Sun Communities Q3 2007 Earnings Call Transcript

Nov. 8.07 | About: Sun Communities (SUI)

Sun Communities Inc. (NYSE:SUI)

Q3 2007 Earnings Call

November 8, 2007 11:00 a.m. ET

Executives

Gary Shiffman - Chairman and CEO

Jeff Jorissen - CFO

Karen Derring - CorporateController

Analysts

Skyler Cho - Citi

Paul Adornato - BMO Capital Markets

John Stewart - Credit Suisse

Andy McCulloch - Green StreetAdvisors

Steven Rodriguez - LehmanBrothers

Operator

Greetings, ladies and gentlemen,and welcome to the Sun Communities' Third Quarter 2007 Earnings Results. Atthis time, all participants are in a listen-only mode. A briefquestion-and-answer session will follow the formal presentation. (OperatorInstructions). As a reminder, this conference is being recorded.

At this time, management wouldlike me to inform you that certain statements made during this conference callwhich are not historical facts may be deemed forward-looking statements withinthe meaning of Private Securities Litigation Reform Act of 1995.

Although the company believes theexpectations reflected in any forward-looking statements are based onreasonable assumptions, the company can provide no assurance that itsexpectations will be achieved. Factors and risks that could cause actualresults to differ materially from expectations are detailed in this morning'spress release and from time-to-time in the company's periodic filings with theSEC. The company undertakes no obligation to advise or update anyforward-looking statements to reflect events or circumstances after the date ofthis release.

Having said that, I'd like tointroduce management with us today Gary Shiffman, Chairman and Chief ExecutiveOfficer; Jeff Jorissen, Chief Financial Officer; and [Karen Derring], CorporateController. Mr. Shiffman you may begin.

Gary Shiffman

Thank you and good morning. Thethird quarter earnings as announced prior to the market opening today werefunds from operations of $11.8 million or $0.58 per share, compared to $11.8million or $0.59 per share in '06.

For the nine months, funds fromoperations were $41 million or $2.02 per share compared to $39.5 million or$1.97 per share in 2006. And at this time, we would like to review theportfolio with you.

Rental increases have beenimplemented for nearly 33,000 of our occupied sites to the first nine months of'07. The weighted average increase for these sites is 3.6% or just slightlyhigher than the 2007 budget of 3.5%.

Through September 30, '07occupied manufactured housing sites have declined by 65, this represents a lossof 160 sites in Q3,'07 compared to a loss of 263 sites in Q3,'06 or animprovement of about 40%.

These site losses areconcentrated in a few Midwest communities, twocommunities have accounted for more than the net loss sites year-to-date and 15communities accounted for the 160 net sites lost Q3, of '07.

We continue to manageaggressively to counter and/or mitigate the historical second half loss ofsites that we have discussed in prior call and we do feel good about theprogress and improvement that we made in third quarter.

The net operating income of communityoperations increased by just under $600,000 over third quarter of '06, whilethe operating income of the home rental operations increased by just over$160,000 together these account for a third quarter year-over-year improvementof $762,000 or approximately $0.04 per share.

The number of homes rented in ourcommunities increased by 108 in third quarter to 5,134 while the number ofrental homes sold was 90 for the quarter and 281 for the nine months whichcompared to a total of 131 in the first nine months of '06.

Rental rates for the homes haveincreased by 5.6% over the last year, to an average of $716 per month atSeptember 30, '07.

Repos have continued to declineand are running at slightly less than 30% below '06 levels and nearly 50% below'05 levels. Similar declines have reduced the existing number of Repos in ourcommunity to a level of 248 at September 30, '07.

Our same site portfolio generateda 2% increase in net operating income, for the nine months, consisting of 1.9%increase in revenues and a 1.7% increase in expenses.

Occupancy declined from 82.7% atDecember 31, to 82.5% at September 30, in '07.

Rental applications, are running 60%ahead of third quarter of '06, while applications to buy the rental homes arerunning nearly 50% ahead of the '06 quarter.

Applications for the purchase ofother new and pre-owned homes declined from 310 in 2006 to 176 in 2007.

In Florida, both new home sales as well asprofitability of sales, has fallen short of our budget. So, we have seen a slowdownin Florida.

And I think, for those of you whowere on the call last quarter, we noted that we have been working withmanufacturers of our product or manufactured homes to design a new and moreattractive product. These homes highlight front entrances nine-foot ceilings,drywall and really a dedication, the quality and distinguishing features whichwe think compete very favorably with comparable size new site-build homes.

We ordered and took delivery ofseven prototypes and played 75 Midwest communities,all of those have sold after we released them and really based on thoseresults, an additional refinements that we've made to the homes after eachprototype was delivered. We've ordered 40 additional "Signature"homes to be placed in 16 of our Midwestcommunities.

As of today, 23 of those homesare delivered and being set-up and all models should be delivered to set-up andready to show by mid-December where we will roll-out the "Signature"program. The program really was designed in part to attract those who are nowshut out of the site-built home market and in that regard, we've entered intodiscussions with various real estate brokerage firms to familiarize them withthe product and to provide them with really another source of commission fortheir customers who can no longer get approved for the typical site-builthousing but you can be approved for our "Signature" products which ispriced in the $45,000 to 65,000 range.

So to summarize, the portfoliofundamentals relating to existing repos and incoming new repos have returnedand continue to operate really at levels of normalized operations of their stabilizedimprovement to the past six years.

Sales of homes in our rentalprograms have been above budget and trending positively, as we convert rentersinto owners and rental rates in overall occupancy and our rental program remainstrong.

Regional economics in the Midwest continue to impact growth of occupancy andfurther increases of NOI in two different ways. Costs associated with theseasonality in the second half related to increased turnover in the rentalhomes and the lack of new home sales that really generate gains from increasednet revenue producing sites, and I've reminded everybody keeping our rentalsflow doesn’t increase revenue producing sites bringing a new home into thecommunity, does increase our revenue producing sites and it’s what we'relooking to do with our "Signature" program.

So, while management continues toaggressively battle, what has been historical fourth quarter seasonality, whichis the turnover in the rental program, I'd just referred to. We will also befocused on growing the initial success on new home sales in the Midwest with our "Signature" home sales programas we roll that out.

The quality and value propositioncreated in partnership with our manufacturers, we believe should compete veryfavorably with site-built product that is once again out of the reach of ourtypical customer and each of these sales would represent a net positive revenueproducing sites starting when we roll this out fourth quarter.

This time both Jeff, I and Karenwould be available for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Ourfirst question comes from Jonathan Litt with Citi.

Skyler Cho - Citi

Hi, this is Skyler Cho callingwith Jonathan Litt. Could you give us a break down of what was in other income,it looks like there may have been some kind of loss due to disposition ofassets?

Gary Shiffman

Well, there's always a lot ofdisposition of assets in that line item. Last year in the third quarter thatnumber was 844,000, and this year it's 1,118,000, and that's generally assetsat the community level that are disposed or traded in, in the normal course ofbusiness.

Skyler Cho - Citi

Okay. And I guess, this number'skind of bounced around quite a bit. So, what kind of contribution should weexpect in 4Q and I guess, going forward into 2008?

Gary Shiffman

Well, we don't have our 2008budget done but the primary item of stabilities are the two items that are tendto be recurring in this category are brokerage revenues, which were down thisyear because of the slowdown in activity in Florida because people can't selltheir homes up north and therefore, they are not buying in Florida and assets disposals.Other things are dramatically less predictable like last year in Q3 we have --or in the nine months, we had a lawsuit settlement, so it will be adds and in.So, it's not all of this stuff is susceptible to prediction or budget.

Skyler Cho - Citi

Okay. And I guess, my otherquestion is about guidance, you think that the range of 266 to 272 is stillachievable given that FO was $0.58 you need may be $0.64 to hit the low end?

Gary Shiffman

Yes, I think that we would feelvery comfortable affirming that guidance.

Skyler Cho - Citi

Okay. Thank you.

Operator

Our next question comes from PaulAdornato with BMO Capital Markets.

Paul Adornato - BMO Capital Markets

Hi, thanks. I was wondering ifyou could talk about the two communities that accounted for the bulk of themove outs, what was happening there, is it close to auto plant or othereconomic factors?

Gary Shiffman

Yeah, sure. There are twocommunities in around the Indianapolisand I think that definitely is rough both related, where we have seen somelayoffs in job related repossessions and deeds in lieu of that exist in thosetwo communities, and they grew very close to each other. We think we arethrough the worst of them. But they definitely have an impact up there.

Paul Adornato - BMO Capital Markets

Is there any action that youcould take in order to ameliorate the situation in those two communities workwith the tenants in any certain way or is it really a tough situation for them?

Gary Shiffman

Paul, I think that certainlythere is always action that we can take. I think, that when we refer to what weare trying to accomplish is here, I would remind everyone on the call that inlooking at occupancy for 2007. We made the decision to reflect the occupancytrends of actual in 2006.

So, our '07 budgets reflect anegative occupancy roughly 500 sites. So, everything that management has beenfocused on, has been reversing that trend, so, that we would be more favorableto our budget. I think that we did a successful job, in third quarter byimproving the lost sites by about 40% year-over-year and losses in our rentalprogram. And I think, we'll look to do that in fourth quarter where we reallycan have a positive impact on our budget, and when we get to these twocommunities because they made up roughly all of the 60 lost sites, there is anawful lot of focus on how we can work with the residence in there to make surethat we are doing the best job we can, whether it would be by working with themon a payment plan or by working with them to move from one type of home toanother type of home. But I think, what you see is in large part the reflectionof -- a give-back of some older homes, where again once again the amount ofmoney that they owed on those homes was greater than the actual value of thosehomes in today's market. And they have to recirculate in the form ofrepossession or in the form of rentals for us to make any progress there.

Paul Adornato - BMO Capital Markets

Okay. And looking at the"Signature" program, the home set you've already sold thoseprototypes, do they occur in the third quarter or is that fourth quarteractivity?

Gary Shiffman

I think that five of those homesclosed in third quarter and two of those are due to close right now actually infourth quarter, and interestingly enough while we had been prepared to financethis program that sale of some homes in this program, to jump start if youwill, the understanding of the value proposition of buying one of these homes.Four of the five homes that sold so far were financed by third-party financing,and either one or two of the additional homes to be closed are also third-partyfinancing. So, we've been very pleased at the fact that third-party financinghas stepped in and these people have qualified for it.

Paul Adornato - BMO Capital Markets

And those third-party lendershave they financed the product traditionally are they manufactured homelenders?

Gary Shiffman

I can't answer that positively, Iam looking at some data and all sales homes. I think, it's a combination ofone, two, three traditional sources that I could identify that are valuabletriad, one origin, one looks to be cash which we don’t know if that’s a localbank or not, so that’s just the best information I can provide.

Paul Adornato - BMO Capital Markets

And you talked about reaching outto the traditional brokerage community, have traditional brokers ever sold theproducts before?

Gary Shiffman

I think that the answer to thatis basically no, there have been an occasional broker that over my 30 yearsthat might specialize in brokering used homes in a specific community usuallyenough scale community, but it's definitely not the norm and there has neverbeen any real significant participation in a program like this. So, I thinkthat we have approached basically one regional, large regional and one nationalbrokerage firm and have been working and there is interest on both sides of thepotential whereby we can bring them a commission of $2,000 to $4,000 that theywouldn’t otherwise be able to have and we can gain a marketing vehicle to acustomer who may want to look at $175,000 similar site-built home but can nolonger get it qualified for that and obviously shouldn't have been with themwith sub-prime lending that took place and now that broker can bring them tothis new product and say, I know, you never thought about a manufactured home,but I think you are going to be pleasantly surprised, let's drive over there.And that's a kind of, so.

Paul Adornato - BMO Capital Markets

Okay. And are there any licensingissues or other kind of structural issues that might prohibit them fromparticipating?

Gary Shiffman

None that I remember, that we'veencountered, so far. My comment that we really picked our toughest marketfirst, which is the Midwest market to roll this program out because we thinkthere's so much value to the customer out there. We are not marking these homesup, we are strictly interested in supporting the interest of new home buyers inour communities again and therefore, the value proposition that they are payingfor these homes, we think will attract them and based on the limited successinitially and getting ready for this program, we would look to roll it out inthe rest of our portfolio, first quarter.

Paul Adornato - BMO Capital Markets

Any thoughts on volumes goingforward or is it too early to?

Gary Shiffman

I think it's too early. I thinkthat we'd like to share those with every one based on the experience that wehave fourth quarter. When the homes are actually setup and after we've marketedand some promotion on them and hopefully brought in some of the brokeragecommunity.

Paul Adornato - BMO Capital Markets

And are there any community saledata points to point to this quarter?

Gary Shiffman

I am just not sure.

Paul Adornato - BMO Capital Markets

Within your regions that is, nowall-age communities in the upper Midwest havethere been any transactions that you have noticed and if you so what has thepricing been?

Gary Shiffman

Transactions on the sale ofcommunities or?

Paul Adornato - BMO Capital Markets

On the sale of communities.

Gary Shiffman

There are none that we are reallyaware of as we follow the market pretty intensively, both in the Midwest andother parts and we have looked in a couple of transactions that Sun and otherof our competitors have been involved in. One of the things that we have seen,is due to the instability of the debt market place from the increased cost ofdebt, a number of transactions that were moving forward, did not move forwardand I don't have any specific cap rate points that I would suggest havechanged. It's kind of been a quiet market place. The debt markets have been sounstable.

Paul Adornato - BMO Capital Markets

Okay. Thank you.

Operator

Our next question comes from JohnStewart with Credit Suisse.

John Stewart - Credit Suisse

Thank you. Gary, I wanted to go back to Skyler's questionon the guidance. What is it that makes you very comfortable affirming guidance,just given the big step up that you would need in the fourth quarter? Just tohit, the lower one, of the range, particularly given the historical slowdownyou have seen in the second half?

Gary Shiffman

Well Jeff, if you want to talkabout budget and what usually happens in fourth quarter.

Jeff Jorissen

Well, after each quarter weforecast the rest of the year. So, we have just completed that exerciseactually, independently. Karen did it and I did it and we do that on a fairlyconservative basis. And given that approach, we do expect to attain the guidanceso that's why Gary's pretty confident because Karen and I have told him that weshould be there. And the fourth quarter budget, if you recall, is patternedafter the fourth quarter of last year in terms of occupancy changes, so it'snot exactly - it's not a stretch, it should not be stretch budget. So we'veconsidered other costs that we are aware out there likely to occur in thefourth quarter so that's why.

John Stewart - Credit Suisse

Yeah, but even excluding chargesin the fourth quarter last term it was, you are roughly flat in the thirdquarter to fourth quarter?

Gary Shiffman

While traditionally, the fourthquarter is stronger than third quarter, fourth quarter, if you went back overthe years, would be our second best quarter. First quarter is strongest, fourthquarter is second strongest and then second quarter and then third quarter isthe weakest quarter. So the other thing that happens in the fourth quarter isthat generally the copy operating and maintenance expenses recede from the levelsof summer because obviously you are not doing landscaping and that kind ofstuff and with any luck at all you are not going to have snow removal in the Midwest until January. So December is expense structuredand the property level tends to be more favorable for profitability.

John Stewart - Credit Suisse

Okay, I understand you haven'tcompleted the budget for 2008. But just broad brush looking forward, do youthink that it's fair I guess when you first kind of gave a '07 guidance youbasically -- you said you kind of expected it to look a lot like 2006, is thatfair for 2008 or do you think that given the slowdown that you talked about inFlorida and the regional economic conditions in Michigan that it would be astretch to even stay on pace with what we did in '07?

Gary Shiffman

I think we are looking for thebudget to actually to come into us over the next four weeks but then workingthrough with all of our operational management we are seeing modest improvementin the areas that we talked about, which are very helpful re-possessions,conversions of renters to buyers, which is more profitable for the company thanjust renting now. And if we see a continued positive progress, for example, aswe're seeing in renewing existing renters, the cost associated with a fewerrenewals and less of a turnover positively impacts the company and that is theprogress that we did make this year with our management programming. We hope tomake it continue it in '08 and finally, if we're able to forecast modest netrevenue producing growth through the sale of "Signature" and ourother sales program. "Signature" is just one or two, we have muchmore [down and dirty] sales program that we are rolling out and that we thinkwill give another buyer a spectrum of the market and what we mean by that isjust a very strip down of that can capture another form of a customer who wouldrather again in a different product but can only afford the lower end of themanufactured housing product. Through the increase in those sites we hope tocontinue to slowly gain back where we've been for the last two or three years.So we cautiously are anticipating some progress in '08 but again we are verycautious to see what happens in the fourth quarter. So, fourth quarter will bethe pivotal quarter where we can judge where we think guidance will be for thecoming year.

John Stewart - Credit Suisse

Okay that's helpful. Gary I did want to talkabout the "Signature" program for just a minute. I guess inparticular I wanted to get your perspective on the Michigan single familymarket because I am just -- I wonder whether at $45,000 to $70,000 for thesehomes I understand that it's much more difficult to get a mortgage today thanit was two years ago but I just wondered, to what extent those prospectivebuyers wouldn't be looking at single family given home pricing?

Gary Shiffman

John, I think it's a goodquestion and I think it's really important to differentiate and distinguish thetype of buyer that we're talking about. This buyer is $40,000 to [$65,000] to$70,000 is going to be a one or two income wage earner at home and they arejust not going to qualify for any type of site build housing. When you look atcompetitive product certainly in the 1500 to 1800 square foot range, its$175,000 to $200,000 at the peak of the market. Then it could drop down to$150,000 and $140,000 and $130,000 and these people are still not going toqualify for that housing. Not under today's lending environment, so we arelooking for a small segment if you will, that on the more affordable side isonly going to be able to afford this type of housing and if you consider that ahuge difference for this company was a sale a month, two sales a month, wouldbe progress we haven't seen in the last six, seven years.

John Stewart - Credit Suisse

For community?

Gary Shiffman

For community, I am sorry. That'sthe type of progress that multiplies by 30 communities by 12 months, by ouraverage rent, begins to reverse the trend that we have seen over, a long periodof time now. So, I think that we will continue to see a very weak housingmarket in the Midwest that I don't foreseeanything on the next year or two to change that.

But, I think that we willcontinue to compete very, very favorably on all different fronts and lower pricedhousing that I discussed and the rental homes that we bought for an averagecost of $14, $15 complete that we were converting through sales on our rentalprogram and on the "Signature" program, which allows someone for$65,000 for example, to get in there with a monthly payment of around $800,$850 even with a rent depending upon the amortization and the interest. We willcompete very favorably with anything else that is out there.

John Stewart - Credit Suisse

Good points, but I guess justlooking at the listings in the trade it seems like there is plenty of singlefamily homes available for 100,000 or 170,000. I guess my other question wouldbe what is the price range for the strip down model that you talked about?

Gary Shiffman

I don't know the exact prices. It's,I know our prices are out for a month we are gearing it for $650 all in paymentper month with I think $325 average rental both into it.

John Stewart - Credit Suisse

Okay, thank you.

Gary Shiffman

Yup, the only other thing I wouldadd the markets where our communities are you know, I don't what comp you arelooking at average pricing in the trade but obviously there is a wide variationbetween the city of the trade and the outline metropolitan suburbs, which iswhere all of the communities are.

Operator

(Operator Instructions). And nextquestion comes from Andy McCulloch with Green Street Advisors.

Andy McCulloch - Green Street Advisors

Hi, Good morning. Are you guyssort of expecting seasonal RV revenue roughly $5.3 million for the year?

Jeff Jorissen

Let's see, I don't think I have abudget in front of me. I'd have to get back to you on that Andy.

Andy McCulloch - Green Street Advisors

Okay, continuing on RV are youseeing any weakness or expect to seen any weakness coming on the RV side due torising gas prices?

Jeff Jorissen

No.

Gary Shiffman

You know, that's really been apleasant surprise, Andy is that, obviously there are different forces that werefavorable and unfavorable and with regard to gas prices, Karen do you have ananswer on seasonal RV?

Karen Derring

Just --let me add, our seasonal RVis about $3.7 million through September 30th though I don't think $5 millionwould be bottom line.

Andy McCulloch - Green Street Advisors

And you do expect sort of a thirdof that to come in the fourth quarter, right, of total?

Karen Derring

It will be higher than that.

Andy McCulloch - Green Street Advisors

It will be higher. Just one morequestion on G&A. Can you guys give us some color on what you expect for theyear there?

Gary Shiffman

I am sorry, on what?

Andy McCulloch - Green Street Advisors

On G&A?

Jeff Jorissen

Well, I would think that thefourth quarter should be, may be slightly higher than the third quarterdepending on some factors that are not within our control.

Karen Derring

Andy.

Andy McCulloch - Green Street Advisors

Yeah.

Karen Derring

I think guidance had G&A atabout $15.9 million and I think that's a good estimate.

Jeff Jorissen

Okay and that would make forabout roughly of $4 million down our Q4.

Andy McCulloch - Green Street Advisors

Great. Thanks guys

Operator

Our next question comes from StevenRodriguez with Lehman Brothers.

Steven Rodriguez - Lehman Brothers

Hi guys. Just a quick question onCapEx, seems like it increased during the quarter what do you guys see goingforward with that?

Jeff Jorissen

Generally, the fourth quarter isvery low in the CapEx, through nine months recurring CapEx was $5.5 millioncompared to last year for the full year of $6.9 million. So, perhaps $6.2million to $6.3 million when we are done with this year maybe $6.4 million kindof sometimes recurring CapEx that you have to take care of certain emergenciesif they should arise, so you always are going to have a little kind ofcontingency in your mind for that, but certainly should not exceed last year'slevel and we would expect it to be lower.

Steven Rodriguez - Lehman Brothers

Any drivers in the third quarter,why is it so high?

Gary Shiffman

I am not aware of any.

Jeff Jorissen

No, I don't think there could beany one of a given program that went into a community or communities that theoperations would have done that we are not typically aware of.

Steven Rodriguez - Lehman Brothers

Okay. Thanks.

Jeff Jorissen

If you want more information onthat we can get back to you.

Steven Rodriguez - Lehman Brothers

Okay. Thanks.

Operator

(Operator Instructions). Mr.Shiffman there are no questions in the queue at this time.

Gary Shiffman

Well we would like to thankeveryone for participating on the conference call. Obviously we look towardsthe fourth quarter to be an important factor and recovery that we are all veryworking hard for and in our industry and within the portfolio and we willadvise everybody as soon as the quarter is over as to how things have gone withregards to the new programs and the existing programs with and I'll stop. Thankyou.

Operator

This concludes today'sconference. Thank you for your participation you may disconnect your lines atthis time.

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.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!