Equity LifeStyle Properties - Q1 2023

Transcript

Operator (participant)

Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties first 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 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 contain forward-looking statements in the meaning of the federal securities laws. Our forward-looking statements are subject to certain economic risks and uncertainties.

The Company assumes no obligation to update or supplement any statements that become untrue because of subsequent events. 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 now like to turn the call over to Marguerite Nader, our President and CEO.

Marguerite Nader (President and CEO)

Good morning, thank you for joining us today. I am pleased to report the results for the first quarter of 2023. The quality of our cash flow and the strength of our balance sheet continues to allow us to report impressive results. Our core NOI exceeded our expectations in the quarter with 5.7% growth year-over-year. Our MH portfolio is 95% occupied. The MH business is unique in that once a high level of occupancy is achieved at a property, the occupancy is generally sustainable for a long time. The key to that stickiness is having an elevated level of homeowners in the portfolio. Our portfolio is 96% occupied by homeowners. Our New Home Sales over the last five years have contributed to building up this important benchmark.

Our homeowners are focused on improving their home sites, and we have seen great effort by those impacted by storms to repair their homes and remain in the community. Over the last 30 years, we have built our organization focused on high-quality team members, properties, cash flow, and capital allocation. The result of this shared focus is sustained value for our residents, customers, and shareholders. Our properties are well located in areas where the demographic trends create tailwinds for ELS. Our properties have shown strong demand even when considering weather-related disruptions. ELS will be the beneficiary of Florida's outsized population growth and heavy demand for seasonal accommodation. We sold 176 New Homes in the quarter at an average price of $104,000.

While this is a decline from sales volume last year, the volume remains at elevated numbers relative to our historical sales volume. We saw an increase in used home sales and are currently experiencing historically low levels of used home inventory. With respect to our RV business, our annual and seasonal segment, which represents the largest portion of our RV stream, performed ahead of expectations in the quarter, and we anticipate growth rates of 8.4% and 8.2% for the full year 2023. The full year guidance for our transient business is impacted by California storms and a reduced number of transient sites.

Our customer surveys indicate that demand for RV camping remains strong, with 9 out of 10 respondents from our database saying that they plan to camp the same or more than last year, driven by their desire to spend more time outdoors and because they recently invested in an RV and want to use it. 20% of our first-time transient guests from last year have booked a reservation in 2023, have increased their engagement as an annual, seasonal, or member. This rate is consistent with the engagement we saw last year. In the quarter, our Thousand Trails membership properties performed very well. We sold approximately 4,500 camping passes and initiated 5,700 RV dealer activations. These passes and activations are the seeds for future growth in the Thousand Trails portfolio.

When we last reported our results, we had not yet negotiated our Insurance premium for the period beginning April 2023 and ending March 2024. We anticipated a tough renewal market. In the end, our overall Insurance premiums increased 58%, which was higher than we anticipated by approximately $0.01 per share. The relationships that we have developed over the last 30 years with the carriers were helpful in allowing us to obtain the coverage for our MHRV and Marina Property. The increase in expenses contributed to the 40 basis point adjustment to our anticipated core NOI growth while still maintaining our initial normalized FFO per share guidance of $2.84.

We had a great snowbird season in the south, and our teams will now begin to focus on welcoming our residents, members, and guests to our northern locations as we kick off the summer season. I'd like to thank all of our team members for their hard work in making this winter season so successful. I will now turn it over to Paul to walk through the numbers in detail.

Paul Seavey (EVP and CFO)

Thanks, Marguerite, and good morning, everyone. I will review our first quarter 2023 results and provide an overview of our second quarter and full year 2023 guidance. First quarter normalized FFO was approximately $800,000 higher than the midpoint of our guidance range of $0.74 per share. Core portfolio revenues and expenses were favorable to our guidance, mainly as a result of higher than anticipated membership upgrade sales revenues and lower than expected real estate tax expenses. These line items contributed to core portfolio NOI growth of 5.7% for the first quarter. Core community-based rental income increased 6.5% for the quarter compared to 2022, primarily as a result of noticed increases to in-place residents and market rent increases on resident turnouts. We increased homeowners by 30 sites in the quarter. Our rental homes currently represent 3.9% of our MH occupants.

Our resort and Marina-based rental income is primarily generated by long-term revenue streams. On a full year basis, more than 80% of our resort-based rent is from annual and seasonal stays, and 99% of our Marina rents are from annual customers. First quarter core resort and Marina-based rental income increased 5.5% compared to 2022. Rent growth from annuals in the first quarter was 8.4%, with 8% from rate increases and 40 basis points from occupancy gains. First quarter rent from core RV seasonal increased 11.9% compared to first quarter 2022. We continue to see strong demand for longer-term stays in our Sunbelt destinations. Core rent from transient customers decreased 14.9% for the quarter, mainly from lower occupancy. Across the portfolio, we have fewer sites available for transient stays.

We experienced operating disruptions in our California portfolio as a result of the strong rains and heavy snowfall during. For the first quarter, the net contribution from our membership business was $18.3 million. Subscription revenues increased 4.7%, which includes a rate increase of 5.2%. The increase in upgrade sales revenue was generated by sales of higher priced products compared to last year. Our average upgrade sale price increased almost 15%, with the percentage of sales attributed to our Adventure product representing almost 30% of our first quarter 2022 sales. Core utility and other income increased 9.4%, mainly as a result of increases in utility income. Our recovery percentage was 46% compared to 45.5% in first quarter of 2022.

First quarter core operating expenses increased 7.4% compared to the same period in 2022. The comparison to prior year is affected by approximately $2 million of repairs and maintenance this year following storm events, including rain, resulting flooding, and heavy snowfall in California. Adjusted for this activity, overall expense growth was in line with CPI for the quarter. First quarter expenses were favorable to our guidance on lower real estate taxes and utility expense. The real estate tax expense favorability is the result of lower tax bills in certain states where we pay taxes in arrears. The actual bills received during the first quarter were lower than the amounts we had accrued at the end of 2022. Core property operating revenues increased 6.4% compared to the midpoint of our guidance of 6%.

Our core property operating expenses increased 7% compared to the midpoint of our guidance of 7.8%, resulting in growth in core NOI before property management 5.7% compared to the midpoint of our guidance of 4.7%, a $1.8 million favorable variance. Our non-core properties contributed $6 million in the quarter, in line with our expectations. Property management and corporate G&A were $31.1 million for the first quarter. Other income and expenses net, which includes our sales operations, joint venture income, as well as interest and other corporate income, $6 million for the quarter, and interest and amortization expenses were $32.6 million. The press release and supplemental package provide an overview of 2023 second quarter and full year 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 referenced in our press release and supplemental package. Our guidance for 2023 full year normalized FFO is $2.84 per share at the midpoint of our guidance range of $2.79-$2.89. This is consistent with our previously provided guidance despite headwinds associated with our annual Insurance renewal. The total impact of our April first renewal on 2023 is an increase to our budgeted expenses of approximately $2.6 million. I'll note that our budget included assumptions related to the split of Insurance premiums between our core and non-core portfolios.

The actual renewal resulted in a higher portion allocated to the core portfolio relative to our budget assumptions. We project full year core property operating income growth of 5.1% at the midpoint of our range of 4.6%-5.6%. Full year guidance assumes core base rent growth in the ranges of 6.3%-7.3% for MH, 5.4%-6.4% for RV and Marina. We assume occupancy in our stabilized MH portfolio will be flat to first quarter. Core property operating expenses are projected to increase 7.9%-8.9%. The primary drivers of the increase in core expense growth compared to our prior guidance are the Insurance renewal I mentioned and utility expense.

Our guidance model includes the impact of the acquisition we announced and the impact of the fixed rate swap we disclosed in our earnings release and supplemental package. The full year guidance model makes no assumptions regarding other capital events or the use of free cash flow we expect to generate in 2022. Our second quarter guidance assumes normalized FFO per share in the range of $0.62-$0.68. Core property operating income growth is projected to be 2.2% at the midpoint of our guidance range for the second quarter, which represents approximately 23% of our expected full year core NOI. In our core portfolio, property operating revenues are projected to increase 5.8% and expenses are projected to increase 10.3%, both at the midpoint of the guidance range.

I'll now provide some comments on the financing market and our balance sheet. As noted in the earnings release and supplemental package, we executed a fixed-rate swap on our $200 million unsecured term loan maturing in 2027. The swap fixes the all-in borrowing cost at 4.88% through maturity. Fixing this rate reduces our floating rate exposure to approximately 7.5% of our outstanding debt and further de-risks our very strong balance sheet. Our debt maturity schedule shows that we have only 6% of our outstanding debt maturing over the next three years. This compares to an average of approximately 27%. I'll also remind you that approximately 20% of our outstanding secured debt is fully amortizing, carries no refinancing risk.

Current secured debt terms vary depending on many factors, including lender, borrower sponsor, asset type and quality. Current 10-year loans are quoted between 4.75% and 5.25%, 60%-75% loan-to-value, and 1.4x-1.6x debt service coverage. We continue to see solid interest from life companies and GSEs to lend for terms 10 years or longer. High-quality, age-qualified MH assets continue to command better financing terms. In terms of our liquidity position, we have $235 million available on our line of credit, and our ATM program has $500 million of capacity. Our weighted average secured debt maturity is approximately 11 years. Our debt to Adjusted EBITDA is around 5.2x, and our interest coverage is 5.5x. We continue to place high importance on balance sheet flexibility. We believe we have multiple sources of capital available to us. We would like to open it up for questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Brad Heffern from RBC Capital Markets.

Brad Heffern (Director and REIT Equity Research Analyst)

Hey, good morning, everyone. Couple questions on the guidance. On the MH and RV growth rates, can you just talk about what is creating the upside for MH and the downside for RV?

Paul Seavey (EVP and CFO)

In terms of the MH, Brad, when you say upside, I guess as I think about our original budget, the guidance really hasn't changed. We had an assumption that we'd have some incremental growth in rates during the course of the year, and that's presenting itself as you, as you see the guidance disclosure for the second quarter. On the RV, the adjustment primarily relates to our seasonal and transient assumptions for the second quarter. You know, as we look at it, our current expectation for second quarter seasonal and transient is based on the current demand trends, which include a shorter booking window than we've seen in the past couple of years. We also attribute, you know, some of the reservation pacing that we're seeing to unfavorable weather patterns in locations that support our transient business in the shoulder season as we shift from winter to summer business.

Brad Heffern (Director and REIT Equity Research Analyst)

Okay. Got it. The non-core NOI guide went up by a decent amount. I think some of that is business interruption, if you could confirm that would be great. I think you also mentioned more Insurance being allocated to core. I guess, can you just walk through what the moving pieces are in that particular line item?

Paul Seavey (EVP and CFO)

Yeah. Yeah. The Insurance change is a pretty significant piece of that. It represents, I'd say, close to a third of that change. I guess I'd speak less to business interruption. I'd really focus more on the demand that we saw in the local market in Florida for just some of those non-core portfolios, just in terms of workers in the area as well as displaced residents. That's driving some incremental revenue in that portfolio. Add to that the acquisition that we executed in the quarter. Those are the main drivers of that increase.

Brad Heffern (Director and REIT Equity Research Analyst)

Okay. Just to be clear on the business interruption, I think there was a footnote talking about $4 million being in the non-core realized this last quarter. I guess, was that originally in the budget, and so that's not affecting it?

Paul Seavey (EVP and CFO)

The $4 million is the total that we collected across the portfolio core and non-core. It was in line. We had disclosed in our investor presentation mid-quarter, we had disclosed an expectation of about $4.5 million of business interruption proceeds in the quarter, and we received $4 million.

Brad Heffern (Director and REIT Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Joshua Dennerlein from Bank of America Securities.

Joshua Dennerlein (Equity Research Analyst)

Good morning, everyone. I saw occupancy dip, I think 10 basis points year-over-year. Just kind of what's driving that? Is that just new sites delivered that just haven't been occupied yet or just something else?

Patrick Waite (EVP and COO)

Yeah, Joshua, it's Patrick. The Q1 occupancy decreased by 79 sites. It's an increase of 30 owners and a decrease of 109 renters. Just from a comp perspective, year-over-year, Q1 2022 was up 38 sites, increase of 191 owners and a decrease of 153 renters. There's a couple factors driving that occupancy result for the quarter. One is the continued impact from Hurricane Ian. We took back 31 homes in the quarter. Just as a reminder, we touched on this last earnings call. We had 107 homes come back to us in the previous quarter as a result of Hurricane Ian. That's, you know, call it 140 to date. We expect there may be in the neighborhood of 100, give or take, additional homes that may come back to us in coming quarters. That was a driver of occupancy for the quarter.

The second, Marguerite mentioned New Home Sales that were down 33% year-over-year. In addition to comping to a robust quarter Q1 2022. there's a couple of kind of inventory things to take into consideration. One is that inventory levels at a few key selling locations for us were reduced. Part of that is selling out expansions at expansion sections that we have in Arizona, as well as experiencing some delays in getting new inventory, some more expansion opportunity in Arizona. The second is several sales locations just had a decrease in volume. Those were a few key higher sales locations. Broadly across the portfolio, we usually experience, you know, one, two, or three New Home Sales at a significant number of properties. Just based on cycling through inventory, there was a little bit less inventory at some of those smaller locations.

Joshua Dennerlein (Equity Research Analyst)

Thanks, Patrick. Appreciate that. Maybe moving to the transient RV side, it was down year-over-year. I know you're lapping tough comps, but just curious if it's also just what else is kind of driving the transient RV revenues at this point for analog?

Paul Seavey (EVP and CFO)

I think, Joshua, as I mentioned, we had disruption in operations. The weather in California in particular was a significant impact to our transient business in the first quarter. The key driver of what we saw year-over-year. Add to that the change that we have in the site mix available for transient as we filled sites with seasonal tenants.

Marguerite Nader (President and CEO)

I think, Joshua, you know, we've talked about this before, but we've, you know, operated RV parks over the last 60 quarters, and when you're looking at the annual, seasonal, and transient results over that time, the transient piece has the most volatility by far. I think we've reported, negative or flat growth over a third of those quarters. We've seen periods of negative, flat, outsized growth, and that's why we're kind of always focusing our business on that annual rental stream.

Joshua Dennerlein (Equity Research Analyst)

Okay. Great color. Thanks, guys.

Marguerite Nader (President and CEO)

Thanks, Joshua.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Jamie Feldman from Wells Fargo.

Jamie Feldman (Managing Director and Head of REIT Research)

Great. Thank you, and good morning. Thanks for taking my question. I was hoping you could just provide more color on the Insurance negotiations. I guess just big picture, you know, can you talk through, you know, did you think about maybe changing the policy at all? Any color you can provide on, you know, how your Florida exposure impacted pricing versus some of your other markets? I mean, clearly a hot topic, so just wondering, you know, as much color as you can provide on both for your portfolio and kind of commercial real estate in general would be really helpful.

Marguerite Nader (President and CEO)

Sure. Every year, we consider the appropriate balance between, you know, retaining and ensuring risk and taking into account costs and available coverage. That involves an analysis of the retention, the possibility to take on primary risk, and utilizing a captive. We also have certain limitations and requirements in our lending agreements that factor into that analysis. That kind of all goes into how we consider where we're going to end up. This year, we spent a lot of time with our carriers. We do as what we do every year. We go over to London to discuss our portfolio. You saw the results we disclosed last night with respect to what the premiums are for this year.

Jamie Feldman (Managing Director and Head of REIT Research)

Okay. Can you maybe talk to, you know, some of the pricing differentials, either by state or by property type across the portfolio? I know you also included your insurance line item includes workers' comp, general liability. Just how are all those trending?

Marguerite Nader (President and CEO)

Sure. We look at when the carriers look at us, they look at us in total, so we don't break it out by region or, you know, by state. At the time, you know, we focus and we're negotiating our renewal, we're focused on all lines of insurance. In some years, we face a hard market and some more than others. This year, we saw the biggest increase in our property coverage, but we don't really disclose the lines, the results for each line item.

Jamie Feldman (Managing Director and Head of REIT Research)

Okay. All right. That's very helpful. you know, I know it's probably a tough question to answer, but like, you look at the expense growth you're modeling for this year or you're expecting for this year. As you think about 2024, you know, I mean, like, do you think it could moderate, like, do you think the growth rates could moderate? Just based on what you're seeing in the market across the different line items of your expense outlook? Or do you think we're just in kind of elevated growth rates for a long time here?

Marguerite Nader (President and CEO)

I guess I would just as it relates to Insurance, I think I'd just like to say that we've certainly seen, you know, a softening of our insurance markets over our long history. I think it's important to, you know, to kind of appreciate the recent claims, not just in our business, but what's happening globally is what's kind of driving those numbers. Maybe, Paul, you could touch on some of the other line items.

Paul Seavey (EVP and CFO)

I guess what I would say with respect to the other line items is when you think about our greatest exposure, we've talked quite a bit about utility expense. We are seeing some indication of moderation in utility expenses. We note the natural gas pricing has come down somewhat. We did recently hear of one utility provider that is considering a future reduction in their electric rate. That's the first that I've heard that in the past year. There are some signals that maybe moderation is coming. I'll say that we've been tracking to the electric component inside of CPI, which I think October, November peaked around 19%, and the most recent CPI print was down to about 10%, but not too far off of our total utility expense. That's probably the key line item I would look to, when you think about exposure for 2024.

Jamie Feldman (Managing Director and Head of REIT Research)

Okay, that's very helpful. Finally for me, I saw that you know, you fixed the $200 million of debt. I'm just curious your view on how to play the interest rate markets here. I mean, when we talk to lenders and even borrowers, you know, a lot of people are kind of banking on rates going lower. You know, you clearly took the other side of that trade. Part of that's probably just conservatism. But, you know, as you think about debt maturities coming due and just, you know, how you're going to raise capital going forward, what are your views on how to react to where we are in the interest rate cycle and where rates might be heading?

Paul Seavey (EVP and CFO)

Yeah. I mean, I think our view, when we think about what we accomplished, locking that interest rate at 4.88%, it's 130 basis points inside of our floating rate pricing. The loan amount represents only 6% of our outstanding debt. You know, as we looked at the options, we saw it as an attractive way to de-risk, as I mentioned. It's, you know, I'm not a guy who's in the business of speculating on interest rates, and I certainly understand what the curve looks like. At the same time, you know, if rates do indeed follow the curve, which I think there's plenty that think that lower interest rates are not likely to happen given everything that's happening in the economy, the break-even point on our swap comes, you know, late 2024, early 2025, so roughly halfway through the life.

We viewed it as an attractive opportunity at this point in time.

Jamie Feldman (Managing Director and Head of REIT Research)

Okay, great. Thank you very much.

Marguerite Nader (President and CEO)

Thank you, Jamie.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Samir Khanal from Evercore ISI.

Samir Khanal (Equity Research Analyst)

Good morning, everyone. I guess, Paul, on this non-core income of about $6.1 million, I think, you know, the bulk of that came from utility and other income. I think as part of that utility and other income, other income where BI is, you know, part of that, how much of that is sustainable going forward? Just wanna make sure we get this right from a run rate perspective.

Marguerite Nader (President and CEO)

I think the piece on the Business Interruption Insurance is sustainable and that it's replacing cash flow that we had anticipated to have and we anticipate to have next year. You know, it's just replacing cash flow that we missed from last year. Does that answer your question?

Samir Khanal (Equity Research Analyst)

Yeah. That's part of the 5.9, I guess. Okay. Okay. That's the other income. In terms of maybe on the Marina's, I know it's a small portion of your business, but I guess, how are you thinking about that segment in a downturn? Maybe how is that tracking versus expectations at this point?

Patrick Waite (EVP and COO)

Yes, Samir. Patrick. I mean, demand has been good for the Marina's. Launches are up 4% year-over-year. That shows a high level of customer engagement. Our occupancy has been stable. I think the top line of the business has been performing, as we've learned, has been pretty stable, and that's the results of almost all of our customers being long-term annual customers. It's a very durable revenue stream. They're with us for a long period.

Samir Khanal (Equity Research Analyst)

Okay. Then finally on the anything on the, on the transaction side? I know you did that one transaction, one campground. What's the pricing on that? That's a small amount. Maybe just talk around kind of what you're seeing on the RV side, the MH, and even Marina's from a movement perspective. Yeah.

Marguerite Nader (President and CEO)

Sure. In the quarter, we did close on the one RV park that you mentioned in New Jersey. It was about $9 million, about a five cap. The property is almost 100% occupied with longstanding annual customers who spend the summer in the area. We have a lot of properties in and around that area, it's a really nice property to be able to own and get some synergies from the properties that we own in that general area. I would say just in general, as in previous quarters, we've looked at all the deals, you know, the volume is down. Owners of MH and RV have generally been conservative with their financing, we don't see any distressed selling. I think it takes a little bit more time for the acquisition market to return to the activity level that we previously have seen.

Samir Khanal (Equity Research Analyst)

Okay. Thanks for that. Thank you.

Marguerite Nader (President and CEO)

Thanks, Samir.

Operator (participant)

Thank you. One moment for our next question. Our next question comes in the line of Anthony Powell from Barclays.

Anthony Powell (Senior Equity Research Analyst)

Hi, good morning. It's a question on MH rent growth, on turnover. I guess, how did that perform relative to your expectations for, I guess, new owners who are in your communities?

Patrick Waite (EVP and COO)

Well, it's been trending favorably. I mean, previous quarters were only around 10% or 11%. Our most recent experience is around 14%. I think that shows consistent demand for the property type. It also shows that, you know, we have the opportunity to close that gap upon turnover.

Marguerite Nader (President and CEO)

I think, you know, Anthony, the way that 14% kind of comes to be is looking at what's happening in and around our markets, and coming up with what the appropriate market rent is for a new customer coming in, and able to kind of set the table with what they would pay for the home and then what they would pay for rent. That's where we get that number.

Anthony Powell (Senior Equity Research Analyst)

Thanks. Maybe a related question. I think the past couple of calls you've talked about various inventory issues, in terms of getting New Homes available to sell. When do you think those will be, I guess, fixed, or I guess rectified, so you can maybe accelerate some home sales here?

Patrick Waite (EVP and COO)

You know, it's, I mean, just for perspective, when you're ordering homes, you're really dealing with individual plants and the general managers at those plants. The place where we've seen pressures has been predominantly out West, as I mentioned on a previous question, getting some New Homes into some MH expansions that we have in some flagship assets in Arizona, has been one point. There's a few others. Those are really the higher volume properties for us. Some of those pressures have subsided in a number of markets, like throughout the Southeast, as an example.

Anthony Powell (Senior Equity Research Analyst)

I guess out West, is that something that could maybe subside in later this year, or is that kind of an ongoing issue?

Patrick Waite (EVP and COO)

I don't, you know, tough to say. I guess I'd hopefully it subsides. I don't think it'll materially change our numbers. I mean, I think what you saw in the quarter is purely a timing component. Those homes, for the most part, have been delivered. It was just a timing of taking advantage in the quarter versus in future periods. I don't think it's going to have a material impact from a long-term perspective. It just happened to come through in the quarter.

Marguerite Nader (President and CEO)

Anthony, the vast majority of our vacant sites are in Florida. As Patrick was saying, there's been some, you know, increase in the availability of those homes. We should be seeing that run through the system.

Anthony Powell (Senior Equity Research Analyst)

Great. Thank you.

Marguerite Nader (President and CEO)

Thanks, Anthony.

Operator (participant)

Thank you. One moment for our next question. Our next question comes in the line of Michael Goldsmith from UBS.

Michael Goldsmith (U.S. REITs Equity Analyst)

Good morning. Thanks a lot for taking my question. The first question's on the guidance, the implied same-store expense growth's now 7.9%-8.9%, which means that expected expense moved higher by $6.3 million on my math. What are the moving pieces there? I'd assume Insurance is $2.6 million, as we talked about. R&M may be another piece in the $2 million range, like, from the first quarter. What are the other pieces there that kind of bridge that gap?

Paul Seavey (EVP and CFO)

Yeah, no. The biggest piece is the Insurance. Michael, as I mentioned in my remarks, the budget assumption in terms of the split between core and non-core, essentially that was overweight to the non-core. Now that we've actually completed the renewal and we've allocated the premiums between those two portfolios, it's closer to 2/3 of that change coming from the Insurance. There's increase in utility expense that we built into our budget for the remainder of the year. Those are really the two main drivers of that total change.

Michael Goldsmith (U.S. REITs Equity Analyst)

Got it. within your RV guidance, it seems like, the implied seasonal transient guidance was taken down from 2%-4% to 0%-2%. you know, you talked a little bit about what you're seeing in the transient RV, but can you maybe talk about how much of a headwind the storms are? Is that a result of closures, or is that a reflection of maybe slowing demand because of the impact of the storms?

Patrick Waite (EVP and COO)

I guess, let me start with, we do have two properties offline in California, with a third that's partially offline. We anticipate that those properties will be coming online in future quarters. All of those properties are membership properties, so there's a, there's stability in that revenue stream that there are pockets of, you know, transient and rental as an example that have an impact on those specific properties. I'd also, you know, just say more broadly, and I think Paul touched on it in his comments, the storms, coastal California, particularly central and north, which also impacted Pacific Northwest, that does have, you know, a dulling effect on transient demand as we move our way through the upcoming quarter. As Paul touched on, a shift from the Sunbelt season, to the, you know, the summer camping season in our northern campgrounds.

Michael Goldsmith (U.S. REITs Equity Analyst)

Got it. Just one final one for me. You know, the same store NOI growth for the second quarter seems pretty low at 1.9%-2.5%. I think there's a little bit slower revenue growth, and then also the expense growth is higher. What sort of seasonality factors are driving kind of this slower growth in the second quarter?

Paul Seavey (EVP and CFO)

I think it's essentially what Patrick just talked about in terms of the development, the transient revenue expectation as we're shifting from the winter to the summer season. As you know, we do have higher expense comp in the second quarter, largely driven by that insurance increase.

Michael Goldsmith (U.S. REITs Equity Analyst)

Got it. Thank you very much, guys.

Patrick Waite (EVP and COO)

Sure.

Marguerite Nader (President and CEO)

Thanks, Michael.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Eric Wolfe from Citi.

Eric Wolfe (VP and Equity Research Analyst)

Hey, thank you. Just wanted to follow up on Michael's question there on the transient season on the second quarter. I think you also said that the booking window was a little bit shorter than historical. Is that just from the weather, or do you think there's other things going on there that's causing that? Just I guess as a follow-up to that, you know, how do you know it's not gonna sort of impact your third and fourth quarter results as well?

Paul Seavey (EVP and CFO)

I guess I would point to a couple things, Eric. First, the weather, as I mentioned, impacts people's decisions, and I'm not sure how things were in New York, but it snowed yesterday in Chicago, so there aren't a lot of people who have yet been thinking about pulling out shorts when they're still grabbing their winter coat to go to work in the morning. I think that that is a function of people's decisions when they're thinking about taking vacation, particularly for Memorial Day weekend, which is the prime weekend during the second quarter. I also think the disruption that happened in California, you know, that had some impact. I think just the weather in general in the western part of the country has given people a little bit of pause in terms of making plans for vacations because of the uncertainty.

Marguerite Nader (President and CEO)

Eric, we're seeing this shorter booking window kind of across the industry as we talk to others in the industry and talk to some of our, you know, the larger players in the industry to just show that that's similar kind of impact to the shorter booking window. Then as it relates to, you know, we have a sense certainly for the second quarter, but as you head into the third and fourth quarter, you just have less visibility.

Eric Wolfe (VP and Equity Research Analyst)

Right. I guess in the industry, what is, what are people's views about what's causing the shorter window? Just changed nature of how people are traveling and working?

Marguerite Nader (President and CEO)

Yes, similar to what Paul just said. I think that there's options. People are looking at other options, and it's just a booking window which is closer to what we saw kind of pre-pandemic. It's not, it's not different than our long history. It's just different than what it's been the last couple years.

Eric Wolfe (VP and Equity Research Analyst)

Got it. Just last question on expenses. Is there anything in the second quarter beyond obviously the Insurance renewal, which is taken care of, that could sort of really move the needle? Any utility rate increases that you're waiting on, big property taxes assessments? I'm just trying to understand, you know, as we sit here three months from now, if there's anything that you're gonna point to that would have really changed your expectations for full year guidance on expenses.

Paul Seavey (EVP and CFO)

Change the expectation for full year or for the second quarter? Sorry.

Eric Wolfe (VP and Equity Research Analyst)

Obviously, whatever happens in the second quarter will inform what happens for the rest of the year. I guess what I'm saying is, you know, are there any sort of large property tax assessments that you're waiting on, utility rate increases maybe from Florida? What's gonna happen over the next three months that could really drive upside or downside to your full year forecast for expenses?

Paul Seavey (EVP and CFO)

I think there's not anything that we're anticipating that's significant in terms of real estate taxes in the coming three months. The next large information that we'll have will be in July. With respect to utility expenses, you know, as I said, we recently have heard of a utility provider that's talking about a future decrease in its electric rate. Most of the rates were implemented at the beginning of the year. We're not anticipating meaningful change quite yet.

Eric Wolfe (VP and Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of John Pawlowski from Green Street.

John Pawlowski (Managing Director)

Thanks for the time. I just have a few questions on operating costs and CapEx. Just the last few years when you've seen outsized both OpEx increases and CapEx increases across the portfolio, I would just be curious, when you're underwriting new acquisitions on MH relative to RV, those two business lines. Do you underwrite a structurally different cost profile now moving forward in one or the other?

Marguerite Nader (President and CEO)

No, on the MH and the RV, I think it's consistent with what we've always had and consistent with our long history, with those capital events.

John Pawlowski (Managing Director)

How about just in terms of the, call it, 3- to 5-year trajectory of operating costs that you have to punch in a pro forma for one versus the other?

Marguerite Nader (President and CEO)

Yeah. Certainly we looked at it and, you know, we just got our Insurance number, so we'll dial that in. We have increased our overall OpEx into our pro formas just as, you know, as what we're seeing is happening in our business.

John Pawlowski (Managing Director)

Okay. Just so I understand the moving pieces in CapEx, because it has been for you and your peer has been elevated the last few years. The $135 million you spent in property upgrades and development last year, can you give us a sense of what proportion is related to property upgrades? Is that a reasonable run rate moving forward?

Paul Seavey (EVP and CFO)

Yeah. The that amount, I'll just speak to last year. The upgrades were about $50 million. A little bit hard to talk about a run rate. Those upgrades represent enhancements to amenities at the properties and other investments that we typically tend to tie to incremental revenues. You know, they can relate to upgrading the electric service to RV sites, so that we could draw, you know, draw customers that are paying a higher rate for that higher service. It could be enhancements to a clubhouse in the context of discussions with the resident base and identification of opportunity in a market to adjust rents, as a result of enhancing the clubhouse. There are different amounts that we spend.

We kind of analyze the opportunity to allocate capital each year and decide, you know, what amount we're going to spend on upgrade. It's a little bit hard to kind of signal a run rate, but last year it was about $50 million.

John Pawlowski (Managing Director)

Okay. Thanks. Last one for me. For the Marina business, on average, could you give us a sense how total CapEx as a percent of NOI from the Marina portfolio has trended over the last few years, and if you expect a meaningful increase or decrease moving forward?

Patrick Waite (EVP and COO)

John. Patrick. Maybe I'll just touch on the typical Marina footprint for us. You know, we have 7,000 slips in 23 locations. 70% of that is, you know, dry slips. A typical property for us is, you know, building that houses boat wraps, has a concrete floor, with a boat launch area with a concrete road base and a seawall. It's, you know, it's pretty straightforward. It's been running in line with our expectations at about 15% of NOI.

John Pawlowski (Managing Director)

Okay. That's total CapEx?

Patrick Waite (EVP and COO)

Yes.

John Pawlowski (Managing Director)

Okay. Thank you.

Marguerite Nader (President and CEO)

Thanks, John.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of John Kim from BMO Capital Markets.

John Kim (U.S. REITs Equity Analyst)

Thank you. On the Insurance renewals, it seems like right now in this environment, you're gonna be a price taker with Lloyd's, just given they're the only major provider. I was wondering if there's anything that you could do on your end to moderate that rate increase going forward, whether it's a different mix of assets or geographies, or are there any, like, local competitors you could use that would help, you know, moderate that cost?

Marguerite Nader (President and CEO)

I think the moderation of the cost will come in with the claims that, you know, that happened this year. I think that's what I would look to that. I think that's certainly an important component. I think we do a very good job of, you know, seeking out competitive bids, and this was a very difficult season, and hope to be able to improve it in 2024.

John Kim (U.S. REITs Equity Analyst)

Right now, looking at local providers, that would not end up being cost-effective for you?

Paul Seavey (EVP and CFO)

I think there are some structural challenges with something like that, John, just in terms of overall claims management and resolution of the claims and so forth. The, you know, the blanket policy that we have with a larger provider like Lloyd's has, you know, meaningful efficiencies that have significant value.

John Kim (U.S. REITs Equity Analyst)

Okay. I just wanted to clarify, your commentary on guidance being maintained. It seems like the business interruption proceeds were already in your original guidance, and I thought that was really just to offset the lost income from the hurricane-impacted assets. Yet it seems to be, you know, one of the major reasons why you maintain guidance despite the higher Insurance premiums. Can you just clarify what was exactly in guidance previously and if the $4 million-$4.5 million that you're expecting, you know, surprise to the upside?

Paul Seavey (EVP and CFO)

You're talking about maintenance of guidance for the full year, right?

John Kim (U.S. REITs Equity Analyst)

Correct.

Paul Seavey (EVP and CFO)

We had an incremental $2.5 million in Insurance proceeds beyond what we expected. As I mentioned, we've seen, you know, local demand on the ground from, you know, from Displaced residents and workers that is driving the increase in the non-core in addition to the asset that we acquired. Those pieces essentially are offsetting each other to position us to maintain guidance.

John Kim (U.S. REITs Equity Analyst)

Okay, the BI wasn't a surprise relative to your expectations?

Paul Seavey (EVP and CFO)

Yeah, it's not so much about the BI, it's how we're seeing, you know, on the ground in Florida.

John Kim (U.S. REITs Equity Analyst)

Got it. Thank you.

Marguerite Nader (President and CEO)

Thanks, John.

Operator (participant)

Thank you. One moment for our next question. Our next question comes in the line of Keegan Carl from Wolfe Research.

Keegan Carl (SVP of REITs Equity Research)

Yeah, thanks for the time, guys. First, your total nights camp dropped about 1% year-over-year in Q1. Just curious how it's trending so far in April?

Paul Seavey (EVP and CFO)

We're essentially down, you know, somewhere around 5%, so far in April.

Keegan Carl (SVP of REITs Equity Research)

That's what you're using for your guidance. You're assuming for all of Q2 you're down 5% year-over-year?

Paul Seavey (EVP and CFO)

Our guidance assumption, if you kind of walk through the footnotes for seasonal and transient in the second quarter on a combined basis, those are down a little over 5%.

Keegan Carl (SVP of REITs Equity Research)

Just on home sales, I know it's pretty topical. I'm just kind of curious, you know, how have they trended so far year-to-date versus your own internal expectations? What's a reasonable baseline for the rest of the year? Do you think we need the housing market to sort of normalize to kind of get more demand, or is it more on the supply side of things that's limiting your potential home sales?

Marguerite Nader (President and CEO)

Yeah. I mean, I think, you know, we've long talked about, you know, not focusing on home sales profit as a large piece of our overall business. I think, you know, as we, as we look to the rest of the year, there might be some moderation in home sales. I think there'll be moderation in expenses as well, so the offset will be there. As we look to opportunities where, in some instances, we've filled, as Patrick walked through, we've filled developments, so we're not able to have home sales in developments that we filled. Others where maybe we're seeing, you know, those one or two home sales not happening at a particular property.I think we will be able to kind of make it up from a standpoint of expenses.

Keegan Carl (SVP of REITs Equity Research)

It's a mixture of both supply and demand issues that would probably.

Marguerite Nader (President and CEO)

Yes.

Keegan Carl (SVP of REITs Equity Research)

Mitigate it?

Marguerite Nader (President and CEO)

Really, it varies by area, as to which is the impact.

Keegan Carl (SVP of REITs Equity Research)

Okay, great. That's it for me. Thanks, guys.

Marguerite Nader (President and CEO)

Thank you very much.

Operator (participant)

Thank you. Since we have no more questions on the line at this time, I would like to turn it back over to Marguerite Nader for closing comments.

Marguerite Nader (President and CEO)

We appreciate you taking the time with us this morning, and we look forward to updating you on our second quarter call.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.