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

Equity LifeStyle Properties, Inc. (NYSE:ELS) Q4 2023 Earnings Call Transcript January 30, 2024

Equity LifeStyle Properties, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties Fourth Quarter and Full Year 2023 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. [Operator Instructions] 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 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.

Marguerite Nader : Good morning, and thank you for joining us today. I am pleased to report the final results for 2023. 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% and a 4.7% increase in normalized FFO per share. Our MH portfolio is 95% occupied. Importantly, more than 96% of our MH sites are occupied by homeowners. The underlying customer demand remains solid, and core operating revenue increased by 5.8% for the full year 2023 compared to 2022. During the fourth quarter 2023, occupancy increased by 65 sites, and we ended the year with stable occupancy levels comparable to year-end 2022. we continue to experience robust demand for the lifestyle our communities provide with 905 new home sales during 2023.

Our strategy of converting existing residents to home buyers continues to be successful with almost 1/4 of our home sales coming from individuals who already reside in our communities. Home buying leads during the fourth quarter were up 7% compared to last year, driven by the availability of popular new home models and leveraging new technology to expand awareness of our homes for sale online. Due to the strength of our operating markets, we continue to see demand for new homes in our communities where we are selling homes on average for approximately $100,000. Our strongest performing communities for home sales were in Florida, which accounted for over 50% of total new home sales with an average sale price of more than $105,000. While home prices are $100,000 on average, they remain significantly lower than other housing options in the immediate vicinity of our communities.

In 2023, the mark-to-market rent increase for new homeowners has been approximately 13%. In 2023, our RV revenue from annual or seasonal customers increased 7.2% as compared to 2022. We saw continued strength in Florida and Arizona. Our transient business continued to be a large driver of our new customer base for both annual and seasonal revenue. We had over 1,000 transient customers convert to an annual or seasonal customer. Continuing to expose new customers to our properties through the transient stay is an important building block for our revenue stream. Turning to 2024, we have issued guidance of $2.88 at the midpoint for next year. The demand for our MH communities continues to increase. Over the last 5 years, we have sold over 35 new homes — 3,500 new homes in our communities.

These new homes further enhance the look of the community as new and existing homeowners throughout the portfolio showcased their pride of ownership. Our guidance for 2024 reflects the strength in our business. Our guidance is built based on the operating environment at each property and continuous communication with our residents. Next, I would like to update you on our 2024 dividend policy. The Board has approved setting the annual dividend rate of $1.91 per share, a 6.7% increase. 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’ve been able to take advantage of opportunities due to the free cash flow generated from our operations.

That will continue in 2024 as this dividend increase of $23.5 million is roughly equivalent to our anticipated increase in FFO for 2024. In 2024, we expect to have approximately $100 million of discretionary capital after meeting our obligations for dividend payments, recurring capital expenditures and principal payments. Over the past 10 years, we have increased our dividend by an average of 11% per year, and this year’s dividend marks the 20th consecutive year of annual dividend growth. I want to take a moment to express my gratitude to our dedicated team members who have worked tirelessly to drive our success. I am proud of their hard work and commitment that contributed to the results for 2023. I will now turn it over to Patrick to provide more details about property operations.

Patrick Waite : Thanks, Marguerite. In 2023, long-term residents and guests at our core MH, RV and Marina properties, continue to demonstrate consistent demand, which supported occupancy and strong rate growth. As we approach the February peak of our winter Sunbelt season, I want to provide some additional color on the drivers of the nearly 70% of our revenue that comes from residents and guests at our Sunbelt properties in Florida, California and Texas. Since our IPO in February 1993, we’ve been talking about the aging of the baby boomers and migration trends to the Sunbelt. In 2023, baby boomers celebrated birthdays, ranging from the ages of 59 to 77. And we’re in the midst of 69 million baby boomers, supporting a pace of 10,000 people turning 65 every day in the U.S. That trend spans the 19-year period from 2010 to 2029.

Given our core residents and guests stay with us 10 years or more, we have another 15 to 20 years of engagement with the baby boomers, as a key driver of demand at our properties. I’d also point out that subsequent generational cohorts, Gen X, Millennials and Gen Z follow similar aging trends as the baby boomers. Note that millennials will start to retire in 20 years, and they represent a population of 74 million, or 5 million more than the baby boom generation. Overall, the U.S. population, 55 plus, is projected to increase 6.4% over the next 5 years. While our Sunbelt properties in Florida, California, Arizona and Texas are projected to increase 8.5%, outpacing the national growth rate by 200 basis points. The leader in our Sunbelt states is Florida, our largest state, with strong 55-plus population growth of 9.4% over the next 5 years, outpacing the national average by approximately 300 basis points.

Our second largest state is California with a 55 population projected to grow in line with the nation at 6.4% over the next 5 years. Two important points of — about California. First, MH and RV properties offer great value to customers, given high-quality locations and high demand. And second, the submarkets where our properties are concentrated are projected to outpace the 55-plus population in California by 70 basis points, emphasizing the strength of our locations within the state. For these key Sunbelt markets that represent nearly 75% of ELS total property revenue, MH, RV and Marina annual customers comprise more than 90% of that revenue while seasonal and transient guests represent 10%, that makes us consistent with the balance of our portfolio.

These revenues in our Sunbelt markets benefit from baby boomer demand and associated population growth trends. Over the last 5 years across the Sunbelt, our MH portfolio has produced 6% revenue growth and our RV portfolio 6.3% revenue growth. Those stable long term revenue streams have consistently been our priority and have consistently provided year-over-year NOI growth. For perspective, our portfolio footprint and current operating characteristics as a result of an investment focus starting in 1993. We focus our acquisition strategy on key submarkets in Florida, California, Arizona and Texas, and those markets have represented 2/3 of our growth through acquisitions over the last 30 years. A couple of final key points to highlight. The contribution of our long-term Sunbelt investments.

Over the last 5 years, 70% of our new home sales and 2/3 of our completed development expansion have been from our Sunbelt portfolio. Those are among the many contributors to the stable operating results referenced above. I’ll now turn it over to Paul.

Paul Seavey : Thanks, Patrick, and good morning, everyone. I will review our fourth quarter and full year 2023 results and provide an overview of our first quarter and full year 2024 guidance. We reported normalized FFO of $0.71 per share for the fourth quarter and $2.75 per share for the full year. Full year growth in normalized FFO was 4.7%. Strong core portfolio performance generated 5% NOI growth for the full year. Core community-based rental income increased 6.8% for the full year compared to 2022. Our rate growth was the result of increases to in-place residents as well as marketing rents to market on turnover at an average increase of 13% during 2023. Also during 2023, we increased homeowner occupancy by 554 sites. Full year core resort and marina-based rental income growth from annuals was 8.1%, with 7.6% from rate increases and 50 basis points from occupancy gains.

RV and marina-base rental income from seasonals increased 2.6% for the full year compared to 2022. Base rent from transient was lower than prior year, mainly as a result of unfavorable weather patterns we’ve discussed throughout the year. 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, was $57.2 million, an increase of 6.7% compared to the prior year. The net deferral impact for the full year was $17.7 million. Subscription revenues increased 3.7%. During 2023, we sold almost 3,900 upgrades with an average sale price of approximately $9,250. Full year growth in core utility and other income is mainly the result of increases in utility income.

Our recovery percentage of 44.9% increased approximately 90 basis points compared to 2022. Other income includes $3.1 million of revenue associated with sites leased to provide housing for displaced residents in Fort Myers, Florida. Fourth quarter core operating expenses increased 8.7% compared to the same period in 2022 and were higher than our guidance as a result of real estate tax increases. Several counties in Florida increased assessed values and millage rates. We have filed appeals and noticed residents of pass-throughs of increased real estate taxes where lease terms allow it. The pass-throughs will be recognized as revenue in 2024. Our noncore properties contributed $5.2 million in the quarter and $27.6 million for the full year. Property management and corporate G&A were $117 million for the full year.

And other income and expenses net, which includes our sales operations, joint venture income as well as interest and other corporate income was $29.8 million for the year. Our interest and amortization expenses were $132.3 million for the full year, and our full year weighted average debt balance was $3.5 billion. The weighted average rate was 3.8%. The press release and supplemental package provide an overview of 2024, 1st 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 in revenue and expense projections are qualified by the risk factors included in our press release and supplemental package. Our guidance for 2024 full year normalized FFO is $2.88 per share at the midpoint of our guidance range of $2.83 to $2.93.

We project core property operating income growth of 5.6% at the midpoint of our range of 5.1% to 6.1%. We project the noncore properties will generate between $14 million and $18 million of NOI during 2024. Our property management and G&A expense guidance range is slightly lower than our 2023 actual expense, primarily as a result of our assumptions for reduced administrative and payroll expenses. We’ve also provided guidance ranges for our weighted average debt balance and interest expense in the supplemental package. The full year guidance model makes no assumptions regarding acquisitions, other capital events or the use of free cash flow we expect to generate in 2024. In the core portfolio, we project the following full year growth rate ranges.

4.8% to 5.8% for core revenues, 4.5% to 5.5% for core expenses and 5.1% to 6.1% for core rev NOI. Full year guidance assumes core MH rent growth in the range of 5.5% to 6.5%. We assume occupancy in our stabilized MH portfolio will be flat during 2024. Full year guidance for combined RV and marina rent growth is 4.9% to 5.9%. Annual RV and marina rent represents just over 2/3 of the full year RV and marina rent, and we expect 7% 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 as well as a real estate tax increase assumption that is consistent with our long-term historical experience. Our first quarter guidance assumes normalized FFO per share in the range of $0.75 to $0.81, which represents approximately 27% of full year normalized FFO per share.

Core property operating income growth is projected to be in the range of 6.7% to 7.3% for the first quarter. First quarter growth in MH and combined RV and marina rents are generally in line with our full year assumptions. We project first quarter annual RV and Marina rent to be approximately $72.9 million at the midpoint of our guidance range. 2024 is a leap year. So as we do every 4 years, we will have a slightly higher allocation of annual RV rent to the month of February as a result of the extra day. The incremental rent represents approximately 100 basis points of the first quarter 2024 growth. Our guidance assumes first quarter seasonal and transient RV revenues perform in line with our current reservation pacing. I’ll now provide some comments on the financing market and our balance sheet.

We have no scheduled debt maturities in 2024. Our $300 million term loan has an in-place swap that fixes the all-in cost of debt at 1.8% until late March. Current all-in cost of floating at swap expiration is 6.7%. Current secured debt terms are 10 years at coupons between 5.5% and 6.25%, 60% to 75% loan-to-value and 1.4 to 1.6x 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. Our $500 million line of credit currently has approximately $435 million available. We have $500 million of capacity under our ATM. Our weighted average secured debt maturity is approximately 10 years. Our debt to adjusted EBITDA is 5.3x, and our interest coverage is 5.2x.

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.

Operator: [Operator Instructions] Our first question comes from the line of Josh Dennerlein from Bank of America.

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Q&A Session

Josh Dennerlein : Just wanted to go into the guidance range for MH same-store NOI for 2024, a little bit more. Could you walk us through like what gets us to the low end and high end? And then just kind of curious if there was any changes for 3Q. I know you put out that 5.4% rate increase out with 3Q results, and I see the range is 5.5% to 6.5%. So just trying to reconcile that.

Paul Seavey: Yes, Josh, First of all, with respect to the range, we noticed in October the rate increase that we anticipate and the 5.5% to 6.5% is the overall increase. The difference that you see there is the occupancy that we increased in 2023. The impact of that included in our current guidance. And then just overall, with respect to the MH business, I mean, we don’t report separately the MH from the RV, but I can tell you that as we think about the business, the rent line is, I’ll call it, stable solid. We do notice decelerating rate throughout the course of 2024. Primarily as a result of increases that we noticed later in ’23 and then an assumption for just following CPI, which is not going to increase as it did last year.

And then on the expense side, I think that the things that might have exposure for us, as we always talk about, we have some assumption for storm events at our properties, but we have incurred outsized expenses in the past related to weather events. And the other thing that we’re watching very closely that we’ve talked about quite a bit over the last couple of years is the volatility in utility expense. That does seem to be settling, but it’s unclear whether there’s some sort of structural shift just overall in energy costs or whether we experienced a period of significant volatility and that seems to be easing.

Josh Dennerlein : One follow-up, Paul. You mentioned the occupancy uplift in your MH based rental income growth rate. That’s just what you’ve incurred in 2023. I think your policy has been not to include anything on a go-forward basis. Is that —

Paul Seavey: That’s correct. In the stabilized portfolio, it’s assumed to be flat yes.

Josh Dennerlein : Okay. Okay. I was missing that. Okay. Got it. And then I think real estate taxes, it looks like there was a big increase in 4Q driving up expenses. How should we think about your ability to kind of pass those increases on to customers, whether it’s through rate or just assessments or anything. Is that possible?

Paul Seavey: Yes. So the lease provisions in primarily the MH properties, which had a disproportionately large exposure to the increases that we experienced allow us to pass through more than 95% of the increase that we experienced. All of it, of course, is subject to the appeals that we have in process. And we have close to 30 properties that are under appeal. And it will be a bit of time during 2024 before we’ll have visibility into the results of those appeals. But to the extent that there is success, of course, the pass-through to the residents would be adjusted.

Marguerite Nader: And Josh, those residents have been notified of that increase already.

Operator: And our next question comes from the line of Brad Heffern from RBC.

Brad Heffern : Can you talk through the seasonal and transient reservation outlook as we sit here today?

Paul Seavey: Yes. As I mentioned in my remarks, Brad, we use current reservation pacing to prepare our guidance for the first quarter seasonal and transient. The seasonal is tracking in line, and we’re reserved for more than 95% of the first quarter rent. We see more variability in transient rent, but the reservation pacing is generally in line with our budget expectations. I will say that we’re not anticipating the recurrence of the impact of severe weather that impacted the first quarter 2023, particularly in California, the first quarter of ’23. The first of many atmospheric rivers that impacted California and had pretty meaningful effect from a few of those storms.

Brad Heffern : Okay. Got it. And just to clarify on the guidance, is the term loan swap expiration included in the guidance? And then is there any plan to either fix that rate again or take out that term loan?

Paul Seavey: Yes and no. So yes, it’s included in guidance. And no, there’s the assumption is that we flow.

Operator: And our next question comes from the line of Jamie Feldman from Wells Fargo.

Jamie Feldman : I just want to go back to the Florida interest — Florida real estate tax increase. Can you give more color on what municipalities or what counties — do you think this could flow through to other countries that haven’t increased yet? Is this specific property types that seem to be getting hit? I think there’s a real read-through here for kind of the rest of residential. I just want to make sure we put some guardrails on what happened and what this could look like going forward?

Paul Seavey: Yes. We experienced outsized increases in Lee County, Charlotte County, and a couple of other counties, but those were significant counties. There was some, I guess, a higher or more significant impact to our MH portfolio than our RV portfolio. And I think that, as I mentioned in my remarks, that leads to the ability to pass through because those lease provisions tend to have pass-through provisions in them.

Marguerite Nader: And Jamie, some of that is a function of acquisitions that have traded in the recent past over the last 3 to 5 years that are driving up that increase.

Jamie Feldman : Okay. And then I guess, switching gears, if we could just talk a little bit more about the RV business. I mean you came in slightly below your full year guidance for growth. And as we estimated what annual could look like, it looks like it’s kind of less than a 2% growth rate. So I’m just wondering, can you give more color on how you’re getting to those numbers. I think in the past, you haven’t really baked in any down days for weather. Clearly, weather has been a bigger issue the last few years. Is that part of the story here? Are you making some new assumption for that? Or any other color you can provide on why the outlook for next year might look weaker than this past year.