Sun Communities Inc (SUI) 2008 Q3 法說會逐字稿

Greetings and welcome to the Sun Communities, Incorporated, third-quarter 2008 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 me to inform you that certain statements made during this 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 revise or update any forward-looking statements to reflect 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; and Karen Dearing, Chief Financial Officer; Jeff Jorissen, Senior Adviser. It is now my pleasure to introduce your host, Mr. Gary Shiffman. Thank you, Mr. Shiffman, you may begin.

Thank you, operator, and good morning. This morning we reported Funds from Operations of $12.8 million or $0.62 per share compared to $11.8 million or $0.58 per share in 2007, representing a 6.9% increase in FFO per share.

For the nine months ended September 30, 2008, FFO was $42.1 million or $2.05 per share before losses related to Origen and severance costs, compared to $41 million or $2.02 per share for the nine months ended September 30, '07.

Revenues increased to $61.4 million in the third quarter of '08 compared to $57.4 million in the comparable '07 quarter.

Before we proceed to a review of the portfolio performance for the quarter, I thought that I would spend some time discussing the specific nature of our business, and the strengths of Sun and its management team.

Our mission is to provide affordable housing. The average sales price for our homes approximates $32,000. The average site rent today for an owner-occupied home is currently $391 per month. Including both the monthly rent and the home loan payment a resident would be making, the average monthly cost is about $700 in total.

For renters who are renting both the home and the site from Sun, the average monthly rate is about $735. The cost to the renter averages a little over $0.50 per square foot per month for the home and site, which competes very favorable to both multifamily rates as well as any single-family rental rate that might come about as a result of the sluggish site-built home sales market.

In addition, while property taxes vary from state to state, there actually is no property tax on our Michigan residents.

The above economics define what is meant by affordable housing and reflect the value proposition to residents residing in Sun Communities. As a result, our business tends to be somewhat countercyclical. In good times, people are often looking to move up; and in harsher economic times, they are often looking to move in. Our business is not recession proof, but it certainly has characteristics that are recession resistant.

Our resistance to recessionary forces derives from the absence of certain risks which impact many other asset classes. Bankruptcy poses a minimal issue among our 38,000 customers. We are not dependent directly on retail sales for our revenue, stability, or growth. And the consolidation of households is at most a minor concern, as we offer more -- and we are actually in fact, a more affordable alternative.

We believe that we are moving out of the harsh times in our industry, as repossessions decline to normal levels and occupancy begins to stabilize.

The credit quality of our portfolio continues to improve. Our industry has been in a depression, as we referred to it, since 2000 due to the poor lending practices of manufactured housing lenders in the late '90s. Shipments of manufactured homes have declined by 75%, with the resulting decimation of the dealer network and an even greater decline in the sales of homes by dealers into our communities.

Not only were fewer residents moving in, due to the availability of currently scrutinized subprime and other available financing for site-built home purchases, but estimated repossessions of 8,000 homes in our portfolio occurred during that period as well, representing an additional loss of occupancy.

During this 2000 to 2008 period, despite the industry turmoil, our same property net operating income was positive in every year. In fact, one might say there were many times during those years when we wished we only had to deal with the recession, as we would have enjoyed stronger same property NOI growth.

Management responded by buying repossessed homes at substantial discounts and augmenting them with purchases of new homes. Systems and controls necessary to manage a rental program comprised of more than 5,000 units were implemented at Sun. Appropriate personnel were recruited, and the rental program has proved not only to have been an effective response to the adverse factors noted, but has drawn what has grown to be more than 16,000 applications per year to live in our communities.

This is what I referred to on our last call as a boarding system towards permanent occupancy, which supplants the nearly nonexistent dealer network which formerly directed potential residents to our properties.

So as I indicated before, we are moving out of these harsh times in our industry. Repossessions decline to normal levels, and occupancy stabilizes.

The credit quality of our portfolio continues to improve. Repossessions have declined by 18% through nine months of 2008 as compared to the 2007 rate. We expect that they will end this year in 2008 at 700. Repossessions have been down each of the last three years to less than one-half of what they were in 2004.

Bad debts on our owner-occupied portfolio net of recoveries has declined from 69 basis points of income from property in the first nine months of '07 to 59 basis points in the current year. This represents less than $600,000 of bad debt on $100 million of revenue.

There is, of course, no question that Michigan has had more than its share of bad economic news over the last two years. While 30% of our sites are located in 47 communities in Michigan, I think that it's important to note that those communities are located in 14 different counties in the state. 57% of our Michigan communities have occupancies of greater than 80%, with 30% over 90% occupancies.

The remaining communities comprise 13% of our portfolio of nearly 48,000 sites. I think that this is a clear example of the stability inherent in our mission of supplying affordable housing even in a difficult marketplace.

While Origen's stock price may fluctuate, resulting in impairment charges, it is now essentially a conduit distributing cash proceeds from the runoff of its securitized loan portfolio. If pro forma results as presented in the Origen proxy are achieved, Sun will actually receive about $18 million in distributions from 2010 to 2014 and an additional $20 million thereafter.

We have approximately $180 million of rental homes. Over the last several years, as those homes have been sold, we have been carrying the paper at Sun. As we have previously disclosed, we have transferred $26 million of that paper at par with recourse to Sun that has reduced to 65% over a period of time.

Additionally, they are flow funding the origination under similar terms. This provides us with an opportunity of tapping that $180 million investment in homes as the homes are sold, and recycling that capital back into our business. This substantially reduces our reliance on external capital sources.

Our 2009 budgets will be complete in about a month. But preliminary quantitative metrics expect a continuing decline in repossessions; weighted average annual rental increases approximating our 2008 experience; and continued improvement in revenue-producing sites and home sales.

Now we can turn to the actual performance of the portfolio. Year-to-date rental increases have been implemented to nearly 33,000 of our sites at our budgeted rate of 3.1%.

Occupancy in the manufactured housing portfolio increased by 50 sites for the nine months versus a loss of 65 sites in the first nine months of 2007. This improvement of 115 sites substantially occurred in the third quarter.

Same property net operating income increased 5% for the quarter and 2.7% year-to-date. We feel that we are on track to exceed our 2.4% net operating income growth forecast in our 2008 guidance.

Rental home occupancy declined by 31, a first-time-ever event at Sun, as rental home sales of 151 in the quarter actually exceeded net rental leases of 120.

Applications to rent or buy in our communities exceeded 4,500 for the third quarter, an annual rate of 18,000 applications per year. This volume of traffic creates the opportunity or the boarding effect that we talked about earlier, which allows us to select the best applicants from a credit basis to become our home renters and we believe eventually our homeowners.

Our sales of new and preowned homes are running 30% ahead of 2007 at 742 for the nine months. We expect these sales to remain strong and grow as we aggressively market the 10% refundable housing credit to first-time buyers of a principal residence. This credit effectively has Uncle Sam providing the down payment for our customers.

Third quarter resulted in 16 Signature sales for a total of 55 Signature sales year-to-date. We have recently brought our Texas properties online with this program and expect to complete the year with about 75 total sales of the Signature program.

As we speak, Sun stock as of yesterday's close is yielding about 19%, about 95% of which has been return of capital in the last three years and hence currently taxable; and it is trading at a multiple of 4.7 of FFO. There is nothing in our horizon which we are aware of that would justify such a valuation.

In addition, the Company has no significant debt maturities before 2011, with most of the remaining debt due in 2014 and 2016. Operator at this time, Karen, myself, and Jeff would open it up to questions.

(Operator Instructions) Michael Bilerman, Citigroup.

This is [Eric Wolfe] here with Michael. I was just wondering if you could talk about how Sun performed during prior recessions and whether you saw any benefits from homebuyers looking for more affordable housing during that time.

Yes, certainly, I think at the beginning of the remarks I think we have always referred to ourself as recession resistant, but not recession proof. The exception to that was created by the financing conditions of the late '90s that, as I said, I feel put our industry and our Company just into something worse than a recession and actually a depression.

But clearly, the remarks indicated that the feature of affordability that manufactured housing offers plays very, very strong to the market under these conditions. I think we are seeing it.

That doesn't mean that we don't feel the effect of job loss and other economic issues, but there are two positive things playing to Sun's favor right now. One is the affordability factor to those who need to cut back. And the other factor as we have talked about is the lack of availability of subprime credit and other forms of finance that were causing our typical customers to be able to acquire site-built housing.

So we are seeing that reflected by a little bit of improvement in overall home sales, by converting the renters into homeowners, and by a rather significant increase in rental applications that we can work with to generate sales.

So, it is definitely a favorable factor to be affordable at this point in the economy.

Great, thank you. You touched on this a little bit before, but as far as Michigan and Florida clearly seeing some economic weakness there, expecting probably more layoffs, housing problems. What are your thoughts on these markets? What steps are you taking in case things are a little bit worse than expected?

Sure, I think the steps that we took started in early 2000, 2001 when we made a decisive strategic decision to go into the rental home program. So that the 13% of our communities that are actually performing at under 80% reside in the areas typically close to Flint, Michigan, and where the factories have been shut down. We have converted them to rental communities wherever we can. Rental occupancies are actually decent and performing well.

I think the news this morning out of the automotive world indicated losses certainly for Ford that were smaller than anticipated, but cash burn rates that are still very challenging. While they talked about cuts in their white collar workers, there was no mention of plant closings. They seem to indicate that all plant closings have taken place.

I remind everybody that the average resident in our community has a combined income of about $28,000 a year. So these are not typically the automotive personnel that are being affected right now. It doesn't mean that there isn't trickle-down effect, but I think we've done a very effective job in managing the Michigan portfolio.

As challenging as it has been, I think the affordability factor of the housing plays further into the difficulties of the Rust Belt.

Great. Thank you for the color.

Mark Lutenski, BMO Capital Markets.

I was wondering if you could give me a background on the additional Origen investments during the quarter; and what is your strategy there?

Sure, I think that as Origen sold its platform origination and servicing and other components and its loans, we realized that Origen not only fulfilled an underwriting service for the Company, but they in fact had the licenses that allowed us to originate loans in all the different states we operate in.

Origen also provided those services for some of our contemporaries, peers, and competitors. We all thought it was logical to get together and preserve that platform. Sun made that investment, which we viewed to be much more prudent than trying to seek those licenses on our own and having to shut down the origination platform until we were licensed.

That investment is a group of our peers, and it is being operated by a third-party company called ManageAmerica, which also provides third-party services to many manufactured housing owners across the country, mostly related to management software services.

So the primary intention was so that we could continue seamless origination and sales within Sun's 135 communities.

Okay. I am sorry I missed this. How money applications do you have this quarter?

We had 4,500 this quarter, which was up about 10% from both Q1 and Q2, where it was around 4,100 in both of those quarters.

Okay. What is your rejection rate for that number of applications?

Roughly 55% of those folks will be rejected, and then we work with the other 45%. The objective is to close about 70% of them.

Okay. Have you seen like an uptick in maybe the reason for rejection being credit?

That's going to be the primary one, sure.

Okay, all right. Thank you.

(Operator Instructions) [David Bindels], Maxim Group.

Yes, good morning, gents. On the balance sheet, our equity shows as basically nil; and that is because property, plant, and equipment is at historical basis, historical cost. What would you say the fair value or the appraised value of that $1.1 billion in property, plant, and equipment is? So that I can get a true enterprise value here.

That is a difficult one to say. Obviously, we do internal estimates of what our net asset value is. Our analysts do work on that also. I think they have somewhere around the $30 to $33 range. We probably have something a little higher than that.

So that would put it up around $1.6 billion to $1.8 billion if I am just guesstimating right now. Is that in line?

That's on a share basis 20 million shares.

So 20 million, then those would be $200 million, right?

It would be about between $600 million and $700 million.

Over and above the historical costs, is that it?

Overall Company value.

Oh, okay, okay. You answered the question in a different way. So that would put the $1.1 billion property, plant, and equipment up about $600 million or something. Is that right? The $1.7 billion, is that what you are talking about? That would flow through to the bottom line, or a net debt equity of the $600 million you are talking about.

That's correct.

That's correct.

Okay. On the dividend coverage, I think you mentioned it but I didn't catch it. Gary said something like 4.5%. But if we are paying out $2.52 what are we guesstimating our FFO will be this year?

The guidance is for $2.76 to $2.82.

Right.

So if you use the midpoint of the guidance of $2.79, and the dividend is $2.52, you got a $0.27 spread; a penny is worth $200,000. So there is about -- that would cover about $5.4 million of the recurring CapEx which is budgeted for an annual amount of about $7 million.

We are roughly within $1 million of having -- or a dime a share of having [FAD] cover our dividend.

Right, okay, so that is all right. Going forward next year without a specific number, you are guesstimating that FFO will be higher, the same, or lower?

We're not guesstimating anything, but we are having budgets completed this month. We will have guidance, of course, issued as soon as that is done, which probably will be the beginning of the year.

But the metrics, all metrics that we indicated earlier in the comments indicate that they will be improving upon what we are seeing so far in 2008.

Very good, so that would indicate that dividend looks pretty coverable then, right?

I would let you make that assumption just because we haven't come out with guidance.

Yes, I hear you. Okay, thanks very much. That's all I had.

(Operator Instructions) There are no further questions in queue. I would like to turn the call back over to management for closing comments.

Well, I would like to thank everybody for participating today. I think that certainly it is more pleasing for management to be able to report on some improvement within the Company. And now that we've seen that improvement for three quarters this year, we are looking forward to being able to report continued improvement at the end of the year, and be able to announce and share with everybody what our budget and guidance will look like for 2009.

As always, Karen, myself, and Jeff remain available at any time if anyone wishes to call us with further questions. Thank you.

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