Equity LifeStyle Properties Inc (ELS) 2003 Q3 法說會逐字稿

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Please stand by. Good day. And thank you for joining us to discuss MHC's third quarter results. Our featured speakers are Howard Walker, MHC's CEO, Tom Heneghan our president and COO, and Michael Berman, our CFO. This call is being recorded. Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law. These 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 would like to turn the call over to Mr. Howard Walker, CEO. Please go ahead, sir.

Thank you. And good morning, everyone. Thank you, once again, for joining us for our 2003 third quarter earnings call. Our usual manner, Tom and Michael, our new CFO, will participate with me on the call today. I would like to add that Michael joined us on September 30th, and we're very happy to have him join the team here. Michael will report on the details of our performance during the third quarter as well as on the recapitalization announced in our press release of September 2nd. Included in Michael's report today willing management's recommendations to the MHC board for the application of the proceeds from the recapitalization. The board meets in two weeks and it will decide at that time how the proceeds will be distributed. In the meantime, we are sharing only management's viewpoint at this time. However, allow me for a moment to reflects on the MHC model initiated prior to our IPO in 1993 and which has become the platform it has become today. It's our underlying basis for our successful recapitalization. It focused on age-restricted communities and the lifestyle offered to the residents who live in them. The lifestyle is the essential ingredient that attacks and retains the residents. MHC has an added advantage because we have always concentrated on the location of our communities. Our residents want the advantages of living in communities that are close to major metropolitan areas or in resort destination locations. The value of these assets is further enhanced by our sensitivity to the needs of our present and future residents. To meet this expectation, MHC's upgrade programs have added value in a number of ways. We have worked diligently with the manufacturers supplying homes to our communities to develop and deliver designs to meet the market's requirements. Recently, a number of investors toured one of our communities and had an opportunity to see firsthand and compare today's Manufactured Home. It has the appearance, size and detailing everyone desires in their home. Among the details offered by today's models are front porch, garage and improved roof line and employer dimensions and amenities that provide a modern home feel.

We're continually reviewing the common area amenities of our communities and have initiated upgrade programs in many of them that not only will preserve but will also enhance the value of our portfolio and the lifestyle choice of our residents.

Consequently, the quality of our assets results in the stability of cash flow, and it is against this background that we have repeatedly stated that MHC is unique in our industry as an investment opportunity and which has permitted MHC to successfully consummate the financing this past week. The outlook for manufacturing in lending has not significantly changed in the last three months. With the reported statistics indicate that the decline in new home shipments may have hit bottom with an estimated annual run rate of approximately 135,000 shipments for 2003 and with an expectation at the annual production numbers for 2004 will improve on that number. We share in this view, though some of next year's success will be dependent on the true absorption of repos by individual residents and not merely shifting from lenders to others buying volume packages at discounted pricing for future resale. The significance of recent events should also be noted on their impact on the industry. Shortly after the sale of Clayton homes was cleared in court, Warren Buffett's company announced the capital raise of approximately $1.5 billion earmarked essentially for home loans generated through Clayton's lending arm, Vanderbilt mortgage, and probably available to 21st Century mortgage, an independent company created by former senior officers of Vanderbilt and Clayton Homes. The significance of this announcement may be twofold, first it represents a vote of confidence in the industry and especially channel finance lending and secondly it appears that the presumption that Clayton will rely on private lending sourcing in lieu of sourcing indications is correct.

While I understand that channel financing securitizations are in disfavor at this time, all things have cycles, and once stabilized, such resources will again become available. This will be beneficial not only to home buyers, retailers and lenders, but of some significance renewed lending pipelines will bode well for manufacturing. We reiterate the strength of MHC's portfolio is in its ability to with stand pressures from a varying economic cycle. Our core business continues to perform in a strong and predictable manner. Now I'll turn it over to Michael to give you his report.

Thank you, Howard. I just want to say that it's an honor to be part of MHC's management team. And so let's get to our performance for the third quarter. Third quarter results reflect the continued stable performance of MHC's portfolio. Our core portfolio, as you know, properties owned as the beginning of each year had base rental income up over 3% for the quarter and over 3.3% year to date. Our average base rental rates were up 5% for the quarter and 5.1% year to date. Average occupied sites were down about 1.9% in the quarter and about 1.8% year to date. As a result of these changes, our core net operating income is up approximately 2.5% for the quarter and 2.8% year to date. Overall, total property revenues were up 3.2% for the quarter and 3.2% year to date. Overall property operating expenses increased approximately 4.4% for the quarter and 3.8% year to date. As the company has mentioned on previous calls, primary drivers continue to be increases in real estate taxes, insurance costs and utility expenses.

During the quarter, we filled approximately 52 expansion sites bringing our total to the year of 112 towards our goal of 150 to 200 sites. With respect to our balance sheet, average debt balance for the quarter was $734 million with weighted average interest rate of 6.2%. And our interest coverage was approximately 2.6 times. Few comments on sales. New home sales volume continued to show excellent performance, up over 22% in the quarter, or 25 homes, and about 12.5% year to date. In line with our plan, we are selling more homes in more communities. However, margins are down primarily related to aged inventory in Arizona.

Now let's get to the recapitalization. On September 2nd, we announced the process to obtain $500 million in loan commitments at a blended average interest rate of 5.92% on 56 previously unencumbered properties. Six weeks later, this past Friday, we closed on 51 loans, with over $501 million in proceeds at a blended average interest rate of 5.84%. We have used approximately $170 million for the proceeds for the payoff of our term loan and reduced our line of credit balance down to 0.

Management intends to recommend to the board that it can consider a special distribution of 8 to $10 per share to its shareholders and holders of operating partnership units in mid-January of next year. With respect to 2004, we will also be recommending a 5 to 10 cent per share annual cash dividend. We expect to discuss these recommendations with the board at our upcoming November 4th board meeting. That concludes my report for the quarter. Now we will take your questions.

Today's question and answer session will be conducted electronically. If you would like to ask a question, you may signal us by pressing the star key followed by the digit 1 on your touch-tone telephone. For those of you joining us today using a speaker phone, please release the mute function so your signal will reach our equipment. Star-1 if you would like to ask a question. We'll hear first from Jonathan Litt with Salomon Smith Barney.

Hi, it's John with Jordan Sadler. I'm not sure if I heard right. Did you say a 5 to 10 cent dividend?

That's correct, that’s our recommendation.

On an annual basis?

That's correct.

That would be the extent of your dividend.

Cash dividend, not the special dividend.

So your current run rate -- maybe I'm just missing something, is $1.98?

That's correct.

You're saying 5 to 10 cents?

That's correct.

And special dividend, you think, based on management's assessment, would be in the 8 to $10 range?

Let me comment on the whole issue so that you have some perspective on our thinking. As a result of the recapitalization, we are putting the company in a position so that from a requalification standpoint, we no longer have to pay a dividend to maintain the restatus. There's going to be -- the additional interest expense and the distribution will be treated as a, you know, kind of a capital gain, and step on the basis because on that distribution. As a result, you have a convergence of factors that allow us to kind of sit back after we make the special dividend, take in the next 12 months, see how things are going and maintain financial flexibility which has been a key to our success historically. We'll have 50 to $80 million of cash on the balance sheet. We'll have up to $100 million of line of credit availability. And we'll be generating in the next year, after the special dividend, somewhere in the neighborhood of 30 to $40 million of free cash flow. So what we are saying is let's get this recap behind us. Let's look at the next 12 months and let's not lose the opportunity to either execute on a stock buyback, execute on taking out the preferred, which is callable next September, execute on an acquisition, or any of the other attractive uses of capital that may appear in the next 12 months after the recap.

So just to go through this, so your 50 to $80 million in cash on the balance sheet after stock dividend, is that what you're saying?

Yes.

And that might be used to take out the preferreds plus borrowings on your line?

It may be used to take out the preferred, it may be used to do a stock buyback. It may be used to fund acquisitions. I guess what we're saying is we want to make sure we have the financial flexibility to execute on value-added actions for the benefit of the shareholders.

And the -- can you give us an update on the stock buyback?

We have bought zero stock as of today under the stock buyback plan.

And why is that?

It hasn't met thresholds that have been decided by the board.

Going back to the 5 to 10 cent dividend, you could pay out more because your cash flow's 30 to $40 million after all your expenses, but you're saying let's catch our breath for '04 and figure out how things looked once we've finished our capital and then reassess after that?

Yes. I guess our view is the difference between paying out the 30 to $40 million next year and not. Provides us more financial flexibility to execute our business plan, and the key to our success, we believe historically, has been financial flexibility, to pursue an acquisition, pursue a stock buyback. Whatever that happens to be at that point in time, we have financial flexibility to execute, and we think retaining that is the key to our success. So it's our recommendation that we retain that financial flexibility and evaluate the options post-recap.

Do you think the special dividend will be paid in '03 or '04?

It will be paid in '04.

That's why you don't have to pay out more than that, or is it that your net income is going to be close to zero because you now have so much interest expense?

It's more the latter. I think the models that we have run say that from a requalification standpoint, we won't have to pay a dividend until somewhere four or five years. So 2008 or so.

Right. From the growth and the cash flow.

Right.

I don't know if Jordan has a question. Jordan?

Yeah, just follow up on the guidance for Q4, 35 to 40 cents or so. What are the charges specifically associated with the recap?

The biggest charge -- I'm sorry?

Just interest expense?

No, no, there's one-time and there's the impact of the interest expense. And I don't have the numbers in front of me, but it's roughly half and half. With respect to the one-time cost, paying off the line and especially paying off the term debt, which was swapped out at a fixed interest rate, so you have the unwinding of the swap cost and you have the deferred financing costs that are being written off. That's a lot of the one-time costs. And then you have the additional load of the interest expense and the deferred financing cost on a going-forward basis from the date of the funding of October 17th.

Okay. And then just lastly, the occupancies continue to draw down during the quarter, sequentially, I think another 50 60 basis points or so. Just curious if that's still attributable to the forced vacancy associated with the redevelopment you guys are doing or is that just a function of additional repos, what have you?

There's a combination of both going on there. I looked at year over year occupancy declined, and I would have to say year over year, two-thirds of the occupancy declined is what I would refer to as economically created. In other words, in our markets where we have those assets, alternative housing costs are as attractive or more attractive than our product. And that continues to be the same location that we have talked about many times on the call. That's Iowa, that's Indiana, that's family in the Phoenix marketplace. The other called a third relates to our upgrade programs where in many of our locations where we have home sales programs going on, we are creating vacancy in order to create that site to sell a new home on. That would be areas like Bay Indies and Florida, meadows of chantilly on the east coast, which is doing quite well. Willow, like up in Elgin, also is having that occur. On a quarter over quarter basis, to hit your point, yes, we are still having a decline in occupancy.

You know, frustratingly, we thought we were kind of hitting a low point on some of these more challenged assets. It doesn't appear to be so. If I look this quarter versus last quarter, it's still the same names coming up, Holiday Village in Iowa, The Mark in Phoenix, Albuquerque, Delray in Albuquerque, New Mexico, Wind Song in Indiana are still having, you know, quarter over quarter declines in occupancy. It's frustrating, and we still don't see anything in those marketplaces that tells us we're going to see improvement in the near term. And these are marketplaces where we have chosen not to, you know, throw capital at it in the forms of, you know, either home rental or subsidized homes or what have you. We've just let that occupancy decline given the market condition. And we are assessing it in terms of when is the right time to get back in that marketplace and try and create some occupancy. And as I sit here today, I still can't justify going into those marketplaces with capital. The apartment markets are still very competitive. And the single-family home market is still very competitive.

What are you seeing in terms of pricing on the acquisitions? You guys are leaving yourself plenty of flexibility, obviously going forward. Is pricing changing at all? Are there any opportunities for the senior communities coming up?

You know, I would have to say pricing is as high and aggressive as I've seen it. It's a very difficult environment with the recap, we certainly made phone calls to people in the industry with respect to assets. We'd like to own. It really wasn't that productive. We don't have a bunch of contracts that we're sitting on. So I would say the acquisition environment is still difficult. However, we want to be able to execute to the extent an acquisition becomes available. And historically, they have come up, and it has been our ability to drive aggressively for that acquisition that has made a difference. Whether it was the Ellenburg transaction, the Willow Parks West transaction and even the Deanza transaction. Our ability to execute quickly and aggressively was the key to getting those portfolios.

Great. Thank you, guys.

Next we'll hear from David Harris with Lehman Brothers.

Good morning, everyone. Is it possible to get an idea of the character of the special dividends by way of capital lower income?

It's going to be roughly taxed somewhere at a 15 to 20% capital gains tax rate. It's going to be a combination of capital gains and a combination of some recapture from the depreciation. But we think that the blended rate will be somewhere in the 15 to 20 rate%. It will be taxable in 2004. The cash would be given out sometime early 2004. And the tax due on it would be in 2005.

Okay. Thanks. And then finally, on the sales activity, are you still thinking that we might break even on this business this year, or is that a bit optimistic?

I'd say that's a bit optimistic. You know, looking at the numbers we're still selling very well in the northeast. And in Florida. We're consistently hitting both higher volumes and good gross profits in those areas. What is happening in terms of our struggle is generally out west. And it's twofold. One, the homes that we're selling in Arizona, and we're selling more homes today than we ever have, have been aged, meaning we put those in place in 2001, 2002, we haven't been able to move them, so we're trying to move them so we can get a fresher, cleaner, newer product there. And some of the volume that occurs historically in the west has come from rather higher gross profit areas, one of them being Colorado, that has pretty much quieted down to little or no activity in this year. And the other is in California. So you're seeing a higher gross profit that was there last year because of some deals, and then a cleaning out, so to speak, of some older inventory affecting gross profit margins in Arizona this year.

Has there been any perceptible improvement in the financing environment with the introduction of new capital into the business?

We're hearing flutters, David but we're not seeing anything of any consequence at this point. I think First Union, if that's the name, is moving slowly into the market. Conseco is certainly making noises about returning to the market. But I think they're going to concentrate on their repos at this time. I do believe that everybody is still scratching and clawing for local and regional lenders and coming up with alternatives. And that's the nature of the market. But we do believe that there's a lot of interest in this business and certainly the Bufett effect is not to be disregarded, although I can't tell you what that means in terms of other people coming in to lend money. He certainly is committing to channel financing in a big way.

Okay. Great. Thanks, guys.

Now we're hear from John Perry with Deutsche Banc. Moving on, we'll hear from Paul Adornato with Cobblestone Research.

Thank you. Could you talk about any computing alternatives for management's proposal for the recapitalization that the board might consider?

Could you just give us a little help on what you mean by that? I mean, some application, some alternative application of the surplus proceeds?

Yes.

Well, that's pretty much up to the board. We're sharing our thoughts today Paul. And that's what we think.

Okay.

About it today. But we certainly don't have any other game plans teed up on the board.

Okay

Now we'll hear from David Ronco with Royal Bank of Canada.

Hi, David Ronco. With Jay Leupp. Getting back to property operations quickly, You've posted 2.5% this quarter and said you didn't expect any material improvement in operating environment. Is it fair to say that, you know given the kind of the slow deterioration of occupancy that looking into '04, although you haven't given specific guidance, that we should expect that to maybe pull back to the 2, 2.25 range?

You know, I would say -- I'll give you some information with respect to '04 that we know of as we sit here today. We have noticed roughly 60% of our residents, the average rent increase on that notice is approximately 4%. We believe, based on our budgets that the rate increase will be in the neighborhood of call it 4 to 4.25%. We believe expenses are going to trend higher than CPI because of pressures on real estate, taxes and insurance. Those are moderating compared to historical increases, especially insurance. We're still seeing a double-digit increase in insurance, but nothing near the levels that we saw, say, from 2002 to 2003. And big question is occupancy. And if occupancy stabilizes or, in fact, starts to recover, you know, that's going to drive that NOI core growth rate. And I would say the range, given what could happen to occupancy, could be as low as 2 and as high as, you know, 3.5. So it is a little bit fluid. And we are a little frustrated with respect to calling the bottom on some of these marketplaces. But it will come back. It has come back historically. The stabilized occupancy in many of the assets that we're talking about is in the high 80s. And you're talking about assets that right now are in the low 70% occupancy. So it's going to come back. It's a question of when. And when it does come back, we're going to see the benefit of that occupancy getting, you know, falling into the numbers.

Great. Do you guys -- I mean, I guess another component, do you guys expect to be in that seller in 2004? I'm assuming so. If so, to what tune do you think you might be in that?

Net seller of assets?

Right.

: I think we're going to be a net buyer of assets in 2004. I would hope to be. We've pretty much either identified assets that were available for sale and rotates capital from those assets into other acquisitions. We still have a number of assets that we would view as not long term for the portfolio, but their current status would not be a good execution with respect to any transaction. We believe that those marketplaces will recover and those assets will gain in value in the future. So I don't think 2004's going to see much in terms of the disposition activity.

Okay. Great. Thanks.

As a reminder, it is star-1 to ask a question. Now we'll hear from John Perry with Deutsche Banc.

Good morning. Most of my questions have been asked, but the meeting with the board in which you're going to ask -- recommend the 8 to $10 special dividend, when is that being held?

November 4.

November 4. Okay. And after that, is that when we should be looking for a little more detail, guidance, in terms of '04 numbers and the size of the dividend?

Certainly we can give an update in '04, and it might be even after that. Some of the issues with respect to '04 guidance are that use the proceeds issue.

Um-hm.

We've put a lot of it to bed, if the board makes some decisions in early November, they might decide to defer and consider some other alternatives. Who knows what they may consider. But as soon as we have that information and are able to kind of articulate the balance sheet and capital structure, I think we'll be in a much better position with respect to '04 guidance. We would expect that to happen between now and the beginning of '04. November might be it, but it also might come a little later.

Okay. Thank you.

Moving on to John Harold with Green Street Adviser.

John Harold I was wondering if you could comment on the California litigation regarding vacancy decontrol. Now that you've had your settlement with Santa Cruz, can you give us some idea of what the next steps are and whether you're taking any additional action beyond that?

I'd love to comment on it, John, but right now we're kind of at a what I would call critical point relative to the settlement agreement in Santa Cruz. And I'd like to keep my comments to a minimum.

Okay. And I wasn't looking for comments on Santa Cruz specifically, but if you were doing anything beyond that. You're saying you can't comment on that either?

We're still -- the one relevant update I can give you, we're still waiting for the decision coming out of the federal court relative to another asset. We finished the trial on that back in January of this year. He did give an order saying effectively that he wants to see how an appeal issue is being decided before he issues his opinion.

Okay.

Roughly, that's what he said. So he has the case. He understands he needs to make a decision and issue an order and I think he wants to wait for another case to be decided so he has that information before him.

Okay. And the settlement with Santa Cruz, you know, I guess -- I don't know how this works legally, but does that establish any precedent for you in California, or can you comment on that?

Again, I'd try and comment later, but I think right now it's kind of critical that we just stick to our knitting and not discuss Santa Cruz.

Okay. All right. Thank you.

And, again, it is star-1 to ask a question today. We'll now hear from Steve Sakwa with Merrill Lynch.

Hi, Jon Stewart here with Steve. Just to follow-up question on the one-time charges in the fourth quarter. Mike, if you quantified those, I must have missed it. Cue give an indication of the impact, the unwinding of the swap and deferred financing costs in the quarter?

Current estimate is half of the 35 to 45 cents, and it's a one-time charge.

Okay. And then any indication with respect to the dividend beyond 2004?

No. I think that's going to be a conversation that's discussed in November and probably each quarterly board meeting thereafter. And I think some of the issues that will impact that decision will be what is available as alternative uses of capital. I don't think this company is trying to keep cash just to keep cash. I think what they want to make sure they can do is execute on alternatives. And if those alternatives don't appear or there's likelihood that they won't come to fruition I think our recommendation will be to return capital to the shareholders via special dividend or a continuing dividend or what have you.

Okay. Thank you.

And gentlemen, that was our final question. I'll turn the conference back over to you for any additional or concluding remarks.

We thank everybody for joining us, and as always, we'll be available if you wish to call. And have a nice day.

))Operator: And that does conclude today's conference. We thank you for your participation, and have a good afternoon.--- 0