Equity LifeStyle Properties Inc (ELS) 2005 Q3 法說會逐字稿

Good day, everyone, and thank you all for joining us to discuss Equity Lifestyles Properties' third-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 meaning 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). Art Havener, A.G. Edwards & Sons.

My first question has to do with the Privileged Access program. Can you help us kind of differentiate between losing a great kind of an asset on the Board versus whatever the new venture -- whatever that route is taking?

Sure, Art. As many of you know, Joe joined our Board a little over a year ago. And he was extremely helpful to the Board in our understanding and analysis of our new investment in the RV park model sector. He came on our Board with a wealth of experience in his prior position as Chief Executive Officer of Affinity Group. Affinity Group is one of the leading service providers to the RV industry. They handle a bunch of clubs as well as some retail camping world stores and some publications.

So while we were running our resort properties, we started to evaluate an opportunity to introduce more flexible used products into our operation, keeping in mind that we'd like to sustain long-term cash flows on our properties. So we had the issue of introducing a more volatile income stream with the goal of creating longer-term income streams. The best execution for us on that score would have been to create a new entity that could lease our sites from us and offer these flexible used products to customers.

Joe was involved in much of the Board-level discussion of this. And I think Joe raised his hand, indicating that he thought he was in a very good position to execute this new entity successfully, given his background on both the Affinity Group and his experience with our properties. So he seemed to be the best candidate available for us to execute this successfully. We will miss Joe's presence on our Board. But we expect to be significantly interacting with Joe in his new position.

This isn't an exclusive relationship though is it between you and Joe -- ELS and Joe?

Well, we got to the point where discussions with respect to the Privileged Access were occurring, and we wanted to avoid any conflict of interest given Joe's position on our Board. So we decided that it was best for Joe to remove himself from his Board-level position so that any of the real discussions and documentation of our relationship with NewCo would avoid any of the conflict of interest issues. So we are just starting out in those discussions, Art.

So it's too early to figure out how many sites that he plans on renting from you? And is it fair to say at this point in time that any kind of relationship between Privileged Access and ELS is not included in the guidance that you have given for next year?

That is correct.

Would it be -- are you considering, let me try it that way, to have ELS invest in Privileged Access, to have some kind of an equity investment?

I think the primary economic relationship between Privileged Access and ELS will be in the form of the ground lease agreement between Privileged Access and our sites. We have and continue to evaluate an investment in Privileged Access, and that negotiation will continue.

In terms of the expectation in marketing costs for next year, I guess would it be possible that there would be some kind of sharing agreement between ELS and Privileged Access? Or would ELS -- or are we just talking about two completely different costs associated with trying to get Privileged Access up and running?

I would not say entirely different costs. But I think most of what we spend our marketing dollars on are to attract residents looking for a long-term relationship with us in the purchase of either our park model or a home within our communities. If you looked at our marketing dollars, the bulk of our marketing dollars are spent on achieving that goal.

I think Joe's Privileged Access is going to be focused on providing a much more flexible-type product in maybe even a different market in terms of where he's marketing than we traditionally market. If you look at where our marketing dollars are spent, most of it is spent in the local areas surrounding our properties to attract those people who are in the area to our properties to evaluate the attractiveness of our homes and our communities. Joe might be taking an entirely different track.

One last question on this, in terms of the marketing costs that you're referencing in your press release, are those primarily related to what you would consider your core resort portfolio? Or is that spread out all over the place?

I would say it's primarily related to the resort half of our core portfolio in terms of where we are spending incremental marketing dollars. I think we see that that segment of our business is fairly robust. And what we want to do, given the strength of the underlying fundamentals, is try to create as much stability and "stickiness" with respect to our customer relationships. So that to the extent of fundamentals deteriorate at large in the business, we are much more comfortable predicting our cash flow streams in a changing economic environment.

I lied; I have one more question. In terms of the core (ph) resort, your NOI was up about 8.6% on revenue increases of 4.4%. Is it fair to assume that your thought process would be that if you increase the marketing cost, you could even accelerate those types of returns going forward because of the opportunity that exists. Is that a fair statement above and beyond of what you've already accomplished?

I think to answer that question fairly, the primary goal is to as we call it internally "nail down the carpet on what we have achieved." Let's make sure that we create stability with respect to the income streams that we have created, create stickiness with respect to our customers. And if there is more to be gotten, then let's go after it. But before you go hunting again, make sure that you've stabilized the income stream that you're currently operating under.

Jordan Sadler, Citigroup.

It is Craig Meltzer (ph) here with Jordan. My first question is on the debt pre-payments, can you provide a breakdown of the 23 million of the transaction costs and whether it's between underwriting or pre-payment penalties?

Effectively 20 million is defeasance costs; approximately 3 million is transaction costs.

In the release, the $340 number mentioned, is that the total proceeds or is that the net proceeds?

That is the total proceeds. So the total proceeds would be used to take out 290 million of debt in place. Roughly half of the 50 that is leftover are transaction costs; the other half we intend to use to pay down our unsecured line.

Can you walk through the assumptions you kind of went through for that deal when you're looking at it on a MPV (ph) basis? Because if you look at it, it seems like there is 4 or $5 million of annual savings, and its motomies (ph) is maturing in 2007.

Let's first look at the transaction itself, and then we can look at the impact on earnings. The defeasance costs were approximately $20 million. We looked at not refinancing today but locking in a 2-year forward swap on a treasury rate that would be 10 years out. That exercise would have cost us about $8 million. In that exercise, we would have had to pay the existing debt for 2 years at 1.5 higher than the rate we felt we could refinance that. So even though we were paying out $20 million in defeasance costs, we thought we'd otherwise could save $16 million relative to where we started. So we looked at the true cost of doing the transaction as approximately $4 million -- 3 to $4 million.

Given that 3 to $4 million, we looked at what risks we were eliminating by doing the transaction right away. First, we were eliminating any credit risk that we might have 2 years out in terms of refinancing. As you know, now is a great time to be a borrower. We eliminated any risk with respect to future underwriting criteria changing, future availability of capital changing. And then what we also did if you look at our balance sheet is, we pushed out approximately $340 million that was coming due in 2007 10 years from there, so beyond 2015. Between now and then, I think the next time we have more than $200 million coming due is in 2010. So we solidified our rollover risk on the balance sheet.

So all the new debt is 12-year debt?

Sorry, 10-year debt. It would be from now -- so it would be 2015, sorry, not 2007. And then in terms of the savings, which is I think is where you were going with your question, on the $290 million, we picked up 1.5 points. We borrowed an incremental 50 at 5.3% and are planning on using $25 million to pay down what is currently 5% floating rate debt. So that would be a $3 million savings. However, when we went through the exercise, we also looked at where our current floating rate debt is going to roll in December looking ahead towards 2006. So we have approximately $155 million of floating rate debt today that is going to roll approximately 1% higher; it may actually be a little bit more. So call it $1.5 million. So net savings would be 1.5 million on our approximate 30 million shares is the $0.05 we put guidance up by.

Do you have the cap rate on the 81 million of acquisitions closed in the quarter?

Somewhere in the 7.5 to 8% range.

And that is NOI cap rate?

Yes.

And the JV's headcount went up by about 1,000 sites last quarter?

Yes.

Can you provide a little color on that?

We historically have included in our JVs -- and this goes back a number of years -- the economic ownership percentage that we have, we counted those number of sites. When we reviewed our site calculations, given how many new assets that we bought in joint ventures where we were including 100% of the sites, we included 100% of the sites that were in joint ventures from older investments that we had made. So that's really all that is.

Can you talk a little bit about your debt covenants at this point; how much flexibility you have?

What specifically would you like to know?

Just from the leverage standpoint, is it debt to under-depreciated book or is it using another metric?

We have a cap rate applied to our EBITDA and a leverage ratio of less than 70%.

And what cap rate does that use?

7% cap rate is what the bank warranted users.

So how much flexibility would you say you have at this point?

At this point, we probably have a little bit more capacity than what our current outstandings are, but it is not a significant amount.

And just a question on the guidance with the utility cost, what percent of your portfolio do you re-bill the utility expenses back to your tenants?

Approximately 40%.

Do you have any updates on the non-core sales? Last time, I felt that there was one under contract. Is there any update on that?

We have one transaction that went hard yesterday as a matter of fact, just in time for the call.

And when is that expected to close?

Mid-November.

Do you have any idea on the pricing or just aggregate sales volume or that specific deal?

Aggregate pricing, well, I'll say it this way -- the model that we have seen buyers use to look at assets has generally been to apply a 7 to 8% cap rate cash flow in place and look to heavily finance as much as they can of existing cash flow.

So what is the total NOI of the seven assets?

I do not remember offhand.

And on the -- can you--?

Just so you appreciate, not every asset gets the same analysis. In terms of the cap rate, it would depend on what level of occupancy you might otherwise have, what part of the country it is in. So I'm giving you a big picture answer to what is more likely a moment-to-moment specific detail between buyer and seller.

And are there any of the opportunistic sales, where there could be a better -- higher better use, such as the Florida Keys? Is there any update on there? Are you pursuing that still?

We continue to have discussions with people who are interested in our assets.

But is there anything under contract or letter of intent?

There's nothing under contract.

Letter of intent?

No letters of intent.

William Atkinson, Merrill Lynch.

On the defeasement, we did a little bit of a simpler analysis than you guys all went through. But it basically works out to the present value of the transaction costs under different interest rate scenarios. It works out to basically an assumption that interest rates were going to up about 100 basis points on a long-term basis over the next 2 years. I guess that's just another way to look at it.

I am assuming the answer is going to be no on this question. But Affordable Residential Communities took out a full page ad in the Wall Street Journal last week -- an auction for 71 properties. Some of the properties have a higher quality nature but are most likely of the family-oriented variety. Are you likely to have any interest in those properties?

Very select interest. We may be interested in some of the stuff in California. I think we will take a look maybe at Idaho. Other than that, a lot of them were small site sizes if I can remember correctly -- less than 100 sites for the most part. And many of the properties were in areas where we are not looking at acquiring.

On the resort acquisitions in the quarter, just looking at the variance versus my estimate for the resort income in your average revenue range there, it looks like these acquisitions were made really towards the beginning of the quarter?

More towards the middle to the end of the quarter. The revenue ranges that are in the press release, if that is what you are referring to, Bill, those haven't changed pretty much since the beginning of the year. We have left those alone; we have not updated those. And we will likely take a look at that portion of our press release beginning of next year.

So the inference to draw from that is the portfolio is at least doing better that it was on a rate basis at the beginning of the year.

Yes.

The financing for the resort acquisitions, was that all on a line of credit or something like that?

We assumed a certain portion of debt, and the remainder came off the line.

You don't have a breakdown of that?

I think we assumed approximately $55 million of mortgage debt.

Do you have a rate on that?

About 6%.

Regarding rent-controlled initiative expenses, just looking at homes, it looks like it probably trended down. But what was in operating expense and/or G&A in the quarter?

This quarter, not much.

Interest rates and what you see as the effect on your home sale business? Is that starting to kick in?

Our sales have been increasing year over year, quarter over quarter. You could make a case that higher interest rates are benefiting us. Our buyer at the margin tends not to be necessarily interest rate sensitive as much as proceeds sensitive.

And for future reference though, one thing that we've been trying to get a handle on is the value of all the potential expansion and/or land in the portfolio that could be the sole to develop on it. Is that something that you are looking at providing a little bit better guidance on going forward? It is very important for the net asset value since you've got a lot of it.

I would say that we are all looking at the exact same issues that you are.

I think we've gone through a lot of effort in the last year delineating and understanding the opportunities and still have some work to go. When you think of the rather massive project to understand all of the development opportunities in literally thousands of acres across the United States, it has been a fairly daunting task. And we haven't -- and maybe we should contemplate -- we haven't devoted a particular group to that task. It has been done in connection with operating our portfolio as we have always operated it.

And I guess just lastly, gasoline prices and your transient residents, any nascent effect being noticed there?

We haven't seen anything yet. And again, I think it is still early. Anecdotally, we have a lower cancellation rate going as of year to date than we had in a prior year for comparable properties. We are seeing some lengthening of stay in the longer-term seasonal revenues. If there's one area we would have some concern about -- not just price of gas but economic generally -- would be the very short-term revenue streams in the 3, 4 day type of category. And that really boils down to just one primary asset in our Orlando marketplace called Tropical Palms that would have that type of activity going on.

(OPERATOR INSTRUCTIONS). Greg Johnson (ph), RBC Capital Markets.

Here with Jay Leupp. A few follow-up questions on Privileged Access -- I was wondering if you expect most of their demand to come in your resort communities? And within the resort segment, if you could just comment across the annual, seasonal, and transient segments where you see most of their demand coming?

I think is still a little too early to indicate where we are going to develop relationships with Privileged Access. I now Joe and I know some of the people that he is contemplating having join him have evaluated many of our assets on both the resort and the manufactured home side and are very pleased with the quality of the asset and the quality of the accommodations. So I think we are just starting out on that process.

And could you talk kind of big picture on the MHC side, the core communities, occupancy trends and NOI trends over the last quarter or two?

Well, on the occupancy trends, we believe Florida and Arizona will continue to increase; we're still watching Colorado -- still struggling there. We haven't seen those fundamentals come back with respect to -- in the apartment business and the single-family housing business.

More importantly, this first quarter was the first quarter we quarter over quarter had sequential increase in occupancy in our portfolio; that stopped a decline we had in the first half of the year. We are still down since the beginning of the year about 150 sites. That 150 sites continues to come out of properties that we have long discussed on the call as in challenged marketplaces, Denver primarily. And then some weakness earlier in the year; although, that is now stabilized in Northern California.

And Roger pointed out, we are very optimistic about what we are seeing in the Arizona and the Florida marketplace in terms of home sales volumes and occupancy increases.

And a quick question on Thousand Trails, you comment on just the property-level performance of that asset since -- relative to your expectations since acquiring it?

Relative to our expectations, it has been disappointing. Relative to their prior performance, I think -- August was the last piece of information we got from them. So we are a little bit behind in this comment, but I think they were flat to last year, maybe a little ahead of last year and behind their expectation and our expectation. It has to do more with the sales and memberships than the core business.

The core campground business is operating in line with expectations. They have a new product out that they call the Getaway Program. It is doing very well for them. But some of the old upgrade products that they had sold to their customers had basically been run through the system, and they're trying to evaluate new opportunities for upgrading their existing customer base.

I do know they started an infomercial on the West Coast; I do not know what the results of that program have been. But I think if you talk to the Thousand Trails and to the ownership of the Thousand Trails' operating company, they are optimistic about the future and they are disappointed with their performance thus far.

And then last question -- I know it's a bit early to discuss this -- but can you just comment on any traction that you're seeing for cross-selling or up-selling within your portfolio thanks to your increased marketing efforts and new loyalty programs?

The loyalty programs were just rolled out. It's (technical difficulty) a little early to give any color. I think what we can say is that there has been good acceptance to the loyalty program in excess of 90% acceptance to those customers that we have presented the opportunity to join our loyalty program to. The benefit package to those customers I think is going to create a real value for them, which will we believe create increased stickiness and long-term relationship with us.

As it relates to the cross-marketing opportunities between us and Thousand Trails, frankly, I would have to say we are disappointed on our side. We haven't had the discussions that we had hoped to have. I know they have been working through some management changes on their side of the fence and trying to figure through some of their problems. But we think we are missing some opportunities there, not because they don't exist, just because there hasn't been much effort between the parties to realize them.

Richard Paoli (ph), ABC Investments.

This is Rich Paoli. Excuse me if this one was asked, I dialed in a little late. Did you comment on G&A for '06, what type of an estimate range are you comfortable with?

No, we did not comment and --

Could you?

Sure, Rich. The third-quarter run rate is probably not a bad number for next year's estimate; although, we have not yet completed our 2006 budget review.

And then again -- hopefully I am not wasting time -- on the home sales, it seemed like there was a noticeable increase this quarter. Was any of that related to people I guess fleeing Katrina or maybe Rita and just kind of buying a house in one of your communities?

Rich, we really haven't seen any of that. Really, it is our customer customers' coming, getting ready for the season. We sold park models to RV customers getting ready to come back for the season, just our typical, normal business.

And then just a follow-up question on the Thousand Trails. Could you give some type of quantifier with respect to how far below expectations it is? Is it 1% below or is it 5% below or 10% below? Just kind of general feel there, how far off it is from what you guys thought it would be doing.

I don't have the numbers in front of me. But I think it is in the order of 5 to 10% below plan through August.

And what does that do for the way you have the arrangement structured? Does that put any stress on it? Or is it--?

No, we are well-covered on the rent payment. I think if you took August and annualized it, it's EBITDA north of $23 million, I think, based on my recall. Given our rent payment of $16 million, it's really not an issue of payment of the rent, it is just whether or not we are realizing the opportunities that we think are in that portfolio. It is great real estate. Our side of the business on the RV is very robust, very strong, and we think that there is opportunity there to be had.

And gentlemen at this time, I have no further questions within the queue.

Well thank you very much for joining us this quarter on our earnings call. As always, Michael Berman, our CFO will be available for any follow-up questions that you may have. And we look forward to updating you again at the end of this 2005 fiscal year. Take care. Bye-bye.

Thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a wonderful day.