Sun Communities, Inc. (SUI) Q3 2008 Earnings Report, Transcript and Summary

Welcome to the Sun Communities Incorporated third quarter 2008 earnings results conference call. (Operator Instructions) At this time management would like me to inform you that certain statements made during this call which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions the company can provide no assurance that its expectations will be achieved. Factors and risks that could cause actual results to differ materially from expectations are detailed in this morning's press release and from time to time in the company's period filings with the SEC. The company undertakes no obligations 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 Senior Advisor. It is now my pleasure to introduce you host, Mr. Gary Shiffman.

This morning we reported funds from operations of $12.8 million or $0.62 per share compared to $11.8 million or $0.58 per share in 2007 representing a 6.9% increase in FFO per share. For the nine months ended September 30, 2008, FFO was $42.1 million or $2.05 per share before losses related to Origen and severance costs compared to $41 million or $2.02 per share for the nine months ended September 30, 2007. Revenues increased to $61.4 million in the third quarter of '08 compared to $57.4 million in the comparable '07 quarter. Before we proceed to our review of the portfolio performance from the quarter, I thought that I'd spend some time discussing the specific nature of our business and the strengths of Sun and its management team. Our mission is to provide affordable housing. The average sales price for our homes approximates $32,000. The average site rent to date for an owner occupied home is currently $391 per month. Including both the monthly rent and the home loan payment a resident would be making the average monthly cost is about $700 in total. For renters who are renting both the home and the site from Sun, the average monthly rate is about $735. The cost to the renter averages a little over $0.50 per square foot per month for the home and site, which competes with very favorable to both multifamily rates as well as any single-family rental rate that might come about as a result of the sluggish site built home sales market. In addition, while property taxes vary from state to state there actually is no property tax on our Michigan residence. The above economics define what is meant by affordable housing and reflect the value proposition to residents residing in Sun communities. As a result, our…

(Operator Instructions). Your first question comes from Michael Bilerman – Citigroup. Michael Bilerman – Citigroup: This is Eric Wolf here with Michael. I was wondering if you could talk about how Sun performed during prior sessions and whether you saw any benefits from homebuyers looking for more affordable housing during that time?

Yes, certainly, I think at the beginning of the remarks I think we've always referred to ourselves as recession resistant, but not recession proof. Exception to that was created by the financing conditions of late 90's. As I said, I feel put our industry and our company just into something worse than a recession, actually a depression, but clearly the remarks indicated that the feature of affordability that manufactured housing offers plays very, very strong to the market under these conditions. I think we're seeing it, that doesn't mean that we don't feel the effect of job loss and other economic issues, but there are two positive things playing to Sun's favor right now. One of the affordability factors to those who need to cut back, and the other factor as we've talked about is the lack of availability of subprime credit and other forms of finance that were causing our typical customers to be able to acquire space built housing. So we're seeing that reflected by a little bit of improvement in overall home sales, by converting the renters into homeowners and by a rather significant increase in rental applications that we can work with to generate sales, so. It is definitely a favorable factor to be affordable at this point in the economy. Eric Wolf – Citigroup: You touched on this a little bit before but as far as Michigan and Florida clearly seeing some economic weakness there expecting probably more layoffs, housing problems. What are your thoughts on these markets and what steps are you sort of taking in case things are a little bit worse than expected.

I think the steps that we took started in early 2000, 2001 when we made a decisive strategic decision to go into the rental home program so that the 13% of our communities that are actually performing at under 80% reside in the areas typically close to Flint, Michigan and where the factories have been shut down and we've converted them to rental communities wherever we can, and rental occupancies are actually decent and performing well. I think the news this morning out of the automotive world indicated losses, certainly for Ford, that were smaller than anticipated, but cash burn rates that are still very challenging, and while they talked about cuts in their white collar workers there was no mention of plant closings and they seemed to indicate that all plant closings have taken place. I remind everybody that the average resident in our community has a combined income of about $28,000 a year, so these are not typically the automotive personnel that are being affected right now. It doesn't mean that there isn't trickle down affect, but I think we've done a very effective job in managing the Michigan portfolio and as challenging as it has been, I think the affordability factor of the housing plays further into the difficulties of the [inaudible].

Our next question comes from Mark Lutenski – BMO Capital Markets Mark Lutenski – BMO Capital Markets: I was wondering if you could give me a background on the additional origin investment during the quarter and what's your strategy there?

Sure, I think that as Origen sold its platform origination and servicing and other components and its loans, we realized that Origen not only fulfilled an underwriting service for the company, but they in fact had the licenses that allowed us to originate loans in all the different states we operate in. Origen also provided those services for some of our contemporaries, peers, and competitors, and we've all thought it was logical to get together and preserve that platform, and Sun made that investment, which we viewed to be much more prudent than trying to seek those licenses on our own and having to shut down the origination platform until we were licensed. That investment is a group of our peers, and it is being operated by a third party company called Manage America, which also provides third party services to many manufactured housing owners across the country, mostly related to management software services. So the primary intention was so that we could continue seamless origination and sales within Sun's 135 communities. Mark Lutenski – BMO Capital Markets: How many applications do you have this quarter?

We had 4,500 this quarter which was up about 10% from both Q1 and Q2 where it was around 4,100 in both of those quarters. Mark Lutenski – BMO Capital Markets: What is your rejection rate for that number of applications?

Roughly 55% of those folks will be rejected and then we work with the other 45% and the objective is to close about 70% of them. Mark Lutenski – BMO Capital Markets: It seemed like an uptick and maybe the reason for rejection being credit?

Well, it's going to be the primary one, sure.

(Operator Instructions) Our next question comes from David [Bendals] – Maxim Group. David [Bendals] – Maxim Group: On the balance sheet our equity shows as basically nil and that's because property planned equipment is at historical costs, what would you say the fair value or the appraised value of that $1.1 billion in property planning equipment is so that I can get a true enterprise value here?

That's a difficult one to say, obviously we do internal estimates of what our net asset value is. Our analysts do work on that also. I think they have somewhere around the $30 to $33 range we probably have something a little higher than that. David [Bendals] – Maxim Group: So that would put it up around 1.6 to 1.8 billion, I'm just guesstimating right now, is that in line?

No, that's on a share basis, 20 million shares. David [Bendals] – Maxim Group: So 20 million at ten bucks would be $200 million, right?

It'd be about, between $600 and $700 million. David [Bendals] – Maxim Group: Over and above the historical costs, is that it?

Over all, company value. David [Bendals] – Maxim Group: You answered the question in a different way. So that would put the $1.1 billion property planned equipment up about $600 million or something, is that right? The $1.7 billion is that where you're talking about? That would flow through to the bottom line or net equity of the $600 million you're talking about?

That's correct. David [Bendals] – Maxim Group: On the dividend coverage, I think you mentioned it, but I didn't catch it, Gary said something like 4.5%, but if we're paying out $252, what are we guesstimating our FFO will be this year?

Well, the guidance is for $276 to $282, so if you use the midpoint of the guidance of $279 and the dividends $252, you got a $0.27 spread, a penny's worth 200 grand so that would cover about $5.4 million of the recurring CapEx, which is budgeted for an annual amount of about $7 million. We're roughly within a million dollars of having [inaudible] or $0.10 a share of having FAD cover our dividends. David [Bendals] – Maxim Group: Going forward next year without a specific number, you're guesstimating that FFO will be higher, the same, or lower?

We're not guesstimating anything, but we're having budgets completed this month we will have guidance, of course, issued as soon as that is done, which probably will be the beginning of the year. All metrics that we indicated earlier in the comments indicate the same will be improving upon what we're seeing so far in 2008. David [Bendals] – Maxim Group: So, that would indicate that dividend looks pretty coverable then, right?

I will let you make that assumption just because we haven't come out with guidance yet.

There are no further questions in queue. I would like to turn the call back over to management for closing comments.

I would like to thank everybody for participating today. I think that certainly it is more pleasing for management to be able to report on some improvements within the company and now that we've seen that improvement for three quarters this year, we're looking forward to being able to report continued improvement at the end of the year and be able to announce and share with everybody what our budge and guidance will look like for 2009. As always, Karen, myself, and Jeff remain available at any time if anyone wishes to call us with further questions. Thank you.

This concludes today's teleconference.