Strategic Decisions

Strategic Decisions

American Land Lease Inc. officials decided three years ago to centralize their operations as a self-administered, self-managed real estate investment trust. The strategy worked.

By David R. Corder

Associate Editor

Terry Considine took an important strategic step about three years ago. The chairman and chief executive officer of American Land Lease Inc. already had negotiated the merger in the late 1990s that transformed the publicly traded Asset Investors Corp. and Commercial Assets Inc. into the Clearwater-based developer of manufactured-home communities. But then Considine put a critical eye on the three affiliated companies charged with land development, manufactured-home sales and property management for American Land Lease.

"Mr. Considine in his role as a strategic thinker concluded: In order to maintain the focus on the quality and the fiscal responsibility that we wanted for our shareholders, we would be best served by, in effect, controlling our own destiny," says Robert Blatz, American Land Lease' president and chief operating officer. "So we bought out those three companies. We also closed a Philadelphia and a Denver office and reduced corporate overhead by about 50%. We made the decision, by pulling everything into one company, we could run it more efficiently from one location."

The effect of such decision-making accounts partly for the strong financial results the publicly traded real estate investment trust has produced - especially this year. Investors rewarded the company's fiscal prudence this month by pushing the value of its common stock to $19.85 on the New York Stock Exchange - an all-time company high.

"I wouldn't say (the performance is) surprising," says Rick Murray, a stock analyst at St. Petersburg-based Raymond James & Associates. "The stock price has performed very well, and that's primarily attributable to the very strong financial results the company is delivering."

Niche marketing

There is another piece of the puzzle that contributes to the company's success: niche marketing.

"The strength of their business model results from a couple of reasons," says Murray, who owns no stock in American Land Lease but advises that Raymond James owns less than 1% of the company's 7 million shares outstanding. "Their business is focused on the age-restricted market, which is much more durable and less susceptible to variations in the economic climate, in our view. That is the one thing that has allowed the company to perform strongly over the past several years, while its peers in the manufactured-home community, who have not been as focused on the age-restricted market, have not fared as well."

Then there is Considine's decision to promote Blatz to president from COO in 2001 and to hire Shannon Smith the same year as the company's chief financial officer.

"Bob Blatz and Shannon Smith really were put at the forefront of what had not been a very well-run operation," Murray says. "They've become very focused on the business model, which is filling the vacant sites within their communities. I also think there is another element unique to their business. While nearly all of their peers engage in the home-sales business as a loss leader, American Land Lease has found a way to make that business quite profitable."

In a self-effacing manner, Blatz describes his relationship with Smith as equal partners focused on one goal: creating value for the company's customers and its shareholders.

"From management style to analytical tools, we complement each other very well," Blatz says. "Unlike many CFOs, (Smith) could be a COO very easily. As a result, both of us are willing and are able to challenge what's going on in the other guy's backyard. We understand that it's only by us working together that we can grow the company."

Blatz also admires Smith's devotion to President Reagan's philosophy that individuals can accomplish great things if they don't care who gets the credit. "As president of the company, I reap much of the success of his work," Blatz says.

Strong financials

Investors reacted strongly to financial results in the company's quarterly report filed Nov. 13 with the U.S. Securities and Exchange Commission.

The company reported net income of about $3.1 million, or 44 cents a diluted share, on total rental-property and home-sales revenue of $18.9 million for the three months ended Sept. 30. That compared with net income of $1.5 million, or 22 cents a diluted share, on total revenue of $12.9 million for the same period a year ago.

Sales of manufactured homes increased by nearly 87% over the three months, while land-lot leases climbed by about 7.2%.

Nine-month results released Nov. 13 also followed a similar pattern. Total rental-property and home-sales revenue increased by about 37%, with net income up nearly 55%. Diluted earnings per share jumped by nearly 50% to 97 cents each over the nine-month period.

When analyzing REITs, however, most investors closely examine the company's funds from operations. The National Association of Real Estate Investment Trusts adopted FFO as a generally accepted accounting principle. FFO is loosely defined as net income excluding gains and losses from debt restructuring and sales of depreciable real estate property net of related income taxes.

Based on the nine-month report, it appears the company is on track to produce its fourth consecutive annual increase in FFO. The company reported FFO of about $8.7 million for the nine months ended Sept. 30, $9.4 million last year, $9 million the year before and $8.6 million in 2000. All the company needs is FFO of $757,000 for the fourth quarter this year to surpass last year, and it produced FFO of about $3.3 million for just the three months ended Sept. 30.

If that trend continues, Murray says, the company should produce FFO per share of about $1.44. "Certainly, the management there has done an outstanding job not only in terms of managing their cost structure but also in terms of continually trying to find value through their operating strategy," he says.

Biggest challenge

Various financial reporting services put the estimated total return on equity at American Land Lease at somewhere between 7.42% to 8.8%.

While Blatz did not dispute those figures, he declined to talk about the company's targeted goal for return on equity. He attributes such reluctance to the Sarbanes-Oxley Act of 2002 - the federal public company accounting reform and investor protection law.

"One of the challenges for a company our size is Sarbanes-Oxley," he says. "We retain the same filing requirements, legal options and other administrative requirements that Microsoft or GE have, but our company requires $80,000 (in compliance costs) for a penny of earnings. So if we need to spend $80,000 on compliance it has a significant impact on us.

"Our estimate, which we put in our press releases, the implementation of Sarbanes-Oxley has cost us 2 to 3 cents in earnings annually," he says. "It's real money to a company our size."

Such concern may be just an extraordinary desire by a corporate officer to reduce cost wherever possible, because Murray does not perceive Sarbanes-Oxley costs as detrimental to the company's overall operations.

"There certainly is going to be a difference in the relative impact (of the federal act) considering the size of the company," he says. "We factored those costs into our model. But really a 2 cent per share model, when we estimated they're going to generate $1.44 funds from operations in 2003, it's really not that significant of an impact, in our view."

Market outlook

The company attributes its growth this year to many of the same national economic factors driving all residential sales such as low national mortgage rates. But the company also benefits from a relative healthy economy for well-heeled retirees and the quality of life the company offers at its communities, which typically provide golf courses, clubhouses and other recreational activities.

"We benefit from the low interest rates, the economy, the environment, because it's increased the value of our buyers' current homes, which translates into a higher home value in our communities or an opportunity for them to purchase a second home in one of our communities," Blatz says.

About 77% of the company's business comes from sales and leasing in Florida, with Arizona accounting for another 22%. As of the year ended Dec. 31, the company owned interests in 29 residential land-lease communities with about 6,090 operational home sites, 1,123 developed home sites and 1,532 undeveloped home sites.

In the Gulf Coast region, the company owns the Blue Heron Pines community in Punta Gorda, 208 operational units 100% occupied; Serendipity in Fort Myers, 338 units 93% occupied; Brentwood in Hudson, 97 units 98% occupied; Lakeshore Villas in Tampa, 280 units 99% occupied; Park Royale in Pinellas Park, 271 units 96% occupied; Pleasant Living in Riverview, 224 units 100% occupied; Riverside near Ruskin, 253 units 100% occupied; and Sun Valley in Tarpon Springs, 261 units 100% occupied.

Short-term goals center on the remaining development entitlements at the company's existing communities, Blatz says. So land acquisition remains low on the company's list of short-term priorities. That doesn't mean he isn't considering the company's long-term options, however.

"We see two kinds of opportunities," he says. "One is an opportunity up and down the Gulf Coast from the Panhandle down south to Charlotte County. Anything past that, the valuations get a little rich. But we think the sound opportunity will be in redevelopment throughout the state. We'll be taking older communities and replacing them with new homes and updated amenities. Many of the older locations are prime real estate locations."

COO Draws on Military Background

By David R. Corder

Associate Editor

Robert Blatz exhibits subtle signs: He sits and stands erect and walks heel-to-toe, with thumbs and forefingers clasped and resting on his pants' inseams.

Those are telltale signs of a West Point graduate, who attributes his commission as captain in the U.S. Army as the foundation for his newfound success as president and chief operating officer of American Land Lease Inc.

During his final tour in Italy, Blatz, 42, served as an aide to the commanding general of the U.S. Army's Mediterranean operations. "Picture spending two years riding around with a CEO of a major corporation," he says. "That's what the job was. The general was responsible for everything the Army did in the Mediterranean theater."

The experience also taught him about flexibility, since during his three years in Italy he also served seven battalion commanders, including four-star Gen. John Abizaid, now commander of the U.S. Central Command at MacDill Air Force Base. "I do attribute part of my success to the fact that in the Army I served for seven battalion commanders, five of who became general officers," he says. "I was able to learn from each of them."

Following his retirement in 1993, Blatz headed down the path of politics. He spent the next three years as chief of staff at the Heritage Foundation, a conservative think tank based in Washington, D.C. He spent his final two years there as chief financial officer. That's where he met Thomas L. Rhodes, a member of the foundation's board of directors, president of the National Review magazine and a majority stockholder in American Land Lease.

It was Rhodes who encouraged Blatz to earn a master's degree in business administration at George Washington University. Abandoning a career in politics, Blatz also took Rhodes advice about the need to gain more practical business experience. In 1998, Blatz took a job as a financial consultant at the former Big Eight accounting firm, Coopers & Lybrand.

A year later Rhodes introduced Blatz to Terry Considine, American Land Lease's chairman and CEO and the chairman and CEO of Denver-based Apartment Investment & Management Co., a publicly traded real estate investment trust.

Blatz took a job as a junior executive at American Land Lease predecessors Asset Investors Corp. and Commercial Assets Inc., two mortgage real estate investment trusts. He remained with the corporation in 2000 during the merger of those entities into American Land Lease and earned a promotion as president in 2001.

- David R. Corder

AMERICAN LAND

LEASE AT A GLANCE

Business: A self-administered, self-managed real estate investment trust focused on sales of manufactured homes on leased land sites to age-restricted customers.

Chairman/CEO: Terry Considine

President: Robert Blatz

Headquarters: Clearwater

Founded: 2002

Employees: 3

Strategic challenge: The company has focused its efforts on filling home sites in its existing land-lease communities. Once it accomplishes this short-term goal, the company then faces a long-term challenge of finding affordable and developable property amid heavy competition from other forms of residential development.

SELECTED FINANCIAL DATA

2002 Revenues: $47.5 million

% Change over 2001: 19.9%

2002 Operating Income: $10.5 million

% change over 2001: 61%

2002 Net income: $5.9 million

% Change over 2001: -5%

2002 Earnings per share: $0.86

2001 Earnings per share: $0.89

Common shares outstanding: 6,970,679

SELECTED ASSETS/LIABILITIES

Cash: $1.2 million

Real estate: $208 million

Total Assets: $228 million

Total Current Liabilities: $124 million

Long-term debt: $97 million

Total Liabilities: $19 million

Total Shareholder Equity: $92 million

Source: American Land Lease, as of Dec. 31, 2002