Sun Communities Inc (SUI) 2010 Q3 法說會逐字稿

Welcome to the Sun Communities third quarter 2010 earnings conference call on the 28th of October, 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 delivered.

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.

I would now like to turn the conference over to Mr. Gary Shiffman. Please go ahead, sir.

Thank you, operator, and good morning. This morning we reported funds from operations of $14.8 million, or $0.69 per share, for the third quarter of 2010 compared to $14.1 million, or $0.68 per share, for the third quarter of '09.

For the nine months, FFO was $46.5 million, or $2.19 per share, compared to $43.3 million, or $2.08 per share, for the first nine months of 2009. The nine months and 2010 results reflect a $0.03 reduction in results due to the dilution incurred from stock issuance in 2010. The FFO results exclude various items noted in the table in the press release.

And at this point, I'd like to proceed to review the highlights of the quarter. Occupancy has increased by 510 sites during 2010, with portfolio occupancy approaching 85%. And as a historical note, the portfolio was often at occupancies in the mid-90% range prior to the industry issues that arose in 2000 and subsequent. So there is plenty of room to grow and to go in occupancy gains in the portfolio.

For years, the portfolio has gained occupancy in the first half of the year and then given back substantial amounts of the gains in the second half of the year. The gain of 76 sites of occupancy in the third quarter is the first third quarter gain since 2002 and the largest gain since 2000. We feel this is another real breakthrough as we continue the overall positive trend momentum in the portfolio.

In addition, the occupancy gains continue to reflect balanced growth across the entire Sun portfolio. Of the 510 gained sites, 46% were generated in Michigan, Indiana, and Ohio, in which 51% of our total portfolio sites are located. We believe this continues to reflect strength in demand for affordable housing in the Midwest, and although there remains general financial uncertainty around national recovery, currently the demand, turnover, renewal, and delinquency rates reflect stabilized and improving economic prospects in the Sun portfolio.

As we begin budgeting, putting our operational plan in place for 2011, I would note that each site occupied for one year generates about $5,000 in revenue, with very minimal incremental operating expenses. So entering a new year with 200 newly occupied sites equates to about $1 million in growth to annual revenue. At the end of the third quarter, our occupancy gain was more than 200 sites over our budget for the year.

The surge in applications to live in Sun Communities continues, with a total of over 17,000 applicants through September 30 compared to 14,600 in the first three quarters of 2009, or an increase of about 17%. Even more dramatic is the increase in the applications to buy homes, which have increased by 33% year over year. Applications to live in Sun Communities have more than doubled in four years, from a little over 10,000 in 2006 to an estimated 22,000 this year.

Reflecting the 33% increase in applications to buy homes, home sales are up by an equivalent amount of 33% over 2009, to 1,075 homes through the third quarter. We have been able to maintain our closing efficiency at 25% of those applications coming in, even as they increased by nearly 1,000 applicants between the years. And I think that speaks to the quality of the applicants, as the underwriting standards have remained unchanged.

Our home sales continue to exceed our home purchases through nine months this year. Third quarter home sales approximate 32% of year-to-date home sales, demonstrating continuing strength after the expiration in April of the federal tax credit program for first-time homebuyers. Further, this is the fifth consecutive year of growth in home sales, from 425 in 2005 to an estimated 1,300-plus in the current year, or an approximate tripling.

Applications and sales are directly related to the appearance and management of the communities. People choose to live in neighborhoods which are well maintained, attractive, and safe, and Sun has maintained the policy of continuous investment in maintaining its communities, which in turn sustains and supports the equity values of the homes in the communities.

In the third quarter, as we far surpassed the anticipated home sites needed to meet the 2010 budget, we have invested an unbudgeted expense or expenses of approximately $500,000 in certain communities to position individual sites and sections of the communities for more rapid and accelerated occupancy than budgeted.

In August, our first expansion in almost 10 years was opened with an initial phase of 21 new sites at Eagle Crest in Colorado, and a second phase of 103 new sites nearly completed. The initial 21 sites will be fully occupied in about 30 days, with approximately 14 reservations in place for late November and early December, when occupancy of Phase 2 will be ready.

Two other expansions in Texas, comprising 176 total sites, are scheduled to open next summer. River Ridge in Austin, Texas, has 337 existing sites that are fully occupied and will be expanded by 79 new sites. Pine Trace in Houston has 406 existing sites, fully occupied, and will be expanded by 97 sites.

The same site portfolio realized growth in net operating income of 2.9% for the quarter and 2.6% for the nine months. This is much stronger than 2009, and the quarterly growth was 0.001%, and the nine-month growth was 0.006%, so we are very pleased with the same-site growth that we're experiencing now.

Regarding our maturing debt, in July 2011 we have received a preliminary term sheet which proposes to refinance the $104 million at a lower interest cost than our existing debt while generating additional proceeds. We are also continuing discussions regarding an early renewal of our line of credit, which matures in October 2011.

We estimate fourth quarter FFO per share to be in the range of $0.75 to $0.79. Shares issued to date will create about $0.06 of dilution through year end. A preliminary estimate of guidance for 2011 FFO per share is a range of $3.03 to $3.15. And with this quarter, we are reporting the fifth consecutive quarter of FFO per share growth over the prior year's quarter.

And at this time myself, Karen, and Jeff will be pleased to take any questions.

Thank you. (OPERATOR INSTRUCTIONS.) Our first question comes from Mark Lutenski. Please state your company name followed by your question.

Hi, this is Mark Lutenski at BMO. A couple of quick questions. The first is on the line and the discussions that you're having right now. Could you discuss what you're seeing for pricing on that?

Yes. Obviously, the capital markets in general to REITs seem to have improved greatly over the last six months, and they continue to do so in addressing the line of credit as well as things like the securitizations that recently take place, I think, bode well for refinancing real estate over a period of time.

But the line of credit, when we first started preliminary discussions, started in a range about a year ago of 400 over, and they've tightened to what I believe is a range of about 250 over to 300 over for what we're looking at right now.

Okay. With the shares that were issued during the quarter, was that through the ATM program?

Yes.

Okay. And another quick question. On the rental home program, I saw that repairs and refurbishment costs increased. I was wondering if there was anything in particular driving that increase. And if so, can you discuss that?

Mark, we had an increase in repairs in our occupied homes. We did a resident relations program, a customer service program to go in and take a look at the homes and help us maintain the asset value.

All right-y. Thank you.

Thank you. Our next question comes from Bill Acheson. Please state your company name followed by your question.

Bill Acheson. Yes, thank you. Benchmark. I've got a question on the home sales. They were down versus the second quarter. I think I heard you say that the expiration of the home tax credit was partly responsible for that?

I think I was referring to they were down from second quarter, and what had happened is some other issues caused first quarter sales to be pushed into second quarter. But the point that I was making, when you look at third quarter, it represents about 32%, or one-third, of the year's home sales. So we feel pretty comfortable that the elimination of the tax credit incentive has not really impacted us to any extent that we can actually feel it.

Okay. So the pace of sales in the third quarter, is that a better run rate going forward?

Yes.

Okay. And then, quickly, on the financing environment for manufactured homes, is that something that's improved as well? Or is that still in the same morass as single-family site-built?

I think that there is very little unchanged. There's always a lot of talk on behalf of Fannie Mae and other government agencies about to provide additional financing for affordable housing, but we haven't seen anything change. I think that there are a number of programs actually being developed out there that are securitizations and somewhat, a little bit are being put together with financing programs that will be offered to community owners that weren't available previously, but nothing of any significance has changed at this point.

Okay. Thank you, Gary.

Thank you. Our next question comes from Todd Stender. Please state your company name followed by your question.

Hi, thanks. Wells Fargo Securities. Good morning, everybody. You mentioned applications to buy homes are up 33%, and 25% are closing. Where are the applicants coming from? Do you find that they're from the single-family residential market? Are they renters? Any changes to this?

No, I think that's a great question and something we monitor very, very carefully. I think that the first thing that we're seeing is that the manufactured housing customers, as I've shared in the past few phone calls, that had the available financing and over-aggressive credit available to them to buy site-built homes over the last seven to ten years no longer have any option whatsoever to be in a site-built home, because they shouldn't have qualified to begin with. So it is that group of residents that wish to probably not be in multi-family or to be a homeowner that have returned to us. And it is that customer that we appeal to well now, because their economics rate them best in a home that really is in the range of $30,000 to $50,000 as opposed to something north of $100,000.

Okay, thank you. And would you mind sharing some of your fundamental assumptions that bake into your 2011 FFO guidance?

I think what we're going to do at this point, because it's preliminary guidance, our budgets are under work right now, and our goal is mid-December to be able to put out those metrics, which would be a full 30 days ahead of what we have done in previous years.

Okay, thanks. And any changes on your margins, rental home sales versus new home sales?

We have shown a decline in our margins for our rental homes and new homes. Essentially, they're offset by volume, though. It's something that I think we talked about in a prior call, about decreasing the home price to increase the volumes and recycle the capital to reinvest in the program.

Okay, thank you.

Thank you. Our next question comes from Chris Van Ens. Please state your company name followed by your question.

Hey, guys, it's Chris at Green Street Advisors. A couple of questions here. I know that we're not very far into the fourth quarter, but how has occupancy trended in October so far?

I would simply quote that because we didn't discuss anything specific in the press release, that we are generally where we anticipated being coming off of our third quarter as it was.

Okay. And then can you speak to the potential acquisitions you mentioned over the past two quarters, how they're progressing? And then also, any new opportunities you may be seeing in the marketplace?

Sure would, Chris. They are progressing. They're progressing at a snail's pace, not even a turtle's pace. We have one community in Austin that we have discussed at the very beginning of the year. We've had it under contract. There have been environmental issues on one section of it. They've required a lot of extensive work to be done by the environmental company. I was told last week that that has all been resolved and cleared up, so I would anticipate that project moving forward, perhaps by year's end.

But the rest of them that we've been working on with the banks seem to just be very, very slow in their cooperation with the sellers or the short sales or things like that. So it's been a little bit disappointing that we haven't been able to put a few more acquisitions in the portfolio. There are a number of new opportunities that we're looking at there at this particular time. I think that with the possibility of conduits opening back up and there being some aggressive pricing on the available debt, there will be a little bit of an opportunity, I think, over the next couple of quarters to look at some things. But nothing as fast as I would like it to be.

Okay, that helps. And then finally, the share issuances that you guys completed this quarter--was that, first of all, under the committed equity program with REIT opportunity? And second of all, have your feelings towards that program changed at all, given what you've seen in the financing market as far as it loosening up?

Karen, I believe, it was under that program.

It was under the program, our docs program. It wasn't under the equity line. It was under our ATM program.

Okay, and then have your feelings changed towards that program, given what you've seen with, you mentioned the term sheet you got and loosening up as far as what you're seeing in the credit markets?

I think that the Company has been very fortunate with this structuring of its secured debt, in a period of time, a year and a half to two years ago, when the markets were in such disarray, and since the price fell down to $7.00 to $8.00, we were fortunate not to have to raise equity at that time. Of course, with the direction of the Board and with management, we've carefully watched the equity stock value increase in the Company.

We've taken advantage through the ATM program to carefully bring in some capital for the Company to make sure that our balance sheet stays liquid. We feel comfortable that each time we are using the ATM program, it is in the best interest of the shareholders. And again, taking care of the balance sheet.

And I think that there is no question that the Company is on the highest end of leverage, while at the same time, I think performing very, very well with a very good future in front of it. So we will look to continue to strengthen the balance sheet. Ironically, with the stock markets improving, our $104 million of debt is actually, could actually yield a lot more debt, but that doesn't help our leverage. It increases our leverage, so we'll seek to size that appropriately, and we will probably seek in the future to add additional equity as it's needed and as the timing is right for the Company.

Okay, thank you. That's all for me.

Thank you. (OPERATOR INSTRUCTIONS.) Thank you. We have a question from Larry (inaudible). Please state your company name followed by your question.

[Moore Simco.] You talked earlier about the sale of homes being a propellant for your revenues. Are you seeing an increase in the conventional customer that comes in just to rent a site?

Yes, I think that the rate of increase in applications, I shouldn't say as a percentage, the applications to rent a site are far greater than the applications to actually purchase a home. But the increase year over year or quarter over quarter has been greater as a percentage on the home purchase. So I think it tells us, Larry, a little bit about both things. There are more and more people looking to rent, and there are more and more people looking to buy, and we can't make any opinion of why one over the other, because they seem to be, both be increasing.

Are you getting cleaner credit applications on the ones who are coming into conventionally rent a site?

Like I say, everything's pretty identical to (inaudible), as I indicated earlier. We get about 25% approval to closing the applications. It's the same as it was last year and similar to what it was the year before.

Great. And so there's no indication that the banks are loosening up at the end user level?

No, I think all that's happening is the pool of customers is getting larger, and the interest and perhaps the necessity of looking at this form of housing has been increasing.

Okay. Goodnight. Thank you very much.

Yes.

Thank you. There appear to be no further questions at this time. Please continue with any remarks you wish to raise.

I'd just like to thank everybody for their participation. We're pleased that the Company, there has been continued growth and we look forward to sharing the fourth quarter results with everybody when it's completed. Thank you.

Thank you. This does conclude the third quarter 2010 earnings conference call. Thank you for your participation. You may now disconnect.