Sun Communities Inc (SUI) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Sun Communities Third Quarter 2003 Earnings Results Conference Call. [operator instructions]

At this time, management would like me to inform you that certain statements made during this conference, which are not historical facts may be deemed forward-looking statements within the means. 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, achieved. Factors and risks and uncertainties that could cause actually results to differ materially from expectation are detailed in this morning's press release and from time to time in the company's periodic filings with the SEC.

The company undertakes no obligations to abide or update in it's forward-looking statements to reflect events or circumstances after the date of this release. Having said that, I would like to introduce management with us today are Mr. Gary Shiffman, Chairman and CEO of Sun Communities Incorporated and Mr. Jeff Jorissen, Chief Financial Officer of Sun Communities Incorporated. Thank you, gentlemen, you may begin.

Good morning. Third quarter earnings as announced prior to the opening of the market today were funds from operation of $17.3 million or 82 cents per share compared to $16.7 million or 82 cents per share in 2002. Net income in the third quarter was $6.4 million or 34 cents per share compared to $5.8 million or 32 cents per share in 2002. Revenues in the third quarter of 2003 were $43 million compared to $40.3 million in the third quarter of 2002. And today, I'd like to begin my comments by focussing on two recent events that are very positive for Sun for which appear to have not been fully understood in the market place and a if place to begin is origin. Origin seems to have been a conference call topic for as long as I can remember and today speak to it with a great degree of confidence as origin has recently completed an equity raise of $150 million dollars, $50 million of which was invested by Sun Communities and is structured as a 144 private transaction. And the key points of the transaction are as follows. Origin is no longer dependent upon Sun to provide capital and liquidity for its operations.

As a result origin will not be consolidated by Sun Communities now or at December 31st, 2003 as Sun is no longer the primary beneficiary of the operating results of origin. Sun will account for its ownership on the equity basis of accounting. Origin expects to be profitable immediately following the closing. And this is because the capital raise allows origin to hold substantial amounts of the high quality loans it has been originating and time the sale of the securitization or sale to maximize profitability rather than having to sell them to raise capital.

This ability to portfolio the loans generate a significant reliable and dependable income stream, which has a high probability of estimation and becoming realized. This is a new well-capitalized and profitable origin. Sun's net cash of $25 million after the investment of the $50 million as a result of the payoff of our line of credit and the purchase by origin of Sun's interest in loans formally acquired by Sun from origin. Sun does not expect a change in relationship to origin from creditor to investor to have an ad verse effect on the amount of income earned by Sun from origin.

We consider these factor to be highly favorable to Sun and yet to be fully appreciated by the marketplace. Origin is no longer dependent on Sun and is profitable on its own and at this time there real isn't any better news that I can deliver to the shareholders. Now I'd like to provide an update on our home buying made easy program. It's taken shape and moved beyond our testing period since our initial announcement in July. One of the significant changes is that Sun was initially going to hold the loans until maturity. Today in fact origin will not only continue to provide credit approval for all loans, but will also hold all the loans on its balance sheet.

Now, Sun's only obligation is to pay the interest differential between the market rate and the coupon rate to origin on a quarterly basis. These payments are due as long as the loan is outstanding and the home is in a Sun Communities. Thus Sun has no additional investment, no interest rate or credit risk and no leverage issues. The cost of the interest differential is absorbed in Part by the profit on the sale of the home and in part by the rental income stream generated by leasing the site and the best way to illustrate this is to use an example that the home profit on an average home would be reduced from what is currently $7400 to about $3800, and the net annual revenue stream from about $3300 to about $2,700 or an adjustment of about $50 per month over the life of the loan.

These appear as relatively minor costs for a program that is unique and that is attracting high quality credit worthy residents, which strategically enhance the company's growth both short and long term as I will discuss in just a moment. To date, we have approximately -- we have approved approximately 80 applications with average FICO scores for new and previously owned homes of 740 and 686 respectively. We are extremely pleased with the credit quality in the business and are actively developing new methods to increase the quantity of transactions. Looking out three to five years, these loans will enhance and increase the overall credit worthiness of the community residence in three different areas.

First, the value priced homes, which are approximately $21 per square foot for previously owned or used homes to $31 per square foot for new homes. The rapid equity buildup as a percentage of costs with a 10% down payment minimum and 15 year amortization and finally the high overall credit scores, which I just spoke about. In turn, we would expect that these homeowners not only be in a position to pay off their principal balance when and if they sell their home in the future, but actually see some significant appreciation. And this results from their ability to buy value-priced homes during this particular window of opportunity. In essence, their high quality credits, lying low with a strong likelihood of appreciation in their homes. These conditions will also benefit the asset backed securitization market, which in turn positively impacts our entire industry.

So to summarize, the loans will not be on Sun's balance sheet. Incremental investment by Sun is zero. And the implicit rental discount is not going to spread beyond the focus of this program. In addition, we are filling vacant sites, creating current revenue as well as a future income stream as we expect these homes to remain in our communities for 30 years. Now moving on to other matters, I want to reassure you that there is no intent for Sun to change its dividend or leverage policies. Sun is investment grade rated which means that we meet the highest standards of financial stewardship and it's our intent to remain so.

Secondly, over the last four quarters, our pay out ratio based on funds from operations is 70% and based on funds available for distribution is 78%. And I would expect that our Board of Directors will continue the practice of increasing the dividend each year with the April distribution. In general, third quarter seemed to be a dejavu all over again, home sales of 148 were comparable to second quarter 2003 and ahead of 124 for the third quarter of 2002. Resident occupancy continued to gain in the new communities developments and slipped in the more stabilized portfolio, and I believe that we are definitely seeing the very last wave of repossessions created by the previous bad lending practices. Property operating and maintenance expenses turned in their best year over year quarter in the same site portfolio with a 6.1% increase.

We would expect that that trend would continue in fourth quarter. General and administrative expenses were adversely impacted by salary costs related to our office relocation and our systems conversion, professional fees and increased Michigan single business tax and administrative expenses related to integrating (inaudible). Delinquencies were higher than second quarter, lower than at the end of 2002 with bad debt expense increased by related legal and core costs were more than offset by late fees in the quarter to a net of $115,000. This year, we expect to provide earnings guidance for 2004 in December, as the first draft of 2004 budgets are now complete for the company and should be finalized in the near future and at this time, I would ask that the operator open it up for questions and both, Jeff Jorissen and myself are available.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [operator instructions]

Our first question is coming from Jonathan Litt of Smith Barney, please proceed with your question.

Good morning, guys. It's Jordan Sadler. I just had a quick couple of questions on origin. How much income did you guys take in, in interest from your loans to origin in the third quarter and on a year-to-date basis?

In the third quarter, that was approximately $2 million and year-to-date about $4.5 million and that includes the loans that we have purchased from origin, that we are expecting in fact most of which have been repurchased by origin since their equity closing of their equity financial.

So to back out $2 million out of FFO for next quarter for the fourth quarter --

I'm not sure that would be appropriate inasmuch as origin is going to be profitable immediately and will be picking up a third of their income. And over the next 12 months, as you look out, as they are going to experience a ramping up as we said, as Gary said in his comments, we would expect no adverse change over that period of time as a result of our going from a creditor and owner of the loans to an investor.

So, I guess that means your impact, the impact should be something, a magnitude of $6.5 million in income from your $50 million equity investment in origin?

That would be -- that's the implication of the statement, yes.

Okay. Is your $50 million investment; is that a one third interest? Does the math work that way?

Yes.

Can you talk a little bit about this home buying made easy program and the success you guys have had? I know in the release, you said, you have 80 applicants or 80 approvals. How many people actually committed? And is the success meeting with your original plans?

I think, Jordan, we were very slow and cautious to roll out the program. We did it in two select market places in July and August and at this particular time, we have recently rolled it out to our entire portfolio again, it includes homes that are sold only by Sun home services. It does not apply to any kind of refinancing or anything like that. So to the extent that we are seeing absolutely the highest level of credit, acquiring these homes, it indicates to us that we're really getting the more credit worthy sophisticated buyer who was turned off by the high disjointed interest rates in the asset class right now, 11, 12, 13% interest rates, are seeing value in the homes and not blinking an eye.

We offer two programs, a program of 15-year amortization and a higher interest rate for new home on a 20-year amortization. All loans that have been closed have all elected to go with the 15-year amortization. So as I discussed before, I think it has very, very positive short and long-term implications for the company, the portfolio, the occupancy and the stability of income. In the future, the question for us now is how do -- we're probably looking to double from an average that looks to be about 30 to 40 homes a month to about 80 homes a month over the next quarter. That would be our goal.

Okay. But how many of the 80 did you say committed?

Do we have that number? It's about 55 of the 80 have actually closed. And we are experiencing a closing that is really too early to compare the numbers of about 65%.

Okay. I guess I'm just curious as to what the purpose is. I mean it seems to me that you guys are interested in primarily leasing up the rental sites and this is a good means in which to do it. I guess I'm not sure why --originally when you talked about it, you talked about passing on the savings of the cheaper homes that are available to the buyers. Now, you guys are making an average of $7400 in profit per home, but yet you're paying the interest expense or the differential in the interest expense out the back door to origin. I'm just curious why you wouldn't lower the cost of the home a little bit and then avoid paying that interest expense?

Jordan, the answer is pretty simple. If you were to walk in and walk through a manufactured home and the price was $40,000 or the price was $35,000, would that change your reaction to being met with as a credit quality individual the prospects of an 11% interest rate? I think if you were at all financially sophisticated that interest rate would cause to you walk out the door and look elsewhere because you're not an 11% person. So it's not the price of the home, although you can't pad it with a lot of air in profit, it's the reality of the interest rate that has, in our view, really turned off the high credit quality people, that's why we're seeing that this interest rate on the new home side is bringing in a 740 FICO score, which is an awesome score. So it is attracting a new level of resident to the product that walks in and says I like this and by the way, what's the interest rate? It's not a double digit rate in a low single digit world.

This is not the same as the resident who justify cares about the monthly payment, how much it costs to live in one of these home?

That is correct. I think that I would emphasize in this program is not designed to necessarily attract the lower credit resident who is only interested in how cheap can they get into this type of housing or any type of housing.

Okay. You mentioned $24 million worth of sales that are upcoming. What is the expected cap rate on that sale, can you tell us?

We've got John Coleman from acquisitions on -- about 8 1/2 I was just told, Jordan.

Okay. And then, you mentioned Sun champ a little bit. I know when you guys really did that deal and bought the other piece of equity, it was something like a $6.2 million first loss piece. When does that is that expected to roll off, that $6.2 million? When will it burn off? And what is the state of profitability of Sun champ when do you think it will be break even?

Well, the note will burn off in somewhere in Q1 or Q2 of next year. The $6.2 million. And Sun champ is --.

So you used about 4.2 or 4.3 so far?

Well, yes, whatever it's --let's see. I think that's right.

Okay.

Yes, yes, it would be about, right around 4 or 4.1, anyway. So there's about two left. So early next year, either Q1 or Q2 it will burn off. Now Sun champ on an NOI basis isn't that profitable. I mean those properties are generating, are budgeting for an NOI of a million eight this year and like ever thing where else in the world they are experiencing some adverse variances to budget, but they should be in maybe the millions, certainly north of a million, six, maybe a million, seven, NOI when the year closes. On those 11 properties. So on that basis, they're contributing.

A million six to a million seven in NOI.?

Yes, for '03.

And what is the total value, I guess, of those properties? Is it $60 million or something like that?

Well, just trying to back in to an interest number. I think the book value of the properties today is approximately 75 million dollars somewhere in that range, in that area.

Okay. And I just, just curious about the rental unit program, how many rental units do you guys have so far in the portfolio?

There are at least, as of September 30, slightly over 1,000 rental units in the portfolio.

What's the ultimate target? How many would you guys?

That was our goal for the year, I think we stated at the beginning of the year, we think that one thousand or thereabout is just about the right number.

You don't plan to increase that anymore? You're not offering any additional rental units?

Well, I think what we try do is take that one thousand and convert them into homeownership, often times through the home buying made easy program or other forms of financing if they don't qualify for it, independent of us. I think that the opportunity to buy the deeply discounted repossessions is definitely becoming more and more limited as I indicated in my remarks and my comment in the press release, I do believe we're kind of seeing the last big wave. We have been told numbers by the fortress group, now green trees at, you know repossessions in their portfolio have gone from this year 11,000 to 8,000, expecting numbers below that that they will advise us of going forward. We have not seen any great difference in the pricing of the repurchase (ph) that we can buy them at. But it wouldn't surprise me as these things continue to dwindle down, because there's more and more time between the bad loans that were created and the present day, but there won't be as great an opportunity to buy them cheap and put them into the rental program.

Okay. And lastly, I look forward to the fourth quarter, you think the trend in net lease sites or move-outs if you will be the same as the experience in the third quarter you still seeing occupancies sliding a little bit relative to what you can --.

You know, I think our budgets look for probably not as much decline fourth quarter but certainly as we see the last wave I refer to it as the last people throwing back their homes we'll see kind of the end of it, the fourth quarter maybe into the first quarter.

Thank you, guys. That's it.

Thank you. Our next question is coming from ((Richard Pali)) of AVP Investments. Please proceed with your question.

Hello, guys. It's Rich Pali. I have a couple of questions for you regarding, of course, origin. I think I heard you say that your returns are not diminished by moving to an equity spot. Is that the way you phrased it? I'm not sure.

We believe for the year we will not have diminished returns because of the fact that origin is now original read and has to distribute its income to the shareholders and we're a one third shareholder.

Let me phrase it this way then. What are the expected returns on the 50 million of equity you now have in this mortgage rate compared to what you were expecting to get as a creditor? And can you quantify the differential in return that we're getting for the added risk as being in an equity position as opposed to a creditor?

Well, I -

I have a follow-up question also.

Yes, I think that we've already indicated that we think the returns will be the same as this year. So you can take a look at the number that's been discussed. I think that specifically we are somewhat limited about what we can discuss because it's is private 144 transaction and there are integration issues that I've been advised I can't give out more details than what we both kind of discussed as far as quantifying the difference the way we quantify it is as a creditor we were the sole financial source, 100% at risk, with a balance sheet of origin that did not have much of a balance sheet other than loans that they were holding and some of their assets. Today Sun's investment is a $50 million investment over total of $150 million. So that we feel that we're in a much better position than we were previous to this.

But you, in terms of a value at risk, you still have $50 million and I understand the viability of the organization has been extended, but you still have now $50 million pushed down into the capital structure and lower positions without added return initially. And then the next follow-up question I have is regarding the longer term viability of origin and I know you guys don't run that business, but to the extent that the asset backed market and the securitization market does not open up, then maybe you've extended your, you know, the life of this thing another year? But if we still continue to see it disjointed environment you've now settled for a lower return or the same return for higher risk. And you know, I just, I'm a little concerned because of, you know, there's other interested parties in here and I'm just hoping that the judgment isn't clouded?

Well let me deal with the return thing. When we were talking about the numbers the previous inquiry I always included the interest income that we made on loans that we had acquired from them. In terms of our line of credit, it was 11%, which for the year, would have run at maybe $3.5 million return on our $35 million and we're expecting that the return on our equity position will not only exceed, equal or exceed the line of credit return, but also the interest that and its a plan the interest income that we have recorded year-to-date on the loans, which we hold, and have held during this year but will not hold next year. So if you just look at the pure line of credit return, vis-a-vis the equity investment, you'll find that the equity investment is actually going to return -- have stronger returns than the line of credit, so to deal with the risk/reward question.

Okay. Thank you.

Thank you. Our next question is coming from Art Havener of A.G. Edwards. Please proceed with your question.

Good morning. I have a couple of questions in response to Gary's comments on the last wave of repossessions. First, if we are ending or if we're at the end of the repossession cycle, what kind of impact does that do to your home buying made easy program? I guess how big is this pipeline and opportunity that exists?

Well, Art, I think that a couple of things happened and I tried to comment about them earlier. I think obviously it's good to be able to buy homes for 10 or 15 cents on the dollar, but long-term if that doesn't go away and you don't restore the value to the underlying asset that obviously it has all kinds of negative implications for our industry from financing to manufacturing all the way down to selling these homes and increasing our occupancies.

So I think we see it as a positive aspect. I think when we look at having a thousand homes and a rental program that were bought properly and can be converted over to homeownership over one, two and three years. And I think that when we look directly at the home buying made easy program, we're about 50% new and 50% used. So it speaks well to being able to convert over to a new home sale, which obviously is a good piece of business for the industry because the value oriented homes or the overhang that depresses prices on new homes and other values in the used home market, that depression goes away and I think to the advantage of anyone who previously bought one of these homes deeply discounted, as I said earlier, I think they will see appreciation two and three years out and therefore when they go to sell this home.

So I think it has kind of a positive and negative for a neutral effect on our home-buyer made easy program. I think that program is just geared to bringing in skimming, if you will, the highest quality resident that's available out there for both new and used homeownership.

I guess what my real question is what happens when long-term home price -- when there aren't these cheap homes out there available to put into this program? What happens when there is only new homes that, you know, retail prices available?

Yeah. I think that we return to what's been a normal marketplace where there's value in buying a new home and I think we will see the new home market pick back up. I think what we've got is a period of time, if we got a thousand leased homes or rental homes, then we've got an inventory of three or four hundred beyond that, we've got 1400, 1500 homes that we can actually sell that were acquired at this discount period as we return to normal times. So my answer is, I just see it returning to a normal marketplace where 270,000 homes or new shipments, five, six years ago was an unrealistic number. A 120,000 where we're at right now is too low so you just return to some balance in between.

Okay. The 13 to 1400 is kind of where I was headed. That helped lot. One more question on the -- in terms of the repossessions, is there a seasonality issue? I have looked and there seems to be an acceleration in the sequential increase in net occupancy loss in your portfolio. It looks like in the first quarter you were around 92, minus 92 homes. It went to 164 and this quarter we are at a little over 300 net sites lost. And last year, we were at about 172. I guess -

I think I would share with you, Art, that in this last wave as I keep referring to it, we're just seeing the real recognition of the all the repos(ph) that were out there and we are seeing a lot of lender repos that were unrecognized and held in limbo or managed for a long period of time, they are just being recognized as going through the process right now.

So this is kind of a one-time adjustment in this quarter?

Well, I think that that's the reason we've seen a little bit of acceleration and we expect to see it tapering off now.

Okay.

But I don't expect it to go to zero until every one of those last bad loans is out of the system.

Okay. Is it fair to say that the majority of these homes are located in Michigan and Indiana, because there seems to be just a continuous slide of lost occupancy in those markets?

Well, I think that's in the supplemental data. I think that does pretty much speak for itself. Included in the Q3 losses are also 69 manufacture pre-leased sites. You know, as the manufacturers begin to --as those agreements expire and the manufacturers given their condition, choose not to renew those, so the 309 ahead of the 69 of those folks in it.

What did we do with those homes? Did we remove them?

No those were just sites that they were releasing, those were not homes on those sites for the most part. So they were leasing the sites and had been for a period of 12 to 18 months, but when the agreements matured, they chose not to continue to lease those sites. So there were 69 that matured in Q3 and they chose not to renew them. And those, of course, are in the 309. And those for the most part are not Michigan or Indiana sites.

Great. Thank you very much.

Thank you. Our next question is coming Alexander Goldfarb of Lehman Brothers. Please proceed with your question.

Yes. Hello. Good morning. First question is on the, if you can just talk a bit about the portfolio performance, the increase in the repair and maintenance and some of the other things that are going on, the property operations expense line.

Well, I think as Jerry indicated in his comments, the year-to-date third quarter '03 compared to third quarter '02, there was a 6.1% increase in PLM and staple property portfolio which is down from 99 in Q1 and 10.6 in Q2 and we expect to see that continue to improve and, you know, repairs and maintenance tend to be spontaneous sometimes in nature. There's an ongoing component, of course, but there's also spontaneous component. And you know, we expect these to return to, you know, normal annual increases year over year and they're improving. So and the budget process for 2004, we're needless to say focused strongly on not just having low numbers but having realistic and achievable numbers in our expense budgets.

Okay. And on the Sun home service for the year, you still expect that to be flat or do you think it might be a bit positive?

Well, let's see here. They lost 171 in Q1, they made 736 in Q2 an 27 in Q3. So I guess they're net about $580 year-to-date. So I would expect that they will finish the year in black. Q4 tends to be a little lower sales because of you know nobody wants to do anything from about the tenth of November until the tenth of January or something like that. So, you know, it be unreasonable to see Sun home services turn in a loss for Q4. They did last year in Q4. They also did last year in Q3, of course. But I think they'll still be in the black for the year.

Okay. Thank you. On the rate differential with the home buying made easy, which line is that booked in?

That comes in through, well it comes in through principally, in Q3, it's the home discount and it's reflected in lower profitability at Sun home services who sells the homes. So that component of roughly $35 or $3600 dollars that reduces the profit on the home is reflected in the operating results of Sun home services. The interest rate discount, there isn't any of that in Q3 oh so you don't see any of that in Q3. You will in either Q4 or Q1 as origin buys the existing loans from us and originates new loans under the program as we described it.

But, where would we see the payment in our, if we modeling this out?

Well, it would be, I think it would be, probably I mean technically, theoretically, conceptually it's a reduction of the income stream. So if it's a material number, it would show up as either a component in the financial statement or in the footnotes relative to rental income.

Okay and then I just have two final questions. First off, it's just go back to your earlier comments on the interest differential. I understand that Sun is not responsible for the performance of the loans. If any of those loans should stop then it's a safe thought jump then the rate differential would stop as well?

The loan isn't current and being paid, if the loan is not outstanding or if the home is not in our community, we have no interest differential obligation. I mean these loans are due and payable if the home leaves the community. And obviously if the person were to go into default, for instance there wouldn't be an interest differential to pay.

Okay. And are you still sticking by your full year '03 guidance or has that been adjusted at all?

I don't think we made an adjustments to that today.

Thank you very much.

Thank you. Our next question is coming from ((John Votesec)) of Reese. Please proceed with your question.

Hello, Jeff, I don't want to beat a dead horse. On origin, can you just walk through where on page nine on the balance sheet where the line of credit, what the rate on that was, what the total outstanding balance mortgage is that will be shifting to origin are and the preferred interest as well? I mean break out the pieces. Because I'm trying to figure out what the cash flows are. I know you're getting $50 million bucks back from them basically by investing in them. I'm trying to figure out the cash flows.

The $116,724,000 number will go down by about $75 million which represents the repayment to us of our $35 million line of credit and approximately $40 million of interest in MH loans. A new line item called investment and origin will appear in the balance sheet 12/31 which will have $50 million in it which will be our equity piece. The interest rate on the line of credit was 11%. The interest the whack on the loans was probably around 10%. The loans were not owned all year long as you can see by in part by the change in the investment in affiliates line from quarter to quarter. I would say the bulk of the loans were probably a third quarter item, almost exclusively. They were not outstanding all year long. And if, you know, rather than to take everybody through a lot of numbers, if, you know, if there's more detail or you want to drill it down a little more, you can give me a jingle and we can go into it one on one.

No. That maybes it real easy. One thing, when you talk about the income from origin, are you talking about the dividend payment they're going to make or actually your share of their earnings?

Well, those should be very, very similar. Because they are a mortgage read and they will be making quarterly distributions. Mortgage reads do not have a lot of taxable income. So their distribution should be approximate to their income. So we'll pick up a third of their income and dividends and that differential should be very small.

My understanding, they're not going do their first offering until next April securitization and therefore they won't have really meaningful earnings, I understand they may pay their dividend earlier than that.

Well, they have a portfolio of interest bearing loans which is how they have become profitable from inception. So I believe, my understanding is that they're going to declare a distribution relative to Q4 and that they expect to be profitable in Q4. So I guess we'll, I guess time will tell.

Okay. And then the preferred investment that got squished in the IPO of origin, the $40 million, is any of that money yours and does Sun have to take a write-off?

No, no write-off,

So, that investment, you guys had no money in that?

I think we did. That's part of the 40, when I went through the 116 number and I said we're getting 75 back which is 35 line of credit and 40 interest and loans and to the extent we own preferred interest will also be coming back.

I thought the preferred interests were going to zero?

Well, yes, they're paying us off.

You're confusing the founder's interest with the preferred interest in the facility.

So you guys had no interest in the founders interest?

We had written that off.

Okay. Where is that?

Well it's written off in Q4 of last year.

Okay. So that was already written down to zero.

Yes.

Okay. Great. Thanks for your help.

[operator instructions]

Our next question is coming from ((Phyllis Block)) of LIS Financial. Please proceed with your question.

Hey, guys. Could you give us a little more color on the home buying made easy in terms of what might be a typical or maybe even a real example for the home buyer in terms of what they have to play without this program, and what you might be able to offer them with it? And would that differ depending on whether it's a new home or a used home?

Well, that's a pretty comprehensive question. I can give you some -- I don't have that actually krank gough (ph), so that I can give you the hard numbers, Ralph, but the average loan amount today is $31,700 under the program. On which you would have 4.99% interest rate and a 15 year AM to the customer. Now absent this program and absent the special pricing, that loan would probably be $36, $38,000, because there would be a smaller down payment, and there would probably be a little more profit margin in the program, because we are value pricing these homes, and the interest rate would probably be in the realm of 10% to 11%. I mean the weighted average, the whack on everything origin originated in 2002 is 10.53, I believe. So if you took 38 at 10.53, compared to 31.7 at 4.99, that would give you a sense of the differential in dollars to the customer. But again, I want to -- I don't think we can reiterate strongly enough the off putting to quality credit of an 11% or 10% or even 9% interest rate in an environment where if they're even modestly sophisticate, and look in the newspaper they can see site fill rates at what, 5 or 5 1/2%, site fill arms at 3 1/2%. So they just walk away and say, not for me.

And is that 4.99, is that, is that adjustable, I assume?

No. I mean if we -- you know by us if we want to make the program 5.99 tomorrow, if we wanted to stop the program tomorrow, I mean we absolutely control the rate and the duration of the program. However, you know, for loans that are -- have been closed, those rates are fixed.

I will see. So these are 15 year fixed loans?

Yes.

Okay. And there's no difference in the interest rate that you're able to give them on a new versus used?

Well, we really make it a difference on, it's 4.99 for 15 year and 5.99 for 20 year. And that's -- so that's really the differentiation.

And one other question on this, if this looks like it's successful for you guys, do you see other larger manufactured home owners doing the same thing as kind of a way to bridge this kind of a current unrealistic gap between manufactured homes and site built housing?

I think there's nothing to stop anyone from moving forward with a similar variation or the same program. I think that one of the opportunities that we hear, I think it is a very solid program. I think it isn't anything that anyone else could have thought of. They could have. We jumped on it right away. We're seeing it begin to make a difference in our portfolio. So I would expect that there would be some copying of the program out there. But it's only around for the period of time that one thinks it makes sense. As soon as there are other alternative, more competitive financing vehicles out there, we would turn to those to sell homes and fill occupancy.

I would just add to that that I think it probably applies to more portfolios that have A&B properties as opposed to ones with C or D type properties simply because the higher quality FICO score just as it's put off by 11% interest rates, is going to place a premium on the appearance and quality of the community and property management. So that may limit its spread somewhat.

Okay. Great, one last question on that. I assume you have not seen any downward movement in traditional interest rates on manufactured homes in the last quarter or two? In other words there's been no buffet effect yet?

I think that there is as rates have drifted slightly down after they drifted up, we've seen some adjustment in the few lenders that are out there, but you know, magnitude of 50 basis points, 25 basis points.

Okay. Thank you.

Thank you. Your next question is coming from Jerry Eleanor (ph) of Heighten Financial. Please proceed with your question.

I just have one question as a follow-up to something I had mentioned earlier. What happens when the repo home market dries up, hopefully. It's more of a question on the home buying made easy. Is it appropriate to look at this as a concession similar to the way it's booked in that once you have increased your occupancy to a level you think is stabilized that this program may simply go away?

Well, I mean if you look at the economics, what we're really doing is we're absorbing a sales discount on the home and a rental discount on the rental stream in order to support the interest rate differential. So I mean substantively I think that's the way you look at it. You know, art's question was really two sided because if the supply of repos goes away, there should be somewhat offsetting increase in new home shipments which would be good for the industry and good for us because as they come into our communities those are new sites. As to the you know the duration or life of the home buying made easy program, I mean that's something that we're going to be looking at like every month. To see, you know, what the results are and how it's going and you know, our assessment of how important it is to us. I mean if it's very successful, it's not a large cost to pay for a 30 year stream of rent. And to fill communities and to bring in the higher quality people. So I mean we'll continue to assess it, Jerry.

So I guess it would be not expensive. Is that fair to assume that not rental rates overall have dropped approximately 15%?

No, I said it's $50 a month is what the effect is on the rental per site per month per resident. So $50 on 325 is about 15% -- I guess you said 13%, I'm sorry, you're right.

Is that the market rate change effected in the market today then?

I don't think that has really anything to do with where the market rents are. I mean every recording image -has reported nothing but we did average rental increases. I don't think the image industry is suffering anything like, has effect has suffered not at all. Like the apartment industry where the rents have decline and declined significantly, our rents continue to increase and you know as long as they're reasonable without any kind of tenant protest or commotion.

You wouldn't be offering this if your communities were 96%occupied. Is that a fair assumption?

Well, if the market didn't require innovation and creativity, we wouldn't be bringing it to market, you're right.

Okay. Thank you.

Gentlemen, at this time, we're showing no further questions in queue. I would like to turn the floor back over for any additional or closing comments.

I would just like to thank everyone for participating in our third quarter call and as usual Jeff and I are available for any further discussion. Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's tele conference you may disconnect your lines at this time. And have a wonderful day.