Sun Communities Inc (SUI) 2009 Q2 法說會逐字稿

Greetings and welcome to the Sun Communities Inc. second-quarter 2009 earnings results conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentations. (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 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; Karen Dearing, Chief Financial Officer; and Jeff Jorissen, Director of Corporate Development. I would now like to turn the floor over to Mr. Gary Shiffman.

Thank you and good morning, everyone. This morning we reported funds from operations of $13 million or $0.62 per share for the second quarter compared to $13.4 million or $0.65 per share in the second quarter of 2008, which is before certain severance costs and equity losses related to Origen of $0.02 and $0.38 per share, respectively. Net loss for the quarter was $2.3 million or $0.12 per share compared to $7.4 million or $0.41 per share in the comparable period of 2008.

For the six months ended June 30, 2009, FFO was $29.2 million or $1.40 per share compared to $29.2 million or $1.43 per share for the first half of '08, which is before certain severance costs and equity losses related to Origen of $0.01 and $0.62 per share, respectively. We have previously issued FFO guidance in the range of $2.84 to $2.92 per share for '09 and I would like to review with you the components of that guidance.

Site rent increases for the first half of the year are 3%, which equals the guidance, and over 70% of the annual rental increases have been noticed or are in place by June 30. Occupancy in our manufactured housing and permanent RV portfolios is a positive 289 sites through June compared to a projected annual gain of 190 sites in the guidance. Occupancy gains occurred throughout the portfolio including Texas, Michigan, Indiana, Ohio, and Florida.

Occupancy in the manufactured housing portfolio has increased 0.5% since December 31, 2008.

Applications to live in our communities continue to grow, increasing by nearly 14% over the first half of 2008 and are on a pace to reach nearly 19,000 for the year. We believe the attraction of affordable housing continues to grow.

Rents in the rental home program are down 1.2% through June compared to a flat rental rate in the guidance, while occupancy in the rental home program is up by 263 sites through June. Through the first six months of '09 we have sold 518 new and pre-owned homes in our communities compared to an annual budget of 1,200. Our current forecast for the year is to sell about 1,100 homes.

Same property NOI grew at 0.3% rate in the first quarter and at 1.3% rate in the second quarter. We expect the strengthening to continue and it is on track for the annual same property growth of approximately 1.7% we noted in the original guidance.

Recurring CapEx is at $3.4 million for the first six months and should also be within annual guidance that we projected of $7.4 million. General and administrative expenses related to real property is running at a stronger annual rate for the first six months due to expensing $1.9 million of deferred comp out of a total of $2.2 million for the year. G&A is on our budget and is expected to approximate guidance of $16.4 million for the end of the year.

Interest expense is expected to approximate annual guidance as well and interest savings due to lower variable rates are actually offsetting the contested rate increases on a particular borrowing tranche that we spoke about at the end of first quarter. FFO for the first six months is right on the Company's budget and therefore we are affirming annual guidance in the range of $2.84 to $2.92.

Now summarizing and turning to other matters of interest, bad debts are running below 2008 levels and the 2009 budgeted amounts. As a percent of property revenue, bad debts have declined by 23 basis points from about 1.22% in the first half of '08 to just under 1% in 2009. Delinquencies are also down over $200,000 or down 17% from December 2008 levels and actually running at the lowest average since pre-2000 time.

Repossessed homes in our communities continue to decline as well standing at a 10-year low of 150 at June 30, 2009. Our rental program, as I previously mentioned, continues to perform strongly with only a 1.2% reduction in rates while occupancy net of sales continues to grow. This program is the primary reason for the continuing growth in applications which should hit over 19,000 this year. And as we have discussed before on our calls the rental program continues to serve as an excellent boarding system for renters on the way to becoming owners of occupied homes.

During the quarter we completed a secured borrowing to repay maturing mortgage notes with the excess proceeds being used to reduce borrowings under our line of credit. There is virtually no other mortgage debt maturing in 2010 or any debt until 2011.

So to summarize management's view on the Company after second quarter, we are experiencing occupancy growth across the portfolio. We are closely monitoring credit performance, which has been increasing throughout 2009. Our six-month FFO performance is right on our budget. We are affirming our annual guidance and we have nearly two years to prepare for any significant debt maturities.

At this time both Karen and I, as well as Jeff will answer any questions.

(Operator Instructions) Michael Bilerman, Citigroup.

Good morning. This is [Eric Wolff]; Michael is also on the line with me. As far as the guidance that you affirmed, does it now not exclude the $0.07 and I guess the higher interest resulting from the increased facility fee because of the lower variable rate debt that you just spoke about?

That is basically correct subject to any change in current interest rates.

And I would assume you are still trying to resolve this dispute with your lender, but just are still in that process?

We are vigorously in the process right now. And I think that as we looked at it -- Karen, correct me if I am wrong -- we anticipated it could affect this year's guidance by as much as $0.07, but we do feel that if rates don't change we will benefit from where rates are.

Okay. And I guess just looking at the guidance and what you have earned year-to-date of about, up 39 in FFO versus your midpoint of $2.88 excluding the interest that you spoke about a second ago. It would imply about $1.49 in the second half. I am just trying to see where that extra $0.10 will come from. Will it come from G&A savings, OpEx? Are you expecting sort of stronger revenues going into the back half of the year?

I think it's a combination of both; certainly the deferred compensation expense that is heavily weighted to the first part this year on an FFO basis. The second half of the year should really benefit from deferred comp expense of more like $0.02 rather than the $0.09 that is in the first half of the year.

Got you, okay. And then just looking at your 2011 maturities of about $100 million, I think you mentioned last quarter that you have about a 25% cushion in refinancing those maturities based on NOI growing from $24 million when it was originally underwritten to about $29 million in 2011. I guess I am just wondering where NOI is now on an annual basis for those assets and I am just trying to get a sense of how much NOI needs to grow from this point to reach that $29 million in 2011.

Well, there hasn't been a significant change in NOI since we made those comments -- was it three months ago? Obviously given same site performance and the fact that we are on budget there has been the expected growth in those NOIs. And we would expect them to grow 3% or 4%, 3% say, on NOI basis over the next two years.

Okay. And just last question, I know there hasn't been too many transactions in the space, but do you have a sense of where cap rates are now for your assets and what kind of cap rates lenders would use to underwrite a loan to you?

Yes, we have looked at ranges that have been between -- as low as 7% and as high as 8.75% with everybody looking to comps, as you know, across various asset classes and not a lot of comps being available. So I think that in our projections as we go forward, in the Midwest area we are looking at the 8% to 8.5% range for a conservative estimate as we look forward to refinancing. In other parts of the country we are at anywhere from 7.25% to about 7.5%.

Those are the ranges that we are seeing as we talk to the appraisers who are working with these lenders that we typically talk to.

Okay, great. Thanks for the detail.

(Operator Instructions) Bill Carrier, KBW.

Following up on that last question, are you looking to sell any of your properties and are any properties currently being marketed for sale?

I think that there are a number of defensive and offensive capital plans that we are looking at for 2011, even out as far as '14 and '17 with the uncertainty that has existed and the things that we have seen happen to other companies that had the maturities. So as one of the three or four different things that the Company and the Board is looking at, the sale of select opportunities or select communities is being looked at to potentially reduce 2011's $104 million worth of debt that comes due, or in fact reduce our credit line at that point.

And I don't mean to indicate that there is an aggressive marketing plan that is out there. But management, as we always do reviewing our assets, has identified two or three properties that we might offer up in some future period of time for sale.

Are you able to tell us if those are all age or age-restricted properties?

I don't think that level of detail has even been completed by us.

Okay. Your rental home program average rent per site has gone down sequentially in each of the past two quarters. What do you think is driving that decrease?

I think that this is a good question and an often asked question after the last conference call. I think it's just a healthy tension of us wanting to keep occupancy above our projections and budgets. We have experienced fourth-quarter fall off in occupancy for the last three to four years and we are determined not to have that fall off this fourth quarter, at least management is really, really focused on it.

One of the things that we are trying to do is take some of the rental agreements that are coming due and aggressively going and getting them re-signed up and offering a few incentives to get them to sign up for in fact 18 months as well as 12 months.

Okay. Speaking of occupancy, are you able to give us any kind of sense on how the third quarter is looking so far in terms of occupancy?

I think that I would say after meeting with management as recently as yesterday is that we are basically on our budget with all of our metrics, occupancy included. And there is nothing to indicate currently that the current gain we have on our budgeted occupancy is eroding.

Okay, thank you.

Andy McCulloch, Green Street Advisors.

This is [Chris Vananzon] for Andy. You spoke earlier about the expected NOI generation from the assets coming due in 2011. We have also heard that Fannie is enforcing occupancy minimums of, say, 85% to 90% on communities with a maximum of 10% rental homes. In light of this, have you had any conversations with Fannie about financing communities that maybe wouldn't qualify under their current standards?

It's Gary answering, Chris. I guess I would say we have ongoing conversations with Fannie on all different levels. We are fully aware of those guidelines and have had discussions with them. We have -- Karen, about $400 million worth of debt with Fannie? -- and are very interested in keeping that dialogue going.

The good news is none of it's due till '14 and a little of it in '17. So it's kind of hard now to determine four years out what the guidelines will be, but when I talk about them and the management and Board reviews the current marketplace I think the planning that many companies are going through in looking at how their debt is termed out takes into account a lot of different things.

One of the things, we just spoke about if we were to sell two or three selective properties or we look at refinancing earlier. Those are the types of things we are looking at now, but beyond that it is hard to say where Fannie will or won't be four years out. As well as looking at our portfolio and the sale or conversion of rentals to owner occupied is something that weighs into our thinking of how we can be prepared for that in the future as well.

Okay. And then can you just remind me when the majority of the debt tied to the Michigan and Indiana assets comes due?

I don't know. Does anyone have that breakdown?

I don't really have that breakdown. They are all broken out into pools and kind of geographically diverse, so I would say they are spread out throughout all of our maturities.

Okay. We can just follow up after the call. Thanks, guys. That is all I have.

(Operator Instructions) Ed Turville, REMS Group.

I apologize if I missed this, but did you comment about the dividend going forward? And is it still the intention of the Company to pay out nearly all of its cash flow in dividends as opposed to creating some cushion going forward?

I think that is a good question, Ed. I did not comment on it, but I think the comments as reviewed most recently in our Board meeting was to continue the current dividend with a review every quarter as it has been and a goal to have a dividend that after CapEx is paid out we are within the FFO and our earnings. That is our goal for the end of the year and we are very, very close to that.

Quarter to quarter I think that we will have better insight as to how we are doing to accomplish that goal. And from that goal at the end of year I am sure the Board will make another determination.

Okay. Thank you.

We have no further questions at this time. I would like to turn the floor over to management for any closing remarks.

I would like to thank everybody for participating again on the call. It has been a good quarter for Sun and we look forward to our next analyst conference call. Anyone who wants to call direct we are all available. Thank you.

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