Equity LifeStyle Properties Inc (ELS) 2010 Q4 法說會逐字稿

Good day, everyone, and thank you for joining us to discuss Equity LifeStyle Properties' fourth-quarter 2011 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 conference call may contain forward-looking statements and the meanings of the federal securities laws. Our forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligation to update or supplement any statements that become untrue because of subsequent events.

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

Thank you all for joining us today. Good morning. I'm Tom Heneghan, Chief Executive Officer of Equity LifeStyle Properties. With me today is Mike Berman, our Chief Financial Officer. I'm going to make a few comments, and then I'm going to turn it over to Mike. After our comments, we will open it up for your questions.

Our business performed very well in 2010, and we expect this performance to continue in 2011. We believe this performance highlights the strength of our business plan and the quality of our cash flow. 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. Our manufactured home communities continue to reflect their hallmark characteristic of stability. We believe the remarkably consistent growth demonstrated over the years is unique in commercial real estate.

In addition, our RV customer is resilient. Over the last few years, we have seen significant fluctuations in gas prices in an extremely difficult economy, yet this revenue stream continues to grow.

It is clear that the installed base of approximately 8 million RV owners finds this lifestyle attractive. Moreover, this growth is coming from recurring annual customers increasing the stability of this revenue stream.

We believe ELS represents a unique company that is well-positioned both geographically and demographically for continued growth in 2011 and beyond.

Before turning over to Mike, I would like to take this opportunity to thank Joe McAdams for being part of our organization. When Joe retired from Affinity Group in 2003, we were able to convince him that being part of our organization first as an ELS board member and then as President these past three years would help him transition to retirement, especially with our demographics and quality Sunbelt locations. I must say ELS suddenly benefited from the exchange. With his experience and strong work ethic, Joe has been a great asset to our organization. I greatly appreciate Joe's willingness to continue working with us, and please don't tell him that part-time work is not the same as retirement.

Now Mike will walk you through some details.

Thanks, Tom, and good morning. I'm going to make a few comments on our fourth-quarter results and then discuss our 2011 full-year expectations, and finally, I will provide some guidance for the first quarter of 2011. Please keep in mind that my commentary is intended to provide direction and may sound more precise than I intend at times.

First, looking at the fourth quarter of 2010 and the full year of 2010. We came in at $0.73 of FFO per share this quarter, a few pennies better than our midpoint of $0.70. Core operating revenues came in better than we thought, and we had some expense savings on our property management line. For the quarter, our core NOI growth before property management was 1.7%.

Our 2010 guidance issued back in January of 2010 indicated we thought we would finish 2010 at $273 million of core NOI before property management for a growth rate of 1%. We came in at $275 million, a growth rate of 1.6% over 2010.

The incremental increase was primarily due to better-than-expected RV revenues with some contribution from better-than-expected MH revenues.

For 2010 our core community-based rental income grew 2.4%, and our core RV resort income grew 3.3%, driven by a 4.4% increase in our annual revenue stream. It is always a good year when you do better in your core activities than you expected, and we are proud of our results.

Moving on to 2011 guidance, we are affirming our 2011 guidance range of $3.75 to $3.95 FFO per share. At the midpoint of our guidance, our core NOI growth before property management is expected to be between 2.5% and 3%.

Our final 2010 results for the 2011 core group include $259.3 million in community-based rental income. We expect to do almost $265 million in this category in 2011 with no assumed change in occupancy for 2.1% growth. Rent increases, as already noticed, reflect this rate change.

We achieved a little over $129 million in resort-based rental income in 2011 from our 2011 core group and expect a 1% growth rate this year. We expect 2011 core annual revenue to grow almost 3% to almost $82.5 million, and we include a modest occupancy gain inside that projection.

Our 2011 core seasonal and transient revenues came in at $494.5 million, and we expect $48 million in 2011. First-quarter core seasonal revenue are expected to be around $11.8 million compared to $12.6 million last year and represent almost 58% of the full-year seasonal revenue number. Currently seasonal reservations are running about 5% to 7% behind last year's pace. At this time last year, we were about 2% ahead of the 2009 seasonal pace and ended up around 2%.

We also look at the entire winter season to gauge our seasonal performance, which we define as the fourth and first quarters. Last year we generated about $16.7 million in core seasonal revenues for our winter season, and we currently expect that to be about $16.2 million for this winter season.

Approximately $13 million or 48% of our core transient revenues is expected to come in the third quarter, and we generally expect transient revenues to be flat to 2010 or about $27.5 million.

Dues revenues came in almost $50 million in 2010, and we expect to be approximately flat in 2011.

Membership sales came in at $19.5 million in 2010, and we forecast $17.7 million in 2011. However, membership sales' FFO contribution came in at $6.9 million in 2010, and we forecast that contribution to be approximately $7.7 million this year. Utility and other income came in at $48.3 million for the 2011 core last year, and we expect a slight increase to $48.9 million this year. Overall we expect 2011 core property revenues to be around $512 million at the midpoint of guidance, up over 1% from $506 million in 2010.

Core property expenses before property management are expected to be approximately $228 million in 2011, down from $230 million in 2010. The primary driver of the reduction is the decline in membership sales expense of approximately $2.5 million. Outside of the sales expense, we currently see limited overall expense growth in 2011 as increases in utility insurance and property taxes are offset by expected savings in controllable expenses.

In sum, core property operating expenses before property management for the 2011 core group in 2010 was $276.3 million and is projected to grow almost 3% to $284 million at the midpoint of our range.

We assume no contribution from non-core properties in 2011. Moving on to property management and corporate G&A, we anticipate we will have around $33.5 million in property management and $24 million in corporate G&A costs for a total of $57.5 million compared to $55.2 million in 2010. For other income and expense, which includes our sales, interest income, corporate income, corporate depreciation, rent control and JV income, we achieved approximately $9.6 million of income in 2010, and we expect this number to be approximately $10.5 million in 2011.

Interest expense is expected to be approximately $84 million this year as we put our cash balances to work. Our preferred distribution continues to be $16 million. We expect our average debt balance to be around $1.4 billion. We make no assumption on the use of our free cash flow on our earnings model.

Overall funds from operations was approximately $123 million in 2010 and is projected to be $137 million or so in 2011. Our share count is expected to average 35.7 million shares in 2011. Therefore, at our midpoint, our FFO per share is $3.85.

For the first quarter of 2011, we expect FFO per share to be between $1.06 and $1.16. We expect core NOI before property management to be approximately $76.5 million, which is in line with the first quarter of 2010 for the 2011 core grouping. Core revenue growth is expected to be flat to up 1% or around $132 million with core MH up 2.3% to almost $66 million and core RVs slightly positive to almost $37 million. Annuals are expected to grow over 4% to over $20 million.

Please keep in mind the percentage contribution from annuals increases throughout the year.

Dues are expected to be around flat at $12 million. Membership sales are expected around $4 million, down from almost $5 million last year. Last year still had our old-line traditional products in the mix.

Utility and other income is expected to be around $13 million, slightly higher than last year. Core expenses are expected to be up around 1% to approximately $55.5 million. Property management and corporate G&A are expected to be around $14.8 million compared to $14.4 million in 2010. Other income and expense around $3.5 million compared to $3.3 million the prior year. And interest expense declines from $23.8 million to $21.4 million. Our preferred payments remained at $4 million. FFO at the midpoint of our guidance is, therefore, $39.5 million.

A few comments on financial flexibility. We have $52 million of debt maturing in 2011 and have more than sufficient cash on our balance sheet to pay off the debt. We have no debt maturing in 2012 and have approximately $105 million of debt maturing in 2013. We expect to generate sufficient free cash flow over the next few years to repay the 2013 maturities.

The financing markets continue to become more borrower-friendly, life companies are substantially increasing their allocations to real estate mortgages in general, and interest in MH communities, particularly senior-oriented assets, continues to be very strong. We anticipate more lending in the RV space, but it is not as institutionally known.

The CMBS market is opening up. Fannie Mae continues to lend to MH communities with a preference for senior assets. In general, loan to values are up to 65% to 70% with coverages of 1.4 to 1.5 times. Spreads to 10-year treasuries are 150 to 200 basis points depending on the property and location.

Finally, we are in the process of renewing our line of credit. As we anticipated last year, terms are improving, and we hope to be done before our next earnings call. Currently three and four-year terms are available with spreads to LIBOR in the 200 to 250 range. Depending on leverage levels and fees, LIBOR floors are around 2%.

Now let's open it up for questions.

(Operator Instructions). Eric Wolfe, Citigroup.

On prior calls you have talked about cap rates for age-restricted assets kind of being in the 5% range. Just given your expectation for about 3% core NOI growth this year, do you think now is a good time to sell, and are you considering selling any assets?

I would say our view with respect to portfolio management has been long-term in nature. The one thing you discover in this industry is accumulating high quality assets is a difficult endeavor, and it is generally done for opportunistic acquisitions. We anticipated, frankly, to be a net acquirer as a result of the credit crisis and the economic issues that are out there. Frankly, we have kind of seen the reverse as you noted that even though there are some distressed situations, there is not distressed pricing.

Would we anticipate selling? I mean I think we would have to really take a long look as to whether -- what that does to our portfolio on the long-term. I think we want to grow our portfolio over time, but we do notice the cap rate compression that you discussed.

And just in terms of the use of proceeds, where would you think that would go? Is there any potential to prepay some of the mortgages that are a little bit further out, and have you had any discussions with your lenders about that?

The feasance costs given the yield curve right now are onerous, and we have looked out in the future. We are really covered for 2011. At the earliest, you're talking about the second half of 2013. And whereas in the past we have been willing to do that when we thought we could get term and rate, right now the economics of the seasons are just working against you.

And last question, your recurring CapEx has been running around [$230] a site this year, up above the [$160] a site you did last year. Why has that been running higher, and what is a good run-rate to assume going forward?

Part of the increase has to do with some wastewater facility plants that we have been working on. We spent a particular amount of money at one particular property over the last couple of years. I would say for 2011 the CapEx number is probably a good number for 2010. I would say inside those CapEx numbers are projects that we expect once we are past them that that run-rate would not continue forever. But, in the near term, we have some infrastructure things that we are in the process of working on.

Andrew McCulloch, Green Street Advisors.

This is Chris Van Ens, but Andy is here with me as well. First off, on the external growth front, are you beginning to see more opportunities out there? And did you look at the Green Courte acquisition? And then secondly, maybe you could speak to all-age and RV as well given the announced transactions in those spaces?

Sure. I mean I would say yes, we are seeing more transactional activity. As I said earlier, I think some of the reason for the transactional activity is some type or kind of distress on the part of the existing owner that has not translated, frankly, into distressed pricing with respect to the assets. The portfolio you mentioned with respect to Green Courte that portfolio has been well-known by us over the years. I think we have looked at it a number of times.

I would say that I think the transaction relates to some distress on the part of the operator with respect to some other real estate investment that they had. I think Green Courte did a good transaction from their perspective trying to build portfolio. I'm not sure that ELS would have been -- in fact, ELS would not have been as aggressive given our existing presence in Florida and given the kind of sea quality locations. You are talking about kind of Central Florida. Not bad assets, but they would not be something we would have pursued aggressively and did not pursue it aggressively.

With respect to some of the other transactions that are out there, there is the pending transaction up in Michigan. Frankly, we decided to get out of Michigan back in the late 90s, early 2000s, so I really don't have much of a good feel for what is going on in Michigan. But from their perspective, they already are in Michigan. So taking a larger presence in Michigan may not be a strategic bad idea. I think, by and large, the assets look to be in pretty good quality shape.

With respect to that RV space, we are not seeing much in terms of transactional activity. Cap rates across the board on the MH space are getting tighter even in the all-age. I think there is some liquidity and some financing that is now being provided to all age operators that's going to find its way through into pricing I think, but we are just not seeing much on the RV space. I'm not sure if that answers it, but that is kind of what we are seeing.

Okay. I know that helps. Switching topics a little bit, can you give us an update on the rental program, and then have your thoughts changed at all on that program?

Yes, I mean our thoughts on the rental program are, it is what we need to do in the current environment. I would think our view is that is something we would rather not own the homes. We would rather own just the land and have our customers own the homes. But I still see in today's environment a very cost conscious retiree/consumer out there who at margin would rather rent than own, and if he was going to own, he would rather buy used than new. We really have not seen any significant shift in that underlying characteristic, and we are seeing that across-the-board, frankly, with respect to the credit quality of the customers. We deal with customers from a kind of mid-600s all the way up through the high 700s FICO score, and even those customers in the high 700s have opted to buy used or resale homes within our communities or rent at the margin. And I don't know when that turns, but right now we are doing a very good job executing our rental program given the market characteristic that exists.

Paul Adornato, BMO Capital Markets.

I was wondering if you could reconcile two numbers that you mentioned. Mike, you talked about membership revenues decreasing from $19.5 million to $17.7 million in 2011, yet the FFO contribution was going to increase from $6.9 million to $7.7 million. Could you just tell us what is going on there?

Sure. We shut down the high cost front-line sales, I believe, it was March or June of last year in getting rid of those sales is what is improving the margins and taking the revenue down.

Okay. Great. To follow up on the transaction activity, what is your feeling overall on all-age communities these days given that it seems like that customers seem to be returning to that space?

You know, our view is we are in the lifestyle segment, not in the all-age segment, although we do have some exposure to the all-age property type. From a fundamental kind of standpoint, one could make an argument that there is a little bit of a tailwind behind the backs of an all-age operator, I would say. You have got the apartment guys getting both occupancy, and now it looks like they are going to start getting rate. Traditionally that has been a good environment for all-age operators. I think the big issue for all-age communities out there, frankly, is the absence or lack of chattel lending or lending on the homes. And I think right now in that sector the guys with the capital are dictating the terms, and that is a little bit of an issue that the sector has to kind of grapple with.

And finally, a couple of years ago, you went through the portfolio's landholdings, and we are in the process of rationalizing some of those holdings just about the same time that the single-family crisis hit. And so I was wondering if now the timing on the environment was amenable to going through a similar exercise either with respect to monetizing existing land or perhaps even thinking about expansion or development on your part?

With respect to monetizing the land, I mean the single-family home marketplace is still punk. I mean we are not really seeing any resurgence in single-family home development or, frankly, interest in doing that. So not really seeing an ability to monetize through that type of sale.

With respect to development, I think we have commented many times before we think we have opportunities with respect to our existing portfolio in terms of increasing the utilization both on TT footprint and in our manufactured home communities that are 90% occupied before we would significantly begin any type of expansion or development.

(Operator Instructions). Todd Stender, Wells Fargo Securities.

If you have already gone over this, I apologize. But your core NOI guidance for 2011 edged down by about 25 basis points at the midpoint. Where is that shaking out? What do you attribute that to?

That is about $0.5 million, and I think it is a subtle shift in the expenses. It is not really intended to send a different message about what we think about 2011.

Okay. Thanks. And how many new homes and also how many new homes are you budgeted to purchase in 2011 to ultimately rent out?

Approximately 250 order of magnitude, and that is basically to assume flat occupancy. That's the obsolescence factor inside the portfolio.

Okay. And you went over the loan to values and the coverage in spreads. Was that for Fannie Mae? Are life insurance companies about flowing within those guidelines?

They are all converging now. Keep in mind, we are not active in the market given our debt profile. So those are general terms that we are hearing in the marketplace as opposed to specific deals.

Sure. Okay. And price points, just to give us an indication of where the new homes are selling at and where the new and the used homes are selling at?

We are really not selling much in the way of new homes other than park models, and those are in the -- the new ones are in the $35,000, $45,000 range give or take. The used homes can range anywhere from $20,000 to $1,000. I would say order of magnitude you are talking $10,000 to $15,000 per used home.

Gaurav Mehta, FBR Capital Markets.

A quick question in regards to your RV business. I was just wondering if you could provide some update on your discussion with the RV dealers and the insurance companies on cross-selling your products? On your last call, you mentioned that you are expecting some success on that front.

Yes, I mean I think those conversations are ongoing. I think you are dealing with some fairly large organizations, so it goes fairly slow. I cannot say we have made significant progress since our last call, frankly. It has been a little bit disappointing. I would say within the RV dealer network, just from a backdrop, you have seen RV sales and commensurately RV shipments fall from 350,000 to 400,000 back in the heyday down to, call it, 180,000 to 200,000 units. So they are focused on getting that last transaction done or that next transaction done, and really are not focused on complicating that process at this stage of the game by introducing a different process to that RV sale. So we are struggling at the level of an RV dealership to introduce our products to the customer.

And with respect to the insurance company discussion, those are ongoing and just happening at a pace that is a little frustrating from a timing standpoint.

Okay. That is all I had. Thank you.

(Operator Instructions). Sir, we have no additional questions at this time.

All right. Well, thank you all for joining us today. If you have any follow-up questions, feel free to call Mr. Berman, and we look forward to updating you after our first quarter. Take care, everyone.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect, and have a great day.