Good day, everyone, and thank you for joining us to discuss Equity Lifestyle Properties' 1st 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, are 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 are 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 are forward looking statements are subject to certain economic risk and uncertainty. And the company assumes no obligation to update or supplement any statements that become untrue because of subsequent events. In addition, during today's call will discuss non GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non GAAP financial measures to 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. Occupancy in our MH portfolio increased 65 sites with an increase of 113 homeowners. New home sales are off to a have 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 are 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 winter before the general public. This year, we saw an increase in commitments of 9% across the portfolio. 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 will host over 500,000 members and guests at our properties during this busy season. Turning to acquisitions. Since last earnings call, we purchased 2 manufactured home communities and 1 RV park in Florida for a total purchase price of $70,000,000 The properties are well located assets with a total of over 1200 sites.
On a final note, I want to take a moment to acknowledge the passing of ELS' Vice Chairman, Howard Walker. Are now available. 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. 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 Q1 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 Q1, 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% include 4% rate growth and approximately 70 basis points related to occupancy gains.
Rate growth was higher than guidance on higher rents resulted from turnover in certain markets in Florida, Northern California and the Northeast. Core RV rental income from annual seasonal and transient performed better than expected during the quarter. Revenue from annuals increased 6.8%, mainly from increased rent throughout our Encore and Thousand Trails and our expectations for the Q1. During the Q1, 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. Experienced strong customer demand for our properties in Florida and Arizona. 1st quarter membership dues revenue as well as the net contribution from upgrade sales were
are higher than guidance. During the
quarter, we sold approximately 3,100,000 trails camping passes, an increase of 23% over the Q1 of 2017. We upgraded 581 members during the quarter, 5% more than our target. Core utility and other income was are higher than guidance as a result of insurance recovery. We recognized revenue of $2,200,000 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.
1st quarter core property operating maintenance and real estate taxes adjusted to exclude $2,200,000 of expenses related to the 2017 hurricane, increased 5.2% compared to Q1 last year. We experienced higher than planned utility expenses from higher gas rates in the South and West. In summary, are now in the line with our expectations. 1st quarter core property operating revenues were up 5.6% and core property operating expenses were up 7.6%, are now in the range
of $1,000,000 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, The press release and supplemental package provide 2018 full year and second quarter guidance in detail. And revenue and expense projections represent midpoints in our guidance range. Our guidance for 2018 normalized FFO is $365,300,000 or $3.86 per share at the midpoint of our range.
We project 4.6% growth in core NOI for property management and 7.3% normalized FFO per share growth for the full year. We expect 2nd quarter normalized are now at the midpoint of our range of approximately $83,200,000 with a range of $0.85 to $0.91 per share. We expect the Q2 to contribute almost 23% of our full year normalized FFO. We assume no MH occupancy increase subsequent to the end of the are now in the Q1. Protected 2nd quarter core community base rent revenue of $127,300,000 reflects a 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 $51,200,000 of core resort based rental income in the 2nd quarter. This represents 23% of our full year are expected to be up to $4,000,000 or RV revenue, and we are projecting growth of 6.3% over last year. We expect our annual rate to increase at almost 5.5% have 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 2nd quarter reservation page shows we are currently 91% reserved for our expected seasonal revenues and 59% reserved for our expected transient revenues are expected to be $11,500,000 on a combined basis, membership dues revenue and membership upgrade sales net are expected to generate approximately $11,900,000 of income. Our guidance update shows 3.5% growth in the 2nd 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.
And investors are in the industry. The industry reports state that 2017 was the
3rd most expensive year for insured losses with estimated global losses of $136,000,000,000 As a result, we encountered a challenging market for negotiation of our April 1 renewal. Carriers saw premium increases will be able to recover their own reinsurance premium increases as well as to recover losses from 2017. Our negotiations resulted in a premium increase of are currently expecting $2,000,000 for the 9 month period of coverage in 2018. For the Q2, 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 based rent questions do not include a change in our MH occupancy subsequent to the end of the Q1. We expect a 4.4% growth in rate growth in core community based rent revenues for the full year. We anticipate
will be
subject to the Q1
of 2019. We project
combined second and third quarter transient revenue of $31,700,000 a growth rate of 4.8% over 2017. We expect approximately 41% of the full year transient income to come in the 3rd quarter. Total core revenue from dues and net contribution from membership sales for 2018 are expected to be $48,500,000 Core property operating expense growth is projected to be 1 point are 6% for the full year. As I mentioned earlier, we have increased our insurance expense following completion of our April 1 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% will be in the range of $1,000,000,000 if all expenses related to unplanned events are excluded from 2017 2018 results. Represent resulting in an increase in core property NOI of 4.6%. We expect the non core properties will contribute about 11 are $2,000,000 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 and A is $86,200,000 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 are $104,200,000 and includes the impact of the loan I'll discuss in a minute. We expect our average debt balance will be approximately $2,200,000,000 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 94,700,000 shares in 2018. 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 $64,000,000 have a 20 year loan with a 4.8 percent coupon. Our cash balance at quarter end was $74,000,000 before our April dividend and funding the acquisition Holiday Travel RV Park. We have one loan maturing in 2018. Current secured financing terms available for MH and RV assets range from are 60% to 75% LTV with rates from 4% to 4.5% for 10 year money. High quality age qualified MH will command preferred can
be found in our respective 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. Secured line of credit had no outstanding balance and our ATM had $150,000,000 of capacity. We continue to place high importance are on balance sheet flexibility, and we believe we have multiple sources of capital available to us. Our debt to EBITDA is 5.1x and our interest coverage is around 4 point are 4 times.
The weighted average maturity of our outstanding secured debt is 13 years. Now we would like to open it up for
if your question has been answered or you wish to remove yourself from the queue, you may press the pound key. As well, once you have asked your question, we please ask that you place are line on mute to prevent any background noise during response. Our first question comes from Nick Joseph with Citi. Your line is now open.
Thanks. What were the cap rates on the acquisitions, both the MH deals in the 1st quarter and then the RV deal in the 2nd quarter?
The 3 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 6, and I think the other 2 were closer to 5, The 2 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 and 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, for the California portfolio, what percentage of your communities are currently subject to rent control and then could the potential appeal to 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 from Drew Babin with Baird. Your line is now open.
Hey, good morning.
Good morning, Drew. General question on
the transaction market and appreciate the detail on the operate. In terms of the landscape 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 What you thought this year would look like? Or is it kind of a similarly quiet and selective type of transaction environment for your quality of product?
I think as the broader acquisition market, I think it's very similar to in the past. We have properties that are under contract and are LOI right now, and these properties that we've 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 are closed. So I don't really see a difference in the transaction market. I think these are opportunities that our acquisition team is are working with some seller 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 Q4, did a 20 year two zero $4,000,000 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 Q1 was a little higher for rate on RV.
Is that difference in the interest rates Attributable to higher benchmark rates than existed in the Q4? Or would it be kind of difference in the collateral for them, 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 debt, we locked that in toward the end of 2017 and the allocations for life companies have 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 I mean by my numbers is getting well into the could potentially go into the floors pretty significantly. And I guess is there sort of a minimum in net debt to EBITDA ratio You would kind of just not see the point in bringing leverage much lower, or is it more just a product of given where stock prices, 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 As far as need be as long as those deals are accretive?
Yes. I think I mean, I think it goes to the have a question and answer session. 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 are 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. Margaret, you mentioned the 9% increase in RV commitments in some of your warm weather states. Can you just comment on that? Are they locked in a lower promotional rate that's flat to what they paid last winter?
No, it's not a lower rate. It's lower than a person coming in are fresh, but they have an increase built in to their to the rate. And what we do is we essentially have will be participating in the next few quarters. We will be taking the next 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 what you attributed 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 are 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 are 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, apologize if I missed this, are there any expansion opportunities on the 3 acquisitions you announced?
No, there are no expansion opportunities on those 3.
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 van lifers don't necessarily need to use campgrounds are 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 has seen records for over the last 40 years ever since they've kept records. The shipments 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 in the minority rather and the majority of what we see for people excited about being outside and staying in our campgrounds.
So our luxury venues, 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. 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 MAB and A incentives for your salespeople are to push new homes if that's the case.
Sure, Todd. I think I'll have Patrick cover that and also maybe talk a little bit about the conversion, the renter conversions, 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 up almost 10% year over year. That's largely driven by conversions in are Arizona and California markets, as well as new home sales in MH expansion properties that we have in Arizona. On the conversion front, 15% of our new and used home sales for the quarter were 2 existing renters. So those are existing renters purchasing the ELS home that they were renting.
If you include Our engagement with all of our residents in the community. So renters that buy the home that they weren't renting or other homeowners that either trading up are trading down to a 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 that process. Our sales team does a very thorough job are 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 you could generalize, are folks financing these purchases? Are they paying with cash? That would be part 1 and part 2. How long are they generally renting before they purchase?
So there are really no finance deals on the 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 is giving us that cash from their personal savings and committing that to us. And in terms of the renter term, it's about between 2 3 years.
Okay. That's helpful. And the last question, just with your share prices 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 the 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 their fully needed for liquidity, because there's certainly a hold period with the OP units. So what we've done in the past Where perhaps the OP units weren't something that was going to happen, we then turned to the ATM. But there's certainly a conversation with each seller.
Okay. Thank you.
Thanks, Tessa.
Thank you. 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 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 hurricane 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. And a couple of areas, the main area really that's are driving an increase there. The insurance that I previously talked about, and then we also have seen wage pressure are 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. 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 say 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 in September.
Okay. And the last question for me, I understand asset values are on pretty firm footing. But as you look across your portfolio in the lowest quality trunk and pick a number 5% or 10% bottom The portfolio, are you seeing any weakness in pricing if you were to go sell it or do you expect to see an expansion of cap rates?
We don't see any issues with the valuation on the lower end or the higher end 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 the 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 around 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 are really over the last 12 months, I would say. That's not to say that it 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 are known for a long time that we've been discussing negotiating with them for a long time. It may be 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 built 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 do get pretty granular and get down give you 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.
Today. Thank you. Since we have no more questions on the line at this time, I would like to turn it back over to Marguerite and Zehr 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