Equity LifeStyle Properties Inc (ELS) 2003 Q2 法說會逐字稿

Good day, and thank you for joining us to discuss MHC's second quarter results. Our featured speakers are Howard Walker, MHC's CEO, Tom Heneghan, our President and COO, and John Zoeller, our CFO. This call is being recorded. Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of federal securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. At this time, I'd like to turn the call over to Mr. Howard Walker, CEO. Please go ahead, Sir.

Thank you, Sylvia, and good morning, everyone. Thank you for joining us as we report on MHC's performance during the second quarter of 2003. MHC released its second quarter earnings this morning and reported that its funds from operations were 60 cents per share on a fully diluted basis meeting consensus estimates. Our performance this past quarter continues to be evidence of the stability of MHC's cash flow and we remain comfortable with our guidance for 2003 of FFO growth in the range of 0-3%. The performance in the second half of this year remains subject to the variables caused by the seasonality of our RV resorts and fluctuations in sales of new and used homes. Our sales volumes continue to show solid interest in the lifestyle offered in MHC's age qualified communities with solid sales numbers coming out in the east, southeast Illinois and with the growing activity in the west. Core performance remains solid and occupancy declines continue to flat line in those markets that have been experiencing serious declines in the past.

We completed the sales of three assets in the second quarter representing three all-age communities in Buffalo, New York, Mount Airy, Maryland, and Morgantown, West Virginia, three markets outside of our business plan of owning properties in vacation retirement destinations in major metro areas. These assets were sold to a single buyer at an aggregate purchase price of $27 million with the proceeds going toward debt reduction. The average price of the 728 sites was $37,000 per site. At least two significant factors go into the ability to achieve these sales prices. The first being the belief in manufactured housing communities as an attractive investment that will continue to provide safe and solid returns. The second being the current interest rate environment with investors seeking safe yields in excess of CDs, Treasuries and bonds, which our industry offers.

In today's capital markets, purchasers are able to obtain 70-80% LTD financing at rates not seen in this country since the 1950's coupled with historically low expectations for meds and equity pieces. This latter condition explains why REITS struggle to acquire assets consistent with their business models. MHC would compete for an asset that conforms to our business plan, but it would be with the understanding that to achieve such an acquisition, we would need to be very aggressive in our pricing. New lending sources have exhibited interest in channel financing, while the manufacturers efforts to establish lending platforms have met with varied results as such programs that depend upon the securitization markets continue to meet with resistance. On a positive note, US Bancorp recently announced its entry into the manufactured home channel lending business with a staff of qualified and experienced people.

New home shipments continue to reflect the competition from new home inventory in place or late model re-pos being absorbed in the market place as well as from stick built development. Again, the broader market conditions have had minimal impact on MHC's portfolio which we feel confident will perform in its usual solid manner this year. John will now report on our financials.

Thank you, Howard. The second quarter results reflect the continued stable performance of MHC's portfolio. With respect to our Core Portfolio, our base rental income is up 3.3% for the quarter and 3.4% for the year to date. These numbers are made up of an average base rental rate increase of 5.1% for the quarter and 5.3% for the year to date. The occupied site component of this number is average occupied sites have decreased 1.8% for the quarter and 1.9% for the year to date. With respect to core net operating income, core NOI is up approximately 2.8% for the quarter and 2.8% for the year to date. The core NOI number is made up of an increase in total property revenues of 3% for the quarter and 3.1% for the year to date. The property operating expenses increased approximately 3.5% for the quarter and 3.6% for the year to date.

With respect to expansion, during the quarter approximately 27 expansion sites were filled which brings to 60 the total expansion sites filled towards our goal of 150 to 200 sites for the year. During the quarter, no new expansion sites were brought on line. With respect to debt, our average debt balance was $753 million with a weighted average interest rate of 6.7%. Our interest coverage was approximately 2.6 times and the availability under our line of credit is currently $96 million. With respect to our guidance for the remainder of 2003, as we indicated in our press release, we continue to project that the range of 2003 FFO will be flat on the low end and about 3% growth on the high end. We base these projections on the following factors and assumptions. Based upon the actual rents for the first half of this year, core base rent rate growth is about 5%. Our projections assume an occupancy decrease for the year of between 1.5 to 1.8%. Overall core revenue growth should therefore be approximately 3%. Core operating expenses are expected to grow in excess of CPI due to increases in insurance, real estate taxes and utility expenses. Our resulting core NOI growth should be approximately 2.5%.

Sales operations earnings are assumed to range between breakeven at the low end and flat with 2002 at the high end. We will continue to follow our plan to run the homes sales program with the continued goal of selling more homes in more of our communities. I'd also like to add a few other issues. The second quarter sales of our all-age communities in Buffalo, New York, West Virginia and Maryland will cause approximately 2 cents of dilution for the second half of the year. We are currently in the process of paying off about $24 million of 7% property debt coming due with the $27 million of sales proceeds. The cap rate on the sale is just under 8%, so while we expect significant dilution from this sale for the second half of this year, the ongoing dilution in 2004 should be minimized. The 2002 sales of our properties in Michigan, Florida and Ohio, coupled with the redeployment of that capital into the property purchases in Florida, Arizona and Texas, is still expected to cause approximately 3 cents of dilution for the full year. The property refinancing completed during the second quarter will cause approximately one cent of dilution for the rest of this year.

I'd like to also add the MHC is still expensing stock options and we expect this year's dilution to be a penny. Also at this time, our projections assume no acquisitions or share repurchases for 2003. Now with respect to our quarterly earnings for the remainder of 2003, if you look through the second quarter, our FFO per share is flat compared to 2002 and $1.27 a share. For the third quarter, there are several items that will affect FFO per share compared to the third quarter of 2002. The first item is the dilution from the property sales we affected in 2002. The second item is the dilution from the recently completed property sales and the timing of this $24 million of proceeds toward higher cost debt pay down. The third issue is, with our redeployment of capital into resort properties, we have increased seasonality in earnings that affects third quarter versus fourth quarter of this year. These items will cause FFO per share to be in the 55 to 56 cent a share range rather than the 58 cents we achieved in the third quarter of 2002.

Consequently, we expect fourth quarter FFO per share to be 2 to 3 cents higher than fourth quarter 2002 with any incremental growth in FFO for the year to occur in the fourth quarter as well. With that, we'll turn it over for questions.

Thank you, Sir. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we will take as many questions as time permits. Once again, please press star one to ask a question and we'll pause for just a moment. Our first question will come from Jordan Sadler of Smith Barney.

Hi, all. I had a quick question on the asset sales. What was the occupancy of those properties?

The occupancy of those properties was approximately 94%, 95%. Basically, the property in Maryland was full at 101 sites. The property in Buffalo was in the 92-93% range and the property in West Virginia was 96, 97% occupied.

I guess - - just looking at your supplemental listing this quarter versus last quarter and I see just a difference in occupied sites. It seems they're down about 1,050 or so. Can you just walk me through the math? You sold, let's say, 730 sites. Did you just lose - - and you have new fills or new home sales of 118, I think it was. Can you just walk me through how occupancy declined? What's the gap there?

Well, there's two factors in that number, Jordan. The first is the fact that we have a seasonal rental program, so when you were looking at last quarter, some of the occupancy reflects the seasonal rental that occurs in Arizona and Florida. People leave in March and April and even some tail into May. That drives some of it and the rest is sequential occupancy decline that we've experienced. You still have some occupancy decline - - I guess what I'd say is there is - - again, we experience two types of occupancy decline. There's the market occupancy decline of for instance what we see in some of these tertiary markets, the all-age communities, as well as we continue to see some modest decline in Colorado. And then you have some decline in the senior communities in Florida and Arizona where we are in this process of upgrading and redeveloping, if you will, these communities. We're letting, again, the old housing stock, leave because over time, we are going to fill those vacant sites with new homes and establish an equilibrium between the sites we lose and new home sales in those markets and gradually have that occupancy climb back up with a higher quality resident and a higher quality house

And how many of those communities are there where there's forced occupancy so to speak, communities? Are there 20 something or - -?

Well if you look, basically most of the communities in Florida and most of the communities in Arizona, if there is an old house that's early 1970's pre-HUD single wide house that's old, in a senior community, we won't fight to try to keep that house in the community. We won't try to broker that resell. As we have people leave, and you've got to remember, it's not an economic issue so much as it's these are senior communities and it's an aging of the population issue where people are - - there's a life event that causes them to leave. And the house is old and we let them go. So it's not just 6 or 7 communities. It's a number of communities where we let that happen.

And then, I guess, maybe just a quick update on the re-pos in the portfolio. I think at the end of the first quarter there was something like 240 in total. Some number of those, 100 or so, take up some. Can you update us some?

Sure. We - - actually, the re-po level has dropped from 240 to 170 and that is, and Conseco's re-pos are still at about 84, 85. They're about half of that still. They were a little over 100 at the first quarter. And that drop in re-pos is - - we're seeing it in a number of spots, it isn't just one or two communities.

Okay, and you're selling them - - I mean, in large part, are they leaving the communities or are they mostly just being resold?

It depends on the community. Some communities you see pull outs and in other communities, you're seeing resell. The lenders are selling. For instance, in Colorado we've seen a significant number of re-sales occur when the homes come off of re-po.

Okay, that'd be all. Thank you.

Our next question will come from Jay Lupe of RBC Capital Markets.

Hi, guys. This is David Ronk here actually with Jay Lupe. I guess first question, highly debated topic these days - - given that you just sold a couple of assets, I think you said in the sub 8% range. I was wondering if - - I know a lot of companies, and you guys in particular, don't like to maybe nail the exact cap rate, but perhaps you can give us a range of cap rates which you feel, given the current sales environment might be appropriate?

We don't comment on cap rates. We have never really provided any cap rate guidance for our stock. We don't pretend to know what that is and we kind of leave it up to you all to do that.

I guess the one comment I will add is that it's not to hard to figure out what a financial buyer can pay on a cap rate basis. Basically take interest rates, the five year, sometimes the 10 year, but you can do either one - - some like to go short, some like to go a little longer - - the equity yields that are required coming out of the box today are kind of in the 7% range. So when you combine, you know, 70-80% financing at call it 5%, and 20% equity with a 7% number, you get some pretty aggressive buyers. Now I will say those buyers are looking for higher quality assets to go to that underwriting level in major metro areas or senior properties, properties that are demonstrating stress, economic stress in the form of vacancy or they're just in areas that are in high competition relative to other forms of housing, are not going at those cap rates, at least that we have seen. But it can get very aggressive out there. California is certainly probably the most aggressive state from a cap rate basis. I would also say Arizona and Florida and then the east coast also demonstrate some incredible cap rates. By way of example, we saw a number of properties trade recently in California at sub 6 cap rates. We know of a deal in Florida that's going to trade roughly at a 6 cap rate, it's a senior property in an east coast location. And in Arizona, we have seen properties trade at sub 7 cap rates. So it's a pretty competitive market place out there.

Great. I appreciate the color. Staying on the sales topic, have the strengths of the disposition market changed your attitude towards asset sales at all? And have you increased your disposition target for '03? Kind of give us a feel for maybe what you expect to do in terms of asset sales over the next couple of quarters.

You know, I think we take a pretty long term view with respect to our portfolio and the rotation of our portfolio. If you go back towards, I think it was 1997, 1998, I don't recall - - but we've been focusing on reallocating capital into those market places where we expect to be long term players. Over the years, we've moved out of Kansas City, we've moved out of Michigan, we've taken one off assets in Minnesota. These assets that are part of this transaction represent another series of assets that we can't either find other assets to build scale or are in locations where we don't view it as a long term place we want to be and have allocated that capital into areas we're more comfortable with in Arizona and in Florida. I think we will continue to do that opportunistically.

Okay, final question - - can you give us a feel for what second quarter cap ex looked like in relation to first quarter?

Yeah. Second quarter cap ex was $3,190,000 versus first quarter it was $3,017,000.

Okay, great. Thanks a lot.

As a reminder, it is star one to ask a question. Our next question will come from Richard Paoli of ABP Investments

Hey guys. I just was wondering if you could back up on the expansions. You said you filled 27 on the second quarter and year to date you're at 60. And then your goal is 200 to 250?

150 to 200.

150 to 200. You're less than halfway there. Why do you see that as a - - is it a realistic goal now or?

Yeah. Rich, if you look at our sales volume versus what we expect to do for the year, we've on pace with that. We've sold 170 houses this year and we do expect - - I'll give you it in terms of last year. I think we built 150 expansion sites and sold 420 homes and last year at this time I think we had only filled 60 to 70 expansion sites. So when you see how our sales build up toward the end of the year, that goes with the building of expansion sites as well.

Does it happen most in the third or fourth quarter? Where does it - - where is the inflection?

I think it's third and then it really kind of reflects it as sales go. The third quarter should be as much volume as the second, and hopefully more, and then the fourth quarter tends to be the big volume quarter.

Why is that?

This is kind of a broad topic, but with respect to the expansion sites, we only have a few expansion areas left. Over the course of the last few years, and I think we've discussed this a number of times on the conference calls, we used to run with an inventory of expansion sites in the neighborhood of 1,100 to 1,200. I think our inventory of expansion sites has been worked down into the 700 range and that's at fewer and fewer properties. The good news is that's as a result of our ability to fill them historically We are looking at other areas where we can add expansion sites. We have three properties, two in Florida, one in Illinois, we are actively evaluating expansion. But on the flip side, we also noticed this was occurring in our portfolio and that is part of this whole upgrade program that we have talked about ognosium, I think, for the last few years, which is - - can we sell new homes in our existing communities or do we always have to create a new site to get that new home sale generated? I think we've proven very successfully that we can sell new homes in existing stabilized communities. We really ramped it up in the last few years in Florida. The incredible thing is, we have year over year sales increases in new home sales and most of that sales increase is coming from existing, stabilized communities where we're putting in new homes in replace of older, less attractive housing. We are now doing that out in Arizona and I have to say hats off to the team in Arizona. They are making it click now. We're seeing some pretty good sales numbers coming out of that group. So we have proven on a portfolio basis that we can take our existing assets and upgrade them in place while we continue to increase the cash flow on those assets. That's where a bulk of our new home sales are occurring on a year over year basis. So expansions are still a part of our business but they're becoming less so in terms of the focal point from where we're getting our new home sales.

Switching gears a little bit, I know the cap rate thing is a little sensitive, you said you sold the portfolio this quarter at sub 8, is that right?

Yeah.

And would it be safe to say that you believe that your - - those assets that you currently retain in your portfolio are of better quality than that you sold? Or at least - - the characteristics, the metro markets, things like that are better characteristics for you? I'm kind of leading into - - why haven't you really used some of these proceeds perhaps to buy back some stock and kind of thinking about it, you know, if you could get a reinvest or double down in what you currently own, if it's better quality or where you want to be long term?

Well, we have, over the years, had buy back plans approved by the Board of Directors and in fact have aggressively participated in buying back our stock at certain points in time. We currently have approval on a share buy back. That is a board level discussion and beyond saying that we have a million shares, I think, approved for buy back subject to Executive Committee approval, it's really a board level discussion and they make the decision with respect to what price they feel comfortable buying.

So management doesn’t have a discretion in terms of price range?

It's set by the Executive Committee of the Board.

It seems like your chairman likes the stock though. I mean, he's been buying it. Is that a little different? I've seen some insider trading going on. He's been in that buyer, but I guess for his account, but doesn't feel this is attractive enough environment for you guys to reinvest in the company?

You know where he is, Rich, you can call him.

Well, I was just kind of curious because I see you guys concentrating into what I believe is just better assets and just why suffer the dilution if you could reinvest? No other comments.

Okay, thank you.

Our next question will come from Lou Taylor of Deutsche Bank.

Thanks. Howard or Tom, can you address the home sale business - - the declining margins during the second quarter?

Yeah. One, the margin in last year was, I think, artificially high given that we had some sales in certain locations that were at very good margins. So there was a little bit of a distortion on a year over year basis from last year being artificially high in the second quarter. I think if you went through the whole year, that second quarter margin of last year did not sustain itself through the year. So that's one piece of it. The other piece of it is we have been focused, very focused, on making sure we move inventory that is beginning to age in our portfolio. And there are probably three to four locations that I can think of offhand where we have aggressively tried to move aged inventory. Most of that was done at kind of breakeven to maybe a slight loss on those sales. So you're seeing the margin compression happening for those two reasons, but if you peel back that stuff and look at kind of ongoing sales that we have in most of our portfolio, you're seeing some margins that are consistent with the prior year at higher average pricing. So we're selling a higher quality product and maintaining margins consistent with what we would call our average margin, although this quarter, the comparisons are being affected by those two issues.

Okay. Can you also talk about cap ex? I mean, what are some of the main items in your cap ex budget this year? It looks like it's running pretty steady $3 million or so a quarter. What are some of the big things this year?

Well, Lou, we hit, when we were doing our original guidance, talked about this that we have this kind of upgrade program. We kind of look at our cap ex as revenue producing cap ex versus just recurring cap ex. Our recurring cap ex has been running at about $7.5 million per year and that's just the usual re-doing streets, any sort of utility replacement, you know, just basic cap ex to keep the communities in the same condition that they've been in. If you take away that $7.5 million, you have up to $4 million I'd anticipate this year of what we call upgrade revenue producing cap ex and that's in a targeted number of communities where we are moving to take a community from being a B grade community to an A grade community through remodeling the clubhouse, redoing the grounds in terms of upgrading landscaping, upgrading the signage, and that type of cap ex gets put through a business plan process and you have to provide an acceptable IRR in order for us to do it.

If you look at our cap ex for 2001 and 2002, it trended higher. What you're seeing in 2003 is the continuance of that. We anticipate that that will go on for another year or two at which point in time we think a lot of the targeted communities will have been upgraded and you'll then see some tail off of that.

Okay, second question pertains to acquisitions in the Chateau deal. Did you have any dead deal costs expensed during Q2 or is it going to be a Q3 number or is it not material at all?

It wasn't material.

Was it in second quarter or third quarter or will it be third quarter, I guess?

There will be a little in the second and a little in the third. But it's not a huge one.

Okay, and then how about just acquisitions generally? I know you've given guidance of nothing for the second half. Is there really nothing in the pipeline or just not enough there for you to get excited about? Or are you just being conservative? I mean, is there anything in the market that you're interested in?

Well, we are seeing deals that we are interested in and deals that we are bidding on in areas that we are interested in. But the pricing and the aggressiveness with respect to what some people will pay for those assets has put us in a position of not being successful on a number of ones that we've gone after.

Okay, thank you.

Our next question will come from David Harris of Lehman Brothers.

My questions have been answered. Thank you.

Moving on to Ralph Block of Bay Isle Financial.

Good morning. Can you comment just a little bit further, maybe provide some anecdotal evidence or whatever, on what you're seeing out there in terms of the lending environment or new buyers of homes? Is it pretty much steady or are you seeing any signs of improvement?

Well, by steady, it's a struggle. The major players are either gone or fading and while you're hearing positive statements from the ones that are trying to remain in the business that have experienced portfolio issues, I am not hearing from my industry colleagues that there's any real velocity. And that's all due to the fact that the securitization market is relatively - - well it's probably just gone with the exception of the Vanderbilt securitizations and that may even go away if the Bircher acquisition of Clayton is successful. The issue is really a little more complex in the sense that you have a breakdown between seniors and family. The seniors have traditionally gone to traditional loan resources such as banks and found that they are able to get home loans at rates that are not inconsistent with stick built home loan rates. They give their business to the bank and we're not experience great difficulty. We've seen some underwriting changes in some of those banks where they have changed or restricted their underwriting to make it a little tighter, but for the most part, we have not been experiencing huge resistance to getting financing for our seniors.

The manufacturers came out with what I thought was the right thing to do if they were going to provide financing for their retail outlets. And they also met with the same expansion, or rather securitization issues and have not been very successful as far as we know. The one light that we're all seeing, of course, well, there's a couple of lights. Chase continues to be active with a fairly significant amount of capital applied to this market and we're all grateful for that. And US Bancorp just announced that they are entering the market with people that we know have been in this business for a long time. So we think people are looking at it, we think the buffet effect is positive. We're not quite sure what that means from Vanderbilt's point of view, but we certainly are hopeful that they will continue to be a resource in the business.

So essentially cautiously optimistic overt he next 9 to 12 months maybe?

Yeah, you know, I'm a believer in the industry and I'm a believer that people will return to the industry and that the underwriting will be a tad more disciplined which I think will be good for the industry. As we, you know, it's all tied up with the re-po and the new home inventory that's been backed up on the lots for the last few years. As we're seeing those absorbed, we think that certainly within the next 12 to 18 months we're going to see something very positive emerge from all of this.

Okay, thanks.

As a final reminder, that is star one to ask a question. There appear to be no further questions. Mr. Walker, I'll turn the conference back over to you for any additional or closing remarks.

Well, thank you, everybody for joining us, and as always, we are available by telephone. Good morning.

That does conclude today's conference call. Thank you, everyone, for your participation.