Equity LifeStyle Properties Inc
NYSE:ELS
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Earnings Call Analysis
Q3-2024 Analysis
Equity LifeStyle Properties Inc
Equity LifeStyle Properties (ELS) demonstrated strong operational resilience in the third quarter of 2024, amidst the backdrop of weather-related challenges. Normalized Funds From Operations (FFO) grew by 5.3% year-over-year, signaling sustained demand for manufactured housing (MH) and recreational vehicle (RV) accommodations. Despite some fluctuations in revenue due to weather impacts, the company's dedication to customer service and property management resulted in solid performance across its portfolios.
In the third quarter, ELS achieved Non-Operating Income (NOI) growth of 5.8%, exceeding guidance by 130 basis points. Core property rental income increased by 6.2% compared to 2023, driven by new resident market rents and renewing resident rent increases. ELS's MH portfolio, with a 95% occupancy rate, continues attracting strong interest particularly in the Sunbelt states of Florida, California, and Arizona, contributing to approximately 70% of stable revenue.
Looking ahead, ELS has adjusted its full-year 2024 normalized FFO guidance to a midpoint of $2.92 per share, reflecting a 6% growth compared to 2023. The company projects a fourth-quarter FFO per share between $0.73 and $0.79. Core property operating income for the year is expected to grow by 6.3%, and the anticipated core base rent growth is pegged at 5.8% to 6.4% for MH, and 2.7% to 3.3% for RV and Marina. ELS remains confident in its ability to manage expenses, projecting a growth rate for core property operating expenses between 2.6% and 3.2% for the full year.
The impact of Hurricane Helene and Milton were addressed, with the management team noting that despite the disturbances, no major property disruptions were identified. The company has prudently conducted cleanup and restoration operations across its Florida properties, indicating a strong commitment to maintaining infrastructure and community integrity.
ELS emphasizes the unique positioning of its MH and RV offerings, catering to a growing demographic seeking affordable living solutions. With around 7 million manufactured homes in the U.S., occupancy in these homes is at an all-time high, driving a long-term resident base committed to the community. Over 95% of new homebuyers in the MH segment were cash buyers, reinforcing the stability of the customer base.
The company has invested significantly in digital marketing and partnerships aimed at expanding its customer outreach. The success of campaigns, such as the '100 days of camping' marketing initiative, indicates a proactive approach aimed at engaging current and potential customers through various platforms.
ELS has successfully managed its core operating expenses, reporting a year-over-year increase of only 2.8%, which is 150 basis points lower than guidance. Strategic controls over payroll and utility expenses have contributed to this positive trend, ensuring the company remains on track to achieve its financial objectives as outlined in its guidance.
While ELS looks forward to continued growth, it remains vigilant about market dynamics, particularly regarding transient RV demand, which has shown some volatility. The company anticipates maintaining a conservative approach in its projections for 2025 to cushion against any potential downturns stemming from external factors such as economic conditions and changing consumer preferences.
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Good day, everyone, and thank you for joining us to discuss Equity LifeStyle Properties' Third 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 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 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'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 be able to report on the third quarter today and provide some insights into the strengths we see in 2025.
Turning to the results for the third quarter. We delivered strong normalized FFO growth of 5.3%. Over the last several years, we have seen increased demand for owning a home in our properties. Our rental pool is at the lowest point since 2010, with 2.9% of our occupancy comprised of rental homes. Over 95% of these new homebuyers were cash buyers. This investment is consistent with our entire portfolio as the vast majority of our residents have made a capital commitment to live in our communities. The commitment from our homeowners results in a pride of ownership and a long-term resident base.
Our RV annual revenue continues to show strength with growth of 6.9% year-to-date. The attractive price point of the vacation cottage product at our properties drives a stable annual revenue base. Our first-time transient customer returning from last year showed a desire to strengthen their relationship with us.
I would like to turn to focus on our access points for new customers. In the last decade, ELS has made significant investments and developed partnerships with leading publishers and Internet listing services to reach our target customers in the U.S. and Canada. Our digital marketing efforts seek audiences that share characteristics similar to those of our existing customers. We focus on the lifestyle-driven decisions of our customers.
Our social media strategy leverages engaging content, targeted advertising and partnerships to expand our reach and boost customer engagement with our RV members, guests and prospects. This summer was the 10th year of our 100 days of camping marketing campaign, which celebrates the time between Memorial Day and Labor Day. The campaign recorded 38.7 million impressions, the highest we have experienced across several social media platforms.
Before I talk about our expectations for 2025, I would like to highlight some of the demand drivers for the MH business. There are 7 million manufactured homes in the country, housing over 18 million people, making up 6% of the housing. And when you go outside of the metro areas, that number increases to 14%.
In 1994, the HUD code was updated and it increased the construction and safety standards for manufactured housing. Our homes fit the needs of our core demographic. The average price of a new home in our property is approximately $90,000, which is about 75% less than a similar home in the neighborhood.
We offer incredible value, and our available audience is significant with nearly 70 million baby boomers and 65 million Gen Xers included in our targeted base. Our customers seek out our properties for the vacation destination locations, high-quality home product at an affordable price and the sense of community.
We are pleased to be able to provide with you an insight into the strength we see ahead in 2025. Within our MH portfolio, by the end of October, we anticipate sending 2025 rent increase notices to approximately 50% of our MH residents. These rent increase notices have an average growth rate of 5%.
For our RV portfolio, we have set annual rates for more than 95% of our annual sites. The RV annual rate increases have an average growth rate of 5.5%. We are engaged with our residents discussing the appropriate areas for capital allocation within our communities. These results set us up for continuing our long-term track record of REIT-leading revenue growth.
Our supplemental report included information on the impact of Hurricanes, Helene and Milton. The strength of the infrastructure, particularly the new homes in the communities has been evident after the storms. Our teams have shown incredible resilience and dedication to the residents and community. This commitment from our employees and residents reinforces the sense of community found at our properties.
Our snowbird residents and guests are anxious to head back to Florida and Arizona for the season. Our teams are prepared for their arrival and will continue to focus on providing outstanding customer service.
We are able today to report the results from operations, provide a positive update about our cleanup efforts and provide an advanced view into 2025 results because of our 4,000-plus team members who are actively engaged to support our residents and customers and to deliver shareholder value. Their focus on meeting the needs of the residents and customers is the reason we are able to report REIT-leading operating statistics over the last 20-plus years.
I will now turn the call over to Patrick to provide an overview of property operations.
Thanks, Marguerite. I'll start by providing a bit more detail regarding our assessments of the impact of Hurricane Milton on our properties in Florida. In the days since the storm made landfall, I've toured properties, and I have seen the great strides our team members have made in cleanup and restoration efforts.
Hurricane Milton impacted a number of our properties in Florida locations. The affected properties experienced flood, wind, wind-blown debris, fallen trees and tree branches. We have seen damaged homes, car ports, screen rooms and onyx. Our team members and third-party contractors are in the process of cleanup projects at the impacted properties, and we're working towards quickly returning our properties to full operating condition.
Our storm operation plan was enacted prior to landfall, helping to ensure our ELS team members were safe at the properties, and we're prepared for the weather. Our teams and contractors were staged and ready to be deployed after the storm. This strategic normalization ensures that we have third-party vendors available to start work as soon as reasonably possible.
I visited storm-impacted properties after every large storm event. And each time I visit, I am impressed by the stability of infrastructure of our properties throughout Florida as well as the impact the residents have as they gather to help others in their communities who may be in need.
Turning to our third quarter results. Our summer camping season is punctuated by 3 major holidays and supported by our annual 100 days of camping campaign. For the 14 weeks between Memorial Day and Labor Day, total RV revenue increased 2.5% over last year, largely driven by annual of 6.3%.
As we have discussed in recent quarters, we are seeing a normalization of demand in the RV space from the peak Covid demand period when we experienced flexible life schedules and the desire to spend time with one socially distance group of family and friends. We now shifted our focus to the winter season when activity picks up in our Sunbelt Resorts.
In the MH portfolio, our properties are 95% occupied and delivered consistent revenue growth. Florida, California and Arizona collectively represent about 70% of our stable MH portfolio revenue. We continue to see strong demand for our homes and communities in these Sunbelt markets, supporting stable long-term rate growth. Florida has historically been the leading state for net in migration. Our development program continues to deliver opportunities for home sales and occupancy growth, and we have more than 1,500 MH sites in the expansion pipeline in Florida to support future growth.
Our California and Arizona portfolios are 97% occupied. Those MH properties in Arizona benefit from strong Sunbelt locations, while California locations offer tremendous value to customers given they are in high demand markets and the high cost of alternatives to ELS properties in those markets. I'd like to thank the ELS team for their efforts. The progress at the properties over the last 12 days, often under difficult circumstances shows a great deal of commitment and teamwork and that progress is meaningful to residents and guests at the impacted properties.
I'll now turn it over to Paul to walk through the results in detail.
Thanks, Patrick, and good morning, everyone. I will discuss our third quarter and September year-to-date results, review our guidance assumptions for the fourth quarter and full year 2024, and close with a discussion of our balance sheet.
Third quarter FFO and normalized FFO were $0.72 share, in line with our guidance. Strong core portfolio performance generated 5.8% NOI growth in the quarter, 130 basis points higher than guidance. Our results include JV income resulting from a distribution following a secured loan refinancing that was included in our guidance model.
Core community-based rental income increased 6.2% for the quarter compared to the same period in 2023, primarily because of noticed increases to renewing residents and market rent paid by new residents after resident turnover. Rent growth from occupancy was 40 basis points compared to the third quarter 2023. We increased homeowners by 111 sites in the quarter. Core RV and Marina annual base rental income, which represents approximately 2/3 of total RV and marina based rental income, increased 6.2% in the third quarter and 6.9% year-to-date compared to prior year. Year-to-date in the core portfolio, seasonal rent decreased 4.4% and transient decreased 4.3%. We continue to see offsetting reductions in variable expenses.
For the September year-to-date period, the net contribution from our membership business was $43.6 million. Membership dues revenue increased 1% for the year-to-date period compared to the prior year. Year-to-date, we've sold approximately 16,100 Thousand Trails Camping Pass memberships. During the year-to-date period, members purchased approximately 2,900 upgrades at an average price of approximately $9,000.
Core utility and other income increased 7.1% for the September year-to-date period compared to prior year, which includes pass-through recovery of real estate tax increases from 2023. As a result of our continuing efforts to unbundle utility expense, our utility income recovery percentage was 46.7% year-to-date in 2024, about 200 basis points higher than the same period in 2023.
Third quarter core operating expenses increased 2.8% compared to the same period in 2023. Expense growth was 150 basis points lower than guidance, mainly resulting from savings in payroll, utilities and repairs and maintenance expenses.
Core NOI before property management increased 5.8% and 6.2% for the third quarter and year-to-date periods, respectively. Income from property operations generated by our Non-Core portfolio was $2.1 million in the quarter and $10.7 million year-to-date.
During the third quarter, we recorded an accrual of approximately $1 million, representing our estimate of expenses incurred following Hurricane Helene, the expenses presented in the casualty related charges, recoveries, net line in our income statement.
The press release and supplemental package provide an overview of 2024 fourth quarter and full year earnings guidance. The following remarks are intended to provide context for our current estimated 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 have increased our full year 2024 normalized FFO guidance $0.01 per share to $2.92 per share at the midpoint of our range of $2.89 to $2.95 per share. Consistent with historical practice at this time of the year, we have narrowed our full year guidance range to match the $0.06 per share range we use for quarterly guidance updates throughout the year.
Full year normalized FFO per share at the midpoint represents an estimated 6% growth rate compared to 2023. We expect fourth quarter normalized FFO per share to be in the range of $0.73 to $0.79. The fourth quarter guidance range we provided includes no assumptions related to impact from recent storms. As Patrick mentioned, we are in the early stages of assessing the impact on our portfolio. As we continue the process, we may identify expenses to be accrued, including any impairment write-off resulting from Hurricane Milton. At this time, we have not identified any property with an operational disruption significant enough to consider a noncore designation.
We project full year Core Property operating income growth of 6.3% at the midpoint of our range of 6% to 6.6%. Full year guidance assumes Core base rent growth in the range of 5.8% to 6.4% for MH and 2.7% to 3.3% for RV and Marina. The midpoints of our guidance assumptions for combined seasonal and transient show a decline of 6.6% in the fourth quarter, a decline of 4.7% for the full year compared to the respective periods last year.
Core property operating expenses are projected to increase 2.6% to 3.2% for the full year. Our full year expense growth assumption includes the benefit of savings in repairs and maintenance and payroll expense during the first 9 months of 2024, as well as the impact of our April 1 insurance renewal for 2024. The full year guidance model makes no assumptions regarding the use of free cash flow we expect to generate in the remainder of 2024.
Our fourth quarter guidance assumes Core property operating income growth is projected to be 6.7% at the midpoint of our guidance range. In our Core portfolio, property operating revenues are projected to increase 4.5% and expenses are projected to increase 1.4%, 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, earlier this month, we raised net proceeds of approximately $314 million, from the sale of shares using our ATM program. The gross sale price per share was $70. We used the proceeds to repay our $300 million unsecured term loan with a maturity date in April 2026. In connection with the repayment of the term loan, we terminated the interest rate swaps with fixed interest at 6.05% through maturity.
We're pleased with this execution, and we estimate it is $0.03 per share accretive to normalized FFO per share on a full year basis. On a pro forma basis for this transaction, we project debt-to-EBITDAre will be 4.6x, interest coverage will be 5.5x, weighted average interest rate would be 4.05% and weighted average maturity for all debt would be 9 years. We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of capital available to us.
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 5.25% and 6%, 50% to 75% loan-to-value and 1.4x to 1.6x 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 approximately $185 million of capacity. Now, we would like to open it up for questions.
[Operator Instructions]
And our first question comes from the line of Jeffrey Spector from Bank of America Securities.
It's actually Josh Dennerlein, not with Jeff Spector, I guess. So I guess just thinking about the 2025 preliminary rate growth guidance that you put out, could you remind us where you sent out the 2024 notices, and then how much uplift you saw over the course of the year from just like new customers coming into the portfolio? Just trying to kind of gauge like what -- maybe a tie-in to that would just be like kind of what do you think the mark-to-market is today across the portfolio?
What we're seeing in terms of the rents charged to new residents after turnover, is 13%. It's moderated a bit in 2024. We started the year -- first quarter, it was closer to 16%, but that's moderated back to about 13%, which is what we saw during the year in 2023.
We have included in our preliminary rate growth estimate the impact of that adjustment for the residents who received notices on January 1. So that 50% of the residents is included in that estimate. But on a go-forward basis, you're correct to point out that there's potential for that to have an impact.
And including that is similar to the way it was last year. So that's keeping with the same methodology.
Okay. Okay. No, good to know. And then maybe just on the other side of the equation, the expenses, I mean, year-to-date have been pretty low, especially the payroll expense. Just kind of take you through, was there any kind of adjustments that you are making on the payroll front? And then just how should we think about this as a go forward? Like should it kind of normalize out towards just like standard wage growth inflation going forward? Or is there something you guys can do to keep it lower than inflation?
Well, yes, Josh, let me just touch on the trends that we're experiencing this year. For the quarter, our payroll favorability was largely based on 5% favorability with respect to the number of employees that we had on staff at our properties. So it's a comp year-over-year, and that's largely driven by the RV properties, if you think about -- we're moving through our summer RV season.
Those positions are partly driven -- those open positions are driven by the competitive job market to some degree. But we're also very focused on managing schedules at the property. And that's coming through in favorability, in overtime and temporary payroll, and we're achieving that through cross-training and sharing our responsibilities. That also helps to contribute to favorability, not only in head count, but in the overall payroll.
I'd highlight that while we're managing through those schedule adjustments in the RV properties, we're also very consistently maintaining high customer experience scores.
And our next question comes from the line of Brad Heffern from RBC.
For the MH rate increases, the past few years have seen the guided base rental income growth be higher than the noticed rate growth figure. I think some of that's obviously the CPI linkage, which presumably won't be a tailwind next year. But can you go through the composition of the other 50% that hasn't seen notices and whether you would expect those to be higher or lower than the 5% figure on the first 50%?
Yes. I think that there are a couple of things to keep in mind. First, we are talking about rate. So let's just understand that there are 2 components to revenue growth overall, rate and occupancy. So this is the rate only component.
When we look at the remaining 50%, the population that received notices -- or are receiving notices for January 1 is a bit more heavily weighted to the longer-term agreements, as we call it, 25% of the population. So the remaining 50% are a bit more heavily weighted to market increases and the CPI associated with rent control.
Okay. And then can you talk through the decision to pay off the term loan with equity? Is that building balance sheet capacity for, maybe potential acquisition activity? Or are you trying to move just to a lower leverage level overall?
I think that in the ordinary course -- in the first week of October, we had the opportunity. We sold 4.5 million shares at the $70 price that I mentioned, and we are pleased with the execution and the enhancement to our financial flexibility.
And our next question comes from the line of Eric Wolfe from Citi.
Maybe just a follow-up there. I mean, you just entered into the swaps, I think, around April. I'm assuming there was an early termination payment for them. Maybe correct me if I'm wrong. So I'm just, again, trying to understand the raising $300 million, this is the largest amount you've raised since, I think the fourth quarter of 2021. So is it just because it's accretive, you're trying to deleverage, just trying to get a better sense for. So why now raising $300 million?
Well, the first part of that, yes, there was a cost associated with it. It was about $5 million to unwind and then write off unamortized loan costs associated with it. And I think from our perspective, when we look at the capital stack, the opportunity to take out debt that was carrying 6.05% interest until 2026 and create the flexibility. We just in July, renewed our credit facility with our bank group. And the opportunity to position ourselves to be able to tap that market in the future if an opportunity shows up was something that we found attractive, just kind of thinking about the levers that we can pull.
And Eric, as Paul had mentioned in his opening comments, we looked at our balance sheet statistics and increasing our term to maturity to 9 years and decreasing our exposure to debt maturing through 2026 to 3% was important for us.
Right. Yes, it makes sense. It was really more the time and that was sort of interesting to me. And I guess you mentioned a second ago that in case opportunities do arise at some point, I mean are you seeing signs that there could be more opportunities. It's been pretty quiet for a while now. And so just curious if you're starting to see something that suggests we're going to see larger transactions in the future.
Sure. I think addressing the 2026 debt made sense for us, and we don't think it limits but rather improve a position to be able to act quickly on acquisition opportunities. With respect to the transaction market in general, there's been a significant slowdown in recent years. I think the volume of transactions for institutional quality assets like what we're looking for is very low, and there's just a lack of available inventory. We are seeing some smaller deals that don't really fit into our portfolio, and they're often sold using seller financing.
But maybe it's helpful to just kind of point out on our available acquisition set with 50,000 manufactured home communities in the United States. And when you remove the smaller kind of noninvestment-grade assets, you get to about 3,000 assets, and we own 200 of those. And then on the RV side, kind of using the same metrics, it's about 16,000 RV parks. Half of those are owned by the State and Federal government. That leaves about 8,000 private campgrounds. 1,200 of those assets are -- we consider investment grade, and we own about 200 of those.
So the opportunity set is large, and we've always said that the acquisition market can be kind of lumpy, and we're seeing that continue.
And our next question comes from the line of John Kim from BMO Capital Markets.
Thank you. Thankfully, it seems like the Hurricane Milton impact isn't as bad as Ian, but I was wondering if we could just review how -- what happened at Ian and the aftermath versus what may play out with Milton.
So from my recollection, 2 years ago, during this time, you would do guidance for the full year. You identified 6 assets and closed them. I'm not sure if all those assets have reopened, but they're not in your same-store pool. I think you have like $55 million of cleanup costs and business interruption. You got the proceeds from that and only included the insurance proceeds when you receive them back into earnings. But I wanted to see how you see Hurricane Milton playing out given it's still relatively early in your assessment of the damage.
Sure. I think you point out that it's relatively early. That's absolutely true. We're 12 days after the storm hit. But you can see the difference between what we saw in Ian and what we saw in Milton and just what Paul pointed out that at this point, there aren't any properties that we're taking out of the Core.
And with Ian, that was our first release or right soon after the storm hit, we were able to assess that. So we've -- as Patrick has pointed out, we've been on the ground. People in Chicago and of course, the Florida team has been working tirelessly to make certain that our customers and our residents are safe and are in a good place, and they've done a great job doing that.
So there are significant differences, I would say, between Ian and Milton. But it is 12 days after. It's going to take us a little bit of time to work through and give you what the final numbers would be. But I think just highlighting that there isn't properties being removed from the core is probably a good thing for you to focus on as it relates to the impact of the storm.
And what happened to those 6 assets from Ian? Are they closed permanently or are they reopened?
No.
No. No. We've resumed operations at those properties. They're partial operations, but we have resumed just the way that we manage our Core portfolio. Those assets didn't return to that condition until 2024, which means the earliest that they would appear in the Core is the beginning of 2026.
But the properties are back in operation.
And I know it's really early. So last year, following Ian, you had a 58% insurance renewal increase. Where do you think this year's renewal rate, how does that play out, given the damages were less, but there were 2 occurrences this time around and it was just 2 years after the last one?
Yes. I think -- as you pointed out, John, I think it's just too early to tell. We'll know better after we -- obviously, as we go through our renewal process and you don't remember that the impact will be 9 months in 2025 because we already know what the first quarter will be because it's an April 1st renewal.
But not unlike years past, the main driver of the rate is the amount of claims history. And we've highlighted what happened during Helene and we're working through Milton. So that's still yet to be determined based on the claim.
And our next question comes from the line of Keegan Carl from Wolfe Research.
I mean maybe just big picture, where is your head at on Florida? I know you called out the expansion and development sites, but are you reconsidering, maybe your geographic exposure to the state at all? And would there be any appetite to reduce your exposure over time, just given we've now had 2 pretty catastrophic events in 3 years?
Yes. Thanks. I think the recency effect certainly applies when someone's asked about a storm event that just happened. But it's probably good to think about and appreciate our long history with storm events inside of our portfolio.
We do have a geographically diverse portfolio that's been subject to weather events each year over the last 30 years. And even with those weather events, we've been able to post REIT-leading results. Florida, specifically, has always been a strong state for us. We look to continue to buy more assets in Florida in all different economic times for Florida and the country. That properties have outperformed -- the properties in Florida have outperformed.
I think I highlighted on the last call or a couple of calls ago that we have an NOI chart that's included in our investor presentation, and it shows our average NOI as a company for the last 20 years is about 4.1%, which compares favorably to the REIT industry. But then when you break that down further, and you consider Florida in the analysis, it shows that Florida has outperformed our overall portfolio by over 100 basis points, and that's with a storm event every couple of years.
And so -- and the team has taken a look at kind of the analysis of storm events, other impactfuls like economic times, election years, just to try to get an understanding of what makes Florida tick and it continues to come out ahead.
That's really helpful. And I guess just pivoting to transient. Look, I know it's a much smaller portion of your guys' business, but there's always questions around it. So I guess a few part question here. It's always tough to gauge expectations, but how does it perform relative to your expectations within the quarter? And how much of an impact was there on weather?
And then just if we look out to next year, I mean, what are your general views on transient? Do you think we might have hit a relative trough and we could start to see it accelerate? Or should we just always expect some downward pressure given your ability to convert transient to annual sites?
Yes. Keegan, just in terms of the performance in the quarter, the transient rent performed in line, I'd say, generally speaking, through August. In September, we did lose some traction, and the properties in the North and Northeast caused them in our September results because of inclement weather in certain areas.
We've talked in the past about the large variance that can be caused by individual locations. And just when I think about the impact in September, 3 properties represented almost 50% of the variance to our forecast. So it was weather driven as we've typically talked about, and again, a relatively small number can have that type of effect.
And just on the '25 outlook, I mean, is it fair to assume that maybe transient starting to hit a trough? Or I mean, I guess like how should we just big picture be thinking about that business?
I mean we've talked about this concept of normalizing demand. I think that the thing to keep in mind is the impact of the weather. So we will -- I expect that we will perform well as we historically have, when the weather is favorable, and it won't be the same when the weather isn't. That's about as much as I can say right now about next year's summer season.
Our next question comes from the line of Samir Khanal from Evercore ISI.
Paul or Marguerite, on the seasonal side, you were down, it was like 13% in the quarter. I'm just trying to get a better understanding of, maybe provide a bit more color around that for both RV and Marina?
Yes, Samir, it's Patrick. We've talked about some of the shifts, particularly driven by Florida with respect to the seasonals. And then construction and other transitional workers responding to Hurricane Ian have been winding on their activity in the state.
That's been really a key with respect to the headwinds that we've seen. I'd point out overall, however, that we had a number of markets that performed well. Throughout the West California and the Pacific Northwest have been consistent and Florida, given that transition, has really been the key factor.
And Samir, I'll just follow on kind of piggybacking on what I said a minute ago to Keegan. When we look at revenue growth by property in the third quarter, and we look at the seasonal in particular, at a majority of our locations, we saw growth compared to the prior year. The minority is really driving the overall decline.
So just to kind of walk through that, 90% of our properties generated 2.3% growth year-over-year in seasonal revenue. It was the remaining 10% that really drove the variance that caused the negative performance.
Okay. Got it. And I guess, Paul, on the expense side, I mean, you've done a good job on the Payroll segment, but is that primarily a function of the RV business at this point?
I'm just trying to understand how much more you can do or lower expense on Payroll if transient sort of starts to normalize or at least hit a trough as we heard from the previous question, and start to stabilize in the next year? And then how much Payroll plus can you do into next year as we think about '25?
Yes. Samir, it's Patrick. I guess I'll add on to the earlier question, we've been able to manage, particularly this is driven by the summer RV business, right, which has a high seasonal employment component, and we've been able to manage a couple of variables.
One is in those competitive markets where we're competing for employees along with other seasonal businesses. We've had some challenges filling some positions. So we've responded to that by managing efficiencies at the property level and that cross-training and sharing responsibilities has helped us modify our approach to the run rate business, and that's created some efficiencies, but also being very diligent in managing overtime and other types of periodic expenses like temporary labor.
I would hesitate to say that there are further efficiencies to be gained. Certainly, we're always looking for opportunities as well as technology to help improve the operations of the business, and we'll continue to focus on that in 2025. But I think the results that you've seen this year are reflective of us responding to those drivers at the property level.
And our next question comes from the line of Jamie Feldman from Wells Fargo.
Great. Could you comment on any difference between RV annual renewal rates and Marina annual renewal rates? Just trying to get some color on how those 2 compare? And then additionally, are you thinking better or worse pricing power for annual RV in any specific geographic regions? Or is the 5.5% expectation broad-based?
Yes. I would say that the -- let me first start with the Marina as it's a smaller section of the business. And as you point out, on the annual front, it's the high 90% with respect to the component of the revenue stream.
That business has a very granular turnover. It's a -- where our annual business in RV tends to have more of a calendar cadence to it, the Marina portfolio tends to be more pro rata or spread out more equally over each of the successive months and quarters. So it's a kind of a consistent renewal. The turnover between the 2 is relatively consistent in the mid-single digits, and the RV is consistent with the overall rates that we're talking about for the 2025 forward.
With respect to the annual RV, the drivers are really in the summer season: Maine, New Jersey, New York, Illinois, Wisconsin, those northern markets. We've experienced some normalization of the peak demand that we've talked about across the RV segments. And as we're working our way through that, we've seen a slightly elevated turnover, but we are rebuilding the business very consistently with respect to new customer acquisition consistent with pre-COVID rates. So that's kind of on the occupancy front.
With respect to just the strength in the submarkets, it's fairly widespread with respect to the overall. I'd point out the strength in the Eastern Seaboard with very strong locations, some key locations outside of key metro areas and some properties outside of the Chicago area, particularly up in Wisconsin. So we see it consistent with respect to the mid-5%, but some points of strength in some of our more desirable locations.
Okay. And then I guess just bigger picture, I mean the transient business, especially RV seems to be taking up a lot of time on the calls and creating a lot of noise. I mean what are your thoughts on guiding for next year, super conservative just to make sure there's more upside than downside. Like do you think you might change how you're presenting this business?
And then I guess just longer term, I mean, what do you even feel about the RV business? Is it really worth growing? Would you like to shrink it, get rid of it completely? Or is it really a core asset for you?
So Jamie, we really like the RV business. We got into the business because it had all the hallmarks of the manufactured housing business, and we focused on the annual base, and we continue to focus on the annual base, and you've seen the results of those efforts with really strong annual numbers.
The transient, absolutely has volatility in it, and it has for 25-plus years. So there's nothing new there. I think it's important to remember that the transient base and the transient customer is a paying lead. So it's a customer that pays us, a lead that's paying us as opposed to the other way around, to be able to experience our properties and then become an annual.
So we really like the RV business and the amount of discussion on the call with respect to the transient business, I think, is a function of everything else going so well in our company.
And our next question comes from the line of Michael Goldsmith from UBS.
First question is, on the 2025 base rent increase, it seems like that where inflation is down 100 basis points from last year and the MH kind of came down 40 basis points, and while the RV base rent increase is coming down a bit more than that.
So I guess, is that kind of what you're getting at with the prior question is that there are some markets where some of the annual RV is facing a little bit more pressure. And so you went with the later rider base rent increases for '25? Are there some other implications why the base rent increase for our annual RV came down so much more than MH?
Yes. I mean I guess I'd say that an increase in the mid-5% range still seems pretty good. It is -- I would highlight that as we speak to the relationship between rate growth, rent growth and CPI, there is a correlation, but it's largely driven by demand at the property level and what we're seeing in the competitive set.
And we did come through a period with the COVID demand as we saw across all of our business lines, and we've highlighted in the RV space for the annual seasonal and the transient. We saw very strong demand, very strong rate growth, and that's normalizing somewhat.
So the mid-5% rate growth, I think, is reflective of consistent demand across our annual portfolio, but it also acknowledges that we're in a period with more moderate rate increases as opposed to periods of peak demand.
Got it. And then my follow-up question is related to issuing equity and just like thought process about issuing equity versus debt? Do you have a target leverage ratio? Is that sort of still in play? And how do you think about the short term accretive nature of issuing equity versus potentially the longer term dilutive pressures of that?
We don't. Michael, we do not have a leverage target. We have not, in our history, had one. Our focus has been historically on financial flexibility, making sure that we are ready for opportunities. And so that's the answer to the first part of that.
The second part of just kind of thinking about the opportunity to remove higher-cost debt and remove uncertainty associated with that. That's long been a hallmark of our strategy in terms of managing the debt stack. So...
Our next question comes from the line of Omotayo Okusanya from Deutsche Bank.
Quick question on the $5 million distribution on the JV side. Could you just talk to us a little bit about the nature of that distribution?
Sure. Just as a reminder, we own interests in 7 joint ventures. There's an aggregate investment. It's less than $100 million across those JVs. Our third quarter guidance included the income contribution from refinancing of loans secured by one of our JV assets.
In the ordinary course of ownership, transactions like this generate this type of income and consistent with GAAP guidance and our past practice, we recognized distribution of JV income in the quarter.
Okay. So the debt was refinanced and that led to a distribution?
Correct. And so GAAP guidance states that distributions are applied to your book investment until the basis reaches 0. And when the basis reaches 0, then the excess cash is recognized as income.
Okay. So that's what's happening. So the basis is not below 0. Okay, that makes a lot of sense to me. That is helpful.
And our next question comes from the line of David Siegel from Green Street Advisors.
This is John on, actually. Quick question on seasonal RVs. Based on leading indicators, you see right now for fourth quarter and first quarter, do you expect year-over-year declines in revenue for seasonal RV winter season or growth?
Well, I can speak first to fourth quarter. Seasonal is tracking slightly ahead of the forecast that we have for the quarter, and we are reserved 92% for the fourth quarter rent. That's slightly higher than this time last year. I'll just tuck-in transient there since I'm in the topic. Transient is essentially flat to our guidance in terms of the reservation pacing.
Okay. But any color, Paul, on the very busy first quarter, just given how much of a weight in the full year revenue, the first quarter seasonal business is? How is leading demand indicators shaking out for the first quarter?
Yes. I think that with respect to the first quarter, it's early. I think the leading indicators are flat to maybe down slightly. And we're anticipating that, that will pick up as we continue through the end of the year.
Okay. And then a question on just how to think through the translating of annual rate growth on the RV side to revenue growth. I know there's probably some modest drag from kind of short-term workers leaving this year. But I've been a bit surprised that conversions from transit's annual hasn't boosted annual RV revenue growth more above the rate growth.
So of the 5.5% rate growth assumed, do you expect any additional drags on the flow through from rate to revenue? Or should we expect some accretion above that 5.5% from conversions from transients to annuals next year?
I do think that next year we'll continue to have a bit of a drag. We've talked about the displaced residents that we're occupying some RV annual spaces across the core portfolio. And as we kind of transition to stabilized operations at those locations or in other words, don't have that incremental revenue. There could be some offset to occupancy that we might otherwise gain in the annual. I think on a net basis, we would anticipate being up, but not as significantly as otherwise.
Okay. And one more follow-up question. Thanks for bearing with me. Have you noticed an increase of essentially attrition on recent -- of tenants that have recently converted from transient to annual in recent years. Is that some of the hole in the bucket?
John, it's Patrick. I think that's a reasonable way to think about it. I guess I would characterize it a little bit differently. As I was kind of walking through earlier, we moved through that kind of post-COVID period where people were able to move around, but there was still a high degree of focus on isolating within your own social group and family that lines up very well with the RV camping and lifestyle.
So we saw really significant demand that led to growth in occupancy as well as very strong rate growth. And now we're more at a point where the build back of normalized attrition isn't keeping pace with just the higher occupancy. So occupancy went up. We have a level of attrition. That's a fair point, although I can't speak to any level of detail. It's a fair point that there might be a higher level of attrition on that broader group.
But we're working through that, and we're building back the business consistent with pre-COVID acquisition of new customer pace. So it's kind of an interaction of the 2. And as we work our way through that process, as Paul highlighted, I would expect we'd revert to something that looks more like our run rate business pre-COVID with respect to occupancy and turnover.
Our next question comes from the line of Mason Guell from Baird.
Another question on insurance. Less on rate, but maybe more in the structure. Do you plan to make any changes to your insurance deductibles and limits? Or are you comfortable where you are at?
Yes. I think that's -- it's too early to tell. I think we do a pretty good job of detailing out our coverage every time after every renewal. So we'll continue to do that, but it's pretty early in the process to determine any change in coverage. It's really a function of what's available in the market and we're not -- we haven't started to have those conversations yet.
And do you expect a meaningful uptick in demand from hurricane relief workers?
If you look at what we've seen historically after a few weeks after the hurricane and as people -- or after the storm events as people get situated and kind of have an understanding of what their needs are, you do see an increase, an increase in occupancy as a result of that. It just takes a while for it to kind of work through the system and determine how many people are needed to help out.
And our next question comes from the line of Anthony Hau from Truist Securities.
Paul, can you quantify the drag from displaced residents for next year? I think you mentioned that earlier.
Yes. It was a little over $1.5 million in 2024.
And do you think that drag will continue in 2025, like another $1 million in 2025?
No. I mean $1.5 million is what we earned in 2024. So potentially, that eases to 0 over time.
And then you mentioned that like the mark-to-market for new tenants remained at 13%, unchanged from last year. But at the same time, right, you guys are renewing leases at like 5%, 6%. So doesn't that mean that the market rent growth is much higher than that? And just curious like what are you guys seeing in terms of market rent growth in your portfolio?
I'm not sure I'm tracking your question, Anthony. When a resident leaves and a new one comes in, they're paying a rent that is 13% higher than the customer who was there.
Anthony, maybe helps to think about it this way. As we move from a period of low-to-moderate inflation, and we've reached a period of higher inflation, significant demand in the MH space or across all our business lines.
We saw growth in occupancy, and we saw sequential increases in rates that we were charging in the market based on demand. And clearly, there's a correlation to inflation as well. So higher inflationary period, higher demand. Rates went up a couple of years at a rate that was just higher than we've seen in our history.
So that led to market rates taking those full increases of 6%, 7%, 8%, sometimes higher depending on the particular property. And our long-term residents, we have a very long-term view, we'll be getting an increase significantly less than that, something in the mid-single digits.
So if you go through a couple of years of that, you start to create a larger gap between the rate that's charged to our run rate customer or long-term MH residents and an incoming customer or a new homebuyer, used home buyer, one of our properties. That's what really drove the, call it, the earn-in of a double-digit mark-to-market.
This concludes the question-and-answer session. At this time, I'd like to turn the program back to Marguerite Nader for any closing comments.
Thank you for joining us today. We look forward to updating you on our next quarter's call.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.