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Executives

Tom Heneghan, Chief Executive Officer

Joe McAdams, President

Michael Berman, Chief Financial Officer

Roger Maynard, Chief Operating Officer

Analysts

Bill Carrier – KBW

David Bragg - Merrill Lynch

Michael Bilerman – Citigroup

Paul Adornato – BMO Capital Markets

Andrew McCulloch – Green Street Advisors

Equity LifeStyle Properties, Inc. (ELS) Q2 2008 Earnings Call July 15, 2008 11:00 AM ET

Operator

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 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 President and CEO.

Thomas P. Heneghan

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’d 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 location and retirement and vacation destinations. In addition, we have consistently focussed 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 of 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, and 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 and 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 co-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; and 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 for rent. We have corrected it in the 8K filing, but the number should be 492 and 493 for the six and the quarter ended. Again, the 8K 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 bases 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 toward 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 home buyers. 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 4000 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 month 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 components 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 sun-belt 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 the 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 bases 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, and again, there was a shift 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 on 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 comparison. We believe the current environment remains difficult and do not expect any meaningful increase in sales volumes or profitability, and so 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, and with respect to 2009, we have $80 million in scheduled maturities. And finally, we are pleased to have a favorable tax opinion regarding the treatment of membership income. We hope to obtain board approval and finalize the 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 you additional information regarding this transaction in the future. Now I’d like to turn it over to Joe for a few comments.

Joe B. McAdams

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 we’ll 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 begins. We have revamped our Florida sales process resulting in better close percentage of prospects. We have enhanced our finance in insurance expertise in all home sales markets occupancy. ELS would love to sell new homes, but is 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.

Critical to this activity will be sales of existing units. We need to find a way to participate in a more significant way in these re-sales. 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 image 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 a 1000 sites that had 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 re-sales. In the quarter, we rented approximately 50 new homes on an annual basis. If you take into account seasonal renter and the other move-outs, our overall occupancy remained flat. While we were pleased with the continued ability to sell homes and with the renewed focus on our sales operation, our ability to gain occupancy through this 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 base for future home sales. We are encouraged with our early success at converting renters to home owners, and 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, credit-worthy customer who is attracted to our lifestyle choices. The last initiative cross-marketing opportunities between TT and ELS, we have sold 20 refurbished older cottages under this initiative within the last 4 weeks at our TT New Jersey Thousand Trails Resort, and we’ll roll this out to other resorts later this year. Our plans call for us to open up membership sales in 2 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 bannered around issue of the day. Our customer base, as Tom has said, is 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 serve 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 charge still economical. This is not to say that we’re 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’re 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 faced another round of reductions late in July. We are forecasting doing better the last 6 months of 2008 than we did in 2007 from a cash EBITDA perspective.

Thomas P. Heneghan

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

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Michael Bilerman with Citigroup.

Michael Bilerman - Citigroup

Tom, can you just go over a little bit about the negotiations on the purchase of PA and you talked about the significant synergies and eliminating some of the structural impediment that exists today, and now with Joe obviously being on the ELS side, not negotiating from ELS but he’ll be negotiating from PA, how will all this be beneficial to ELS shareholders when you think about the business?

Thomas P. Heneghan

I think I’d 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’s now 24,000 sites in that portfolio. Our first investment was under a lease with the operating company owned by a private buyout firm Colberg; since we have 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 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 will this membership income get treated for reaped gross income tax purposes. We conservatively structured to make sure that the re-qualification was a primary consideration in terms of our investment.

Joe McAdams brought Privilege 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 interests as Joe was president and owner of Privilege 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 is the same, the real estate we see at heart is the same, and have been always struggling trying to realize the potential in the portfolio and keep in mind the structural impediments. We now have a favorable opinion of outside counsel with respect to the treatment of membership income, and I think we’re 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 at 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 Privilege Access at a $2 million or so price. So, that is the information that exists out there, again it’s 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 some thousand RV properties outright through ELS’s property management structure. We believe there will be synergistic savings between the two portfolios and combining property management. We also believe that Privilege Access spans upwards of $25 or $30 million a year in sales and marketing expenses under combined operation; without having to deal with the conflict of interest and the structural impediments, we believe there are additional synergies that could be realized in the sales and marketing as well.

Michael Bilerman - Citigroup

But do you think right now the rent payment that PA is paying you is in excess of their EBITDA, and it sounds like Joe there is some expense 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 be bringing in something that is on an operational basis less than what you’re receiving in rent.

Thomas P. Heneghan

Right now it’s flat to lease coverage with respect to cash flow. We’d 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’re slightly above the lease payment with respect to cash flow. The cash flow under lease is probably $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 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 an expense saving and on an operating basis, and we think that there are synergistic savings that are available under our combined portfolio. So, on a cash flow basis, we think it will be positive.

Michael Bilerman - Citigroup

And you’re saying that equity, there’s a $2 million effectively option out there right now, so that’s probably in the realm of where this buy-out would occur?

Joe B. McAdams

We haven’t finalized any of the negotiation, but that piece of information does put you in a box car area relative to evaluation at least from ELS’s perspective.

Michael Bilerman - Citigroup

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

Joe B. McAdams

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

Michael Bilerman - Citigroup

Just going to guidance for a second, you maintained 315 to 330, it looks like on the home sales part just given the language and the press release you’re saying, second half would be similar to first half which would imply about negative 13 cents versus flat previously, and then there was the JV gain which I don’t think was included in the guidance before; what else is going on within the numbers that would take you up low end versus high end of the range?

Thomas P. Heneghan

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’m rounding, so I might be off a little bit in terms of totals, and if I get too specific, I’m only intending to be a point within a range, but we had a 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 if you go back to our January press release as 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, so call it a $207 or $207.5 NOI number. Sales go from zero contribution to -4. Other increment expenses combined go from $8 million to $10.5 million. Interest expense goes from approximately $101 million or a little less to about $99, so that some of the pick-up Michael that I think you’re looking for. FFO in aggregate goes from about $100 million to $98.6 million in terms of being in middle of our core NOI guidance range, and the share count stays approximately the same, slightly less.

Michael Bilerman – Citigroup

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

Thomas P. Heneghan

Yeah we had 1.6 from the gain in this quarter, we’ve had over $0.5 million of gains from insurance and then there’s a bunch of noise in there that accounts for the difference on the 2.5.

Michael Bilerman – Citigroup

And then on the interest expense, that’s just floating rate?

Thomas P. Heneghan

Floating rate and lower than expected balance.

Operator

Our next question will come from the line of David Bragg with Merrill Lynch.

David Bragg - Merrill Lynch

Just a followup question on guidance; for the resort segment, is revenue growth for the full year still targeted at 3% to 3.5%?

Joe B. McAdams

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’re through the 6 months at about 4%, that’s 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 in the RV business and it’s really going to be tied down to the transient revenue business. I think we’ve 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.

David Bragg - Merrill Lynch

And Michael can you talk about the expense pressures and the growth that you’re expecting in the second half of the year there.

Michael Berman

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 bundling activities, but we’re certainly seeing pressures there. We have had a double-digit growth rate in property management all year long; that’s probably going to continue with the pace it has been at although we’re looking to try to do some savings there. Real estate taxes 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. I forget what the second half number is, David; we could talk about that offline.

David Bragg – Merrill Lynch

Okay, and then shifting over to the home sale 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 of 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 volumes. Can you talked 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 the margin?

Michael Berman

I am not sure that I would say we experienced a slight improvement, David, but in terms of what we saw in the 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 be 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. And on a per-home gross profit number, we made over $14,000 per home in the second quarter of ’07 and about $2200 in ’08. On the RV side, we did 49 sales versus 36; we took a slight loss on each home, about $500 to $600 in the second quarter, and we made about $6800 in the second quarter of ’07.

Thomas P. Heneghan

If I could add to that, I think that is one area and I think you are seeing it come in through the numbers. Actually price is not really driving velocities 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 outside transactions where we pick up 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 a huge discount. That makes sense to us with respect to the existing inventory. Box card numbers, we basically took about 300 new homes of existing inventory and are now renting them out at annual rents of about $4 million a year and I think we think that that at the margin that’s a pretty good execution as opposed to leaving that inventory sitting on our balance sheet or selling it at deep discount even if we could sell it, which we think is a challenging environment even in itself.

David Bragg – Merrill Lynch

And 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 and where could you see this program headed in the second half

Joe McAdams

In our new home rental program, as Tom said, we rented approximately 300 homes, and that includes 50 new homes each in the first and second quarters of ’08. This new home rental program should be viewed in three different categories. First of all, California; we’ve focused on the California market places where the rental of home and land allows us to capture a total rent of let’s say $1500 to $1850 a month in markets where site rent is constrained by rent control to approximately $800. So you can see that California has a very positive aberration. In 2007-2008, we have 94 new homes in California of which 87 are rented at these levels, the $1500 to $1800. 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 $1000 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 sq ft highly amenitized unit for a cost of around low of $50,000 and 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 and 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’s kind of where this rental program is.

Thomas P. Heneghan

So as a resultant 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.

Joe McAdams

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

David Bragg – Merrill Lynch

That helped. Thank you.

Operator

Our next question comes from the line of Bill Carrier with KBW. Please proceed.

Bill Carrier – KBW

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

Thomas P. Heneghan

The Treasury Department hasn’t asked us, so we’re going to keep those comments to ourselves, but in any event, our focus is really closing our transaction. We’ve been in touch with Wells Fargo our Fannie underwriter, I would say, if not on a daily basis then 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’re hearing and what they’re sending us in emails, we’re expecting to close in early August on the $114 million that we have left. We do have another $60 million that’s due in early November. The debt on those currently is on four RV communities, and we’re using those as a test for what kind of capital is available in for RV properties and 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 side 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’re moving ahead, that it’s business as usual, but the RV business financings are particularly difficult today.

Joe McAdams

And 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 is the light company, pension funds, or what have you. But as Michael said, there is a little bit of softening with respect to any demand for financing on RV properties.

Bill Carrier – KBW

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

Thomas P. Heneghan

With respect to American Land Lease I would say their portfolio is a very strong portfolio; about 75% in Florida and 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’re interested to the extent they want to talk about the core portfolio, absent any development or green field properties.

Operator

Our next question will come from the line of Paul Adornato with BMO Capital Markets. Please proceed.

Paul Adornato – BMO Capital Markets

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?

Joe McAdams

There are several ways that we’re identifying prospects. Probably our most effective right now is through internet sites, and that can range everything from craigslist.com, forrent.com, and then we work those leads with a combination of inbound and outbound telemarketing, and that’s our most fruitful lead. When we are able to generate a lead, when we come to the part that is a potential home buyer, it’s almost like if the guy can’t either afford it or is not in the frame of mind to buy immediately, we’ll counter with a rental product. So it’s a combination of both, but our internet leads are right now our most efficient.

Paul Adornato – BMO Capital Markets

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

Thomas P. Heneghan

Yes. We do.

Paul Adornato – BMO Capital Markets

What is the rental term that you do offer? Do you offer 6 months or a year?

Joe McAdams

Presently it’s one year.

Paul Adornato – BMO Capital Markets

And nothing shorter?

Joe McAdams

I shouldn’t say that, we do have a seasonal rental that we will do in Florida, that’s 3 to 4 months, and Arizona 3 to 4 months. But what I talked about this morning in the rental program that we’re really focusing on is an annual customer.

Paul Adornato – BMO Capital Markets

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

Thomas P. Heneghan

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

Operator

Our next question is a followup question from the line of Michael Bilerman with Citigroup. Please proceed.

Michael Bilerman – Citigroup

Just sticking with the rental program, you talked about in the press release $31 million that you re-classed out of the sales inventory into the rental. What is the amount that you have now in homes for rent in terms of a basis?

Michael Berman

It’s $31 million of which $20 million is the new homes that Tom mentioned.

Michael Bilerman – Citigroup

And you are currently earning $4 million….

Michael Berman

On the new homes in terms of revenues.

Michael Bilerman – Citigroup

Just on the $20 million or on the total $31 million….

Michael Berman

On the $20 million. The other $10 million or so is used homes which is really more of a strategic activity. Historically we have 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.

Michael Bilerman – Citigroup

So everything you have in the home rental pool is currently rented; there is no actual vacancy in the ones you’ve transferred over?

Michael Berman

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

Michael Bilerman – Citigroup

And you came up with a pretty high return on capital. 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?

Thomas P. Heneghan

The market. I mean we did significant market studies to determine what rents we could offer our products at. I do want to point out that in the FFO numbers is a depreciation charge in the quarter of…

Michael Berman

About $300,000 to $325,000.

Thomas P. Heneghan

So we’re taking this rental inventory and you will see that depreciation charge included in our FFO numbers of about a million plus a year with respect to that new home inventory.

Michael Bilerman – Citigroup

And then how much inventory is sitting on the for sale side at this point taking this out?

Michael Berman

Overall magnitude of $25 to $30 million.

Michael Bilerman – Citigroup

And then, Tom you talked a little bit about the CPI bumps coming up. CPI obviously had a pretty strong flip 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 if you can just walk through where you see that falling out overall.

Thomas P. Heneghan

I would say at this stage of the game it’s going to be difficult for me to give you any color other than what I’ve already addressed. I think the CPI will be self-explanatory as the information comes out. We’ve 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’s going on the single family housing market. There are issues with respect 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’s going to hit the shadow supply with respect to the rental market as well. So, we’re a little bit cautious in that there is a lot of stuff out there that needs to get cleared and we’re sensitive to that with respect to how we would set our annual rent process.

Michael Bilerman – Citigroup

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

Thomas P. Heneghan

There are some of our properties, for example, Montavista out of the 850 site property, I think we have 25 sites that are transient; Paradise, another property north of Phoenix, out of 1000 properties, it’s got maybe 100 transient. And we’ve seen that that amount of transient fills 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.

Michael Bilerman – Citigroup

Okay. Thank you.

Operator

Our next question will come from the line of Andrew McCulloch with Green Street Advisors. Please proceed.

Andrew Mcculloch – Green Street Advisors

On the $10 million in used homes that you have in inventory, what’s the number of homes there?

Michael Berman

About 900 to 1000 roughly.

Andrew Mcculloch – Green Street Advisors

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

Joe McAdams

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’re looking for 2 to 3 times that additional coverage. And the fourth quarter, last year, we took a big dip in Q2 ’07, 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 is $5 million in cash in Thousand Trails, and there is $24.5 million worth of receivables. So, I don’t see PA defaulting on the lease.

Andrew Mcculloch – Green Street Advisors

A coverage of one-one or one-two?

Joe McAdams

Yes sir.

Andrew Mcculloch – Green Street Advisors

And then, just back to the 1.7% increase in resort revenues and you gave the 6.9 annual, what’s the breakup of transient and seasonal there?

Michael Berman

I focused more on the north for the color of it all which really is 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% to 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 the revenue coming off the north is 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% to 2% as opposed to being down the 7% I indicated.

Operator

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

Thomas P. Heneghan

Thank you for joining us on our call. We look forward to updating you in the future with respect to both Privilege Access and our third quarter results. We look forward to speaking to you again. And if you have any questions, as always, feel free to call Michael Berman. Take care, everyone.

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Source: Equity LifeStyle Properties, Inc. Q2 2008 Earnings Call Transcript
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