Sun Communities Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2024

There are 9 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Communities 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.

Operator

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 Shiffman, Chairman and Chief Executive Officer Fernando Castro Carattini, 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.

Operator

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.

Speaker 1

Good afternoon and thank you for joining us to discuss our Q3 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 underperformers. As communicated, we have been focused on executing our strategic initiatives to position Sun Communities to deliver sustained earnings growth over the long term. The business fundamentals of our portfolio remains 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.

Speaker 1

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 3rd quarter, we disposed of 8 manufactured housing communities for approximately $300,000,000 along with 2 manufactured housing land parcels for $37,000,000 bringing total proceeds from asset sales to $392,000,000 year to date. As of September 30, our total debt stood at $7,360,000,000 dollars a reduction of approximately $450,000,000 from the end of 2023 and our floating to fixed rate mix currently stands at approximately 6%, down from 21% 2 years ago. That said, we acknowledge that our 3rd quarter results and our adjusted 2024 guidance are below both our and the market's expectations and we are very disappointed by our performance.

Speaker 1

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 2 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 determines that the company complied with its disclosure obligations.

Speaker 1

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 and 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.

Speaker 1

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 8 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.

Speaker 1

As of today, we have identified and expect to realize annualized G and A and operating expense savings of between $15,000,000 $20,000,000 or approximately $0.11 to $0.15 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've informed the Board of my intention to retire in 2025, following more than 40 years with the company. I led the company through its $115,000,000 IPO in 1993 as a small manufactured housing REIT with 31 manufactured housing units and Sun has evolved into the leading owner and operator of MH and RV and marinas with a market capitalization of approximately $16,000,000,000 I am proud of what we have accomplished and believe it is time to transition the CEO role.

Speaker 1

The Board of Directors has a CEO search committee in place led by independent board members, Jeff Plow, CEO

Speaker 2

of the

Speaker 1

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. Cleanup crews were deployed immediately and our teams work swiftly to provide necessary supplies, food and resources. Company continues to assess the overall impact of the storms.

Speaker 1

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.

Speaker 1

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 RME 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 formed of a 3.7% rent increase for 2025 and 51% of our Marina members have also received notice of a 3.7% rental increase.

Speaker 1

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 success fueling organic real property NOI growth. We are not satisfied with the 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?

Speaker 2

Thank you, Gary. For the quarter ended September 30, 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 segment. Our core North America manufactured housing business continued to deliver growth with same property NOI increasing by 5.3% year over year.

Speaker 2

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 remains 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 1st 2 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 year to date.

Speaker 2

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 headwinds. 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.

Speaker 2

We have invested strategically in our marinas, including the acquisition in the Q3 of 1 Marina and 1 Bolt On for approximately $52,000,000 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 UK 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%.

Speaker 2

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 and E NOI came in below expectations, primarily linked to softer transient demand in the RV and Marina segments. Core 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 August. During the quarter, in relation to Hurricane Helene, we recognized $2,200,000 of impairment charges for assets at 5 MH and RV Communities and $1,700,000 for assets at 9 Marina, with impacted properties located in Florida, South Carolina, North Carolina and Georgia.

Speaker 2

On October 9, 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 8 manufactured housing communities for approximately $300,000,000 and 2 MH Land parcels for $37,000,000 We also reduced non recurring capital expenditures down approximately $255,000,000 through September versus 2023, reflecting a nearly 50% year over year decrease.

Speaker 2

Additionally, we settled all forward sales agreements with respect to 2,700,000 shares of common stock under our at the market program. This activity took place during August 1st days of September and resulted in net proceeds of approximately $362,000,000 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 $450,000,000 of less debt on our balance sheet today. As of September 30, SUNS' debt balance stood at $7,360,000,000 with a weighted average interest rate of 4.1 percent and a weighted average maturity of 6.4 years. Our net debt to trailing 12 month recurring EBITDA ratio is 6 times.

Speaker 2

We are continuing to evaluate non core asset and land parcel capital recycling opportunities to continue to focus on our core portfolio and 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 3rd quarter underperformance and the continuation of headwinds in the business inclusive of transient RV revenue and higher expenses for the Q4. We are reducing North American same property NOI guidance by 2 25 basis points at the midpoint to a range of 2.6% to 3.3%.

Speaker 2

Summarizing the changes by segment. Manufactured Housing same property NOI expectations are reduced to a range of 5.6 percent to 6.2%, primarily driven by higher expenses across the plant repair and utilities. RV same property NOI 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.

Speaker 2

Arena same property NOI 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.

Speaker 2

For our U. K. Same 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 payroll. Service retail dining and entertainment NOI primarily linked to transient demand in RV and Marina is expected to experience continued headwinds into the 4th quarter. FFO contribution from North American home sales expectations are lower, reflecting fewer sales expected in Florida and the Southeast due to hurricane activity.

Speaker 2

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 and A expense savings of between 15 $1,000,000 to $20,000,000 or approximately $0.11 to $0.15 per share on a run rate basis, as well as interest expense savings from lower current and expected year end debt balances versus 2024.

Speaker 2

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 analyst estimates. This concludes our prepared remarks. We will now open the call up for questions.

Speaker 2

Operator?

Operator

We'll go first to Samir Khanal with Evercore ISI. Please go ahead.

Speaker 1

Hey, good morning everybody.

Speaker 3

On the cost savings that you identified the $15,000,000 to $20,000,000 how much of that is OpEx and G and A? And I know you talked about potentially identifying more, maybe expand on that comment as we think about maybe in 'twenty five and into 'twenty six. Thanks.

Speaker 1

Yes. Hi, Sameer. It's Gary. I think that as we shared in the remarks that that is a starting point for us. With John McLaren coming aboard, he's working closely with the group to evaluate what opportunities there are with regard to additional cost savings.

Speaker 1

Most of that focuses on the MHRV side as we continue to look into the other business platforms on the Park Holiday side and working with Safe Harbor to identify additional opportunities and cost savings going forward. So, it is a combined amount of both OpEx and G and A savings.

Speaker 4

And then can I ask if

Speaker 3

I can ask for one more here in terms of question? Can you talk about any further dispositions in the pipeline currently? I think that the pool that you said about year to date you've done about 390,000,000 I guess how big is that pool for non core assets at this point? Thanks.

Speaker 2

Hi, Sameer. This is Fernando. We are continuing to evaluate single assets, small portfolio and non income producing land potential dispositions for capital recycling. As outlined in the investor presentation that we put out this evening, there's potential for an additional $100,000,000 to $200,000,000 over the near term.

Speaker 3

Okay. Thanks.

Operator

We'll go next to Wes Golladay with Baird. Please go ahead.

Speaker 5

Hey, everyone. Can you just comment on the guidance? I mean, you had some segments you were just taken up last quarter. Now they're coming down. It seems like it's a lot of expense related.

Speaker 5

But I mean, how hard are those line items to forecast? I'm just having a hard time understanding why we're bouncing around so much on a business that is pretty resilient, sticky business.

Speaker 1

Yes. I think reflecting this quarter, Wes, in the 4th quarter, we are, as we discussed, extremely disappointed with the results. The primary challenges we had in the quarter were related to the businesses we've identified as more volatile than our core MH business and annual RV business, notably transient RV and marinas, which underperformed, especially as Fernando said in September going into July August, we felt much more comfortable with where results were, but September really did not perform well. So alongside this with some occupancy headwinds, if you will, in the marinas due to the adverse weather effects and the adverse weather effects on home sales in Florida. We moved from ahead of internal guidance early in the quarter to well behind in September.

Speaker 1

The most disappointing for us was the lack of ability to achieve expense objectives in the Q3 and into the Q4. Having identified the full scope of those, A lot of those fall under 3rd party providers where we need to flex better against the reduced revenue in these transient areas and did not accomplish our goals of flexing expenses during the time that we needed to and thought that we would flex them and during this rapid decline in September on the revenue side of the transient business. So there is what we've been focused on and continue to be focused on going forward. And under John's leadership, having the experience, the track record, if you will, the ability to focus on the bottom line, that's where we're concentrating all our efforts with regard to reorganizing and being in position for growth in 2025.

Speaker 2

Yes. Wes, John, let me just I think I've managed this portfolio in the past for over 14 years. And what I can confidently tell you is this, we continue to have the best team in the business. Our communities look excellent. I know that because even over the last 2 years, I still go around, creep around the communities and everybody they may not know it, but I do.

Speaker 2

The fundamentals of our portfolio are strong. The opportunity is there. We're not reinventing high quality properties. We already have them. We're not reinventing strong demand.

Speaker 2

We already have it. But instead it's about taking a closer look at how we'll execute on efficiency and performance opportunities in certain areas. We are making targeted adjustments to enhance what's already working as well as the operations teams that frankly have carried out the methodologies I originally put in place. But we're also constantly reevaluating where changes need to ensure long term success. This is just what we've done.

Speaker 2

This is what we do. And so being plugged back into that is going to be exciting.

Speaker 5

And welcome back, John. I look forward to working with you again. Quick question on the CEO search, would there be a potential internal candidate?

Speaker 1

I think that, what I would suggest is the Board has always focused on succession planning at all levels. Certainly, they have 2 great co chairs in Jeff Blau and Tanya Allen to oversee the committee that's been appointed. They will use a search firm and they will run a very, very strong process. And I think it would be expected they will look both internally and externally.

Speaker 5

Okay. That's all for me. Thanks.

Operator

We'll go next to Eric Wolf with Citi. Please go ahead.

Speaker 3

Thanks. It's Nick Joseph here with Eric. Obviously, a lot announced tonight, but as the Board thinks about maximizing shareholder value, is everything on the table in terms of selling the company or selling large portfolios? Or are you more committed to try to maximize value within?

Speaker 1

Hi, Eric, it's Gary. I think in general, our goal as a public company is always to maximize value. So, we look at all opportunities and it's not specific to any one part of the business. So as those opportunities come up as responsible operators of the public company, we look at everything.

Speaker 3

Thanks. And then just in terms of the G and A, the non recurring G and A went up significantly. Just wondering if you can walk through what's driving that as well as the recurring G and A increase that we saw?

Speaker 2

Sure, Nick. The largest driver in the non recurring piece of G and A is an insurance receivable that was written off in the quarter from a legal settlement in prior to this period. The other components of the non recurring, we had an additional $2,500,000 of debt deal costs and severance expenses in the quarter. On the recurring side, the main driver of the increase is payroll related.

Speaker 3

Thank you.

Operator

We'll go next to Michael Goldsmith with UBS.

Speaker 4

Good afternoon. Thanks a lot for taking my question. Congratulations, Gary. Welcome back, John. Just to follow-up on the question on the nonrecurring G and A.

Speaker 4

Is the new outlook for the G and A ex nonrecurring expenses, is that the right way to think about kind of like the starting point for how we should be thinking about it for next year? And then the restructuring expenses come out of that? Or because the guidance kind of moved up with the new outlook, is the restructuring expenses expected to kind of get back to where you were? Thanks.

Speaker 1

Michael,

Speaker 2

the run rate expense savings that we've detailed will be on a 2025 basis. And that so it would be from the recurring piece of G and A.

Speaker 4

Okay. Thank you very much.

Operator

We'll go next to John Kim with BMO Capital Markets. Please go ahead.

Speaker 3

Thank you. Gary, can I ask your decision to retire from the CEO position, what drove that decision? How much of that was influenced from the Blue Orca report that came out? And if you have any commentary on some of those findings, including the personal loans taken from some Board members?

Speaker 1

Yes. I think thanks for asking, John, because certainly there's a big decision in my life. After 40 years of building this business with the last 30 as a public company, I've been contemplating my next steps especially over the last couple of years. At this stage of my life with 3 children and lots of grandchildren, there are a lot of other things I want to experience. And while I love this business and deeply value its continued success, I'm just confident in the strategic objectives we put in place and I really am excited with the progress we're making.

Speaker 1

So having John here to help drive our initiatives was also a key factor in my decision to move forward with the transition and it is not related to any report or anything like that. It's just the period of time and the fact that starting this process for a company that I co founded back in 1975, it is certainly bittersweet for me, but I couldn't be more excited about what lies ahead for Sun. It will continue to be the largest single contributor of my net worth. So I remain very, very excited and very positive, if you will, about the growth opportunity for Sun. So, I look forward to working with the Board and the company on a transition and as the committee runs its search process.

Speaker 1

But it is a bittersweet moment for me and I've watched this company as we talked about earlier grow, if you will, from a handful of communities 30 plus years ago to what it is today. So I'm pleased at what we've accomplished and I just do think it's time for a new CEO to step in and take over.

Speaker 3

And given the company is such a complex business today, what do you think the priorities will be as far as finding the new CEO? Will it be someone with turnaround experience, someone with public REIT experience? Anything that you could share as far as what you think the priorities are?

Speaker 1

Well, that's a great question. And I just want to take the opportunity to talk about the complexity of the company. Unfortunately, the quarter was bad and we're responsible for it. I've been running the company as I said back to 1975 even as a private company. So it's never an ideal time to report these kinds of results.

Speaker 1

That said, after all these years, I am just very positive as I said about the outlook of the portfolio of properties and the business. And I want to take a moment just to say, part of the reason for my transition is what we're accomplishing and what we've accomplished. Aside from the results and the repositioning that we're sharing with the market to get back to sustainable profitability, we have been accomplishing simplifying the business, if you will, moving as much complexity as we can step by step, the things that we've talked about, removing our ownership of the headstock in Australia, some of the JVs that we removed out of continuing to push towards more budgetable and dependable annual revenue away from the transient revenue, improving the balance sheet and Fernando talked about what great progress we're making there, set up the company and this is where I feel comfortable, really to be in good hands for a new CEO to step in, especially with John here overseeing a lot of the reorganization while we're looking for that new CEO. So I think the skill set will really be important, but it really will tie into the quality of the assets and the ability as we've always said of a portfolio that has great occupancy, has continued ability to increase rental rents every single year and control expenses, which we now know we need to do a better job.

Speaker 1

So I think there's a wide range and I think we continue to examine opportunities within the report portfolio to remove complexity. And I think that will be a piece of what the new CEO does.

Operator

We'll go next to Jamie Feldman with Wells Fargo. Please go ahead.

Speaker 6

Great. Thank you. I was hoping you could comment a little bit more on the audit committee review from the independent third party law firm. I guess just maybe if you can give any more detail on their perspective on any of the items in the short report. And then also, I mean, were there any suggestions or changes made whether the Board or management as a result of their review or it was pretty much just kind of checking things off saying all good?

Speaker 1

Yes. I think, Jamie, the complex and compound question there, based on the clear motives of the short seller, if you will. But based on those motives, as I said in my remarks earlier, the Board through the Audit Committee really took the matter seriously and engaged on independent third party law firm to conduct an investigation and provided very thorough report to the audit committee and the board. And as you either read or heard today, the investigation concluded. There have not been any changes to our financial reporting practices.

Speaker 1

It determined that we've complied with proper disclosure obligations. The Board, I would say, has what I would call the correct facts on all of the matters is very well advised. And as I said, it's my understanding, the Board feels that we complied with all of the proper disclosures and obligations. So that's where we really came out on it and nothing really to report on its impact to any ongoing work that's being done or anything that we're sharing with you today.

Speaker 6

Okay. Thank you for that color. And then I guess as you think about potential G and A savings, you've got Safe Harbor, which is kind of a standalone entity in terms of full G and A and its own management team. How do you think about that as an opportunity to cut G and A and cut savings? Like, do you think that gets folded even more into the platform in this process?

Speaker 6

Or you like the current structure, how it stands?

Speaker 1

So, it's a great question. We continue to believe in the strength of the platform and the long term opportunities in the marine sector. As we said, we've had outstanding growth over the last 2, 3 years at a level greater than we think it will sustain at. It will continue to grow and the management team is doing a great job. But as we previously discussed, we need a more we expect a more normalized level of growth from there.

Speaker 1

So, as recently as yesterday, I've talked to Baxter and we've been discussing how they can contribute strategically to the cost savings effects. And we will be working together on that project as we go forward and share those changes as we're able to do so.

Operator

We'll go next to David Segal with Green Street.

Speaker 2

Hi, thank you. I was curious if you could talk about whether there's any attrition you're seeing in the annual RV business? Hi, David. This is Fernando. On the annual side, we continue to gain occupancy.

Speaker 2

We have converted nearly 2,000 sites this year. So it would be the 3rd year with expectations in the Q4. It would be the 3rd year running with 2,000 or more conversions per annum. Our renewals are strong within the annual segment. And so we're actually seeing a 10 year increase on the annual side.

Speaker 2

Great. Thank you. And can you provide some more color on what changed in the revenue growth assumptions across the business segments? Sure. The primary driver David as detailed are connected to the transient side of the business be that in RV or Marina.

Speaker 2

So that's we have lowered expectations for transient RV revenue performance where we were expecting close to being 10% down to being close to 12% down now for the year. Similar impact as far as less transient demand on the Marina side given the delayed return of the larger vessels from the Mediterranean. Other revenue impacts for home sales, we are seeing we saw less home sales in September and are forecasting fewer home sales as well in the Q4 largely due to the impact from the storms in Florida and the Southeast. And that is again linking to the transient side less service retail dining and entertainment revenue which is having its flow through to NOI.

Operator

We'll go next to Josh Dennerlein with Bank of America. Please go ahead.

Speaker 2

Yes. Hey, guys. I guess just like thinking about like some of where the questions are going and where like people are I think really focused on this call, it's a lot on governance. Has there been any discussion about maybe refreshing the Board a little bit? It's like a lot of Board members have been there a long time.

Speaker 2

And then Gary, just like do you think like a new CEO can comment if you're still on the Board? Would you consider kind of stepping down? And are you going to remain Chairman of the Board?

Speaker 1

Okay. Well, taking that one at a time, Josh, I'd remind everybody that we have added and refreshed 4 new, I think very qualified Board members over the last 4 years. So, the board takes its governance very seriously and has been refreshing the board. We have a board member that will step down at the end of this year and we are definitely examining continued refresh, especially on the very long tenured Board members to be able to position this company for the next chapter of growth, if you will. So that work continues on.

Speaker 1

With regard to myself, as I just announced my intention to retire and we'll be working with the Board on a smooth transition. We'll be having those conversations with the committee in the near future. And as I have answers to that, I'd be glad to share them with you.

Speaker 2

Okay. Appreciate that. Sorry, if I missed it, did you say which Board member is stepping down at the end of the year?

Speaker 1

No. The Nominating and Governance Committee works through all of that and they'll share that as soon as they determine it. Okay. Why will we know that? The thing is they made that Sorry, what?

Speaker 2

No, no. I guess, would it just be 1? I'm when I'm looking at like the Board lineup, it's you have 1 Board member who's in their 28 years.

Speaker 1

What I stated just a little while ago is that we know that one is stepping down and that there is a deep look at replacing the additional long tenured board members, so that we can refresh going forward.

Operator

We'll go next to Omotayo Okusanya with Deutsche Bank. Please go ahead.

Speaker 7

Yes. Good evening, everyone. I wanted us to drill down a little bit on the ability to kind of flex operating expenses. You had mentioned that there were maybe some third party vendors or things like that. You did not flex in time.

Speaker 7

Hoping you could just give us a little bit more detail about those particular expenses and kind of what happened, whether it was a breakdown in process or whatever it was that resulted in you not kind of reacting as quickly as you probably would have liked to?

Speaker 2

Sure. With over 500 manufactured housing and RV properties, small incremental expenses across each property or and quickly add up to a significant amount, which is impacting our results over the course of the second half of the year. The primary overages stemmed from landscaping, tree trimming and pool repairs. We did achieve our expected targets and payroll and other parts of supply and repair, but these items are higher than originally forecasted.

Speaker 3

Thank you.

Operator

We'll go next to Anthony Hau with Truist Securities. Please go ahead.

Speaker 3

Hey guys, thanks for taking my question. I noticed that other expenses was up 25% in the same property portfolio. Can you provide a little bit more color on this?

Speaker 2

Sure, Anthony. Other expenses are mainly related to advertising spend and certainly looking to mitigate the revenue declines. There was advertising spent for the properties. We did not see that convert to transient stays at the portfolio.

Speaker 3

Got you. And like what do you think needs to happen for transient RV revenue to bounce back?

Speaker 2

Anthony, I would say, right, transient is a great feeder for our annual side of the business. We continue to reduce the impact that transient can have on the business by continuing to convert. We have converted nearly 9,000 sites over the course of almost 4 years, which has increased annual sites by over 30% during that time. Transient has underperformed original expectations, But we will continue to look to mitigate the impact from that top line by being laser focused on expenses as the revenue side has been harder to predict.

Speaker 1

Yes. I would just say that during COVID, we invested in building infrastructure for our transient RV business. We believe it has strong long term fundamentals. However, as we've talked about in the near to medium term, the market conditions have been much more challenging than we anticipated, leading to continued revenue declines as we give back most of the really outsized growth that we experienced through COVID. So we're managing this and this was the question before by flexing expenses as revenues are down and probably we would suggest that we did not get the flexed expenses that we should have gotten related to the rapid decline, especially in September with the RV transient properties.

Speaker 1

But looking forward, we do see strategic value in that transient portfolio because as Fernando said, it is the feeder for our annual RV income stream growth, which as we said continues to grow and really perform well. So we remain focused on reducing that total exposure, but maintaining that part of our transient RV that kind of strengthens and grows the annual piece.

Operator

We'll go next to Keegan Karl with Wolfe Research.

Speaker 8

Yes. Thanks for the time, guys. I guess I'm just looking for more color on the G and A reduction next year. And does this contemplate both the new CEO salary as well as the salary for a Chairman?

Speaker 1

I think that where we stand right now, we have looked at actionable G and A and OpEx expense decreases. And with regard to being able to share forward guidance and how we're thinking about it, we shared the rental rate increases. And historically and especially now with John McLaren back on board, our expectation is controllable expenses. So as we share G and A, we look forward to being able to share bridgeable growth, if you will, when we provide guidance. And a couple of new pages in our presentation that we sent out today, I think can help walk through the steps, if you will, of how we're thinking about the G and A and OpEx expense growth on top of the other strategic progress that we've made and then applying rental rate growth and assuming making assumptions on expenses will help you get to how we're thinking about 2025, which is where we're focused right now.

Speaker 8

Got it. I mean, so just to be clear, the answer is, I'm assuming no. But I guess we'll pivot to the Marina business. I guess, I'm just curious what drove the occupancy decline? And I know we've heard a lot in the past about you guys having waiting lists to the vast majority.

Speaker 8

Is that still true?

Speaker 1

There is a waiting list for some size both at the vast majority of the marinas. The largest piece of the miss is related to the storms, which prevent those superyachts and large vessels from returning to the Mediterranean. As we shared earlier in the year, what we were experiencing was earlier departure and what we budgeted for those large superyacht vessels that generally travel to the Mediterranean for the summer season and then return back across the Atlantic. And they left earlier than we budget them and are now coming back later predominantly because of the storms, the name storms we're familiar with and other tropical storms that take place over the Atlantic or near the Med that keep the boats kind of in bay over there because they don't tend to cross the Atlantic when these storms are formed there. So that's been the largest impact.

Operator

This does conclude today's question and answer period. I will now hand the call back over to Gary Shiffman for any additional or closing remarks.

Speaker 1

Thanks, operator. And I would take this opportunity for a few remarks to wrap it up tonight. Despite what is a disappointing quarter and outlook for all of us at the company, as I shared before, I really do remain confident ability to demonstrate value of core portfolio. And in doing so, make myself, John, and the entire management team available to all of you and all of our stakeholders with any follow-up questions. There is a lot of positive that has taken place in our strategic initiatives to return to the type of growth in 2025 that this portfolio and this management team can deliver.

Speaker 1

As I said earlier, it's never an ideal time for these results. Nevertheless, the quarter was bad. We own it and we understand the urgency within which to turn it around and that is what we're focused on just as we accomplished our strategic goals that we set forth in 2024. And I look forward to sharing further results or speaking to any of you on a follow-up call. Thank you, operator.

Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

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Key Takeaways

  • Disappointing Q3 and lowered full‐year FFO guidance: Core FFO per share was $2.34 and Sun adjusted 2024 guidance down to $6.76–$6.84 (4.8% below prior midpoint), reflecting headwinds in transient RV revenue and higher expenses.
  • Asset recycling and deleveraging progress: Year‐to‐date disposals generated $392 million of proceeds, driving a $450 million reduction in debt to $7.36 billion and shrinking the floating‐rate mix to 6%.
  • Cost‐saving initiatives accelerated: Management expects to achieve $15–20 million of annualized G&A and operating expense savings ($0.11–$0.15 per share) by reorganizing operations, streamlining technology and improving asset management for 2025.
  • Leadership transition announced: Chairman & CEO Gary Shiffman plans to retire in 2025 after four decades, and the board has formed a search committee led by independent directors to identify his successor; John McLaren returns as full‐time President to oversee the repositioning effort.
  • Segment performance highlights mixed fundamentals: Manufactured housing delivered 5.3% same‐property NOI growth while RV transient revenues fell over 10%, and marina NOI was pressured by storm‐related timing delays despite minimal structural damage.
AI Generated. May Contain Errors.
Earnings Conference Call
Sun Communities Q3 2024
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