Equity LifeStyle Properties Inc (ELS) 2010 Q2 法說會逐字稿

Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties' second 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 related to the Company's earnings release.

As a reminder, this call is being recorded. Certain matters discussed during this conference call may contain forward-looking statements in the meaning of the federal securities laws. Our forward-looking statements are subject to certain economic risk and uncertainty. The Company assumes no obligation to update or supplement any statements that become untrue because of the subsequent events.

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

Thank you for joining us today. Good morning; I am Tom Heneghan, CEO of Equity LifeStyle Properties. I'd like to make a few remarks, and then I'll turn it over to Mike Berman, our Chief Financial Officer, to take you through the numbers in more detail. We'll then open it up for your questions.

Our second-quarter results continue to reflect the stability of our business. As you know, we believe this is the result of our quality real estate locations, the positive demographic trends of the baby boomers and retirees, the flexibility of our housing and lifestyle offerings and our desire for predictable and stable cash flow. 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 MH business as stable. Our rate growth 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. Even though we were successful increasing occupancy in the second quarter, we would characterize the current environment as challenging.

Nevertheless, we believe we compete well in the current environment and we also believe our ability to offer low-cost single-family homes to empty nesters and retirees is well-positioned for the eventual recovery in overall home sales activity.

Our second-quarter results for our RV business reflect the continued ability to attract customers to our annual sites. The keys for the remainder of 2010 are our transient revenues from our summer season properties, impacting mostly the third quarter, and our renewals for next winter season in the fourth quarter going into the first quarter of 2011. Reservations for both of these are running slightly ahead of last year's pace.

Another area of focus has been the 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 on creating more dues-paying members, as we see this as a very stable and predictable cash flow. The rollout of the new low-cost products in the second quarter of this year through direct mail, customer contact at our properties and in retail channels has been very positive. It is still early, but this is one area we see opportunity.

Overall, our RV business has been a pleasant surprise and a pleasant positive contribution to our overall platform and has proved to be a stable cash flow generator. 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, Mike will walk you through in our numbers in more detail.

As we have intimated on numerous prior calls, forecasting is an art, not a science. Our primary goal is to relate the trends in our business and provide enough information to allow outside parties to follow along and anticipate with us.

First, a few comments on the second quarter. Our positive results to prior guidance reflect some positive operating trends with respect to RV membership products, some better-than-anticipated other income items and some expenses which will push to the second half of the year. For the second half of 2010, we expect $1.73 of FFO per share at the midpoint of our range with estimates of $0.91 and $0.82 for the third and fourth quarters, respectively. Adding the first half results of $1.82 gives us $3.55 for the year.

For core community-based rental income, our second-quarter revenues of $64.6 million were slightly higher than our forecast and 2.1% ahead of last year. In the second quarter, we gained some occupancy, so year-to-date we are up 36 sites. We expect to generate almost $130 million in revenues in this category, assuming no change from June occupancy, which would be a growth rate of 2.4% for the second half and 2.2% for the full year. Almost all of this revenue growth comes from rate, and almost all of our rate growth is a function of CPI.

The most recent CPI release for June shows 1.05% growth over the prior year. The rate of growth has declined each month since a high of 2.72% in December of 2009. This could provide a headwind to rate growth in 2011.

For core resort-based rental income, I'm going to start with our annual revenue stream. In the second quarter we had $19.3 million in revenues, growth of 4.5%, and expect $39.1 million for the remainder of the year, growth of 2.7%. We continue to see occupancy gains in the annual program we instituted at our membership properties early last year. Currently, we are expecting $77.3 million of annual income, or almost a 4% growth rate for the full year. Our model assumes no occupancy gains in the second half of the year.

Our seasonal forecast for all of 2010 is approximately $21 million, a 2.4% growth over 2009. Year to date, we have booked $15.1 million, approximately 3.4% growth over 2009. For the remainder of the year, we expect around $6 million, flat to 2009 with about $4 million of that in the fourth quarter.

During the quarter we had $5.9 million in transient revenue, down 5% for last year, and first-half transient revenues of $10.8 million, down approximately 5.1% to the first half of 2009. For the second half of the year, we anticipate transient revenues of $15.5 million, almost flat to 2009. Keep in mind that our third quarter expectation is flat compared to $12.5 million in the third quarter of 2009. As we have noted before, transient revenues might be the most difficult of all of our predictions, but our forecast for July represents almost 44% of the third quarter, and through Monday we were up 3.5% for July. We'll see how it goes.

Our first-half total core resort-based revenues was approximately $64 million, in line with our expectations and growth of 3%. Our second-half expectation hasn't really changed; it's $60.7 million, a growth rate of approximately 1.6%.

Moving onto our dues revenue, in the first quarter we were down approximately 5.5%, in line with our expectation for the year. In the second quarter our dues revenue was almost $12.9 million, a 1.5% increase over the second quarter of 2009 and approximately $600,000 higher than our forecast. We have benefited from a modest reduction in our attrition rate compared to 2009 and the introduction of low-cost membership products. For the first six months our dues revenue was approximately $25.1 million, a decline of approximately 2% compared to 2009.

For the remainder of the year, we are projecting dues revenue of $25.6 million, an increase of 1.8% over the second half of 2009. This assumes we can increase our low-cost sales velocity from approximately 1500 in the second quarter to between 2000 and 2500 sales in each of the next two quarters. If our assumptions hold, we would be at $50.7 million in dues revenue for 2010, just about even to 2009. We consider this to be a great accomplishment. We began the year with approximately 106,000 active dues-paying members and could end the year at that level.

We use this active status to calculate our dues base for revenue purposes. The press release member count is somewhat higher, adding in members who have made dues payments in the last 12 months. In the second quarter we had approximately $5.7 million in right-to-use contract revenue, including upgrades, compared to an expectation of $4.8 million. Year to date, we did $10.6 million in right-to-use contract revenue, a decline of over 7%. For the second half of the year we forecast $8.5 million in right-to-use contract revenues compared to $10 million in the second half of 2009.

Core utility and other income came in on forecast for the quarter at $11.8 million and is $24.7 million year-to-date. For the second half, we project around $22.9 million compared to $23.4 million in the second half of 2009. So, for total core property revenues for the second quarter, we came in at $122.6 million, approximately $1.4 million better than anticipated. For the remainder of the year, we expect $247.6 million compared to $245.2 million in 2009, growth of approximately 1%.

With respect to our core property operating expenses excluding property management, for the second quarter we were at $58.1 million and were at $56.8 million last year, a growth of 2.3%. Year to date we were at $112.8 million, a growth of 2.4%. For the remainder of the year, we expect $112.5 million compared to $114 million, a decline of 1.3%. The decline is primarily attributable to a drop in sales and marketing expense, which matches the drop in the second half with respect to sales and marketing revenue.

Our full-year expense expectation of $225.2 million is less than a 1% increase over 2009; $224 million.

Core net operating income before property management for the second quarter came in at $64.5 million, about $1.1 million better than we anticipated. Year to date, this was $140.7 million. For the remainder of the year, we expect $135.2 million compared to $131.3 million in the second half of last year, growth of approximately 2.9%. For the full year, our core NOI guidance is almost $276 million, up from almost $271 million, or a growth rate of 1.8% over 2009. Previous guidance had us at 0.5% to 1.5% in core growth for the year.

Non-core properties are expected to add around $600,000 to $650,000 in the second half of 2010 and added $900,000 in the second half of 2009.

For our sales operation, we came in at $140,000 in the second quarter, about $250,000 better than we expected. Some of this was better profitability on used home sales, some better than expected ancillary activities. For the remainder of the year we expect to be at $700,000, for a total of $1.6 million for the year. Last year, the second half was $1.35 million.

Other income, which includes interest income, other corporate income, rent control, joint ventures, corporate depreciation and discontinued operations, came in at $2.7 million in the second quarter, over $900,000 better than we expected, a variety of small positives that we don't expect to continue. For the remainder of the year, we expect this group to be about $5.2 million compared to $6.6 million in 2009.

Moving onto property management and corporate G&A, we came in at $13.3 million in the second quarter, and it's $27.8 million year-to-date. We expect $28 million in the second half compared to almost $28 million in the second half of 2009. Financing costs came in at $27 million in the second quarter. $23 million of that was interest expense, and it's $54.8 million year-to-date, of which $46.8 million is interest expense. We expect $52.3 million in the second half, of which $44.3 million is interest expense compared to $56.8 million in the second half of 2009. We continue to deploy our cash balances in reducing our outstanding debt. Full-year interest expense will be approximately $91 million compared to $98.3 million in 2009.

By the end of 2010 we expect to have a secured mortgage balance of $1.4 billion with $85 million of cash on hand. We expect to use $50 million of the remaining cash balance to reduce debt by the end of the second quarter in 2011. We expect our average debt balance to be $1.37 billion in 2011 with an average interest rate of approximately 6.1%, giving us $84 million of interest expense in 2011 and total financing costs of $100 million.

For FFO, we did $64.6 million in the first half, up from $61.5 million in the first half of last year. Our average share count went from 30.6 million to 35.5 million. For the second half we expect $61.4 million compared to $56.5 million in FFO in the second half of last year, over 8.5% growth.

Our weighted average share count in the second half is expected to be 35.5 million compared to slightly less in the second half of last year. FFO per share is expected to be $1.73 in the second half, as I mentioned earlier, $0.91 in the third quarter and $0.82 in the fourth quarter, compared to $1.60 in the second half of last year.

And with that, I'll open for questions.

(Operator instructions) David Toti, FBR Capital.

Good morning, guys; a couple of questions relative to the transient revenues. Can you walk us through some of the challenges you are having there at the ground level, and maybe talk about some of the dynamics on the pop that you saw in July, so far?

Well, yes. There's a number of things that all blend together on that transient revenue number. Some of it is, as we said in the past, as we convert more of our site usage to annual, that comes at the expense of the transient and the availability of sites for transient usage, so some of that is mixed in there. I would say, with respect to the second quarter, we were down compared to last year. I hate to say it, but most people would point to weather -- we had a pretty wet, dreary May and June. July, it's been hot and nice. I think you're seeing that reflected in the reservation activity. So I don't think we could point really to some external factor that's changed or that's driving it.

As we have traditionally said, the weather is a big driver to people's willingness to want to go out and enjoy the summer.

Relative to some of the new inventory that you added to the rental pool, can you give us pricing points on some of those units?

Yes. It's approximately, all-in cost, $40,000; could be as high as $55,000, depending on the size of the unit. And I'm talking all-in site development, extras, the unit itself. And I'd say that it also depends on what part of the country you're in with respect to the actual cost, but that's a pretty good range.

I know you guys have been focused on pushing some lower price point products in a number of the non-MH business lines. Are you testing any higher price point products anywhere, given a little more stability in the economic environment?

No. What we are seeing on both the MH and the RV side of our business is a value-conscious customer who is sitting on his capital, frankly. He'd rather rent than own. If he's going to buy, he's going to buy something that's very affordable in terms of cost. I think you are seeing our ability to roll out these low-cost products. As an example of that, we're doing much better volumes than we had when we had higher price points. So I think we are responding to what we think is going on in the macro environment, which is a consumer who's looking for value and is focused on capital conservation.

Great, and then my last question -- and, Mike, forgive me if I missed this -- did you talk about your decision to reduce the credit availability to such a low level relative to levels you had pointed to earlier in the year?

Yes, well we had a $350 million line that we had a one-year extension on. We started looking at that in the winter and in the spring. And at the time, spreads were 350 over. We had to pay an arrangement fee. There was a facility fee. It was unbelievably expensive, at least we thought, relative to what our capital needs are. We've got $150 million of cash on our balance sheet that we've carried for about a year now. We are generating free cash flow. We did promise the market that we would use all of that free cash flow and all of that cash balance to pay down debt through 2013. We're really not seeing an acquisition environment that requires us to carry a large balance.

So, from our cost purpose, given we had a one-year extension on what was one of the more favorable unsecured line deals in the marketplace, we decided to hit the bid, lower our cost. And we'll go back into the market probably in the next couple of quarters. That market has already improved in terms of pricing by, order of magnitude, 50 basis points in our favor. So we didn't need the money, and we didn't want to waste the shareholders' money on the fees.

Thank you for all the detail.

[Eric Wolf], Citigroup.

First question, just on the dividend, I was wondering if you could share your thoughts on the current dividend level, how you are thinking about potentially raising the dividend versus retaining cash flow to delever, maybe increasing your investment in inventory?

Our philosophy in terms of the dividend is, first and foremost, is to sit with our board in our November meeting and talk about how we see the future. The last couple of years, and this is not to say history is going to be repeated, but the last couple of years, our recommendation has been to give increases in FFO to drive a dividend increase. But again, that's a function of where we see the capital markets, capital availability, working capital needs. So it's a little early for us to comment on what we would be planning on doing with the dividend.

Right, I guess just at current levels, though, you are generating a lot of excess cash flow above the dividend level. If you kept it the same, would you anticipate that you would use that to pay down debt? Because you already have $150 million of cash on balance sheet, you only have $130 million of debt through 2011. I'm just trying to think about whether we can just expect you to keep a very high level of cash for the next couple of years.

Well, the cash, at least on paper for us, most of that cash is going to go between the rest of this year and the first part of next year. So that has all been allocated towards specific mortgages that are coming due and getting paid off. And again, we were very clear when we did our equity offering last year that all the cash that we were raising plus all the cash flow we could generate wasn't just through 2011. But we promised the market we would take care of everything through 2013, which may be more conservative than maybe other companies are doing. But that's what we felt we wanted to say at that point in time. So the free cash flow that you are seeing -- we may carry some excess cash balances around, but it won't be the full 150 over the next few years.

And I would add to that, just part of the discussion we're going to have with our board in November is the capital markets and what we see with respect to capital availability, both unsecured financing and unsecured. So that's going to roll into it. I think, right now, we would characterize the availability of capital in the manufactured home community business as okay, not great. And I think, as we look out at future maturities, we're going to have that discussion as to where do we feel comfortable running the dividend and where do we feel comfortable having free cash flow, given maturities that go out from here, let's say, through 2013-14.

So I guess, as you see the capital markets today, is there a target leverage level that you are trying to get to, or is it debt service coverage? I'm just trying to understand exactly what -- if there's a benchmark there that you're trying to get to that, like you said, you promised last year after the equity raise.

No; we typically don't go for a benchmark, but we go for balance sheet flexibility. We define that as being able to do what we want to do and not being put in a position of doing what we have to do. So a number of things roll into that calculus. Do we see any attractive acquisition opportunities? How do we see the capital markets? What's going on with our free cash flow and our potential uses of free cash flow?

And we have historically -- if we don't have a use for it, we have no problem sending it out to the shareholders. So it's not like we have a bias against that. We did a massive dividend a few years ago, $8-a-share dividend. So it's not something that is foreign to us, to reward the shareholders through the dividend, but I think we do a pretty good job of analyzing the factors that go into that decision. And as I said and Michael said, that's really kind of a board-level discussion that happens in November. So it's a little early for us to be commenting on.

And just last question -- you talked about the headwind that the low inflation environment might have on 2011. If inflation rates stay at current levels, what would that imply for rate growth in 2011?

We're going through our budget process now. We faced basically the same issue last year, and so far we are at 2%-plus. Our rent structure is such that we generally have minimum amounts, and so we'll see how it goes with respect to our budget process.

Michelle Ko, Banc of America.

I was just wondering, it seems like you are starting to see a little bit of better trends in terms of the dues. You had some expense reductions in terms of the drop in sales and marketing that's going to carry through a little bit to the rest of the year. I was just wondering if your expectations for the second half of the year, if you think they're a little bit more on the conservative side, just given some of the macro factors, just because it seems like you haven't really changed the second-half expectations since the last quarter yet. Things are trending a little bit better now.

I would say, we do a pretty realistic view of what we see going on in our business. Certainly, the second quarter came in better than we had anticipated. And if I had to peg why, there was a number of non-operating items that really don't do much for the second half. And on an operating basis, there were two things that drove it in addition to some expense shifting, again, which isn't going to help you in the second half, the expense shifting. But the top-line dues revenue and some better performance on the MH side relative to occupancy -- kudos to the field guys, kudos to our operating team. We did have a pretty good second quarter with expect to occupancy on the MH. But I would say, I not characterize that as a trend change, and the macro environment has gotten increasingly better for us and we see a positive environment going forward.

In the markets that we are in, which is Florida, Arizona and California, I would characterize California as okay, maybe a little better than okay; Arizona and Florida as challenging; the Northeast as positive. Since most of our activity is going on in Arizona and Florida, I don't sense that we are turning bullish with respect to the environment over the next six months, although we did have a good second quarter. I think that's kudos to the operating team and executing in a difficult environment.

With respect to the dues, I feel a little more bullish about that. We have an existing installed base of RVers of approximately 8 million and we have been developing products that would resonate to that existing installed base of RVers, and that's low-cost products. We had a great rollout of the new product. I think, in our second half, we increased our expectations with respect to velocity on that. So it's not like we've played conservative on that; we increased the velocity, order of magnitude, 25% to 50%. So you are seeing that in our numbers.

So as I look at the second half of the year, I don't see that we've been overly conservative relative to what's going on.

Okay, great, thanks, that's helpful. I was also wondering, in terms of acquisitions, if you could talk a little bit about what you are seeing now. Last quarter, you mentioned you saw more product in the for-sale market that was all-age versus maybe the restrictive age. Can you just give us an update on what you're seeing now and the cap rates that you are seeing?

Not a lot of transactions. There's been a recent transaction out in California that I would say is in line with our prior comment that well-located assets, especially age-restricted assets, are trading at very tight cap rates. I haven't really seen much trade in that environment, and frankly, I haven't seen much trade in the all-age family markets, either.

On the RV side, we are not seeing any distress. We thought we would see more. What we are seeing is, frankly, is existing CMBS lenders are extending maturities instead of kind of dealing with the problem today or in the future. So, they are just pushing them out.

Okay, great, thanks; and then just lastly, do you think you could give us an update on financing costs from the GFCs and life co's, what you're seeing today?

Sure. In the secured markets, Fannie Mae continues to lend. Freddie Mac has decided against park lending. Terms are generally, today, 265 to 270 over for a 10-year deal. Loan-to-value coverages and coverages are similar to what they have been, 70% loan to value, debt service coverage 135. There continue to be heavy-duty underwriting restrictions on low occupancies and high rentals.

On the insurance companies, again, spread can be tighter or wider, depending on the property or the leverage amount. In general, they're at a 60% loan to value, 1.5 times debt service coverage and, say, 275 to 300 over the 10-year.

On the RV side there's really only a handful of insurance companies. They are at 50% to 55% loan to value, 1.5 times coverage or higher, again depending on the property, and 300-plus on spreads. And the types of assets and the type of operator that they will underwrite is somewhat limited.

(Operator instructions) Todd Stender, Wells Fargo Securities.

Within dues revenue, can you expand just on the trends you are experiencing in two things -- both the portion that Thousand Trails is contributing; and, two, the rate of attrition from existing membership contracts?

Yes, if I understand the question. I'll give some historical context. Since we've been involved with the Thousand Trails business, one is that landowners are subject to a lease to the operating business; and, two, since we've taken over the operating business, the membership base has been declining. The attrition rate of the members -- as people get to a stage of life where they are no longer using their RV, has been about 7% a year. So we have been seeing that attrition occur on a year-in, year-out basis for at least the last five years, if not the last 10, as the membership base has been declining.

We started to introduce these low-cost products and tried to get more of the installed base to see this product as a viable option relative to their RV and camping usage. This is the first time in I can't say how many years, call it 10 years, where on a sequential basis the member base has been increasing. Now, it's been increasing for two months in a row. We expect it to continue to increase through the remainder of the year. And in terms of the way the attrition happens on the member base, it's not ratable throughout the year. Most of the attrition that will occur in the member base will occur in the first quarter, right around March-April, when most of the bases do on an annual basis in, say, a January time frame, so that people who haven't paid us by March or April have essentially decided that they've given up their membership.

Are you seeing it as a function of pricing? Is it the flexibility and the options that they have? Is anything that you're identifying in the last two months?

I'd say pricing is a big part of it. The sales process is another huge part of it. Right now, we are trying to ask our customers what they want and trying to develop products that are responsive to what they want. Gone are kind of a tour-driven, I would say, high-pressure kind of sales process where we tried to generate a tour to one of our properties and had people come to our properties and go through a presentation. We no longer do the tours. We go out and meet people, we ask them what they're doing with their RV usage. And we are actually displaying the menu of products that we have available. And that includes more than just the membership products.

We certainly have talked about the annual site usage, where we are communicating that potential to our customers. We have low-cost discount products. One of them is called a Ready Camp Go! card that allows some discounted camping by paying some nominal fees up front. We have the membership product, we have seasonal, we have cottage use. So we have a variety of products. I think we have a great menu to meet the needs of the RVer, the active RVer. And what we are just trying to do is display that product offering to the installed base of RVers, and those that are attracted to the membership, give them a product that meets their needs. And, I think we're having some pretty good success for that.

But we are also trying to meet the needs of the guy who wants to stay on the site on an annual basis and meet the needs of the guy who wants to come down to Florida for January through March or April, and also the needs of the guy who just wants to go camping on the weekend. So we've got a broad menu of products, and I think we are doing well with respect to all of them.

Okay, thanks; just last question, CapEx was up in the quarter. Was that a timing issue? Was this within your original budgets? And any specific properties that you are making improvements on?

CapEx can vary quarter to quarter, depending on the projects that you did. We are within our budget for the year. It's really just the timing of some of the bigger wastewater treatment plants that we've been working on.

Okay, thanks, guys.

And there are no further questions at this time. I'd like to turn the call back over to management for closing remarks.

Well, thank you for joining us, and as always, anybody with follow-up questions, feel free to reach out to Michael Berman. Thank you, everyone. Look forward to next quarter.

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