Hilltop Holdings Inc (HTH) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Affordable Residential Communities, Inc. fourth-quarter 2004 earnings conference call. Today's call is being recorded. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference is being recorded and would now like to turn the conference over to Brad Cohen of Integrated Corporate Relations. Please go ahead, sir.

At this time -- thank you very much. At this time management would like to inform you that certain statements made during the 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 that 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 expectations will be achieved and actual results may vary. Factors and risks could cause actual results to differ materially from expectations are detailed in today's press release and from time to time in the Company's periodic filings with the SEC. The Company undertakes no obligation to revise or update any forward-looking statements reflected in or circumstances after the date of this release.

Having said that, I would like now to introduce Mr. Scott Jackson, Chairman and CEO, and Larry Kreider, Chief Financial Officer. Scott, please go ahead.

Thanks, Brad. Thank you and good afternoon, everyone. I'm here with John Sprengle, our Vice Chairman, and Larry Kreider, our Chief Financial Officer. After my opening remarks Larry will review financial results. I will then wrap up our formal remarks before we conclude with Q&A.

First of all, I'd like to say personally and professionally I acknowledge that 2004 was a very disappointing year for ARC and I'm sure many of our shareholders felt the same. However, the Company, I believe, is now well positioned to overcome many of the operating and industry obstacles we have encountered over the course of the last nine months. I also hope that our shareholders realize that although much has been accomplished since September, it will take some time to realize the results of all these efforts. I believe we've made real progress on many initiatives that we started in the fall of 2004 and those should result in improved occupancy, produce higher quality cash flows in '05 and beyond.

In view of the prolonged industry slowdown and our own internal challenges, we've spent a significant amount of time making changes to our management team and how that team is organized to drive occupancy in an expedited manner during the fill stage on our acquired communities, namely the Hometown Chateau portfolio and the Dam portfolio. These additional resources are expected to be redeployed or eliminated once we reach occupancy levels above 90%.

During 2004 we restructured our senior operating management which enabled John and I to spend more time in our communities and thereby ensure that our employees had a clear vision and direction from us to meet our customer needs and to attain our corporate goals. I believe we've now empowered our field team to make decisions, seek the resources and help that they need, and to deliver on the plan that we have collectively put together for calendar year '05 and beyond. To create greater focus on occupancy growth we continue to focus on our operating philosophy that has served us well for the first nine years that we were in existence. That is buy, fix, fill and run, or BFFR as we call it within the Company.

In addition, we have brought together three very talented individuals who will focus on the daily execution of that strategy of buy, fix, fill and run. These individuals reporting to me include Larry Brown, who joined the Company last year as head of marketing and is being promoted to Chief Operating Officer of sales, marketing, and inventory management; Mark Schwanker (ph), a long time employee who is formerly our regional vice president in the South Central region being promoted to Chief Operating Officer of community operations; and Tom Herman (ph), who joined us last summer and brings 30 years of manufactured housing finance experience being promoted to Chief Operating Officer of our consumer finance entity Enspire Finance.

In addition, in our financial accounting area we have added Alan Cassock, who joined us as vice president and treasurer. He will be overseeing financing, cash and risk management. Alan has over ten years of public company CFO experience and 25 years in various accounting and finance positions.

In addition to those changes we've expanded our regional district management to increase focus on each individual community and how we manage that community in regard to BFFR. We've created an -- as I said in the last conference call, a strike force which has positioned itself to address specific issues related to particular markets and to drive new programs. We've built a bilingual state-of-the-art national call center in Dallas which is now fully functional and handling not only our customer service calls but also our marketing and lead management calls. We've given decision-making back to the point-of-sale, which was one of the functions that was sorely missing when I took the reins back in October.

We built out completely our in community sales organization, focused on the customer who needs our products at prices that provide value and affordability to that customer. Further, we have replaced or retrained virtually all managers in those acquired communities and we have, in addition, adding additional management where needed. We will continue to run this Company as we did successfully for the first nine years of its operation. We are an operating company and will pursue what we know works. Even if that doesn't fit the typical mold of an REIT in the public markets.

While our performance was below my expectations, and I'm sure our shareholders, I believe that our business model, our management team, and the capital financing we now have in place will allow ARC to meet our objectives -- occupancy objectives for 2000 and beyond. This will result in higher cash flow, greater FFO and enhanced shareholder value and, at the appropriate time when the wind is at our back and we have met our occupancy expectations, we will once more begin to grow this Company.

Our company has always been built around purchasing distressed communities, repositioning those and filling them. That is what ARC does and we do it better than anyone in the country. That was the mission of the Company when it was created in 1995 and it is still our mission today. As challenging as '04 was, we outperformed the majority of the industry in maintaining occupancy even though we made management decisions that initially reduced occupancy in order to achieve long-term stable growth and position our acquired assets for the long haul. In our view, based on our past experience, these activities will serve us well in the future.

In the fourth quarter we lost approximately 690 units of occupancy. We would estimate that during the third and fourth quarters we took actions that caused the loss of approximately 1,000 units of occupancy through tenant eviction that was not only for late to pay or no pay but also for cosmetic reasons, social reasons within our communities, and 1,000 units through our reduction in our older rental unit inventory where we actually stocked out of homes to meet our rental unit demand.

Reducing or exposure to the rental market and transforming our portfolio takes time. We readily acknowledge that our plan was slow to take off in 2004 but believe that today we are positioned to move forward. To fill a home site in today's market an operator must be willing to supply a home and the necessary financing to facilitate the sale or the lease of that home to a new customer.

The way we view our properties is basically in what stage they are currently operating in relation to buy, fix, fill and run. Today we have 315 communities each with business plans utilizing BFFR. Specifically we have 108 communities with 19,000 home sites that average 95% occupancy. In these communities our primary focus is to improve operating margins through expense and overhead management, utility recovery and creation of additional revenue streams. We have 98 communities or 20,000 home sites that average 85% occupancy. We are focusing in those communities on inventory management, that is the right product, the right price at the right time, resident retention to reduce rollover, and sales and leasing activities.

Finally we have 59 communities or 12,000 home sites with an average of 75% occupancy and an additional 50 communities with 11,000 home sites that average approximately 62% occupancy. For both of these segments with occupancy below 80% we know that we have to focus our capital and our people in ways that will generate significant occupancy improvement and growth. These 109 communities and 23,000 home sites is where our true, real heavy lifting is taking place and is, in fact, where the majority of our increased expenses are being spent.

Today with the majority of these communities now repositioned after a very, very tough third and fourth quarter, occupancy growth is a function of inventory, manpower, and time. In the each of these communities we've identified our target market, we know who they are, we know what demand they possess and we're operating accordingly. We believe the combination of our management reorganization, our specific community focus, and the sales and leasing tools we now have assembled will serve us well as we maximize long-term occupancy, create stable cash flow, and ultimately create shareholder value.

To give a little insight on how things are shaping up since the end of the fourth quarter, we've achieved positive occupancy increases in a broad range of our markets through March 11th of this year. Our overall occupancy grew to 82% compared to 81.5 at the end of December '04. We show a broad range of growth in our top ten markets with average occupancy growth slightly over 1%. In Dallas specifically 2.8%, Atlanta 1.1%, Salt Lake City 0.5%, Front Range of Colorado flat, Kansas City/Topeka 0.2%, Jacksonville Florida 1%, Wichita Kansas 0.5%, Orlando 0.5%, St. Louis and Oklahoma City flat. And the remaining 81% of -- or in the remaining communities within the portfolio we show roughly 0.2% for a total of about 0.6% since the beginning of the year.

Let me provide an update on home sales. During the fourth quarter of '04 we sold 946 homes and leased to own 348 homes. This compares to 277 homes sold and 36 leased through the lease with option to purchase program in the third quarter of '04. A total of 1341 homes were sold for all of 2004. The average age of used homes sold during the fourth quarter was approximately four years, with an average blended cost including selling commissions of about 13,000, slightly lower than the 13.8 we reported for the third quarter.

To build momentum in our sales organization and enhance our Hispanic marketing initiative and to move our older inventory, we offered homes in the fourth quarter at very attractive pricing, which provided excellent value to customers. Sales prices for the homes we sold in the fourth quarter, some of our oldest homes in the fleet, averaged approximately $9,300 per home. By providing this value to the consumer, we expect to realize significant referral business in the future, which hopefully will lower our acquisition costs of new customers to the Company.

Improvement in the past six months in sales of previously occupied homes is dramatic. We moved home sales from 159 in September to 315 in October, 334 in November, and 297 in December. And that is considering December is a three-week month; 308 January and 226 in February. The last three months are the slowest months of the year based on our historical trend. When the Company focuses its effort, it can initiate positive change.

While we will concentrate more on the lease with option to purchase and new home sales going forward, the previous six months have helped to train our community managers and the related teams including our sales and leasing agents and sales and leasing managers on how to sell, create value for our customer base, and hopefully position the Company to build real sales momentum throughout 2005. While our Fiesta marketing continues to evolve and drive new customers through our communities, we also recently announced the new American program that makes home ownership easier for newcomers to the United States. This initiative was carefully designed over the past year as we gained a clear understanding of the needs of the new American population. Our product is a particularly enticing alternative for this group compared to renting, and often renting in very poor-class, multi-family type of housing. And we have now made it so that home ownership can become a reality for the majority of these families. Through the new American program, we have simplified the process and requirements to buy a home. This includes accepting a wide range of identifications which can allow individuals with no U.S. credit history to buy a home and build their credit rating.

Finally, we continue to address capital needs of the Company. In '04, we sold 30 properties which improved their financial liquidity and added to our cash position. We have also improved our capital structures through 100 million of additional funding and commitments, 75 million through a lease receivables line of credit commitment, and 25 million through an unsecured trust preferred security which was funded yesterday. We will continue to evaluate the best use of our capital to generate the best return, and we will continually seek additional sources for future capital needs.

In addition, we continue to explore the sale of additional communities that do not meet our criteria for investment or do not meet our operating platform requirements. We have identified approximately 14 additional communities, most of them small in Pennsylvania and the Northeast, that will be put up for sale directly, and we expect those sales to occur in the second quarter. With that, I'll turn it over to Larry for the financial rundown.

Thank you, Scott. Let me start by stating that the prior-period numbers have been recast to reflect the exclusion of the 30 noncore communities sold during 2004, or held for sale as of year-end. For the three months ended December 31, 2004, our net loss available to common stockholders was 35.4 million or $0.87 a share on a fully diluted basis, compared to $17.2 million or $0.42 a share in the third quarter, and a net loss of 10.7 million or $0.63 per share in the fourth quarter last year. We reported FFO available to common stockholders of -13.2 million or $0.32 per share on a fully diluted basis in the fourth quarter, versus FFO of $2.6 million or $0.06 per share for the third quarter 2004, and -1.5 million or $0.09 per share in the comparable quarter last year.

Revenue for the fourth quarter 2004 was $64.5 million, compared to $60.1 million in the third quarter 2004, and $37.5 million in the comparable quarter last year. Revenue from our real estate segment for the three months ended December 31, 2004 was $55.6 million, compared to $56 million in the three months ended September 30, 2004. This decrease resulted from slightly lower average occupancy in the fourth quarter, partially offset by higher revenue resulting from a higher proportion of our income coming from home renters. Expenses for our real estate segment for the three months ended December 31, 2004 were $29.0 million, compared to $25.1 million for the three months ended September 30, 2004. Virtually, all of the increased expenses occurred in our acquired communities.

The increase is primarily due to increases in utilities of 1.0 million as a result of seasonal matters; real estate taxes of $1.3 million, mostly as a result of reassessment of our acquired communities; repairs and maintenance expenses of $900,000, primarily due to the completion of development expenses in all of our communities; and bad debt expense of $3,000, primarily due to the resolution of tenant retention issues in the acquired communities and some remaining effects of hurricane-related abandonments. As a result of the foregoing, our real estate net segment income for the three months ended December 31, 2004 was $26.6 million as compared to $30.9 million for the three months ended September 30, 2004.

Revenue for the retail segment for the three months ended December 31, 2004 improved over 200% to $8.8 million, compared to $4.1 million for the three months ended September 30, 2004. This resulted primarily from the increased number of homes sold of 946 from 283, driven by our in-community retail home sales and associated financing initiatives. Expenses for our retail segment for the three months ended December 31, 2004 were $14.8 million, compared to $6.4 million for the three months ended September 30, 2004. The increase is primarily due to an $8.4 million increase in the cost of homes sold. The retail segment incurred $3.6 million of gross margin losses based on management's decision to invest in the development of our in-community sales organization, to create a longer-term resident base and settle older inventory whose operating expenses were due to increase. As a result of the foregoing, our retail home sales segment loss for the three months ended December 31, 2004 was $6.1 million, compared to $2.4 million for the three months ended September 30, 2004.

On a same communities basis, comparing the fourth-quarter 2004 to the fourth-quarter 2003, real estate net segment income was $18.2 million as compared to $19.7 million. This decrease was a result of relatively flat same community revenues of $34.8 million as compared to $34.7 million, and a 10.8% increase in same community real estate expenses. The increase in same community expenses resulted primarily from increased repairs and maintenance and salaries and benefits expenses to support our growth initiatives, which we embraced in a comprehensive manner in the fourth-quarter 2004, and to overcome the ongoing challenging conditions in our industry.

On to other expenses. Property management expenses were relatively flat at $2.1 million during the fourth quarter. General and administrative expenses rose by $1.4 million to $5.8 million in the fourth quarter as compared to $4.4 million in the third quarter, primarily due to a severance cost of $700,000 and from the inclusion of our regional management group. Depreciation and amortization rose by $2.5 million to $21.2 million for the fourth quarter from $18.7 million in the third quarter, primarily because of capital expenditures put into service in the fourth quarter, new homes put into service in the fourth quarter, and adjustments to the amortization of loan origination costs related to our consumer finance debt facility.

Interest expense increased by $2.2 million in the fourth quarter, primarily related to additional borrowings under our floor plan and revolving credit mortgage facilities, and reduced capitalized interest. In terms of our discontinued operations, we generated $565,000 in income on the 15 communities held for sale or sold in the fourth quarter, and a loss of $6.3 million on the sales. These communities were sold at an average combined cap rate of 7.4%. For the 12 months ended December 31, 2004, net loss available to common stockholders was $94.7 million or a loss of $2.49 per share, as compared to net loss of $34.4 million or $2.03 per share for the year-ago period ended December 31, 2003.

FFO for the full year 2004 was a loss of 23.2 million or $0.61 per share, and net loss in 2004 included $30.5 million in charges related to the Company's initial public offering in 2004, recorded at the time of the IPO or in the third quarter. In terms of our capital structure, we had slightly more than $1 billion in debt at December 31, 2004, including approximately $28.5 million drawn under our $50 million floor plan facility and $51 million outstanding on our $85 million revolving credit mortgage facility. The weighted average rate of our debt was 6.1%, including the impact of interest rate swaps, and 87% is not due until 2008 or later. Additionally, our fixed-rate debt including variable-rate debt hedged by interest rate swaps amounted to 85% of total debt. This month, as Scott said, we secured an additional $100 million in funding and commitment, consisting of an unsecured $25 million trust preferred security and a $75 million lease receivables line of credit secured by our own homes. The $25 million trust preferred security was borrowed in full yesterday on March 15th, and is an unsecured note that matures in 30 years and bears interest at three-month LIBOR plus 3.25% -- noncall 5. The $75 million lease receivables line of credit is expected to close within 30 days and is subject to customary closing conditions and documentation.

Now I will turn the call back over to Scott.

To summarize very quickly, again 2004 was very disappointing, but I do think we bit the bullet, took the pain, made the changes which were necessary to get us in the right frame of mind and the right focus and on the right track, and we are now moving forward. In '04, we reached the conclusion that our industry was not going to recover any time soon, and to survive and thrive, this Company needs to be able to provide self-financing and provide alternative occupancy drivers independent of the industry. We have them. We believe we're one of the few companies that do. We have made additions that have increased costs, but we believe these will result in expediting improvements in occupancy and increasing our FFO over time.

We have and expect to generate occupancy improvements. In our fourth quarter, we made the necessary evictions and pulled homes out of the rental inventory to convert for sale and to prepare for '05. Our new lease with option to purchase products, very positive growth four out of the past five months. Our direct sales for cash trend was positive for six months. We rebuilt our financing product to stimulate new home sales and to better meet the challenges of the marketplace. We created market recognition for the platform and refined our message, reduced our cost of delivery, and are now building customer awareness, traffic, value recognition, and most importantly, a very significant referral base within our communities.

We have invested heavily over the course of the third and fourth quarter in community cleanup and creation of curb appeal, and we've created a network of word-of-mouth marketing which is very, very important to our Hispanic demographic in our target market. We have improved our capital structure to match our assets and to provide ongoing capital to take those vacant assets and turn them into productive yielding assets. In turn, we believe this will drive our occupancy. Once we have attained the occupancy goals that we have for ourself, we will then focus on expense management just as we have before as we have managed through over 200 communities prior to the IPO that were purchased on a distressed basis.

Again, we are going to execute it. We need to execute. It will take time, but this comprehensive strategy -- and I can assure you we have left no stone unturned -- we believe will result in a stable resident base, higher occupancy, increased cash flow over the long-term. Our management approach has worked successfully in the past nine years for, as I said, over 200 communities in 30 markets.

So with that, we would like to open it up for questions.

(OPERATOR INSTRUCTIONS) Paul Adornato with Maxcor Financial.

Good afternoon. Just to clarify, the 30 properties that are discontinued operations does not include an additional 14 properties that you have identified for sale; is that correct?

I'm sorry?

That's correct, it does include the 14.

Discontinued operations is 30 properties. Then there's another 14 behind that that you are going to sell?

That is correct.

And for the discontinued operations, what was the average occupancy of those communities?

One pool was about 64%, I believe, and the other pool was about 52%.

And how are those assets valued? Are they sold on a cap rate basis?

The majority of them were sold at auction and, in general, they were sold in combination of cap rate plus replacement cost and option value for the vacant home site.

And what -- maybe you could just give a little bit more detail on the valuation of those assets, in terms of cap rate and (indiscernible).

We actually thought the valuation was quite high. The loss on sale was primarily from the ARC core communities that had been -- had a stepped-up valuation back in 2001-2002, when they were refinanced and we rolled together our limited partnerships. At that time, the majority of those had quite high occupancy and had suffered declines in occupancy for a number of reasons, primarily the collapse of the finance side of this industry. On the other hand, the Hometown communities that we sold, in general we sold them for more than we paid for them. We were pretty pleased with the auction results.

Okay. And on that note, are all the mortgages that you have nonrecourse?

Yes.

Yes, they are all CMBS nonrecourse. Some of them are in certain SPEs. They are crossed within the SPE, but the SPEs are not crossed together. Some of them are single asset, and then some of them are on revolving lines.

Okay. And it sounds like the conversion of rental to homeowner status is kind of a painful process, in that you kept them vacant in order to sell the older homes coming off lease. How much longer will that process go on? How many more properties do you need to convert that way?

Well, it is not properties; it's homes, and it is an ongoing process. We obviously had a bubble when we first began. I think of the 962 that we had at year-end, we're down to roughly -- we're down to 670. So we sold about 300 of those. Basically, what we do is we look at vintage where we earmark sales. Primarily in the third and fourth quarter were homes that had a vintage of 2002 or older. We actually had some communities that sold out of those homes and we, therefore, stocked out and didn't meet some of our demand because we had not reordered inventory yet because of a lot of other reasons, primarily us rightsizing our capital and working on repositioning of the platform.

But, in general, how we look at this business is that in our rental home when we buy a new home and we put into service, in general, if we bought 10 homes in January, by June about 90% of those homes would become a yielding asset, either through sale or through rental. If we rent them, we generally hold those homes from three to four years, and then as that last tenant moves out, if we don't sell that home to that tenant, we then put them into our sales inventory and generally sell those at prices roughly equivalent to book value plus a markup against our administrative expenses for sales. So it is sort of an ongoing process always.

Okay. In terms of capital needs through the rest of the year, maybe you could just run through sources and uses for 2005.

Essentially, today we -- and it depends on the business plan and how you look at it -- but assuming that we sell only these 14 communities, we have essentially covered our capital needs somewhere between the third and fourth quarter, depending on occupancy run-up. And our real capital needs or capital that is needed for continued growth of FFO is primarily focused on new home inventory. So it depends on the focus or the type of transaction that the field is producing. If we bring a new home in and it is sold, either financed or for cash, that is a much less capital-intensive exercise than if we bring a new home in and we put it into our leasing fleet.

On the other hand, when we bring that home in and put it into our leasing fleet, we know from our own past experience that within six months that asset is yielding somewhere between 15 and 18% on an unlevered rate of return. So it is a bit of a Rubik’s cube, but essentially with the lease facility now in place, with the toppers in place and with these home sales depending on the mix of transactions, we have met our capital requirements, including necessary cash flow to meet -- certainly get service but other discretionary items like dividends until year-end.

Okay, thanks. That is all for me right now.

(OPERATOR INSTRUCTIONS) Lee Cooperman with Omega Advisors.

Thank you very much and thank you, Scott, and your team for a comprehensive rundown. It was so comprehensive, I couldn't follow everything, but that's my fault. I'm getting too old. But to try to stick these three questions, what I would like to do is just give you my questions, and you can take some now and take some later, not to monopolize the call. But first question, it was my understanding that 86% occupancy rate was a level necessary to cover the dividend. A, is this correct? If so -- and I would like to get all my questions out. You can answer them now, later, whatever. Is this correct? And if so, when does your budget show you getting to 86%?

Second is how much room do you have on your unborrowed lines to support the dividend as you're getting to that occupancy rate? Third is this whole area of like a good bank/bad bank. If you looked at your portfolio, what's behind the question is to try to get to an NAV of the Company, you have a bunch of properties that occupancy rates are above the mid-80s generating positive cash flow. That cash flow is valued at some cap rate. Then you have a portfolio that is either set aside for sale or set aside for improvement, where you can look at deriving an asset value for that portfolio.

And my third question would be, if you look at the portfolio that way, what is the recurring cash flow coming out of the reasonably highly-occupied properties, and what is your assessment of the NAV of the properties either for sale or below acceptable levels of operation where you either approve them or you sell them?

I guess the fourth question, again, is you sold a bunch of properties at 7.4 percent cap rate. How would you compare them to the properties that you have in the portfolio on average? Are they better or are they worse? And those would be my questions. You can handle them in any order you want at any time you want.

Okay, why don't we start with the last first. As it relates to property sold, we have done a pretty exhaustive scrub of our entire portfolio. As it relates to the 30 properties that were sold, they were clearly the outliers both from an operating point of view as well as from what we viewed as what we could do to those properties within the markets that they were in. In general, if you look at it on an average price home site, they roughly sold at about $12,000, I believe, a home site. But if you look through those and try to figure out how they were priced, it is somewhat all over the board. In general, how we value properties depending on rent levels and operating margins, it sort of ranges from where you have a low occupancy part to a high occupancy part. In general, a full home site generally commands a price of somewhere between $27,000 on the low side to as much as 45 or $50,000 on the high side, depending on the markets. In a number of our markets where we have high occupancy across that market, we are operating those communities on a very high operating margin, so we tend to produce a very high level of NOI, and that results in very high valuation.

In general, on vacant home sites depending on where they are, private markets because these people were private buyers, we generally value those first on a concept of replacement value. And in today's market, to build a new home site generally costs around 18 to $20,000 in hard costs, and then depending on the location it can cost anywhere from 5 to $15,000 in soft costs. Soft costs would include planning and zoning, water tap fee, special municipal expenses, off-site improvements, that sort of thing. So as we look at our portfolio, we sort of have different values for different home sites in different buckets, and basically how we look at our company is in those really three buckets, which 90 and above, 80 to 90, and anything 80 or above (technical difficulty) operating margins and fill.

I don't know if that answers your question, but in general what we have done throughout the entire portfolio is we basically prioritized our every asset and said, okay, what were the ones that we would first sell? Then what was the next level, the next level, the next level? I think kind of part of your question as well as part of Paul's question was how many of these communities could you sell, and what is the ultimate valuation on those communities.

That's part of it, but let's say like the good bank analogy; how many home sites do we have now left in the Company roughly?

64,000, a little less.

I'm sorry, 64?

64,000.

Of the 64,000, how many of them are what you would call well-occupied, strongly-performing properties?

About 40,000.

So the good bank is 40,000 properties. What is the recurring cash flow of those 40,000 properties?

Well, that's pretty hard to answer. We can try to answer that for you --.

What's behind the question, I assume that the 40,000 strongly-performing properties could be worth, I don't know, 12 to 14 times cash flow. Or is that low?

Yes, I think that would be a reasonable assessment, yes.

Okay, fine. Then we have the bad banks, so to speak, which are properties that are suboptimally operated. We have the hope of improving them. Some where you're going to sell them to a doctor or a dentist who has a different hurdle rate that wants to own some dirt. And so then I add those two numbers together, and I come up with an NAV of X. What I'm looking for is to derive my own independent view of NAV and also ask you what's your view of NAV as you look at the Company?

We have three components of NAV, one of which -- or two of which we think, or I think the market has primarily overlooked. We have those full home sites, those fully-occupied home sites. That's roughly 40,000 home sites. That is roughly the size of the third-largest company in our industry, and in those if you combine those, we are roughly running those at about 90% occupancy, which I believe also is quite high for our industry today. If one was to value those say at $35,000 a home site, that would be a total enterprise value of roughly 1.4 billion.

Now, if you look at normal leverage per REIT and let's say that's 50%, that is roughly equity value of about 700 million on that piece of the equation. Now, in addition if you were to right-size the company to that piece of the equation, your overhead would be significantly less because you would have full communities and you would not need the sales force, the amount of people that we have in these communities for the heavy lifting that we're doing right now and today. So you would basically look at that, look at revenues, and you could probably rule-of-thumb figure that overhead costs would be above the park level 5 to 7%. And that would give you a company roughly valued at, I believe, somewhere between 600 and $700 million of equity value, assuming that your leverage was roughly 50%.

So on the other 24,000, which I believe on a combined basis runs approximately 60% occupancy, 63 I think, when you combine them all, if you look at our overhead allocated to that on a real-life fashion, roughly 60% of our overhead when you really -- if you were to do timecards on everybody working on those assets, about 60% of our overhead, 60 to 70, would be allocated towards those properties.

Now if you were to value those properties let's just say a walk away value of 25,000 for the occupied homesites, which would roughly be 12, 14,000 homesites, and 12,000 for the vacant homesites -- let me just do the math here. It would be a value of about $500 million.

470 million.

There, again, if you figure 50% leveraged, that would tend to show an equity value of about $250 million.

Turning to maybe doing something wrong because I am not a real estate expert, but if I took 1.4 billion and the 470 million and that would be 1,870,000,000, the total borrowings of the Company now are about -- what $1 billion?

About $1 billion, yes.

So that would be 870 million of equity of value divided by 41 million shares?

43, yes.

43 million shares? That is $20 which is not quite twice the price of the stock. Your belief is the NAV of the Company approaches $20?

Well, I don't think I want to make that statement on this call, Lee. But I would also say that you're missing one other very important component of the value of this Company and that is roughly a $200 million portfolio of homes. Which are driving in today's market -- that is what is driving our (multiple speakers).

I'm sorry to interrupt, Scott. I apologize. The $200 million in addition to the other things we talked about?

Yes sir. Which we have roughly about today about 50 million in debt against.

So just to make sure I want to understand this correctly. We have 40,000 homes that are occupied at about 90%. You think rule of thumb will be worth around 35,000 for home or 1.4 billion of gross value. We have 24,000 suboptimal homes, 14,000 of which are occupied which you think are worth about 25,000 a pop, so 25,000 times 14 is basically 350 million and we have 12,000 basically that are vacant that you think are worth 10,000 a pop or 120 million. And then you said there is another 150 million of unencumbered homes net of encumbrance?

Yes.

Sometimes you come up with an answer that is so disconnected from the market that it makes you wonder but if I add up 1.4 billion and 470 million, and 150 million, that comes up with 2 billion and I divide that by 43, even I can know that minus the $1 billion of debt -- I take $1 billion, and I divide $1 billion by 43 million shares, that is $23.25. Now, period another way of approaching it, which would not seem to make sense is if the NAV is derived by saying somebody who buys this property wants 7% cash-on-cash return plus some kind of growth, to get 7% cash-on-cash, you'd need to be maybe generating free cash of $1.50 a share which we are nowhere near.

But what we have now is a so-called good bank, bad bank. Some of the stuff is generating free cash flow and others aren't. I don't want to pin you down to a number, and I'm going to give you a tremendous amount of room, but for what you are saying, rightly or wrongly only time will tell obviously -- the stock price presently is substantially below what you believe the NAV or liquidating value of this Company is?

Yes.

Back to the first question, is the 86% occupancy rate to keep a divided -- what is behind the questioning just to help you and your Board, the two relevant questions it seems to me to for a shareholder now is $1.25 dividend safe? And what's the assets of the Company worth? Is $1.25 dividend is linked to the issue of occupancy and is 86% occupancy a number that would give you the ability to support your present dividend?

Today, 86% occupancy is not enough to support our dividend at our expense levels. Okay?

What would that number be, 90?

That number would be roughly 91%, but in normal operating conditions, so (multiple speakers) If you were -- say you were going to get it to 86, you would shed operating expenses and just let things happen to get you above that, then you would be very close to dividend coverage.

I guess what you are saying is as you get rid of some of these troubled properties which are more management intensive; you will be in a position to reduce your expenses and therefore your occupancy breakeven for the dividend coverage?

It's not only the troubled properties, Lee, it is also increasing the occupancy in the property. (multiple speakers)

Right. But for example, just to give you an example, it would be whether you get rid of those troubled properties or you fill those troubled properties and we are now showing evidence of significant fill in our most distressed markets, i.e., Atlanta; i.e., Wichita; i.e., Dallas, Texas, as you fill you need less human capital and investment and expenses go down as communities fill up.

How much borrowing capacity do you have left on your unused lines that's unrestricted where you could support the dividend as you improve the operations of the Company?

We have a number of sources of cash liquidity and let me just kind of click through them. One is today on the facility that we are putting in place which is subject to a Mac-out (ph) only, although we do have to document it at Merrill Lynch, we will have $75 million worth of capacity. That capacity will be taken down in conjunction with inventory purchases for homes going into our lease fleet. Not homes going into the sales fleet.

On the sister facility to that is $125 million channel finance facility so that when we buy a home into our $50 million warehousing floor plan facility, and that home is sold to a customer and financed, we get roughly a 75% advance and so that gives us room to basically finance --bear with me one second -- about 7800 home sales. So that is the second source.

The third source is on our revolving line of credit with our mortgages. Today we have about $20 million worth of capacity there. But within our portfolio, we have roughly 110 communities that in one form or fashion over the course of the next few years we can refinance those communities as occupancy increases in those communities or we could sell those communities if we had to, to provide liquidity in the Company.

In addition, and finally, if you look at the leasing inventory today of which we have roughly 8000 homes on the books, we can also sell those houses today because they are essentially 150 million of those are not pledged, they will be pledged going forward, and we have ways to prerelease, those also provide a great deal of liquidity throughout the month each and every month as we sell those either for financing or for cash.

So liquidity across the board, although I believe what the market doesn't understand is that we have invested since the IPO almost $120 million in new inventory and additional acquisitions of communities, there is a significant amount of liquidity within our balance sheet today.

One thing -- one last comment. Again, it is a very comprehensive call -- if I believe as you apparently do that my NAV, just to give you a range, I want to give room. You are working very hard on our behalf and I don't want to pin you down, but if I believe my NAV was 17 to 20 or higher and my common stock was the highest yielding piece in the capital structure, it is because the stock closed today at 1185 and you're paying $1.25 dividend which is a yield in 10% (multiple speakers).

That would be my best investment, you're right.

So what I would find a way of doing, if I believed the NAV, I would find a way of accelerating dispositions and taking this money and again only if you are highly confident that there is room for error in your calculations, I would add shrinking the cap because every share you buy back, you are accreting to all the remaining shares, both in NAV and in your ability to pay the dividend.

I think are two ways to do that. One is through selling assets, clearly that is one way. However, you do then give up the growth that we did the public offering for, and we do believe that we are now starting to get very good traction in those low occupancy communities.

The second is to look to other sources of liquidity, i.e., borrowings or some capital market activities or some other form of financing those low occupancy communities and using proceeds to buy back stock.

The borrowing however -- I'm not saying which way to go -- I'm would just say the obvious. The borrowing has risks associated with it. There's something exciting about the prospect of selling something at private market value, full value and turning around and buying your stock at 60% of its private market value.

No doubt about it, and certainly it is a topic of discussion every time we have a Board meeting.

I've asked you enough questions. Thank you very much and good luck in pursuing your plans.

Thank you.

Jordan Sadler with Smith Barney.

Hi Scott. I'm here with Jon Litt. My first question is regarding the occupancy. You have several different drivers of occupancy or vacancy as the case may be. From the fourth quarter -- from the third quarter to the fourth quarter, net occupancy instead of I guess increasing declined on an overall site basis. In the third quarter you had -274 sites; in the fourth quarter, you're down 700 sites. Yet you are selling more homes. What is going on with the rental program? I don't understand what the objective is behind the rental program?

I don't know if you listened to the call, but I mean, we said it. We took 1000 homes out of our rental home inventory and held them for sale which meant it isn't just one part and they are across a whole punch of different certain parts we stocked out of inventory so leasing activity clearly went down. Part of this was intentional; part of it frankly was a mistake on our part by taking our '02 vintage homes as they became vacant off of twelve-month leases and putting them into the sales bucket. We have now reversed that and frankly for the first two months of the year, not only is sales activity good, but leasing activity is also very, very robust as well as lease to own. But -- that was (multiple speakers).

You're leasing again more vigorously than you were --?

We are converting as many of our twelve-month leases on a going forward basis today to a lease-to-own program which is typically on a three to five year duration where they end up owning the home either in the third year or the fourth year or the fifth year and that roughly today is about a little over half of our total monthly leasing activity.

And then secondly, in those numbers, third and fourth quarter and by the way in the third quarter conference call we did tell the marketplace that we did not expect any pickup in occupancy for the fourth quarter but that we did expect pickup in occupancy for the first quarter which we are now seeing. That we also primarily in the acquired communities bit the bullet, did a lot of cosmetic evictions. As well as we were able by finally getting the majority of the Chateau community managers no longer as employees, we found certain instances of late pays and discrepancies as it related to billing matters and that sort of thing. And we evicted over 1000 residents in those communities. Not all of which were for late pay, a lot of them were for cosmetics.

Just one thing I wanted to point out to you, if you go to the table in the press release, you can see the occupancy drivers for the (multiple speakers).

I do see that, Larry, thank you. I do you see that. I guess my question was in terms of increasing from 81.5% occupancy at the end of the year to 82% in February. Are you achieving net positive net absorption?

Yes, we are achieving very good net positive absorption.

Or is that a function of having sold lower occupancy properties in December, January?

No, (multiple speakers).

This excludes all of the discontinued properties.

So that is basically on a same-store basis.

What is sort of the monthly pace that you're seeing of total net absorption?

Right now we're not seeing necessarily a monthly pace of absorption, but what we are seeing is roughly that the platform now is producing between 913 to 1400 transactions on a monthly basis which is basically right where we need to be in order to hit what we believe is our occupancy targets by year end of somewhere between 86 and 88%.

And the number of repos and organic move-outs that are offsetting that?

It's essentially the same as it was. So what we have done is we have ramped up our own activity to not only overcome that, but really, I think this is one misconception in the marketplace is that our buy, fix, fill and run is exactly that. We buy community, we fix a community, that fix is not only capital improvements but it is tenant remixing. Its tenant eviction for tenants that don't follow the rules or don't pay the rent or for some other reasons we don't believe are conducive to the overall health of that community. And once you get through that, then you can begin to start to fill.

Not to pin you down, Scott, but you're saying 86% by year end seems feasible. You're at 82% in February. That is 400 basis points of occupancy, so like 2500 sites in 10 months at 250 a month net?

Yes.

Okay. What was the total volume of sales in terms of the 30 properties you sold? I know you previously disclosed the other ones. I'm just -- the ones that were sold or auctioned in December? What was the dollar value?

The total dollar value of all of the sales?

Yes.

It was roughly what, 95 million?

Out of all the sales, yes. It was that amount. I think it might have been gross basis a little higher.

Okay, 95 million. And the ones in December alone were how much of that?

It was roughly 35 -- bear with us. Let us look at that.

I will hold on for that one. And the ones that you identified, the 14 communities in Pennsylvania in the Northeast that are going to go in the second quarter, what do you think those will go off at?

They tend to be small parks. A lot of them that we picked up in our D.A.M. acquisition, the ones that we wanted to see zoning and that sort of thing for expansion. There are a couple of Hometown Parks, a couple in Iowa that we are considering selling. But there again, they are odds and ends and it is a reasonably -- it's a reasonably -- it's a short list and it is roughly I think gross 2000 homesites.

Jordan, I think of the properties held for sale you could turn to the balance sheet. We had $54 million of gross value, and then against which we had about $30 million of debt. That is as of the end of the year. That was for 12 of the 15 properties.

The 2000 homesites that you just mentioned, where do those go off at, the 27,000 a site -- what is a good average?

I don't know that I can tell you that. What I would say is that they tend to be smaller parks but they have very high occupancy and my sense would be that there will be sort of a boutique buyer here and if our other auctions are any indication, we should sell these through an 8 cap (ph).

Okay. During the quarter you had an amortization of loan origination fees of 3.5 million. I noticed, what was that related to?

That was paying back your institution on the bank line that didn't work. Oh, and Merrill's too. Steve's too, also.

It was also a catch-up adjustment for -- I think our ongoing amortization rate is about 1.2 million. We had an adjustment related to the consumer finance line based on our negotiations that we are conducting in the first quarter.

So it will be 1.2 million going forward, you think?

That is about what the rate is going forward yes. Based on the lines we had in place at the end of the year.

Didn't you have a cancellation, a prepayment fee of 3.5 million last quarter?

That was last quarter. That was on the -- yes.

Does that relate to these same facilities?

No. It did not relate.

This relates to the chattel facility that is not drawn upon but it was incurred in '04 and so --.

The chattel facility?

Yes.

Lastly, the shares that were distributed by Thomas Lee in January, do you know if those shares were held in the street name? If they were registered or they had to get through a registration process?

Well, they have not gone through a registration process. We had little knowledge of the transaction until after the fact, but they distributed those to their LPs. Their LPs had accounts -- I believe they were distributed into Merrill Lynch accounts. They are still subject to 144 and will be registered when we put up our shelf in June.

Then none of them have traded?

Actually, we believe that probably over half of them have traded under rule 144.

Okay, thank you.

Steve Sakwa with Merrill Lynch.

Thanks. I know this call has gone on long and I won't try and beat a dead horse. I'm just trying to get some comfort here that the wheels are really moving and moving forward and I guess I'm trying to look at this table that you laid out here, this occupancy activity for the three months ended December 31. And you're obviously making strides on home sales and renter move ins, but things like repossessions and I guess this home, rent or move out --.

I guess I'm trying to understand the 1000 homes that you took out of the rental home pool, is that partly reflected in this -1378 or is that a separate issue? Because if it is not included, you basically lost ground even though you are running faster. It is sort of the treadmill is speeding up and you're doing more and more and not making up any ground. And I'm just trying to figure out how some of those things that you did yourself kind of flowed through these members?

Okay, actually I think John wants to answer this. So I'll let him take a crack.

Steve, what I would say that where we took those homes out of the rental portfolio, it didn't affect the home move outs because -- or the rental home move outs because those people moved out as their leases expired. What it affected was rental home move ins because we did not necessarily in a lot of our markets in some of those parks like Scott talked about, have rental homes available to release when we moved those into the for sale bucket.

So our leasing activity went down. Our sales activity went up. Our sales activity did not go up as much as inventory we took out of our leasing portfolio, but nonetheless, we made that conscious decision for a number of reasons including we wanted to test where that prime the pump on home sales and also we knew that the majority of those homes were being focused and sold to our target market, our target demographic. And we viewed that to a certain extent as a way to jump start our referral business which we think long-term will reduce our overall sales and marketing costs.

As it relates to and we clearly said this in the third quarter call, we did not expect to have any positive pick up within the fourth quarter because we knew we were still going to the fixed stage -- which by the way that fixed stage should have occurred starting in May and June and July and it did not occur until September, October, November and December and that was our fault and we fully take responsibility for that. But we knew we had to clean that tenant base out and it is our view over and above our repossessions, over and above our kind of standard third-party move out. Which by the way our third-party move-out is lower than the industry average today. We knew that we would have increased vacancy, but we needed to make that increase, create that increased vacancy in order to rightly position those acquired assets so that we could move forward in our fill stage of our business plan.

Okay, I guess taking what your expectations are which is kind of 250 of net move-ins a month, it translates to 750 a quarter. Can you maybe give us some sense as to what you think the gross activity will be on a move in basis and kind of the gross move out because repossessions look like they are up, and so the (multiple speakers).

There's some reasons for repossessions being up too, because we (multiple speakers).

They're not. They are actually down. They are up Steve, simply because of -- from last year, simply because we have more communities. (multiple speakers) If you look at same communities they are actually trending down.

Right. But we also forced hand here in that we have become very aggressive on bidding on repos today and if we don't get that bid on moving those out and weaning ourselves from really any payments from the finance companies because in my view it just isn't -- that isn't the way to advance the ball.

To answer your question, are we seeing less repossession in our communities? We are beginning to see less repossessions but just as I said last quarter, I'm not going to say that is a trend because I don't know. What we have done is we have put in a horsepower and capital and manpower into the platform in those low occupancy communities so that we are basically creating enough transactions to compensate for the repossession move-outs, for the third-party homeowner move-outs and for the rental fleet move-out which is a natural occurrence and still pick up net occupancy which was really our goal as we repositioned the Company mid-September through the end of the year.

If I add up those three numbers in the fourth quarter, the 436, the 341 and the 1155, you get about 1932 move-outs. And I guess to net 750 then, you're gross number has to be close to 2700?

Right and we're --.

How would you see that breaking down between sales and rental so we can kind of track your progress?

Sure, we are executing and you've got to realize that we have some seasonality in our activity as it relates to sales and leasing and especially as it relates to those in our northern communities. So today there are very little activity going on in places like Iowa, Indiana, Pennsylvania, upstate New York. We still continue to have activity in Texas and in our western states.

But in general, we expect the platform on an average basis to generate about 12 to 1400 transactions a month and it will track up so what we will actually be seeing is more transactions than that probably May, beginning May through ending October but on average 1400 transactions. And those in general should be divided roughly depending on availability of capital and we now have a buffet of products so we try to meet demand as demand comes to us.

But basically 50% of those transactions are what we deem lease products of which a little over half today is our lease-to-own product which is tandem out to a tote-the-note sale and we want to move that to as much of that 700 a month as we possibly can. The other half of that is roughly divided about 400 used homes and about 300 new homes. We are not there yet on new homes. We are there on used homes but we believe that now with the changes in our financing facilities and our ability to continue to buy inventory and put into communities that we'll roughly get there.

Now if you track it every month and you say is it 50-50? It probably won't be but in general we think over the course of the next twelve months we will generally average between 12 and 1400 transactions a month. And that over that period of time, that should meet occupancy targets of somewhere between 86 and 88% by year-end December 31.

Okay, thank you.

John Diffendal with BB&T Capital Markets.

Just a couple of quick questions, what was the number of new homes that you purchased from MH Manufacturers in 2004 and for the fourth quarter?

We bought about, exclusive of the Hometown acquisition, we bought about 3400 homes in all of 2004, and over 700 homes in the fourth quarter.

Your inventory that is left to sell at the end of the period?

Is around 8200 homes. It is actually in the tables.

Not to sell. Total of 8200 homes.

Less than 920 -- (multiple speakers).

Less than 900 that are held for sale.

I see. What are your plans for '05 in terms of new purchases of new homes?

It depends on demand. We have put that decision-making at the point-of-sale, and our reorganization if you noted the gentlemen, Larry Brown, who is in charge of sales, marketing. He's also in charge of inventory and depending on what our run rate is on new homes sales, versus leased sales, but in general if you look at where we think our demand is, we will buy between now and next March roughly another 6 to 7000 homes.

That will be a combination of purchase of repossessions that are existing in our communities plus new home orders. We do not in general buy used homes in the open market to put into our communities.

And you shifted a bit toward buying more repos than new? Is that what I'm kind of hearing?

No, not really. We have always bought new homes. We've just gotten a little more aggressive on our repo home bidding and we have also in our reorganization, we have created a field force whose primary duties within their daily activities is the purchase of inventory, the transportation and the installation of that inventory. They are going to be compensated on a capital charge basis, and they not only focus on the ground on our new home shipments into communities, they also focus on our repossession purchases.

Thank you.

You bet.

Richard Solomon (ph) with Kennebec Resources.

Good afternoon. How are you? My question is pointed at occupancy, which is to me the driver of what will ultimately realize value. Mr. Cooperman asked questions about what was the prospective occupancy that you needed in order to be stabilized in being able to attain free flow coverage enough to pay the dividend. What I'm trying to figure out simply without getting into the micro of it all is, is there some way transparently that an investor can look at the Company from the outside and understand what the significance to the bottom line would be for a 1% change in occupancy?

This is Larry. I think there is. If you go to the tables that we provide, we show the rent per home site that we charge on average and you can extrapolate and perform your own mathematics.

I think there is a much better way and that is to look at the buckets and I think going forward we are going to provide that transparency into each one of these groups. What I would tell you is you get significant pickup in FFO as operating margins increase. So in that top bucket of 20,000 homesites, of which there are some parks that were acquired parks, those tend to run at significantly lower operating margins than our core parks at that occupancy level.

The focus on those parks for '05 will be to be significantly move that operating margin within that segment of our business. In addition, additionally, we will also in those communities be ordering out and filling those homesites. So for example in our southeast region, we just where we have I think 30 communities that are 90% or better, we just ordered enough homes to fill every home site in those 30 communities.

So we will have physical occupancy in those communities of 100%. And within those we will have about 6% of those homesites to 8% of those homesites in rental units. We know from our own experience that when we buy those rental units within six months and we are trying to shorten that period, those begin to be rented and 90% of those stay a yielding asset as long as we own them or as long as they are in our communities. That is one way to look at that piece of the business.

Then you take a look at it and you say where are you picking up occupancy? If you are picking up occupancy in high margin communities or high margin markets, obviously a point of occupancy in those markets is a lot more valuable than a point of occupancy in our lower margin or lower priced markets. So in Oklahoma City, a huge pick up in occupancy doesn't have the same effect as a big pick up in occupancy in Salt Lake market or a Front Range, Colorado market, or a Des Moines, Iowa market. It is not just occupancy.

In the occupancy -- in the sector of the portfolio of the 20,000 homes that are less than optimal margins, it's better to have occupancy period in that portfolio than to have no occupancy at all?

No doubt about it, and that is why if you look at our expense line and our overhead line, and you see really as we said in the call where it is focused, that is where it is focused and that is where we are doing the majority of our heavy lifting to push the occupancy up.

Next question. Is there prospectively the prospect of being able to have the Company issue guidance going forward sometime in the year 2005? Or are we going to go from quarter-to-quarter more or less without there being transparency from one conference call and earnings release to another?

I would say that that is probably a decision of the Board.

Okay, the next question is, in terms of information with or without guidance, as an investor trying to gauge the disconnect from the stock to the reality of what the net asset value of the assets might be, it would be useful if the Company could communicate more transparently, if possible in between the earnings releases so that there isn't such a wide gap of noncommunication and possible speculation as to what may or may not be going on incorrectly. That's it. I wish you good luck. Thank you very much.

Thank you.

David Rodgers with Key McDonald.

I had two quick questions actually. The first was, of the homes that you wrote off with the impairments in the quarter, were all of those homes that you had purchased as new homes or were some of those repo purchases?

Many of them, the majority of them were older homes. They were a combination of homes that we had acquired when we acquired communities. Homes that we had acquired through repossessions in our communities and to a certain extent, probably the homes that were 2001 or newer were homes that we acquired as new homes over the course of business.

They were also -- and we didn't really focus on where the majority of markets that those impairments came from -- but in general, the impairments on the newer homes that we had bought into the leasing fleet it was either market-driven impairment; it was specific home driven impairment because for one reason or another, the home had fell in a significant disrepair; or it was a management decision to move that home out of the fleet for a number of reasons, including attracting more tenants.

With each one of those sales, in general, what was attached to that sale and what is important for people to understand is that we required a three- or a five-year lot lease on those sales and therefore we know that those homes are going to stay in our community probably another 15 years. But for certain we know we have created a long duration, good credit within our community. So it had lots of implications over and above an impairment.

I guess the final question for Scott or Larry, was on the operating expense increase between the third and fourth quarter, I know Larry broke that out earlier. How much of that goes away in the first quarter? You mention some personnel, some maintenance and expense. Are you done with the maintenance expense side or does it all carry forward here at this point until some further time?

I think you can expect to see that level of expenses perhaps a little bit lower but not significantly lower until we reach full occupancy across the platform or until we would make the decision to sell a number of assets which I don't believe we are ready to make that decision at this time. With that added expense clearly a lot of the R&M (ph) will go out of the number, but the personnel expense is primarily focused on that fill activity in those 24,000 homesites, those two buckets of 75, 80% or below buckets of communities. And as of those fill, then you will begin to see very dramatic overhead cuts in those communities.

That frankly is how we have always run the business prior to being a public company and at least we believe that is an equation that actually works.

Thanks.

Jordan Sadler with Smith Barney.

My last question is just on the home sale. Should we expect that you would continue to sell each of these homes at a 3 to $4000 loss?

No, you shouldn't expect to see that. We actually are now selling homes at net book value plus depending on the markets anywhere from a 3 -- from a 1000 to $3000 markup which should be sufficient to cover our overhead costs of our marketing and sales organization over time and we're having very good activity. This was a specific course of action for a number of reasons as I have said before. And it was primarily to get the momentum and the culture and frankly to give our field force the confidence that they could go out and make this thing happen.

To be clear though, we will see some of that in the first quarter. Some of that carryover. (multiple speakers).

Some carryover, right. Because a lot of those homes closed in the -- some of those homes closed in the first quarter. They were documented in the fourth quarter.

That's the impairment charge?

That is correct, yes.

Right. Right.

But there will be a little bit more carryover in the expense for 1Q, we think?

I don't think so. The impairment charge was meant to cover the required reserves for the homes that were vacant at the end of the year.

And primarily when we created -- when the account signed off on that impairment, it was really focus at probably our most distressed market which is primarily Wichita, Kansas.

Okay, thanks guys.

You bet.

At this time, there are no further questions in our queue. I will turn the conference back to you gentlemen for any closing remarks you may have.

We are finished. Thank you for participating. Have a nice evening.

Once again ladies and gentlemen, we do appreciate your participation. This does conclude our conference call. You may disconnect at this time.