Sun Communities Inc (SUI) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Sun Communities second quarter 2010 earnings conference call on the 27th of July, 2010. 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 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.

Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS.) I would now like to turn the conference over to Gary Shiffman. Please go ahead, sir.

Thank you and good morning, everybody. This morning we reported funds from operations of $14 million, or $0.66 per share for the second quarter of 2010 compared to $13 million, or $0.62 per share, in the second quarter of 2009. For the six months, FFO was $31.7 million, or $1.50 per share, compared to $29.2 million, or $1.40 per share, in the first half of '09.

These results reflect FFO per share growth of 6.5% for the second quarter and 7% for the six months, a strong increase over FFO per share gain of 2% to 4% over the last few years. These FFO results exclude various items, as noted in a table to the press release.

This morning I'd like to begin by focusing on occupancy trends. As those of you who follow Sun and the industry know, manufactured housing has experienced a 10-year deterioration in the number of homes shipped by manufacturers, a simultaneous and precipitous decline in the dealer network that had always been our primary source of new residents, and a sharply more demanding underwriting environment with larger down payments and shorter maturities.

Despite substantial and prospering operations in Texas, Florida, Colorado, and the mid-Atlantic, our prospects are strongly influenced by the economic conditions in the Midwest. The domestic auto industry, which has teetered and tottered in the economic winds of the last few years, seems to have stabilized, somewhat anchoring the economic base upon which much of the Midwest actually draws its strength.

While much of the landscape has changed, the impacts related to the uncertainty of automotive job loss, the restructuring of GM, and the adjustment to the site-built housing market all are having favorable results with regard to recent trends in our Midwest portfolio.

For the last several quarters, we have noted that our Midwest portfolio, which is Michigan, Ohio, and Indiana, was steadily improving and that it was losing fewer sites and thus adversely impacting our growth markets to a lesser and lesser degree. We are finally able to report that the Midwest is actually a contributor to occupancy growth.

In the most recent quarter, the Midwest added 119 sites, and for the trailing 12 months, which include what has usually been a weaker second half, the gain was 34 sites. This in fact marks the first positive trailing 12-month period result in over five years. As a basis for comparison, the worst trailing 12-month period suffered a loss of 751 sites through June 30, 2007.

This represents a key and long-awaited turnaround in occupancy performance in our Midwest markets, which comprise about half of our overall sites. I'm pleased to report this positive trend and believe it bodes well for overall occupancy improvement within the portfolio.

Overall occupancy in the entire portfolio increased nearly a full percentage point during the first two quarters of the year, improving from 83.4% at December 31, '09, to 84.3% at June 30, 2010. And as would be expected from the developing strength in occupancy, our same-site portfolio performance benefited from stronger revenue growth to result in NOI growth of 3.4% for the second quarter of 2010 compared to 1.3% for the second quarter of 2009.

Portfolio applications, which provide the primary source of resident growth, increased by 23%, from 9,430 in the first half of '09 to over 11,650 in the first half of 2010. This reflects the increasing demand for our affordable housing lifestyle, and if the first half trend continues, we will top 23,000 applications to live in our communities for 2010. We believe this demand marks not only the return of our traditional customer, but that of several segments of newly interested residents expanding and accounting for the increase in applications.

First, with the restructuring of pay scale related to the automotive and other industries, particularly in the Midwest, as well as job loss and job change, manufactured housing is now the only affordable means of home ownership for some of this new segment.

Second, demand to rent an affordable home as opposed to buy has been on the increase. Further, our Midwest applications have also increased from 2009, with applications to purchase homes through the first two comparative quarters year over year increasing from 300 to 800. Applications to rent homes in that same Midwest segment of the portfolio and to convert from a renter to an owner have also increased.

Our home sales are now exceeding our home purchases, which represents a milestone and another long-term trend. The proceeds from home sales are gradually reducing the Company's need to allocate capital beyond that realized from home sales to buying homes to support our rental program. 732 homes were sold in the first half of 2010 compared to 518 in the same period of '09. To put the 732 first half sales in perspective, this is 1.5 to 3 times the new and pre-owned home sales in the first half of each of the years from 2001 to 2008.

Our rental home program has never operated more efficiently in terms of inventory levels and average days in inventory. With approximately 500 leases expiring each month before considering renewals, inventory was reduced to 515 homes at June 30, with an average days in inventory of 50. These are all-time peak achievements and reflect the efficiencies in the field related to refurbishment and re-leasing efforts, as well as the internal systems and controls at the home office, but underscore the demand for this affordable housing.

In addition, the average cost per turn of a leased home has continued to decline some $1,403 at June 30, 2010, from $771 at June 30, 2006, for the respective 12-month periods.

Our expansion program to bring on more sites in our stronger markets is well underway. 124 sites will open by the fall in Colorado, and an additional 200 sites will open in Houston and Austin next spring. These sites are adding to supply in communities that are currently 95% to 100% occupied, with rental rates that are approximately $100 greater than the portfolio average. In addition, these three markets have accounted for 16% of our total year-to-date lease, and only 3.5% of our available vacant sites.

The capital expenditures for these three expansions currently benefit from the front-end development and entitlement costs that were incurred more than 10 years ago. We are optimistic that each of these communities will fill at a rate of 35 to 50 sites per year and are reviewing our expansion opportunities in the portfolio that might be ready to benefit from similar trends as they occur over the next 12 to 18 months.

We continue our due diligence on a number of communities for acquisition, which represent turnaround opportunities with attractive and accretive returns on investment. This program has been slow-moving, however, as both the financial institutions and the owners in various stages of foreclosure are typically mired in a process of paperwork. Often, as they continue the process of foreclosure, short sale, or deed in lieu, the properties deteriorate in terms of occupancy, delinquencies, and appearance, which of course impacts the price Sun is willing to pay.

And finally, after considering the effects of the anticipated annual dilution of $0.04 per share related to equity and $0.02 per share of other one-time incurred expenses, we affirm guidance of $2.89 to $2.98 per share for the year.

And at this time, we would invite any questions. Operator, if you're there.

Thank you very much. (OPERATOR INSTRUCTIONS.) The first question comes from William Acheson from Benchmark. Please go ahead.

Yes, good morning, everyone. Everybody, I wanted to ask, if you look at the sales in the single-family home market, they're just simply taking it on the chin here. But your home sale program continues to improve. And I was wondering, is this a manufactured home industry trend, or is it just a result of a concerted effort on your part?

Bill, I like to think it's a little bit of both. I think that we often like to point out that the average home, single-wide, sells in a range of $35,000 to $40,000 for new and slightly lower for used. And then you get into sectional homes that average around $45,000 to $50,000 for new and less, obviously, for used. And those are very competitive price points.

And when we're asked a question about how the competition of site-built housing and the inventory of site-built homes is impacting our sales, I think we typically point out that there's just such a vast difference in price points that they're two different markets and two different customers that are going to qualify for them.

And the second answer is that the depth of the management team and experience in the industry at Sun, I think, can be viewed as having expertise that enables us to aggressively create the programs, the net promoters' scores that we're looking at, focusing on in 2010 indicate what satisfies the customers and all the efforts of management to get recommendations that are focused on satisfying those customer needs, and it helps us sell homes.

Okay, thank you. And given the improved demand here on the rental side, have you changed the outlook for more or less holding the rental rate constant?

Yes, I think that's a good question. I think what we saw over last year was about a $10.00 overall reduction, on average, to the previous year's rental rate, and it had been growing at a rate of almost 10% a year for several years prior to that. So I think we're looking at rental rates that are staying pretty constant or slightly increasing to hedge for costs of operating.

But we're not looking for any significant growth. We are looking to convert as many of the renters as possible into homeowners, and that's been working pretty much according to our strategic plan. So more interest in converting from renter to owner than there is, right now, in increasing significantly the cost to rent the home.

Okay. One last question. Kind of similar to what's going on in the apartment sector, although we really had no actual job growth to speak of. It's not really holding back a recovery in pricing power in your case and increased occupancy. How long do you think the improvement can continue without any real job growth?

I think that anyone could feel free to speculate on what they think. I think the way that it improved for our industry, and in particular for Sun's portfolio, is the fact that the affordability aspect is much more important to a growing segment, so we don't just have the return of our original base customer. We have an increased pool who wouldn't probably have considered manufactured housing previously. So I think it fuels a little bit of strength and growth beyond what happens in the job market. It just drives more customers to us.

Okay, thank you very much.

Sure.

Thank you. The next question comes from Paul Adornato from BMO Capital Markets. Please go ahead.

Hi, good morning. I was wondering if you could comment a little bit on July activity in both the rental and the sales programs. Did you see a continuation of the second quarter trends in the month of July?

I think that's a great question that, had we touched on it in our press release, we would be able to discuss it a little bit more, Paul. But I think I can share with everybody that, in affirming guidance and taking into account the dilution from the equity and some of the one-time items, our expectation and our message to America is that we continue to expect the trends that we're seeing to move forward and continue to be able to affirm guidance based on that.

Okay. And in terms of rental increases, could you remind us again what percentage of your leases are tied to CPI?

Paul, I think it's about 10% of our leases, of our sites, are 55-and-over sites, and therefore those would be the ones that would be related to CPI.

And what have been the trends, or what are your expectations in terms of increases? Do you think you'll be able to achieve better than CPI increases over the next 12 months?

Yes, I think that based into our original guidance, we had rental rate increases of about 2.5% through the first two quarters. And just remind everybody, about 50% of our rental increases take place in the first quarter, 25% in the second quarter, so about 75% have taken place, and the last 25% takes place in the third and fourth quarter. We're right on track with that budget of 2.5%.

In addition, I think that we oftentimes look to do multi-year rental increases in some of the adult communities so that they can lock in the knowledge and not be subject to CPI. I think two of those multi-year leases have been executed already down in Florida. So we will, I believe, see an average certainly well above CPI for the foreseeable future.

Okay, thank you.

Thank you. The next question comes from Mark Lutenski from BMO Capital Markets. Please go ahead.

Hey there. A question on the home sales. I was wondering, how did that trend over the months in the second quarter, was it high in the first month and in the second month, did it decline? What was the change?

I'm sorry, Mark. We're having trouble hearing your question.

Hey, can you hear me better now?

Yes.

Okay. I was wondering if you could talk about the trend of home sales over the second quarter. Did it change between the first and the third month, or was it constant?

Let's see. Home sales increased about 41% year to date. You're talking over the quarter. We sold 407 this quarter and 270 last quarter, last year--I mean second quarter last year. I'm not sure I've answered your question, though.

I'm just wondering, over the individual months, was it a constant stream?

It's improved. We sold 325 last quarter, 407 this quarter. It's kind of similar to--.

He wants a monthly.

A monthly?

For the second quarter. Tell him to give me a call back.

Yes, I'm sorry, Mark. I don't have monthly.

Okay. And so your guidance is unchanged, but you had $0.04 of dilution now and $0.02 of nonrecurring expenses included in that. Were you making up--I guess that's an increase to guidance. What has improved versus what your original expectations were?

So I think we have some anticipated increases in same property, in our guidance was 1.9% NOI growth. And we're at 2.5% through the second quarter. So although that's dependent on keeping occupied sites and maintaining our expense controls, we are anticipating some greater performance there.

And it's going to be somewhat offset by an increase in our G&A costs. I think our run rate in G&A, it will be about $1 million higher than the $16.4 million we have in guidance right now. So we're anticipating that, so that higher operating performance is going to trigger some anticipated increased incentive payments and other costs related to operating performance, legal insurance and consulting.

All right.

Mark, it's mostly coming from top line revenue and reflects what's happening with occupancy and the strength that we're experiencing, particularly in the Midwest as well as our other markets.

Okay. And last quarter you guys sounded a little bit more intrigued by acquisition prospects. I was wondering if you could comment on that in this quarter.

I don't think anything has changed except for, as I indicated, the painful, slow movement of the foreclosure process or the short sale process has just, after we've gotten into the contract phase, we've just been on the sideline as the lenders and the owners are negotiating final issues.

And so where we would have expected to be further along in closing one or two or three acquisitions, we are in the phase of still negotiating some price adjustments. And the banks and the owners are negotiating their final paperwork, which seems to drag on much, much longer than we think it should. But it's just a fact of doing business with them.

All right. Thank you.

Thank you. The next question comes from Andrew McCulloch from Green Street Advisors. Please go ahead.

Good morning, guys. This is Chris Van Ens, and Andy McCulloch is here with me as well. The first question, can you just remind me what economics are behind the rental home sales in particular? What sort of margins are you selling them at, what kind of returns are you guys generating, et cetera?

Margins on the rental home sales--let me see if I can find it real quick here. About a 20, it's about the same, it's about 24% margin on our rental home sales, and profits are about $6,000 a home--$4,000 to $6,000 a home.

And what sort of returns do you think you're generating on those?

What returns are you talking about, Chris?

Yes, returns on the rental home sales.

I think that basically, and again, I'm not sure we're answering this right, but we look to pretty much break even or show a small profit. And the program is just geared toward maintaining occupancy, as it was in a deteriorating environment over the last nine years. And now converting those owners into owners, so there is no real anticipated profit margin on the overall operation of the home sales in rental program.

Okay. And then on home sales in general, it looks like the gross profit generated from 2Q sales is about equal to that that you guys did in 2Q '09. You sold a bunch more homes this year. What's the reason behind that? Is that a mix issue, or are you actively lowering home prices or something else?

No, we are actively decreasing home prices in order to increase volume. The goal is to be accelerating the recycling of our capital to reinvest in the program.

Karen, okay, that makes sense.

I think we also have a particular program in place right now where we are focusing efforts on actually turning over and selling the oldest of the homes in the portfolio, so that might impact average prices and probably profit margins as well.

Okay. And you guys mentioned in your press release that you've sold around 0.5 million shares in the last six months. Is that all we're going to see, or do you guys plan to get a little bit more aggressive with your ATM, do you think?

I think we've been pretty consistent with the program and the message. I think we were initially at 1,600,000 shares in the program; about 1 million remain. I think that through the guidance and discussion with the Board and as we look at continuing to create good liquidity and looking at the balance sheet as to what we have coming in 2011, which is about $104 million securitization, and the renewal of our line, we are paying close attention that we're not in a position to have to raise capital, as others did at a time when the stock price was very, very low.

And we were fortunate enough to catch an updraft in the price and raise the equity through the ATM program. And it is likely that as performance continues, we will continue to look at opportunities for, whether it be equity or restructuring existing debt or improving on the line of credit, as we have in the most recent six months. So it's just continued efforts to make sure that we steward the balance sheet properly.

Okay. And then finally, regarding the renewable line of credit and the secured debt coming due in 2011, any more color on that, where you guys stand right now?

Sure. I think that we have been very much on the offensive. We've shared on the calls before, we have met with the participants in the line, we have discussed and reviewed several different options with regard to both the line of credit and the debt coming up. We continue to do so. We have a bank group meeting in August with the participants in our line of credit. We have received interest from several other banking institutions with regard to other types of facilities.

And we've also noted, as you may have seen, an improvement in the overall terms, certainly in the last three months or 90 days, with regard to pricing and terms in the facilities. And our approach to equity also plays into the strength within which we will be able to negotiate the renewable line of credit.

And as we've indicated before, the properties that make up the securitization are yielding NOIs of 15% to 17% greater than where they were underwritten originally. And we feel good, under a tough market, that we'll be able to successfully deal with the pending terms coming up, probably prior to those terms expiring.

So the bottom line is, we continue all efforts. We're very focused on that. And after '11, we have a little bit of room until 2014 before any significant debt comes up again. So it leaves us a lot of time to focus on this.

Okay. And what kind of rates do you think you can get on 10-year secured financing, whether it be agency or balance sheet lender right now?

The rates that we're seeing are right around 5% right now to 5.75%.

And that area, are you speaking, is that 60 to 65 LTV or something like that, or what kind of coverage ratios, too?

That's 65 LTV.

Okay. Great. That's all my questions. Thanks, guys.

Thank you. (OPERATOR INSTRUCTIONS.) The next question is from Mike [Bourgeois] from Bourgeois Investment Incorporation. Please go ahead.

Good morning. Might you provide some detailed insight as to the drivers of improvement in your Midwest portfolio? I know you mentioned some of the macro forces, but is there some other factors to consider, for example, the export industry strengthening in Toledo, or is there something happening in Grand Rapids that's having a spillover effect in your growth?

No, I don't think there is anything other than the macro trends that we referred to. I think that just removing the uncertainty of so much that's going on, a lot of the shift in job loss that has taken place, and obviously, the redistribution of some of the great employment talent that has left America has kind of stabilized. And I think that right now, we're benefiting from the affordability and the quality of the leasing opportunities that we have. And I don't know if anyone else has anything to add to that. I think it's just that simple.

Very well. And is there anything in the demographic trends that--I know you touched upon that briefly--but anything that surprises you? For example, the 55 and older group?

No, I don't think there's anything that surprises us. I think that we're very, very positive on the metrics that we're seeing, for two reasons. Seeing the toughest of our portfolio begin to improve quarter after quarter and get to positive occupancy is something, as I indicated, we haven't seen in more than five years.

And we keep referring to metrics that have not been this good in about a 10-year period of time. And we're at the point, I think, as I said in the last call, that we feel the trends are not just blips anymore. They certainly seem to be backed up by more than multiple quarters of positive direction.

So it's just good, solid management by the operations component. I think our rental strategy has proved itself over the last eight to nine years. I know that the Board and myself are pleased to see the conversion from rental to sales taking place right now, bringing more capital and making less dependency on the capital outlay for the rental program to fuel our growth. So generally, in a very, very tough Midwest market in particular, it's right now currently good to be in the manufactured housing leasing business.

I appreciate that, and congratulations on a solid quarter.

Sure.

Thank you. The next question comes from David Minkoff from Maxim Group. Please go ahead.

Good morning, guys. Nice to see the good results this quarter. I'm trying to figure out whether the tax credit had anything to do with some of this nice increase. The home sales, which were up 50.7% quarter over quarter--let me see, the tax credit expired in April, was it, but you had until June to complete the closing? Is that how it worked?

Yes.

So when would the accounting after that period be meaningful? For after April or after June, to see whether expiration of the tax credit was meaningful?

I would say it would be after April. We don't have near the lead time of site-built in terms of moving from an accepted offer to a closing. It's a much more contracted period of time in our industry. And as Karen indicated earlier, we do not have present with us the monthly sales for the second quarter, but certainly that's available. If anyone is interested in that, they can call Karen or I after the call, and we can get into what happened each month during the second quarter.

Yes, I think that would be interesting, especially in this event. And with the rental home sales, not only were the home sales up 50%, but coincidentally, the percentage of renters that bought homes were 50% of the total sales. Also, that 214 renters became owners in the quarter of the 407 units that were sold.

So when you think about it, that was almost a no-brainer for a renter, because a renter was already living there and was acclimated to the community. So with the tax credit expiring, he certainly should have bought, because he already knew what the community was like. That's probably an easier sale than a totally new person that may not have been familiar with it. Would you agree with that?

It certainly is logical.

Right. So you may need a couple more months to see whether the expiration of the credit affects those conversions from renters to owners, right?

I'm sure a little time will give us the seasoning to make a judgment on that.

Right. Okay. Again, great results, good hearing from you guys in this vein, and the stock is acting accordingly, I guess. So very nice. Good job.

Thank you.

Thank you. The next question comes from Cathy Hazlett, a private investor. Please go ahead.

Yes. What is the average site rent in Michigan?

I don't have that in front of me. The average is $409 for the whole portfolio. I guess--higher than that.

Kathy, I think it's an easy question to answer. If you just want to give Karen or Jeff a phone call, we'll dig it out. We just don't have it broken down in front of us.

Okay, thank you.

Thank you. The next question is from Ian (inaudible) from KBW. Please go ahead.

Hey, there. Can you hear me?

Yes.

Yes.

Okay. Just a couple of follow-ups. Can you give more color on the change in home pricing that you alluded to earlier? Can you give us some sense of or quantify that a bit, how much lower those prices are, and if you've in fact changed your underwriting standards on the portion that you provide financing for?

I'll answer the second part of the question. No, we have not changed our underwriting standards whatsoever. I think one of the key reasons for the success Sun's having, particularly in the Midwest, and it's all-age communities, is that we've kept those underwriting standards at the level they need to be in our industry. Most importantly, with average amortizations of 15 years, which I underscore is necessary so that people build up some equity value, or at the very least have a value in their home greater than the principal they own when they come to sell the home.

With regard to pricing of home sales--?

The average sales price on our pre-owned homes has dropped about $5,000 a unit.

Okay, thanks for that. Can you give me the interest rate and the LTV on the secured line of $20 million? Is that within the range you were discussing earlier? Was that you, Jeff?

Let's see, we've locked that in on a spread--.

5.5%.

5.5%.

And 65% LTV?

That sounds right. You're talking about the $20 million rental home line that's 200% collateralized, so--.

Okay.

I wouldn't, I don't have a (inaudible) value on that.

Okay, we could discuss it later. And just one last thing--would you recount for me in where your investment in Origin is today and what the near-term outlook is on when you think you'll stop taking losses on it?

Our investment in Origin remaining on the books at the end of the quarter is $18,000. So if Origin should have another loss in the third quarter, we will take a loss to the extent of that $18,000. And we'll stop taking losses if they, until they should start having income and that income exceeds the losses that we haven't taken on the investment. Also, they should begin making cash distributions to their shareholders at some point in time in the future.

Well, thank you. I'll follow up more on that later.

Thank you. There appear to be no further questions. Please continue with any other points you wish to raise.

While this doesn't specifically address the home sale question, looking at applications to buy homes, both from renters and from people that come into our communities off the street, those applications averaged 500 per month for the first six months of the year. And while in May they dropped to about 365, in June they were over 500. So that would suggest that maybe there was some sales that took place through April that borrowed a little bit from May. But the interest has picked right up in June to the average level of the first six months.

Okay, I'd like to thank everybody for participating today. Karen, Jeff, and I, of course, are available for any follow-up questions. We look forward to sharing with you our third quarter results, and thank you for participating.

Ladies and gentlemen, this concludes the second quarter earnings conference call. Thank you for participating. You may now disconnect.