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Equity LifeStyle Properties, Inc. (NYSE:ELS) Q1 2024 Earnings Call Transcript

Equity LifeStyle Properties, Inc. (NYSE:ELS) Q1 2024 Earnings Call Transcript April 23, 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 for joining us to discuss Equity LifeStyle Properties' First Quarter 2024 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. For those who would like to participate in the question-and-answer session, management asks that you limit yourself to two questions, so everybody would like to participate has ample opportunity. As a reminder this call is being recorded.

Certain matters discussed today on 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 this 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.

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Marguerite Nader: Good morning and thank you for joining us today. I am pleased to report the results for the first quarter of 2024. Quality of our cash flow, our in-demand locations, the lack of new supply and the strength of our balance sheet continues to allow us to report impressive results. In times of macroeconomic uncertainty, we continue to deliver strong revenue growth as well as expense control throughout our portfolio. Our core NOI for the quarter was strong with a 7.1% increase compared to last year supported by MH and RV rate growth and controlling expenses. Our results for the first quarter and our view for the continued strength for the remainder of 2024 support our guidance rates. Over a 10-year period of time, we have increased the dividend on average 14% compared to the REIT average of 5.5%.

Our balance sheet is in great shape with an average term to maturity of nine years. 18% of our debt is fully amortizing and not subject to refinance risk and our debt maturity schedule through 2026 shows only 11% of our debt coming due compared to the REIT average of 29%. We have spent the last 30 years building a portfolio focused on high-quality coastal and Sunbelt retirement and vacation destinations. We are in locations where active adults want to be. Our customer base is seeking a place to escape from the cold winter and lead an active lifestyle in locations such as Florida, Arizona and California. We are in states where there is outsized growth in seniors and we appeal to the right demographic. The population of people aged 55 and older in the US is expected to grow 15% from now until 2039 with 10,000 baby boomers turning 65 each day for the near future.

Our MH portfolio comprises approximately 60% of our total revenue and our properties are 95% occupied. The MH business is unique in that once an elevated level of occupancy is achieved at a property, the occupancy is sustainable for a long time. For ELS, the key to that stickiness is an elevated level of homeowners in the portfolio. Our portfolio is 96% occupied by homeowners. This composition of our resident base is important to protect an uninterrupted cash flow stream as new residents are welcome to our communities. Our residents enjoy the community found in our properties and spend time focused on building new relationships with their fellow residents. We continue to engage our existing customers and attract new prospects through media outreach, engaging in social media campaigns and targeted digital advertising.

Our public relations strategy helps build awareness and credibility through coverage of the LifeStyle offered at our Properties and interesting stories about our customers who make a difference in the communities in which we operate. Our social media strategy seeks to engage both customers and prospects in a wide variety of platforms, so we can reach people where they spend time. We have almost two million fans and followers across social media networks. Over the past 10 years we have grown our social media fans and followers by an average of 19% annually. Our property teams in the north are gearing up to open the summer season. This year Thousand Trails will celebrate its 55th anniversary. Thousand Trails is one of America's most well-known Camping brands, and we have earned strong Customer Loyalty with hundreds of thousands of our years, making memories with families and friends throughout the camping the company's long history.

We have closed another successful quarter and our teams will now begin to focus on welcoming our residents to our northern locations, as we kick off the summer season. I would like to thank all of our team members for their hard work in making this winter season so successful. I will now turn it over to Patrick, to provide an operational overview.

Patrick Waite: Thank you, Marguerite. As we wind down the 2023, 2024 Sunbelt season and look forward to the 2024 summer season I will provide color on the Sunbelt season results and a view into the summer season including drivers of demand. Overall we continue to see consistent demand across each of our lifestyle property types reflecting the high quality of our property locations. I will start by highlighting our MH business. Over my 30 years in the industry my responsibilities have ranged from acquisitions to asset management to operations. And regardless of my area of focus the consistency of our high-quality MH portfolio has been a constant. MH properties operate year-round and seasonality is not a consideration. Our MH portfolio maintains high occupancy and each year approximately 10% of our resumes, turns over.

This turnover results in an uninterrupted revenue stream for ELS, as a current homeowner sells their home to an incoming home buyer and the new resident pays market rent. Year-to-date, we have seen an average rent increase of 5.6% to renewing residents. Our resident base generally consists of retired individuals who are cash buyers. Due to the high homeowner base in our portfolio occupancy is resilient and the delinquency rate is very low, which is reflected in bad debt that is typically 40 to 45 basis points of revenue. This low level of delinquency has been consistent over the last 30 years in all economic cycles. Moving to the RV portfolio. The Sunbelt season runs from December to April peaking in February and demand is largely comprised of snowbirds from the Northern U.S. and Canada seeking out the temporary climate of Florida, California, Arizona and Texas.

In Q1 annuals delivered steady occupancy and strong rate growth. Combined seasonal and transient increased in line with expectations supported by demand with consistent rate growth. I'd also note that nearly 50% of our seasonal revenue for the full year comes to us in Q1 during the Sunbelt season, while Q1 Transient represents less than 20% of the full year Transient revenue. We are now looking forward to the summer season which is comprised of the 100 days of camping from Memorial Day to Labor Day and spans 14 weeks. This is the time that our annual customers at 125 summer resorts and Campgrounds visit their getaways, on weekends, holidays and summer vacations. Summer season annuals have a vacation or lake house, basically their resort cottage or park model, located on one of our properties.

The resorts are now active with customers focused on spring cleaning and getting their homes ready for summer activities. These customers are from the local or regional sub markets and are typically a one hour to one and a half hour drive from their homes to their campgrounds. In contrast to the overweight of seasonal revenue in the Sunbelt season, during the summer season approximately two-thirds of our transient revenue for the full year is earned in the second and third quarters. Our reservation pace is similar to last year with the holiday weekends in demand. While booking windows are similar to last year, the booking window was short, and therefore we have limited visibility. More than 50% of transient reservations are booked within 10 days of arrival, and are subject to short-term disruptors like weather.

An iconic residential property, symbolizing the company's industry focus on REIT--Residential.
An iconic residential property, symbolizing the company's industry focus on REIT--Residential.

Finally, I would like to focus on our home sales efforts. Over the last five years we've sold 4,500 new homes. Investing in these new homes is an upgrade for the community. The new homes construction quality meets stick-built construction standards, including primary bedrooms with walking closets, open floor kitchens with high-end high-efficiency appliances, and exterior finishes like gable roofs and architectural shingles. And they remain affordable when compared to other housing options. We've been able to sell our homes for an average price of about $100,000 with limited concessions. Demand for these homes and our locations is evident from new leads and referrals from current residents, all supporting an 8.5% increase in Q1 new home sales year-over-year and a more than 100% increase from the pre-COVID time frame in Q1 2019.

The aging trends from 70 million baby boomers who are currently moving through their retirement years to almost 140 million combined Gen Xs and Millennials who will follow the boomers into their own retirement years, all support generational demand for MH and all of our property offerings for decades to come. I'll now turn it over to Paul.

Paul Seavey: Thanks, Patrick, and good morning, everyone. I will review our first quarter 2024 results and provide an overview of our second quarter and full year 2024 guidance. First quarter normalized FFO was $0.78 per share, in line with our guidance. Strong core portfolio performance generated 7.1% growth in the quarter, also in line with our expectations. FFO was $0.86 per share and includes $14.8 million of insurance recovery revenue that has been deducted from normalized FFO. Core community-based rental income increased 6.4% for the quarter compared to 2023, primarily as a result of noticed increases to renewing residents and market rent paid by new residents after resident turnover. We increased homeowners by 123 sites in the quarter.

Rental homes currently represent 3.1% of our MH occupancy. First quarter core, resort, and marina-based rental income increased 5.8% compared to 2023. Rent growth from annuals in the first quarter was 8%. As a reminder, 2024 is a leap year which results in an additional day of revenue allocated to the first quarter, resulting in higher rate growth than we expect in the subsequent quarters of 2024. Our first quarter rent from core RV Seasonal and Transient generally performed in line with expectations. Seasonal rent increased 2.4% and Transient rent increased 1.4% compared to first quarter 2023. For the first quarter, the net contribution from our membership business, which consists of annual subscription and upgrade sales revenues offset by sales and marketing expenses, was $14.9 million, an increase of 3% compared to the prior year.

The net deferral impact for the quarter was $3.2 million. Subscription revenues increased 2.7% as a result of rate increases effective for 2024. During the quarter, we sold just over 800 upgrades. Our average upgrade sale price increased 4% with the percentage of sales attributed to our adventure upgrade product, representing 28% of our first quarter 2024 sales. Core utility and other income increased 5.6%, which includes pass-through recovery of real estate tax increases from 2023. Our utility income recovery percentage was 46.5%, about 70 basis points higher than the first quarter of 2023. First quarter core operating expenses increased 3.9% compared to the same period in 2023. Growth in real estate taxes and insurance reflect the run rate impact of increases that took effect after the first quarter of 2023.

Repairs maintenance decreased compared to 2023 when we incurred expenses to recover from several winter storms. Utility expenses reflect moderating rate growth, along with reduced gas consumption, particularly in California. We renewed our property and casualty insurance programs at April 1 and the premium increase was approximately 9%. We are pleased with the result which reflects no change in our program deductibles and expansion of coverage limits for named wind storm damage. Core property operating revenues increased 5.8%, while core property operating expenses increased 3.9%, 50 basis points lower than the midpoint of our guidance. Resulting in growth in core NOI before property management of 7.1%, 10 basis points higher than the midpoint of our guidance.

Our noncore properties contributed $5.3 million in the quarter in line with our expectations. The press release and supplemental package provide an overview of 2024 second 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 2024 full year normalized FFO is $2.89 per share at the midpoint of our guidance range of $2.84 to $2.94, an increase of $0.01 per share compared to prior guidance. We project full year core property operating income growth of 5.8% at the midpoint of our range of 5.3% to 6.3%.

Full year guidance assumes core base rent growth in the ranges of 5.6% to 6.6% for MH and 4.5% to 5.5% for RV and Marina. We assume occupancy in our stabilized MH portfolio will be flat to the first quarter. Core property operating expenses are projected to increase 4.2% to 5.2%. Our full year expense growth assumption includes the benefit of first quarter savings in repairs and maintenance and payroll expense, as well as the impact of our April one insurance renewal for the rest of 2024. Our guidance model includes the impact of the fixed rate swaps we disclosed in our earnings release and supplemental package. The full year guidance model makes no assumptions regarding other capital events or the use of free cash flow we expect to generate in 2024.

Our second quarter guidance assumes normalized FFO per share in the range of $0.61 to $0.67. Core property operating income growth is projected to be 4.6% at the midpoint of our guidance range for the second quarter, which represents approximately 23% of our expected full year core NOI. In our core portfolio, property operating revenues are projected to increase 5.1% and expenses are projected to increase 5.6% both at the midpoint of the guidance range. I'll now provide some comments on our balance sheet and the financing market. As noted in the earnings release and supplemental package, we executed fixed rate swaps on our $300 million unsecured term loan maturing in 2026. The swaps fixed the all-in borrowing cost at 6.05% through maturity.

We are pleased with this execution, as it eliminates floating rate exposure except balances outstanding from time to time on our line of credit. Current secured debt terms vary depending on many factors including lender, borrower sponsor and asset type and quality. Current 10-year loans are quoted between 6% and 6.75%, 60% to 75% loan-to-value and 1.4 to 1.6 times debt service coverage. We continue to see solid interest from life companies and GSEs to lend for 10-year terms. High-quality age qualified MH assets continue to command best financing terms. Regarding our liquidity position, we have approximately $470 million available on our line of credit and our ATM program has $500 million of capacity. Our weighted average secured debt maturity is almost 10 years.

Our debt to adjusted EBITDA is 5.1 times and interest coverage is 5.2 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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