Equity Lifestyle Properties, Inc.

Good day, everyone, and thank you for joining us to discuss Equity Lifestyles Properties' second quarter 2022 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. For those who would like to participate in the question and answer session, management asks that you limit yourself to two questions, so everyone who would like to participate has ample opportunity. As a reminder, this call is being recorded. Certain matters discussed during this conference call may consist forward-looking statements in the meanings of the Federal Securities Law. 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 the SEC Regulation G, reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release, our supplement 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 am pleased to report the results for the second quarter of 2022. We continued our record of strong core operations and FFO growth with a 4.5% growth in normalized FFO per share in the quarter and a 9.3% growth year to date. We have often discussed the quality of our portfolio and our cash flow. Over the years, our acquisition strategy has been focused on the quality of cash flow from property operations and buying in locations with long-term positive demographic trends. We see high demand for our key locations with our customers expressing a desire to stay with us on a longer term basis. Our residents and customers see the benefit of an increased commitment to us from a quality of life standpoint. We are well positioned and have benefited from an influx of resident and customer interest into our key states of Florida, Arizona, and California. Our strong top line performance coupled with disciplined operating practices results in continued strength and growth in normalized FFO per share. The revenue from our MH communities represents 60% of our revenue. We have seen a heightened increase in leads and interest in our locations over the past two years. Over the last two years, Florida has seen outsized population growth. Our customers are attracted to the Sunbelt climate. They are taking advantage of the added flexibility in their schedules as well as technology to accelerate the move from their northern location. Our portfolio is well positioned to take advantage of this key demographic movement. Continued evidence of the demand for our product offerings is seen in our new home sales results. During the quarter, our new home sales increased 24%. We sold 365 new homes in the quarter, which was a high watermark for ELS. The primary driver of the new home sales volume increase was our Florida MH sales program, where we saw an increase in the volume of 60%. Over 95% of these new home buyers were cash buyers. This investment is consistent with our entire portfolio, as the vast majority of our residents have made a capital commitment to live in our community. That commitment from our homeowners results in a pride of ownership and a long-term resident base. Core RV and marina revenue produced strong results with an increase of 6.6% in the quarter. The primary driver of this increase was the strength of our annual revenue stream, which increased by over 9%. Our market surveys provide support for an increase in market rates, and we saw an increase in conversions from transient and seasonal guests. Our transient and seasonal revenue grew by 2.4%. We saw a strong pickup in seasonal revenue demand, Roughly half of the increase in seasonal demand was from our Florida customers who extended their stays in April due to the continued difficult weather conditions in the north. The transient revenue decline was impacted as well by the difficult weather in April and May in key locations. Strong demand for longer-term stays has reduced the number of available transient sites across our portfolio. We were able to increase the rate on the transient sites to combat some of the weather-related declines. Our operating teams have done a great job keeping up with the high demand for our properties. In June, TripAdvisor announced that 63 of our properties received Traveler's Choice Awards, and 23 of those properties are in the Hall of Fame since they have received the award for five or more consecutive years. Our ELS team members are dedicated to exceeding the needs of our customers. They have done a great job delivering excellent customer service and have continued to focus on safety for our customers, guests, and employees. I will now turn it over to Paul to walk through the numbers in detail.

Thank you, Marguerite. Good morning, everyone. I will review our results for the second quarter and June year to date, highlight our guidance assumptions for the third quarter and full year 2022, and discuss debt market conditions as well as our balance sheet. For the second quarter, we reported $0.64 normalized FFO per share. Core and non-core property operations delivered the strong results we expected. while home sales volumes and profits exceeded our expectations in the quarter. Our second quarter core MH rent growth of 5.7% consists of approximately 5.3% rate growth and 40 basis points related to occupancy gains when compared to the same period last year. We have increased occupancy 97 sites since December with an increase in owners of 443, while renters decreased by 346. Core RV and marina base rental income increased 6.6% in the second quarter and 13.9% year-to-date compared to prior year. Base rental income from annuals represents more than 60% of total RV and marina base rental income, and it increased approximately 9% for the second quarter in year-to-date periods compared to last year. Annual RV rate increases generated approximately 6.4% growth in the year-to-date period with occupancy contributing close to 300 basis points of growth. Our guidance for the second quarter included a range of growth rates for combined seasonal and transient rents with 4% at the midpoint of the range. The actual results of the second quarter was 2.4% growth, a variance of approximately $500,000. Demand for extended stays resulted in better than expected seasonal rental income during the quarter and offset to lower than expected transient income. Year-to-date, combined seasonal and transient rent increased almost 23% compared to prior year, following recovery of our seasonal RV business during the first quarter of 2022. Membership dues revenue increased 9.3% and 10.1% for the quarter and year-to-date, respectively, compared to the prior year. Year-to-date, we've sold approximately 12,300,000 trails, camping pass memberships, While this represents a 9% decrease over the same period in 2021, it represents a 20% increase over membership sales in second quarter 2019. At the end of the second quarter 2022, our member count, excluding RV dealer free trials, was 3.6% higher than the same time last year. Also, during the quarter, members purchased approximately 1,100 upgrades at an average price of approximately $8,700. Core utility and other income was higher than expected during the quarter as a result of utility income that offset higher than expected utility expense. Year to date, our utility recovery rate is approximately 45%, the same rate we experienced in the first six months of last year. The decrease in utility and other income in the second quarter compared to prior year is the result of $2.3 million of hurricane-related insurance proceeds that we recognized in 2021. Core property operating expense growth was 7% in the second quarter and 8.6% year-to-date. The second quarter growth rate was 60 basis points higher than the midpoint of our guidance range, a variance of approximately $800,000. In the second quarter, utility expense, specifically electric expense, was the largest contributor to core property operating expense growth. Rate-driven increases in Florida and California cost electric expense to be more than a million dollars higher than last year and our guidance. The increase in repair and maintenance expense compared to last year is attributed to inflationary effects on the services of third-party contractors we engage for property maintenance and landscaping. Property payroll reflects a modest increase in the number of employees across our portfolio. The percentage growth is mainly the result of wage rate changes with some additional expense for overtime to cover open positions. In summary, second quarter core property operating revenues increased 4.9%, and core NOI before property management increased 3.3%. For the year-to-date period, core property operating revenues increased 7.2%, and core NOI before property management increased 6.2%. Income from property operations generated by our non-core portfolio was $8.2 million in the quarter and $18.6 million year-to-date. These results were in line with our expectations. Revenues generated by our recently acquired assets reflect our strategic focus on long-term revenue streams. During the year-to-date period, only 8% of our non-core property operating revenues were generated from transient rent. Property management and corporate G&A expenses were $30.8 million for the second quarter of 2022 and $61 million for the year-to-date period. Other income and expenses, excluding transaction and pursuit costs, generated a net contribution of $9.4 million for the quarter. New home sales profits, along with our ancillary retail and restaurant operations, generated approximately $4.1 million in the second quarter and $6.7 million year-to-date. Interest in related amortization expense was $28.1 million for the quarter and $55.5 million for the year-to-date period. The press release provides an overview of third quarter and full year 2022 earnings guidance. As I provide some context for the information we've provided, 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 and are qualified by the risk factors included in our press release and supplemental financial information. A significant factor in our guidance assumptions for the remainder of 2022 is the level of demand for shorter-term stays in our RV communities. We have developed guidance based on current customer reservation trends. We provide no assurance that our actual results will be consistent with our guidance, and we assume no obligation to update guidance as conditions change. Our full year 2022 normalized FFO guidance is $2.73 per share at the midpoint of our range of $2.68 to $2.78. Full year normalized FFO per share at the midpoint represents an estimated 7.5% growth rate compared to 2021. We expect third quarter normalized FFO per share in the range of 66 cents to 72 cents. Full year core NOI is projected to increase 6.1% at the midpoint of our guidance range of 5.6 to 6.6%. We project a core NOI growth rate range of 4.7 to 5.3% for the third quarter and expect NOI for the quarter to represent 25% of full year core NOI. Full year guidance assumes core rent rate growth in the ranges of 5.2 to 5.4% for MH. and 6.2% to 6.4% for annual RV rents. Our guidance assumptions for the third and fourth quarters include MH occupancy gained in the second quarter with no assumed occupancy increase in the second half of the year. Our assumptions for expense growth reflect current expectations based on year-to-date activity and our review of property level and consolidated expense projections for the remainder of the year. As a reminder, we make no assumptions for storm events or other uninsured property losses we may incur. The midpoints of our guidance assumptions for combined seasonal and transient show a decline of 3% in the third quarter and growth of 11.1% for the full year compared to the respective periods last year. Our guidance for the full year and third quarter includes the impact of the acquisition activity we've closed in the first and second quarters with no assumptions for additional acquisitions during the year. We have repaid all debt with maturity dates in 2022. The full year guidance model makes no assumptions regarding other capital events or the use of free cash flow we expect to generate in the remainder of 2022. And now some comments on debt markets and our balance sheet. During the quarter, we observed significant volatility in the debt capital markets. In April, we closed the previously announced $200 million secured loan at a fixed rate of 3.36% for 12 years. Proceeds were used to repay 2022 maturities that carried a weighted average rate of 4.2%. Shortly after we locked rate on that loan, Treasuries began to rise. The 10-year moved around 175 basis points before it topped out close to 3.5% in the middle of June. During that same time period, we noted varied reactions from lending sources, but they generally behaved in a similar manner by increasing spreads on loans and limiting capacity for new deals. For comparison, the loan we closed in April would likely price around 150 basis points higher if we locked REIT today. In the face of extreme volatility and uncertainty, ELS is well positioned with a debt maturity schedule that shows only 15% of our outstanding debt matures over the next five years. This compares to an average of approximately 45% for REIT. In addition, 23% of our outstanding secured debt is fully amortizing and carries no refinancing risk. Current secured debt terms available for MH and RV assets range from 50% to 75% LTV, with rates from 4.25% to 5% for 10-year maturities. High-quality, age-qualified MH will command best financing terms. RV assets with a high percentage of annual occupancy have access to financing from certain life companies as well as CMBS lenders. Life companies continue to express interest in high-quality communities, though some have set limits on capacity and pricing. 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 RE is 5.3 times, and our interest coverage is 5.7 times. The weighted average maturity of our outstanding secure debt is approximately 12 years. Now we would like to open it up for questions.