Equity LifeStyle Properties Inc (ELS) 2014 Q4 法說會逐字稿

Good day everyone and thank you all for joining us to discuss Equity LifeStyle Properties fourth quarter and year-end 2014 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 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 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.

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.

In 2014, we focused on increasing the strength of our existing operating platform and balance sheet management. I am pleased with our execution on our key initiatives.

Our real estate footprint is attractive to the growing population of retirement age baby boomers, who are well-positioned to take advantage of a time in the not too distant future where 20% of the US population will be 65 years and older. Our retiree population is looking for more ways to stay fit both physically and mentally and we are adjusting core amenities to accommodate their preferences. From building new pickle ball courts and softball fields to various activities and classes offered at our communities.

We set a goal in the beginning of 2013 to increase the number of homeowners in our portfolio and since that time, we have increased the number of our homeowners by 369. On the new home sales front, we sold over 300 new homes in 2014 compared to just over 100 in 2013.

Over half of the new homes we sold in our MH communities for the year were through the joint-venture with Cavco. We will look to continue to grow this partnership in 2015. These new home sales are tactile to us as they both upgrade the community look and feel and introduce the property to a loyal customer who will be with us for an average of 10 years.

The new home buyer we are seeing is a younger retiree buying a home with an average sale price of $70,000. In the quarter, we continued to see the trend of customers converting from a renter to an owner. In 2013, 5% of our new and used sales were to existing renters buying the home they were renting. In 2014, we have increased that conversion to 10%.

One aspect that we monitor as an indicator of strength in the market is the sales from homeowner to homeowner, or resale transactions. We are seeing strengths in these resales, with an average purchase price increasing [to] $20,000.

In 2014, we saw a 15% increase in ownership transfers, which is a further positive sign for building on our home sales momentum. For the year, our occupancy increased by 214 sites and we are currently at 92% occupancy.

In 2014, homeowner occupied sites increased by 464, while sites occupied by home renters decreased by 250, compared to 2013, when we had an increase of 407 home renters. Emphasizing the quality of occupancy growth is important and will continue to be a focus. As we have often discussed, a key issue for this business is the capital investment in our rental program.

In 2014, we were able to significantly reduce our working capital commitment, as we were able to recycle our capital through selling homes. The benefit of this is two-fold, as we both upgrade the community and are able to redeploy our capital into other investments. We see trends and more online browsing for our communities and have adjusted our marketing and websites to meet the demand.

As with each quarter in 2014, the fourth quarter RV platform performed better than expected. We saw an increase of approximately 8% within our RV revenue streams. For the full year, our RV revenue grew almost 7% year-over-year. We are focusing our marketing efforts at our Snowbird locations, where we are seeing increase demand for our product offerings.

Our reservation pace for the first quarter is up in all three categories of revenue. Annual, seasonal, and transient. Our customers are booking early so they can secure their site. We have seen an increase in RV leads coming from new digital programs. These new leads become revenue-producing customers.

In 2015, we will continue to maximize our search engine optimization and look for opportunities for renew online exposure. With respect to our balance sheet, we are in a period of unprecedented low interest rates. We have been able to take advantage of this environment by refinancing our properties with longer terms.

Our maturity schedule has changed dramatically over the last couple of years. Upon completion of our previously announced refinancing plan, we will have gone from a 5.3% cost of debt to approximately 4.9%, while extending our average maturities from 5 years to 11 years.

Additionally, approximately 27% of our debt maturities are 20 plus years in duration and fully amortizing. Thus eliminating the refinance risk on these assets.

Turning to transaction activity in the quarter, we purchased a 1,600 site high-quality RV Park in Mesa, Arizona for $41 million, or $26,000 per site. The property is a well located, top-quality property that will complement our existing properties in the area.

Over the last four years, ELS has acquired 90 properties and invested $1.7 billion in MH and RV assets. We focus on buying great real estate locations. Our compounded annual return since IPO 20 plus years ago has been 17%, including a 22% return over the last four years.

We have grown the dividend every year since 2004, and over the last four years have doubled the dividend to $1.50 today. We have grown FFO over the last four years by 50%. The stability of our cash flow in our assets continues to increase the value of the ELS.

Our business performed very well in 2014 and we expect that performance to continue into 2015. 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 2015 guidance, and discuss our detailed first quarter guidance.

Normalized FFO per share for the fourth quarter with $0.66, $0.02 higher than guidance. The out performance was driven by core property operations and sales operations. Core base rental income was in line with forecasts, up 2.8% with 2.4% coming from rate and 40 basis points coming from occupancy.

We increased occupancy 46 sites this quarter. And as Marguerite mentioned, the quality of our occupancy continues to improve as we reduced our rental occupancy by 119 in the quarter. Our core RV business showed strong revenue growth at 7.8%. Annuals performed in line with expectations with revenues increasing 5.7%, mainly due to rate increases across the portfolio.

Strong demand in Florida drove rate and occupancy increases in our seasonal business delivering 14.4% growth over 2013. Florida, along with California, also delivered strong gains in transient rate and occupancy, which resulted in 12.7% growth. Turning to our membership business, I'll take a minute to explain a change in presentation of results related to our upgrade sales.

In the past, we have offset membership upgrade sales revenue with a reserve against uncollectible accounts. Beginning in the fourth quarter, with prior periods adjusted for comparative purposes, we have included those amounts with our membership expenses. Our fourth quarter results missed our expectations for membership expenses because of an increase in the reserve I just mentioned.

We introduced a new product that included financing during 2012. As a result of higher than expected default activity in 2014, at year end we increased our reserve $600,000. We have adjusted our underwriting criteria and don't expect defaults on finance sales to have significant impact on our membership sales results going forward.

Core property operating expenses, excluding the reserve adjustment I just mentioned, were in line with guidance. The savings in property operating maintenance and real estate taxes were primarily the result of lower than expected real estate taxes, offset by higher R&M expenses.

Florida, which represents close to 50% of our total real estate tax expense, sent final bills in the fourth quarter that were lower than expected. In the fourth quarter, our core revenue growth was 3.7% and core expense growth was 2.4%.

The revenue and expense performance increased core NOI growth, before property management, to 4.7% compared to guidance of 4.2% for the quarter. Acquisitions contributed $2.3 million in the quarter. Mesa Spirit close in late December and had no impact on NOI for the quarter.

Property management and corporate G&A were $500,000 below guidance as a result of lower than expected legal and accounting fees. Other income and expenses were $3.6 million, the largest contributor to the $1.6 million increase over guidance came from sales operations.

Financing costs were on target at $30.4 million. Full-year core NOI increased 4.5%, core revenues grew 3.6%, driven by core MH growth of 3% and core RV growth of 6.8%.

The press release and supplemental package provide 2015 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 2015 normalized FFO is $271.3 million or $2.96 per share at the midpoint of our range.

Our changes in guidance since we released preliminary guidance in October, include updates to core property operations, property management and corporate expenses, and the refinancing and acquisition activity we announced in our release last night. For the year, growth in core NOI, before property management, is expected to be approximately 4.4%.

We assume flat occupancy in our MH properties for 2015. Base rent is expected to grow 2.8% with 2.6% from rate and 20 basis points from occupancy, as we realized the full-year impact of site filled in 2014.

Our budgeted base rent continues to reflect utility and real estate tax unbundling efforts. Our base rent growth is approximately 40 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 4.3% to 5%. We are projecting 5.3% growth in our annuals. Almost 53% of our seasonal revenue is earned in the first quarter. Our first quarter reservation pace is consistent with our updated guidance.

We expect first quarter seasonal and transient revenue growth of 8% and 10%, respectively. The updates to first quarter growth rate for these two line items are driving the increases in full-year guidance to 4.7% for seasonal revenue and 4.3% for transient revenue.

Keep in mind, we budget more than 40% of our transient income in the third quarter and we expect to gain visibility into third quarter activity during the second quarter. Our membership business, which includes right to use annual payment revenue, right to use contract sales, and sales and marketing expenses is expected to be up slightly next year with a net contribution of $47.1 million.

Our updated guidance reflects a shift in our customers behavior towards broader usage of our entire RV footprint. This is evidence by continued demand for annual, seasonal and transient stays among our TT member base. In total, we expect to generate 20,500 memberships by selling 11,000 Zone Park Passes and activating 9,500 ZPPs through our RV dealer program in 2015.

In addition, we expect to increase the annual count inside the Thousand Trails footprint by almost 250 and to upgrade 3,200 TT customers. Page 16 of our supplemental package shows aggregate revenue generated by our Thousand Trails properties. We project $89.8 million in 2015 from dues revenue, annual, seasonal and transient stays, upgrade sales and other income, up from $87.6 million in 2014.

Core expenses are expected to increase 1.5% in 2015, compared to growth of 2.5% in 2014 over 2013. We are projecting a deceleration in our overall growth rate mainly because of our expectations for R&M and utility expenses in 2015. For 2015, we expect the recent trend of moderation in utility expense increases to continue, mainly affecting natural gas expense and we do not include one-time events in our R&M guidance.

Also, as I noted in my comments on fourth quarter performance, Florida taxes were lower than expected. We have updated our 2015 guidance to reflect of expected increases over the 2014 actual taxes. Because of the timing of these tax adjustments in 2014, this guidance update has more impact on overall expense growth later in 2015.

Our guidance includes $5.6 million of NOI from the acquisitions we completed in 2014, including the Mesa Spirit acquisition, which closed in late December. As mentioned in our release, the purchase price was $41.6 million. In connection with the acquisition, we assumed a $19 million loan with a stated average rate of approximately 5.7%, maturing in 2017.

We expect $72.4 million in property management and corporate expenses in 2015. The increase from prior guidance is mainly the result of higher stock-based compensation reflecting the almost 20% increase in our stock price since we provided preliminary guidance in October. Other income and expenses of $16 million are up slightly from prior guidance.

Financing costs are $1.3 million lower than prior guidance, reflecting the net effect of the proportion of our refinancing plan we closed in January and the assumption of debt in connection with the acquisition of Mesa Spirit. I'll provide more color on our refinancing activities when I comment on the balance sheet.

Mesa Spirit is included in our 2015 guidance, but we assume no additional acquisition activity in our guidance. Our first quarter normalized FFO guidance is approximately $74.5 million or $0.81 per share at the midpoint of our guidance range. We expect our core to generate revenue growth of 3.7%, expense growth of 2.1%, and NOI growth of 4.8% in the first quarter.

Our first quarter core base rent growth of 2.7% assumes a 2.4% rate increase and 30 basis points related to occupancy gains we achieved in 2014. The impact of unbundling is expected to decline during the year. We see approximately 60 basis point impact in the first quarter. We do not assume incremental first quarter occupancy gains in our guidance.

With the first month of the quarter almost complete, we expect growth of 6.7% from our core RV business in the first quarter. Revenues from annuals are expected to grow 5.1% from rate and occupancy gains in Florida and the continuing impact from annuals we gained in the north during 2014. Seasonal and transient reservation activity continues to show strong results, particularly in Florida and California.

Our reservation pace is driving our expectation of 8% seasonal and 10% transient revenue growth in the first quarter. We are projecting first quarter core expense growth of 2.1%. As I mentioned in my full-year guidance discussion, this growth rate is higher than our full-year growth rate in part because of the impact of Florida real estate taxes later in the year.

We expect our acquisition properties to be contribute $2 million of NOI in the first quarter. Now I'll discuss our recent refinancing activity and comment on our balance sheet. In December, we announced a plan to refinance approximately $395 million of secured debt with maturity dates in 2015 and 2016. The new debt is expected to have a weighted average rate of 4.1% with a weighted average rate maturity of 21 years.

During January, we closed on loans with two life companies and generated proceeds of $199 million. These 25-year fully amortizing loans have a weighted average rate of 4.16%. We use of proceeds to retire $190 million with a weighted average rate of 5.4%. We also incurred defeasance costs of $9 million.

The favorable impact to normalized FFO resulting from closing these loans is approximately $0.02 per share in 2015. We are on track to close on the remaining loans during the first quarter. We expect proceeds of approximately $195 million at 3.85%, with a weighted average maturity of 16.5 years. We plan to use these proceeds to repay debt with a weighted average rate of 5.1%.

We have not assumed interest expense savings associated with the planned closings in our guidance. While the effect on 2015 will depend on many factors, including timing of closing, interest rates at closing, and defeasance costs, on a full-year basis we anticipate the net favorable impact on normalized FFO per share to be consistent with the impact of the loans we closed in January.

At the end of the quarter, our unrestricted cash balance, net of the fourth quarter dividend paid earlier this month was approximately $34 million. As I mentioned, when discussing preliminary interest expense guidance in October, we plan to use this available cash for repayment of debt as it comes due in early 2015. There's nothing drawn on our $380 million line of credit.

Current secured debt terms are 10-years at coupons around 3.5%, 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 to place high importance on balance sheet flexibility and we believe we have multiple sources of public and private capital available to us.

Now we would like to open it up for questions.

(Operator Instructions)

Your first question comes from the line of Nick Joseph with Citi. Please proceed.

Thanks. Can you talk about what's driving the continued out performance in the RV portfolio relative to your expectations? And do you think it's more of capturing more of the market or is it the pie growing or is it combination of both?

Nick, it's Patrick. I would say it's a combination of the two. And I'd touch on transient to start, just because that's typically the first touch that we have with our customers.

In the fourth quarter and also going 2015 that's at about a $30 million bucket. In the fourth quarter we increased transient revenue by 12.7%, 10.5% of that came from rate and 2.2% of that came from occupancy. We've seen strong growth and a strong contribution, particularly from our two RV resorts, on Islands and the Keys in Florida. Both those properties as an example, had a favorable pickup in rate and also double-digit outsize growth in occupancy.

In 2015 we'll continue to focus on yield management through the three big holiday weekends, Memorial Day, the Fourth of July. The Fourth of July happens to fall on a Saturday this year so it's a good three-day weekend for us, and also Labor Day. We'll increase rate where the opportunity exists based on reservation pace. We did that throughout 2014 and on the transient side, we're able to push transient rates almost 90% which was an improvement of 400 basis points over the previous year.

So overall, from a transient perspective, we're going to focus on the yield management. On the seasonal front, we do a review annually of what's going on in the market, what sort of pace we're seeing, and then we set our rates accordingly.

We've seen a very nice pickup in rate year-over-year, but also strength on occupancy front. And in annual I think it has been relatively consistent strong in rate and stable in occupancy.

And, Nic, we've also seen an increase in people renting cabins at our properties, so you see an increase in rate coming from that. And we see that as a very big positive.

Someone doesn't own an RV, wants to explore the outdoor lifestyle, wants to understand what it's all about. And it's really kind of getting to know our -- getting to know the system, getting to know our properties. So that's a big part of it as well.

Thanks. And then in terms of the transaction market can you talk about the amount of product you're seeing today and cap rates, I guess, for both MH and RV?

Sure. Obviously in our press release we talked about that we closed Mesa Spirit. Right now we have LOIs and contracts in various stages. There's a strong interest overall in using in deals using OP units. And we're working with interested sellers on that front.

Specifically on Mesa Spirit, in terms of just cap rates that we've experienced, this property was -- has historically been under managed. We bought the property for $25,000 per site and I anticipate that it's stabilized cap rate would be 6.5% or 7%.

We're excited about this deal in that it is located right next to two other premier RV properties that we own. More generally speaking, I think there's a lot of data points out there in terms of transactions. And I think it's helpful for what is happening for just overall discovery price point for the industry.

Great. And then I guess with your stock trading where it is today and the availability of low-cost debt, how does the cost to capital come into the equation? And can we expect you to be more aggressive in terms of acquisitions in the current market?

I think that what you're going to find with us is the same thing that we've kind of always done is our disciplined approach to underwriting and consider the value creation that will come from a transaction.

I think certainly using OP units is something that we've -- we continue to talk about and continue to talk to sellers about. So you may see more of that.

Great. Thanks for all the details.

Thanks, Nick.

Your next question comes from the line of David Toti with Cantor Fitzgerald. Please proceed.

Good morning. Marguerite a quick question and it's a little left field.

What do you expect impact of lower gas prices over the next 12 months or so relative to some of the RV product? Are you already seeing increasing demand because of low gas prices or do you view that a sort of a peripheral variable in the equation?

I think, I've been used to answering that question as it relates to the price of gas or oil going up, so as I've considered what's happened over the last few months here, during those times when oil and gas is going up, our data shows that our customers are not likely to defer a vacation simply because of the price of gas. Because we offer an affordable vacation option.

But now as we sit here today, the average RV has a tank size of about 50 gallons to 100 gallons, so last summer it cost $200 to $400 to fill it and now it costs $100 or $200. That's a positive for us. If nothing else from a psychological point of view.

Our customer has that added flexibility to be able to spend that money elsewhere. I think we're also seeing it -- we're monitoring what potential cost savings we could see just from an expense side from third-party vendors and then we see a decrease in our natural gas prices.

Overall, that's just the effect of what we're seeing in terms of oil. I think that from an RV side in terms of filling up that RV, it's certainly -- what's pushing dealers, pushing RV dealers to sell more, which will benefit us.

Okay. And my second question has to do with the rental burn off and that continues to -- appears to continue to decline slowly. Is this something you're pursuing actively with the rental units or are you just sort of letting that take its course as those rental units convert?

No, we're actively pursuing it where we're trying to get an existing renter to convert. But we're also cognizant of areas where we say, the rental program isn't so bad, we can put some rental units in here knowing that we've got this increasing conversion ratio.

So you may see some fluctuation in these rental numbers in terms of we bring some rental units online and then work with that owner to convert them.

Last question. A quick one pick, are you seeing any change in price point in the MH sales? As those numbers increase, are we seeing a return to more and more expensive units?

Yes, I mean the price point is increasing a little bit, certainly from a few years ago but the number of data points there was five or six, so it's not something to talk about. But they are increasing and what we're seeing is that the customer is looking for a down-sized home from -- but from a home up north which was 3000 square feet, 4000 square feet. So they're interested in a home coming down in Florida and Arizona, $70,000 home, $65,0000, $75,000

So you're not selling a lot of the $200,000 units yet?

No, we're not.

Okay, thanks for the detail today.

Okay.

The next question comes from the line of Jana Galan with Bank of America Merrill Lynch. Please proceed.

Thank you good morning. Following up on the lower oil prices, I was curious if that had been factored into both your RV guidance or your expense guidance or is that if that could be a potential upside?

Well, certainly as it relates to the RV and potential impact on transient, we've followed our historical practice which is to take a look at where we are and focus really on the upcoming quarter. And as we move through the first quarter, then we'll take a look at our reservation pace and address our guidance just as we roll through the year.

And, again, 40% of that transient activity occurs in the third quarter. So there's a whole lot that we have included on transient revenue in that third quarter.

Then as it relates to expenses, as I mentioned, we have a deceleration of the expense increase. We saw a significant increase in 2014 over 2013 as a result of natural gas. And the trend later in the year was significantly lower and we're following that trend in our guidance.

Thank you. And you mentioned the success you've had with some of your online initiatives and the greater online traffic. I'm wondering if you can talk about where you are in the process of some of those marketing initiatives?

Yes, I mean right now what we're looking at is a few things with respect to marketing. We have RV lead generation through new digital programs.

Really more than half of the new leads that we got this year on the RV side were from online or digital programs. And what we're seeing is the impact of these campaigns, we can see it in significantly higher open rates for email campaigns. Which really is a big deal for us because the email gets opened and then the next step is to making a reservation.

We're making it so that our digital marketing campaigns are relevant and useful to the customer so that they keep coming back to the site for more information. A site that's just there that doesn't provide somebody useful information won't get used. And we're trying to continue to modify our sites so that they're relevant to the customer.

We've also just finished a short music video that we just put on YouTube and other venues that highlights all of the reasons why staying in the cold North is a bad idea and our theme is winter differently. And that has been a good marketing focus for us this year and just encouraging people to come down to the South.

Great. Thank you.

Your next question comes from the line of Paul Adornato with BMO Capital Markets. Please proceed.

Paul?

Please check your mute feature, sir.

Operator maybe we can go on to the next question and Paul can jump back into the queue.

Our next question comes from the line of David Bragg with Green Street Advisors, please proceed.

Hi, thank you. Good morning. A couple of follow-ups to Nick's questions. First, on the Mesa deal, can you talk about how you sourced that acquisition?

And also to give us a better understanding of your ability to improve operations at mismanaged assets, what's the cap rate today and what's the amount of time that you require to get to that stabilized yield of 6.5% to 7%?

Let me just take that. We'll take that in two parts. First to, as to the sourcing of the deal, exactly on what we've seen in historical deals, which is a property that we looked at for a long time. We've known the seller for 20 years.

He had an event a family event really that caused him to say, okay I want to get out, I want to move back to Michigan. Wants to go back and live in Michigan. So that's really what sourced the deal.

But that is similar to what we see throughout just relationship based. With respect to just operating the assets, going in is a little bit North of 5 cap and maybe Patrick can walk through how we get -- how we take a mismanaged asset and bring it forward.

Sure. We have a clearly a platform and a presence in the greater Phoenix market so in addition to knowing that market very well, we have synergies with respect to 10-year knowledgeable operators that have been part of our Company for 10 years, 15 or more years.

The first thing we do really is evaluate the on-site staff and make sure that we have the appropriate team members in place. To manage the property in a run rate perspective the way we like to present our communities to our customers. That all those all the way to physical experience or physical appearance to the experience of the customers.

We'll be changing over a number of the members of the on-site management team. That kind of started as we took the property on boarded it. That'll occur over call it 30 to 60 day period.

I think were very well-positioned to finish off the season. And then set our sights on the upcoming season as we work our way through the summer.

Our look there is towards the upcoming season, 2015 into 2016, where we can drive revenue and occupancy. And again given our experience in that market, what will have some pretty good strategies and we feel that we're going to be able to deliver outside revenue -- excuse me, outside revenue growth on 12 month or 18 month run right.

Thanks for that insight. So that's the timeframe to get from the 5% to the 6.5% to 7% is about 12 months to 18 months?

That's correct.

Okay thank you. And then the next question is regarding the disciplined underwriting approach you've mentioned. As your cost to capital has improved pretty dramatically over the past year or so, how have you adjusted your underwriting?

Well, we'll look at, certainly from an underwriting perspective of just the asset itself it's pretty similar to what it's always been. In terms of what are the effects of the rate growth, what are the effects of the real estate tax impact that's going to happen when you buy a property.

That's been consistent. And we know that those are kind of hot buttons, the real estate taxes and what happens on repair and maintenance kind of -- when we take over the assets. So we'll look at that but that's consistent historically. And then we do look at now and have over the last few years is what is the impact if we were to do an OP unit structure. And I think we hadn't done an OP unit deal in 10 years. I think the last one we did was 2004 until last year when we did one as part of our $100 million transaction last summer in August of -- in August 2013.

So we'll look at it that way and kind of run out the model.

And what's the appropriate relationship between your cost of capital and the IRR's you expect to achieve on potential acquisitions?

We look at what's the going in rate, the going in cap rate plus the growth rate. And then we compare it to what our cost of capital is.

Okay. So you've lowered that targeted IRR in the past year or two as that cost of capital has improved?

Yes I think the IRR is a difficult thing for us because it implies what you're reversion cap rate is going to be and we generally look at a more of a yield plus growth.

Okay. And then the last question is Paul, you mentioned your recent deals with life insurance companies. But with entry of Freddie into the space, to what degree has that impacted your borrowing costs? Do you think that you're seeing lower spreads due to heightened competition?

I think generally we are seeing that. Yes. As I mentioned, the second part of our refinancing plan has a shorter weighted average maturity than the first. There is a 10-year component in that.

And we're working through a deal right now with Freddie Mac. And I think I've previously discussed the competition that Freddie introduced into the marketplace when they came into the MH space earlier this year.

Okay. Good. Thank you.

Sure.

Your next question comes from the line of Todd Stender with Wells Fargo. Please proceed.

Thanks, everybody. For the renters who converted to homeowners in Q4, can you just go through the average cost of their rent versus the cost to own? Just seeing what the tipping point at this point in the cycle is.

Well, the average cost to rent's in the low $800s across the portfolio and that's typical for the rental conversions that we've been doing. It's difficult to pin down the value proposition for each of the individual renters that's going to determine or be based on whether or not they use financing, how much financing they use, and whether or not they pay cash.

So the simple example would be if someone were to pay cash for the home they're going to revert to our lot rent, which is going to be in the mid $500s, so a couple few hundred dollars drop off in their all-in payment. And depending on whether or not they use financing, that could be anywhere from a moderate discount to similar value proposition, of course once they buy the house and take on any financing that would be amortizing over time they'll pay that down and would just be left with the lot rent obligation.

Okay. Thanks. And you said I think Marguerite you said last year you saw 10% renter to homeowner conversions, is there a fair target for this year? How do you guys budget that?

We don't really budget it that way but it's something that we certainly have started in the last couple quarters to talk about this conversion. We're also going in 2015 going to be talking about another sort of conversion which is the conversion of not the existing renter buying that home, but somebody that's inside the community just buying another home.

So we're going to be tracking both of them. So I think we will just keep you updated through the year on both of those statistics.

Okay thanks. And I think you said earlier you probably don't expect much occupancy move this year or not as much as in the past. Does that mean we can expect more rental rate increases? Are you guys pushing a little more aggressively on existing tenants?

I think what we've said is what we've said in the past is that we don't, our guidance never assumes any occupancy growth. So that's just how we build up our budget that's how we build up our guidance model. And I think every year that we do that, we show that we increase occupancy.

It's just that's how we kind of do that we build up our budget or build up our guidance in October. As far as the rental rate and the rate increases, for the most part, they are locked down really from September to October is when we determine what our rent increases are going to be. And they become part of our guidance.

Okay. That's helpful. And, Paul, I think we can expect more defeasance costs for the upcoming re-fi's. Can you just talk about your recent decision, you prepaid the 2015 mortgage early. But they're due this year.

Just wanted to see about how you think about that when maturities are coming up in the same calendar year. How you kind of weigh defeasance cost versus say just waiting of paying them off once that window opens up to a prepay without penalty?

Right. In our decision here was really driven by the availability of the long-term debt. As we surveyed the appetite among life companies in kind of mid to late 2014, what we saw was reduction in that overall appetite. And thought it was important to lock down the opportunity. And that really was the driver behind that decision related to defeasing that 2015 debt rather than try to wait and risk not being able to have access to that 25 year debt at such historically low coupons.

And had you just said on the cash, there's an earnings drag associated with that, it that what you're trying to avoid?

Yes, yes.

Okay. Thank you.

Sure.

(Operator Instructions)

Your next question comes from the line of Michael Bilerman with Citi.

Good morning. Marguerite or Paul. I think one of you mentioned in your opening comments about increasing the Cavco venture. And I just wasn't sure sort of from a dollar, homes perspective what directions that was and how meaningful that was?

This year, we looked at the Cavco numbers and as we had 372 homes something like 400 home or so we ordered and sold roughly half of those. I would see that continuing and having that relationship with Cavco where we're able to really only put half the chips on the table in terms of from a working capital perspective, it is a positive for us and it works for Cavco.

Cavco obviously is in the business of building homes and they're able to get more homes out there. So I think you'd see along those same lines and looking to grow the business in Colorado and Florida. Is really where we're going to concentrate growing that Cavco joint venture.

So not tremendously higher than the 400 homes bought in 2014 something like a 5% or 10% increase -- [not a doubling] of the venture?

Yes, I think that's right, Michael.

Okay, thank you.

Our next question comes from the line of Paul Adornato with BMO Capital Markets. Please proceed.

Thanks. We heard about some very good strength in the RV business, but there was the one product that caused an uptick in bad debt. So was wondering if you could just describe that product and the pricing there?

Yes, this is actually a product that we have our ZPP product which is the Zone Park Pass. It's a $500 product. It is the low cost entry level product into Thousand Trails.

And when we went to do some upgrades to those individual, it turned out that some of them were in for just the three months stay and didn't want to continue in the system. So upgrading those resulted in us having to kind of reevaluate.

But from an upgrade perspective to our legacy member, that continues to be very strong and continues to be consistent with what we've seen over the last 10 years. But it's really for us just tweaking and having an understanding of how to upgrade a guy who'd be all-in initial cost is lower than what it had been previous it with a legacy member, which is more of a $6000 product.

Okay. Thanks. And you talked about cabins as being a nice entree into the RV lifestyle. How many cabins do you have in the portfolio and what's the occupancy of the cabins?

We have about 1000 cabins in the portfolio. And the occupancy, I don't have that, Paul I'd have to kind of get that for you off-line. Certainly, the occupancy follows the RV occupancy in terms of heavy in -- heavy on the weekends, heavy on holiday weekends.

The one thing that the cabins do is they may have a longer length of stay because someone may stay for one week on a transient basis they decide that this is there one week or two week vacation. And they're going to stay with us for that whole time.

Okay. Great. Thank you.

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

Okay thank you everyone. We look forward to updating you next quarter on our results.

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