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

Citi's 2023 Global Property CEO Conference. I'm Eric Wolfe with Citi Research. And we are pleased to have us with us today. Equity Lifestyle Properties and Marguerite Nader, CEO. 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. And as a reminder, the questions I will ask today during the session will not reflect or imply my opinions or those of Citi Research, and are being asked for informational purposes only. For those in the room or on the webcast, you can sign on liveqa.com and enter code Citi2023 to submit any questions if you do not want to raise your hand. Marguerite Nader, we will turn it over to you to introduce your company and members of the management that are with you today and provide any opening remarks. Thanks.

Thank you, Eric. Welcome back to Citigroup. Thanks for having us here to present. With me here today is Paul Seavey, our Chief Financial Officer; and Patrick Waite, our Chief Operating Officer. Before I highlight the reasons to own ELS, I'd like to acknowledge an anniversary that we just had last week. We celebrated our 30-year anniversary as a public company. In this time, we have gone from 40 properties to 450 properties, from 220 employees to 4,200 employees. Our enterprise value has gone from $300 million to $16 billion. And importantly, we have delivered a 17% annualized total shareholder return over the last 30 years. I believe the reason we've been so successful over the last 30 years is the high quality of our cash flow, customers, locations and team members. We've assembled an unparalleled group of assets in great locations over the last 30 years.

So we've been starting out each session. This is the first one. So you're the person want to get it. What are the top 3 reasons to buy your stock today?

Sure. I think I would reference a few pages of our investor presentations, which we -- which is online right now. So the first one is our locations, which is on Page 8 of our investor presentation. We're in the right locations. We're located where active adults want to go. Long ago, we set a strategy on the vacation destination markets and that strategy has paid off. We are in states with outsized growth opportunities. The next reason, it's on Page 14 of our investor presentation is that -- is demographics. We appeal to the right demographics. The population of people aged 55 or older in the U.S. is expected to grow 17% over the next 15 years. With 10,000 baby boomers turning 65 each day, there's a lot of room to increase our customer base. The third reason is on Page 17 of our investor presentation, supply constraints. There have been very few communities, manufactured home communities and RV communities built over the last 20 years. We have increased demand without the overhang of supply coming on to the market, and that we will continue to benefit from that at ELS. And lastly, Page 12 of our investor presentation, the inputs are the locations and the demographics, but the results are what's there important. And courtesy of Citi for the last 25 years, they've been tracking our NOI and the REIT average NOI. Our average NOI has grown 4.3% annually versus a 3% increase for the REIT average. We performed very well in all economic cycles in a pandemic, and you have never had a quarter with negative NOI growth.

Great. When you put out an update, it looks like on February 21, it looks like your core revenue growth, 6.4% is running a little bit ahead of the top end of your guidance. But at the same time, your MH is in line. And it looks like the marina and RV is a little bit on the low end. So maybe just help us understand sort of what's driving the revenue growth to the top end so far, what's making up for sort of the RV and marina, and then how you would expect to sort of end the rest of the quarter?

Sure. I think the short answer on that, Eric, is we do have variability month-to-month. And so January results, which we reported in the investor presentation, we're in line with our expectations for January. We expect the quarter to be in line with our guidance. There's just some slight variability from month-to-month.

And then maybe thinking a little bit longer term. Your tenants are under the same sort of inflationary pressures as a lot of the other people out there right now. But on top of that, the homes that they're purchasing in your communities costs more. They're probably paying higher property taxes, just like everyone else, even if it's just on the home itself, not on the land. So maybe help us think about how sustainable the type of revenue and rate growth that you're seeing is today on the MH side for the next couple of years?

Sure. Our MH growth really -- we focus on our market surveys. And every year in about, I think, October, is when we release our guidance for the following year. And the reason we're able to do that is because we've built up all of our market surveys, we've determined what our rent increase is going to be based on what's happening in and around the marketplace. So we look at what's happening in the single-family rental marketplace. We look at what's happening in other manufactured home communities, in multifamily, and we have an appreciation for what the market will bear. We also look at what's happening with home sales in our community. So we've had an increase in the price of homes over the past few years, and we've also had an increase in our rental rate. The other thing that we look at is what's happening with social security. For the last 2 years, our residents have gotten a healthy bump in social security increases, which has been beneficial when we have discussions about what the rent increase will be next year.

And I think you said on the call that you have a mark-to-market of about 11% on the MH portfolio. But this year, you're planning to put through around 6.5% increases on average. Maybe just help people understand sort of why if you have 11% in the mark-to-market, you're putting through 6.5%. Is it just limited to CPI, other homeownership agreements? Just help us understand when you're going to be able to realize that full mark-to-market.

Yes, sure. The makeup of our MH leases across the portfolio, half of those leases are market, another quarter are CPI, and another quarter are long-term agreements. Those long-term agreements are really concentrated in Florida. They tend to be 2 to 3 years in length. And they're negotiated on a forward basis, 1, 2 or 3 years. Given the trend that we've seen in inflation, some of those rates that are increasing in the current period are in that 4% range. So that's moderating the blended rate increase. And what we're seeing on market in CPI are generally both trading roughly in line with the trends that we've seen in CPI.

I mean for those that you have -- you can put through full market increases, I mean, to what extent do you sort of work with the residents, I mean if you could lift things 10%, would you? Or is it as a practical matter, you have a limitation because you simply just don't want to put those types of increases on to your residents?

I mean we have long-term relationships with our resident base. We spend a lot of time talking with them about what they want their community to be, between amenities they would like to be enhanced or added, add pickleball courts. That's a large discussion around rent increased time. And we will always air on the side of working with our residents at a reasonable rate increase rather than pushing through something that we feel is too large and not warranted.

And you mentioned on the call just how affordable your product is relative to other property types, relative to other communities around you. Could you just give us a sense for how big that affordability gap is today? Obviously, we've seen, for instance, in Florida, apartments, rents go up north of 40%, 50% in some locations. Just help us think through like based on affordability, how affordable your product is relative to history?

Sure. So our -- I think our home sale price in the last year was about $100,000 on average. That compares to homes that are trading in our marketplace of about $300,000. There is site rent, of course, that goes on top of that and our average site rent is about $750. So what we have to offer is a very affordable housing option. The majority of our residents come down as second homeowners. They come down to Florida, Arizona, California. They think they're going to stay down in Florida for the season and then go back up north. And that happens for 5 or 6 years until the residents realize, well I think I want to stay down in Florida full time and then they sell their home up north. So it's a little bit of a process that happens. But I think that affordability factor is what's driving them. They, of course, want to get to the sunshine, want to get away from the cold weather, we see an increase in activity as the weather gets bad up north as people want to escape the winters and come down to Florida and Arizona.

I think occupancy in your portfolio was sort of flattish for the first time in a while. Do you think that we've reached sort of the structurally high point of occupancy and now it's really just all about rate growth? Or do you think there's further gains that you could see there on the MH side?

Yes. I think on the MH side, there is still room -- certainly room for growth in 2 ways: by filling our existing communities; and then our expansions. It's interesting -- when you think about -- and Eric, you were at the property yesterday. So you see once a home gets put on a site, it's going to stay there for a very, very long time. And what happens is a change in homeownership. So the resident may change out, but that occupancy is very, very stable. And so what I think you'll see is us continuing to be able to build on our occupancy and then fill our expansions, which will increase occupancy as well.

And then we received the question here is just how large is the potential to grow the marina portfolio?

So the marina portfolio, when you think about the institutional class properties, are about 500 that we would consider institutional class. We own 25 of those. So there is opportunity inside of the space. We have said on multiple occasions that what we like in the marina space is we like a high level of annualized income. We like the assets to be delivered, fee simple versus a ground lease. And a low, low food and beverage and ancillary type of revenue. So that further kind of reduces the amount of the pipeline that we're interested in.

And you've been a bit less aggressive, I guess, versus your peer, Sun, in terms of acquisitions, which is something that I think analysts have harped on from time-to-time. I mean, as you look back over the last sort of 5 years or so, I mean are there deals that you wish that you would have done that now you said, "Wow, I wish I could have gotten that," or do you feel like you made all the right decisions along the way?

Yes, I mean -- I think, the good thing about our business is that everyone knows everyone and everyone knows every deal. So it's not like deals happen that we're not aware of. So we're certainly participating and actively making a decision as to whether or not to buy or sell. I think that as we look at how we've done over the last 30 years, as I mentioned, in our returns to shareholders, I think it proves our disciplined approach towards investing our capital. And I think what we've done, you've seen us do over the last few years is got into the marina space in a way that made sense for us and looked very similar to our fantastic MH and RV business, highly annualized business, and formed some very interesting JVs and spend some time on expansion activity, which we think are all value-add activities.

As you start to look at opportunities going forward, are you starting to see them present themselves? Is pricing changing at all, or potential sellers coming to you? Or is it more a wait and hold at this point?

Yes. So the transaction market is interesting. Over the last 6 months, there has been not a lot of data points out there. I'd say owners who don't know yet that their sellers had expressed an interest maybe last year in determining what they wanted to do and what they're kind of thinking about for their future. And then with the interest rate movements, there may have been kind of a change in the pricing. And that just puts owners or sellers on the sidelines. They've really, I think, manufactured home community owners and RV park owners are typically very conservative with their capital. They, in many instances, don't have loans on the properties. So there isn't a financing trigger that they're waiting for that's in front of them. They're happy to operate at another year. They like the cash flow coming from these properties. So there's really no, no impetus right now for them to have to sell, and they're happy to hold it for another year. So I haven't seen a lot of movements. There's certainly no distressed selling going on. I think they've, for the most part, the owners have built these properties over the last 40 years, and they're happy to hold them for a couple more years.

How much of your underwriting standards changed as you think about acquisition opportunities, just given the current financing market?

Yes. I think certainly, it's something we consider. It's something we've always considered. I think as we look at our acquisition model and look at the inputs for both revenue and what -- how we can increase revenue and then, of course, expense pressures and what are the expense pressures we're seeing on various line items, we're dialing that in. And then what is our cost of debt as we consider an acquisition.

I guess, as you think about acquisitions, how much of an uplift from an NOI perspective or cash flow perspective do you get when you acquire from a private owner? I know there's family work in there. There's probably a lot of expense opportunities, but how much of an uplift do you actually see?

Yes. I think there's a few things that happen when we take over. We'll look at how the rent increases were built up. So we'll have an understanding, there's not typically the kind of formal market surveys that we do in our organization with a one-off asset. But we'll look at the market, understand what the true market increase should be or what the true market rent should be. And the issue with that, we want to make certain that we're not going in and putting forth a really large rent increase. Instead, we work with the residents. We say this is what we're thinking. These are the capital things that we think we could fix and things that we should be working on at the property and here's what we're thinking about for a rent increase. So that's the first input. Then we look to expenses and we look to how does this operate, how does this property operate relative to other properties in the immediate area? We see if there's synergies that are there where we can maybe share personnel, that's always very helpful. And then -- and certainly, as you point out, Nick, there are oftentimes a lot of family members that work at the property. And then maybe some of that is rationalized a little bit. So we see a tick up in NOI from kind of a going-in yield probably 150, 200 basis points.

And it sounds like you're mainly expecting more one-off type acquisitions. But I guess, how many portfolios are left out there on any side of the business that would sort of meet your high criteria for quality? I'm just trying to think through what the total consolidation opportunity could be over time.

Sure. So like I said at the beginning, we started out as a public company with 40 properties. We now have 450, but it took us 30 years to get there. So that's a long time. Now when you think about the next 30 years on the manufactured housing side, there are about 50,000 manufactured home communities across the country. 3,000 of those, we would consider investment grade, and we own roughly 200 some of those. So -- and there's certainly other larger players who own a portion of that, but there's still a lot of opportunity. The acquisition set and the target list that we've had for many years is still the same because, for the most part, a lot of assets have been traded. On the RV side, there's about 16,000 RV parks across the country. 8,000 are public campgrounds owned by states and federal land, and 8,000 are owned by individuals. There's about 1,200 of those that are -- would be interesting to ELS, and we own about 200 of those. So there's a lot of opportunity in that space as well. So I think there's a lot of opportunity for further consolidation. Some of that is one-off. There are still certainly portfolios that are out there that are of interest, and it's a matter of when they're situated to sell.

And there's none being marketed today?

Excuse me?

There's none being marketed today. There's no portfolios in the market.

Nothing that we're interested in.

And then in terms of development, how many expansion and sort of greenfield development sites do you have and are sort of fully entitled today and ready to go? And how should we think about the sort of cadence of when you move forward with those?

If you look at our history over the last 3 to 5 years, we built that pipeline from, call it, 300 to 500 sites on an annual basis coming online being completed the last couple of years. I think 3 years, we've been over 1,000 sites. Given what we see in the pipeline, I expect that the 1,000 sites a mix of MH and RV, leaning towards RV, will continue to be -- the sites we'll be able to deliver for the next several years. And we have the capacity. We have projects in process all the way from shovel on the ground on the 1,000 sites that will be delivered this year and then projects moving into the next couple of years as well.

And maybe just frame in terms of like annual spend, IRR hurdles that you hope to achieve?

Yes. So let's cover one of the slides of the investor presentation. Our stabilized yields are in the range of 8% to 10%, so call it, high single digits in today's world. And that spend has been in the neighborhood of $70 million, $80 million annually.

And Eric, one of the things that we've been doing is looking at land and buying land that's adjacent to our properties that is either, in some cases, farmland or in some cases, there may be just 1 or 2 homes on the land. We've bought about 3,000 acres of land adjacent to our communities since 2016. So that's a strategy that has worked well for us and in the process of entitling those assets. What we try to do is get the entitlements before we close so that we're not kind of land banking properties that don't have the proper entitlements. And most of the times, we're successful in that, sometimes we have to take possession and then get the entitlements after.

Are you starting to see municipalities be more open to manufactured housing as an affordable housing solution?

Yes. I would love to say yes, but we're not seeing it. We certainly hear things at the federal level about affordable housing and about what it would take to really increase the amount of affordable housing in the United States. And then it comes down to the city level, to the city council level where you're sitting in front of 6 or 7 people who are just saying, no, we don't want -- we don't want that -- your community to expand or for you to build a new community. I think our team does a very good job of showing all of the -- showing what the property is going to look like, indicating the -- what we can bring to the community. And sometimes it's just been a no. And I think that the issue there is that there's no incentive for them. At the city level, there's no incentive. Nothing is coming down from the federal level saying if you don't do this, then this will happen. So it's an option in some cases, some times they just say that they're not interested in, they want to have it as an open field instead.

We have 2 live QA questions, which are pretty related, so I'm going to ask them both. How are you dealing with the large increase in insurance costs, especially in your coastal areas? And then the other question, which is related is that there's some market concerns around you not being aggressive enough around expense growth guide, especially after SUI's insurance guidance. Can you just talk about sort of what's in your guide and whether you feel like you've been appropriately conservative? And I think just maybe as related to that, in your presentation, you did have, I think, 8.8% expense growth thus far, which I think is a little bit above what you're expecting. So.

Right. And as I said, in the month of January, that expense growth is in line with what we expected for the month, the quarter from everything that we see will be in line with our expectations. On the insurance renewal, just a reminder that, that renewal date is April 1. And as we talked about on the call, we're in the midst of negotiations. So there's not a lot that we're planning to share as we're working through that negotiation right now. I will say that our history -- we've talked about this quite a bit in the last 5 years. We've seen a 20% average increase in our property insurance renewal. Going into our planning process for the budget, we understood that the market was going to be harder than we had seen in the past. So we certainly factored that into our assumptions -- and we do have an expectation for an increase. But we still have a little bit less than a month ago before we finalize the renewal, and we have those -- have the premium finalized.

And then maybe I think you'd be on this year, I mean, do you think just the reality of this current inflationary environment is that we should just expect sort of structurally higher expenses? Or as you look at it, do you think there are certain things that should normalize going into next year?

Yes. I think as it relates to the insurance, the other thing to keep in mind is there's a lot that goes into the structure of a program, right? And that drives the premium. If you look at our expense base, about 1/3 of our expenses are utilities and insurance. And those are the areas that we've seen, the more significant increase over the past year and quite a bit of volatility, specifically in the utilities. I think that -- the -- when you look at the CPI information that's available, last October I think was the peak of the electric component inside CPI that was up about 19%. In February, when the January CPI information was released, I think that had dropped to just below 13%. So there's still an elevated increase that we're seeing across electric, which is 40% of our utilities. To the extent that those expenses moderate over time, then 1/3 of our expense base is potentially coming back in line with CPI, and we would anticipate more moderate expense growth going forward.

And we added additional disclosure over the last couple of quarters to let our investors appreciate where that expense increase is coming from. And I think that's been well received and appreciated as to the drivers of the expenses.

And I think you said there was some potential to get a little bit more reimbursement on the utility side, sort of how that process work and sort of where do you think it could go over time?

Yes. I mean I think there's some. I don't think it's a significant amount of incremental recovery. We have had a long-term strategy of, we call it, unbundling. So taking the rent, those utility components that are embedded in rent over time and charging those customers directly for those costs, that involves potentially some investment in meters at the individual sites and so forth, which we've done over the years. So there is still some opportunity. I think the largest challenge in increasing that recovery rate is associated with the transient RV business as we've talked about quite a bit. There's not a convention in the industry similar to checking into a hotel if you left a hotel and saw an electric charge on your hotel bill, it would be a bit of a surprise to you. It's very similar in the RV industry.

Got it. And you partly addressed this on the call, but I just want to make sure it's clear. For the non-core portfolio, it looks like you're assuming that you lose about $20 million or $0.10 a share. I mean, income from the 6 properties that were impacted by Hurricane Ian. I guess 2 questions on that. Is that something that should fully come back into 2024, we should expect sort of the full earnings power of those properties? And then second, do you -- what's built in your guidance in terms of how much you should get in terms of business interruption proceeds, if any?

Well just to clarify a little bit, I think the total guidance for the non-core portfolio is around $20 million. We had a range. A little bit less than half of that is from those 6 properties. And that represents the full -- a combination of operations of those properties and business interruption.

Okay. So what's the difference between that and the $40 million? It's just other -- last year, I think you had $40 million in sort of none. So is that just -- communities are going to the same-store pool?

Exactly. Exactly.

And could you just talk about your Thousand Trails business, something that often sort of get, I think, a little bit sort of overlooked. It's a little bit less clear to investors, sort of where you see the sort of long-term growth in that business, how many customers you service, what your top priorities are in terms of growing it?

Sure. So we bought the Thousand Trails land in 2004. We were thrilled to be able to buy the portfolio. It was 75 properties at the time. It wasn't until 2008 that we started operating it. And since 2008, we've been able to increase the membership base, the dues base and the upgrades, which is a member comes in -- they're interested in staying with us for a longer period of time and having additional benefits, and so they upgrade their membership. What you've seen, I think, is that the quality of that dues base has increased significantly over time. The properties, it's interesting. The properties used to be very rural for the most part, and it turns out that the cities have gone out to the properties in many instances. So they're not quite as rural, but they still have the feeling of getting away and being kind of one with nature, and that's really what the focus has been for our customer base. That's what they want to do. They want to get out with their family and have a good time camping. What we see as our customers increase their usage of the property over time. So in the beginning, they may stay with us for a couple of weekends a year or -- and after that, we see them increase their activity levels to where they may convert from a membership, and then they want to stay in one particular property for an annualized basis. So you -- so you get both a member and an annual revenue stream. So it's a very sticky cash flow. We have members, 25% of our members have been with us for more than 20 years. So these are generational-type memberships where people just want to pass it on to their families and the families then continue to pay the dues. The -- if you look at the pictures of the Thousand Trails portfolio, they're just absolutely beautiful properties. And it's really nature that does most of the work because they're really next to tree, next to streams, rivers, mountains and that type of thing.

And before we get to the rapid fire, one question we've been asking and we'll ask in each session is just what's your top ESG priority this year?

Sure. For us, it's our environmental strategy, that covers a few components of our business. Our primary focus is our operating platform. Over the last 3 years, we've installed more than 30,000 smart water meters across our portfolio to reduce water consumption. Smart water meter provides real-time information to a central server in our community office, so we're able to respond to spikes in usage for a common area. We can also notify residents. We recently had a resident left his garden hose on, that hit a spike in our office. We reached out to them. We didn't know it was a garden hose. He turned off his garden hose, saved some water and saved some money on his monthly water bill. Across our common areas. We've installed LED. So LED retrofits for our common areas. By the end of 2023, we'll have completed LED retrofit some more than 400 of our properties. And associated investment in solar. Since 2019, we've invested and entered into contracts for 13 megawatts of solar production on our portfolio. For perspective, that's roughly the usage of 10,000 single-family homes on an annual basis. We also engage with our customers. Recycling is a high-priority, composting where we have the opportunity. As many of you I'm sure are aware, meeting the standards of our recycling program are very important to what actually makes its way to being recycled, so engaging in that type of knowledge base with our customers and our residents is very important. And last, I'd point out that we have a very unique portfolio. We have 10,000 forested acres. Marguerite was just touching on this. Almost 5,000 acres of wetlands. Collectively, those areas sequester 9,000 metric tons of CO2 on an annual basis. So we want to nurture those natural areas. We invest in augmenting those natural areas where we have the opportunity. Just as a quick example here in Florida, over on the greater Tampa market. We recently worked with local organizations on a micro forest. So 1.5 acres that was open land, there was also regularly landscapes, lawnmowers, leaf blowers, et cetera. It Is now a high-density native species, 4,000 trees and plants that were planted by our team members and other volunteers of the community.

Rapid fire. Very rapid, I guess. What will same-store NOI growth be for the manufactured housing sector overall next year in 2024?

5%.

What is the best real estate decision today, buy, sell, build, redevelop or hold?

For us, it's expansion and development.

Then finally, will your property sector have more or fewer the same number of public companies a year from now?

Every time we say we can't answer this question. Same. Same.

Awesome. Thank you so much. Appreciate it.

Thank you all very much.