Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Communities Second Quarter 2019 Earnings 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 Shipman, 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 Shipman, Chairman and Chief Executive Officer.
Mr. Shipman, you may begin.
Good morning and thank you for joining us on our Q2 2019 earnings conference call. Our portfolio has continued to exhibit strong growth during the Q2 completing a solid first half of twenty nineteen 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 experienced strong demand for affordable housing and vacationing. Core FFO for the Q2 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 a range of 6.6% to 7.2%. Prior to and just after quarter end marked the opening of the first phases of 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 We'll total over 2,200 sites with strong demand and limited new supply putting management's development expertise to work 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 $49,200,000 Year to date, we have now invested almost $375,000,000 in operating properties and are diligently working on additional Conference. 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 on over $5,000,000,000 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. 1st, The continued reinvestment in our operating portfolio in order to secure continued demand for our properties at high occupancy percentages. 2nd, 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. 3rd, 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 4th, selectively building the best new resorts and communities in the country. Together, these core initiatives will continue to drive and long term shareholder value creation.
I'll now turn the call over to John and Karen to discuss the results in detail. John?
Thanks, Gary. Sun delivered great operational results for the Q2 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 percent 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% With regards to our recent investment activity, both our 2018 2019 acquisitions have exceeded our budgeted expectations.
For the Q2, these properties exceeded their NOI budgets by $1,300,000 Total portfolio occupancy was 96.6%, 50 basis points higher than a year ago, driven by the addition In our manufactured housing expansion communities, 265 sites were filled in the 2nd quarter and 4 96 sites year to date, which is a 41% increase over the first half of twenty eighteen. Where we look selectively to convert transient RV sites to annual leases, We picked up 267 conversions in the 2nd quarter and 424 year to date. Home sales continue to demonstrate sustained demand. For the quarter, we sold 927 homes, including 139 new homes, Accounting for 77% of total new home sales. In the second quarter, we completed the construction of approximately 100 20 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 1200 to 1400 total expansion sites in 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 Bostock, North Carolina. We also opened the first fifty sites of 1 of the Florida Keys properties redeveloped after Hurricane Irma and expect a strong home sales pace there for the next few quarters. The 4th 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 July. For this period, our resorts had 4.8% same community revenue growth year over year. We are encouraged by our Strong performance in transient RV to start the Q3. We are very pleased with our performance in the 2nd 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?
Thanks, John. Sun reported $1.18 of core FFO per share for the quarter ended June 30, 2019, dollars 0.04 ahead of the top end of previously provided Conference 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 Q1, we anticipate that some of the outperformance experienced in the Q2 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 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 $452,000,000 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 Also in the quarter, we amended our senior credit facility, increasing the capacity by $100,000,000 to $750,000,000 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 $28,700,000 of unrestricted cash on hand with total debt outstanding of $3,100,000,000 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 5.2 times, down from 6 times at the end of the Q1. 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 twenty nineteen 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 markets activities that may be included in analyst estimates. This concludes our prepared remarks.
We'd like to open up the call to questions. Operator?
One moment please while we poll for questions. Our first question comes from Nick Joseph, Citigroup. Please proceed with your question.
Thanks. For the development openings, can you walk us through where we are today in terms of
Sure, Nick. I want to make sure We heard your question right. It related to Greenfield development occupancy?
That's right. Where we are today in terms of the occupancy, because I know they're phased openings And then how you expect that occupancy to grow and how long it takes to actually stabilize each of those projects?
Sure. It's obviously different for manufactured Time, 300 site RV community. So stabilization is reached and we look for a high single digit return Upon stabilization and the first two twenty one sites of 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 denominator sites in Labor Day, I included 700 sites to be completed by Labor Day and our expectation is that we would Meet that modeling.
From a sales and marketing perspective, how do you actually add these projects to your platform and
Hey, Nick, this is John. So there's a lot that goes into it 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 RVers in these particular cases within the Sun portfolio already. Cava Robles out in California is a really good example conference call that where we opened that up in May of last year and a lot of people 1, we got 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 area 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 a pretty small community and in terms of the The communication that 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 conference.
Our next question comes from John Kim, BMO Capital Markets. Please proceed with your question.
Thank you. Looking at your income statement and the transient revenue, there was a large increase Year over year of 42% and your number of transit sites only went up 8%. So I'm wondering what's driving that Disproportionate increase in transient revenue.
Yes. Most of it has to do with the Northgate acquisition that we did last year.
Okay. So that's a higher price point and that's what's driving it more than 8%?
We only had Northgate for a portion of the year last year. So we have a significant amount of more revenue
Okay. It seems like the development and acquisition opportunities are more available for you in RVs than MH, Just given pricing, do you see your mix changing over time?
We don't. And I don't think that I I mean, if you look at the $350,000,000 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's just the basic profile of the existing portfolio.
Karen, in past calls, you've talked about being comfortable running leverage in the low 6s net debt to EBITDA. This quarter is down to 5.2%. Your equity raises recently have been well supported and your closest peer trades has leveraged below 5. Do you still feel comfortable taking leverage above 6?
Well, you're correct in all of your comments. Yes, we are running a bit lower at this time. And I don't think we are comfortable running at that 6 times leverage level based on the stability of the cash 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 6 times and we don't believe that's imminent. So it appears that we will likely remain in the mid to low fives near term.
Great. Thank you.
Our next question comes from John Pawlowski, Green Street Advisors. Please proceed with your question.
Thanks. Could you share the cap rates on the 3 RV acquisitions?
Sure. John, the cap rates fell between The range of 5 and 6, and there were 3 of them in total.
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 is a bit tougher to find on a 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?
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 a 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 a 3 to 4 hour Drive Time and in Reunion Lake, I think is the
name of the
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 saw that there were 5,500,000 people within a 3 hour driving distance to the resort. 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 a very, very strong growth over the next 5 plus years At that particular community and that was the impetus to acquire it.
Okay. And you intend to grow in Louisiana, Mississippi, Alabama type of areas?
I think we're very cautious So 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 than 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 has the most amount visitors in the entire country, about 11,000,000 annually.
So it was an area that We are really focused on and that's kind of how we're looking at the different opportunities in our acquisition pipeline now.
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?
Sure. I think not to be redundant, we will look at cap rate and we can talk about the Spread, but more important than cap rate once you've 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, 1st of all, of 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%
Okay. Thank you.
Our next question comes from Todd Stender, Wells Fargo. Please proceed with your question.
Just back to the acquisitions, the New Hampshire property was a low price point and didn't list site count. Can Just maybe characterize what that property looks like?
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 will 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 3 50 sites.
So you won't buy that sister asset, you'll just manage it, is that right?
No, we'll be acquiring it. It's not closed yet.
Okay, got it. Thank you. And then the Louisiana property, you've got the developed sites and then you've got expansion sites. Do you differentiate between the price point that you're Are you paying for that and are those
expansion sites entitled yet? 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.
So So you'll go in and in the call it in the 5s at a cap rate and then there'll be some stabilized yield In the 7s, I guess, couple of years from now, is that fair?
Certainly, it's something we would strive for.
Okay. And then just because you're developing RV resorts, you've got the Paso Robles, 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're on pace and holding their own?
Yes. I think first, it's important to recognize that 60 plus percent of the portfolio, John, what is annual That's a makeup of our RV?
Yes. 60%.
Yes. 60% of it is annual. So it will We 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 Continued to cash manage the transient side of things.
So Hey, Todd, the only 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 Dreams to draw from, which is you've got annuals, which is the majority of it like Gary talked about, transient sites, which To allow you and 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 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 create stability and that revenue upside And that stability is important when it comes in terms of weather and things like that, that happen.
Did we address your question, Todd?
Yes, you did. Thank you. And John, just I guess a final question just to stick with you with new home sales.
Sure.
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 folks buying new homes and their ability to either I am outright, maybe just any color there.
Yes, I mean it's really sort of a little bit of everything of what you just said. I mean When you get into the age restricted communities, we are 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.
2018, we had 45% growth in new home sales and we're 10% ahead of last year even with a 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, 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.
Thank you. Yes.
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.
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 Q3. Thank you.