Equity LifeStyle Properties Inc (ELS) 2020 Q2 法說會逐字稿

Good day, everyone, and thank you for joining us to discuss Equity LifeStyle Properties' Second Quarter 2020 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 meaning of the federal securities laws. Our forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or to supplement any statements that become untrue because of subsequent events.

In addition, during today's call, we will discuss non-GAAP financial measures as identified by the SEC Regulation G. Our 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. Our second quarter results show the continued strength of our business. We continue to be able to safely and efficiently operate our properties under new operating conditions. Paul will provide more details on collections, but across our organization, we have seen payment patterns consistent with last year. We have put in place a rent deferral program for residents facing the hardship due to the impact of COVID-19. Approximately 500 residents are enrolled in this program. We saw strong demand on the MH side of the business with a 4.6% increase in rental revenue. In the quarter, we saw a decrease in residents moving out of our community.

We increased new home sales volume by 14%, and the average purchase price increased by 10%. Our MH properties are currently 95% occupied. Our residents are homeowners who have generally paid cash for their home. This capital commitment to our communities is an important differentiator in difficult times. Our overall occupancy consists of less than 6% renters.

Moving to our RV business. We have had an acquisition strategy over the years of buying RV resorts that are heavily focused on annual and seasonal revenue streams. 80% of our RV revenue is longer-term in nature and 20% comes from our transient customers. In the second quarter, our properties were impacted by local shelter in place orders, which called for reduced or eliminated travel activity inside a jurisdiction.

Our RV annual customer generally has developed roots at the community. For the second quarter, the annual revenue, which historically accounts for approximately 70% of our total revenue, grew by 4.7%. In the quarter, we were primarily closed to transient traffic until the beginning of June. We followed shelter-in-place orders and reduced activity to protect our employees and customers from potential risks associated with transient traffic. We saw a significant increase in reservation activity and revenue in the month of June. The demand is high for customers to travel in a controlled environment.

I would like to close by thanking the entire ELS family. They have continued to react to the evolving climate in an impressive manner. The team has successfully adapted to new regulatory protocols and changes in the operating environment, with the primary focus on the safety and well-being of our employees, residents and guests.

I will now turn it over to Paul to walk through the numbers in detail.

Thank you, Marguerite, and good morning, everyone. I will review our second quarter results, highlight some of the topics mentioned in the COVID-19 update included with our earnings release and supplemental financial information and discuss our balance sheet and liquidity position.

For the second quarter, we reported $0.47 normalized FFO per share. As disclosed in our earnings release, we incurred approximately $1.4 million in nonrecurring COVID-19 related expenses during the quarter. We have added these expenses back in our calculation of NFFO.

Our core MH rent growth of 4.6% consists of approximately 4.1% rate growth and 50 basis points related to occupancy gains. We've increased occupancy 103 sites since December with an increase in owners of 156, while renters decreased by 53. Core RV resort base rental income from annuals increased 4.7% for the second quarter and 6.1% year-to-date compared to the same period last year. The driver of rent growth from annuals in the quarter was rate with occupancy essentially flat compared to the prior period.

Year-to-date core resort base rent from seasonals increased 3.7% compared to 2019. Core base rent from transients decreased 47.7% in the quarter as a result of the closures Marguerite mentioned in her remarks.

Membership dues revenue increased 3% compared to the prior year. During the quarter, we sold approximately 5,800 Thousand Trails Camping Pass memberships. This represents a 12% decrease for the quarter, which we attribute to the impact of COVID-19. We experienced significant recovery in sales volume in June, which showed an increase of 43% over June 2019.

The net contribution from membership upgrade sales in the quarter was flat compared to last year. Sales volumes increased almost 12%, while the mix of products sold changed, resulting in a lower average sales price. Core utility and other income was about $400,000 lower than second quarter of 2019. Increases in pass-through and utility income primarily resulting from pass-throughs of real estate tax increases that were effective in late 2019, were offset by reduced revenue resulting from our suspension of late fees as well as fees related to transient RV stays. Core property operating expenses were flat compared to second quarter 2019. The footnote disclosure included in our supplemental financial information package states that our core income from property operation includes approximately $1 million of nonrecurring COVID-19 related expenses. Excluding these expenses, we realized a 90 basis point decline in core property operating expenses in the quarter compared to last year.

In summary, second quarter core property operating revenues increased 60 basis points, and core property operating expenses increased 10 basis points, resulting in an increase in core NOI before property management of 1%. Core NOI before property management, excluding COVID-19 related expenses increased 1.8%.

Income from property operations generated by our noncore portfolio, which includes our marina assets, was $3 million in the quarter. Revenues from annual customers at the marinas and other properties in the noncore portfolio generated more than 90% of total noncore revenues in the quarter and year-to-date period.

Property management and corporate G&A expenses were $25.4 million for the second quarter of 2020 and $51.3 million for the year-to-date period. Other income and expenses generated a net contribution of $1.7 million for the quarter. Ancillary retail and restaurant operations were impacted by COVID-19 and generated approximately $1.2 million less NOI during the quarter than last year. In addition, our joint venture income was approximately $2.4 million lower because of the refinancing distribution we recognized in 2019.

Interest and related loan cost amortization expense was $26.2 million for the quarter and $53.2 million for the year-to-date period. We included a COVID-19 update with our earnings release and supplemental financial information. All of our MH, RV and marina locations are open, though some have limited access to certain amenities pursuant to state and local guidelines. Our rent deferral program was in place from April through June. Through that program, we assisted 540 residents with a deferral of approximately $0.5 million of rent.

We also provided assistance in the form of rent credits to annual customers at certain of our RV resorts, where openings were delayed because of shelter-in-place orders. Those credits will be applied to future charges and total approximately $900,000. We have also continued suspension of late fees in the month of July.

Since the outset of the COVID-19 pandemic, we have not experienced meaningful negative impact to our rate of rent collection. For the second quarter, our overall collection rate for our MH, RV and TT properties was 99%, consistent with the second quarter of 2019. Our month-to-date collections in July are consistent with the collections at this time in April, May and June 2020.

Now some comments on debt markets and our balance sheet. Market conditions have stabilized somewhat since our April call. Current secured financing terms available for MH and RV assets range from 55% to 75% LTV, with rates from 2.75% to 3.5% for 10-year money. We continue to see lenders place high-value on sponsor strength and ELS continues to be highly regarded. High-quality, age-qualified MH assets will command preferred terms from participating lenders.

Our cash balance after funding our July dividend is more than $50 million. We have available capacity of $350 million from our unsecured line of credit. We have approximately $141 million of capacity under our ATM program, and we have no scheduled debt maturities for the next 12 months. We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of capital available to us. Our interest coverage ratio is 4.9x, and our debt-to-adjusted EBITDAre is 5x. The weighted average maturity of our outstanding secured debt is 12.5 years.

Now we would like to open it up for questions. Jonathan?

(Operator Instructions) Our first question comes from the line of John Kim from BMO Capital Markets.

You had a strong quarter as far as the collection rate, and your RV parks are now almost fully open. Can you just discuss why you didn't reinstitute earnings guidance for the year?

Sure, John. So every year, as you know, we issue guidance well in advance at the start of the year. I think we've historically been among the first to release guidance, and we're really focused on making certain that -- that the investors appreciate the assumptions that go into the range we provide. We feel very good about our business going forward. It really has shown the true strength during this pandemic. But we did feel that with the uncertainty in the regulatory and specifically the health environment, it was prudent to wait to reissue guidance and provide it at a time when there is more clarity with respect to that environment. Our MH and RV annual revenue line items have performed remarkably well during these tough times, but the part of our revenue with more moving pieces like seasonal and transient revenue, they're more difficult to forecast, and that really factored into our decision to wait on reissuing guidance.

How much of this decision was based on concerns of the unemployment benefits expiring and the additional government stimulus as well? Did that factor into your decision at all?

No. I mean I think what I just -- what I kind of covered there at the end with the seasonal and transient was really the drivers of the decision. As you've seen in our MH platform, really good collections, high occupancy rates, great sales, so that wasn't -- but that wasn't really a factor.

Okay. And then last quarter, you suspended notice of rent increases in MH. So I'm just wondering if that has -- if that's continued. Or if now you are increasing rent?

Yes. John, if you refer to our June investor presentation, we had talked about the fact that we were reinstating them in June. And in fact, we did do that at the end of June. So there was a very brief suspension for the months of April and May on those rent increases, but we effectively had a catch-up of those notices in June.

Our next question comes from the line of Samir Khanal from Evercore.

I guess, can you talk about the changes you're seeing, maybe trends in the properties in Florida, Arizona and even California, we've seen some news reports to sort of flare-up some of the fires there. Any notable changes in those properties?

Yes. I mean those properties right now for us, are in the -- that -- not as busy season. So you really -- we have our annual -- our RV annual there and our RV and our MH there. So it's not as busy of a season. So it's not impacting us currently. We're certainly looking towards how that changes and how the virus changes over time and how that impacts and that's why I touched on -- impacts our transient and seasonal reservations into the third and fourth quarter.

Okay. And I guess my second question is just on kind of just a general market in terms of opportunities that you're seeing. The acquisition side, portfolios, one-off, whether it's RVs or MH. I guess, what is out there today and kind of our expectation sort of on the other side of the virus here in the next sort of 6 to 12 months?

Yes. I mean I think there's -- we didn't close on any new communities in the quarter. We are in due diligence on deals, and we'll update you on the kind of the timing of the closing. There are certainly transactions that are happening. Some transactions are happening are in kind of the all-age MH space, which we have expressed that we're not necessarily interested in. But I see that there's -- I think there are some deals that are coming to market now where people are interested in selling. I think that's consistent with the years passed where it's just kind of the timing is right, not necessarily having anything to do with the pandemic.

Your next question comes from the line of John Pawlowski from Green Street Advisors.

Just curious on the uncertainty around the U.S. Canada border being closed or the closure being extended. Is that impacting kind of your early indications of snowbird traffic being able to come down into the southern states or intend to come down? Any risk to the seasonal RV demand in the back end of this year?

Sure. So let me give you a little -- just overview of our Canada -- our Canadian customers. I think our Canadian -- overall Canadian revenue is $18 million. And a little more than half of that is annual. And the largest portion of those Canadian customers stay with us in Florida, Arizona and Texas. It's basically about 7% of our total revenue. And the first half of the year, I think, represents about 60% of the full year revenue. So that's kind of already collected and accrued.

We do have approximately, I think, it's 98% of the annual RV customer is already -- has their park model or RV on-site in the south. So that -- now we're just kind of dealing with the seasonal and the uncertainty around that travel. And so it's something that we're watching. I don't think it's something that we'll have clarity on until the border was -- the border closure was extended to, I believe, August 22 or the end of August. So we'll see, and we're watching that closely. But it's something that we're paying attention to it. And it affects really December and into next year, January and February.

Right. But if the border is closed, on the annual side, I understand the individuals' homes are still in place. But in terms of rent refunds and prorated rent, that would be a risk to the annual bucket as well, right?

We haven't kind of gotten there yet. I mean at this point, in some cases, the customer is in -- is in Florida right now or in Arizona right now. So it's not something that we've discussed, certainly not something we've discussed with our customers yet. And unlike -- and as you remember, John, in the north, there was -- we were not able to open the properties. And so people couldn't have access to the properties. This is not the same. People can have access certainly to these properties.

Okay. And then last one for me. I apologize if I missed this in your opening remarks. But could you share how the July transient RV reservation pace is shaking out versus a year ago?

Sure. I didn't share it, so happy to. So our July, and I think just -- I'm not providing guidance, but I want to kind of touch on a couple of items relative to what we've seen already, not what we're seeing in the future, which is July month-to-date transient results and to put some parameters around that, which in 2019, I think, that represented about 40% of the third quarter. It's in line with last year, so we're tracking last year. Our online camping pass sales in June, they increased 100%. And then since the beginning of June, we've seen an increase in leads from our RV dealer program of about 71%, and then our RV dealer activations increased 20%. So some pretty significant kind of demand indicators that we've seen really since the start of June.

Our next question comes from the line of Joshua Dennerlein from Bank of America.

Maybe just a follow-up on John's question there on the transients. Any color you can provide us on maybe forward indicators on the RV side, like bookings that you're seeing come through on the Internet?

Sure. I mean we've seen, I think, over the last 4 or 5 weeks, we've seen significant increases to our booking channels. I think, in some cases, 100% increase over the last, I think, 3 or 4 weeks. Now along with those records, we also -- are also seeing some cancellations that is offsetting some of that new revenue in some locations where we're able to operate as -- where we were able to operate a full capacity, but the surrounding area and attractions are problematic. So we're seeing some issues there. But so those are the kind of the demand indicators that we're seeing.

Okay. And then in the second quarter, you had elevated costs from COVID of, I think, it was $1 million. Is that past us now? Or is that kind of going to travel through into the third quarter and kind of continue at that run rate until the pandemic is over or does it throttle down?

Yes. I think what we highlighted, the total of $1.4 million, $1 million of which impacted the core expense base, those really represents the nonrecurring expenses related to COVID. We focus very closely on the SEC guidance around COVID disclosure, and the team worked very hard to differentiate between really what our onetime costs related to development of the protocols around operations of the properties at this time as well as the employee time off program, the property employee appreciation bonuses. So that's not really indicative of -- excuse me, a run rate.

Now the incremental costs that we incurred associated with cleaning, meaning supplies and so forth, those are included in our expenses and weren't separated or excluded as COVID-related expenses. It's a little bit difficult at the moment to kind of project what those will be on a go-forward basis, primarily because a lot of it is driven by the experience at the property, the timing of the opening of the amenities and so forth.

Okay. Did you disclose that somewhere, the level of kind of the increased supply, I didn't see a footnote, I might have missed it though?

We did not separately disclose that. It's not a significant amount. It was a couple of hundred thousand dollars in the quarter.

Our next question comes from the line of R.J. Milligan from Baird.

I wanted a little bit more color, if you could, on the rent increases. You guys mentioned that you reinstated them at the end of June and that there would be a catch-up. So does that imply that third quarter, you're going to see outsized growth from the increases?

We won't see outsized growth. I think the way that we framed it on the call in April was the suspension to the extent that it continues through the end of the year, the impact would be about 50 basis points, just doing the math, the impact would have been about 50 basis points in rent growth. I think the brief suspension for those couple of months that changes that impact to being just about 10 basis points on growth.

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

Just a question on the amenities that are not open due to some of the state local guidelines. Does that impact either pricing or refunds at all in terms of some of the amenities just won't be open for use?

Let me -- this is Patrick. Nick, let me touch first on MH, and then we'll get to RV. On the MH front, that's not -- that's not impacted any sort of concession on rents. We have managed through the process of first closing those amenities and then reopening and -- predominantly across our portfolio. Amenities are open, particularly on the MH side of the portfolio. We have protocols in place to ensure that our employees are safe and safely interact with one another and our customers. All of our employees are required to wear masks when in proximity to one another. Our offices are by appointment only. And we have clean protocols in place. And as I mentioned in the last call, we have a relationship with a national vendor that has specialists in industrial hygiene to ensure that we're following CDC guidelines.

On the RV side of the world, I mean just on -- with respect to the previous quarter, the amenities that were closed were really part of the properties that were closed. And that was the driver of the refunds in those instances for annuals in the northern campgrounds across the South. We are out of season right now. So it's a lower demand. And at this point, it's not impacting any sort of rent payments for any of the annual season on transients.

Okay. Great. And then just back to the acquisition environment. I was wondering specific to RVs, has there been any disruption or kind of increased opportunities given what happened in the second quarter or on the private side, have many owners been able to weather that storm?

I think that most have been able to weather the storm. I -- there may be some opportunities, just people, like I said, I think it's just -- the time is right in their lifetime in their cycle. But I don't see a lot of opportunities coming as a result of people seeing the effects because I think the effects were really good both on the MH and the RV business, same for the transient for a couple of months. And I think people saw that as a once-in-a-lifetime kind of thing and not to be repeated and so I don't know that there will be opportunities to come. As a result of that, it's more of a personal kind of preference and people willingness to sell now.

Next question is a follow-up from the line of John Pawlowski from Green Street Advisors.

Paul, curious how municipalities are approaching property taxes this year, less about the impact to ELS in 2020, just more from a real estate lens? Any color from on-the-ground conversations with the municipalities?

No direct color. I don't think for us, it translates into delays in timing, although there could be extensions of time for payments but not seeing that happen yet. And not seeing -- we're not seeing -- just -- it's a little bit hard. The time frame, though it feels like this has been going on for such a long time, the time frame really isn't that long. And so when you think about the typical assessment cycle and so forth, that results in the build, that any impact on income that may drive evaluations for purposes of the assessors that's not had time to make its way through the system.

Okay. There's no chatter over the next, call it, 12 months where municipalities have to fill a bigger hole in their budgets to kind of come after residential a little harder and particularly when other property types really can't carry the weight?

I mean there's chatter. There's been that type of chatter for sometime now. I don't hear it on the ground being louder than it's been before. I will say, obviously, California has the issues that they're working through. I'm kind of setting that aside and thinking about the rest of the country.

And then, John, we also have our -- at the level of Florida, for instance, where we have the ability to pass-through real estate taxes, we have a lot more kind of help in front of local municipalities to not do that, so that it's not just a big kind of corporate transaction at the level of the property.

And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Marguerite Nader for any further remarks.

Great. Thank you for joining us today. We look forward to updating you on the next quarter's call.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.