Equity LifeStyle Properties Inc (ELS) 2010 Q1 法說會逐字稿

Good day, everyone. Thank you all for joining to us discuss Equity LifeStyle Properties first quarter 2010 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 this 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 uncertainty. The Company assumes no obligation to update or supplement any such statements 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. Good morning. I am Tom Heneghan, Chief Executive Officer of LifeStyle Properties. I will make a few remarks then turn it over to Mike Berman, our Chief Financial Officer, to take you through the numbers in more detail. We will then open it up for your questions.

Our first quarter results reflect the stability of our business. We believe this is the result of the quality of our real estate locations, the positive demographic trends of baby boomers and retirees, the flexibility of our housing and lifestyle offerings and our desire for predictable and stable cash flow.

The fundamentals of our business continue to operate in line with our guidance expectations. We expect to grow both core revenues and net operating income in 2010. I'd like to discuss a few items that we are focused on for the remainder of 2010.

We see our manufactured home community business as stable. Our rate growth in the first quarter is slightly better than expected. However, we continue to see a headwind with respect to our ability to sell new homes.

As we have discussed before, in light of this difficult selling environment, we incrementally rented our home inventory including buying additional low-cost homes to add to this program. We expect to continue this during 2010.

There is much talk of a stabilizing housing situation, but currently we do not see significant improvement in our properties. Nevertheless, we believe we compete well in the current environment. We also believe our ability to offer low-cost single-family homes to empty nesters and retirees is well positioned for the eventual recovery and overall home sales activity.

Our first quarter results for our RV business reflect the finishing touches of what has turned out to be a very strong winter season. We had good success growing both annual and seasonal revenues. The keys for the remainder 2010 are our transient revenues from our summer season properties impacting our second and third quarters and our renewal for next winter season on the fourth quarter.

Reservations for both of these are running slightly ahead of last year's pace. Another area of focus for us has been better utilization of the Thousand Trails footprint. In addition to promoting annual site usage, we have also been transitioning the membership sales process away from a tour driven high-cost, low-volume model to one based on higher volume, lower priced products.

Our focus is creating more dues-paying members as we see this as a very stable and predictable cash flow. The results of recent tests through direct mail, Internet and retail channels has been very positive. We believe we have finally started to get some traction on this initiative. It is still early, but this is one area we see opportunity.

Overall, our RV business has been a pleasant, positive contribution to our overall operating platform, and has proved to be a stable cash flow generator. On the expense side of our business, we are not seeing any significant cost pressure in utility real estate tax or insurance expenses, but we do expect that a decision to invest more on our operating platform will increase our overhead.

With respect to our balance sheet, we believe we are very well positioned for the future with no significant maturity issues and significant free cash flow. Now I'll turn it over to Mike.

Thanks, Tom. First, I want to provide an update on 2010 full-year guidance. At the beginning of the year, we expected funds from operations to be $123 million to $124 million with a share count of about 35.5 million for a midpoint of guidance range of $3.49 of FFO per share.

We continue to expect this overall result. We acknowledge that our second quarter guidance is different than consensus. We see a difference for the third quarter as well. We think this is primarily due to the timing of expenses. We have some comments for how the remainder of the year breaks out into the quarters and are available to go over any questions with anyone who needs some assistance with their earnings model.

Given our performance in the first quarter, that leaves about $86 million to $87 million in FFO, or about $2.44 per share for the remainder of the year. We reported $80 million of FFO for quarters 2 through 4 in 2009. We expect the upcoming second quarter to be about $23 million to $24 million in funds from operations.

As a rough guide to the remainder of the year, we should be in the area of $33 million for the third quarter and $29 million for the fourth quarter. Our overall assumptions for property operations are consistent with our prior calls. We continue to assume no change in our MH occupancy and expect to show revenue growth of 2% for the year which is consistent with our first quarter results.

In our RV business, we had a good winter season and look forward to the summer season. Our first quarter growth was almost 3.5%. In the second and third quarters, we have already $20 million of transient revenue forecasted with about two-thirds of that expected in the third quarter. Our second quarter transient reservation pace is slightly ahead of last year.

For the whole year, we believe we have overall RV revenues in $124 million to $125 million, overall, a growth rate of 2% to 2.5% over last year. Potential upside to this is a strong summer season in our transient business, a continuation of incremental annual revenues from the TT footprint and a strong winter season beginning the fourth quarter.

Although the mix between members sales revenue and dues revenue may change as we introduce lower cost products, we don't expect the total contribution from these items to net operating incomes to be materially different than we have forecasted in the past. The total contribution was and is expected to be $55 million to $56 million.

Our operating expenses, excluding the membership sales expense and property management, is still in line with our guidance. We expect an increase of 1% or so for the year. Overhead previously within the $56 million area, we think this might be a little light.

Moving on to our balance sheet. We have $80 million of financing that remains to be paid off in 2010, and have approximately $50 million of mortgages coming due in 2011. Our current cash balance is approximately $130 million and we expect to generate cash flow between now and year end.

We have no debt maturing in 2012. We are in the process of getting financing on two of our RV communities with a large insurance company. One is an unencumbered asset and is expected to generate about $15 million in proceeds.

Coupons on these loans are approximately 6.5% which is a spread to ten-year treasuries of approximately 250 to 300 basis points. The loan to values are in the 60% area with [coverage] close to 1.5 times. On the MH financing front, coupons from Fannie Mae today are at the lower end of this range but LTVs are in the 70% area and coverage is around 1.3 times.

We have finalizing discussions with our banks concerning our line of credit. Our current facility has $370 million of capacity with zero outstanding. Pricing is LIBOR plus 1% with a 15-basis-point facility fee. We do have an option to extend for one year at a 15-basis-point fee.

If we were to redo the new line today, we would be at LIBOR plus 3% to 3.5% with a 40-basis-point facility fee, a commitment fee of 50 basis points and an additional 50-basis-point arrangement fee. Our view is that the bank market lags the capital markets and that market pricing will hopefully move in our favor.

In any event, we have also decided that we don't need a large unused line, especially at current market pricing given our debt maturities, cash on hand and free cash flow generating capacity. We expect to take the line down to $100 million and hit the extension option. And with that, I'd like to open it up for questions.

Thank you. (Operator Instructions) And our first question will come from the line of Eric Wolfe from Citigroup. Please proceed.

Good morning, guys. Michael is on the line with me as well. Could you give just us some more detail on the financings you closed through April, who the lenders were and why there was 115 basis points spread between the $12 million mortgage and the other $50 million in mortgages you closed?

These financings are ones that we operate on six months ago. The difference in the spreads is generally has to do with what the treasuries were at the time we locked rate. The spreads in general are basically consistent. They've come down a little bit from a year ago, but the reasons the coupon differentials are the way you lock the rate with respect to Treasury.

Got you. Just as far as, you talked about the $130 million that was on your balance sheet, cash. Why take on the additional debt when you had that much cash to pay down, the upcoming debt. Was that because you felt that the line was going to be reduced?

No. We felt it was important for to us maintain relationships with insurance companies. We felt it was important for us to show financing on an RV property, it was not part of the proceeds that we needed.

We felt it's a great asset. We wanted to do business with this particular insurance company. It wasn't a lot of dollars. Gives us a little extra cash at the margin and we thought strategically it was important to do this.

Okay. And just lastly, as far as RVs, it seems like RV sales are really picking up, does this make you more optimistic about your RV income forecast for the remainder of the year, especially perhaps the transient revenues you talked about this summer that were going to be key for the rest of the year?

Well, I would say, I'd have to concede that the trend might be picking up a little higher than we previously thought, but I do have to caution, with $20 million of the $27 million of transient revenues coming in a change in that could change the overall growth rate.

Yes, and I'd also caution making a tie between RV sales and how it really translates into revenue at the level of our property. Just for the benefit of, we saw RV sales go from 370,000 units down to 165,000 units while we were still growing revenue at our properties.

So to say that there's a tie, that would be a stretch. There's 8 million installed base of RVers out there. We cater to the installed base, so whether it's 200,000 shipments in a year or 300,000 in a year relative to the installed base, that's a tiny amount.

Over the long term, more RV sales is going to be good for us. But in any particular quarter I don't think it's really going have an impact at the level of the property.

Got you. Do you have any sort of marketing efforts to those new customers or is it still like you said just focused on the installed base at this point?

We market to all RVers where RVers show up. So we are in dealerships, we're in retail stores. I think we've done a very good job over the years of being in places where RVs congregate, especially with respect to introduction of some of these low cost products that I mentioned in my remarks.

I think we are now being received quite well from various distribution channels that are talking to the RV customer and seeing our products as an advantage in their own efforts to retain and keep customers.

Thank you for the detail.

Our next question will come from the line of Todd Stender from Wells Fargo Securities.

Hi, good morning, guys. Thanks for taking my call. Last quarter you kind of mentioned that Yuma and Texas were improving. Are they, one, still trending well, and, two, what other markets are you seeing some slight if not modest improvement in?

I would say just looking at the season in its totality which we would call from, call it November through March of this year, Texas and Arizona were very strong. Saw some strength out in California as well. Florida was a little less robust than we saw in those other areas.

And just on the acquisition front, cap rates have certainly been low on stuff that has traded, some stuff in the sub 6% range. Are you seeing any transactions happening and are you anticipating any acquisition activity leading into the summer months?

I would say that there has been some pickup in transactional activity. We see no deals in the RV space to note, so that's pretty much still shut down. With respect to MH communities, we have seen a pickup in transactions, but 95% of the activity that we're seeing is on all age properties, and the cap rates on all age stuff that -- we're seeing anywhere from, call it a low of 7.5% to a high of 10%, I would say.

And I would call those generic kind of all age communities. There are a few transactions out there of what I would call well-located, age-restricted, or California all age. Those have traded in the sub 6% cap rate, call it 5.5% or so. But, again, I'm talking about two or three deals in that environment as opposed to 20, 30 deals in the all-age generic stuff.

Thanks. Just switching gears. Just on the expense control, looking at where your real estate taxes have come in. Looks like you've had good success in keeping the increases low. Anything you're doing right? Anything that seems to be working well in this kind of environment and then geographically, any municipalities that seem to be maybe a little looser on their raises?

I wish we could control it as well as we are showing. At the end of the day, a lot of the markets are a function of the single family housing markets. The real estate markets, you've seen very little growth in Florida and in some places in Florida they've gone down.

We have a lot of exposure through Florida, so we benefit to that at the margin. I would say the theme of municipalities, local governments, state governments looking for sources of revenue, I think the pressure's only going to get worse.

It may not only show up in real estate taxes all the time, but so far I would say the real estate tax thing is more a function of the housing market than anything else.

Okay. Thank you.

(Operator Instructions) And our next question will come from the line of Michelle Ko from BanK of America.

Hi. I was just wondering if you could talk a little bit about the better trends that you are seeing in the RV business? You mentioned transient reservations were doing a little bit better. Could you talk a little bit more about why this is the case and what you're seeing out there?

Just to break down a little bit on our first quarter. The real strength and the thing we focus on with respect to the RV business is creating more additional annual revenue streams. We think that's the bread and butter of this business. And that is the line item that excelled in the first quarter for us. It was up 6% in the first quarter.

Seasonal was up almost 3% and actually transient traffic, which again, amounts for very little piece of the overall revenues of this Company were down slightly. So we see the transient as a feeder to the seasonal and the annual business. What's driving the annual business for us at the margin right now is our continued success in trading more annual site usage in the Thousand Trails footprint.

We've talked about this a number of times during 2009. We're seeing the benefits of that in 2010 as the Thousand Trails property rotate into the core portfolio. I would say on that 6% growth, about half of that is due to incremental annual site usage in the TT footprint.

Okay. Great. Thanks.

We don't expect that growth rate to continue throughout the year on the annuals. It's more a function of how the TT annuals came in last year as well.

Okay. That's helpful. Thank you. And also, could you just comment on what kind of spreads, if you had to get secured financing today, call it from the [GOCs], what kind of rates you would see today?

I think the spreads under the 250 to 300 range depending on the property and the underwriting.

Okay. Great. Thank you.

And our next question will come from the line of Earnest Sweat from BMO Capital Markets.

Good morning, everyone. I have one quick question concerning -- I see that used home sales volume increased year-over-year. I was wondering, does this increase kind of show that there's kind of a break in the logjam of the HUD home sale business of yours and the overall market, and would it make sense to create the infrastructure in preparation for the improved housing market in the next 12 to 18 months?

That's a great question. I think we've said a number of times that there is sensitivity to price at the level of home sales transactions. And we have seen it where new home sales are competing with used home sales. And at the margin somebody is interested in conserving capital and would opt for a used home. The pricing on some of that used home stuff is $5,000, $10,000. Goes up to, call it, $20,000, especially if you roll in kind of the resale transactions.

So from a cost perspective, we have been trying to get our new home price points more competitive with what's going on, on the used and the resale. But certainly, the volume of activity on both resales and on used home sales seems to have hit a bottom and are going in a positive direction.

Over time, I that's going to just offer an opportunity to sell new homes. I'm a little cautious as to saying it's going to happen within the next quarter or so, given what we see on a much more macro basis with respect to housing generally. We really haven't seen the corner be turned there.

So I think we compete generally against the housing market. As the housing market starts to improve and more normal transactions occur in the housing market as opposed to foreclosure sales, as more normal transactions start to increase as a percentage of the total number of transactions, I think that's when you might see us consider looking at new home sales.

Thanks for the color, guys.

And there are no further questions in the queue at this time.

Thank you, everyone, for joining us. As always, if you have some follow-up questions, Michael Berman is available. Look forward to next quarter. Take care.

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