Equity Lifestyle Properties Inc Q2 FY2022 Earnings Call

Good day, everyone and thank you for joining us to discuss Equity LifeStyle Properties' Second Quarter 2022 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. 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 risks and uncertainties. The company assumes no obligation to update or supplement any statements that become untrue because of subsequent events. In addition, during today's call, we will discuss non-GAAP financial measures as defined by the SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release, our supplement information and our historical SEC filings. At this time, I'd like to turn the call over to Marguerite Nader, our President and CEO.

Good morning and thank you for joining us today. I am pleased to report the results for the second quarter of 2022. We continued our record of strong core operations and FFO growth with a 4.5% growth in normalized FFO per share in the quarter and a 9.3% growth year-to-date. We have often discussed the quality of our portfolio and our cash flow. Over the years, our acquisition strategy has been focused on the quality of cash flow from property operations and buying in locations with long-term positive demographic trends. We see high demand for our key locations with our customers expressing a desire to stay with us on a longer-term basis. Our residents and customers see the benefit of an increased commitment to us from a quality of life standpoint. We are well-positioned and benefit from an influx of resident and customer interest into our key states of Florida, Arizona, and California. Our strong topline performance, coupled with disciplined operating practices, resulted in continued strength and growth in normalized FFO per share. The revenue from our MH communities represents 60% of our revenue. We have seen a heightened increase in leads and interest in our locations over the past two years. Over the last two years, Florida has seen outsized population growth. Our customers are attracted to the Sun Belt climates. They are taking advantage of the added flexibility in their schedules as well as technology to accelerate the move from their northern location. Our portfolio is well-positioned to take advantage of this key demographic movement. Continued evidence of the demand for our product offerings is seen in our new home sales results. During the quarter, our new home sales increased 24%. We sold 365 new homes in the quarter, which was a high watermark for ELS. The primary driver of the new home sales volume increase was our Florida MH sales program, where we saw an increase in the volume of 60%. Over 95% of these new homebuyers were cash buyers. This investment is consistent with our entire portfolio as the vast majority of our residents have made a capital commitment to live in our community. That commitment from our homeowners results in a pride of ownership and a long-term resident base. Core RV and marina revenue produced strong results with an increase of 6.6% in the quarter. The primary driver of this increase was the strength of our annual revenue stream which increased by over 9%. Our market surveys provide support for an increase in market rates and we saw an increase in conversions from transient and seasonal guests. Our transient and seasonal revenue grew by 2.4%. We saw a strong pickup in seasonal revenue demand. Roughly half of the increase in seasonal demand was from our Florida customers who extended their stays in April due to the continued difficult weather conditions in the north. The transient revenue decline was impacted as well by the difficult weather in April and May in key locations. Strong demand for longer-term stays has reduced the number of available transient sites across our portfolio. We were able to increase the rate on the transient sites to combat some of the weather-related declines. Our operating teams have done a great job keeping up with a high demand for our properties. In June, TripAdvisor announced that 63 of our properties received Travelers' Choice Awards and 23 of those properties are in the Hall of Fame since they have received the award for five or more consecutive years. Our ELS team members are dedicated to exceeding the needs of our customers. They have done a great job delivering excellent customer service and have continued to focus on safety for our customers, guests, and employees. I will now turn it over to Paul to walk through the numbers in detail.

Thank you, Marguerite. Good morning, everyone. I will review our results for the second quarter and June year-to-date, highlight our guidance assumptions for the third quarter and full year 2022 and discuss debt market conditions as well as our balance sheet. For the second quarter, we reported $0.64 normalized FFO per share. Core and noncore property operations delivered the strong results we expected, while home sales volumes and profits exceeded our expectations in the quarter. Our second quarter core MH rent growth of 5.7% consists of approximately 5.3% rate growth and 40 basis points related to occupancy gains when compared to the same period last year. We have increased occupancy in 97 sites since December with an increase in owners of 443 while renters decreased by 346. Core RV and marina base rental income increased 6.6% in the second quarter and 13.9% year-to-date compared to the prior year. Base rental income from annuals represents more than 60% of total RV and marina based rental income and it increased approximately 9% for the second quarter and year-to-date periods compared to last year. Annual RV rate increases generated approximately 6.4% growth in the year-to-date period, with occupancy contributing close to 300 basis points of growth. Our guidance for the second quarter included a range of growth rates for combined seasonal and transient rents was 4% at the midpoint of the range. The actual results for the second quarter was 2.4% growth, a variance of approximately $500,000. Demand for extended stays resulted in better-than-expected seasonal rental income during the quarter and offset lower-than-expected transient income. Year-to-date, combined seasonal and transient rent increased almost 23% compared to the prior year, following recovery of our seasonal RV business during the first quarter of 2022. Membership dues revenue increased 9.3% and 10.1% for the quarter and year-to-date, respectively, compared to the prior year. Year-to-date, we've sold approximately 12,300 Thousand Trails Camping pass memberships. While this represents a 9% decrease over the same period in 2021, it represents a 20% increase over membership sales in the second quarter of 2019. At the end of the second quarter 2022, our member count, excluding our RV dealer free trials, was 3.6% higher than the same time last year. Also, during the quarter, members purchased approximately 1,100 upgrades at an average price of approximately $8,700. Core utility and other income was higher than expected during the quarter as a result of utility income that offset higher-than-expected utility expense. Year-to-date, our utility recovery rate is approximately 45%, the same rate we experienced in the first six months of last year. The decrease in utility and other income in the second quarter compared to the prior year is the result of $2.3 million of hurricane-related insurance proceeds that we recognized in 2021. Core property operating expense growth was 7% in the second quarter and 8.6% year-to-date. The second quarter growth rate was 60 basis points higher than the midpoint of our guidance range, a variance of approximately $800,000. In the second quarter, utility expense, specifically electric expense, was the largest contributor to core property operating expense growth. Rate-driven increases in Florida and California caused electric expense to be more than $1 million higher than last year and our guidance. The increase in repair and maintenance expense compared to last year is attributed to inflationary effects on the services of third-party contractors we engage for property maintenance and landscaping. Property payroll reflects a modest increase in the number of employees across our portfolio. The percentage growth is mainly the result of wage rate changes with some additional expense for overtime to cover open positions. In summary, second quarter core property operating revenues increased 4.9% and core NOI before property management increased 3.3%. For the year-to-date period, core property operating revenues increased 7.2% and core NOI before property management increased 6.2%. Income from property operations generated by our noncore portfolio was $8.2 million in the quarter and $18.6 million year-to-date. These results were in line with our expectations. Revenues generated by our recently acquired assets reflect our strategic focus on long-term revenue streams. During the year-to-date period, only 8% of our noncore property operating revenues were generated from transient rent. Property management and corporate G&A expenses were $30.8 million for the second quarter of 2022 and $61 million for the year-to-date period. Other income and expenses, excluding transaction and pursuit costs generated a net contribution of $9.4 million for the quarter. New home sales profits, along with our ancillary retail and restaurant operations, generated approximately $4.1 million in the second quarter and $6.7 million year-to-date. Interest and related amortization expense was $28.1 million for the quarter and $55.5 million for the year-to-date period. The press release provides an overview of third quarter and full year 2022 earnings guidance. As I provide some context for the information we've provided, keep in mind, my remarks are intended to provide our current estimates of future results. 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 financial information. A significant factor in our guidance assumptions for the remainder of 2022 is the level of demand for shorter-term stays in our RV communities. 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. Our full year 2022 normalized FFO guidance is $2.73 per share at the midpoint of our range of $2.68 to $2.78. Full year normalized FFO per share at the midpoint represents an estimated 7.5% growth rate compared to 2021. We expect third quarter normalized FFO per share in the range of $0.66 to $0.72. Full year core NOI is projected to increase 6.1% at the midpoint of our guidance range of 5.6% to 6.6%. We project a core NOI growth rate range of 4.7% to 5.3% for the third quarter and expect NOI for the quarter to represent 25% of full year core NOI. Full year guidance assumes core rent rate growth in the ranges of 5.2% to 5.4% for MH and 6.2% to 6.4% for annual RV rents. Our guidance assumptions for the third and fourth quarters include MH occupancy gains in the second quarter with no assumed occupancy increase in the second half of the year. Our assumptions for expense growth reflects current expectations based on year-to-date activity and our review of property level and consolidated expense projections for the remainder of the year. As a reminder, we make no assumptions for storm events or other uninsured property losses we may incur. The midpoints of our guidance assumptions for combined seasonal and transient show a decline of 3% in the third quarter and growth of 11.1% for the full year compared to the respective periods last year. Our guidance for the full year and third quarter includes the impact of the acquisition activity we've closed in the first and second quarters, with no assumptions for additional acquisitions during the year. We have repaid all debt with maturity dates in 2022. 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 2022. And now, some comments on debt markets and our balance sheet. During the quarter, we observed significant volatility in the debt capital markets. In April we closed the previously announced $200 million secured loan at a fixed rate of 3.36% for 12 years. Proceeds were used to repay 2022 maturities that carried a weighted average rate of 4.2%. Shortly after we locked rate on that loan, treasuries began to rise. The 10-year moved around 175 basis points before it topped out close to 3.5% in the middle of June. During that same time period, we noted varied reactions from lending sources but they generally behaved in a similar manner by increasing spreads on loans and limiting capacity for new deals. For comparison, the loan we closed in April would likely price around 150 basis points higher if we locked the rate today. In the face of extreme volatility and uncertainty, ELS is well-positioned with a debt maturity schedule that shows only 15% of our outstanding debt matures over the next five years. This compares to an average of approximately 45% for REITs. In addition, 23% 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 4.25% to 5% for 10-year maturities. High-quality, age-qualified MH will command the best financing terms. RV assets with a high percentage of annual occupancy have access to 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-EBITDA is 5.3x and our interest coverage is 5.7x. The weighted average maturity of our outstanding secured debt is approximately 12 years. Now, we would like to open it up for questions.

Maybe first, can you help us reconcile the performance a bit on the core seasonal transient RV base rental income? Maybe just what drove the slower growth? Was it a function of the site mix or something larger?

Yes. I think what we saw, Keegan, as we made our way through the quarter, was certainly strengthen the seasonals as very strong interest on the part of our customers to spend more time in our properties. And we talked quite a bit about the weather in April and May and its impact on the transient business. And into June, we didn't quite see the development that we expected in terms of the demand for those shorter-term stays.

And then I think also, I mentioned it in my comments but the seasonal days in Florida, they were extended just because it was tough weather up north which caused people wanting to stay in Florida for a longer period of time which we were the beneficiaries of that in the seasonal area.

Got it. And just to clarify one thing on that. So I saw that the days actually spent in the parks were up. I'm curious, is that just a function of more seasonal sales and less transient? Or are you seeing a shift in how people are staying with maybe less trips but extended stays and it's going further into the week?

I think the overall transient is up slightly by about half a day. But what you're seeing is that shift from transient to seasonal and annual which is making up the additional nights.

Got it. And then just kind of one more here. Maybe on the July 4 weekend, what drove the weaker rent to income there? Was it particularly volume or price? And were there any sort of elevated cancellations maybe coming into the weekend?

In terms of cancellations, when considering the booking window, we've observed that customers who make their reservations 90 days in advance account for about 20% of our reservations by the end of the period. A significant 55% to 60% of customers are deciding within eight or nine days of arrival. We have previously discussed weather dependency and similar factors, but this is the timeframe that gives us insight into the behavior of transient, short-term customers and their arrival patterns.

Got it. So it's primarily about the weather. From your perspective, there's nothing concerning you as we approach Labor Day weekend?

As I just said, 60% of the revenue comes from those customers who are making the reservation eight to nine days in advance. So Labor Day is a ways out. But yes, we're up...

And our next question comes from the line of Lizzy Doykan from Bank of America.

I just wanted to understand the utility recovery rate a bit more which ticked down this quarter. Historically, what has that number been for 2Q? And just if you could break down how exactly you're passing through these costs to the residents? What specific measures are you guys taking to relieve some of that pressure to utility costs?

Yes. So just overall, I think our long-term history and we focus really on the full year activity, not so much quarter-to-quarter but 45% is really kind of the midpoint of the recovery range and it's consistent with what we saw in the quarter. With regard to our practices, we definitely focus on, we call it unbundling. So to the extent that there are charges that are utility in nature that the customers are reimbursing us for the expense, we separate that from the rent and charge that to them separately in every chance we get essentially. One of the limiting factors for us in utility recovery relates to our transient RV business. Just that short-term stay, the infrastructure is not there to measure that activity for a very brief period of time and charge those customers. So when customers are annual or have longer-term stays in those RV communities, we are able to bill them back for their utility usage but not those shorter-term stays.

And Lizzy, that also helps from a conservation standpoint. And we find that if people are submetered, they will use less and that just helps from an energy conservation standpoint.

Okay. Got it. And my second question is just around the transient demand. What visibility do you have for that trending into the second half as we go into the third quarter and the fourth quarter, given the nature of bookings? I mean, do we expect the third quarter to be the heaviest period for transient?

Yes. So I mean our third quarter guidance, the 2.5% to 3.5% decline in the combined seasonal and transient, that's based on our current pace for seasonal and transient rents. The seasonal pace continues to reflect demand for longer-term stays. That's showing about a mid-teens percentage growth compared to last year. Transient pace looks similar to the experience we had in the second quarter, kind of evidenced by what we saw over the fourth of July weekend, it's down, call it, 6% to 7%. When we think about that transient pace, particularly in the third quarter, the booking window that I mentioned a minute ago is really important. I'll say it again, just in 2019 and 2021, about 40% of the booked reservations were made more than 90 days in advance of planned arrival. But by the end of the third quarter in those years, that reservation category represented about 20%. So as we step into the quarter, that reservation made a while ago represents significantly more than it ends up representing and that's because those short-term reservations, kind of eight to nine days ahead of arrival, they end up representing 60% in total.

And our next question comes from the line of Samir Khanal from Evercore ISI.

I’m trying to understand more about the transient growth where you lowered the forecast by 300 basis points. Can you break down how much of this is due to general slowdown compared to last year’s overperformance, tougher comparisons, or factors like weather or transient conversions? I’m not sure if you can provide that breakdown.

I think you're correct. When we look at 2021 in comparison to 2022, it's important to set aside weather as it is a consistent factor in our business. In 2021, there was a significant level of flexibility for our customers to choose where to live and work, which led to increased demand. This year, however, we are facing the overall impact of inflation. There has been considerable discussion about rising gas prices, but the reality is that all costs are increasing, which may cause our customers to reconsider their behaviors compared to last year. Despite these challenges, when we compare all this activity to 2019, we continue to show strength against that baseline.

And I think, Samir, we have experienced operating RV parks over the last 60 quarters. When you look at the annual seasonal and transient results over that time, transient revenue has been the most volatile by far. We've seen periods of negative growth, flat growth, and then significant growth. However, we've continued to focus our business on the annual rental stream to avoid the volatility, and you saw that reflected in the quarter. Over a 10-year period, transient growth has contributed approximately 30 basis points to our overall NOI growth. So it's not a large driver of our operating results by design and the way we built our portfolio.

Okay. Understood. My next question is regarding the growth in MH rates. You're predicting low 5% increases. Marguerite, considering the current inflation and what you've observed, how much higher can we push that rate over the next year? Is there a point where we might face resistance from customers? I'm trying to gauge the potential for further growth.

Yes, Samir, it's Patrick. I would like to remind everyone that we are about to begin our budget process for 2023, which will give us a clearer understanding of the effects of CPI as we progress. Approximately a quarter of our rents are linked to CPI, making our portfolio primarily influenced by market conditions. We will keep up with the market trends. Over time, we value our long-term relationships with customers, but we closely follow market performance, and historically, I expect our results to be positive in response to CPI changes. Florida, with its 40,000 manufactured home sites, is a significant contributor to our business, and due to the lease structures in that area, CPI becomes important. Year-to-date, about 15% of our sites are in Florida, meaning roughly 6,500 have seen rent increases tied to CPI. These increases have been implemented smoothly. Our residents with CPI-linked leases are well-informed about first-time CPI adjustments, so they monitor it closely, and it typically does not come as a surprise in regard to rent increases.

And I think it's also helpful that there is going to be social security increase. So that will benefit our customers as well.

And our next question comes from the line of David Toti from Colliers.

Just quickly, Marguerite, maybe you can comment on any differences that you might expect from the next cycle of the MH housing sales? And how that might differ from single-family home sales which is obviously expected to cool? Do you expect MH patterns to be different in terms of sales?

No, I think about 50% of our vacant sites are in Florida, which is a really high demand market. We have a product that is attractively priced, and that has been beneficial. You've seen this in the quarter as we've increased our home sales. I would continue to see robust demand in our well-positioned portfolio. However, I want to caution that when it's difficult for someone to sell their home up north, we may see a decline in home sales. I believe we have positioned ourselves well over the years. When we had the opportunity to sell homes, we did so and significantly reduced our rental pool. There is some room in the rental pool if that needs to increase, but right now we feel very confident as we look out to the rest of the year.

Great. That's helpful. And just one follow-up relative to strategy. Obviously, with the increased price sensitivity among some of your customer segments, gasoline, housing and so forth, are you planning any strategic shifts in terms of product to meet more sensitive customers or lower price points or higher volumes? Are there any changes coming around those anticipations?

We will always focus on the manufactured housing side, particularly in home sales. We are actively addressing the costs we are facing from our manufacturers. Our goal is to maximize value for our customers. However, I don't have any specific updates to share at this time, other than ensuring we secure the best price from manufacturers that we can pass on to our customers.

And our next question comes from the line of Brad Heffern from RBC.

Given the limited visibility you have in the transient, I guess, why guide down at this point? Is that based largely on the relatively small proportion of forward bookings? Or are you seeing some sort of consistent demand erosion day-to-day?

I think, Brad, it's our practice and historical custom to review our reservation pace and make adjustments based on the information available at the time we update our guidance. So we have followed our historical practice.

Okay. And so that's basically just suggesting that the reservation pace is down 3% or something like that?

Right, right.

Okay. Got it. And then on the acquisition front, can you just talk about what you've seen in terms of cap rates across the businesses?

Sure. So in the quarter, we closed on two RV parks. The blend of those purchases from a cap rate perspective is about a 5% cap. Both properties are Oceanside resorts, one on the East Coast, one on the West Coast. And I think that's kind of in line with the types of cap rates we've seen for these types of assets.

Okay. And then any color on anything that you've seen on MH or marinas as well?

I believe we haven't observed a significant change in cap rates for pricing overall. Currently, cap rates are around 4% to 5%. There are some exceptions where high-quality, age-qualified manufactured homes are trading more aggressively. However, aside from that, there hasn't been a substantial shift in cap rates.

And our next question comes from the line of Wes Golladay from Baird.

I just have a quick question on the annual RV. I guess, do you think any of the softness in the transient will end up spilling over into the annual side and you may see some churn pick up? And then maybe a follow-up to that. It's my understanding that the portfolio lags you tied it for both the MH and annual RV. And can you either confirm that? And I guess how you capture all the CPI that you missed this year? The rent increase for this year will be maybe a 2023 event?

Yes. So I guess I'll go to the latter part of the question first in terms of our rate increase process. On the MH side, as Patrick earlier mentioned, we've started our process for 2023. By the end of September, we'll have sent our first notices to residents for MH rent increases effective January 1, 2023. As a reminder, I think we've talked before, 25% of our leases overall have a tighter CPI, the remaining 75% are market-driven. And by the time of our October earnings call, notices to about 50% of our MH residents will have been sent. So we'll take a look and kind of figure that out. On the RV side of the business, the rates will have also been noticed. It's a much greater percentage. It's closer to 95% by November. So in this time period right now, the next three months, there's a significant amount of activity related to setting rates that become effective in 2023.

We expect to see a shift from a temporary and seasonal pattern to an annual one. Considering our northern location, our properties offer an appealing vacation option for individuals looking to spend the summer just 90 miles from home, with the opportunity to have a resort cottage there. I believe this will only become more enticing.

Got it. And then I guess for Labor Day, how important is that for the quarter? And then when we look at that, the guidance, how much of that is just having fewer sites because of the conversions and then maybe just demand being down? Would it imply that rate is still low to mid-single digits for the people that you show up?

Yes, you're correct about the rate increase. Regarding the impact of the weekend, our holiday weekends typically contribute around $2 million. We expect Labor Day to be similar.

And our next question comes from the line of John Pawlowski from Green Street.

Paul, the reduction to 2022 revenue growth guidance after the second quarter beat expectations. Is that solely driven by transient? Or are there any other business lines that you have some incremental concern over?

Yes. It's really driven by our transient business.

Okay. Maybe Paul or Marguerite, could you remind us the average turnover rate within the total Thousand Trails membership program? And then just in recent years and then historically, during soft economic times, how do you see that turnover rate, the attrition rate change?

Yes, we have two segments within that business. The legacy members have an attrition rate of about 10%. The cabin pass members experience a higher attrition rate, closer to 25%. For legacy members, their decision-making is influenced by the memories they have at the properties and their desire to camp, so we focus on encouraging them to camp at the properties, as we believe this is a strong indicator of retention, more than their economic situation at any given time. The Camp Pass membership is somewhat more affected by changes in the economy.

And our next question comes from the line of Anthony Hau from Truist.

What is the mark-to-market premium on the MH lot rent when there is a homeowner turnover today?

It's going to vary broadly. With respect to Florida, we've been seeing 10% to 15%. It's obviously a strong market for us and it's a major driver of that growth for the portfolio.

And that's borne out of market survey, basically, what's happening in and around the community, looking at single-family rental, multifamily, MH and that those are important components which provide them what the market increase should be.

And what do you think that number will be by year-end? Do you think it will go up to like 20% and 25%?

So I definitely really don't think it's going up to 20% or 25%. I think we look at it on a monthly basis. We look at what's happening in and around our properties and also look at our resident base and understand that we have a long-term relationship with our resident base and want to make certain that we're evaluating it from a fair perspective.

And our next question comes from the line of Anthony Powell from Barclays.

On transient, maybe just some more qualitative, I guess, thoughts on what you think is going on with the customer there? Is it an inflation that's maybe impacted some customers? Is it the availability of alternate travel experiences? What do you think may be driving some of the softness? And I know it's above 2019 but I guess, what do you think the right baseline is for us as we look at the business in the next several quarters, not just this year? Actually, trying to get a sense of where we should be on a run rate basis.

Yes. I mean, I think there's inflationary pressures in all areas which begin to put pressure on incremental or last-minute decisions. The transient line item is a volatile line item. It's something that people are deciding, as Paul has walked through, based on the forward bookings. So what we've tried to do and lay out for you is our best guess of what we see happening for the rest of the year. But I think we've long said that this is a particular area that can surprise us on the negative or the positive. And you've seen that happen over the last 60 quarters within the business.

And maybe demographically, how does the seasonal and transient customer differ besides geographic origin? Are they similar in income and what not? And just maybe what's your view on that seasonal customer over the next several quarters?

Sure. The primary seasonal customers are those who come from the South, including Florida, Texas, and Arizona. They tend to be snowbirds who escape the cold and spend 30, 60, or even 90 days with us. During the quarter, we noticed that this group stayed with us longer into April due to favorable weather conditions in Florida and Arizona, while the weather was not as good up north.

And our next question comes from the line of Nick Joseph from Citi.

Marguerite, I want to revisit your comments regarding the cap rates. It seems they haven't changed significantly, and I’d like to connect that to Paul's remarks about the fluctuations in the capital markets. When do you anticipate seeing an effect on cap rates due to rising interest rates? What degree of change would be necessary before you believe it would actually influence the transaction market?

It's challenging to respond to that question. Owners have noticed a decline in the number of interested bidders due to the current financing conditions, leading potential buyers to hold back. However, sellers are experiencing double the number of bidders compared to six years ago, indicating that these assets remain quite sought after. The rising interest rate environment may motivate sellers who are not fully committed to a transaction to proceed. One deal we completed this quarter involved a seller who developed a property in 1976 and is now seeking more freedom in his life. I anticipate more opportunities like this due to the timing of when many RV parks and manufactured home communities were established. I am unsure how long it will take for cap rates to change and be impacted. These assets are in high demand, and we continue to see robust interest in them. Consequently, there hasn't been a significant change in the cap rates.

Marguerite, it's Michael Bilerman. I wanted to revisit the discussion on RVs and transient travel and delve into a few subjects. You mentioned alternative travel, and I noticed that air travel is encountering significant challenges this summer. The situation with air travel seems to be deteriorating. I would have expected this might boost your transient business as more people would prefer to drive, especially with gas prices declining by 10% to 15% from their peak. Why isn’t this trend reflected in your numbers given the poor state of air travel?

No, we've discussed this extensively. When traveling, uncertainty about reaching your destination is a concern. It’s advisable to plan for a few days in advance. I believe this should indeed influence travel choices. However, many still have set vacations at places like Disney World and prefer not to drive from Chicago. That said, when we compare our transient traffic from 2019 to 2022, we can observe significant increases, although year-over-year comparisons present challenges.

Our next question comes from the line of Michael Goldsmith from UBS.

My first question is on the expense expectations for the back half of the year. Core operating expense was up 7% in the second quarter. Biden calls for it to slow in the back half. Like what are the factors that can help kind of slow the growth of expenses in the back half of the year? And then as you look out, like, should expense be growing kind of in the rate of inflation? Is that the right way to think about it?

Sure. So each quarter as part of our process for determining any updates that we make to our guidance, we review our property level, our consolidated expenses for the quarter and year-to-date periods and identify any outliers in terms of expected growth. We then use the information to refine our projection for the remaining quarters in the year. And our second quarter expense results as well as the increase to our full year property expense expectations, they reflect the rapidly increasing CPI environment that we've been operating in throughout 2022; so we saw that. Now in terms of the deceleration, we also test our forecasted growth by reviewing our actual 2021 results. And in the latter half of last year, we incurred almost $5 million in R&M, legal, utility and some other expenses that we don't expect to recur. So if the expense growth rates were adjusted, you'd see less of that deceleration that you mentioned.

Got it. That's helpful. And my second question is on the transient revenue. I guess just try to put the performance in the 4th of July weekend into perspective. In the weekend surrounding the holiday weekend, this summer travel season, were core transient revenues ex the impact of the conversions, were those up year-over-year?

I'm sorry, Michael, core transient revenue ex the conversion...

You've converted a number of transient RV sites, 40% to annual and other types. However, I am trying to understand if the weekends around July 4, which seemed to be affected by weather among other factors, saw an increase in core transient revenues if we exclude the impact of some conversions.

The conversions are not the only reason for the decline in the transient pace. There are various factors at play, including weather, as well as inflationary pressures that are affecting the transient customers who would have visited last year or the year before but are not doing so this year, which is influencing their decisions.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Marguerite Nader for closing comments.

Thank you for joining us today. We look forward to updating you in next quarter and are available for any questions you may have. Take care.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.