Equity LifeStyle Properties Inc (ELS) 2015 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 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 question-and-answer session with management, relating to the Company's earnings release. As a reminder, this call is being recorded.

Certain matters discussed during this conference call may contain forward-looking statements in the meanings of the call's 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 2015, we focused on increasing the strength of our existing operating platform and I am pleased with the results. Our key demographic, the baby boomer generation, is turning 65 at a rate of 10,000 people per day and we are prepared to meet their needs. Our amenity-base and activity schedules meet the demands of this customer. Our customers are active retirees who have made a lifestyle decision to live or vacation at an ELS property.

Our focus on enhanced tools to listen to our customers' feedback has allowed us to increase the level of customer satisfaction and retention. Our platform continued to show the strength of the underlying fundamentals. We own great real estate locations with a strong a demographic trend.

Now a few highlights from 2015, that will help us build momentum into 2016. We continued our positive occupancy trend of both increasing occupancy and gaining homeowners. For the year, we have increased occupancy by 473 sites, and increased homeowners by 749.

On the new home sales front, we sold 479 homes in 2015, a 40% increase from 2014. Our same-store NOI growth was 5.5%, a level not previously seen since 2009 in our portfolio. We finished the year with our strongest quarter of MH growth rate with a 4% increase. And finally, our RV revenue grew by nearly 8%. We've been focused on converting existing renters to owners and are pleased with the trend we are seeing. For the year, 10% of our new and used home sales were conversions of renters to owners.

We see the advances in social media as an important factor in a customer's decision to relocate for the winter. The advancement in technology has allowed grandparents to be just a video call away from seeing their grandchildren on a regular basis. This allows newfound freedom and flexibility to the retiree and provides an increased customer pool for ELS. Our MH customer continues to increase the amount of time spent shopping online for their home and vacation decision.

For the full year, our RV portfolio performed very well. The annuals, which represent two-thirds of our RV income generated a 6% growth rate, the seasonals came in at 10% and the transient base increase was 12%. We are currently in the heart of our snowbird season and we are focused on extending our existing customers' stay with ELS, as well as obtaining a commitment for staying with us in the 2017 snowbird season.

Our partnership with Lazydays, the largest RV dealer in the world, has strengthened as we recently set up a state-of-the-art travel center inside their brand-new super warehouse store adjacent to their Tampa RV location. The travel center allows new RV buyers the opportunity to learn more about our Thousand Trails and Encore RV resorts. We are excited about this new venture and look forward to providing updates.

Our business performed very well in 2015 because of the hard work of our employees. Our focus on meeting the needs of the customer has been successful because each employee strives to make a difference each day.

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 and full-year results, update our full-year 2016 guidance and discuss our detailed first-quarter guidance. Core property operations were in line with guidance for the quarter and generated 5.5% growth in NOI for the full year. Normalized FFO per share for the fourth quarter was $0.74, a penny higher than guidance. Full-year normalized FFO per share was $3.04, 9.7% higher than 2014.

Full-year core base rental income growth was 3.5%, with 2.9% coming from rate and 60 basis points coming from occupancy. We increased core occupancy 134 sites in the quarter and 473 sites year to date. Our full-year rental home occupancy decreased by 276 sites and at the end of the year, represented 7.6% of our core occupancy.

Our core RV business generated revenue growth of 7.9% for the year. Revenue growth from annuals in the fourth quarter was in line with expectations and consistent with performance in earlier quarters last year. Full-year growth in annuals of 5.9% is mainly the result of our ability to increase rate across the portfolio. Seasonal revenue growth of almost 10% for the full year was the result of rate and occupancy gains in the South and West. Full-year transient revenue growth of more than 12% resulted from increased rate and occupancy across the portfolio.

Net activity in our membership business, including dues revenue and upgrade sales and expenses, was slightly below expectations in the fourth quarter, as a result of lower-than-expected upgrade sales volume. Our ending member count of 102,413 was almost 6,300 higher than the 2014 ending member count.

Camping past sales and RV dealer activations increased almost 30% compared to the fourth quarter of 2014. Core property operating expenses increased 2.3% for the full year compared to 2014. We experienced higher-than-expected R&M and payroll expenses during the year as a result of increased cost to maintain our water and sewer systems, some storm events and healthcare costs for our employees.

In the fourth quarter, our core revenue growth was 3.9% and core NOI growth was 5.8%. Full-year core revenue growth was 4.1% and core NOI increased 5.5%. Acquisitions contributed $1.7 million in the quarter and $6.8 million for the full year.

Property management and corporate G&A were $18.7 million for the fourth quarter. In the quarter, these expenses were $600,000 higher than expected as a result of an increase to insurance reserves and payroll costs, including temporary pay and healthcare costs.

Other income and expenses of $3.1 million in the quarter included income received from BP Oil to settle a damage claim related to the deepwater Horizon oil spill in 2010. For the full-year our financing costs were $115 million.

The press release and supplemental package provide 2016 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 in revenue and expense projections represent midpoints in our guidance range.

Our guidance for 2016 normalized FFO is $294.6 million, or $3.20 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 and property management and corporate expenses. For the year, growth in core NOI before property management, is expected to be approximately 4.1%.

We assume flat occupancy in our MH properties for 2016. Base rent is expected to grow 3.5%, with 3% from rate and 50 basis points from occupancy as we realize the full-year impact of sites filled in 2015. In our resort business, the midpoint of our updated revenue guidance is $192.4 million for 2016, consistent with our preliminary guidance.

We maintain our expectation of 5.7% growth in our annuals for 2016. We have reviewed our first-quarter reservation pace for our seasonal and transient businesses and incorporated that pacing into our guidance update. Growth rates for first-quarter seasonal transient revenues are expected to be 5% and 6.4%, respectively.

For the full-year, we anticipate seasonal revenue growth of 4% and transient revenues are expected to increase 3.5%. Keep in mind, we budget more than 40% of our transient income in the third quarter and we expect to gain visibility into the 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 consistent with our preliminary guidance and shows a net contribution of $45 million. In total, we expect to generate 27,700 memberships by selling 13,800 Thousand Trails camping passes and activating almost 14,000 camping passes through our RV dealer program in 2016. In addition, we expect to increase the annual count inside the Thousand Trails footprint by almost 300 and to upgrade 2,600 TT customers.

Page 14 of our supplemental package shows aggregate revenue generated by our Thousand Trails properties. We project $91.9 million in 2016 from dues revenue, annual, seasonal and transients stays, upgrade sales and other income. This compares favorably to $87.6 million just two years ago in 2014.

Core expenses are expected to increase 1.6% in 2016. Excluding R&M, administrative and real estate tax expenses, our 2016 expense growth rate is expected to be approximately 3%. We expect growth rates in R&M, administrative and real estate tax expenses to moderate in 2016.

Note that our assumptions for 2016 R&M don't include expenses to recover from potential storm events or other property damage losses. We do anticipate some quarterly fluctuations in our growth rates during the year.

Our guidance includes $1.6 million of NOI from the acquisitions we completed in 2015. We make no assumptions regarding additional acquisitions in our 2016 guidance.

We expect $77.2 million in properly management and corporate expenses in 2016. Our guidance update includes updated payroll assumptions and we have assumed some increases in our technology and sales and marketing initiatives, as well as public Company costs. Other income and expenses of $14.6 million are in line with our preliminary guidance.

Financing costs are in line with prior guidance and reflect the repayment of a maturing $9.7 million mortgage earlier this month. As discussed in my 2016 guidance review on our last call, we had planned to repay this loan at maturity using available cash. The full-year guidance model makes no assumptions regarding the use of free cash flow we expect to generate in 2016.

Our first-quarter normalized FFO guidance is approximately $82.4 million or $0.90 per share at the midpoint of our guidance range. We expect our core to generate revenue growth of 3.6%, expense growth of 2.8% and NOI growth of 4.1% in the first quarter.

Our first-quarter core base rent growth of 3.8% assumes a 3% rate increase, and 80 basis points related to occupancy gains we achieved in 2015. 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 5.6% from our core RV business in the first quarter. Revenues from annuals are expected to maintain fairly steady growth of 5.7% in the quarter. As previously mentioned, our current reservation pace is driving our expectation of 5% seasonal and 6.4% transient growth in the first quarter.

We are projecting first-quarter core expense growth of 2.8%. As I mentioned in my full-year guidance discussion, we do anticipate some quarterly fluctuations in expense growth rates and the first quarter excludes an expectation for R&M that is higher than the remainder of the year. We expect our acquisition properties to contribute approximately $700,000 of NOI in the first quarter.

Now I'll comment on our balance sheet. the press release shows a year-end cash balance of $80.3 million. Please note that in early January we used approximately $49 million to fund the debt repayment I previously mentioned, as well as our January dividend payment, and made a $5 million additional investment in our ECHO joint venture. Therefore, our current estimate of our available unrestricted cash is approximately $25 million. There is nothing drawn on our $400 million line of credit and we have an untapped $125 million ATM program to provide additional liquidity.

Our remaining 2016 debt maturities total approximately $70 million. These loans can be repaid without penalty a few months in advance of maturity later in the year. We are currently evaluating our refinancing options and will provide updates on future calls.

Current secured debt terms are ten years at coupons between 3.75% and 4.25%, 60% to 75% loan to value and 1.4 to 1.6 times debt service coverage. We continue to see strong interest from light companies and the GSEs, but we do note some instability related to the CMBS market following the recent broader market volatility. High-quality H-quality 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 capital available to us. Our debt to EBITDA is around 5.5 times and our interest coverage is 4 times.

Now, we would like to open it up for questions.

(Operator Instructions)

Gaurav Mehta, Cantor Fitzgerald.

Good morning, thanks. A couple of quick questions. First on the occupancy, it would seem like your portfolio was 92.8% occupied as of 4Q. I know in the past you've talked aiming for 95% occupancy as like the target range. Is that still your goal and how do you reach from 92.8% to 95% occupancy?

Yes, this is Patrick. As you mentioned, the previous high-water mark for our MH occupancy was 95%. We view that as an achievable goal, as we increase occupancy to 93%, we have got a home sales platform in place. We've got an active renter conversion program.

We've been purchasing more new homes, including through our Cavco joint venture. So we have the inventory and the platform established to continue to grow occupancy. Although that, of course, is going to be dependent upon the market continuing to hold up.

Okay. And then, second, I want to go back to your comments on the travel center with Lazydays. Can you expand on what kind of arrangement you have there?

Sure. We've been working with Lazydays for a while now, for several years. But they just recently built a travel center adjacent to their existing location, and they have about, I think it's something like 500,000 visitors visit the Lazydays centers every year.

And what we have is, we have employees on-site at that center, able to sell our products, make reservations. It's kind of a one-stop shopping for an RV. It's a massive store where you can get everything you need for your RV trip as well as book reservations. So it's just -- the grand opening was last weekend, and we're excited about what we can do with that relationship.

Okay. And then lastly, could you talk about expansion opportunities in your portfolio? Do you plan to expand in 2016?

I think we've talked before about a couple of properties we are expanding, one outside the Phoenix area and one in Houston. Those two, in particular, are continuing into 2016. I would say that we're somewhere in the 600 new-developed sites for 2016.

Great, thanks.

Thanks, Gaurav.

Nick Joseph, Citi.

Great, thanks this is John here with Nick. I think Paul touched on this in opening remarks. On the RV side, could you elaborate on what drove the RV guidance decrease? Looks like 2015 and 4Q came in ahead, but net-net, 2016 expectations are down a little.

Right. I guess with respect to that RV increment, I think I did see that written about it. I think it's important to look at all the buckets of the revenue. So in 2015, the annual and seasonal buckets, which represent 80% of the total revenue, that grew by about 7%. That growth was fueled by the annuals, as I mentioned to my comments.

And then the transient piece is, we look at the transient piece for 2016, where we have less visibility, we have anticipated growth rate of 3.5%. We really haven't changed the guidance for RVs but rather we've maintained our total expected RV revenue. But the growth rate was impacted by, I think, about 20 basis points due to our 2015 performance.

We are seeing some cancellations in our properties that we are attributing to warmer weather in the north. With the exception of last weekend, where we had out east had a big snowstorm, there's really not been a winter to speak of, and this tends to impact those customers who have not yet made their decision to come down south.

Have you seen any impact from a lower Canadian dollar value, given that a lot of RV travelers are Canadian?

For us, Canadian is a small piece of our business. It's about 10% of our business. And it's about 10% of that is on the transient side, so you're really talking about the seasonal guide's going to come down because that's what they do. That's how they vacation or how they spend their winters is with us in Florida and Arizona and Texas.

It's really whether or not that transient piece, and again that's a smaller piece, whether or not they're going to make the trip down. And I think there's two things that are cutting against us on that. One is certainly the dollar but also the weather. The Canadian weather has been like ours, not as harsh as we've seen the last few years.

Okay. And then, finally, can you touch on the acquisition pipeline and like what you are seeing in the transaction market?

Sure. Consistent with what we've seen in prior quarters, right now we're under various stages of LOI and contracts. It's difficult to predict timing when something would close. As to the broader markets, there really haven't been a whole lot of new data points in the quarter.

Okay, thank you.

Thank you.

Jana Galan, Bank of America Merrill Lynch.

Thank you, good morning.

Good morning, Jana.

On the RV questions, thank you for the comments on the first quarter reservation pace and that you'll have some added visibility in 2Q on the transients. But hoping if you could provide more detail on how much visibility you currently have at this point on each of the annual, seasonal and transient bookings?

Just like what we've said in the past, as we get closer on the transient side, we're certainly able to see what's happening. We have an awful lot of -- on the transient side -- an awful lot of walk-up traffic. You don't know that traffic is going to be there until it arrives.

We have very good visibility on the annual and the seasonal piece. Which is really, as we refine our guidance and we refine our numbers, that's really what we look to, is where are reservations coming in? And I think we've often said that transient piece is something that we set an awful lot of time marketing, a lot of time drawing the customer to come to stay at our location, but you don't know that they're there until they show up.

And are you seeing any benefit from the lower oil in your bookings?

Yes, I think it's a little bit -- since now we're coming on a second year of lower gas prices, I don't think we see a big increase as a result of that. People are expecting it. And overall, gas prices have not really been a contributor to our growth.

Thank you.

Thanks, Jana.

David Toti, BB&T Capital Markets.

Good morning. Quick question. Provide an update on the migration to lower price points in the portfolio, if that's complete or if tougher economic times would keep you focused on that agenda in the coming year.

And, David, you're referring to the RV product on the Thousand Trails product?

Yes. So the last couple years I know you guys have worked towards getting to lower price points and doing higher volume. Is that still an initiative?

Yes, it absolutely is. What we've seen is the ability to sell our camping passes. I think for the year we've increased camping pass sales in 2015 by 18%. And that's selling that $500 product versus the $6,000 product from years past.

And really, the exciting thing I think that happened inside those camping pass sales this past year, an increase in sales, but an increase came from online sales. So people are able to go on our website, understand what the product is that we're offering and actually commit to us online and buy it online. That has tremendous advantages for us to be able to efficiently sell these passes. So we look to do more of that in 2016 as we continue to utilize the Internet.

Along those lines, is there any pricing differential in online purchases versus in-place or by phone?

It's an interesting question because we get a lot of pushback from that because, as you can imagine, on an online purchase there are no commissions. And when you're booking it through a sales person, the sales person is looking to get the commission. So we have a lot of debate internally because you often see deals online that you might not get in person. At this point, they are the same pricing.

Okay. And then I just had one last question. It's been a while since there were any large acquisitions. Could you give us a little bit of insight into what the transaction market looks like? Are there any assets being marketed today that are of interest? And perhaps any cap rates or values that you've seen in recent transactions?

I think in terms of what's out there, I think that there's some of the portfolios that we've talked about over time, some of the previously ARC assets that's been broken out into a couple different portfolios. My understanding, that's something that's kind of out there.

As you know, David, Patrick Waite was the operator of those assets so we have a good familiarity. Those are assets that we have passed on over time. And I think there's a couple other potential portfolios out there. But in terms of cap rate, in terms of when something would happen, it's difficult to predict.

Okay, thanks for the detail.

Paul Adornato, BMO Capital Markets.

Thanks. I was wondering if you could drill down a little bit on your sales efforts? You have a couple of JVs in place. You mentioned Lazydays. But as you look at your sales infrastructure, as sales are increasing, where do you intend to spend more, if at all, on sales?

Sure, and I think -- Patrick can walk you through. There's two things on the sales I think is important to highlight. One is the new home sales and what we've seen and where we've seen the increase in new home sales. And the other is the used home sales.

And the import of that number relative to -- I think people always think that number should go up. There's always the perception that having an increased number of used home sales is good. But, Patrick, walk through a little bit where we're at in terms of new home sales and where we're seeing the increases.

Sure. The trend on new home sales continues to be favorable. We sold 479 new homes for the year, compared to 336 in 2014. So that's about a 40% increase year over year. You mentioned JVs, our JV with Cavco continues to be a source of home inventory for those new homes. The JV was responsible for 38 new home sales for the fourth quarter and for almost 180 MH sales for the full year. Life to date we've ordered 750 new homes through the Cavco joint venture and we sold or rented almost 450.

Now, moving over to the used home side, we sold 305 used homes for the quarter, and that's down slightly about 50 from the same quarter last year. Over the last few quarters we've seen used home sales settle into that range of 300 to 350, which I think is representative of what I'd expect in coming quarters. That reduced run rate for used home sales is largely due to an improved economy and current residents having success selling their homes.

So sales from homeowner to homeowner within the community. So homes we don't touch, but between home owners of the community, a homeowner moving out and a homeowner moving in, was up about 8% year over year. And that's as opposed to, in the downturn, homes coming back to us. So there's basically fewer used homes for us to manage, and therefore, fewer used home sales.

Okay, thanks for that. One follow-up, too, on the acquisition environment. Are you seeing institutional interest on the RV and resort side of the business? Maybe you could comment on that side versus the traditional retiree business.

I think that there has been an interest over time, over the last few years, an institutional interest in both the MH and the RV side. I think there's an appreciation, there's a real appreciation, when we talk about the term RV resort and then when you go and visit a property and you see that it's primarily filled with park models which look an awful lot like a manufactured home, it starts to be the realization that these two asset classes are very similar, have the same cash flow characteristics. So I think that there is -- the interest level is definitely there.

Great, thank you.

Thanks, Paul.

Drew Babin, R.W. Baird.

Good morning. Most of my questions have been answered but I have a quick one here. Right-to-use annual payments, there was year-over-year growth in the fourth quarter, and it looks like in 1Q 2015 you're expecting something similar after, really, a string of consecutive quarters that was actually down year over year.

And I was wondering if there is a trend there? I know guidance for 2016 is flattish for that. I'm just trying to understand what's behind that, behind the fluctuations there, whether we can expect year-over-year increases to continue?

I think that what we really see in the Thousand Trails portfolio and the way we rearranged that table, I think, a couple quarters ago, is to show that we're seeing a shift in the way the customer is using the real estate. The right-to-use annual payments have been flattish, but you can see that the income from annual, seasonal and transient is up significantly. I think over the last five years those income streams have increased over 10% a year.

So you'll see churn inside the member base, but those new customers coming in are transacting with us in a different way than they did in the past. As we look at our business, as we look at the Thousand Trails business, we look at it in totality because you are exchanging a right-to-use member for a seasonal or transient or an annual.

Okay. And one more for Paul. I was hoping you could break down ELS's view of cost of equity. Obviously, on an implied cap rate or multiple basis, cost of equity is very, very low in historical context. But taking more of a longer-term view, how would you square up your cost of equity currently?

You're talking about relative to historical?

Yes. If you implied cap rate, at least in my numbers, coming down below 5%, some would use that as a cost of equity. But certainly there's several ways to calculate it. I was trying to get some insight on what ELS looks to in order to tag a cost of equity, taking a longer-term approach.

I think for us, it sounds a little bit like what you are talking about, is strategy and view. I think that one thing you have to temper that analysis with is the understanding of our overall opportunity set as it relates to acquisitions and growth. And so a lot of our analysis over time has been dependent on when the transaction appeared.

And so, we focus a lot, we talk a lot about the importance of financial flexibility. It really can depend on, in terms of our execution, on an opportunity. It really depends on what the environment is at the time that opportunity comes.

Okay, that's helpful. Thank you.

Sure.

Thanks, Drew.

(Operator Instructions)

Philip DeFelice, Wells Fargo.

Good morning.

Morning.

G&A expense was up sequentially from Q3. Typical seasonality usually results in a decline. It was also the highest levels, as a percentage of total revenue, in the past few years. I was wondering if you could talk a little about the trend on G&A expense and what do you expect going forward?

Sure. In 2015, overall, for property management and corporate, when you exclude the transaction costs, we were at $74 million. As I mentioned, in the fourth quarter, we had an increase related to insurance reserve and then some payroll costs, temporary costs in healthcare.

As we look ahead to 2016, I mentioned some technology and sales and marketing initiatives that we have that drive our number toward $77.2 million. Also included in that guidance adjustment is an increase to stock-based compensation as a result of the increase in our stock price and full staffing in 2016.

Okay, thanks for that. And thanks for the color on the resident-to-resident used home sales. Could you talk a little bit about the rental conversions? It looks like rentals in the used units continues to decline and new unit sales are doing better than used unit sales.

What are the trends as far as converting from used ones to new ones? Are they typically buying the same used unit that they are currently renting? Or are you seeing some buys, some of these units you're referring to that are being sold by other residents in the community?

Well, let me start with what unit they're buying. When we reference conversions, when it's 10% for the year, those are current renters either buying the home that they're in or another home across the portfolio that's owned by ELS.

And that mix, it's going to vary from property to property, and I'd say it's split about equally between purchasing the home they're in and purchasing another ELS home. Sometimes we see customers up-sizing to a nicer home. Sometimes we see customers down-sizing.

With respect to that mix of new and used, it really comes down to price point. I think a little bit of what you're seeing in the new home sales is just a ramp-up of our sales platform and having more new inventory available. But certainly, you referenced the increase in homeowner-to-homeowner sales, that's just a sign of an improving economy.

Those home sale prices that we touch in resales and used home sales are up 8% to 10% annually alongside of those homeowner sales in number up 8%. So we see some favorable trends in transactions and pricing, and I do think that has a favorable effect on our rental conversion program.

Great, thank you.

Sure.

Paul Adornato, BMO Capital Markets.

Thanks. Just a follow-up. In the past we've talked a little bit about Airbnb use within your portfolio. I think you guys were going to study its impact and how you might be able to participate. I was wondering if you had an update on that?

We don't have an update to discuss on that. We have been working with Expedia, but we don't have an update on Airbnb.

Okay, thanks.

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

Thank you all very much. Paul Seavey will be around for any additional questions.