Equity LifeStyle Properties Inc (ELS) 2011 Q2 法說會逐字稿

Good day, everyone, and thank you all for joining us to discuss Equity Lifestyle Properties Second-Quarter 2011 results. Our featured speakers today are Mr. Tom Heneghan, our CEO, and Mr. 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 may contain forward-looking statements, in the meanings of the Federal Securities laws. All 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 Mr. Tom Heneghan, our CEO. Please proceed.

Thank you, everyone, for joining us today. Good morning, I'm Tom Heneghan, Chief Executive Officer of Equity Lifestyle Properties.

Our core business continues to operate in line with our expectations. We expect to grow both core revenues and net operating income in 2011. Given the size of the acquisition we announced in June of this year, 76 properties for over $1.4 billion, and all of the related activity, it is comforting to have such a strong core platform and the Management talent necessary to successfully operate. With respect to the announced acquisition, we are also pleased with the progress we have made to date, having closed on 35 properties on July 1, 2011. We currently expect to close on an additional 20-plus assets on August 1, 2011, and if all goes well, the remainder should be completed by October 1, 2011.

We have provided a supplemental package available on our website under About ELS, Investor Information, Quarterly Supplemental Packages, which includes significant information about the impact the acquisition could have on our results. Since our original guidance for 2011 is no longer relevant in light of the acquisition, we were essentially faced with a choice of either eliminating guidance entirely or providing additional information including our best guess as to the closing date for the remaining properties. We opted for the latter, but please appreciate that the supplemental information includes some significant assumptions regarding the timing of when we will close on the remaining properties.

Even if we are off by a few months in the actual timing of the closings, the impact on our results for 2011 could differ materially from the information contained in the supplement. As indicated though, we are pleased with our progress to date and things are progressing well with respect to the remaining closings, but we think users of the supplement should appreciate the potential variability involved in using this information.

In addition, the supplement also provides an update on the potential impact of the acquisition on our results, assuming we acquired the portfolio as of the beginning of this year. We believe this information will be useful in evaluating our Company's prospects for 2012 and beyond. We are excited about the acquisition and what it does for our Company, and have been gratified by the favorable response from investors and analysts. Our Company has always been a story about stable and predictable cash flow, and our performance over the years has solidified the belief in this characteristic. We love annuity-type cash flows.

Our philosophy has been to focus on a high quality assets and high barrier-to-entry markets near major metropolitan areas and vacation or retirement destinations. The announced acquisition is every bit consistent with who we are and what we do. We believe the future of ELS will continue to demonstrate our trademark performance. Mike Berman, our CFO, will now take you through some of our numbers in more detail.

Thanks, Tom. As mentioned, we have provided some additional supplemental information, including our guidance models, financial and other information concerning our recent portfolio acquisition, a break out of the components of our RV revenues and a break out of our home rental activities. Although our forecasted materials appear to have a high level of precision, we want to remind everyone that forecasting is very much an art.

These are points on a range of possible outcomes and reflect our best current estimate of the most likely outcome. In particular, the acquisition forecast for the remainder of the year is based on numbers provided by the seller which we have reviewed but not directly prepared. We have closed on 35 of the 76 acquisition properties, with the remainder expected to be closed by October 1.

With respect to the second quarter, old ELS had a solid quarter operationally. We expected to be at $28.5 million of FFO and are coming in at almost $29.5 million. Core MH revenues were up 2.8%, with 2.2% coming from rate and 60 basis points coming from occupancy. We gained almost 60 sites this quarter and are up 125 sites year-to-date. We rented about 140 new homes in the second quarter and about 210 new homes year-to-date. Core RV revenues were up 2.3%, with annuals contributing a growth rate of 4.2%, seasonals were positive this quarter at over 2%, but the transients were down about 3.5%.

Dues were off as greater-than-forecasted attrition offset an increase in low cost sales volumes. We sold almost 2,500 low cost membership products in the second quarter compared to 1,400 sold in last year's second quarter. So far this year, we have sold almost 3,500 low cost products compared to about 4,500 for all of last year.

Although right-to-use contract revenues were down, this reduction is primarily due to a $1 million revenue decline from the high cost membership sales we stopped doing in the second quarter of last year. This quarter's results would otherwise show almost a 4% increase in this line item. Overall, core revenues and core property operations, net operating income, came in as expected.

Remaining items in the second quarter, such as some modest savings in property management, better than expected used home sales profit, and some miscellaneous income items, drove the $900,000 increase in funds from operations over our previous guidance.

Moving on to the second half of the year, for old ELS, we see around $67 million of FFO for the second half compared to previous guidance of $68 million. The changes are generally due to an increase in interest expense from a larger-than-anticipated line of credit, a higher forecast on utility expense and the pushing forward of some expense items into the second half. Otherwise, it's steady as she goes from our perspective. The biggest risk to our second-half core forecast are transient revenues, the most difficult line item to forecast.

Our 2011 full year guidance model is provided on Page 7 of the supplement. Page 8 lays out the details behind the full year forecast of the core. We assume core property NOI contribution of almost $285 million, or over 3% growth for the year, and second-half growth of over 4%. Core revenue growth is the primary driver of the second-half forecast. Expenses were down around 1% in the first half and are forecasted to be approximately flat in the second half. Core revenue growth is over 2% in the second half compared to less than 1% in the first half.

There are greater contributions of core MH revenues and core RV annual revenues as a percent of total revenues in the second half, and the right-to-use contract contribution goes from a drag in the first half to a contributor in the second half. We provide FFO guidance assumptions to the third and fourth quarters on Pages 9 -12 of the supplemental package. These forecasts are particularly dependent on the timing of closings of the acquisition properties as well as the performance of the acquisition properties once closed. The schedule showing our best guess as to the anticipated timings of closings is included in the acquisition property table beginning on Page 17.

For 2011, our FFO per share guidance before transaction costs of approximately $21 million is $4.01, or $0.16 ahead of our previous mid point. We pick up some of this accretion in the third quarter and significantly more in the fourth quarter. Our FFO per share growth, excluding acquisition transaction costs, is over 15%, and was under 11% prior to the acquisition.

On Page 14 of the supplement, we show our FFO as if we closed on the entire acquisition portfolio on January 1 of this year. Excluding transaction costs, this as-if FFO contribution from the acquisition is approximately $59 million, which is higher than we projected during our equity offering. Our current operational outlook is consistent with our underwriting at the time of the equity offering, however, the increased FFO contribution comes from raising $250 million in our CMBS offerings at a cost of funds of 5%, compared to a prior assumption of $300 million at a rate of 5.25%.

This lower interest cost is offset by the exercise of the green shoe allotment in the equity offering, which was the source of the incremental cash. Our assumed share count was a little over $44 million and ends up around $45 million. As-if FFO of $196 million is about $4.34 per share. This is $0.49, or about 13% accretive to the old ELS $3.85 FFO per share guidance.

Moving on to 2012. Over the past several years, we have provided guidance for the forward year in our October earnings call and expect to do so again this year. Given the size of our recent acquisition and the consensus forming for 2012 estimates, we feel it is not unreasonable to assume the approximate $0.50 FFO per share accretion could be applied to the old ELS mid-point guidance of $3.85, with some anticipated growth on the old ELS numbers. Historical FFO per share growth since our IPO is 7%, and since our recapitalization in 2003 and subsequent investment in the RV and membership space, it has been 11%.

We would caution against applying a growth factor to the fourth quarter run rate or the as-if presentation, the acquisition portfolio, as we have only begun the consolidation process and, as noted, we are not only making assumptions about the timing of closings but assumptions about the operating of performance of properties we have not yet closed on.

Some comments with respect to our balance sheet. Our overall capitalization now includes approximately $2.3 billion of secured mortgage debt, as we have added $250 million in new secured debt, expect to assume approximately $520 million of additional secured debt and added $200 million of unsecured debt.

We have no remaining exposure to maturities this year and a total of $150 million maturing in 2012 and 2013 on an as-if basis. We have about $35 million of cash and short-term investments today. Our equity capitalization is now over $3 billion, and includes $200 million of preferred stock and approximately $45 million shares, assuming full conversion of all the shares issued in the portfolio acquisition.

For 2011, on an as-if basis, our EBITDA interest expense ratio would be almost 2.4 times, and was almost 2.4 times prior to the impact of the acquisition. Our cash flow after dividends and capital expenditures before the acquisition was about $56 million, before anticipated investments in rental homes of $15 million and principal amortization of $21 million. The portfolio acquisition adds about $36 million on an as-if basis, before anticipated investments in rental homes of $15 million and principal amortization of $7 million. This leaves about $30 million to $35 million after all of these adjustments, and does not include any assumption of future investments.

Our line of credit is $380 million, is undrawn, and has about a four year maturity. Finally, we believe we have multiple sources of public and private capital available to us.

And now, let's open it up for questions.

(Operator Instructions) Your first question comes from the line of Gaurav Mehta of FBR. Please proceed.

Hi, good morning. Could you talk a bit about the portfolio integration of the Hometown of your existing properties from an operations point of view?

Sure, sure. We've closed on 35 assets and as part of the deal with Hometown, we also entered into a property management agreement where Hometown will agree to continue doing property management for a period of 90 days, so that we're in a position to make sure the integration goes well and allow us the opportunity to meet and greet the Hometown people at the level of the property and the regional offices. I think things are going along swimmingly. We have been impressed by the on-site people that we've come in contact with at the property, and we've been impressed by the regional people involved in monitoring and overseeing that portfolio. So, from our perspective, things couldn't be going better for us as it relates to, 1, getting the property closed in a timely manner and, 2, just the transition from the Hometown ownership over to ELS, and we look forward to welcoming the remaining Hometown employees as the additional properties close in the next few months here.

Thank you, and second question. I was just wondering, a question on your capital structure, once you close the acquisition maybe like in 2012 or long term, what's your sort of target leverage levels?

We have not really had a specific target leverage ratio. Our philosophy has been to keep our balance sheet financially flexible, which to us means being able to do what we need to do when we need to do it. The last few years we've seen a decline in leverage that was primarily a lack of available investment opportunities, so we'll see how the future holds, but we're comfortable with our leverage as it is today.

That's helpful. And lastly, I was just wondering if there's any part of your portfolio that you'd like to sell in the future.

I would say our first goal is to get the properties under contract closed. That's our main focus, that's occupying a significant amount of our time and attention from an operational as well as, kind of, an underwriting due diligence perspective and financing perspective, so once we get the portfolio under wraps and then start to assimilate the properties, I think that's the appropriate time that we will kind of look at whether or not there's properties within the existing ELS portfolio, or the acquired portfolio, that we would look to potentially dispose of, but it's not something that's top-of-mind for us right now. One of the things we are impressed with so far with respect to the Hometown acquisition is the more exposure we get to the affordable housing segment. In today's economy, there's a lot of demand for affordable housing. It happens to be at the rental -- at the margin, but what we've seen thus far up in our tours of Michigan and the properties we've closed up there is there's significant demand for rental housing, and I think we're going to take our time and evaluate where we think that's going to take those properties.

I guess the Michigan portfolio, that's part of the acquisition. I was just wondering what's your kind of outlook for that market, given that the occupants for those particular properties is below your average occupancy level, where do you see that going?

I would say based on the communications and discussions that have happened at the level of property and above, there's just a demand right now for housing units. Literally everything that can be occupied is occupied, and to get occupancy up at the margin it would require investment of homes, and we're excited about evaluating that opportunity and executing on that opportunity if we think it's a good payback. The rental ranges for the properties up there are in the, call it $800-a-month level, which we think bodes well for putting additional homes up there.

That's all I had. Thank you.

Your next question comes from the line of Eric Wolfe of Citigroup. Please proceed.

Thanks. Just a couple questions on your rental operations. For the homes, the rental homes specifically you list on Page 6, how are you depreciating those assets and in terms of investing in new rental inventory, how do you think about the residual value of these homes after, say, 5 to 10 years?

The depreciation policies on the new homes generally reflect a long term review of the assets. We generally have been depreciating them over a 20-year period with a 40% residual life. The used homes are much faster. It's roughly 15 years down to a 0 residual. What was the second question, Eric?

It's just, thinking about more of an economic perspective, how do you actually think about your ability to sell those homes after say, like, 5 to 10 years? Is the cost allocation equivalent to what you think you could sell them for in, say like, 5 or 10-year period?

Well, again, that depends. In today's market, there really is no sales capability unless you're going to provide seller financing for the most part, or entire recourse financing, which is in some respects just rental by another name. Different people have a view on it, but there really is no serious third party financing out there that really is only looking to the chattel for its recovery, which is dampening the ability to sell homes. We've been dealing with that, as we have mentioned, many times since 2008 or so, and so there's two things we kind of look at with respect to the rental program, and it goes with respect to our depreciation policy.

A home that is occupiable or rentable in our properties sustains the ability to generate a rental revenue that's pretty impressive. Whether that home is brand new, whether that home is 5 years old or whether that home is 10 years old, the difference between what that would rent for, new versus 5 years, versus 10 years old, is essentially irrelevant. It doesn't really affect the marketing value of the rental stream coming off on that, and I think that's what you're seeing when we look at our depreciation policy, as matching the revenue coming off of that unit with the cost of that unit over some lengthy period of time. As it would relate to a liquidation value, I think the liquidation value is going to be below what our depreciation policy would be, especially in today's environment.

I would caution that, however, with, at some point there's a value for a housing unit and we see it in our used homes throughout our portfolio, the average resale that goes on in our portfolio is in the neighborhood of, call it $20,000, and it's been pretty consistent over time. So, there's a point at which homes can trade at a value that can clear in this economy, as the housing market would improve over time and if we could get some third party capital interested in financing customers, I think you're going to see a better value on that home as a sales opportunity as well, but certainly not in this environment, so there's a couple of things going on in terms of evaluating that rental program and its impact on the Company.

Got you, so just to make sure I understand, a home that's, say, 5 years used or been rented for 5 years runs for about the same level as one that is new that you just purchased?

Yes, that would be correct.

And, about how much CapEx do you estimate that you have to put into each of these homes, on an annual basis to keep rents at about those same levels? If you're buying a $30,000 home right off the bat, is it $1,000 a year? Just trying to get a sense for how much you're going to be capitalizing on an annual basis.

It's in the R&M as relates to the information we showed with the rental. What we've experienced thus far is very low turnover or maintenance costs with respect to our new rental homes. Now, I will make a couple of comments with respect to that. For the most part, our rentals have been in age-qualified communities and I think we're seeing a renter in those communities who, to put it bluntly, grandma doesn't go and ride around in the house with the tricycle, so we aren't seeing impact of wear and tear on those homes. As we go into more of the affordable housing and an all-age, I think we're going to have to make sure we pay attention to a potential increase in turnover costs and whether that would make it something that's less attractive for us is something we'll have to evaluate.

And then, just the last question, and you spoke a little bit about this, but has there been any more progress in lining up capital Partners to fund the program, or do you think -- or are you considering doing a little bit more on balance sheet?

Well we're going to continue to do it on balance sheet until we close on outside capital. We're currently in discussions with one party with respect to a debt structure and one party with respect to an equity structure, and other parties that have indicated an interest. So no, there's no terms, there's just mostly concept now in terms of how this might work, but we continue to believe that we'll be able to bring third party capital to the table.

Thank you.

There are no further questions in queue at this time.

Well thank you, everyone, for joining us on our call. We look forward to updating you at the end of our Third Quarter. Have a good day, everyone. Take care. Bye.

Ladies and Gentlemen, this concludes the conference. Thank you for your participation. You may now disconnect and have a great day.