Equity LifeStyle Properties Inc (ELS) 2005 Q1 法說會逐字稿

Good day everyone, and thank you all for joining us to discuss ELS first-quarter results. Our featured speakers are Tom Heneghan, our President and CEO; also Michael Berman, our CFO; and Roger Maynard, our COO. This call is being recorded.

Certain matters discussed during this conference call may contain forward-looking statements in the meanings of the federal securities laws. Our forward-looking statements are subject to certain economic risk and uncertainty. The Company assumes no obligation to update or supplement any 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 today as we discuss Equity Lifestyle's results for the first quarter of 2005 and our expectations for the remainder of the year. I am Tom Heneghan, Equity Lifestyle's CEO. And joining me today are Mike Berman, Equity Lifestyle's CFO, and Roger Maynard, Equity Lifestyle's COO. 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.

The results for the first quarter of 2005 reflect the lifestyle business we operate with investments in over 275 properties with more than 100,000 sites. Doing our year-end call for 2004, we indicated our focus for 2005 would be to begin realizing the potential of this larger and more vibrant portfolio.

Improving both our new home sales volumes and the profitability of our sales operation is a key goal. For the first quarter of 2005, we achieved both. I think there is still more progress to be made.

Including new homes sold by a third-party dealer operating in one of our properties, we sold 127 new homes in the quarter, up 33 new homes or 35% from the year-ago quarter. Included in these volumes are sales of both resort homes and cottages. As we have discussed before, many of our recently acquired properties allow our sites to be used for either recreational vehicles or factory built cottages, sometimes referred to as park model homes. These resort cottages are smaller versions of the factory built homes we have been selling in our communities for years. They are attractive to recreational vehicle owners who desire the same active lifestyle available in our community but want the lesson (ph), the on-the-road lifestyle that they previously enjoyed. These cottages are also attractive to customers who desire the lifestyle available at our property but who have no interest in the ownership of a recreational vehicle. At an average price of $40,000, these cottages represent attractive and affordable second homes or vacation homes, especially when combined with the amenities and attractive locations of our properties.

Importantly, we also achieved these higher net in sales volumes, while improving the profitability of our sales operation. For the first quarter, our sales operation generated income of 1.9 million compared to a loss of $100,000 in the first quarter of 2004.

Another focus for 2005 was how we utilized our sites to generate revenue. This involves not just occupancy but also yield management technique focusing on average length of stay and rate structures. Given the significant change in the makeup of our portfolio, comparisons to last year are difficult. However, what we can say is that we made great progress in improving how we use our sites.

Our goal coming into the season was to convert more of our sites to an annual or seasonal usage and to actively manage the more transient sites to maximize revenues. For the first quarter of 2005, we not only increased our annual and seasonal site usage compared to our budget, but we're also able to get higher rate on the remaining sites used by our more transient customers.

I cannot understate the level of attention these goals had within our organization and want to recognize and thank our employees throughout the organization for their efforts. The first quarter was a busy time for us, and our results reflect that effort.

More importantly, we also see opportunities. For some of our locations, demand exceeded our ability to provide sites to our customers. During the first quarter, we averaged over 5,000 calls a week coming into our central reservation number for customers wanting to enjoy our Sunbelt location in the peak season of January through March. This call volume excluded the substantial number of reservation requests made directly to our properties. We are also working on programs for next year that will allow us to better manage this demand and create customer loyalty, allowing us to channel this demand to availability throughout our portfolio.

In addition to our focus on operations, we continue to evaluate and make progress on our various expansion and development opportunities. As a result of our acquisitions, we now have more opportunities than at anytime in our history. Roger will provide an update on our progress. However, in addition to our own internal efforts, we have been in discussions with various third-party developers about some of our properties and locations. Most of these discussions are at a very preliminary stage, but we are attracted to the prospect of teaming up with experienced developers, who are willing to invest their capital, while allowing us to retain an interest in the property through a ground lease or other form of joint venture.

Finally, we have begun to actively market some of our affordable housing properties for sale. Our efforts will be to redeploy some of our capital to properties more focused on lifestyle. We will continue to reposition our Company with the goal of being the premier provider of lifestyle housing option for the Baby Boom and retiree demographic. We have successfully assimilated our acquisitions and continue to look for additional opportunities. Our ability to execute on the opportunities available to us both operational and strategic is the key to providing attractive returns to our shareholders.

We are pleased with our results for the quarter, but we are also cognizant of our shortcomings compared to the opportunities available to us. Roger will now comment on our operations in more detail.

Thanks, Tom. First, I would like to discuss occupancy in the portfolio. In the first quarter of 2005, 38,679 of our sites were occupied by manufactured home owners. 13,058 sites were occupied by annual RV customers. 7,175 sites were used by seasonal RV customers, and 6,059 sites were used by transient customers visiting our properties.

We just completed our winter season and are pleased with our results. We increased our annual RV sites by 65, principally in the Arizona market. We also have successfully converted 385 of our sites for use by seasonal customers. Most of this activity occurred in Arizona, California and Texas. And the strong Florida market, specifically -- Florida Keys, Orlando, and Sarasota -- we experienced demand greater than our available supply for certain time periods.

In May, we will be entering our summer season for our 21 northern resort destination locations and anticipate operating in line with expectations. We are mindful of the recent increase in the cost of gas and the recent slowdown in RV sales for the first few months of 2005. Given our focus on a seasonal or long-term customer, the quality of our locations near major metropolitan areas and the existing installed base of over 7 million RVs, we do not expect this to -- significant impact on our operations.

We continued to see a challenging market for those properties in our portfolio focused on affordable housing. These all-age properties are facing stiff competition from single-family homebuilders and condo conversions. Notably Denver, which we believe is a good long-term market, is experiencing high vacancies due to continued repossessions and the difficulty of obtaining financing for new customers.

Occupied sites decreased by 54 sites in the quarter, and we expect continued pressure on occupancies in these markets. 7 assets are being marketed for sale, including some of our more challenging markets.

With respect to sales, we did 118 new home sales in the first quarter of 2005 compared to 94 in the first quarter of 2004. We also added 9 new home sales from outside dealers in the quarter. The increase in new home sales volume is due to the acquired properties. We initiated programs throughout the Sunbelt properties and generated 24 resort cottage sales and the acquisition properties in the quarter. This is an area we expect to see continued improvement.

We also increased margins on our new home sales year-over-year by approximately $5,000 per deal. We did 53 used home sales in the quarter compared to 76 in the first quarter of 2004. Our resale volume increased, as we brokered 372 homes in the first quarter of 2005 compared to 329 in the first quarter of 2004.

We continue to focus our efforts on the development and expansions of our properties. We plan on developing this year 149 sites at Coquina Crossing, located in St. Augustine Florida; 50 sites in Twin Lakes, located on the coast of North Carolina; 132 sites on the Intercoastal Waterway at Bulow Plantation, located near Florida's Gold Coast in Flagler Beach; and approximately 400 sites in Mesa, Arizona at two of our flagship assets, Monte Vista, and ViewPoint.

We continued to increase our online presence from both our advertisement perspective and a customer resource perspective. We recognized the desire for our customers to communicate with ELS online and are continuing to improve that line communication. We will be directing our marketing efforts during the off-season towards extending the stay of our existing reservations that the 2005/2006 winter season. However, new customer contact feats (ph) this more stable revenue stream. As a result, we have identified marketing partners to promote our properties. This process is just beginning, but we see significant potential.

Mike will now discuss the financial results.

Thanks, Roger. First, I will discuss our financial performance for the quarter. For the first quarter of 2005, Funds From Operations were 25.3 million or $0.85 of Funds From Operations per share on a fully diluted basis compared to FFO of 15.5 million or $0.55 Funds From Operations per share on a fully diluted basis for the first quarter of 2004. Our results reflects the relative stability of our core properties, contributions from previously announced acquisitions during 2004, and by the contribution from our sales operations.

Turning our attention to our core portfolio, core property operating revenues were up 3.5% for the quarter compared to the first quarter of 2004. And core expenses were up approximately 6% in 2004, as utility, administrative and insurance expenses contributed to the increase. Overall, core income from property operations was up approximately 2% over the same period last year.

Our resort operation outperformed our first-quarter expectation. We achieved higher-than-expected occupancy among our long-term customers and a higher-than-expected rate from our transient customers. Our positive ancillary experience in the quarter was a byproduct of this. As previously noted, the first quarter represents 65% of our seasonal business and approximately 35% to 40% of our transient business. We are ahead of budget for April for long-term customers and expect to be in line with our expectations for the quarter.

Acquisitions, during the quarter, we closed on the Bar Harbor portfolio, two oceanfront properties and one lakefront property containing approximately 500 sites with approximately 100 acres for expansion. We invested approximately $7 million and expect to receive a 7% preferred return.

During the quarter, we added $25 million to our outstanding preferred securities. The total amount of that security is now $150 million. The coupon on the preferred is approximately 8%, reduced from 9% on the original $125 million issuance. We used the $25 million fund to reduce our outstanding line of credit balance. Our average long-term debt balance was approximately 1.415 billion in the quarter with a weighted average rate of approximately 6.1%. At the end of the quarter, we had 1.413 billion in long-term debt with a rate of approximately 6.1%.

Our unsecured term debt consists of a $120 million, 3-year term loan we used to finance our Thousand Trails acquisition this past November. We had a 2005 amortization requirement of 7.2 million, which we fulfilled in this quarter. This loan has a fixed interest rate of 4.67% until mid-December, 2005.

Our remaining 160 million unsecured debt consists of our lines of credit with a current availability of approximately $71 million. $60 million of the outstanding balance is also fixed at 4.67% until mid-December. The remaining $29 million outstanding balance is subject to floating rates. Our interest coverage was approximately 2.2 times in the quarter, reflecting the strong revenue from our winter season in our Sunbelt properties.

Guidance for 2005, our guidance for 2005 remains at $2.44 to $2.54 of fully diluted FFO per share. Furthermore, management expects fully diluted FFO per share for the first half of 2005 to range between $1.35 and $1.38. Factors impacting our guidance for the remainder of 2005 include our mix of site usage, yield management of our transient sites, scheduled or implemented rate increases, occupancy changes, home sales, and greater-than-expected CPI expense increases.

Since our last call, we have undergone a review of our 2005 budget. We have continued to add human resources and have included investments made since our last reported results. Furthermore, given the pendacy (sic) of certain cases before the Supreme Court of United States, our guidance does not include any additional costs for our rent control initiatives. We also expect income from discontinued operations to be approximately $0.02 of Funds From Operations per fully diluted share per quarter in 2005.

The forward-looking statements contained herein are subject to certain risks and uncertainties including to the Company's ability to maintain rental rates and occupancy with respect to properties currently owned or pending acquisition; the Company's assumption about rental and home sales markets; the completion of pending acquisitions and timing with respect there to; the effective interest rate as well as other risks indicated from time to time in the Company's filing 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.

Now, let's open it up for questions.

(OPERATOR INSTRUCTIONS). Jordan Sadler, Smith Barney.

Mike, in your comments, you mentioned that you tweaked guidance, I think, or some of the assumptions for the addition of some human resources as well as investments that you've already made. Could you just give us a little bit more color on that?

We have, as you know, Jordan, bought a lot of properties over the course of the last year and have added some resources both here in Chicago and in the field. We see that in the year-over-year growth in the G&A. With respect to acquisitions, it is not a large dollar amount.

That's just the Bar Harbor acquisition?

And we did one other property late December, small asset.

Could you give us a little bit more color on Bar Harbor? Did you receive -- you said you invested $7 million, and you are receiving a $0.07 preferred return. What is your overall interest in the property?

We have a 50% interest in the property, but we have a priority position with respect to cash flow and with respect to liquidation value. So we are in at the $7 million approximately investment, but we will get the first $7 million in liquidation. And we look get the first 7% cash flow coming to us. After that, our partner will receive up to her 50%. And then thereafter, the future profits would be split 50/50 beyond that.

Are you consolidating this property? Or are you managing it?

No, we are not managing the property. The on-site owner is going to be managing the property and coordinating the upgrading and the development potential of the property.

A little bit more color maybe on the seven assets that are being marketed for sale. I think Roger said some of them would be in challenging markets. Are these not sort of the seven lowest performing assets? Maybe you could talk about the occupancies and the expected proceeds?

In aggregate, Jordan, that group of assets contains about 2,500 sites. It's about a 60% occupancy level. We are in the market with them. We have just begun that process. And the asking price in the marketplace relates approximately 20 to $22,000 per site.

But they are in areas that we have long discussed on the call -- Indiana, Iowa, New Mexico, Michigan.

Michigan.

None in Denver?

Nothing in Denver, no.

And then just on the acquisitions, do you have anything else in the pipeline? Is there anything else included in your guidance?

There's nothing else included in our guidance. We see a very tight market out there. We are looking for coastal United States and major metropolitan areas vacation destinations. We have no contract that has been signed as of this date, but we are in discussions with a variety of owners out there and then hope to be able to get something done. Although, it is a difficult market.

Any letters of intent?

Yes, we have one letter of intent.

Anything specific?

Nothing we can discuss on this call.

And just in terms of your threshold for making additional acquisitions in terms of your balance sheet, how much leverage would you be willing to put on additional debt -- would you be willing to put on? In addition to the I guess you have 70 million available on your line of credit at this point.

We tend to look at each acquisition as putting on 75% give or take leverage in the secured debt market.

25% equity for anything incremental? Is that what you're saying?

I think we look at our balance sheet in total. We have done a number of transactions with maximizing leverage on the particular asset. However, as we sit here today, I think we're going to be looking at the amount of leverage we want on any particular deal in light of where we are on our balance sheet and where we are with our excess cash flow and where we are with our potential disposition. So assuming we do execute on those dispositions, we would like to take that proceeds and redeploy it in assets that are in line with our lifestyle focus. Although, that all remains to be seen. But when we do look at acquisitions, we do take into account our entire balance sheet structure and our cash flow.

Would you be comfortable operating at in the comp (ph) percent debt-to-gross asset value?

Given the quality of our assets, I would say yes. But I do not think we want to max out our financial flexibility. I certainly believe in the quality of our cash flow and the quality of our real estate. But we also are very mindful of retaining financial flexibility so that this Company is in a position to execute on opportunities that may exist out in the marketplace. It has been a focus that since we have been public and has been actually one of the things that has allowed us to get where we are.

If you look at the deals we've done historically, they were opportunistic deals. And a flexible balance sheet has allowed us to execute on that. And I think we are always going to try to retain that balance sheet flexibility.

One last question. On Thousand Trails, could you maybe give us a sense, and maybe you have some better insight into how their operations have progressed and how they are doing in the first quarter? Maybe what your expectations or their expectations might be?

Yes, well they are a little lag in terms of how they report to us information. So our information is about a month old and a little preliminary. But their first quarter is not meeting their expectations or ours. It is down from the year-ago period. We don't believe it has anything to do with the real estate.

In fact, given what's happened on our side with respect to the RV properties that we own and the demand for the assets, we believe it's much more of an execution issue at the Thousand Trails' side than it is a property-related issue. They did go through a management change at the end or about the middle of last year. They brought in a new CEO, and they have been changing their focus and spending some dollars on marketing and Internet advertising that is affecting the numbers. But clearly, they are not performing in a manner that they expect or we expect.

Any issues meeting rent payments?

No, no issues on that. It is not a coverage issue. It's just an expectation issue.

Brett Johnson, RBC Capital Markets.

Brett Johnson with Jay Leupp. A couple of quick questions. One, if you could just give us an update on your same-store NOI growth in your community site portfolio and the resort site portfolio?

The same-store in the court is that a NOI level of 2%.

Up 2%?

Yes.

And do you guys have enough history with the resort sites to give us in-store number there yet?

No.

But we can give you same store on properties that we have owned for both periods. And that has been a rather robust same-store growth, 7% or so on the revenue side and north of that on the NOI side. But again, that's a small piece. That's 12 assets out of the resort site of the business.

But we can say the properties that we did buy last year have performed better than our expectations going into the year. We had a very strong quarter, good demand in Florida, good demand in Arizona, improving demand in the Rio Grande Valley of Texas. Like where we own; like what we're doing.

And maybe excluding the -- I guess you can include them in this number -- but the occupancy for your core portfolio of the community sites -- can you talk a bit about the trend there? And what your outlook is, maybe after you have sold your 7 properties with the 60% occupancy?

The trend on the lifestyle is up. We certainly have proven the ability to sell new homes in the Florida, Arizona, Las Vegas marketplace. The drag right now for us is what is happening in Denver. We are seeing a little sloppiness on certain assets in California, principally due to some aggressive lending that was going on, more than just a market issue at the particular property.

But for the most part, we're cautious of Denver. Recently, we have seen stuff happening in Denver that is not making us excited about the market in the near-term. There are local players, who are now providing move-in incentives and rent concessions. We see that as not a beginning of an end but a sign of a fairly sloppy market for some time.

Great. And Mike, a couple of quick questions too. If you could talk about the components of the ancillary service revenues from home sale operations and then just other corporate income?

Other corporate income is Thousand Trails and income from the JV's as a big picture. The ancillary consists of activities at various properties. This was clearly our biggest season with respect to ancillary, include golf courses, restaurants, things we have talked about in the past.

And then last question, strategically because it is so difficult to acquire right now on the two coasts -- if you could talk a bit about whether you have considered or would consider investing in sites overseas?

We have always kind of evaluated all opportunities that I can tell you in the history of this business, we have looked at assisted living. We have looked at timeshare. We've looked at nursing homes. We have consistently looked around to find attractive investments. I think the RV focus that we're now embarked upon is after a lot of careful thought about what type of investments we want to use our capital for. And it all goes back to the mantra that we speak of early, often and always, which is -- we want to own high-quality real estate in major metropolitan markets and in retirement and vacation destinations.

We think there is still some opportunities in the U.S. And we have looked overseas as well; although, we see a lot of complications with respect to going overseas in terms of the ability to get our competency far away from us.

Great. Good quarter guys.

Alexander Goldfarb, Lehman Brothers.

So just wrapping up on the homes sales and the ancillary income, it sounds like we shouldn't take this to be a run rate and we should sort of go back to the way historically it's been? Or would you expect it to be a little more elevated?

You definitely should not take it as a run rate, Alex. That ancillary, as we said earlier, is driven in the first quarter. And no real change other from the guidance we talked about in the last call.

Okay, but looking forward if we are looking at Ospex (ph), would you expect that ancillary to be sort of consistent next year? Or you think this was sort of more of one-off this year?

I would say that the ancillary Alex is probably our most volatile revenue item, and we look at it from quarter-to-quarter.

But I think long-term, we expect to grow that line item. It includes --one, the ancillary businesses from our resort properties, but also more importantly, the sales efforts that we have embarked upon. We have sold more homes in each of the last few years. We expect to continue to do that. We like what we see on our ability to be able to sell to lifestyle customers in our manufactured home communities. We have just initiated our sales process with respect to the resort cottages. We like what we see there for the demand. We think there's a lot of opportunity available to us, and it's really just a matter of execution.

I think with respect to the guidance, I think Michael gave some guidance going into the year that we expected to increase the sale operations profits, 50% during the year. I think that guidance still stands, so this first quarter was a lot of the way of getting there. And with respect to long-term guidance, again we expect to be able to grow that number long-term.

And then Mike, going back to what Jordan was asking you early on. It seems like the revenues are coming in a bit stronger from the seasonal and the resort, I'm sorry, the seasonal and the transient. The homes sales are little stronger. We're getting full impact from all the acquisitions that you made last year. The rent expense doesn't seem that big relative to some of the positive misses that have occurred, if that is a word. But it seems like you are cautious on the guidance because of other expenses that may have come on that were not yet seen impact results yet. Is that fair?

The expenses Alex, come in ratable over the year for the revenues, which get somewhat pushed into the first quarter.

Okay. Then going to the rent-controlled. Do you have a sense of the timing of when the Supreme Court will rule on the case that you guys are referencing? And also, you mentioned something that might indicate that there might be some additional costs or something may happen when that case is settled.

Sure, what we are hearing from discussions with our attorneys is that we should expect a decision out of the two cases that we are kind of looking at some time by June of this year. The cases were argued in February of this year.

And they primarily relate to a case that has been tried back in 2002 at our property in San Rafael, California. The judge in that particular case has delayed ruling to see how these related cases get decided. He originally delayed ruling when it got to the appeals level, and he is again delayed ruling when they got kicked up to the Supreme Court level.

What that means for us is there is a claim in that case that relates to our ability to close down the property, which we might have to pursue, given the decision that might come out of the Supreme Court. It also could mean that the judge decides squarely in our favor in the underlying case after hearing from what the Supreme Court justices have to say on the matter. So we are watching it. And it could impact what we do at that particular property.

Okay, and the June timeframe that relates to the Hawaii case in the Supreme Court?

There's two cases. One is the Hawaii case. The issue which is, what does substantially advanced mean within the rent-controlled, and what is the legitimate government purpose with respect to the imposition of rent-controlled. The other related case has to do with eminent domain and when can a government condemned private property and hand it over for the benefit of public owners. So there are two cases that are out there. We are watching them both. I would say the first case that has to do with substantial advances, the one that our judge in the San Rafael case is watching closely.

And then going back to then the developments, you listed a number of developments or expansions, I should say, at a number of your properties that you already own. There is the pending, what has been quoted in the paper, as a $1 million up in the Bar Harbor project. What is your sense of total cost, timing yield on the expansions and redevelopments of the property?

Alex, the developments all have the green light that you mentioned except Bar Harbor word is -- when the early stages are trying to figure out what to do with that. Some of that is upgrade; some of it is expansion. But on all the other developments for this year, they've got the green light. We are working on them now. But our resources are stretched. You guys are going to have to give me a little break on what we get done this year. But we look for a yield of 15% to 20%.

We are roughly bringing on 800 sites. The timing of which I think we are a little hesitant to lay out in front of you just because we have got so much going on. But we expect to be bringing that stuff online as soon as possible. The cost of doing those developments are somewhere in the neighborhood of 15 to 20,000. And the rent that we get depending on particular location on the low end are 3, and on the high-end are 5,000, 5,500.

Okay. So it sounds like timing would be over the next say 2 to 3 years?

Well with respect to that 800 if it's 2 to 3 years, then we are really having a problem. We are hesitant on giving you guidance within the next 6 months, but we certainly expect to be bringing this stuff online through this year and into next year.

Jay Leupp, RBC Capital Markets.

Just a couple follow-ups on earlier questions and a couple points you made during the call. Could you expand a little bit on the joint venture discussion that you had during the main comments of your call? And the going-in yields on development and also the yields on your equity investment that you'd anticipate from those potential transactions? And then talk a low bit more about the potential for additional development going forward and what type of hurdle rate you would use on the yields you would expect?

Well, let's break that down. I think the first question you asked on that would talk a little bit more about the potential joint ventures on the development. As I said in my comments, I think it is a little preliminary to get into a significant discussion about that. But I think we are complimented by the expressions of interest that we are hearing. And primarily the locations the people are looking at are in Florida, Texas and the Northwest United States. What they are looking at it is the excess land available in the Thousand Trails portfolio as well as the potential to work with us on some of our expansion projects on the MH side of the fence.

We are hesitant to sell out on the real estate and are much more interested in trying to figure out how we can contain and continue an interest in the real estate. We like the real estate. We like the locations. And right now the discussions revolve around how we can let them have access to our properties while having ELS retain a future interest in whatever it is they are doing. And that whatever it is they are doing is a wide expanse of contacts that we have got in so far. We have had contacts from a single family home. We have had contacts from timeshare. We have had contacts from hotel type resort developers. So it is a pretty broad expanse of discussions that are going on right now. But like the fact that we are having them. And like the fact that there is interest in our real estate.

Tom, would you say that this interest is capital-driven? Because capital is available for development? Or is it truly demand driven and can generate above acquisition yields when it is stabilized?

Oh, I would think that it's -- it's certainly in part capital-driven. But the demand for some of our locations is significant. If you just go -- the farther south you go in Florida, just to give you some sense, the more there is demand. Now some of it is speculative demand. The keys right now has been getting a lot of news about speculation going on with respect to development, and developments selling out in literally a day. And if you use some of the numbers that are going on in there, you get some eye-popping valuations of some of the real estate that we have. We take that with a little bit grain of salt in terms of the ability to maximize and realize that. But again, we feel complimented by the expressions of interest.

Okay. And then just one quick question on -- we understand that the goal of your operation is to grow your earnings, utilizing leverage. Could you talk a little but about potentially your tax position at year-end? And if there would be any sort of impetus to boost the dividend merely to maintain your REIT status?

We do not have an issue with respect to dividends vis-à-vis taxable income. Taxable income does not become a concern for us. I have not looked at the latest models. But I think probably the last time I looked at them, it was a 2 to 3-year horizon, where taxable income is growing but given the interest and depreciation deductions coming off the acquisition, it was not an issue from the perspective of a REIT compliance dividend issue.

Is it safe to assume also that should you start moving forward with some of these developments, you are going to have a significant amount of upfront costs that are deductible that you are likely to be in the similar position for even longer than 2 years?

I would caution on that development. I think, at least as we sit here today, the way the discussions on the developments have occurred is a willingness to allow others to put their capital on our real estate to make something happen as long as we can retain an interest and the benefits of that execution. We certainly have looked at putting our own capital in there. I think we are pretty business busy right now just focusing on our expansion opportunities. So I think you are looking at those -- if the development opportunities really step up, it's going to be a third-party source of capital not our capital.

But as it relates to the issue on the dividend that every November the Board has evaluates the Company's capital position and its opportunities and decides accordingly with respect to the dividend. Last November, it determined to keep the dividend rather low. Given the opportunities that we see in the marketplace, I think they will have a reassessment of that in November based on what happened this year.

(OPERATOR INSTRUCTIONS). William Action (ph), Merrill Lynch.

Real quickly, what was the litigation expense in the first quarter?

It was about 570,000, 600,000. It is broken out as a line item on the income statement.

Okay, sorry. Then on the all-aged communities that you are selling, you mentioned a cost per site. Any sort of cap rate guidance you can give on that?

Given the occupancy of the properties, cap rates are aggressive. They are in the 5% to 6% range on average I would say for those properties.

Now in the past, you have given occupancy by a group 1, 2 and 3 in your portfolio. Are you guys prepared to do that this time around?

Well, group 1, which would be the market challenged assets are primarily the assets that are held for sale this time around. Occupancy on those has continued to decline somewhere in the neighborhood of 50, 60 sites, I would say, since the end of the year. We did pull two assets out of that market challenged group -- one in Las Vegas, one in Phoenix. We have initiated new home sales programs at each of those properties. And correct me if I'm wrong, Roger, I know in at least one of the properties we sold four new homes since end of last year. Another one we're going to an upgrade and trying to reposition it as a lifestyle focused age qualified type property in the Phoenix marketplace that we'll have good demand for.

With respect to the other properties, I'd put them all in the same bucket. Our upgrade, we continue to sell new homes. The issue we have had with the upgrade properties was the hurricane rolling through in Florida that cost us about 200 sites. We're still recovering from that. And the only other place that we struggle with respect to gaining occupancy is the Denver marketplace that we discussed earlier in the call.

I guess what I am hearing is that the group 3 sites are probably still in the 85% range and the group 2 sites are 90% plus.

Yes.

Not to read too much into the numbers, successful pushing rent in the quarter, same-store rent on the overall community portfolio was up 5.1%, but occupancy was down 1.1%. Is that a matter of coming up against a little bit of resistance? Or is that continuing problems in markets like Denver, etc.?

There is a disconnect between where we're getting the rents and where we are losing the occupancy. We are losing the occupancy in some of those challenged markets that we've been discussing. Where we are getting some pretty good rent increases is California certainly, Arizona, Florida, and the East Coast in the United States.

Jordan Sadler, Smith Barney.

I just had one other on the acquisition front. Just what are the best opportunities out there today that you are seeing? Is it in MH or seasonal or transient RV or campgrounds?

I would characterize them as all difficult, especially for properties that we want to own. There's always been a scarcity of assets with respect to the MH. I think that scarcity of assets characteristic is now present in both the Park model properties and Sunbelt and vacation destinations and has just recently shown itself in some of the what I would call campgrounds or northern destination RV resorts. That is where our focus has been over the last few years, the coastal Sunbelt areas and up through the East Coast. And we don't find it any easier today than it was years ago.

Should we expect that there might be another property sub-type that you guys might be entering?

I don't see that other than potentially we may be aligned with another operator on some of the joint venture developments on the vacant excess land we have. We don't really want to go into the hotel operating business or resort operation business. But we may have a developer who would like to do that. And we can participate in a way that we are comfortable with, I think we will look at that.

And lastly on the same-store portfolio, Mike, you mentioned the expenses were up 6% year-over-year, and that was insurance, utilities and admin. Is that going to continue right through the rest of the year? Should we expect to see that level of same-store growth, same-store expense growth?

You know, I hope not. Although, I would say that the utility number was the driver in that side, not really within our control.

And at this time, gentlemen, there appears to be no further questions. I'll turn the conference back over for any additional or closing remarks.

Thank you everybody for joining us today on our call. As always, Michael Berman is available for questions and follow-up. Thank you again, everybody. And look forward to talking to you again next quarter.

This does conclude our teleconference for today. We'd like to thank you for your participation. Please disconnect.