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Executives

Marguerite Nader – President

Paul Seavey – CFO

Analysts

Jana Galan – Bank of America

Eric Wolfe – Citi

Gaurav Mehta – Cantor Fitzgerald

Andy McCulloch – Green Street Advisors

Equity Lifestyle Properties, Inc. (ELS) Q4 2012 Earnings Call January 29, 2013 11:00 AM ET

Operator

Good day everyone, and thank you all for joining us to discuss Equity LifeStyle Properties Fourth Quarter 2012 Results. Our featured speakers today are Marguerite Nader, our President; and Paul Seavey, 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 call is being recorded.

Certain matters discussed during this conference call may contain forward-looking statements in the meanings of the Federal Security laws. Our forward-looking statements are subject to certain economic risks 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 Marguerite Nader, our President. Please proceed.

Marguerite Nader

Good morning and thank you for joining us today. Before I turn the call over to Paul Seavey, our Chief Financial Officer, I would like to take some time to walk you through some of our highlights for 2012 as well as thoughts for 2013.

In 2012, we fully integrated the 75 Hometown properties, a $1.5 billion transaction. The integration went very well from an operating standpoint and the properties performed better than expected for the full year 2012. We increased occupancy 280 sites in our core portfolio. We increased FFO by $0.96 per share or 26% year-over-year.

As we look into 2013, I’m excited about the opportunities that lie ahead. The 75 Hometown properties will now be included as part of our core results. Our guidance projects an increase in FFO to $5.04 or 9-plus percent growth.

I also think it would be helpful to provide my view on our business. We continue to have high demand for our MH properties overall. Our properties appeal to the baby boomer demographic, a group which will grow to over 100 million people over the next 10 years. Our properties are well positioned to accommodate the growth in this key demographic.

I recognized that the MH business has changed over time with the need for land owners to commit working capital in order to sustain occupancy. Prior to 2008, ELS had a very robust sales platform selling 700 to 800 new homes per year. While today’s customers are hesitant to part with their capital, I intend to focus on increasing the number of ownership transactions within our property.

With respect to our RV business, our RV footprint appeals to both the baby boomers who are just considering retirement and those who are well underway into retirement. We have an extremely loyal and vibrant customer base ranging from members who had been with us for more than 20 years to annual customers who have spent a decade with to the RV customer who is just starting out exploring the RV lifestyle. We can meet the demand of the RV-ers for a quality, affordable vacation experience.

We have often discussed utilization of our RV sites. Increasing utilization can be achieved by increasing our annual customers, increasing our member count and promoting additional transient business. I believe in order to realize this increased utilization, it is necessary to expand our customer base through deeper relationships with distribution channels, to increase marketing campaigns for our properties and to focus on the younger customer demographic. These include depreciating the best ways to communicate with customers from social media to grass root effort and understanding the amenities that drive their decisions to stay at particular property.

Finally, 2012 also began the implementation of our succession planning and rotation of our executive team. At the end of this month, Tom Heneghan will be moving on to Equity International. To that end, just as I gave some numbers on how ELS performed this year, I’d like to give you some numbers about how ELS fared under Tom’s leadership. We went from a portfolio of 65 properties and 25,000 sites to almost 400 properties and 143,000 sites. We went from $37 million in FFO to $210 million. Our stock price went from $15 to $71, delivering a 15% total shareholder return annually. I have worked for Tom for nearly 20 years and he has been a great mentor and friend. We are pleased that he will continue to have a role at ELS as Co-Vice Chairman.

I will now turn it over to Paul to walk through the numbers in detail.

Paul Seavey

Thank you, Marguerite, and good morning, everyone. I will first discuss our fourth quarter results, then update full year 2013 guidance and provide guidance for the first quarter. FFO per share in the fourth quarter was $1.11, $0.03 higher than guidance. On a combined basis, core and Hometown property operating income before property management was slightly ahead of expectation.

Sales operations performed better than expected in the fourth quarter and we received a one-time insurance reimbursement. Fourth quarter core base rental income increased 2.9% over last year with 2.3% coming from rate increases and 60 basis points from occupancy. We gained 100 occupied sites from September to December, bringing our total 2012 increase to 278 sites.

We continue to see strong demand for rentals and we note a 20% increase in used home sales volume in our core MH portfolio in 2012. Core RV revenues in the quarter were 3.7% higher than last year and about 50 basis points higher than guidance. Our annual and transient performance was better than expected.

Membership dues were 4.4% less than last year and approximately $0.5 million below guidance. We continue to see net attrition in the member base. We sold approximately 10,200 zone park passes during the year including approximately 1,200 membership activated as a result of our RV dealer program. The net membership sales revenue and expenses were approximately $800,000, down about $400,000 from guidance. Core property operating expenses excluding property management were $57 million, an increase of 1.7% over last year and about 50 basis points lower than guidance. For the quarter, our core NOI growth before property management was 1.4%.

Our 2012 full year core NOI grew 2.3% to $292.2 million in line with our updated 2012 guidance issued last October. Hometown full year NOI was $103.2 million compared to prior guidance of $102.5 million. Core base rent increased 2.9% in 2012 and core RV revenues increased 2.5% with the annuals increased in 4.1%. Full year core property operating expenses were up 1.1%.

Turning to 2013 guidance, keep in mind the Hometown portfolio will be included in our core results this year. Our supplemental package provides additional detail on specific revenue and expense growth assumptions. Also, our guidance is meant to explain results within a range of possible outcomes rather than specific expectations for any particular category or line item.

At the end of December, we acquired two RV resorts in the Rio Grande Valley, Texas for $25 million, approximately $14,000 per site and an 8% cap rate. As a result, our full year 2013 FFO per share guidance range is now $4.94 t $5.14. FFO is expected to be $229.6 million at the midpoint. We expect core NOI before property management to be $406.3 million, a 2.7% increase over 2012.

The midpoint of our guidance range projects 2013 core property operating revenues of $705 million, a 2.5% increase over 2012. Our 2013 core properties produced $414.2 million in community-based rental income in 2012. In 2013, we expect approximately 2.6%, consisting of 2.2% in rental rate increases and 40 basis points related to occupancy gains achieved during 2012. Rent increases we have already sent for 2013 are consistent with our guidance, and we assume no occupancy increase during 2013.

Full year 2012 resort-based rental income for the 2013 core properties was $134.3 million. Midpoint of our guidance assumes 1.8% growth in 2013, driven by 2.9% in annuals. Seasonal and transient revenues are expected to be flat to 2012.

For 2012, we reported $292.6 million of property operating expenses in our 2013 core properties and we expect an increase of approximately 2.1% to $298.7 million. The midpoint of our 2013 guidance includes approximately $65.8 million in property management and corporate G&A expenses. Other income and expenses are expected to be approximately $17 million.

We project interest expense to be approximately $120.5 million, and we expect our preferred distribution to be $9.3 million. We make no assumption about the change in fair value of the $6.7 million escrow denominated in ELS stock.

FFO per share as the midpoint of our guidance range is expected to be $5.04, and our average share count is expected to be 45.6 million shares for 2013. We make no assumptions with respect to the use of free cash flow in our guidance.

We expect first quarter FFO to be $63.5 million or $1.40 per share at the midpoint of our guidance range. Guidance that didn’t score NOI before property management of $106.8 million in the first quarter compared to $103.8 million in 2012, a 2.9% increase.

Core revenues are expected to increase approximately 2.9% to $179 million. Community-based rental income is projected to increase 2.6% to $105.7 million and RV resort-based rent is expected to increase 1.4% to $38.1 million primarily driven by growth in annual.

First quarter seasonal and transient is expected to be flat to 2012. Our seasonal and transient reservations are 90% and 53%, respectively, our first quarter budget revenues consistent with this time last year. First quarter core expenses are expected to be $72.1 million, an increase of 2.8% over 2012. Some ion property management and corporate G&A are expected to be $16.7 million for the first quarter of 2013.

Other income and expense is projected to be approximately $5 million as compared to $6 million in 2012. We estimate $30.3 million of interest expense in the first quarter down from $31 million last year, and we project $2.3 million for our preferred distribution.

Finally, I’ll provide an update on our balance sheet. We have approximately $74 million in secure debt maturing in 2013 and we expect to repay these loans with available cash and free cash flow. Our current cash balance is approximately $50 million and we project free cash flow before working capital of approximately $80 million for the year.

In addition, we have $380 million available on our line of credit. In 2014 and 2015, we have debt maturities of approximately $133 million and almost $600 million respectively. Current secured financing terms for 10-year loans include coupons ranging from low to mid 4% with LTVs between 60% and 70% and debt service coverage between 1.35 and 1.5 times.

Now, we would like to open it up for questions

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Jana Galan with Bank of America. Please proceed.

Jana Galan – Bank of America

Thank you, good morning.

Paul Seavey

Good morning.

Jana Galan – Bank of America

I was curious for the Rio Grande acquisition cap rate of 8%, is that including your expectation of any occupancy or renting?

Marguerite Nader

That’s, first, the winning cap rate for the first year. The interest rates for the year have been set already so that includes what’s going to happen for 2013.

Jana Galan – Bank of America

Thank you. And then on the sale of the Cascade property it looks like that’s a unique situation but would you consider any disposition this year?

Marguerite Nader

Yes, that property was unique. They were planning – the hospital district in Seattle was planning to build a new hospital on that land. So it was – it’s been – it was a property that was on the outskirts of Seattle years ago and it was a membership property but it’s been closed for a couple of years. To the extent additional sales there’s no sales – additional sales in the pipeline but we certainly look at offers as they come in.

Jana Galan -- Bank of America

Great. Thank you.

Operator

Your next question comes from the line of Eric Wolfe with Citi. Please proceed.

Eric Wolfe – Citi

Hey, good morning.

Marguerite Nader

Good morning, Eric.

Paul Seavey

Good morning.

Eric Wolfe – Citi

Just looking at page 11 of your supplemental, it looks like you saw some modest improvement in the fourth quarter on the new home sales front. I mean do you think that it could be a sign of things to come for this year or are you expecting still a pretty muted number in terms of home sales?

Marguerite Nader

We would expect that number to continue to be muted in 2013. Some of those new home sales that occurred in the fourth quarter and throughout this year were really, I think, half of them were at our RV parks, at one particular RV park in Phoenix, where we have seen an increase in used home sales in our portfolio, as Paul mentioned, of about 20% for the year. And that’s 20% in our core portfolio and that primarily occurred in Florida specifically, I think, in the Fort Myers and Clearwater area. Again, I think these buyers are looking for low price point sales and they’re particularly buying their homes for all cash and then rehabbing the home in some instances.

Eric Wolfe – Citi

Right. And are those used home sales, are those individuals that are moving out of their home and then looking for something else or are these homes that you’re buying used and then these are new entrants into your communities?

Marguerite Nader

There are homes that were either – they came to us in one form or another, either somebody left the community and had a life event and returned the title to us or in some instances, we have bought the home just to keep the home in the community.

Eric Wolfe – Citi

Right. And so it’s not really a net increase in terms of occupancy. If I’m looking at those used home sales, right, that’s indicated, right?

Marguerite Nader

That’s correct.

Eric Wolfe – Citi

Okay. And then you mentioned that in 2008, you saw like 700 to 800 home sales. Is that kind of the level that you would want to see before you felt comfortable, no longer investing in rental inventory? I’m trying to think about over the next couple of years what we should look for in terms of thinking about when you’re going to kind of stop doing rentals and try to focus more on home sales?

Marguerite Nader

I think what we look at when we think about our sales operations and what’s happening in our communities is first we look at the resale market and how strong that market is. And right now, because that’s the largest number of transactions that are happening in our properties and the average purchase price of those resales is between $16,000 and $20,000 and those are all cash.

As that continues to grow with the price – those resales continue to grow and I think that they are the more normal residential housing market and our poor customer feels better about putting up their home, their primary home for sale, I think we would see an increase in new home sales. And also maybe Paul will talk a little bit about the chattel.

Paul Seavey

Sure. In terms of the chattel financing, we haven’t seen much change in the recent past in the environment. Keep in mind as we are talking about the past in our experience selling homes, historically, our target customer hasn’t accessed chattel financing for retirement home purchases.

That being said, the programs available today continue to provide subsidized financing to those customers with the community owner carrying the obligation for guaranteeing their defaults and the characteristics continue to have stringent underwriting criteria, sizeable down payment, short loan amortization, and high interest rates. So that hasn’t changed really very much.

Eric Wolfe – Citi

Got you. And I think, Marguerite, you mentioned that one of your goals, I believe you said this was to increase homeownership within your portfolio. Can you just give some specifics around how you plan to do that, whether you have specific targets or goals in mind? I mean, I’m just wondering with chattel financing, not really change them. That’s what you can really do to try to increase homeownership in your portfolio.

Marguerite Nader

One of the things is throughout our – since 2008, as we were selling 700 to 800 homes prior to 2008, we have a lot of sales people on the ground selling homes. As the market change and we were unable to do that, we no longer had sales people, and the process is really a person coming in to our community, and the manager meets them and there’s a rental event happening. What we’re doing is to try to say, we can take some time and try to get to a customer that is a more of a buyer than a perpetual renter. We think there’s two types of renters, one is a dedicated renter, those who just always want to rent and you really not going to change their mind, and then those who just don’t want to forfeit their capital right now but would like to own. And we need to work towards marketing our communities towards the latter customer.

Eric Wolfe – Citi

Right. And I guess but thinking about, I mean what specific metrics could we look at over the next couple of years that sort of ascertain whether you’ve been successful in finding that right customer? I mean should we see like a high percentage of sort of those who started out renting and owning? Like what metrics should we look to see whether that’s successful or not?

Marguerite Nader

I think that the conversion rate will probably always be relatively low from – to go from a renter to an owner and leave from the existing renters because I think they’re more on the former side which is dedicated renters. So I would look to the transaction happening, used home sales increasing, and that change between renters and used home sales.

Eric Wolfe – Citi

Got you. Okay. Thank you.

Operator

Your next question comes from the line of Gaurav Mehta with Cantor Fitzgerald. Please proceed.

Gaurav Mehta -- Cantor Fitzgerald

Good morning.

Marguerite Nader

Good morning.

Paul Seavey

Good morning.

Gaurav Mehta -- Cantor Fitzgerald

I want to go back to your comment on two types of renters that you just mentioned. So what’s the split in your portfolio today between dedicated renters and the renter that would like to own.

Marguerite Nader

We haven’t had a lot of conversions. I would say it’s been a very low number so I’d say the majority is the former dedicated renter.

Gaurav Mehta -- Cantor Fitzgerald

Okay. And then going to your 2013 guidance, how much have you budgeted for the rental program in terms of past?

Paul Seavey

We don’t have an assumption with respect to the rental program. As I said, our free cash flow before working capitals is $80 million for the year.

Gaurav Mehta -- Cantor Fitzgerald

Okay. And then last question I have on the acquisition markets, so you aquired two-edge restricted properties in the quarter, can you provide details on what you’re seeing in the overall market both on the edge-restricted side and all its side?

Marguerite Nader

Sure. I think as we’ve said in the past that our business has always been a building relationship with owners where you have met some most important part of the acquisition process so opportunities for purchasing properties kind of comes in a choppy pattern.

But right now, just in terms of transactional activity that’s out there, get it limited. There’s a property I think they just sold in California, Laguna Beach, a small property 150 sites sold at a subsite cap I believe. And there’s also some larger mid-west portfolios that have sold over the last three or four months, family property.

Gaurav Mehta -- Cantor Fitzgerald

Okay. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Andrew McCulloch with Green Street Advisors. Please proceed.

Andy McCulloch -- Green Street Advisors

Hi, good morning.

Paul Seavey

Good morning, Andy.

Marguerite Nader

Hi, Andy.

Andy McCulloch -- Green Street Advisors

Just one question on the cascade asset in Washington that was sold. I know that was a unique asset that was condemned by the city but how do you think that sales price on a per site basis compares your other assets that you have in that Thousand Trails portfolio?

Marguerite Nader

No, that’s – I think it’s a difficult question. I think that came in at $49,000 per site. So what we said at the beginning, it’s a unique asset and it was really subject of a condemnation. So it’s difficult to value it relative to the rest of the portfolio.

Andy McCulloch -- Green Street Advisors

How does the city arrived at the value?

Marguerite Nader

It was – I’m not exactly certain how they arrived at it. They were building a new hospital and they were also in the – they were removing their old hospital, selling it to an Indian Tribe Casino. So, I think that was part of the factor of what available funds they had. I’m not sure of their whole processing in coming to the number.

Andy McCulloch -- Green Street Advisors

Okay. But it doesn’t make you think that pricing in the private market for some of that RV stuff is better that you thought they would prompt more sales there?

Marguerite Nader

No, I think it was – this is a unique transaction.

Andy McCulloch -- Green Street Advisors

Okay. Thank you.

Marguerite Nader

Thanks.

Operator

(Operator Instructions) Our next question comes from the line of Todd Stender with Wells Fargo. Please proceed.

Todd Stender -- Wells Fargo

Hi, good morning.

Paul Seavey

Good morning, Todd.

Todd Stender -- Wells Fargo

As the rental home portfolio gets larger. How do you think about your financing, your short term financing maybe gets bigger over time, can this be aggregated and you start looking at more mortgage financing? Just kind of thinking about your thoughts there.

Paul Seavey

Financing in terms of purchasing of the home themselves or community financing?

Todd Stender -- Wells Fargo

The home themselves, as you build out your rental home portfolio. It looks like it’s getting bigger. I just want to see how you think about that?

Paul Seavey

Sure. I think that we look at the cash flow coming off of those assets. I mean, obviously we are carrying that today but we look at the cash flow coming off of those homes, and I think that we could over time to the extent that the program continues to grow, identify lenders that would lend on the cash flow associated with those homes.

Todd Stender -- Wells Fargo

Okay. And do you have a budgeting number for this year, about how many new and used homes you think you’ll place within the communities for the rental program?

Paul Seavey

We don’t have an expectation as it relates to incremental commitment but I would say that our expectation in terms of the turnover in our communities is like that it will be consistent year-to-year, so maintaining occupancy at current the level, you probably would expect to see us purchase similar number of homes next year.

Todd Stender -- Wells Fargo

Okay, thanks. And just lastly, I don’t know if you break it out this way but just if there is, what is the premium on rent minus the site rent just the mobile home rent on a new rental home versus a used rental home, is there a much difference?

Marguerite Nader

There’s about – it’s not broken out in our supplemental but it’s about $150 difference between a new rental home versus a used rental home which to us just shows you the stability of that cash flow you can have a 1975 used home generating basically the same amount of cash flow as a brand new home.

Todd Stender -- Wells Fargo

And as a monthly number?

Marguerite Nader

Yes.

Todd Stender -- Wells Fargo

Okay, thank you.

Operator

We have no further questions in the question queue. I will now turn the call back over to Marguerite Nader for any closing remarks.

Marguerite Nader

Thank you all for joining us today. Paul Seavey is available to follow up questions and we’re looking forward to updating you on the first quarter call. Thanks.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. Everyone may now disconnect and have a great day.

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