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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day everyone and thank you for joining us to discuss Equity LifeStyle Properties' First Quarter 2018 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.
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'd like to turn the call over to Marguerite Nader, our President and CEO.
Good morning and thank you for joining us today. I'm pleased to report the results for the first quarter of 2018. Our key operating statistics continue to show strength. Occupancy in our MH portfolio increased 65 sites with an increase of 113 homeowners. New home sales are off to a strong start for the year with 130 new home sales in the quarter.
Year-to-date, 30% of our new and used home sales were the result of an in-place resident conversion. The snowbird season performed well for us this year. We had an overall increase in RV revenue of 7.5% with strength in each category of annual, seasonal, and transient. We are focused on making it as seamless as possible for a customer to complete a transaction with us. Our efforts have paid off as online activity continues to escalate.
In the quarter, our RV revenue through digital channels increased 12% and our sales of online camping passes increased by 42%. This is the time of year where we focus on finishing the snowbird season strong by completing bookings for next season.
Each year in the spring, guests at our Florida, Arizona, and South Texas properties are given an opportunity to book for next winter before the general public. This year, we saw an increase in commitments of 9% across the portfolio.
Our employees have done a great job of accommodating our members and guests in the winter season and we now focus on our summer season where we will start our 100 days of camping campaign and we'll host over 500,000 members and guests at our properties during this busy season.
Turning to acquisitions, since last earnings call, we purchased two manufactured home communities and one RV Park in Florida for a total purchase price of $70 million. The properties are well-located assets with a total of over 1,200 sites.
On a final note, I want to take a moment to acknowledge the passing of ELS' Vice Chairman, Howard Walker. Howard served as Co-Vice Chairman of ELS since 2003 and was our Chief Executive Officer prior to assuming that role. He was a great leader and mentor to many. His presence around ELS will be missed. Our thoughts are with his family during this difficult time.
I will now turn it over to Paul to walk through the numbers in detail.
Thank you, Marguerite and good morning everyone. My remarks related to first quarter results and second quarter guidance will focus on property operations. I will also walk through our detailed full year guidance for 2018 and finish with an overview of our balance sheet.
For the first quarter, we reported normalized FFO per share of $1.04. Core RV revenue outperformance was the primary contributor to better than expected core income from property operations.
Core MH rent growth of 4.7% includes 4% rate growth and approximately 70 basis points related to occupancy gains. Rate growth was higher than guidance and higher rents resulting from turnover in certain markets in Florida, Northern California, and the Northeast.
Core RV rental income from annual, seasonal, and transient customers performed better than expected during the quarter. Revenue from annuals increased 6.8%, mainly from increased rent throughout our Encore and Thousand Trails portfolios. During the first quarter, we also gained annual occupancy in our Encore portfolio.
Demand for seasonal stays in Florida, Arizona, and Texas properties were the drivers of the 9% seasonal revenue growth. Our transient revenue growth was 7.1% in the quarter. We experienced strong customer demand for our properties in Florida and Arizona.
First quarter membership dues revenue as well as the net contribution from upgrade sales were higher than guidance. During the quarter, we sold approximately 3,100 trails camping passes, an increase of 23% over the first quarter of 2017. We upgraded 581 members during the quarter, 5% more than our target.
Core utility and other income was higher than guidance as a result of insurance recovery. We recognized revenue of $2.2 million to offset the remaining expenses related to recovery from the hurricane in 2017. The favorable revenue variance to guidance is offset in repairs and maintenance expenses.
First quarter core property operating maintenance and real estate taxes adjusted to exclude $2.2 million of expenses related to the 2017 hurricane increased 5.2% compared to first quarter last year. We experienced higher than planned utility expenses from higher gas rates in the south and west.
In summary, first quarter core property operating revenues were up 5.6% and core property operating expenses were up 7.6%, resulting in an increase in core NOI before property management of 4.4%.
While the hurricane-related revenues offset expenses and had no impact on NOI growth in the quarter, the adjusted growth rates for revenue and expense, assuming no hurricane effect, were 4.6% and 5% respectively.
Property operating income from the non-core portfolio, which includes our RV parks in the Florida Keys as well as assets acquired during 2017 and 2018, was higher than guidance. NOI from the two assets we acquired during the quarter as well as insurance proceeds we identified as business interruption recovery caused the favorable variance.
The press release and supplemental package provide 2018 full year and second 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 in revenue and expense projections represent midpoints in our guidance range.
Our guidance for 2018 normalized FFO is $365.3 million or $3.86 per share at the midpoint of our range. We project 4.6% growth in core NOI before property management and 7.3% normalized FFO per share growth for the full year.
We expect second quarter normalized FFO at the midpoint of our range of approximately $83.2 million with a range of $0.85 to $0.91 per share. We expect the second quarter to contribute almost 23% of our full year normalized FFO.
We assume no MH occupancy increase subsequent to the end of the first quarter. Projected second quarter core community based rent revenue of $127.3 million reflects the growth rate of 4.5%. Our core rental home income net of rental expenses is expected to be flat compared to last year and reflects our current rental program occupancy.
We anticipate $51.2 million of core reserve base rental income in the second quarter. This represents 23% of our full year core RV revenue and we are projecting growth of 6.3% over last year. We expect our annual rate to increase at almost 5.5% with occupancy gained in prior periods driving the rest of our 6.8% growth in revenue from annuals.
We anticipate a strong shoulder season as we transition to the summer season at our northern resorts. We project growth rates of 6% for seasonals and 5% for transients. Our second quarter reservation pace shows we are currently 91% reserved for our expected seasonal revenues and 59% reserved for our expected transient revenues, ahead of this time last year.
Membership dues revenue is expected to be $11.5 million. On a combined basis, membership dues revenue and membership upgrade sales net are expected to generate approximately $11.9 million of income. Our guidance update shows 3.5% growth in the second quarter core property operating maintenance and real estate tax expenses.
Guidance for the quarter and remainder of the year includes the impact of our recent property and casualty insurance renewal. Industry reports state that 2017 was the third most expensive year for insured losses with estimated global losses of $136 billion.
As a result, we encountered a challenging market for negotiation of our April first renewal. Carriers saw premium increases to cover their own reinsurance premium increases as well as to recover losses from 2017. Our negotiations resulted in a premium increase of approximately $2 million for the nine-month period of coverage in 2018.
For the second quarter, core property operating revenues are expected to be up 4.4% and core property operating expenses up 3.5%, resulting in an increase in core NOI of 5.2%.
I'll now discuss our detailed guidance for the full year 2018. Our core MH base rent assumptions do not include a change in our MH occupancy, subsequent to the end of the first quarter.
We expect a 4.4% growth in -- rate growth in core community based rent revenues for the full year. We anticipate full year core RV revenue growth of 6%. We expect annuals to continue showing strong performance with 6.2% growth projected, 5% of that growth is from rate.
As we continue to look ahead to the full summer season, we project combined second and third quarter transient revenue of $31.7 million, a growth rate of 4.8% over 2017. We expect approximately 41% of the full year transient income to come in the third quarter.
Total core revenue from dues and net contribution from membership sales for 2018 are expected to be $48.5 million. Core property operating expense growth is projected to be 1.6% for the full year. As I mentioned earlier, we have increased our insurance expense following completion of our April 1st renewal.
Our guidance model includes no assumptions related to unplanned events, such as storms, that may have an impact on expenses. To the extent our properties are affected by these types of events during the remainder of 2018, our expense growth rates may increase.
To illustrate the impact of unplanned events, we estimate full year 2018 expense growth will be approximately 2.8%, if all expenses related to unplanned events are excluded from 2017 and 2018 results.
For the full year, core property operating revenues are anticipated to be up 3.4% with expenses growing at 1.6%, resulting in an increase in core property NOI of 4.6%.
We expect the non-core properties will contribute about $11.2 million in income from property operations for the full year. Our Kingswood, Serendipity, and Holiday Travel Park acquisitions are included in updated guidance.
Full year guidance for property management and corporate G&A is $86.2 million. Guidance reflects our internal focus on asset management oversight of our expansion opportunities as well as resources dedicated to technology and marketing initiatives.
Interest and amortization expense for the full year 2018 is expected to be approximately $104.2 million and includes the impact of the loan I'll discuss in a minute. We expect our average debt balance will be approximately $2.2 billion. We make no assumptions regarding future capital events in our guidance model.
Our 2018 normalized FFO per share estimate at the midpoint is $3.86, and our share count is expected to average 94.7 million shares in 2018. We have made no assumption related to the use of future free cash flow in our earnings model.
Before opening up the call for questions, I'll discuss secured debt market conditions and provide some comments on our balance sheet. During the quarter, we closed a $64 million, 20-year loan with a 4.8% coupon. Our cash balance at quarter end was $74 million before our April dividend and funding the acquisition of Holiday Travel RV Park. We have one loan maturing in 2018.
Current secured financing terms available for MH and RV assets range from 60% to 75% LTV with rates from 4% to 4.5% for 10-year money. High quality, age-qualified MH will command preferred terms from all lending sources. RV assets with a high percentage of annual occupancy have access to financing from CMBS lenders and certain life companies. Life companies are still quoting deals with 15 to 25-year maturities.
At quarter end, our $400 million unsecured line of credit had no outstanding balance and our ATM had $150 million of capacity. 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 5.1 times and our interest coverage is around 4.4 times. The weighted average maturity of our outstanding secured debt is 13 years.
Now, we would like to open it up for questions.
Thank you. [Operator Instructions]
Our first question comes from Nick Joseph with Citi. Your line is now open.
Thanks. What are cap rates on the acquisitions both the MH deals in the first quarter and then the RV deal on the second quarter?
The three deals that blend was about a 5.5 cap.
And was there a difference between the MH and the RV?
Yes, the RV was roughly six, and I think the other two was closer to five -- the two MH. They were age-qualified manufactured home communities.
Thanks. And then you mentioned the strength of the RV portfolio. Is the current mix of annual seasonal transient optimized or is there an opportunity to continue to adjust that mix?
I think there's always an opportunity to adjust the mix. We adjust it every quarter, every day, frankly, in our properties. So, I think there's that opportunity. And as we see new transient customers coming in, we note that they are new to our system and we encourage them to kind of move throughout the system to become a seasonal and then become an annual. And that's an effort that we have at the local level and then also throughout our national marketing efforts.
Thanks. And just finally, to the California portfolio, what percentage of your communities are currently subject to rent control? And then could the potential PO of Costa-Hawkins impact any of your communities?
We have about 15 properties that are subject to rent control and I don't think that would have an impact on us.
Thanks.
Thanks Nick.
Thank you. Our next question comes for Drew Babin with Baird. Your line is now open.
Hey good morning.
Good morning Drew.
General question on the transaction market, and I appreciate the detail on the cap rates. In terms of the going [Indiscernible] for the rest of the year, has overall activity in the market kind of surpassed your expectations maybe relative to last year, relative to what you thought this year would look like? Or is it kind of a similarly quiet and selective type of a transaction environment for your quality of product?
I think it's -- as the broader acquisition market, I think it's very similar in the past. We have properties there under contract and under LOI right now and these properties that we closed on; they've been under LOI for a while. It was just a matter of when is the right time for the seller to actually want to close.
So, I don't really see a difference in the transaction market. I think these are opportunities that our acquisition team is working with some seller -- or the sellers that they have long-term relationships with.
Okay. Thanks for that. And a couple of questions on the balance sheet. I guess, first of all, in the fourth quarter, did a 20 year, $204 million Fannie Mae facility close to 4%. I'm not sure whether that was on an MH or an RV portfolio.
And then, obviously, the rate on the 20-year money in the first quarter was a little higher for a rate on RV. Is that difference in the interest rates attributable to this higher benchmark rates that existed in the fourth quarter? Or would it be kind of difference in the collateral for that MH versus RV or otherwise?
I think it's primarily related to just a bit of a timing on the financing and the availability of the life company that we locked that in towards the end of 2017 and the allocations for life companies that pretty well been used by that point. So, there's a little bit of uptick just in general market conditions and then relatively modest scarcity that drove that coupon up a bit.
Okay. And I guess, more generally, your leverage ratio, obviously, has declined quite a bit over the years and, by my numbers, is getting well into the -- could potentially go into the force [ph] pretty significantly. And I guess is there sort of a minimum in net debt to EBITDA ratio where you would kind of just not see the point in bringing leverage much lower?
Or is it more just a product of, given where your stock price is, acquisitions continue to pencil out relative to where you can issue equity on the ATM? I guess are you willing to take down your leverage ratio kind of as far as need be as long as those deals are accretive?
Yes, I think -- I mean, I think it goes to the financial flexibility and what the best execution is. We talk a lot about positioning the enterprise to be ready to act when opportunities present themselves and kind of what's the right mix of debt and equity at that point in time. So, we don't have and historically have not had targets and I think you'll see us use debt and equity, just depending on what the opportunity is.
All right. That's all very helpful. Thank you.
Thanks Drew.
Thank you. Our next question comes from John Kim with BMO Capital Markets. Your line is now open.
Thank you. Marguerite you mentioned the 9% increase in RV commitments and some of your warm other states. Can you just comment on that? Are they locked in at a lower promotional rate that's flat to what they did last winter?
No, it's not a lower rate. It's lower than -- and its person coming in fresh, but they're -- they have an increase built in to their -- to the rate. And what we do is we essentially have parties that we get together to talk about what's the opportunity for next year, what we're going to be doing next year and sign up all the customers.
And so as we look at that and we see an increase of 9% in that growth rate, we think that's a very positive theme for next year as we expect all those people to come back as they put down a deposit.
So, would you attribute that growth rate to versus what you did last year?
Well, I think some of it has to do with just from an operational. There was a big focus on that knowing that if you can get a person to commit before they leave, it's very important, rather than when you're calling them when they're up north. So, I think that was a -- it was a concerted effort on the operating team -- from the operating team.
Okay. And then on your acquisitions, I apologize if I missed this, but are there any expansion opportunities on the three acquisitions you announced?
No, there are no expansion opportunities on those three.
Okay. And then finally, last week, The Wall Street Journal reported on the growth rate of the luxury van market as an alternative to RVs. And I think the implication of the article is that [Indiscernible] don't necessarily need to use campgrounds going forward. And I was wondering if you have any comments on this, whether you view this as competition or opportunity for you?
Well, I think it's certainly an opportunity. I think that the RV industry is being records of progress the last 40 years, ever since they've kept records. The shipment this past year in 2017 were 500,000, which was a 17% increase from 2016. So, I think that you're just seeing an increase in people interested in the RV lifestyle and you'll continue -- we'll continue to see that.
And to the extent someone buys something that maybe they don't want to go to a particular campground, I think that's a -- in the minority rather than the majority of what we see for people excited about being outside and staying in our campgrounds.
So, our luxury van users, are they current customers of you?
They may be. I mean, in some cases, certainly. They may check into our properties on a transient basis. They will be part of that transient component.
Okay, great. Thank you.
Thanks.
Thank you. Our next question comes from Todd Stender with Wells Fargo. Your line is now open.
Hey thanks. Marguerite, can you talk more about the new home sales in the quarter? We saw an increase in new home sales, but not in used. It's kind of a new dynamic, I guess. Can you talk about the conversation with renters and also may there be any incentives for your salespeople to push new homes if that's the case?
Sure. I think I'll have Patrick cover that and also, maybe talk a little bit about the conversion, the rental conversions, which have been very positive over the quarter.
Thanks.
Sure. So, the new home sales overall for the quarter, as Marguerite mentioned, were 130. That's above almost 10% year-over-year. That's largely driven by conversions in our Arizona and California markets as well as new home sales in MH expansion properties that we have in Arizona.
On that conversion front, 15% of our new and used home sales for the quarter were two existing renters. So, it's our existing renters purchasing the ELS home that they were renting.
If you include engagement with all of our residents in the community, so renters that buy the home that they weren't renting or other homeowners that are either trading up or trading down with smaller home, that conversion rate increases to 30%.
So, from an incentive perspective, customer-facing, it really has more to do with our engagements in managing their process. Our sales team does a very thorough job of reaching out to renters and offering them the opportunity to purchase homes. And with respect to our salespeople, they're compensated with a standard industry commission schedule.
That's helpful. In general, I don't know if I could generalize, are folks financing these purchases? Are they paying with cash? That will be part one and part two. How long are they generally renting before they purchase?
So, there are really no finance deals on the new home sales that we did for the quarter. So, those are all cash transactions, and that's similar to what we've seen in the past. So, people are spending $60,000, $70,000 of giving up that cash from their personal savings and committing that to -- and in terms of the renter term, it's about between two and three years.
Okay, that's helpful. And the last question, just with your share price is hung in there year-to-date. It's been a good performer. How often is the conversation with sellers? So, private sellers of their communities to you guys, how often is to OP unit that you might be able to offer them a part of the conversation?
Well, Todd, it's a part of every conversation, and it's just a matter of as you get to closing whether or not what their desire is and what they're fully need is for liquidity because there's certainly a whole period with the OP unit. So, what we've done in the past where perhaps, the OP units weren't something that was going to happen, we then turn to the ATM. But it's certainly a conversation with each seller.
Okay. Thank you.
Thanks Todd.
Thank you. [Operator Instructions]
Our next question comes from John Pawlowski with Green Street. Your line is now open.
Thanks. Paul I was hoping you can give some granularity to the 1.8% full year operating maintenance and property tax guidance. What's within that? What's in each individual bucket? What kind of growth rates do you expect?
Yes. So, the first thing I'll do is just to kind of circle back on that growth rate and just remind everybody that, that does include this what I view to be somewhat confusing impact of the hurricanes from last year. So, when you adjust for that on a, call it, normalized basis, that would be a 2.8% growth in the core in those expenses.
In a couple of areas, the main area, really, that's driving an increase there, the insurance that I previously talked about and then we also have seen wage pressure at the level of the properties.
So, we've talked in the past about minimum wage increases. But then in addition to just increases related to changes in statutes across the country, just the cost at the property level to attract and retain the employees that we have at the properties is a driver of the expense growth as well.
Okay. And just curious, what do you expect property taxes to be up in 2018?
We expect a relatively modest increase in property taxes. We saw last year kind of a low to mid-single-digit increase and anticipate something similar in 2018, but I will say it's quite early in the process. Notices for the State of Florida, which is a significant impact for us, we won't have visibility into that until later in August and September.
Okay. And the last question for me, I understand asset values are on pretty firm footing. But as you look across our portfolio and the lowest quality chunk and you pick a number, 5% or 10% bottom of the portfolio, are you seeing any weakness in pricing if you were to go south or do you expect to see an expansion of cap rates?
We don't see any issues with evaluation on the lower end or the higher and in terms of our properties. Just from a performance standpoint, they're both performing very well, so we don't see an expansion in cap rates.
Great. Thank you.
Thanks.
Thank you. Our next question comes from Samir Khanal with Evercore. Your line is now open.
Good morning. I guess, just a follow-up on the question before. More on the transaction side, I mean, which we've seen kind of 10-year yields rising at close to 3% now and sort of potentially going higher.
I mean, have you seen any sort of early signs of cap rate changes as you're kind of going through the due diligence of kind of potential assets to acquire over the next kind of couple of months? I'm just trying to get a sense of any color on that if you can provide.
Sure. I mean, we're actively in the market actively talking to sellers and we really haven't seen any change really over the last 12 months I would say. That's not to say that that doesn't change in the future, but that's just what we're seeing right now.
And maybe just to extend a little further on that same topic. I mean, when you're looking to acquire or go through due diligence of these assets, can you talk a little bit about maybe the buyer pool or the mix that you kind of encounter?
Sure. I mean the existing owners of the communities are owners that we've known for a long time that we've been discussing, negotiating with them for a long time and maybe that we negotiated with the father and then now the son is in charge. So, the pool is -- there's a lot of families that are -- that own these communities. A lot of them build the communities from scratch, so there's a lot of history there. And this is -- and the discussions really center around timing. I mean they know at some point they want to sell, but just what is the right timing.
Sometimes we focus on whether or not it's a tax-driven reason. Other times, it's more of a personal reason. But the conversations, as you get pretty granular and get down to a level of detail about what's happening in their own life and own set of circumstances as to when they want to kind of stop working, but that's really the majority of the conversations that we're having.
Okay. Thanks.
Thank you.
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 remarks.
Thank you for joining us today. We look forward to updating you on next quarter's call.
Thank you very much ladies and gentlemen. That does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.