Equity LifeStyle Properties Inc (ELS) 2010 Q3 法說會逐字稿

Good day, everyone, and thank you all for joining us to discuss Equity Lifestyle Properties' third-quarter 2010 results.

Our feature speakers today are Tom Heneghan, our CEO, and Michael Berman, our CFO.

In advance of today's call, management released earnings. Today's call will consist of opening remarks and a question-and-answer session with management relating to the County's earnings release. As a reminder this call is being recorded.

Certain matters discussed during this conference call may contain forward-looking statements in the meanings of the federal securities laws. Our forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligation to update or supplement any statements that become untrue because of subsequent events.

At this time, I would like to turn the call over to Tom Heneghan, our CEO. You may proceed.

Thank you for joining us today. Good morning, I'm Tom Heneghan, Chief Executive Officer of Equity LifeStyle Properties.

I'd like to make a few remarks and then turn it over to Mike Berman, our Chief Financial Officer, to take you through the numbers in more detail. We will then open it up for your questions.

Our third-quarter results continue to reflect the stability of our business. We believe this is the result of the quality of our real estate locations, the positive demographic trends of Baby Boomers and retirees, and the flexibility of our housing and lifestyle offerings, and our desire for predictable and stable cash flow. We are well on our way to 2010 marking yet another year of growth in both core revenues and core net operating income. We also expect to continue this growth in 2011.

I'd like to discuss a few items that we are focused on for the remainder of 2010 and 2011. We see our MH business as stable. Our rate growth is slightly better than expected. However, we continue to see a headwind with respect to our ability to sell new homes. As we have discussed before, in light of this difficult situation, we incrementally rented our home inventory, including buying additional low-cost homes to add to this program. Even though we were successful increasing occupancy during the third quarter, we would characterize the current environment as challenging. Nevertheless, we believe we compete well in the current environment. We also believe our ability to offer low-cost single-family homes to empty-nesters and retirees offers an attractive and affordable option to those wanting to reduce the amount of capital tied up in their housing and still enjoy a high-quality active lifestyle.

Our third-quarter results for our RV business reflect the continued ability to attract customers to our annual sites. We also grew both seasonal and transient revenues, reflecting a strong summer season. Reservations for the upcoming winter season are running slightly ahead of last year's pace.

Another area of focus for us has been better utilization of the Thousand Trails footprint. In addition to promoting annual site usage, we have also been transitioning the membership sales process away from a tour-driven high-cost low-volume model to one based on higher volume, lower priced products.

Our focus is creating more dues paying members, as we see this as a very stable and printable cash flow. The rollout of new low-cost products in the second and third quarters through our call center, customer contact at our properties, and retail channels has been very positive. It is still early, but this is one area we see opportunity. Overall, our RV business has been a pleasant positive contribution to our overall platform and has proved to be a stable cash flow generator.

With respect to our balance sheet, we believe we are very well positioned for the future with no significant maturity issues and significant free cash flow.

Now I'll turn it over to Mike.

Thanks Tom. For the third quarter, we had a better performance on the RV side than we expected, but had some offsetting operating expenses. Overall, our core NOI forecast was in line with our expectations. The "Penny B", which for us is about $350,000, can be attributed to better than expected profits in our home sales operation and better than expected income from joint ventures.

Before we get to 2011 guidance, I want to go over our thoughts for the rest of the year. Our estimates for 2010 are the basis for our 2011 growth rates. As always, I caution that forecasting remains art, not science, and our primary goal is to provide the investing community with the direction we're going.

2010 fourth-quarter guidance is $0.80 of FFO per share at the midpoint of our range. Given our third-quarter performance, that puts us at $3.54 for the year, near the top end of the $3.39 to $3.59 guidance we gave this time last year.

Moving on to our expectations for the fourth quarter, core property operations, we expect core property revenues for the fourth quarter to be around $119 million to $120 million, 1% growth over 2009. The drivers for this revenue increase include $65 million in revenues from our MH communities, around 2.5% quarterly growth over 2009. This includes some modest occupancy gains that we achieved in the third quarter.

We expect our RV resorts to be around $27 million, up 2.4% over last year's fourth quarter. We continue to see progress in improving our annual revenue stream, and we expect seasonals and transients to be flat to 2009 for a total of $7 million or so.

Dues should be up slightly to $12.5 million. This includes the sale of 2000 low-cost memberships in the third quarter. We expect to do around 1000 low-cost products as we move out of our prime selling season. Membership sales are projected to come in at $4.2 million, down around $800,000 as last year included the high-cost membership products that we discontinued this year. The expenses are also projected to be down north of $900,000.

Other income should be around $10.8 million. Operating expenses, excluding property management, should come in around $53 million, slightly higher than last year.

Core net operating income at the midpoint is therefore expected to be $66.5 million, up around 1.4% to 2009. Non-core property should continue -- contribute around $200,000 in the quarter. Other income items should add around $1.5 million. Property management and corporate G&A are expected to come in at $13.5 million to $14 million. Interest expense and preferred costs should be around $26 million. Add it all up and you get about $28.5 million at the midpoint of guidance or around $0.80 of FFO per share.

Moving on to 2011 full-year preliminary guidance, starting with core property revenues, these are expected to be approximately $512 million and expected to grow approximately 1.3%. Approximately 90% of this revenue stream comes from annual-based revenue sources, and only 10% is what we refer to as seasonal and transient sources. The annual revenue sources consist of community-based rental income, annual revenues in our resorts, membership-related income consisting of dues and right-to-use contracts, and utility and other income.

2011 community-based rental income is assumed to increase around 2.1% to around $264.5 million. We assume no change in occupancy in 2011, but expect 2011 to benefit from some modest uptick in occupancy during 2010. By the end of October, we will have noticed over half of our residents with rate increases reflecting this revenue growth.

2011 annual resort-based rental income is expected to increase almost 3% in 2011 over 2010 to $82 million. Our forecast is primarily based on reservations in place. We continue to benefit from customers desiring longer-term stays and better site utilization in our membership properties.

2011 resort seasonal revenues are expected to be $20.5 million, down around 4.5% to 2010. Approximately 55% to 60% of this revenue comes in the first quarter, which is currently down around 4% to 5% reservation activity. We are seeing some geographic strength in Arizona and Texas and some weakness in Florida based on current reservation activity. This could change, as it has in years past, as we get closer to the winter season.

2011 transient revenues are expected to be $27.6 million, flat to 2010. The first and second quarters represent 40% of the total. The third quarter represents 45% to 50% of the total. For the first quarter of 2011, we are about 4% behind on our reservation pace.

Overall, we expect our resort-based revenues in 2011 to be approximately $130.5 million, increasing approximately 1.2% over 2010. Dues revenue is expected to be a little better than $50 million, slightly higher than 2010. We anticipate we will successfully offset our turnover with the continued rollout of our low cost products.

Membership sales are expected to contribute $17.5 million in 2011, down 8.5%. However, this reflects the shutting down of our high-cost front line sales product earlier this year. More importantly, the FFO contribution from our membership sales activity, including the contribution from the sale of low-cost products which is reflected in our dues revenue, is expected to be up almost $1.5 million compared to 2010.

We expect utility and other income to be almost $49 million, up about 1.6% to 2010. Core property operating expenses before property management are expected to be approximately $227 million to $228 million in 2011, down from an expected $229 million to $230 million in 2010. The primary driver of the reduction is the decline in membership sales expense of almost $2.5 million. Outside of the sales expense, we currently see limited overall expense growth in 2011.

In sum, core property operations before property management for the 2010 core grouping is expected to be approximately $284 million and projected to grow 3% at the midpoint of our range. We currently assume no contribution from non-core properties in 2011.

Moving on to property management and corporate G&A, we anticipate we will have $33 million in property management and $23.5 million in corporate G&A costs in 2011, for a total of $56.5 million, compared to $55.6 million in 2010. Other income and expense grouping together our sales operation and all of our other income and expense items, in 2010, we achieved almost $13 million of income. In 2011, we expect to achieve the $11 million.

Interest expense is expected to be approximately $84 million as we put our cash balances to work. Our preferred distribution is $16 million. We expect our average debt balance for the year of 2011 to be around $1.4 billion.

We make no assumption on the use of our free cash flow in our earnings model. Overall, we expect FFO is approximately $126 million in 2010, and $137.5 million in 2011, at the midpoint of our range, an increase of over 9%. Our share count is expected to average 35.5 million shares in 2010 and 35.7 million shares in 2011. At the midpoint of our parliamentary guidance, our FFO per share estimate is $3.85.

Now I'd like to open it up for questions.

(Operator Instructions). David Toti, FBR Capital Markets.

Good morning guys. Quick question on site utilization. The average occupancy seems to be sort of stuck at 90%. Can you walk us through the difficulty in pushing that number closer to some of your multifamily peers?

Yes. A big driver for occupancy historically has been our ability to sell new homes. As we've discussed a number of times, our ability to sell new homes is very challenged right now. So as it relates to occupancy, the way we are getting occupancy is to buy homes and put them in our communities and rent them. Even with that, say buying a couple hundred homes a year, you are seeing a flat occupancy because there are some homes in our communities that have reached their useful life and end up being pulled or are not usable in the community any longer and therefore are removed. So that's essentially the backdrop for why occupancy has stayed relatively flat. So importantly to getting occupancy up is a return of a fairly robust new home sales environment.

But if you've managed to purchase inventory that's relatively low cost, why not increase that effort? Or is it just sort of not attractive on a return basis, even at the low-cost units?

We've discussed this thing internally probably since the middle of 2008 going forward. We have kind of taken a status quo environment with respect to our view on putting homes in for rentals as kind of maintaining occupancy. There has been discussion about whether or not we want to do that more aggressively in return for an occupancy pickup. Really, it involves a number of factors, whether doing more rental is kind of against our core business model. We actually like just owning the land. When you start owning the home, you start bringing in just another operating environment, another cost of doing business. You have to maintain the home; you have to consider the value of the home over time. So it does complicate the business.

We haven't really done much in terms of the new homes we've put in. I think we are at a total of 600 to 800 homes. So it's been a modest program.

I think the returns you can get by putting a home and renting it in our community, if you wanted to say you're occupying a vacant site, it looks pretty significant. But what we would like to see is our ability to do that without having to put the capital of a new home there and to see some return of a new home sales market. Until that time, I think we're going to be a little cautious as to how we use our capital in a rental home situation, mindful of what it does to the business model.

Great. Then Winnebago sales were fairly robust, obviously off of a low base. Do you have any view as to the longer-term reading from that, relative to your RV business?

There is a little bit of a disconnect going on among RV manufacturers and their shipment numbers. I think Winnebago and Thor and a number of manufacturers have posted pretty strong year-over-year growth in shipments and sales. But if you take a peek behind those numbers and you look at what's going on at the retail sales level, the retail sales numbers are -- they are up but they are up in the low single-digit percentage I think through kind of August, whereas the shipment numbers are up 100%. So there's a disconnect as to what's happening. So, it looks like there is some inventory replenishment or inventory increases going on within the dealership network.

The real question is whether or not that inventory will turn into retail sales in the future. But if you look just plain at retail sales, you wouldn't get the same bullishness as you would see if you looked at the manufacturer shipments.

Then along those lines, have you made any progress in terms of expanding initiatives into the RV dealerships, into other channels, to push memberships and seasonal products?

Yes, we've had a number of discussions with some major RV dealer networks. We've had a number of discussions with insurance companies that service the RV industry. I would say the discussions have been good. I think they like the product. I think they like our properties. I think there's a lot of similarities with respect to our customers and their customers. I think we've had difficulty finding out how we work together at the level of the transaction, meaning, at that point in time, when that RV dealer is making that sale, how does he introduce one of our products to that customer, and is he willing to introduce that product to his customer or is he focused on getting his RV sold? That is kind of -- we are now trying to figure out how we make it streamline at the level of the transaction. I think we will be successful, but we're just starting those conversations.

Thank you for the detail.

[Eric Wolfe], Citigroup.

Thanks guys. I believe you mentioned in your remarks that [community] based rate growth is expected to be 2.1% next year, which would seem to be slightly underneath this year's growth rate. Just given that your forward rate growth is generally tied to current CPI growth and CPI growth in 2010 has been quite a bit higher than in 2009, why wouldn't your rate growth next year be higher than it was this year?

I mean, we often talk about the importance of CPI as it impacts our rate growth, but we often also indicate that there are time lags and other factors that make it not a direct correlation. We would say CPI acts as a magnet with respect to what our rate growth will be, but it's not a direct correlation.

If you understand our process, we essentially look at CPIs in the middle of the year that we use for notices that need to go out anywhere between 60 and 90 days before rent increase. We also have much of our rent increase occurring, say, in the first quarter of any particular area but never the less, we have rent increases that occur throughout the year. Then on top of that, we have marked to market and negotiated agreements with many of our properties and tenant bases that lay on top of that.

So when CPI was low last year, we actually had a fairly pretty good rent increase, given CPI. A lot of that had to do with some of the minimums that were in place. I think you're seeing some of that in this year where even CPI is higher, meaning it went from a negative 1.-whatever to a positive 1%. Once you start dealing with a minimum at that change from a negative 1% to a positive 1% really doesn't affect our rent structure that much. So although you are seeing a change in the trend of CPI as it bleeds into what we would put out in rent increase notices, you're not going to see that direct correlation.

So I guess looking forward, what would make that 2.1% next year higher and what kind of degree of variation could it be? Is the lowest it could be next year like 1.5% and the highest it could be 2.6? Just trying to understand, going forward, what you're going to be looking at that is going to change that assumption.

I guess that's difficult to answer. I would say taking CPI from a negative to a slight positive and using that as an increase in CPI from a negative 1% to a positive 1% and saying CPI went up 2 percentage points, why are you guys going up by that amount? As I said, from a number of perspectives, that's not a valid comparison to how CPI affects our rate growth, given negotiated agreements with our tenant base and minimums set forth in some of our rent increases.

Once you start getting beyond a 1% or 2% type of CPI, I think then you can see a little more direct correlation. But going from negative to positive I don't think is the one to use. If CPI went from 1% to 5%, I think you would see some pretty good impact on our rate structure. So, I'm not sure if that's helpful to you.

That's fair. Just as far as expenses, the reduction that you mentioned, what gives you the confidence you'll be able to achieve this? How concerned are you about real estate taxes looking out next year?

Well, most of the expense, the driver of the expense reduction relates to the membership sales expense. Most of that relates to the high-cost products that we had earlier in the year, so we benefit from year-on-year comparisons. Some of the expense categories are up; some are down. They blend to a modest increase.

With respect to real estate taxes, the notices are first starting to come in. I would say that we feel pretty good that we're going to be in the 2.5% growth rate range, but as we get closer towards the end of the year, when the final notices come in, we will have more clarity.

And just last question, have you seen transaction activity pick up in your space recently? I know British Columbia Investment Fund made a bid to take over Park Ridge. So I was just wondering whether you had any thoughts on that transaction and if you think it's a harbinger for the manufactured homes sector at all.

We know of the transaction. We did take a look at the company and looked at the transaction in some depth. I would say I haven't seen a lot of activity in our sector, but I would say that BC Pension Funds' interest in investing in a group of properties that provide stable, predictable cash flow is not an anomaly in today's world, and that there has been a number of pension funds or life companies that have expressed interest in the type of assets that Park Ridge has and in fact ELS has many more of. So that doesn't mean there's a lot of transactions, but it does say there is money out there looking for some very attractive characteristics at stable, predictable cash flow.

I was just wondering -- I know it's early in the process -- but whether there's any thoughts on the valuation, and also if there's other opportunities out there like this or whether you consider this kind of to be a one-off type of opportunity.

Transactions in our sector are always one off. Sure there was the Park Ridge transaction two years ago in 2008, there is the American Land Lease transaction, before that in the late '90s early 2000s, ELS itself did a number of sizable transactions on the buy side. This industry is not characterized by a constant flow of transactions that you can take a look at every day and try and figure out what's going on. It is characterized more by the latter, or the former, I should say, where it's a good portfolio will trade very often. If it does trade, it trades pretty aggressively.

Michelle Ko, Bank of America Merrill Lynch.

Good morning. I was wondering. I believe, on the call, you said that for the transient, the reservation pace was up 4%. I was wondering if you could talk a little bit more about that, if there's anything to read into that.

That's the current reservation pace in the first quarter. The first quarter transients is one of our -- might be the lightest dollar amount that we have. I don't know I would read too much into it. Sometimes that could just be people delaying, making their reservations. We've learned that sometimes it's a function of whether; sometimes it's a function of the reservation window; and sometimes it's a function of who knows what's going on in a particular property. So, I wouldn't read too much into that. We have seen -- last year, I think we had seasonals down 15% at this time, and it came in pretty good. I wouldn't read too much into that one.

I'm just wondering. It seems that resort and home sales have done better than at least what I expected the past couple of quarters. I was just wondering if you thought there were opportunities in those two lines of business. I know, on the call earlier, you said that home sales still remain tough, but it seems that it has done relatively better over the past quarter or two.

With respect to the home sales, we tend to assume 0 profits in our earnings guidance, whether those are used homes or new homes. So sometimes the couple hundred thousand dollars extra that we might otherwise get comes from profitability on some home sales. We did see, in 2010, resort-based rental income tick up during the year as we did better on annuals throughout the year than we expected at the beginning of the year. Is there upside in 2011 with respect to that? There very well might be.

Paul Adornato, BMO Capital Markets.

Thanks, good morning. Just to follow up on the transient question -- and that is could you characterize the transient customer? Is it someone who has no experience with your company, or is it kind of a repeat transient customer who comes back year after year?

Most of the activity that's going on in the transient level is a repeat or referral customer. I think somewhere in the order of 70% of our transient activity is comprised of repeat and referral customers.

To give you some general sense of that customer profile, based on our statistics, the people coming in the door, the new customers, not just the repeat and referrals, are essentially the quintessential new RV customer -- about 51-year-old person, early in their retirement or just beginning retirement empty-nester living and looking for an attractive, affordable and lifestyle-oriented opportunities.

So has that 70% ratio of repeat customer changed over the last few years, or has that held steady?

No, it's pretty sticky. We've actually -- I would say what happened last year is a pretty good indicator of what's going to happen next year based on the stickiness of the customers.

Okay. Given the lack of significant transaction activity in your space, and given that you do have a very nice land portfolio, I was wondering if there was any thought to rationalizing the landholdings, like you did a few years ago, either through development or outright sale as appropriate. What are you thinking with respect to land these days?

I would say given kind of the general economy that exists out there, there isn't a heck of a lot of discussion going on with respect to development or funds available for development. So I think that's -- I have to say the same with respect to vacant land held for development. I think our focus, frankly, is from an operating perspective. We already have developed land meaning vacant sides in both the MH footprint and in the RV footprint that are underutilized. Our goal is to try and use our operating skill to bring more and more cash flow to the business without having to spend additional capital dollars to generate that cash flow.

Okay. Finally, with respect to your membership sales, you said you completely discontinued the higher-cost and have moved to lower-cost options. I was wondering if someone who just bought a high-cost membership is now looking for a refund or something like that if now everyone is getting in at a lower membership cost.

No, what we have done is also change the membership. So it's not like the guy coming today can get the exact same membership as the guy who spent call it $4000 or $5000. We've changed it significantly in terms of geography and accessibility with respect to the properties through that geography. We've changed it with respect to how customers can make a reservation, when they can make a reservation. We've also changed it with respect to some of the other additional benefits that those other prior members have that the new members do not have.

What we think is it does two things. It allows us to attract people to our properties so that they can see and enjoy the experience. That's our best selling point, when people get out there and take part in the lifestyle of our properties. We do extremely well getting those people to become members of our Thousand Trails properties. We also are then able to upgrade those people as they want more and more experiences within that membership group of properties, either through geography or through additional stays or through additional benefits.

So the one thing that has continued, even though we've kind of reduced the high front cost membership, we continue to do upgrades of our existing membership base. I think Michael talked about that. That is still a $17 million or so revenue number. So we still are selling additional benefits to our membership base as we bring those low-cost products in.

So are you able to measure utilization per membership? Is there a comparable way to look at that kind of before and after? (technical difficulty) (multiple speakers) and low-cost memberships?

Yes. We look at memberships in a variety of different ways. I would say that users are what we want. We want members to be active users within the system. In both the prior membership and the new membership, we are targeting people who have an RV and who want to enjoy the lifestyle. That creates stability and stickiness with respect to that experience. Once they make it part of their lifestyle, they continue to use the product and continue to become a member. So I don't think we've change with respect to the target customer and what we expect that customer to be doing post-becoming a member. I think we've allowed customers an easier way into our properties so that they can experience the lifestyle and be part of that membership experience.

Okay, great. Thank you.

Andrew McCulloch, Green Street Advisors.

This is actually Chris Van Ens, but Andy is here with me as well. Back to the transaction market real quick, first, off you talked about this a little bit. But are you seeing anything open up on acquisitions front, whether -- you mentioned not too much on the MH side, but maybe on the resort side. Second of all on that question, do you expect to see anything come back to market from the [Arc] or the [ANL Green Court] portfolios?

On the last part of your question, I haven't heard anything with respect to either one of those portfolios and properties being marketed. I think we've talked before that there is kind of a huge difference in pricing and in transaction volume depending on the property that you're talking about. So I'll just go through it.

If you have a senior-oriented, well-located manufactured home community that would qualify for GSE financing, it's very aggressive, very aggressive bids on those. One area that has come to our attention recently is resident groups are now actively trying to buy some of their properties and do a co-op type of financing and own the property instead of having an institutional owner. Those deals are going up very aggressive per site at very aggressive cap rates, essentially on top of the financing.

As you move away from that kind of high-level price point, I would say a senior-oriented lifestyle community that could have components of both MH and RV is literally right behind that in terms of attractiveness to investors. As you start moving into the all-age segments, I would say all-age, depending on location, you can still have a very attractive asset that will bid well, especially if it's along the East Coast, maybe out on the West Coast. But as you get towards the center of the United States, there are many assets that are in a fairly challenged position from a capital standpoint-wise. I think there is a lack of bidders and there may not be a lack of properties available to have, and there is some bid-ask spread in terms of what price will allow those assets to clear. So I think I can give you a pretty broad brush of what's going on out there.

Sure. Then a little bit on that but a little bit differently, with the lack of external growth projects I guess or prospects kind of in your strike zone, and only $55 million I believe it was of debt to pay down next year, what are you guys going to do with your cash going forward? Does that (technical difficulty) dividends, does that just accrue on the balance sheet? Can you just give us a little color on that? Thanks.

Yes. Every November board meeting is when we talk about the annual dividend. I think we're going to have that discussion again come November. I think we've done a very good job of considering a number of items with respect to the dividend. One is our existing balance sheet flexibility, our view of our balance sheet flexibility going forward. The second would be what are quite attractive opportunities for investment do we see out there from an acquisition standpoint?

I have said a number of times on the call that I thought we would see some distressed opportunities where we could put our capital to use pretty attractively. To date, I haven't seen that. In fact, I've seen the reverse. I've seen some properties trade at prices that caught my attention, frankly. But still expect the distressed properties to come once some of the debt issues that are being extended have to be addressed. There are a number of properties out there that are just plain old overleveraged. What happened thus far has been an extension of the maturities of that. I think that can only last so long, or at least I hope that can only last so long. We want to be ready to take advantage of an attractive opportunity to the extent that arises. So that will factor into our decision-making.

Lastly, we have shown a history of providing our shareholders the cash flow of the business that we don't think we can put to use attractively. So, to the extent we think we have balance sheet flexibility and we don't think we have any attractive opportunities, we have no problem sending the money out to our shareholders in the form of intermodal dividends. But I think those are the issues that we're going to be talking about in November, and look forward to updating you with respect to some conclusions.

Great, that's it for me.

(Operator Instructions). Todd Stender, Wells Fargo Securities.

Thanks guys. Just looking at 2011 guidance, are there any prepayment penalties assumed in paying off the debt in the first six months next year?

No, it's all locked in, and it's just a question of the timing of the cash flows.

Then in home sales profits, you kind of touched on this before. Are you assuming flat profitability for next year?

Pretty much. Most of the income from the sales operation comes from our ancillary services line. We basically are assuming no real gross profits from the sale of new homes or used homes.

Okay. Just an update, if you can provide us some color on how your lease-to-purchase program is going.

Rental conversion?

Yes.

Yes, I would say rental conversions are a trickle. With respect to people buying homes in our community, I can say the following -- price matters, it significantly matters. Used homes can be sold in our communities fairly robustly. Resales are occurring within our properties across the United States fairly actively, but when you start getting kind of the resale price points, or call it $25,000, but when you start getting into price point in the $40,000, $50,000, $60,000, very little activity is occurring at those price points. So to the extent there are people out there and they want to buy, they are more attracted to, in today's environment and today's economy, a 25-year-old 1000 square foot house for $25,000 than a brand-new $40,000 house that's got 800 square feet. So they are opting for lower capital costs out of their pocket, which makes the conversion of the existing rental stock challenging, frankly. We have no problem renting it; we can rent it all day long. But to get that same customer who may qualify as a buyer to become a buyer of that unit, I think he is sitting on his wallet right now. Given some of the uncertainty that exists with respect to the economy and healthcare and maybe perhaps their pension fund, you can understand why they are a little reluctant to take capital out of their pocket in size.

Thanks for the detail. Thanks guys.

At this time, I'm showing no further questions in queue. I would like to turn the call back to management for any closing remarks.

Thanks for joining us. As always, if you have any follow-up questions, feel free to reach out to Michael Berman. Look forward to next quarter. Take care.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.