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

Thank you. Welcome to Citi's 2021 Virtual Global Property CEO Conference. I'm Nick Joseph with Citi Research. We're pleased to have with us ELS and CEO, Marguerite Nader. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast. [Operator Instructions] Marguerite, I'll turn it over to you to introduce the company, make any opening remarks and any team members with you today. And then we get into Q&A.

Wonderful. Good morning, Nick, and thanks for asking us to present today. Joining me here in Chicago are Paul Seavey, our Chief Financial Officer; and Patrick Waite, our Chief Operating Officer. Let me give you a brief overview of ELS. We own 434 properties containing over 165,000 sites. We are geographically diversified, and our portfolio is comprised of high-quality properties with a focus on age quality properties with rich amenities. Our footprint includes property locations that are strongly correlated with population migration and now retirement and vacation destinations. Our portfolio has been built over time with a focus on steady, predictable revenue streams with 91% of our revenue derived from stable annual sources. The demand for our products is high, and we will benefit from the growth in the baby boomer population. Our track record, as included in our presentation today, shows the strength of our historical results. Over the last 15 years, we have grown our per-share dividend annually by 23%, increased normalized FFO annually by 9% and have a solid balance sheet that provides financial flexibility for future opportunities. Finally, we own well-located properties in supply-constrained markets. We have over 4,000 employees dedicated to meeting the needs of our residents and customers. Our culture is inclusive and collaborative. And we look forward to a great year in 2021. Now I'll turn it over to Nick to start the Q&A.

We're starting every session off with the same opening question. Coming out of the pandemic, if an investor were to choose only one real estate stock to own, what are the 3 reasons why they should invest in ELS?

I think investing in ELS is important because if you look at, we have the top quality portfolio that has produced outsized returns since IPO. We have -- as I mentioned in my opening remarks, we have very limited supply from our product type with high demand. And we have a solid balance sheet with our average term to maturity double the REIT average. So those are the 3 highlights that I would highlight as reasons to invest in ELS.

Great. Well, let's dive into some of those. Maybe we can start on operations. What are you seeing on the transient RV side? Obviously, there was good disruption from the border closing with Canada. I think you talked about maybe seasonal and transient RV down about $10 million year-over-year. How are things trending so far?

Sure. Maybe, Paul, you could highlight. We did put a slot in our presentation, we have an update, an operations update. Maybe Paul could cover that.

Right. So in terms of the anticipated impact in the first quarter, we were talking about a $10 million decline year-over-year at the time of the earnings call. That was based on reservation pace at that time. We've updated our presentation, now it shows that has compressed at $8 million as our reservation pace in -- about a week ago. So definitely a pickup there. The Canadian border is definitely still closed. So it's not driven by those customers. What we've seen is a pickup in demand from the domestic customer attributed mainly to, we think, 2 things: one, overall vaccine availability and comfort with being able to travel and visit our properties; and two, the very difficult weather pattern that the northern part of the country experienced -- well, really, the whole country experienced in February really prompted people to try to find someplace warm and sunny to visit. So that was to our benefit and the driver of that change.

And what we also see, Nick, we also see that there's additional flexibility in people's schedules, our customers' schedules. So that Fridays and Mondays don't seem -- it doesn't seem as crazy to take the day and maybe take a couple of video calls from our properties. So that flexibility is going to benefit us, has benefited us so far in the year and will continue to benefit us as we head into our strong summer season as people have more time on their hands and more ability to stay at our properties.

How do you think about that from an amenity standpoint? Obviously, people are more flexible about where they can work. Have you had to put any upgrades on to the properties or kind of the marketing to let people know that they can go camping and still do their work on those days?

Well, fortunately, for us, this is something that happened many years ago in that our -- we saw that our customer base, while they said they really wanted to get away and disconnect, and we had a lot of ads that talked about disconnecting and being one with nature. And that's true, they want to disconnect and they want to be one with nature, but they want their WiFi and the connection needs to be there. So it was years ago that we really developed a plan to improve the WiFi at our resorts, and that's been really helpful during these times. So we didn't have to have additional capital commitments to this. They were already in place. But it is something that we get calls about, customers call and ask whether or not -- what is the signal and are they going to be able to stream their movies and now it's stream the video so.

It is important.

It is.

You guys have been very proactive kind of on the social media and marketing engagement. I mean what are you seeing from those metrics of reaching new customers?

I think it's been incredible over the years. We -- early on, we started with Facebook, that was our first kind of endeavor. And we looked at it as an opportunity, maybe we could reach some people and we wanted to understand the exposure that we may be able to put forth for our customers. And we did it and we started to get some really positive statements back -- some really positive engagement. And then we grew from Facebook to Instagram and really have been able to look at those opportunities to showcase our assets in ways that were more difficult to do in just traditional e-mail kind of campaigns. And what we found was that a picture is worth a thousand words, that's for certain. But a video is worth even more than that. People like looking at small, short videos and videos of adventures that are going on at our properties. And so that's what we've done. And we have a highly engaged social media base. So we're not sending -- oftentimes, you may get 10% off coupons or something like that as an incentive to kind of communicate with somebody -- with a particular company. But what we do is try to engage and offer stories and offer reasons that you want to come back and see the pictures and see the videos.

You mentioned the Canadian border still being closed. How does that impact kind of the forward quarters if it remains closed for longer? How is that Canadian demand impact second quarter through fourth quarter?

It really doesn't have a lot of impact, Nick, on the second or third quarters. We have some very modest activity, Canadians who might visit our northern resorts during the summer months, but it's a few hundred thousand dollars. It doesn't pick up again until the fourth quarter and really it's the month of December when we see that impact. So we think there's a lot of runway there and continued border closure in the near term really won't have an impact on us. It's behind us, essentially.

And it's in the second -- and in the second quarter in the summer months, there may be opportunities. If it's still closed, there may be opportunities where people that may be usually up in Maine, they might go to Canada. Since they wouldn't be able to, they could go to our main resorts. But again, like Paul said, it's a very small dollar amount.

We're seeing the RV sales really pick up. What have you seen, first of all, the correlation of RV sales to demand for your properties?

Yes. So we really -- our focus is on the 9 million installed base of RVers. So the added extra -- new RVers coming in are nice, but it's really that focus. I mean, there's 1 million RV sites across the country and there's 9 million RVers. So there's an awful lot of supply of RVers out there. So that's helpful. But as we look to the new RVer, it's really we focus on our RV dealer program. And that is a program where if you buy an RV, you get to experience the Thousand Trails resorts for a year. And it's kind of a year-free camping pass and then you have the ability -- then you would convert to a paid camping pass after that. And so we've seen an increase in those dealer leads of 20% since June. And we received that -- we received those leads over time and then it's about a year before you get the fruits of that in a paid membership. So that's an exciting new increase for us. It has always been a channel for us, but it's good to see that increase in that behavior and people really excited about being part of the RV lifestyle.

What's the typical conversion there after the year?

So it's about -- it depends. If -- it's broken out between people who use the pass. So sometimes you may just be -- they may just be tailgating or they're using it for their own thing. They're not kind of going. But for those who actually use, it's about a 20% conversion.

Maybe shifting over to MH. You've obviously gained occupancy kind of throughout the years on a quarterly basis. What's the opportunity to continue to gain occupancy on a same-store portfolio basis?

Patrick?

Sure. The -- our occupancy, 95% plus, 45% of our portfolio is less than 98% occupied. So we have an opportunity to continue to drive occupants. About half of our vacancy is in Florida, which has a very strong demand and demographic profile for us. So I think it's reasonable to assume that, over time, assuming that the market is stable and the demand profile continues to hold up, that we can continue to drive properties to 98%, 99% of occupancy.

And I think what you see, Nick, and you've seen this when you toured our properties, once a home is in place, I mean it stays in place. I mean the resident changes hands, but it's not unheard of that you have 100% occupied community for 20-plus years. I mean that's just -- that's just once a home, and it's a great home, home gets in there, it can stay. So that's what contributes to the stability of that occupancy base that Patrick mentioned.

And so for those opportunities, is that where you proactively use the rental program? Or is there some kind of marketing? How do you think about actually getting homes on to those lots?

I think it really depends. It's on a property-by-property basis. So where we feel like we can sell, we will do that. We will always opt for the sale rather than the rental. But there are certain areas where if we're doing a development, we think that there may be a good chance to bring in some velocity, we may start a rental program. But it's a rental conversion. It's a real focus on that rental conversion because we think, in the end, it is better to have a community filled with owners that are highly engaged at the property level. The renter conversion, maybe, Patrick, touch a little bit on the renter conversion over time?

Yes. We've been averaging in the 20% to 30% range. That number dropped off a little bit in 2020 down to the high -- or low 20% range. Prior years was around 30%. That was driven more by the lack of mobility early in COVID. But those conversions for us are residents on-site, either renters or either homeowners who are looking to purchase a home from us on-site. So it's a highly engaged resident. They want to stay in the community. In the case that it's a renter, they've made a decision now that they want to purchase a home and remain in the community long term. In the case that it's a homeowner, which is a smaller percentage of those conversions, those are typically people who either want to upscale to a nicer home or a larger home, or depending on where they are in their lifestyle, they may be downsizing to something that's a little bit more manageable.

How much competition have your residents or prospective residents seen from other housing alternatives, single-family side or multifamily?

So we look at that, we certainly include in our market surveys, multifamily, what's happening in the multifamily space and what's happening on single family. And we'll -- we know what the rates are and what if the multifamily say, what amenities they have and how we're competing with that. But really, on the single-family side, it's kind of interesting because if you want to go to Florida or Arizona and experience -- you're going out from the Midwest or the Northeast and you're just trying to get out of the weather and you want to buy a place in those areas, then if you're not looking for community, maybe single-family rental is something that you want to do. You want to live on a street all by yourself and not really engage with people around you, that may be the best bet. But what our customers want is they want that community. They want that high-quality amenity base. They want to walk past the gates -- hello? Are you guys -- can you guys hear?

I can hear you.

Okay. And so they want to do it. They want to be able to see everybody, know who they are and really associate with their neighbors. So that's a real factor in their consideration. And so I think they may, at some point, look to the single-family rental, but it's really about the community that they see. And so we know what's happening in the general area and it's part of our market survey. But it's -- we don't see it as a big -- as a source where a lot of our customers may be looking.

With the conversations different this year about setting rent, did you get a little more pushback either from HOAs or any of the communities just given the macroeconomic environment?

Yes. Go ahead, Patrick.

Yes. Sure. I mean just walking through our typical process. It usually starts midyear, around our -- building our budgets. And as we work our way through the latter part of the year, we're meeting with HOAs and resident bases across the portfolio to have conversations about exactly at what the rent increases are going to be planned for the year. That includes a review of the competitive market, other manufactured home communities: as reference points, multifamily condos, single-family rental that you just mentioned. And it also includes a conversation about the resident's priority for the properties: what kind of upgrades they'd like to focus on, any operational improvements that they'd like to suggest with us. So there's a meaningful long-term relationship there. And as part of the rent increase discussion, we're talking about those priorities. I would say that as we worked our way through that process this year, there was some conversation around COVID and where we were in the process for the most part. That was a small part of the conversation and it was very similar to prior years.

You guys become more active it seems, at least over the past quarter or so -- past few months on external growth. It seems like it's been across everything, right, acquisitions, development expansion, including the large marina acquisition that you just -- that you announced recently. What has changed throughout the acquisition market? Is it just timing? Is it something about your strategy? Is it -- what has made you more acquisitive more recently?

Sure. It's really just timing. A lot of the deals that happened in the fourth quarter were deals that we were working through throughout the year and it just ended up being that we closed in the fourth quarter. Two of the largest deals that we closed in the fourth quarter was one was a deal that had -- was outside of Phoenix, a 5-star quality MH, age-qualified property, that had -- has the ability to -- for us to develop 200-plus sites on it. That was really exciting for us. We looked at it and we said, okay, this is an opportunity we really want to be able to do. We think that this is something that we can add some real value on. And so that was something that we looked at. It came away relatively quickly in the latter half of the year and then closed at the end. The other deal that we did -- the other large deal that we did was a marina, which was actually part of the deal that we then announced in February. It was just a contract that was assigned to us as part of the deal. So it was just -- it was more of the strategy around the deal that we were working on that ended up closing in February. And the deal that we closed in February, the marina portfolio, was something they were -- sellers that we had been talking to over the last year and they were building up their portfolio, they were trying to figure out what the best execution was. That portfolio was very similar to our Loggerhead portfolio, and we've talked a lot about how much we like our Loggerhead portfolio. And so we looked at this and saw all of the similarities and thought it was a great opportunity for us to invest.

And so with that, it looks like marinas are almost 5% of the portfolio now. Where could that go?

So we put in our presentation we showed that it's 5% of site. And the import of that was to show those -- that pie chart is going to look very similar through the years. It's just the pie is going to grow, but that -- those percentages will roughly stay the same.

And why is that the right balance when you think about kind of the income stream of the company, medium to longer term?

Yes. I mean when we think about the opportunities, I see opportunities in the MH, RV and the marina space. I think that there are -- as we look to the marina space, we're going to be very focused on assets like what we just -- what we bought with Loggerhead and what we just bought in this portfolio. And so that's where I think that there will be -- the opportunities will be kind of in that space of being able to grow to where we're 5% and stay in line with where we're growing on the MH and the RV.

Is there anything from the income stream perspective, either more volatility on the marina side or anything that kind of caps it from that aspect?

Well, there's a few things and it's the same on anything that you look at from MH or RV. It's really about the quality of the asset and the quality of the cash flow. So just like we've long said on the RV side, we tend to want the high-quality cash flow, which is an annual base versus a transient RV property. And the same on the marina side, we will always gravitate towards the annualized RV, a fee simple, no ground lease, focus on -- with not a high focus on ancillary revenue. We appreciate there is some ancillary revenue, but that it's not a large focus. So that's kind of where you'll find us really sticking to those stable cash flows.

How easy is it to transition either from an RV perspective with a lot of transient into more of those seasonal and annual -- or from a marina standpoint, some of that ancillary revenue more into annual?

I think it takes time. It takes time to build over time, I mean, on the RV side to go from transient to seasonal to annual. It's a matter of just experience. It's people enjoying and appreciating what's going on at the property. Constant communication. So when you stay with us once for a weekend, then there has to be a reason we're going to get you back for the next weekend and then the next weekend turns into a week, et cetera. And so it's much the same on the marina side in that do you like what you see here and how can we strengthen that relationship, how can we grow the relationship.

How does the acquisition pipeline look today?

I think it looks similar to what we said in the past. It's lumpy. It's not always certain when things are going to close, but we have properties right now in various states of LOI and contracts. And when we close them, we'll disclose and talk about them.

And what sort of cap rates are you seeing? Or what kind of trends are you seeing? And maybe we can touch on each of the 3 different businesses.

Sure. So I mentioned on the call -- on the earnings call that we were -- that the deals we did in the fourth quarter were between a 3.5% cap and a 5.5% cap, the high-quality MH on the lower end and the marina that we did in the fourth quarter on the higher end. And then the deal that we just did in February was also a 5.5% cap. So that gives you some appreciation for where cap rates are. There's certainly -- the high-quality MH is trading very aggressively, as you would imagine, with the kind of stability in the cash flow and the long history now in outsized returns for the MH business.

Would you expect cap rates on marina just to compress on top of where you're seeing the MH and RV?

Well, cap rates have compressed over time in the marina space. I think that it's important to kind of look under the covers and appreciate what's going on with each individual marina. They're not -- just like I said, they're not all the same. And there needs to be appreciation, as we do, in our underwriting of what is going on with the cash flow and what is the volatility inside of it.

How much NOI uplift, when you buy these, are you getting from adding to your platform?

Well, I think what you see, like on the MH property that we bought in the fourth quarter, there's going to be an increase in NOI just from the expansion. So on the marina side, I'd see the 3% to 4% NOI growth over time.

I appreciate everyone's sending in questions. I'll turn to weave in some of these, but we do have a handful of questions actually on the marina. So if you feel like you're at scale right now or if you grow that business, would it have any impact on G&A?

Sure. So when we talk about our cap rates, we're talking about it with G&A included. So that's part of the number that we've disclosed. We think that what we've done on this portfolio and the Loggerhead portfolio we just bought, we have a vice president that's in charge of it and it's integrated into our existing operating structure. So just like when we started in the RV space, we wanted everybody on our operating team to run manufactured homes communities, RV parks. You couldn't be an expert in one, you had to kind of know about both. And so now we have a portfolio that every one of our operators can handle a manufactured home community and an RV park and we're doing the same with them on the marina side. So everybody has to have a portfolio that contains a little bit of everything. So I don't envision an increase in G&A.

We've touched on expansions a little, but it's obviously an accretive use of capital. How large is the opportunity at the existing portfolio today for expansions?

Sure, I'll take that, Nick. First, I'll reference just kind of the deliveries in 2020. We're around 1,100 development sites completed. We think there's a similar number in 2021. And looking at our pipeline, 1,000 to 1,200 sites a year, mix of MH and RV, is a reasonable -- it's a goal for us and I think it's a reasonable expectation that, for the next several years, that's in the pipeline. We're also going to continue to build that pipeline with land that we already own, that's either zoned and has the appropriate entitlements or need some refresh of either one of those, and continue to acquire land adjacent to our assets so that we can continue expansion. The expansion, in particular, as you can imagine, is very efficient, right? You already have the operating business in place. There's name recognition for either the MH community or for the RV resort in that location. So the increment is almost all falling to the bottom line.

What sort of returns are you getting on those expansions today?

Ranges from high single digits up to the mid-teens. Really, that's going to be driven by the cost of development that can be impacted by utilities, topography, how much dirt you need to move. And then, of course, the strength of the location.

Marguerite, are you surprised that supply hasn't come in more to the space?

We've seen a little bit of increase in supply on the RV side. On the MH side, we haven't seen much. We've seen some new development, but we've also seen some developments come off-line and turn into alternative uses. So I think that certainly, there's -- it really is at the level of the municipality is what you're dealing with at a local municipality. So what happens at the federal level and the state level doesn't seem to have a big impact, but I would say that at some point in the near-ish future, there should be some movement on this even at the local level. I think that when you see -- when we're showing pictures of what -- how great our properties look and what can be on this vacant piece of land, I think there can be a real appreciation for how great our asset is, and hopefully, there'll be some movement. Like I said, it's a little bit easier on the RV side to make some movement there. But -- and I think it can happen. It'll just take a little bit of time.

And what would get you more involved in trying some of that greenfield development?

I think that we have a lot of development, as Patrick has said, adjacent to our land already. So we have a full plate of opportunities. But where there are opportunities where we know that there is an open kind of entitlement process, we would certainly be interested. And on the RV side, you're able to fill it with a transient revenue base before it turns into annual. That's just something you could do to start it out. On the MH side, there is the opportunity to create a rental stream, but it does require you to buy the homes and invest the extra capital to do that.

What is the capital plan for funding external growth this year?

I think for us, Nick, as we've talked in the past, we're very focused on maintaining financial flexibility. That's our long history, that's our long-term strategy. We have seen and been able to execute very attractively in the debt markets recently. I talked about on the call, and we closed last week, the financing 2.4% for 10 years, $270 million loan from a life company. It's great execution for us. Our balance sheet, as Marguerite mentioned earlier in the conversation, is certainly positioned to be able to handle more debt and with the attractiveness of the debt markets subject to what may happen with rising interest rates, we would look to do more. But at the same time, we're always ready to flip the lever that's appropriate at the time to execute in the most efficient way.

What are your top 3 priorities to improve your ESG score next year?

So one of the main ones is increased disclosure, and we've done that, I think, very effectively over time. We'll continue to do that. Continuing to work with our very important diversity initiatives. And then continue to focus on making our property operations more energy efficient. And maybe, Patrick, if you could provide a couple of details about how we're doing that on the energy initiatives.

Yes, really on a conservation front, we're focused on energy efficiency, including renewables and also water conservation. So first, I'll just focus on water conservation. We've invested in smart meters across the portfolio. And there's really 2 points of benefit there. One is with our residents, they're individually billed for their water consumptions that promotes conservation. And then across our common areas, we've installed meters so that we have visibility into consumption, including potential leaks or peaks in that usage. And these meters are smart, that they're WiFi enabled or they have radio frequency capabilities that provide real-time information. And that allows us to either reach out to a resident whose consumption has spiked, but also across our common areas, monitor what our water usage is. With respect to energy efficiency, we've invested in LED across the portfolio, as well as smart thermostat. So the LED common area lighting, much more efficient than traditional lighting. And for the smart thermostat, it's programmable for all the indoor spaces to manage periods of peak and offpeak usage and that will reduce our reliance on electric grids and GHG as well as natural gas. And then, last, from a renewable perspective, we'll have 10 solar projects in process or completed in 2021 and we'll continue to build that pipeline. That, again, will help reduce our reliance on GHG-generating electric grids.

Great. Thank you. We do have a rapid-fire to end up this session. When we're sitting physically together in Florida a year from today, what will be the one thing that will surprise people the most about your business over the prior 12 months?

Nick, I think we're known for no surprises. So we have a great company, high demand for our assets. We'll continue to grow stronger this year, but it won't be a surprise.

What do you think your corporate travel budget will be next year in 2022 as a rough percentage of what you spent in 2019?

Well, is Citi going to be in person because that's going to be -- that's part of the budget. I'd say 75% -- sorry, 75%.

75%. What will same-store NOI growth be for your property sector, so maybe a blend of the 3 overall next year in 2022?

4% to 5%.

And finally, what will the 10-year U.S. treasury yield be a year from today? It's roughly 1.5% this morning.

1.8%.

Great. Well, thank you very much for your time. Really enjoyed it and hope you enjoyed the conference as well, and we'll talk soon.

Thank you, Nick, very much. Take care.