Hilltop Holdings Inc (HTH) 2006 Q1 法說會逐字稿

Good day and welcome to the Affordable Residential Communities Incorporated first quarter 2006 earnings conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Scott Gesell. Please go ahead.

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 to be forward-looking statements within the meaning of Section 27-A of the Securities Act 1933 and Section 21-E of the Securities and Exchange Act 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 first quarter 2006 are detailed in the financial tables at the end of today's earnings release. As is customary for us, we have provided some expanded financial information in our supplemental package, which is available on our website at www.aboutarc.com.

Having said that, I would like to get on the floor, Mr. Larry Willard, Chairman and Chief Executive Officer. Larry, please go ahead.

Thank you, Scott. On the call with me today is Larry Kreider, our Chief Financial Officer. This afternoon, I will focus on an overview of our operations, then turn it over to Larry Kreider to provide you some details on our financial results. We will then be able to take questions from you.

Today, I would like to focus my comments on the way we are conducting business. As we have discussed on our previous calls, our business approach continues to be one of a very basic focus on operations, specifically the community and our residents on a community to community basis and maintaining a disciplined manner of business operations that strives for good execution.

We continue to emphasize the community and our residents welfare to our team in the field. We want to encourage a feeling of community, a good line of communication between our community managers and the residents, ongoing community activities involving adults and children and family, and a good community parents and function. We believe our continuing capital spending programs and repairs and maintenance activities are providing our residents with an attractive community in which to live.

Such a feeling of community can bring a lot of benefits, including resident retention, resident referrals, rent adjustment opportunities and better community appearance, including resident retention, resident referrals, rent adjustment opportunities and better community appearance.

Resident retention is a key focus. And the community feeling I've just discussed is an important part of this. It is much more cost-effective to retain a good customer than to attract a new one. And a satisfied resident is important to providing referrals for new customers and retention.

We're also placing a renewed emphasis on reestablishing relationship with independent builders who can be instrumental in referring our customers through our communities as new residents. We believe that a resident gained in our community referred by the independent builder network is the most cost-effective new resident because we make no investment in the resident's home.

In reestablishing our relationship, we tend, intend to have our community managers methodically call on our local leaderships. There's nothing like dropping off some doughnuts, investing in bits to enable a productive working relationship. We believe our focus on the community and our residents as discussed above will enhance those opportunities over time.

As previously disclosed, we have also emphasized rent levels. In many markets, we believe that we could've been global market leader especially given a substantial investment we have made in our communities. As a result, we have put into place rent increases in a number of communities.

We have also focused on recovering and control of utility cost as emphasized in our budgeting process. We've put into place more consistent pass through of utility cost to our residents and have taken steps to control excess cost per volume.

Collections continue to be very important for us. We believe it is very important to have our community managers directly involved in the collection process and to act quickly to resolve issues. We will seek to reduce both our aggregate past imbalances and our ultimate bad debt expense.

As we suggested earlier, we have also reinvigorated basic management processes. While in completion of our extensive community with community budgeting process last year, we've begun regular reviews with our operating management to review and compare results against budget. Make necessary adjustments and identify opportunities.

In fact, we've just completed a series of such reviews with each one of our four regions covering our first quarter operating results. We're conducting all of this on a community-by-community basis.

We're also scrubbing our operations for operating improvements at every level. For example, in the near future, we expect to implement check scanning at community levels that allows faster deposit of rent payments and better utilization of cash with less work.

We're putting in an enhanced invoice submission and payment system that will be virtually paperless. And allows a cost reduction throughout the process and provides for easier use.

We're enhancing our internal audit program to reduce cost and maintain our controls after the Sarbanes-Oxley process and obtain operating enhancements.

In summary, we're embarked on a basic operating strategy that focuses on our community operations and addresses avenues we identify that allow us to optimize our operations. We believe this process will take time, which should have an impact over time.

Now as the side note, just a few words regarding our community sales. Through today, we have closed 28 of the 38 communities we have identified as held for sale. These sales generated approximately 38 million in proceeds. Net of 34 million of related debt, defeasance and other closing costs. We recorded a net gain on these sales of approximately 10 million. We continue to focus on these sales of the remaining communities held for sale and intend to report our progress in each of our quarter releases at a minimum.

With that, let me turn the call over to Larry Kreider to provide some details for the quarter.

Thank you Larry. I refer everyone to our earning's release and supplemental data package that we issued today. This afternoon, I will focus on providing information on our financial results for the first quarter 2006 primarily as compared to the fourth quarter of 2005 with respect to our income statement and balance sheet.

For the first quarter of 2006, we had a reduced loss from continuing operations reflecting increased net segment income and reduced costs. In our community business segment, net income increased from the increased homeowner and rental revenue rates for home site and a larger percentage of home renters. We also had an increase in the recapture of our utility cost in our revenues and a slight reduction in overall utility costs.

Overall, we had reduced operating costs in our community segment primarily as a result of seasonally lower repairs and maintenance costs. Our resident recap remained flat in the first quarter 2006 as compared to the end of the fourth quarter 2005.

With respect to homeowner activity, we experienced an increase in new residents who bring their own homes into our communities, reduced sales of homes and slightly reduced move outs of homeowners and repossessed homes owned by finance companies.

With respect to home rental activity, we experienced increased activity in new 12-month leases, slightly reduced activity in lease-to-purchase transactions and reduced rental home move outs. Home rental occupancy increased to 85% at the end of the first quarter 2006 from 80% at the end of the fourth quarter 2005.

In our retail segment, we have lower sales volume than in the fourth quarter 2005 and an increase in gross margin and sales. Our pricing increases and commission decreases were not adjusted until mid-to-late in the fourth quarter 2005.

We also had lower retail expenses due to reduced salaries and benefits, severance and advertising costs. The reduced salaries and benefits reflect the reduction in force in the fourth quarter of 2005 that primarily effected sales management.

In our consumer finance and insurance segment, our results were consistent with the fourth quarter of 2005 reflecting the limited number of new loans.

Our portfolio's loan loss experience is in line with our expectations. We expect our loan losses in the event of a default to be mitigated by our ready access to the borrower's home in our community, our close communication with the borrower through our on-site 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, general and administrative and property management expenses were lower in the first quarter of 2006 than in the fourth quarter of 2005 primarily due to cost incurred in the fourth quarter for severance of two former executive officers and completion of the company's internal control evaluation as required by the Sarbanes-Oxley Act.

Depreciation expense was lower in the first quarter of 2006 than in the fourth quarter of 2005 primarily due to the fourth quarter 2005 placement of substantial capital improvements in the service and the fourth quarter 2005 re-continuance of 41 communities.

Interest expense was lower in the first quarter of 2006 than in the fourth quarter of 2005 primarily due to repayment of debt from the net proceeds of the community sales completed in the first quarter of 2006 offset somewhat by higher rates under our variable rate instruments.

With respect to our balance sheet, we had cash availability at March 31, 2006 of approximately $65 million including our available cash position and indrawn availability on our lease receivables line of credit. In February, we exercised our right to extend our variable rate notes for the first of the three consecutive one-year extensions. In February 2006, a $100 million swap expired and we did not obtain a new one.

We expect to refinance our revolving credit mortgage facility by September 2006. We used a substantial portion of our net proceeds for community sales to repay mortgage, Floorplan and other indebtedness

Let me now turn the call back over to Larry Willard for some concluding remarks.

Thank you Larry. In summary, 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, provide real value and service to our residents.

We know we must continue to redeliver and build in our approach should be willing to make changes as required in order to be successful in improving our results.

We will now actually take any questions that you may have. Operator, please queue up the participants for questions.

Thank you sir. [Operator Instructions].

Our first question comes from Paul Adornato, Harris Nesbitt.

Hi thanks, good afternoon. Larry, you talked about some of the reasons for expense reductions. Specifically on the operating expenses, they went down a little bit in the quarter sequentially. Was wondering if you could talk about what those items were that reduced operating expenses and do you think that the run rate that, that you're operating at, at a healthy rent rate? That is, do you anticipate needing to increase operating expenses going forward?

Well this is Larry Kreider. I highlighted one particular change, and it was repairs and maintenance which were significantly lower as we will have in more detail of course in our 10-Q that we intend to file tomorrow or the next day. And other than that, we had some reductions in salaries and benefits, but that was the major item. And as I said, I believe that it has some seasonal aspect to it.

Okay. And in terms of reporting, do you anticipate perhaps reporting in terms of FFO because a lot of investors are used to seeing FFO? And am I doing my math correct, correctly by estimating that FFO in the quarter would've been a positive $0.9 per share?

Well, I, I -- because we're not a REIT, we have taken a position that we would be measured by conventional GAAP measures including operating cash flow all of which we have provided in our supplemental deck . However, I can suggest to you that the calculation that you would do for FFO is in line with what we've previously reported where you would take our loss from continuing operations which I think you can readily see in our financial statements that's prior to discontinued operations. Add back depreciation and amortization and subtract then comparable amounts of depreciation on equipment in the fourth quarter. And I believe the other adjustments would be minor.

Okay. And finally, I was wondering if you could talk a little bit about a new resident coming in to the rental program. Are they immediately categorized as kind of long term renters or rent-to-own and can they move from one category to the other if they demonstrate good credit, et cetera?

That, that's-- it's Larry Willard. That somewhat depends on their intent and how they choose to come in. We have a broader array of programs. Really the one that is really the best in the company point of view somebody pulls up out-front with a trailer and wants to move in, we call that organic move in. And that's really the best of all worlds. Really next is our bigger in resident referrals again. But once we get beyond that, if somebody comes in and they just want a lease, a home and a lot, then they can do that. Sometimes those are for a year. Obviously if-- if they're credit worthy, then they could take advantage of our lease-to-purchase program or take advantage of buying a home in some other way than being financed.

So-- so someone's coming in, you may decide that they're not credit worthy enough to be in the lease-to-own program. But they could still be-- they could still rent the home for a year?

Sure.

Yes. Okay and then finally, Larry Willard it looks like you sold the plane in the quarter. Are you ready to buy a bigger one at this point?

No we-- we had two planes and we got rid of one.

Okay thanks.

Any other questions?

Not right now. Thanks.

We'll go next to William Aitcheson, Merrill Lynch.

Yes, thank you. Yes Larry, Larry Kreider?

Yes?

Yes, I certainly understand your stance on FFO and of course going forward we can all change over to that metric as the primary one that we key on. But as to getting to the number for the quarter, wouldn't there also be an adjustment for depreciation on discontinued operations to get at the real number?

There would be. But, that number is diminimus because when you discontinue operations, we do cease depreciating those assets.

Okay, okay. That's helpful. And then I was hoping to find out progress on-- I know you've only been working on it for a little bit over a quarter now. But the goal of getting the breakeven on the home sales operations. Do you have any qualitative remarks that you can share with us on that?

Other than to say we're continuing to work on it. We have really no previous benchmarks to reflect back on with whatever month and quarter that passed, we'll get a better feel for that. And it's something that we're still really fine-tuning. I think part of what the numbers really point out is, which is been good, is better retention in this first quarter and that's been very exciting.

Okay. On the trend in repossessions, it's following a good downward trend but, and the number is still fairly significantly high. Any sort of update that you can give to us on that?

Well, won't you...

Well, with respect to our repossessions, we, we work very closely with our, with the finance companies who own homes in our communities. We have noticed and we are reporting a kind of a secular decline in repossession move outs. We are focusing our activities in buying homes presently to buying these used homes that are in good condition.

Well, most of our buying at this point in homes is repossessed or used and really the best buy that typically we can make is one that, that is already in our community or is sitting in one of our pet sites in contrast to any other purchase that we might make. That together with inventory of homes that we already had in queue is really providing our stock in net result. Up to this point we're really not purchasing any new homes.

Okay. On the renters, it, it looks like the paragraphs has really been bumped up fairly significantly over the last two quarters. It looks like there's been a little bit of an impact there or a fairly significant impact there in terms of occupancy. Is this a sort of repositioning of your tenant base that you're going through here?

No, I think not, not really. In a lot of cases it's been pretty standard period of time, which we had not increased, lot rent and some of those and it really gotten out of queue or out of line. And so, we certainly continue to review that and we'll continue to do so. We truly feel with the value that we bring in our communities to the marketplace that we can expect to be at the upper end of the market and that's really where our hopes are.

Okay and then lastly, with respect to mortgage rates on single-family homes, is there any sense that you're getting from the feel that you're receiving a benefit from the decrease in housing affordability in any of your major markets?

Well, I think they both really, we'll still be out on that. I think, it's hard to really tell you as to what, how much benefit we're getting out of that. Of course, it's surprising how the increase is. And I think it will be to our advantage. Whatever rates, or interest rates or whatever else.

Okay, thank you gentlemen.

We'll go next to Richard Palely, ABP Investments.

Hi gentlemen. Couple of questions and then a comment. Why don't we start off with a comment perhaps? The FFO debate, in the least I would hope that you perhaps could supply in the future the, maybe the inputs to get to FFO if you don't officially report it. I simply put I think the real issue behind. Real estate companies reporting FFO is that depreciation tends to be a very misleading number for these companies and it distorts the EPS versus.

And frankly there are plenty of REITs out there that have TRS that are paying some sort of tax today. So I realize that you're not taxed as a REIT but you are a real estate operating company. And I think in the future if you actually have positive FFO and you have a multiple, you may want to be compared off to somebody like Sun, just a guess.

[inaudible] thanks.

Okay as far as my questions are concerned, I'm kind of flipping through the supplemental and I don't see a, maybe I'm missing it, but a same-store analysis. Could we just go through on a same-store basis what revenue growth was and what expense growth was and then, and then why for the land lease sites? And then also maybe I think they're always kind of circling the question on the rental homes. What type of increase are you getting on rents on a same-store basis? As opposed to new, because the mix is shifting if you bring new, new communities into the rental pool.

Well, this is Larry Kreider. Now same-store is the same as our reported results. We had no acquisitions from the beginning of 2005 and with respect to our sales, they've all been reclassified for all, for all periods to discontinue.

So, everything's that's in discontinued operations?

They're all the same.

Great, I appreciate that and then what kind of turnover cost are you experiencing on the, on the rental homes? I guess you're becoming a hybrid apartment company/manufactured housing operator and you're now experiencing new returns I'm sure on the product that you're renting.

Well, I could say it is that all of our, that all of our turn costs are reflected in repairs and maintenance, which as I called out, are significantly lower. In the past though we have measured a turn cost of somewhere between 500 and $1000 on average.

On the, on the houses themselves?

On the houses themselves, they're sporadically incurred.

500 and 1000 is a pretty wide. Is it closer to 1000 or is it...

It is in a wide range.

It is closer to which?

I take a bit, at this point.

Okay, and then my next question is about the operating efficiency initiatives that you were speaking about. You mentioned one was the check scanning and a couple other items other that I wasn't fast enough to write down. But my question goes to what type of upfront costs are we going to experience as you roll these initiatives out?

Obviously there will be some costs but it certainly the cost is not such that it's not advantageous for us to embark on these programs. Cash utilization, quicker that we can get to the checks in the income stream and quicker that we can sales and all of that is something that is advantageous to us and the cost is well in line with achieving that.

And I can tell you this, the accounts payable system we're using in in-house program and the check scanning costs will be primarily the cost of the check-scanning machine placed into all of our 278 communities.

Right, alright my last question is regarding bad debt expense. I think you referenced that credit quality is getting better. I don't recall hearing a number. What was the charge offs for the quarter for bad debt and what is your, I guess when you call it past due but not necessarily written off?

Well, our bad debt expense with respect to our community operations, we will report in the 10-Q. But it, is roughly in line with last quarter's experience, somewhat higher.

And remind me of last quarter's experience.

Last quarter's amount was, I'm sorry, it's somewhat lower than last quarter's expense. Last quarter, last quarter was $612,000.

612,000.

And it will be, we expect to report something lower.

Thank you.

Our next question comes from John Litt, Citigroup.

Hi, it's Greg [inaudible] here for John Litt. Just going back to the rental home program, the lease-to-own move ins were down pretty significantly from the past couple of quarters. Do you think this is the trend we'll continue to see where the lease-to-own programs a smaller portion of the rental program overall?

I think, it will moderate I think it's something that we'll continue to use as one of our helpers. And, but, I wouldn't be surprised if it didn't low.

Why do you think it's moderating? Is it the quality of the tenant? Or is it just the demand for that product really isn't there?

I think it's something that we'll continue in our sales efforts, our sales program that we'll continue to fine-tune and in that process I think that well could have an impact on one way or the other. That's part of our learning process.

Okay. Looking at the margins by the different occupancy levels, the ones for the, the communities with less than 70% occupancy were up, were down. But there's a pretty significant difference between the different community levels of occupancy. Can you just talk a little bit about the means and strategies expenses for the different occupancy buckets?

Well, as I've stated almost in every call, our approach is community to community. And obviously those communities do have certain things in common but then they're very different. Because they're different economies, different price points and have all kinds of different variables. So really our approach is to write basically a prescription for each community and what we think that market gives us.

In some case, the platform's that we would need our new homes that market won't support. In some cases, we can't really do much there in at least the purchase. So in some case it's purely organic move in and bigger relationships. But, so it just depends on what the market gives us and what that gives us then we try to, try to enhance it and try to rifle in on it.

How much more room do you think you have to push around? You've been pretty successful over the last couple of quarters. Where do you think you are relative to where market or where you think the market should be?

Repeat the question.

As far as increasing the actual rents on the home sites, where do you think you are relative to where you think events could go?

Well, again, that comes back to community to community. And what we think it will, what it will support, what our competition is, not only in mobile home communities, but also in stick-built housing. So what, we'll continue to monitor that and at the same time, the quality of our communities and the community involvement that we are continuing to push, we think can provide a full map for us to increase rents in certain communities.

How much pushback are you getting at this point on these rent increases?

Oh, you're, you're always going to get, get some kickback on that. But I think it has a lot to do with how we've enhanced the communities and how we bring that to the table as to what, what people ultimately feel like they can live with.

And on G&A expenses in the quarter was down about $4 million from the fourth quarter. Now the half of it was severance. Is the remaining half Sarbox or were there any other big pieces in that weren't separately broken out?

Sarbanes-Oxley's and the expense in achieving that certainly is part of that equation. But I think there are other smaller factors that needs to add up.

Do you think there's more room for savings there or do you think you're running a pretty tight ship for this plan?

I think we'll continue to push for more savings in all our expense areas and obviously time to get the below hanging fruit first and then the other, you've got to work a little harder on. But, but I think part of our bill and check scanning and accounts payable and a lot of other things that we're trying to do, all in addition to be more efficient, more effective that [inaudible] more expenses.

The last question is on the recurring CapEx. This decline is pretty, pretty big the last couple of quarters. What do you think is a sustainable level of recurring CapEx on an annual basis?

Well, as you, as you go back in our history certainly the big acquisitions occurred, we bought communities that had a -- needed a lot of money spent on and that was done. And as we go into this year, we're looking at a somewhat lower number unlike our other number was over 50 million. And, and I think in this year somewhere in a 12 to $15 million range. And we feel like that is sustainable as long as we're not in an acquisition role.

Thank you very much.

We'll take our next question from Paul Adornato, Harris Nesbitt.

Thanks. Just a follow up. How many, what are the sites, what's the site count related to the 28 properties that you sold? Do you have a schedule of which, which properties they, they are? Sort of I missed that somewhere.

It's the 28 properties, we had 2,860 home sites.

Okay and finally last year you eliminated a whole bunch of sites that 800 or more sites from the overall site count. And now in the first quarter, you got back about 121. Maybe you could just explain to, explain to us now that the nature of those, those additions this quarter.

Well, it, it continues to be our approach as we look at our organization community by community to really look as land based in these communities at other potential sites that we can develop or are already based there. We need to do something just a little different to obviously put those on the markets so we can generate more revenue. And that's something that we'll continue to do as we go forward.

So, so the 121 are the ones that are already ready to rent?

In most cases, that is correct.

Okay, thanks.

Our next question comes from William Aitcheson, Merrill Lynch.

Yes, thank you. I just wanted to try to understand the difference between the average occupancy rates for the rental homes of 81.7% versus, if you take the occupied rate of home sites divided by rental homes owned. You have an occupancy rate at 85.1% at the, at the end of the quarter. I mean does that represent the, the strong seasonal leasing period kicking? It's pretty wide difference in the numbers. What am I not looking at right here?

I think you've got it right. I mean, we started out at 80%. We went up to 85% and the average is somewhere in the middle. And I think it is the first statement that a good chunk of that leasing activity occur later, rather later in the quarter rather than earlier.

Okay, thank you.

The next question comes from Robert, private investor.

We had a lot of tornadoes in the mid section of the country. And what I would like to know is number one, did we suffer any damage, I haven't heard anything about that. And what kind of insurance do we have, how well are we protected in case we do get hit hard?

We have had an isolated case or two, where we had a home impact but for the most part, [inaudible], to say this, we have been pretty lucky. We did not really had any issues. But [inaudible], risk has been business is Mother Nature, and dealing with that across the country, and we didn't feel it, we were adequately insured.

We have Business Interruption Insurance for those tenants that are no longer to be able to pay rent because they are either too damaged?

Yes we do, yes we do.

Thank you.

And we now go to [Harry Splinker, Splinker & Company].

Hello Harry?

Would you say your numbers appear that one of your major emphasis in the coming year to is owners to occupy sites rather than renters is that correct?

Well, what we found our experience has been, homeowner is somebody that sees themselves as a homeowner, tends to stick around longer and feel more secure in doing that. So it's our advantage to really to produce the environment and it starts whether it is leased or purchased, or whether we sell him something, we get third party finance. We sell it and refinance it, and I can't emphasize enough how important it is to produce that community environment for people. They know our manager we know their name, we have activities, they feel secure there all these are so important to completing that home experience, and a feeling which makes more stay.

And people in your business tell me they treat their home different if they own it compared to renting?

Well I think there is something to it.

Yes, in your increase in charges for utilities which you passed on to customers, were you able to keep any of the increase or was that a pure [inaudible].

Now I think the revenues went from 5 million to about 6 million. That is expense that we had that we are now passing on? So that's plus and, on the hand, we have brand increases than that for the most part rocks the bottom line.

With any of the utility charges, the charge costs plus or is it just a straight path?

This will raise a straight -- but for the most part a straight pass through.

Okay.

And to answer to your first question, we did achieve a significant portion of the increases.

Oh you did?

Yes we did.

Oh.

Aggregate of recovery increase.

And I have ...

We have had the increase but we had the expense already.

Say that again?

We already had the expense.

Oh got you, got you.

Much of the increase.

I notice that between the between the fourth quarter and the first quarter gross property plant and equipment dropped to 5 million bucks. But you sold about $60 million worth of homes. I thought that the gross property might have dropped that 60 million itself or was there some other place that you had the other 55 million?

No, we didn't sell $55 million of homes.

What did you sell for $60 million in the cash flow segment?

We sold, our sales of homes were $2.7 million.

Sorry community sales were $61 million.

All I'm sorry its all community sales have been stripped out of all historical time period that included in assets held for sale.

Oh I see, oh I see.

Already, all five periods.

And second and finally, please explain this table to me called operating results by occupancy level, what's EOP occupancy percent?

End Of Period occupancy percent.

End Of Period, all else is okay, and finally on your Top 20 markets, there are few towns with very low occupancy, is that a case of location or is it a whole town have AIDS, are people dying?

Oh it has more to do with the market the economy; its maximum analysis, the camp setter Denver is like that [inaudible]. It's really going to these community [inaudible].

For example the Greensborough or -- was that overcrowded or do you allow the location?

Well, no Greensborough for a market or where you get markets, those happen to be ones that were originally included in the auction process, and as lot of homes were sold out at that time and when we didn't give the right kind of price and we kept it then we inherited back the results of that in being since we are in the auction. And also in Greensborough, [Vermont] these communities with a very low occupancy level.

And I guess the same will apply to [Pueblo] or something like that your gut feeling is that you are going to be able to raise the occupancy substantially and that's why you are hanging out, is that correct?

Well we think, we think they do the good markets, we are in the operating business. They are obviously not equal, but we do think the opportunities are there and we look at each one and write a prescription and hopefully -- success.

Okay, thanks.

[OPERATOR INSTRUCTIONS]

We will go next to Craig [inaudible] advisors.

Hi it's Mark. I wanted to ask -- set some positive trends and repossessions this quarter as well as move outs, but one thing I noticed is that we are still seeing a declining ratio of conversion of home renters to homeowners? Is this below your expectations for that business segment and how do we really benchmark that success of the home renter and the home programs?

Well it's some of those numbers there but our first advantage really coming back to the fact that our basic business is renting pads, leasing pads, and everything we do is what I call is beyond is organic growth oh help or enhancements and it wouldn't break even in those areas and lease more [inaudible] and that's what our goal and objective is, and these other things my decline, might comeback.

Obviously made the statement but we have no issues, that's what it takes to build through these other helpers and create a homeownership involvement in order to get retention. But ultimately to lease release that back. So as we go into this year in this first quarter with no benchmarks in the past. We are kind of figuring it out, what we tweak here and what we tweak there in order that to be a positive for us and there is a lot of answers still don't have yet quite frankly.

Okay, I notice that the investment in the Reynolds Homes leveled off this quarter after several quarters of increase, where do you think that trend is likely to go and how high could the rental home inventory get over the next year?

We purchased 165 homes. A substantial portion of those were the repossessed homes already in our communities, and I would point out that at the end of this quarter, we still have a little over -- a little under 1,400 homes that are still vacant. So we think there is substantial opportunity for us to improve our operations without buying any new homes in the immediate future.

And certainly our attempt to obviously get those homes occupied and we are making some progress with the numbers from the previous quarter.

Just a follow-up on the repossessions, are you seeing the trend in declining repoes leading to firmer prices on used homes, both for yourselves and better proceeds that homeowners are expected to get?

I think you could be right in respect that that market has firmed up. There is not as many out there in our overall inventory, and the result of that is prices are as soft as they once were. The sale in area that we feel like, particularly those that become available in our communities, the best deal we could make the best buying that home because we are in the best position to buy. And it saves us money of having to move something out and move something in. And it is something we want to get better and better at but the market, it's going to gyrate on you and you've got to figure out how to go with the market and make it work for you.

Another follow-up on that same line is, at this point do you think you are more inclined to be buying repossessed homes or new homes?

I think our best value right now is really in repo homes, even though the market has-- is not as soft as it was for a period of time. But that doesn't say at the same time that we wouldn't buy some new homes because we got some markets we can get the price point, we can get our mark up. And more than likely, as the year moves forward, we'll be looking at that.

One more question, then I think Craig might have one as well, which is that you have been very successful - you've been successful in pushing rents recently, and we are seeing lower occupancy on the homeowner side. At what point might you be concerned that you may have pushed rent too hard?

Well, I think it's a fine line there and it's not like one size fits all. It's going to vary from community to community and economy to economy. And I'm not saying there isn't some challenge in that. But we will continue to work on it and tweak it, and at the same time, if we're creating the right kind of community environment and the right value for our customer, then we think we will be successful at being able to enhance rents at the same time we will retain customers.

Larry, it's Craig [Leopold]. One last question, I guess. You mentioned that you are really in the business of renting sites, whether that be to a homeowner or a home renter. I'm wondering, given that you bring an outside perspective and kind of newer in this industry, what kind of sensitivities do you have to the extent that possibly more home renters take away from the value of a community in the eyes of a homeowner?

Do you sense that that's an issue? I mean, I'm just looking at some of the trends for your homeowner move outs and they are running a pretty good clip. And I don't know if it's attributable to the increase in home renters or not. Do you get any sense or feedback from that?

I don't know, not by perhaps in the strictest sense. But I do feel the value that we bring to the table-and Larry, I don't know if you've got that number [inaudible] to previous.

Well, actually we are showing, I guess we call it sectorial decline in home owner move out but its improving. We are focusing on resident retention. So this is in line, I think, with our historical expectations and observations.

I can underline our builders retention and we feel like, and I said it in our earlier comments, if we can keep somebody it's much less expensive for us to go find somebody new. But we are going to continue to try to enhance the homeowner environment and try to create more homeowners through this helper process. But since December 31st through the end of the quarter when you look at our overall occupancy level area waiting in roads, we got a net what?

We are overall flat in terms of occupancy, especially when you adjust for the 120 home sites that we have.

So my numbers are showing that you are speaking to the [inaudible] but our numbers are showing that third quarter relatively flat compared to December 31, '05.

And the mix perhaps will be changing some, but that is something we are going to certainly speak to and we will continue to work on, because our approach and our emphasis is a community environment in which we can retain more of our people as compared to what we have done in the past.

And if I'm hearing you right, you are more focused on overall occupancy without much concern about the mix. Is that a fair statement?

Well, it's not that I'm not concerned about it. But on the other hand, we've done the first quarter, you go there and-- without much base to work on, and you go out there and do some things and you kind of see what comes out of that. And we'll tweak it as we go forward and try to do the adjustments that we feel like is overall favorable to the company.

Great. Thank you.

And our next question comes from William Atchison from Merrill Lynch.

Thank you. Just looking at the supplemental, it appears to show that you sold 27 properties. Did you sell another one after the close of the quarter?

Yes, we did.

Okay, okay. So there are 10 left, not 11?

That's correct.

But the 2860 and the numbers in the release, let me see here May 8th. How many sites relate to the total proceeds of 782.5 million. How many sites are related to that?

That's the 2000-- 2860 sites does relate to the 27. And the one additional community -- could you hold on one second and I will go offline here for a second. It's approximately 100 home sites.

Okay it's 100 home sites. So it looks like you got just over $25,000 per site. Are you releasing any cap rate information on the sales on the composite basis?

No.

No.

Okay. How about can you speak to the quality of the remaining communities versus what you sold so far, in terms of location, in terms of occupancy. Are they pretty much the same caliber?

It's kind of a mix. In the ones yet remain to sell, a lot of [inaudible] properties, what we define as that. But I think the mix that we sold versus what we have, certainly this will be too bad if not better.

Okay, and do you still have those that one potentially valuable property in West Palm Beach. Is that still on the block?

Yes

Okay, thank you.

Due to time constraints, I will now turn the call back over for any additional or closing remarks.

Thank all of you for being here today, showing interest in [inaudible] and we will continue to do the very best job we can do is we move on to enhance your investment and also make a good place for our residents to go home and our employees to enjoy their work. Thank you all for your interest and for your time.

Once again, that concludes today's conference and you may now disconnect.