Sun Communities Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 11 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Communities Second Quarter 2023 Earnings Conference Call. At this time, management would like me to inform you that certain statements made during this call, which are not historical facts, may be deemed forward looking within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward looking statements are based On reasonable assumptions, the company can provide no assurance that its expectations will be achieved. Factors and risks that could cause Actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the company's periodic filings with the SEC.

Operator

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 As a reminder, this call is being recorded. I'll now turn the call over to Gary Shiffman, Chairman, President and Chief Executive Officer.

Operator

Mr. Shiffman, you may begin.

Speaker 1

Good afternoon, and thank you for joining our call to discuss second quarter results and our updated 2023 guidance. We are pleased to share Sun's continued strong operating results. Core FFO per share of $1.96 for the quarter was in line with guidance, supported by strong 6.3% year over year growth Our properties share the compelling fundamentals of resilient demand and low to shrinking supply, which when combined with the unparalleled customer services Our teams deliver historically generate high durable cash flow streams throughout economic cycles. Same property NOI growth in the quarter exceeded the high end of guidance by 150 basis points It was driven by solid revenue growth and the successful implementation of ongoing expense management. In manufactured housing, same property NOI grew 5.7% compared to 2022, driven by strong rental rate growth and bolstered by occupancy gains.

Speaker 1

In RVs, same property NOI growth of 3.2% reflected our continued focus on converting transient guests and to annual resonance, which increases our stream of stable revenue and improves operational efficiencies. At the end of the quarter, same property adjusted occupancy for our combined MH and RV locations It was 98.7 percent, a year over year increase of 170 basis points. That reflects the resilience of demand for our properties. Additionally, across our total portfolio, We gained over 1,000 new revenue producing sites during the quarter, which represents 9.4% growth compared to last year that brings total gains for the year to nearly 18 50 sites. Main property Marina NOI grew 11.9% compared to the prior year, exceeding our expectations.

Speaker 1

The outperformance was fueled by robust demand for wet slips and dry storage from boaters who increasingly discover the convenient On a trailing 12 month basis, our same property portfolio generates 91% of total real property NOI and is a powerful engine for EBITDA and cash flow growth. We intend to remain internally focused on optimizing our embedded portfolio growth. By reinvesting in our properties and providing the highest level of customer service, we preserve and increase value for the residents, guests and members and help ensure predictable long term revenue growth. Portfolio optimization includes completing select property expansions and in the case of Marina's dock reconfigurations to enhance property returns and to scale property operations. In the Q2, we delivered over 100 expansion sites across 3 communities.

Speaker 1

In May, we published our 2022 ESG report, highlighting our significant achievements, including the expansion of our GHG inventory to cover marinas and the UK and their Board's commitment to achieving net zero emissions. These and other important initiatives reinforce our dedication to being Responsible stewards of all resources toward a shared goal of improving the communities in which we live, work and serve. I would like to thank all Sun team members who have been instrumental in our accomplishments in the first half of the year. As we progress through the second half of twenty twenty three, I look forward to realizing even greater achievements that will further enhance Sun's platform and the value we delivered to all of our stakeholders. I'll now turn the call over to Fernando to discuss our results in more detail.

Speaker 1

Fernando?

Speaker 2

Thank you, Gary. During the Q2, core FFO of $1.96 per share was in line with guidance. Real property revenue growth as well as efficiencies in property and corporate level expenses drove the quarter's performance, partially offset by higher interest expense. Our same property results were solid as demand for our properties remained strong. Total same property NOI grew 6.3% in the quarter as compared to 2022, which outperformed the high end of our guidance by 150 basis Total same property revenues grew 6.2% and exceeded property operating expense growth of 6%.

Speaker 2

The lower expense growth was broad based with moderate year over year growth realized in payroll, utilities, real estate taxes and other expenses. Same property manufactured housing NOI increased 5.7% during the quarter, exceeding the internal expectations. Outperformance was driven by strong occupancy gains bolstered by a rental rate increase of 5.7% and lower than expected expense growth, especially in payroll and benefits. In RV, same property NOI for the quarter increased by 3.2%. We achieved strong 8.6% growth in weighted average annual rents over the prior year and operating expense efficiencies that resulted in modest Our RV communities delivered solid results during the July 4 holiday weekend.

Speaker 2

Same property RV transient revenue increased by 8.4% compared to 2022,

Speaker 3

even as

Speaker 2

we had 5.7% fewer transient sites available. July 4 fell on a Tuesday this year, whereas last year it fell on a Monday. Adjusting for just the Friday to Monday period, Same property RV transient revenue still increased by 2.7%. While we continue to see strong holiday and weekend demand, During mid week periods, transient RV revenue growth continues to moderate from recent record levels. Strategically, we remain focused on increasing our Stable annual property revenues through increased transient to annual site conversions.

Speaker 2

In addition to increasing the percent of revenues derived from annual residents, Conversions result in higher NOI margins over time by decreasing the higher level of variable expenses associated with transient guests. During the Q2, we converted over 7 50 transient sites across our total RV portfolio, bringing first half conversions to nearly 1300 Since the start of 2020, we have converted over 6,000 transient sites to annual and we intend to continue driving transient to annual In the 2nd quarter, Marina Safe Property NOI increased 11.9%. This outperformance was driven by a 9.2% increase in revenue from stronger demand overall and lower expense growth of 3.4% that significantly surpassed our internal expectations for mid single digit expense growth. Lower expense growth was most significant in Marina payroll and benefits, utilities and supply and repair. In terms of home sales, we were in line with our expectations in North America and are on track to achieve our guidance.

Speaker 2

Continued demand is demonstrated by an average price for new homes of $210,000 and higher margins. In the UK, economic headwinds continue to impact vacation home sales. Home sale NOI margins, while 5.7 percent below prior year margins, were in line with our expectations. The approximately 840 homes sold in 2nd quarter were 8% below our expectations. Inflation in the UK has remained higher for longer than anticipated.

Speaker 2

And in late June, the Bank of England implemented an unexpected 50 basis point increase in its base interest rate. We have seen the time home purchasers On the Real Property side, we are seeing higher retention rates for Park Holiday homeowners, which leads to higher average resident tenure approaching 8 years. We remain enthusiastic about the growth opportunity in this segment of the business. As of June 30, 2023, our 7 $6,000,000,000 in debt outstanding or interest at an weighted average rate of 4% and had a weighted average years to maturity of 7.1 years. Our trailing 12 months leverage ratio was 6.2 times.

Speaker 2

Based on our operating cash flow expectations for the remainder of the year and potential capital We are revising our full year guidance range for core FFO per share downward by 2.2% to a revised range of $7.09 at $7.23 and established guidance for the Q3. Our revised guidance is primarily reflective of lower expected home sales in the UK And higher interest expense expected in the second half of the year predominantly from the flexible variable rate sterling denominated debt that funded our UK business. Since our last guidance update in April, short term interest rates have increased meaningfully. We are evaluating opportunities to refinance and pay down floating rate debt over the second half of the year. We expect continued strong same property performance and are increasing our total same property NOI growth for the year to a range of 5.3% to 6.1%.

Speaker 2

The 20 basis point increase at the midpoint is driven by outperformance in manufactured housing and marinas, moderated by revised expectations for same property RV. We also expect additional G and A savings over the second half of the year. Our revised same property NOI growth ranges for the year are 5.2% to 5.8% for manufactured housing, representing a 50 basis point increase at the midpoint, 3.4% to 4.6% for RV, representing a 100 basis point decrease at the midpoint. The largest driver for the decrease is revised growth expectations for transient RV revenue, which is now forecasted to be a 3.9% decline for the full year. 8% to 9% for Marina, representing a 110 basis point increase at the midpoint.

Speaker 2

For our UK operations, we are lowering our full year forecast for home sales NOI to a range of $65,700,000 to $75,400,000 The revised range represents a $10,200,000 decrease to prior 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 July 26 and the effect of a property disposition under contract that is expected to close during the Q3. Our guidance does not include the impact of This concludes our prepared remarks. We will now open the call up for questions. Operator?

Operator

We will now open the call for questions. Again, we ask all participants in the queue to please limit yourself to only one question to allow others to participate. One moment please while we poll for questions. Our first question comes from the line of Josh Denali with Bank of America. Please proceed with your question.

Speaker 4

Yes. Hey, guys. Thanks for the time. So I guess this is the second time in a row you've Taking down U. K.

Speaker 4

Home sale profits and I think the volumes as well. What's to say this is the bottom and can you kind of walk us through how you Forecast or come up with that guidance range for the home sales and the profit?

Speaker 1

Sure, Josh. Thanks. To really look at Our thinking about the fact that we've had to reguide before on the UK, I'd underscore that the home sales forecast are built really from the bottom up at the community level, taking into account All available sites to sell homes on, which include vacant sites, sites to be delivered from expansion activity And rental home hire fleet sites that we can convert to be able to sell homes and Annual Fee on and this exercise is completed With a lot of oversight, but built up from the property level. Our revised range really incorporates current market conditions As we understand them, it doesn't assume any major decline in inflation or interest rates And the U. K.

Speaker 1

For the remainder of the year and we think even if we were to see them the lag between those changes and improvements Wouldn't impact results for the balance of this year, certainly they would into 2024. So the high end of our range Currently indicates what we believe is the most likely of outcomes And the low end of our range really had handicaps that outcome further to what we would consider a worst case scenario. As Fernando mentioned in his remarks, since we met at NAREIT, certainly the conditions Since then, they have changed in the UK, much slower reduction of CPI, Although there has been some modest reduction, but the Bank of England's 50 basis point rate increase was unexpected And it does have ramifications on the buyers of our vacation homes. So from the best insight that we can see, we That's how we adjusted guidance and came up with a range.

Speaker 5

Okay. And then could you walk us through how most

Speaker 4

Do a lot of people use like a second lien on their primary home to pay for it?

Speaker 2

Sure. So Josh, about 30% of our homeowners are purchasing with financing that would be akin to Chattel financing here in the U. S, the other 70%, we see it as cash. In some instances, they are, right, using proceeds from refinancing their home, their primary home in order Purchase their vacation home, certainly rates are refinancing rates are higher for primary homes. So That's going into the equation as far as lower volume expected of sales.

Speaker 1

And the only thing that I would add that in the UK, The single family residential primary home mortgages tend to fix rates for a shorter period of time here U. S. 3 to 5 years. So certainly, those potential Vacation homebuyers are experiencing a reset to their mortgage rates and that probably It's a factor of why we're seeing a slower conversion to buy homes from our potential customers. But The interesting thing I just would add is that the Parked Holidays platform really continues to Play strong to market through the changes in Brexit, the location of the units, the work of the properties, The work from home that's taking place there, so there's still when we talk about the real property activity, Still high demand, high tourism, high usage and a high anecdotal interest remains in I'm buying homes, but it is definitely influenced by a slower pace of sales As I think they're experiencing the financial ramifications in the UK.

Operator

Our next question comes from the line of Brad Efrain with RBC Capital Markets, please proceed with your question.

Speaker 6

Yes, thank you. Sticking with the U. K. Home sales, Can you talk about what underlies the guidance for the rest of the year in terms of the ASPs and the margins compared to last year?

Speaker 2

Sure. So Brad, our 2800 to 2,900 home sales expectations for the full year Have us having a margin of between $24,000 $25,000 NOI margin As you see, as you would see it reported for us, so we do have a moderation Margin expected is on a year to date basis, we have been achieving about a $26,000 margin.

Speaker 6

Okay, got it. And then how do you think about what needs to happen for that business to recover? Is it just Rates need to stabilize or go down, does the UK economy need to improve and how long do you think about that potentially taking?

Speaker 1

Yes. I'd like to think we had a crystal ball. And if we went on our assumptions, we would have thought earlier we would I'll start to see some improvement, but that hasn't taken place. Clearly, when you look Through Europe, UK has the most challenged economy right now. I think the steps that have been taken by the Bank of England I have begun to show some improvement in CPI, which was right around 10% a year ago.

Speaker 1

As recently as a little while ago, it dropped to 7.9%. So it still has a ways to go. I think as we see that improvement, we would expect there would be commensurate

Speaker 2

Rate decreases,

Speaker 1

in conjunction with that over time. So as we look out into 2024, We think that's when we'll begin to see the change and realization that we go back to more normalized sales.

Speaker 6

Thank

Operator

Thank you. Our next question comes from the line of Keegan Karl with Wolfe Research. Please proceed with

Speaker 3

Just curious, 1, what you're seeing on the Safe Harbor platform 2, how you're thinking about underwriting the long term view of the space and then 3, what the Marina performance does to your views on long term capital allocation going forward?

Speaker 2

Degan, the first, I would say 5 seconds of your question, 5 to 10 seconds of your question did not come through. Can you repeat? Can you just start over?

Speaker 3

Yes. So, just focusing on the Marina business, because obviously the outperformance is really impressive and I think people So one, given what you're seeing in the Safe Harbor platform, how is that trending versus your initial expectations? How are you thinking about the long term underwriting of the space because of this? And then what does it mean from a capital allocation standpoint going forward?

Speaker 1

I'll start out, Keegan, and just suggest that the Safe Harbor outperformance Really was driven by strong demand for slip and dry storage and rental across the entire board from small To medium all the way through to the superyachts, the peak season rate increases were passed through And occupancy remained very strong. We're seeing increased demand For slips across the board, and a lot of it, we really do attribute to the value of the Safe Harbor membership, which includes such things as an unmatched network of locations out there today to travel between Best in class facilities and amenities for the members to use and really best in class Customer service that we talk about and then the perks like passing on fuel at basically our cost. We noticed that fuel usage is up 13% year over year on a per gallon basis. So Some of the impact to SR and D and E, which was a decision we made intentionally to sacrifice that margin It's really paying reward in the more important slip rental. So we're very, very pleased at How things are performing at Safe Harbor marinas and we've seen it in performance With regard to our long term outlook, I think we have shared with you that Capital allocation is very restricted at the company today.

Speaker 1

We're very internally focused Using our capital in a very disciplined way within our portfolio and Mermina is a great example. We have identified 27 opportunities to reconfigure Marina slips. And when we invest in reconfiguring these slips, we get about a 10% to 12% return on that investment. Of the 27 opportunities, 7 reconfigurations have taken place. 3 are Under construction right now and about 10 others are And the permitting process in 3 or 4 are still being worked on.

Speaker 1

So that's where we'll see capital allocation. If we're looking for external growth, it will be restricted to a really accretive opportunity in a situation like a Savannah Yes, Marina, we're strategically, it has a lot of benefit to the network effect that we're trying to achieve within the Marina's. So I don't know if you have anything to add. Hopefully that addresses the questions.

Speaker 3

Can I just follow-up just because Fernando called out capital recycling as an opportunity? Is it fair to assume you might sell Some MHRV assets and recycle the capital into the higher cap rate, higher return Marina business. Is that the right way to think about it?

Speaker 2

Ian, I think as we look at our portfolio and evaluate, there is a bottom tier of assets always when forced ranking. So we'll look to selectively and strategically look to recycle out of some properties that Maybe aren't meeting the long term growth profile that we're looking for. And today, any immediate Use of that capital would likely go towards deleveraging, but certainly, right, we'll evaluate all opportunities in front of us.

Speaker 3

Got it. Thanks. I'll hop back in the queue.

Operator

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

Speaker 7

Thanks. It's actually Nick Joseph here with Eric. Gary, if I think about Kind of really over the last 10 years, I think the company has really benefited from a stability of results. And if we go back to kind of the guidance questions earlier, It definitely seems like things are a lot more volatile now. Obviously, part of that's probably the recent acquisitions, but at the end of the day, it's missing guidance and calling into Question, kind of the forward guidance from here.

Speaker 7

So as you think about what do you think needs to change from the corporate side to forecast results more accurately. These are just growing pains, I guess, with the U. K. And maybe some of the macro Volatility that you cited, and ultimately we get back to kind of how it was traditionally, or is the range of outcomes just a bit broader given the new businesses.

Speaker 1

I'll give some thoughts That I have and Fernando certainly can share his thoughts. But we have shared with our stakeholders that Complexity is something we're working very hard to reduce, taking all the There is no doubt the headwinds we're experiencing in the U. K. Have caused A lot of challenges with regard to guiding forward. And when we think about things, we use the best Tools that we have at the time, whether it be the forward curve, whether it be reading everything we can with regard to Yes, we'll look on the economic challenges there.

Speaker 1

Obviously, we've had to re guide, So that makes things difficult. But all in all, when we think about 91% of the entire Contribution from real property is what we're trying to guide to. We have a lot of work to do in the UK that we're working on. On the Marina side, we've worked very, very hard to be able to Put together the same site, MARINA data so that we can measure going forward. And I know that Fernando in the disclosure and supplemental has been working to simplify a lot of things and Kind of present a lot of benefits that can help the modeling and I don't know if you have anything you want to add from there.

Speaker 1

So We are very, very attuned and aware of the complexity that has been created, in large part through the acquisitions, Both marinas and the UK recently and as a company that's been around 30 plus years in the public marketplace, We listened to our stakeholders and we're very, very focused on step by step reducing that complexity And making the modeling and the forward guiding as good as possible.

Speaker 7

Thanks. Maybe just to follow-up on that. What can you do to reduce the complexity kind of in the near, medium and longer term, right? Is it selling the UK home sale business? Is it How are you thinking about actually reducing that complexity?

Speaker 1

Well, certainly one piece of it is the fact that strategically we have shared with the market that our long term goal in the UK Was to deemphasize contribution from the home sales margins and focus on the Very, very stickiness of real property contribution like we do in the U. S. And that was a Kind of a 5 year strategic plan. We're slowly making progress at that. Ironically, as a percentage with home sales down, That real property side percentage is up, but we're working on that over a long period of time.

Speaker 1

And I think that we've already increased the average stay in the UK to around 8 years. We're expanding our licenses to stay in the UK properties for from 20 years to 30 years. So we expect that 8 years to continue to grow and look more similar to the 15 years, if you will, in the North America manufactured housing. So de emphasize the margins on home sales and really focus on the Real property contribution and we've taken similar steps in the Marina side to accomplish that as well As we convert some of the SRDV in particular the service over to rental income from third parties, All that I think as we look out over a period of time will help to simplify things going

Speaker 7

forward. Thank

Speaker 1

you.

Operator

Our next question comes from the line of Anthony Powell with Barclays.

Speaker 8

Thanks. Good afternoon. Just a question on, I guess, the normalization of various leisure adjacent businesses. It's been a Topic of a lot of calls past few days. Transient RV and Marina, you're still seeing growth in transient RV, I guess, on holidays, And then Marine has been pretty strong.

Speaker 8

Do you see any risk of normalization impacting these revenues in the next few years as People will return to maybe more older habits at post COVID. I

Speaker 2

would say Anthony, I think we're overall on the Transient RV side, we're seeing that normalization from record years over the last 2 to 3 years Given the bump over the second half of twenty twenty and into 2021, We are we continue to see a lot of demand for our properties. I think you see that with the record number of conversions that we have, having converted over 6,000 sites over the course of the last 3.5 years, which Greatly outpaces what we were averaging on a per year basis prior to the pandemic. And so now we're taking that transient guest and they're choosing to stay with us for

Operator

Call it on

Speaker 2

average about a 5 year period of time and on an annual basis getting a rental predictable rental increase From our standpoint, on the Marina side, we've certainly seen very high demand on the transient side as well In the first half of this year, I would say, we're not underwriting Double digit transient growth for that line item, but I'll remind Our stakeholders, the percentage of rental income coming from transient on the marine side is much smaller. It's about 5% 4% to 5% of total rental income. So we have seen outperformance on that line item, but Are not underwriting double digit growth for over the course of the mid to long term.

Speaker 8

All right. Thank you.

Operator

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

Speaker 9

Great. Thank you. So appreciate all your commentary on Park Holiday and simplifying. But if you think about some of the other areas where You took down guidance. How do you create more visibility on that and simplify that?

Speaker 9

And then along the same Your credit line balance is up above $800,000,000

Speaker 5

Can you

Speaker 9

talk about plans to either keep it there or Refinance that to bring it back down.

Speaker 2

Sure. Thank you, Jamie. On the We modestly brought down expectations on the SRD and E side. That is, as Gary mentioned earlier, We are looking to deemphasize that over time as we especially on the Maria side, we convert The service business over to 3rd parties paying us rent at the property level. So I think you'll Continue seeing that over time and that ultimately will benefit real property NOI and rental income that we receive not just from our members, but then third parties that pay us rent to Be at our properties to provide that service.

Speaker 2

As it relates to our line of credit, We have we've mentioned over the course of the last couple of months pursuing various strategic Alternatives where whether that's capital recycling from operating assets that the immediate use of that capital would be to pay down debt. I think as you look towards the second half and into 2024, There will be a moderation in capital investments as well that will convert more free cash flow towards We are evaluating transactions in the capital markets as well in order to

Speaker 9

Okay. Thank you. And if I could just ask a follow-up on that. So the interest expense guidance reduction, is that Because you used the credit line and didn't expect to or because rates are higher than you thought they would be? And if you did use it more than you expected, what was the reason for

Speaker 2

Sure. On a forecast to forecast basis, I would say, primarily would be expectations from the from the forward curve, where in general ending the year rates For both Sofer and Sonya are up on average about 70, 75 basis points from Our last forecast in at the end of April.

Speaker 1

Okay.

Operator

So it's not balanced,

Speaker 9

it was really just forecast?

Operator

Our next question comes from the line of Sameer Khanal with Evercore ISI. Please proceed with your Yes, good afternoon. I guess, Gary, just on maybe switching gears a little bit on the MH side, Pricing is still strong on that end. I guess how do you think about rent increases into next year with inflation moderating here? I mean more of a question kind of in the next 18 months.

Operator

Thanks.

Speaker 1

Yes. It's a great question. Certainly, at overall 98.7 percent occupancy, MH Annual, there will be the opportunity to continue to pass through all Inflationary pressure, I'd suggest that what we did last October in advance Providing guidance in February with 4th quarter in year end results, we will again Share with the market

Speaker 4

our forecast

Speaker 1

on Rental rate increases across the board, but our expectation is that We will be able to pass through solid rental increases throughout the businesses And we'll share those with everybody in October.

Operator

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

Speaker 4

Thanks for the time. Fernando, I wanted to follow-up on the revolving credit facility question. I guess it's been well over a year where you've leaned heavily in the revolver. So why wasn't debt properly termed out long ago to more closely align the duration The debt with your assets and when specifically should we expect you to lock in longer term financing?

Speaker 2

John, you'll see us over the course of the next couple of quarters look to extend Our maturities, not just what's in our line of credit, but what is coming due from a secured debt standpoint. So that is That's something that we are actively working towards. But as far as bringing Balance is down. It's really evaluating the multiple strategic alternatives that we have in front of us as far as Being able to execute on those transactions and bring balances down, We've been since our initial investment grade rating in the summer of 2021, we've been Very active in the bond market having done about $2,200,000,000 of long term debt between 7 10 years of 10 year. And our most recent transaction was back in January of this year and That would be expected to continue over the course of the next couple of quarters.

Speaker 4

Okay. And then another question on Park Holidays. At your Investor Day over there, We're toward properties with 4 or 5 of senior leaders from Park's Holidays. Have any senior leaders left since left Retired and who's overseeing the day to day operations from the Sun Mothership here in the States?

Speaker 1

Yes. John, generally, everybody is still there and there's a really well seasoned team Looking to work on pulling every single lever as they have these challenging economic times. So that group of talented people are still there and we're very pleased that they are there.

Speaker 4

Thank you.

Operator

Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Speaker 2

Good afternoon. I had

Speaker 5

a question on Ingenia. If I'm not mistaken, your development joint venture had a 5 year initial term It would be up for renewal later this year. So I was wondering what your appetite is to keep it going or could this be a potential use sorry, potential source of funds?

Speaker 1

Great question, John. I think the fact is that technically the SunGenia, as we call it, JV, 5 year period of time is up at the end of November. We are always assessing our businesses, if you will. To remind everyone, Sun owns a 10% interest And we really have had a successful JV, which is performing. We're happy with the partnership relationship there, although there is no doubt COVID and the pandemic, but kind of a 2 year crimp in the plant, the Sun Genia JV now has 4 developments, 2 are in Fill up phase and they're filling up nicely.

Speaker 1

And the other 2 are just about to break ground. With the JV expiring, we will continue to review how we will think Moving forward, but one of the factors is that as these four developments are moving forward, We want to make sure that we have the best opportunity to maximize those results Once they're filled up and stabilized, but we also are reviewing all optionality that relates to We capital recycling and the options that we can do to bring down some of our variable rate debt. So we'll continue to keep you advised as we think through how we're going to focus on the

Speaker 5

So quarter of the year, out of the number of homes that you had planned to sell for the Q3, How many have already been sold or are currently in negotiations? And I was wondering how sensitive this is to mortgage rates. There was an article that came on the AppShe just a couple of hours ago of 3 of the largest UK lenders reducing mortgage rates. I'm wondering if that's been factored in at all.

Speaker 1

Got it. I would start to say that as I shared in the comments earlier, we're not sitting here anticipating The benefit of reduced mortgage rates or anything like that going forward that would definitely be a positive, but We do think there will be a lag before we see the benefits of things like that. So the underwriting that we talked about in the 2,600 to 2,900 unit range for the year is kind of our downside To our view in the market right now and I don't know Fernando, do we have any information on how they Going to Q3?

Speaker 2

John, we'll provide updates on homes sold over the course of the quarter when we meet during investor And any other potential updates, but we are as you identified, We're heading into a busy period as the holidays do pick up in August and We'll be able to report back to the market over the course of the next couple of weeks.

Speaker 5

Can I just squeeze in one more question? The seasonality had shifted a little bit, but you also provided more clarity or more disclosure On the seasonality of UK home sales, is this a good run rate going forward where roughly a third is sold in each of the second and third quarters?

Speaker 2

Yes. The seasonality shift would say due primarily to the changes in volume. But yes, this would be the best Run rate to use from a seasonality standpoint.

Speaker 5

Okay. Great. Thank you.

Operator

Our next question comes from the line of Wes Golladay with Baird. Please proceed with your question. Hey, everyone. I just want to maybe address maybe a few more of the moving parts that you may have in the future. Can you comment on the loan book?

Operator

Is that mostly fixed rate Rates that you're charging, is it floating? And do you expect the size of the book to stay the same over the next few years?

Speaker 2

Wes, our wholly owned notebook Portfolio is about $62,000,000 $62,000,000 today. That is in active repayment, as residents make payments on their loans. We do have a joint venture where we are a 40% partner. Where we are Underwriting run rate, call it $7,000,000 to $10,000,000 of financing per month as we as our residents Finance their homes in our communities. But that is fixed.

Speaker 2

That is those are Those haven't moved significantly. There's been an uptick, but they are, call it, plusminus at the high end of the range today for customers.

Speaker 1

I would only suggest with a slowdown of capital allocation to Development of new sites, which is where most of that channel loan is used Probably a reduction in usage as we go forward.

Operator

Our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.

Speaker 10

Good afternoon. Thanks a lot for taking my question. Gary, earlier you were Talking about the how the U. K, you're looking for a mix shift away from the NOI generated from the home sales And more from the rents, in the Q2, our U. K.

Speaker 10

Home sales, the quantity was up 11%, Selling price down 11%. But have you been able to pass along greater rents, along with the lower

Speaker 1

Yes. When we talk about the U. K. Management team, As they shared with us on one of our update calls recently, they are fully attuned with that strategy and very, very focused on it. And we expect to see the ability to pass on those rental increases.

Speaker 1

And in fact, it's a little bit accelerated right now as we Adjust our home price margins to move volume in this challenging economic time and sell more homes And are able to put it on to the monthly real property fees. So We expect to continue seeing that, as we said strategically over the next 4 or 5 years And would expect to see accelerated growth on the real property monthly fee side as we reduce Operating margins not operating, sales margins, sorry.

Speaker 10

And as a follow-up, are you able to kind of quantify If the increase in the rents is offsetting the pressure on the home sale, so like are you just getting the back What you're losing in the near term, are you giving that back over time as part of the consistent cash flow? Or is it just kind of A more careful balance as you navigate a pressured consumer and then over time you look to navigate it further.

Speaker 1

Yes. At this time, I think it's a ladder.

Speaker 2

1st of

Speaker 1

all, it will be too soon to drop and share any conclusions At this time, because we're just adjusting to a very challenging economic environment there, but we do believe over a period of time, Just as we do in North America, we would sell a home at a very low margin to be able to create Sticky rent in one of our manufactured housing communities that with less than 0.5% of homes leaving on an annual basis Generally, we generate uninterrupted rent for 40, 50 plus year period of time. And obviously, that predictable steady cash flow is what we're looking for because it does tend to get the better multiple And understanding that management and our stakeholders are looking for that over a period of time, we're very, very focused on achieving that. And so is the team over there. So we are aligned on that.

Speaker 10

Thank you very much.

Operator

And our next question comes from the line of Anthony Chow with Churrus Securities. Please proceed with your question.

Speaker 5

Hey guys, thanks for taking my question. Can you guys talk about the trends that you guys are seeing on the holiday rental side in the UK? I heard that some of the competitors are lowering their rates. Just curious if you guys are doing the same thing as well?

Speaker 2

Anthony, good question. We have seen the competition bringing down rates To capture demand, but we're actually seeing we're holding rates up Fairly steady and our factoring market share from the market on that segment. And so that's the outlook. That is the conversations that we're having today.

Speaker 5

Got you. And just a separate question. Can you guys go over the current like RV, AMH and Holiday Park And also like the potential return?

Speaker 2

Anthony, in any of these projects from Expansion or growth potential, expansion will typically be that MH or RB, We'll typically carry returns in low teens of 10% to 13%. Historically, that has been the case. Any solar rays would vary Slightly higher ROIs in the mid teens from that standpoint. And then in the UK, any expansion opportunity carries a slightly higher ROI, Call it in the 20% range, given that payback period when building in, let's call it a home sale And the usage of the rental unit, it pays back much, Much faster. We can offline, we can go through in detail for any of these buckets What the capital spend would be?

Speaker 2

I think as we mentioned earlier, We are looking at each of these investment buckets as we head into 2024 and We expect a deceleration of spend as we focus on converting more free cash Well, towards debt repayment, but we can review those buckets offline.

Speaker 8

Okay. Thank you.

Operator

And we have reached the end of the question and answer session. And I'll now turn it back over to management for closing remarks.

Speaker 1

Well, we appreciate everyone joining us for our Q2 call and we look forward to Speaking on the Q3 and also sharing how we're viewing the Implementation of rental increases going into 2024. Thank you, operator.

Operator

And thank you for your participation in today's conference. This does conclude today's remark the company's remarks. You may now disconnect your line.

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Earnings Conference Call
Sun Communities Q2 2023
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