Sun Communities Inc (SUI) 2009 Q1 法說會逐字稿

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 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 -- Mr. Gary Shiffman, Chairman and Chief Executive Officer; and Karen Dearing, Chief Financial Officer; with Jeff Jorissen, Director of Corporate Development.

Good morning, everybody.

This morning, we reported funds from operations of $16.3 million or $0.79 per share, compared to $15.9 million or $0.78 per share in the first quarter of 2008. The 2008 numbers exclude origin-related losses.

Net income was $0.9 million or $0.05 per share, compared to a net loss of $3.1 million or $0.17 per share in the prior year. Revenues increased from $64.8 million in 2008 to $65.3 million in 2009. This was a very good quarter for the Company.

And in summary, we had a net gain of 166 manufactured housing and permanent RV sites, compared to an increase of 22 sites during the same period last year. This represented improvement of 144 sites from the first quarter of 2008. And I'm pleased to announce that 161 sites were actually gained in Michigan, Ohio and Indiana, which has been a positive trend in the Rust Belt for the last two quarters.

Our home sales exceeded 2008's first quarter and are on track for the best year of home sales in the Company's history. Our delinquencies [have] the lowest we have experienced in nine years and over 40% lower than at the end of 2008.

Our same-property NOI grew a bit slower than budget, but in absolute dollars it's actually less than $250,000. And we fully expect it to recover due to strong leasing experience towards the end of the quarter and other seasonality that we feel will keep us right on budget as we go through the year.

The performance is in line with our budget and guidance for 2009 subject to the favorable resolution of a disagreement with a lender over the appropriate rate to be charged on borrowings. This is discussed in further detail in our press release. But if adversely determined, this could have an impact of up to $0.07 per share in 2009.

We believe that there are a number of key factors which bode well for the Company's performance and continued growth. These are our niche in supplying affordable housing, the rental program, availability of financing for homebuyers in our communities, a comprehensive liquidity plan, innovative culture and deep industry experience. The key words I'd like to highlight, that I think explain our positive outlook, are "affordable housing."

We provide homeowners with amenities comparable to a permanence and a 4,000- to 5,000-square-foot home site, for an average site rent today of around $397. The monthly cost to finance a pre-owned home, assuming an average price of $30,000 and 10.9% financing for 20 years, is around $309. So you have a total combined monthly cost currently averaging $706.

Rental homes in our communities range from $500 a month to $1,000 per month, presenting a further wide array of price points in Sun's communities. And I underscore "in the area of affordable housing."

Applications to live in our communities grew from 15,000 in '07 to 17,000 in '08, with over 80% of those applications representing the rental homes. The rental program is the single most significant source of new residents in our communities, and it provides the Company with an effective means of reaching the public and providing an opportunity for them to experience the manufactured housing lifestyle, thereby becoming an outstanding boarding system, as we discussed prior, for obtaining new residents. One half of the rental population turns over every year on average, which renews the base of prospects for our home sales.

Financing is actually currently available for many of our customers. Approximately 80% of our home sales are being financed by third parties or are in fact cash sales. And the remaining sales are financed internally by the Company. With the proceeds from third-party financing sources, we are able to recycle cash into the purchase of homes, thereby reducing reliance on our line of credit.

The Company has no significant liquidity pressures in the short term, as the remaining 2009 debt maturities are $11.7 million, while 2010 maturities are less than $1 million. The Company expects to close on approximately $19 million of secured financing, which exceeds the 2009 and 2010 amounts coming due. In July 2011, $104 million of secured debt matures in October. And in 2011, the Company's line of credit will be up for renewal. When these financings were closed in 2004, the aggregate net operating income of the underlying properties was $23 million, which is expected to grow in excess of $28 million by 2011.

These relationships can be summarized as indicating that the increased net operating income could absorb underwriting standards, which are approximately 25% more stringent and still generate sufficient proceeds to meet all of our obligations.

On April 6, 2009, Credit Suisse indicated -- or issued a REIT Liquidity Survival Guide, in which they estimated the liquidity outlook through the year 2012 for REITs on which they provide analytic research. The harshest scenario presented assumed no new secured debt issuance, 80% refinancing of existing secured debt, maintenance of current dividend and 50% refinancing of existing credit facilities upon maturity.

The Company's plan includes similar assumptions to the above Credit Suisse fair-case scenario, along with numerous other components, significant estimates and forward-looking assumptions which, if fully implemented -- the plan provides for adequate liquidity for the Company over the coming years and includes the potential for a significant reduction in our unsecured line of credit by 2011.

Beginning in 2000, our industry entered into a depression/recession, marked by bankruptcies among lenders, manufacturers and dealers who left the industry. During this period, before bailouts, the Company substantially upgraded personnel and systems across the board and implemented new and significant strategic plans, while instituting a culture of accountability and achievement. This process has generated a creative and innovative management team accustomed to the attainment of ambitious objectives, in light of the most challenging times in our industry. And we continue to meet those objectives.

At this time, I would turn it over for any questions of myself, Karen or Jeff.

(Operator instructions) Michael Bilerman, Citigroup.

Hey, this is Eric Wolf here with Michael.

For the $152 million that you extended to 2014, what triggered the increase to the facility fee from the lender's point of view? And what kind of remedies do you have that essentially challenges the increased fee? And when do you expect it might be resolved?

Eric, simply put, this was an option to extend, as it has existed since 2004 in the origination, with absolutely no provision in the documents to adjust the fee. And rather than go into default or have other impending issues, we've preserved our rights to dispute this and are looking at those alternatives. But the answer to the question is there is nothing, upon careful review, that would indicate there could be any adjustment to that fee.

Okay. And so, for the $19 million financing that you're in process of attaining, are you planning to secure, I guess, the three unencumbered assets that aren't currently supporting the borrowing base? And what type of rate terms are you expecting on that?

Sure. The -- I think there's $11.2 million that encumbers one or two of those properties. So that will be paid down, and the rest will be applied to our line of credit. It's a three-year term, with basically a 5% floor, I think, and 400 basis points over LIBOR.

Okay.

And I guess just lastly, switching topics -- given the high level of unemployment in Michigan and Indiana, and basically everywhere, one would expect that the credit profile of your tenants would actually be declining. Yet you noted in your remarks that you're seeing some of the best -- the least delinquency, and there's been a strong improvement to the credit profile of your residents. I guess, why do you think this is? Is it a result of tighter credit screening, or a larger pool of customers to choose from?

Well, I think there are a couple things that are happening. I think that it's becoming housing of last resort, to some degree. So you either move in with mom and dad, you move out of state if you're pursuing a job out of state, or you consider manufactured housing when you might not have considered manufactured housing again.

Second point is with the lack of available subprime lending, and all of that type of credit disappearing in the site-built housing, there's not the opportunity for many of these people to buy a site-built home as there was in the last seven or eight years, and we know how that's turned out.

And the third point that I made a little bit earlier is just the sheer affordability right now. There's nowhere where you can get this much opportunity, this much housing, as you can get dollar-for-dollar in our homes. And certainly, when you look at the inventory of repossessed homes that we bought over the last seven years, that are for sale or part of our rental program, those are very, very good opportunities in a very, very uncertain economic environment here.

And certainly, we've gotten through Chrysler and understand where they have declared themselves through bankruptcy. We're certainly waiting to see what will happen with GM. And I think that that has played somewhat favorable to our occupancies, to our credit collections and delinquencies so far. And we've seen it for two quarters now, where we've had the biggest increases actually in Michigan, Indiana and Ohio.

We've also done some things in our for-sale home program where we have offered some rent incentives, $100 to $200 per month, if they actually go ahead and commit to buying a house. And that's worked very, very well. As you know, we've converted increasing amounts of home sales from rental program three years ago. Two years ago, we sold 300 homes; last year, over 600, and this year, we're budgeting right around 900 -- between 800 and 900 home sales. So we're making those opportunities of great interest, in particular in Michigan, Indiana, Ohio right now.

Great. Thank you for the info.

Mark Lutenski, BMO Capital Markets.

Hi. A question on the $152 million secured debt -- when did you guys extend those out? Was that in the second quarter or first quarter?

It was in the second quarter.

And when were those coming due? Was that just coming due in 2013?

They were -- they came due this year. But we had an extension option that was available --

Okay.

-- at our discretion, to 2014.

Okay, got it.

When that debt was structured, we structured in a way to have several options so that at any given time, depending upon what was going in the credit marketplaces, we could either extend it --

Yes.

-- which we've done two different times, or pay it off.

Okay.

And just curious -- I saw a sequential drop in interest expense, and I was wondering what that might have been related to.

That's just a decrease in variable rates.

Okay. Got it.

And just given the recent wave of dividend cuts, I was wondering if you guys had given any consideration to that.

I think that each quarter, as I've indicated in the past, the Board carefully evaluates the dividend.

Yes.

They had done so and declared the dividend which we just paid in April, and will do so again very shortly. And also, in paying very, very careful attention to the balance sheet in liquidity -- which we try and share with everybody on each call and in our press release -- feel comfortable at this time with all steps taken by management to create liquidity now and into the future. And I'm sure that they will evaluate all that as they determine the next dividend.

Okay.

And just curious if the sales number -- how much of that was signature homes? How many homes were those?

I think there's about 40 in the overall annual budget. And I think that they've been averaging somewhere around two to three per month. So I'd say we're pretty close to budget in our strong season we're coming into right now.

Okay, great, thanks.

Bill Carrier, KBW.

Thanks.

You mentioned applications. Do you have the number of applications from the first quarter?

Yeah. In the first quarter of '09, the applications were just under 4,600, compared to the first quarter of '08, where they were a little bit over 4,100. So it marked a 10% increase.

Okay. And are about 80% of those -- do those -- are those representing rental applications?

Exactly.

Okay.

Last quarter, your 2009 guidance included full-year gain of 190 sites. So with 166-site increase in this first quarter, are you still maintaining your expectations for the 190-site gain? Or how do you see the rest of the year unfolding in terms of occupancy?

Well, Bill, the unfortunate news is the seasonality we tend to have every year in fourth quarter. We are significantly above budget, and we'd like to be optimistic. But we're going to be cautious, because we've seen early leads first, second and third quarter, dissipate fourth quarter. And so there would be no indication sufficient for us, at this early time, to change anything in the budget or guidance.

Okay. Thank you.

Yes.

(Operator instructions) David Minkle, Maxim Group.

Good morning, everybody. Nice job in a difficult environment. Don't have too many companies that are showing increases in revenues and earnings or FFO. So my hat's off to you on that.

With the increased sales and/or rentals, what is our vacancy rate at the current time?

In the rental program, it would be about 10%. We have probably around 6,000 homes, 6,200 homes in the program, of which a little over 5,500 are leased. And of course, in terms of occupied sites, the occupancy is about -- little over -- hair over 82%. So with 18% vacant, there's probably 6,000 sites eagerly awaiting residents.

Right.

And the growth that you've seen in the first quarter -- do you see sustainability of that? Or was it somewhat of an aberration?

I think that we're pleasantly optimistic in seeing, first of all, as much growth as we've seeing in the Midwest. And there's nothing that would indicate to us at this time that we'd see anything that would erode that. I think to the contrary -- and I don't want to make too much of this -- but collections and delinquencies are at historically great rates.

I don't think -- I would sense that some of our residents who are moving in right now are hunkered down. They don't have a lot of other opportunities that they can get into, which is playing well to our communities right now.

Right. Sure.

One of our advantages, of course, is that we sell affordable housing. Are we seeing any competition from foreclosures or short sales, which would almost make site homes affordable, if you will?

Sure.

Does that compete with us?

No, we're gauging that where we can do it best. In Michigan, we're -- as many of you know, we rank one, two or three in the lowest decrease in the site home value. I think that what we're seeing is you're still working off an average median home price -- starter homes at the $175,000 level, and next-level housing $249,000 in this particular area.

Right.

Even with 25%, 30% decline in price, it's a completely different customer that's going to qualify --

Right.

-- for that now --

Still not affordable, in other words, compared to our homes. (inaudible)

Interestingly enough, what we gauge in multifamily is that they have not experienced quite the uptick that we have, particularly in the Midwest. So we're watching that very, very carefully. And historically, one would tend to see more correlation between growth in multifamily in Michigan and manufactured housing.

Very good.

And on the rentals side -- what percentage are units rented, as opposed to owned?

The rental number is about 5,700 rented. And we've got total occupied manufactured housing sites of about 35,000, plus another 3,000 permanent. So we've got -- 38,000 would be the denominator, and 5,700 would be the numerator. So --

Right, so it's --

-- up [7%], maybe 14%.

14%. In the last two years, what percentage of renters become owners? Do you have any experience with that to see -- renting is a good idea to fill the vacancies, but what percentage of renters become owners -- you have a brief history of that -- maybe in the last year or two? Can you tell?

Well, in '07 and '08, in the total, we sold about 960 rental homes.

Right.

And probably around the beginning of '07, we probably entered this period with around 5,000 occupied rentals.

Right.

So in two years, we would have sold 18% of that base. And of course, the base has changed since then, as we buy more homes for the program. So it's constantly shifting, moving. But you could certainly safely say that about -- just under 20% of the homes that were rented at the end of '07 -- or '06 got sold in '07 and '08.

Right. So -- okay, I understand that. So that's a good advertisement right there, by letting someone rent, taste the property, if you will; and taste the cooking that way, and become a buyer if they like it, right?

We -- it has worked very good so far.

Right.

So the scenario looks pretty good. Why do you think the -- and I have my ideas on this -- why do you think the stock, at the current selling price, is yielding 17.75%? I know it's a factor of what the dividend is and what the price is. Why do you think the dividend yield -- or the yield on this particular issue is so high?

I think we can share the commentary that we get back on this question from both sides. But typically, exposure to the Midwest is something that has created uncertainty, as automotive has gone through the turmoil it's gone through.

Right.

And we have significant exposure in the Midwest. The amount of leverage that's on the Company, without carefully looking at the terms of that debt -- how it rolls over, the bulk of it being in 14% and 17% -- there is a look towards how will that debt roll over at that period in time. And then overall leverage -- we would be in the higher category, if you will, of the REIT world with regard to our leverage.

Right.

And those are the things that most typically we have discussions with internally here and externally with our shareholders.

Right. I appreciate that.

So I -- in the current environment, with the scenario you laid out and the guidance given, we paid the $2.53 for last year. And I think we're looking for a better year going forward. To me, the dividend seems like it's safe. And I think you hit your -- you hit the nail on the head when you said there's -- there may be some question about that dividend, or doubt, of sustainability, even by virtue of the fact, just a few moments ago, one of the questioners asked if you were going to cut the dividend.

But as I look at it, [say] we paid it last year. We were looking for better guidance, based on what you said. You might consider a slight increase on the dividend and remove some of that doubt about the dividend. I think that would do wonders for the stock. This shouldn't be yielding more than 10%, in my judgment. That would put the stock up around $25. So you ought to consider a slight increase and remove some of that doubt, if you can do it. So just my own comment.

It's duly noted.

Okay. Thanks very much. Keep up the good work. I'm looking forward to next quarter.

By the way, have you seen a continuation of what we saw in the first quarter going into the second quarter so far?

I would only comment that we look very, very comfortable with our ability to meet the budget that we've set internally. And if we were to hold up at better-than-expected levels, as we are currently in this quarter, we would obviously expect to beat the budget.

Very good. Nice job, guys.

Thank you.

Michael Bilerman, Citigroup.

Just two follow-ups.

In terms of the 2011 maturities, I was just wondering -- and I apologize if you said this before -- but what -- when you originally underwrote it, what was the debt to GAV on that? And, I guess, what cap rate did they use to underwrite those debt levels?

I don't think we have the cap rate at our fingertips. Is this Eric?

Yes.

But Karen could definitely get the underwriting information to you, if you want to give her a direct call.

I do know this -- that in my comments and the analysis that Karen did for me, we looked at the NOI. We applied the same standards that it was underwritten at in '04. And that's where we felt that we had a 25% cushion, if you will, for more stringent underwriting. So that would have included a difference in cap rate, difference in coverage. So we feel pretty good about it.

Fair enough.

And I guess just one last question -- I know that one of the -- on your covenants for your line of credit [is] that you can't exceed 92%. Your dividend can't exceed 92% of your FFO. I know that right now, you're planning on keeping the current dividend level. But if you were to think about cutting, would this be more of a proactive decision to try to reduce -- try to save some liquidity for principal payments CapEx? Or do you think it's going to be more of like a -- we have to cut the dividend this time, so we're going to do that?

Well, I wouldn't forecast, one way or the other, any dividend decrease or change to the dividend. We evaluate our covenants quarterly, if not more frequently. And there is no knowledge in this room, from any of us, that because of a covenant we would be cutting our dividend.

Okay. Thank you.

(Operator instructions)

Okay. At this time, I would like to thank everybody for participating on the phone call. And we certainly look forward to reviewing second quarter and are optimistic that we will continue to be able to report and build on the results that are reported today.

Thank you very much, Mr. Shiffman.

This concludes today's Teleconference. You may disconnect your lines at this time, and thank you for your participation.