Earnings Call
Equity Lifestyle Properties Inc (ELS)
Earnings Call Transcript - ELS Q1 2021
Operator, Operator
Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties First Quarter 2021 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 of 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 meanings of the Federal Securities laws. Our forward-looking statements are subject to certain economic risks and uncertainty. The company assumes no obligation to update or supplement any statements that become untrue because of subsequent events.
Marguerite Nader, President and CEO
Good morning and thank you for joining us today. I'm pleased to report the results for the first quarter of 2021. Our performance shows the increased demand for our properties. We continued our record of strong core operations and FFO growth, with an 8.1% growth in normalized FFO per share in the quarter. New customer growth in both our RV and MH business contributed to the positive results in the quarter. Our new home sales grew by 24%, contributing to the high quality of occupancy at our MH communities. We ended the quarter with core portfolio occupancy of 95.4%. Home sale leads from websites increased by 37% in the quarter. Within our RV platform, we were successful in offsetting some of the loss in seasonal business with significant growth in transient business for the quarter. We ended the quarter with a 15% increase in transient revenue. Our subscription-based Thousand Trails Camping Pass showed strength this quarter. Over 5,000 new members purchased the Camp Pass, which was an increase of 64% over the first quarter of 2020. In the quarter, we saw an increased demand for upgrades in the Thousand Trails system. Our members were looking for expanded access to our portfolio and we saw an increase of $5 million in sales. We now have 117,000 members with access to the Thousand Trails footprint. We're approaching our Summer RV season and are encouraged by the reservation pace and the feedback we have received from our customers. We recently completed a customer survey and the results support our view that our customers are looking forward to spending time outdoors and at our properties. The survey results show that 98% of respondents who were new to camping last year plan to camp again this year. The respondents indicated that they chose to camp because it felt like a safe choice and they were able to safely travel with their family and friends. The survey indicates a plan for increased camping adventures with 65% of those responding indicating an intention to camp more this year. The survey also showed that 70% of those responding do not plan to travel by plane this year.
Paul Seavey, Executive Vice President and CFO
Thank you, Marguerite, and good morning everyone. I'll provide an overview of our first quarter results and walk through our guidance for the second quarter and full-year 2021. I'll also discuss our balance sheet before the operator opens the call for Q&A. For the first quarter, we reported $0.64 normalized FFO per share. The outperformance to guidance in the quarter resulted from better than expected transient performance, membership upgrades, and expense savings. In addition, our guidance did not assume the net contribution from our Southern Marinas portfolio acquisition. Core MH rent growth of 4.7% includes 4.1% rate growth and approximately 60 basis points related to occupancy gains. Core RV and Marina rental income from Annuals was in line with expectations for the quarter. Annual RV rental income represents 90% of the combined RV and Marina rental income from Annuals, and it increased 3.5% with 3.4% from rate.
John Kim, Analyst
Thank you. A couple of questions on your guidance. So in the second quarter, you're projecting an $8.8 million increase in transient RV, which would put it above 2019 levels. But I was wondering how much clarity you have on that at this moment. I know you've talked about the reservation pace, but your first quarter numbers came in well above your initial projections, but I just wanted to see how confident you were in the second quarter projections?
Paul Seavey, Executive Vice President and CFO
Yes. I think John, as we think about our guidance, the second quarter increase, that $8.8 million over 2020, that's about 14% over 2019. We've taken a look at our reservation pace, and we've taken a look at the activity in 2019 as an indicator of a normalized environment because it is quite challenging, frankly, to look at 2020, but we definitely recognize that over time pace can change. So, we've given our current estimate and anticipate that that may change, but it's our best view into the second quarter at this time.
John Kim, Analyst
And what are you expecting as far as the growth in the Thousand Trails. You had strong demand this quarter with membership upgrades. Do you see that pace continuing in the second quarter and for the remainder of the year?
Marguerite Nader, President and CEO
I think that if you look at our history over the last 10 years, you see that our upgrade revenue line tends to increase in periods when we introduce a new product, and we introduced a new product this quarter. And the biggest uptick is really in 60 to 90 days after that product launch, and then it tends to fall in line with more of a historical run rate performance.
John Kim, Analyst
And can you remind us, Marguerite, once you upgrade the membership, is the goal to keep them at that level or is the goal to convert them to a seasonal RV customer?
Marguerite Nader, President and CEO
Sure. A bit of background on the Thousand Trails upgrade: it provides various options for owning an upgraded membership. It's specifically designed for RVers who plan to camp and travel across multiple locations for an extended time, or for those who prefer the flexibility to visit a single destination with fewer usage restrictions. These members typically seek longer stays, advance booking options, and the ability to move between different resorts. As we observe some of these members transition to Annual memberships and others opting to continue upgrading, we see a trend where multiple upgrades occur as new products are introduced.
John Kim, Analyst
Okay. And then my final question is on the Marina acquisition. And basically, what is your appetite to do more, right now it's about 4% of your total sites, what are your expectations to acquire more and also what are the opportunities?
Marguerite Nader, President and CEO
Sure. Since our last call, we purchased a portfolio of Marinas for approximately $260 million. This deal was something we had been considering since the end of last year, and it aligns perfectly with our acquisition strategy. The portfolio complements our current Marina assets, featuring about 4,100 slips, with 95% owned outright and 96% of the revenue coming from annual sources. Based on our analysis post-acquisition, we expect to maintain a growth rate of around 4% in the Marina sector, alongside expansions in the manufactured home and RV spaces.
John Kim, Analyst
And what was the cap rate on this portfolio?
Marguerite Nader, President and CEO
This deal was a 5.5 cap.
John Kim, Analyst
Okay. Thank you.
Marguerite Nader, President and CEO
Thanks, John.
Operator, Operator
Thank you. Our next question comes from Nick Joseph with Citi. Your line is now open.
Nick Joseph, Analyst
The transaction pipeline and acquisition pipeline looks like today, and then how does it compare across the three different verticals?
Marguerite Nader, President and CEO
The deal flow is consistent with what we've observed recently. Over the past five years, we've successfully completed around a billion dollars in transactions while focusing on creating long-term value. Our strong industry relationships will continue to provide benefits as we finalize these transactions. As we've previously discussed, our asset class remains in demand, and our performance during the pandemic and in the first quarter has increased interest from others wanting to acquire these assets. However, most deals are well marketed, and our acquisition team excels in underwriting assets and determining their strategic fit for ELS. There are definitely opportunities available, and we will keep everyone updated as we close deals.
Nick Joseph, Analyst
Is it weighted towards any of the different verticals or are you seeing opportunities across all three?
Marguerite Nader, President and CEO
We're seeing opportunities across all three.
Nick Joseph, Analyst
Thanks. And then just you mentioned the technology enhancements, how does that impact long-term expenses from a property level perspective, and does it change margins at all?
Paul Seavey, Executive Vice President and CFO
I think what we anticipate over the long term Nick, is that there will be some shift and potential for reduction in those expenses. As we talk about the initiatives like contactless check-in, the self-serve options for the customers, I think that frees up resources that would otherwise be dedicated to those efforts. But in the near-term, there's a transition back to normalized operations that we're working through, but I definitely think over the long-term, we would see that.
Nick Joseph, Analyst
Thank you.
Marguerite Nader, President and CEO
Thanks Nick.
Operator, Operator
Thank you. Our next question comes from Keegan Carl with Berenberg. Your line is now open.
Marguerite Nader, President and CEO
Hello, Keegan. Keegan, do you have a question? Operator, maybe we could move to the next one. And then we could circle back with Keegan.
Operator, Operator
Absolutely. Our next question comes from Wes Golladay with Baird. Your line is now open.
Wes Golladay, Analyst
Hi, good morning, everyone. I just wanted to go back to the upgrade product, it sounds like you said the price increased 10%. Was that due to the new introduction of the product you mentioned, Marguerite?
Marguerite Nader, President and CEO
Yes, it was. So we upgraded the product. The upgrade product is a new product called Adventure. And there were some additional benefits in it. And we were able to increase the price as a result.
Wes Golladay, Analyst
Got you. And then, I think on the last call, you kind of mentioned that deals tend to close in the fourth quarter and I was a little bit surprised about the first quarter deal, I guess, would you still hold that same comment for the remaining pipeline that weighted towards the fourth quarter?
Marguerite Nader, President and CEO
Yes, I think what we've observed historically is consistent with what I mentioned in the last call. We had the opportunity to finalize some deals, particularly the two transactions in the first quarter. The results can vary from quarter to quarter, but over a five-year period, I believe we're averaging around 225 million a year.
Wes Golladay, Analyst
Got it. And then maybe one last one, are you seeing any inflationary pressure in the business and probably more specifically on the home sale?
Patrick Waite, Executive Vice President and COO
Yes, sure this is Patrick. Let me take our home sales prices first, and then I'll speak to cost. We saw an increase in our new home sale prices for the quarter of 20% year-over-year, and some of that is just mix and that will continue to contribute to quarter-over-quarter yield differences and some of that's based on some higher priced homes. But broadly, we saw strength in Florida where home prices were up more than 10%. And we're consistently seeing 5% to 6% increases in new home sale prices in our primary sales locations across the portfolio. With respect to your pricing pressures, lumber is up 2.5 times year-over-year, steel is up 1.5 times year-over-year, crude oil 1.7 times that's the base for PVC pipe and other pieces. The U.S. Chamber of Commerce Construction Index really points to price fluctuations, and supply shortages in lumber, steel, PVC and copper. That's due to a couple issues. One we know about increasing demand, that's broad across the residential space. But we're starting to see supply chain issues materialize. And another one, just recently, was that major winter storm in Texas disrupted petroleum processing. So we're seeing good demand for new home sales. We're seeing price increases come through on our new home sale prices. But there's also going to be some price impacts on the cost of homes as well as potentially timing for delivery.
Marguerite Nader, President and CEO
The demand is very high, but it is taking us longer to get the homes to the locations but the demand is very high.
Wes Golladay, Analyst
Great. That's all for me. Thank you.
Marguerite Nader, President and CEO
Thank you.
Operator, Operator
Thank you. And our next question comes from Keegan Carl with Berenberg. Your line is now open.
Keegan Carl, Analyst
Everyone hear me now?
Marguerite Nader, President and CEO
We got you now, Keegan. Hello.
Keegan Carl, Analyst
Sorry about that.
Marguerite Nader, President and CEO
No problem.
Keegan Carl, Analyst
So with the explosion of our RV sales and RV ownership how have your online metrics specifically trended? And I guess what conversion rates do you guys anticipate from the memberships just into the annual passes?
Marguerite Nader, President and CEO
Yes. So we've seen a significant increase on the Camping Pass sales over time. So the vast majority of the increases from our, the Camp Pass sales for the quarter, I think they went from 5,000 compared to 3,000 last year, a 64% increase, and the vast majority of that comes from online channels. So we went from many years ago, where we were all face-to-face sales to now a significant portion of our Camp Pass sales are done online. And it's a very seamless process. Something it's a subscription-based model. So people have become very familiar with that concept over time. And we've seen people continue to want to push that through and we'll continue to push other opportunities through the online channel.
Keegan Carl, Analyst
To follow-up on that, are you seeing your average age of a resident trending down? I know in the March presentation, you said the average age of a new resident in the RV space is 55. But your RVIA was putting out a report showing that the 18 to 34 age cohort is actually picking up in ownership?
Patrick Waite, Executive Vice President and COO
Yes, it's Patrick. I'm familiar with the study. And I would anticipate over time that we may see additional lower age new customers coming into this space as Marguerite and Paul have pointed out in different parts of their comments. There's significant demand across the portfolio. One thing we're seeing that contributed to results in Q1 and also what we're seeing in Q2 on the transient side is reservations being booked much earlier in the corresponding months than we've seen in the past. So there's a real desire for people to get out in a socially distanced COVID-safe manner and spend time with family and friends that is bringing with it people with first-time users and first-time exposure to the RV space. So, we may anticipate to see some younger, new customers come into the space in coming quarters. We haven't seen that come through our average age at this point. But it's a reasonable expectation.
Marguerite Nader, President and CEO
And it would take a lot for the average age to change. So it'll take time for that to change within our forecast.
Keegan Carl, Analyst
And then, just one final one for me, do obviously, leverage is now at 5, 5.7 times highest you've been in quite a bit. Is there an expectation, this is going to come down back to this five times range or you guys actually more comfortable with some higher leverage, given how you performed during the pandemic?
Paul Seavey, Executive Vice President and CFO
I believe it's settled. We've consistently highlighted the strength of our balance sheets, and we're completely at ease with a higher level of leverage since we don't have a specific target we need to reach.
Keegan Carl, Analyst
Right, that's it for me. Thanks, everyone.
Paul Seavey, Executive Vice President and CFO
Thanks Keegan.
Marguerite Nader, President and CEO
Thank you, Keegan.
Operator, Operator
Thank you. Our next question comes from Joshua Dennerlein with Bank of America. Your line is now open.
Joshua Dennerlein, Analyst
Hey, Marguerite, hey Paul. How are you?
Marguerite Nader, President and CEO
Good mining, Josh.
Paul Seavey, Executive Vice President and CFO
Yes, we're doing well.
Joshua Dennerlein, Analyst
On the Thousand Trails product update, was that kind of something you had planned that had been in the planning for a while? Or was this an opportunity you saw because of COVID to offer something new or unique on that side?
Marguerite Nader, President and CEO
Yes. We roll out a new program every few years. However, last fall, as we faced ongoing travel restrictions and a decline in seasonal revenue, we developed the product based on the demand from our existing customer base. We encountered challenges with our Canadian customers; while the demand was present, access was limited. We noticed our customers seeking ways to access more properties with advanced booking options. Consequently, we launched that program in response to the challenges we observed at the Canadian border and in our seasonal business.
Joshua Dennerlein, Analyst
Okay. All right. And then do you expect to see additional strengthening in the upgrades in Q2 and then you kind of build them?
Marguerite Nader, President and CEO
Yes, I think what you observe is an increase that I mentioned initially when the new product was released, and then it tends to align more with our historical run rate.
Joshua Dennerlein, Analyst
Okay, okay. And then on the transient revenues, they seem to come in much better than expected for 1Q offsetting some of the weakness you're expecting in the seasonal side, how does that trend across the quarter and has that kind of trend continued into like the early days of Q2?
Marguerite Nader, President and CEO
I mean, what we really saw in the quarter was that March was the highlight of the quarter, you saw really strong demand when as the weather got really bad towards the end of February, up north, and then we just saw more activity at our properties in March, and it is continuing into April.
Joshua Dennerlein, Analyst
Okay, awesome. Was it more weather driven or maybe COVID cases coming down?
Marguerite Nader, President and CEO
Yes, I believe it was a bit of both. The timing aligned with the availability of the vaccine and strong demand, which certainly helped. Additionally, the weather conditions were quite challenging, and we experienced significant demand at our Keys property during that period.
Joshua Dennerlein, Analyst
Okay, awesome. Appreciate the color.
Marguerite Nader, President and CEO
Thanks, Josh.
Operator, Operator
Thank you. Our next question comes from John Pawlowski with Green Street. Your line is now open.
John Pawlowski, Analyst
Thanks for the time. Maybe just a follow-up question on the transaction market. When you're looking at pricing, in terms of private market pricing, and MH in different types of RV product, is pricing getting to a point where borderline irrational where you'd start to maybe sell assets and buy back stock?
Marguerite Nader, President and CEO
Yes, I mean I think that there's certainly some deals that are trading that we've walked away from because we don't think the pricing makes sense. But I do think there are still a lot of opportunities out there for us to invest in accretive deals that would make sense for us in the long-term. So I'd say we would continue to pursue those deals.
John Pawlowski, Analyst
I guess, maybe a follow-up direct question, is your share price screening more attractive than kind of a bigger and bigger swaps of the private market across MH and RV right now?
Marguerite Nader, President and CEO
Yes, I mean, I think that the best use of our capital right now is to continue to invest, invest in our properties, invest in development, and invest in future acquisitions.
John Pawlowski, Analyst
Okay. And then just one follow-up question on Paul, your opening remarks about Q1 is better than expected, but the balance of this year is trending in line with prior expectations. Is it the fair interpretation that if the positive trends on the transient and membership businesses continue there's going to be additional upside coming this next few quarters?
Paul Seavey, Executive Vice President and CFO
It's not an unreasonable statement to make.
John Pawlowski, Analyst
Okay. Thank you for the time.
Paul Seavey, Executive Vice President and CFO
Thanks, John.
Marguerite Nader, President and CEO
Thanks, John.
Operator, Operator
Thank you. Since we have no more questions on the line, at this time, I'd like to turn it back over to Marguerite Nader for closing comments.
Marguerite Nader, President and CEO
Thank you all for joining us today. We look forward to updating you on the next quarter's call. Take care.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.