Equity LifeStyle Properties Inc (ELS) 2006 Q2 法說會逐字稿

Good day, everyone, thank you all 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 may contain forward-looking statements in the meanings of the Federal Securities laws. All forward-looking statements are subject to certain economic risks and uncertainty. The Company assumes no obligation to update or supplement any statement that becomes untrue because of subsequent events.

I would now like to turn the presentation over to your host for today's call Mr. Tom Heneghan, please proceed, sir.

Good morning, everyone. Thank you for joining us today. As our earlier press releases indicate, we have a great portfolio of assets that continues to achieve growth, despite a changing environment.

Before we open it up for questions, I'd like to note that we appreciate the desire for quicker action with respect to certain aspects of our business plan, especially as it relates to generating cash flow from some of our latent or underutilized assets.

In this regard, I'd like to discuss two topics that I believe are of interest. First the status of a property in New Mexico, and second the status of our property in the Florida Keys. As our press release indicates, the purchaser decided not to close on our property in New Mexico.

As we understand it, that decision had more to do with specific issues between the city and the home builder, related to a fence in the development, as opposed to some broader issue with respect to the Albuquerque housing market, which is still experiencing year-over-year growth. As we indicated, we have already begun discussions with other interested parties.

With respect to our property in the Florida Keys, we have determined to maintain ownership, despite receiving some very attractive offers. At base, this decision reflects the irreplaceable nature of the assets, a lack of attractive alternative investments, and a belief that we will be able to increase the cash flow from this property in a manner consistent with our business plan.

That said, I think now would be a good time to open it up for your questions.

Thank you, sir. Ladies and gentlemen, [OPERATOR INSTRUCTIONS] Your first question will come from the line of Richard Paoli, ABP Investments. Please proceed.

Hey, guys. Just a couple quick questions. First one is surrounding, I guess, the all-age property that you still have in your portfolio. And I guess the overall housing situation, there appears to be a slowdown going on for stick build demand, and I'm wondering if you've seen any change in demand for your product, and if you can quantify any of that for us?

In most of our markets, we haven't seen much of a change. If there's any place that you could see the beginnings of some changing environment, it may be Denver, which appears to be stabilizing somewhat, but again we're cautious with respect to our view on Denver as we sit here today.

Got you. Another question is regarding privileged access. You put some, I guess, some comments into your prepared remarks regarding the expanding of the business there. And I guess, you had some generally positive comments about how things are going, could you give us some quantifiable numbers in any way, shape, or form, that could help us, you know, benchmark what's happening there?

Yes, as long as we take them in the context of it's three months into the game, and you know three months doesn't make a year, or set a trend. But I think, that said, we've got some very positive fundamentals occuring in the Thousand Trails business since Mr. McAdams has taken over ownership. Sales for the three months ended June have increased order of magnitude 50% from the year ago period. That's essentially dropping down to the bottom line in terms of EBITDA, and we refer to EBITDA before our lease payment or interest payments. EBITDA for the three months ended June is up about 50%, just to give you some raw numbers. That's an increase of approximately $2.5 million on a base of about $5 plus million. So very solid, you know, beginning of Mr. McAdams' run at the Thousand Trails operation.

Great. Okay. And my last question as a broader, big picture question regarding your, I guess, your age restricted, your 55 and over type product. In your prepared remarks, you spoke about, you know, the rapid expense acceleration, or above trend. And I'm just curious as to your, what you think your ability to push those expenses through to your residents, given that most of them are seeking to live in your community for economic reasons, or some combination of economic reasons and beautiful locations.

Yes, Rich, as we have said many a time, the primary reason people choose our location, choose our properties is lifestyle and location. Certainly there's an affordability aspect, vis-a-vis single-family homes and other alternatives in the marketplace. But in the marketplace, we believe we are well-positioned.

And in that same marketplace, single family homes and townhome owners are experiencing the same increases in utility costs, so it's not an issue that's going to affect us in a marketplace unilaterally. And historically, we've been able to unbundle the utility costs and get recovery. As we said, some of the recent acquisitions we've done have not gone through that unbundling process, but we see no reason to think that that cannot be achieved on a going forward basis.

Thank you.

And your next question will come from the line of Paul Adornato, BMO Capital Markets.

Just to follow-up on Richard's question regarding utilities, could you just describe the unbundling process, and how long you expect it to take, and what's involved? Do you need to get residents' approval, et cetera?

Well, it's generally going to be impacted by the state in which the property operates in. And also whether it is a manufactured home community or RV resort property. The issue that we are pointing to is more on the RV resorts, those are the properties we've been acquiring over the last couple of years. That's where the unbundling activity, I think can occur. It is a little premature to give you a timeframe, but we're pretty optimistic, and have begun a process with respect to unbundling that stuff coming up for the upcoming season in 2007.

And is the RV side less regulated?

Yes, as it relates to that issue, yes.

Okay. And finally, you refer to 2007 guidance being impacted by some of these expense items, but you didn't actually release a range, is that, did I miss something there?

We actually didn't release a range, we will release a range later on in the year. I think what you're hearing from us is, we have a fundamental confidence in the strength of our business. As we indicated the top line is growing well, we've got a great set of fundamentals and demographics driving the top line growth.

And we are dealing with cost pressures on a number of line items that we articulated. How those impact 2007, we're not really sure, so we don't want to give you too wide of a range, we want to get our arms around it, before we start articulating what the impact is in 2007. And that relates to how successful will be the unbundling process, what in fact, is going to be the utility increase in 2007.

It's a little early to say what that is going to be at this point in time, and again, what are our alternatives with respect to insurance, if insurance rates continue to increase at the same rate? You know, another factor driving some of these year-over-year comparisons is also some significant investment in our property management infrastructure, along the lines of IT group systems, a development group, and a call center group. We believe those investments are yielding a benefit on the top line growth.

And we don't expect to be able to, you know, continue growing the property management at the same pace, so we're dealing with a number of issues with respect to giving you the cost side of our business in 2007. I think we feel very comfortable with the top line issue.

Okay. And finally, I thought I would just ask once again, seems to be the typical quarterly question. And that is regarding the land development. You articulated four possible ways that land could be, value from land could be realized. Any timeframe that we might expect to see some joint ventures or developments coming down the pipeline?

Well, and our preference as we go through those alternatives is to realize the cash flow potential of our assets in a manner consistent with our business plan. We think that the recent changes in the Thousand Trails platform were instrumental in that whole analysis.

We believe there currently exists significant underutilized capacity in the Thousand Trails assets as they sit there today, beyond the excess land and beyond the development potential that exists in those assets. And we're having some pretty positive conversations with the Thousand Trails people, about how to realize the existing underutilized capacity within the system, before we start throwing capital at an asset. I think we can generate some cash flow without even having to make that expenditure.

Okay. Can we expect an '07 or an '08 timeframe for some of that coming to fruition?

Well, let's talk about what's going on with Thousand Trails right here and now. They have begun to introduce a fractional use product in one of our properties, Tropical Palms in Orlando. They haven't sold anything yet, they're just going to start this in the next few weeks, next few months.

We'd like to see how that works, but assuming that is a positive product in the marketplace, we are then going to expand that throughout our properties and into their properties, as a way to bring in a flexible use type, you know, customer into the matrix, on a way that is consistent with our desire for long-term cash flow streams, because Thousand Trails and/or Privileged Access will be leasing those sites from us to introduce that program.

Okay. All right. Great. Thank you.

And your next question will come from the line of John Stewart with Credit Suisse.

Tom, should we infer from your comments about 2007, that you think the current Consensus is high just given the cost pressures, as well as the difficult of putting capital to work?

You know, I guess I don't really want to comment as whether it's too high or too low. I don't think we can comment on 2007 with clarity. I'm a little hesitant to give you a sense as to what is going on with it, until I get my arms around it. I guess I can say this with respect to where we are today, you know, we have grown the core portfolio in a fairly good manner, despite dealing with some of these issues that we've discussed on the call. And I'm hesitant to get in to a but/for discussion. That's always a game you can play.

But for insurance costs, utility pressures, and a dragging issue with respect to the hurricanes, we're going to be sitting here talking about core NOI growth north of 4, probably closer to 5, than where we were, on a, closer to 3. So you know, as we get our arms around those issues, I think we'll be able to articulate what the impact is on the 2007 guidance.

Okay. I understand that the all-age transaction was more of an exchange than an outright sale, but based on your estimate of value, what do you peg the cap rate on that asset sale at?

It's in the 5 or 6ish type range.

Okay. Can you give us any more color on the Del Rey transaction, and what the fence is that you're referring to?

Apparently the plan went into the city for approval surrounded by a fence. And at the last hour, the city council decided that, I think, the fence along the main road, I'm not sure. I think it's the fence along the main road was inappropriate, relative to the look and feel they wanted to create within that community. And they approved it again, but for the fence. And it mattered in this case to the homebuilder, who thought the fence was crucial relative to their marketing plan.

Deal-breaker, huh? And Mike, what was the coverage on Thousand Trails in the second quarter?

About 1.5 times.

That's down a bit from the first, is it not?

It's actually should be up, I think the first quarter was more like 1.3.

Okay.

And I'm adding in all of the new transactions that we've done with them, in terms of an overall coverage ratio, but I'm pretty sure it's 1.5, getting close to 1.6.

Last question, how much in cost savings do you expect from the unbundling of utilities?

You know, generally speaking, we have in the portfolio, and it's different in every market on the manufacturing home community side, we generally recover about 50% of our expenses. We are shooting for, you know, a similar direction on the RV side. Right now we're recovering, you know, order of magnitude less than 10% of the incremental change.

Okay. Thank you.

Your next question is from the line of Art Havener of A.G. Edwards.

Good morning, Tom in your prepared remarks, you talked about the 3 revenue segments. And I just want to understand on the transient business, I believe you mentioned that the Tropical Palm site was down 8%, is that the same for the whole total piece of the transient business?

No, Art, the total piece of the transient business I think is down 6% with Tropical Palms kind of leading the charge at 8%.

In respect to the lease with Thousand Trails, the way I understand it is there are 3 components. You had the original component, which was updated like April 14th, and then you had the recent acquisitions that were added, and now, I believe, Thousand Trails have leased 130 sites from Tropical Palms, can you talk about the terms?

Yes, that's a top line, excuse me for a minute. The Thousand Trails lease, it's really a Privileged Access lease of the 130 sites, and Tropical Palms is a top line lease of those sites. So, you know, there's a rental cottage program going on there, where they rented out almost like a hotel-type of experience, for vacationers wanting to go to Disney and the surrounding Orlando attractions. That 130 sites generate order of magnitude 2.5 to $2.8 million of revenue, Privileged Access has leased those sites from us on an annual basis, at approximately that top line revenue base.

I think Thousand Trails or Privileged Access' goal in that lease is to get in front of all of those customers, to start introducing their membership products to an ongoing stream of customers interested in a vacation experience, not unlike what the Thousand Trails product offers.

Okay. But that doesn't add $2.5 million to your revenue.

No, not at all.

Okay. How does Privileged Access' strategy at that property differ from your change in strategy, in terms of selling cottages and renting them out?

I don't think the strategy is going to be different, I guess I would say from an order of operating philosophy, in the Thousand Trails business model, two weeks is a long time. And our business model, two weeks is nanoseconds.

We look for annual, seasonal, and long-term revenue streams, they are very comfortable operating a business, where there's a highly transient customer in and out of the properties. I think they are better-positioned operationally to manage the activity that goes on in that cottage rental program, and expose them to a whole host of customers who may be interested in the Thousand Trails products that they could sell to them.

Okay, but you're not competing directly with them by selling the 125 cottages?

No, they are going to try and introduce a fractional use product on, we have 130 sites in the hotel usage that they have leased, 30 of those sites have been cleaned off, with respect to the existing products, so that Thousand Trails can begin to introduce a fractional-flexible use type product, not unlike their get away product that they have on their properties, where for an upfront price and an ongoing fee, you can have access to the unit periodically throughout the year. Either a week or two weeks in any particular year.

Okay. I have one more follow-up question on the Florida Keys Lazy Lakes property. The way I understand it is that you backed out because of the pricing issue. And will you be proceeding with the rezoning of that property, like the previous potential buyer was planning?

I want to make sure that we clarify issues, Art. There's two properties in the Florida Keys, one is called Lazy Lakes, and one is called Sunshine Key. My comments related to Sunshine Key. And just for the benefit of everybody on the call, the Sunshine Key is essentially an island in the Keys, it's got 400 RV sites, and about a 200 slip marina, we believe it is a unique asset in the United States, and particularly in the Florida Keys relative to the potential.

Lazy Lakes is a small 100 site property located in the Florida Keys, not as attractively located within the Florida Keys, but still in a very good market down there, and has structural issues with respect to that property. It's 100 sites, but frankly 50 of the sites are usable on a long-term basis. That property we don't feel as strong about, relative to our opportunity to maximize long-term cash flow, and may, in fact, sell that particular asset.

We have decided to retain Sunshine Key, however, the larger of the two assets.

Okay that clarified it. One last question, Mike, on the inventory of homes, what is the current book value on your balance sheet?

the current book value is about 65 to $70 million total all-in for all of the inventory.

Okay. Do you, can I infer, it sounds like you're going to kind of hold that steady going forward?

Let's not look for ways to start moving it south.

All right. Thank you.

And your next question will come from David [Bragg] of Merrill Lynch.

Yes, on the Del Rey transaction that was cancelled, there was a recent article stated that the city might actually step up and purchase the property. Is that something that you've discussed so far? And what other options might you be considering?

There are interested homebuilders that we are discussing. I don't want to get too much into it, but we have had discussions with the city, I guess we would put it from this perspective.

We thought a transaction was in place that was good, that the city liked, that the remaining residents were happy with, that we were happy with, and for some reason Centex decided not to close. We think it was related to this fence issue, but it may have been a broader issue for them. I'm not sure. We would like to go back and get a transaction along the lines of what we had. We're more than happy to have executed on the transaction that you know, was right there and ready to close. Also are you currently negotiating with single-family home builders regarding those?

Okay. And also, on the other 3 properties held for sale, are you currently negotiating with single family homebuilders, regarding those?

No, the locations of those properties are not in markets that I would say are strong alternative use, relative to single-family home use.

Okay, and then my other question is on Tropical Palms. Just trying to get an understanding of that property, and how the 541 sites, which is about 10% or less of total transient sites, accounts for one-third of transient revenue.

One is the 130 cottages used in a hotel-like environment. That's a high-dollar, but low-margin business. Right? It's 2.5 to $2.8 million on 130 sites. The margin on that is probably 20% or less. It's a big revenue, but it's a small margin, small NOI contribution. So that's why it's driving such a big part of the transient revenue base.

Okay, thanks.

And your next question will come from Jonathan Litt of Citigroup.

Hi, it's Craig Melcher here with John. I wanted to go back to the Thousand Trails coverage you mentioned. If the EBITDA was up 50% and the coverage only went from 1.3 up to 1.5 or 1.6, does it make sense that then the new transactions had lower coverage, and if so, what was the coverage on the new transactions that were added to the Privileged Access lease?

I'd have to get back to you on the details of that Craig, but we had more investment, we had a $10 million investment, and I'm including in the loan payments to us, that they didn't have previously, as well. So apples to apples it may not, the EBITDA change wouldn't necessarily result in the same coverage change. But I can get back to you on that offline.

Okay. In terms of the opportunistic sales, what other potential assets are there in their portfolio? Or are there any that you're pursuing, to be sold to single-family homebuilders?

Outside of the discussion I had with Art, in the Florida Keys, I would say that we have focused more on creating cash flow streams out of our assets, in connection with evaluating the opportunities in the Thousand Trails excess capacity and excess land, than discussing alternative use sales with homebuilders.

Can you talk a little bit about the marketing arrangement you have with Privileged Access, with the cross marketing of your product types?

Yes, I can talk about it a little bit. What we're trying to do is benefit each other's customer base with the products that we have. So for example, a Thousand Trails customer has recently been able to come into an ELS property, at a discount to, you know, call it the rack rate, the daily average rate, as part of being a Thousand Trails member.

They also receive discounts on the purchase of a cottage or home in one of our properties. And mostly what we have been allowing the Thousand Trails members to have access to within our properties is the shoulder season and the off season, and it is a net revenue pick up for us as a result of their usage.

Going the other way, we are trying to introduce the Thousand Trails membership to both our homeowners who might be interested in the get away program, which doesn't involve ownership of an RV, but allows somebody who is say owning a home in Florida, to then have a product attached to that home that allows them to go visit, you know, California, the Northeast, you know, the Northwest, of Oregon and Washington areas through the use of a park model or resort cottage.

We're introducing that to our homeowners and we're introducing that to our annual and seasonal RV users. And the RV users also have the opportunity to buy a Thousand Trails membership at a discount, to use the system either to get up and down from their home in the North/Northeast or Midwest as they come down to Florida, Gulf Coast of Texas, or Arizona. So a number of ways we're trying to explore that

And do you have a specific budget on how much you're looking to spend with that marketing and advertising this year?

The marketing and advertising dollars are almost nonexistent. It's really just an ability to allow each of us to have access and cross-promote within our existing literature. They're on our website, we're on their website. The cost of that was diminimus, they issue a monthly periodical that goes out to all of their members, we are in there with a number of advertisements within that periodical.

We have a newsletter that goes out to our customers, their product is listed as an opportunity to our customers within that literature. It's really a better use of existing literature, not an incremental cost.

Thank you.

And your next question will come from David Harris of Lehman Brothers.

Good morning, guys, we're working you hard this morning. Your occupancy for the quarter slipped below 90%, did your guidance presuppose a higher occupancy in the second quarter? And could you give us an idea of where you think occupancy may be going into '07, I know you're not getting specific, but it's obviously below 90, sort of leaves a lot of money on the table.

Occupancy slipped about 30 basis points with respect to our guidance. We've assumed a 0% occupancy change in the year, a 30 basis point occupancy change while very important to us operationally is not going necessarily going to have a direct, you know, see-through impact on those of us, on those people following us with respect to our earnings.

With respect to the rest of the year, we are working hard to make the needle go north, I can assure you of that, and we are assuming still a 0% occupancy change for the rest of the year.

An what do you --?

Without getting into it, I did the but for on the core NOI growth, but underlying what's going on within this Company on the occupancy trend line is nothing but positive, despite some lingering issues, one being the hurricanes that affected Florida over last year.

Not to say another hurricane can't affect the season coming up, but if you exclude the effect of that hurricane, there's growth in occupancy in Florida. There's definitely growth in occupancy in Arizona, again, we've mentioned Colorado as an issue in terms of a drag on occupancy. We've seen some stabilizing there, not sure if it's going to be firming up, or if we've still got some issue there. And we're effectively stable throughout the rest of our portfolio.

So big picture, we think if you could remove the effects of the lingering hurricanes on our occupancy, you get a positive trend line. You are going to have growth in Florida, you are going to have growth in Arizona. We think Colorado is stabilizing, and the rest of the portfolio is going to be flat to up.

What would be your best guess? 92 or 93, X those factors which take you to the current level?

No, I wouldn't say 92 or 93. I could tell you Florida alone cost us order of magnitude cumulative 500 sites, which is 1.5 points. But that's, you know, that's okay in terms of if the hurricanes didn't happen. If the guys on the phone out in operational world are listening, we think there's significant opportunity in our portfolio relative to the vacancy issue.

We've got great locations that should be running stabilized occupancy at 95%, that's what they did before we started doing some of the upgrade programs. I think that's what they are going to do long term. It's just a question of executing and how we get there, and when we get there. But there's significant upside in occupancy in this portfolio, given where we are right now.

Okay. Did you mention your view on where you see cap rates going across your property types?

The demand for [Adress Rigged] and manufactured home communities, it's almost unwavering in terms of the desire for people to build that portfolio. Given the stability of the cash flow stream and the scarcity of the asset, have seen no change in that environment. We have recently seen over the last few years, a huge demand for age-oriented, I wouldn't say age-restricted, but age-oriented RV resorts that are geared toward the baby boomer demographic, the older customer, that's mostly the Sunbelt in the United States, and in California. Those assets are going for premium pricing today.

Not so sure on what's going on in some of the Northeast, that's a different asset mix entirely. Brings in a much younger customer, and also has typically been run in a manner that's a little bit different than what we believe is our core business, there's a little more transient activity going on in the North. And one of the factors that plays into that is weather. And depending on the year, you could have the weather impact have a marginal change in that property in a way that is memorable, which I think translates into some impact on pricing over time.

So what you're suggesting is maybe some softness with the higher rates for those properties?

Softness, no, there's demand, there's long term core demand for those properties in the North and the South. The issue that's going to affect the northern property is, did it rain?

Okay.

At the margin, did it rain. There has been some commentary about the price of gas. We haven't seen the effect of the price of gas on our core business. It may eventually translate into an impact on us, but let's remember in our core business, on the MH side, there's almost no impact at all.

And on the RV side, you're talking about an installed base of RVs of 8 million. The cost of gas and uncertainty in the economy may affect the marginal newcomer into the RV sector, you know, the now 350,000 plus RV sales on an annual basis the last couple of years, they're still expecting some pretty strong shipment volumes and sales volumes this year, but at the margin it's going to be affecting right there. We don't think it's really going to be affecting our core business.

And as it relates to the Sunbelt properties, you know, they don't even get affected by the weather. The Northern properties are the ones that marginally get affected by the weather.

Final question for Mike, if I may. I'm looking in your disclosures on CapEx, which, you describe as non-revenue producing improvements to real estate. It looks if I do very simple math, using the total unit sub site count. Looks like at an annualized basis, you're running at about $100 per site. Is that a decent run rate? And how would you pass that between some of the major elements of the portfolio?

It's roughly, you know, we've been saying roughly 13 to $15 million a year on a run rate basis. So this particular quarter might be a little low, David.

Right.

You know, some of that CapEx is just money that you put into a property to, you know, keep a property's life, you know, as long as you want it to be.

Another portion of that goes into our home set up when we sell homes. And that's not necessarily a function of closings in a particular quarter, but how many we are putting out there, and we also are working on reducing those costs through smaller products, and outsourcing some of the items associated with those homes.

Okay, but you look at a stabilized community site that you want to see running for an indefinite period of time, what's your CapEx per site --?

I would think about it in terms of order of magnitude, 3% of revenues.

Okay. Okay. And presumably rising at inflation plus type numbers?

You know, inflation plus kind of depends on where and what you're doing.

Okay, okay. Thanks, guys.

And your next question will come from Craig Leupold of Green Street Advisors, please proceed.

Good morning. Michael, first sort of a housekeeping question. The $1 million of nonrefundable deposit you guys kept from Del Rey, how was that accounted for?

It will be accounted for in the third quarter, it was not part of the second quarter results.

Okay, so will you include that in your FFO?

You know, we have included in the past, a nonrefundable deposit that we received, without talking to my accounting firm, I would assume that it would probably be part of the FFO.

I guess maybe to ask it differently, is it included in your new guidance range?

No.

Okay. And then, I guess I want to understand a little bit. The Privileged Access lease at the Orlando RV property, is that separate? I mean is that an individual lease just for that property, or is that rolled up into the whole Thousand Trails lease transactions?

It's separate.

Okay, and what is the structure of that lease? What's the term, and what's the rate that they're paying you for those 130 sites?

Currently it's a master lease, I think for a year. Of the top line, meaning they're taking over the top line revenue stream, in the hopes that they can manage that inventory in a better way than we can, and gain incremental occupancy, and incremental revenue to them. And put themselves in front of a host of customers that may be interested in the Thousand Trails product. So to us, it's going to be a net neutral.

Okay. So when you say a net neutral, are you sharing in some portion of the revenue that they generate, or are they just paying you a flat?

They're paying us a flat.

And is it roughly equivalent to the $6,000 that you're getting for the other properties that you've moved to a cottage program?

No it's roughly equivalent to the revenue that is in place on those sites, given the existing use, and the hotel-type use that's currently going on. So $2.5 million, or whatever the number is.

Okay. And then, you know, Tom, you mentioned in an answer to a previous question that you didn't think gas prices and such are really affecting the RV business, but clearly your resort revenues are down at this property 8%, overall down 6%. What do you attribute that to?

Well, in this property particularly, we've taken, let's walk through some of the numbers. Of 130 cottages that have been used in the rental program, we took 30 offline. We just dismantled, took offline 30 cottages that had been previously used in a hotel-type experience, and moved them off property, for purposes of allowing Thousand Trails to introduce their fractional use products. So there's one thing that's going to affect year over year numbers at that property.

The second thing we've done is we've taken somewhere in the order of magnitude of 50 to 60 sites on the RV side of the property offline, by putting in our own resort cottage that we're selling as whole ownership. To date, we have sold and closed 25 or 26, we've actually sold, but not closed another 20 plus. And we expect to be able to continue selling of that property to the point in which we're going to get 125 of those sites offline.

Now, when does that revenue come in? It comes in now on a going-forward basis. You're not seeing the full effect of that at that property, and where does it come in? It's no longer transient revenue on our bucket.

So on a transient-to-transient revenue base, we have taken some revenues offline for purposes of introducing this flexible use product vis Thousand Trails, and we've taken some units offline and sent them over to the annual bucket. Right, so that's more that's driving that annual, I mean that transient revenue decline than anything to do with gas prices.

Okay. Great. So it really isn't a reflection of the underlying business, it's just a transformation of how you're operating that property.

Right. As it relates to that particular property, yes. As it relates to the other trends in revenue stream, which is down 6%, that's more weather than gas, in my view.

Okay. Great. And just curious, '07, I know you don't want to get, you know, pinned down, and so I won't go to the expense side, but on the revenue side, when you talk about historical growth patterns, are you referring to kind of CPI plus 100 or 150 basis points, is that what I can imply by historical growth patterns?

Yes.

Okay. And then I think Andy, do you have a question?

Hey, guys. Andrew McCullough here. Quick question, the $18.2 million annual rent for Privileged Access that you have in the supplement, that incremental $700,000 was just the 1594 additional sites? Am I looking at that right?

Yes.

Okay, and then one more question. Marketing for Privileged Access. The only incremental cost you have for that is kind of your swapping of these ads in the newspaper, there's no other incremental cost there?

I'm sorry, one more time with that question?

Right. [multiple speakers]

That's all the marketing there is for that? Just the swapping of the ads in the newsletters?

That's what's going on currently. We have not done any incremental spending relative to marketing of those customers. We do have incremental marketing dollars related to stuff we're doing on our side of the fence, on the ELS side, our royalty program, for example. I think we've spent introducing that program probably $300,000 this year introducing that program. And I would say this year, or the last 6 to 8 months introducing that program.

Okay, great. Thanks.

Actually, one last follow-up to an earlier question. Michael, when you mentioned the 1.5 to 1.6 coverage for Thousand Trails, did you say that included both the rent and the interest on the note?

Yes, I'm pretty sure it does.

Okay. Thank you.

And your next question will come from Jeff [Bigham of REIT].

Hello, this is [Jerry Erlinger] with Jeff here. I think he has a few questions, as well. Getting back to Del Rey, the Del Rey asset. Was that generating a negative return given the way the occupancy had fallen during the quarter?

It's roughly breakeven. For the first six months.

Is that sort of the run rate, as well?

I don't remember the run rate for the rest of the year. You know, the low occupancy has also resulted in a reduction of incremental expenses.

Are you required to do anything to your property, given the city's requirement to remove the fence for a new buyer, or is that only on change of control?

That related to the new development that was proposed at the property with the purchaser as it relates, than it does to us.

So right now you're simply going back to #2 and #3 in line, to see if their bids are still open?

We've got recent expressions of interest along the lines of what we have initially seen from those other buyers. And what we'd like to do is see if we can sustain the existing transaction, I think as I said before, it was a transaction that the city would approve, the residents, the remaining residents liked, and we liked. So if we could get back there, we'd like it.

Getting, thinking about your what you called your other alternative opportunities, the Keys first of all. Sunshine Key, given you're no longer marketing it for sale, can you share what the interested parties are willing to pay you on a price and/or a cap rate basis, so we can get an understanding of the potential value on that asset?

I think we're going to be hesitant to articulate those values on the phone here, Jerry. What I will say is there have been some pretty intelligent people looking out there at that asset in the analytical and investment community. They have seen some of the stuff that's happened in that environment, both down in the Keys and other parts in Florida, relative to assets being sold for alternative use, and or other types of transactions in the environment.

And, I guess I would say, have confidence, baby, have confidence in your analytical abilities. The stuff that's out there is indicative of what's going on, relative to discussions on Sunshine Key.

What would be the drawback of given you there's a bid on the table, wasn't necessarily explicit by you. Or maybe it was. And you're not putting it for sale. Seems like disclosing that would only potentially solicit other interested parties. If indeed they think that's low?

One could argue that who knows what somebody may offer, right? This is a unique asset in a unique location. It's probably one of the last large parcels to develop in the Florida Keys marketplace. And as a result, it's a special asset. We think we can create some cash flow streams off of it. So even to talk about a cap rate, you know, Jerry, are we talking about a cap rate on what it was, or a cap rate on what we think it could be?

I'm a little hesitant to get into that discussion. I think it could, you know, start a little bit of a, get us off track from what we're focused on doing.

Okay. Hope maybe you can disclose down the road, I think it would be useful to just understand, at least what you think is too low of a value for that asset, which would presumably be the price you turned down.

And then, I guess, related on that question, do you think that the current use is the best alternative use, given you're holding it for cash flow, or do you think there's still an alternate better use down the road?

I wouldn't, I guess I would say we have over the course of time and evaluating what other people have approached us with doing on that asset, both from a standpoint of their redevelopment or potential joint venture with us, that the marina alone is significantly underutilized. You have a 200 site marina, I think we get average rent, monthly rents of somewhere in the neighborhood of Roger Maynard help me.

$400.

$400 a month. Do some checking in the marketplace, what's going on in the marketplace is multiples of that. Now is our marina set up in a way to attract that valuation, given that it's currently operating a very transient RV property, where the guy isn't necessarily bringing his boat down to go use that facility. That's one of the issues we're dealing with internally, how can retain our property, and use it in a manner consistent with our business plan, and optimize the cash flow both from the marina and the RV sites.

Do you ultimately need to completely change the makeup of the guest at that site? Clearly it's a unique asset. It's an island. There's not another island like it, but it seems like that tenant base may not have the effluency to pay a higher rent, so you can sell it at a 3 cap to get to a 6 cap, to make it worth your while?

I would say, we don't think so at this point. We think that what we're doing right now operating that asset as a separate RV park and a separate marina, is a problem that is hampering our ability to cash flow the asset appropriately, but I think you can attract somebody there, on both the RV side and on the marina side. That will pay cash flows equivalent to the value of that real estate, and the value of that location.

So, I guess, thinking about your other opportunities, can you just list the large deals you're working on, which I guess would include Lazy Lakes?

We are working on, working, we have a property listed for sale on the east coast of Florida, vacant land. So that's out there. We are considering our options with respect to Lazy Lakes, the property in the Florida Keys, it's a smaller property. We are considering offers relative to approximately 26 acres of vacant land adjacent to our Monte Vista resort out in Arizona.

And we are evaluating options with respect to another parcel in Florida right now, that's currently a manufactured home community, but has been significantly impacted by hurricane damage, and we're evaluating what to do with that property on a go-forward basis. There may be others, but those are the ones that kind of come to my attention right now.

Do you have any, I guess, timeframe in terms of a window that was potentially opened for sale of these assets, you mentioned Del Rey was because of a fence? I would assume that's the reason, it seems like an expensive fence. Assuming that was the reason, talking to brokers down in the Keys, it sounds like they're a pretty hot market, but time is of the essence. Do you share that view? Or is that not your view?

From a brokers' standpoint, time is always of the essence, but long-term, trying to take an asset that's an island in the Florida Keys, and decide what you want to do with it, just because somebody's banging on you about the opportunity. We think long-term Florida Keys, boy, what a great place to own an asset if you can operate it in a portfolio that's like ours, wow, you might have something special going on there.

And we don't think long-term the other opportunities go away.

This is all like on a NPV or ROI basis, you looked at the different alternatives?

We can debate the value of NPV and IRR, if you like on what the right cap rate at the end, and what's the appropriate discount rate. I think that what we're saying is, we think that there's value in front of us, and we're going to go it.

So we should expect some meaningful cash flow out of at least the Florida Keys, Sunshine Keys asset?

We expect to be able to generate increasing cash flow out of that asset, yes.

Getting over to Privileged Access. I don't know if you talked about the transcripts, if you did, I'll look at the transcripts, but the assets you transferred over, not the 130 sites, but the other ones that are outside Thousand Trails, what's the lease structure on those?

It's modeled after the Thousand Trails lease, in essence they are leasing all of the property. I think the annual lease payment is $700,000 a year, which translates into I think a 6 yield on the capital out there. We've kept the lease short in duration, because I think we're going to renegotiate the terms, and the renegotiation is going to depend upon the execution of what we think long-term is the best use of those assets, whether it's more membership type activities, or some alternative situations.

And on the other 130 sites that you leased? If I remember, the answer to Craig's question correctly, you're not getting anything incremental from these, it's simply transferring over to a different strategy?

Yes.

Is there a fear that it would go the other way? Or what's your long-term upside on this?

Our long-term upside is bringing in a proven operator on a very transient customer base into our property, for purposes of stabilizing and taking our effort, focus and resources away from managing a hotel, which we're not really suited for. So one we're just freeing up resources relative to how we operate that asset, so we can focus on what we think we're very good at doing, which is selling homes, and creating long term cash flow stream. And two is to allow Thousand Trails to have access of a whole host of customers streaming through that asset, for purposes of selling their products.

Outside of that asset? Selling their products outside of that asset?

Yes.

And are you, given the improvement in their cash flows, are you participating yet given the original lease structure that you struck last quarter? Or is that still a ways off?

That's still a ways off.

Jeff, did you have any questions?

Yes, just briefly. Can you guys disclose how much your marketing the property on the East coast of Florida for, or the 26 acres of vacant land next to Monte Vista?

I think on the one of east coast of Florida is public. It's listed at the brokers at $28 million. I think the vacant land in Monte Vista is order of magnitude $400,000 an acre, in terms of the offers we've received.

Okay. And just briefly on the rent control issue. Just trying to get a sense of the upside at the Vienza property in California. My understanding is the litigation is complete there, and can you just give us a sense for what the up side is, sort of the mark to market?

At our Santa Cruz property if I remember my numbers correctly, we are turning over at the margin approximately $2,500, $3,000 a site. Approximately, again, $500 order of magnitude. It's roughly a $2,000 change. We have turned in the last couple of years, I think, 10 to 15 sites in the last 18 months give or take, I don't remember exactly, but that is the flavor for the upside there.

Okay. And then lastly, on Thousand Trails, Jerry had asked about the, I think, the rent hurdle. Can you guys give us the rent hurdle that has to be hit in order to get your participation?

The rent hurdle is on dues, as opposed to sales revenue. And I think that that hurdle is, you know, an improvement on order of magnitude 10% in their dues revenue. I think their dues revenue is about $40 million. I think the hurdle kicks in at 45, I may be off a little bit here or there, but I think that's generally where it is.

Okay. Okay. Thank you.

And your next question will come from the line of Aceeta of U.S. Bank. Your line is open, you may proceed.

Your next question will come from William Acheson of Merrill Lynch.

Real quickly, could you give us the acreage at the two Florida properties and Monte Vista?

Yes, usable acres as opposed to just acres I think is probably important. It's 30 some usable acres in the Florida Keys, and it's somewhere order of magnitude, you know, 6 usable acres in the Lazy Lakes property. I may be off by a little bit off there. In Monte Vista, it's about 26 acres that we're talking about.

26 --, the Florida property that's listed for $28 million --

That's about 100, usable acres it is about 130, there's a lake on the property.

Okay. And then how about the Florida property that already has a manufactured home community on it?

About 20.

About 20 acres.

Okay, thank you.

And your next question is from Richard Paoli of ABP Investments.

Hey, guys, just a couple follow-ups. First, in your prepared remarks, your reference to the LIBOR contract. Could you just reacquaint me with what's going to go on there. Did you have a rate lock that expires in '07? And then also just a quick review of where, I guess, interest rates had to be for the total recap that you guys did a while back to make sense. And where we are versus that today?

Sure. With respect to your first question, we did one year LIBOR when we put our line together back in December of '05. And given the renewal, we are effectively maintaining that rate through the middle of December, which is the one-year renewal. I think the LIBOR that we locked in was about 4.5 or 4.75, so we get the benefit of that remainder through the end of the year, which is why we rephrased that in the press release the way we did.

With respect to our recap, we locked in back when we did that transaction, our Treasury Yield was slightly higher than 4 or 4.25. And our breakeven at the time was a 60 basis point move. And I haven't looked in the last couple of days, but I think we're in the money.

Okay. One other quick question. This is just a follow-up on Tom, your comments earlier. You said that on Privileged Access, I think it was Thousand Trails you were referencing, you were saying sales were up, and then you also referenced EBITDA. Which was up 50%? You gave me a $2.5 million, saying it was 50%.

Sales are up 55%, and that's essentially falling down to the bottom line EBITDA, creating a 47% increase in EBITDA.

Okay. Thank you.

Gentlemen, you have no further questions at this time.

Thank you for joining us on the call. As always if you have follow-up questions, feel free to call Michael Berman, and we look forward to speaking with you after our third quarter. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference, this concludes the presentation. You may now disconnect, have a wonderful day.