Sun Communities - Q3 2010

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to the Sun Communities Third Quarter 2010 earnings conference call on 28 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 the 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 its release.

Having said that, I would like to introduce management with us today: Gary Shiffman, Chairman and Chief Executive Officer, Karen Dearing, Chief Financial Officer, and Jeffrey P. Shoemaker, 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.

Gary Shiffman (Chairman and CEO)

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 2009. 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 in 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 and the press release. 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%.

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. 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 and momentum in the portfolio. In addition, the occupancy gains continue to reflect balanced growth across the entire Sun portfolio.

Of the 510 gain 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 gross 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 30th, compared to 14,600 in the first three quarters of 2009, or an increase of about 17%. Even more dramatic is the increase in 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.

I think this 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 home buyers. Further, this is the fifth consecutive year of growth in home sales, from 425 in 2005 to an estimated 1,300+ 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 a 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 two 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, when the quarterly growth was 0.1%, and the nine-month growth was 0.6%. So we're 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 $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-$0.79. Shares issued to date will create about $0.06 of dilution through year-end. Our preliminary estimate of guidance for 2011 FFO per share is a range of $3.03-$3.15. And with this quarter, we are reporting the fifth consecutive quarter of FFO per share growth over the prior year's quarter. At this time, myself, Karen, and Jeff would be pleased to take any questions.

Operator (participant)

Thank you. If any participant would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, please press the star followed by the two. Your questions will be polled in the order they are received. There will be a short pause while participants register for a question. Our first question comes from Mark Almeida. Please state your company name followed by your question.

Mark Almeida (Senior Analyst)

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

Gary Shiffman (Chairman and CEO)

Yeah. Obviously, the capital markets in general for REITs seem to have improved greatly over the last six months, and they continue to do so. Addressing the line of credit as well as things like the securitizations that have recently taken 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.

Mark Almeida (Senior Analyst)

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

Gary Shiffman (Chairman and CEO)

Yes.

Mark Almeida (Senior Analyst)

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 particular driving that increase, and if so, could you discuss that?

Karen Dearing (CFO)

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

Mark Almeida (Senior Analyst)

All righty. Thank you.

Operator (participant)

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

Bill Sutherland (Senior Analyst)

Yes, thank you. Benchmark. I 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.

Gary Shiffman (Chairman and CEO)

I think I was referring to they were down from second quarter, and what had happened is some weather issues caused first quarter sales to be pushed in the 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.

Bill Sutherland (Senior Analyst)

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

Gary Shiffman (Chairman and CEO)

Yes.

Bill Sutherland (Senior Analyst)

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 build?

Gary Shiffman (Chairman and CEO)

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 tools that are being put together where financing programs will be offered to community owners that weren't available previously, but nothing of any significance has changed at this point.

Bill Sutherland (Senior Analyst)

Okay. Thank you, Gary.

Operator (participant)

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

Todd Stender (Equity Research Analyst)

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, or are they renters? Any changes to this?

Gary Shiffman (Chairman and CEO)

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 7-10 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 multifamily 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 a range of $30,000-$50,000 as opposed to something north of $100,000.

Todd Stender (Equity Research Analyst)

Okay. Thank you. Would you mind sharing some of your fundamental assumptions that bake into your 2011 FFO guidance?

Gary Shiffman (Chairman and CEO)

I think what we're going to do at this point, because of preliminary guidance, our budgets are underway 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.

Todd Stender (Equity Research Analyst)

Okay. Thanks. Any changes on your margins, rental homes sales versus new home sales?

Karen Dearing (CFO)

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

Todd Stender (Equity Research Analyst)

Okay. Thank you.

Operator (participant)

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

Chris Darling (Senior Analyst)

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?

Gary Shiffman (Chairman and CEO)

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 third quarter as it was.

Chris Darling (Senior Analyst)

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

Gary Shiffman (Chairman and CEO)

Sure would, Chris. They are progressing. They are progressing at a snail's pace, not even a turtle's pace. We have one community in Austin that we had 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 out 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'll 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.

Chris Darling (Senior Analyst)

Okay. That helps. And then finally, the share issuance 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?

Gary Shiffman (Chairman and CEO)

Karen, I believe it was under that program.

Karen Dearing (CFO)

Oh, it was under the program, our DOC program. It wasn't under the equity line. It was under our ATM program.

Chris Darling (Senior Analyst)

Okay. And then have your feelings changed towards that program given kind of 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?

Gary Shiffman (Chairman and CEO)

Sure. I think that the company has been very fortunate with the structuring of a secured debt in a period of time, a year and a half, 2 years ago when the markets were in such disarray, and since price fell down to $7, $8, we were fortunate not to have to raise equity at that time. Of course, with the direction of the board and with management, we 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.

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 debt markets improving, our $104 million of debt is actually and could actually yield a lot more debt, so 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.

Chris Darling (Senior Analyst)

Okay. Thank you. That's all for me.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press the star followed by the one on your telephone. To cancel this request, please press the star followed by the two. As a final reminder, if you would like to ask a question, please press the star followed by the one on your telephone. Thank you. We have a question from Larry Wissong. Please state your company name followed by your question.

Speaker 7

I'm Larry Wissong. You talked earlier about the sale of homes being a propellant for your revenues. Are you seeing an increase in the conventional customer who comes in just to rent a site?

Gary Shiffman (Chairman and CEO)

Yeah. I think that the greatest 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, 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 being increasing.

Speaker 7

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

Gary Shiffman (Chairman and CEO)

I'd say everything's pretty identical to what it's been. 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.

Speaker 7

All right. You said there's no indication that the banks are loosening up at the end-user level?

Gary Shiffman (Chairman and CEO)

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

Speaker 7

Okay. All right. Thank you very much.

Gary Shiffman (Chairman and CEO)

Thank you.

Operator (participant)

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

Gary Shiffman (Chairman and CEO)

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

Operator (participant)

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