Hilltop Holdings Inc (HTH) 2004 Q1 法說會逐字稿

Good morning and thank you for joining the ARC first quarter 2004 conference call. At this time management would like me to inform you that certain statements made during this conference call which are not historical facts may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions they are subject to economic risks and uncertainties.

The company can provide no assurance that its expectations will be achieved and actual results may vary. Factors and risks that could cause actual results to differ materially from expectations are detailed in this morning's press release and from time to time in the company's periodic filing with the SEC. The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release. Having said that I would like to introduce management that is with us today. Mr. Scott Jackson, Chairman and CEO, and Mr. John Sprengle, Chief Financial Officer. At this time I would like to turn the call over to Mr. Jackson for opening comments.

Thank you. Good morning. It's Scott Jackson. I am Chairman and CEO of ARC and joining me today is John Sprengle, our Chief Financial Officer. After my announcements John will discuss our financial results in more detail and we will then open it up for questions and answers. As a new public company with many new investors I would like to take a few minutes to introduce our company and provide an accurate profile of our community portfolio, particularly in light of the recent acquisition of certain communities owned by Hometown America, most of which were previously owned by Chateau Communities.

To start I'll recap the high points of our IPO completed on February 18 of this year. We offered 24.5 million shares of common stock at $19 per share of which 2.3 million shares were offered by selling stockholders. The company did not receive any proceeds from the shares sold by these selling shareholders. On March 18, '04 our underwriters exercised their over-allotment option to purchase approximately 800,000 additional shares of common at $19 per share. We currently have approximately 43.4 million shares of common stock and OP units outstanding. Concurrent with our IPO we also raised 125 million of gross proceeds through the issuance of 5 million shares of our new Series A cumulative redeemable preferred stock. In connection with the IPO we acquired 90 communities from Hometown America for approximately $615 million, totaling 26,406 home sites located in 24 states. A number of the communities with single asset financings which were assumed, have been acquired over time throughout the first quarter with the last three loan assumptions completed on April 9th of this year.

Simultaneous with our IPO we completed financing transactions totaling $500 million that was comprised of 215.3 million of ten-year fixed rate mortgage debt at an interest rate of 5.53, 100.7 million of five-year fixed rate mortgage debt at a rate of 5.05, 184 million of two-year floating rate debt, and a $125 million revolving credit facility which is undrawn at this time. The proceeds were used to repay certain indebtedness and to fund a portion of the Hometown acquisition. In conjunction with our IPO we also finalized the funding facilities supporting our consumer finance program, our 225 million four-year consumer finance facility provided by Merrill is unique to the industry and it provides the cornerstone of our occupancy initiatives. Origen Financial is providing the origination and servicing functions for that entity.

Turning to our portfolio, I'd like to speak to the quality of our communities including location, size, amenity and occupancy profile.

The majority of our communities are located in large markets with very dynamic and diverse economies including Dallas, Fort Worth, Atlanta, Salt Lake, the front range of Colorado and Jacksonville, Florida. With our presence in 29 states we have geographic diversity and over two-thirds of our home sites are located within our top 20 markets. Our strategy of focusing on existing communities and refurbishing and repositioning them as necessary versus greenfield development has allowed us to acquire communities and intown locations and in many cases in irreplaceable locations as it relates to manufactured housing communities. These communities are in highly desirable locations located near job centers, convenient commuting routes, retail districts and good school districts. While our average community size is 220 home sites, this is a function of our focus on markets rather than on community size. Our smaller communities are typically located adjacent to or near our larger communities and in markets where we have significant presence. In fact, in some of our markets we have communities that are contiguous to each other and appear and operate as one community.

It is true that many of our acquisitions have included underperforming and under-managed and poorly maintained communities at purchase. Over the last nine years we've developed the expertise and invested the capital to renovate and reposition these communities and have spent more than 100 million in capital expenditure upgrades. Today approximately 170 of our communities have club houses. Approximately 200 of our communities have our standard amenity package including pools, play grounds, with many having large common areas with picnic tables, basketball courts and other features. In most markets residents in our smaller communities have access to amenities in larger nearby communities.

As the company builds on creating opportunity and capital gains for investors we've acquired many communities with low occupancy. We have the experience and the marketing programs and now the ability to provide financing for our residents to purchase their home. We view occupancy as both our challenge and as our opportunity. Make no mistake about it, we have lots of work to do. However, we have many communities with high occupancy and stable resident basis. We have 145 communities of 302 with occupancy in excess of 85%. And in fact these communities have an average occupancy of 92.5%. To place this in context our communities with over 90% occupancy would be the seventh largest portfolio in the United States per the 14th annual George Allen report.

As for the Hometown portfolio and to further clarify, we acquired a physically and geographically attractive portfolio of communities from Hometown, including 73 communities previously owned by Chateau. In general these are large communities averaging nearly 300 home sites per community with quality infrastructure and amenities and most importantly strong markets with excellent locations within each market. This portfolio provided entry into attractive new markets, notably Atlanta, Georgia, with 16 communities totaling over 5,000 home sites. The Atlanta portfolio represents a unique opportunity to have acquired 20 plus percent market share in one of the largest and most dynamic markets in the United States and perfectly illustrates our strategy of obtaining leading market share and benefiting from the resulting operational efficiencies. Many of the other communities complement our presence in some of our largest and best performing markets. For example, we acquired additional market share in Dallas/Fort Worth, acquiring four communities totaling 1,181 home sites bringing our market presence to 41 communities and approximately 7400 home sites. Salt Lake City, Utah, acquiring two communities totaling 445 home sites, bringing our market presence to 15 communities and approximately 3300 home sites. Orlando, Florida, acquiring one community totaling 670 home sites bringing our market presence to seven communities and approximately 2,000 home sites. And the Inland Empire of California acquiring two communities totaling 336 home sites and bringing our market presence to six communities and approximately 1200 home sites. In addition, we acquired home sites in some of our other large markets including St Louis, Greensboro, North Carolina, Jacksonville, Florida, Raleigh Durham, North Carolina among others.

Now I would like to speak a little bit about the industry and its environment. There has been much press and speculation about the pending turn around in the manufactured housing industry, largely based on several new entrants into the financing sector and Berkshire Hathaway's acquisition of Clayton Homes and their follow on acquisition of Oakwood. Clearly the entry of these new lenders is a good sign our industry however their interest in reentering chattel for home only financing in any meaningful way is still undetermined at this point. We have not experienced any meaningful noticeable increase in move in activity resulting from new chattel financing and are not projecting any significant pick up in that in the near future. Perhaps the second half of the year will prove to be an entry point for more active chattel lending. For now it remains largely a land home financing environment.

On a more positive note the rate of repossession incurs or the number of repossessions experienced each month appears to be slowing, at least in the ARC legacy communities. It is too early to the tell in the communities that we acquired from Hometown. In addition the finance companies are more eager to resolve repossessions versus simply extending their problems and by default our problems to another day. More importantly we believe our industry needs to readdress it's fundamental competitive advantage and that being affordability. We are convinced that we can provide a clean, attractive affordable place to live that generates profits for our shareholders, is competitive with other forms of housing and provides real value and service to our residents. To that end we have built a business plan that provides affordability and value in the home and the financing and in our communities.

Given the size of the Hometown acquisition I would like provide some comments on our initial experience with these assets. We are satisfied thus far with the integration of the Hometown portfolio. We have expanded our district management infrastructure from 7 districts to 12 districts to reflect the increase of approximately 26,000 homes sites to our overall portfolio. Our integration priorities for the portfolio include our human resources, training, IT systems and capital expenditure projects. This focus will not only enhance our occupancy programs, it will also strengthen our long-term operating infrastructure. Our primary challenge to date relates to the leadership, the management, the training and the process and procedures found in those assets. This is requiring us to increase and improve our recruiting, dedicate more of our district managers’ time to culture and team building and allocate more time to training. In addition to this initial training we require completion of online training modules, full day training seminars and on-site sales, leasing and merchandising demonstrations. Over time we expect to substantially upgrade the quality of the team that was previously in the Hometown portfolio. All communities are now integrated into our management information system and the quality of information, productivity and decision making within those assets are improving. We have many of our projected capital expenditure projects underway and are proceeding on schedule.

Our capital expenditure projects are focused on preparing home sites for new home deliveries, addressing deferred maintenance including things like tree trimming, trash removal, basic landscaping and resident home site clean up and improving amenities in order to meet ARC's quality standards. We do not expect home site upgrades in preparation to be a limiting factor in our ability to place rental homes and for sale homes into these communities. We acquired approximately 1100 homes both rental and for sale homes in the Hometown acquisition. For the Hometown communities we purchased or ordered approximately 500 additional new homes through March 31, of '04. We expect to see price points and we expect to see significant sales and leasing activity in the coming months due to our focus on affordable price points, increased training, marketing and availability of chattel financing through our finance program.

In light of our overall portfolio occupancy and the potential to derive significant net operating income growth from our portfolio I'd like to quickly summarize our business plan. As many of you know the Hometown acquisition was very attractive to us given the quality of the communities, the quality of the markets and the opportunity for value creation. However, occupancy is low at approximately 75%, combined with ARC's communities we have portfolio occupancy of approximately 80%. We believe we have the tools to generate occupancy gain and create value for our shareholders. I would like to outline for you the key characteristics of those -- one, quality communities; two, in quality markets; three, top grade personnel and a strong operating platform; four, the ongoing conversion of our existing rental residents to homeowners. And we have the tools to drive the occupancy and financial performance through our rental home initiative, our for sale inventory, our consumer financing and our marketing programs. This is our focus for the next 12 to 18 months.

Let me turn to our results. For the last ten weeks we have made significant strides in executing our business plan. Our focus has been on -- one, the roll-out of our in-community sales program; two, the roll-out of our consumer finance program; three, integrating the Hometown acquisition in terms of human resources, capital expenditure plans and information systems. We expect to increase rents in approximately 90% of our communities in 2004, including the Hometown communities. Approximately 75% of these increases have been implemented, our average rent increase has been approximately 3.8% for the year. As of December 31, 2003, the ARC and Hometown communities had occupancy of 83.3 and 75.3 respectively, or 80.1 on a combined basis. At the end of March 31, '04, the ARC and Hometown communities had occupancy of 82.8 and 76.1 respectively, or 80.2% on a combined basis. We expect to see improvements in both the ARC communities and the Hometown communities throughout 2004 as our occupancy initiatives begin to take hold. Other results of note include -- at quarter end we had approximately 1400 repossessions in our communities representing 2.1% of our total home sites and 2.9% of homeowner occupied home sites; we experienced approximately 34% fewer repossession incurs in the first quarter of '04 as compared to the first quarter of '03. Approximately 325 repossessed homes were moved out of ARC communities not including the Hometown communities by finance companies during the first quarter. We have entered into a consignment agreement with a major finance company to market their repossessed homes located in our communities thus we anticipate a reduction in the number of repossessed homes moving out of those communities.

Excluding the Hometown communities our first quarter gross rental home move in increased 16% and 23% versus first quarter '03 and fourth quarter '03 respectively. In these same communities we had net rental home absorption of 438 rental homes in the first quarter of 2004. Traditional move in activity remains morbid, at an annual rate of less than 1,000 move ins. However, this is partially mitigated by a fairly low organic move out rate. Of our large markets Wichita, Kansas, continues to be our biggest challenge. Given mid quarter closing and the IPO, the Hometown acquisition and the delay in closing on 11 of the Hometown communities with single asset financing, our ability to implement the full scope of our business plan has been somewhat delayed. However, visible progress has been made notably in terms of inventory procurement and delivery and make ready of inventory. Through March 31, we have purchased or ordered 1,341 new homes of which 827 have been delivered and 257 have been made ready to lease. This large front end order allows us to have the necessary inventory made ready in the merchandise as we enter the prime selling months and allowed us to achieve attractive pricing from the manufacturers due to the size of the order and the placement of the orders during the winter months. As of March 31, '04, our total home inventory has increased to 8,127 homes. This includes approximately 1100 homes acquired in the Hometown acquisition.

With the completion of the IPO, the ongoing integration of the Hometown portfolio, access to additional capital and the purchase of additional inventory, our full focus is now turned to training and marketing. The training of our field organization in terms of merchandising and selling techniques and the processes and procedures to sell and finance homes is fully underway. We have completed training in 52 of our markets with all districts scheduled to be trained by May 12th of this year. Finally I'd like to add that our Hispanic marketing program has been integrated into everything we do -- recruiting, operations, resident retention, marketing, rental home leasing and home sales, consumer financing and customer support services.

I'd like to spend a minute or two on a couple of our other occupancy programs. The primary tools we have are -- our rental home program, our for sale inventory and our consumer finance program. As most of you know it is our intention to migrate many of our current rental residents to homeowners. Our initial focus has been on converting existing renters to homeowners for those renters interested in homeownership. This conversion provides the added benefit of allowing us to recycle our inventory and our capital. To date our entire home inventory of 8,127 homes with a current book value of 144 million is financed with equity capital. We have an active marketing campaign underway, having contacted over 2,000 of our existing renters over the last two weeks. We will continue this effort in the coming weeks with the expectation of contacting all qualified renters by May 31 of '04.

On an initial basis and a qualitative basis we are encouraged by the level of response and the credit quality of these renters. We expect a high conversion rate given that approximately 70% of our current renters would recognize a decrease in their monthly housing cost by owning versus renting.

To summarize all of our occupancy initiatives and programs are focused on providing affordable housing with good value and service. We emphasize the attractiveness and the compelling value we offer to potential homeowners for the sale of homes at cost, meaning no retail mark up, and our ability to provide financing with loan structures that provide real value to those residents. Now let me briefly turn to a few other activities.

On February 26, we closed two properties in the Nashville, Tennessee market totaling 401 home sites. This brings our greater Nashville, Tennessee market presence to approximately 1,134 home sites. These two communities were acquired for 7.4 million at an end place cap rate of approximately 8.7%. At March 31, '04, the occupancy was 66% and the average rent was $241 per month. This brings our total portfolio to just over 67,000 home sites and 304 communities. On May 3rd we placed a 36 community portfolio under contract. This portfolio consists of 3600 home sites that are approximately 88% occupied with an average rent of $254 per month. The portfolio will be purchased for approximately 65 million including closing costs and represents an in place cap rate of approximately 8.5%. The acquisition comes with 28.5 million of existing debt that will be assumed by ARC and has an interest rate of approximately 7.2%. The remainder of the consideration is expected to consist of cash and preferred operating partnership units. Taking into account the loan assumption process we expect this portfolio to close in June, '04. The communities are located in the eastern half of the U.S. and fit well with our existing footprint. At this time there's no guarantees we will close this portfolio. In addition we have placed four communities under contract in Salt Lake City, Utah. There are a total of 558 home sites with an average occupancy of 78.5%. These communities are each under separate contract for a total of 12.6 million with an in place cap rate of 6.7%. There is a significant upside potential in terms of both rent and occupancy. Our existing Salt Lake portfolio has occupancy of 93.1%. These acquisitions bring our Salt Lake City presence to approximately 3900 home sites. These contracts are subject to completion of due diligence and can be terminated by us. During the question and answer period I would be happy to answer any questions on specifics of each one of those acquisitions.

In conclusion the organization is very enthusiastic and determined to utilize our new marketing, sales and finance programs to drive occupancy and improve financial performance over the coming quarters. We have a clear-cut competitive advantage with our lower priced homes and our ability to provide financing to our customers. At this time I will hand it over to John Sprengle, our CFO.

Thanks, Scott. I would like to break down my comments into two parts; the first the recap of the effect of the IPO and the financing transactions on our financial statements, and then secondly the first quarter financial performance.

As most of your aware the Hometown acquisition was completed using the purchase method of accounting. As a result the financial contribution of the Hometown acquisition began on February 18, for those 79 communities acquired at closing and the remaining 11 communities as the loan assumption process was completed for those communities. In addition we incurred a series of charges relating to the IPO, the acquisition and the repayment of certain indebtedness. The primary components of this $27.9 million in charges includes the restricted stock rent of 10.1 million, the write-off of loan origination costs and exit fees associated with the repayment of our existing indebtedness of 13.4 million, and IPO related costs of roughly 4.4 million. These costs will not impact future reporting periods.

For the quarter, ARC reported a net loss available to common shareholders of 35 million, or $1.20 per share on a fully diluted basis and FFO of a negative 21.7 million or 74 cents per share on a fully diluted basis. Of this loss 27.9 million, or 88 cents per share, was a result of the one time charges associated with the IPO and financing transactions. Backing this out, FFO available to common shareholders was approximately $4 million, or 14 cents per share on a fully diluted basis.

On a same community basis comparing the first quarter of '04 to the first quarter of '03, net real estate segment income was up 4.2% to 22.8 million, due primarily to a 3.5% increase in total real estate revenue partially offset by a 2.3% increase in expenses. The expense increase was primarily property taxes and it's a combination of higher assessed values on some of our properties and a 38% increase in the number of homes that we own within the communities.

The only other income statement item of note is a reduction in manufactured home sales and insurance revenue as we closed our standalone retail stores during the last half of '03. Because expenses decreased commensurately the loss in the retail sales and insurance segment was unchanged at roughly $225,000 during the quarter.

In conjunction with the IPO we also refinanced a significant portion of our debt. Today we have approximately 746 million in fixed rate mortgage debt with a weighted average interest rate of 6.3% and five, eight, and ten-year maturities. We also have approximately 184 million of variable rate mortgage debt with a two-year maturity, and three one-year extension options. Also to support our growth, as Scott mentioned earlier, we have two floating rate revolving credit facilities, one of which is a $225 million, four-year facility to finance home loans to our customers. The other is $125 million three-year revolver, to funds acquisitions, capital improvements and other general corporate purposes. We have not drawn on either of these facilities. Finally because of the expected growth in our variable rate debt we purchased a $100 million, two-year floating to fixed interest rate swap to hedge our exposure to increasing interest rates. At March 31, including the interest rate swap costs, the weighted-average interest rate on our debt was 5.96%, compared to 7.74%, at December 31 of '03.

This concludes our prepared remarks. I ask the operator to open the call to questions.

Thank you, sir. [Operator Instructions]. Our first question is from Jordan Sadler with Smith Barney.

Good morning, it's Jon Litt here with Jordan. First question is, how is April looking? I know since you're only public for part of the quarter, it seems like April might be a little more important than what happened during the quarter.

Jon, this is John Sprengle. I think everything that I've seen up to this point in time is on track with what we've seen both in the Hometown and the ARC portfolio with respect to the first quarter in terms of occupancy and revenues.

So it's seems as though occupancies are moving up, rental units are continuing to get leased up?

Yes.

Do you have any numbers you can assign to that.

Not at this time, Jonathan.

You talked about the chattel business. What kind of activity did you see in the first quarter or through April in terms of your own lending?

Jonathan, would you repeat that?

On the lending, the lending to people buying homes, what type of activity have you seen?

Activity has been limited. We really wanted to make sure we had all of our people completely trained on our processes and we really start kicking that off after the 15th of May. But we've had generally good response as we have begun contacting, our first priority there is renters, our rental homes to owners and we are out soliciting that business as we speak and we are getting very good response there.

You had a little activity prior to the IPO had you a small portfolio of loans but you haven't really done much.

We want to make sure that because of the consumer nature of this we want to make sure that all of our people understand the processes, that we are completely licensed across our entire platform and that our systems are exactly where they need to be, primarily on the training side because our own view here is you get one chance to make a good first impression.

If you could expand on the -- you did a couple of acquisition and a few that are set to close, but on the pipeline, we're seeing that some of the other public companies are fighting over the same transaction and finding not a big opportunities in the acquisition front. Maybe you could expand a little bit more on the acquisition opportunities?

Since we are not in the RV business we are not fighting over those. But basically our pipeline, frankly, is probably as full as we've ever seen it. We are seeing lots of infill market opportunities with occupancy levels in the 75 to 80% range. A lot of these are not physically distressed assets. Many of them are, I guess to a certain extent, financially distressed because of occupancy levels. I would say that our acquisition activity, depending on our ability to integrate and I think we are focused on making sure what we have on the books today and the stuff that we lined up and are under contract is fully integrated into the company prior to moving forward with a lot of major acquisitions. On the other hand, we clearly are out there soliciting acquisitions and looking at a great number of acquisitions.

I believe Jordan had some questions. Jordan.

On those acquisitions, what do you view as your dry powder at this point? I know you had 90 million in cash at the end of the quarter but some of that's obviously going to go towards some of the stuff you have under contract, so.

I think there are a couple of things that the market has not generally recognized as it relates to our balance sheet. Clearly we've got the 125 million in revolver. Secondly, and I think more importantly, is that the 8100 homes that we currently have on the books are financed with equity. So as our sales programs take hold, especially with this renter to owner conversion as we place that chattel paper into the Merrill Lynch facility that frees up a significant amount of cash.

So over time we see that as -- one, a great cash management vehicle and; two, the ability to generate more cash. As well as looking at our portfolio over the course of the year and focusing on pruning some of the our assets that may not fit into our operating platform as it is firming up after the Hometown acquisition. So I don't feel as though we have many limitations on acquisitions from a capital point of view. I would say more importantly that we want to make sure that we are running what we have and that we are moving the needle on occupancy before we jump into many more very large portfolio type acquisitions. On the other hand, beyond our own balance sheet we have access to joint venture money if we need it and so we feel like the future is pretty bright on acquisitions.

Then just drilling down a little bit more on the core during the quarter, you said you had 438 net rental homes absorbed, and that was, I guess, in ARC's legacy portfolio. Were there any homes rented within the Hometown portfolio during the quarter?

Actually there were some in the Atlanta market and if you recall from our first discussions, many of the homes that were on the Hometown/Chateau book, primarily the Chateau assets, were being held for sale. So we have systematically gone through, looked at those homes one by one, made our own assessment of those homes and turned them into the rental fleet over time and it seems to be that we are getting a good absorption in a number of those markets including Atlanta on those.

I guess on the sale side of it I guess, like you said, you are kicking off the initiative really on May 15 or thereafter. So you really haven't ramped up there, either?

We have not ramped up there but I think that was pretty much expected, as I said before, I want to make sure that everyone of our people in the field fully understand this and we want to make sure that we are providing the right kind of paperwork. We've got licensing in place everywhere and that our systems are in good shape there as we begin to book those sales.

Your next question comes from John Stewart with Merrill Lynch.

Good morning. Scott, you mentioned that with respect to the Hometown acquisition you're focused on the HR front, IT and CapEx as well. Can you put some parameters around that? First of all in terms of CapEx dollars you've spent to date and how far along you are in terms of getting the quality people that you'd like in place and rolling up the IT systems into your platform as well.

Let me turn the CapEx question to John and then I will handle the other two.

Our CapEx expenditures during the first quarter were roughly 3.5 million. Frankly that's below what our expected rate for the 12 months post acquisition would be both in terms of our own portfolio and the Hometown portfolio. That's a combination of the winter months in a lot of our markets and also the fact that we didn't close the Hometown communities until February 18.

Are you still on track you think for 21 million?

Yes.

And with respect to HR and IT?

Sure. From an HR point of view what I would say is that, and specifically in the Chateau properties, fairly significant culture problem, I would say as of today we have turned about 45% of those personnel at the park level, we did not take on any of their regional management. And I would say over the course of the remainder of the year, although I am hopeful that we will retain certainly some of those folks, it would not surprise me if we have about 75% turnover. Our systems are much more intense, our marketing and just the time we have our communities and our offices and our managers on community in that marketing process is significantly more than the previous company had and we just have a different way of doing things. We are, from the senior management point of view, a lot more face time in those communities and a much more intense operating philosophy.

As it relates to IT we are completely cut over to IT. I think we actually delivered our rental bills in March with absolutely no problems and frankly we are working pretty diligently to move their bad debt allowances down and their past dues down with some real success.

Okay. You mentioned that had you seen some rentals in the Hometown portfolio in Atlanta. Can you talk about what concessions you might have to do on deals like that and how the availability of multi-family housing in that market is affecting you guys there?

I think on concessions on average across the entire company it really is not even meaningful. I think it's less than a week and a half of free rent concession across the portfolio. Atlanta is no different. Frankly, in the Atlanta market specifically I think we are as encouraged by that market as any market that we have. And to date what we are doing is installing our marketing processes and we are getting good velocity of perspective customers coming through the door. As we said prior to the acquisition we felt, based on our due diligence, that the problem in Atlanta was not demand but it was really one of merchandising and we continue to agree with that assessment. And our price points seem to be competitive and really more than anything, what will either limit or make our occupancy efforts successful in the Atlanta market is the availability of product into and on those home sites and there is a lot of dust flying in those communities.

A lot of dust flying.

To make that happen.

I'm sorry.

To make that all happen. We think we will have a very successful summer of leasing and sales activity there.

Okay. Scott if I got the numbers right, it sounded like the ARC portfolio occupancy was down 50 basis points sequentially but up 80 basis points in that Hometown. Is that right?

That's correct.

I guess I was a bit surprised at the drop off in the ARC portfolio. Is there anything that you can point to that drove that, whether it was a specific market or anything else?

Well, we continue to have occupancy loss in the Wichita market which is certainly a focus point for us. We have created a new marketing team in that market. We've intensified our focus on that market. But if you look it's primarily associated with -- one, fewer organic move ins from third parties, i.e., somebody got a home and had it financed somewhere else; and, two, the amount of repossessions that we had in the fourth quarter and the first quarter of this year. Now, we are pretty optimistic on the repossession front, i.e., one, we've seen that rate slow down. But, two, more importantly, is we've been able to make some significant gains as it relates to having deals with finance companies to keep those homes in our communities and act as a marketing arm for those finance companies selling those homes on consignment and we think as that kicks in that will certainly help the slow of those repossessed move outs. On the flip side our own move out sort of natural roll is less than 4% which is about 2 to 3% below the industry average and shows that our management people and our people at the park level are doing a very good job of tenant retention.

[Operator Instructions]. Your next question comes from Paul Adornato with Maxcor Financial.

Yes, thanks. On the consumer finance initiative you said you really hoped to get ramped up by middle of May. What could we expect in terms of volume by the end of the year in consumer finance?

Well, we feel pretty comfortable that our previous projections are on track as it relates to sales within our communities. Just to kind of give you in context, the system is operative, it's working, all of our IT computer-in-computer (ph) is all in place. We actually funded our first loan last week. We've got 75 deals approved that are in the pipeline awaiting funding as of today. And I would say that we hope to see volume somewhere in the 2000 to 2500 units on a run rate basis for twelve months March to March.

Okay. And in terms of capitalization, given the characteristics of your portfolio, what level of indebtedness do you project on a going forward basis?

Again I think that we are looking at that 55% on a debt to market cap basis. I think nothing has changed with respect to our original expectations in that regard either.

Okay. And in terms of capital expenditures, what do you estimate the total dollar amount of deferred maintenance is in the portfolio?

In the Hometown portfolio?

How about both halves?

In the ARC portfolio I think it's safe to say we don't feel like we have any deferred maintenance. In the Hometown portfolio I think our initial projection was about 27 million of CapEx. We are actually finding it to be somewhat lower in that obviously we wanted to make sure that we were looking at it from a very conservative light going into the acquisition. What we are finding is pretty much throughout the Hometown portfolio, and let me say first, the Hometown parks in general were in pretty good shape, but secondly, as it relates to the Chateau portfolio, that the deferred maintenance items were primarily cosmetic, we have not found a tremendous amount of infrastructure problems.

We've got a couple of sewer issues that we are addressing, but in general it was things like common area landscaping, for one reason or another, it seems as though for the last 12 to 18 months they had been on all of their sort of refuse, landscaping refuse, they had been dumping it on park so we're removing that kind of stuff. And a lot of it is real basic simple items like general landscaping, common area landscaping, repairs to things like play grounds and swimming pools and that sort of thing. Patching streets, some over-layment(ph) of streets primarily in the Atlanta market. Actually the streets where we had sort of projected complete over-layments, it actually is turning out that a lot of those are street repairs with coatings over the top and some things like that. So we just aren't seeing quite as much as we anticipated.

Sir, we have a question from David Rodgers with Key McDonald.

First question's probably for John. Wanted to talk about same store results sequentially. I got a sense that occupancy was about 84% in the fourth quarter. Could you go over same store results, revenue, expenses, NOI? I didn't catch that if you said that earlier.

I didn't do it sequentially. We looked at it compared to the first quarter a year ago. As we said earlier, sequentially occupancy was down about 50 basis points compared to the prior quarter on a same store basis. In our core portfolio or in the same communities most of our rental increases are put into effect during the first quarter of the year. So the revenues were up slightly and I don't have those exact numbers in front of me. Revenues were up slightly from the fourth quarter. Expenses were down about, we got that number. It was between 1.5 and $2 million first quarter of '04 compared to the fourth quarter of '03.

And we had some rental occupancy tail off in December of '03 primarily associated with the fact that the prior year we had delivery, make ready and leasing of a large number of rental units in November and December of '02.

Okay. And on that, the inventory calculation for the quarter, how many homes did you start the quarter with in aggregate, rental or for sale?

Prior to the Hometown acquisition?

Yeah.

We started with roughly 6,000.

I guess I was just trying to get back to the number. Did you convert or do you have a number of how many you might have converted or sold during the period? When I add about the 1600 or so that you acquired either through Hometown or outside purchases, it would be 827 that I think you said were delivered in the period, I'm not able to reconcile.

We've got some still in the float, so to speak, between the manufacture and actual delivery to the communities. But we roughly had, I believe, 6100 inventory units on our books as of December 31, '03. We picked up approximately 1100 in the Chateau acquisition. We have placed orders for roughly 1800 homes as of today. Of those 1800 homes our initial order was approximately 1300 homes, of which approximately 850 of those homes have been delivered and made ready. As it relates to conversions, primarily any conversions that we had were not material and they were financed by generally cash purchases prior to us putting this consumer finance program in place. And as I said, we funded our first loan last week.

Okay. Any thoughts on dispositions to fund some of the pipeline that you were mentioning?

We are looking at dispositions. We wanted to have a significant amount of time to look at the entire Hometown portfolio before we went out and made any sales. I can't really tell you specifically what we will dispose of. I do think that you will see a few dispositions in the balance of the year. I would say it's not material but it certainly can provide funding for things like the Salt Lake acquisition.

Okay. And on the acquisitions that you have under contract do you have any termination fees that you might be responsible for there? Would they be --?

No.

Okay. The property management expense on the income statement, John, is that internal or externally operated properties?

That's all internal.

All internal. Okay. And the final question was, how many repo sites in aggregate across both Hometown and ARC portfolio did you see at the end of the quarter?

1400.

Thank you.

Thank you.

Our next question is from John Herald with Green Street Advisors.

Could you give us the terms on the consumer financing that you guys are going to be using?

Yes. Basically we've got three credit down payment buckets. In general these loans will be originated on ten-year amortization schedules, roughly at a average coupon of about 12.5%. FICO scores 650 or better will require 10% cash down, below 650 with a pristine history on housing costs, housing payments will require a 15% down and those individuals who may not have FICO scores, i.e. not bad credit but no credit, in general are a 30% down payment of cash.

You mentioned you haven't seen much change in the financing industry right now. What if it does change? What if the traditional lenders start to come back in? Will that affect this program or are you still going to go forward with it no matter what?

Absolutely. That's a wonderful thing. We would love to see -- as just an example, back in ‘98, ‘99, we would generally, and at the time we had about 22,000 home sites, we would see as many as 50 to 100 third party move ins in markets like the Dallas market and across the portfolio. We often saw as many as 300 move ins. So that's music to our ears and we certainly hope that will happen.

Is there a reason you changed from Vanderbilt to Origen to do your servicing?

A couple of reasons. One is and specifically during the course and just prior to the completion of the IPO, Vanderbilt closed on an acquisition which was called 21st Century or 21st Mortgage. They moved all of their third party servicing to 21st Mortgage. We were not as familiar with them as we were Vanderbilt. We discussed it with our primary lender, Merrill Lynch. And because we were very familiar with the Origen systems and that's really what took us to Origen and their ability to provide reports and data on a real time basis that we made the decision to move over to the Origen platform.

Okay. Looking at your same community results, the rental home occupancy was relatively flat between the two quarters. I guess I was a little surprised by that. I expected that to continue to ramp up in occupancy. Is there a specific reason that that occurred?

On a percentage basis the reason that it's down a little bit is because of the addition. I pulled the numbers here, excluding the Hometown rental homes that we purchased or for sale inventory that they had, we bought about 1150 homes during the first quarter. So as those homes are coming in and being made ready, they go into the denominator in terms of total homes, but we don't have that leasing activity moving at the same rate that those new homes came in.

Sort of a real time example. On the 1100 that we picked up through the acquisition, contrary to what we define as a make ready, it required a lot of supervision by both our DMs as well as our regional people as well as myself and George McGeeney, who is our Chief Operating Officer, out there as to what the definition of made ready is, what their previous definition was versus what our definition was. And our definition is that it's made ready. When they walk in and there's a for rent sign on that home and they are showing that home, that home is white glove clean, carpeting is redone and shampooed or whatever it needs to be, walls are painted, appliances are in good order, the whole thing is working nicely and that wasn't necessarily the way they were as they were merchandising them. That all takes time. You have got to go touch 1100 homes.

Sir, we have a question from Rob Stevenson with Morgan Stanley.

Good afternoon, guys. Scott, can you talk about the demand on the consignment sale side? Have you seen any difference in the last few months there versus historical norms from retail people?

I don't quite understand your question, Rob.

You're basically actively doing consignment sales on repoed products. Is the demands for that product the same as it's been for the last year, two years, three years type of thing, or is it more difficult to move the stuff these days?

No, I actually think it's a function of price. And what I would tell you is that over the course of the previous year and a half to two years we passed on a lot of that stuff where we were buying as principal because we thought the pricing was too high. We thought the pricing was generally being driven by entrepreneurs who were taking those homes, putting them to land and financing those homes in a land home real estate package. What I would tell you today and obviously if you look at the finance companies, you've also got to realize that the majority of these legacy repossessed units now belong to finance companies that are either not in business or they are tailing down their business or they have gone out of business and there is somebody else at the reins of these things that are trying to do collections and that sort of thing.

I think for the first time we are now seeing those folks get realistic about price and they are looking at where our price points are and what we think is needed to clear the market and are more realistic about what that pricing should be to that end consumer than they've ever been. So to answer your question, I think more specifically, is that we think on those consignment units as we roll-out our financing platform that they are going to be very competitively priced and will provide a lot of value to our customer.

All right. Where was bad debt as a percentage of revenues during the quarter?

It was at 1.2%.

How does that compare to the year ago and to the fourth quarter?

That is lower than a year ago and it's also lower than the fourth quarter. But one thing I've got to say is that because we acquired the Hometown communities in the middle of the month, the bad debt reserve was basically nothing by the end of the first quarter there. So that could be skewed a little bit in the first quarter because of the acquisition. We did see some improvement in our core portfolio with respect to bad debt and our past due accounts but I'm not sure it's a trend yet. I feel good about it but again I think because of that acquisition it skews that number a little bit.

Okay. And then given the acquisition pipeline that you guys have and given the fact that you're seeing fairly robust market right now, where are you guys comfortable with earnings for the second quarter?

I don't think we are going to comment on second quarter earnings on this call.

Okay. And then lastly what was the ending share count at the end of the quarter?

I've got that right here. Hang on just a second. The total common shares outstanding were 40,952,000, OP units outstanding at the end of the quarter were 2,412,000. So on a fully diluted basis total outstanding 43,364,000.

Sir, we have a question from Todd Voight (ph) with Clifford Partners.

Yes, hi. I was just wondering if you have any background or insight on Chase leaving the chattel business and if that's something that is -- or just why they left?

Well, first of all Chase had a focus that tended to be high FICO scores, land home or a little bit different than the straight chattel business. But I think it just emphasizes what we said earlier in the call, is that we've not seen any meaningful entrants into the chattel side of this business and frankly it highlights the reason why we think having our chattel finance business and the ability to deliver these homes at essentially no retailer markup is so critical in our approach to filling our vacancy. And frankly in many of our markets we tend to be the only game in town. So that really is why we work so hard to get that facility established and why it is an integral part of our business plan today.

Okay. Great, thanks.

Sir, we have a follow up from Jordan Sadler.

Hi, guys. I just wanted to find out about your guidance for March to March. You previously gave $1.50 to $1.63. You still comfortable with that?

I am comfortable that we are on track, Jordan.

Okay, thank you.

Sir, we have a follow up from John Stewart.

Just along those lines, Scott, how do you feel about consensus for the second quarter at 32 cents?

I don't think we are going to comment on quarterly, John, but thanks any way.

Okay. That's it, thanks.

Sir, we have no further questions. Back to you for any closing remarks.

We appreciate you guys all listening in today. We are very focused and dedicated to meeting our business plan. And what I would say is that there are a whole lot of plane tickets in a whole lot of people's back pockets and we are in the field trying to make this business plan happen. Thank you very much.

Ladies and gentlemen, this concludes your presentation. We appreciate your participation in today's conference. You may now disconnect.