Equity Lifestyle Properties, Inc.

Good day, everyone, and thank you all for joining us to discuss Equity Lifestyles Properties second quarter 2023 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 Release 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 a 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 contain forward-looking statements in the meaning 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 and 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.

Good morning, and thank you for joining us today. I am pleased to report the results for the second quarter of 2023. Our performance exceeded our expectations in the quarter, driven by continued strength in our annual revenue and reduced expenses throughout our portfolio. The quality of our revenue streams and the strength of our balance sheet continues to allow us to report impressive results. Our core NOI exceeded our guidance in the quarter with 3.5% growth year over year. Our MH portfolio is approximately 95% occupied. Over the last 10 years, we have sold over 6,000 new homes in our community. These new homes contribute to the quality of housing stocks in the community. Our residents have enjoyed the ability to resell their homes in a timely manner, and ELS benefits from bringing a new resident into the community at a market rate increase. Year-to-date, the mark-to-market for new homeowners has been over 13%. Currently, less than 4% of our occupancy is comprised of rental homes. The high level of occupancy in our portfolio is sustainable, and based on demand, we believe we can continue to increase occupancy throughout our portfolio. Our communities offer an incredible value proposition. The cost to purchase a manufactured home is significantly less than a single-family home. The average cost of a site-built home in the U.S. is approximately $500,000, while our homes sell for an average of $102,000. Manufactured housing is an efficient way to address the housing shortage in the U.S. The affordability of manufactured homes coupled with the high-quality amenities in our communities create the continued demand for our properties. Prospective residents' interest in our community remains solid. We sold 226 new homes during the second quarter, contributing to stable portfolio occupancy. While home sales are down compared to the historical highs of last year, our home sale business is strong by comparison to typical years. With respect to our RV business, our annual segment, which represents the largest portion of our RV revenue stream, performed well in the quarter, and we anticipate growth rates of 8.3% for the full year 2023. The full year guidance and results for the quarter for our transient business are impacted by California storms and a reduced number of transient sites. Our team's focus on providing best-in-class customer experience helps drive guest retention and attract new prospects to our RV properties. TripAdvisor collects customer reviews and uses the information to spotlight the very best destinations with the Traveler's Choice Award. In June, TripAdvisor announced that 49 ELS RV properties were named winners of the Traveler's Choice Award. These awards acknowledge the efforts of our property teams to create lasting memories with friends and families across our portfolio. We continue to engage our guests, members, and prospects through our social media strategy. We have grown our fan and follower base to 1.8 million. Across Instagram, YouTube, TikTok, Facebook, and other social platforms, we are currently in the middle of our 100 Days of Camping campaign that focuses on the days of summer camping between Memorial Day and Labor Day. In May, we announced the passing of our chairman, Sam Zell. A debt of gratitude is owed to Sam for ELS's long and successful track record. In the 1980s, he saw what others didn't and invested in this asset class. Before others accepted the asset class as institutional grade, Sam knew it and acted on that belief. Sam grew the company from 41 properties at our IPO with a market cap of $300 million in 1993 to 450 properties with a market cap of $16.5 billion today. Sam was instrumental in laying the foundation for the modern REIT era. While most people listening know Sam for his extensive real estate successes, he is equally well-known and appreciated for his philanthropic contributions dedicated to helping others. Sam was a willing mentor to many both inside the equity world and beyond. In line with our succession plan, Tom Henehan was appointed as chairman of our board. Tom was most recently the vice chairman of ELS and has been an integral part of the organization for the past 28 years. Tom is a proven leader and his extensive knowledge of the MH&RB industry will serve us well. I would like to thank our employees for their continued contributions this quarter. Their diligent efforts to service our customers are the primary reasons for our continued success. I will now turn the call over to Paul to provide further details on our financial performance.

Thank you, Marguerite, and 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 2023, and close with a discussion of our balance sheet. For the second quarter, we reported 66 cents normalized FFO per share. Core and non-core property operating income outperformed our expectations. Core MH rent increased 6.7% in the second quarter and 6.6% year to date compared to the same periods last year. Rent growth in the second quarter includes approximately 7% rate growth as a result of our rent increases to in-place residents and our 13% mark to market on turnover when a new resident moves in. Core RV and marina annual base rental income which represents approximately two-thirds of total RV and marina-based rental income, increased 7.8% in the second quarter and 8.1% year-to-date compared to prior year. Annual RV and marina rate increases generated approximately 7.1% growth in the year-to-date period, with occupancy contributing close to 90 basis points of growth. Since June 2022, we've increased our core annual occupied sites by 240. Year-to-date in the core portfolio, seasonal rent increased 9.2%, offsetting some of the transient decline we've experienced as a result of challenging weather patterns and site usage increasing for longer-term stays. We also experienced offsetting reductions in variable expenses that I'll discuss shortly. On a combined basis, core seasonal and transient rent decreased approximately 3.2% in the year-to-date period compared to prior year. Membership dues revenue increased 3.8% and 4.6% for the quarter and year-to-date, respectively, compared to the prior year. Year-to-date, we've sold approximately 11,300,000 trails camping pass memberships. This represents a 10% increase over pre-pandemic membership sales in the first half of 2019. Also during the year-to-date period, members purchased approximately 1,900 upgrades at an average price of approximately $9,000. Core utility and other income was in line with our expectations for the quarter. The increase in the quarter compared to the same period last year was mainly the result of higher utility income. Our utility recovery rate for the year-to-date period was 45.6%, compared to 44.7% in the same period last year. Also, during the quarter, We recorded approximately $1.3 million of revenue associated with sites leased to provide housing for displaced residents in the Fort Myers, Florida market. Core property operating expense growth was 7% in the second quarter and 7.2% year to date. The second quarter growth rate was 340 basis points lower than the midpoint of our guidance range. Our three main operating expense line items, utility, payroll, and repairs and maintenance expenses all showed moderation in second quarter year-over-year growth rates when compared to the first quarter growth rates. In the second quarter, property operating and maintenance expenses were approximately $3.7 million favorable to our guidance. Utility expense and property payroll on a combined basis represented more than 85% of this favorable variance. As we reviewed the expense savings at properties with lower than forecast transient revenues, we saw a strong correlation. Essentially, the transient RV revenue variance to our forecast was offset by expense savings and utility and payroll expense. In summary, second quarter core property operating revenues increased 5%, and core NOI before property management increased 3.5%. For the year-to-date period, core property operating revenues increased 5.7%, and core NOI before property management increased 4.6%. As mentioned in our earnings release, in the second quarter, two properties were moved to the non-core portfolio from the core portfolio. These California Thousand Trails properties, which combined generated modest NOI in 2022 of a few hundred thousand dollars, were impacted by storms and flooding events earlier this year. Following the storms, we suspended operations, resulting in the determination to present them with our non-core portfolio. Income from property operations generated by our non-core portfolio was $9 million in the quarter and $14.9 million year to date. These results outperformed our expectations as a result of lower than expected utility and payroll expenses. Property management and corporate G&A expenses were $36 million for the second quarter of 2023. and $67.1 million for the year-to-date period. The second quarter and year-to-date amounts include the expense associated with accelerated stock compensation vesting. Other income and expenses, which includes home sale profits, brokered resales, ancillary retail and restaurant operations, interest income, as well as JV and other corporate income, generated a net contribution of $7.9 million for the quarter. and $14.5 million year-to-date. Interest in related loan cost amortization expense was $33.1 million for the quarter and $65.7 million for the year-to-date period. The press release provides an overview of third quarter and full year 2023 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 2023 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. We have increased our full year 2023 normalized FFO guidance to $2.85 per share at the midpoint of our range of $2.80 to $2.90 per share. Full year normalized FFO per share at the midpoint represents an estimated 4.5% growth rate compared to 2022. We expect third quarter normalized FFO per share in the range of 68 to 74 cents. Full year core NOI is projected to increase 5.4% at the midpoint of our guidance range of 4.9% to 5.9%. We project a core NOI growth rate range of 5.2% to 5.8% for the third quarter and expect NOI for the quarter to represent 25% of full year core NOI. Full year guidance assumes core rent growth in the ranges of 6.3% to 7.3% for MH, and 7.8% to 8.8% for our 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 that may occur. The midpoints of our guidance assumptions for combined, seasonal, and transient show a decline of 6.2% in the third quarter and decline of 2.5% for the full year compared to the respective periods last year. Our guidance for the full year during the year. We also assume the debt capital transactions announced in our earnings release will close during the third quarter and use of proceeds will be consistent with the comments I'll make in a moment. 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 2023. Now some comments on our balance sheet. In our earnings release, we announced secured debt transactions that are expected to generate proceeds of approximately $464 million at a weighted average interest rate of 5.05%. The primary use of proceeds from these transactions include repayment of our 2023 and 2024 secured debt maturities and the balance on our unsecured line of credit. The weighted average maturity of these loans is eight years. We are extremely pleased with the execution of these loans, which leveraged a long-standing life company relationship and demonstrated the value of a structured facility with one of the GSEs. that included terms allowing incremental borrowings as property values increase over time. After closing these loans and repaying secure debt maturities, we will have addressed all debt scheduled to mature between now and April 2025. Our debt maturity schedule will show 22% of our outstanding debt matures over the next five years. This compares to an average of approximately 50% for REITs. In addition, 21% 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 5% to 6% 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 5.2 times, and our interest coverage is 5.4 times. The weighted average maturity of our outstanding secured debt is approximately 10.6 years. Now we would like to open it up for questions.