Sun Communities Inc Q3 FY2023 Earnings Call

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Communities Third Quarter 2023 Earnings Conference Call. At this time, management would like me to inform you that certain statements made during this call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time-to-time in the company's periodic filings with the SEC. The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release. Having said that, I would like to introduce management with us today. Gary Shiffman, Chairman, President and Chief Executive Officer; and Fernando Castro-Caratini, Chief Financial Officer. After their remarks, there will be an opportunity to ask questions. For those who would like to participate in the question-and-answer session, management asks that you limit yourself to one question, so everyone who would like to participate has ample opportunity. As a reminder, this call is being recorded. I will now turn the call over to Gary Shiffman, Chairman, President and Chief Executive Officer. Mr. Shiffman, you may begin.

Good afternoon. And thank you for joining our call to discuss third quarter results and our updated 2023 guidance. We reported another strong quarter with core FFO per share of $2.57, exceeding the high end of our guidance range. Total same-property NOI growth of 6.7% meaningfully outperformed guidance, demonstrating how our properties' high demand and scarce supply fundamentals generate durable, growing real property income. Same-property NOI growth was fueled primarily by solid revenue growth and continued cost-saving initiatives across our properties. In our manufactured housing segment, third quarter same-property NOI grew 8% as compared to 2022, supported by a 6.1% increase in monthly base rent per site and occupancy gains. Within our RV communities, the 4.1% same-property NOI growth achieved in the quarter is a testament to continued high demand at our communities, exemplified by the successful execution of our strategy to convert transient sites to annual leases. To date, our transient to annual conversion surpassed 1,800 sites, and we are on pace to meet guidance for the year. On a combined basis, same-property adjusted occupancy for manufactured housing and RV communities increased 170 basis points this quarter compared to last year. And across the total portfolio, revenue-producing sites increased by approximately 750 sites during the third quarter, an 8% increase compared to 2022. Marinas delivered another very strong quarter with same-property NOI growth of 8.9% over the prior year period. Demand to join our unparalleled safe harbor network remains strong, as demonstrated by the increase in rate lift at 89% for Marinas. Our manufactured housing portfolio in the U.K. will be included in same property results starting January 1st, only resetting the same community pool for 2024. For the third quarter, real property NOI in the U.K. grew 15.1% over the same period last year, in line with our expectations. Adjusting for exchange rate changes, U.K. real property NOI increased by 8.7% over the prior year quarter. Home sale activity, which supports the predictable rental income of our communities, was in line with our expectations and is tracking within our guidance ranges for the year. Looking ahead to 2024, we expect rental rate growth in our same-property portfolio to exceed inflation. At the midpoint, we expect to realize average annual rental rate increases of 5.4% for manufactured housing in North America and 7.1% in the U.K. We expect a 6.5% increase in annual ROI rates for our annual RV portfolio and 5.6% growth in annual rates across Marinas. We expect these strong rental rate increases combined with modestly higher occupancies and our ongoing focus on expense management to produce another year of strong organic cash flow growth in 2024. And now I want to give you some perspective on Sun's broader strategic objectives. The Sun Board and management team are laser-focused on implementing changes designed to streamline our company and position us for growth. Our goal in making such changes is to help ensure that our best-in-class, operationally resilient portfolio delivers the consistent FFO per share growth our stakeholders historically have enjoyed from Sun. For example, we recently sold our stock position in Ingenia, generating over $100 million to pay down variable rate debt. This transaction had the added benefit of increasing the FFO. Additionally, as we have previously discussed, we continue to advance the process to identify select properties for potential disposition with the intent of further deleveraging proceeds. As we move forward, we are substantially reducing capital spending, including acquisitions and development activity, in light of the more challenging economic and capital markets environment. This year, as we have stated before, we are completing ground-up development projects that were already underway, and new external growth projects will be solely focused on the most strategic opportunities. Our strategic positive investment activity can be seen in our U.K. operations as well. In 2021, after we announced the agreement to acquire Park Holidays, we extended a loan to RoyaleLife, a U.K. holiday park and manufactured housing developer and operator in a separate transaction. This development opportunity is distinct from our Park Holidays business. Our loan to RoyaleLife is collateralized by real estate and several other assets. We have selectively partnered with strategic counterparts for development throughout Sun's history. As macroeconomic conditions rapidly deteriorated in the U.K., we decided not to pursue incremental acquisitions to develop. Since that decision, RoyaleLife engaged with several lenders to repair a note but was unable to do so. Ultimately, at the end of September, we appointed a receiver to enforce our interest in the real estate securing our loan. We continue to assess our options as we take the note through the receivership process. Additionally, Sandy Bay is a premier manufactured housing community in the U.K. we acquired in 2022. It has 730 operating sites and can be expanded by an additional 450 sites. As part of our broad strategic portfolio review, we decided to sell the property and it is under contract to be sold to RoyaleLife, backed by additional financial investors and lenders. While that transaction is not progressing, we are in discussions with other potential buyers, and in the meantime, continue to benefit from the community's contribution to real property NOI. Now, Sun has a 30-year history as a public company; we have demonstrated operational reliability and cash flow strength throughout economic cycles and we are continuing to see this in the solid performance of our real property business. We remain optimistic about our performance and organic cash flow generation in the near term, supported by our anticipated rental increases in 2024. However, we recognize the headwinds from today’s challenging macro environment. And as I said, we are taking actions and steps to realign our strategy to focus on our proven, durable income streams. We are recycling capital out of non-core investments, including our operating portfolio, to monetize lower-growth communities and remaining disciplined and deliberate in pursuing only the highest growth capital expenditure projects. As we implement these resizing activities in the coming quarters, we are optimistic the market will recognize how these activities will decrease our leverage and target a return to the consistency of our earnings we have long enjoyed. As always, the management team and I are grateful for the hard work and accomplishments of the entire Sun team this quarter, and I would like to thank all team members for their dedication and all of our stakeholders for their support. Fernando will now discuss our results in more detail. Fernando?

Thank you, Gary. Third quarter core FFO of $2.57 per share was $0.01 above the high end of our guidance range. Expense savings at the property and corporate level were the primary contributor to outperformance as compared to our midpoint. Sun's total same-property NOI for the quarter increased 6.7% as compared to last year, outperforming the high end of our guidance by 220 basis points. Our performance was driven by same-property revenue growth of 5.5% and lower-than-expected property operating expense growth of 3%. For the quarter, same-property manufactured housing NOI increased 8%, driven by a rental rate increase of 6.1%, continued occupancy gains, and focus on expense management. RV same-property NOI grew 4.1% due to an 8.8% increase in weighted average annual rental rate, approximately 2,100 transient to annual site conversions over the trailing 12 months, and ongoing operational programs to mitigate expense growth. These were partially offset by a 4.4% decline in transient RV revenues, as transient occupancy normalizes. Adjusting for the decrease in sites converted to annual, transient revenue grew 2.2% relative to the prior year period. Over the Labor Day holiday weekend, same-property transient RV revenue was down 1.5% compared to last year's holiday weekend. Adjusting for the 5.7% decrease in transient sites converted to annual, transient RV revenue increased by 4.4%. We continue to drive the pace of transient to annual RV lease conversions to increase our percent of sticky revenues. This quarter, we converted nearly 540 sites to annual leases, for a year-to-date total of over 1,800 conversions. In Marinas, same-property NOI increased 8.9% in the third quarter as compared to 2022, an 8.4% increase in revenues highlights the strong demand to be part of our network. Our performance was due to solid rental rate increase, longer stays by guests in our Southeastern Marinas, and operating expense savings, particularly within payroll and utilities. In the U.K., real property NOI for the quarter of $29 million was in line with our guidance. Retention rates among our U.K. owners are holding steady, with an average resident tenure that approaches eight years. The increased retention over 2022 was a meaningful driver of real property income growth this year. Turning to home sales, North American home sales contribution was broadly in line with our expectations for the quarter, where lower volume was offset by higher margins. In the U.K., despite economic headwinds continuing to challenge home sales volumes, we sold 2,310 homes through the end of the third quarter. Fourth quarter to date, we have sold 204 homes, leaving approximately 300 homes to be sold to achieve our full year volume guidance. In terms of NOI, we are on track to achieve the midpoint of prior guidance, which approximates just over $70 million for the full year. Regarding our balance sheet, since our last call, we have focused on decreasing leverage and variable rate debt. During and subsequent to the third quarter, we entered into $150 million of SOFR swaps on our U.S. dollar line of credit at a fixed SOFR rate of 4.8% through April 2026. As Gary discussed, we sold our position in Ingenia and used the net proceeds of approximately $100 million to pay down borrowings on our line of credit. Additionally, we refinanced approximately $118 million of secured debt that was maturing this year with approximately $250 million of new secured debt. Adjusted to include the positive impact of a $50 million SOFR swap executed in March, the new loans bear interest at a fixed rate of 6.25% and mature in 2030. Taking this activity into account, we had $7.6 billion in debt outstanding at a weighted average rate of 4.15% and had a weighted average maturity of approximately seven years. Our trailing 12-month leverage ratio was six times and approximately 14% of our debt is floating. Turning to guidance for the year, we are revising our full-year core FFO per share guidance downward by 1% at the midpoint to a range of $7.05 to $7.13 and establishing a fourth-quarter core FFO per share guidance range of $1.28 to $1.36. Our revised guidance for the year is driven primarily by higher expected interest expense in the fourth quarter, related primarily to the U.K. note remaining outstanding, U.K. home sales NOI performing towards the midpoint of our range and lower expectations for transient revenue in the U.S. Regarding the U.K. note, through the first nine months of this year, we recognized $28 million or approximately $0.22 per share in interest income. There is no interest income from this note in fourth-quarter guidance. We previously expected to pay down debt with the note's repayment, which would have generated roughly $5 million or approximately $0.04 a share of interest expense savings in the fourth quarter. For U.K. home sales, we expect to finish the year within our prior guidance range, with home sales volume of around 500 units in the fourth quarter. We are forecasting lower margins on these home sales as U.K. consumers continue to favor pre-owned homes and part exchanges to new home. NOI margins on U.K. home sales for the first nine months averaged $26,000, and our revised guidance assumes average NOI margins of approximately $20,000 per home in the fourth quarter. Our same-property portfolio is by far the largest driver of our results, representing over 90% of NOI. Based on results to date and our expectations for continued strong demand, bolstered by effective expense management, we are increasing total same-property NOI guidance by 50 basis points from 5.7% growth at the midpoint of the prior range to a new midpoint of 6.2%. The increase is based on higher expectations at our same-property manufactured housing and Marinas properties, partially offset by slower growth in RV addressed earlier. At the midpoint, the 5.8% to 6.1% NOI growth we now expect from MH is 45 basis points higher than the midpoint of the prior range. For our same-property RV portfolio, we now expect NOI to grow 3.5% to 4.2%, which represents a 15-basis-point decrease at the midpoint as compared to prior guidance. For same-property Marinas, we expect NOI to increase to a range of 10% to 10.3% for the year, a 165-basis-point increase from our prior assumed range of 8% to 9%. Additionally, and as Gary discussed, we are providing guidance on preliminary rental rate increases for 2024. At the midpoint, we expect to realize average annual rental rate increases of 5.4% for manufactured housing in North America and 7.1% in the U.K. We expect a 6.5% increase in annual rental rates for our annual RV portfolio and 5.6% growth in annual rates of cost Marinas. For additional details regarding our updated full-year guidance, please see our supplemental disclosures. As a reminder, our guidance includes acquisitions and dispositions and capital markets activity through October 25th. Our guidance does not include the impact of prospective acquisitions, dispositions or capital markets activities, which may be included in research analyst assessments. This concludes our prepared remarks. We will now open the call up for questions. Operator?

Thank you. Our first question comes from Samir Khanal with Evercore. Please proceed with your question.

Hi. Good afternoon, everybody. Gary, maybe provide a little bit more detail on your sort of your plan to sell assets. I guess what’s the transaction market look like in the U.K. and the U.S.? Just trying to figure out your ability to sell those assets as it relates to the U.K. loan. You kind of stated about Sandy Bay. I think it was in the market, now it’s held for sale. Just want to maybe you can provide a bit more color on the market in the U.K.? Thanks.

Our goal of selling assets, as we've communicated to the market, is focused on recycling capital and reducing debt. While these assets are high-quality and performing well in our portfolio, we believe that bringing them to market to pay down more expensive debt will be advantageous moving forward. In North America, we've conducted a thorough analysis and identified some assets to market. The first group will be marketed either currently or within the next week, and we'll gauge market reaction at that point. It's important to note that there have been very few transactions in the manufacturing RV market, which leaves us without data points right now. Although we know that rates are significantly higher, these assets remain valuable. We look forward to updating you on the market's response in our next call or sooner if we execute any sales beforehand. Regarding the U.K., particularly the assets linked to the Royale loan, we can't comment much during this receivership period, but we are exploring options for those assets as discussions continue. Additionally, we mentioned Sandy Bay, which is a premier asset with 730 sites and significant expansion potential. We are currently in talks with several parties about a potential sale there, and we will be eager to share market insights as we begin the marketing process.

Okay. And then, I guess, just as a follow-up and maybe changing the subject here on Marinas, that continues to show strength. I would have thought you would have been able to push the rates for 2024 a little bit higher. I mean your rate was 5.6%. I understand there’s been a moderation in inflation, but I would have thought maybe the rate would have been higher. Can you provide a bit more color around that?

Yeah. I think it speaks to how we have shared with our stakeholders over 10 years, 20 years, 30 years of business, kind of the slow marathon over the sprint and our approach to wanting to be able to really get outsized growth above inflation. When inflation is low and when inflation is high, last year, we got off 7.2%, 7.3% rental increase. So we really are enjoying heavy, heavy demand and want to continue to see it continue. So we think that we have really set the rent in a way that over a long period of time, we will be able to maintain NOI growth in excess of inflation, and at the same time, retain high occupancy. So after a couple of years of tremendous growth, we look forward to continuing that growth and set the rental rate very thoughtfully for 2024.

Thank you.

Our next question comes from the line of Wes Golladay with Robert W. Baird. Please proceed with your question.

Hi, everyone. Maybe looking into next year, can we talk about some of the bigger moving parts that we should be aware of? One, in particular, I want to give more clarity on, would be home sale volume expansion and development? Will that have any impact in the U.S?

Yeah. I will take the first part and Fernando wants to add anything. I think we have been very, very clear that with regard to use of capital and our free cash flow, the most highest priority and best use for that free capital will be to reduce leverage. As we look at this high capital cost environment that we are in right now, recognizing that we do get very, very strong IRRs on expansion usually in the 10% to 13% range. I mentioned RV and new development on the high single double-digit, those are IRRs and they do take a period of time; they are initially dilutive. So by putting those things on hold moving forward, our expectation is that in a better economic environment, we have the inventory of sites on hand and we can resume our expansion and development activities. So as it stands right now, and we will share exact numbers as we go forward in guidance for 2024, the expectation is to have a very limited capital investment in the development area and it’s just a fact from where we are sitting and see the cost of capital right now.

And Wes, to add to Gary’s comments, we have inventory to sell on the manufactured housing side. By the end of the year we will be delivering nearly 1,000. We will have to deliver nearly 1,000 new sites across expansion and ground-up development. So that would support the home sales volume or contribution to NOI here in the U.S. Where we would say, should be around what we expect to get this year.

Okay.

And with regards to home sales volume, again, in the U.K. we have the sites, we have the homes. The U.K. Park Holidays team is doing a remarkable job. We are very, very pleased with how home sales are continuing, although they are guided down from the beginning of the year, and we will be able to share those guidance post 2024 guidance.

And then a follow-up on the balance sheet. You have taken the variable rate down. I believe you said Fernando, about 14% is floating now. Should we think the balance just being repaid off with the asset sales? Are you going to keep a certain amount of floating?

We will continue to look to move that percentage downward. Certainly, the immediate use of proceeds of free cash flow in 2024, as well as any proceeds from dispositions or other activities would be to pay down debt. Yes.

Okay. Thanks a lot.

Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your question.

Thanks. Fernando, what percentage of the roughly $360 million loan to RoyaleLife is secured by real estate versus the OpCos or the manufacturers?

Sure. Hi, John. About 70% is secured by real estate and the other $30 million by the operating companies.

Could you provide any insight into what you consider a reasonable base case for the level of impairment of the $360 million loan?

Yeah. I think that based on what we have shared we have had third-party appraisers throughout the process at the beginning and as recently as June 1st provide appraisals and the overall appraisals, I think, last came out about 80%.

At the midpoint of value, the loan is covered at 80%.

Okay. Back in June 1st and so it’s a lot lower now, is that fair?

No. That’s not the assumption. The valuations do cover a wide range of scenarios in that analysis with our third-party providers and appraisers. So, no, that would not be the assumption.

Okay. Last one for me. Can you just give us, I guess, what specific expense control initiatives were rolled out to result in such a large reduction to expense growth guidance this year and should we expect these benefits to continue into 2024?

Sure. John, I would say, the primary driver has been in response to normalizing transient revenue growth, and given normalizing occupancy, any variable expenses at the property level have been managed across payroll, supply repair, and utilities. As it relates to our Marina portfolio, for example, we have had some of the growth capital that we have invested in solar projects driving lower utility expense year-over-year for those properties. So, yes, much of that would be sustainable and our expense control on the variable side is in response to top line. So we would continue to look to mitigate the impact of lower revenues, if that would be the case.

Okay. Thanks for taking all the questions.

Thank you.

Our next question comes from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.

Hey. Thanks everybody. Thinking back to last year, you obviously gave some impressive rate indications in 3Q 2022, but we were all surprised by how that translated into FFO when the full guide came out. Obviously, you are not going to give 2024 guidance yet, but just given a similarly high set of increases, do you think we will see Sun return to a more normal level of FFO growth next year or are there other headwinds like this loan that might prevent that from happening?

Brad, our expectation is with 90%-plus of our revenue being derived from those real property operations and with the fact that 30% to 40%, maybe by year-end close to 50%. Those rental rate increases will all be out there with good expense control, should continue to see the benefit of high occupancy, solid rental increases, and expense control, as Fernando just referred to.

Brad, you have seen operational leverage at the corporate level with more muted G&A growth, and we believe any activity, as it relates to episodic capital recycling events, right, will reduce not just leverage but then also any interest expense impact of growth that we did see this year and was a large contributor to the flow-through from same-property growth not showing up in FFO per share growth.

Okay. Got it. Perfect. And then on the 2024 rate indications, I think, you just said, close to 50%. But I am curious if you could just talk about how locked in those are and I assume that there’s different numbers across the different businesses for how many of those rates have been fully set for 2024?

Sure. So by the end of October, just over 40% of our manufactured housing portfolio will have been noticed, and those have been at about a 5.4% increase. They will be around half of the portfolio will happen by the end of the year. On the RV side, about 60% of our residents have been noticed at this point. In the U.K., 100% of residents have been noticed at this point. And Marinas, essentially our Southeastern or Southern Marinas have been noticed and the rest are rolling over time.

Okay. Appreciate it.

Thank you.

Our next question comes from the line of Eric Wolfe with Citi. Please proceed with your question.

Thanks. It’s actually Nick Joseph here with Eric. Gary, you mentioned in the press release, I think, on the call as well, implementing the select changes. It sounds like you have talked about CapEx spend and dispositions to pay off floating-like debt and some other opportunities that you think will get back to earnings growth and it sounds like that earnings growth will be in 2024. But how about on the G&A side and the integration on the back end of some of these portfolio companies on the U.K. and the Marinas. What’s the opportunity there and can you frame some time in around it as well, please?

Yeah. I think I don’t know if that was directed to me or to Fernando, but I will start out with it. I mean, summarizing you are exactly correct. The steps that we are thinking about, the fact that we have shared, we stopped new development and acquisition, continuing converting transient to annual or when you think about those conversions in the last three years, we have actually converted about 20% of our transient sites or will have by the end of this year to annual leases and we will continue to do so. As Fernando mentioned, we sold our stock position in Ingenia, all looking to recirculate more free cash flow and capital to pay down debt and demonstrating the operational leverage, which you are referring to, is something we are very hyper-focused on for 2024. We have continued to see a slowdown and even minor reduction in the growth that we have seen for the last five years, seven years, and certainly, for the last two years, three years as we brought these portfolios in. And Eric, we are working really hard and look forward to sharing with you the outlook for 2024. As we have owned the portfolios and will have owned the portfolios for two years to three years, and I think that, that will also underscore how we are able to deliver bottom-line FFO growth moving forward.

Thanks. I guess just more specific to G&A, though, right? So you have different management industry for these portfolios.

That is what I am referencing. It is our goal to be able to share the 2024 expectations for G&A and to have created leverage moving forward.

All right. Thanks. And then just on Ingenia, obviously, you sold the stock, but you have the JV that had been extended there. Can you talk about the timing and the potential monetization of that investment?

We are very pleased with our relationship with Ingenia. We established the joint venture Sungenia in 2018, and while we sold our entire stake in Ingenia stock, they remain great partners in the Sungenia development. We no longer have a member on the overall Board, allowing them to focus on daily management and operations of the development. After this time and investment, the work completed alongside the rising demand for retirement housing in Australia indicates that the near-term returns are very promising, and we are optimistic about the cash flow for the next 12 months. We will outline this more clearly in 2024. We have invested for five years in anticipation of what is expected in 2024, and we plan to provide guidance on this, followed by discussions about future plans.

Thanks. We will get back in the queue.

Yeah.

Our next question comes from the line of Keegan Carl with Wolfe Research. Please proceed with your question.

Yeah. Thanks for the time guys. Maybe first, just wondering if you could walk through your reconciliation of your FFO per share guidance, where we went from negative $0.10 a share to positive $0.02 a share in the other adjustments line item?

Hi, Keegan. Yes. While there are various line items that contribute to that change, the primary drivers will be the re-measurement of marketable securities, which is Ingenia on a quarter-to-quarter basis, which accounted for about $0.06 and then any unrealized gain or loss on foreign exchange changes, again, in the quarter that accounts for $0.05.

Got it. And then, I guess, I am struggling to with the Marinas rate increase. I was a little disappointed in the number, but I also know that there’s not good data on Marinas. So I am just curious, do you have an idea of what your hypothetical loss to lease will look like on that portfolio, given where market rents would be today if some were to come in and put their boat there?

I believe that after two years of owning the Marinas and a 7.3% rental increase last year, we've seen strong demand. Sun has always focused on delivering sustainable returns year after year on a consistent community basis. A significant amount of consideration went into that rental increase. As we look ahead, we expect to see continued long-term growth similar to what we've experienced with our manufactured housing and RV portfolios. Our lease turnover is minimal, especially in our manufactured housing and annual RV portfolios, as well as in our Marinas. Specifically, on the manufactured housing side, we have a 15-year average turnover with nearly 98% occupancy, and less than 0.5% of homes move out each year. Additionally, we don’t have many leases directly tied to the consumer price index or any long-term leases. Our current market rents align closely with standard market rates, and we believe the same applies to our Marinas. It's important to note that an empty site, or an empty slip in the case of the Marinas, is the most expensive slip we can have. As we aim for solid performance in 2024, we settled on a 5.6% increase, which does not contribute to any significant market rental increase in our overall portfolio.

Got it. Thanks for the time guys.

You bet.

Our next question comes from the line of Josh Dennerlein with Bank of America. Please proceed with your question.

Yeah. Hey, everyone. I wanted to follow up on the marine rate growth of 5.6%. How should we consider occupancy increases in that area? It would be helpful to know what rate growth you reported last year along with the occupancy uplift.

Yeah. I don’t have the occupancy uplift for 2023. Of course, 2024 will give that thought as part of the guided range, but...

Yeah. I guess I am just trying to figure out if that 5.6% is like kind of static or like if there’s potential kind of upside relative to kind of where that is, as I think about rental revenue on that side?

Hey, Josh. Year-to-date, non-transient income from the Marinas side has been just under 10%, and our rental increase is in the 7.5% range. So, doing some quick math, we have roughly 200 basis points of occupancy gain in that number.

Okay. Okay. Awesome. And then just the U.K. sale that, I guess, it was disclosed in February, but didn’t go through. What’s, sorry if I missed it, I had to jump on late on the call. What’s the back story there?

We acquired a high-quality manufactured housing community in the U.K. in late 2021. As we proceeded with the RoyaleLife Group, we decided to issue them a note for repayment. They were also in discussions with a party interested in acquiring Sandy Bay, which we communicated to the market at the time. It was an offer we were prepared to accept as we aimed to decrease our capital commitments in the U.K. Separately from RoyaleLife and Park Holidays, we entered into a contract with that group to sell Sandy Bay. Since that deal is not progressing, we will continue to operate the property, hold it for sale, and recognize the income. There are about 730 existing sites with expansion potential for an additional 450.

Okay. But I guess why didn’t the sale go through? Was it related to the buyer couldn’t find financing or something else?

Yeah. I can’t comment too much on RoyaleLife other than the same things that everyone is aware of that they have been taken under certain aspects of it have been taken under receivership and the recapitalization, as I understand it, is certainly stalled, if not terminated at this time.

And our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.

Good afternoon. Thanks a lot for taking my question. My first question is on the guidance and some of the moving pieces there. I am not sure if we touched on this earlier, but it seems like the NOI guidance moves higher and then that would be kind of offset by the higher interest expense as a result of not using the proceeds of this note to pay that down. So what were the moving pieces kind of like below the line that drove the FFO guidance lower? Was that the Ingenia piece?

Hi, Michael. Ingenia is not relevant in this context. The $9 million loss recognized reflects the difference between the share value at the end of the third quarter, which was A$4.20, and our eventual sale price of A$3.90. This does not affect our guidance. Regarding our guidance, we are seeing higher interest expenses due to the note that hasn’t been repaid, along with some additional interest costs, primarily associated with the Park Holiday note from home sales. In July, we provided guidance with an upper estimate of about US$75 million, but we now anticipate it to be closer to the midpoint. We offer a range in our guidance and acknowledge that different parts of the business may perform variably. Transient revenue, as I mentioned, is projected to decline more than initially expected. In July, we anticipated a 4% decline in transient revenues, but we are now looking at approximately a 7% drop for the full year. We will attempt to offset some of that impact through expense savings, as we successfully did during the third quarter.

Okay. Thanks for that. My second question is a little bit more strategic in nature. What is the profile of the properties that you are looking for sale, like is there anything specific about the Sandy Bay property that made it a good candidate? Was it the fact that had these development sites in like the additional capital into it? And then, finally, allowing the same line, do you have a target leverage ratio, which you are looking to move down to through the sale of some of these properties? Thank you.

On the Sandy Bay property, we have indicated that it is a high-quality and prominent asset. We decided not to increase our capital exposure in the U.K., which led us to accept the offer and list it for sale. We will continue to market the property as this process unfolds. Regarding North America, we previously conducted an in-depth analysis to identify opportunities for capital recycling. We assessed all of our properties and found some located in a single area where we anticipated acquiring more assets, but they are not efficient to operate without additional properties nearby. Those are among the candidates for consideration. We also have smaller properties that currently do not align with the company’s operational size. All these properties are performing well, and we are selectively evaluating these opportunities to recycle capital.

And then, Michael, regarding our long-term leverage targets, we aim to be at 5.5 times or below in terms of leverage. After the Ingenia stock sale, we are currently at six times on a trailing basis. We plan to reach and maintain that target through free cash flow and some occasional sales.

Thank you very much. Good luck on the fourth quarter.

Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Thank you. In the U.K., can you just comment on, who drove the decision to move forward with 2 separate transactions with RoyaleLife? Was it the local Park Holidays team or was it your team in Michigan?

As I said before, they are not related to Park Holidays. They are separate and distinct and it was management.

Okay. Yes. I mean I am sure you are aware of this and you can hear this on the call, but in meetings you have had. But the performance of Sun is getting completely dominated by the U.K. business and I know you are looking to simplify and improve your balance sheet. But I am just wondering how much longer you could stomach having this much exposure to the U.K. and have you contemplated exiting the business? I know you don’t want to buy high and sell low, but looking at the forward growth prospects of all your different businesses, why not contemplate exiting the U.K.?

Well, John, I think it’s important to understand that, first of all, the management team is doing very well there. And the growth and reliability the real property income is achieving management’s goals, although home sales and the challenging environment aren’t and there’s been a big focus by stakeholders. Who clearly are focused on home sales and how they are lower than we originally guided to and the fact that it’s not the business or the percentage that we wanted to be able to contributing income. But we acquired the portfolio in a much different economic environment. When we took the opportunity in what was a strong economy to increase our manufactured home holdings by acquiring Park Holidays. The properties are excellent, and we do believe in the business and the team. That being said, unfortunately, the opportunity in the U.K. has been impacted by really strong economic headwinds, even though the core of the business is performing. So with that being said, in very challenging times, we continue to really review all of our options, but we are very supportive of what the team is accomplishing there and we are very aware of those people, who have shared with us their thoughts on the capital invested in the U.K. Our goal really…

Just one more final question for me.

Our goal really is to maximize value for that investment and as we continue to perform and view the U.K., we are happy to share any thoughts that we have moving forward.

Just one more final question on me. On the sales that you are planning in the U.S., what kind of cap rate should we expect? You have taken out mortgage debt at 5%, obviously, the interest rate environment is not helping, but what should we be modeling in for exit cap rates?

So I am going to suggest we are going into the market next week with the first group, and it would be best if we are able to report realize market data and not interfere with the process that’s taking place as we go out to the market.

Great. Thank you.

Okay. Thanks.

We have reached the end of the question-and-answer session. I will now turn the call back over to Chairman, President, and CEO, Gary Shiffman for closing remarks.

Well, for those of you who are still on, we appreciate your patience and we really do look forward to providing full guidance for 2024 fourth quarter earnings call, and I look forward to speaking to everybody then. Thank you.

This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.