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

Good afternoon, everyone. Welcome to Bank of America's Global Real Estate Conference. I'm Josh Dennerlein. I cover the residential REITs for those of you who don't know me. We're pleased to have with us ELS's CEO, Marguerite Nader; CFO, Paul Seavey; and Patrick Waite, EVP and COO. With that, I'll turn it over to Marguerite for opening remarks, and then we can do Q&A. And as always, I encourage audience questions. With that, Marguerite?

Wonderful. Thanks, Josh, and thanks for allowing us to present today. So a couple of things I wanted to focus on isn't included in our investor presentation on Page 2 of our deck. The first thing is really just focused in on the -- our annual revenue sources, and that 90% of our revenue comes from annual sources. The next thing just to focus in on our annualized total return since IPO has been 15%, and our 10-year total return has been 303%. And I think as most of you know, last year, we were added to the S&P 400. The next thing on Page 3 touch on just ELS at a glance for those of you who are not familiar with us. We've really focused on translating NOI growth into FFO growth, strong FFO growth. So our NOI growth over time has been about 4.4% and translating into 8.6% of FFO growth, and that compares to the REIT industry average of about 4%. Turning to our balance sheet. Looking into the future in 2026, 12% of our debt is coming due through '26 compared to the REIT average of about 27%. Paul is going to highlight for us our performance through Q2, and then Patrick is going to walk through the demographic trends for our sector.

Thanks, Marguerite. The page after the one Marguerite was just highlighting has our highlights. And we've been very focused on talking with investors about our performance year-to-date through June, our normalized FFO per share growth. The chart on that page shows our performance of right around 6% compares favorably to REITs at roughly 4%. And the resi sector, which is just below 2% in that year-to-date period. Internally and with investors, we spend a good amount of time talking about our focus on the NOI that's generated by the core portfolio and how we make sure that, that translates into normalized FFO per share growth. So very pleased to be able to show the chart in the center part of the page, which is consistent with the long-term performance that Marguerite mentioned a minute ago. Core NOI growth of 6% is more than double residential REITs and the REIT sector broadly. And that comes on strong revenue growth and our demonstrated ability to control expenses. I will point out, when we think about revenue, I think one key differentiator for us is the payment patterns of our customers. We have extremely low delinquencies and have historically had that. Before, kind of during the period of the pandemic, and after the pandemic, our delinquencies have been very consistent in the 30 to 40 basis point range. So happy to see that performance continue and broadly very, very pleased with how the portfolio is performing year-to-date.

Thanks, Paul. Patrick is going to walk through demographic trends.

Yes. So on Page 15 of our investor presentation, there's a graph that goes through kind of the demographic trends and the cohorts that are aging into our core customer demographic. We've been talking about the baby boomers since we went public in 1993. We're basically at the back half of that cohort aging into their retirement years. Currently, 10,000 baby boomers are turning 65 every day. The baby boomers are about 70 million in population. That's going to be followed by Gen X at 65 million. And behind Gen X, millennials at 75 million. As each one of those cohorts age into their retirement years, they all age into kind of our core demographic. And if you think about millennials are going to start retiring in about 20 years, and you'll have about a 15-year trend of them working their way through their retiring years. We've got a 30-plus year trend of aging demographics that are going to hit our core customer base. I'd highlight back on Page 9 just kind of the -- what that population cohort aging means with respect to our core portfolio. Florida, California and Arizona represents about 2/3 of our total revenue. Florida, currently on a 5-year look forward on population growth, is favorable to the overall population growth in the U.S. and the 55-plus age cohort population growth in the U.S. by about 300 basis points for each one of those age categories. Arizona and California are both in line with respect to the 55-plus cohort and relatively in line with respect to total population. California is lagging a little bit with respect to total population growth compared to the comp for the U.S. I'd highlight that our locations in California have a favorable population trend relative to the balance of California, favorable by about 75 basis points. And then our housing and our RV products in California comp very favorably within that high-cost market.

Maybe could we go through just like the demographics? I think like -- because I cover senior housing as well, it's very well known there. It's great that you brought it up for how it impacts your portfolio. Just like how can we think like where will it kind of show up more? Will it be more RVs, more MH, marinas? Like where is kind of like this demand kind of really going to push the needle?

I think you're going to see it show up primarily on the MH side. First, you see 70% of our properties are age-restricted communities. So as we continue to fill and repopulate as people leave the communities, we'll be repopulating with that demographic. As you move down into the RV space and the marina space, it is a younger customer. And the RV annual stays with us about 10 years, so they're kind of aging into that demographic. But the MH customer is right squarely inside that demographic.

And then as -- like I know you've been in the business a long time like when different kind of generations or age cohorts kind of start to hit the age that they would come into like MH. Have you kind of had to change your strategy on how you approach like acquiring those customers? Or is there things that might resonate? Like the boomers versus like the silent generation that you've typically had?

We've certainly changed our marketing over time and marketing to the customer base kind of based on the way people view offerings. So it used to be a classified ad. Years ago, it was a classified ad in an Ohio paper. And obviously, that's changed over time to where we have focused our marketing efforts on social media. There's a lot of focus on social media, Facebook, Instagram, where we're posting examples of our lifestyle to encourage people to become a fan and follower. And then after a while, they just keep seeing these great postings and then they go to the website. And then they -- there's communication, and they become a lead, and that lead takes a while to work through the system in terms of when are -- when is that person prepared to make the decision to go from living in the Northeast or living in the Midwest and then deciding that they're going to buy a home in Florida or Arizona. And what we've seen is kind of a two-pronged approach. First, they buy the home and they still have a home in -- up north or in the Midwest or the Northeast. They'll do that for a few years until they kind of think, you know what, I'm going to stay down full time, and I'm going to become a full-timer in the South.

Is there anything that -- I know in the past, we've talked about like different things that have been installed like at the club house or pickleball or stuff like that to kind of cater to like the changing needs. Anything that you guys are doing on the property level that might kind of transition over time?

Yes. Maybe Patrick can touch on a little bit what we're doing now. But in the past, we've built some Internet cafes. That obviously -- that's not in favor anymore. And now it's really a lot of focus on physical fitness and what we can do to encourage people to come to our communities to live a more active lifestyle. So maybe, Patrick, you could touch on a couple of those things.

Yes. I mean I'll start on the fitness front. One thing that we started 4 or 5 years ago was Peloton bikes in our fitness centers. Very well received. You see it in a lot of hotels to most of us who have traveled pretty regularly. And I recognize at least a few faces in the room that I've seen in a Peloton next to me at the fitness center. So yes, that's a component of ensuring that the fitness center, those types of offerings, are up to date. Pickleball, I know we talk about it a lot, but that is in high demand, and we continue to expand across the portfolio. And I think from the perspective, I'll move over to the -- more specifically to the RV side of the business. Continuing to upgrade offerings, not only with respect to the amenity package but also upgrading some of the services that are offered at the site-specific locations, full service, upgraded electric for -- to accommodate the newest units in the RV world. That also helps drive rate and a sticky customer.

And a lot of those decisions, those capital decisions are made in conjunction with the homeowners association, so to say, what do you think you would like to have at the property? What are the things that are important to you? So that we're not operating out of Chicago and understanding what's going on at the property level. And I think that's an important factor that happens at the property and regional level.

And then, I guess, just thinking about you do have the demand pipeline coming. Like there's going to be more and more. And you mentioned in your opening remarks that 90% of your revenue comes from annual sources. Is there a way to kind of use that demand to kind of continue to grow that revenue from annual sources? Maybe like take transients and convert them to annuals? Like is that -- will that be a trend that we're going to see for a while? Or...

Sure. One of the things that we've been talking about over the past couple of days, as we've been meeting with investors, is this -- is that the transient business and the importance of that transient business for those annual streams. So the transient business is an important lead for us. It's a paid lead. Usually, we have to pay for leads, but these are leads that are paying us to stay at our property, experience the lifestyle, and then decide to stay with us for a longer-term basis to become a seasonal and then to become an annual. So that transient piece of the business is important. It does have volatility inside of it, mainly due to weather events. But it's an important piece, so it's not going away. And it is the reason that we're able to post such great numbers on our highly annualized cash flows.

Okay. So it's like it's more strategy driven at this point. I guess, how do you attract the transient customers in? Like what -- is that a lower cost than bringing an annual in? Or...

Well, what it is, is it's a person that hasn't yet committed to the lifestyle or can't because their lifestyle doesn't allow them to their -- maybe they're working full time. They don't have the kind of time off to be able to dedicate a month at a time or a full year to a different location. So you're really -- you're marketing to a younger person who maybe has the weekends, and has a few weekends, a summer that can dedicate to camping. And many of those efforts are done through social media and our focus on TikTok, Facebook, Instagram, et cetera.

A big -- I've asked this pretty much to every company that's come up on the panel with me, and it's an area where I'm really focused in on. And it's just the platform advantages that REITs can build, if you think about your permanent long-term capital vehicle, the capabilities to kind of do investments that others might not, what their focus is right now at ELS on like improving the platform, the ability to kind of just drive a better outcome for investors. Like what's the real focus at ELS these days?

Sure. I think, Paul, maybe you could touch on some of the technology things that we're doing to support some of the strength that we have in our portfolio.

Yes, definitely. We focus really on 2 primary areas. One is the customer experience and the other is the employee experience and how can we make them better for each. So from the customer perspective, there's a lot of attention around self-service, enabling the transactions that they otherwise want to process, whether that's making reservations for stays at our RV communities, whether if you're a boat owner, the ability to schedule the delivery of your boat into the water and show up and enjoy yourself rather than having to arrive and request it and wait for that. The MH side of the business, enabling electronic payments. There's a complete flow-through of electronic documentation related to application and home purchasing and so forth that's been implemented over the last couple of years. So a lot of attention on those types of issues. And then in terms of the employees, a big focus on how we reduce and hopefully eliminate manual tasks. We can automate processes. We can write scripts, and we can and have implemented bots into our processes to really facilitate a higher quality, a higher level of thinking rather than kind of rote tasks that would otherwise be completed by administrative groups or our accounting team and so forth.

Any questions from the field? One thing that I was thinking about with your model is just it seems like margins have dipped a little bit. And just trying to think through like is there margin expansion opportunity in the years ahead? And kind of how are you guys thinking about that?

We have a page in our investor presentation on expenses that I think has been really helpful to walk through with investors, and maybe Paul could touch on some of the highlights.

Sure. I think that what we saw over the past couple of years, kind of during and following the pandemic, was a bit more volatility and pressure on our expense base. That came in a few different areas. Utilities was one that was experiencing pretty significant increases, particularly electric costs in '22 and into '23. We've seen that moderate significantly, and it's returned to kind of our long-term historical experience, which is close to CPI. That's meaningful for us. The utilities are -- that's the largest expense category that we have. We saw in our repairs and maintenance some cost pressures, supply chain-type pressures, and that has eased as well. With respect to our payroll, as we've seen shifts in activity of the transient RV properties, the team has historically been very efficient with respect to staffing and they've managed those staffing levels quite well. So we've seen a moderation in those expenses. I think on a go-forward basis, as we think about it, we are in line with, again, a historical experience, which tracks expenses far closer to CPI than what we saw for a period of time. I will point out 2 expense categories that continue to either be under some pressure or have the potential for just some maybe unplanned or unexpected increase. One is insurance. We saw last year an increase in our insurance program was 58%. This year, that moderated significantly to 9%. That's on the heels of a year when we didn't have any insurance claims. But we're several months away from our renewal. It's April 1, and we are 3 months into a 6-month hurricane season. And so far, we haven't had any claims to speak of. So hopefully, we're in a similar situation as we talk to our carriers for next year. And then real estate taxes is just one that our historical experience is kind of a mid-single-digit increase on an annual basis. But local governments are looking for sources of revenue, and that's just an area that could have some exposure to us going forward.

How interesting. Do you think there'll be more pressure on like the millage rate or just like this?

I think it probably -- it could come through in the millage rate. And then also as transactions have traded, it's a possibility that assessed values are adjusted.

And then just as a reminder, real estate taxes, we do have the ability to pass through some of those real estate tax increases, specifically within our Florida portfolio. That is helpful from the standpoint of being able to oppose any rate increases because the homeowners are part and parcel of that opposition. So that's helpful to have more than just us going and talking about kind of reducing the rates.

So is that -- that's mostly in a Florida setup? Or why did that come about in Florida and maybe not other places?

Yes. It's just historically been part of the Florida prospectus. And that's just the way the industry kind of evolved over time.

Okay, understood. And then, mostly focused on the expenses, but did the margin dip because expenses just grew faster than rate? And I guess, like the recovery would be more on if rate kind of outpaces the expense growth? Interesting. Maybe that leads me to my next question. Just I think you guys start -- well, I forget. When do you guys start notifying like residents of like potential rate increases?

At the end of this month.

End of this month. Okay. Interesting. Any kind of like call it -- could you remind us the process? And just like how you guys typically think about, I guess, setting the rate?

Sure. Patrick can walk through the process that he's in right now, and he and his team are going through right now for September, end of September notice, effective January 1.

Yes. So most of our rent increase is occurring in the first quarter. So over the next couple of months, starting end of September, which is like an October notice, we'll start sending out those notices. And we are going through the portfolio as part of our typical budget process, updating comp sheets for each individual property that's really run by our general managers of each property with their regional manager, with 40 regional managers across the company. They come up with a view towards the market and recommendations. And then we meet as a senior team, including me, and we settle on rate increases across each one of the properties in the MH portfolio. That's really governed by direct comps in the MH space but also what's going on in multifamily, single-family rental, trends in single-family home prices as well, so that we take a broad view of what's going on in the broad residential market where each of our properties is located.

And can you remind us what it was, the rate increases you sent out last year, and then what you ultimately achieved for this year?

The notice rate was...

It was just over 6%, and that's what we've achieved.

Okay. Okay. And the variability, where would the variability come from like?

The biggest source of variability is just if CPI changes dramatically from the beginning of the year to the end, and those increases or those leases that are tied to CPI would have an adjustment if there's meaningful volatility there.

And in our deck, it shows what we've achieved in terms of MH growth rate over time, and you can see 140 basis points spread to COLA over time.

Should we -- inflation has been coming down. I guess, the assumption that -- would it be a wild assumption to assume it's weaker? Or I guess...

Right. I'll say this, that we -- consistent with what we've done in the past, in October at our earnings call, we plan to disclose where we're at, where we are for top line growth for RV revenue, RV annual and MH. So it's a little bit early to talk about it, but we're not that far out.

Questions from the field?

So on the insurance cost there, I mean, do you have like a -- it's the importance of [ doing it with ] one big national insurer. Or is that done locally? How does that work? I'm just curious.

So we place our insurance through Lloyd's of London. So we go meet annually with the underwriters. And essentially, there's a syndicate that's put together that provides blanket coverage for our entire portfolio.

And so they look at the experience of the entire portfolio, and there's been a concentration of claims in Florida, but they look at the whole portfolio.

Other questions? How do you guys think about your ability to maybe accelerate expansion sites being added to the portfolio? Like in the beginning, we were talking about the demographics and like the demand. Do you think like this is probably a big growth area? Like just kind of how do you think about the governor or the pace?

Yes. We have a slide in the deck that goes over the last 5 years, and we've been delivering about 1,000 expansion sites on an annual basis. I talked about this on the last earnings call. I expect that this, the current year 2024, in the range of 700 to 800. Some of that is just reflective of the cadence of the pipeline. We've also experienced and we have -- Florida is a big market for us. We also are doing several expansions in Florida. There's a lot of development activity in Florida, which means those local administrative oversight offices and building departments and other review departments have a lot of workflow coming at them. And some of the time lines between plans to permits to completing projects end up being delayed. I think the demand profile has been very consistent. Just as a reminder for everybody, our expansions are exactly that. They are incremental expansions of existing properties, so we've already got a going concern business. We have brand recognition. We have operations in place. We have core amenity packages. So that incremental investment that's throwing off, call it, 8% to 10% returns is a really attractive risk reward profile because the ability to drive revenue once you complete the expansion is pretty favorable.

What's the -- I guess the -- so I guess, is that land you have to acquire? Or you already have the land? And I guess like what's the land bank look like is probably the right question.

Yes. So we have about 6,000 acres adjacent to our properties. So we're developing those vacant acres that we've owned for a long time. In addition, over the past 4 or 5 years, we have purchased land that was -- that is adjacent to our properties that we hadn't previously owned. And what we've done there is receive the entitlements before we close on the property, so that we're able to build it as quickly as possible.

Those 6,000 acres, like is that located in areas like Florida where you want to develop? Or like, I guess, what's the...

Probably 85% of that is adjacent to our RV parks, so it's not on the MH side. Now some of the stuff that we have acquired over the last 5 years, some of the acreage has been on the MH side.

Interesting. And then -- sorry, Paul, if I missed it in your update. But the transient, how did that go over Labor Day?

Labor Day revenue growth was essentially flat to last year.

Okay. Okay. Any weather or any...

Over Labor Day, there wasn't significant weather that impacted it. So...

Other questions from the field? I guess, turning to external growth and the transaction market. Any opportunities you guys are seeing out there in the acquisition market?

Sure. I think just to kind of frame the acquisition market, I think as everyone is aware, acquisition activity can be pretty lumpy in our industry. And if you think about the available base of communities, there's about 50,000 manufactured home communities across the country, 3,000 of which we would consider investment grade, and we own about 200 of those. On the RV side, there's about 16,000 RV parks. 8,000 of those are publicly owned and then 8,000 are privately owned. So if you take those 8,000, there's about 1,200 of those that we would consider investment grade. We own 200 of those. So the difference between those two is what -- those opportunities for us. So the opportunity set is significant. And it's -- for us, it's a matter of the right timing. Right now, what we've seen is RV park owners and MH owners have kind of sat by the sidelines for the last 1.5 years to 2 years. I think they were seeing an interest rate environment where rates were rising. They weren't seeing as many people come to their door to inquire about owning the asset. Numbers that they had in their head before are no longer the numbers that they are now seeing, so they kind of just took a step back. And I think to the extent that rates fall a little bit, I think you'll see some more activity. But a lot of what happens in the RV and MH space is really a function of understanding where the owner is deciding whether or not they want to hand it down to their family, the asset down to the family, does the family want to own it and operate it, or are they at the point where they want to sell it.

Questions? Maybe just thinking about like your land bank and how it's tied to -- like a lot of it seems to be located around RVs. And then I think a big part of your utility expense that you can't pass through is from RVs. Have you thought about adding solar to kind of offset the loss -- the stuff you can't recover?

Sure. We do have solar at various properties. I think we have something in the deck. And maybe Patrick, you could walk through some of the solar plans that we have put in place over time.

Yes. We have about 20 projects that we've completed. The rest, in process. In the deck, there's some shots of a covered RV storage in California, so I thought there's one. You are getting the solar benefit. Next year, you're getting the benefit of covered RV storage in places where covered RV storage is able to generate a premium to just regular surface RV storage. And we look for opportunities to continue to expand on the solar front. Just with respect to energy conservation, I'd also highlight that we've gone through a review and a retrofit across the portfolio, close to completing the portfolio in the common areas of LED conversions, which helps to obviously moderate our electric consumption.

Any other initiatives you're working on, on that front?

On the electric front?

Yes, I guess anything on the property management side.

Well, utilities broadly, investment in particularly water meters, electric meters on our long-term annual customers, where you get the benefit. When people get a bill for that type of consumption, their consumption goes down. There's a 100% correlation there. The question is how much does it go down. So we're working to make sure we have that investment and infrastructure everywhere we have those long-term customers.

Any update on the marina front?

Not really. It's a small piece of our business. It's going as planned. The annual streams are doing well, and we're happy with the portfolio that we own. And as we look to grow that portfolio, we would want it to have the same hallmarks as our existing portfolio, which is a highly annualized base, not a lot of ancillary revenue, fees simple, not ground leases. So that's the kind of the buy box for marinas, but they've been performing in line with our pro formas.

How's expansion into that space? Like did you expect to maybe see more opportunities to acquire? I know like when you got into the space, like you were the pioneers and then others came in. Like has the opportunity set been smaller or the competition has been higher? Or...

I think that when we got into the space, we were focused on just the things I just highlighted. And we knew that, that buy box was going to be smaller as a result of that. Because if you expand it out and you focus on ground leases or ancillary -- additional ancillary revenue or transient business, you're going to be able to cast your net wider. And what we were focused on is how can we make it be as close to MH, as close to RV annual as possible. And we think we've achieved that. But as you know, all marinas are not the same. So it's important that we pick the ones that are very similar to our existing portfolio and cash flow characteristics.

Excellent. Any last questions? So we are out of time, but we do have 3 rapid fire questions, they're multiple choice, that we've been asking all management teams. So the first one is, do you expect real estate transactions to increase once the Fed starts to cut? Yes or no?

Yes.

If yes, when do you expect them to pick up? A, 4Q '24; B, first half '25; or C, second half '25?

B.

How would you characterize demand for space today? A, improving; B, steady; C, weakening?

A, improving.

Last year, the majority of companies at our conference stated they expected to ramp up spending on AI initiatives in 2024. How would you characterize your plans over the next year? A, higher; B, flat; C, lower?

A, higher.

Excellent. Thank you.

Thank you very much.