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Edited Transcript of SUI earnings conference call or presentation 25-Apr-19 3:00pm GMT

Q1 2019 Sun Communities Inc Earnings Call

SOUTHFIELD Apr 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Sun Communities Inc earnings conference call or presentation Thursday, April 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary A. Shiffman

Sun Communities, Inc. - Chairman & CEO

* John Bandini McLaren

Sun Communities, Inc. - President & COO

* Karen J. Dearing

Sun Communities, Inc. - Executive VP, CFO, Treasurer & Secretary

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Conference Call Participants

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* Andrew T. Babin

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Samir Upadhyay Khanal

Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst

* Todd Jakobsen Stender

Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst

* Wesley Keith Golladay

RBC Capital Markets, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Communities First Quarter 2019 Earnings Conference Call. At this time, management would like me to inform you that certain statements made during this conference, which are not historical facts, may be deemed forward-looking statements within the meanings 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 and Chief Executive Officer; John McLaren, President and Chief Operating Officer; and Karen Dearing, Chief Financial Officer. After their remarks, there'll be an opportunity to ask questions.

I'll now turn the call over to Gary Shiffman, Chairman and Chief Executive Officer. Mr. Shiffman, you may begin.

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [2]

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Good morning, and thank you for joining us on our first quarter 2019 earnings conference call. Strong performance in the first quarter has laid a solid foundation for the balance of 2019.

Core FFO for the quarter was $1.18 per share, ahead of the top-end of our guidance range and a 3.5% increase over first quarter 2018.

Looking across our operations. Contributions were very strong from our manufactured housing and RV platforms, home sales and our rental program. The quarter's performance included strong Same Community NOI growth of 7.2% and the benefit from the incremental contributions of the investments we made and the expansion sites we've delivered over the last 12 months.

Our outperformance allows us to increase full year core FFO per share guidance by $0.03 at the midpoint to a range of $4.80 to $4.88. We have also revised Same Community NOI growth guidance to a range of 6.4% to 7%.

As we shared with you on our year-end call, Sun has been active on the acquisition front, having completed approximately $325 million of investments in 7 operating communities in the first quarter. These investments are comprised of roughly 3,600 sites, with 83% of these sites in manufactured housing communities.

Our pipeline of opportunity remains full with prospects in both manufactured housing and RV resorts, and we are carefully vetting these potential investments. We believe that our long-term relationships in the industry, the ability to bring management, development and expansion expertise and our efficient tax structure and capabilities provide us with an advantage in sourcing opportunities.

Sun's portfolio continues to deliver strong results. Total occupancy rose to 96.4% at the end of first quarter from 95.8% in the first quarter of 2018. Demand for our communities is robust as reflected by the strong pace of applications, continued occupancy gains and home sales volume.

Before turning the call over to John and Karen, I wanted to take a moment to reflect on Sun's history and operating philosophy in the manufactured housing and RV resort industry. We have been a trusted provider of affordable housing and vacationing solutions for nearly 45 years as a private and public company. That trust was earned because we have always approached this business as a long-term proposition, given that Sun is our livelihood.

We value our residents and guests, and pride ourselves in the value we deliver through the reinvestment in our communities and world-class customer service. It is this attention to service and reinvestment that has differentiated Sun as a viable housing and vacationing option for many individuals and families across the U.S. and Canada as well as a sustainable long-term investment vehicle for our shareholders.

As we progress through 2019, we will continue to seek to execute on our 4 core investment strategies, which are: the investment in our existing portfolio; the acquisition of operating properties; the construction of expansion sites adjacent to our operating communities; and allocating capital to select ground-up developments, all to drive sustained industry-leading results.

I will now turn the call over to John and Karen to discuss our results in detail. John?

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John Bandini McLaren, Sun Communities, Inc. - President & COO [3]

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Thanks, Gary. Sun delivered excellent operational results for the first quarter, with strong contributions from each of our business lines. The largest of these is the contribution from our Same Community portfolio, which delivered 6% revenue growth, driven by a 4.2% annualized increase in monthly rental rate and a 210 basis point gain in Same Community occupancy on an adjusted basis.

Drilling down further into Same Community revenue, manufactured housing revenues rose 5.9%, with annual RV revenues gaining 10.5% and transient RV revenues growing by 1.7%. With the inclusion of recently delivered but still vacant sites, total Same Community occupancy is 96.4% with manufactured housing at 95.4%.

Top line performance and favorable expense growth as compared to last year drove our Same Community NOI increase of 7.2% for the quarter.

Total portfolio occupancy rose by 60 basis points to 96.4% at March 31, 2019, driven by the addition of 2,555 revenue-producing sites over the last 12 months, including the addition of 571 site gains during the first quarter.

Of the first quarter gains, 43% or approximately 250 sites were in our manufactured housing expansion communities. We also converted 165 transient RV sites to annual leases. One element of Sun's ability to generate incremental occupancy opportunities stems from the construction of expansion sites and communities that are near capacity with strong consumer demand. In the quarter, we completed the construction of the first 67 vacant expansion sites across 3 manufactured home communities and are on pace to add 1,200 to 1,400 expansion sites in 19 communities for the year.

We also expect to deliver an additional 800 to 1,000 sites from our ground-up development projects by the year-end.

With respect to home sales, we continue to see sustained demand. In the quarter, we sold roughly 800 homes, with an increase in new home sales volume of approximately 18%. The strong demand for new homes was concentrated in Florida, Michigan, Texas and Arizona, which accounted for 77% of sales.

Our new home sales margins came in better than expected at 14.5% for the first quarter as compared to 12.9% for 2018's full year new home sales. In addition to Sun's home sales business, we provide and operate a brokerage resale business to assist our residents in selling their homes. The brokerage business has seen a 20% average increase in sales volume over the last 3 years, providing price stability and flexibility for our residents.

From 2016 through 2018, it's important to note that Sun brokered homes have had an average price increase of almost 12%, demonstrating the value that is created through our continual reinvestment into our communities. This trend has continued in 2019.

Regarding our ground-up developments, construction at Carolina Pines and Myrtle Beach, South Carolina and River Run Ranch in Granby, Colorado is progressing well, and we expect to deliver approximately 600 sites by the end of the second quarter. We have already started taking online and call center reservations for these communities for the summer season. We are very pleased with our first quarter results and with our positioning, which allows us to deliver an excellent product to our residents and guests, which in turn drives shareholder value.

With that, I'll turn the call over to Karen to discuss our financial results. Karen?

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Karen J. Dearing, Sun Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [4]

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Thanks, John. Sun reported $1.18 of core FFO per share for the quarter ended March 31, 2019, ahead of the top-end of previously provided quarterly guidance and a 3.5% increase over the first quarter of 2018. This outperformance was driven in part by strong annual and transient RV revenue growth as well as the net contribution from home sales, driven by better-than-expected sales margins as discussed earlier. We anticipate that some of the outperformance experienced in the first quarter may reverse over the rest of the year due to the timing of certain property operating, maintenance and corporate-level expenses. These expectations are reflected in our updated guidance, which we will discuss shortly.

As Gary referenced earlier, our investment pipeline is quite active. We have invested $325 million across 7 operating properties and continue to underwrite additional opportunities. Given our consistent focus on enhancing our balance sheet flexibility, we believe we are well positioned to fund prospective investment activity. We closed the quarter with $22 million of unrestricted cash on hand, and we are currently in discussions with our relationship banks to recast and upsize our revolving line of credit.

Total debt outstanding for the quarter was $3.4 billion with a weighted average interest rate of 4.39%. At quarter end, the company's net debt to trailing 12-month EBITDA ratio was 6.0x. Our leverage ratio is 5.6x on a pro forma basis, reflecting the impact from a full year of EBITDA contribution from our recent acquisitions.

Looking at our debt maturity schedule, the company has no material debt coming due until 2021. With that said, we will continue to look for financing opportunities to further enhance our liquidity and extend or improve our debt profile and balance sheet flexibility.

Moving on to guidance. We are raising our annual core FFO guidance per share for the year to a range of $4.80 to $4.88. This increase reflects the outperformance in the quarter, offset by expense timing over the rest of 2019, as previously mentioned. We are also revising our Same Community NOI growth guidance to a range of 6.4% to 7%. As is our practice, our guidance does not include the impact of prospective acquisitions or capital market's activities, which may be included in analyst estimates.

This concludes our prepared remarks. We would like to open up the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is coming from Nick Joseph of Citigroup.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [2]

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Maybe just starting on the updated same-store NOI growth guidance. Can you walk us through what the assumptions are for same-store revenue and same-store expenses?

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Karen J. Dearing, Sun Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [3]

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Yes, sure, Nick. So we -- as I mentioned a little bit, we [didn't] have higher-than-anticipated RV revenues and lower-than-anticipated utilities, supply and repair, real estate, taxes and other general operating expenses. On the expense side, we believe some of these items are simply timing, and they'll be incurred in future quarters. So that being said, we increased the midpoint of the Same Community guidance by 10 basis points. What that does it reflects a decrease to the range of total operating expense growth to approximately 4.2% to 4.9%. Original guidance had that at 4.5% to 5.3%. And our revenue growth expectations were essentially unchanged.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [4]

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And then maybe just on occupancy. For the portfolio overall, it's high. But if you look at the individual states, there's a bifurcation between a handful of that are very high and 3 specifically, Texas, Arizona and Indiana that are below the average and have been for the trailing 5 quarters. Is there an opportunity in those 3 states to raise occupancy? Or is there a structural issue with those states?

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Karen J. Dearing, Sun Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [5]

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Texas was -- it's really about expansions and the filling up of expansions. We've been doing a lot of expansions in that state. And I am sorry, Nick, what were the other 2 states?

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [6]

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Arizona and Indiana.

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Karen J. Dearing, Sun Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [7]

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Yes. Arizona had one of -- the recent acquisition in Arizona had a little bit lower occupancy than our total portfolio. So it pulled occupancy down there. And there was also an expansion, significant expansion at a property in Arizona also.

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John Bandini McLaren, Sun Communities, Inc. - President & COO [8]

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Indiana. Yes, Nick, this is John. In Indiana, we actually -- from the end of the year to March 31, we actually saw an occupancy increase in Indiana. We've seen a little bit of a decline in 2018, much as a result of a couple of expansions there as well, and now they're picking up steam and we're seeing that growth.

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Operator [9]

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Our next question is coming from John Kim of BMO Capital Markets.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [10]

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I guess rent control has been permeating in the media, mostly in multifamily. But even John Oliver talked about mobile home communities on his HBO show recently. So I'm wondering, are you sensing any discussion in your markets about rent control in your community?

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [11]

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I think we can probably all respond to it, John. We're obviously very sensitive to some of the materials and articles and John Oliver's story. So we watch them very closely. We talk about it internally. And there's nothing that we could point to that's any different today than it's been in the past. It is unfortunate, there are a few bad apples and -- to paint the entire industry the way it's been painted on a few negative related issues to those personalities in the industry. And some of the things that are taking place as the industry is attracting so much capital, driving the cap rate so low. And we'd speculate that, that is causing some of those new entrants to the industry to try and push up their returns on their investments, fast-track, as I indicated in my initial remarks. It's a long-term investment for Sun as we look at communities and we look at creating value for the shareholders. So we are sensitive to rent control. But there is nothing that we would point to right now that we are aware of.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [12]

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And on the cap rate discussion, what are you seeing today in some of your markets? And how is that compared to cap rates maybe 12 months ago?

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [13]

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Yes, I think as I have shared on, and it's Gary speaking again, last few conference calls. We've seen that tightening and compression kind of reach a level, but that level is pretty surprising to us. Seen things trade for the first time in coastal areas with a sub-4% handle on it. We see it off and on. And we are all pretty aware of how many financial institutions, sovereigns and other platforms have been created over the last 3, 4 years, probably attracted the fundamentals that Sun and its competitors are well aware about that. So they've driven down cap rates. And they've been pretty much at this level for, I'd say, the last 12 to 18 months. And as I also shared that cap rate is the first thing that we're looking at, but it's not the last thing that we're looking at. We're really trying to determine at Sun, based on the purchase price, what kind of value can we drive over a 1, 3 and 5-year period of time through the obvious expense reductions, repositioning of the properties, filling vacancies, professional management, et cetera. So we've been able, and I expect that we will continue to be able to source accretive acquisition opportunities. But it is very, very competitive out there, and we do rely more on relationships. When we go to the auctions, we don't quite compete at the levels some of the other funds are at, but we are very, very competitive throughout the industry, both manufactured housing and RV.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [14]

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Gary on that sub-4% cap rate transactions, are they smaller communities to specific markets? Or are they sizable communities?

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [15]

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Yes, we're seeing it mostly in California, mid- to large-sized communities. Some of it a little bit in certain areas of Florida and some of it in certain areas of Arizona, and certainly, some of it in the Northwest. But they tend to be mid- to large communities. I think one of the benefits that Sun has is a strong history in the last 5 to 10 years of acquiring properties from sellers who actually do feel a responsibility to their residents. They've had long-term ownership of the assets. And how we've demonstrated the investment in those communities, we have acquired the professional management, and as John like to say, the absolute emphasis on customer service. It has helped us a lot, and that's why our pipeline is full. It's mostly from inbound calls, wanting to understand what it might look like if they were to sell their properties to Sun.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [16]

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My final question is on new home sales, which increased significantly this quarter. I realize the demographics and financing options are major drivers. But I was wondering if obsolescence could be a major driver for home sales for you going forward.

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [17]

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I'm sorry, John, you broke up a little bit. We heard obsolescence and then lost you there.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [18]

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Basically, if obsolescence could be a driver of home sales going forward, if you're tracking the average age of your homes and if there's a sweet spot where new home sales could increase.

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John Bandini McLaren, Sun Communities, Inc. - President & COO [19]

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Yes, John, this is John. I think that the bottom line for us is that the demand for homes in our communities continues to grow as you've seen over the last few years. And we think that it's really more a direct result of the, as Gary's talked about, many, many times the continual investments in our communities and plus the overall repositioning strategy that takes place and at the time that we acquire communities that come into our portfolio and the sales know-how of our teams in terms of the product selection, pricing and volume and balancing, all of that. We've got a lot of experience and expertise in doing that, that's been able to balance that through. And really what's even more paramount to all that, as we've said many times, is the experience that our residents have in our communities. That relationship really builds what we think is like the greatest sales force that you could have to support your brand and be advocates for your brand. So we get a fair amount of referral business into our communities, which has led to that increase and interest in new home sales. And on top of that, what we're seeing in terms of product selection is concerned is our consumers. The level of spec that they want in homes has changed versus a couple of years ago where that's really grown. And we've been successful in passing the majority of this on in the [former] house pricing along the way.

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [20]

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Yes, I would only add, John, that we offer affordability at all different levels, the entry level, and perhaps, some homes offer that. And then the new homes that John's indicating are crossing retail price line that we haven't seen in a long, long period of time. So it seems like we're working well against both ends of the model. So we don't see functional obsolescence per se. But we will see a home that cost 20%, 30%, 40% less 10, 15 years ago is appealing to one group, and the newer homes with the higher specs appealing to a different group.

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Operator [21]

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Our next question is coming from Drew Babin of Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [22]

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Our question on Page 19 of the supplemental, the breakout of CapEx. It looks like expansion and development spending just year-to-date is higher than in past year run rates. Obviously, as you've talked about, there's lots of opportunity there. But I was just curious whether that's sort of $50 million number would be a good quarterly run rate for the rest of the year? Or whether this is kind of a lumpy amount of spending in 1Q?

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Karen J. Dearing, Sun Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [23]

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Drew, that $51 million is in line with what our expectations were for the quarter. And analyzing that to around $200 million is an expectation for development and expansion spend for the year.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [24]

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Okay. That's helpful. And then while I have you, Karen, one more question on the balance sheet. Any more large secured loans expected for this year, whether they'll be opportunistic or up financing-type opportunities like the one executed in the first quarter?

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Karen J. Dearing, Sun Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [25]

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Well, we don't have any significant debt maturities coming up until 2021. But just looking at our funding overall and our balance sheet positioning, with our pro forma net debt to recurring EBITDA at 5.6x. And we have comfort. And I think we've discussed before operating at a leverage in the low 6s. We do have capacity to secure additional debt funding. We have a significant portfolio of unencumbered properties and very strong relationships and interest from lenders. So it's a possibility, but ultimately, we have a lot of flexibility. It'll depend on the transaction pipeline and overall capital needed. We'll just look at all the sources that we have available.

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Operator [26]

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Our next question is coming from John Pawlowski of Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [27]

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First question is on the strategy in Canada. I guess over the next 3 or 5 years, are you most likely to grow, shrink or exit Canada?

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John Bandini McLaren, Sun Communities, Inc. - President & COO [28]

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Well, we've been pretty pleased with Canada's performance. So our plan would be to continue to grow it, John.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [29]

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Any sense for size?

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [30]

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John, I think that will depend upon the acquisition opportunity. I can tell you that our Sherkston Shores on Lake Eerie is approaching with the most recent expansion, 2,000 sites. We're now looking at surrounding land there because we can't really meet with the demand. And I would suggest that it would be a nice to think that we could double the size of our Canadian business in a reasonable period of time. Otherwise, we would look for selective disposition.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [31]

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Okay. Makes sense. And then just in terms of opportunistic acquisitions at the portfolio level, when you look across the top 10 private operator list, I know a few of them have recapped in recent years, but if you were going to make a bet, how many of these top 10 operators you think could hit the market or the portfolios could change hands in the next -- over the near term?

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [32]

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Again, it's Gary. Like our competitor, we're always looking to be able to expand through the acquisition of a quality portfolio. There, obviously, are only a handful of high-quality portfolios that would be of interest to us. There have been several portfolios, as everyone is aware, that have transacted but not fit the profile of us or our competitors. So with that handful, we'll carefully watch them. There is none that I'm aware of that will be coming to the market near term. One thing that we are finding, though, that might influence that over a period of time is that with a little bit of market volatility that's come and gone over this last 12-month period of time, a sensitivity to what may or may not happen with interest rates, the length of the economic run, we are in more dialogues with high-quality owners of properties that might be 1 or 2 or 3-type community owner operators that hadn't previously been considering a sale. But I think in a lot of cases due to the market circumstances I just described, the age, what's happening generationally with the management, we're able to really review opportunities that weren't in front of us a year ago. But they're onesies and twosies.

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Operator [33]

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Our next question is coming from Samir Khanal of Evercore ISI.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [34]

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So Gary, what's the update on your Australian joint venture at this point? Just trying to understand sort of the opportunities that you see possibly for this year.

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [35]

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Sure. We will be breaking ground late this quarter on our first joint venture. It's in a place called Burpengary. It's about 40 miles -- 40 minutes north of Brisbane on what they call the way to their Sunshine Coast, which is a really fast-growing retirement corridor. It's a 131 approved and developed sites for 12.1 -- I'm sorry, 46 of them are already developed. But the purchase for 131 is $12.1 million. There are a 102 additional sites requiring approvals that we'll be paying just under $6 million for it. So we hope by the end of this quarter or early third quarter to actually be moving homes and selling homes on to that first group of 46 sites that are in developed. And then we do have a second JV site identified, and we would expect to acquire it and be in the ground very late this year. So we look forward to really updating everybody when we've closed and put a shovel on the ground and started moving in houses in Burpengary.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [36]

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Got it. Okay. Thanks for the color. I guess my second question is around the operating expense side. Just sort of maybe you can talk generally about sort of the pressures you're seeing kind of on the real estate or the property taxes side. 6% you did was better than certainly what you're forecasting. So maybe just color around kind of what you're seeing on real estate assessments and maybe property taxes.

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Karen J. Dearing, Sun Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [37]

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Yes, as you noted, the real estate tax expense growth in Same Community was lower than what we expected. It's pretty early in the year when it comes to giving in your tax assessments. So we do see there's a potential for a reversal of that benefit. As we do continue to see pressure on assessments in several states, including Florida, including Texas, and we do so much expansion work, our real estate taxes are impacted by the completion of construction at expansion sites also.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [38]

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Got it. I guess my final one is on the acquisition side. You did over $300 million in 2018. You've already done $320 million in 1Q. I guess what does that opportunity set look like for the remainder of the year? I mean you've talked about sort of additional opportunities you're looking at. I mean how should we think about that?

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [39]

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Well, we can't forecast exactly what we think will happen within the pipeline. But I think we can share that our equity raise from 2018 leaves us with capacity to move forward comfortably. And I think that you will see something that looks like the $100 million to $200 million range that we feel we will be able to close on over a maybe 12-month period of time. But it's hard to tell what that choppiness will look like on the closing side from quarter-to-quarter. And I guess if we understood it better, we could include it in the forecast and guidance, but we're just going to have to wait until we actually close them.

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Operator [40]

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Our next question is coming from Wes Golladay of RBC Capital Markets.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [41]

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Can you tell us how the transient segment is performing, excluding the conversions, I guess, comparable to lodging a RevPAR, maybe a RevPass in this case?

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John Bandini McLaren, Sun Communities, Inc. - President & COO [42]

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Wes, this is John. I can tell you that we talked about in your prepared remarks that we saw 1.7% growth in transient in Q1. This was really a reflection of the seasonality associated with that revenue stream. And we would expect it to be a little bit lower in Q1 because the revenue generated is in southern resorts, which have the highest concentration of annual residents. Looking out forward, we expect to achieve our guidance growth rate of 2.9% to 3% for 2019 transient, even with having fewer transients sites available to lease as a result of the success that we've had in the transient guest annual lease conversion that you mentioned. You've got that RevPAR.

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Karen J. Dearing, Sun Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [43]

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We don't have our -- we don't have that RevPAR right in front of us, Wes. But I think that Keith will probably follow-up with Fernando to get that later.

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John Bandini McLaren, Sun Communities, Inc. - President & COO [44]

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Yes.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [45]

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Yes. Fantastic. And then my next question would be for development starts in North America this year, how should -- for the next 12 months, how many do you plan to do? And then what would be the split between RV and manufacturing?

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [46]

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I think we see 3 that I can refer to right now, new developments, and they're actually split. One is a RV community, one is strictly a manufactured housing community, 1 in California and 1 in Colorado. And then the third one that we're looking at on the East Coast, which would be a hybrid, both manufactured housing and RV and one new development.

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Operator [47]

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Our next question is coming from Todd Stender of Wells Fargo.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [48]

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Just to follow up on the new home sales. I guess maybe there's 2 questions tucked in here. The price points now that we're seeing they're well in excess of 100,000, can you speak to that, one, how residents are financing these higher prices? And then, two, just affordability among these type of tenants who can pay these kind of prices? When I look at your base rents going up 4.1%, it just suggests that folks can afford rising rents and higher prices. Maybe you can just talk about this kind of dynamic you're seeing.

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John Bandini McLaren, Sun Communities, Inc. - President & COO [49]

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Yes, I think that with respect to the pricing itself, again it goes back to sort of what consumers are wanting first and foremost. It is driving a little bit of that. And it does vary geographically where we've got, for example, we talked about this a couple of years ago with the repositioning of a particular committee called the Ocean Breeze in Jensen Beach, Florida. These are homes that would typically be on stilts because they're right on the water and so they're going to be a little bit higher priced, but you have to look at that relative to the market and what's around you, okay, when you think in terms of what affordability is. So we might be selling a house there as an example for $150,000, $160,000, $170,000 where everything around us is selling at $300,000, $400,000, $500,000. So within that specific geographic area or we could say that about pretty much in every market that we're in, we are in the sweet spot of affordable housing. So relative to everything else that's what makes it work. And then if you don't mind just one more time on the second part of your question.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [50]

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Sure. The monthly rents are up 4.1%. So you're obviously having the -- your occupancies are extraordinarily high, allows you to push REIT, I totally understand that, but it's still affordable housing at the end of the day. But maybe your answer regarding affordability kind of points to that and push rate in some of these markets.

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John Bandini McLaren, Sun Communities, Inc. - President & COO [51]

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It's all relative within the given market is basically what it boils down to, which is why we carefully look at that on an individual property basis whenever we're going through that rent increase process.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [52]

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Right. That's helpful. And just my final question just to stick with you, John, you gave some new supply numbers. When you talk about this split between expansion and ground-up for 2019, can you give those numbers again?

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John Bandini McLaren, Sun Communities, Inc. - President & COO [53]

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The guidance numbers?

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [54]

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Yes, please.

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John Bandini McLaren, Sun Communities, Inc. - President & COO [55]

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Yes, yes. So the guidance numbers for expansion was for 1,200 to 1,400 sites and for ground-up was for 800 to 1,000.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [56]

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And any internal rate of returns or yield expectations split between those two?

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [57]

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Yes, sure. I think that in our underwriting model for the new development side of things, we look for something in the very high single digits and a unlevered internal rate of return. And we are generally pretty comfortable that we're targeting it. But that's on a 3-year, 4-year stabilization with RV communities and approximately a 5-year stabilization in manufactured housing communities. When we think of 300 site communities in the cases of what we have under development right now, these communities are closer to 1,000 or greater than 1,000 sites each when they'll be fully developed out. So we still feel pretty comfortable with the way we're thinking through and modeling things and having to time down some of the takedowns of future phases in order to hit those hurdles. So we're not going in there, building everything at once, we're kind of carefully phasing them one phase at a time. On the expansion side, Karen, do you want to share?

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Karen J. Dearing, Sun Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [58]

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Typically, on a 4 to 8 per month sale on a typical 100 to 150 site expansion, we're looking at 5-year unlevered IRRs in the 11% to 14% range.

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Operator [59]

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At this time, I'd like to turn the floor back over to management for any additional or closing comments.

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [60]

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We just like to thank everybody for participating today, and we look forward to sharing our earnings next quarter. Thank you.

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Operator [61]

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Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.