Equity LifeStyle Properties Inc (ELS) 2006 Q4 法說會逐字稿

Good day, everyone, and thank you offer joining us to discuss Equity Lifestyle Properties' fourth-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. Today's call will consist of opening remarks and a question-and-answer session with management relating to the Company's earnings release.

As a reminder, this call is being recorded.

Certain matters discussed during the conference call may contain forward-looking statements in the meaning of 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 subsequent events.

At this time, I'd like to turn the call over to Mr. Tom Heneghan, our President and CEO. Sir, over to you.

Thank you. Thank you for joining us as we recap our performance for 2006.

First, I would like to discuss the changes to our portfolio during the year. In the first half of 2006, we announced that we consented to the transfer of Thousand Trails Operating Company, the lessee of approximately 59 properties, to Privileged Access. Since that time, ELS has acquired and subsequently leased to Privileged Access both the mid Atlantic and the Outdoor World RV membership properties. These 22 properties greatly improve the ability of Privileged Access to leverage the Thousand Trails operating platform, opening up additional access along the East Coast of the United States. With new locations outside the metro areas of Boston, New York, Baltimore and Philadelphia, Privileged Access and ELS now have greater exposure to the highly populated areas for new customers. In addition, with locations near Cape Cod, Cape May, Chesapeake Bay, the Poconos, and Pennsylvania Dutch country, these properties deepen the ability to offer customers a coast-to-coast experience.

Importantly for ELS, these acquisitions were also very attractive real estate investments. At a total purchase price of approximately $23.5 million for over 5500 sites, we believe the $4200 per site acquisition cost reflects a steep discount to replacement cost and the underlying value of the real estate.

We also acquired our outside partners' interest in various joint venture properties during the year. These transactions brought an additional 15 properties and over 6700 sites into our existing operating platform during 2006, primarily in the important markets of Arizona and Florida. In addition, we also reduced our exposure to non-targeted properties and markets by disposing of two family assets in Indiana containing approximately 500 sites and selling our mezzanine investment in a portfolio of 11 properties and 1900 sites located primarily in Michigan and Ohio.

From an operating standpoint, 2006 was very gratifying. It marks the first year since 2000 where our communities finished at a higher level of occupied sites than where we started the year. It helps that we had no significant hurricane activity, but our operating people performed remarkably well.

For our resort properties, the second half of 2006 reflects an operating team hitting its stride, overcoming a slow start in the beginning of the year to finish strong in the fourth quarter and head into the busy winter season of 2007. We have also successfully assimilated into our operations all of the acquisitions.

Our one area of disappointing performance was in our sales operation. The ability for some of our potential customers to sell their existing residences and higher home insurance costs in Florida contributed to a loss or delay in some sale transactions. However, most of the poor performance in 2006 in the sales operation was self-inflicted. We need to make better inventory purchasing and sales and marketing decisions and have set about our focus on doing so.

Overall, I am extremely pleased with our performance and the direction of our company. We have an exciting combination of great real estate and an operating company that is capable of meeting the lifestyle demands of active adults with a variety of location, housing, and usage options. We look forward to a very successful 2007.

With that, I'd like to open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS). Jonathan Litt, Citigroup.

This is [Skyler] (indiscernible) with (indiscernible). I was wondering if you could give us some color as to what should be the (inaudible) new run rate for 2007.

It would be around 15.5, 16 million, Skyler.

I guess I also noticed that you lowered NOI guidance for 2007 by (inaudible). It seems to be expense-related. Could you give us some indication as to why that change was made?

We kept our expense budget the same that we had previously when we talked in October, and that resulted in--it was purely math on the NOI growth rate.

Okay, thank you.

Michael Gorman, Credit Suisse.

Could you just walk us through a little bit more on the home sales, maybe clarify what exactly you mean by improving the marketing strategy and the inventory purchases and also I guess sacrificing profitability to move through the inventory. Are you done moving through the inventory that you wanted to get out, or is there going to be some more spillover into the first half of '07?

We've moved most of the inventory out. We have a few remaining homes left and Florida and Arizona, but for the most part, it was in the Park model. Sales were--we're still learning this business and we put in some higher-priced product in Arizona and Texas that we found out now just won't sell. We are seeing good results in January already where we put in a lower-priced product in those markets and have started to sell.

Florida was kind of the opposite. We put in some lower-priced product and got burned on that. People in Florida just wanted a higher quality product than we had put in. We've sold off most of that inventory also.

Okay. Was the Arizona issue, do you think, related to the slowdown in the housing--residential market, were you guys bumping into that as an option in that price range?

No, really it was just the selection of the product that we wanted to sell. We started out with a view of the higher-cost, higher-priced product that frankly just was not a product that our customers were looking for. We find that the price point that they're looking for is much lower than the 50 to $70,000; it's more in the 30 to $50,000 range. So we just had to adjust our inventory accordingly to a priced product that would reflect that marketplace.

Okay. Could you just walk me through the rationale for purchasing the JV interests? I mean, does this reflect on the acquisition opportunities that are out there, or do you guys have an expiring option that you wanted to take advantage of? What was going on there?

There were two things going on, one the mezzanine, which was an--the relationship we have with the joint venture partner is long all the way back to the late '90s. He was with the [Ellenberg] portfolio which was a portfolio we bought back in 1998, so we've had a long-standing relationship with this partner. We have bought a number of properties from him; I think we would continue to do so. We termed a stand-alone sales transaction into a long-standing relationship where we are allowed to joint venture with them on successive deals with the eye to eventually acquiring those properties, and that's what we've done here.

Then I guess just two quick final ones--can you just give us a status on the four properties that are under negotiation for sale and I guess sort of a time frame for closing? Also does the sale of Lazy Lakes and the price that you got on that, does that impact at all your math on what Sunshine Key is worth in the portfolio versus putting it out on the market?

I will let Michael talk about the properties we are holding for sale. I will talk a little bit about Lazy Lakes. First, let's get an understanding of the property itself. It's located in the Keys but it is a challenged property in terms of usable acreage. We believe that the usable acreage in that property is approximately 5 acres, so on a price per usable acre execution, it was in the 1.6 million per acre price range. In addition, it had 100 sites at the property but most of those sites were challenged with respect to the ability to put anything on them other than a small camper. So we had looked at redoing that property to accommodate a larger unit or a park model or a cottage or even a manufactured home, and based on that analysis believed we could put in about 50 units. So from our perspective, what we did was sell a challenged asset that may have fit into our portfolio but just because of the real estate itself made it a challenge to make use of it, it also had some impact from the recent hurricanes that would have resulted in significant improvement necessary to return the infrastructure to a long-operating condition. So we sold what we believed a 5 acre parcel that had approximately 50 usable sites for $8 million.

I would say that the transactional activity out there and demand for unique locations I don't think has changed. What has changed is the risk profile of what a buyer is willing to do in pursuit of those transactions. What I mean by that is whether or not they're willing to go hard on a significant amount of money, or whether they want some options built into the contract that will allow them to get out from various contingencies. That's more the flavor of what's going on on some of those special real estate locations.

With respect to the four properties we mentioned in the press release, Del Rey, which has been prior topic of conversation, we currently have communications with the city about how to move forward. With respect to the other three properties, we continue to receive interest from time to time. It is properties that we think we're going to achieve good prices over the long-term, but given where the markets are right now in terms of the demand for these kind of properties, we continue to have them being marketed for sale.

Okay, great. Thanks.

David Bragg, Merrill Lynch.

Good morning. I was just looking for an update on the Thousand Trails business over the last nine months since the arrival of Joe MacAdams, including the increasing number of members and your efforts to reach the $45 million break point.

Yes, let me just give you an update on the trailing 12 preliminary numbers. I think that's what I have available to discuss today. On a trailing 12 EBITDA, before lease payments, we think that the business is going to end up in the 28 to $29 million range with a lease coverage of about 1.6. Now, the Outdoor World addition to that happened in December, so that really is not reflected in this trailing calculation.

With respect to members, the existing portfolio had about 115,000 members, but the Outdoor World transaction added an incremental, say, 25,000 members to that total count.

I'm a little hesitant to talk about what it means to the 45, because we haven't fully negotiated through all the lease provisions on the new acquisitions. We have a short term, in essence an annual lease. What we're trying to work out is what's the long-term relationship we want to have with Thousand Trails on the Outdoor World portfolio.

Okay, thanks. Also, could you update us on cross-selling initiatives, including the whole ownership program that you discussed last quarter?

Yes, there's a whole ownership program that has been tested down in a property in the Houston marketplace on Lake Conroe. They are on expectation; they expected to sell about two per month. I think they've to date to sold ten units at that location, so they are in line with the expectations. I think what Mr. MacAdams would say as he looks at that business is he understands it's a viable and useful product in the Thousand Trails platform, and we're going to trying and see what we can do next with respect to implementing that in other locations.

Okay, thank you. Then just another question on the occupancy increase in the MH segment. Where are you seeing the strength? Is it continuing to come from Florida and Arizona, or are there other markets that are improving as well?

It mostly was in Arizona. We had to pick up some in Florida but most of that was in Arizona.

Okay, thank you.

Paul Adornato, BMO Capital Markets.

I was wondering if you could talk about your yield management initiatives as it relates to your seasonal and transient business and how that turned out in the fourth quarter.

Yes, I think what we should discuss before that is the impact of a particular property which I think we've discussed a number of times on the call. Historically, it's Tropical Palms. For the benefit of everybody on the call, Tropical Palms is a 500-site property outside Disney World in Florida, Orlando, Florida. We are trying to reposition that asset. It has a very transient, hotel-like nature to the revenue streams. We've discussed a number of initiatives historically about repositioning that asset to create areas where we would have annual customers buying cottages. We've also tried to reposition the very hotel-like rental cottage program going on there through a lease with Privileged Access. So we can talk about that a little bit if anybody has any questions on it, but taking Tropical Palms out of the analysis, I would have to say that we have done a very, very, very good job implementing some of our yield management.

For the fourth quarter, without Tropical Palms, annual site revenue is up about 8%, seasonal site revenue is up about 6%, and transient site revenue is up about 5%, so pretty strong numbers across the board. I would say that, as we migrate our customers from transient to seasonal to annual, keep in mind a couple of things. As we gain more annual customers, that's a benefit that I like to say keeps on giving throughout the year. Once you get that annual customer in there, it's not just a revenue impact on the first quarter but it's a revenue impact that will accrue throughout the year from that annual customer. The seasonal customer is one we want to move into that annual position, and the transient is what we want to feed off of to replace that seasonal.

So depending on what we're doing and how we are executing at a particular property, you could see some sloppiness I guess I would say as you are migrating customers back and forth across those different pools. But the fourth quarter certainly shows success on all of them.

Excluding Tropical Palms, are you happy with your product mix between transient and seasonal? Do you think that transient segment is cost-beneficial?

Well, we think the transient business is the feeder to everything else, so we're mindful that we need to keep our properties vibrant. I would say that, for the most part, we think we can go higher on the annual and seasonal count and still keep a vibrant seasonal component within our portfolio.

Okay. Switching to insurance, any comments or thoughts on the Florida State legislation that's happened this week?

You know, the state is continuing to trying figure out the insurance needs for homeowners. It's clearly an issue with respect to selling larger homes down there. The Florida Manufactured Home Association is working on its own private company that we've had a good dialogue with. So keep your fingers crossed that they're going to do something positive.

Okay, thank you.

Dave Rodgers, RBC Capital Markets.

The first question, Tom, could you clarify a couple of comments that you made towards the beginning of the Q&A session? First, on price points in Arizona and Florida, can you quantify kind of what (indiscernible) numbers those were at where you thought you were off?

Yes, in big box cars, as we look back at the year, we kind of separated out our successes from our failures. Roughly half of our activity on the Park model sales or cottage sales business we'd have to classify in the failure category, just mispricing the product in terms of the cost of the product the customer was willing to pay. The other half was done at the reasonable gross profits.

Then in terms of delays versus cancellations, do you have a sense of what percentage of cancellations and how that compares historically?

No, other than anecdotally. I think we need to do a better job getting our arms around what happens when the single-family home market slows down. I mean, I would say, first of all, we think we are a business that's very competitive in the marketplaces in which we operate, Florida and Arizona, so when we're talking about the impact of the single-family housing market, what we're talking about are kind of specific trail-off issues of that, one being the quickness with which a customer can sell his single-family home, and the feeling he has with respect to the proceeds. I think we benefited on our higher-priced, higher-margin product in the state of Florida from a customer who was quickly selling his single-family home at a very favorable price and was using some of those proceeds to buy an otherwise higher-first product down in the state of Florida from us that also had a higher margin.

I think that, when you look at it again, whether or not we could still be competitive at a lower priced product as that seller readjusts his expectations and maybe doesn't feel as good, I would have to say the answer is affirmative. We think we can still sell a product in Florida that's very competitive and still leaves us with reasonable gross profits.

The second issue in the state of Florida is the insurance issue. As the cost or the price of the home increases, the cost of insuring that home and even the availability of the insurance on that home become a factor. The poster child for this for us this year was Coquina Crossing, a property we have up in the St. Augustine area of Florida. We had two issues, one being the single-family home market, the typical customer coming out of Coquina Crossing is a downsizing customer. The other issue, given the price points we were hitting in Coquina, insurance and the availability of insurance became a factor. So volume from Coquina between 2005 and 2006, Roger, was--?

53 in '05 to 30 in '06.

So we decreased 20-some units. Our gross profits on those units are in the average neighborhood of $20,000, so that was an issue that affected the 2005-2006 comparisons.

A specific cancellation rate, not something that you have or do you have that number?

No, I don't have a specific insulation rate.

Okay. Maybe a couple of questions for Michael. Michael, in terms of your changing thoughts on margin, in terms of the--or not changing margin but marketing and the homebuying, any chance to thin out the home selling expenses or is that number pretty firm?

No, I think we're looking at our overall operations; we're looking for efficiencies. We're looking to--we are reevaluating marketing dollars that we've spent and analyzing the effectiveness of it. We certainly anticipate reducing the run-rate on the selling expenses.

Can you comment on the margin on the new home sales? I know it was most of the sales in the quarter but do you have a specific number for that?

Not with me.

Okay. Then finally, the remaining reservations for the kind the peak season here as we are getting through it, do you have a sense? Has the reservation count changed at all?

We're doing very well on reservations for the first quarter. I would say that based on reservations as we sit here today, we are already ahead of last year on two line items, both the annual and seasonal line item. So how good the quarter is going to be really kind of rolls down to how strong our transient traffic is. Thus far through early January, transient traffic has been very good so we're sitting today feeling pretty good about what we've accomplished as we enter into the season.

Thank you.

Art Havener, A.G. Edwards.

Thank you. In the past, you've provided some same-store performance based on a regional breakdown. Can you provide any breakdown on, regionally, how you've done in '06

I will have to get back to you, Art. I don't have that in front of me.

I can give you some color. There was, on the community side of our business, it was strong rate growth across the portfolio. There were very few areas that had less than 4%, and that would primarily be kind of Colorado and some of the more family-oriented locations. But on the age-restricted and Sunbelt locations, we had good rate growth. As Roger mentioned, the occupancy gain came out of Arizona.

On the resort side of the business, strong results in both Florida and Arizona, especially as we enter into the fourth quarter. As you'll recall, Art, we had a little issue in the first quarter of 2006 where we got kind of bit by utility costs that we didn't really pass through to our customers. We think we've resolved that problem as we head into the first quarter of 2007. We don't see the same increase in utility expenses that we saw last year. So I think, overall, we like the businesses in the areas we are in, good growth out in Arizona, good growth in Texas in the fourth quarter here, good growth in Florida.

Okay. I know, in your guidance, you don't include the change in occupancy, but are there any locations or specific properties that you're concerned about that might impact your net occupancy for '07? Because it kind of seems, with your home sales and the way things are going, that could be a pleasant upside in '07.

I would agree with you, Art, but let's all remember, in order to gain occupancy in this portfolio on the community side of our business, it comes essentially from home sales activity. Given our performance in 2006, you know, we sold close to 700 homes and gained 100 sites, so it takes a lot of home sales. Why is that? Because many of the home sales we do in our portfolio are replacement of some of the older housing stock, so it has to be a pretty strong sales volume to lead to incremental occupancy gains. But I do agree with your initial comments.

Okay. Can you give us an indication of what your inventory balance stands at, at the end of the year, of homes?

Yes, it's approximately--for all the inventory pieces that we have of new homes, it's around 45 to 50 million and the overall balance is around 65 million.

Okay. Do you still have the outstanding note with Thousand Trails?

Yes. (multiple speakers).

Yes?

Yes.

Okay, thank you.

(OPERATOR INSTRUCTIONS) David Harris, Lehman Brothers.

A quick question on the resort (indiscernible) business. I know, in the past, we've talked about this business' lack of sensitivity, it seems, to oil price changes, gas changes. Do you have any concerns that a slower economy might impact the business? I think most economic forecasters are forecasting at least a modest slowdown in the economy. But I just wondered what your take is on the business as you get a little bit more comfortable in terms of understanding the business dynamics of the cycle.

I guess I would start with, let's just recall that what we are dealing with on our side of the kind of the RV exposure business is the installed base, and the installed base is rather large. Let's call it 8 million RV owners out there. There has been and we expect there will be marginal changes on the sales of RVs. I think the 2006 actual sales of RVs were down over 2005 modestly. Concerns with respect to the availability of the price of gas and the general economy I think will affect, marginally, those sales. But from our perspective, sitting there servicing an installed base, what we really focus on is what are our customers wanting in terms of their experience. From the perspective of a person who is near-retired or essentially retired and looking to enjoy life, some of the economic macrofactors become less of an issue compared to what his individual desires are. We have focused on creating an experience in our location that is geared to meeting those lifestyle expectations, those lifestyle needs, whether it's the concert series, whether it's the tournaments and what have you. Once you get into that lifestyle, that's a hard lifestyle to give up and then stay home for the winter season and stare at the TV, even if there is a little general economy hiccup, not to say that it doesn't maybe affect it, but I think we like the installed base and our ability to service that installed base.

Okay, thank you.

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

Thank you, everyone. As always, if you have any follow-up questions, feel free to call Michael, and we look forward to our first-quarter results and our upcoming earnings release. Take care.

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