This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Community's second quarter 2023 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 meaning 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 would like to introduce management with us today, Gary Shiffman, Chairman President and Chief Executive Officer, and Fernando Castro Carantini, Chief Financial Officer. After their remarks, there will be an opportunity to ask questions. For 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 call is being recorded. I'll now turn the call over to Gary Schiffman, Chairman, President, and Chief Executive Officer. Mr. Schiffman, you may begin.
spk20: Good afternoon, and thank you for joining our call to discuss second quarter results and our updated 2023 guidance. We are pleased to share some continued strong operating results. Core SFO per share of $1.96 per quarter was in line with guidance, supported by strong 6.3% year-over-year growth in same-property NOI and 3.4% growth in recurring EBITDA. Our properties share the compelling fundamentals of resilient demand and low to shrinking supply, which when combined with the unparalleled customer services our teams deliver, historically generate high durable cash flow streams throughout economic cycles. Same property NOI growth in the quarter exceeded the high end of guidance by 150 basis points. and was driven by solid revenue growth and a successful implementation of ongoing expense management. In manufactured housing, same property NOI grew 5.7% compared to 2022, driven by strong rental rate growth and bolstered by occupancy gains. In RVs, same property NOI growth of 3.2% reflected our continued focus on converting transient guests into annual residents, which increases our stream of stable revenue and improves operational efficiencies. At the end of the quarter same property adjusted occupancy for our combined image RV locations was 98.7% a year over year increase of 170 basis points that reflects the resilience of demand for our properties. Additionally. Across our total portfolio, we gained over 1,000 new revenue-producing sites during the quarter, which represents 9.4% growth compared to last year and brings total gains to the year to nearly 1,850 sites. Main property marina NOI grew 11.9% compared to the prior year, exceeding our expectations. The outperformance was fueled by robust demand for wet slips and dry storage from voters who increasingly discover the convenient, unmatched locations and premium amenities offered throughout our best-in-class network of marinas. On a trailing 12-month basis, our SANE property portfolio generates 91% of total real property NOI and is a powerful engine for EBITDA and cash flow growth. We intend to remain internally focused on optimizing our embedded portfolio growth. By reinvesting in our properties and providing the highest level of customer service, we preserve and increase value for the residents, guests, and members, and help ensure predictable long-term revenue growth. Portfolio optimization includes completing select property expansions and, in the case of marinas, dock reconfigurations to enhance property returns and to scale property operations. In the second quarter, we delivered over 100 expansion sites across three communities. In May, we published our 2022 ESG report, highlighting our significant achievements, including the expansion of our GHG inventory to cover marinas and the UK, and our Board's commitment to achieving net zero emissions. These and other important initiatives reinforce our dedication to being responsible stewards of all resources, toward a shared goal of improving the communities in which we live, work, and serve. I would like to thank all Sun team members who have been instrumental in our accomplishments in the first half of the year. As we progress through the second half of 2023, I look forward to realizing even greater achievements that will further enhance Sun's platform and the value we deliver to all of our stakeholders. I'll now turn the call over to Fernando to discuss our results in more detail. Fernando?
spk03: Thank you, Gary. During the second quarter, core FFO of $1.96 per share was in line with guidance. Real property revenue growth, as well as efficiencies in property and corporate level expenses, drove the quarter's performance, partially offset by higher interest expense. Our same property results were solid, as demand for our properties remained strong. Total same property NOI grew 6.3% in the quarter as compared to 2022, which outperformed the high end of our guidance by 150 basis points. Total same property revenues grew 6.2% and exceeded property operating expense growth of 6%. The lower expense growth was broad-based, with moderate year-over-year growth realized in payroll, utilities, real estate taxes, and other expenses. Same property manufactured housing, NOI, increased 5.7% during the quarter, exceeding internal expectations. Outperformance was driven by strong occupancy gains bolstered by a rental rate increase of 5.7% and lower than expected expense growth, especially in payroll and benefits. In RV, same property, NOI, for the quarter increased by 3.2%. growth in weighted average annual rents over the prior year and operating expense efficiencies that resulted in modest 4.1% expense growth over the prior year. These partially offset a 6.1% reduction in growth in transient RV revenue. Our RV communities delivered solid results during the July 4th holiday weekend. Same property RV transient revenue increased by 8.4% compared to 2022, even as we had 5.7% fewer transient sites available. July 4th fell on a Tuesday this year, whereas last year it fell on a Monday. Adjusting for just the Friday to Monday period, same property RV transient revenue still increased by 2.7%. While we continue to see strong holiday and weekend demand, during midweek periods, transient RV revenue growth continues to moderate from recent record levels. Strategically, we remain focused on increasing our stable annual property revenues through increased transient to annual site conversions. In addition to increasing the percent of revenues derived from annual residence, Conversions result in higher NOI margins over time by decreasing the higher level of variable expenses associated with transient guests. During the second quarter, we converted over 700 bringing first-half conversions to nearly 1,300 sites. Since the start of 2020, we have converted over 6,000 transient sites to annual, and we intend to continue driving transient to annual site conversions to optimize long-term returns. In the second quarter, Marina Safe Property NOI increased 11.9%. This outperformance was driven by a 9.2% increase in revenue from stronger demand overall and lower expense growth of 3.4% our internal expectations for mid single-digit expense per lower expense growth was most significant and marina payroll and benefits utilities and supply and repair in terms of home sales we were in line with our expectations in North America and are on track to achieve our guidance continued demand is demonstrated by an average price for new homes of two hundred and ten thousand dollars and higher margins in the UK Economic headwinds continue to impact vacation home sales. Home sale NOI margins, while 5.7% below prior year margins, were in line with our expectations. The approximately 840 homes sold in the second quarter were 8% below our expectations. Inflation in the UK has remained higher for longer than anticipated, and in late June, the Bank of England implemented an unexpected base interest rate. We have seen the time home purchasers take to buy a vacation home continue to lengthen, and the margins on those home sales remain under pressure. Our experienced UK team continues to successfully navigate this challenging market environment with a focus on optimizing volume and margins while these conditions persist. On the real property side, we are seeing higher retention rates for park holiday homeowners, which leads to higher average resident tenure approaching eight years. We remain enthusiastic about the growth opportunity in this segment of the business. As of June 30, 2023, our $7.6 billion in debt outstanding bore interest at an weighted average rate of 4% and had a weighted average years to maturity of 7.1 years. Our trailing 12-month leverage ratio was 6.2 times. Based on our operating cash flow expectations for the remainder of the year and potential capital recycling opportunities, we anticipate the leveraging towards our long-term leverage target. As detailed in our supplemental, we are revising our full year guidance range for core FFO per share downward by 2.2% to a revised range of $7.09 to $7.23 and established guidance for the third quarter. Our revised guidance is primarily reflective of lower expected home sales in the U.K. and higher interest expense expected in the second half of the year, predominantly from the flexible variable rate sterling denominated debt that funded our U.K. business. Since our last guidance update in April, short-term interest rates have increased meaningfully. We are evaluating opportunities to refinance and pay down floating rate debt over the second half of the year. We expect continued strong same property performance and are increasing our total same property NOI growth for the year to a range of 5.3% to 6.1%. The 20 basis point increase at the midpoint is driven by outperformance in manufactured housing and marinas moderated by revised expectations for same property RV. We also expect additional G&A savings over the second half of the year. Our revised same property NOI growth ranges for the year are 5.2% to 5.8% for manufactured housing, representing a 50 basis point increase at the midpoint. 3.4% to 4.6% for RV, representing a 100 basis point decrease at the midpoint. The largest driver for the decrease is revised growth expectations for transient RV revenue, which is now forecasted to be a 3.9% decline for the full year. 8% to 9% for Marina, representing a 110 basis point increase at the midpoint. For our UK operations, we're lowering our full year forecast for home sales NOI to a range of $65.7 to $75.4 million. The revised range represents a 10.2 million decrease to prior guidance at the midpoint and assumes we sell between 2,800 to 2,900 homes for the full year. an approximate 11% decrease in volume from April expectations. 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 26th, and the effect of a property disposition under contract that is expected to close during the third quarter. Our guidance does not include the impact of prospective acquisitions, dispositions, or capital markets activities, which may be included in research analyst estimates. This concludes our prepared remarks. We will now open the call up for questions. Operator?
spk09: We will now open the call for questions. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing these star keys. Again, we ask all participants in the queue to please limit yourself to only one question to allow others to participate. One moment, please, while we poll for questions. Our first question comes from the line of Josh Danaway with Bank of America. Please proceed with your question.
spk22: Yeah. Hey guys, thanks for the time. Um, so I guess this is the second time in a row you've taken down UK home sale profits and I think that the volumes as well. Um, what, what's to say this is the bottom and can you kind of walk us through how you forecast, um, or come up with that guidance range for the home sales and the profit?
spk20: Sure, Josh, thanks. You know, to really look at how we're thinking about the fact that we've had to re-guide before on the UK, I'd underscore that the home sales forecasts are built really from the bottom up at the community level, taking into account all available sites to sell homes on, which include vacant sites, sites to be delivered from expansion activity, and rental home hire fleet sites that we can convert to be able to sell homes and create an annual fee on. And this exercise is completed with a lot of oversight, but built up from the property level. Our revised range really incorporates current market conditions as we understand them. It doesn't assume any major decline in inflation or interest rates in the UK for the remainder of the year. And we think even if we were to see them, the lag between those changes and improvements wouldn't impact results for the balance of this year. Certainly they would into 2024. So the high end of our range currently indicates what we believe is the most likely of outcomes, and the low end of our range really handicaps that outcome further to what we would consider a worst-case scenario. As Fernando mentioned in his remarks, since we met at NARIC, certainly the conditions since then have changed in the UK. Much slower reduction of CPI, although there has been some modest reduction. But the Bank of England's 50 basis point reduction rate increase was unexpected, and it does have ramifications on the buyers of our vacation homes. So from the best insight that we can see, we feel that we've done a good job really thinking through what the scenario should be through 2023, and that's how we adjusted guidance and came up with the range.
spk22: Okay. And then Could you walk us through how most people finance or pay for their park holiday homes? Do a lot of people use a second lien on their primary home to pay for it?
spk03: Sure. So Josh, about 30% of our homeowners are purchasing with financing that would be akin to chattel financing here in the US. The other 70%, we see it as cash. In some instances, they are using proceeds from refinancing their home, their primary home, in order to purchase their vacation home. Certainly, refinancing rates are higher for primary homes, so that's going into the equation as far as lower volume expected of sales.
spk20: And the only thing that I would add that in the UK, the single family residential primary home mortgages tend to fix rates for a shorter period of time here in the US, three to five years. So certainly those potential vacation home buyers are experiencing a reset to their mortgage rates, and that probably is a factor on why we're seeing a slower conversion to buy homes from our potential customers. But the interesting thing I just would add is that The Park Holidays platform really continues to play strong to a market through the changes in Brexit. the location of the units, the work of the properties, the work from home that's taking place there. So there's still, when we talk about the real property activity, still high demand, high tourism, high usage, and a high anecdotal interest remains in buying homes. but it is definitely influenced by a slower pace of sales as I think they're experiencing the financial ramifications in the U.K.
spk09: Our next question comes from the line of Brad Effern with RBC Capital Markets. Please proceed with your question.
spk21: Yeah, thank you. Sticking with the U.K. home sales, Can you talk about what underlies the guidance for the rest of the year in terms of the ASPs and the margins compared to last year?
spk03: Sure. So Brad, our 28 to 2,900 home sales expectations for the full year have us having a margin between $24,000 and $25,000 NOI margin, as you would see reported for us. So we do have a moderation to margin expected on a year-to-date basis. we have been achieving about a $26,000 margin.
spk21: Okay, got it. And then how do you think about what needs to happen for that business to recover? Is it just, you know, rates need to stabilize or go down? Does the UK economy need to improve? And how long do you think about that potentially taking?
spk20: Yeah, I'd like to think we had a crystal ball, and if we went on our assumptions, we would have thought earlier we would start to see some improvement, but that hasn't taken place. Clearly, when you look through Europe, UK has the most challenged economy right now. I think the steps that have been taken by the Bank of England have begun to show some improvement in CPI, which was right around 10% a year ago. As recently as a little while ago, it dropped to 7.9. So it still has a ways to go. But I think as we see that improvement, we would expect there would be commensurate rate decreases in conjunction with that over time. So as we look out into 2024, We think that's when we'll begin to see the change and realization that we go back to more normalized sales.
spk06: Thank you.
spk09: And just as a reminder, anyone who needs to ask a question is star one. And please limit yourself to only one question so we can accommodate everyone to ask a question. Thank you. Our next question comes from the line of Keegan Carl with Wolf Research.
spk06: Please proceed with your questions.
spk04: I'm just curious, one, what you're seeing on the Safe Harbor platform, two, how you're thinking about underwriting the long-term view of the space, and then three, what the marina performance does to your views on long-term capital allocation going forward?
spk03: Egan, the first, I would say, five seconds of your question, five to ten seconds of your question did not come through. Can you repeat? Can you just start over? Yeah.
spk04: Yep. So just focusing on the marina business, because obviously the outperformance is really impressive, and I think people should be focusing on that. So one, given what you're seeing in the Safe Harbor platform, how is that trending versus your initial expectations? How are you thinking about the long-term underwriting of the space because of this? And then what does it mean from a capital allocation standpoint going forward?
spk20: I'll start out, Keegan, and just suggest that the Safe Harbor outperformance really was driven by strong demand for slip and dry storage rental across the entire board from small to medium all the way through to the super yachts. The peak season rate increases were passed through, and occupancy remained very strong. We're seeing increased demand for slips across the board, and a lot of it we really do attribute to the value of the Safe Harbor membership, which includes such things as an unmatched network of locations out there today to travel between, best-in-class facilities and amenities for the members to use, and really best-in-class facilities customer service that we talk about, and then the perks like passing on fuel at basically our cost. We noticed that fuel usage is up 13% year-over-year on a per-gallon basis, so some of the impact SRD&E which was a decision we made intentionally to sacrifice that margin is really paying a reward in the more important slip rental. So we're very, very pleased at how things are performing at Safe Harbor Marinas. And we've seen it in performance quarter after quarter. With regard to our long-term outlook, I think we have shared with you that capital allocation is very restricted at the company today we're very internally focused on using our capital in a very disciplined way within our portfolio and marinas are a great example we have identified 27 opportunities to reconfigure marina slips And when we invest in reconfiguring these slips, we get about a 10% to 12% return on that investment. Of the 27 opportunities, seven reconfigurations have taken place. Three are under construction right now. about ten others are in the permitting process and three or four are still being worked on. So that's where we'll see capital allocation. If we're looking for external growth, it will be restricted to a Really a creative opportunity in a situation like a Savannah Yacht Marina where strategically it has a lot of benefit to the network effect that we're trying to achieve within the marinas. So I don't know if you have anything to add.
spk06: Hopefully that addresses the question.
spk04: Could I just follow up? Just because Fernando called out capital recycling as an opportunity, is it fair to assume you might sell some MHRV assets and recycle the capital into the higher cap rate, higher return marina business? Is that the right way to think about it?
spk03: Ian, I think as we look at our portfolio and evaluate, there is a bottom tier of assets always when forced ranking. So we'll look to selectively and strategically look to recycle out of some properties that maybe aren't meeting the long-term growth profile that we're looking for. And today, any immediate use of that capital would likely go towards deleveraging. But certainly, we'll evaluate all opportunities in front of us.
spk05: Got it. Thanks a lot, Dr. McKeel.
spk09: Our next question comes from the line of Eric Wilford, Citi. did proceed with your question.
spk11: Thanks. It's actually a Nick Joseph here with Eric. Uh, you know, Gary, if I think about kind of really over the last 10 years, I think the company's really, um, benefited from a stability of results. And, you know, if we go back to kind of the guidance questions earlier, definitely seems like, uh, things are a lot more volatile now. Um, obviously part of that's probably the recent acquisitions, but at the end of the day, it's, it's missing guidance and calling into question, um, kind of the forward guidance from here. So, you know, as you think about what do you think needs to change from the corporate side, you know, to forecast results more accurately? You know, these just growing pains, I guess, with the UK and maybe some of the macro volatility that you cited, and ultimately we get back to kind of how it was traditionally, or is the range of outcomes just a bit broader given the new businesses?
spk20: You know, I'll give some thoughts that I have, and Fernando certainly can share his thoughts, but we have shared with our stakeholders that complexity is something we're working very hard to reduce, taking all the steps that we possibly can to get back to helping and assisting with simplification and the modeling. forward guidance. There is no doubt the headwinds we're experiencing in the UK have caused a lot of challenges with regard to guiding forward. And when we think about things, we use the best tools that we have at the time, whether it be the forward curve, whether it be reading everything we can with regard to The outward look on the economic challenges there, obviously, we've had to re-guide, so that makes things difficult. But all in all, when we think about 91% of the entire contribution from real property is what we're trying to guide to. We have a lot of work to do in the UK that we're working on. On the marina side, we've worked very, very hard to be able to put together the same site marina data so that we can measure going forward. And I know that Fernando and The disclosure and supplemental has been working to simplify a lot of things and kind of present a lot of benefits that can help the modeling. I don't know if you have anything you want to add from there. So we are very, very attuned and aware of the complexity that has been created in large part through the acquisitions, both marinas and the UK recently. And as a company that's been around 30 plus years in the public marketplace, we listen to our stakeholders and we're very, very focused. on step-by-step reducing that complexity and making the modeling and the forward guiding as good as possible.
spk11: Thanks. Maybe just to follow up on that, what can you do to reduce the complexity in the near, medium, and longer term? Is it selling the UK home sale business? Is it somehow restructuring it? How are you thinking about actually reducing that complexity?
spk20: Well, certainly one piece of it is the fact that strategically we have shared with the market that our long-term goal in the UK was to de-emphasize contribution from the home sales margins and focus on the very, very stickiness of real property contribution like we do in the U.S., And that was a kind of a five-year strategic plan. We're slowly making progress out there. Ironically, as a percentage with home sales down, that real property side percentage is up. But we're working on that over a long period of time. And I think that we've already increased the average stay in the UK to around eight years. We're expanding our licenses to stay in the UK properties from 20 years to 30 years. So we expect that eight years to continue to grow and look more similar to the 15 years, if you will, in the North America manufactured housing. So de-emphasize the margins on home sales and really focus on the... real property contribution, and we've taken similar steps in the marina side to accomplish that as well as we convert some of the SRDD and take you into service over to rental income from third parties. All that, I think, as we look out over a period of time will help to simplify things going forward.
spk06: Thank you. Our next question comes from the line of Anthony Powell with Barclays.
spk09: You can proceed with your question.
spk16: Thanks. Good afternoon. The question on, I guess, normalization of various leisure-adjacent businesses has been a topic of a lot of calls the past few days. Transient RV and marina, you're still seeing growth in transient RV, I guess, on holidays, not necessarily midweek. And then marinas have been pretty strong. Do you see any risk of normalization impacting these revenues in the next few years as people will turn to maybe more older habits post-COVID?
spk03: I would say, Anthony, I think we're overall on the transient RV side. We're seeing that normalization from record years over the last two to three years, given the bump over the second half of 2020 and into 2021. We continue to see a lot of demand for our properties. I think you see that with the record number of conversions that we have, having converted over 6,000 sites over the course of the last three and a half years, which greatly outpaces what we were averaging on a per-year basis prior to the pandemic. And so now we're taking that transient guest and they're choosing to stay with us for, call it on average, about a five-year period of time and on an annual basis getting a rental, predictable rental increase from from our standpoint. On the marina side, we've certainly seen very high demand on the transient side as well in the first half of this year. I would say we're not underwriting double-digit transient growth for that line item, but I'll remind the Our stakeholders, the percentage of rental income coming from transient on the marina side is much smaller. It's about 5%, 4% to 5% of total rental income. So we have seen outperformance on that line item, but are not underwriting double-digit growth over the course of the mid to long term.
spk06: All right. Thank you. Our next question comes from the line of Jamie Feldman with Wells Fargo.
spk09: Please proceed with your question.
spk08: Great. Thank you. So appreciate all your commentary on Park Holiday and simplifying. But if you think about some of the other areas where you took down guidance, you know, how do you create more visibility on that and simplify that? And then along the same line, you know, your credit line balance is up above $800 million. Can you talk about plans to either keep it there or refinance that to bring it back down?
spk03: Sure. Thank you, Jamie. On the... We modestly brought down expectations on the SRD&E side. That is, as Gary mentioned earlier, we are looking to de-emphasize that over time as we, especially on the marina side, we convert the service business over to third parties paying us rent. at the property level. So I think you'll continue seeing that over time, and that ultimately will benefit real property NOI and rental income that we receive, not just from our members, but then third parties that pay us rent to be at our properties to provide that service. As it relates to our line of credit, We've mentioned over the course of the last couple of months pursuing various strategic alternatives, whether that's capital recycling from operating assets that the immediate use of that capital would be to pay down debt. I think as you look towards the second half and into 2024, there will be a moderation in capital investments as well that will convert more free cash flow towards deleveraging. But we are evaluating transactions in the capital markets as well in order to bring those balances down and delever towards our long-term target of being in the mid-fives.
spk08: Okay, thank you. And if I could just ask a follow-up on that. So the interest expense guidance reduction, is that because you used the credit line and didn't expect to or because rates are higher than you thought they would be? And if you did use it more than you expected, what was the reason for that?
spk03: Sure. On a forecast-to-forecast basis, I would say primarily would be expectations from the forward curve, where in general, ending the year, rates for both SOFR and SONIA are up on average about 70, 75 basis points from our last forecast at the end of April.
spk06: Okay, so it's not balanced. It was really just forecast. Okay, all right.
spk08: Thank you very much. Thank you.
spk09: Our next question comes from the line of Samir Canal with Evercore ISI. Please proceed with your question.
spk13: Yeah, good afternoon. I guess, Gary, just on maybe switching gears a little bit on the MH side, pricing is still strong on that end. I guess, how do you think about rent increases in the next year with inflation moderating here? I mean, more of a question kind of in the next 18 months. Thanks.
spk20: Yeah, that's a great question. Certainly at overall 98.7% occupancy MH annual, there will be the opportunity to continue to pass through all inflationary pressure I'd suggest that what we did last October in advance of providing guidance in February with fourth quarter interim results, we will again share with the market our forecast on rental rate increases across the board. But our expectation is that we will be able to pass through a solid rental increases throughout the businesses and we'll share those with everybody in October.
spk06: Our next question comes from the line of John Pawlowski with Green Street.
spk09: Here to proceed with your question.
spk02: Thanks for the time. Fernando, I wanted to follow up on the revolving credit facility question. I guess it's been, you know, well over a year where you've leaned heavily on the revolver. So why wasn't debt properly termed out long ago to more closely align the duration of the debt with your assets? And when specifically should we expect you to lock in longer term financing?
spk03: John, you'll see us over the course of the next couple of quarters look to extend our maturities, not just what's in our line of credit, but what is coming due from a secure debt standpoint. So that's something that we are actively working towards. But as far as bringing It's really evaluating the multiple strategic alternatives that we have in front of us as far as being able to execute on those transactions and bring balances down. But we've been, since our initial investment grade rating in the summer of 2021, we've been very active in the bond market, having done about $2.2 billion of long-term debt between seven and ten years of tenure. And our most recent transaction was back in January of this year, and that would be expected to – the course of the next couple of quarters.
spk02: Okay. And then another question on Park Holidays. At your investor day over there, we toured properties with four or five senior leaders from Park Holidays. Have any senior leaders left, since left, or retired? Who's overseeing the day-to-day operations from the Sun mothership here in the States?
spk20: Yeah. John, generally, everybody is still there, and there's a really well-seasoned team looking to work on pulling every single lever as they have these challenging economic times. So that group of talented people are still there, and we're very pleased that they are there.
spk06: Thank you.
spk09: Our next question comes from the line of John Kim with BMO Capital Markets. Good to proceed with your question.
spk14: Good afternoon. I had a question on Ingenia. If I'm not mistaken, your development joint venture had a five-year initial term that would be up for renewal later this year. So I was wondering what your appetite is to keep it going, or could this be a potential source of funds? Yeah.
spk20: Great question, John. I think the fact is that technically the Sun Genia, as we call it, JV five-year period of time is up at the end of November. We are always assessing our businesses, if you will, to remind everyone Sun owns a 10% interest in Genia Headstock. And we really have had a successful JV, which is performing. We're happy with the partnership relationship there, although there is no doubt COVID and the pandemic put kind of a two-year crimp in the plant. The SunGenia JB now has four developments. Two are in fill-up phase, and they're filling up nicely. And the other two are just about to break ground. With the JV expiring, we will continue to review how we will think about moving forward, but one of the factors is that as these four developments are moving forward, we want to make sure that we have the best opportunity to maximize those results once they're filled up and stabilized. But we also are reviewing all optionality that relates to and the options that we can do to bring down some of our variable rate debt. So, we'll continue to keep you advised as we think through how we're going to focus on the period of time where that does expire.
spk14: Okay. And if I could just follow up on UK home sales, just given the third quarter is the most crucial quarter of the year. Out of the number of homes that you had planned to sell for the third quarter, how many have already been sold or are currently in negotiations? And I was wondering how sensitive this is to mortgage rates. There was an article that came out in the FT just a couple hours ago of three of the largest UK lenders reducing mortgage rates. I'm wondering if that's been factored in at all.
spk20: I would start to say that as I shared in the comments earlier, we're not sitting here anticipating the benefit of reduced mortgage rates or anything like that going forward. That would definitely be a positive, but we do think there will be a lag before we see the benefits of things like that. So the underwriting that we talked about in the $2,600 to $2,900 unit range for the year is kind of our downside to our view in the market right now. And I don't know, Fernando, do we have any information on how many stoves deserve work?
spk03: John, we'll provide updates on homes sold over the course of the quarter when we meet during investor presentations and any other potential updates. But we are, as you identified, we're heading into a busy period as the holidays do pick up in August. And we'll be able to report back to the market over the course of the next couple of weeks.
spk14: Can I just squeeze in one more question? The seasonality had shifted a little bit, but you also provided more clarity or more disclosure on the seasonality of UK home sales. Is this a good run rate going forward where roughly a third is sold in each of the second and third quarters?
spk03: The seasonality shift would say due primarily to the changes in volume, but yes, this would be the best run rate to use from a seasonality standpoint.
spk06: Okay. Thank you. Our next question comes from the line of Wes Galladay with Baird.
spk09: Please proceed with your question.
spk07: Hey, everyone. I just want to maybe address maybe a few more of the moving parts that you may have in the future. Can you comment on the loan book? Is that mostly fixed rate rates that you're charging, or is it floating? And do you expect the size of the book to stay the same over the next few years?
spk06: Wes, our wholly owned notebook note
spk03: no portfolio is about 62 million dollars uh 62 million dollars today um that is um that is in active uh active repayment um as residents uh make uh make payments on their loans uh we do have uh we do have a joint venture where we are a 40 partner um where we are um we are Underwriting a run rate, call it $7 to $10 million of financing per month as our residents finance their homes in our communities. But that is fixed. Those are fixed rate financings. Chattel loan rates have historically been in the 8% to 10% range. Those haven't moved significantly. There's been an uptick, but they are, call it plus minus, at the high end of the range today for customers.
spk20: I would only suggest with a slowdown of capital allocation to development of new sites, which is where most of that channel loan is used, probably a reduction in usage as we go forward.
spk09: Our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
spk19: Good afternoon. Thanks a lot for taking my question. Gary, earlier you were talking about how the UK, you're looking for a mix shift away from the NOI generated from the home sales and more from the rents. In the second quarter, UK home sales, the quantity was up 11%, selling price down 11%. But have you been able to pass along greater rents along with the lower selling prices, so maybe you get a little bit more income over the long tail as people pay their regular rents? Yes.
spk20: When we talk about the UK management team, As they shared with us on one of our update calls recently, they are fully attuned with that strategy and very, very focused on it. And we expect to see the ability to pass on those rental increases. And, in fact, it's a little bit accelerated right now as we adjust our home price margins to move volume in this challenging economic time and sell more homes. and are able to put it on to the monthly real property fees. So we expect to continue seeing that, as we said, strategically over the next four or five years, and would expect to see accelerated growth on the real property monthly fee side as we reduce operating margins.
spk19: Not sale margins, sorry. And as a follow-up, are you able to kind of quantify if the increase in the rents is offsetting the pressure on the home sale? So are you just getting back what you're losing in the near term? Are you getting that back over time as part of the consistent cash flow? Or is it just kind of a more careful balance as you navigate a pressured consumer than over time you look to navigate it further?
spk20: Yeah, at this time, I think it's the latter. First of all, we'll be too soon to drop and share any conclusions at this time because we're just adjusting to a very challenging economic environment there. But we do believe over a period of time. Just as we do in North America, we would sell a home at a very low margin to be able to create a sticky rent in one of our manufactured housing communities with less than a half a percent of homes leaving on an annual basis. generally generate uninterrupted rent for, you know, 40, 50 plus year period of time. And obviously that predictable steady cash flow is what we're looking for because it does tend to get the better multiple. and understanding that management and our stakeholders are looking for that over a period of time. We're very, very focused on achieving that. And so is the team over there, so we are aligned on that.
spk06: Thank you very much. And our next question comes from the line of Anthony Howell with Truist Securities.
spk09: Please proceed with your question.
spk14: Hey, guys. Thanks for taking my question. Can you guys talk about the trends that you guys are seeing on the holiday rental side in the UK? I heard that some of the competitors are lowering their rates. Just curious if you guys are getting the same thing as well.
spk03: Anthony, good question. We have seen the competition bringing down rates to capture demand, but we're actually seeing we're holding rates up fairly steady and are capturing market share from the market on that segment. And so that's the outlook. That is the conversations that we're having today.
spk14: Gotcha. And just a separate question. Um, can you guys go over the current like RV animation holiday park expansion opportunities and other initiatives such as solar arrays and slip configurations. It'd be great. You can you can like quantify the size of each opportunity and also like the potential return
spk03: Anthony, in any of these projects from an expansion or growth potential, expansion will typically be that MH or RV will typically carry returns in low teens, about 10% to 13%. Historically, that has been the case. Any solar arrays would carry slightly higher ROIs in the mid-teens from that standpoint. And then in the UK, any expansion opportunity would carries a slightly higher ROI, call it in the 20% range, given that payback period when building in, let's call it a home sale, and the usage of the rental unit, it pays back much, much faster. Offline, we can go through in detail for any of these buckets what the capital spend would be. I think as we mentioned earlier, we are looking at each of these investment buckets as we head into 2024 and would expect a deceleration of spend. as we focus on converting more free cash flow towards debt repayment, but we can review those buckets offline.
spk06: Okay. Thank you.
spk09: And we have reached the end of the question and answer session, and I'll now turn it back over to management flow code remarks.
spk20: Well, we appreciate everyone joining us for our second quarter call, and we look forward to speaking on the third quarter and also sharing how we're viewing the implementation of rental increases going into 2024. Thank you, operator.
spk09: And thank you for your participation in today's conference. This does conclude today's The company remarks, you may now disconnect your line. Goodbye. you you Thank you. Thank you. Thank you.
spk12: Thank you. Thank you.
spk09: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Community's second quarter 2023 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 meaning 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 would like to introduce management with us today, Gary Shiffman, Chairman President and Chief Executive Officer, and Fernando Castro Carantini, Chief Financial Officer. After their remarks, there will be an opportunity to ask questions. For 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 call is being recorded. I'll now turn the call over to Gary Shiffman, Chairman, President, and Chief Executive Officer. Mr. Shiffman, you may begin.
spk20: Good afternoon, and thank you for joining our call to discuss second quarter results and our updated 2023 guidance. We are pleased to share some continued strong operating results. Core SFO per share of $1.96 per quarter was in line with guidance, supported by strong 6.3% year-over-year growth in same-property NOI and 3.4% growth in recurring EBITDA. Our properties share the compelling fundamentals of resilient demand and low to shrinking supply, which when combined with the unparalleled customer services our teams deliver, historically generate high durable cash flow streams throughout economic cycles. Same property NOI growth in the quarter exceeded the high end of guidance by 150 basis points. It was driven by solid revenue growth and the successful implementation of ongoing expense management. In manufactured housing, same property NOI grew 5.7% compared to 2022, driven by strong rental rate growth and bolstered by occupancy gains. In RVs, same property NOI growth of 3.2% reflected our continued focus on converting transient guests into annual residents, which increases our stream of stable revenue and improves operational efficiencies. At the end of the quarter, same property adjusted occupancy for our combined MH and RV locations was 98.7%, a year-over-year increase of 170 basis points. That reflects the resilience of demand for our properties. Additionally, across our total portfolio, we gained over 1,000 new revenue producing sites during the quarter, which represents 9.4% growth compared to last year and brings total gains to the year to nearly 1,850 sites. Main property marina NOI grew 11.9% compared to the prior year, exceeding our expectations. The outperformance was fueled by robust demand for wet slips and dry storage from voters who increasingly discover the convenient, unmatched locations and premium amenities offered throughout our best-in-class network of marinas. On a trailing 12-month basis, our same property portfolio generates 91% of total real property NOI and is a powerful engine for EBITDA and cash flow growth. We intend to remain internally focused on optimizing our embedded portfolio growth. By reinvesting in our properties and providing the highest level of customer service, we preserve and increase value for the residents, guests, and members, and help ensure predictable long-term revenue growth. Portfolio optimization includes completing select property expansions, and in the case of marinas, dock reconfigurations to enhance property returns and to scale property operations. In the second quarter, we delivered over 100 expansion sites across three communities. In May, we published our 2022 ESG report, highlighting our significant achievements, including the expansion of our GHG inventory to cover marinas and the UK, and our Board's commitment to achieving net zero emissions. These and other important initiatives reinforce our dedication to being responsible stewards of all resources, toward a shared goal of improving the communities in which we live, work, and serve. I would like to thank all Sun team members who have been instrumental in our accomplishments in the first half of the year. As we progress through the second half of 2023, I look forward to realizing even greater achievements that will further enhance Sun's platform and the value we deliver to all of our stakeholders. I'll now turn the call over to Fernando to discuss our results in more detail. Fernando?
spk03: Thank you, Gary. During the second quarter, core FFO of $1.96 per share was in line with guidance. Real property revenue growth as well as efficiencies in property and corporate level expenses drove the quarter's performance, partially offset by higher interest expense. Our same property results were solid as demand for our properties remained strong. Total same property NOI grew 6.3% in the quarter as compared to 2022, which outperformed the high end of our guidance by 150 basis points. Total same property revenues grew 6.2% and exceeded property operating expense growth of 6%. The lower expense growth was broad-based, with moderate year-over-year growth realized in payroll, utilities, real estate taxes, and other expenses. Same property manufactured housing, NOI, increased 5.7% during the quarter, exceeding internal expectations. Outperformance was driven by strong occupancy gains bolstered by a rental rate increase of 5.7% and lower than expected expense growth, especially in payroll and benefits. In RV, same property, NOI, for the quarter increased by 3.2%. We achieved strong 8.6% growth in weighted average annual rents over the prior year and operating expense efficiencies that resulted in modest 4.1% expense growth over the prior year. These partially offset a 6.1% reduction in growth in transient RV revenue. Our RV communities delivered solid results during the July 4th holiday weekend. Same property RV transient revenue increased by 8.4% compared to 2022, even as we had 5.7% fewer transient sites available. July 4th fell on a Tuesday this year, whereas last year it fell on a Monday. Adjusting for just the Friday to Monday period, same property RV transient revenue still increased by 2.7%. While we continue to see strong holiday and weekend demand, during midweek periods, transient RV revenue growth continues to moderate from recent record levels. Strategically, we remain focused on increasing our stable annual property revenues through increased transient to annual site conversions. In addition to increasing the percent of revenues derived from annual residence, conversions result in higher NOI margins over time, of variable expenses associated with transient guests. During the second quarter, we converted over 750 transient sites across our total RV portfolio, bringing first-half conversions to nearly 1,300 sites. Since the start of 2020, we have converted over 6,000 transient sites to annual, and we intend to continue driving transient to annual site conversions to optimize long-term returns. In the second quarter, marina-safe property NOI increased 11.9%. This outperformance was driven by a 9.2% increase in revenue from stronger demand overall and lower expense growth of 3.4% that significantly surpassed our internal expectations for mid-single-digit expense growth. Lower expense growth was most significant in marina payroll and benefits, utilities, and supply and repair. In terms of home sales, we were in line with our expectations in North America and are on track to achieve our guidance. Continued demand is demonstrated by an average price for new homes of $210,000 and higher margins. In the UK, economic headwinds continue to impact vacation home sales. Home sale NOI margins, while 5.7% below prior year margins, were in line with our expectations. The approximately 840 homes sold in the second quarter were 8% below our expectations. Inflation in the U.K. has remained higher for longer than anticipated, and in late June, the Bank of England implemented an unexpected 50 basis point increase in its base interest rate. We have seen the time home purchasers take to buy a vacation home continue to lengthen, and the margins on those home sales remain undervalued. Our experienced UK team continues to successfully navigate this challenging market environment with a focus on optimizing volume and margins while these conditions persist. On the real property side, we are seeing higher retention rates for park holiday homeowners, which leads to higher average resident tenure approaching eight years. We remain enthusiastic about the growth opportunity in this segment of the business. As of June 30, 2023, our $7.6 billion in debt outstanding bore interest at an weighted average rate of 4% and had a weighted average years to maturity of 7.1 years. Our trailing 12-month leverage ratio was 6.2 times. Based on our operating cash flow expectations for the remainder of the year and potential capital recycling opportunities, we anticipate the leveraging towards our long-term leverage targets. As detailed in our supplemental, we are revising our full year guidance range for core FFO per share downward by 2.2% to a revised range of $7.09 to $7.23 and establish guidance for the third quarter. Our revised guidance is primarily reflective of lower expected home sales in the U.K. and higher interest expense expected in the second half of the year, predominantly from the flexible variable rate sterling denominated debt that funded our U.K. business. Since our last guidance update in April, short-term interest rates have increased meaningfully. We are evaluating opportunities to refinance and pay down floating rate debt over the second half of the year. We expect continued strong same property performance and are increasing our total same property NOI growth for the year to a range of 5.3% to 6.1%. The 20 basis point increase at the midpoint is driven by outperformance in manufactured housing and marinas moderated by revised expectations for same property RV. We also expect additional G&A savings over the second half of the year. Our revised same property NOI growth ranges for the year are 5.2% to 5.8% for manufactured housing, representing a 50 basis point increase at the midpoint. 3.4% to 4.6% for RV, representing a 100 basis point decrease at the midpoint. The largest driver for the decrease is revised growth expectations for transient RV revenue, which is now forecasted to be a 3.9% decline for the full year. eight to nine percent for marina representing a 110 basis point increase at the midpoint for our uk operations we're lowering our full year forecast for home sales noi to a range of 65.7 to 75.4 million dollars the revised range represents a 10.2 million decrease to prior guidance at the midpoint and assumes we sell between 2 800 to 2 900 homes for the full year an approximate 11% decrease in volume from April expectations. 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 26th and the effect of a property disposition under contract that is expected to close during the third quarter. Our guidance does not include the impact of prospective acquisitions, dispositions, or capital markets activities, which may be included in research analyst estimates. This concludes our prepared remarks. We will now open the call up for questions. Operator?
spk09: We will now open the call for questions. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing these star keys. Again, we ask all participants in the queue to please limit yourself to only one question to allow others to participate. One moment, please, while we poll for questions. Our first question comes from the line of Josh Danaway with Bank of America. Please proceed with your question.
spk22: Yeah. Hey guys, thanks for the time. So I guess this is the second time in a row you've taken down UK home sale profits and I think the volumes as well. What's to say this is the bottom and can you kind of walk us through how you forecast or come up with that guidance range for the home sales and the profit?
spk20: True, Josh, thanks. You know, to really look at how we're thinking about the fact that we've had to re-guide before on the UK, I'd underscore that the home sales forecasts are built really from the bottom up at the community level, taking into account all available sites to sell homes on, which include vacant sites, sites to be delivered from expansion activity and rental home hire fleet sites that we can convert to be able to sell homes and create an annual fee on. And this exercise is completed with a lot of oversight, but built up from the property level. Our revised range really incorporates current market conditions as we understand them. It doesn't assume any major decline in inflation or interest rates in the UK for the remainder of the year. And we think even if we were to see them, the lag between those changes and improvements wouldn't impact results for the balance of this year. Certainly they would into 2024. So the high end of our range currently indicates what we believe is the most likely of outcomes, and the low end of our range really handicaps that outcome further to what we would consider a worst-case scenario. As Fernando mentioned in his remarks, since we met at NARIC, certainly the conditions since then have changed in the UK. Much slower reduction of CPI, although there has been some modest reduction. But the Bank of England's 50 basis point reduction rate increase was unexpected, and it does have ramifications on the buyers of our vacation homes. So from the best insight that we can see, we feel that we've done a good job really thinking through what the scenario should be through 2023, and that's how we adjusted guidance and came up with the range.
spk22: Okay. And then Could you walk us through how most people finance or pay for their park holiday homes? Do a lot of people use like a second lien on their primary home to pay for it?
spk03: Sure. So, Josh, about 30% of our homeowners are purchasing with financing that would be akin to chattel financing here in the U.S., The other 70%, we see it as cash. In some instances, they are using proceeds from refinancing their home, their primary home, in order to purchase their vacation home. Certainly, refinancing rates are higher for primary homes, so that's going into the equation as far as lower volume expected of sales.
spk20: And the only thing that I would add that in the UK, the single family residential primary home mortgages tend to fix rates for a shorter period of time here in the US, three to five years. So certainly those potential vacation home buyers are experiencing a reset to their mortgage rates, and that probably is a factor on why we're seeing a slower conversion to buy homes from our potential customers. But the interesting thing I just would add is that The Park Holidays platform really continues to play strong to a market through the changes in Brexit. the location of the units, the work of the properties, the work from home that's taking place there. So there's still, when we talk about the real property activity, still high demand, high tourism, high usage, and a high anecdotal interest remains in buying homes. but it is definitely influenced by a slower pace of sales because I think they're experiencing the financial ramifications in the U.K.
spk09: Our next question comes from the line of Brad Effern with RBC Capital Markets. Please proceed with your question.
spk21: Yeah, thank you. Sticking with the U.K. home sales, Can you talk about what underlies the guidance for the rest of the year in terms of the ASPs and the margins compared to last year?
spk03: Sure. So, Brad, our 28 to 2,900 home sales expectations for the full year have us having a margin between $24,000 and $25,000 NOI margin, as you would see reported for us. So, we do have a moderation to margin expected on a year-to-date basis. we have been achieving about a $26,000 margin.
spk21: Okay, got it. And then how do you think about what needs to happen for that business to recover? Is it just, you know, rates need to stabilize or go down? Does the UK economy need to improve? And how long do you think about that potentially taking?
spk20: Yeah, I'd like to think we had a crystal ball, and if we went on our assumptions, we would have thought earlier we would start to see some improvement, but that hasn't taken place. Clearly, when you look through Europe, UK has the most challenged economy right now. I think the steps that have been taken by the Bank of England have begun to show some improvement in CPI, which was right around 10% a year ago. As recently as a little while ago, it dropped to 7.9. So it still has a ways to go. But I think as we see that improvement, we would expect there would be commensurate rate decreases in conjunction with that over time. So as we look out into 2024, We think that's when we'll begin to see the change and realization that we go back to more normalized sales.
spk06: Thank you.
spk09: And just as a reminder, anyone who needs to ask a question is star one. And please limit yourself to only one question so we can accommodate everyone to ask a question. Thank you. Our next question comes from the line of Keegan Carl with Wolf Research.
spk06: Please proceed with your questions.
spk04: I'm just curious, one, what you're seeing on the Safe Harbor platform, two, how you're thinking about underwriting the long-term view of the space, and then three, what the marina performance does to your views on long-term capital allocation going forward?
spk03: Deegan, the first, I would say, five seconds of your question, five to ten seconds of your question did not come through. Can you repeat? Can you just start over? Yeah.
spk04: Yep. So just focusing on the marina business, because obviously the outperformance is really impressive, and I think people should be focusing on that. So one, given what you're seeing in the safe harbor platform, how is that trending versus your initial expectations? How are you thinking about the long-term underwriting of the space because of this? And then what does it mean from a capital allocation standpoint going forward?
spk20: I'll start out, Keegan, and just suggest that the Safe Harbor outperformance really was driven by strong demand for slip and drive storage rental across the entire board from small to medium all the way through to the super yachts. The peak season rate increases were passed through and occupancy remained very strong. We're seeing increased demand for slips across the board, and a lot of it we really do attribute to the value of the Safe Harbor membership, which includes such things as an unmatched network of locations out there today to travel between, best-in-class facilities and amenities for the members to use, and really best-in-class facilities customer service that we talk about, and then the perks like passing on fuel at basically our cost. We noticed that fuel usage is up 13% year-over-year on a per-gallon basis, so some of the impact to us are D&E, which was a decision we made intentionally to sacrifice that margin is really paying a reward in the more important slip rental. So we're very, very pleased at how things are performing at Safe Harbor Marinas. And we've seen it in performance quarter after quarter. With regard to our long-term outlook, I think we have shared with you that Capital allocation is very restricted at the company today. We're very internally focused on using our capital in a very disciplined way within our portfolio, and marinas are a great example. We have identified 27 opportunities to reconfigure marina slips. And when we invest in reconfiguring these slips, we get about a 10% to 12% return on that investment. Of the 27 opportunities, seven reconfigurations have taken place. Three are under construction right now. about ten others are in the permitting process and three or four are still being worked on. So that's where we'll see capital allocation. If we're looking for external growth, it will be restricted to a Really a creative opportunity in a situation like at Savannah Yacht Marina where strategically it has a lot of benefit to the network effect that we're trying to achieve within the marinas. So I don't know if you have anything to add.
spk06: Hopefully that addresses the question.
spk04: Could I just follow up? Just because Fernando called out capital recycling as an opportunity, is it fair to assume you might sell some MHRV assets and recycle the capital into the higher cap rate, higher return marina business? Is that the right way to think about it?
spk03: Ian, I think as we look at our portfolio and evaluate, there is a bottom tier of assets always when forced ranking. So we'll look to selectively and strategically look to recycle out of some properties that maybe aren't meeting the long-term growth profile that we're looking for. And today, any immediate use of that capital would likely go towards deleveraging. But certainly, we'll evaluate all opportunities in front of us.
spk05: Got it. Thanks a lot, Dr. McKeon.
spk09: Our next question comes from the line of Eric Wilford, Citi. did proceed with your question.
spk11: Thanks. It's actually a Nick Joseph here with Eric. Uh, you know, Gary, if I think about kind of really over the last 10 years, I think the company's really, um, benefited from a stability of results. And, you know, if we go back to kind of the guidance questions earlier, definitely seems like, uh, things are a lot more volatile now. Um, obviously part of that's probably the recent acquisitions, but at the end of the day, it's, it's missing guidance and calling into question, um, kind of the forward guidance from here. So, you know, as you think about what, what do you think needs to change from the corporate side, um, you know, to forecast results more accurately, um, you know, these just growing pains, I guess, with the UK and maybe some, some of the macro volatility that you cited. Um, and ultimately we get back to kind of how it was traditionally, um, or is the range of outcomes just a bit broader given the new businesses?
spk20: You know, I'll give some thoughts that I have, and Fernando certainly can share his thoughts, but we have shared with our stakeholders that complexity is something we're working very hard to reduce, taking all the steps that we possibly can to get back to helping and assisting with simplification and the modeling. forward guidance. There is no doubt the headwinds we're experiencing in the UK have caused a lot of challenges with regard to guiding forward. And when we think about things, we use the best tools that we have at the time, whether it be the forward curve, whether it be reading everything we can with regard to The outward look on the economic challenges there, obviously, we've had to re-guide, so that makes things difficult. But all in all, when we think about 91% of the entire contribution from real property is what we're trying to guide to. We have a lot of work to do in the UK that we're working on. On the marina side, we've worked very, very hard to be able to put together the same site marina data so that we can measure going forward. And I know that Fernando and The disclosure and supplemental has been working to simplify a lot of things and kind of present a lot of benefits that can help the modeling. I don't know if you have anything you want to add from there. So we are very, very attuned and aware of the complexity that has been created in large part through the acquisitions, both marinas and the UK recently. And as a company that's been around 30 plus years in the public marketplace, we listen to our stakeholders and we're very, very focused. on step-by-step reducing that complexity and making the modeling and the forward guiding as good as possible.
spk11: Thanks. Maybe just to follow up on that, what can you do to reduce the complexity in the near, medium, and longer term? Is it selling the UK home sale business? Is it somehow restructuring it? How are you thinking about actually reducing that complexity?
spk20: Well, certainly one piece of it is the fact that strategically we have shared with the market that our long-term goal in the UK was to de-emphasize contribution from the home sales margins and focus on the very, very stickiness of real property contribution like we do in the U.S., And that was a kind of a five-year strategic plan. We're slowly making progress out there. Ironically, as a percentage with home sales down, that real property side percentage is up. But we're working on that over a long period of time. And I think that we've already increased the average stay in the UK to around eight years. We're expanding our licenses to stay in the UK properties from 20 years to 30 years. So we expect that eight years to continue to grow and look more similar to the 15 years, if you will, in the North America manufactured housing. So de-emphasize the margins on home sales and really focus on the... real property contribution, and we've taken similar steps in the marina side to accomplish that as well as we convert some of the SRDV and take you into service over to rental income from third parties. All that, I think, as we look out over a period of time will help to simplify things going forward.
spk06: Thank you. Our next question comes from the line of Anthony Powell with Barclays.
spk09: Keith, we'll see what you have.
spk16: Thanks. Good afternoon. The question on, I guess, normalization of various leisure-adjacent businesses has been a topic of a lot of calls the past few days. Transient RV and marina, you're still seeing growth in transient RV, I guess, on holidays, not necessarily midweek. And then marinas have been pretty strong. Do you see any risk of normalization impacting these revenues in the next few years as people will turn to maybe more older habits post-COVID.
spk03: I would say, Anthony, I think we're overall on the transient RV side. We're seeing that normalization from record years over the last two to three years, given the bump over the second half of 2020 and into 2021. We continue to see a lot of demand for our properties. I think you see that with the record number of conversions that we have, having converted over 6,000 sites over the course of the last three and a half years, which greatly outpaces what we were averaging before. on a per-year basis prior to the pandemic. And so now we're taking that transient guest and they're choosing to stay with us for, call it on average, about a five-year period of time and on an annual basis getting a rental, predictable rental increase from from our standpoint. On the marina side, we've certainly seen very high demand on the transient side as well in the first half of this year. I would say we're not underwriting double-digit transient growth for that line item, but I'll remind the Our stakeholders, the percentage of rental income coming from transient on the marine side is much smaller. It's about 5%, 4% to 5% of total rental income. So we have seen outperformance on that line item, but are not underwriting double-digit growth over the course of the mid to long term.
spk06: All right. Thank you. Our next question comes from the line of Jamie Feldman with Wells Fargo.
spk09: Please proceed with your question.
spk08: Great. Thank you. So appreciate all your commentary on Park Holiday and simplifying. But if you think about some of the other areas where you took down guidance, you know, how do you create more visibility on that and simplify that? And then along the same line, you know, your credit line balance is up above $800 million. Can you talk about plans to either keep it there or refinance that to bring it back down?
spk03: Sure. Thank you, Jamie. We modestly brought down expectations on the SRD&E side. That is, as Gary mentioned earlier, we are looking to de-emphasize that over time as we, especially on the marina side, we convert the service business over to third parties paying us rent. at the property level. So I think you'll continue seeing that over time, and that ultimately will benefit real property NOI and rental income that we receive, not just from our members, but then third parties that pay us rent to be at our properties to provide that service. As it relates to our line of credit, We've mentioned over the course of the last couple of months pursuing various strategic alternatives, whether that's capital recycling from operating assets that the immediate use of that capital would be to pay down debt. I think as you look towards the second half and into 2024, there will be a moderation in capital investments as well that will convert more free cash flow towards deleveraging. But we are evaluating transactions in the capital markets as well in order to bring those balances down and delever towards our long-term target of being in the mid-fives.
spk08: Okay, thank you. And if I could just ask a follow-up on that. So the interest expense guidance reduction, is that because you used the credit line and didn't expect to or because rates are higher than you thought they would be? And if you did use it more than you expected, what was the reason for that?
spk03: Sure. On a forecast to forecast basis, I would say primarily would be expectations from the forward curve, where in general, ending the year, rates for both SOFR and SONIA are up on average about 70, 75 basis points from our last forecast at the end of April.
spk06: Okay, so it's not balanced. It was really just forecast. Okay, all right.
spk08: Thank you very much.
spk09: Our next question comes from the line of Samir Kanaal with Evercore ISI. Please proceed with your question.
spk13: Yeah, good afternoon. I guess, Gary, just on maybe switching gears a little bit on the MH side, pricing is still strong on that end. I guess, how do you think about rent increases in the next year with inflation moderating here? I mean, more of a question kind of in the next 18 months. Thanks.
spk20: Yeah, that's a great question. Certainly at overall 98.7% occupancy MH annual, there will be the opportunity to continue to pass through all inflationary pressure I'd suggest that what we did last October in advance of providing guidance in February with fourth quarter interim results, we will again share with the market our forecast on rental rate increases across board, but our expectation is that we will be able to pass through solid rental increases throughout the businesses, and we'll share those with everybody in October.
spk06: Our next question comes from the line of John Pawlowski with Green Street.
spk09: Here to proceed with your question.
spk02: Thanks for the time. Fernando, I wanted to follow up on the revolving credit facility question. I guess it's been well over a year where you've leaned heavily on the revolver. So why wasn't debt properly termed out long ago to more closely align the duration of the debt with your assets? And when specifically should we expect you to lock in longer term financing?
spk03: John, you'll see us over the course of the next couple of quarters look to extend our maturities, not just what's in our line of credit, but what is coming due from a secure debt standpoint. So that's something that we are actively working towards. But as far as bringing... balances down. It's really evaluating the multiple strategic alternatives that we have in front of us as far as being able to execute on those transactions and bring balances down. But we've been, since our Since our initial investment grade rating in the summer of 2021, we've been very active in the bond market, having done about $2.2 billion of long-term debt between seven and ten years of tenure. And our most recent transaction was back in January of this year, and that would be expected to continue over the course of the next couple of quarters.
spk02: Okay, and then another question on Park Holidays. At your investor day over there, we toured properties with four or five senior leaders from Park Holidays. Have any senior leaders left, since left, or retired? Who's overseeing the day-to-day operations from the Sun mothership here in the States?
spk20: Yeah. John, generally, everybody is still there, and there's a really well-seasoned team looking to work on pulling every single lever as they have these challenging economic times. So that group of talented people are still there, and we're very pleased that they are there.
spk06: Thank you.
spk09: Our next question comes from the line of John Kim with BMO Capital Markets. Good to see you. What's your question?
spk14: Good afternoon. I had a question on Ingenia. If I'm not mistaken, your development joint venture had a five-year initial term that would be up for renewal later this year. So I was wondering what your appetite is to keep it going, or could this be a potential source of funds?
spk20: Great question, John. I think the fact is that technically the Sun Genia, as we call it, JV five-year period of time is up at the end of November. We are always assessing our businesses, if you will, to remind everyone Sun owns a 10% interest in Genia Headstock. And we really have had a successful JV, which is performing. We're happy with the partnership relationship there, although there is no doubt COVID and the pandemic put kind of a two-year crimp in the plant. The Sungenia JV now has four developments. Two are in fill-up phase, and they're filling up nicely. And the other two are just about to break ground. With the JV expiring, we will continue to review how we will think about moving forward, but one of the factors is that as these four developments are moving forward, we want to make sure that we have the best opportunity to maximize those results once they're filled up and stabilized, but we also are reviewing all optionality that relates to capital recycling and the options that we can do to bring down some of our variable rate debt. So we'll continue to keep you advised as we think through how we're going to focus on the period of time where that does expire.
spk14: Okay, and if I could just follow up on UK home sales, just given the third quarter is the most crucial quarter of the year, out of the number of homes that you have planned to sell for the third quarter, how many have already been sold or are currently in negotiations? And I was wondering how sensitive this is to mortgage rates. There was an article that came out in the FT just a couple hours ago of three of the largest UK lenders reducing mortgage rates. I'm wondering if that's been factored in at all.
spk20: I would start to say that as I shared in the comments earlier, we're not sitting here anticipating the benefit of reduced mortgage rates or anything like that going forward. That would definitely be a positive, but we do think there will be a lag before we see the benefits of things like that. So the underwriting that we talked about in the $2,600 to $2,900 unit range for the year is kind of our downside to our view in the market right now. And I don't know, Fernando, do we have any information on how many stoves deserve work?
spk03: John, we'll provide updates on homes sold over the course of the quarter when we meet during investor presentations and any other potential updates. But we are, as you identified, we're heading into a busy period as the holidays do pick up in August. And we'll be able to report back to the market over the course of the next couple of weeks.
spk14: Can I just squeeze in one more question? The seasonality had shifted a little bit, but you also provided more clarity or more disclosure on the seasonality of UK home sales. Is this a good run rate going forward where roughly a third is sold in each of the second and third quarters?
spk03: The seasonality shift would say due primarily to the changes in volume, but yes, this would be the best run rate to use from a seasonality standpoint.
spk06: Okay. Thank you. Our next question comes from the line of Wes Galladay with Baird.
spk09: Please proceed with your question.
spk07: Hey, everyone. I just want to maybe address maybe a few more of the moving parts that you may have in the future. Can you comment on the loan book? Is that mostly fixed rates that you're charging, or is it floating? And do you expect the size of the book to stay the same over the next few years?
spk06: Wes, our wholly-owned notebook note
spk03: No portfolio is about 62 million dollars, 62 million dollars today. That is that is in active active repayment as residents make make payments on their loans. We do have we do have a joint venture where we are a 40 percent partner where we are. We are. Underwriting a run rate, call it $7 to $10 million of financing per month as our residents finance their homes in our communities. But that is fixed. Those are fixed rate financings. Chattel loan rates have historically been in the 8% to 10% range. Those haven't moved significantly. There's been an uptick, but they are, call it plus minus, at the high end of the range today for customers.
spk20: I would only suggest with a slowdown of capital allocation to development of new sites, which is where most of that channel loan is used, probably a reduction in usage as we go forward.
spk06: Our next question comes from the line of Michael Goldsmith with UBS.
spk09: Please proceed with your question.
spk19: Good afternoon. Thanks a lot for taking my question. Gary, earlier you were talking about how the UK, you're looking for a mix shift away from the NOI generated from the home sales and more from the rents. In the second quarter, UK home sales, the quantity was up 11%, selling price down 11%. But have you been able to pass along greater rents along with the lower selling prices so maybe you get a little bit more income over the long tail as people pay their regular rents?
spk20: Yes. When we talk about the UK management team, As they shared with us on one of our update calls recently, they are fully attuned with that strategy and very, very focused on it. And we expect to see the ability to pass on those rental increases. And in fact, it's a little bit accelerated right now as we adjust our home price margins to move volume in this challenging economic time and sell more homes. and are able to put it on to the monthly real property fees. So we expect to continue seeing that, as we said, strategically over the next four or five years, and would expect to see accelerated growth on the real property monthly fee side as we reduce operating margins. Not sale margins, sorry.
spk19: And as a follow-up, are you able to kind of quantify if the increase in the rents is offsetting the pressure on the home sale? So are you just getting back what you're losing in the near term? Are you getting that back over time as part of the consistent cash flow? Or is it just kind of a more careful balance as you navigate a pressured consumer than over time you look to navigate it further?
spk20: Yeah, at this time, I think it's the latter. First of all, we'll be too soon to drop and share any conclusions at this time because we're just adjusting to a very challenging economic environment there. But we do believe over a period of time, just as we do in North America, we would sell a home at a very low margin to be able to create a sticky rent in one of our manufactured housing communities that with less than a half a percent of homes leaving on an annual basis, generally generate uninterrupted rent for, you know, 40, 50-plus year period of time. And obviously, that predictable steady cash flow is what we're looking for because it does tend to get the better multiple. And understanding that management and our stakeholders are looking for that over a period of time, we're very, very focused on achieving that. And so is the team over there, so we are aligned on that.
spk06: Thank you very much.
spk09: And our next question comes from the line of Anthony Howe with Truist Securities. Please proceed with your question.
spk14: Hey, guys. Thanks for taking my question. Can you guys talk about the trends that you guys are seeing on the holiday rental side in the U.K.? ? I heard that some of the competitors are lowering their rates. Just curious if you guys are doing the same thing as well.
spk03: Anthony, good question. We have seen the competition bringing down rates to capture demand, but we're actually We're holding rates up fairly steady and are capturing market share from the market on that segment. And so that's the outlook. That is the conversations that we're having today.
spk14: Gotcha. And just a separate question. Can you guys go over the current RV, AMH, and Holiday Park expansion opportunities and other initiatives such as solar arrays and slip configurations, it'd be great. You can, you can like quantify the size of each opportunity and also like the potential return.
spk03: Anthony, in any of these projects from an expansion or growth potential, an expansion will typically be that MHRV will typically carry returns in low teams, about 10% to 13%. Historically, that has been the case. Any solar arrays would carry slightly higher ROIs in the mid-teens from that standpoint. And then in the UK, any expansion opportunity would carries a slightly higher ROI, call it in the 20% range, given that payback period when building in, let's call it a home sale, and the usage of the rental unit, it pays back much, much faster. Offline, we can go through in detail for any of these buckets what the capital spend would be. I think as we mentioned earlier, we are looking at each of these investment buckets as we head into 2024 and would expect a deceleration of spend. as we focus on converting more free cash flow towards debt repayment. But we can review those buckets offline.
spk06: Okay. Thank you. And we have reached the end of the question and answer session.
spk09: I'll now turn it back over to management for a couple of remarks.
spk20: Well, we appreciate everyone joining us for our second quarter call, and we look forward to speaking on the third quarter and also sharing how we're viewing implementation of rental increases going into 2024. Thank you, operator.
spk09: And thank you for your participation in today's conference. This does conclude today's The company remarks, you may now disconnect your line.
Disclaimer