Sun Communities, Inc. (SUI) Earnings Call Transcript & Summary

All right. Welcome to the 2:00 session at Citi's 2022 Global Property CEO Conference. I'm Nick Joseph here with Michael Bilerman with Citi Research. We're pleased to have with us Sun Communities, and CEO, Gary Shiffman. The session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. If you want to ask questions, please step to the middle. There are mics there. If not, please send them through live QA. Gary, I'll turn it over to you to introduce the company and the management team, and then we'll get into Q&A.

Well, thanks, Nick, and thanks to Citi for returning us to the first in a long time in-person conference. So it's great to see everybody and share those fond memories of when we were here 2 years ago and the COVID scenario was just starting up.

And Gary, thank you for providing boat transportation for 70 of your investors on Sunday. It was a very generous tour that you did for Safe Harbor. So thank you.

Well, thanks. And we hope you all join us on our U.K. tour, which will be mid-June post closing the Park Holidays transaction. But more of that will come to you via email. Good afternoon, everybody, and thank you for joining us today. I'll make a few brief remarks, and then turn it over for Q&A. For those of you who know us and those of you who are new to us, we are the premier owner/operator of manufactured housing communities, RV resorts and marinas with about 600 properties comprised of over 159,000 manufactured housing and RV sites and more than 45,000 marina wet slips and dry racks. And as the largest owner/operator, we are uniquely positioned to meet customer needs across all of our platforms. I think that we're best known as a proven industry consolidator on those platforms. We've acquired properties valued at about $9.6 billion over the past 11 years. And approximately 16 months ago, we acquired Safe Harbor Marinas portfolio, and we could not be more pleased than we are as to its performance, especially against underwriting. So great management team and an incredible portfolio of world-class assets. In November, we announced that Sun has entered into a definitive agreement to acquire Park Holidays UK, which is expected to close over the next couple of weeks. We're waiting for final FCA approval, but should be there and close very shortly afterwards. The thing that's exciting for us up here is the fact that Park Holidays UK represents direct access to increasing our manufactured housing portfolio at very attractive yields and at a time when the competitive environment for manufactured housing has compressed cap rates that are currently sub-3% for the quality assets. So look forward to sharing more about that when we do close. Sun continues to selectively build new ground-up manufactured housing communities here in the U.S., and we think this is a great differentiator. We've been working on this for the last 5 years and built up a significant inventory of approximately 10,000 potential sites for the entitlement and development of manufactured housing communities, predominantly about 85%, 15% for our RV greenfield developments. And I really do think this is a distinct competitive advantage from the standpoint where we can build to yields of 5%, 6%, 7% to IRRs once stabilized in the 8% to 9% range against these 3% and sub-3% cap rates. We can really create significant value for our stakeholders. So we look to start 5 new manufactured housing developments this coming year, finished 2 last year, and we expect that we can sustain or increase the amount of new manufactured housing developments we bring to the market each of the next 4, 5 successive years at least. I think I'll close and really share with you that we move forward and remain very committed to what's taking place in the RV segment of our business. Great increase in expansion as more and more people discover the outdoors and staying in an RV outdoors community -- Sun Outdoors community, and expect that the growth that we're seeing in the RV business, double-digit growth, will continue far past the pandemic. Many people returned to their other forms of vacations. They'll go back on cruises, they'll visit places on airplanes, but the demand is such that we have really set a new base. Over 200,000 first-time guests went to Sun Outdoors RV resorts this past year. And we're currently at a reservation pace for 2022 of 50% above where we were at this time last year, early in the year. So it bodes well for what's moving forward. For those of you on the marina tour, anyone in here on the tour? Okay, great. Hopefully, you saw the quality of assets. The demand is very, very deep, much like the RV business. 13 million registered boats in the U.S. today, 800,000, 900,000 wet slips and dry slips for storage. So we see that incredible demand outstripping supply, and we're very excited as we've been able to grow the platform by about 60% since we acquired Safe Harbor about 17 months ago. So in closing, we remain highly confident in the short, medium and long-term macro and secular trends in our business and our platforms. And I'd open it up at this point to any Q&A. I'd introduce our Chief Operating Officer, John McLaren. On my right, Fernando Castro-Caratini, the EVP of Finance, Capital Markets; and Karen Dearing, our Chief Financial Officer as well as many other titles, Secretary and so forth, Treasurer, yes. Thank you.

All right, Gary. Where is the Sun yacht docked? What slip is that in?

So the Sun yacht dock, there's a little dinghy that's tied up. It's something smaller than a Boston Whaler, but bigger than an inner tube. So it's right outside. We'll take you all for a ride on it afterwards.

That sounds like fun. So what are the top 3 reasons that investors should buy Sun stock over any other listed property company? Not against your peer but against any company.

I think number one bit would be the expansion of the addressable market today in each of our different segments. They say there's a shortage of 3 million to 5 million houses today in America against the demand or excited to be able to fill that opportunity through expansion and development. So that would be one. The demonstratable long-term growth through economic cycles. We talk about the recession resistance of our platforms demonstrated over a long period of time and 30-plus years really of outsized stable growth throughout those periods. Our MH and RV business probably did best in '08, '09 and '10, right into the teeth and the wind of the great financial recession crisis, whatever we choose to call it, as the demand for obtainable housing and our big -- the pool of our customers grew during that period of time. And then finally, I do reflect on that sustained growth and what we've been able to deliver, and I attribute it to, I think, the most experienced, qualified management team in our industry that is able to achieve that type of performance.

Gary, how do you think about -- obviously, you have the marina business, which is performing very well, and you talked a little bit about sort of the long-term dynamics between supply and demand. You obviously talked about Park Holiday and closing certain -- those 2 businesses, you haven't owned for a long term, right? And you also don't manage those, where you're buying separate teams, almost entities that are becoming part of the Sun family. In the RV/MH business, it was your teams that were developing and managing it. What controls are in place to make sure that the incentives are aligned in these new businesses that you're going into?

So starting with the U.K. and working back to Safe Harbor, Park Holidays, it is a mirror image. It is a manufactured housing business. John and I went to do the original due diligence. And certainly, we're pleasantly surprised. We expected it to look a little bit different than it did. And these customers are second homeowners. They must own a primary house by regulation in the U.K. to qualify for a second home in a Park Holiday community. So they signed 20- and 30-year, they call them licenses, what we would refer to leases. It's a long sticky revenue. That being said, John is stepping up to oversee the management in the U.K. and the growth of that part of the MH business. And I don't think that there is an operator that I could point to in the industry that I could trust or count on more, or we could as a team, to oversee that management group. The irony and the delay in closing has been COVID-related to the FCA, but it's given the financial team, Karen and John, the ops team, a lot longer to preintegrate, if you will, with the management team there. Their incentivization is tied into -- everything aligned with our shareholders' interest, including how the overall performance does. And the team that is over there now has been with them through 3 sales from private equity firms over a 15-year period of time, each private equity firm needing to sort of mark their market every 5 years. And you can imagine how they feel about an investor well-capitalized with a longer-term horizon, and they're very excited. So we feel very comfortable with the Park Holidays group. On the Safe Harbor side, we first sat down with the management team 5 years previous to buying the platform. We got to know them over that period of time. We are very, very pleased with the decision that we made because we didn't just buy the platform. Again, they were a PE firm. 5 years or so had gone by. It was time for a transaction. And that's pretty disruptive when you're a management team and you have a passion and a connection and a culture to have to keep going through the hoop, some new ownership every 4 or 5 years. So the Chief Operating Officer there rolled over the vast majority of his equity -- Chief Executive Officer there. What did I say? Chief Executive Officer. So he was committed to the platform. We provided RSUs and incentivization, and the result of which is we're continuing to outperform past our underwriting. So I think for those of you new to the marina business, it's very similar to when we went into the RV business in 2011. Similar supply-demand fundamentals. And I would suggest that if there is anything harder to build or get entitlement for the manufactured housing, it's the marina business. So great assets, a great team, an aligned team, a financially incentivized team and then a great back office sitting with me and many people at the Southfield office overseeing that platform. So we feel very comfortable with the management teams to move forward.

Are there other verticals that investors should be thinking of as expansion or for the next, let's call it, 2 to 3 years, it will be growing the existing ones you have?

I think for more than the next 2 or 3 years. For the foreseeable future, these are our business platforms. They're all tied together by the same 3 fundamentals. Supply doesn't meet demand, nimbyism, nothing else is getting developed in the areas and the macro wins in forces are really strong at the back. So even with our U.K. transaction, we have no interest in being in other parts of Europe. It's just a specific manufactured housing opportunity that really doesn't exist anywhere else. We have seen some of it in Australia and we have partners there, but nothing for the foreseeable future.

So it's global expansion. I guess Australia is still -- I mean, that company is growing. I know you're participating in the equity offerings. How should investors think about future expansion, whether it's into Canada or in other areas?

I think in the areas that you see us right now is where you will see us focused.

On that topic, we do have a question specific to the Australian investment and the future plans for that.

Can everybody hear me? Okay. Good. Yes. So I think everybody knows that I recently took over from Gary for the Board of Directors for Ingenia. The fact of the matter is, is that I think most people are familiar that Australia -- doing the same thing into the microphone as I do it in church.

Do I repeat that for everybody? That was a church comment.

Yes. Kids make fun of me when I read at church. So anyway, so it's obviously been very strict guidelines in terms of COVID. The fact is that we've been developers as a company for the past 4 decades, which means that we like to have boots on the ground in terms of being able to see and feel and walk the sites that we want to develop. I'm pleased that we have 5 different parcels that are in various stages of entitlement in Australia. It's obviously been a bit of a slow go over the last 2 years because of the COVID restrictions that have existed. It's just now opening up. I'm also pleased to note that we have -- one of the properties is actively and has been selling homes and is doing very well. We expect 3 others of the remaining 4 to be actively into ground developing and look forward to seeing those first home sales probably coming sometime next year. So it's been a little slow because of COVID, but we look to pick it up. And my hope personally is to get out there in the next month or 2 now that things have opened up.

How do you think about the price sensitivity across the different businesses to higher inflation and the ability to price into that? And maybe on the MH side, you can delineate between all-age and age-restricted.

Yes. I'm going to -- we can start with that, but I suggest all of our 3 platforms are able to pass on the pressure of inflation. On the MH side, there are only 20 properties approximately in California that have actual rent control. Of those 20 properties, the rent control is tied to CPI. And the rest of the portfolio, we have the elasticity. And when we often talk about the resilience, nothing is recession-proof. We talk about recession resistance. And on the MH side, 40-plus years of experience, 2 recessions, 18% interest rates that took place in the '90s. We've been able to successfully increase rental rates. And the best example of that is we've averaged 2% to 4% for the last 20 years or so. But if you look at the last 10 years, we've been closer to the 3%, 4% range in a sub-1% inflationary or CPI environment. So the MH platform really can pass on those expenses.

And is that true on both the age-restricted and all-age? Or is there a difference between the 2?

Yes, it really is true. We often point out the fact that during strong economic times, we generally get higher rental growth in our nonage-restricted or all-age communities. The age-restricted tend to be more CPI connected, CPI plus something. So we're able to pass on that inflation as well.

The other question we get frequently is on gas prices, right? So the impacts both on the RV portfolio and now more recently on the marina portfolio.

Yes. So from the RV side, typically, most of our guests come from with a 2- to 3-hour radius to the properties. And so when you really look at an actual trip that somebody might take a vacation to come to one of our resorts, it's actually a fairly small component of the total spend against that trip versus other traditional forms of vacationing such as the family trip down to Disney that requires an airplane flight and those sorts of things. So this is why we call it affordable vacationing. So we have seen it in earlier years where gas prices have creeped up to $4.50 to $5 a gallon, a couple of different times over the course of my career, and really saw no impact. I think that if -- we believe that if it went beyond that, that, that could potentially lead to more conversions of our short-term guests to long-term guests, which we had a tremendous amount of success in 2021 with record conversions of short-term guests to long-term guests, which also is a pickup of 50% additional revenue in that given year. And so it may lead to people that maybe travel a little bit more in their RVs, picking a place where they want to stay and becoming an annual within our communities. Do you want to talk about the marina bit or...

Yes. So net-net, I just want to close it on that one. We will lose some people at the margin, especially those people who would visit us who aren't going on the trans-U.S. trip probably more than make it up in the short-term guest data that's coming from that 2- to 3-hour place. And then what we did see in 2010 when prices went up, a lot more conversions, then a pickup of 50% rent on a site for the first annual year more than made up for it. So we expect to be in good shape on the RV performance.

And what's the breakdown of the business between those trans-U.S. -- my uncle is doing it right now. So I just don't know what percentage of people of your guests actually do that versus that 2- to 3-hour drive. And you're talking about it switching. I just didn't know the book of business that's in each of those pieces.

Yes. That's actually not the greatest component of our business. It's primarily the 2- to 3-hour radius. It is you're bringing up a really important point in terms of our acquisition strategy out into the future and looking at what are the points on the map across the U.S. where we want to be optimally located. And so we've actually done a number of different studies in being able to determine what we consider the top 5 -- or excuse me, top 50 RV traveling markets across the U.S. So we'll look to build out that road map where that will be a more meaningful flow to the company.

Does it impact the Canadian travelers traveling a lot more than 2 to 3 hours when they're driving across? And I know that business was impacted clearly by COVID. Is that -- does the rise in gas price affect the return of that business, which you thought was going to come back more meaningfully this year?

Not really because the vast majority of our Canadian guests are annuals already. They have been through COVID and also on top of that, those that would be considered more short term, when they're taking that trip, they're still staying 2 and 3 months at a time. So it's less of a factor.

Just to talk about the marina side. It's interesting to note that similarities, higher fuel prices, fuel is more expensive than at the dock than it is at the station. So the impact over a period of time is that people drive around cruising much less. They drive out onto the waters, drop their anchor, have a good time, whatever that is for them. Many more users just come to the marina, put their barbecue out there and stay right on the dockside. It's also an opportunity to get service. All boats need service continually. Most boaters put it off because they want to enjoy their boat, but more service will take place. Safe Harbor Marinas and the core of the business is on the bigger size boats. They're not the ski boats and those types of small crafts that are pulled out and trailered somewhere else. So these boats have to have a home, and I think it's just the alternative use and reduced use. The final thing is, interestingly enough, Safe Harbor controls its fuel prices because they sell -- we sell it at the dock. Therefore, we can reduce profits to $0 or even below that if we so elect to support the steadiness of the slip rental. But there's nowhere else for these boats to really go. So again, we think it's a very positive note, both in the RV and the marina business that -- through what we've looked at and modeled through roughly $5, $6 a gallon Beyond that, we really can't tell. We're all in trouble beyond that, and we'll see what happens.

You had the marina article in the journal last month, and I was scrolling through some of the comments that people are leaving. And I love this comment that this person wrote. He goes, as I was told when purchasing our last boat, you will use it less than you think. It will be more expensive than you can imagine. Everything is broken. You just don't know it yet, and it will be a great experience. I don't know if Jon Litt wrote that from his boat. It entirely sounds like him. But what do you say to that element that we could have a lot more boats coming back if all this rush of people that bought them sort of figure out that even though it's a great experience, maybe not using it and costing you a lot more money than I thought.

Yes. First of all, as a former boat owner, I've experienced all that. It's part of the pleasure you get of boat ownership. And similar to the RV, the RVs, they sort of say, sometimes buy a used one because the person who owned it the first year had to deal with all the maintenance involved in getting everything tested and corrected. I mean the bottom line is that supply-demand is such that I haven't -- and I'm not aware of any mega trend where people are walking away from their boats because of those type of issues. But I have heard the kind of comment that the best days about being a boat owner are the day you buy and the day you sell. So -- but it seems like there are plenty of buyers to take over all the sellers.

Gary, this came up a few times on Sunday. But just for everyone else's benefit, and we've received it a few times through live QA, what is the exposure? I guess I know the answer. But how do you -- can you talk about the exposure to Russian oligarchs in the Safe Harbor portfolio?

Yes. Certainly, light went off and...

Cell phones went off.

The cell phones out, all the Board of Directors called and everyone's get those Russian boats out of Safe Harbor Marinas. So after a sleepless night and talking to the Safe Harbor staff and the determination came through, we were very, very pleased and I believe, fortunate to find out that -- what to get this...

Crimea .

That in 2014, the Crimea invasion caused sanctions to take place in the U.S. that I wasn't aware of, where no Russian vessel is permitted to be berthed or serviced in the U.S. And it is strictly enforced by the government because it's very difficult to pierce the flags and the registrations and who the ownership is. So fortunately, the government has done a good job on that, and there are no Russian boats that we can determine within the Safe Harbor Marinas. So that was a surprising but very pleasant outcome to the situation.

Can we talk about other billionaires and oligarchs' boats that are in the Safe Harbor Marinas?

They'd mostly be celebrities and things like that, people you would know that we're sworn to secrecy at. But as those of you who know are on the marina tour, we were told that we were launching from -- Tiger Woods slipped that day because his boat was out. So obviously, high net worth individuals on those bigger boats. And it also speaks to the fact that the boating business has had a shift to larger boats and those boats are stickier. They might not be used very much, but they can't be trailered away. And it's a positive aspect that I think much like the RV business, the transient component of it when we got into '11, there was a lot of concern over what would happen year after year, and we found out it is very sticky revenue. I think over the next few years, Sun will demonstrate that the marina slip revenue is very sticky as well.

All right. We'll go through some rapid fire. What is the biggest growth opportunity that you believe the market is not giving Sun credit for?

I think the MH development inventory and opportunity that we have, certainly, will move the needle as I talked about a competitive advantage before. So it's the development of manufactured housing communities as we go forward.

And just to put the goalpost around that total capital yield, market cap rate and value creation for that, just range-bound?

I think that we're looking to direct about $200 million to the -- on an annual basis to the development of manufactured housing when we reach full scale over the next couple of years.

And those are being developed at high single-digit yields and arguably cap rates in your space are 3% to 4%?

Yes.

So that $200 million is worth, call it, $550 million, $600 million of value?

I'm going to defer to my financial...

Yes. They're going to be worth that.

There's a yes coming from here.

Number of shares outstanding would be how many?

126 million.

All right. So we're talking almost $5 to $6 a share a year from potential value creation from the development pipeline.

Yes.

There's always a danger of doing math. Like Steve Roth gave me a test yesterday, and I was very nervous. It sounds like a big opportunity.

Yes.

All right. Same-store NOI growth, how are you asking this, Nick?

I guess we'll go through each, but same-store NOI growth for the different segments industry-wide next year in 2023.

By segment. That's a nuance of -- Nick, that we're coming up with. So I think I'll -- MH and RV -- and again, this is for the industry or for the company?

If you want to do the company.

You always push me into doing the industry.

Your choice.

Okay. I'm going to make a call. Throughout each of the segments, you're at a 6.4% is the midpoint of the overall same community growth and closer to 7% on the marina side of things.

10-year U.S. treasury yield a year from now?

Over 2%.

How over? Mid-2s, low 2s, high 2s?

Low 2s.

Will there be more or fewer public companies within your -- we'll do residential, within residential overall next year?

Same in our collective universe.

And then what's your #1 ESG priority in 2020 -- 2022?

Really establishing tangible goals. We're really very focused on our ESG. Three things we're trying to really focus on, reduction in greenhouse gas emission would be one, reduction of water consumption and usage and reduction of waste at our communities because we do have a big population in each one of the business platforms.

Perfect timing.

Gary, thank you very much.

Wow. Well done, Gary.

Thank you, everybody. And I do encourage anyone who wants to follow up on any questions, we're always available by phone.