Sun Communities Inc (SUI) 2005 Q3 法說會逐字稿

Greetings and welcome to the Sun Communities third quarter 2006 earnings results conference call. (Operator Instructions).

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

Having said that, I'd like to introduce management with us today. Mr. Gary Shiffman, Chairman and Chief Executive Officer of Sun Communities, 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 operations of 10.5 million or $0.52 per share, compared to 11.6 million or $0.56 per share in 2004. Net loss in the quarter was 3.7 million or $0.21 per common share compared with net income of 0.6 million or $0.03 per common share for the same period in '04. Revenues for the third quarter of 2005 were 50.2 million compared to 48.6 million in 2004.

And now I turn to a review of the portfolio itself. Rental increases for 2005 through the first three quarters have increased by about 3.98%, which is basically on budget or just slightly ahead of budget. The increases are in place for 31,950 sites and approximately 2,000 additional sites will receive rental increases in the fourth quarter of this year. The performance of our same property portfolio continued to strengthen in third quarter as revenues increased by 3.6%, expenses by 1.3%, yielding an increased NOI, of 4.6%.

We have leased 226 net sites in our manufactured housing portfolio in the first nine months of 2005. While this is an improvement of 524 sites compared to 2004, it does represent a decline of 168 sites from where we were at June 30, 2005. While the loss of those 168 sites is an improvement of about 109 sites compared to the 277 which we lost in the third quarter of '04, we were obviously disappointed by the reduced momentum experienced from the first half of the year.

We expect to finish the year with net positive leasing, breaking the trends of the last two years, but are not likely to regain both the momentum and rate we experienced during the first half of 2005. So I think I'd say that it's better than last year but not where we want it to be. We have rented approximately 1,500 homes in the first nine months of 2005, resulting in total rental homes to date of 3,438, a net increase of 381 homes for the quarter. The average rent at September 30 is $636, an increase of 3.8% from $613 at June 30.

We believe we can continue to raise rents aggressively, as the surveys that we have taken indicate that our pricing, averaging about $0.55 per square foot, remains considerably below the competing apartments. 30 rental homes were sold in the third quarter, bringing the total to 68 for 2005 and the sale prices in the aggregate for those homes have in fact exceeded the original cost of the homes.

We're in the process of conducting an extensive review of the markets in which we operate, and the prospects for strengthening and leasing and operating results. When this is completed, we will implement a strategy which will likely reposition some of the geographic concentration of our portfolio.

Discussing Hurricane Wilma, it appears that the damage from the hurricane was limited to carports and awnings and some exterior structures as well as the loss of some trees. Power is out in a couple of the communities, but our staff and most residents that evacuated have returned and are in fact back in their homes. The general review of the properties again is that there is no structural or significant damage, and most of the losses relate exterior add-on things like carports, and awnings.

Regarding the SEC inquiry, we continue to cooperate and have submitted all appropriate responses in a timely fashion and at this time there is really nothing new that I could report to you.

Operating budgets for 2006 have been substantially completed. We have provided guidance for 2006, forecasting FFO to be in the range of $2.87 to $2.95 per share and for funds available for distribution to exceed the current annual dividend of $2.52. The 2006 results are driven primarily by modest improvements in net operating income at the communities, continued expansion of the rental program, cost and expense reductions, and an absence of hurricanes impacting Origen or Sun.

We consider our five-year guidance issued in '04 as continuing to be the definitive long-term operating objective of management and the company. We had not expected the 8% to 10% compounded annual growth to be achieved ratably and as noted in our press release today, 2005 has been adversely impacted by extraneous factors. And at this time, Jeff and I would be glad to respond to any questions.

Thank you, gentlemen. (Operator instructions). Our first question comes from Jordan Sadler with Citigroup.

Hi. It's Craig Melcher here with Jordan. My question is related to what your expectations are for the fourth quarter. What do you expect your net leased sites to be in the fourth quarter?

Well, we have an overall budget for the year of 450. Obviously, through the first half, we expected the momentum to carry us to that 450, if not greater. We had cautiously advised everybody that for the past two years we have seen some seasonality in that there has been a decline in net revenue producing sites the second two quarters. We certainly experienced some of it the third quarter. I would estimate that we will wind up somewhere between our 450 budget and the 277 we were at during third quarter.

So you're saying it should be flat to slightly up in the fourth quarter?

Somewhere in between, correct.

Okay. And on your '06 guidance, I just had a couple of questions on the underlying assumptions. What are you assuming for occupancy or net leased sites?

We're looking for a net leased site increase of approximately -- in the range of 300 to 350 sites.

You mentioned the rental program being expanded for '06. What's your target for the rental program, the total rentals in the portfolio?

I think I said on the last conference our goal is to be at around the 4,000 level.

In the release, with the mention of the strategic plan, are any acquisitions or dispositions included in that guidance?

No.

When you do look at possibly selling some assets, do you think that is going to be more market specific or more the type of asset, be it family or senior?

When we look at what we expect to have -- we have -- when we look at the gross loss - loss sites from communities that will lose sites this year, two-thirds of those loss sites are in 14 communities. If we broaden the scope a bit, 26 communities actually account for three-quarters of the gross launch sites which we expect to experience in communities over the year. So those would be the range of communities that we would be looking at most closely.

And which markets are those in?

They are in Michigan and Indiana primarily. And then there is one or two scattered elsewhere. But it is primarily Michigan and Indiana. In Michigan it's primarily Flint with a couple of others.

Okay, my last question is just a quick one on the income statement. What line item were the legal expenses?

G&A.

G&A? Thank you.

Our next question comes from Art Havener from AG Edwards.

Hi. Can you update us on the share repurchase program?

I think that our most recent purchase was completed in October, 200,000 additional shares at an average purchase price of $30.62.

And year-to-date, where do you stand?

Approximately 600,000 shares year-to-date.

Okay. I noticed your line of credit went up $30 million. Can you reconcile that for us?

Well it's -- not in detail in specific, but I mean -- the share repurchases in Q3 would be roughly 6 million to $7 million. And then, probably a pretty large chunk of the remainder would relate to acquisition of homes for the rental program. But I don't have the specific numbers in front of me.

Okay. On the 24 new community developments, do you have any kind of a sense on what your return on investment is, to this point?

Well, certainly, it's susceptible of ready computation but again, I don't have the actual investment in each of those 24 communities and the NOIs in front of me to be able to give you a -- come up with a percentage at this point in time.

Do you have a ballpark of what your cost basis is?

We have a specific as to what our cost basis is but not in front of us.

Okay. In terms of the rental units, are those going into established communities or are they going into the new community developments, or both?

I think they are going broadly to broad base of the communities, probably more so in the 14 to 24 communities that Jeff indicated that tend to be a little bit more affected by the rust belt, probably in larger proportion so logically those are the ones that we are most focused in on but I think the program operates throughout the portfolio. I think clearly it's not geared specifically towards the development communities.

Okay. Just so I understand what you said, most of the rentals are going into those properties that are losing occupancy?

I would say that a disproportionate amount or the greatest amount of focus on the rental program has been in the more challenging properties where if we didn't buy the homes being created by the repossessions, we would just have that many more vacancies in there. So where we can opportunistically buy the homes, which is the properties where the largest amount of repossessions and vacancies are being created, that's where we wind up having the largest portion of the rental program.

On the -- Hurricane Wilma, should we expect an impact on Origen's contribution in the fourth quarter?

We have no update on Origen's impact by Wilma. However, when I did contact them, they had far less exposure in the regions of Florida than they did in Louisiana and Mississippi. Therefore, they expected any impact that they had to be far less than anything like they just reported. But the information was not readily available nor had they had time to --

Okay. They made a press release yesterday. So they expected a 5 to $7 million loss. Can you compare that to what the loss that impacted you in the third quarter?

Well I think what they indicated was that their loan-loss provisions for those hurricanes would aggregate those amounts as opposed to whatever their net income is. As we disclosed in the press release the loss that we picked up from Origen in Q3 was $0.08 below what we had forecast for them to contribute to our earnings for the third quarter.

Okay. One last question. In terms of the Wells notices, how much more do you expect to incur in terms of legal costs?

Art, I wish we could tell you that. I think that as I said in my prepared remarks, we cooperated, we responded and have had some dialogue going back and forth and look forward to being able to complete that dialogue. I hope optimistically, by the time we speak to you next quarter, we have put some resolution to it but I have no way of estimating at this time where they will come out and how much more legal we will incur related to it. I certainly hope that the bulk of it is behind us. I remain cautiously optimistic that we will receive response back to what we submitted and be able to sit around and get some resolution to it.

Okay. Other than the -- just so I am clear. Other than the costs associated with the legal defense, is there any other liabilities to the shareholders?

The Wells notice, as we've issued in our press release, is a recommendation that staff recommend to the SEC board that civil action be taken related to the accounting on SunChamp for the specific periods that were pointed out. So I mean, we have no way of quantifying what that would mean or will mean if that were to take place but I think we've indicated before that we - while we can't get into the specifics or details of what we're addressing with them, that we feel that we will reach resolution in some short period of time.

Okay, I am just trying to distinguish the difference between the Sun shareholders and what is going on with the lawsuit.

Which lawsuit?

The Wells notices.

Well, the Wells notice isn't a lawsuit, it is only a recommendation, a staff recommendation to the SEC. There is no lawsuit that is in place at this time.

Okay. All I'm trying to ask is, is there any liabilities to the shareholders because of this issue, other than the expenses that are incurred that would impact earnings?

I wouldn't be qualified to be able to answer that for you. I'd have to get a more technical response to that.

Okay. Thank you.

Our next question comes from Alexander Goldfarb with Lehman Brothers.

Good morning. Just first - just some line item stuff. The gain on sale that's included in the FFO, unless my printout is not correct, the gain on sale item up -- below revenues is blank. So where is that 365? Wouldn't that have appeared up top in the P&L?

It's in other income. And that's actually a loss in the three months.

Okay, the gain -- so you're adding back a loss?

Yes. Just as you subtract gains, you add losses.

Okay, that was a loss on a sale of the property?

Loss on disposition of assets.

Okay, I thought the accounting was - I mean, I know the accounting doesn't make sense, but I thought the accounting was you cannot record the gain but you have to record the loss.

No, I think the accounting requirements are that you have to give full recognition to gains or losses as they're incurred.

Okay. This is just another wonderful – (multiple speakers).

This is not market appreciation, this is an actual disposition of assets. So if you have a gain or a loss, whatever the result of a disposition is will generate either a gain, a loss or in rare instances a breakeven.

Right, right. Okay, we can follow-up offline. That's fine. The next item is on the communities that you're thinking about doing something with. So in the guidance you do not have acquisitions or dispositions, so to the extent obviously that you get rid of communities that will affect guidance. There's been some news reports of possibly converting some communities into either multifamily or single-family. Do you think that this is a program that would be material among a number of communities or do you think that this is more an isolated community here and there?

I'm not going to be able to define materiality at this point. I can just --

Would it be more than just one or two? Or is this just one or two that you are looking at.

I think this is more of a strategic look than a tactical look.

Okay.

To date, I think we had reported that we have sold one actual expansion parcel to a single-family developer. We are in the process of selling a second parcel that I discussed last quarter, also to a single-family residential developer. We have strategically looked at all of our developments, as I indicated again in the past, and kind of will look at taking some of those assets that are not generating any revenue and will not for the foreseeable future and looking at selling those and taking the results of that and either putting them into producing assets or buying back the stock or paying down the line. I would say there are three or four different parcels right now, that both residential and commercial developers are reviewing.

Could you give us a sense in terms of either square feet or acreage how much you've sold and what the prices have been?

I think that I don't have -- what we have sold already took place several quarters ago, so I don't have that information. One parcel was over 100 acres in Colorado attached to one of our developments and --

Do you recall what the pricing was on that?

I do not recall off the top of my head. It was about 7 to $8 million is my recollection.

Okay. And would you consider existing communities in terms of converting to multifamily? Or should we only think of this as available expansion land?

I think that there isn't anything that we wouldn't consider. Obviously, we look at everything in the best interest of our shareholders. I think that there is a lot of talk about certain areas where the land can be redeveloped at better opportunities and better asset classes. We review those. We from time to time get an unsolicited offer. We're glad to share those with the market when they are at a point where there is some material documentation related to them but at this time the only other property that is under contract is for sale at about $5 million with a cost basis of around $3 million in it.

And how big is it, how many acres?

I don't know the acreage. It's a little over 230 sites.

Those are existing sites?

They're existing sites but most of them are vacant sites. And it's empty land attached to a development.

Okay. On your CapEx or I should say on your implied FAD (ph) for next year, it sounds like it's about 263, which sounds like you'd only have about 5.6, 5.7 million of CapEx for next year. You guys seem to run more in the 6.5 to 7.5 million in annual CapEx looking out over the past few years. Are you expecting CapEx to reduce by about 1 million next year?

I think that budgets were just completed, and I think we're experiencing some lower costs related to lot mods and other items that when we went back with that very question to all our operations people, they felt very comfortable for the year that that is in fact the number. And we're pretty comfortable after their review with it.

Okay, so next year we'll see your CapEx go down by about 1 million

Correct.

Okay, The next - I just have two questions final and they're sort of more bigger picture. Given that interest rates are still - I was looking this morning - they're still in the 6% range, at what point do you think that MH sort of regains its competitive advantage in the marketplace relative to single family especially in the Midwest where you can find homes for 120,000?

Well, I'd like to be able to look out and give you that answer. I mean, I'm in the position of having forecast wrong for the last five years as I always saw things out 12 to 18 months. I think that the one thing that I would point to is that when we compare ourselves to multifamily and look at the cost per square foot of about $0.55 in a range that multifamily is $0.80 to $1.25, we feel we're very, very competitive on the rental market and obviously that's why our rental program has been very successful.

On the sales side of things, we do not see a dramatic improvement on shipments of manufactured homes. There may be some increase that we'll see due to FEMA and other purchases from the manufacturers that might spike it up a little bit. Where we're losing ground with our net revenue producing sites, it tends to be in areas where there's either natural attrition in our community or, the repos are coming in and there's no in-fill from existing dealers other than what we create ourselves. We have felt that a little bit of an increase in rates will be supportive of this. I think that we're watching it very, very closely as we saw 10-year, for example, cross over 60 yesterday. And probably think another 40 basis points from a sales standpoint would be helpful.

I don't have a crystal ball to tell you when it will happen. I do think the key factor and fundamental that we keep in mind when we look at how we project out into the future for 2006 and beyond is the fact that we're holding a lot of assets at what we consider to be extremely competitive prices -- homes that are in the 17 to $20 a square foot cost to us competing with site-build homes that obviously are far in excess, double and triple and more than that. So, interest rates are a big factor when that value can be created. I don't have an exact answer, whether it is three months, six months, or a year in the future.

What I can tell you is that the company has had its nose to the grindstone and operating as efficiently as we can. And we'll be poised to take advantage when that takes place.

The final question, I appreciate your time, is just looking out over the past number of years, the MH sector has not received the same investor interest as some of the other property types. Do you see that changing going forward?

I see that changing going forward and that change coincides when we are able to post significant growth to attract the investor attention. And I think that if you were to take a look at us successfully completing our plan for 2006 and achieving in '07 and the future what we expect to achieve, I think that that is significant a growth to attract that type of investor. But obviously, as I said before, we've got to actually post that kind of growth. It's been a challenge historically. It's been five years of very, very challenged industry and everybody, of course, is waiting to see when that turn will come and we're as anxious as everyone. But as I said before, I think we're well positioned, but I can't call the shot on the timing.

Thank you.

Our next question comes from Dave Rodgers with Keybanc Capital Markets.

Gary, question for you to start with. You saw the momentum slow in the second half of the year at least to this point in terms of your net leased sites. What do you attribute that to? And particularly, do you think there's any concern that the rental program and the internal home sale program is placing pressure on your existing residents that may be trying to sell?

No, I think that the bottom line is we've seen no slowdown in repossessions. The good news/bad news we keep referring to from quarter to quarter is that they're the same this quarter as last quarter. They're the same through this period of this year as they were last year and going back the last two years, so there has been a flattening and no further reduction but no improvement. So when these homes move out, we have two choices. We can look to buy the home if we're interested and the value is there or we can let the home get abandoned or pulled out by the lender.

And what we're missing in our market right now is enough competitive interest for the buyer to step in and a) either buy these homes or have a third party retailer, dealer so to speak, in there in-filling the empty sites. And that's not taking place right now. That is something that has to take place for the fundamentals to improve and for us to get weaned off of the rental program so to speak. Those are kind of the dynamics that have caused the loss.

We certainly think that in scaling up for the sales of these homes, we are starting to make slow, steady progress. And when we started out talking about the five-year program, Dave, it looks for the second or third year where we are reducing the amount of rental homes that we have in the portfolio by selling them faster than we are buying them. And that's pretty much what we're focused on in 2006 and 2007.

As you sit here today and you look at the backdrop for third-party financing, does your 2006 kind of -- not necessarily guidance but your -- outlook tell you that more of that financing to get out of that business, the rentals, is going to come internally or is it going to come from the third-parties externally?

I believe pretty firmly that it's going to come externally. Sitting as a board member over at Origen and we had a board meeting yesterday, I think that pretty tuned to the competition that's out there and the financing. And we're starting to see a lot of credit unions, a lot of regional banks, a lot of other people who are driven to MH by what appeared to be attractive yields stepping back into the business. And we in fact have been approached by at least three different sources who wish to evaluate and put a bid on the loans that we are actually carrying on our books and internally finance.

So we have in our budget approximately 2 to $3 million currently for an in-house financing. We kind of expect during that period of time to be able to sell off some of the existing financing because all of the financing that we do is underwritten through credit, down payment, payment history and our F&I department has got it in shape so that I think we will get some of it sold over the next six months or so. So I do see third-party independent financing starting to kind of dip their toe in the water, if you will. And I see it as a positive thing this coming year.

Last question for Jeff. As we run through the year, you're running at about $0.62 - $0.63 per share in FFO, excluding a lot of the one time items, Origen, the G&A, costs from the SEC et cetera. Assuming that continues in the fourth quarter, you run around to $2.55 for the year, at the midpoint of your 8 to 10 guidance for the long term, 9% growth puts you at like 2.80 which is well below the low end of the guidance next year and, given the net lease up in sites that you kind of are modeling in and no acquisitions - am I thinking about that right? I mean, is that a bit of a stretch for next year in terms of the guidance?

We really don't think so because we've also got cost and expense controls which are contributing to that achievement as well as we've got 226 sites today and we're in the 300 to 350 expectation for growth next year. So we think that the guidance range as disclosed for '06 is -- if we didn't think it was reasonable, obviously we wouldn't have put it out there.

Okay. Thanks guys.

Our next question comes from Eric Wildman (ph) with Schwerin Boyle Capital.

Hi Could you review the number of gross new repos in the quarter and what's the trend? And then lastly, could you review the numbers that go into the net revenue producing sites? I believe it was 226 sites? Thanks.

Sure. So the first part was repos for the quarter.

The repos for the year are running pretty much -- I don't know that I - I don't have the exact number for the most recent quarter. For the year they're running at the same rate as last year.

Roughly 90 to 100 a month?

Probably a little stronger than that. Around 1,300 for the year, so it would be around 115 or 120, I guess I'm quibbling here over 10 or 15 but running at approximately that rate. The second part of the question was, I think, how do we compute the net leased sites?

Correct.

Well that's any site that has got a resident -- any home in our community that has a resident in it who is paying us rent.

Alright, so that's -- you lost 168 sites and then you rented 381 and then I plugged in the new land lease sites at 13? Is that how you get the 226?

The 226 is a year-to-date figure. The 381 are rental homes that were leased or were rented in Q3. The 226 is the beginning of the year occupied sites that were paying us rent compared to the same methodology at September 30. So there were 226 more occupants in our communities paying us rent at 9/30 than there were at 1/1.

Hi, this is Dan Boyle. I have a question regarding the non-earning assets that you have that you are carrying. How do you look at it? You mentioned some parcels of land and so forth. I'm just curious what you consider to be potentially salable non-earning assets?

I think it would be any land that is expansion land and not developed. Or it would be developed expansion land that is different than in-fill in existing communities. So to the extent in Lansing where we have this one property I referred to that's under contract right now, there are roughly 100 sites constructed with 30 residents in the community and another 120 to be constructed. So, we look at that asset as something that we can basically call a non-revenue producing asset and sell it and re-deploy the capital into something that will provide a return for the residents. So I don't know if that is answering your question.

I'm just wondering in a broader scale, there's probably many other things or many other parcels that might fit similar characteristics. And then Origen has been a non-earning asset also. I'm just curious as to what you think the larger amount might be?

I don't think I have a total amount for you but I think as we've indicated this is a period of time that we're looking very carefully at all our non-revenue producing assets and expect to carefully develop a strategic plan to take the non-income producing assets and turn them into obviously income producing assets for the investor.

How do you -- would you include Origen in that category?

You've got to come a little closer to the phone.

In terms of Origen, would you include that as a non-earning asset or --?

I think - that's a good question. I think that Origen is something the board here reviews every quarter when they get together. And I think that there is a guidance and a forecast that we put together that includes return on investment from Origen. And I think that each quarter we have to take a fresh look at it. Certainly, it's been very disappointing by the -- one-time expenditures related to it. But on the other hand, from an operational standpoint, we have found them pretty much on track with where they expected to be for the year. And right now we're awaiting how they think guidance will be for 2006 and that the board will sit down and make the same kind of assessment on that investment as it would on any other one such as land (ph).

Thank you very much.

Our next question comes from Craig Leupold with Green Street Advisors.

Good morning. Gary, can you talk a little bit more about this strategic review of your portfolio in terms of how significant the changes might be to that portfolio as you look forward and comment on whether the existence of all the mortgage financing restricts your flexibility there at all?

Well, I think going at it backwards, we have the ability for substitution of property and pay down of the mortgage. So we did a very good job initially when we set those mortgages up. So I think we have sufficient flexibility to accomplish pretty much anything we would want to do. I think the idea of how much are we looking at, I think under review in total is pretty reflective in Jeff's earlier comments that about two-thirds of the actual losses in sites that are in the budgets for 2006 come out of 14 communities. And those are the 14 communities that we indicated that are primarily in Michigan and Indiana. And again, even within these geographic locations, it's specific regions within those states. And we're looking very, very hard at those 14 communities, and with the stock price like it is today, weighing very very carefully what we could do and what our alternatives would be if we were to have sold those communities and had the proceeds to put to work either again paying down the line, buying back stock or redeploying it other ways.

I thought I heard the answer to the question on the mortgages that you have the flexibility to just pay down those mortgages as opposed -- you mentioned substitute collateral but then you also mentioned the possibility that you might be able to just pay down those mortgages.

We have the ability to do either.

Okay. So we could see a shrinking of the company then and possible pay down of debt and repurchase of stock?

That is a very carefully analyzed factor that we're taking a look at now.

Okay. It would seem like that would make sense given the significant discount to underlying real estate value at which the company trades, that that would be a welcomed strategic move by the part of your investors, I would imagine.

On the rental home program, you mentioned that the ultimate size might get to roughly 10% of the portfolio. That's obviously higher than kind of when you guys suggested when you initially got into the rental home program. Is that a reflection of the markets just being more difficult and repossessions being more problematic than you expected at this point? Or is it that you like the economics of the rental home business better?

I would say it's yes and yes to the former.

Okay.

As I said earlier, it has been five years that this industry has been very, very challenged. The repossessions went deeper and the poor credit standards as they were uncovered and as we went through the various bankruptcies over the last five years with Conseco and others. It has been a deeper recession in the industry than we ever imagined.

The rental program, we view as a very, very solid business shift to deal with a very challenged industry. However, I have said before it is not a business we would choose to be in but it is also something we have done time to time in the past. I have been in the business and so has a lot of our operations people in excess of 20, 30 years. It is a short-term substitution to deal with the soft market conditions and the challenges that are facing the industry.

If you would have asked me four years ago where did we want to be in it, not at all. Three years ago, not as deep as we are in it right now. It is a very challenging business, as you can imagine, to be in. Turnover is roughly 50% a year. We study that very, very carefully. If we could reduce turnover to 40%, the numbers driven down to our bottom line are incredible. 10% is where we would like to draw the line. One of the things we're seeing is that pricing of the repos is increasing a little bit right now. While we have no hard facts and we've seen it off and on over the period of the last couple of years, we kind of look forward to seeing that reduction in the repos take place. I cannot say is it three months, six months, or 12 months at this time.

I know it is a fairly small sample but you mentioned that of the 68 homes that you sold for the year that the price exceeds your cost. Could you give any more color as to the magnitude?

The purpose of the LPT sales program is really not to endeavor to make a large margin, it is to recover cost and convert obviously a renter into an owner-occupied residence. I would characterize the profit on the homes as modest.

Just a couple of quick questions for you Jeff. On page 8, I appreciate the breakout on the rental home program. The repairs and refurbishments, it looks like - this is a nine month number, I know you have been building up the program so it is not perfect but if I annualize the repairs and refurbishment number, 2.1 million, it looks like you are running at about $800 a site or more. What do you expect that number to ultimately top out at?

On the homes that actually turn over, the refurb cost averages somewhere around $1,600. And of course on some of them it is actually almost zero and on others it is a larger number.

But it's 1600 now.

That is approximately the average on the homes that turnover during the year. As much as half of them turnover on average during the course of the year. If you looked at the entire population of homes, I think you'd be looking at half the 1600 or 800. I think your computations, depending on what your numerator and denominator are, are pretty close to our reality.

Okay and then just last question. On page 2 on the balance sheet you show rental homes of 104 million versus that on page 8 you are at 98 million. Is the difference just rental homes?

Precisely.

And then the inventory down below of 20 million, is that inventory of homes for sale?

For sale and/or rent depending on what community they're in, whether it has a rental program or whether it is strictly a for sale program. And then if they in fact go into the rental program, they get transferred into the rental home number.

Okay. So there are vacant rental homes potentially in both of those lines.

Yes.

Thank you.

Our next question comes from Jordan Sadler of Citigroup.

Hi guys, just a quick couple of follow-ups. Just following up on Craig's last question, the number of rentals at the end of the period on page 8 were 3,438. Now that -- were those the occupied homes that you just described?

Yes, occupied.

So, if you had to take a guess at the overall occupancy of the rental homes --

95%.

95%. So it's 95% of the $103 million cost.

Yes, exactly.

Okay. And total number of homes in the inventory, down below, the 20 million?

There would be 700, almost 800 homes, new and pre-owned, in the inventory.

Okay. Do you -- is there a set-up cost? I mean, if I divide the 97 or 98 million on page 8 divide it by the number of occupied units I am getting 28,500 on average of total cost per unit. Is there a set-up cost in that number?

Yes. It would be all in there.

It's all in.

Yep, set up and if there had to be any work done to them when we bought them, everything is in there.

Okay. And would it be appropriate to assume that this site rent -- that the lot rent on these homes would be pretty close to the average of 353 or would it be higher or lower?

Well, it would be the market rent for the community. Given the size of the program, I think it would probably -- you could probably use portfolio averages.

Okay. And then the debt coverage I noticed was creeping down a bit. It's down to, I guess your fixed charge coverage is down to 1.7. Is the strategic initiative -- is it partly aimed at improving this overall coverage ratio? Or are you okay with maintaining it at sort of the 1.7 level?

That may be a byproduct, but the purpose of the strategic review is a bigger picture than just that particular metric.

You're not worried about debt levels at this point?

No. I mean, that doesn't mean that we're going to run it to 100% or take it down to a one-to-one, but no, it's not a matter of particular concern at this point.

Okay. And I just wanted to double back on Origen, what the thinking was. Maybe Gary, what's the reason to own Origen still?

The reason to own Origen at this time is to produce the best return and exit strategy for the shareholder. I think that the market conditions, as I have indicated, for five years have reached a level where the expectation was to have had a turnaround and to be able to capitalize on what had been a bad investment from the start. During the turnaround and that turnaround has not taken place so the review by the board each and every quarter is one to weigh the investment in the company and the value of an exit and how and when to exit and at what price.

So I guess - I mean intuitively, it seems as if you or the board expects that the return from the investment in Origen would be higher than the let's say 13% return you're currently earning on your rental program as you lay it out on page 8? Because why wouldn't you just sell the asset - I mean, if you didn't think it was higher wouldn't you just sell the stock and redeploy it into the rental program?

Well, that's if you wanted the rental program, for example, to be 6,000 or 8,000 units. I think you've got to weigh out the deployment of the capital. One could argue better I think would the cash be better used in buying back stock at these prices.

Right. Well, I mean, with the return on buying back stock and your expectation given your strategic review be better than owning Origen?

I think that that's under review.

Okay. Thank you.

(Operator instructions). Our next question comes from Richard Paley (ph) with AVP Investments.

Hey guys. I would like you to walk through the earnings guidance just a little. Maybe I missed it, but what is your expectation for core NOI growth? What do you have built in for further expenditures on the litigation front? And then in total on the G&A front, what are you guys expecting?

On the G&A front we are expecting that next year's G&A will run very close to our third quarter actual G&A for the rental part component of the G&A that is reflected in the income statement. In terms of additional legal, we do not have additional legal relative to the inquiry in the 2006 guidance in the expectation that we will have a resolution in the not too distant future, defined as, on the one hand who knows what the government but 60 days to 90 days, something like that.

Why do you have that expectation?

Do we have that expectation? Yes we do.

Why? Is there something in terms of communication?

No, there has been no fixed communication but that is the expectation that we have been led to by counsel who are more experienced in these things.

Okay, so your third quarter G&A level has the litigation expenditures in it?

Yes.

So I should remove that number and run with that?

Pretty close.

What about on the core, you know...?

We do not have the weighted average rental increase computed at this point in time. So, it is a little bit tough to give you a number. In terms of the core growth but I guess we would expect, say, same property to be in the say 2.5% range for next year.

That is on the revenue side or NOI?

That would be the NOI side. Maybe roughly that for the portfolio, but it is a little bit early. That is why we did not get into that level of detail because these budgets are substantially complete at this point in time, but all of the refined computations have not been completed but we have confidence in the big picture. It's just that we can't put exactly all the building blocks with specificity into place at this point in time.

Right. My next question is, and maybe it's (indiscernible) but could you walk through what transpired with Origen? Basically they had loans out to people whose homes got wiped out and they stopped paying the loans. What happens going forward? Are these written off and does that impair the cash flows that Origen was expected to be booking? I know you're hesitant to speak on terms from Origen, but what's your perspective of what happened and what do you expect from them?

Well, I think that I, again, I wouldn't speak on their behalf. I would simply say that the explanation that they gave with regard to the approximate 5 to $7 million sustained loss was that it was less than 1% of their overall portfolio but represented a combination of issues in the South related to the hurricanes whereby they have a certain amount of homes in that area, a certain percentage of those homes have hurricane insurance, a certain percentage of those homes have flood insurance, a certain percentage of those homes have hurricane and flood insurance. And obviously, there's a certain percentage that don't.

And as they walk through the numbers, the estimated losses in each one of those homes in each one of those categories with or without insurance, in addition to the fact that much of that area is still evacuated, so people tend not to send in their monthly payment, they arrived at that estimated number of 5 to $7 million. And we simply took our ownership percentage of the company and that's how it affected us directly. So beyond that, an understanding of their business, you'd have to go directly to them.

But is that 5 to $7 million the, I guess, what's anticipated to be the write down of the loan balances, or is that just the cash flow of the rent payments that they didn't receive and these are loans that are in technical, I guess, default?

That would be additional provision for loan losses given their analysis of the extent of the issue. I mean it's not – that isn't not cash. But certainly prospective cash flow will be reduced to the extent these folks can't -- the homes are not there and/or the folks are not there and/or the jobs aren't there.

What do you have in your expectations for '06 with respect to Origen and what do you expect to see?

We have an estimate of their estimated results for next year in our next year's guidance.

Okay. And you don't want to say that because it's an Origen (inaudible - cross talk).

I think that that would be their position to say that.

Okay. Thank you.

(Operator Instructions). Gentlemen, we have no further questions. Do you have any closing comments?

We'd just like to thank everyone for participating on the third quarter conference call and we look forward to updating everyone as we make progress as a company. And as always, Jeff and I welcome any phone calls. Thank you.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.