Equity LifeStyle Properties Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 18, 2023

There are 15 speakers on the call.

Operator

Good day, everyone, and thank you all for joining us to discuss Equity Lifestyle Properties' 2nd Quarter 2023 Results. Our featured speakers today are Marguerite Nader, our President and CEO Paul Sibi, 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 a question and answer session, management ask that you limit yourself to 2 questions.

Operator

As a reminder, this call is being recorded. Certain matters discussed during this conference call may contain forward looking statements in the meaning of the federal securities laws. Our forward looking statements are subject to certain economic risks and uncertainty. The company assumes no obligation to update or supplement any statements that become untrue and because of subsequent events. In addition, during today's call, we will discuss non GAAP We discuss non GAAP financial measures as defined by SEC Regulation G.

Operator

Reconciliations of these non GAAP financial measures to the comparable GAAP financial measures are included in our earnings release, our supplemental information and our historical SEC filings. At this time, I would like to turn the call over to Marguerite Lainer, our President and CEO.

Speaker 1

Good morning and thank you for joining us today. I am pleased to report the results for the Q2 of 2023. Our performance exceeded our expectations in the quarter, driven by continued strength in our annual revenue and reduced expenses throughout our portfolio. The quality of our revenue streams and the strength of our balance sheet continues to allow us to report impressive results. Our core NOI exceeded our guidance in the quarter with 3.5% growth year over year.

Speaker 1

Our MH portfolio is approximately 95% occupied. Over the last 10 years, we have sold over 6,000 new homes in our community. These new homes contribute to the quality of housing stocks in the community. Our residents have enjoyed the ability to resell their homes in a timely manner And ELS benefits from bringing a new resident into the community at a market rate increase. Year to date, the mark to market for new homeowners has been over 13%.

Speaker 1

Currently, less than 4% of our occupancy is comprised of rental homes. The high level of occupancy in our portfolio is And based on demand, we believe we can continue to increase occupancy throughout our portfolio. Our communities offer an incredible value proposition. The cost to purchase a manufactured home is significantly less than a single family home. The average cost of a site built home in the U.

Speaker 1

S. Is approximately $500,000 while our home sell for an average of $102,000 Manufactured housing is an efficient way to address the housing shortage in the U. S. The affordability of manufactured homes coupled with the high quality amenities in our communities create the continued demand for our properties. Prospective residents' interest in our community remains solid.

Speaker 1

We sold 226 new homes during the Q2, contributing to stable portfolio occupancy. While home sales are down compared to the historical highs of last year, our home sale business is strong by comparison to typical years. With respect to our RV business, our annual segment, which represents the largest portion of our RV revenue stream, Performed well in the quarter and we anticipate growth rates of 8.3% for the full year 2023. The full year guidance and results for the quarter for our transient business are impacted by California storms and a reduced number of transient sites. Our team's focus on providing best in class customer experience helps drive guest retention and attract new prospects to our RV properties.

Speaker 1

TripAdvisor collects customer reviews and uses the information to spotlight the very best destinations with the Travelers' Choice Award. In June, TripAdvisor announced that 49 ELS RV properties were named winners of the Travelers Choice Award. These awards acknowledge the efforts of our property teams to create lasting memories with friends and families across our portfolio. We continue to engage our guest members and prospects through our social media strategy. We have grown our fan and follower base to 1,800,000.

Speaker 1

Across Instagram, YouTube, TikTok, Facebook and other social platforms, We are currently in the middle of our 100 days of camping campaign that focuses on the days of summer camping between Memorial Day and Labor Day. In May, we announced the passing of our Chairman, Sam Zell. A debt of gratitude is owed to Sam for ELS's long and successful track record. In the 1980s, he saw what others didn't and invested in this asset class. Before others accepted the asset class as institutional grade, Sam knew it and acted on that belief.

Speaker 1

Sam grew the company from 41 properties at our PO with a market cap of $300,000,000 in 1993 to 4.50 properties with a market cap of $16,500,000,000 today. Sam was instrumental in laying the foundation for the modern REIT era. While most people listening know Sam for his extensive real estate successes, He is equally well known and appreciated for his philanthropic contributions dedicated to helping others. Sam was a willing mentor to many both inside the equity world and beyond. In line with our succession plan, Tom Hennahan was appointed as Chairman of our Board.

Speaker 1

Tom was most recently Vice Chairman of ELS and has been an integral part of the organization for the past 28 years. Tom is a proven leader and his extensive knowledge of the MH and RV industry will serve us well. I would like to thank our employees for their continued contributions this quarter. Their diligent efforts to service our customers are the primary reasons for our continued success. I will now turn the call over to Paul to provide further details on our financial performance.

Speaker 2

Thank you, Marguerite, and good morning, everyone. I will review our results for the Q2 June year to date, highlight our guidance assumptions for the Q3 and full year 2023 and close with a discussion of our balance sheet. For the Q2, we reported $0.66 normalized FFO per share. Core and non core property operating income outperformed our expectations. Core MH rent increased 6.7% in the 2nd quarter and 6.6% year to date compared to the same periods last year.

Speaker 2

Rent growth in the Q2 includes approximately 7% rate growth as a result of our rent increases to in place residents and our 13% mark to market on turnover when a new resident moves in. Core RV and Marina annual base rental income, which represents approximately 2 thirds of total RV and Marina base rental income, increased 7.8% in the 2nd quarter and 8.1% year to date compared to prior year. Annual RV and Marina rate increases generated approximately 7.1% growth in the year to date period, with occupancy contributing close to 90 basis points of growth. Since June 2022, we've increased our Core annual occupied sites by 240. Year to date in the core portfolio, seasonal rent increased 9.2%.

Speaker 2

Offsetting some of the transient decline we've experienced as a result of challenging weather patterns and site usage increasing for longer term stays. We also experienced offsetting reductions in variable expenses that I'll discuss shortly. On a combined basis, Core seasonal and transient rent decreased approximately 3.2% in the year to date period compared to prior year. Membership dues revenue increased 3.8% and 4.6% for the quarter year to date, respectively, compared to the prior year. Year to date, we've sold approximately 11,300,000 Trails Camping Pass memberships.

Speaker 2

This represents a 10% increase over pre pandemic membership sales in the first half of twenty nineteen. Also during the year to date period, members purchased approximately 1900 upgrades at an average price of approximately $9,000 Core utility and other income was in line with our expectations for the quarter. The increase in the quarter compared to the same period last year was mainly the result of higher utility income. Our utility recovery rate for the year to date period was 45.6% compared to 44.7% in the same period last year. Also, during the quarter, we recorded approximately $1,300,000 of revenue associated with sites leased to provide housing for displaced residents in the Fort Myers, Florida market.

Speaker 2

Core property operating expense growth was 7% in the 2nd quarter and 7.2% year to date. The Q2 growth rate was 3.40 basis points lower than the midpoint of our guidance range. Our 3 main operating expense line items, Utility, payroll and repairs and maintenance expenses all showed moderation in 2nd quarter year over year growth rates when compared to the Q1 growth rates. In the Q2, property operating and maintenance expenses were approximately $3,700,000 favorable to our guidance. Utility expense and property payroll on a combined basis represented more than 85% of this favorable variance.

Speaker 2

As we reviewed the expense savings at properties with lower than forecast transient revenues, we saw a strong correlation. Essentially, the transient RV revenue variance to our forecast was offset by expense savings in utility and payroll expense. In summary, 2nd quarter core property operating revenues increased 5% and core NOI before property management increased 3.5%. For the year to date period, core property operating revenues increased 5.7% and core NOI before property management increased 4.6%. As mentioned in our earnings release, In the Q2, 2 properties were moved to the non core portfolio from the core portfolio.

Speaker 2

These California Thousand Trails properties, which combined generated modest NOI in 2022 of a few $100,000 were impacted by storms and flooding events earlier this year. Following the storms, we suspended operations, resulting in the determination to present them with our non core portfolio. Income from property operations generated by our non core portfolio was $9,000,000 in the quarter and $14,900,000 year to date. These results outperformed our expectations as a result of lower than expected utility and payroll expenses. Property management and corporate G and A expenses were $36,000,000 for the Q2 of 2023 and $67,100,000 for the year to date period.

Speaker 2

The 2nd quarter and year to date amounts include the expense associated with Accelerated stock compensation vesting. Other income and expenses, which includes home sale profits, brokered resales, Ancillary retail and restaurant operations, interest income as well as JV and other corporate income generated a net contribution of $7,900,000 for the quarter and $14,500,000 year to date. Interest and related loan cost amortization expense was $33,100,000 for the quarter and $65,700,000 for the year to date period. The press release provides an overview of Q3 and full year 20 20 3 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.

Speaker 2

All growth rates and revenue and expense projections represent midpoints in our guidance range and are qualified by the risk factors included in our press release and supplemental A significant factor in our guidance assumptions for the remainder of 2023 is the level of demand for shorter term stays in our RV communities. Please. We have developed guidance based on current customer reservation trends. We provide no assurance that our actual results will be consistent with our guidance and we assume no obligation to update guidance as conditions change. We have increased our full year 2023 normalized FFO guidance to $2.85 per share at the midpoint of our range of $2.80 to $2.90 per share.

Speaker 2

Full year normalized FFO per share at the midpoint represents an estimated 4.5% growth rate compared to 2022. We expect 3rd quarter normalized FFO per share in the range of $0.68 to 0 point 7 $4 Full year core NOI is projected to increase 5.4% at the midpoint of our guidance range of 4.9% to 5.9%. We project a core NOI growth rate range of 5.2% to 5.8% for the 3rd quarter and expect NOI for the quarter to represent 25% of full year core NOI. Full year guidance assumes core rent growth in the ranges of 6.3% to 7.3% for MH and 7.8% to 8.8 percent for our annual RV rents. Our guidance assumptions for the 3rd and 4th quarters include current expectations based on year to date activity and our review of property level and consolidated expense projections for the remainder of the year.

Speaker 2

As a reminder, we make no assumptions for storm events that may occur. The midpoints of our guidance Assumptions for combined seasonal and transient show a decline of 6.2% in the 3rd quarter and decline of 2.5% for the full year compared to the respective periods last year. Our guidance for the Q1 was no longer in the quarter. We also assume the debt capital transactions announced in our earnings release will close during the Q3 and use of proceeds will be consistent with the comments I'll make in a moment. The full year guidance model makes no assumptions regarding other capital events or the use of free cash flow we expect to generate in the remainder of 2023.

Speaker 2

Now some comments on our balance sheet. In our earnings release, we announced secured debt transactions that are expected to generate proceeds $464,000,000 at a weighted average interest rate of 5.05 percent. The primary use of proceeds from these Transactions include repayment of our 2023 2024 secured debt maturities and the balance on our unsecured line of credit. The weighted average maturity of these loans is 8 years. We are extremely pleased with the execution of these loans, which leveraged A long standing life company relationship and demonstrated the value of a structured facility with 1 of the GSEs that included terms allowing incremental borrowings as property values increase over time.

Speaker 2

After closing these loans and repaying secured debt maturities, We will have addressed all debt scheduled to mature between now April 2025. Our debt maturity schedule will show 22% of our outstanding debt matures over the next 5 years. This compares to an average of approximately 50% for REITs. In addition, 21% of our outstanding secured debt is fully amortizing and carries no refinancing risk. Current secured debt terms available for MH and RV assets range from 50% to 75% LTV with rates from 5% to 6% for 10 year maturities.

Speaker 2

High quality age qualified MH will command best financing terms. RV assets with a high percentage of annual occupancy have access Financing from certain life companies as well as CMBS lenders. Life companies continue to express interest in high quality communities, though some have set limits on capacity and pricing. We continue to place high importance on balance sheet flexibility and we believe we have multiple sources of capital available to us. Our debt to EBITDAre is 5.2x and our interest coverage is 5.4x.

Speaker 2

The weighted average maturity of our outstanding secured debt is

Operator

Thank you. One moment for our first question. Our first question will come from the line of Josh Gendlerlein from Bank of America. Your line is open.

Speaker 3

Yes. Hey, everyone. Good morning, Jeff.

Speaker 4

Just curious hey, Marguerite. So curious on

Speaker 5

the ability to flex Expenses on the transient side. I kind of don't really recall that happening in the past. Has something changed? And can you kind of walk us through like Is that just a summer event or something you can do throughout the year?

Speaker 2

Yes. Josh, I think there are a few things to highlight as we talk about Growth experience in the Q2 and our expectations for the full year. So first, I'll talk about utility expenses. Excuse me. As I mentioned, we experienced continued moderation in growth in electric rates during the quarter.

Speaker 2

So the average increase in rate was approximately 8% for the quarter In the most recent billing period, it was closer to 6% year over year. This compares to the rate increases in the mid teens that we experienced in the second half of last year that had moderated to around 9% in the first quarter. In addition, the reduced site usage and the transient footprint during the Q2 resulted in lower utility usage overall. Then with regard to payroll expense, we have a large population of hourly workers that support our guest experience in the RV communities. And I'll remind everyone that we discussed on the April call that we were experiencing some unfavorable weather patterns, including delayed openings at certain of our Northern resorts.

Speaker 2

These delays resulted in expense savings relative to our forecast. In addition, in the ordinary course of business as we monitor upcoming reservations, We continually review property staffing levels. And if the transient reservation pace is not matching our plan, we do have the ability to adjust schedules for those hourly employees on property. So as I mentioned in my remarks, payroll and utility expenses generated savings compared to our forecast. Essentially, they offset the unfavorable variance in the transient rent, and those savings were generated from the combination of variables that I just highlighted.

Speaker 5

Okay. No, that's good additional color. Maybe on the two assets that were moved into the non same store pool, Can you just provide a little bit more detail on how long you expect those to be? Are they down or they just moved out of the pool and what happened there and any impact on the same store growth rates as a result?

Speaker 2

Yes. I think on the last call, Patrick talked a little bit about the fact we had 3,000 Trails properties that were impacted by storms in California. At the time, one of them had partial disruption to operations and the other 2 had suspended operations. During the second quarter, As we assessed the condition of those properties, we determined that the time to return those 2 properties that had suspended operations to normal operations It was going to be longer than expected. And so it will extend into 2024.

Speaker 2

So we moved them to our non core portfolio in the second quarter. As I mentioned in my remarks, the NOI contribution in 2022 from those two properties was modest. It was a few $100,000 So they are Thousand Trails properties, so the dues revenue overall isn't impacted by the fact that the properties are offline. It's any kind of ancillary or incremental revenue that is generated at those locations.

Speaker 5

Okay. Thank you. Appreciate that.

Speaker 2

Sure. Yes.

Operator

One moment for our next question. Our next question will come from the line of Brad Heffern from RBC. Your line is open.

Speaker 6

Hey, everyone. On the expense guide, obviously, it moved lower and you talked about that being due to lower transient activity. I'm curious, is all of the reduction due to the lower transient volumes? Or have some things on the expense front also come in better than expected, Excluding the transient piece of it?

Speaker 2

Yes. Brad, as I was just walking through, I mean, we definitely have seen moderation in In electric expense on the utility side, so that moderation in the quarter, The average rate increase quarter over quarter compared to last year dropped to 8%. It was down to 6% by June. That compared to 9% in the Q1 and it compared to the mid teens last year. So they're definitely across The portfolio is a favorable impact associated with the utilities.

Speaker 1

And that's, Brett, that's rate and then there's also a reduction in usage because there's Less transient guests. Right.

Speaker 3

Yes. Okay, perfect. Got it.

Speaker 6

And then on the hurricane impact from last year, I saw you got another $4,000,000 Business interruption this quarter. Can you give an update on where those hurricane affected properties stand right now? And are we currently in a situation or will we be in a At some point where you're sort of over earning because you're getting business interruption proceeds on a lag and the parks are back up?

Speaker 2

I can take the latter part of the question and then maybe Patrick will talk about the condition of the properties. There's definitely a timing issue with respect to the recovery. So as we've talked before, business interruption proceeds are recognized upon receipt. And so we excuse me, as of the end of 2022, we had not recorded Or not received business interruption proceeds. The event did occur in At the end of Q3 last year.

Speaker 2

So there was definitely impact in 2022 and proceeds started to be received in 2023. So we do have a timing lag. Those properties are now out of season because they're Florida properties. And so as we're working on our submission, We're definitely collecting proceeds in arrears. Yes.

Speaker 7

And just with respect to the timing of those properties Returning to operations, all but 1 are operating at some level of operations at the property currently as we go through Repairs and improvements to bring the properties fully back online. The one remaining property will come online in the 3rd quarter At partial operations and we'll continue to build capacity over the next few quarters. I would expect Roughly half of those properties to be online by the end of the year and the other half to come on in subsequent quarters depending on the scale of the build back that's required.

Speaker 3

Okay. Thank you.

Speaker 1

Thanks, Brad. Victor, do we have another question?

Operator

One moment. Our next question comes from the line of John Kim from BMO. Your line is open.

Speaker 8

Thank you. Hi, Matt. On your transient RV decline in revenue of 13.9%, How much would you attribute this to lower demand from the storms which you cited versus fewer transient sites? And I ask this because when you look at the number of transit sites you have on Page 12 of your supplement, it's kind of bounced around last few quarters, but it has averaged 14,900 is what you had in the Q2. So it seems like it's more of a demand issue than a site issue, but just wanted to get your comments on that.

Speaker 1

Yes, John, maybe Patrick can walk through the demand and just the difference on the transient and maybe Paul will touch a little bit on the site count.

Speaker 7

Yes. So John, I think the way to think about it is longer term stays, Weather disruptions and that normalizing of demand that you just referenced, think of it relatively evenly split across Each one of those categories, the longer term stays as we've talked about our view of the Predictable stable revenue on the annual front is a consistent theme for us and we continue to grow that business. Paul really touched on the weather disruptions. One thing that I'd highlight there is we have a property At Yosemite, adjacent to the National Park, that property was pretty significantly impacted by heavy snowfall, Then snow melt coupled with rainfall that led to road closures around the park And around our property in April June, so that had kind of an outsized impact. I think Paul also mentioned Pennsylvania.

Speaker 7

We had a very cool start to the summer camping season and that was a headwind. And lastly, that point that you're talking about is just a normalization of demand and we see that coming through broadly, but also you think about Kind of our key destination resorts, the Keys in Florida, a significant property, flagship property that we have In the Orlando area, a couple of our flagship properties on the East Coast, as well as the Pacific Northwest. And that's what we've seen because of the destination nature and the significant pickup in demand Immediately following COVID is that's normalizing. That's where that type of impact has been more concentrated.

Speaker 1

And I think, John, as you see in our press release, we kind of compare just on a total nights basis compared to 2019 And we're up about 8% on a total nights basis.

Speaker 2

And John, just in terms of sites, when you think about the transient, the presentation In the supplemental is total, and the growth rate that we're talking about is core. So there's a difference there. And We do have the there's kind of a change that occurs on a quarterly basis that is the result of the expansion sites that we add to Portfolio, which I'll just give you the example of the past quarter. I think we were down about 100 sites if you look at Q1 compared to Q2. We actually had about 400 sites that moved to annual and we added 200 plus Expansion sites to the portfolio.

Speaker 2

So that kind of nets to the 100 difference.

Speaker 8

And can you remind us of how you define transient versus seasonal? Like what's the number of days they need to stay for it to be considered a seasonal site?

Speaker 3

Longer than 30.

Speaker 8

Okay. So on Patrick's commentary that the length of stay isn't as long, That's purely on the transient side. Like people are coming, but not staying as long as they had pre COVID. Okay.

Speaker 1

That's correct, Jan.

Speaker 8

Thank you so much.

Speaker 1

Thanks.

Operator

One moment for our next question. And our next question will come from the line of Eric Wolf from Citi. Your line is open.

Speaker 9

Hey, thanks. It seems like most are predicting that the cost of living adjustment for Social Security will be around 3% this year. Could you just give a sense for what that will mean for your rate growth negotiations on the MH side? And like would it be possible, for instance, to get Over 5% rate growth if the cost of living adjustment is closer to 3%.

Speaker 1

Yes. I think that, Eric, it depends. It's obviously on a property by property basis. But within our MH portfolio, about 70% of our portfolio is age qualified. And so our residents are really are focused on that Social Security increase.

Speaker 1

The average social security right now check for an individual is around, I think, dollars 1700 And about 2,700 for a couple kind of living in our community. Over the last couple of years, they've seen some large increases in Social In line with the CPI, and current estimates are for COLA to increase about 3%, which would be About a $51 to $80 I think increase in monthly benefits for our customer base. And kind of just for reference, Our average rent in our portfolio is $800 and the average rent increase over the last 10 years has been about $26 So I think it's those are important components that we talk to our residents about. I think it's You'll note that our adjustments have we've historically outpaced the COLA adjustments, I would and I would imagine that we would continue to do that. But it really is a buildup on a property by property basis, that starts now frankly and kind of continues into the fall.

Speaker 9

That's really helpful. I guess historically, how much have you sort of outpaced the COLA adjustment?

Speaker 1

I don't have that number in front of me. I think it's by 150 basis points, 200 basis Something like that. We can get back to you, Eric, unless Paul you know that.

Speaker 9

I was just

Speaker 2

going to say, I think over the long history, that's true. Keep in mind, Eric, there was a Period of time when the COLA adjustment was 0.

Speaker 1

Right.

Speaker 2

And we were achieving rent increases that were in the 4 ish percent range. But over a long history, I think my rate is right about 150 basis points.

Speaker 9

Thanks. Paul, it's Nick here with Eric. Just Quick question on, I guess, the decision to take out the California properties from the same store pool, more just kind of how you think about it from a policy perspective. Obviously, Weather events continue to happen. So kind of what is the test to remove a property versus keep it in that pool?

Speaker 2

Yes. It really Nick, it's actually an interesting question to ask in this quarter because we had an example of a property that was partially disrupted and we had Two properties that had suspended operations. And our practice that we established a number of years ago following Hurricane Irma Has been to move those properties when operations are completely suspended. And so as we consider the circumstances of these locations, the other element that we think about is the length of time that operations will be disrupted. And because they are going to extend into the subsequent calendar year, that fits our definition And when it's appropriate to move the property to non core.

Speaker 1

And then they would come back into the core in 2025 To create an apples to apples comparison within our numbers.

Operator

Sounds good. Thank you. Thanks. Thanks. One moment for our next question.

Operator

And our next question comes from the line of James Feldman from Wells Fargo. Your line is open.

Speaker 10

Thank you and good morning.

Speaker 1

Good morning.

Speaker 10

Hi. How are you?

Speaker 1

I'm good. How are you?

Speaker 3

I am doing well. Thank you.

Speaker 10

So the annual RV and Marina growth rate of 8 0.3%, down from 8.4% in your last guidance. Can you break that out by RV versus Marina And how that's changed versus the last guidance?

Speaker 2

Shoot, I don't have that in front of me, Jamie. RV versus Marina, I'll say that the Marina rate It's essentially in line with our last guidance, which is about a 4.5% increase. And so the slight variability came The from the RV and the Marina represents about it's around 10% of that Total rent.

Speaker 10

Okay. And then we're focusing a lot on the transient RV business. Can you talk about the Marina business? I know it's Heavily weighted towards annual leases, but are you seeing weather impact there or is this pretty much an RV discussion we're having About some of the impacts you've seen in the quarter? Yes.

Speaker 1

The impacts we've seen in the quarter really relate to the transient piece and we don't have a large Piece of Transient business inside of the Marina space, but Patrick can certainly walk through where we're at in the Marina space.

Speaker 7

In the annual business, as Marty pointed out, I mean, that's the significant majority. It's almost exclusively the revenue stream in our Marina business. So our occupancies have been consistently stable around 90%. Paul just referenced rate increases and call it that 4% to 5% range. So good stability there.

Speaker 7

And we've seen consistent demand from a launch perspective. Year to date, our launches are up pushing 4%. And just a little perspective for the 4th July weekend, we were up double digits with respect to launches year over year. Our customers have been sticky, occupancy is stable and usage has been high.

Speaker 10

Okay, great. Very helpful. And then just thinking about in the quarter you really didn't have acquisitions or disposition activity. Is that more a function of just nothing you felt ready to get done either on the sales side or nothing out there to buy? Or Is there something in price discovery right now where you're kind of questioning if it's a good time to put capital to work or to sell assets?

Speaker 1

Yes. Jamie, I would say that kind of deal flow is down across the industry. As usual, we're viewing all deals, but we really haven't seen Many deals of interest right now. The owners of MH and RV are they're not distressed sellers. They have the flexibility to Take more time with a potential sale or take an asset off the market entirely and that's kind of what we're seeing over the last few months.

Speaker 1

I think it takes a few more months for that acquisition activity to return, but we're still fully engaged With potential sellers, and we'll announce deals as we close them.

Speaker 10

Okay. But in terms of pricing, you kind of feel comfortable where underwriting is and given the move in rates and things like that, But you have decent visibility on where you'd want to put capital to work and what assets should be worth?

Speaker 1

Yes. We definitely have good visibility. We have our target list of properties that we want to buy, and we're working with Owners as to what the right pricing is.

Speaker 10

Okay. All right. Thank you.

Speaker 1

Thanks, Jamie.

Operator

One moment for our next question. And our next question comes from the line of Anthony Powell from Barclays. Your line is open.

Speaker 6

Hi, good morning.

Speaker 9

Good morning,

Speaker 11

Good morning. On transient RV, you talked about the, I guess, demand normalization in certain of the destination oriented, I guess, Communities and I know this year was the 1st year that we've had the full return of capacity of things like cruise lines and international travel. Do Do you think 2023 is the proper year where we'll see kind of normalized demand for transient RV or is there any more, I guess, normalization to happen in future years?

Speaker 1

I think that's kind of, Anthony, why we're pointing to 2019. 2019, 2018, those were kind of what we would consider normal demand years, And we're up from a Knights perspective from those. So I think that there is a little bit of the normalization and then but In addition, some of the items that Patrick is pointing out on the weather related issues and that conversion to annual is Certainly a factor.

Speaker 11

Okay. And I guess in terms of maybe July 4th versus Memorial Day and if you can exclude weather impacts, was there Strengthening or weakening again transient RV trends between those two holidays?

Speaker 7

I would say there was a moderate strengthening. We finished up Memorial Day down about 7.8% year over year. And for the July holiday, We improved that by about 100 basis points to down about 6.8%.

Speaker 5

Okay. Thank you.

Speaker 1

Thanks, Anthony.

Operator

One moment for our next question. Our next question will come from the line of Samir Khanal from Evercore. Your line is open.

Speaker 12

Good morning, everyone. Hey, Paul. Hi there. So when I look at your membership data, I guess Page 13, Your member count, if you go back to sort of pre COVID, was about 115,000, it's 116,000 something like that.

Operator

And then you saw a

Speaker 12

big Jump in COVID, right, that 125, 128. I guess, I know there's been a lot of questions about normalization, but Where do you eventually go back you think? Just curious, I mean, do you go back to that 115 kind of pre COVID or where do you kind of normalize you think?

Speaker 1

Yes. I think Sameer, we've seen a decrease in the total member count since the start of the year. That decrease can really be attributed to less Free RV dealer activations and less transient activity at the property, which is how a large majority of those sales occur. RVD, their activations are down about 11% compared to last year and that's consistent with the reduction in RV sales at the dealership. And the 2 of those items the 2 of the items of the RV dealer and then the transient activity kind of accounts for that 1500 reduction in members.

Speaker 1

But really, I think the strength in that in our dues number, our revenue number comes from members coming in at an increased rate With more expensive products that have a higher dues base.

Speaker 12

Okay. And then, I'm sorry if this was asked Sure. But occupancy in the quarter was down sequentially, which is normally we don't see that. I mean, maybe you can comment on that?

Speaker 7

Yes, sure. It's Patrick. We and I've addressed this on the last couple of earnings calls. As we've worked our way through the aftermath of Ian, we have had some headwinds in Florida. Those are subsiding, I would expect, As we work our way through the next couple of quarters, Florida will make more of a contribution.

Speaker 7

And we also have Seeing somewhat of normalization, you can see that coming through in some ways on our new home sales volumes. A couple of the drivers on those New home sales trends has been 1, filling up a couple of expansions that we had, so they're no longer contributing to some of that growth. But also similar to the RV side of the business, just kind of a normalization of demand, Yes, selling 226 new homes in the quarter. From a pre COVID perspective, we would have considered, We'll call it 150, 175 new home sales in the quarter to be a solid quarter on a new home sales perspective. So that number is normalizing somewhat from the year over year comparison that was almost 316 in the quarter.

Speaker 9

Thank you.

Speaker 1

Thank you, Sameer.

Operator

One moment for our next question. Our next question comes from the line of Kegan Karl from Wolfe Research. Your line is open.

Speaker 3

Hey, guys. Hate to belabor transient RV, but I guess I'm just trying to better understand the weather impact. So I know cancellations are a decent sized portion of that business

Speaker 8

that can come up. But if

Speaker 3

we take a step back and just look at the advanced booking levels that might have been canceled As weather issues came up, how would that have trend on a revenue growth basis if you kind of exclude the excess level of cancellations?

Speaker 2

Yes. Keegan, I do think the booking window is an important thing to talk about, especially I mean, certainly in this time period, The Q2 and headed into the busy summer season. As we look at reservations that are made during the 30 days before arrival, The average time between booking and arrival is 8 to 9 days. This activity represented about 55% to 60% Of our total reservations by the end of the 3rd quarters in the past few years, and it was similar in the second quarter. I'll set aside 2020.

Speaker 2

Go back to pre pandemic 2019 and then look at 2021 2022. It was kind of 8 to 9 days in advance of arrival And when you look inside that population of reservations, those that were made within 30 days, When we look at those that were made 7 days before arrival, the average time between booking and arrival is 2 days. And that represented a third of the total reservations that are made. So there's a significant population of reservations, People coming to our properties who are making their decision just a couple of days before they arrive. And we've talked before about how close people live to our properties.

Speaker 2

They're just driving 60 to So it's easy enough for them to decide they want to visit our properties.

Speaker 3

Okay. No, that's helpful. But I guess on like, for example, like the Yosemite Park, like I'd imagine people are booking more than 2 days out for that, right? And Did you experience any cancellations on some of your bigger assets where there's probably demand further out?

Speaker 2

Well, certainly, I mean, Patrick talked about the road closures and so forth. Specific to Yosemite, certainly, Cancellations were generated as a result of weather. People who had booked in advance because they were planning their trip, but they couldn't make it to the property Or people who are watching the weather and hoping they're going to be there. But I'll say that when it's a destination like that, they're more likely to bring rain gear And kind of tough it out, so to speak. It's more likely to be kind of a significant access or other issue that would cause them to cancel.

Speaker 1

And Kegan, we do have certainly advanced bookings that come up, which is the inverse of what Paul is talking about. It's just that there is an awful lot that Come through at the last minute or within those 7 days. So people do plan their trip for July 4 well in advance, a year in advance Maybe, but things may happen that would cause them to not take that trip.

Speaker 3

Okay. No, that's helpful. And then just shifting gears here. I know you're decent way out on the renewals, but just what are your broader thoughts in the insurance market? What are you guys seeing as far as Improvement, if there is any.

Speaker 3

And if not, is it time to maybe think about taking on more risk to sort of alleviate the expense pressure from that line item?

Speaker 1

Yes. So our new insurance policy is in effect for the last 4 months. We really still see a hard insurance market Due to the industry losses, inflation and rising interest rates. So we really haven't seen any change. I think the claim history for this year will be an important contributor to what happens for next year.

Speaker 1

So I think We'll let you know as we head in towards the end of the year, how we think we would reconstitute our insurance.

Speaker 3

Great. Thanks for the time guys.

Speaker 1

Thank you.

Operator

Thank you. One moment for our next question. Our next question will come from the line of Wesley Golladay from Baird. Your line is open.

Speaker 13

Hey, good morning, everyone. I've got one more seasonal transient RV question for you. It looks like you're Forecast and another soft patch here in 3Q, but then reflecting in 4Q. Are you seeing anything in your bookings to give you the confidence in the 4Q guide and anything intra order, any acceleration going on?

Speaker 2

I think, Wes, the short answer to that is the limited visibility that we have. Just given what I walked through a moment ago in the booking window, so we're Kind of holding the Q4 steady, so to speak, and don't really have visibility into what the transient reservation pace is for the Q4 yet.

Speaker 13

Okay. And then if I can go back to that MH rate question, I think you're talking about going 150 basis points over COLA. Would that be mainly driven by, I guess, the alpha on the 150 basis points, would that be driven by just the new leasing? I think you mentioned 13% New lease growth or is that 150 basis points over just strictly tied to renewal and having a 450 basis point renewal growth?

Speaker 1

That's mainly tied to the renewals. That increase that I mentioned in my comments has been something that we've seen over the last Few years, that's not really consistent with what we've seen across our portfolio over the last 30 years. So My commentary relative to the 150 basis points, is on the renewals.

Speaker 13

Got it. And then can you remind us again what the turnover typically is about?

Speaker 9

Is it about 10%?

Speaker 1

It's 10%, yes.

Speaker 13

Got it. Thanks everyone.

Operator

One moment for our next question. Our next question comes from the line of John Pawlowski from Green Street. Your line is open. Thanks for the call.

Speaker 1

Welcome back, John.

Speaker 4

Thank you very much. Patrick, are you also seeing a kind of a step backward in leading demand For the seasonal RV business that you're seeing in the transient side?

Speaker 7

I guess I'd emphasize a little bit of what Paul just said with respect to the visibility that we have Into the Q4 and the seasonal business really comes through during the winter season in the Sunbelt As we build up to those colder months, we saw consistent demand As the last winter season wound down, so I would anticipate that we had some Favorable Canadian trends, favorable trends from our domestic customers. I haven't seen anything that would say that that would subside.

Speaker 4

Okay. And I just want to make sure I'm interpreting the comments on the transient RV business properly. When I hear Normalization of demand towards 2018, 2019 levels. I interpret that as like a reasonable base case is Modest declines in the absolute level of revenue over the next few years. Is that how you guys are thinking through the business?

Speaker 4

Did you guys underwrite Transient RV acquisitions, it's kind of a slow bleed towards 2018 2019 levels?

Speaker 1

Well, I think as we underwrite acquisitions, it's certainly a view to what's happening in the local markets. As it relates to our portfolio, it's really a function of the annual conversions and Weather events that happen that you don't know they're going to happen, we're talking about them on a backward basis. So we've always said and I think, John, we've had this conversation about there is volatility in that transient revenue line item. Paul has walked through the booking window. You kind of don't know it until you're right up against it, whether or not you're going to have A good quarter or not, which is why we have really focused our efforts on building that annual base and Seasonal base, which is just a far more predictable cash flow.

Speaker 4

Okay. Last one for me. Patrick, just curious where you think you can operate the MH occupancy portfolio where you can get MH occupancy to And when, just given the affordability gap that you referenced in your opening remarks, no new supply demographics, Everything on paper suggests occupancy should be closer to 100% than 95%. So where do you think peak occupancy in this portfolio, when can you get there?

Speaker 7

I would Suggested that I agree with you. There is the opportunity to grow occupancy in the MH portfolio. As we work our way through the There's this normalization piece we talked about a little bit earlier as well as some of the headwinds from the last hurricane that We'll get that behind us as we move through the back half of this year and into 2024. I think we consistently see A strong demand profile. We've talked about rate a couple of times on this call.

Speaker 7

That 13% mark to market, which Marguerite pointed out was outsized compared to our history. It still points to very strong demand as do our run rate, rate increases in our core occupancy. So given that roughly half of our properties are 95% occupied or less, we have an opportunity to drive those occupancies higher. And I think Marguerite's touched on this several earnings calls in the past. We have a significant number of properties that are 100 percent occupied.

Speaker 7

So I think there is opportunity to continue to grow occupancy. I'd also highlight that The percentage piece can be a little misleading just because we do develop MH and Our pipeline from 2023 into 2024 is going to add several 100 sites to our overall site count And a couple of core markets, including Coastal Florida.

Speaker 1

And I think, John, once you do once we are Getting that occupancy up to that 98%, 100%, it can stay there for a very long time and we have properties that have been 100% It's really sustainable due to the investment the customer is making when picking out a community, they're making a long term commitment For themselves and a long term commitment for the home that they're putting in the community or buying. So I think that's helpful, that once that occupancy gets up there, it can stay for a very long time.

Speaker 3

Okay. Great. I appreciate you taking all

Speaker 8

my questions.

Speaker 1

Thank you.

Operator

One moment for our next question. Our next question comes from the line of Michael Goldsmith from UBS. Your line is open.

Speaker 14

Good morning. Thanks for taking my questions. Your same store revenue guidance kind of has bounced around a little bit going from 6.2% to start the year, we're up to 6.5% at the midpoint, now we're back at 6%. So just maybe kind of tie everything that we've talked about together, The business is just more difficult to forecast or more volatile. How can you look So make it a little bit more consistent overall.

Speaker 14

Am I breaking up? Okay.

Speaker 1

I think we You were breaking up, but I think we got it.

Speaker 2

I think you're asking about consistency of revenues, Michael, and I think It really speaks to the transient that we've been talking about during the really during the call. I think there's been tremendous Consistency on the MH and the annual revenue streams for the RV, it's really been a discussion around the transient and the impact in 2023 of some of the weather events that we've experienced as well as the shifting in that transient From shorter term state to longer term state based on customer demand.

Speaker 14

Got it. And then just as a follow-up, July 4th the Friday of July 4th shifted into the Q2 of this year and there was a 4 day weekend. So Can you talk a little bit about how maybe some of those moving pieces may have impacted results in the Q3? And just if you can help us quantify How big the 4th July weekend typically is as a percentage of the whole quarter? That would be helpful.

Speaker 14

Thank you.

Speaker 2

Yes, I think I mean historically we've talked about the large holiday weekend that's kind of being $2,000,000 weekends for us. 4th July is a little bit trickier than Memorial Day and Labor Day because the date fluctuates. So it can be midweek as compared to the weekend. But In any event, I would give those amounts as a general guide for the holiday weekend. And our guidance For the Q3 includes the experience that we had in the 4th July as well as our anticipated reservation pace for the Q3 based on current reservation pacing.

Operator

Thank you very much.

Speaker 9

Sure. Thanks, Michael. Thanks, Michael.

Operator

One moment for our next question. And our next question will come from the line of Eric Wolf from Citi. Your line is open.

Speaker 9

Hey, thanks for taking the follow-up. I know the call is going a little long here. And sorry to ask another question on seasonal transient, but Just trying to understand the math in the back half of the year. So you're guiding to the full year around 2.5% down. You're 3.2% through the first half of the year sort of implies around, call it, 2% -ish in the back half.

Speaker 9

If I look at the second quarter, you're down 9.3 combined. So I'm just curious like what is sort of improving in the 3rd and fourth quarter off the second quarter run rate to get there? Is transient going to be a bit better or seasonal is going to be a larger percentage. Just trying to understand how you get to that, call it, 2% in the back half of the year? Thanks.

Speaker 2

Sure. I mean, you can see what we have forecast for the Q3. I think that when you think about the transient for the Q4, As I said a moment ago in response to another question, we have not adjusted meaningfully the budget assumption that we had. The short visibility on the transient is one that causes us to Just have a view that as we put our budget together and make an assumption, we don't have a basis for changing that. So We've left that in place for the Q4.

Speaker 9

Okay. Meaning that you've left, call it down 13% into the Q4?

Speaker 2

No, I think if you take a look at what we have in the forecast for the 3rd quarter, You would show stabilization in the Q4 for the transient.

Speaker 9

Okay. All right. Got it. Thank you.

Speaker 1

Sure. Thanks,

Operator

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

Speaker 1

Thank you for participating today. We look forward to joining you You joining us on our Q3 call. Thanks very much.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great

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Earnings Conference Call
Equity LifeStyle Properties Q2 2023
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