Equity LifeStyle Properties, Inc. (ELS) Earnings Call Transcript & Summary

8:10 a.m. session at Citi's 2020 Global Property CEO Conference. I'm Nick Joseph with Citi Research, and we're pleased to have with us Equity LifeStyle and CEO, Marguerite Nader. This session is for investing clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available up here and on the webcast on the Disclosures tab. For those in the room, or the webcast, you can sign on to liveqa.com and enter code CITI2020 to submit any questions. Marguerite, I'll turn it over to you to introduce the company and the team and provide the audience 3 reasons why investors should buy ELS stock today, and then we can get into Q&A.

Sure. Thank you very much, Nick. I'm here today with Paul Seavey, ELS' Chief Financial Officer. And the 3 reasons why investors should buy ELS stock today. I guess, I would start with: First, our track record. On Page 13 of our investor presentation that we distributed yesterday shows our FFO growth over -- since 2006 of 9% per year. We're really translating NOI growth into FFO growth. And you can see that NOI growth on Page 9. The next thing is customer demographics and supply. The demographic trend is in our favor with baby boomers coming in at 10,000 a day, and then there's increased interest with millennials and Gen X population. And there is no new supply to speak of. So those two together are very positive for our stock. And then the third is a solid balance sheet. Our term to maturity is 12 years, with 32% of our debt fully amortizing, and we thereby have no refinance risk.

Thanks. So we're starting every session off with the same question. ESG has increasing importance for all company stakeholders. What is the one thing ELS is doing to improve its overall ESG score over the next 12 months.

I think what you'll see with us is additional disclosure and you've seen that over the last couple of months. Just about the way we operate already and you've seen improvements in our scores as a result. And we're planning on an ESG report in the coming months. But by nature, our business really provides sustainable aspects, including lower and smaller homes with lower footprints and limited common area waste. And there's extensive mature landscaping that contributes positively to the environment that we also believe should be factored into our ESG scores.

Thanks. So obviously, coronavirus is on everyone's minds. How is ELS dealing with it preemptively, both from a community on the ground perspective and also from a corporate perspective.

Sure. So both from an employee and corporate perspective, we continue to remind people about just general healthy habits, washing hands, all the standards of -- that the CDC has issued, and we continue to remind people of that. We are used to dealing with flus that happen every year, so we're following our standard protocol. We also have limited -- within our properties, we have limited common areas, so we are able to maintain those and make certain that those are in a healthy state.

Great. So the second reason you mentioned, wanted by the stock demographics? Clearly, they're in your favor in terms of just the aging population. Is there anything unique to that population, either in terms of marketing, amenities, that's different from the customers that you've had in the past?

The amenities have changed over the last few years or 5 to 6 years. We're really seeing an increased concentration on well-being and fitness. Our customers, they come in and they look for where is the fitness center, what can they do? How can they stay active? What are the activities that are around. That has certainly changed and increased over time. It's not necessarily that they're going to use every one, every day, but they want to be part of a social fitness or if there's something that -- activities outings, that type of thing. It's really important. To live in our communities, we used to be called manufactured home communities when we went public. We changed our name in 2004 to Equity LifeStyle Properties because of the lifestyle that we offer. You can certainly think of living in -- you want to live in Florida, if you want to live in a place where there's a lot of socialization going on, that's the reason people are choosing to live with us and so we see that just continuing to increase. And we're using social media, and we're using access to our marketing efforts to show what we have to offer.

You're also seeing younger customers, I guess, mostly through the RV side. And it feels like you've made pretty significant investments in marketing and, certainly, on the social media side of trying to reach those customers. Where are we from -- is there more to go there? How are you making sure you're reaching the right customers, both on the MH and on the RV side.

I mean I think that most of what we're doing is focused around social media and our web sites. We have two: mymhcommunity and rvonthego.com that are the main focus, and thousandtrails.com, and really providing to our customers or to our potential customers a story. Because it's not about a 10% off coupon. That's not going to be what drives people, that's not going to be what wants people to -- makes people want to engage with us. It's about the story. It's about what's happening at the property. Pictures tell a lot. We went from heavy pictures and now we're heavy video. People want to see people in action. So I think as we see that, and we continue to see people engaged, we know they're going to make a transaction. It may not be now, it may be a year from now, but as we've seen that those social media followers grow to now over 650,000. We know that, that's just kind of setting the seeds for the future. We're also looking -- we also work with the OTAs, the online travel agencies, to get our product exposed to a broader base. So we have -- on the RV side, there's 9 million installed base RVers. So that's a lot of RVers that are out there on the road, but there's even a wider net of outdoor enthusiasts. So there's 45 million outdoor enthusiasts, people who want to be outside, people who don't necessarily want to be in a hotel for their vacation experience. So we've been able to go out to that group, have them come and see some of our unique accommodations: our yards, our tiny homes. And in fact, check that off their bucket list. And while they do that, they look around and they say, "Well, this is pretty neat." It's pretty neat that you can go on vacation and have a campfire and be outside and take a hike, and that type of thing.

Do you think that's similar to what your private competitors are doing?

Yes. I think, just in general, that the whole camping experience and the whole RVing experience is very positive and is seen across the spectrum of RV park owners. I think it's very helpful for us. The marketing campaigns that we have and the ability to reach such a wide breadth of people and prior guests, and with the database that we have, I think it's very helpful for us.

And you mentioned almost no new supply. What is it, given the need for affordable housing, that is still the issue in terms of greenfield development more broadly for the sector and then for ELS, specifically? Why not go into that?

Sure. So we often talk about -- and we have talked about for years, for the 25 years that we've been a public company, there's no new supply. And that's still a factor. I mean it is difficult in the areas where we operate, we like to say we paint a smile on the face of the United States. So we're up and down the coast, a lot of concentration in Florida, up the East Coast, up the West Coast. And in those areas, it is difficult to get entitlements to build our properties. We have expansion land that is adjacent to our properties. We have about 5,000 acres of land that's adjacent to our properties that we will develop over time. But going into a brand-new community, in an area start-up, it is difficult to get the entitlements. There is a -- the "not in my backyard," NIMBY view that tends to, while on high, maybe at a state level, there's a desire for increased affordable housing. When you get down to the city level, it's not always as appreciated. So I think that's what -- that's where that struggles, that struggles for increased supply.

From an operating MH perspective, you're basically in all-time high, high watermark, 95.5% occupancy. What's the opportunity to move up from here?

I mean we have about 3,500 vacant sites inside of our MH portfolio, so we have the opportunity to fill those sites. I mean once a community gets filled, you can see that roughly -- over 50% of our communities are 98% occupied. So once a community gets filled, it has a staying power and it can stay filled, so it's a matter of moving that up. I think that we have a number of tools in our toolbox to raise the occupancy, but it does get harder when it gets to be 95%. And -- but we're continuing to see growth and continuing to see a high interest and a high demand in our sites and in our homes.

What do you see the biggest risk to demand? Is it the home sale market? Because clearly, the demographics are there. So what is the toggle there that could turn on or off demand?

Right. And I think that the -- when you think about -- there's high demand right now. There's -- the demographic trend is in our favor. If something happens and in Chicago, in New York, in the Northwest, if people are unable to sell their homes, if our potential customers are unable to sell their homes up north, that will start to have an impact on us, on our home sales. Now what we've done over time, in 2008, we were in a situation where we found it difficult to sell as everybody did to sell homes. And we had a lot of homes on the ground, and we tried to figure out what should we be doing? Because at that point, we really weren't renting homes to any degree. But we had these homes, and we decided that the best course of action was to begin to rent the homes. We became very good at renting homes. We worked with those who are in the rental market to understand what the best way to do that. We got up to speed on it. And from 2008 till about 2012, we became heavier in our -- in the rental pool and in that occupancy. And then in 2013 -- 2012, '13, we said, well, there's an opportunity here to sell instead of rent. So we kind of changed the toggle. We changed the incentive to the -- to our managers at the field level and said, we want you to sell. We know it may take a month, 2 months, 3 months longer, but we think this is the right decision because we're in a market right now where we can sell. We're still there. We continue to be there where we're selling. We're selling at rates that we're comfortable with. But to the extent that something happens and that something happens up in the north and people are unable to sell their homes, we would be able to toggle back into that rental. We've reduced our rental pool from 6% to -- 10% to 6%. And we would be comfortable if the market was such that, that made sense to raise that.

And what sort of conversion trends are you seeing from that renter pool to ownership today?

Yes. So the -- we're seeing really good conversion. And certainly, in the beginning, we didn't have very much conversion. It wasn't something that we were focused on. And in the last year, in 2019, our conversion was about 30%. So of the homes that we were selling, that were sold at our community, about 30% came from somebody that was already in the community. And it's that concept of kind of try before you buy. People are very open and interested in coming down. They want to get out of the cold. They want to get out of the cold weather. They're willing to get out of that and they're willing to kind of bet a year on that. They'll rent site unseen. And once they get down there, it's that community experience that they have, that then they start to convert. And we start to work with those renters immediately upon when they come into the community, to get them to feel a part of the community, so that they know what's there and that they're able to participate and then buy.

As you see conversions occur, I'd imagine some of those renters are buying the home that they're actually in, some are buying other homes within the community. How do you think about backfilling the rental program? And is 5%, 6% the right number for now?

I believe so. And we watch it and look at it on a market-by-market basis, so that if this is the average across the portfolio. But there are certain locations and a certain property maybe where we say, you know what, we're just not seeing the traffic. We're not seeing the traffic that would indicate that people are willing to buy right now. So we may increase the rental pool in that location. And others, we would do the opposite and say, there's no rentals here. It doesn't make sense. The demand is so strong. So it really -- we really look at it on a case-by-case basis.

Any questions from the audience? Want to turn to RVs then. So I think right now, you're about 65% annual RVs, and then the remainder is seasonal and transient. What's the right mix between those? And how do you think about transient as -- just as a business, given maybe a little more volatility, but also the lead generator it is?

Right. So in our business, when we look for acquisitions, we really are -- we look at opportunities to invest in a higher annualized base of RVer -- RV community. And the reason that is, is because the transient base, if you have -- and we have a couple of properties that are 100% transient. And 100% transient RV park on a Wednesday looks like a parking lot. And if it's a Wednesday, it looks like a parking lot, and there's nobody there, even it looks like a very pretty parking lot. On Friday, it starts to rain. You still -- it still looks like a parking lot. Nobody shows up. And that's where it causes us -- we look and it doesn't look and feel like the MH business. We got into the RV business because it looks and feels like the MH business. We like that stable cash flow. We like the annual cash flow and so we tend to avoid the highly transient locations for that exact reason for just the volatility of it. But as we look to -- on the annual side, we'll look to having some piece of transient inside of each community because it does -- it is that lead generator. It is that ability for people to come in and kind of try the community before their -- before they commit on a longer-term basis. So we do appreciate that business on a smaller basis. Within each community. And it does -- and it does -- it generates excitement. Our annual customers will go over and greet the transient customers and ask where they're coming from, talk about their rig and that type of thing. So it is an important piece on a piece by piece basis in our communities, but not as a whole community.

You mentioned the weather risk. What is the cancellation policy typically for transient? Is there an opportunity to Kind of keep any of that revenue? Or does it just go away if the weather is bad over July 4?

It depends. I mean on the July 4 holiday, we have a stronger cancellation policy. So you have to book further. You have to cancel further in advance. But on a standard weekend, it may only be a 24-hour, 48-hour notice. And weather tracking has gotten so good over time, people can look at 10 days out and kind of have a sense of what's happening. So there's cancellations and, in some instances, the cancellations will allow for you to rebook. We try to get you to rebook next year so that you can apply your deposit to the next year.

How are seasonal transient bookings for the first quarter trended?

They're good. Our performance update that we included was through the month of January and right in line with our guidance, showing strong demand that we talked about on the January call, continuing to develop into February.

And really strong demand. I mean Florida is the main participant. But it's a very strong demand in Florida.

We've had, actually, a lot of questions come through here. The Trump administration a few months ago proposed privatizing national park campgrounds, what do you think the opportunity is for your business if that does happen?

So there are about 16,000 RV parks across the country. 8,000 are public and 8,000 are private like ELS. So there's -- there are 8,000 parks that have -- that are public parks that there's an opportunity there. Certainly, if they -- if there was an opportunity with the various federal government or the state governments to buy those assets, I think that would be a positive. They're less amenitized. They're very basic in many instances, although very well located. So I think that could be an opportunity. I don't know how far out that would be, but it's certainly something that we think about really based on the locations. They're well located.

How do you see yourself making further investments in the marina space?

So we own -- we did a transaction last year where we bought out our joint venture partner. We own the Loggerhead portfolio. It's 11 Marinas in Florida. And those properties are highly annualized properties. 90% annuals has a lot of a look and feel of what we think about it from our RV space. And we would -- and very low ancillary revenue. It's really all just -- it's all a slip revenue. And we would look to continue in that space, in that same type of disciplined manner.

Are you seeing more opportunities in that space today? If you think about the pipeline between MH, RV, Marina, where are the most opportunities?

I think there's opportunities across the spectrum, on all of -- on the MH, RV and Marinas. And I think that, that same -- the underwriting criteria that we have has been the same. And so we would look to a highly amenitized RV, highly amenitized -- sorry, highly annualized RV, highly annualized Marina and then a well-located manufactured home communities.

Rent control and regulation has been a big topic really across the residential space. I know you've dealt with it in the past in some of your markets. What are you seeing today in terms of conversations and potential risks?

Sure. So we've dealt with rent control for many, many years. We've been subject to rent control in California. We have 17 properties in California subject to rent control. In total, across our portfolio, we have 24 properties that are subject to rent control. And so we operate and the numbers that we have here, that we show in our NOI chart, that's operating in a rent control environment. So I think we've done fairly well over the years operating in that environment. That being said, there has been some recent -- Oregon, Washington, New York, there's been some recent rent control that's come up that is starting to -- that's limiting the increases. It hasn't affected us and doesn't affect us for 2020 as we rolled out our guidance. But for instance, in Florida, we have what's called a prospectus. And that's a prospectus that is between us and the homeowner, and it allows for increases in the rents. The relationship that we have with our homeowners is very important to us. People -- we own the land, people put their homes on our land. And they want to be assured that there isn't going to be some massive increase in rent as a result of that relationship, that kind of unique relationship. So I think Florida has done a good job in having this prospectus in place and we have a very good relationship with our homeowners' associations. And when we go forward and we have rent increases, there's a lot of discussion about what the rent increase is going to be, and what they're looking for, what the homeowners are looking for. And a lot of that is something that we talk about with any governing body that is interested in rent control. We talk about our process, and I think our process works pretty well as it is.

What's the average annual retirement income of your residents? And what is feasible rental rate growth on that income level?

So the majority of our residents are retired, so they don't have income. But what we look to -- they don't have working income, so what they -- what we look to is what's happening in the markets around. So we'll look to -- increasing rents for us is what's happening in the single-family rental? What's happening in the multifamily space? What's happening in other manufactured home communities around our area? And that's how we arrive at a rent increase. So for the last 20 years, I think, our rent increase has been about 3.7% to 4% on average. And as we look at that, that's a build-up of all of those factors. It's -- that's just not a number that's thrown out. It's a number that is built up on a property-by-property basis based on what's happening in those local markets. And in some markets, there have -- where you've seen all of those: the multifamily, single-family, et cetera, where there is muted rent increases, you'll see ours muted as well. So it is a function of what's happening in the market and so as that's changing, and that's moving, you'll see us continue to move.

How do those conversations typically go in terms of -- you're going to increase, call it, 3.5%. They're going to ask for additional amenities or updates to that. How long does that process typically take? And how does ELS think about it?

Sure. It takes -- it can take a couple of months. So we kind of start out at the beginning and we want to just talk about how the homeowners association -- so we're talking to 6 or 7 people. We're not talking to the 250, 500 people that are in our communities. We're talking with the representatives. We meet with them. We want to hear what they want? What they're thinking about for the community? This is the place -- this is where they live. This is where they have all of their activities, and we want to understand what they want. So they provide for us kind of a to-do list of things that they're interested in. We talk about rent increases. It's at that meeting where we might say an initial number, and we'll get a reaction from them. They'll then tell us what they think in terms of what's happening at the community? What they want to see? Maybe how they want us to allocate our capital? And we may think the best thing to do is to redo the tennis court, and they look at us a little bit crazy and say, "Why aren't you putting in a new pickleball court?" And we will do that, then we'll have that conversation, and you'll see us build more pickleball courts as a result of that or change our tennis courts into pickleball courts. The residents are then -- the homeowners association goes back to the whole homeowner group and they say, this is what's happening, and this is where we think we're going to be. And they kind of get a sense of whether or not the homeowners, in general, will sign off on it. They come back to the table with us. We have discussions, and then we get to a point where in September -- by September of each year, we have a good sense of where we're going to be for the following year, which is really why we're able to issue guidance. We issue guidance earlier than most. We issue guidance in October. But that's because we have these meetings. We have conversations, and we know where we think we're going to be for the January rent increases. There's a -- a lot of our portfolio is focused on that January rent increase and so we have a good sense of that at that point.

When you think about the expansion to Marinas, you talked about the attributes that make them very similar to the RV side. What additional yield can you get on the going-in cap rate on a Marina versus an RV?

It depends. I mean the property that we just bought -- the properties that we just bought for Loggerhead portfolio was a 6% cap. And there aren't too many 6% caps around in RV or MH land right now. So the spread is a little bit wider than what you see in the other spaces.

And are you seeing any movement on any of the larger high-quality portfolios on the MH side?

I think similar to what we've seen in the past, it's difficult to know when they're going to move. I think that a lot of them, there's been a lot of trading over the last several years. But I think that there's still more, but I don't know when it happens, in this year, next year, or the year after.

When you look at larger portfolio deals, how do you think about the quality of that portfolio versus your existing portfolio? And how comfortable are you buying a portfolio for half the assets, 2/3 of the assets and trying to sell the remaining that may not fit with the ELS' strategy?

Sure. So we did that with the Hometown portfolio. In 2011, we bought it. We knew that there were assets there that were not long-term hold for us, although we did hold them for a while just trying to consider whether or not we wanted to continue to hold them. And then we sold them in 2013-'14. And so I think that you'll see us do that, certainly, if there's opportunities. If we look at the whole portfolio and see where -- maybe there's ones that just don't make sense for us or if they're not core assets for us and we would have no problem disposing of those for the benefit of the -- to get the larger deal.

And the expansion sites are very accretive to you. You obviously have some built-in within the portfolio that can expand on existing land, how active are you looking for contiguous land and trying to expand that way?

So we have already in place. We have 5,000 acres of land adjacent to our properties that's developable, and we're working towards the entitlement process on those. And the majority of that is on the RV side. So it's about 90% skews towards the RV. So then when you look to the MH side, we are working on land that's adjacent to our properties that we don't own, and trying to go through. And what we don't want to do is land bank. We want to get the entitlements in advance of that type of a purchase, and some are small. I mean there was one that we purchased. It was 20 acres. It's not -- they're not huge parcels. But there -- as we look across our portfolio, there is a number of parcels that are adjacent to our properties that are of interest to us.

Are municipalities more open to entitling that land than you've seen in the past?

They are. It seems like in the beginning, they're very positive. And of course, we're operating inside the county or the city right there, and they can see it. It just takes a little bit longer than what we would like to see. But I think that, that's something that will -- you'll see us do more and more of.

Is there a densification opportunity within the portfolio putting aside the expansion sites from an existing site perspective?

Our site are -- our properties are zoned with a certain number of sites. So it would be difficult to increase the density. And even within some of our properties, where we would say, these are MH properties, we'd like to put some RV and sometimes that is difficult as well. So once it's kind of set, it's difficult to change, but for adding new land.

So we saw one of your peers, in the last few years expand into Australia. I know you've thought about international expansion in the past. What are the current thoughts and opportunities given kind of the current cap rate in the U.S.?

We've certainly looked at Australia. We looked at Canada, Mexico, Europe. And some of the issues that we looked at, we weren't comfortable with the concentration of the sales in Australia. It's kind of a different model than what we have here in the United States, and the cap rates are similar. And -- so that, to us, was something that was not as attractive. So we've looked at other areas. We've certainly done our due diligence, but everything kind of came back to that United States was the best place for us to be.

Is that sales model prevalent across the other regions?

It is in certain parts of Europe, but it's mainly in Australia.

So it's just a different revenue stream versus collecting site rent.

Correct.

We had a couple of other questions here. How do you handle on-site property management? And has that changed or handled differently today?

Our on-site property management has been handled really the same for 25 years. We have 4,000 employees, that are all dedicated to serving our customers and our residents. And those employees report to regional staff and report to corporate staff. So it's been pretty similar throughout the years.

All right. And then the -- I've -- my 4 rapid-fire questions, but any final questions? All right. Will your property sector have more or fewer public companies a year from now?

Same.

What will same-store NOI growth be for the MH-RV sector next year in 2021?

5%.

What will the 10-year treasury yield be a year from now?

Higher than it is today.

How much higher?

Do you have dartboard? I'll throw it.

And then in what year will the U.S. enter a recession?

Not this year. Something beyond this year; how about that? Does that work for you Nick?

This have to go into Excel. We tabulate that.

I can't use Excel anymore. I don't know how that works.

All right. Thank you very much.

All right. Thank you.

Thank you.