Equity Lifestyle Properties Inc Q2 FY2024 Earnings Call

Good day, everyone, and thank you for joining us to discuss Equity LifeStyle Properties Second Quarter 2024 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 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 our supplement and 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'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 2024. Our performance exceeded our expectations. For the first six months of 2024, we have seen an increase in NOI of 6.4% compared to last year. We focus on translating NOI growth to normalized FFO growth. Our normalized FFO growth year-to-date is 5.9%, driven by continued strength in our annual revenue and reduced expenses throughout our portfolio. The strength of our portfolio results and our balance sheet allow us to increase full-year guidance for the second time this year. We have raised full-year guidance for normalized FFO to $2.91 at the midpoint. The demographics of the U.S. population support the demand for our MH and RV portfolio, with 70% of our MH portfolio catering to seniors and the strong interest in RV travel among older adults. Approximately 70 million baby boomers are currently enjoying their retirement years, followed by nearly 140 million Gen X-ers and millennials. We see long-term generational demand for all of our property offerings. Our MH portfolio, which comprises 60% of our overall revenue, is approximately 95% occupied. Over the last 10 years, we have sold over 5,500 new homes in our communities. These new homes contribute to the quality of housing stock in the community. Currently, less than 3% 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. 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 7% for the full year 2024. Since 2018, our total core RV revenue has had an annual growth rate of 5.6%. We have seen significant shifts in customer behavior as we increased the number of annuals in our core portfolio by approximately 3,000 sites. This increased stable customer base will be an important part of our future performance. We are proud to share that 50 of our RV resorts and campgrounds have received the recently announced 2024 Tripadvisor Travelers' Choice Award. Each year, this award is given to approximately 10% of the businesses listed on Tripadvisor. Our property teams provide guests with positive experiences when they stay with us, and referrals from our guests are a top source of new customers. We continue to engage our guests, members and prospects through our social media strategy. We have grown our fan and follower base to over 2 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 between Memorial Day and Labor Day. I want to express my gratitude for our employees for their exceptional contributions this quarter. Their hard work in serving our customers is the key reason behind our ongoing success. I will now turn the call over to Patrick to provide further details on our financial performance.

Thanks, Marguerite. The consistency of our results over time comes from our strong property locations and the value that each of our residents and guests finds at their own property. Value is top of mind for consumers across the country, including homebuyers and vacationers. Our offerings are attractive in any economy, and we are particularly well-positioned to serve customers who are looking for value in a challenging economic environment. Our MH portfolio maintains high occupancy and provides consistent revenue growth. We sold 255 new homes during the second quarter, an increase of 13% year-over-year. Since 2018, the CAGR for total MH revenue is 5.6%. These results are driven by consistent rate growth through economic cycles, coupled with an opportunity for occupancy growth. This long-term demand is supported by the value residents find in our communities, high-quality homes that compare favorably to alternatives in our submarkets and an active lifestyle that is not available elsewhere at the price point offered at ELS communities. Today's homebuyers are increasingly focused on value and affordability, given increases in housing costs and higher interest rates. Manufactured housing offers a value advantage compared to site-built homes. The average cost of purchasing an ELS new home is approximately $100,000 compared to the $500,000 average cost of purchasing a new site-built home. That value holds true for renters in our portfolio as well. Those who rent a new ELS home pay $1,400, or approximately 35% less than the average three-bedroom apartment in the same submarkets. Manufactured home communities offer value in any economy, but in today's housing market, marked by constrained supply and facing price pressures and increased interest rates, ELS-manufactured home communities present exceptional value. The monthly payments for homebuyers in ELS communities are approximately 70% less than for buyers of single-family homes in the same submarkets. Homeowners in ELS communities enjoy comparable fixtures and finishes as site-built homeowners, as well as a resort lifestyle in a community setting, and often lower maintenance costs, which are another appealing factor for buyers facing higher living expenses. The combination of home affordability, inventory availability, and the resort lifestyle found in our communities makes our offerings very attractive to homebuyers in today's housing markets. For the RV portfolio, we are in the middle of the 2024 summer season with two of the big three holiday weekends behind us. Transient RV revenue is less than 5.5% of our total revenue and is prone to volatility, largely driven by weather events. Similar to our other RV offerings, transient stays offer real value to our guests. Our average rolling stock nightly rate is $70. Our average rental cabin rate is $140 compared to average hotel nightly rates of $160. Vacationers are looking for value and affordability when considering their travel options. Our RV resorts offer budget-friendly vacations in premier destinations that align with consumers' focus on value this summer, including our longer-term stays. Our average annual site rent is approximately $6,000, while a seasonal site that's typically a four-month stay for a customer who brings their RV is about $1,100 a month. The combination of exceptional property locations and a variety of offerings for customers to choose from translates to consistent year-over-year revenue growth. I'll do a quick around the horn to highlight our RV performance. As Marguerite mentioned, since 2018, total RV revenue produced a CAGR of 5.6%. That growth is supported by our strong property locations concentrated in the Sunbelt and along the coast. Florida is our largest market, and given leading in-migration trends and a strong economy, it also leads our portfolio with a 2018 RV revenue CAGR of 6.6%. The West region, which includes our next two largest markets, California and Arizona, produced a 2018 RV revenue CAGR of 5.1%, while our North region, ranging from the Great Lakes to the Eastern coastline, produced a 2018 CAGR of 5.3%. The revenue growth CAGRs for both our MH and RV portfolios are approaching 6%. Those results come from consistently meeting resident and customer demand. In today's environment, consumers are seeking value, and we continue to provide high-quality lifestyle offerings at an attractive price. I'll now turn it over to Paul.

Thanks, Patrick, and good morning, everyone. I will highlight some takeaways from our second quarter and June year-to-date results, review our guidance assumptions for the third quarter and full year 2024, and close with a discussion of our balance sheet. Second-quarter normalized FFO was $0.66 per share, $0.02 higher than the midpoint of our guidance range. Strong portfolio performance generated 5.5% NOI growth in the quarter, almost 100 basis points higher than guidance. FFO was $0.69 per share and includes $6.2 million of insurance recovery revenue that has been deducted from normalized FFO. Core community-based rental income increased 6.2% for the quarter compared to 2023, primarily as a result of noticed increases to renewing residents and market rent paid by new residents after resident turnover. We increased homeowners by 171 sites in the quarter. Core RV and Marina annual base rental income, which represents approximately two-thirds of total RV and Marina base rental income, increased 6.6% in the quarter and 7.3% year-to-date compared to the prior year. Year-to-date in the core portfolio, seasonal rent decreased 2.4% and transient decreased 2.7%. We continue to see offsetting reductions in variable expenses. For the June year-to-date period, the net contribution from our membership business was $29.2 million, an increase of 1.7% compared to the prior year. Membership dues revenue increased 1.3% and 2% for the second quarter and June year-to-date, respectively, compared to the prior year. Year-to-date, we've sold approximately 10,500 Trails Camping Pass memberships. Also during the year-to-date period, members purchased approximately 1,800 upgrades at an average price of approximately $9,200. Core utility and other income increased 6.1% for the June year-to-date period compared to the prior year, which includes pass-through recovery of real estate tax increases from 2023. Our utility income recovery percentage was 46.4% year-to-date in 2024, about 100 basis points higher than the same period in 2023. Second quarter core operating expenses increased 3.4% compared to the same period in 2023. Expense growth was 200 basis points lower than guidance, mainly resulting from savings in payroll and repairs and maintenance expenses. June year-to-date expense growth was 3.7% and includes the impact of real estate tax increases effective in late 2023, as well as our April 1, 2024 property and casualty insurance renewal. For the second quarter, core property operating revenues increased 4.6%, while core property operating expenses increased 3.4%, resulting in growth in core NOI before property management of 5.5%. For the year-to-date period, core NOI before property management increased 6.4%. Income from property operations generated by our non-core portfolio was $3.3 million in the quarter and $8.5 million year-to-date. The press release and supplemental package provide an overview of 2024 third 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. We've increased our full-year 2024 normalized FFO guidance by $0.02 per share to $2.91 per share at the midpoint of our range of $2.86 to $2.96 per share. Full-year normalized FFO per share at the midpoint represents an estimated 5.7% growth rate compared to 2023. We expect third quarter normalized FFO per share in the range of $0.69 to $0.75. We project full-year core property operating income growth of 5.9% at the midpoint of our range of 5.4% to 6.4%. Full year guidance assumes core base rent growth in the ranges of 5.6% to 6.6% for MH and 3.3% to 4.3% for RV and Marina. The midpoints of our guidance assumptions for combined seasonal and transient show a decline of 4.5% in the third quarter and a decline of 2.5% for the full year compared to the respective periods last year. Core property operating expenses are projected to increase 3.3% to 4.3%. Our full-year expense growth assumption includes the benefit of savings in repairs and maintenance and payroll expense during the first six months of 2024, as well as the impact of our April 1 insurance renewal for 2024. As a reminder, we make no assumption for the impact of a material storm event that may occur. The full-year guidance model makes no assumptions regarding the use of free cash flow we expect to generate in 2024. Our third quarter guidance assumes core property operating income growth is projected to be 4.5% at the midpoint of our guidance range. In our core portfolio, property operating revenues are projected to increase 4.4% and expenses are projected to increase 4.4%, both at the midpoint of the guidance range. I'll now provide some comments on our balance sheet and the financing market. As noted in the earnings release and supplemental package, we closed on a modification of our $500 million unsecured line of credit that extends the maturity to July 2028 and provides a one-year extension option related to our $300 million unsecured term loan. We're pleased with this execution as the modification closed with no material modification of terms and the bank group remains substantially the same. Current secured debt terms vary depending on many factors including lender, borrower, sponsor, and asset type and quality. Current 10-year loans are quoted between 5.5% and 6%, 60% to 75% loan-to-value, and 1.4 to 1.6 times debt service coverage. We continue to see solid interest from life companies and GSEs to lend for 10-year terms. High-quality age-qualified MH assets continue to command the best financing terms. In terms of our liquidity position, we have approximately $450 million available on our line of credit, and our ATM program has $500 million of capacity. Our weighted average secured debt maturity is almost 10 years. Our debt-to-adjusted EBITDA is 5.1 times, and interest coverage is 5.1 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.

And our first question comes from Josh Dennerlein from BofA. Please go ahead with your question.

Yes, hi, guys. Saw seasonal revenue was weak during the quarter. Could you remind us how you define the seasonal customer, and then just any additional detail you could provide?

Yes, Josh, a seasonal customer is a customer who stays with us longer than a month and shorter than six months.

Okay. Is there just...

And then go ahead, sorry.

I was going to ask, is that RV and Marina or just apply to RV, just...

Well, it would apply to both, but the practical answer is that the Marina customers we have are annual customers, predominantly, with some very limited shorter-term day use.

Okay. Sorry, I cut you off.

No, no.

Okay. And then on the RV and Marina revenue outlook, I saw you lowered the annual, looks like, 10 bps at the midpoint. Any particular color on that? Like what drove kind of the revision there? And then any kind of differences between the RV and then the Marina side?

I think, I mean, I'll go back to a comment I made on the April call. 2024 is a little bit tricky just because of leap year and the impact of that. So we have this one day issue that impacted the first quarter, and then it impacts the second, third, and fourth quarters in the opposite direction. So I think that's the slight 10-basis point movement is really mostly attributed to refining that as we're moving through the year. And then with respect to the RV and Marina and any differential there, not a meaningful difference. I think that the RV rate and the Marina rates are relatively close, with RV maybe being 50 basis points higher than the Marina rate increases.

Okay. Appreciate that. Thank you.

Thanks, Josh.

Thanks, Josh.

Thank you. And our next question comes from the line of Eric Wolfe from Citi. Your question, please.

Hi, thanks. Maybe to follow up on that annual RV, you're guiding to 7% revenue growth. I think I remember last year, you mentioned that you're going to be increasing rates 7% for the annual RV. Is there like an offset to the conversion impact, because I would think that with conversions from transient to annual, you'd see above 7% revenue growth there, but didn't know if there was some kind of offset?

Some kind of offset?

In other words, if you're increasing rate by 7%, right, that alone would get you to 7% revenue growth. And then if you're also converting customers from transient to annual, that would increase it above 7%. So I guess, I'm just trying to understand how you sort of get to 7% revenue growth with the 7% rate increase plus the incremental impact from converting customers from transient to annual.

There was also some offset for some of the workers who were with us on an annual basis but are no longer here due to hurricane cleanup and similar reasons. So, we observed some reduction in annual count that balances out that rate increase.

Okay. Got it. Makes sense. And then as far as the transient performance, you've talked in the past about how weather is the main determinant. If you strip out the locations that had bad weather, either this quarter or this year or however you want to define it, just curious how much you see the transient business growing. I'm trying to think through how things would look different if you had maybe two consecutive years of consistent weather, or if there's some way to estimate the impact that weather is having on your transient business.

I think what we see is that probably 10 to 15 of our properties are impacted by the weather and then the resulting issues that you see as a drag to the transient base. In the areas where you don't have that weather impact, we've seen an increase in transient revenue.

Is there a way to quantify what that impact is? Is it just related to pricing, like it's up 3% or 5%? I'm trying to understand how much the weather might be affecting that growth rate, if possible.

Yes. I would say it's about 3% overall on those that are not impacted by the weather. And then, if you're impacted by the weather, it's not a rate issue, it's a night issue. People just aren't staying with us on those nights.

Okay. Thank you.

Thanks, Eric.

Thank you. And our next question comes from the line of Brad Heffern from RBC. Your question, please.

Yes, hi, everybody. Can you give more color around the lower operating expense guidance? I think you said in the prepared comments, payroll and R&M savings. But how much of that overall is just an adjustment to lower RV expectations and then how much of it is true savings?

Yes. I think when I think about the full year, Brad, if you just look at the expense growth assumption, so we're 3.8% at the midpoint of our range. Utility, payroll and R&M overall, that's roughly two-thirds of our expenses, and those are increasing almost 2%. Now that's about 100 basis points lower than the July CPI print. And I'll say that, that mainly results from a favorable year-over-year comp that we have in R&M. So in 2023, we had some smaller-scale, I'll call them, storm events throughout the first six months of the year. And so we have that favorable impact. And then the remaining one-third of our expenses include real estate taxes and insurance. And those are going up over 7%. So that's kind of how we think of it. Inside that mix is the impact of the transient business as well, to your point.

Okay. Got it. Thanks. And then it looks like the expectation right now for the cost of living adjustment in '25 is in the mid-2% range. Is there any reason to think that MH rent growth, the differential of that to the COLA adjustment would be higher or lower than normal? There's obviously a lag when it was moving higher. So I'm curious if there's also a lag when it moves down as well.

I think if you looked at our latest investor presentation that we put out a couple of months ago, I think it's on Page 23, it highlights the outperformance of that annual rate increases compared to COLA adjustments over the long term. So if you go back to 2000, you see an average spread of about 140 basis points. Our focus is really on negotiating those annual rent increases with our residents, which include an open dialogue and feedback from the residents. And we'll be able to give you an update on that later on in the year.

And I would also remind you, Brad, that we have had the benefit in recent years of the increases to new residents who are coming in to market. And year-to-date, in 2024, that increase has been about 14%.

Okay. Thank you.

Thanks, Brad.

Thank you. And our next question comes from the line of Keegan Carl from Wolfe Research. Your question, please.

Yes, thanks for the time, guys. Maybe first, a two-part question here. I guess one, what's your view on home sales for the balance of the year? And then how do you envision that impacting your rental homes portion of your business as it's ticked down on a year-over-year basis?

For you, Patrick.

Yes. The trend we've observed regarding rental homes shows that we are currently below 3% of our total occupied sites. This figure may continue to decrease slightly, and we will manage that overall load accordingly. Just to remind everyone, this is down from a high of about 9% following the global financial crisis, and we have worked to reduce it to ensure that we can respond to any disturbances in the broader housing market if rental becomes more of a priority than home sales. Regarding home sales, we achieved 225 sales in the quarter, which represents a 13% increase year-over-year. We are still witnessing consistent demand, although there has been some moderation at the higher price points. The demand for manufactured homes in our communities remains strong. As a reference, prior to COVID, selling around 500 to 600 new homes in a year would have been seen as a good outcome, so if we can maintain around 200 new home sales each quarter, we view that as favorable.

Got it. Then, shifting gears, maybe just a more general question, but just curious to see what you guys are seeing in the transaction market, and if there's any movement at all on cap rates?

Sure. The transaction market, as you know, has slowed down significantly over the last few years. There are still a lot of buyers that are interested in the assets. Buyers' cap rate expectations have increased, but sellers really have been slow to adjust. Transaction volume is very low for institutional quality assets. These assets continue to command really strong cap rates, but there's a lack of product for sale. We're seeing smaller deals that really don't fit into our acquisition set trading, often with seller financing.

Super-helpful. Thanks for the time, guys.

Thank you.

Thank you. And our next question comes from the line of Samir Khanal from Evercore. Your question, please.

Hi, good morning.

Hello.

Hi, Marguerite, I just wanted to ask a follow-up here. I think you said weather hurt transient growth by 3%. So I just want to make sure when you're down roughly 5% in the quarter, that would mean you were down 2% ex-weather. Is that kind of the right way to think about it?

No, what I was saying that ex-weather, for the ones that had a good weather event, you'd be up about 3%.

Okay. Got it. Sorry about that. And then just in terms of the acquisition, as a follow-up, I know you said there isn't much out there in terms of acquisitions, but how should we think about your opportunity set? I mean, you haven't been active during the first half of the year. Trying to understand kind of what the opportunity set you're seeing right now...

Yes, sure. We have established ourselves over the years to achieve internal growth through operations and expansion, increasing from 41 properties 30 years ago to 450 properties now. The acquisition market has not always been favorable for us to make transactions, which is why we are focused on maintaining a strong balance sheet to be ready for interesting acquisition opportunities when they arise. We are still engaging with sellers who are undecided about the timing of their sales, and our acquisition team regularly meets with property owners. We have a clear idea of the properties we want to acquire, and we will discuss any transactions once they are finalized.

Okay. Thank you.

Thank you, Samir.

Thank you. And our next question comes from the line of Jamie Feldman from Wells Fargo. Your question, please.

Great. Thanks for taking my question. So, on the...

Good morning.

Good morning. Regarding the seasonal and transient segment, the current guidance suggests improved growth compared to the third quarter. I understand that this is largely influenced by the mix of seasonal and transient factors. Could you elaborate on the seasonal and transient fundamentals in the Northeast and Pacific Northwest compared to those in Florida and Arizona?

Sure, I can address that. As you mentioned, the seasonal aspect is mainly influenced by our Florida properties, which are significant in the first and fourth quarters. In the Northern markets, we are currently in the middle of the season, but the scale is much smaller, with results primarily aligned with the overall annual performance. When focusing on seasonal versus transient, the transient business in those submarkets plays a major role. This year, we have observed a normalization in demand across those markets, which I've mentioned in previous calls. However, as Marguerite pointed out, although we face some weather-related challenges this summer, we continue to see strong customer demand for our properties.

Thank you for that. I’d like to revisit the transient action market. It’s quite an interesting phase in the cycle with expectations for lower rates, and we’ll have to see how the election influences those rates. Could you discuss what typical sellers are currently in the market? What might motivate them to make a transaction? Or is there really a lack of activity regardless of the rate situation, because these assets are difficult to acquire and many generational owners prefer to hold onto them? Do you believe that if rates significantly decrease, this could be the opportunity for those who have been waiting on the sidelines?

Right. Certainly, I think that could be an indication that some sellers are interested in transacting. What we've long talked about is the majority of the transactions that we've seen over time are a result of a life event of an owner. There is either a retirement or a desire for the family, maybe, to sell in light of the patriarch or matriarch passing away. And so we've seen that happen. So the key for us is to just keep engaged with these owners that were interested in the assets that we're interested in owning. So no real change to that. I mean, the thing you mentioned rates. Many of these assets that we are interested in do not have any financing on them. They're free of debt. So that isn't a driver for the owner to have to refinance or anything like that. There is really no distress in these assets at all.

Okay. If I could just ask, like how many assets are you really tracking in each property type?

Well, when you say tracking, I mean, we have a target list that's been roughly the same target list for the last 30 years because there has been really no new supply in the marketplace. So we have a target list that we focus on assets that we'd like to own, and then, of course, we have a smaller subset of opportunities that we're looking at right now and that our teams engage with.

Okay. But in terms of, like, account or dollar amount?

We don't provide details about the smaller subset. The broader picture consists of over 1,000 opportunities that we are focused on.

Okay. All right. Thank you.

Thank you, Jamie.

Thank you. And our next question comes from the line of Wes Golladay from Baird. Your question, please.

Hi, everyone. Can you comment on annual RV retention if you strip out the change in the hurricane cleanup people?

Yes. I mean, our long-term turnover is very similar to the MH portfolio. So customers are staying with us 10 years. So it's roughly a 10% turnover number.

Okay. And then on the seasonal and transient, you mentioned the night issue. Is that just fewer guests showing up or they're just staying fewer days? And have you seen any impact to supply on the RV side?

I will address the second part of your question first. In some markets, new communities have emerged, and there has been some effect, but it's limited to just a few locations in the portfolio. Therefore, the supply issue does not have a broad impact on the overall portfolio; it may only affect specific areas. Regarding the transient stays, we have noticed a decrease in the duration of these stays as we move further away from the end of the pandemic and as people's flexibility has changed.

And if you had to guess or estimate, do you think that we have fully absorbed the benefits from the work-from-home pandemic period at this point?

It seems like we're depleting the last of it this summer season.

Okay. Thanks for the time, everyone.

Thank you.

Thank you.

Thank you. And our next question comes from the line of Michael Goldsmith from UBS. Your question, please.

Good morning. Thanks a lot for taking my questions. We've talked a little bit about the weather, but I was wondering if you've seen any incremental price sensitivity from your customer on the annual RV membership or transient RV business. I think you called out the average rental cabin rate is $140 compared to the average hotel nightly rate of $160. Is that gap consistent of where it's been over time? I'm just trying to get a sense of the price sensitivity of the customer right now.

Yes, Michael, it's Patrick. First, I want to mention that we have observed opportunities in rates with both our transient and seasonal customers, while our annual business has remained consistent and predictable, similar to our motorhome business. I would highlight the stability and strength in rates across all three business lines. To touch on some elements contributing to total RV revenue, I noted the compound annual growth rates earlier, which have been very stable when considering the combined business lines over the long term. In the second quarter, particularly for seasonal and transient, we experienced cooler and wetter weather in key markets, especially in the North and Northeast, as well as California, right at the start of our summer season. For seasonal business, instead of typically benefiting from a cold winter in the North, we had a relatively mild winter. This impacted our expected seasonal customer increase at the beginning of the second quarter, as we did not see the usual surge from people wanting to stay in the Sunbelt. Additionally, as Marguerite pointed out, there has been a transition regarding hurricane workers, including construction and traveling nurses, as we move further away from the peak activity period, though we will still have that in the comparison period.

Got it. And as a follow-up, how much of the same-store expense guidance adjustment lower was due to savings associated to lower transient RV usage? I'm just trying to get a sense of the ability. I think you've done a nice job of offsetting some of the pressure on transient RV with lower expenses. I'm just trying to get a sense of how much of the expense reduction was your ability to kind of adjust lower due to some of the lower demand in transient RV?

Yes. I think, Michael, what I mentioned earlier about the repairs and maintenance and the favorable comp that we have year-over-year from those smaller-scale storm events, that's a relatively significant contributor this year as compared to what we've seen in variability on the expenses associated with the transient activity in other periods. So it's a larger piece than we've seen in the past coming from the change in transient.

And if I can squeeze one more in, can you talk a little bit about the trends that you saw over July 4 weekend and maybe how that compared to Memorial Day?

Yes. For the July 4, we finished up 10% year-over-year on transient. A couple of drivers and we've spoken about the weather, and broadly, we had favorable weather for the holiday weekend. The holiday also fell on a Thursday this year as opposed to Tuesday last year. And just from a comp perspective, the Wednesday to Sunday holiday weekend this year better fits customers' time off and vacation plans than a Friday to Tuesday from last year. Overall, rolling stock performed very well. Rentals even outperformed the rolling stock. And we saw pretty consistent performance across the portfolio, with the Northeast, obviously, summer-focused performing very well, as well as the West, including California.

Thank you very much.

Sure.

Thank you. And our next question comes from the line of John Kim from BMO Capital Markets. Your question, please.

Thank you. So RV demand got a huge boost during COVID. It looks like now, a lot of those gains have been given back. When you look at seasonal transient RV revenue and Thousand Trails membership, they're both below 2021 levels, but they're still above 2019 levels. So I'm wondering if that's the next leg where it goes. Do we retrench all the way back to 2019, both on the revenue and membership side?

Well, yes, it's Patrick. I'll speak to the revenue. I don't see retrenching in back to 2019 as a trend coming through in our business. The fact that we're in a period of normalization off of that COVID peak, which is a fair characterization, and I appreciate the question. But if we look to the trend from 2019, 2018, we see growth across our business lines. And that comes through in both occupancy and rates. So I would say the fundamentals of the business bear a comparison back to pre-COVID periods. And we're going through a normalization as opposed to, I guess, I'll use your term, a retrenchment back to a 2019 level.

And I think the thing to also think about, John, is just as it relates to the Thousand Trails portfolio, I think the team has done a great job of focus on growing that annual base at the properties. I think when we bought the Thousand Trails portfolio, the annual base represented about 7% of the total revenue, and today, it's about 21%. So we would envision that continuing to grow and support strong fundamentals in the RV business.

At the same time, regarding your sites, the annual RV sites decreased sequentially this quarter, while transient sites increased sequentially and reached an all-time high. Will these be indicators of revenue trends for both, or do we expect transient sites to be converted at some point?

I believe we will keep seeing transient customers turning into long-term customers, both seasonal and annual. There has indeed been a shift, but I don’t think that indicates any change in our long-term business or our capability to attract annual customers to our properties.

Final question for me. Can you talk about your ability or history of converting RV sites to MH? I realize some communities have both and some are integrated. But I'm wondering if that's a potential for the company going forward.

Yes. I would say broadly across the portfolio, it's a relatively low percentage. But with respect to your question, with respect to those properties that have multiple uses, you have MH and RV on the same property. In fact, we toured viewpoint together a few years ago. When we went through a 400-site expansion which is now full, so it's 400 sites of MH at that property in Phoenix, Arizona, I believe the number, at least on the front end in particular, was into the double digits with respect to the purchasers of those units. Those MH units were coming from the existing RV customers. So there's a relationship there. The more you have proximity in the MH use is proximate to the RV property, there's more of an opportunity, particularly where we have that shared use opportunity where you're already embedded in the community, your friends are there, your family's there, you like the location, you're familiar with the location, there's a better opportunity for us to convert that RV customer to MH.

And John, the entitlements are different for RV and MH. Sometimes, that can be a barrier to putting MH on an RV. However, I envision that in the future, some of those barriers may loosen up.

Thank you.

Thanks, John.

Thank you. And our next question comes from the line of David Segall from Green Street Advisors. Your question, please.

Hi, thank you. I was wondering if you could talk about where you see MH rent increases going as we've seen them decelerate slightly and perhaps in the context of where CPI and cost of living adjustments are trending. Thank you.

Yes, sure. I'll just go through the kind of the recent history of rent increases. Historically, our rent increases have been roughly 140 basis points higher than the COLA increase. And that's a slide in the investor presentation. As we went through COVID and we experienced a period of high demand and high inflation, our increases reached into the higher-single-digits, which is now normalizing to your point. And I would expect that long term, the expectation of us being in the range of 140 basis points to 150 basis points of inflation or the COLA adjustment is a reasonable expectation. On that slide, you can see that in periods of higher inflation, our rent increases were more moderate. So that the peaks don't really come through in a long-term trend for us. As we've spoken to many a times, we tend to have a more moderate long-term view of how we manage rent increases over time.

Great. Thank you. And my second question was, curious, what do you think is the typical churn level in the memberships as we've seen those decline, but still had very good origination volumes? Thank you.

When we consider attrition within our member base, our legacy members, who have been with us for 20 years or more, experience an attrition rate of about 7%. In contrast, our Camping Pass customers have an attrition rate of approximately 33%, meaning about one-third of them churn. However, other customer segments display a significantly higher retention rate.

Does that answer your questions?

Yes, thank you.

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

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

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