Equity LifeStyle Properties, Inc. (NYSE:ELS) Q3 2023 Earnings Call Transcript

Equity LifeStyle Properties, Inc. (NYSE:ELS) Q3 2023 Earnings Call Transcript October 17, 2023

Operator: Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties Third Quarter 2023 Results. Our feature 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. [Operator Instructions] 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 risks 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. Reconciliation of these 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 now 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 third quarter of 2023. The quality of our revenue streams and the strength of our balance sheet continue to allow us to report impressive results. Our MH portfolio is approximately 95% occupied. We have had continued success in the quarter selling new homes. Year-to-date, 51% of our new home sales have been in Florida communities and 13% in Arizona. Year-to-date, the mark-to-market increase for rent in new home — for rent increase for new homeowners has been approximately 13%. Our team has done an exceptional job of selling available inventory and we are currently at near record low levels of rental homes in our portfolio.

Our communities continue to offer an affordable option to purchase a home amid a single family housing market with limited availability and high price points. Today’s national headlines highlight that home buyers are grappling with housing affordability driven by a lack of affordable homes and rising mortgage rates. These broader national housing trends have enhanced the appeal of our communities for prospective homeowners. Two-thirds of our RV and marina income is generated from our annual customers. Core annual RV and marina revenue increased 8% compared to the third quarter of last year. Core seasonal and transient revenue for the quarter was impacted by an increase in annual site usage, reducing site availability, and weather-related property disruption.

Our social media strategy leverages engaging content, targeted advertising, and partnerships to expand our reach and boost customer engagement with our RV members, guests, and prospects. This summer was the ninth year of our 100 Days of Marketing campaign, which celebrates the time between Memorial Day and Labor Day. The campaign recorded 32 million impressions, the highest we have ever experienced, across social media platforms, including TikTok, Instagram, and Facebook. Turning to 2024. We anticipate continued demand into next year. Within our MH portfolio, we anticipate sending 2024 rent increase notices to approximately 50% of our MH residents. These rent increase notices have an average growth rate of 5.4%. For our RV portfolio, we have set annual rates for 95% of our annual sites.

The RV annual rate increases have an average growth rate of 7%. Our snowbird residents and guests are anxious to head back to Florida and Arizona for the season. Our teams are prepared for their arrival and will continue to focus on providing outstanding customer service. I would like to thank our team members for all their efforts this year to support our residents and guests. I will now turn the call over to Patrick to provide further details on our portfolio operations.

Patrick Waite: Thanks, Marguerite. As we wind down our summer season and move into our winter Sunbelt season, I wanted to provide some additional color on the drivers of the 80% of our $1.3 billion of total revenue that comes from annual residents and guests in our MH, RV, and marina properties. Consistently through the years, the MH portfolio has been the key driver of our business, with a trend of high-quality occupancy achieved by increasing homeowners. Today, nearly 97% of our occupancy is long-term homeowners who are typically with us 10 years or more. I’ll do a summary around the horn on those markets, collectively representing 70% of our MH portfolio. First, Florida occupancy is 95%. Florida is the leading state for net in-migration, and we see demand most directly in our East sub-markets, like Tampa, St. Pete, and Clearwater, and West sub-markets, like Fort Lauderdale and West Palm Beach, which are consistent with historical trends.

Demand in East Florida comes from the Northeast U.S., New York, New Jersey, and Massachusetts, which are among some of the top states leading out migration. While demand in West Florida comes from the Midwest, states like Illinois and Minnesota, which are also leading out migration. Given this demand, we have an opportunity to continue to grow MH occupancy, including through our development program. We developed more than 750 sites in Florida and have more than 1,000 MH sites in the expansion pipeline. Over the last three years, we have sold more than 1,400 new homes in Florida, indicating consistent demand. Our next largest markets are California and Arizona. Those portfolios are 97% occupied, and we have opportunities to convert rental homes to homeowners, marginally increase run rate occupancy, as well as grow through expansions.

Portfolio-wide for MH, over the last three years, we’ve sold 2,600 new homes, enhancing quality of occupancy by meeting important demand from homebuyers. Moving on to the RV and marina businesses. Over the last 20 years, we added RV and marinas to our portfolio with a focus on long-term annual revenue streams that paved similarly to the MH portfolio. Our RV properties are predominantly located in Sunbelt locations. And our marinas are mostly coastal Florida and coastal Carolinas. Coming out of the summer season, we continue to see consistent demand from RVers, especially our core annual guests. As noted in the press release, our 2024 rate guidance for RV annuals is 7%. For perspective, average annual RV rate is approximately $500 a month, so the 7% increase translates to $35 a month, or a relatively reasonable amount for long-term annual customers, valuing their leisure options.

For the marina portfolio, we have continued to maintain occupancy of 90% and boat launches have been consistent year-over-year, evidencing consistent demand from our long-term marina customers. Those are the highlights on the drivers of the property operating results, with some market and property detail on our annual MH, RV and marina revenues. Together, they represent more than 80% of our portfolio revenue as well as the highest quality durable revenue streams at ELS. I’ll now turn it over to Paul to walk through the results in detail.

Paul Seavey: Thank you, Patrick, and good morning, everyone. I’ll provide a summary of our results for the third quarter and September year-to-date periods, provide some information about the assumptions included in our updated guidance model for the full year 2023, and close with some comments on our balance sheet and debt market conditions. In our earnings release, we reported third quarter and year-to-date normalized FFO per share of $0.71 and $2.12, respectively. Core MH rent increased 6.8% in the third quarter and 6.7% year-to-date compared to the same periods last year. Rent growth in the third quarter includes approximately 7.1% rate growth as a result of our rent increases to in-place residents and our 13% mark-to-market on turnover when a new resident moves in.

Core RV and marina annual base rent increased 8% in the third quarter and 8.1% year-to-date compared to prior year. Annual RV and marina rent increases generated approximately 7.4% growth in the year-to-date period with occupancy contributing close to 70 basis points of growth. Rent from seasonal and transient customers on a combined basis in the core portfolio represents approximately 10% of our core revenue. Core seasonal and transient rent combined decreased approximately 4.8% in the year-to-date period compared to prior year. Core seasonal rent increased 5.5% year-to-date, offsetting some of the transient decline we’ve experienced as a result of challenging weather patterns and site usage increasing for longer-term stays. Membership dues revenue increased 4% in the year-to-date period.

During the quarter, we sold approximately 6,100 Thousand Trails Camping Pass memberships. Membership upgrade sales volume in the third quarter was slightly lower than last year, while the average sale price increased approximately 12%. Total core utility and other income increased 7.9% in the year-to-date period. Utility income increased 10% during the same period, somewhat offsetting a 7% increase in utility expense. Year-to-date, our utility recovery rate is approximately 45%, compared to 43.5% in the first nine months of last year. Other income includes $2.2 million of revenue associated with sites leased to provide housing for displaced residents in Fort Myers, Florida during the year-to-date period. Core property operating expenses were in line with expectations during the third quarter.

Our two largest expense line items, utility and payroll, were favorable to our forecast for the third quarter and increased 1.2% over prior year on a combined basis. Utility expense favorability was mainly the result of relatively cool and wet conditions across the Midwest and Northeast in August and September. The 30-day mean temperatures for those months in those areas were at or below the long-term average. In addition, many areas of the Northeast experienced record levels of rainfall. Payroll expense in the third quarter was 1.7% lower than the same period in 2022. Our property operations team remains focused on rationalizing staffing to meet customer demand. Repairs and maintenance expense was elevated in the quarter relative to our expectations.

We incurred expense related to local storm events across the portfolio, primarily tree removal, debris cleanup, and costs to operate on-site utility systems during periods of heavy rainfall. Our year-to-date core property operating revenue growth of 5.4% and core property operating expense growth of 6.5% contributed to an increase in core NOI before property management of 4.5%. As I switch topics to discuss guidance for the remainder of 2023, I’d like to highlight some initiatives that illustrate our well-established approach to managing our business, which involves continually challenging the status quo and promoting innovation. Over the years, we’ve implemented process improvements focused on automation and reporting enhancements that include historical weather data, employee staffing trends, and publicly available market-driven housing data.

These, and many other innovations, enable the day-to-day decision-making that generates impressive results quarter after quarter as we continue to focus on our strategic objectives. The press release provides an overview of fourth quarter and full year 2023 earnings guidance. Our long-standing practice has been to report quarterly guidance with a range of $0.06 per share from high to low end of the range. As a result, each year when we report full year guidance at this time, with only one quarter remaining in the year, we report full year guidance with a similar $0.06 per share guidance range. As I provide some context for the information we’ve provided, 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 and are qualified by the risk factors included in our press release and supplemental financial information. Our fourth quarter guidance assumption for shorter-term stays in our RV communities was developed based on current customer reservation trends. We provide no assurance that our actual results will be consistent with our guidance and we assume no obligation to update guidance as conditions change. Our full year 2023 normalized FFO guidance is $2.85 per share at the midpoint of our range of $2.82 to $2.88 per share. Full year normalized FFO per share at the midpoint represents an estimated 4.5% rate growth compared to 2022. We expect fourth quarter normalized FFO per share in the range of $0.70 to $0.76.

Full year core NOI is projected to increase 5.1% at the midpoint of our guidance range of 4.8% to 5.4%. We project a core NOI growth rate range of 6.3% to 6.9% for the fourth quarter and expect NOI for the quarter to represent almost 26% of full year core NOI. Full year guidance assumes core rent growth in the ranges of 6.5% to 7.1% for MH, and 8% to 8.6% for annual RV rents. Our guidance assumptions for the fourth quarter include MH occupancy gained in the third quarter with no assumed occupancy increase in the fourth quarter, our assumptions for expense growth reflect current expectations based on the year-to-date activity and our review of property level and consolidated expense projections for the remainder of the year. As a reminder, we make no assumptions for storm events that may occur.

The midpoints of our guidance assumptions for combined seasonal and transient show a decline of 4.9% in the fourth quarter and a decline of 4.8% for the full year compared to the respective periods last year. Our guidance for the full year and fourth quarter includes no assumption for acquisitions closing before year-end. The full year guidance model makes no assumption regarding other capital events or the use of free cash flow we expect to generate in the remainder of 2023. Before we open the call up for questions, I’ll discuss our balance sheet and current debt market conditions. Our balance sheet is extremely well positioned with a debt maturity schedule that shows approximately 11% of our outstanding debt matures over the next three years, and around 23% of our outstanding total debt matures over the next five years.

This compares to an average total debt maturity for REITs of approximately 45% over the next five years. In addition, 22% of our outstanding secured debt is fully amortizing and carries no refinancing risk, and we have no year in our schedule when more than $350 million of outstanding debt matures. Current secured debt terms available for MH and RV assets range from 50% to 75% LTV with rates from 6% to 6.75% for 10-year maturities. High-quality, age-qualified MH will command best financing terms. RV assets with a high percentage of annual occupancy have access to financing from certain life companies as well as CMBS lenders. Life companies continue to express interest in high-quality communities, though some have set limits on capacity and pricing.

We continue to place high importance on balance sheet flexibility and we believe we have multiple sources of capital available to us. Our debt to EBITDA is 5.3 times, and our interest coverage is 5.3 times. The weighted average maturity of our outstanding debt is approximately 10.5 years. Now, we would like to open the call up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Josh Dennerlein with Bank of America. Your line is open.

Josh Dennerlein: Yeah. Hey, everyone. Appreciate the time.

Marguerite Nader: Good morning, Josh.

Josh Dennerlein: Good morning. Just curious on — I appreciate all the color on 2024 on the rate growth that you’re sending out. Could you remind us of the timing of when you send out the other 50% of the manufactured housing rate notices? And then, what’s the framework for how you set that rate? Is it just a function of CPI at the time, or what other kind of factors going for that?

Patrick Waite: Yeah. Josh, it’s Patrick. As Paul covered in his commentary, about half the increases will be sent out by this time. So, we’re — by the time we hit the first quarter, the majority of the rent increases have been noticed and go into effect. Over the balance of the year, it’s mostly ratable. To the extent that there is a CPI-based lease, it will likely reference updated CPI as you move through the course of the year. And then, to the extent that there are market rate increases, we’ll revisit markets that we have a view right now that we go through our budget process and to the extent that we feel it’s appropriate to update quarter by quarter. We’ll update it as those notices go out accordingly.

Josh Dennerlein: All right. Appreciate that, Patrick. And then, I get a lot of questions on just OpEx. Is there any kind of like framework you can provide us as far as like moving pieces as we look forward, or any base effects? And then, I know insurance is pretty topical. I know your renewal is on April 1st. Just kind of any kind of color you can provide on that insurance line item too?

Paul Seavey: I guess, Josh, what I would say with respect to expenses on a forward view into 2024, we, in the quarter, second quarter, and also into the third quarter, have seen moderation in utility rates. We also have seen, with respect to our payroll, obviously, the ability to flex that payroll based on demand in the properties that have variable demand, the transient RV properties, primarily. With respect to the — going back to the utilities for a moment, I think that on a go-forward basis, we would probably see a more steady level to what we’re seeing now. So, we were at about 6% growth at the end of the second quarter. That moderated further in the third quarter. And so, I think we would anticipate that continuing. The last thing I’ll touch on, is R and M.

I think that — but for the local weather events that I mentioned in my opening remarks, I think that there is some easing of pressure that we’ve seen in the last couple of years in terms of contract labor for maintenance at our properties as well as the cost of supplies.

Marguerite Nader: And then, Josh, with respect to insurance, as you point out, our property level insurance policies renew on April 1st of next year, So, we have seven months of experience behind us, five months left to go. So far, our claims have — experience this year has been good, but we’re only 60% through the year. So, we’ll have a better idea after we meet with our brokers in January and be able to incorporate into our 2024 forecast.

Josh Dennerlein: Great. Appreciate the time, guys.

Marguerite Nader: Thanks, Josh.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of James Feldman with Wells Fargo. Your line is open.

James Feldman: Great. Thank you, and good morning.

Marguerite Nader: Good morning, Jamie.