Equity LifeStyle Properties Inc (ELS) 2017 Q2 法說會逐字稿

Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties' second quarter 2017 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 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 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 like to turn the call over to Marguerite Nader, our President and CEO.

Good morning, and thank you for joining us today. I am pleased to report the results for the second quarter of 2017. We are now halfway through the year, and we are experiencing continued high demand for our products as seen by lead flow, reservation activity and operating results.

Year-to-date, we have increased occupancy by 255 sites, and this quarter marks our 31st consecutive quarter of occupancy growth. We sold 100 new homes at our MH communities with an average purchase price of $66,000. For the quarter, 33% of our new home sales were in Florida and 36% were in Colorado. Our conversion rates remained high as over 17% of our new and used homebuyers were an existing customer living in our communities.

Our same-store NOI growth was 4.8%. Our MH properties posted a strong growth rate with a 4.8% increase in base rent revenue. The results are in for 2 of the 3 summer holiday weekends, and we performed well over those weekends with a 6% growth rate. For the quarter, we have seen an increase in annuals of 6%. Seasonal increase was 14%, and the transient increase was 12%.

While our holiday weekends are an important component for our summer operating success, we have seen increased activity outside of these weekends to help further strengthen our overall performance. Through our summer marketing campaigns, we have increased the awareness of our product offering, and year-over-year, we have seen increase in social media fans of 30%.

The sales channel with the largest increase in revenue is digital, driven by the growth in reservations booked on mobile devices. Our websites are optimized for all devices to provide for a positive booking experience for the customers. Our customers are increasingly choosing the web as a vehicle to transact with us. Over the last 3 years, we have seen our transient web revenue increase from 10% to 32% of the overall transient revenue. In the quarter, our online [camping pass] sales increased 45%.

I'd like to thank our employees for their efforts in delivering another strong quarter at ELS. I will now turn it over to Paul to walk through the numbers in detail.

Thank you, Marguerite, and good morning, everyone. I will discuss our second quarter results and update guidance for the remainder of 2017.

For the second quarter, we reported $0.81 of normalized FFO per share, higher than guidance, as a result of strong core property revenue growth, offset by higher-than-expected expense growth. Our core MH rent growth of 4.8% consists of approximately 3.9% rate growth and 90 basis points related to occupancy gain. Our second quarter core RV resort-based rental income growth was 8.1%, ahead of our guidance, as a result of outperformance in all lengths of stay, driven by strong demand across the country.

Growth in annual revenues was mainly the result of rate increases in our encore resorts combined with occupancy increases in the Thousand Trails portfolio. Our Southern resorts posted strong growth during the quarter.

Core utility and other income was higher than guidance as a result of increased utility recovery, offsetting higher-than-expected expense. In addition, we recognized approximately $300,000 of insurance recovery related to certain California properties that suffered damage from severe storms and flooding earlier this year.

Membership dues revenue was in line with guidance for the quarter. During the quarter, we sold approximately 4,700 Trails camping pass memberships. Year-to-date, we have sold approximately 7,300 camping passes, a 10% increase over the first 6 months of 2016.

During the quarter, we've sold 635 upgrades at an average price of approximately $6,000. The net contribution for membership upgrade sales was higher than expected as a result of price increase on our upgrade products and increased sales for our highest-priced upgrade.

Core property operating expenses were higher than expected in the quarter. Net of the revenues generated by utility and insurance recoveries, property operating and maintenance expenses were approximately $1.5 million higher than budget. Storm restoration expenses and higher-than-expected water and sewer expenses are the main contributors to the higher-than-expected growth.

In summary, second quarter core property operating revenues increased 5.5% and core property operating expenses increased 6.5%, resulting in an increase in core NOI before property management of 4.8%. Income from property operations generated by our acquisition properties performed better than guidance. The properties we owned prior to the beginning of the quarter performed in line with our expectations during the quarter.

Property management and corporate G&A, other income and expenses as well as financing costs and other were in line with our guidance for the quarter. Year-to-date, core property operating revenues increased 4.9% and core NOI increased 4.3%, driven by our core community-based rent increase of 4.8% and our resort-based rental income increase of 5.3%.

Turning to our guidance update. The press release and supplemental package provide third quarter and full year guidance in detail. Please note, the following remarks are intended to provide our current estimate of future results. All growth rates and revenue and expense projections represent midpoints in our guidance range.

We have increased our full year 2017 normalized FFO per share guidance $0.01. Our range for the year is now $3.52 to $3.62. The midpoint for our third quarter normalized FFO guidance is approximately $83.3 million with a range of $0.86 to $0.92 per share. We expect the third quarter to contribute approximately 25% of our full year normalized FFO. For the remainder of 2017, we assume no change in our core MH occupancy from the end of the second quarter and expect community-based rent revenues of $243.9 million, a growth rate of 4.6% for the remainder of the year.

In our RV business, we anticipate core RV revenues of $102.4 million for the rest of the year, a 5.2% increase over the second half of 2016. This projection is based on expected growth of 5.4% from our annual customers, 5.6% from seasonals and 4.6% from transient customers. We expect between 40% and 45% of the full year transient income will come in the third quarter. Based on our review of current reservation pace and overall expectations for activity in August and September, we are projecting 6% growth in transient revenue for the third quarter.

Dues in membership sales revenues for the second half of the year are expected to be $28.8 million. The associated sales and marketing expenses are anticipated to be approximately $5.7 million for a net contribution of $23.1 million. Core operating expense growth is projected to be 3.5% for the full year. Our current guidance for the second half of 2017 does not include any assumptions regarding unplanned storm events. During the second half of 2016, we incurred $2 million of expenses related to unplanned events. Adjusted for that 2016 activity, our normalized core operating expense growth rate would be 2.5% for the remainder of the year.

For the rest of the year, core property operating revenues are anticipated to be up 3.7% with an increase in core property NOI of 5.4%. We expect the [non-core] properties will contribute about $3.6 million in income from property operations for the remainder of the year. For the full year, we project $8.8 million of income from property operations from this group of assets.

Property management and corporate G&A is expected to be $39.9 million for the remainder of the year and $81 million for the full year. Other income and expense items are expected to be approximately $5.8 million for the rest of the year and approximately $13.8 million for the full year.

Financing costs and other in the second half of the year are expected to be $54 million. Our guidance includes the interest expense associated with the debt we assumed with our acquisition in the second quarter.

Now some comments on our balance sheet. During the quarter, we funded investments of approximately $17 million using available cash. We also assumed a $5.9 million loan with a remaining term of approximately 23 years and a 4.6% coupon. We continue to see strong interest from various lending sources to finance our MH and RV assets. Current secured debt terms available for MH and RV assets range from 60% to 75% LTV with rates from 3.85% to 4.15% for 10-year money. High-quality age qualified MH will command preferred terms from all lending sources. Fannie and Freddie, CMBS lenders and certain life companies are offering debt to finance RV assets. The current lender underwriting model for MH and RV assets places high value on strong sponsorship. Our interest coverage ratio is 4.3x, and our debt to adjusted EBITDA is 4.9x. Our cash balance at the end of the quarter was $68 million. After adjusting for restricted cash and our July dividend, available cash is approximately $20 million. We have no outstanding balance on our $400 million line of credit, which has approximately 1 year remaining and carries a 1-year extension option.

Now we would like to open it up for questions.

(Operator Instructions) Our first question comes from the line of Joshua Dennerlein with Bank of America Merrill Lynch.

Question. Did you guys disclose cap rates on the 2 acquisitions you -- 2 properties you acquired during the quarter?

We didn't disclose that, but we can discuss it now. So they're both at about a [5.5%] cap going-in with some room for growth potential in the next couple of years.

And room for growth. Is that because there's empty sites where you can put expansion sites on it? Or just...

There are some available, some vacant sites. It's not so much expansion, but some vacant sites, and it's really just kind of changing around the management of the communities.

Okay. And is there any CapEx needed for the site?

No. Not a whole lot of CapEx needed.

Okay. And how come you went into a JV on the St. Petersburg, Florida asset? And maybe how did that come about?

Yes. The JV that we entered into is with a partner that we had -- that we've worked with over the last 20 years, and he's actually a JV partner with us in 2 other deals. And the asset needs a little bit of repositioning just from kind of a standpoint of marketing and the customer base. And our partner has a good track record for turning around those properties.

Our next question comes from the line of Drew Babin with Robert W. Baird.

Looking back to last year, looks like your overall RV resort revenue growth went from 6% in 2Q to 7% in 3Q. So things kind of accelerated somewhat sequentially. Can you talk just anecdotally about what you're seeing right now in your business, kind of going through the remainder of the summer relative to last year and whether there's anything specific behind [third quarter] guidance being kind of a step-down from what actual results were in 2Q?

I mean, I think what we're seeing and what I mentioned in my remarks, we had a strong July 4 weekend. And a lot of what we're seeing is happening that's in July -- the weekends in July, kind of non-July 4 weekends, are strong. So I think comparisons to last year are -- they're very similar to last year, and the reservation pace is pretty equal. And that's really coming as a result of [picking] new customer bases as we look to reach out to different sources of customers from the hospitality industry, which is where we're reaching out and finding new customers that way.

Okay. That's helpful. And then secondly, Paul, looking at the balance sheet. Is there anything that you can provide on the preferreds that become callable in September? Talks about that and whether that might be replaced with some other term secured debt.

Yes. I don't have anything to say specific to that right now. I'd say that we've talked in the past about the opportunity that continues to exist to finance on a secured basis for a long term, but there's been no decision made as it relates to the preferred.

We have our board meeting coming up, so we'll be having those discussions at that time.

Our next question comes from the line of Nick Joseph with Citigroup.

Just going back to the JV in St. Petersburg. Is that an opportunity that your partner brought to you? Or did you bring the partner in?

We actually found the asset, and we looked at it, and we said, "This is something that makes sense to work with our JV partner on." It was part of our acquisitions team.

And then just more broadly on acquisitions. What are you seeing in the pipeline today? And do you have any interest in the larger portfolio deals that are on the market?

I mean, the pipeline, what we see is similar to what we see in the past. So no real change there. But as to the -- some of the portfolios that are out there, I think we talked about that they're not really of interest to us other than if they were to be kind of pulled apart and broken apart into pieces. But the ones that are out there right now are really not of interest.

So are there any indications that, that could happen, that those portfolios could be disaggregated into smaller pieces?

I don't know. It kind of changes on a regular basis as to what's going to be happening there. So I'm not sure where it lands, but we're hanging around the hoop.

And then just finally on occupancy. You're getting closer to the 95% high watermark. So just current thoughts on the ability to achieve 95% and maybe even exceed it going forward.

Yes. Sure, it's Patrick. With occupancy at 94.3%, and obviously, we're closing in on 95%, we're about 500 base or 500 occupied sites away from that historical high watermark. Given how the first half of the year went, I would expect that we can achieve 95% occupancy as long as the markets hold up and we continue to execute. And it's just a matter of time and working through continuing to sell new homes and drive occupancy.

But just to confirm. Within guidance, there's no assumed additional occupancy from today.

That's correct.

Our next question comes from the line of Gwen Clark with Evercore ISI.

I have a bigger-picture question. Can you walk us through how guys go about setting rate growth for the [MH asset]? And particularly, if you would just talk about the timing when you go into the communities and then what that discussion is like. That would be great.

Sure. We're actually at the very early stages of our budgeting process now, and our revenue management team is working through projected rate increases with our field teams over the next couple of months. Generally, the way that process starts is a review of market surveys where we are relative to the competition, and then we come up with projected rate increases that we review at a senior level. Once those are established, rate increase letters are sent out. That happens in the latter part of the year, with the lion's share of those rate increases being effective in the first quarter. Depending on where we are in the country, there may be a process of more involved discussions with resident bases. This is an example in Florida. Homeowners' associations are structured in that market where there is typically a dialogue between the owner-operator and the homeowners association with respect to their shared views on rate increases. So generally, we'll be working through that process over the coming weeks, with letters to go out later in the third and early fourth quarters. And we'll work our way into 2018.

Okay. That's helpful. Just one quick follow-up. Do you find that the process is different at an age-restricted asset versus an All Age?

I think the process is very similar in terms of just what we do in terms of looking at what's happening in the marketplace. Maybe on the All Age side, you're looking at -- more closely at what's happening in the apartment market in and around. We do that on the age-qualified side as well, but it's a little bit more relevant. So if there's specials or there's some type of concessions being made on the apartment side, that's more relevant. But the procedures are very similar.

(Operator Instructions) Our next question comes from the line of Todd Stender with Wells Fargo.

Paul, I think you were highlighting some of the expense growth that you saw in Q2. Was that primarily from the West Coast storms? Did that kind of trickle into the second quarter?

Yes. Well, we had a couple of things. We've seen elevated utility expense broadly for the first half of 2017, mainly usage in electric, water and sewer. And we have had some corresponding recovery associated with that to offset the elevated expense. But then in the second quarter, we did record about $900,000 of expense following those storms in California and then did have insurance recovery that we've recognized to offset that as well.

Got it. And then you were providing the second half of last year expenses as a comp. Does that suggest that you could be a little conservative going into the back half of this year just because you're applying a growth rate to that number?

Well, we're -- essentially, I think what I'm trying to say is that we haven't made an assumption with respect to those types of events in the second half of 2017. And I'd say we've talked about it a bit. We've just seen some increased volatility as it relates to these events and the impact on the business. So just want to highlight that. It's something that's not dialed into the numbers.

Got it. Okay. That's helpful. And then when looking at total home sales, what percentage of the home sales represented the renter conversions in the second quarter?

Overall, it was -- well, actually, let me walk through it this way to help provide a little additional color. The conversions, as Marguerite mentioned, overall were 17%. 12% of those new and used home sales were to existing renters. The balance, which gets us to a 17% overall, what we refer to as a conversion rate, is a sale of an ELS home to another renter or owner in the property that was not a renter of one of our homes. So it's roughly in the 10% to 12% range.

And with home sales volumes coming in, I guess, on a comparable basis versus second quarter last year, is that -- is the emphasis not as much on home sales? Or are you kind of getting maybe some pricing resistance? How do you guys look at that?

I wouldn't characterize it as pricing resistance. I think there's a couple of factors with respect to the relative performance year-to-date. On the MH side, we're getting very high occupancy in a number of the markets that drive our overall occupancy growth at some of our core in Florida as well some of our core in the Colorado market. On the RV side, which also contributes a portion of our overall sales, we have a couple of properties where we have ongoing expansion in home sales. One of those properties performed very, very well for us last year, and we're really focused on trying to match that outside performance that we've had last year. Haven't seen it so far through this part of 2017. But as we move into season, latter part of 2017 and into 2018, we're hopeful that, that will pick up. As well, we have another RV property where we've developed 50 sites last year. We've sold out those premium sites and velocity has slowed slightly.

And then just lastly, on the JV in St. Pete. Is there a purchase option or anything after a couple of years maybe once it gets stabilized? Or you like what you're seeing? That's part 1. And part 2, do you generate any management fees over the course of this?

Well, there are a couple of things. We -- this is, like I said, with an existing JV partner, and there is a buy/sell after a certain period of time consistent with our other JV relationships we have with him. And he is actually the manager of the assets.

And our next question comes from the line of Ryan Lumb with Green Street Advisors.

To stay on the topic of occupancy and that high -- as high as it is, would there be any change of approach to your rental business and how you think about replacing over time the spaces that are being taken out by the less desirable or less sustainable renters and replacing them with new homeowners as sort of leases come due?

We have actually done that in the past, where we've gone in and we've said -- we've taken the street and we've looked at it, and we said there's homes that are for sale right now. We'll take those homes out and put in new homes. So it is a process and certainly in a robust market. That's something that we can do. And in some locations, we are doing that, not to the extent of a whole street at a time. But it's -- certainly, it upgrades the community, upgrades the kind of the look and the feel of the community. And it's always good to have new homes coming in. I don't think that's something that we do want to rent large spaces, but it is something that we do property by property.

So say a year from now when we reach or get closer to that 95% occupancy point, is that a lever that you guys would pull or really look to, to, as you said, upgrade the quality of the property?

Well, I think that -- I don't think there's any difference from now from a year from now in terms of the way we would do it. Where we see opportunities and where we see opportunities to upgrade the community, we would do that and the ability to do that while, at the same time, maintaining the rent -- that strong base rent growth. We would continue to do that. So I don't know if there'll be a change from now to a year from now.

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

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.