Equity LifeStyle Properties Inc (ELS) 2013 Q3 法說會逐字稿

Good day everyone, and thank you all for joining us to discuss Equity LifeStyle Properties' third quarter 2013 results. Our featured speakers today are Marguerite Nader, our President and CEO; Paul Seavey, our CFO; and Patrick Waite, our Senior Vice President of Operations. 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 and the meaning of the federal securities law. Our forward-looking statements are subject to certain economic risks and uncertainties. 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 President and CEO. Please proceed.

Good morning, and thank you for joining us today.

Our normalized FFO for the third quarter was $0.65 per share, which represents a 12% growth rate from 2012. Our results for the quarter show the strength of our business, which is supported by our quality real estate locations, stability of our cash flow, and flexibility of our product offerings. We continue to have high demand for our properties overall. Our properties appeal to the Baby Boomer demographic, a group that will grow to over 100 million people over the next ten years. Our properties are well-positioned to accommodated the growth in this key demographic.

On the MH side of our business, as I discussed at the beginning of this year, we continue to focus on increasing the number of ownership transactions in our portfolio. We see the impact of this focus as our used home sales volume within our MH footprint increased 43% this quarter. Our operating teams are using available tools, including adding additional marketing channels, to attract buyers. The quality of occupancy remains important to us, and we are seeing a higher concentration of customers making the decision to buy rather than rent homes in our communities. This quarter marks the first quarter since we reduced our sales operations in 2008 that we have increased our homeowner base.

The RV industry has had some positive trends in 2013, including sales growth of 13%. While these sales do not translate directly into our RV revenue, it is helpful to see sales following an upward trend. While ELS continues to be focused on marketing to the 8 million to 9 million [install-base] of RVers, it is always a positive sign for our business for new customers to enter the lifestyle. We are pleased with the strength of our RV revenue this quarter with an overall growth rate of 6.3%. The majority of this growth was the result of increased seasonal and transient revenue; while our transient revenue represents less than 4% of the total RV revenue, it has the highest exposure to new customers. This revenue stream becomes our future revenue stream from annuals, as a customer's first experience at a property is only a starting point in their level of commitment to ELS.

We have directed our marketing campaigns to gain exposure to a new customer base and have increased bookings online and at the call center. We have launched a mobile version of our website, which has provided for increased access to making reservations. Our social media outreach has increased, and we now have 66,000 fans actively communicating with us on a regular basis.

As we have disclosed in press releases this quarter, we closed on the sale of 11 properties in Michigan, and redeployed our capital into 3 high-quality assets in the greater Chicago metro area. These properties have 1,200 sites and represent an attractive alternative to the Michigan portfolio. With these transactions, we traded communities in non-core markets with unstable historical performance, low occupancy, and a high percentage of rental and home loans for institutional quality assets in core markets with strong stable performance and minimal working capital requirements. We believe these assets achieve our goal of acquiring quality assets and creating shareholder value.

I would like to update you on our proposed 2014 dividend policy. The ultimate decision for the dividend policy is a board-level decision that is typically done at our November Board of Directors meeting. As in the past we feel it is helpful to highlight management's recommendation with respect to the dividend. Each year, to arrive at a recommendation we review our proposed growth and FFO, our outstanding obligations, all with a goal to ensure our underlying financial flexibility. We have been able to increase our dividends significantly over the last few years because our company continues to grow.

Over the past few years our dividend policy recommendation was colored by the large maturities that we had for 2014 and 2015. With our recent financing we have effectively reduced our exposure to large maturities due in any one year. With that uncertainty behind us, we felt the confidence to be able to recommend a significant dividend increase. Management is recommending an increase in the dividend from $1.00 to $1.30, or a 30% increase. This proposed dividend would provide the tenth consecutive year of dividend growth for ELS. Please note while this is management's recommendation, the board has not yet met to discuss it. The board is expected to discuss the 2014 dividend policy in early November at the quarterly Board of Directors meeting.

As we head into the final stretch for 2013, we are pleased with the execution of some key initiatives, including balance sheet management, strategic dispositions, quality acquisitions, new customer acquisitions on the RV side of our business, and increasing ownership transactions on the MH front. I would like to thank the team for all of their efforts.

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

Thanks Marguerite, and good morning everyone.

I will review our third quarter results, walk through the details for the rest of this year, and discuss our preliminary guidance for 2014. We reported $0.65 normalized FFO per share for the third quarter, $0.01 ahead of our guidance. Property operations performed in line with expectations, and we realized some savings in property management and interest expense. Core base rental income came in slightly ahead of forecast, about 3.2%, with 2.5% coming from [rate] and 70 basis points from occupancy. We had strong occupancy gains of 53 sites this quarter and we are up 224 sites year-to-date.

Our core RV revenues were higher than guidance, driven largely by seasonal and transient revenues. Annuals were up 3.9%. Seasonal revenues were up 16.3% and transient activity increased 8.6%. One of the drivers of the seasonal revenue increase related to temporary pipeline workers in one of our properties. These customers generated approximately $120,000 of revenue we don't expect will be recurring. Transient revenue growth was favorable as a result of occupancy and rate growth in the West, as well as our cabin rental program, which contributed approximately $500,000 to our transient revenue growth in the quarter.

I'll take a moment now to discuss our RV dealer program and a related change in accounting treatment. We are excited about the opportunity to expose a broader base of customers to our resorts, including having our product embedded in the sale of RVs at 34 dealerships. Since inception, this program has resulted in the activation of 6,425 memberships. A review of the roughly 380 customers whose memberships have come up for renewal through September indicates 42% of them have used their membership, and of those customers, 36% renewed their membership upon expiration. This results in an overall renewal rate of 15%. We continue to be excited about the RV dealer program as a lead generator for our membership platform. We expect to expand the program with a larger group of dealers in more locations during 2014.

In the quarter, we changed the accounting treatment of revenues and expenses related to memberships activated through our RV dealer program. We no longer recognize non-cash revenue or expense associated with these memberships. While this accounting change has no impact on net property operating income, it does impact the right to use annual revenue, and sales and marketing expense line items.

In the quarter, core property operating expenses were 50 basis points higher than guidance. The $300,000 variance was primarily the result of higher than expected taxes and other administrative costs in our rental program. Non-controllable expenses included in property operating maintenance and real estate taxes grew 3.2%, compared to last year, driven by utility expenses. The growth in our non-controllable expense was lower than our guidance assumption, as we made an initial adjustment to our estimate of Florida real estate taxes based on tax notices received during the quarter. Controllable expenses were 3.5% higher than last year, mainly as a result of higher repairs and maintenance expenses. Ordinary property R&M was higher than expected and we also incurred expenses related to storms and other events in the third quarter. Overall core NOI before property management grew 3.3%, in line with guidance.

Property management and corporate G&A were $16.1 million, $600,000 less than guidance from savings in property management costs such as payroll and travel. Other income and expenses were $6.3 million, slightly ahead of guidance, and financing costs were $31.6 million in the quarter. Year-to-date core NOI increased 2.9%, core revenues grew 3.1% driven by core MH growth of 3% and core RV growth of 4.7%.

The press release and supplemental package provide fourth quarter and full year 2013 guidance in detail, as well as preliminary 2014 guidance. As I discuss guidance, keep in mind my remarks are intended to provide our current estimate of future results. All growth rates and revenue and expense projections represent mid-points in our guidance range. Our fourth quarter normalized FFO guidance is approximately $53.5 million or $0.$0.59 per share at the midpoint of our range. We expect our core to generate revenue growth of 3.3%, expense growth of 4.7%, and NOI growth of 2.3% in the fourth quarter. We assume no growth in our core MH occupancy during the quarter. Looking ahead to the fourth quarter in our RV business, our annual reservation pace is about 4% ahead of last year, consistent with our guidance. Seasonal and transient reservations are in line with our expectations as well. Our expense growth assumption of 4.7% in the fourth quarter is driven by our current estimate of growth in our uncontrollable expenses.

For the year, we expect core revenue growth of 3.2% and NOI growth of 2.8%. Normalized FFO at the midpoint of our guidance range is about $229.1 million, or $2.51 per share. Our preliminary guidance for 2014 normalized FFO is $243 million or $2.66 per share at the midpoint of our range. Normalized FFO for 2014 is expected to be up approximately 6% from 2013. Our projection of normalized FFO growth for 2014 assumes fourth quarter results will be consistent with our stated guidance. We will plan to update guidance on our next call, and we may adjust growth rates on certain line items after we finalize results for 2013.

Growth in core NOI before property management is expected to be approximately 3.6%. We assume flat occupancy in our MH properties for 2014. Base rent is expected to grow 2.2%, with 2% from rates and 20 basis points from occupancy as we realize the full year impact of sites filled in 2013. Our budgeted base rent reflects utility and real estate tax on bundling efforts. Our base rent growth is approximately 50 basis points lower as a result of these efforts. This revenue has been budgeted in utility and other income.

In our resort business, we expect annuals to continue to show solid growth of 4%. We expect to add about 300 annuals in 2014. We expect seasonal revenue to increase 3.2% and transient to increase 3.8%. We anticipate continued strong demand for our RV resorts in 2014. We expect to realize approximately 50% of our seasonal revenue in the first quarter, and our current reservation pace is consist with our budget. Our budget is also consistent with our first quarter transient reservation pace; however, it represents approximately 20% of full year transient revenues. We budget 45% of our transient income in the third quarter and we expect to gain visibility into third quarter activity during the second quarter.

Overall, results from our membership business, which includes right-to-use annual payment revenue, right-to-use contract sales, and sales and marketing expenses, are expected to be flat to down slightly next year. We expect annual membership sales to be around 10,000 in 2013 and 2014. Our RV dealer program is expected to generate 8,500 new customers next year, up from 6,000 this year. Core expenses are expected to increase approximately 1% in 2014, compared to expected growth of 3.6% in 2013 over 2012. The main drivers of growth in property operating maintenance and real estate taxes are the uncontrollable expenses, utilities, insurance, and real estate taxes. It is important to note that we are forecasting 2014 without the benefit of actual full-year results for 2013. Financing costs include savings of approximately $6.8 million in 2014 as a result of our refinancing efforts in 2013. We assume no acquisition activity in our guidance for 2014.

Now I'll provide an update on our refinancing activity and comment on our balance sheet. During the quarter we closed on $237.1 million dollars of secured debt as part of our refinancing plan. The new debt has a weighted average term of 20 years and a weighted average interest rate of 4.28%. We incurred defeasance costs of $36.5 million and retired $295.3 million of secured debt with a weighted average rate of 5.66%. Year-to-date we have closed on $347 million and retired almost $394 million of debt through defeasance or pay-off at maturity. Our total defeasance costs of $37.8 million were lower than anticipated as a result of savings in legal and other fees. We have commitments from two life companies for an additional $78.7 million at 4.5% for approximately 23 years with scheduled closing dates in December and April 2014.

At the end of the quarter, our cash balance net of the third quarter dividend paid earlier this month, was approximately $28 million. We anticipate ending the year with between $0 and $5 million of cash on our balance sheet. As discussed, we have used our available cash during 2013 for repayment of debt and property acquisition. There is nothing drawn on our $380 million line of credit. Current secured debt terms are 10 years at coupons in the 4.5% to 5% range, 60% to 75% loan-to-value and 1.4 times to 1.6 times debt service coverage. High-quality age-qualified MH assets continue to command best financing terms. We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of public and private capital available to us. Now we would like to open it up for questions.

(Operator Instructions) Your first question comes from the line of Nick Joseph with Citigroup.

Thanks. 2014 guidance assumes same-store growth accelerating, pretty much the result of lower expense growth; what gives you the confidence that expense growth in 2014 will be lower than this year given 2013 expense growth guidance continues to increase throughout this year?

I think we need to take a look at expense growth. And in my remarks, I commented on the accounting change related to our RV dealer program. When you adjust for that change, which represents a reduction of about $2 million in expense next year, we have growth that essentially is at CPI. In our long-term view, we expect expenses to grow generally in line with CPI.

Okay thanks. Then how much free cash flow do you expect to generate in 2014 and what does guidance assume in terms of the future use of that free cash flow?

Guidance makes no assumption with respect to the use of free cash flow. We have -- I'll just walk it through for you. $243 million of FFO. We have roughly $40 million in principal payments next year. Our dividend recommendation is about $120 million and we have roughly $30 million in recurring CapEx. And beyond that we have our working capital requirements for our investment and our rental program. That is kind of the breakdown on the free cash flow.

Okay thanks. Then what are you seeing in terms of transaction cap rates for institutional quality assets in the market today? Have you seen any impact on cap rates from the rise in rates?

We haven't really seen any impact. I mean our business, the acquisition market is choppy. There haven't been a lot of transactions, you know consistent with what we have seen in the past. There haven't been a lot of transactions that have happened. But anything we have seen hasn't really been -- the interest rates haven't impacted it.

All right thanks.

Jana Galan with Bank of America Merrill Lynch.

Thank you, good morning.

Good morning

Following up on, you know, the transaction environment, I know 2014 does not assume any acquisitions or dispositions, but maybe if you could just comment on what is being marketed right now? And do you expect that to kind of increase just due to seasonality?

Sure. I mean I think in my opening comments, I addressed that in terms of transactions that we did, that we traded out of Michigan and we got into our core Chicagoland properties. Additionally in the quarter we bought a property in the Keys, in the Florida Keys, a 300-site property. And in terms of other acquisitions that are out there, right now, there isn't a lot trading. I think that you would see the same environment where you see a little MH, some MH trading and some RV trading over the next year, consistent with what we have seen in the past.

Is it mostly single asset or single communities? Or are there some portfolios?

Right now there is some all-age portfolios, primarily in the Midwest, that are available in terms of portfolios. But generally, they are one-off transactions.

Thank you.

David Toti with Cantor Fitzgerald.

Good morning.

Good morning David.

Marguerite, I just want to follow-up on sort of a strategic comment that you made, relative to, you know, how you are thinking about increasing home sales versus sort of pushing on the rental program. It sounded to me like distinctly you are thinking the company will pull back a little bit on the rental program and really focus on home sales. Is that the correct take-away from your commentary?

Yes, what I said in the beginning of the year was that we wanted to focus on reducing our rental program. And by virtue of increasing our used home sale program and our new home sale program, that will diminish our rental program in various locations. And so -- and actually I think Patrick Waite can kind of give you some more details about what we are doing from an operational standpoint. Because it really is the day-to-day operations that are impacting this and that cause us to have such a, really a good quarter from a sales perspective.

It is, just briefly in the overall, there are a few factors are contributing to the improvement in home sales. We are pursuing new marketing channels including greater emphasis on a website, MHVillage.com, that focuses on home buyers. At the properties we have installed new signage emphasizing home sales to draw potential customers from drive-bys and other traffic. Further from an operational perspective, we did two things to increase sales; first we changed compensation structure for transactions by reducing commissions for rentals, and that made home sales a more profitable activity on a relative basis. And second we started to hold homes for sale only to make them available for home buyers as opposed to home renters.

Okay that is helpful. So I assume we are not going to see you selling $150,000 units just quite yet, right?

No. That would not be the case David, you are correct.

Did you provide an update on the joint venture? Financing efforts?

We didn't. But we have been happy with our relationship with Cathco. We have set -- I think it's 40 homes in our communities, and have additional homes on order and we have sold or closed on 23 of those homes.

Okay my final question just has to go sort of back to the acquisitions environment. Are you able to disclose a cap rate on the assets you purchased in Chicago? And also were those all-age or age-restricted and what were the occupancy levels on those assets?

Sure the cap rate was -- it is included in our guidance in terms of the contribution for next year -- it was a 6% cap. In terms of the makeup of the properties, there are three properties, one is age qualified, one is all-age but used to be age-qualified and basically looks and smells and feels like age-qualified, and one is an all-age asset. The properties are I think 96%, 97% occupied, with no rentals, really no loans in the portfolio, so it is kind of, you know, our old MH model in Chicago which we were very positive about being able to acquire.

Great, thanks for the detail today.

Thanks.

David Harris with Imperial Capital.

Thank you. Good morning. Compliments to you in terms of the detail and the clarity of your -- and timing -- of your 2014 guidance. I think it sets a standard by which others should pay heed. I have a question for you Paul, actually on this. The resort income that you are forecasting, how sensitive do you think that is to variance in the economy?

I think that you raise an excellent point, as we look at next year and as we developed our budget we spent a lot of time talking about our experience this year and the positive results that we had in seasonal and transient. As I mentioned in my remarks, our third quarter represents 45% of our transient revenue and we really don't have good visibility into that until the second quarter. That being said, the greatest correlation that we've seen historically in our transient RV business has really been weather. And I think economy is second to weather. So we are watching it very closely and we are optimistic that we will continue to see strong growth in the RV business.

I wonder if the Chairman has ventured a contribution towards -- sort of a GDP forecast -- for 2014.

It always helps.

Did he throw out a number to guide you?

No. No.

Okay. All right. Second question is, are we likely to see any more defeasance charges this year or into next with regard to the outstanding mortgage debt you could take down?

No, we have no further defeasance charges. We have structured those forward fundings -- we structured those with a rate lock up-front and we will pay those loans off at maturity.

Okay. If you look at the other non-recurring items, I think there was some acquisition related costs which obviously would be dependent on your acquisition volume. Was there anything else in there?

The only other item is the change in value of our contingent assets on our balance sheet related to our Colony Cove asset that we bought in the hometown transaction. There is an escrow that we had that is denominated in ELS stock, and to the extent that our stock price fluctuates, we recognize income or expense associated with that.

Without getting too much into the weeds, that is fairly minimal but would be ongoing?

Would be ongoing. At the moment the balance is about $4.5 million and it burns off into 2014.

Okay. Very good. Thank you.

Your next call comes from the line of Todd Stender with Wells Fargo.

Good morning everybody.

Morning Todd.

Marguerite, you quoted a 6% cap on the Chicago assets. Is that on a forward basis? How do you get a look at that?

That is basically what we are going to see, experience in 2014, on those assets.

Okay. Trailing in the 5%s?

Trailing a little bit, a little bit, you know probably 5.8%, something like that -- around there.

Okay. Just looking at quality, if you can look at it this way, how do the site rents compare to what is currently in the ELS portfolio?

The site rents are consistent with what you'll see throughout our portfolio. They have, you know, they have the ability to grow rents there. At I think historically, it has been a 4% increase over time. And from -- I think I mentioned it earlier -- but just from a perspective of the quality of the occupancy, you are dealing with all people who own their homes, no rentals, no loans, the working capital commitment just doesn't exist inside these portfolios. These are quality properties.

Okay that is helpful. Just looking at some of the cap rates we are hearing on age-restricted MH communities, definitely we'll go into the 4%s and they seem more driven by new owners relying on lease-up through rentals. How much, just based on your comments today and kind of the direction you are taking with the rental model, how much validity do you put into some of the -- maybe some of your competition chasing some of these cap rates? And I guess the legs that a rental model has, particularly in select markets?

Well, I think that there has recently been some new entrants into the MH and the RV marketplace that have generated some news, and I think that has tracked some of those cap rates that you are referring to. I think that a certain piece of rental inside of a property is appropriate to have and actually can be a lead generator for the greater business, for the greater MH business and the ownership model. But there is a point where it gets to -- it gets too large of a component and we prefer to have that quality occupant, which is someone who has the ownership in the home.

Okay. Thank you. And then just looking at the RV business, Paul, I think you mentioned where you give a forecast for next year's -- I think it was in the RV memberships, looked like a pretty good increase. You have made an acquisition in the Florida Keys recently. You are able to tap secured financing in the second quarter in RVs. Can you guys just talk about generally your thought on how much your RVs are going to contribute to next year's growth and how the marketing campaign is going with RV retailers?

I think what we are showing for growth in 2014 is about a 4% growth in RV. As Paul mentioned in his comments, our transient growth is difficult to get visibility into that because it happens in the second and the third quarter. So we would certainly have an update for you as we get closer to that in terms of how we are pacing. From the RV overall component we have our membership business, which we have I think it's 96,000 members right now. We see -- our supplemental kind of shows the various ways that Thousand Trails contributes and that RV contributes to our revenue streams. I think we've see strength in the annuals there and we continue to see strength in the transients. Our new online applications -- between having a mobile site, which is key for us, because people are on the road, making reservations, and really trying to tap into new RV distribution channels, both from the -- we are doing the dealer program, going to be increasing the dealer program next year, and look to other avenues to just get exposure to our customer, get exposure to our properties for new customers.

And just in general, Paul I think you mentioned that you have commitments from life insurance companies for debt financing going into next year. Are any of those properties collateralized within the RV segment?

That group of financing does not happen to. Life companies will finance very high-quality RV assets with high annual occupancy in the properties. And the CMBS market is generally speaking the market that we tapped in July, for our RV portfolio. And subject to the overall health of the CMBS market there is interest in financing RV in that market.

Okay. Thank you very much.

(Operator instructions) Your next question comes from the line of Paula Poskon with Robert W. Baird.

Thank you, good morning everyone

Good morning.

I just wanted to follow-up on Todd's line of questioning around the value of the rental business. As we were doing our diligence in preparing to launch coverage on the sector, we heard a variety of philosophies around the different cash flow streams and the quality of those, ranging from the manufactured housing community, the traditional cash flow has always been more highly valued and straying off into the resort business and certainly the rental business degrades the cash flow, while others have said we are obviously becoming a renter nation and that is just evolving the business strategy. How do you think about those two philosophies?

I think that there is a component in most of our properties that does have this rental component and that is a good thing for us, in terms of being able to generate additional leads and additional traffic. But when it starts to impact us from the standpoint of being able to finance the property and being able to just impact the neighborhood feel of the property where people are no longer owners, then I think that you start to have a negative impact and you start to see change in valuation. That is what we try to encourage, and what we've done I think in this quarter is to change our incentives at a property level so people -- so that our employees are concentrating on the sale rather than to rent.

Thanks Marguerite.

Your next question comes from the line of Dave Brag with Green Street Advisors.

Hi, good morning.

Good morning.

On the rental program, can you help us understand what your investment has been and the growth of that has been as we progressed through 2013 given that you had the sale in Michigan that removed about 1,000 units. In each quarter in 2013 what have you added to rental inventory?

I think in our supplemental maybe Paul has a better view of it. You can see in our supplemental we had an increase year over year of about -- less than $20 million -- $19 million in the rental program. And I think if we break it out in supplemental every quarter so you can see that change in the total cost basis in the rental homes.

We'll review that. I think it is distorted by the removal of the Michigan portfolio but we'll follow-up on that.

The historical -- the historical is -- as presented in the current supplemental, it is core only. So Michigan's been extracted. But I can follow-up with some more detail around the core activity in prior quarters.

Okay, and at what level of home sales can we expect you to halt incremental investment in the rental program? How are you thinking that through?

Well I think that we have seen an increase in new home sales; this is new for us for the last two quarters as we have seen it. So I think it is a little bit too early to tell you as to when we increased the new home sales more and the used homes and were able to pull back on the rentals. So still a little bit early to be able to answer that.

All right. Last question is on the operating expenses in guidance. Paul, the property operating maintenance and real estate tax line, the 1.7% growth you expect in 2014, please break that down by the major line items embedded in there and give us the growth rates that you expect.

The uncontrollable represents about 50% of that. And we see that growing. We see that growing closer to 3%, and the controllable represents the other 50% roughly. And as I mentioned in the third quarter, we had some one-time costs associated with storms and other events that we don't expect to recur. So I think that overall we are at generally a CPI, on an adjusted basis inside the controllable, and then the uncontrollable are expected to grow closer to 3%.

Thank you.

There are no further questions from the phone lines. I would now like to turn the call back over to Marguerite Nader for closing remarks.

Thank you all very much. Paul Seavey will be available after for any follow-up questions and we look forward to updating you on the next quarter's earnings call. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.