Equity LifeStyle Properties Inc (ELS) 2017 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 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 final results for 2017. We continued our record of strong core operations and FFO growth with an 8.5% growth in FFO.

2017 was a year marked by solid demand. We are pleased to report that quarter-over-quarter occupancy has now increased for 8 consecutive years. Our MH portfolio increased occupancy by 475 sites while increasing homeowners by over 800 sites or more than 1%. Our properties are well located in high-growth markets. We saw continued strength in our ability to increase rent at our MH properties, with a full year rate growth of 3.9%.

Customers are experiencing our properties before making the purchase decision, and renter conversion trends are positive. We finished the quarter with our strongest conversion rate for new and used home sales at 24% with an average of 20% for the full year. Our ownership transfers continue to increase year-over-year, signifying a robust resale market in our properties.

The demographic trend is in our favor, with baby boomer relocation trends and overall population growth in some of our key states. Over the next 5 years, the U.S. population is predicted to grow 3.5%, while 2 of our key states, Florida and Arizona, are anticipated to grow almost double the U.S. average. ELS offers the newly retired boomer an opportunity to live in a community setting and take advantage of all the extensive amenities at our properties.

Our RV properties performed well this year. For the year, our core RV income grew 5.9%. This growth was fueled by a 5.6% growth in annuals, a 9% growth in seasonals and a 4.5% growth in transient revenue.

Our marketing programs continue to bear fruit. We increased our social media fan base by 27% to 436,000. Our marketing campaigns encourage the customer to book online, and we have seen a 42% increase in revenue coming through online reservations as compared to 2016.

Our customers continue to migrate towards booking on their mobile devices. For the year, mobile revenue increased 87% and now accounts for 32% of all revenue booked on our website.

Turning to acquisitions. In the quarter, we purchased 2 flagship RV resorts located on the Chesapeake Bay for a total of $134 million. The properties contain 1,700 sites and have 80 acres of external expansion as well as between 400 and 500 expansion sites in the internal footprint. The properties have received multiple Mega Park of The Year awards and have long been on the top of our acquisition target list.

I'd like to thank our employees for continuing to deliver a great experience for our customers as this translates into repeat business and solid operating results. The effort of each employee is important and appreciated.

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 2018 guidance and discuss our detailed first quarter guidance.

Before I begin, I'll mention that our core results for 2017 as well as our guidance for 2018, reflect the designation of our Florida Keys properties as noncore properties. Our definition of core properties include those owned and operated during comparative periods presented. We've made good progress toward reopening our RV assets in the Florida Keys, but we decided to designate them as noncore properties in the fourth quarter because operations have been interrupted. While the change has minimal impact on core portfolio NOI growth rates, for both guidance and actual results, we believe it provides a clearer picture of the financial results of our business.

Core property operating income was higher than guidance for the quarter, and our core portfolio generated 5% growth in NOI for the full year. Full year normalized FFO per share was $3.60, 8.5% higher than 2016. Full year core base rental income growth was 4.8%, with 3.9% income rate and 90 basis points coming from occupancy. We increased core occupancy 125 sites in the quarter, including a decrease in rental home occupancy of 85 sites. At the end of the year, rental homes represented 6.7% of our core occupancy.

Core resort-based rental income growth was 7.9% in the fourth quarter compared to prior year. The outperformance to our expectations was driven by higher seasonal and transient revenues. Seasonal revenue growth in our resorts in the south and west was driven by strong rate growth of 7% to 8%, accompanied by increased occupancy. Our Florida RV resort saw very strong demand for transient stays during the quarter.

Net activity in our membership business, including dues and upgrade sales revenue and sales and marketing expenses, was higher than expectations in the fourth quarter as a result of increased camping pass sales and sales of higher-priced upgrades. The average sale price of our upgrade products was almost $6,000 in the fourth quarter, an increase of approximately 15% compared to fourth quarter 2016.

Core utility and other income was higher than guidance mainly because of the accounting treatment of revenues and expenses related to Hurricane Irma. During the fourth quarter, we recognized revenue of $3 million to offset property cleanup and debris removal expenses in our core portfolio. The favorable revenue guide -- variance to guidance is offset in repairs and maintenance expenses.

Fourth quarter core property operating maintenance and real estate taxes, adjusted to exclude $3 million of Irma-related expenses, increased 5.5% for the fourth quarter compared to 2016.

We experienced higher-than-planned administrative expenses during the quarter as a result of certain property legal matters. We also realized an increase in our advertising promotion expenses related to higher-than-expected seasonal and transient revenues.

In the fourth quarter, our core revenue growth was 6.2% and core NOI growth was 4.7%. Full year core revenue growth was 5.8% and core NOI increased 5%. Our noncore properties contributed $2.3 million in the quarter and $12.6 million for the full year.

The acquisitions included in noncore modestly outperformed guidance. In addition, our fourth quarter acquisition of Bethpage and Grey's Point was not included in prior guidance. The favorable variance generated by the acquisition properties was offset by the impact of the interruption of business at our Florida Keys properties.

Property management and corporate G&A were $20.5 million for the fourth quarter. In the quarter, these expenses were higher than expected as a result of an increase to our insurance reserves. Other income and expenses were higher than guidance as a result of interest income, a JV distribution and insurance proceeds received during the quarter.

The press release and supplemental package provide 2018 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 2018 normalized FFO is $364 million or $3.85 per share at the midpoint of our range. Our changes in guidance since we released preliminary guidance in October reflect our fourth quarter acquisition activity, updated RV revenue assumptions based on our strong fourth quarter 2017 performance and the reclassification of the Keys properties to noncore.

For the year, growth in core NOI before property management is expected to be approximately 4.3%. We assume flat occupancy in our MH properties for 2018. Base rent is expected to grow 4.1%, with 3.7% from rate and 40 basis points from occupancy as we realize the full year impact of sites filled in 2017.

In our core resort business, our projected revenue growth rate of 4.7% is in line with our prior guidance for 2018. The 2018 projected revenue is almost $1 million higher than prior guidance. We see continued strong demand for our RV properties, and our updated view of 2018 is supported by the outperformance we saw in the fourth quarter. We expect 5.1% growth in our annuals for the year. We've reviewed our first quarter reservation pace for our seasonal and transient businesses and incorporated that pacing into our guidance update.

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 $48.6 million.

Page 15 of our supplemental package shows aggregate revenue generated by our Thousand Trails properties. We project $101.1 million in 2018 from dues revenue, annual seasonal and transient stays, upgrade sales and other income.

The midpoint of our core utility and other income guidance is approximately $84.2 million and is in line with prior guidance. The growth rate change from prior guidance mainly is a result of the insurance revenue we recognized during the fourth quarter. Keep in mind, our guidance does not assume property loss events that may generate insurance-related revenue to offset property restoration expenses.

Core expenses are approximately $361.4 million at the midpoint of our guidance range, consistent with our preliminary guidance.

The growth rate changed from prior guidance as a result of the fourth quarter actual results, including storm-related expenses. We do anticipate some quarterly fluctuations in our growth rates during the year. Our guidance includes $9.3 million of NOI from our noncore properties. We make no assumptions regarding additional acquisitions in our 2018 guidance. We expect $84.5 million in property management and corporate expenses in 2018, consistent with prior guidance.

Other income and expenses and financing costs and other have changed from prior guidance. These changes are the results of the expected ancillary activity and debt costs related to our Bethpage and Grey's Point resorts.

The full year guidance model makes no assumptions regarding the use of free cash flow we expect to generate in 2018.

Our first quarter normalized FFO guidance is approximately $97.1 million or $1.03 per share at the midpoint of our guidance range. We expect our core to generate revenue growth of 3.9%, expense growth of 4.3% and NOI growth of 3.6% in the first quarter.

Our first quarter core base rent growth of 4.5% assumes a 3.8% rate increase and 70 basis points related to occupancy gains we achieved in 2017. 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 5.1% from our core RV business in the first quarter. Revenues from annuals are expected to grow 5.6% in the quarter. As previously mentioned, our current reservation pace is driving our expectation of 4.2% seasonal and 5% transient growth in the first quarter.

Utility and other income is flat to prior year as a result of insurance recovery recorded in the first quarter of 2017.

We are projecting first quarter core expense growth of 4.3%. As I mentioned in my full year guidance discussion, we anticipate some quarterly fluctuations in expense growth rate, and the first quarter includes an expectation for R&M and payroll that is higher than the remainder of the year.

We expect our noncore properties to contribute approximately $1.3 million of NOI in the first quarter. This includes our assumptions related to the Keys properties gradually returning to stabilized operations.

Now I'll comment on our balance sheet. The press release shows a year-end cash balance of $31.1 million. We have $30 million outstanding on our $400 million line of credit, and our ATM program is available to provide additional liquidity. We have no scheduled debt maturities in 2018. Current secured debt terms are 10 years at coupons between 4% and 5%, 60% to 75% loan-to-value and 1.4 to 1.6x debt service coverage. The change in rates from last quarter follows the recent movement in treasuries. We continue to see strong interest from life companies, GSEs and CMBS lenders to lend at historically low rates for terms 10 years and longer. High-quality, age-qualified MH assets continue to command best financing terms.

We 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 5.1x, and our interest coverage is 4.4x. The weighted average maturity of our outstanding secured debt is 13 years.

Now we would like to open it up for questions.

(Operator Instructions) Our first question comes from the line of Samir Khanal with Evercore ISI.

Just, can I ask you guys about the acquisition that you did, maybe around cap rates on the deal? I guess I was a little surprised that the midpoint FFO did not go up more than just $0.01. I know you tapped the ATM, but I'm just trying to understand if there's any debt or sort of capital improvements associated with the assets that you acquired. Any color around that would be great.

Sure. So in the quarter, I think in November, we purchased Bethpage and Grey's Point. These were really family-held assets for the last 25 years, and we've been interested in these assets for a long time. The going-in cap rate is 5%. And as I said, I think in my opening comments, there's upside potential in the expansion sites. There's upside potential from both expansion sites and adding these 2 assets to our marketing campaigns and bringing awareness of these properties to our customer base. So between that -- and that contributed to us having the ability to increase guidance.

Okay. And then just out of curiosity, why did you get -- why did you tap the ATM to fund the acquisition? Why not just issue more debt? I mean, pricing's pretty favorable still, and you have a strong balance sheet and sort of very low leverage at this point.

I think our view was to do a mix of debt and equity on the deal, which we've dialed into our guidance. And we reviewed our options and found it a very attractive option to tap the ATM and use equity to fund a portion of the deal.

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

Just sticking on the acquisitions. In terms of -- you mentioned expansion sites as a source of upside going forward for them. But in terms of the marketing platform, what growth rate are you underwriting, I guess, this year and next on that versus kind of the core portfolio overall?

So I think we really need to get in there and operate on -- these are flagship operations and properties on the eastern seaboard, which are new to us. So as we look at it, I think it's going to probably grow in excess of what we've seen in our Northern campgrounds. So we're pretty excited about that, about getting in and starting to operate them.

And then just, do you have an update on the performance of the marinas? I know you didn't own them last year, and I know they're on a JV, but just relative kind of growth rate in the fourth quarter versus last year in the fourth quarter.

Yes, actually, the Loggerhead portfolio was not -- we didn't own it, but they also -- Suntex didn't own it in the fourth quarter of last year, of '16. So -- but we're pleased with the results of the Loggerhead portfolio for the limited time that we've been a partner. And so there's no real update on that, other than that.

And maybe just finally, you mentioned population growth expected across your footprint. Just wondering more broadly your thoughts on kind of tax reform and the impact it could have, certainly, in the kind of home resale market for where your potential tenants are moving from.

Yes. I mean, Nick, we think about the tax reform in a few different ways: Specific impact on ELS and then impact on the customer base. I think for ELS, there's not much impact. We did take a look, though, at our customers and considered how it might impact their individual situations and put together some models of typical customers making taxable income assumptions about their income levels, the source of income, whether it was wages, dividends, capital gains, and so forth. In most instances, we see our typical customer getting some tax savings. The estimated dollar amount could be in a range from a couple of hundred to maybe $1,000 or more annually. Just by way of example, a married couple with no dependent children that has $50,000 of interest and dividend income annually could see $300 in increase in their tax return -- their refund, I should say. And a married couple that has no dependent children but earn wages of the same amount would see a reduction closer to $700. So we think overall, there's a modestly favorable impact on the customers when you think about the impact to their income.

And Nick, this is kind of from a longer-term, looking back over the last 5 years, I think we've seen a decline in homes coming back to us, of about 40% over the last 5 years, really showing the strength of the resale market in our portfolio, which in turn, I think, shows people are able to sell their home, both up North and also in our portfolio.

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

I noticed in the supplemental 2018 guidance, it looks like annual and seasonal RV revenues came in just marginally. I was just wondering if there's anything embedded in that, whether it's the changing comps that, with Florida Keys properties, tougher comps. Or just looking for some color.

Yes. So that change, it's impacted by a couple of things. First, the core portfolio is different because we designated the Keys properties as noncore. That change had almost no impact, though, on expectations, maybe 10 basis points. But October guidance for 2018 results was based on the forecast that we had for fourth quarter of 2017, and we completed our preliminary forecast review in January. We increased the core RV revenue expectations for 2018 by almost $1 million. So because core outperformed expectations in Q4 of '17, the impact does kind of look like a slight decline in growth rates, but it's really an increase in overall revenues.

Okay. That's very helpful. And one last one just on the overall cadence of expansion sites being delivered within your portfolio. I'm not sure whether the Chesapeake acquisitions are going to provide any opportunities this year, but expansions that are underway elsewhere. Is there may be a quarterly number of sites we should model in, in terms of just increase in available site count?

Yes. I mean, with respect to the Chesapeake Bay there, we won't have those expansions online this year. I think that what we're planning for 2018 is about 700 sites, and we will be breaking it down quarterly as they become available.

And our next question comes from the line of John Kim with BMO.

On the recent acquisitions, can you just discuss how competitive the sale process was, and if it was the usual players? Or is there any new entrants in the market?

I'd say the process was very competitive. Like I mentioned, this is something that -- these was assets that we've highly sought after for a long time. But once it was clear that they were going to be sold, there was a process. A lot of people were interested. And it -- I think it just boiled down to some relationships, which is really what a lot of the deals and how they kind of come together happen. So -- but as far as new players, really, the same players that have been interested in other assets, I would say.

Okay. And then local media reports referenced a purchase option for an additional 46 acres nearby. Was that part of the $134 million acquisition price? Or was that a separate transaction?

No. That's all part of the acquisition price.

Okay. And I don't know if you gave it already, but what is the timing for the expansions? And do you already have the approvals in place?

There are approvals in place for some of the internal expansions. And the timing is over the next few years.

Marguerite, in your opening remarks, you referenced your occupancy increasing for, I think, you said 8 consecutive years. Can you just comment on how much runway is left? What is the peak occupancy in your mind? And also when do you think you'll hit it?

It's Patrick. Just for perspective, our historical high water mark is 95%. We're currently at 94.5%, so we're roughly 350 occupied sites away from that high water mark. And just at a high level across the portfolio, Florida's obviously our largest market with about half of our current vacancy, roughly 1,800 vacant sites, in the Florida market. And if we look at that market, Tampa, Clearwater, Fort Myers, the Gulf Coast, Fort Lauderdale, West Palm on the East Coast, are in the 97% occupancy range. And as you move north up through Orlando up the coast to Vero and Daytona, you run into occupancy rates more in the low to mid-90% range. So there's additional runway in Florida for us to continue to add occupancy. California, Arizona, both highly occupied markets for us, 97%, 98%. We've seen strength, particularly in the last few quarters, on rental conversions, particularly with new homes, in both of those markets. So that continues to contribute to overall quality of our occupancy growth as well as some opportunity to continue to contribute to occupancy. Likewise, Colorado has been doing very well for us over the last several quarters, and there's some more opportunity there. And if you look at the broader portfolio, about 40% of our portfolio is 99% to 100% occupied. So that starts obviously getting into a structural vacancy concept. But below that, we have a lot of opportunity in those key markets that are highlighted to continue to grow occupancy. And I would envision that we're going to eclipse the 95% mark, but that all assumes that market holds together and consumer confidence holds tight.

Okay. And then my final question is on Tropical Palms RV Resort. You've taken over operations of the asset recently, it's out of your same-store pool. But I was just wondering if you could elaborate on your plans for additional CapEx or investment you plan to do with this asset.

Sure, it's Patrick again. Our view of that asset is it's obviously in the premier location, high profile in the Greater Orlando and Disney World market. And we've seen very consistent demand there with our on-site team from an operations perspective, and our asset management team, we're continuing to invest in not only the common area amenities, but also many of the rental units that we have at that property. So there's a multiyear plan we have to continue to keep that property positioned competitively in that very strong market.

And John, we've owned this property since 2004, and we operated it for a few years, and then we had a third party operate it for a while. So we're very familiar with the asset, and I think we've operated it now for almost a year and -- 1 year and a couple of months. So it'll be in the same-store pool in 2018.

What kind of returns do you typically expect on investment?

On the investment on a?

Like, additional CapEx in something like this.

Well, I think it depends. It depends what we're talking about. I mean, there's obviously revenue-producing CapEx when you put in a cabin or an amenity base that generates additional revenue. So I think the range is pretty wide in what we would expect.

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

So expense growth in the core portfolio in the fourth quarter came in a bit above guidance given for the quarter, the third quarter. Just wondering if you can give some more color on what the delta was there during the fourth quarter.

Yes. As I mentioned, the main drivers of it were administrative and then advertising promotion cost. The advertising promotion, in some respects, offset the incremental $1 million, little over $1 million of RV revenue that we had relative to guidance in the quarter, and then the administrative costs related to certain legal matters at some of our properties.

Okay. And then earlier this month, Skyline and Champion Homes announced plans to merge and become the largest builder of manufactured homes in the U.S. Any thoughts on what the impact might be for ELS or the industry more broadly?

Yes, it's Patrick. We have a relationship with both those manufacturers. Over the last 7 to 10 years, you've seen consolidation across the manufacturing platform, including with another large manufacturer out there, Capitol Homes. We purchase from all of them, so I don't know that it'll particularly change the landscape for us with respect to the volume of homes that we purchase and who we purchase them from. That's largely dictated by the geographic distribution of the manufacturing plants of each of the individual manufacturers.

And I think there's really strength in the MH industry. I think there's 81,000 shipments this year, and we've seen double-digit growth in shipments for each of the last 5 years. And when you look at, just focusing on the states that are of impact to us, California, Arizona, Florida, they've doubled in shipments over the last 5 years. So there's a lot of activity going on, on the manufacturing front.

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

Just as we look at the occupancies reaching these fairly high levels, I'd say the emphasis that we look at, at least, is on the rate growth. And in Q4, you did 3.7% MH growth, I guess, from the base rent. If that's the average, what's the range around that average? How high can you push rate in just MH alone? Just seeing how high you can push within the MH business.

I mean, it really depends, obviously, on a market-by-market basis. And you look at our MH growth rate for this quarter of 4.8%, it's the highest level we've seen since 1997. And so I think that as we look at it and go through our market surveys on a market-by-market basis to determine where we have the ability to push rate, and then growing occupancy is obviously the other lever. And as Patrick pointed out, we have a lot of properties that are 99% occupied. But the key there is that they've also been that way for many years. So these are sustainable levels in the business, where the customer is putting down considerable capital to live in the property.

And any update on home sales? I just want to hear what the foot traffic sounds like, and any volume numbers.

Well, traffic has been good. Our leads year-over-year increased almost 20%. A good deal of that is from the marketing platform focusing on relaunching our website. It's fully responsive to mobile devices, and we have strong SEO. We also have those remarketing ads that track you around the Internet once you've visited our site. And from just a workflow perspective at the property level, we're holding monthly national open houses. It's coordinated with our national marketing platform. And we have improvements in lead management. So we see consistent demand. New home sales overall were up a little bit more than 20% for the quarter year-over-year. That is in part is based on, I mentioned earlier, strength in Arizona and California with respect in new rental conversions. But we've also seen strength in a couple of our flagship resorts in Phoenix where we have expansion sections. And we're seeing good demand in selling new homes.

That's helpful. And just finally back to the expansion site discussion. Just as a reminder, can you discuss the economics and returns of spending capital? Just seems like it's such an excellent use of allocating capital to expansion sites. When you look at the cost per site, how long it takes to get it entitled, payback period, IRR, can you just talk maybe about some of the metrics and returns when you entitle land next to an existing community?

Sure. So generally, it's cost between $25,000, $30,000 to build a site out. And that kind of depends on, certainly, the area, the location we're at and if there's additional amenities that need to be put in. And then we generally get about $6,000 in revenue. And in terms of the timing, that happens relatively quickly. As an example of what Patrick just mentioned at the property in Mesa, we're building them and filling them effectively. So the return happens quite quickly.

And IRR is in the 15%, 18% range? Is that fair?

I think that's fair.

Thank you. And 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 for joining us today. Paul Seavey is around for any further questions. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.