Equity LifeStyle Properties Inc (ELS) 2015 Q2 法說會逐字稿

Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties second-quarter 2015 results. Our featured speakers today are Marguerite Nader, our President and CEO; Paul Seavey, our Executive Vice President and CFO; and Patrick Waite, our Executive Vice President and COO. In advance of today's call, Management released earnings. Today's call will consist of opening remarks and a Q&A session with Management, related 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 Security 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 President and CEO. Please go ahead.

Good morning, and thank you for joining us today. Our second quarter results show strong growth, with Core NOI up 5% and FFO up 11%. The strength of our NOI is due to the high demand for our real estate locations. Our properties are located where the greatest demand exists for our customer demographic, the baby boomer generation.

In the MH footprint, we had our 23rd successive quarter of occupancy growth, with an increase of 112 sites. This gain is made up of an increase of 239 homeowners, and a reduction in rental occupancy of 127. This is our eighth consecutive quarter of homeowner occupancy growth, and we are pleased with this trend. We are currently 92.7% occupied. We have roughly 5,100 vacant sites, with half of that vacancy in Florida, where there is strong demand for our value proposition.

We had a good quarter with respect to both new and used home sales. We sold 143 new homes, as compared to 86 last year. Additionally, we saw an increase in used home sales of over 28%, as we increased sales from 340 to 436. Within our four key Florida markets, Orlando, Tampa, Sarasota, and southeast Florida, we see customers willing to either try before they buy a home in the form of a rental conversion, or simply purchase outright after having toured the community. These new buyers are generally 60 years old with FICO scores of over 700.

Operationally, we are focused on converting existing renters to owners. We are encouraged by our results year-to-date, as 11% of our overall sales are a result of a renter converting to a homeowner. We analyze the demand for conversions at a property and adjust our inventory accordingly. We encourage prospective customers to commit to us in the form of a rental for year, and then convert to a homeowner after they have developed roots in the community and surrounding area. The rental conversion program allows us to access a broader customer base with a buying decision that may be 12 to 18 months away.

With respect to our RV portfolio, we had strong revenue growth rate of 7.7%. This overall growth rate was bolstered by great performance from our seasonal and transient customers. There was a strong demand from our customers to get outdoors after the long winter. While the transient component of our RV business only represents 5% of our overall revenue, it is an important feeder for the rest of our business. Our transient business is concentrated in the summer months, with over 50% of the full year revenue coming in from Memorial Day to Labor Day. We now have two of the important summer holidays completed, and we are pleased with the results, with a 7% increase year-over-year. This additional revenue was driven from a combination of new customers visiting our resorts, existing customers returning, and adjusting the rate where demand is high.

We continue to focus on delivering a great experience to our customers, both while they are in our communities and before they arrive through improved reservation channels. We have completed development on our reservation app, and have improved our websites to meet the needs of our customers. Our marketing efforts extend beyond the 9 million installed base of our readers, to the 40 million outdoor enthusiasts who are interested in learning about our product offerings. We continue to use our customer feedback tool to enhance the experience at the property level.

Turning to transaction activity, in the quarter we purchased one property in Miami, Florida, with a total of 300 sites. The property will complement our existing properties in the area. I want to thank our entire team for delivering great results this quarter. The summer is a busy time for us, and I appreciate everyone's continued efforts to deliver a great experience for our customers.

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 second quarter results and update guidance for the remainder of 2015.

For the second quarter, we reported $0.70 of normalized FFO per share, approximately $1.8 million ahead of guidance and $0.02 ahead of the midpoint of our per-share guidance range. Overall, Core property NOI contributed $1 million more than expected as a result of strong revenue growth across the MH and RV portfolio. Core MH rent growth was 3.2% ahead of expectations. The base rental income increase consists of approximately 2.8% rate growth and 40 basis points related to occupancy gains. We sold 143 new homes, including 49 through our ECHO joint venture.

Our second quarter four-RV resort base rental income growth was 7.7%. Revenue from annuals performed as expected in the quarter, resulting in 5.7% growth over 2014. Revenue from seasonal and transient performed better than expected, delivering 10.6% and 12.6% year-over-year growth respectively. The annual revenue growth was driven by increased rate in our Encore properties, and a mix of rate and occupancy increases in the Thousand Trails portfolio. The south and California properties contributed both rate and occupancy gains to drive the seasonal out-performance. Strong transient performance in California, Florida, and the west is the result of growth from both occupancy and rate.

Membership dues were $10.9 million for the quarter. During the quarter, we sold and activated approximately 7,900 Thousand Trails camping pass memberships, an increase of almost 40% over second quarter 2014. Paid camping passes increased 26%, and RV dealer activations increased 56% to 3,900 in the second quarter. Year-to-date, we have generated approximately 12,100 camping passes, an increase of 43% over the first six months of 2014. For the quarter, the net contribution from right-to-use contracts or membership upgrades was lower than expected as a result of increased expenses, including commissions on higher than expected sales volume of camping passes. We sold 757 upgrades at an average price of approximately $4,700.

Core property operating expenses were in line with expectations in the quarter. Core expenses include approximately $500,000 related to one-time storm events; savings and utility and payroll expenses offset the one-time event. In summary, second quarter Core property operating revenues were 50 basis points higher than guidance at 4.4%, and Core property operating expenses were in line with guidance, resulting in an increase in Core NOI before property management of 5%. Property management and corporate G&A came in at $18.6 million. Other income and expenses of $5.1 million were $900,000 higher than guidance.

Sales operations generated $400,000 more income than expected as a result of higher used home sales profits and increased ancillary income. We also recognized $300,000 of income related to a joint venture distribution in the quarter. Year-to-date, Core property operating revenues increased 4.3% and Core NOI increased 5.5%, driven by our Core community base rent increase of 3.1% and our resort base rental income increase of 8.3%.

The press release and supplemental package provide third quarter and full-year guidance in detail. Please note the following 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.

For the remainder of 2015, we assume no change in our Core MH occupancy from the end of the second quarter and expect community-based rent revenues of $221.5 million, a growth rate of 3.4% for the remainder of the year. As I mentioned on prior calls, our base rent growth rate is expected to accelerate slightly throughout the year as the comparison persons reflect prior year un-bundling activity. In our RV business, we anticipate Core RV revenues of $84 million for the rest of the year, a growth rate of 5.8%. We expect annual growth to continue showing strong performance with 6% growth projected. Our seasonal business is expected to increase 4.9% for the remainder of the year, and our transient business is expected to grow 5.8% for the remainder of the year. We expect about 40% to 45% of the full-year transient income will come in the third quarter. Based on our review of current reservation pace and overall expectations for activity in August and September, we are projecting 6% growth for the third quarter.

Total Core revenue from dues and membership sales for the second half of the year are expected to be $30.2 million. The associated sales and marketing expenses are anticipated to be approximately $6.7 million, for a net contribution of $23.5 million. Core operating expense growth is projected to be 1% for the remainder of the year, and 1.8% for the full year. Our current guidance has been updated with increases in the second half of the year in payroll and real estate taxes, as well as membership sales and marketing.

For the rest of the year, Core property operating revenues are anticipated to be up 3.4%, with Core expenses growing at 1%, resulting in a net increase in Core property NOI of 5.2%. We expect the acquisition properties will contribute about $2.9 million in income from property operations for the remainder of the year, for a total of $6.6 million for the full year. Property management and corporate G&A is expected to be $36.6 million for the remainder of the year and $73.5 million for the full year. Other income and expense items are expected to be approximately $6.9 million for the rest of the year, and approximately $16.8 million for the full year. Financing costs and other in the second half of the year are expected to be $56.8 million. This represents a reduction of $3.8 million compared to the second half of 2014, primarily as a result of our refinancing efforts. Our current full-year 2015 normalized FFO per-share guidance range is $2.97 to $3.07.

Now, some comments on our balance sheet. In April, we repaid the remaining mortgage with a 2015 maturity. We have approximately $80 million maturing in 2016. The majority of these loans come due in the third and fourth quarters next year.

Continued volatility in the broader Capital Markets has not had an impact on the availability of capital in the MH, RV space. We continue to see strong appetites for financing MH and RV assets from various lending sources. Current secure debt terms available for MH and RV assets range from 60% to 75% LTV, with rates from 3.8% to 4.3% for 10-year money. High quality age-qualified MH will command preferred terms from all lending sources.

Fannie and Freddie, CMBS lenders, and certain life companies are currently offering debt to finance RV assets. Our interest coverage ratio is 3.7 times. Our cash balance at the end of the quarter was $85 million. After adjusting for restricted cash and our July dividend, available cash today is approximately $40 million. We have no outstanding balance on our $400 million line of credit, which is approximately three years remaining and carries a one-year extension option.

Now we would like to open it up for questions.

(Operator Instructions)

Our first question comes from the line of Nick Joseph from Citigroup. Please go ahead.

Thanks. For the Core MH portfolio, it looks like occupancy is at its highest point since the end of 2002, at 92.5%. Where do you think it could go from here before you reach frictional vacancy?

I think, as we have said, and at the high point we were at 95% occupancy, and we continue to see positive trends in increasing occupancy, so I think at that 95% is what we are aiming for.

Thanks. Now to get to 95%, would you be comfortable increasing the rental program to see those further occupancy gains, or do you expect enough demand from homeowners?

What we have seen is an increase in our homeowner base, and at the same time, we have seen a decrease in the rental base, but we would be comfortable because we're seeing some of the conversion activity pick up. We would be comfortable, in certain markets, increasing the rental program on kind of a short-term basis and making it part of a conversion program to an ownership. We really see that when people have the opportunity to come down and see our lifestyle offerings and kind of experience what we have for a year, they're able to make a commitment to us on a much longer basis.

Thanks. And then just turning to acquisitions. What was the cap rate on the deal this quarter, and can you talk about the pipeline as it is today?

Sure. The pricing was approximately, on the Miami deal, was about $38,000 per site and it's a 6% cap. With respect to just other transactions, it's really the same as we have always said. Difficult to figure out timing of when a transaction would take place. I think the acquisitions we have done over the last year have really been primarily under-managed assets, which we saw the ability to drive growth through right-sizing; and we'll continue to look for those opportunities.

And then does the pipeline skew either MH or RV at this time?

No, it's pretty much the same -- kind of equal on RV and MH in our Core markets.

Great, thanks.

Thanks.

Okay, thank you. And our next question comes from the line of Guarav Mehta from Cantor Fitzgerald. Please go ahead.

Thank you, good morning. You touched upon used and new home sales in your prepared remarks; could you speak about the price points for the used home sales? Are you seeing an uptick in the price points?

Yes. We have seen an increase in the price points. Year-over-year, the average price of a used home sale for ELS is up about 5%. The re-sales that we're seeing in the market are up about 10%. So, we're seeing, you know, continued strength in the -- not only the pricing but the volume of used home sales and new home sales as the overall housing market continues to firm up and recover.

Okay. And then on the result-based income side, if I look at your first half numbers, and if I look at 2015 guidance, seems there's some slowdown in second half. Can you perhaps talk about that? And also I called on the 4Q call; you talked about used management initiatives around the holiday weekends. Could you touch upon that as well?

Yes, I think in terms of guidance, we took the Core RV revenue guidance up 1.3% for the remainder of the year. The guidance model, as we've talked about, projects RV revenue based on visibility into future quarters. The annuals really aren't subject to much seasonal volatility, and generally are locked in by the end of the first quarter. We did increase, for the second half of the year, the annual growth rate slightly to 6% to reflect some rate and occupancy gains that we've achieved. Roughly 35% of the full-year seasonal comes in the second half of the year, with the majority coming from the southern resorts as they enter the winter season in the fourth quarter.

Our transient growth rate assumption is almost 6% for the second half of the year. That's up more than 3% from our prior forecast. The Fourth of July holiday, the activity was strong, as Marguerite said, but we do continue to see significant amounts of rain in the Midwest and the Northeast, and if this weather pattern persists, it will likely have an impact on the rest of the summer season. We will, as we always do, update our expectations for the fourth quarter seasonal and transient in October, when we have better visibility into those reservation trends heading into the winter season.

Okay, thank you. That's all I had.

Thanks.

Thanks, Guarav.

Okay. Thank you.

(Operator Instructions)

Our next question comes from the line of Jeff Spector from Bank of America Merrill Lynch. Please go ahead.

Good morning, thank you. I just wanted to confirm, I guess clarify, on the rental program, Marguerite, that you are saying that this is just a short-term decision in select markets to increase the program -- you're not changing the long-term view?

No. Absolutely. And what I am saying is that what we concentrate on is that increase in the homeowner base; and overall, you may see that the rentals, when you roll it all up, still continue to decline, but there may be areas. There's areas in Florida, for instance, some of our markets in Florida, where we just have really strong conversion rates, which we would want to continue to work through those and get the customer to become an owner. But not a change at all in our overall view that we prefer owners to renters. Kind of the next in line is a guy that could be a renter conversion. We like them and then renters.

Okay, great. And then I just wanted to see if you could provide a little bit more information on the vacant sites; I believe you said half are in Florida. What have you been seeing there over the last year or two years, or even the last quarter, and how should we be thinking about those sites?

I think about half of the vacancy, or the improved occupancy, that we've seen in the year is coming out of Florida, and just, as I'm sure you take a tour around Florida just as we do, there is a lot of activity going on in Florida. And we're seeing it in the form of customers coming through our door, coming through our website, to inquire about either moving a home in, or living in an existing home that we have for sale. So it's a large concentration for us; obviously, it's because where our highest vacancy is, but it's also where we have a lot of demand.

Okay. Thanks. And then last, we have been reading about low inventory levels on single families throughout the country, especially in certain markets. Are you seeing a different customer today, this quarter, this past quarter, than last year, or is it still the same profile, you know, and that's not that low inventory on single families not having as much of an impact? Just trying to see if you guys have discussed, I guess, some of the things you might be benefiting from from the single family market?

Yes, it's Patrick. Let me just give you a basic view of the customers that we've been seeing over, call it, the trailing 12 months in both Florida and I'll compare that to Colorado as well. I mean Florida, that's a traditional retirement destination. We're seeing that re-emerging traditional retiree buying a home in an ELS community. Just over 80% of those home buyers relocated from a single-family home or condo. Their basic profile is that they are in their early 60s, FICO score in the mid 700 range, and approximately half of those new home buyers relocated from the Midwest, Northeast, and Canada. So, you know, we see that as a trend of people up north being able to sell their single-family home and then come down and set up roots in one of our communities for retirement.

If you compare that to Colorado, which has also been doing very well for us on new home sales, that's mostly a local market. Approximately 90% of those new home buyers are coming from the local market within the state, and only about 50% of them have sold a single-family home or a condo. So this is basically, you know, call it primary, long-term housing for them. Their basic profile is that they are in the mid 50s. FICO scores again in the 700 range. As with Florida, what we are seeing from a traffic perspective, about a half of all of those buyers are coming to us through MH Village, which is a third-party website, or through resident referrals -- you know, people who are already our customer. They're reaching out to their families and friends.

Great, thank you. Helpful.

Okay, thank you. Since we have no more questions on the line at this time, I would like to turn it back over to Marguerite Nader for closing comments.

Thank you all for joining us today. Paul Seavey will be around if there are any additional questions.

Thank you for your participation in today's conference call. This concludes your presentation. You may now disconnect, and good day.