Sun Communities Inc (SUI) 2008 Q4 法說會逐字稿

Greetings, and welcome to the Sun Communities Incorporated fourth 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) 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 that the expectations reflected in any forward-looking statements are based on a reasonable assumption, 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 advise 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, Director of Corporate Development. 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 to everybody. This morning we reported funds from operations of $15 million for the fourth quarter of 2008 compared to $14.3 million for the fourth quarter of '07. Both before impairment and other charges of $15.6 million and $9.8 million, respectively. FFO per share for the year ended December 31, 2008 was $2.78 compared to $2.72 for 2007, both before impairment and other charges. Total revenue for 2008 was $225 million compared to $236 million in 2007. For 2008, the affiliate loss, including impairment charges for the quarter and year relate to Sun's investment in Origen in the amounts of $2.5 million and $16.5 million. Also included in the fourth quarter and 2008 year results are asset impairment charges related to the carrying value of three properties which we no longer intend to fully develop, about $6.9 million and one property which has experienced severe local market conditions for $2.2 million and the company's decision to cease offering cable television and internet services in 12 communities, which is due to the increasing competition and advances in technology related to DVR, pay per view and high definition type services. The 2008 results also exclude severance costs of about $900,000 as discussed during the second quarter.

Before we get into the details of 2008 and discuss 2009 guidance, I wanted to briefly comment on Sun's position during the current difficulties in the overall marketplace. We are, in fact, in a pretty good place. First, we are under no significant pressure from debt maturities. The 2009 mortgage maturities of $11.2 million are awaiting final term sheets, which we expect sometime next week. We have only about $800,000 of debt coming due in 2010. In July 2011, approximately $104 million of secured debt is due, and that's on properties whose NOIs have grown consistently since the 2004 original financing, but we have two years for continued NOI growth in those properties and for the capital marketplaces to become a little bit more functional. Second, our portfolio's performing well in this environment, where demand for affordable housing is strong and likely to strengthen further. In 2008, there were only two states comprising 19 communities which did not generate positive net operating income compared to 2007. Indiana, where 18 of those communities are located, experienced a decline of about 2.5% in net operating income. Additionally, while we have lost 82 sites through February 2008, we have actually gained 40 sites through February 2009, a positive swing of 122 sites, which in fact are totally attributable to improvement in Michigan, Ohio, and our Indiana markets.

The credit quality of our portfolio is holding up quite well. Our delinquencies at February 28, 2009 total $806,000, which is about 36% lower than at the same time February -- I'm sorry, December 31, 2008 and slightly lower than the same period February 28, 2008. Finally, and third, I just wanted to comment that the company feels it's ready for this market. We have always invested in our communities to maintain their premier position within our markets. This is attested to by the continuing growth and applications to live in our communities and our multiyear emphasis on customer satisfaction. We also have an environment of accountability, which really has resulted in a substantial qualitative and quantitative increase in the performance of our management team. So if one had to be prepared for the turbulent times that exist now, as I stated earlier, I do think we are in a pretty good place.

And at this time, I would like to review the portfolio. The weighted average rental increase for 2008 was 2.9%. For 2009, we expect the increase to be 3%. We lost 47 occupied sites in 2008 compared to a budgeted loss of 100 sites and a loss of 132 sites in 2007. For 2009, we have budgeted an increase of 190 sites, and that includes 50 RV sites which are permanently cited in communities, and these generally represent a conversion of seasonal RV sites and generate 12 months of revenue compared to about half of that when they are a seasonal site. And this, of course, only represents the -- really, the second time since 2001 that net lease sites have or are projected to increase for the year. The improvement in occupancy when comparing 2008 to 2007 has spread throughout the portfolio, while as I indicated, the 2009 budget is based on improved Midwest occupancy which we are already experiencing. We're budgeting the remainder of the portfolio to continue to perform at basically historical levels.

JLT and Associates, an independent real estate market research company recently issued a summary of its 2008 and 2007 home community surveys, and the surveys covered 71 major markets in the US and included just over 1,300 all-age communities with just under 370,000 home sites. The national average occupancy in that survey was 82.7% and the weighted average rent increase is 3%. Sun's portfolio occupancy at December 31, 2008 was in fact 81.9% and the weighted average rental increase for 2008 was 2.9%. Sun's portfolio, while weighted toward the Midwest, is actually performing consistently with the results of the JLT and Associate's national survey results and based on this research, it would appear that the company's performance has been impacted more by the manufactured housing industry issues related to poor underwriting standards and repossessions that have actually dramatically mitigated than by regional economic issues in the Midwest.

Our same-property portfolio experienced a 2.3% increase in revenues while expenses increased by 1%, resulting in a 2.8% increase in NOI compared to a budgeted 2.4% increase. Our 2009 budget is for a 1.7% increase in same-property net operating income. In 2008, we experienced occupancy in our rental home program to increase by 250 while rents increase by 3%. Occupancy actually increased by 189 while rents increased by a little over 2.5%. Home sales were expected to increase from 363 in 2007 to 600 in 2008. Sales actually ended the year at 596 and are budgeted in 2009 at 800.

Rental rate growth will depend upon market conditions, but at this time, the 2009 guidance includes no increase in rental rates, and that's for our rental program. The rental program continues to generate substantial traffic in our communities. As I mentioned in my comments in the press release today, applications to live in our communities have increased from 10,000 in 2006 to 15,000 in '07 to over 17,000 in 2008. This increase may well be a measure of the growth in demand as people seek more affordable housing because other options are no longer available. And this source of customers replaces that which was formerly supplied by the retail dealers network. It provides the company with an effective means of reaching the public and selling them on the manufactured community housing lifestyle, and this has proven to be an outstanding resident boarding system for potential resident/owners in our communities. The success of the program is enhanced by the annual capital improvements which have maintained the communities at the top of the quality pyramid and is why the company is positioned to meet increasing demands related to the increasing need for affordable housing.

In 2008, we sold 965 new and pre-owned homes, which includes the rental homes, and this compares to 712 in 2007. In our 2009 budget, we expect to sell over 1,200 new, used and rental homes. Recurring CapEx is expected to be $7.4 million or about $0.36 per share in 2009 and using the midpoint of earnings guidance, funds available for distribution will approximate $2.52 per share resulting in a dividend which is 100% of funds available for distribution based on an annual dividend of $2.52. The board does expect to declare a $0.63 dividend in early April.

G&A expenses totaled about $16.4 million for 2008 and are expected to approximate the same amount for 2009. We've included no contribution to FFO from Origen in 2009 guidance, as fluctuations of the market price of its common stock may give rise to fair value adjustments which will offset reported equity earnings. And finally, with these operating metrics as our basis, FFO guidance is set at $2.84 to $2.92 per share, which reflects growth in FFO of between 2.2% and 5%. And at this time, Karen, Jeff and I would be glad to answer any questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from David Toti with Citi. Please proceed with your question.

Good morning, everyone. Gary, can you just walk us through your strategy in terms of how you decide when a used home should be ear marked for sale? Is it more age-driven or location-driven?

Well, I think that all homes throughout the portfolio in the rental pool and the homes carried in used inventory are for sale. So at any given time, any home, when it becomes either vacated or as we've discussed, we telemarket and approach our renters to convert them into sales. So they are basically all available for sale. There's no determination as to which segment would or wouldn't be for sale at any given time.

And what's the targeted margin on that residual value? Is there one?

Historically targeted margin on the sales that we've had or on the assets in general?

Going forward, given that you have an aggressive sales program, you must have a sense of sort of what kind of numbers you want to shake out.

Margins on those, the used home sales have been about -- they were about 27% this year, and I think they are budgeted for about the same next.

Okay, and then how much do you link your financing program to the targeted sales? Is it completely intertwined?

Yes, I think that the financing program that exists right now is predominantly through Sun Communities, but it's flow funded currently through other sources that allow us to get the capital back upon sale.

Okay, and then are there general terms you could describe relative to the customer financing? What's a typical rate or credit quality threshold?

Yes, I think the current rate is 9.95% for the most qualified resident with a 10% down payment, and then it goes up to around 11%, 11.25% for a 5% to 7% down payment. And term, average term running around 15 years now --

Yes.

About 15 year amortization. FICO scores are generally between 625 and 725 and are rated by rate accordingly through the underwriting process.

Okay, great. Thanks for the detail.

Our next question comes from Andy McCullough with Green Street Advisors. Please proceed with the question.

Hi, good morning. On the homes that you sold in 4Q, how many of those did you guys finance versus outside financing?

Well, we have a program where -- with 21st Mortgage where most of our home sales are financed through them. So in the fourth quarter, I would say --

Vast majority of them.

-- vast majority of them, probably 85%.

And then on your debt maturities, are you guys looking at refinancing your 2011 maturities yet, or would the prepayment penalties still be too big?

I think that we've taken a look at it and the penalties are in fact too great at this particular time so that, as I mentioned earlier, we've had growing NOI in that portfolio, and we expect it to continue to grow. But we will look at all our maturities and our line of credit even though it's got a few more years to take the appropriate time when market conditions are such to refinance or re-up the credit line as we've done historically, often times earlier than term.

And just hypothetically, if you were to refinance today, what kind of rates or terms are available on the market today?

I think that recently we approached the lead in our credit facility and we discussed extension, even though it's late 2011, I believe.

Yes.

And the rates that we're in currently are 165 over and they felt that the current market would be closer 350 to 400 over.

What about a more typical kind of secured mortgage product?

Secured mortgage product, we're in the market right now looking at refinancing the $11 million that comes due in June, and we're seeing about 300 basis points over LIBOR being quoted on about 70% LTV.

Great. Thanks a lot.

Our next question comes from Bill Carrier with KBW. Please proceed with your question.

Good morning. Can you give us a Signature update? How many homes did you sell on the quarter and how many are you looking to sell in 2009?

Sure. I think that -- Karen, do you know the amount we finished off with?

We finished off in 2008 with 55 Signature home sales.

Budgeted in 2009 is right around 60 Signature home sales. Our original goal for 2008 was 90, but as we saw the total deterioration and meltdown in site build housing, which is what Signature was completely geared to compete with, we put and had a little bit less emphasis on Signature and more emphasis on generating occupancy through our rental program and converting the homes, as you have seen, from 300 to 600, '07 over to '08 and then 800 in '09. So I would expect roughly the same amount in Signature. And as we see a little bit more stabilization in our economic market, I think we'll light a bigger fire under the Signature program again.

Okay. In each of the last four years, you've gained occupancy in the first half of the year and lost it in the second half of the year. So what do you think has caused that seasonality? And have you assumed that same seasonality for this year?

Yes, we have assumed it for this year, and I can tell you with anything that I would say on what cause it is would be speculation, because we have sure tried as a management group to pinpoint it so that once we do identify it, we can work on it. What we are working on right now is a little bit of an alteration to the timing of the turnover of our leases so that they can be more evenly distributed or more heavily weighted to the first half of the year and Jeff, do you have anything on historicals?

Yes, in 2006, in the last half of the year, we lost about 700 sites. In 2007, in the last half of the year, we lost about 225 sites. And this year in the last half of the year, we lost about 186. So yes, the pattern holds, but the pattern seems to be mitigating quite a bit.

I think it's just been sheer brute focus on trying to mitigate that pattern, but we don't have something to point to other than currently trying to adjust expiration leases by trying to do an 18 month lease, a 16 month lease, anything that steers it out of that fourth quarter.

Okay, and as far as the dividend is concerned, your dividend coverage is tight and the current yield is over 20%. So with many REITs reducing their dividends over the past several months, what are your thoughts on lowering your dividend or paying part of the dividend in stock?

Well, I think that's very -- that's something the board very carefully looked at in its most recent meeting. I think it's something, as I've said before, the board reviews carefully every quarter. Certainly, that consideration was reviewed. Certainly where the stock has been trading, there has been concern over value of the dividend against the value that isn't being recognized in the marketplace, but currently, the board feels comfortable with the balance sheet liquidity and as I indicated, will declare a dividend for first quarter in April. So we'll continue to review that, and those points will be under review each time the board gets together.

In addition, the ability to pay in common stock is to satisfy the requirement under the code to distribute 90% of earnings. Our requirement would be in the low millions of dollars just to satisfy the IRS code. So one of the very -- the company has, under no consideration whatsoever of issuing its common stock in payment of the dividend because of the massive dilution inherent in such an action.

Okay, thank you.

Our next question comes from [David Minkle] with Maxim Group. Please proceed with your question.

Good morning, gents. Congratulations on nice numbers in a difficult environment. Subsequent to 2008, you had a $40 million floor plan line that matured, and I see you replaced it with a $10 million facility. Was that cut back by the lender, or was $10 million all you required?

The -- our $40 million facility with a different lender matured, and we secured a new line with a different lender for $10 million.

And was $10 million all you required on this?

The other line had the ability to borrow against rental homes and other items. It wasn't just for new homes.

Right, okay. And regarding the question previously on the dividend, I just have a comment. I think it was wise paying the dividend in cash and not using stock because with the stock as low as it is, why dilute and use the stock as a currency at that low level? In fact, at a 23% yield, the stock could be 25% and still yielding 10%. So in that light, has the company considered, and/or do the lines provide for a buyback of stock? And do we have room to do that?

I think that, David, we've -- the board had authorized a million share buyback, of which only a couple hundred thousand shares were utilized previously. It's something, again, that is always under review, but I would suggest that at this particular time with the uncertainty of the marketplace and certainly with the fluctuation of our stock price and the disconnect between the dividend and the share price, the wisdom of the board at this time was to just move forward and review it each quarter.

And that's probably wise, but at what price was the stock when you authorized the million share buyback?

I can't tell you that. I think it was reconfirmed -- yes -- no, about a year ago and then it was reconfirmed I think a couple board meetings ago.

So the stock was probably in the 20 range or something like that at that point, right? Yes, it's possible, yes.

So it's even more compelling now at 10. With interest rates at practically zero, depending on what rates you use. 23% is -- to me looks kind of compelling when you consider the guidance going forward in 2009, I think this is -- and that's not even accounting for any appreciation. So this is probably a better yield than you, than you get on your business, 23% as the stock went up some more, it just adds to that. To me it's compelling. We will pass that along.

Keep doing your thing. You're doing a good job, and I'm happy to see it. Thanks a lot.

Thank you.

(Operator Instructions) Our next question comes from Paul Adornato from BMO Capital Markets. Please proceed with your question.

Yes, thank you. The headlines these days are dominated by the auto industry and was wondering if you could comment on the impact of the auto industry on your business and what you expect from here.

Well, I'll start and then anyone can add. As I said in our comments, the uptick in growth in the portfolio, certainly for the last two months when the automotive is at the headline has been nearly 120 site increase in occupancy for January and February, all predominantly in Michigan, Indiana and Ohio. So I think what we're seeing and one of the reasons we're holding our rents a little bit more consistent in the rental pool is that we have a large appeal currently within the Midwest, probably related to a lot of the uncertainty of automotive and the affordability factor of what we're offering. We're still on the low side offering space at about $0.50 a square foot all in and on the high side, $0.70 a square foot on a monthly basis, and that's still compares very favorable to other forums out here. So while we all watch closely what happens with the automotive industry in the US, I think that so far, the affordability factor, we've had a slight uptick in benefit from it and we anticipate that even if it were to worsen a little bit, the size of the pool interested in our offering for residents continues to increase.

Okay, and I guess related question is that all things being equal, at some point, a decrease in the -- a decrease in income of all Americans is going to affect your residents as well. And so at what point might you expect an influxion in the positive credit trends that have happened in your portfolio over the last two or three years?

Well, I think that's a really good question, and I think the way that I have been discussing it certainly internally, and then anyone else can add, it's almost as if we're taking two steps forward on the affordability factor, but we're losing one step on job loss and the issues of ability to pay and credit, as you just indicated. So I think that the good news is the broad pool and available customer to us increases at a greater rate than the loss of deterioration of credit and jobs so far. If that were to change, certainly, we might lose our edge that we are forecasting for this coming year, but so far, it's the larger pool and the more affordability that's outpacing the downside of what would happen to credit as the economy continues to deteriorate.

Okay, and I think you may have mentioned this. I apologize, but how did the trends continue in January and February of this year? In terms of the portfolio performance, credit quality, occupancy, et cetera?

Yes -- go ahead, Karen.

We -- I think Gary did mention a little in his call script that we have seen a decline, actually, in delinquencies from the end of the year and a slight decline from this time last year, and I think the occupancy has also improved in the Midwest, as Gary mentioned.

Okay. Thank you.

Thank you.

Our next question comes from Daniel Fisher with Wachovia Securities. Please proceed with your question.

Good morning. I just had a question, first of all, the -- your business seems to be very reliable in its cash flows and its operations, and you've been very consistent with your dividend. But now that the stock price is where it is, the dividend represents -- the issuance of the dividend represents a major change in the stock price when you go ex-dividend and I would like to suggest perhaps that you consider a monthly dividend to keep the volatility down and the stocks more closely reflect the consistency of your business.

Well, Daniel, that is something we can definitely take back and review. It's an interesting concept and something we would have to look at.

Okay, and it also gives reassurance to shareholders that the dividend's really there when it goes monthly. The second thing I was talking about, when people are talking about stock buybacks, I was wondering whether or not rather than buying your stock back, would there be a thought to perhaps buying some of your debt back in some manner that you could perhaps. in this debt market, you would be able to buy your debt back at a pretty big discount and there you wouldn't just be putting your cash out to buy equity, but you would be lowering the risk of the business by having less debt.

Sure. I would suggest to you that it's something we've been looking at very, very, very carefully. We have yet to make significant progress, but we're looking at it at every level of debt that we have in the company.

Okay, thank you, again. And congratulations on the fine quarter in these difficult times.

Thank you.

There are no further questions at this time. I would like to turn the call back over to management for closing comments.

On behalf of management, we would like to thank everybody for participating in the call. Karen, myself, Jeff are available for any follow-up, and we certainly look forward to reporting to you after first quarter is completed. Thank you.

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