Equity Lifestyles Properties Inc. Q3 2008 Earnings Call Transcript

| About: Equity Lifestyle (ELS)

Equity Lifestyles Properties Inc. (NYSE:ELS)

Q3 2008 Earnings Call

October 21, 2008 11:00 am ET


Joe McAdams – President

Thomas P. Heneghan – Chief Executive Officer

Michael B. Berman – Chief Financial Officer

Roger A. Maynard – Chief Operating Officer


David Bragg – Merrill Lynch

Paul Adornato – BMO Capital Markets

David – Citigroup

Bill Carrier – Keefe, Bruyette & Woods

Alan Calderon – European Investors, Inc.

Andrew McCulloch – Green Street Advisors


Good day everyone and thank you all for joining us to discuss the Equity Lifestyle Properties third 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 opening remarks and questions and answer sessions with the managements relating to the company’s earnings release.

As a reminder this call is being recorded. Certain matters discussed during this call may contain forward looking statements in the meaning of the federal securities laws. Our forward looking statements are subject to certain economic risks 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 CEO. Please proceed.

Tom Heneghan

Good morning, thank you for joining us today as we discuss our results for the third quarter of 2008. I am Tom Heneghan, Chief Executive Officer of Equity Lifestyle Properties.

In a very difficult macro environment, I am pleased with our third quarter results, which reflected stability of our business. Joe McAdams and Mike Berman will provide more details regarding our results following my comments.

Our business plan has always been to create long term stable and predictable cash flows. I believe our results so far for 2008 and also our expectations of both the fourth quarter of 2008 and the year 2009 reflect this plan.

Our primary investment objective has been to offer a affordable housing options in high quality real estate locations focused on 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 a generally higher credit quality.

It is this combination of strong demographics, high quality affordable housing and a fulfilling lifestyle. That we believe position our company well in the current environment and for the future.

One potential trend we see emerging out of the current economic turmoil is simplification. We believe that there will be an increased desire for simplicity in both financial and social interaction.

Our business fits this desire for simplicity. A review of our customer characteristics reveals the customer who has generally avoided credit, saved money, focused on expense control and is focused on simplifying their life, both financially and socially.

However, simplification does not mean less fulfilling. To the contrary our customers have an active lifestyle ranging from recreation activities such as golf, tennis or shuffleboard, to music, plays, crafts, and social gatherings. Such as concerts, dances and dinners. All within the confines of our communities.

Much of this activity is provided by residents of the community and therefore available for little or no incremental costs. With all the stress and worries that exist in our time, our customers find comfort in their friends and neighbors. And security in knowing you’ll always be greeted with a friendly wave.

The coffee or drinks shared with friends or the joy of participating in, participating in or watching a wide array of activities for little more than the cost of your time, provides an easy respite from all of the outside noise.

This is not to say that our customers and potential customers do not face challenges. The increased uncertainty of the future has caused people to be more cautious in their spending and decision making.

In light of this we too have made adjustments to our business. However, we strongly believe that by making appropriate adjustments to our products and services. We can offer attractive solutions to those customers seeking to reduce their exposure to residential real estate. While improving their ability to engage in an active and fulfilling lifestyle.

Now I’ll turn it over to Joe for his remarks.

Joe McAdams

Thanks Tom. I’d like to provide some color regarding our operations for the current quarter and our future expectations.

With respect to our core community business. We continue to enjoy a very stable customer base. So our focus has been on how we incrementally attract customers fitting our profile.

For many years we have used a new home sales program to attract younger retirees and empty nesters. Selling on an average of approximately 400 homes per year in the last eight years. This has allowed us to focus on removing some of the oldest housing stock out of our communities and replacing those homes with newer, more attractive homes.

We have also focused on beefing up our lifestyle offerings to make our communities more attractive to the new generation of retirees. We’ve been extremely successful with this program. And I believe we will in the future continue to be successful.

The last couple of years have been painful. While we kept this part of our strategic plan in place, despite lower sales volumes and lower profitability, we continued new home sales operation in 2007 and thus far in 2008 despite total sales operation losses of over $4 million because it represented a strategic initiative. However, we also commented that we would temporarily eliminate this program if it became necessary. Today’s economic environment represents such a time.

We have decided to significantly reduce our new home sales operation. Beginning in the fourth quarter of this year and into 2009, and until such times as conditions become more favorable. This step should reduce annual expenses by over $3 million. We decided to convert our remaining for sale new home inventory, currently as comprised of approximately 248 new homes to our rental program.

If you’ll recall we began our new rental program initiative approximately nine months ago in reaction to this economic environment. And have shown that this can be a positive program. Renting over 77 new homes in the third quarter and 206 homes to date.

In addition results to date reflect little incremental cost associated with the program. Given the retiree renter and the consequent lower wear and tear on the homes. Moreover many of these renters represent good buying prospects.

As outlined earlier in the year, we are now underway with the first marketing campaigns based on that outcome of the [Actium] database initiative. While it may take some time to find the right combination of customer and offer. My experience tells me this effort will ultimately be successful in bringing additional customers, both buyers and renters to our communities.

We also have stopped acquiring new inventory. Until we are better able to assess the future environment. We expect to reassess this during January of 2009. We are mindful of the concerns regarding a home rental program and have kept tight control over our customer quality.

However carrying a new home sales operation at continued losses could not be justified at this time. And rental of the remaining inventory is a natural progression of this decision.

We also have decided to present FFO after a charge for home depreciation to better reflect the economic cost of this decision. We expect the marginal impact of this decision to be a potential positive to occupancy and increased revenues in addition to expense savings mentioned.

One additional factor impacting occupancy in 2009 will be how many homes are removed from our communities. As I said earlier, over the years we have allowed some of the oldest housing stock in our communities to leave when the homes were not sold in place by the owner.

This natural attrition allowed us to replace the older housing stock with new homes. However, in the current economic environment we recognize the need to limit this activity. And I believe we’re in a position to potentially slow this strain on occupancy compared to previous years.

With respect to ELS ‘s RV segment for both our northern and [sun] belt resorts. We continue to be very successful in moving our short term customers to annual customers. With annual revenue up over 7.3% in the quarter, in 6.7% for the year-to-date.

Our challenge is to find additional new customers interested in short term stays at a reasonable cost. To offset the impact this transition has on our seasonal and transient revenues. In addition to provide opportunities to grow our annual customer base.

We will be utilizing several of the mass RV channels to acquire new customers. My former company [inaudible] and Camping World, control four to five million customers and Reserve America has over three million in their data base files. ELS has formed alliances with these companies to enhance our new customer acquisition.

With respect to Thousand Trails, we began the consolidation of Thousand Trails into ELS in the third quarter. And have realized synergies of $3 million to $4 million on an annualized basis. We will be restructuring the sales and marketing operations further during the fourth quarter. These changes will reduce both our front line sales and the associated sales and marketing expenses as we reduce the front line sales activity.

There are further G&A and overhead expense synergies that will be achieved during 2009. And we expect the net impact of these changes to be positive. We are also evaluating new products that lower the upfront costs of becoming a member and offer additional opportunities to grow our $50 million due space.

We believe our RV properties represent an economical leisure option for the install base of approximately eight million registered RV owners. In addition we continue to create long term stable revenue within the existing Thousand Trails footprint.

I mentioned to you last quarter that we were testing selling used cottages in the north east at Thousand Trails resorts. This program has been a success in spite the current economic environment. We have sold 82 used cottages over the last four months and will continue to expand the program to more Thousand Trails resorts in 2009.

We have also expanded extended stays at Thousand Trails resorts. Both of these initiatives create annual site revenues in excess of $3,000 per site. We expect to continue both of these initiatives in 2009. These new options offer our existing member base, the opportunity to increase the value of their membership experience and provide them with attractive and affordable options for their active lifestyles.

Now I’d like to turn it over to Michael Berman.

Michael Berman

Thank you, Joe. I’d like to make some comments with respect to our 2009 full year guidance. This is a challenging environment for forecasters even if you like our business, as we do. That said we believe it is important to maintain our forward look at 2009. And I would like to go through our thoughts and assumptions, underlying our 2009 guidance range.

In general we are assuming zero occupancy growth. In 2008 full year numbers are estimates. First core property operations; 2008 community-based rental income for our 2009 core properties is expected to be approximately $245 million to $246 million and is assumed to increase 3.5% to 4%. By the end of October we will have noticed approximately 60% of our residents with rate increases reflecting this revenue growth.

2008 resort based rental income for our 2009 core properties is expected to be approximately $104 million and is assumed to increase 1% to 3%. We expect good growth at the margin in the annuals which generally comes at the expense of transient and seasonal revenue growth as we take sites away from the latter category.

Our annual revenue stream represents 60% to 65% of our resort cash flow stream and is anticipated to increase 5% to 6% in 2009. This revenue growth is a combination of rate increases as well as occupancy gains that occurred throughout 2008 and will have the full benefit of in 2009.

As we have stated many times, our goal is to increase our long-term revenue stream. Over the past few years we have done an excellent job of expanding transient and seasonal customers in their length of stay. And in particular have converted a number of seasonal customers to annual.

Our 2008 transient revenues for our 2009 core properties which is less than 5% of our overall property revenue base is expected to be approximately $18 million. We anticipate a 5% decline in transient revenues in our 2009 guidance.

Our 2008 seasonal revenues for our 2009 core properties is expected to be approximately $21 million and is expected to decline 5% to 10% in 2009. We attribute a portion of this decline to seasonal customers that have become annual customers.

Approximately 60% to 65% of our seasonal revenue occur in the first quarter. Our 2009 core properties generated approximately $13 million in the first quarter of 2008. And assuming approximately $1 million of this revenue has moved to the annual pool, we would anticipate $11 million to $12 million in seasonal revenue in the first quarter. To date we have approximately $9 million in reservations for the first quarter. For the remainder of 2009 we anticipate remaining revenue will be flat to 2008 or approximately $7.5 million.

Moving on to other income. Our unbundling efforts continue as we expect utility and other income approximately $39 million in 2008 to grow over 7.5% in 2009. Overall core property operating revenues are expected to increase 3% to 4% in 2009.

Core property expenses before property management are expected to be approximately $161 million in 2008 and our budget to increase 2.5% to 3%. In 2008 our core expenses grew 4.5% before property management and was led by utility expenses which is approximately one third of our expense base before property management. These expenses were up over 7.5% in 2008 and we expect this growth rate to be reduced significantly. We anticipate real estate taxes to be up over 5% in 2009.

Overall core property operations before property management is therefore expected to grow 3.5% to 4.5% in 2009. We assume no contribution from non-core properties in 2009.

Comments on privileged access. At the beginning of 2008 we anticipated to receive a $25 million lease payment. And therefore a $25 million FFO contribution from PA. We expected privileged access to have generated approximately $26 to $27 million in cash EBITDA for 2008.

In 2008 CA anticipated $17 million in property management and corporate G&A costs. So the FFO contribution prior to overheads to 2008 would have been approximately $44 million. Of the $44 million, approximately 70% from ancillary activities and other income, comes from sales.

The sales contribution primarily comes from upgrade sales and front line sales are at best a modest contribute. We anticipate FFO contribution prior to overhead to be approximately $39 million to $43 million in 2009. As we are anticipating a similar performance in 2009 for property operations as we are just taking over management of the 82 privileged access resorts.

The anticipated variability in our results primarily relates to the sales operation.

Moving onto property management and corporate G&A. In 2008 ELS expected to have $22 million in property management costs and $21 million in corporate G&A. In 2008 PA expected to have approximately $70 million in overhead costs. Pro forma for 2008 would be approximately $60 to $60.5 million.

We have achieved initial synergies of $4 to $4.5 million, of which approximately $1 million of cost savings will be rolling into our fourth quarter results. For 2009 we anticipate we will have $56 million in property management and corporate G&A costs.

Our sales operations. Following up on Joe’s comments, we have shifted our focus on our home operations away from new home sales in our manufactured home communities and towards renting our vacant inventory balances. As a result we have dramatically reduced the expenses associated with our new home sales activities.

We continue to sell cottages in our resort communities. As a result of our efforts we expect our overall sales operation to break even in 2009. Reversing 2008’s anticipated $3.5 million loss.

Other income expense items unrelated to privileges is expected to contribute, is expected to have contributions from interest income, other corporate income and joint venture income of approximately $6 million offset by rent control of $2.5 million. In 2008 we received $8 million of income from these items offset by $2.5 million of rent control.

Financing costs consist of interest expense and preferred costs, we assume this is going to remain at approximately $116 million. We make no assumption on the use of our free cash flow on our earnings model.

Overall FFO is approximately $98 million for 2008 and $110 million in 2009 at the midpoint of our range. We estimate our share count will grow approximately 0.5% in 2009. At the midpoint of our preliminary guidance our FFO per share estimated at $3.55 with a range of $3.45 to $3.65 FFO per share.

I’d like to make a few comments on our leverage. Before I discuss the status of our 2009 refinancing and our plans for 2009. At the end of 2003 we undertook a re-capitalization that brought our coverage ratio, which I’ll define as EBIDTA interest expense. From 2.25 times at the end of 2003 to a low point of less than 1.8 times during 2004.

Over the past five years we have more than doubled the size of our company, expanded into faster growing revenue streams, enhanced our customer base and maintain our financial flexibility.

At the midpoint of our 2009 guidance, our coverage ratio will be 2.26 times, we accomplished this leveraging with almost no dilution to our shareholders. In 2008 we had approximately $200 million to refinance with a weighted average interest rate of about 5.4% and we have replaced that with about 6% debt.

We paid off $131 million November 30th and paid off another $60 million in October. We have approximately $8 million to go with cash proceeds set aside. Our cash balance is approximately $27 million $28 million today and in this environment we have tended to hold higher cash balances primarily invested in short term U.S. Treasuries.

Although spreads have significantly widened and the number of lenders have decreased. There is still a strong interest in financing our properties. We provide a stable cash flow, a diversification element, a relationship approach for long term lending – these are well received in today’s credit market.

With respect to 2009 in addition to our excess cash we have on hand we have more than $70 million of free cash flow, less recurring CapEx estimate of $15 million and a current common dividend of approximately $25 million.

We are currently negotiating a detail term sheet with Fannie Mae concerning a $200 million secured credit facility and have over $250 million of availability on our lines of credit. Our line banks are Wells Fargo, Bank of America and US Bank. We are running our bank ahead of maturity.

We are currently in the market with $80 million of financings the amount we have coming due for 2009, which more than half of which matures in the second half of 2009. As a result we may end up holding more cash than we have historically which may result in some dilution and is not factored into our guidance.

[audio gap] like to make concerning TT’s accounting. Let me take a moment to address some accounting implications related to the consolidation of the privileged access business. As most of you know privileged access generates substantial cash flow, official right to use payments which are non refundable.

Under GAAP these payments are being amortized over periods of up to 30 years. For purposes of FFO we have added this non cash amortization back to our results. Depreciation is a good analogy. There you spend cash on your real estate it gets depreciated over some future period. Here we receive cash from our real estate and our amortizing over some future period. In both cases the non cash adjustments are added back to assess the performance of the real estate.

And now I’d like to open up the discussion for questions.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of David Bragg - Merrill Lynch.

David Bragg

Yes good morning. Just wanted to focus on the decision that you’ve made on the home sales business, and as you look at that, clearly the benefit [break in audio] forward for 2009, what are the risks and the costs that you could see going out over the next three to five years [break in audio] cut back this business now, and in terms of community quality or higher operating expenses?

Tom Heneghan

I would say that we're making the decision in light of the short-term economic environment and not a long-term change in our strategic view of how we want to run our properties. We're sitting with an inventory of approximately 250 homes. If you look at the cost of carrying that inventory non cash flow generating, and the sales of the cost and marketing operation around that, that was a pretty significant drag.

We did not see the home sale environment improving in 2009. Everybody knows what's going on with single-family housing environment right now. There's significant liquidation of foreclosures that are occurring. There's difficulty accessing the credit markets for home buyers, and out customers at the margin, even if they could buy, are opting to rent in the current economic environment, so I would say the decision was made with the light of today's uncertainty.

I think you will see us reinitiate a home sale program in the future, and if you recall, the home sale program used to be a net positive to our results, not the $3 million plus negative that is occurring right now, and we don't think it's going to meaningfully change our strategic initiative relative to customer quality, or the quality of the lifestyle or our amenity package.

David Bragg

Could we just review those numbers real quick? How many homes are currently in the rental pool?

Tom Heneghan

New homes, I think, is somewhere around 300; 100 that we've already rented that were in our new home inventory. We have about 250 for sale homes in inventory that have been held back selling program, as a result of this decision those 250 homes will be now available for rental.

We've also made the decision that we will stop buying inventory at least until the January 2009 period where we can reassess the environment. So essentially what we're going to be working with over the next few months, maybe half a year, is going to be the existing sale inventory that has been converted to rental. And we've been renting that new home inventory up at anywhere from call it 50 to 70 a quarter.

David Bragg

Just a couple questions for Joe; first, Joe, could you review the TA cost structure now and discuss any potential changes there for new Thousand Trails members?

Joe McAdams

David, let's talk a little bit. I think maybe the easiest way to do this is, we've got about $80 to $81 million worth of property operating revenue, and that comes from roughly $50 to $55 million in annual dues, $20 million in ancillary revenue, and that consists of everything from extended stays to rentals of cottages to boat rentals and retail operations. And then we have about another $7 million of other income, which basically comes from Resort Park International and a Thousand Trails management company. That gets us to about $81 million in revenue, and on that $81 million we have roughly a $31 million contribution.

In 2008 our sales front rails will be roughly $20 million, and as Michael said earlier that's a very small contribution. Let's say it's 5% or less. And then on our upgrade sales there's $20 million there and the contribution is 50% to 60%, so with that, that gives us the $44 million contribution that Michael was talking about.

In 2009 what we will do is we'll actually take the sales down on the front line to roughly $12 million, and we will keep the upgrades at about $15 million. So we'll take the mix from the frontline sale – it is extremely costly 3,200 units we did, roughly, in 2008 – we'll take it down to around 2,100 units, and then we'll upgrade those folks and our contribution then would be roughly $42 million. That's what we're looking at for 2009.

With respect to the members, we have an attrition of roughly – after we shook out the Outdoor World membership and consolidated that – we have an attrition of roughly 8,000 members. That comes in about three broad-range categories. The first category, a third of them is people that have health problems and are dying; can't do much about those folks.

The other third comes from people that have left a lifestyle – actually they sold the RV. What we intend to market those folks this year is a cottage-type program or a rental. They still enjoy the outdoor resort but they actually don't have the RV.

And the third are the members who say look, the dues are too expensive for us; we're not using that much. So what we're looking at is a flexible dues program to go back with those people. So maybe that's more than you want to know about it, David, but that's where we're going.

David Bragg

Well just to be clear on the roller upfront sales in 2009, that's a result of your expectations for less sales not lower price points?

Joe McAdams

That's correct. We will be introducing some lower price points, but remember that's that very high-end sale, and we will be reducing selling locations.


Your next question comes from Paul Adornato – BMO Capital Markets.

Paul Adornato – BMO Capital Markets

Yes, I'd like to focus on the move out from the core portfolio, the core retirees. What's the average age of the home that leaves the community?

Tom Heneghan

Oh, historically? I'd say over the last 10 years we've probably moved out 30-year-old plus housing. There used to be some of our communities that would have a single-section home, kind of metal sided, metal roof. Those are the homes that we have targeted over time to remove.

A couple of things that happens when you replace that older housing stock with the newer homes with front door, front porch, and the higher roof pitch, is the surrounding home owners also start to make improvements on the existing housing stocks, so there's a beneficial fact that occurs over time as a result of a removal of the older housing and replacing with the newer home.

Paul Adornato – BMO Capital Markets

And the homes that leave the communities, is there any value to those homes? I think you mentioned that the homeowner just kind of writes it off if you will, and there's not actually a sale that occurs. Is that correct?

Tom Heneghan

There is some of that. There are some that we've actually historically bought for removal if it's a targeted location in our property, for example, by the entrance and we wanted to improve the look and feel of the community as you drive in, we would have targeted and bought existing housing stock and targeted it for removal. Sometimes that's a demolition of the house and sometimes you could sell it offsite, but we're talking for very little money.

Paul Adornato – BMO Capital Markets

And so the plan at this point is to somehow make that house livable and salable to a new customer, is that the plan?

Tom Heneghan

I would say that for the most part throughout our properties we've culled a lot of older housing stock, so we're in a position now to not have to be as aggressive as we would have been, say back in 1999 when we first started this program. As I mentioned before, when you upgrade both the amenity package and the housing stock with the new home, there is a lot more care and attention paid by homeowners with respect to the existing housing stock, because they're competing against the newer homes as a result of their resale values. So I think we've done a pretty good job. The housing stock on our properties, I think, is in pretty good shape overall.

Paul Adornato – BMO Capital Markets

And moving to the decision to no longer sell the homes in inventory, granted the sales environment is much slower now, but if someone wants to buy one of those homes why wouldn't you kind of sell out what you have and then not hold any inventory of owned homes?

Tom Heneghan

We would. I mean, we have been trying to sell all year long. We'd be ecstatic to sell a home if it made sense relative to the economics. What we're seeing right now is almost no activity on the buying side, and to the extent we do get any activity on the buying side these are very sophisticated bargain hunters who have the shopped the market well and putting price points on homes that make it an absolute bargain for them to buy. We don't think that's an economic decision relative to what we could rent that home out for and retain in our inventory and perhaps sell it as a used home in two or three years, as opposed to selling it for deep losses today.

Paul Adornato – BMO Capital Markets

And then just one final general question, of course, I think everyone is just trying to get a sense of what consumers are up to, and you guys talk to the consumers every day, so I'm wondering if you could kind of give us a progression of activity from the beginning of the quarter to the end of the quarter, and then if you could comment on the activity in the month of October?

Tom Heneghan

Sure, I'll break it into a couple of segments. With respect to the manufactured home communities again, we've commented about the sales environment. There's really no sales environment to speak of, but there is good demand for rental housing, both new and used rental housing.

I think we are seen as an attractive, affordable lifestyle option for people seeking retirement and/or empty-nester housing. It allows people to simplify their lives in line with my opening comments – the cost of heating a 1,000 square foot home versus a 2,500 square foot home, the cost of maintaining. All of your costs start to get downsized, and I think that is seen as very attractive, so we still have demand for our product. What is causing an issue is the availability of capital in the marketplace homes or to sell their existing single-family home residence in this environment.

I think that would be the biggest issue on the manufactured home side. On the RV side, despite – I'll give you more of a year perspective than a current quarter perspective – despite significant issues with the cost of gas earlier in the year, we've seen a very sticky type of revenue stream coming from the RV segment. Certainly there are some customers who've decided that they could not afford an RV trip this year, but there were also other customers who changed more expensive spending patterns and more expensive vacations and rotated to a family weekend out at one of our RV resorts in the summer.

I think I mentioned in prior earnings call comments, we saw some pretty robust activity on that. We've also seen significant demand for those people who already owned an RV unit to want to leave it in place on an annual basis and use it as a form of second home, vacation home, and vacation destination.

I think overall we're pretty pleased with how our business is reacting to the economy.


Your next question comes from Michael Bilerman – Citigroup.

David – Citigroup

This is David here with Michael, just a couple questions. Can you guys provide a quick market update on Florida and California in terms of demand spend, piggybacking on the previous question?

Tom Heneghan

I don't know if there is much more I can add to – but Florida certainly has been news with respect to what's going on in the single-family housing market, but again, we continue to see demand for our product. Not on a for sale basis but on a for rent basis.

California, I would say that northern California as a market continues to be [inaudible], and southern California I would characterize as weak.

David – Citigroup

And then I may have missed this, but could you provide terms on the negotiations that you're doing with the agencies at the moment?

Michael Berman

No, what we are looking at is a $200 million facility secured by a pool of assets. Pricing in the marketplace could be anywhere from $250 to $400 over depending on the day and depending on the lender. Specifically with respect to Fanny May, it's a somewhat spec flexible facility; you could have forwarding in fixed rate tranches the fixed rate could go out to 10 years. If you float you have to cap it, but it's a very interesting facility to us.

David – Citigroup

Yes. Do you have a sense of when that might close?

Michael Berman

We're looking to finish that in the quarter.

David – Citigroup

And then lastly, can you provide some guidance on CapEx impact of privileged access to consolidation?

Michael Berman

Sure. In general we have run recurring CapEx at about $125 to $150 per site. My $15 million comment before includes the privileged access sites.


Your next question comes from the line of Bill Carrier – Keefe, Bruyette & Woods.

Bill Carrier – Keefe, Bruyette & Woods

You sent out most of your annual rent notices for '09. Would you know the post-bridge increases over 2008 that those notices contained on average?

Michael Berman

Yes. It reflected about 4.5%, 4.6% rate increases, and inside and going back to my numbers is about a 1% impact due to our unbundling efforts.

Bill Carrier – Keefe, Bruyette & Woods

Guidance for the fourth quarter of $0.66 to $0.68 –

Michael Berman


Bill Carrier – Keefe, Bruyette & Woods

Does that include any items that might be considered one-time in nature?

Michael Berman

No. Basically the fourth quarter previously had implicit in there a $6.3 million lease payment from privileged access that we otherwise would have had in our results. The privileged access results we estimate to be about $0.04 to $0.05 less, so that's really the adjustment that I would to the fourth quarter guidance. The rest of our results are as anticipated.

Bill Carrier – Keefe, Bruyette & Woods

And last quarter you mentioned that you had expressed interest in talking to American Land Lease about their portfolio, but your comments today indicate that you're no longer interested in acquiring properties right now. Do you guys have any updates that you can provide us with about those talks with A&L?

Tom Heneghan

Well first, I don't think we made a comment with respect to our view on acquisitions. I think we have mentioned American Land Lease from the perspective of seeing their portfolio as a nice portfolio, and seeing their management as capable management, but at the time that they were announcing their strategic review we decided not to enter into any confidentiality agreement, and I think our issue at the time is we addressed it is the difficulty in valuing much of the development land that was held on their financial statements.

Bill Carrier – Keefe, Bruyette & Woods

So you're no longer in talks? Those talks have ended?

Tom Heneghan

But I mean we expressed an interest in pursuing it if they could find some way to take the development parcel out of the equation, and this was a conversation done through intermediaries. They expressed lack of desire to want to do that, and I think that's where the conversation ended.


(Operator Instructions). Your next question comes from Alan Calderon – European Investors, Inc.

Alan Calderon – European Investors, Inc.

When you discussed the home rental program versus the home sales program there was a comment made to present FFO after it charged for home depreciation, and this is going to be a positive, I believe, to FFO in '09 over '08?

Tom Heneghan

It's actually going to be a deduction.

Michael Berman

Yes. We're running about – right now in the second and the third quarters it's about $300,000, $350,000 a quarter of depreciation. That will increase in our guidance to about $600,000 a quarter, and that's running through our ancillary services and net line item in our sales operations.

Alan Calderon – European Investors, Inc.

But it sounds like overall from doing this from a rental perspective versus a sales perspective, you're expecting a positive to contribution to your results in '09?

Tom Heneghan

Yes. As a result of eliminating significant home selling expenses and some negative gross profits on the sale of the homes, we're going to eliminate those two effects. The depreciation effect that Michael talked about is an additional expense that will flow through and hit FFO to the tune of about $2.5 million. Offsetting that will be the incremental revenue we get by renting those out.


Your next question comes from Andrew McCulloch – Green Street Advisors.

Andrew McCulloch – Green Street Advisors

Can you comment on your expectations from third part dealer sales in '09?

Tom Heneghan

Well third-party dealer sales I think we year-to-date got 60 or so, but that includes both in the park model segment and in the manufactured home community segment. I would say on the MH side of the business, I mean you’re talking about an industry that went from 350,000 shipments a year on a pretty wide dealership program down to an annualized rate of 80,000 shipments a year and a fairly well decimated dealership environment out there.

We would love to see some more dealers out there, and we would be very excited about working with them to come into our communities and try and initiate new home sales; but I don’t see a lot of that activity out there, although we would be happy to see it and talk to them.

Andrew McCulloch – Green Street Advisors

You think you would ever bring their sales operations back onto the community? Like their physical sales office?

Tom Heneghan

I don’t – I would say that we would have to think long and hard about that. I mean the one thing that traditionally a dealer wanted to do was sell the home and leave and never talk to you again, and we were left then with any of the difficulties that that process left with a homeowner who didn’t like the set-up or wasn’t happy with the home.

We took over the home sales business within our communities to control the quality of the experience for our customers. I think we are still are very mindful of that. We consider the sales operation to be the front door, for lack of a better word, to our communities. We are very, very interested in that in maintaining the quality of the customer and the quality of the housing stock.

If we could get a dealer who was sensitive to our needs on that respect, and treated the customer as a customer he wanted to make a long-term happy customer, we would be more than happy to talk to a dealer about that.

Andrew McCulloch – Green Street Advisors

Thanks. Where are the LTDs on your recent Fannie financing?

Michael Berman


Andrew McCulloch – Green Street Advisors

What kind of rates do you think you would get if you locked, say, 10-year debt today? What would the spread be?

Michael Berman

As I mentioned before, Andy, you know it depends on the lender. It depends on what they are looking for, you know anywhere from 250% at the very low end to 400% on the upper end.

Andrew McCulloch – Green Street Advisors

One last question; can you tell us what the cash EBITDA was for privileged access for all of 3Q?

Michael Berman

The third quarter was almost $10 million.


It appears we have no more questions in the queue at this time. I would like to turn the call over to Tom Heneghan, the CEO. Please proceed.

Tom Heneghan

I appreciate everyone’s time this morning as we went through our results and as always, if you have additional questions, feel free to follow-up with our Chief Financial Officer Michael Berman. Take care, everyone.


Thank you for your participation in today’s conference. This concludes our presentation.

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