Equity LifeStyle Properties, Inc. (NYSE:ELS) Q1 2024 Earnings Call Transcript

Equity LifeStyle Properties, Inc. (NYSE:ELS) Q1 2024 Earnings Call Transcript April 23, 2024

Equity LifeStyle Properties, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and thank you for joining us to discuss Equity LifeStyle Properties’ First Quarter 2024 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 question-and-answer session with management relating to the company’s earnings release. For those who would like to participate in the question-and-answer session, management asks that you limit yourself to two questions, so everybody would like to participate has ample opportunity. As a reminder this call is being recorded.

Certain matters discussed today on 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. In addition during today’s call, we will discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of this non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release, our supplemental information and our historical SEC filings. At this time, I would like to turn the call over to Marguerite Nader our President and CEO.

Marguerite Nader: Good morning and thank you for joining us today. I am pleased to report the results for the first quarter of 2024. Quality of our cash flow, our in-demand locations, the lack of new supply and the strength of our balance sheet continues to allow us to report impressive results. In times of macroeconomic uncertainty, we continue to deliver strong revenue growth as well as expense control throughout our portfolio. Our core NOI for the quarter was strong with a 7.1% increase compared to last year supported by MH and RV rate growth and controlling expenses. Our results for the first quarter and our view for the continued strength for the remainder of 2024 support our guidance rates. Over a 10-year period of time, we have increased the dividend on average 14% compared to the REIT average of 5.5%.

Our balance sheet is in great shape with an average term to maturity of nine years. 18% of our debt is fully amortizing and not subject to refinance risk and our debt maturity schedule through 2026 shows only 11% of our debt coming due compared to the REIT average of 29%. We have spent the last 30 years building a portfolio focused on high-quality coastal and Sunbelt retirement and vacation destinations. We are in locations where active adults want to be. Our customer base is seeking a place to escape from the cold winter and lead an active lifestyle in locations such as Florida, Arizona and California. We are in states where there is outsized growth in seniors and we appeal to the right demographic. The population of people aged 55 and older in the US is expected to grow 15% from now until 2039 with 10,000 baby boomers turning 65 each day for the near future.

Our MH portfolio comprises approximately 60% of our total revenue and our properties are 95% occupied. The MH business is unique in that once an elevated level of occupancy is achieved at a property, the occupancy is sustainable for a long time. For ELS, the key to that stickiness is an elevated level of homeowners in the portfolio. Our portfolio is 96% occupied by homeowners. This composition of our resident base is important to protect an uninterrupted cash flow stream as new residents are welcome to our communities. Our residents enjoy the community found in our properties and spend time focused on building new relationships with their fellow residents. We continue to engage our existing customers and attract new prospects through media outreach, engaging in social media campaigns and targeted digital advertising.

Our public relations strategy helps build awareness and credibility through coverage of the LifeStyle offered at our Properties and interesting stories about our customers who make a difference in the communities in which we operate. Our social media strategy seeks to engage both customers and prospects in a wide variety of platforms, so we can reach people where they spend time. We have almost two million fans and followers across social media networks. Over the past 10 years we have grown our social media fans and followers by an average of 19% annually. Our property teams in the north are gearing up to open the summer season. This year Thousand Trails will celebrate its 55th anniversary. Thousand Trails is one of America’s most well-known Camping brands, and we have earned strong Customer Loyalty with hundreds of thousands of our years, making memories with families and friends throughout the camping the company’s long history.

We have closed another successful quarter and our teams will now begin to focus on welcoming our residents to our northern locations, as we kick off the summer season. I would like to thank all of our team members for their hard work in making this winter season so successful. I will now turn it over to Patrick, to provide an operational overview.

Patrick Waite: Thank you, Marguerite. As we wind down the 2023, 2024 Sunbelt season and look forward to the 2024 summer season I will provide color on the Sunbelt season results and a view into the summer season including drivers of demand. Overall we continue to see consistent demand across each of our lifestyle property types reflecting the high quality of our property locations. I will start by highlighting our MH business. Over my 30 years in the industry my responsibilities have ranged from acquisitions to asset management to operations. And regardless of my area of focus the consistency of our high-quality MH portfolio has been a constant. MH properties operate year-round and seasonality is not a consideration. Our MH portfolio maintains high occupancy and each year approximately 10% of our resumes, turns over.

This turnover results in an uninterrupted revenue stream for ELS, as a current homeowner sells their home to an incoming home buyer and the new resident pays market rent. Year-to-date, we have seen an average rent increase of 5.6% to renewing residents. Our resident base generally consists of retired individuals who are cash buyers. Due to the high homeowner base in our portfolio occupancy is resilient and the delinquency rate is very low, which is reflected in bad debt that is typically 40 to 45 basis points of revenue. This low level of delinquency has been consistent over the last 30 years in all economic cycles. Moving to the RV portfolio. The Sunbelt season runs from December to April peaking in February and demand is largely comprised of snowbirds from the Northern U.S. and Canada seeking out the temporary climate of Florida, California, Arizona and Texas.

In Q1 annuals delivered steady occupancy and strong rate growth. Combined seasonal and transient increased in line with expectations supported by demand with consistent rate growth. I’d also note that nearly 50% of our seasonal revenue for the full year comes to us in Q1 during the Sunbelt season, while Q1 Transient represents less than 20% of the full year Transient revenue. We are now looking forward to the summer season which is comprised of the 100 days of camping from Memorial Day to Labor Day and spans 14 weeks. This is the time that our annual customers at 125 summer resorts and Campgrounds visit their getaways, on weekends, holidays and summer vacations. Summer season annuals have a vacation or lake house, basically their resort cottage or park model, located on one of our properties.

The resorts are now active with customers focused on spring cleaning and getting their homes ready for summer activities. These customers are from the local or regional sub markets and are typically a one hour to one and a half hour drive from their homes to their campgrounds. In contrast to the overweight of seasonal revenue in the Sunbelt season, during the summer season approximately two-thirds of our transient revenue for the full year is earned in the second and third quarters. Our reservation pace is similar to last year with the holiday weekends in demand. While booking windows are similar to last year, the booking window was short, and therefore we have limited visibility. More than 50% of transient reservations are booked within 10 days of arrival, and are subject to short-term disruptors like weather.

Finally, I would like to focus on our home sales efforts. Over the last five years we’ve sold 4,500 new homes. Investing in these new homes is an upgrade for the community. The new homes construction quality meets stick-built construction standards, including primary bedrooms with walking closets, open floor kitchens with high-end high-efficiency appliances, and exterior finishes like gable roofs and architectural shingles. And they remain affordable when compared to other housing options. We’ve been able to sell our homes for an average price of about $100,000 with limited concessions. Demand for these homes and our locations is evident from new leads and referrals from current residents, all supporting an 8.5% increase in Q1 new home sales year-over-year and a more than 100% increase from the pre-COVID time frame in Q1 2019.

The aging trends from 70 million baby boomers who are currently moving through their retirement years to almost 140 million combined Gen Xs and Millennials who will follow the boomers into their own retirement years, all support generational demand for MH and all of our property offerings for decades to come. I’ll now turn it over to Paul.

Paul Seavey: Thanks, Patrick, and good morning, everyone. I will review our first quarter 2024 results and provide an overview of our second quarter and full year 2024 guidance. First quarter normalized FFO was $0.78 per share, in line with our guidance. Strong core portfolio performance generated 7.1% growth in the quarter, also in line with our expectations. FFO was $0.86 per share and includes $14.8 million of insurance recovery revenue that has been deducted from normalized FFO. Core community-based rental income increased 6.4% for the quarter compared to 2023, primarily as a result of noticed increases to renewing residents and market rent paid by new residents after resident turnover. We increased homeowners by 123 sites in the quarter.

Rental homes currently represent 3.1% of our MH occupancy. First quarter core, resort, and marina-based rental income increased 5.8% compared to 2023. Rent growth from annuals in the first quarter was 8%. As a reminder, 2024 is a leap year which results in an additional day of revenue allocated to the first quarter, resulting in higher rate growth than we expect in the subsequent quarters of 2024. Our first quarter rent from core RV Seasonal and Transient generally performed in line with expectations. Seasonal rent increased 2.4% and Transient rent increased 1.4% compared to first quarter 2023. For the first quarter, the net contribution from our membership business, which consists of annual subscription and upgrade sales revenues offset by sales and marketing expenses, was $14.9 million, an increase of 3% compared to the prior year.

The net deferral impact for the quarter was $3.2 million. Subscription revenues increased 2.7% as a result of rate increases effective for 2024. During the quarter, we sold just over 800 upgrades. Our average upgrade sale price increased 4% with the percentage of sales attributed to our adventure upgrade product, representing 28% of our first quarter 2024 sales. Core utility and other income increased 5.6%, which includes pass-through recovery of real estate tax increases from 2023. Our utility income recovery percentage was 46.5%, about 70 basis points higher than the first quarter of 2023. First quarter core operating expenses increased 3.9% compared to the same period in 2023. Growth in real estate taxes and insurance reflect the run rate impact of increases that took effect after the first quarter of 2023.

Repairs maintenance decreased compared to 2023 when we incurred expenses to recover from several winter storms. Utility expenses reflect moderating rate growth, along with reduced gas consumption, particularly in California. We renewed our property and casualty insurance programs at April 1 and the premium increase was approximately 9%. We are pleased with the result which reflects no change in our program deductibles and expansion of coverage limits for named wind storm damage. Core property operating revenues increased 5.8%, while core property operating expenses increased 3.9%, 50 basis points lower than the midpoint of our guidance. Resulting in growth in core NOI before property management of 7.1%, 10 basis points higher than the midpoint of our guidance.

Our noncore properties contributed $5.3 million in the quarter in line with our expectations. The press release and supplemental package provide an overview of 2024 second quarter and full year earnings guidance. The following remarks are intended to provide context for our current estimate of future results. All growth rate ranges and revenue and expense projections are qualified by the risk factors included in our press release and supplemental package. Our guidance for 2024 full year normalized FFO is $2.89 per share at the midpoint of our guidance range of $2.84 to $2.94, an increase of $0.01 per share compared to prior guidance. We project full year core property operating income growth of 5.8% at the midpoint of our range of 5.3% to 6.3%.

Full year guidance assumes core base rent growth in the ranges of 5.6% to 6.6% for MH and 4.5% to 5.5% for RV and Marina. We assume occupancy in our stabilized MH portfolio will be flat to the first quarter. Core property operating expenses are projected to increase 4.2% to 5.2%. Our full year expense growth assumption includes the benefit of first quarter savings in repairs and maintenance and payroll expense, as well as the impact of our April one insurance renewal for the rest of 2024. Our guidance model includes the impact of the fixed rate swaps we disclosed in our earnings release and supplemental package. The full year guidance model makes no assumptions regarding other capital events or the use of free cash flow we expect to generate in 2024.

Our second quarter guidance assumes normalized FFO per share in the range of $0.61 to $0.67. Core property operating income growth is projected to be 4.6% at the midpoint of our guidance range for the second quarter, which represents approximately 23% of our expected full year core NOI. In our core portfolio, property operating revenues are projected to increase 5.1% and expenses are projected to increase 5.6% both at the midpoint of the guidance range. I’ll now provide some comments on our balance sheet and the financing market. As noted in the earnings release and supplemental package, we executed fixed rate swaps on our $300 million unsecured term loan maturing in 2026. The swaps fixed the all-in borrowing cost at 6.05% through maturity.

We are pleased with this execution, as it eliminates floating rate exposure except balances outstanding from time to time on our line of credit. Current secured debt terms vary depending on many factors including lender, borrower sponsor and asset type and quality. Current 10-year loans are quoted between 6% and 6.75%, 60% to 75% loan-to-value and 1.4 to 1.6 times debt service coverage. We continue to see solid interest from life companies and GSEs to lend for 10-year terms. High-quality age qualified MH assets continue to command best financing terms. Regarding our liquidity position, we have approximately $470 million available on our line of credit and our ATM program has $500 million of capacity. Our weighted average secured debt maturity is almost 10 years.

Our debt to adjusted EBITDA is 5.1 times and interest coverage is 5.2 times. We continue to place high importance on balance sheet flexibility and we believe we have multiple sources of capital available to us. Now we would like to open it up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Josh Dennerlein with Bank of America.

Josh Dennerlein: Yes, guys. Thanks for the time. I just wanted to dig into the guidance update a little bit. It looks like you lowered your RV and Marina revenue range midpoint by 40 basis points. I’m assuming, there’s a corresponding like drop in expenses. Is that all transient related? Or is it somewhat Marina? I guess how do you think about the mix here?

Paul Seavey: Yes. I think Josh, maybe it’ll help if I just walk through the process. So just when we think about our budget and reforecast process for seasonal and transient rent overall, I’ll start by framing the timing and the composition of those revenue streams. During the first quarter, we earned approximately 50% of our anticipated full year seasonal rent and almost 20% of our full year transient rent. And then by the end of the second quarter, we’ve earned almost two-thirds of our anticipated full year seasonal rent and close to 45% of our full year transient. The last thing on that is just in the third quarter we earned almost 40% of our transient rent. So we’ve talked often about the impact of weather on those variable rental income streams both seasonal and transient, particularly considering the short booking window for the transient customers.

I mentioned on the call in January that when we prepared our 2024 budget, we focused on reservation pacing at that time for rent that we anticipated earning in the first quarter. And we had expectations for modest rates of growth in subsequent quarters. We’re pleased with our first quarter results for seasonal and transient, particularly to seasonal, which as I mentioned represents half of the seasonal ramp we expect in the year. Our guidance update for the second quarter and full year employs the same methodology we use for the budget. We focused on reservation pacing for rent. We anticipate earnings in the second quarter and we didn’t assume any change to our original budget assumptions for the third and fourth quarters. Our current view on second quarter reservation pacing reflects some softness mainly, as a result of weather in April.

And I think Patrick, can provide a little bit more color on that.

Patrick Waite: Yes. During the first half of April, precipitation was significantly above average in California, the Midwest and the Northeast, but especially so in California where the RV portfolio experienced precipitation around 300% of average. California has experienced more precipitation in the first half of April, than in the entirety of April last year. So that’s been a headwind to the business. Some markets in the Midwest and the Northeast, have also experienced above-average rainfall by about 200%. I’d also point out that, the relatively cool and wet Sunbelt season in Florida, and the relatively mild winter in the Northern US, resulted to a difficult year-over-year comparison regarding seasonal guests, extending from Q1 into Q2.

So these are seasonals that are down for the winter season extending their reservations into April. The winter of 2023 was very cold in those extensions were pretty robust, just with respect to the current period of headwinds again, really weather related.

Q – Josh Dennerlein: Okay. I appreciate that color. And then maybe just on the Thousand Trails membership. It looks like it dipped in the quarter. Just curious, just what’s driving that? Is this just like normal seasonality? Or any kind of color would be helpful?

Marguerite Nader: Sure, Josh. And certainly there is some seasonality to that. At the end of the quarter, we had — I think 119,000 members. Those members are made up of really both dues paying members and then the free trial members. And the drivers of the decrease, is a reduction in free trials and a reduction in the sales activity. At the property level, really you see a lot of that happening in the first quarter in other years. I think there’s a few things to focus on regarding the membership line. If you go back kind of to the beginning when we started operating the Thousand Trails properties, which I think was in 2008, you’ll see some years where there’s been a drop in a member count. But even with that decrease in those various times, we’ve really been able to grow the dues revenue base meaningfully, through rate increases and additional product offerings. And so, I think you’ll continue to see us do that.

Q – Josh Dennerlein: Thanks for the color.

Marguerite Nader: Thanks, Josh.

Operator: Our next question will come from the line of Jamie Feldman with Wells Fargo.

Q – Jamie Feldman: Great. Thanks. And good morning.

Marguerite Nader: Good morning, Jamie.

Q – Jamie Feldman: Hi. So I guess just to start, I just want to follow up on the insurance renewal of 9%. Can you talk about the assumption that was originally embedded in your guidance? And then also, how much the full year decrease in property expense growth — operating expense growth results of the lower insurance premium than expected? And are there other areas on the expense line where you’re seeing more relief, than you expected in your initial numbers?

Paul Seavey: Yes. I think generally Jamie, we’re pleased with the 9% premium increase on renewal. I’d say, that in terms of the other line items, we saw in the first quarter, a reduction in our repairs and maintenance that was in-place savings on R&M. We did have portion of that was timing related and we’ve included that in the reforecast going forward but there was a meaningful savings compared to our budget that we consider permanent in R&M.

Jamie Feldman: Okay. And then on the insurance side how did the 9% compared to your initial guidance?

Paul Seavey: It was favorable.

Jamie Feldman: Yes, as we all know that. I mean can you ballpark it? I think a lot of people were thinking like 20% to 30%. Will you that high or maybe not?

Paul Seavey: We didn’t have an assumption as high as 30% in our budget no.

Jamie Feldman: Okay. All right. And then I guess second question is just I know you guys have said in the past not a ton happening on the distressed acquisition front. But maybe if you could provide an update as we’re kind of further into the cycle and the banks seem to be working through more loans. Is anything starting to look more promising or interesting to you that we might be able to get your hands on?