Equity LifeStyle Properties Inc (ELS) 2006 Q3 法說會逐字稿

Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties third quarter results. Our featured speakers today are Tom Heneghan, our President and CEO, and Michael Berman, our CFO. In advance of today's call, management released earnings. Today's call will consist of CEO remarks and a question and answer session with management relating to those specific announcements. As a reminder, this call is being recorded.

Certain matters discussed today in the conference call may contain forward-looking statements in the meanings of the Federal Securities laws. All 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.

At this time, I would like to turn the call over to Mr. Tom Heneghan, our President and CEO. Please proceed.

Thank you. Good morning and thank you for joining us today. Before we open it up for your questions, I'd like to make a few comments about our business as we head into 2007. We are seeing improvements in most areas of our business that we believe will translate into strong operating results. In our manufactured home communities, there is a noticing procedure with respect to our annual rent increase process. We have noticed approximately 50% of our residents through today and expect that by year-end, that number will exceed 70% of our residents. Higher year-over-year CPI data is contributing to our 2007 rate growth.

We also have a positive occupancy trend in our core markets of Florida and Arizona. The 120-site improvement in third quarter occupancy is the largest quarterly increase in approximately six years. Although only one quarter of activity, this trend makes our guidance assumptions of stable occupancy in 2007 appear reasonable.

Our 2007 annual revenue in our resort business looks solid based on existing reservations in our system. In addition, we continue to drive seasonal and transient resort activity in a positive way. Once again, we are ahead in first quarter reservations compared to this time last year.

Utility increases appear to be moderating in 2007 and we have taken steps to recover these costs where appropriate. As you know, double-digit increases in 2006 have negatively impacted our results.

Also during 2006, we have taken steps to reduce the potential volatility in our highly transient resort near Orlando, Florida, Tropical Palms. These efforts have been a drag on resort performance in 2006 but 2007 should show improved comparisons.

Also, our property management platform, which grew significantly over the last few years, is expected to show more modest year-over-year expense growth.

Finally, our lessee, Thousand Trails, under the new ownership of Joe McAdams, continues to perform well ahead of the prior year. ELS in Thousand Trails are currently testing products that we believe will be attractive to our core customers.

In short, we are actively managing our business to positive effect. I'd like to thank and acknowledge the significant effort put forth throughout our organization. I am very pleased with the progress we have made to date. And now I'm happy to open it up for your questions.

[OPERATOR INSTRUCTIONS] We'll take a question from Mr. Art Havener, A.G. Edwards. Please proceed, sir.

Good morning. Can you give us an idea of how much free cash flow after principal amortization you're expecting next year and what your forecast of use of funds would be?

With respect to free cash flow, it would be, this year is about 45 million plus a marginal change, be about 55 million next year, Art. With respect to use of proceeds, it's a similar discussion that we've had in the past. Potential acquisitions pay down the line and subject to the board conversation about dividends in November.

Okay. I mean, have you incorporated any kind of -- you haven't --

We've included within the range a modest amount of assumption with respect to free cash flow.

There are no acquisitions assumed in the guidance. There is, in essence, a pay down of the line.

Okay. Did you guys ever figure out a return on investment of your College Heights that you sold? Or any kind of IRR?

I can't quote an IRR, but I can kind of walk through the transaction for you, Art. Maybe that will be helpful. We invested in College Heights back in 1998. I believe we invested $19 million, primarily a portfolio in the upper Midwest or Ohio and Michigan. There was one property in that portfolio, a 300-plus site community in Clearwater, Florida called Down Yonder. We restructured the relationship with the operator in, I believe, 2002 and were able to pull that high quality property out of that portfolio at essentially the book value of the original investment. It was a fairly good transaction for us. So we were able to take that out of book value, reduced our remaining basis in the venture somewhere around the 10 million mark and we've been getting somewhere around a 10% return on our money and got all of our money back this year. That's effectively the summary of the transaction.

Okay. I'm sure this question will be asked by somebody else but on the Thousand Trails, do you have an update on how the operations are going? Is Joe McAdams successful in improving the EBITDA?

Yes, he continues to exert positive effect on that business. For the six months that he's been operating the business, EBITDA is up approximately 4 to $5 million at about 40, 42%. On a trailing 12-month EBITDA basis before the lease payments, I think he's at about $23 million. That is essentially all of last year's number and he still has a quarter left so we expect him to continue to perform well with that business. He is working on a number of initiatives. I don't think everything has gone as quickly as Joe would have hoped but his impact on the business has certainly been positive to date, and Joe and ELS are working on testing a couple of products on both the Thousand Trails properties and in the ELS properties that we believe, if tested successfully, will help both of our businesses.

Without getting into too much detail, can you provide kind of what these initiatives in cross-marketing ideas are or concepts?

Yes, sure. I can give you some specific examples, Art. In the Thousand Trails properties, we are testing a whole ownership program where existing members in the Thousand Trails system, who are seeking a second home or a vacation home or a weekend home apart from their RV experience, would be able to purchase a resort cottage in an existing Thousand Trails property and continue to enjoy the benefits of the lifestyle and the activities and amenities within the Thousand Trails resorts while also using it as a second or weekend home. We have tested that thus far in a property in Texas right outside of the Houston market, Lake Conroe. We started it in September. I think the total program as a test basis was about 26 or so sites. I think they've sold somewhere in the order of five, plus or minus, thus far in terms of sales of resort cottages. To the extent that test works, we expect to roll it out in a few other resorts within the Thousand Trails and also begin looking at evaluating the vacant land in those vicinities where we have successfully tested the product. For example, at Lake [Conroe], if the test works out, we have an ability to expand that property by over 200 sites easily and we would expect to go and move forward on that project.

Other things we are testing is on the ELS properties, Joe is attempting to lease some of our sites in our resort properties to introduce a fractional or membership type product on our sites, similar to a get-away product that has been proven very successful in the Thousand Trails business where customers would be able to purchase a membership or an interest in one of our resort cottages that would allow them to gain access to that resort cottage for a week or two weeks in a particular year or up for, say, a ten-year period. The lease that Joe is going to initiate with us to place those cottages is going to be a market-based lease. So those are two of the products. We've got a number of other ones, Art. I could keep going but suffice it to say there's some active conversation between ELS and Thousand Trails.

Okay, great. Just real quick on the home ownership test in the resort cottages. What are you selling the homes for?

I think the price points are in the $70,000 range.

Okay. Great.

Okay.

Thanks a lot.

I'll take our next question from David Bragg of Merrill Lynch. Please proceed.

Yes, good morning. Could you walk us through the asset related transactions section and the related $0.04 gain. I know you have the $1 million deposit in there, but what are the other components and also, in connection with that, what were the pursuit type transactions that you looked at and decided not to go after?

Essentially would be the line of detail going on in the other income to make it easy for you. Del Rey was $0.03. College Heights gain was about $0.03. The transactional activity was $0.02. That's the $0.04 we put in the press release. With respect to the transactional activity, that's just things that we have been looking at, seeing and decided not to pursue. Nothing in particular in there. The rest of it, we could deal with the details off-line if you like, David.

Okay. Thanks. And can you provide an update on the Del Rey asset in New Mexico?

Yes. We currently in an agreement with the city of Albuquerque where we're going to try and find another buyer for the parcel, working with the city in connection with that evaluation and marketing, and given that it's still in that stage, not really ready to release anymore information other than that.

Okay. And finally, considering -- you mentioned occupancy gains in Florida and Arizona. I was looking for more detail on Florida given the pretty quiet hurricane season, how has that impacted occupancy there and looking forward to '07?

Sure. We've had two successive years, 2004 and 2005, where the hurricanes have negatively affected occupancy in Florida to the tune of about 500 sites in total, would be my guess. Some of that occupancy loss was actually coming through in the first half of 2006 this year in Florida. So what you saw happening in Florida was a masking of a fairly robust positive trend line due to the losses created from the hurricanes and I think you're seeing it show up now that we haven't thus far had a hurricane in 2006, and we've also had some very strong positive trends coming out of Arizona as well.

Okay. Thank you.

I'll take our next question from Michael Walker, Credit Suisse. Please proceed.

Yes, good morning, guys. I just had a question on the expense front. Seems like the expense growth was pretty tame in the third quarter, 3.1%. What are you guys seeing that is forcing you guys to take the expense growth back up again in 2007, 4.75 to 5.25, what are you seeing on that front?

We had a couple of one-time, small one-time things that hit us in '05 that impacted the Core growth rate on the expenses. The fourth quarter is going to be similar to the rest of the year. The third quarter was a little bit of an out lier. We continue to see negative trends in utilities, real estate taxes and insurance. In '07, we think the utility growth rate is going to moderate from call it 10% down to 5, but we expect real estate taxes to push us back up. Overall in '07, our expenses are ticking down 25 basis points in our guidance.

Got it, and just to follow up on that, on the utilities and insurance specifically, I guess the 10% or the 5%, is that something in the marketplace or is that related to your unbundling activities? And then just how are you proceeding in looking for alternatives to the third party insurance, especially in the Florida area?

With respect to utilities, we have, I think we mentioned last time, we have an outside firm that is helping us with respect to looking at all our different utility expenses and helping us clear our crystal ball a little bit and working with them we see, in particular down in Florida, given the lack of hurricanes, the whole world is expecting a lower utility expense growth rate. I mean, the hurricanes drove a lot of that growth in '06 versus '05 so that's why we're cautiously optimistic with respect to that growth. With respect to our unbundling activities, we look forward to 2007. We are unbundling at a number of properties that should mitigate the expense growth and also looking to pass through some of our costs to our customers.

Okay. Great. Thank you.

I'll take our next question from [Lloyd Hashton] of Merrill Lynch.

All right, good morning. Thank you. Just to be clear, the 800,000 joint venture gain, that is College Heights?

Yes.

Okay. And then there is $0.02 of other transactions?

$0.02 of costs, whole deal costs.

Okay, got it. On the home sales margins, down about 500 basis points year-over-year. I'm guessing, since the sales price of the new homes were actually up, that this has to do with the margin on the used homes?

Effectively what's going on for us in this particular quarter, and we don't think overall it's going to be representative of our results, but let's just talk about what happened in the third quarter. In '05 and early '06, we made a concerted effort to increase the number of park model sales throughout our portfolio. The way we did that was to give a number of places the opportunity to make those sales. In our upcoming season, seeing where we were with respect to how many unsold homes we had, we made a concerted effort to move them and focus our energies on getting higher annual rates, those go into our Core property revenues and are something that we focus on. And the mix inside the portfolio is shifting towards the park models versus the manufactured homes. We continue to sell manufactured home communities at similar volume levels, similar gross profits that we've had in the past. But the overall mix is changing to where the park models are moving up as a percentage of the whole and their gross profits are 75% less at the margin than the manufactured home communities. So we pushed the field to sell more homes more quickly and we also have a different mix going on. It was -- I think in the home price of the new homes was down quarter over quarter reflecting that mix.

Okay. Okay. That's a good answer. I'm sure other people on the call might be interested in this, but where do you feel your manufactured home product fits within the context of the slowdown in the site built home sales nationwide? It's just an interesting offset. It doesn't appear to be directly correlated.

Well, I guess I'd answer that question kind of with a view of our performance historically. We have initiated programs going back into 2000 where we intended to be able to sell a new home in literally any one of our communities throughout the United States. That was a sea change because before that, most of the new home sales volume came out of new developed sites. So we focused on replacing some of the older housing stock in our existing communities and to date, we've been nothing but incredibly successful in that effort and successful, I might add, in a period where if you were going to be buying a home in Florida or Arizona, some people would look at you askance as to not buying the underlying real estate because the very robust and speculative frenzy that was going on within those marketplaces. We were experiencing double-digit growth during that time frame in volumes in those locations and we believe we were doing that because to an intelligent, sophisticated buyer, we offer a high quality, detached, single family home experience without having to outlay the capital to buy the underlying real estate. So on a going forward basis, if you're more concerned about putting your capital in the underlying real estate on a comparative basis, our product and our price point, if you still want to enjoy the Florida sun or the Arizona sun, incredibly attractive in comparison.

Okay. You wouldn't happen to have the sales margin on just new homes available?

Gross profits in general on new homes for the MH or call it 10 to 12,000 a home.

And then finally, are you guys going to be presenting at NAREIT? I'm just, the timing of your investor presentation tomorrow just made me curious.

We are planning to be at NAREIT, Bill.

Okay. Thank you, sirs.

I'll take our next question from Paul Adornato of BMO Capital Markets.

Hi, good morning. Are there any acquisitions in 2007 guidance?

No.

And maybe you could just comment on the acquisition environment in general. Are properties trading? And if so, what cap rates are you seeing for the various property types, resort versus age restricted communities?

I guess I would say that there isn't a heck of a lot of transactional activity out there in the marketplace, that there is a divergence that has occurred over the last couple of years between all-age, affordable housing communities located in, call it the Midwest and low barrier markets. There's been some challenges with respect to those asset classes in terms of occupancy and gaining financing for customers. It has impacted our portfolio, mostly in Denver, and we've also had some properties we've sold out of that business. With respect to the age qualified and what I would call the lifestyle focused assets, still strong demand for that property type in Florida, Arizona, California. The number of transactions that occur is fairly minimal but the pricing on those transactions can be very aggressive.

Okay. And anything to point to on the resort property front?

In terms of the resort, there's almost no difference or distinction in the sunbelt areas on a cap rate analysis between a high quality resort community and a manufactured home community.

Okay. Thank you.

I'll take our next question from John [Witt] of Citigroup.

Hi, it's Craig Melcher here with John. On the home sale business for next year, in the guidance you said that the income you expect to be similar levels to '06. But what do you expect the gross revenues to be and how margins are expected next year versus this year?

I would leave it as similar to what we did in '06. We're finishing up our final budgets and I couldn't tell what you the gross revenues were, per se. I would expect them to be similar to this year, though.

Okay. But with more park models, could that make the margins slightly lower than what you experienced in the first half -- ?

Yes.

Okay. In the margins, you mentioned 75% less margin. I'm guessing that's an absolute.

We talk about the manufactured home communities as 10 to 12 and the park models as three to four kind of numbers.

Okay.

Dollars, dollars. So it is absolute dollar amount that he's talking about, not a percentage margin.

Right, and do you know what that translates into on a percentage margin?

A typical park model or resort cottage sells at a low price point of 40, high price point of 70, with a gross profit four to five.

Okay. And last quarter you walked through some of the assets you were marketing and land parcels you were marketing. Can you give us an update on those and if anything is under contract at this point?

Sure. Del Rey, I think I mentioned earlier in the call, given that we're in an active phase of marketing the property, not really interested in discussing it at this point in time. With respect to Monte Vista, we have marketed the property. Monte Vista, for the benefit of everybody in the call, is a 832-site resort property in Mesa, Arizona, that has 50 acres of vacant land adjacent to it. On those 50 acres, we have approval to build roughly 500 plus sites, a combination of both resort cottage, RV sites and manufactured home or resort home sites. We've sent out the project for bids and we have some idea of what the costs would be to do that expansion and we have been in discussions with a bidder who priced half of the parcel, which we put up for sale. So 25, 26 acres was put up for sale at approximately a $10 million price and we're evaluating what is the better execution. One concern we do have with respect to a sale or entering into a contract for sale on the 25-acre parcel is whether or not it's going to close and if it does not close, whether or not it's going to delay our ability to start developing our assets. We believe it's a great asset. We'd be happy doing the development, but the price at which they have offered for the land is grabbing our attention so we're struggling with that issue and really haven't yet decided what we're going to do there.

And any of the parcels in Florida?

Bulow is still marketed, really no activity at all on that asset. We had a small asset, I think we discussed last time, Holiday Village, where I believe we've had an offer in there that we're evaluating. I'm trying to think of any other ones that we discussed. Lazy Lakes, which is under contract for $8 million for the benefit of everybody on the call, Lazy Lakes is about a 100-site property in the Florida Keys. That property is under contract for $8 million and is expected to close in December, January, upcoming months.

Thank you.

I'll take our next question from Dave Rodgers of RBC Capital Markets.

Good morning. Most of my questions have been asked but I did have one. On previous calls, Mike, I think you talked about additional seasonality that you had expected this quarter and obviously we saw some of that, didn't quite come up to the level that maybe you had expected. Can you address whether that seasonality from some of the recent acquisitions, I think it was in the Midwest, did come into play at all in the quarter?

Trying to guide everybody on seasonality in a changing portfolio mix has been a little bit of a challenge for me. Maybe the best way to address that is to talk about 2007 and how that lays out with respect to seasonality. Just to go through some of our fundamental assumptions in '06, we are taking our Core growth rate up from a range of 3.5 to 4%, up to 5.5, 6. Our '07 Core will be our '06 Core plus our '05 acquisitions. By the end of the year, we expect that to be about 180, $181 million of net operating income. When you factor in the growth rates that we have, and we can walk through the revenues and expenses if anybody has any questions, you get to about 190 to 191 for next year. If you add in our acquisition expectations, that's another 7, so call it 198 for income from property operations. Roughly 25 to 30% of that will come in in the first quarter. The rest of it will come in somewhat ratably so the seasonality effect in our portfolio is really starting to come through just in the first quarter for the most part.

Okay, and then the, I think the lease income you mentioned for 2007 related to Thousand Trails. Was that what you had expected initially or is that a little better than expectations?

Well, between during the year in '06, we increased the lease payment as a result of the sale of two properties to Thousand Trails so they leased another $10 million plus there's the uptick due to inflation that occurs so our lease payments are spot on to what we expected.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] We'll take a question from John Stewart of Credit Suisse.

Thank you. Mike, the $7 million of NOI from acquisitions you just referenced, is that '06 vintage acquisitions?

Yes.

Okay, just wanted to clarify that. Can you give us any update on your plans to potentially self insure the portfolio?

What we have been doing is doing our homework in the marketplace. The renewal season is coming up. We are keeping our fingers crossed that no more hurricanes hit. The insurance marketplace seems to be open in around Thanksgiving and closes about a month before Easter when all the activity comes for renewal. We are also pursuing other industry type programs and programs for ourselves. It's a little too early to give you too much information yet, John.

But this is an issue that -- it's not affecting just ELS in the state of Florida. So there are manufactured home communities, residences, other property owners and other real estate owners who are focused on this issue. I believe that there has been a committee formed by the governor down there to evaluate this issue and there are representatives from our industry that are participating in that committee so there's a lot of work going on. We're in the middle of it. We're trying to get smart and figure out what our options are.

Okay. Thank you. And then Mike, you mentioned that you have a modest free cash flow assumption in your '07 guidance. What does that assume in terms of dividend policy going forward?

It doesn't really assume anything with respect to dividend policy going forward. It assumes the current dividend is what is in next year's dividend. That is nothing more than a statement that says I don't know what it's going to be. Inside our guidance, I would say there is probably $0.03, $0.04 that we assumed with respect to free cash flow.

Okay. Thanks a lot.

At this time, I'm showing no questions. I'll turn the call back over to the presenters for closing remarks.

Well, thank you for joining us on our call. We look forward to updating you with respect to our final results for 2006 and highlight some of the issues that we're dealing with going into 2007. Again, we're very pleased with our performance. We think we're heading in the right direction and I look forward to speaking with you at the next quarter. Take care.

Ladies and gentlemen, thank you for joining us on the call. You may now disconnect.