Equity Lifestyle Properties Inc Q4 FY2022 Earnings Call

Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties Fourth 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 under federal securities laws. All 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 SEC Regulation G. Reconciliations of these non-GAAP financial measures to 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 Nader, our President and CEO. You may begin.

Good morning, and thank you for joining us today. I am pleased to report the final results for 2022. The strength of ELS can be seen in all facets of our business. We continued our record of strong core operations and FFO growth with full year growth in NOI of 5.7%, which translated into a 7.4% increase in normalized FFO per share. Our MH portfolio is 95% occupied. Importantly, 96% of our sites are occupied with homeowners. The pride of ownership is evident in the well-kept homes and landscaping throughout our community. The stability of our resident base can also be seen in the high FICO scores for incoming residents. For the year, we experienced an all-time high for new home sales with over 1,100 new home sales. Due to the strength of our operating markets, we were able to increase sales prices by 22%. Our strongest performing properties for home sales were in Florida, with a 16% increase in sales volume and a 28% increase in home prices. It is important to note that while home prices have increased to an average of $106,000, they remain significantly lower than other housing options in the immediate vicinity of our community. Turning to our RV properties. In 2022, demand was strong for RV sites across the country. It is estimated that 67 million Americans plan to take an RV trip in the next 12 months. These trips will strengthen the commitment to the RV lifestyle. Our quarterly surveys indicate that our guests plan to camp more this year. The reasons cited for their desire to camp more include spending time outdoors and traveling with their pets. In the year, we continued to see new transient guests converting to a longer-term commitment, with nearly 4,000 guests increasing their commitment to us after their initial transient days. Our transient revenue increased 26% from pre-pandemic levels, with an increase in the average rate being the largest driver of that increase. In 2022, our Thousand Trails membership properties performed well. We sold over 23,000 camping passes and initiated 28,000 RV dealer activations. These passes and activations are the seeds for future growth in the Thousand Trails portfolio. Turning to 2023. We have issued guidance of $2.84 at the midpoint for next year, which is a 4.1% growth in normalized FFO per share. The demand for our MH communities continues to increase. Over the last five years, we have sold over 4,000 new homes in our communities. These new homes further enhance the look of the community as new and existing homeowners throughout our portfolio showcase their pride of ownership. We have noticed rent increases for approximately 67% of our residents and anticipate growth of 6.5% in core MH rent revenue. Our guidance for 2023 reflects the strength in our business. Our guidance is built based on the operating environment in each property, including a robust market survey process and continuous communication with our residents. In 2022, our acquisitions and development teams focused on strategic RV investments and added over 1,600 sites to the portfolio. In addition, we purchased six parcels of land with approximately 300 acres of development potential. Our vacant land is geographically diverse and will positively contribute to our future growth. Next, I'd like to update you on our 2023 dividend policy. The Board has approved an annual dividend rate of $1.79 per share, a 9.1% increase. The Board will determine the amount of each quarterly dividend in advance of payment. The stability and growth of our cash flow, our solid balance sheet, and the strong underlying trends in our business are the primary drivers of the decision to increase the dividend. Historically, we have been able to take advantage of opportunities due to the free cash flow generated by our operations. That will continue in 2023 as the dividend increase of $29 million is roughly equivalent to our anticipated increase in FFO for 2023. In 2023, we expect to have in excess of $100 million of discretionary capital after meeting our applications for dividend payments, recurring capital expenditures, and principal payments. Over the past five years, we have increased our dividend by an average of 10.2%. We had a strong finish to the year due to the hard work of the ELS team members. The well-being of our residents and guests was prioritized. The dedication of the property regional and corporate teams is impressive. I will now turn it over to Paul to walk through the numbers in detail.

Thanks, Marguerite, and good morning, everyone. I will review our fourth quarter and full year 2022 results and provide an overview of our first quarter and full year 2023 guidance. Fourth quarter normalized FFO was $0.66 per share. Strong performance in our core portfolio generated 7.3% NOI growth for the fourth quarter. Core NOI growth of 5.7% for the full year contributed to our normalized FFO per share growth of 7.4%. Core community-based rental income increased 5.8% for the full year compared to 2021. Rate increases contributed 5.4% growth, while occupancy generated the additional 40 basis points. During 2022, we increased homeowner occupancy by 637 sites. Full year core resort and marina-based rental income increased 9.1% compared to 2021. Growth from annuals was 8.8%, with 6.7% from rate increases and 2.1% from occupancy gains. In our seasonal RV income, the strong demand trend for stays of a month or more continued in the fourth quarter generating 17.4% growth over 2021. The full year increase in seasonal RV income was almost 40%. Full year growth in seasonal RV rent offset the decrease in full year transient income. These rental streams combined generated 9.5% growth. For the full year, net contribution from our membership business, which consists of annual subscription and upgrade sales revenues offset by sales and marketing expenses, was $74.4 million, an increase of 4.9% compared to the prior year. Subscription revenues increased 8.4%, reflecting a 3.2% increase in the member base and a rate increase of approximately 5.2%. During 2022, we sold almost 4,700 upgrades at an average sale price of approximately $7,400. Full year growth in core utility and other income was mainly the result of increases in utility income. Our recovery percentage of 44% remained consistent in 2022 compared to 2021. Fourth quarter core operating expenses increased 2.1% compared to the same period in 2021. We experienced some moderation in growth in utility and payroll expenses compared to earlier quarters in 2022. In addition, during the quarter, repairs and maintenance, and insurance and other expenses decreased from prior years. Overall, full year 2022 core property operating expenses increased 6.7% compared to 2021. Utility expenses represent more than 27% of our core operating expenses, and they increased 10.6% for the full year. Payroll and repairs and maintenance expenses generally increased in line with inflation for 2022. Our non-core properties, including the assets in the fourth quarter as a result of suspended operations following storm damage, contributed $5.8 million in the quarter and $41.2 million for the full year. Property management and corporate G&A were $119 million for the full year. Other income and expenses net, which includes our sales operations, joint venture income as well as interest and other corporate income, were $32.5 million for the year. Interest and amortization expenses were $116.6 million for the full year. Our full year weighted average debt balance was $3.275 billion and the weighted average rate was 3.4%. We've modified our income statement presentation to include a line item for casualty-related charges, recoveries net. The Hurricane Ian-related expenses incurred through year-end, along with offsetting revenue accruals for expected insurance recovery are presented in this line item. The press release and supplemental package provide an overview of 2023 first quarter and full year earnings guidance. The following remarks are intended to provide context for our current estimate of future results. All growth rate ranges and revenue and expense projections are qualified by the risk factors included in our press release and supplemental package. Our guidance for 2023 full year normalized FFO is $2.84 per share at the midpoint of our guidance range of $2.79 to $2.89. We project core property operating income growth of 5.5% at the midpoint of our range of 5% to 6%. We project the non-core properties will generate $18 million to $22 million of NOI during 2023. Our non-core portfolio includes properties acquired during 2022 as well as the six properties with interrupted operations. Our budget assumes stabilized NOI at these six properties from a combination of reduced operations and business interruption insurance proceeds. We intend to recognize business interruption proceeds upon receipt. As a result, we may experience some variability in recognition of income during the year as compared to our budget assumption. Our property management and G&A expense guidance range is lower than our 2022 actual expense primarily as a result of legal activity in 2022 that we don't expect to recur. We've also provided guidance ranges for our weighted average debt balance and interest expense. Our guidance model includes the impact of all acquisitions we've announced. The full year guidance model makes no assumptions regarding other capital events or the use of free cash flow we expect to generate in 2023. In the core portfolio, we project the following full year growth rate ranges: 5.7% to 6.7% for core revenues, 6.7% to 7.7% before expenses, and 5% to 6% for core NOI. Full year guidance assumes core MH rent growth in the range of 6% to 7%. We assume occupancy in our stabilized MH portfolio will be flat during 2023. Full year guidance for combined RV and marina rent growth is 5.7% to 6.7%. Annual RV and marina rent represents 2/3 of the full year RV and marina rent, and we expect 8% growth in rental income from annuals at the midpoint of our guidance range. Our full year core expense growth assumptions include our current projections for future utility rate increases and the potential impact of our April 1 insurance renewal. Our first quarter guidance assumes normalized FFO per share in the range of $0.70 to $0.76, which represents approximately 26% of full year normalized FFO per share. Core property operating income growth is projected to be in the range of 4.4% to 5% for the first quarter. First quarter growth in MH and combined RV and marina rents are in line with our full year assumptions. We project first quarter annual RV and marina events to be approximately $67.1 million at the midpoint of our guidance range. Our guidance assumes first quarter seasonal and transient RV revenues perform in line with our current reservation pacing. I'll now provide some comments on the financing market and our balance sheet. During 2022, we invested cash of approximately $150 million in operating properties, development properties, and land for future development. The investments were funded with available cash and proceeds from our line of credit. At year-end, our unsecured line of credit balance was $198 million. Current secured debt terms are 10 years at coupons between 4.75% and 5.5%; 60% to 75% loan-to-value; and 1.4 to 1.6 times debt service coverage. We continue to see strong interest from GSEs, life companies, and CMBS lenders to lend for 10-year terms. High-quality, age-qualified MH assets continue to command the best financing terms. We have approximately $92.5 million of secured debt maturing in 2023, and the in-place rate on this maturing debt is 4.9%. Our $500 million line of credit currently has approximately $265 million available. Our ATM program currently has $500 million of available sales. Our weighted average debt maturity is approximately 10 years. Our debt to adjusted EBITDA is 5.3 times, and our interest coverage is 5.6 times. We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of capital available to us. Now we would like to open it up for questions.

Thank you. Our first question comes from Nicholas Joseph with Citi. Your line is open.

Thank you. Just in terms of the properties that were still interrupted from Hurricanes Ian, can you give us an update on what's actually happening on the ground there and when you would expect things to return to normal? And then related to that, what the business interruption and other insurance recoveries are assumed in 2023 guidance?

Sure, Nick, it's Patrick. So just as a reminder, it's six properties in the greater Fort Myers market, four of those RV with 1,550 sites and two of those are marinas with 550 slips. Four properties have resumed operations; and two will resume operations in the next few months. We're working through infrastructure repairs and improvements in order to bring those properties back online. So, by the time we get into mid-2023, all properties will be operational, and we'll bring them up to full operations over the next few quarters.

And as far as the expected contribution, Nick, those properties get a little bit less than half of the non-core NOI that we'd expect in total from those properties.

Perfect. Thank you. And then just broadly on the transaction market, it looks like there are a handful of RV acquisitions, so maybe a bit more interesting with JVs or development in the quarter. But just broadly, what are you seeing on the transaction market today across RVs and MH? And has there been any movement in cap rate or pricing?

Sure. Thanks, Nick. So, yes, in the quarter, we closed three deals. One was near the shore in New Jersey. It's a property that had 80% annual, I think, and it was really a great access to a large RV customer base and population. And then we also continued our growing relationship with RBC and invested in a new development in Sandusky, Ohio. And then we entered into a 50-50 joint venture with KOA in the foothills of the Blue Ridge Mountains. So, we're pleased about those acquisitions in the quarter. I'd say, in general, the acquisition volume was kind of down across our industry in 2022. And we haven't really seen a real pickup in activity so far this year. There are certainly sellers in the market, but they're not really in a rush to sell when there's uncertainty with respect to cap rates and valuations.

Thank you very much.

Thank you. Our next question comes from the line of Anthony Powell with Barclays. Your line is open.

Hi. Good morning. I guess a question on the RV annual revenue growth, which was pretty strong. Could you remind us how you go about pricing those annual contracts? And what kind of the outlook looks like for kind of ongoing growth for annual revenue growth in RVs going forward?

Yes, Anthony, thanks. I think Patrick can talk you through kind of our market survey approach to how we determine the RV annual rate.

Yes, Anthony, it's similar to the process that we go through in our other business lines, particularly on the MH front. These are long-term customers, and they typically own a unit that's located on our property for years, if not more than a decade. So, we review the directly competing properties as well as other choices for hospitality and that type of a weekend getaway in the local submarkets. When we come to the determination of what we feel to be representative of the market, we then send out the rate increases. Similar to the MH process, we may very well have more moderate rate increases for our in-place long-term customers. And as new customers come in, they'll be charged at a full market rate.

Thanks. Maybe switching gears to the same-store expense guidance in the hurricane and the insurance impact. How much of the growth is driven by the resetting of the insurance rates? And do those insurance resets cover just the impact of properties in Florida as a whole, or maybe more detail there would be super helpful.

Yes. I guess kind of as I think about our guidance assumptions for expenses, I'll cover insurance and utilities, both because I think those are the two key areas to focus on. Those line items on a combined basis represent about one-third of our total core property operating expenses. Regarding the insurance, we're in the process of negotiating with our insurance carriers. So, I'm not really inclined to disclose too much on this call. I will remind you, though, that we've talked about over the past five years or so, we've seen premium increases around 20% each year. Our policy renewal is April 1, and we plan to provide an update on the first quarter call as far as how we progress. With regard to utilities, our growth assumptions are based on various factors, including projections of rate increases that we've identified directly from the utilities to the extent we have noticed. We also have two third-party advisers that we rely on for this information and the eia.gov website for the Energy Information Administration. So, we make all of that information, triangulate that, and come up with our model for utility expense increases.

Thank you.

Thank you, Anthony.

Thank you. Our next question comes from the line of Brad Heffern with RBC. Your line is open.

Hi, thanks. You had a strong fourth quarter and operating expenses with a 2.1% growth, but the guidance obviously shows a reacceleration to a figure that's a little bit above what you reported in 2022. Can you walk through first, what led to the low figure in the fourth quarter? And why you would expect that to pick back up meaningfully?

Yes, I think our experience in the fourth quarter, we had some moderation in expenses, primarily moderation in our payroll and our utility expenses. Then I did mention that repairs and maintenance, and our insurance lines were down in the fourth quarter. I'll cover the year-over-year reduction first. We have an annual process related to our casualty insurance line, and we'll take a look at the reserves that we have established. As we review the activity at the end of the year, we identified favorable development and that supported a reduction in the reserves on the balance sheet and thereby reduce the insurance expense. The repairs and maintenance expense savings resulted really from a favorable comp that we had because there were some elevated expenses in repairs and maintenance in 2021. The moderation in utility expenses attributed primarily to a change in the mix of operations from the third quarter to fourth quarter as we exited the summer season. Payroll expense growth moderated mainly as a result of reduced reliance on overtime as we stabilized staffing to pre-pandemic levels in 2022. We reduced our reliance on overtime, which generated savings year-over-year in the fourth quarter.

Okay. Got it. So, I guess why, like, for instance, the payroll, presumably you'd have easier comps in 2023 as well. So, is that just being overwhelmed by the insurance and the utility expense? Is there something else going on there?

No. Well, I think it's less about the fourth quarter being an indicative run rate and more about kind of the fourth quarter activity. I think looking to the full year of 2022, considering where we are with CTI headed into 2023, those are the key drivers. And then as I said a moment ago, keep in mind that one-third of our expenses are utilities and insurance, and we're talking about increases that are meaningfully higher than CPI expected from one-third of our expense base.

Okay. Got it. And then moving to the transient business. I guess, can you talk about what the underlying assumption is that's in the guide? And then in the core numbers, I think transient was down 16% or so in the fourth quarter. I know there can be some moving pieces there with the site count. So, I'm curious if that's a comparable number and then what your expectations are for '23?

Yes. I think if you take a look at the guidance page in the supplemental, you'll see our footnote disclosure that provides the expected percentage contribution from annual rent. From that, you can derive our expectations for combined seasonal and transient in the first quarter as well as the full year. I'll say that we anticipate the strong demand for longer-term stays in a monthly stay that drives the seasonal business, and anticipate that strong demand will continue and will offset any unfavorable impact, if any, on transient rents, resulting from availability of fewer sites, market-specific demand trends and perhaps weather. You should expect these combined rental income stream to deliver modest growth in 2023.

And I think, Brad, we've experienced operating with our RV parks over the last 15 years. We're very experienced. When you look at annual, seasonal and transient results over that time, transient revenue has had the most volatility by far. We've seen periods of negative growth, flat growth, and outsized growth. That's why we're really focused on the business of the annual rental stream to reduce that volatility.

Ok, thank you.

Thanks, Brad.

Thank you. Our next question comes from the line of Samir Khanal with Evercore. Your line is open.

Thank you. Marguerite or Paul, just curious, are you doing anything differently this year from a projection standpoint for expenses to get a better read on utilities? I know last year, there were sort of two guidance increases on expenses. So just wondering how you're thinking about that line utilities from a projection standpoint? And how much sort of conservatism you've baked in this time around?

I think certainly, the approach, I mentioned the sources that we use to build our model. I'll say that we've refined our approach historically because of the consistency that we saw in utilities over our long history. We did place a greater reliance on our past experience when developing our annual model. This year, we stepped away from that a bit and looked to other sources to provide insights and develop the model.

Okay. Got it. And then just on new home sales, gross revenues saw a meaningful decline sort of year-over-year in that number. Is that just a function of sort of the macro environment? Just maybe a little bit more color you can provide on that.

Yes. Samir, it's Patrick. For the quarter, we were down 35% in new home sales. There are a few drivers there, really largely impacted by the hurricanes that came through Florida in late September and then Nicole mid-November. We have seen some pressures just with respect to construction activity and the number of new homes that we have ready for the full quarter. That was exacerbated in Florida as a result of the hurricanes. Likewise in Florida, the disruption in just kind of the cadence of home sales, the marketing, the showing, and the eventual closing of those transactions to new homebuyers experienced some disruptions that led to a push of about 15 new home sales. Some of that is a mix of potential buyers just reassessing and potentially pulling back from purchasing a home at this time, and the balance was for just delayed closings as we work through the timing disruptions of the hurricanes.

Thank you.

Thank you. Our next question comes from the line of Keegan Carl with Wolf Research. Your line is open.

Maybe just on the communities that are removed from the same-store pool but are now up and running. Could you just provide some color on occupancy and your expectation for leasing those communities back? And were there any material move-outs that took place?

Yes. So just as a reminder, for those properties, it was four RV and two marinas. So, we don't have any of the direct impact with respect to occupancy trends. As we're bringing those properties back online, I would expect them to largely reach full operations in late 2023, but we have resumed operations at all but two of those properties to this point. Those are modified operations on a few key categories, but our core customers are engaged and have access to the properties with amenities coming online over time.

What we've seen is a real desire for our customers to come down and come back to their place in Florida and get out of the winter and come down and start to fix their home if it was impacted or fix their RV if it was impacted.

Got it. And just shifting gears on to transient revenue. Obviously, it was down in the quarter, but it was relatively offset by the seasonal growth. Just kind of curious on transient. Are you guys seeing any relative softness in demand? Or is it primarily just a function of having fewer sites available?

I think it's really a function of having fewer sites available. We're seeing people choose to stay with us longer, so they're staying with us on a seasonal basis and staying with us on an annual basis. So that's just having we have fewer available sites.

Got it. Thank you.

Thank you. Our next question comes from the line of Wesley Golladay with Baird. Your line is open.

Thank you and good morning everyone. I just noticed that the Thousand Trails membership dipped in the fourth quarter sequentially. Is this just a seasonality having to play here? And then what is your expectations for subscription income growth this year? It was around 5% in 2022.

I think year-to-date, I'd say our camp sales are down, I think they're about down 3%. Upgrades are down a little bit or down about 18%. The camp pass sales are really a decline from a heightened interest in 2021. The upgrade decline is really a result of a new product that we launched in 2021, where we typically see outsized demand in that time when we launched the product.

And our expectation for subscription revenue in '23 is right in line with our experience in '22.

Thank you.

Thank you. Our next question comes from the line of Anthony Hau with Truist. Your line is open.

Hey guys, thanks for taking my question. What is the mark-to-market on the image portfolio when a new tenant replaces an existing tenant? Is this still 10% to 11% after the recent rent increase?

Yes. That trend is holding.

And Anthony, if you look at the trend on a monthly basis. Certainly, as you look at it, roll it up for the quarter, I think in the fourth quarter of 2022, it was somewhere between 10.5% and 11.5%.

Okay. And so shifting gears to RV, like; there's a lot of articles about the Airbnb bust. I know this might not be true in your markets, but in some markets, occupancy for Airbnb is down like 8% to 9%. Just curious, what do you think the implication could be for RVs?

Yes. I think the demand is very strong for our RVs. Our locations are where people want to be, whether in the winter or in the summer. So, I think that I don't see a change to that. I do see that we have fewer available sites like I just mentioned. So that's going to have an impact, but we've been able to push rates on the transient side, and we continue to be able to do that. So, I think that shows the strength of the market.

Okay. And just one last question for me. So, you highlighted the quarter-over-quarter office sites for the core portfolio was down 130. I know this is not a material number, but I don't think I've seen this since ELS started reporting this metric. Can you provide some color on what you're seeing on the ground today?

Well, I think you're talking about the sequential quarter. The full year occupancy was essentially flat. I think we were down 15 sites for the year. In the quarter, there was some impact associated with the storm.

And that impact was a result of homes coming back to us, but also our inability to sell homes through the hurricane and during the hurricane.

Thank you. Our next question comes from the line of Joshua Dennerlein with Bank of America Securities. Your line is open.

Good morning everyone. I guess there were two same-store spend line items we didn't touch on, payrolls and real estate taxes. I guess I'm just curious what kind of trend you assumed in both of those for your guide. And then if you could remind us on the real estate taxes, like is that a projection at this point, like a best assumption? Or is that kind of totally unknown or known?

To answer your latter question, real estate taxes are primarily a projection. Our biggest exposure is in Florida. Florida and Texas are billed in the current year, with payments due in the same calendar year, but we won't know the expected increases until August or September. We anticipate a mid-single-digit increase for real estate taxes, which aligns with our historical trends. Regarding payroll, I would say our assumption is more in line with headline CPI for 2023.

Closer to headline CPI or core CPI? Or just...

Yes, headline CPI.

Okay. Great. And then just for your guide, the same-store revenue is lower than your same-store expense growth guidance. Just kind of curious how we should be thinking about that on a more go-forward basis? Is this kind of a one-off? Or should we kind of assume that same-store revenues can exceed expenses in a more normalized go-forward basis?

Yes. If you consider our long history, we have not encountered such significant volatility in the Consumer Price Index over the past 12 to 15 months. Historically, our revenue growth has been approximately 100 basis points above CPI and has been trending similarly. Looking ahead, as we find our footing, we want to identify areas where we can maintain or enhance our margins. There are opportunities through automation and technology implementation. However, we should not use 2023 as the benchmark for the future indefinitely.

And Josh, I want to remind you that we are in January and have good visibility into our revenue, which we discussed back in October. However, we have less clarity when it comes to expenses. This is how we establish our model for the year.

Thank you. Our next question comes from the line of John Pawlowski with Green Street. Your line is open.

My first question is on the trajectory of manufactured housing rent increases. And so, I think last quarter, you anticipated the first batch, the first 50% of MH rent increases to go out in the low to mid-6% range. Just curious, as the year unfolds, do you expect that growth to accelerate, be stable or come back down?

John, we have an assumption that is tied to a projection of CPI that anticipates that CPI moderates throughout the year. But one thing to keep in mind is that the notices that we send. The last notices that we send will have an impact in 2023 in the month of August. So, it's really looking at CPI from now through, call it, July. Our model tested down a bit to 5% from a starting assumption of 7%.

Okay. That's helpful. I apologize if I missed this. Can you let us know how seasonal bookings and actually the 1Q reservations are trending versus last year?

Yes, I would describe it as the guidance model we have developed based on our current reservation pacing for seasonal and transient bookings. I mentioned earlier that, similar to the trend we observed in 2022, there is strong demand for longer-term stays, with guests wanting to stay for a month or more. Based on the calculations provided on the guidance page, our combined rent growth for the first quarter and full year for seasonal and transient bookings is projected to be between 2% and 3%. This estimate reflects our current pacing. As for the transient business, as you know, it can be challenging to predict. Approximately 60% of those rentals are booked within 5 to 7 days of arrival, making it difficult to provide forward-looking estimates beyond the first quarter.

Okay. Last one for me on the financing markets. Paul, I'm just curious if you've seen secured financing terms or just the availability of debt change at all for really hurricane-prone properties along the waterfront?

It's a bit early to say there's been a change. We are not currently in the market. What I'm hearing is that there are more questions regarding spending additional time on underwriting, but I haven't noticed any signs of reduced capacity or interest from lenders.

Ok, thank you.

Our next question comes from the line of Michael Goldsmith with UBS. Your line is open.

Good morning. Thanks for taking my question. Your 2023 FFO guidance calls for a $0.10 range, which is consistent with the range you provided last year. So presumably, you have a similar level of insight into the year. I guess, I was wondering, what are the factors or the line items that you have maybe less or limited visibility in 2023 to accommodate this range?

Well, certainly, the transient RV business is the line item that has the greatest exposure to us. After that, I would point to our membership upgrades and just our home sale activity at the level of the properties. As we look at the economic landscape and we kind of think about projections for 2023 and talk of a potential recession, it harkens back a bit to 2008, and we certainly saw impact from the slowdown in the single-family home sales market on our business. Despite the fact that we continue to see very strong demand for our home sales in our properties today, I'd say that as an area, we have less visibility.

So, would you say you have less visibility into kind of like the top line than you do to the expense growth for the year?

Well, I think that, as I mentioned earlier, we have refined the way that we review our utility expense, which created a significant amount of exposure in the expense line item in 2022. So, I think that to ask whether we have greater visibility, I think that we have a model that looks to different sources of information, and based on the recent experience that we have had, and our testing of that model, we think we'll be more reliable than our method.

Got it. That's helpful. Are you seeing any change in bad debt? Was there a change in infrastructure in the fourth quarter? Are you expecting any change in 2023? Is that built into the guidance in any way?

So, our rent collection rates remain strong in the MH and RV properties. There were a reduction moratorium following the onset of the pandemic that did cause a slight increase in our delinquent MH rents. As those restrictions have begun to ease, we've been collecting past due rents from residents interested in resolving their debts. Our reserve policy takes a look at debt collectability. We've seen an increase in the gross receivables resulting from the delay in processing collections across the MH portfolio since the beginning of the pandemic. That pressure has started to ease in 2022. So, our bad debt expense moderated to be in line with historical levels. Our historical levels are about 40 to 50 basis points of base rent. So, I think that kind of return to historical normal is what I would otherwise expect in 2023, absent some legislative impact that extends moratoriums or challenges our ability to collect rent.

One last one for me is you've been acquiring land and you've been looking at expansion sites, which given the current backdrop, is this a good time to continue to push on that? And then how have expected yields on expansion sites changed? Is there any difference for '23 versus maybe in the past?

Yes. We acquired a significant amount of land during the pandemic and last year. We plan to keep doing this where it makes sense. Land adjacent to our properties is particularly valuable. While there have been general cost pressures on construction, we believe we are purchasing land at reasonable prices, and we will continue this strategy, which you will see in this year and in the future.

Thank you very much.

Thank you. We have a follow-up from the line of Joshua Dennerlein with Bank of America. Your line is open.

Yes, Paul, I wanted to clarify your statement that payroll should align with headline CPI for the 2023 guidance. Are you referring to the current CPI or how CPI is expected to trend over the next 12 months?

We took a look at current CPI.

Current. So, the latest print?

Yes.

Thank you. Ladies and gentlemen, this concludes the question-and-answer session at this time. I would now like to turn the call back over to Marguerite Nader for closing remarks.

Thank you very much for joining us on today's call. We look forward to seeing you at all the upcoming events. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.