Sun Communities, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Community's third 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 today'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 Schiffman, Chairman and Chief Executive Officer, Fernando Castro Caratini, Chief Financial Officer, Erin Weiss, Executive Vice President of Corporate Strategy and Business Development, and John McLaren, President. 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 would now like to turn the call over to Gary Shiffman, Chairman and Chief Executive Officer. Mr. Shiffman, you may begin.

Good afternoon, and thank you for joining us to discuss our third quarter results, the strategic updates we are announcing, and our guidance for 2024. First, I want to emphasize my disappointment in the results we are reporting and our revised outlook for the remainder of the year. As I will discuss, we are acting swiftly to address our underperformance. As communicated, we have been focused on executing our strategic initiatives to position some communities to deliver sustained earnings growth over the long term. The business fundamentals of our portfolio remain strong, and we are confident that by continuing to execute on our strategic priorities, the company will be positioned for growth, thereby demonstrating the long-term value of our assets. These priorities as articulated and executed in 2024 include recycling non-strategic assets, reducing debt, and increasing the contribution from annual income streams. We continue to make progress in each of these areas. In the third quarter, we disposed of eight manufactured housing communities for approximately $300 million, along with two manufactured housing land parcels for $37 million, bringing total proceeds from asset sales to $392 million year-to-date. As of September 30th, our total debt stood at $7.36 billion, a reduction of approximately $450 million from the end of 2023, and our floating to fixed rate mix currently stands at approximately 6%, down from 21% two years ago. That said, we acknowledge that our third quarter results and our adjusted 2024 guidance are below both our and the market's expectations, and we are very disappointed by our performance. Starting with our board of directors, the entire SUN organization is committed to proactively addressing our challenges and restructuring SUN to unlock the value and earnings potential of our portfolio, as we demonstrated for the past two decades. Before I address the acceleration of our strategic plans, I wanted to provide an update on the recent short report issued on SUN. Upon being made aware of the report, the Board tasked the Audit Committee to address the matters that it raised. The audit committee engaged an independent third-party law firm to investigate the report. After a thorough review, the law firm has concluded its investigation, and there have been no changes to our financial reporting practices, and the audit committee determined that the company complied with its disclosure obligations. The company reiterates its strong commitment to maintaining high standards of corporate governance and internal controls, as well as timely and transparent disclosure in compliance with applicable rules and regulations. Evident in our results is the impact of continuing volatility in the transient components of our business, which we have been proactively working to reduce. as well as cost pressures. We are not satisfied with our performance and are acting with great urgency. To that end, we undertook a comprehensive bottom-up review throughout the organization, and concurrent with today's earnings release, we are announcing a broad repositioning effort to more effectively align the company's operating expense and G&A infrastructure to deliver earnings growth. We have been considering and studying many of these cost-saving initiatives throughout this year, and we are now ready to accelerate their implementation and expansion. I'm pleased to announce that John McLaren is returning to the company on a full-time basis as president to oversee this accelerated repositioning and the execution of these initiatives. John has been with Sun for 22 years, was Chief Operating Officer for 14 years, and was President for eight years through 2022. During his time as Chief Operating Officer, John oversaw the integration and operation of almost 350 manufactured housing and RV communities and brought a performance-driven approach with a focus on bottom-line operational results. The cost reduction measures include better operating expense management and the implementation of identified efficiencies and savings to the company's cost base. It is expected that these will be achieved primarily through initiatives, including reorganizing our operational structure, streamlining and optimizing our technology systems, implementing more effective asset management to drive efficiencies, maximize revenue, and other cost-cutting measures. As of today, we have identified and expect to realize annualized G&A and operating expense savings of between $15 million and $20 million, or approximately 11 to 15 cents per share, as we rebase our cost structure for 2025. I want to emphasize that this is just the starting point. and we will continue to seek additional efficiencies and revenue enhancement opportunities. We anticipate strong rental rate increases in 2025, and this restructuring should allow our top-line growth to translate into attractive earnings growth by establishing a sustainable and efficient cost structure. Additionally, as announced this evening, I have informed the board of my intention to retire in 2025, following more than 40 years with the company. I led the company through its $115 million IPO in 1993 as a small manufactured housing REIT with 31 manufactured housing communities. And Sun has evolved into the leading owner and operator of MH and RV and marinas with a market capitalization of approximately $16 billion. I am proud of what we have accomplished and believe it is time to transition the CEO role. The Board of Directors has a CEO search committee in place, led by independent board members Jeff Blau, CEO of the Related Companies, and Tanya Allen, President of the McKnight Foundation. to conduct a comprehensive search process to identify and hire a new CEO. Turning to Hurricanes Helene and Milton, we are happy to share that none of our team members, residents, or guests were injured during these events. We extend our deepest gratitude to our team members for their exceptional care and compassion in supporting our residents and guests all while managing their own personal challenges in the lead-up and aftermath of the storms. Clean-up crews were deployed immediately, and our teams worked swiftly to provide necessary supplies, food, and resources. The company continues to assess the overall impact of the storms. Most of the damage was limited to trees, fencing, skirting, and carports, while our common buildings and utility infrastructure remained largely unaffected. We have one small RV property that is partially closed, and we anticipate it will fully reopen in early 2025. Similarly, our marina portfolio sustained only minimal damage, with some bulkheads and docks requiring relocation or replacement. Overall, our assets weathered the storms well, and we are optimistic in our ability to manage the recovery process efficiently. Our supplemental report provides additional details. While we fell short of guidance this quarter, we still achieved year-over-year growth across our key manufactured housing, annual RV, and marina segments. As we look to next year, We believe the strategic initiatives already in place along with the steps we now are taking will enable reliable growth moving forward. In our manufactured housing segment, nearly 35% of our residents received rent increase notices for 2025 at the end of October with an average increase of 5.2%. For our RV portfolio, annual rates have been established for approximately 55% of sites, reflecting an average growth rate of 5.1%. In the UK, all residents have been informed of a 3.7% rent increase for 2025, and 51% of our Marina members have also received notice of a 3.7% rental increase. Importantly, We are positioned in sectors with compelling supply-demand dynamics. The ongoing demand for attainable housing and affordable vacationing continues to be a key driver of our platform's success, fueling organic real property NOI growth. We are not satisfied with our results, and we are leveraging every available tool so our platform reflects the underlying value of our assets, and that it delivers sustainable and reliable earnings growth over time. I will now turn the call over to Fernando to discuss our financial results and guidance. Fernando?

Thank you, Gary. For the quarter ended September 30th, 2024, Sun reported core FFO per share of $2.34. Total North America same property NOI, increased by 0.5%, driven by a 2.8% increase in revenues, offset by a 7.7% increase in expenses. This underperformance relative to our expectations was driven primarily by higher expenses, continued headwinds in Transient RV, compounded by the September hurricane further impacting Florida and Southeast Transient business and home sales. Here's a closer look by Cegnet. Our core North America manufactured housing business continued to deliver growth, with same property NOI increasing by 5.3% year over year. Although our revenue growth was strong, we faced elevated expenses, primarily due to higher supply and repair costs. Despite these pressures, our year-to-date growth remained strong at 6.6%, reaffirming the long-term fundamentals of the segment. The RV segment faced top line and expense challenges this quarter, leading to a 6.9% decline in same property NOI, largely attributed to a 10.4% reduction in transient revenue. While we were tracking generally in line with guidance for the first two months of the quarter, transient revenue and resultant NOI underperformed in September. Despite this, our annual RV business remains strong. with nearly 900 sites converted from transient to annual this quarter, accounting for 85% of total revenue-producing site gains here to date. So far this year, we have completed almost 2,000 transient to annual conversions, further increasing our recurring income stream supported by long-term occupancy and revenue stability. Supply and repair and utility costs were elevated in the quarter, driving underperformance beyond the transient revenue headwind. In our marina segment, same property NOI increased by 2.5% for the quarter and 5% year-to-date. The segment faced pressures from the delay of large vessel returns from the Mediterranean due to storms, including Helene, and lower overall occupancy. Also, similar to our MH and RV segments, we experienced higher than expected operating expense pressures, further impacting marina NOI performance in the quarter. We have invested strategically in our marinas, including the acquisition in the third quarter of one marina and one bolt-on for approximately $52 million, primarily funded through the issuance of common OP units. These additions expand our member networks and enhance our capabilities and customer experience. In the UK, overall occupancy increased by 110 basis points from the prior year, while timing factors related to residents leaving and new owners moving in led to a same-property NOI decline of approximately $700,000, or 2.3%, this quarter. A key year-over-year expense driver was higher payroll costs, stemming from a U.K. national minimum wage increase of approximately 13% this year. Despite this, the segment shows positive momentum with increased rental rates and vacation revenue driving year-to-date same-property NOI growth of 7.7%. There remains some broader uncertainty around UK fiscal policy and the macroeconomic outlook, but we are encouraged by our positive momentum driven by higher rental rates. Additionally, home sales revenue rose 5.2% compared to last year with stable margins. SRD&E NOI came in below expectations, primarily linked to softer transient demand in the RV and marina segments. or FFO contribution from North American home sales was lower than expected in the quarter, primarily due to the impact of Hurricane Helene in Florida, prior to which we were ahead of internal expectations for July and August. During the quarter, in relation to Hurricane Helene, we recognized $2.2 million of impairment charges for assets at five MH and RV communities and $1.7 million for assets at nine marinas. with impacted properties located in Florida, South Carolina, North Carolina, and Georgia. On October 9th, Hurricane Milton impacted some of the company's properties in Florida. The company responded promptly, and cleanup and restoration efforts are underway. We believe we have adequate insurance coverage, including property, casualty, flood, and business interruption, and at this time, do not anticipate a significant adverse impact on operating results or financial condition. Impairment estimates are based on current information and may adjust as assessments continue. As it relates to our balance sheet, we continue to advance our capital recycling strategy, selling eight manufactured housing communities for approximately $300 million and two MH land parcels for $37 million. We also reduced non-recurring capital expenditures down approximately $255 million through September versus 2023, reflecting a nearly 50% year-over-year decrease. Additionally, we settled all forward sales agreements with respect to 2.7 million shares of common stock under our at-the-market program. This activity took place during August and the first days of September and resulted in net proceeds of approximately $362 million. Combined proceeds from asset sales and the ATM program were used to pay down secured debt and our revolving line of credit, strengthening our balance sheet for sustainable growth going forward. As compared to 2023 year end, we have approximately $450 million of less debt on our balance sheet today. As of September 30th, Sun's debt balance stood at $7.36 billion with a weighted average interest rate of 4.1%, and a weighted average maturity of 6.4 years. Our net debt to trailing 12-month recurring EBITDA ratio is six times. We are continuing to evaluate non-core asset and land parcel capital recycling opportunities to continue to focus on our core portfolio in our deleveraging path. Turning to updated 2024 guidance. We are adjusting our full year core FFO per share guidance to a range of $6.76 to $6.84, a reduction of 4.8% at the midpoint from our prior expectations. This reflects the impact of third quarter underperformance and the continuation of headwinds in the business, inclusive of transient RV revenue and higher expenses for the fourth quarter. We are reducing North American St. Property NOI guidance by 225 basis points at the midpoint, to a range of 2.6 to 3.3%. Summarizing the changes by segment. Manufactured housing, same property, and OI expectations are reduced to a range of 5.6 to 6.2%, primarily driven by higher expenses across supply and repair and utilities. RV, same property, and OI expectations are reduced to a range of negative 5.3 to negative 4.1%. The change is primarily driven by continued headwinds in transient RV revenues and higher expense expectations, primarily in supply and repair and utilities. Full-year transient RV revenue is now expected to decline by 11.9% at the midpoint versus July expectations of a 10.3% decline, due in part to an impact from Helene and Milton on our Florida assets and the broader Southeast RV portfolio. Marina, St. Property, and Hawaii expectations are reduced to a range of 4.4 to 5.2%. The change is primarily driven by occupancy declines, including the delayed returns of large vessels to the U.S. from the summer and fall boating season in Europe, in part due to weather patterns. Expenses are running higher than originally expected, mainly in payroll. For our UK St. Property portfolio, we are reducing NOI growth expectations to a range of 7.1 to 8.7%, primarily due to the move in timing of new owners and higher expenses in supply and repair and payroll. Service, retail, dining, and entertainment NOI, primarily linked to transient demand in RV and marina, is expected to experience continued headwinds into the fourth quarter. FFO contribution from North American home sales expectations are also lower, reflecting fewer sales expected in Florida and the southeast due to hurricane activity. These headwinds are anticipated to be partially offset by higher than expected UK income tax refunds. As reflected in our updated guidance, we are anticipating some specific headwinds for the remainder of this year. However, we continue to see stability in our core business and are constructive on our outlook beyond 2024 as we realize the impact of our accelerated and expanded initiatives. Importantly, this is supported by the strong rental rate increases that we expect to see next year of 5.2% in manufactured housing, 5.1% in annual RV, and 3.7% in the UK and marina segments. We also anticipate annualized operating and G&A expense savings of between $15 to $20 million, or approximately 11 to 15 cents per share on a run rate basis. as well as interest expense savings from lower current and expected year-end debt balances versus 2024. Finally, as we have discussed, we continue to focus on our reliable real property income and reducing transient exposure while materially reducing our non-recurring capital expenditures and selectively recycling assets for further debt pay down. 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 November 6, but it does not include the impact of prospective acquisitions, dispositions, or capital markets activities, which may be included in research channel assessments. This concludes our prepared remarks. We will now open the call up for questions. Operator?