Sun Communities Inc (SUI) 2005 Q4 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the Sun Communities fourth quarter 2005 earnings results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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 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, Chief Executive Officer of Sun Communities; and Mr. Jeff Jorissen, Chief Financial Officer of Sun Communities. Thank you, gentlemen; you may begin.

Good morning. This morning we reported funds from operations of 13.4 million for the fourth quarter, and 51.3 million for the year ended December 31st, 2005; compared to 10.3 million and 53.9 million for the comparable ’04 periods.

On a diluted per-share basis, FFO per share of $0.67 for the fourth quarter and $2.54 for the year ended December 31st, 2005; compared to per-share amounts of $0.50 and $2.57 for the prior-year periods.

Total revenue for 2005 increased to 202.6 million, from 194 million; excluding the gain on sale of land in 2004. And the 2004 numbers exclude charges related to the Company’s recapitalization in ’04.

During 2005, the Company incurred approximately 1.2 million, or roughly $0.06 per share, of expenses directly related to the SEC inquiry. The Company, in a press release earlier this week, announced that it has agreed in principle on a settlement with the SEC. And at this time, we turn to a review of the portfolio.

Rental increases for 2005 were at 4%, which was our budget for the year. The 2006 budget is currently based on a 3.6% weighted-average rental increase. And our same-site portfolio of 121 communities has registered a revenue increase of 3.2%, while expenses increased by 2.1%, resulting in an increase in net operating income of 3.6% for 2005. And we expect 2006 same-site performance to be very similar to that of 2005.

In ’05, we added 99 net leases to the manufactured-housing portfolio, which is the first increase since 2001. And the 2006 objective and budget provide for an increase of 286 manufactured-housing sites.

The number of homes which we have rented in the portfolio stands at 3,711, an increase of almost 1800 homes during 2005. And the average rental rate increased from $579 to $643 during ’05, and basically represents a monthly cost of under 50 cents, per square foot.

During ’05 we acquired about 2200 homes of which 1800 were rented, and 425 were actually sold. 89 rental homes were sold in ’05 at aggregate proceeds in excess of the original cost paid for them.

We have completed and refined our 2006 budgets, and affirmed previous FFO guidance; ranging from $2.87 to $2.95 per share. We also expect that FFO per share, after adjustments for recurring CapEx, will exceed our current dividend payment.

Operational budgets in the first half of 2006, pretty much mirror the Company’s performance in 2005; before we expect to see any clear, positive trends in repossessions and occupancy or in fact, shipments of manufactured homes and strengthening of retail sales. As part of that budgeting process, we have reviewed assets that have been particularly affected by regional economics. We have discussed them before on the conference calls; in particular, those most-affected in the rust belt. And while no specific decision has been made with regard to any dispositions, we have received inquiries from parties interested in acquiring communities.

Actual shipments of new manufactured homes, although up for the last few months of the year, I think reflect purchases by FEMA for hurricane victims; and when adjusted, shipments actually were pretty flat year over year.

The retail-financing market for manufactured homes, while still tight, has had several new players initiate and/or expand programs this year. US Bank, San Antonio Credit Union, and Banque Populaire, as well as Green Tree; have either recently entered the finance market or in fact, expanded their existing programs. And local banks seeking yield these days, have also increased their appetite and remain really an important funding source for the retail buyer.

Although January bounced back strong in the recent articles I read on new site-built housing starts, possible signs of a slow-down, as predicted in the site-built housing market; we believe should begin to help manufactured housing sales sometime later in ’06 as affordability becomes more of a predominant theme, again as we’ve discussed in prior calls.

At this time, I think Jeff and I would open it up to your questions.

Thank you. [Operator Instructions] Our first question comes from line of Jonathan Litt of Citigroup. Please proceed with your question.

Hi, it’s John Stewart here with Jon Litt. Gary, you mentioned that rentals were up again to 3,711 in the fourth quarter. Where do you expect that number to go in 2006?

John, I’ve been a victim of my own thinking as we moved through the last three or four years of challenges in setting numbers. But the repossessions continue. The good news is they are at the same level and they’ve been stable the last few years, but they create the obvious opportunities we talked about, to buy and the necessity to keep those sites from being vacant or non-revenue producing sites.

So, in the past we’ve expanded the rental program from what I thought would be 2,000—a couple years ago to around 4,000 estimated homes at this time. It will continue to be an integral part of our strategy until the market turns. I guess the best way I can answer your question is to say that I expect there will be some increase over 2006 to the program. Until the homes that were actually selling, which we’re making progress on now, exceed those cheap repos that we’ve been buying opportunistically. So, I’m looking forward in the first quarter to be able to give a little bit more color on that. And I want to remain optimistic that the number will start reversing, as we sell the homes off.

Along those lines, how much do you expect in profit from home sales in 2006?

I think that to date on the 90 or so homes that we’ve sold, we’ve sold them at prices above our cost. And I don’t know Jeff, if you—

Are you speaking of our regular home sales program, John? Or are you talking about the sale of the rental homes?

Both.

Well, our normal program, obviously that’s encompassed in our earnings guidance for next year. We make about gross margin of maybe 15 or 16%, something in that range on the sale of new homes. And on the sale of pre-owned homes, the LPP program, we’re probably selling them at a couple of percent above our original costs. So it’s not really a profit contributor, so much as it is converting a renter to an owner.

Okay. And then how much seasonal RV income was there in the fourth quarter, and where do you expect that level in ’06?

Well, we expect a modest increase in seasonal RV revenue in ’06, as budgeted compared to ’05. The seasonal RV business remains quite strong. I do not have a fourth quarter seasonal RV number with me. So I’ll have to defer that one.

Okay. Thank you.

Our next question comes from the line of Paul Adornato of Harris Nesbitt. Please proceed with your question.

Hi, thanks; good morning. The press release talked about one acquisition of 227 sites for about $12 million. That’s a pretty high cost per site. I was wondering if you could tell us the story behind that.

I don’t think it was $12 million. I think that number isn’t accurate. We’ll try and get the correct number for you now.

There was an RV—we repurchased Tampa East for 7.3 million, which was 700 RV sites and 30 manufactured-housing sites, in Florida. And then, since year end, we acquired a community with 227 sites in Oakland County for 7.8 million.

Maybe you’re thinking—

Okay, that was the one.

You’re adding the debt. The 4.5 is subsumed into the 7.8 number. So it was 33,000-35,000 a site—I guess 35,000 approximately for Oakland County.

Okay, what type of rents do you expect to receive there or if you could talk about a Cap rate there?

I think it’s right outside of Bloomfield Hills, Michigan. It’s something that I saw constructed about 10 years ago. It probably would be the jewel manufactured-housing community in Oakland County. And due to some estate planning and a long-term relationship, we were able to buy that at approximately a [8] Cap rate. And I think it’s an excellent acquisition. It is 95% occupied and has been 95% occupied since it’s been built. There are currently two repos in the community, and that’s just a case of location, location, location; surrounded by Bloomfield Hills; one of the largest per-capita and greatest value of homes in the state of Michigan, and often times in the top five in the country; just an odd acquisition.

And also back to the rental program; now that you have a few more quarters of experience, what is the average length of stay for a renter?

We’ve seen the renewal rate climb slightly above 50%, which is pretty much where it has been consistently. So if that’s the case, you’re talking 18 months, average.

Okay, and the number on the cost per turn; I see you break out repairs and refurbishments, is that the expense line that’s equating to the cost for turnover?

Yes, it is.

Okay, thank you.

Our next question comes from the line of Alexander Goldfarb of Lehman Brothers. Please proceed with your question.

Hi and good morning. If we can first just go to the CapEx; it’s a two-prong question. First, just has to deal with the ’06 guidance is about 6 million. This year you guys came in at about 7.7. So obviously the ’06 guidance reflects almost a $2 million downward adjustment. In addition, on the rental program, it seems that the cost of refurbishing and rehabbing the rentals outpaced the revenue growth. So I just want to get a framework for how we should think about the overall occurring CapEx reduction, and where we would expect refurbishment CapEx to be on the rentals.

First of all recurring CapEx has some strong cyclical qualities to it, depending upon how many trucks we buy in a given year or how many community buildings we freshen up, or how much road work is done. If you were to go back to the earlier years in the 2000s, you would see that that number did come in, in the 125-135 per-site range, for two or three years in a row, during that cycle. So we’re expecting that that cycle is recurring here probably for the next couple of years. And then you get back into the trucks and the roads again, and so on and so forth.

And I’d like to take this opportunity to amend my answer to Paul. The repairs and refurbishment line, repairs are those things which take place while a home is occupied. The refurbishment is the cost which is incurred when the house turns over. So, that is not a pure turnover cost, because it does include the repairs that take place on the home during tenancy.

Okay, and then the second part on the refurbishment, on the rental program—

Well, you have a growing program, you’re going to have as the homes turnover, the refurbishment is going to grow as a percentage of the prior-year refurbed, until the program stabilizes, it’s going to grow more rapidly.

Okay, so we should expect that continue?

Yes.

Okay, and just so I understand your general CapEx question; so what you’re saying is, you guys have done a lot of the major CapEx items, and now you expect to have a lower spend going forward, because a lot of the major stuff has been done in recent years?

Well, the major stuff, yes; but the major stuff recurs though, by the very nature of the animal. So, the roads will eventually wear out and the trucks will wear out and the cycle will repeat itself.

Okay, going to your guidance for ’06 verses ’05, you mentioned the $1.2 million SEC cost which was in ’05 and is obviously not anticipated to be in ’06; what are some of the other either one-time items or areas of significant pick up in earnings that we should be aware of?

It’s important for me to point out that at this time the cost related to date in ’05 to the SEC inquiry, the proposed settlement is with the Company only. Therefore, there could be additional costs incurred based on the individuals that as of yet, have not settled with the SEC. So, those potential one-time costs remain out there.

But I thought the Company settles, so wouldn’t the individual expense be a personal item, or that would fall to the Company?

That would fall to the Company. The Company indemnifies the individual with regard to these types of actions unless gross negligence or fraud or something like that is involved.

The Company settled, the corporate entity settled; and there was no cost. What you’re saying is that if there is something that happens with the individuals, there is a potential for a cost--?

I’m talking about costs related to the inquiry, not costs related necessarily to the settlement. So to date, the money expended, predominantly legal, related to the investigation and the defense of that investigation by the Company, that has now in principle been settled without additional costs likely to be—any significant cost to be involved there if it’s approved at the commission level. And the individuals, as I said, continue related to the inquiry; and the defense of those individuals would be incurred under normal circumstances, barring those I just explained, by the Company.

Okay and your ’06 guidance does assume that ongoing expense for the individuals, or does not?

It does not reflect those one-time expenses if they are incurred.

Okay and the expense of defending against the SEC action is the 1.2 million that was spent last year; should we think of the number as sort of half of that amount?

First of all, it’s impossible to think of any specific number because it revolves on a number of contingent decisions of the individuals. But an awful lot of the 1.2 million had to do with discovery and depositions and all that kind of stuff in 2005, which presumably will not be recurring. And also of course, the Company is probably a major player in these costs, as opposed to—not that individuals are insignificant, but the costs incurred were substantially weighted towards the Company’s process.

Okay, and just finishing up on the FFO guidance for ’06; is there any sort of—in the earnings on the revenue growth or seasonality or rental home business; is there any significant up tick that we should expect? Or if we follow the trends that were present in ’05, we should be able to get to the ’06 guidance?

I think as I indicated earlier in my remarks, we have based our budget in ’06 in industry and portfolio conditions that would be very similar and mirror and reflect what took place in ’05.

Okay, perfect; thank you very much for your time.

Our next question comes from the line of Dave Rodgers of Keybanc Capital Markets. Please proceed with your question.

Gary, just to follow up on that; we should then expect really no pick up in organic home-site occupancy throughout the year?

Yes, I think 286 is what we budgeted, yes 286 increase in occupancy; most of which will come from the rental program unless we finally begin to see some fundamental changes, which I discussed; in site-built housing, a little bit more interest-rate pressure I think that will drive value to the affordability. I think we’re starting to see early recovery, pricing pressure on the repos as the repo inventory is reduced. A little bit of retail activity as a potential for third-party retailers to begin selling homes, because there is some financing out there from—it’s spotty but some that’s out there.

So the organic growth will be much more limited until we see some significant change. But the fundamentals that we try to point to is that we look for NOI same-site growth to be similar as ’05. We look for a slight pick up in sites to 286 that we talked about. And we also look at our rental program, and feel that sub-50-cent per square foot prices are still very, very competitive. And I think we saw an increase of average rent on the rentals – was it 11% Jeff? Approximately 11% over the year, and we would expect a similar-type increase that would be very achievable, and beginning average rent in the rental program until it completes in ’06.

What is the average price now? You said there was somewhat upward pressure on the repo homes. What is the average price there now? And at what point is the breaking point where you’d rather buy new?

Well, it’s still running for a double-wide, including the renovation costs to bring it to initial habitability status; it’s still running around $16-$17 a square foot. New, the construction cost of that home is in the low 30s per square foot. And of course the retail and the set-up costs and everything would drive that number probably up another 7 or 8 or $9, probably into the $40-$45 a square foot purchase price. So, it still remains at $16-$17 a square foot, a strong economic value.

Gary, how do you feel about your portfolio in the sense of obsolete home sites, with the way homes are continuing to get I guess larger it sounds like, in terms of the new construction; if the market strengthens, if the demand goes in that direction, how comfortable are you with the existing portfolio in terms of obsolete home sites, etc.?

I think that’s a great question. I think we spent 12 years trying to get rid of the functionally obsolete communities and sites. And I think we’ve done an excellent job through asset management and the dispositions and I think we’re quite comfortable, as a company; although we are weighted more heavily to the all-age type communities. I think our sites generally will all accommodate, with a few exceptions, the modern larger manufactured homes. So we welcome the opportunity for those types of retail sales and those types of residents to move the larger double multi-sectioned homes into the communities. So there is no issue there.

Okay. It looked like you completed development of roughly 75 home sites in the quarter. How much did you spend and what’s your outlook for 2006 in terms of new development and spending?

Well, we spent—I don’t have the number right in front of me, but I think we spent around $30,000 a site, 27-30. It varies, depending on where they are. I know that—I believe we did Hamlin in Michigan and I think we did Sunset Ridge. It’s going to be modest, because until we see this cycle turn, when we do run out of sites in a particular community, whereas 8 or 10 year ago we would have built 150 more sites; now we’ll build 30 or 40 or maybe 50 new sites, depending on rate of absorption. And I think there might only be one or two-- I would say comfortably that it’ll be under 100 sites developed in 2006.

And last question for you, Jeff; can you talk about—I think I’m following it, but the increase in the line of credit, the $20 million in the quarter; can you just kind of walk me through the components of that so I can make sure I’m following the cash and the investments okay; [inaudible]?

You’re kind of asking for a cash-flow statement, which I do not have in front of me. I can obviously tell you that we bought approximately $13 million of rental homes in the quarter. And so that would be perhaps 70% of the $20 million. And the rest I’d have to really have a cash flow statement to button it down.

Alright, not a problem; thanks, guys.

Our next question comes from the line of Mark [Berry], of Green Street Advisors. Please proceed with your question.

Hey guys, I just wanted to ask—do you have assumptions in ’06 guidance for stock buyback?

There are no assumptions as of this time for stock buyback.

Okay. The other question is about your same-store results. Do you have any thoughts on where the same-store numbers in the forecast might be, if you were to pull out the impact of increased rental-home inventory?

You mean if we had no rental home program whatsoever?

Not stripping out the site portion of the home-rental rent, but maybe the home portion of the rent.

Well, I think, as we’ve tried to make clear, the home portion of the rent is not in the same-site data. Actually it’s in an income-statement line item in the press release, rental revenues net. That’s the residual rental revenues after the site rent, less all of the direct expenses of the rental-revenue program, which are delineated I think in a table in the press release and also in the supplemental data.

Okay. The other question is—with additional home rental purchases this year, how high might your line balance go? I noticed that last year you bought, increased the rental home inventory by 65 million. How much investment might you make this year?

I think that’s pretty much related to what I said before. I think we’re going to look at it at quarter by quarter instead of making a blanket statement, but the expectation is that with nothing changing, right now in the flow repossessions and until we see some push back on the pricing, you will see some increase. I think I’d probably defer the question until first quarter; and actually look optimistically to be able to respond with a favorable result whereby we don’t expect anywhere near that type of purchase going forward.

Okay. My last question is—you touched on a little bit the challenges in the financing market for manufactured homes verses site-built homes. Do you have any thoughts on where that spread might be between interest rates for I guess chattel loans, verses the ones on site-built homes?

I only have the discussions that we had with the lenders, and certainly we do have the opportunity to talk to the folks at Origin and sitting on their board, I do get to download—I mean to them an ideal world, if I’m understanding your question right, would be 125-150 basis point narrowing of the gap between the site-built home. But then you get into the cost of the funds that the different lender has to look at; and you tip the scales to the lenders obviously with the cheaper cost to funds. And I think you’re seeing that chasing for yields, if you will, from the banking—the actual individual regional banks right now, chase some of that yield because 9 or 10% yield on a manufactured home is very attractive to them. So I think it’s one of the areas that we look to get a little future absorption from third-party buyers, moving their homes into our communities right now.

Alright, thanks.

Our next question comes from the line of Eric [Wineman] of Schwerin Boyle Capital. Please proceed with your question.

This is Dan Boyle. Gary, I was curious if you were thinking of doing something more bold on the asset-disposition side. You mentioned a few inquiries, and I was just curious if you wanted to speak to that.

Yes, I think that my comments were carefully chosen before, as no specific assets have been recognized for sale. But certainly in the heart of automobile country, and with an exposure to the rust belt; we spoke on last quarter’s conference call that we would be carefully looking at the assets. We’ve kind of got an 80-20 model going where 80% of a lot of the difficulties and challenges that we’ve had in our occupancies have come from 20% or so of the properties. Obviously many of those are focused around the rust belt. GM and Ford in particular, have caused us to pay a lot of attention to those communities. We’ve identified them.

There are a lot of complex issues with tranches of loans and securitizations and releases and fundamental economics. The budgeting process helped a lot in identifying which might be keepers and which might be ones we wanted to consider, and as we’ve gone through that process we’ve carefully examined who the likely purchasers might be out there. And I think we’re kind of in the process of making some final decisions. And the obvious decisions, as we said, relate around what’s the future, the upside and what’s the risk of holding specific communities? And I think that we’re just a little bit in advance of being able to share that with everyone.

In terms of real estate in general, or at least in apartment world, it seems like there is a dramatic for assets and that Cap rates have come down for pretty stable assets, I guess. Do you think that’s the case in your part of the real estate world, or likely to be the case at some point? Or has kind of the institutional demand for this type of asset kind of not been there?

I think that from everything that we’ve experienced on the acquisition and disposition side, Cap rates pretty much remain unchanged. I think that you’re going to see a lowering and tightening of Cap rates, obviously that are coupled and geared to what interest do; but in general with a modest change in interest rates I haven’t seen any change in Cap rates. They’ve been from a low of 6.5 to a high of 9.5, depending upon the quality, condition and history of the communities. And nothing much has changed in the last two or three years, I’d say.

When you think about the value of the enterprise, kind of all in, what sort of Cap rate kind of goes through your mind?

I think what we do—well we used to post our NAV and apply Cap rate to the overall portfolio as part of our quarterly supplemental data. I think we announced to the analyst community and others that it made more sense to us for others to apply their Cap rates, and not get into a debate over NAV or valuation. The Company has its interpretation, and all the analysts and portfolio managers and others can use the Cap rates that they feel most comfortable with. So the range that I shared with you is a range that I would apply from one end of the portfolio to the other end, and I don’t have a specific average without sitting down and applying it and doing the math.

Well, thank you very much and best of luck as you move forward.

Okay, thank you.

Our next question comes from the line of Richard Paoli, of AVP Investments. Please proceed with your question.

Hey guys, can you just shed a little light on where the preponderance of the rental units are? I’m presuming that it’s in Michigan and Indiana. Can you just kind of tease out what percent of the occupancy or occupied units or occupied sites in each one of those states are coming from; houses that are being rented?

Well, I don’t have that break down with me; I can tell you—

It’s funny, when we have it with us; nobody ever asks that question, Richard.

You got to bring it all with you.

It’s going to be concentrated in Michigan, Indiana and Texas. That’s probably going to account for about 90% of the rental homes. And if you really want a specific number, I will get that for you. You can just shoot me an email and I’ll bounce it back to you with that. But I have to go add it up.

Sure. Okay, so do you have an idea of say in Michigan, is that the market with the largest number of rentals?

Well, probably; simply because it’s got about 42 of the communities. If you just prorate it a little bit and say – Michigan’s got 43 communities, Indiana’s got 17 and Texas has got 6. So I guess Texas might be 10-15% of the rentals. And then the bulk of the rest are going to be in Michigan and Indiana, and probably just about maybe in relative numbers, two-thirds, one-third. But we’re surmising and interpolating and extrapolating and I can add it up, so we can get more specific.

Yes, because the reason of my [inaudible] of my questions, especially on like Michigan and Indiana, is that despite the rental program, your site occupancy continues to slide. What is it going to take to arrest the slide in occupied sites in these markets?

I think it’s two critical things. One is the repossessions have to diminish. They’re still running around 1300 a year; so that’s 1300 sites that are gone, that you have to replace just to get to zero. And so that and the other trend that’s necessary is the strengthening of the manufactured-housing shipments and retail sales in the industry. And those trends, as repos go down, new home shipments should go up. So they should be reinforcing. But those are two of the key things.

But more to the rental; I mean what do you have to do in the short term, because those sound like longer-term fundamental issues that need to work their way through. It seems like as a stop gap you guys have used the rental program to supplement that. What do you have to do to the rental program to stabilize things? I mean it’s grown magnificently—

[Inaudible] it’s not a short-term scenario. It’s a long-term scenario that we’ve committed to, strategically; in a way that I think protected the value and the cash flow and on behalf of the shareholders. I think that when you look carefully as I indicated before, at certain asset management, and see if there are things that can be done that is logical through the disposition of certain of the assets; or through the strengthening of the rental program and those assets. And then maybe some of those assets end up as rental communities for some time in the future.

Do you think a buyer would look upon a community that’s got a large component are a 100% component of rental houses supporting site rent with the same value that they would as I guess owned houses on the sites?

I think there are different buyers from all kinds of different metrics. I’ve experienced and heard of both and there have been all rental communities, none of which this Company would choose to acquire, that have existed and do exist at all different times in all different marketplaces for a host of different reasons. But there are buyers for each kind of product, and I think that obviously one would tend to—at least we certainly would tend to pay lower Cap rates for something that didn’t have rentals or wasn’t a 100% rental, than we would for something that was.

Okay, one other question for you; what is the dollar amount that you have invested in inventory, of houses that are being rented at this time?

The actual cost of the occupied 3711 is about 109 million. And then there are 567 pre-owned homes that have a cost of 13.7 million. And those are available for either sale of rent.

So that’s your inventory to lease at this point, or to sell?

Yes, plus new homes that are primarily in Florida.

Great, thank you.

Thank you.

[Operator Instructions] our next question comes from the line of Art Havener, of A.G. Edwards. Please proceed with your question.

Thank you. Can you break apart the other income line for the quarter and for the year?

Other income in the fourth quarter of ’05 is—brokerage is about 200,000, interest is 800,000; and then there are several other items that in total are about 350,000 negative, which comes to the 640. And looking at the year, brokerage is 900,000; interest is about 4.4 million, and then there are several other things and the other things include actually what you’d call miscellaneous—failed acquisitions of which in the first quarter was the $350,000 item; and also our investment in Origin which is why I’ve left you with rather a large other number, because we can’t really release our estimate of their earnings in advance of their release of their earnings.

In respect to Origin, in terms of your guidance next year; are you incorporating a rebound in the contribution from Origin?

We would call it a modest bounce.

Okay. Does that mean you still expect to have a negative impact from Origin, without quantifying it?

No, a modest bounce above break even.

Okay. On the rental units, I just want to be clear; when you reference that you’re rates are up 11%, is that generally you moving kind of the new market rent up and really you’re not feeling too much impact from attracting your renters? If that’s the case—or is there a component on the existing renters that you’re actually raising rents on them; but if they stay 18 months, is that possible? Hopefully, that made sense. I’m sorry.

If I understand the question right, Art, over the 12-month period of time it includes new renters that are coming in for higher rents than the old average rent. And it includes the renewals being re-signed at rates that are higher than their previous rates.

Okay, so you are raising rents on the renewals, is that correct?

Yes we are, and we expect to continue doing so.

Just out of curiosity, I know it’s new and everything; but do you think, is that causing some of the turnover? Or do you think if you kept the rents at the same level, would those renters stay?

I think that we have done enough testing in all different levels and recognize that the benefit of getting a renewal far outstrips the benefit of getting a $10 or $15 rent increase. So I have to trust in everything that I’ve seen with the management group, that they well understand the fact that the rental increases that they’re putting in place that does not have an impact on the renewals. They have all kinds of programs, just to give you a bit of—now where they’re saying—there is advantage to people if they’ll sign up for an 18-month lease or a 24-month lease with no rent increase or maybe even a decrease, because when you look at the cost of turning over that home and run it over the average of the turnover rate, there’s a huge benefit to the Company on that. So I think to answer your question is they’re fully aware of that, and I do not think it’s the rental increase that’s having any impact on the renewal rate now.

Okay, and just so I’m clear in terms of ’06; you still expect to continue raising rates because you really don’t know what the ceiling is on the renters?

I think that we think our cost per square foot is somewhere between 47 and 50 cents right now. And when we compare that to a multi-family rent, and consider we probably—15-20 greater space that’s being offered to them, and we factor that in, we’re still far below 80 to $1.20 competition that we’re getting from multi-family.

Okay, thank you.

We have a follow-up question coming from the line of Richard Paoli of AVP Investments. Please proceed with your question.

Hey guys, just a quick question; what’s your credit loss on the rental component, maybe expressed as a percentage of the revenue?

It’s budgeted and estimated at 2.5% for 2006. It’s been running closer to 2%.

Great, thanks.

Gentlemen, there are no further questions at this time.

Okay, we’d like to thank everyone for participating and as always, Jeff and I are available at the office all day today for any further questions.

Ladies and gentlemen, this concludes today’s teleconference. We thank you for your participation and you may disconnect your lines at this time.