Good afternoon, everyone. Welcome to Citi's 2024 Global Property CEO Conference. I'm Eric Wolfe with Citi Research. We are pleased to have with us Marguerite Nader of Equity LifeStyle. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveqa.com and enter code GPC24 to submit any questions if you don't want to raise your hand. Marguerite, I'll turn it over to you to introduce your team, give some opening remarks, and tell people the top reasons to buy your stock today.
Wonderful. Thank you very much, Eric.
Demographic trends. On page nine of our deck, you can see our property locations. We've spent the last 30 years building a portfolio focused on high-quality coastal and Sunbelt retirement and vacation destinations. We're in locations where active adults want to be. They want to get away from the cold winter and be able to lead an active lifestyle. We have 30 years supporting leading results, a geographically diverse property base in sought-after markets, and no new supply on the horizon. That's the reason to own our stock today. And I think it was helpful, Eric, in the Citi report that you put out. You highlighted property type, geography, and management team. They matter the most, and we agree with you.
Thank you for that. I guess as you look at the next couple of years and you think about how your pricing power could change, I mean, is there anything that you can think of that would cause a sort of step down in pricing power? Obviously, you've had multiple good years of rate increases. Just trying to think through the risk that something could change. Is it just that CPI comes down a bit and you have some percentage of leases tied to that? What could change that's going to change the fundamental backdrop for your property sectors over the next couple of years?
Certainly. I think a focus on CPI is important, and we have a slide in our presentation that focuses on how we've been able to increase rents in excess of the cost of living every year over the last 30 years. It might be helpful for Patrick to walk through the market analysis that we go through every year to determine those market rents and be able to build up the rent increases that we do.
Yeah, sure. I guess I'll focus on MH. It's roughly two-thirds of our revenue, but the process is pretty similar for the long-term customers in both the RV space and in the marina space. We look at competing properties, obviously directly competing properties in the MH space, but also the multifamily, single-family rental, the prices of single-family homes and condos, and directionally where those prices are moving and how we compare with respect to a straight value proposition. I think, as you asked that question, Eric, where my head went really was that there will be a normalization to something that's more similar to historic trends. We've just went through this period of elevated inflation. The portfolio, all asset classes, performed very well, but we've seen some moderation just with respect to the comp set and also with our rate increases.
Got it. And I often get asked a question of sort of how do you define quality within the manufactured housing space. I know that you have strict standards on quality, but what is sort of the best quality product within MH? Is it age-restricted? Is it floor location near the water? How do you define quality within manufactured housing, and sort of what percentage of your portfolio do you think falls into that? I'm assuming maybe it's probably 100%, but just trying to understand sort of how you think your quality stacks up to other owners that have manufactured housing within their portfolios.
Sure. If you think about the manufactured housing across the United States, there are about 50,000 manufactured home communities across the United States, and 3,000 of those are what we would consider to be investment-grade, and we own 200+ of those. Now, the way you go from 50,000 to 3,000, the first cut is really the size of the community. There are many communities in the United States that are 50 sites, 60 sites, and our benchmark is really about 200 sites. So first, you kind of get rid of everything that's under that 200 site number. Then it's a focus on, for us, a focus on the age-restricted properties, and these are properties that mainly comprise of seniors living an active lifestyle.
Our focus is on the Sunbelt area and wanting to grow in areas where we're already located in and trying to grow more inside of our existing footprint.
Got it. And why is age-restricted better? I mean, is that they have better credit? They have more ability to pay rent increases? And if you think about over time, the growth profile of, say, age-restricted versus all-age, has age-restricted outgrown all-age? Just trying to understand why all-age properties tend to be considered higher quality.
Yes. It's really the quality of the cash flow. Inside of the age-restricted or active adult communities, you have a large percentage, and especially at our properties, 95% of the homeowner base owns their own home, which is an important component, and they paid for their home with cash as opposed to having a loan on it or some other way to acquire it. So that's a real positive for us. As we look at acquisition opportunities, it's important on the age-restricted side to get the location down correctly. So you want to be in the right location. And once you're in the right location and you have the right population that's demanding that location, you need to understand the numbers, but you kind of end your due diligence there.
On the all-age side, there are a lot more moving pieces that you need to consider, and those are what's happening in the local school districts, what's happening in the local economy in general, what are jobs in the area. Those things may be one answer today and five years from now a different answer. That creates some additional risk that you just don't see on the age-qualified side. I think there should be a compensation for that risk, and we really haven't seen too much of a divergence of cap rates between the two over the last few years. That's why we've really stuck with the age-qualified, and I think we've been served well with that strategy.
Got it. Remind me what percentage of your MH is age-restricted?
Sure. It's 70% is age-restricted, and the 30% that is kind of "all age" is many of it are second homeowners, vacation destination locations. So of the 30%, it's probably half and half true family and the other a vacation second home destination for a younger family.
Got it. Now on the call, you spent some time talking about the percentage of your portfolio that was in Florida, Texas, Arizona, these places that are benefiting from immigration demographics. I guess as you look at the sort of occupancy within those states or within those segments of your portfolio, I mean, where do you think the opportunity is to sort of increase that, and sort of what's going to get you there? Is it better marketing? Is it increasing referrals? What gets you from, say, a 95% occupancy in some of those markets to 97%-98%?
Yeah, sure. Well, to your point on the Sunbelt properties, I'll speak specifically to Florida, and then I'll address the other, specifically California and Arizona. Florida is obviously a very important market for us. We see very consistent demand across the portfolio. Our portfolio is disproportionately coastal and south, which are the strongest immigration locations in the state of Florida. The opportunity certainly is there to continue to increase occupancy. I would always encourage you to look at the number of occupied sites in Florida because one thing we are doing in Florida is we continue to develop MH sites, so the percentage can be a little misleading. As we move into 2024, we have three or four projects that will deliver several hundred sites in MH in those coastal markets in Florida. So that's an opportunity to continue to grow the overall pie.
So as we're filling those sites, that will help to increase the percentage. And then we'll focus on the balance of the portfolio in Florida, investing in new home inventory, upgrading home inventory in order to further increase that occupancy rate. Arizona and California - and I touched on this in the call as well - very high occupancy there as well. In our core markets, we're 98%-99% occupied, several assets that are 100%. So what we really focused on there over the last several years was improvement in the quality of occupancy. And you see there's a slide in the deck that goes through the growth of occupancy and the reduction of renters as we increased homeowners. And we work through converting a number of that rental inventory over to homeownership.
In those markets, while we're focused on growing overall occupancy because the opportunity set is much smaller, we really focused on improving the quality.
Got it.
One thing, Eric, on that, if I would just add that 50% of our properties are 98%+ occupied, and they have been for 20+ years. So once you get to that level, you can stay there for a long time. And that is because people are putting their capital, putting their capital on our land, and they're able to resell the home. So certainly, there's been a change in ownership of that home over time, but being able to stay at that sticky level, which is contrary to what you see in other forms of real estate, to be able to stay at that elevated level for long periods of time.
Got it.
Yeah. And I guess that's what I was trying to think through, is the difference between those that are at 98% versus maybe a little bit lower. I didn't know if there was something sort of identifiable. Maybe it's just they're structurally different. But one thing that occurred to me on the tour yesterday that I think I should probably have appreciated more of it, but these communities have sort of a they're very strong communities, right? The people come back there not just because of the good weather. It's because they see some of the same people year after year. There's a community of people that come at certain times, and they're all enjoying themselves.
And so I didn't know if there was something maybe at the initiative level that breeds that community, that generates those referrals, that then allows you to get to that sort of 98% level. But in any case, it just didn't occur to me how much the community aspect of it really mattered in terms of the reason why people were there.
It really does. And we used to, years ago, when we first became a public company, we were Manufactured Home Communities, MHC. In 2004, we changed our name to ELS, and kind of Equity LifeStyle Properties with lifestyle being our middle name, and that was kind of that's what we led with because that's what we're offering. We're offering that lifestyle, that community. And it's interesting that you ask about or talk about referral fees or referrals in general. We have a really high number of sales coming from referrals, and we try to pay a referral fee, and we do. We offer a referral fee, but oftentimes, people don't want to take us up on it because they just want the person to join them. They want their brother, their sister, their friend from up north to just be part of the experience.
We've seen that time and time again. I think our teams have done a really good job. Our marketing teams have done a really good job of touching on that and being able to use social media to put people together, fun little videos, exciting news that they have, and they're able to put on Facebook, put in a TikTok video, and people then send it around to their friends. That really further just creates an online community feel that then is definitely translated. What you saw yesterday was some of that. It would have been better if it hadn't been raining so hard, but you'd see a real high level of community feel and people wanting to be around and socialize, which is the main reason that people want to be at our properties.
Got it. Maybe just two quick ones on MH before we switch over to other areas. But within your guidance, I think you had about 6%, call it sort of rental income growth, 5.4% existing rate, plus it sounds like maybe 60 basis points of occupancy just based on what you already did in 2023 that then carries over into 2024. But I guess the one piece I didn't see in there was that mark-to-market on new tenants. And I understand that some of it's already kind of embedded in that 5.4% because of Florida, where people can assume the lease is at current, and then you take them up to market. But nonetheless, I guess I would have thought there'd be some piece of upside from marking tenants to market.
So maybe help us understand if that's just excluded from guidance, and if not, sort of what the mark-to-market looks like in your portfolio there.
Sure. Excuse me. It is embedded in guidance. 2023, we were seeing about a 13% increase on turnover. Much of that, as you said, happens in Florida, where it takes effect when the new lease takes effect, which is, generally speaking, the first of the year 2024. But that 10% turnover that we experience, the average mark-to-market has been around 13%, and so far this year, it's tracking at a similar level. So we do have an assumption for it built into our guidance.
Okay. I think it's important, Eric, just on this mark-to-market to appreciate that this is a new customer coming in, buying a home, and we're able to reset the table as far as expectations as compared to an existing customer who bought their home at a certain price and came in at a different rental rate. It's a new customer, and you're able to while they're negotiating the price of their home, they're also understanding what that rent is.
Yeah. Makes sense. And then you talked about the property taxes in Florida came in higher than expected, but you can pass through 95% of those increases. I mean, I understand what you're saying in terms of it doesn't really impact you because you can pass it through, but at the same time, it's an additional expense, right, for your tenants. And so in the past, when you've seen something like this, I mean, has it sort of altered your ability to be able to raise sort of your real rents on them? Because obviously, this is not they're paying you, but you're just paying taxes. I get it's just a pass-through. But at some point, does it influence your ability to charge rent increases to them?
And then in terms of the mechanics of how it's recorded, do you record the property taxes sort of in the current year and then recognize the pass-through as a revenue later on? I would think it would be matched just based on a matching principle. But how does it work from an accounting point of view in terms of when you record that revenue versus the expense?
So to the end of the question first, the taxes are paid in the year that they're assessed, which in Florida is the current year. So we paid those taxes in 2023. The lease provision allows us to charge the customer, but we have to give them a notice. And so the notice is effective in the following year. So we didn't accrue in 2023 that rent because it wasn't billed to the customer until 2024. So there's essentially a lag there in terms of the collection. And in terms of the overall cost to the customer, the notice was sent at the same time as the rent increase notice. And the conversations with the resident base, there hasn't been a dialogue expressing concern about the pass-throughs. They've been accepted, and those customers have been paying those amounts.
Finally, we also have appeals underway in a number of properties. To the extent that we are successful and there's relief in those appeals, the reduced tax flows back to those customers, of course.
Got it. And so is the revenue that you'll be collecting from the taxes that were accrued in 2023, is that built into your guidance?
It is built into our guidance, and it appears in other property income. So it doesn't flow through the rent line. We have our pass-throughs flowing through other income in our property operating statement.
Okay. Got it. All right. Switching to RVs, I think you talked about sort of 68% of your RV revenue is from annual customers. Obviously, you like the stickiness of those customers, and we got to see some of them yesterday in the park models. I guess, is there a limit just to how high that can go? I mean, is 68% the limit? I mean, obviously, you need some transient as a feeder to your annual, but it seems like every year, people talk about how many sites are being converted from transient to annual. So I'm just wondering if there's some kind of a structural limit at some point where you just can't go beyond a certain percentage.
Yeah. I think that what we like to focus on is having a piece of transient business in each of our properties as a feeder, as you mentioned. It's really important for us to bring in new leads, new customers into the community so that they kind of like to try before they buy, try before they decide to stay for a longer term. So we will focus on that and make certain that we can limit the number of transients to what we think is the appropriate number that allows us to have that lead base flowing. And generally, I think since probably 2004, we haven't purchased a property that is fully transient. So we've generally, from an acquisitions perspective, stayed away from those fully transient properties.
As to the conversion from a transient to an annual, oftentimes, there are examples of the big uplift you get in revenue going from a transient to an annual. That uplift really only occurs when a transient site is not being utilized. So if you go from having the transient site, you have 365 days in a year. If it's only occupied for five nights and you turn it into an annual, it's going to be a big revenue lift. Conversely, if that transient site was occupied 365 days a year, you would see a decrease in revenue when you put an annual on that site. So it's really specific as to what's happening and what's the level of activity at the property on the transient site as to what the conversion is.
Got it. So that 68%, isn't it? You have some goal of getting to 75%. It's really just what maximizes revenue. If you have a transient site that's earning more than you would earn on an annual, you're just not going to convert it to an annual.
Right. Exactly.
Okay. And then what is the, I guess, what do the characteristics kind of look like of the annual sort of RV customer versus, say, MH? Obviously, we saw, I think, people got to see yesterday that these are fixed structures there. But what does the turnover look like in the business? What percentage of them own sort of the park models? If you think about the stickiness of that revenue versus MH, how is it different? So let's go with that first.
Sure. Sure. With respect to the park models that we saw from the bus yesterday, those behave very, very similarly to the MH, which for those who weren't on the tour, we have park models and then an MH section in one property. And those park models, as Marguerite mentioned, they're owned in the same way that an MH owner owns their home. It's almost exclusively a cash transaction. So they own their home free and clear, own their park model free and clear. The nature of turnover in a park model with an RV property is identical to the turnover with an MH property, meaning the unit remains in place, and the existing guest or resident sells the unit to the incoming guest or resident, and we have an uninterrupted revenue stream. So they're very, very similar.
I think a little bit of a difference that you would see at the property that we toured yesterday is there's more of a seasonal component in the park model. That resident or that guest is much more likely to be coming back and forth. There's a high Canadian concentration at that property, so back and forth from Canada as opposed to in the MH. They still may move back and forth but would tend to be at the property for a better part of the year.
Got it. And then if I think about the difference between what you're passing through to your annual RV customer, it's 7% versus the, call it, 5.4% to MH. Is the difference really just that there's no CPI limitation? It's just purely market? Is that the right way to think about why there's a difference each year and that annual RV is higher than MH?
Yeah. You really don't have regulation. You also don't have the ability for an annual to leave on the RV side is much easier, especially if it's an actual RV vehicle, which is important. It's important for us to focus on what's the appropriate rent. So the market surveys are important so that we can highlight and notice the proper rent, or else you'll have people who can just leave and go across the street or to another RV location. So it really is that. And when you look at across our portfolio, we do have rent control that impacts our overall results on the MH side that is not the same and doesn't exist inside the RV footprint.
Got it. And then maybe the last question on annual, but you think about sort of the larger weather events that have happened, do these park models tend to hold up about the same as the manufactured homes? Or I mean, it's probably easier to place because I assume it's cheaper, but nonetheless, I know there's been advancements in sort of how MH is built over time to withstand these storms. Is the same thing true for these park models?
Yes. You're exactly right. The standards have changed over time, and that includes the park model standard. So newer park models hold up the same way newer MH hold up, and older ones tend to not fare as well. But there is also less if there's a smaller footprint, so there's kind of less impacted. But yes, I think it is that the newer ones are doing a very good job of holding up during a storm event.
Got it. And I think your favorite question on transient and seasonal RV, that tends to take up a lot of time on the calls, but you did update through January. I was just curious how you're seeing sort of the rest of the Q1 play out. I know this is a pretty important seasonal quarter for you, and you're also facing, I guess, a relatively tough comp. So I just wanted to get some commentary on the seasonal bookings thus far and then maybe we'll just ask the same question for transient. I know it's entirely dependent on the weather, but how's the weather been thus far relative to your expectations?
Sure. I think Paul can walk through it. I mean, the bottom line is that we're trending in line with our expectations that we put out a few weeks ago, but Paul can walk through those.
Sure. And I think it is important to keep in mind the Q1 does represent roughly 50% of the full-year seasonal rent, and it's a little bit less than 20% of the full-year transient. So the big quarter for transient is the Q3 when we earn around 40%. And that's coming from northern properties, completely different customer, completely different experience. But overall, as Marguerite said, we're trending in line with our expectations. The seasonal reservations are continuing to be what we expected when we finalized our budget in January. And the transient, while there have been some weather events in certain parts of the country that have made some national news, we've been fortunate so far that we haven't had much impact from weather kind of in the local areas where our properties are located. So the transient is generally meeting our expectations as well.
Got it. I guess, what do you use to price the transient and the seasonal? I mean, is it a dynamic sort of system like airlines where it's like utilization goes higher, then the price goes higher, or is it a little bit more manual? What systems are pricing the rates that we see online when we try to book?
So on the transient, we do have that. We have a dynamic pricing model that essentially increases the price as occupancy increases at the location. The seasonal, we have kind of two things that happen. At the end of the winter season, as the customers are leaving, we set the rates for those returning customers as an incentive for them to book at that time, and that drives the pricing. So there's a little bit of kind of conceptual discounting that might happen at that point in time to drive the early reservation, but it's an increase that's embedded. And then as we go through the season, we use a dynamic pricing model as we come closer to the winter season starting to drive the pricing.
Got it. I guess maybe switching to external growth. I mean, you talked about 1,000 expansion sites this year. I guess, why is that sort of the right level? I mean, it seems like the returns there are quite high. I mean, I think high single-digit sort of NOI yield is what you said. And if I think about what could you start today if you wanted to? If you think about all the unutilized land in your portfolio, if you think about adjacent land to current communities, what is the sort of amount of land that's just sort of sitting there not earning income, and how could you sort of monetize that over time?
Yeah. On the deck, we have a slide that walks through kind of the buildup of that 1,000 sites on an annual basis. A lot of work goes into delivering the annual sites or delivering those development sites on an annual basis. The land predominantly that we're developing is adjacent to our properties, may have been owned, to your point, for an extended period of time, many, many years. The challenges in increasing volume is just the nature of working our way through the entitlement process and the construction process in the many locations where we have those projects ongoing. I would expect that the number is going to be in that 900-1,100 range for the foreseeable future as long as demand ends up being consistent.
We've dedicated resources to bring more capacity online, and I think there's a natural governor on that volume in part based on some of the challenges to bring those sites to market. A lot of those sites are expansions of, call it, 3-100 sites. That's a very, very good risk-reward profile, right? I've got an existing property. It's a known brand. It's a known commodity for all of the residents and guests who reside there. I have on-site management. So the increment almost exclusively falls to the bottom line, and I don't have to go through a process where if I was doing a greenfield of getting a name out to build brand recognition to start driving traffic and building that core business. So I think that 1,000 sites is a reasonable number. We certainly will be focused on increasing it.
I'd also highlight that those mid to high single digits have a very good risk-reward profile as well with respect to that capital investment.
Yeah. And if I were just to try to attempt to model one year of it, so I understand that everything's delivering at a certain time, so it depends on how much you're delivering in a certain year. But I mean, is it just a function of occupancy that controls the yield, meaning you put homes on the property as soon as you fill them up, you're getting income from them? So it's just a matter of filling them up. So if I were to try to model it, is it like 2.5%, 5%, 7.5%? Is that how you could model it going forward, or is it not as easy as that?
I would say it's not as easy as that. If Paul wants to add some additional color to my statement, I'd ask him.
Well, I think it also depends on if it's MH or RV. So RV, you're able to get revenue-producing sites online and on a transient basis, even though we don't like the transient. But we really like the transient when we're developing sites because you're able to get revenue-producing right away. And then you can convert those and say that we're going to have transient for the first year, and then we're going to convert those into annual sites. On the MH side, that requires putting a home in place, and you can decide whether or not you want to sell the home or rent the home. Historically, we have sold the home and then started to get rent, and that takes a little bit longer to do that, but we think that makes sense and is the right thing to do for us as an organization.
But that will add a little bit extra time to become revenue-producing.
Got it. So for that latter example, you sell an MH adjacent to a current community. It still takes like three years to stabilize, something like that?
Probably.
Yeah. It's going to depend on the scale. At some of our larger developments in Florida, we've been selling 30-40 homes on an annual basis in the community. So it just depends on how many sites you have available.
Got it. Okay. Maybe our rapid-fire questions. What will same-store NOI be for your property sector overall in 2025? So maybe we'll just say MH and RV.
Yeah. I'd say it's about the same as what we're seeing this year, right around 5.5%.
Got it. Will your property sector have more, fewer, or the same number of public companies a year from now?
Same.
All right. And maybe I'll just add along since we have 50 seconds. But you said there's like 2,800 or 2,700 communities that are of the quality that you would want. I think I got that right, sort of 3,000 minus your 200 or so. Will you have your hands on any more of those a year from now?
Oh, I would say yes. I think there's going to be acquisition opportunity. It was a really this past year in 2023, there weren't a lot of transactions. I think 2024, there's going to be more transactions. There's going to be more one-off sellers that are now interested in doing the transaction, realizing that interest rates aren't going to go back to 2%, and appreciating what that dynamic means. So I think there will be more activity, but we'll still stay disciplined as we always have when considering acquisitions.
Great. And so what's the best real estate decision today: buy, sell, build, redevelop, or repurchase stock?
Right now, redevelop our properties, expand their properties.
Okay. Thank you.
Thank you very much.