Equity LifeStyle Properties Inc (ELS) 2004 Q1 法說會逐字稿

Good day. And thank you for joining us to discuss MHC's first quarter results. Our featured speakers are Tom Heneghan, our President and CEO, Roger Maynard, our COO and Michael Berman our CFO. This call is being recorded.

Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the Federal Securities Law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.

At this time, I would like to turn the call over to Mr. Tom Heneghan. Please go ahead, sir.

Thank you for joining us as we discuss MHC's results for the first quarter of 2004, and our expectations for the remainder of 2004. I am Tom Heneghan, MHC's Chief Executive Officer, and joining me today are Mike Berman, MHC's Chief Financial Officer and Roger Maynard, MHC's Chief Operating Officer.

After my initial comments, Roger will provide some comments with respect to property operations, and Mike will discuss our financial results in more detail. We will then open it up for your questions.

During our year-end call for 2003, we indicated that our focus for 2004 would be the successful consummation and integration of the acquisition program and the increase in core portfolio occupancy continuing to increase new home sales volumes and improving the profitability of our home sales operations. This focus already incorporates our rental rate growth expectations of approximately 4% as a result of the annual notice process we undertake each year.

To recap the acquisition program, since December of 2003, MHC has invested in 61 properties, representing over 24,000 sites. I am pleased with our success in closing the transaction, and although still early, I am also pleased with the integration of these properties into the MHC portfolio and their early performance. We have added both regional and home office support and remain focused on performing in line with our expectations.

As has often been discussed, two very different environments have impacted our core portfolio occupancy. For our age qualify properties, we have been upgrading our communities and the housing options they provide to be more responsive to the demands of today's customer. This has led to increased vacancy in these properties as we replace older housing stock with newer homes. This has allowed us to meet our customer's demand for new, high quality affordable housing options.

We now sell more homes to more customers in more properties than at any time in our history, and I believe we will continue to improve on this performance in the months and years ahead. These customers view the purchase of a new home in our communities as an attractive option and have either their own access to funds or are able to obtain reasonable financing options from local financial institutions.

Contrasting this environment is extremely competitive conditions for certain of our family properties. These properties are experiencing strong competition from alternative housing options including single-family, residential and apartments. Compounding that competition has been a lack of attractive, or in some cases, any financing options, to offer a potential purchaser in these family communities, and the supply of used homes at cheap prices due to the liquidation of repossessed homes.

Although conditions do not appear to be deteriorating, we also don't see meaningful, positive changes. We look for three conditions before positive changes occur in these communities. A cooling off of the rather robust environment for single-family homes, improvements in the fundamentals of the local apartment markets and finally, an increased availability of financing options for these customers. Although these properties represent a small portion of our portfolio, their performance negatively impacts our overall results. As a result, in the interim, we'll be focused on retaining and attracting residents consistent with our long-term view of the asset.

Although our overall sales volumes improved dramatically, we continue to struggle with the profitability of these sales. Some of this is related to the difficult environment for new home sales in our family marketplaces, primarily Denver. However, poor decisions of the past also contribute to the disappointing profitability of our sales today.

The placement of a home for sale in one of our communities is one of the biggest decisions with respect to the use of our capital. We don't see the impact of poor decision until months, if not years, after the capital has been spent. When the difficulty selling the home due to unattractive floor plan, poor design or other factors gets translated into lower gross profit on the sale.

Our sales effort has created incredible opportunities for upgrading our assets and is the key to the future of our success. We have made significant progress in understanding our customer's wants and preferences, but that progress has to be translated into profitable sales results. It continues to have our focus.

Roger will now comment on operations.

Thanks, Tom.

On the year-end call for 2003, I segmented our portfolio into three distinct groups, with group one representing eight all-age communities and low-barrier-to-entry markets in Indiana, Iowa, New Mexico, Arizona, and Nevada. These communities are in a highly competitive environment and we will continue to struggle in this market until we see repos diminish, chattel financing return and competition from single-family housing slow down.

The occupancy for the first quarter of 2004 for these assets compared to year-end 2003 has decreased by 67 sites. As you will recall, our group two represents 77 properties that are age-qualified communities and all-age communities in major areas with high-barriers-to-entry or in resort destinations. This group includes properties in Denver, Colorado, which although, currently experiencing softness, has consistently been a strong market for our product.

The occupancy for the first quarter of 2004 compared to December 31st, 2003 had a decrease of 15 sites. Most of the occupancy declined within Denver where we continue to monitor the market and have seen some positive movement in our sales activity in the first quarter of 2004.

Group three represents 26 upgrade properties and our occupancy to the first quarter of 2004 compared to December 31st, 2003, had an increase of 18 sites. 35 of our new home sales in the quarter were from these communities. We're bullish on our upgrade program and believe we will continue to see a positive effect on this segment of our portfolio.

Our sales effort for the first quarter reflects a ramp-up in sales volume as we doubled our performance year over year, but suffered at the margin. Poor margins can be attributed to the difficult housing market in Denver and continue liquidation of aged inventory in Arizona, Colorado, New Mexico, Delaware and Texas. We closed 94 new homes in the first quarter and 25% of these closings were aged housing stock that have been in inventory for more than two years and experienced a loss of approximately $250,000.

In contrast, 75% of the remaining closings had been in inventory less than two years and contributed gross profits of over 700,000. We still have approximately $2 million of aged inventory.

With respect to our park model resorts, they can be segregated into two distinct groups. The Sunbelt areas of Florida, Arizona and Texas and the northern resort destinations. Including the Encore portfolio, we have approximately 25,000 sites or 82% of our portfolio in the Sunbelt area, and we have just completed our busy season and our resorts have performed in line with expectations. Our northern resorts, which consist of over 5,000 sites, are now entering their summer season, and our initial assessment is that they will be in line with expectations.

With the recent purchase of over 22,000 park model sites, we have started to implement our comprehensive business plan that incorporates new home strategies, marketing tactics and ongoing personnel decisions. Our plan includes working with the manufacturers to produce a higher quality product that will ensure different elevations that will help us to achieve the desired streetscape that today's customer demands. We also continue to incorporate and develop techniques to cross-market our park model resorts with our manufactured home communities.

Mike will now discuss the financial results.

Thank you, Roger.

First, we'll discuss our financial performance. For the first quarter of 2004, funds from operations were 16.2 million or 57 cents per share on a fully diluted basis, compared to 18.6 million or 67 cents per fully diluted share in the same period last year. The results for the first quarter of 2004 reflect the relative stability of our core properties in a challenging environment. The results are also impacted by our previously-announced acquisitions, as well as the sale of properties in the second quarter of 2003.

Quarterly comparisons to 2003 will be impacted throughout 2004 by the $500 million recapitalization transaction we closed in the fourth quarter of last year. When giving our previous guidance to this quarter on January 27th, 2004, we specifically excluded the impact of potential acquisitions.

To provide what we believe is a helpful comparison of our core performance, we have calculated pro forma FFO per share, which excludes the impact of acquisitions in the current quarter and adjusts first quarter last year for the impact of the recapitalization and the property sales. Excluding acquisitions, our fully-diluted FFO per share for this quarter was 47 cents. On a pro forma basis, the first quarter of 2003 would have been 44 cents FFO per share, impacted by two events. Additional interest expense from the recapitalization and reduction for discontinued operations as a result of the property sales.

The first quarter represents the high season for a number of our properties, especially the PAMI properties. Furthermore, our acquisitions were closed throughout the period, thus, first quarter is not representative of the remainder of the year.

Turning to our core portfolio, which our manufactured home community properties owned as of the beginning of this year and last year. First, comparisons to last year's first quarter. Our base rental income was up 2.4%. Average base rental rate was up 4.7%. And average occupied sites were down 2.3%. Our core net operating income is up approximately 2% quarter over quarter on property revenues up 3.1%, offset by a 4.9% increase in property operating expenses. We continue to face significant increases in real estate taxes, utility expenses and insurance costs.

Excluded from this core portfolio are results from the resort communities owned as of the beginning of each of the two years. Although only 12 properties with 6,100 sites, these properties experience strong revenue growth over the prior period. As a result, overall core net operating income from both manufactured home properties and resort properties increased approximately 3.8% this quarter over last year's first quarter.

Since December 2003, we have closed on almost $138 million of equity investments, acquiring interests in 61 properties containing over 24,000 sites. Our average long-term debt balance was approximately 1.2 billion in the quarter with a weighted average rate of approximately 6.77%.

Our interest coverage was approximately two times. And our availability under our existing line of credit was $75 million as of March 31, 2004.

A few comments on our activities in the debt markets. For the past several months, we have been an active borrower from both traditional and securitized real estate lending markets. We continue to see significant demand for both our retirement communities and our resort communities, as many lenders have come to assess the latter as a stable property type, particularly those resort communities with long-term rental streams. We are doing financings with a wide range of capital providers including insurance companies, commercial banks, conduits and finance companies.

Now, I'd like to discuss our guidance for 2004. A previous guidance of $1.70 to $1.75, FFO per share had no acquisitions in it. Looking ahead, we see additional increases in expenses, particularly in real estate taxes and utility expenses that will negatively impact FFO per share.

Furthermore, we have experienced some incremental dilution due to the effects of options on fully diluted shares outstanding. Corporating this information into our initial guidance would result in revised guidance of $1.65 to $1.70 FFO per share. We expect the acquisitions we have closed during the first quarter to add approximately 20 cents of FFO per fully diluted share in 2004. This takes our guidance to $1.85 to $1.90 FFO per fully-diluted share for 2004, not including any additional acquisitions we may make.

On a run rate basis, the acquisitions we have closed to date would add approximately 38 to 39 cents of funds from operations per fully diluted share, and provide with us an equity return of approximately 8% on the $138 million of equity we have invested so far under our acquisition program.

The forward-looking statements contained herein are subject to certain risks and uncertainties, including but not limited to the company's ability to maintain rental rates and occupancy with respect to properties currently owned or pending acquisitions. The company's assumptions about rental and home sales markets, the completion of pending acquisitions and timing with respect thereto, the effect of interest rates as well as other risks, indicated from time to time in the company's filings with the Securities and Exchange Commission. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

And now I would like to open it up for questions.

Thank you. Our question and answer session will be conducted electronically. If you'd like to cue up for a question today, please press the star key followed by the digit 1 on your touchtone telephone.

As a reminder, if you're on speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it is star 1.

We'll hear first from Jordan Sadler with Smith Barney.

Hi, it is John Litt here with Jordan.

Mike, I had a couple of questions. You just said that your acquisitions during the first quarter would add 20 cents in 2004. And then you said your acquisitions would add 38 to 39 cents. Is the difference between full year -- the full calendar year versus partial quarter?

The acquisitions in the first -- yes, the acquisitions in the first quarter was 10 cents. The full year impact is 20 cents.

But you said that acquisitions -- the $138 million in acquisitions would add 38 to 39 cents.

As if we had done it on January 1.

Okay. So, the 20 cent difference is attributable to the timing.

Yes.

Yes.

Okay. Why do you consolidate PAMI?

From our perspective, it is a transaction we entered into. We certainly understand that there's a dispute relative to that transaction. I think we indicated that a trial occurred on it and we eagerly await a decision from the court.

I mean, I guess -- you mean the accountants would have to feel pretty confident that you're going to prevail to allow you to include that in the numbers.

Well, it was certainly an issue discussed with the auditors. Again, the quarterly financial statements are not an audited set of financial statements, but we certainly discussed the issue with them. They were aware of it. They did review the documents in connection with that and are comfortable with our disclosure.

If, for some reason, the trial went against you, how much of the first quarter results would have to be restated?

I don't think it is a question of restating. I think we would be divesting of the investment that we made, and I think there would be a gain or loss on the sale in connection with that investment.

But again, we feel very good about the position that the MHC principal's put forth in the case and we eagerly await a decision from the court.

And how much of the first -- how much on an FFO basis was in the first quarter from PAMI?

The whole acquisition, I think, added 10 cents. My sense is that PAMI was slightly more than half of that in terms of its impact in the first quarter.

And you guys disclosed the amount of equity on that, I think it was 69 million, but we never really got to the debt component. But if we look at how much your debt's increased on your balance sheet, it looks as though maybe that was more like a $260 million acquisition with debt and equity? Would that be in the ballpark?

I think it is overstated slightly. It's in the magnitude of 200 -- 225 I would think.

And can you talk more about the seasonality? Because we were -- we thought there was more seasonality summer than winter. Maybe you could just walk through why there was such a big seasonality impact in the first quarter and why PAMI, in particular, had such a big seasonal impact.

Well, there's a few assets in the PAMI portfolio. And again, there were a number of efforts in connection with this litigation to put forth a confidentiality and limit disclosure related to what's going on. That was initiated by the PAMI side of the transaction so I do want to be careful about what I do say. But in any event, there were a couple of properties in that portfolio that were more transient than we would have typically been interested in. It came as part of the portfolio. We think there's an opportunity to create more permanent revenue streams in some of those assets.

There is an order from the court that is kind of enforcing a status quo so we're not able to make any operational changes to those assets. But again, PAMI is creating some of that seasonality.

What would you expect that -- the seasonality to be from the park business, as opposed to your traditional business? What are the high quarters and the low quarters on your percentages you could assign to that?

Well, definitely, the first quarter is the high season. You'll see the fourth quarter also a little bit less than what's going on in the first quarter. And in the second and third quarter, you have the slow season.

Now, again, we feel much more comfortable talking about the core business that we've been operating on the park model resorts. You know, for example, on that order of magnitude, you're talking about $13 million of revenue. I would say 10 million of that occurred ratably throughout the year with the additional $2 to $3 million occurring in the first quarter and in the fourth quarter. Most of that geared toward the first quarter.

You also should take into account that some of the acquisitions that we have consummated in this first quarter are northern destinations that have a summer season and are geared toward more activity in the summer months.

Let me see if I got this right. So you're saying there's, let's say, 13 million in, I guess, NOI from the park business?

No, no, no. I was talking about our core park model business as in --

Oh, in your core portfolio.

Yeah. In the core park model business properties, we've owned for years now, it's about a $13 million revenue business with about 10 million halving ratably throughout the year, and the seasonality of the additional revenue is first and fourth quarter weighted, most of it to the first quarter.

We are pursuing investment that our like that for the most part to the extent they're Sunbelt destinations. However, we're also adding some northern locations into the portfolio. They're not as large of an investment as what we've got in the Sunbelt, but there is still some of that.

Okay. And I think Jordan Sadler had some questions.

On the additional pipeline here, in terms of acquisitions, I thought you had previously said that PAMI was not included in the $140 million of equity number you guys were talking about putting to work in the fourth quarter when you discussed it. Is there -- are there other acquisitions teed up?

We have additional pipeline, which is consistent to our previously announced acquisition program, Jordan. There's a couple of additional assets that are in there. Order of magnitude, it's about 200 million of gross purchase price, subject to due diligence, you know, going through contracts.

Okay. And how would that be funded through debt?

Combination of debt and, as we have previously mentioned, some of the sellers are taking back OP units.

And was that sort of what you were talking about, Tom, when you said in the Sunbelt, you're presuming some additional properties. Are these also RV park communities?

Of the 200 million under contract, I think roughly 60/40 in the split park model communities to manufactured home communities. 60% being park model communities. 40% being manufactured home communities.

Okay. And the cap rate on that, is that similar to the 8% number you guys had previously talked about?

It's a little difficult to kind of give a cap rate. It all depends on which transactions actually get consummated. There's a couple of premier assets in that group that are at very aggressive cap rates from a normal asset perspective, but we think they're certainly worth it in terms of the quality of the asset and what it can provide for us. And the other stuff is in cap rate range is relative and consistent with what we've been doing in the last few months here.

So, on a blended basis, it might be a little bit lower than that number?

Yes.

Okay. And I guess I just wanted -- I had a question on -- it seems same store revenues, or your revenue assumptions came down for the full year, and I'm talking about the core portfolio from 4% expectation for the full year to now 3%. Could you give us maybe a little bit more color on that? You talked about higher expenses, but not really about the revenues.

I'm not sure that that has changed in terms of our guidance. I believe our rate, which we do discuss in every call, is still in line with what we discussed historically. I think we also commented on the impact of the occupancy decline that had, for the most part, occurred in 2003.

Again, what we're dealing with on a comparison to 2003 is the occupancy decline that's happened throughout 2003. There is still some of it happening in this first quarter, but not as dramatic. And that's forcing those occupancy issues on a total revenue growth basis. So, you're seeing the rate come through and you're also seeing the impact of the lower occupancy, some of which occurred last year.

I don't think we're changing that number. I think our guidance that's been revised really reflects some higher than inflation cost pressures we're seeing on operating expenses. This has been an issue that we've been dealing with for a number of years now where, although CPI had been a fairly low number, we have seen cost pressures primarily on line items related to insurance, real estate taxes and utilities that have been outpacing the inflationary index by some magnitude. And I think that's what's getting rolled into these revised, kind of core estimates that Michael discussed.

Lastly, I think -- you talked about occupancies, Roger. Just curious if you had a breakout between the all-age versus the senior communities. I know you talked about how many sites you lost during the quarter, but was curious as to what the occupancies are in each type of portfolio. If you'd do it that way.

On the group one, I think, Roger was talking about, which is the eight family assets, I think our occupancy percentage for that group has to be in the 70%-type occupancy range. For the stable portfolio, it's in the mid to low 90s percentage. And for the upgrade, it's in, I'd say in the 85% range.

Again, I'm guessing, but given what we've done with the portfolio over time, I think those numbers are approximately what's going on. We've created some incremental vacancy in those upgrade properties that we're now selling new homes into. We really haven't done anything with respect to our capital to address vacancy in the eight economically-challenged assets, for lack of a better world.

And our stable portfolio continues to perform in line with the historical measures.

Okay. Thanks for the time.

And moving on to Lou Taylor with Deutsche Bank.

Thanks. Good morning, guys.

Maybe just a different cut at the seasonality question. What would you guys estimate on the PAMI acquisitions or just acquisitions for the quarter? You're going to get 8% return for the year, how much of that return comes in roughly the first quarter and how much would come in the fourth quarter?

I think that's a little difficult to talk about the PAMI transaction in isolation, but I think we could give you a little more clarification relative to the guidance we've already given. I think we've set 38 to 39 cents for a year on our investment. That will equate to roughly an 8% yield on the investment.

If you look at what's gone on in terms of the guidance, we said that 20 cents of it will be in '04. So you're not seeing all of it occur in '04 given the timing of the acquisition. We've also given guidance that 10 cents happened in this first quarter, and 10 cents will happen for the rest of the year.

So, if you took 10 cents that's going to happen for the rest of the year, meaning second, third and fourth quarter off of the annual guidance, you're going to get some indication for what will happen in the first quarter. And if you subtract what we already have in the first quarter, which is that 10 cents from that number, you're going to get some indication for the magnitude of the impact in the first quarter that was not in the transaction given the timing of it.

Okay. Gotcha.

Second question pertains to the RV communities that you already had going into the year. And how was their performance year over year?

The properties -- our core park model communities had a very strong first quarter. Double digit-type revenue increases on both rental rate and occupancy gains. Florida is a strong market for both manufactured home and park model communities. The RV business and the park model business are experiencing a lot of customer interest, customer demand.

If you'd looked at some of the statistics being issued by the RV industry, the baby boomer demographic is certainly interested in this product and that is now getting reflected in some of the performance of the assets in that sector.

Okay. And then just last question. Is there any changes in your plans for the preferred operating units that are callable in the third quarter?

Well, we really haven't indicated a plan with respect to those preferred operating partnership units. They are callable, I think -- I believe at the end of September. We are evaluating our option, including taking out the preferred or replacing with some other form of capital or leaving it in place. So we are evaluating all of our options. Some of which is going to be impacted by where we are on capital structure and other acquisitions we're looking at.

Okay. Great. Thanks.

We'll now hear from Art Havener from A.G. Edwards.

Thanks. I do have a couple more questions on the PAMI transaction. Can you give us an idea of how much sunk costs you've had so far into this process, and have those been expensed?

No. I don't believe they've been expensed. Most of our costs related to that transaction involve actually consummating the transaction with the MHC principles. We are somewhat involved in the ligation, but we're not a party to it.

The MHC principles certainly hired their own legal counsel. We have our legal counsel and have some exposure to the litigation cost. Order of magnitude, I think we're talking somewhere in the neighborhood of half a million dollars, but I'm not really -- it could go a little bit either way on that.

Okay. I also have a question regarding -- the fact that you consolidated them in the first quarter and you said it's somewhere north of 5 cents per share impact, and I believe you said that if the deal falls through, you would recognize a gain or a loss on your divestiture of that $69 million of equity. The way I understood it was is that this transaction was off of a fixed price. So, how would you recognize a gain or a loss on that investment?

It would be the difference between what's happened relative to our ownership of the investment and the proceeds we would get back, upon being forced to liquidate that investment.

But wouldn't you just get the $69 million back?

Yeah, but there's been changes in the assets and liabilities from February -- mid-February until whatever date that decision would occur, if it ever would occur.

Okay.

So those are the issues that are -- there's changes in the net assets from that business compared to potential liquidation of that as a result of court proceedings.

Okay. So presumably, you would get a larger amount back and that would cover the 5 cent share that -- per share impact that you recognized in the first quarter?

No. I'm not sure I understand the question, but we have the investment, and to the extent we're forced to liquidate it, I believe we're looking at taking a -- eliminating the net assets that have occurred within our consolidated financial statements and return getting $69 million back.

Okay. I guess I'm struggling with the -- you recognized a 5 cent or more impact in the first quarter, but that was -- essentially, that's not a cash impact, right? I mean you didn't receive the cash equivalent.

The portfolio is generating cash.

Right.

There are bank statements that are receiving that cash, yes.

But it's not coming to MHC at this point?

I don't really know the answer to where that cash ended up. I mean, we'd have to take a look at that. But I think it's been in our financial statements. It's in our cash.

Okay. On the -- can you comment on how the portfolio performed in the first quarter? Was it above your expectations or in line? The PAMI portfolio? I guess what I'm getting at in this case is, is it still being managed correctly, given all of the litigation that's going on?

I think it's still being managed in a status quo -- in fact, there's an order from the court that says no extraordinary changes in the business can occur with respect to that portfolio. As a result, it's been managed in a manner similar to what has happened historically. I think they had a good first quarter.

Again, there is a rather robust environment in Florida. This transaction has a good size of the portfolio located in the Florida marketplace and has experienced a fairly good first quarter.

Okay. Moving away from PAMI real quick, has there been any progress related to the closing of the Monte Vista acquisition?

Yes, there's been progress. We're still not closed. We're still working towards closing and working through some of the final issues.

Okay. Still expected sometime this summer?

Yes. I think sometime before end of June would certainly be our expectation.

Okay. Last question. And Mike, maybe you can address -- in relationship to the guidance you provided, what is your home sales expectations for this year, in terms of the impact to FFO?

Just the home sales themselves?

Well, yeah. I mean, the home sales operations. Are you expecting a flat impact or --

Well, the guidance that we give assumes a zero profit --

Okay.

-- in that.

That's what I was after. Thanks a lot.

Our next question comes from Allen -- Alexander Goldfarb with Lehman Brothers.

Good morning. Just a few follow-up questions. First, just recapping Monte Vista, is that -- so that hasn't closed yet, so that's not part of the 138 million of equity that's been consummated. Is that part of the 200 million gross potential?

That is correct.

Okay. So, sounds like, you know, seeing as it's a pretty good asset, that could be a fairly sizable chunk of the 200 million relative to some of the other stuff you're maybe looking at?

Yes. There's actually two large assets in that potential $200 million pipeline that we're looking at. One of them is Monte Vista, the other one we're subject to confidentiality on.

Okay. But it might be an aggregate, something like 50 million or less? Or more?

I'm sorry. One more time with that?

In aggregate, the two properties could be around 40, 50 million?

It'd be more than that. It'd be over half.

It'd be over half. Okay. Okay. Great. Moving on, just going back on the PAMI questions, sort of taking where Art was heading. If PAMI is taken -- if it goes against you and you have to divest of PAMI, it would seem that your -- your FFO number for the year, the 185 to 190, would go down or if you get to keep PAMI, that number would go up.

No. I don't -- I think in some of the guidance and discussion we've talked about, you know, PAMI's activities are geared towards, very much towards the first quarter. And as a result, you're not seeing all of what PAMI would generate in a first quarter, given the timing of the transaction in late February. The rest of the year for that portfolio, given that it's not in season, is a rather flat contribution.

Okay. So the 50% plus benefit in the first quarter you received is, you know, obviously isn't representative then of the year.

Correct.

But it obviously, if it goes against you, this will impact directly year '05.

Yes, yes.

Okay. Okay. And how much -- on the acquisition front, a lot has been discussed of PAMI by both you and another company out there. And then also, obviously, these -- the Monte Vista-type assets, these high-quality assets have been discussed. How much regular stuff is out there that's of your caliber that you guys would consider buying that's either for sale or that's being offered at a price that you would think makes competitive sense to buy it? Just I'm based -- you guys have been talking about acquisitions. One of your competitors has been -- just did a recap talking about acquisitions. But in the press, it just doesn't seem like there are that many portfolios out there. Can you give us a flavor of the activity potential?

Yeah. Sure. I mean, I'll give you a broad brush stroke of the marketplace that we see out there. You know, despite being a fairly aggressive pursuer of acquisitions, MHC has lost out on a number of potential transactions, primarily on the manufactured home side. High qualities assets on the manufactured home side, you know, we are taken aback in some cases by how aggressively they trade. We recently saw one transaction where we were rather low on the bidding list. The winning bid, I think is probably a cap rate that's right on top of the financing cost. So, we're -- there isn't that much going on out there on the manufactured home side, but what we're seeing in terms of high-quality assets is that they're pursued by a number of financial investors and strategic local owners of the manufactured home product.

On the resort side, broad brush stroke, we see similar characteristics, frankly, with the manufactured home community business in terms of the opportunity. Although the manufactured home community is -- the community business is a fairly fragmented business with many owners out there, the opportunities for consolidation are limited, given the scarcity of the asset and the desire for many of the local players to pursue some of these transactions. We believe that's also going to occur on the park model resort side of the business.

There are something in the neighborhood of -- from our estimates, you know, call it 500 assets that we think fit our criteria in terms of geographic location or geared toward the park model resort business. And we think that many of those assets are sales in terms of whether or not there will ever be a transaction on those.

Okay. So they're 500 assets in the park model, but basically, from what you're saying, it sounds like there's, I mean, outside of these deals that you've discussed, it doesn't sound like there's really that much left out there that's tradable.

I think we believe it's a fairly finite opportunity. I think we've discussed that before. We'd like to be pleasantly surprised with the opportunities that exist out there, but we're already seeing a closing down on the opportunities and some fairly fierce competition for some of the assets out there.

So basically, if we look at the recap and the acquisitions you guys were going to do, I mean, basically, after this next round of 200 million, if that's done, I mean, that's basically it.

At this stage of the game, I would say, yes. We are pursuing some other transactions. We are discussing it with some other owners out there. Nothing's come of it. And we've also seen some properties trade at prices that we couldn't really justify.

Okay.

So as I sit here today, I'd agree with that, although, we're hopeful that we're actually going to find something to invest in.

Okay. And then just finally, can you just refresh us of the increase in costs? You mentioned some new regional offices for doing the park models. Can you just tell us a bit about the incremental costs on the overhead side of PAMI, of the park models, et cetera.

Well, the PAMI transaction had a management company built into it that is, you know, probably order of magnitude, you know, $3, $4 million a year-type cost structure. We, for the most part, are going to absorb that management company and help us integrate the other transactions we're pursuing. In addition to that, we have added home office support and the accounting functions in Chicago, and also regional support to directly manage some of these park model resorts.

How much is that?

You know, I -- order of magnitude, I -- it's half a million dollars or more, but I honestly don't know what that number is.

Okay. Thank you.

And moving on to John Stewart with Merrill Lynch.

Good morning. Most of my questions have been answered, but just one quick follow-up question on PAMI. Synthesizing all your comments about the seasonality and the run rate from the contribution from the first quarter acquisitions, is it fair to assume that there might be, Mike, another 5 cents of contribution in the second -- or in the next three quarters if that acquisition were to be -- if the court were to rule against you there? Or am I missing something?

I don't think it would be that much, John, over the next three quarters.

Less than 5 cents.

Yeah.

Okay. And then, Tom, in your comments, you mentioned that you guys are actively doing things to retain tenants in your family communities. Can you give us a sense of what kind of things you're doing to retain or to maintain occupancy in your family communities?

Well again, I think the comment related to the eight properties that we talk about as economically-challenged, and I think my comments related to we are doing things at those properties that we believe are in line with our long-term view of the assets. What that means is we struggle putting capital into certain assets where we don't think we really create value.

For example, in some of these assets, you could put in a rental program after you take in the cost of the rental program, including the capital, to enable you to get into that program versus the value you created in the property itself. Sometimes that is a value-diminishing proposition or a push. We still don't see that as something that we're very much interested in. Until we see an opportunity to liquidate the capital, given a stronger demand for the product.

However, we are looking at some of our properties that are in the economically-challenged marketplaces that offer us a potential opportunity to convert those assets to a senior focus. There's two properties, I believe, out of the eight, there may have been a third that we are evaluating as to whether or not capital put into that asset to attract a retiree or a senior would end up with a value-creating proposition.

Got it. Okay. And then, Roger, would you mind going back over your comments on the gross profit and the -- specifically, as it related to the aged inventory? I'm not sure that I caught all of what you were saying there.

Right. We had some aged inventory that we're selling off and created some losses, and then in the Florida market and other areas we've seen, you know, are in-lined expectations for gross profit. So, I think it was about a $250,000 loss on the aged inventory and over a $700,000 gain on the other -- which is about a 75% of our other sales for other communities.

Okay. Thank you.

And as a reminder it is star 1 if you have a question or comment.

We'll hear now from Ralph Lockwood, Essential Wright Publishing Company.

Good morning. Just a few questions. What are you projecting for occupancy rates through the balance of the year? Are you expecting them to continue to stabilize?

Well, we would -- on the bulk of our portfolio, which we would call the stable assets and the upgrade assets, frankly, we hope to increase occupancy. I think we lost 15 sites in the stable assets from primarily in Denver, and we gained, I believe it was 18 sites in the upgrade asset. So we're net up 3. I think we'd like to see that number grow. And that is the bulk of our portfolio and I think we're very pleased with the performance of the bulk of our portfolio in terms of the opportunities to sell new homes and the marketplaces that we operate in. So for the most part, I think we feel very good about this portfolio.

Again, we have about eight assets that have been a drag on overall results. We lost, I believe, 67 sites this first quarter. A lot of that was in a couple of assets that continue to face repossession issues.

What we are seeing out there in the marketplace, frankly, is a much quicker reaction on repossessed homes than historically has been the norm. I'd say two years ago, we would have seen lenders carry the repossessed inventory for some period of time hoping to liquidate it. What we are seeing today is that they're putting that out for bid fairly quickly once the home does go repo, and that is resulting in some pretty quick action in terms of homes leaving our communities.

I think we're still struggling with what to do on some of those assets. I think we discussed that maybe we might take two or three of those assets and try to gear them more towards the senior marketplace. But we really are waiting for signs, generally, of a more robust opportunity in those properties before we start to insert more capital.

Okay. And sort of following along that line, do you see any significant improvement in the fortunes for some of these more difficult communities should interest rates rise, mortgage rates rise by maybe 50, 75, 100 basis points? In other words, how economically sensitive do you think these are?

That's a topic that has been discussed in the industry as to what is the -- what is the impact of a 50 basis-point or 150 basis-point increase in interest rates. You know, we think it's going to take more than 50 basis points to start changing the dynamic.

In fact, what we really are looking for is not just the increase in interest rates, but also a slowdown of the availability of capital. The economically-challenged assets are essentially affordable housing. When you're talking affordable housing, you're talking about people who have little access to capital. And in some respects, the single-family home market, given the aggressiveness with respect to their lending practices, has provided them access to capital. If they tighten up their underwriting standards, even a little bit, frankly, and with a little nudge in interest rates, our product becomes much more attractive and much more competitive with that as an alternative.

Okay. And one last question. Do you see any kind of abatement in these CPI plus increases in some of these expenses over the next few quarters? Or is this something we just have to assume it's going to continue through '05 as well?

We've seen some significant slowdown in the increases in insurance costs. In fact, we're going through -- we've recently gone through evaluating our insurance coverage option this first quarter. I think we're pleased with the rates that we're seeing. They've come down from prior year increases.

As it relates to real estate taxes and utility costs, you know, I think the real estate taxes is the result of a rather robust general real estate environment out there that's washing through in terms of assessed valuation. As long as that market continues to be very healthy, I think you're going to see some pressure on that line. And on the utility expenses, I think they're dealing with some of the commodity cost-type pressures that people have been talking about.

Okay. So some progress on insurance, but you don't really see any on the other two.

Yeah. And insurance was one of the ones that was really going up dramatically. I think a year ago, two years ago, we were seeing 30% increases in our insurance costs. Mike might be able to comment a little bit on where it is now, but I think it's much lower than that.

Okay. Thank you.

We'll now hear from Dan Gluck with GWA.

Hey, guys, how you doing?

Good.

Just wanted to know how does the lack of future acquisition opportunities impact your decision regarding your dividend policy going forward?

It's going to play a significant role in -- again the decision with respect to dividend policy is a board level decision. What they will be taking into account though is, you know, uses of capital and balance sheet flexibility. And as we evaluate uses of capital, to the extent we do not believe alternative uses of capital are preferable to returning capital to our shareholders, I think that's something that's going to weigh into the decision process, but also going to take into account balance sheet flexibility and potential other uses of capital within the balance sheet.

And when will the board be discussing this?

The first time we revisit the dividend policy will be in the November board meeting. I think we've indicated that from the get go, that we're going to give us essentially a year to see what's out there and discuss the opportunities and intelligently put forward proposals to the board, given activities that happened over the last few months.

Okay. Great. Thanks.

And we now have a follow-up from Alexander Goldfarb. Mr. Goldfarb, your line is open.

Sorry. Just a quick follow-up. Maybe you addressed this and I might have missed it. But you had said the original guidance was 170, 175. Obviously, it's been revised up to reflect the acquisitions, but you said the pro forma base guidance is 165 to 170. The 5 cent delta is --

Additions to expenses in primarily real estate and utilities --

Okay.

-- and a little bit in dilution in our share count.

Okay. Perfect. Thanks.

It does appear we have no further questions.

Mr. Heneghan, I'll turn things back over to you for any additional or closing remarks.

Well, thank you for your time on our call today. We will be available for questions, to the extent you have further questions, after the call. I think our contact is Mr. Berman. And feel free to give him a call. Thank you very much.

And that does conclude today's conference. Thank you and have a great day.