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

Good morning, and thank you for joining us as we discuss our fourth quarter and full year 2020 results as well as our 2021 guidance. We hope that you and your families are in good health as we continue to navigate the challenges of the pandemic. We are very pleased with the resilience of our portfolio and the commitment and humanity of our team members during this most difficult time. The stable growth we delivered in the environment further demonstrates the strength of manufactured housing and RV resorts through economic cycles. It also underscores our rationale for meaningfully expanding our platform with the acquisition of Safe Harbor Marinas, a business that exhibits similar stability and growth characteristics. For the year, Sun generated core FFO per share growth of 3.5%. Same community NOI growth of 4% added over 2,500 revenue-producing sites and achieved total portfolio occupancy of 97.3%, a 90 basis point improvement over 2019. To drive additional future growth, we acquired almost $3 billion of properties in 2020. Over $600 million of our acquisitions took place in the fourth quarter after the closing of the Safe Harbor transaction. Total acquisitions for the year included 24 manufactured housing communities and RV resorts with over 6,900 sites and 106 marinas with nearly 39,000 wet slips and dry storage spaces. Additionally, post year-end, through the date of this call, we have closed acquisitions totaling over $43 million, including 1 manufactured housing community, 2 RV resorts and 2 marinas. We are actively pursuing opportunities in each of our segments. Our extensive experience, track record and industry relationships have helped continue to facilitate successful MH and RV transactions. On the marina side, since the closing of the Safe Harbor transaction, we have added 7 additional marinas, inclusive of the world-class Rybovich superyacht marinas in West…

Thank you, Gary. Our solid performance for the fourth quarter and full year 2020 demonstrate the resilience of our operations across manufactured housing, RV resorts and marinas. We benefited from heightened demand for our RV resorts in the second half of the year and the steadiness of manufactured housing through all of 2020. Our same community results reflect the stability of the platform as we work through the challenges of the pandemic. For the fourth quarter, same community NOI increased by 2.1%. Excluding direct COVID-19-related expenses of $300,000, our same community NOI growth would have been 2.4%. In the fourth quarter, same community NOI was driven by a 5.7% growth in revenues, reflecting a 3.8% increase in weighted average monthly rent and a 180 basis point occupancy gain. Breaking it down further, manufactured housing revenues grew by 4.8%, annual RV grew by 1.9% and transient RV grew by almost 18%. If it were not for the mandated closures of our resorts in California starting in December as well as the continued Canadian travel restrictions, our fourth quarter transient RV results would have been even stronger. The good news is that travel restrictions were lifted in California at the beginning of February, and we have already begun to welcome our guests to these resorts. Expenses in the fourth quarter were elevated predominantly due to the costs associated with the pandemic, along with higher payroll, supply and repairs and utilities at RV resorts had at extended seasons. For the full year, same community NOI increased 4%. Excluding $2.4 million of direct COVID-related expenses, same community NOI would have increased by 4.4%. This growth reflects a 3.6% revenue increase and a 3% increase in same community expenses. The revenue growth was primarily driven by a 4.5% increase in annual RV revenues and 5.6%…

Thanks, John. For the fourth quarter, Sun reported core FFO per share of $1.16, 5.5% above the prior year and $0.04 ahead of the top end of our guidance range. These results reflect better-than-expected performance from our ground-up developments and recently completed acquisitions, including Safe Harbor Marinas. For the 12 months ended December 31, 2020, core FFO per share was $5.09, up 3.5% from 2019. We are very pleased with our results and our positioning for 2021. During the year, we acquired almost $3 billion of operating properties, including the Safe Harbor Marinas portfolio. Subsequent to year-end, we acquired a manufactured housing community for redevelopment adjacent to an existing community, 2 RV resorts and 2 marinas for a combined $43 million. We had an active year on the capital markets front, raising approximately $1.9 billion in equity to ensure the strength and flexibility of our balance sheet to support our acquisitions and growth initiatives. We ended 2020 with $4.8 billion of debt outstanding at a 3.4% weighted average rate and a weighted average maturity of 9.4 years. We had $83 million of unrestricted cash on hand and a net debt to trailing 12-month recurring EBITDA ratio of 6.9 times. Pro forma leverage, including the estimated full year EBITDA contribution from Safe Harbor and other acquisitions, is in the mid-to-high 5 times EBITDA, which is in line with our long-term leverage target. Our performance in 2020 and the confidence we have in the ability to continue to generate industry-leading results provided the incentive for our Board to raise our 2021 distribution to $3.32 per share, up 5.1% from last year. This is our fifth consecutive annual distribution increase. Turning to guidance. For the year, we expect core FFO to be in the range of $5.79 to $5.95 per share, an increase…

[Operator Instructions]. Our first questions come from the line of Josh Dennerlein with Bank of America.

It's actually [Lou Asscherick] on for Josh today. Congratulations on a great quarter. Just jumping on to the marina side. We thought that Safe Harbor is hosting regattas in Newport this August. Do you envision hosting similar events across the different areas in your marina portfolio over time? Are there any other events that the team is working on that might drive traffic across your marina's portfolio? I know you mentioned a little bit more on the ancillary side for the NOI, but just kind of trying to figure out what else is part of it.

So it's Gary. I think that we're very excited to participate in the first event that you described. And I think it is the beginning of trying to tie a very large membership consisting of close to 50,000 members in the marina right now to the ability to go from Safe Harbor to Safe Harbor Marinas and understand the expectation that one would have in visiting the consistency of how these marinas run and what the services they offer. So I think that this will be the first opportunity to really showcase that. And the Sun staff sitting in this room is as excited as anyone to really participate and really see what the safe harbor management has planned for the future. So with regard to that, we'll be able to share more, with regard to what the future holds in those types of events going forward. So kind of one of the first inaugural step-outs for Sun to participate in this type of safe harbor event. With regard to marina details and disclosures, what we wanted to share with everyone today is that we will be providing enhanced disclosure by business segmentation, and specifically for marinas, with our first quarter earnings release. So in doing so, we'll begin providing separate disclosure on our manufactured housing business line as well as separate disclosure on our RV business line in an effort to really provide insight into each of the 3 business lines. So I think it will be a -- first quarter, we'll have the opportunity to look a little bit more clearly into marinas and the business segmentation as well as helping everyone understand for their review and modeling purposes breaking apart MH and RV as well. So that will be coming first quarter, and we'll be better able to look into the segmentation of each.

Okay. Great. And I apologize I may have missed this, but did you guys discuss the guidance for acquisitions this year? Just trying to think about if we are seeing the same flow from 4Q going forward? Or I don't know, I think you might have mentioned that 4Q is usually a big acquisition quarter. So just trying to figure out?

Yes. You didn't miss it. You didn't miss it. We didn't give it. We typically don't give guidance. We usually have forward acquisitions. We usually reference the previous year or the previous few years. Obviously, new with Safe Harbor Marinas acquisitions. But generally, we look forward to $100 million to $400 million of MH and RV acquisitions based on historical numbers, excluding large portfolios, which basically have already been consolidated. And then separately, we spoke about or I mentioned in my remarks that I can share that the acquisition pipeline really in manufactured housing, RV and marinas as absolutely as full as it's ever been. So we certainly have our work cut out for us. We are seeing increased competition in the MH and RV space. And it might not surprise many of you that we're starting to see increased competition in the marina space. So we will be very, very selective that anything we do acquire will be the highest of quality and the highest of opportunity to provide growth and value creation for our shareholders. And we're excited to work through that pipeline and be able to present exactly what we've accomplished each quarter.

Our next questions come from the line of John Kim with BMO Capital Markets.

A couple of questions. On the Rybovich portfolio, which is the largest acquisition you've done in marina since Safe Harbor. Is this the first superyacht marina that you've -- that you own? Any -- can you compare some of the characteristics as far as margins, retention rates or growth potential in events of superyacht versus your typical marina?

Yes. It's Gary again. I'll defer to first quarter, when we can really look a little bit deeper into segments of the business, but I would share with you that the Rybovich marina in both locations offers services to the world's largest boats. But when you get into it, the margins remain similar, but because of the unique offerings, the occupancy, the service requirements, which specialties draw in vessels and boats that are less sensitive to the cost of staying in the marina and provide all the ancillary revenue lead towards very good returns against the investment on a pretty predictable basis. So as you look out over a long period of time, the consistency of their growth of revenue is very comfortably predictable, so those are the characteristics of it. But within it, it's just high occupancy, high demand. Their slips can accommodate boats in excess of 300 feet. So it is really the world's largest boats and yachts and sail craft. And I can share with you, it's really a list of the who's who in marina yacht ownership as it's one of the few marinas that can culminate that size and scale of boats.

Looking at your guidance this year for marina is at the midpoint of NOI, that's about a 6.6% cap rate. Are you seeing compression on across the board on marinas? Or is it really just the Rybovich portfolio with a lower cap rate acquisition?

Yes. I guess I would describe it that we expected some cap rate compression after our announcement, and there have been a couple of other platforms for sale over the last 12 months. And as we study them carefully and did our research and began to understand the stability of cash flow, the lack of new supply, the demand versus supply fundamentals, the growth in boat ownership, it doesn't come as a surprise to us. I think what does come as a little bit of a surprise as how fast the awareness of many other potential investors are queuing in, in the marina business. So we have heard both on a publicly announced basis and a private basis that there has been cap rate compression taking place. Certainly, marina is changing hands at a lower cap rate than the ability of the Safe Harbor group to generate higher cap rates. So that cap rate is creeping in. And the way I describe it right now is our view on the marinas is that they're trading at a 300 basis points to 400 basis points spread above where we're seeing many manufactured housing and RV communities trading at today. So still a good solid spread. And what I'd share is that the 7 marinas that were closed, including Rybovich, traded in the range of a 6.4% to 8.5% cap rate thus far.

Okay. I appreciate the information that you provided on the seasonality of the marina. Can I just ask just given that 58% of NOIs in the second and third quarter, how much visibility you have on those contracts being signed? And if there's any variability cases, any travel restrictions going forward, what the risks are to achieving that NOI?

I think as far as -- are you speaking of maybe in terms of COVID impact and things like that? We don't see much risk associated with that. I mean, the portfolio performed very well through COVID last year. So I don't really see much impact if that were to happen based on what happened last year.

Our second quarter bookings, John?

Yes. I mean on the RV side, our second quarter and third quarter, bookings are pacing ahead of last year. So as I shared in my remarks, I mean, it's just -- it's that -- what Gary has talked about the whole time is there is a tremendous amount of pent-up demand for people wanting to get outdoors. And the RV asset class, along with the marine asset class, really serve that purpose. So we're really pretty excited about what we see going forward, John.

Yes, MH is all annual contracts. So we've seen how it performed in 2020, so. But for the impact on the Canadian borders John covered and the California closures that are now up in February, we are feeling very comfortable with how 2021 should play out just based on what we saw in 2020.

Okay. Last one for me. Just turning over to RVs. When I look at your RV site breakdown in Page 3 of the supplement, the transient RV as a percentage of total RV sites has been increasing over the last year. Now it's 16.8% from 15% a year ago. Is that due to recent acquisitions and expansions? Or is this partially due to a slower conversion rate from transient to annual leasing?

Well, we converted 863 transient guests over to annual leases last year, which is pretty close to what we do on an annual basis. And so I think we're really pleased with that performance. And -- but I would say the bigger part of that, John, has been the development that we have done that's added to that denominator of transient sites that we have in our portfolio, which, of course, are future transient conversion opportunities to annual leases.

That conversion gets us a 40% to 60% per site revenue increase on an annual basis. So...

First year.

First year. So those conversions are very important to us. There's a part of our strategy that seeks to buy transient just as we seek to buy vacancy in our manufactured housing communities because it's an absolute tremendous first year benefit when, A, we get the sites filled and manufactured housing; and B, when we convert the transient. So you will find us stepping up our conversion programs as we get more and more inventory of the transient sites going forward.

Our next questions come from the line of Nick Joseph with Citi.

Gary, appreciate the comments on the cap rate differential between marinas and MH and RV. But how does it work on an IRR differential for the acquisitions that you've done recently?

We're excited to demonstrate to the market and our shareholders growth on the marina side, if you're referencing the marina side, I think that part of the excitement by the Safe Harbor management and operational team is the ability to have a strong, well-capitalized partner to enhance and grow the business. So I think the opportunity ahead of us to create increased cap rate, which will generate into a greater IRR over a, call it, a 3 to 5 to 7-year period of time with additional, I think, contraction of cap rate, which will naturally enter in over a period of time. I think the exit cap rates in this particular asset class will be modeled probably more aggressive than the entry if our strategy proves out. And so the IRRs are very, very strong.

When you compare that to MH or RV where you're getting some level of uplift, should that incremental capital be going to marinas right now or the IRR is pretty similar, given the uplift that you're seeing on the other segments?

Yes. I would say that the capital will go out similarly where we can justify the return we're going to get on it. But due to the ability to buy at a higher cap rate and the strategy and the supposition, as we said, that there'll be cap rate contraction. Then on paper at least, the IRRs grow a little bit faster on the marina side.

And then just on the G&A side and understand that it's a wholly owned subsidiary. But obviously, there's some cost there. And I'm wondering if there's an opportunity for synergies or to consolidate some of the back end across marinas and the rest of the platform for some savings in the future?

Nick, what I'd say is that, as you mentioned, this -- the marina platform is independently operating. So we did absorb all of the executive team senior operations back office. And we did not underwrite any expected synergies or efficiencies with that platform. And if you think about that platform, it is -- it's scaling, right? It's growing very, very rapidly. It's not scaled yet. So I would think that we will leverage G&A over time, but I would not expect that near term.

Our next question is come from the line of Wes Galladay with Baird.

I'd like to talk about the pace of the marina deals. And how much you think was due to pent-up demand for OP units?

That's a great question, Wes. Certainly, both the Sun management and Safe Harbor management when we explored the transaction, both were excited about the opportunity to create a tax-deferred security to be able to unlock the acquisition of marinas that might not otherwise be available. As I know Baxter and the Safe Harbor management have shared on some of our calls, many of these marinas are second and third generation. So the tax recapture and the tax ramifications and the fact that they generally won't qualify for 1031 exchanges, I think, lead us to believe that we have a lot of opportunity in front of us. I think Rybovich is an excellent example of where -- do you recall the exact percentage there of securities? 30?

A 1/3.

A 1/3 of it.

Okay. A 1/3 of it was actually a combination of preferred operating partnership units and operating partnership units. And the Huizenga family really was aligned and wanting to protect the tax implications and obviously defer the impacts. But at the same time, as I mentioned earlier in our remarks, we're really excited to have that entire team with their experience in the superyacht marina world as part of the Safe Harbor team. So not only do the tax securities become important to acquire the property, but in this case, we acquired a management team, relationships in the industry and core competencies that are just going to enhance safe harbor's efforts moving forward. So there's a lot of benefits from having those securities.

Great. And maybe switching over to development. Do you have any planned starts this year? And then maybe a bigger picture for the industry. Do you have a sense of how many active developments there are for MH and RV right now nationally?

Yes. These are all coming to me. I get the operational questions out here to John. It's a great question. And today, we have about 8,400 sites in various stages of predevelopment, okay? 9 manufactured housing communities, 8 RV communities, 2 hybrids. That are hybrids for us are a combination of manufactured housing and RV in a single development. So as we kind of shared, we've been the largest consolidator of manufactured housing communities over the last 10 years or so. And we began to ramp up our efforts on new community development, especially as we saw the severe compression in cap rates, no new supply coming on and having the experience at Sun Communities -- being a developer of new communities initially. We determined that we could start developing communities at better returns than acquiring the existing communities at these compressed cap rates. So today, we'll continue acquiring existing communities where we think the cap rates justify and the growth justified it. But you'll continue to see a focus on development as we think we can generate high single-digit returns upon stabilization, which generally looks to be 3 to 5 years after the construction begins, depending if it's RV or MH.

Great. And then last one, the topic of rent control comes up in a lot of discussions with investors. And just curious if you're seeing it in more of your markets for the MH segment. And if so, how much -- or I guess, what type of restrictions are they looking to implement? And then maybe a follow-up on that would be with the new administration, is there anything in their plans that will impact your business?

Wes, this is John. So no, I mean, no real impact for Sun as far as that's concerned. It's more -- I think some of it really has to do with a simple fact that, as we've shared, we've always been, on average, over at least the last 20 years, rent increases in the 2% to 4% range. We do have some rent control communities in California that are pure rent control, but it's really a smaller part of our portfolio. And the fact that we've always managed that rent increase between 2% to 4%. What I'm seeing out there and what I've heard in various locations, even if we have a single community in a particular state, that a lot of that dialogue, frankly, is sort of within our range that we would be doing anyway. So it doesn't really have a tremendous impact on us at this point.

Great. And anything on the new administration? Any plans that impact your image positively or negative?

Really too early to tell. We're watching it carefully and everyone is. There's a lot of discussion out there. Certainly, a lot of discussion on the HUD front and the continued commentary to focus on affordable or obtainable housing by the government agencies, but we're yet to see any meaningful shift towards anything.

The other thing I'd add, Wes, like some of the numbers that Gary just shared with you in terms of what we have in various stages of entitlement on development is, I think, that we are in a bit of a unique position just because we have constructed 7 ground-up developments now over the last 3 years. And so when I'm going to these meetings with various municipalities and planning commissions and that sort of thing, I'm no longer showing renderings of what we can do. I'm showing what we've actually done. And so with the dialogue from Washington, which is important about attainability and affordability, we're very well able to demonstrate how we play so well into that -- into helping with that crisis.

Our next question is come from the line of John Pawlowski with Green Street Advisors.

Gary or John, I want to understand the scalability of Safe Harbor's platform a little bit better. And so you have to bring on the Rybovich team for yacht expertise. Just curious, as this grows, are there any -- it takes you to different regions of the country or different types of marinas, are we going to see big step changes in G&A over the coming years? Or do we now have all the expertise in-house to scale your marine investment?

John, that really is a great question. And obviously, as we prepared for budgeting for the acquisition of Safe Harbor and to discuss guidance, we tried to be very, very transparent in our G&A, and we ask that question ourselves, even during the underwriting. This should be very scalable. We do underwrite to a approximately 3% of...

Revenue.

… revenue for G&A as we acquire the new marinas. That has been the practice of Safe Harbor. We continue to underwrite in that methodology. But in working closely with Baxter and Gavin, senior management at Safe Harbor, the addition of the Rybovich senior staff and back office is not so much of a have to have. It's a want of have. And so that's a perfect example where their skill set will be able to be spread over many of the existing Safe Harbor Marinas to be able to now take that superyacht ability to shift and provide services and ancillary revenues from other Safe Harbor Marinas to be able to deliver services back and forth, we think will incrementally grow the existing opportunities. And as we look to new opportunities, and there are several that I could point to in the pipeline, it is their skill set that is being levered to be able to really take a hard look at opportunities and create what we would call more strategic value post-acquisition that will benefit growth going forward. So I don't think you'll see the step. I think you see that we're there, and you'll see the incremental changes from where we are right now.

Okay. And Karen, the $23 million in business combination expenses that are excluded from core FFO. What specific costs are included in that? And are additional costs expected in 2021?

No. So the $23 million of business combination costs are really the impact of the Safe Harbor Marinas being treated as a business com rather than an asset acquisition. So asset acquisitions, you capitalize cost business coms, you expense them. Those costs are just typical closing costs on real estate transactions. They are the legal costs associated with it. And the M&A advisory fees, those types of things. I think the amount in line with what you'd see on an M&A transaction of this size and they're not anticipated going forward. Most of our acquisitions are considered asset acquisitions. So those types of costs would be capitalized.

And the only thing that I'd add to that, the complexity of marinas, they're being the uplands in the water. We did extensive diligence from an engineering standpoint to evaluate the uplands, the utilities, the waters, the wave attenuation complexities of the business, the seawalls. So more than we would be doing at an MH or RV transaction, even at that size. One-time costs.

Okay. Last one, if I may. Could you share the cap rate for Rybovich, just NOI? And then what it would be if you include their G&A load?

What I can share is what I have in front of me. And I indicated for the 7 properties acquired, the cap rate range was from 6.4% to 8.5%. And Rybovich would be on the lower end of that.

Okay. And then including G&A, what would the yield be?

I'm sorry, I missed that.

Including G&A, the yield would be?

Yes. I don't have that in front of me, but you could definitely follow-up with Fernando.

Our next question is coming from the line of Keegan Carl with Berenberg.

So first, just given what's going on in Texas, have you guys heard of any reported damages either to your MH or RV or marina properties? And if so, how material of an impact do you think that will happen in the quarter?

Hey. This is John. So I mean, we've been dealing with some of the power outages and things like that. But really, we haven't had -- other than a few broken pipes and things like that. They're really -- we feel fortunate as of right now within our communities and resorts in Texas that we haven't had more damage than we have. So we seem to be in pretty good shape right now.

Okay. That's good to hear. And then shifting gears a little bit. If we look at resident move-outs in the MH and RV space, it looks like they ticked up to 3.3% for the year. What was the driver of this? And how quickly do you expect to fill these sites?

Well, I think that on the RV side, it was really more to do with our conversions earlier in the course of the year. And we have gained a lot of that back towards the latter half of this year. On the MH side, I mean, what I can tell you is we've seen more homes on our -- particularly our brokered home sales business has grown considerably in more houses changing hands, which is good, and it's healthy for the community. So I think we're just seeing additional activity that's happening. But as I've shared in some of our earlier calls as well, what we may lose from an occupancy standpoint, we are seeing it overwhelmingly come back in terms of the application activity for new people to move in as well.

Our next question is comes from the line of Todd Stender of Wells Fargo.

Just to stay on the Rybovich deal, what were the terms on the new Series I preferred OP units, and how did that compare to the Series H?

Well, that one I'm going to have to dig up.

But similar to a preferred OP unit, there's got to be a coupon, right?

Yes. Yes. Yes.

Yes. It a 3% coupon. The Series H was a 3% also.

And there's a lockup period or some type of hold period that converts to common at some point?

There is. I don't think we have in front of it, but we'd be glad to share it with you.

Our next question is come from the line of Josh Dennerlein with Bank of America.

Just a follow-up. We talked a lot about superyacht and it made me think about how global that industry is. What's your appetite for international expansion on the marina side?

That's a great question. I think that the seasonality that exists in that superyacht world of where both spend their time at different times of the year. I think it will be logical to look towards a sister marina in the areas of superyacht travel. And I think we have identified a couple that are under consideration and discussion based on the vast experience of the great team that we're getting along with Rybovich and their understanding of that superyacht business. So we won't be jumping and running anywhere soon, but I think that we will selectively look at an opportunity or 2 that matches against the -- generally, the Transatlantic traffic that exists out of Rybovich.

Okay. Interesting. So that sounds more like a Mediterranean expansion?

Yes. Mediterranean would be the logical spot.

Thank you. There are no further questions at this time. I would like to hand the call back over to management for any closing comments.

Well, we'd like to thank everybody for participating on this call. We hope that everybody stays safe, and we look forward to speaking again after first quarter. Thank you.

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.