Equity LifeStyle Properties, Inc. (NYSE:ELS) Q4 2022 Earnings Call Transcript

Equity LifeStyle Properties, Inc. (NYSE:ELS) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties Fourth Quarter 2022 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. All forward-looking statements are subject to certain economic risks and uncertainties.

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. You may begin.

Marguerite Nader: Good morning, and thank you for joining us today. I am pleased to report the final results for 2022. The strength of ELS can be seen in all facets of our business. We continued our record of strong core operations and FFO growth with full year growth in NOI of 5.7%, which translated into a 7.4% increase in normalized FFO per share. Our MH portfolio is 95% occupied. Importantly, 96% of our sites are occupied with homeowners. The pride of ownership is evident in the well-kept homes and landscaping throughout our community. The stability of our resident base can also be seen in the high FICO scores for incoming residents. For the year, we experienced an all-time high for new home sale with over 1,100 new home sales.

Due to the strength of our operating markets, we were able to increase sales prices by 22% for the . our strongest performing properties for home sales were in Florida with a 16% increase in sales volume and a 28% increase in home prices. It is important to note that while home prices have increased to an average of $106,000, they remain significantly lower than other housing options in the immediate vicinity of our community. Turning to our RV properties. In 2022, the demand was strong for RV sites across the country. It is estimated that 67 million Americans plan to take an RV trip in the next 12 months. These trips will strengthen the commitment to the RV lifestyle. Our quarterly surveys indicate that our years plan to camp more this year.

The reason cited for their desire to camp more includes spending time outdoors and traveling with their pets. In the year, we continue to see new transient guests converting to a longer-term commitment with nearly 4,000 guests increasing their commitment to us after their initial transient day. Our transient revenue increased 26% from pre-pandemic levels with an increase in the average rate being the largest driver of that increase. In 2022, our Thousand Trails membership properties performed well. We sold over 23,000 camping passes and initiated 28,000 RV dealer activation. These passes and activations are the seeds for future growth in the Thousand Trails portfolio. Turning to 2023. We have issued guidance of $2.84 at the midpoint for next year, which is a 4.1% growth in normalized FFO per share.

The demand for our MH communities continues to increase. Over the last five years, we have sold over 4,000 new homes in our communities. These new homes further enhance the look of the community as new and existing homeowners throughout our portfolio showcased their pride of ownership. We have noticed rent increases for approximately 67% of our residents and anticipate growth of 6.5% in core MH rent revenue. Our guidance for 2023 reflects the strength in our business. Our guidance is built based on the operating environment in each property, including a robust market survey process and continuous communication with our residents. In 2022, our acquisitions and development teams focused on strategic RV investments and added over 1,600 sites to the portfolio.

In addition, we purchased six parcels of land with approximately 300 acres of development potential. Our vacant land is geographically diverse and will positively contribute to our future growth. Next, I’d like to update you on our 2023 dividend policy. The Board has approved set an annual dividend rate of $1.79 per share, a 9.1% increase. The Board will determine the amount of each quarterly dividend in advance of payment. The stability and growth of our cash flow, our solid balance sheet and the strong underlying trends in our business are the primary drivers of the decision to increase the dividend. Historically, we have been able to take advantage of opportunities due to the free cash flow generated by our operations. That will continue in 2023 as the dividend increase of $29 million is roughly equivalent to our anticipated increase in FFO for 2023.

In 2023, we expect to have in excess of $100 million of discretionary capital after meeting our applications for dividend payments, recurring capital expenditures and principal payments. Over the past five years, we have increased our dividend by an average of 10.2%. We had a strong finish to the year due to the hard work of the ELS team members. The well-being of our residents and guests were prioritized. The dedication of the property regional and corporate level is impressive. I will now turn it over to Paul to walk through the numbers in detail.

Paul Seavey: Thanks, Marguerite, and good morning, everyone. I will review our fourth quarter and full year 2022 results and provide an overview of our first quarter and full year 2023 guidance. Fourth quarter normalized FFO was $0.66 per share. Strong performance in our core portfolio generated 7.3% NOI growth for the fourth quarter. Core NOI growth of 5.7% for the full year contributed to our normalized FFO per share growth of 7.4%. Core community-based rental income increased 5.8% for the full year compared to 2021. Rate increases contributed 5.4% growth, while occupancy generated the additional 40 basis points. During 2022, we increased homeowner occupancy by 637 sites. Full year core resort and marina based rental income increased 9.1% compared to 2021.

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Growth from annuals was 8.8% with 6.7% from rate increases and 2.1% from occupancy gains. In our seasonal RV income, the strong demand trend for stays of a month or more continued in the fourth quarter generating 17.4% growth over 2021. The full year increase in seasonal RV income was almost 40%. Full year growth in seasonal RV rent offset the decrease in full year transient income. These rental streams combined generated 9.5% growth. For the full year, net contribution from our membership business, which consists of annual subscription and upgrade sales revenues offset by sales and marketing expenses, $74.4 million, an increase of 4.9% compared to the prior year. Subscription revenues increased 8.4%, reflecting a 3.2% increase in the member base a rate increase of approximately 5.2%.

During 2022, we sold almost 4,700 upgrades at an average sale price of approximately $7,400. Full year growth in Core utility and other income was mainly the result of increases in utility income. Our recovery percentage of 44% remained consistent in 2022 compared to 2021. Fourth quarter core operating expense increased 2.1% compared to the same period in 2021. We experienced some moderation in growth in utility and payroll expenses compared to earlier quarters in 2022. In addition, during the quarter, repairs and maintenance and insurance and other expenses decreased from prior year. Overall, full year 2022 core property operating expenses increased 6.7% compared to 2021. Utility expenses represent more than 27% of our core operating expenses, they increased 10.6% for the full year.

Payroll and repairs and maintenance expenses generally increased in line with inflation for 2022. Our noncore properties, including the assets sits group in the fourth quarter as a result of suspended operations following storm damage, contributed $5.8 million in the quarter and $41.2 million for the full year. Property management and corporate G&A were $119 million for the full year. Other income and expenses net, which includes our sales operations, joint venture income as well as interest and other corporate income, $32.5 million for the year. Interest and amortization expenses were $116.6 million for the full year. Our full year weighted average debt balance of $3.275 billion and the weighted average rate was 3.4%. We’ve modified our income statement presentation to include a line item, casualty-related charges, recoveries net.

The Hurricane Ian related expenses incurred through year-end, along with offsetting revenue accruals for expected insurance recovery are presented in this line item. The press release and supplemental package provide an overview of 2023 first quarter and full year earnings guidance. The following remarks are intended to provide context for our current estimate of future results. All growth rate ranges and revenue and expense projections are qualified by the risk factors included in our press release and supplemental package. Our guidance for 2023 full year normalized FFO is $2.84 per share at the midpoint of our guidance range of $2.79 to $2.89. We project core property operating income growth of 5.5% at the midpoint of our range of 5% to 6%.

We project the noncore properties will generate $18 million and $22 million of NOI during 2023. Our noncore portfolio includes properties acquired during 2022 as well as the six properties with the interrupted operations. Our budget assumes stabilized NOI at these six properties from a combination of reduced operations and business interruption insurance proceeds. We intend to recognize business interruption proceeds upon receipts. And as a result, we may experience some variability in recognition of income during the year as compared to our budget assumption. Our property management and G&A expense guidance range is lower than our 2022 actual expense primarily as a result of legal activity in 2022 that we don’t expect to recur. We’ve also provided guidance ranges for our weighted average debt balance and interest expense.

Our guidance model includes the impact of all acquisitions we’ve announced. The full year guidance model makes no assumptions regarding other capital events or the use of free cash flow we expect to generate in 2023. In the core portfolio, we project the following full year growth rate ranges, 5.7% to 6.7% for core revenues, 6.7% to 7.7% before expenses and 5% to 6% for core NOI. Full year guidance assumes core MH rent growth in the range of 6% to 7%. We assume occupancy and our stabilized MH portfolio will be flat during 2023. Full year guidance for combined RV and Marina rent growth is 5.7% to 6.7%. Annual RV and Marina rent represents 2/3 of the full year RV and Marina rent, and we expect 8% growth in rental income from annuals at the midpoint of our guidance range.

Our full year core expense growth assumptions include our current projections for future utility rate increases the potential impact of our April 1 insurance renewal. Our first quarter guidance assumes NFFO per share in the range of $0.70 to $0.76, which represents approximately 26% of full year normalized FFO per share. Core property operating income growth is projected to be in the range of 4.4% to 5% for the first quarter. First quarter growth in MH and combined RV and Marina rents are in line with our full year assumptions. We project first quarter annual RV and marine events to be approximately $67.1 million at the midpoint of our guidance range. Our guidance assumes first quarter seasonal and transient RV revenues performed in line with our current reservation pacing.

I’ll now provide some comments on the financing market and our balance sheet. During 2022, we invested cash of approximately $150 million in operating properties, development properties and land for future development. The investments were funded with available cash and proceeds from our line of credit. At year-end, our unsecured line of credit balance was $198 million. Current secured debt terms are 10 years at coupons between 4.75% and 5.5%; 60% to 75% loan-to-value; and 1.4 to 1.6 times debt service coverage. We continue to see strong interest from GSEs, life companies and CMBS lenders to lend for 10-year terms. High-quality, age-qualified MH assets continue to command best financing terms. We have approximately $92.5 million of secured debt maturing in 2023, in-place rate on this maturing debt is 4.9%.

Our $500 million line of credit currently has approximately $265 million available. Our ATM program currently has $500 million of available sales. Our weighted average debt maturity is approximately 10 years. Our debt to adjusted EBITDA is 5.3 times, and our interest coverage is 5.6 times. We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of capital available to us. Now we would like to open it up for questions.

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Q&A Session

Operator: Thank you. . Our first question comes from the line of Nicholas Joseph with Citi. Your line is open.

Nick Joseph: Thank you. Just in terms of the properties that were still interrupted from Hurricanes Ian, can you give us an update of what’s actually happening on the ground there and when you would expect things to return to normal? And then related to that, what the business interruption and other insurance recoveries are assumed in 2023 guidance?

Patrick Waite: Sure, Nick, it’s Patrick. So just as a reminder, it’s six properties in the greater Fort layers market, 4 of those RV with 1,550 sites and two of those are Marinas with 550 slips. Of four properties have resumed operations; and two will resume operations in the next few months. We’re working through infrastructure repairs and improvements. in order to bring those properties back online. So, by the time we get into mid-2023, all properties will be operational, and we’ll bring them up to full operations over the next few quarters.

Paul Seavey: And as far as the expected contribution, Nick, those properties get a little bit less than half of the noncore NOI that we’d expect in total from those properties.

Nick Joseph: Perfect. Thank you. And then just broadly on the transaction market, it looks like there are a handful of RV acquisitions, so maybe a bit more interesting with JVs or development in the quarter. But just broadly, what are you seeing on the transaction market today across RVs and MH? And has there been any movement in cap rate or pricing?

Marguerite Nader: Sure. Thanks, Nick. So yes, in the quarter, we closed three deals. One was near the shore in New Jersey. It’s a property that had 80% annual, I think, and it was really a great access to a large RV customer base and population. And then we also continued our growing relationship with RBC and invested in a new development in Sandusky, Ohio. And then we entered into a 50-50 joint venture with KOA in the foothills of the Blue Ridge Mountains. So, we’re pleased about those acquisitions in the quarter. I’d say, in general, the acquisition volume was kind of down across our industry in 2022. And we haven’t really seen a real pickup in activity so far this year. There are certainly sellers in the market but they’re not really in a rush to sell when there’s uncertainty with respect to cap rates and valuations.

Nick Joseph: Thank you, very much.

Marguerite Nader: Thanks Nick.

Operator: Thank you. Our next question comes from the line of Anthony Powell with Barclays. Your line is open.

Anthony Powell: Hi. Good morning. I guess a question on the RV annual revenue growth, which was pretty strong. Could you remind us how you go about pricing those annual contracts? And what kind of the outlook looks like for kind of future kind of ongoing growth for annual revenue growth in RVs going forward?

Marguerite Nader: Yes, Anthony, thanks. I think Patrick can talk you through kind of our market survey approach to how we get to the RV annual rate.

Patrick Waite: Yes. Anthony, it’s similar to the process that we go through in our other business lines, particularly on the MH front, these are long-term customers, and they typically own a unit that’s located on our property for years, if not more than a decade. So, we review the directly competing properties as well as other choices for hospitality and that type of a weekend getaway in the local submarkets. When we come to the determination of what we feel to be representative of the market. And then we send out the rate increases. Similar to the MH process, we may very well have more moderate rate increases for our in-place long-term customers. And as new customers come in, they’ll be charged at a full market rate.