Equity LifeStyle Properties Inc (ELS) 2009 Q4 法說會逐字稿

Good day everyone, and thank you all for joining us to discuss Equity LifeStyle Properties' fourth-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 in the meanings of the federal securities laws. Our forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligations to update or supplement any statement that become untrue because of subsequent events.

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

Thank you everyone for joining us today. Good morning. I am Tom Heneghan, Chief Executive Officer of Equity LifeStyle Properties. Again, 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 performed very well in 2009. 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.

I would like to highlight some of the themes running through our business in 2009, and likely into 2010. Our RV customer is resilient. Over the last few years we have seen significant fluctuations in gas prices, an extremely difficult economy, yet this revenue stream continues to grow. It is the installed base of approximately 8 million RV owners that find this lifestyle extremely attractive. Moreover, our growth is coming from recurring annual customers, increasing the stability of this revenue stream.

With the Thousand Trails portfolio joining our 2010 core portfolio, we expect to continue the success achieved in 2009, and increasing our annual revenue streams. We are optimistic about generating better utilization at these properties as we seek ways to attract new customers.

Our manufactured home communities continued to reflect their hallmark characteristic of stability. At the margin the home rental business has allowed us to maintain occupancy. However, renting new homes would not be our preferred method of creating occupancy. In late 2008 we reacted to the difficulties in the economy by essentially closing our new home sales function and focusing on renting our available inventory. We were very successful with this initiative in 2009. These actions were the main driver of the improvement from our sales operation from a 2008 loss of $5.7 million to income of approximately $800,000 in 2009.

The plan is to convert these renters into homeowners over time. However, our success on conversion has been somewhat elusive. Currently our customers are sensitive to large capital outlays, with many customers preferring renting versus buying, and when buying choosing affordably priced resales or used home sales versus new homes.

We have made good progress in bringing in lower-priced new homes into our communities, but we need to do even better. We have seen some ability to move new home product at price levels of less than $40,000, although these have been isolated sales. In 2010 our ability to sell new homes, either by converting renters to owners, through third-party dealers or through our own sales efforts will have implications for occupancy and capital spending. A major factor influencing this, as we have mentioned before, is the impact of government programs designed to support the single-family housing market.

In addition, in 2009 we significantly benefited from lower expense pressures. Some of this reflected our efforts at cost reduction; however, we have also benefited from lower real estate tax, utility and other expenses. Our guidance for 2010 assumes a continuation of a low inflation environment.

We were also pleased with our balance sheet and the increased flexibility created by our June 2009 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 reduced interest expense resulting from the offering.

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

Thanks, Tom. I want to make a few comments on our fourth-quarter results and then discuss our earnings guidance. As always, I caution that I do not intend the precision my comments imply, and my guidance comments reflect the midpoint of ranges.

Our fourth-quarter results exceeded our internal forecast by 0.14 per share or approximately $4.7 million. Approximately $2 million of the positive variance came from core property expense savings. More than half of this came from lower than expected real estate tax and utility expenses.

Another $2 million or so came from a combination of factors, including various other income items, better than expected results from our sales operations, and lower than anticipated rent control expenses.

Our core RV-based rent did about $450,000 better than expected, with most of this coming from higher seasonal revenue. Core RV-based rental revenue growth came in at 4.2% compared to the fourth quarter of 2008.

Finally, core MH revenues came in at 2.7% growth, a continuation of the sequential slowing of our growth rate we have seen throughout the year due to a lower CPI.

Our expectation for 2010 results have not changed since our October call, given our final 2009 results. As a reminder, our core operations changed dramatically with the inclusion of our right-to-use properties in the 2010 core.

First, final 2009 results for our 2010 core group. After that I will go through our first-quarter guidance in some detail. 2009 total property revenues for the 2010 core group came in at almost $495 million. We still expect approximately $500 million from this group in 2010.

2009 community-based rental income for the 2010 core group came in at $253.3 million. We have currently notified approximately 65% of our residents of a rate increase of approximately 2% for 2010, through the end of 2009. We continue to assume no change in occupancy in our guidance assumption.

2009 resort-based rental income for the 2010 core group came in at approximately $122 million. Annuals came in at approximately $74.4 million. Seasonals came in at $20.6 million, and transients came in at $27 million. Our dues income came in at $50.8 million, and right-to-use contracts revenues came in at $21.5 million. Utility and other income came in at $47.4 million.

2009 core property operating expenses, excluding property management, came in at $224 million, and is expected to be $226.5 million in 2010. As a result, our 2009 income from property operations for the 2010 core group, excluding property management, came in at almost $271.5 million, and is expected to grow approximately 1% to $273 million. The $273 million is where we thought we would be back in October.

Total property operating income for 2010, including our non-core properties, is expected to range between $274 million and $275 million, consistent with our comments back in October.

In 2009 we had $33.4 million in property management costs and $22.3 million in corporate G&A costs. We anticipate we will have $33 million in property management and $22.5 million in corporate G&A costs in 2010.

Our other income and expense group includes our sales operation and all of our other income and expense items. In 2009 we achieved approximately $16 million of income for this group. In 2010 we expect to achieve around $12 million.

In 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 $90.7 million in 2010, a reduction of approximately $7.6 million from 2009 as we put our cash balances to work.

Our preferred distribution is $16 million. Overall we expect our funds from operations to be approximately $124 million, at the midpoint of our guidance range, an increase of approximately $6 million over 2009. Excluding $3 million of one-time gain gains in 2009, the increase is approximately 8%.

We expect our average shares outstanding to be approximately [35.5 million], up from almost [33 million] in 2009, an increase of almost 8%. We make no assumption with respect to the use of our free cash flow.

Moving on to first-quarter 2010 guidance. We expect funds from operations of approximately $34 million to $38 million. In 2009 we reported approximately $38 million of FFO, including $3 million of one-time gains and other income. The quarterly share count for the first quarter will go from 30 million to over 35 million, an increase of almost 16%.

We expect core MH-based rent to be up around 2%, from $63.2 million to $64.4 million. We will see an impact from last year's CPI throughout the year on our MH-based rent revenues.

We expect core RV-based rent to be up at least 2% from $35.2 million. Annuals show a growth of at least 4% to 5%, from almost $18 million to almost $19 million.

We increased the number of annuals in our right-to-use properties throughout 2009, and this is having a positive impact on our annual revenue growth.

Seasonals are expected to be flat $12.3 million for the quarter; however, considering the prior quarter and the current quarter as the whole season, we are up around 2%. Early discount programs stimulated higher occupancies for the whole season.

Transients are projected to be slightly down $5.2 million to $5.1 million. Dues and right-to-use contracts are now part of our core results. As we have noted before, there is an attrition in the membership base. Some of this is offset with dues increases. We are also working to increase our site utilization with low cost products. Our dues forecast for the first quarter is almost $12 million.

Right-to-use contracts are anticipated to be at least $5 million in the first quarter. Utility and other income for the 2010 core group was $12.4 million in 2009, and we anticipate zero growth in the first quarter.

Overall core property operating revenues for the 2010 core group are expected to be approximately $130 million in the first quarter, compared to $129.3 million in the first quarter of 2009.

Core property operating expenses for the 2010 core group, before property management, are expected to be $54.7 million compared to $53.3 million in the first quarter of 2009.

Property management and corporate G&A are expected to be $14.5 million compared to $14.9 million in the first quarter of '09. Other income and expense, including the sales operation, is expected to be $3.3 million compared to $5.2 million in the first quarter of '09. Interest expense and amortization is expected to be approximately $24 million compared to $24.6 million in the first quarter of '09. Our preferred distribution is still about $4 million per quarter.

A few comments on the financing [margins]. Capital continues to be available for good quality manufactured home assets from agencies and life companies; however, underwriting, as we have noted before, is increasingly stringent. Virtually all life companies are in the broader market now as compared to roughly half of them last year at this time. And life companies seem to be looking to put loans on the books. A few life companies are in the RV market, and we are exploring some debt financing in that space.

With respect to loan terms and pricing, agencies continue to lend up to 75% loan to value. They are utilizing cap rates in the 5.5% to 6.5% range in determining that value, with coverage of approximately 1.3 to 1.4 times. Pricing currently is approximately 200 to 250 over the [10-year].

Life companies use a much higher cap rate. It can be as much as 200 basis points higher than Fannie Mae. Pricing is currently generally similar to the agencies, but obviously on a lower loan amount. They are starting to recognize they may be too conservative.

The conduit market seems to be returning. We have had a number of calls from various banks seeing whether or not we would have any financings. You can get some RV financing on high-quality assets. The loan to value is 55% to 60%. The coverage is a little higher than on the MH side, 1.4 to 1.5 times.

Finally, a comment with respect to the SEC letter that we received. The SEC periodically reviews all public company filings and routinely sends out a letter with questions. We received the letter at the end of the year and have submitted our response. We thought it better to mention this, given the timing of the earnings call, although we could have waited for the 10-K next month as an alternative. We believe the items will be resolved with any material impact.

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

(Operator Instructions). David Toti, Citigroup.

My first question is relative to your 2010 guidance, and in the light of the performance in the fourth quarter, would you classify it as conservative given the overall improving economy and the expectation for continued expense control? Is this is potentially the bottom end of the range of performance for the year potentially?

The only thing that really changed was where our expenses came in at. The way we budget, we generally like to budget from a zero base. So the number that we have for 2010 continues to be the same number. The improvement that we saw in the fourth quarter really wasn't going to change our outlook with respect to 2010, given that it is so early in the year.

I would just add relative to the general environment out there, what we are seeing is price sensitivity pretty much across-the-board. You can get activity, but it is a very price conscious customer out there. So I'm not -- I don't think we are seeing a bullish return of say back to the 2006, 2007 level. I think we are seeing a customer who enjoys the lifestyle, but is very concerned about getting that lifestyle at affordable prices.

Great. Then my second question layers on top of that. What are some of the initiatives that you're still pushing on relative to the new customer strategy, moving price points lower? It would be great to hear your progress on some of those internal efforts relative to the more price sensitive customer.

Sure, I will talk about the MH business first. Obviously, the first thing we did that you can immediately see is we went to a rental program as opposed to a sales program in the fall of 2008. That was in reaction to the general economic environment. We used to sell homes for an average price of $70,000, $80,000 upwards of close to $200,000.

We decided literally a year ago that we had to bring price-sensitive products in, and we targeted a $40,000 product, ostensibly to compete against the resale and the used home sale market. We did bring that product. It is out in our properties. And I would say the ability to sell that is still pretty elusive. We have had a few isolated ones, but it is not happening at a level that we would like it to happen at.

So frankly we're going back down again and saying we need to take more price out of this thing. We've got to be competitive with what is going on with the resale market. I would say we are trying to hit into the 20s or low 30s, with respect to prices.

So continue to see a price-sensitive customer out there. On the RV side we started with a discount program in the spring of last year that if you booked early, we essentially either kept the rate flat or gave you a discount to come early. We found that to be received very well by the market, and I think you are seeing it show up in the fourth quarter of this year and into the first quarter of 2010.

With respect to the Thousand Trails footprint, again, what we immediately tackled was the opportunity to take the existing installed base of members and offer them attractive options with respect to continuing to use their RV in ways that were more in line with their desire. And frankly that was the annual site usage. I think we added 1,000 annual sites in the year. We continue to think that there is more opportunity there.

As it relates to the more transient customer, we have been testing a number of products, but I would say success has been pretty elusive on that right now in terms of trying to find the right combination of low cost products. We have learned a lot in the last year. I think we are going to continue refining it. And I frankly think we are going to have success on that. I think when we do have success on that, that is going to open up the door to a lot of opportunity, as we have always talked about the ability to take that new customer and walk them through from a transient experience to a seasonal experience to an annual experience. So I think that is a big picture view of what we are trying to achieve.

Great. Thanks for the detail.

Todd Stender, Wells Fargo.

The first one had to do with you paid off for mortgages in the fourth quarter with cash. Were those mortgage payoffs included in your dilution assumptions for 2010?

Yes.

Okay, great. Just switching gears, you have had success in getting approval to increase rents in rent-controlled communities in San Rafael and Santa Cruz. Are there any updates on any other communities that could surprise on the upside?

No. That is a long road with respect to our efforts. We started that back in 1999 and 2000. We tackled those property properties where we saw the biggest difference between market rents and rent-controlled rents. That would be Santa Cruz, California, where we entered into a settlement like 2004 and 2005.

Again, we recently had some positive results with respect to litigation in San Rafael. I think they have tried to get a stay with respect to our ability to go to market on turnover. I don't think that stay was successful. And we continue to pursue market rents on turnover in both of those communities, with some pretty large differences between the rent-controlled rent and the market rent.

But generally those would be the bigger areas that we focused on. We don't see another -- if there was low hanging fruit, I think we would have been pursuing it.

If we could switch to Creekside, what is the current occupancy there, and is there a breakeven occupancy level to service the mortgage?

The occupancy there is, I believe, 60%, 65%. That is higher than the -- lower than the breakeven level. The property is negative cash flowing.

Any other properties that we could see return to lenders this year, same all-age type communities in markets that you don't see yourself in long term?

I would say no. This property was the last of a portfolio of assets that we held for sale. We have had it in discontinued operations for five years. We felt that this was our best alternative with respect to how to dispose of the asset.

Michelle Ko, Merrill Lynch.

Good quarter. I was just wondering if you could talk a little bit more about in the fourth quarter you had said that the RV rental income, there was improvement in the seasonal. If you could talk a little bit about why you think you are starting to see that, and what you're anticipating in 2010. And could there be some upside to your numbers in that category?

The season, as we would define it, is effectively a period, call it from November through April. So the fourth quarter and the first quarter kind of all in the middle of all that activity. I think what you're seeing, and what Michael's comments show, we are having a very good fourth quarter. Seasonal revenues are up pretty significantly. But we actually expect it to be flattish in the first quarter of 2010.

What that is telling us is -- what you really need to do is step back and look at the season. Call it again that period from November through April. And what we did in the spring of last year to entice our customers to book with us and to return was offer some incentives that if they booked with us early or they came down earlier, we gave them a discount, say, in November or December. What is happening is we are getting incremental volume. It is not rate driven. We think it is occupancy driven. Again, it is a sign that those customers are looking for value.

We have seen some very big improvements in markets such as Yuma and Texas that a year ago were not doing so well. So that customer has returned. And I keep on saying, he has returned because of two things. The lifestyle is very attractive and he is finding it to be a very affordable offer that we are presenting here.

Bill Carrier, KBW.

Regarding acquisitions, could you describe the acquisition environment right now? Are you actively looking to make acquisitions, and maybe what kind of cap rates you are seeing out there?

We typically don't talk about cap rates, but only in a broad sense. I would say there is a dichotomy out there, a bifurcation in the marketplace. High quality, even if it is in RV, if it's got a lot of park models and it is a high-quality asset, or a high quality manufactured home, age restricted asset, are trading at very aggressive kind of near all-time high cap rates -- or low cap rates I should say, or high prices.

We have seen some deals go off at sub 6%, 5% cap rates. On the flip side of that, if you are an all-age property in a difficult marketplace, and I don't want to pick on Michigan, but if you are in a difficult marketplace, you almost can't get a price, because there is no buyers. So you have this really kind of bifurcated marketplace out there. And we have not seen a lot of those distressed asset that we would like to buy, although we have seen a lot of distressed assets out there in the family sector.

Do you assume any acquisitions in your 2010 guidance?

No.

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

Can you give us some added color on the rental program, how many additional homes did you rent in 4Q on a net basis?

On a net basis -- I could tell you for the whole year new homes were a couple of hundred, I think. Looking into 2010, the issue we are going to be playing with is how many new homes would we be purchasing to maintain flat occupancy. There is still a couple of hundred pullouts that occur either from third-party or just the home is in condition where it is not worth keeping in the community.

So I think as we look at 2010, we are looking at bringing in another, call it, 100, 200 new homes. We are very price sensitive with respect to the capital we want to put out. And we have had very good success renting that sounds out in the marketplaces where we are putting that.

Just a comment, just to provide more color, we were down in occupancy in the second half of the year. That is not a true indicator of what we think is really going on. You could count a handful of assets and come up with that occupancy decline. It is really coming out of -- Denver is a very tough market for us right now. It equated to about half of that occupancy decline. We have a family asset in Florida that is operating inconsistent with our senior assets in Florida. Then we have another asset on the west coast of Florida that frankly has never really recovered from the hurricane that continues to lose occupancy.

So if you isolated on Colorado and handful of other assets, you're going to see that occupancy decline. Taking a step back and looking at our major markets of California, Arizonan and Florida, we think we compete extremely well in the marketplace from a housing affordability standpoint, but we still see a very price sensitive customer out there.

Great, that's helpful. Just to follow-up on the acquisition question, if you're not seeing a lot of opportunities out there, how does that environment affect where you are setting your dividend?

The dividend is done every year. What we have done is the last few years have taken whatever internally generated growth that we have had above a base and applied it to a dividend increase. That has been the general philosophy. Whether or not that continues in the future is up to the Board, but it has really been a function of our free cash flow.

Listen, we are pretty -- we are still optimistic that some level of stress is going to create opportunity for us. Although I must say we haven't really seen it; it has been isolated. But on the flip side we have seen more assets go to special services situations in the CMBS area. How long it takes to resolve that, who knows.

But most of that stress is in the family side, correct?

Well, also on the RV. And RV I wouldn't characterize the stress as operating stress, I would characterize the stress as financing stress. There is assets that were leveraged in the CMBS market at levels that you won't even come close to today. So those owners have issues with respect to upcoming refinances.

We have no further questions. I would like to turn the call back over to Mr. Heneghan for further remarks.

Alright, everyone, I appreciate you joining us on the call today. If you have any follow-up questions, as always, Michael Berman is available. I look forward to updating you after our first quarter in 2010. Take care.

Bye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. And have a great day.