Equity LifeStyle Properties Inc (ELS) 2004 Q2 法說會逐字稿

Once again, you're waiting for the MHC Second Quarter Earnings Call. At this time, we are still admitting additional participants. We should be starting shortly. Thank you for your patience. Please continue to stand by.

This is the conferencing center. Please stand by. We are about to begin. Good day and thank you for joining us to discuss MHC's second quarter results. Our featured speakers are Mr. Tom Heneghan, our president and CEO, Mr. Michael Berman our CFO and Mr. Roger Maynard, our COO. 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 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 of subsequent events.

At this time, I would like to turn the conference over to Mr. Thom Heneghan. Please go ahead, sir.

Thank you for joining us as we discuss MHC's results for the second quarter of 2004 and our expectations for the remainder of 2004. I am Tom Heneghan, MHC's Chief Executive Officer, and joining me today are Mike Berman, MHC's Chief Financial Officer, and Roger Maynard, MHC's Chief Operating Officer. After my initial comments, Roger will provide some comments with respect to property operation, and Mike will discuss our financial results in more detail. We will then open it up for your questions.

During our year-end call for 2003, we indicated that the focus for 2004 would 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 home sales operation.

To recap the acquisition program -- since December of 2003, MHC has invested in 69 properties, representing over 28,000 sites. Our focus has always been, and continues to be, to own stable, cash flow generating properties, in major metropolitan areas with high barriers to entry, in retirement and vacation destinations. This is reflected in our acquisitions completed this year.

We are excited about the opportunities for our portfolio. We enter 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. The acquisitions also allow us to offer myriad lifestyle opportunities and locations, at various price points and home sizes.

Today, the resort market of Florida and Arizona represent approximately 70% of our total sites, with the remaining sites being concentrated along the East and West Coast of the United States, the Gulf Coast of Texas, and the major metropolitan areas of Denver, Chicago and Las Vegas. I am pleased with the success in closing these transactions. And although still early, I am also pleased with the integration of these properties into the MHC portfolio, and their early performance.

We have added both regional and home office support, and remain focused on performing in line with our expectations. The current acquisition environment is still characterized by a scarcity of properties meeting our objectives. But over the long-term we look to increase our exposure along both the East and West Coasts of the United States.

With respect to core portfolio occupancy, although we are still experiencing decline in certain markets, the rate of decline has decreased. There is also a general sense of firming. Our goals for the remainder of the year will be to recoup the modest declines experienced since December 2003 and finish at the December 2003 occupancy level.

New homes sales volumes for the second quarter were on pace with last year, and on a year-to-date basis, were up 26%. The second quarter performance is less than we are capable of and we expect to improve on that performance. One positive of note is our ability to sell park model homes in our communities. The acquisitions increase this opportunity significantly.

The profitability of our home sales operations improved over last year. However, included in this sector's results was income generated from ancillary services at our properties -- including restaurants, golf courses and marinas. Despite higher new homes sales volumes, gross profit from new homes sales remained under pressure and decreased from the year ago period. We expect the pressure on our gross margin to continue for the remainder of 2004.

Roger will now comment on our operations in more detail.

Thanks Tom. On the year end call for 2003, I segmented our portfolio into three distinct groups, with Group 1 representing all-age communities and low barriered entry markets. These communities are in a highly competitive environment, and we will continue to struggle in these markets until we see repos diminish, self-financing return and competition from single family housing slow down.

With that said, we have slowed the rate of decline to 25 sites in the second quarter compared to the first quarter. Total occupancy for these Group 1 sites at June 30 2004, was approximately 63%, and there were two new homes sales quarter-to-date.

As you will recall, Group 2 represents 77 stable properties that are age-qualified communities and all-age communities in major metro areas, with high barriers to entry or in resort destinations. The occupancy for the second quarter of 2004, compared to the first quarter of 2004, had a decrease of 43 sites. As discussed in prior calls, this group includes Denver -- where despite positive movement in our sales activity, we experienced a net decrease in occupancy.

In Denver, we more than doubled our sales volume in used homes quarter-over-quarter, but still struggled to regain our volumes for new home sales due to continued competition from repos, apartments; single family housing. Total occupancy for these 25,746 sites in Group 2 at June 30 2004, was approximately 94%, and over 46 new home sales quarter-to-date.

Group 3 represents 26 upgrade properties. Although representing only about 25% of the core portfolio, this group contributed almost 50% of our new homes sales volume in the second quarter. An important aspect of our upgrade program has been the introduction of the seasonal Well Program. This program allows our customers to experience our product and lifestyle during the January through April season.

We invested approximately $6m per year in the last two years in our seasonal Well Program and we successfully rent these homes during the season. Sequential occupancy for this group is down 100 sites from the first quarter of this year as their seasonal lease has ended. However, the seasonal rental program has generated approximately 100 new homes in each of the last two years, and we expect this year to be no different.

We are pleased with our upgrade program and believe we will continue to see positive activity from this segment of our portfolio. Total occupancy for these 11,959 sites in Group 3 at June 30th, 2004, was approximately 88% and there were 49 new homes sales quarter-to-date.

Overall, our new homes sales effort for the second quarter of 2004 was basically flat, compared to the second quarter of 2003. But on a year-to-date basis, we continue to outperform 2003, having sold 44 more new homes this year compared to last. Even though volumes are up, we continue to suffer at the margin. Our increased sales volume can be attributed to our ability to create a new homes sales program in almost every community.

We embarked on this strategy several years ago, as we have realized we needed to not only service our existing customer base, but also give our future customers the products and services they desire. Historically, expansion sites within our portfolio generated the bulk of our new homes sales. Over the years we have successfully filled the bulk of our expansion opportunities. Today, infill sales at existing communities account for more than 75% of our new homes sales.

These infill or upgrade sales allow us to keep the base platform of our sales company. As a result, from more than 2,700 expansion sales sites available from our acquisitions, we now have replenished our expansion capability. These expansion opportunities, when combined with our infill sales capability, allow us to leverage our existing sales platform. We also have the ability to offer a wider variety of products.

With the acquisition of Monte Vista and View Point in Mesa, Arizona, MHC has over 29,000 sites in park model resorts in the sun belt areas of Florida, Arizona and Texas. In addition, we have over 5,000 sites located in northern resort destinations. In the middle of their summer season, these properties are performing in line with expectations. We are encouraged by the response to our new home designs in our northern resorts and have experienced our sales presence.

We have worked together with the manufacturers and are implementing new home design for these communities. We believe the combination of the new product and formal sales program creates significant sales opportunities in our park model resorts. In addition, we are getting prepared for the sun belt season by evaluating our inventory needs and personnel, in order to have effective sales season. We will begin to implement our business plans for these properties for the 2004 and 2005 season.

Based on current demand, we expect the third and fourth quarter to meet expectations. Mike will now discuss the financial results.

Thanks Roger. Let us first discuss our financial performance. For the second quarter of 2004, funds from operations were $13.2m for $0.45 per share on a fully diluted basis, compared to $16.7m or $0.60 per fully diluted share in the same period last year. The results for the second quarter of 2004 reflect the relative stability of our core properties.

The results are also impacted by our previously announced acquisitions, as well as the sale of properties in the second quarter of 2003, and the sale of one asset in the second quarter of 2004. Quarterly comparisons to 2003 will be impacted throughout 2004 by the $500m recapitalization transaction we closed in the fourth quarter of last year.

Excluding all investments made since December 2003, our fully diluted FFO per share for this quarter was $0.41. On a pro forma basis, the second quarter of 2003 would have been approximately $0.375 FFO for fully diluted share, impacted by two events -- additional interest expense and discontinued operations.

The results for the first six months are as follows. For the six months ended June 30 2004, FFO were $29.3m or $1.02 per fully diluted share, compared to $35.3m or $1.27 per fully diluted share for the same period last year. Our fully diluted FFO per share for the six months ended June 30 2004, excluding all investments made since December 2003, was $0.88. On a pro-forma basis, fully diluted FFO per share for the six months ended June 30th, 2003, was $0.82. Again, the impacts were additional interest expense and reduction for discontinued operations.

Now let's turn our attention to the core portfolio which, as I like to remind you, are our Manufactured Home Communities properties owned as of the beginning of each year. First, comparison to last year's second quarter. This base rental income was up 3%. This consists of average base rental rate of 4.8% to the quarter, and average occupied sites down 1.8% for the quarter.

A note on this occupancy decline. It is important to note that most of the occupancy decline occurred in 2003, and as Tom and Roger have both indicated, we believe our occupancy is stabilizing. Core net operating income is up approximately 2.2% on property revenues of 2.8%, offset by a 3.8% increase in operating expenses. We continue to face increases in real estate taxes and utility expenses in excess of CPI.

Excluded from the MH core portfolio are results from the resort communities owned as of the beginning of each year. Although only 12 properties with 6,100 sites, these properties experienced strong revenue growth over the prior period. As a result, overall co-ordinate operating income from both MH and resort properties increased approximately 4.4%.

Provisions. During the quarter, we acquired eight manufactured home and resort communities, containing 4,325 sites, for an aggregate purchase price of approximately $185m. Among the acquisitions are the village of Monte Vista and View Point Golf Resort. These two properties, located a few miles apart in Mesa, Arizona, combined contain over 2,700 sites, two golf courses, and extensive amenity packages.

Since December of 2003, the Company has acquired 69 properties containing 28,428 sites. These investments have added $0.14 fully diluted FFO per share in 2004 year-to-date, of which $0.04 occurred in the current quarter.

Our debt. Our average, long-term debt balance was approximately $1.36b in the quarter, with a weighted average rate of approximately 6.56%. Interest coverage was approximately 1.7 times, and our availability under our line of credit was $97m as of June 30th, 2004.

Guidance for 2004. Looking ahead, we will be working to fully integrate our acquisitions. We are evaluating potential synergies and cost savings. Our share count increased in the second quarter from OP units issued in our acquisitions of Monte Vista and NHC. The full impact of these increased units will occur in the third quarter. Incorporating this information into our guidance results in no change to our current FFO estimates of $1.85-1.90 per fully diluted share.

Guidance for 2005. We have recently completed 3-year projections on all our assets and are currently preparing our 2005 budget. We expect continued growth in our core property performance along historical trends. Our preliminary guidance for 2005 is therefore $2.20-2.25 fully diluted FFO per share. After debt amortization and capital investments, we anticipate free cash flow of over $45m in 2005. Our guidance does not include any specific use of this free cash flow.

Over the course of the next several months we will begin to evaluate the potential uses of these funds. These choices include acquisitions; expansion opportunities at our properties; partial redemption of our 9% preferred security; repayments of amounts outstanding on our line of credit; dividends whether annual or special; and stock repurchases. Our intention is to work with our Board of Directors to maximize value for our shareholders.

The forward-looking statements contained herein are subject to certain risks and uncertainties, including but not limited to the Company's ability to maintain rental rates and occupancy with respect to properties currently owned or pending acquisitions. The Company's assumptions about rental and home sales markets, the completion of pending acquisitions and timing with respect thereto, the effect of interest rates, as well as other risks indicated from time to time in the Company's filings with the Securities and Exchange Commission.

The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Now, let's open it up for questions.

And, thank you. We will open up today's question-and-answer session format electronically, today. If you would like to ask a question, please signal at this time by pressing the star or asterisk key, followed by the digit 1 on your touchtone telephone. If you are using a speakerphone today, please make sure that your mute function is turned off, to allow your signal to reach our equipment. We'll proceed in the order that you signal, and we'll take as many questions as time permits. Once again, that is star-1 to signal your question. And, gentlemen, we'll pause for just one moment to assemble the roster.

And our first question today will come from Jordan Sadler with Smith Barney.

How are you doing? Thank you. It's actually Craig [inaudible] here without Jordan. In your prepared remarks, you spoke with [inaudible] stabilizing. Would you say that's more because there's less repos? The repos are slowing? Or is it more sales that are offsetting the end result?

Yes. Repos have not really been an issue for us over the last few quarters. It's more that our upgrade properties are seeing sales activities and we are not, as Roger mentioned... The only place we're really seeing any real occupancy declines is in the Denver area and in some of the property subject to market conditions.

Have you begun to see that there might be any in the third quarter? I mean in the second quarter, your occupancy continues to tick down a little bit.

Right. The rate of decline has slowed dramatically, which has given us confidence in making the statement we made about it stabilizing.

Okay.

And Jordan, you will see that in our used homes, we did double year-over-year. And the use of that was buying some of the repos that did occur. So we have been having some success with that.

Do you have a sales price on that asset you sold in the second quarter?

Not off the top of my head. It's one of the assets that was in the MHC portfolio where there was a contract early on in the process -- and we sold it at the price of that contract. It was one of the smaller assets -- it had a minimal effect on [inaudible]

And cap rates?

I'll have to get that for you.

Okay. Thank you. Do you have any sequential data? Other operating revenues or other lines? Or is that just done year-after-year?

We have provided... "Sequential data," meaning what exactly?

Meaning how revenues attended first quarter versus second quarter, same-store?

Yes. That's the core operating performance to success, in the prepared remarks.

That's seen sequentially, not year-after-year?

I don't think so.

Do you have the number of OP units that you issued in the second quarter with the Monte Vista and...

It was approximately $1.2m OP.

Okay. Now it seems like there was a slight change in the disclosure on the "Other Corporate Income" line. It looks like in the first quarter, that line used to be the income in the JVs -- which ticked up a little bit. But I need what explains kind of what went on there.

This quarter, we had a one-time distribution from one of our joint ventures that was pretty large, relative to their history. It was due to a refinancing that they did. That's why that number is larger than it has been historically.

So would a number around 899,000 be a corporate good run rate? Or...?

Probably a little higher than that.

Okay. That's it. Thank you very much.

We're taking our next question. We'll remind you that it is star-1 to signal. And at this time, we'll go to Mr. Alexander Goldfarb, representing Lehman Brothers.

Good morning. Just following up on the MHC. I was curious as to the cap rate, too. So you're saying that was just subject to a sale agreement before you guys acquired the property?

Yes. Effectively. Whatever the cap rate is on that. It's not necessarily representative of anything else that went on.

Okay. Can you talk a bit about your resort income? Obviously, that line was substantially larger than it has been, historically. It's probably about even with Q1. How should we look at this, going forward? I mean is this a sustainable level? What's the seasonality of this line?

Well, in this year, Alex, you'll see the resort lines be relatively consistent with each other. Keep in mind that we bought a bunch of properties during the first and second quarters. Many of which have their highest income component in the first quarter, and a large measure in the second quarter. So in 2004, you might not necessarily see that line be much different, quarter-to-quarter.

There'll be some growth, but it'll be within a bounds. There won't be spikes up or spikes down, this year.

So are you saying in the next -- in Q3 and Q4, it's going to stay at this $12m level, or it's going to go back down?

I would say that it shouldn't go back down. It might go back down. You never know what's going to happen on some of this income. But I would say that what you're really seeing is, let's say, we're pretty comfortable with the full year and not really trying to get too much into the quarter, right now.

Okay. What you're saying on the full-year basis is basically expenses remain the same? Rents stay the same? So the real thing that's keeping your guidance unchanged is just the increased share count?

My guidance for the year is my guidance for the year. I'm not really sure I understand your question.

No, no. But my... You guys are running at a fairly good clip. And I'm just asking -- I mean -- we shouldn't expect a sudden up tick in expenses or a drop-off in home sales, or anything like that? The real variable is the increase in share count that's keeping the guidance unchanged.

That's a portion of it. But you also shouldn't necessarily just look at the second quarter as something you should run off of, assuming that that's indicative.

Okay. And can you give a little more detail on the home sales? I mean it's always a volatile item. The fact that you're now selling park models. Does that give you greater confidence in the stability of this line item, or net, it's going to be what it's been historically?

I think it's a little too early to see. We've seen some opportunities, there, Alex. But they're new to us. Where we've worked on some designs. We're working on our business plans for the park model resorts. So we think there's some opportunity there. But you know, we're going to have to wait and see.

Okay.

And let me just add one comment. We recognize the sale operation as the key driver in value-creation throughout our property. It always has been that way and will continue to be that way. But we also recognize the fact -- that segment of the business has to be more profitable than it is today. We are struggling with some margin pressure on the new home sales. Some of that has to do with really pushing a more approved new-home product throughout our portfolio, and pushing the manufacturers to build that product. We have eaten some of the incremental expenses in connection with that higher-quality product.

We expect to ramp up our volumes in the future, over the long-term. We also expect to create more efficiencies on the cost side of the fence, and bring that gross margin back into historical norms.

Okay. And just my final question. From your comments, it sounded -- I mean, obviously, you guys are working on the infill product and just keeping the portfolio -- bringing it out to sea level -- stabilizing. When do you see or what things need to be in place for you to start returning to looking toward the development to generate the growth?

I think it's going to be mutual. We're looking right now at where we could execute a development. Or -- I wouldn't say "development," I would say "expansion," with respect to the properties we've acquired. That's ongoing.

As you look at the portfolio, where the occupancy can pick up, we certainly are very optimistic on the upgrade properties. It's 88 percent occupied. That's not the stabilized occupancy for those properties in this economic environment, with the demographics that they're dealing with. So we expect upside in occupancy, there, over the long term.

With respect to the Group 1 assets, or the economically-challenged assets, 63 percent occupancy is not the stabilized occupancy for those assets, either. The question is, "When is that group of properties going to be competitive in the economic environment?"

I think Roger discussed that there are a number of factors that roll into that. One being the single-family home situation. Another being the apartment markets, which are competitive to that. And a third being the chattel financing and the availability of our customers to get financing for new home purchases.

Okay. So we're still on numbers a year ago.

Well I would have to characterize that this business expects on a spectrum from what I would call "lifestyle/resort" through "affordability." We try to operate more in the "lifestyle/resort" aspect of the business than on the "affordability" aspect of the business. Although affordability always will play a part in the decision. But it is not the main focus of the decision. On the affordability side of the business, there are some strong competition to those products. I believe that those communities today are struggling -- not just MHC's properties, but other properties in the business. And that the community owner is frankly in a position of having to put capital into those assets to sustain or increase occupancy. Given the small portion of those assets within our portfolio, we really avoided putting capital into those assets until we'd see a turn in the marketplace.

As a result, occupancy has fallen from stabilized levels of near 90 percent, down to the level that we have today. What we are saying on the call is we see a stabilizing. Meaning we don't think it's going to get much worse. But we're not optimistic yet that it's going to turn around and we're going to gain incremental occupancy in those properties.

Thank you.

And I'm showing no questions in the queue. So I'll just offer a final reminder to all participants that if you do have a question or comment, please signal now by pressing star-1.

We have had an additional question queue. This is from Mr. Ralph Block with Bay Isle Financial.

Hi. Good morning, guys. Can you give us a little bit of additional guidance on how you're looking at the deployment -- or you may, in terms of how you discussed this with the board -- with regard to the $45m. Is it something that you may allocate among your different types of opportunities? Would you focus on one of them? What criteria might you use to determine which would be the highest and best use?

I think it's difficult to entertain that question at this point in time. We're just gathering information about, one, the cash flow available and the timing of that availability to cash flow. And two, what the potential uses of that cash flow could be.

What I will say is that it will be a board-level decision. We will certainly provide information to the board. One of the key characteristics that management will be communicating to the board in connection with that decision process is maintaining balance sheet flexibility. It has been a hallmark of this company from even before it was a public company. I think it has been instrumental in our success in terms of our ability to execute on opportunities that we see in front of us.

So we ill be recommending to the board that whatever decision is made, we will retain balance sheet flexibility in connection with that decision.

Okay. And one other question. When you look out at the potential-acquisition landscape, do you see perhaps better opportunities in terms of property availability? And pricing? In the park models versus your traditional types of communities? Or not necessarily?

I would say not necessarily. I would not use what's happened over the last six or seven months as an indication of what we think is capable in the park model segment on a going-forward basis. I think it was a unique opportunity. I think the MHC portfolio was also a unique opportunity. Not unlike acquisitions from our past on the manufactured-home side. The [Elenburg] portfolio or the Global Parks West portfolio or the [Dianza] Portfolio -- to name three large transactions. Each of those occurred at least a few years apart from each other. I don't expect there to be the opportunity on an ongoing basis in the park model segment that we've enjoyed in the last six or seven months. We're already seeing scarcity of opportunity in that segment.

Okay. Thank you.

We'll move next to Mr. Brett Johnson, representing RBC Capital Markets.

Hi. Good morning, guys. Brett Johnson with [JLP]. Most of my questions have been answered. I'll be pretty brief. Just one quick question about acquisitions and cap rates. I was wondering if you guys could comment on how you sourced the $185m of acquisitions in Q2? It was obviously a very competitive acquisition environment, and it's pretty impressive volume. Additionally, if you could comment, if you've seen any moving cap rates at all over the last quarter.

With respect to the $185m transaction that came through relationships that we had corporately, not dissimilar to many of our acquisitions that we did throughout the program -- with respect to cap rates -- cap rates in general have tightened fairly dramatically. And we are seeing and hearing of cap rates on good / not great assets that are right on top of financing rates.

Okay. And then I guess going forward and the remainder of the year -- do you guys have any -- can you comment on your acquisition targets, and the balance of 2004?

We have no targets for the balance of 2004.

Okay. Great. Thanks, guys.

And we will take a follow-up question now from Mr. Alexander Goldfarb with Lehman Brothers.

It's already been answered.

Thank you. And gentlemen, then at this time, I'm showing no further questions are in the queue. So I will return the conference to you for your additional or concluding remarks.

Thank you for joining us today on our conference call. As always, Michael Berman will be available for questions post-call. Thank you very much.

And this will conclude today's MHC second-quarter earnings results conference call. We do thank you for your participation. We hope everyone has a wonderful day. All participants are now welcome to disconnect from the line.