Sun Communities Inc (SUI) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Sun Communities third-quarter 2004 earnings results conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

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 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 periodic filings with the SEC. The Company undertakes no obligation to advise or update any forward-looking statement to reflect events or circumstances after the date of this release.

Having said that, I'd like to introduce management with us today, Mr. Gary Shiffman, Chairman and Chief Executive Officer of Sun Communities Inc., and Mr. Jeff Jorissen, Chief Financial Officer of Sun Communities Inc. Thank you, gentlemen. You may begin.

Thank you, operator, and good morning.

Third-quarter earnings, as announced prior to the opening of the market today, were funds from operations of 11.6 million or 56 cents per share compared to 17.3 million or 82 cents per share in 2003. Net income in the third quarter was 0.6 million or 3 cents per share compared to 6.4 million or 34 cents per share in 2003. And revenues in the third quarter of 2004 were 48.9 million compared to 47.7 million in the third quarter of 2003.

Results included $600,000 of expenses related to the 4 hurricanes in Florida and $200,000 related to severance. No reserves have been made for the $1.5 million note receivable which is due from 2 adjacent Florida communities which we formerly owned and sold. And decision on that is pending the owner's recovery plan and/or discussions with the first mortgage lender, which are ongoing currently. The borrower is, however, current on the note.

approximately one-half of the $600,000 of hurricane expense is attributable to Charlie, $100,000 to Francis, nothing to Ivan and $200,000 to Jeanne. So they were spread out pretty much between most of the storms.

Out of an approximate total of 8100 occupied sites in our Florida portfolio, Sun lost about 25 revenue producing sites in the storms with about 15 lost due to flooding and 10 due to tree damage. It was especially instructive for our staff to visit the communities after each of the storms and see how well the modern manufactured homes withstood the wind and the fury as compared to the older homes that were build prior to the wind zone standards implemented approximately 10 years ago.

Our cash on hand averaged nearly $90 million for the quarter. These balances earned approximately 1.5 percent during that period, and obviously were seriously dilutive to operating results, as we had expected when we determined to execute on this year's recapitalization.

In October we purchased 3 communities for $43 million, including $15 million of assumed debt. We expect to close on an additional $100 million of property in mid-November which will require approximately $45 million of cash. $50 million remains available to draw on our Fannie Mae financing by December, which we may use to either retire our 8 7/8 preferred issue and/or acquire additional shares of our stock in the marketplace. When these transactions are complete, we should have a minimal cash balance and a fully available $115 million line of credit.

Our 2005 budgets are nearly complete, which will provide the basis for a longer-term projection of operating results. We fully expect to provide earnings guidance in mid-November when we have achieved the clarity necessary to look at 2005 and beyond.

And we can turn to a portfolio review for the quarter. In our same-property portfolio of 108 communities revenues increased by 3.3 percent for the quarter and 3.5 percent for the 9 months. Expenses increased at a rate of 6.3 percent for the quarter, driven primarily by real estate taxes, and 3.7 percent for the 9 months. Net operating income increased by 2.1 percent for the quarter and 3.4 percent for the 9-month period.

Occupancy declined by 268 sites in the portfolio from Q2 to Q3, with nearly two-thirds of that decline occurring in 8 communities in 5 states. And after solid occupancy performance in the first 2 quarters of 2004, and with industry consensus and data pointing to reduced levels of new repossessions, we do remain optimistic regarding improving conditions.

Our rental increases for the first 3 quarters were 4.5 percent, 4.6 percent, and 4.6 percent, which is on budget for our 2004 plan.

We have continued to expand our rental home program in response to the availability of bargain priced and relatively new repossessed homes. We believe that the availability of these homes will continue to decline over the next few quarters causing pricing to increase, and therefore have bid on total packages of 200 to 300 repo homes from lenders. These homes remain available at averaged all-in prices of $11 per square foot for a 900 square foot single wide and about $17 for a 1650 square foot double wide. That works out to our costs ranging from about $10,000 for a single to $28,000 for a double. And when we compare this to new homes, it represents a discount to a newly manufactured home of about $18,000 or 64 percent for a single and $14,000 or nearly 33 percent for a double. So the value equation at this point is still irresistible for us. And as we discussed on previous calls, it is my belief that these quality homes bought at these deeply discounted prices over the last 4 years or so will in fact appreciate in value in the near-term as the new home industry continues to get off of the bottom and they see increased demand for selling their new homes.

We continue and are aggressively marketing these homes that we acquire as values for sale to existing renters and to generate traffic in our communities, and believe that the values, as I indicated, are compelling, especially as financing conditions improve. And as we look at the capital market in general around our industry, delinquency rates on securitization since 2002 are declining, renewing interest in the market and the paper. Repose are moving to more historical norms, which we believe should improve loss severity, as I just spoke about, and returns to the lenders and bondholders.

Origin's 2004 A Issue (ph) reveals significant improvement in FICO scores, loan to values and loan terms. And Origin's 2004 B securitization, which was just recently completed, was substantially oversubscribed.

The market for single section homes and the modular market are growing. The market for multi-sectional homes has firmed, but has not yet started to grow according to the manufacturers.

US Bank, GMAC, Greentree and Country Place have all announced that they have entered the market for retail financing, which we believe is indicative of improved underwriting, loan origination and servicing standards. A community rating system is and development, which we believe will create a tiered lending system favoring higher quality, well-managed communities, which we believe will also play to Sun's advantage. And these are but a few of the qualitative and quantitative improvements taking place that we're aware of on the capital market side of our business. After 4 or 5 years of working through this deep downturn cycle of the manufacturers, dealers, and finance companies, we think that the news is absence previous volatility and continues to show signs of bottoming out, which we believe is encouraging.

And at this time Jeff and I will turn it back over to the operator for any questions and answers.

(OPERATOR INSTRUCTIONS) Brett Johnson (ph), RBC Royal Bank of Canadia (ph).

This is Brett Johnson with J Loop (ph). A couple of quick questions. 1, I was wondering if you could provide a bit more color on the occupancy loss in the quarter, specifically what's going on at the 8 properties that accounted for two-thirds of the loss.

I think that it's a good question. We've looked at it up and down, and we honestly can't point to a trend other than that there is a part of it due to a little bit of a clean up and recognition by a couple of the lenders who were lagging behind some of the bigger lenders and still paying the rent, if you will, on a repos that they had in our communities some of that cleanup took place.

The rest of it, I think some of it can be pointed to as just some fluke turnover in some of the rentals that are in those properties. You will have a little bit of sporadic activity where you'll have a streak and where 6 or 7 or 8 or 9 rental units will all come back at 1 given time, and I think we experienced a little bit of that.

I think as we review it with operations, we see it as a little bit of an abnormal blip in what we've seen in all 3 quarters and don't see it as a trend of anything.

So you're seeing, I guess, those properties getting better, not worse, in the fourth quarter?

Yes. Overall I would say that we're looking at things that are pretty steady. They've been pretty steady through the first 2 quarters. Obviously we're disappointed in the third quarter, but what we're seeing so far indicates more of first and second than it does the third.

Great. And then I guess on evolving trends in the industry, I know you guys aren't giving guidance yet for 2005, but I was wondering if you could just provide your more general outlook for your same-store expectations within your core portfolio. Specifically, do you expect expense growth to continue outpacing inflation? And what's your outlook for occupancy?

I am being cautious that we have not given guidance so far, and it is something that this Company is most focused on providing to its shareholders and the analyst community. I would not want to touch on too much of it other than to say that generally what we've said in 4/04 prior to our recapitalization is that we believe there's pretty much a stabilization in occupancy as the lenders have cleaned up their problems. There has been little or no activity in the area of new home sales, which has caused us to get a little bit more into the rental program, as we have discussed before, as we buffet, if you will, the transaction from a bottomed-out declining market to a bottomed-out market until we see some increase.

And as far as the core portfolio goes itself, we expect much of the same thing that we see over and over again each year, that provided we make the proper capital improvements, which we don't expect to change in the future from what we're doing historically, the rental increases and revenue increases should be pretty similar to historical rates. And expenses, we believe, will be similar from what we see right now. After going through a couple of enormous increases in health care and benefits, we see some slowdown by that. And obviously as most of the other world, we've seen a little bit of pressure on utility items such as natural gas and fuel. But because natural gas and fuel is such a small part of our expense factor, we don't see or expect anything too different from the coming period than we've experienced historically.

Last question, if you just could comment on the local economic environment and the health of your fundamentals in Michigan, Indiana and Ohio. And then I'm all set. Thank you.

I think that, as we have said in the past, 1 of the interesting surprises to us in the downturn of our industry over last 4 or 5 years has been the weakest in Michigan, which historically through even the worst periods that our industry has had has been a very, very strong market. And the loss in occupancy there is something that we've been very, very focused on. I think we've stemmed that tide. I think we had to go a little bit more to the rental program to achieve that. And that would be the 1 area where I would say that we were a little bit surprised by the downturn.

At the same point we've taken a little bit of an opportunity on the acquisition side. As I've announced previous, having had 20 plus years relationship in Michigan and the surrounding Midwest with all the owner operators and developers, who are now advanced a little bit on age and perhaps enjoying a little bit their retirement, they have not been so prepared to deal with the unexpected decline in occupancy and the unexpected necessity to work a little bit harder in those communities. So we have seen more acquisition opportunity in those markets. We've maintained a discipline. Our view is to look cautiously and carefully at the most quality communities, and to consider acquisitions based on existing (indiscernible) cash flow, and believing that our attentiveness and skills can provide some upside in what are not real well-managed communities.

So on the one hand, it has impacted us. On the other hand, I think it has created a little bit of opportunity that wouldn't have else wise been there.

Great. Thank you very much.

Jordan Sadler, Smith Barney.

I just wanted to follow up on Brett's question about the occupancy loss during the quarter. It seems like there was nothing specific to point to. I don't know if I'm reading this schedule wrong at the operating statistics year-to-date. And I'm just looking in Indiana. I see net leased sites are now -113. In Michigan they are now -170. Those numbers were -- Indiana was in the black as of last quarter. How do I interpret that? Does that mean there were 117 repos or move-outs in Indiana? Or what does that --?

I think it as a combination, as I indicated, of a rash of repos that were recognized for the first time by some of the small banks in particular in Indiana who had been paying rent for in some cases up to 3 years and not really focused the fact that these repos were sitting around. So there was some cleanup on that. I think there were 51 more rental units that had turned vacant than they had in average periods of time in Indiana specifically. And I think that running through, as I said before, with our operations, while the trend is definitely bad in the third quarter, there's nothing that we can point to or nothing that's taken place thus far in October that would indicate that something specifically is happening. So I think we have to watch fourth quarter and --

Gary, is this the rentals now turning over, like the ones that were completed maybe in the third quarter of last year when you started ramping up this program a little bit more?

What we see is a turnover of approximately 40 to 45 percent of the units on an annual basis. I think what's being told to me is that we saw a streak of 50, 51 units in Indiana above what the normal average -- particularly in September what the normal average turnover would be. So to the extent that that's an unusual set of circumstances, that accounts for 50, 51 more than we would normally have. And those just get re-rented and in theory they should show a positive trend in the coming quarter.

How many rental units are you up to now in the portfolio?

We were just over 1600 when I reported at the end of second quarter. I think we are just under 1800 at this time.

Should that continue to move up a little bit as you bid on these additional?

(multiple speakers) yes, I announced at the last quarter that we would be making these bids and had a goal of capping off the rentals at 2000.

Okay.

I think that that's pretty much in our strategic plan and what we're developing as we see how lenders respond to our bids on the repossessions that we have just put on (ph).

And I guess that will be paid for out of the cash that's on the balance sheet -- what about $5 million or so on those 2 to 300 homes?

That would be about right.

Do you have a current occupancy number on your rental units since that is getting to be a bigger portfolio on the 1800?

The 1800 are the leased homes, are rented.

They are fully leased?

Yes.

How many vacants would you have?

We have a for sale and/or lease -- pre-owned homes there's another approximately 370 which averages out to about 3 per community. And then there's new home inventory, which would probably be at this time of the year skewed a bit towards Florida in anticipation of the season of about 150 or so homes.

Okay. Now just moving to the acquisitions that closed during the quarter, and actually you have 100 million expected to close in mid-November, what's the expected cap rate on the November closings?

I think flat cap rate on everything is a blended probably 7 3/4. 7.5 to date and probably closer to 8 for what we have in the pipeline right now.

How does this differ? I know that the stuff you closed in October was in Michigan and Atlanta. Where's this stuff located? Is it MH product or what?

I couldn't really comment on it right now.

But it's probably closer to 8 percent. And you're assuming 55 million of mortgages with this, because you said 45 million in cash would be required.

That's correct.

What's the rate on the debt?

That is a floating debt piece that would be fixed at the time of closing.

Okay. Just going back to the rentals real quick, I was just curious, have you guys had any success selling any of the rentals on turnover?

Yes, but I think -- do you know what the average is of what we are selling now?

I think we have sold about 70 of them thus far this year.

Okay.

I think that we would wanted to caution everybody that our rental program is not our business "model"; that it is there, I think, to, as I said, buffet the challenges that we faced in the industry. We think it's a wise move and we think that we will create long-term value for our existing residents and some profitability as we wind this program down and see a little bit more pressure created on the value and the pricing on the residual repo inventory as there is a little bit more demand for the new homes that are out there. And we are seeing a specific difference between demand on the, let's call it the newer homes -- 2000 and up -- '99, '98 versus the much older homes. And that's pretty much what we're focused on and what we're acquiring.

Jeff, on the interest expense during the quarter, obviously that was a big difference and probably reason for the discrepancy with the Street, as you commented in your release. Is that a good run rate at this point, the 11.8 million, to use for the fourth quarter at least? I know you are going to take down the 60 million, or you plan to take down the 60 million at some point, but --?

The 60 should probably come I think in mid-or-late-December, so it would have a modest effect on Q4. I think it's reasonable.

It has the financing -- all the financing is in the for a full quarter.

Yes, except for the 16 million, which of course was just assumed in October on that closing. And then to the extent we assume debt on the 100 million in mid-November, that of course isn't in there either. That would be the 55 million that you referenced earlier.

Right. What else do you guys have in the pipeline in terms of acquisitions beyond this 100 million? Is there anything else out there or will you digest this and then sort of look around after that?

I think certainly there's an active pipeline out there. There's nothing that is under contract other than what we have disclosed at this time, but there is a significant discussion on a number of different properties. And then we very carefully will look at, as Jeff indicated, retiring the preferred versus the value the buying and acquiring of properties brings to our shareholders, as well as stock repurchase. And that's a function of pricing of the stock and a renewal of a stock repurchase program by our Board as we have currently completed the 1 million share buy back that was authorized.

You did about 570,000 shares in the quarter? Is that about right?

That's about right.

Thank you.

Art Havener, A.G. Edwards.

I have a question on the occupancy loss. Is that a -- the net 268 sites loss, was that from Q2 to Q3 of this year or a year-over-year figure?

That's Q2 to Q3 and the same property portfolio.

That's a net number. Do you have the total sites lost versus move-ins?

No I don't.

Can you give us an idea of your return on Origin? How much dividends have you received in the third quarter and since they've gone public to kind of compare it to what you were expecting a year ago?

I think and their most recent dividend declaration was 6 cents a share, which we would have received -- I believe that was after their second quarter so we would have received it in our third quarter. And I think that they were looking for a stronger return on equity, as I read their press releases, because that's where I get my information as probably everyone on the call gets it. They were expecting things to be stronger. So 6 cents was not their expectation. But I believe the issue was their ability or at least the competition for existing servicing portfolios that they ran into competing with Berkshire Hathaway's credit rating.

Can you quantify how much Sun has received?

We would have received 6 cents times 5 million shares, so we would have received a dividend of $300,000 in Q3. Now of course what we report as income is not the dividend; it's our equity ownership of Origin times their results. So that was earlier in the year, and that was around 30 percent. And then after their equity offering that dropped to about 22 percent of their earnings, I believe, for Q2 and Q3.

It is Sun still employing the Home Buying Made Easy Program? Is that still active and is that working at all?

It is still available. In terms of volume, year-to-date there have been 75 loans closed under the program out of about 200 applications and aggregating about 2 million -- a little over $2 million of loans at an average FICO of 707.

But you're not spending any money advertising that?

No, other than the usual point-of-sale kinds of advertising.

Can you help reconcile the diluted share count? Since you have bought 1 million shares, repurchased 1 million shares this year, can you kind of reconcile year-over-year diluted shares outstanding?

The answer is of course, but the answer is also probably not in midair on the phone call.

Okay. What did the severance charge have to do with?

Severance charge was separation from the head of one of the Champion people who came over with the SunChamp acquisition. When we fully took out our partners at Champion Enterprises we agreed to a severance package that was $200,000 and let that vice president and head of SunChamp go. We felt that we comfortably could manage the portfolio.

I would remind everyone we did not have day-to-day management of it; Champion did. And in an effort to minimize difficulties in the transaction we retained this 1 individual who ran it for Champion. He ran it for us. He did a very nice job. The market had been very, very soft. And we felt that having him in the cost overall did not make sense. So it was just a package to allow him to move on and the properties got absorbed within our internal management.

So we should not expect any more severance packages?

No, there's none that I am aware of.

Okay. In terms of retiring the preferred shares, can you give us an idea of what has held you back to this point from actually retiring them? You have enough capital resources, right?

Initially they weren't available for call until the end of September, so we've only had approximately 30 days. In addition to which, the 100 million of acquisitions which is due to close now in mid-November had been anticipated at an earlier date. So we were maintaining some liquidity for that particular purpose, which could require, depending on the timing of the financing that is placed on those 2 properties, an initial downstroke of $100 million. And then our line of credit, as we announced, was just closed about 10 days ago at the 90 million, subsequently increased to 115 million. So there were a lot of moving pieces, and it just seemed prudent to hang on to the 50 until we had a little bit more clarity.

I'm a little bit confused. On the $100 million of acquisitions you're assuming 45 million of debt. Is that correct?

45 million of cash ultimately. The debt on the properties would be new debt --

Which we have commitments of, but would have to be closed. So it is possible we would have to close it for cash, and there would be a timing difference between that closing and receiving the $65 million of debt.

But you still are going to draw down the extra $60 million, correct?

That's due to occur in December, yes.

Should we kind of expect maybe that that would be the time that you would retire the preferreds? Or you don't want to --?

That would be, as Gary's comments and I think the press release, that and/or a combination of that and buying back some of our stock.

1 last question. You continue to raise rents in about 4.5 percent area. Are there any properties that you're not raising rents or you're actually rolling rents down to kind of preserve occupancy?

There are certainly no properties that we are rolling rents down to preserve occupancy. There's certainly no knowledge that we have in micro-managing where Brian, Our Chief Operating Officer, and his people pick and choose a property that might be 5 percent and 1 might be 3 percent, but there are no negative trends that we're aware of that would suggest that rents aren't moving forward on a similar basis.

So you don't think that if you were to slow the rent increases down that would help your occupancy? There's no data to support that?

There's no data or no understanding to the best of my knowledge that we're losing occupancy due to rental increases.

Thank you very much.

Eric Weinnan (ph) Swergold Capital Management.

Could you review your thought process on what goes into raising rents? Thanks.

I think that historically we have been a company that fundamentally believes that if you disproportionately raise rents you're stripping the equity out of the home values, and therefore you have to raise rents in accordance with obviously your competition, but with the investment that you make back into the community. This Company has taken in the early days a lot of criticism for our capital expenditure policies, which average -- are they around 150 per sire now Jeff?

I think they were 148 last year and about 108 for the first 9 months, on track for 140, $150 range.

And clearly, being in this business for 20 plus years now, we believe that residents generally respond well to rental increases when you're re-investing back into the community. When you're just gouging, if you will, and stripping the rent out and not putting anything back in, that's when you start have problems and the picketers start coming in. But quite clearly someone or a resident will tell you, "look, if you're fixing the roads, if you're fixing the pool, if the clubhouse isn't leaking, I don't mind paying by 10 or $12 or $15 monthly rental increase; everything goes up, I understand that." It's when you're not doing anything and re-investing and letting the CapEx go and your property is deteriorating that you have the greatest degree of difficulty. So the response that I give back to the question is that our policy has always been to seek our rental increases consistent each year, provided that we put the same kind of consistent investment back into the properties and provide the same kind of consistent management.

Thank you.

Alexander Goldfarb, Lehman Brothers.

Good morning. First, can you walk us through the repo process? You mentioned that some banks went through and cleaned up some old properties. Were these homes that the tenant had stopped paying rent but the bank had never come around to repossess it so the tenant was still paying rent to you? Or these were homes that the tenant had left but the bank was still paying, and thus paying you the money and they finally came out and repossessed the home?

The latter.

Next, how much of the home buying easy made homes -- loans have you sold to Origin?

We've only done 2 million this year. I'm thinking that we may have sold up to half of them, but that's kind of an estimate. I don't have that precise number right at my fingertips.

What keeps you from selling all?

Well, it's the cheaper for us -- well, we think that there are benefits to our holding them, because we then are not responsible for any interest differential between the rate on the loan and the market rate. So we kind of look at it on a loan-by-loan basis depending on loan to value and the characteristics of the loan.

In addition, there are certain overrides that we were willing to take that do not fit their profile. And because of the differential that we have to pay them, it's still beyond recourse, if you will, and we would just rather carry them on our books. This is a situation where historically as you look out past -- over the past 10 years, this is a diminimous amount of loans. We've always carried more, even as a private company. So we're generally looking over each 1 and seeing when it makes sense to sell them and when it doesn't.

On the $1.5 million, the mortgage, could we expect that to be resolved this coming quarter? And if so, if the owner forfeited and couldn't pay it anymore or decided he didn't want the property, would you guys then, 1, have to write off the mortgage; and 2, would you assume ownership of that property?

I think those are all good questions, and I think that's what we're looking at right now. We have had a historical situation similar to this, not due to weather, but where we had sold a property, had a second, and in fact gone back to the first that was in place. They took and were willing to take at discount such that we were not impaired and did not have to write anything off. That turned out to be a fabulous community for us.

I meant to indicate in my remarks, and I do so again, that we are working closely with the current owner, who is aware of all of the different aspects. He is a very experienced owner-operator, has a very significant portfolio, is working with his insurance company and with his lenders, is current (indiscernible) this month with his payment to us. And I had a dialogue with him last week and I think we're having a meeting the middle of this coming month for him to update us as to where he thinks he is at. And without that update, although we have actually physically visited the property, it is difficult to speculate as to which 1 of the different options we would take a look at. But they're all possibilities, from a write-off and walking away from the situation, to an actual ownership position of the properties or to be in some sort of workout cooperative period with the current owner.

What was the original sale price and what's the coupon on that mortgage?

The coupon is I think in the low double digits percentage-wise. (indiscernible) know the amount. The sales price I think was in an earlier press release. We sold it for 1.6 million over our original cost. So the gain was of course north of the 1.6 because of the depreciated basis.

Right, but the total amount of the sale?

I think it was like 15.6 million or something like that.

So the guy only mortgaged -- I mean he paid basically all cash and took out a very small mortgage.

No, he took out like a 13 million first and a 1 million plus second. We're the second.

So what is standing -- you guys are the -- you're second in line in terms of collateral?

Yes.

Can you tell us how the restatement came about, the '03 FFO restatement?

Well, I think the press release indicated that it was a routine SEC review of our 10-K from last year. And apparently, they like to draw a distinction between an impairment of an asset and the gain and sale on the disposition of an asset, a distinction that perhaps doesn't have a real significant difference. However, impairment is a hot issue with them, and I guess they were able to get that into or to coerce or to encourage that to be excluded from -- or included in definition of includable items in FFO by NAREIT. So if we had sold the property and taken the loss, it would have been a loss that would have been added back and coming to FFO. But because we took an impairment reserve, in their view it was appropriate to reduce FFO by the amount. So that was their viewpoint and so we changed it.

But in looking back over the Q4 results -- maybe I missed it, but I didn't see the impairment indicated. It was later indicated in the 10-K.

Well, I would have to look and see what the third quarter 10-Q looked like or fourth -- well, fourth quarter Q was the 10-K. So I don't have last year's fourth quarter press release in front of me, so I don't know what it said. I know the impairment loss was certainly disclosed in the K, but I don't recall if it was in earnings release.

So carrying that on, a number of other REITs have sort of indicated they would prefer NAREIT to change the FFO definition to include gains and losses. Are you saying then that you would be supportive of NAREIT making that change?

I've always thought -- let's talk about gains for a moment -- that the gain that is in excess of the original cost of the asset should be included, which would mean you'd exclude the portion of the gain represented by depreciation because that's already been reflected in previous FFO. I have not necessarily thought through the loss side of it, but an analogous treatment on the lock side I suppose would be appropriate. So I would say yes as modified for depreciation reflected in FFO in both cases.

Finally, with my final question with your '05 guidance, will you be giving us the sense of your free cash flow for '05 net of debt amortization?

It's going to be very -- that will be easy because there's going to be very little principal amortization on any of our recent financings in the first 2 years. So that's going to be diminimous.

So you can provide us a free cash flow?

Sure.

For next year in the guidance in mid-November?

Yes, sir.

I appreciate it.

Dave Rogers, Key McDonald.

Gary, a quick question on the repo volume, both in the industry and your portfolio. Can you give us a sense of where you're at maybe on an average monthly basis and what you think the industry is currently?

I think, Jeff, we have quarter-to-quarter comparisons on our repos (indiscernible)

Yes we do. The repossessions at June 30 -- or let's start at the -- kind of give you the trend. At December 31st they were 612, at March 31 they were 648, at June 30 they were 528, and at September 30 they were 589. And I guess 1 more number; at September a year ago they were 681. So they are down about 100 year-over-year. They're up a little bit over June.

And in that, would that include any additional site where the finance companies or small banks may be still paying rent? Or would that not be included in those sites?

That would be included.

Do you know how much of that that is?

Generally we think about half of those sites are actually paying rent (multiple speakers) a little bit more.

In terms of the home sales volume, it seemed to be down sequentially during the quarter. Any reason for that more than seasonality? And what do you expect moving into the fourth quarter?

If you look new and used home sales in the first 3 quarters over the last 3 years, you find that in 2002 we sold 373 new and pre-owned, in the '03 it was 412, and in '04 it is 447. Now the mix is clearly shifting more towards pre-owned and less towards new, but that is a 10 percent increase from '02 to '03 and '03 to '04, which isn't too shabby an increase. It's the kind of position between new and pre-owned that is changing.

It is an important point to look at that we focus on when we sell converted rental, for example, into a new buyer -- it does not create another revenue producing site, where bringing a new home sales in and putting it on a site we do you pick up 1 RPS that way. So that has been kind of what operations is most focused on now, is kind of there is stabilization; there's a bottoming out. Repos generally have gone probably from an estimated 100,000 a year to probably something in the ordinary level of 20 to 30,000 a year. And at the same time, new home sales, based on shipments, and retailers, which are now 40 percent, 50 percent fewer than they were 3 years ago are not as of yet moving the new homes, not increasing the revenue-producing sites within the communities. And that's the change that really we have to look forward to seeing a big shift in growth in our communities (indiscernible)

Are you saying that that 20 to 30,000, that's what you're looking ahead to or that's kind of the numbers you're seeing in today's environment?

I think that's more of a normalized annual repossession level.

And where might you be today in the industry from where you sit compared to that level?

I think we're pretty much there.

Final question. In the RV portfolio, did you have the occupancy and average rental rate of that portfolio in the third quarter?

Well, the answer is there's like 15 different rates in the RV portfolio in terms of seasonal, whether it's a day, a week, a month, 3 months, 6 months. The reality is in Q3 there's very little seasonal RV activity, so it would have had almost no effect in Q3 of any materiality whatsoever. And the permanent RV are very like much like MH, where the monthly rate is roughly almost the same as the MH portfolio (indiscernible) in the 330 to 340 range per month. But I can have the guys pull something together if you'd like to see kind of how the seasonal rates work. Hello?

His line has disconnected. Jordan Sadler, Smith Barney.

My question has been answered. Thank you.

There are no further questions at this time, gentlemen. Do you have any closing comments?

We look forward to fourth quarter analyst conference call, to putting out guidance and being more available to talk with everybody about how the Company will look moving forward with its new recapitalization. Thank you.

Ladies and gentlemen, thank you very much for your participation in today's audio conference. You may all disconnect your lines at this time and have a good day.