Jan 28, 2014
Executives
Marguerite M. Nader - Chief Executive Officer, President and Director Paul Seavey - Chief Financial Officer, Executive Vice President and Treasurer
Analysts
Gaurav Mehta - Cantor Fitzgerald & Co., Research Division Nicholas Joseph - Citigroup Inc, Research Division David Bragg - Green Street Advisors, Inc., Research Division David Harris - Imperial Capital, LLC, Research Division Paula J. Poskon - Robert W.
Baird & Co. Incorporated, Research Division
Operator
Good day, everyone, and thank you for joining us to discuss Equity LifeStyle Properties' Fourth Quarter 2013 Results. Our featured speakers today are Marguerite Nader, our President and CEO; Paul Seavey, our CFO; and Patrick Waite, our Executive Vice President of Operations.
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 meaning of the federal securities laws.
Our forward-looking statements are subject to certain economic risk and uncertainty. The company assumes no obligation to update or supplement any statements that become untrue because of subsequent events.
At this time, I would like to turn the call over to Marguerite Nader, our President and CEO.
Marguerite M. Nader
Good morning, and thank you for joining us today. Before we discuss the specifics of the fourth quarter and guidance for 2014, I would like to take some time to walk you through some of our highlights for 2013 and outlook for 2014.
In 2013, we focused on increasing the strength of our existing operating platform, balance sheet management, strategic disposition and quality acquisitions. I am pleased with our execution on our key initiatives.
On the operating front, we improved the quality of our occupancy by bringing more homeowners into our communities than in previous years. We had our 17th consecutive quarter of occupancy growth.
While we continue to utilize the rental program to augment our occupancy, we have reduced our reliance on the program in favor of selling homes. Throughout the year, our sales activity for both new and used homes have increased.
We have increased our used home volume by almost 30% and have increased our new home sales as well. We believe our product competes well in the current environment.
Our ability to offer low cost homes to empty-nesters and retirees offers an attractive option for those wishing to reduce the amount of capital tied up in their housing and still enjoy a high quality lifestyle. As we have often discussed, a key issue for this business is the capital investment in our rental program.
The execution of our plan this year has allowed us to recycle some of our capital. Our sales activity comes from both local and national traffic, and we have directed our marketing efforts accordingly.
We have increased traffic coming to our properties in online sites. We will focus on this important part of our business in 2014 as we increase our sales and marketing efforts.
Our RV business was strong in 2013. The RV industry has trended positively, including sales growth of 17%.
ELS is focused on marketing the 8 million to 9 million installed base of RVers and 40 million outdoor enthusiasts. In 2013, we focused on bringing in new customers to experience our lifestyle offering.
We saw an increase in new customer counts, which will translate into repeat business as repeat customers are our largest customer source. We increased the utilization of our RV sites in both our Thousand Trails and Encore platform.
Accessing new customers is evident in our results for the full year, which include a 5% increase in our RV revenue. We have focused our marketing efforts on new website, designed to engage users to generate reservation activity.
We have launched a mobile version of our website, which provides improved access to reservation. Externally, we have focused on advertising to the new customer and providing information online for customers to be able to make an informed decision about our product offering.
Our social media outreach has increased, and we now have 80,000 fans actively communicating with us on a regular basis. In 2014, we intend to strengthen the relationship with third-party websites to generate new customers, as well as increase the functionality of our internal site.
Our first quarter guidance shows the continued strength of our RV market with projected revenue growth of approximately 6%. New customer acquisition will be a focus in 2014 in both our MH and RV portfolios.
Balance sheet management was a big focus this year, as we determine the best way to address our maturity. In 2013, we refinanced $430 million of debt with a blended rate of 4.5% and a term of 18 years.
We have significantly improved the maturity schedule, and we will continue to explore ways to optimize our balance sheet flexibility. With respect to transactions, we had an active year in acquisition with over $150 million of asset purchases and a strategic disposition of noncore Michigan property.
In 2014, we will continue to focus on opportunistic acquisitions. Our business performed very well in 2013, and we expect that performance to continue in 2014.
We have a great business model, and we will continue to look for growth opportunities that allow us to increase shareholder value. 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 fourth quarter results, update our full year 2014 guidance and discuss our detailed first quarter guidance.
Normalized FFO per share for the fourth quarter was $0.62, $0.03 higher than guidance. Roughly half of the increase comes from Core property operations, where we saw strong revenue growth in our RV portfolio, and the other half comes from proceeds related to the settlement of our hurricane litigation.
Core base rental income came in slightly ahead of forecast, up 3%, with 2.6% coming from rate and 40 basis points coming from occupancy. We increased occupancy 88 sites this quarter, and the quality of our occupancy continues to improve as we gain 29 homeowners in the quarter.
Year-to-date, our core occupancy increased 312 sites. Our core RV revenue growth of 7% was driven by seasonal and transient revenue.
Annuals performed in line with expectations, and revenues increased 4%, mainly due to occupancy gains in the North, Florida and the West. Revenues from seasonals were up 16%, and transient activity increased 16.5%.
The growth in seasonal revenue was evenly split between rate and occupancy, with Florida and California generating most of the growth. All regions of the country saw double digit revenue growth in our transient business.
The growth from occupancy in our transient revenue was approximately 5%. The remainder of our growth resulted from increased effective rates.
The combination of increased nightly rates, a changing mix within our portfolio and cabin rental activity generated the growth from rate. In terms of geography, the Southwest and Northeast saw transient revenue growth rates ranging from almost 17% to more than 21%.
On a net basis, our membership dues revenue and sales and marketing revenues and expenses performed in line with guidance. Core property operating expenses were less than guidance because of payroll savings in the quarter.
Utilities, insurance and real estate taxes represent almost 50% of our expenses and were in line with guidance for the quarter. These line items increased 7.2% year-over-year, driven by real estate tax growth of 11.5%.
Insurance expense increased 13% and utilities were up almost 4%. In the fourth quarter, our core revenue growth was 4% compared to guidance of 3.3%, and core expense growth was 4.4% compared to guidance of 4.7%.
The better-than-expected performance in both revenues and expenses drove core NOI before property management to 3.7% growth compared to guidance of 2.3% for the quarter. Property management and corporate G&A were in line with guidance.
Other income and expenses were $5 million, $1.8 million higher than guidance as a result of the settlement of our hurricane litigation. Financing costs were $31.1 million.
Year-to-date, core NOI increased 3.1%. Core revenues grew 3.3%, driven by core MH growth of 3% and core RV growth of 5.2%.
Before moving on to my guidance update, I'll provide some detail on the contingent asset-related expense we reported. As I have mentioned in previous quarters, we acquired Colony Cove as part of the Hometown acquisition.
Our ownership of this 2,200-site community consists of a fee interest and a leasehold interest. The lease terms include an option to purchase the underlying fee interest upon the death of the lessor.
We negotiated with Hometown to cap our exposure to increases in both the ground lease payments and the option purchase price. At closing, Hometown deposited shares of ELS stock into escrow and agreed to release shares to us each quarter until the option could be exercised, at which time, any remaining shares would be distributed to Hometown.
We recorded this escrow as a contingent asset on our balance sheet. We have received quarterly distributions from the escrow to offset the lease and option price increases.
During the fourth quarter, we learned of the death of the lessor. We intend to exercise our purchase option as soon as possible, and our fourth quarter results include net expense of $1.6 million.
This represents the change in fair value estimate of the escrow in the fourth quarter, offset by the fair value of shares to be distributed to Hometown. At year end, the remaining contingent asset balance on our balance sheet represents our expected distributions before the closing date.
Consistent with our normalized FFO definition, the expense has been added back in the calculation of normalized FFO. Concurrent with the acquisition of the fee interest and the final escrow distributions, this matter will be resolved.
On to guidance. The press release and supplemental package provide 2014 full year and first quarter guidance in detail.
As I discuss guidance, 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.
Our guidance for 2014 normalized FFO is $245.4 million or $2.68 per share at the midpoint of our range. Our guidance differs from the preliminary guidance we provided in October, primarily as a result of the acquisitions we announced in our release last night.
Growth in core NOI before property management is expected to be approximately 3.4%. We assume flat occupancy in our MH properties for 2014.
Base rent is expected to grow 2.3% with 2% from rate and 30 basis points from occupancy, as we realize the full year impact of sites built in 2013. As a reminder, our budgeted base rent reflect utility and real estate tax on bundling efforts.
Our base rent growth is approximately 50 basis points lower as a result of these efforts. The revenue has been budgeted in utility and other income.
In our resort business, we raised our full year revenue guidance from 3.8% to 4.1%. We now project 4.5% growth in our annuals.
We expect seasonal revenue to increase 3.1% and transient to increase 3.8%. We anticipate continued strong demand for our RV resorts in 2014.
We expect to realize approximately 50% of our seasonal revenue in the first quarter, and our current reservation pace is consistent with our guidance. Our expectation of 10.6% growth in our first quarter transient revenues is also based on our review of reservation pace.
Keep in mind, we budget 45% of our transient income in the third quarter, and we expect to gain visibility into third quarter activity during the second quarter. Overall, results from our membership business, which include right to use annual payment revenue, right to use contract sale and sales and marketing expenses, are expected to be flat to down slightly next year.
In total, we expect to generate 18,000 memberships through the sale of low cost products in 2014. Core expenses, excluding sales and marketing expenses, are expected to increase 2% in 2014 compared to expected growth of 3% in 2013 over 2012.
Our expense growth assumptions are driven by our current view on real estate taxes and insurance. In 2013, we saw growth of 6.4% in these 2 line items.
This was driven by our property insurance renewal in early 2013 and continued real estate tax reassessment of properties acquired in the Hometown acquisition. Our 2014 growth is projected to be 3.9% for these line items.
Early indications ahead of our April insurance renewal suggest the increase will not be as steep as the 16.5% expense increase experienced in 2013. Our guidance includes $9.5 million of NOI from the acquisitions we completed in 2013, as well as the 2 properties we acquired this month.
As mentioned in our press release, we closed on 3 RV properties for a total purchase price of approximately $31.5 million. In connection with the acquisition, we assumed loans with a total remaining balance of $18.7 million and a stated average rate of approximately 6.5%.
Financing costs include interest expense associated with the acquired assets. Aside from the 3 RV properties we acquired over the past few weeks, we assume no additional acquisition activity in our guidance for 2013.
Our first quarter normalized FFO guidance is approximately $69.3 million or $0.76 per share at the midpoint of our guidance range. We expect our core to generate revenue growth of 3%, expense growth of 2.3% and NOI growth of 3.6% in the first quarter.
Our first quarter base rent growth of 2.5% assumes a 2% rate increase and 50 basis points related to occupancy gains we achieved in 2013. We do not assume the incremental first quarter occupancy gains in our guidance.
Looking ahead to the first quarter and our core RV business, our revenues from annuals are expected to grow 4.5% compared to last year. We're seeing strong results in Florida and we're realizing continuing impacts from annuals we gain in the North and Northeast during 2013.
Seasonal and transient reservation activity continued to show strong results, particularly in California and Florida. The reservation pace is driving our expectation of 5.5% seasonal and 10.6% transient revenue growth in the first quarter.
We are projecting first quarter expense growth of 2.6%, excluding sales and marketing. In the first quarter, we realized the remaining impact of the increase in the 2013 insurance renewal.
Our other expense line items are expected to increase between 2% and 2.5%. We expect our acquisition property to contribute $2.3 million in the first quarter.
Now I'll mention our recent refinancing activity and comment on our balance sheet. During the quarter, our refinancing proceeds totaled $28.4 million and carry a weighted average rate of 4.35% for 25 years.
These proceeds were used to retire $26.1 million with a weighted average rate of 5.81%. We have commitments from a life company for an additional $54.3 million at 4.5% for approximately 22 years, with closing scheduled for April.
We expect to use those proceed to repay debt at maturity and have additional maturities totaling approximately $35 million in late 2014. At the end of the quarter, our unrestricted cash balance, net of January loan payoffs and the fourth quarter dividend paid earlier this month, was approximately $5 million.
As discussed, we use our available cash during 2013 for repayment of debt and property acquisitions. There is nothing drawn on our $380 million line of credit.
Current secured debt terms are 10 years of coupons in the 4.5% to 5% range, 60% to 75% loan to value and 1.4 to 1.6x debt service coverage. High quality, age-qualified MH assets continue to command best financing terms.
We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of public and private capital available to us. Now we would like to open it up for questions.
Operator
[Operator Instructions] The first question comes from the line of Gaurav Mehta from Cantor Fitzgerald.
Gaurav Mehta - Cantor Fitzgerald & Co., Research Division
A couple of questions. Marguerite, in your prepared remarks, you talked about improvement in utilization for Encore and Thousand Trails portfolio.
As you think about that in 2014 and onwards, how much work do you think is left? And can you talk about your strategy to further improve it?
Marguerite M. Nader
Sure. I mean, what we did this year was really kind of take a look at our website, redo our website and also work with local marketers in the area close to our properties to try to figure out the best way to access new customers.
The result of that is, I think we had a 35% increase in calls coming in to our portfolio, into our call center, with respect to asking questions, and wanting ZPP or the low cost product. So they have people -- additional people interested in the Zone Park Pass, which we see as a positive, and we think that would continue into 2014.
When we built the new website, the new website was done at the end of December, beginning of January for Thousand Trails. That has already started to generate new activity.
Increased users coming through. Understanding that new experience shift both from the members’ side and the new member or the nonmember base.
So I would see those continuing. On the Encore side, our RV on-the-go-traffic is up about 30%, just on the website.
So we're seeing an increased usage of our online strategy and people kind of calling both the call center and the -- and booking online with us, as well as I think I mentioned a mobile application. We know our customers are mobile, and we built it now so that people can access reservations through their smartphone.
Gaurav Mehta - Cantor Fitzgerald & Co., Research Division
Great. That's helpful.
Then second question on acquisitions, where are you seeing opportunities both in RV and manufactured housing in 2014 in terms of additional acquisitions? And could you talk about your thoughts on buying assets via issuing OP units?
Marguerite M. Nader
Sure. I think just as a thing about our recent acquisitions that we bought, they're in Wisconsin.
We had those 3 properties that we just closed there in Wisconsin. They're going to be integrated into our existing Wisconsin footprint.
So this year, we've been able to both take down MH assets and RV assets, and I would say throughout the beginning of this year, we wouldn't be able to tell you what the pipeline was going to look like. We certainly have ongoing conversations with owners, and we've identified properties we'd like to own.
But we don't really quantify the pipeline. As far as just what's happened in the general marketplace, there has been a few new entrants into the market recently.
But the vast majority of those transactions are family transactions or in the all-age sector. And those are good data point for us, but they don't really fit within our core portfolio.
I think the latest large transaction that just took place was a family asset portfolio that Hometown has sold in 2011 and then was resold again at the end of last year. With respect to OP units, we had -- we actually did an OP unit transaction this year.
The MH transaction we did in the Chicago land area had a component of OP unit. And this year was the first year in a long time that we had received -- we received a lot of calls from individuals interested in accessing OP units and using that as a component of a sale.
And I would anticipate an increase in this activity in the future. Net sellers are looking for an efficient sale on assets that they've held for a long time.
Operator
We have a question from the line of Nick Joseph, Citigroup.
Nicholas Joseph - Citigroup Inc, Research Division
Sticking with the acquisitions, what were the cap rates on the 3 acquisitions?
Marguerite M. Nader
They were between a 7 to an 8 cap in the Wisconsin asset. You can kind of see that in the supplemental as we break out the acquisition NOI.
Those properties -- there's 2, they're in the Madison, Wisconsin area, one in La Crosse, a lot of mainly annuals at these properties.
Nicholas Joseph - Citigroup Inc, Research Division
Okay. And then for high quality Core properties, what spread are you seeing between RV and MH properties?
Marguerite M. Nader
The spread really depends on the location. If you're a well-located RV, it's going to trade right on top of a well-located MH.
So it really varies by location.
Nicholas Joseph - Citigroup Inc, Research Division
All right. And then you decreased your estimated core income growth rate for 2014 from the preliminary guidance.
Was that entirely due to 4Q results coming in ahead of expectations, or has your outlook for the business changed at all?
Paul Seavey
No, I don't think the outlook has changed. I think it really was a reflection of quarter 4 results.
We did adjust the revenues up, as I mentioned, and scrubbed the expenses in the process and are showing an expectation of 3.4% rather than the 3.6% we previously announced.
Operator
The next question comes from the line of David Bragg, Prime (sic) [Green] Street Advisors.
David Bragg - Green Street Advisors, Inc., Research Division
It's Dave Bragg with Green Street. I wanted to ask about your underlying change in plans for 2014 for the rental inventory.
It seems as though you significantly reduced your expected rental home income and expenses for '14. So can you talk about what your expectations for rental inventory at the end of '14 are now as compared to what they must have been as of 3Q?
Paul Seavey
Yes, a couple of things happened in there, Dave. First, we ended the year with fewer rentals than we originally expected, and that's really driving our assumptions for 2014, that's driving the change in the revenues.
We had about -- we finished the year with an incremental gain of just over 400 rentals on a net basis, and that was about 300 lower than we had anticipated. Looking into 2014, we haven't made an adjustment in the level that we expect throughout the year.
And I think that what you will see us do as we go through the year is continue to evaluate the opportunities on a regular basis -- weekly basis. We're reviewing our opportunities for occupancy gain and our commitment to gaining occupancy through that rental program.
So we didn't make a major assumption change related to 2014 rentals.
Marguerite M. Nader
And I think if you look back at our rental income over the last few years, in terms of the percentage increase, it's going down from '12 to '13, and we would anticipate it going down again '13 to '14, just as a result of what Paul was saying.
David Bragg - Green Street Advisors, Inc., Research Division
Okay. That's helpful.
And what are you assuming for new home sales volume in '14?
Marguerite M. Nader
New home sales volume would be in line to maybe slightly better than what we've seen this year is what we're projecting. But it really -- it's something that we would be updating -- we update on a regular basis.
Certainly, we have our ECHO joint venture, a joint venture with Cavco, where we're bringing in new homes solely for the purpose of selling those homes. So we just continue to try to push that activity, and you can see we've sold 109 this year.
David Bragg - Green Street Advisors, Inc., Research Division
Got it. And the last question is just on your forecast for the transient side of the resort business.
You have -- you're looking for significantly better growth in the first quarter than you are for the full year. Is that purely a function of your limited visibility on the second and third quarter, or is there something about that period of time in '14 that leaves you more cautious?
Marguerite M. Nader
No, I think, we look on the transient base. For us, there is that limited visibility.
We have all of these properties for a long time, so we have a lot of experience with the properties, but there's a lot that happens between now and the July 4 weekend and the Memorial Day weekend. So we would prefer, I think, we ended the year transient revenue up 9%.
And as we sat here last year at this time, we were anticipating to be flat to up a little bit. So it's really just a function of getting closer to the dates when that activity happens.
Operator
The next question comes from the line of David Harris, Imperial Capital.
David Harris - Imperial Capital, LLC, Research Division
Here's a topical question for you. Any view as to whether the current weather conditions that are impacting much of the country are going to have any impact on your business in the first quarter?
Marguerite M. Nader
Well, we've seen a -- just on an expense standpoint, Paul can comment on that, but we actually see it as a positive as we -- as the phone calls -- phone calls generates just continue to increase as people realize why would you stay up in this northern climate for too much longer. But maybe Paul comment on some of the expenses.
Paul Seavey
Yes. I think the downside of that is in our MH properties, it doesn't really impact our RV resorts in the north because generally speaking they are closed.
But our MH properties, there's some pretty heavy snowfall in January. Nothing that cost us so far -- nothing has occurred that's caused us to want to reconsider guidance.
But that is a factor.
David Harris - Imperial Capital, LLC, Research Division
Okay. And your CapEx -- your maintenance CapEx numbers are still probably good.
You wouldn't cause -- no reason to think that those numbers might be a little higher?
Paul Seavey
No, no.
David Harris - Imperial Capital, LLC, Research Division
Okay. Big picture, I mean going back to previously announced event, but you increased the dividend 30%, you still got -- you're still twice covered.
Could you share with us any conversations you've had with the board about the future trend and the scope for dividend increases?
Paul Seavey
Yes. I think that the discussions with the board, at least on a go-forward basis, is focused on growth in the company.
And the importance of, as we talk about financial flexibility that, that is very important factor, and we would expect the dividend to grow over time as we're able to grow cash flow.
David Harris - Imperial Capital, LLC, Research Division
How much of the 30% was driven by net taxable income considerations, or should we see it really as discretionary and a sort of one-off correction up to a higher level, and then rate of growth will be somewhat more modest as we go forward?
Paul Seavey
Right. And we were paying out close to 100%, so it wasn't driven necessarily by a taxable income issue.
It really was about the use of the available cash flow and our ability to get past the pressures on our balance sheet related to our 2014 and 2015 maturities.
David Harris - Imperial Capital, LLC, Research Division
Shall I take that the answer as being that the 30% should be considered rather a more of a one-off and that you are going to have a more normalized -- I mean, obviously, you don't want to preempt decisions the board may make and events might change, but is it fair to say that the 30% was a one-off bump and that future growth will be a more modest proportion?
Paul Seavey
I think that's fair.
David Harris - Imperial Capital, LLC, Research Division
Okay. Another board-related question is, you’re chaired by Sam Zell equity -- of Equity Residential -- let's get the right one -- was notably active in buying back stock.
Now your stock is not trading at a material discount to my net assets and I don't think consensus. Has the board considered putting in place a share buyback program at all?
Paul Seavey
No. I think there have been some discussions on that.
I think that, for us, given that we're carrying limited amounts of cash, buying back stock really, in a meaningful way, would come through additional leverage. And I think that the limitation on our flexibility kind of cuts against us heading in that direction.
But there haven't been meaningful discussions about putting a buyback program in place.
Operator
[Operator Instructions] The next question comes from the line of Paula Poskon, Robert W. Baird.
Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division
I see that the G&A dollars year-over-year were down 4.5%, not -- excluding the transaction costs in both quarters. Can you just talk about what was driving that decline, and is the fourth quarter a good run rate going forward?
Paul Seavey
You're talking about G&A in the quarter?
Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division
Yes.
Paul Seavey
Yes. I think if you look to our guidance for 2014, we are up -- we had a normalized G&A kind of adjusted for the transaction costs of around $67 million, and I think it goes up to about $68.5 million.
And that increase, generally speaking, is generated by salary increases kind of a 2% increase in our budget for 2014.
Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division
And how does that juxtapose with the payroll savings you mentioned that you saw in the fourth quarter? And is that something sustainable, or was that more of a onetime event?
Paul Seavey
Those payroll savings came through our property operations, so you -- we would see those in the property, operating and maintenance expense line. And they -- those savings, a portion of them, were realized from open positions.
And generally speaking, budget and forecast for full employment throughout our portfolio.
Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division
That's helpful. And just if you could just give a little bit more color on how the Cavco relationship is progressing?
What you've learned through the time period that you've been involved with it? Anything you would do differently in launching that?
Marguerite M. Nader
Sure. We really like the relationship that we have with Cavco.
We have the benefit of being able to work closely with the manufacturer, get new homes to our properties, while at the same time only committing half of the capital. So far, we've set I think it's about 60-plus homes across 11 communities, and we've closed on the sale of 26 of those homes.
And then we have an additional 70 or so homes that are on order that will be put into our communities in the first quarter. So we like the relationship.
We'd like to do -- we like to increase the velocity, and that's just a matter of getting more homes out to our properties and sell them.
Operator
At this time, I'd like to turn the call back over to Ms. Marguerite Nader, our President and CEO, for closing remarks.
Marguerite M. Nader
Thank you very much. Paul Seavey will be around for any follow-up question.
Operator
Ladies and gentlemen, that concludes our conference. Thank you so much for your participation.
You may now disconnect. Have a great day.