Sun Communities, Inc. (SUI) Earnings Call Transcript

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sun Communities Third Quarter 2026 Earnings Conference Call. The press release and supplemental financial information can be found on the Investor Relations section of the company's website. 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 meaning of the Private Securities Litigation Reform Act of 1995. During today's call, management may discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable to GAAP measures are included in the press release and supplemental financial information. 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. The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this call. Having said that, I would like to introduce management with us today: Charles Young, Chief Executive Officer; John McLaren, President and Chief Operating Officer; Bob Garechana, Chief Financial Officer; and Aaron Weiss, Executive Vice President and Chief Investment Officer. [Operator Instructions] As a reminder, this call is being recorded. I'll now turn the call over to Charles Young, Chief Executive Officer. Mr. Young, you may begin.

Good morning and thank you for joining us to discuss our third quarter 2026 results and our outlook for the remainder of the year. We delivered another strong quarter. Core FFO per share was $2.35, $0.02 above the high end of our guidance. This marks the third consecutive quarter of exceeding our expectations this year, reflecting the consistency of execution we are seeing across the organization. Earlier this month marked my 1-year anniversary at Sun, and I want to take a few minutes this morning to step back and reflect on the year. When I joined Sun, I knew I was joining a company with a rich history, exceptional communities and a strong culture. What I did not fully appreciate was the depth of talent across the organization and in genuine pride of ownership within our communities. At year-end that initial conviction has only deepened. In September, we completed the sale of our U.K. business, marking the culmination of a multiyear simplification effort. Today, Sun is a focused pure-play North American manufactured housing and RV company in resilient supply constrained sectors with a strong balance sheet and a significant financial flexibility. Earlier in the year, we established 3 strategic priorities, allocating capital with discipline, optimizing our operating platform and investing in our people, technology and operating capabilities. Let me share how we have delivered against each. First, allocating capital with discipline. We have been delivered in deploying capital, guided by a consistent set of principles, maintaining a strong and flexible balance sheet, returning capital to shareholders and investing in high-quality MH and RV communities where we can drive attractive long-term returns. With the roughly $1 billion of U.K. proceeds, we returned capital to approximately $544 million of share repurchases year-to-date, paid down nearly $450 million of debt and continue to pursue internal and external growth opportunities. We have continued with our proactive approach to portfolio management. During the third quarter, we sold 3 RV communities in Fort Myers, Florida, for $127 million, realizing compelling value. We remain selective on acquisitions and are pleased with our purchase of 2 manufactured housing communities in the Pacific Northwest that closed earlier this month. Second, optimizing the operating platform. Our teams are collaborating more effectively using better data to make decisions and becoming more disciplined in how we allocate time and resources. You can see it in the results. Manufactured housing continues to deliver strong same-property growth on very high occupancy. Our annual RV communities continue to grow and transient RV results are stabilized. As John will discuss, our 2027 rental rate increases are coming in above 2026 levels for both MH and annual RV. Third, investing in our people, technology and operating capabilities. We have strengthened and broadened the skills of our leadership team, and we continue to build on our foundation with investments in technology and data to improve operating efficiency, revenue management, pricing and procurement. A key addition to the team is Bob Garechana, who joined us as Chief Financial Officer in September. Bob brings more than 2 decades of REIT experience, including roughly a decade as CFO of a large residential, and we are glad to have you. I also want to thank Fernando Castro-Caratini, for his many contributions to Sun over his 10 years with the company, including his leadership as CFO in his partnership in ensuring a seamless transition. We wish him the best in his next chapter. I'm pleased with our progress over the past year, and I am encouraged by our outlook. Sun is a more focused company with a clear path to long-term value creation. We are strategically positioned around the themes that define our business: housing affordability, attainable vacationing and demographic tailwinds behind both. The entire team is focused on consistent execution quarter after quarter, year after year. None of this happens without our people who turn properties into communities. I want to thank every one of our team members for their dedication, discipline and focus on serving our residents and guests. With that, I'll turn the call over to John and Bob to discuss our operating results and financials in more detail.

Thank you, Charles. I could not be more pleased with how the team executed this quarter. In the third quarter, our same-property MH and RV NOI increased 3.6%, with strong performance from manufactured housing and occupancy of approximately 98%. In manufactured housing, same-property NOI increased 6.9% for the quarter driven by a 5.8% revenue growth and a 2.8% increase in expenses. As Charles mentioned, the demographic tailwinds behind our business are something we see on the ground every day. Manufactured housing is part of the solution for housing affordability and demand for our communities remains very strong. That demand is illustrated at the top of the funnel with traffic to our MH website in the third quarter, up approximately 50% versus last year, which translates to over 20 applications on average we receive for every available site. The work we are doing to optimize our operating platform, including how we market our communities and convert that demand is showing up in our occupancy and rental rate growth while continuing to execute solid expense discipline. We expect our 2027 full year rental rate increases for MH to average approximately 5.4%. Through the end of September, about half of our MH residents have received their 2027 rent increase notices. Turning to RV. Same-property NOI decreased 1.3% for the quarter. Revenue was in line with our expectations, supported by resilient annual demand and transient performance consistent with our outlook. Annual RV continues to provide a durable base of recurring revenue with same property annual RV revenue up 2.4% for the quarter. Our work optimizing the RV platform is producing results, enhanced revenue management and the real-time data we now have on booking patterns and market trends are enabling us to be more disciplined in how we price and manage our RV portfolio. We have also improved the guest journey with technology initiatives that have expanded our booking channels, enhanced digital self-service and helped drive approximately 40% improvement in response rates. We also continue to see strong demand and retention across our annual RV portfolio. For 2027, annual RV rental rates are being set with estimated annual average increases of approximately 4.4%. We are performing at a high level, and I want to take a moment to thank our entire team for the discipline and dedication they bring to achieving our goals and positioning us for continued success. Their commitment to service and operational excellence enables us to deliver these strong results. We are long-term stewards of our communities, and we remain committed to investing in them while preserving quality attainable housing options for residents. I'll turn the call over to Bob to discuss our financial results and updated guidance. Bob?

Thank you, John, and good morning, everyone. Before getting into the numbers, I want to take a moment to see how glad I am to be here. I want to thank the entire Sun team for an incredibly warm and generous welcome. In my first couple of months, I've had the opportunity to visit a number of our manufactured housing and RV communities. The consistent theme is our high-quality affordable communities but even more so, our great people who are passionate, dedicated and focused on serving our residents and guests. Having spent my career in residential real estate, I would tell you that the fundamentals supporting our business and the opportunities ahead for Sun are compelling, and I'm very excited to be here. Now to the numbers. This morning, I'll walk through our third quarter results, our capital deployment and balance sheet and our updated 2026 guidance. I'll then finish with a few items to keep in mind as you think about 2027. Starting with the quarter, Core FFO per share of $2.35 exceeded the high end of the guidance range by $0.02, driven primarily by higher same-property NOI in manufactured housing, as John discussed, as well as higher interest income and a lower share count from our share repurchases. Turning to capital deployment. In September, we closed on the sale of our U.K. business with net proceeds of approximately $1 billion and completed the disposition of 3 RV properties and Fort Myers for $127 million. We've deployed those proceeds in line with the priorities Charles just outlined. First, via share repurchases mentioned earlier by reducing debt including the repayment of approximately $267 million of mortgage loans during the quarter and nearly $450 million year-to-date and through the highly selective acquisitions completed after quarter end. We expect to deploy the remaining cash against similar priorities subject to market conditions. This leaves our balance sheet very well positioned. As of September 30, Sun's debt balance was approximately $3.8 billion with a weighted average interest rate of 3.3% and a weighted average maturity of 7.1 years. We have ample liquidity, no floating rate debt and no meaningful debt maturities until 2028. Now let's pivot to our updated 2026 guidance. As we have disclosed, our prior core FFO guidance assumed a full year contribution from the U.K. Now that it is sold, we have updated our guidance to remove the U.K. business after the September 22 closing date. As a result, the change in our range is not an apples-to-apples comparison to the prior range, and I'll walk through the bridge in a moment. On same property, we are raising our manufactured housing NOI growth guidance, reflecting continued outperformance in the business. For RV, we are narrowing our growth range, primarily reflecting higher-than-expected expense growth from property-specific utility costs. Taken together, we are raising our combined MHRD same-property NOI growth guidance. On core FFO, our updated full year guidance range of $6.97 to $7.05 per share. The change in our range is primarily driven by the fall. First, the U.K. sale reduces core FFO, reflecting the loss of contribution from the closing date through year-end. Second, the increase in our same-property NOI expectations I already described as additive as is the net impact of interest income and interest expense. Third, share repurchases and new acquisitions are additive as well. Finally, the Fort Myers sale reduces core FFO as we will no longer recognize the business interruption income related to Hurricane Ian that was previously included in our original guidance. As a reminder, our guidance reflects acquisitions, dispositions and capital markets activity completed through October 26. Consistent with our prior practice, it does not assume future acquisitions or dispositions, additional share repurchases or other capital allocation activity beyond that date. Looking ahead, while we will provide full year 2027 guidance with our fourth quarter results in February, there are a few items worth highlighting now as you begin to think about the next year. First, our core business. Our 2027 average rent increases at approximately 5.4% for manufactured housing and 4.4% for annual RV are both above last year's levels, provide a solid foundation for organic growth and we will continue to focus on optimization identifying opportunities to drive NOI and FFO growth across the platform. Second, 2027 will reflect our first full year without the U.K. business compared to roughly 9 months of contribution in 2026. We have partially offset those earnings through the share repurchases and debt reduction funded with the proceeds. Third, Fort Myers. These communities were not in our same-property pool, so same property results are not affected. However, as I mentioned, they contributed approximately $10 million of business interruption income in 2026 and in our broker and other income line, which, along with their NOI, will not recur in 2027 given the sale. The redeployment of the sales proceeds only partially offsets this lost income. And finally, our Sungenia manufactured housing development joint venture in Australia that was entered into in 2018, while a small part of our business has contributed to FFO through income from nonconsolidated affiliates, primarily through home sales. With 3 of the JVs, 4 communities now largely filled, we expect fewer home sales in 2027 and the joint venture's contribution will therefore be lower. We look forward to sharing our full year 2027 outlook in February. With that, I'll turn the call back to Charles for a few closing remarks.

Thank you, Bob. We have simplified the business, strengthened our foundation and are generating real momentum. Our focus is clear, finish 2026 strong and position Sun for long-term growth and value creation for all of our stakeholders. Thank you for your continued support of Sun. Operator, please open the line for questions.

[Operator Instructions] The first question is from Jamie Feldman from Wells Fargo.

I appreciate the commentary on what took down the RV outlook on property-specific utility costs. Can you just talk like bigger picture about what's going on in the RV business and maybe more on the revenue side, but also on the expense side, just to get a sense of like, is it bottoming? How should we be thinking about what it looks like now, what it's going to look like next year? Just some bigger picture thoughts on the line items and driving it and the -- just kind of the outlook.

Jamie, it's John. I appreciate the question. I think the first thing I'll share is, we're really pleased with the execution through 2026 thus far. On the RV annual side, we got ahead of renewals, like I've talked about before, improved retention earlier in the cycle. We achieved close to 150 net conversions over the last 6 months. On the transit side, we feel good. We're encouraged by what we're seeing. Demand trends are stable, pacing is solidly within our expectations. And as you know, we have well located, high-quality resorts and service-oriented team that provides great experience for our guests. I think backing up a little bit, I've operated communities and resorts on for nearly 25 years. And during that time, we've continually refined our approach to maximize operational performance while delivering compelling value proposition to our residents and guests, for example, and you know this, I mean, it started in 2020, we proactively implemented our successful conversion approach, ultimately converting over 8,000 sites to annual improving the consistency of earnings and durable cash flows across the RV portfolio. Following that, record conversion activity and supported by the strong base of annual sites that we have now and focus in 2026 shift toward maximizing performance across each communities. We are leveraging technology, data analytics and enhanced operating discipline to drive greater accountability, transparency and more consistent results. So our focus will remain on site optimization, enhancing revenue management and controlling expenses. I think our scale, experience and growing use of real-time data provides deeper visibility into those booking patterns we have. Customer behavior, market trends, and that enables fast and more informed decision-making across the portfolio. So I think I said a little bit differently, we really, over the last several years, employed a deliberate strategy to convert to annual and built that solid base and revenue optimization. And what we're doing now is unlocking that as we balance between the site mix across the portfolio. So like I said, pacing is solid within our expectations and trends are stable. So -- yes.

You expect the inflection next year?

Yes. I think it's -- Jamie, I think it's same as I said before, I think that the question that comes up often is are we stabilizing, I think is what you're asking. And I like where we sit right now. I like what we see, and we'll obviously get a little bit more into it when we get to our guidance for next year.

The next question is from Michael Goldsmith from UBS.

The MH guidance moves higher and materially higher, I guess, from 6.1% to 6 -- 6.1% to 6.9% before to 6.9% to 7.2%. So I think you just mentioned that it was an outperformance. So what's driving that? And that was also pretty materially higher than the preliminary rent growth that you provided at the beginning of this year. So given that the preliminary rent growth for '27 is higher, like should we expect kind of similar highest numbers going forward in the MH business?

Michael, it's Bob. I'll start, and John may augment as we go through. As it relates to the guidance change related to 2026 in MH, we had great quarter. We've got a great year-to-date performance. A lot of the driver of that was some on revenue on some other income items, but also largely on the expense line item. So we reduced our expense expectations in driving the NOI improvement. A lot of that came from real estate taxes specifically as it relates to Q4. As you think about kind of revenue growth in the aggregate and into 2027, the rental rate guidance that we gave is really solid. It's 40 basis points above where we were last year, which is amazing. It is one, albeit large input in total revenue, but there are other factors that helped drive revenue in the aggregate. So it is one input, but there are other levers not dissimilar to other residential spaces around occupancy, other income, the rental program, et cetera, that will lead to overall outcomes. And when we give you 2027 guidance for same property in February, we'll give you more color around those other areas.

The next question is from Brad Heffern from RBC Capital Markets.

Yes. So you obviously sold some RV assets in the quarter. You acquired some MH assets as well. Should we expect going forward that you would try and scale down the RV business in favor of the MH business? Or is that just sort of random transaction activity and doesn't necessarily represent a strategy?

Brad, it's Charles. Look, we're always going to be far fully kind of opportunistic as we think about the overall portfolio. And I would look at this as more of a one-off. We saw an opportunity it made sense to try to create compelling value. We had a history with that site. And so we saw the opportunity and we took it. And you'll see us just be thoughtful on more one-off and broader kind of approach that you had in the first part of your question.

Okay. Got it. And then, Bob, you talked about a lot of moving pieces for '27 from U.K. sale to repurchases to the loss of the BI, Australia understand like you're not going to give guidance at this point, but can you talk in broad terms about should we expect growth in 2027? It's just a lot of moving pieces to try and figure out how it shakes out.

Yes. I mean we're not going to give guidance yet. I think it's a little bit too early to talk about the overall proposition. The good news is that our core business is very durable and growing really well. And I think that big headline, which is the -- you heard from on the rental revenue or the rental rate growth that John gave and the 40 basis points incremental that we saw. You've seen the team execute really well as it relates to expense management, other and other items. So the core business is growing very positively. There is some noise just with the portfolio transformation, and we're trying to be very clear and credible and transparent with you to provide you with that detail. But the great thing, and I'm very appreciative of it being new in the seat, is just how wonderful the core business is here and what a great setup that is as we go into '27.

The next question is from Steve Sakwa from Evercore ISI.

I was just curious, how did you go about sort of thinking about rent increases for '27? Was that kind of an inflation adjusted kind of cola factor I guess, what decisions go into that rent increase?

Steve, it's John. Thanks. Great question. Frankly, our approach to setting rents is balanced and thoughtful what we like to say. It's led to long-term durable growth for decades. Our expected increase of 5.4% on the MH side is, like we said earlier, above the 2026 level. and in line with the spread CPI we've historically achieved. We set rents community by community. It's not a single formula index. We consider a multitude of factors, including occupancy, retention, resident satisfaction, demand for our product and value our communities provide local regional markets and the corresponding comp set. Each one is a factor, not the factor. So it's really -- it's about appropriately balancing our revenue strategy between occupancy and rate, while continuing to reinvest in our communities, ensuring our residents are satisfied, so that they continue to be advocates of and a sales force for Sun, that's why our residents stay with us on average 10 years or longer and why our cash flows have generated consistent NOI growth over multiple decades.

The next question is from Eric Wolfe from Citi.

It's Nick Joseph here for Eric. Just going back to the acquisitions. I was hoping you could walk through the rationale for them versus other uses of the capital, including obviously, the buybacks that you've been doing what's the billing cap rate on those deals? And then what's the return to some just getting the low-cost preferred and financing structure of that?

Eric (sic) [ Nick ], Charles here. I'll start on just kind of the broader capital allocation priorities, then I'll hand it over to Aaron to go into some of the details. As we talked about all year, we look at capital allocation through the lens of maximizing long-term shareholder value. We'll continue to be awful, discipline, opportunistic. And our actions so far this year I believe, demonstrate that discipline. Year-to-date, we've been active with buybacks $544 million and pay down of debt of about $450 million. And we still have meaningful capacity allowing for future flexibility. That's the great news. And so to your question, if there are buckets out there, here's how we're thinking about those buckets, if you will. Again, we've demonstrated this on the share buyback. Right now, we've leaned in. We talked about that over our last kind of investor meetings, and that's kind of topped list. It underscores the conviction that we have in our underlying business, and we have plenty of capacity. The other buckets that we are looking at are kind of growth CapEx, investing back in our business, expansions, we'll be thoughtful and more targeted on that side of the business, and we can get into that. But those are opportunities that I think roll off long term and allow us to get into that kind of reinvesting in the business, if you will. And then you asked specifically between buybacks and acquisitions, acquisitions are going to continue to be selective. We're always evaluating. You'll see that we're in the market. We want to know what's out there. But we're going to be targeted and selective on what we do and discerning, if you will. In the last -- on the list right now, which we're just given kind of low priorities debt payback. Given we have a healthy balance sheet, we're well balanced and no maturities or the maturities addressed through '28, that's lower down on the list. All of that is to say we're constantly keeping our eye on the market. We're going to be opportunistic, thoughtful and we're going to weigh our options against our leverage levels. So those are the high level, and then I'll turn it over to Aaron for the other part of your question. .

It's Aaron, great question. Just following on what Charles was saying, once we identify the strategic opportunities. We move forward to the extent the math works, we're able to structure attractive deals. In the Pacific Northwest, specifically, we went into 2025 with 3 communities, with the benefit of an acquisition we made in '25 and then these acquisitions, we now have a 1,600 site area where we can operate them efficiently with John's existing team with minimal incremental staffing to deliver outsized returns over time. We believe these communities will deliver outsized growth and deliver yield on cost improvement, which is consistent with what we shared with the market a bit earlier. The going-in yields on these were the low to mid-4s. And again, we do expect that to grow. We shared the market earlier, we're seeing over 50 basis points of yield on cost improvement on an annual basis for the acquisitions we closed on in 2025. In terms of the structure of the transaction, historically, Sun has a long track record structuring deals, compelling for private institutional sellers to deferred tax. Those can include low current yields as well as high conversion premiums, which ultimately the cap rate -- effective cap rate to us and lowers our cost of capital for the transaction. So we will effectively use those going forward as we have this past and that could like the opportunity set despite the low cap rate environment we continue to see in the space.

Really just on that point, low cap rate environment. Are you seeing any movements in cap rates just broadly in the transaction market, given the changes to the debt financing?

Aaron, again, it's a great question. We obviously are active in the market. We are not yet seeing a material move in underlying valuation expectations from sellers. What you are starting to see is probably lower volume as there becomes a bid-ask discovery period through this higher rate environment. So given the sector we're in and what you've heard from Charles and John and Bob earlier, it is a highly compelling, ultimately, one of the most attractive, if not the most attractive residential asset class. So we continue to see valuations in that range. We'll continue to monitor the market, leverage our balance sheet, leverage our occasion and structure to potentially effectuate some transactions to the extent they are compelling and again, we'll weigh them against our other capital allocation options.

The next question is from Jana Galan from Bank of America.