Hilltop Holdings Inc (HTH) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Affordable Residential Communities, Incorporated fourth quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Brad Cohen of Integrated Corporate Relations. Please go ahead.

Thank you very much, operator. 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 various 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 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. The results for the fourth quarter and year end 2005 are detailed in the financial tables at the end of the earnings release. As is customary for Affordable Residential, the company has provided some expanded financial information in a supplemental package, which is available on the website, under the Investor Relations section, at www.aboutarc.com.

Also, while the company does not want to limit questions, and ask as many as you would like, in the interest of giving everyone a fair chance to ask questions, they ask that you ask two or three questions at a time, and just jump back into the queue to be re-queued. So, with that, let me pass the call to Mr. Larry Willard, Chairman and Chief Executive Officer.

Thank you, Brad. And I also want to thank all of you for tuning in today. On the call with me today is Larry Kreider, our Chief Financial Officer. This afternoon, I will focus on recent operational events, make some broader comments on the company, then turn it over to Larry Kreider to provide you some color on our financial results for the fourth quarter and year end. We will then be happy to take any questions you have.

It is my intent today to focus on fourth quarter '05 and not spend much time reflecting on our company's past. As I look at the fourth quarter, which is when I came in the door, I will quickly recount our steps. In the fourth quarter, I visited approximately 100 of our communities. We downsized our sales force from the top down by 150 people. We put a new sales organization and community structure in place. We took a layer out of our property management. We put together a new operating and sales budget, one community at a time, under the premise that each one has its own opportunities and challenges. In those budgets, we focused on rent increases, utility recapture, expense reduction, including control of capital expenditures.

We also took over management of an auction that had already been put in motion for December the 15th, 2005. We feel as a result of our efforts since the end of September '05 that not only is our team a part of the process, but it has an understanding of our new strategy and the direction we are going.

Even though I came in the door in the fourth quarter, I feel we're already seeing some evidence of our back to fundamentals strategy. The fourth quarter 2005 as compared to the third quarter of 2005 reflects improved results in the community segment and lower losses in the retail home sales segment.

Communities net segment income reflects higher retail income due to improved rental rates applicable to both homeowners and renters. These more than offset the lower average resident occupancy in the fourth quarter. In addition, the communities' net segment income reflects lower operating expenses. The decrease in the retail net segment losses reflect lower operating expenses, partially offset by lower volume of homes sold and lower margins.

We are also seeing a reduction in the run rate of our G&A expense after adjusting for the additional expenses for severance for senior officers and Sarbanes-Oxley first-year costs net of positive adjustments for our incentive comp expense. The strategy that we put in place is back to fundamentals. Our progress will not be evident overnight. In the coming quarters, I will provide you with details of the results of our activities.

Let me now comment on our release from Tuesday, which provided an update of the auction and our intention to de-REIT or revoke our tax election to operate as a REIT. As we stated in the release, we entered into contracts to sell of the 71 properties from the auction. We also expect to sell an additional eight communities in private party transactions or through brokers.

We expect to close these sales by the end of 2006. We have therefore placed 41 communities back in our continuing operations. The details of this change is discussed in our earnings release and in our forthcoming 10-K filing. We have included a list of the communities sold or to be sold in our press release. Larry Kreider will provide some additional commentary in his remarks.

As of March 8th, 2006, the company has closed 12 of these transactions, collecting 10.2 million of cash proceeds after paying down related debt of 19.5 million. It is our intent to provide at least a quarterly update on our progress in connection with the closing of the sale of communities. We're now focusing our efforts on site revenue and controlling cost on our portfolio of properties remaining.

Also announced Tuesday was the company's decision to change our tax status to a C Corp from a REIT. As is probably evident, we have never received any of the benefits of being a REIT given our historic operating loss, and in fact all of our historical common dividends were a return of capital. Given the risk we would incur of having to pay a 100% penalty tax under applicable REIT rules on any gains we get from community sales, we believe eliminating our REIT status was a prudent decision.

We believe this action benefits all of our long-term shareholders by choosing a tax status consistent with our focus on operating our communities and by minimizing potential negative tax implications of our asset sales.

With that overview of our recent actions taken to improve our cash flow, let me turn the call over to Larry Kreider, who will provide some details on the fourth quarter and the year end 2005.

Thank you, Larry. I refer everyone to our earnings release and supplemental data packets that we issued today. This afternoon, I will focus on providing some additional information on our financial results in the fourth quarter and year end with respect to our income statement and balance sheet. Let me begin with the framework for our accounting changes this quarter. As Larry Willard mentioned, we have brought 41 communities back into our continuing operations this quarter, and have recast all of our historical financial results accordingly.

In providing for all the accounting in accordance with FAS-144, accounting for the impairment or disposal of long-lived assets, in the fourth quarter, we took an additional impairment charge of $3.7 million related to the 38 communities we expect to sell at a loss, and an additional write-off of goodwill of $4 million related to the communities that we recontinued, for which we have previously estimated a gain.

In the third quarter, as recast, we also redistributed the previously recorded impairment charge on the recontinued properties of about $23 million to continuing operations for FAS-144. Let me now provide some detail on our financial results for the fourth quarter. In our community business segment, revenues increased from the increased homeowner and renter revenue rates per home site and larger percentage of home renters, principally under our rent to own programs.

Our communities are generally in excellent condition following significant capital expenditures in 2004 and 2005, and staff training activities in 2005. Resident count declined by 769 residents in the fourth quarter following the realignment of the sales organization. This resulted from lower sales and lease to purchase transactions and other home leasing activities. We experienced some improvement in the inflow of new residents who bring their own homes into our communities.

Community-level costs continue at low levels. As compared to the third quarter, we incurred lower salaries and benefit costs, primarily from lower incentive compensation and slightly lower bad debt expense and slightly higher repairs and maintenance expenses. In our retail business, results reflect lower volume. Our pricing increases and commission decreases were not adjusted until mid to late in the fourth quarter 2005. We had lower retail expenses as compared to the third quarter, due to lower salaries and benefits, reflecting the reduction in force, primarily sales management, and lower advertising costs.

The reduction in salaries and benefits includes additional cost of approximately $300,000 of severance expense. In our consumer finance and insurance segment, we had improved results from the prior quarter due to higher average loans outstanding and slightly lower operating costs, primarily lower salaries through headcount reduction midway through the fourth quarter and lower bad debt expenses due to lower loan originations, offset somewhat by higher borrowings and rates from our LIBOR-based consumer finance line of credit.

Our portfolio's loss experience is in line with our expectations. Our losses are mitigated by a ready access to the borrower's home in our community, our close communication with the borrower through our onsite management and normal land lease activities, as well as the relatively short amortization period of our loans, keeping our outstanding balance roughly in line with the underlying collateral value of the home.

In terms of other expenses, property management was lower due to an adjustment in our incentive compensation and some staff reduction. G&A expense was higher during the quarter, reflecting additional severance of $900,000, related to the departure of senior executives and higher Sarbanes-Oxley costs of $2 million, partially offset by adjustments to the incentive compensation expense of approximately $800,000.

The severance cost increase reflects $1 million recorded in the third quarter 2005 versus $1.9 million recorded in the fourth quarter 2005. Depreciation expense reflects the fourth quarter placement of substantial improvements into service. Interest expense reflects a full quarter of interest on our exchangeable notes, higher outstanding balances under the lease receivables line of credit and higher rates under our variable rate instruments not covered by our $100 million swap. That expired in February 2006.

With respect to our balance sheet, we had cash availability at December 31, 2005, of almost $60 million, including our available cash position and indrawn availability on our lease receivables line of credit. In February, we exercised our right to experience our variable rate notes for the first of three consecutive one-year extensions, and we expect to refinance our revolving credit mortgage facility by September 2006.

Now let me turn the call back over to Larry Willard for some concluding remarks.

Thank you, Larry. In the five-plus months of my tenure as Chairman and Chief Executive Officer, after having thoroughly reviewed all the community's operations and having visited more than half of our properties, I firmly believe that we can provide a clean, attractive and affordable place for our residents to live that is competitive with other forms of housing, provides real value and service to our residents.

In closing, we must continue to be deliberate and diligent in our approach and be willing to make changes as required as we walk into the future.

We'd now like to take any questions that you may have. Operator, please queue up the participants for questions.

Thank you. [OPERATOR INSTRUCTIONS] We go first to Paul Adonato, with Harris Nesbit. Please go ahead.

Thanks. Larry, I was wondering if you could give us your thoughts on the home sales business. Is it a good way to increase occupancy? What are your plans for owning homes going forward?

Currently, we have about 1,800 homes that are not occupied. About 600 of those are new homes. Quite frankly, as we look back at '05, with all that went on, it doesn't provide us really a benchmark. And so really as we go into '06, we're forming our own benchmark and getting a feel for what each one of the communities gives us. We do think that we will have some need for newer homes as we work into the year, but we're still rolling up what those communities are giving us and what we think is going to happen in the marketplace. But, no, I think it's an ongoing part of what we do.

Okay. And what about owning homes on the balance sheet to rent to residents?

Well, my observation on that, or my short observation, is this -- when we lease a home for a year, what it really gives us an opportunity to do is further qualify that person during that year to put them in our lease to purchase program, or to sell them a home. So I really see that as a plus, and I think it's very much one of the tools in our kit.

Okay. And, Larry Kreider, I was wondering if you could provide us an update on debt covenants and satisfaction thereof?

We have no issues on our debt covenants at this time.

And, finally, I was wondering if you could provide an update on the non-auction properties that were being listed for sale? How is that process going, and -- if you could provide any sense of the pricing there?

Let me take that. We couldn't at this point in time. We have some Florida and California properties listed, and I think they're included in that group of the attachment. And we do have some under contract, but we don't have any of those closed, and we'll be reporting on those on a quarter-to-quarter basis as they are closed.

Okay, thanks. I'll yield the floor.

We'll go next to Lee Cooperman of Omega Advisers. Please go ahead.

Thank you. Some of these are easy and kind of been addressed and maybe one more philosophical. First, can you just kind of discuss qualitatively your comfort factor with the existing balance sheet leverage and where we stand relative to our ability to meet all our obligations and also having adequate capital to run our business. That would be the first question.

Second, without getting into the forecast business, because I know you don't want to forecast, do you believe in the current fiscal year, I mean, December '06, that we will generate more revenues than expenses, ex asset sales. In other words, will this business generate cash in 2006?

And third, don't take this - this is not a question from a wise guy, but it's a question from a person who has a very, very high regard for your largest shareholder. He's known to be a very astute moneymaker for himself and for his shareholders historically. And I couldn't help but notice that not too long ago he added 1.6 million shares to his position, pretty much around current prices, bringing his ownership to about 15 or 16% of the company.

And he sits on the board and, Larry, I guess he must have been influential in getting you to be CEO. So I was just curious if you would want to comment on what you believe the astuteness of your fellow board member is in terms of his investment decision. So those three questions, one philosophical, two quantitative.

Well, Lee, let me start with the last one first and say I think Mr. Ford's background and history pretty much speaks for itself. And I think you said it well, and so I won't really add anything to that.

I think as we look at '06, we're not, again, going to give any guidance to '06, but I think as it unveils, the first quarter will be coming up pretty quick and you'll begin to get a sense for kind of what that's going to look like. As far as our balance sheet, our cash position, all those things, I feel reasonably good about that as we go into the new year, and that does provide us the platform to do the things that we want to do, we're going to make better utilization of cash in the buying of homes and how we do that. And I think as far as CapEx we're going to manage that much better. So I think there's just a lot of things that we've underlined for ourselves to do better that will help in the cash arena.

But I do feel like that we have a platform adequate to do the things we want to do as we go forward.

Thank you.

We'll go next to Craig Leupold with Green Street Advisers. Please go ahead.

Good afternoon. Can you comment at all about - for those properties that are subject to contracts through the auction, as to what are the growth proceeds you expect from those? And then how much debt is associated with those properties and what kind of brokerage fees and prepayment penalties, or defeasance cost you'd have to incur to get to net proceeds?

Kreider, do you want to address that, or do you want me to?

Well, Craig, I think you spoke to the properties that we have under contract. Is that correct?

Correct.

Yes. And I think we're going to speak to the -- just to the actual closing, to properties, this being the real estate industry and there could be a lot of twists and turns, so to speak. But with respect to the properties that we sold, I think we disclosed those in the release and in our call just now and that it was about $34.5 million of gross proceeds, and I think we had 19.5 million of debt that we paid down against those properties.

Going forward, as we close those, within the quarter we'll put out information on those, but anything we'd do prior to that would be premature, because until they're closed, they're not closed.

I guess the auction costs, though, I know previously they were about 6% of revenues. Is that still about the same level? I'm trying to think about kind of what your defeasance costs may have been to get to your net proceeds.

The auction costs are indeed running between the commission and other costs about 5 to 6%.

Okay, and then two last questions. One, Larry Willard, you've made reference to G&A run rate. Can you give us any more color as to where you expect that G&A to settle out over the next quarter or two?

It's something that we're really heavily focused on and I think the numbers will speak for themselves. But let me assure you, it's got my attention.

Okay. And let me ask it maybe a different way. The only unusual items in the fourth quarter would be 1.9 million related to severance and then some incremental S-Ox costs?

Yes, we have S-Ox costs, which I highlighted of 2 million, and then we did have a favorable adjustment in our incentive compensation costs of $800,000.

Okay. And then last question related to operating expenses at the property level, from page 11 of your supplement, you had a significant decline in real estate taxes, order of magnitude 1.9 million, and clearly you also had property operating expenses decline. I'm wondering how much of that is like true cost savings versus maybe seasonality, and then on the real estate taxes, if you could address why there would be such a big decline.

I think the real estate tax is - could you hold on one second please? Let me research this for just a minute, please.

Sure.

Craig?

Yes?

On the real estate taxes the decrease was attributable primarily to some savings we got on appeals that we realized in the fourth quarter and to some of the - we made pretty conservative accruals throughout the year in terms of real estate taxes and those were principally related to our home inventory, and, as you know frequently, you know the actual tax results kind of at the end of the year, and that resulted in a net reduction in the fourth quarter. I would say this, probably, if you took the whole year and averaged it, that would be something that would be more representative of the year, because real estate taxes are in arrears.

And then to the property operating expenses, could you comment about seasonality versus actual true cost savings?

We've had so many things happen, I think the seasonality is not terribly pronounced in this area.

Thank y our.

[OPERATOR INSTRUCTIONS] We go next to William [Akeson] with Merrill Lynch. Please go ahead.

Yes, thank you. On the discontinued income, do you have a breakout for the line items or revenue operating expense, interest depreciation, whatnot, the coagulated number isn't all that useful.

Well, I believe we will provide that in the 10-K. We don't presently have that here. So we will file our 10-K next week.

We'll just have to wait for it then.

And I would point out that it does include $3.7 million of an impairment charge in the fourth quarter.

All right. On the 41 properties no longer for sale, can you give us just a qualitative idea about how far apart you guys were with the bidders on cap rates and pricing?

Yes, let me take that. In the most part, there was quite a bit of gap in there, and our approach in the auction was, yes, produce some cash, yes, pay down some debt, but at the same time it was not to take any big losses on these properties. And if the price was a fair price, we looked at it real hard, but if it wasn't fair, there was no point in us entertaining them.

Okay, on the 12 properties that have been sold and, by the way, it was nine properties just a few days ago, can you give us an idea of what the price per site was, and perhaps the cap rate.

No. I don't think at this juncture that we would give that number.

The number of home sites was 1,587.

Okay, that's helpful. Now, looking at the assets held for sale of 122 million and change, it looks like that's about almost 8,100 sites. It works out to a valuation of something like 15,000 per site. That seems like a pretty conservative valuation. Am I doing the math right?

Well, let me re-compute it.

Well, there were 5,326 home sites altogether in that 122 million, so that would compute to something like 23,300.

Okay, so it's 5,346.

That's 5,326, roughly, home sites.

There had been some confusion about that one property, Desert Palms, getting sold for a cap rate at 2.75%. Could you just set the record straight there, what happened?

That property is set to close and there's not really much we can talk about at this juncture, now, as we do ultimately have it closed in the quarters that we're talking about those that are closing, there would be more out there about it.

Okay, just two more quick questions here. If you look back in the back of your supplement, where you show the operating margins by occupancy tier, the occupancy margins for the lower-tier properties, those under 80% occupied, the operating margins just went up dramatically there. They went up to on the order of 56% from 49% and 32%. I guess that's an indication of the properties you took back were of fairly decent quality compared to the whole boat that you had in there before.

Yes, this is Larry Kreider. I can't quite comment as to the kind of mix in that regard.

Okay. Well, I guess the numbers are the numbers. Then one last question. I mean, we've talked about this, that one of the goals was to have the home sales division breakeven this year. I don't know if that was for the whole year or by the end of the year in the fourth quarter. Could you just elaborate on that?

The home sales, or actually the financing of homes, any of those components, our approach would try to be at least at a breakeven. I mean, as you look at the total year, but I think the proof is in the pudding and we'll see as we move along what we're able to do with that.

Okay, thank you very much, gentlemen.

We go next to John Litt of Citigroup. Please go ahead.

Hi. It's Craig Melcher here with John Litt and John Stewart. Was removing the ownership constraints - the removing the ownership constraints when you went to the C Corp structure, is that at all related to the fact that maybe there may be a private investor that would be looking to increase his stake in the company?

I wouldn't read anything into that at all.

What's your plan for the dividend policy going forward?

That's strictly up to the board on a quarter by quarter basis.

In the release, you mentioned part of the occupancy decline was because of the new home sales business. Could there be any further decline in the occupancy from this home sale business, or do you think you got it out in the fourth quarter?

Well, there can always be a decline, but our approach going forward as compared to the past is since we've really had no benchmark to work with in the way we saw occupancy and all cost in the past, I think we'll kind of see how that goes. But certainly the buying of homes will continue to be a part of our strategy.

And the last question is just on the gross margins in the home sale business. This quarter, it was negative. Is there anything different going on there, or is that just a function of the new structure?:

Well, I think - and again, in the past, our juncture was to even sell homes at a loss to create occupancy, and our focus is different as we go forward.

Okay, yhank you.

We'll go next to Robert Stevenson of Morgan Stanley.

Thank you. Most of my questions have been asked. The one question I have is have you guys already de-REITed, or is that something that's coming shortly.

The board has already made the decision to de-REIT.

Is that all there is to it? I mean, I'm not exactly familiar with the process of this. Do you have to file papers or anything else? Is there some sort of effective date of the decision?

Kreider, do you want to?

No, it's a very simple election and we have not made it yet, but we will shortly, given it needs to be done by March 31st to be effective for the tax year ending December 31, 2006.

Okay, thank you, guys.

We'll go next to a follow-up from Paul Adornato of Harris Nesbitt. Please go ahead.

Thanks. I was wondering if you could share with us the benchmarks or milestones that you guys are focused on for next quarter and the year?

I think I stressed in my opening remarks is really the fundamentals, and I think we'll continue to do that. We continue to look at each community in some ways as if it were the only community we owned, and how can we do the very best job we possibly can with what that market gives us. And we'll look at what opportunities and challenge is there. We'll continue to look at proper lot [ran] as we think we have the quality parts to play a lead role in the markets in which we're in. We'll continue to look heavily at utility recapture, our expense levels, control and CapEx, target marketing, and then the tools that were there. Of course, organic growth is really the best from our point of view. We continue to work at enhancing our dealer relationships, so if they're recommending our communities for people that are buying homes from them, we will continue to use our helpers. And that's leasing homes, lease to purchase home and selling homes, and financing them where necessary.

And we feel we'll continue work on the community activity to really work on our retention in the communities.

Okay, thanks. And one last question. Larry, I was wondering if you could walk us through the impairment accounting this quarter?

Sure, I'd be happy to. It's fairly detailed, but I summarized most of the implications.

Are the impairments based on a market evaluation or a market price?

Yes, and we retain the impairment charge in most of its amount. It was actually booked in the third quarter when these communities, the 41 communities, were deemed to be sold. When we deemed them to be recontinued, what the accounting rules say is you don't look to recoverability of your costs in the investment in the specific communities. It says go right to the lower cost or market analysis. You kind of eliminate a step in that accounting. So based on that, we attained approximately the same result.

Okay. And how did you determine the market prices?

We looked at what we thought we could -- should be able to get for the communities in a selling activity that was taken in a reasonable manner, one at a time, over a reasonable amount of time.

Would you be willing to share some of those metrics?

No, I think the metrics are - we might disclose some of that in the 10-K.

Okay. Thank you.

We'll go next to Lee Cooperman of Omega Advisers. Please go ahead.

[audio gap] sides. It's very clear, Larry, from your style that you kind of want to be long on performance and short on rhetoric, so I'd ask you - you kind of was pressed into action when you went on the board. This outcome was not really anticipated. So I'd ask you, are you happy that you've become CEO of this company? Because in the end, I guess you want to come out a winner, and so given everything you see that you're think you're going to win, I kind of recall an old adage by the great Warren Buffett where he said when a business with a reputation for poor fundamentals is tackled by a management for reputation for brilliance, it's usually the reputation of the business that remains intact.

And I'm just curious, given everything you see, do you think that with everything you see, that a year from today, 18 months from today, that your reputation for strong performance will be intact and that you will have been happy taking on this role?

Lee, you just have such a way of putting words, let me tell you --

Well, I've got to draw you out a little bit. You're so conservative.

-- it blows me away. Well, as far as giving any guidance, I won't. I certainly didn't come here to administer something that wasn't good. And, quite frankly, I get pretty excited as we're visiting our communities. As you know now, I've been in over 150 of our communities, and when you get out there with our people and you see the quality of our people, and even in markets that we consider off a little, when you see what's happening out there, you just can't help but feel good about the opportunities.

Now, the whole strategy, you've got to execute, and so we're going to do the best we can in executing, because I have yet to be in a community that I didn't see a way that we couldn't do it better, and we've just got to see how we make it happen.

Well, good luck.

Thank you.

We go next to William Akeson with Merrill Lynch. Please go ahead.

Yes, just circling back on the impairment charges, the goodwill impairment of 3.99, that is real estate related?

Yes, all of our goodwill starting at the end of this quarter was real estate related.

Okay, thank you.

Thanks. We'll go to [Max Frooms] with Crittenden Research.

Yes, good afternoon. I'm actually following up on a question by the gentlemen from Merrill Lynch about the one property that originally got bid on for a 2.75 cap rate. You said that's still set to close, correct?

I said that particular property is set to close. That would be my comment.

And I originally saw 31 contracts drawn up, and now there are 30. Which property did not close?

I think there's only 30. There's been so - through the time and when you have an auction, you're going to have some movement on some of this stuff, but I think the number is 30.

Okay, and then the second question, and then I've got two more, was that the plan for increasing the home sales with the decreased sales force, is there going to be an aggressive marketing strategy, or how do you expect to fill the home sites with about 150 fewer employees?

Well, it does speak to the inefficiency of the previous process, I suppose, if you look at it that way. But we have a heavier dependence on our community managers and our process that works very well, and we have a lot of ours that are very seasoned, and where in the past that's been very divided, and so we've integrated it much better and we've pushed the sales process down to our district levels, which there are four of those. So, again, I think just a better utilization of our structure and better utilization of our people are going enable us to do that.

On the other hand, if you're able to retain through really doing the right thing in these communities, you don't have to generate as much as you might have otherwise. So that's - as we go into '06, we'll see kind of how that works. But again, I come back to underline that we've got good inventory, we've got 1,800 homes, about 600 of them are new, and as we project into - when you look at the holiday season, November, December and January are slower times. When we start coming into the spring, we're going to be geared up and really focused on what our opportunities are and working on that.

Okay. And then, I guess, the last question - I hate to be the person with the fascination with the abomination, but do you expect any legal problems from the terminated employees?

Don't -- not anything that I know of.

Well, thank you very much.

We'll go next to [Andrew Cohen] with [Dune] Capital.

It's actually [Jimmy Levin] here with Andrew Cohen. It looks like we were able to raise rents in the fourth quarter, but suffered some lower occupancy. Curious how you think about the extent to which the lower occupancy is a result of the raised rents and how you're going to strategize on that going forward?

Well, some of the lower occupancy - I mean, when we look at it, when we're redoing our sales force, redoing that structure, I mean, you're kind of on the side of the road with the hood of your car up, working on it, but that was really the best time for us to be there to be redoing that, because that's kind of our off-season anyway.

Well, that kind of caught up with us a little on the occupancy side of it, but I think going forward that was the best time to do that.

And I think the issue was really the decline in the leasing and selling activity related to the sales force. Actually, the other activities were better in fact than in the third quarter. We had fewer homeowner move outs and we had fewer home renter move outs.

Thanks, just to follow up a little bit. Going forward, how important is raising rents to the strategy for driving revenue?

Well, it certainly would be a part of our strategy. You spoke to the rent increases. Some of that was feathered in in the last part of the year and goes into the first part of this year. Those aren't like flipping a light switch, depending on how the contracts are and how those change. But we'll continue to review that on a market-by-market basis as there's opportunities, and it depends on how the contracts run and when we can do it, but it's certainly something that we will look at.

Larry, it's Andy Cohen. Does it speak at all to anything you're seeing on the demand side?

Well, when you look at it market by market, I mean, you see what your competition is in stick-built homes and apartments and other things, so you really look at that. You see who your competitors are that are your peers in the business, and I think we've taken more of an approach that with the quality we bring to the marketplace, perhaps where historically we've seen ourselves fitting in the pack, at the low end of the pack, we now view ourselves as the leader in the pack. And so we act accordingly.

Thanks.

And we'll take our final question from Howard Flinker with Flinker & Company. Please go ahead.

In view of the approving mobile home markets, what are the chances that you guys think you could raise rents, or rental rates, 4 to 6% this year.

I didn't understand the percentage.

I chose a number, 4 to 6%.

Forty-six --

No, 4 to 6%.

4% to 6%.

4 or 6.

Yes. Well, I think when you look at our last round, and I think it's in our numbers, somewhere isn't it, Larry? Or we've already published it?

It's not in anything we've reflected through December, and most of our rents are effective more in the beginning of the new year, January and February. So I think it would be more evident in the first quarter results, which we will be publishing shortly.

Yes, I think our opportunity there as we look at that, when we've had some communities that hadn't had increases in two to three years, then there is some possibility for that. I think once you kind of catch up, so to speak, then as you look in the coming year, in '07, then you're probably not going to be able to do as much. But, again, you're looking at the individual markets and what they give you.

And the alternative seems to be cooling, stick-built housing. So that may offer you an opportunity as well, might it not?

We hope so.

In fact, we are seeing some higher move-ins as we reflected in the fourth quarter from just third-party people moving in with their own homes and financing.

Thanks.

Ladies and gentlemen, this does conclude our Q&A session. At this time, I'd like to turn the conference back over to your hosts for any additional and/or concluding comments at this time.

Well, I thank all of you for being here today and asking your questions. I assure you, each one of your questions are important to us. Boy, I tell you, we're -- I'm figuring this business out as we go along, but I'm telling you, I'm excited about being involved, and as we look forward to the future, look forward to working with you, and thank you for your confidence.

Have a good day.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.