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Edited Transcript of SUI earnings conference call or presentation 27-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Sun Communities Inc Earnings Call

SOUTHFIELD May 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Sun Communities Inc earnings conference call or presentation Thursday, April 27, 2017 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. - Executive Chairman and CEO

* John Bandini McLaren

Sun Communities, Inc. - President and COO

* Karen J. Dearing

Sun Communities, Inc. - CFO, EVP, Treasurer and 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

* Gwendolyn Rose Clark

Evercore ISI, Research Division - Research Analyst

* Jason Belcher

* Joshua Dennerlein

BofA Merrill Lynch, Research Division - Research Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - VP and Senior Analyst

* Ryan Cole Burke

Green Street Advisors, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Sun Communities First Quarter 2017 Earnings Conference Call on April 27, 2017.

At this time, management would like me to inform you that certain statements made during this conference 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 this morning's press release and, from time to time, in the company's periodic filings with the SEC. The company undertakes no obligation to advise (sic) [revise] 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. (Operator Instructions)

I'll now turn the call over to Gary Shiffman. Mr. Shiffman, you may begin.

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

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Good morning, and thank you for joining our first quarter earnings call.

I'm pleased to share that 2017 has gotten off to an excellent start, with same-community NOI growth of 6.7%, strong occupancy gains of 170 basis points in our same-community portfolio and 40 basis points from the portfolio overall, as well as an 8% increase in the number of homes sold.

While the quarter was a relatively quiet one from an external growth perspective, our prior hard work on that front, coupled with our best-in-class operating platform and focus on sustained internal growth, allowed Sun to deliver 22% FFO per share growth, a growth rate that we are certainly very proud of.

In the quarter, we permitted over 500 manufactured housing expansion sites that were completed late in the fourth quarter of 2016 and delivered over 250 newly built manufactured housing expansion sites in 3 communities as part of our 2017 expansion program. We are on track to deliver an additional 870 expansion sites in 10 communities in the second quarter.

On the RV side of our business, we converted over 200 transient sites to annual seasonal rentals as compared to approximately 150 conversions in the first quarter of 2016. On the external growth front, we continue to utilize our deep relationships and market knowledge to source selective, high-quality acquisitions, which enhance our portfolio and strategic direction.

Our pipeline is very active, and we expect our acquisition pace to reflect similar levels of activity to that of our prior years with respect to one-off transactions. We also continue to seek out 1 to 2 development opportunities each year.

As previously discussed, our selective developments and redevelopments will focus on increasing our presence in high-barrier to entry states and resort or waterfront destinations where we believe we can generate strong returns for our shareholders. In the first quarter, we purchased a 328-site RV resort outside of Sacramento, California, which further expands our presence in a key high-barrier to entry state.

Subsequent to quarter end, we closed on a fully entitled 194-acre parcel of land in Myrtle Beach, South Carolina. Over the course of the last year, we've successfully entitled and zoned this land to build up to a 775-site RV resort approximately 6 miles away from the ocean.

Additionally, in keeping with our intention to deepen our presence in the West, we were awarded the opportunity to redevelop a 267-site RV resort on the highly desirable San Diego Bay by its port authority. The development is subject to successfully negotiating a long-term lease with the port authority of San Diego.

We have now completed the high season for our Southern RV properties and our first with Carefree in the portfolio. The season went extremely well and reinforces our conviction about this accretive acquisition. With the benefit of 3 quarters of Carefree financials in our trailing 12-month results, our debt ratios are moving towards the normalized level we had anticipated. As we look ahead, the portfolio is well positioned to deliver ongoing consistent NOI growth, driven by contractual increases in monthly base rent per site, additional occupancy gains, the continued flowing of expansion sites and the conversion of RV sites from transient to annual seasonal.

With a solid start to the year, we continue to anticipate same-community NOI growth in the 6.4% to 6.8% range, in line with the guidance we provided. We have worked hard to reposition our portfolio, and we have successfully integrated numerous entity-level transactions. These have added meaningful scale, along with demographic and geographic diversification, to enhance Sun's ability to generate steady internal growth. With one-off acquisitions, existing community expansions, incremental ground-up developments and asset redevelopments, we believe that we can deliver attractive returns to our shareholders over the long term.

And now I'll turn it over to John to discuss our operating results. John?

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

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Thank you, Gary. Sun delivered another excellent quarter of operating results. Total revenues increased by over 34% as compared to the same quarter in 2016, reflecting both the contribution of Carefree as well as sustained strength across multiple revenue streams of our platform.

We added 687 revenue-producing sites during the quarter, which boosted total occupancy to 95.9%, up 40 basis points from the prior year period. Additionally, we sold 826 homes in the quarter, up 8% on a year-over-year basis. Of these, 240 or approximately 30% of total sales were former occupied rental homes.

Our same-community results were strong across the board, with NOI increasing by 6.7%. Same-community revenues were up 5.2% on occupancy growth of 170 basis points and a monthly base rent growth of 3.3%.

Same-community expenses increased by 1.1%, lower than anticipated predominately due to timing of certain expenses, which Karen will discuss momentarily. We anticipate continued strong same-community performance throughout the year, given sustained demand for our high-quality communities.

On the Carefree front, it is performing ahead of our original underwriting and in line with our budget for the first quarter of 2017. Metrics across the portfolio in terms of product type were consistent, with the MH same-community revenues up 5.2%, while RV same-community revenues were up 5.8%.

On the non-same-community RV front, of which Carefree is a significant contributor, we are closing on a highly successful Southern RV season and look forward to a strong summer vacation season in our Northern resorts. Our call center reservations are up 44% year-to-date, and our transient rental sites in our same-community portfolio are now 65% booked for the upcoming season as compared to 56% at the same time last year. On a total portfolio basis, transient sites are 63% booked for the Northern season.

We have delivered over 250 expansion sites thus far and remain on track to deliver the balance of 1,800 MH and 400 RV expansion sites over the next 3 quarters. As we have discussed previously, we are currently building a 322-site RV resort in California Wine Country located in Paso Robles. Targeted to open by mid-2018, this resort is located close to 2 other communities we currently own where we've consistently experienced more demand than available capacity.

At Jellystone Larkspur, an RV resort we acquired during the fourth quarter 2016 in the greater Denver MSA, we are in the process of expanding and repositioning the resort. We are developing 352 new sites on contiguous entitled and zoned land and adding a number of new amenities. Expected completion for this phase is fall of 2018, at which point we will redevelop the original 148 sites for a total of 500 sites once the resort is completed.

As noted earlier, we closed on a fully entitled land parcel, which will become an RV resort in Myrtle Beach, South Carolina. We expect completion of Phase 1 that includes the first 435 sites and the amenity core by June 2018. This site is located just 10 miles away from our 96%-occupied, 422-site, age-restricted manufactured housing community of Lakeside Crossing.

All in all, it was a successful quarter. Our assets are performing in line with expectations, and we are actively laying the groundwork for future growth.

And now I'll turn it over to Karen to discuss our financial results. Karen?

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Karen J. Dearing, Sun Communities, Inc. - CFO, EVP, Treasurer and Secretary [4]

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Thanks, John. Sun recorded $1.10 of FFO per share on a diluted basis, up 22% over Q1 2016, reflecting the addition of Carefree and strengthening our same-community portfolio. Our same-community showed strong top line growth and benefited from the impact of timing differences on certain expense line items.

Property operating and maintenance expenses and real estate taxes grew by 1% and 1.4%, respectively, for the quarter. Supply and repair costs, including certain community maintenance expenses, were lower than expected in Q1, which is due to timing. The expected year-over-year real estate tax increase will accelerate as the year progresses due to prior year real estate tax expense not having been ratably incurred. We expect to be within our original guidance for property operating and maintenance and real estate taxes by year-end.

We reiterate our previous FFO per share guidance for the year in the range of $4.16 to $4.24 per diluted share, with full year same-community NOI growth in the range of 6.4% to 6.8%. For the second quarter, we anticipate FFO per diluted share to be in the range of $0.93 to $0.95.

I've noted in our Q4 2016 earnings release, we raised roughly $21 million in net proceeds through our at-the-market equity sales program in January 2017 by selling approximately 281,000 shares at a weighted average price of $76.47. At quarter end, we had $3.1 billion of debt outstanding, with a weighted average interest rate of 4.45% and a weighted average maturity of 8.2 years. Having addressed a number of our 2017 debt maturities in the fourth quarter of last year, we have only $4 million of debt maturing in the remainder of this year.

We finished the quarter with roughly $11 million of cash on hand and $272 million of capacity on our line of credit. As Gary mentioned earlier, our debt ratios have continued to improve, reflecting the additional quarters of Carefree in our trailing 12-month EBITDA. Our net debt to trailing 12-month EBITDA was 7x at the end of the first quarter, 0.5 turn better on a sequential basis and 2.1 turns better as compared to June 30, 2016, when we closed on Carefree. This puts us on track to achieve our expected leverage range of mid-6x net debt to EBITDA by mid-2017.

On Tuesday of this week, we completed the refinancing of our existing line of credit. We increased the size by $200 million to $650 million, and we're able to improve our interest rate spread as well as other terms.

And with that, I'd 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 comes from the line of Nick Joseph with Citigroup.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [2]

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Karen, you mentioned that first quarter FFO [accounted for those] $0.03 ahead of guidance. I'm just curious why that -- is it well within the intended updated full year core FFO guidance number, if there's any kind of timing issues that should be offset later in the year.

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Karen J. Dearing, Sun Communities, Inc. - CFO, EVP, Treasurer and Secretary [3]

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Yes, Nick. As I mentioned, the Q1 outperformance is really due in large part to expense timing rather than revenue outperformance. In the same-community, we had some community maintenance expenses and also advertising and health insurance costs that were lower than what we had originally expected. And we believe that a significant portion of those will be incurred later this year. And we also saw similar timing items in the non-same-community expenses and in some of the total portfolio ancillary expenses.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [4]

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And then same-store NOI guidance was maintained. Are the underlying same-store revenue and expense guidance also maintained or if the components there have shifted?

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Karen J. Dearing, Sun Communities, Inc. - CFO, EVP, Treasurer and Secretary [5]

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No. We're maintaining the underlying revenue and expense line items for same-community.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [6]

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So in terms of same-store revenue, I think you had guided to 5.6 to 5.8. It came in at 5.2 in the first quarter. So can you talk about the ramp that you're expecting and the underlying assumptions that will get you to that midpoint?

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Karen J. Dearing, Sun Communities, Inc. - CFO, EVP, Treasurer and Secretary [7]

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Yes. There -- Q1 revenues were pretty much in line with what we had expected, and there is seasonality in the same-community NOI revenue and expense performance. Yes, we don't provide quarterly same-community NOI guidance, but we do and did in -- with our guidance for 2017, we did provide quarterly FFO seasonality. And I think one could infer that the same-community NOI growth would sort of follow that pattern, that Q3 would be the highest NOI growth and Q2 would be the lowest.

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Operator [8]

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Our next question comes from the line of Gwen Clark with Evercore ISI.

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Gwendolyn Rose Clark, Evercore ISI, Research Division - Research Analyst [9]

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Can you guys talk about which markets are doing the best so far this year and then after, which markets are the weakest?

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Gary A. Shiffman, Sun Communities, Inc. - Executive Chairman and CEO [10]

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We -- I heard the beginning regarding best markets. What was the last part of it, Gwen?

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Gwendolyn Rose Clark, Evercore ISI, Research Division - Research Analyst [11]

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Oh, the weakest ones, sorry.

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Karen J. Dearing, Sun Communities, Inc. - CFO, EVP, Treasurer and Secretary [12]

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I think overall, the portfolio is just really performing as expected. Our major markets are all in line with one another. Not really seeing much distinction in the markets. I don't know if, John, you had anything to add to that.

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John Bandini McLaren, Sun Communities, Inc. - President and COO [13]

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The only thing I would add is just, Gwen, relative to the budgets and the expectations we had for '17, reiterating what Karen said, I mean, everything is pretty much performing in line with what our expectations were.

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Gwendolyn Rose Clark, Evercore ISI, Research Division - Research Analyst [14]

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Okay. One just other quick one. Can you remind us, how do you underwrite the RV developments both in terms of the stabilized yield that you target and the lease-up?

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

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So I'll let John speak to the lease-up. But it's actually part of the model. We look for stabilization in the RV development kind of between 24 and 36 months that are underwritten 2 and 8 to 10 return at stabilization. One of the differences between the RV development and manufactured housing development is we can reach stabilization a little bit faster in the RV developments just due to the fact that upon day 1, they are available to all the transient and traffic. And as we convert into seasonal annual, the occupancies are a lot faster than developing a manufactured housing community, which we underwrite with an occupancy absorption of about 6 to 8 sites [per month] (corrected by company after the call), and it's about 36 months or 48 months to stabilization. In the manufactured housing, basically the same type of stabilized return.

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Gwendolyn Rose Clark, Evercore ISI, Research Division - Research Analyst [16]

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Okay, that's helpful. Sorry, and just one last quick one. Do you have enough sense for how many RV developments might be under construction today in the U.S.?

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John Bandini McLaren, Sun Communities, Inc. - President and COO [17]

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Across the country? Really, nothing off the top of my head. And as far as I know, I think that we are the ones that are doing most of the development within the industry right now. I mean, I know that there's some operators that are doing smaller expansion projects and things like that, but nobody that I'm aware of that's doing any sort of ground-up development.

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Operator [18]

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Our next question comes from the line of Drew Babin with Robert W. Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [19]

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I was hoping you could talk about the Myrtle Beach development. And apologies if I missed this, but what is the total investment that you had projected for the development all in?

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John Bandini McLaren, Sun Communities, Inc. - President and COO [20]

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Drew, this is John. Well, with Myrtle Beach, like Gary mentioned earlier, it can be built out when it's done to 775 sites. That's a large community, so we're going to take it in phases, with really, Phase 1 investment will be about -- somewhere in the $13 million to $15 million range, taking it through those steps.

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Gary A. Shiffman, Sun Communities, Inc. - Executive Chairman and CEO [21]

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How many sites, John, those -- that represents?

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John Bandini McLaren, Sun Communities, Inc. - President and COO [22]

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That would represent like the first 200, 250 sites.

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Gary A. Shiffman, Sun Communities, Inc. - Executive Chairman and CEO [23]

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So I think if you just took it from there and multiply that to 775, putting in a factor for inflation, this will be slowly built out depending upon demand, Drew. And I think that's the nice thing that we're able to do with the developments and time and according to absorption and what the market demand is before we expand beyond first phases.

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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 how are you able to get the land entitled and rezoned? We always hear about manufactured housing. It's difficult to get land entitled and rezoned , and municipalities tend to not favor new RV or manufactured housing development. What was unique about this opportunity that enabled you to get it done?

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Gary A. Shiffman, Sun Communities, Inc. - Executive Chairman and CEO [25]

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I think just tenacity. It's very, very challenging to get entitlement zoning for both manufactured housing and RV, especially in the highly desirable areas. Oftentimes there'll be a set of good circumstances where a city is looking for growth. And there's maybe local municipal representation in the owner group of a particular parcel of land, and that kind of paves the way to make things a little bit smoother. And then the final thing that I would suggest is that the experience and the portfolio that we can put in front of the municipalities and the zoning entitlement bodies really helps. And the best example, that is what's going on with the San Diego development. There were a host of people bidding to redevelop an existing RV community on the bay, and the municipality is building a very large convention center on the site. So they wanted to move the community a couple of miles down shore. And it was the ability for Sun to talk about the experience and the development and show the type of product that we do develop that allowed us to be awarded that particular example. But I'd share with you, for every 1 or 2 that we get as zoned, there's probably 5 or 6 that get rejected. And that's after the 10 or 12 that we reviewed and didn't even take to the step of looking at entitlement zoning. So it's what keeps the demand so high in our industry, and it's frustrating sometimes that we can't expand and develop a little bit more. But at the same time, it's shortage of supply, so it's a good thing as well.

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Operator [26]

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(Operator Instructions) Our next question comes from the line of Joshua Dennerlein with Bank of America Merrill Lynch.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [27]

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Are there any other land sites in your portfolio where you're working on entitlement or zoning? Or is Myrtle Beach like the only one that was -- that you're in process of?

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Gary A. Shiffman, Sun Communities, Inc. - Executive Chairman and CEO [28]

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Well, I would just add that -- as we're burning through an inventory of 8,000 to 10,000 expansion sites that we have at a rate of 2,000 a year right now, we've got to be very, very focused on replenishing that inventory. So one of the projects for 2017 is to identify additional contiguous land for rezoning next to our existing communities, and we're very, very focused on that. To Drew's question before, I mean, Josh, I would just add that it's much easier to entitle adjacent land that it is a new development site. So that's one part of the question. The second part is that we are out there working very, very diligently to be able to know that we can develop 1 to 2 ground-ups per year. And that means we, I guess, as I said, have to turn over a lot of rocks to get to that point. One of the things that Sun has begun to identify is the process of redeveloping existing, maybe functionally obsolete communities that have the underlying zoning and entitlement in place. And that is what we're doing in our Larkspur, Colorado property, where we'll take -- how many sites that's existing, John?

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John Bandini McLaren, Sun Communities, Inc. - President and COO [29]

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148 sites.

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

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148, and acquire the existing land, which was easier to entitle, and turn it into a 500-site modern community. So...

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [31]

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Interesting. And how many kind of sites are out there that could be resold that you think exist? Like is it a substantial part of a market?

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

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As far as redeveloping the existing communities with entitlement, it's hard. It's -- first of all, you've got to be able to acquire them and purchase them at a price that when their complete development is redone because you're basically buying them for an NOI, and then you're scraping them to the ground and rebuilding everything from the infrastructure underground all the way up. So they've got to be bought property, and the highly desirable locations obviously are costly. So it's something we'll continue to do in onesies and twosies. But I don't think there's an abundant opportunity out there to start doing those type of redevelopments.

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Operator [33]

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Our next question comes from the line of Ryan Burke with Green Street Advisors.

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Ryan Cole Burke, Green Street Advisors, LLC, Research Division - Analyst [34]

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Just one question at this point. Tax reform is obviously very topical, and what it will ultimately look like is very uncertain. It does seem that there's some evidence that suggests that the 1031 exchange could go away or that's at least one of the more likely outcomes. Do you have a feel for how often private investors utilize 1031 in MH and RV? And I guess probably even more importantly, are you seeing any uptick in interest in OP unit deals as another form of tax deferral for sellers? Or would you expect an uptick?

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

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Yes. It's Gary again. I think that it's very, very seldom that we've experienced tax-free exchange from a seller. Maybe a couple of times over the last 20 years. So it hasn't been something that's been very significant in the transactions we've done. On the other hand, the OP units and the preferred operating partnership units that we've used to structure many of our small and large transactions continue to be of interest. And I guess I would suggest that I have not experienced or heard of anything from our acquisition department that would indicate they have seen any kind of change in sentiment out there.

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Operator [36]

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Our next question comes from the line of Jason Belcher with Wells Fargo.

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Jason Belcher, [37]

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Sorry if I missed this, but wondering if you all can give us an update on what you're seeing in terms of cap rate trends in the broader acquisition market as well as for your recent acquisitions.

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Gary A. Shiffman, Sun Communities, Inc. - Executive Chairman and CEO [38]

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Yes. Again, Jason, it's Gary. We have really not seen anything change on the cap rate front. The transactions are taking place in a 5% to 6% cap rate range for the very high-quality communities. And I have seen and continue to see floor handles on things like very special communities or communities in California in particular, but not a lot has changed on the base cap rates. The property that we acquired in California this past quarter, which we're very pleased, we were able to acquire at a 6% cap rate, so on the higher end of that spread. And I think that, that was just a very unique opportunity.

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Jason Belcher, [39]

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Great. And then secondly, can you guys update us on the age-restricted mix across the overall portfolio and then also what that looks like within the current investment pipeline?

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Karen J. Dearing, Sun Communities, Inc. - CFO, EVP, Treasurer and Secretary [40]

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Currently, our age-restricted is about 33% of our portfolio on a site basis.

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Gary A. Shiffman, Sun Communities, Inc. - Executive Chairman and CEO [41]

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And I would share, because I'm most involved in the acquisition pipeline, that the pipeline is very, very homogenous across all types: RV, MH, senior, all age. And one of the benefits that we have right now is that we're very discerning and very selective on what we are acquiring so that all the hard work we've done on building the high-quality portfolio is maintained. So I would expect to see things continue basically in the percentages that the existing portfolio is in.

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Operator [42]

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Ladies and gentlemen, there are no further questions. At this time, I'll turn the floor back to management for final remarks.

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Gary A. Shiffman, Sun Communities, Inc. - Executive Chairman and CEO [43]

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It's always a pleasure to be able to deliver these kinds of quarterly results. The entire management staff is available for any follow-up questions, and we definitely look forward to speaking to everybody on our call after the second quarter. Thank you.

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Operator [44]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.