Question-and-Answer Session
Operator
(Operator Instructions) Questions will be taken in the order received. Your first question comes from Greg Meltzer of Citigroup. Please proceed.
Craig Meltzer-Citigroup
Thank you. My first question is on the home renting initiative. You mentioned the returns, you’re looking to [indiscernible] you would look, they get on that business and how you would think about the potential for the value of these homes to decline over time and how the returns look after considering that.
Joe McAdams
You know we have a financial model that we look at that takes into account the site rent, the home rent, that we expect to get, the expenses associated with it we do it on a three to five year basis. We assume deprecation of that home upon exit at the end of three to five years that’s in line with our perceptions of home values and we model out IRRs order magnitude in the 15% to 20%, depending on where you are in the country. I mean, that’s just the first cut that we take at it, but that’s kind of the basic financial modeling that we’re looking at.
Craig Meltzer-Citigroup
Okay and should we expect you to buy additional homes, or is this just to work through the existing inventory of homes?
Joe McAdams
Well, in terms of our rental business, over the past few years we’ve marginally increased our rental activity of new homes in light of the current economic environment. We’ve been using this tool to help us maintain and hopefully increase our occupancy level. Now keep in mind that with respect to this new home activity, we’ve restricted the activity to California, given its high rent structure, which is a program that we put in place last year, and certain retirement communities in Florida and Arizona. In Florida we would probably utilize some of the existing inventory that we have, California has very little inventory now, we generally will buy at the margin if we need it for rental and Arizona has also a place where we would be willing to purchase inventory at the margin, given the relatively strong sales effort that we have there.
Craig Meltzer-Citigroup
How many homes are you currently renting?
Joe McAdams
It’s about, new homes about 250, 275 new homes.
Thomas Heneghan
Craig, if I could just interject here with respect to this issue. I think it is ELS reacting to the current environment. We have long kind of looked a little bit negatively on doing any type of renting of the structure, but in today’s economic environment, you’ve seen the last two securitized lending platforms essentially shut down, close their doors. Not that an ELS customer was relying on that type of financing through the Chattel on securitization, but you’ve also seen significant tightening with respect to bank lending, even in our age restricted communities; in fact, their tightening and cherry pickings on the loans, giving the quality of the potential customers. You’re saying, what I would call, when I first started the call, the comment to the ripple effect, I mean if you looked at what was going on with those securitizations, and the Chattel financing, you were seeing extremely good loan performance. You were seeing default rates at 3% or less, loan to values in the 80% range. So the fact that they shut their doors wasn’t attributable to the fact of poor loan performance, it was attributable to the ripple affects of a tightening credit environment. As a result, we’re trying to react to that environment and use a little bit more of our balance sheet in a way that maybe we wouldn’t have looked at it before. You can bet we are looking at it closely, but from the early results that we’ve had, we’re seeing some positive ability to put our capital to use in a way that is comfortable for us long term.
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