Equity LifeStyle Properties Inc (ELS) 2007 Q4 法說會逐字稿

Good day everyone and thank you for joining us to discuss Equity LifeStyle Properties' fourth-quarter and year ended December 31, 2007 results. Our featured speakers today are Tom Heneghan, our CEO; Joe McAdams, our President; and Michael Berman, our CFO.

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 conference call is being recorded.

Certain matters discussed during the conference call may contain forward-looking statements in the meaning of the federal securities laws. Our forward-looking statements are subject to 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 CEO. Please proceed.

Thank you all for joining us today. Good morning; I am Tom Heneghan, CEO of Equity LifeStyle Properties. I'd like to make a few comments before we open it up for your questions. But first I'd like to introduce Joe McAdams who joined us as our President in January of this year. The reasons for bringing Joe into our organization were compelling. Joe's experience and knowledge round out a very solid operating team.

We have a strong operating capability in Roger Maynard, our Chief Operating Officer; strong investment banking and capital markets expertise in Mike Berman, our Chief Financial Officer; extremely capable legal as well as strong overall business skills in Ellen Kelleher, our Executive Vice President and General Counsel; and strong deal experience in Marguerite Nader, our Senior Vice President of New Business Development.

In addition, my fingerprints are all over having served over the years as ELS' Chief Financial Officer, Chief Operating Officer, CEO and President and working with Sam to set our strategic direction. The average age of this group is about 45 years old with an average of over 10 years experience in the manufactured home and RV resort business. At heart it is a real estate focused group that has been extremely successful creating our current platform of well located demographically focused high-quality properties. This group has created a platform with significant internal growth opportunities.

One key to realizing our potential is to improve our sales and marketing capabilities. Looking back we have been very successful on a number of sales and marketing initiatives, but have been unable to crack the nut with respect to realizing the opportunities I believe are available to us. This is not for lack of effort. We lack strong sales and marketing experience in our senior management team. Joe McAdams fulfills this need.

In addition, Joe, who is much closer to being eligible for Social Security benefits than the rest of us, brings a depth of senior management expertise that will mentor and strengthen the existing team. I am glad to have him as my partner and after my remarks you will hear directly from him.

A few comments on our 2007 fourth-quarter and year-end results. We continue to show good core growth in both revenues and net operating income, reflecting the stability of our business. However, sales volumes continue to reflect the disruption in the single-family housing market. My third-quarter 2007 earnings call discussed our view of the stick built housing issues at length, so I will limit my comments on that issue today. I believe the transcript from that call is available on our website.

Today I would like to discuss two issues that I believe will be differentiators in 2008 -- quality of earnings and balance sheet flexibility, factors critical to an assessment of risk in today's uncertain economy. On both of these issues I believe ELS is well positioned.

ELS derives its cash flow by serving the housing and lifestyle needs of one of the fastest growing demographic segments of our population, empty nesters and retirees. On average this demographic is better positioned financially and less susceptible to changes in job growth or other economic concerns. Most wealth accumulation occurs later in life as empty nesters get ready for retirement. In addition, many have or will begin to enjoy the safety net provided by Social Security, pensions and Medicare.

From a housing perspective we offer this demographic the ability to lessen their exposure to residential real estate and related credit concerns. Our communities offer an attractive lifestyle in quality locations throughout the country for those customers who either cannot or choose not to tie their capital in housing. The current disruptions should highlight the advantages of our communities.

We believe ELS' cash flow is less dependent on consumer discretionary spending, job growth or other economic factors that may impact other income producing real estate. In addition, the long-term nature of our relationship with our customers increases the stability and predictability of our income stream.

From a balance sheet perspective we have always positioned our company to have financial flexibility; in times of scarce or expensive capital this flexibility should be rewarded. There are various ways to look at financial flexibility, but for us the simplest is the want to versus the have to thought process as it relates to capital allocation decisions. In other words, having the flexibility with respect to decisions about buying, selling, investing, borrowing and equity decisions.

We believe 2008 will be a period in which many companies are forced to make these decisions based on factors out of their control and at the expense of shareholder dilution. Obligations under development agreements; the requirements imposed by rating agencies; significant exposure to maturing debt obligations; and pressure to maintain dividends above long-term sustainable levels will not be issues ELS will have to struggle within 2008.

In short, we have high-quality, stable revenue streams and the financial flexibility to execute on our business plan and react to opportunities that may arise, characteristics that create value in periods of uncertainty. Now I'd like to turn it over to Joe McAdams for a few remarks.

Tom, thank you. Let me first say how pleased I am to join this company. I have known and worked with the people at ELS since the early 2000's. As most of you know, after retiring from Affinity Group I agreed to join ELS' Board and have the pleasure of working with Sam and the other Board members in this management team.

It was from this experience that I recognized a number of things. First of all, these guys are sharp. Secondly, they were putting together an incredible operating platform; that platform could create significant value and opportunity and I could add value to that platform.

It was at this point that energized me to unretire in order to create Privileged Access and begin to work with ELS. The performance of Thousand Trails operating company since being acquired by Privileged Access demonstrates the value proposition I provide. However, remember what I said earlier, these guys are sharp and tough negotiators. Tom and his team knew the value of the real estate they had acquired and were focused on extracting that value. This became highlighted with the Mid-Atlantic and the outdoor acquisitions and Privileged Access to gain access to those assets.

Given the long-term nature of the customer relationships in the campground membership business, the incredible footprint of the system, the untapped capacity and the potential synergies, ELS wanted to shorten the lease parameters to take more real estate exposure. Now obviously as the tenant I would have loved to get ELS to commit to a long-term lease and leverage that position to create significant value for PA. It became clear that both parties needed to see the future before committing to terms. And the best way to accomplish this was through annual renegotiation of the lease payments, especially given ELS' unwillingness to consummate an acquisition of PA.

At the same time my success at Thousand Trails also highlighted the potential value that sales and marketing experience could create within ELS' own footprint of the RV resorts in the communities. With this in mind Tom and I discussed me joining this team.

I am now focused on helping Tom and his team create value in all of the real estate holdings. I believe these opportunities to be significant. Under my three-year employment agreement I have significant incentives to create value for ELS shareholders. At the same time my interest in Privileged Access results in a desire for strong and viable tenet. Both of these goals are in ELS' long-term interest.

My focus will be on creating value through gaining a thorough understanding of our customers. Customer discovery is what I'm all about and how to best profitably serve these customers' needs. I am confident in my ability to add value to this organization and I look forward to discussing our accomplishments with you in the future. Now I'll open it up for questions?

Sure.

(OPERATOR INSTRUCTIONS). David Bragg, Merrill Lynch.

Good morning. Just wanted to touch on the image segment and occupancy there. Michael, could you talk about your target for home sale income for this year and if that has changed? Also in terms of volume. And then I'd like -- it would be great to hear an update on the correlation between home sale volume and occupancy in that segment?

Sure. Right now our earnings guidance has a zero profit contribution from our overall home sales operation. Obviously given the current economy we're going to watch that very carefully, but that is our corporate goal right now. With respect to home sale volumes, we are assuming 2008 to be similar to 2007. We saw an uptick in the RV home sale volumes and a down tick in the MH.

And with respect to occupancy, our guidance assumes flat occupancy again during '07 and '08. We have a bit of a drop-down in turnover given the reduced transactions that are going on in the marketplace that has helped offset the decline in home sales. And during 2007 we saw an occupancy gain for the first time in a long time and the driver there was our operations in Arizona.

Okay. So I think you've said this before, but is it correct that a new home sale volume level of around 400 to 500 is targeted to not have a negative impact on MH occupancy?

Yes, and inside that new home volume it's roughly 50% MH and 50% RV. It's the MH that counts towards the occupancy statistics.

Correct, so that was the split this past year in '07?

Approximately, yes.

Okay. And is that the driver behind the lower sale prices that we saw this quarter -- the split towards the park models?

Park models certainly drive it and we've also seen a little bit of selling pressure on the prices in some markets where we sell homes as well.

Okay. And then in Arizona versus Florida, can you update us on the occupancy levels in both of those markets and how they've changed during '07?

Florida was flat for the year; I'm going to guess it's approximately 90%, David, I don't remember off the top of my head. And Arizona I believe was up approximately 100 sites during the course of the year on average.

Okay. And just one last question. On the disposition of Holiday Village, what was the occupancy level on that?

I'm going to guess 50% or less.

Thank you.

Jonathan Litt, Citigroup.

It's Craig Melcher here with Jonathan. How do you expect the RV segment same-store results to compare to the MH segment in '08?

Craig, let me just spend a couple minutes maybe on our '08 guidance, kind of walk people through that. As we put in our press release, we expect revenues to grow between 3.5 and 4%. On the MH side, as I mentioned, we're assuming flat occupancy, although I can assure you we're focused on making that needle go north. With the revenue growth modeled in of about -- almost 4%, 3.25 to 4%, we expect the resorts to be 3.5 to 4%.

Again, in this business we are trying and succeeding corporately, extending the customer and locking down our revenues in advance which pushes our annual revenues higher than the rest of the revenue streams that we have. We're expecting another pretty good year. We had north of 6% revenue growth in '07 and we're anticipating a similar kind of number in '08. We're looking at an overall revenue growth, as I mentioned, of 3.5 to 4%.

And then on the expense side, we are modeling in expenses such that our core NOI growth is 2.5 to 3%, that would give us approximately at the midpoint of the range $207 million of core NOI for 2008. We anticipate a $2 million contribution from our acquisitions for a total income from property operations of $209 million.

As I mentioned before, a sales contribution of approximately zero and other income and expenses -- everything but interest expense and preferred -- we anticipate $8 million this year from our investments. And interest we're anticipating to be about $101 million. Principal on the payments on the preferred of approximately $16 million. So that would give us about an FFO of $100 million and we expect our share count to rise approximately 1%. So that would give you kind of the business model that we have going forward in 2008.

In the release you mentioned that based on the assumptions you're heading toward the high-end, but it acknowledges the economic conditions. Is that more of, that caveat, an issue on financing side of your uncertainty with where interest costs are going to come in or is it more on occupancy on the MH or just the income on the RV side?

I would say that at the margin where we are cautious with respect to the 2008 outlook -- and I want to say that that caution is based on sitting here in January, we're actually seeing some very good results coming out of both the MH and the RV business as I sit here today. But we do have a $20 million revenue stream coming from transient customers on the RV business. For the most part that comes throughout the year, but a lot of it has to do with northern destination resorts.

Very little data as I sit here today to tell you how that's going to come in, but I can tell you with respect to where I sit in January for the transient activity that's happening in our Sunbelt oriented properties it's coming in quite well.

And what we're really saying is, gee, there's a lot of stuff happening. The President gets on with a $150 billion stimulus package this morning; the Fed cuts rates 75 basis points in an attempt to stimulate the economy. To the extent those are effective we're going to feel a heck of a lot more comfortable about what's happening in the economy and how that translates into the transient revenue streams.

So we feel very good, but there are a lot of people doing a lot of things to make sure the economy stays on track. And we're just flashing a little caution with respect to how that all washes out.

Thank you.

(OPERATOR INSTRUCTIONS). Andrew McCulloch, Green Street Advisors.

A quick question. Can you break down your other income and expense guidance and does that guidance include the $1 million payment to Joe?

Let me break it down for you in terms of the line items that show up on our reported selected financial data. Interest income we expect to be -- the fourth quarter of '07 to be a pretty good run rate for 2008. With respect to income from other investments, we have a lot going on in here. We have a $5 million increase year-over-year from the Privileged Access lease that's offset by some onetime events that occurred in '07 that we don't anticipate coming in '08 including the Seasons transaction and the hurricane proceeds that we received.

We anticipate our G&A, the fourth quarter to be a pretty good run rate. If you multiply it out it's $18 million. We actually think it will be closer to $19 million. Again, the driver there for the most part is Joe's compensation which, again, has been offset by the lease. And rent control, again, the fourth quarter I think is a pretty good run rate. We're anticipating it to be about $2 million which is down from this year. If you have any other questions, Andy, I can handle it off-line.

Okay. What's the current lease coverage ratio on the Privileged Access lease now?

It's approximately 1.5 times.

One last question, what were the cap rates on Tuxbury and Holiday Village?

Holiday Village, given it was 50% occupied; I think it was not a practical cap rate -- nearing infinity I think. The Tuxbury property is an RV/MH combination property that has about 1000 potential expansion sites. But we went in at a seven, but very excited about, one, the location of that property, about 40 minutes, 40 miles north of Boston on water and with both an MH and an RV component that we can expand upon.

Are you guys seeing any movement in cap rates and can you comment on any potential movement you see going into '08 for your core MH and your RV products?

What we're seeing in the marketplace is much fewer transactions going on. That would imply to us cap rates are likely to start trending up and, again, not a lot of transactions. It tends to be a marketplace where you don't see much on any particular quarter and it seems that it's particularly slow in the last 90 days.

All right, thanks.

(OPERATOR INSTRUCTIONS). At this time we have no questions in queue. I would like to turn it back over to management for closing remarks.

Thank you very much for joining us on our call today. We also would like to point out that we asked Privileged Access to release some financial results for 2007 and they issued a press release. That can be found at BusinessWire.com. If you search under the name Privileged Access you'll see some of their 2007 preliminary unaudited financial results. And to the extent anybody has any questions with respect to this call, as always feel free to call Mike Berman. Thank you very much for joining us. Take care.

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