Equity LifeStyle Properties Inc (ELS) 2008 Q4 法說會逐字稿

Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties fourth quarter and year ended December 31, 2008, results. Our featured speakers today are Tom Heneghan, our CEO; Joe McAdams, our President; and Michael Berman, our CFO.

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

Certain matters discussed during this conference call may contain forward-looking statements in 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.

At this time I would like to turn the call over to Tom Heneghan, our CEO. Please proceed.

Thank you for joining us today as we discuss our year-end results for 2008 and our outlook for 2009. The 2008 financial performance for both the fourth quarter and the year continue to reflect the stability of our core business. In an environment of extreme uncertainty, the strength of our business plan is a primary contributor to this solid performance.

Our story is familiar because it has been so consistent. It is to own high-quality real estate locations across the country in areas where people want to be -- the Sun Belt, retirement, and vacation destinations, along the coast, major lakes and rivers, and near major metropolitan areas; to attract high-quality empty nester and retirement customers with a goal of long-term lasting relationships. And to use our geographic breadth, flexibility of product offerings, and myriad lifestyle options to create a robust operating platform able to meet our customers' changing needs and lifestyles.

Very simply, our goal has been to find high barrier-to-entry real estate that we believe will be in demand over the long term due to the favorable demographic trends and use our operating platform to generate stable and predictable cash flow. In addition, our ability to react to the increased uncertainty has been a key driver of our 2008 performance.

In this regard I would like to discuss some themes that ran through our previous earnings calls and how they played a part in contributing to our 2008 performance. In late 2007 we commented about the issues in the single-family housing market. We indicated that the issues bore a striking resemblance to the meltdown in the manufactured housing industry that occurred in the late 1990s and early 2000s, and which is still impacting the industry today.

As a result, we expected a long, slow, and painful process and proceeded to orient our business to react to this situation. We announced that Joe McAdams would join us as president to provide additional depth and experience in our senior management. In January 2008 we highlighted the importance of quality earnings and balance sheet flexibility. Quality of earnings for ELS has meant high quality customers with recurring, long-term relationships focused on the empty nester and retiree. We believe that this segment was better position financially and less susceptible to job growth or other economic concerns and had safety nets available, such as Social Security, pensions, and retirement accounts.

Our operating philosophy revolves around an emphasis on creating recurring cash flow and this is reflected in our compensation. We avoid stock options since they can encourage a swing for the fences mentality on the upside and a desire to recut the deal on the downside. Our annual bonus targets focus on key operating statistics that produce long-term value, such as occupancy, core revenue growth, additional annual resort revenue, core NOI growth, home sales volumes, and capital spending.

We avoided an over reliance on transactionally-driven income, such as development in joint ventures, or an overemphasis on per-share data to the detriment of solid operating performance. This is not to say our earnings guidance is taken lightly and on a few occasions over the years the bonus pool fell before guidance was reduced.

Our emphasis on balance sheet flexibility reflects our long-held belief that this flexibility allows us to make decisions that we want to make instead of decisions that we are forced to make. Our dividend level allows us to retain significant amounts of free cash flow.

On the financing side, we focused on single-asset, secured lending and developed a diverse source of lenders including insurance companies, pension funds, securitizations, and government-sponsored enterprises. Our relatively small loan size and single-asset focus lessens event risk at the portfolio level and improves our refinancing capabilities. In addition, we have intentionally kept our line of credit with a small group of banks so that we could create relationships. We value these relationships and believe that this policy has served us well.

In April and in July 2008 we highlighted our belief that fiscal and monetary responses would introduce additional volatility and uncertainty. We were concerned with not only the immediate impact of actions taken in response to events, but also expected significant ripple effects that would take time to present themselves. In response we indicated our heightened focus on actions we could take in the near term to reduce uncertainty, react to opportunity, and create stable and predictable cash flows.

The impact of this focus included, among other actions, the evaluation and implementation of a new home rental program, carrying a higher level of cash on our balance sheet, front-running or getting ahead of our upcoming debt maturities, reducing our exposure to joint venture property holdings, stricter working capital management, and the cessation of our home sales operation. In addition, we began to pursue the consolidation of our operating platform by acquiring our tenant, Privileged Access, in order to gain operational control, eliminate conflicts of interest, and improve our ability to react to a changing environment.

We also streamlined the membership sales operation in reaction to falling RV sales. We refocused our marketing efforts and sales efforts on the installed base of approximately 8 million registered RV owners and on the introduction of more annual, extended stay, and whole ownership products into the Thousand Trails footprint creating new streams of recurring cash flow and meeting the needs of our customers who desired more flexibility with their lifestyle.

In October 2008, we highlighted our view that one trend emerging in light of the economic environment was simplification in both financial and social interactions. We noted how our business fit that desire. We adjusted our business at the margin to respond to our customers desires to spend more wisely and preserve capital while still engaging in an active and vibrant lifestyle. These changes include new membership and affinity products in our resort properties and a focus on smaller, more energy efficient and more affordable homes in our communities.

Today we can look back on 2008 with confidence in both our long-term business plan and in the ability of our organization to react to a changing environment.

With respect to 2009, it is clear more change is on the menu. We do expect some future trends to continue, however. The aging of the baby boomers, the attractiveness of our real estate, the desire to lead an active and fulfilling lifestyle, and an increased emphasis on capital preservation and affordability -- these trends bode well for our long-term performance.

However, there are some troubling trends as well. In 2008 the manufactured home lending and manufacturing complex experienced the lowest transactional volume since records were kept in 1959. And it looks like 2009 will be even worse. The current run rate of approximately 7,000 shipments is less than 20% of volumes in the late 1990s.

The survivability of some of the remaining participants is in question. However, survivors have learned how to adjust their business to the realities of the current market place and have been dealing with a declining volume for over 10 years. In addition, the remaining lenders are experiencing loan performance vastly superior to single-family loan performance.

With respect to our remanufacturers and dealers, 2008 represented the second year of declining volumes with current monthly activity reflecting precipitous declines of over 70% over the prior year. Availability of financing for both floor plan inventory, and retail customers is severely constrained with little hope for improvement in 2009. Although industry experts are predicting shipments of approximately 180,000 RV units, down from the estimated 240,000 in 2008, the current annualized run rate is less than 100,000 units.

As with the decline experienced by the manufactured homes segment, the remaining participants' survival depends on their ability to react to the new environment.

It is also pretty clear at this point that aggregate demand for housing will be negatively impacted by job losses, economic uncertainty, and dislocation in the credit markets while the huge overhang of supply will continue to negatively impact pricing of both for sale and for rent housing. With this backdrop, we believe 2009 will present more challenges than 2008.

However, we also believe we are well-positioned to continue delivering stable performance. Our performance thus far in 2009 is in line with our guidance assumptions with occupancy in January flat to up slightly, MHC core revenue growth in line with our guidance, RB core performance and reservation activity in line with our first-quarter guidance assumptions, and membership dues and sales also operating in line with our expectations.

While our traditional tour-driven membership sales are impacted by new and used RV sales, we have already begun to adjust our business model with the introduction of low-cost Internet and alternate distribution channels that focus on the installed base of almost 8 million RV owners. Given our long-term, recurring relationships, our growing base of targeted customers, and a focus on serving the installed base, we don't expect a severe break in our overall trends although anything can happen in this environment.

We are keeping our eye on CPI data, which for December 2008 essentially reflects no price inflation. Since most of our rent increases are already done for 2008, we expect we expect -- excuse me, for 2009 -- we expect this to be more of a 2010 issue. In addition, our guidance for 2009 includes the stabilizing impact of our long-term incentive plan. This plan requires certain benchmark operating performance for both core revenues and NOI over a three-year period ended 2009 to achieve any distribution.

The size of the award is tied to pre-award, targeted FFO growth rates over the three years ended 2009 of 8% or more. We have been accruing for this plan since 2007. Performance during 2009 for our core portfolio would have to be in line with our core guidance assumptions in order to achieve the three-year benchmarks.

I have confidence in our ability to react to events that may occur in 2009 that impact our business. We have incredible flexibility in how we can use our real estate locations. Customers can enjoy our locations for a day, a week, a month, a season, a year, or a lifetime. In addition, their accommodations can be a tent, a recreational vehicle, a seasonal cottage, or a spacious home. As a result, we are able to hit a wide variety of price points in both accommodation and duration.

The key to our continued success will be unleveraging our operating platform to provide customer solutions for those customers seeking to achieve high-quality, affordable lifestyles.

Thank you for your time. And now Mike will provide some additional comments regarding our 2009 guidance.

Thanks, Tom. For the first quarter of 2009 we anticipate a range of FFO per share of $1.03 to $1.13. We anticipate core NOI growth before property management to be approximately 1% to 1.5% over first quarter 2008 of almost $65 million. Core revenue growth is anticipated to increase approximately 1.5% to 2% over the first quarter 2008 of almost $105 million.

These assumptions reflect anticipated core MH revenue growth of approximately 3.5%. This growth reflects rent notices sent to almost 70% of our tenants.

So far occupancy looks even to year end. Core MH revenues represent approximately 60% of total core property revenues.

Annual RV revenues continue to show quarter-over-quarter growth of 5% or so. Due to seasonality, first-quarter seasonal and transient revenues in the first quarter represent approximately 45% of our anticipated $37 million of seasonal and transient income for all of 2009. We expect around $15.5 million in seasonal and transient income in the first quarter of 2009 compared to approximately $17.5 million in seasonal and transient income in the first quarter of 2008, a decline of around 10% to 12%.

Total core RV growth is expected to be down approximately 2% to 3%. Core RV revenues represent approximately 30% of total core property revenues. On our last call we indicated that our expectations for the first quarter season was $11 million to $12 million in seasonal revenues. We currently have over $11 million in revenues for the quarter and expect further reservations. Each year we look to extend customers during the season.

Our expectation for transients in this quarter is approximately $4 million and we are a little over halfway right now in reservations. For the first three weeks of the year we have earned approximately $33,000 per day, about 1% ahead of last year.

It appears that our booking window has shortened considerably in comparison to prior years. For example, despite January's transient growth, February and March are pacing about 15% to 20% behind last year.

Our 2009 core RV guidance growth rate was flat to 3%. The first quarter is 30% of expected revenues and forecasted down 2.5%. We need about 3% to 4% growth for the rest of the year to get to our targets. Annual revenues account for approximately 70% of the expected future 2009 RV revenue for quarters two through four. Assuming the 5% annual growth continues, that will give us 3.5% growth. As a result, seasonal and transient volatility will have less of an impact on core RV growth rates going forward.

It's early for expenses, but we don't see anything that would upset our assumptions.

We expect a Thousand Trails to contribute $7 million to $8 million to income from property operations before property management expense in the first quarter. This also includes our membership sales activities. Over 55% of the expected Thousand Trails property revenues comes from dues earned in the first quarter. Our January activity reflects payment trends that are consistent with those TT experienced in last year's first quarter. These trends are based on the percentage of members who have made dues payments to date. However, we see more customers choosing monthly pay options over annual pay options. This payment flexibility was introduced in last year's billing cycle.

Another indicator of trends, campground usage was up 1.5% fourth quarter to fourth quarter and appears to be up again in January. The primary volatility in our Thousand Trails results relates to frontline and upgrade sales. We anticipate a contribution of $2 million from sales in the quarter, down slightly from first quarter '08 results. This reflects reduced sales volumes and commensurate expense reductions.

Front-line sales, a low margin product, are running somewhat behind plan in the first quarter but upgrade sales, a higher margin product, are somewhat ahead of plan. It's a little early to discern any significant trends although the RV industry continues to be challenged in the sales of new and used RVs.

We expect property management costs to be around $8.5 million to $9 million in the first quarter. Home sales is tracking breakeven. Other income including interest and other income and joint venture income combined is around $3 million, offset by expenses for rent control and corporate G&A combined of around $6 million. Our financing costs are around $29 million. Overall, our expectation is $32 million to $33 million of FFO at the midpoint of our range and a share count of around 30.5 million shares.

Moving on to some comments about our debt financings and our balance sheet flexibility. In 2008, we refinanced approximately $200 million of secured debt on 24 properties with $214 million of debt on 15 properties. The excess proceeds were used to reduce our line of credit balance. Our borrowing costs were around 6%, replacing coupons in the 5.5% area.

In 2009 we are continuing our strategy of borrowing on a cost-effective basis from government agencies. We have recently locked rate on a financing that will provide over 75% of our 2009 maturities of around $75 million. We will be moving ahead with additional financings as the year progresses to address our 2010 needs. We may carry higher cash balances as we move throughout the year.

Finally, as a follow-up to some of Tom's remarks, the Company initiated a long-term incentive plan at the beginning of 2007. This plan sought to incentivize senior employees of the Company and have requirements of minimum core revenue growth of 4%, minimum core net operating income growth of 4.4%, and minimum FFO per share growth of 8% over the three-year period ending this year.

The amount of payoff could be increased or decreased depending on how the Company's stock price performs against a diversified group of real estate companies. If the Company delivers the average return of this group of real estate companies, the payoff will be 100% of the available pool. The maximum payoff can be 200% of the pool and the minimum payoff is zero.

Payoffs under the plan increase with each 1% of FFO growth beyond 8% and is capped at 15%. Neither the CEO or president participate in this plan and other senior executives of the Company do not participate in the plan until FFO per share growth is 10%.

The accrual for the pool for the past few years has been based on a 10% FFO growth and 100% stock price performance. The accrual for 2009 is approximately $1.4 million -- I am sorry, $1.1 million and the total accrual at the end of the year is expected to be $2.8 million. In order to achieve the 10% FFO target, we will need to be towards the top of our guidance range.

With that I will turn it over to the operator for questions.

(Operator Instructions) Michael Bilerman, Citigroup.

Good morning, this is David here with Michael. Just a couple of questions, I thought we would start with could you provide a little bit of color on the inventory adjustment that occurred on the home sales in the quarter?

Sure. In connection with closing down the sales operation, we reviewed all the elements with that. We discovered that over time we had been making estimates with respect to rebate programs, you make a lot of estimates with respect to cost of goods sold, and we found a receivable that we are not going to be able to collect on so we wrote it off.

Is that something that could occur again? Is that sort of an ongoing adjustment process?

There are no more receivables with respect to that and going forward we won't be estimating what expected rebates might be. We will just be calculating actuals as we go. Over the years we have had -- we have been purchasing hundreds if not 1,000 homes in a given year, so there was a lot of estimation that was going on. We had all kinds of different programs, all kinds of manufacturers.

Okay. Then just moving over to the discussions you are having with the agencies at the moment, are you seeing any change in tone relative to their appetite for underwriting? Are you seeing any change in the terms of the underwriting, anything you can disclose about what that would be helpful?

I would say that with respect to the terms of the underwriting they have been fairly consistent in our dealings with them. They continue to be more cost effective than insurance companies and banks with respect to spread. They have increased their spreads over the last 12 months. We locked rates in the last couple of days that we noted in the press release. The spread was 400 over; I would say last year it was more like 250, 300.

Michael, it's Michael Bilerman. Can you just go over just in terms of the seasonality in FFO? If you look at where your guidance is for the first quarter relative to the year, it would imply a much bigger ramp than you have seen I guess in the back half of the year. So if you are at $1.03 to $1.13 in Q1 and $3.45 to $3.65 for the year, you are sort of in an $0.80 to $0.84 quarter for the second, third, and fourth, which would be a much bigger increase over last year. I'm just trying to figure out what is impacting 1Q and then what are you getting the benefits in the rest of the year.

Without getting into too much detail I would say the first half of the year and the second half of the year provide similar results. The second and the fourth quarters are roughly the same. The third quarter you will see a jump as a result of incorporating in the Thousand Trails operation instead of lease payments. So that is where you will see it with respect to seasonality; more so than we had in the past. The third quarter will be closer to the size of the first quarter than it had been in the past.

So in terms of the way you are booking the revenues out of Privileged Access?

It's not so much the way that we are booking the revenues; it's just when the revenues come in. The sales activity peaks June, July, and August. The usage of the properties peaks June, July, and August.

How do we -- you provide the Privileged Access breakout in the press release. How can we look at that -- and then understandably a lot of the property management fees, which are not broken out between the two -- how do we sort of look at the fourth quarter PA relative to your former lease payment? And maybe you can just walk through if you were at $5 million to $5.5 million for the quarter previously how does that sort of breakout on a net basis over the four quarters?

I don't have all of the Privileged Access broken out separately in front of me, but in the fourth quarter it contributed, after an allocation for property management -- and appreciate the property management allocation is a large one -- but order of magnitude it contributed about $5 million in the quarter of FFO. And the lease payment had been -- I don't remember what the lease payment was in 2007, but in the prior quarters it had been about $6.3 million that when we were just getting a lease payment.

And that from a quarterly going forward --? How does that --?

On a quarterly going forward, Thousand Trails is going to roughly mirror, again depending on the quarter, it will roughly mirror the lease payments. Except in the third quarter it will be higher than the lease payment otherwise would have been, but it's a little early to be talking about the third quarter.

Okay. All right, thanks.

David Bragg, Banc of America Securities.

Good morning. Your comments on 1Q operations were helpful, but I was just hoping we could take a step back and look at the full year. It appears as though core property operations for the full year was taken down about 50 basis points to a range of 3% to 4%. Can you talk about the drivers of the change?

The fourth-quarter expenses ended up being at about $1 million less than we thought it was going to be. So I think I previously said we expected to have around $161 million in expenses for 2009. It ended up being $160 million, but my budget didn't change for 2009 as a result of that. That is just the way the dollars flow. So that $1 million ended up being 50 basis points on the core. That is the reason why we put that in there.

Okay, so no FFO impact (multiple speakers) of 2009?

No FFO impact, right.

Got it. And just moving on to the home inventory, how did the -- as you look back at 4Q given your comments in October, how did the 55 new home sales compare to your expectations?

I would say that we were pleased that we sold 55. Activity on the RV side continues. You still have some residue of demand on the new home front. We haven't said we wouldn't sell any homes, although our main mission is to rent because that is the easiest path to gaining occupancy. But if a customer comes in and wants to buy a house, we are happy to discuss selling it to them.

How many homes did you rent in 4Q?

We rented on a net basis about 70, 80 homes.

Okay, so it sounds like that is in line with the third quarter?

Yes, I think it increased a little bit but not materially.

Okay. And then, finally, are you planning to acquire any new inventory this year?

For 2009 in our business plan we are not requiring -- we don't' think we will need to buy any new homes, but we do have certain markets and certain properties where we are a little bit more bullish and we may end up buying inventory there. Our focus on inventory, if we do purchase it, is on a very low-cost product.

We think we can get a one- to two-bedroom, 600 square foot to 800 square foot unit for an all-in cost of less than $30,000, which is a very attractive product for our age-restricted communities.

And just generally on that product what would we see for average rent rates?

Right now we are getting order of magnitude $800 to $1,000. It depends on where you are. California can be a little bit higher, some properties could be a little bit lower, but that is an order of magnitude.

Okay, thank you.

(Operator Instructions) [Bill Caria], KBW.

With the economy the way it is have you guys seen any uptick in residents falling behind on their payments to you?

Generally speaking, we have defaults and delinquencies that we look for in a number of different revenue streams, and I would say that for the most part the trends are continuing. I think we mentioned on the last call we saw a little bit of a tick up in delinquency with respect to the loans we make to customers purchasing front-line sales in the Thousand Trails side. But, again, I wouldn't call it a material change.

We are on the lookout for indicators of the credit crisis, but we haven't seen it so far.

Okay. On the RV business do you guys track the percentage of customers that rent their RVs as opposed to owning their RVs? And how have you fared in attracting those rental RV customers versus the past?

In terms of renting RVs, at a number of the properties we have units for rent. It's incorporated inside our transient income. I don't know off the top of my head, Bill, whether or not that is changing or not. I would imagine that the trend itself is probably not changing. It's a portion of the transient income.

But as it relates to the businesses that rent RVs to customers so that they can go touring around, no, we don't track that business separately. I don't know if, Joe, whether you have any comments as to what is going on in the rental business of RV. I do know that a lot of manufacturers who are sitting on significant amounts of inventory have pushed some of their inventory into a rental experience just to see if they can gain some liquidity.

The one thing that is preventing any of that happening in a mass is the floor plan restrictions with respect to that inventory. But other than that Joe, I don't know if you have something --?

There are manufacturers, as Tom said, as well as larger dealers who are trying to utilize that inventory some way by renting it. So there is an uptick in the rental business, but the rates are down because of the oversupply.

Okay. Last question, with CPI growth having slowed substantially, looking ahead to mid-summer when you guys send out your annual rent notices for 2010 is there a floor for rent growth or could rent growth conceivably even be negative if, say, CPI were to have negative growth?

You know that is a state-by-state and agreement-by-agreement type of analysis. But, no, generally it doesn't go below zero and in many cases there are floors in place with respect to a minimum increase of, say, $5 or CPI, whichever is higher, or any minimum increase of, say, 3% within the agreements we have with our customers.

Without getting too much into it, please appreciate it at July of last year it was 6% and December it's 0%. With what is going on in the monetary creation side, who knows what it's going to be come January -- or excuse me, come July of 2009. But, yes, we are focused on it and it will have an impact on our revenue growth.

Okay, thanks.

You have no further questions.

Thank you for your time today. As always, if you have any follow-up questions with respect to our comments or our release, please feel free to call Michael Berman, our CFO. Thanks again, everyone. Take care.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.