Sun Communities Inc (SUI) 2007 Q4 法說會逐字稿

Greetings and welcome to the Sun Communities Inc. fourth quarter 2007 earnings results conference call. 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 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 vice or update any forward-looking statements to reflect events and 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; Ms. Karen Dearing, Chief Financial Officer; and Mr. Jeff Jorissen, former Chief Financial Officer.

Thank you, Mr. Shiffman, you may begin.

Good morning, everybody.

This morning we reported funds from operations of $14.3 million, or $0.70 per share for the fourth quarter of 2007, before $9.9 million or $0.48 per share of charges related to our investment in Origin. FFO per share for 2007 was $2.72 before the aforementioned charges related to Origin, and comparable FFO per share for 2006 was $0.55 for the fourth quarter and $2.61 for the year, again before the 2006 impairment charge. Net loss for the fourth quarter and the year ended December 31, 2007 was $10.2 million, or $0.57 per share, and $16.6 million, or $0.93 per share respectively, including the Origin-related charges. Total revenues increased from $227.8 million in '06 to $236 million in 2007. Origin's operating results for 2007 were profitable, and in fact grew nearly 40% from '06 operating results.

The loan portfolio had record low default rates, charge-offs and delinquencies in '07, and recoveries on defaulted loans were at a record high in '07 as well. The charges related to goodwill and loan impairments were as a result of macroeconomic forces described in detail in Origin's press release release of March 13, 2008, and Origin's Board of Directors is assessing strategic alternatives, including sale of some or all of the company or a continuation of operations related to third-party fee business and management of its $1 billion loan portfolio.

At this time what I'd like to do is turn to Sun's portfolio for a review, beginning with the weighted-average rental increase for 2007 of 3.54% or just slightly above our '07 guidance of 3.4%. Our same property portfolio of 135 communities registered a revenue increase of 2%, while expenses increased by 1.5% resulting in an NOI increase of 2.2% for the quarter. Our occupied rental homes stand at 5,328 at the end of December '07, an increase of about 752 from the prior year end. The average monthly rental rate increased by 4.7% to $718 from $686 at the year-end of '06, and during 2007 we sold 363 rental homes compared to 170 in '06.

Through the first two months of '08 we have had 82 sales of rental homes to date -- I'm sorry, through the first two months. In 2005 we purchased 2,185 homes and soiled 425 homes, for a net purchase of 1,760 homes. In '06 we purchased 1,343 homes, sold 492, for a net purchase of 851 homes, and in '07 we purchased 1,285 homes, sold 712, for a net purchase of 573. Most of the net purchases are dedicated to the rental program, and in two years the gross home purchases have declined by over 40%, while net purchases have declined by 67%. So the bottom line is that home purchases are declining, home sales are increasing and home purchases dedicated to the rental program are also declining.

In 2007 we lost 132 revenue-producing sites in our manufactured housing portfolio, compared to a loss of 508 sites in 2006. This improvement was supported by a decline of about 250 homes repossessed by lenders in 2007 as compared to 2006. Our fourth quarter performance demonstrated substantial improvement over 2006; Q4 of '06 we lost 439 sites as compared to fourth quarter in '07, where we lost 67 sites. 21 or 15% of our communities lost approximately 400 manufactured housing sites in '07. These communities represented 2 of 11 in Ohio; 7 of our 18 communities in Indiana; 11 of 46 in Michigan; and one in Kansas. So the occupancy issues remain confined to a limited number of communities in several weak markets.

As we turn from our portfolio review to our company outlook, excluding Origin-related charges Sun's FFO per share has grown from 254 in '05 to 261 in '06, to 272 in '07, with earnings guidance up from 276 to 282 in '08. That would represent compounded annual growth of just over 3%, to the midpoint of our '08 guidance.

In 2007 each category of same property showed growth in net operating income. Our re communities, retirement communities, and all-age communities. This was also the case in '06 and our 2008 guidance compares to our 2007 performance as follows. Weighted-average rental increases of 3.1% in '08 compared to 3.5% in '07. Same property net operating income growth of 2.4% in '08 compared to 2.1% in '07, and a reduction in occupancy of 100 sites in '08 compared to actual loss of occupancy of 132 in '07.

Our expectation for growth in 2008 occurs within the context of the turmoil in the credit markets, and concerns related to the economic prospects of the Midwest. The primary reasons for the confidence in the manufactured housing industry, and specifically our performance, have been discussed at different times and on occasions during these phone calls; basically, the demand for affordable housing and the improving credit profile of the homeowners in our communities. The demand for affordable housing is perhaps best measured for us by applications for living in our communities. In '07 applications to live in our communities exceeded 14,500, which was almost 50% greater than the '06 applications. Applications to buy homes increased from 1600 to 1700, and as we stated in our press release today, sales of new and pre-owned homes increased from 500 in '06 to 700 in '07. The demand for affordable housing remains evident in every one of our markets.

There are several affordability measures that we like to point to. The construction cost per square foot of the average 1,600 square foot home manufactured home, according to the Manufactured Housing Institute, was $40.13 for '06, compared to $92 for the average 2,450 square foot site built home, excluding the land. We believe even with continued pressure in the current site-built housing market, the gap or affordability factor, as we refer to it, remains very favorable. So we seek to capture a customer that can only afford our product.

The average monthly rent for our rental portfolio is $1,718 per month. That equates to approximately $0.55 per square foot per month for a 5,000 square foot site with a home and adjacent parking and amenities equivalent to most apartment complexes, and we believe superior privacy characteristics. Our Signature Series of homes, with square footage ranging from 1,456 to a little over 1,900 square feet, and featuring drywall 9-foot ceilings and all site-built features, our deluxe models retailing for approximately $0.50 per square foot, which includes site reps. Again this compares to a site-built home of 1,750 square feet financed at 6% for 30 years with annual property taxes at round $4,300 that equate to a monthly cost of about $0.80 per square foot here in Michigan where we first began test marketing the Signature Series.

The improving credit profile of our homeowners is reflected in the following ways. The number of homes repossessed by lenders has declined from nearly 1,400 in the period of 2003 to 2005, to about 800 in 2007, and is currently running 50% of that high rate, or a rate of around 700 annually, based on the first two months of 2008. he average monthly delinquencies approximated $1.1 million in 2007, compared to $1.4 million in the peak year 2003, and bad debts have stabilized as a percentage of income from property at about 70 basis points currently, and for the last two years.

In a challenging environment, we are very pleased with our results in 2007. We do look forward to slow, continued, steady growth in 2008.

At this time, myself and Karen and Jeff would open it up to any questions.

Thank you.

(OPERATOR INSTRUCTIONS)

First question, Craig Melcher with Citigroup. Please go ahead with your question.

I am here with Michael Bilerman as well. Can you talk about the financing environment for individuals looking to by homes and put them in your communities today, with Origin and others in the marketplace?

Certainly. I think the most visible change that's taken place is what's happened at Origin. As they discussed and we talked about briefly, the current conditions in the credit market make it not profitable for them to originate loans based on their securitization model. I think they were the primary lenders who used that model, and the other lenders of note would be Vanderbilt and existing banks that aren't as dependent on a securitization model. We haven't seen any change in originations from those other groups. However, I think that there will be an affect overall by Origin not originating loans currently. However, they are much less that 1% of all loans that originated in the Sun portfolio on an annual basis. So I don't think it has a direct effect on the company as far as selling to third parties, but certainly it's not a positive factor.

Are there changes in the interest rates on loans just out in the market today that individuals can get?

I think that for those individuals who qualify with a local lending institution and banks, they've seen a positive improvement to their lending rates related to the recent reduction in overall interest rates, and I think that's been about the extent of it right now.

What is your expectations for margins in the home sales business in '08, with all this activity?

Well, speaking to the biggest program that we are launching in '08, which is the Signature program, which to date late December we rolled out about 20 communities with the Signature sales, which are geared to just basically break even, but increase new revenue-producing sites so there is no margin there, and I'll turn to Karen and Jeff to talk about the rest of the home [service].

We are seeing some recovery in the Florida market, which has strong margins, so we would expect them to be in their traditional 20 to 25% range. The Midwest and the rest of the portfolio, Texas is a strong market. So we really wouldn't see much change in margins as we go into 2008 as compared to prior years, with the exception that we are value pricing the Signature line, and we would expect those margins to be closer to perhaps 10% than 20%.

Okay. The last question, G&A in the quarter was quite low; was there anything specific going on there, and what the run rate you expect in '08?

G&A for the quarter and for the year includes the reversal of about $900,000 of deferred compensation amortization.

Okay. Thank you.

I think we have the run rate - in our guidance for 2008, we had G&A at about $16 million.

Thank you.

(OPERATOR INSTRUCTIONS)

Our next question comes from the line of Brian Roman with Weiss, Peck and Greer. Please go ahead with your question.

Good morning. I had to go in and out of the call, so you may have answered some of this stuff. Your balance sheet, could you just remind us about your funding needs over the next 12 to 18 months?

We have maturities in 2008 of about $16 million in 2009 of about $28 million, and we've got considerable capacity, like $70 million on our lines of credit. So we do not foresee any critical financing situations arriving during that period, although we are always looking at the marketplace and what it's giving in terms of rates, and of course rates, although volatile, are - can be kind of attractive even now. So we will proceed with our financing on a kind of an opportunistic basis.

What are your funding needs going forward?

I just indicated we have debt maturities of 16 million --

No, I meant in terms of growing the business, do you find it advantageous to do that right now?

Acquisitions, Gary?

Yeah, I think that we've made it clear, strategically right now we are deep into the last portion of strategically getting in and out of the rental program as best we can to asset manage the toughest properties that we have in the Midwest, in particular Michigan, Indiana and Ohio, some of Illinois. So that coupled with not a lot of cap rate movement and a difficult environment to finance properties, we do not see acquisitions as an area where we are going to need capital over the next 12 months.

We do carefully look at the acquisition of homes, which has been the biggest use of capital, and we see that as steadily declining. Additionally, in our Signature program where we had been prepared to finance and house the first 100 homes, about 70% of the 15 or so homes that have sold so far have been financed with third-party capital, so we have reduced capital needs there, and we do have the capacity on unencumbered properties to lever up on those; and I think the opportunity for capital will be a close examination of what we could utilize those proceeds for, with the stock being always an attractive value at this current time. We are waiting to see how the market values the unencumbered properties to determine what we could do with that capital. But there are no pending major capital meets that we are looking at right now.

So it's sort of a long way of saying that spreads aren't wide enough right now to really go out and make any acquisitions?

That would be correct as of this time on the acquisition front. I think we would do better buying the stock, actually.

Okay, that's fine. And you said you had about a 3% rental increase on your sites in '07. What's your expectation in '08?

3.1% is in guidance.

Okay. Thank you.

Our next question comes from the line of Andrew McCulloch with Green Street Advisors. Please go ahead with your question.

Hi, good morning. What are the current spreads that an individual can receive or have access to on a [channel] loan versus like a 30-year fixed conforming mortgage?

This is the retail buyer of the home?

Yes.

Andrew, can you re-ask the question?

What are the current spreads at - you know, current rates on [channel] finance versus if you were to go buy a single-family home? Is it 200, 250?

I'm going to guess, you're starting with a 9.5% channel loan with a larger spread for financing because of the - for servicing of about 100 basis points. So you are taking it down to about 8% compared to whatever is available on there in the 6% range, I would imagine that's probably 20, 30 basis points for servicing. So you know, you are a good 250, 300 basis points spread.

Could you give us an update just on Fannie and Freddy's role in your space, both from their appetite to buy channel loans also their interest at financing at the community level?

I think it could be best when Brian or COO and now our President addresses that, than I do. We've both been in the industry for over 25 years now and I can best describe as Fannie and Freddie as having an appetite but never coming to the table. They just talk like they have a program and they are charged by the government to make more affordable "loans," and they never seem to put together the programs to the industry.

Great. Thanks.

Our next question comes from the line of Jeff Cross with Cross Capital. Please go ahead with your question.

Thanks, good morning, guys. I was wondering if you could give us a little more detail on just where we are with the Signature program, and what's happened year-to-date and what's likely over the next few months?

Sure. I think I'll respond to what I can because year-to-date hasn't been reported yet but we were, I would say that we are probably one quarter behind where we'd like to be. We had a lot of disappointments when we rolled out the program in December due to very harsh winter conditions, which not only affected the promotions we wanted to do and the turnout, but also the actual set up and delivery of the homes. So about 20 communities now have Signature operations and inventory. They are predominantly in Michigan, with a few in Indiana. That's where we rolled it out first. I think that we have 20 more communities in Texas and Colorado to be opened up during the second quarter, and there are about 12 signature sales in the budget for first quarter. So 12 sales in the budget for the quarter, and we are I would say one quarter behind where we would like to be at this point, due to initial weather conditions and the challenges to get the program going.

Okay. Thanks very much.

Our next question comes from the line of Steven Rodriguez with Lehman Brothers. Please go ahead with your question.

Hi, good morning. That 12 that you just mentioned, and now that we are 2, 2 and a half months in the first quarter, how comfortable are you with that?

I think that 12 is in our budget because we believe that it's the right number for the quarter, and while we have had some sales, sales have been slower than we'd like just due to weather conditions. But I think that the main emphasis as we roll out the program is really creating the affordability factor and the value proposition that we talked about to the customer, and it appears on a comparative basis that we think we are right where we should be to hit our budget for 2008.

Fair enough. I'm not sure if you guys mentioned this, but have you been buying back your stock in the fourth quarter?

We did not by back any stock in the fourth quarter.

As you said before, you would be interested possibly going forward?

I believe the Board is carefully reviewing that on a quarterly basis, and it is something that is attractive now from a return standpoint and we believe a long-term value, and it's a question of deploying capital for the right needs of the company and determining the cost of capital right now, which we are looking into.

Is there a program put in place?

Yes, there is. We have 400,000 shares remaining on a 1 million share authorization.

Great, thanks. My last question relates to the - part of the writedown. The $8 million portion of the writedown from the Origin $32 million or so, I was wondering if you can talk further what are the reasons why that was written down? Because I would have thought - I'm not sure why that was written down because it seems like you guys, I thought it was more of an equity balance, so obviously you guys would write - mark to market your equity balance on your line items, but I'm not sure why that was also written down.

Those are items that were reported in Origin's financial results, and so we took into our equity loss from affiliate our percentage of those two items, the goodwill impairment and the investment impairment.

But so by marking some to market your equity value in affiliates, that doesn't also take into account the goodwill writedown the affiliate does?

Well, especially that equity loss from affiliate we'll writedown - we'll take our investment value down and then wrote it - wrote it down another $1.9 million.

Okay. Fair enough. Thanks.

There are no further questions in the queue at this time. I'd like to hand it back over to management.

Well, as I said earlier, I think that overall portfolio performance and performance of the company was on track for what we hoped in 2007. Occupancy, or loss of occupancy, was greatly improved over '06, and we look for more steady slow growth in '08 and Karen, myself and Jeff are always available for any follow-up questions. We look forward to reporting first quarter results and appreciate everyone's participation.

Thanks.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.