Equity LifeStyle Properties Inc (ELS) 2008 Q2 法說會逐字稿

Good day, everyone, and thank you for joining us to discuss Equity LifeStyle Properties' second-quarter results. Our featured speakers today are Tom Heneghan, our CEO; Joe McAdams, our President; Michael Berman, our CFO; and Roger Maynard, our COO.

In advance of today's call, management released earnings. Today's call will consist of an opening remark and 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 economic risk and uncertainties. The Company assumes no obligation to update or supplement any statements that become untrue because of subsequent events.

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

Good morning. Thank you for joining us today as we discuss our second quarter 2008 results. Again, I am Tom Heneghan, Equity LifeStyle's Chief Executive Officer. Before I turn it over to Joe McAdams, our President, for some comments and then open it up for your questions, I would like to make a few remarks.

Our business plan has always been to create long-term, stable, and predictable cash flows. I believe our results so far for 2008 reflect this plan. To achieve our goal, our primary investment objective has been high-quality real estate locations in retirement and vacation destinations. In addition, we have consistently focused on serving the housing and lifestyle needs of retirees and baby boomers, based on both the positive demographic trends of this segment and its generally higher credit quality.

The number of people over 55 is expected to grow at a rate well in excess of the general population. It is also the segment of the population that has the highest share of household net worth and is in better overall financial shape than the rest of the economy. This segment is less reliant on access to credit and job growth and is able to access pension, retirement accounts, Social Security, and Medicare programs.

However, a significant portion of their net worth is tied up in residential real estate. As the current disruption clearly shows, having a large portion of your net worth tied up in residential real estate may not be an attractive retirement planning tool.

In addition, it is also clear that some people approaching retirement are not as financially prepared as they would like to be. As a result, we continue to believe we are well positioned to serve the lifestyle and housing needs of this demographic.

With new homes at price points as low as $50,000, attractive real estate locations, and an active and vibrant lifestyle available at our properties, ELS is an attractive financial solution to those people who either cannot or choose not to tie up significant amounts of capital in their housing.

In my comments from our first quarter of 2008, I indicated that we believed ripple effects of fiscal and monetary actions would create volatility and uncertainty. I indicated that ELS's response would be to focus on those actions that we can take near-term to reduce uncertainty, react to opportunity, and create stable and predictable cash flows. It is with this in mind that I would like to walk you through our results for the second quarter.

With respect to our core operations, revenues increased approximately 3.7% for the second quarter. This increase reflects a 4.1% increase in our manufactured home sites, a 1.7% increase in our resort sites, and a 5.4% increase in utility and other income. With respect to that 4.1% increase in manufactured home sites, our press release issued last night had a clerical error on the table that showed monthly base core rent. We have corrected it in the 8-K filing; but the numbers should be $492 and $493 for the six and the quarter ended. Again, the 8-K does correct that, and we apologize for any issues with respect to that.

The 4.1% increase in the manufactured home site revenue reflects a rate increase of approximately 4% and 10 basis points of occupancy gain. Occupancy has remained essentially flat for the first half of 2008.

As discussed in our first-quarter call, we are renting some of our existing inventory and evaluating an ongoing program to acquire additional homes for our designated rental program. This initiative is in response to the impact of the housing turmoil, a tightened credit market, and our belief that renting homes may represent an attractive source of occupancy and eventually new homebuyers. We also believe that customers that are capable of purchasing are opting to rent in today's economic environment.

We have identified two primary criteria with respect to allocating our capital to this initiative -- the ability to attract high-quality customers consistent with the existing customer base, and an acceptable return on our capital. Thus far, we have rented approximately 300 new homes, up from approximately 250 homes at the end of the first quarter. We are approaching this cautiously in order to make sure our criteria are being met and we can evaluate the impact on our business.

With over 4,000 vacant sites, we continue to evaluate ways to stimulate incremental occupancy gains and believe the rental program represents an additional tool.

In addition to evaluating ways to gain incremental occupancy, we are also heading into our annual rent review and notice process. As a result of the time lag caused by our annual rent notice process, published CPI data for the months of June, July, and August either directly or indirectly drive a significant portion of our rent increases for the following year. Although we expect much higher CPI numbers than last year's readings, we also expect this year's housing problems to temper our annual market studies.

For the second quarter, core resort site revenue reflects a 6.9% growth in revenues from annual customers, partially offset by fewer sites available for seasonal and transient use. We have actively transitioned the revenue component associated with our resort properties to longer, more stable, and predictable revenue. Annual and seasonal site revenue now represents approximately 80% of our total resort revenue of approximately $100 million per year.

At the margin, this increase in annual revenue also reduces the number of sites available for transient usage, especially during peak usage periods.

The second quarter reflects the transition of revenue streams from Sunbelt-oriented properties to Northern properties, so it is not necessarily the best indicator as to how each property type is performing. The second quarter includes the tail-off of the winter season properties in April and May, as well as the initial months of our summer-oriented properties which experience most of their transient revenue between Memorial Day and Labor Day.

Nevertheless, to provide some regional color for core resort revenues, Arizona was up over 5%; Texas about 4%. Southeast Florida, which includes our property in the Florida Keys, was down over 17% in the quarter, contributing to a 100 basis point drag on core RV revenue performance. The remaining Florida RV portfolio was up about 4%. With respect to our core Northern resorts, overall resort revenue was up about 3% in the quarter. Strong annual revenue growth in the Northern resorts offset about a 7% decline in transient revenue.

Again, there is a shift from site usage to -- from transient into annual revenue usage.

We are attentive to how the recent increase in the cost of gasoline and diesel may impact our business and have initiated specific programs to respond to these concerns, including highlighting the advantage of annual and seasonal usage and promoting our RV storage capability, either on-site or in designated storage areas. However, our changing site mix, the timing of holidays and weekends, and weather have been the main factors impacting our transient revenue results.

We deal with an installed base of almost 8 million RV-ers, and despite the recent increase in the cost of gas it still represents an economical vacation, weekend home, or seasonal home alternative.

We also expect our cottage program to be an attractive alternative to those customers who want to enjoy the lifestyle available at our properties but want to avoid purchasing an RV or the high cost of driving.

We continue to experience a challenging environment in our home sales division, both in volumes and in pricing. The drop in volumes -- excluding third-party dealer sales -- during the second quarter represents the seventh quarter in a row of lower year-over-year comparisons. We believe the current environment remains difficult and do not expect any meaningful increase in sales volumes or profitability until the overhang in the single-family market begins to clear.

With respect to our balance sheet, we currently have just under $300 million available under our lines of credit. With respect to debt maturing in 2008, we have already refinanced or paid off $30 million in debt and have commitments to refinance $114 million in early August at an average rate of 5.91%. We are evaluating proposals with respect to an additional $60 million in debt that matures in November of this year. With respect to 2009, we have $80 million in scheduled maturities.

Finally, we are pleased to have a favorable tax opinion regarding the treatment of membership income. We hope to obtain Board approval and finalize a transaction in the near future. We believe the integration of PA's operations with our existing operations should allow for significant synergies and eliminate significant structural impediments and conflicts of interest. We look forward to providing additional information regarding this transaction in the future.

Now I would like to turn it over to Joe for a few comments.

Tom, thank you. I thought I might review the five strategic initiatives we discussed on the last call. We are progressing on the planned timetable with our data marketing initiative. We will be live in August and will attempt some targeted promotions utilizing this technology in mid-September and October.

We continue to make progress in our lead tracking task, but had very little traffic in most of our destination locations. We are implementing software to automate this process before our winter season began.

We have revamped our Florida sales process, resulting in better closed percentage of prospects. We have enhanced our finance and insurance expertise in all home sales markets.

Occupancy. ELS would love to sell new homes, but it's extremely difficult when the downsizer can't sell his home. Even with the down economy, there is still robust activity within our ELS portfolio in 2008. Most of this activity will be sales of existing units. We need to find a way to participate in a more significant way in these resales. We can refurbish and recondition units at the community level at a minimal capital investment and control occupancy through this route as well as quality.

We are also focused on gaining incremental occupancy in our MH portfolio. Our communities exist in active marketplaces with a number of different type of transactions occurring all the time. This quarter, in line with our customary experience, we had close to 1,000 sites that have successfully turned over in transactions between home buyers. We participated in this activity through sales of 91 new homes and 106 used homes, and brokered 174 resales.

In the quarter, we rented approximately 50 new homes on an annual basis. If you take into account the seasonal renter and the other moveouts, our overall occupancy remained flat.

While we are pleased with the continued ability to sell homes and with the renewed focus on our sales operation, our ability to gain occupancy through the sales process has been impacted by ripple effects from the economy as a whole. Our occupancy initiatives, including rental of new and used inventory, allow us to continue to attract customers who want to access our properties but who are not willing or able to purchase at this time. It allows us to draw off this space for future home sales.

We are encouraged with our early success at converting renters to homeowners. The rental program is just one of the customer identification strategies available to create access to our properties.

Our goal, as it has always been, is to create long-term, stable cash flow starting with a quality, creditworthy customer who is attracted to our lifestyle choices.

The last initiative, cross-marketing opportunities between PT and ELS. We have sold 20 refurbished older cottages under this initiative within the last four weeks at our TT New Jersey, Thousand Trails resort and will roll this out to other resorts later this year. Our plans call for us to open up membership sales in two ELS parks this fall and several others in 2009.

Let's turn our attention to the RV business. The price of gas and its impact is the most bantered-around issue of the day. Our customer base, as Tom has said, is the 8 million installed RV-ers who have invested substantially in their vacation vehicle and continue to use it in pursuit of their lifestyle. This is reflected in our second-quarter core RV revenue being flat to 3% gain.

We have done and continue to survey our customers concerning their usage and elasticity to gas prices. The takeaway from the initial research is that the transient customer still considers a 60- to 100-mile distance to a resort affordable. This amounts to a $25 to $50 increase in fuel cost each way and makes his vacation choice still economical.

This is not to say that we are not reacting to the significant fuel change. We are helping our customer combat higher fuel prices with specific offers. We will store your RV at the resort at a heavily discounted rate, and in certain instances free of charge, if you're a frequent customer or a heavy user. We are offering gas rebate incentives to customers who stay for extended periods in specific cases.

In addition, we are creating exclusive opportunities for our customer to expand their relationship with us, whether it be an on-site cabin, RV rentals, selected upgraded sites, or extended-stay options to reduce the stress of transporting the customer's RV. We are finding this as a great opportunity to show the value to our customer in becoming a heavy user and ultimately an annual customer.

We also believe that our resorts are positioned nicely to exploit the family camping movement without the RV. We have an abundance of rental cottages, park models, trailers, tenting sites, etc. in our portfolio, considering both ELS and TT. In other words, you can enjoy our real estate without an RV.

Our vacation alternatives still are affordable in most cases. Product usage remains in strong demand. We are developing promotional strategies that will hopefully educate our existing customers as well as new customers that our value proposition remains intact.

Finally, I would like to touch briefly on PATT, and its struggle in this RV environment. We continue to experience a decline in front-line sales of approximately 25%. Membership sales are a discretionary buy and are correlated closely with consumer confidence. We have adjusted our cost structure to compensate for this decline.

These reductions did not take effect until June, and we face another round of reductions late in July. We are forecasting doing better the last six months of 2008 than we did in 2007 from a cash EBITDA perspective. Tom?

I think it is now time to open it up for your questions.

(OPERATOR INSTRUCTIONS) Michael Bilerman with Citigroup.

Good morning. Tom, can you just go over a little bit about the negotiations on the purchase of PA? You talked about the significant synergies and eliminating some of the structural impediments that exist today. Now with Joe obviously being on the ELS side, not negotiating for ELS, but he will be negotiating for PA, how will all this be beneficial to ELS shareholders when you think about the business?

Yes, I think I would like to kind of put the whole thing in perspective. We invested in the Thousand Trails portfolio back in 2004 and added a couple of smaller portfolios to that footprint over the last few years. So there is now 24,000 sites in that portfolio.

Our first investment was under a lease with the operating company owned by a private buyout firm, Kohlberg. Since we've invested in the real estate, we have come to find the business a solid business, and the real estate some fantastic real estate. So our goal ever since then has been to try and figure out how we get this business more under our hood, so to speak.

The big impediment to that has always been this issue of -- how does membership income get treated for REIT gross income test purposes? We conservatively structured to make sure that the REIT qualification was a primary consideration in terms of our investment.

Joe McAdams bought Privileged Access or the Thousand Trails operating platform, call it, in 2006. That brought that business closer to ELS, but still with this structural impediment. Joe McAdams then became President of ELS, bringing again the business closer; but also with the structural impediment and the added conflict of interest, as Joe was President and owner of Privileged Access.

So although the business has come closer, we still are struggling with running the business from a synergistic standpoint with our core business. The demographics are the same. The business we see at heart as the same. The real estate we see at heart as the same, and have been always struggling trying to realize the potential in the portfolio and keep in mind the structural impediment.

We now have a favorable opinion of outside counsel with respect to the treatment of membership income, and I think we are now much more comfortable owning the whole thing and operating the portfolio consistent with our whole portfolio.

I would say with respect to the transaction, we just got the opinions recently. We still have to negotiate. There is no final transaction in play at this time. It does need Board approval, ELS's Board approval, and they will be representing the Company and the shareholders from that perspective.

But what I would say is that not even a year ago Mr. McAdams did enter into a transaction with respect to an option. There is a third party who holds an option to buy the equity interest in Privileged Access at a $2 million or so price. So that, the information that exists out there, again it is early in the process. We will get back to you when we do have something finalized and something to communicate. But we look forward to bringing that into ELS's portfolio and operations.

With respect to the synergies, we operate 20,000-some RV properties outright through ELS's property management structure. We believe there will be synergistic savings between the two portfolios in combining property management.

We also believe that Privileged Access spends upwards of $25 million, $30 million a year in sales and marketing expenses. Under a combined operation, without having to deal with the conflict of interest and the structural impediments, we believe there is additional synergies that could be realized in the sales and marketing as well.

So do you think from a -- right now the rent payment that PA is paying you is in excess of their EBITDA, and so -- it sounded like, Joe, there is some expensive initiatives that you're pursuing that would make the second half better than the first half.

But Tom, when you look at this business, you potentially could have been bringing in something that is on an operational basis less than what you're receiving in rent.

I mean right now, it's flat to -- at least coverage with respect to cash flow. I mean, let's just -- we would have to get back to you with respect to what the impact is on FFO. But relative to cash flow, which we can see and is out there in the marketplace, I think they are slightly above the lease payment with respect to cash flow. The cash flow under lease, just call it $25 million, I think we feel comfortable that the cash flow as a result of combining the operation will exceed the lease payment on an annual basis, barring any significant issue in the business. Meaning from an operating standpoint in terms of a downturn in the RV business that's beyond what was already experienced and assuming that synergies are not able to be realized.

But we think that the business can be reacted to on an expense saving and on an operating basis. And we think that there are synergistic savings that are unavailable under a combined portfolio. So on a cash flow basis, we think it will be positive.

You're saying the equity -- there is a $2 million effectively option out there right now; so that is probably in the realm of where this buyout would occur?

You know, again, we haven't finalized any of the negotiation. But that piece of information does put you in a box-car area relative to valuation at least from ELS's perspective.

I assume this would be done in stock, to sort of align interests.

Consideration could be stock, could be a note, could be cash. I don't think it has been finalized.

Just going to guidance for a second, you maintain $3.15 to $3.30. It looks like on the home sales part, just given the language in the press release, you're saying second half would be similar to first half, which would imply about negative-$0.13 versus flat previously. And then there was the JV gain which I don't think was included in guidance before.

What else is going on within the numbers that would take you low-end versus high-end of the range?

Michael, let me kind of take a step back and kind of go through our model. We've had a number of changes to it, given Appalachian and Tropical Palms and some of our acquisitions.

Where we were -- and again, I'm going to use numbers that I am rounding, so I might be off a little bit in terms of totals; and if I get too specific I am only intending to be a point within a range. But we had an NOI number at the beginning of the year of $209 million, which was reflective of a core of $207 million and acquisitions of $2 million. To go back to our January press release, that is the source of what I'm talking about.

Today, given the adjustments to core that we've made, we think the core will be -- again for the full year -- about $205.5 million and acquisitions down slightly, $1.7 million, for a, call it, $207 million, $207.5 million NOI number.

Sales goes from zero contribution to minus-4. Other income and expenses combined go from $8 million to $10.5 million. Interest expense goes from approximately $101 million, a little less, to about $99 million. So that is some of the pickup, Michael, that I think you are looking for.

FFO in aggregate goes from about $100 million to $98.6 million in terms of being in the middle of our core NOI guidance range. The share count stays approximately the same, slightly less.

Then on the other income, so that went up 2.5; 1.6 of that is the gain?

Yes, we had 1.6 from the gain in this quarter. We've head over $0.5 million of gains from insurance. Then there is a bunch of noise in there that accounts for the difference on the $2.5 million.

Then on the interest expense, that is just floating rate?

Floating rate and lower than expected balance.

Okay, thank you.

David Bragg with Merrill Lynch.

Thank you. Good morning. Just a follow-up question on guidance. For the resort segment, is revenue growth for the full year still targeted at 3% to 3.5%?

I think embedded in the guidance, I think we gave a range for revenue growth of 3% to 4%. I would say, breaking down the business, with respect to the MH business we are through the six month at about 4%; that is pretty much all rate. We expect that to kind of continue through the year, and we also continue to expect flat occupancy.

So implicit in our guidance, then, is the volatility with respect to revenue for the remainder of the year is in the RV business. It is really going to be tied down to the transient revenue business. I think we have given ourselves essentially a plus or minus kind of 10% on the transient component of the RV revenue business, which is driving that variability in the guidance.

Okay. Michael, can you talk about the expense pressures and the growth that you're expecting in the second half of the year there?

You know, I don't have the second half of the year growth rate in front of me. But I would say certainly the utilities are expected to grow 7% to 10% in the second half of the year. You look at natural gas prices, you look at oil prices, and we think some of it will be offset by other income and unbundling activities; but we are certainly seeing pressures there.

We have had a double-digit growth rate in property management all year long. That is probably going to continue at the pace it has been at, although we are looking to try to do some savings there.

Real estate taxes, order of magnitude, are in the 5% range; and then no real outside pressure anywhere else. We did our insurance renewal and did not see much increase when we did that. So I forget what the second-half number is, David; we can talk about that off-line.

Okay, thanks. Then shifting over to the home sales segment, you obviously sound cautious; and thank you for the explanation on what you're expecting in the second half of the year. But a couple things in the second quarter, I was curious if you are seeing any early signs of improvement.

Gross margin was a little bit better than expected or better than the first quarter. You did mention the uptick in the used home sale volume. Can you talk about what you're seeing on the ground? Traffic, perhaps in Florida versus Arizona, and what might be changing there to allow that slight improvement in margin.

You know, I am not sure that I would say we experienced a slight improvement in the margin, David. But in terms of what we would see -- what we saw second quarter of '07 versus second quarter of '08, on the MH side we sold 42 homes in the second quarter; we sold 66 in the second quarter of '07.

Florida has continued to basically at the same pace and a low number. We did see a drop-off in Arizona in the second quarter. That accounted for most of the decline, not 100% of it, but basically most of it.

On a per-home gross profit number, we made over $14,000 a home in the second quarter of '07 and about $2,200 in '08.

On the RV side, we did 49 sales versus 36, but we took a slight loss on each home, about $500, $600 in the second quarter; and we made about $6,800 in second quarter of '07.

If I could add to that, I think the one area -- and I think you're seeing it coming through the numbers. Actually price is not really driving velocity is I think the way we would describe it.

Somebody is either a buyer or not a buyer in our communities in this environment, and I don't think it is price-sensitive. We tested this quarter to see if we could get price to move it. Other than a few outsize transactions when we take a pretty good haircut, price really wasn't a factor. And those incremental transactions amounted to one or two in the quarter. So it wasn't like a deep discount drove the number on home prices.

But what we did see is the ability to rent our homes at the margin at economics, as compared to selling them at huge discounts, that makes sense to us with respect to the existing inventory.

Box-car numbers, we basically took about 300 homes of new homes of existing inventory and are now renting them out at annual rents of about $4 million a year. I think we think that that -- at the margin that is a pretty good execution as opposed to leaving that inventory sitting on our balance sheet or selling it at deep discounts -- even if we could sell it, which we think is a challenging environment even in itself.

Okay. Then finally, could you just talk about your flexibility on the rental program? 300 homes now, how quickly are you able to react with inventory? Where could you see this program headed in the second half?

David, this is Joe McAdams. In our new home rental program, as Tom said, we have rented approximately 300 homes. That includes 50 new homes in each the first and second quarters of '08.

This new home rental program should be viewed in three different categories. First of all, California. We have focused on the California marketplaces where the rental of home and land allows us to capture a total rent of, let's say, $1,500 to $1,850 a month in markets where site rent is constrained by rent control to approximately $800. So you can see that California is a very positive aberration.

In 2007, in 2008, we have 94 new homes in California, of which 87 are rented at these levels of the $1,500 to $1,800.

The second category is we have focused on renting our existing inventory, primarily in Florida, where the sales environment has slowed dramatically. In total, we have rented 57 new homes in Florida in 2007 and 2008, generating total rents anywhere from a low of $800 to a high of $1,000 per month. This program allows us to utilize the inventory again that is already in place, of which we have a bunch.

Finally, we are evaluating the 800-square-foot, highly amenetized unit for a cost of around low of $50,000, hopefully high of $55,000. Rents on these units are $800 to $900 per month. This represents a premium over the site rent of around $250 to $300 to contribute to the cost of a house.

This is a targeted program in specific Florida and Arizona markets based upon site availability and demand. We believe this unit will be particularly attractive to the Boomer customer; and we are in hopes to launch it in several markets after testing. We have only about 30 or 40 of these ordered. I would say 75% of them are in place.

But you can see, the cost of the unit and the rent that is coming in, you guys can put on that stream of revenue whatever multiple you would like. But that is kind of a -- where we -- this rental program is.

So as a result and response, with respect to additional capital investment, we are going fairly cautiously as Joe indicated. We bought maybe 20 to 30 with respect to a new initiative. So I think you will hear from us updating that as we go forward.

And remember, the other primary is not just the rental, the programs. Lastly, this is occupancy and it really is a pipeline for our future purchases.

Okay, that helps. Thanks.

Bill Carrier with KBW.

Thanks. You mentioned the financing with Fannie Mae. I was wondering if you could give us an update on how you view the Fannie-Freddie crisis of confidence and how this might impact you.

Well, you know, the Treasury Department has not asked us, so we are going to keep those comments to ourselves. But in any event, our focus is really closing our transaction. We have been in touch with Wells Fargo, our Fannie underwriter, I would say if not on a daily basis than certainly a few times a week; and directly in touch as well with Fannie Mae.

As far as we can tell and from what they are hearing and what they are sending us in e-mails, we are expecting to close in early August on the $114 million that we have left. We do have another $60 million that is due in early November. The debt on those currently is on four RV communities. We are using those as a test for what kind of capital is available in four RV properties. Specifically we have had a couple of lenders tell us that they will do the transaction at terms that we're not necessarily jumping up and down at. The number of lenders on the RV site is dramatically less than it was 12 months ago.

We do have a number of MH communities in our unencumbered pool. So from a financial flexibility perspective, we are feeling very comfortable.

But I would say that the Fannie people are telling us that they want to fund, that they are moving ahead, that it's business as usual. But the RV business financings are particularly difficult today.

Even excluding Fannie and Freddie capital, with respect to manufactured home communities looking for financing, indications are strong demand for that product throughout the lender spectrum, whether it's life company, pension funds, or what have you.

But as Michael said, there is a little bit softening with respect to any demand for financing on RV properties.

Okay. Last week, American Land Lease, one of the few public manufactured housing REITs, announced that it's undergoing a strategic alternatives process. So I was wondering how you view the portfolio that they have, and if its geographic footprint would appeal or maybe not appeal to you guys.

With respect to American Land Lease, I would say their portfolio is a very strong portfolio, about 75% in Florida, 25% in Arizona. Exactly what ELS would target with respect to acquisitions.

We think management is strong within American Land Lease. We would have an interest in that core kind of operating portfolio. But we struggle with the development side and the valuation of the development side.

So with respect to a transaction, I think we've expressed interest. We have not signed any confidentiality agreement, and we are interested to the extent they want to talk about the core portfolio absent any development or greenfield properties.

Okay, that's very helpful. Thanks a lot.

Paul Adornato with BMO Capital Markets.

Hi. Good morning. Just a couple more questions on the rental program. How are you sourcing renters? Are you advertising separately for them? Or are they just potential buyers that happen to come through?

Paul, there are several ways that we are identifying prospects. Probably, our most effective right now is through Internet sites. That can range everything from craigslist to forrent.com, and then we work those leads with a combination of inbound and outbound telemarketing. That is our most fruitful lead.

We also have people that, when we are able to generate a lead, that come to the park that is a potential homebuyer, it is almost like if the guy can't either afford it or he is not in the frame of mind to buy immediately, we will counter with a rental product.

So it's a kind of combination of both, but our Internet leads right now are most efficient.

Then your age-restricted communities, do you also have the same restrictions for renters?

Yes, we do.

What is the average rental term, or what is the rental term that you do offer? Do you offer six months or a year?

Presently it's a one year.

Nothing shorter?

I shouldn't say that. We do have a seasonal rental that we will do in Florida that is three to four months, and Arizona three to four months. But what I talked about this morning in the rental program that we are really focusing on is annual customer.

Right, right. I realize you haven't had the program in place for a long time, but do you have any experience with converting to buyers?

We've had a handful of buyers convert to sales. Some people have walked in and said I want to rent, and we have talked them into buying. But that activity has just started.

Okay, thank you.

Michael Bilermen with Citigroup.

Just sticking with the rental program, you talked about in the press release $31 million that you reclassed out of the sales inventory into the rental. So what is sort of the amount that you have now in homes for rent in terms of the basis?

It's about -- it's $31 million, which $20 million is the new homes that Tom mentioned.

You are currently earning $4 million?

On the new homes in terms of revenues.

Just on the $20 million or on the total $31 million?

No, on the $20 million. The other $10 million or so is used homes, which is really more of a strategic activity for us. Historically, we have used used-home rentals as a way to control sites, control quality.

We can convert those rentals to sales if we wanted to push that activity. But again, we are strategically choosing to control the site.

Then how much do you have? So everything you have in the home rental pool is currently rented? There is no actual vacancy in the ones you have transferred over?

There is a little bit of vacancy on the used side, but on the new it is all filled.

You came up with -- it's a pretty high return on capital lease initially; granted there is a lot of depreciation in the home over the years. How did you sort of determine what the right rent was going to be?

The rent is the market. We did significant market studies to determine what rents we could offer our product at. I do want to point out that in the FFO numbers is a depreciation charge in the quarter of -- I don't know.

About $300,000, $325,000.

So we are taking this rental inventory and you will see that depreciation charge included in our FFO number. So add about -- what is that? $1 million-plus a year with respect to that new home inventory.

Then how much inventory is sitting on the for-sale side at this point, now that you have taken this out?

Order of magnitude, $25 million, $30 million.

Okay. Then, Tom, you talked a little bit about the CPI bumps coming up, and with CPI obviously had a pretty strong clip, affecting -- I think it's almost half of your portfolio. But then you had a little bit of cautious commentary saying that other things would have tempered your view of being able to put those rental increases through.

So maybe you can just walk through where you see sort of that falling out overall.

You know, I would say at this stage of the game it is going to be difficult for me to give you any color other than what I have already addressed. I think the CPI will be self-explanatory as the information comes out.

We have typically said that we can get 100 to 150 basis points over CPI on a historical basis. I think I am tempering that type of comment in light of the significant disruption that is going on in the single-family housing market. There's issues with respect to significant price discounts being offered to move inventory.

Who knows what the foreclosure numbers are going to be? Who knows how much of that stuff is going to be cleaned through the system, and at what price it's going to be cleaned through the system, and how that affects the marginal cost of housing in the areas in which we compete? Or who knows how that is going to hit the shadow supply with respect to the rental market as well?

So we are a little bit cautious in that there is a lot of stuff out there that needs to get cleared, and we are sensitive to that with respect to how we would set our annual rent process.

The last question was just you talked about switching the transient to seasonal and annual, which you had a pretty big conversion this past quarter. How much more do you want to target in terms of getting that transient business moving towards the annual and seasonal?

Well, you know, there are some of our properties -- for example, Monte Vista. Out of an 850-site property, I think we have 25 sites that are transient. Paradise -- another property in North of Phoenix, out of 1,000 properties it's got maybe 100 transient.

We've seen that that amount of transient builds enough transient activity to feed what we call the fillet, which is the annual customer. So we want to have enough transient activity in our properties, where the new customer can come in and enjoy the lifestyle and become attracted to that lifestyle and look for ways to turn that experience into a longer-term experience. So I think there is a lot of room with respect to that conversion. I can't give you a number as I sit here today, though.

Okay, thank you.

Andrew McCulloch with Green Street Advisors.

Good morning. On the $10 million in used times that you have in inventory, what is the number of homes there?

It's about 900 to 1,000, roughly.

Back to PA for a second, if a deal didn't transact, what do you think that lease coverage would look like at the end of the year?

As Tom stated in the second quarter, PA was about $850,000 above positive to the lease payment. The third quarter in PA's business is the strongest quarter of the year. We are looking for 2 to 3 times that additional coverage.

The fourth quarter, last year we took a big dip in 2007, even though the other quarters were banner years, the best years that Thousand Trails had ever had. We think in '07 we will be equal with the lease.

The other thing, Andrew, we might say is that there's $5 million in cash in Thousand Trails; and there's $24.5 million worth of receivables. So I don't see PA defaulting on the lease.

Coverage of 1.1 or 1.2?

Yes, sir.

Then just back to the 1.7% increase in resort revenues, and you gave the 6.9 annual. What is the breakout of transient and seasonal there?

I focus more on the North for the color of it all, which really -- where the transient activity is occurring. Because the other stuff you are seeing, the roll off of the end of the season and the winter season.

But with respect to the North, I think the annual revenue increase was order of magnitude 7%, 8%, with a decline in the transient of about 7%.

On an annual basis, just to give some perspective for the North, you are talking about probably annually $17 million of revenue a year, $5 million of which will be transient. So 70% of revenues coming off the North are annual revenue streams.

With respect to that 1.7%, again I think we gave you some color as to how those numbers roll off. But we think that adjusting for the timing of holidays and adjusting for the site mix, transfer from annual to seasonal, the transient revenue in the North would be up 1%-ish, 2% as opposed to being down the 7% I indicated.

Great, thanks.

At this time, we have no questions in queue. I would like to turn the conference back over to Tom Heneghan for closing remarks.

Well, thank you for joining us on our call. We look forward to updating you in the future with respect to both Privileged Access and our third-quarter results. Look forward to speaking to you again. If you have any questions, as always feel free to call Michael Berman. Take care, everyone.

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