Equity LifeStyle Properties Inc (ELS) 2002 Q4 法說會逐字稿

Good day everyone, and welcome to this Manufactured Homes Communities Fourth Quarter Earnings Conference Call. Just a reminder, this call is being recorded. Our featured speakers today are Howard Walker, MHC’s CEO; Tom Heneghan, MHC’s President; and John Zoeller, MHC’s CFO.

Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the Federal Security 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. And now I will turn the conference over to your host, Mr. Howard Walker.

Thank you [Sylvia]. Good morning everyone, and thank you for joining us as we report on MHC’s performance. Today MHC announced on a fully diluted basis that its funds from operations were 63 cents per share for the fourth quarter, and $2.48 per share for the year. In our customary manner, John will give you the details following my brief remarks. And then we will go to Q&A with John, Tom and myself.

We are pleased with the solid performance of our core business as it continues to show its resiliency in today’s challenging environment. In our age-qualified communities, where it is the lifestyle that attracts new residents and retains existing residents, we are doing well and are maintaining occupancy levels, through low turnover, re-sales, and new sales, notwithstanding today’s economic environment. We have a product that meets the needs of future retirees. And the demographics continue to improve the prospects for this business.

In our all age markets, our success has always been based on our relative affordability. In the current environment we see strong competition from other housing options, such as new stick-build home developments, where low interest rates, combined with aggressive lending practices offering full funding have created an attractive housing opportunity.

This increased access to stick-build homes has not only impacted our market, but the apartment market as well. Further, while we have seen this condition in tertiary markets, we are now seeing the impact to some degree in some of our major markets, where there are lower barriers to increasing supply.

Denver, for examples, has been experiencing a softness in all segments of residential real estate that compete with new home development. We want to emphasize that the performance of MHC’s core business is strong. It is our expectation that our assets in our major metropolitan and destination retirement markets will continue to yield positive results for us in 2003.

There are variations in our portfolio performance, depending on the location and the local economy. For instance, we continue to see good market conditions in our communities located in the Pacific Northwest, the East Coast, Florida, and California, and in the Metropolitan Chicago area. Market conditions essentially remained stable in Arizona, Nevada and Utah, while we are experiencing some decline in Indiana, Denver, Albuquerque and Iowa, where our all-age communities are primarily located.

For example, while sales have slowed considerably in Denver, we had strong sales in Florida, the East Coast, especially in Virginia and [inaudible], and in the Chicago area. Please remember that in selected communities we see some occupancy decline as an opportunity to attract stronger tenancy, as the economy revives.

MHC is experiencing the same pressures on expenses as commercial real estate has been reporting in general this past year. We have seen our property and general liability insurance premiums increase by 30-40%. And our real estate taxes have risen by 7% on a portfolio-wide basis, while most of the increases are concentrated in states such as Florida, Arizona, and Illinois.

Healthcare insurance premiums saw another increase of 25% this year, as carriers seek to increase profit margins. Notwithstanding these factors, MHC expects that our portfolio will again perform in a positive manner, assuming that the economy continues to perform in no worse a manner than we have seen these past 12 months.

Our business model has been tested in many ways in the past three years, from such factors as an over-supply of housing inventory, loose credit underwriting, and the decline in the number of financing resources doing business in manufactured housing loans. This period was then followed by the general economic conditions we are experiencing today.

Nevertheless, MHC has reported strong performance throughout this period. We continue to provide guidance that MHC will perform in a solid manner this year as well, all things being equal, and barring a serious event that substantially impacts the U.S. economy.

We usually comment on the manufacturing and financing components of the manufactured housing industry. The manufacturers are reported to have shipped less than 170,000 homes in 2002. And our expectations are that 2003 will probably be similar. The major manufacturers have positioned their companies to sustain themselves as we ride out this part of the cycle.

To their credit, they have done a number of things that we consider positive. For instance, a number of companies have reviewed product lines and improved their homes in a manner that makes manufactured housing more attractive to buyers. Some have created financing platforms through acquisition in order to reduce their vulnerability in the future to the coming and going of third party lending sources. And finally, they have restructured their organizations to be more efficient.

The same cannot be said of many of the manufactured housing lenders. But we do feel that we are in a better position today to resolve past issues, disclose the depth of delinquencies and repos, in order to absorb this supply, and thereby stabilize the industry.

In the meantime, there continues to be a group of existing lenders doing business. Most, if not all of them, have revised their credit guidelines, which, while more restrictive, are nevertheless designed to avoid the problems that caused many companies to leave this business. We expect that it will be a difficult year, but that we will see more resources emerge as the year progresses. Now John will report on our financial results.

Thanks Howard. The results for the year 2002 reflect the relative stability of our portfolio property performance in what has been a continuously challenging economic environment. Before getting into some of the numbers, I would like to recap some of the significant events in 2002.

In March, MHC acquired Mt. Hood Village, a 450-site park model RV resort in Oregon, for approximately $6.8m. In August, MHC closed on the acquisition of Tropic Winds RV Resort, a 536-site park model RV community in Harlingen, Texas, for a price of $4.8m.

In September, MHC completed the restructuring of its College Heights Joint Venture. The transaction resulted in the sale of 17 predominantly all-age communities in Michigan, Ohio and Florida, totaling 3,220 MH sites, for approximately $5.1m in cash, and $11.4m of preferred partnership interest. In addition, the venture retained about $56.7m of outstanding property debt.

As part of the restructuring, MHC retained ownership of a 361-site property in Clearwater, Florida. This restructuring resulted in the gain of approximately $2.5m, of which $800,000 is currently recognized in 2002’s financial statement.

In December, MHC completed the acquisition of what we call the Diversified Portfolio. This acquisition resulted in the purchase of nine age-qualified communities, totaling 1,735 manufactured home sites, and 1,632 park model RV sites, at a price of approximately $89m. This purchase price included the assumption of $44m of property level debt.

As part of this deal, MHC sold Camelot Acres to the seller of the previous properties - a 319-site property in Minnesota - for approximately $14m. This sale of the Minnesota property resulted in a fourth quarter gain of approximately $12m.

The net effect of these transactions is to replace 18 predominantly family communities, totaling 3,500 sites in Michigan, Minnesota, Ohio and Florida, with eleven age-qualified or park model RV communities, totaling approximately 4,300 sites in Florida, Arizona and Texas.

And finally, as we previously announced, MHC has resolved the litigation at our Santa Cruz property. Our general and administrative expense for the fourth quarter includes a $500,000 charge related to this matter.

With respect to our core portfolio, our base rental income is up 3.9% for the quarter, and 4.1% for the year. Our average base rental rate component is up 5.6% for the quarter, and 5.3% for the year. Our average occupied sites are down 1.7% for the quarter, and down 1.2% for the year.

Core net operating income is up approximately 2.5% for the quarter, and 3.4% for the year. This core NOI number consists of total property revenues, which are up 3.9% for the quarter, and 3.4% for the year. Property operating expenses increased approximately 6.4% for the quarter, and 3.5% for the year.

Excluding our expansion communities, total occupied sites for the core portfolio are down approximately 1.5% for the year. With respect to our expansion during the quarter, we filled 58 expansion sites, bringing to 154 the number of expansion sites filled, which is short of our goal of 200 sites for the year. During the quarter, six new expansion sites were brought on line. And in total for all 2002, ninety new expansion sites were added.

With respect to our debt, our average debt balance was $752m for the quarter, and $732m for the year, with a weighted average interest rate of 6.4% for the quarter, and 6.8% for the year. Our interest coverage was approximately 2.7 times for the quarter, and 2.6 times for the year. Our availability under our credit line is currently $65m.

With respect to our projections for 2003, and our guidance in our press release, at presented we project that the performance of our portfolio in 2003 should be essentially the same as 2002. We have not seen any indications in the economy, the financing environment, alternative housing markets, or our individual markets, that would lead us to conclude that conditions will change from those experienced in 2002.

Based upon this view, we project that FFO should be essentially the same in 2003 as in 2002. You should note that our projections are based upon the following factors. Our core base rent growth is expected to be approximately 4% for the year, based on the rent notices sent out so far. And assuming current economic conditions continue to impact occupancy, overall revenue growth should be between 2-1/2% and 3%.

Core operating expenses are expected to grow in excess of CPI, due to increases in insurance, utility expenses, and real estate taxes. Our resulting core NOI growth should be approximately 2%. Sales operations we assume to run at break-even or better. And I would like to emphasize that we will continue to follow our plan to run the home sales program, with a continued goal of selling more homes in more of our communities.

The completed sales of the properties in Michigan, Florida, Minnesota and Ohio, coupled with the reinvestment of the capital through the completed purchases in Florida, Arizona and Texas, should cause approximately three cents of dilution in 2003. In addition, MHC will be expensing stock options, with an expected initial dilution of approximately a penny a share.

Finally, I would like to emphasize that our projections assume no acquisitions, dispositions, or share repurchases for 2003. And now I we will be open for questions.

Thank you. The question-and-answer session will be conducted electronically. (Caller Instructions.)

And our first question comes from [Kevin O’Shea] of UBS Warburg.

[Kevin O’Shea]: Good morning. First question, comparing your guidance now versus what it was in the third quarter call, I think the low end previously was 1-2% FFO growth, with 50 basis points of occupancy erosion. What is your view currently with respect to occupancy erosion? And from a trend perspective, what has sort of changed since then?

[Kevin], what we are saying in our guidance is that what we know right now is what we have experienced in our communities in terms of occupancy decline for 2002. And all we are saying is if that were to continue into 2003, we have experienced this year about a 1.5% occupancy decline. And so we see that type of a decline in 2003.

One of the things I would like to say is when you look at our occupancy decline for this year, you really have to put it in perspective as to where and how that occupancy decline is occurring. Of the 1.5% decline, about 60% of that decline is predominantly in nine communities, in some of these markets that we have been talking about over the last two years. It is family in Las Vegas and Phoenix. It is Iowa. It is Indiana. It is New Mexico.

We have also seen some decline in Denver this year as well. And that has contributed to the decline from the all-age side. But the other thing I would like to say is we have got about 40% of our occupancy decline is in roughly two dozen senior communities, where we have these upgrade programs going, where what we are saying is as part of our upgrade of these communities, to the extent there is old housing stock that is becoming vacant, we are allowing that housing stock to leave the community, because we feel that in the long run our business plan is to sell lifestyle and to seller a higher-end type of community experiencing.

So in roughly those 24 communities – and they are all senior communities – that is where you are seeing some of the decline. The rest of our portfolio, about 60% of the sites, is basically flat in occupancy. So our issue for 2003 is going to be can we, through our upgrade program and our home sales initiative, avoid some of the occupancy decline in these upgrade communities.

And then the issue with respect to the all-age communities is just that is really just a question of what will the single family housing market be in 2003. What will interest rates be? And right now all we are saying is, based upon where things are at, we just have to wait and see.

[Kevin O’Shea]: Okay. Well a couple of follow-up question related to that point then. So the nine all-age communities where 60% of the occupancy erosion has occurred, what is your current occupancy level in those communities?

In those communities it is roughly in the – for most of them it is in about the mid-70% range, between 72% and 75%.

[Kevin O’Shea]: And what is the turnover experience then with that group of properties?

In those properties the turnover is in the neighborhood of 15% to 20%. And overall turnover for the portfolio this year has been about 11.

[Kevin O’Shea]: Okay. So in looking at perhaps some continuing occupancy erosion for this year, is it your sense then that this incremental occupancy erosion – and obviously I don’t know where it is going to come from. But when you kind of build out your pro formas, are you expecting to see in ’03 as much of the deterioration in these nine communities? Or do you think there might be sort of some slippage in the rest of the portfolio?

I would say we are still looking at those areas. Maybe Denver has been added a little more to the list than it has historically. The thing that we are dealing with, frankly, isn’t an acceleration of people moving out of our communities to seek other housing choices. Our turnover on the out is essentially stable with what we have experienced in prior years.

What we are having difficulty with in some of these very competitive marketplaces is that new customer who now has a variety of very competitive housing options, be it apartment options or single family housing options, that we are in some pretty tough competition with.

So as we look at the world today, we don’t see that competition ebbing. We continue to see the apartment industry offering free rent in many of our locations where we have all-age communities. And we continue to see a lot of liquidity being afforded to home buyers.

So that is the thing we are struggling with, with respect to some of these all-age communities. It isn’t so much an acceleration of people leaving our communities. But it is enticing a new customer to come to our communities.

[Kevin O’Shea]: And you had mentioned, Howard, that I guess the loan criteria has tightened for the MH buyer. What is your sense about the typical loan package that a prospective buyer is being offered today in the market?

They are actually looking for some equity, which in our industry could be as little as 5-10%. But the essential difference is that they are reducing the amortization schedules, so that there is actually an equity build-up, and you don’t have this upside down environment that we have been experiencing with the securitization environment in ’97, and where you had amortization schedules lengthening out to 25 and 30 years, and the down-payments were, if not illusory, very, very thin.

[Kevin O’Shea]: In the past you have noted Howard that many people in the industry estimated that the level of repos was around 100,000 units. And with shipments of about 175,000 units, and demand of about 225,000 units per year, that it might take about two years to absorb that 100,000 repo level. Is your sense, with Conseco’s recent bankruptcy filing, or just additional information you have gathered over the quarter, changed with respect to where you think the repo level is today?

I am still fearful that it is at the 100,000 level. And the difference between the last quarter and today is that I think we are going to see a change in attitude, and a desire to liquidate that portfolio as they process through the bankruptcy, [Kevin], so that maybe the year and a half to two year period of absorption is really starting.

The interesting thing that is going on in the business right now is, frankly, for those people who have capital, some of the most affordable housing product that exists out there right now is the manufactured housing product. You can get your hands on repossessed inventory at say pennies of the replacement cost of that inventory. Except many customers don’t have that capital.

And therefore they have to go and seek that capital. And that is the issue that this industry is facing, with its access to capital has basically been constrained, while access to capital for a single family house has basically become much more available.

So for those who have the capital and have the cash walking around, they could look at a single family house and the appreciation in the price of the house, and compare it to a value of buying a manufactured home, and determine that the manufactured home is probably a better buy. But those who are having to borrow to access that capital can get cheaper financing in the single family housing market than they can in the manufactured housing market.

[Kevin O’Shea]: Okay. One last question. John, looking at the home sales operations, the gross margin relative to the third quarter was compressed a little bit. Is that simply because the mix of new home sales as a percentage of the total increased over the quarter, and it is a lower margin business?

The gross margin part of that, [Kevin], was in certain areas of the country. We wanted to move to some model close-outs. And so we were -- obviously we had some pricing pressure, because we wanted to move inventory that was a little bit on the older side.

[Kevin O’Shea]: Okay. That is it. Thank you.

Our next question comes from [Jordan Sadler] of Salomon Smith Barney.

Hi. It is [John Lute] with [Jordan Sadler]. A couple of questions. First, you had commented that your guidance for ’03 assumes no acquisitions, dispositions or share repurchases. Is the message that you are done with some of the repositioning? Or is that just a baseline assumption?

It is just a baseline assumption [John].

So should we expect that there will be some dispositions? I mean I think about these nine all-age communities that are sucking down your occupancies. Is that something you might blow out this year?

I think we are constantly looking at the portfolio, obviously, and trying to look at acquisition opportunities as well. And part of it is a function of pricing. Frankly, some of our all-age communities right now we wouldn’t sell, because we don’t think, given the market conditions, it would be the right time to sell the communities. And others we certainly can look at periodically. And I think every year we evaluate our portfolio. You may see some activity, and you may not. I think a lot of that depends on whether there is a buyer out there.

’02 was a fairly active year. Would you characterize it that way? That is the way I would characterize it. Would you characterize it as fairly active? Or would you characterize it as typical?

I think it was fairly active. I don’t think you are going to see that type of repositioning.

So there will be something, but something less than what you did last year?

Yes. I think so.

So, just to recap, so the dispositions were clearly at higher cap rates than the acquisitions, which is why this thing is negative and will continue to weigh on ‘03’s numbers?

Yes.

You ran through weak markets. I was wondering if you could just go through those one more time, your weaker markets overall?

It is going to be Indiana, Iowa. It will be family product in Arizona, and in Las Vegas. It is Albuquerque, New Mexico. That is pretty much – if you wanted to account for the nine communities, I think I basically got it.

Operating expenses, you think they are going to go up more than CPI. Clearly this year they went up by quite a bit more than CPI, at least some of your operating expenses. Can you quantify how much you think they are going to go up? I mean I know your NOI assumptions are 2%. I mean should we just back into it? Or is there anything there that is still a moving target that you are worried about?

I think you just back into it at this point. We obviously are concerned about real estate taxes. I have some concerns about utility, specifically municipal utilities, because there is obviously revenue pressures at the state and local level. And then insurance, we renew our insurance at the end of February. And that is just a process we are going to be engaging in over the next few weeks, as to what our insurance increases are going to be for this year.

I think you had said real estate taxes were up 7-1/2%. I guess it is probably pretty safe to assume that is going to happen again.

It is probably a safe assumption.

If not greater. And so I guess as I look at it, what percentage of your total expenses is real estate taxes?

Eight percent.

In your all-age communities, there is nine weak ones, low occupancies. Were you able to push rents at all? Or are rents going down?

We are doing modest rent increases in those properties, nothing – I mean CPI type based rental increases. Again, we are not seeing an acceleration of the move-out. We are having difficulty enticing people in. And we have, as kind of a business matter, allowed vacancy to go, and allowed that level to find its own balance, so to speak, with the marketplace, and have not tried to purchase occupancy or buy occupancies through a number of programs.

So we haven’t really entered into say buying homes and renting them out, or accelerated our desire to be lenders to customers. We often find that the value you create by capitalizing the revenue stream on that is directly offset by the capital you use in either purchasing a home or making the loan. So we really haven’t done that, not that we wouldn’t consider it in certain markets if we think there is a turn in the marketplace and we want to take advantage and create some activity. But when the marketplace is in its current condition, it is kind of fighting an uphill battle.

Is there an opportunity to convert to the age-qualified or not?

No. That is very difficult to do.

On the senior communities, I guess the 24 senior communities, how much are you increasing rents there, the ones you are in the process of upgrading?

In the upgraded communities, it depends. But some of them are in the middle of some CPI agreements and will come off of those agreements over time. Others we have seen rent increases in the double-digits. And overall, when you see 5.3% rate growth this year, a significant amount of that rate growth is coming from some of those upgrade communities.

So it could be you are closer to 10% in those communities?

Well I think it is in the order of 100 basis points above what we are getting in other places, on average. If you just split the country in half, which we run two divisions, the Eastern half being most Florida and the East Coast, I think our rate growth is a little better than 6%. And in the Western division it is around a little less than five I think. So it averages out to somewhere around 5-1/2 or 5.2 or something like that.

So, and you could tell the same story, frankly, on occupancy. If you split the country in half again and looked at our Eastern half, which is the East Coast, and again Florida, occupancy has been essentially flat to stable, where on the West Coast, which includes those areas that we mentioned were down I think 600 or so – 500 or 600 sites overall year-over-year.

What would you estimate a fair cap rate would be on your portfolio, if I were to do an [NAV] calculation?

We typically don’t discuss valuations of cap rates on our portfolio. I guess I would answer the question by saying assuming somebody gave me access to all the capital I wanted and told me to go duplicate a portfolio such as MHC’s, I couldn’t do it. We have many what I would call irreplaceable or scarce assets. And the marketplace for those assets is extremely aggressive. They very frequently ever go up for sale. And when they do go up for sale, there is a very competitive environment for those properties.

Right. And I guess the implied cap rate on your portfolio is 7-1/2. And what you are suggesting is, and let’s use that number for argument’s sake, that you could not replace your portfolio for that kind of a cap rate. Would that be fair to say?

Yeah. That would be fair to say.

If you could replace your portfolio for a nine cap rate, I assume you would do that if an opportunity presented itself.

You mean would we buy at nine?

Yes.

Yeah. Depending – tell me what quality asset we are talking about. But if it is an asset that is like what I already own, tell me where it is and put me in touch with the seller, because I am the buyer.

Well I don’t know that there is a seller. But there is clearly a portfolio worth a billion seven, trading today at a 9-3/4 cap rate.

But you said was it our portfolio.

Right. No, and I – granted, there are distinctions between the portfolios. But I was curious in your appetite there, if that portfolio became available.

Frankly, I think we should limit our comments with respect to MHC and MHC’s portfolio. And I don’t think we are prepared to comment on anything else but that.

Okay. I think [Jordan Sadler] has some questions. [Jordan]?

Hi guys. I just had one quick question regarding the RV sites, and the performance throughout the fourth quarter. Obviously a stronger quarter from a seasonal standpoint. But the total number of sites looked to be up about 80% I guess from last year. But income is not up a commensurate amount. Can you just discuss the experience there, and how you see the income going forward in ’03, maybe on a quarter-by-quarter basis?

Sure. Well the first thing [Jordan] is that you see the sites go up because a significant amount of our purchases in diversified happened in the last quarter of the year, as well as the Tropic Winds purchase. So our park model RV sites are going up, because of the repositioning of the portfolio, and this acquisition in Oregon and the one in Texas.

With respect to RVs for next year, I think you will see that the first quarter is typically the best quarter. The fourth quarter I think is going to – you will see that less than the first, but pretty close. And then the second and the third quarters you will see a dip. When you look at it on a full run rate, we think of park model RV income will be classified in that line. For ’03 it is going to be in the $11m range.

Okay. Fair enough. So that is sort of – okay, that makes sense, $11m. And then just one other question on the assets that you have invested in, and the occupancy sort of run off as you have upgraded them. How many more communities are there, would you estimate, within the portfolio, that represent similar opportunities, and you might initiate during 2003?

Well what I would tell you is some of these 24 that we are talking about, we are in the process of the upgrade program. We are not completely finished. And then really what it depends on is how we can execute. In order to do a decent upgrade program, you need the right people in place, because if you are going to put significant capital into that asset, and you expect a proper return on it, you just can’t go off and start remodeling clubhouses without an idea of what it is you want that community to be. So just the process of getting it done takes some time.

The other thing I would emphasize with our upgrade program is it is more of a looking at the market as well. I think there is an internal aspect of execution. Then it is also looking at the market. An example – we were going to do a substantial upgrade in the Denver area this year. And, as we said, the Denver market has turned significantly. We have tabled that upgrade, and don’t know when we would do that again. It is all a question of whether we think the reward is there for doing these things.

So we really have to evaluate it. The communities I am talking about are some prime communities in Florida, Arizona, Las Vegas and Southern California. And that is kind of - right now that is where you see our upgrade focus, is in the retirement vacation destination community. But again, we will look at the portfolio as market conditions dictate, and upgrade it accordingly.

We would also emphasize that we distinguish between recurring maintenance and an upgrade program, so that anything we say on an upgrade program, it is tied to a market. It is not to be confused with our continuing efforts to maintain our properties.

Okay. So I guess just to sum it up, I mean it looks like 17% or so of the total communities you own of the full 141 are being upgraded. And that represents – 17% is really only of the senior or age-qualified communities. Would you say that is a good sort of run rate to assume at any point in time you might be turning and looking at opportunities at that sort of level going forward? Or would it be declining or increasing?

[Jordan], I guess what I would say is that when we talked about our upgrade program in the past, we spent $4-1/2m this year on major upgrade programs. Last year we invested about $5m. We could certain envision another $5m. But one of the things we are doing right now is we are kind of picking the low lying fruit, is I guess what I would say.

There are communities where we just – it is pretty obvious to us that there is a return there, and you can take the communities from a B community to an A community by just doing these upgrades. And you can charge rents and attract better residents. Once you get beyond that group, then it becomes a tougher analysis. And you would just have to sharpen your pencil and wait for what market conditions are at that point in time.

I wouldn’t put a run rate on forever and ever that we are spending $5m a year in upgrades. I don’t think that our portfolio would require that.

Okay. Thank you.

Moving on to [Richard Paoli] of [ABT] Investments.

Hey guys. I wanted to revisit the asset sale that you did. Did you disclose what the cap rate was on that pool of assets?

Yeah. It was a little bit north of a nine.

A little bit north of a nine. And what was the average rent on those, and the occupancy again?

Boy [Rich], I don’t have that with me. But you are talking Michigan and Florida. Michigan in the area of 350 to 400, and Florida family in the area of 300 to 350.

Okay. So you would say comfortably above 300?

Yes.

And would you say the average occupancy is above 80%?

Yes.

Okay. It sounds like you guys got a bad deal then, because there was another public company that just bought some assets for an eight cap, according to them. Would that be fair? Or do you think that there is some interesting pricing going on?

We are not familiar with what you are talking about. I think that we think that we executed a good transaction for our company and our shareholders. So I think, again, we will keep our comments restricted to MHC.

Okay. How would you say the interest for additional dispositions of the family stuff – I mean what do you have left in MHC?

Well we have significant family assets. And I guess one of the things we would say is our all-age communities is a good portfolio. I mean if you look, we are in places like [inaudible], Delaware, Washington, D.C., Denver – although it is problematic now. We are in San Jose, in Southern California, and the Pacific Northwest. We are in areas where there are supply constraints for all-age family type of housing, in California, Pacific Northwest, and the East Coast.

So I would not want to tell you that we are trying to get out of the all-age business. We think that if you are in the right areas, it is a solid business. And we think it is going to come back. We think in the long run – we think for our whole portfolio, our business model of 100 basis point rent increase is over CPI and expenses of CPI, is a model that will sustain itself over time. And what is going on in the marketplace right now is not changing that view.

So is it fair to say that you sold all the – or most of what you are looking to get out of in the old age sector?

No. That wouldn’t be a fair –

No. That wouldn’t be fair.

Would be?

Would not be.

Would not be. Proportionally, I mean I don’t want to nail you to a particular number, but you don’t have any assumptions in your guidance. But yet you are not done with your program. So I mean – and I know it takes time to get these things to work out. But how much are you looking over a multi-year period of - that is still on your target list to kind of cull from your portfolio?

I think our view is certainly long-term, and also would have to be characterized opportunistic. I can tell you that some of the properties that we do not think fit long in our portfolio are at occupancy levels that I don’t think are representative of a stabilized occupancy, given current economic conditions. I do expect them to return to a stabilized occupancy level, and be a much more attractive sale for us. And I am willing to hold those properties until market conditions return to a point where I think I can realize the value that is in that asset. We are not a distressed seller.

Right. And that is why I said kind of long-term. I mean, but proportionally, of your ex the number of all-age community houses that you have, home sites, what proportion would you look to cull? I mean, another 10% from here? Is it another 25%? And I know I am not going to hold you to a time frame. But if you had your wishes, and there was a buyer out there, and occupancies have improved, I just want to get a sense of –

I understand what you are saying [Rich].

Where do you want the ultimate mix to wind up?

I think a decent assumption would be that over time you might see 10% to maybe 15% of our all-age communities, we would think that those would not fit into the portfolio long-term.

Okay. Thank you.

Our next question comes from [Paul Ardanado] or Mercury Partners.

Thanks very much. Most of my questions have been answered. But I was wondering if you could let us know, or compare the performance of the RV communities versus the full-time residential properties in this environment.

Sure. One thing I should note with respect to our view of the RV and the RV investments, we typically look for properties that have a significant – and when I say significant, a majority, or 60-70% of their revenue stream coming off of either park model homes, which are essentially a cottage type or a small manufactured home located on a site, or long-term annual revenues from essentially repeat customers with RVs. So when you are looking at our business, where we don’t have as much of a transient component to that revenue stream as the word RV would suggest.

But I would say the RV industry today is doing, I would say, well – not great. Florida is doing fairly robust. Rio Grande Valley in Texas, I would say it is stable. And Arizona is a little soft in certain marketplaces. And that is soft after experiencing some pretty healthy rent increases over the last five years.

And what is the average occupancy of those properties?

The average occupancy? Given that 60-70% of the properties have a long-term revenue stream, you are going to probably be somewhere around – I mean on a weighted basis, you would say, okay, if 60% of the property is year-round, and then the rest tends to be seasonal, where basically you are 100% occupied in the types of areas where we are looking in January/February, it starts to tail off in March.

You have to do kind of a weighted occupancy on RVs. So take that as three months of the year you are at 100%. You are at 60% essentially for the year. Then there is another few months where you are at – you are going from that 60 to 100.

Okay. And would you expect to increase your exposure to this niche?

If we can find properties that fit in with our overall plan, and then that has been to target properties that are in or near locations where MHC already has a presence, has a manufactured housing component, we are looking at RV components that are attractive to a more senior RVer, a more seasonal RVer, somebody who is looking to stay longer than daily or nightly type of experience – so much more of a resort type experience. And to the extent we find those assets in areas where we do business, I think we would be interested in looking up.

Okay. Thanks very much.

Moving now to [Brian Legg] of Merrill Lynch.

Hi. Looking at your occupancy of 92-1/2%, can you break that out into the two different categories, all-age and age-restricted?

Our age-restricted is in the area of about 96%. And all-age, probably weighted is in the mid-80s to high 80s. I mean I don’t have the exact numbers in front of me. But I think that is how it would fall in.

And where was this a year ago?

I think you have seen in the all-age, you have seen – on a weighted basis, you have seen about probably a 3-4% drop. And in the seniors you have seen, overall almost nothing.

And the call it 1-1/2% drop again in ’03, will all of that come from all-age? Or will some of it – ? You talked about some weakness in the age-restricted.

Well it isn’t weakness in the age-restricted. It is simply – again, what I would say [Brian] is that there is a difference between our allowing vacancy to occur, because of a longer-term upgrade program, where we could have somebody move into an older home that isn’t really in conformance with the community, as opposed to somebody who is leaving due to economic conditions, we can’t get – as Tom was saying earlier – somebody to come in.

I think, based upon what we are seeing right now, and if you were to take that and put that into next year, I would say, again, 60% is going to come from the all-age side. And 40% would come from the senior side. And that is if we can’t get sales traction in the senior area.

Okay. And that 40%, would you categorize the vast majority of that from your upgrade program? Or will some of it just be general economic environment and lack of financing?

I think most of it is just the upgrade program. I think that the buyers in the age-restricted communities have access. Either they have capital, and they can pay cash for the house, or access to capital to buy the house is reasonable. When I say reasonable, it is not at the Chase, Triad, type of Conseco rates.

And keep in mind, one of the attractions of our product, and certainly it holds true for the seniors, is the fact that you don’t have to spend a lot of money to get in. If somebody who is selling their house for $200,000, looks at a $70,000 home as either a cash deal, or they are just more sophisticated in terms of liquidity, and they want to finance some of it. But those people can get financing.

Right. They go to their local banks.

Yeah. They go to local banks. And if it is Florida, they go to Florida. And they love those customers all the time. They have got money to put in the bank.

Yeah. Again, just to add to add to John’s comments, if you again split the country into the east and the west, I think sales were up overall in the east year-over-year, which is mostly senior properties. And new home sales were down 80 some homes in the west. And principally Denver was off nearly 50 new home sales.

So you are seeing the difference in the environment. Those who have capital, or who have access to cheap capital are still buying product, given the affordability aspects of it. Those who can’t access capital by themselves, and have to go out and look to the lending segment, are finding availability of capital restricted in our industry compared to other places.

And our next question will come from [David Harris] of Lehman Brothers.

Good morning all. I know this has been going on for some while. And I will keep my questions brief. How many Conseco-related repos in the portfolio at the moment? What is the status?

We have about 90, [David]. And predominantly 90% of those are in the western part of the United States. It kind of follows the same theme that Tom has been talking about in terms of regions. The status of those are Conseco has not been paying rent. They have announced, as part of the bankruptcy, that they have stopped paying site rent.

And we are viewing those as – we are evaluating what is going on in the Conseco bankruptcy, vis a vis our rights, and evaluating what we wish to do with those houses.

And that would include making a possible bid to Conseco on those properties?

We have purchased a handful.

It depends on the quality of the house, and whether or not it fits with the community or our potential for upgrading the community, or whether or not it has serious deterioration and it is just not worth it.

Okay. That kind of leads me – the conversation on Conseco leads me into my next question, which is you guys, I think, indicated that you are anticipating brokerage fee income to be roughly comparable in ’03 to what it was in ’02. What should we look for in terms of potential for that to improve on a forward basis? Does it rest on resolution to the financing situation, and something happening specifically in Conseco?

The brokerage revenue stream will follow the general economy and the resurgence or reemergence of some form of stabilized environment for all of us. So as we see the stick-build mortgage loan environment kind of return to its original or historical rates, and we see the affordability margins between our product and stick-build return to historical margins, you will start to see brokerage income improve for all of us in the industry.

Okay. Did I pick up a reference - ? I think maybe you had mentioned a sort of two/two and a half year clearance period to see your way ahead on the financing side. Or was that a mistake on my behalf?

I think I was referring to the absorption of the repos.

Okay. So would the situation in Conseco now in Chapter 11 - ? And is this the final chapter of the horror story? Can we see a light at the end of the tunnel?

I think there is a lot brighter people than me that may know that. But I –

They are working on Chapter 12.

But you know, I think that you have a fairly – the remaining players may or may not elect to leave this business for business reasons. But I am not aware of any other portfolio that has serious problems that we do business with.

There is nothing behind this Conseco situation?

You know, I don’t know [David]. I wish I did. But my feeling is Conseco will start to do whatever it has to do to liquidate the portfolio, and reemerge as a servicer. They are making sounds as if they want to remain in the lending side of the business. I assume that is going to be dependent on whether or not there is any availability of capital to them at numbers that make sense. But I am really looking for the industry to stabilize, and for possibly a couple of other lenders to enter the industry with a little more discipline than we have seen in the past from some of the people who have exited.

Okay great. It wouldn’t be the same conference call unless I got a question on the big picture with you Howard, is it?

Yeah. Thanks [David].

All right. Thanks gentlemen. Thank you.

And our next question comes from [Lou Taylor] of Deutsche Bank.

Yeah, hi. Our questions have been answered. Thanks.

Moving now to [Jay Loop] of RBC Capital Markets.

Thanks. Good morning. Just two quick follow-up questions on earlier questions. I am here with [Dave Lanco]. What are the chances, given the margin pressure you have seen in the home sale operation, that the income actually turns negative in 2001? And on the broader market picture, can you give us some sense of, other than existing community expansions, are any of your private market competitors doing any significant development at this time? And I will wrap it up there.

The development and access to development capital has pretty much ceased. It is frozen. And frankly, there wasn’t much development going on in areas where we did business. Most of the development was in other areas of the country. What was the other question?

Oh, just following up on [David]’s question about the income from home sales, given the margin pressure you have seen, and the shrinkage in that contribution this past year. What are the chances that you see that business actually having a slight or a larger negative contribution than next year’s operations?

You know, I would doubt it would go negative, because there are things that we can do to reduce our capital invested in that business, and the expenses of running that business. We haven’t chosen to do that. We still think we have a very vibrant home sales business. And we continue to look at it as a long-term add-on to our existing core portfolio business.

If we needed to focus on reducing costs and capital in that business, I think it is fairly easy to liquidate some positions we have in that business, and return much more to a, what I would say, Century 21-type brokerage operation, where we are just brokering a sale between Mr. Smith and Mr. Jones. And that always has and continues to be a profitable business, that I think generates close to a million dollars or so of profits for us.

Right now you are seeing that getting eaten up by difficulties with respect to new and used homes. But we could adjust the business model to fit a new reality. We don’t think that it is time or necessary to do that. So I guess that answers the question.

Thanks.

Moving now to [Ralph Block] of Bay Isle Financial.

Yeah, the company has been a pretty active acquirer of its stock in the past. And do you have a handle on, or a feeling for the relative attractiveness of buying stock at current prices, versus perhaps acquisitions or community upgrades, or debt reduction?

I can say we always look at alternative uses of capital. And that does – and this is a board level discussion. It does involve re-acquisition of company stock. I think it was – what quarter we announced - ?

We have a million share authorized repurchase program right now. We have not to date bought any shares back under that program.

And that frankly involves Board level discussions, executive committee level discussions, that happen on a quarterly basis with the Board. So –

Can you tell us whether it looks like it is a low priority or a high priority? Or can you give us any thoughts there?

You know, we don’t prioritize it that way. We kind of look at it from a value and allocation of resource point of view [Ralph].

You know, opportunistically using our capital in the best place for the best return, be it investing in our existing assets, be it buying new assets, or be it buying back our existing stock. I think if you look at our history, you have seen us do each one of those things at the appropriate time.

Right. And just one other question. Can you give us a kind of a rough ballpark estimate of the kinds of terms that might be available by today’s somewhat more conservative lenders, for someone to finance either a new home or a repo?

I can give you a little bit of background on that. It really depends on a couple of things. It depends on what is the term of the loan, in terms of is it going to be a – what you are seeing is 240 to 360 month terms.

These are on new homes.

On new, low/hi section homes.

There is a difference [Ralph] between new home financing and used home financing in the industry. Used home financing has deteriorated considerably. So the numbers John are going to be talking about are new.

You probably can’t get a loan longer than at most 15 years on a used home in all likelihood. And then you are seeing rates anywhere from 8-1/2 on the low side, with all the right credit scores and a healthy down payment, to 11-1/2 on the high side. So it really all depends on what their cycle score is. It depends on what their employment history is. It depends on are they 5% down, 20% down? Is it a 10 year loan, 15 year? Or is it going to go up to 20 or 30?

So they are really pricing in risk a lot more accurately, it looks like, than they have been in the past.

Yes. I think the underwriting in the industry has improved dramatically.

And our next question will come from [Alexander Goldfarb] of Lehman Brothers.

Hi. Good morning. Just had some quick P&L questions. First off, on the G&A you had mentioned there was about $500,000 in legal expense that was in this period. I know that there is some ongoing litigation. So what should we expect going forward as a run rate? Should we still keep that $500,000 model in, or increase it, decrease it?

Yeah. The $500,000 is a one-time charge to cover resolution of the litigation. With respect to our ongoing initiative in California, those expenses are not reflected in P&L. Those are capitalized. And we disclosed that in the 10K.

Okay. Then – oh, I don’t have the K yet. Can you just give me a rough idea what the breakout is between expense and capitalized legal expenses?

Well with respect to our California legal initiative, we capitalized those expenses. In the past year those expenses have totaled – let me see if I can give you that number.

And these are expenses that are still ongoing?

Yes, although it is hard to put a run rate on, because it depends if you are going to trial or not. Trials are obviously very expensive. But during the course of the year, it was approximately $5m of legal cost.

And that was just California for the pending litigation? Not for the case that was settled?

Right.

Okay. And what was the total amount for the case that was settled?

The total cost of that is $500,000.

So that is it? Everything just was expensed in the period?

Yes.

Even though it may have occurred through other periods?

No. That was the cost of settling the case, plus past expenses during 2002 for the case.

Okay. But they all get rolled up in that $500,000 figure?

Yes.

Okay. So with the pending $5m that has been capitalized in 2002 for the ongoing California litigation, let’s just hypothetically say that is resolved in the first quarter of ’03. Then that will see a one-time $5m expense?

No. That number is based upon the success of – the accounting literature basically would tell you that what occurs with those expenses depends on what the ultimate outcome is with respect to the property. There is a change in use concept. And what I would refer you to, so that we don’t get into a long dissertation on GAAP, is that if you look in our 10K that we will be filing shortly, you will look in the legal and accounting policy area, and you will see a disclosure on that.

Okay. The next question is on the home sales, the margins seem to have really compressed. I think last quarter it was around 19%. And this quarter it went down to roughly 14%. Can you – I mean is this an ongoing trend, and we should expect the margins just to keep eroding? Or were there a few one-time things? I am assuming that, going back to –

Basically there was a – we basically did a lot of year-end close-out sales on models. And so we offered some incentives and some more favorable pricing than we had earlier in the year.

Okay. So just standard let’s close them up before the year ends?

Yes.

That stuff.

We manage our inventory in this business, because we don’t want it to get old.

Okay. So going forward for ’03, should we expect sort of a resumption to what it was like through ’02, without the fourth quarter?

If you look at all of ’02, we averaged gross profit for new home sales $14,000. In ’01 it was $13,700. So we would expect that we can maintain those margins.

Okay. And then just getting back to G&A, so G&A would go back to its normal run rate?

Yes. You take the $500,000. The only thing I would reiterate is that expensing stock options is going to [inaudible].

Okay. That is fine. And then more on the home brokerage, the home selling expenses – I mean you certainly sold a lot in the fourth quarter. Yet home selling expenses was less than the other quarters in ’02. Can you just explain that or talk about that?

Well it is timing of – basically there is some timing on payroll. In some cases you reduce payroll, because the sales initiative doesn’t have a lot of momentum. And then it is also advertising and promotion. In this business, depending on the region where you are at, you basically build up an advertising and promotion effort to get home sales. And you have to understand, in most cases you are not selling a house, and somebody comes in and orders it or agrees to buy it, and they close in two weeks.

You may have a sale with a very healthy, non-refundable deposit, that is put down in March. But the people don’t want to close until Autumn, because that is when they are going to move down to Florida or move to Arizona. So you expend money at different quarters of the year that result in sales in other parts of the year. So the point is that I think you need to look at it year-over-year.

And our final question is a follow-up from [Jordan Sadler].

Hi. Yeah. It is [John Lute]. If your acquisition and disposition program in ’02 was on the margin dilutive, and you are making no assumptions about acquisitions and dispositions in ’03, but you do some, does that suggest that your estimates would be too high, because you continue the strategy of selling some of those low quality assets and replacing them with credit quality assets?

Yeah. I mean if we just sell assets and don’t acquire, it will be dilutive.

And even if we sell and buy what we are looking for, it may be dilutive as well, because we may want to make a capital allocation decision in the long-run.

Okay. Thank you.

And there are no further questions at this time.

Well thank you very much for joining us. And, as always, we are available if people need to get further clarification. Have a nice day.

And that concludes today’s conference call. Thank you everyone for your participation.