Equity LifeStyle Properties Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.22.13 | About: Equity Lifestyle (ELS)

Equity LifeStyle Properties (NYSE:ELS)

Q3 2013 Earnings Call

October 22, 2013 11:00 am ET

Executives

Marguerite M. Nader - Chief Executive Officer, President and Director

Paul Seavey - Chief Financial Officer, Senior Vice President and Treasurer

Patrick Waite - Senior Vice President of Operations

Analysts

Nicholas Joseph - Citigroup Inc, Research Division

Jana Galan - BofA Merrill Lynch, Research Division

David Toti - Cantor Fitzgerald & Co., Research Division

David Harris - Imperial Capital, LLC, Research Division

Todd Stender - Wells Fargo Securities, LLC, Research Division

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

David Bragg - Green Street Advisors, Inc., Research Division

Operator

Good day, everyone, and thank you, all, for joining us to discuss Equity LifeStyle Properties' Third Quarter 2013 Results. Our featured speakers today are Marguerite Nader, our President and CEO; Paul Seavey, our CFO; and Patrick Waite, our Senior Vice President of Operations. 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. 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.

At this time, I would like to turn the call over to Marguerite Nader, our President and CEO.

Marguerite M. Nader

Good morning, and thank you for joining us today. Our normalized FFO for the third quarter was $0.65 per share, which represents a 12% growth rate from 2012. Our results for the quarter show the strength of our business which is supported by our quality real estate locations, stability of our cash flow and flexibility of our product offerings. We continue to have high demand for our properties, overall. Our properties appeal to the baby boomer demographic, a group that will grow to over 100 million people over the next 10 years. Our properties are well positioned to accommodate the growth in this key demographic.

On the MH side of our business, as I discussed at the beginning of this year, we continue to focus on increasing the number of ownership transactions in our portfolio. We see the impact of this focus as our used home sales volumes within our MH footprint increased 43% this quarter. Our operating teams are using available tools, including adding additional marketing channels, to attract buyers. The quality of occupancy remains important to us, and we are seeing a higher concentration of customers making the decision to buy rather than rent homes in our communities. This quarter marks the first quarter since we've reduced our sales operation in 2008 that we have increased our home owner base.

The RV industry had, had some positive trends in 2013, including sales growth of 13%. While these sales do not translate directly into our RV revenue, it is helpful to see sales following an upward trend. While ELS continues to be focused on marketing to the 8 million to 9 million installed base of RVers, it's always a positive sign for our business for new customers to enter the lifestyle. We are pleased with the strength of our RV revenue this quarter, with an overall growth rate of 6.3%. The majority of this growth was the result of increased seasonal and transient revenue. While our transient revenue represents less than 4% of the total RV revenue, it has the highest exposure to new customers. This revenue stream becomes our future revenue stream from annuals, as the customer's first experience at a property is only a starting point in their level of commitment to ELS. We have directed our marketing campaigns to gain exposure to a new customer base and have increased bookings online and at the call center. We have launched a mobile version of our website, which has provided for increased access to making reservations.

Our social media outreach has increased and we now have 66,000 fans actively communicating with us on a regular basis. As we have disclosed in press releases this quarter, we closed on the sale of 11 properties in Michigan and redeployed our capital into 3 high-quality assets in the greater Chicago Metro area. These properties have 1,200 sites and represent an attractive alternative to the Michigan portfolio. With these transactions, we traded communities in non-core markets with unstable historical performance, low occupancy and a high percentage of rental and home loans for institutional-quality assets in core markets with strong stable performance and minimal working capital requirement. We believe these assets achieved our goal of acquiring quality assets and creating shareholder value.

I'd like to update you on our proposed 2014 dividend policy. The ultimate decision for the dividend policy is a board-level decision, that is typically done at our November Board of Directors' meeting. As in the past, we feel it is helpful to highlight management's recommendation with respect to the dividend. Each year, to arrive at a recommendation, we review our proposed growth in FFO, our outstanding obligations, all with the goal to ensure our underlying financial flexibility. We have been able to increase our dividend significantly over the last few years because our company continues to grow. Over the past few years, our dividend policy recommendation was colored by the large maturities that we had for 2014 and 2015. With our recent financings, we have effectively reduced our exposure to large maturities due in any one year. With that uncertainty behind us, we felt the confidence to be able to recommend a significant dividend increase. Management is recommending an increase in the dividend from $1 to $1.30, or a 30% increase. This proposed dividend would provide the 10th consecutive year of dividend growth for ELS. Please note, while this is management's recommendation, the board has not yet met to discuss it. The board is expected to discuss the 2014 dividend policy in early November, at the quarterly Board of Directors' meeting.

As we head into the final stretch of 2013, we are pleased with the execution on some key initiatives, including balance sheet management, strategic dispositions, quality acquisitions, new customer acquisitions on the RV side of our business and increase in ownership transactions on the MH front.

I'd like to thank the team for all of their efforts.

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

Paul Seavey

Thanks, Marguerite, and good morning, everyone. I will review our third quarter results, walk through the details for the rest of this year and discuss our preliminary guidance for 2014. We reported $0.65 normalized FFO per share for the third quarter, $0.01 ahead of our guidance. Property operations performed in line with expectations and we realized some savings in property management and interest expense.

Core-based rental income came in slightly ahead of forecast, up 3.2%, with 2.5% coming from rates and 70 basis points from occupancy. We had strong occupancy gains of 53 sites this quarter and we are up 224 sites year-to-date. Our Core RV revenues were higher than guidance, driven largely by seasonal and transient revenue. Annuals were up 3.9%. Seasonal revenues were up 16.3% and transient activity increased 8.6%.

One of the drivers of the seasonal revenue increase is related to temporary pipeline workers in one of our properties. These customers generated approximately $120,000 of revenue we don't expect will be recurring. Transient revenue growth was favorable as a result of occupancy and rate growth in the West, as well as our cabin rental program, which contributed approximately $500,000 to our transient revenue growth in the quarter.

I'll take a moment now to discuss our RV dealer program and a related change in accounting treatment. We are excited about the opportunity to expose a broader base of customers to our resorts, including having our product embedded in the sale of RVs at 34 dealerships. Since inception, this program has resulted in the activation of 6,425 memberships. A review of the roughly 380 customers, whose memberships have come up for renewal through September, indicates 42% of them have used their membership, and of those customers, 36% renewed their membership upon expiration. This results in an overall renewal rate of 15%. We continue to be excited about the RV dealer program as a lead generator for our membership platform. We expect to expand the program with a larger group of dealers in more locations during 2014.

In the quarter, we changed the accounting treatment of revenues and expenses related to memberships activated through our RV dealer program. We no longer recognize noncash revenue or expense associated with these memberships. While this accounting change has no impact on net property operating income, it does impact the right-to-use annual revenue and sales and marketing expense line items.

In the quarter, Core property operating expenses were 50 basis points higher than guidance. The $300,000 variance was primarily the result of higher-than-expected taxes and other administrative costs in our rental program. Non-controllable expenses, included in property operating, maintenance and real estate taxes, grew 3.2% compared to last year, driven by utility expenses. The growth in our non-controllable expense was lower than our guidance assumption, as we made an initial adjustment to our estimate of Florida real estate taxes based on tax notices received during the quarter.

Controllable expenses were 3.5% higher than last year, mainly as a result of higher repairs and maintenance expenses. Ordinary property R&M was higher than expected and we also incurred expenses related to storms and other events in the third quarter.

Overall, Core NOI before property management grew 3.3% in line with guidance. Property management and corporate G&A were $16.1 million, $600,000 less than guidance from savings in property management costs, such as payroll and travel. Other income and expenses were $6.3 million, slightly ahead of guidance, and financing costs were $31.6 million in the quarter.

Year-to-date, Core NOI increased 2.9%. Core revenues grew 3.1%, driven by Core MH growth of 3% and Core RV growth of 4.7%. The press release and supplemental package provide fourth quarter and full year 2013 guidance in detail, as well as preliminary 2014 guidance.

As I discuss guidance, 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. Our fourth quarter normalized FFO guidance is approximately $53.5 million or $0.59 per share at the midpoint of our range. We expect our Core to generate revenue growth of 3.3%, expense growth of 4.7% and NOI growth of 2.3% in the fourth quarter. We assume no growth in our Core MH occupancy during the quarter. Looking ahead to the fourth quarter in our RV business, our annual reservation pace is about 4% ahead of last year, consistent with our guidance. Seasonal and transient reservations are in line with our expectations as well. Our expense growth assumption of 4.7% in the fourth quarter is driven by our current estimate of growth in our uncontrollable expenses.

For the year, we expect core revenue growth of 3.2%, and NOI growth of 2.8%. Normalized FFO at the midpoint of our guidance range is about $229.1 million or $2.51 per share. Our preliminary guidance for 2014 normalized FFO is $243 million or $2.66 per share at the midpoint of our range. Normalized FFO for 2014 is expected to be up approximately 6% from 2013. Our projection of normalized FFO growth for 2014 assumes fourth quarter results will be consistent with our stated guidance. We will plan to update guidance on our next call and we may adjust growth rates on certain line items after we finalize results for 2013.

Growth in Core NOI before property management is expected to be approximately 3.6%. We assume flat occupancy in our MH properties for 2014. Base rent is expected to grow 2.2%, with 2% from rates and 20 basis points from occupancies, as we realize the full year impact of sites filled in 2013.

Our budgeted base rent reflects utility and real estate tax unbundling efforts. Our base rent growth is approximately 50 basis points lower as a result of these efforts. This revenue has been budgeted in utility and other income. In our resort business, we expect annuals to continue to show solid growth of 4%. We expect to add about 300 annuals in 2014. We expect seasonal revenue to increase 3.2% and transient to increase 3.8%. We anticipate continued strong demand for our RV resorts in 2014. We expect to realize approximately 50% of our seasonal revenue in the first quarter, and our current reservation pace is consistent with our budget.

Our budget is also consistent with our first quarter transient reservation pace. However, it represents approximately 20% of full year transient revenues. We budget 45% of our transient income in the third quarter, and we expect to gain visibility into third quarter activity during the second quarter.

Overall, results from our membership business, which includes right-to-use annual payment revenue, right-to-use contract sales and sales and marketing expenses are expected to be flat to down slightly next year. We expect annual membership sales to be around 10,000 in 2013 and 2014, our RV dealer program is expected to generate 8,500 new customers next year, up from 6,000 this year.

Core expenses are expected to increase approximately 1% in 2014, compared to expected growth of 3.6% in 2013 over 2012. The main drivers of growth in property operating, maintenance and real estate taxes are the uncontrollable expenses, utilities, insurance and real estate taxes. It is important to note that we are forecasting 2014 without the benefit of actual full year results for 2013. Financing costs include savings of approximately $6.8 million in 2014, as a result of our refinancing efforts in 2013. We assume no acquisition activity in our guidance for 2014.

Now I'll provide an update on our refinancing activity and comment on our balance sheet. During the quarter, we closed on $237.1 million of secured debt as part of our refinancing plan. The new debt has a weighted average term of 20 years and a weighted average interest rate of 4.28%. We incurred defeasance costs of $36.5 million and retired $295.3 million of secured debt with a weighted average rate of 5.66%.

Year-to-date, we've closed on $347 million and retired almost $394 million of debt through defeasance or payoff at maturity. Our total defeasance cost of $37.8 million were lower than anticipated, as a result of savings in legal and other fees.

We have commitments from 2 life companies for an additional $78.7 million at 4.5%, for approximately 23 years, with scheduled closing dates in December and April 2014. At the end of the quarter, our cash balance, net of the third quarter dividend paid earlier this month, was approximately $28 million. We anticipate ending the year with between 0 and $5 million of cash on our balance sheet. As discussed, we've used our available cash during 2013 for repayment of debt and property acquisitions, there is nothing drawn on our $380 million line of credit.

Current secured debt terms are 10 years at coupons in the 4.5% to 5% range, 60% to 75% loan-to-value and 1.4 to 1.6x debt service coverage. High-quality age-qualified MH assets continue to command best financing terms. We continue to place high importance on balance sheet flexibility and we believe we have multiple sources of public and private capital available to us.

Now, we would like to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Nic Joseph with Citigroup.

Nicholas Joseph - Citigroup Inc, Research Division

2014 guidance assumes same-store growth accelerating, pretty much as the result of lower expense growth. What gives you the confidence that expense growth in '14 will be lower than this year, given '13 expense growth guidance continues to increase throughout this year?

Paul Seavey

I think a couple -- I think we need to take a look at expense growth, and in my remarks, I commented on the accounting change related to our RV dealer program. When you adjust for that change, which represents a reduction of about $2 million in expense next year, we have growth that essentially is at CPI. And in our long-term view, we expect expenses to grow generally in line with CPI.

Nicholas Joseph - Citigroup Inc, Research Division

Okay. And then how much free cash flow do you expect to generate in 2014 and what does guidance assume in terms of the future use of that free cash flow?

Paul Seavey

The guidance has -- make no assumptions with respect to the use of free cash flow. We have -- I'll just walk it through for you: $243 million of FFO; we have roughly $40 million in principal payments next year; our dividend recommendation is about $120 million; and we have roughly $30 million in recurring CapEx; and beyond that, we have our working capital requirements for our investment in our rental program. That's kind of the breakdown on the free cash flow.

Nicholas Joseph - Citigroup Inc, Research Division

Okay. And then what do you see in terms of transaction cap rates for institutional-quality assets in the market today? And have you seen any impact on cap rates from the rising rates?

Marguerite M. Nader

We haven't really seen any impact. I mean, our business is -- the acquisition market is choppy. There hasn't been a lot of transactions. Consistent with what we've seen in the past, there haven't been a lot of transactions that have happened, but anything that we've seen hasn't really been -- the interest rates haven't impacted it.

Operator

And your next question comes from the line of Jana Galan with Bank of America Merrill Lynch.

Jana Galan - BofA Merrill Lynch, Research Division

Following up on the transaction environment, I know 2014 does not assume any acquisitions or dispositions, but maybe if you could just comment on what is being marketed right now and do you expect that to kind of increase just due to seasonality?

Marguerite M. Nader

Sure. I mean, I think in my opening comments I addressed that in terms of transactions that we did, that we traded out of Michigan and we got into our core Chicago land properties. Additionally, in the quarter, we bought a property in the Keys -- in Florida Keys, a 300-site property. And in terms of other acquisitions that are out there right now, there isn't a lot trading, and I think that you'd see the same environment where you'd see a little MH -- some MH trading and some RV trading over the next year, consistent with what we've seen in the past.

Jana Galan - BofA Merrill Lynch, Research Division

And is it mostly single asset -- single communities or are there some portfolios?

Marguerite M. Nader

Right now, there's some All Age portfolios, primarily in the Midwest, that are available in terms of portfolios, but generally they're one-off transactions.

Operator

And your next question comes from the line of David Toti with Cantor Fitzgerald.

David Toti - Cantor Fitzgerald & Co., Research Division

Marguerite, I just want to follow up on sort of a strategic comment that you made relative to how you're thinking about increasing home sales versus sort of pushing on the rental program. And it sounded to me like, distinctly, you're thinking the company will pull back a little bit on the rental program and really focus on home sales. Is that the correct takeaway from your commentary?

Marguerite M. Nader

I mean, what we said in the -- what I said in the beginning of the year was that we wanted to focus on reducing our rental program. And by virtue of increasing our used-home sale program and our new home sale program, that will diminish our rental program in various locations. And so -- and actually, I think, Patrick Waite can kind of give you some more details about what we're doing from an operational standpoint, because it really is the day-to-day operations that are impacting this and that cause us to have such a -- really, a good quarter from a sale perspective.

Patrick Waite

Just briefly, I mean, overall, there are a few factors contributing to the improvement in home sales. We are pursuing new marketing channels, including greater emphasis on the website, mhvillage.com, that focuses on home buyers. And at the properties, we've installed new signage emphasizing home sales to draw potential customers from drive-bys and other traffic. Further, from an operational perspective, we did 2 things to increase sales: first, we changed compensation structure for transactions by reducing commissions for rentals, and that made home sales a more profitable activity on a relative basis; and second, we started to hold homes for sale only to make them available for homebuyers, as opposed to home renters.

David Toti - Cantor Fitzgerald & Co., Research Division

Okay, that's helpful. So I assume we're not going to see you selling $150,000 units just quite yet, right?

Marguerite M. Nader

No. That would not be case, David. You're correct.

David Toti - Cantor Fitzgerald & Co., Research Division

Did you provide an update on the joint venture, the financing efforts?

Marguerite M. Nader

We didn't, but we have -- we've been happy with our relationship with Cavco. We have said -- I think it's 40 homes in our communities and have additional homes on order. And we have sold or closed on 23 of those homes.

David Toti - Cantor Fitzgerald & Co., Research Division

Okay. And then my final question just has to go sort of back to the acquisitions environment. Are you able to disclose a cap rate on the assets that you purchased in Chicago? And also, were those All Age or age-restricted? And what were the occupancy levels in those assets?

Marguerite M. Nader

Sure. The cap rate was -- and it's included in our guidance in terms of the contribution for next year. It was a 6 cap. And in terms of the makeup of the properties, there are 3 properties: one is age-qualified; one is All Age, but used to be age-qualified and basically looks and smells and feels like age-qualified; and one is an All Age asset. The properties are, I think, it's 96%, 97% occupied with no rentals, really, no loans in the portfolio. So it's kind of the -- our old MH model in Chicago, which we are very positive about being able to acquire.

Operator

And your next question comes from the line of David Harris with Imperial Capital.

David Harris - Imperial Capital, LLC, Research Division

Compliments to you in the terms of the detail and the clarity of your -- and timing of your '14 guidance. I think it sets a standard by which others should pay heed, I think. And I have a question for you, Paul, actually on the resort income that you are forecasting. How sensitive do you think that is to variance in the economy?

Paul Seavey

I think that -- I think you raise an excellent point. As we look at next year and as we developed our budget, we spent a lot of time talking about our experience this year and the positive results that we had in seasonal and transient. As I mentioned in my remarks, our third quarter represents 45% of our transient revenue and we really don't have good visibility into that until the second quarter. That being said, the greatest correlation that we've seen historically in our transient RV business has really been weather, and I think economy is second to weather. So we're watching it very closely and we're optimistic that we'll continue to see strong growth in the RV business.

David Harris - Imperial Capital, LLC, Research Division

I'm wondering if the chairman has mentioned a contribution towards sort of GDP forecast for '14?

Marguerite M. Nader

It always helps.

David Harris - Imperial Capital, LLC, Research Division

Did he throw out a number to guide you?

Marguerite M. Nader

No. No.

Paul Seavey

No. No.

David Harris - Imperial Capital, LLC, Research Division

Okay, all right. Second question is, is the -- are we likely to see any more defeasance charges this year or into next, with regard to that outstanding mortgage debt that you could take down?

Paul Seavey

No. We have no further defeasance charges. We've structured those forward fundings. We've structured those with a rate lock upfront and we will pay those loans off at maturity.

David Harris - Imperial Capital, LLC, Research Division

Okay. So if you look at the other nonrecurring items, I think there were some acquisition-related costs, which obviously would be dependent on your acquisition volume. And was there anything else in there?

Paul Seavey

The only other item is the change in value of our contingent asset on our balance sheet, related to our Colony Cove asset that we bought in the Hometown transaction. There's an escrow that we have that's denominated in ELS stock. And to the extent that our stock price fluctuates, we recognize income or expense associated with that. And in the quarter...

David Harris - Imperial Capital, LLC, Research Division

Well, without getting too much into the weeds, that's fairly minimal but would be ongoing?

Paul Seavey

Would be ongoing. At the moment, the balance is about $4.5 million and it burns off into 2014.

Operator

And your next call -- question comes from the line of Todd Stender with Wells Fargo.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Marguerite, you quoted a 6 cap on the Chicago assets. Is that on a forward basis? How do you look at that?

Marguerite M. Nader

Yes, that's basically what we're going to see -- experience in 2014 on those assets.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Okay, so trailing in the 5s?

Marguerite M. Nader

Trailing a little bit, probably, 5, 8, something like that, around there.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Okay. And then just looking at quality, if you can look at it this way, what -- how do the site rents compare to what's currently in the ELS portfolio?

Marguerite M. Nader

The site rents are consistent with what you'll see throughout our portfolio. They have the ability to grow rents there at, I think, historically, it's been a 4% increase over time. And from -- I think I mentioned it earlier, but just from a perspective of the quality of the occupancy, you're dealing with all people who own their homes. There's no rentals, no loans, so the working capital commitment just doesn't exist inside these portfolios. These are quality properties.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. And just looking at some of the cap rates we're hearing on age-restricted, MH communities are definitely -- will go into the 4s, and they seem more driven by new owners relying on lease-up through rentals. How much -- just based on your comments today and kind of the direction maybe you're taking with the rental model, how much validity do you put into some of the -- maybe some of your competition chasing some of these cap rates and I guess the legs that the rental model has, particularly in select markets?

Marguerite M. Nader

Well, I think that there has recently been some new entrants into the MH and the RV marketplace that have generated some news, and I think that have attracted some of those cap rates that you're referring to. I think that a certain piece of rental inside of a property is appropriate to have and it actually can be a lead generator for the greater business, for the greater MH business and the ownership model. But there is a point where it gets too large of a component and we prefer to have that quality occupant, which is someone who has the ownership in the home.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Okay. And then just looking at the RV business. Paul, I think you mentioned -- or you gave a forecast for next year's -- I think it was the RV memberships, looked like a pretty good increase. You've made an acquisition in the Florida Keys recently. You were able to tap secured financing in the second quarter in RVs. Can you guys just talk about, generally, your thought on how much RVs are going to contribute to next year's growth? And how the marketing campaign is going with RV retailers?

Marguerite M. Nader

I mean, I think what we're showing for growth in the 2014 is about a 4% growth in RVs. And I think, as Paul mentioned in his comments, our transient growth, it's difficult to get a visibility into that because it happens in the second and the third quarter. So we would certainly have an update for you as we get closer to that in terms of how we're pacing. But from the RV overall component, we have our membership business, which we have, I think it's 96,000 members right now. And we see -- our supplemental kind of shows the various ways that Thousand Trails contributes and RVs contribute to our revenue streams. And I think we've seen strength in the annuals there and we continue to see strength in the transients. Our new online applications between having a mobile site, which is key for us because people are on the road making reservations, and really trying to tap into new RV distribution channels, both from the -- we're doing the dealer program. We're going to be increasing the dealer program next year and look to other avenues to just get exposure to our properties for new customers.

Todd Stender - Wells Fargo Securities, LLC, Research Division

And just in general, and, Paul, I think you mentioned that you have commitments from life insurance companies for debt financing going into next year. Are any of those properties collateralized within the RV segment?

Paul Seavey

That group of financing does not happen to. Life companies will finance on very-high-quality RV assets with high annual occupancy in the property. And the CMBS market is, generally speaking, the market that we tapped in July for our RV portfolio. And subject to the overall health of the CMBS market, there is interest in financing RV in that market.

Operator

[Operator Instructions] And your next question comes from the line of Paula Poskon with Robert W Baird.

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

I just wanted to follow-up on Todd's line of questioning around the value of the rental business. As we were doing our diligence and preparing to launch coverage on the sector, we heard a variety of philosophies around the different cash flow streams and the quality of those, ranging from the manufacturing housing community, the traditional cash flow has always been more highly valued and straying off into the resort business, and certainly, the rental business degrades the cash flows, while others have said we're obviously becoming a renter nation and that's just evolving the business strategy. How do you think about those 2 philosophies?

Marguerite M. Nader

Well, I think that there is a component in most of our property that does have this rental component. And that is a good thing for us in terms of being able to generate additional leads and additional traffic. But when it starts to impact us from the standpoint of being able to finance the property and being able to just impact the neighborhood feel of the property, where people are no longer owners, then I think that you'd start to have a negative impact and you'd start to see change in valuation. And that's what we try to encourage and what we've done, I think, in this quarter is to change our incentives at the property level so that people -- so that our employees are concentrating on the sale rather than to rent.

Operator

And your next question comes from the line of Dave Bragg with Green Street Advisors.

David Bragg - Green Street Advisors, Inc., Research Division

On the rental program, could you just help us understand what your investment has been and the growth that has been, as we progressed through 2013 given that you had the sale, Michigan, that removed about 1,000 units? In each quarter, in 2013, what have you added to rental inventory?

Marguerite M. Nader

I think in our supplemental, and maybe Paul has a better view of it, you can see in our supplemental we had, I think, an increase, year-over-year, of about less than $20 million -- $19 million in the rental program. And I think if you break it -- we break it out in the supplemental every quarter so you can see the change in the total cost basis in the rental homes.

David Bragg - Green Street Advisors, Inc., Research Division

All right, we'll review that. I think it's distorted by the removal of the Michigan portfolio, but we we'll follow up on that.

Paul Seavey

The historical is -- that's presented in the current supplemental, it's Core only, so Michigan has been extracted, but I can follow up with some more detail around the Core activity in prior quarters.

David Bragg - Green Street Advisors, Inc., Research Division

Okay, and at what level of home sales can we expect you to halt incremental investment in the rental program? How are you thinking that through?

Marguerite M. Nader

Well, I think that we've seen an increase in home -- in new home sales. This is new for us for the last 2 quarters, as we've seen it. So I think it's a little bit too early to tell you as to when we increased the new home sales more and the used-home and are able to pull back on the rentals. So I think we're still -- it's still a little bit early to be able to answer that.

David Bragg - Green Street Advisors, Inc., Research Division

Okay. And then last question is on the operating expenses and guidance. Paul, the property operating, maintenance and real estate tax line, the 1.7% growth that you expect in 2014, please break that down by the major line items embedded in there and give us the growth rates that you expect.

Paul Seavey

The uncontrollable represents about 50% of that, and we see that growing closer to 3%. And the controllable represents the other 50%, roughly. And as I mentioned, in the third quarter we had some onetime costs associated with storms and other events that we don't expect to recur. So I think that, overall, we're at, generally, a CPI on an adjusted basis inside the controllable, and then the uncontrollable are expected to grow closer to, as I said, 3%.

Operator

And there are no further questions from the phone lines. I would now like to turn the call back over to Marguerite Nader for closing remarks.

Marguerite M. Nader

Thank you, all, very much. Paul Seavey will be available after for any follow-up questions, and we look forward to updating you on the next quarter's earnings call. Thank you.

Operator

Ladies and gentleman, that concludes today's conference. Thank you for your participation, you may now disconnect and have a great day.

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