Sun Communities, Inc.

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

Good afternoon, and thank you for joining us to discuss our second quarter results in 2024 guidance. Ben is pleased to report a solid second quarter. Our FFO per share of $1.86 was in line with guidance driven by same property NOI growth of 3.6% in North America and 9.3% in the UK. Manufactured housing, our largest segment, generated same property NOI growth of 6.4% in the quarter, driven by strong rental rate growth and occupancy gains. We continue to benefit from the strong demand versus supply dynamics embedded in manufactured housing. In RV, same property NOI decreased 4.6%. The decline was driven by weakness in the transient RV segment, but we are seeing continued demand headwinds. Importantly, due to our ongoing transient to annual conversion strategy, we have fewer site nights available for transient guests. While we were able to partially offset revenue underperformance by managing expenses, We're even able to hold transient RV margins flat to budget because reductions did not fully mitigate the revenue impact. Our strategic focus on transient to annual conversions increases the contribution of revenue from annual property agreements, improves RV NOI margins over time, and increases occupancy. Since 2020, we have now completed approximately 8,000 conversions, increasing the number of annual RV sites by approximately 30%. These RV conversions supported strong occupancy gains, with our same property adjusted occupancy for MH and RV increased by 150 basis points to 98.7% as of June 30, 2024. Additionally, our revenue-producing sites increased by over 1,200 sites in the quarter compared to a 1,000-site increase in the prior year. We're very pleased with Marina's same property results as the business achieved 6.1% NOI growth in line with our guidance. Demand for the Safe Harbor Network's unmatched locations premium amenities, and expert services remains strong. While we are seeing superyacht transatlantic movement earlier than originally forecast, arena business fundamentals remain strong and Safe Harbor continues to actively manage its operating expenses. Our strategy in the UK remains focused on increasing real property NOI, and decreasing the contribution from home sales. The six months ended June 30th, 2024. Real property NOI in the UK counted for 55% of total UK NOI, up from 42% during the first six months of 2023. On the same property basis, UK NOI grew 9.3% over the second quarter last year, exceeding the high end of our guidance range. Strong year-over-year revenue growth was in line with our expectations, and the outperformance was driven primarily by lower-than-expected utility expenses. 2K home sales were in line with expectations through May, before slowing in the run-up to England's elections and the related concerns regarding fiscal policy. Early third-quarter trends indicate that that uncertainty surrounding the elections is dissipating. Buyer interest is increasing from some headwinds we experienced in June. Overall, for the second quarter, UK home sales FFO was within our expected range. In terms of other strategic initiatives, we are very pleased to share that since our last earnings call in April, we sold eight properties, bringing total asset sale proceeds year-to-date to over $300 million. We use net proceeds to pay down debt, reducing our leverage ratio to 6.0 times on a pro forma basis. We are laser focused on maximizing Sun's performance by increasing the revenue contribution from annual income, active expense management, non-strategic asset recycling, and debt reductions. As we continue to convert more RV sites from transient to annual, grow the base of occupied sites at Park Holidays, and reduce leverage, SUN is positioned to generate long-term attractive FFO per share growth. Before handing the call over to Fernando, I'd like to acknowledge and thank each SUN Safe Harbor and Park Holidays team member for their hard work, dedication, and continued support in delivering our results. Fernando?

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