Equity LifeStyle Properties Inc (ELS) 2007 Q2 法說會逐字稿

Good day, everyone, and 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. 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 this conference call may contain forward-looking statements under the meanings of the federal securities laws. Our forward-looking statements are subject to certain economic risk and uncertainty. The Company assumes no obligation to update or supplement any statements that become untrue because of subsequent events.

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

Thank you. Thank you for joining us today. Good morning. I am Tom Heneghan, President and Chief Executive Officer of Equity Lifestyle Properties. Before we open up for questions, I would like to give you my thoughts on our second-quarter and year-to-date performance.

Overall, our second-quarter results reflected the same trends discussed during our first-quarter 2007 conference call -- strong core performance and a difficult new home sales environment. Since core performance excludes any properties acquired during 2006 and 2007, I think it is helpful to discuss their impact on quarter-to-quarter and year-to-date comparisons.

Acquired properties contributed approximately $1.1 million and $6.1 million to the increase in second-quarter and year-to-date revenues, respectively, and approximately $2.8 million to the year-to-date increase in income from property operations. We continue to be pleased with the performance of these recent acquisitions. Our operating team successfully assimilated 17 properties and over 7000 sites into our operating platform, and their performance in 2007 is in line with our expectations.

With respect to our core portfolio, we experienced strong revenue growth of 6.1% for the year-to-date period. This growth reflects a year-to-date increase of approximately 5.7% for our community properties and approximately 7.3% for our resort properties. The core communities are benefiting from a 4.2% year-over-year rate increase, 50 basis points of occupancy increase, and higher utility and other pass-through income.

Average occupied sites increased by approximately 200 sites over the 2006 year-to-date period. In addition, since December 2006, occupancy has decreased about 14 sites through June 2007, mostly due to the impact of higher winter occupancy as a result of our seasonal rental program. Florida, California and Arizona account for over 80% of the year-to-date 2007 core community revenue growth.

The 7.3% year-to-date core revenue growth in our resort properties includes the results of Tropical Palms in Orlando, Florida. As many of you know, Tropical Palms is a highly transient property with a number of components, including RV sites, a cottage rental area and a recently established cottage wholesale area. Since its acquisition in 2004, we have taken a number of steps to lengthen the revenue streams at this property. These steps impact the results of this property and skew our overall resort performance.

Excluding Tropical Palms, core resort revenues in our resort properties increased approximately 8.2% year to date, with strong increases in annual, seasonal and transient components. However, transient revenues were down in the most recent quarter, reflecting the use of more of our sites for longer-term revenue streams in our northern destination properties. We also have benefited from higher pass-through income.

Our year-to-date core NOI growth of approximately 7.6% benefited from the strong core revenue performance. In addition, property management expenses in the first six months of 2007 were lower than the year-ago period. As we indicated in our first-quarter remarks, we believe this comparison is not indicative of the full-year comparison, where we expect property management expenses to increase. We also expect more challenging top-line revenue comparisons in the second half of 2007 resulting from the strong occupancy growth and resort revenue gains we experienced in the second half of 2006. Adjusting for these factors, we expect core NOI for the full year to be more in line with our current guidance of 5% to 5.5%.

Our sales operations continue to be down in the second quarter of 2007. The main factor impacting the results were lower new home sales volumes. The ability of potential customers to sell their existing single-family home and the availability and cost of homeowners' insurance in Florida continued to negatively impact our sales efforts.

We are pleased with the performance of Privileged Access and the Thousand Trails operating platform. However, as with our core portfolio, we expect Thousand Trails' performance to encounter more challenging comparisons in the second half of 2007 due to their strong increases in the second half of 2006. We are also currently in discussions with Privileged Access regarding ways in which we can benefit from their sales and marketing platform and overall expertise in the RV business.

Finally, our preliminary guidance for 2008 reflects a stable operating environment impacted by the lower CPI-driven increases in our community business and our view of a continuing challenging environment on the new home sales front.

In summary, our business is performing well, and we have a positive view of our short- and long-term prospects. I think now would be a good time to take your questions.

(OPERATOR INSTRUCTIONS). Jonathan Litt, Citigroup.

It is Craig Melcher here with Jon. Tom, I was just looking to get a little bit more color on the initial 2008 guidance. Do you have any of the drivers underlying that with the NOI growth or the home sales income?

I would say the emphasis is on preliminary with respect to 2008 guidance. We are still in the process of our budgeting for 2008. What we did see and what we did want to communicate to our investors and the public were two issues that we think we are going to be dealing with in 2008, the first being a much lower CPI number that is used to gauge the increase on much of our community-based rental income, and the second is a continuing challenging environment in the single-family home and the resulting impact on our ability to sell homes in our communities. So those are the two issues we think were noteworthy of raising and that we're trying to communicate with respect to the preliminary guidance. I think beyond those two issues, we feel we have a very strong operating platform. We continue to see good results in our resort business in terms of our ability to increase the efficiency with which we can use the sites, and we continue to look for ways to gain occupancy in the community side of our business.

So if [you use] guidance for the second half of '07 to get to that NOI growth of 5% to 5.5%, you need to set up around 3% NOI growth in the second half?

Yes, that would be a good estimate, Craig.

And can you expand a bit on the CPI-based increases in the revenues on the community side? How much flexibility do you have going beyond or different from the CPI number?

Approximately 50% of our MH revenues are directly tied to CPI, and as a practical matter, almost all of it is.

Paul Adornato, BMO Capital Markets.

On the expense side, you mentioned that you did better in expense recoveries. I was wondering if you could give us a little bit of color there. Do you have more opportunities to do better there?

We have been pretty successful so far in increasing our pass-through on unbundling activities. I think we have done a very good job so far of doing that, given the utility expense rises that we have had over the last couple of years. And yes, we think we do have additional opportunities going forward.

And are those kind of written into new leases, or are you able to layer them into existing tenants?

Well, with respect to the resort business, there is no lease per se; it is just our ability to pass through utility just by changing the way that we charge rates in the resort business. Typically, any stay less than 30 days, the rate included an electric charge. We have reevaluated how we wanted to charge for usage at our properties and really have focused on the electric charges that occur at the resort business and trying to pass that through as a usage charge to our customers. With respect to the community business, many of our leases dictate, and there's also laws within specific states that dictate how we can go about unbundling. In some cases, that involves procedures that would involve a rollback of the existing rent and a pass-through of actual costs, etc., etc. So I think what we are focusing on in the first half of this year has been on the resort side of the business. We continue to see opportunities to pass through the utility charges on that business. The community business, we have done a lot of that historically. There may be some opportunity to do that incrementally, but it is really not going to be driving it as much as the resort side of our business.

And finally, I was wondering if you can comment on the state of the third-party dealer network. Is it kind of stable compared to a few years ago, or have you seen players drop out of the third-party dealer network?

Well, with respect to the third-party dealer network, I think you're asking about the community side of the business as opposed to RV dealerships. Is that correct?

Correct.

We have traditionally been in areas where there hasn't been a heck of a lot of -- community manufactured home dealers. Florida, Arizona really haven't seen a lot of dealers. So we are not seeing much of a change because there wasn't much to begin with. There used to be a fairly active dealership business out in California. That still is out there. It still is fairly active. It still is looking for opportunities to sell homes within existing communities. I think that is the limit of what we could talk to with respect to that.

David Bragg, Merrill Lynch.

Can you talk a little bit more about the summer reservation activity at Northeastern resort properties versus your expectations? I think you mentioned that stays are looking to be longer than expected.

Yes, we have focused on, throughout our resort business, on increasing the annual and seasonal components of the revenue stream. We think that is a much more stable revenue stream, and have focused in our Northern destinations of taking sites that were predominantly used on a weekend or holiday basis and converting them to annual usage. So at the margin, what we are doing is converting what could be some volatile income -- if it rains on a weekend, it is going to affect the transient business, or if it rains on a major holiday, it certainly is going to affect your transient business.

So at the margin, we are reducing that exposure and increasing our annual and seasonal revenue components in our Northern destinations. So what you will see is the annual will go up, but that is spread out over the year. The transient, and you're seeing it in the second quarter, will go down. Net-net, we think it is a slight positive, but what you're going to see is a little bit of a drag in the second and third quarter with respect to the transient revenue streams, and that is being offset by annual streams that are coming in through the first, second, third and fourth quarter.

And on Thousand Trails, did you extend the mid-Atlantic lease along with Outdoor World? I believe that also expired at the end of May.

No, that is still on a short-term month-to-month basis. We did not extend it in line with what we did with Outdoor World.

And regarding the all-age portfolio, although it is a small part of the MH segment, what trends are you seeing there recently? Have you seen any improvement?

On an operating basis, we are really kind of focusing on what I would say California and Colorado. With respect to Colorado, I would say it is stable, but stable at a fairly challenging level. We are not gaining occupancy; we're not losing occupancy. It is kind of just sticking where it is at.

With respect to California, there has been some rotation in terms of what is going on in the marketplace. I would say last year at this time, Southern California was really, really strong. Northern California was okay, not great. That has rotated a little bit. We're seeing some weakness in Southern California and we're seeing some strength up in Northern California.

John Stewart, Credit Suisse.

Mike, I was hoping you could give us a bit more color on the new home sale environment. You kind of referenced the homeowner insurance in Florida and then the single-family environment as well, but can you give us a bit more color in terms of what is going on there?

Yes, what is going on mostly in Florida is there is about 18 months' worth of single-family product on the market. Insurance is still high, it is still expensive, still hard to get. And financing has been impacted some. On a senior buyer, it is 20% down on a 20-year AM. So it is still pretty challenging, I would say.

So does the difficulty seem to be concentrated in Florida primarily? Is that fair?

I think it is Florida primarily. Arizona, there was a little tick-down. We're watching it, but they still are performing. So I would say it is Florida.

And the issue that really is meaningful to us is the ability of some of our downsizing customers to sell their existing single-family home. Roger may be able to give us a little more color on that as well.

Yes, I think we have traffic. We have customers. We have written contingent contracts and have some buyers on contingency. But they have to move their primary residence. They are trying to downsize. And until they can do that, they just can't buy.

Got it. That's helpful. Thank you. And then in terms of the acquisition during the quarter, what sort of cap rate did that imply?

That is about a 7.5 cap rate on a trailing basis.

And at 41,000 a site, it seemed maybe a bit light relative to what we would have expected in Florida. Was there anything specific to that property? What other color can you give us there?

I would say that is a C plus, B minus-grade property in an okay, not great location outside of Orlando, so what I would call a bread-and-butter property, not a really high-end property in terms of its look, appeal and marketplace.

And any expectations for charges for rent-control initiatives throughout the rest of the year?

No, I would say -- we will report as we go along whether or not any additional initiatives are happening. We do have some modest amounts similar to last year in our guidance.

And then Tom, I think you just touched on it briefly in your remarks and then in the press release as well in terms of reviewing your relationship with Privileged Access. Can you give us any more color there?

I think it is beneficial to walk through the history of this Thousand Trails investment. We invested originally in the real estate and we're leasing it to the operator that was owned by Kohlberg. We think there are some pretty good locations, and the more we understand the business, the more we like it.

We worked on trying to get that the operating platform into the hands of a proven operator who is knowledgeable about the RV business. That was Joe McAdams. That happened about a year ago at this time. Joe has done a very, very good job. The trailing EBITDA has grown at roughly 30%-plus under Joe's stewardship. So we have seen Joe really kind of bring some life to the sales and marketing platform and to that business. We also see some opportunities with respect to the additional capital we put out in the mid-Atlantic portfolio and in the Outdoor World portfolio. Where we have issues is splitting of the economics of the potential upside. And that has created some frustrating conversations between myself and Mr. McAdams, where we see some opportunities, but trying to figure out the fair splitting of that has caused a delaying of some potential opportunities.

We also see a difficulty in using their resources and then using our resources, just from a cultural perspective. But we do see a heck of a lot of opportunity in their platform. And I think they see a lot of value in our locations and our platform. And what we are trying to do and what we are working on is to see if we can bridge some of the issues that are causing us to delay what otherwise would be some pretty good execution. Beyond that, I don't think I am comfortable saying anything more.

Do you have any sense in terms of timing, when we might see some resolution?

We would like to be able to say something a little more definitive by the end of this year, certainly. We have been working on it, talking to Joe over the course of the last few months. So we would like to be able to say something certainly by the end of the year.

Dave Rodgers, RBC Capital.

Tom, just as a follow-up to that last question, is part of those negotiations -- are you talking about potentially encumbering any of the land either with homes or I guess some type of residential unit that would be more permanent?

Well, I can talk historically as what has happened in terms of tests that either Thousand Trails has done or ELS has done. We have done a few tests, and frankly, the tests work incredibly well when there isn't a heck of a lot of interaction between the two management teams. It is when we have to work together that we sometimes don't execute as well as we think we could.

So Joe has done a whole ownership program in Lake Conroe down in Texas. He's sold 26 homeownership units in -- I think they started in October, at the end of October. So they have proven that within the Thousand Trails footprint, whole ownership is a product that works there.

We on our side have actually introduced in the fall of last year what we've called a park pass, which is a mini-membership product on an annual basis for the Thousand Trails customers to come into our properties in the season and use our facilities and our properties under a quasi-membership-type product on an annual basis. And that has worked out well.

So we see opportunities where the products that each of us have to offer can be used throughout the real estate portfolio. And what I think we need to do from a big picture standpoint is figure out how we can work together to use those products effectively. And a lot of that involves different operating platforms, different cultures. And that is what we're going to try and work on.

The increase in the lease payment, although it is not significant necessarily on an annualized basis over a long period of time, but is the increase in the rent payment -- was there a value placed on that, or was it merely the time -- the length of the lease generated the increase in the payment, or was there a change necessarily in the structure that might have increased that lease payment?

You're talking about the Outdoor World?

Yes.

Well, the Outdoor World -- a little color on that transaction -- it was approximately 15 properties subject to membership usage on the East Coast of the United States in pretty good locations generally. We did that transaction at a $10 million price, which we think was a very good transaction from an investment point of view. And we think there is a lot of upside. There is 35,000 or so members in the Outdoor World platform. There is 100,000-plus members in the Thousand Trails platform. We believe that there is a lot of upside in sharing those various platforms between the membership bases. And that is the focus of some of our discussions, is how do we execute a potential upgrade of the Thousand Trails members into Outdoor World and vice versa with respect to Outdoor World into the Thousand Trails platform, and the adjustment in the lease is in recognition of some of that opportunity that both parties see.

With respect to home sales, have you booked any deposits that have been nonrefundable into earnings at all this year?

No.

I think previously going into the second quarter, you had talked about an unusually -- or a larger-than-anticipated historical rent-control charge, potentially, or legal charge. Did that occur, and was that in the rent-control number that you gave us?

Yes, we actually went through a trial in the first half of this year. There has been no decision, but we did incur about $1 million of incremental costs related to that trial at a particular property in California subject to rent control.

David Harris, Lehman Brothers.

I had a question on the CPI. Are most of your increases tied to year-end CPI? My economic forecast suggests there's very little change expected this year and into '08 over what was running in '06.

We have a notice requirement for most of our rent increases. And it is either a 60- or a 90-day notice. We've got a lot of notices that go out on a 90-day basis. So you're having to send a notice out prior to the end of the year. And the CPI that you're using at that time are basically June that come out in July, and July that come out in August.

If you looked at the CPI statistics, it was 4.2%, 4.1% in the June/July timeframe last year on an index basis. And frankly, the index went down in the second half of '06, a very unusual kind of blip in the index if you looked at the data. And that is driving a lot of what is happening and hitting us here in 2007 going into 2008.

So these numbers you referenced in the press release are probably the basis on what you are making this assumption, rather than me looking at year-end numbers?

That is right.

Right.

Outside of the rent increases which are tied to CPI, what is your idea of what the magnitude of your rent increases is going to be on a market basis -- 4 or 5?

Again, we are just going through our budget, so I don't want to get too far ahead of ourselves. What I will do is talk about historically, we have said and continue to believe that we can increase rent at better than CPI, somewhere 100 to 150 basis points better than CPI on an annual basis. If you looked at us historically, that trend has been there. But I think it is a little early in the game to tell you what our market rent increases are going to be in 2008.

And how many leases are fixed permanently? Or is there a time in terms of how you fix to CPI? Do these things burn off and you can move them to market over time, or should we look on this as being 50% of the portfolio is indefinitely tied to CPI-type increases?

It depends on the state that you're talking about. In Florida, there are some leases that are tied to a prospectus that is in essence a CPI-based perspective. And there are many situations in Florida and other areas of the country where we will negotiate with the homeowners' association for a long-term rental agreement -- three- to five-year type agreement. After we get them to market, we will give them CPI-type increases.

So what also plays into this, David, is how much of that is rolling off at any particular time and what is the size of those properties that may be rolling off. And frankly, I don't have that data in front of me right now. But that does play into it. So there is a CPI and lag with respect to market on some of the CPI-type rent increases.

California, which is subject to a lot of rent control, is CPI and fractions of CPI. So deepening on where you are looking at, it is all tied in some respects to CPI, but it can be different depending on location.

Craig Leupold, Green Street Advisors.

Tom, just following up on David's question, then, is it just coincidental -- in your opening comments you indicated that the average rent increase in your portfolio is 4.2%, which ties exactly to the 4.2% CPI figure that you note in your press release.

It is coincidental.

And then just a follow-up on the Outdoor World lease. Does the increase in the payment just allow them access to a larger number of sites within that portfolio?

No, they have access -- they run the membership business for all of the Outdoor World members on that existing footprint. What they are interested in doing and what we have agreed to on a limited basis is for their ability to sell a product to their existing Thousand Trails members that allow those Thousand Trails members access to the Outdoor World properties. And we've done it in a way that we've said, okay, X many sites in these various properties we think will allow you to sell and upgrade access to the Thousand Trails membership base. And again, it relates to what do we want to do long term with some of this real estate, and how do we want our relationship between the Outdoor World portfolio, the Thousand Trails portfolio and ELS to work long term.

So there has been a delay and a hesitancy with respect to entering into any long-term agreement that may impact the ability to do something in the future.

And then just one question for Michael, just a clarification. On the rent-control initiative costs, I think you said that built into your guidance for this year is something similar to the costs incurred last year?

Yes, in general. I don't have the specific numbers, Craig. I can get you those off-line.

And would the same be true for what is embedded in your preliminary '08 guidance?

'07 included a trial. '08, we don't know whether or not we would have a trial, so it doesn't include a similar to '07 number. But it might by the time we get to October; I don't know. It depends.

(OPERATOR INSTRUCTIONS). Richard Paoli, ABP Investments.

Just following up on a question that was asked earlier. On the new home sales and even the brokered resales, have you seen any difference between the all-age, what you have left -- I know you don't have as much anymore -- and the retirement-type communities? There has been some suggestion that because of the pickups in the residential market, the [stick-built] residential market, that the all-age may be a beneficiary. Have you seen any of that?

I would say the all-ages is down also. We have not seen -- we're still struggling on sales on the all-age properties also.

Is it down to the magnitude of the -- because I think on a percentage-wise, the contraction is pretty large, I guess 45%, almost, on the new home sales. Is that pretty evenly split, or is there more one way or the other?

We don't really do much selling in the all-age communities, Rich, just in general. So telling you we were down from, like, 3 to 1, I'm not really sure that is all that meaningful.

And then how about just rental product in those communities? You guys have kind of strayed from that, or stayed away from it, I should say, renting that actual house.

We stay away from -- in the all-age properties, we stay away from the rental market.

At this time, I show no further questions in queue.

Thank you, everyone, for joining us on our call. As always, Mike Berman, our Chief Financial Officer, is available for questions to the extent you want to follow up with anything. Take care, everybody. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.