Equity Lifestyle Properties Inc Q2 FY2020 Earnings Call

Good day, everyone, and thank you for joining us to discuss Equity LifeStyle Properties' Second Quarter 2020 Results. Our featured speakers today are Marguerite Nader, our President and CEO; Paul Seavey, our Executive Vice President and CFO; and Patrick Waite, our Executive Vice President and COO. In advance on today's call, management released earnings. Today's call will consist of opening remarks and a question-and-answer session with management relating to the company's earnings release. As a reminder, this call is being recorded. Certain matters discussed during this conference call may contain forward-looking statements in the meaning of the federal securities law. All forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or to supplement any statements that become untrue because of subsequent events. In addition, during today's call, we will discuss non-GAAP financial measures as identified by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release, our supplemental information, and our historical SEC filings. At this time, I would like to turn the call over to Marguerite Nader, our President and CEO.

Good morning and thank you for joining us today. Our second quarter results show the continued strength of our business. We continue to safely and efficiently operate our properties under new operating conditions. Paul will provide more details on collections, but across our organizations, we've seen payment patterns consistent with last year. We've put in place a rent deferral program for residents facing hardship due to the impact of COVID-19. Approximately, 500 residents are enrolled in this program. We saw strong demand on the MH side of the business with a 4.6% increase in rental revenue. In the quarter, we saw a decrease in residents moving out of our community. We increased new home sales volume by 14%, and the average purchase price increased by 10%. Our MH properties are currently 95% occupied. Our residents are homeowners who have generally paid cash for their home. This capital commitment to our communities is an important differentiator in difficult times. Our overall occupancy consists of less than 6% renters. Moving to our RV business, we've had an acquisition strategy over the years of buying RV resorts that are heavily focused on annual and seasonal revenue streams. Eighty percent of our RV revenue is longer-term in nature, and 20% comes from our transient customers. In the second quarter, our properties were impacted by local shelter-in-place orders, which called for reduced or eliminated travel activity inside the jurisdiction. Our RV annual customers have generally developed roots in the community. For the second quarter, the annual revenue, which historically accounts for approximately 70% of our total revenue, grew by 4.7%. In the quarter, we were primarily closed to transient traffic until the beginning of June. We found shelter-in-place orders and reduced activity to protect our employees and customers from potential risks associated with transient traffic. We saw a significant increase in reservation activity and revenue in the month of June. The demand is high for customers to travel in a controlled environment. I would like to close by thanking the entire ELS family. They’ve continued to react to the evolving climate in an impressive manner. The team has successfully adapted to new regulatory protocols and changes in the operating environment with a primary focus on the safety and well-being of our employees, residents, and guests. I will now turn it over to Paul to walk through the numbers in detail.

Thank you, Marguerite, and good morning, everyone. I will review our second quarter results, highlight some of the topics mentioned in the COVID-19 update included with our earnings release and supplemental financial information, and discuss our balance sheet and liquidity position. For the second quarter, we reported $0.47 normalized FFO per share. As disclosed in our earnings release, we incurred approximately $1.4 million in nonrecurring COVID-19 related expenses during the quarter. We have added these expenses back in our calculation of NFFO. Our core MH rent growth of 4.6% consists of approximately 4.1% rate growth and 50 basis points related to occupancy gains. We've increased occupancy at 103 sites since December with an increase in owners of 156; our renters decreased by 53. Core RV resort base rental income from annuals increased 4.7% for the second quarter, and 6.1% year-to-date compared to the same period last year. The driver of rent growth from annuals in the quarter was rate, with occupancy essentially flat compared to the prior period. Year-to-date core resort base rent from seasonals increased 3.7% compared to 2019. Core base rent from transients decreased 47.7% in the quarter as a result of the closures Marguerite mentioned in her remarks. Membership dues revenue increased 3% compared to the prior year. During the quarter, we sold approximately 5,800 Thousand Trails Camping Pass memberships. This represents a 12% decrease for the quarter, which we attribute to the impact of COVID-19. We experienced significant recovery in sales volume in June, which showed an increase of 43% over June 2019. The net contribution for membership upgrade sales in the quarter was flat compared to last year. Sales volumes increased almost 12% while the mix of products sold changed resulting in a lower average sales price. Core utility and other income was about $400,000 lower than the second quarter of 2019. Increases in pass-through and utility income, primarily resulting from pass-throughs of real estate tax increases that were affected in late 2019, were offset by reduced revenue resulting from our suspension of late fees as well as fees related to transient RV stays. Core property operating expenses were flat compared to the second quarter of 2019. The footnote disclosure included in our supplemental financial information package states that our core income from property operation includes approximately $1 million of non-recurring COVID-19 related expenses. Excluding these expenses, we realized a 90 basis point decline in core property operating expenses in the quarter compared to last year. In summary, second quarter core property operating revenues increased 60 basis points, and core property operating expenses increased 10 basis points, resulting in an increase in Core NOI before property management of 1%. Core NOI before property management, excluding COVID-19 related expenses, increased 1.8%. Income from property operations generated by our non-core portfolio, which includes our marina assets, was $3 million in the quarter. Revenues from annual customers at the marinas and other properties in the non-core portfolio generated more than 90% of total non-core revenues in the quarter and year-to-date period. Property management and corporate G&A expenses were $25.4 million for the second quarter of 2020 and $51.3 million for the year-to-date period. Other income and expenses generated a net contribution of $1.7 million for the quarter. Ancillary, retail, and restaurant operations were impacted by COVID-19 and generated approximately $1.2 million less NOI during the quarter than last year. In addition, our joint venture income was approximately $2.4 million lower because of the refinancing distribution we recognized in 2019. Interest and related loan cost amortization expense was $26.2 million for the quarter and $53.2 million for the year-to-date period. We included a COVID-19 update with our earnings release and supplemental financial information. All of our MH, RV, and marina locations are open, though some have limited access to certain amenities pursuant to state and local guidelines. Our rent deferral program was in place from April through June. Through that program, we assisted 540 residents with a deferral of approximately $0.5 million of rent. We also provided assistance in the form of rent credit to annual customers at certain of our RV resorts where openings were delayed because of shelter-in-place orders. Those credits will be applied to future charges and total approximately $900,000. We have also continued the suspension of late fees in the month of July. Since the outset of the COVID-19 pandemic, we have now experienced meaningful negative impact to our rate on rent collection. For the second quarter, our overall collection rate for our MH, RV, and TT properties was 99%, consistent with the second quarter of 2019. Our month-to-date collections in July are consistent with the collections at this time in April, May, and June 2020. Now some comments on debt markets and on our balance sheet. Market conditions have stabilized somewhat since our April call. Current secured financing terms available for MH and RV assets range from 55% to 75% LTV with rates from 2.75% to 3.5% for ten-year money. We continue to see lenders place a high value on sponsor strength, and ELS continues to be highly regarded. High-quality, age-qualified MH assets will command preferred terms from participating lenders. Our cash balance after funding our July dividend is more than $50 million. We have available capacity of $350 million from our unsecured line of credit. We have approximately $141 million of capacity under our ATM program and we have no scheduled debt maturities for the next 12 months. We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of capital available to us. Our interest coverage ratio was 4.9 times and our debt to adjusted EBITDA RE is 5 times. The weighted average maturity of our outstanding secured debt is 12.5 years. Now, we would like to open it up for questions.

Our first question comes from John Kim from BMO Capital Markets. Please go ahead with your question.

Thanks. Good morning. You had a strong quarter as far as the collection rate and your RV parks are now almost fully open. Can you just discuss why you didn't reinstitute earnings guidance for the year?

Sure, John. So, every year, as you know, we issue guidance well in advance at the start of the year. I think we've historically been among the first to release guidance. And we're really focused on making certain that the investors appreciate the assumptions that go into the range we provide. We feel very good about our business going forward. It really has shown the true strength during this pandemic. But we did feel that with the uncertainty in the regulatory and specifically the health environment, it was prudent to wait to reissue guidance, and to provide it at a time when there is more clarity with respect to that environment. Our MH and RV annual revenue line items have performed remarkably well during these tough times, but the part of our revenue with more moving pieces like seasonal and transient revenue is more difficult to forecast and that really factored into our decision to wait on reissuing guidance.

How much of this decision was based on concerns of the unemployment benefits expiring and the additional government’s stimulus, did that factor into your decision at all?

I believe that what I mentioned earlier regarding seasonal and transient revenues was the main reason behind our decision. Our MH platform has shown impressive collections, high occupancy rates, and strong sales, so those factors did not play a significant role.

Okay. And then last quarter you suspended notice of rent increases in MH; I'm just wondering if that has continued or if you are increasing rents?

Yeah, John. If you refer to our June investor presentation, we had talked about the fact that we were reinstating them in June, and in fact we did do that at the end of June. So there was a very brief suspension for the month of April and May on those rent increases, but we effectively had to catch up those notices in June.

Okay. Great. Thank you.

Thanks, John.

Thank you. Our next question comes from the line of Samir Khanal from Evercore. Your question, please.

Can you talk about the changes you're seeing, maybe trends in the properties in Florida, Arizona, or even California? We've seen some news reports of sort of flare-ups of the fires. Any notable changes in those properties?

Currently, our properties are in a quieter season, primarily serving our annual RV customers and mobile home residents. This seasonal slowdown is not affecting us at the moment. However, we are monitoring how the situation may evolve with the virus and its potential effects on transient and seasonal reservations as we move into the third and fourth quarters.

Okay. And then I guess my second question is just about the general market in terms of opportunities that you're seeing, you know the acquisition side, portfolios, one-offs, whether it's RVs or MH. What is out there today and what is your expectation on the other side of the virus here in the next sort of 6 to 12 months?

We didn't close on any new communities in the quarter. We are currently evaluating potential deals and will provide updates on when those might close. There are transactions occurring, specifically in the all-age manufactured housing sector, which we have stated we are not particularly interested in. However, I notice that some deals are hitting the market now, and sellers appear to be motivated. This aligns with patterns from previous years where the timing is appropriate, and it’s not directly related to the pandemic.

Thank you. Our next question comes from the line of John Pawlowski from Green Street Advisors. Your question, please.

Hey. Thanks for taking my question. Just curious about the uncertainty around the US-Canada border being closed or the closure being extended. Is that impacting your early indications of snowbird traffic being able to come down into the southern states or intend to come down? Any risks to the seasonal RV demand at the end of this year?

Sure. So, let me give you a little overview of our Canadian customers. I think our overall Canadian revenue is $18 million, and a little more than half of that is annual. The largest portion of those Canadian customers stay with us in Florida, Arizona, and Texas. It’s basically about 7% of our total revenue. In the first half of the year, I think it represents about 60% of the full year revenue, so that's already collected and accrued. We do have approximately 98% of the annual RV customers who already have their park model RV on site in the south. So, we’re just dealing with the seasonal and the uncertainty around that travel. It’s something that we're watching, and I don't think we'll have clarity until the border closure was extended, I believe, to August 22 or the end of August. So we'll see and we're watching that closely, particularly into December and into January and February of next year.

Right. But if the borders are closed on the annual side, I understand that the individual homes are still in place, but in terms of rent refunds and pro-rated rent, that would be a risk to the annual bucket as well, right?

We haven't gotten to that point yet. At this point, there are some cases where the customer is in Florida or in Arizona. So it's not something we discuss with our customers yet. And unlike previously in the North, we were not able to open the properties, so people couldn't have access. This is not the same, as people can have access to these properties.

Okay. Well, the last one from me, I apologize if I missed this in your opening remarks. Could you share how the July trends in RV reservation pace are shaking out versus a year ago?

Sure. I mean I didn't share it, so I'm happy to. July, and I think just to clarify, I'm not providing guidance, but I want to touch on a couple of items relative to what we've seen already. Just to put some parameters on that, in 2019, July represented about 40% of the third quarter, so it's in line with last year. Our online camping pass sales in June increased by 100%. And then, since the beginning of June, we've seen an increase in leads from our RV dealer program of about 71%. Our RV dealer activations increased 20%. So, we've experienced some pretty significant demand indicators since the start of June.

Thank you. Our next question comes from the line of Joshua Dennerlein from Bank of America. Your question, please.

May just be a follow-up on John’s question there on the transient side. Any color you can provide us on maybe forward indicators on the RV side, like bookings that you're seeing come through on the Internet?

Sure. I mean, we've seen significant increases in our booking channels over the last four or five weeks, I think in some cases a 100% increase over the last three or four weeks. Now, along with those records, we are also seeing some cancellations that are offsetting some of that new revenue, you know, in some locations where we're able to operate at full capacity, but the surrounding area and attractions are problematic. So we're seeing some issues there, but those are the kind of demand indicators that we’re seeing.

Okay. Thanks. And then, in the second quarter, you had elevated costs from COVID of $1 million. Is that past us now? Or is that going to travel through into the third quarter and continue at that run rate until the pandemic’s over, or does it taper down?

Yeah. I think what we highlighted was a total of $1.4 million, of which $1 million impacted the core expense base. Those represent the non-recurring expenses related to COVID. We focused closely on the SEC correct guidance around COVID disclosure. The team worked hard to differentiate between really what were our one-time costs related to the development of the protocols around operations of the property at this time, as well as the employee time-off program and the property employee appreciation bonuses. That’s not really indicative of the run rate. The incremental costs that we incurred associated with cleaning and supplies are included in our expenses and weren't separated or excluded as COVID-related expenses. So it's a little bit difficult at the moment to project what those will be on a go-forward basis, primarily because a lot of it is driven by the experience at the property, the timing of the opening of the amenities, and so forth.

Okay. Did you disclose that somewhere, the level of the increased supplies? I didn’t see that.

No, we did not separately disclose that. It’s not a significant amount. It was a couple of hundred thousand dollars in the quarter.

Thank you. Our next question comes from the line of RJ Milligan from Baird. Your question please.

Hey. Good morning. I wanted a little bit more color on the rent increases. You guys mentioned that you reinstated them at the end of June and that there would be a catch-up. So does that imply that the third quarter you're going to see outsize growth from the increases?

We won't see outsize growth. I think the way that we framed it on the call in April was the suspension, and to the extent that it continued through the end of the year, the impact would be about 50 basis points. Just doing the math, the impact without suspension changes that to being just about 10 basis points on growth.

Okay. That's helpful. That's all I have. Thanks.

Thanks, RJ.

Thank you. Our next question comes from the line of Nick Joseph from Citi. Your question, please.

Thanks. Just a question on the amenities that are not opened but due to some state and local guidelines. Does that impact either pricing or refunds at all in terms of if some of the amenities just won't be opened for use?

Let me address MH first and then we’ll move on to RV. Regarding MH, there have been no concessions on rents due to this situation. We have successfully closed some amenities and then reopened them. Most of our amenities, particularly in the MH area, are now open. We have safety protocols in place to protect our employees during their interactions with each other and our customers. All employees must wear masks when they are near one another. Our offices are operating by appointment only, with strict cleaning protocols implemented. As I mentioned in the last call, we are working with a national vendor that specializes in industrial hygiene to make sure we adhere to CDC guidelines. On the RV front, in previous quarters, the closed amenities were mainly tied to properties that were also closed, which led to refunds for annual fees in the northern campgrounds. In the south, we are currently in the off-season, resulting in lower demand, which is not affecting any rent payments related to the annual seasonal changes.

Okay. Great. Thanks. And then just back to the acquisition environment. I was wondering specific to RVs if there has been any disruption or kind of increased opportunities given what happened in the second quarter or on the private side. Have many owners been able to weather that storm?

I think that most have been able to weather the storm. There may be some opportunities, but the timing is just right for them in their cycle. I don’t see a lot of opportunities resulting from people seeing that effect because I think the effects were really good on both the MH and RV businesses except for the transient side for a couple of months. People saw that as a once-in-a-lifetime kind of thing and not to be repeated. I don’t know that there would be opportunities arising from that; it's more of a personal preference and people’s willingness to sell now.

Thank you. Our next question is a follow-up from the line of John Pawlowski from Green Street Advisors. Your question, please.

Thanks, Paul. Curious how municipalities are approaching property taxes this year. It's less about the impact to ELS in 2020 and just more from a real estate lens. Any color from the ground conversations with the municipalities?

I don't think we're experiencing delays in timing, although there might be some extensions for payment, but we haven't seen that yet. We're also not noticing any significant increase in chatter on the ground compared to before. Clearly, California has its challenges, but overall, the rest of the country remains quite stable.

Okay. There’s no chatter in the next, call it, 12 months where the municipalities have to fill a bigger hole in their budgets to come after residential a little harder and particularly when other property sites really can't carry it away?

I mean, there's been that type of chatter for some time now. I don't hear it on the ground being louder than before. I will say, California has its own issues it's working through, and we’re keeping that aside.

And then, John, we also have at the level of Florida, for instance, where we have the ability to pass through real estate taxes. We have a lot more support from local municipalities to not do that, so it's not just a big corporate transaction; it's at the level of the property.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Marguerite Nader for any further remarks.

Great. Thank you for joining us today. We look forward to updating you on the next quarter's call.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.