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Edited Transcript of ELS earnings conference call or presentation 23-Jul-19 3:00pm GMT

Q2 2019 Equity LifeStyle Properties Inc Earnings Call

NEW YORK Jul 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Equity LifeStyle Properties Inc earnings conference call or presentation Tuesday, July 23, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marguerite M. Nader

Equity LifeStyle Properties, Inc. - President, CEO & Director

* Patrick Waite

Equity LifeStyle Properties, Inc. - Executive VP & COO

* Paul Seavey

Equity LifeStyle Properties, Inc. - Executive VP, Treasurer & CFO

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Conference Call Participants

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* Andrew T. Babin

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Samir Upadhyay Khanal

Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst

* Todd Jakobsen Stender

Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst

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Presentation

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Operator [1]

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Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties Second Quarter 2019 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. (Operator Instructions) As a reminder, this call is being recorded.

Certain matters discussed during this conference call 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 is 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.

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [2]

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Good morning, and thank you for joining us today. Our second quarter results released yesterday showed strong quarter and year-to-date trend. Year-to-date, we increased occupancy by 204 sites, and this quarter marks our 39th consecutive quarter of occupancy growth. Customer demand to live in our communities continues to be high. The ownership transfer activity within our communities shows the strength of the market.

The satisfaction of our residents is important to us. Our residents recognize the benefits of community living and choose to live in our communities an average of 10 years. Approximately 50% of our new and used home sales come from residents living in the community and resident referrals to family and friends. This percentage has increased each of the last 3 years.

New residents are interested in our lifestyle offering. They have expressed a strong desire to be part of an active community. Over 40% of our new residents are moving from a site-built home and 25% are moving from an apartment. Year-to-date, our MH revenue, which accounts for 70% of our total revenue, had a growth rate of 5.1%, comprised of 4.5% rate and 60 basis points of occupancy.

Our RV revenue, including Thousand Trails, has grown 4.7% year-to-date. This growth has been fueled by growth in our annual income in our Thousand Trails revenue. The annual growth of 6.1% is comprised of 5.1% rate and 1% occupancy. Our Thousand Trails portfolio revenue increased from both dues and upgrades. Year-to-date, we have seen an increase in sales of 13% and an increase of upgrades of 25%.

Our self-service volume of transaction increased in the quarter. Our RV revenue through digital channels increased 21%, and our online sales of camping passes increased by 28%.

The satisfaction of our RV park guests can be seen in both the length of tenure with us and the third-party feedback we receive. We can constantly see customer feedback as a tool to improve the experience for our guests. We are pleased to report that we have 79 properties that have received TripAdvisor Certificates of Excellence for 2019. This distinction is earned by consistently achieving high ratings on TripAdvisor from guests. I'd like to thank our employees for their efforts in delivering another strong quarter at ELS.

I will now turn it over to Paul to walk through the numbers in detail.

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Paul Seavey, Equity LifeStyle Properties, Inc. - Executive VP, Treasurer & CFO [3]

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Thank you, Marguerite, and good morning, everyone. I will discuss our second quarter results and updated guidance for the remainder of 2019. For the second quarter, we reported $0.96 normalized FFO per share and $0.94 FFO per share. Normalized FFO per share was $0.04 higher than the midpoint of our guidance on higher-than-expected Core property operating income and the timing of joint venture income we had anticipated would be received in the third quarter. FFO includes expense of approximately $0.02 per share related to early debt retirement.

Our core MH rent growth of 5.2% consists of approximately 4.5% rate growth and 70 basis points related to occupancy gains. Our second quarter core RV resort-based rental income growth was 4.1%. Growth in annual and seasonal revenues was in line with expectations and increased 6% and 4%, respectively. Rate growth in our annuals was 5.2%, and we realized approximately 80 basis points of growth from occupancy.

Seasonal growth in the quarter came from our properties in California and Florida. We continue to experience strong demand for transient stays across the portfolio as evidenced by the occupancy and rate growth at locations not impacted by weather as well as the strong growth in our membership dues, which I'll discuss in a minute. The majority of the transient guidance miss occurred in June as a few locations in the Midwest and Northeast experienced heavy rains and colder-than-normal temperatures. As I mentioned, membership dues revenue continued its strong growth pace during the second quarter, showing a 5.8% increase over prior year.

During the quarter, we sold approximately 6,600 Thousand Trails camping pass memberships. Year-to-date, we have sold approximately 10,200 camping passes, a 14% increase over the first 6 months of 2018. In response to customer demand, we have offered a supplement to our membership product that provides access to a broader network of properties. This product continues to drive better-than-expected growth in sales. The net contribution from membership upgrade sales was also higher than expected during the second quarter.

We continue to see an increase in sales volume of our higher-priced upgrade products. During the quarter, we sold almost 750 upgrades at an average price of approximately $6,700. Core utility and other income was lower than guidance partially as a result of lower utility recovery, offset by lower-than-expected expense, which I'll discuss next along with core expenses.

Core property operating expenses were lower than guidance in the quarter. Property operating and maintenance expenses, including real estate taxes and rental home expenses, were approximately $1.1 million lower than expected mainly as a result of savings and payroll and utility expenses.

Sales and marketing expenses represent costs associated with our membership sales activity, including commissions on upgrade sales. While the outperformance in our sales activity drove increased expense, as I previously mentioned, the net impact was favorable to our guidance during the quarter.

In summary, second quarter Core property operating revenues increased 4.9%, and Core property operating expenses increased 4.5%, resulting in an increase in core NOI before property management of 5.2%. Income from property operations generated by our noncore properties performed in line with guidance during the quarter. The results include the 2 acquisitions we closed during the second quarter.

Property management and corporate G&A expenses were higher than guidance mainly because of legal and insurance-related costs. Certain corporate legal matters as well as increases to insurance reserves drove the higher-than-expected expense. Other income and expenses include fee income effect of the joint venture income I previously mentioned. This is a timing variance as we have previously included the income in our guidance for the third quarter of 2019. Aside from the joint venture activity, our other income and expense categories performed in line with expectations.

Interest expense and related amortization was lower than guidance as a result of the early retirement of approximately $67 million of secured debt with a weighted average rate of 6.9%. The primary funding source for the debt prepayment was the sale of stock from our ATM program during the quarter.

Turning to our guidance update. The press release and supplemental package provide third quarter and full year guidance in detail. Please note, the following 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.

We have increased our full year 2019 normalized FFO per share guidance $0.02. Our range for the year is now $4.12 to $4.22. The midpoint of our third quarter normalized FFO guidance is approximately $102.2 million with a range of $1.03 to $1.09 per share. We expect the third quarter to contribute approximately 25% of our full year normalized FFO.

For the remainder of 2019, we assume no change in our core MH occupancy from the end of the second quarter. And expect community-based rent revenues of $267.4 million, a growth rate of 5% for the remainder of the year. In our RV business, we anticipate core RV revenues of $121.4 million for the rest of the year, a 4.6% increase over the second half of 2018. This projection is based on expected revenue growth of 4.9% from our annual customers, 3.5% from seasonal and 4.1% from transient customers. We expect more than 40% of the full year transient income will come in the third quarter.

Based on our review of current reservation pace and overall expectations for activity in August and September, we are projecting 4.2% growth in transient revenue for the third quarter. Our assumptions for transient income in the third and fourth quarters do not anticipate meaningful impact on demand resulting from adverse weather conditions.

Membership dues revenues are expected to increase $1.1 million or 4.7% compared to 2018. Our contribution from membership upgrade sales, net of related sales and marketing expenses, is projected to be almost $2.1 million for the rest of the year, an increase of almost 25% compared to 2018. Core property operating and rental home expense growth is projected to be 2.6% for the full year, in line with our prior guidance. Our expense guidance for the second half of 2019 does not include any assumptions regarding unplanned storm events.

For the rest of the year, Core property operating revenues are anticipated to be up 3.7% with an increase in Core property NOI of 5%. We expect the noncore properties will contribute about $9 million in income from property operations for the remainder of the year. For the full year, we project $20.9 million of income from property operation from these noncore assets.

Property management and corporate G&A is expected to be $45.1 million for the remainder of the year and $92.3 million for the full year. The increase from prior guidance includes the second quarter variance I previously mentioned as well as an update to the second half of the year to reflect expected legal expenses and technology-related expenses.

Other income and expense items are expected to be approximately $6.6 million for the rest of the year and approximately $16.7 million for the full year.

Financing costs and other in the second half of the year are expected to be $50.5 million and reflect the impact of the debt we retired during the second quarter.

Now some comments on our balance sheet. As I previously mentioned, during the quarter, we raised equity from our ATM and used proceeds for early retirement of debt. The amount of debt was not significant relative to our overall debt balance and had little impact on our balance sheet metrics. We acted on an opportunity to raise equity at an attractive price and to retire debt that carry to high coupon.

We continue to see strong interest from various lending sources to finance our MH and RV assets. Current secured debt terms available for MH and RV assets range from 50% to 75% LTV with rates from 3.25% to 4% for 10-year money. High-quality age-qualified MH will command preferred terms from all lending sources. Fannie and Freddie, CMBS lenders and certain life companies are currently offering debt to finance RV assets. The current lender underwriting model for MH and RV assets places high value on strong sponsorship.

Our interest coverage ratio is 4.7x, and our debt to adjusted EBITDAre is 4.7x. We have available capacity of $400 million from our unsecured line of credit, and we have approximately $141 million of capacity under our ATM program.

Now we would like to open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Nicholas Joseph from Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [2]

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Maybe just starting with RV. You raised RV revenue growth guidance for the third time since initially providing it last third quarter. What have seen on the ground that's driving the reduction? And how comfortable are you with the new guidance of 4.4% for full year 2019?

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Patrick Waite, Equity LifeStyle Properties, Inc. - Executive VP & COO [3]

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Nick, it's Patrick. What we're seeing on the ground is consistent demand across all 4 buckets, annual, seasonal and transient. And as Paul just addressed on the annual front, which for the quarter, was just about 70% of our total revenue. So a rate growth of 5.2% occupancy growth, the 80 basis points. So that's the key driver of our business and that's where our focus is historically.

The miss for this quarter, as you're aware, is on the transient side that was impacted by weather. For the quarter, we saw historically high rainfall across the Northern United States, that really affected 4 properties of ours pretty significantly. 2 are closed for a period of time, 2 others had a significant number of sites offline for a period of time. Those weather events are past us. So I'm comfortable with respect to our demand profile and our view going into the quarters that we're well positioned and continue to take advantage.

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [4]

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And I think also, Nick, when you look at our RV results, looking at the whole picture, looking at our subscription, our membership revenue, we saw increases in that in the quarter. I think that's really -- that transient customer converting to a member and that's been picked up in that revenue line item.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [5]

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So when you think about the 5.2% that you initially thought for RV growth versus the 4.4% now, is that 80 basis points mostly weather-driven?

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [6]

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It's -- there's a combination...

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [7]

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Not just for the quarter but would...

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [8]

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Sorry, it's a combination, it's weather and then it's that off-spend that -- what you see in the dues line item or the subscription revenue. You can see the same pickup in there.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [9]

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Okay. And then maybe just on the balance sheet. You continue to lower leverage. You mentioned prepaying the 2020 debt with the ATM equity. How do you think about the current capital stack in optimizing leverage levels going forward?

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Paul Seavey, Equity LifeStyle Properties, Inc. - Executive VP, Treasurer & CFO [10]

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Yes. I think in the quarter, we had a debt. It was a relatively small amount of debt. There was a nice opportunity for us to task the ATM. It didn't have any meaningful impact on our leverage metric. And I think that as we've said in the past, our focus is on flexibility and being able to access various sources of capital at the appropriate time when an opportunity presents itself.

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Operator [11]

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And our next question comes from John Kim with BMO Capital Markets.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [12]

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On the RV growth, it seems like the Thousand Trails membership is cannibalizing some of the transient growth more so than in prior years, and I'm wondering why that's the case.

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [13]

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I think what you're seeing there is an increase in our online sales. And if the conversion from the person who came in and intended to be a transient and was -- saw the opportunity to become a member or have a subscription revenue model and they chose that. So I think it's just that increase in activity on the membership side and our customer having the option to choose that.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [14]

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And do you see the same conversions of members going to annual and seasonal as you do from transients? And also, can you talk about the profitability of the Thousand Trails revenue versus the typical RV business, just given the acquisition -- customer acquisition cost?

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [15]

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I mean you can see on the conversion from membership and annual and seasonal, you can see on our -- in our supplemental, we show how many annuals we have inside of the Thousand Trails membership base, which is about 5,000 or so. And we see people coming in on the membership side and then they decide to become an annual. And then we'll also see the transient pickup into the seasonal and then subsequently into the annual. We've seen that change over time, over the last couple of years, an uptick in that activity to where we're seeing more conversions. And that's really just a matter of people staying at the properties for a longer period of time and then deciding that they want to spend more time with us. As to the profitability on the Thousand Trails side, on the supplemental page, it shows the revenue that we have on both the -- on the dues side, the annuals and the upgrades and -- so you see that there, and the profitability is similar to what you see on the overall RV base.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [16]

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Okay. And then finally, we're hearing from some of the retailers that the low-income consumer is really being pressured by rising rents and that includes by manufactured housing owners. I guess not so much from your end, but maybe from some of the p buyers in the market. But how much of a concern of this -- this is for you and potentially some of your customers?

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [17]

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I mean, I think, what we have is -- we do a market survey, which is surveying everything is going on in and around our properties. So what's happening in manufactured home communities, what's happening in single-family, multifamily, et cetera. And so that is how we're deciding how to increase rates. So we're keeping in lockstep with what's happening in the local market and we don't see that changing anytime soon. We generally send out a significant portion of our rent increases at the end of September, kind of beginning of October, which is how we're able to put out our guidance so early in the year. But at this point, we don't see any change to what you've seen over the last couple of years.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [18]

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There's no discussions of rent regulations in some of your markets or an increased concern of it?

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [19]

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Well, there's certainly -- there are certainly -- we've seen properties -- there's been a lot of press lately about rent-control initiatives across the United States. We have 23 properties right now subject to mandated rent control primarily in California. But we've been actively opposing that rent control -- those rent-control ordinances for over 20 years, but we've -- and we've had success in some jurisdictions and others, we just have had operated in a rent-control environment. But when you kind of consider areas of concentration for ELS, in the state of Florida, we've always operated under the terms of a prospectus. That -- the prospectus that runs with the land and it governs their annual rent increases. So we've developed relationships with the homeowners' associations, and we spend a lot of time meeting with them and talking about the needs of the residents to achieve fair rent increases. So I think that we certainly see that, but there's also a lot of discussion with our residents about what rent increases should be and what makes sense for them and for the community.

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Operator [20]

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And our next question comes from Samir Khanal with Evercore ISI.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [21]

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I guess just getting back to that question on RV, I mean, when you look at RV shipments on an year-over-year basis, they continue to be down. And yet, your business still -- I mean there's been a bit of slowdown here, but you're still kind of in that 4.5% range. So I really haven't seen the impact as you would -- maybe I would have thought. So when you go back, maybe sort of the last downturn, and I'm sure you track the numbers pretty closely in regards to your RV shipment, was there some sort of a time lag before you started seeing the changes in sort of consumer appetite there?

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [22]

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Yes. I mean certainly, you look at the shipments, I think, they're down -- sales are down 8% for RV sales for the year and some of that decline, I think, is weather and some excess inventories. But really how it impacts ELS, it really -- you think about our portfolio and it's comprised primarily of longer-term customers staying with us on average 10 years. So they've made that decision to stay at the property and develop roots. So our focus is not really the new RVers as much it is the 9 million installed base of RVers, and so we're marketing to those RVers and we don't -- we didn't see impact in the market last time the RV industry had a blip in that. We don't anticipate seeing one now because we are focused on the installed base.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [23]

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And I guess my second one is, I mean, you did a small acquisition in the quarter. Can you talk sort of pricing around that and the cap rates?

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [24]

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Sure. So we closed on 1 property in April that we actually already previously announced that we've -- in the quarter, we actually closed on 2 properties. But the new one that we announced today was a property near one of our premier North Carolina properties. The property is 455 sites. That deal was not unlike some of the deals that we've done in our history. This is a seller who previously sold us one of our assets, one of the assets I just referenced near the asset that we bought. He built this property and the book -- he built the property and the book of business and then he was ready for an exit. The property has internal expansion sites and the seller is also developing additional sites adjacent to the property that we will purchase once those sites are complete.

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Operator [25]

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Our next question comes from Drew Babin with Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [26]

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I would assume based on the transient guidance for the third quarter that the 4th of July holiday went well, and I was hoping you could maybe kind of validate that or talk about that. And then give a little color on just, and apologies if I missed this, but just kind of booking pace for the rest of the summer season relative to kind of where things were last year. What type of revenue is sort of earned in at this point relative to last year?

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Patrick Waite, Equity LifeStyle Properties, Inc. - Executive VP & COO [27]

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Drew, it's Patrick. With respect to the 4th of July, I would say that things trended well and it's reflected in our guidance for the quarter. As I mentioned earlier, we're seeing consistent demand across RV platform, that includes all the buckets, annual, seasonal and transient. I think about some of the key drivers for that summer season, which are the northern campgrounds and resorts across our portfolio. New York has good demand profile, one of our largest transient properties in Lake George. We have a property just outside of Chicago here, that was one of the properties that was impacted by weather, but it's pacing favorably today. And in Wisconsin, where another property we had was offline and another was impacted by the weather events early. Overall, that market is pacing well in addition, too. So I would say that, that I would expect barring weather events for us to have a solid quarter.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [28]

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And any of the, I guess, cleanup cost or alternatively just kind of missed revenue in the second quarter, is any of that reimbursable or covered by insurance?

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Paul Seavey, Equity LifeStyle Properties, Inc. - Executive VP, Treasurer & CFO [29]

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Not really. I mean what we had were kind of property-specific events that didn't necessarily cause a significant amount of damage to the property. It was really the adverse conditions, people not wanting to visit the property because it was expected to be colder than typical, and as Patrick said, just the level of precipitation was significant.

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [30]

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And then on the lost revenue, we just have a campaign to work on encouraging that customer to rebook with us.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [31]

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Sure. Okay. That makes sense. And then secondly, to the extent, and I know that sometimes it gets tricky with the 55-plus communities in the Florida where there's a prospectus. Are you finding the tenants are as willing to pay rent increases to pay for upgrades, new amenities, things like that, going into the properties and though some of the higher-amenity RV properties have a little more flexibility to do that? Are you still seeing a customer that's willing to kind of pay up when capital can be put into a property? Or you're seeing a little more pushback these days?

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [32]

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I mean, I think, we're still seeing the same -- the customer feedback or the resident feedback meeting with the homeowners association is such that we're working with them. We talk about what the rate increase would be. We talk about the needs of the property. We make certain that what we think is important is equally important to the resident base, especially when it comes to an amenity. We may think it's a good idea to put in some new fitness equipment and they may want a pickleball court. So there's just something that we try to figure out the best -- kind of the best avenue to go down, and we haven't seen a pushback. And it's really dealing with the homeowners' associations at each individual property.

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Operator [33]

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Our next question comes from John Pawlowski with Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [34]

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Marguerite, has the recent share price run changed your acquisition appetite at all for the balance of this year?

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [35]

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I think we're still in the same place that we've been and that we have properties in all stages of under contract, LOI, et cetera. Certainly, we look to it. We've been -- and you've seen, we've been using our ATM, and we're engaged with sellers and it's a matter of timing for them in some cases. And in some cases, it's a matter of pricing and what does it mean in terms of -- for ELS. But certainly, share price goes into the -- factors into the equation.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [36]

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So are you bidding on more deals? Or are you bidding a bit harder now?

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [37]

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We're bidding on, I would say, the same amount of deals. It changes by quarter, whether or not it's RV or MH. So I think it's along the same -- I don't think -- we've continued to have the same disciplined approach to our underwriting and that hasn't changed, but certainly factoring in using our equity.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [38]

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Okay. And I'm no expert on how Florida prospectuses work. I understand everything is negotiated at the property level. From your monitoring of Florida state politics, is there anything in the hopper today or is there any chatter down the line of just the overarching prospectus system strengthening in favor of renters?

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [39]

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We haven't really heard anything. I think it's pretty strong, I mean, the prospectus is pretty strong. And it's good for us and it's good for perspective residents, it's good for current residents. So we -- there's a lot of focus on that, when we meet with the individual homeowners association. But we haven't heard anything, any kind of rumblings about a grand scale change in that.

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Operator [40]

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(Operator Instructions) Our next question comes from Todd Stender with Wells Fargo.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [41]

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Just looking at the number of occupied rentals, when you look at new homes versus used homes, I would think that the economics would be better for used. But maybe you guys could just speak to the rental differences between the 2 and how you're looking at the rental segment?

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [42]

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The economics on -- I'm not clear, Todd, on your question.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [43]

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I guess when you look at the numerator for both, are they comparable because I would imagine the denominator would be lower for used, so your economics would be better for used? But that just seem like it went down in the quarter, but occupied rentals went up for new. Just wondering if you could kind of speak to the differences between the 2.

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Patrick Waite, Equity LifeStyle Properties, Inc. - Executive VP & COO [44]

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Yes, Todd. So I think you're referring to the mix of the new -- occupied new rentals versus occupied used rentals.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [45]

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That's right.

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Patrick Waite, Equity LifeStyle Properties, Inc. - Executive VP & COO [46]

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And if you compare it to the same period last year, the rental pool is flat, it's right around 4,000. And to your point, the mix reflects an increase of about 460 new and a decrease of about 460 used. That's driven by a couple of factors. One is our focus on reducing the used inventory across the portfolio just because over time, it becomes a little less efficient to operate those used homes from a maintenance and an operations perspectives. And the focus on new is, more new inventory coming to our portfolio and looking at a mix of sales and rentals in order to manage overall occupancy. And as Marguerite mentioned in her opening comments, also a focus on rental conversions to manage that overall rental load. The total conversions for the quarter are right around 30%. Just for perspective, full year 2018 was right around 28%, so it's trends that we favorably. But that's our overall goal. You manage that overall rental load that's currently 6% of our overall occupancy and focus on conversions with a bias towards selling used inventory. Does that answer your question?

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [47]

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It sure does. Any length of stay differences between the 2 or compared to last year?

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Patrick Waite, Equity LifeStyle Properties, Inc. - Executive VP & COO [48]

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No, we haven't seen a change. It's -- the stay is usually 2 to 3 years. Some of our conversions are ranging from 18 months to 36 months. It just depends on the community and that customer behavior.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [49]

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Okay. Very helpful. Just transitioning to Paul. You spoke about the upgrade sales, I think it averaged 6,700, if I heard that right.

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Paul Seavey, Equity LifeStyle Properties, Inc. - Executive VP, Treasurer & CFO [50]

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Yes.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [51]

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Can you talk about some of the underlying factors that fueled that move? And then maybe speak to the cost of achieving that growth just to get a sense of the net impact?

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Paul Seavey, Equity LifeStyle Properties, Inc. - Executive VP, Treasurer & CFO [52]

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Sure. I think that as we look at the product that we offer to our customer in terms of the upgrade, a lot of that revolves around how they can expand their usage of the properties, how they can enjoy the properties for longer periods of time, how they could access or make their reservation with a greater length of time so they have more certainty with respect to the site that they can book and so forth. So we package those options together and it drives the upgrades. We've seen a pretty consistent increase in the pricing as the customers have opted for more amenities and more added features to their membership over the last couple of years. As it relates to the overall net contribution, I think I mentioned that for the full year, we anticipate about $2 million net contribution from the membership sales, offset by sales and expense -- sales and marketing expenses. That's on a total of $17.5-ish million on upgrade sales.

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Operator [53]

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And we have a follow-up from John Pawlowski with Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [54]

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Yes. One modeling follow-up. Paul, could you remind us just average operating margins for both MH and RV portfolios right now? And how much upside over the next few years you think with operating initiatives are left to squeeze?

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Paul Seavey, Equity LifeStyle Properties, Inc. - Executive VP, Treasurer & CFO [55]

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I think what we've seen on the MH side of the business is pretty consistent over our long history, call it a 65% to -- could be up to 70% operating margin, just depending on the location of the property and the rent level. On the RV side, it really can be quite similar when you're talking about a highly annual property, but when you have a highly transient property in the RV business, those margins could be significantly different, call it, a 35% operating margin if you're reliant on that transient customer and have the risk of a property really being occupied. For example, in the summer, occupied for the weekends, but not occupied during the week.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [56]

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Okay. And where do we go from here in terms of operating initiatives?

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Paul Seavey, Equity LifeStyle Properties, Inc. - Executive VP, Treasurer & CFO [57]

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I think that what we try to do on the latter with respect to those transient customers, how do we extend the stay? How do we increase their time with us? Can we get them to stay Sunday into Monday so that we could drive that? We also have some of our highly transient properties initiatives in place to introduce cabin-type or park-model housing stock so that we could convert customers to annuals and drive the long-term revenue that way. We see on kind of an average daily rate basis, a reduction in the rent. But over the course of the year, more stability and a reduction in the variable expenses because we don't have to staff the property quite the same way if it's more fully occupied with the annuals.

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Operator [58]

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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 comments.

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Marguerite M. Nader, Equity LifeStyle Properties, Inc. - President, CEO & Director [59]

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Thank you for joining us today. We look forward to updating you on our next quarter's call.

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Operator [60]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may all disconnect. Everyone, have a great day.