Equity LifeStyle Properties Inc (ELS) 2005 Q2 法說會逐字稿

Good day everyone and thank you for joining us to discuss Equity Lifestyle Properties’ second quarter results.

Our featured speakers today are Tom Heneghan, our President and CEO, Michael Berman, our CFO, and Roger Maynard, our COO. In advance of today’s call management released earnings and opening remarks. Today’s call will consist of a question-and-answer session with management relating to those specific announcements. As a reminder, this call is being recorded.

Certain matters discussed during this conference call may contain forward-looking statements in the meanings of the Federal Securities laws. Our forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligation to update or supplement any statements that become untrue because of subsequent events.

[OPERATOR INSTRUCTIONS]. And our first question comes from the Jordan Sadler of Smith Barney. Please proceed.

Hi, it’s Craig [Notzer] here with Jordan. Guidance for the full year was maintained but you came in $0.04 above what your expectations were for the first half. I figure the Preferred is one piece that’s pulling you down to the second half. So, are there any other changes? And would you now expect to be coming in towards the high end of your range?

Craig, I’d say there were no other changes and I would say we would stick to our guidance for now.

Your equity and income from JVs was up to $3.4 million during the quarter and it was $1.1 in the first quarter. What was the driver there?

We had done some additional investments that we made [inaudible] second quarter. We had better performance on our existing joint ventures and we’ve had distributions from the joint venture where our investment -- we’ve had the investment for awhile and our cost basis is down.

So what portion of that would you say would be one time and not going to be going forward?

I’d say probably about $800,000 of it would be one time not going forward, give or take.

And G&A in the quarter was $3.8 million. It was up pretty big quarter-to-quarter. Is that a good run rate, or do you think it should come down a bit?

We hope it comes down a bit. I would use it as a run rate for now.

Okay. And Jordan also has a few questions.

Just on the asset dispositions, there are some strategic sales that you are pursuing. It’s 7 assets. Can you talk about where you are in the process, if you’ve gotten any Letters of Intent or if you’re under contract yet anywhere?

We have 1 asset under contract, subject to confidentiality. The other ones are in various stages of being marketed, being discussed, being negotiated. Nothing really more than that to comment on.

Expected timing maybe?

Expected timing is something that your guess might be as good as ours. It’s Family assets. They are occupancy-challenged assets and we’re looking to get good prices for them so we’re not in any particular rush.

What about the opportunistic sales? Are there any properties that you guys are exploring to maybe dispose of because of current pricing in good markets like the ones down in Florida, in the Florida Keys for instance?

Well, I think what I will say is that there have been expressions of interest with respect to a number of our properties from outside third parties, everything from single-family home developers to resort -- timeshare developers have at various points in time expressed interest in a few of our properties.

We’ve had negotiations and discussions with those parties, but as of yet there has been -- there has been no transaction.

And what’s the thought process and would you be willing to sell some of these things opportunistically? I mean, since there’s a good value realization proposition. And what kind of Cap rates would you be looking for? What’s sort of the end game?

Well, the Cap rates are basically irrelevant to the discussion. It’s really a real estate value and almost like an entitlement or a per-site capability in some of these locations where getting the ability to develop anything is the key to creating any value. And we have some of those locations that already have the entitlement to do something on the property.

I don’t think we started out with any sense that we’d want to sell any of this stuff and what we have been trying to do through the discussions is try to participate in what these various parties are contemplating to do with the property. In one way, shape, or form try to retain some residual interest in the property.

I mean, is it realistic for us to expect that you could sell 1 or 2 of these things this year then? Or are you just kind of loggerheads with the people you’re negotiating?

There are no loggerheads. They’ve put some valuations on our properties. Some of this has been discussed internally. We just have been sitting back evaluating the various scenarios and making sure that if we were going to sell any of the assets we thought it was going to be a long-term best interest execution for the Company.

So, I don’t think there are loggerheads. I think it’s really management on our side trying to make sure we fully understand the capabilities and the prospects of the various parcels of real estate so that we’re smart sellers if we are sellers, or we are smart participants if we are going to participate in a redevelopment of any of the properties.

Okay. Any progress on the out parcels as it relates to the Thousand Trails’ portfolio?

Yes, we’ve gone around, probably in the last -- since the deal evaluating the various excess land parcels and working with the Thousand Trails people to demarcate clearly the beginning of the excess parcel versus the existing operating membership campground. We’ve also evaluated and tried to create some type of priority list with respect to those assets that economically were feasible and legally were feasible given the entitlement process that may be involved when doing any of the settlements.

So, we’re getting a short list. Hopefully we can actually announce something sometime next year as to which assets we’re starting to work on.

Okay. The next question is on the investment fund. You said in the release that you’re in the various stages of negotiations on some acquisitions. Anything you can give us some color on?

They are, as always, transactions where we are subject to confidentiality. We -- the dispositions are in various stages of negotiation and when something happens we’ll let you know.

What types of assets are you pursuing on the investment funds? Is it Family -- excuse me -- is it manufactured homes? Is it RV? Or trailer park -- excuse me -- campgrounds?

I think Lifestyle assets would be the best way to describe what we’re doing at this stage of the game.

My last question is just on next year’s guidance. It seems like, just based on your first-half performance, you’re tracking toward the top end or at least towards the middle end of the range for the second half of this year. If I look at the low end of your guidance for next year, it looks like 6% growth. Relative to your [inaudible] growth expectation, think 4% revenue growth and TPI-type expense growth, it seems pretty conservative given your leverage, that 6% FFO growth. Is there anything dragging on it?

No, no. I think here we are in the middle of July trying to give you a sense for what 2006 looks like. I think that the takeaway from the guidance is that everything we expect to be able to do with our Core portfolio we believe we’re going to be capable of doing next year. So, we still believe we can get good revenue growth. We think that the sales operation is going to perform in line with this year or better. We have the drag coming from the issuance of the Preferred. Hopefully we can close on some acquisitions to offset some of that dilution.

But I think it’s a mark of confidence with respect to the Core operations. They’re going to operate in line with historical norms. There is nothing on the horizon that causes us concern or worry. And at this stage in the game I think that’s what we’re comfortable with.

Our next question comes from David [Bronco] of RBC Capital Markets.

I’m filling in for Brett Johnson here and with Jay Leupp. A question on guidance as well for 2006. You indicated that there were some acquisitions in that guidance. I wondered if you could give us any color? I’m sure you have a pretty conservative number on your own internal models. Anything you could give us in terms of dollar volume would be helpful.

I think what we said was, traditionally we have not put acquisitions into guidance. I think the only comment we made in the press release was that we were hopeful that acquisitions would offset the dilution from the Preferred, but that there would be no guarantee of that.

Okay. And then another question, a follow-up as well. You commented on the fact that timing is very unpredictable as far as the strategic dispositions go. Is there any sense for dollar volume of those dispositions?

No. Right now we’re, like I said, in various stages of these confidentiality -- as it happens we will pass that information along.

Our next question comes from Craig Leupold of Green Street Advisors.

Michael, a quick just question in definitional where you call your Core property operating revenues [inaudible]. Does that include the resort properties as well? Or, are the 2 Cores separate and exclusive of one another?

The discussion in the press release about the Core includes everything. We do break out the Core Resort properties to give you a flavor for those as a separate subset.

Okay. So that is a subset of the broader Core?

Yes.

Okay. Can you just talk about what you’re seeing in terms of the acquisition and disposition market in terms of -- do you see kind of institutions playing in this market or taking a more interested look at the manufactured housing sector? It appears to me that when you look at what’s happened with cap rates across different property sectors that in the more “traditional” sectors we’ve seen a much greater decline in cap rates than appears to have taken place in the manufactured housing sector. And I’m wondering to what extent institutions might be taking note of that.

And then also if you could just comment generally to where you guys see cap rates for traditional manufactured home communities?

We really haven’t seen much institutional interest in our sector. It still continues to be, and if you’ve looked at some of the transactions that have been done by some of the other public companies on their asset sales, it’s still a very localized marketplace. And on a local marketplace, that local guy is a very aggressive buyer of any particular asset, all the way from the senior properties down through an affordable housing family type of asset.

With respect to the cap rate, I think there has been a clear understanding and distinction in the marketplace on the differences between a senior or age-restricted asset and an all-age asset, or affordable housing type asset. There are issues that are going on in the all-age assets that just are not occurring in the age-qualified assets, and that is getting reflected in cap rate.

A very small number of transactions are occurring on the age-qualified properties. I think you could probably call Florida pretty much locked down. Not much is going on. The same with California, Arizona, East Coast. Very few properties are available. Those properties that are available for sale will be bid aggressively by both financial buyers and local operators.

The Lifestyle assets that we have been acquiring over the last 2 years is attracting much more of an institutional quality type of buyer and is also attracting institutional capital in the form of borrowing credit.

If you had to give sort of broad ranges of kind of where you think cap rates are for seniors versus all-age communities, what -- I know it’s very community specific, but just generally?

That’s really hard to give at this stage of the game because we’ve seen assets that have traded apart from a cap rate basis. The more Lifestyle-oriented or age-restricted oriented, the more there’s an opportunity for that asset to trade almost on an alternative use-type basis.

I mean, I can give you a flavor for a property on the East Coast of the United States. Then on a cap rate basis we’d probably trade in the $20,000–$30,000 a site range and I believe it’s under contract today for $100,000+ a site. The cap rate had nothing to do with it. What had to do with it is that an alternative real estate operator outside of our industry got interested in the vocation and the real estate and was the buyer of that asset.

We’ve also had expressions of interest from various non-dedicated operators in our sector that others outside of our sector in our properties, not on a cap rate basis but purely on a real estate basis.

Can you -- maybe ask the question a little differently. I know you guys aren’t necessarily cap rate buyers, but if you were -- do you have some sort of internal hurdle rate that you think about from a cap rate standpoint for an asset that you might purchase that you expect to continue to operate as a manufactured home community as opposed to converting to some alternative use?

I think you can look at what we’ve done historically in the recent past and in the years past that where we would buy assets at. We started out early in our careers buying at 8.5. That went to 8, that went to 7.5, and I would bet if you did some calculations, our investments over the last year or so have gone from a low of say 5.5% where we thought there was upside in either expansion land or revenues to 10% with respect to the Thousand Trails portfolio. So there is a wide range of cap rates that we have participated in, but trending lower, I would say.

Okay. And then could you just comment on Thousand Trails’ performance at the operating level?

At the operating level, we don’t have their results yet, but from what we hear, flat to last year’s through the first half of the year.

Okay. And are all of their communities on an annual use basis, or is some portion of it -- does some portion -- is some portion of it seasonal in terms of how they recognize income?

They recognize income in 2 basic forms. One is the annual maintenance payment that every member pays Thousand Trails. That happens generally once a year, earlier in the year than not, but it is recognized throughout the year since it is the payment that a member gives to Thousand Trails for its right to use during the year. And the other way they get revenue is the sale of new memberships and that happens throughout the year with any location in the season.

[OPERATOR INSTRUCTIONS]. Our next question comes from Steven Bloom of European Investors.

Could you fill me in how you expect that G&A to trend during the rest of the year? You mentioned specifically that there may be some stepped-up litigation expense. Can you provide any additional color on that?

I would expect the G&A to remain relatively where it is throughout the rest of the year. With respect to the litigation comment we made in the press release, that’s a function of decisions that have been at different courts as to where we take our strategy. That’s not in any of our guidance. We don’t plan on a number with respect to those.

So, if the courts were to become active and review the cases again and you needed to show up and fence more money, that would be an additional reduction?

Yes.

Our next question comes from Stephen Silver of Silver Partners.

Michael, can you comment on what you foresee the dividend policy in the future? You’ve done a good job of articulating what you’ve done up until now. And I didn’t know at what point the taxable income would reach a point where you’d have more of a normalized dividend.

Dividend policy is the purview of the Board of Directors. We review it in November with them. So, when we have that discussion and have an answer we’ll communicate it to the marketplace. What was the second half of your question?

No, that was basically it. I’m just trying to figure out, since you still obviously are going to distribute 90 or 95% of your taxable income you still feel that the $0.10 level, you’ll be -- that’s how it will be for ’05, I assume. Future years will be decided in November.

That’s correct.

And can you comment on -- or do you not comment until November as to what you see your taxable income next year being?

We won’t comment until November.

Our next question comes from Jordan Sadler of Smith Barney.

Just following up, if you guys were to pursue an opportunistic sale of one of your properties what would the use of proceeds be most likely?

We’d love to be able to re-deploy that into the acquisitions. If we had our dreams come true that’s what we would be doing instead of selling out of some of these assets and re-deploying into assets that are more in line with our Lifestyle focus. If not, we’ll probably be paying down debt.

One issue that could come up is that to the extent we experience gains on the sale of any of these assets it may go into the dividend question as well.

Is that an obstacle? Would you not want to pay it out through a dividend?

I don’t think a dividend is an obstacle, no. It’s just an issue that comes into play as we evaluate the sales and use the proceeds.

You’d have to pay a one-time or something to get a gain.

Yes, the REIT’s compliance for the 90% payout.

Sure. Could you just lastly walk me through the [inaudible] process on the Preferred? An 8% yield, which keeps kind of costing relative to some of the options that are out there these days.

Well, I’m not sure what other options you’re referring to. What other options would you be referring to?

You’ve, I mean, referred to what you’d like to earn as a return on equity at 8%, right?

Right.

So, you’re paying 8% on a Preferred?

I guess I’d answer it this way. We have done what I would say an incredible job managing the balance sheet while we have been managing growth. I mean, I think Michael has done an outstanding job considering balance sheet flexibility as we’ve taken the Company from 140-type assets to close to 300. We still have significant financial flexibility in this Company to pursue additional opportunities if they are available and that has been the hallmark of our success. Historically that we have left ourselves with the financial flexibility to execute on opportunities that may be available to us. I think the Preferred issuance was directly in line with maintaining that balance sheet flexibility.

And we are able to still grow this Company, grow the earnings of this Company and maintain balance sheet flexibility by issuing an 8% Preferred. I think that’s just an incredible job.

I guess that would be sort of the next lever if you guys were to make an acquisition, for instance?

Well, I think we now have $122 million of available [inaudible] on the line and certainly more leverage beyond that if we so choose. So, we may simply have increased the size of the Company and maintained a significant amount of financial flexibility and didn’t stress us on the way to achieving that growth.

[OPERATOR INSTRUCTIONS]. It appears there are no further questions, sir.

I will thank everybody for joining us on this call. Hopefully you’ve noticed the change in the format. I think that was designed to kind of streamline the process. Hopefully you found it useful and informative and also a good use of your time. I think we’re going to adopt it on a going-forward basis. And thank you very much. Take care!

Ladies and Gentlemen this does conclude the conference. You may now disconnect. Have a good day!