Equity LifeStyle Properties Inc (ELS) 2011 Q4 法說會逐字稿

Good day, everyone, and thank you all for joining us to discuss Equity Lifestyle Properties fourth-quarter 2011 results. Our featured speakers today are Tom Heneghan, our CEO, and Marguerite Nader, 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 in the meanings 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 subsequent events.

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

Thank you for joining us today. Good morning. I am Tom Heneghan, Chief Executive Officer of Equity Lifestyle Properties. With me today is Marguerite Nader, our Chief Financial Officer. I'm going to take a few minutes to take some comments, and then turn it over to Marguerite. After our comments, we will open it up for your questions.

At the beginning of 2011, ELS had 307 properties in 27 states, containing just over 111,000 sites. Today, as a result of the Hometown acquisition, 75 properties were acquired during 2011. We have 382 properties in 32 states, and over 141,000 sites. We increased the number of manufactured home communities in our portfolio from 136 to 210, and the number of manufactured home sites from 44,000 to 74,000.

At the beginning of 2011, ELS expected total property operating revenues to be about $510 million. Going into 2012, we expect those revenues to be about $680 million. Our total FFO for 2010 was about $123 million, and now going into 2012 we are estimating our FFO in excess of $200 million. We were also able to integrate these new properties into our organization in a few short months. I am grateful for all the hard work put in by both the team at ELS, and our new employees who have recently joined us.

Our business performed very well in 2011, and we expect this performance to continue into 2012. 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've seen significant fluctuations in gas prices in an extremely difficult economy, yet this revenue stream continues to grow. It is clear 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.

In short, we believe ELS represents a unique opportunity and a unique company that is well positioned both geographically and demographically for continued growth.

Now, Marguerite will walk you through our results in more detail.

Thanks, Tom, and good morning. I'm going to give some details on our fourth quarter results, and then discuss our 2012 full-year expectations, and finally, I will provide some guidance for the first quarter of 2012. For the fourth quarter, before transaction costs, we came in at $0.99 FFO per share, a few pennies better than our midpoint of $0.96. Core property operating revenues came in better than we had projected, and approximately 2.5% higher than last year. We had occupancy gains of 73 MH sites in the quarter. We continue to see strong demands for rentals throughout the portfolio, and we have made progress on reducing the cost of the home.

Within our RV business, we had core resort-based rental income growth of almost 2%. We had strong demand for annuals, with a growth rate of over 4%, offset by some declines in seasonal and transient revenue due to weather-related issues. We also look at the entire Winter season to gauge our performance, which includes the fourth and first quarters. Last year, we generated about $15.7 million in core seasonal revenues for our Winter season, and we currently expect that to be flat for this Winter season.

Core property operating expenses, excluding property management, are $54.4 million, up 1.3% from last year. For the quarter, our core NOI growth before property management was 3.4%. Corporate G&A came in better than expected at $5.7 million versus $5.5 million last year. The acquisition portfolio performed in line with our expectations, contributing $23 million in property NOI. Our updated 2011 guidance issued in October 2011 provided a projection for the full-year 2011 at $283 million of core NOI, for a growth rate of 2.4%, and we came in at $284 million, a growth rate of 2.7%. For 2011, our core community-based rental income grew 2.8%, and our core RV resort income was up a little less than 1%, with strong growth in annuals of 4.3% offset by declines in seasonal and transient income. For the year, core property operating expenses were down approximately $700,000 from last year, to $229.1 million.

We are affirming our full-year 2012 guidance with a range of $4.32 to $4.52. This guidance assumes closing on the one remaining Hometown America asset. To the extent we do not close on this transaction, it would impact FFO by $0.03.

At the midpoint of our guidance, our core NOI growth before property management is expected to be almost 2%. Our final 2011 results for the 2012 core group include $266.5 million in community-based rental income. We expect to do almost $273 million in 2012. This represents a 2.3% growth rate from 2011. This is 2% from rate, and 30 basis points from occupancy. Rent increases already noticed reflect this rate change.

The Hometown properties will contribute $142 million to MH-based rent in 2012. When you add our recurring revenue from our RV segment, our long-term revenue from recurring customers account for over 90% of our total revenue. Overall, we expect 2012 core property revenues to be around $523 million. At the midpoint of guidance, property revenues are up 1.9% from $513.5 million in 2011. Core property expenses before property management are expected to be approximately $234 million in 2012, up from $230 million in 2011. In sum, core property operations before property management for the 2012 core in 2011 was $283.3 million, and is projected to grow approximately 2% to $288.8 million at the midpoint of our range. Specific growth factors of revenue line items can be found in the supplemental.

For our acquisition portfolio, we see a contribution of income from property operations before property management to be around $101.3 million, which is in line with our underwriting of the Hometown transaction. We see some modest revenue growth in 2012 of 1.5%. This revenue growth is essentially offset by an increase in real estate taxes due to anticipated reassessments. We anticipate we will have around $39 million in property management, and $26 million in corporate G&A costs in 2012, for a total of $65 million compared to $59 million in 2011. The majority of this increase is the result of increased property management expenses for Hometown for the full year.

With respect to other income and expense, I am grouping together our sales operation and all other income and expense items including the chattel loans. In 2011, we had $15.7 million of income. In 2012, we expect to have approximately $17.3 million. Interest expense is expected to be approximately $125 million. Our preferred distribution is $16 million. We expect our average debt balance to be around $2.23 billion. We make no assumption on the use of our free cash flow in our earnings model.

Our 2012 FFO per share estimate at the midpoint is $4.42, and our share count is expected to average 45.5 million shares in 2012. Our first quarter FFO is expected to be $56.7 million or $1.25 per share at the midpoint of our range. We expect 2012 core NOI before property management to be approximately $78 million compared to $77 million for the same properties in 2011. Core revenue growth is expected to be over 2%, or around $134.3 million. Core MH revenue is expected to be up 2.7% to almost $68 million, and core RV revenue is expected to be up 2.4% to over $37 million. First-quarter seasonal revenues are expected to be around $11.5 million, and represent almost 57% of the full-year seasonal revenue number. Currently, we are 91% reserved for our seasonal reservations, as compared to 86% at this time last year.

On the transient revenue side, we are 54% reserved versus 46% last year. The specific details of growth factors for the first-quarter 2012 can be found in the supplemental. Property management and corporate G&A are expected to be around $16.5 million compared to $14.1 million last year. Other income and expense is expected to be around $4.9 million compared to $3.2 million last year. Interest expense for the quarter is anticipated to be $31.4 million compared to $21.4 million in 2011, and our preferred payments remain at around $4 million.

Now to update you on our balance sheet, we have $35 million of debt maturing in 2012, and have more than sufficient cash on our balance sheet to pay off that debt. We have approximately $105 million of debt maturing in 2013. We have a $380 million undrawn line of credit, with approximately four years remaining. Secured mortgage terms are 10 years with coupons in the low to mid 4% range at 60% to 65% loan-to-value and 1.5 times debt service coverage ratio.

Now we would like to open it up for questions.

Thank you. (Operator instructions) Our first question comes from the line of Jana Galan with Bank of America Merrill Lynch. Please proceed.

Hi, thank you. Good morning. I was wondering if you could update us on the acquisition environment? I understand your guidance doesn't include any future acquisitions or dispositions, but 2011 was a very active year. Maybe if you could let us know what you're seeing on the market and potentially how much of that pipeline is age restricted and what's affordable and what's RV?

Sure. We have seen a few transactions take place over the last few months, but we don't see a lot of communities for sale. If you want to buy an all-age affordable asset, we do see a lot of those available. We are continuing to monitor the lenders and the special servicers to determine if there's an opportunity to purchase a distressed asset by buying the loan or taking the title. We do see that some lending maybe loosening up a little to be able to get some attractive rates for long-term debt and this may increase deal flow.

And can you maybe talk about potential cap rates? Would you see those kind of stable in what we saw with 2011 deals?

Yes. Cap rates are really impacted by location. We see well located properties in California and the northeast. They are kind of trading in line with what you could finance the asset for. Contrary to the all-age markets in less attractive locations, we will trade at a premium to debt of anywhere from 3% to 5% and then with respect to -- there's high quality RV parks with a high number of annuals, they tend to trade at cap rates similar to MH.

Thank you very much.

And our next question comes from the line of Eric Wolfe with Citi. Please proceed.

Thanks. In terms of your 2012 guidance, it looks like you dropped your growth assumptions around the RV and membership businesses, but from your comments it sounds like you're already ahead of last year's pace on reservations. So I'm wondering what could have changed in the last couple of months that makes you want to be, I guess, a little bit more conservative around those businesses.

I don't think anything has really changed respect to our view of the businesses. I mean, the way we have provided the guidance before has kind of been a number in the future that we think we can get to. We did have a pretty good fourth quarter, but if you looked at the season, which is the fourth quarter and the first quarter combined, I think you're going to see that's a little flat. So I don't think we are changing our view and, if you looked at the annual for the RV sector, it's up 4% plus this year. It's going to trail off a little bit next year, 50 basis points less growth we think, but we still like the RV business and we're still trying to figure out how to grow that business and that involves really kind of figuring out how to get that membership base growing faster.

Got you. And completely separate to that, I mean, in your 10-K you've had for quite some time that you have 5300 acres of land available for expansion. Just curious how you think about the building to monetize that land at some point? You've been pretty honest about the home builders not providing too good of a bid on it right now, so I'm just curious where -- are you going to sell that off at some point, are you going to develop on it, or are you going to leave it there for a while?

In today's environment, it's questionable what you could do with that real estate. Frankly, as we look at our portfolio, we think we've got a lot of excess capacity within the existing footprint, so to develop more, given the excess capacity we already have, we just don't see that as attractive. And in terms of selling it off for alternative use, those days from the 2005 era are just not present today. So, for the most part, it's going to sit there until times improve.

Okay. And then last question, we've seen a little bit of a turnaround, I guess, in the home builders being a bit more optimistic. I'm just curious of whether you're seeing a turnaround at all and if you think about some of the problems your consumers are facing in terms of buying a home, whether you think the issue is more structural, that they just can't just get a mortgage or is it really a consumer psychology issue that you're dealing with right now?

I think it's all of that. If you look at -- let's talk about the age-restricted customer. The age-restricted customer has been looking over the last few years and wondering what the heck happened, right? My house was my nest egg, I can't get out of it, I can't get out of it at the price I thought. The stock market volatility has got me all worried. What's going to happen with health care?

I mean all of those issues are affecting the customer at the margin in the age-restricted sector and we are seeing customers, we still see demand for our product, we still see demand for our properties and as we have said many times before, that demand has channeled into a value equation for them. They are trying to find the lifestyle they want to pursue at a much cheaper version of it than they would have back in 2003 to 2005, for example, so we are seeing a lot of demand for rentals, we are seeing a lot of demand for used homes but our ability to sell a new home today is still difficult and frankly don't see that improving until we see the single family housing market clear.

I heard your comments with respect to some of the home builders getting a little more upbeat but, I mean, upbeat from the bottom. I mean, there just really hasn't been a heck of a lot of activity, so the trend may be up but it's down from a pretty big low and we think that's going to affect us for some period of time. On the affordable housing side, I mean you're dealing with a challenged customer who has got an income stream but limited capital to spend, so we don't see that changing until you see some significant changes in what's going on with the job growth.

Tom, it's Michael Bilerman with a question from Marguerite. I think you had said you weren't using any of the free cash flow generated after payment of dividends, which is -- call it about $100 million a year right now that you're generating of free cash flow. I guess you don't have that much debt rolling. I mean what are you doing in the model from -- I guess there was $35 million of debt rolling. Are you -- assuming you're putting that on the line, are you refinancing that with higher coupon debt?

We have $200 million in FFO and after we pay down principal payments of $30 million and dividends of $80 and then our CapEx of $30, we get to about $60 million of free cash flow and we have debt maturing in 2013 -- 2012 of $30 million.

And, Mike, the real question for us is how much investment do we want to make in the rental home. I mean, you've seen in 2011 we were able to get occupancy growth by investing in the rental program. As it's not our preferred use of capital, we'd prefer somebody else to put the homes on our sites as opposed to ELS, but we have demand, significant demand for housing within our properties. It's just the business model is a little bit of a drift from where we would like it to be where we are renting out the land and somebody else owns the house but we can get incremental occupancy if we choose to put more rentals in and we have also mentioned time and again that we would prefer somebody else do that. So that's an issue for us in 2012 that we are trying to figure out with respect to how we use our free cash flow.

I guess I was thinking about it on a leverage neutral pre amortization. That's where I was thinking $90 million to $100 million in terms of free cash flow. It sounds like that's just a -- at least in the FFO guidance, that's just a buildup of cash with no return.

Yes.

So any incremental investment you make is gravy?

Yes.

And then the debt that you're paying off, what's your assumption in guidance for that $35 million?

We are sitting on cash on the balance sheet, Mike.

You'll pay it down with cash?

Yes.

All right. Thank you.

And our next question comes from the line of Paul Adornato with BMO Capital Markets. Please proceed.

Thanks. I was wondering if you could touch on the chattel portfolio and, just in general, do you plan to continue to make chattel loans in order to attract new residents?

No. We've pretty much shied away from the chattel loan. There are some other operators who do a chattel loan portfolio, seller financing in essence, to get people to be buyers of the homes. We have really opted to rental strategy. We just see some incremental problems involved with providing chattel. It generally has to be a subsidized loan and it does involve some issues with respect to velocity, you're going to see lower velocity on being able to lease up a home on a rental versus sell it and you also have some issues with respect to some of that -- some of those homes coming back to you in less favorable condition than you can control in a rental program. So I don't see us continuing the chattel program. It is a program that Hometown used.

Hometown was into it big from 2008 through 2010 and, frankly, they realized it was a very costly program. They discontinued that program in 2010 and opted to go into a for-rent model. With respect to the chattel, we have taken over in the Hometown portfolio. As long as those homes -- those loans perform, I think you're going to see the benefits of the cash flow coming into ELS, but in any default scenario our general guidance would be to consider those homes going into the rental program. So there's about 2500 chattel loans today. At some point those are either going to perform and pay off or some of them are going to transition into additional homes for rent.

Okay. And looking at the affordable side of the business, now that you have kind of dipped your toes in that end, could you talk about the opportunities over the next year or two to perhaps increase your relative exposure to that side of the business?

Paul, that's a place we have looked at and I think I've mentioned on the call before, you can get your head wrapped around it in today's environment affordable housing in the manufactured home community sector has a place in the housing universe, which is much different than it was in 2005 where anybody and everybody could go get a single family home so why would you live in an affordable housing manufactured home community? So we think there's been a c-change, so we think there's demand for the product and I think you've seen in some of the operators out there that are public and in ELS that there is demand for affordable housing. It's primarily going to be a for-rent or a subsidized sale type of execution, but still that's demand coming in, net increase in occupancy.

The question is the capital required to get that incremental occupancy and I feel like you got to look at the affordable housing business kind of like office or kind of mall exposure; the lease-up is great but the TIs will kill you. There's a significant amount of capital required to get that occupancy and we struggle with it and if we could ever get back to somebody else putting that home on the land on both the age-restricted or on the affordable housing side we would be happy campers so to speak.

Thank you.

(Operator Instructions) And our next question comes from the line of Taylor Schimkat with KBW. Please proceed.

Hi, guys. Just curious on the rental homes in the portfolio that have been leased for comparable years, what kind of rent growth are you achieving as compared to the site-only rents?

Generally the rent growth in the portfolio is in line with what's going on with the site rents. That's what we have essentially done with our rental home portfolio. And I would just characteristically say we don't feel like we have a lot of pricing power. It's not like we are giving up massive rent increases that we think we could get. We see a very price sensitive customer out there. The monthly payment range where we see a lot of demand, call it from $700 to $800, but when you start getting up above $1000 in to $1100, $1200, it gets pretty thin in terms of the number of customers.

I see. I mean, is there a sense that anything is improving there with the comparability to apartments and single family home rentals having relatively better growth rates, is there any sense that the outlook for that growth for the rental homes is improving?

Well, I would say there's a kind of a dichotomy going on out there. Certainly, as everybody knows, the apartments are doing extremely well; they're getting rate growth and they're getting occupancy. At the same time, the single family housing market is in a state of disarray. More and more product is going to single family home rental and, based on what we are seeing and what we expect to be coming, we don't think the single family home rental guy has a lot of pricing power either, especially given the cost of the homes that they are acquiring and putting into the single family rental.

It's almost -- it's cheaper to rent the home than it would be to buy a home today so, in essence, the single family guys who are investing in that pool for rent are in some respects subsidizing it as compared to somebody having to buy that house, so we see that as a downward pressure, frankly, even though I think there was some recent comments that they have actually increased rents, call it 2% or something like that, but that would be in line with what we are doing. So I think in the single family home rental and in what we are seeing, there is some difference between what's going on in the apartment sector broadly, with respect to their ability to increase rate and get some occupancy. And, at some point, we expect that to wash back over to both the single family home and the manufactured home community side. As population grows and job growth returns, people are going to be looking for housing and both single family housing and manufactured home communities ought to participate in that.

Okay. Thanks and one more question. It looks like in 2011 ELS picked up about 50 basis points of occupancy in the core portfolio and, in 2012, I think you said guidance assumes 30 basis points of revenue growth.

Yes.

So I'm curious, are you expecting a slowdown in new sites rented or is this an element of conservatism or is it a mix?

It really relates to the investment in the rental pool. Essentially what we have done for guidance modeling purposes is assume flat occupancy from year end so the 30 basis points you're seeing in 2012 over 2011 is really the carryover effect of occupancy increases during 2011. In fact, you're seeing a little bit in that first quarter, the first quarter for MH is up, I don't know, 2.7%, which is higher than the guidance for the year. And that's really just showing that, throughout 2011, we gained occupancy so when you look at first quarter over first quarter, you're seeing the net effects of that occupancy pick up coming through into the first quarter of 2012 and the question for us, as we have mentioned before in the call, is just how much investment do we want to make in the rental program in 2012? But our guidance assumes that occupancy will be flat to year end.

Okay. Thank you.

Okay.

Ladies and gentlemen, with no further questions, this concludes today's question-and-answer session. I would now like to turn the call back over to Mr. Heneghan for closing remarks.

Thank you all for joining us today and, as always, if you have any follow-up questions, feel free to call Marguerite Nader. We look forward to speaking to you at our next earnings call. Take care.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.