Equity LifeStyle Properties Inc (ELS) 2012 Q4 法說會逐字稿

Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties fourth-quarter 2012 results. Our featured speakers today are Marguerite Nader, our President, and Paul Seavey, 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 risks and uncertainties. The Company assumes no obligations 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 Marguerite Nader, our President. Please proceed.

Good morning and thank you for joining us today. Before I turn the call over to Paul Seavey, our Chief Financial Officer, I would like to take some time to walk you through some of our highlights for 2012 as well as thoughts for 2013.

In 2012, we fully integrated the 75 Hometown properties, a $1.5 billion transaction. The integration went very well from an operating standpoint and the properties performed better than expected for the full-year 2012. We increased occupancy 280 sites in our core portfolio. We increased FFO by $0.96 per share or 26% year over year.

As we look into 2013, I'm excited about the opportunities that lie ahead. The 75 Hometown properties will now be included as part of our core results. Our guidance projects an increase in FFO to $5.04 or 9% plus growth. I also think it would be helpful to provide my view on our business.

We continue to have high demand for our MH properties overall. Our properties appeal to the baby boomer demographic, a group which will grow to over 100 million people over the next 10 years. Our properties are well-positioned to accommodate the growth in this key demographic.

I recognize that the MH business has changed over time with the need for landowners to commit working capital in order to sustain occupancy. Prior to 2008, ELS had a very robust sales platform, selling 700 to 800 new homes per year. While today's customers are hesitant to part with their capital, I intend to focus on increasing the number of ownership transactions within our properties.

With respect to our RV business, our RV footprint appeals to both the baby boomers who are just considering retirement and those who are well on their way into retirement. We have an extremely loyal and vibrant customer base, ranging from members who have been with us for more than 20 years to annual customers who have spent a decade with us to the RV customer who is just starting out exploring the RV lifestyle. We can meet the demand of the RV years for a quality, affordable, vacation experience.

We have often discussed utilization of our RV sites. Increasing utilization can be achieved by increasing our annual customers, increasing our member count, and promoting additional transient business.

I believe in order to realize this increased utilization it is necessary to expand our customer base through deeper relationships with distribution channels, to increase marketing campaigns for our properties and to focus on the younger customer demographic. This includes appreciating the best ways to communicate with customers from social media to grassroots efforts and understanding the amenities that drive their decisions to stay at particular properties.

Finally, 2012 also began the implementation of our succession planning and rotation of our executive team. At the end of this month, Tom Heneghan will be moving on to Equity International.

To that end, just as I gave some numbers on how ELS performed this year I'd like to give you some numbers about how ELS fared under Tom's leadership. We went from a portfolio of 65 properties and 25,000 sites to almost 400 properties and 143,000 sites. We went from $37 million in FFO to $210 million. Our stock price went from $15 to $71, delivering a 15% total shareholder return annually.

I have worked for Tom for nearly 20 years and he has been a great mentor and friend. We are pleased that he will continue to have a role at ELS as co-Vice Chairman.

I will now turn it over to Paul to walk through the numbers in detail.

Thank you, Marguerite, and good morning, everyone. I will first discuss our fourth-quarter results, then update full-year 2013 guidance and provide guidance for the first quarter.

FFO per share in the fourth quarter was $1.11, $0.03 higher than guidance. On a combined basis, core and Hometown property operating income before property management was slightly ahead of expectations. Sales operations performed better than expected in the fourth quarter and we received a one-time insurance reimbursement. Fourth-quarter core base rental income increased 2.9% over last year with 2.3% coming from rate increases and 60 basis points from occupancy. We gained 100 occupied sites from September to December, bringing our total 2012 increase to 278 sites. We continue to see strong demand for rentals and we note a 20% increase in used home sales volume in our core MH portfolio in 2012. Core RV revenues in the quarter were 3.7% higher than last year and about 50 basis points higher than guidance. Our annual and transient performance was better than expected.

Membership dues were 4.4% less than last year and approximately $0.5 million below guidance. We continue to see net attrition in the member base. We sold approximately 10,200 Zone Park passes during the year, including approximately 1,200 memberships activated as a result of our RV dealer program. Net membership sales revenue and expenses were approximately $800,000, down about $400,000 from guidance.

Core property operating expenses excluding property management were $57 million, an increase of 1.7% over last year and about 50 basis points lower than guidance.

For the quarter, our core NOI growth before property management was 1.4%. Our 2012 full-year core NOI grew 2.3% to $292.2 million, in line with our updated 2012 guidance issued last October. Hometown full-year NOI was $103.2 million compared to prior guidance of $102.5 million. Core base rent increased 2.9% in 2012 and core RV revenues increased 2.5% with annuals increasing 4.1%. Full year core property operating expenses were up 1.1%.

Turning to 2013 guidance, keep in mind the Hometown portfolio will be included in our core results this year. Our supplemental package provides additional detail on specific revenue and expense growth assumptions. Also, our guidance is meant to explain results within a range of possible outcomes rather than specific expectations for any particular category or line item.

At the end of December we acquired two RV resorts in the Rio Grande Valley Texas for $25 million, approximately $14,000 per site and an 8% cap rate. As a result, our full-year 2013 FFO per share guidance range is now $4.94 to $5.14. FFO is expected to be $229.6 million at the midpoint. We expect core NOI before property management to be $406.3 million, a 2.7% increase over 2012.

The midpoint of our guidance range projects 2013 core property operating revenues of $705 million, a 2.5% increase over 2012. Our 2013 core properties produced $414.2 million in community base rental income in 2012. In 2013, we expect approximately 2.6% growth, consisting of 2.2% in rental rate increases and 40 basis points related to occupancy gains achieved during 2012. Rent increases we have already sent for 2013 are consistent with our guidance range and we assume no occupancy increase during 2013.

Full-year 2012 resort base rental income for the 2013 core properties was $134.3 million. Midpoint of our guidance assumes 1.8% growth in 2013 driven by 2.9% growth in annual. Seasonal and transient revenues are expected to be flat to 2012.

For 2012, we reported $292.6 million of property operating expenses in our 2013 core properties and we expect an increase of approximately 2.1% to $298.7 million. The midpoint of our 2013 guidance includes approximately $65.8 million in property management and corporate G&A expenses. Other income and expenses are expected to be approximately $17 million. We project interest expense to be approximately $120.5 million and we expect our preferred distribution to be $9.3 million. We make no assumption about the change in fair value of the $6.7 million escrow denominated in ELS stock.

FFO per share at the midpoint of our guidance range is expected to be $5.04 and our average share count is expected to be 45.6 million shares for 2013. We make no assumptions with respect to the use of free cash flow in our guidance. We expect first-quarter FFO to be $63.5 million or $1.40 per share at the midpoint of our guidance range. Guidance assumes core NOI before property management of $106.8 million in the first quarter compared to $103.8 million in 2012, a 2.9% increase. Core revenues are expected to increase approximately 2.9% to $179 million. Community-based rental income is projected to increase 2.6% to $105.7 million and RV resort base rent is expected to increase 1.4% to $38.1 million, primarily driven by growth in annuals.

First-quarter seasonal and transient is expected to be flat to 2012. Our seasonal and transient reservations are 90% and 53%, respectively, of first-quarter budget revenues, consistent with this time last year. First-quarter core expenses are expected to be $72.1 million, an increase of 2.8% over 2012.

Combined property management and corporate G&A are expected to be $16.7 million for the first-quarter 2013. Other income and expense is projected to be approximately $5 million compared to $6 million in 2012. We estimate $30.3 million of interest expense in the first quarter, down from $31 million last year, and we project $2.3 million for our preferred distribution.

Finally, I'll provide an update on our balance sheet. We have approximately $74 million in secured debt maturing in 2013 and we expect to repay these loans with available cash and free cash flow. Our current cash balance is approximately $50 million and we project free cash flow before working capital of approximately $80 million for the year.

In addition, we have $380 million available on our line of credit. In 2014 and 2015 we have debt maturities of approximately $133 million and almost $600 million, respectively. Current secured financing terms for 10-year loans include coupons ranging from low to mid 4% with LTVs between 60% and 70% and debt service coverage between 1.35 and 1.5 times.

Now we would like to open it up for questions.

(Operator Instructions). Jana Galan, Bank of America.

I was curious for the Rio Grande acquisition cap rate of 8%. Is that including your expectations of any occupancy or rent gains?

That's in first -- going in cap rate for the first year. The interest rates or the rates for the year have been set already so that includes what's going to happen for 2013.

Thank you. And then on the sale of the Cascades property it looks like that's a unique situation but would you consider any dispositions this year?

Yes, that property was unique. They were planning -- the hospital district in Seattle was planning to build a new hospital on that land so it was -- it has been -- it was a property that was on the outskirts of Seattle years ago. And it was a membership property but it's been closed for a couple of years to the extent additional sales -- there is no sales, additional sales in the pipeline. But we certainly look at offers as they come in.

Great, thank you.

Eric Wolfe, Citi.

Just looking at page 11 of your supplemental, it looks like you saw some modest improvement in the fourth quarter on the new home sales front and do you think that could be a sign of things to come for this year or are you expecting still a pretty muted number in terms of home sales?

We would expect that number to continue to be muted in 2013. Some of those new home sales that occurred in the fourth quarter and throughout this year were, really I think half of them were at our RV Park, at one particular RV Park in Phoenix. Where we have seen an increase is used home sales in our portfolio as Paul mentioned of about 20% for the year and that was -- that's 20% in our core portfolio and that primarily occurred in Florida, specifically I think in the Fort Myers and Clearwater area. Again, I think these buyers are looking for low price point sales. And particularly buying their homes for all cash and then rehabbing the home in some instances.

Right. And are those used home sales -- are those individuals that are moving out of their home and then looking for something else? Or are these homes that you're buying used and then these are new entrants into your communities?

They are homes that were either -- they came to us in one form or another -- either somebody left the community and had a life event and returned to the title to us or in some instances we would've bought the home just to keep the home in the community.

Right. And so it's not really a net increase in terms of occupancy if I'm looking at those used home sales, right? That doesn't indicate it, right?

That's correct.

Okay. And then, you mentioned that in 2008 you saw like 700 to 800 home sales. Is that kind of the level that you would want to see before you felt comfortable, no longer investing in rental inventory? I'm trying to think about over the next couple of years what we should look for in terms of thinking about when you're going to kind of stop doing rentals and try to focus more on home sales?

I think what we look at when we think about our sales operations and what's happening in our communities is, first, we look at the resale market and how strong that market is and right now, that's the largest number of transactions that are happening in our properties and the average purchase price of those resales is between $16,000 and $20,000 and those are all cash.

As that continues to grow, as the price of those resales continue to grow and I think as there is a more normal residential housing market in our core customer and our core customer feels better about putting up their home -- their primary home for sale, I think we would see an increase in new home sales. And we'd also -- and also maybe Paul would talk a little bit about the chattel.

Sure. In terms of chattel financing we haven't seen much change in the recent past in the environments. Keep in mind as we were talking about the past in our experience selling homes historically, our target customer [hasn't] accessed chattel financing for retirement home purchases.

That being said, the programs available today continue to provide subsidized financing to those customers with the community owner carrying the obligation for guaranteeing their defaults and the characteristics continue to have stringent underwriting criteria, sizable down payments, short loan amortization and high interest rates so, that hasn't changed really very much.

Got you. And I think, Marguerite, you mentioned that one of your goals, I believe you said, was to increase homeownership within your portfolio. Can you just give some specifics around how you plan to do that, whether you have specific targets or goals in mind? And I mean I'm just wondering, with chattel financing not really changing that much what you can really do to try to increase homeownership in your portfolio?

One of the things is throughout our -- since 2008 as we were selling 700 to 800 homes prior to 2008, we had a lot of sales people on the ground selling homes. As the market changed and we were unable to do that, we no longer had sales people and the process was really a person coming into our community and the manager meets them and there is a rentals event happening.

What we are doing is to try to say we can take some time and try to get to a customer that is more of a buyer than a perpetual renter. We think there's two types of renters. One is a dedicated renter, those who just always want to rent and you're really not going to change their mind and then those who just don't want to part with their capital right now but would like to own and we need to work towards marketing our communities towards the latter customer.

Right and I guess but thinking about what specific metrics could we look at over the next couple of years to sort of ascertain whether you've been successful in finding that right customer? I mean should we see like a high percentage of sort of those started out renting and owning, like what metrics should we look to to see whether that's successful or not?

I think that the conversion rate will probably always be relatively low from to go from a renter to an owner at least from the existing renters, because I think they are more on the former site which is dedicated renters. So I would look to the transactions happening, used home sales increasing, and that change between renters and used home sales.

Got you. Okay, thank you.

Gaurav Mehta, Cantor Fitzgerald.

I want to go back to your comments on two types of renters that you just mentioned. So what's the split in your portfolio today between dedicated renters and the renters that would like to own?

We haven't had a lot of conversions. I would say it's been a very low number so I would say the majority is the former dedicated renter.

Okay. And then going to your 2013 guidance, how much have you budgeted for the rental program in terms of cost?

We don't have an assumption with respect to the rental program. As I said, our free cash flow before working capitals is $80 million for the year.

And then last question I have on the acquisition market. So you acquired two age-restricted properties in the quarter. Can you provide details on what you're seeing in the overall market both on the age-restricted side and [all in] side?

Sure. I think as we've said in the past that our business has always been a building relationship with owners where that's the most important part of the acquisition process. So, opportunities for purchasing properties kind of comes in a choppy pattern. But right now just in terms of transactional activity that's out there again it's limited. There is a property, I think, that just sold in California. Laguna Beach, a small property, 150 sites sold at a sub-five cap, I believe. And there is also some larger Midwest portfolios that have sold over the last three or four months. Family properties.

Okay. Thank you.

(Operator Instructions). Andrew McCulloch, Green Street Advisors.

Just one question on the Cascade asset in Washington that was sold. I know that was a unique asset that was condemned by the city but how do you think that sales price on a per site basis compared to your other assets that you have in that Thousand Trails portfolio?

No, that's, I guess, a difficult question. I think that came at $49,000 per site. So, what you said at the beginning it's a unique asset and it was really subject of a condemnation. So, it's difficult to valuate, relative to the rest of the portfolio.

How did the city arrive at the value?

I'm not exactly certain how they arrived at it. What they were -- they were building a new hospital and they were also in the -- they were removing their old hospital, selling it to an Indian tribe casino so I think that was part of the factor of what available funds they had. I'm not sure of their whole process in coming to the number.

Okay, but it doesn't make you think that pricing in the private market for some of that RV stuff is better than you thought that would prompt more sales there?

No. I think it was -- this is a unique transaction.

Okay. Thank you.

(Operator Instructions). Todd Stender, Wells Fargo.

As the rental home portfolio gets larger, how do you think about your financing? Your short-term financing maybe gets bigger over time. Can these be aggregated and if we start looking at more mortgage financing, just thinking about your thoughts there.

Financing in terms of purchasing of the homes themselves or community financing?

The homes themselves. As you build out your rental home portfolio, it looks like it's getting bigger. I just want to see how you think about that.

Sure. I think that we look at the cash flow coming off of those assets. Obviously we are carrying that today; but we look at the cash flow coming off of those homes and think that we could over time, to the extent that program continues to grow, identify lenders that would lend on the cash flow associated with those homes.

Okay. And do you have a budgeting number for this year about how many new and used homes you think you would place within the communities within for the rental program?

We don't have an expectation as it relates to incremental commitment but I would say that our expectation in terms of the turnover in our communities is likely to be consistent year to year. So maintaining occupancy at the current level, you probably [wouldn't] expect to see us purchase a similar number of homes next year.

Okay, thanks. And just lastly I don't know if you break it out this way but just if there is, what is the premium on rent minus the site rent, just the mobile home rent, on a new rental home versus a used rental home? Is there much difference?

You know it's not broken out in our supplemental but it's about a $150 difference between a new rental home versus a used rental home which to us just shows you the stability of that cash flow. You can have a 1975 used home generating basically the same amount of cash flow as a brand-new home.

And that's a monthly number?

Yes.

Okay. Thank you.

We have no further questions in the question queue. I will now turn the call back over to Marguerite Nader for any closing remarks.

Thank you all for joining us today. Paul Seavey is available to follow up questions and we're looking forward to updating you on the first-quarter call. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect and have a great day.