SUI - NYSE

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Communities Second Quarter 2024 Earnings Conference Call. At this time, management would like me to inform you that certain statements made during this call, which are not historical facts, may be deemed forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday’s press release and from time to time in the company’s periodic filings with the SEC. The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release. Having said that, I’d like to introduce management with us today, Gary Shiffman, Chairman, President and Chief Executive Officer; Fernando Castro-Caratini, Chief Financial Officer; and Aaron Weiss, Executive Vice President of Corporate Strategy and Business Development. After the remarks, there will be an opportunity to ask questions. Those who would like to participate in the question-and-answer session, management asks that you limit yourselves to one question, so everyone who would like to participate has ample opportunity. As a reminder, this conference is being recorded. I’ll now turn the call over to Gary Shiffman, Chairman, President and Chief Executive Officer. Mr. Shiffman, you may begin.

Good afternoon. And thank you for joining us to discuss our second quarter results in 2024 guidance. Sun is pleased to report a solid second quarter. Core FFO per share of $1.86 was in line with guidance, driven by same property NOI growth of 3.6% in North America and 9.3% in the U.K. Manufactured housing, our largest segment, generated same property NOI growth of 6.4% in the quarter, driven by strong rental rate growth and occupancy gains. We continue to benefit from the strong demand versus supply dynamics embedded in manufactured housing. In RV, same property NOI decreased 4.6%. The decline was driven by weakness in the transient RV segment and we are seeing continued demand headwinds. Importantly, due to our ongoing transient-to-annual conversion strategy, we have fewer site nights available for transient guests. While we were able to partially offset revenue underperformance by managing expenses, and were even able to hold transient RV margins flat to budget, the cost reductions did not fully mitigate the revenue impact. Our strategic focus on transient-to-annual conversions increases the contribution of revenue from annual property agreements, improves RV NOI margins over time and increases occupancy. Since 2020, we have now completed approximately 8,000 conversions, increasing the number of annual RV sites by approximately 30%. These RV conversions supported strong occupancy gains, as our same property adjusted occupancy for MH and RV increased by 150 basis points to 98.7% as of June 30, 2024. Additionally, our revenue-producing sites increased by over 1,200 sites in the quarter, compared to a 1,000-site increase in the prior year. We are very pleased with Marinas same property results, as the business achieved 6.1% NOI growth, in line with our guidance. Demand for the Safe Harbor network’s unmatched locations, premium amenities and expert services remains strong. While we are seeing superyacht Transatlantic movement earlier than originally forecast, Marina business fundamentals remain strong, and Safe Harbor continues to actively manage its operating expenses. Our strategy in the U.K. remains focused on increasing real-property NOI and decreasing the contribution from home sales. With six months ended June 30, 2024, real-property NOI in the U.K. accounted for 55% of total U.K. NOI, up from 42% during the first six months of 2023. On a same property basis, U.K. NOI grew 9.3% over the second quarter last year, exceeding the high end of our guidance range. Strong year-over-year revenue growth was in line with our expectations, and the outperformance was driven primarily by lower-than-expected utility expenses. U.K. home sales were in line with expectations through May, before slowing in the run-up to England’s elections and the related concerns regarding fiscal policy. Early third quarter trends indicate that that uncertainty surrounding the elections is dissipating, and buyer interest is increasing from some headwinds we experienced in June. Overall, for the second quarter, U.K. home sales FFOs were within our expected range. In terms of other strategic initiatives, we are very pleased to share that since our last earnings call in April, we’ve sold eight properties, bringing total asset sale proceeds year-to-date to over $300 million. We’ve used net proceeds to pay down debt, reducing our leverage ratio to 6.0 times on a pro-forma basis. We are laser-focused on maximizing Sun’s performance by increasing the revenue contribution from annual income, active expense management, non-strategic asset recycling and debt reduction. As we continue to convert more RV sites from transient-to-annual, grow the base of occupied sites at Park Holidays and reduce leverage, Sun is positioned to generate long-term attractive FFO per share growth. Before handing the call over to Fernando, I’d like to acknowledge and thank each Sun, Safe Harbor, and Park Holidays team member for their hard work, dedication and continued support in delivering our results. Fernando?

Thank you. As Gary mentioned, one of our key priorities is to delever by disposing select non-strategic assets, remaining disciplined in our non-recurring CapEx spend and allocating free cash flow to debt reduction. Subsequent to quarter end, we closed on the sale of seven communities for a combined $263 million. Operationally, these transactions allow us to exit non-core markets and provide operational efficiencies going forward. The communities were encumbered with $79 million of mortgage loans, which were paid off at closing, improving our secure debt-to-total asset ratio. We used the remaining net proceeds of $171 million to reduce borrowings on our senior credit facility. During the second quarter, we also sold one Park Holidays property for $5.4 million. Adjusting our June 30th results solely for the July dispositions and the associated debt repayment, our pro forma net debt-to-trailing 12-month EBITDA ratio is approximately 6.0 times and we remain focused on continuing to improve this metric. Importantly, these properties were sold on an FFO accretive basis with reduced interest expense offsetting loss of income from the assets. For the first half of 2024, our non-recurring property capital expenditures are down approximately 47% year-over-year. Looking ahead, we are on target with reducing 2024 non-recurring CapEx spend by approximately 50% from last year’s levels. I’ll now walk through our guidance for the remainder of the year. Second quarter Core FFO per share of $1.86 was in line with our guidance range. We are reaffirming prior guidance for full year Core FFO per share of $7.06 to $7.22 and establishing third quarter guidance in the range of $2.46 per share to $2.56 per share. Total real property NOI is 80 basis points lower for 2024 at the midpoint of guidance, primarily reflecting the recent asset sales and the resultant loss of income from these properties. Interest expense guidance is $6.5 million lower at the midpoint after paying down debt using the net proceeds generated from the asset sales. North America, we are maintaining the prior midpoint of expected same property NOI growth for the full year at 5.2% and narrowing the range to 4.7% to 5.7% growth over the prior year. Note that 2023 and year-to-date 2024 actual results have been adjusted in same property NOI for historical and guidance purposes to exclude income from properties disposed of during the year. MH is performing well and we forecast continued strength from this segment. Our revised same property NOI growth range for this segment of 6.8% to 7.4% represents a 50 basis points increase at the midpoint of prior guidance. For same property RV NOI, we are reducing our prior full year guidance to incorporate recent operating trends. Second quarter, RV transient revenues decreased 12% underperforming the 8% decline we expected. Our revised same property NOI range of negative 0.7% to positive 0.9% is 40 basis points below the midpoint of prior full year guidance. Embedded in our guidance for same property RV are approximately 1,700 transient-to-annual converting. Year-to-date, we have converted approximately 1,100 sites and are on pace to achieve our full year target. We believe in the long-term attractiveness of the transient RV business where the five-year site adjusted revenue CAGR is 5.6% and we are excited about the pipeline of annual conversions it will continue to provide in the coming years. Our prior Marina guidance assumes some Transatlantic migration by superyachts. Thus far, this migration is occurring earlier than expected. Safe Harbor continues to manage variable expenses to match revenues as demonstrated by second quarter results. We are lowering our same property NOI growth expectations for the full year by 30 basis points at the midpoint to a new range of 6.2% to 7.2% to reflect current dynamics with that large vessel movement. U.K. real property continues to outperform as our strategy on increasing real property NOI bears fruit. We expect a strong performance to continue in the second half of the year and are increasing the midpoint by 250 basis points. Overall, U.K. home sales have been in line with expectations. While July results show positive momentum, we did see some softness in the sales pipeline in June ahead of the elections and are lowering U.K. home sales FFO contribution by $850,000 at the midpoint based on current trends and expectations for the remainder of the year. With regards to G&A, reflecting continued focus on corporate expense rationalization, we are decreasing the midpoint by approximately $5 million or 210 basis points, reflecting an expected increase of 2.5% at the midpoint, compared to prior guidance of 4.6% growth for the full year. For additional details regarding our updated full year guidance, please see our supplemental disclosures. As a reminder, our guidance includes acquisitions and dispositions and capital markets activity through July 31st, but it does not include the impact of prospective acquisitions, dispositions or capital market activities, which may be included in research analyst estimates. This concludes our prepared remarks. We will now open the call up for questions. Operator?

Thank you. [Operator Instructions] Our first question is coming from Michael Goldsmith from UBS. Your line is now live.

Good afternoon. Thanks a lot for taking my question. $260 million of dispositions announced in the quarter. You did another $50 million or so prior to the quarter. That brings you to $300 million, which is in line with your last capital recycling program. So, my question here is, are you looking to do more dispositions from here and if you can provide some information around the cap rates of the property sold, that would be really helpful? Thank you.

Thanks for your question, Michael. It definitely is on plan, as we shared in 2014. We did about a $300 million disposition program, so we are right on target there. We do have several other select dispositions in the market right now. We continue discussion over those and they are the similar type assets where, in this case, the six MH properties that we sold actually remove us from single states, where we just had one single MH property, or four states, I should say. So, real efficiency is there and as we look at these other properties that we are offering in the market, similar strategy with regard to the fact that they are not strategic locations and they could help to improve operating efficiencies as we go forward. So, I would refer to them as opportunistic, non-strategic asset sales, and we will provide updates at the appropriate time.

Thank you. Next question is coming from Brad Heffern from RBC Capital Markets. Your line is now live.

Yeah. Hey, everybody. Can you give an update on the U.K. loan collateral and if any of those assets are potentially among the assets that you are looking to monetize in the near term?

Hey, Brad. Thank you for the question. No. Those assets that were collateral for the U.K. loan are not part of those potential dispositions. As we detailed during our call and Investor Conference -- call in April and Investor Conferences since then, the Park Holidays team has taken over the operations of those and we are excited to see them continue to produce.

Thank you. Next question is coming from Samir Khanal from Evercore ISI. Your line is now live.

Hey. Good afternoon, everybody. Hey, Gary. Maybe you can elaborate on this Marina business being down 30 basis points. You kind of mentioned those large vessel movements. Can you talk around that a little bit? And I guess what gives you the confidence to say that a 30-basis-point cut is enough at this time? Thanks.

Thanks, Samir. Well, certainly, as we do at all our businesses, we build from the bottom up. We remain very positive about continued near- and long-term FFO growth for our Safe Harbor Marinas business, and in fact, investor demand in the asset class itself has never been greater. So embedded in our revised guidance is this adjustment in Marinas in the second half is, we really see these large superyacht vessels heading towards the Transatlantic and the Med movement. Just as Fernando said earlier than forecasted, so we did forecast this, but there has been a fair amount of pent-up demand through COVID. These boats have been more stationary, and I think with all that’s on the agenda over in the Med, including the Olympics and things like that, there’s just been earlier departure. These boats go back and forth across the Atlantic, and we do have the historical numbers to take a look at how things do return. We have built in the fact that with America’s Cup taking place over on the other side of the Med this year, these boats will probably return where we might expect them in August, September. We’re more likely to see them come back in late September, early October.

Thank you. Our next question is coming from John Pawlowski from Green Street. Your line is now live.

Thanks for the time. A question on the U.K. business. I just want to better understand what’s going on on the ground in terms of the meaningful shift in the same-store revenue guide and meaningful decline in expenses. So we started the year, real property revenue is expected to grow roughly 5%. Now it’s tracking towards 7%. Expenses were expected to grow by 8%, but tracking towards 4%. Just some on the ground operating color from what’s happening in that portfolio?

I’ll start out, and then Fernando can add some specifics. But looking at the U.K. operating environment, we are feeling better than we have as inflation is running at 2%, and overnight, Bank of England announced a cut of rates of about 25 basis points. So these macro trends, if you will, are positive for our consumer and should bode well for our U.K. operating businesses, which are actually seeing in our real property performance. So, big picture, things look positively improving there. We believe our continued focus on increasing real property contribution over home sales profit is the best strategy in creating stakeholder value. So, we remain really focused on increasing occupancy and increasing real property contribution. And I turn it over to you, Fernando for…

And John, for more specifics as it relates to revenue and expenses, I’ll remind everyone, the same property pool for the U.K., its total contribution in 2023 was about $70 million. So, a small dollar amount can have a large change from a percentage basis, but we are seeing the outperformance coming both from the topline and then expense side. On the topline, we’re seeing our new owners at higher rates than originally forecasted. And then from an expense perspective, and this applies to the first half of the year, as well as the second, we have seen lower utility and forecast lower utility costs than we’d originally expected. Those are going to be the largest drivers of that continued outperformance and what has allowed us to take guidance upward as meaningfully as we have over the course of the year.

Thank you. Our next question is coming from Josh Dennerlein from Bank of America. Your line is now live.

Yeah. Hey, guys. Gary, I just wanted to follow up on your comment on the superyacht movement. You said you expect the boat -- some of the superyachts to start to come back in October after the America’s Cup. It looks like the America’s Cup ends late October. Was that just misspeaking or is that when you kind of assumed the boats to come back?

Yeah. Just speaking -- I was just commenting that they usually come back late August, September, and due to America’s Cup, there’ll probably be a month or two delay in them coming back, and we took that into account in the approximately $750,000 reduction at the midpoint related to that.

Okay. So I guess current guidance assumes kind of like a November return.

Yes. Correct.

Okay. Okay. Just wanted to clarify. All right. Thank you.

Thank you. Next question is coming from Eric Wolfe from Citi. Your line is now live.

Hey. You mentioned that the dispositions were done on an FFO accretive basis, but it looks like you took down your real property NOI by around $10 million and the interest expense was taken down by about $6.5 million. So I was just curious whether there was something else in that real property NOI other than just those dispositions? Thanks.

Hey, Eric. This is Fernando. Yes. There is -- there are some shifts as it relates to performance over the course of the second quarter. For the rest of the portfolio, we did our same property growth was at 3.6%, slightly below the midpoint of the range. So it does have some shifts as it relates to that and movements in our non-same property pool, which would account for any acquisitions that were done last year or any of our development assets that are in the process of stabilization.

Thank you.

Thank you. Next question is coming from John Kim from BMO Capital Markets. Your line is now live.

Thank you. Gary, you mentioned the BOA -- BOE interest rate cut. I imagine that’s going to lead to higher demand for Park Holidays. But I was wondering how you’re going to manage home sales from not being a bigger contributor to FFO going forward. We noticed that margins also increased during the quarter on home sales. So how are you going to balance that demand versus home sales not being a big part of earnings going forward?

So I think that I would share with you, John, that we have a great operating team with a strong 10-year history on the portfolio, best-in-class assets there. So we will -- we have put together a forecast that reduces margins and increases velocity of occupancy. It’s in our forecast. So there will be a continued delicate balance if we were to see we have more room to reduce margin, we will reduce margin, and our goal of creating stickier revenue, if you will, and more valuable revenue on the real property side.

And John, I’ll add, while our -- right the business plan is to continue reducing the percentage contribution from home sales, it is -- it feeds getting more owners and it is leading to that outperformance that we’re seeing on the real property side. So home sales will continue to be part of the business just like it is here in the U.S. It is a larger contributor on a percentage basis than in the U.S., but we’ll continue to manage those sales, manage the margins to accelerate velocity, and that ultimately will result in more reliable income on the real property side.

So you’re saying that buyers are willing to take a lower price but with longer term on the land rental or maybe a higher rent than land rental?

No. Just saying that accelerating, right, sales ultimately lead to more owners paying rent on the real property side. So it is our sales funnel, as many of the -- many of our guests that vacation with us end up purchasing a holiday home within our property. So that is the interplay between the home sales and the real property or rental income side of the business.

So the residents, if you will, pay their pitch fee or their rent fee, but they’re on annual contracts. So in reducing margin and making these more attractive, we expect to accelerate the velocity of occupancies, John.

Thank you.

Thank you. Next question is coming from Keegan Carl from Wolfe Research. Your line is now live.

Yeah. Thanks for the time, guys. Just wondering if you could give some more color in your transient RV outlook for the balance of the year, just more color on how July 4th in particular performed.

For -- and Fernando, if you have a little bit of pacing information to share and everything like that, I just remind everybody that we remain laser focused on converting transient-to-annual. Obviously, over long periods of time, the margins are better, the predictability, the forecasting and the budgeting. We have about 25,000 transient sites right now with approximately 2,000 a year conversion average. So, we expect over the next five years to convert 10,000 or more sites. And we’re just very pleased to say that we’ve had a lot of success in converting and it’s really leading to a sticky revenue as we can forecast annual much better average 10-year stay right around six years. And I’ll let Fernando respond to how the holiday is going.

Yeah. So, Keegan, transient revenue for the full year is now expected to decline by about 10% for the year, which implies, call it a decline of about 8.8% for the second half of the year. The 4th of July results and pacing for Labor Day have given us comfort that the revenue decline is more muted in the second half as the results that we saw during the first half, because it’s when more transient-focused resorts are at peak occupancy and these have performed closer to original expectations this year. For the 4th of July, we were down about 7% on revenue. That’s an out note, right? We’ve converted over the trailing 12-month period, we converted around 7% of sites from transient-to-annual. When you’re comparing just the 4th of July day, we were up over 24% for just the 4th of July day. As it relates to Labor Day pacing, we’re currently pacing it being down between 4% to 6% on revenue for the weekend.

Thank you. Our next question is coming from Jamie Feldman from Wells Fargo. Your line is now live.

Great. Thank you. So, when we met with your team at NAREIT, there was a lot of talk around bigger picture potential, either spinoffs or sales, whether it was a Safe Harbor spinoff or things to do with the U.K. business. It sounds like now you’re on the path of stick with all the core businesses, sell some non-core assets. Is that the way to think about this? Kind of a lot was discussed at the Board level and you guys are now thinking the plan is let’s enjoy what we’ve got, maximize NOI margins and get to our leverage targets through asset sales, or is there something else that may be coming down the pike?

Well, Jamie, I would say that, we certainly wouldn’t share anything of major consequence. We operate all of our business platforms to increase FFO growth, real property contribution over home sales, as we indicated both in the U.K. and in the U.S., maximize returns and conversions by transient-to-annual, and continue to grow contribution and FFO growth in the Marina segment. That being said, we’re just laser focused, as I said before, on our strategies that we’ve shared with you. We believe they will create stakeholder value. That said, we’ll continue to evaluate all options, and when I think about how we’re looking forward, I’d suggest we’re just starting to see the benefit of our strategic plan translate into NOI growth, and I think, what we tried to get across when we met last is the fact that without the headwinds of what we’ve gone into, into 2024, the 2025 will be a much better year where we can see NOI growth translate into FFO growth, and for now, that’s really what we’re targeted at. So nothing really new or changed that I would suggest in a recent period of time.

When you think about potential options, is there anything that would get in the way of your current trajectory for 2025 growth?

There is nothing that I see that would change how we’re evaluating and working towards 2025.

Okay. Great. Thank you.

Sure.

Thank you. Next question is coming from Omotayo Okusanya from Deutsche Bank. Your line is now live.

Hi. Yes. Good afternoon, everyone. Just to stick on transient RV, again, it’s been very hard for the entire industry to kind of forecast what that’s going to look like for all year. And I guess at this point, when you think about that business, what are some of the signs or the green sheets you’re looking at to kind of make you feel more confident about it, ultimately, quote-unquote, stabilizing? And when do you think you may actually start to see some of those signs?

Well, I’ll start out, Gary, and you can add Fernando. So I think Fernando shared the 5% CAGR growth in the transient segment over the last five years. And as we think about things, certainly we’ve shared a lot about the benefit of converting transient-to-annual. So that’s been very, very favorable as we move forward. The transient sites today, as I said, we’re converting about 2,000 a year. So good growth there. And I think that we see RV over a long period of time as a very, very good business. The transient has some cyclicality to it. We’re pushing through that right now. We’re probably headed for the pre-COVID levels. And we’ll continue to control expenses, manage the variable expenses that we can. I think the benefit of really having best-in-class, well-located RV communities and a great operating platform to go forward. The last thing I’d add is that the transient is a great funnel for conversions. So the transient portfolio helps us in the profit margin that we get on the annual side of things and the growth we get on the annual side.

Yeah. I was just going to reaffirm, right? Our strategy of conversion continues to minimize the impact in the near-term of any short-term volatility on the transient side. That business, on a site-adjusted basis, as I mentioned, has grown at an over 5% CAGR on the revenue side. But that, right, we will continue to minimize. Transient revenues four years ago represented about 60% of total revenues in our same property pool. They’re now approaching 40%. And so our strategy is bearing fruit. We’re seeing continued demand for conversions. And then that family is with us, on average, for a six-year period of time and we’re hard at work to continue to extend that tenure. So it is all part of the strategy to continue minimizing that near-term impact.

Got you. Thank you.

Thank you. Next question is coming from Mason Guell from Baird. Your line is now live.

Good afternoon, everyone. Regarding the line of credit balance, it looks like there’s over £1 billion on the line. Are there any plans to pay down these U.K. borrowings?

We are consistent with the strategy as it relates to capital recycling and free cash flow conversion that we would look to continue to pay that down. That is our immediate use of proceeds for any capital recycling opportunities or free cash flow is the pay down of short-term borrowings on our credit facility.

Thank you.

Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over to Gary for any further closing comments.

Well, we thank everybody for their participation and we do look forward to sharing with you third quarter results. Thank you.