Equity LifeStyle Properties Inc (ELS) 2013 Q1 法說會逐字稿

Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties first-quarter 2013 results. Our featured speakers today are Marguerite Nader, our CEO, 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 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 like to turn the call over to Marguerite Nader, our CEO.

Good morning and thank you for joining us today. As Paul will describe more fully, our normalized FFO for the first quarter was $1.41 per share, and we maintain our 2013 normalized FFO guidance, which is $5.04, representing a 9%-plus growth rate from 2012.

Our results for the quarter show the strength of our business plan, which is supported by our quality real estate locations, stability of our cash flow, and flexibility of our product offering. We are positioned well from a demographic and geographic standpoint.

Our consistent FFO growth over time illustrates the strength of our business. We continue to see strong demand for our MH product, which we see as an affordable option for empty-nesters who desire a quality lifestyle.

Our focus continues to be on increasing the number of ownership transactions in our portfolio. To that end, our used home sales volume increased 15% this quarter. Our operating team is focused on continuing this trend.

We have long discussed third-party capital partners for our home sales operation. We have recently entered into a venture with Cavco that will provide a leading platform for our homebuying customers. Working with Cavco, the new venture will place homes in our communities for sale and will provide financing if needed to close the sale. ELS is joining with a quality name in the industry with a goal to sell homes.

While we are just in the beginning stages of this venture, I am pleased that we have another tool to use for selling homes in our communities.

With respect to our RV footprint, 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 customer who is just starting out exploring the RV lifestyle. We can meet the demand of RVers for a quality, affordable vacation experience.

In the quarter, we saw strength in our annuals as we continue to grow our Thousand Trails and Encore annual base. In the first quarter, we also saw an increase in our transient revenue of 10% over last year. The majority of this increase comes from Florida and Arizona.

We increased our social media presence in the quarter and added to our existing RV dealer distribution channels, including adding new RV dealers and working with large RV rental company. We continue to work on ways to bring our value proposition to a wider group of RVers as well as outdoor enthusiasts.

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

Thank you, Marguerite, and good morning, everyone. I will discuss our first-quarter results, update guidance for the remainder of 2013, and provide detailed guidance for the second quarter.

For the first quarter, we reported $1.41 of normalized FFO per share. We are reporting normalized FFO because we believe it is the most appropriate measure of our operating performance as it eliminates the impact of certain nonoperating items included in FFO.

Overall, core income from property operations performed in line with our expectations. Core MH rent came in better than we had projected and was 2.8% higher than last year. The base rental income increase includes approximately 80 basis points related to occupancy gains and 2% in rate growth. We had core occupancy gains of 141 MH sites in the quarter. We continue to see strong demand for rentals throughout the portfolio, and we've continued to be successful selling used homes. In our core portfolio, the used home sales volumes increased more than 15% over first quarter 2012.

Within our RV business, we had core resort-based rental income growth of 2.5%. Our annual growth rate was 3.4%, and we had strong growth of 10.5% in transient income, both of which were offset by a decline of 2.6% in seasonal income.

Membership dues came in at $11.5 million for the quarter. During the quarter, we sold and activated approximately 2600 memberships. We expect to generate 15,000 new memberships this year through sales of low-cost products and activations from our RV dealer program.

For the quarter, the revenue from right-to-use contracts or membership upgrades was $2.8 million, and the expenses associated with this activity were $2.4 million, resulting in a net contribution of approximately $400,000, in line with our guidance.

Core property operating expenses were approximately $800,000 higher than expected in the quarter. The main areas contributing to this variance were increased real estate taxes, repairs and maintenance, and rental expenses.

Various storm event impacted the quarter and generated higher snow removal and other costs compared to our expectations and prior-year results. Rental expenses increased with the addition of homes to our rental program.

In summary, first-quarter core property operating revenues were up 3.4%, and core property operating expenses were up 4%, resulting in an increase in core NOI before property management of 2.9%.

We are pleased to report that the acquisition portfolio performed better than expected, contributing $1.3 million in property NOI. Property management and corporate G&A came in at $17.1 million. And other income and expenses, excluding the income related to our contingent assets, generated a net contribution of $5.6 million.

Our full-year 2013 normalized FFO per share guidance range is $4.94 to $5.14. The press release and supplemental package provides full-year guidance in detail. Please note the following remarks are intended to provide an estimate of guidance. All growth rates and revenue and expense projections represent midpoints in our guidance range.

We expect the second quarter at the midpoint of our range to be almost $52 million in normalized FFO, with a range of $1.09 to $1.19 of normalized FFO per share. We assume no change in our MH occupancy from the end of the first quarter. Core community-based rent revenue is projected to be $106.3 million, a growth rate of 3%.

For the second quarter, we anticipate $31.2 million of rental revenue from our core RV properties, up 2.5% from last year. We expect continued strong performance from annuals with a growth rate of 4.2%. Seasonal revenues are projected to be flat in the quarter, and transient revenues are expected to be down 2.2%.

The timing of the July 4 holiday has an impact on our expected second-quarter transient growth rate. Adjusting second-quarter 2012 actual results for comparable holiday weekend timing results in a projection of approximately 1% growth in transient income. As we look ahead to the full summer season, we project combined second- and third-quarter transient revenue of $18.3 million compared to $18.1 million in 2012, a growth rate of 1.4%.

Our second-quarter reservation page shows we are currently 77% reserved for our expected seasonal revenues and almost 50% reserved for our expected transient revenues, consistent with this time last year.

Membership dues are expected to be $11.9 million, and we expect a net contribution from membership sales and upgrades of $0.5 million in the second quarter. On a combined basis, these lines are expected to generate $12.4 million of income compared to $12.5 million in the second quarter of 2012.

Operating expense growth in the second quarter is projected to be 3.2%. Increased insurance expenses as a result of our April 1 property and casualty insurance renewal, as well as expected increases in utility expense and rental expenses, are contributing to expense pressures in the quarter.

For the second quarter, core property operating revenues are expected to be up 2.4% and core property operating expenses up 3.2%, resulting in a net increase in core NOI of 1.7%.

We anticipate that the acquisition properties will contribute approximately $400,000 of property NOI in the second quarter.

I will now comment on guidance for the remainder of 2013. For quarters 2 through 4, we assume no change in our MH occupancy from the end of the first quarter and expect to show core community-based rent revenues of $320 million, which is a growth rate of 2.8% for the remainder of the year.

In our RV business, we anticipate core RV revenues of almost $100 million for the rest of the year, which is a growth rate of 3.1%. We expect annuals to continue showing strong performance, with 4% growth projected. It is anticipated that about 45% of the full-year transient income will come in the third quarter.

Total core revenue from dues and membership sales in quarters 2 through 4 are expected to be $47 million. The associated sales and marketing expenses are anticipated to be approximately $9.7 million for a net contribution of $37.3 million compared to $37.9 million in 2012.

Operating expense growth is projected to be 3.1% for the remainder of the year. The previously mentioned increase in our insurance expenses, as well as expected increases in utility costs and real estate taxes, are the main causes of the increase for the remainder of 2013.

For the rest of the year, property in operating revenues are anticipated to be up 2.8%, with expenses growing at 3.1%, resulting in a net increase in core property NOI of 2.7%. We expect the acquisition properties will contribute about $1.3 million in income from property operations for the remainder of the year for a total of $2.5 million for the full year.

Property management and corporate G&A is expected to be $49.9 million for the remainder of the year and $67 million for the full year. Other income and expense items are expected to be approximately $11.9 million for the rest of the year and approximately $17.4 million for the full year.

Interest expense for 2013 is expected to be approximately $120.4 million. We expect our average debt balance will be $2.21 billion.

Our interest coverage ratio is more than 3 times. Our preferred distribution is $9.3 million.

Our 2013 normalized FFO per share estimate at the midpoint is $5.04, and our share count is expected to average 45.5 million shares in 2013.

From a free cash flow perspective, we anticipate full-year normalized FFO of approximately $230 million. After paying $90 million in dividend payments, $30 million in principal payments, and $30 million in recurring CapEx, we generate approximately $80 million in free cash flow before working capital needs. We make no assumption about the future use of free cash flow in our earnings model.

Now some comments on our balance sheet. We have used $13 million in available cash to repay two maturing mortgages in 2013. Our current cash balance is approximately $60 million, and we have approximately $60 million maturing before the end of the year. Absent another opportunity to use our available cash, we assume it will be used for repayment of debt.

Current secured financing terms available for MH and RV assets range from 60% to 75% LTV, with rates between 3.75% and 4.5% for 10-year money. High-quality age-qualified 8 MH will command preferred terms from life companies, Fannie Mae, and the CMBS market. Generally, CMBS and a few life companies are currently offering debt to finance RV assets.

We have a $380 million undrawn line of credit with almost three-and-a-half years remaining and a one-year extension option.

Now we would like to open it up for questions.

(Operator Instructions) Nick Joseph, Citi.

Thanks. So you mentioned on your two acquisitions in late 2012 that the NOI is coming in ahead of expectation so far. And it looks like the year-one cap rate is going to be about 10% versus 8%. So, what do you attribute that to, just from the guidance you gave just two months ago?

We have seen an increase in revenue really from strength in annuals coming from rate. And so you'll see that throughout the year. That's why that guidance change was made.

Okay, and then what's the acquisition pipeline look like right now? Do you expect anything going forward for the rest of the year?

I think consistent with what we have said in the past, opportunities for purchasing properties, it comes in a relatively choppy pattern. And the current environment is no different. I think there continues to be an opportunity to buy in the family sector more than the age-qualified retirement destination locations. But we continue to work with owners who may be interested in selling, but it's difficult to predict the opportunities that we may have.

Okay. And then could you talk a little about your Michigan portfolio and how the occupancy is there versus the rest of the portfolio?

Our Michigan portfolio occupancy is just under 70%.

Okay, and is there --

If you extract Michigan from our core, the adjusted core occupancy is about 91.5%.

Okay. And how are you seeing that 70% trend? Is there a potential upside, or is it still a tough market?

Occupancy has been holding steady, but it still continues to be a tough market in Michigan.

All right. And then finally, just with the recovery in the single-family housing market, have you seen that as a source of competition, or is it more of an opportunity with people from the Northeast and Midwest able to sell their homes easier and move down to Florida?

I think that improving single-family housing market is going to be helpful to ELS. If there's a more normal residential housing market, our core customer will feel better about buying a home. And we've seen increases in our used home sales, as I mentioned, and we see that as a positive.

All right, great. Thanks.

David Toti, Cantor Fitzgerald.

Just a couple questions on the third-party venture. I know a lot of us have been looking forward to hearing some news about that for a while. Are you able to disclose some of the terms and maybe some of your expectations for the program? Or is it too preliminary to really forecast the impact?

I mean, we're really just starting out. And we entered into the agreement with Cavco. We're going to really share the working capital requirement, and the venture will buy new homes and put homes in communities in places where we think we can sell them.

But I think it's, like I said, it's in the beginning stages. We're just pleased to be able to partner with Cavco. And I think we'd have a little bit more color next quarter on how we are doing.

Okay. And may be how do you guys think about the rental program as it interacts with the financing programs? In other words, if you start to see some success in sales because of the partnership, do you anticipate pulling back on the rental program?

Yes, I mean, I think the rental program will always be with us, but it's a toggle between rentals and sales. And as you've seen in the quarter with the used home sales, that's really just holding out some homes for sale as opposed to rental. So I think we will see that same type of dynamic with this new venture.

Okay. And my final question, Paul, for you, you commented on some of the price points. Can you give us a little bit more granularity in terms of what we're seeing at the level of price point, which price points are moving better? Are you still seeing extreme sensitivity in the customers? Are you still trying to roll out lower-price-point products, or is that sort of flattening somewhat, given the improving economy?

We, early in the year, we increased our rate on the ZPP, the low-cost product, 5%. And we have seen consistency year over year in the volumes of sales, so --

So would you suggest there is some firming at that level?

It appears that way.

Okay, thanks for the detail today.

Jana Galan, Bank of America-Merrill Lynch.

I also had a follow-up on the Cavco venture, which seems very interesting. I think that they are more Southwest focused. Would you also be looking to maybe partner with some other manufactured home manufacturers maybe in the Southeast, or are you waiting to kind of see how this program takes shape?

Well, actually, they cover a larger footprint. So we will be able to utilize it at our properties -- at all of our properties.

Okay, great. And does it preclude you from partnering with anyone else?

No, it does not.

And then maybe just on acquisitions, I think we saw a few of the all-age portfolios trade year to date. I was just curious if you were seeing some cap rate compression or more competition as CMBSes become more active in the space?

Yes, I think the portfolio that you are referring to, the ARC portfolio they traded, I think it sold in four or five different transactions, which was a nice price discovery for us, at least for the industry. And certainly I think it traded between a 7 and an 8 cap, which is great execution on ARC's part. I think that that footprint is significantly different from ELS's footprint, but I think it served as an interesting data point for everybody.

Thank you.

Dave Bragg, Green Street Advisors.

In addition to the new homes sales volume figures from the quarter, are there any leading indicators that you look at that might have been different directionally than the volume figures from the quarter, such as traffic, that there might lead you to be more optimistic about sales volume potential over the rest of this year?

When we look at our new home sales volume, it's obviously very small, I think less than -- or 10 -- 10 homes. So we do look at traffic, both the traffic that we're seeing online and just foot traffic, frankly, coming into the properties. And it's been pretty consistent with what we have seen last year.

Okay. And in conjunction with the lending program, is there anything else you'll be doing to drive transaction volume -- for example, putting salespeople back into some of your communities?

What we have done is in areas where we think we could have a larger sales presence, we are looking to put in salespeople. We're also, from a marketing standpoint, I think we've said in the past that craigslist has been a large marketing source for us on the rental side. And we're kind of rotating some of our marketing towards more of for-sale, such as MHVillage, that type of sources, so that we can get the people that are interested in buying rather than just renting.

Interesting, thank you.

Todd Stender, Wells Fargo.

Of the 3.4% increase in core revenue, are you able to quantify what the contribution was from the Hometown portfolio?

Hometown, when you look at Hometown, essentially the topline revenues at Hometown were in line with the rest of the core, so essentially consistent inside Hometown.

Okay. And it and it looks like when you look at the -- in the fourth quarter, your core monthly base rent per site was $570. Now that Hometown is in the core portfolio, if my math is right, the Hometown average was about $470. Is that about right?

I think that's about right.

And would you say that they are of the same quality? And basically just kind of look at what the runway looks like to get that portfolio up to the existing average of about $570. Can you just maybe qualify that portion of the portfolio?

I think we have talked about it when we bought the Hometown transaction, that there was some ability to increase rents. But I would say it's kind of consistent with what you'd see in our core portfolio.

Okay, thanks. And just with the debt capital availability that you guys went into the CMBS market insurance, can you quantify what the cap rate disparity is between acquisitions you're looking at and MH, whether they be just the disparity between all-age and age-restricted?

In terms of -- I'm sorry, you're talking about in the financing market or the --

Cap rates, if you can just maybe quantify what the cap rates would be on something age-restricted that you're looking at and maybe what the cap rates would be on all-age right now.

I think it's difficult to say, because it's kind of on a property-by-property basis as to what the cap rates are. But certainly the impact of the attractive financing is driving cap rates down.

And probably narrowing that traditional spread?

Right, absolutely.

Okay. And Paul, I may have missed this. What's your CapEx budget for the remainder of the year? And would you say that there's room to expand that number, just based on the success you're having and the core portfolio's performing?

I think our expectation is $30 million of CapEx from our available cash flow this year. I don't anticipate that we'll expand that.

Okay, that's helpful. Thank you.

David Harris, Imperial Capital.

Paul, a couple of questions for you. Sorry, I missed the CMBS financing rate that you made reference to in your prepared remarks. Could you repeat that?

Sure, the range of rates is about 3.75% to 4.5%, and the higher-quality MH assets are going to command the lower price point. And then as you migrate into the RV financing, you're going to see a bit of an uptick in the rate.

Okay. And I know I get lost in the weeds on this, but this fair-value adjustment that you have introduced in the -- was introduced in the first quarter, that's going to introduce a degree of volatility in your reported numbers as we go forward, isn't it?

Well, the related asset is denominated in ELS stock. And so the value moves as our stock price moves. And there is a related purchase option, which is explained in the footnote in the supplemental. And to the extent that that purchase option is exercised, we do carry an asset that would be written off at that point in time. Today, that asset is almost $8 million in value.

Okay, so just to put this in very simple terms, if your stock goes up in the quarter, are you likely to be writing up or down this asset?

If the stock goes up, the asset value goes up.

And that's why you saw that increase in FFO this quarter, with the rate -- the rise in the stock price.

Right. And then, was this a new investment? I mean, this is the first time we have seen this in your numbers. So was this something new, or was this an accounting change that was suggested by your auditors?

It's part of the purchase accounting related to the Hometown transaction.

Oh, I see. Okay. Very good, thank you.

(Operator Instructions) Nick Joseph, Citi.

Yes, it's actually Michael Bilerman. Paul, I just wanted to follow back upon the margin heading into -- for the full year, just as you think about what changed in your forecast. The expenses are growing a lot faster than the revenues in terms of the change. Relative to the guidance, the same-store NOI core growth is staying the same, but your components changed and your margin actually is dropping a little bit. And I think I heard you say real estate taxes, rental expenses and insurance, the rental expenses are broken out and are a small piece of it, but how big did things change on the tax and insurance side relative to where your head was at two months ago? And how much of those -- how much do taxes and insurance make up of that $280 million of property operating, maintenance and tax number?

Well, I think in terms of the margin, I think it was a few-basis-point change in the margin from what it was to what it is now. The insurance renewal was around 12% increase year over year. And as I said, that is effective April 1.

And with respect to the real estate taxes, we don't have great visibility, as we've said before, but we do have some indications that come in earlier in the year. And I think on a combined basis, real estate taxes and insurance represent call it 30% to 40%, off the top of my head, of our overall expenses.

That's over the overall sort of $300 million, or just of the property operating, maintenance and real estate tax number?

Inside the property operating and maintenance.

And then how much are taxes going up?

Taxes are up -- I think it's around 10% or maybe a little bit better than that. Keep in mind that inside our core, the tax increase is impacted by our exposure at Hometown to reinvestment in the second year after purchase.

Right, so that may be driving it as well. And so where do you feel more -- are you more confident in the revenue increase versus the expenses? I guess are you -- did you over -- are you overly conservative on the expenses in terms of the changes that you made, which would seem to be much higher increases than what you thought it would be?

What we do when we go through guidance every quarter is to really take a bottoms-up approach and try to understand the pieces of it. So we've looked at the expenses, and know that those expenses, specifically the ones that Paul just highlighted, are known and baked in.

With respect to the revenue, we work with the operations guys to determine where we think we're going to be. And so the numbers that we've put down on guidance is really where we think we're going to be for the year.

Okay, thank you.

Okay. Thanks, Michael.

Thank you very much for your question. Ladies and gentlemen, that is all the time we have for questions. I would now like to turn the call back to Marguerite Nader for closing remarks.

Thank you very much. We look forward to updating you again in July, and Paul Seavey will be available for any follow-up questions. Thanks very much.

Thank you for joining today's conference. Ladies and gentlemen, this concludes the presentation. You may now disconnect. Good day.