some of the brokerage community.

Are there any community sale data points to point to this quarter?

I'm not sure.

Within your regions -- that is, all age communities in the Upper Midwest. Have there been any transactions you have noticed? And if so, what has the pricing been?

Transactions on the sale of communities?

On the sale of communities.

There are none that we are really aware of as we follow the market pretty intensively both in the Midwest and other parts and we have looked at a couple of transactions that some and other of our competitors have been involved in. One of the things that we have seen is due to the instability of the debt marketplace and the increased cost of debt, a number of transactions that were moving forward did not move forward. And I don't have any specific cap rate points that I would suggest have changed. It has kind of been a quiet marketplace, the debt markets have been so unstable.

John Stewart, Credit Suisse.

Gary, I wanted to go back to Skyler's question on the guidance. What is it that makes you very comfortable affirming guidance, just given the big step up that you would need in the fourth quarter just at the low end of the range, particularly given the historical slowdown you have seen in the second half?

I don't know, Jeff, if you wanted to talk about budget and what usually happens fourth quarter.

Well, after each quarter, we re-forecast the rest of the year, so we have just completed that exercise on actually independently. Karen did it and I did it and we do it on a fairly conservative basis. And given that approach, we do expect to attain the guidance. So that is why Gary is pretty confident because Karen and I have told him that we should be there and the fourth quarter budget if you recall is patterned after the fourth quarter of last year in terms of occupancy changes, so it's not exactly a -- it should not be a stretch budget. Then we have considered other costs that we're aware of that are likely to occur in the fourth quarter. So that's why.

But even excluding charges in the fourth quarter last year, you were roughly flat from the third quarter to the fourth quarter.

Traditionally, fourth quarter is stronger than third quarter. Fourth quarter if you went back over the years, it would be our second-best quarter. The first quarter is strongest, fourth quarter is second strongest, then second quarter and then third quarter is the weakest quarter. So the other thing that happens in the fourth quarter is that generally the property operating and maintenance expenses recede from the levels of summer because you obviously are not doing landscaping and that kind of stuff. And with any luck at all, you're not going to have any snow removal in the Midwest until January. So December's expense structure at the property level tends to be more favorable for profitability.

Okay. I understand you haven't completed the budget for 2008, but just broad brush looking forward, do you think that it's fair -- I guess when you first gave '07 guidance, you basically said that you kind of expect it to look a lot like 2006. Is that fair for 2008, or do you think that given the slowdown that you talked about in Florida and the regional economic conditions in Michigan, that it would be a stretch to even stay on pace with what we did in '07?

I think that we are looking for a budget actually to come into us over the next four weeks and we're working through them with all of operational management. We are seeing modest improvements in the areas that we talked about which are very helpful -- repossessions, conversions of renters to buyers, which is more profitable for the Company than just renting the home. And if we see continued positive progress, for example, as we are seeing in renewing existing renters the cost associated with fewer renewals and less of a turnover, positively impacts the Company and that is progress that we did make this year with our management programming. We hope to make it -- continue it in '08. And finally, if we are able to forecast modest net revenue producing growth through the sale of Signature and our other sales program, Signature is just one of two, we have a much more down and dirty sales program that we are rolling out that we think we will give another buyer a spectrum of the market. What we mean by that is just a very stripped-down home that can capture another form of a customer who would rather again, a different product, but can only afford the lower end of the manufactured housing product. Through the increase in those sites, we hope to continue to slowly gain back where we have been for the last two or three years. So we are cautiously anticipating some progress in '08. But again, we are very cautious to see what happens fourth quarter. So fourth quarter will be the pivotal quarter where we can judge where we think guidance will be for the coming year.

Okay, that's helpful. Gary, I did want to talk about the Signature program for just a minute. I guess in particular I wanted to get your perspective on the Michigan single-family market because I am just -- I wonder whether at 45 to $70,000 for these homes, I understand that it's much more difficult to get a mortgage today that it was two years ago, but I just wondered to what extent those prospective buyers wouldn't be looking at single-family, given --.

I think it's a good question and I think that it's really important to differentiate and distinguish the type of buyer that we're talking about. This buyer at 40,000 to $65,000 and $75,000 is going to be a one or two income wage earner at home, and they are just not going to qualify for any type of site-built housing. When you look at competitive products certainly in the 1500 to 1800 square foot range, it's $175,000 to $200,000 at the peak of the market and it could drop down to $150,000 and $140,000 and $130,000, and these people are still not going to qualify for that housing, not under today's lending environment. So we are looking for a small segment, if you will, that on the more affordable side is only going to be able to afford this type of housing. And if you consider that a huge difference for this company would be a sale a month, two sales a month would be progress we have not seen in the last six-seven years -- per community, I'm sorry -- that's the type of progress that multiplied by 30 communities by 12 months by our average rent begins to reverse the trend that we have seen over a long period of time now. So I think that we will continue to need to see a very weak housing market in the Midwest. I don't foresee anything in the next year or two to change that, but I think that we will continue to compete very, very favorably on all different fronts. On the lower-priced housing that I discussed, on the rental homes that we bought for an average cost of $14, $15 complete that we're converting through sales in our rental program. And on the Signature program which allows someone for $65,000 for example to get in there with a monthly payment of around $800, $850 even with our rent depending upon the amortization and the interest, will compete very favorably with anything else that is out there.

Good points. But I guess just looking at the listings in the [trade], it seems like there's plenty of single-family homes available for under $170,000. I guess my other question would be -- what is the price range for the stripped-down model that you talked about?

I don't know the exact price. I know how it prices out per month and we're gearing it for a $650 all-in payment per month with a I think $325 average rent built into it.

And the only other thing I would add, the markets where our communities are, I don't know what comps you're looking at, at average pricing in Detroit, but obviously there is a wide variation between the City of Detroit and the outlying metropolitan suburbs which is where all the communities are.

(OPERATOR INSTRUCTIONS) Andy McCullough, Greenstreet Advisors.

Are you guys still expecting seasonal RV revenue roughly $5.3 million for the year?

I don't think I have a budget in front of me. I would have to get back to you on that, Andy.

Continuing on RV, are you seeing any weakness or expect to see any weakness on the RV side due to rising gas prices?

No. That has really been a pleasant surprise, Andy, is that obviously there are different forces that work favorable and unfavorable with regard to gas prices. Karen, did you have an answer on seasonal RV?

Just that we have seasonal RV at about $3.7 million through September 30. So I don't think $5 million would be (MULTIPLE SPEAKERS).

You'd expect about a third of that to come in in the fourth quarter, right, of total --?

It will be higher than that.

It will be higher. One more question. On G&A, can you guys give us some color on what you expect for the year there?

On what?

On G&A.

I would think that the fourth quarter should be maybe slightly higher than the third quarter, depending on some factors that are not within our control.

Andy, (MULTIPLE SPEAKERS) guidance has G&A at about $15.9 million, and I think that is a good estimate.

That would make for about roughly a $4 million Q4.

Steven Rodriguez, Lehman Brothers.

Just a quick question on CapEx, seems like it increased during the quarter. What do you guys see going forward with that?

Generally, the fourth quarter is very low in the CapEx. Through nine months, recurring CapEx was $5.5 million compared to last year for the full-year of 6.9. So, perhaps 6.2, 6.3 when we're done with this year, maybe 6.4. Sometimes recurring CapEx that you have to take care of certain emergencies if they should arise, so you always have a little kind of contingency in your mind for that. But certainly it should not exceed last year's level and we would expect it to be lower.

Any drivers in the third quarter on why it's so high?

I don't think there could be any one of a given program that went into a community or communities that the operations would have done that we're not physically aware of. If you want more information on that, we can get back with you.

(OPERATOR INSTRUCTIONS) Mr. Shiffman, there are no questions in the queue at this time.

We'd like to thank everyone for participating on the conference call. Obviously, we look towards fourth quarter to be an important factor on recovery that we're all working very hard for in our industry and within the portfolio. And we will advise everybody as soon as the quarter over to how things have gone with regard to the new programs and the existing programs within Sun. Thank you.

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