Thanks, Nick. Eric and Nick. Hopefully, everyone can hear me okay. Okay. Good afternoon, and thank you for joining us today at the Citi conference. We all really look forward to answering your questions about Sun Communities. Last week, in addition to providing our 2024 results and 2025 outlook, we were able to share the announcement of the sale of the Safe Harbor Marinas platform to Blackstone Infrastructure. This is a significant milestone for the repositioning of the company, offering simplification, and really helps our positioning overall of the business and balance sheet enhancement, focusing on a pure-play MHRV platform that we've always been known for. We are really excited about the transaction and really the positive inflection point that it brings about as we think about 2025 and the future of the company.
We're able to refocus on our core businesses, our best-in-class manufactured housing and RV communities, supported by a really strong balance sheet. We're very confident in the favorable dynamics and durable income streams of our core businesses and really are encouraged on the outlook, much of which we're glad to share with you today. Furthermore, we continue to implement our operating initiatives, which focus on maximizing revenue for the top-line growth and driving bottom-line operational results. We do have a clear strategic direction as we move forward, focused on realizing the potential earnings of our portfolio and our platform. At the same time, we announced last year that my intention is to retire at the end of 2025 or by the end of 2025, and the board has appointed a search committee with ongoing efforts to find a CEO replacement.
I look forward to sharing those updates with everyone as time progresses and at the appropriate time. We are pleased to have the opportunity to be in front of you today. Look forward to answering your questions. I'm joined by John McLaren, who just rejoined the company as President. Off to my far right, Fernando Castro-Caratini, our Chief Financial Officer, and Aaron Weiss on my left, Executive Vice President of Business Development. I'll turn it back over to you, Nick and Eric, to open up the questions.
Great. Maybe we could just start with Safe Harbor. Could you just talk about internally how long you've been discussing the sale of the Marina portfolio? I mean, it did surprise me, to be honest. I was thinking more likely it was going to be the U.K. portfolio. But maybe just talk about when you started this process, what you talked about internally in terms of getting it done, and then to what extent other assets like the U.K. portfolio, you'd be willing to sell those, or if you're very focused on taking the remainder and running it as a public company?
Starting with Safe Harbor, as I indicated, we are very excited about the opportunity that it brings to this company for all the reasons that I shared in my opening remarks and ones that we'll go into during the Q&A. We really evaluated the portfolio and the business lines and determined that we would retain advisors, both on the financial and banking side and legal side, to take a look at the market and ran a very thoughtful approach, which eventually wound up in us executing this transaction with Blackstone Infrastructure. It is an all-cash offer. Safe Harbor had contributed very nicely to our growth over the four-year period of time.
That, coupled with a $5.65 billion all-cash offer that was taken to the board and fully reviewed, and the board was part of the whole process, was significant enough to transact and really leaves us with a feeling, and I hope most of those that we're talking about concur, that it's been an excellent investment and this is a really good outcome going forward. So that was the process that we ran that took us here. As far as other things that we would look at, I would suggest that we've been very direct and transparent in our strategic objectives to simplify the business, get back to a pure-play company, MH and RV.
And over this past year, we've eliminated or thoughtfully worked through JVs that we sold out of, as well as a target of $200 million-$300 million of dispositions of non-core assets that didn't meet the strategic goals. And from that $200 million-$300 million, through the first week of January, had reached just under $500 million worth of non-core dispositions. So we're pleased that we followed that as part of our strategy and additionally used net proceeds to pay down debt, along with the fact that we shared we were reducing CapEx investment in construction development and reduced that by about 50% and used that free cash flow also to reduce pay down debt. And with regard to how we think about the rest of our business portfolio, we're very pleased to have best-in-class assets, and we will continue to evaluate any future opportunities that we do have.
That being said, I think we've clearly demonstrated the focus we've had on our strategic initiatives.
And then just there was a follow-up question from an investor. It was basically asking whether the sale was more driven by the good pricing or just a change in anything fundamental from when you first bought the business.
We're really happy with the execution. It's been four years. We accelerated the plan. We doubled the size of the business. In two years, it did incredibly well for us. It was a proactive decision by the board, and ultimately, we're really happy and believe it's a win-win for ourselves and Blackstone Infrastructure.
Yeah. And then we talked about this a little bit last week, but for the $5.5 billion in sort of after-transaction proceeds, I just wanted to make sure that for everybody, there's nothing else that's in that sort of transfer taxes, change of control. There's anything that would significantly reduce that sort of $5.5 billion in proceeds, or if that's sort of the total available pool that we're looking at that could either be returned to shareholders or you're going to do something with it like pay down debt or investment, which we can get to in a second. But I just wanted to confirm that that $5.5 billion was sort of the net after-transaction. There's not something else that we're missing, like transfer taxes or other things.
Those are the net proceeds pre-tax that we've talked about, the $5.5 billion. We've talked about a book gain, which we've announced publicly. We're going to look to minimize any other tax or other implications as we finalize the transaction between now and closing and ultimately throughout 2025.
Okay, and then I know you can't say what exactly you're going to do with the proceeds. It's going to be a thoughtful process based on what the Capital Allocation Committee recommends. I guess the question is, what is the framework from which the Capital Allocation Committee is going to make this judgment? You've done so much work over the last year in terms of improving the growth profile of the company, paying off debt accretively, selling assets, paying off debt at higher rates. I think the fear among investors is that you just did this great sale, call it a 4.7-4.8 FFO yield, and you're going to be paying off debt at, call it, 4% because that's what you have in place today.
So, maybe just talk about the framework from which the Capital Allocation Committee is going to reinvest these proceeds and if you think you can do it accretively.
So a lot to unpack there, for sure. I think that I would share with everybody we have three priorities: to close the deal, close the deal, and close the deal. That's what we're most focused on. At the same time, we want to be able to share with all stakeholders use of proceeds. The board, the Capital Allocation Committee management is very, very focused on use of proceeds. We have various options and are studying them all. Obviously, first course of action will be to pay down debt. We look to minimize taxes. We look to the possibility of distributions, 1031 exchanges. There's a whole host of possibilities. And we'll be working very, very hard between now and closing to be able to share more information on those use of proceeds.
So it's something that we want to be very thoughtful on, and when we share that information with all the shareholders and the stakeholders, that we can actually act upon those. So there's a lot of work that's got to take place now over the next period of time while we close.
Maybe a stupid follow-up to that, but I have to ask it. I mean, I guess the question is, can you do it? Do you think you can do it accretively? Really, is the sort of simple? Because everyone's trying to figure out what your earnings are going to look like, and that's a very hard to put a multiple on it. And so to do that, you kind of have to understand generally where you're going to be investing, and if not, if you're going to be returning proceeds, because you can't do it accretively.
That's a great question. We're certainly focused on what we call strategic value accretion. I think the market reaction to the announcement would suggest we're on a path to doing that. Our 2025 guidance highlighted our core business outlook. We do have a pending large all-cash transaction. So we provided some guidance on a historical basis from which people can make their forward-looking assumptions. As Gary said earlier, over the last 18 months, I think we've done a pretty good job restructuring the balance sheet over $500 million of asset sales in the U.S., RV, and Canada, a couple in the U.K. So we feel really comfortable with the trajectory we're going with. We want to be sure whatever we go out to the market with, ultimately, we can deliver on.
We believe as a starting point, there's lots of opportunities from a matrix perspective in terms of how to deliver that. Gary highlighted debt pay down. Certainly, there's other options from a capital perspective, reinvesting in our core businesses, growth opportunities, etc. But we are very excited about the runway this does provide the company through the rest of this year and beyond.
You said close the deal three x. What is left on either the due diligence side? How much hard money's down? Is it just timing, or are there still steps to clear?
It's a lot of work to get done from a net proceeds perspective to make sure we can deliver those outcomes in what is a tight timeline. So it's the right question. I think it all relates to what we're talking about here. There's closing, but ultimately, there's a lot of pre-closing needs we need to finalize to make sure we can maximize that value outlook. There is nothing that you're not aware of. It's a very tight-to-close timeline, which we expect in the second quarter. I can suggest we'll look to close as soon as we can. We do have some pending closures, which, again, we expect to be about 10% maximum of the total proceeds due to some U.S. Army Corps of Engineers and other governmental approvals. But otherwise, it's full steam ahead to closing.
But there is a lot of work to be done given the size, scale, and breadth of the transaction. Ultimately, we do also want to be prepared to hit the ground running the first day that we close with a good strategy on use of proceeds and guiding the research community and our investors as to what we're doing with the money and what the runway for growth looks like.
I've gotten a lot of questions. Sorry, go ahead.
I mean, I think we're going to work towards closing. When we get through the net proceeds and post-closing, we'll be happy to provide a lot more detail on cash-on-cash returns and ultimate IRRs. The business performed in line and/or exceeded expectations depending on the metrics you're looking at. We're incredibly pleased with the outcome.
I've gotten a lot of questions on, in your press release, you say that I think you're going to be at 2.5-3 x net debt to EBITDA. But I think the confusion stems from if you just kind of take that sort of $5.5 billion in proceeds to pay off debt, you'd actually be lower than 2 x. So it sort of signifies that maybe you're returning some capital. I guess my ultimate question is, why was that sort of 2.5-3 x included in the press release? Should that be a guide for where leverage will ultimately end up, or are you just trying to tell people that there's going to be a little bit of tax liability? Just curious why the 2.5-3 x included in the press release.
We wanted to guide people to the appropriate at-closing expected leverage with our ability to provide further guidance that maximizes the long-term strategic growth of what we can create over time. I think we note that we can use it for debt pay down. It's a pre-tax number. So certainly, there's an expectation around tax as well as potential distribution. So we're certainly going to avail ourselves of all those alternatives with the board's guidance.
And then in terms of the debt structure, I guess you have $1.4 billion on the line of credit. You have $3 billion in mortgage debt. I think it's about four. But I guess how much of that sort of $3 billion mortgage debt is, call it, higher coupon debt that you could pay off? I'm just trying to think through the different pieces of your debt stack that would make sense to be paid off if you're able to.
Our average weighted average cost of debt on the secured side is about 4%. We have disclosure as it relates to the weighted average rates through 2029 on secured debt in our supplemental. That being said, we have about $650 million. That is, call it, above 4.5% weighted average rate.
$650 million, that's 4.5 average weight of the.
Of the asset.
Okay. Gotcha.
So there's accretion as we think about the pay down. There's also the matrix of secured versus unsecured, maximizing the implications on our debt holders and including the rating agencies. So that is the matrix. There's certainly an earnings accretion piece. There's a flexibility piece. And then our long-term debt cost of capital, which we hope to significantly improve post-transaction.
Got it. And then I think in the press release, you also mentioned some investment opportunities. I think you also talked about some top-level revenue growth opportunities this year. Can you just expand on what those would be? Just trying to understand. When you say top-level revenue growth opportunities, what is that referring to?
Yeah. So great question. I mean, really, what that's referring to is everything I've been talking about in terms of our execution era, which is like many companies, we have a sales funnel, and it starts from prospects to applications to approvals to closings. And the opportunity is for us to execute at a different level within that funnel. And so one of the things that we implemented very quickly towards that goal was more transparency, more cadence in the performance reporting around that across all the different sorts of transactions that we do within the operations world. And I'm really pleased, as I said on the call, of the early returns and what I've seen that's happened over the course of the end of Q4 and the beginning of 2025 and how those conversion metrics are improving within the company.
So what that really means is that leads to more top-line business that we are able to do and fulfill and close while at the same time spending less money on marketing to put more traffic into that funnel. So it has an impact on both sides of it. So that's just one of the opportunities. As you might imagine, when we're looking through the whole portfolio I've talked about on the expense side, moving more of our spend towards the already established procurement platform that we have that aggregates big portions of our spend. We have expanded that. We've increased adoption. We've increased standardization in three short months that we've been really focused on this.
We're seeing early returns come in from that in terms of ways that we can continue to do what we've always done, which is to find ways internally to outperform in the areas where we can.
Got it. And John, maybe I guess while we're talking through it, can you remind us again sort of when you started, what sort of changed specifically what you implemented versus what's been there before and how much impact it's already had thus far and sort of what you expect to be on the come later on?
Yeah. Actually, I don't think there's enough minutes left on the clock to talk about all the things that are going on and the momentum that we have going here at Sun. It's pretty exciting. I do want to remind everybody that we're in the affordable housing business, is the bottom line, and I've always described it as you have a robust economy, you have a challenging economy. Sun sits right here, and that band moves around us, so we've always had great demand for our product. The fundamentals are solid. We have the highest quality communities. We have a great team. We have excellent demand, like I said. And our focus, Eric, has been on executing on those fundamentals that already exist.
One of the benefits that I have coming in with the introduction of a new ERP platform that was introduced into Sun over the course of 2024 is data like I've never had before, and the utilization of that data is incredible. This is a new thing. This is incredibly impactful for how operations operates in terms of telling our folks where to be, why to be there, when to be there, all those sorts of things, so it allows us to work smarter based on the myriad of data that we have today. And it also allows us to do the things that when you talk about what we specifically implemented, there isn't a single performance report that goes out at Sun at whatever cadence it might be, whatever metric it might be that isn't ranked, doesn't have a name. They all have names.
They see how they're looking relative to everybody else. And so we've sort of created, refined, grown that competitive spirit that's always existed at Sun and the winning mindset. And it's about building that continually, as it always has been, to permeate within our culture, that mindset of winning. And so it's about talking about the things that I've always talked about, which is the one mores. What's the value of, I'll just give you an example, an additional home sale at every property over the course of 12 months? Now, when you're speaking with a community manager, if you were a community manager and I asked you to do one more over the course of 12 months, that doesn't seem like a very hard goal. When you start rolling that up across the entire organization, it can be a big number.
We talk about building our resident sales force, being out there in our communities, speaking with our residents, being really part of them. They are the greatest advocates for the company and the brand and everything that we do. So we are laser-focused on service and performance excellence. And I would say it's just what's taken place, Eric, has been an enhancement of what is already a great culture within the company that will unlock all the potential that we have into the future.
Gotcha, and then I could ask frankly what that translates to in sort of dollars and cents, because that's sort of my job. But at the end of the day, it is very difficult for me to figure out. I think it's difficult for others, so I guess the question is really, if you look at G&A on the reduced basis, so after Marina, basically what you guided for, it's flat about year over year, about flattish. And I do think you talked about some declines, call it, in the sort of $7 million-$10 million range. Is that just some upside that we could see later on, or has that already been included in that run rate? And then on the same-store expense side, it's down a bit, but it is still a little bit higher than your peer ELS.
So maybe talk about whether there's sort of potential upside in the same-store expense as well.
From a G&A perspective, guidance is flat growth at the midpoint on a year-over-year basis, ex-Marina. That is removing the $11 million that John discussed on the call. Without that, G&A would have grown technically just over 5% on a year-over-year basis from an expense perspective in same-store. John realized about $4 million of savings in the fourth quarter, that run rates that will run rate into 2025, and we discussed an additional $3 million-$5 million that is embedded in the 3% guidance at the midpoint for our manufactured housing and RV portfolio.
And I think you said that this is potentially just the - I mean, correct me if I'm wrong - but you said things like, "This is maybe just a start. We're still looking at everything." I mean, help us think through what the opportunity is beyond that then.
I think, Eric, some of the opportunities that I was mentioning earlier, which is what we can do and the work that we're doing in terms of aggregating more of our spend on the procurement side, what we're doing in terms of various contract negotiations that we have for the broader services that take place at the properties, both from a regional and a national perspective, the opportunities that we see in terms of the upside opportunities with more top-line sort of measures, whether it's in the form of rental home renewals, all those sorts of things, incremental sales that we might pick up in areas where we can, and that sort of thing, or improve margins on home sales. Although sales, as everybody knows, home sales is not, really, it's only about a $5 million contribution to FFO in 2025, but every penny counts when it comes down to it.
We're trying to work out those opportunities. I think in the end, my hope is that everything that I'm talking about, you'll see materialize in terms of our results over the course of 2025, where it'll be clearer as to where you're seeing those impacts have a positive effect on our performance.
Got it. And I guess there's been some discussion about Yes! Communities potentially going public. I think maybe recently they've thought about selling some assets, maybe selling the whole portfolio. Could you just talk about whether anything within Yes! Communities would be of interest to you and how you'd go about evaluating whether some of those all-age properties are interesting, what kind of all-age properties you look for, the characteristics that you generally look for in that segment?
We're pretty happy and pretty busy right now with what we're looking to do. So certainly focused on what Sun is doing. I think the company's been incredibly acquisitive over the past 15+ years and will continue to evaluate opportunities subject to their return expectations and whether or not they're core to what we want to do. So I think we like our portfolio mix. We like the 55+. We like the all-age. We like our geographic mix. We have been probably the most active disposer of assets over the last 12 months in the space as we become more thoughtful with what we're looking to do. So I would suggest we have pretty good market insight from the broker community and the owners in the asset class. So to the extent there are accretive strategic opportunities that present themselves, we will certainly review them.
We do have some potential, as Gary mentioned earlier, 1031 options available to us. It does not mean we need to move forward on them, and we're cautious not to set expectations about that pipeline because we do feel incredibly good about our core portfolio that John is overseeing and driving.
Got it. And I think one of the benefits of selling the Marina business is that I think the CapEx profile had been a little bit higher than maybe we expected. You've talked about a step down in CapEx not only last year, which you saw, but also this year. Could you maybe just tell us sort of what you're expecting in terms of recurring and non-recurring CapEx for this year for the retained portfolio, so everything besides Marina?
Sure. So we are last year overall from a CapEx perspective, both recurring and non-recurring. We saw a reduction of nearly 50% from 2023. Ex-Marina, which represented, call it, about 43% of total CapEx spend in the portfolio last year for about 21%-22% of real property NOI for our portfolio. This year, we are underwriting another decrease on a year-over-year basis as it relates to total CapEx for the remaining portfolio, certainly not the 50% into 2024, but in that 10%-12% range.
Got it. And 10%-12% of.
Reduction for the remaining portfolio.
For the remaining portfolio. Gotcha. And presumably, if you were to deleverage now your CapEx, your CapEx is going to be down materially. You should be, I would think, very free cash flow positive. Could you maybe just talk about how you think that sort of enhances the growth rate of the company going forward?
Certainly, I mean, reiterating the comment as it relates to the flow-through on a consolidated portfolio ex-marina, we should see a significant increase to our EBITDA margins, for example, given the sale of the portfolio. We are underwriting significant flow-through now with the consolidated portfolio.
Got it. And then looking at your guidance, if I kind of do an apples-to-apples comparison of what you're expecting for this year versus last year, stripping out the sort of marinas, it looks like you're predicting around 2.5% core FFO growth. And then also, if I look at your fourth quarter, you beat very easily on same-store, but core FFO kind of came in just $0.01 ahead. Can you maybe talk about some of the things that might be kind of lowering core FFO growth for this year? So the brokerage business seems to be one. Taxes seems to be another thing. And sort of whether that you think is going to hamper growth going forward or if this is more of just an event that's going to happen this year type of thing.
Sure. The guidance for the consolidated portfolio ex-Marina outside of any pro forma adjustments to interest expense or, say, interest income potentially as it relates to those line items, that is a good run rate from a projection standpoint into 2026. We are seeing expectations for home sales in the U.S., for example, to decline materially. As John mentioned, we are underwriting at the midpoint around $4 million of contribution. That, again, pulling back and looking at total real property NOI ex-Marina, that's generating, call it, $950 million of NOI. Any incremental improvement of 25, 50 basis points in growth for that portfolio makes up for those decreases as it relates to a year-over-year basis for North America home sales. But the rest of the line items, that is a good basis from which to build your models for 2026 and beyond.
Gotcha. And I think in the beginning, you talked about the CEO search process. I guess, is there anything more that you can sort of share about where you are? And then I guess, even if not, Gary, you're a major shareholder in the company, CEO, and you're the chair of the board. Just sort of what type of CEO would you like to see in the new role?
Certainly, as I said before, there are two chairs, very qualified chairs in Jeff and Tonya and the committee and board's involvement. I'm looking to support attracting the best CEO that we can attract. I think that there will be plenty of opportunity as we look at how we've taken out and strategically reduced complexity into more of a pure play. I'm very, very excited to see and support the candidates as they're presented to me.
Gary, we had a question come in, I think, off of an 8-K in mid-February, but it changed some of the Board Code of Conduct and Business Ethics, but also gave an updated indemnification agreement for a number of the company's executives. And so the specific question is, is there anything specific that caused that to occur now? This is from the February 19th 8-K with some of the board.
I think it's just a bit of traditional language to bring it forward to what market is. Nothing other than that.
but nothing specific that.
No.
Okay.
I think we've already got this one, but it was basically asking, would you sell the U.K. portfolio at the right price?
I think we continue to evaluate our entire company for what's non-strategic, non-core. We have the best management team, the best assets on the ground, and the best thing we can do is support and drive the business until at which time there is something to do if there ultimately is.
Got it. And then I guess maybe Gary, just give the last word to you. I remember talking to you almost 15 years ago when the company was quite different. I think it was trading at that point. I think it was a 20% dividend yield, and a lot's changed with the company over time. Do you think in your conversations with investors over the last two years, certainly it's been pretty volatile, but do you think there's anything that investors are just generally missing about this company that they should think about and focus on as they think about the opportunity for Sun over the next couple of years?
Yeah, I think there has been challenges, no doubt, these last couple of years. As all of you are aware, transient had really grown through COVID, and then it's fallen back to kind of more historical paces. And we've been very, very focused on reducing volatility, converted transient to annuals the last three years at a pace of 2,000 sites a year. So really focused on being able to produce and demonstrate more modeling ability and budgeting capability that we can achieve within the company. And I think inclusive of the strategic initiatives that we've all discussed that have taken place over the 18 months, most of the feedback, if not all of it that we're getting, is very, very positive. And as a team, we really couldn't be more excited on where we're headed right now.
The concept of this pure play, MHRV, best in class, the fact of the matter is the tenure of our residents and our manufactured housing communities has grown to an all-time high this year of 19 years off of something that was 14 years about 10 years ago for a long, long period of time and below that after that, fewer and fewer sites available at a 97%-98% occupancy. So the demand remains there. The supply is virtually limited. And that's the exciting thing about what we're able to share and to be able to simplify the business is a very exciting opportunity for us.
All right. So we have the two rapid-fire questions. Do you want to do it?
Sure. Sure.
Okay. Yeah, I love these. Same-store NOI growth for MH and RV next year overall in 2026 for the sector?
4%-5%.
And then will there be more or fewer of the same number of companies next year?
Same.
Thank you very much.