Q3 2024 Sun Communities Inc Earnings Call
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Speaker Change: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Community's 3rd Quarter 2024 Earnings Conference Call.
Speaker Change: At this time, management would like me to inform you that certain statements made during this call, which are not historical facts, may be deemed forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995.
Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved.
Factors and risks that could cause actual results to differ materially from expectations are detailed in today's press release and from time to time in the company's periodic filings with the SEC.
Speaker Change: The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release.
Speaker Change: Having said that, I would like to introduce management with us today. Gary Shiffman, Chairman and Chief Executive Officer
Speaker Change: Fernando Castro Caratini, Chief Financial Officer
Speaker Change: Aaron Weiss, Executive Vice President of Corporate Strategy and Business Development and John McLaren, President
Speaker Change: After their remarks, there will be an opportunity to ask questions.
Speaker Change: For those who would like to participate in the question and answer session, management asks that you limit yourself to one question, so everyone who would like to participate has ample opportunity.
As a reminder, this call is being recorded.
Speaker Change: I would now like to turn the call over to Gary Shiffman, Chairman and Chief Executive Officer.
Speaker Change: First, I want to emphasize my disappointment in the results we are reporting and our revised outlook for the remainder of the year.
Speaker Change: As I will discuss, we are acting swiftly to address our underperformers.
Speaker Change: As communicated, we have been focused on executing our strategic initiatives to position some communities to deliver sustained earnings growth over the long term.
Speaker Change: The business fundamentals of our portfolio remain strong, and we are confident that by continuing to execute on our strategic priorities, the company will be positioned for growth.
Speaker Change: thereby demonstrating the long-term value of our assets.
Speaker Change: These priorities, as articulated and executed in 2024, include recycling non-strategic assets, reducing debt, and increasing the contribution from annual income streams.
Speaker Change: We continue to make progress in each of these areas.
Speaker Change: In the third quarter, we disposed of eight manufactured housing communities for approximately $300 million, along with two manufactured housing land parcels for $37 million.
Speaker Change: bringing total proceeds from asset sales to 392 million dollars here today.
Speaker Change: As of September 30th, her total debt stood at $7.36 billion, a reduction of approximately $450 million from the end of 2023.
Speaker Change: and our floating-to-fix-rate mix currently stands at approximately 6%, down from 21% two years ago.
Speaker Change: That said, we acknowledge that our third quarter results and our adjusted 2024 guidance are below both our and the market's expectations.
Speaker Change: and we are very disappointed by our performance.
Speaker Change: 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.
Speaker Change: as we demonstrated for the past two decades.
Speaker Change: Before I address the acceleration of our strategic plans, I wanted to provide an update on the recent short report issued on Sun.
Speaker Change: Upon being made aware of the report, the Board tasked the Audit Committee to address the matters that it raised.
Speaker Change: The Audit Committee engaged an independent, third-party law firm to investigate the report.
Speaker Change: After a thorough review, the law firm has concluded its investigation, and there have been no changes to our financial reporting practices.
Speaker Change: And the audit committee determines that the company complied with its disclosure obligations.
Speaker Change: The company reiterates its strong commitment to maintaining high standards of corporate governance and internal controls.
Speaker Change: as well as timely and transparent disclosure in compliance with applicable rules and regulations.
Speaker Change: Evident in our results is the impact of continuing volatility in the transient components of our business.
Speaker Change: which we have been proactively working to reduce.
Speaker Change: as well as cost pressures.
Speaker Change: We are not satisfied with our performance.
Speaker Change: and are acting with great urgency.
Speaker Change: To that end, we undertook a comprehensive bottom-up review throughout the organization and concurrent with today's earnings release.
Speaker Change: We are announcing a broad repositioning effort to more effectively align the company's operating expense and G&A infrastructure to deliver earnings growth.
Speaker Change: We have been considering and studying many of these cost-saving initiatives throughout this year.
Speaker Change: And we are now ready to accelerate their implementation and expansion.
Speaker Change: I am pleased to announce that John McLaren is returning to the company on a full-time basis as president.
Speaker Change: to oversee this accelerated repositioning and the execution of these initiatives.
Speaker Change: John has been with Sun for 22 years.
Speaker Change: was Chief Operating Officer for 14 years and was President for 8 years through 2022.
Speaker Change: During his time as Chief Operating Officer, John oversaw the integration and operation of almost 350 manufactured housing and RV communities.
Speaker Change: and brought a performance-driven approach with a focus on bottom-line operational results.
Speaker Change: The cost reduction measures include better operating expense management and the implementation of identified efficiencies and savings to the company's cost base.
Speaker Change: It is expected that these will be achieved primarily through initiatives, including reorganizing our operational structure, streamlining and optimizing our technology systems,
Speaker Change: Implementing more effective asset management to drive efficiencies, maximize revenue, and other cost-cutting measures.
Speaker Change: As of today, we have identified and expect to realize annualized G&A and operating expense savings of between $15 million and $20 million, or approximately $0.11 to $0.15 per share.
Speaker Change: I want to emphasize that this is just the starting point.
Speaker Change: We will continue to seek additional efficiencies and revenue enhancement opportunities.
Speaker Change: 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.
Speaker Change: Additionally, as announced this evening, I have informed the Board of my intention to retire in 2025, following more than 40 years with the company.
Speaker Change: I led the company through its $115 million IPO in 1993.
Speaker Change: has a small manufactured housing REIT.
Speaker Change: with 31 Manufacturer Housing Planners.
Speaker Change: And Sun has evolved into the leading owner and operator of MH and RV and marinas with a market capitalization of approximately $16 billion.
Speaker Change: I am proud of what we have accomplished and believe it is time to transition the CEO role.
Speaker Change: The Board of Directors has a CEO search committee in place.
Speaker Change: led by independent board members Jeff Flau, CEO of the related companies, and Tanya Allen, president of the McKnight Foundation, to conduct a comprehensive search process to identify and hire a new CEO.
Speaker Change: Turning to Hurricanes Helene and Milton.
Speaker Change: We are happy to share that none of our team members, residents, or guests were injured during these events.
Speaker Change: We extend our deepest gratitude to our team members for their exceptional care and compassion in supporting our residents and guests.
Speaker Change: all while managing their own personal challenges in the lead-up and aftermath of the storms.
Speaker Change: Cleanup crews were deployed immediately, and our teams worked swiftly to provide necessary supplies, food, and resources.
Speaker Change: The company continues to assess the overall impact of the storms.
Speaker Change: Most of the damage was limited to trees, fencing, skirting, and carports.
Speaker Change: while common buildings and utility infrastructure remained largely unaffected.
Speaker Change: We have one small RV property that is partially closed, and we anticipate it will fully reopen in early 2045.
Speaker Change: Similarly, our marina portfolio sustained only minimal damage, with some bulkheads and docks requiring relocation or replacement.
Speaker Change: Overall, our assets weathered the storms well, and we are optimistic in our ability to manage the recovery process efficiently.
Speaker Change: Our supplemental report provides additional details.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: and our manufactured housing segment.
Speaker Change: Nearly 35% of our residents received rent increase notices for 2025 at the end of October with an average increase of 5.2%.
Speaker Change: For our RE portfolio, annual rates have been established for approximately 55% of sites, reflecting an average growth rate of 5.1%.
Speaker Change: In the UK, all residents have been informed of a 3.7% rent increase for 2025.
Speaker Change: And 51% of our marina members have also received notice of a 3.7% rental increase.
Speaker Change: Importantly, we are positioned in sectors with compelling supply-demand dynamics.
Speaker Change: The ongoing demand for attainable housing and affordable vacationing continues to be a key driver for our platform's success, fueling organic, real property NOI groups.
Speaker Change: We are not satisfied with her results.
Speaker Change: 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.
Speaker Change: I will now turn the call over to Fernando to discuss our financial results and guidance.
Speaker Change: Randall?
Speaker Change: Thank you, Gary.
Randall: For the quarter-ended September 30th, 2024, Sun reported core FFO per share of $2.34.
Randall: Fodal 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.
Randall: This underperformance relative to our expectations was driven primarily by higher expenses, continued headwinds and transient RV.
Randall: compounded by the September hurricane further impacting Florida and southeast transient business and home sales.
Randall: Here's a closer look by segment.
Randall: Our core North America manufactured housing business continued to deliver growth, with same property NOI increasing by 5.3% year-over-year. Although our revenue growth was strong, we faced elevated expenses, primarily due to higher supply and repair costs.
Randall: Despite these pressures, our year-to-date growth remains strong at 6.6%, reaffirming the long-term fundamentals of the segment.
Speaker Change: 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.
Speaker Change: While we were tracking generally in line with guidance for the first two months of the quarter, transient revenue and resultant NOI underperformed in September.
Speaker Change: Despite this, our annual RV business remains strong, with nearly 900 sites converted from transient to annual this quarter, accounting for 85% of total revenue-producing site gains here to date.
Speaker Change: 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.
Speaker Change: Supply and repair and utility costs were elevated in the quarter, driving underperformance beyond the transient revenue headwinds.
Speaker Change: In our marina segment same property NOI increased by 2.5% for the quarter and 5% year-to-date
Speaker Change: The segment faced pressures from the delay of large vessel returns from the Mediterranean due to storms, including Helene, and lower overall occupancy.
Speaker Change: Also, similar to our MH&RB segments, we experience higher than expected operating expense pressures further impacting Marina NOI performance in the quarter.
Speaker Change: We have invested strategically in our marinas, including the acquisition in the third quarter of one marina and one bolt-on for approximately $52 million, primarily funded through the issuance of common OP units.
Speaker Change: These additions expand our member networks and enhance our capabilities and customer experience.
Speaker Change: 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.
Speaker Change: A key year-over-year expense driver was higher payroll costs, stemming from a UK national minimum wage increase of approximately 13% this year.
Speaker Change: 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 Change: 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.
Speaker Change: Additionally, home sales revenue rose 5.2% compared to last year with stable margins.
Speaker Change: SRD&E NOI came in below expectations, primarily linked to softer transient demand in the RV and marina segments.
Speaker Change: Our FFO contribution from North American home sales was lower than expected in the quarter, primarily due to the impact of Hurricane Helene in Florida, prior to which we were ahead of internal expectations for July and August.
Speaker Change: During the quarter, in relation to Hurricane Helene, we recognized $2.2 million of impairment charges for assets at five MH and RV communities, and $1.7 million for assets at nine marinas, with impacted properties located in Florida, South Carolina, North Carolina, and Georgia.
Speaker Change: On October 9th, Hurricane Milton impacted some of the company's properties in Florida.
Speaker Change: The company responded promptly and cleanup and restoration efforts are underway.
Speaker Change: Impairment estimates are based on current information and may adjust as assessments continue.
Speaker Change: As it relates to our balance sheet, we continue to advance our capital recycling strategy, selling eight manufactured housing communities for approximately $300 million and two MH land parcels for $37 million.
Speaker Change: We also reduced non-recurring capital expenditures down approximately $255 million through September versus 2023, reflecting a nearly 50% year-over-year decrease.
Speaker Change: Additionally, we settled all forward sales agreements with respect to 2.7 million shares of common stock under our at-the-market program.
Speaker Change: This activity took place during August and the first days of September and resulted in net proceeds of approximately $362 million.
Speaker Change: 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.
Speaker Change: As compared to 2023 year-end, we have approximately $450 million less debt on our balance sheet today.
Speaker Change: As of September 30th, Sun's debt balance stood at $7.36 billion with a weighted average interest rate of 4.1% and a weighted average maturity of 6.4 years.
Speaker Change: Our net debt to trailing 12-month recurring EBITDA ratio is six times.
Speaker Change: 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.
Speaker Change: Turning to updated 2024 guidance.
Speaker Change: 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.
Speaker Change: This reflects the impact of third quarter underperformance and the continuation of headwinds in the business, inclusive of transient RV revenue and higher expenses for the fourth quarter.
Speaker Change: We are reducing North American St. Property NOI guidance by 225 basis points at the midpoint to a range of 2.6 to 3.3 percent.
Speaker Change: Summarizing the changes by segment.
Speaker Change: Manufactured housing, same property NOI expectations are reduced to a range of 5.6 to 6.2 percent, primarily driven by higher expenses across supply and repair and utilities.
Speaker Change: RV St. Property NOI expectations are reduced to a range of negative 5.3 to negative 4.1 percent.
Speaker Change: The change is primarily driven by continued headwinds and transient RV revenues and higher expense expectations, primarily in supply and repair and utilities.
Speaker Change: 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 Change: Marina St. Property NOI expectations are reduced to a range of 4.4 to 5.2 percent.
Speaker Change: 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.
Speaker Change: Expenses are running higher than originally expected, mainly in payroll.
Speaker Change: For our UK Sink Property Portfolio, we are reducing NOI growth expectations to a range of 7.1 to 8.7%, primarily due to the move in timing of new owners and higher expenses in supply and repair and payroll.
Speaker Change: Service, retail, dining, and entertainment, NOI, primarily linked to transient demand in RV and marina, is expected to experience continued headwinds into the forecourt.
Speaker Change: FFO contribution from North American home sales expectations are also lower, reflecting fewer sales expected in Florida and the southeast due to hurricane activity.
Speaker Change: These headwinds are anticipated to be partially offset by higher-than-expected UK income tax refunds.
Speaker Change: As reflected in our updated guidance, we are anticipating some specific headwinds for the remainder of this year.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: We also anticipate annualized operating and G&A expense savings of between $15 to $20 million, or approximately $0.11 to $0.15 per share on a run rate basis.
Speaker Change: as well as interest expense savings from lower current and expected year-end debt balances versus 2024.
Speaker Change: 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 paid out.
Speaker Change: for additional details regarding our updated full-year guidance.
Speaker Change: Please see our supplemental disclosures. As a reminder, our guidance includes acquisitions and dispositions in capital markets activity through November 6, but it does not include the impact of prospective acquisitions, dispositions, or capital markets activities, which may be included in research channel assessments.
Speaker Change: This concludes our prepared remarks. We will now open the call up for questions.
Speaker Change: Operator.
Speaker Change: At this time, if you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: You may remove yourself from the queue at any time by pressing star 2.
Speaker Change: As a reminder, we ask that you limit yourself to one question.
Speaker Change: We'll go first to Samir Kanal with Evercore ISI. Please go ahead.
Samir Kanal: Good morning, everybody. On the cost savings that you identified, the $15 million to $20 million, how much of that is OPEX?
Samir Kanal: and GNA, and I know you talked about potentially identifying more. Maybe expand on that comment.
Speaker Change: as we think about maybe in 25 and into 26, thanks.
Speaker Change: Yeah, hi Samir, it's Gary. I think that
Speaker Change: As we shared in the remarks, 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 Change: Most of that focuses.
Speaker Change: On the MHRV side, as we continue to look into the other business platforms on the
Speaker Change: Our county side and working with.
Speaker Change: Safe Harbor to identify additional opportunities and cost savings going forward. So it is a combined amount of both APEX and G&A savings.
Speaker Change: And then can I ask, if I can ask for one more here in terms of question, can you talk about any further dispositions in the pipeline currently?
Speaker Change: I think the pool that you said about, year to date, you've done about 390 million. I guess, how big is that pool for non-core assets at this point? Thanks.
Speaker Change: Hi, Samir. This is Fernando. We are continuing to evaluate single asset, 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 to $200 million over the near term.
Samir Kanal: Okay, thanks.
Speaker Change: We'll go next to West Holliday with Baird. Please go ahead.
West Holliday: Hey, everyone. Can you comment on the guidance? I mean, you had some segments you were just taking up last quarter. Now they're coming down. It seems like it's a lot of expense related, but I mean, how hard are those line items to forecast? I'm just having a hard time understanding, you know, why we're bouncing around so much on a business that is pretty resilient, you know, sticky business.
Speaker Change: Yeah, I think, uh,
Speaker Change: Reflecting on this quarter, West and the fourth quarter, we are, as we discussed, extremely disappointed with the results.
Speaker Change: The primary challenges we had in the quarter were related to the businesses we've identified as more volatile than our four MH business and annual RV business.
Speaker Change: Notably, transient RV and marinas, which underperformed, especially as Fernando said, in September, going into July and August, we felt
Speaker Change: 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.
Speaker Change: and the adverse weather effects on home sales in Florida.
Speaker Change: We moved from ahead of internal guidance early in the quarter to well behind in September.
Speaker Change: The most disappointing for us was the lack of ability to achieve expense objectives.
Speaker Change: in the third quarter and into the fourth quarter. Having identified the full scope of those, a lot of those fall under third party providers where
Speaker Change: We need to flex better against...
Speaker Change: the reduced revenue in these transient areas.
Speaker Change: and did not accomplish our goals of flexing expenses.
Speaker Change: 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
Speaker Change: Under John's leadership.
Speaker Change: and 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 25.
Speaker Change: Yeah, well, John, let me just.
Speaker Change: Um,
Speaker Change: You know, I think, you know, I've managed this portfolio in the past for over 14 years.
Speaker Change: And, you know.
Speaker Change: 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 out around, creep around the communities and everybody, they may not know it, but I do.
Speaker Change: 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. 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.
Speaker Change: We are making targeted adjustments to enhance what's already working.
Speaker Change: as well as the operations teams that frankly have carried out the methodologies I originally put in place, but we're also constantly re-evaluating where changes need to ensure long-term success. This is just what we've done, this is what we do, and so being plugged back into that.
Speaker Change: is going to be exciting.
Speaker Change: I think that what I would suggest is the board has always had always focused on succession planning at all levels.
Speaker Change: Certainly.
Speaker Change: They have two great co-chairs, 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.
Speaker Change: and I think it would be expected they will look both internally and externally.
Speaker Change: Okay, that's all for me. Thanks.
Speaker Change: We'll go next to Eric Wolf with Citi. Please go ahead.
Speaker Change: Thanks, it's Nick Joseph here with Eric. Obviously a lot of mouths 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 Change: Hi Eric, it's Gary. I think in general our goal as a public company is always to maximize value.
Speaker Change: 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 Change: Thanks and then just you know in terms of the GNA you know the non-recurring GNA went up significantly you know just wonder if you can walk through what's driving that as well as a recurring GNA increase that we saw
Speaker Change: Sure Nick, the largest driver in the non-recurring piece of of GNA is an insurance receivable that was written off in the in the quarter from a from a legal settlement in prior to prior to this period.
Speaker Change: the other components of the non-recurring
Speaker Change: Thank you.
Speaker Change: We'll go next to Michael Goldsmith with UBS.
Speaker Change: Thank you. Bye-bye.
Michael Goldsmith: Good afternoon. Thanks a lot for taking my question. Congratulations, Gary. Welcome back, John. Just to follow up on the question on the nonrecurring
Michael Goldsmith: that, or, you know, because the guidance kind of moved up.
Speaker Change: with the new outlook, is the restructuring expenses expected to kind of get back to where you were? Thanks.
Speaker Change: The run rate expense savings that we've detailed will be on a 20-25 basis.
Speaker Change: and that so so it would be from the from the recurring piece of of DNA.
Speaker Change: Okay, thank you very much.
Speaker Change: Thank you.
Speaker Change: We'll go next to John Kim with BMO Capital Markets. Please go ahead.
John Kim: Thank you. Gary, can I ask your decision to retire from the CEO position? What drove that decision?
Speaker Change: 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.
Gary Shiffman: Yeah, I think, thanks for asking, John, because certainly it is a big decision in my life after 40 years of building this business.
Gary Shiffman: With the last 30 as a public company, I've been contemplating my next steps, especially over the last couple of years
Gary Shiffman: At this stage of my life with three children and lots of grandchildren, there are a lot of other things I want to experience.
Gary Shiffman: And while I love this business and deeply value its continued success, I'm just confident in the strategic objectives we put in place.
Gary Shiffman: And I really am excited with the progress we're making. So having John here to help drive our initiatives was also a key factor in my decision.
Gary Shiffman: To move forward with the transition and it is not related to any report or anything like that
Gary Shiffman: It's just, you know, the period of time and the fact that starting this process for a company that I co-founded back in 1975.
Gary Shiffman: 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
Gary Shiffman: I'm very, very excited and very positive, if you will, about the growth opportunity for Sun. So,
Gary Shiffman: I look forward to working with the board and the company on a transition and as a...
Gary Shiffman: The committee runs its search process.
Gary Shiffman: But, uh...
Gary Shiffman: It is a bittersweet moment for me and I've watched this company is
Gary Shiffman: We talked about earlier role, if you will, from a handful of communities 30 plus years ago to what it is today. So I'm pleased that what we've established and I just do think it's time for a new CEO to step in and take over.
Speaker Change: And given the company is such a complex business today, what do you think the priorities will be as far as...
Speaker Change: defining the new CEO. Will it be someone with turnaround experience, someone with public read experience?
Speaker Change: anything that you could share as far as what you think the priorities are.
Gary Shiffman: Unfortunately, the quarter was bad.
Gary Shiffman: and we're responsible for it. I've been running a 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.
Gary Shiffman: That said, after all these years, I am just very positive, as I said, about the outlook of the portfolio of
Gary Shiffman: properties and the business.
Gary Shiffman: 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.
Gary Shiffman: Aside from the results.
Gary Shiffman: 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.
Gary Shiffman: the things that we've talked about, removing our ownership of the headstock in Australia, some of the JVs that we've removed out of, continuing to push towards more budgetable and dependable
Gary Shiffman: 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.
Gary Shiffman: 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.
Gary Shiffman: will really be important, but it really will tie into the quality of the assets.
Gary Shiffman: 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.
Gary Shiffman: So I think there's a wide range, and I think we continue to examine opportunities within the report portfolio to remove complexity. I think that will be a piece of what the new CEO does.
Speaker Change: We'll go next to Jamie Feldman with Wells Fargo. Please go ahead.
Jamie Feldman: 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...
Gary Shiffman: Just, you know, 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 Change: Yeah, I think Jamie has a complex and compound question there.
Speaker Change: Based on the clear motives of the short seller, if you will. Um, but based on those motives, as I, uh, said, uh, in my remarks earlier, the board.
Gary Shiffman: through the Audit Committee really took the matter seriously and engaged an independent third-party law firm to conduct an investigation and provided very thorough report.
Gary Shiffman: To the audit committee and the board and as you either read or heard today the investigation concluded
Gary Shiffman: The board, I would say, has what I would call the correct facts.
Gary Shiffman: on all of the matters.
Gary Shiffman: is very well advised.
Gary Shiffman: And as I said, it's my understanding, the board feels that we complied with all of the proper disclosures and obligations.
Gary Shiffman: So that's where we, you know, 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 Change: Okay, thank you for that color.
Speaker Change: You've got Safe Harbor, which is kind of a stand-alone entity in terms of full G&A and its own management team. How do you think about that as an opportunity to cut G&A and cut savings? Do you think that gets folded even more into the platform in this process, or do you like the current structure, how it stands?
Speaker Change: So, it's a great question. We continue to believe in the strength of the platform and the long-term opportunities in the marina sector. As we said, we've had outstanding growth.
Speaker Change: Over the last two, three years at a level.
Speaker Change: Gary Shiffman You know, 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,
Speaker Change: We need a more we expect a more normalized level of growth from there. So as recently as yesterday, I've talked to Baxter and we've discussing how they can contribute strategically to the cost savings effects.
Speaker Change: And we will be working together on that project as we go forward and share those changes as we're able to do so.
Speaker Change: We'll go next to David Segal with Green Street.
Speaker Change: Hi David, this is Fernando.
Speaker Change: On the annual side, we continue to gain occupancy. We have converted
Speaker Change: nearly 2,000 sites this year. So it would be the third year with expectations in the fourth quarter. It would be the third year running with 2,000 or more conversions per annum.
Speaker Change: Our renewals are strong within the annual segment, and so we're actually seeing a 10-year increase on the annual side.
Speaker Change: Great, thank you. And can you provide some more color on what changed in the revenue growth assumptions across the business segments?
Speaker Change: are connected to the transient side of the business, be that in RV or marina.
Speaker Change: 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.
Speaker Change: as far as less transient demand on the on the marina side given given the delayed return of the larger vessels from the Mediterranean.
Speaker Change: Other revenue impacts.
Speaker Change: For home sales, we saw less home sales in September and are forecasting fewer home sales as well in the fourth quarter, largely due to the impact from the storms in Florida and the southeast.
Speaker Change: and that is again linking to the transient side.
Speaker Change: less service retail dining and entertainment revenue, which is having its flow through to NOI.
Speaker Change: We'll go next to Josh Dennerlein with Bank of America. Please go ahead.
Josh Dennerlein: Yeah, hey guys, um...
Speaker Change: No, 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. And then Gary, just like, you know, do you think like a new CEO can come in 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 Change: Okay, well, taking that one at a time, Josh,
Gary Shiffman: I'd remind everybody that we have added and refreshed four new, I think, very qualified board members over the last four years.
Speaker Change: So, the board takes as governance.
Speaker Change: very seriously and has been refreshing the board.
Speaker Change: We have a board member that will step down.
Speaker Change: at the end of this year, and
Speaker Change: We are definitely examining.
Speaker Change: continued refresh, especially on the very long tenured board members, to be able to position this company, you know, for the next chapter of growth, if you will. So that work continues on. With regard to
Speaker Change: Myself
Speaker Change: Um, as I just announced my intention to retire and we'll be working with the board on a smooth transition, um, we'll be having those conversations, uh, with the committee, um, in the near future. And, uh, as I have answers to that, I'd be glad to share them with you.
Speaker Change: Okay, I appreciate that. Sorry if I missed it, did you say which board member is stepping down?
Speaker Change: At the end of the year, I know the nominating and governance committee works through all that and they'll share that as soon as they determine.
Speaker Change: Okay, when will we know that?
Speaker Change: This easement is there for maintenance.
Speaker Change: Sorry, what?
Speaker Change: No, no, I guess would it just be one? When I'm looking at the board lineup, you have one board member who's been there 28 years.
Speaker Change: We'll go next to Omatayo Okusanya with Deutsche Bank. Please go ahead.
Omatayo Okusanya: Yes, good evening everyone. I wanted us to...
Speaker Change: But drill down a little bit on the ability to kind of flex operating expenses.
Speaker Change: You had mentioned that there may be some third-party vendors or things like that you do not flex in time. I'm hoping you could just give us a little bit more detail about those particular expenses.
Speaker Change: 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 Change: each property or and quickly add up to a significant amount which is impacting our results over the course of the second half.
Speaker Change: of the year. The primary overages stemmed from landscaping, tree trimming,
Speaker Change: and pool repairs we did achieve.
Speaker Change: Thank you.
Speaker Change: Sure, Anthony. Other expenses are mainly related to advertising spend and certainly looking to mitigate the revenue declines.
Speaker Change: to transient stays at the portfolio.
Speaker Change: Joshua, and like what do you think needs to happen for change in RV revenue to bounce back?
Speaker Change: Anthony, I would say, right, Transient is a great feeder for our annual side of the business.
Speaker Change: We continue to
Speaker Change: 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 four years, which has increased annual sites by over 30%.
Speaker Change: during that time.
Speaker Change: Grandiet has underperformed.
Speaker Change: 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 Change: During COVID, we invested in building infrastructure for our transient RV business.
Speaker Change: We believe it has strong long-term fundamentals.
Speaker Change: However, as we've talked about in the near to medium term, the market conditions have been much more challenging than we anticipated.
Speaker Change: leading to continued revenue declines as we give back most of the really outsized growth that we experienced through COVID.
Speaker Change: So we're managing this, and this was the question before, by flexing expenses as revenues are down.
Speaker Change: and probably
Speaker Change: 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.
Speaker Change: properties. But looking forward, we do see strategic value in that transient portfolio, because as Fernando said, it is the feeder.
Speaker Change: for our annual RV income stream growth which, as we said, continues to grow and really perform well.
Speaker Change: 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.
Speaker Change: We'll go next to Keegan Carl with Wolf Research.
Speaker Change: I think that where we stand right now, we have looked at actionable
Speaker Change: 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.
Speaker Change: So, as we share DNA, we look forward to being able to share.
Speaker Change: Thank you.
Speaker Change: When we provide guidance and a couple of new pages in our presentation that we sent out today, I think can help.
Speaker Change: walk through the steps, if you will, of how we're thinking about
Speaker Change: the GNA and APEX expense growth on top of the other strategic progress that we've made.
Speaker Change: 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 Change: 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 at the vast majority. Is that still true?
Speaker Change: There is a waiting list for some size.
Speaker Change: quote that the vast majority of the marinas, the largest piece of the mist is related to the storms which prevent those super yachts and large vessels from returning to the Mediterranean. As we shared
Speaker Change: Earlier in the year, what we were experiencing was earlier departure than what we budgeted.
Speaker Change: For those large.
Speaker Change: superyacht vessels that generally travel to the Mediterranean for the summer season and then return back across the Atlantic.
Speaker Change: And they left earlier than we budgeted them and are now coming back later, predominantly because of the storms, the named storms we're familiar with.
Speaker Change: and other tropical storms that take place over the Atlantic or near the Med.
Speaker Change: 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.
Gary Shiffman: Thanks, Operator.
Gary Shiffman: I would take this opportunity for a few remarks to wrap it up tonight.
Gary Shiffman: Despite what is a disappointing order and outlook for all of us as a company, as I shared before, I really do remain confident in our ability to demonstrate value of core portfolio.
Gary Shiffman: And in doing so, make myself.
Gary Shiffman: John, and the entire management team.
Gary Shiffman: Thank you.
Gary Shiffman: return to the type of growth in 2025 that this portfolio and this management team can deliver.
Gary Shiffman: 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 24.
Gary Shiffman: And I look forward to sharing further results or speaking to any of you at a follow-up call.
Speaker Change: This does conclude today's program. Thank you for your participation. You may disconnect at any time.