Equity LifeStyle Properties Inc (ELS) 2005 Q4 法說會逐字稿

Good day, everyone. Thank you all for joining us to discuss Equity LifeStyle Properties' fourth quarter results. Our featured speakers today are Tom Heneghan, our President and CEO, Michael Berman, our CFO, and Roger Maynard, our COO.

In advance of today's call, management released earnings and opening remarks. Today's call will consist of a question-and-answer session with management relating to those specific announcements. As a reminder, this call is being recorded.

Certain matters discussed during this conference call may contain forward-looking statements and the meanings of the federal securities laws. Our forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligation to update or supplement any statements that become untrue because of subsequent events.

We would now like to open the discussion for a Q&A. (OPERATOR INSTRUCTIONS).

(OPERATOR INSTRUCTIONS). John Stewart, Citigroup.

It's John Stuart here with Jon Litt and Craig Melcher. Tom, in your prepared remarks, you said that you expect to reverse the trend in occupancy in 2006. Can you quantify that for us?

If you looked at 2005, I think, excluding discontinued operations, we were down about 100 sites beginning of the year through the end of the year. Actually, that's kind of offsetting some pretty good results in both Arizona and Florida. We had about 100 sites we lost due to hurricanes in both 2004, 2005 combined that affected our -- this year's occupancy. If you exclude those out, we actually gained occupancy, and that would be in both primarily the Arizona and Florida market. We still are seeing weakness in Colorado that we don't expect to turn around anytime soon. And for the most part, excluding Colorado, we are in some pretty good marketplaces and we like what we're doing.

But in terms of the expected occupancy pickup in '06, can you give us a sense for what you expect to -- what the gain should be in '06?

I think we put out guidance assuming occupancy is relatively flat year-over-year. It's our goal to increase occupancy; we have our sights set on it. Frankly, from my perspective, we could start just changing the trendline to a positive statement in 2006 -- we would be very happy. But once we start that, we'd expect to continue it going forward.

Mike, what was the rent coverage at Thousand Trails during the quarter?

Pretty similar to the last quarter. They were a little lower on the trailing 12 in this quarter than they were last quarter. But it's roughly one four.

Okay. And can you give us any update on your expansion plans for the Thousand Trails [land]?

Expansion broadly, I think, is probably an appropriate discussion, instead of just focusing on Thousand Trails. We've been struggling in 2005 with the analysis of our various expansion properties. We have a long list of properties, and one of the things we're struggling with is the issue of a sale of the land for alternative use versus expanding a property. Some of the real estate values that we're getting quoted on relative to the value of our land makes the expansion analysis a little more difficult to justify. We've been spending a lot of time trying to get our arms around that in 2005, and are still looking at that issue into 2006.

To that end, Tom, can you maybe speak to the asset sales? You have said previously, I believe, that you had two of the seven all-age communities under contract, and closed one in the fourth quarter. And I guess you're in various stages of negotiations on the other six. Can you give us a sense for where those negotiations stand?

Not much more than what we said in our press release. We still have one that is under contract that has not yet closed, and no other properties beyond that.

I think Craig Melcher has a couple of questions as well.

On your guidance, in the last quarter when you gave the guidance, it specifically said that the free cash flow was not included in the guidance. Now that you're [given] into debt for '06, is that included?

The guidance assumes no acquisition and a modest amount for interest income.

So for the 50 or $60 million of free cash flow, are you considering a return on that money?

The free cash flow -- why don't we just take a minute and walk through that so we can all be on the same page with respect to it. The middle of our range has FFO of about 85 million. We amortized debt around 15 million for the year, recurring CapEx and upgrades is order of magnitude 15, and the dividend (indiscernible) gets you to about 40 to 45. We have, like I said, a modest assumption with respect to interest income of around 3%.

And specifically on the (indiscernible) income statement is the equity and income of JVs. That was down pretty considerably from the third quarter. Can you talk a little bit -- it went down from about 2.9 million to 1 million. Can you talk a little bit about that?

As we mentioned in the press release, 2005 included approximately 2.5 million of onetime gains in some of our joint ventures. They've showed up primarily in the second and the third quarter.

So what number -- what should that be? If it was 8.5 for the full year in '04, should it be more like 6 million?

Yes.

So 1.5 million a quarter?

Right.

Brett Johnson, RBC Capital Markets.

Here with Jay Leupp. A couple of quick follow-up questions. Can you provide a bit more detail on your 4Q expense growth in the MHC portfolio? And kind of briefly, was most of that attributable to hurricane-related expenses?

Expenses grew; without the hurricane expenses, I think we indicated north of 5%. A lot of the expense growth that we're seeing is related to utilities and property taxes.

Looking forward in '06, do you expect that to abate quite a bit, or do you still expect more utility growth?

We're assuming it's higher than inflation. (indiscernible) the price of oil is going, Brett.

Okay. And then a couple of other follow-up questions on the occupancy questions which were asked before. I know that your guidance assumes flat occupancy for the year, but maybe to ask it another way -- what is your occupancy? I don't know if you release this by state, (indiscernible) Florida and Arizona. Do you have occupancy numbers for the MHC portfolio?

Not in front of us right here, but I'm sure if you call Michael up after the call, I'm sure we could give you some indication.

How much of a pickup in overall portfolio occupancy do you expect after the disposition of those six properties?

They're not included in our occupancy statistics.

They're not? Okay. Great. And how much debt is on those six properties?

I think it's a small amount relative to our balance sheet. I think -- about $15 million; it's on, I think, a couple of the assets.

So most of the proceeds then will not be used to repay property-specific debt, that you can basically do with it as you please?

Correct.

Great. And then, last question is, can you comment a bit about the overall acquisition environment? Have you seen any move at all in cap rates? And where are you seeing more opportunities, on the MHC portfolio side, or on the resort side?

There's certainly been some noticeable changes in how people are evaluating affordable housing properties. There have been a couple of auctions that I'm sure you guys are familiar with. We have really not spent a lot of time evaluating those opportunities and those marketplaces. We spent a lot of time again focusing on locations that are more geared to our long-term business objective of resort and lifestyle-oriented properties. That said, I would say most of the opportunity would be in RV or park model resort properties. The cap rate on senior or retirement-oriented manufactured home communities in areas where we would like to be are fairly low. We've heard of some deals going off at five cap rates or less than five cap rates in Florida. Very strong demand also in Arizona and California.

[Dan Farris], A.G. Edwards.

Just a couple of questions in terms of your dispositions. Do you guys -- can you give out the current cap rates, or the cap rate you guys got for the Five Seasons sale? And what was the occupancy on that property?

The occupancy on that property was in the low 60s. Cap rate -- I don't remember off the top of my head. I'm pretty sure it was less than six.

And then, in terms of your 2006 sales, you had mentioned some of the auctions that have been going out in the markets. Do you have a strong confidence level that you could get what you would consider fair sales prices for some of these assets, and would they be located in similar markets as what we've seen currently for sale out there?

I think if you went through, we are in fairly good locations, pretty strong locations in terms of the properties that we're targeting for sale. Northwest Indiana, Southwest Michigan; so you're close to the Chicago major metropolitan area, and then you're also outside of Indianapolis. I wouldn't call the environment in those properties to be bullish or strong. But relative to some other properties that have been potentially put out there for sale, they are, one, of size that makes it an institutional quality asset, and two, in geographic locations that are fairly reasonable if you're in that business and targeting that type property.

Okay. Can you give me the average occupancy on the sites that you guys have held for sale right now currently?

I don't remember exact numbers. I'm sure it's in the mid 60s or lower.

And then lastly, what's with the average length of stay in your RV sites now, compared to what they have been in the past? Are you increasing the average length of stay, or what's the trendline on that?

You would have to break that down in terms of the total site usage. I think the annual site usage this year versus last year is approximately the same. The seasonal site usage is, again, approximately the same in terms of the number of sites we're devoting to that; maybe it's up a little bit. But the length of stay in those seasonal sites is up nicely year-over-year as we look at the numbers in January.

William Acheson, Merrill Lynch.

Gentlemen, you said earlier that the increase in land prices has kind of made it difficult for you to get the numbers to foot on your expansion plans. Can we kind of look at that conversely to say that you might be considering some sales of either expansion lots or entire communities for a "higher and better use" purpose?

That is certainly part of our evaluation. I can provide detail on one specific asset, as I think it's been a subject of expansion discussions for some period of time in our portfolio. We have a property that's located on the East Coast of Florida, right by Daytona. It has had an expansion parcel for a number of years that we have had difficultly justifying the capital compared to what the real estate is worth. Over the last couple of years, the real estate has only gotten more valuable, which has made the exercise increasingly more difficult -- even though our pro formas now are showing higher velocity and better rental structures in the assumptions for the expansion. So we are doing better on our ability to put together a pro forma that shows rent and velocity on home sales. But more than offsetting that and causing some of the problem is the real estate pricing in some of these marketplaces. So yes, we are evaluating that in terms of looking at alternative use (indiscernible) for a higher and better use for our real estate and investing it in other areas of the country.

Any sort of round figures you can give us help on with respect to the value of the fixed properties that have yet to go?

No.

That's subject to what's going on in the market.

I appreciate the question, but from our perspective, those properties are a rather small piece of what we're trying to achieve both in 2005 and 2006. We are actively marketing them. I think we will sell them well or not sell them at all. They are not a hamper on our operations. They have been somewhat isolated, and they're really not the focus for where we are spending a lot of our time and capital.

I understand. On the annual revenue ranges, the table you give on the last page or so of your release, it gives annual revenue range per sites. My eye was drawn particularly to the rent rates revenue ranges on the transient properties. It's shown going from 2300 to 2500, up to 2600 or 2800. I believe these properties in the third quarter report were actually listed at 2000 to 2200. So in any case, it looks like the revenue projections there have gone up appreciably.

We have -- what we use these revenue ranges for is to help give people guidance with respect to an expected overall revenue number on each of the individual categories of sites that we have. The transient site count went up, and therefore, the revenue range went up. It's not necessarily an indicator of what we're charging at a particular property.

It includes the impact of any acquired property.

Okay. On the home sales initiatives, gross margin went up, selling expenses on a percentage basis went down. On the gross margin, is that due to mix or demand and selling expenses? How did you manage your salespeople to take lower in commissions, if that is indeed the case?

No, it's not lower commissions. We have a base of operation and we're seeing some efficiencies in it. With respect to the margins, we're doing better on our house prices and on our costs.

I guess just one last thing. It looks like given the revenue projection and the NOI projection same-store, it looks like you're looking for expenses to grow on the order of -- just a little bit more than revenues, something on the order of 4.5% or so, maybe a little bit less. Is that's what is more or less included in your figures?

Yes.

Alexander Goldfarb, Lehman Brothers.

My questions are first off, there was a reference in the press release to occupancy and affordable housing. I couldn't tell if that was affordable housing communities like your all-age stuff, or if you were talking about competition from affording -- more affordable housing alternatives.

It was our all-age stuff. Primarily that's referring to Colorado.

All-age, primarily Colorado. Would this be the stuff that you -- you site communities around Denver. I'm assuming these are the same communities, or is this a different subset of those Colorado ones?

This is Denver.

Okay. But again, you remain committed to keeping [those].

I think for the time being we like Denver. It's a strong market. It's historically over the last 30 years been a very good market for ELS and MHC as the predecessor entity. It has shown a little sloppiness over the last couple years, but nothing compared to what is going on in affordable housing in other areas of the country. There are higher barriers to entry in Denver generally, and it's also a fairly vibrant, growing economy. So we wouldn't view it as negatively as we would view some other areas of the country.

Can you just give perhaps a general breakout for the occupancy of the all-age versus the senior?

We don't have that in front of us here.

I'll follow up with Mike after the call. The next question is in the third-quarter release, there was a reference to increased marketing expense. I didn't see it specifically mentioned in this Q4 release with respect to '06 guidance. Presumably it's buried in some line. I'm just wondering if you can elaborate a bit on what your marketing expense is for the portfolio, and then specifically for Thousand Trails.

We have a number of different items that we refer to as marketing expenses. They're in different line items depending on the use. We highlighted a particular number in the third quarter because we were launching a loyalty club.

So you didn't disclose a number?

That's correct. It's inherent in our costs, Alex, that we have more marketing costs as we expand our sales and expand our RV base.

And any sense on how much is being spent at Thousand Trails to try and improve things?

We're spending very little on Thousand Trails in terms of cross-marketing as we sit here today.

[But] your partner?

I'm sorry?

The partner.

You mean the operator? They are spending a significant amount on sales and marketing. We have not spent any on a cross-marketing program where we're trying to bring those customers over to our side of the fence.

Okay. But can you give us a flavor for how much they are spending? Is it 5 million, is it 2 million?

We could --

How much Thousand Trails is spending (inaudible). We'll have to get back to you on that one, Alex.

The next is on hurricanes. Is there anything in '06 guidance for either insurance recoveries or some sort of budgeting for future hurricanes? A lot of the press reports seem to indicate we are in for another tough year, and we've already had two powerful years of hurricanes; nothing to suspect that's going to go down. So is there anything in your budget for additional hurricane expense?

We haven't yet budgeted for hurricanes.

And what about recoveries, insurance recoveries.

It's not in our budget.

My final question, then, goes back to the whole realizing value in the portfolio. Obviously, some of the earlier comments focused on it, and Tom's remarks in the press release touched on the communities -- a third of the portfolio being near water. If we think about ELS, not necessarily in '06, but looking at it for the next few years, presumably there's an indication from you guys that you want to realize value from the properties. You could outright sell stuff, in which case the Company starts to get much smaller, or you could sort of shift the focus in terms of bringing on joint venture partners to develop the properties in a different sense. How much of the portfolio should we think about as undergoing a potential change?

I would restrict it to a very small percentage of the portfolio where we either, one, have excess land, or two, they are in fairly unique locations that would represent an opportunity for us to sell it at a price that allows us to justify the sale and redeploy the capital elsewhere. I don't think we're going to be in the wholesale selling of our portfolio. It's been years putting this portfolio together. We like what -- we like the locations we are in. We like the business that's on it. We think the demographics are fantastic. We think the population growth is fantastic. We see nothing to cause us to believe the fundamentals of our business will be negatively influenced over the next 10 to 20 years. So I think we like what we're doing; we're just trying to make sure that we can add value at the appropriate time through alternative use evaluation of our land.

What about like reconfiguring properties to be more like [resorty] in the sense of what people traditionally think about as like resorts with permanent structures, etcetera?

That definitely has been something we have looked at at a number of our properties, but I wouldn't say it's going to comprise a big component of where we're going.

So less than 10% of the portfolio?

Certainly less than 10%.

Less than five?

I don't -- It's an asset-by-asset evaluation, and we have a handful of assets that we're looking at.

(OPERATOR INSTRUCTIONS). Craig Leupold, Green Street Advisors.

This is actually -- this is [Mark Ferry]. The first question I had was with regards to the land sale and potential conversion opportunity, if you think you'd be entitling that land yourself or leaving that up to the buyer.

For the most part, leaving that up to the buyer.

The other question was about, I guess, your expense growth for '06, the projections for utility expense increases. Could you share that with us?

Again, north of -- the utility would probably be one of the higher expense growth rates that we would otherwise expect.

Okay. Potentially north of 10%?

I would say if our overall expense growth is expected to be four -- which is a little bit higher than inflation, and utilities might be at the upper-end of that number, and maybe a little higher -- in terms of the guests, we don't try to forecast utility expenses down to the penny. But I would expect it to be a number that we have focused on all year long.

A couple of other questions about the home sale program. It looked like when I looked at the average price of the homes sold, that the new homes were selling for 85,000, and the used homes were selling for like 10,000. I'm just wondering if there's kind of a high-low strategy that you could comment on.

Certainly we have spent a lot of time, money, and effort in upgrading a number of our properties. That has a lot of (indiscernible) to sell new homes in existing properties. I think 80 to 90% of our new homes sales are going on at what I would call in-fill locations, meaning it's an existing already developed property where we are selling a new home on an existing site as opposed to expansion sales, or virgin new site sales. And in those properties, you're trying to manage a number of things as you do the new home sales process. And one of those includes the used homes and the older homes that exist in the property, trying to balance the desire to turn over and bring in new homes with an occupancy level that maintains the cash flow of the property. So we will occasionally be selling used homes that we can upgrade somewhat and leave in the community to a fairly price-sensitive buyer, and at some point in the future, look to replace that home with a new home.

Do you see similar margins on both the new and the used homes?

No. The margins on used homes can be all over the map, depending upon how we end up getting the home, whether we bought it, whether it was a death and a transfer to us, or what have you. So you can get margins all over the map on a used home sale.

My last question was about the cost of financing for your home buyers. Do you have any thoughts on where mortgage rate or, I guess, loan rates would be for manufactured homes versus maybe in the sub-prime market for site-built homes, and whether that gap is growing or shrinking over time?

I think there's two different customer bases out there trying to get financing for manufactured homes. There's affordable housing participants that, I think, are looking at double-digit rates for channel mortgages, and then there's retirees who have access to local banks for their business. They are in the call it 7% range for financing in a home in one of our communities. So there's a huge difference in the marketplace of what's available for a lifestyle-oriented or a retiree versus what's available for an affordable housing customer.

[Richard Polle], ABP Investments.

I just have a follow-up question on Mark's question, and I may be wrong with this. But is my impression correct that if a manufactured housing unit was attached to perhaps a ground lease or a piece of dirt, the financing would be much more, maybe not on top of the traditional mortgages, but that gap would shrink? And if that's an appropriate premise, have you given any thought in the all-age communities to perhaps maybe condominiumizing the community in some way, where perhaps you'd structure a long-term ground lease that would be amenable to the lenders?

There's two issues you touched upon. One is an actual subdivision of the sites and a sale of the land as well as the home. That's often known in the industry as a land home package. And yes, when you put the land and the home together, it does approach single-family home-type financing rates, because there's collateral in the land as well as the home. There's also -- I think Fannie Mae and Freddie have programs available where they will lend more aggressively if there's a long-term lease in place on the site. And that program has been in pilot programs, and I think is used somewhere throughout the country in different points. It's not something we have really focused on for us. Given the terms of the lease on a long-term basis, I don't think we're comfortable executing that long-term lease at this point in time.

Could you flesh that out for me? When you say the terms of the lease, is that in terms of what the market is offering on the ground lease right now?

It has to do with what the future rental values can be under those long-term leases. They are more geared towards CPI-type structures.

So you don't think that that's a good trade right now for something, say -- like you said you like Colorado long-term. What do you guys think you're going to get over the long-term, above CPI there?

We traditionally have. If you took Colorado over the last 30 years, I think it's probably one of the strongest rent growth markets we have in our portfolio.

And you don't think with your higher quality that you can perhaps demand from the market something that's CPI plus a little bit, just because you've got better assets than the competition, and the financing would be that much more attractive versus what somebody would be looking at like this for just a land lease site?

These are programs that pretty much get into an institutional box, and you just take what they have or not. It's not like you can customize and negotiate every deal. It's a fairly formal structure and formal lease that the terms have been given to everybody on.

So the banks are driving those terms? Is that what it is?

Fannie and Freddie on their programs.

I got you. Okay, thank you.

Craig Leupold.

It's Mark Ferry. Is it true that most of your leases in the all-age segment actually have kind of an upward-only CTI adjustment anyway?

I'm not sure I understand the question.

(indiscernible) one of your properties down in Florida was asking about the lease structures, and my understanding was that a lot of your leases were on CPI kind of (indiscernible) anyway.

Within Florida there's -- I would say almost all of the properties we enter into multiyear agreements with the homeowners association, anywhere from three to five years generally, where we will make a market adjustment and then give them CPI protections for three to five years. A couple of things. One, that's not generally assumable on turnover, and we get the mark-to-market on turnover. And three to five years is much different than 30 years.

And that's predominantly just Florida?

No, I wouldn't say it's predominantly just Florida. I think as a general policy, if we can achieve a market rent with respect to a customer in one of our properties, we are more willing to provide them some assurance over a three to five-year horizon as to their housing costs. So I wouldn't say that's restricted just to Florida.

William Acheson, Merrill Lynch.

I just wondered if you guys could comment on what effect repossessions have had across your portfolio, and if that's had any material effect on your occupancies, and if an improving trend in repossessions might be one of the potential positives for occupancy in the current year.

We have a very modest amount; I'm talking less than 200 sites, maybe it's 100 sites, impacted by repos.

So it's pretty much immaterial.

Right.

At this time, gentleman, you have no further questions.

Thank you, everyone, for joining us on our year-end call for 2005. Michael will be available for any follow-up questions, and look forward to updating you with our first quarter of 2006 in a few months. Take care.

Thank you, ladies and gentlemen, for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.