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Sun Communities Inc (NYSE:SUI)

Q4 2008 Earnings Call

March 13, 2009; 11:00 am ET

Executives

Gary Shiffman - Chairman & Chief Executive Officer

Karen Dearing - Chief Financial Officer

Jeff Jorissen - Director of Corporate Development

Analysts

David Toti - Citi

Andy McCullough - Green Street Advisors

Bill Carrier - KBW

Bill Carrier - Keefe, Bruyette & Woods

David Minkoff. - Maxim Group

Paul Adornato - BMO Capital Markets

Daniel Fisher - Wachovia Securities

Presentation

Operator

Greetings, and welcome to the Sun Communities Incorporated fourth quarter 2008 earnings results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

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 that the expectations reflected in any forward-looking statements are based on a reasonable assumption, 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’d like to introduce management with us today; Gary Shiffman, Chairman and Chief Executive Officer; and Karen Dearing, Chief Financial Officer, Jeff Jorissen, Director of Corporate Development.

It is now my pleasure to introduce your host, Mr. Gary Shiffman. Thank you, Mr. Shiffman. You may begin.

Gary Shiffman

Thank you, operator and good morning to everybody. This morning we reported funds from operations of $15 million for the fourth quarter of 2008 compared to $14.3 million for the fourth quarter of ’07, both before impairment and other charges of $15.6 million and $9.8 million respectively.

FFO per share for the year ended December 31, 2008 was $2.78, compared to $2.72 for 2007 both before impairment and other charges. Total revenue for 2008 was $225 million, compared to $236 million in 2007. For 2008 the affiliate loss including impairment charges for the quarter and year relate to Sun’s investment in Origen, in the amounts of $2.5 million and $16.5 million.

Also included in the fourth quarter and 2008 year results our asset impairment charges related to the carrying value of three properties which we no longer intend to fully develop about $6.9 million, and one property which has experienced severe local market conditions for $2.2 million and the company’s decision to cease offering, cable television and internet services in 12 communities which is due to the increase in competition and advances in technology related to DVR, pay-per-view and high definition type services.

The 2008 results also exclude severance costs of about $900,000, as discussed during the second quarter. Before we get into the details of 2008 and discuss 2009 guidance, I wanted to briefly comment on Sun’s position during the current difficulties in the overall marketplace. We are in fact in a pretty good place.

First; we are under no significant pressure from debt maturities. The 2009 mortgage maturities of $11.2 million are awaiting final term sheets which we expect sometime next week. We have only about $800,000 of debt coming due in 2010. In July 2011, approximately $104 million of secured debt is due and that’s on properties whose NOIs have grown consistently since the 2004 original financing, but we have two years for continued NOI growth in those properties and for the capital marketplaces to become a little bit more functional.

Second; our portfolio is performing well in this environment, where demand for affordable housing is strong and likely to strengthen further. In 2008, there were only two states, comprising 19 communities which did not generate positive net operating income compared to 2007. Indiana, where 18 of those communities are located experienced a decline of about 2.5% in net operating income.

Additionally, while we have lost 82 sites through February 2008, we have actually gained 40 sites through February 2009, a positive swing of 122 sites, which in fact are totally attributable to improvement in Michigan, Ohio and our Indiana markets. The credit quality of our portfolio is holding up quite well. Our delinquencies at February 28, 2009 total $806,000 which is about 36% lower than at the same time December 31, 2008 and slightly lower than the same period February 28, 2008.

Third; I just wanted to comment that the company feels it’s ready for this market. We’ve always invested in our communities to maintain their premier position within our markets. This is attested to by the continuing growth and applications to live in our communities, and our multi-year emphasis on customer satisfaction.

We also have an environment of accountability which really has resulted in a substantial qualitative and quantitative increase in the performance of our management team. So one had to be prepared for the turbulent times that exist now, as I’ve stated earlier I do think we are in a pretty good place and at this time I would like to review the portfolio.

The weighted average rental increase for 2008 was 2.9%. For 2009, we expect the increase to be 3%. We lost 47 occupied sites in 2008 compared to a budgeted loss of 100 sites and a loss of 132 sites in 2007.

For 2009, we have budgeted an increase of 190 sites, that includes 50 RV sites which are permanently cited in communities and these generally represent a conversion of seasonal RV sites and generate 12 months of revenue compared to about half of that, when they are a seasonal site.

This, of course only represents the second time since 2001 that net lease sites have or are projected to increase for the year. The improvement in occupancy when comparing 2008 to 2007 has spread throughout the portfolio while as I indicated the 2009 budget is based on improved Midwest occupancy which we are already experiencing.

We are budgeting the remainder of the portfolio to continue to perform at basically historical levels. JLT & Associates an independent real-estate market research company recently issued a summary of its 2008 and 2007 manufactured home community surveys and the surveys covered 71 major markets in the US and included just over 1,300 all age communities, with just under 370,000 home sites.

The national average occupancy in that survey was 82.7%, and the weighted average rent increase is 3%. Sun’s portfolio occupancy at December 31, 2008 was in fact 81.9% and the weighted average rental increase for 2008 was 2.9%. Sun’s portfolio, while weighted toward the Midwest is actually performing consistently with the results of the JLT & Associate’s national survey results.

Based on this research, it would appear that the company’s performance has been impacted more by the manufactured housing industry issues related to poor underwriting standards and repossessions that have actually dramatically mitigated, than by regional economic issues in the Midwest.

Our same property portfolio experienced a 2.3% increase in revenues, while expenses increased by 1% resulting in a 2.8% increase in NOI compared to a budgeted 2.4% increase. Our 2009 budget is for a 1.7% increase in same-property net operating income.

In 2008, we experienced occupancy in our rental home program to increase by 250, while rents increase by 3%. Occupancy actually increased by 189, while rents increased by a little over 2.5%. Home sales were expected to increase from 363 in 2007 to 600 in 2008. Sales actually ended the year at 596 and are budgeted in 2009 at 800. Rental rate growth will depend upon market conditions, but at this time the 2009 guidance includes no increase in rental rates, and that’s for our rental program.

The rental program continues to generate substantial traffic in our communities. As I mentioned in my comments in the press release today, applications to live in our communities have increased from 10,000 in 2006 to 15,000 in ‘07 to over 17,000 in 2008. This increase may well be a measure of the growth in demand as people seek more affordable housing, because other options are no longer available.

This source of customers replaces that which was formerly supplied by the retail dealer’s network. It provides the company with an effective means of reaching the public and selling them on the manufactured community housing lifestyle. This has proven to be an outstanding resident boarding system for potential resident/owners in our communities.

The success of the program is enhanced by the annual capital improvements, which have maintained the communities at the top of the quality pyramid and it’s why the company is positioned to meet increasing demands, related to the increasing need for affordable housing.

In 2008, we sold 965 new and pre-owned homes, which include the rental homes and this compares to 712 in 2007. In our 2009 budget we expect to sell over 1,200 new, used and rental homes.

Recurring CapEx is expected to be $7.4 million or about $0.36 per share in 2009 and using the midpoint of earnings guidance, funds available for distribution will approximate $2.52 per share resulting in a dividend which is 100% of funds available for distribution, based on an annual dividend of $2.52. The board does expect to declare a $0.63 dividend in early April.

G&A expenses totaled about $16.4 million for 2008, and are expected to approximate the same amount for 2009. We’ve included no contribution to FFO from Origen in 2009 guidance as fluctuations in the market price of its common stock may give rise to fair value adjustments, which will offset reported equity earnings.

Finally; with these operating metrics as our basis, FFO guidance is set at $2.84 to $2.92 per share, which reflects growth in FFO of between 2.2% and 5%.

At this time Karen, Jeff and I would be glad to answer any questions.

Questions-and-Answers Session

Operator

(Operator Instructions) Your first question comes from David Toti - Citi.

David Toti - Citi

Gary, can you just walk us through your strategy in terms of how you decide when a used home should be ear-marked for sale? Is it more age driven or location driven?

Gary Shiffman

I think that all homes throughout the portfolio in the rental pool, and the homes carried in the new used inventory are for sale. So at any given time, any home when it becomes either vacated or as we’ve discussed, we telemarket and approach our renters to convert them into sales. So they are basically all available for sale, there’s no determination as to which segment would or wouldn’t be for sale at any given time.

David Toti - Citi

What’s the targeted margin on that residual value, is there one?

Gary Shiffman

Historically targeted margin on the sales that we’ve had or on the assets in general?

David Toti - Citi

I guess going forward, given that you have an aggressive sales program. You must have a sense of sort of what kind of numbers you want to shake out.

Karen Dearing

Margins on those used home sales have been about 27% this year and I think they are budgeted for about the same next.

David Toti - Citi

Then how much do you link your financing program to the targeted sales? Is it completely intertwined?

Gary Shiffman

Yes, I think that the financing program that exists right now is predominantly through Sun Communities, but its flow funded currently through other sources that allow us to get the capital back upon sale.

David Toti - Citi

Are there general terms you could describe relative to the customer financing? What the typical rate or credit quality threshold?

Gary Shiffman

Yes, I think the current rate is 9.95% for the most qualified resident with a 10% down payment and then it goes up to around 11%, 11.25% for a 5% to 7% down payment and the average term running around 15 years now --

Karen Dearing

Yes 15.

Gary Shiffman

About 15 year amortization, FICO scores are generally between 625 and 725 and are rated, by rate accordingly through the underwriting process.

Operator

Your next question comes from Andy McCullough - Green Street Advisors.

Andy McCullough - Green Street Advisors

On the homes that you sold in 4Q, how many of those did you guys finance versus outside financing?

Karen Dearing

We have a program with 21st Mortgage where most of our home sales are financed through them. So in the fourth quarter, I would say a vast majority of them, probably 85%.

Andy McCullough - Green Street Advisors

Then on your debt maturities, are you guys looking at refinancing your 2011 maturities yet or would the prepayment penalties still be too big?

Gary Shiffman

I think that we’ve taken a look at it, and the penalties are in fact too great at this particular time. So as I mentioned earlier, we’ve had growing NOI in that portfolio and we expect it to continue to grow, but we will look at all our maturities and our line of credit even though it’s got a few more years to take the appropriate time when market conditions are such to refinance, or re-up the credit line as we’ve done historically, often times earlier than term.

Andy McCullough - Green Street Advisors

Just hypothetically, if you were to refinance today, what kind of term and rates are available in the market today?

Gary Shiffman

I think that recently we approached the lead in our credit facility and we discussed extension even though it’s late 2011, I believe and the rates that we are in currently are 165 over, and they felt that the current market would be closer to 350 to 400 over.

Andy McCullough - Green Street Advisors

What about more typical kind of secured mortgage product.

Gary Shiffman

Secured mortgage product, we are in the market right now looking at refinancing the $11 million that comes due in June and we are seeing about 300 basis points over LIBOR being quoted on about 70% LTV.

Operator

Your next question comes from Bill Carrier - KBW.

Bill Carrier - KBW

Good morning. Can you give a signature update, how many homes did you sell in the quarter and how many are you looking to sell in 2009?

Gary Shiffman

Sure. Karen, do you know the date and the amount we finished off with?

Karen Dearing

We finished off in 2008 with 55 signature home sales.

Gary Shiffman

Budgeted in 2009 is right around 60 signature home sales. Our original goal for 2008 was 90, but as we saw the total deterioration and meltdown in site build housing which is what signature was completely geared to compete with. We put and had a little bit less emphasis on signature and more emphasis on generating occupancy through our rental program and converting the homes as you’ve seen, from 300 to 600 ‘07 over to ‘08 and then 800 in ‘09.

So I would expect, roughly the same amount in signature and as we see a little bit more stabilization in our economic market, I think we’ll light a bigger fire under the signature program again.

Bill Carrier - Keefe, Bruyette & Woods

In each of the last four years you’ve gained occupancy in the first half of the year and lost it in the second half of the year. So what do you think has caused that seasonality and have you assumed that same seasonality for this year?

Gary Shiffman

Yes, we have assumed it for this year and I can tell you, anything that I would say on what cause it is would be speculation, because we have sure tried as a management group to pinpoint it, so that once we do identify it we can work on it.

What we are working on right now is a little bit of an alteration to the timing of the turnover of our leases so that they can be more evenly distributed or more heavily weighted to the first half of the year. Jeff, do you have anything on historicals?

Jeffrey Jorissen

In 2006, in the last half of the year we lounged about 700 sites. In 2007, in the last half of the year we lounged about 225 sites and this year in the last half of the year, we lounged about 186. So yes, the pattern holds but the pattern seems to be mitigating quite a bit.

Gary Shiffman

I think it’s just been sheer focus on trying to mitigate that pattern, but we don’t have something to point to, other than currently trying to adjust expiration leases by trying to do an 18 month lease, a 16 month lease anything that steers it out of that fourth quarter.

Bill Carrier - Keefe, Bruyette & Woods

As far as the dividend is concerned, your dividend coverage is tight and the current yield is over 20%. So with many REITs reducing their dividends over the past several months, what are your thoughts on lowering your dividend or paying part of the dividend in stock?

Gary Shiffman

I think that’s something the board very carefully looked at in its most recent meeting. I think it’s something as I said before, the board reviews carefully every quarter. Certainly that consideration was reviewed. Certainly where the stock has been trading there has been concern over value of the dividend against the value that isn’t being recognized in the marketplace, but currently the board feels comfortable with the balance sheet, liquidity and as I indicated we’ll declare a dividend for first quarter in April.

So we’ll continue to review that and those points will be under review each time the board gets together.

Jeffrey Jorissen

In addition the ability to pay in common stock is to satisfy the requirement under the code to distribute 90% of earnings. Our requirement would be in the low millions of dollars, just to satisfy the IRS code. The company has under no consideration whatsoever of issuing its common stock in payment of the dividend, because of the massive dilution inherent in such an action.

Operator

Your next question comes from David Minkoff. - Maxim Group.

David Minkoff - Maxim Group

Congratulations on nice numbers in a difficult environment. Subsequent to 2008 you had a $40 million floor plan line that matured and I see you’ve replaced it with a $10 million facility. Was that cut back by the lender or was $10 million all you required?

Karen Dearing

Our $40 million facility, with a different lender matured and we secured a new line with a different lender for $10 million.

David Minkoff. - Maxim Group

Was $10 million all you required on this--?

Karen Dearing

The other line had the ability to borrow against rental homes and other items. It wasn’t just for new homes.

David Minkoff. - Maxim Group

Regarding the question, previously on the dividend I just have a comment. I think it was wise paying the dividend in cash and not using stock, because with the stock as low as it is, why dilute and use the stock as a currency at that low level. In fact at a 23% yield, the stock could be 25% and still yielding 10%.

So in that light, has the company considered, and/or do the lines provide for a buyback of stock and do we have room to do that?

Gary Shiffman

I think that, David the Board had authorized a million share buyback of which only a couple hundred thousand shares were utilized previously. It’s something, again that’s always under review, but I would suggest at this particular time with the uncertainty of the marketplace, and certainly with the fluctuation of our stock price and the disconnect between the dividend and the share price, the wisdom of the board at this time was to just move forward and review it each quarter.

David Minkoff. - Maxim Group

That’s probably wise, but what price was the stock when you authorized the million share buyback?

Gary Shiffman

I can’t tell you that. I think it was reconfirmed probably a year ago and then it was reconfirmed, I think a couple board meetings ago.

David Minkoff. - Maxim Group

I guess so. The stock was probably in the 20 range or something like that at that point, right?

Gary Shiffman

Yes it’s possibly, yes.

David Minkoff. - Maxim Group

So it’s even more compelling now at 10. I mean with interest rates at practically zero, depending on what rates you use. 23% to me looks kind of compelling when you consider the guidance going forward in 2009 and that’s not even accounting for any appreciation. So this is probably a better yield than you get on your business. 23%, the stock went up some more, it just adds to that. To me it’s compelling so –

Gary Shiffman

We will pass that along.

David Minkoff. - Maxim Group

Keep doing your thing. You’re doing a good job and I’m happy to see it. Thanks a lot.

Operator

(Operator Instructions) Your next question comes from Paul Adornato - BMO Capital Markets.

Paul Adornato - BMO Capital Markets

The headlines these days are dominated by the auto industry. I was wondering if you could comment on the impact of the auto industry on your business and what you expect from here.

Gary Shiffman

I’ll start and then anyone can add. As I said in our comments, the up-tick in growth in the portfolio certainly for the last two months when the automotive is at the headline has been nearly 120 site increase in occupancy for January and February all predominantly in Michigan, Indiana and Ohio.

So I think what we are seeing, and one of the reasons we’re holding our rents a little bit more consistent in the rental pool is that we have a large appeal currently within the Midwest, probably related to a lot of the uncertainty of automotive and the affordability factor of what we’re offering, but we are still on the low side offering space at about $0.50 a square foot all in and on the high side $0.70 a square foot on a monthly basis.

That’s still is compared very favorable to other forums out here. So we all watch closely what happens with the automotive industry in the US, I think that so far the affordability factor, we’ve had a slight up-tick in benefit from it. We anticipate that even if it were to worsen a little bit, the size of the pool interested in our offering for residents continues to increase.

Paul Adornato - BMO Capital Markets

I guess, related question is that all things being equal, at some point a decrease in income of all Americans is going to affect your residents as well. So at what point might you expect an influxion in the positive credit trends that have happened in your portfolio over the last two or three years?

Gary Shiffman

Paul I think that’s a really good question and I think the way that I have been discussing it, certainly internally and then anyone else can add. It’s almost as if we are taking two steps forward on the affordability factor, but we’re losing one step on job loss and the issues of ability to pay and credit as you just indicated. So I think that the good news is the broad pool and available customer to us increases at a greater rate than the loss of deterioration of credit and jobs so far.

If that were to change, certainly we might lose our edge that we are forecasting for this coming year, but so far it’s the larger pool and the more affordability that’s outpacing the downside of what would happen to credit as the economy continues to deteriorate.

Paul Adornato - BMO Capital Markets

I think you may have mentioned this. I apologize, but how did the trends continue in January and February of this year in terms of the portfolio performance, credit quality, occupancy etc..?

Karen Dearing

I think Gary did mention a little in his call script that we have seen a decline, actually in delinquencies from the end of the year and a slight decline from this time last year and I think the occupancy has also improved in the Midwest as Gary mentioned.

Operator

Your last question comes from Daniel Fisher - Wachovia Securities.

Daniel Fisher - Wachovia Securities

Good morning. I just had a question, first of all your business seems to be very reliable in its cash flows and its operations and you’ve been very consistent with your dividend, but now that the stock price is where it is, the issuance of the dividend represents a major change in the stock price when you go ex-dividend and I’d like to suggest perhaps that you consider a monthly dividend to keep the volatility down and the stocks to more closely reflect the consistency of your business.

Gary Shiffman

Daniel, that’s something we can definitely take back and review. It’s an interesting concept and something we would have to look at.

Daniel Fisher - Wachovia Securities

It also gives reassurance to shareholders that the dividend is really there when it goes monthly. The second thing I was talking about; when people are talking about stock buybacks, I was wondering whether or not rather than buying your stock back would there be a thought, or perhaps buying some of your debt back in some manner, that you could perhaps in this debt market you would be able to buy your debt back at a pretty big discount, and there you wouldn’t just be putting your cash out to buy equity, but you’d be lowering the risk of the business by having less debt.

Gary Shiffman

Sure. I’d suggest to you that it’s something we’ve been looking at very, very, very carefully. We have yet to make significant progress, but we are looking at it at every level of debt that we have in the company.

Operator

There are no further questions at this time. I would like to turn the call back over to management for closing comments.

Gary Shiffman

On behalf of management we’d like to thank everybody for participating in the call. Karen, myself, Jeff are available for any follow-up. We certainly look forward to reporting to you after first quarter is completed. Thank you.

Operator

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

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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