Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Sun Communities First Quarter 2018 Earnings Conference Call. At this time, management would like 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 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, from time to time, the company's periodic filings with the SEC.
The company undertakes no obligation to advise or update any 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 McLaurin, President and Chief Operating Officer Karen Deering, Chief Financial Officer. After the remarks, there will be an opportunity to ask questions. I'll now turn the conference call over to Gary Shiffman, Chairman and Chief Executive Officer.
Mr. Shiffman, you may begin.
Good afternoon and thank you for joining us on our Q1 2018 earnings conference call. We have started 2018 on a positive pace, posting $1.14 in core FFO per share, which is at the top end of our guidance range. All cylinders are firing on our operations front and both our manufactured housing and RV components driven by outperformance in our rental program and home sales net profit as well as lower than expected interest expenses. Same community revenue growth for the quarter was 5.7%. We did experience 6 0.6% same community expense growth in the quarter, the majority of which related to a one time reserve increase For certain general liability claims and increased utility usage in the Midwest, Texas and Florida, which we attribute to significantly lower temperatures Demand for the high quality lifestyle Sun delivers remains robust.
For the quarter, Sun gained 6 revenue producing sites, which included outperformance and RV conversions from transient to annual sites. Home sales volume rose 1.3% to 8 37 homes in the quarter, driven by an almost 40% increase in new home sales. The bulk of our over 100 new home sales in the quarter were in Florida, Arizona, South Carolina and Texas highlighting the diversification and increased demand throughout the portfolio. In the quarter, we also completed the construction of 246 expansion sites and 2 manufactured housing communities that will contribute to revenue growth as these sites lease up over the coming quarters. The company remains on pace to complete construction 13 50 expansion sites and 16 communities of which 1,000 are in 12 manufactured home communities And 350 are in 4 RV Resorts by the end of 2018.
On the external growth front, Our ground up developments continue to progress. The construction work at our 332 site, Cava Robles RV Resort is nearly complete. The resort is now accepting reservations and is scheduled to open by the end of Q2. Construction at Carolina Pines, Our 840 site development in South Carolina began in the Q1 and we expect to complete approximately 470 sites by the Q2 of 2019. We are pleased to announce that our mixed manufactured housing and RV Resort development in Granby, Colorado, Outside of Rocky Mountain National Park has now received full entitlements and approvals.
We anticipate closing on the land purchase in mid May with construction to start immediately thereafter. Our acquisition pipeline is very active and we continue to evaluate several accretive opportunities. Cap rates for both MH Communities and RV Resorts remain unchanged despite observed volatility in interest rates. We remain quite disciplined in our underwriting and hope to close on a number of investments in the near future. The capacity of our operating portfolio to deliver out Size returns over the long term remains solid.
The demand for affordable housing and affordable resort vacationing is Stronger than ever. In 2017, shipments of new manufactured homes increased by 14.4 And recreational vehicle sales rose by 17.2% year over year. These industry tailwinds bode well for Sun as we continue to experience growth through same community occupancy gains, home sales and conversions from transient to annual RV rentals. And with that, I would like to turn the call Now, I'll turn the call over to John and Karen to discuss our results in more detail.
Thank you, Gary. Sun delivered a total revenue increase of 10% in the quarter with significant contributions from both our manufactured housing communities and RV Resorts. Total manufactured housing revenues Increased 7.5% for the quarter benefiting from rate increase and the contribution of our 5 manufactured housing properties acquired in 2017. Occupancy in the total portfolio was 95.8% with the manufactured home portfolio at 94.7%. RV revenues rose 8% in the quarter spurred by a good winter season, a 4.6% RV rental rate increase and the acquisition of 4 RV Resorts in 2017.
The demand for both manufactured home and RV sites This provides the supply demand tension needed to enable continued future revenue growth, an exciting prospect as we develop expansion sites in areas with continued appetite for Sun's affordable housing and vacationing. We experienced an increase in home sales revenues on a year over year basis of 28%, driven by an increase of almost 40% new homes sold. The average new home sales price grew by 23.9% to just over $112,000 Our pre owned home sales revenue rose 12.9% in the quarter And the average selling price on our pre owned homes increased to 15.8%. We gained 6 16 revenue producing sites In our total portfolio in the quarter, 52% or approximately 320 of our gains were in manufactured home sites with 165 of those site gains in expansion communities.
One of the highlights of the
quarter was the 295 sites of RV transient to annual lease Conversions, which was a 40% increase over the Q1 2017. Our same community portfolio continues to deliver excellent top line growth resulting from the high quality experience we offer to our residents. Same community revenues rose 5.7% for the quarter, driven by a 3.8% weighted average monthly rental rate increase And a 220 basis point occupancy gain to 97.6%. Same community expenses Increased by 6.6% for the quarter due to higher than expected utility costs and general liability claim reserves as Gary mentioned earlier. This translated into same community NOI increasing by 5.3% for the Q1.
As a reminder, our same community portfolio has Seasonality, therefore each quarter's contribution to growth will vary. Same community manufactured housing revenues rose 6% for the quarter, while same community annual RV revenues posted 8.3% growth. Transient RV revenues increased by 0.1% and are expected to accelerate in the remaining quarters to achieve our transient revenue guidance of 4.9% to 5.8%. We have kicked off our summer RV Resort campaign And advanced bookings for the 2nd and third quarters are pacing at approximately 58% of budget revenue for the same community RV Resorts, in line with last year at this time. We expect an active northern resort season and anticipate that our 2018 summer holidays will be very Successful.
Karen will now discuss our financial results and capital markets activity in more detail. Karen?
Thanks, John. Sunrun reported $1.14 of core FFO per share for the quarter ended March 31, 2018, at the top end of previously provided quarterly guidance. With respect to Capital Markets, During the quarter, we repaid 4 mortgages totaling $24,400,000 due to mature in March 2019 that carried a weighted average interest rate of 6.36%. These transactions are in keeping with our stated intention to Pursue the restructuring or pay down of liabilities maturing in the near term to drive down our cost of funds. For the balance of 2018, we have $26,200,000 of loans maturing and we have approximately $40,000,000 outstanding with a weighted average interest rate of 4.45 percent and a weighted average maturity of 8.5 years.
At quarter end, we had $15,200,000 of unrestricted cash on hand and our net debt to trailing 12 month recurring EBITDA was We issued 220,000 shares of common stock through our at the market equity sales program at a weighted average price $91.31 per share. Net proceeds from the sales were $19,800,000 Moving on to guidance. We met the high end of our core FFO guidance range of $1.14 per share and affirm our full year core FFO per share guidance in the range of $4.48 to $4.58 We anticipate core FFO per share for the Q2 of $1.03 to 1 $0.06 We are modifying Same Community annual NOI growth guidance by 25 basis points to 6.75% to 7.25% from 7% to 7.5% based on the level of operating expenses incurred in the Q1. As is our usual practice, our guidance does not include any impact from prospective acquisitions or capital markets This completes our prepared remarks, and we'd like to open up the call to questions. Operator?
Thank
Our first question is from Nick Joseph with Citigroup. Please proceed.
Thanks. Just starting on same store growth, just Just want to confirm, so same store revenue guidance for 2018 is the same as what was provided with 4Q? And then what's the updated Same store expense growth guidance for full year 2018.
So Nick, I think with that Slightly lower revised same community guidance just being a reflection of that higher than expected expense growth in Q1. With every all the other line items the same, I think the math would tell you that the total property operating expense That's POM and real estate taxes would be in the range of 3.8% to 4%.
Great. Thanks. And then just in terms of Indiana occupancy, it looks like it dropped from the end of the Here, is that a reflection of expansion sites or is it something on the demand side?
Yes. Hey, Nick, this is John. Yes, that's It's a direct reflection of one of the properties that was part of that 2 46 expansion sites is located in Fort Wayne, Indiana.
Okay. And then finally, Gary, you mentioned a number of acquisitions. It sounds like in the near future, can you put some parameters around the potential Size of the acquisition pipeline today and maybe more specifically over the next 3 to 6 months? Sure. Typically, we don't discuss acquisitions under Contract until they are actually closed,
but we are working on a full pipeline of acquisition opportunities. The timing was Such that nothing fell in the Q1 when we talk about what we've done Aside from the large portfolio transactions, we look to do between $100,000,000 $200,000,000 of acquisitions per year of basically one off We're 2 z's and I think the pipeline reflects a similar level as it did throughout the last couple of years. In 2017, we kind of hit that midpoint of $150,000,000 for the year. So the expectation We would continue in that $100,000,000 to $200,000,000 range.
Thanks. Thank you.
Our next question is from Drew Babin with Robert W. Baird and Company. Please proceed.
Hey, good afternoon.
Hey, Jeremy.
Hi, Jeremy.
A quick question on the same property revenue growth. It looks like the 5.7 That is below the just the addition of the 3.8 percent rent growth and 2 20 basis points of occupancy, which tells me there's probably a deceleration in the year over year growth in fee income. Is there anything behind that or was fee growth maybe outsized And kind of the first phase of the Carefree integration, and is that indicative of maybe a trend that continues through the rest of the year?
Drew, I think I would look at it a different way. There wasn't really necessarily a deceleration in fee growth. But When you look at that 2.2% occupancy gain, those are A transient piece of that is transient to annual conversions where that's an increase in revenue rather than Sort of a one for 1, 100 percent revenue contribution as a Previously unrented site would be. So, I think it's more about that rather than deceleration in fee income.
Okay. And then lastly on the expense growth, thanks for the color on what the full year guidance would be as revised. Are there any quarters throughout the year where you expect maybe lumpy expense growth? I know the comp is probably I think expenses only grew to 3% in 3Q 'seventeen, so would 3Q 'eighteen maybe have a little more expense growth based on seasonality or comps or is there any color you can give there?
Sure. It's a good question. Because same community has so much change in it, we added the 100 Carefree Communities Intuit. So it's really difficult to make comparisons on same community growth rates from This quarter to same quarter last year or in sequential quarters just because the portfolio has changed so much And the makeup and the seasonality is there. So it's tough for me to provide you That type of guidance.
Our next question is from John Pawlowski with Green Street Advisors. Please proceed.
Thanks. Gary, I appreciate the comments on the acquisition volume targets. Today's share price and given today's Cost of debt, how would you approach funding that acquisition volume if you had to fund it today?
Well, I think that As the company strategically redefined itself over the last 9, 10 years through acquisitions and reduction in leverage, There has been a commitment really to maintain debt neutrality. I think we're at 6.2x, Expecting to be at 6x by the end of the year and our expectation is Anything we did acquisition wise would pretty much leave that intact.
Okay. John, could you remind us what bad debt is as a percent of rents? And are there any notable trends here in any markets?
Well, I can tell you the trend has been it's actually overall in the portfolio looking through quarter over quarter has actually gone down Slightly. So we're seeing this really boils down to from a bad debt standpoint, part of the operating strategy that we've always Taken, which is, for lack of better words, a sort of tough love, which is we follow the process, okay? If we have delinquency, and we will from time to time, we follow the process because that's good in terms of service to the residents, So particularly in affordable housing. So but to answer your question, it's been down just slightly.
And what is it as a percent of rent?
It's about 60 basis points.
Our
next question is from Todd Stender with Wells Fargo. Please proceed.
Thanks. For the expansion sites delivered in the quarter, Maybe number of sites and allocated budget.
Hey, Todd, you we lost your question in the middle, but it went silent for a second. Can you repeat it?
Of course. Sorry about New expansion sites delivered in the quarter, what was the cost? And then can you shed some light on how much you're going to spend in The remainder of the year and maybe by number of sites as well.
I think, Karen, do you have any specifics on that?
The expansion and development spend in Q1 was around $25,000,000 primarily related to expansions. And site count, I think we have An expectation of
another That will be $13.50 less.
$13.50 less. So another 1,000, 1100 sites, Average cost of around $25,000 to $30,000
Okay. Per site?
Yes.
Got it. Okay. Thank you. And it sounded like you tapped the ATM for $20,000,000 The timing That was post quarter?
Yes, it was post quarter.
Okay. Did that go towards the line balance? Just Trying to see what the timing of your capital needs might be?
Yes, we as Gary mentioned, we have a pretty good visibility into The acquisition pipeline. So we just thought it was prudent to take advantage of accessing the capital markets for a small capital raise and it did go Take the line, Dawn. It's $20,000,000
Okay. Thank you.
Our next question is from Wes Golladay with RBC Capital Markets. Please proceed.
Hello, everyone. Can you talk about the competitive landscape On the acquisition front, are you seeing more new entrants versus last year? And are they being aggressive on underwriting?
This is Gary. I'll suggest that over the last 12 months, there have been new entrants as we've seen Some funds and sovereigns enter into combinations of platforms and buying various portfolios. We've talked about the cap rate compression that's taken place. I guess, I would say on the competition front, All things seem to be where they were over the last 12 months. We really haven't seen any Change or widening in what I'll call the bid ask spread for manufactured housing or RV assets.
And For now, the volatility or increased interest rates in the market really have not impacted cap rate for manufactured housing and RV assets. I think that just to give you some color on how I'm looking at it. The high demand for MH and RV assets exists with no pressure from new or overdevelopment. So it creates somewhat of a scarcity effect on the assets and the in turn the scarcity drives growth levers It accelerates value creation due to the high consumer demand for affordable housing and the affordable resort vacationing that we offer And therefore, places somewhat of a premium on the existing available sites for the residents and in turn creates Pricing pressure on the demand for the assets themselves. So it's a good time to be in the manufactured housing and RV business.
And I think as indicated in my earlier remarks, the year over year growth double digit for both 2017 Over 2016 in the manufactured housing sales and RV sales have been very, very strong. So I don't Expect to see much change in the near term.
Okay. And then looking at the payroll and benefits, about 1.3% This quarter, what are your expectations for the year? And what is, I guess, if it's going to remain, let's call it sub-three percent for the year? If so, what is driving that? Are you having a hard time finding employees due to labor shortages?
We're seeing nationally, are you doing any automation? Just kind of getting
I I wouldn't say that it has anything to do with finding employees or the other items that you mentioned. We have not broken out expense growth on for guidance by line item.
Yes. I think we're very careful looking at the regulations in all the states that we operate in to make sure that we were meeting minimum wage numbers As they were increasing and projected, what we need to do to be competitive in the market. So I don't think it's coming from that.
Okay. Thanks a lot.
It is from shamir Khanal with Evercore ISI. Please proceed.
Hi, good afternoon. I guess just wanted a little bit more color on the utility I know it was up around 12%, but what did you see some sort of offset on the revenue side as well on that?
Yes. Our utility increases that 12% is actually net Utility reimbursements also. Significantly, the Utility usage increase was in water sewer, it was in electric and gas. And I think John may be able to give you some more information about the Carefree portfolio. Yes.
I think first First
off, I
think it's important to note that we've had really excellent performance year over year sort of setting the budgets and achieving the results we set out for. But Every so often, you get faced with an event that's outside of your control like a quarter winter. As an example, the Midwest Temperatures were down 15% year over year. But I will add To Karen's point that we also feel that there's both a conservation and a financial opportunity that may exist with this since A good portion of the Carefree Communities we added same site in Q2 excuse me, Q1 historically had not metered water sewer usage. So we've implemented metering programs that's been underway and we expect to complete that over the next couple of quarters.
Ladies and gentlemen, I would like to hand the conference back over to management for closing remarks.
At this time, we thank everybody for participating on the call, and we look forward to presenting after Q2 is completed. Thank you.
Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.