Equity LifeStyle Properties [ELS] Conference call transcript for 2023 q1
2023-04-18 15:12:05
Fiscal: 2023 q1
Operator: Marguerite Nader: Good morning, and thank you for joining us today. I am pleased to report the results for the first quarter of 2023. The quality of our cash flow and the strength of our balance sheet continues to allow us to report impressive results. Our core NOI exceeded our expectations in the quarter with 5.7% growth year-over-year. Our MH portfolio is 95% occupied. The MH business is unique in that once a high level of occupancy is achieved at a property, the occupancy is generally sustainable for a long time. The key to that stickiness is having an elevated level of homeowners in the portfolio. Our portfolio is 96% occupied by homeowners. Our new home sales over the last five years have contributed to building up this important benchmark. Our homeowners are focused on improving their home sites, and we have seen a great effort by those impacted by storms to repair their homes and remain in the community. Over the last thirty years, we have built our organization focused on high-quality team members, property, cash flow and capital allocation. The result of this shared focus is sustained value for our residents, customers and shareholders. Our properties are well located in areas where the demographic trends create tailwinds for ELS. Our properties have shown strong demand even when considering weather-related disruptions. ELS will be the beneficiary of Florida's outsized population growth and heavy demand for seasonal accommodations. We sold 176 new homes in the quarter at an average price of $104,000. While this is a decline from sales volume last year the volume remains at elevated numbers relative to our historical sales volume. We saw an increase in used home sales and are currently experiencing historically low levels of used home inventory. With respect to our RV business, our annual and seasonal segments, which represents the largest portion of our RV stream performed ahead of expectations in the quarter and we anticipate growth rates of 8.4% and 8.2% for the full year 2023. The full year guidance for our transient business is impacted by California storms and a reduced number of transient sites. Our customer surveys indicate that demand for RV camping remains strong with nine out of ten respondents from our database saying that they plan to camp the same or more than last year, driven by their desire to spend more time outdoors and because they recently invested in an RV and want to use it. 20% of our first-time transient guests from last year have booked a reservation in 2023 have increased their engagement as an annual, seasonal or member. This rate is consistent with the engagement we saw last year. In the quarter, our Thousand Trails membership properties performed very well. We sold approximately 4,500 camping passes and initiated 5,700 RV dealer activations. These passes and activations are the seeds for future growth in the Thousand Trails portfolio. When we last reported our results, we had not yet negotiated our insurance premium for the period beginning April 2023 and ending March 2024. We anticipated a tough renewal market. In the end, our overall insurance premiums increased 58%, which was higher than we anticipated by approximately $0.01 per share. The relationships that we have developed over the last thirty years with the carriers were helpful in allowing us to obtain the coverage for our MH, RV and Marina properties. Overall, the increase in expenses contributed to the 40 basis point adjustment to our anticipated core NOI growth, while still maintaining our initial normalized FFO per share guidance of $2.84. We had a great snowbird season in the South and our teams will now begin to focus on welcoming our residents, members and guests to our northern locations as we kick off the summer season. I'd like to thank all of our team members for their hard work in making this winter season so successful. I will now turn it over to Paul to walk through the numbers in detail.
Paul Seavey: Thanks, Marguerite, and good morning, everyone. I will review our first quarter 2023 results and provide an overview of our second quarter and full year 2023 guidance. First quarter normalized FFO was approximately $800,000 higher than the midpoint of our guidance range or $0.74 per share. Core portfolio revenues and expenses were favorable to our guidance mainly as a result of higher than anticipated membership upgrade sales revenues and lower than expected real estate tax expenses. These line items contributed to core portfolio NOI growth of 5.7% for the first quarter. Core community base rental income increased 6.5% for the quarter compared to 2022, primarily as a result of noticed increases to in-place residents and market rent increases on resident turnover. We increased homeowners by thirty sites in the quarter. Our rental homes currently represent 3.9% of our MH occupancy. Our resorts and marina base rental income primarily generated by long-term revenue streams. On a full year basis, more than 80% of our resort base rent is from annual and seasonal stays and 99% of our marina rents are from annual customers. First quarter core resort and marina base rental income increased 5.5% compared to 2022. Rent growth from annuals in the first quarter was 8.4%, 8% from rate increases and 40 basis points from occupancy gains. First quarter rent from core RV seasonal increased 11.9%, compared to first quarter 2022. We continue to see strong demand for longer-term stays in our Sunbelt destination. Core rent from transient customers decreased 14.9% for the quarter, mainly from lower occupancy. Across the portfolio, we have fewer sites available for transient stays. We experienced operating disruptions in our California portfolio as a result of the strong rains and heavy snowfall. For the first quarter, the net contribution from our membership business was $18.3 million. Subscription revenues increased 4.7%, which includes a rate increase of 5.2%. The increase in upgrade sales revenue was generated by sales of higher priced products compared to last year. Our average upgrade sales price increased almost 15%, the percentage of sales attributed to our adventure products representing almost 30% of our first quarter 2022 sales. Core utility and other income increased 9.4%, mainly as a result of increases in utility income. Our recovery percentage was 46%, compared to 45.5% in first quarter of 2022. First quarter core operating expenses increased 7.4% compared to the same period in 2022. The comparison to prior year is affected by approximately $2 million of repairs and maintenance this year following storm events, including rain, resulting flooding and heavy snowfall in California. Adjusted for this activity, overall expense growth was in line with CPI for the quarter. First quarter expenses were favorable to our guidance on lower real estate taxes and utility expense. The real estate tax expense favorability is the result of lower tax bills in certain states where we pay taxes in arrears. The actual bills received during the first quarter were lower than the amount we had accrued at the end of 2022. Core property operating revenues increased 6.4% compared to the midpoint of our guidance of 6%. Our core property operating expenses increased 7. [Indiscernible] compared to the midpoint of our guidance of 7.8%, resulting in growth in core NOI before property management of 5.7% compared to the midpoint of our guidance of 4.7%, a $1.8 million favorable variance. Our non-core properties contributed $6 million in the quarter, in line with our expectations. Property management and corporate G&A were $31.1 million for the first quarter. Other income and expenses net, which includes our sales operations, joint venture income, as well as interest and other corporate income, $6 million for the quarter and interest and amortization expenses were $32.6 million. The press release and supplemental package provide an overview of 2023 second quarter and full year earnings guidance. As I provide some context for the information we've provided, keep in mind my remarks are intended to provide our current estimate of future results. All growth rates and revenue and expense projections represent midpoints in our guidance range and are qualified by the risk factors referenced in our press release and supplemental package. Our guidance for 2023 full year normalized FFO is $2.84 per share at the midpoint of our guidance range of $2.79 to $2.89. This is consistent with our previously provided guidance despite headwinds associated with our annual insurance renewal. The total impact of our April 1st renewal on 2023 is an increase to our budgeted expenses of approximately $2.6 million. I'll note that our budget included assumptions related to the split of insurance premiums between our core and non-core portfolios. The actual renewal resulted in a higher portion allocated to the core portfolio relative to our budget assumption. We project full year core property operating income growth of 5.1% at the midpoint of our range of 4.6% to 5.6%. Full year guidance assumes core base rent growth in the ranges of 6.3% to 7.3% for MH, 5.4% to 6.4% for RV and Marina. We assume occupancy in our stabilized MH portfolio will be flat to first quarter. Core property operating expenses are projected to increase 7.9% to 8.9%. The primary drivers of the increase in core expense growth compared to our prior guidance are the insurance renewal I mentioned and utility expense. Our guidance model includes the impact of the acquisition we announced and the impact of the fixed rate swaps we disclosed in our earnings release and supplemental package. The full year guidance model makes no assumptions regarding other capital events for the use of free cash flow we expect to generate in 2023. Our second quarter guidance assumes normalized FFO per share in the range of $0.62 to $0.68. Core property operating income growth is projected to be 2.2% at the midpoint of our guidance range for the second quarter, which represents approximately 23% of our expected near core NOI. In our core portfolio, property operating revenues are projected to increase 5.8% and expenses are projected to increase 10.3%, both at the midpoint of the guidance range. I'll now provide some comments on the financing market and our balance sheet. As noted in the earnings release and supplemental package, we executed a fixed rate swap on our $200 million unsecured term loan maturing in 2027. The swap fixes the all-in borrowing cost at 4.88% through maturity. Fixing this rate reduces our floating rate exposure to approximately 7.5% of our outstanding debt and further derisks our very strong balance sheet. Our debt maturity schedule shows that we have only 6% of our outstanding debt maturing over the next three years. This compares to an average of approximately 27%. I'll also remind you that approximately 20% of our outstanding secured debt is fully amortizing carries no refinancing risk. Current secured debt terms vary depending on many factors, including lender, borrower sponsor, asset type and quality. Current ten year loans are quoted between 4.75% and 5.25%, 60% to 75% loan-to-value and 1.4 to 1.6x debt service coverage. We continue to see solid interest from life companies and GSEs to lend for terms 10 years and longer. High quality, age-qualified MH assets continue to command at the financing terms. In terms of our liquidity position, we have $235 million available on our line of credit and our ATM program has $500 million of capacity. Our weighted average secured debt maturity is approximately 11 years. Our debt-to-adjusted EBITDA is around 5.2x and our interest coverage is 5.5x. We continue to place high importance on balance sheet flexibility and we believe we have multiple sources of capital available to us. Now we would like to open it up for questions.
Operator: [Operator Instructions] Our first question comes from the line of Brad Heffern from RBC Capital Markets.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Joshua Dennerlein from Bank of America Securities.
Operator: Thank you. One moment for our next question. Our next question comes from the line of James Feldman from Wells Fargo.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Samir Khanal from Evercore ISI.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Anthony Powell from Barclays.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Michael Goldsmith from UBS.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Eric Wolfe from Citi.
Operator: Thank you. One moment for our next question. Our next question comes from the line of John Pawlowski from Green Street.
Operator: Thank you. One moment for our next question. Our next question comes from the line of John Kim from BMO Capital Markets.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Keegan Carl from Wolfe Research.
Operator: Thank you. Since we have no more questions on the line, at this time, I would like to turn it back over to Marguerite Nader for closing comments.
Marguerite Nader: We appreciate you taking the time with us this morning and we look forward to updating you on our second quarter call.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
