Equity LifeStyle Properties Inc (ELS) 2013 Q4 法說會逐字稿

Good day, everyone, and thank you for joining us to discuss Equity LifeStyle Properties' fourth-quarter 2013 results. Our featured speakers today are Marguerite Nader, our President and CEO; Paul Seavey, our CFO; and Patrick Waite, our Executive 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 in the meanings of the federal securities laws. Our forward-looking statements are subject to certain economic risks and uncertainty. The Company assumes no obligation to update or supplement any statements that become untrue because of subsequent events.

At this time, I would like to turn the call over to Marguerite Nader, our President and CEO.

Good morning, and thank you for joining us today. Before we discuss the specifics of the fourth quarter and guidance for 2014, I would like to take some time to walk you through some of our highlights for 2013 and outlook for 2014.

In 2013, we focused on increasing the strength of our existing operating platform, balance sheet management, strategic dispositions, and quality acquisitions. I am pleased with our execution on our key initiatives.

On the operating front, we improved the quality of our occupancy by bringing more homeowners into our communities than in previous years. We had our 17th-consecutive quarter of occupancy growth. While we continue to utilize the rental program to augment our occupancy, we have reduced our reliance on the program in favor of selling homes.

Throughout the year, our sales activity for both new and used homes has increased. We have increased our used home volume by almost 30% and have increased our new home sales as well.

We believe our product competes well in the current environment. Our ability to offer low-cost homes to empty nesters and retirees offers an attractive option for those wishing to reduce the amount of capital tied up in their housing and still enjoy a high-quality lifestyle.

As we have often discussed, a key issue for this business is the capital investment in our rental program. The execution of our plan this year has allowed us to recycle some of our capital.

Our sales activity comes from both local and national traffic, and we have directed our marketing efforts accordingly. We have increased traffic coming to our properties and online sites. We will focus on this important part of our business in 2014, as we increase our sales and marketing efforts.

Our RV business was strong in 2013. The RV industry has trended positively, including sales growth of 17%. ELS is focused on marketing the 8 million to 9 million install base of RVers and 40 million outdoor enthusiasts.

In 2013, we focused on bringing in new customers to experience our lifestyle offerings. We saw an increase in new customer accounts, which will translate into repeat business, as repeat customers are our largest customer source. We increased the utilization of our RV sites in both our Thousand Trails and Encore platforms. Accessing new customers is evident in our results for the full year, which include a 5% increase in our RV revenue.

We have focused our marketing efforts on new websites, designed to engage users to generate reservation activity. We have launched a mobile version of our website, which provides improved access to reservations. Externally, we have focused on advertising to the new customer and providing information online for customers to be able to make an informed decision about our product offerings.

Our social media outreach has increased, and we now have 80,000 fans actively communicating with us on a regular basis. In 2014, we intend to strengthen the relationship with third-party websites to generate new customers as well as increase the functionality of our internal site.

Our first-quarter guidance shows the continued strength of our RV market, with projected revenue growth of approximately 6%. New customer acquisition will be a focus in 2014 in both our MH and RV portfolios.

Balance sheet management was a big focus this year, as we determined the best way to address our maturities. In 2013, we refinanced $430 million of debt, with a blended rate of 4.5% and a term of 18 years. We have significantly improved the maturity schedule, and we will continue to explore ways to optimize our balance-sheet flexibility. With respect to transactions, we had an active year in acquisitions, with over $150 million of asset purchases and a strategic disposition of non-core Michigan properties.

In 2014, we will continue to focus on opportunistic acquisitions. Our business performed very well in 2013, and we expect that performance to continue in 2014. We have a great business model, and we will continue to look for growth opportunities that allow us to increase shareholder value. 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 fourth-quarter results, update our full-year 2014 guidance, and discuss our detailed first-quarter guidance.

Normalized FFO per share for the fourth quarter was $0.62, $0.03 higher than guidance. Roughly half of the increase comes from core property operations, where we saw strong revenue growth in our RV portfolio, and the other half comes from proceeds related to the settlement of our hurricane litigation.

Core base-rental income came in slightly ahead of forecast, up 3%, with 2.6% coming from rate and 40 basis points coming from occupancy. We increased occupancy 88 sites this quarter, and the quality of our occupancy continues to improve as we gained 29 homeowners in the quarter. Year to date, our core occupancy increased 312 sites.

Our core RV revenue growth of 7% was driven by seasonal and transient revenue. Annuals performed in line with expectations, and revenues increased 4%, mainly due to occupancy gains in the North, Florida, and the West. Revenues from seasonals were up 16%, and transient activity increased 16.5%. The growth in seasonal revenue was evenly split between rate and occupancy, with Florida and California generating most of the growth.

All regions of the country saw double-digit revenue growth in our transient business. The growth from occupancy in our transient revenue was approximately 5%. The remainder of our growth resulted from increased effective rates.

The combination of increased nightly rates, a changing mix within our portfolio, and cabin-rental activity generated the growth from rate. In terms of geography, the South, West, and Northeast saw transient revenue growth rates ranging from almost 17% to more than 21%.

On a net basis, our membership-dues revenue and sales and marketing revenues and expenses performed in line with guidance. Core property operating expenses were less than guidance because of payroll savings in the quarter.

Utilities, insurance, and real estate taxes represent almost 50% of our expenses, and were in line with guidance for the quarter. These line items increased 7.2% year over year, driven by real-estate tax growth of 11.5%. Insurance expense increased 13%, and utilities were up almost 4%.

In the fourth quarter, our core revenue growth was 4%, compared to guidance of 3.3%, and core expense growth was 4.4%, compared to guidance of 4.7%. The better-than-expected performance in both revenues and expenses drove core NOI, before property management, to 3.7% growth, compared to guidance of 2.3% for the quarter. Property management and corporate G&A were in line with guidance.

Other income and expenses were $5 million, $1.8 million higher than guidance, as a result of the settlement of our hurricane litigation. Financing costs were $31.1 million. Year-to-date core NOI increased 3.1%. Core revenues grew 3.3%, driven by core MH growth of 3% and core RV growth of 5.2%.

Before moving on to my guidance update, I will provide some detail on the contingent asset-related expense we reported. As I have mentioned in previous quarters, we acquired Colony Cove as part of the Hometown acquisition. Our ownership of this 2,200-site community consists of a fee interest and a leasehold interest.

The lease terms include an option to purchase the underlying fee interest upon the death of the lessor. We negotiated with Hometown to cap our exposure to increases in both the ground lease payments and the option purchase price.

At closing, Hometown deposited shares of ELS stock into escrow and agreed to release shares to us each quarter until the option could be exercised, at which time, any remaining shares would be distributed to Hometown. We recorded this escrow is it contingent asset on our balance sheet. We have received quarterly distributions from the escrow to offset the lease and option prices increases.

During the fourth quarter, we learned of the death of the lessor. We intend to exercise our purchase option as soon as possible, and our first-quarter results include net expense of $1.6 million. This represents the change in fair value estimate of the escrow in the fourth quarter, offset by the fair value of shares to be distributed to Hometown.

At year end, the remaining contingent asset balance on our balance sheet represents our expected distributions before the closing date. Consistent with our normalized FFO definition, the expense has been added back in the calculation of normalized FFO. Concurrent with the acquisition of the fee interest and the final escrow distribution, this matter will be resolved.

On to guidance, the press release and supplemental package provide 2014 full-year and first-quarter guidance in detail. 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 midpoints in our guidance range.

Our guidance for 2014 normalized FFO is $245.4 million, or $2.68 per share at the midpoint of our range. Our guidance differs from the preliminary guidance we provided in October, primarily as a result of the acquisitions we announced in our release last night. Growth in core NOI, before property management, is expected to be approximately 3.4%. We assume flat occupancy in our MH properties for 2014.

Base rent is expected to grow 2.3%, with 2% from rate and 30 basis points from occupancy, as we realize the full-year impact of sites filled in 2013. As a reminder, our budgeted base rent reflects utility and real-estate tax unbundling efforts. Our base rent growth is approximately 50 basis points lower as a result of these efforts. The revenue has been budgeted in utility and other income.

In our resort business, we raised our full-year revenue guidance from 3.8% to 4.1%. We now project 4.5% growth in our annuals. We expect seasonal revenue to increase 3.1% 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 consistent with our guidance. Our expectation of 10.6% growth in our first-quarter transient revenue is also based on our review of reservation pace. Keep in mind, 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 include 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. In total, we expect to generate 18,000 memberships through the sale of low-cost products in 2014.

Core expenses, excluding sales and marketing expenses, are expected to increase 2% in 2014, compared to expected growth of 3% in 2013 over 2012. Our expense-growth assumptions are driven by our current view on real-estate taxes and insurance. In 2013, we saw growth of 6.4% in these two line items. This was driven by our property insurance renewal in early 2013 and continued real-estate tax reassessment of properties acquired in the Hometown acquisition.

Our 2014 growth is projected to be 3.9% for these line items. Early indications ahead of our April insurance renewal suggest the increase will not be as steep as the 16.5% expense increased we experienced in 2013.

Our guidance includes $9.5 million of NOI from the acquisitions we completed in 2013 as well as the two properties we acquired this month. As mentioned in our press release, we closed on three RV properties, for a total purchase price of approximately $31.5 million.

In connection with the acquisitions, we assumed loans with a total remaining balance of $18.7 million and a stated average rate of approximately 6.5%. Financing costs include interest expense associated with the acquired assets. Aside from the three RV properties we acquired over the past few weeks, we assumed no additional acquisition activity in our guidance for 2014.

Our first-quarter normalized FFO guidance is approximately $69.3 million, or $0.76 per share at the midpoint of our guidance range. We expect our core to generate revenue growth of 3%, expense growth of 2.3%, and NOI growth of 3.6% in the first quarter. Our first-quarter base rent growth of 2.5% assumes a 2% rate increase and 50 basis points related to occupancy gains we achieved in 2013. We do not assume incremental first-quarter occupancy gains in our guidance.

Looking ahead to the first quarter in our core RV business, our revenues from annuals are expected to grow 4.5%, compared to last year. We are seeing strong results in Florida, and we are realizing continuing impacts from annuals we gained in the North the Northeast during 2013. Seasonal and transient reservation activity continues to show strong results, particularly in California and Florida.

The reservation pace is driving our expectation of 5.5% seasonal and 10.6% transit revenue growth in the first quarter. We are projecting first-quarter expense growth of 2.6%, excluding sales and marketing. In the first quarter, we realize the remaining impact of the increase in the 2013 insurance renewal. Our other expense line items are expected to increase between 2% to 2.5%. We expect our acquisition properties to contribute $2.3 million in the first quarter.

Now, I will mention our recent refinancing activity and comment our balance sheet. During the quarter, our refinancing proceeds totaled $28.4 million and carry a weighted average rate of 4.35% for 25 years. These proceeds were used to retire $26.1 million, with a weighted average rate of 5.81%.

We have commitments from a life company for an additional $54.3 million, at 4.5%, for approximately 22 years, with closing scheduled for April. We expect to use those proceeds to repay debt at maturity and have additional maturities totaling approximately $35 million in late 2014.

At the end of the quarter, our unrestricted cash balance, net of January loan payoffs and the fourth-quarter dividend, paid earlier this month, was approximately $5 million. As discussed, we used our available cash during 2013 for repayment of debt and property acquisitions. 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 to 1.6 times debt service coverage. High-quality, age-qualified MH assets continue to command best financing terms. We continue 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)

Gaurav Mehta, Cantor Fitzgerald.

Marguerite, in your prepared remarks you talked about improvement in utilization for Encore and Thousand Trails portfolio. As you think about that in 2014 and onwards, how much work do you think is left? And, can you talk about your strategy to further improve it?

Sure, what we did this year was really take a look at our websites, redo our websites, and also work with local marketers in the area, close to our properties, to try to figure out the best way to access new customers. The results of that is, I think we had a 35% increase in calls coming into our portfolio, into our call center, with respect to asking questions and wanting ZPP, or the low-cost product. So, additional people interested in the Zone Park Pass, which we see as a positive, and we think that would continue into 2014.

When we built the new website -- the new website was done at the end of December, beginning of January, for Thousand Trails, that has already started to generate new activity. Increased users coming through, understanding that new experience, both from the member side and the new member, or the non-member base. So I would see those continuing.

On the Encore side, our RV-on-the-go traffic is up about 30% just on the website. So, we are seeing an increased usage of our online strategy, and people calling both the call center and booking online with us, as well as I think I mentioned a mobile application. We know our customers are mobile, and we've built it, now, so that people can access reservations through their smartphones.

Great. That is helpful. Then, second question on acquisitions -- where are you seeing opportunities, both in RV and manufactured housing, in 2014 in terms of additional acquisitions? And, could you talk about your thoughts on buying assets via issuing OP units?

Sure. I think, just as a thing about our recent acquisitions that we bought, they are in Wisconsin. We had have those three properties that we just closed are in Wisconsin, and they are going to be integrated into our existing Wisconsin footprint. So this year, we have been able to both take down MH assets and RV assets.

I would say, Gaurav, at the beginning of this year, we would not be able to tell you what the pipeline was going to look like. We certainly have ongoing conversations with owners, and we have identified properties we would like to own, but we don't really quantify the pipeline.

As far as just what is happening in the general marketplace, there have been a few new entrants into the market recently, but the vast majority of those transactions are family transactions, or in the all-age sector. And, those are good data points for us, but they don't really fit within our core portfolio. I think the latest large transaction that took place was a family active portfolio that Hometown had sold in 2011, and then was resold again at the end of last year.

With respect to OP units, we actually did an OP-unit transaction this year. The MH transaction we did in the Chicago land area had a component of OP units. And, this year was the first year in a long time that we received a lot of calls from individuals interested in accessing OP units and using that as a component of a sale. And, I would anticipate an increase in this activity in the future, [mass] sellers are looking for an efficient sale on assets that they have held for a long time.

Nick Joseph, Citigroup.

Sticking with the acquisitions, what were the Cap rates on the three acquisitions?

They were between a 7 to an 8 Cap on the Wisconsin acquisition that you can see in the supplemental as we break out the acquisition NOI. Those properties -- there's two that are in the Madison, Wisconsin area and one in La Crosse. A lot of mainly annuals at these properties.

And then, for high-quality core properties, what spread are you seeing between RV and MH properties?

The spread really depends on the location. If you are -- a well-located RV is going to trade right on top of a well-located MH, so it really varies by location.

All right, thanks. And then, you decreased your estimated core income growth rate from 2014 from the preliminary guidance. Was that entirely due to 4Q results coming in ahead of expectations, or has your outlook for the business changed at all?

No, I don't think the outlook has changed. I think it really was a reflection of quarter four results. We did adjust the revenues up, as I mentioned, and scrubbed the expenses in the process and are showing an expectation of 3.4%, rather than the 3.6% we previously announced.

Okay, great. Thanks.

David Bragg, [Prime] Street Advisors.

Thanks, it's Dave Bragg with Green Street. Good morning to you. I wanted to ask about your underlying change in plans for 2014 for the rental inventory. It seems as though you significantly reduced your expected rental home income and expenses for 2014.

So, can you talk about what your expectations for rental inventory at the end of 2014 are now, as compared to what they must have been as of 3Q.

Yes, couple of things happened in there, Dave. First, we ended the year with fewer rentals than we originally expected, and that is really driving our assumptions for 2014, that is driving the change in the revenues. We had about -- we finished the year with an incremental gain of just over 400 rentals on a net basis, and that was about 300 lower than we had anticipated.

Looking into 2014, we haven't made an adjustment in the level that we expect throughout the year. And, I think that what you will see us do, as we go through the year, is continue to evaluate the opportunities. On a regular basis, weekly basis, we are reviewing our opportunities for occupancy gains and our commitment to gaining occupancy through that rental program.

So, we didn't make a major assumption change related to 2014 rental.

And, I think if you look back, Dave, at our rental income over the last few years, in terms of a percentage increase, it has gone down from 2012 to 2013, and we would anticipate it going down again 2013 to 2014, just as a result of what Paul was saying.

Okay, that is helpful, thank you. And, what are you assuming for new home sales volume 2014?

New home sales volume would be in line to maybe slightly better than what we have seen this year is what we are projecting. But, it really -- it is something that we would be updating -- we update on a regular basis. Certainly, we have our ECHO joint venture, our joint venture with Cavco, where we are bringing in new homes solely with a purpose of selling those homes.

So, we just continue to try to push that activity, and you can see we sold 109 this year.

Got it, thanks. And, the last question is just on your forecast for the transient side of the resort business. You are looking for significantly better growth in the first quarter than you are for the full year. Is that purely a function of your limited visibility on the second and third quarter, or is there something about that period of time in 2014 that leaves you more cautious?

No, I think -- we look at on the transient base for us, there is that limited visibility. We have owned these properties for a long time, so we have a lot of experience with the properties. But, there is a lot that happens between now and the July 4th weekend and the Memorial Day weekend, so we would prefer -- I think we ended the year transient revenue up 9%, and as we sat here last year at this time, we were anticipating to be flat to up a little bit.

So, it is really just a function of getting closer to the dates when that activity happens.

Okay, thanks a lot.

David Harris, Imperial Capital.

Here is a topical question for you -- any view as to whether the current weather conditions that are impacting so much of the country are going to have any impact on your business in the first quarter?

What we have seen, just from an expense standpoint, Paul can comment on that, but we actually see it as a positive as the phone calls generate just continues to increase as people realize, why would you stay up in this northern climate for too much longer. But, maybe, Paul, comment on some of the expenses.

Yes, I think the downside of that is in our MH properties. It doesn't really impact our RV resorts in the north, because generally speaking, they are closed. But, our MH properties, there was some pretty heavy snowfall in January. Nothing that caused us -- so far, nothing has occurred that has caused us to want to reconsider guidance, but that is a factor.

Okay. Your CapEx -- your maintenance CapEx numbers are still probably good? You wouldn't cause -- no reason to think that those numbers might be little higher?

No.

Okay. Big picture, going back to previously announced event -- you increased the dividend 30%, you are still twice covered. Could use share with us any conversations you have had with the Board about the future trend and the scope for dividend increases?

Yes, I think the discussions with the Board, at least on a go-forward basis, have focused on growth in the Company, and the importance of, as we talk about financial flexibility, that is a very important factor. And, we would expect the dividend to grow over time as we are able to grow cash flow.

How much of the 30% was driven by net taxable income considerations, or should we see really as discretionary and a one-off correction up to a higher level, and then rate of growth will be somewhat more modest as we go forward?

Right. We were paying out close to 100%, so it wasn't driven necessarily by a taxable-income issue. It really was about the use of the available cash flow and our ability to get past the pressures on our balance sheet related to our 2014 and 2015 maturities.

Shall I take that answer as being that the 30% should be considered rather a more one-off and that you are going to have a more normalized -- obviously, you don't want a preempt decision that the Board may make and events might change, but is it fair to say that the 30% was a one-off bump and that future growth will be a more modest proportion?

I think that is fair.

Okay. Another Board-related question is -- you're chaired by Sam Zell, off of Equity Residential -- let's get the right one -- was notably active in buying back stock. Now, your stock is not trading at a material discount to my net assets and I don't think consensus. Has the Board considered putting in place a share buyback program at all?

I think there have been some discussions on that. I think that for us, given that we are carrying limited amounts of cash, buying back stock, really in a meaningful way, would come through additional leverage. And, I think that the limitation on our flexibility cuts against us heading in that direction. There haven't been meaningful discussions about putting a buyback program in place.

All right, terrific. Keep warm, guys. Thank you.

(Operator Instructions)

Paula Poskon, Robert W Baird.

I see that the G&A dollars year over year were down 4.5%, not -- excluding the transaction costs in both quarters. Can you just talk about what was driving that decline, and is the fourth quarter a good run rate, going forward?

You're talking about G&A in the quarter?

Yes.

Yes, I think if you look to our guidance for 2014, we are up -- we had a normalized G&A adjusted for the transaction costs of around $67 million, and I think it goes up to about $68.5 million. And, that increase, generally speaking, is generated by salary increases -- a 2% increase in our budget for 2014.

And, how does that juxtapose with the payroll savings you mentioned that you saw in the fourth quarter? Is that something sustainable, or was that more of a one-time event?

Those payroll savings came through our property operations, so we would see those in the property operating and maintenance expense line.

Yes.

And, those savings, a portion of them were realized from open positions. And we, generally speaking, budget and forecast for full employment throughout our portfolio.

That is helpful, thanks, Paul. If you could, just give a little bit more color on how the Cavco relationship is progressing? What you have learned through the time period that you have been involved with it? Anything you would do differently in launching that?

Sure, we really like the relationship that we have with Cavco. We have the benefit of being able to work closely with the manufacturer, get new homes to our properties, while at the same time only committing half of the capital. So far, we have set, I think it's about 60-plus homes across 11 communities, and we've closed on the sale of 26 of those homes. And then, we have an additional 70 or so homes that are on order that will be put into our communities in the first quarter.

So, we like the relationship. We'd liked to increase the velocity, and that is just a matter of getting more homes out to our properties and sell them.

Great. Thanks, Marguerite.

At this time, I would like to turn the call back over to Ms. Marguerite Nader, our President and CEO, for closing remarks.

Thank you very much. Paul Seavey will be around for any follow-up questions.

Ladies and gentlemen, that concludes our conference. Thank you so much for your participation. You may now disconnect. Have a great day.