Equity LifeStyle Properties Inc (ELS) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen and thank you all for joining us to discuss Equity Lifestyle Properties third-quarter earnings 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 in 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 like to turn the call over to Tom Heneghan, our President and Chief Executive Officer. Please proceed, sir.

Thank you for joining us today. Good morning, I'm Tom Heneghan, President and CEO of Equity Lifestyle Properties. Our results for the quarter reflect the stability of our Core business. We continue to show good growth in both revenues and net operating income.

However, our sales operation is negatively impacted by disruptions in the stick-built housing market. Before we open it up for your questions, I would like to take a moment to discuss current stick-built housing issues. This is a little departure from our normal discussion but I think it is helpful in understanding our business today and our future prospects.

There is a spectrum of property types in our industry ranging from affordable housing through lifestyle oriented housing. My comments have a particular focus on affordable housing. However, we believe there are spillover effects to housing in general.

Although we have some exposure to affordable housing, our primary focus has been and continues to be on properties that attract customers seeking an active adult lifestyle. We think the current disruption in stick-built housing will be a net long-term positive for our Company. I think a little history will help explain why.

From 1990 through the 1996, inflation-adjusted stick-built home prices were relatively flat in most markets. Some markets, including California, actually experienced nominal price declines during the 1990 to 1996 period. Loan underwriting requirements included significant downpayments, good credit, income documentation and tight housing expense ratios.

All of this created a backdrop in which the home buyer was at risk with respect to his investment and the lender at risk with respect to repayment. In addition the underwriting standards acted as a barrier to entry for less qualified buyers.

Compared to stick-built homes, the less than $40,000 cost of a factory built home was a viable alternative to customers seeking affordable housing. As it turned out, so attractive manufacturers and lenders took it to excess.

Securitization of manufactured homes loans, or chattel financing as it is called, began in the mid-1980s. During the 1990s the process of securitizing chattel loans became so popular that one Company, Greentree Financial, became an industry darling capturing over 40% of the market. It's CEO was the highest-paid executive in the country in 1996 earning over $100 million.

The market for securitizations of chattel loans which were essentially sub prime loans went from $0 billion to $12 billion a year by 1998. At the peak, placements of homes almost doubled to over 370,000 homes a year. In the process, any semblance to rational underwriting went out the window. No money down, very low interest loans, interest rate buydowns, teaser rates, longer amortization periods, no documentation, aggressive appraisals, loan fraud, etc. became the norm and so eventually did loan defaults, repossession, lender and manufacturer bankruptcies and related investigations and lawsuits.

By 1998 the gig was up. The rush in credit default and long-term capital meltdowns spelled the closing of the securitization window for chattel finance. With no funds to refinance or rollover nonperforming loans, all the accumulated warts, pimples and blemishes from bad lending practices began to show up in reported loan performance, exacerbating the downward cycle.

During this time, ELS was increasing its exposure to lifestyle oriented properties. We experienced a little of the turmoil that has impacted affordable housing property owners since 1999.

Recent estimates are that 2007 factory built shipments will be around 100,000 units. Access to the securitization market for chattel loans remains essentially closed. The last seven-plus years have been difficult for factory built housing participants focused on affordable housing.

Their sub prime debacle began almost ten years ago and they continue to struggle today. Further frustrating any recovery has been a strong competition from stick-built housing. Yesterday's chattel borrower became today's stick-built sub prime borrower. The corollaries are striking although the numbers are quite a bit higher.

Existing stick-built homes were less than 3.5 million units sold in each year from 1989 to 1992 and they reached their peak at 7.1 million units in 2005. Median home prices increased to $230,000 in 2007 from less than $100,000 in 1990.

Even after adjusting for inflation, home prices have almost doubled. In addition, new home sales volumes went from approximately 500,000 homes to over one million homes a year in the period 2003 to 2006. In total that's over $1 trillion a year of additional transactional activity.

New single-family home sales alone exceeded $300 billion a year. Sub prime lending, which averaged over $600 billion a year in 2005, 2006 was a major factor driving this activity. All this new leverage was achieved with household incomes adjusted for inflation essentially unchanged since 1990 and rising less than 50% in nominal terms.

The story is now front page news -- ARM resets, interest-only, no doc, no money down, longer and negative amortizing loans, aggressive appraisals, teaser rates, loan prod etc. became the norm. More recently, defaults, repossessions, lender and builder bankruptcies and related investigations and lawsuits. Although the similarities are striking, there also significant differences.

Primary among them is they're fueling the stick-built housing boom with a speculative fever. This speculation was absent in the factory-built housing industry. Many unqualified borrowers obtained chattel financing but at its essence it was a desire for an affordable home.

The average chattel loan exposure was less than $50,000 per borrower. In the stick-built market by comparison, homes were purchased with the expectation of selling them for more later. With higher leverage came the expectation of higher returns. It was literally a no-brainer in more ways than one.

The last few years close to 20% of stick-built home sales were for speculative or investment purposes exacerbating the overhang of supply. A no-money-down wire loan for $300,000 or more makes the bad lending practices of the chattel lenders look prudent.

In addition, factory-built homes can be moved to locations where there is demand helping to liquidate excess supply. Moreover, many of the factory-built homes are replacing existing older housing stock. There was no significant development in most states. In many respects, the issues the factory-built industry dealt with were degrees lesser in severity, although it didn't feel that way for those experiencing decline.

As I indicated earlier, most of this turmoil has not impacted our business. Over the years ELS has been successful selling new homes in our lifestyle oriented communities despite a backdrop where investing in residential land was seen as a no-lose proposition combined with the negativity of chattel lending's securitization problems.

We attracted customers either as a primary retirement homeowner or affordable second home owner wanting to limit their exposure to residential real estate and preserve capital for other uses. In hindsight, these customers seem [persian].

In addition, despite the current disruption, the demographic trends remain unchanged. More and more people continue to look for a sense of lifestyle in their housing choice as they approach retirement.

In the near-term, we are being impacted by the inability of our potential customers to sell their existing stick-built residences as well as heightened price sensitivity for seasonal and second home buyers. We do not know how the current stick-built over supply problem gets resolved but we do expect the overhang to impact our new home sales operations into 2008.

We also believe that as the over supply issues resolve and psychology shifts, even more people will be attracted to the housing choice we offer -- an active, vibrant community that allows owners to limit their exposure to residential real estate while still enjoying a detached single-family home in some of the most attractive locations around the country. For around $70,000, you can own a three-bedroom, two-bath home in an ELS community offering an active lifestyle, a deal looking better and better.

Finally, I would like to update you on our discussion with Joe McAdams and Thousand Trails Operating Co. We have made significant progress over the last few months and we believe we are on track to make an announcement by year-end. With that, now I think we will open it up for your questions.

(OPERATOR INSTRUCTIONS) Dave Bragg of Merrill Lynch.

Thanks; good morning. I was just looking for a breakout between the image segment and the RV segment for this quarter. But also as we get closer to 2008, given that your guidance is still intact, if you could just provide some more color on both of those segments going forward. Thanks.

Overall our Core was up 5.9% in the quarter; really three things going on there. One, on the Core MH side we were up 4.4%. Approximately 30 basis points came from occupancy. Most of our occupancy gains came from Arizona.

In our resort business we were up a little over 5% and there we have seen a continuation of the trends we have had all year long with our annuals up over 8%, roughly 6% from rate and about 2% from occupancy in rough numbers. The other thing that we have seen is our utility and other income programs continue to show results. They were up almost 20% in the quarter.

With respect to the fourth quarter, we see similar trends going on; really not much different than what you would see in the third quarter. In 2008 we would expect some of the revenue numbers to moderate.

We mentioned on the last call, we see CPI going down for us in 2008. Our expectation is we would have Core revenues on the MH side growing approximately 3.8%. That's kind of the midpoint of a range assuming a zero increase in occupancy; and about 65% of our notices have gone out at that rate.

On the RV side, a little bit harder to predict in the future given the seasonal and transient component that we have. But assuming it hits our expectations we would expect the order of magnitude, 4.5% to 5.5% -- again, driven by our annuals.

And again on the utility and other income we see that slowing fairly dramatically as we have no new plans right now to implement any new programs in 2008 although that could always change sometime down the road. So that gives you our revenue expectation, order of magnitude -- 3.5% to 4% on revenue.

Great, thanks. Next on rent control, do you have an outlook there for costs expected in 2008 and could you provide us with any update on this year, any progress that you have made? I understand that you have been at trial in recent months.

We have had no update on the decision from Judge Walker. Timing of that is whenever he wants to let us know what his thoughts are.

With respect to 2008, given that we are waiting for Judge Walker, I would say that we have fairly modest expectations (inaudible) now. However if we get a positive result which we hope to happen, then we might invest more in that activity.

John Stewart of Credit Suisse.

Thank you. Tom, now that you have closed the Del Ray sale, can you give us an indication of how that price came in relative to where you had it under contract previously?

Well, we had it under contract a couple of times but the one that fell out of bed in which we had $1 million escrow deposit that we kept I think was $16.5 million.

16.5?

Yes.

Just to follow up on your comments on the stick-built housing market, can you give us any color -- are you seeing any impact on the RV business?

No, I don't think so. But I'll let Roger comment on -- I think at the margin our product on the cottage side bodes well for that.

Right, I would say in our RV business, as Michael said, our annuals are up about 8%, our seasonals are up about 8%, our transients are flat. And what we are seeing -- we had a business plan on our RV side to take our existing customer base and extend the length of stay.

I think the [field is] executed on that magnificently. We have created more annuals, we have created more seasonals and you know we liked the opportunities we have in the RV business and see it performing well.

Then in terms of the acquisitions that you made during the third quarter -- I mean it looked like several smaller deals. Can you give us a sense for what type of properties those were?

They were three RV communities. We like what we did in the quarter. The one that is outside Boston is a great property. They are in similar locations to where we have been, places that we like, destination resort locations. So, for us it was a pretty good quarter in terms of acquisitions.

What was sort of the weighted average cap rate on acquisitions for the quarter?

Well, we are seeing cap rates in the 6% to 7% range.

Mike, can you give us the breakdown specifically related to your 2008 guidance? What does that contemplate in terms of volume and pricing on new home sales?

It assumes overall our sales operation for 2008 right now as we look out. We are assuming we will be a breakeven operation in terms of volumes of home sales. We don't really see, unless something dramatically changes, an uptick in terms of our overall volume which we would anticipate to be 400 to 500 depending on where you are in 2008; I think 2007 is going to be in that range.

Okay -- sorry, go ahead.

I was just going to say that -- don't really see a great environment for pricing given what's going on reflecting Tom's comment.

Lastly, Tom, you touched on your expectation of an announcement by year-end for privileged access. Can you give us an update in terms of what has gone on during the last 90 days?

Just trying to clear all of the impediments that would cause us to be in a position to announce something; it's potentially what we have been working on for the last 90 days. That involves negotiation with Mr. McAdams. It also involves legal counsel and accounting review. So I think what we are going to announce is going to be a positive event for the Company and we are looking forward to announcing something by the end of the year.

Jonathan Litt of Citi.

Hi; it's Craig Melcher here with John. Can you go through the connection between the home sales piece as it relates to the occupancy levels with home sales coming down and how you expect that to translate into your occupancy in your communities?

Well at the pace we're at right now, we are up in the quarter about 80-plus sites, about 160 year to date based on our home sales that we're projecting now that Michael just spoke about -- 450 or so for the year. If we stay at that pace we're looking at occupancy really to be flat in 2008 -- flat to the fourth quarter.

Okay, what's the nature of the buyer of the Del Ray asset?

Stick-built homebuilder.

Last question is just on the 2007 guidance. What was the cause for the (inaudible) revision. I mean, assuming it's the home sales, is that now a breakeven business in 2007? Maybe the remainder of the (inaudible) revision?

Well, we gave guidance at the beginning of the year at 295 to 305. Our mission was to be within that. We have now taken -- when you do the math on the first three quarters and what we expect to happen in the fourth quarter, it is 295 to 297.

From where we were on our last call our home sales operation is showing a little bit less performance than we had anticipated. But again, we feel like given our target at the beginning of the year we feel pretty good about where we are.

Paul Adornato of BMO Capital Markets.

Hi, thanks. I was wondering if you could comment on the transient business in the third quarter. I realized that a lot of the communities are out of season. But are you thinking of ways to perhaps try to get some additional revenues out of these properties in off-season?

Yes, well we -- in our summer season, our transient business was about flat but as I have said a while ago, we're trying to migrate our customer to longer-term stay. We're taking a lot of transient guys and trying to convert them into seasonal and annuals.

We are trying to do some rallies and some other things in our business trying to create some off-season business. But [Boyd] still very strong demand on the weekends and holidays during the season. And we've got some work to do on the shoulder in the off-season for us to pick up some transient revenue there.

And just to follow up on your stick-built comments which I appreciate, I realized that you're focused on the high-end but your comments might indicate that there could be some stabilization on the low-end as well. Do you share that view?

You know, the question is timing and how does the stick-built housing issue get resolved. You have seen a lot of commentary with respect to either monitored or fiscal policy being involved in how the stick-built housing issue does get resolved. So it's a little difficult to say how it unwinds or how it does get resolved.

But to the extent that capital that was once available to borrowers in the sub prime lending environments is no longer available. Certainly the affordable housing factory-built community owners should be net beneficiaries of that.

A couple of cautions with respect to that. Location and population and job growth are everything to one, resolving the stick-built housing issue and its oversupply. And two, the demand for any factory-built affordable housing community.

And finally on Del Ray. If you were to look at it from a cap rate perspective, what was the cap rate that you sold at?

We had essentially closed the community so it was negative cash flow community by the time we sold it. By way of some historical perspective, we looked at selling it and an existing manufactured home community of roughly 70% occupancy and we couldn't see pricing getting worse off -- call it $8 million to $9 million at some fairly aggressive assumptions in cap rates. So, the execution that we did embark upon, closing the community and selling it to stick-built housing, turned out to be a pretty good execution.

Richard Paoli of ABP Investments.

Hey guys; thank you for the backdrop on the housing side. That was probably pretty much where I have been, coming from that perspective. Tom, maybe you could help me out with something though especially, with respect to Florida.

I hear it's a bloodbath down there on the stick-built side. There's a lot of new product coming on and not everything is age-restricted but there's a lot of age-restricted development going on down there on the semi-atttached side.

What is happening with pricing there and how compelling is that becoming compared to the manufactured housing alternative with the similar nice clubhouse, swimming pool and all the activities and stuff that goes with it? And similarly, you're probably not cutting your lawn or anything like that.

It seemed like there were a lot of speculators that are dying to rent their place at whatever they can to kind of stem the bleeding from their personal cash flow perspective. So is renting a villa in a age-restricted community becoming more of a competitive option for them?

I think anything out there in terms of oversupply that becomes available is going to be competitive supply. I would say a couple of comments -- location matters within Florida. We have seen and have focused our investments along the coasts. Migration to Florida has consistently been a positive statistic over the last 50 years. We don't -- given the demographics we don't expect that to change.

This oversupply may be being provided to the market at less than replacement cost. We do think there is some disruption with respect to that and it's affecting our sales. But at its Core, we believe we provide a very attractive community-based lifestyle that once the oversupply gets resolved and the migration pattern to Florida continues at pace, we think we will be well positioned to get our share of that marketplace.

Have you tracked where in all in rent the ground rent and maybe an imputed price to purchase a house in your communities, your higher -end communities compares to competing product if they wanted to rent or buy something that's materially discounted in the stick-built category? What's happening with that pricing dynamic?

Price discovery is a little difficult to come by given that there has been some cessation in activity. We do expect some supply to come on either in rental stock or in deeply discounted pricing and that I think is at the margin going to be affecting us in 2008.

How about -- I don't want to dominate -- but just also Phoenix and California which are the other two areas that you guys have tended to have nice assets as well as the competition from housing now.

Again, we believe population growth is going to continue apace in Arizona. Arizona's issues were more of an overall housing supply than some of the pricing issues that happened in certain locations in Florida. So the question is how does this oversupply issue get resolved with respect to absorption? And I think that's going to be an overhang not on just the factory-built but also on the apartments and any other housing choice that exists in this marketplace.

Indeed, thank you.

(OPERATOR INSTRUCTIONS) Steven Rodriquez of Lehman Brothers.

I was wondering if you could talk about your thoughts on the impact of higher gas prices specifically on your 2008 assumptions within your RV park?

Right now, we haven't really seen any impact on the price of gas. For our winter season a lot of seasonal customers that come down to Florida and stay one to three to four months -- and really just haven't seen that impact yet from the fuel prices.

True; but with gas hovering around $86 would you agree it's fair to say that should increase going forward?

Well what I would say at the margin, especially given the focus on the demographic and the retiree lifestyle that we show in our Sunbelt oriented properties, the choice is stay home and heat the house -- which is going up at double-digit rates -- or come down to Florida or go to Arizona, enjoy the sun, reconnect with friends, enjoy a good lifestyle, forget about shoveling etc., etc. So at the margin, there can be some impact of the price of gas of course but we think net, net, net the cost to get down to Florida or Arizona for our lifestyle oriented customers is not a significant factor in their determination.

That's fair. On your 2008 assumptions for expenses, were you able provide some type of expense growth number, a range?

I would say for the expenses -- again, order of magnitude 4.75 to 5.25 we have seen a little bit of moderation this quarter in utilities and real estate taxes. We're keeping our fingers crossed that that continues in 2008.

Andy McCulloch of Green Street Advisors.

Hey guys; just one quick question for you. On a historical basis, what percent of your MH buyers are all-cash buyers?

Approximately 50%.

(OPERATOR INSTRUCTIONS). At this time gentleman, we have no further questions in queue.

Thank you, everyone, for joining us on our call today. As always Michael Berman, our CFO, is available for anybody who has follow-up questions after the call. I look forward to updating you at our next quarter. Take care.

Thank you very much, sir, and thank you, ladies and gentleman, for your participation in today's conference call. This concludes your presentation for today. You may now disconnect. Have a good day.