Equity LifeStyle Properties Inc (ELS) 2003 Q4 法說會逐字稿

Good day, and thank you for joining us to discuss MHC's fourth-quarter results. Tom Heneghan, our President and CEO; Roger Maynard, our COO; and Michael Berman, our CFO, will provide prepared remarks, followed by a Q&A session. As a reminder, 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, we will begin the prepared remarks. Please go ahead.

Good morning. Thank you for joining us as we discuss MHC's year-end results for 2003 and our expectations for 2004. I am Tom Heneghan, MHC's CEO, and joining me today are Mike Berman, MHC's CFO, and Roger Maynard, MHC's COO. After my announcements, Roger will provide some comments with respect to property operations, and Mike will discuss our financial results in more detail. We will then open it up for your questions.

2003 marks MHC's tenth year as a public company, and also a year of significant change. Before I comment on the changes, I think it is helpful to review the last 10 years. In February 1993, MHC completed its initial public offering at a split adjusted price of $12.88. We had 41 properties and just over 12,000 sites. The book value of our assets was $161 million, with total debt of $103 million. Our equity capitalization was $218 million. Funds from operations for full year 1993 were approximately $1 per share. Since 1993, total dividends paid to shareholders were $15.71 per share. If you include the $8 per share special dividend paid in January of this year, it represents $23.71 per share, or almost two times the IPO price of $12.88. Obviously, cash generated by the operation of our properties has allowed us to achieve these results. The average rent on properties that we have owned since the IPO has increased in excess of 70 percent since 1992.

Our business plan has always been to focus on major metropolitan areas with high barriers to entry, and retirement and vacation destinations. This is reflected in the changes to our portfolio, both in the acquisitions completed and the anticipated investment in 2004. Our commitment to our business plan and our desire to maintain balance sheet flexibility has resulted in a number of sound decisions.

A constant during all of this time has been our steadfast confidence in the stability of our cash flow and the attractive value proposition that we offer our customers. It is the continued belief in this view that was the basis of the recapitalization conducted in 2003, and the acquisition program we expect to consummate in 2004. It is important to note that almost the entire acquisition program resulted from long-standing relationships with owners who were not currently marketing their properties for sale. As a result of this effort, MHC currently expects to invest in transactions involving 37 properties during 2004.

Of course, there are a number of factors that could result in some or all of the investments not being consummated, but we are pleased with the effort and the resulting opportunities for the pro forma portfolio. On a pro forma basis, MHC would have interest in 177 properties, with over 68,000 sites. In addition, we would increase our expansion capacity by almost 2,400 additional sites. Pro forma FFO per share, assuming a full 12-month contribution from the acquisition, would be in excess of $2 per share. The total book value of our assets would approach 1.5 billion, with total debt of approximately 1.25 billion, and an equity capitalization of over $900 million.

The core retirement markets of Florida and Arizona would represent almost 60 percent of our total sites, with the remaining sites being concentrated along the East and West coasts of the United States, and the major metropolitan areas of Denver, Chicago and Las Vegas.

The performance of our portfolio over the last 10 years has been impressive, yet we are more excited about the prospects for the next 10 years. We enter the beginning of the Baby Boom retirement years well-positioned to service this customer. The quality of the housing product we offer today is superior to that of even a few years ago, and our investment of over $10 million in upgrade programs at various properties since 2000 has allowed us to compete well for these customers.

The acquisition program allows us to increase our exposure to, and expand, this attractive customer base. Given the difficulty of finding manufactured home communities in our targeted markets, we are focusing on the park model resort business. This business is consistent with our overall objective of stable, predictable cash flow streams and a core customer focused on high-quality attractive and affordable lifestyle. Moreover, the current economic environment for these resort properties is also more robust than what is occurring in many of the family manufactured home communities across the United States.

It is our belief that our existing portfolio, when combined with the acquisition program, creates exciting new opportunities for our Company. We will be able to offer a myriad of lifestyle opportunities and locations to our core customer at various price points and home sizes. We also expose our Company to a younger customer by moving toward the park model resort segment. These customers are, on average, younger than our manufactured home customer, and also have a positive view of the manufactured home product. In fact, based on recent analysis, we know that over 3,000 of our existing manufactured home residents at one time enjoyed the RV lifestyle before purchasing their home. We view this as an impressive number, especially since it occurred despite any formal marketing effort. Though we are excited about the cross-marketing possibilities created by the pro forma portfolio, we also recognize the additional operational complexities of the park model resort business.

To ensure that it gets the appropriate support for success, we have invited Joe McAdams to join MHC's Board of Directors. Mr. McAdams recently retired from Affinity Group, Inc., a leading service provider to the RV and park model resort business with over 2 million customers. We look forward to Mr. McAdams's contribution.

2003 also marked the end of succession plans initiated in 2000. On behalf of our Company, I thank Howard Walker for his years of stewardship. Both personally and professionally, as a friend and a mentor, I also appreciate his continued input in his role as Vice Chairman of our Board and Chairman of the Board's executive committee.

Our focus in 2004 will be the successful confirmation and integration of the acquisition program, an increase in core portfolio occupancy, continuing to increase new home sales volumes and improving the profitability of our sales. We will also reevaluate our dividend policy toward the end of 2004. While our goal is to return to a meaningful dividend, the key factors impacting the timing of this decision include estimates of our future cash flow, alternative uses of your capital and financial flexibility.

Roger will now provide some comments of our property operations.

Thanks, Tom. 2003 performance reflects two very different operating environments within our portfolio. It is a poignant example of the differences we are experiencing. I've separated the performance of our assets into three groups and I reviewed the performance since 2000. Group one represents all-age properties in low-barrier-to-entry markets, which I'll refer to as economically challenged properties. Group two represents age-qualified properties and all-age properties in major metro areas with high barriers to entry or vacation destinations, which I'll refer to as targeted holdings. And group three represents upgrade properties.

The economically challenged group contains eight properties and 2,702 total sites. These properties are located in Indiana, Iowa, New Mexico, Arizona and Nevada. Since 2000, these properties have experienced a decline of 480 occupied sites, a 1.3 million decline in net operating income and just two new home sales in 2003. Although only 6 percent of our total sites, their performance has been a drag on the remaining portfolio. The targeted holdings group contains 77 properties and a total of 25,259 sites. The bulk of these properties are located in the Sunbelt areas of Florida and Arizona and along the East and West Coast of the United States. Since 2000, these properties have experienced relatively stable occupancy, a 13.6 million increase in net operating income and a total of 245 new home sales in 2003. This group includes our core holdings in Denver, Colorado. Strong competition from alternative housing options has negatively impacted our ability to sell new homes, but has not yet significantly impacted occupancy. We continue to monitor this market. The upgrade properties include 26 properties with a total of 11,958 sites. After careful evaluation, we believe these properties represent an opportunity to invest capital and achieve targeted returns in markets with positive fundamentals. We focused on upgrading the amenities and creating a vibrant lifestyle, with the goal of attracting a new generation of customers to purchase new homes. The results thus far have been favorable, and bode well for the future of our portfolio, but near term have created additional vacancy in otherwise stable properties, as we replace some of the older homes in our communities. Since 2000, we have experienced a decline in occupancy of 685 sites. Notwithstanding the additional vacancy, we have increased net operating income by 2.1 billion since 2000. We also have increased new home sales every year at these properties since 2000, with a total of 182 new home sales in 2003. A return to stable occupancy at these upgrade properties would represent in excess of 3.5 million in incremental revenue to our portfolio.

Mike will now discuss the financial results.

Good morning. Our financial performance for 2003 reflects the relative stability of our properties in a continuously challenging economic environment. First, let's quickly discuss events affecting comparability of 2003 results to 2002. In June of 2003, we sold three properties for approximately $27 million, and used the proceeds to repay amounts on the Company's line of credit. In mid-December, we acquired three properties for approximately $12 million. With respect to the Company's recapitalization financing, this occurred on October 17, 2003. The Company borrowed approximately $502 million on a secured basis, at an interest rate of 5.84 percent -- that's a weighted-average interest rate -- with a weighted-average maturity of approximately nine years. We used approximately 170 million of those proceeds to repay all amounts outstanding on the Company's line of credit and the term loans. The second important event that occurred in 2003 was our settlement with the city of Santa Cruz, where we achieved essentially vacancy decontrol.

Now let's turn our attention to our core portfolio. As you know, these are properties that we owned at the beginning of each your. Base rental income was up 2.7 percent for the quarter and 3.2 percent for the year. Our average base rental rate was up 4.9 percent for the quarter and 5.1 percent for the year. However, occupied sites were down 2.1 percent for the quarter and 1.8 percent for the year. As a result, our core portfolio showed a net operating income increase of 2.2 percent for the quarter and 2.6 percent for the year. Our operating expenses continued to increase at rates greater than CPI.

During the quarter, we filled approximately 24 expansion sites, bringing the total for the year of 136 expansion sites filled, which is a little bit short of our goal of 150 to 200 sites for the year. No new expansion sites were brought online during the quarter or the year.

Turning to our debt, as I previously mentioned, our recapitalization financing was about 502 million. The remainder of our debt is first mortgage financings of approximately $576 million -- no change with respect to that balance. We have a line of credit with a capacity of $110 million, and an interest rate of approximately LIBOR plus 1.65 percent.

Now, let's turn our attention to our sales operation. New home sales were up 2.7 percent for the quarter and over 9 percent for the year. For the quarter, our home sales operation had income of approximately $200,000, but lost approximately $580,000 for the year. Our performance in 2003 reflected lower-than-expected gross margins, particularly in Arizona, despite a substantial increase in sales.

Turning our attention now to guidance for 2004, first, our results will be impacted throughout the year by our acquisition program, continued competitive housing options and new home sales initiatives, which may impact occupancy levels at certain communities and, finally, variability in income from our home sales operation. We are assuming a core base rent growth of approximately 4 percent, and core portfolio expenses will continue to grow in excess of CPI, primarily as a result of increases in insurance, real estate taxes and utility expenses. As a result, we would project core NOI growth of approximately 2.5 percent. We are assuming a breakeven result in our home sales operations. Based upon these factors, and prior to the impact of the acquisition program, we continue to project that fully-diluted FFO per share will range between $1.70 and $1.75 for the year ended December 31, 2004. Any impact from the acquisition program will increase this expected result. Given the magnitude of the acquisition program, it's difficult to give quarterly guidance in 2004. However, our near-term estimate for the first quarter of 2004 is 46 to 47 cents of fully-diluted FFO per share. We will provide additional guidance in 2004 as the acquisition program purposes.

Now, let's open it up for questions.

(OPERATOR INSTRUCTIONS). Jonathan Litt, Smith Barney.

It's actually Craig Melcher (ph) here with Jon. I'm just trying to get a little bit more color on the acquisitions. Do you have any of those properties, of the 37 mentioned in the release, under contract or letter of intent?

All of the 37 properties are under contract. We had provided some indication of the acquisition program in a previous press release, and I think at that time it was a $75 million investment. That was deals either under contract or letter of intent. That program now is an investment of 140 million; all of it is under contract.

The occupancy decline 60 (indiscernible) sequentially, from 3Q to 4Q -- was that in the family communities, the all-age communities? Or was there any weakness in the senior?

The biggest notable area of concern relative to occupancies -- I think Roger commented on it a little bit in his prepared remarks -- Denver, for us, third quarter to fourth quarter, experienced, I think, somewhere in the area of 100 to 150 site decline. That comprises most of our disappointment in the fourth quarter, relative to occupancy. We have always made some comments with respect to Denver. We think it's a core holding, it's a good marketplace. But there is incredibly strong competition today coming from apartments and single-family homes. Anybody who's gone into the Denver marketplace will notice that you can get single-family home financing with no money down, creating an incredibly competitive environment for us. We have seen our sales decline at Denver over the last few years from historical level, and occupancy has been fairly stable. This third quarter to fourth quarter was a noticeable exception to that, and we are currently focusing on that market closely.

Do you think occupancy could tend to stay flat from here, or do you think there is some more downside potential in these (inaudible) communities?

I'll talk market by market; that might give you some indication for our view. The East Coast of the United States we feel very good about. Florida and West Coast we also feel very good about, either stable or increasing occupancies. Arizona, at least as it relates to the age-qualified properties -- we have taken vacancies in an effort to create sites for new home sales. If you've noticed, our new home sales in 2003 were four times or more what they were in previous years. So I think we've got that market well understood and heading in the right direction. Denver is an area of concern, as I think we've mentioned. But as you see, during 2003, we had experienced a decline throughout the year. As we sit here today, with respect to occupancy, I think with the notable extraction of an eye on Denver, we feel pretty good that we're going to have incremental occupancy gains coming from the rest of the portfolio.

One last thing on this -- the one-time expenses and the fourth quarter results of the recap. Were they all in which line items in the income statement? Was that in the interest line?

Yes, it is.

In fact, the amortization and interest expense.

Right. And how much of that was one-time?

The one-time charges is about 3.9 million in the quarter.

Alexander Goldfarb, Lehman Brothers.

Good morning. First, if you could just let me know, how many sites were in that acquisition in the third -- in December?

It was about 900 sites, three properties.

And if you can go back over, just to refresh us, the park model dynamics versus the age-restricted, and then also what this will mean to your current all-age/age-restricted split, and then what the pro forma would look like after the 37 site properties close?

Again, we have given you some guidance and preliminary indications of where we think we're going to go on the acquisitions. It is all under contract. We feel pretty strongly that we're going to get it all closed. So there is some flex, however, with respect to some closed versus others which will drive the numbers. But I'd say 70 percent of the properties that we're targeting are in the park model resort business. And by park model resort business, we are referring to communities that are essentially Manufactured Home Communities, for the most part, but are geared toward the placement of what is known as a park model home. We have often discussed the park model home on prior calls. It's a factory-built product designed with 400 square feet. It often comes with additional add-on's when it's placed on site, and it's geared for certain properties that are focused on empty nesters and retirees or preretirees. That is the prototype of the asset we are focused on, from an acquisition program. We put some additional press release out on one particular asset, Monte Vista. Monte Vista is the prototype for the asset that we're targeting. I think, out of 832 sites, every site in that property is either occupied by a park model home or a resort home, which is essentially a manufactured home, actually a double wide, 1,100-square foot home that has been placed on the property, a highly amenitized property targeted for the empty nester and retiree.

So these are more like seasonal? They come down and use them for a bit and then go elsewhere?

For the most part, it's going to be seasonal. There are some people who live in these communities year-round, not unlike what you would see in our Arizona or Florida Manufactured Home Communities. Many of the people own the home and pay for the rent on an annual basis, but actually, the use pattern is more geared toward the winter months, the snowbird type activity.

And are these people that you sort of capture in both halves of the year? They are in some of your, let's say, northern communities and then go to a sunnier community? Or are the people going to these new MHC people?

I'm sorry; I don't understand the question.

The ones that are sort of more seasonal -- are you able to capture people coming from some of your more northern or colder communities, who go to these sunny communities, or are these people sort of new MHC tenants?

Well, there is both. I think what we are trying to put together, with respect to the combination of these park model resorts with our existing Manufactured Home Communities, is the potential for that cost marketing effort. We know that many people, when they desire to get a larger house than, say, a 600-square-foot park model, look at the manufactured home, which can go up to 1,500 square feet or more, as a viable alternative. They are favorably impressed with the product, and we know that we draw some from park model residents into our manufactured home community. We also would like to do some cross-seasonal activity between our northern areas and our sunbelt areas. But again, I think I mentioned in my prepared remarks, we've noticed 3,000 of our existing customers came from these park model resort type communities, and we didn't even do any marketing to those customers; they just came, knowing that our product existed. We are going to be a little more focused on actively marketing both to the manufactured home customer the opportunity to use the park model as a seasonal destination in the sunbelt areas and also, for those park model customers who are interested in a longer-term stay in a larger house, marketing then a manufactured home product.

And in terms of the issues of rent control, are these park models that are generally subject to rent control, or you're able to push rents as much as you can?

They are not -- they don't have as much regulation as a manufactured home community in many of the areas that we operate. There is no per se rent control on the product. But in areas that have a fair amount of regulation on the manufactured home side, call it California and Florida, this product is not nearly as regulated.

And then, for leverage, some of the numbers you threw out sound like somewhere in the 50 to 60 percent leverage for these acquisitions. Is that about accurate, or the leverage could be more?

It depends on the deal. Some of the acquisitions are as high as 80 percent, some are as low as 40 percent. Blended, that's probably a good estimate.

Okay, somewhere in that range. Great. Okay, well, thank you.

(OPERATOR INSTRUCTIONS). John Stewart, Merrill Lynch.

Just a couple of follow-up questions on the acquisition program. Can you give an indication of how many separate transactions you are talking about here?

Well, there's a large transaction which accounts for probably 60 to 70 percent; it's one common owner with multiple properties. The rest are individual transactions.

And you indicated that they are all under contract at this time; is that correct?

Yes. They are all under contract. Some are still subject to due diligence, but they are all under contract.

And then, with respect to the leverage, are you going to be primarily assuming debt? Or how is the debt going to be financed, I guess?

Most of it is going to be individual mortgage financing.

And maybe I'm missing something, Mike. But you talked about sort of a pro forma book value of 1.5 billion; is that right?

Yes.

So if I kind of back out the difference between what the book value is today and the $140 million equity investment, I'm coming up with incremental debt of like 300 million. Am I missing something there, or are those the right numbers?

I don't know what numbers you are looking at, so -- I know the pro forma book value is -- it's about a $300 million plus acquisition program in total.

Right, of assets.

Of assets.

Fair enough. And lastly, if you could just speak to the cap rates on these deals?

Some of the assets are -- the range of cap rates is anywhere from 6 to almost 10 percent. The 6 percent cap rates are the highest-quality assets with growth opportunities, below-market rents, expansion capacity. The higher cap rate assets are a little bit more stabilized assets. I'd say, on a blended basis, it's order of magnitude about 8 percent.

Art Havener, A.G. Edwards.

I have a question to clarify the guidance. You're not including any assumptions related to the redemption of the preferred operating partnership units; is that correct?

That's correct.

Just for clarification purposes, the 30 cents that you stated on a pro forma basis of the impact of the acquisitions -- that does not include any impact of the line of credit; it's all individual mortgage financings?

Yes, that is correct. So the current acquisition program, at its conclusion, would involve no draw on the line of credit. We would still have $110 million of availability in the line of credit, and the 30 cents, Art, is the run rate that we would get from the acquisitions, not the impact it will have in '04, just because of the timing of the transactions.

Of the 75 million of acquisitions that you identified previously, the 12 million that you closed in the fourth quarter -- was that included in that 75 million?

Yes.

Are all the remaining assets in that 75 million still under contract, or did some of those fallout?

None of them fell out.

So we should expect kind of a staggered acquisition strategy between now and the end of the second quarter?

In terms of the closings --

In terms of the closings, yes.

Can you give us any more details on the Monte Vista property? Only because you broke that one out, can you give us a cost of that one?

No; that's subject to confidentiality. We are still in the due diligence stages. The owner of Monte Vista, Craig Bowman (ph), used to be -- was the founder of MHC. He's very interested in combining what he's been doing at Monte Vista with all of MHC's portfolio, very optimistic of the combination of the portfolios that exist out there and the direction that we are heading, and was excited about letting people at the property know that we share his vision, with respect to the empty nest or lifestyle type properties.

Just out of curiosity, was there any specific reason why we broke this one out versus the other ones?

Frankly, Craig Bowman's desire to allow people at the property to understand what's happening before closing, and the ability to present a property to investors that would be typical of what we're pursuing. We remain subject to confidentiality agreements on virtually everything else, so we would love to have a product to show. Craig was nice enough to agree that we could disclose Monte Vista prior to going hard under the contract, and I think Monte Vista is a great example of the type of property we're pursuing.

One more question. What's the current weighted-average interest rate on your debt balance? It's about 6.75, 7 percent.

(OPERATOR INSTRUCTIONS). Alexander Goldfarb.

Just going back to Art's question, on the 12 million acquisition -- so obviously that's just the equity amount -- that's probably levered, what, like 60 percent?

The $12 million is the total purchase price. We expect to put on about $8 million of debt.

Okay. So you're talking 20 million?

On the three that closed, 12 million purchase, of which 8 is expected to be debt and about 4 is equity.

Okay. That makes sense. So that was part of the original 75 million, but that whole program is now 140?

Right.

Your CapEx that you spent -- not recurring CapEx, but the CapEx you spent on park upgrades -- what was that in '03, and what do you expect that to be in '04?

CapEx for upgrades in '03 was about 4 million, and in 2004, we expect it to be $3 million.

And that includes everything from redoing pools, installing docks, clubhouses, all that stuff?

Yes.

And then, what do you expect for interest and G&A run rates for '04?

Interest expense run rate would be, including amortization, close to $73 million. G&A -- we don't anticipate much difference between 2003 and 2004.

And then the final question is, in your comments of what could affect the '04 performance, you had mentioned home sales incentives. Can you just talk about this a little? Is that coming from -- I'm assuming it's not coming from you, so it's coming from competitors?

I think what the prepared remarks were, were home sales initiatives, not incentives -- initiatives meaning we have focused areas in our portfolio we believe we can create incremental volumes in new home sales, with a higher-quality product in the properties attracting the new generation of customers. What he's specifically commenting about is Arizona, and I think Arizona has shown, with respect to 2003 volumes, certainly a strong indication of our ability to do well in that marketplace.

So for home sales, you expect that to be what, slightly positive, breakeven?

We would expect to exceed last year on sales volumes. We would like to be better than breakeven. We have suffered margin pressures in Arizona that have affected 2003 and, with respect to Florida, we have noticed an increasing cost relative to some of the on-site setup activity that we do. When we buy the home and place the home, we do a lot of improvement at the site. Given the strong single-family home market, we are competing with a number of the trades to get work done at our property, and that is affecting some of our margins down in Florida. But we do expect to sell more homes, and we do expect to at least break even and potentially have a profit.

Art Havener.

I have a follow-up question regarding the acquisitions. Is it safe to assume that about 70 percent of the acquisitions that you'll close -- assuming that all these acquisitions close -- will be the RV resort properties?

Yes.

And so can we assume that that same 70 percent area will fall into the resort base rental income line?

No; I'm not so sure that's -- 70 percent is kind of the gross number of properties, Art. Some of the properties on the park model resort business -- three that come to mind immediately -- are rather large assets. Monte Vista is a 900-plus-site asset, and a couple of others that I know of, where we're targeting to close in the first half of this year, are also of that size or larger. So I don't know if that --

So the rental impact will be less or maybe 50 percent?

Maybe more, I would say.

Okay. I guess what I was trying to get at is we should see -- assuming that all these properties close, we should see a much greater fluctuation in the seasonality of your revenues, and Q1 and Q4 having a much greater impact after these closings?

Yes, but not significantly. Again, these resorts, at least the larger ones, are predominantly occupied by people paying on an annual basis, and just have a use pattern that may be seasonal instead of a payment pattern that's seasonal. I think we went back and looked at -- of all the transactions we have under contract, what is the permanent, in-place annual revenue stream coming, as a percentage of the total revenue from the properties. And that's somewhere in the neighborhood, Art, of 80 percent of the revenue stream is a constant revenue stream. So yes, there will be some incremental seasonality, but it's not going to be that significant.

There are no further questions at this time. Mr. Heneghan, I will turn the conference back over to you for any further or closing comments.

Thank you. We will be available after the call for questions, so please call if you have any further questions. Thank you very much.

That does conclude today's conference. We thank you all for your participation. You may now disconnect.