Equity LifeStyle Properties Inc (ELS) 2009 Q2 法說會逐字稿

Good day, everyone, and thank you all for joining us to discuss the Equity LifeStyle Properties' second-quarter 2009 results. Our feature speakers today are Tom Heneghan, our CEO, and Michael Berman, our CFO.

In advance, 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 and the meaning 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 their 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. Good morning. I am Tom Heneghan, Chief Executive Officer of Equity LifeStyle Properties. With me today is Mike Berman, our Chief Financial Officer. I would like to make a few comments and then turn it over to Mike. After our comments, we will open it up for your questions.

Our business continues to perform well. Before taking into account the effects of our recent equity offering, the midpoint of our 2009 FFO guidance of $3.65 per share reflects a growth rate of approximately 14% over 2008 $3.20 a share. We believe this performance highlights the strength of our business plan and the quality of our cash flow.

As we have discussed many times, our customers are generally in better financial shape, are less exposed to job losses and have fewer credit problems than the broader economy. Our properties represent an attractive and affordable option to empty-nesters and retirees wanting to reduce the amount of capital tied up in their housing and still enjoy a high quality, active lifestyle. Most of our customers own their housing units outright.

We are also pleased with our balance sheet and the increased financial flexibility created by our recent equity offering. Absent interesting investment opportunities, it will take us until about mid 2010 to fully deploy the proceeds to reduce outstanding debt. And as a result, the second half of 2009 bears a disproportionate dilution compared to the longer-term positive impact of the offering. Mike is going to walk you through the rest of 2009 in more detail, but I would like to make some comments about 2010.

Despite the difficult macro environment, we plan on growing our business in 2010. With respect to our community business, we have indicated that the published CPI statistics issued during June through September impact a significant portion of the following year's rent increases.

Notwithstanding the wild card of unprecedented monitor and fiscal stimulus, with the June 2009 CPI of minus 1.4%, it looks unlikely we will see a positive year-over-year increase in CPI until October or November of this year. However, given the 3% to 5% annualized rate of growth in the index since the December 2008 lows, we expect much stronger revenue growth in 2011 and beyond. As discussed in previous calls, for 2010, we have modeled our portfolio assuming CPI statistics reflect zero or even negative price changes.

Under these flat to negative index assumptions, we currently expect 2010 rent growth of approximately 1%. This estimate excludes the potential positive impact of our recent success on rent control and other turnover-based market increases. Although the current home sales environment remains difficult, we continue to rent homes at the margin.

For our resort business, our ability to attract new annual customers and to renew existing customers is important to the stability of our revenue stream. We expect 2010 annual revenue growth to moderate. However, we think this lower growth will also be coupled with somewhat flat seasonal and transient revenue, resulting in overall resort revenue growth in 2010.

Reservations for our winter season for the first quarter of 2010 are currently up 2% over last year. This compares to last year at this time when reservations were off approximately 15% for 2009's winter season. In addition, our transient business continues to perform better than expectations.

One key to growth in 2010 will be better utilization of the Thousand Trails footprint. We have successfully and aggressively managed this business in what has been a 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 is experiencing significant distress. This has put pressure on RV dealers and manufacturers, driving many into or near bankruptcy. In response, we have transitioned the Thousand Trails business model to one that focuses on the installed base of approximately 8 million existing RV owners. This business model is very similar to our existing business model for our non-membership resort properties.

This transition has essentially focused on three objectives -- rationalize the existing front-line sales platform, create annual sites in the Thousand Trails footprint and introduce low-cost, entry-level products that would appeal to the existing base for approximately 8 million RV owners.

We have scaled down the number of membership sales locations to three currently from over 19 during the summer of 2008, eliminating over $10 million of sales-related overhead. We still have some work to go, but the most drastic changes are behind us.

Our focus has now shifted to tapping into a variety of RV-focused distribution channels free of the negative product perceptions that a high-cost, tour-driven sales model tends to create. In addition, we have had good success in introducing more than 600 annual sites to the Thousand Trails footprint, adding more than $1.5 million in revenue.

Another area receiving attention as we planned for 2010 is opportunities for additional synergistic savings on operating expenses. In 2008, we tackled overhead savings. 2009 was focused on rationalizing the sales platform. In 2010, we expect to take a closer look at operating efficiencies.

Although I am pleased with our execution thus far, we have much more to accomplish. The speed and success we have had thus far in transitioning this business makes me bullish about our 2010 prospects.

Now, I will turn it over to Mike for some comments on 2009.

I would like to begin by walking through our guidance assumptions for the second half of 2009. As I mentioned last quarter, my comments will be very specific at times. It is not my intent to imply great precision. I am speaking about ranges that represent our best estimates of future activities.

With respect to core property operations, community-based rental income for 2009 was previously expected to grow 3.5% to approximately $254 million to $255 million. For the first half of the year, base rental income came in at $126.5 million or growth of 3.3%. For the second half of the year, we forecast $127.2 million, representing growth of 3.1%.

We are seeing some pressure at the margin on rate and concessions, although we continue to expect flat occupancy for the year. Occupancy is down 15 sites since the beginning of the year, but down 70 sites in the second quarter.

Overall, our expectations for the year are now $253.5 million to $254 million, growth births of 3.2%.

Resort-based rental income for 2009 core properties is expected to be approximately $104 million to $105 million, approximately flat to up 1% over 2008. For the second half, we expect $49.5 million, growth of approximately 1%, over $49 million in the first half of 2008. We achieved $55.3 million in the first half of the year, basically flat to the first half of 2008.

Our annual revenues are expected to grow 4.2% in the second half and represent almost 70% of second-half resort revenues. The expected annual run rate does drop below 4% in the fourth quarter.

Based on current reservation trends, we expect second-half seasonal revenues to be around $5.3 million, or down around 4.5% to 5% and the second half transient revenues to be almost $9.6 million, down around 6.5% to 7%. 80% of the second-half transient revenue stream comes in the third quarter.

Moving on to other income, we expect utility and other income to contribute $19.5 million in the second half, 5% growth over 2008 and a total of $41 million for 2009.

Overall, core property operating revenues are expected to be a little over $196 million for the second half, growth of approximately 2.75%. In the first half, we achieved $203 plus million, growth of approximately 2.6% over the first half of 2008.

The second half benefits from the high percentage of resort-based annuals in the mix, but there is some pressure on the core MH revenue line, which will present some challenges for us in 2010. For 2009, we expect core property revenues to grow 2.7%.

Core property expenses before property management are expected to be approximately $81 million in the second half of 2009, growth of about 1.5% over 2008. The first half of 2009 was $79.5 million, a 1% decline from 2008.

The driver of the second-half growth primarily comes from real estate taxes, and most of the expected growth occurs in the fourth quarter. A significant portion of our tax notices come in the fall. Prior to 2008, we saw significant upward growth in real estate taxes and our '08 forecast reflected the long-running rising trend. As the actuals came in, we made an adjustment in the fourth quarter of 2008 to reverse our over accrual that had occurred in that year. This adjustment is driving the second-half expense growth for 2009. Overall, core expenses are expected to be a little over $160 million compared to $160 million in '08 and down from an initial expectation earlier in the year of $163 million.

Core property operations before property management is expected to be a little over $239 million for the year, up about 4.3% over 2008. In the second half of the year, we expect growth of around 3.6%. Acquisitions added $400,000 in the first half and should provide around $800,000 in the second half.

Our sales operation, our home selling operation if you will, excluding the results from Privileged Access, which I will include below, lost approximately -- is expected to lose approximately $1.8 million for the year. Most of that occurred in the first half. That was about $1.5 million.

Other income and expense items unrelated to Privileged Access. We expect a second-half contribution of approximately $1.5 million. Other income and expense provides a full-year contribution of $7.6 million.

With respect to Privileged Access, in the first half, we achieved an FFO contribution prior to overhead of approximately $19 million. We expect an $18.5 million contribution in the second half, down from a previous expectation of $20 million.

For the year, we now expect $29 million from operations and other income and $8.5 million from membership sales, all of which is expected to come from upgrades.

We reduced our previous full-year operational contribution by $1.5 million, primarily from lower dues and interest income contribution, offset by higher annual revenues. So far in 2009, we have had about 1000 less new sales than in 2008.

Our annual programs are working and we have signed over 600 new annual agreements since the beginning of the year. And we have seen some progress on our low-cost products. We are starting to address efficiency opportunities. Our operating expectations are generally being fulfilled and we continue to execute well on upgrade programs.

We still expect $56 million in property management and corporate G&A costs in 2009. For the second half of the year we expect this number to be $27 million.

On financing costs, interest expense and preferred are expected to be approximately $57 million in the second half, slightly less than $115 million for the year. The second half includes about $1.3 million of interest savings from accelerating the pay-down of some of our outstanding debt as a result of the equity offering.

For the year, we now expect almost $113 million of funds from operations with a weighted average share count of approximately 32.9 million shares and OP Units, which is approximately $3.43 per share, the midpoint of the guidance we put in the press release.

The first half was $61.6 million of FFO with a weighted average share count of 30.6 million shares, $2.01 a share in the second half is expected to be $51.5 million of FFO with a weighted average share count of 35.3 million shares, $1.46 per share. For the third quarter, we expect our FFO contribution to be around $27.5 million at the midpoint or about $0.78 per share.

One final note, operationally, we closed on the sale of Casa Village, a property we've been seeking to sell for a while. It's located in Billings, Montana. The purchase price was approximately $12.4 million, and the cap rate was approximately 7%.

With our cash balance of approximately $170 million plus anticipated proceeds from Fannie Mae of $86.5 million, we have sufficient capacity to pay off the remaining $248 million of '09 and 2010 maturities. Currently our line of credit balance is zero, and we have $370 million capacity.

Full deployment of cash balances is not expected until August of 2010. Once deployed, the net reduction of debt of $150 million due to the equity offering will result in interest savings of approximately $9 million a year or over $0.25 of FFO per share on a run rate basis.

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

Michael Bilerman, Citi.

This is Eric [Wolf] here with Michael. Some of the recent financings that you announced with the agencies look like they're going to be priced about 7%. I was just wondering if you could talk a little bit about how the agencies are underwriting manufactured housing loans and their commitment to the space right now?

We have seen some of it, 7%. It kind of depends on where the treasury market is and where their cost of funds is I guess. Really no change since we went out on the equity offering. It's typically 75% loan-to-value. One-two, one-three coverage. Limitations on lending to properties that have low occupancies and some percentage of rentals in there. In the last, since we went live on the equity offering, I wouldn't say it's gotten much different. It's been a struggle to get the funds.

Got you. And then switching over to 2010, you talked about looking at potential operating efficiencies, moving from 2009 rationalizing your platform. Where do you think there is potential to find these efficiencies in improved margin, lower costs?

From an operating side, it's really integrating the Thousand Trails properties. We took over operating those properties in August of 2008. And as I said in my comments, kind of our first places to look for synergies were on what I would call the overhead expenses. We did that in the fourth quarter of 2008. We next turned our attention to the sales operation. I think we've made some great progress rationalizing the sales operation. We pretty much left property operating expenses at the level of the property alone, but we think there's an opportunity to gain some efficiencies when you start looking at a cost per site or a margin type of analysis on some of the properties, we think there's some efficiencies to be gained. But it's still early in the process.

And Tom, it's Michael Bilerman. How would you sort of evaluate the impact that you have had in terms of cutting the overhead, moving on the sales in terms of margin or in terms of NOI, understandably since the business has gotten a little bit weaker, but just trying to really isolate that impact of what you've been able to bring to the table?

Well, we can quantify it on the overhead. I think it's $3 million of savings -- $3 million to $4 million of savings we found with respect to the overhead in the business.

With respect to the sales operation, boy, I'd hate to be in the same sales business that they were in, in kind of the heyday of 2007. That was a pretty high cost toward dependent business model. In today's environment, given what's going on with the RV dealerships and the manufacturers, it's a given that tour flow would have declined. The question is whether or not you would have been able to offset the expenses at the rate that tour flow would have declined.

What I see right now is we've successfully transitioned away from that business model. We now have a new one, but it still needs to bear fruit frankly. We need to get ourselves out into distribution channels with some of these low-cost products. We've tested a number of products.

I would say today's environment is not the best time to be testing some of these products. The RV dealers are kind of scraping by. Manufacturers are dealing with financing for their retail and also on the floor plan basis. But initial testing to date has turned out to be pretty positive.

So I think what we're doing is transitioning into an environment where we're trying to put an attractive product out the door that is at a price point that for somebody who owns an RV, looks extremely attractive. And the one thing we have seen despite the economy is that those people who have an RV are out and using them. So I'd say I'm optimistic, but we've still got some strides to make.

And if you were to think I guess three years out, do you have a picture of where FFO would be for Thousand Trails?

I'll make a couple of comments and you guys can then fill it in. I would say this has been a discussion that we've had, so we still have to execute, but when we bought the Thousand Trails footprint, we saw essentially something on the order of 50% to 60% utilization of that footprint. We think we can drive that utilization up. There is two methods we're looking at. One is to increase the number of annual site in the Thousand Trails footprint. You've seen us make some progress year to date. We've added 600 annual sites at an annual revenue generator of call it an incremental $1.5 million, $2 million.

And the other area we're looking to is to grow that membership base. So we've got two methods to try and better utilize that real estate. I think we're going to have success on both of them. And for every 10,000 incremental members, you're talking about $5 million incremental cash flow. It remains to be seen -- we still struggle trying to maintain that dues base in the current environment, but I'm looking to grow it in the future.

And then just one last question for Mike, just in terms of the guidance, the equity offering was about I guess at least on an annualized basis for 2009, about call it $0.40 dilutive, so about 20% for 2009 for the back half.

And your guidance didn't go down by as much, and I know you went through a lot of detail in terms of the ins and outs. What were the major things that allowed you not to reduce guidance by the full $0.20?

Well, we had a guidance range of $3.45 to $3.65, a midpoint of $3.55. We didn't change that in the first quarter. We left it alone. We added in -- if you add in the $0.08 of one-time gains, you get the $3.63, so use that as a starting point. Then you get down to where we are now, which would be $3.43.

We've had some positives, which have been the expenses. We've had a little bit of negatives with respect to the PA platform, but with respect to the PA platform, I think we feel like we are stabilizing the stream even though it may be down a little bit.

And those $0.08 from this quarter and the utility and other income?

That's really the dues. At the end of the day, we took the dues down in the second half of the year. For the most part, given the attrition rate that we've had, we've had 1,000 less sales this year than we did last year. Just looking out, we felt the dues was probably a little bit over. There's some other things pluses and minuses going on, but those are really the big, big drivers.

Okay. And then you'll get -- once you pay down the debt in the third quarter of next year, you will pick up that $0.25 annually.

It will come in during the next 12 months, but on a run rate basis, you will see the full impact by the time you get to the third quarter of next year.

Great. Thank you so much.

Paul Adornato, BMO Capital Markets.

Hi, Good morning. Was wondering if you could talk a little bit about the strategy for rent increases next year in the various segments of the business.

Sure. In my comments, we talked about the impact of CPI driving a lot of what happens on the community side of the business. Just for the benefit of the background discussion, we have about a third of our rent agreements directly tied to CPI and another third that we negotiate with homeowners' associations that in many cases have some tie to CPI as well with another third kind of market-driven. So when we're looking out into 2010 and saying we're looking at a 1%, that includes the mix of the CPI impact on the agreements tied directly to CPI as well as what we think is going to happen on some of the non-CPI tied rental agreements that we have. And that's that 1% that I did talk about.

On the RV size, I think we are looking at probably the fourth quarter of 2009 will be a pretty good run rate for what we think is going to happen in 2010. Again, it's a little early. We're giving you guys a lot of color on 2010 pretty early in the game. But as we sit here today, I would say the annual revenue stream on the RV business will be up call it 3%-ish. And the seasonal and transient we're looking to be flattish to down a little bit.

In my comments you saw that we are already ahead on reservation pace going into the winter season in 2010. That is a pretty stark contrast to what we were facing at this time last year when we were looking at the winter season of 2009. We were -- reservations were down 15%.

So to be up 2% as we sit here today gives us some confidence that that business is stabilizing for us as we look into 2010. And the transient business has always performed better than our initial expectations would have indicated.

Okay. And I apologize. I missed the introductions. Is Joe McAdams on the line?

Joe McAdams is in the room, but he is available to answer questions.

Okay. I was wondering if we could hear from him on any update on marketing efforts in this environment?

We are focused, as Tom had talked about the extended stay on the Thousand Trails footprint. I will reiterate that the low-cost products are a high priority for us. And then we were having a lot of success in [written] up our inventory. So we are positioned well in a struggling environment.

Okay, thanks. And what's happening with respect to California rent regulation? Are there any pending lawsuits underway right now?

No. I would say the biggest news in 2009 relative to California was our recent success and entry of an order on a rent control in San Rafael, California that affects our property, Contempo Marin.

For the benefit of everybody on the call, the judge has essentially entered an order that would phase out rent control over 10 years and in the interim, allow us to mark rents to market on turnover. We have just got that thing done in the last couple of weeks here, and I think frankly, we just had one site turn over at 1500, 1600 monthly rent compared to the rent control rents of I think $600, $700. So it's a 400-site community, so as that community turns over, it should be a nice little boost to revenue growth.

And how many properties are still subject to rent control?

In California? I would say there's about 2,000 to 3,000 sites in California that are affected by rent control. Now rent control is done at a municipal level, so not every rent control ordinance is the same. What we have done over the last -- I hate to say it, but over the last 10 years is focus on those rent control ordinance that had the most confiscatory-type of provisions in them that prohibited us from marking to market at any time; in fact transferring the value of our land to homeowners.

We've succeeded in getting a settlement in Santa Cruz, California that allows us to go to market on turnover. And again, I just ask -- I just discussed the recent success in Contempo Marin, where we're allowed to go to market on turnover with a complete phaseout in 10 years. So the effort has borne fruit for this Company, and I think we are pleased with the results so far.

And again, on California, any expected negative impact of the budget crisis? I know they just recently passed their budget, but any lingering effects?

We actually think California is a place where our product is just so attractive from an affordability standpoint, that we are somewhat insulated to the disruptions, especially given some of our real estate locations. We're in some of the highest-cost areas in California. So even though the house price may have gone from $800,000 to $500,000 or $500,000 to $300,000, when we are able to put a brand-new home in for $50,000, we offer a pretty attractive alternative in those housing locations.

On the resort side of the business, again, I think we offer very attractive seasonal or weekend housing for anybody trying to get out of the major metropolitan areas. And as the state of California starts to evaluate whether or not they can afford to keep their state campgrounds open, I think that just creates a net benefit to private operators that may be in that state. So we are somewhat insulated from the broader impacts, I would say.

Okay. Thank you.

(Operator Instructions). With no further questions in the queue, I would now like to turn the call back over to Tom Heneghan, our CEO, for closing remarks. You may proceed.

Well, thanks, everyone, for joining us on our call. As always, to the extent you have some follow-up questions, please call Mike Berman, and we look forward to updating you in the third quarter. Take care, bye.

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