Jan 24, 2017
Operator
Good day, everyone and thank you all for joining us to discuss Equity LifeStyle Properties' fourth quarter and year-end 2016 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.
In addition, during today's call we will discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release, our supplemental information and our historical SEC filings.
At this time I would like to turn the call over to Marguerite Nader, our President and CEO.
Marguerite Nader
Good morning and thank you for joining us today. I am pleased to report the final results for 2016.
We continued our record of strong core operations and FFO growth. Our platform continues to show the strength of the underlying fundamentals.
We own great real estate locations with a strong demographic trend. Now a few highlights from 2016 that are helping us to build momentum into 2017.
We continued our positive occupancy trend of both increasing occupancy and gaining homeowners. For the year, we have increased occupancy by 597 sites and increased homeowners by 814.
On the new home sales front, we sold 657 homes in 2016, marking our second year of a 40% increase in sales volume. Our new home sales are generally all-cash transactions to customers who are using our homes as second homes and want to escape the harsh Northern winters.
We see high demand for our homes and communities. Our same-store NOI growth was 5.7%.
We finished the year with a strong growth rate of 4.5% in our MH business. And, finally, our RV revenue grew by nearly 6%.
We have been focused on converting existing renters to owners and are pleased with the trend we're seeing. For the year, 17% of our new and used home sales were conversions of current residents who purchased a home.
2016 marks the end of our third year of enhanced marketing campaigns to drive traffic to our properties and websites. In that time period, we have tripled our social media fan base to the current level of 340,000.
Our annual online visitors have doubled and we have tripled our RV reservations booked online. We have significantly increased the volume of our online applications.
And in 2016, we took in over 10,000 online applications for residency on our websites. We believe we will continue to see increased levels of engagement on our digital channels in 2017.
For the full year, our RV portfolio performed very well. The annuals which represent two-thirds of RV income, generated a 6% growth rate.
The seasonals came in at 3% and the transient base increase was 8%. We're now turning our attention to our snowbird customers in the South.
Our operating personnel are focused on our 2017 performance and they will also be working with our customers to obtain commitments for the 2018 season. I would like to thank our employees for producing impressive 2016 results.
Through the effort of each property, regional and corporate level employee, we have been able to continuously maximize 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 and full-year results, update our full-year 2017 guidance and discuss our detailed first quarter guidance.
Core property operating income was higher than guidance for the quarter and generated 5.7% growth in NOI for the full year. Normalized FFO per share for the fourth quarter was $0.81, $0.03 higher than guidance on property operations and savings in corporate and other expenses.
Full-year normalized FFO per share was $3.31, 9% higher than 2015. Full-year core base rental income growth was 4.6%, with 3.7% coming from rate and 90 basis points coming from occupancy.
We increased core occupancy 147 sites in the quarter and rental home occupancy decreased by 39 sites. At the end of the year, rental homes represented 7.2% of our core occupancy.
Core resort base rental income in the fourth quarter was in line with guidance. Revenue growth of 5.7% from annuals was in line with expectations and reflects our ability to increase rate across the portfolio.
Transient revenue in the quarter was slightly ahead of expectations, driven by our Northern resorts which benefited from warmer weather during late fall. Net activity in our membership business, including dues and upgrade sales revenue, as well as sales and marketing expenses, was higher than expectations in the fourth quarter as a result of upgrade sales volume from our in-park sales efforts.
In addition, we experienced a reduced rate of member attrition which had a positive effect on dues revenue. Our ending member count of 104,728 was 2,300 higher than the 2015 ending member count.
Camping pass sales and RV dealer activations increased almost 16% compared to the fourth quarter of 2015. Utility and other income was higher than budget as a result of insurance recovery associated with damage at certain properties.
The favorable variance is largely offset by increased repairs and maintenance expenses as we cleaned up properties during the quarter following those storm events. Core property operating expenses increased 3.2% for the full year compared to 2016.
We experienced higher-than-planned R&M and administrative expenses during the year as a result of increased costs related to maintenance of our water and sewer systems and legal and regulatory fees. In the fourth quarter, our core revenue growth was 5.2% and core NOI growth was 5.6%.
Full-year core revenue growth was 4.6% and core NOI increased 5.7%. Acquisitions contributed $2.3 million in the quarter and $5.5 million for the full year.
The contribution from acquisitions was higher than guidance, mainly as a result of the resumption of operation of Tropical Palms RV resort during the quarter following termination of the ground lease. The acquisition properties acquired and operated prior to the fourth quarter performed in line with expectations during the quarter.
Property management and corporate G&A were $18.8 million for the fourth quarter. In the quarter, these expenses were lower than expected as a result of payroll savings.
The press release and supplemental package provide 2017 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 2017 normalized FFO is $328.1 million or $3.53 per share at the midpoint of our range.
Our changes in guidance since we released preliminary guidance in October include updates to core and acquisition property operations and adjustments to other income and expenses as a result of the Tropical Palms RV lease termination and settlement of the California litigation. For the year, growth in core NOI, before property management, is expected to be approximately 4.3%.
We assume flat occupancy in our MH properties for 2017. Base rent is expected to grow 4%, with 3.5% from rate and 50 basis points from occupancy as we realize the full-year impact of sites filled in 2016.
In our resort business, the midpoint of our updated revenue guidance is $205.5 million for 2017, in line with our preliminary guidance. We maintain our expectation of 5% growth in our annuals for 2016.
We have reviewed our first quarter reservation pace for our seasonal and transient businesses and incorporated that pacing into our guidance update. For the full year, we anticipate seasonal revenue growth of 2% and transient revenues are expected to increase 4.5%.
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 consistent with our preliminary guidance and shows a net contribution of $46.3 million.
In total we expect to generate 29,800 memberships by selling 13,100 Thousand Trails camping passes and activating 16,700 camping passes through our RV dealer program in 2017. In addition, we expect to increase the annual count inside the Thousand Trails footprint by 250 and to upgrade 2600 TT customers.
Page 15 of our supplemental package shows aggregate revenues generated by our Thousand Trails properties. We project $95.2 million in 2017 from dues revenue; annual, seasonal and transient stays; upgrade sales; and other income.
The midpoint of our utility and other income guidance is approximately $78.5 million and is in line with prior guidance. The growth rate change from prior guidance mainly is a result of the insurance recovery we recorded during the fourth quarter of 2016.
Keep in mind, our guidance does not assume property loss events that may generate insurance recovery to offset expenses necessary to restore property operations. Core expenses are approximately $339 million at the midpoint of our guidance range, consistent with our preliminary guidance.
As I mentioned on our October call, our budget for repairs and maintenance expenses does not assume expenses related to property damage or other one-time items. Our updated guidance does include the impact of recent minimum wage changes in states such as Arizona and Washington.
We do anticipate some quarterly fluctuations in our growth rates during the year. Our guidance includes $8.1 million of NOI from the acquisitions we completed in 2016 and the resumption of operations at Tropical Palms RV.
We make no assumptions regarding additional acquisitions in our 2017 guidance. We expect $80.5 million in property management and corporate expenses in 2017, consistent with prior guidance.
Other income and expenses of $13.1 million are in line with our preliminary guidance. Note this line item has been adjusted to eliminate ground lease income as well as the expenses associated with property rights initiatives following settlement of our California litigation.
Financing costs are in line with prior guidance. We make no assumption regarding refinancing activity in 2017.
The full-year guidance model makes no assumption regarding the use of free cash flow we expect to generate in 2017. Our first quarter normalized FFO guidance is approximately $90.7 million or $0.98 per share at the midpoint of our guidance range.
We expect our core to generate revenue growth of 3.1%, expense growth of 3.8% and NOI growth of 2.6% in the first quarter. Our first quarter core base rent growth of 4.3% assumes a 3.5% rate increase and 80 basis points related to occupancy gains we achieved in 2016.
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 2.8% from our core RV business in the first quarter.
Revenues from annuals are expected to grow 4.4% in the quarter. The first quarter growth rate is impacted by the Leap Year effect which impacted our accrued revenue during 2016.
As previously mentioned, our current reservation pace is driving our expectation of 1.5% seasonal and flat transient revenue growth in the first quarter. Utility and other income is down from prior year as a result of insurance recovery recorded in the first quarter of 2016.
We're projecting first quarter core expense growth of 3.8%. As I mentioned in my full-year guidance discussion, we do anticipate some quarterly fluctuations in expense growth rates.
And the first quarter includes an expectation for R&M and payroll that is higher than the remainder of the year. We expect our acquisition properties to contribute approximately $3.4 million of NOI in the first quarter.
Now I'll comment on our balance sheet. The press release show the year-end cash balance of $56.3 million.
There is nothing drawn on our $400 million line of credit and our ATM program is available to provide additional liquidity. Our 2017 debt maturities total approximately $34 million.
These loans can be repaid, without penalty, a few months in advance of maturity later in the year. We're currently evaluating our refinancing options and expect to provide updates on future calls.
Current secured debt terms are 10 years at coupons between 4% and 4.5%, 60% to 75% loan to value and 1.4 to 1.6 times debt service coverage. We continue to see strong interest from like companies and the GSEs.
We know some interest from CMBS lenders. But with the change in risk retention rules, the list of lenders is shorter and pricing is high relative to other secured debt sources.
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 capital available to us.
Our debt to EBITDA is around 5.1 times and our interest coverage is 4.1 times. The weighted average maturity of our outstanding secured debt is almost 11 years.
Now we would like to open it up for questions.
Operator
[Operator Instructions]. And our first question comes from Gaurav Mehta from Cantor Fitzgerald.
Your line is now open.
Gaurav Mehta
A couple of questions, I think in your prepared remarks you talked about new home sales being strong for the last couple of years. I was wondering if you could comment on the price points now for these new home sales and in which markets are you seeing trends.
Patrick Waite
It's Patrick. The average price of our new home sales is in the $60,000 to $70,000 price range.
It's been relatively stable over the last several quarters. And I think the key there is really that we price to the market in order to achieve our occupancy growth.
As Marguerite pointed out, year-over-year, our new home sales were up about 40% and that's a trend that's held over the last couple of years. But we haven't seen a meaningful shift in the price of the new homes.
Marguerite Nader
And Gaurav, roughly half of those new home sales were in Florida.
Gaurav Mehta
Okay. And I think you also mentioned that 17% of your home sales were conversions from a rental to owners.
Is that a trend that you are seeing in Florida as well?
Patrick Waite
Yes. We're seeing that in Florida.
We're seeing it really across the portfolio. And just to break down that 17%, roughly 10% are homes that we're selling to our existing renters.
The balance that gets to the 17% are other either renters or owners in the community deciding to purchase a new home from us or a used home.
Gaurav Mehta
Okay. And then lastly, the member count that you have on page 15 of the supplement, it seems like that's slower than what we had in the last quarter.
Can you provide more color on that?
Patrick Waite
Excuse me, Gaurav.
Gaurav Mehta
It's 105,500. In the last quarter, it was higher for 2017.
Patrick Waite
Right. It's just a slight adjustment based on where we ended the year and what our expectations are.
Marguerite Nader
Our focus on that, Gaurav, is really on that growth in the member base from 2013 forward. And you see that from both the member count and then also an increase in the dues, primarily this past year.
Operator
And our next question comes from Joshua Dennerlein from Bank of America Merrill Lynch. Your line is now open.
Joshua Dennerlein
Just curious on what your thoughts are on how many expansion sites you can bring online in 2017. How does that compare to prior years?
And also do you think you can accelerate that pace going forward, as more Baby Boomers retire each year?
Marguerite Nader
Sure. And just taking a look of a historical perspective, we had many years where we didn't have any expansion sites.
Over the last couple of years we've built 500, 600 sites of expansion and this is expansion adjacent to our existing properties. I would anticipate in 2017 that we would be somewhere in the 500 to 600 range of new homes' site development.
Joshua Dennerlein
And I guess is that kind of maybe like a normalized pace per year. Does that have to do with demand or just kind of how fast you guys can bring it online each year?
Marguerite Nader
It's really a little bit of both. When we look at the demand in the areas where we see that we're going to be able to either fill the site -- some of the sites are RVs, so either fill it with an RV or fill it with a manufactured home.
So certainly demand plays into it. And as we look out, it takes a while to build a site, so we have some visibility as to what we're going to do in 2017.
It gets a little bit more difficult to predict for 2018 and beyond. We do have 5,000 vacant acres that are adjacent to our properties.
Operator
And our next question comes from Drew Babin from Robert W. Baird.
Your line is now open.
Drew Babin
A couple of balance sheet questions for Paul here. The $34 million of secured debt that comes due in 2017, should we expect that the financing you did in 4Q 2016 positions you to pay that down sooner, rather than later?
Just in 2017?
Paul Seavey
Yes. As we're looking at maturities for 2017 and even looking ahead into 2018, we're going through that process right now; evaluating our options.
We think about 2018 and the opportunity set. The cost to defease that debt is, call it, $15 million.
And on a payback analysis which we used in 2013 and 2015, when we went through our refinancing activity in those years, we were kind of targeting a 2- to 3-year payback. That's closer to five or six years.
So it's still pretty expensive when looking at 2018. I think that what you've seen us do over the past few years is take advantage of long term debt, focus on financial flexibility and address maturities by going long.
That's been a great opportunity for us. Our -- as I mentioned in my remarks, our weighted average maturity on our secured debt is almost 11 years.
I think broadly across REITs, that is closer to five years. So we have options in front of us.
We're figuring that out. And I think we'll have more information to share in future calls.
Drew Babin
Okay. So it sounds like there are no assumptions regarding any 2018 paydown or anything like that in guidance.
Paul Seavey
That's correct.
Operator
And our next question comes from Gwen Clark from Evercore. Your line is now open.
Gwen Clark
Looking forward, given there's next to no new supply and you have sustained new demand, how long do you think you can keep up the rent growth kind of in the level that you have it?
Marguerite Nader
When we look at -- this year, we increased occupancy by 600 sites. And that was primarily -- half of that was in Florida.
We see -- currently we have the same amount of kind of breakdown of our vacant sites; half of it is in Florida. We see high demand going in locations where we have vacant sites.
So as we look to the year, it's difficult to look beyond that. But I would see the same kind of positive trends in occupancy.
Gwen Clark
Okay, that's helpful. I guess there's just one follow-up.
Do you see differences in the strength in rate growth in different regions that you guys operate in?
Patrick Waite
Yes; yes, we do. I think if I were to point to some of the stronger markets for us, certainly coastal Florida has historically been strong and it continues to be today.
California is very strong demand and when we have the opportunity to do market-based increases there, that's very strong. The Denver market, although that's a relatively small market for us, has been very strong and it's also been a large contributor to our new home sales.
Just for perspective, over the last six or eight quarters, new home sales in Florida and Colorado contributed about 70% to total new home sales. So those have been very strong markets for us.
Operator
And our next question comes from Ryan Burke from Green Street Advisors. Your line is now open.
Ryan Burke
First one is a follow-on to Gwen's first question. In looking back at your core MH rent growth, the peak was around 5% back in the early 2000s.
The world is certainly different now. But besides the leases that are tied to CPI, what's really holding you guys back from being able to achieve sort of the 4% to 5% rent growth, particularly as occupancy has continued to increase?
Marguerite Nader
Certainly we have, there is areas where we have rent control. We have prospectus-driven rent growth.
So there is opportunity to get mark to market upon a vacancy. But what we're seeing is that our customers are staying longer in our properties so we're not able to necessarily achieve that mark-to-market; and, instead, it's more of a CPI-based rate growth.
Ryan Burke
Okay, is it fair to sort of characterize the strategy as occupancy has taken more importance? And do you think as occupancy goes higher, you will focus more on rent growth?
Or is that not the right way to think about it?
Marguerite Nader
I don't think that -- where we can get rate growth, we're. Where we have the opportunity to mark-to-market, we're.
And at the same time, we're highly focused on filling vacant sites. So we're kind of doing both, I would say.
Ryan Burke
Okay, got it. Second question, for Paul, just in terms of the lawsuit settlement impact on the income statement, did legal costs on those three California properties comprise the majority of the property rights initiative line item over the past few years?
And, if so, should we assume that that line item drops down close to zero, unless more lawsuits or rent control initiatives pop up?
Paul Seavey
Yes; they did comprise the majority over the past few years. And as I mentioned in my remarks, we eliminated that from our guidance for 2017.
Ryan Burke
Okay. And third question, final question, just higher level, the FHFA has done a bit of an about-face in terms of chattel lending.
If you look back to 2015, it didn't seem like they were going to push Fannie and Freddie to find a way to support chattel lending. Fast forward to the end of 2016, it looks like they are pushing them to do so.
But what do you think the odds are of something actually happening? And if something does happen, what does it mean for the sector?
What does it mean for ELS?
Paul Seavey
Yes, I would say a few things. Certainly everything is in question under the Trump administration.
So kind of overlay that on top of everything as it relates to the GSEs. Set that aside.
Kind of our understanding of what's happening inside the GSEs in response to the FHFA is development of a program to address chattel financing. They have a timeline of a few months to spend on that.
There is a comment-and-answer period that kind of goes through a process. MHI is quite involved in reviewing what the GSEs are doing, participating in that comment period.
And our understanding is they might have something to announce or roll out by the end of 2017 or into early 2018.
Marguerite Nader
But you know as it relates to ELS, ELS has never relied on chattel financing and don't intend to in the future; don't intend to need to in the future. So 90% plus of our transactions are all cash.
So while it's important and something we're watching for the industry, it's not as relevant for ELS.
Operator
And our next question comes from Todd Stender from Wells Fargo. Your line is now open.
Todd Stender
I'm not sure if I missed this, but can you give more detail around your slight reduction in core guidance assumptions? Maybe just talk about top line and then maybe expenses?
Paul Seavey
Yes. Primarily the change really relates to where we landed in the fourth quarter.
The change in expense guidance really is a function of the increased expenses we saw as a result of some of the storm events that I mentioned in my remarks. Those were offset by increased revenues which represented the insurance recovery associated with those COGS.
So primarily it was movement in line items as a result of the actual activity in the fourth quarter.
Todd Stender
And just to stay with you, Paul, it sounds like if you are getting a 3.9% coupon on debt in Q4 which I think in your remarks you mentioned it climbing upwards to 4.5%. Is that -- has that had a commensurate move in cap rates?
Have you guys seen any movement in acquisition yields?
Paul Seavey
I'd say that the financing rate has ticked up to the 4% to 4.5% that I mentioned; hasn't seen much movement in terms of pricing on acquisitions as a result.
Todd Stender
What are you guys budgeting for this year? Do you have some yields either from the MH side or RV that you can expect for the full year?
Paul Seavey
In terms of acquisition volume?
Todd Stender
Yes. As volume -- or actually it's yields, just cap rates on new acquisitions.
Paul Seavey
We don't have any assumptions for acquisitions built into our guidance model.
Marguerite Nader
And it's easier, I think, to take a look at what has happened if you look at the past year. In 2016 we closed on $120 million of assets.
In the quarter, we closed on the one RV resort which was a $20 million deal at about a 5% cap. So it's a lot easier for us to talk about things on a historical basis on a cap rate or a per-site basis, than to kind of figure out what's going to happen in 2017.
I think our acquisitions team did a good job in 2016 of finding accretive deals and I think that the team will continue to do that in 2017.
Todd Stender
And then just finally looking at your debt levels, they've come down over the year. You are in the debt to EBITDA range of about 5 times.
Just directionally, where do you see your target for debt levels trending this year?
Paul Seavey
I wouldn't say we're targeting anything. We have little activity in terms of maturities this year; just the $34 million that comes due.
So I wouldn't expect a significant change from where we're today.
Operator
And our next question comes from Paul Adornato from BMO Capital Markets. Your line is now open.
Paul Adornato
I was wondering, you mentioned you've completed your three-year process in terms of digital advertising, social media and online booking, et cetera. Was wondering if there was another level or anything else on that agenda or if you've kind of reached a steady state and are happy with your presence.
Marguerite Nader
Yes, I don't think there is a steady state in digital media. It keeps changing.
Three years ago, I wouldn't have thought that we were going to be -- had 340,000 Facebook fans; on Instagram, Twitter, TripAdvisor; all of those different ways. So I anticipate that we would be, three years from now, talking about something different.
We do have an excellent marketing department that is focused on just staying in touch with the latest technology to access our customer. So I think it will change over the course of the next three years.
I can't exactly say how. But I would anticipate more of the same of just being able to access our customer more efficiently.
Paul Adornato
And in terms of the spend on those activities, how do you evaluate how much you are going to spend? Is it possible to do a cost-benefit in the digital world?
Marguerite Nader
Sure. It absolutely is.
It actually is much easier to do than in the old world of print. So we're able to look at our return on our investment.
Basically, our marketing expense is split about 60% for our local and kind of property-focused marketing; and about 40% for national marketing efforts which include our digital marketing efforts. But each campaign basically needs to pay for itself and then some.
So we evaluate each campaign in that manner.
Paul Adornato
And just one more follow-up, anything else on your radar, either positive or negative, in terms of administration policy changes besides the GSEs?
Marguerite Nader
No. I think we're waiting, along with the rest of the world, to find out what's next.
Operator
Thank you. Since we have no more questions on the line at this time, I would like to turn it back over to Marguerite Nader for closing comments.
Marguerite Nader
Thank you all very much for joining us. We look forward to updating you on our next earnings call.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.
Everyone have a wonderful day.