Sun Communities Inc (SUI) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Communities' Third Quarter 2018 Earnings Conference Call. 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 yesterday'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: first, Gary Shiffman, Chairman and Chief Executive Officer; John McLaren, President and Chief Operating Officer; and Karen Dearing, Chief Financial Officer. After their remarks, there will be an opportunity to ask questions.

I would now like to turn the call over to Gary Shiffman, Chairman and Chief Executive Officer. Thank you. You may begin.

Good morning, and thank you for joining us on our third quarter 2018 earnings conference call. Sun Communities' platform continues to demonstrate strength, industry-leading growth and sustained consumer demand. For the quarter, we delivered core FFO growth of 19.5% over last year to $1.35 per share, stemming from strong same community results and the incremental contribution of our expansion program and prior acquisitions. Sun generated same community NOI growth of 6.2% in the third quarter, driven by 4% weighted average rental rate increase and 220 basis points of occupancy gains to 97.8%. Our NOI growth was slightly moderated by elevated supply and repair expenses as well as increases in certain insurance claim reserves in the quarter, which John will address shortly. In terms of capital deployment, we remain very active in identifying opportunities that generate current cash flow as well as opportunities that will provide Sun with future growth through the expansion of existing communities and the development of new properties. Acquisitions in the third quarter totaled roughly $40 million, reflecting a mix of income-producing RV resorts and 2 fully entitled land parcels, one of which will be an expansion of an existing community and one that will be a manufactured housing ground-up development. Subsequent to quarter end, we also purchased land for a 220 site manufactured housing community expansion in Austin, Texas, and [earned diligence] on various manufactured housing income-producing communities and resorts. Year-to-date, we have closed on acquisitions valued at nearly $364 million in 19 operating communities and 6 land parcels across 14 states. Our capital deployment practices are best described as a combination of investments, which enhance our current manufactured housing community and RV Resort portfolio, while also positioning Sun with the ability to generate growth into the future. We continue to support our operational and investment efforts with diligent balance sheet management. To that end, we raised roughly $500 million in early September, which provide us with additional capacity to deploy capital and acquire selective communities from an active pipeline of attractive opportunities. The company has built a multifaceted platform that captures demand from a broad segment of the population. Families, millennials and first-time homebuyers looking for an affordable alternative to [stick-built] homes, empty nesters looking to downsize or reduce the burden of their more expensive homes, baby boomers looking for both all age and resort-like retirement community experience and RV travelers looking for well-amenitized resorts and desirable vacation destinations.

We remain focused on delivering a best-in-class experience for all of our residents and guests, which we believe goes hand-in-hand with delivering shareholder value.

With that, I'd like to turn the call over to John and Karen to discuss our results in more detail.

Thank you, Gary. Sun's third quarter results demonstrate the strength of our operations, the success of our diversification strategy, expansion activity, and most importantly, the desirability of our communities and resorts. In the quarter, we delivered robust home sales and realized one of the highest weighted average rental increases in the company's recent history. All these factors contributed to an increase in total portfolio of revenue of 20.6% over last year.

Occupancy in the total portfolio was stable year-over-year at 96.1%, with manufactured housing portfolio occupancy at 94.9%, a slight year-over-year reduction accounting for vacant expansion site deliveries, which we expect to translate into further occupancy gains in the coming quarters.

Revenues from home sales were strong, growing by 39% for the quarter. Sales volumes improved 20.6% and we experienced a 43% increase in new home sales volume, which resulted in 146 homes sold in the third quarter. Our average new home sales price rose to approximately $112,000 in the third quarter, up 11%. Our highest demand for new homes came from communities in Florida, Michigan and Ontario, which together contributed 70% of total new home sales. Preowned home sales volumes rose 17.4%, while our preowned home sales revenue grew by 29.9% in the quarter. Year-to-date, we've received over 37,000 applications to live in a Sun community and expect approximately 50,000 applications by year-end. Applications for the purchase of homes are up 40% year-to-date, underscoring the demand for affordable housing and the desirability of our communities. This continued strong demand resulted in a gain of 628 revenue-producing sites in our total portfolio in the quarter, and roughly 42% of those gains in our manufactured home communities. The balance of occupancy gains were convergence of transient RV sites to annual leases. 215 of the MH site gains were in expansion communities predominantly in Texas and Michigan. Our transient RV to annual leased conversions totaled 365 in the quarter, bringing our total to 879 RV conversions for the year. We have now gained 1,878 revenue-producing sites for the year and remain on track to deliver 2,700 to 2,900 revenue-producing sites for all of 2018. Year-to-date, we have completed the construction of 751 vacant expansion sites in 9 communities and expect to complete the construction of an additional 600 expansion sites by year-end in 7 communities.

Turning now to same community results. Sun generated 6.2% Same Community NOI growth for the quarter and 6.2% growth on a year-to-date basis. We continue to experience strong top line growth throughout the portfolio. For the quarter, same community revenues rose 6.3%, driven by a 4% weighted average monthly rental rate increase and a 220 basis point occupancy gain to 97.8%.

In same community, manufactured housing revenues rose 5.8% for the quarter, while RV revenues increased by 7.2%. Same community expenses rose by 6.6% for the quarter, primarily a result of elevated supply and repair expenses as well as an increase in reserves associated with certain workers compensation and general liability claims from prior periods. While we are diligent in our efforts to monitor and manage these claims, occasionally they are higher than the amounts reserved. We also incurred higher legal expenses than budgeted during the quarter.

With regard to hurricanes Florence and Michael, we are happy to report that we experienced minimal damage, primarily limited to debris removal, downed trees and the replacement of certain outdoor fixtures. Our social media and marketing strategy in the RV portfolio continues to strengthen, posting some significant gains and reach over the course of the third quarter. Our SEO work has resulted in a 37% increase in organic searches since the beginning of 2018. In the third quarter alone, we experienced over 766,000 unique visitors to our website, which is over 100% increase year-over-year. This strategy, along with the all-important resort experience, continues to support our ongoing growth. We are currently preparing for a southern winter RV season and are experiencing strong demand through reservations, supporting our expectations to achieve budget in the fourth quarter. With this strong demand, we expect to continue to capitalize on converting more of our transient guests into annual leases.

With that, I will turn the call over to Karen to discuss our financial results.

Thanks, John. Sun reported $1.35 of core FFO per share for the quarter ended September 30, 2018. Investment activity in the quarter totaled $40 million, which included an additional RV resort in Moab, Utah; a 507 site age-restricted RV Resort in Desert Hot Springs, California; and a 210 site RV Resort in the vacation destination community of Petoskey, Michigan. During and subsequent to quarter end, we acquired 3 entitled land parcels slated for expansion and development in Florida, Texas and Colorado. At the end of the quarter, we had $3 billion of debt outstanding with a weighted average interest rate of 4.5% and a weighted average maturity of 9.4 years.

At quarter end, we had $114 million of unrestricted cash on hand and our net debt to trailing 12 month recurring EBITDA was 5.4x. On the capital markets front, we issued roughly 5 million shares in an equity offering raising approximately $500 million. Proceeds were used primarily to pay down the balance on our revolver and term loan facility, giving us the financial flexibility to execute on our pipeline and take advantage of opportunistic acquisitions.

We also raised an additional $40 million on our ATM during the third quarter.

And turning to guidance, we are updating our fourth quarter and full year core FFO guidance to a range of $1.01 to $1.04 and $4.57 to $4.60 per share, respectively, accounting primarily for the short-term dilution from the public equity raise as well as the contribution of our income-producing acquisitions from the third quarter. We have adjusted our annual Same Community NOI guidance to 6.75% to 7%, reflecting the impact of the third quarter same community expenses. As a reminder, additional potential acquisitions or Capital Market activities not specifically outlined in our discussion are excluded from revised guidance.

This completes our prepared remarks. We would like to open up the call to questions. Operator?

(Operator Instructions) Our first question is from Nick Joseph from Citi.

Leverage has moved around the last few quarters and you're at the low end from a net debt to EBITDA perspective following the equity raise. What's the long-term target or range? And how do you expect it to trend over the next few quarters, given the external growth pipeline that you talked about?

Nick, yes, we're pretty happy to be at 5.4x net-debt-to-EBITDA, but I think as we've discussed previously, we're comfortable operating in, and we really believe the asset class and its stability of cash flows supports a leverage level. That's more in line in the low 6s, something near our near-term historical levels. So as we deploy capital for acquisitions over the next several months, we would expect our leverage to gradually increase to something near that range.

And then just on Greenfield developments. Are municipalities becoming more receptive to manufactured housing? And you previously talked about 2 to 3 starts per year. Could we see that increase?

Nick, it's Gary. I think that we are seeing more receptiveness. I think I mentioned in our last call, it's been a slow go. We've worked very closely on Colorado with the municipality and achieved entitlement and are actually in the ground on that project right now, but I would say that took almost 2 years to work through all the issues. We talked about Chula Vista on San Diego Bay where we've been dealing with the coastal authority there and the city of San Diego to acquire more affordable housing -- or to place more affordable housing. It's been almost 2 years now and when we got final approval, I think, 2 weeks ago. Once these developments are done, we're hoping to use them as examples of, first of all, the high-quality type development that Sun is known for, but as examples of working with the community to solve all the different affordable housing type issues that exist -- that can exist on the general workforce. They can exist at all different levels, depending upon the home prices and living expenses scenarios. So I do look forward to being able to use these examples to stimulate more interaction with municipalities as we look to develop more communities. I think the last part of the question related to where we are at with regard to our development. Our goal as to the Greenfield development [of] somewhere between 2 to 4 communities, starting each year. We have 2 developments under construction right now, one on the East Coast in Carolina Pines and 1 in Granby, Colorado. They're probably about 9 months away from completion, and we have a little bit of a slow go in what we will start in 2019 because entitlement, again, it's just taking longer than we anticipated. And I think that at the time [that we're] really ramped up at that level of 2 to 4 communities of development each year, we'll begin to provide more information when the Greenfield development is a little bit more meaningful in the portfolio.

Our next question is from John Kim from BMO Capital Markets.

I think, John, on your prepared remarks you mentioned that you're on track to deliver 2,700 to 2,900 revenue-producing sites. And I'm wondering how realistic is the midpoint of that guidance, because that's just a significant take-up in the fourth quarter.

Yes. I think if you look at sort of historically, what we've done and what we've produced, I mean typically, the fourth quarter is -- has been a pretty good quarter to us from a revenue-producing site standpoint and you kind of add to that what we've done in terms of expansion site deliveries, both last year and over the course of 2018. We feel -- we're very optimistic in terms of being within what's in the guidance that we've stated before.

But is the low end of guidance more realistic than mid to upper end?

Likely close to the midpoint.

Okay. Can you just provide some commentary on the acquisition environment overall for MH and RV as far as competition in the market, if there have been new participants and if pricing has changed at all?

Well, again, it's Gary. It's a good question because I didn't think it was possible that cap rates in MH and RV in particular could contract any further, but in reality there are more participants out there. We're seeing financial funds that we talked about put together co-investments with operating platforms. We've seen sovereigns invest. We've seen consolidation of some of the portfolios. And recently, we've been seeing a lot of 1031 exchange money moving in to some of these assets, as well as some of the people that Sun have been involved with from time to time who have exited the business looking to get back into the business, and that's created continued pressure on the limited acquisitions that are out there. And best way I can refer to it as recently I've seen quite a few, what I would consider B grade type communities trade in the low 4 cap rates. And as recently as last week, I saw 2 communities that Sun had passed on trade with an upper 3 handle on them. So there is further interest in both MH and RV, and I think in large part, it's related to the identified cash stability that Karen referred to, and the type of financing that lenders are willing to put on the asset class. So continued tightening all across the board.

Has this changed your view at all as to potentially selling some communities into the strength of the demand?

So I won't say that it has changed our view, but first quarter, we always take a very hard look at asset management because it comes on the heels of all of our budgeting. And our budgeting process is taking place right now, and towards the end of it, we really do identify those communities that don't seem to be growing at the level of the balance of the portfolio or require more CapEx or more actual resources to grow at the level. And if we do identify a group of dispositions, we'd probably be bringing it to the market in first quarter. But I would share with the market that -- or the attendees on the call that we did a disposition program of, I think, 29 communities, was it? 30 communities.

30.

30.

That we finished up and I want to say 15, so we really did call the portfolio pretty significantly. But if there were extraneous communities that we thought didn't fit the profile, we'd look to bring them to the market.

Okay. And then looking at your market summary, it looks like Arizona and Indiana have been a couple of the states that had seen occupancy kind of been weaker over the last few quarters, and I was wondering if you could provide some commentary on this dynamic.

Well, with respect to Indiana, it's -- first off, I think it's important to note that Indiana is about 2% of the sites within the portfolio in total. As we kind of looked at that at the end of quarter, it actually -- you can boil it down to one specific community, and the reason why -- the reason we had a bit of an occupancy decline in Indiana is because the main county road was shut down in May, which slowed down some traffic to that community. And as a result of that, the quarter, meaning July had a little bit of a lighter front end application count, but I'm pleased that one, the road is open; and two, our application count in September is double that of July in that specific community. Regarding Arizona...

I just wanted to note, just on Indiana, just to remind everybody, there was close to 200 sites added as expansion sites in Indiana. So the decline from last year to this year is primarily due to building expansions, and same thing with Arizona. Arizona had a couple of hundred sites added in Q4 of last year at [Palm Creek] , so that's really what's going on in Arizona.

Can I ask the [converse] of that on Ontario? You have high occupancy in -- looks like the sites for development have been flat the last few quarters. What's your ability to execute on those developments?

Well, Ontario, it's primarily all RV, so the growth that you're seeing in Ontario is from Sherkston Shores. Those are all park model, park model additions that would move from a transient site to an annual site. And so -- and we have, in Ontario there, our 1,600 sites available for development and -- so the big portion of those that are in Sherkston Shores, so we do have the ability to continue to sell park models and increase the -- or change the dynamics in the community to higher annual and fewer transients.

Our next question is from Wes Golladay from RBC Capital Markets.

Last quarter, you mentioned having sort of a internal consulting team that you just started. Can you, I guess, share with us some of the early findings there?

Sure. This is John. So just real quick, the genesis of Apex was -- really lies in our culture of continuous improvement and really what they're focused on is process improvement and particularly after this period of extraordinary growth that we've had within the organization. So innovation is really in our roots and focusing that on the core. And so we've laid out a series of -- we'll call them larger products that will go on in terms of efficiencies that we can pick up and things like that moving from certain processes that we have today that might require paper and converting them to electronic processes and that sort of thing. And they've really gotten into walking those processes, identifying some of the root issues that are associated with those processes under the process improvement methodology called DMAIC, which is Six Sigma. And as a result of that, walking the processes, they've actually kicked [out] what we call some sort of quick wins along the way and some things that are going to, over the next 12 months, help to bring more efficiency or better efficiency that are on the expense side or revenue opportunities on that side. And so they're really just now getting into it with some of this stuff, and we really look forward to maybe talking a little bit more in more detail as we get to the next call, like some of those -- the details on those quick wins and where we stand with some of the longer processes.

Okay. And then looking at the RV rent, it's up 5% back to back quarters now. Is that purely a function of a stronger consumer? Or is there any operational impact there as well?

I think on the RV side, again, it really comes down to the demand that we have with the communities that we have and everything that we put into them and then the experience that we have at the resorts. And we're still seeing solid transient RV revenue growth as a result of -- and that's even with a smaller RV transient site count that we have year-over-year. And so it's just sort of a -- it's a cycle. I mean, we've gained 879 conversions of transient guests to annual guests this year, but they keep bringing in more and they keep telling their friends and we get good referral business to bring more people in and cycles in as they start as transient guests and they become an annual. So I think it really, in the end, boils down to the experience that they have as well as some of the marketing that we do to make them aware of everything we have to offer.

Our next question is from John Pawlowski from Green Street Advisors.

Curious, Gary, are larger private operators having an easier time zoning land for the expansion site?

I don't know that it's a factor of larger operators, John. I think it's more of a factor of those who wish to commit to the long-term process and the cost associated with that long-term process to have a lot of partials in for entitlement change, knowing that it might only win that entitlement 2 or 3 out of 5 or 6 opportunities. So I think a example of that is one I just read about where somebody had been trying to rezone something for 5 years and is now going to court over it out on the West Coast. So it's a costly time-consuming process, even when you got the wind at your back, as we've had with the municipalities at Chula Vista and in Granby, the 2 I set as examples, getting through all the development agreements and all the committee meetings and the case of California, its coastal regulatory issues, it takes a long period of time. So I think it's more of a commitment than it is the size of the company behind doing the work.

Got it. Today, the pools of capital floating the space are both deeper and more patient than recent years, so how concerned are you in 2 or 3 years that we're going to be talking about shadow supply risk on expansions?

Yes. I think you're exactly right. The overall pool is deeper and broader, so that there are fewer and fewer opportunities that are out there. So I think that for Sun, what we do try and do is, we try and selectively focus on opportunities that can drive revenue growth for the shareholders beyond just that of rental increases. It's kind of our pillars. We played at the strength of our ops team for expansion opportunities, filling vacancies. We like vacancies in the right locations. Repositioning maybe under managed but well-located assets, converting transient RV to annuals, as John indicated. Those are all positives on top of the just year-over-year rental increases. Where I think that many other buyers out there are just focusing on what they kind of see as the NOI growth from the core portfolio, so that's a little bit of differentiation that we do out there. And then I'm not sure I follow the second part of your question with regard to the shadowing.

Yes. No. It's again the capital providers or investors in this space have more patient capital and longer-term investment mandates that would be willing to stick out an expansion, a zoning process if it's going to end up actually over long term. So is there a shadow supply risk for your existing communities in 2 to 3 years?

Well, I could say for the foreseeable future, 2 or 3 years out, I don't see that much inventory or new community development taking place. It is 2- or 3-year process even if you were to get started now. And I would also suggest that the vast majority of owner-operators, whether they be funds or syndicators, they don't have development experience. It's not how they've assembled their platforms, so they would have to gear up to it, they would have to go up the learning curve. I think we'll start seeing more development come through the pipeline, but I think it's a 3-, 5-, 7-, 10-year process before it's at all meaningful.

Okay. Makes sense. Last one for me. Can you share the nominal cap rates on the RV acquisition this quarter?

Yes. Let me take a look here. So for the 3 fully operating communities, the overall average cap rate for the 3 of them was 5.75.

Our next question is from Todd Stender from Wells Fargo.

And just going back to that last point about the 5.75 cap rate for all 3. If you look at the cost per site, it's a pretty wide range. How do you kind of look at that? I know you got California. There's Michigan and Utah, but is there any expansion or anything else in there that [would factor in] such a wide-ranging cost per site?

I've got it in front of me. Let me see.

And if those cap -- maybe you have a range of cap rates as well, if that helps to round out the..

So that might help. There is 1 community, I guess I won't identify, but the range would be -- well, let me put it this way, there's 1 community that we paid as little as $30,000 a site for, okay?

Right. That's in Desert Hot Springs?

Yes. And that would be a much lower cap rate than the other communities that we bought, but it is also something that we have very, very high expectations for repositioning and seeing NOI growth increase by 20% over the next 2.5 years, so we'll be repositioning that completely and it's in Palm Springs area, [so high] opportunity. The annual revenues per site really are what I would say drive the opportunity what we did there. And then -- and our Moab opportunity, the annual revenues per site are really what drive the higher price per site, so it's kind of a function of what kind of rents you can get on the demand and the location and we do see it all the way across the board. I noticed some RV communities for the first time approaching $200,000 a site. They were $170,000 to $180,000 in the upper 3 cap rate range that I mentioned earlier, so you're seeing a wide, wide spectrum. But what we do look for and I've talked about it before for our acquisition team and when our ops underwrites it, is we're looking at cap rate, of course. We're first looking at location, but we're looking at what kind of growth on cap rate we can create year-over-year in a 5-year period of time. So whether we're buying for $30,000 a site or $125,000 a site, it really is about how fast we can grow revenue and it comes from all those different levers that I mentioned in the last question that ops really has core strength in.

And is stabilized cap rate in the 7s? Is that fair to say? You entered a 5 and you ramp it up into the 7 range. Is that fair?

Yes. We'd be very pleased with that, especially if it's a well-located community.

Okay. And then just shifting back to the expenses. I know they were elevated in Q3. Does that bleed into Q4 or the pullback in your NOI expectations for the full year are really all attributed to the Q3 period?

Yes. The pullback from Q2, our year-to-date guidance is really attributed to the Q3 expense level that we had. So if you look at our Same Community NOI guidance, if you think of revenue expectations in line with our year-to-date performance, it does imply a deceleration in expense growth in Q4. We -- our budget for Q4 had minimal expense growth and we believe some of the expenses we incurred in Q3 were pulled forward from Q4, so we're pretty comfortable with our expectation for both the next quarter and our revised guidance for full year 2018.

Our next question is from Drew Babin from Robert W. Baird.

This is Alex Kubicek on for Drew this morning. Following upon John's acquisition question earlier, seems like a good number of this year's acquisitions appear to be heavier on the RV side, while recent MH opportunities have been more add-ons [at land parcels intended] to develop. Curious what's driving these different outcomes on underwriting side, and whether you guys are just seeing more pricing pressure generally on the MH side, which is leading towards the development.

So I think it is the latter. We are seeing more pricing pressure on the MH side, although -- more recently, we're seeing it even contract further on the RV side, but I think it's just trying to identify the deployment of capital so that it will create the best growth for our shareholders and it has recently been on the RV side. We've bought the Northgate portfolio as you might recall, I think, in second quarter. And it gives us an abundance of transient sites that we can also look to convert to annual sites and reap the benefit of the site night premium and the conversion to annual. In this particular quarter, we saw these particular opportunities and really felt they were located well. They fit our strategic geographic desire to continue to want to diversify. But going forward, I think you will see whether they get pulled in the fourth quarter or first quarter, probably around manufactured housing community acquisitions because that's what we have [under] diligence right now, and that would be our expectation about what we'd see next.

Also, we were just curious how you guys are thinking about growth opportunities specifically in California, seeing as your product obviously is very practically positioned, given all the continued press about California's housing affordability crisis. Just curious what your thoughts are and what the road looks like for opportunity.

I would say that it is very positive, as again, strategically we've started on the East Coast to create some more geographic diversity. We were just southern. We're now the north -- the East Coast north to south. We've started trying to accomplish the same thing on the West Coast 3 years ago. I think we are up to mid-20s in properties now. We've just completed and opened our first development in California in Cava Robles. The name of it is Cava Robles and Paso Robles. It's a 350 site RV community. I was out there with some of our board members a couple of weeks ago. It's doing everything we hoped in the 4 weeks that it's been open, so it's really working well. And more that we can focus on the footprint of the West Coast where we think we could develop for better returns, risk-adjusted than acquiring at these compressed cap rates, the more kind of focus on opportunities there. We do like to have a foothold in the area, so we have management and operations there. So as we acquire the right properties in California, we look to also be able to either expand the existing communities or develop new communities in the area and Cava Robles is a direct example of that. We acquired Wine Country and what was the name of the other one?

Vines.

Vines within 10 miles of that property. [Couldn't] expand those 2 communities and based on the reputation of those properties, we were able to get entitlement. Again, it took better part of 2 years and open up a brand-new community that we think will stabilize at a high single-digit level. And I don't think we could get into that area today for anything above a 4 cap rate.

Our next question is from Nick Joseph from Citi.

It's Michael Bilerman here for Nick. Gary, I just wondered if you could just provide an update sort of where Fannie and Freddie are with the [chattel] lending program and how that potentially [portrays] into your investments in with your loan book and how you see that evolving.

So Mike, actually, John has had numerous conversations and meetings with them and is continuing to work on that. So I'll turn it over to you, John.

Yes. I mean, it's been, like Gary said, a continual dialogue. Frankly, we meet with Fannie pretty much on an every other week basis now as we've talked through, meeting their needs under congressional mandate and the potential for that. We've been through a lot of diligence in terms of them seeing how we operate and things like that, and so we think that potentially there's an opportunity. We keep working through that and we'll continue to have the dialogue and -- but it's still a little bit early in the game.

I guess, how do you see -- I think you're earning like an 8% yield right now in your loans. Ideally, you'd probably want more demand and turn that ultimately into site rent, rather than loan income. But does it evolve or do you think that your book of loans starts to decrease, so there's an earnings or cash flow headwind as you roll that to MH rent?

So, yes, this is something we look at strategically. We -- there would be a loss of FFO based on the generation of rents that we get off of the notes. However, I think strategically, we're a company that looks to be as pure as we can in manufactured housing and RV resort operation. So the extent we provide some capital, to the extent we provide capital whether it's for loans or for rental units, it's really just a tool to eventually fill occupants with bona fide third-party owners of homes. And it's one of the reasons that we don't stray too far from the core business of manufacturing -- manufactured and RV operations, so it's part of our business. We like the revenues from both the rental side and the returns on the notes that we get. But if we had the opportunity to convert that capital and it made sense and redeploy that capital into our core business, we wouldn't hesitate to do so.

And arguably, 5%, 6% of earnings at this point, it's probably the lowest level that I've seen in your company, given the fact that you've grown so dramatically through acquisitions of core product. The loan piece is now a much lower risk overall than even the home sales stuff. It's a lower percentage of your total than it was over before.

It is, and we are seeing some opportunity if Fannie or Freddie were to elect to want to meet their charter through the purchase of those loans. It's then incumbent on John to negotiate what that price of the sale of those loans would be and for us to view it against the headwind over the loss of any revenue that you referenced there.

This concludes the question-and-answer session. I would like to turn the floor back over to management for any closing comments.

Well, at this time, management would like to thank everybody for participating on the third quarter call. As usual, we're excited to get fourth quarter behind us so we can share with you the results prior to that call. All of us are always available for any follow-up conversation and we look forward to seeing everybody at NAREIT. Thank you, operator.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you, again, for your participation.