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 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'd 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 Q3 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 19.5 percent 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 0.2% in the 3rd 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 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 3rd quarter totaled roughly $40,000,000 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 our diligence on various manufactured housing income producing communities and resorts. Year to date, we have closed an acquisitions valued at nearly $364,000,000 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 efforts with diligent balance sheet management. To that end, we raised roughly $500,000,000 in early September, which provides 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 3rd 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 revenue of 20.6% over last year. Occupancy in the total portfolio was stable year over year at 96.1 percent 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 percent and we experienced a 43% increase in new home sales volume, which resulted in 146 homes sold in the 3rd quarter. Our average new home sales price rose to approximately $112,000 in the 3rd 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. Pre owned home sales volume rose 17.4%, while our pre owned home sales revenue grew by 29.9% in the quarter.
Year to date, we have received over 37,000 applications live in the Sun Communities 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 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 conversions of transient RV sites to annual leases. 215 of the MH site gains We're in expansion communities predominantly in Texas and Michigan.
Our transient RV to annual lease conversions totaled 365 in the quarter, bringing our total to 879 RV conversions for the year. We have now gained 1878 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 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 budget 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 in reach over the course of the Q3. Our SEO work has resulted in a 37% increase in organic Since the beginning of 2018. In the Q3 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 Q4.
With this strong demand, we expect to continue to capitalize on converting more of our transient guests and annual leases. With that, I will turn the call over to Karen to discuss our financial results. Karen?
Thanks, John. Sun reported $1.35 of core FFO per share for the quarter ended September 30, 2018. Investment activity in the quarter totaled $40,000,000 which included an additional RV resort in Moab, Utah, A 50 7 site age restricted RV resort in Desert Hot Springs, California and a 2 10 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 $3,000,000,000 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 $114,000,000 of unrestricted cash on hand and our net debt The trailing 12 month recurring EBITDA was 5.4x. On the capital markets front, we issued roughly 5,000,000 shares equity offering raising approximately $500,000,000 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 $40,000,000 on our ATM during the Q3. And turning to guidance, We are updating our 4th quarter and full year core FFO guidance to a range of $1.01 to 1 $0.04 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 Q3. We have adjusted our annual same community NOI guidance to 6.75% to 7%, reflecting the impact of the 3rd 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?
Great. Thank you. At this time, we will be conducting a question and answer session. It may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Our first question is from Nick Joseph from Citi. Please go ahead.
Thanks. Leverage has moved around the last few quarters and you're at the low end from a net debt to EBITDA All in 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 something near that range.
Thanks. 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 on our last call, it's been a slow go. We've worked very closely in Colorado with Pality 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 City of San Diego to acquire more affordable housing or to place more affordable housing. It's been almost 2 years now and we got final approval in 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, they can exist on the general workforce, they can exist at all different Levels depending upon the home prices and living expenses in areas. 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 at with regard to our development. Our goal is to be a greenfield development of somewhere between 2 to 4 communities starting each year.
We have 2 developments under construction right now, 1 on the East Coast and Carolina Pines and one 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 is 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 will begin to provide more information When the greenfield development is a little bit more meaningful in the
portfolio. Thanks.
Our next question is from John Kim from BMO Capital Markets. Please go ahead.
Thank you. I think John on your In prepared remarks, you mentioned that you're on track to deliver 2700 to 2,900 revenue producing sites. And I'm wondering how realistic is the midpoint of that guidance because that's just a significant pickup in the Q4?
Yes. I think if you look at Sort of historically what we've done and what we've produced. I mean typically the Q4 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 the guidance that we've stated before.
But is the lower end of guidance more realistic than the mid
Probably 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've 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 move into 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. 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 four 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 this demand?
So I won't say that it's changed our view, but Q1, 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 into the market in Q1, but I would share with the market that There are 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 Has 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 the quarter, It actually you could 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 1, the road is open and 2, 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 and expansion sites in Indiana. So the decline from last year to this year is primarily due to those expansions. And same thing with Arizona. Arizona had a couple of 100 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 in Ontario, you have High occupancy and looks like the sites for development has been flat for the last few quarters? What's your ability to execute on those developments?
Well, Ontario, the it's primarily all RV. So the growth that you're seeing in Ontario is from Shuckston Shores. Those are all park model additions that would move from a transient site to an annual site. And we have in Ontario, there are 1600 sites available for development and primary There's a 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 annuals and fewer transients.
Great. Thank you.
Our next question is from Wes Colliday from RBC Capital Markets. Please go ahead.
Hi, everyone. Last quarter, you mentioned having sort of an internal consulting team at Sun 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, so 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 We've had within the organization. So innovation is really in our roots and focusing that on the core. And so they've laid out a series of, we'll call them, larger projects that will go on in terms of efficiencies that we can pick up Yes, on 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 process under the process improvement methodology called DMAIC, which is 6 Sigma. And as a result of that walk in 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 either 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, I'd like some of those 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, 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 we keep bringing in more and they keep telling their friends And we get good referral business to bring more people in and it 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.
Okay. Thanks a lot. That's all for me.
Our next question is from John Pawlowski from Green Street Advisors. Please go ahead.
Thanks. Curious, Gary, are larger private operators having an easier time, zoning land for the expansion side?
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 Parcels in for entitlement change knowing that you might only win that entitlement 2 or 3 Out of 5 or 6 opportunities. So I think an example of that is one I just Threat about where somebody had been trying to rezone something for 5 years and is now going to court over it out in the West Coast. So, it's a costly time consuming process, even when you've got the wind at your back as we've had with the municipalities At Chula Vista and in Granby, the 2 I said as examples, getting through all the development agreements And all the committee meetings and in the case of California, it's 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 flooding 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 Rental increases, it's kind of our pillars. We play to the strength of our ops team for expansion opportunities, Selling 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 of the 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 Zoning process, if it's going to hedge cash over long term, so is there a shadow supply risk for your existing companies 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 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 acquisitions 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.
Thanks.
Our next question is from Todd Stender from Wells Fargo. Please go ahead.
Thanks. Just going back to that last point about the $575,000,000 cap rate for all 3. If you look at the cost First Sight, it's a pretty wide range. How do you kind of look at that? I know you've got
California, there's Michigan and Utah, but is
there any expansion There's Michigan and Utah, but is there any expansion or anything else in there that would factor in such a wide range in cost per site?
I've got it in front of me. Let me see.
And if those cap maybe have a range of cap As well, if that helps to round out the valuation?
So that might help. There is One community, I guess I won't identify, but the range would be Let me put it this way. There's one community that we paid as little as $30,000 of site for, okay?
Right. That's the 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, high opportunity. The annual revenues per site really are what I would say drive The opportunity, what we did there and then in 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 in 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, 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 $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 strengthened.
And a 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. Thank you. 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 3, period.
Yes. The pullback from Q To 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. Our budget for Q4 had minimal expense growth, and we believe some of the expenses we incurred in Q3 were pull forwards From Q4, so we're pretty comfortable with our expectation for both the next quarter and our revised guidance for full year 2018.
Okay. Thanks, Karen.
Our next question is from Drew Babin from Robert W. Baird. Please go ahead.
Good morning. This is Alex Kubitschek on for Drew this morning. Following up on Jean's acquisition question earlier, it seems like a good number of this year's 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 that latter. We are seeing more pricing pressure on the MH side, although more recently we're seeing it even contracts 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 bought the Northgate portfolio as you might recall I think in Q2 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, and 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 4th quarter or Q1, probably a run of manufactured housing community acquisitions Because, that's what we have under diligence right now and that would be our expectation of what we'd see next.
Great. Thanks for the color there. Also, we were just curious how you guys are thinking about growth opportunities, specifically in California, seeing as your product Obviously, it's very practically positioned given all the continued press about California's housing affordability crisis. Just curious what your What the road looks like for opportunity?
I would say that It is very positive. As again, strategically, we 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 So we started trying to accomplish the same thing on the West Coast 3 years ago. I think we're up to Mid-20s in properties now. We just completed and opened our first development in California It's Cava Roble.
The name of it's Cava Roble and Paso Roble. 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 the more that we can focus On the footprint of the West Coast where we think we could develop for better returns risk adjusted Then acquiring at these compressed cap rates, the more we're 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 Cabo Roble is a direct example of that. We acquired Wine Vine Country and what was the name of the other? Vines.
Vines, within 10 miles of that property couldn't expand those two 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.
Yes. Thanks for the color there. That's really helpful. That's all for me.
Our next question is from Nick Joseph from Citi. Please go ahead.
Hey, it's Michael Bilerman here with Nick. Gary, I was wondering if you can just provide an update sort of where Fanning Frity are with Lending program and how that potentially portrays into your investments With your loan book and how you see that evolving?
So Mike, Actually, John has had numerous conversations and meetings with him 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 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 I'm 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 it's 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 where you think that Your book of loans starts to decrease, so there's an earnings or a 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 Bonafide 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 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 at 5%, six Percent 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 And even the home sales stuff is a lower percentage of your total than it was ever 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 is 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 of the loss of any revenue that you referenced there.
Yes. Okay. Thanks, Darren.
Thank you. 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 3rd quarter call. As usual, we're excited to get 4th quarter behind us, so we can share with you the results. Prior to that call, all of us are always available for any fall follow-up conversation. And we look forward to seeing everybody at NAREIT. Thank you, operator.
Okay. Thank you.