Jan 27, 2015
Executives
Marguerite M. Nader - President and Chief Executive Officer Paul Seavey - Executive Vice President and Chief Financial Officer Patrick Waite - Executive Vice President of Operations
Analysts
Nicholas G. Joseph - Citigroup Global Markets Inc.
David Toti - Cantor Fitzgerald & Co. Jana Galan - Bank of America Merrill Lynch David D.
Bragg - Green Street Advisors, Inc. Todd J.
Stender - Wells Fargo Securities LLC Michael Bilerman - Citigroup Inc. Paul E.
Adornato - BMO Capital Markets
Operator
Good day everyone and thank you all for joining us to discuss Equity LifeStyle Properties’ Fourth Quarter and Year-End 2014 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 may contain forward-looking statements in the meanings 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. In 2014, we focused on increasing the strength of our existing operating platform and balance sheet management.
I am pleased with our execution on our key initiatives. Our real estate footprint is attractive to the growing population of retirement age baby boomers, who are well-positioned to take advantage of a time in the not too distant future, where 20% of the U.S.
population will be 65 years and older. Our retiree population is looking for more ways to stay fit both physically and mentally and we are adjusting core amenities to accommodate their preferences.
From building new pickle ball courts and softball fields to various activities and classes offered at our communities. We set a goal in the beginning of 2013 to increase the number of homeowners in our portfolio.
And since that time, we have increased the number of our homeowners by 369. On the new home sales front, we sold over 300 new homes in 2014 compared to just over 100 in 2013.
Over half of the new homes we sold in our MH communities for the year were through the joint venture with Cavco. We will look to continue to grow this partnership in 2015.
These new home sales are tactile to us as they both upgrade the community look and feel and introduce the property to a loyal customer who will be with us for an average of 10 years. The new home buyer we’re seeing is a younger retiree buying a home with an average sale price of $70,000.
In the quarter, we continued to see the trend of customers converting from a renter to an owner. In 2013, 5% of our new and used sales were to existing renters buying the home they were renting.
In 2014, we have increased that conversation to 10%. One aspect that we monitor as an indicator of strength in the market is the sales from homeowner-to-homeowner, or resale transactions.
We are seeing strengths in these results with an average purchase price increasing to $20,000. In 2014 we saw a 15% increase in ownership transfers, which is a further positive sign for building on our home sales momentum.
For the year, our occupancy increased by 214 sites and we are currently at 92% occupancy. In 2014, homeowner occupied sites increased by 264, while sites occupied by home renters decreased by 250 compared to 2013, when we had an increase of 407 home renters.
Emphasizing the quality of occupancy growth is important and will continue to be a focus. As we have often discussed, a key issue for this business is the capital investment in our rental program.
In 2014, we were able to significantly reduce our working capital commitment, as we were able to recycle our capital through selling homes. The benefit of this is two-fold, as we both upgrade the community and are able to redeploy our capital into other investments.
We see trends in more online browsing for our communities and have adjusted our marketing and websites to meet the demands. As with each quarter in 2014, the fourth quarter RV platform performed better than expected.
We saw an increase of approximately 8% within our RV revenue streams. For the full year, our RV revenue grew almost 7% year-over-year.
We are focusing our marketing efforts at our Snowbird locations where we are seeing increased demand for our product offerings. Our reservation pace for the first quarter is up in all three categories of revenue, annual, seasonal and transient.
Our customers are booking early so they can secure their site. We have seen an increase in RV leads coming from new digital programs.
These new leads become revenue-producing customers. In 2015, we will continue to maximize our search engine optimization and look for opportunities for new online exposure.
With respect to our balance sheet, we are in a period of unprecedented low interest rates. We have been able to take advantage of this environment by refinancing our properties with longer terms.
Our maturity schedule has changed dramatically over the last couple of years. Upon completion of our previously announced refinancing plan, we will have gone from a 5.3% cost of debt to approximately 4.9% while extending our average maturities from five years to a 11 years.
Additionally, approximately 27% of our debt maturities are 20 plus years in duration and fully amortizing. Thus eliminating the refinance risk on these assets.
Turning to transaction activity in the quarter, we purchased a 1,600 site high-quality RV Park in Mesa, Arizona for $41 million or $26,000 per site. The property is a well located, top-quality property that will complement our existing properties in the area.
Over the last four years, ELS has acquired 90 properties and invested $1.7 billion in MH and RV assets. We focus on buying great real estate locations.
Our compounded annual return since IPO 20 plus years ago has been 17%, including a 22% return over the last four years. We have grown the dividend every year since 2004 and over the last four years have doubled the dividend to $1.50 today.
We have grown FFO over the last four years by 50%. The stability of our cash flow in our assets continues to increase the value of the ELS.
Our business performed very well in 2014 and we expect that performance to continue into 2015. 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 2015 guidance, and discuss our detailed first quarter guidance.
Normalized FFO per share for the fourth quarter was $0.66, $0.02 higher than guidance. The out performance was driven by core property operations and sales operations.
Core base rental income was inline with forecasts, up 2.8% with 2.4% coming from rate and 40 basis points coming from occupancy. We increased occupancy 46 sites this quarter.
And as Marguerite mentioned, the quality of our occupancy continues to improve as we reduced our rental occupancy by 119 in the quarter. Our core RV business showed strong revenue growth at 7.8%.
Annuals performed in line with expectations with revenues increasing 5.7% mainly due to rate increases across the portfolio. Strong demand in Florida drove rate and occupancy increases in our seasonal business delivering 14.4% growth over 2013.
Florida along with California, also delivered strong gains in transient rate and occupancy, which resulted in 12.7% growth. Turning to our membership business, I'll take a minute to explain a change in presentation of results related to our upgrade sales.
In the past, we have offset membership upgrade sales revenue with a reserve against uncollectible accounts. Beginning in the fourth quarter, with prior periods adjusted for comparative purposes, we have included those amounts with our membership expenses.
Our fourth quarter results missed our expectations for membership expenses because of an increase in the reserve I just mentioned. We introduced a new product that included financing during 2012.
As a result of higher than expected default activity in 2014 at year end we increased our reserve $600,000. We have adjusted our underwriting criteria and don't expect defaults on finance sales to have significant impact on our membership sales results going forward.
Core property operating expenses, excluding the reserve adjustment I just mentioned, were in line with guidance. The savings in property operating maintenance and real estate taxes were primarily the result of lower than expected real estate taxes, offset by higher R&M expenses.
Florida, which represents close to 50% of our total real estate tax expense, sent final bills in the fourth quarter that were lower expected. In the fourth quarter, our core revenue growth was 3.7% and core expense growth was 2.4%.
The revenue and expense performance increased core NOI, before property management to 4.7%, compared to guidance of 4.2% for the quarter. Acquisitions contributed $2.3 million in the quarter; Mesa Spirit closed in late December and had no impact on NOI for the quarter.
Property management and corporate G&A were $500,000 below guidance as a result of lower than expected legal and accounting fees. Other income and expenses were $3.6 million; the largest contributor to the $1.6 million increase of our guidance came from sales operations.
Financing costs were on target at $30.4 million. Full-year core NOI increased 4.5%; core revenues grew 3.6% driven by core MH growth of 3% and core RV growth of 6.8%.
The press release and supplemental package provide 2015 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 2015 normalized FFO is $271.3 million or $2.96 per share at the midpoint of our range.
Our changes in guidance since we released preliminary guidance in October include updates to core property operations, property management and corporate expenses, and the refinancing an acquisition activity we announced in our release last night. For the year, growth in core NOI before property management is expected to be approximately 4.4%.
We assume flat occupancy in our MH properties for 2015. Base rent is expected to grow 2.8% with 2.6% from rate and 20 basis points from occupancy as we realize the full-year impact of sites filled in 2014.
Our budgeted base rent continues to reflect utility and real estate tax unbundling efforts. Our base rent growth is approximately 40 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 4.3% to 5%.
We are projecting 5.3% growth in our annuals. Almost 53% of our seasonal revenue is earned in the first quarter.
Our first quarter reservation pace is consistent with our updated guidance. We expect first quarter seasonal and transient revenue growth of 8% and 10% respectively.
The updates to first quarter growth rates for these two line items are driving the increases in full-year guidance to 4.7% for seasonal revenue and 4.3% transient revenue. Keep in mind, we budget more than 40% of our transient income in the third quarter and we expect to gain visibility into third quarter activity during the second quarter.
Our membership business which includes right to use annual payment revenue, right to use contract sales, and sales and marketing expenses is expected to be up slightly next year with a net contribution of $47.1 million. Our updated guidance reflects a shift in our customers behavior towards broader usage of our entire RV footprint.
This is evidence by continued demand for annual, seasonal and transient stays among our TT member base. In total, we expect to generate 20,500 memberships by selling 11,000 Zone Park Passes and activating 9,500 ZPPs through our RV dealer program in 2015.
In addition, we expect to increase the annual count inside the Thousand Trails footprint by almost 250 and to upgrade 3,200 TT customers. Page 16 of our supplemental package shows aggregate revenue generated by our Thousand Trails properties.
We project $89.8 million in 2015 from dues revenue, annual, seasonal and transient stays, upgrade sales and other income, up from $87.6 million in 2014. Core expenses are expected to increase 1.5% in 2015, compared to growth at 2.5% in 2015 over 2013.
We are projecting a deceleration in our overall growth rate mainly because of our expectations for R&M and utility expenses in 2015. For 2015, we expect the recent trend of moderation in utility expense increases to continue mainly affecting natural gas expense and we do not include one-time events in our R&M guidance.
Also, as I noted in my comments on fourth quarter performance, Florida taxes were lower than expected. We have updated our 2015 guidance to reflect expected increase over the 2014 actual taxes.
Because of the timing of these tax adjustments in 2014, this guidance update has more impact on overall expense growth later in 2015. Our guidance includes $5.6 million of NOI from the acquisitions we completed in 2014, including the Mesa Spirit acquisition which closed in late December.
As mentioned in our release, the purchase price was $41.6 million. In connection with the acquisition, we assumed a $19 million loan with a stated average rate of approximately 5.7%, maturing in 2017.
We expect $72.4 million in property management and corporate expenses in 2015. The increase from prior guidance is mainly the result of higher stock-based compensation reflecting the almost 20% increase in our stock prices since we provided preliminary guidance in October.
Other income and expenses of $16 million are up slightly from prior guidance. Financing costs are $1.3 million lower than prior guidance reflecting the net effect of the proportion of our refinancing plan we closed in January and the assumption of debt in connection with the acquisition of Mesa Spirit.
I'll provide more color on our refinancing activities when I comment on the balance sheet. Mesa Spirit is included in our 2015 guidance, but we assume no additional acquisition activity in our guidance.
Our first quarter normalized FFO guidance is approximately $74.5 million or $0.81 per share at the midpoint of our guidance range. We expect our core to generate revenue growth of 3.7%, expense growth of 2.1% and NOI growth of 4.8% in the first quarter.
Our first quarter core base rent growth of 2.7% assumes a 2.4% rate increase and 30 basis points related to occupancy gains we achieved in 2014. The impact of unbundling is expected to decline during the year.
We see approximately 60 basis points impact in the first quarter. We do not assume incremental first quarter occupancy gains in our guidance.
With the first month of the quarter almost complete, we expect growth of 6.7% from our core RV business in the first quarter. Revenues from annuals are expected to grow 5.1% from rate and occupancy gains in Florida and the continuing impact from annuals we gained in the north during 2014.
Seasonal and transient reservation activity continues to show strong results, particularly in Florida and California. Our reservation pace is driving our expectation of 8% seasonal and 10% transient revenue growth in the first quarter.
We are projecting first quarter core expense growth of 2.1%. As I mentioned in my full-year guidance discussion, this growth rate is higher than our full-year in part because of the impact of Florida real estate taxes later in the year.
We expect our acquisition properties to contribute $2 million of NOI in the first quarter. Now I'll discuss our recent refinancing activity and comment on our balance sheet.
In December, we announced a plan to refinance approximately $395 million of secured debt with maturity dates in 2015 and 2016. The new debt is expected to have a weighted average rate of 4.1% with a weighted average maturity of 21 years.
During January we closed on loans with two life companies and generated proceeds of $199 million. These 25-year fully amortizing loans have a weighted average rate of 4.16%.
We use the proceeds to retire $190 million with a weighted average rate of 5.4%. We also incurred the season costs of $9 million The favorable impact to normalized FFO resulting from closing these loans is approximately $0.02 per share in 2015.
We are on track to close on the remaining loans during the first quarter. We expect proceeds of approximately $195 million at 3.85% with a weighted average maturity of 16.5 years.
We plan to use these proceeds to repay debt with a weighted average rate of 5.1%. We have not assumed interest expense savings associated with the planned closings in our guidance.
While the effect on 2015 will depend on many factors, including timing of closing, interest rates at closing, and de-seasons cost, on a full-year basis we anticipate the net favorable impact on normalized FFO per share to be consistent with the impact of the loans we closed in January. At the end of the quarter, our unrestricted cash balance, net of the fourth quarter dividend paid earlier this month was approximately $34 million.
As I mentioned, when discussing preliminary interest expense guidance in October, we plan to use this available cash for repayment of debt as it comes due in early 2015. There's nothing drawn on our $380 million line of credit.
Current secured debt terms are 10-years at coupons around 3.5%, 60% to 75% loan-to-value, and 1.4 to 1.6 times 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] Your first question comes from the line of Nick Joseph with Citi. Please proceed.
Nicholas G. Joseph
Thanks. Can you talk about what's driving the continued out performance in the RV portfolio relative to your expectations?
And do you think it's more of capturing more of the market or is it the pie growing or is it combination of both?
Patrick Waite
Yes, Nick, it’s Patrick. I would say it's a combination of the two.
And I'd touch on transient to start, just because that's typically the first touch that we have with our customers. In the fourth quarter and also going into 2015 that's at about a $30 million bucket.
In the fourth quarter we increased transient revenue by 12.7%, 10.5% of that came from rate and 2.2 % of that came from occupancy. We've seen strong growth and a strong contribution, particularly from our two RV resorts, on Islands and the Keys in Florida.
Both those properties as an example, had a favorable pickup in rate and also double-digit outsize growth in occupancy. In 2015, we'll continue to focus on yield management through the three big holiday weekends, Memorial Day, the Fourth of July.
The Fourth of July happens to fall on a Saturday this year so that’s a good three-day weekend for us, and also Labor Day. We'll increase rate where the opportunity exists based on reservation pace.
We did that throughout 2014 and on the transient side, we're able to push transient rates almost 9% which was an improvement 400 basis points over the previous year. So overall, from a transient perspective, we're going to focus on the yield management.
On the seasonal front, we do a review annually of what's going on in the market, what sort of pace we're seeing, and then we set our rates accordingly. We've seen a very nice pickup in rate year-over-year but also strength on the occupancy front and then annualized I think it’s just been relatively consistent strong in rate and stable in occupancy.
Marguerite M. Nader
And Nick we’ve also seen an increase in people renting cabins at our properties, so you see kind of an increase in rate coming from that and we see that as a very big positive Someone doesn't own an RV, wants to explore the outdoor lifestyle, wants to understand what it's all about and its really kind of getting to know our - getting to know the system, getting to know our property so that’s a big part of it as well.
Nicholas G. Joseph
Thanks and then in terms of the transaction market, can you talk about the amount of product are seeing today and cap rates, I guess, for both MH and RV?
Marguerite M. Nader
Sure. You know obviously in our press release we talked about that we closed Mesa spirit.
Right now, we have [low lies] and contract in various stages there's a strong interest overall in deals using OP units and we're working with interested sellers on that front. Specifically on Mesa spirit, in terms of just cap that we've experienced, this property has historically been under managed, we bought the property for $25,000 per site and I anticipate that a stabilized cap rate would be 6.5% or 7%.
We're excited about this deal and that it is located right next to two other premier RV properties that we own. More generally speaking, I think there is a lot of data points out there in terms of transaction and I think it’s helpful for what's happening for just overall discovery price point for the industry.
Nicholas G. Joseph
Great. And then I guess with your stock trading where it is today and the availability of low cost debt.
How does that cost to capital come into the equation and can we expect you to be more aggressive in terms of acquisitions in the current market?
Marguerite M. Nader
I think that what you are going to find with us is the same thing that we kind of always done is our discipline approach to underwriting and consider the value creation that will come from a transaction. I think certainly using OP units is something that we continue to talk about and continue to talk to sellers about.
So you may see more of that.
Nicholas G. Joseph
Thanks for the details.
Marguerite M. Nader
Thanks Nick.
Operator
Your next question is come from the line of David Toti with Cantor Fitzgerald. Please proceed.
David Toti
Good morning. Marguerite a quick question and it's a little bit left field.
What is your expected impact of lower gas prices over the next 12-months or so relative to some of the RV product are you already seeing increasing demand because of lower gas prices or do you really view that is sort of a really peripheral variable in the equation?
Marguerite M. Nader
Well, I think I've been used to answering that question as it relates to the price of gas or oil going up, so - considered what's happened over the last few months year, during those times when oil and gas is going up our data shows that our customers are not likely to differ the vacation simply because of the price of gas. Because we offer an affordable vacation option.
But now as we sit here today, the average RV has a tank size of about 50 to 100 gallons, so last summer it cost $200 to $400 to fill it and now across $100 to $200 that’s a positive for us. If nothing else from a psychological point of view.
Our customer has that added flexibility to be able to spend that money elsewhere. I think we’re also seeing it, we are monitoring what potential cost savings we could see just from an expense side from the third-party vendors and then we see a decrease in our natural gas prices.
Overall, just that the effect of what we're seeing in terms of oil. I think that from an RV side in terms of filling up that RV, it certainly was pushing dealers, pushing RV dealers to sell more which will benefit us.
David Toti
Okay. And my second question has to do with the rental burn off and then that continues to appear to continue to decline slowly, is this something you're pursuing actively with the rental units or are you just sort of letting that take its course as those rental units convert?
Marguerite M. Nader
No, we are actively come pursuing it what we are trying to get an existing renter to convert. But we're also cognizant of areas where we keep the rental program isn’t so bad we can put some rental units in here knowing that we've got this increasing conversion rates show.
So you may see some fluctuation in these rental numbers in terms of we bring some rental units online and then work with that owners to convert them.
David Toti
Last question. Just quick one, are you seeing any change in price point in the MH sales?
As those numbers increase or releasing a return to more-and-more expense of units?
Marguerite M. Nader
In the price point increasing a little bit certainly from a few years ago, but the number of points there was five or six, but not something to talk about, but they are increasing and what we're seeing is that the customer is looking for a downsized home from - but from a home up north which was 3,000, 4,000 square feet. So they are interested in a home coming down in Florida and Arizona, $70,000 home, $65,000 to $70,000.
David Toti
So you're not selling a lot of the $200,000 units yet.
Marguerite M. Nader
No, we’re not.
David Toti
Okay, thanks for the detail today.
Marguerite M. Nader
Okay.
Operator
Your next question comes from the line of Jana Galan with Bank of America Merrill Lynch. Please proceed.
Jana Galan
Thank you, good morning.
Marguerite M. Nader
Good morning, Jana.
Jana Galan
Following up on the lower oil prices, I was curious if that had been factored into both your RV guidance or your expense guidance or is that the potential upside?
Paul Seavey
Well, certainly as it relates to the RV and potential impact on transient, we have followed our historical practice which is to take a look at where we are and focus really on the upcoming quarter and as we move through the first quarter, then we will look at our reservation pace and address our guidance just as we roll through the year. And, again, 40% of that transient activity occurs in the third quarter so there's a whole lot that we have included on transient revenue in that third quarter.
Then as it relates to expenses, as I mentioned, we have a deceleration of the expense increase we saw significant increase in 2014 over 2013 as a result of natural gas and the trend later in the year was significantly lower and we’re following that trend in our guidance.
Jana Galan
Thank you. And then you mentioned the success you've had with some of your online initiatives in the greater online traffic.
I'm wondering if you can talk about where you are in the process of some of those marketing initiatives?
Marguerite M. Nader
Yes, I mean right now what we are looking at is a few things with respect to market. We have RV lead generation through new digital programs.
Really more than half of the new leads that we got this year on the RV side were from online or digital programs. And what we're seeing is the impact of these campaigns, we can see it in significantly higher open rates for email campaigns.
Which really is a big deal for us because with the email gets open and then the next step is to make a reservation. We are making it so that our digital marketing campaigns are relevant and useful to the customer so that they keep coming back to the sites for more information.
A site that's just there that doesn't provide somebody useful information won’t get used and we are trying to continue to modify our sites so that they are relevant to the customer. We’ve also just finished a short music video that we put on YouTube and other venues that highlights all the reasons why staying in the cold north is a bad idea and our theme is winter differently and that’s really been a good marketing focus for us this year and just encouraging people to come down to the south.
Jana Galan
Great, thank you.
Operator
Your next question comes from the line of Paul Adornato with BMO Capital Markets. Please proceed.
Marguerite M. Nader
Paul.
Operator
Please check your mute to be sure, sir.
Marguerite M. Nader
Operator, maybe we can go on to the next question and Paul can jump back into the queue.
Operator
Our next question comes from the line of Dave Bragg with Green Street Advisors. Please proceed.
David D. Bragg
Hi, thank you, good morning. Couple of follow-ups to Nick’s questions, first, on the Mesa deal, can you talk about how you sourced that acquisition and also can you give us a better understanding of your ability to improve operations at miss managed assets.
What’s a cap rate today and what's the amount of time that you require to get to that stabilized yield 6.5% to 7%?
Marguerite M. Nader
Yes, let me just take that, we’ll take that in kind of two parts. First to add to the sourcing of the deal, that’s exactly on what we've seen in historical deals which is property that we looked at for a long time with no seller for 20 years.
He had an event a family event really that caused him to say okay I want to get out I want to move back to Michigan. Want to go back and live in Michigan, so that’s really what sourced the deal, but that is similar to what we see throughout just relationship based.
With respect to just operating the assets, going in is a little bit north of five cap and maybe Patrick kind of walk through how we get - how we kind of take a mismanaged asset and bring it forward.
Patrick Waite
Sure, and we have a clearly a platform and a presence in the greater Phoenix market, so in addition to knowing that market very well we have synergies with respect to 10-year knowledgeable operators that have been part of our company for 10, 15 and more years. The first thing we do really is evaluate the onsite staff and make sure that we have the appropriate team members in place to manage the property in a run rate perspective the way we like to present our communities to our customers and that will goes always from our physical appearance to the experience of the customers.
We will be changing over a number of the members of the onsite management team that kind of started as we took the property on board if it. That will occur over call it 30 to 60 day period.
We think we're very well positioned to finish off the season and then set our sites on the upcoming seasons as we work our way through this summer. Our look there is towards the upcoming season 2015 into 2016 where we can drive revenue in occupancy and again given our experience in that market we have some pretty good strategies and we feel that we are going to be able to deliver upsides revenue - excuse me outside revenue growth on 12 or 18 month run right.
David D. Bragg
Thanks for that insight. So that's the timeframe to get from the 5% to the 6.5% to 7% is about 12 to 18 months?
Patrick Waite
That’s correct.
David D. Bragg
Okay thanks you. And the next question is regarding the discipline underwriting approach you've mentioned.
As your cost to capital has improved pretty dramatically over the past year or so, how have you adjusted your underwriting?
Marguerite M. Nader
Well we will look at - certainly from an underwriting perspective of just the asset itself is pretty similar to what it's always been. In terms of what are the effects of the rate growth, what are the effects of the real estate tax [intake] that’s going to happen when you buy a property.
That’s been consistent and we know that those are kind of hot buttons to taxes and what happens on a repair and maintenance kind when we take over the assets, so we’ll look at that but that’s consistent historically and then we do look at now and have over the last few years is what is the impact if we were to do an OP unit structure. And I think we haven’t done an OP unit deal in 10 years, I think the last one we did was 2004, until last year when we did one as part of our $100 million transaction in last summer in August of last 2013.
So we’ll look at it that way and kind of run out the model.
David D. Bragg
And what's the appropriate relationship between your cost of capital and the IRRs you expect to achieve on potential acquisitions?
Marguerite M. Nader
Well we look at what's the going in rate - going in cap rate plus the growth rate and then we compare it to what our cost of capital is.
David D. Bragg
Okay. So you lowered that targeted IRR in the past year or two is that cost of capital has improved.
Marguerite M. Nader
Yes, I mean I think that the IRR is the difficult thing for us because it implies what you are reversion cap rate is going to be and we generally look at a more of a yield plus growth.
David D. Bragg
Okay. And then the last question is Paul you mentioned your recent deals with life insurance companies, but with entry of Freddie into the space, to what degree has that impacted your borrowing cost you think that you’re seeing lower spreads due to tightened competition?
Paul Seavey
I think generally we are seeing that, yes, as I mentioned the second part of our refinancing plan shorter weighted average maturity than the first. There is a 10-year component in that and we are working through a deal right now with Freddie Mac and I think I previously discussed the competition that Freddie introduce into the marketplace when they came into the MH space earlier this year.
David D. Bragg
Okay, good thank you.
Paul Seavey
Sure.
Marguerite M. Nader
Thank you.
Operator
Your next question comes from the line of Todd Stender with Wells Fargo. Please proceed.
Todd J. Stender
Hi, thanks everybody. For the renters who converted to homeowners in Q4, can you just go through the average cost to the rent versus the cost to own just seeing what the tipping point at this point in the cycle is?
Patrick Waite
Well, average cost to the rents in the low 800s across the portfolio and that’s typical for the rental conversion that we’ve doing. Its’ difficult that to pin down the value proposition for each of the individual renters that’s going to determine or be based on whether or not they use financing and how much financing the user whether or not they pay cash.
So the symbol example would be if someone were to pay cash for the home they’re going to revert to our lot rent which is going to be in the mid-500 so a couple few hundred dollar drop off in there all in payment and depending on whether or not they use financing that could be anywhere from a moderate discount to similar value propositions where once they've by the house and take down any financing that's will be amortizing over time now pay that down and we just be left with the lot rent obligation.
Todd J. Stender
Okay thanks and you said I think Marguerite you said last year you saw 10% renter to homeowner conversions is there are fair target for this year. How do you guys budget that?
Marguerite M. Nader
We don’t really budget it that way but it's something that we certainly has started in the last couple of quarters to talk about this conversion. We're also going in 2015 going to talking about another sort of conversion which is the conversion of not the existing renter buying that home, but somebody that inside the community just buying another home so we're going to be tracking both of them.
So I think we will just kind of keep you updated through the year on both of those statistics.
Todd J. Stender
Okay, thanks. And I think you said earlier you probably don’t expect much occupancy move this year or not as much as in the past.
Does that mean we can expect more rental rate increases? Are you guys pushing a little more aggressively on existing tenants?
Marguerite M. Nader
I think what we said is, what we said in the past is that we don't, our guidance never assumes any occupancy growth. So that's just how we build up our budget that's how we build up our guidance model.
And I think every year that we do that, we show that we increase occupancy. It's just – that just kind of how we do, we build up our budget and build up our guidance in October.
As far as the rental rates and the rate increases for the most part they are locked down really from September to October as when we determine what our rent increases are going to be and they become part of our guidance.
Todd J. Stender
Okay, that’s helpful. And Paul, I think we can expect more to seasons costs for the upcoming refi’s.
Can you just talk about your recent decision you prepaid the 2015 mortgages early. But they are due this year, just wanted to see about how you think about that when maturities are coming up in the same calendar year.
How you kind of way the seasons cost versus say just waiting and paying them off once that window opens up to a prepay without penalty.
Paul Seavey
Right. And our decision here was really driven by the availability of the long-term debt as we surveyed the appetite among life companies in kind of mid to late 2014 what we saw was reduction in that overall appetite.
And thought it was important to lock down the opportunity and that really was the driver behind that decision related to [indiscernible] 2015 debt rather than trying to wait and risk not being able to have access to that 25 year debt at such historically low coupons.
Todd J. Stender
And how do you just said on the cash, there is an earnings drag associated with that, is that what you are trying to avoid?
Paul Seavey
Yes, yes.
Todd J. Stender
Okay, thank you.
Paul Seavey
Sure.
Marguerite M. Nader
Thanks, Todd.
Operator
[Operator Instructions] Your next question comes from the line of Michael Bilerman with Citi. Please proceed.
Michael Bilerman
Yes, good morning, Marguerite or Paul. I think one of you mentioned in your opening comments about increasing the Cavco venture.
And I just wasn’t sure sort of from a dollar as a homes perspective, what direction that was and how meaningful if that was.
Marguerite M. Nader
This year, we looked at the Cavco numbers and as we I think we had 372 homes something like the 400 homes that we ordered and we sold roughly half of those. I would see that continuing and having that relationship with Cavco where we are able to really only put half the chips on the table in terms of from a working capital perspective.
It’s a positive for us and it works for Cavco. Cavco obviously is in the business of building homes and they are able to get more homes out there.
So I think you would see along those same lines and looking to grow the business in Colorado and Florida. Is really where we are going to concentrate on growing that Cavco joint venture.
Michael Bilerman
So not tremendously higher than the 400 homes, but in 2014 something like maybe a 5% or 10% increase that is double of the venture?
Marguerite M. Nader
Yes, right. I think definitely Michael.
Michael Bilerman
Okay, thank you.
Operator
Our next question comes from the line of Paul Adornato with BMO Capital Markets. Please proceed.
Paul E. Adornato
Thanks, we heard about some very good strength in the RV business, but there was the one product that caused an uptick in bad debt, so I was wondering if you could just describe that product and the pricing there?
Marguerite M. Nader
Yes, this is actually a product that we have our ZPP product which is our Zone Park Pass, it’s a $500 product, it’s the low cost entry level product into thousand trails. And when we went to do some upgrades to those individual, it turned out that some of them were in a just for a three months stay and didn’t want to continue in the system.
So upgrading those resulted in us having to kind of reevaluate, but from an upgrade perspective to our legacy that continues to be very strong and continues to be consistent with what we've seen over the last 10 years, but it’s really for us just tweaking and having an understanding of how to upgrade a guy who would be all an initial cost is lower than what it had been previously with a legacy member which is more of a $6000 product.
Paul E. Adornato
Okay, thanks and you talked about cabins as being a nice entree into the RV lifestyle. How many cabins do you have in the portfolio and what’s the occupancy of the cabins?
Marguerite M. Nader
We have about I think about a 1,000 cabins in the portfolio. And the occupancy, you know, I don't have that.
Paul has to kind of get that for you offline. Certainly, the occupancy follows the RV occupancy in terms of heavy in - heavy on the weekends, heavy on holiday weekends.
The one thing that the cabins do is, they may have a longer length of stay, because someone may stay for one week on a transient basis they decide this is their one week or two week vacation and they are going to stay with us for that whole time.
Paul E. Adornato
Okay, great.. Thank you.
End of Q&A
Operator
Since we have no more questions on the line at this time, I would like to turn back over to Marguerite Nader for closing comments.
Marguerite M. Nader
Thank you everyone. We look forward to updating you next quarter on our results.
Operator
Ladies and gentlemen that’s concludes today's conference. Thank you for your participation.
You may now disconnect. Have a great day.