Equity LifeStyle Properties Inc (ELS) 2011 Q1 法說會逐字稿

Good day, everyone, and thank you for joining us to discuss Equity LifeStyle Properties' first-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 conference is being recorded for replay purposes. Certain matters discussed during this 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 uncertainty. 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 am Tom Heneghan, the Chief Executive Officer of Equity LifeStyle Properties. And I am going to make a few remarks, and then I'm going to turn it over to Mike Berman, our Chief Financial Officer, and he will take you through the numbers in more detail. Then we will 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, the positive demographic trends of our baby boomers and retirees and the flexibility of our housing and lifestyle offerings and the desire for predictable and stable cash flow.

The fundamentals of our business continue to operate within our guidance expectations. We expect to grow both core revenues and net operating income in 2011, and I would like to take some time to discuss a few items we are focused on.

We see our MH business as stable. Both our rate and our occupancy growth was slightly better than expected. The key issue for this business is the capital investment in our rental program. As we have discussed, the rental program was initiated as a result of the difficult housing market and the inability to sell new homes. We do not see this ending in the near term.

We have executed the rental program well, and we continue to see strong demand for rentals. This has resulted in an increased investment in homes. To address the capital requirement, we are focused on two initiatives -- reducing the cost of the home and attracting third-party capital.

We have made good progress in reducing the home costs. We are currently testing a 750-square-foot two-bedroom, two-bath home at two locations. The all-in cost is approximately $30,000, and the home is designed to add components either at installation or at a later date that increase the square footage by approximately 300 square feet for an additional $5,000.

We are also in discussions with capital providers and manufacturers on rental home ownership structures that would attract capital.

Overall, our first-quarter results for our RV business reflect strong growth in annual revenue, offset by lower seasonal and transient revenue. We expect the annual business to remain positive throughout the year. The keys for the remainder of 2011 are our transient revenues from the summer season properties impacting the second and third quarters and our renewals for next year's winter season on the fourth quarter.

Another area of focus for us has been better utilization of the Thousand Trails footprint. In addition to promoting annual site usage, beginning last year, we transitioned 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.

We believe we have successfully made this transition and are now focused on increasing awareness of our new products. To that end, we have recently reached an agreement with GEICO Insurance where our properties and our products will be marketed to their prospective customers and hope to add additional distribution channels in the future.

Now Mike will walk you through some numbers.

Thanks, Tom. First, we are reaffirming our 2011 guidance at $3.75 to $3.95 FFO per share, with a midpoint of $3.85. At the midpoint, we expect to be around $137 million in funds from operations. Although our first quarter came in a bit better than anticipated, we are comfortable with our forecast and our midpoint.

Moving on to the first quarter, core community base rent came in at $66.2 million, a 2.7% revenue growth rate, and we expect to maintain this growth rate for the remainder of the year. This better-than-anticipated result came from an occupancy increase of almost 70 sites compared to year-end and an average increase of 170 sites over the first quarter of 2010. As a result, occupancy gains contributed about 40 to 45 basis points to our growth rate. Our rate came in slightly better than anticipated as well. We continue to show an ability to gain occupancy through our new home rental program.

Core annual RV revenues came in as expected at $20.3 million, a growth rate of 4.5%. Core seasonal revenues came in at $11.6 million and core transient revenues came in at $4.5 million. We expected the total of these two items to be around $16.6 million back in January.

For the year, we expect core RV revenues to show almost a 1% gain to $130.2 million. Annuals represent 66% of the remaining RV revenues compared to only [56%] in the first quarter. We continue to expect annual revenues to grow 3.5% to 4% or $62.6 million for the remainder of the year.

We expect $31.3 million from core seasonal and transient for the remainder of the year, a decline of approximately 1.5% to 2%. We currently expect our upcoming summer season to be flat to last year, with most of the forecasted decline coming in the fourth quarter.

Membership dues came in almost $12 million. We sold approximately 1000 new low-cost membership products in the quarter. Please note we started this program late last spring and sold about 5500 in 2010. We expect to sell approximately 7500 this year.

First-quarter core property operating revenues were over $131 million, essentially flat to last year. First-quarter core property operating expenses before property management came in at $54.3 million, lower than $55.5 million in our January guidance.

Overall, core NOI before property management was approximately $77 million, or an increase of 1% quarter over quarter. Our January guidance in this category was $76.5 million.

We did have some overhead savings relative to expectations, and this was somewhat offset by lower-than-expected miscellaneous income items.

Moving on to second-quarter guidance and some comments on the rest of the year, we expect the upcoming second quarter at the midpoint of our range to be about $28.5 million in FFO, with core net operating income before property management expense to be around $67 million, or growth of 3.6% at the midpoint of guidance. This assumes a core property operating revenue growth rate of 1.6% or approximately $125.5 million at the midpoint.

Overhead is expected to be around $14.4 million, and all other income statement items, excluding financing costs, add to about $1.7 million. Financing costs are expected to be $25.5 million.

As a very rough guide for the remainder of the year, we should be in the area of $37 million FFO for the third quarter and in the area of $31 million FFO for the fourth quarter.

We assume no change in our MH occupancy from the end of the first quarter going forward, and expect to show core community base rent revenues of $200 million, which is a growth of 2.7% for the remainder of the year, consistent with our first-quarter results.

In our RV business, we expect to continue to have success with our annual program. In the second and third quarters, we have $19.5 million of transient revenue forecasted, with about two thirds of that expected in the third quarter. Our second-quarter transient reservation pace is currently down about 5% to last year, although Memorial Day is slightly ahead.

For the rest of the year, we anticipate core RV revenues of almost $94 million compared to $92.3 million in the prior year. Potential upside to this can come from our new marketing relationships.

The total core revenue contribution from membership dues and sales for the remainder of the year is approximately $52 million, and the total core property revenues for the remainder of the year are expected to be approximately $382 million and $513 million for the full year.

Our core property operating expenses excluding property management are expected to be around $173 million for the rest of the year compared to around $172 million in our prior guidance. For the last three quarters last year, our core property operating expenses were around $175 million.

For the full year, we expect around $227.5 million in core property operating expenses. At the midpoint of guidance, full-year core property NOI excluding property management is expected to be up 3% to 3.5%. Overhead is expected to be $42.5 million for the rest of the year and $56.5 million for the full year.

Other income and expense items are expected to be $6.7 million for the rest of the year and around $10 million for the full year. Financing costs are expected to be $75.5 million for the rest of the year and $101 million for the full year. The finances include interest expense and our preferred stock dividend.

Our current cash balance is over $80 million, and we have approximately $50 million in debt to pay off by year-end. We have no debt maturing in 2012. We are currently in the bank market with our line of credit and expect to close on a $300 million facility by mid-May. We think demand for our credit would be higher.

Generally speaking, we have received significant commitments from our lead banks and hope to add a few new players. Terms have improved significantly from borrowers over the past three months.

Financing for secured term loans is improving. The CMBS market continues to open up. Fannie Mae continues to lend to MH communities and does have a preference for senior assets. In general, loan-to-values are 65% to 70%, with coverages of 1.4 to 1.5 times. Spreads to 10-year treasuries are 150 to 250 basis points, depending on the properties.

Life companies are participating on similar terms. MH continues to be more in demand than RV, although high-quality RV assets continue to be attractive to lenders. And now, I would like to open it up for questions.

(Operator Instructions) David Toti, FBR.

Quick question. Mike, did you mention on the expanded line of credit what the primary reason was for expanding from $100 million to $300 million? Is it an increasing opportunity set in the acquisition world, or is it some of the home financing driving that?

You know, we've had a large line of credit for many years. We only took it down to a small number because we had a short-term renewal and didn't want to pay the fee. So the number that we have now really reflects our long-term balance. It is not really intended to be a comment on the acquisition market or anything else.

Okay. And then there has been some positive reports out of some of the big RV manufacturers. Do you think that is going to translate to any improvement in the business anytime soon? Or I guess what is your estimation of the lag time for a real improvement there to show up in your numbers?

I would say what we are seeing, and I think we are seeing it in just about every segment of our business, is more activity, but value is probably the most prominent thing in their decision-making. I think with respect to the RV manufacturers, volume has picked up a little bit. I mean, it is positive. It is going in a northerly direction.

But the average price point of the units that are being sold is off, order of magnitude, 25%, 30% from prior years. And the shift in units is away from motorized big bus-type units into towable units.

So you are seeing a value-conscious customer in the RV. We think that bodes well for our business, given we offer an extended stay opportunity, we have low price points with our membership products, and we have locations that are within easy drives from major metropolitan areas. So I think we are playing well to that on the RV side, and I think we feel pretty good about the way we are positioned.

And on the MH side, I think we've also addressed some of that value consciousness with respect to what we are doing on the rentals.

Great. And then my last question -- is there any way to provide more detail or a sort of deeper update on the capital provider opportunity, the third-party capital and the manufactured discussions that you are having relative to the rental homes?

I would say from a macro perspective, the manufactured home community business has taken a long walk through the desert, and essentially the community owners have been the capital providers of last resort. I think that needs to change and I think everybody in the industry would agree with that.

There is a lot of vacancy in the marketplace that could be tapped to the extent capital could come into the business. It is hard to do it all on your own balance sheet, and I think it is only the big buys who can do that. So the smaller players are having significant difficulty kind of tapping into that rental opportunity that may exist in their markets.

And at the same time, you have manufacturers that have taken shipments from 10 years, 12 years ago, from 300 plus thousand units down to 50,000 units. And you've got institutional players that have come into that side of the business as a result of some of the restructuring and the consolidation. And those institutional capital providers are pretty sophisticated and pretty smart, and it doesn't take a rocket scientist to say, if I can get 50,000 shipments back up to 100,000 or 150,000 shipments, I am going to be a happy, happy guy.

So the manufacturers have an incentive. The community owners have an incentive. I'm not really sure how that incentive works out into an actual structure. I believe some of it will have to be an allocation of the cash flow coming off of that rental stream provide an incentive for capital to come into the business.

When you look at the amount of capital that a rental can create -- just order of magnitude, use some of our numbers, right? $30,000 to $35,000 investment generates top-line new of $8000 to $10,000. That's a 3, 3.5 year payback on a quick and dirty math. There is enough cash flow there to treat that capital with some respect. And I think that is going to happen. I'm not really sure how that works out.

We're having good conversations with the manufacturers and we're having some conversations with capital providers, but I think it's a little too early to say what that structure evolves into. But we are going to try and figure it out.

Great. Thanks for the detail.

Jana Galan, Bank of America Merrill Lynch.

Good morning. I was wondering if you could give some more color about the new marketing relationships -- what kind of traction have you seen with the GEICO partnership, what are their distribution channels? And you said it could kind of provide some upside. I was wondering if you could give a little bit more -- or quantify that a bit.

The GEICO relationship has just been finalized within the last few weeks. I don't think it has been initiated. I think we expect to launch in May -- June, I think (multiple speakers).

I see.

But I think that is -- one, that has been a long time in coming. If you've listened to our previous conference calls, we've talked about a desire for us to take our products and embed them or create relationships with big distribution channels. We started having conversations with GEICO more than a year ago, and finally got something inked in the last few weeks here. And we're having conversations with other like providers of a RV experience to their customer base.

We are optimistic that we are actually going to get some pickup on that, but it's too early to say just how quickly or how well our products would get integrated into that stream and how quickly we could convert those prospects into our customers.

But I think it is a sign of a direction we are heading. I think we've kind of got over some of the issues that existed with our legacy product, the high-cost product, and how some of our potential customer relationships avoided having a conversation with us because of those products. I think that is gone. So the conversations that we are having with some large sources of prospective customers are good, and we expect to kind of keep pushing in that direction.

Great. Thank you very much.

Eric Wolfe, Citigroup.

Maybe I missed this in your answer to David's question, but why are you comfortable paying the higher fee on the line of credit now versus I guess just six months ago? Obviously, that expanded capacity is going to probably be used for something. I'm just wondering what you think you are going to be using it for.

I may not use it for anything, Eric.

Our kind of base point was to add balance sheet flexibility. And I think we've created a balance sheet that has got a significant amount of flexibility. We have often talked about opportunities in the marketplace. Frankly, more transactions are occurring, both the all-age and in the age-qualified sector. Haven't seen much happen in the RV space.

There is a lot of properties that had structural issues with respect to debt. We think that issue hasn't really been fully solved, and we hope to be in a position to take advantage of an opportunity to the extent it arises.

But as Michael said, the reality of why we increased our line is the reality of the way we've run our balance sheet since we've been a public company, which is to try and maintain financial flexibility and to be in a position to capitalize on opportunity to the extent it was there. But it's not an indication of us seeing something in the immediate future.

And has the pricing become at all more attractive from what you were seeing last year, just in some of the opportunities that are coming around, or is it still a little bit more of the same, where you are just not seeing the distress that you anticipated?

The deal we did, the mezz line, is an inkling of an issue that we think is out there -- that guys got a little bit overleveraged or they had a mezz position that today isn't going to get refinanced like it did in the prior years. We think that's an indication of what may be coming down the pike on some of these -- good properties, just got a little ahead of themselves with respect to leverage compared to today's underwriting.

That issue needs a solution, and I think we would explore similar opportunities like the one we saw for the Lakeland assets. It is a large asset that is mostly park modeled up. It's got homes on the sites for the most part. And it is just a nice cash-flowing asset on a major lake in Wisconsin.

Hopefully, we could see some more opportunities like that, not only on a mezz position, but also on an acquisition opportunity. But it's not like we are seeing those things flying at us left and right.

Right. Tom, it sounds like from your comments earlier that it seems like you are thinking about potentially putting a little bit more capital work in your rental program. I'm just wondering how you're thinking about the return and what sort of average rent, resale prices -- just sort of any detail about what sort of return you are looking for and how you are getting there.

I'll give you the math on the rental program. Like I just said, it is $8,000 to $10,000 revenue with a $30,000 to $35,000 investment. That is kind of the numbers we are working with. And at some point, there is a residual value in that rental structure. You spend $35,000, you create this cash flow stream, and at some point, you're going to be able to sell that unit at a price in the future.

And the one thing I would point to is there is quite an active market on existing housing stock. It is not that customers won't be buyers; it is just they are very, very price-sensitive and very value conscious on what they will buy. So as we've discussed before on the call, a $10,000, $15,000, $20,000 used home for 1100, 1200 square feet is much more attractive than what we can deliver on a new basis in today's market.

But at some point, we expect to be able to liquidate our rental stock at some price in the future as we, in essence, depreciate that cost down through the rental structure. I'm not sure that answers your question.

That's helpful. I'm just wondering, I guess, if you think five years out, I mean, what would that $30,000 home you think be worth five years or 10 years from now, just to sort of think about how much is a return on capital versus just a return of capital?

I would say, order of magnitude, 50% depreciation in five years. So the -- $15,000 in valuation, and maybe so it goes from $30,000 to $15,000. The funny thing about these homes, and I think you've seen it throughout the industry, is there is a value for occupancy. Meaning we've got 20, 30, sometimes even older homes in our properties that still trade for $15,000 because they are in good shape and in a good location. And they were probably built and installed for somewhere around what they are selling for today.

So there is a point at which depreciation stops and the value of the housing unit kind of sustains itself. So there is a point at which the depreciation kind of just ceases.

Got you. That's helpful. Thank you.

Andrew McCulloch, Green Street Advisors.

This is actually Chris Van Ens on for Andy today. Along the lines of the rental home program, a couple more questions. How big do you expect that program to ultimately be?

I think the answer to that question is really another question -- how long do we think the current environment in the single-family home situation is going to last, and what are the issues that are going to cause that thing to kind of loosen up and return to some -- maybe a different normal, but at least some sense of normalcy?

I have not been a fan of the rental program because it changes the dynamic of the business that we know and love, where we own the land and somebody owns the structure on it. I think our desire to get some other capital involved in a rental situation is indicative of that desire to focus on really being a landowner as opposed to being a homeowner.

But that said, I will also have to say that it has been much better than what I would have anticipated in terms of the operational drag, the ability to rent the homes, the wear and tear on the homes, the value of the homes over time -- much better than what I would have anticipated.

And I think in some respects, there could be a place for a component of rental over the long term. It gets to a customer that is very focused on maintaining or preserving capital, or who may not have access to capital, but otherwise is a good customer in our communities.

That helps. Secondly, somewhat along those lines, what are the financing terms for a prospective homebuyer for a used rental home? And would you guys think about financing that off your balance sheet if it came to that?

Most of the stuff that is happening on the used is cash, frankly. There is not a robust -- unless you want to be seller financing, which some of the guys in the industry do that, I don't think -- I think we would view a loan as a rental with another name, and perhaps less control over the situation of the house and the quality of the customer in that house.

So we certainly have made loans. We have a very small book -- call it $8 million to $10 million. I don't expect us to do view that as something we want to do. It just puts us further away from our collateral, the asset, and in less control of its future.

And I think you get adverse selection in the loan flow, meaning if there is value in the home, it is going to be sold to somebody else, and if it is not, you are going to get it back to you and you are not going to really like what happens when you get it back to you.

Okay. Switching gears a little bit, can you be a little bit more specific on what kind of pricing you are actually being quoted by the banks for the line renewal?

I would rather wait until we were done negotiating, Chris. We are in the middle of finishing that up.

Okay. Thanks, guys. That's all for me.

(Operator Instructions) Paul Adornato, BMO Capital Markets.

Just back to the home rental program. Has the basic customer changed in the business? That is, I guess the conventional or the traditional buyer was someone who was selling their home in order to buy a retirement home and didn't need financing. And so what is the dynamic? Is it someone that is just hanging on to their pre-retirement home and wants financing? I don't -- I guess it is not clear to me why third-party financing is very critical to the business.

It is just a use of capital issue. But I would say with respect to the first part of your question, customers, we run an application process that screens potential customers.

And I would say the one thing that you will notice -- but I wouldn't call it a significant change, but it is noticeable -- is that there are more customers with some type of history in their credit profile, meaning a foreclosure or a short sale or something with respect to their previous housing arrangement.

But as it relates to FICO and non-single-family home-related credit issues, we are not seeing any change with respect to that. We are seeing a psychological change, just in terms of people wanting to preserve their capital and not want to put much of it into a single-family home situation. They would rather have it in the bank or the stock market -- I'm not really sure where else. But they're certainly not excited about putting large amounts of capital into a housing situation. That is what we are seeing at the level of the property.

Okay. With respect to the usage fee, the one-time usage fee, you now have the lower price points in place. Are you happy with the price point, or do you anticipate more fine tuning? Is there an opportunity to provide a premium product again, or is the environment still too weak for that?

We actually do have premium-priced product. So what we've essentially done is create a pricing tier within our product menu. It used to cost as much to get in the front door as it did to enjoy more benefits at a later date. We've now created a process where it is very easy to become a member, but that membership doesn't have all the bells and whistles of other products in our menu that offer a wider variety of choices and opportunities. And we still will provide those and still do provide those products to the membership base through what we call an upgrade program.

That has essentially stayed pretty robust, even as we've kind of refocused what we call the frontline sale. So I don't want you to get the impression that we don't have other products that may be interesting to our existing membership base at an additional price. That is still going on, and it's retaining its characteristic quite well.

What we are trying to do is open up the funnel on the front end and get more customers involved with our properties. And once we get them involved with our properties, we have a very good chance of creating a long-term relationship with them. The one thing I will say about the low-cost products that we've introduced, high degree of affinity with respect to that, meaning a lot of referrals, a lot of friends and family programs, a lot of past customers coming back, saying, boy, I would want to be a member.

And what we see with that is it is a positive, positive result. And essentially, our goal is spread the word. We've got great locations, we've got a great experience, we've got a great lifestyle; people should know about this.

Okay, great. Thanks very much.

Haendel St. Juste, KBW.

I guess that's me. Good morning, guys. Just a couple quick ones here. Would you -- just going back to the rental program, what submarkets would you characterize today as the most attractive for expansion of your rental program? And as you look forward, could we see you introduce the use of incentives to assist in this effort to build up the rental program?

We actually do use some amount of incentives in the existing rental program. I think in some markets, not all markets, we would offer a month concession or a $99 move-in type of concession.

With respect to where, I would say high-cost markets -- it would be obvious. So, California, but I think we've pretty much tapped most of what exists in California. Florida and Arizona offer us opportunities, where there is a lot of vacancy and a lot of demand.

It is just at a much more sensitive price point than what you would see in, say, San Jose, California. You are talking in the Florida, Arizona marketplaces, I would say the sweet spot is somewhere between $600 and $900 a month, and we are trying to bring a product in line with where we see that demand.

Okay, thanks. One more, going back to your note investments. Can you, I guess, give us a sense of where in the capital stack you stand? And also, I'm assuming this is a line of business we could see you get more involved with, assuming there are sufficiently enough attractive opportunities out there for you.

It's a mezzanine investment, so it is not directly secured by the property. And we would hope to do more. We like the investment and we think there is a need for capital like this in the marketplace.

And it is about at the -- I think it is up to 85% value, where we are sitting.

Okay. Thank you.

At this time, I show that we have no questions in queue. I would like to turn the call back over to Mr. Tom Heneghan, our CEO, for closing remarks.

Thank you for your time today. As always, if you have follow-up questions, Michael Berman is available. And we look forward to updating you on our second quarter. Take care, everyone.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.