Equity LifeStyle Properties Inc (ELS) 2009 Q1 法說會逐字稿

Good day everyone and thank you all for joining us to discuss Equity LifeStyle Properties' first quarter 2009 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 the subsequent events. At this time I would like to turn the call over to Tom Heneghan, our CEO. You may proceed.

Good morning. Thank you for joining us today. I am Tom Heneghan, Chief Executive Officer of Equity LifeStyle Properties. I would like to make a few comments, and after my comments I will ask Mike Berman, our Chief Financial Officer, to take you through the numbers in more detail. Then we will open it up for your questions.

Our first quarter results reflect the stability of our business. We have long talked about our quality real estate location, the positive demographic trend of baby boomers and retirees, and the flexibility of our housing and lifestyle offerings and our desire for predictable and stable cash flow.

For the first quarter of 2009 all of our fundamental drivers of our business operated in line with or better than our expectations. Core rate growth and occupancy in our community business were in line with our guidance, and RV resort-based income came in slightly better than our guidance assumptions. Overall Thousand Trails operations were also in line with our expectations.

In addition, expense growth during the quarter was lower than expected due to underlying softening of expense pressures. The first quarter of 2009 also reflects additional income from nonoperating items, as discussed in our earnings release.

As a result, it is difficult to not be impressed by the strength of our first-quarter performance. It reflects the strength of our business and the hard work of our employees. However, it is also important to note that this performance reflects a changing dynamic and that it will present challenges for the rest of 2009 and 2010.

For our community business at the margin our business has changed from an owner-occupied to a rental model, and this change has a related impact on our occupancy. Says the decision to shut down our sales operation, the contribution to occupancy from home sales has slowed significantly. Offsetting this decline has been our ability to rent our new home inventory. As of the end of the quarter we have rented a total of 508 new homes and have less than 120 remaining in inventory.

As we have discussed a number of times, the decision for rent our new home inventory reflects the difficult macroeconomic environment and its related impact on customer preferences. It was the appropriate decision and we have executed it well.

As we progress through 2009 and beyond we will continue to address the issue of rent versus own. We are working with manufacturers to introduce low-cost homes that we believe will be attractive to homebuyers. In addition, we have been working with third parties to create additional sources of new homebuyers, including Internet, brokers and dealers. We have also developed programs to convert existing renters into owners with some early success.

All of these initiatives depend to some extent on the availability of financing, a difficulty in today's economy. As a result, we continue to evaluate additional investment in low-cost new homes to add to our rental inventory in our communities. During the first quarter of 2009 we placed an order for an additional 25 new homes at an average cost per home of $28,000.

With respect to community rental rate growth, we have indicated that a significant portion of our rental agreements are directly or indirectly tied to publish CPI statistics that are issued during June through September each year. If you recall last year during this period, CPI was increasing at an annualized rate of in excess of 5%. We mitigated some of our 2008 rental increases, despite these higher CPI figures, due to the disruption we saw in the housing market.

These next six months have important implications for 2010 rental rate growth. Given the March 2009 CPI index reading of about 212, the index would have to increase by about 3% over the next three to six months just to equal the 2008 index of approximately 219 which of course, would only reflect no year-over-year price change.

To the extent the unprecedented monetary and fiscal stimulus create inflation, the timing of when these measures take hold could significantly impact the published CPI measures and our rent notice process, and so too could continued decline in overall housing markets.

To evaluate a low or no inflation environment, we have modeled our portfolio assuming CPI statistics reflect zero or even negative price changes. Under these flat to slightly negative index assumptions, we currently expect 2010 rent growth of approximately 1%.

For our RV resorts the first quarter of 2009 benefited from strong annual revenue growth that partially offset declining seasonal and transient revenues. Our ability to attract new customers and renew existing customers were the important drivers to this business.

In addition, we have seen a shorter booking window in our transient business, which reduces our visibility somewhat, but thus far we have been pleased with our actual performance. We believe that we offer an attractive and affordable vocation alternative as we approach our summer season. Although transient revenues comprise a small percentage of our total revenues, this activity can impact our year-over-year performance.

The performance of our Thousand Trails portfolio reflects aggressive management in what is a very difficult external environment. As a backdrop, Thousand Trails has traditionally relied upon new RV owners as leads for the sale of its front-line membership product. Many of these leads were obtained through relationships with RV dealers. The broader RV industry has experienced significant distress with new RV sales at or near a standstill. This has put significant pressure on RV dealers and manufacturers, driving some into bankruptcy. We expect this to continue well into the future.

In response we have transitioned the TT business model to one that focuses on the installed base of approximately 8 million existing RV owners. This model is very similar to our existing business model for our nonmembership resort properties.

This transition has essentially focused on three objectives, rationalize the existing front-line sales platform, introduce additional extended stay opportunities to the existing membership base, very similar to our annual revenue streams in our nonmembership resort properties, and introduce low-cost entry-level products that would appeal to the existing base of approximately 8 million RV owners.

We have scaled down the number of membership sales locations to three currently from over 20 during the summer of 2008. Year to date we have introduced more than 200 extended stays within the Thousand Trails footprint for the benefit of the membership base. We are currently testing a variety of low-cost products and distribution channels.

Although I am pleased with our execution thus far, we have much more to accomplish. As a result of rationalizing the Thousand Trails sales platform, we have decreased sales and marketing costs significantly, but we have also experienced significantly lower sales volumes. We need to successfully introduce new low-cost entry-level products to offset the natural attrition that occurs in the member base.

In short, our business fundamentals are strong and we are reacting well in an uncertain environment. Mike will now walk you through our 2009 guidance assumptions in more detail.

Thanks, Tom. Our first quarter results were better than our first quarter expectations, even excluding the extraordinary favorable items. However, some of our previous expectations need to be adjusted, so I want to take the opportunity to update our 2009 full-year guidance, after which I will comment on our outlook for the second quarter, and then I will address our balance sheet.

We continue to assume zero occupancy growth. We do not expect we will need to make significant investments in new inventory to achieve this goal; however, we intend to continue to be opportunistic.

Please note that my comments will be very specific at times. It is not my intent to imply great precision to a very complicated enterprise. I am speaking about ranges that represent our best estimate of future activities, although using specific numbers to help guide through changes in our thinking. This continues to be a challenging environment.

With respect to property core operations, our community-based rental income for 2009 is expected to grow 3.5% to approximately $254 million to $255 million. This is in line with our previous expectations. Our first quarter showed a growth rate of 3.5%. Through April we are essentially flat on occupancy to year end 2008.

Resort-based rental income for our 2009 core properties is expected to be approximately $104 million, which would be approximately flat to 2008. Our previous expectation was almost $105 million. Keep in mind that core RV-based rental income represents about 25% of our overall core revenues.

Our annual revenue stream, again approximately two-thirds of our core RV revenues, is expected to grow approximately 4% this year to a little less than $68 million, and we originally expected $68 million. Although annuals grew about 5.5% in the first quarter, we now expect growth of about 3.5% for the remainder of the year.

We have not sold as many park models as we had hoped in the first quarter, and we are less bullish on rate increases later in the year given the current economic environment. We expect that our core seasonal revenue stream to contribute about $11 million to $12 million in the first quarter, and almost $19.5 million for the year. In the first quarter we came in at $11.8 million, but still down around 9% from 2008. We expect the rest of the year to come in around $7 million.

Our core transient revenues contributed approximately $4 million in the first quarter, down about 6.5% to 2008. In the first quarter we came in at approximately $4 million last year. We expect the rest of the year to come in at $13.2 million, a decline of 6.5% to 2008. A little less than 60% of the remaining income on the transient side is expected in the third quarter.

For April we are currently 7% ahead on reservations compared to last year's pace, but May, June and July average about a 15% decline in reservation pace. This is consistent with our recent experience. Customers are booking later this year than in the past.

We expect utility and other income to contribute about $41.5 million in 2009, a 6% -- 6.5% growth over 2008. We initially expected a $42 million contribution. Much of this variance occurred in the first quarter. Overall, core property operating revenues are expected to be around $400 million, a growth of almost 3%.

Core property expenses, before property management, were expected to be approximately $165 million in 2009, and now we expect around $163 million. We exceeded our first-quarter expectations by approximately $1.5 million, and achieved better than expected premiums on our recent insurance renewal. The first quarter results were approximately $39.5 million, a decline of almost 1% to last year.

Core property operations, before property management, is expected to be $237 million, consistent with our January call, and up about 3.5%.

We previously indicated no contribution to property income from non-core properties; however, the joint ventures that we recently acquired are expected to contribute approximately $1 million of property income for quarters two, three and four.

Moving on to Thousand Trails, in the first quarter we achieved an FFO contribution of approximately $9.5 million, prior to overhead. This number includes about $1 million of interest and other income.

Front-line sales, while more profitable in the quarter than we expected, have seen reduced average selling prices of about 20%, and volumes off almost 50%. We previously anticipated Thousand Trails FFO contribution to be approximately $39 million to $43 million, and now we are taking that down to $37 million to $41 million, consisting of $30.5 million from operations and other income, and $8.5 million from membership sales. Most of the decline is assumed that front-line sales will be breakeven for 2009, given the reduced sales volumes. The sales contribution will continue to come solely from upgrades.

For April front-line sales volumes are significantly down to last year. Our new customer focus is on low barrier to entry products, such as One Park memberships and our Ready Camp Go! products

We continue to experience member attrition. Our dues were off to our expectations in the first quarter; however, we are starting to see increases in longer-term stays. Anticipated losses in dues revenues for 2009 are offset by better than expected extended-stay revenues, some operational expense savings, and increases in other income. We are focused on increasing site utilization through cottage sales and increasing our annual revenue streams.

We still expect $56 million in property management and corporate G&A cost in 2009. With respect to our sales operation, we previously expected it to be breakeven, but now expect a loss of about $1.5 million for the year. Most of this change relates to increases in reserves we experienced in the first quarter.

Other income and expense items previously -- we previously expected a contribution of about $3.5 million. This will now be around $7 million, with the increase primarily a result of the transactions we noted in our press release. Interest expense in Preferred are expected to be approximately $116 million.

We make no assumption on the use of our free cash flow in our earnings model. Our model also excludes any impact from our successful rent control litigation noted in our press release, any additional insurance-related recoveries, and any additional income we may have as a result of the portfolio of loans we acquired firm Privileged Access in August of 2008.

The market value of the portfolio was approximately $20 million at the time of purchase, with a face value of $28 million. The loans generally pay off in 2.5 to 3 years. And the performance of the pool has been consistent with prior years.

Overall we are leaving our guidance of $3.45 to $3.65 funds from operations per share in place. With respect to the second quarter we expect core NOI, before property management, to be around $54.5 million, about 2.5% growth over 2008. Acquisitions to contribute about $250,000. A contribution from Thousand Trails of around $9.5 million. Property management is around $8.5 million. The sales operation will lose around $600,000. Other income and expense of a loss of $3.4 million, and financing costs of about $29 million. And FFO contribution expected in the midpoint of the range of about $21 million or $0.69 per share.

Balance sheet flexibility. We have $48 million of financing that remains to be paid off in 2009, and are in the process of placing secured enhancing with Fannie Mae for proceeds of $55 million to $60 million.

We are also working to enter into a one-year forward rate lock with Fannie Mae on a $200 million transaction that will take care of our 2010 financing needs, and anticipate locking rate this quarter. Currently our line of credit balance is zero, and we have $370 million of capacity.

A final comment on our note in our press release concerning our Shelf filing. ELS is all about financial flexibility, and in this environment that needs to includes raising equity capital, particularly if investment opportunities present themselves. We are one of the only REITs not to have a Shelf, and we expect to change that this quarter. We have no current intention to issue any equity securities, but want to be able to act as quickly as possible should the need arise.

With that, I would like to open it up for questions.

(Operator Instructions). David Toti, Citigroup.

Just a couple of questions with regard to the home sale business. Can you just walk us through how you decide when you're going to take the loss on the inventory, when you are going to convert to rental, when you're going to choose to sell at a loss? It seems like there is a mix of options, and I'm not sure how you think about those things.

With respect to the inventory reserves, what we do on a regular basis, parts of the portfolio historically have done quarterly, is look at the sales. What we have left in our for-sale inventory were basically park model. Those few sales that we had in the quarter were indicating lower prices that we previously expected, so we added to reserves based on that.

With respect to the decision to sell or rent that is generally done on a home by home basis. In this marketplace renting has been a much easier path to gaining occupancy, and so we have generally chosen to do that. If there is an opportunity to sell a home at a large loss or keep it as a rental, we will generally defer to keeping it as a rental, rather than just taking a loss just for the sake of taking a loss.

Then with respect to guidance, was the additional $0.09 of insurance proceeds and joint venture gains already sort of baked in?

We had not had that included.

So then for the remainder of the year there is some negative offsets, since you have left it unchanged.

Yes, that is the $2 million that we took down Thousand Trails on. And my remarks indicated about $1 million less of RVs that we thought we were going to otherwise have. That was the offset to the first quarter [beat].

Then just lastly, with respect to the Shelf, what types of opportunities could you potentially see going forward?

Currently we are seeing nothing out there that looks interesting. But to the extent some of the securitization issues do not get resolved, a lot of the financing that was done in the, call it, 2005 vintage will be starting to roll in 2010, 2011 and forward. And potentially you could see some fairly distressed opportunities, although we are not seeing much at this moment.

Great, thanks for the detail.

(Operator Instructions). Paul Adornato, BMO Capital Markets.

I appreciate the detail. You mentioned that the transient bookings in April were actually 7% above plan, but May, June and July was running 15% below. I was wondering -- and part of that was because people tend to book more last-minute. I was wondering if April was lagging, but then shot up and exceeded your expectations, and if we might expect the same for May, June and July numbers, or if kind of below, or I should say, a comparable decline is baked into your guidance at this point?

What we said was this is reservation pace, which goes into -- is part of our overall expectation, but we don't base it just on the reservation pace. The reason for the comment is just to indicate the pattern of customers appear to be booking later than they did in the past. Even though May, June and July are down, Memorial Day is a little bit better than July 4, some other indicators as well. So it is really more just to give you a flavor for what we are seeing out there.

With respect to the pattern that we have put forth, that pattern has shown up since the fall of last year. If you were looking at our first-quarter transient business in October, November, December, you would have seen us down order of magnitude 20%, 25%. We ended up for the first quarter of 2009, I think down around 5%, slightly less.

In fact, as we sit here today, as of April 21, reservation and actual activity in April alone is positive. So you're seeing April look pretty good. But as you look out, you lose that visibility based on the reservation pace.

I think we are pleased with how the transient business has come in, especially in light of what is going on in the economic environment. It looks like we provide a very attractive and affordable vacation product. And we expect that to continue, but we just don't have the visibility that we would normally associate with that business to communicate.

Great. As you mentioned, you are already assuming Thousand Trails is going to be lower than your previous forecast.

Yes.

In terms of the guidance.

That is primarily -- we took out what we expected to be a contribution from front-line sales.

Okay. With respect to the home sale business, you mentioned that you are talking with manufacturers about delivering a lower-cost product. What was the average cost, let's say, two years ago of the homes that you are selling?

In terms of price points we -- in the early 2000, call it, probably 2000 to 2004, we were hitting price point of $60,000, $70,000. Starting around 2004 through probably 2007, we saw the price points creeping up into the 90s. And in fact on individual transactions, we were hitting sale prices of $150,000, $200,000.

Today it is very difficult to get any visibility as to what will sell in the marketplace. But we are trying to put a price point on a product of about $30,000. We have talked to manufacturers. We think we can bring that product to market. We have actually ordered some homes to put into market. We think that is a pretty competitive price point.

As we talk and we focus on the new home sales part of our business, what happens almost day-to-day and we don't really give it its due, is the turnover that happens in our properties. We have on average, call it, 10% turnover within our properties. And that is Mr. Smith selling to Mr. Jones on a resale basis.

There is strong demand for affordable housing in our properties. And you can see it every day in the resale volumes that occur. What we are trying to do with this new home product is bring that new home price point to be competitive with those resale products.

With respect to the mix of the homes on your properties, does this imply kind of a -- well, it does imply a lower price point, but how much will this affect the overall mix? And how long do you anticipate these lower-priced homes to be added, whereas in the past you are adding, as you said, up to $200,000 homes, now essentially a fraction of that?

I just -- what I don't want you to get the feeling of with respect to this new product is that it is visually or structurally of less quality than what we were selling a few years ago. We could take you into one of these $30,000, $40,000 homes and it still has a great look and feel. Front porch, front door. All of the stuff we have been trying to put into our communities for the last 8 to 10 years.

It is smaller. You're talking about a square foot size of, call it, 700 to 800 square feet in this lower product as opposed to 1,300 to 1,500 square feet. The manufacturing of the home has been very competitive. And as a result you're seeing just a competitive environment with respect to pricing of that product.

It is that not all coming out at the expense or the quality of the home. It is coming out in terms of the size. But in terms of the look and feel of our properties it is a high-quality home. We still pay significant attention to the streetscape within our properties, and we like what we are bringing in.

I guess related to that, what are the implications for the rental income stream of the smaller homes compared to the larger homes that you were putting in?

We have been renting out these 700, 800 square foot house for some time now, and that is the $700, $800 a month type of rental rates that we have been achieving. We think we can be consistent with that program and actually to continue to rent them. And to the extent we can generate some sales, it will be a good product for home buyers as well.

Do you break out rent attributable to ground rent versus rent for the unit?

Yes, you are talking about, as you call it, a $500 ground rent and a $300 or so rent on the home on a, call it, a $30,000 investment, so it is $3,600 a year revenue stream on the $30,000 incremental investment.

Once sold, those smaller homes will still pay a $500 ground rent?

Yes.

David Toti, Citigroup.

It is actually Mike Bilerman. Just a question of looking out to 2010, the $215 million of secured debt, have you started the process on that at all?

Yes, that is the forward rate lock that I discussed in my remarks. So we are in process of, hopefully by the end of the quarter, of locking rate on a $200 million facility. Those properties are the ones that are generally -- not all the properties, but some of the properties that are maturing in 2010. And as they mature, we will just refinance at the rate we lock in, hopefully by the end of the quarter.

And that -- around what rate are you looking at the rate lock?

Today, again, most of the coupons today, call it, order of magnitude 6%. It could be a little higher. It could be a little lower.

Then I assume on the lines of credit you will just take your extension and [put that] 2011 and start discussions on renewing those next year, or is that an active process today?

We have active dialogue with our line banks. I'm always asking them what is going on in the marketplace. They are continuing telling us that we have a wonderful deal and I shouldn't do anything about it.

Then you have a pretty long dated maturity schedule. The next big piece is 2015, which was one of those 2005 deals. Granted it was a 10 year deal. How do you think about -- I know it is far away aways, but how do you think about that piece of it, of the cap structure just being the next biggest thing that you have to tackle?

If you look at our -- the way we are running the Company right now, we will have pretty good free cash flow between now and then. We will have -- we have some modest maturities over the course of the next couple of years. There is a year in there where we have no maturities. Again, if today's environment is like tomorrow's environment, I would imagine us freeing up assets and stockpiling cash.

Can you start paying down -- yes, I guess you will leave it outstanding, but effectively stockpile cash to be able to refi those assets at that point?

Right. And again, most of those assets are MH communities, which continue to have very strong financing from Fannie Mae and even other entities, although they are much lower in proceeds and higher in coupons than Fannie Mae is. We have also started a dialogue with Freddie Mac. They are not currently doing MH, and we are hoping to help them along.

David Harris, Royal Capital.

Just a couple of more questions on the financing side. The Fannie Mae financing that you secured in the first quarter, could you -- is that principle and amortization? And could you give us an idea of what the loan to value was on that debt?

The loan to value is generally 75%. The coverage is generally 1.25, 1.35. And I believe there is a short period of interest-only that you have to pay up for sometimes, but generally we are not doing any interest-only periods.

I know you sort of answered this question partly with regard to the questions Michael Bilerman was asking a couple of minutes ago. How much is the appetite do you have, and how much appetite do you think Fannie and Freddie have on a go-forward basis for looking to do more of these type of financings? You don't have that much debt, apart from the stuff rolling in 2010, but do you think you might put a little bit more mortgage financing in place over the next couple of years?

That is something that we would otherwise consider. We are operating under the assumption that you never know what can happen, so we are trying act as quickly as we can with respect to the government. But haven't really - we have looked at some other opportunities say with insurance companies that are willing to allow you to prepay without penalty, but those sometimes are so far in the future, and the coupons are so attractive that it doesn't really make any sense to do it.

Can you agree that the debt would be assumable if you were to look to sell any of these properties? Is that something that you agree from the get-go?

Yes, we get that in there. No, they have the right to approve the borrower, but the loans are generally assumable.

We have no further questions in queue.

Thank you everyone for joining us on our call. And as always, to the extent you have follow-up questions, please feel free to call Mike Berman. Take care everyone.

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