Sun Communities, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Community's third 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 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 would like to introduce management with us today. Gary Shiffman, Chairman, President, and Chief Executive Officer and Fernando Castro Caratini, 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 yourself 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.

Good afternoon, and thank you for joining our call to discuss third quarter results and our updated 2023 guidance. We reported another strong quarter with core FFO per share of $2.57, exceeding the high end of our guidance range. Total same property NOI growth of 6.7%, meaningfully outperformed guidance, demonstrating how our property's high demand and scarce supply fundamentals generate durable, growing real property income. Same property NOI growth was fueled primarily by solid revenue growth and continued cost-saving initiatives across our properties. In our manufactured housing segment, third quarter same property NOI grew 8% as compared to 2022, supported by a 6.1% increase in monthly base rent per site and occupancy gains. Within our RV communities, the 4.1% same property NOI growth achieved in the quarter is a testament to continued high demand in our communities, exemplified by the successful execution of our strategy to convert transient sites to annual leases. To date, our transient to annual conversion surpassed 1,800 sites and we are on pace to meet guidance for the year. On a combined basis, same property adjusted occupancy for manufactured housing and RV communities increased 170 basis points this quarter compared to last year. And across the total portfolio, revenue producing sites increased by approximately 750 sites during the third quarter, an 8% increase compared to 2022. This brings year-to-date revenue-producing site gains to nearly 2,600. Marinas delivered another very strong quarter with same property NOI growth of 8.9% over the prior year period. Demand to join our unparalleled safe harbor network remains strong as demonstrated by the increase in our wait list at 89% for marinas. Our manufactured housing portfolio in the UK will be included in same property results starting January 1st when we reset the same community pool for 2024. For the third quarter, real property NOI in the UK grew 15.1% over the same period last year in line with our expectations. Adjusting for exchange rate changes, UK real property NOI increased by 8.7% over the prior year quarter. Home sale activity, which supports the predictable rental income of our communities, was in line with our expectations and is tracking within our guidance ranges for the year. Looking ahead to 2024, we expect rental rate growth in our same property portfolio to exceed inflation. At the midpoint, We expect to realize average annual rental rate increases of 5.4% for manufactured housing in North America and 7.1% in the UK. We expect a 6.5% increase in annual rental rates for our annual RV portfolio and 5.6% growth in annual rates for us marinas. We expect these strong rental rate increases combined with modestly higher occupancy and our ongoing focus on expense management to produce another year of strong organic cash flow growth in 2024. And I want to give you some perspective on Sun's broader strategic objectives. The Sun board and management team are laser focused on implementing changes designed to streamline our company and position us for growth. Our goal in making such changes is to help ensure that our best-in-class, operationally resilient portfolio delivers the consistent FFO per share growth our stakeholders historically have enjoyed from Sun. For example, we recently sold our stock position in Ingenia, generating over $100 million to pay down variable rate debt. This transaction had the added benefit of being recruited to FFO. In addition, we've previously discussed, we continue to advance the process to identify select properties for potential disposition with the intent of further delivering proceeds. As we move forward, we are substantially reducing capital spending, including acquisitions and development activity in light of the more challenging economic and capital markets environments. This year, as we have stated before, we are completing ground-up development projects that were already underway. Any new external growth projects will be solely focused on the most strategic opportunities. Our strategic positive investment activity can be seen in our UK operations as well. In 2021, after we announced the agreement to acquire Park Holidays, we extended a loan to Royal Life, a UK holiday park and manufactured housing developer and operator in a separate transaction. This development opportunity is distinct from our park holidays business. Our loan to Royal Life is collateralized by real estate and several other assets. We have selectively and successfully partnered with strategic counterparts for development throughout Sun's history. As macroeconomic conditions rapidly deteriorated in the UK, we decided not to pursue incremental acquisitions or defaults. Since that decision, Royal Life engaged with several lenders to repay a note but was unable to do so. Ultimately, at the end of September, we appointed a receiver to enforce our interest in the real estate securing our loans. We continue to assess our options as we take the note through the receivership process. Additionally, Sandy Bay is a premier manufactured housing community in the UK we acquired in 2022. It has 730 operating sites and can be expanded by an additional 450 sites. As part of our broad strategic portfolio review, we decided to sell the property and had it under contract to be sold to Royal Life backed by additional financial investors and lenders. While that transaction is not progressing, we are in discussions with other potential buyers, and in the meantime, continue to benefit from the community's contribution to real property NOI. Throughout Sun's 30-year history as a public company, we have demonstrated operational reliability and cash flow strength throughout economic cycles. And we are continuing to see this in the solid performance of our real property business. We remain optimistic about our performance and organic cash flow generation in the near term, supported by our anticipated rental increases in 2024. However, we recognize the headwinds from today's challenging macro environment. And as I said, we are taking action and steps to realign our strategy to focus on our proven durable income streams. We are recycling capital out of non-core investments, pruning our operating portfolio to monetize lower growth communities, and remaining disciplined and deliberate in pursuing only the highest growth capital expenditure projects. As we implement these rate-sizing activities in the coming quarters, we are optimistic the market will recognize how these activities will decrease our leverage and target a return to the consistency of our earnings we have long enjoyed. As always, the management team and I are grateful for the hard work and accomplishments of the entire Sun team this quarter, and I would like to thank all the team members for their dedication and all of our stakeholders for their support. Fernando will now discuss our results in more detail. Fernando?

Thank you, Gary. Third quarter core FFO of $2.57 per share was one cent above the high end of our guidance range. Expense savings at the property and corporate level were the primary contributor to outperformances compared to our midpoint. Some total same property NOI for the quarter increased 6.7% as compared to last year, outperforming the high end of our guidance by 220 basis points. Our performance was driven by same property revenue growth of 5.5%, and lower than expected property operating expense growth of 3%. For the quarter, same property manufactured housing NOI increased 8%, driven by a rental rate increase of 6.1%, continued occupancy gains, and focus on expense management. RV same property NOI grew 4.1% due to an 8.8% increase in weighted average annual rental rate, approximately 2,100 transient to annual site conversions over the trailing 12 months, and ongoing operational programs to mitigate expense growth. These were partially offset by 4.4% decline in transient RV revenues as transient occupancy normalizes. Adjusting for the decrease in sites converted to annual, transient revenue grew 2.2% relative to the prior year period. Over the Labor Day holiday weekend, same property transient RV revenue was down 1.5% as compared to last year's holiday weekend. transient sites converted to annual, transient RV revenue increased by 4.4%. We continue to drive the pace of transient to annual RV lease conversion to increase our percent of sticky revenues. This quarter, we converted nearly 540 sites to annual leases for a year-to-date total of over 1,800 conversions. In marinas, same property NOI increased 8.9% in the third quarter as compared to 2022. An 8.4% increase in revenues highlights the strong demand to be part of our network. Our performance was due to solid rental rate increase, longer stays by guests in our southeastern marina, and operating expense savings, particularly within payroll and utilities. In the UK, real property NOI for the quarter of $29 million was in line with our guidance. Retention rates among our UK owners is holding steady, with an average resident tenure that approaches eight years. The increased retention over 2022 is a meaningful driver of real property income growth this year. Turning to home sales, North American home sale contribution was broadly in line with our expectations for the quarter, where lower volume was offset by higher margins. In the UK, despite economic headwinds continuing to challenge home sales volumes, we sold 2,310 homes through the end of the third quarter. Fourth quarter to date, we have sold 204 homes leaving approximately 300 homes to be sold to achieve our full year volume guidance. In terms of NOI, we are on track to achieve the midpoint of prior guidance, which approximates just over $70 million for the full year. Regarding our balance sheet, since our last call, we have focused on decreasing leverage and variable rate debt. During and subsequent to the third quarter, we entered into $150 million of SOFR swaps on As Gary discussed, we sold our position in Ingenia and used the net proceeds of approximately $100 million to pay down borrowings on our line of credit. Additionally, we refinanced approximately $118 million of secured debt that was maturing this year with approximately $250 million of new secured debt, adjusted to include the positive impact of a $50 million SOFR swap executed in March, The new loans bear interest at a fixed rate of 6.25% and mature in 2030. Taking this activity into account, we had $7.6 billion in debt outstanding at a weighted average rate of 4.15% and had a weighted average maturity of approximately seven years. Our trailing as well loans leverage ratio was six times and approximately 14% of our debt is floating. Turning to guidance for the year. We are revising our full year core FFO per share guidance downward by 1% at the midpoint to a range of $7.05 to $7.13, and establishing a fourth quarter core FFO per share guidance range of $1.28 to $1.36. Our revised guidance for the year is driven primarily by higher expected interest expense in the fourth quarter, related primarily to the UK note remaining outstanding, U.K. home sales NOI performing toward the midpoint of our range, and lower expectations for transient revenue in the U.S. Regarding the U.K. note, through the first nine months of this year, we recognized $28 million for approximately 22 cents per share in interest income. There is no interest income from this note in fourth quarter guidance. We previously expected to pay down debt with the note's repayment, which would have generated roughly $5 million or approximately $0.04 a share of interest expense savings in the fourth quarter. For U.K. home sales, we expect to finish the year within our prior guidance range with home sales volume of around 500 units in the fourth quarter. We are forecasting lower margins on these home sales as U.K. consumers continue to favor pre-owned homes and part exchanges to new homes. NOI margins on U.K. home sales for the first nine months averaged $26,000, and our revised guidance assumes average NOI margins of approximately $20,000 per home in the fourth quarter. Our same property portfolio is by far the largest driver of our results, representing over 90% of NOI. Based on results to date and our expectations for continued strong demand, bolstered by effective expense management, we are increasing total same property NOI guidance by 50 basis points. from 5.7% growth at the midpoint of the prior range to a new midpoint of 6.2%. The increase is based on higher expectations at our same property manufactured housing and marina properties, partially offset by slower growth in RV addressed earlier. At the midpoint, the 5.8 to 6.1% NOI growth we now expect from MH is 45 basis points higher than the midpoint of the prior range. In our same property RV portfolio, we now expect NOI to grow 3.5% to 4.2%, which represents a 15 basis point decrease at the midpoint as compared to prior guidance. For same property marinas, we expect NOI to increase to a range of 10% to 10.3% for the year, a 165 basis point increase from our prior assumed range of 8% to 9%. Additionally, and as Gary discussed, We are providing guidance on preliminary rental rate increases for 2024. At the midpoints, we expect to realize average annual rental rate increases of 5.4% for manufactured housing in North America and 7.1% in the UK. We expect a 6.5% increase in annual rental rates for our annual RV portfolio and 5.6% growth in annual rates across marinas. For additional details regarding our updated full year guidance, please see our supplemental disclosures. As a reminder, our guidance includes acquisitions and dispositions in capital markets activity through October 25th. Our guidance does not include the impact of prospective acquisitions, dispositions, or capital markets activities, which may be included in research channel assessment. This concludes our prepared remarks. We will now open the call out for questions.