Sun Communities Inc (SUI) 2008 Q2 法說會逐字稿

Welcome to the Sun Communities, Inc. second earnings 2008 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 me to inform you that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can provide no assurance that its expectations will be achieved. Factors and risks that could cause actual results to differ materially from expectations are detailed in this morning's press release and from time to time in the company's periodic filings with the SEC. The Company undertakes in obligation to advise or update any forward-looking statements to reflect events or circumstances as of the date of this release.

Having said that, I would like to introduce management with us today. Gary Shiffman, Chairman and Chief Executive Officer, Karen Dearing, Chief Financial Officer and Jeff [Jorason.] Thank you. I'll hand the floor over to Mr. Gary Shiffman.

Thank you operator and good morning. This morning we reported funds from operations of $13.4 million or $0.65 per share to support $.0.38 of losses related to origin and $0.04 related to severance cost. This compares of FFO of $13.7 million or $0.68 per share in 2007. Net loss was $7.4 million or $0.41 per share compared to $2.2 million or $0.12 per share in ' 07.

For the six months ended June 30, 2008, FFO was $29.2 million or $1.43 per share before losses related to origin and severance, compared to a $1.44 per share for the six months ended June 30, 2007. Revenues increased to $65.5 million in the second quarter of ' 08, from $57.9 million in the second quarter of 2007.

As we have got half a year, or two quarters at that, I thought I would turn the discussion at this time towards guidance. The Company has issued FFO guidance in the range of $2.76 to $2.82 per share for 2008. Reviewing the components of the guidance in detail, increases for the first half are 3.1% which equals guidance.

The Company has issued FFO guidance in the range of $2.76 to $2.82 per share for 2008. Reviewing the components of the guidance in detail, guidance increases for the first half are 3.1%, which equals guidance. Occupancy is at 98 sites through June, compared to an annual loss of just under 100 sites in the guidance.

Rents in the rental home program are up 1.7% through mid-July compared to an annual guidance of 3%. Occupancy in the program is up 152 sites through June compared to annual guidance of 250 sites. And sales of rental homes are at 296 through mid-July compared to annual guidance of 600 sales for the year.

For the first six months of 2008, Sun Home Services and outside dealers have sold 277 new and pre-owned homes in our communities, compared to an annual budget of 571 homes. The sales of the Signature homes included in those sales are at 33 compared to an annual guidance which includes 90 Signature sales. Outside dealer sales in the six months exceeds all such sales for the entire year of 2007, which is an encouraging sign.

Same-property NOI has grown at a 1.6% rate through June 30, which is actually ahead of the six-month budgeted NOI growth, and is on track for the annual same-property growth of 2.4% as noted in the Company's guidance.

Recurring CapEx is running right on guidance for an annual expenditure of $150 per site. And finally, real property G&A is running at $16 million annual rate which equates to guidance at the $900,000 of severance costs excluded. Basically all of our operating metrics are in our line with our budget and guidance. And excluding the effects of origin and the severance payment, which were not anticipated, the company affirms 2008 guidance.

At this point, I want to turn to origin for a moment, which has been a casualty of the credit market collapse during the last six to 12 months. Despite originating high-quality loans, five securitizations that continue to perform at or better than all agency levels, the turbulence of the market have essentially forced origin to close its doors. Its plan as delineated in their proxy, anticipates the sale of their servicing, which is actually now completed, and their origination platform, which also was recently completed. This will leave origin to manage its remaining assets, which are mainly the approximately $1.02 billion of unpaid principal amount in their securitized loan portfolio.

From information provided in origin's proxy, it appears their estimate of cash flows available for shareholders from that activity will approximate $8.50 per share. They go on state that nearly one-half of that cash flow is realizable through 2014, which equates to approximately $20 million for Sun. We have written our origin investment down to $1.49 per share, which was the trading price at 6-30-08 per all accounting rules.

Severance costs took place in July, as Brian Fannon, who served as Chief Operating Officer of Sun from 1994 to 2008, retired. During his tenure, the Company grew from 30-plus communities to 136. I think I would add that this growth was integrated and managed so effectively and seamlessly that it's a tribute to Brian's operating systems, personnel recruitment and focus. No one has ever toured a Sun community and noted deferred maintenance or property management of less than the highest caliber. In February, Brian stepped down as Chief Operating Officer, and was replaced internally by John McLaren in a natural transition. Brian remains available as a resource to us, and I want to state in this call that we wish him the very best.

In July, the Company transferred about $25.6 million of notes, which were originated on sales of homes to residents in our communities over the last four years. Notes were valued at par, with retention of 90% recourse after 15 payments were made by the borrower, and then reduced to 65% recourse after certain additional payments will be made by the borrower.

By the end of this quarter, more than 50% of the loans will be at 90% recourse or less. This transaction in relationship provides Sun with the means to access its nearly $180 million of capital invested in the rental homes for various purposes, including occupancy growth and reduction of debt. We are very encouraged by the fact that we were offered several opportunities to sell this debt at par.

At this time, what I'd like to do is turn to the rental program and share a little bit of what is going on there through the first two months of this year. I'll start with talking about dealer activity, which is showing signs of modest improvement as I indicated in my earlier remarks. The dealer network, despite that improvement,still remains virtually non-existent in many of our markets. It wasn't that uncommon for dealers to move in up to 1,000 homes per year in our communities in the 1990s. And obviously that provided us with a third-party network, which supplied many residents to our communities. As I've discussed on numerous previous conference calls, the severe reduction in dealers out there has really caused us the loss of that of that very significant source of occupancy.

The rental program, however, has filled that void for us. At current rates, we will receive approximately 16,000 applications in 2008 to live in our communities, which is about 48 applications per day,. And the rental program has developed into a crucially important -- what we refer to as resident boarding program. It exposes thousands of new potential customers to our product and our communities. And this year for the 3,000 to 3,500 who are first-time renters, it provides the target market for our rental home sales program, which has grown from 180 home sales two years ago to an annual rate of around 600 this year, with further increases being forecast for the years to come.

Turning now to our RV seasonal business, I would inform everybody that at this time our seasonal reservations for the ' 08 - '09 season are running slightly ahead of 2007-2008, an encouraging sign. A few key points that I'd share are that 29% of our seasonal residents from Canada, and are now benefiting from the favorable exchange rate for the Canadians. An additional 24% of the business is from residents who live in Florida or actually in Texas where the RV communities are actually located.

We believe marketing at trade shows has been much more effective than general advertising, and we continue to market for customers at the trade shows. We are also promoting programs that allow the customer to store the RV on-site rather than drive the round trip. And we have had a lot of success converting seasonal customers to permanent residents.

We are obviously pleased that gasoline prices have eased of late. However, RV industry forecasts estimate gas would have to hit around $5 per gallon in order to begin having a dramatic effect on RV-ers. So the bottom line is that the seasonal RV business at this time remains in very good shape for the Company. We will, of course, have further updates after each of the next two quarters are completed.

Investors have raised the question of our leverage from time-to-time, which has approximated 70% based on gross assets for several years. The first response to that is that our top-line revenue stream is very constant which, with expense control, has resulted in same-property NOI growth in every year since Sun became a public Company. This time period discussed is both a period of strong growth in our industry as well as one of severe contraction for the last six, seven years. The reliability, consistency and dependability of our cash flow allows us to be comfortable with higher levels of leverage than some of the more volatile asset classes.

Secondly our EBITDA over mortgage interest and EBITDA over mortgage interest and preferred distribution coverage ratios are approximately two-to-one, and are little changed from the end of 2004 through the current quarter.

Thirdly, the substance of our secured debt maturities are due in 2011, 2014 and 2016. Further, we have a strong liquidity position, currently with $90 million available on our lines after giving effect to the $25.6 million proceeds from the note transaction that I just covered.

Turning now to our resident credit profile, we have commented on the improving credit quality profile where residents in previous calls -- and I'm pleased to say that process continues. Repos are down approximately another 20% year-over-year. Average delinquencies are down. Delinquency-related legal fees are below budgets. Late fees and NSF charges are below budget as well.

So our residents' credit profile continues to strengthen within the communities. We currently have an improved buy-back authorization of one million shares with about 400,000 open shares remaining in it. We will be giving that buy-back serious consideration in the near term.

And at the midpoint of our guidance, which was affirmed today, our dividend payout approximates 103% of funds from operations, after adjustment for recurring capital expenditures or FAD. This calculation is performed without regard to the nearly $6.1 million received from the sale of undeveloped parcels of land this year, which more than offset the FAD shortfall.

At this time what I'd like to do is turn it over for any questions that Karen, Jeff and I would be glad to answer.

Thank you. We will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). Your first question comes from Andy McCulloch of Green Street Advisors.

Good morning. On the installment loan for a second, what are the average LTVs on those loans?

They are about 90%.

And then on the break point for a second, 15 months to get to the 90%. What is the time period to get to 65?

There is a formula. A month that goes out an additional three months, with different things being triggered over that period of time. It takes us to a 65% level.

Can you guys talk a little bit to expenses in the quarter, and what drove those to get a little bit above 4%?

Expenses --

What is the main items that are driving that expense growth?

There are expense increases in utilities, supplies and repairs and payroll and of course, we have looked at this as well. Those expense increases are very close to budget for the first six months. So while the expenses are increased year-over-year, most of these increases were within our expectations when we put together the 2008 budget and of course, therefore are incorporated within the guidance. It's primarily in utilities, some in payroll and benefits, and then supplies and repairs which can also be somewhat due to timing depending on when they take on the various projects in the communities, which is also a function of weather and other factors like that.

Can you guys speak to any recent transactions in your markets and/or give any color on where you think cap rates are or where they are headed?

I think that transactions have been somewhat quiet, although there is the odd one taking place and obviously one of the public companies is looking at strategic alternatives right now. And I don't think that we've seen anything to indicate cap rates have changed from a low six caps for the highest quality resort-like communities to a high of 9 cap rates for some of the all-age older communities, with probably an average cap range expectation by me still, right in the -- 71/4 and 7.5 range.

(OPERATOR INSTRUCTIONS) Our next question comes from Mark Lutenski with BMO Capital Markets.

How are you? My question is -- you have an other income of $2.8 million in the quarter. Could you break down what components were in that?

The majority of the other income is a gain on sale of undeveloped land, and I think that's around $3.1 million. The remainder of it is really just brokerage income.

Do you have any other land sales contemplated in guidance?

There were no land sales contemplated in guidance. And they are not in FFO.

Okay.

Your next question is coming from Jeff Cross of Cross Capital.

I have got a couple of quick questions. One of them is the margin on homes sold. I notice that that was down a bit on a year-over-year basis, on a percentage basis. I'm wondering if it is likely to trend down or up or if -- kind of like 20%to 22.5% is -- it can bounce around based on mixed shift, anyplace in that range?

I actually have some increase in margin on our pre-owned home sale. There is a slight decrease in our margin for new home sales,and I think there is a heavier weight to non-Florida home sales which have a lower margin.

Okay. So but basically, it likely to be in the low, low 20s.

I would expect it to be about the same.

Okay. Also on -- if we could kind of dig into expenses, because I think expenses in the quarter were higher than were generally anticipated by those of us on the outside looking in. To what extent were there expenses in this quarter that might exceed an annual run rate or might have been recognized in a different quarter last year? To the extent that you can really answer that.

As far as the timing question, I don't know that I could answer that. As we had indicated earlier, the expense increases were items that were for the most part anticipated by us and included in our guidance. So for instance, in property operating maintenance, where you have utility increases, we've seen increases in water/sewer expenses, in rubbish expenses. With fuel surcharges, we have seen electric and gas expense increase. Supplies and repairs were kind of ail across the board, many increases in our lawn maintenance and common area maintenance. So the expense increases were across the board, as I said mostly anticipated by the company.

Okay. I just forget the question I was about to ask. I'll just have to get back in queue or I will e-mail you. It wasn't major, but I thought it worthwhile. I'm sorry.

No problem. If you think about it, get back in the queue.

I have it my notes someplace, but it would be rude for you to wait while I look for it. Appreciate it and that takes care of me for the moment.

Okay. Thank you.

There are no further questions at this time. I would like to hand the floor back over to Management for any closing comments.

Well, I would like to thank everybody for participating on our second quarter analyst conference call. I think as we indicated, we remain solidly on budget and look forward to reporting third quarter results with everybody. And if you have any further questions, please don't hesitate to contact Jeff, Karen or myself. Thank you.