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

Q2 2019 Sun Communities Inc Earnings Call

SOUTHFIELD Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Sun Communities Inc earnings conference call or presentation Thursday, July 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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* 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

* Todd Jakobsen Stender

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

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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 Second Quarter 2019 Earnings Conference Call.

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 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 will 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 second quarter 2019 earnings conference call. Our portfolio has continued to exhibit strong growth during the second quarter, completing a solid first half of 2019 as both our Same Community and our recent acquisitions outperformed. Fundamentals in both the manufactured housing and RV segments reflect further opportunities for continued growth as we experience strong demand for affordable housing and vacationing.

Core FFO for the second quarter was $1.18 per share, up 10.3% from the prior year and $0.04 ahead of the top end of our guidance.

Given the outperformance in the quarter, we are again raising our full year 2019 core FFO per share guidance. Our new range is $4.84 to $4.90 or a $0.03 increase at the midpoint.

Additionally, we are revising our guidance on Same Community NOI upward to range of 6.6% to 7.2%.

Prior to and just after quarter end marked the opening of the first phases of the 3 ground-up premier RV developments. By Labor Day, a total of over 700 RV sites in Colorado, North Carolina and South Carolina will be delivered. When all phases are completed, these upscale RV destination resorts will total over 2,200 sites. With strong demand and limited new supply, putting managements' development expertise to work should yield steady incremental growth as new development sites are built out over time.

We continue to focus attention towards developing in high-demand areas, where we can build new communities and resorts at better risk-adjusted returns when compared to current cap rates on acquisitions of operating properties.

With respect to our acquisition activity, we continue to add very high-quality properties to our portfolio. During and subsequent to quarter end, we acquired 3 RV resorts in Tennessee, Louisiana and New Hampshire for a total of $49.2 million.

Year-to-date, we have now invested almost $375 million in operating properties and are diligently working on additional opportunities across both manufactured housing and RV.

While the market for high-quality manufactured housing communities and RV resorts remains highly competitive, we continue to leverage our long-term industry relationships, reputation and track record.

Additionally, our expertise in structuring tax-efficient transactions for sellers has been a differentiating factor in our ability to execute on over $5 billion of acquisitions over the last 8 years.

Based on the current acquisition pipeline, we are confident in our ability to continue acquiring both manufactured housing communities and RV resorts that will further enhance our portfolio performance for years to come.

We have achieved a great deal over the past 6 months and remain optimistic in our ability to continue delivering strong performance over the near and long term, as we execute on our 4 core capital allocation initiatives. First, the continued reinvestment in our operating portfolio in order to secure continued demand for our properties at high-occupancy percentages. Second, additional consolidation through the acquisition of operating manufactured housing and RV properties that, once placed on the Sun platform, can be levered to maximize performance and growth. Third, investing in the site expansion of our existing communities and resorts where fixed expenses are in place and the additional sites yield highly accretive returns. And fourth, selectively building the best new resorts and communities in the country. Together these core initiatives will continue to drive long-term shareholder value creation.

I'll now turn the call over to John and Karen to discuss the 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 great operational results for the second quarter with strong contributions across the portfolio. The driving factor for our outperformance was better-than-expected NOI growth from our Same Community portfolio as well as our recent acquisitions.

Same Community NOI growth was 7.2% for the quarter, driven by a 6.4% revenue increase and a 4.7% expense increase. Lower-than-expected utilities and payroll expenses contributed to our outperformance.

Our Same Community revenue breakouts are as follows: Manufactured housing increased by 6.2%; annual RV increased by 9.9%; and transient RV increased by 1.8%. Year-to-date, our Same Community NOI growth was also 7.2%, driven by a 6.2% revenue increase and a 3.9% expense increase. For the last 6 months, manufactured housing revenues have increased by 6.2%.

Annual RV revenues grew by 10.2%, driven by strong rental rate growth and over 760 transient RV site conversions in the Same Community portfolio over the last 12 months. Transient RV revenues grew by 1.8%, despite an almost 9% reduction in available site nights due to the aforementioned site conversions.

With regards to our recent investment activity, both our 2018 and 2019 acquisitions have exceeded our budgeted expectations. For the second quarter, these properties exceeded their NOI budgets by $1.3 million.

Total portfolio occupancy was 96.6%, 50 basis points higher than a year ago, driven by the addition of 2,589 revenue-producing sites over the last 12 months, including the addition of 668 site gains during the second quarter. In our manufactured housing expansion communities, 265 sites were filled in the second quarter and 496 sites year-to-date, which is a 41% increase over the first half of 2018.

Where we look selectively to convert transient RV sites to annual leases, we picked up 267 conversions in the second quarter and 424 year-to-date.

Home sales continue to demonstrate sustained demand. For the quarter, we sold 927 homes, including 139 new homes, an almost 4% increase over last year's new home sales. Top new home sales states were Florida, South Carolina, Michigan and Texas accounting for 77% of total new home sales.

In the second quarter, we completed the construction of approximately 120 vacant expansion sites across 4 manufactured home communities and RV resorts. The bulk of our vacant expansion site deliveries are expected in the second half of the year.

We continue to be on pace for the addition of 1,200 to 1,400 total expansion sites and 18 communities for 2019.

As Gary mentioned earlier, we opened the first phases of 3 premier RV resorts: Carolina Pines in Myrtle Beach, South Carolina; River Run in Granby, Colorado; and Jellystone Golden Valley in Bostic, North Carolina. We also opened the first 50 sites of one of the Florida Keys properties redeveloped after Hurricane Irma and expect a strong home sales pace there for the next few quarters.

The 4th of July is an important long weekend for our northern RV resorts. Since it fell on a Wednesday last year and a Thursday this year, the most comparable way to look at it is the 10-day period inclusive of the weekends before and after the 4th of July. For this period, our resorts have 4.8% Same Community revenue growth year-over-year. We are encouraged by our strong performance in transient RV to start the third quarter.

We are very pleased with our performance in the second quarter. Our results are a reflection of our commitment to deliver excellence to our residents and guests, and that effort is translating into shareholder value.

With that, I will 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 June 30, 2019, $0.04 ahead of the top end of previously provided quarterly guidance and a 10.3% increase over the second quarter of 2018.

As we mentioned earlier, this outperformance was driven by better-than-expected NOI growth in our Same Community and recent acquisition portfolios.

Our rental home program also performed ahead of expectations. Much like the first quarter, we anticipate that some of the outperformance experienced in the second quarter may reverse over the second half 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.

We were active on the capital market side ensuring that the balance sheet remains in optimal condition to continue to support our growth initiatives. In late May, we completed an overnight equity offering raising $452 million of net proceeds. The initial use of the proceeds was to pay down our revolving credit facility, and we will continue to invest in the acquisition of operating properties and land for expansion sites as well as the development of greenfield projects.

Also in the quarter, we amended our senior credit facility, increasing the capacity by $100 million to $750 million.

We improved borrowing terms for the facility and now have the ability to borrow in Australian dollars for our development joint venture with Ingenia.

At quarter end, the company had $28.7 million of unrestricted cash on hand, with total debt outstanding of $3.1 billion. Our debt has a weighted average interest rate of 4.4% and a weighted average maturity of 9.9 years. We have no material debt maturities until 2021 and continue to actively review our debt ladder for opportunities to pay down or refinance at attractive long-term rate.

At quarter end, the company's net debt to trailing 12-month EBITDA ratio was 5.2x, down from 6x at the end of the first quarter.

Moving on to guidance. We are raising our annual core FFO guidance per share for the year to a range of $4.84 to $4.90. This increase reflects the outperformance in the quarter, offset by expense timing over the second half of 2019, as previously mentioned, as well as the impact of our equity offering. We are also revising our full year Same Community NOI growth guidance to a range of 6.6% to 7.2%. As is our practice, our guidance does not include the impact of prospective acquisitions or capital market's activities that may be included in analyst estimates.

This concludes our prepared remarks. We'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 Nick Joseph, Citigroup.

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

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For the development openings, can you walks us through where we are today in terms of occupancy and the timing and path stabilization for each of the projects?

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [3]

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Sure, Nick. I want to make sure we heard your question right, it related to greenfield development occupancy?

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

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That's right. Where we are today in terms of the occupancy because I know they are phased openings. And then how you expect that occupancy to grow? And how long it takes to actually stabilize each of those projects?

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [5]

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Sure. It's obviously different for manufactured housing and RV. We speak of RV as a stabilizing in a shorter period of time, about a 3-year period of time and a 300-site RV community. So stabilization has reached, and we looked for a high single-digit return upon stabilization. And the first 221 sites of the 700 newly developed RV sites were delivered at the very end of June, and the balance in 2 other communities were delivered in July with a total of -- how many sites in Labor Day I had included it in my -- 700 sites to be completed by Labor Day. And our expectation is that we would meet that modeling.

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

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From a sales and marketing perspective, how do you actually add these projects to your platform and drive demand initially?

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John Bandini McLaren, Sun Communities, Inc. - President & COO [7]

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Nick, this is John. So there is a lot that goes into a year ahead of these ground-up developments opening. And so as you would imagine, some of it has to do with just the relationship we already have with existing RV-ers in these particular cases within the Sun portfolio already. Cava Robles up in California is a really good example of that, where we opened that up in May of last year. And a lot of people -- one, we get the word out via all the avenues we have, whether it's social or advertising, billboard campaigns, local advertising, that we might have in the immediate areas as well as markets where people typically draw from. And then just to give you an example of that particular opening, it was sort of a phased, staged opening and so people got to test drive. And so we reached out to them to be advocates for the community and share their experiences in the RV world, which I think you might know is kind of pretty small community. And in terms of the communication it has within it and it's that -- it's really a combination of things what I'm trying to say that really drives that initially and really kicks it in the gear.

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Operator [8]

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Our next question comes from John Kim, BMO Capital Markets.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [9]

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Looking at your income statement and the transient revenue, there was a large increase year-over-year of 42%, and your number of transient sites only went up 8%. So I'm wondering what's driving that disproportion of increase in transit revenue?

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John Bandini McLaren, Sun Communities, Inc. - President & COO [10]

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Yes, most of that has to do with the Northgate acquisition that we did last year.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [11]

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Okay. So that's the higher price point and that's what's driving it more than 8%?

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Karen J. Dearing, Sun Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [12]

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Is it -- we only had Northgate for a portion of the year last year. So we have a significant amount of more revenue coming from Northgate in this year and the sites would have been added last year.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [13]

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Okay. It seems like the development in acquisition opportunities are more available for you in RVs than MH, just given pricing. Do you see your mix changing over time?

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [14]

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We don't. And I don't think that -- I mean if you look at the $350 million-plus acquisitions that we've done year-to-date, I think, what you'd find is just over 70% on a dollar basis and right around that level on a per site basis, 3,000 of the 4,000 sites were actually manufactured housing. So I think as we look at the pipeline, John, our expectation is that we would continue to have opportunities that fit the basic profile of the existing portfolio.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [15]

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Karen, in past calls, you've talked about being comfortable running leverage at -- in the low 6s net debt to EBITDA. This quarter it's down to 5.2. Your equity raises recently have been well supported and your closest peer trades -- or has leverage below 5. Do you still feel comfortable taking leverage above 6?

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Karen J. Dearing, Sun Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [16]

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Well, you're correct in all of your comments. Yes, we are running a bit lower at this time. And yes, I don't think -- we are comfortable running at that 6x leverage level, based on the stability of the cash flows of this asset class. But as you mentioned, our recent capital markets activity and also really the strength of our EBITDA growth in the portfolio, it would take a pretty large transaction to move us back to that higher level of 6x. And we don't believe that's imminent. So it appears that we will likely remain in the mid-to low 5s near term.

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Operator [17]

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Our next question comes from John Pawlowski, Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [18]

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Could you share the cap rates on the 3 RV acquisitions?

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [19]

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Sure. John, the cap rates fell between the range of 5 and 6, and there were 3 of them in total.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [20]

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Okay. Gary or John, could you help us understand particularly the Louisiana acquisition, just the type of customer demand, the percent transient, because it's your first purchase in Louisiana, it's a bit tougher to find on the map. So how durable are the cash flows for that 5 to 6-ish cap rate? And how do you underwrite that acquisition versus your existing RV portfolio?

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

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Sure. This is Gary, I'll start out, John can add whatever I leave out. But we're really excited to begin differentiating a little bit in our footprint and always very, very focused on location. Because location really will drive growth and demand. And I think this management team is always very focused on growth, not just acquiring at an accretive cap rate but more importantly, how much growth can we generate by putting a property on the Sun platform and extracting growth in the years to come. So one of the big things that we look at is, in RV destinations, the average drive time that we look at is what is the population within the 3- to 4-hour drive time, and in Reunion Lake, I think it's the name of that property, it's about 45 minutes from New Orleans and 45 minutes to Baton Rouge. So as we plot out how we think about buying an RV community, we thought that there were 5.5 million people within a 3-hour driving distance to the resort. Additionally, there is upside through 69 expansion sites that were purchased and recently entitled by the seller, and we were also able to acquire an adjacent piece of land, which is not yet entitled, but we expect to apply for expansion entitlement. So we project very, very strong growth over the next 5-plus years at that particular community, and that was the impetus to acquire.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [22]

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Got it. And you intend to grow in Louisiana, Mississippi, Alabama type of areas?

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

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I think we're very cautious with everything that we underwrite, but we are looking for diversification in our geographic footprint. And so most likely, we will be very, very selective in those areas. And when we can check the box, not to give you more information really that what you're asking for, but if we look at River Plantation, which was Tennessee, a new market for us as well. It's located 6 miles away from Dollywood, the entertainment park, and 10 miles outside the doorway to the Great Smoky Mountain National Park. And as we continue to do our diligence, one of the things that surprised us that the park resort has the most amount of visitors in the entire country, about 11 million annually. So it was an area that we really focused on, and that's kind of how we're looking at the different opportunities in our acquisition pipeline now.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [24]

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Okay. Understood. And then one broader transaction market question across your footprint. Could you give us a sense for a transient RV Park and an annual RV Park? What's the typical prevailing cap rate spread?

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

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Sure. I think and not to be redundant, we will look at a cap rate and we can talk about the spread, but more important than cap rate, once you got the right location, is what kind of growth can we generate in the next 3 to 5 years. So that will be a big function of the cap rate that we are willing to pay. But generally, we do not differentiate as much between annual and seasonal. It's more, as I said, first of all, a growth trajectory. But also importantly, when we convert transient to annual, we pick up 40% to 60% additional revenue on an annual basis by having those sites paying annual rent. So if we can buy a transient again, at the same cap rate as an annual but get the benefit of that additional growth through the conversions and, as John shared, we are currently converting at about 10% a year transient population to annual, then we'll absolutely pay the same cap rate.

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Operator [26]

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Our next question comes from Todd Stender, Wells Fargo.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [27]

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Just back to the acquisitions, the New Hampshire property was a low price point and didn't list site count. Can you just maybe characterize what that property looks like?

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

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Sure. That's a great question. And it's Gary, again, only because I'm probably most involved in the recent acquisitions. But it is part of a larger single asset purchase that would be managed together with that. It's 139 sites, very, very high quality, and the sister asset that we will manage with it will be over 350 sites.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [29]

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So you won't buy that sister asset, you'll just manage it. Is that right?

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

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No, we'll be acquiring it, it's not closed yet.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [31]

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Okay. Got it. And then the Louisiana property, you've got the developed sites and then you got expansion sites, do you differentiate between the price point that you're paying for that? And are those expansion sites entitled yet?

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

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So the first 69 sites are entitled and each individual deal is different. Sometimes they come along built into the purchase price. Sometimes, we will acquire them separately. Sometimes, we'll acquire them on a deferred payment basis. But separate in this particular property is the additional piece of land we were able to tie up and acquire separately from the cap rate paid on the acquisition of the existing property.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [33]

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So you'll go in and then call it in the 5s at a cap rate and then there'll be some stabilized yield in the 7s, I guess, a couple of years from now, is that fair?

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [34]

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Certainly, it's something we would strive for.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [35]

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Okay. And then just because you're developing RV resorts, you've got the Paso Robles, the Myrtle Beach, and just because it's not MH, they're not going to be permanent residents, how do you show or how do you measure the success of the lease-up? How do you kind of look to see that they are on pace and holding around?

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [36]

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Yes, I think first it's important to recognize that 60-plus percent of the portfolio, John, what is annual as a makeup of our RV.

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John Bandini McLaren, Sun Communities, Inc. - President & COO [37]

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Yes, it's about 60%.

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Karen J. Dearing, Sun Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [38]

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It's 60%.

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

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60% of it is annual. So it will operate and function and pay rent that's recognized over the period of a year. So we certainly have the ability to monitor the success of occupancy in that fashion. And then on our transient side, we're very engaged in really analyzing and working on our own proprietary software right now of how to continue to cash-manage the transient side of things. So...

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John Bandini McLaren, Sun Communities, Inc. - President & COO [40]

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I think, Todd, the one thing I'd add with that is in an RV resort it's really, I mean, to some extent, it's sort of like the best of all worlds in my opinion because you've got multiple revenue streams to draw from, which is you've got annuals, which is the majority of it, like Gary talked about, transient sites, which allow you in a development to sort of hit the ground running with all sites available being able to generate revenue as well as vacation rentals and we're very diligent in terms of what the balance should be on an individual community basis, which may differ because, for example, you might have some communities where the transient revenue that you gain over the course of the year, it frankly doesn't make sense to convert to an annual on a particular sites within a community. But again, that balance is important because one of the other things that having a high percentage of annuals within the overall RV portfolio does is, it creates stability and that revenue upside and that stability is important when it comes in terms of weather and things like that happen.

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

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Did we address your question, Todd?

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [42]

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Yes, you did. And John, just I guess, a final question just to stick with you with the new home sales. They appeared solid. Can you just maybe speak to some of the underlying, whether it's credit, affordability, buying trends, age, anything you're seeing with the folks buying new homes and their ability to either buy them outright? Maybe just any color there.

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John Bandini McLaren, Sun Communities, Inc. - President & COO [43]

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Yes, I mean it's really -- it's sort of a little bit of everything of what you just said. I mean when you get into the age-restricted communities where you're seeing the vast majority of those purchases are coming in the form of cash sales, you get into the family communities, they're more supported by finance. I think the biggest draw has been the continued need for affordability, which is what our product and our communities offer and the quality that we offer along with it. And we continue to see really solid demand. In 2018, we had 45% growth in new home sales, and we're 10% ahead of last year even with the big year like that in 2018. So as well as pricing has been continuing to go up. As a result, a lot of customers really wanting to spec up their houses, so to speak, as well as all the different benefits and amenities that we have within the houses. So from a credit standpoint, it really -- that's how the portfolio breaks apart, but it really comes back to that being in a community that is beautiful and affordable at the same time, which is the draw.

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Operator [44]

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

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Gary A. Shiffman, Sun Communities, Inc. - Chairman & CEO [45]

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Thank you, operator. We'd like to thank everybody for participating on our second quarter call. And we look forward to announcing results at the end of third quarter. Thank you.

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Operator [46]

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