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 forlicking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forlicking 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 forlicking statements to reflect events or circumstances after the day of this release. Having said that, I would like to introduce management with us today. Gary Schiffman, 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 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.

Good afternoon, and thank you for joining our call to discuss third quarter results and our updated 2023 guidance. We reported another strong quarter, the 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 .1% increase in monthly base rent per site and occupancy gains. Within our RV communities, the .1% same property NOI growth achieved in the quarter is a testament to continued high demand in our community, exemplified by the successful execution of our strategy to convert transient sites to annual leases. Today, 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 .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, only reset the same community pool for 2024. For the third quarter, real property NOI in the UK grew .1% over the same period last year in line with our expectations. Adjusting for exchange rate changes, UK real property NOI increased by .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 midpoints, we expect to realize average annual rental rate increases of .4% for manufactured housing in North America and .1% in the UK. We expect a .5% increase in annual rental rates for our annual RV portfolio and .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 opportunity. Our strategic pause in investment activity can be seen in our UK operations as well. In 2021, after we announced the agreement to acquire Partality, 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 product holidays business. Our loan to Royal Life is polarilized 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 developments. Since that decision, Royal Life engaged with several lenders to repay our 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 loan. We continue to assess our options as we take the note through the receivership process. Additionally, Sandy Bay is a premier manufacturer of 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 we sold to Royal Life, backed by additional financial investors and lenders. While that transaction is not progressing, we're in discussions with other potential buyers and in the meantime, continue to benefit from the community's contribution to real property and a lie. Throughout Sun's 30 year history as a public company, we have demonstrated operational reliability and cashflow strengths without economic cycles. And we are continuing to see this in the solid performance or real property business. We remain optimistic about our performance and organic cashflow 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 strengths. We are recycling capital out of non-core investment, tuning 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 out-performance as compared to our midpoint. Sun's total same property NOI for the quarter increased .7% as compared to last year, out-performing the high end of our guidance by 220 basis points. Our performance was driven by same property revenue growth of .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% increase in weighted average annual rental rate, approximately 2,100 transient annual site conversions over the trailing 12 months and ongoing operational programs to mitigate expense growth. These were partially offset by .4% decline in transient RV revenues as transient occupancy normalizes. Adjusting for the decrease in sites converted to annual, transient revenue grew .2% relative to the prior year period. Over the Labor Day holiday weekend, same property transient RV revenue was down .5% as compared to last year's holiday weekend. Adjusting for the .7% decrease in 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 .9% in the third quarter as compared to 2022. An .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 marinas 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 markets. In the UK, despite economic headwinds continuing to challenge home sales volume, 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 our US dollar line of credit at a fixed SOFR rate of .8% through April, 2026. 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 .25% and mature in 2030. Taking this activity into account, we had $7.6 billion in debt outstanding at a weighted average rate of .15% and had a weighted average maturity of approximately seven years. Our trailing 12 months leverage ratio was six times and approximately 14% of our debt is floated. 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, UK home sales NOI performing toward the midpoint of our range and lower expectations for transient revenue in the US. Regarding the UK note, through the first nine months of this year, we recognize $28 million for approximately $0.22 per share and interest income. There is no interest income from this note in fourth quarter guidance. We previously expected to pay down debt with the notes repayment, which would have generated roughly $5 million for approximately $0.04 a share of interest expense savings in the fourth quarter. For UK 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 UK consumers continue to favor pre-owned homes and part exchanges to new homes. NOI margins on UK 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 .7% growth at the midpoint of the prior range to a new midpoint of 6.2%. The increase is based on higher expectations that are same property manufactured housing and arena properties, partially offset by slower growth in RV addressed earlier. At the midpoint, the 5.8 to .1% NOI growth we now expect from NH 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 their range of 10 to .3% for the year, a 165 basis point increase from our prior assumed range of eight 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 .4% for manufactured housing in North America and .1% in the UK. We expect a .5% increase in annual rental rates for our annual RV portfolio and .6% growth in annual rates for property marinas. For additional details regarding our updated foliar 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 and assessment. This concludes our prepared remarks. We will now open the call up for questions.

Operator. Thank you, and at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate a line is in the question queue. You may press star two if you would like to remove your question from the queue. Participants use the speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Samir Kanaal with Evercore. Please proceed with your question.

Hi, good afternoon, everybody. Gary, maybe provide a little bit more detail on your plan to sell assets. I guess, what's the transaction market look like in the UK and the US? Just trying to figure out your ability to sell those assets as it relates to the UK loan. You kind of stated about Sandy Bay, I think it was in the market, now it's held for sale. Just want to, maybe you can provide a bit more color on the market in the UK, thanks.

There, Samir. I think underlying our goal to sell assets as we've shared with the market is just a use of recycling capital and paying down debt. Generally, these are all high quality assets, and they are performing in the portfolio, but for various reasons, we think that bringing them to market and being able to pay down higher priced debt would be favorable as we go forward. So in North America, we've shared, we've done a kind of deep dive and identified some assets to bring to market. Those first group of assets are either currently or in the next week will be marketed, and we will determine at that time how the market feels in North America. As everyone's aware, there's been very, very little transaction in the manufacturing, RV market, so there are no data points to point to right now. We know that rates are significantly up, but these are good, high quality assets, so we look forward to being able to share with you on our next call or if we're able to execute on anything before our next call, how the market is responding to those assets. With regard to the UK in particular, those that are collateralized by the Royal Life assets, because we're in the receivership period, there's really little that we can comment on, but during the receivership period, we are in dialogue with optionality on those assets and will continue to be so. And then we talked about Sandy Bay, it's a really high quality premier asset, 730 sites with a big expansion piece to it, and we are in dialogue with a number of people regarding a potential sale there as well. So we will be very pleased to be able to share with everybody what the market is looking like as we begin the first steps of marketing.

Okay, and then I guess just as a follow up and maybe changing the subject here on Maureen, as that continues to show strength. Now I would have thought you would have been able to push the rates for 24 a little bit higher, I mean your rate was 5.6%, I understand there's been a moderation in inflation, but I would have thought maybe the rate would have been higher. Can you provide a bit more color around that?

Yeah, I think it speaks to the fact how we've shared with our stakeholders over 10, 20, 30, 40 years of business, kind of the slow marathon over the sprint and our approach to want to be able to really get outside growth above inflation when inflation is low and when inflation is high. Last year we got off a seven two, seven three for Nino, rental increase. So we really are enjoying heavy, heavy demand and wanna continue to see it continue. So we think that we've really set the rent in a way that over a long period of time we'll be able to maintain NOI growth and excessive inflation and at the same time retain a high occupancy. So after a couple of years of tremendous growth, we look forward to continuing that growth and set the rental rate very thoughtfully for 2024.

Thank you. Our next question comes from the line of West Gallaudet with Robert W. Baird. Please proceed with your question.

Hi everyone. Maybe looking into next year, can we talk about some of the bigger moving parts that we should be aware of? One in particular I wanna get more clarity on would be home sale volume, expansions and development. Will that have any impact in the US?

Yeah, I'll take the first part and Fernando wants to add anything. I think we've been very, very clear that with regard to use of capital in our free cash flow, the most highest priority and best use for that free capital will be to reduce leverage. As we look at this high capital cost environment that we're in right now, recognizing that we do get very, very strong IRRs on expansion, usually in the 10 to 13% range, MH and RV and new development and the high single double digit. Those are IRRs and they do take a period of time and they are initially dilutive. So by putting those things on hold moving forward, our expectation is that in a better economic environment, we have the inventory of sites on hand and we can resume our expansion and development activities. So as it stands right now, and we will share exact numbers as we go forward in guidance for 2024, the expectation is to have very limited capital investment in the development area. And it's just a fact from where we are sitting and see the cost of capital right now.

And Wes to add to Gary's comments, we have inventory to sell on the manufactured housing side. By the end of the year, we'll be delivering nearly a thousand. We will have delivered nearly a thousand new sites across expansion and grounded development. So that would support the home sales volume or contribution to NOI here in the US, where we would say should be around what we expected to get this year.

And

with regard to home

sales, again in the UK, we have the sites, we have the homes. The UK Park holidays team is doing a remarkable job. We're very, very pleased with how home sales are continuing although they're guided down from the beginning of the year. And we'll be able to share those guidance posts with 24 guidance.

And then a follow up on the balance sheet. You're taking the variable rate down. I believe you said Fernando, about 14% is floating now. Should we think the balance is being repaid off with the asset sales are gonna keep a certain amount of floating?

We'll continue to look to move that percentage downward. Certainly the immediate use of proceeds of free cash flow in 2024 as well. As any proceeds from dispositions or other activities would be to pay down debt, yes.

Okay, thanks, Watt.

Our next question comes from the line of John Polowski with Green Street. Please proceed with your question.

Thanks, Fernando, what percentage of the roughly 360 million loan to Royal Life is secured by real estate versus the opcos of the manufacturers?

Sure, hi John. About 70% is secured by real estate and the other 30 by the operating companies.

Okay, could you just give us any sense of magnitude of the, in your guys' minds, what's a reasonable base case for the level of impairment of the 360 million dollar loan?

Yeah, I think that based on what we've shared, we've had third party appraisers throughout the process at the beginning. And as recently as June 1st, provide appraisals and the overall appraisals I think last came out about 80%. At the midpoint of value,

the loan is covered at 80%.

Okay, back in June 1st and so it's a lot lower now, is that fair?

No, that's not the assumption. The evaluations do cover a wide range of scenarios in that analysis with our third party providers and appraisers, so no, that would not be the assumption.

Okay, last one for me. Could you just give us, I guess, what specific expense control initiatives were rolled out to result in such a large reduction to expense worth guidance this year and should we expect these benefits to continue in 2024?

Sure, John would say that the primary driver has been in response to normalizing transient revenue growth and given normalizing occupancy, any variable expenses at the property level have been managed across payroll, supply and repair and utilities as it relates to our marina portfolio. For example, we have some of the growth capital that we've invested have been in solar projects that are driving lower utility expense year over year for those properties. So yes, much of that would be sustainable and our expense control on the variable side is in response to top line. So we would continue to look to mitigate the impact of lower revenues if that would be the case.

Okay, thanks for taking on the questions.

Our next question comes from the line of Brad Heffern with RBC Capital Markets. Kate, we'll see what your question.

Hey, thanks everybody. Thinking back to last year, you obviously gave some impressive rate indications in -2-22, but we were all surprised by how that translated into FFO when the full guide came out. Obviously you're not gonna give 2024 guidance yet, but just given a similarly high set of increases, do you think we'll see SON return to a more normal level of FFO growth next year or are there other headwinds like this loan that might prevent that from happening?

Brad, our expectation is with 90 plus percent of our revenue being derived from those real property operations and with the fact that 30 to 40%, maybe by year end, close to 50%, those rental rate increases will all be out there with good expense control, should continue to see the benefit of high occupancy, solid rental increases and expense control as Fernando just referred to.

Brad, you've seen operational leverage at the corporate level with more muted GNA growth and we believe any activity as it relates to episodic capital recycling events will reduce not just leverage, but then also any interest expense impact or growth that we did see this year and was a large contributor to the flow through from same property growth not showing up in FFO per share growth.

Okay, got it, perfect. And then on the 2024 rate indications, I think you just said close to 50%, but I'm curious if you could just talk about how locked in those are and I assume that there's different numbers across the different businesses for how many of those rates have been fully set for 24.

So by the end of October, just over 40% of our manufactured housing portfolio will have been noticed and those have been at about a .4% increase. They will be around half of the portfolio will have been noticed by the end of the year. On the RV side, about 60% of our residents have been noticed at this point. In the UK, 100% of residents have been noticed at this point and Marina, essentially our Southeastern or our Southern arenas have been noticed and the rest are rolling over time. Okay,

appreciate it.

Thank you. Our next question comes from the line of Eric Wolf with Citi, please proceed with your question.

Thanks, it's actually Nick Joseph here with Eric. Gary, you mentioned in the press release, I think on the call as well, implementing the select changes. It sounds like you've talked about cap expend and dispositions to pay off floating rate debt and some other opportunities that you think will get back to earnings growth and it sounds like that earnings growth will be in 2024. But how about on the GNA side and the integration on the backend of some of these portfolio companies on the UK and the Marina? What's the opportunity there and can you frame some timing around it as well,

please? Yeah, I think, I don't know if that was directed to me or to Fernando, but I'll start out with it. I mean, summarizing, you're exactly correct. The steps that we're thinking about are the fact that we've shared, we've stopped new development and acquisition, continuing converting transient to annual where when you think about those conversions in the last three years, we actually converted about 20% of our transient sites or we'll have by the end of this year to annual leases and we'll continue to do so. As Fernando mentioned, we sold our stock position in Ingenia, all looking to recirculate more free cash flow and capital to pay down debt and demonstrating the operational leverage which you're referring to is something we're very hyper focused on for 2024. We've continued to see a slowdown and even minor reduction in the growth that we've seen for the last five, seven years and certainly for the last two, three years as we brought these portfolios in and Eric, we're working really hard and look forward to sharing with you the outlook for 2024 as we have owned the portfolios and we'll have owned the portfolios for two to three years and I think that that will also underscore how we're able to deliver bottom line FFO growth moving forward.

Thanks, I guess just more specific to GNA though, right? So you have different management for these portfolios. That's what I'm referencing.

That is what I'm referencing. It is our goal to be able to share the 2024 expectations for GNA and to have created leverage moving forward.

All right, thanks and then just on Ingenia, obviously you sold the stock but you have the JV that had been extended there. Can you talk about the timing and the potential monetization of that investment?

Yeah, sure. First of all, I'd say that we're very pleased with our relationship with the Ingenia folks and we set out to have this JV Sungenia in 2018 and while we sold our entire investment in Ingenia stock, they are great partners in the Sungenia development and we don't have to, we no longer have someone on the overall board. We're able to allow them to focus on the day to day management and operations of the development and the fact of the matter is that after all that time in the investment, the work that's now completed and the backdrop of demand in Australia for retirement housing, the near term returns are very attractive and we are very positive about the cashflow over the next 12 months. Again, that's something we'll be able to lay out in 2024. So we've invested five years for what is expected in 2024 and I think that that'll be pretty clearly laid out as we provide guidance and then we can talk about thoughts going forward from there.

Thanks, we'll get back in the queue.

Our next question comes from the line of Keegan Carl with Wolf Research, please proceed with your question.

Yeah, thanks for the time guys. Maybe first, just wondering if you could walk through your reconciliation of your FSO for share guidance where we went from negative 10 cents a share to positive 2 cents a share and the other adjustments line item.

Hi Keegan, yes, while there are various line items that contribute to that change, the primary drivers will be the remeasurement of marketable securities which is in genia on a quarter to quarter basis which accounted for about six cents and then any unrealized gain loss on FX changes, again, in the quarter that accounts for five of them, five cents.

Got it and then I guess I'm struggling too with the marina rate increase, I was a little disappointed in the number but I also know that there's not good data on marinas. So I'm just curious, do you have an idea of what your hypothetical loss to lease would look like on that portfolio given where market rents would be today if somewhere to come in and put their boat there?

Yeah, I think that after two years of ownership of the marinas and the .3% rental increase last year and seeing the demand, as I said, what Sun's always focused on is the ability to give sustainable returns year after year on the same community basis and the fact of the matter is that a lot of thought and dialogue went into that rental increase so that in the coming years we will be able to look for continued long-term growth in the same way as we had in our MH and RV portfolios. We don't have much marked lease pickup just because there's very, very little turnover. Well, I'll say in our MH, annual RV portfolio as well as our marina, so on the MH side, not to drift but to share with you, 15-year average turnover, nearly 98% occupancy, less than a half percent of the homes move out a year and the fact that we don't have many leases that are directly tied to CPI or any long-term leases, so our market rents or our current rents seem to be pretty close by standard to market and we feel the same is true on the marina side and we've always shared that an empty site or in this case, in the marina, an empty slip is the most costly slip that we have so as we look for providing solid performance in 2024, we arrived at the five, six increase and it does really not provide for very much if any market, mark to mark rental increase at all as does the rest of our portfolio.

Got it, thanks for the time, guys.

Our next question comes from the line of Josh Dennerline with Bank of America, to see what your question.

Yeah, hey guys, just maybe a follow up on that marina rate growth of 5.6. I guess, how should we also think about maybe occupancy increases in that line of business? Maybe it would be helpful to just hear what rate growth you sent out for last year in the occupancy uplift.

Yeah, I don't have to, the occupancy uplift for 23, of course 24 will give that thought as part of the guided range but.

Yeah, I guess I'm just trying to figure out if that 5.6 is kind of static or if there's potential kind of upside relative to kind of where that is as I think about rental revenue on that side.

I mean, Josh, through year to day on non-transient income on the marina side, I think that's a good point. The marina side has been just under 10% and our rental increase in the .5% range. So from a back of the envelope math, roughly 200 basis points of occupancy gain in that number.

Okay, okay, awesome. And then just the UK sale that I guess it was disclosed in February but didn't go through. What's, sorry if I missed it, I had to jump on late on the call. What's the backstory there?

Well, we acquired a really high quality premier manufactured housing community in the UK in late 21. And as we move forward with the Royal Life Group and determine that we would provide them with a note for them to pay us back with that loan. They were also working with a group that was interested in acquiring Sandy Bay and we shared with the market at that time. It was an offer we were willing to accept as we were looking to really reduce our capital commitments in the UK. And as completely separate from Royal Life and completely separate from Park holidays, we agreed and entered into a contract with that group to sell Sandy Bay. And now that that's not moving forward, we will continue to operate it and hold it for sale and recognize the income. It's about 730 existing sites with expansion potential of 450. And that's what I had shared earlier.

Okay, but I guess why didn't the sale go through? Was it related to the buyer couldn't find financing or something else?

Yeah, I can't comment too much on Royal Life other than the same things that everyone is aware of that they've been taken under certain aspects of it have been taken under receivership. And the recapitalization as I understand it is certainly stalled if not terminated at this time.

And our next question comes from the line of Michael Goldsmith with UBS. Chief, let's see what your question.

Good afternoon. Thanks a lot for taking my question. My first question is on the guidance and some of the moving pieces there. I'm not sure if we touched on this earlier, but it seems like the NOI guidance moved higher and then that would be kind of offset by the higher interest expenses as a result of not using the proceeds of this note to pay that down. So what were the moving pieces kind of like below the line that drove the FFO guidance lower? Was that the Ingenia piece?

Hi Michael, no Ingenia would have nothing to do only as it relates to the pay down, the $9 million loss recognized is essentially marking the value of the shares at the end of the third quarter at $4, four Aussie dollars and 20 cents to our ultimate sale price of 390. So that would not impact guidance as it relates to the guide, certainly higher interest expense as it relates to, as it relates to the note not being repaid, there's some additional interest expense in there as well, but it's primarily the note on the park holiday side from a home sales perspective. We provided guidance in July with a high end of about $75 million US. We are expecting that to be closer to the midpoint. And we give guidance and we provide ranges and some outcomes, right? We have parts of the business that outperform and others that perform to the midpoint or to the low end. And transient mentioned in my remarks, transient revenue is down on a guide to guide standpoint where when we spoke in July, we were expecting about a 4% decline in transient revenues and we are now expecting about a 7% climb for the full year. We will look to offset and mitigate some of that impact with expense savings as we've done in the third quarter.

Thanks for that. My second question is a little bit more strategic in nature. What is the profile of the properties that you're looking for sale? Is there anything specific about the Sandy Bay property that made it a good candidate? Was it the fact that it had these development sites and you wanna put the additional capital into it? And then finally, along the same line, do you have a target leverage ratio which you're looking to move down to through the sale of some of these properties? Thank you.

Yeah, on the Sandy Bay, I think as we've shared, it just was this very high quality, very high profile property. The fact of the matter is that we determined we did not wanna increase our capital exposure in the UK and therefore took the offer and the opportunity to put it up for sale and we'll continue to market it. And as I said, during the income, as that process goes forward. So nothing particular about that. In North America, I think what we shared before is we did sort of a deep dive looking for where we can recycle capital. We looked at all of our properties and the fact of the matter, we have some properties where they're in a single location. We probably expected to be able to acquire more properties in the area, but the fact of the matter is they're not efficient to operate without more properties in the area. So those are the candidates. And then we have some smaller properties that really don't fit the size of the company right now and the way that we operate. So those are the types of things that fall in the bucket. They're all performing. They're not cats and dogs. And we just selectively bucketed those opportunities to recycle capital.

And then Michael, as it relates to long-term leverage targets, we stated our goal is to be at five and a half times and below from a leverage perspective. Pro forma for the Ingenious Stock Sale, we are on a trailing basis. We are now at six times. So we will through free cashflow and then through these episodic sales, we will look to get to and within that range.

Thank you very much. Good luck in the fourth quarter.

Our next question comes from the line of John Kim with BMO Capital Markets. Steve, we'll see with your question.

Thank you. In the UK, can you just comment on who drove the decision to move forward with two separate transactions with Royal Life? Was it the local Park Holidays team or was it your team in Michigan?

As I said before, they're not related to Park Holidays. They're separate and distinct and it was management. I mean,

I'm sure you're aware of this and you could hear this on the call but in meetings you've had, but the performance of Sun is getting completely dominated by the UK business. And I know you're looking to simplify and improve your balance sheet, but I'm just wondering how much longer you could stomach having this much exposure to the UK and have you contemplated exiting the business? I know you don't wanna buy high and sell low, but looking at the forward growth prospects of all your different businesses, why not contemplate exiting the UK?

Well, John, I think it's important to understand that first of all, the management team is doing very well there. And the growth and the liability, the real property income is achieving management's goals, although home sales and the challenging environment aren't and there's been a big focus by stakeholders who clearly are focused on home sales and how they are lower than we originally guided to and the fact that it's not the business or the percentage that we wanted to be of the contributing income. But we acquired the portfolio in a much different economic environment when we took the opportunity in what was a strong economy to increase our manufactured home holdings by acquiring park holidays. The properties are themselves are excellent and we do believe in the business and the team. That being said, unfortunately, the opportunity in the UK has been impacted by really strong economic headwinds even though the core of the business is performing. So with that being said, in very challenging times, we continue to really review all of our options, but we are very supportive of what the team is accomplishing there. And we are very aware of those people who've shared with us their thoughts on the capital invested in the UK.

One more final question for me.

Our goal really is to maximize value for that investment and as we continue to perform and view the UK, we're happy to share any thoughts that we have moving forward.

One more final question on me. On the sales that you're planning in the US, what kind of cap rates should we expect? You've taken out mortgage debt at 6.5%. Obviously the industry environment is not helping, but what should we be modeling in for exit cap rates?

So I'm gonna suggest we're going into the market next week with the first group and it would be best if we are able to report real live market data and not interfere with the process that's taking place as we go out to the market. Great.

Thank you.

Okay, thanks.

Our next question comes from the line of James Feldman with Wells Fargo. Please proceed with your question.

Great. Thanks for taking my question and appreciate the commentary on the board and management team focused on streamlining the company for growth. As I think about the last year, a big part of the Sun story for investors has really been just kind of surprises, taking down UK park holiday guidance and then the loan, the UK cap rates, the UK loan. So as you're thinking about selling assets, de-leveraging, I mean, that all makes sense, but what can you say to this process also making sure that there's just not stuff that kind of catches people off guard or out of left field that maybe you can't see quite as clearly from the balance sheet or some of the reporting for the company?

Now I'm only gonna suggest that there is a tremendous effort from the board of directors down to management to make sure that we provide as much transparency as we can so that those type of surprises, although they weren't economic headwinds in the UK, came about very, very fast and had obviously dramatic impacts on these things that you're referencing, but I think what you're finding is that everything is clearly in disclosure and clearly open to discussion by the management team and we want nothing more than to be as transparent as possible so that there aren't any surprises going forward.

Okay, thanks for that. And then as we think about, can you talk to what kind of pre-COVID run rates were whether it's the Marina business or even the MH business or even the UK business, just to give us a sense of what we should expect in terms of longer term run rates for these businesses once the COVID activity fades?

I think that speaking to some communities which has been public for 30 years, we have three business lines that all have the same underlying fundamentals of high demand against very short supply and MH certainly affordable housing which drives the high occupancies that historically performed very, very well at all economic times. And so when we share the fact that we've been able to get rental rate increases in excess of inflationary pressure through our history and have never delivered as a company a four quarter period where we didn't have positive NOI growth, our expectation and our goal with everything we're doing with the rental increases, with the priorities that I shared with everybody, with the focus of the strategy that we've been implementing is to continue to get that same kind of same community growth and I have a drop down in an FFO per share basis to our shareholders. So I think historically one has to look to how we performed and what we see as the outlook for certainly the rental rate increases that we have going forward in the high occupancies and demand is that we should be able to continue to grow and provide growth as we have historically done as a company. So we're optimistic about moving forward and we certainly have a lot of steps that we identified that we're taking to secure that kind of growth.

And our next question comes from the line of Anthony Powell with Barclays, please proceed with your question.

Hi, good afternoon, thanks for taking the question. I guess in terms of RV expenses, you've done a good job of reducing the expenses when you've had lower, I guess, transient demand. Are you able to leverage these lower expenses let's say next year if you have a recovery or stabilization there or do you think you would have to add back more of these expenses and create some surprises? I think

Anthony, we're always on the lookout for efficiencies and there's certainly things we're learning as an ops team to run our properties more efficiently, but certainly there is flex, right, as it relates to the variable rate or the variable expenses with transient. We're working on that. We're looking at another very strong year of transient site conversions over to the annual side where we're already at 1800 sites converted as of the end of the third quarter and would expect that elevated level of conversions to continue into 2024, which does continue to reduce transient revenue as a percentage of total revenues for the

portfolio. Got it, maybe one more expense question on insurance. I guess so far this year, I think it's been a less destructive hurricane season. I know we talked about some initiatives to reducing surge expense increases at NAIRY in June, so maybe update us on how you're looking at expense for insurance next year and will you be able to maybe have a better outcome on that line item?

Sure, I just got back from London a couple of weeks ago with the initial meetings with the syndicate. The tone of the conversations is certainly more constructive than it was a year ago at this time and we are working through the insurance program as we speak with our broker and the syndicate itself. As we mentioned at NAIRY, we have not implemented significant changes to our historical insurance program and so that is something that we will be looking to do to mitigate the large increase that we saw this year of 40% across our MHRV and marina business, but mitigating that increase year over year heading into 2024. As a reminder, our program renews at the end of the year and so we'll look to share with the market at that time once we've bound our coverage.

Great, thank you.

Our next question comes from the line of Anthony Howe with True Securities.

This was he with you, Quay. Hey guys, thanks for taking my question. Gary, you mentioned that you guys are focused on only pursuing the highest growth capital projects. Can you provide a little bit more color on what type of projects they are and what type of returns do we expect from these opportunities and what projects are you guys cutting back?

Yeah, I think it's very, very limited in scope. There will be certain expansions where there's high, high demand in some of our MH communities and actually a backlog of potential sales. So some small expansion opportunity and then in marinas where we identify a great opportunity that provide 10 to 13% rapid returns on investments, reconfiguration of slips and other small expansions that we can do. Those are the type areas that we'll be focusing on.

Gotcha. I also noticed that the move out rate year to day is like 3.7%, which is at least 100 bids higher than last couple of years. What are the top reasons for the move out and where are the residents moving to home to? Is there a good difference in move out rate for age qualifier or all age?

Anthony, that move out rate is a combination of manufactured housing and RVs. So what I can share is as it relates to our manufactured housing portfolio, move out rates are largely the same as they have been historically. We've seen some higher move outs on the RV side. But as I shared a bit earlier, our 1800 site conversions are a net number. So we are continuing to fill sites, fill vacancy as it relates to on the RV side and are implementing various strategies to look to lengthen that stay at our properties.

So the RV move out, they're not the park models that's moving out, right? It's mainly the wheel vehicles, right? That would be correct. Okay, and like my last question is like, for the assets that you guys are marketing next week, are these considered like four to five star parts and do they qualify for agency loans?

I think they're a select small group, as I said, both small and large assets that would be high quality assets. And my expectation is they would qualify for agency

loans. Yes, Anthony, the comment would be that both Fannie and Freddie finance manufactured housing across the quality spectrum. They also finance RV resorts that are, that veer mostly towards the annual side.

And our next question comes from the line of Steve Sackwa with Evercore ISI. Please proceed with your question.

Yeah, thanks. I just wanted to clarify maybe an answer that Fernando had given, I think, to John Polowski early on about the collateral on the UK loan. Fernando, did you say that it was, that today it was at 80% loan to value or that the assets only were worth 80% of the loan amount? I just wanted to make sure I understood that correctly and I had a quick follow up on that.

Sure, Steve, 80% loan to value.

Okay, and maybe back when the loan was originated, what was the loan to value when you guys worked with the accounting firm to figure out what that collateral was worth?

About 60%, Steve.

Great, thanks very much.

And our next question comes from the line of Eric Wolf with Citi. Please proceed with your question.

Thanks. I guess, is it possible just to provide interest expense guidance for this year and then I guess going forward, I mean, it would be great to get that. And then the second part of it is just if there's anything considered in guidance like asset sales or something else that would reduce that interest expense later this year, just so we're aware of it.

Sure, Nick, no prospective acquisitions, dispositions or capital markets activities are factored into our guidance for the full year. We are expecting interest expense to be somewhere between 328 million and 330 million.

Okay, that's helpful. And then just to follow up on Steve's question there, going from 60 to 80, that's mainly because the second piece, the seller financing was done at like 100% LTVs originally was at 60%. And then you added to the balance, I think about 108, 109 million, and presumably that was closer to like 100%. Is that the right way to think about it?

Yes, the additional, the land sale that was sold in February was 100% LTV. So that would increase the LTV and some additional accrued interest would also increase the LTV there. So it would not be a measure of the collateral itself.

Right, is it possible to provide the debt yield or NOI on the assets? Debt yield, meaning just the NOI, and divide by the debt or just the NOI just in general for the collateral properties?

Yeah, I think that that's something that is gonna come out of the work that's being done with the receivership. And at this time, there's very little we can comment about those properties, but it is all inclusive of the third party appraisals that we had done. And so it is included to get to that value. But I would suggest that majority is the value of the properties themselves and the entitlement. Right,

okay, thanks for taking the followups.

Our next question comes from the line of John Polowski with Green Street. Please proceed with your question.

Thanks for keeping the call going. Fernando, I just wanna make sure I interpreted your comments of how NOI is gonna flow through to earnings going forward. How I interpreted it was you do expect earnings growth for next year relative to calendar year 2023. Is that a fair interpretation? Yes. Okay, I'm gonna back to Nick Joseph's question about GNA. Are there corporate cost cutting initiatives gonna lead to declines in GNA next year relative to calendar year 23?

Yeah, I think we'd share that when we provide guidance.

Okay, all right, thanks for all the time today.

Thank you.

And we have reached the end of the question and answer session. I'll now turn the call back over to Chairman, President, and CEO Gary Schiffman for the closing remarks.

Well, for those of you who are still on, we appreciate your patience and we really do look forward to providing full guidance for 24th quarter earnings call and I look forward to speaking to you and everybody then. Thank you.

And this concludes today's conference and you may disconnect your line at

this time.

Thank you for your participation. Thank you.