Equity LifeStyle Properties Inc (ELS) 2002 Q2 法說會逐字稿

Good day, everyone and welcome to the Manufactured Home Communities second quarter earnings release conference call. Just a reminder this call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to the director of investor relations, Mr. Marty McKenna please go ahead, sir.

Thank you. Good morning and thank you for joining us to discuss Manufactured Home Communities' second quarter results. Our featured speakers today are Howard Waller, our chief executive officer, Thomas Heneghan our president and chief operating officer, and John Zoeller, our chief financial officer. Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I'll turn it over to Howard.

Thanks, Marty. Good morning everybody and thank you for joining us today. John will present MHC's second quarter financial performance to you following my remarks regarding three topics: Recent acquisition and disposition activities, our ongoing efforts to achieve a more fair regulatory environment including vacancy decreases rent controlled jurisdictions in California, and the impact of the general economy on our portfolio. First with respect to acquisition and dispositions, I would like to remind everyone about some comments we have made over the last few years with respect to our long-term business plan. Our acquisition focus has been on high quality assets in major metropolitan areas and/or retirement and vacation areas. Our desire is also to achieve concentrations in these markets. For the most part this focus has led us to concentrate on age qualified or retirement communities generally and with respect to all age communities to be in areas where there is a high costs to alternative to housing options. It has also resulted in an interest in the RV resort industry which shares many similarities with our age qualified community with their emphasis on active life-style especially those resorts that make use of park model home. These homes are similar to small manufactured homes and are placed on site by long-term residents of the resort looking for alternatives to the recreational vehicle but still attracted to the active life-style. This focus has historically created unpredictability with respect to the timing and size of our acquisition program due to the scarcity of available product. In addition our goal is to time the disposition of assets to coincide with our acquisition opportunities. We are pleased that today's announcement represents another milestone as we continue to implement our business plan. Now for a few comments about each of these anticipated transactions. Tropic Winds is a 536 site RV resort in Darlington, Texas less than 15 minutes away from fun and sun, our resort in san benito, and will bring our total of RV sites in that area to over 2,000 sites. We also recently acquired land adjacent to fun and sun with the potential for an additional 400 new RV sites. Tropic Winds was developed within the last five years and offers an opportunity to add significant value in the future. It also increases our ability to bring efficiencies of marketing and management to this distination location. In addition, we are pleased to have entered into a contract for the acquisition of nine high quality manufactured home and RV communities in Arizona and Florida. These properties are consistent with our business plan by adding new sites to our H qualified portfolio and increasing the number of RV sites in our portfolio to the 6,000 site level. At part of this portfolio transaction the seller has agreed to buy MHC's Camelot acres, a 319 site family community in burnsville, Minnesota, at a price of 14.2 million dollars with a closing schedule in the third quarter of this year. All in all this transaction will add 3,367 RV and manufactured home sites in destination locations consistent with our portfolio and eliminates a community in a state where we have been unable to create any concentration. Continuing this focus on senior communities MHC and our joint venture partner in the College Heights portfolio are in the process of restructuring the venture so that MHC will assume sole ownership of down under, a 2361 site age-qualified manufactured home community in Largo, Florida, and our partner will assume sole ownership of the remaining 17 predominantly all age communities with 3,220 sites in Florida, Ohio and Michigan. We are pleased to have restructured this venture in a manner beneficial to all parties and barring any unforeseen circumstances the partners are committed to concluding the restructuring in the next 30 days. As to the acquisition of the manufactured home communities these additions continue to build on our business model and add depth and opportunity for value creation. As we review these assets and create a long-term business plan for each we are confident in our aggregate ability to critique each asset and at maximizing value for our shareholders. At the same time we believe that in restructuring our portfolio and concentrating on our existing and newly acquired age-qualified communities MHC is better able to focus on that which we do best. Such efforts require commitment of both capital and even more importantly the time for our people to focus on and implementing each communities business plan. Accordingly we believe that these transactions will add value to the portfolio over the coming years. Our business plan further reflects our belief in the long-term potential of a RV portfolio with high quality assets located in Mt. Hood, Oregon, Palm Springs, California, Phoenix and Tucson, Arizona, the south Texas golf coast and into the Florida cities of Daytona, Orlando and [Houstis]. This platform will enable us to begin cross marketing and concentrating on the synergies between the RV experience and the age qualified manufactured home community life-style. As part of our overall effort to create and preserve value we'd like to give you some thoughts regarding the ongoing effort to achieve of level of fairness for our assets located in California's rent controlled jurisdiction. I would like to caution you at this time that we are going to be commenting on a number /-FP matters that are presently in litigation in California. And if during the Q and A we are unable to answer your question attention not because we are being evasive but it's only because we are sensitive to the relationships and to the fact that we are in lawsuits in various jurisdictions. In certain communities there are restrictive rent control ordinances imposing caps on annual rent increases of CPI or less and which prohibit increasing the rent to market levels resident turnover. This regulatory feature called vacancy control allows existing tenants to sell their home for a premium, representing the future value of discounted rents. In effect, the value of our shareholders land which would otherwise be reflected in market rents is transferred to the homeowner upon the sale of the home in the form of an inflated purchase price that cannot be attributed to the home. As a result, MHC loses the return on the value of our asset and the departing homeowner leaves the community with a windfall premium. To quantify this we have noted premiums on homes sold in our communities that regularly exceed $45,000 and have been as large as 470 thousand dollars. For example, one seller who had previously acquired two homes in one of our communities at an aggregate cost of approximately 117 thousand dollars recently sold these homes for a total of approximately $720,000 for a premium in excess of $600,000. We have recently determined through the discovery process that at least two municipalities have seriously considered condemning our communities at values well below the value of the underlying land. At least one city also concluded that the goal of affordable housing had not been achieved through rent control but it was unwilling to amend or abandon rent control. Instead the rent control ordinance was amended to reduce the annual increase to 75 percent of CPI to appease the residents and further lower the value of our asset. Had we not undertaken steps to articulate market rents we believe we are at risk for condemnation or imminent domain repeating based on artificially reduced rents. A physical taking at such pricing would have represented 10 [inaudible]. the current regulatory environment has resulted in MHC shareholders subsidizeing rent in an amount we estimate to be 15 million dollars annually [inaudible] demonstrates the regulatory environment has shifted too far in favor of tenants and supports or strategy [inaudible] to support our position. Finally, [inaudible] the economy as well as the condition of the industry in our performance. Home loans continues to be the major player struggle with repos and home levels continue to be in the low teens. The impact of these factors has been previously noted. [Inaudible] with respect to our all age communities located in Nevada, Indiana, Arizona, Iowa and New Mexico. Denver has now joined these markets where the economic downturn has caused or new home sales to seriously deteriorate as our [inaudible] compete with constricting loan availability. Noncompetitive interest rates, department give aways and reduced rents and even the low cost of a new home where the aggregate monthly [inaudible] coupled with either low or [inaudible] level. [Inaudible] and deteriorating [inaudible] housing [inaudible] while somewhat thankful nevertheless a platform to build a community with newer homes [inaudible] as the cycle up turns. The scale of our portfolio and with the stability of our [inaudible] strength of MHC business plan that we continue to perform in a steady and solid way. It is our goal to maintain the strength of this core and seek opportunities that will add to this strength on a long-term basis. Now to John.

Thanks, Howard. The second quarter results reflect a continued stable performance in our portfolio of properties. With respect to our core portfolio performance, which we define as properties owned as the beginning of each year and also excluding the property classified as held for sale, our base rental income is up 4.1 percent for the quarter and 4.2 percent year to date. Of these increases, average base rental rates are up 5.1 percent for the quarter and 5.2 percent year to date. Average occupied sites are down one percent for the quarter and one percent year to date. Core net operating income is up approximately 3.7 percent for the quarter and 3.9 percent year to date. The core in a line number is made up of an increase in total property revenues of 3.2 percent for the quarter and 3.1 percent year to date. In property operating expenses increased approximately 2.3 percent for the quarter and 1.8 percent year to date. I would also note that the small increase in both property expenses and revenues is due to decreases in both utility expenses and the related utility revenues, primarily due to the decreases in utility rates in California from a year ago. Excluding our expansion communities our total occupied sites for the core portfolio are down approximately 1.5 percent for the quarter and 1.4 percent year to date. With respect to expansion, during the quarter 267 expansion sites were filled which brings to 70 the total expansion sites filled towards our goal of 200 sites for the year. During the quarter approximately 29 expansion sites were brought on line. With respect to our debt balance, our average debt balance was $732 million for the quarter and 727 million year to date with a weighted average interest rate of 6.9 percent for both the quarter and year to date. Our interest coverage was 2.8 percent and our availability under our line of credit is currently 115 million. With respect to the pending acquisitions and dispositions the diversified portfolio acquisition will result in the purchase of nine communities totaling 1,3735 manufactured home sites and 1,632 park model RV sites. The purchase price is approximately 89 million, and includes the assumption of 44 million dollars of debt. The diversified acquisition also requires MHC to sell as part of the deal one 319 site property there Minnesota for approximately 14.2 million dollars. In addition, MHC will shortly close at Tropic Winds RV resort a [inaudible] community in Darlington Texas, for a price of 4.8 million. With respect to the College Heights restructuring, the transaction will result in the sale of 17 communities in Michigan, Ohio and Florida, totaling 3,220 MH sites for approximately 6.8 million in cash, 10 million dollars of preferred partnership interest, and the venture will retain approximately 57 million of outstanding property debt. MHC will retain ownership of one property based in clear water, Florida. The net effect of these transactions will be to effectively replace 18 predominantly family communities totaling 3500 sites in Michigan, Minnesota, Ohio and Florida, with ten age-qualified or RV park model communities totaling 3,900 sites in Florida, Arizona and Texas. With respect to our 2002 guidance, the year to date FFO growth has been four percent which we think is attainable for the full year. However, the following issues could impact the results. The College Heights joint venture restructuring will dilute FF O for the rest of the year by approximately three cents a share. The diversified portfolio acquisition could be accretive to FF O but as much as one cents a share for 2002, depending on when the properties close. The closings of the diversified transaction are dependent, seven of the properties are subject to seven different loans which need to be assumed. And the assumption process on those loans will affect the timing. But our goal right now is to try to achieve both the College Heights joint venture close as well as the diversified transaction close by the end of the third quarter. However, it could take into early 2003. The Tropic Winds acquisition should be mildly dilutive to FFO in 2002. With respect to RSI home sales activity, bear in mind that we sold 161 new homes year to date versus 197 in 2001. A large amount of our volume decrease is due to declines in the Denver market as Howard mentioned. Just to give you a flavor for the numbers. Year to date last year we sold 37 homes in the Denver market. This year we sold 12. Our growth profit per home has been better than 2001, but it has not been enough to offset the decreased volumes. In addition, as Howard also mentioned, the lack of affordable housing for buyers in family communities has also had an adverse impact on our sales. Next issue is our family communities in Nevada, Arizona, Iowa, knew Mexico and Indiana. Some of the markets that we've been the talking about struggling in the past, we continue to experience declines in occupancy in those markets that could further hurt our results. And then finally, just like to note that there's been considerable stock option exercise activity in the trail in periods that has created additional dilution. 00:20:25 >>HOWARD WALLER: Now we're ready for questions.

Thank you. Today's question and answer session will be conducted electronically. If you wish to ask a question, simply do so by pressing the star key followed by the digit one on your touchtone telephone. Ones again, to ask a question press the star key followed by the digit one on your telephone key pad. We'll take our first question from David Harris.

Good morning. Question for you, Thomas Heneghan. Can you give us an idea of the cap rates on the acquisitions and sales.

Yeah, I'll give you a little color on that. It's a little difficult with respect to a clean cap rate analysis, especially on the addition position of the College Heights, the joint venture that we're restructuring. We're retaining a 10 million dollars piece of paper depending how you value that preferred interest, and we're also getting a property out of it depending how you value that property. So there are some issues that role into that calculation. And then on the buy side with respect to the acquisitions it's really going to be in some respects dependent upon the timing of the closings. They could close as early as August and as late as January depending on some of these lender issues that John Zoeller has discussed. But with that as a backdrop, I would have to say that boxcar numbers were out of Michigan and Ohio and somewhere around the nine cap and we're into Florida and Arizona at somewhere around an eight cap. So around a hundred basis point spread, I would have to say on in place [inaudible]as you would value the acquisition and the disposition. As it relates to next year it all depends on what you think is going to happen relative to family communities in 2003 versus your perception as to what's going to happen on senior communities. I guess [inaudible] in place look at up sides next year versus retaining a nine cap that we're not exactly clear on as to what's going to be going on with the cash flows from that portfolio.

The rates that you're quoting are for the manufactured home sites. Would you distinguish the cap rates on the RV element of the transactions. >UNKNOWN SPEAKER: The whole house portfolio is, I'm doing boxcars, what I would say the diversified.

[Inaudible] okay. So is there still a delta between MHC as opposed to RV cap rate in the marketplace, Tom. >UNKNOWN SPEAKER: Yeah, there is still a Delta. It really depends on the quality of the property. For park model sleigh RV properties especially in the areas where we're trying gain ownership there has been a compression of cap rates in those properties, especially in the Phoenix Arizona marketplace there's been a significant compression in cap rates on those quality properties. But outside of that, there is, yeah, a difference between a manufactured home community and a park model or RV community.

Typically what's that, 50 to 100 basis points.

I would say 100 basis points or more.

Could I just turn to John Zoeller and talk through the transaction. Does this mean when you close all of these acquisitions, disposals, rearrangements, the JV, the company is going to be more heavily indebted? Can you give us an idea of what it does to the balance sheet.

Actually for the balance sheet perspective it's pretty much a net. On the College Heights deal, David, there is 56 million dollars of debt that is leaving the balance sheet. 57 I think roughly, from my remarks. And we are assuming on the diversified transaction about 45 million of property level that we actually have an opportunity to pay down some, down to four and five, which will be using our line of credit to pay down. So net net it's, you know, at the property level you're going to assume 45, give up about 58 and draw down on credit lines for the rest.

Okay. Couple questions for you, Howard, if I may. Howard, could you just give an idea of what your sense of timing is with regard to the California situation. Or is that one of the questions you choose to duck.

Or I choose to duck it because I don't have an answer. We're looking at this as a long haul program, David. And as a result we would love to get some near term decisions. But we have taken the position that [inaudible] this is something that could take three to five years, and this is how we presented it to our board. And the company's commitment is to follow through on this [inaudible].

[Inaudible] effective.

Well, the cost, some of the costs are being capitalized [inaudible] where we feel there's the greatest. What the market rents should be because with those communities, the outcome is, I think, you know, the most uncertain in terms of the outcome, a change in rent control, if it results in ultimately in a sale of the property or if it results in also a change in use in the property, to some other use besides manufactured housing. In other properties where that isn't the, the outcome isn't as up in the air and the values are not as disperate, the costs are being expensed.

Is that being reflected in the G and A line or property operations.

That would be in property operations.

Okay. One final question from me to Howard. In the past you guys have been very active share buy back buyers. I wonder what your comments are now with regard to the share, potential share buy back activity in the light of stock price falls.

We first of all, it's a bored issue. And we have a board meeting coming up in August. We have historically when the share price has fluctuated raised the issue with the board and considered it. And then followed through on their direction. We have not been in the market actively for a couple of years based upon the share price, and at the next board meeting we will certainly bring it up again as we have in the past. If there's going to be a program we generally announce what we're going to do.

Okay. Thanks gentlemen.

We'll hear next from Johnson lit with Solomon Smith and Barney.

Hey, Jordan sadler here with Johnson. I just had a few questions. One follow-up on David's question regarding the College Heights transaction. Were the 17 communities all age or family communities, all of them.

They were predominantly all age. There were a small number of senior communities in Florida. But a rough breakdown of that, out of like 3200 sites, roughly 2400 were all age, and the remainder were senior sites. About 2400 and 800.

Okay. And I guess separate question was, I guess your guidance came down, your FF O guidance came down from last quarter a little bit. I think you were calming from five to eight percent for the full year. What we are the prime changes to your assumptions? Was it the timing of these acquisitions? Was it the dilution you expect from college heights.

Some of it is the timing of the acquisitions as well as just in terms of our remainder of the year performance in terms of occupancy and sales. And sales feed occupancy. And some of these offsets in some of these other communities. And we're just not certain as to what sort of sales volumes we're going to achieve this year. We certainly, we've been trailing last year's numbers. And chasing those. As well as our property expenses, we talked about, it really hasn't changed too much since the earlier guidance. It really is somewhat in the revenue line and the expenses staying high in terms of insurance. One expense we have seen go up is bad debt expense from last year and from our original assumptions. And that has been about $300,000 in the first six months, which is significantly more than last year.

Double or-

Let me - it had a been - it was 174,000 last year year to date, and it's 306.

Okay. What were your previous occupancy assumptions for the full year versus now? Are you assuming a steady state rate of 93 percent or so for the rest of the year, whereas you were assuming 94.

For the rest of the year what we're expecting to occur is some dip in our occupancy in the third quarter. And then some of the sales activity to hopefully fill in some of that in the fourth quarter. Our sales season in Florida tends to be back loaded towards the end of the year.

Okay. And then one separate question related to your disclosure with regard to capital expenditures. I believe in your 10-Q from the first quarter you reported improvements on rental properties of almost two and a half million. What is that comprised of? Is that all recurring capex.

For the quarter, Jordan, I couldn't break that out. But let me give you a sense of the year.

Okay.

We've talked about - I think in the past a little bit, we have reforecasted as much as 15 million dollars in capex for this year. Okay? That breaks down between roughly seven and a half, about half of that being recurring, and another seven and a half being what we call upgrade capex, revenue producing capex. I don't believe we're going to hit this year just for starters because year to date-

On either account.

I think recurring we will. The issue with your upgrade capex is we have communities that we have focused on for upgrades in capex. But the key, as Tom looks across the table at me, is that it's about whether or not you have the right people in place who can execute an upgrade plan, number one. And number two, you also have to focus on what the market is. To give you an example we have some upgrades programs that are on the table for some of our Colorado communities. But we've really kind of slowed those down because of the uncertainty as to what's going on in the Denver market.

Right.

In some of our other communities, in Florida and Arizona where there's a significant amount of upgrade it's just a question of, can you get it done and are you comfortable doing it with, you know, the people that you have in place. Because it's just - it's not an easy process. And you don't want to waste the capital. You don't want to wind up finding out that you did a remodeling of a club house that isn't enhancing your sales effort or really enhancing the property. So that's kind of how our capex breaks out. But you certainly will see more capex. There is more last year than I think there typically had been. There will be more this year. Over time the reoccurrence should be three to three and a quarter percent of property revenue, just a street seal coating and maintaining the community. With us you're going to see significantly in excess of that. You have saw it last year and you see it this year and you'll see it next year as we continue with these programs.

You started - just two more things. You first started to stay what the year to date numbers were.

The year to date number for capex - I'll get it here for you - is 5,760,000.

That's total.

Yeah. Getting the 15. I just don't think that's going to happen.

With that mostly recurring.

Yeah. I would say that's a breakdown between-

Four and 17.

Probably about three million plus. Looking at the general category, probably three million of recurring and probably two and a half of upgrade.

Okay. And I guess the upgrades would be like you said, a club house remodel. And what else would be there.

Relandscaping, recreating the entrance, remodeling the club house, putting in fitness centers, updating the pool area. It's just, you know, that. Predominantly those are the things that you do. Because what really sells houses in the community is when somebody first drives in.

Right.

So it's important to, as you drive in, you know, perhaps we put in gating, we change the gating, change the signage. You know, put in brick pavers, create a boulevard effect driving up to a club house that is remodeled both on the inside and the outside. You know, just that's what people who are 55 years old now come to expect. People walk into these communities and they expect to see a fitness room and the fitness room that you see in a health club, a mirror and mounted TV and everything else.

Thanks guys.

Thank you.

As a reminder to our phone audience to ask a question you may do so by pressing the star key followed by the digit one on your touch ton telephone. We'll move next to Lewis forks with Merrill Lynch.

Gentlemen, just a little more background on the College Heights acquisition. What sort of joint venture was it and can I assume you're accounting for it by consolidating the entire joint venture.

We did account for it. College Heights was consolidated on our balance sheet. And it will now deconsolidate from our balance sheet. And if you look at what the accounting will be going forward you're going to see roughly 57 million dollars worth of standing property debt leave the balance sheet. We'll get seven million dollars in cash. And then there is the 10 million dollars preferred interest that we're retaining in the partnership. That preferred interest starts with a pay rate of seven percent and escalates one point a year for the next six years. And it's redeemable in six years. It also has a IRR carry of 12 percent. And we will be accounting for it on the equity method. And for purposes of modeling, I mean, I would say we will certainly be accruing the paid amount. And then we just simply have to evaluate how the venture is doing under GAAP in terms of what sort of equity.

So it will be somewhere between seven and 12 perhaps.

Right.

Okay. Now, what percentage of the equity in the joint venture would your 10 million dollars represent.

Well, it's a preferred piece. The partner a part of the 6.8 million that's coming out is putting in 5.1 million dollars in common that will be behind our 10 million dollars of preferred. So we're effectively taking a mezzanine position in the venture.

Right. Okay. Can we expand a little bit on Howard's reference to the weak financing markets for the sale of manufactured homes. Just broadly speaking. What percentage of your tenants would have a loan secured by their home and generally speaking what would the loan to value ratio be. Do you have a sense of that.

That pretty much is going to be dictated by family versus very properties.

Right.

Very few family buyers historically and presently are cash buyers.

Right.

And what happened in the late '90s was easy credit, low down payment or no down payment type financing that accelerated the availability of home purchasing by the family residents. On the senior side, I'd have to say we're seeing more financing. I don't think I could give you ever the exact numbers. But that financing is generally from a local bank, a local institution or a regional financial institution. It's generally done on terms that are advantageous from the residents perspective by involves a significant down payment on the order of 20 percent. And if they are not doing that financing they are coming in a cash buyers and we're seeing a significant amount of cash buyers. I don't think I could give you on this call that split. But we have seen more financing than historically on the senior properties. There was a time when most of that was cash buyers. But I couldn't tell you the mix. I think it's probably about 50-50 or thereabouts.

Okay. With the shrinkage in supply of credit to your tenant base on either side of the line, family or senior, are you seeing it expressed in terms of tougher underwriting criteria or just lenders exiting the market? How is shrinkage and credit being exhibited.

On the senior side we need to differentiate the product. I think on the senior properties, there is credit available. Local banks want the business of their retiree. They want their CD business, they want their checking business, and they are willing to get into this business of lending on the manufactured home in order to attract those service. So that's a different mix entirely. But generally in the manufactured housing sector a lot of the lending for your family communities came from the [conescos] and the burkas and the Ford associates, some major lenders that use the securitization market as their exit vehicle. That has fallen by the wayside. They are very difficult to get securitization done in this marketplace on the manufactured home product and the pricing of those securitizations and the buyers of the big pieces are buyers such that you're really talking about sub prime credit pricing, double digit type rates. And you're seeing not only a bad pricing issue. You're seeing stricter underwriting and frankly a lack of capital entering the business to do loans at any price.

And on a long-term basis or near term bases, however you want the look at it, as the market and the industry shakes out, you are starting to see new resources emerge to replace the exiting resources. For instance, Champion industries which is one of the largest manufacturers if not the largest manufacturer with all their divisions, bought the CIT manufactured home platform. And they are gearing up to make home loans available to related or affiliated entities and purchasers of champion homes. Palm harbor has done the same thing in buying the bank that will do the same, make the same type of arrangements with Palm Harbor buyers through its affiliate. So we're starting to see resources emerge as people look for answers. And it's going to take a while to shake out. What you don't see is loan rates that are akin to residential or stilt built home loans except with Fannie Mae and Freddy Mac. And those loans are starting to become available, certainly with respect to green field development because of certain restrictions that they impose Fannie Mae. But I do believe within the next three to five years we will see those become more available as the industry gets more comfortable and Freddy Mac and Fannie Mae get more comfortable with us.

Okay. Can you talk a little bit about the volume of repossessed homes in your portfolio. .

Sure. We presently have 192 repoed. Now, some of that repo decreased. That's a fall lot of some of that repo decreases. That's just what is in disc OP. There is, you know, the discontinued operations that we pose that are not in that number.

Okay. And-

I could tell you apples to apples.

Yes.

It's probably holding at about where it was. It might be down a little bit

Okay. And what sort of recycling is going on in that inventory? Are there some success stories being replaced by new failures? What's the dynamic.

Well, you know, we underwrite a resident the same way we would underwrite a borrower. So a lender looking to sell a repo, whether they cooperate with us or not, still has to bring in the credit consistent with that community. So you are not going to see the typical recycling and delinquency rates as you see in the general repo population over the last two years. So the answer is, the fact that we have maintained a steady level of 190 or so in our own core community tells you that it's relatively stable and that the credits that are coming in are probably consistent with a credit that we would accept as a resident.

Right. But sorry, Howard. I wasn't clear. Of the 190 or 92 repos that's let's say you had three months ago, were 20 of those solved and 20 new repo situations appeared from entirely different tenants.

Well, we have had pull outs.

I don't think it's 192 static number. That's-

That's the point. I understand.

No, it is a rolling number. And we are taking an approach. I think Howard mentioned in the call that we're going to allow the vacancy to occur. There are some manufactured home community owners trying to avoid the vacancy by participating in what I would call the paying of this old lending process. Some are actually using their balance sheet to make some loans to buyers. Some are doing lease option programs with the homes. Some are doing rental programs with the homes. That may work in certain situations. We've pretty much tried to avoid it and isolate it. We view it as an opportunity to, again, cull some of the properties from the standpoint of poor performing credits and end up in had a position where we can grow the portfolio long term with a higher quality cash flow. We may react with some of those programs to the extent it starts to deteriorate. But if you kind of take a snapshot of where we are this year versus last year, I would say that that hundred basis point decline in occupancy, there is a lot of repo ~s that have been pulled in that number. So although we're staying static on the amount of repos per se in any given time, a good portion of those repos are rolling off with just a pull-out in the community and you're seeing a decline in the occupancy number.

Right. Okay. And last question before I let someone else have a chance. Some of your minor expense lines, G and A and property taxes are up while property management is down. Is there anything you can point to to explain those changes.

Real estate taxes we think will be up this year. We are, as we get our real estate tax information during the year, we change our real estate tax accrual, and we are seeing some upward pressure on real estate taxes in some of our communities. Primarily I think it's driven by in the bigger picture just the fact that municipalities are strapped for revenue and they are trying to get it wherever they can. So you do see this upward pressure on real estate taxes. With respect to the G and A, we talked about this back when we were originally projecting for the year. There were a number of costs that were going to raise G and A this year in the form of we are still continuing with our Internet and marketing operations and trying to view that as - we view that as a long-term opportunity to sell houses. Our insurance is up. Some other categories like rent. And then also compensation accruals are up simply because some of the comp plans cost us more at the bottom line given what the share price has done in the last couple of years.

Right. Okay. Thank you very much, John. I'll pass the phone to somebody else.

And our next question comes from Steve Madison with oscar white capital management.

Good morning. I have a couple of questions for you. With regard to your comment about the dilution and accretiveness of the acquisitions, were those annualized numbers or are those your numbers that you expect to have in the second half depending on closing.

The discussion on cap rates was from an annualized perspective. The discussion that John had with respect to the second half of the year may be down three cents on College Heights and may be picking up a penny on the diversified portfolio. Strictly toward the second half of this year and really sensitive to the timing of any of the acquisitions we do on the diversified portfolio and the timing of the College Heights restructuring. But given ballpark I think that's what we think is likely to happen.

And if you close them both on the same date, what would be the annualized impact.

You're roughly talking about, as an in place bases, I'd say two to three cents, 100 basis points on 80, 89 million.

That would be the easy way to do a calculation that would roughly give you the sense of what's going on.

Steve, we're effectively disposing of 89 million of property and taking on 89 million in property with a cap rate spread.

Got it. And in California, what are you seeing in the way of occupancy trends in your family communities.

Given the affordability caused by rent control, occupancy has remained fairly high in California. So we're not - that's a different environment entirely given the affordability of the product compared to alternatives. What is happening in California that we're noticing is on the sale side and the pricing of the sales.

Right. As long as you're on California, you've been engaged in this initiative in terms of vacancy control for some time now. What differs about your discussion today about it and what you're doing today versus what you were doing a year ago.

I don't know how much we can go into this discussion. You know, frankly, I think we went into the thing somewhere in the year 2000, articulating a vision for what we thought our rents would be under our market situation. As a result of efforts, I think we have in a number of locations, and it's isolated by the opportunities, either a second homeowner or in some cases we are able to increase rents to market on the removal of the home, we've established market rents that are in line with our first analysis of what we thought the market was. So I guess we have confidence, more confidence as we sit here today, that the market really is in line with our original estimates of where we thought it would be, that the subsidy that we're providing is in fact as significant as we thought it was. And the other I think comment that I would like to probably share is we're surprised by the degree to which some of the municipalities are holding onto the rent control benefits in light of information that's become available to them that reflects that the ordinance isn't really work is as designed to provide affordable housing. It's really just transferring values between a landowner and homeowner.

And does that mean that you are expanding your efforts today versus where you were a year ago, 18 months ago.

[Inaudible] in California [inaudible] properties [inaudible] rent control versus the value of the underlying land [inaudible] in those and continue to pursue those . As we've worked [inaudible] in terms of a dollar amount.

I see. My last question. It appears as though your non-California family communities are now down to roughly eight percent of the portfolio. Is that about right.

I think that's probably right.

Thank you very much.

As a final reminder to our phone audience. To ask a question you may do so by pressing the star key followed by the digit one. Lewis fors with Merrill Lynch has a follow-up question.

Two small ones. Any discussion about expensing stock options through the income statement rather than through the notes.

We - I guess what we're looking at, Lou, is what the industry as a whole, especially the real estate industry, where the world goes. With all the accounting issues that are out there for the real estate industry, we tend to be a follower rather than a trend setter. I think - I don't believe that the stock option expensing will be - it certainly isn't of the magnitude, if we do it, and we have to do it, it won't be of the magnitude that you see in a lot of companies, a lot of nonreal estate companies.

We provide pro forma impact of what it would be if we expensed it. And I think it's immaterial. The one thing that you have to keep in mind when you look at our compensation programs is there are options and there are restrictive tox. Restrictive stocks we value essentially at market and role through earnings on an amortization basis. If you pull back and try do that whole fair market value analysis of the compensation programs you might see some expensing of stock options based on the fair market value at the date of grant but I think the analysis of what the fair market value of a ten year restricted stock award is would somewhat offset that. So I think there's pro forma disclosure of what the impact is. I don't think we think it's significant and are kind of watching this issue with some interest.

Could you remind me what the vesting period or the period or accounting period for restricted stock.

There's been awards of restricted stock I'd say all the way back to 1996 or 1997. There's some that are tied to performance. There's some that are tied to stock price. Some FFO and some years of service.

Yeah.

Okay. And the 10-K referred to I think your line of credit coming up for renewal in August of next year. Do you see it as being adequate today for your business plan going forward.

I think it's adequate today because I believe that we also have other financing alternatives with our portfolio.

Right.

You know, it's 150 million dollars. If we start to feel that we're constrained in any way, then we obviously will look at that. But typically this company has operated at anywhere from 125 million dollars to 175 million dollars line of credit. We've been successful at growing over the last nine years with that level. Recent years especially. So I wouldn't necessarily see the line of credit increase but obviously you'll see more capital raising activity if the opportunities for the capital are there.

Okay. Thank you.

We'll move now to Ralph block with bay I'll financial.

Good morning. You mentioned a figure of 3.7 percent in O I growth. Is that something that's pretty much in your range of assumptions fourth quarter the second half? Should we expect something like that.

With respect to the core portfolio I guess our view is it's still operating every bit in line with the fundamentals of the business. We're seeing rate growth year to date of a little bit of five percent with some occupancy decline bringing the total somewhere around the four percent range. You know, the NOI growth has been in the 3.8 to 4 percent range. The things that affect our view of NOI growth for the reminder of the year are not the top line rate growth nor are we overly concerned about the occupancy issue. I think we're seeing about as much as we'll see forth rest of the year in our view. But does have some concern on the expense side relative to the rolling in of the cost of some of the increases in insurance and other, I would say, property level costs. I think the insurance issue is still washing through. In fact, just on some of the assumption issues we've had to work through on the acquisition process it's been surprising how that issue has raised its head as a significant issue in the discussions. Terrorism insurance being the primary area of concern. But insurance in general has kind of come up as a topic. So I think for the second half of the year we're still in line with a four percent give or take N O I growth rate. We're pretty comfortable that we're going to continue selling in Florida. We're very unsure of what's going to happen in Denver. We thought Denver was going to come back in the second quarter of this year from a sales perspective. It's pretty much turned off. And don't expect it to turn back on any time soon. So with respect to the sales view, I think we'll be happy to get to last year's number on a NOI basis or sales contribution basis.

Okay. And do you have any handle for, let's assume a four percent run rate for NOI growth, about how much of that would be generated by selling expansion sites.

Well, our goal is for this year 200 expansion sites. Typically that would be, you know, roughly-

Fifty basis points.

Yeah, half a point.

Okay. And so are we seeing this occupancy rate for the end of the year will be pretty much roughly where it is now.

We'd like to see it go up. But I guess where we sit here today we think it's probably fair to say that it's probably going to be flat for the rest of the year.

Okay. And one last question. You have mentioned at the beginning of the call synergies perhaps between some of your senior communities and some of the newer RV parks you're focusing on. Can I go to the conclusion that there may be some possibility of working out programs where you might actually bring some of the park tenants from the north to the south during certain times of the year.

Yeah. That the what we're looking at as we go through these marketing programs and we have attended a number of these rallies or exhibits, seminars. You talk to people, and more and more people are looking for options. They live in a warm climate in the winter, it gets hot, or they want to change their location for the summer months and are looking for alternatives. So this is, you know, this is what all the literature is saying about, you know, assuming that the current economy doesn't change the attitude of the boomrs. We are seeing exactly that, Ralph.

Okay. Thank you.

And our final question comes from David hars with Lehman Brothers.

Yeah. Sorry for me to come back on this. John, could you just repeat those same store revenue expense and NOI numbers. As you went through them I didn't jot them down.

Sure, property revenues are up 3.2 percent for the quarter and 3.1 percent year to date. Operating expenses are up 2.3 percent for the quarter and 1.8 percent year to date. And that results in core NOI growth of 3.7 percent for the quarter and 3.9 percent year to date.

Great. Thanks so much.

And Mr. McKenna, it appears there are no further questions at this time. I'd like to turn the call back over to you for any additional or closing remarks.

Thanks very much for joining us.

That does conclude today's teleconference. Thank you 01:05:31 for joining us.