Sun Communities, Inc. (NYSE:SUI) Q4 2023 Earnings Call Transcript
Sun Communities, Inc. (NYSE:SUI) Q4 2023 Earnings Call Transcript February 21, 2024
Sun Communities, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sun Communities Fourth Quarter and Year End 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 statements within the meanings of the Private Securities Litigation Reform Act of 1995. Although, the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the company's periodic filings with the SEC.
The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release. Having said that, I 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. [Operator Instructions] As a reminder, this call is being recorded. I'll now turn the call over to Gary Shiffman, Chairman, President and Chief Executive Officer. Mr. Shiffman, you may begin.
Gary Shiffman: Good morning, and thank you for joining us as we discuss fourth quarter and full year results for 2023 and our guidance for 2024. 2023 results demonstrated the resiliency of our best-in-class portfolio and our ability to generate reliable, strong same-property NOI growth. For the year, Sun's core FFO per share of $7.10 was in line with our expectations. Same-property NOI increased 7.3% compared to last year, surpassing the high end of guidance. Our operational strength highlights the enduring robust demand and limited supply fundamentals of our portfolio, which supports continued strong revenue growth complemented by diligent expense management. For the fourth quarter, total same-property NOI increased 9.6% compared to the same period in 2022.
The outperformance was driven by higher rental revenues from MH and Marinas and lower expense growth across all segments. For the quarter and year, MH same-property NOI increased by 8.6% and 6.8% and RV same-property NOI increased 9.3% and 4.8%. Same-property occupancy in MH and RV increased 230 basis points during 2023 as compared to 2022. The increase was largely driven by transient to annual RV site conversions of more than 2,100 sites. Since the start of 2020 when we began to strategically focus on transient to annual RV site conversions, we have completed approximately 6,900 conversions and have increased the number of annual sites by 24%. Within our Marina same-property portfolio, the continued strong demand for wet slip and dry storage spaces led to another positive quarter and year with a 12.5% increase in NOI for the quarter and an 11.7% increase for the year.
In the UK the real property NOI of $66.7 million for the year was in line with guidance, demonstrating the strong value proposition our Holiday Parks represent. The value of owning a holiday home in Park Holidays property is exhibited by the average resident tenure increasing to approximately eight years. Demand for UK home sales showed signs of stabilizing during the second half of the year. UK home sales and margins were in line with our guidance, which reflected economic headwinds facing UK consumers, including higher inflation and interest rates. We anticipate a continuation of current volume and margin trends. Based on the macroeconomic dynamics in the UK, we have recognized total noncash impairments of approximately $370 million related to the goodwill, associated with the Park Holidays platform acquisition.
Despite of our year-end audit process, it was determined that the impairments should have been recognized in earlier periods, resulting in a material weakness in internal control over financial reporting. These impairments, which are now recognized at March 31, June 30 and September 30, 2023, reduced balance sheet goodwill and GAAP net income. They are noncash and there is no impact on revenues or FFO for operational metrics. From Park Holidays and as previously disclosed in late December, we obtained tied-up a three real estate assets securing the UK note. Additionally, we've recently completed the receivership and disposition processes related to the manufacturing businesses that represented the remaining collateral on UK note. As we previously stated, because we did not wish to operate the manufacturing businesses, we moved expeditiously to dispose of them.
As of this month, the UK note has been completely resolved. At the end of the year, we reclassified Sandy Bay, a high-quality MH community that's held for investment. Sandy Bay, along with one operating property and three development parcels that were not part of the original Park Holidays acquisition, are now being operated by the Park Holidays team. We continue to seek to maximize value related to these assets. We are excited about the prospects awaiting us in 2024 and beyond. Our primary goal remains simplifying our operations, while positioning Sun for steady earnings growth. Achieving this involves maintaining focus on our best-in-class portfolio and operating team, which have consistently delivered strong same-property NOI growth. As detailed in our earnings press release, we sold our shares in Ingenia, monetized the portfolio of MH consumer loans, divested our interest in Campspot and meaningfully reduced the number of properties owned in joint ventures.
During 2024, we intend to focus on capital recycling strategies, including via select asset sales. By remaining highly selective with development projects and acquisitions, we intend to allocate our free cash flow and any additional capital proceeds generated towards deleveraging. As detailed in last night's press release, our Board announced a $0.01 per share increase to our quarterly distribution or $0.04 on an annual basis. I would also like to take this opportunity to welcome Jerry Ehlinger and Craig Leupold to our Board. We look forward to their contributions and new perspectives. Last, and certainly not least, I would like to thank all of our team members for their hard work and dedication. I will now turn the call over to Fernando, to discuss our results and guidance in more detail.
Fernando?
Fernando Castro-Caratini: Thank you, Gary. For the year and the quarter, Sun reported core FFO per diluted share of $7.10 and $1.34 respectively, both of which were in line with guidance. During the year, same-property NOI grew 7.3% versus the prior year, driven by a 6.2% increase in revenue and a 4.2% increase in expenses. For the quarter, same-property NOI increased 9.6% compared to the prior year due to a 6.3% increase in revenues, driven by strong rental rate increases and occupancy gains. Expenses grew by only 30 basis points in the quarter, led by utilities and supply repair cost management and a onetime benefit from lower real estate taxes. Looking at same property results across each segment, manufactured housing performance was strong.
NOI grew 8.6% in the quarter, due to a 7.6% increase in revenues and expense growth of 4.8%. For the year, same-property NOI in manufactured housing increased by 6.8% compared to 2022. Strong revenue growth for the year of 7% was partially offset by a 7.5% growth in expenses. Same-property RV NOI increased 9.3% in the quarter, driven by a 2.1% increase in revenues and a 4.7% reduction in expenses. The expense savings were driven by aligning controllable costs with lower transient revenues especially in supply and repair, utilities and payroll. For the year, same-property RV NOI increased 4.8%. The continued strong volume of transient to annual RV site conversions also supported operational efficiency as annual RV sites typically allow for lower operating expenses.
Our same property adjusted occupancy for manufactured housing and RV increased by 230 basis points to 98.9%, reflecting the demand to be a resident in a Sun Community. On the RV front, we have a long runway of transient sites that can be converted to annual over the coming years. The Marina same-property portfolio had another very positive quarter and year with a 12.5% increase in NOI for the quarter and an 11.7% increase for the year. The outperformance was driven by continued strong demand for wet slip and dry storage spaces due to higher boat traffic especially in the Southeast. Strong revenue growth was supported by expense management and real estate tax savings. As discussed earlier, UK real property performance showed strong growth and home sales volumes were in line with guidance.
Our property level results were partially offset by higher interest expense G&A and other corporate costs. Regarding new investment activity, during the year we delivered approximately 800 expansion and development sites in North America. To simplify our business and reduce exposure to variable rate debt, in the fourth quarter, we made strong progress towards monetizing assets no longer deemed to be strategic. We materially simplified our Sun NG joint venture, an arrangement entered into in 2018 with Northgate Resorts, an experienced RV owner and operator. We have a successful relationship with them and it helped us achieve our leading position as an owner and operator one of the highest quality RV portfolios in the US. Given our focus on simplifying how we own properties, we sold our majority equity interest in three joint venture properties and acquired their minority interest in 14 joint venture properties so that we now own 100% of them.
Notably we believe these 14 properties have a long runway of embedded growth with meaningful opportunity for transient to annual RV site conversions over the coming years, five properties remain in consolidated JVs where we hold approximately 95% ownership interest. During the quarter, we also sold our ownership interest in RezPlot whose Campspot Software is a valuable tool that we continue to use for managing our RV bookings. Given the strong position we helped Campspot achieve over the past several years, it was an opportune time to divest our interest. In total, the Sun NG and RezPlot transaction netted us a minimal positive cash benefit, which was used to pay down debt. During the quarter, we recycled capital from a $53 million portfolio of manufactured housing consumer loans held on our balance sheet and used the net proceeds to pay down debt.
As Gary discussed, we completed the receivership process related to the UK note. The three real estate assets are now reflected on our balance sheet as their currently assessed fair market value of $264 million as supported by updated third-party valuations. Now that we own them these assets in Sandy Bay are being managed by the Park Holidays team and all income derived from their operating performance is included in our 2024 guidance. The remaining assets that collateralize the UK now were manufacturing businesses. Disposing of these businesses expeditiously was a key priority. And in mid-February, they were sold for a total of approximately $10.7 million. We have no further legal, financial or other obligations to these businesses. Regarding our balance sheet, at December 31, 2023, the company had approximately $7.8 billion in debt outstanding and our net debt to trailing 12-month recurring EBITDA ratio was 6.1 times.
With respect to capital markets activity in January, we issued $500 million of five-year senior unsecured notes with a 5.5% coupon. We used the majority of the net proceeds to repay borrowings outstanding under our senior credit facility. Adjusting our year-end debt balances for this new issuance, we reduced our variable rate debt to approximately 10% of total debt. Turning to guidance for 2024. For 2024, we are establishing full year guidance for core FFO per share in the range of $7.04 to $7.24. We are also establishing guidance for first quarter 2024 core FFO per share in the range of $1.14 to $1.19. For 2024, 95% of our properties are included in the same property pool including Park Holidays. In North America, at the midpoint, we expect same-property NOI growth of 6.5% for manufactured housing, 2.8% from RVs and 6.8% from Marinas to generate total same-property NOI growth of 5.6% for the year.
In the UK, we forecast real property operations will generate same-property NOI growth of 1.3% to 3.3% for the year. Our outlook for same-property NOI is anchored on solid expected rental rate growth, and we are confirming the average rental rate guidance provided in October of a 5.4% increase for manufactured housing in North America, 6.5% for RV, 5.6% for Marinas and 7.1% for manufactured housing in the UK. For home sales in North America, our guidance assumes an FFO contribution from $14.4 million to $15.9 million in 2024. The in the UK, our 2024 guidance assumes an FFO contribution from home sales of $62.3 million to $69.9 million, reflecting home sales volume of 2,750 homes at the midpoint. At the midpoint, our guidance assumes we increase revenue-producing sites in North America across manufactured housing and RV by 2,600 sites in 2024.
For ground-up developments and expansion activity, our 2024 guidance assumes we allocate approximately $115 million to advance or complete projects already in progress. This includes approximately $50 million of spending, related to the redevelopment of our Hurricane Ian impacted properties in Fort Myers. We are not planning to commence any new ground-up developments. And our average expected investment this year would mark a 54% decrease from our development spend in 2023. For the year, we expect G&A expense to run between $262.2 million and $267.4 million, which equates to a 2.7% decrease over 2023 G&A at the midpoint. Adjusting for anticipated add-backs of nonrecurring expenses, we expect G&A to increase 5.3% at the midpoint. As a reminder, our guidance includes acquisitions and dispositions and capital markets activity through February 20, 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. Operator?
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