Sun Communities Inc (SUI) 2009 Q3 法說會逐字稿

Welcome to the Sun Communities, Incorporated, third quarter 2009 earnings results conference call. 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 to 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 advisor update any forward-looking statements to reflect the 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, Karen Dearing, Chief Financial Officer, and Jeff Jorissen, Director of Corporate Development. I will now hand the floor over to Mr. Gary Shiffman.

Thank you, Operator. Good morning, everyone.

This morning, we reported funds from operations of $14.1 million or $0.68 per share compared to $12.8 million or $0.62 per share for the third quarter of 2008. For the nine months ended September 30, '09, FFO was $43.3 million or $2.08 per share compared to $42.1 million or $2.05 per share in the first nine months of '08. Certain periods were adjusted for origin equity losses and flooding as detailed in the press release. Revenues increased to $63.4 million for the third quarter from $61.3 million in the third quarter of '08. In summary, it was a pretty good quarter with per share FFO growth up 2% over the 2008 period after the aforementioned adjustments. This leaves us on track to be able to once again affirm guidance from $2.84 to $2.92 for the 2009 year. We are currently in the middle of completing the 2010 annual budget and expect to be in a position to issue guidance for 2010 mid-January.

Before proceeding to the portfolio end review, I'd like to discuss the unusual items in the quarter. First, one of our properties in Atlanta suffered flooding from a brief, but torrential downpour, when the area received nine to twelve inches of continuous rain. It is estimated the unreimbursed cost, which relates primary to removal of debris material, is approximately $800,000 which has been expensed in the quarter. The manager who had worked at the community had performed an outstanding job; working for 30 years she had never seen anything like this rain accumulation in her tenor. Negotiations with our insurer are ongoing, and as with many weather-related claims we will require some time to work through. However, we deemed it prudent to recognize the entire loss as stated in the quarter.

The quarter also includes an equity loss from our investment and origin, approximating $850,000. This is due to the mark-to-market loan loss reserve, which do not impact cash flow which, in fact, continues to remain very strong. We remain optimistic that our cash flow assumptions, based on the origin 2008 proxy, remains in tact.

And now turning over to the Sun portfolio in review. Our rental increases continue to approximate 3%, with nearly all sites having received their 2009 increases. Same property net operating income grew at 0.1% in the quarter and 0.6% through nine months, which is slightly below our expectations. However, without the unusual spike in medical benefits this quarter the NOI growth would have been 1.5% in the quarter and 1% for the nine months which is, in fact, within 0.1 of one point within budget.

Occupancy in the rental program has increased by 232 sites year-to-date. The average rental rate, which had dropped 1% in the first six months, has, in fact, stabilized since then and flat for the year at around $726 per month. Applications to rent or buy in our communities exceeded 5,000 for the quarter, a new quarterly high. The strong continued traffic creates the opportunity to select the best credits to live in our communities as both renters and home buyers. The applications for the nine months were 14,600 in 2009 compared to 12,800 in 2008, and 11,202 in 2007. We have continued to develop and work hard at increasing applications through our website and we are seeing steady growth as we continue to work at access of new customers and new residents.

Home sales totalled 293 for the quarter, which is the strongest quarter to date, compared to 251 in the third quarter of 2008. The nine-month totals are 811 for 2009 versus 742 in the prior year. Revenue producing sites, which include seasonal RV sites, for the nine months, grew by 243 through September '09 compared to 88 in the comparable 2008 period. For a number of years we have experienced a deterioration of occupancy in the second half of the year. Revenue producing site losses for the third quarter have tallied from 2006, 259, 158, 37, and 46 for the last four consecutive years, including 2009. Improvement has clearly been substantial. October's improvement compared to prior years was also strong, and we believe that we will, in fact, end the year with a positive occupancy result.

The credit quality of our residents continues to improve as bad debt for third quarter as a percent of revenue declined from third quarter of 2008. And for site rent the percent declined from 72 basis points to 69 basis points. For the rental program, the decline was from about 4.45% to 2.97%. And, in total, the decline was from 1.52% to 1.19%.

We are continuing to negotiate a settlement with one of our lenders over a disputed monthly interest charge. While we have been expensing the entire higher amount, year-to-date our numbers reflect the increased expenses by $0.05 with another $0.02 to be incurred in quarter four.

At this time, I'd turn it over for questions. Both Karin, myself and Jeff would be pleased to answer any.

At this time, we will be conducting a question and answer session. (Operator Instructions). One moment while we poll for questions. Thank you. First question is coming from Bill Carey of Keith, Bruya and Wood.

Good morning. Your operating expenses were higher this quarter than in quarters past. What was driving that increase? Was that the unusual spike in medical benefits that you referenced?

Yes, that's correct, Bill. There was upwards of $400,000 increase in medical costs in the third quarter.

That makes sense. Your sales of preowned homes continue to increase. So I was wondering if you would be able to give additional information on those sales, maybe the number of those sales that are coming from your current rental program

Well there were -- how many rental sales did we have in the quarter?

Rental home sales were 531 for the year, 185 in the quarter. Total preowned sales for the quarter were 272.

Approximately two thirds of the home sales -- preowned home sales were out of the rental program in the quarter.

Okay. Great. And in terms of looking out at 2010, overall what do you expect many terms of demand for affordable housing versus what you have seen so far in 2009?

Well, I think that I would share with you, first of all, that we are looking for occupancy growth for the first time in almost ten years through the end of 2009, although we are cautious about stating anything as the year end isn't completed. The general trends that we have shared with everybody is at a loss of 47 sites through third quarter is the second smallest reduction we have seen in five years, so we are seeing positive trends throughout occupancy moving forward.

I think that we in particular pay very close attention to the Midwest because of the challenges of the rough spell in automotive. We have been pleased to announce throughout the year and on our quarterly calls that we have seen very positive trends in the Midwest, in particular in Michigan where I shared a mentality that says we are seeing less skip in the mix, we are seeing more frequent renewals, and we are seeing increased applications that we really believe this affordable housing presentation and factor of our communities is offering the only available housing opportunity to many of our clients who have gone off to site build housing over the last nine to ten years. Either one is moving out of our communities because they are moving in with mom and dad or because they are moving out of state for a job or other opportunities.

I think the best way we describe it is, we go two steps forward. There's maybe a step and a half backwards. Otherwise, we would be seeing greater growth, but that obviously is an impact by decreasing jobs. We saw the increase in unemployment announced this morning, and we played well and into the winds of affordable housing in that opportunity, but we are certainly not insulated from what's going on in the job market.

Okay. Great. Thanks.

Thank you.(Operator Instructions). Thank you. Next question is coming from Mark Lutenski of BMO Capital Markets.

Could you remind me what that 3% rent increase pertained to? Is that just the rental homes?

No, that's across the portfolio for site rent.

Okay.

You might recall the program increases about 50% first quarter and then rentable over the next two quarters.

Have you got any pushback on some of those increases?

No, we are actually, I believe, closer to 0.1 of our basis point ahead of budget on rental increases for this year.

How does that work? Do you guys ever negotiate with tenants when you want to push through that 3% and at the point say they can't afford it? Is there a negotiation on a case-by-case basis or if they just kicked out at this point?

No, I believe that each community and community manager up to the regional VP make determination on the rental increases each year. They do market surveys comparing other forms of site build housing, multi-family rental pricing, and competitive manufactured housing communities.

They compare our opportunities of a quality home site and/or rental home to those and determine individually how to set the rental increases. I think one distinction that Sun has always put forth for the last fifteen years is that we do have and continue to have capital improvements, money going back into each of the communities. So as long as we can show that roads are being improved, clubhouses are being built, pools are being maintained. Those types of things. These general rent increases have not met a lot of resistance. Occassionally in maybe a dozen or fewer communities, many of them in Florida, we will elect to have a multi-year rental increase. Three of those were just negotiated down in Florida. There will be either agreements on increases for three years or for five years based on associations working with our regional managers.

I'm sorry to make you repeat yourself, but could you -- what was the application volume for the quarter?

Applications during the quarter were, I think 5,000 for the third quarter which takes us to I think around 13,000 for -- 14,000 for year-to-date. 14.6 year to date.

Could you remind me what was in 2Q?

Second quarter. Second quarter 4,900 apps.

Okay. Got it. Karen, just a little housekeeping item. What was in that other income so I'm certain that items are in there?

Other income. Decline in other income?

What constitutes the other income?

Generally, it is just ancillary businesses and a gain or loss, disposal on assets. Last year we had a significant gain on vacant land, sale of vacant land. Last year, we also had some fees related to changes services on our note portfolio in that line item.

Got it. Thank you.

(Operator Instructions). Thank you. There are no further questions at this time. I'd like to hand the floor back over to Management.

Well, Jeff, Karen, and I would like to thank everybody for their participation. We are, obviously, very pleased through three quarters and looking for a strong finish fourth quarter when we have the opportunity to experience all our rental increases in place, a little bit greater occupancy this year and good healthy occupancy in our RV communities as we get into the colder months here and people -- the snow birds -- head to the south. So we are all available for questions and we look forward to speaking to everybody after fourth quarter. Thank you.

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