Equity LifeStyle Properties Inc (ELS) 2002 Q3 法說會逐字稿

Good day, everyone, and welcome to the Manufactured Home Communities' Third Quarter Earnings Release Conference Call. Just a reminder, this call is being recorded. At this time, for opening remarks and introductions, I'd 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' third quarter results and 2003 outlook. Our featured speakers today are Howard Walker, our CEO; Tom Heneghan, our President and Chief Operating Officer, and John Zoeller, our CFO.

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, and the company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.

And now I'll turn it over to Howard.

Thank you, Marty, and good morning, everybody. Thank you for joining us. In a moment John will report on MHC's performance in the third quarter and our expectations for the remainder of the year as well as for 2003.

In general, MHC continues to perform in a stable manner relative to the market and the ongoing effects of the economy. We see the greatest impact, as we have previously reported to you, in the area of new and used home sales. The lower sales volumes to date are reflective of consumers' confidence levels in today's economic and political environment, the low interest rates available for conventional stick build home loans, and the choppiness of home loans available to manufactured home buyers, especially in the affordable family markets.

There is some benefit from the current slow economy as traditional lenders are forced towards some resolution of their portfolio and corporate economic issues. Assuming a stable economic environment, we are close to establishing the level of repos that exist in the market and that will compete for the new buyer market in the next 12 to 24 months.

I continue to believe that there are approximately 100,000 repos available in some manner. These are concentrated in select, affordable markets such as the Southeast, excluding Florida, the Midwest from the central states southward through Texas, and the Pacific Northwest. What this means must be put in context with new home default and loan availability. The annual run rate for new home production this year is estimated to be in the neighborhood of 175,000 homes, give or take 10,000, subject of course to a number of variables. It will probably be the same for the next year or two.

If the future absorption of manufactured housing units is 225,000 to 250,000 homes per year, then we can expect to absorb the existing repos outstanding in two years. We hope that the sale of repos occurs at realistic pricing and is financed by lenders applying a disciplined approach, that is requiring true acuity and using amortization schedules of 15 to 20 years. If this happens, the manufacturers will then be able to produce more new homes to meet market demand.

In addition, the lender sector will have stabilized with current and merging resources meeting demand at profitable levels. With more diligent underwriting, a return to securitization programs and their access to capital may be possible.

The industry is going through a down cycle that has been prolonged, in my opinion, beyond the length of prior cycles, by the securitization opportunities not available prior to 1995. This has resulted in efforts that may have caused this cycle to persist, but the end is in sight. In support of this the Manufactured Housing Institute recently produced an analysis of the number of manufacturers and retailers in the market from time to time. Significantly, the number of both is at or near the levels of June 1991, the low point of the last down cycle. While only hindsight will establish the turning point, it does evidence the possibility of a return to an equilibrium essential to a stable marketplace. I again remind us all that MHC and its portfolio of predominantly age-qualified assets is less sensitive to the impact of the issues currently affecting our industry. For example, the August 2002 year-to-date floor shipments to the top 10 states reported by the Manufactured Housing Institute indicated that Florida and California, two states where we have a major presence, experienced essentially the same volumes for the same period in 2001 versus seven of the remaining top 10 which had greater declines. Only Louisiana, ranked ninth among the top 10, reported a strong positive growth for the same period.

As to acquisitions and dispositions, during the third quarter we closed on seven of the 10 communities MHC contracted to purchase for an aggregate of $70.8 million and consummated the restructuring of the College Heights portfolio with our joint venture partner.

Now to John.

Thanks, Howard. The third quarter results reflect the relative stability of our core portfolio property performance in a difficult economic environment. With respect to our core portfolio performance, our base rental income is up 4 percent for the quarter and 4.1 percent year to date. Of those amounts, the average base rental rate increase is 5.5 percent for the quarter and 5.2 percent year to date. The average occupied site component is down 1.5 percent for the quarter and 1.1 percent year to date. Core net operating income is up approximately 3.2 percent for the quarter and 3.6 percent year to date. Total property revenues are up 3.7 percent for the quarter and 3.3 percent year to date. And finally, core property operating expenses increased approximately 4.5 percent for the quarter and 2.7 percent year to date. Excluding expansion communities, our total occupied sites for our core portfolio are down approximately 1.7 percent for the quarter and 1.5 percent year to date.

With respect to expansion, during the quarter 26 expansion sites were filled, which brings to 96 the total expansion sites filled towards our goal of 200 sites for the year. During the quarter we brought online 55 expansion sites. Included in that number are 38 expansion sites acquired in the purchase of Holiday Village in Ormond Beach, Florida. There have been a total of 84 expansion sites added to our site totals for 2002.

With respect to our average debt balance, our average debt balance was 723 million for the quarter and 682 million year to date with a weighted average interest rate of 6.7 percent for the quarter and 6.7 percent year to date. Our interest coverage is approximately 2.6 percent for the quarter and 2.7 percent year to date. The availability under our line of credit is currently 76 million.

With respect to our acquisitions and dispositions in terms of an update of our status, MHC has closed on six of the nine communities that we contracted to purchase in the diversified portfolio. When this is completed, this acquisition will result in a total purchase of the nine communities, which- with total MH sites of 1735 and a total park model/RV sites of 1,632, and the purchase price will be approximately $89 million. Included in that purchase price will be the assumption of $44 million of debt. The six properties acquired to date represent approximately $66 million of that total 89 purchase price with the assumption of 32 million of the 44 debt assumed so far- of the 44 million to be assumed.

In addition, I'd like to remind everyone that the diversified acquisition also requires MHC to sell 1,319-site property in Minnesota for approximately 14 million. Also during the third quarter MHC closed on the acquisition of Tropic Winds RV resort, a 536-site RV community in Harlingen, Texas, for a purchase price of 4.8 million.

We have also completed a restructuring of our College Heights joint venture. The transaction resulted in the sale of 17 communities in Michigan, Ohio and Florida totaling 3,220 manufactured home sites for approximately 5.1 million in cash, 11.4 million of preferred partnership- and 11.4 million of preferred partnership interest. In addition, the venture will retain approximately 57 million of outstanding property debt, which has gone off of our balance sheet.

MHC has retained ownership of one 361-site property in the venture that's located in Clearwater, Florida. The results of this restructuring will be a total economic gain of 3.2 million of which approximately 1.3 million is recognized currently in the third quarter.

The net effect of these transactions is to effectively replace 18 predominantly all-age communities totaling about 3500 sites in Michigan, Minnesota, Ohio and Florida with PAN-age qualified or RV Park Model communities totaling 3,903 sites in Florida, Arizona and Texas.

With respect to our 2003 guidance, we have completed our budgets for the year 2003. We project core NOI growth of approximately 3 percent, which should yield FFO growth in the range of 1 to 2 percent on the low end and 4 to 5 percent on the high end. Included in these numbers are core-based rent growth. Rate growth is expected to be approximately 4 percent based upon our rent notices sent out so far.

In addition, on the occupancy side, the lower end of our FFO estimates assume core occupancy decreases of approximately one-half of 1 percent. Core operating expenses are expected to grow in excess of CPI due to increases in insurance, utility expenses and real estate taxes. Our sales operations income is assumed to run at breakeven or better. We affirm our plan to run the home sales program with the continued goal of selling more homes in more communities.

In addition, the completed and pending sales of properties in Michigan, Florida, Minnesota and Ohio, coupled with a reinvestment of the capital in the completed and the pending purchases in Florida, Arizona and Texas will cause an estimated dilution in 2003 of approximately 3 cents. And finally, in 2003 MHC will start expensing stock options. We expect the initial dilution to be approximately 1 cent per share.

Great. We'll open up to questions.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function has turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and take as many questions as time permits. Once again, press star, 1 if you have a question.

And we'll take our first question from David Harris with Lehman Brothers.

Yeah, good morning, everyone. Could you just give a little bit of color on the rent notice increases? With that 4 percent- obviously it's a portfolio-wide number, but would it hold true across most geographies as well as the different property types?

Well, it's stronger in the age qualified than it is in the family, and it's stronger in major metropolitan areas than it is in tertiary markets. In fact, we're seeing occupancy issues and inability to obtain rate increases in some of the markets that we've long talked about time and again on the call, which would be, you know, Iowa, down into New Mexico, Indiana. We are struggling on both a rate and an occupancy issue in those markets. They don't represent much of our portfolio. On the East Coast, down into Florida, out through California and in Arizona we are experiencing some ability to increase rents based on the strength of the single-family housing markets that are much in line with the competition for the senior lifestyle buyer. And in the strong markets in, say, Southern California, we're seeing some ability to increase to market given the strength of everything going on down in the San Diego area. So, depending on the area, but if you wanted to break it down, it's the senior properties or age-qualified properties are ahead of the family properties this year.

And the seniors, are we up to sort of 5 or 6 and then on some of the more all age in, say, the Midwest, are we talking zero?

No, I don't think we are talking zero. And again, I'm giving you a pretty broad brush here.

Sure.

We do have some properties that are senior properties that are constricted by agreement or prospectus to CPI increases. So you're seeing some of our senior properties, frankly, with a 2 percent increase, but I'm giving you a kind of an overall that we're able to push rents given market situations in the age qualified better than we are in the family. Now there may be specific instances with respect to a particular community that would be outside of that broad comment, but, no, I don't think you're going to see 6 percent in senior and 2 percent in family. By and large, we're talking in the range of 100 basis points between those two except for some of the outlier areas where we're really struggling with both vacancy and rate.

Okay. Could you give a little bit of color on your comment with regard to the pressure from single family? I mean, you guys haven't historically talked about turnover rates, but I wonder if you might be able to sort of give us an idea of what that might be. Have you seen a pickup in turnover? And do you keep a tally of the number of folks that leave you to go into single family?

I don't know if we have a specific number of that, and where it really impacts us is on the sales side of the business, and we've seen that in some painful ways in this quarter. Denver, for example, an area where we're stable on occupancy, but for years that I've been involved with this company have traditionally been able to sell new homes in that marketplace with some relative consistency. Year to date, we are down some 38 home sales- new home sales in that marketplace. We're not suffering on occupancy, but when you take those 38 home sales out of our sales operation and then you couple it with some of the activity going on in Florida where we are filling out our properties that had expansion opportunities, and there's two properties that come to mind that represent another 30 new home sales opportunities. That's really where you're seeing some of this impact. We're trying to fill it back in, meaning we're trying to replace those expansion site sales with sales in our existing properties. And that's where you're seeing the single-family home, because of the mortgage rates, being a very competitive alternative to our, you know, product in certain areas of the country.

Okay. I have couple of questions for John with regard to the '03 guidance range that you just spoke of. Is there anything in your assumptions for share buybacks?

No.

Okay. So we're assuming nothing there. Okay. The second question was, what- you talked of the variability around the range being predicated on occupancy assumptions. How much variability did you build into your guidance range based on other income?

Based on...

Well, how much...

...sales income?

How much swing could there be on the sales income side?

On the sales income? At the low end of the range we're assuming breakeven, and then on the high end of the range we're assuming in the area of about 1.2 to 1.4.

Okay. All right. Thank you. And David [Shulman] had a question as well.

Good morning, guys. Question one. Do you have anything new to report on the rent control litigation in California?

Other than what we've said in the recent announcement with respect to proceeding to trial, no.

Okay. Next question is, how much of those costs were capitalized during the quarter?

David, I would have to- I don't have that with me, but I can get that for you.

Could you give us a guesstimate?

Yeah, a guesstimate is in the four or $500,000 range.

And four or 500,000 would be a sort of run rate kind of a number.

No, a lot of that is because we are preparing for trial and are ongoing in some of the other court actions.

Okay, so the run rate will be somewhat lower once you get into trial and beyond.

Yes.

Okay, thank...

Yes. Trials are, you know, expensive.

That I know. Thank you so much.

And we'll take our next question from Richard [Pirelli] with ABP Investments.

Hi, guys. I wanted to get a little bit more color on, you know, what you're expecting from RSI. You made some comment to that in your guidance, but it was a little murky to me. What are you expecting in terms of volumes? I'm looking at, you know, your disclosure here, and, you know, either on a year to date or on a quarter-to-date basis, you've got- you know, your new home sales volume is down, you know, 20 percent or so, and, you know, used home sales are down, you know, in the neighborhood of 40 percent. One, what are you expecting? What do you have budgeted in terms of volume? Do you have that continuing to drop, flattening out? And one of the interesting things I did notice is that the revenues from the new home sales dropped significantly less than the proportional change in the actual unit volumes, which tells me there is some kind of margin expansion there. What's driving that? And then also, you know, what are you expecting just in terms of aggregate, you know, dollars there?

I guess what we're commenting on is, I guess, the sense of caution with respect to what's going in the RSI side of our business, frankly, given some of the things we struggled with in this recent quarter. So let me just walk through some of the issues we're dealing with. On the new home sales side, frankly, we are still very bullish that we are going to be able to sell new homes in more communities to more customers in the future than we have historically. We are struggling with two areas that I discussed that are impacting that year-over-year comparison, one being Denver, which has traditionally produced a significant amount of sales for us on an annual basis, is now down 38 sales from last year. And the profits from Denver have been healthy profits in that marketplace. And we're filling up on certain areas in Florida where we had expansion programs and losing the site inventory to sell homes. We are trying to produce more available sites in our other expansions. But frankly, where we are producing some sites, we're not selling as many homes. So we've got sites being put online in places where we're not as successful selling the homes.

So we're in a little bit of a catch 22 here where our successful sales programs are running into capacity situations. We're bringing new sites on in areas that we really haven't generated sales we would expect, and we're struggling with what's happening in Denver in a way that we haven't seen it historically. So that'll paint you a picture on the new home sales side. What you're seeing on the gross profit margin is we are able to get better margins on the homes that we're selling and at higher average price on the homes that we are selling. We believe that our product is a high quality product. We're selling it as a high quality product, and we're able to sell that quality at a higher price and a better margin today than we did historically.

What's the price point that you're- you know, your average price point on the house that you're selling into your community today?

Sixty-six thousand or so.

Okay. And then again, you know, with taking the comments that you've, you know, laid out that's sort of a rearview mirror...

Well...

...what is your- you know, in your growth expectations for '03, what do you have -- flat line, up, down or...

Richard, the lower end, we think volume will be either flat to this year or down slightly.

And...

We think we can break even in this business.

And with respect to RSI, if you look at the numbers, it's not the new home sales that's causing the problem with respect to this quarter. You peel it back and you find out used home sales hurt us badly this quarter. Now the issues affecting used home sales which Howard addressed a little bit on his comments, is there's a glut of repos out there that are active competition for the used home sales that we have in our communities, and the ability to finance those homes has deteriorated dramatically in the last few months given what's going on with Conseco and some of the other lenders out there. We think that that will cure itself. We think the new lenders will come in. We think that underwriting will return to more normal standards. But right now we're facing an issue in this quarter alone where you're seeing, I think, almost a half a million dollar falloff compared to last year in the used homes sales numbers. And if you break it down even more, you go into some of our ancillary businesses over on the RSI side, which is restaurants and golf courses, there is some lack of spending going on at these ancillary businesses that we didn't anticipate being as significant as it has. You take those two numbers together and you're representing $600,000 or so of the falloff that we're experiencing on the RSI side. So I think we're still bullish that we can sell new homes.

I think we have proven it in a difficult market. What we're seeing in RSI is that there's other parts of that business that we're struggling with and that are being impacted by the broader macro issues in the industry being lending and repossession issues. We think...

What if...

...that will clear itself, but who knows?

So what's your view in terms of the guidance just so, you know, people can have I guess road map going forward as to- you know, do you have anything built in for the used home sales? I mean does it get worse before it gets better? I mean, what- you know...

But we could...

...kind of break it down for us then.

I guess what I tell you, Rich, is we- if you look at the volumes for new homes and used homes this year, on the breakeven analysis, which puts us at the low end, okay, there is some moderate falloff in new home volume with used home volumes being the same with some, you know, moderate amount of profit or breakeven.

So you're saying that the volumes in the used is flat from your current quarter. You think that the falloff is kind of going to moderate from here.

Yes.

Okay. Just wanted to get the breakdown. Thank you.

Rich Anderson with Salomon Smith Barney has our next question.

Hi, it's John [Litt], Rich Anderson. Just continuing down some of the questions that Rich asked, what percentage of the homes in your existing communities typically go into the used home market each year?

Oh, it's a very small percentage. The used homes represent those homes that we actually acquire and then we sell as compared to the brokerage activity where we are playing a broker for the sale of somebody's residence to another buyer. Both of those are down on a year-to-date basis, both the brokerage activity and the used home sale activity. But, John, how many used homes do we have in inventory?

We have about 550.

Six million dollars or so of...

Six-and-a-half-million dollars out of $34 million of inventory is used homes, and there's about 550 houses in there.

This 550 homes that you own that you are trying to sell, how many are you trying to broker?

We broker about anywhere from 900 to 1,000 or 1100 transaction a year, somewhere around 1,000 transactions a year.

It's actually, yeah, 12, 1300.

And how long is a typical loan that one of the residents in one of your communities has? What's the duration?

That would depend on new versus used. New homes you can get 20-year amortization schedules and pretty reasonable loan to value. Used, the older it gets the more of a struggle it is. There are some lenders who have significantly tightened what they will do on used home, both on rate and on collateral, in terms of down payment and even refusing to lend to homes that are older than either 20 years old or pre-HUD homes. So you can see on a used home, you know, a 10-year loan at 18 percent or 10 year at 15 percent, those are not unusual with, you know, significant down strokes.

When you say a 20-year amortization schedule, does that means it's a 20-year loan, or is it a 10-year loan with a 20-year amortization schedule?

No, it's a 20-year loan on the new.

And, so- I mean it sounds to me like maybe 5 percent or so of your residents are facing loans which are mature in any given year. And so the question is, if the financing environment is as difficult as it is, what happens to those people when those loans come due and they, you know, go to refi and there's no refi market? Have you seen homes coming back to you as a result of that? Is that something we should be worried about?

No, not because of a refi. Those situations aren't really out there. The amortization is pretty steep on the used. What you're seeing is defaults on the used in repos which, I think we've given that number a few times in historical calls. I think we have...

It's 180.

We're dealing with about a 180 repos in our total 40, 50,000 sites. So we're not dealing with a major issue as it relates to repossessions within our communities. And I think that that number as 180 has been pretty stable over the last few quarters.

The other thing I would add, John, is that there is a higher proportion of our residents on the senior side- do not use financing. And so the issue of debt coming due is a large proportion of these people don't have debt on the houses.

All right.

And if they do have debt, these are people who are easily refinanced, and they're only using it as a financial tool. So the substantially lower portion of our portfolio is the one that is meeting the resistance in the market to whatever extent it is.

Considering the fact that the financing market is in pretty rough shape today and that many of the people who traditionally lend to this industry securitize those loans, and those loans are now trading at cents on the dollar, who do you think is going to emerge to be lending to the business? And if the exit strategy of securitizing those loans isn't there, you know, what kind of rates can they offer that would be competitive?

You know, this lending question needs to get broken down into some subcategories. We have not seen a problem on the age-qualified communities with respect to our customers getting financing. Local banks or regional banks, regional financial institutions, have certainly stepped in, want the business of the senior customer from the standpoint of checking, CDs, investment, what have you. So we're not really seeing this issue over on the age-qualified part of our business. Where we are seeing it is more on the family business where your traditional buyer is more of an affordable buyer versus a lifestyle buyer. And as an affordable buyer, he comes necessarily with some potential credit issues. That's the guy who's struggling trying to financing in our communities, because the loans that have been done in the last, you know, five years have been proven to be at aggressive underwriting, and that is now being tightened up. The good news is that there are people looking at coming into the business, and there are people lending in the business. The underwriting has tightened considerably. So I think you're going to see a return to lending and capital coming into the business. We hope that with the good underwriting comes an ability to securitize these things at a more normal pace and access to that capital at a profitable basis, but that remains to be seen.

You know, when you ask about merging resources, look to the manufacturers. Two of them have made significant moves toward building a lending platform. Champion bought the CIT manufactured housing platform, and they have now hired and put in place a number of people who are experienced in this industry. And yesterday I read an announcement. I knew that [Tom Harbor] had bought a platform, a bank out at Texas, and they hired two former senior guys from Conseco who certainly know this business, so that the manufacturers are seeing the vacuum and are making moves to fill it. Some of the banks are also merging. [Wahmu] is certainly expanding. They just announced 72 branches in the Chicago area alone.

So you have the regionals. You have the origins and the triads. So there are people seeing an opportunity to make this a business and move into the traditional areas at Green Point and Conseco and to some extent [Propadia] and Deutsche filled prior to this time.

I guess to the extent that the underwriting criteria is pretty tough to meet in terms of down payments and loan devalue that the buyer may find more attractive alternatives now in the single family- continue to find more attractive alternatives in single-family homes than some of these more restrictive underwriting criteria in the in the manufactured home business.

And we will agree with that point entirely. What we're seeing in some of our markets on a single-family housing situation is some of our potential customers are able to get single-family home financing at down strokes that we would kind of raise our eyebrows at and at rates that we certainly would raise our eyebrows at. So, you know, who knows how that whole single-family housing situation is going to play out, but some of the customers who would really only have a choice from an affordable housing standpoint, to come in and experience our communities are now finding that they have access to the single-family housing market with little or no down and very attractive rates. You know, that sounds a heck of a lot like what was going on in the late '90s with Conseco and some of the other lenders in our business where you could get literally no down and long amortization and some pretty attractive rates. And that did not turn out too well in our industry. But we'll have to see what happens in the single-family housing.

But against that backdrop, you know, you guys are forecasting half a percent decline in occupancy in '03. It seems to me that if this situation persists through all of '03 that half a percent down in occupancy would be a good outcome not a sort of base case.

Well, you know, you have to kind of tie all of this together. And one of the things that I'm actually looking forward to, John, is a full disclosure of how many repos are in the business, because those will be discounted at historical discounting levels, which could be anywhere from 30 to 50 percent of the original sales prices. And those will then be available to affordable buyers. So you're starting to create the spreads that you need to make the Manufactured Home a viable alternative even with the lending rates being dramatically different, which has been not been the case always in the past. But the price of the house and the cost of occupancy- the total cost of occupancy I think will start to change. And as Tom alluded to, we're all and you all are seeing you're going to start seeing loan severities on these stick-built home portfolios start to change. And I just hope we don't have a whole disaster there, but we certainly have something happening there.

And again, let's all be mindful of the portfolio that MHC has. We're two-thirds senior. We're not seeing this on the senior side of our business, nor are we seeing it, frankly, in the major metropolitan areas. We are seeing it on a very small portion of our business where these macro issues are affecting us. And yes, in those properties, we've seen year-over-year declines in occupancy in the order of 10 percent. But that's a handful of communities within our portfolio. We do think it has hit a trough. You can look at some of our biggest family communities that are in this class. And over the last, say, 15 or 20 years you can watch this cycle. They've ramped up from, you know, 80 percent occupancy up to 95 percent occupancy and now they're back down to 80 percent occupancy again. We don't think it's going to trough much lower than that in some of these tertiary markets. We actually think that we've seen the worse and we're going to able to at least stabilize and if not, increase occupancy in those markets. We think, again, as Howard has mentioned, that much of the pain with respect to the lending situation and the repossessions has hit us. It's out there. It's being digested. New capital is coming in, smarter capital is coming in at pricing that makes sense most for our customer and for the lender, and that's a good sign. How long it takes for that to clear out may be some time, but I don't think we're seeing a deterioration in the situation, at least as a macro issue.

Great. I think Rich Anderson has a question as well.

Actually, no, why don't I yield the floor for now and come back with some questions and give someone else some time? Thank you.

And we'll move on to Louis Forbes with Merrill Lynch.

Good morning, gentlemen. John, in your comments you mentioned that a portion of the gain on the sale is being deferred. Could you explain what's driving that?

Yeah. It's essentially under GAAP, an installment sale. Because we are retaining this preferred partnership interest in the property, you take a proportionate amount of the gain and you don't realize that until that interest is liquidated.

Okay. The properties that were acquired during the quarter, when did they begin to contribute to operations during the quarter, and what might the dollar amount have been?

We started to acquire the properties in very early August- the end of July actually. I think we closed on the first group. So they started to contribute in August, and we closed on the- and that was about two-thirds of them. I want to say four of the properties we closed on in August, and then we closed on one more at the beginning of September and one more at the end of this quarter. And the amount of NOI that they contributed in the neighborhood of- I'll give that to you, Louis. That's 400 plus- about 800,000 in the whole quarter.

Okay, thank you. The RV segment of your business seems to have performed much better than other components, especially during the third quarter. Is that because of the acquisition of Tropic Winds, or are you seeing better performance from that segment?

That's the acquisition of Tropic Winds and there are some RVs that were acquired as part of diversify...

Okay.

...that are in the RV line as well.

Okay. So it's site count increases as opposed to performance, okay.

Yes.

Are you considering at all expanding the rental of homes or rental to own programs like some of your competitors are?

You know, we have, for a number of years done a seasonal rental program in our senior communities. It started in Florida, I'd say about three years ago. We are going to continue to do that program. We put about 100 and- I'd say about 130 homes in the program coming up this year. We also broker the rental of our other residence homes in that seasonal rental program. We've brought that out into Phoenix a couple of years ago, and I think we have another 30 or 40 homes that we put in that seasonal rental program. That program itself has a goal to liquidate those homes within two years of putting them into the program. We've been pretty close on hitting those liquidation numbers, so we're always, you know, re-deploying and reallocating that capital to proprieties in areas where we think that seasonal rental program will produce new home sales. It seems to be working for us.

Outside of that, you know, we will look at lease to own. It's not something we've really are excited about doing. We think it changes the dynamics of the business to a negative. The upkeep and the maintenance of long-term rental homes becomes an issue both in terms of the payroll you have to add to maintain those units and the cost of maintaining those units. So I would say it would be a last resort. I can't think, as I sit here right now, of any place that we're actively trying to create that program and do that program, but there might be a few homes in some of these tertiary marketplaces that have been given back to us that we've turned around and just started to rent them, but that would not be a significant number of homes.

Okay. And coming back to Howard's comments on the- potentially solving the inventory of repossessed homes, I've had it explained to me from one source that the product that is selling new is now different from the product that was sold and so that what buyers are getting today for a new home is different from the inventory of repossessed homes and that the price point has moved downstream and so that someone can buy the home they want for less than what some or many of the repos asking prices are. Are you seeing anything like that?

Well, yeah. I mean we're seeing it both in a quality and in price issue. Again, it's really not in our senior properties. I think in the senior properties who've demonstrated that we can sell a higher quality home at a higher price, and we'll continue to pursue that program, but in the family marketplaces repos are competition and the new home product on both a price and quality issue in some of those family marketplace is very competitive with anything the repos would be offering, and you have that whole dynamic of- you know, we don't sell a huge price on a home to begin with. You're talking about I think the new home's average sale price across the Unites States and somewhere in the neighborhood of 40, $45,000. So you're not talking a significant difference between a new home and some of the repos that were out there, and most people want a new home versus a used home. And when you're talking about the repos and then the relocation of that repo inventory and the re-setup of that inventory and the quality issues that occur when you take a home apart and try and put it back together someplace else, you know, it's panning out where that product isn't very competitive to some of the new home product that's available at a may be a higher price but certainly the quality is there to justify that price.

Right, so the inventory repos may hang around longer than expected.

Well, I don't know the source of your information and you and I will have a conversation about this probably later on today, Louis. My first reaction to that is one of the problems we've been having- because I really want to know what this is all about. But one of the problems we've been having during this last two to three years has been the resistance to discount repos at historical discount levels. And as a result there has been a pressure to maintain a certain book value or salvage value, and they have not been offered at the significant discounts that I am told prior to my joining the industry, what's an expected number. So I am somewhat at a loss to have a discussion with you about this without having a greater understanding, but my initial reaction is, as these repo inventories become available and you have to deep discount them to the 25 to 35 cents on the dollar and then you add in all the things that Tom was talking about, either relocating them or refurbishing them to put them back in the market, you're going to still come up at sales prices that are significantly less than what they sold for a new.

Okay.

Okay?

Yes.

All right.

Thank you, Howard.

Thanks.

As a reminder, press star, 1 if you would like to ask a question. We will move on to Lou Taylor with Deutsche Banc.

Thanks. Good morning. Tom or Howard, could you just walk through the reconciliation of your '03 guidance? You're looking for a rate increase of around four and with NOI growth at around three, presumably, you know, expenses at 4-1/2, but you've got some occupancy slippage in there. And how much do you have built in there?

We have occupancy slippage of one-half of 1 percent built into the low end.

All right. But how about just going from a 4 percent rate increase to a 3 percent NOI growth? I mean...

Yes. Basically what you have is if you look at real estate taxes and you look at utility expense and insurance, we are projecting significant increases in those categories of expense in access of CPI. On the utility side, you know, a significant amount of our utility expense is water and sewer, predominantly owned by municipalities. And what we're seeing- you combine that with the real estate taxes. We are seeing, from a state and local government perspective, a significant push on the revenue side for the state and local government, which translates into the cost side for MHC. We're seeing, you know, increased assessments on our properties. We're seeing increased assessments on water and sewer, as well as in terms of usage rates and just pure rate increases. On the insurance side, we don't renew our insurance until the end of February. So for the first two months of the year we have the large increases that we experienced last year of over 30 percent. And this year on the insurance side we're just conservatively budgeting a 25 percent increase in insurance rates. It remains to be seen as to whether or not we'll actually experience that. Our insurance markets can't tell us right now, because we renew next year and the reinsurance agreements haven't been formulated until January 1st. So hopefully that gives you some color on the expenses.

Okay. Now, how about going from 3 percent NOI growth to 1 to 2 percent FFO to 4 to 5? Is it, on the low end, just simply occupancy, or is there other changes either in interest or in the home sales operations?

Yes. If we're breakeven on sales, I think, we'll lose a couple of pennies over this year, so there's 2 cents there. There's a penny on- there's dilution on these acquisitions. There's a penny on stock options.

Okay. And then what gets you to the high end of the range?

High end of the range is better sales performance, which translates into less occupancy loss, which with the expenses- not much variance in the expenses but mostly the sales NOI being on the higher side as well as the occupancy loss not being as great.

Okay. Thank you.

And Evelyn [Inferno] with Corner Real Estate Advisors has our next question.

All of my questions have been answered. Thank you.

We move on to Steve [Manslon] with [Utterwise] Capital Management.

Good morning. I've a couple of questions for you. In California, family communities, could you talk a little bit about their performance, particularly in terms of rate, occupancy and home sales?

Yeah. I mean we have to kind of break out California. I would say- in three areas. There's Northern Coast, Southern Coast and Central California. I would have to say that Southern Coastal around San Diego, LA is very strong economically. We're able to sell new homes and get reasonable rent increases, given what's going on in the marketplace. Northern California, I think the economy is struggling, but many of our properties up there are under rent control regulation that puts our rent so much below what the market rent is. We're seeing no issue with respect to occupancy. We have avoided being in the new home sales business given some of the outstanding issues with respect to rent control and the litigation regarding rent control. So I'll stay away from that issue, if you don't mind.

And then in the central valley of California actually we are seeing a pretty healthy area out there, all the way from kind of the Modesto down in through, you know, even as far as Hemet. That whole central area of California is, I wouldn't say, going gangbusters, but it isn't declining. It is relatively robust. We're selling new homes, and we're getting some rent increases in that marketplace.

So really the issue with family communities are the ones in the Midwest, those few communities that you've spoken to overtime?

Yeah, I mean I could go down. I think [Wynsong], which is in Indiana, is down 10 percent in occupancy. I think Del Rey in New Mexico is down somewhere in the order of 9 to 10 percent in occupancy. Bonanza, which is a family community in Las Vegas, again, I think is somewhere in the neighborhood of 8 to 10 percent down in occupancy. The Mark, which is in Phoenix, Arizona-it's our only family asset in that marketplace-is down again somewhere in the neighborhood of 10 percent in occupancy. So it is a handful of properties. But when you start adding up 10 percent, 10 percent, 10 percent, declines in occupancy, it does have an effect on our overall occupancy on a portfolio-wise basis.

And then you'd mentioned that you have, you know, two issues with regard to your home sales, Denver and Florida. Could you talk about how you're planning to respond to those two particular areas to improve things for next year?

You know, I think we're going to start reallocating the inventory, frankly, as we watch what's going on in the marketplace. We have $35 million invested in capital in our sales operation. A lot of that is in Denver. We held on to that inventory in Denver early in the year, thinking that the market was going to recover and thinking that we're going to be able to return to near normal sales levels in Denver. I have to say we don't think that today. If you looked at the single-family housing market in Denver and the dearth of listings- I mean the listings in Denver have increased substantially. So it's a very competitive product to what we have. So I think we're going to reallocate capital away from that area and into areas like Arizona and Florida where we have been successful continuing new home sales and into Southern California in the central areas of California. East Coast for us still looks pretty good.

So I think what you're going to see is we still think we can sell homes. We need to get the homes in the right place in order to do that. We are working on expansions in Florida at additional sites for us to be sold- be able to sell new homes. And we're also continuing with our upgrade programs where we are selling new homes in communities that previously had new homes- had no new homes of sales occurring. We have an issue with one location in Florida where we've added sites on and have the capacity to add more sites on. And we are just struggling trying to get that new home sales volume to where we think it can be. We think that's really our control and our thing to do, not a market situation, and we think we're going to be successful there. So overall I think we're committed to the sales operation. I think we've seen some things in the quarter that we struggled with, but that does not mean we're abandoning that effort, and we think it does a lot of positive things for this business.

Thank you very much.

And we'll move on to Ralph [Block] with [Bay Isle Financial].

Good morning. Could you comment a little bit about whether you've seen any changes in pricing among some of the communities in terms of cap rates and that kind of thing and also how you would compare in terms of priorities for your free cash flow making additional acquisitions versus stock buybacks?

On the cap rates, we are still seeing, in senior communities, that pricing is still in the low sevens or even more expensive. You know, if you have a stabilized senior community right now, they trade at that level. In some areas, as a country like Florida, you're competing not only with other buyers but as well as, you're competing with the residents who have a right to buy the community. On the family side, we are not seeing a lot of product in the areas where we want to be. There just isn't a lot for sale, and I think in some of the markets where we- part of our strategy, I think we see the cap rates are going up, but it's not of great interest to us.

Okay, and in terms of priority, in terms of allocating free cash flow between acquisitions and stock buybacks?

I think that's- the priority is, I think as we just evaluate, you know, acquisition opportunities and evaluate what the stock price is- it's kind of hard to say. I guess what I would tell you is if, all things being equal, I think the priority is acquisitions. But, you know, at a given point in time it just depends on what the acquisition opportunities are out there and what is the share price. Two years ago- three years ago, during 1999 and 2000, we really didn't see much in the way of acquisition opportunities. And the share price was such that we, you know, pursued share buyback. You know, that- you look at this year, as we've seen from the last quarter's activity, there are some acquisition opportunities out there, and it's just a question of, you know, looking forward and seeing what's there for us to take advantage of.

Okay. Thanks.

And we'll move on to Art [Havener] with AG Edwards.

Okay. Thank you. On that same line, have you bought any shares back with your recent share repurchase program or authorization?

No, Art, we haven't.

Okay. After the College Heights transaction and all your acquisitions are complete, how much, I guess, balance sheet flexibility will you have or do you anticipate?

We will have about the same liquidity that we have now, about 75- 70 to $75 million. The remaining diversified acquisitions that we have to consummate will be funded by the Minnesota sale. So we are essentially not going to be using significant amount of liquidity.

Okay. After your cap ex reserves, how much do you guys think that you'll have with free cash flow for next year? And you can use your high and low end of the range.

I think free cash flow would be -- I'll come to that- somewhere, if you take- I don't know, I'm just trying to do this on paper. Basically I think you're going to see about anywhere from 10 to 15 million of free cash flow.

Okay. Can you give us an idea of what the Q3 and year-to-date recurring cap ex has been?

Sure. Year three- or quarter 2, 3.

The one comment I'll make on that, Art, is- as he's looking up that number, is, you know, we have announced and have completed some of those upgrade programs on specific properties. That has inflated recurring cap ex both last year and this year. We are going through a process right now of evaluating whether or not any other properties would justify capital investments in terms of an upgrade program. So if there is an issue as to whether or not we invest capital on those upgrades, I think the performance to date of those properties that we've selected for upgrades and the results we've been able to achieve by those upgrades have kind of been worth to capital that's been invested. But I don't know whether we can answer the question of how much we would be investing in next year from an upgrade perspective, since we haven't gone through that. We go through a business review of each asset and discuss whether or not the asset can justify the capital investment, and those are going to be discussions that are occurring from now until, you know, the beginning of next year.

Okay. In that same answer, I found it kind of surprising that 60 percent of the rent increases effective January 1st were going to be able to achieve a 4 percent average rent increase, especially given the high concentration of the Florida retiree communities. Can that be explained by some of these upgrades that you're referencing?

Yeah, you can trace our activity- what we try to do is invite and entice a new customer to come to our properties through providing that new customer the amenities and the homes that that customer is looking for versus his alternatives in the marketplace. That's the whole game on this upgrade program. Can we make our asset that's 30 years old attractive to a new buyer today who's looking at his retirement choices and lifestyle choices? And the answer to that, we've said, yes, in some of our communities, have invested the capital and been able to sell new homes to those customers who are quite comfortable with the rent levels that we believe represent market rents and quite comfortable paying us a fair value for the house. That has allowed us to create an ability to increase rents given that new access to that customer and given that new view with respect to what they view as a reasonable rent and a reasonable price for a house versus having to deal with all of the issues of a 30-year-old asset.

Okay.

Art, on the cap ex, the cap ex for the quarter- total cap ex is 4.290 million. Year to date, our cap ex is 10 million 58. I would expect it's going to come in between 12 and 13, but I would tell you that about 4 million of that is these upgrades that we're talking about. To give you a little color, we had originally budgeted approximately 15 million of potential cap ex this year. And as Tom was referring to, we budget- and that's the range on free cash flow, is we budget numbers initially, but the cap ex valuation is something that is almost ongoing throughout the year. There were some upgrade programs that were budgeted last year that a year ago at this time we would have said we would have done. And some of them turned out in markets. For instance, I could think of one in Denver where we just said now was not the time to engage in a large upgrade program. So we're pretty prudent about spending that capital.

Okay. I have one more- or two more questions. I'm assuming that your portfolio is a little insulated from the bad debt reserves and the write-offs, but have you incurred any net write-offs of collection costs this year?

In terms of our- well, our bad debts for the year are right now running at about 420,000, which is running about 20, 30 percent ahead of last year. Last year at this time it was a little over 300,000. Some of that is some of these issues in the communities that we've talked about in these tertiary markets, but the other thing I would caution you on is a significant amount of our occupancy loss and our bad debt is in senior communities where we are- as part of our desire to upgrade our communities and sell more houses and get sales programs going in these communities, we are taking the vacancy that we otherwise could avoid. And what I mean by that is that you will have somebody moving out in the housing stock that they're in is old. It's, you know, 1970s, late '60s vintage house. And we could, without expending capital, have that house pass hands and even collect a brokerage fee on that sale. Instead we're saying we- that house doesn't meet community standards and we would like to have it out of the community. That creates vacancy and oftentimes that also creates a bad debt, because what happens is you're handed the title to the house and rather than trying to do anything with it you're just going to pull it.

Okay. And then you would write-off the cost to move it associated with that. Right?

Yes.

Okay. That $420,000 that you gave us, you said that that's up 20 to 30 percent over last year. Does that include the late fees that you generate so that is a net figure?

No. The late fees that we generate are outside of that figure.

Okay. Do you think- it's not enough to be breakeven, is it?

I think our late fees average about $35,000 a month.

It will probably be a little- late fees should come in at about 450,000 for the year against- you may see bad debts of 600, so it may be- it'll run negative probably 100-1/2.

Okay. That's a good- the last question is, what should we expect from a dividend policy for next year? Do you think we'll see an increase given the turmoil in the industry and the slower growth?

You know, the board always considers that, and we have a meeting coming up in the next month. So that's when we'll be discussing it.

Okay.

No point anticipating it at this point.

Okay. Thanks.

And now Rich Henderson with Salomon Smith Barney has a follow-up question.

Thank you. I just want to follow up with the topic of expansions. You said that- maybe I got this number wrong, but that you have filled 96 sites so far this year.

Yes.

And your goal is 200?

Well, yes. That's our goal. I...

So you're not going to get to your goal.

I'm not going to get to- we're not going to get there.

Okay. And what makes you then comfortable with 175 filled sites for your guidance in '03?

Well, number one, I think we've dialed it down. I mean we've- our goal has been between 200 and 250. Part of the issue is simply- I mean we have some expansion coming online that we hope to get online next year that have been delayed. I can think of two offhand that we thought we would get online by the end of this year or by the second half of this year and be able to start selling. So it is- it's a question of availability of expansion sites, as well as we have expansion in areas where we really- as we were saying, our sales have not fallen off in those areas where we have, you know, expansion capacity. In Florida our sales are still very stable outside of Chicago here. Our sales are still relatively stable. We don't have expansion in Denver, for example. So it's not like we're sitting there in Colorado unable to fill an expansion. So we think the 175 is an achievable number.

And I'm sure there's certainly people from MHC listening to this call and I- if they could get online and tell you that they're going to make it, I'm sure they would be getting online right now and telling you that those are certainly reasonable numbers and certainly within our capability to...

I appreciate you teeing up that answer, Rich.

Whatever I can do. And also on the acquisitions with the remaining that you're looking to close, what are the timing of those final three that- is that this year or next?

We hope to have them closed this year. There is an out date of January 31st. So I would tell you, I think we're going to have them done by January 31st.

Okay. Last question is on the topic of succession. Any comments, Howard?

Oh, my God.

Rumors of your death precede you or something. I'm not sure.

I've seen notes but, you know, Tom has been President for a couple of years, and I'll be 65 in a year and a half. And I think the succession plan is pretty clear. There'll be a transition over the next year, year and a half.

Thank you very much.

And there are no more questions in the queue at this time. However, if you would like to ask a question, press star, 1 now. We do have a follow-up question from Louis Forbes.

Very quickly, John, you commented on the municipal cost pressures. Are those pressures being placed on single-family homes equally or is your price advantage shrinking?

Well, I think it's the pressure by every municipality to try and balance the budget shortfalls. And I can't say that they're singling out the manufactured housing product individually. I think they're all looking for any way that they can increase revenues to try and balance some of the budget shortfalls that are occurring throughout there. You know, this is an unusual environment for us where we've typically been able to, with some degree of reliability, predict our expenses to fall somewhere in line with CPI. And here you have an environment where CPI is fairly low, 1 to 2 percent, but on line items that are significant to us we're seeing frankly inflationary pressures, real estate taxes, municipal provided utilities and other utilities as well, and on insurance. Insurance alone is experiencing 25 to 30 percent annual increases in the last two years. You're not seeing the same magnitude with respect to real estate taxes or utilities. But they're in the neighborhood of, you know, 3 to 5 percent. And when CPI is running at one, you know, it's triple the rate of CPI, which is not something we're typically used to seeing on our expense side of our income statement.

Thank you.

And there are no more questions at this time. I'll turn the call over to Mr. McKenna for any additional or closing remarks.

Thanks very much for joining us today.

That concludes today's conference call. Thank you for your participation, and have a nice day.