Equity LifeStyle Properties, Inc. (NYSE:ELS) Q2 2024 Earnings Call Transcript

Equity LifeStyle Properties, Inc. (NYSE:ELS) Q2 2024 Earnings Call Transcript July 23, 2024

Operator: 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. [Operator Instructions] 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.

Marguerite Nader: 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% as 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.

Patrick Waite: 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 $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 the 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 as well, which is another appealing factor for buyers facing higher living expenses. The combination of home affordability, inventory availability, and the result — 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 as compared to average hotel nightly rates of $160. Vacationers are looking for value and affordability when considering their travel options. And 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.

Paul Seavey: 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 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 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 $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 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 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.

Q&A Session

Operator: [Operator Instructions] And our first question comes from the line of Josh Dennerlein from BofA. Your question, please.

Josh Dennerlein: 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?

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

Josh Dennerlein: Okay. Is there just…

Paul Seavey: And then — go ahead, sorry.

Josh Dennerlein: I was going to ask, is that RV and Marina or just apply to RV, just…

Paul Seavey: 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.

Josh Dennerlein: Okay. Sorry, I cut you off.

Paul Seavey: No, no.

Josh Dennerlein: 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?

Paul Seavey: 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.

Josh Dennerlein: Okay. Appreciate that. Thank you.

Paul Seavey: Thanks, Josh.

Marguerite Nader: Thanks, Josh.

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

Eric Wolfe: 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?

Paul Seavey: Some kind of offset?

Eric Wolfe: 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 transit to annual.

Marguerite Nader: And there was also — Eric, there’s also some offset to that for some of the workers that were with us on an annual basis that are no longer with us from hurricane cleanup, et cetera. So you saw some of that reduction in annual count that offsets that rate increase.

Eric Wolfe: 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.

Marguerite Nader: 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.

Eric Wolfe: I guess, is there a way to quantify what that is? Like the — is it just pricing that like — it’s up 3%, 5%? Just trying to understand how much weather might be taking that growth rate-down, if possible.

Marguerite Nader: 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.

Eric Wolfe: Okay. Thank you.

Marguerite Nader: Thanks, Eric.

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

Brad Heffern: 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?

Paul Seavey: 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.

Brad Heffern: 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.

Marguerite Nader: 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.

Patrick Waite: 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%.

Brad Heffern: Okay. Thank you.

Marguerite Nader: Thanks, Brad.

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

Keegan Carl: 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?

Marguerite Nader: For you, Patrick.

Patrick Waite: Yes. Well, the trend that we’ve seen with respect to — first, I’ll touch on the rental homes, and Marguerite referenced it in her opening comments, we’re down below 3% of our total occupied sites. That number may continue to go slightly — go down slightly, and we’ll continue to manage that overall load. But just as a reminder, that’s down from a high of around 9% following the GFC, and we’ve managed that number down to make sure that we’re in a position to be able to respond to any shocks to the broader housing market if rental becomes more of a priority than home sales. With respect to our home sales, 225 sales in the quarter, as I mentioned in my comments, up 13% year-over-year. So we continue to see consistent demand.

While we have seen some moderation at the higher price points, we still see consistent demand for manufactured homes in our communities. And just as a reference point, pre-COVID, a year where we’re selling, call it, 500 to 600 new homes over the course of a full year, that would be considered a favorable outcome. So if we’re in the 200 new home sales a quarter range, we consider that to be favorable.

Keegan Carl: 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?

Marguerite Nader: 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.

Keegan Carl: Super-helpful. Thanks for the time, guys.

Marguerite Nader: Thank you.

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

Samir Khanal: Hi, good morning.

Marguerite Nader: Hello.

Samir Khanal: 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?

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

Samir Khanal: 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…

Marguerite Nader: Yes, sure.

Samir Khanal: …I think, on the acquisition side.

Marguerite Nader: Sure. So, we’ve really positioned ourselves over time to find internal growth from operations and expansion when we’ve grown from 41 properties 30 years ago to 450 properties. The acquisition market has not always been conducive for us to transact, which is really why we’re focused on keeping our balance sheet in great shape to be able to transact when an interesting acquisition comes to market. So we’re continuing to talk with sellers who aren’t quite determined whether or not they’re timing on their sale. And our acquisition group continues to meet with owners on a very regular basis. We know the properties we want to own. And when a transaction — we’re able to report on a transaction, we’ll talk about it.

Samir Khanal: Okay. Thank you.

Marguerite Nader: Thank you, Samir.

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

James Feldman: Great. Thanks for taking my question. So, on the…

Marguerite Nader: Good morning.

James Feldman: Seasonal and trans — good morning. On the seasonal and transient segment, it seems current guide implies better growth versus 3Q. I know much of that is due to the mix of seasonal versus transient. But could you talk about the transient and seasonal fundamentals in the Northeast and Pacific Northwest for those in — versus those in Florida and Arizona in a bit more detail?

Patrick Waite: Sure. I mean, I can touch on that. I mean, as you referenced, the seasonal component is largely driven by our Florida portfolio. And that’s more of a Q1 — Q4 and a Q1 driver. When we look to the Northern markets, we’re in the middle of that season today, that said, it’s a much smaller number, and the results are driven predominantly, I guess, consistent with the balance of our portfolio by the annual business. And if you’re looking at seasonal and transient, it’s going to be largely driven by the transient business in those submarkets. And what we’ve seen across those markets this year is some normalization in demand. Spoken of that in the last few — on the calls as well. But as Marguerite highlighted, as we move through this summer season, while we face some challenges on weather, we continue to see customer demands to come to our properties.

James Feldman: Okay. Thanks for that. And then, I guess, just to go back to the transient action market one more time. I mean, kind of an interesting point in the cycle, expectations for lower rates. We’ll see what happens with the election, if they stay low or not. I mean, can you just talk about the typical seller that is even out there? Is there — what’s the catalyst to get them to actually transact? Or, is there just really nothing out there and you just don’t see anything trading, regardless of where rates are, just because it’s such a tough — all three are just such tough assets to get a hold of and generational people just want to hold on to them? Do you think if rates are really pulling back, this would be the moment if people have been waiting on the sidelines?

Marguerite Nader: 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.

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

Marguerite Nader: 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.

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

Marguerite Nader: Well, we don’t talk — we have never — we don’t talk about the subset. The broader set is that — is that 1,000-plus opportunities that we’re interested in.

James Feldman: Okay. All right. Thank you.

Marguerite Nader: Thank you, Jamie.

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

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

Paul Seavey: 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.

Wes Golladay: 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?

Paul Seavey: I think in — well, I’ll take the latter part of the question first. In certain markets, there have been new communities developed and there’s been some impact. But that’s less than a handful of locations across the portfolio. So the supply question isn’t one that broadly impacts the portfolio. It may impact a specific location. And then with respect to the — excuse me, with respect to the nights, we have seen some pullback in terms of the length of those transient stays as we’ve progressed further from the end of kind of the pandemic period and people’s ultimate flexibility.

Wes Golladay: And if you had to guess, would you — or estimate, would you think that we’ve kind of burned off all that work-from-home pandemic benefit at this point?

Paul Seavey: It seems like we’re burning through the — if we haven’t already, we’re burning through the last of it, this summer season.

Wes Golladay: Okay. Thanks for the time, everyone.

Paul Seavey: Thank you.

Marguerite Nader: Thank you.

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

Michael Goldsmith: 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.

Patrick Waite: Yes, Michael, it’s Patrick. I guess, first, I’ll say that the — we have seen opportunity in rates with both our transient, our seasonal customers, and the annual has, like our MH business has, consistent to be very predictable. So I would say rate stability and strength across all three business lines. And just to, I guess, touch on a couple of the components that roll up into the total RV revenue, I mentioned the CAGRs earlier, which if you take the longer-term view, have been very consistent when you combine the business lines. But as a reminder in Q2 for seasonal and transient, on the transient front, April, which now seems like quite some time ago, but is the beginning of our summer season, started with cool, wet weather in some very major markets for us, including throughout the North and Northeast as well as California.

On the seasonal front, where we would usually expect some benefit from a cold winter up North, we had a relatively mild winter and where we would usually pick up some seasonal into the beginning of Q2 through extensions of people that wanted to stay in the Sunbelt. We didn’t have that same level of pickup. And as Marguerite mentioned, also we’ve had a transition with respect to hurricane workers, whether or not that be construction, traveling nurses, et cetera, as we’re getting further and further away from the inlet that we’ll receive, but we still have that in the comp period.

Michael Goldsmith: 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?

Paul Seavey: Yes. I think, 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.

Michael Goldsmith: 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?

Patrick Waite: 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.

Michael Goldsmith: Thank you very much.

Patrick Waite: Sure.

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

John Kim: 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?

Patrick Waite: 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.

Marguerite Nader: 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.

John Kim: At the same time, looking at your sites, the annual RV sites went down sequentially this quarter. Transient sites went up sequentially. It’s now at an all-time high. Are those going to be drivers for — or leading indicators of where revenue goes on both, or is the expectation that the transient sites get converted at some point?

Paul Seavey: Well, I think that we’ll continue to see conversion of — excuse me, transient customers to longer-term customers, seasonal and annuals. So I think that there has been a shift, yes, but I don’t think that suggests any change in the long-term business and the ability to attract annual customers to the properties.

John Kim: 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.

Patrick Waite: 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.

Marguerite Nader: And John, the entitlements are different for RV or MH. So sometimes, that is — can be a barrier to being able to put MH on an RV. But I would envision in the future that some of those barriers may loosen up.

John Kim: Thank you.

Marguerite Nader: Thanks, John.

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

David Segall: 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.

Patrick Waite: 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.

David Segall: 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.

Paul Seavey: Sure. So when we think about attrition in that member base, we have — excuse me, I’m sorry, we have our legacy members who’ve been with us 20 years or more. That attrition, it’s about 7%. And then our Camping Pass customers, that attrition that we see is about 33%. So about one-third of those customers’ churn over. But the other customers have a much higher retention rate.

Operator: Does that answer your questions?

David Segall: Yes, thank you.

Operator: 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.

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

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