Sun Communities Inc (SUI) 2010 Q1 法說會逐字稿

Greetings and welcome to the Sun Communities, Incorporated First Quarter 2010 Earnings Results Conference Call. 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 form 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'd 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.

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. Thank you. Mr. Shiffman, you may begin.

Thank you, Operator. And good morning, everyone. This morning we reported funds from operations of $17.7 million or $0.84 per share for the first quarter of 2010 compared to $16.2 million or $0.78 per share for the first quarter of '09. These FFO results exclude a state tax reversal and equity affiliated adjustments as noted in the adjusted FFO table accompanying the press release today.

This morning, we do have an abundance of good news and trends to report on. FFO per share has shown strong year-over-year performance for the third quarter in a row representing growth of 9.7%, 5.5% and 7.7% respectively. Occupancy improved to 83.9% in the first quarter of 2010 compared to 83.3% in first quarter of '09.

The 242 additional occupied sites gained this quarter include gains in all major markets including 106 sites in Michigan and Indiana. The 242 additional residents compares to 166 in first quarter of '09. And I'm happy to say the trend has continued in April with the addition of a net increase of 77 more residents in our portfolio.

In 2009 home sales increased to 1116 from 965 in '08. In the first quarter of 2010, home sales rose to 325, an annual rate of 1300. In April home sales surged to 191 representing the single largest total of homes sold during a month at the Company. Some of this may be attributable to the imminent demise of the tax credit, but in general, we have not seen that as a significant factor in our sales over its term, nor so far during the early days of May.

Homes sales result in owner-occupied homes and provide us with recycled capital to continue to build our occupancy. When we look at home purchases net of sales, we purchased 573 net homes in 2007, 387 net homes in 2008, and 236 net in 2009. In the first quarter of 2010 we sold 73 more homes than we actually purchased. This has the effect of better balancing the capital flows dedicated to home purchases in the company.

Applications to live in our communities surged 26% to 5748 in the first quarter of this year compared to 4572 the same quarter in '09. This is a strong statement of the attractiveness of our communities and the continued demand for affordable housing.

On the other side of the coin, the first quarter marked the lowest combined total of resident move-outs and resales, 7.3% in over 15 years. So residents appear to appreciate community living, management and, of course, the economics.

We have played defense in a beleaguered industry for ten years now generating modest FFO growth and positive same property performance. We are now at a point where we can look to sources of growth and opportunity for the future. We are focusing on improving rental rates, strengthening occupancy, increasing rental home sales, developing a few of our existing expansions and acquiring distressed properties.

Let's turn to the improving of rental rates. And in the portfolio, site rents have traditionally increased 3% to 4% per year. In the last few years the increase has been 2.5% to 3% reflecting the difficult economy and competition from site built housing based on the loose underwriting and overly abundant credit and apartments for rent had been plunging. As the economy slowly begins to improve and/or the demand for the Company's affordable housing has strengthened, we believe that our site rents will begin to return to historical increases. A one-half percent increase in site rent approximates additional annual revenue of $900,000.

The rental home program experienced a 1.1% reduction in the average rent from $736 in 2008 to $728 in 2009. Rental homes are typically priced at around 10% below the competing apartment product in our various markets. As apartment rents are expected to bottom out in 2010 in our markets before, perhaps, rebounding in '11, supported by an expanding economy and very limited additional supply of apartments in those markets, we believe it is reasonable to expect that the Company's home rents will also increase. Every 1% increase in the rental rate on rental homes in the portfolio equates to about $500,000 of additional annual revenue.

And now we look at the strengthening occupancy trends that we've been seeing. They've been favorable across all of our markets. The primary Midwest markets which has experienced losses of approximately 400 in 2007 and 2008, experienced a loss of 66 in 2009. In fact, it gained 114 positive sites in the first quarter of 2010. So, again, the trend has been slowing down and has, in fact, reversed from a negative loss to a positive.

Our primary Western markets gained occupied sites of 196, 259, and 269 over the past three years and 100 in the current quarter. A number of the communities in these markets are nearing 100% occupancy. And we'll discuss expansion opportunities in just a moment. But an increase of 100 occupied sites generates nearly $500,000 of annual revenue with very little marginal expense in the portfolio.

Another factor to note is the composition of the occupancy growth which reflects reduced reliance on renting of homes. Through April 2009 we would have lost 240 sites of occupancy compared to 138 sites at April 2010. Thus, this is a substantial improvement and reflects growing contributions to occupancy from dealers and relocations while the sources of occupancy losses are gradually and continue to diminish.

Turning to our rental home sales. While we have generally earned a return of 16% to 18% on our overall investment in rental homes, the revenue attributable to the home investment net of site rent and expenses has resulted in a 2% to 3% return on the cost of the home. When we sell a rental home at its original cost, we either earn 10% to 12% on the loan if we finance it, or generate a 16% to 18% return by reinvesting the proceeds if a third party finances the sale. This represents an increase of profitability of between $2000 to $3000 per home sold per year. Thus, the sale of each 100 homes generates an additional annual revenue of $200,000 to $300,000 dollars per year.

Turning to expansion for a moment. There are ten communities in Texas, Colorado, and North Carolina that have occupancies of 97% or greater. These communities have expansion sites available totaling well over 1000 sites. Sun has specialized in the development of expansion sites in the '90s developing thousands of these sites, which are zoned and contiguous to our existing communities.

The first expansion will consist of additional -- of an additional 124 sites to a Colorado community and we expect to lease about 50 sites per year driven by our sales, rental and relocation program. This investment should generate initial unlevered returns of 9% to 11%, increasing gradually to the mid-teens as any rental homes are sold off.

Finally, as I shared on our last conference call, we continue to review a number of distressed acquisition opportunities, which are seeming to share a common profile. The owner could not afford the capital requirements to operate a rental program and thus suffered deteriorating occupancy resulting in reduced cash flow which can no longer cover annual maintenance and debt service requirements. Additionally, many of these community owners have lacked the skill set and systems required to operate a successful and profitable rental program as Sun has learned has been necessary to stem the tide and difficulties in our industry from 2000 to 2009.

And these opportunities bid our strength, a strong operational sales rental team and systems which can be readily leveraged to exploit what's out there today. We currently have two letters of intent outstanding and are entering into a contract on a third property.

And at this time, both Karen, Jeff and myself are happy to answer any questions. And again, we share and are eager to share the opportunities for growth and the prospect that we're now viewing for the future of the Company.

(Operator Instructions). Thank you. Our first question is from Paul Adornato with BMO Capital Markets. Please proceed with your question.

Thanks. Good morning. In terms of the overall portfolio occupancy we've seen now as you mentioned some sequential gains and I was just wondering, what's kind of a target occupancy level for, let's say, the next two to three years?

Good morning, Paul. I think that the best way to answer that question is in the budget this year we have --

We're looking to grow about 300 --

300 revenue producing sites.

-- revenue producing sites, which is roughly 1%. And I think 1% to 2% annual growth in occupancy would be in the range of reasonable expectation for the company.

Okay. And looking at the market for manufactured homes, are you still buying them from financial institutions and what is the outlook for continued availability of that stock of homes?

Sure. I think the repossessions have dropped dramatically since 2000 and we're just slightly under the lowest levels of 2009. Do we have a targeted?

The repossessions are running about the same as they were in 2009, which has steadily declined as you had indicated. So we are still purchasing homes from financial institutions, but filling in with new homes where necessary.

And now, how is the market for the new homes?

The new homes that we've seen and shared in the earlier remarks are -- the demand is starting to increase. The alternative site built housing is not available either because the -- our customers can't get underwritten or the financing is not available or their credit won't provide for the necessary level. And we're seeing it, again, a return of customers that had been manufactured home customers for the last 20 years. I think that we're slowly expecting to see that increase. And we're also seeing an increase of outside dealers being brought into our communities.

Okay. And finally, just looking at the year-over-year average, weighted average monthly rental rate, which was essentially flat, do you think you've maxed out on rental rates or is that really a function of competitive apartment rental rates in your -- in those markets?

Yes.

Are we talking about the rental homes?

Yes.

Yes. I believe you're referring to the rental homes, right, Paul?

Yes.

I think you touched on the point where we do compete with markets in that state and try to price our product about 10% lower than apartments and with the anticipation of the apartments being able to increase their rents in 2011 and we do anticipate being able to follow suit.

And finally just on the acquisition -- on the potential acquisition of communities, I was wondering if you could comment on what your hurdles might be in terms of cap rates or initial returns. And are you able to offer stock as a currency and is that helping to potentially open up some doors for you?

Okay. So I think that I'll start with your first question. Most of what we're looking at are A and B grade communities that either have fallen in occupancy since 2000 and have had no ability to prevent occupancy trends declining because of the repossessions and the finance companies pulling the homes. So we are looking to buy those communities at cash neutral.

And then there are other opportunities, one or two that we're looking at that are communities that are A grade communities that were built directly into the problems and the difficulties and challenges of our industry competing against other forms of housing in 2001 to 2005. Those have minimal occupancies and we're looking at buying those at a discount of at least 50% of replacement value.

And the third point, with regard to our stock, we are looking at two transactions right now that utilize operating partnership units to effectively deal with tax difficulties that the sellers would have and the state planning issues that will assist us. And in each one of those cases, the stock strike price is adjusted to match the necessary accretive-ness of the transaction versus the dividend that we pay on the stock.

Right. Okay. Thank you, very much.

Thank you. Our next question is from Bill Acheson with Benchmark. Please proceed with your question.

Thank you. Good afternoon, everyone. It sounds like you guys are really getting back to your more traditional business model here after as you pointed out a fairly tough decade. Have you seen a change in where your new residents are locating from be it single family, apartments or other communities?

I think that what we've seen, Bill, is first time home buyers that were able to step right into site built housing between 2000 and 2008, can no longer do so. So we are getting that customer back. It has not been so much somebody stepping out of a site built housing back to us. That does happen in some cases, but it's mostly a factor of if we take the Midwest, the loss of job growth, the restructuring of the automotive seems to have bottomed out the losses within the existing portfolio. So as I indicated earlier, we've had the lowest amount of departure from the community in over 15 years. We're seeing less skips and evicts because there aren't as many alternatives for the people. And basically to your question, we're just seeing the return of the customer that needs to and can only afford to live in something that has a -- let's say a cost range of between $30,000 and $55,000 as opposed to $125,000 to $175,000 site built home.

Okay. You mentioned the auto industry and to a large extent they have gotten their act together. Sales were up pretty significantly last month. They are hiring, although a lot of the new jobs don't have anywhere near the wages and benefits as the older employees did have. But you do have a lot of locations that are kind of like in the back yard and dependant on the auto industry. Are you sensing a positive effect from the auto manufacturer's "turn around"?

Well, I'll give you what we're experiencing and then my personal optimism about automotive. But I think what we're experiencing, we remind everybody that the average combined income in our industry or in our portfolio is a total income of $28,000. So oftentimes people think of the automotive worker as being our residents. And most frequently when they were earning $60,000 plus, plus time and a half and overtime, they, in fact, were ideal candidates for site built housing. And we catered more toward service providers, hourly workers in the $15 range that could work from anywhere from a convenience store to a nursing home, but not at the level of a union contract. So we think that now with the new levels of pay in automotive, more and more of those workers fit the category and the need of the homes that we have to offer at Sun. And that's our experience over the last three to five months. Personal opinion is that I do believe that with the restructuring, we will see positive trends at the automotive companies and if those positive trends actually become reality, obviously, jobs will increase. They will start hiring again. And I think that spending cycle in and around our communities will definitely help what we're looking to do occupancy-wise there. But again, I emphasize, that's just my opinion.

Okay. It may be a little bit early here to talk about new supply industry-wide. But the lead time to prepare a new pad, a new site, is a lot less than in the apartment sector, certainly a lot less than the single family home sector. First of all, is it safe to say that any new supply in your markets that you're looking at would certainly not come from new communities, but from expansion of sites in the existing communities and do you have a handle on what that is?

Yeah. I think that we could safely say that economically it would be very challenging for somebody to develop a new community right now. The economics just would not work. I think when you have the benefit to lever on your existing infrastructure and fixed costs, expansions are the only thing that I could suggest that we could justify. And they have to be in areas that do have job growth and high demand. One of the benefits in the Midwest is that we are still doing very well due to our rental programs. And they would not be the first areas that we would be looking to expand in. We'd be looking to expand in many more communities that are showing outright sales and are approaching full occupancy.

Okay. Let me see. I think there a couple of sources out there that actually do do some clients for manufactured homes. I'm not exactly sure how good they are. I think the economy has gotten calm -- does it -- what are the figures that you're looking at, maybe from MHI?

Good question. We've sat with Clayton Homes -- I think they're still the largest manufacturer of homes as an executive team -- to meet with them and we bring out our entire management team and meet with them once a year. We just completed that. Estimates are between a low of 45,000 homes forecast at MHI to our estimates and Clayton's estimates which are at levels of around 60,000 to 65,000.

Okay. Thank you, very much, guys. Thank you, everyone.

Sure.

Thank you. Our next question is from Mark Lutenski with BMO Capital Markets. Please proceed with your question.

Hey, there. Sorry if I missed it. Was there any adjustment to guidance for the quarter?

I'm sorry. I didn't hear your question, Mark.

He asked about adjustment to guidance.

No. We have not made any adjustment to guidance, Mark.

Okay. And the wholesale sequentially increased but it looks like the net income out of that is a decline sequentially. I was wondering if there -- you could shed a little light on that?

Well, yeah, you are seeing some decreased profit margins in new home sales or in all of our home sales, actually. And I think that in general we have taken the approach of concentrating on achieving home owners rather than home renters. And at the present time, the Company's forgoing a little bit of immediate profit to kind of gain a resident that will be in the community for over ten years.

Okay. So the margin compression is really on the pricing side, it's not --

Yes.

-- is it a function of the composition of the homes being sold or anything like that?

I'm sorry. I didn't hear that.

Is it a function of the composition, the type of homes being sold over the quarter, does come into play at all?

Well, there certainly are more pre-owned homes being sold. A little decline in new homes.

It's not a function of the margin. No.

Okay. All right. Thank you.

Our next question is from Andrew McCulloch with Green Street Advisors. Please proceed with your question.

Good morning. First question on the homes sales. What percent of used homes has Sun provided financing for, call it over the last year? And can you give us what the general terms on that financing look like?

There's about 80% of the home sales that are financed third party. And the term is around 15 years.

Average interest rate of probably about 11.5%.

And then funds providing financing for the remaining 20%?

Yes.

And are the terms pretty similar?

Yes.

Okay. And then I'll --

Well and when we have those sales of those financed loans a little bit seasoned, we take them to the market. We have about $14 million in those loans currently in the portfolio and we are getting ready to take probably half of them to the market very shortly.

All right. And then on the rental program, can you remind me how you split the total rent between the home and the site?

We allocate market rent, market site rent and the remainder goes to the home site.

So it's done by community?

Yes. It is.

Okay. And then, final question. Just on the acquisition opportunities that you're looking at -- and I'm sorry if I missed this -- can you tell us where those are located and what the dollar investment is looking like?

These are onsies and twosies in general. They are coming from workout in banks or they're coming from owners who are looking to short sale and reduce their losses by cooperating with the bank. And they're pretty much scattered all over our existing geography.

Can you tell us what the dollar investment is looking like?

Sure. The communities are ranging from a cost of at the low of $2 million to $8 million.

Right. Thank you, very much.

(Operator instructions). Our next question is a follow up question from Paul Adornato with BMO Capital Markets. Please proceed with your question.

Thanks. Just on the home financing front, what's the appetite of third party lenders in the space these days?

That's a good question, Paul. It really hasn't changed. There is not a lot of available retail financing out there other than the traditional sources that we've been working with for the last 15 years. And what we're finding is that through our relationships we're able to sell or place about 80% of those loans immediately and 20% were as Karen indicated, we're holding onto and we're seasoning. Once those are seasoned, there a lot of alternatives for us to go out there and sell it. So, again, there's a little bit of a lag in between us putting out the capital and getting that capital back into the Company to recycle it. When you get into Florida and the retirement communities, you have a little bit more flexibility in that most of those residents have enough debt or -- I'm sorry -- have enough capital saved on their own so that if they want to finance it, there are traditional bank sources available to them. But not much in the way of national financing programs right now.

And Fannie Mae and Freddie Mac continue to talk about programs they will be releasing as soon as within the next three to six months, but they have been talking about them for many years now.

Okay. And just to follow up. On the 20%, you said that you would retain to season. How long do you have to retain them and what has been the credit performance of that pool?

We usually hold the loans from nine to say fifteen months before we resell them. And at March 31st, 2010, the overall 30-day delinquency on all of these loans was 1.78% based on units. And defaults and delinquencies remain well below our expectations. We believe that this is in no small part due to the fact that so many of these sales are made to people who have lived in our communities and rented homes for a period of time. And therefore, we've gotten to know not just their credit profile on paper, but their character as residents in our communities and they've stood up very well.

Okay. Thank you.

Thank you. Our next question is form David Minkoff with Maxim Group. Please proceed with your question.

Good morning, guys. On the 31% increase in homes sold, let's see, during the year, what percentage and I realize it may just be a guess, what percentage would you say was attributable to the fact that there was the tax incentive out there. I know you said it surged in April and that, you could say might have been done to -- due to the tax increase. But how much of the 31% would you say is due to that tax credit?

David, that's a really hard question to answer and we asked it before the call to our Sun Services Group if they could help us determine that. And their response to us is that they really don't get to see the opportunity -- they don't get the opportunity to see who's applying for that program the way they sell the homes. But the best they said to us was that their sense is it never really played as big of an impact as we had hoped because we ran a big program, "Ask us about the tax credit" for the last year. And during the brief five days of this month, they've indicated to us that they've continued to see what they saw in April. So their best anecdotal response to us was it didn't seem to play that big of a role.

Hm. That's pretty good. The other thing I had was can you talk somewhat about the larger financing that comes due next year? What are your options there? How do you see that going? I guess things are opening up a little bit, maybe you have some more choices now. But I'd like to hear from you on that.

Sure. I think we've shared with everyone on our previous calls and with those who talk to in between, Sun has always been very aggressive and in the past with all of our credit facilities we're discussing with the banks and the institutions well in advance of the term and the expiration with regard to about $103 million securitization. The term is up -- is it July 1st, 2011, assuming that's what you're talking about.

Right.

We have met with at least a half dozen bank groups that are either in our facility or we have relationships with and we're pretty far along the underwriting and the diligence with a couple of them to look at right sizing the facilities to look at the terms and we are seeing -- most of the feedback is that there is availability out there. It's firming up slightly. There certainly is a lot of uncertainty as to the securitization market and where it's going. So I think this will be pretty much driven by metrics that Karen and Jeff have put together that show the NOI and the underwriting of that loan to today's terms, which looks more like between 300 and 400 basis points over the treasury. We'll stand up very nicely and I think we'll be in a pretty good position to have structured refinancing well in advance of the terms of those loans or that loan.

Was that the bulk of the amount that came due in 2011? I thought it was a little higher than that?

I think the only other piece is our line of credit which comes due October 1st in '11 and again, we started that dialogue and we're pretty comfortable. We have an early commitment on that replacement as well.

Very good. So things are looking a lot better and congratulations on a nice quarter.

Thank you.

Thank you.

Thank you.

There are no further questions at this time. I would like to turn the floor back over to Mr. Shiffman for any closing comments.

At this time, I'd just like to thank everybody for their participation and acknowledge the great work everyone's doing at the Company. And Karen, myself, and Jeff are available all day today if anyone has any questions. And we look forward to announcing results for second quarter.

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