SUN COMMUNITIES INC Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Safe Harbor Transaction: Successfully closed the Safe Harbor Marinas transaction, marking a major milestone in Sun's strategic repositioning toward a pure play owner and operator of manufactured housing and recreational vehicle communities. Cash generated from the transaction enhances financial flexibility and positions the company for long-term growth.
• Portfolio Streamlining: Year-to-date, sold six non-strategic MH and RV communities generating total gross proceeds of approximately $124 million. Established a new long-term net debt-to-EBITDA target of 3.5x to 4.5x.
• Capital Allocation: Allocated approximately $1 billion into 10/31 exchange accounts for potential tax-efficient acquisitions. Underwriting high-quality single assets and small portfolio manufactured housing opportunities.
• Board Update: Board nominated Mark Deneen as an Independent Director candidate for election to the Board. Deneen has over three decades of real estate experience.
• CEO Search: CEO Search Committee is advancing work to secure the top candidate as successor by year-end.

Segment Performance

• Manufactured Housing: Same-property NOI increased by 8.9% in the first quarter. Revenue grew 7.3% due to strong rental rate increases and a 150 basis point occupancy gain. Expenses were well managed, growing 2.8%. Occupancy remained strong at 97.5% with average resident tenure of approximately 21 years.
• RV: Annual side of the RV business had revenue increasing 7.8% year-over-year. However, same-property NOI declined by 9.1% due to softness in the transient RV business, impacted by general macroeconomic uncertainty and reduced Canadian guests. Transient guests account for roughly 4% of the annual base and 5% of transient RV revenue.
• UK: Total same-property NOI saw a modest decrease of $600,000 compared to the prior year, primarily due to higher payroll from increases in national minimum wage and higher real estate taxes. Revenue grew 0.2% supported by higher MH income and home sales volumes with average sales prices approximately 8% higher year-over-year.

Guidance

• Full Year 2025 Core FFO: Core FFO per share guidance ranges from $6.43 to $6.63. This reflects execution and timing of the Safe Harbor Marinas transaction.
• Manufactured Housing: Same-property NOI guidance raised by 60 basis points at the midpoint, driven by strong first quarter results and continued top-line strength.
• RV: Same-property NOI expected to range from down 3.5% to up 0.5% due to slower transient reservation pacing.
• North America Same-Property NOI: Expected to grow 3.5% to 5.2% with a midpoint of 4.4%.
• UK Same-Property NOI: Guidance unchanged, projected growth range of 90 basis points to 2.9% with a midpoint of 1.9% growth.
• Ancillary NOI: Reduced by approximately $4 million at the midpoint primarily due to lower-than-expected transient RV activity.

Risks

• Macro-Economic Uncertainty: Impact on transient RV business, particularly related to Canadian guests and general economic conditions.
• Forward-Looking Statements: Factors could cause actual results to differ materially from expectations, as detailed in SEC filings. Potential differences between forward-looking statements and actual outcomes.

Question and Answer

• Q: Starting with the Manufacturers Housing NOI guidance, it went up 50 basis points from your initial guidance. Can you walk us through what are you seeing on the MH side that has you revising guidance up early in the year? And is that on the revenue side or is that on the expense side?

A: It's a little bit of everything. Good occupancy gains over the course of the first quarter that we expect to continue. Good renewal performance in the first quarter, good rent collections, and good discipline with the expense savings program launched towards the end of last year.

• Q: As you think about the repurchase authorization, are you thinking of that as an opportunity to opportunistically purchase shares at what you see as a discounted valuation or is this kind of a indication that Sun is out in the market and kind of consistently be acquiring?

A: It's part of the larger thoughtful program related to the positioning of the company. Gives continued flexibility, and is part of the overall plan including balance sheet strengthening and capital allocation.

• Q: I just wanted to follow-up on the revision in the RV guidance and whether you're kind of attributing that to potentially just the continued return to office or lower Canadian travel, and if you have any visibility into Memorial Day weekend that you can comment on.

A: Transient RV headwinds are due to success in converting transient sites to annual sites. Recent trends show shift towards shorter booking windows and challenges with Canadian guests. RV strategy focuses on flexing operating expenses and retaining existing annual guests.

• Q: You said that you're assuming 3.5% to 4% rate on the cash that you're holding on your balance sheet. Can you just talk about what the average cash balance is you're assuming for the rest of the year?

A: Not assuming any prospective acquisitions or capital markets activity, carrying a higher cash balance around $1.7 billion embedded in guidance.

• Q: Gary, you gave a very brief update on the search for your successor. Can you give any additional details there on what the process has been so far and what remains?

A: Search committee in place with outside third-party firm, moving thoughtfully through the process. Focused on Safe Harbor closing and CEO succession, with decision expected by year-end.