Equity Lifestyle Properties Inc Q2 FY2023 Earnings Call

Good day, everyone and thank you all for joining us to discuss Equity LifeStyle Properties Second Quarter 2023 Results. Our features, speakers today are Marguerite Nader, our President and CEO; Paul Seavey, our Executive Vice President and CFO and Patrick Waite, our Executive Vice President and COO. In advance of today's call, management released earnings. Today's call will consist of opening remarks and a question-and-answer session with management relating to the company's earnings release. For those who would like to participate in the question-and-answer session, management asks that you limit yourself to 2 questions. So everyone who would like to participate has an ample opportunity. As a reminder, this call is being recorded. Certain matters discussed during this conference call may contain forward-looking statements in the meaning of the federal securities laws. Our forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement any statements that become untrue because of subsequent events. 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 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 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 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 continue to allow us to report impressive results. Our core NOI exceeded our guidance in the quarter with 3.5% growth year-over-year. 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%. Currently, less than 4% of our occupancy is comprised of rental homes. The high level of occupancy in our portfolio is sustainable 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.S. is approximately $500,000, while our homes 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 creates the continued demand for our properties. Prospective residents' interest in our community remains solid. We sold 226 new homes during the second quarter, 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. 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 1.8 million. 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' 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. Sam grew the company from 41 properties at our IPO with a market cap of $300 million in 1993 to 450 properties with a market cap of $16.5 billion 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 Hanahan was appointed as Chairman of our Board. Tom was most recently the 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.

Thank you, Marguerite, and 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 2023 and close with a discussion of our balance sheet. For the second quarter, we reported $0.66 normalized FFO per share. Core and noncore property operating income outperformed our expectations. Core MH rent increased 6.7% in the second quarter and 6.6% year-to-date compared to the same period last year. Rent growth in the second quarter 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 2/3 of total RV and marina based rental income increased 7.8% in the second 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%, 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 and year-to-date, respectively, compared to the prior year. Year-to-date, we've sold approximately 11,300 Thousand Trails Camping Pass memberships. This represents a 10% increase over pre-pandemic membership sales in the first half of 2019. Also during the year-to-date period, members purchased approximately 1,900 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 $1.3 million of revenue associated with sites leased to provide housing for displaced residents in the Fort Myers, Florida market. Core property operating expense growth was 7% in the second quarter and 7.2% year-to-date. The second quarter growth rate was 340 basis points lower than the midpoint of our guidance range. Our three main operating expense line items, utility, payroll, and repairs and maintenance expenses all showed moderation in second quarter year-over-year growth rates when compared to the first quarter growth rates. In the second quarter, property operating and maintenance expenses were approximately $3.7 million favorable to our guidance. Utility expense and property payroll on a combined basis represented more than 85% of this favorable variance. As we review 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, second 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 second quarter, two properties were moved to the noncore portfolio from the core portfolio. These California Thousand Trails properties which combined generated modest NOI in 2022 of a few hundred thousand dollars were impacted by storms and the flooding events earlier this year. Following the storms, we suspended operations, resulting in a determination to present them with our noncore portfolio. Income from property operations generated by our noncore portfolio was $9 million in the quarter and $14.9 million year-to-date. These results outperformed our expectations as a result of lower-than-expected utility and payroll expenses. Property management and corporate G&A expenses were $36 million for the second quarter of 2023, $67.1 million for the year-to-date period. The second 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 $7.9 million for the quarter and $14.5 million year-to-date. Interest and related loan cost amortization expense was $33.1 million for the quarter and $65.7 million for the year-to-date period. The press release provides an overview of third quarter and full year 2023 earnings guidance. As I provide some context for the information we've provided, keep in mind my remarks are intended to provide our current estimate of future results. All growth rates and revenue and expense projections represent midpoints in our guidance range and are qualified by the risk factors included in our press release and supplemental financial information. 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. 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. Full year normalized FFO per share at the midpoint represents an estimated 4.5% growth rate compared to 2022. We expect third quarter normalized FFO per share in the range of $0.68 to $0.74. 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 third 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% for our annual RV rents. Our guidance assumptions for the third and fourth quarters include MH occupancy gained in the second quarter with no assumed occupancy increase in the second half of the year. Our assumptions for expense growth reflect 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 that may occur. The midpoints of our guidance assumptions for combined seasonal and transient show a decline of 6.2% in the third quarter, a decline of 2.5% for the full year compared to the respective periods last year. Our guidance for the transit during the year. We also assume the debt capital transactions announced in our earnings release will close during the third quarter 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. Now some comments on our balance sheet. In our earnings release, we announced secured debt transactions that are expected to generate proceeds of approximately $464 million at a weighted average interest rate of 5.05%. The primary use of proceeds from these transactions includes repayment of our 2023 and 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 one of the GSEs and that included terms allowing incremental borrowings as property values increase over time. After closing these loans and repaying secured debt maturities, we will have addressed all debt scheduled to mature between now and 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. High-quality age-qualified MH will command 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 ratio is 5.2x and our interest coverage is 5.4x. The weighted average maturity of our outstanding secured debt is approximately 10.6 years. Now, we would like to open it up for questions.

So curious on 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?

Yes, Josh, I think there are a few things to highlight as we talk about expense growth experienced in the second quarter and our expectations for the full year. So first, I'll talk about utility expenses. As I mentioned, we experienced continued moderation in growth in electric rates during the quarter. So the average increase in rate was approximately 8% for the quarter and 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 in the transient footprint during the second quarter 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. 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.

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?

Yes. I think on the last call, Patrick talked a little bit about the fact we had three Thousand Trails properties that were impacted by storms in California. At the time, one of them had partial disruption to operations and the other two had suspended operations. During the second quarter as we assessed the condition of those properties, we determined that the time to return those two properties that had suspended operations to normal operations was going to be longer than expected. And so that it will extend into 2024. So we moved them to our noncore portfolio in the second quarter. As I mentioned in my remarks, that NOI contribution in 2022 from those two properties was modest. It was a few hundred thousand dollars. So they are Thousand Trails properties. So the dues revenue overall isn't impacted by the fact that the properties are off-line. It's any kind of ancillary or incremental revenue that is generated at those locations.

Our next question will come from the line of Brad Heffern from RBC.

On the expense guide, obviously, it moves 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?

Yes, Brad, as I was just walking through, I mean, we definitely have seen moderation 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 first quarter and then compared to the mid-teens last year. So they're definitely across the portfolio is a favorable impact associated with the utilities.

And that's, Brad, that's rate and then there's also a reduction in usage because there's less training than these guests.

Yes. Okay, perfect. Got it. And then, on the hurricane impact from last year, I saw you got another $4 million of 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 situation 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?

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, 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 the third quarter last year. So there was definitely an impact in 2022 and proceeds started to be received in '23. 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. And just with respect to the timing of those properties returning to operations. All but one are operating currently as we go through repairs and improvements to bring the properties fully back online. The one remaining property will come online in the third 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.

Our next question comes from the line of John Kim from BMO.

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 asked this because when you look at the number of transient sites you have on Page 12 of your supplement, it's kind of bounced around the last few quarters but it has averaged 14,900 which is what you had in the second quarter. So it seems like it's more of a demand issue than a site issue but just wanted to get your comments on that.

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.

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, I think of it relatively evenly split across each one of those categories. The longer-term states 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 melts, coupled with rainfall that led to road closures around the park and around our property in April and June. So that had kind of an outsized impact. I think Paul also mentioned, Pennsylvania, we had a very cool start to the summer camping season and that was headwind. And last is that point that you're talking about is just a normalization of demand. And we see that coming through kind of 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 where 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.

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 night basis.

And John, regarding the sites, the presentation in the supplemental shows both total and core growth rates, which are different. We experience a quarterly change due to the expansion sites added to our portfolio. For example, in the past quarter, we had around 100 fewer sites from the first to the second quarter, but approximately 400 sites transitioned to annual, and we added over 200 expansion sites, resulting in that 100-site difference.

And can you remind us of how you define transient versus seasonal like what's the number of days that you just pay for it to be considered a seasonal side?

Longer than 30.

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 to.

That's correct, John.

And our next question will come from the line of Eric Wolfe from Citi.

It seems like most are predicting that the comp and living adjustment for social security will be around 3% this year. Can you just give us 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 is the talk of living adjusted is closer to 3%?

Yes. It really varies based on each property. In our manufactured housing portfolio, approximately 70% of our properties cater to age-qualified residents. These residents are particularly concerned about increases in social security. Currently, the average social security benefit for an individual is about $1,700 and around $2,700 for couples in our communities. In recent years, there have been significant social security increases aligned with the Consumer Price Index. Current projections suggest a 3% increase, translating to roughly $51 to $80 more per month for our residents. For context, our average rent across the portfolio is $800, with average rent increases over the last decade being about $26. These factors are crucial in our discussions with residents. Historically, our adjustments have outpaced the cost-of-living adjustments, and I expect that trend to continue. However, it really depends on each individual property, starting now and moving into the fall.

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

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

I believe that historically that has been the case. It's important to note, Eric, that there was a time when the colo adjustment was at zero, and we were still managing to achieve rent increases in the range of approximately four percent. Overall, I think my rate is around 150 basis points.

Paul, Nick here with Eric. Just a 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 the property versus keep it in that pool?

Yes, it's an interesting question to ask this quarter because we had an example of a property that was partially disrupted and two properties that had suspended operations. Our practice, which we established years ago after Hurricane Irma, is to move those properties when operations are completely suspended. As we consider the circumstances of these locations, we also think about how long operations will be disrupted. Since the disruptions will extend into the next calendar year, that aligns with our criteria for moving the property to noncore.

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

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

So the annual RV and Marina growth rate of 8.3%, 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?

I don't have that information readily available, James. The marina rate is essentially in line with our last guidance, which indicates an increase of about 4.5%. The slight variability originates from the RV and the Marina, which accounts for approximately 10% of that total rent.

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 like 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?

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.

In the annual business, as Mary 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. 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 of July weekend, we were up double digits with respect to launches year-over-year. So our customers have been sticky, occupancy is stable, and usage has been high.

Okay, great. Very helpful. In the quarter, you didn't have any acquisitions or sales activity. Is that because you didn't find anything ready to move forward on either the selling side or the buying side? Or are you questioning whether it's the right time to invest or sell due to price discovery?

Yes, Jamie, I would say that deal flow is down across the industry. As usual, we're looking at all deals, but we really haven't encountered many that are interesting right now. The owners of MH and RV are not distressed sellers; they have the flexibility to take more time with a potential sale or remove an asset from the market entirely. That's been evident over the past few months. I believe it will take a few more months for acquisition activity to pick up again, but we remain fully engaged with potential sellers and will announce deals as they are finalized.

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

Yes, we definitely have good visibility. I mean 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.

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

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, it was the first year that we've had the full return of capacity of things of cruise lines and international travel. Do you think 2023 is a 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?

I believe that is why we're referencing 2019. The years 2019 and 2018 were what we would classify as normal demand years, and we are seeing an increase from a night perspective compared to those years. So, I think there is some degree of normalization occurring, but also, as Patrick mentioned regarding the weather-related issues, the conversion to annual demand is definitely a contributing factor.

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

I would say there was a moderate strengthening. We finished 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%.

Our next question will come from the line of Samir Khanal from Evercore.

Good morning, everyone. Paul, I've been reviewing your membership data, and on Page 13, I see that your member count was around 115,000 before COVID, and it's now just over 116,000. There was a notable increase during COVID, reaching about 125,000 to 128,000. I know there have been numerous questions about normalization, but where do you anticipate settling back to? Do you think you'll return to that pre-COVID number of 115,000, or do you have a different expectation for normalization?

Yes. We have noticed a decline in the total member count since the beginning of the year. This decline can primarily be attributed to fewer free RV dealer activations and reduced transient activity at properties, which typically drive a significant portion of those sales. RV dealer activations have decreased by about 11% compared to last year, which aligns with the drop in RV sales by dealerships. Together, these factors account for the 1,500 reduction in members. However, the strength in our DUS revenue comes from an increased rate of new members purchasing higher-priced products that contribute to a larger dues base.

I'm sorry if this was asked before, but occupancy in the quarter was down sequentially, which is something we don't usually see. Perhaps you could comment on that.

Yes, it's Patrick. I've discussed this in previous earnings calls. As we've navigated the aftermath of Ian, we've experienced some challenges in Florida, but those issues are easing. I anticipate that over the next couple of quarters, Florida will contribute more significantly. We have also observed some normalization, which is reflected in our new home sales volumes. A couple of factors affecting these new home sales trends include filling up some expansions that are now fully operational, which has stopped contributing to growth, and a similar pattern in demand as seen in the RV side of the business. We sold 226 new homes this quarter, whereas from a pre-COVID standpoint, we would have considered 150 to 175 new home sales in a quarter to be strong. Thus, that number is normalizing when compared year-over-year, where we had nearly 360 sales in the quarter.

Our next question will come from the line of Keegan Carl from Wolfe Research.

So 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 that can come up. But if 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 trended on a revenue growth basis, if you kind of exclude the excess level of cancellations?

Yes, Keegan, I believe the booking window is a crucial point to discuss, particularly during this period, the second quarter, as we approach the busy summer season. When we analyze reservations made within 30 days of arrival, the average time from booking to arrival is 8 to 9 days. This segment accounted for around 55% to 60% of our total reservations at the end of the third quarter in recent years, showing a similar trend in the second quarter. Excluding 2020, if we look back to pre-pandemic 2019 and compare it to 2021 and 2022, the pattern remains consistent with reservations being made 8 to 9 days in advance, representing 55% to 60% of bookings. Moreover, focusing on reservations made just 7 days before arrival, those typically have an average booking-to-arrival time of 2 days and account for one-third of our total reservations. This indicates a significant number of guests are deciding to visit our properties merely a few days before their arrival. Additionally, we have mentioned previously how many guests live close to our locations, often within 60 to 90 miles, making it convenient for them to choose to visit us.

Okay. No, that's helpful. But I guess 1 like for example, like the semi part, you imagine people are booking more than 2 days out for that, right? And did you experience any cancellations in some of your bigger assets where there is probably demand further out?

Well, certainly, I mean, as Patrick talked about the road closures and so forth specific to 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 rather issue that would cause them to cancel.

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

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

Our new insurance policy has been in effect for the last four months. We are still observing a challenging insurance market due to industry losses, inflation, and increasing interest rates. There hasn’t been any noticeable change. The claims history for this year will play a significant role in determining what happens next year. We will update you as we approach the end of the year regarding how we plan to adjust our insurance.

Our next question will come from the line of Wesley Golladay from Baird.

Got one more seasonal transient RV question for you. It looks like you're forecasting another soft patch here in 3Q but then reflected in 4Q. Are you seeing anything in your bookings to give you the confidence in the 4Q guide and anything intra-quarter any acceleration going on?

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

Okay. If I revisit the question about the MH rate, you mentioned that it would be 150 basis points over colo. Would this mainly be driven by the alpha of those 150 basis points, specifically relating to the 13% new lease growth you referenced? Or is the 150 basis points strictly connected to renewals, particularly considering a 450 basis point renewal growth?

That's mainly tied to the renewal that increase that I mentioned in my comments has been something that we've seen over the last few years. It's not really consistent with what we've seen across our portfolio over the last 30 years. So my commentary relative to the 150, 200 basis points is on the renewals.

Got it. And then can you remind us again what the turnover typically is it about 10%?

It's 10%, yes.

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

Patrick, are you also seeing kind of a step backward in leading demand indicators for the seasonal RV business that you're seeing in the transient side?

I guess I emphasize a little bit of what Paul just said with respect to the visibility that we have into the fourth quarter and the seasonal business really comes through during the winter season and 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.

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 for the next few years. Is that how you guys are thinking through the business that you guys underwrite transient RV acquisitions, it's kind of a slow bleed towards '18 and '19 levels?

As we evaluate acquisitions, we certainly take into account local market conditions. Regarding our portfolio, it's largely influenced by annual conversions and unpredictable weather events, which we can only assess in hindsight. We've always mentioned, and I believe John, we've discussed this, that there is volatility in the transient revenue line item. Paul has explained the booking window, and you really can't determine whether a quarter will be strong or not until you're close to it. This is why we have concentrated on building our annual and seasonal bases, which provide a much more reliable cash flow.

Okay. Last question for me. Patrick, I’m wondering where you think you can operate the MH occupancy portfolio. Where do you think you can get MH occupancy to, and when, considering the affordability gap that you mentioned in your opening remarks, the lack of new supply, demographics, and everything on paper suggesting occupancy should be closer to 100% rather than 95%. What do you believe is the peak occupancy for this portfolio, and when can you achieve that?

I agree with you that there is an opportunity to increase occupancy in the manufactured housing portfolio as we navigate through the normalization process and address some of the challenges from the last hurricane. We expect to overcome these issues as we progress through the second half of this year and into 2024. We consistently observe strong demand, as we have noted with a 13% mark-to-market, which is notably high compared to our historical performance. This indicates robust demand, supported by the increases in our core occupancy. Since about half of our properties are 95% occupied or less, there is potential to raise those occupancy rates. Additionally, we have a substantial number of properties that are fully occupied, indicating further opportunities for growth. It's important to mention that the percentage figures might be somewhat misleading, as we are developing more manufactured housing, and our pipeline from 2023 into 2024 will contribute several hundred sites to our overall count in key markets, including coastal Florida.

I believe that once we achieve occupancy levels of 98% to 100%, they can be maintained for a long time. We have properties that have remained fully occupied for 25 years. This sustainability is largely due to the long-term commitment customers make when selecting a community and the homes they choose to purchase. Therefore, I think it's advantageous that once we reach those occupancy levels, they can persist for an extended period.

Our next question will come from the line of Michael Goldsmith from UBS.

Your same-store revenue guidance kind of has bounced around a little bit, going from 6.2% to start the year or 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 just more difficult to forecast or more volatile how can help you look to it a little bit more consistent overall?

I think you were breaking up, but I believe we understood you. Paul?

I believe you're inquiring about revenue consistency, Michael. This relates to the transient issue we’ve been discussing throughout the call. There's been significant consistency in the MH and annual revenue streams for the RV sector. Our focus has been on the transient impact and how various weather events in 2023 have influenced this, along with the shift from shorter-term stays to longer-term based on customer demand.

Got it. And then just as a follow-up, July 4, the Friday of July 4 shifted into the second quarter. 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 third quarter? And just if you can help us quantify how big the 4th of July weekend typically is as a percentage of the whole quarter, that would be helpful.

Yes, historically, we've mentioned that large holiday weekends bring in around $2 million for us. The 4th of July is a bit more complex than Memorial Day and Labor Day due to the date being variable, which can place it in the middle of the week instead of on a weekend. Nonetheless, I would use those figures as a general reference for the holiday weekend. Additionally, our guidance for the third quarter takes into account our experience from the 4th of July and our expected reservation trends for the third quarter based on the current reservation pace.

And our next question will come from the line of Eric Wolfe from Citi.

I realize the call is taking longer than expected, and I apologize for asking another question about seasonal transience. I'm trying to understand the numbers for the latter half of the year. You are guiding for a full year decrease of around 2.5%, having been down 3.2% in the first half, which suggests a decline of about 2% for the second half. In the second quarter, you experienced a combined decrease of 9.3%. I'm curious about what improvements you expect in the third and fourth quarters compared to the second quarter to achieve that. Will the transience be better, or will the seasonal factors contribute more? I'm just trying to grasp how you'll reach that 2% decline in the second half of the year.

Sure. I mean, you can see what we have forecast for the third quarter. I think that when you think about the transient for the fourth quarter, 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 fourth quarter.

And the visibility that we have is primarily based on the dynamics of the whole industry.

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

Thank you for participating today. We look forward to joining you in joining us on our third quarter call. Thanks very much.

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