Equity LifeStyle Properties Inc (ELS) 2009 Q3 法說會逐字稿

Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties' third quarter 2009 results. Our featured speakers today are Tom Heneghan, our CEO 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 the conference call may contain forward-looking statements within the meaning of the federal securities law. 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 like to turn the call over to Tom Heneghan, our CEO.

Good morning, everyone. Thank you for joining us today. 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, then turn it over to Mike. After our comments, we will open it up for your questions.

Our business continues to perform well. We believe this performance highlights the strength of our business plan and the quality of our cash flow. As we have discussed many times, we believe 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 pleased with our balance sheet and the increased financial flexibility created by our recent equity offering. It will take us until about mid-2010 to fully deploy the proceeds to reduce outstanding debt and as a result, until then, our results will bear a disproportionate amount of dilution compared to the longer term positive impact of the reduced interest expense resulting from the offering.

2010 will also mark the first year that Thousand Trails portfolio enters our core results.

Since our acquisition of this operating company back in August of 2008, we have been discussing the Thousand Trails business as a separate component of our results. The benefit was that we could introduce and explain some of the concepts particular to that business, such as annual dues and membership sales.

However it has also slowed the assimilation of that business into our operations. Thousand Trails was, in some sense, separate because we treated it as separate. In actuality, that business and its customers are every bit a part of who we are and what we do.

Taking a step back and looking at the whole will allow us to focus on creatively using the best products and services for our customers across the whole portfolio. This changes how we discuss our business, but I think you will also agree that this approach highlights the strength of our operating platform and business plans.

Although there is a growing sense of optimism with respect to the economy, we believe there are significant issues at play that impact our results and will continue to do so in 2010.

We essentially see two main issues influencing consumer behavior. First with respect to what I would call current income, we think consumers are focused on obtaining value. This desire for value is a net benefit for our business since we provide significant value to our customers, both economically and from a community or lifestyle point of view. In addition, a significant amount of our revenue is derived from our customers' current sources of income and not dependent on access to credit, providing stability to our revenue.

The second factor would be spending that is dependent upon consumers' access to capital or credit. Not only is access to credit influencing consumer behavior, but so too is the willingness to take on credit for those customers who do have access. Spending of this type typically involves big-ticket purchases like cars, housing, etc.

We currently see consumer access to credit as essentially being bipolar. If your credit is somehow tied to the government, then credit is generally available and at attractive rates. However, if your need for credit is not tied to some government program, we would characterize credit as generally unavailable or available at higher rates and more restrictive loan terms.

Unfortunately consumer loans for the purchase of factory-built housing do not benefit from a significant government program. And as a result loans are only available on very restrictive terms and at comparatively higher rates. This has directly impacted our home sales capability.

It's unfortunate that the one industry that can actually claim to provide affordable housing is in essence penalized at the expense of an extraordinary amount of government support being given to the single-family housing industry. We have successfully reacted to the situation during 2009 by converting our for-sale inventory to new home rentals.

The degree of government support to this single-family home industry in 2010 and beyond will influence our ability to return our sales operation to its historical position as a major contributor to occupancy. Our guidance for 2010 assumes this static environment.

Now Mike will walk you through our results in more detail.

Thanks, Tom. I would like to go through our thoughts and assumptions underlying our 2010 primary guidance range.

2009 full year numbers or estimates. As always I caution that I do not intend to position my comments (inaudible). Our Core property is defined as those properties we own and operate for two consecutive years. If you recall, we purchased the operating entity of Privileged Access in August of 2008. All of these properties will now be included in our Core discussions -- Core Property operations.

2009 total property revenues for the 2010 Core group is expected to be approximately $493.5 million and is expected to grow approximately 1 to 1.5%. Approximately 90% of this revenue comes from annual revenue sources and only 10% is what we refer to as seasonal and transient revenue streams.

The annual revenue sources consist of community-based rental income, annual revenues in our resorts, membership related income consisting of dues and right-to-use contracts, and utility and other income.

2009 community-based rental income for the 2010 Core group is expected to be approximately $253.5 million and is assumed to increase 1.5 to 2%. We assume no change in occupancy, but acknowledge the hard work that is necessary to manage this assumption in the current environment. By the end of October we will have noticed approximately 60% of our residents with rate increases reflecting this revenue growth.

On our last earnings call, we indicated that revenue growth coming from CPI and minimum rate increases would be approximately 1%. The remaining growth we are forecasting comes from turnover to market, which was not included in our prior analysis.

2009 annual resort-based rental income for the 2010 Core group is expected to be approximately $74 million and is assumed to increase 2.5 to 3% next year. Our forecast is primarily based on reservations in place. And for the past several years, we have been very successful in increasing the number of annual customers in our Encore properties. We are pursuing the same strategy in our membership properties and we will see some of this benefit in 2010.

Our 2009 [transient] revenues in the 2010 Core group is expected to be approximately $27 million and are expected to be flat in 2010. The first and second quarters represent 40% of the total, almost evenly split between the two quarters, and the third quarter represents 45% of the transient revenues.

For the first quarter of 2010, we are over 5% ahead on our reservation pace. At this time last year, we were over 25% behind pace. Our 2009 seasonal revenues for the 2010 Core group are expected to be approximately $20 million and projected to be flat in 2010.

Approximately 60% of our seasonal revenues occur in the first quarter. Our 2010 Core properties generated approximately $12 million in the first quarter of 2009. Based on current reservations, we would anticipate a similar performance in the first quarter of 2010.

To date we have over $9.2 million in seasonal reservations for the first quarter, an increase of over 2.5% for last year. At this time last year our seasonal reservation pace was 15% behind the prior year. Reservation comparisons are point in time. We ended down in the first quarter in '09 versus '08 with much less than the pace would have suggested.

Overall, we expect our resort-based revenue revenues for our 2010 core group to be approximately 112.5 million -- $121.5 million increasing approximately 2% to 2010 to $124 million.

Membership income consists of dues, income and right-to-use contracts. In 2009 we expect to achieve dues revenues of almost $51 million. We are forecasting to be down approximately 5 to 6% in 2010 to about $48 million. Continued attrition of the dues base is offset by a modest rate increase.

In 2009 we expect to achieve approximately $21 million in right-to-use contract revenues and expect to achieve a similar performance in 2010. We expect Core utility and other income approximately $47 million in 2009 to grow approximately 1.5% in 2010.

Core Property operating expenses for the 2010 Core group before property management is expected to be approximately $225 million in 2009 and are budgeted to increase approximately 1% in 2010 to $227 million. We expect utility, real estate taxes, and insurance costs to be approximately $107 million in 2009 and increase by 2% in 2010 to $109 million. The remaining expenses are forecasted to show no growth next year.

In sum, 2009 Core property operations before property management to the 2010 Core group is expected to be approximately $268.5 million and is projected to grow 1 to 2% to $273 million. We expect a $1.8 million contribution from our non-Core properties in 2010. These properties generated about $1.4 million in 2009. Total forecasted income from property operations is therefore approximately $275 million.

In 2009, we expect to have $34 million in property management costs and $22 million in corporate G&A for a total of $56 million. We anticipate we will have $33 million in property management costs and $22 million in corporate G&A in 2010 for a total of $55 million.

For other income and expense items, I am grouping together our sales operation and all of our other income and expense items. In 2009, we achieve $14 million of income. In 2010 we expect to achieve $11 million in income. In the first quarter of 2009, we reported approximately $3, million of one-time gains associated with joint venture sales and insurance recoveries.

Interest expense is expected to be approximately $91 million as we put our cash balances to work. During the fourth quarter of 2009 and the second quarter of 2010, we will generate approximately $74 million of proceeds on mortgage finance since we have already locked rate on with Fannie Mae. We expect to pay off $32 million of mortgages during the fourth quarter of 2009, $100 million in April 2010 and $76 million in August of 2010. Our preferred distribution is $16 million.

We make no assumptions on the use of our free cash flow in our earnings model. Overall, FFO is approximately $113 million for 2009 and $124 million in 2010 at the midpoint of our range, an increase of almost 10%. However our share count is expected to average 35.5 million shares in 2010, up from almost 33 million in 2009, an increase of almost 8%.

At the midpoint of our preliminary guidance, our FFO per share estimate is $3.49. Given how our debt payoffs occur in 2010 and the impact of the June equity offering on our share count, I also wanted to make a few comments about the first quarter, our largest.

In 2009, we reported FFO of almost $38 million or $1.24 per share. This result included almost $0.10 per share of FFO from one-time events. In 2010, the first look at the first quarter indicates we expect $34 million to $38 million in FFO or $0.98 to $1.08 per share.

At the midpoint FFO increases approximately 4% adjusting for the one-time gains, but the share count is up almost 16%.

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

(Operator Instructions). Andrew McCulloch. Green Street Advisors.

Good morning. Michael, on the new Fannie debt, especially the rate lock stuff --?

Yes.

The rate is noticeably higher than what the apartment REITs have recently been paying. Maybe 100, 125 basis points higher. Why do you think that is?

We locked our rates most of it back in May in the spring. Treasuries were higher. We also paid 50 to 60 basis points in order to get a one-year forward rate lock.

Today, spreads for manufactured housing is, call it 2, 2.25 over the 10-year. I don't think that that is too far away from where the apartment deals are going.

It is also hard to know exactly what the comparisons are. You need to know where the properties are located and what the underwriting is with respect to individual assets.

And where are those four properties located?

One was in Florida. One was -- and three were in California.

And appreciate, Andy, we decided to lock rate last year because if you remember, we started to get some uncomfortable feelings as to how committed Fannie and Freddie would be to the manufactured housing industry. In essence, we ended up doing an offering in light of that. So there were decisions that were made at the time based on what we saw happening.

Okay. That makes sense. Thanks. And then on your rental program, can you tell us how much that has expanded in the last quarter and how much you think that is going to expand in 2010 to maintain occupancy?

It hasn't really expanded much in the last quarter. For the year I think we have done 300, 325 net rentals. For next year we are forecasting a similar change.

Okay. And then just one more question. Are you guys seeing any opportunities on the acquisition front that look attractive and what kind of cap rates are you seeing out there?

Yes, I would say we are seeing significantly more what I would call distressed asset opportunities. Most of it is on the family side. It is distressed as it relates to occupancy, market, in some cases even debt.

Good located properties, however, especially age-restrictive properties we are not seeing any distress. In fact, the pricing for that stuff is still pretty strong. If you can get financing through Fannie Mae, again that also is a buffer under the pricing.

And what sort of cap rates roughly for kind of Core age-qualified stuff?

I'm not seeing any age qualified stuff trading frankly, but there are some guys down in Florida looking to sell a portfolio that would be 6 less -- less than 6 cap rate.

Great. Thank you.

Bill Carrier. KBW.

G&A costs were down quite a bit in the third quarter versus the second quarter. What was the driver of that decrease?

The G&A costs on a quarterly basis, Bill, are really just a function of expenses as they come in. We are on pace for G&A being $22 million, I think, this quarter. I don't have the number in front of me, but I think this quarter is pretty much on that run rate.

So no one time?

No. Again, just as it rolls through the quarters as it can change, but no really special event between then and now.

Used home sales in the third quarter were the highest for you guys in many years. Are you seeing increased demands for used homes in certain states or regions of the country?

I would say that, for quite some time, we have made comments about what I call the organic retail environment that happens in our communities that continues to happen almost without much of a discussion. People are looking for attractive values and used home sales in our communities represent that attractive value.

So you are seeing it on both the resale side and you are seeing it also on the used home sale side. In addition we are focused on moving some of our rental inventory through to used home sales. So we are also just focused on turning our capital over as well.

Industry RV sales appear to have bottomed or are bottoming and are looking as though they will improve off of trough levels here. What kind of impact do you think improved RV sales could have on your 2010 results? And is there historically some lag time between improved RV sales and results for your Thousand Trails and resorts?

We essentially deal with what we call the installed base of the 8 million RV'ers out there. So as frankly RV sales fell precipitously in the last 12 months from I think they were 300,000 plus down to 200,000 plus and now they will be slightly over 100,000 in 2009.

So you have seen a pretty dramatic falloff in RV sales over the last 24 months without really impacting any of our RV business. Where you will see it is on the membership sales. We used to focus on the new RV owner as the main target for membership sales. We are actually taking a different approach now and trying to broaden our products to be much more attractive to the installed base.

So at the margin, you'll see some impact from RV sales on our business. But it is again 200,000 sales on a base of 8 million. So that I would say the relative impact it's having on our business.

There has been some chatter about potential REIT IPOs lately and possibly in the manufactured housing space. Do you guys anticipate any new manufactured housing REITs coming public?

I don't anticipate any, but that could happen. I mean the one place where you can get capital is in the public marketplace. So I could see a number of people evaluating whether or not that makes sense. And in some cases it very well might.

All right. Thanks.

[Todd Spencer] with Wells Fargo Securities.

Good morning. Thanks. First question would I guess back to your home sales, what was the mix? I guess in the sales, regarding the size -- did it seem like more on the smaller size in the 800 square foot range versus the larger 1500 square foot?

We sold three homes that we would call manufactured home sales and we did 22 that we would call RV sales. The RV sales are at the park models that average, call it 400 square foot apiece. The other ones could be anywhere from 800 to 1000 square feet, give or take.

Any specific properties or markets that you would see experiencing more success than the others?

We are not seeing a lot of volume on home sales I think is the point to take away from this. You are saying, again, demand for used homes and affordably priced new homes. We have been trying for quite some time to introduce new homes into the market at lower price points. We are now hitting price points underneath $50,000 with respect to it.

But frankly, even those homes are difficult to sell in this environment but easy to rent. When our customers are looking at financing options that are 8 to 10%, 10 to 20% down and very stringent with respect to FICO scores, it may be a good deal economically, but viscerally somebody is looking at it a 9% interest rate when they know single-family home interest rates are 5% and there is just -- there's an impediment as a result of that comparison.

It may be a great value, but at the margin our customers are opting to rent. And I think some of that has to do with just that comparison it has. And the face of it, it just doesn't look attractive when it very well might be very attractive.

Thank you. And the last question, the debt you sourced in the third quarter, the $21.1 million. Was that backed by Fannie Mae?

Yes.

Can you share the loan to value in coverage and if any portion of that is interest only?

No portion is interest only. I think it is a 30-year amortization schedule as the loan to values have generally been in the 70 to 75% range. I don't remember the coverage numbers off the top of my head, but they have generally been 1 2, 1 3-ish, depending on the property.

David Toti with Citigroup.

Hello. Michael Berman is here with me as well. Couple of questions with regard to some of your efforts at the frontline going for lower price points. Are you making any progress there? Are you finding that you need to do deeper commercial activity? Some -- a little picture of what is going on in the frontline would be helpful.

Yes. I mean we have essentially been testing two products. One, we will refer to as kind of a -- we call it a one park. Instead of having access to the whole portfolio of properties, you have access to a limited number of properties starting out as few as one and up to call it three properties.

I would say we have 400, 500 of those sold. It hasn't gone as well as we would have liked. We are finding out that actually customers view the portfolio as an attractive feature. In other words the flexibility of going to a number of locations is part of their decision-making process. So we are trying to look at how we would adjust that low-cost product and take that into account.

Another product that we have introduced that is what I would call a hybrid membership, non membership product is called the [Ready Camp Go Cart]. We have actually introduced a couple of thousand of those to pretty good success. It hasn't really gotten as much attention internally as trying to work through the One Park issues, but frankly maybe that is the product that we spend a little more time on.

Essentially, that is a product that involves an upfront payment of as low as $50 to as high as call it $300 and then has a pay-per-use privilege underneath that that as you use your card at one of our properties, you get some discounted rates at the properties. So it has both an upfront component and a pay as you go component.

Frankly that's done pretty well without much effort. So we are spending a lot of time internally trying to figure out what is the best mix of products to introduce. And I think we are going to continue to be working on that in 2010, but we are not pleased with our ability to introduce those products efficiently and effectively at this point.

And then just moving over to Thousand Trails. Something you talked about in the last call was your efforts around utilization. Is there any way to quantify how that has changed in the last few months relative to those efforts?

We've done a very nice job in the portfolio of expending a significant number of customers from whether they were seasonal or dry storage to an annual base. I would say we've done probably 750 to 1,000 this year. What we would otherwise referred to as annuals. You're not getting a full incremental revenue pop because the customer was paying you something.

But on average they are paying us -- call it $2500, maybe $3,000 depending on the property. Again that is not all incremental revenue, but I would say operationally, we are looking at that as a good success so far.

And then just hopping over to the expense side of the equation, you made pretty good progress in terms of trimming expense growth this year. But it looks like it is going to be modestly up next year.

Is that generally the mix of components that you can't control? Or is that your cost-cutting efforts have reached the maximum depth?

In my remarks I broke out real estate taxes, utilities and insurance costs. I would like to say we can control those, but we can't. Those are forecasted to be up 2%.

I'm a little nervous about my utility expense. If you look at where natural gas prices are today, they are at pretty low levels. If those start to pop up large, I could have a negative variance, although it does take time to go through the system. The utility system before it actually hits your P&L.

We are hedged to some extent on that, but utility number I get a little nervous about.

With respect to the rest of it, I think we are doing a very good job of managing the expenses that we can control. We are looking forward to doing that also in 2010, particularly with respect to some of our memberships and RV properties.

Okay and then just one last question. Relative to the CPI forecast that you are underwriting for next year of around 1%, do you think there is more risk to the upside or the downside to that number?

Well, the CP -- for us, we are essentially a laggard when it comes to the CPI. We see the CPI July, August, September as basically setting our forward rates for next year. There is a mass of spike up in CPI in the next few months. It won't really affect us that much in 2010, but will probably have an impact in 2011.

Great. Thanks for all the detail.

Michelle Ko with Bank of America Merrill Lynch.

I was just wondering if you could give us more details on the increase in your 2010 core operating revenues to 1 to 1.5% from your prior estimate of about 1%?

The difference there is really the mark to market on turnover. We have at any particular property an existing group of customers that's paying X dollars in terms of rent. Next year when we negotiate rent increases, they move to Y dollars.

That mark to market process was not in our initial forecast. Our initial forecast was solely based on what we thought would be the CPI going forward on a 12-month basis as well as minimums that we have in our agreements. So the incremental dollars are coming from the turnover to market.

And can you also tell me on the Montana asset that you sold, can you give us a sense for what the cap rate was on that?

It was less than 7%. I think the asset was 70-ish percent occupied at the time we sold it.

Great. Thank you.

(Operator Instructions). There are no further questions at this time.

Thank you, everyone, for joining us on our call today. As always if you have some follow-up questions, please call Michael Berman. And we look forward to updating you with our year-end results and our new outlook for 2010. Take care. Bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.