All right. Good afternoon, everyone. Welcome to the 4:20 P.M. session at Citi's 2023 Global Property CEO Conference. I'm Eric Wolfe, here with Nick Joseph of Citi Research. We are pleased to have with us Sun Communities and CEO Gary Shiffman. This 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. As a reminder, the questions I will ask today do not reflect the views of Citi or myself and are being asked for information purposes only. For those in the room or the webcast, you can sign into LiveQA.com enter Code: GPC 23. Submit any questions if you do not want to raise your hand. Gary, I'll turn it over to you to introduce your management team, give some opening remarks, and then we'll go into Q&A.
Thank you, Eric. I want to introduce you on my right, Fernando Castro-Caratini, I'd like to welcome him as he joined us as our CFO. It's been how long now, Fernando? 10 months. 10 months. Getting through our first full- year, he's done a fabulous job, I'm glad to have him in the position at the company and have him have this opportunity to join me today at this table at his first Citi conference. Although I will in full disclosure, share with everybody he had sat on that other side of the Citi table for a long period of time.
We're over there to the side.
I think I'd get started by thanking everyone for joining us today during the conference.
It's been an excellent conference for us, and we look to answer any questions after prepared remarks or to see you as we meet with everybody throughout the rest of the conference. Sun is the premier owner-operator of manufactured housing communities, recreational vehicle communities, and marinas. We've been public for 30 years and private for 10 years, so I'm speaking to you as somebody who has been in the business for 40 years. The persistently strong demand and highly constrained supply, it's those fundamentals that underpin our portfolio, make our business highly recession-resistant by generating steady NOI growth. At this and to this point, for over the past 20 years, we've grown same-property NOI by over 5%, and every individual year or rolling 4-quarter period during the past two decades has achieved positive same-property NOI growth.
Today, about 85% of our total portfolio is in our same -property mix. During our 30-year history, as a public company, we have a proven track record of delivering attractive returns. Very pleased that we've been able to do so for investors by growing and diversifying our portfolio. We're grateful for the opportunity of being able to meet with you today and answer questions during this session. We'd be pleased to get started.
Great. We've been starting each session with the same question, which is: what are the top three reasons to buy your stock today?
I think that first, we're in the best asset class. Highly resilient, if you will, to very challenging economies and just really demonstrated long-term growth really underpinned by the supply/demand fundamentals. You can't get zoning or entitlement for manufactured housing, marinas, very, very challenging RV side, so there's no new supply coming in with a steadily increasing demand. That is really what differentiates the business platform we're in. Second, we're positioned to generate revenue and NOI growth from our same-property portfolio. As that indicated, that's about 85% of our properties. Third, we have a very solid balance sheet with less than 5% of our debt due over the next three years and approximately 85% of our debt fixed.
Great. Let's start with the MH side. Great tour on Sunday. Thank you for being a part of it. You know, one of the questions that was coming up a lot among investors was just your customers' ability to continue paying these sort of level of increases of site rent. I think this year it's about, you know, 6.3%. You know, they're facing a number of higher costs. The cost to purchase homes in your communities is higher. The property taxes that they're paying on their house, I know they don't pay tax on their land, but they're paying on their house, presumably is going up. They're facing the same inflationary pressures that others are facing. The question is really, how sustainable do you think, this level of increase, is in the MH side of the business?
I think one of the strong characteristics of the business is the fact that we can pass on inflationary expenses through all economic cycles. If you look back, over the last 7+ years in the CPI or of 1% or less, our average annual rental growth was 3%-4%. As you look towards where we are in the cycle right now in the manufactured housing and the property that we toured that you referenced, the average MH rent for 2023 has increased by 6.3%. That 6.3% is not headline inflation, but it represents the expected cost of our expenses, and manufactured housing runs at a very healthy margin of 65%-75%.
We're very, very confident, in our history that we can push on, our inflationary costs of operating. I'd share with everybody that there, but for maybe, 10, 15 properties out of a total of 290, the ability to push on is equal to market or CPI or greater. There's nothing, other than in those 15 properties that would prevent us from, pushing things forward.
I don't know if there's-.
One thing I would add, today we sit at over 70% of the properties are 98%-99% occupied. The ability to continue to grow rent, there's that fact. You don't wanna create a vacancy. We've always said the most costly item that we can own is an empty site. There's a delicate balance to think about the marathon, if you will, the long-term steady, predictable growth that we've represented against pushing too far in any given year.
Has there ever been a sort of another period of time where rents have sort of grown this fast over a sustained period? I'm trying to think about another inflationary periods whether your customer's been able to sustain just sort of 6% after 6% 'cause obviously you can start compounding that and it ends up being quite a large number in a few years. Just curious whether you've seen another period of time like that.
Yeah. I have to look around and measure the age group here for a second, because I'll share with you all that I grew up in an environment where the normal CPI was 5% and interest rates were 8%.
Okay.
Having that advantage, I've been able to see over a 40-year period of time. That was before we were public. I honestly think when you look at the delta difference between manufactured housing and RV vacationing, but in particular the housing, and compare it to single-family residential, to multi-family into site -build, that delta difference is always so great that we are the affordable choice. In challenging economies, we do lose, at the bottom, a person who is challenged by the economy, maybe a job loss.
We gain at the top of the funnel two or three, four candidates or residents who are more interested in affordable housing. That's the stickiness, and to kinda represent, you know, how sticky the rent is and the ability to push through rates. The average stay in one of our manufactured housing communities is 14-15 years, but less than 0.5% of the homes in our communities ever move out on average per year. Once a home is moved in the community, and once we're at 98%, 90% occupancy, that home sells in place every 15 years or so, creating uninterrupted rent stream for a longer period of time than any of us will be around here. Yes, I do think it's very sustainable to be able to increase costs. That's what history has demonstrated through the stronger and weaker economic times.
Maybe switching to marinas. You talked about a 12 to 1 ratio between the number of registered boats in the U.S., versus supply of boat slips. Just two questions there. First one maybe is stupid, but gonna ask it anyways. Is where are these other boats being kept that, you know, that's a big ratio? Second, you know, why is 12 to 1 sort of where does that range versus history? Can you put some context around it? I mean, has it ever been 15 to 1? Just trying to understand whether that's a really advantageous, supply-demand ratio or, if it's sort of average versus history.
Yeah. I'm gonna suggest, I've been following the marina industry intensively for about five years prior to our acquisition of Safe Harbor. It's been a pretty steady, healthy inventory that hasn't changed a lot. As boats age out, new ones come onto the market. With supply demand that we're discussing, we're not agnostic to boat sales. Boat sales go up and down. They're down right now from historic highs two years ago, but they continue to fill the inventory. The thing that I've watched, one of the reasons we became most interested in the marina business, is the fact that boats are tending to become larger and larger. Safe Harbor Marina acquisitions focus on boats that are 30 feet or larger. The smaller boats can be trailered out.
You see them in backyards and garages. The larger boats can't be trailered out. They can't be moved out. Oftentimes there's homeowner associations that prohibit overnight stays, so it puts increased demand for those types of slips that Safe Harbor is focused on. Then I'd follow up and say that it's one of the few businesses with the same supply-demand fundamentals and that I've seen that it's harder to increase or to gain a new marina through the approval process, mostly due to the coastal commissions and environmental issues. What's interesting is you have an inventory that's actually shrinking as opposed to growing from the redevelopment of the waterfront properties into other real estate assets. They might be commercial, mixed use, obviously condominium on the waterfront. Things from a demand standpoint continue to increase.
Today, two years after acquiring Safe Harbor Marinas, there is a waiting list in 90% of our marinas.
Maybe you could talk a little bit about sort of the annual turnover you see there. Presumably, if you have 91% waiting lists, again, I'm gonna ask what that means. That means that if you have 100 customers, you have 91 waiting to be in your community, just so I understand?
It could be 1 waiting to get in, it could be 50 waiting to get in any marina. It basically is full annual occupancy and all slips 30 feet and over, and very close to that in the smaller sites as well.
I guess just two questions there. I guess, again, what's the turnover sort of in the marina business? Then, you know, historically, you know, you've been growing things around call it 7% or so. I mean, has that been the sort of average historical rate over time, or is this sort of an unusual period of time where the business is growing faster?
I'm gonna suggest, since I've been following Safe Harbor Marinas, the average stay of a boat owner is eight years, and it's been pretty consistent as I've seen it. There's been more demand for the bigger boats. Some of the low-hanging fruit, if you will, that we look to deliver to our stakeholders is the fact that we can reconfigure for demand of these larger and wider boats. Rental increases, excuse the pun, aren't linear in the boating business, but it is a linear charge per foot, and that's how we charge the rents. The bigger the boat, the greater the linear dollar because the higher demand that's there for the boat. The anticipation is, same community that we reported for 2022 was 7.7% growth. In our guidance for 2023, it's right around 7.5%.
Yeah.
Yeah, at the midpoint. We do believe, like we've done in the manufactured housing platform and when we consolidated the RV platform, that we do have good opportunity over the next three to five years to just expand the growth off of a very healthy base.
Eric, we have seen an acceleration on rental rate increases. We would observe that, increases have historically been in line with our manufactured housing, increases at 3%-4%. Last year, on average, increases were about 5%. Certainly, this year we're about 250 basis points above, last year from a rental, from a rental rate increase. It's the demand that we're seeing, for our marinas, both for our wet slips and dry storage spaces that, gives us that conviction to, increase at a 7.5% level.
A lot of questions coming in. I think this first one is related to the sort of demographics of your overall tenant base and sort of if you could break it out by various segments, and sort of talk about sort of what information you actually know about your tenants. Do you know their income levels? Do you know credit scores? What sort of information do you gather along the various property segments?
Well, I think the best way to look at it in the manufactured housing segment of our business, we're approximately split down the middle, 50% age-restricted, a little bit more than 50%, a little bit less than 50%, all-age. We've been kind of quite clear as a public company that we believe in a balanced portfolio like this. In our age-restricted, at least one person in the home must be 55 years or older. All-age, obviously, there's no restriction there. In having the balanced portfolio, what we've observed over a long period of time is that in good economic times, we get similar rental rate increases in both types of communities.
In very challenging economic times, we actually get higher rental increases in all-age communities rather than the age-restricted, where there's more pressure tied to CPI, tied to retirement, tied to Social Security and other aspects. You also have a whole community of retirees with nothing to do all day but give management grief with regard to rental increases. That being said, the balanced portfolio, I think, has helped us to achieve top growth in our sector for a long period of time, and that's how we view we will go forward. Our demographic is really attractive on growth of boomers on the age-restricted side as well as the employment base on the all-age side. We think about that mixed portfolio of 50/50 going forward.
Obviously, we just talked about this, but, you know, from a fundamental perspective, sounds like all your businesses are doing great. You made a comment on the call that, you know, at times like this when there's stress in the system, is when you start seeing the best acquisition opportunities. I guess two questions on that is that, first, if the fundamentals are so good in your business, I guess why would you end up seeing good acquisition opportunities? Presumably, if the fundamentals are good, there probably won't be that much stress. The second question is, if you are able to see some stress, you know, and you're able to go out and buy a portfolio or a couple portfolios, how would you fund that today, just given your lower equity cost of capital?
Both great questions. Certainly whenever I made that statement, cost of capital has changed to the fact that I would share this with you. Challenging times tend to bring about opportunities. That being said, in consolidated markets like manufactured housing and RV, where all the institutional-quality properties are really held amongst two public companies and three private companies, and the onesies and twosies that are out there that have demonstrated resilience in tough economic times and just continue to do well, they don't tend to come to market, and there isn't a lot of opportunity there. That said, with the deep relationships that we have, similar to those of our competitor, we do experience opportunity. I think currently we're looking at two opportunities, and they're funded with Sun Securities, and they're funded with metrics that have triggers.
They'll take securities, they'll defer their taxes. We'll have the transaction. They're structured in a way so that our NAV is protected in the future when those securities are freely tradable. For now, barring a big change to capital costs on the positive side of them coming down, which after today, we can all scratch our heads and wonder, probably be a quiet time for acquisitions. We will deploy capital where we can get the best returns by developing ground-up communities or expansions in our manufactured housing portfolio. We have about $200 million of internally funded capital from our after-dividend cash this year that will go into ground-up communities. Last year, we developed five new manufactured housing communities from the ground -up, delivered just about 2,000 sites.
Our expectation is we will deliver two to three new manufactured housing communities for each of the next three years. We'll be focusing on the deployment of capital internally, if you will, as opposed to externally, until things change.
Gary, you mentioned the absolute cost of equity capital. Completely get that that's somewhat macro-driven. There's also the relative cost of capital, right? If you look at kinda your relative valuation versus your closest peer, there's a discount there. I think if we go back over the past few years, there's been times you traded in parity, times at a premium. What do you attribute that discount to today?
No, no question that it's tough for our management team to post the kind of growth we're posting and to see a bit of a discount. I think that over a 2-year period of time, the size of the acquisitions, both our entry into marina with Safe Harbor and the acquisition of Park Holidays in the U.K., have yet to be fully digested and fully understood. We are meeting with all stakeholders, understanding what the modeling challenges are, and working enormously hard with an effort in 2003, and then sharing feedback across the table to simplify that modeling. A lot of that has to do with shrinking, if you will, the size of our SDNE lower-margin business and moving more and more over to the rental side.
We've owned Safe Harbor, as I said, for two years at this point, and have had a property tour, have successfully integrated the financial reporting of a private company to a public company. On the U.K. side, we've done one property tour. We've only owned it, eight or nine months in total right now. I think April will be the first anniversary. I think there's a little bit of a continued show me the concept. What we see in Park Holidays UK is opportunity to expand our manufactured housing business, similar to our snowbirds, in Florida, Arizona, and elsewhere, where it's second homeownership. The snowbirds come down for the winter season to be warm. In the U.K., it's a bit opposite, although they tell me that the sun doesn't necessarily shine in the summertime.
These are owners who have a primary residence and must have a primary residence in order to qualify for a second vacation home in Park Holidays. They spend their summers there, their vacation season when the kids are out of school. I think that, as we look to integrate that platform, just as we did in 2016 with Carefree as we expanded into the RV business. It takes a little bit of evidence on the type of growth that we see and that we can produce, and working with the stakeholders to help them understand it. We had a property tour last year. We expect to have a property tour in the U.K. this year.
I think as people are starting to adjust to marinas and see the value proposition, we will start to see that value proposition with Park Holidays and begin to close that gap. There's nothing like reporting solid earnings in each of those pieces of business that will overcome, I think, that discount that exists today.
Yeah. I guess just on the G&A point, right? Purchasing these two companies, G&A has grown pretty considerably over the past few years as part of that. When should we expect to start to see actual G&A savings versus just growth or in line with kind of growth of revenue?
Sure. Outside of annualizing the corporate costs associated with our U.K. platform this year, we're seeing very muted growth here for our MHRV and Marina platform. They're using a lot of baseball analogies as far as integration points and shared services and things of that nature for our business, for our integration of the Marina business, would say the, you know, the pitcher has made its way once through the lineup, but is still in the game. There are continued opportunities from an integration perspective with our Marina platform here in the U.S., and certainly getting through SOX compliance, accounting, and finance integration with our U.K. platform. We are looking at additional integration points with them as well.
This is after two years of recognizing large corporate cost growth, given the integration of the two platforms. You are starting to see that leverageability for us on the corporate cost side.
Maybe with regard to the same-store expenses, you know, a few investors brought up that, you know, that sort of caught them off guard, sort of the total level of same-store expense, but also just the insurance, which was a big piece of that. Two questions there. You said that you can continue to negotiate, I guess, the contract throughout the year. I'd love to understand how that works and, you know, whether there could be some savings at some point. Second, you know, is there anything else this year that you think could provide meaningful sort of volatility, whether it's on power costs? Obviously we saw with ELS, you know, in the third quarter last year, they got some, you know, surprising news in Florida on utility rates. Just other things that we can think about this year that might create some volatility on expenses.
I'll start with the first and on the volatility side, either one of it stands. There is nothing that we have insight to at this time, volatility-wise. On the insurance piece, one thing that we wanna make sure that everyone understands is that insurance and for Sun had been growing anywhere from 17%-15% year-over-year for the last number of years. After Hurricane Ian, we had three communities that were totally impacted by it, fully covered for building them back up and full business interruption for a five-year period of time after we get our certificate of occupancy.
We carry significant levels of insurance to really make certain that we can deliver the kind of growth that we deliver year after year, and it's not interrupted by weather events. That being said, we did share with the market that our expectation was that interest, insurance rates were going to be significantly higher this year. We have a November renewal. We probably expected them in the 30%-40% range, and they first presented them to us in the 100% increase range. That caused us to head to the U.K . To spend time at Lloyd's, to hire a third-party broker to sit down and meet with the insurers one by one. We had a 3-year extension agreement to keep our insurance three months through January to complete our insurance renewal.
We did get the advantage of a reduced, same insurance for those three months. The fact of the matter is we completed the deal at the end of January and signed up. Some of the constructive criticism was that we wish we would've had given a heads up on the magnitude of an 80% increase year-over-year on insurance. The fact of the matter was, we were sitting 18, 20 days away from our earnings announcement, completing our budget, completing guidance, completing our year-end work. We thought it would be confusing to the market to step in and not be able to address a lot of questions, and thought better that we should wait a couple weeks to provide the update and information and guidance.
There was no intention of not releasing that in a timely method. That being said, we did negotiate something that's unusual in our insurance, and that is a six-month window after which we can pay a very small fee to readjust our insurance. At this time, we have two outside consultants and our internal team looking at every aspect of our insurance. Taking a look at the risk pieces that we take. Do we wanna change our deductibles? We have a captive. Do we wanna push more risk over to the captive? There's reinsurance opportunities. We're kinda turning over every rock, that could lead to the second half, seeing some savings on insurance, and a better market by the insurers could lead to it as well.
Where we really will see it, certainly in 2024 in two ways, we do expect to have some normalization. I'm dating myself again. 1992, I lived through Hurricane Andrew, southern Florida. Homestead was just devastated by Andrew. We saw a similar spike in insurance, and it did normalize in a 12-18-month period of time. We would expect some normalization, and we would expect to be able to really carefully examine our existing insurance risk profile. You go ahead on insurance.
Just real quick, I guess we're running out of time here. A lot of questions that are coming through. You just made a comment on the call, I just wanna... I think it's gonna be an easy answer. You said, given sort of the higher insurance and other costs, you were looking at Florida more carefully and strategically. I just wanna understand, does that mean that you'd sort of consider parting with part of that portfolio, just given the expenses are growing too quickly because of insurance? I just wanna make sure I understood it.
For clarification purposes, we're not considering cutting off a limb. But where Florida, because of the cap rates and the fact that it's in the top three growing states in the country still, the demand is there, and we wanna be by the demand, where we never considered a disposition of a Florida property in general in our asset management and thought process this year, we've kinda opened up Florida. There may be onesies or twosies where a Florida property doesn't meet the growth that we're looking for in a property. Maybe there's some functional obsolescence or something like that. Now all properties are available to be thought through. We did about $40- 50 million of dispositions, I think, last year in 2022. We're usually somewhere in that range.
You know, we could be carefully looking at some more opportunity and thinking about redeploying the capital, paying down variable rate debt or putting it in other areas of the company where we can get higher growth opportunity than that. I didn't mean to indicate anything more than onesies and twosies.
Got it. Thanks. We can go to rapid-fire questions. I'm gonna add one, just 'cause we've been asking in each session, your top ESG priority this year.
That'd be interesting to note, I would say on at least four of our meetings over the last two days, the first question was about ESG, which I share with everybody as it's on everybody's mind. For Sun, our number one priority would be to enhance our GHG inventory as we've committed and are committed to achieving carbon neutrality. The first step to that is kind of taking that inventory, and we're really hard at work at it right now. Probably a close second would be continuing to attract and retain top talent. In doing so, the benefits over a long period of time of transferring a knowledge base and not having same -store growth for MH and RV next year, 6%.
more or fewer public companies a year from now?
Same.
Best real estate decision today.
Best real estate decision today? Hold on and watch the properties grow.
Thank you so much.