Equity LifeStyle Properties Inc (ELS) 2006 Q1 法說會逐字稿

Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties first-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 the 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 uncertainty. The Company assumes no obligation to update or supplement any statements that become untrue because of the subsequent events.

At this point, ladies and gentlemen, we will be taking questions. (Operator Instructions).

David Harris, Lehman Brothers.

A little bit -- surprised I was up so quickly. Could you talk a little bit more about the Privileged Access, whether it is a private or public company and the sort of credit checks that you put in place to approve the consent in terms of the change of ownership there?

Privileged Access is a company that is owned by Joe McAdams. Mr. McAdams was a member of our Board of Directors and resigned approximately 6 months ago to pursue the Privileged Access business opportunity. We know Joe for many years, given his role at The Affinity Group, one of the leading service providers in the RV business. They own Woodalls, Trailer Life and provide a bunch of other services to the RV business. We're very excited about Joe's taking over Privileged Access and his announcement of the Thousand Trails acquisition. We believe it's going into the hands of an extremely strong operator. We look forward to Joe working at Privileged Access for many years.

Could you just elaborate a little bit more specifically on why you think you are so excited about the change there? But do you think that there is going to be significantly more acquisition opportunities come out of this new relationship?

Well, with respect to the transaction, we invested in Thousand Trails a little over 1.5 years ago. In connection with that transaction, Kohlberg retained the Thousand Trails operating business and we leased the land to that operating business owned by Kohlberg. They are not, in our eyes, a long-term owner of that business. We think that now that Joe McAdams has acquired the Thousand Trails operating business, it is a long-term owner of that business, who is experienced in the RV industry, who has existing contracts to make that business from our perspective very exciting. So, we're pleased with that execution. It answers something that we were concerned about in connection with our initial investment in Thousand Trails, finding a long-term owner of that business. I think Joe McAdams is a perfect fit for that business.

So, how is he financed, Tom? He has he got private equity behind him?

No. Joe McAdams is financing the acquisition himself.

One final question from me and I will yield. Did you see any impact on your seasonal RV businesses and suchlike from higher gas prices? What is your sense as to how that might impact on a go-forward basis?

Literally, there was no impact in the Sunbelt areas of the United States this winter season. We had a very strong season in Arizona. We had a very strong season in Florida. Both of those increased revenue north of 4%. We had some sloppiness down in the Gulf Coast to Texas due to some elimination of some discount programs we were running. But, overall, we're very, very positive about the environment. We didn't see any impact with respect to price increases and the cost of gas.

As we look at the summer season, most of our resorts are located within a short drive from a major metropolitan area and are geared toward RV enthusiasts and people who want to put a park model or a cabin on a site to enjoy it as a second home or a weekend getaway. So, we think that the price of gas could moderately improve the demand for that type of experience, where people want to leave their RV on-site for the summer and avoid the cost of driving it. But, we don't really expect a significant impact on our business in the North with increases in the cost of gas.

[Richard Bailey], [ADP Investments].

A couple of questions -- first, following up on David's questions about Thousand Trails. Does Joe McAdams and Privileged Access have any prior experience in running a -- I guess what I would term a membership subscription-type business in its history?

Joe McAdams has significant experience as a CEO of Affinity Group, dealing with a membership-type product -- a couple of membership products that Affinity Group owned. One was the Good Sam Camping Club that is owned by Affinity Group -- has I think in excess of 2 million members in the Good Sam Camping Club. He also ran or owned through Affinity Group an entity called Coast to Coast, which has I believe in excess of 100,000 members in a reciprocal use-type environment geared specifically for the RV industry. I mean Joe McAdams has 18 years in the RV business, most of it servicing a customer base through some type of membership product -- be it subscription services, be it roadside assistance, be it insurance and a number of other products.

Why are you -- I don't mean this in a bad way -- but why are you talking in past tense about what he did? What happened to the ultimate businesses there? Did you sell those or does he still run them?

Joe retired from Affinity Group 3 years ago I believe. The thing that is exciting for us is here's a guy, who ran successful businesses. The Affinity Group is still a very successful company in the RV industry. He retired from that business. He came on our Board. As a result of being on our Board, he saw the opportunity involved in some of the stuff that we were doing. He raised his hand and said listen, I think I can make something happen in this business on the real estate side. I know the customer base fantastically well. I want an opportunity to try and see if I can put together some flexible-use products that take advantage of your real estate location. He formed Privileged Access to do that. I think his acquisition of the Thousand Trails operating platform greatly accelerates that business plan. We're very excited about having a guy like Joe McAdams working with us to create value in our real estate.

My follow-up question is more on the I guess operating fundamentals in the past. I think you guys indicated that Thousand Trails under the prior lease or I guess business operator was below your expectations. Was that still the case? Were they just not getting done and they bailed out?

Well, I think they were never a long-term owner. They had projected growth in EBITDA. Since the transaction with us, EBITDA was essentially flat at 22 to $23 million. It really wasn't growing like they had anticipated it to grow. We contrast that with what was going on in our RV business. It's a very robust, very positive environment. RV sales are in excess of 300,000 units for the last 2 years running. They are still up in the first part of this year. The demographics show a long-term trend that is positive with respect to the RV experience.

So, we struggled with the contrast. We think that some of the steps that the prior owner made was indicative of a product that had been in existence for 30 years, and they were hesitant to try and improve or change that product. I think Joe McAdams is going to bring some fresh insight into that business. He's very experienced in what the RV wants today. I think he's going to develop products that are going to excite the RV owner out there.

One follow-up question and then I will yield the floor. You guys added I guess a couple properties and altered the lease payment. Could you please compare and contrast what I guess -- I don't know if I'm using the right term -- but the lease rate that you initially were getting as part of that master lease agreement and what that new rate is, incorporating the additional capital that ELS has invested in, the higher rent payments that you are expecting to get?

It still is approximately a 10% yield. We invested 160 million and returned 16 million on that through the lease payment. Now, we've invested another 10 million, and it's now 17.5. That additional 0.5 million was just the escalation that occurred after the first year of ownership in the business.

[Wayne Ashtenson], Merrill Lynch.

How many sites were there in the two Thousand Trails sites' camps that you got?

Approximately 600 plus, I would imagine.

600 plus. The pricing on that, how did that -- I just qualitatively compared the pricing on the original. These seem to be larger properties.

No, I think they are in line with the other properties. They are in locations -- Florida and California -- that are more attractive than some of the other locations that Thousand Trails owned. We also acquired some getaway units that Thousand Trails had been putting into their real estate across the United States for purposes of introducing a non RV'er into the Thousand Trails experience through a cottage-type program. We acquired those and are leasing them back. That's part of that transaction.

Okay, I see. What about the increase in the cash reserves from 3 going up to 12 million? What's going on there?

I think we just negotiated additional protections for our benefit under the lease. The business prior to the transaction had approximately 15 to $17 million of cash. Our reserves prior to the transaction were in the 3 to $4 million range. We were able to negotiate with Privileged Access an increase in those reserves to protect our position under the lease. So, we are pretty comfortable with that.

Okay, so it didn't have to do with anything that you saw going on in the business?

No, it's just negotiation of additional protections.

Then on the loan to Privileged Access, the $12 million to facilitate what is a potential sale 3 years away, I was just kind of curious the need to do that.

No, it was to facilitate the transaction that just occurred. Joe McAdams has visited and discussed the financing of his business with a number of investors and lenders, given the timing of the transaction. We facilitated this loan. We do not believe we will be there in a long-term position. We made it a 1-year loan, and we expect Mr. McAdams will refinance us out eventually out of that position.

Okay, I understand. Then on the two Indiana all-age properties that you are sort of swapping here, what sort of pricing -- can you give us some ballpark figures on pricing for those properties (multiple speakers)?

You know, one thing we should recognize is that there is a little bit of a trade going on, those two assets for the lifestyle assets. So, pricing per se, given the trading of the assets is a little difficult to come by. But using book values as an approximate value for what we traded the assets for, you are talking about a sale in the neighborhood of about 100,000 an acre for the land and we are buying into the lifestyle assets at somewhere around $10,000 an acre. You are selling at roughly $20,000 a site on the two assets in Indiana. We are buying into the lifestyle assets at roughly $8,000 a site. On a cash flow basis, it is a wash; it is a breakeven. I think about 0.5 million and 0.5 million after CapEx I think is the rough numbers -- 0.5 million to $0.75 million of cash flow.

That's very helpful. The 950 acres of expansion land, is that evenly distributed with the location of the properties or is it concentrated more in one place than another?

It's concentrated in one property in North Carolina in the Blue Ridge Mountain area outside of Asheville. So, we like that area a lot. It's a very beautiful resort that they have there. One thing we should say about the excess land, I think it's in about three locations that we are very interested in. The prior owner had been getting entitlements to increase the number of sites at each one of those locations and introduce a manufactured home or resort home product at each of those locations, and they are further along than just excess land. It's actually been down through some entitlement process.

Then, on the mezzanine deal, I was interested how you unwound that? Did you just add the $30 million investment to the $73 million in debt, and you are almost all the way up to that $105 million fare? If you could just go (technical difficulty) how you unwound that.

That's effectively where we ended up, but we negotiated the price separate and apart from our mezzanine investment. Again, on the mezz, we were getting about a 10 -- Michael, 10, 10.5 yield on that. We acquired the properties I think at about a 7.25% cap rate or a little north of 20,000, $22,000 a site. Given the locations, we are incredibly pleased with that execution. They fit right into our existing operations in both of those locations in Arizona and Florida, and we now get to bring them into our operating philosophy and our marketing and Web site traffic. So, we thought that was a great execution for us.

We were also able to lock in long-term financing on those assets as well at less than a 6% rate.

Yes, I know; that looked very attractive.

Paul Adornato, Harris Nesbitt.

You passed on a right of first offer to acquire Thousand Trails just now, but you left open the possibility in a couple years. I was wondering if you could comment on risk reward profile of your current position versus owning the operating business outright.

Structurally, I think we disclosed in the press release, there is some uncertainty as to how the revenue coming off a membership contract would be treated for REIT purposes. The size of that revenue stream is approximately $100 million. So, there was some -- we were much more comfortable structuring the transaction in a way that clearly complied with REIT structure and REIT qualification tests than going in a direction where we would acquire that whole business without definitive evidence that it would be a qualifying revenue stream.

That said, we believe it is real estate-related revenue. There's just nothing we can point to that would say that it is. Some have -- we have a private letter ruling on timeshare. Some have analogized it to a timeshare type of product. Some have analogized it to a service type of product. Without clarity on that issue, we believe the existing structure of the landlord/tenant relationship is the best execution for us, while leaving open the opportunity that if we can get clarification on that issue we have the opportunity to bring the whole thing in-house. So, that is structurally part of the decision-making going on.

Secondarily, just as an operating business, we do not really understand the sales and marketing efforts involved in selling that product. It would be a new business for us inside of our operations. Frankly, we've taken out a lot operationally over the last couple of years. I think we're doing a fantastic job, but it would stress the operational capability of us additionally beyond what we think is prudent. We've brought in a guy over on the lessee position, who knows this business inside and out. So, from an operational standpoint, we couldn't be happier with the execution. So, I think both structurally and operationally, this was a structure and a transaction that we are very pleased with.

Do you anticipate bringing in perhaps McAdams' expertise in 3 years' time? Or you guys would then take over the operating business at that point?

You know, that remains to be seen. We would love to -- if we did acquire the [stub] business in the future, we would love to get Joe McAdams. I think very highly of his capabilities. He has proven that he can be successful time and again. But that remains to be seen.

You are getting a 10% yield with presumably pretty decent coverage on your investment. I'm just wondering kind of what the upside might be and how we might get comfortable, given that perhaps the higher volatility or more uncertainty of this line of business?

I don't know if I would say uncertainty or volatility with respect to this business. The one thing that we have become quite comfortable with, with respect to the membership business is the stickiness with respect to the cash flow and the stickiness with respect to that customer. On average, a member lasts in the Thousand Trails system approximately 14 years. So, once they get a member, they have a great experience, they like the product a lot, they use the product, and they stay as Thousand Trails customers over the long-term.

So our question wasn't really whether it was a stable platform or whether it was volatility. It is, we believe that that business is ripe for improvement and some operational improvements, and we think Joe is the guy who can execute that strategy.

Jon Litt, Citigroup.

It's John Stewart here with Jon Litt and Craig Melcher. Mike, what was the purchase price of the Thousand Trails transaction?

Purchase price has been -- is a private transaction. Mr. McAdams has asked that for his reasons that we keep it confidential.

Then, what's the pricing mechanism for the option to -- for you guys to buy it in 2009?

For the fair market value.

Fair market value at the time. Did you have to give anything up to get that option? What consideration did you give for the option?

I mean, the whole lease was renegotiated. So, you know, we've gotten additional cash protections. We've got an escalation in the base rent. We've got CPI escalations every year. You know, we've gotten a number of amendments to the lease, and the whole thing was negotiated between ELS and Privileged Access that both parties agreed to.

So there wasn't a direct payment for that option?

I'm sure there would. In terms of the entire transaction, I think in consideration of all the amendments we've made to the lease and the acquisition of the two properties, that was part of the entire transaction.

Did the acquisition of the two properties actually erode rent coverage in that you know the rent payments has gone up another $1 million. Were the results from those carved out of the 100 million in revenue that Thousand Trails had been recording?

The coverage over the course of the last 12 months has essentially been 1.4 times EBITDA to the lease payment. With the transactions and the step-up in the lease, it's now approximately 1.3 times.

I think Craig Melcher has a couple of questions as well.

Could you walk through the changes in the guidance? In the release, you mentioned it was the insurance and the additional resources. But what is the magnitude of these different items?

Effectively, the $0.05 that we took guidance down by -- $1.5 million between the insurance, the additional overhead.

What was the amount of the -- or was there any dilution from the mezzanine investment being converted to a purchased asset?

There's some slight dilution that occurs at the end -- in the second half of the year. The properties came online at the end of their season effectively at the end of March. So, we achieved a little bit of a positive in the quarter, again slight dollars here. Then, there's some slight dilution over the course of the year as they move out of season.

Relative to the guidance.

Relative to the guidance, all of the acquisitions and all of the changes were roughly no impact on the guidance.

For the full year, what's the negative reinvestment spread when you converted from the mezzanine investment into the wholly-owned?

I don't know that off the top of my head in terms of a specific dollar amount. Approximately, we went from a 10% return on our mezzanine to roughly a 7, 7.5% cap rate with a little less than 6% on leverage and it's approximately 75 to 80% levered. I can't do all that math quickly in my head, but that's effectively what happened on a 12-month run rate, not necessarily for '06.

Right. What was the timing of that transaction during the first quarter?

Within the last 10 days of the quarter.

(Operator Instructions). Craig Leopold, Greenstreet.

Michael and Tom, I understand the hesitation to maybe talk about the purchase price of Thousand Trails, but can you give us any inside into the capital structure and how the transaction is financed and therefore help us be able to evaluate your $12 million loan?

Well, the Thousand Trails has two subsidiaries, one involved in management of government camp grounds and other in reciprocal use, similar to the business that Joe ran at Affinity Group called RCI. In addition, they have the contract receivables. We own all of the real estate. They also have the cash and some miscellaneous other assets.

But I'm trying to understand how much equity is in the transaction, relative to your financing and whatever other financing is in place.

Well, with respect to the receivables, it's $17 million of contract receivables that we lent 12 million against. Then, there is roughly $15 million of cash on the balance sheet.

What percentage of your sites are currently leased to Privileged Access prior to the Thousand Trails transaction at this point?

None.

None?

None.

I thought the idea was that they would enter into leases with you guys and then make them available to their clients.

Absolutely. That is their business plan. They have been spending the last 6 months evaluating the different types of products. One of the issues that has been discussed between Privileged Access and ELS is making sure whatever product Privileged Access wants to introduce in our real estate that it does not impair our real estate. So, for example, a timeshare-type product generally comes with it a piece of the real estate into that product. We do not believe that that's a long-term structure we would feel comfortable with because it would impair the rest of the real estate where that product was introduced.

So we're talking about a structure where ELS would lease sites to Privileged Access. As a result, Privileged Access has done a fair amount of review of the different regulations in place in different states to determine how to market that product appropriately and legally to the customer base.

Then, one last question on the Thousand Trails sale. Was that something that KKR was looking to get out of, or is this something that Joe approached them on or approached you on? Could you just maybe just give us 30 seconds on the process?

I think there was some conversation between ELS and Kohlberg shortly after the transaction about what their long-term interests were, as they brought in a new management team and they seemed pretty much committed to see if they can make something happen. I think they were excited about the opportunity in the RV space that they saw. I think they were going to try and consolidate the private membership business. I know one transaction that they worked on fell out of bed. I know Joe, after he left the Board, had certainly expressed an interest to the Kohlberg principles about buying that business when the time was right. I think they ended up negotiating this transaction.

Richard Bailey, ADP Investments.

I just want to follow up on the question that was directed at the pricing of the asset swap. What when these come on will be the book value for the approximately 1,600 sites that you acquired? What is the book value ascribed to the 950 acres?

I don't know about the book value ascribed to the acres yet. The transaction is not closed yet. But the transaction will be roughly recorded in our books I believe -- subject to Michael correcting me -- at somewhere around 13.5, $14 million, which represents the book value of our asset that we gave up plus the $5 million of cash.

Okay, so between 13.5 and 14 million. Okay, that helps. And then, just another question, follow-up -- on the manufactured housing communities, the four that you got in the mezzanine transaction, maybe I missed it, but how would you describe those? Are those age restricted or are those all-age communities?

There is two in Florida. One is all age; one is age restricted. They are both in the Fort Myers marketplace. There's one in North Carolina outside of Myrtle Beach that is age restricted, and there's one in Asheville, North Carolina that I believe also is age restricted.

Okay, so 1 out of the 4.

Is all age.

Right. Okay, that is it.

Jon Litt, Citigroup.

It's John Stewart again. Mike, what's the dollar amount of the seven pending acquisitions?

Oh, that's the other side of the 13. That's the 13.5.

And the cap rate?

I don't remember the cap rate off the top of my head.

I would say it's roughly about $0.75 million, $700,000 on the 13th, so whatever that would be. We didn't bifurcate that 13.5 for the excess land value, so, somewhere in that ballpark, which would equate to the cash flow that's on those assets that we're giving out.

We have no questions at this time. (Operator Instructions).

Thank you for joining us on this call. As always, Michael Berman will be available after the call for any follow-up questions and look forward to discussing our second-quarter results with you in July. Take care. Bye.

Ladies and gentlemen, thank you for joining us on the call.