Hilltop Holdings Inc (HTH) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you, for standing by. Welcome to the Affordable Residential Communities Incorporated First Quarter 2007 Earnings Conference Call. Today's call is being recorded.

(OPERATOR INSTRUCTIONS)

I would like to remind everyone that this conference is being recorded and would like to turn the conference over to Mr. Scott Gesell, General Counsel for Affordable Residential Communities Incorporated. Please go ahead, sir.

Thank you, very much. Good afternoon. 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 27(a) of the Securities Act of 1933 and Section 21(e) 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.

Many of the 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 and forward-looking statements reflected in or circumstances after the date of this call.

We would also like to inform you with respect to our previously announced agreement to sell all of our manufactured home communities business, we expect to issue a proxy statement and hold a special stockholders meeting on this issue. As a result, we are in a proxy solicitation period, and we apologize that we will not be discussing this matter on this call nor respond to any questions regarding the same.

The results for first quarter of 2007 are detailed in the financial tables at the end of the earnings release. As is customary for us, we have provided some expanded financial information in our supplemental package including for the first time, information about our insurance operation, which is available on our website at www.aboutarc.com.

Having said that, I will now turn the call over to Mr. Larry Willard, Chairman and Chief Executive Officer. Larry, please go ahead.

Thank you, Scott. In addition to Scott Gesell, our General Counsel and myself, we have on the call today, Jim Kimsey, our President and Chief Operating Officer; Greg Vanek, President and CEO of our NLASCO insurance operations; and Larry Kreider, our Chief Financial Officer.

This afternoon, I will recap our first quarter of 2007 and then turn the call over to Larry Kreider to provide you with some details on our financial results. We will then be happy to take questions from you. As Larry will explain in further detail, I think we have begun to include the operating results of our NLASCO insurance operation since its purchase on January 31, 2007.

In addition, as Scott mentioned, we have announced the proposed sale of our community business, which we expect to close as soon as we can following the receipt of our shareholder vote and satisfaction of other closing conditions. As a result, I will discuss our results for these two operations separately. And for a moment, our overall combined pretax loss from continuing operation in the first quarter decreased to $5.8 million from $12.3 million in the fourth quarter of 2006.

This resulted primarily from a reduction of the net loss in our communities business of $3.4 million, and inclusion of pretax income from the insurance business of $3.1 million. The contribution from NLASCO represents only two months of the quarter, February and March.

In our manufacturing home community business, our results are consistent with the trends established in 2006. Net segment income increased $3.2 million, accounting for almost all the increase in pretax income to $38.2 million in the first quarter, from $35 million in the fourth quarter of 2006. Our results were driven by annual rent increases, most of which were in effect for the full quarter, some growth in our resident base, the expense control and continued management discipline.

We placed most of our rent increases for rental leases in place at the beginning of the first quarter of 2007, and achieved an overall increase of 3.5% to approximately $325 per home site per month. We made progress in the effectiveness of our marketing programs to attract and retain residents. In the first quarter, we had an increase of over 200 residents.

While expenses decreased in the first quarter over the fourth quarter, we continue to expand appropriately at the community level to maintain our communities. The decrease was almost exclusively due to the seasonally lower repair and maintenance expense. We expect to continue investing in the improvement of our community management group.

For the quarter, our utility recapture was nearly 78%, and we reduced bad debt expense to 0.4% of revenue, from 0.6% of fourth quarter. All of this contributed to an increase in our community margins to 63.1% in the first quarter, from 59.8% in the fourth quarter and 62.3% in the first quarter of last year.

We had suitable results in our retail and finance operations. We believe that sales and marketing programs that we described in detail on our last conference call positively impacted our results as we experienced higher new resident totals and lower departures of existing residents.

We continue to focus our sales and marketing efforts at the community level. With that effect, we seek to maintain the credit-worthiness of our customer base, target qualified residents in neighboring communities that are closing or inferior and establish good relationships with local manufacturing home dealers.

We seek to enhance our resident retention by establishing a community service program. We have aligned our compensation programs to be consistent with all of these objectives. Overall, occupancy levels increased to 82.7% from 82.4%. Rental home occupancy increased to 92.7%, principally as a result of a higher level of residents with lease with option-to-purchase contracts.

With respect to external market conditions, we continue to believe that we are well prepared to target potential new residents who've -- who have been [formerly] to find other competitive housing alternatives. As those alternatives become more costly due to higher short-term interest rates, higher apartment rent levels and toughening credit standards in the subprime mortgage market, we believe that ARC is well positioned to provide an affordable alternative.

We continue to hold steady in our management processes that are focused on accountability. We're operating against a community-by-community budget and continue to conduct detailed quarterly business reviews. Let me now discuss our insurance operations. At the end of January 2007, as previously discussed, we completed the acquisition of NLASCO, a property and casualty holding company operating mainly through two insurance companies for approximately $118 million. NLASCO operates on a largely standalone basis, headquartered in Waco, Texas.

It recorded $3.1 million in pretax income in the two months for the first quarter that we owned it after giving effect to the non-cash amortization of the tangible assets set up in accounting for the acquisition of $0.6 million. Since this is the first time we have included the results of NLASCO, I would like to spend a little time giving you some background on this company.

NLASCO operates mainly through two insurance subsidiaries, National Lloyds Insurance Company and American Summit Insurance Company that between the two of them operate in 28 states. National Lloyds primarily provides fire and limited homeowner insurance for low-value dwellings, mainly in Texas. American Summit primarily provides homeowners and property and casualty insurance for manufactured homes mainly in Arizona.

To a lesser extent, both companies operate in other states and offer other types of insurance. NLASCO's policies are typically written for actual cash value of up to $250,000 in the low-value dwelling market, and replacement costs of up to $200,000 in the manufactured home market. Liability on a homeowner's policy typically provides coverage of up to $100,000. The vast majority of NLASCO's property policies exclude coverage for water and mould and provide actual cash value payments as opposed to replacement costs.

NLASCO's writes its policies principally through an agent network comprising approximately 4,800 agents in National Lloyds and 2,000 agents in American Summit. Combined, National Lloyds and American Summit have in excess of 231,000 policies in force. NLASCO currently has 150 million of catastrophic reinsurance, subject to $7 million of retention. National Lloyds has an A.M. Best rating of A and American Summit has an A.M. Best rating of B++.

We have continued to operate NLASCO in the manner it was operated prior to the acquisition at the end of January. NLASCO continues to write new business in experienced claims at roughly the same levels. In February and March, we experienced a level of fire and wind-related claims that were in line with the company's historical averages, although somewhat higher than last year's first quarter that was unusually favorable.

Including the effects of the amortization charges I mentioned earlier, our loss expense ratio was 53%, our underwriting expense ratio of 34% and our combined ratio was 87%. We continue to run our investment portfolio of approximately $120 million in a very conservative manner with an average duration of approximately four and a half years and a return of approximately 4.8%.

I would now like to turn the call over to Larry Kreider, our Chief Financial Officer, who'll provide some details on our results in the fourth quarter. Larry?

Thank you, Larry. I refer everyone to our earnings release and supplemental data package that we issued prior to this call that contains trend information on both our manufactured home communities operations and our newly acquired insurance operations. While we have entered into a contract to sell our manufactured home communities business to Fair Lawn, we will continue to treat this business as continuing under applicable accounting rules until we obtain the necessary stockholder approval.

This afternoon, I will provide information our financial results for the first quarter of 2007 as compared to the fourth quarter of 2006. For the first quarter of 2007, we had a pretax loss of $5.8 million, as compared to a pretax loss of $12.3 million last quarter. This reflects a reduction in the loss by $3.4 million or 28% in our manufactured home communities business, and the inclusion of $3.1 million of income from our insurance operations for the first two months of our ownership.

After-tax net loss available to common shareholders was $9.0 million, as compared to $10.1 million in the fourth quarter. This reflects non-cash income taxes, including a deferred tax income tax charge of $0.7 million in the first quarter of 2007, as compared to a $4.6 million income tax benefit in the fourth quarter of 2006 relating to intra-period tax allocation.

As Larry described, we had our increase in pretax income in the manufactured housing business almost entirely from the increase in net segment income. We achieved this in part as a result of nearly full implementation of our annual ground lease rental rate increases of approximately 3.5% or $2 million. We had almost no change in our lease rates per unit for our home renters, reflecting some concession of rents to new renters.

We achieved the remaining increase in net segment income through reduced expenses of $1 million, principally as a result of seasonal decreases in repairs and maintenance. Community net segment income as compared to revenue increased to 63.1% in the first quarter of -- up from 59.8% in the fourth quarter of 2006. Retail and finance operations recorded approximately level results. The retail operation had 148 homes sold in the first quarter, as compared to 106 units in the fourth quarter. Gross margin was slightly higher at approximately 22% before commissions.

In terms of other expenses, property management, general and administrative, interest and depreciation expenses -- depreciation and amortization expenses were comparable in the fourth quarter -- in the first quarter of 2007 as compared to the fourth quarter of 2006. With respect to our newly acquired insurance operations, NLASCO reported $3.1 million of pretax income in the last two months of the first quarter, after giving effect to the non-cash amortization of intangible assets set up in the acquisition of $0.6 million.

NLASCO's expense ratio on a GAAP basis, including the effects of these amortization charges, was 53.1%, and it's combined ratio, 86.8%. Its return on investment was approximately 4.8%, and the average duration of the portfolio was approximately four and a half years. The company has incurred no cash income taxes for any period. Income tax expense in the first quarter of 2007 reflects $0.7 million of deferred taxes, principally due to utilization of our NOLs to offset NLASCO income.

The income tax benefits in the fourth quarter and first quarter of 2006 are due to intra-period tax allocations arising as a result of the gains we recorded on our sales of discontinued operations. At the end of the first quarter of 2007, we estimate that we had approximately $384 million of tax basis net operating loss carry-forwards. Approximately $91 million of these net operating loss carry-forwards relate to the insurance business and would not be used in the sale of the manufactured home business.

With respect to our balance sheet, we had cash and cash availability at March 31, 2007, of approximately $131 million, including our available cash position and undrawn availability on our lease receivables and consumer finance lines of credit but excluding cash held in our insurance companies. The proportion of our fixed rate debt to total debt was 85%, and the proportion of our debt due in 2009 and beyond is 92%. Over 97% of our debt is mortgage debt or unsecured debt due in approximately 20 years or more.

The average effective rate of all of our debt instruments is approximately 6.8%. Operating cash flow was approximately $15 million in the first quarter of 2007, as compared to $12 million in the fourth quarter of 2006. With respect to other matters with -- I'd like to help you just to understand our share count. On January 31, 2007, in connection with the acquisition of NLASCO, we completed a rights offering and private placement and the sale of shares of common stock to Flexpoint Partners.

As a result, we increased retroactively the number of shares outstanding by approximately 2.6 million shares, representing the effect of issuing shares in the rights offering and private placement at $8 per share, which was below market at that time. In January 2007, the holders of the Series C preferred partnership units elected to redeem their holdings, and the company issued them 1.6 million shares of common stock, representing an aggregate value of $17.6 million.

Taking into account the acquisition of NLASCO and the Series C redemption, we increased the number of shares outstanding to approximately 57.9 million shares, bringing our aggregate market capitalization to over $680 million using yesterday's closing price.

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

Thank you, Larry. In summary, I believe we have reported the results of the initiative we put in place in 2006. We're excited about bringing NLASCO into our company in 2007. And as we move forward, we will apprise our shareholders of our progress.

We would now like to take any questions you may have. Again, we will only take questions regarding our first quarter 2007 operating results, and we will not entertain or answer questions regarding our announced sale of the communities. Operator, please queue up the participants for questions.

Thank you.

(OPERATOR INSTRUCTIONS)

We'll go first to Paul Adornato with MBO Capital Markets.

Hi, good afternoon.

Good afternoon, Paul.

Good afternoon, Paul.

I was wondering if you could maybe tell us your thoughts regarding the increase in activity on the real estate side, on the manufactured home side. Do you think it's due to new policies and promotions, or perhaps due to the larger economic environments?

Good afternoon, this is Jim Kimsey. I think our results are mostly coming from the better-trained and more effective sales effort that we've put forth in the first quarter.

Yes. And so, you mentioned the potential benefit of the subprime fallout. Do you think that's not a huge impact on your results this quarter?

We're trying to follow that closely, but we haven't derived any results as yet.

Okay. And could you perhaps comment on activity in the month of April?

Couldn't comment on that, Paul.

Okay. All right, thanks.

(OPERATOR INSTRUCTIONS)

We'll go next to Brett Fialkoff with P2 Management.

I know you guys can't really comment a whole lot on what's going on, but if this deal goes through, which I hope it doesn't, can you give us any indication of what direction the company will go in the future?

Really on the advice of our counsel, as we stated earlier, we're really just going to be talking about the quarterly financial package today.

All right. Just the shareholders, kind of frustrated, it sounds like maybe the wings finally getting on our back and we're showing good improvement. And now, we're bellowing out a lowball price, [backwards] in the 13. Now, it's the 11. So, it's a little frustrating, but thank you.

We appreciate your comments. Steve?

We'll go next to [Steve Ericco] with Locustwood Capital.

Hi, guys.

Hey, Steve.

On the NLASCO, can you tell me -- just looking at it pro forma, it looks like the revenue -- the premium revenue was a little bit lower than it was a year ago. You guys talked about some of the losses, but what about the top line at NLASCO? Is anything going on there? Thank you.

Greg Vanek, would you get that question?

Certainly. Well, there's two things, one of which is that we did commit to withdrawing out of the State of Mississippi at the end of 2005. And that's taking place as we speak and actually being finalized as well as we have been in a soft market in regards to the business.

Right.

Well in Texas, in Oklahoma and in other states as well, and therefore, the premium volume has gone down.

Yes. And Steve, there's also one other point. As a result of the purchase accounting, we were required to reduce our revenue by approximately $3 million, with an offsetting reduction in our expenses by $2.7 million. So, there's some purchase accounting in there that we will live through for the first year.

Okay, thank you. I wasn't aware of that.

Yes.

Okay, thanks.

We'll next to Craig Leupold with Green Street Advisors.

Good afternoon.

Good afternoon, Craig.

Larry, on Page 14, I'm just trying to understand the rent average rental rate, that increase you stated at 3.5%. If I look at on Page [14] and I'm on the -- it's homeowner occupied home site.

Right.

That increase is like 6.2% if you compare to the first quarter of '06.

What I was referring to was the lot rent, the second line.

Okay.

325 compared to the 313.

Oh, I see. Okay, so from the --?

Yes.

From the fourth quarter to the first quarter?

Yes.

Did you institute your rental adjustments later last year? Is that why you see a pick-up from the first to second quarter in '06? And you've indicated in your comments that most of the increase was through at the very beginning of this quarter, the first quarter of '07.

Jim, do you want to cover that?

Yes. That's correct. Most of our increases for 2007 will occur in the first quarter.

As it related to last year, it was feathered in perhaps a little bit more. This year, I think it's a little more distinct load in that first quarter as we kind of put that together.

Okay. And then, I guess -- and hopefully, this question doesn't border on not being able to be talk about the transaction. Just going to [various prior] comments about the NOLs, indicating that you had $384 million at the end of the quarter, $91 million of which were associated with the insurance business and wouldn't be used in the sale of the community business, does that imply that the balance would be used in the sale of the community business? Is that what you're saying there? I'm just trying to understand your comment.

Well, they -- in any sale, they would be available for use in that transaction.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS)

We'll go next to [Carny Hawkes] with [Brigade Capital].

Yes guys, I've got a couple of questions. They're mostly procedural about the transaction, so hopefully, you can talk about them. Do you have any expectation as to when a proxy is going to be filed?

We'll get that done in the near term, but really can't speak to that at this point.

And since you can't talk about the transaction now, is there going to be some point when the management is going to be able to talk about why this is a transaction that's good for shareholders and why this is something that people should vote? Because, I think a prior shareholder expressed his dissatisfaction with it, and I think I need a little convincing too that this is the right thing to vote for.

Certainly, the proxy will address a lot of those issues for you in terms of the rationale for the transaction and that type of thing.

Thank you. It's the last question, the timing of it I guess I saw, it says hopes to be completed by the end of the year. It's kind of a vague. Is -- can I assume that means it's going to be the fourth quarter or any time this year, it could be completed? And is there any regulatory reason why that's the case? Or, is that just kind of a conservative estimate?

We have to go through a review process on the proxy with the SEC, and there's some other things that come up. So, the timing is a little bit uncertain at this point. And we'll get it out as soon as we possibly can.

But, going back to the last question, there will not be any call following the proxy to hear shareholder questions or concerns?

I think we'll look at that at the time. Once we get that information out, we'll get a feel for it.

Thank you, very much.

We'll go next to Jed Nussdorf with Soapstone Capital.

Good afternoon. I just want to clarify a question that was asked earlier. I think, Larry Kreider, you said there was $380 million of NOLs, of which $90 million was NLASCO. That leaves $290 million in the manufactured housing operations. Would you be using the full $290 million in the sale transaction? Or, would there be some residual NOLs that would remain with the remaining company?

Well, as I said, the $91 million would remain with ARC. And the other -- the balance would be available to be used against the transaction.

But, you're not saying that you're planning to use all $290 million of the balance?

Well, we'll spell all that out in the proxy.

Okay, thank you.

(OPERATOR INSTRUCTIONS)

At this time, we have no further questions in the queue. I would like to turn the conference back to your speakers for any additional or closing remarks.

Thank all of you for listening in today. It's -- we really appreciate your all support and look forward to the future. We think things have gone well for us in the past. We feel they will go well in the future. Thank you, very much. Have a great day.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may disconnect your phone lines at this time.