Sun Communities Inc (SUI) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Sun Communities fourth-quarter 2006 earnings results. 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, Chairman and Chief Executive Officer of Sun Communities, Incorporated; and Mr. Jeff Jorissen, Chief Financial Officer of Sun Communities, Incorporated. Thank you, gentlemen. You may now disconnect.

Thank you and good morning. This morning we reported funds from operations of $13 million for the fourth quarter before an impairment of $18 million related to our investment in Origen. FFO per share was $0.64 before the adjustment and $0.25 after. FFO for the year ended was $2.61 before the Origen adjustment and $1.72 after. The comparable FFO per share amounts for 2005 were $0.67 for the quarter and $2.54 for the year.

Total revenue for '06 was $226.9 million compared to $210.9 million in 2005. And this morning we will cover a number of topics including the shortfall from consensus estimates, the Origen adjustment, a portfolio review and earnings guidance for 2007. The following topic will address FFO before the Origen adjustment and then we will talk about that adjustment.

The FFO of $0.64 for the fourth quarter was $0.06 below the consensus of $0.70. It was comprised of $0.01 related to the SEC civil action; $0.02 related to lower than budgeted occupancy in the rental program, which I will discuss in a moment in detail; and $0.03 was related to extinguishment of debt and the write-off of the related deferred financing costs.

In December we defeased approximately $40 million of secured debt collateralized by seven properties. And the payment was funded through the refinancing of one of those seven properties for approximately $54 million leaving the other six properties unencumbered. The new debt that was placed is an interest only mortgage with a term of 10 years and a 5.79% interest rate.

Origen's business as we turn to look at what has taken place with our investment there has in fact continued to grow in 2006 as reported in their earnings release yesterday, total loan originations were $332 million in '06 versus $277 million in '05. Nonperforming loans decreased from 1.1% to 0.6% of outstanding balances and net loan charge-offs decreased by 14% from 2005 while the loan balances themselves increased by nearly 24%.

In 2006 Origen became the first company in the manufactured housing industry to receive a servicer quality rating from Moody's Investor Service and net income in '06 was $7 million compared to a loss of $2.7 million in 2005. However, accounting literature requires that an adjustment to recognize other than temporary impairment be considered when the market price of an investee's stock consistently trades at a discount to the investors carrying value of the investee's stock. Accordingly, we were required to adjust our carrying value of the Origen investment by the $18 million write-down which is reflected in the quarter and the year's announcement today.

Turning from Origen and looking at Sun's portfolio in review, the weighted average rental income for 2006 was about 3.8% which was just slightly above our budget of 3.6% for the year. Our same site portfolio of 103 communities registered a revenue increase of 3.3% while expenses increased by 3% and NOI for the year increased by 3.5% which was in fact approximately equal to the performance of 2005 same site data.

Our occupied rental homes stand at 4576 at December 31, 2006. This is an increase of about 865 rental units from the prior year end. However, this was 723 fewer then we budgeted for the end of the year.

The average monthly rental rate increased by 6.7% to $686 at the end of 2006. The Company purchased approximately 1000 homes for the rental program in 2006 and this was down from over 1900 homes that were purchased in 2005. During 2006 we sold 170 rental homes compared to 89 in 2005 and we do continue to execute rental home sales for amounts in excess of the original cost and have already sold 53 homes during January and February which is just slightly ahead of our '07 budget projections.

During 2006 we lost 508 revenue producing sites and obviously many factors impact the final net lease site number. The result in '06 as compared to 2005's gain of 99 units was negatively impacted by the slowing growth in the number of occupied rental units and in the press release I have some comments related to the lower leasing levels.

The increase in 2006 was 913 less than the increase in 2005. And this was positively impacted by the net site result of a reduction in new repossessions by 385 compared to the prior year. So this approximates the loss of revenue producing sites for the year.

Repossessions have continued to decline thus far in 2007. And as we step back from the micro data of the Sun portfolio and look at a little bit of a global picture of the industry, industry shipments for 2007 fell to -- I'm sorry 2006 -- fell to a 45-year low of 117,500 which was a decrease of about 20% from levels of 2005. And we previously reviewed the litany of causes on numerous occasions, competition from the nothing down, no doc site build financing and various other programs, decimation of the manufactured housing retail dealer network and steep competition from the discounted price, repossessed homes which overhang seems to be diminishing at this time.

It also appears that the nothing down, no doc financing of site built homes is finally experiencing what we view as its inevitable fallout with the nearly daily headlines of banks and finance companies withdrawing from the sub prime market and worse. These former site built customers we believe are strong candidates to return to manufactured housing's affordable value. They also should return we believe to the prospect of acquiring homes in manufactured housing communities. And they have certainly formed a base of our market in the past.

The retail dealer network that used to account for nearly 80% of the new homes moving into our communities does not exist anymore and Sun Home Services, our wholly-owned retail dealer now sells more new homes into our communities than the dealer network that exists out there. So we are reorienting our market focus for the coming year to be much more proactive to reach out to these prospective customers well beyond simply placing the ads in various media. It includes such programs as referral programs to existing residents, web-based programs, direct mail, a lot of apartment search referrals and other kinds of marketing outreach efforts that we're working on currently and will be working on through 2007.

As we look to 2007, we expect FFO per share as our guidance to range from $2.66 to $2.72 and I would like to emphasize that this is based on the following which I will discuss which pretty much reflects our 2006 experience untempered by any optimism. The components I would share at this time are a weighted average site rent increase of 3.4% for '07; weighted average home rental increase of 3%; an increase in the occupied rentals of about 750 for '07; same site NOI is forecast to increased by approximately 1.8%; an increase in the sale of rental homes to 320 from the previous year's 170; an increase of approximately 100 units in the sales of new and preowned homes; recurring capital expenditures of about $6,240,000 or $130 a site; and we expect G&A to be about 3% lower in 2007 than 2006.

And when we use the midpoint of the earnings guidance, funds available for distribution are expected to be $2.38 per share or about 94% of the 2007 budgeted dividend of $2.52. That increases to about 99.9% when non cash stock amortization is added back and to approximately 101% when corporate depreciation is also added back.

That concludes my formal remarks and Jeff and I are available for your questions at this time.

(OPERATOR INSTRUCTIONS) Jonathan Litt, Citigroup.

It's Craig Melcher here with Jon. The first question I had was on the rental home guidance for '07. You mentioned there was going to be 750 increase in that into '07. Is that going to come from you buying more homes or increasing the occupancy in the homes you own? And maybe if you could touch on this, I didn't get the number in terms of number of homes you currently own?

Yes, I think it comes from a predominantly existing inventory and Jeff will give you those numbers and we continue to selectively buy the repossessions that become available in our portfolio although we are at the lowest levels since 2000. But I think that operations aggressively pursues the purchase of additional repos when they do become available.

There are currently about 535 or at 12/31 -- 535 homes that were unoccupied in the rental portfolio. We expect this year if repossessions continue to run at the current rate which would be maybe around oh say 800 to 900 that we would buy maybe three-quarters of those assuming that they are priced properly and meet our other criteria.

How many of the loans on these new homes are being done through Origen versus third-party lenders?

I would say the vast majority of the homes are being financed by Sun Communities and we've shared the beneficial economics we believe by converting these homes from rental homes on the asset side of the balance sheet to receivables in the form of these loans. Everything is being underwritten by Origen and Origen's criteria. And they are servicing those loans.

Recently they have put together our first package to sell those loans once they are seasoned in the marketplace and we've identified $3 million worth of loans that are ready to be sold from Sun's balance sheet. And received our first bid yesterday at about par for those $3 million of loans. So we are financing internally the vast majority of those loans and servicing them through Origen.

What is the total amount of loans you have on your balance sheet and the average interest rate? That is my final question.

Craig, I'm going to let Jeff get back to you on that one. He is fighting a cold and just walked out of the room to choke a little bit so he didn't disrupt the call. But as soon as he gets back in we can go over that question.

Okay, thank you.

Paul Adornato, BMO Capital Markets.

Good morning. Just to be clear on the accounting, was the Origen impairment based only on 2006 activity and results?

No, I think the accounting literature that was reviewed very carefully by the company with your auditors really doesn't speak to their results at all. It simply speaks to the trading value in the marketplace and the necessity as I indicated earlier that requires an impairment be considered when the market price of that stock consistently trades at a level that is below what we are carrying it on our books.

Interestingly enough that is different criteria than exists for the specific company Origen. So it's not necessarily related based on performance other than how performance is valued in the existing marketplace.

Okay. Yesterday Origen reported an uptick in February loan application volume. I was wondering if you have seen any change in activity in February?

I can only comment on this phone call as opposed to in the press release in the following manner that we are certainly on target for January and February throughout our budget and have seen a continuation of the diminishment of repossessions. So as far as what they commented on yesterday I couldn't say.

Okay. I know you guys have not been active necessarily in acquisitions but maybe you could comment on the acquisition environment and where you see cap rates these days?

I think that -- it's a good question. We are looking at several acquisitions right now. They are obviously in areas where we've continued to experience good or better growth than the weaker areas of the Midwest and cap rates are certainly very, very aggressive in the 6 to 7 level for the areas that are continuing to enjoy that growth. So not much has changed from that perspective. As we continue asset management and looked at the disposition of a few properties in the Rust Belt area, we are looking at cap rates that are in the 8 to 8.5 range for dispositions.

Okay. Thank you.

Before we go further, we've got Jeff back in the room and there was a question while you were out from Craig and Jonathan Litt regarding the balance of loans receivable at this time on our books.

Well, at 12-31, our portfolio of loans receivable is $20.7 million and of that $20.7 million, 2.94% were more than 30 days delinquent. At the end of January that percent of 2.94% dropped to 2.35% and at the end of February, only 1.26% of the entire portfolio was more than 30 days delinquent.

Okay, Jackie, we would be ready for the next question.

John Stewart, Credit Suisse.

Just to follow-up on that quickly. What do you attribute that trend to particularly given the trend that we've seen in sub prime delinquencies?

Very -- well first of all it starts with the underwriting. Many of these people had lived in our communities for periods of one or two years before they bought the homes and we extended the financing so they were not unknowns off the street. We knew their payment history; we knew their sense of ownership. And then we also have very aggressive servicing to make sure that payments are on time. But it starts with the underwriting.

Yes, but 170 basis point drop in delinquencies in two months seems pretty striking.

We agree.

Okay. You referenced Origen's underwriting standards, again given what we're seeing in the sub prime market would you mind walking us through do specifically -- giving us a bit more color into what those standards look like?

Yes, I think that clearly after the lending debacle that took place that we referenced for some time now, one of the key features that we thought and believe makes a significant change in the underwriting is the amortization period and the down payment. In the case of our portfolio the average 15-year amortization with an average stay in the home of five years to seven years means that substantially more principal will be paid down. The opportunity for them to sell their home and pay off their loan is much greater as we move forward in time.

The FICO score band is tightened between a range of roughly 650 and 720 to meet most of our programs and in order for us to increase or accept a resident below 650, there has to be a substantial increase to down payment and a review of extenuating circumstances. What we are able to do in some cases when we've got a particular individual who has been renting from us for a year or two that is rejected by Origen, Origen may send it down to us with the advice that the person has had solid work history, had a medical issue, had to leave work, catching up with their medical bills but it might be rejected under their system whereby we will review it and because they are perhaps already a renter its logical for us to move them into the sales category.

The big points that I think are worth noting all loans being originated today are roughly at a 9.9% interest rate level so they are very saleable in the marketplace. They have an amortization of the 15 years or lower. In fact many of them today that we're doing our 12-year amortizations and they have a significant down payment of 5% to 10%.

Okay, that is very helpful, thank you. Maybe this one is for Jeff. Jeff, do you know what your basis is in the 4500 rental homes on the books?

Yes I do. The net book value is $114 million; the original cost is $136 million.

Okay. And then I presume that your guidance excludes any charges related to the SEC civil inquiry, is that correct?

Well, actually this year we included $500,000 budgeted for SEC which is actually in that guidance. It's an excellent question; I meant to point it out earlier.

Okay. And can you give us any update there?

Yes. It's is at the point where the government by demand of the judge has supplied the company with its expert accounting as to why they felt the accounting should have been different at the company. Our experts and the special committee appointed by the Board has reviewed that information carefully and is in the process to I think start a few of the rounds of depositions in preparation for going before the judge probably 6 to 12 months from now.

Okay. And then lastly, Gary, could you just touch on the dividend policy? It sounds like on your numbers you expect to pay out a little over 105% of FFO, maybe a little bit more than that on ours. Can you give us a sense for how you feel about the dividend given the erosion that we've seen at least in FFO?

Sure. I would like to give you the sense of the Board of Directors as opposed to just my sense and this has been a carefully discussed subject along with them being very involved in us completing our budgets for 2007 which we spent more time doing this year because of the results of the last two quarters in 2006. And the strong desire to have the K filed in a timely and orderly fashion as it related to how much study had to go into making the right decision with regard to the Origen adjustment.

Through those discussions and meetings with the Board, it was determined that it is our full intention to maintain the existing dividend. We are cautiously optimistic that while we feel we are one year behind due to the results of the end of 2006 and having an FFO that certainly meets the payout of the dividend that we will gradually get there on a run rate by the end of the year and feel pretty confident that there will be the change in the dividend moving forward.

Additionally, the Board has requested a submission by management of projections or our best projections out over the next three to five years based on using the template of 2006 to complete our 2007 budgets so they could look at it on a most conservative basis, if you will. And look out at items that certainly shareholders would be interested such as the security of the dividend, the returns over that period of time to the shareholders and several other items that we will be reporting on each quarter as we move forward this year.

Okay, thanks a lot.

Steven Rodriguez, Lehman Brothers.

Are you expecting any type of debt prepayment into '07 similar to the one we saw in the fourth quarter?

All of the debt that was on the seven properties was paid off in December through defeasance. So the other six -- six of the properties are encumbered and one of the properties was remortgaged for $54 million.

I think we had right around $600,000 related to the early extinguishment of that debt that was all written off and those were the expenses -- all expenses related to that. So nothing further on that.

Nothing further on. Okay and on the same -- you guys provided a same-store portfolio increase --you are thinking about a 1.8% in '07. It is about half of what '06 saw. Could you speak to the that, maybe what are the dynamics there, explain that?

Well, 1.8% actually was the fourth-quarter experience and what is going to happen next year is -- '07 this year -- we're forecasting a loss of sites this year and we're also going to have the rollover effect for the other half-year of the loss of sites from last year. So when you put it all together you come up with something in the 1.8% range.

So that seems like a basis line more of a run rate and not a midpoint to a range?

Well, it is the fourth-quarter run rate but it also is approximately -- I mean it's where we expect '07 to be as a result of the loss of these sites both last year where we get the full-year affect and this year.

Okay, thanks. And you mentioned that you are looking at several acquisitions in the 6% to 7% cap range?

Correct.

I know you didn't mention any specific number amount of acquisitions in '07, but is there in potential range you could provide that you would look to acquire?

I think that the target to acquire acquisitions in the strong parts of our marketplace is around $75 million.

$75 million, okay. Great, thank you.

Eric Wiemann, Schwerin Boyle Capital Management.

Do you have a range of the number of total homes in the rental program will be for 2007? And also what were they for 2005 and then as far as 2007, what is the mix? What is the source? Where are you getting these homes? Thanks.

Well, at the end of '05, there were approximately 4000 homes in the rental program. At the end of '06, there is about 5100 homes in the rental program. If we net lease 700 -- it should be probably about 5700 give or take a bit at the end of 2007.

Okay. And as far as the source of the new homes that you may acquire?

Last year we ended the year with 1061 repositions. This year we are thinking that number would be around 900. Generally somewhere around two-thirds of those may be a little bit more are homes that we would buy if assuming they are priced right given their age and their condition. So that would be a primary source (multiple speakers)

That and our existing inventory of a little over 500 that are not rented now.

This is Dan Boyle. I wanted to ask you a couple or two or three questions too, please. In terms of the value proposition that a potential customer has, how big a deal is this sub prime potential debacle? I mean over the years my sense has been that your rental has become less competitive against site built homes and now that may be reversing. I'm wondering if you have any update or any thoughts as far as this goes?

Dan, it's Gary. I can share with you most of management's thoughts which the team at this company certainly has many, many, many years of experience within the industry. We are optimistic. We want to be cautiously optimistic. We were obviously very, very disappointed by third and fourth quarter of 2006. While I didn't go into as many specifics in my comments on the call, I did comment in the press release today that basically for all the obvious reasons certainly in the Rust Belt, there was just a complete lackluster of traffic and leasing opportunity and certainly sales opportunities for those two quarters.

So it certainly would temper any comments that we want to make as to our expectations in the near term of 2007. That being said, as I did say in my comments today and as we discussed in our management meeting last week, we are pretty much on a full court press as to trying to opportunistically move into a group of individuals we believe should not -- okay -- and now cannot buy the site built housing product in the fashion that they were buying it before. Therefore, one of the alternatives and certainly the other -- the main alternative for ownership drifts back to manufactured housing.

So we do feel that this has been and is an excellent source of customers for us and I think the difference of what has to be done now to address the questions of creditworthiness of these customers, I don't think the vast majority of them is an issue of whether they are creditworthy or will pass the underwriting, it is a matter of the fact that they no longer should be able to or can go into the site built housing market. And so we think that is a nice pool for us to market for and a pool that will qualify.

The other thing that I would add to that is that we have to adapt the product when people look at the functional model of manufactured housing and the community and compared it to what has been going on in the site built world for the last 10 years or so, we get questions arising of whether or not the model is broken.

My response to that has always been it depends on the differential between affordability of our product and the site built housing product and what we are really, really focusing on and have been focusing on in this company is creating a big differential. And that differential comes from the ability to sell single section homes from $25,000 or $30,000 to sectional homes at a level of $40,000, $45,000, $50,000. And when we can create that kind of competition and there is limited or no sub prime lending which most recently our studies showed there would be a plain -- but no a first mortgage and then either a mezz or a sub prime form on top of that allowing a lot of these unqualified buyers to get into the entry level of housing. To the extent that goes away I think we can really build on that customer base.

At the same time, management is concerned as to the fact there is no retail dealer network out their as it existed seven years ago, eight years ago. And what the timing related to that retailer network to develop on how we can perform as starting up retail sales in our communities is kind of what we are going to be looking at over the next few quarters.

So is there -- they are interesting comments and I appreciate those, Gary. In terms of that distribution, that retail distribution which is missing and you've got to do the best you can within the community, are you very short on resources as far as that is concerned at this point? What are your preliminary thoughts on that?

Are you referring to internal resources at Sun to execute?

Yes, that is correct.

No. I think that one of the things ironically that has been a long time since we talked about it, the one thing that we have is unleveraged resources here both on an experiential basis and operational skill -- sales skills is something that we are very, very full of so all we're looking to do is to take that and leverage that opportunity into an improving customer base and improving competitive marketplace for us so that we can capture some of this.

And I shared with everyone my comments earlier that no optimism based on execution beyond our existing budget is in our guidance at this time because there is no assurance and there has not been enough time to be able to come out and respond to you -- yes, we see a big difference in interest in our product because of the sub prime issues that our existing in there.

I think as someone mentioned earlier, Origen has seen a substantial increase in the number of applications they've gotten year to date but there again, not certain whether that is related to what is going on directly by sub prime or indirectly in that a lot of other competitive financing sources that are out there have decided -- banks and things like that that are not going to be lending at this time on manufactured housing. It's a little too early to tell, Dan.

One final question, in past conference calls you've mentioned that you've touched upon acquisitions, potential dispositions even including land and Origen itself. You've mentioned cap rates on this conference call. I'm wondering if that whole analysis has given you an insight into the net asset value or potential range of net asset values of the company that you'd be willing to share?

Well, I think that as Jeff shared with the marketplace a few years ago that we made the decision because there is such disparity and differences in how people calculate our NAV and NAV in general that we'd like to just put out the information and make it available on our supplemental quarterly information and let everybody do their own calculations. I don't know if Jeff -- if you have anything?

Well, we haven't concluded in our supplemental data now for probably three years. Our official policy has been to let every man come up with his own net asset value.

That is probably a good policy. I thought I would try anyhow. Thanks a lot and best of luck.

Thank you.

Stephen Mead, Anchor Capital Advisors.

On the debt refinancing that you did what was the rate on the debt that you got rid of?

7.01%.

And then are there opportunities to do more of that as you look across your liability structure?

Not significantly. This was a $40 billion piece of debt. And so it was material but most of the rest would be an individual mortgage here or there when you get past the prepayment penalty period.

And then as you look at the homes that you sold in 2006, what was the average price like of those homes?

Well, let's see, the average price would have been right around in the low 30s.

And then as far as new product on the marketplace, what is the range of price as far as new product coming on in terms of manufactured housing?

Well, you've got to cut that in two, you've got the Florida which is always a special world where the prices can be in the very high five digit -- they can be higher than that but in our communities high five digits. Elsewhere I would say it is more in the 40s.

Okay. And then the average age or the quality of the portfolio that you have in terms of owned homes, what does it look like?

Well, you mean the quality of the homes that are in the rental program and are owned and available for sale?

The homes that you own, the 5100 that are in the rental program, and then I was just wondering how they stack up versus say alternatives in the market, say average age and the quality of those and how you manage that process?

Well, the age is getting onto probably in the five- to seven-year range on average. When a tenant moves in, a renter moves in there is a 90-day inspection on every home. When they move out, the home is completely refurbished and that refurbishment cost is expensed which brings the home back to a virtually as new condition which was recently -- we recently had some independent research team actually visited 15 of our communities and found that a refurbished rental home was virtually indistinguishable from a brand-new home never occupied.

We bring them back to snuff and in fact the home is in better shape probably then if were owner occupied because it is unlikely that the owner would expend that kind of money every say two years to freshen up the house back to nearly original state.

Do you track the reason why you lose a renter or lose somebody off of a site? I was wondering what that looked like in terms of outflow of customers in 2006 versus 2005? Getting back to the competition from a stick built?

Yes, we certainly track them. I would say 15% of the turnover is skips and evictions where either they just leave the community or we evict them from the community for one obvious reason or another. The vast majority of them fall into buckets that are indistinguishable from job transfer, ability to buy a single-family home, move to multifamily, transfer, nothing of any individual class that we've been able to identify because we do look for that and we look at how we can improve renewals or add a renewal rate roughly around 50%.

Our goal is to improve that for a few points in 2007. We did lose a few points of that and two or three points of renewal in third and fourth quarter of 2006. So that is really a key metric renewal for us because the costs associated as Jeff indicated with refurbishing the home, bringing it back up to new condition with leasing the home, commissions, time that it is not rented, so downtime that it is not collecting revenue is very, very costly. So a key metric is renewal and we do focus on all the reasons people leave the communities or leave the home.

Very few of them I'm happy to say are service related. The vast majority are just various trends in the marketplace. And certainly when we get into the Rust Belt everyone is aware of what is taking place on the market here.

And the number of shares of Origen that you own?

Roughly 5 million shares that Sun Communities owns.

And then -- I just want lost the -- I had another question but I lost it. Go onto the next guy.

Sure, thank you.

Craig Leupold, Green Street Advisors.

Good morning. Gary, a couple of questions. I guess first just a quick -- I want to get your thoughts on the sub prime issue again. And that is given that you guys have FICO score requirements of 650 to 720, say, does a sub prime fallout really free up potential buyers that meet that standard?

The best people to answer that are the lenders and people like Origen that measure those metrics finitely. Craig, I'm sure they'd be glad to field a call on that. To the best of my ability I would suggest yes. When you are dealing with a $40,000 home by way of example or $45,000 new home that is maybe 1300, 1400 square feet and you've got a combined rental and home payment of maybe $675, $700, you've got a customer even at a 650 level for example a 650 FICO, and by the way we don't limit to 720 -- we just don't tend to get many scores above that.

But I think that now all of a sudden on $185,000, $200,000 site built home, okay, even with the tax benefits and the longer amortization they can't come up with the down payment and they can't come up with the qualification for that type of home without the no verification tricks and the fact that they've got a sub prime taking them up to a 90% or 95% level.

So, I do think we have a good customer there. I think that we are going to have a continued challenge to convince them to look at the manufactured housing product again as a real alternative. But I think over time that is a real marketplace for us. I think that they definitely are our customer.

Okay. And then just to be clear, I know you indicated there's about $500,000 in your guidance for the FTC issue. If that in the G&A -- the 3% reduction in G&A -- is it included in there?

Yes.

Okay. And then could you guys maybe break out -- you've given a same storage NOI expectation of 1.8%. Could you break out what your revenue and your expense expectations are?

They would also be approximately 1.8%.

Okay. I guess, Jeff, my understanding is that what you are doing on the same store basis for the rental home program is only including the site portion of rent in that calculation?

Correct.

So if you've got site rents that are increasing at 3.4% and you've got a pick up in rental homes of 750 homes which would equate to about a 160 basis point increase in occupancy. That would get you maybe to a total revenue growth number of 5%. Is the difference between that and the 1.8 that you just threw out a loss of occupancy and homeowners? Is it as much as 300 basis points?

Well effectively, yes. I mean we are projecting a loss of about a little over 500 sites for 2007. And that is after we grow the rental program by 700 whatever -- 750 I think. So, yes, that means that there is additional losses. People move to private property, move to other communities, move to relocate, etc. So there are other factors that impact occupancy. But, yes, bottom-line is yes.

A net loss of homeowners of 1200 to 1300?

Yes -- (multiple speakers).

3% that would be exactly right. We get an average -- we've had an average move out for 20 years in our industry of about 3% on a base of 40,000, you are right at 1200.

Okay. So as you say, your numbers are conservative if somebody were expecting a sub prime fallout to help capture greater, homeowner versus where it has been -- where it has been the last few years. Okay.

I think that is correct. I think in the approach I indicated before that our Board asked us to look at the growth potential of the company going forward and do it on a conservative basis. For us to go out and be able to give that presentation to them, we decided to do it based on a template of '06 which said repos already clearly have been reduced, okay. Nothing else has changed in the marketplace with regard to a dealer network or the incoming inflow of customers. That was all done prior to what has recently happened in the sub prime market. So I mean yes, we are cautiously optimistic that we can build on a customer base that has prior -- in prior years been a good solid customer base for us.

Okay. And then two last questions. Jeff, when you mentioned that the home sales were above your cost basis, is that on a net book value basis or a gross investment basis?

That is over our original cost.

Okay, great. And then last one than I guess. What impact might you expect the buyout packages offered to and accepted by the tens of thousands of auto industry workers to have on demand in the Midwest? And does that cause you maybe to get more aggressive in looking to dispose of assets in that area?

I think we are in a continual mode, Craig, to look at the disposition of assets in this area. I know that in December I think you guys toured a lot of our Midwest assets. It is a carefully balanced quarter by quarter presentations of the Board, of how we are doing into Midwest assets versus disposition. And as I've said before when we look at the process to date what we see is very little capital being generated after the extinguishment or the payoff of debt and we are seeing slow trends through the rental program that indicate an increasing NOI. However, it is offset obviously as you guys and others have indicated in the past that the return on the capital investment is less than satisfactory.

So the only way I can really answer that question is that it is being scrutinized quarter by quarter. It is the right question to ask. It is the question our Board asks is what are the long- or medium-term returns on the Midwestern properties versus a "liquidation". And at this point as we've expressed in the past, I think that everybody has concluded that for the time being, we are better off trying to manage through the challenging period and create more valued than we think the returns would be based on a liquidation.

Great, thanks.

(OPERATOR INSTRUCTIONS) Charles Fitzgerald, High Rise Capital.

I just wanted to get a little more information about the debt refinancing that you did. What was the loan to value on the property that you financed in the quarter? And where was it located?

It was 70% -- sorry? I'm sorry -- it was 80% and in Florida.

Okay, great. What is the current unencumbered asset pool number of properties and estimate of fair market value today?

Well, the pool is probably -- and this is not a precise number -- but it is probably around 35 properties that are unencumbered. And the unencumbered NOI from these properties is approximately $19 million to $20 million.

So that is just under 18% of your NOI, something like that?

Roughly.

Okay. You talked earlier about dispositions and acquisitions going forward. I just wanted to get your thoughts on where stock buybacks would fall in that place given the high AFFO yields that your stock currently trades at?

I think it has been discussed and reviewed at our recent Board meeting and the inclination of the Board was to suggest that it gets reviewed at the next Board meeting. Certainly the one thing that everything wanted to accomplish was to get the earnings release out to the marketplace. So at this time there is no specific position by the Board. But I think it will get reviewed at the next quarterly meeting.

And you currently have an authorization in place, is that correct?

We do. There is always a question of how often that authorization technically has to be renewed. But the authorization for 1 million shares was -- Jeff is indicating to me there is 400,000 left of that 1 million shares.

Thanks.

Thank you. Gentlemen, there are no further questions at this time.

At this time, I would like to close by thanking everybody for participating on this conference call. Jeff, I and others in management are always available to discuss individually what we can with regard to operations and the company as a whole. And we would look forward to reporting the progress of the company after first quarter is completed which actually is five or six weeks from now, we will be back to everybody. Thank you.

This concludes today's conference. Thank you for your participation.