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

Welcome to the 4:15 p.m. session at Citi's 2022 Global Property CEO Conference. I'm Nick Joseph with Citi Research, and we're very 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 and at the AV desk. For those joining us here today in person, to ask management any questions, please step up to one of the mics we have located in the center aisle of the room. If you're joining us remotely, simply type them into the question box on the screen. They will come directly to me, and I'll do my best to ask them during the session. Marguerite, I'll turn it over to you to introduce the company and the management team, and then we'll get into Q&A.

Great. Thank you, Nick, and thank you all for joining us today. I'm Marguerite Nader, CEO of Equity LifeStyle Properties. With me here today is Paul Seavey, our Chief Financial Officer; and Patrick Waite, our Chief Operating Officer. We look forward to talking with you today about ELS and all the great things that are happening.

Sounds good. We'll start with the opening question. What are the top 3 reasons an investor should buy your stock instead of any other listed company?

Sure. So I think the first reason is really, to buy ELS centers, around the quality of product offerings. We have high-quality properties, cash flow and team members. And I think the second reason to buy is really that we've proven, through every economic cycle and real estate cycle over the last 30 years and now with pandemic, that we can outperform the REIT index. And finally, the supply and demand characteristics. We operate in locations where building new developments is difficult and the demand for our products is extremely high.

Great. How do you think about the ability to keep up with inflation? I guess, particularly on the MH side, on the age-restricted side, obviously, you've been able to kind of put up very good rent growth throughout the years. But as inflation picks up, what's the ability to keep?

Sure. I think, Nick, we added a slide to our investor presentation last year to address inflation. If you take a look at that slide, it shows our outperformance. It takes a look back over a 20-year period and shows our spread to CPI in terms of same-store NOI growth. You can see it in aggregate for that 20-year period, and then we also have a chart that shows the detail. And the key driver on that is the revenues. You'll see in the chart that we outperform CPI in terms of our revenue growth. And really, when we think about the overall business, the primary component of that is our MH rent. And the structure of those leases is such that about 25% of them are directly tied to CPI. There's a floor of 3% in half of those, and then the remaining 75% are driven by market. And market for our properties and in our business, market is regulated because of the nature of the relationship that we have with our residents. So they've made a significant equity investment in a home that they've placed on our land, and there are regulations state-by-state that govern the rent increases, the relationship that we have with them. So if you think about Florida, which is the majority of our portfolio, the statute says that rent increases must be reasonable. We come to that reasonable conclusion by triangulating data points. We look at competitive housing options in the local area, other MH communities, apartments, single-family rental and so forth, but also look at CPI, look at social security and triangulate all of that. So as you see those housing costs and other related indices increasing, you'll see our rents increase as well.

And we recently saw, as you saw, an increase in social security, a 6% increase, which is, of course, important for our customer base.

And how do the mechanics of those conversations, particularly in Florida, go? You guys have always been very careful not to kind of strip out the equity from the homeowner side. And so kind of, obviously, there's HPA, a lot of the other comps are clearly moving up from a market study perspective, but how do you balance that with being responsible as you've been in the past?

Sure. So Patrick's team spends a lot of time focused on market surveys at the property level. And what we do is we go out, we conduct a market survey on a very regular basis. We look at what's happening in the single-family home market. We look at what's happening in the manufactured housing properties around our property, single-family rental and multifamily. We take all of those data points, and we come up with what is the market rent. As we look at that then, we sit down with the homeowners' association, and we'll sit down with probably 6 to 8 representatives of the entire association and talk with them about what's happening at the property. This is a partnership. And they're interested in our capital allocation and where is the best place to put capital. We're going to spend money at the property. We think the best thing to do is x, and they think 2 pickleball courts is the right thing to do. We talk a lot about capital. And by the way, here's the rent increases, and here's what we're thinking. And there's 2 rent increases. The one is the rent increase that we're going to give for in-place residents, and then the other is the rent increases that we give on mark-to-market upon turnover. So those 2 numbers are discussed, and we make certain that our residents are involved in those discussions and take a very active role in those discussions.

And how are you thinking about the efficiencies on your expense side from just inflationary pressures?

In terms of the expenses, we take a look at the 3 key expense categories that we have: utilities, payroll and R&M. Those represent almost 2/3 of our expenses overall. In terms of utilities, there's some mitigating factors there, in that we're able to build through our customers about 45% of our overall expense. So their consumption is recovered through those billings. We also have initiatives that Patrick's team has worked on for energy conservation related to electric as well as water and wastewater in our properties. On the payroll front, we have an employee base that is largely hourly workers, about 4,000 employees across the country. And what we've seen over the last several years, it started pre-pandemic, was competition for those employees in the western part of the country. And so at that time, we increased our wages to retain and attract employees, attract them away from quick-service restaurants, retailers and so forth. And over time, those increases spread across the organization as a matter of being equitable, of course. Current pressures, I characterize them. But in terms of overall, there's not a catch-up that we see as a risk in terms of those expenses. There is also an intangible element associated with employment in our properties. And that is really kind of the quality of the experience for the employees. Many of our employees do live on site. And the ability to be outdoors and have a nice work experience relative to maybe working in some of those alternative employers, I mentioned, are attractive to those employees.

Have you seen any change? Obviously, labor availability has been a big topic really across sectors. Have you seen a change on employee turnover?

We've seen turnover generally trending down slightly as we come through the pandemic. Across that 4,000 employee base, I think we had roughly 100 open positions in the fourth quarter. So really, we're able to attract and fill those positions as they come available.

We do have a question on live Q&A, Paul, I think, on something you said. I just want to clarify. So 25% of leases are indexed to CPI. Is that on a yearly basis? Or how does the CPI play out?

They are indexed to CPI. We are able to increase rents annually. So depending on the anniversary date of those leases, it's an annual adjustment.

And the CPI is sometimes local CPI or U.S. CPI, it depends on the lease. So like in California, we've been advantaged to have the local CPI over this last few years where we have a higher CPI.

And are those typically Jan 1? Or will they reset throughout the year?

They're typically Jan 1.

Maybe shifting to the RV side. The big question we keep being asked is related to prices. I know it's been a topic both as gas prices have moved up but also as gas prices were lower. So when you parse through the data in the portfolio, how impactful will that be on RV demand?

You're the first person that's asked this question. We have been asked this question a lot, and I really appreciate taking the question because I think it's important to understand how gas prices impact ELS. So if you consider 2008, gas prices were about $4, similar to where they are right now. We didn't have as large of an RV portfolio as we do now. But at that time, we looked at it and we said, okay, gas prices are going up, what's going to be happening? And then we started to collect data, gas prices, and we also looked at what was happening in weather and the weather patterns. And as we saw, what was happening in that summer of 2008, if it rained, it was a tough weekend on a transient basis. But the price of the gas really didn't seem to make a big impact. You also saw gas prices increasing in 2012, similar numbers to now, and now we're seeing $4-plus gas prices. What we've done in our portfolio is we've really built our portfolio around an annual seasonal customer base with not a heavy reliance on the transient base. So that's important to remember. But then it's also even when you break down the transient base, which is approximately 7% of our overall, our overall revenue, when you look at that, the customer is only traveling about 90 miles one way. So 90 miles one way, 90 miles back. With gas prices changing, a $2 change in the gas prices -- an average RV Class A, I think, gets about 10 miles per gallon -- you're really talking about a $35 to $40 difference in pricing. And while that's not insignificant, it's a number that if the RV is in the driveway, the kids have all their stuff in it, the food is ready to go, you're going. You're not, not going because of that. So I think that's something. And we have been asked that in, I would say, probably every meeting during this conference. And I think it's important to note how kind of small of an impact it is for the RV or just that transient piece of the business. We do not sell RVs. But on the RV sales side, I think it starts to have a little bit of an impact when you go and you go to an RV dealer, maybe you and your significant other, maybe both of you, aren't interested in buying an RV one more so than the other. When you get to the point where someone says, "How much does it cost to fill this RV," that number is now $400 when it was $200 a few weeks ago. So that could give somebody pause as to whether or not they would want to continue to load that up and fill up their RV. But again, that's not an area that is a big issue for us or a focus for us because of the large installed base that already exists.

You mentioned looking at the data of weather and gas, how correlated is RV demand to RV sales?

In the RV industry, there's 11 million installed base and there's 1 million RV sites. So right at the outset, before you even talk about bringing in the new sales, it's a great formula. You have a lot of people looking for sites, looking for good sites, before you start tapping into the additional sales, a 500,000 sales. So it's a very small piece of our overall business. And again, we only have about 14,000 sites that are transient. Our large portfolio gets shrunk down pretty quickly when you talk about just the ones that are in play.

You mentioned the 90-mile average distance. How impactful are cross-country RV-ers to the portfolio?

There aren't a lot of cross-countries. There are certainly, what they're termed, full-timers is what you see. You see people living in their RV full time and they're going from coast to coast. And I think what happens in these times is that they're generally indifferent between being in Florida, Texas, Arizona as long as the weather is right. And they may decide, "You know what, maybe staying in Tampa an extra couple of months isn't so bad," because the other alternative is to drive across the country. And then it starts to be more impactful, the price of gas. But I would say the full-timers are very industrious and so they know exactly the right way to kind of move about the country for them to be efficient. And it is a smaller group, but they have amazing flexibility in their schedule because many work out of their RV and so they have that flexibility.

So when you blend this all together, how are transient bookings looking?

Transient bookings are, I'll say, strong with the caveat that we're still early in terms of the summer season. So generally speaking, 60 to 90 days in advance of the kickoff to the summer season, which is Memorial Day, that's the main indicator. But what we've seen through the winter season is really continued very strong demand and nothing that sets us up to think that will change.

You obviously can't control the weather, but you can control the cancellation policies. How do you think about the ability to kind of derisk any adverse weather, particularly related to 3-day weekends, and kind of policies around that?

Yes. We adjusted our cancellation policy during COVID. And there is still some flexibility inside of the policies. I think that we've asked a lot of our customers. We've asked for them to change their ways. And in turn, we've changed ours in some ways. And I think there may be the right time to get a little bit more strict on those policies but I think as the summer approaches.

Is there basically kind of a policy across the industry?

Not really. It's not quite like that. It's more regional-based. So you might say, well, this is what so and so is doing down the street more so. But your point to a 3-day weekend, and it seems like many weekends are 3-day weekends now, that's important for us, especially the holiday weekends and making certain that we're able to be at full capacity. Generally, on those weekends, we will have a waiting list, so we're able to fill that in.

That was going to be my next question. So you have benefited from people extending stays, right? So Sundays, Thursdays, kind of working from home working normally, how sticky is that? And how do you think about kind of providing amenities that would allow people to work from your properties for an extra day or 2?

Right. So I think years ago, 10 years ago, we had this initiative that we wanted to really increase the WiFi capabilities at our properties. At the time, we were marketing campaigns that said, "Get disconnected. Stay away. Get off the Internet," all that. But the reality was no one wanted to get off the Internet. Nobody wanted to not have their kids be able to watch their videos and Netflix, et cetera. So we were beefing that up. And the result of that is, as Zoom came to the forefront, we were ready and prepared for it. There's a couple of really remote locations that we have that are difficult to get any service, but people really like that. That's an extra special treat. You can't use your phone when you're there, and that's something that's appreciated. I think that what we've seen, I think we said on the call, that we saw an increase on Tuesdays and Wednesdays in the second and third quarter. And now it's rotating to more of that Friday, Monday because I'm seeing that the flexibility that people have is really around that weekend. Wednesday isn't so flexible anymore. Wednesday seems like day that, if you're in the office, you're in the office on Wednesdays. But I feel that it's a permanent shift at least for a large-enough population that it will be impactful for us to be able to continue that, being able to see people come in on those Fridays and Mondays. I think that shift happened, it took a long time. Certainly, the European business week has been not as stringent as ours, and it seems like ours kind of overnight, during the pandemic, kind of became closer to that. So I think we will be the beneficiaries of that. We'll also be the beneficiaries of that flexibility that's kind of in one schedule. If you think about January and February in the Northeast and the Midwest, maybe just speaking for myself, nobody wants to be up there. They want to be down here in Florida. And that flexibility that can be afforded, if you say, "I'm going to take a month and I'm going to work down in Florida," it's much more acceptable than it was 2 years ago. You'll kind of be looked at like, "What are you talking about? You're going to be here for the Monday morning meeting at 8 a.m." That changed. And I think that's a permanent shift, which will help on the MH side of the business.

But you're not seeing anything from forward bookings, as kind of return to the office happens, that that's different than what you saw last year?

No, we're not seeing that. No.

You guys have made a big digital marketing push trying to reach, I guess, consumers, both existing and new ones. How are you thinking about kind of marketing and drawing kind of even a bigger crowd?

We've had online reservations for 20-some years, so a long time focused on those online initiatives and making certain that we can connect with our customer. We use social media, Facebook, Instagram, Pinterest, TikTok, all those avenues, which end up really just being -- a picture is worth a thousand words, and now a video or small, a little snippet, a 15-second video with a song is incredibly impactful. And you look at it where people are sharing that content and excited about sharing that content and encouraging their friends to book. Our marketing department does an incredible job of focusing in on when is the best time to meet or to talk to our guests, when do they respond the best to an e-mail that's served up to them. We do something where we look at the weather and where the weather is difficult, up in Minnesota or Chicago. The minute that snow starts, those e-mails start coming out, "It's not snowing down here." So it's impactful. And people open those emails. We have a really high open rate because they find them informative and a little bit funny or cheeky.

Home sales really, over the last few years, have been very strong. And I recognize it's a different kind of financing mechanism, and a lot of them are all cash. But just given rising mortgage rates for kind of for-sale housing, how will that impact manufactured housing sales?

Yes. Thanks, Nick. For our core customer, as you pointed out, they overwhelmingly purchase their homes for cash. It's the empty nesters, retirees. They're moving from the north down to the south to set up their home base for retirement. So confidence in the value of their home up north, whether or not they intend to sell it soon or are going through the sale process, that confidence is a support for them to make that decision and purchase a home in one of our communities. I wouldn't anticipate that a stability or a slight slowdown in the single-family housing market would have a significant impact on our business. If there's a dislocation, obviously, it would. But the run-up in the pricing has been very supportive. I think a piece that's been particularly important for us is that, in a post-COVID environment or transitioning out of a COVID environment, that control of having your own space, not having to go through common area facilities, hallways, elevators, that's highly valued. And we offer that in an environment where you also have professional management lifestyle activities, and it's a unique offering at our price points. And I think it will continue to be stable at least based on what we can see today.

As you think about the need for kind of affordable housing nationally, are you expecting any changes to channel lending?

We've been expecting changes for quite a while, and they haven't yet come. I think that, again, for our business, it's not a significant component. I think that the channel question really hinges on how effectively a secondary market can be established. I think that Fannie and Freddie spent a good deal of the time at the direction of the regulators trying to explore that, unfortunately, not to very much success because the lenders to the space today have enjoyed tremendous returns, very low defaults and really have been not very interested in sharing that information to then potentially build the secondary market that has been sought. So I think structurally, there's a challenge that needs to be overcome, and I'm not quite sure how they break through that.

If there were changes eventually, would that impact the business at all? Obviously, we talked about most of yours are cash buyers, but how would you think the ripple effect would be?

I think across the industry, certainly, it would have impact. There are lenders today, and the rates are quite attractive. You can finance a home today as compared to, say, 5 years ago when pricing was a high single-digit interest rate. You can finance a home today at kind of a mid-single digit. So it's 300, 400 basis points inside what it once was. And the overall term extended a bit, call it, a 20-year loan as compared to what it was, 15. So there is availability today. I think the question is for the lesser credit quality customer maybe who's challenged and in need of that affordable housing, how do you position them so that they could qualify for the loans.

You were active last year. I think you did over $800 million of external growth. What does the pipeline look like today? What's the opportunity to either meet or exceed that again this year?

Yes. So in 2021, we did, as you said, $800 million of acquisitions. And really, we focused on all 3: MH, RV and marina. And I think we had some unique opportunities, a couple of joint ventures. One joint venture we got out of that we've been in for 20 years, and so we were pleased to be able to do that. And then another joint venture that we entered with RVC Outdoor, which we were really happy to be able to do that, worked with Andy Cates who is a great operator and builder of RV parks across the country. And so we were excited to do that. And then we talked on the calls about a deal that we did in Myrtle Beach, a $100 million deal. Those deals that we did, and I point those out because those were deals that were kind of unique. They weren't kind of things that were given to us in a broker package. There's a lot of broker packages that are highly marketed deals. These were deals that we saw that there was an advantage for us to own the assets. And so we were happy to be able to do that and close out the year in that way. And as we look forward to 2022, we see similar opportunities. Timing is never certain. I think I've said on a call once that a lot of our acquisitions happen in the fourth quarter, and that's kind of what happens, what we see happening. I don't have a rhyme or reason why it happens. A lot of sellers seem to get a little bit more motivated at the end of the year.

How are you thinking about the opportunity to grow the marina portfolio, particularly kind of large acquisition opportunities out there?

Sure. So we got into the marina space in 2017 with a joint venture with Suntex, and we had a baby JV with them with the Loggerhead portfolio. And we have the right to get into the parent, so we have ability to buy into the whole of Suntex. We looked at it at the time. We like our partnership. But what we really like was the Loggerhead portfolio. And we realized, at the time, what we really liked was the stability that, that portfolio offered. We liked the fact that it was long-term customer base, fee simple assets, low ancillary. It started to look and feel an awful lot like what we know and love in the RV and MH space. So we were really excited, and we said, "Hey, look, we'd like this. Are you interested if we could buy you out of this JV?" They were pleased to do that, and they moved on. Then at the beginning of last year, we looked at another portfolio that had all the hallmarks of the Loggerhead portfolio, and we were able to close on that portfolio. And I think to the extent that we find other portfolios of that same type of quality, we would continue to buy.

How do you think about quality within marinas?

Well, I think it's much like what you see on the RV side. The MH side, you can pretty well establish. If you've got the right location, you have the right customer base, you're in a good place. On the RV side, it really runs from a highly transient RV with a lot of amenities, a lot of low-margin business with a lot of team members that are out there that need to work to be successful, for the property to be successful. To the other end of an RV park is more like what we have, which is highly annualized, customers around for 10-plus years. And so we've often talked about those 2 types of differences within the RV platform. And those same differences exist on the marina side. So on the Marina side, you can have one end of it, which is a ground-leased asset on a highly transient, high ancillary basis with high boat repair, food and beverage and those types of things. And then on the other end of the spectrum is a fee simple asset with annual boat slips, payments and a customer base that's been around a long time and high-quality boats. And there's a lot of due diligence in between those 2. And we will look to be at the right end of that, on the spectrum of the annual side.

You've talked in the past about kind of the number of MH communities nationally, the number of RV. How large of an opportunity is there in that second bucket of desirable marinas for ELS?

So there's about 4,000 marinas across the country. We would consider 400 of them to be investment grade. But then when you peel back some of the things that I just talked about, it probably cuts that number to 100, 125. So it's not an overall large number the way it is on the MH and RV side.

Is there a benefit to more scale there? Or are you just comfortable as is if those opportunities don't exist?

I think if there's opportunities, I certainly think if there's something that looks very similar to what we have, we would be very interested in doing that. But the way I think it plays out is that we look an awful lot the way we look right now in terms of percentages, maybe we grow a little bit in one category or another. But from a percentage basis, I think we grow in all 3 different verticals.

What's the biggest growth opportunity that you believe the market is not giving you credit for?

I think the market has given us credit and has done a good job of appreciating the value of ELS. We've seen an adjustment to cap rates over time, the significant adjustment, as we went out and we talked about the different data points over the years. So I think that's been really good. I think it's important to understand that the future of ELS is really bright and that the demand for our properties, it was really big and really large 2 years ago. And what we're seeing now is significantly more than we would have ever thought just from the demand, from people wanting to get out of the Midwest and the Northeast in an affordable way. So we're located where people are spending an increasingly more amount of time, and I think that's important. And I think some of the quality issues that I highlighted, and Nick, you highlighted the fact that we don't have a lot of people who have loans on their homes, so they own their homes outright. So it just goes to the other piece, the quality of the cash flow on our MH, RV from the standpoint of the RVs that people own and the value of the boats that people own in our marinas.

Rapid fire, what will same-store NOI growth be for the manufactured housing sector overall next year in 2023?

5-plus percent.

Where will the 10-year U.S. treasury yield be a year from now, 2.25%? Then finally, will your property sector have more or fewer public companies a year from now?

The exact same.

Great. Thank you very much, Marguerite.

All right. Thank you. Thank you all very much for joining.