Greeting. Thank you for joining us today for Sun Communities Third quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will begin after the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now like to turn the conference over to your host, Gary Shiffman. Chairman and Chief Executive Officer. Thank you. You may begin.

Thank you, operator. Good morning. And thank you for joining us today as we discuss our third quarter results and provide an update on the continuing impact of COVID-19. We hope that you and your families are staying healthy and managing through this challenging time. We're now in our 7th month of navigating the pandemic, and we are pleased to share that our performance continues to exceed our expectations. Our commitment to the safety of our residents, guests, and team members remains our top priority, and we are balancing this responsibility with our pledge to deliver Sun's signature service throughout our communities and resorts. In addition to the solid performance delivered in our manufactured housing and RV portfolios, we are excited to further expand and enhance our platform with the pending acquisition of Safe Harbor Marinas. Safe Harbor brings a high-quality rental revenue stream, adds diversity in terms of geography and customer base, and is expected to further enhance Sun's earnings growth potential over the long term. We are pleased with our results for the third quarter as our RV portfolio continued to build reservation momentum on a week-over-week basis and manufactured housing continued to see increased demand given the need for affordable housing. We outperformed initial expectations discussed during our second quarter earnings call in July, primarily due to the strong performance of our transient RV business and related ancillary income generated at our resorts. Our third quarter forecast guided to a net reduction due to the impact from the virus of up to $15 million from our original budget. As the quarter progressed, we continued to perform better than forecast expectations and ultimately outperformed our forecast by approximately $20 million. RVing [ph] proved to be a preferred method of vacationing across the country, due in large part to…

Thank you, Gary. Our results in the third quarter speak to the resilience of our platform as we outperformed our forecasted expectations across all of our revenue streams. From a total portfolio perspective, we gained 776 revenue-producing sites, a 1.3% increase boosting total occupancy to 97.2%, up 50 basis points from last year. This now brings our year-to-date revenue-producing site gains to approximately 1,930 sites putting us within striking distance of achieving our original RPS gain budget for 2020. The demand for our communities and resorts is stronger than ever. Manufactured housing revenue producing site gains totaled 1,400 sites, or 72% of total site gains year-to-date. 910 of these gains were in manufactured housing expansion communities. The balance of the RPS gains, or 530 sites, came from conversions of transient RV sites to annual leases. Our same community portfolio NOI for the third quarter rose 5.5%, resulting from a 5.4% increase in revenues and a 5.2% increase in operating expenses, which included $1.1 million of PPE-related expenses. Adjusting for our PPE expense, same community NOI growth would have been 6.2%. Our weighted average rental rate increase was 3.6% for the portfolio with manufactured housing at 3.2% and annual RV at 5.5%. Same community manufactured housing revenues increased by 5.4%, driven by the discussed 3.2% rental rate increase and occupancy gains over the last 12 months. Same community annual RV revenues increased by 3.6% and transient RV revenues rose by 5%. On the expense side, while we no longer have team members on furlough, we did have payroll savings due to the delayed hiring for seasonal positions. Our rental program continues to perform well. In the quarter we had a 9% increase in applications to rent the home from Sun and our rental home renewal rate was 67%. Consistent with renewal…

Thank you, John. I will be reviewing our financial results followed by a discussion of our balance sheet, our capital markets activities and our expectations for the fourth quarter. For the quarter ended September 30, 2020, we reported $1.60 per share in core funds from operations, as compared to $1.46 last year. During the third quarter, we acquired seven properties for approximately $205 million. The acquisitions are comprised of two manufactured home communities with approximately 1200 sites and 5 RV resorts with approximately 1300 sites and just over 100 sites available for expansion. The properties are located in California, Florida, Michigan and Texas. As previously communicated, on September 29, we announced the acquisition of Safe Harbor Marinas for $2.1 billion, including the assumption of approximately $800 million of unsecured debt. We intend to run Safe Harbor as a wholly-owned subsidiary of Sun, retaining the existing management team and its infrastructure. The acquisition is expected to close on October 30. To support the Safe Harbor investment and maintain a flexible balance sheet, on September 30th, we launched an equity offering for 5.6 million shares. Due to strong demand, the offering was subsequently upsize to 9.2 million shares, including the greenshoe, which allowed us to raise approximately $1.3 billion. As of the end of the third quarter, we had $102.4 million of unrestricted cash on hand and $3.3 billion in debt outstanding with a weighted average interest rate of 3.86% and a weighted average maturity of 11.4 years. Our net debt to trailing 12 month recurring EBITDA ratio at September 30 was 5 times. The pandemic and its financial and operational implications continue to be a fluid situation. However, with that said, and with the expectation that current operational conditions continue, we are providing a forecast range for fourth quarter core FFO per share. Based on our current estimates, we anticipate core FFO for the fourth quarter to be between $1.08 and $1.12 per share. When added to our actual results for the first three quarters, it implies the core FFO per share range of $5.02 to $5.06 for 2020. This forecast range includes, but is not limited to the latest revenue expectations for our transient RV portfolio, the estimated two month contribution from Safe Harbor and the impact of our equity raises and other financing activities. It does not include any prospective acquisitions or capital markets activities. Thank you for joining us today. This concludes our prepared remarks. We would like to open the call now for questions. Operator?

Thank you. [Operator Instructions] Our first question will be with Nick Joseph with Citigroup. Please proceed.

Thanks. And appreciate you providing fourth quarter guidance. So you'll have the two months of the Safe Harbor that will hit the fourth quarter. And I think previously you talked about a 6.7% year one cap rate. I'm wondering if you can walk through the seasonality of that, particularly for these winter months, November, December, and into the beginning of the year, and how that 6.7% plays out over the four quarters.

Sure, Nick. So, yeah, obviously, we're highly active in the pursuit of industry-leading results. So we realized there are a lot of moving parts to creating FFO estimates between COVID impact pluses and minuses, contributions from acquisition, share count changes from equity raises, seasonality, just to name a few of the items going into that high-speed blender. For the Safe Harbor portfolio, there is seasonality in it. So based on our underwritten EBITDA, the fourth quarter typically contributes about 16% to 18% of full-year EBITDA rather than a pro rata 25%. November and December for the month that will be in our portfolio in 2020, those months contribute 7% to 8% of EBITDA. For full year, since Safe Harbor is just in the process of creating their 2021 budget, as are we, I'll provide some quarterly seasonality based on our underwriting. So their seasonality is similar to our MH and RV portfolio, but it's even more heavily weighted to Q3 and Q2. So, seasonality is generally in Q1 15% to 17% of EBITDA, Q2 30% to 32%, Q3 35% to 37%, and Q4 is 16% to 18%. And so we're busy putting together 2021 information, and we look forward to providing some additional information on that seasonality when we provide our 2021 guidance.

Thank you. That's very helpful. And then just on the transient RV, given the travel restrictions with Canada, how big of a risk do you see that and what's the ability right now do you think to backfill with any sort of domestic demand?

Hey, Nick, it's John. Good morning. Well, I think the first obvious thing is they all want to come down and get out of the cold. Okay, there's no question. And I think that a lot of people are focused on whether or not the border will open, but I think it's important to break it out into two parts. First really is the transient business and looking back on our seasonality on that. Canadian guests only represent about 5% of our yearly transient budget, and so when you look at like Q4, that represents less than 1% of that. But with snowboard season coming, as you might expect, we've been working on executing on plans and campaigns for months to help secure any potential softness that may come in demand, inclusive of having elevated campaign segmentation targeted more to U.S. guests. At this point in time, I can tell you I'm very comfortable with the proactiveness the team has had and the strategy we've employed over the last four months to offset any potential Canadian business decline domestically. With respect to annuals, which is the other component of that, I think, really, their homes are in our communities, and like I said, they want to come down to their winter homes. We've spoken with many of them. They still plan to come down, and in fact, some even might come sooner to enjoy the winter warmth. And I think it's important to note also that our annual guests are all under lease contracts for their homes located in our communities, and we have developed and implemented a number of strategies to help support those folks that may not be able to come down at least as early as they want. We could see some shifts where maybe some of those annuals might come down. Maybe they can't come down in December or maybe they can't come down in January, but maybe they come down in February, March, April, and stay a little longer as well. So all in all, I feel very confident with what we're doing from a marketing and strategic perspective to recapture any potential offset we might have.

Thank you.

Yeah.

Our next question is from John Kim with BMO Capital Markets. Please proceed.

Thank you. Good morning. You had a very strong growth in third quarter. Your fourth quarter guidance is basically flat year over year. And, John, you mentioned you have high-single digit growth expectations in RVs for the fourth quarter. So I'm wondering why the fourth quarter guidance was relatively modest.

I think it's primarily due to the expectations of the Safe Harbor contribution. As I mentioned a little bit earlier, when I look at the rest of the portfolio exempting Safe Harbor, between I think the partial year contribution from our acquisitions along with the expected transient RV and vacation rental and ancillary contributions that will be very strong, along with higher even broker commissions. Those items are basically offsetting any sort of negative COVID impact that we might have to manufactured housing rents, based on delayed or lowered rent increases, annual RV impacts or even our home sales impacts.

Okay. I mean, third quarter was up almost 10% year over year. So an ex the core business, I would assume a lot of that would carry over into the fourth quarter. So is it really the ancillary revenue that's going to come down or I can't imagine Safe Harbor alone is going to bring down that growth for the remainder of the year.

There's not an anticipation that ancillary will be a negative to the fourth quarter.

Okay.

I think Karen covered in her earlier remarks, there are a lot of pieces going into fourth quarter and beyond post Safe Harbor. So we do look forward to closing the transaction at the end of the month and being able to share guidance. But sharing the seasonality I hope will be very helpful as you build your models. But the sensitivity of fourth quarter is absolutely lowest in the RV transient as well. So it represents about 15%. So it's not going to be as strong as it was in third quarter.

And just overall, Q4 is lower for the core portfolio just based on our own internal seasonality and the way transient business impacts that.

Back in September, you gave the bookings indication of forward bookings up 20% in transient RV. I was wondering if you had that same figure for the next couple months.

Yeah, I mean, October is solidly up year over year. And like we mentioned in the prepared remarks, we do expect the highest single-digit growth for Q4. That's about the best outlook I can give you for the fourth quarter at this point in time, John. You know, but I would say that looking out beyond that, again, that's something that we really need to include when we release guidance here in the fourth quarter.

Okay. I was wondering if you could quantify your Canadian customers as your percentage of RV revenue, either for the year or particularly the fourth quarter and first quarter, typically.

Yeah. Annual represents about -- Canadians represent about 7.6% of annual revenue and transient is 5.1% from Canada.

Got it. Okay. Thank you.

Yeah.

Our next question is from Joshua Dennerlein with Bank of America. Please proceed.

Yeah. Hey, guys. I'm curious on what you expect to do maybe on a forward basis as far as marina acquisitions. I think it looks like the Safe Harbor has done about 10 marina acquisitions a year over the last two years. Just curious what your early thoughts are there.

I think from a capital allocation perspective, on the marina side, I think initial expectations are in the $200 million to $300 million range. And just looking forward for the company overall, I think we're going to continue to deploy capital in the MH and RV space, although it's getting tougher. Our long-term relationships are tax-advantageous structures and our trusted name recognition really continues to bear fruit for acquisition opportunities, evidenced by over $300 million in acquisitions so far this year. And we have a very robust pipeline. And outside of the large portfolio transactions, we've been able to typically deploy between $250 million and $300 million in acquisitions per year. And besides that, we'll continue to deploy long-term growth capital on expansions and developments.

Thanks, Karen. Maybe one follow up. When you guys are underwriting or maybe when you're thinking about your capital budget for marinas, what kind of CapEx load are you underwriting to? Is it like 5% of NOI or, I don't know, just throwing out a number there just to see how do you guys think about it and how might that compare to MH or RV?

Yeah, it's very, very similar. I think that when we sat down and did our underwriting, and as Baxter shared on some of our early calls when we announced the deal. Interestingly enough, when you divide their entire CapEx on a per slip [ph] basis, it was approximately $250 per site. Karen's correcting me.

No, it was $250. It was $250. And it's interesting that ours is between $250 and $300 a site, 300 sites, so pretty close to what we experienced.

So very similar to our industry. And I think it just, again, underpins how much similarity there are. Certainly there are differences between the marinas, the customers, the business. But the core fundamentals, as we've talked about, supply, demand, all the things that MH and RV are known for are similar. And then working through the CapEx, it was a pleasant surprise for us to see it very similar to our existing core business.

Great. Thanks, Gary. Thanks, Karen.

Our next question is from John Pawlowski with Green Street Advisors. Please proceed.

Great. Good morning. Thanks for the time. John, as you've gone and reinstated the rental increases on the MH side, could you give us a sense for the average rate you're sending out today? And how that may differ around that average by markets to come up what's the low and what's the high looking like?

Yeah. I think we might have shared this before. But we had temporarily halted our rent increases in the spring, I think you know. And in response to the unprecedented impact of COVID, when we reinstated those increases, we elected to do it at a lower rate to both aid and supporting our loyal residents and to better secure occupancy and long-term success of the business for all Sun stakeholders. So I think right now we're right about we're averaging 3.2%, and we would expect that to finish out 2020 at about 3%, John.

Okay. Within the portfolio, what's the weakest market? Are rental rates falling anywhere?

No. There's nothing that really stands out, John? No, because of the demand that we've got throughout the country, we've applied it on a pretty consistent basis throughout the portfolio.

Okay, thanks. And last one for me I guess for anybody. Trying to wrap my head around the environmental risk for some of the marinas, maybe namely the lake-focused marinas and less about the economy but more floods, droughts, and the like. Historically, have there been assets you've acquired in recent years where just the boating season is largely gone because of environmental factors and revenue plummets? Just how do you think through the volatility associated with the environmental impacts on some of the marinas?

It's Gary, John. And it's a good question and a question that we really spend time on and diligence on during our underwriting of both Safe Harbor and the other marina opportunities that we've looked at over the last four years or so. And I think that one of the things that attracted us to Safe Harbor was their outlook on what they are inclined to want to bring into their platform and what they are inclined not to want to or exclude from their acquisition horizons. And we got comfortable with the fact that the current portfolio and the acquisition objectives take into account as best they can, both historical indications of what have happened, mostly title wise, as well as droughts. And they've focused on the big water opportunities and the coastal opportunities. Certainly, there is future climate risk throughout the marina business and all assets, however you look at those risks with regard to hurricanes, tornadoes, storms, floods, title issues. But the existing portfolio we feel has really been scrutinized and hand selected well. So to the best of our underwriting ability, we think it's the best the best marinas to own, insulated as much as possible from the environmental issues.

Okay. In recent years, how many assets, if any, have lost considerable amount of just the demand in a year due to environmental issue? Have there been any?

There are none that I'm aware of. That being said, there have been adjustments made to docks and things like that, fixed docks are now floating docks. And that capital has been invested in areas where they've seen a benefit to putting the floating docks in. And as an industry common, I think that's the way of the future, if you will, where the fixed moorings become less and less frequent than the floating moorings, which interestingly enough, much of it is done with floating concrete. A lot of air is injected into that concrete. And I think that's the forward direction of most marinas.

Okay. Thanks for the time.

Our next question is from Samir Khanal with Evercore ISI. Please proceed.

Yeah. Good morning, everyone. Hey, Gary, just curious if you can give some color around the ancillary revenue side. It was very strong in the quarter. What's sort of boosting that number? Is it certainly younger age cohort and how should we think about that over the next 12 months considering that the Safe Harbor as also I think it's about a 10% component to ancillary revenue as well.

Yeah. Samir, this is John. Hey, hey, I think it's primarily as a result of the reservation activity that we've had. We've just simply had more people come into our resorts which drives that ancillary business at the same time.

Inclusive of vacation rental.

Yeah, inclusive of…

The cottage and vacation rental.

Yeah.

Okay. And you think it's sustainable as we think about sort of modeling '21 in numbers at this point with kind of the growth you're seeing?

Yeah.

Okay. That's it for me. Thanks so much.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Well, we thank you again for joining us today, and we believe Sun has demonstrated its durability and resiliency during these challenging times. We look forward to sharing additional information with you and guidance on our fourth quarter call. Thank you. Be safe.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a pleasant day.