Hilltop Holdings Inc (HTH) 2005 Q2 法說會逐字稿

Good afternoon ladies and gentlemen, welcome to the Affordable Residential Communities Incorporated Second Quarter 2005 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. And now I would like to turn the conference over to Mr. Brad Cohen of ICR. Please go ahead sir.

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 in 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 that 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 period filings with the SEC.

The Company undertakes no obligation to advise or update any forward looking statements reflected in, or circumstances after the date of this release. Having said that, I would now like to introduce Mr. Scott Jackson, Chairman and CEO and Mr. Larry Kreider Chief Financial Officer. Scott, go ahead please.

Thanks Brad. Good afternoon to everyone. After my opening remarks Larry Kreider will review financial results and then I'll wrap up with formal remarks before we conclude with Q&A.

I'm pleased with our results in the second quarter and think that they demonstrate progress of our BFFR strategy laying the groundwork for improving operating cash flow over time. We have previously discussed BFFR, our operating philosophy which stands for Buy Fix Fill and Run, by which we will continue to operate the Company. This is a simple acronym, which is the foundation of our business model, and the framework we use to assess progress within our communities.

During the second quarter we (audio break) using BFFR and our improved corporate structure put in place in the latter part of 2004, we focused on each community relative to where it stands on a performance basis. By positioning our resources to maximize each communities performance we drove on a year over year basis as well as a sequential basis improvements in occupancy, home sales, lease with option to purchase agreements across all occupancy categories. We think the initiatives we have put in place for the last few quarters are beginning to translate into improving results.

However, we caution you that while the trends we are seeing are encouraging it is not the 1 or 2 quarter story. We are committed to the long-term interest of our shareholders and our customers. We hope to continue making steady progress, but recognize that while the year over year trends will heavily (ph) be positive on a sequential basis, the comparisons might not always be as positive as we have experienced this quarter.

The structural changes implemented last year have made us a more responsive team on a local case by case basis while our people now have a clear understanding of what we expect from them in helping the Company in meeting it corporate goals.

From the regional and district manager to our field operators and our in community sales organization, our people are now incented on a basis of increasing occupancy, improving operating margins, improving cash flow and its growth, and creating value for both our customers and share holders.

Our BFFR operating philosophy has and will be the basis on which we will operate our company. By measuring each of our 315 communities against clear objective criteria, we can measure progress with our communities and assess each assets current stage of operations in relation to Buy Fix Fill and Run.

We have a 3-tier framework for increasing occupancy and cash flow predicated on that strategy. High occupancy, focusing on rapid fill and improving operating margins in communities with occupancy 90% or greater and medium occupancy focusing on tenant retention, value creation through affordable profit offerings and fulfilling and creating a fulfilling customer experience.

And in our low occupancy communities which involve the highest level of attention and commitment of our resources we deploy significant manpower along with investments in marketing, sales in relation to each community's business plan. While this is an intensive process its necessary and important to think outside the box in order to optimize the asset's long-term performance.

Please refer to our bucket report in the supplemental available on the About Arc.com, investor relations website. We are continuing - continuously reviewing our operations a part of - as part of our BFFR and to that end we continue to work to identify communities and markets that do not fit our returning characteristics for potential sales.

As we analyze these assets we will strive to attain the following; 1) Eliminate markets which do not offer either current or future opportunities for superior growth either from a revenue or a profitability perspective. 2) Eliminate specific communities which require significant infusion of capital that would negatively impact with the short term and long term return on total invested capital in the Company.

3) Eliminate both markets and communities that do not lend themselves to being efficiently managed, in other words, those communities that are a drain on capital as well as a drain on manpower and do not enable us to leverage our resource, human or financial. As we embark on these asset sales we'll also make decisions on the best way to redeploy our human capital and reinvest proceeds to enhance a long-term prospects of the company for the benefit of our shareholders, our customers and our employees.

While we've not taken any specific actions to sell any of these communities yet and cannot assure you that any of these community sales will in fact occur, we do know that our company and shareholders are better served by channeling our energy and resources in the most efficient manner possible. Some of these include; a focus on capital as a scarce resource versus the allocation of capital to fill home sites and communities across the board.

A focus on markets that have the highest margin potential, we want to invest capital to maximize the return and not invest in markets bust because they exist. It is critical that we ensure that each dollar invested provides incremental positive cash flow. And finally, right sizing the Company's portfolio in order to maximize the quality of the cash flow over the long term.

As of June 30th we had 227 communities, consisting of 43,500 home sites that's average occupancy was 91%. This was up by almost 1.6% in the first quarter. A remaining 88 high focus communities with 19,400 home sites also reported a significant improvement in occupancy, basically 0.8 of 1% in the second quarter, up to an average of 69.6. We have organized and committed significant resources to these more challenged communities and think over time they will demonstrate further improvement in appreciation and value. There is no silver bullet but rather a combination of manpower, capital spending, inventory management and most importantly, time.

Now I would like to talk briefly about our occupancy. It is critical to increase occupancy but not just for the sake of growth. It's important to constantly address the resident base and actually proactively manage each community to maximize the quality of cash flow. Not all vacancy or additional occupancy is created equal. An increase of 1 point of occupancy, its duration and the capital required to obtain the occupancy increase, differs considerably in each market and potentially within communities in the same market.

Specifically, occupancy pick up in major markets where we operate a high operating profit margin, such as our Salt lake City market, or communities where we can effectively increase operating margin by leveraging our presence as we are doing so in Atlanta is a highly valuable point of occupancy. In the locations we're occupancy is an acceptable levels, that is 90% or greater, we understand from our experience the velocity to add incremental occupancy will occur at a pace that is generally significantly faster than at low occupied communities or markets.

One example would be our Ohio -- or our Iowa properties versus our North Caroline properties. It is this understanding of occupancy that is enabling us to drive improvements in operating margin as well as occupancy gains. Specifically in the second quarter, we gained approximately 874 units of occupancy, representing 1.4% occupancy increase. This compared to a gain of 380 units in the first quarter and a loss of 691 units in the fourth quarter of 2004. This was our second quarter of positive net absorption since our IPO in February of 2004.

Strategically, from a long term perspective it will be important for us to determine the ideal number of markets and the size of those markets while rationalizing the optimal operating infrastructure needed in each market to maximize profitability. Today we are in 67 markets and over the next few quarters will determine how many of those markets are right for us to produce high quality sustainable cash flow.

In the second quarter we removed net - a net of 716 lots from out total home site count as part of an ongoing review of operations. This had the effect of increasing occupancy by 1%. Of the net 716 lots removed from home site count. 502 were determined to be lots not suitable for use, 69 lots were added and the remaining 283 have been reclassified as lots held for future development. Of the net 716 lots removed from the home site count, only 175 of those were in the Company's top 10 markets.

As a result of these 2 changes our total occupancy as a percent increased 2.4% to 84.5 from 82.1 as of March 31st, 2005 and 81.5 as of December 31st, 2004. we showed a broad range of growth in our top 10 markets with an average increase in occupancy of slightly over 1.4% to a total of 85.4%. This improvement in percent is the result in increases in residence only, excludes the effect of the 716 home sites that were removed from our home site count effective June 30th, 2005.

In the Wichita market, our most troubled market. We produced an occupancy increase of 2.9%, the largest gain within our top 10 markets. The Dallas Fort Worth market posted an occupancy growth of approximately 2.5% to 82.6. While the occupancy in Atlanta increased to 89.2 a 2.1% improvement. Front Range Colorado and Salt Lake City produced occupancy growth 1.9% and 1.0% to 89.2 and 92.1 respectively.

We made good progress in improving occupancy as well as increasing the composition of our resident base comprised of long-term residents. In the second quarter we gained, 2,221 new residents through in community home sales and lease with option to purchase programs as compared to 1,587 in the first quarter. Since July 2004, when we completed the Dam acquisition we have gained 10,717 new residents. This is on top of about 9 - I'm sorry, excuse me. Of these new residents added in the second quarter, 989 were through the sale of homes during the second quarter of 2005, compared to 774 homes sold in the first quarter.

We also came close to achieving our objective of obtaining a roughly break even home sales operation while providing value for our new residents. We improved the gross margins on our home sales to approximately 11.5% in the second quarter versus a small margin loss in the first quarter. We sold 222 new homes as compared to 46 in the first quarter, which contributed to an increase of an average selling price of our homes in the second quarter to 18,500 from 10,300 in the first quarter.

We increased our lease with option to purchase transactions to 1,232 in the second quarter as compared to 813 transactions in the first quarter, and 348 in the fourth quarter of 2004. Our lease to own transactions comprised approximately 53% of our total leasing activity as compared to 48% in the first quarter. At the end of the second quarter, residents living in our communities, under lease with option to purchase programs amounted to approximately 31% of the total home renters at the end of the second quarter '05. This compared to none at the same time in 2004, and only 18% in the first quarter of 2005.

We look upon our residents living in our communities under our lease with option to purchase contract as a long term resident. We believe our lease with option to purchase product will extend the duration of our customer stay, and facilitate significant renter to owner conversions over the long term. We will require additional funding in order to fully implement our growth plan, during the midst of exploring various alternatives including the expansion of our lines of credit and additional sources of funding. Additionally as I discussed earlier, we continued to explore sale of assets. With that I'll turn it over to Larry Kreider for a financial run down.

Thank you Scott. For the 3 months, ended June 30, 2005, our net loss available to common stock holders with 18.2 million or $0.45 a share on a fully diluted basis compared to a net loss of 15.9 million or $0.39 a share in the first quarter and a net loss of 7.1 million or $0.17 per share in the second quarter last year. We reported FFO available to common stock holders of positive 0.5 million or $0.01 per share on a fully diluted basis in the second quarter, versus FFO at 1.6 million or $0.04 per share for the first quarter of 2005, and 9.3 million or $0.23 per share in the comparable quarter last year.

Total revenue for the second quarter 2005 was 75.6 million compared to 64.5 million in the first quarter 2005 and 55.1 million in the second quarter 2004. FFO in the second quarter of 2005 as compared to the first quarter, reflect improved community and retail segment operating results from higher occupancy and better home sales margins. These were offset by higher interest expense resulting from additional borrowings made to invest in home purchases and drive occupancy. Additional costs due to the Company's new 2005 occupancy incentive programs and higher Sarbanes-Oxley compliance costs.

FFO in the second quarter 2005 as compared to the second quarter 2004, also reflects improved community and retail segment operating results from higher occupancy and better home sales margins. These improvements were offset by the higher costs of our significant investments in the company's infrastructure necessary to drive occupancy. As a result, we have incurred increases in interest expense and related loan cost amortization for borrowers to fund home purchases, and higher general and administrative expenses and property management expenses to manage our occupancy push.

With respect to the real estate segment. Our revenue from our real estate segment for 3-months ended June 30, 2005 was $56.8 million compared to $56.4 million in the 3-month ended March 31, 2005. The 1.2% increase resulted from a higher portion of rental income attributable to rent, principally from our lease with option to purchase programs. The increase in our resident base will principally effect the third quarter and beyond.

Expenses for our real estate segment for the 3-month ended June 30, 2005 and March 31, 2005 were approximately $24.5 million. Expenses in the second quarter reflect improvement to the utility costs and bad debt expense offset by continued investment in our community staffing to drive occupancy growth. As a result, our real estate net segment income rose to $32.3 million versus $31.7 million in the first quarter of 2005, with the gain stemming primarily from the revenue occupancy rate increase.

On a same community basis, comparing the second quarter of 2005 to the second quarter of 2004, real estate net segment income was $20.3 million as compared to $21.2 million. Same community revenues were $35.5 million as compared to $35.6 million reflecting a slightly higher average resident base. Same community expenses were $0.8 million higher in the second quarter of 2005 as compared to 2004, primarily as a result of continued investment in our community staffing to drive occupancy growth.

Now with respect to the retail segment. Revenue for the retail segment, for the 3 months ended June 30, 2005 grew 128% to $18.3 million, compared to $8 million for the 3 month ended March 31, 2005. This resulted primarily from the increase in the number of homes sold from 774 in the first quarter to 989 in the second quarter, and the increase in average home sales price to $18,500 from $10,300. Home sales reflect a greater composition of new home sales and increase in sales prices of used homes and a substantial increase in the number of financed home sales as Scott discussed earlier.

Expenses for our retail segment for the 3-month, ended June 30, 2005 were 19 million, comprised of 16.2 million in cost of homes sold and $2.8 million in other costs. As compared to 10.8 million, comprised of $8.2 million in cost of homes sold, and $2.6 million in other costs for the 3 months ended March 31, 2005. As a result the retail home sales segment loss for 3 month ended June 30 decreased to $0.8 million compared to $2.8 million for the 3 month ending March 31, 2005. The significant improvement in operating margins is principally the result of the improved gross margin in home sale, and to a lesser extent a reduction in our marketing costs offset by additional costs from our continued investment in our sales organization to drive sales and occupancy.

With respect to other expenses. In terms of other expenses, property management expenses were $2.5 million during the second quarter of 2005 as compared to $2.3 million in the first quarter of 2005. General and administrative e expenses grew by $0.9 million to $6.3 million in the second quarter as compared to $5.4 million in the first quarter of 2005. This was primarily due to $0.4 million increase in salary and benefits related to incremental effect of our new occupancy based incentive compensation program, including amortization of restricted stock grants and $0.4 million in adjustments to professional services and fees for Sarbanes-Oxley and D&O insurance.

Depreciation and amortization increased by $2.2 million to $22.2 million for the second quarter from $20 million in the first quarter of 2005, primarily due to placing a substantial purchased homes into service. Interest expense increased by $1.2 million in the second quarter to $16.5 million versus $15.3 million in the first quarter, primarily due to higher average borrowings in our retail and finance business incurred to purchase homes and drive occupancy.

For the second quarter of 2005, the board of directors declared a quarterly dividend of 18.75 cents per share of common stock. This represents a reduction from the dividend paid in the first quarter of 2005 and is consistent with our focus on investing capital in communities to drive occupancy and improve the cash flow that results from improved occupancy. The board of directors also declared a dividend of 51.5625 cents on each share of the series A cumulative redeemable preferred stock. In addition, the board of directors declared a $0.39 per unit dividend on its series B and series C preferred operating partnership units.

In terms of our capital structure, we had approximately $1.1 billion in debt at June 30, 2005. This includes approximately $43.9 million drawn under a $50 million floor plan facility, $42.1 million drawn under our $75 million lease receivables line of credit, $9.4 million drawn under our $125 million chattel facility for making consumer loans, $25.8 million drawn under a trust referred security and $58.8 million outstanding on our $85 million revolving credit mortgage facility.

The weighted average interest rate was approximately 6.6% and approximately 83% of our debt is not due until 2008 or later, assuming our senior variable rate debt due 2006 is extended in accordance with the terms of the current debt agreements. Fixed rate debt including variable rate debt hedged by interest rate swaps amounted to approximately 80% of the total. Now I will turn the call back over to Scott Jackson.

Thanks Larry. We're working hard to increase our occupancy in 2005 and beyond with long-term customers. We're improving the quality of our customer base at the community level, which should increase cash flow stability and ultimately enhance shareholder value.

Industry fundamentals remain daunting, but we remain steadfast in our approach to drive high quality cash flow improvements. Our investments in acquired community clean up and creation of curb appeal have increased our cost in the short term, but are at the same time, fundamental to expediting improvements in occupancy and increasing our FFO over time and we believe we are well positioned within our industry.

Strategically now that our selling, marketing, inventory management tools and personnel are effectively executing against our business strategy at the community level. Its essential for the management team to rationalize the Company's operations and determine how best to marshal limited capital in order to reach our goal. A fully occupied stable portfolio of manufactured housing communities, which are efficiently and effectively managed for the long term.

In closing we know we must continue to be diligent in our approach, and be willing to make changes as required. We would now like to take any questions that any of you may have.

Thank you. Today's question and answer session will be conducted electronically.

[Operator Instructions]. We'll go first to Paul Atternato (ph) with Harris Nesbitt.

Hi, thanks, good afternoon. The manufactured homes on the balance sheet, the homes that you're holding in inventory rose to $250 million, was wondering how much higher we might see that number go or do you think that that has peaked?

Well, Paul we're - we - that's sort of a moving target, some of those when we buy new homes they ultimately end up in 4, one of 4 transactions.

One is a sale transaction using cash, two is a sales transaction that we finance and which then ultimately transfers into our chattel receivables line as a receivable. Three is a long-term lease to purchase contract, which ultimately translates into our lease receivables line. And four is finally our 12-month lease, which also goes into our lease receivables line.

So we're showing we're - you end up showing that on the balance sheet in one form or fashion. What I would say is that from an occupancy view of those homes that are ready to be, ready for a transaction, in other words they're either older homes that have become vacant, have been made ready or new homes that have been transported, installed and received a certificate of occupancy. Our occupancy rate on those is roughly about 92%. As it relates to the remainder of the year. currently we have based on demand and we are - that demands reasonably active today. We have on tap about 1100 more orders between now and year end.

Okay, great. And I noticed that you purchased 222, or you sold 222 new homes this quarter, which is quite a big increase from the prior quarters. I was wondering if you could talk about that for a little bit. Are you getting the new homes at any sort of discount or what's, what's driving that that new home number?

Well, I think it's the fact that we've now got a true sales force in place, we made significant improvements and additions to our infield sales management team. We have fully implemented our call center, which is coordinated with our media activity and our referral activity and we've also now got fully in place our tracking so we can drive those sales and what I would say is that in fact we significantly improved our margins on those new home sales as well as our used home sales this quarter and so the facts are its just now, its really starting to work.

Okay, great and then just one, one additional question. How do you set the prices for the homes that you're selling or the homes that are going into the rent to own program. Are you always looking to make a profit or break even on those sales?

Yes, we are always looking to at least break even, and break even would be declined as our actual cost plus an administrative mark up depending on whether they're financed or their leased or sold for cash. That would include any referral fees, commissions, administrative fees, fees to origin for originating the, the financing piece, the chattel loan and, and an override to meet sort of the overall fixed costs of our marketing and sales operation. Today that averages roughly $4500 to 5000 a copy on, on both our financed transactions as well as our lease to purchase transactions.

And ladies and gentlemen in the interest of time we ask that you ask one question and one follow up. We'll go next to Lee Cooperman with Omega Advisors.

Thank you very much, thanks Scott for a very comprehensive call. I'd ask you the two questions I kind of asked you before and which you gave at least one of them a very scholarly comprehensive response and that was kind of how do you look at the NAB of the properties how, 3 months have passed, you've made some sales, you've done some lease ups. How do you look at the NAB of the company, and secondly, while it's a board decision, looking at your budgets, how comfortable you are - are you with the sustainability of the present dividend.

Okay, well let me try to answer both of them. And what I would kind of refer you to as it relates to NAB and I believe the last call we didn't actually answer the NAB question but I think you sort of worked your way towards it and that is probably how we should do it this time but if you were to have in front of you our operative results by occupancy level for the last 5 quarters, what you would see is that over the quarter - and we sort of dissect the portfolio into those communities that are 90% or better occupied, 80 to 90, 70 to 80 and below 70.

Our communities in that 90% bucket, migration from the 80 to the 90 bucket was 26, migration from the 70 to 80 bucket was 23. Migration from the 70 - below 70 to the 70 to 80 bucket was 8 and we actually had 2 communities move from the 70 bucket up to the 90 bucket. 244 remain the same and we had 10 communities that went to lower buckets because of, of various stages of clean up. But essentially across that what you'll see in general between the fourth quarter of '04 and the second quarter of '05 is reasonably significant margin growth and occupancy growth in each one of those buckets.

So I guess to answer your question, my answer would be I don't see the numbers certainly much different on a, on a negative basis as I did at our last quarterly conference call and one hopefully could presume that as these operating margins improve and the occupancy improves at the park level that on a park basis NAV should be remaining the same if not improving.

As to the dividend question, I'm going to answer that again as I always have, we look at it on a quarterly to quarter basis. We had our first board meeting of our new board where we actually added 6 new board members to an 11-man board. That was not a keynote of our discussion, we did spend some time on funding and liquidity but again I have to say that that is going to be a quarter-by-quarter decision.

We'll come next to Steve Stockwell with Merrill Lynch.

Good afternoon Scott.

Hi Steve.

can you just maybe explain how 700 units that I guess were maybe theoretically in service have now become output of service and I guess I'm wondering if those - were those lots things that you purchased in the home town acquisition and I guess I'm just -

Sure.

Extremely confused as to how these things have just sort of become uninhabitable.

Well they haven't become uninhabitable but the majority of them were from acquired communities and frankly it was based on us actually going and physically measuring lots and doing some things that are necessary to meet specific codes in those localities so for example some of those lots that were put out of service were actually combined with another lot to create a lot that met new zoning requirements in the, in the various markets they were in. some of those lots were lots that frankly had so much re-furb work and lot made ready work that we simply deemed it as not economic to pursue them and so we took them out of service and some of those lots frankly they were booked wrong on the rent roles of the communities when we bought them.

So its fair to say that at one point you maybe thought these could be rent producing sites and now we've kind of lost in effect the ability to generate revenue on 700 lots.

It was frankly a mistake in due diligence. That's what it was. Now I would also say during that review we also found I think nearly 400 lots that, although are not totally developed certainly are going into the bucket of lots to be developed and in fact in that particular instance its all in one community where, where various - they have various stages of development but utilities and that sort of thing are too the lots so they just need to be brought up on grade and risers and some of those things to add back into the inventory.

We'll go next to Jordan Sadler (ph) with Smith Barney.

It's Craig Melcher (ph) here with Jordan. Can you walk me thought the thought process of allowing Gerald ford to increase his state ownership take up to 20%?

He asked and we said yes.

Okay, and has he made any additional purchases since that initial ...

...You know he's a public dialer and that should be in 13D I believe. Frankly I haven't had time to look at what 13Ds have been filed so I can't answer yes or no.

We'll go next to Dave Rogers with Key Bank Capital Markets.

Hey Scott could you talk a little bit about asset sales, I mean you mentioned it in your comments but I was kind of curious about what volume of asset sales you might be looking and given some of the high cost debt that you have out, does it make sense to start selling some of your, your newer occupied properties and reducing some of the high cost debt that you have outstanding for a positive cash flow spread at least?

Well, clearly some of the acquired communities I don't know that they were tremendously high cost debt. There were a couple of them that were high but the biggest problem with some of the acquired communities were that they were so inefficiently financed. But basically where we're really focused on is 1) what kind of profit margins and capital do we require - what kind of capital do we require to fill those communities and once those communities are filled what kind of profit margins do we drive.

That's number 1, number 2 is where are they as it relates to growth within the market they're in, how much variability of homeowner turn over do they have and, and what do you have when you're finished as it relates top the whole. So what we said in the very beginning when we made these acquisitions is that we were going to operate these communities for some period of time and that we were going to look at them on an incremental basis to see what made sense for the whole.

We went for the first 6 to 8 months, we decided on a group to sell and we did. We've now gone another 6 to 7 months. We have another group and we're prioritizing those groups from sort of the most likely candidates to the least likely candidates outside of things for e example of a community that might be in the path of growth that would have a higher and better use but these are really on operating metrics and operating details and really looking at variability of move outs and cash flow.

Overall profit margins once we meet full occupancy expectations, capital requirement to get there and then efficiency of the long-term management of that asset. So what that would tell you as in any company as you grow there are going to be some assets within core markets that we will probably sell and there are also going to be some markets because of their size in relationship to our 10, 15, or 20 markets that it makes sense to sell from an operating basis.

Can you also address the pace of home sales. It obviously picked up from the first quarter and has continued to pick up but it seems to be a little bit behind still what maybe you're implied growth in the home fields business maybe should have been or what you had implied earlier, maybe the first quarter call. Could you address where the second half the home sale volume sits as you look at it today.

I don't know if I can address that specific question, what I could say is that transaction wise we're actually on plan to slightly ahead of plan. The lease to purchase product frankly has gotten more traction than we presumed it would it actually, on a, on a number basis tends to be a better product for us to sell than an absolute sold financed item.

But I think in general, we feel good about the amount of transactions that we're pushing across the finish line on a monthly basis. Would we like to change the mix, absolutely, we probably would prefer to see more sales than lease towns but certainly in general both those categories awe view as a significant improvement from our 12 month lease program.

And then last question, it looked like your same community repo move-outs second quarter '05 over second quarter '04 actually improved and that was after a declining trend I guess in the first quarter. Anything you attribute that to and could you comment on the number of repos moving into potential pull out of the home site in the third quarter?

Well what I'd say is that, that we - and although we're still not, we're still not comfortable in saying that we've established a trend. It does appear by market that repositions are beginning to go down slightly however these things sort of have a lift of their own market by market, and so if you were to say where are the markets that you're seeing no repos but I would tell you that Iowa we're seeing very few repos. Indiana we're seeing very few repos. New York state we're seeing almost no repos. We're seeing incredibly low repos in Florida's however we're still seeing significant repos in North and South Carolina. Repo activity in Atlanta seems to have peaked and is going down as it is in Texas however its not in Kansas.

In general it would seem as though based on the amount of ABS that was issued 3 and 4 years ago and some of the information that we've, we've now gathered from Green Tree, which essentially now is not only the Green Tree historical portfolio, but the Green Point historical portfolio is that their, their occurrence and frequency is lowering, they're defaults are going down, their past dues are going down and they seem to be working through that which is a positive note.

I think the other thing that's important on the move out in this portfolio is that you know last year we had almost I believe 3200 home owner move outs, and if you really look at what those movements were we think as many as 2000 of those move outs were associated without clean up of our acquired communities. So its sort of 2 things you need to look at in that sort of churn within the community. Its not only repos, but is also the stability of the current homeowner base within the community.

Thank you.

[Operator Instructions].

We'll go next to Richard Paley (ph) with ABP investments.

Hi guys, I have a couple questions. First, Scott, following up on Steve Stockwell's comments regarding these home sites that were deemed, I guess unusable or not zoned correctly. Has there been any write off related to those associated with the - maybe an asset impairment or something like that.

There, there has not been yet but part of the reason for that is that we, per accounting standards and practice, we do an impairment study at the end of each year as we go through our final audit for that year.

Okay, so you're not taking an inter-period estimate of what that can be?

Larry would you like to address ...

...Well, there's - pardon me ...

...Go ahead.

Well, there's no - at this point we don't think that this indicates any impairment in the earning stream of the asset in so far as we see it and we don't expect to have any asset impairment resulting from it. but as Scott said we do perform a detailed calculation typically annually in connection with their audit.

Okay.

What I'd say is we don't - the other thing is that we don't necessarily think that this is a material item but it is good to have, have your books right and we're going to have them right.

Yes, that's - I would generally say that's good. My other question is more of a big picture question and I want to step back for a second. I hear a lot of commentary about occupancy, you're feeling marginally better about the business and then I go through the supplementals and I - maybe I'm interpreting this wrong but I look at the, the home renter income per occupied unit and versus last year its down 17% on a same store basis.

I look at the same store on the home, home owner rental income, its flat as a board year on year sequentially and then also on the, just on the - not the same store but on the total portfolio, similarly I don't see any positive movement aside from on the revenue side just more volume on the home sales activity and what are you guys doing? Are you dropping rents to get these, the volume going here, I just don't see, I see a lot of heat but no light here.

Sure, let me address that. First of all if, if you were to look at the, the actual timing of the majority of the occupancy increase in the second quarter of '05, that basically occurred in June of '05 and therefore our view is and in fact the case will be that we'll see that improvement in, in the third quarter on an absolute basis.

On a general basis, what I believe you're seeing is that over the course of the last 12 months we have actually moved approximately 4,000 of our units from sheer rental to either homeowner or lease to own. Among - of that a little over half were cash sales so you're going to see the rental piece come out of, of the equation and you're going to see that the home site rents stay there. That obviously doesn't positively impact cash flow or revenues but it does impact the stability of the cash flows over time and think we have in general made the decision that an owner is a better piece of occupancy than a renter.

So I think that's kind of what you're seeing there in addition to the fact that, as I said last year, if you look at it, we had roughly 3200 home owner move outs of which we think 2200 were sort of managed by us out. we had 1500 repossessions and we turned our rental units about 5000. this year we've had 280 - or 2982 sale move ins, we've had 2428 lease to purchase move ins. We've had about 700 third party move ins and about 4615 rentals. So I think part of what you're seeing is a time lag and a change in the composition of the portfolio.

And that's not picked up though in - when I looked at the stats in the same community, homeowner move ins, homeowner move outs. That's not reflected in those numbers at all?

Yes, it is but what I'd say, do you have the supplemental?

Yes.

If you can go to - what page is this guys in the supplemental?

I'm on page 11, it's the same community data.

Oh, that's, that's on page 16 is the -

But what, what I would suggest is the buckets.

Yes, the buckets, that's, that's what it is based, page 16 is the buckets -

If you go to page 16, Rich?

Yes.

And take a look at - and I, I'd ask that we don't compare Q1 to Q2 because you don't have the benefit of a full quarter of earnings in these numbers but if you look under which ever one you want to look at but lets look at acquired communities. Okay? If you look at the 90 to 100% occupied bucket, we, we had - basically we started out at about 90% occupancy and a 40.6% operating margin. If you move over across the page, to the left, what you'll see is that we've moved to about 95.2% occupancy and an operating margin of 60.8 and that's really how we look at it from a macro sense.

If you look across that whether it's the total real estate segment, the acquired communities or the same communities. Think what you see between fourth quarter '04 and second quarter '05 is a significant pick up across the board. You don't see that big of a pick up between Q1 and Q2 however I would suggest that next quarter will see a reasonably good pick up between Q1 of '05 and Q3 of '05.

Okay, I'm going to digest it and get back to you if I can follow. Two other quick questions. One on the G&A, have you guys - is the current quarter a good run rate to go with going forward?

I would say there's an element of catch up in the Sarbanes-Oxley from the first quarter but generally speaking, and there was a charge with respect to the restricted stock grant of about 300,000 that is not recurring this quarter. So apart from that I would say that the run rate for this particular year is probably at about where it will be.

right. So it should be good for the next 2 quarters. One would hope that we have a drop off beginning in the first quarter of '06.

Okay last, last question and then I'll yield. In the liquidity discussion on your text in the front part of the release there was a, a commentary in there regarding capital expenditures, dividends etc and I was just curious, it seemed like a statement that hadn't been in there before. Is the - is the preferred dividend also something that's considered by the board at this time or could you give us some help on that one?

I would say the preferred dividend is not something considered by the board, however at this time, however, again, we look at dividends on a quarterly basis. I think if you look at what we've done over the course of the last 3 quarters there's a tremendous amount of investment going into the company to drive this occupancy.

However we do have various methods of creation of liquidity including assets sales. Part of also is right sizing our receivables lines, both our lease receivables and our chattel receivables. Today we are getting about 55% collateral advance on the, on the lease receivable. About 75% collateral advance on the chattel receivable and we're working very hard to move that lease receivable up as it relates to the rest of our financing tools.

Thank you.

We'll go next to Craig Leopold with Green Street Advisors.

Good afternoon, just to follow up I think on Rich's question. I'm working off of page 11 as well. Scott, I certainly understand your point about you would expect revenues to pick up in the third quarter because of the occupancy pick up at the - late in the - late in the second quarter but on, but on page 11, I'm focused on the line where you show average monthly home renter income per occupied rental home and it looks like that number has declined pretty significantly over the recent last 4 quarters.

Right.

So my question is to what extent does that reflect some kind of changing mix versus a reduction in rental rates to drive that occupancy game?

Well, actually I think part of it can be also explained and I think understand the question a little bit better, is frankly the activity we have had in some of our lower margin markets, primarily south east Dallas, Oklahoma City and Wichita where rents are lower and we had very significant vacant inventory in those communities and we have made the decision that it was better to have those assets yielding than not yielding.

The good news is in at least 2 of those 3 markets, Wichita in particular and South East Dallas the majority of our transactions have either been sale transactions or lease to own transactions versus straight 12-month lease transactions. So I think, and when I say material both of those markets had a very material amount of rental inventory in them. I believe Wichita had almost 600 units and South East Dallas had similar, 6 to 700 units. So I think that's part of what is skewing the numbers.

Okay, great, that is helpful. And then related to that on the home rental, lease to own, what's been the experience thus far in terms of the breaking of those leases if any?

Obviously we haven't had those on long enough to really create any sort of a historic, certainly we anticipate that our performance will be as good as our 12 month lese and we feel reasonably comfortable on our 12 month leases. What I would tell you is I think we'll have a much better handle on that by the end of the year, we've actually had very good performance in our finance sales portfolio also but then again I think its just a little bit early to really be - have any real opinions.

Okay, and then one last question. What's the status of John Sprengle at this point?

Well, I don't know, he's setting across from me, would you like to talk to him?

I didn't know, I hadn't heard from him for a while so I was just curious.

John took a vacation and I wish I could have taken one too.

Okay great, thank you.

Thanks.

We'll take our next question from William Atteson (ph) with Merrill Lynch.

thank you. Just trying to get at the profitability of the home sale business. Looking at the gross margins, its about 13%, but then you look at the category of expenses, retail home sales, finance and insurance, now that's a $4.1 million number. If I heard you correctly, it was said only 2.8 million of that figure is directly related to the home sale business.

That's, that's correct.

Okay, and the comparable number in the first quarter was what?

2.6.

2.6. and then what about the finance cost? That's included in your total interest expense or can you break that out?

Well we can and you'll see a break out of that Bill in the - when the 10Q is filed in our segment footnote.

Okay, you don't have -

That would be a good time to do that. I think that's also in the supplemental now that I think about it. on page, page 10.

Page 10?

So you'll be able to parse out some of those costs. Now the retail home sales expenses does include cost of sales.

Okay. Looking at the home renter move outs second quarter to first quarter. It was up 20% and I guess this goes kind of back to Craig's question. How many of the home renter move outs were in the lease to own program or in other words just why was the home renter move out so, up so large in the second quarter, 20%?

Part of our numbers capture total move outs and, and in fact we, although I don't have the numbers and I apologize, we had a significant amount of conversions from 12 month renters to our lease to own program as well as our cash sale program. I'm not sure that explains it all, we had a significant spike in move outs in June and if you look back we also had a fairly significant amount of 12 month leases come on board a year ago in June. So I think it actually just shows the natural progression of that 12-month lease category.

There is some seasonality in that.

Right. Just like that's why we anticipated June would be a very - that we'd start to see a real pick up in sales and leasing 12 month - or lease to own transactions and we generally see that seasonality June, July, August and September and occasionally October.

Okay, you referred to this before. The average occupancy was 82.8 for the quarter, end of period 84.5, really indicative of some momentum there. Can you make any comments on the momentum that you've seen through, since we're effectively a third of the way through the third quarter.

I hope it keeps up. I think we're just working hard and the market can throw you a curve ball at any time but we're just trying to put one foot in front of the other and I do think that our sales force and sort of all the gears are moving better than they did certainly a year ago at this time.

Okay, thank you.

We'll take our next question from Steve Sweat with Wachovia Securities.

Hey good afternoon Scott. I just wanted to follow up on this - on the quarter end occupancy question as well. Do you guys have an average occupancy for this second quarter to try to capture what the incremental increase in July might be?

What I, well, what I would tell you is that almost 7 - I believe over 700 of the 800 plus new net occupants came on board in June.

Okay, and -

But Steve we also do disclose the average occupancy in our charts on page 12 for example.

Okay, and then Larry just in terms of how you broke even - is there any free rent in these leases or would that impact the cash that recognized in the second quarter?

Just ...

...Recognizing revenue on a cash basis versus a GAAP basis?

Well, I think, I think consistently with our leasing practices we do concess typically the first month's rent or the remaining part of the month that's left so that will effect the second, the third quarter.

And so you book the revenue on a cash basis.

Oh, absolutely, yes.

Okay, so even is somebody took occupancy in June it's likely that there was no revenue recognition in that quarter.

That's correct.

Okay.

Potentially and let me just also say as a practical matter on an operational basis why we do that. We're selling or leasing downing all through the month but in general we don't get any closings until the end of the month because people are somewhere else and they don't want to pay that that uneven days lot rent. So we've made the determination so that we can actually get things done and booked and closed and that sort of thing that if they come in, walk in the door and buy a house on the fifteenth that we'll concess them to the first, just as a matter of being able to get that into process because you don't close these things in, in 2 hours.

Okay, and then just final question no the margins on the home sale business. Those have been improving in the past couple quarters. Would you expect them to continue to improve or do you think this is kind of a sustained level of margin.

I would, I really wouldn't comment either way. I think the marketing and sales people did an excellent job in moving their margins over the last quarter, I would hope that they'd continue on the other hand we have long said that we're focused on selling these homes and leasing to own these homes and that the profitability of our marketing and sales group is not necessarily a given nor a required.

Okay thanks.

We'll go next to Todd Voight with Cliffwood Partners.

Yes, good afternoon. I was just - I need some help maybe on your receivable growth, I saw in the latest quarter receivables went up by I think 14 million and it looks like your reserves for loan losses went up by about 4 million, so is your overall receivable growth then really 18 million? And is that roughly in line with your home sales?

No, our receivables growth is principally from the increase in the loans that we made to our customers in connection with sales of homes and that the -

So does that mean your LTV there is about 100%, or you're financing about 100% of what you're selling.

We're financing - well then the - yes, we're financing 75% of - well, see we sold - we financed of the 900+ sales that we made in the quarter we financed an excess of 500.

I don't think you're answering the question.

Yes, what was the, maybe you could repeat the question again.

You're receivables went up by 14 million and then you added increase in reserves by 4 million so is that an effective reduction to the receivable. So the receivable really was a growth of 18 million, is that right? And I just saw that that was equal to your home sales revenue so it seemed like a lot of what you're selling, that revenue is becoming a receivable on the balance sheet.

Well, when you say loan reserves went up by 4 million, is that, are you referring to the loan reserves on the balance sheet?

Correct.

That's, that's unrelated. Those are loan reserves, those are assets against the debt that we have, the mortgage debt.

Oh, okay.

Escrow deposits -

Escrow depositions.

So then of the 14 million, those are all, that increase is all for the homes that you're selling?

That's correct.

Okay and you say the loan devalue there is 75%?

Thanks correct.

and can you divide - can you define for me ...

...That, that isn't correct - we did a 75% advance against the receivable, the loan devalues is generally - if you look at the industry historically it generally advances 135 to 160% of the invoice cost. How we do it in general our advance against the home only is about 104 to 105% and on average we take about a 13% down payment on that receivable so the day we book that, that loan we generally have about a 93 to 94% loan to LTV however that does not include the cost of the set. And then if you compare that receivable to the market outside of our communities, it generally comes out rough numbers around a 60% loan to value versus market price. Does that answer the question?

Now as we - and excuse me but as we then add that to the receivables line, whatever that dollar amount is and in general I believe our average receivable is about $20,000 per contract we then finance against that or we put that as collateral for the receivables line where we receive about a 75% advance.

Okay, I understand. Thank you. also wondering -

You bet.

Do you finance within your loan skirting or set up costs?

We, we provide set up costs and we amortize it over the life, expected life of the home being in the part which is roughly 10 years in the majority of our markets.

So that, that isn't, so in addition - basically the average contract, lets say that the invoice cost deliverer to the community is 20,000 we generally add to that somewhere between $3000 and 4000 for our administrative costs and that becomes the sales price to the customer.

Okay.

Averages roughly 104%, 104, 108% percent of invoice depending on the market. And some markets, we actually do a lot of cash sales and we'll have higher markets because of the. For example we've got some communities in Florida, where we don't, we don't need to finance any of the sales and often times we can run a little bit higher margin.

Great thank you that's helpful. And one last question. What is the average FICO score of the people you're selling homes to?

I believe our average for the quarter was about a 615, or 620 and then we have a group which are primarily our new American's program where we don't - I mean we go through a bureau, generally they don't show a FICO score and what we look for is no adverse credit on those.

Okay, great, thank you.

You bet.

Well take a follow up question from Paul Atternato with Harris Nesbitt.

Yes thanks, what's been your turn over cost experience for the rental homes?

About $900 a turn.

And how does that compare to, to expectations?

That's, that's about what, I mean that's our average that we've developed over the last 4 or 5 years and in general we're right there.

That is what we expect, yes.

And are the rental residents being put into new homes or used homes or how do you decide where they go?

In genera, across the platform, what sort of this is how we look at it. if we have an older home which we could define depending on the market somewhere between older than 2001, 2001 or older. In general when that home comes vacant out of the 12 months rental fleet we sell that home and preferably we sell that home for cash. That, that cash price is roughly $13 to 15,000 cash. Homes newer than that, if they're coming vacant out of the 12 months rental fleet in general we've designated that those homes either be leased to own or sold in finance.

Then in our new homes we allow our sales people to either sell those new homes for cash or finance or we allow them to lease to own except in some specific communities or markets.

And for example if we have a community where we' are approaching 100% full occupancy what we will do is put a new home in that community and we will generally lease that home on a 12 month basis at a reasonably premium price as compared to other markets. Then as we have obsolescence in that community and we have a home move out for whatever reason, as that, as the home we put in becomes vacant we sell that house under the LTT or the financed, financed product. So in a full park ideally, how we like to run those is, is roughly 92% homeowners and roughly at any given time 6 to 8% home renters.

Right. Okay. Thank you.

We'll take our next question from Matthew Lentz (ph) with Fidelity Investments.

Hi guys. If you - how many homes - are you planning to take more homes or more sites out of service and if so what would that number be?

Well at this time we're not necessarily planning on taking more sites out of service. I do think that one has to be realistic on the capital required to bring a site in, into service and so we really look at that on a community-by-community basis and on a profit margin basis. At some point if that cost is too high versus what we're receiving for that home or that home site, then we're going to make a decision either 1, to sell that community because it doesn't meet our return requirements or 2 to essentially mothball that home site at this time until we see improvements in the markets.

Can you give us just a sense of --?

Well we ...

...How many sites might fit into that category.

Well we have scrubbed the portfolio reasonably well over the last 2 quarters and we're feeling pretty good about what we sort of put in there in the, in the second quarter. But markets change and markets shift as does zoning and in certain markets that you constantly have the planning and zoning people trying to essentially outlaw mobile home parks.

And they do that by creating restrictive zoning covenants on set backs and side by side sets and that sort of thing so that at any given time you run into that and then you have to decide is that worth going to court and fighting about it or are you better off to combine 2 lots or take half a lot into another lot or something like that. So it's kind of a hard question to answer. I'm not trying to be evasive.

all right thanks guys.

You bet.

We'll take another follow up question from Jordan Sadler with Smith Barney.

Hi guys, can you walk through the economics of the used home sale versus the new home sale. I know the average price on the 989 home sales was 18,000 or so but maybe could you break it out.

Well, in general, what we are now trying to do and clearly we made a management decision in the first, in the last 6 months of '04 to prime the pump which we think has come off quite well, is that in the used home sale we are striving to sell that for our net book value of that home plus an additional margin on top of that to cover our selling costs. On new homes we basically take the invoice amount, we add our administrate costs to that and we sell that for that price. On our lease to own we generally take our, our invoice cost plus and administrative price plus an implied sort of cost of carry in that house and try to do that on that basis.

So how many homes in terms of total volume, if you sold 1000 this quarter and that business lost a couple thousand. So I'm just trying to get a sense of the total admin mark up. How many homes would you have to sell in order for this total business to be breaking even, quarterly?

Well, first of all it's how you recognize the income, Jordan. On your lease to owns you're not, you're not recognizing a gain on sale, your accruing that as income over the life of the lease. So that's, that's another matter. On the actual home sales, one would think that we probably need to be selling 1500 - yes

1500, somewhere around 2-grand a home.

Yes, somewhere around 1500 a quarter to make that break even.

Or drive that margin up.

Or drive the margin up, and in fact - and in fact as we move towards fuller communities, more full, communities and certain markets we're actually able to drive that margin up quite successfully and in some of our communities in the north east, in the upper Midwest we're adding somewhere between $6 and 8,000 margin which not only covers our cost but it covers our administrative costs, our costs of sales and commissions and it makes a contribution to the bottom line of that entity.

If you had to ballpark it on the prices being so - these are being sold at the new homes, the 222 versus the 767.

Yes, well the ballpark would be somewhere around $29,000 probably, average price for a new home, somewhere around between $15 and 16,000 for a used home and average - for us to have achieved break even in the second quarter. we would have had to add about $750 to the price of each home, kind of gives you the order of magnitude for what it would take to get to break even.

Thanks perfect thank you. the other thing was just on terms of the asset sales you mentioned. The few different categories. What would you think would be in terms of volume and timing, what kind of guestimates would you have?

I really, Jordan, unfortunately I just don't think we're ready to comment on that because there are lots and lots of data points that we're trying to consider and some of those date paints make themselves aware after certain periods of operation and focus. And so I would say that I think we should have a better handle on that towards the end of the year but I cant, I cant guarantee that and frankly we're in a reasonably robust educational period with our new board members as well as continuing to look at our capital structure.

To some degree I sense it's a function of l liquidity at this point. What is the total liquidity you think you guys have excluding floor plan financing liquidity. Just general corporate use.

Well, what I would tell you is that it's a function of purchase of inventory. I mean if you look at our run rate on average we have been purchasing between $10 and 16 million worth of inventory on a monthly basis plus the associated cap-ex of that - of that inventory, which includes not only the set costs, but also the make ready costs on the home sites and in addition to that the overhead required to handle all of that and move that needle.

So it's a little bit hard to kind of give you a straight forward answer. If everything was to stop its one answer if we were to continue at this pace is another answer I guess the bottom line is it is somewhat discretionary on how much we make in investment on those homes on a monthly basis.

This concludes our question and answer session. Mr. Jackson, I'd like to turn the call back to you for concluding remarks.

We have no concluding remarks, we appreciate you all listening to the call and as usual if you have questions please feel free to give Larry, John or myself a call. Thank you.

Ladies and gentlemen this concludes today's Affordable Residential Community conference call. We thank you for your participation and you may disconnect your phone line at this time.