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 reflected in any forward-looking statement 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 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, Karen Dearing, 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 first quarter 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 in 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 6.6% 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 for the period. Demand for the high-quality lifestyle Sun delivers remains robust.
For the quarter, Sun gained 616 revenue-producing sites, which included outperformance and RV conversions from transient to annual sites. Home sales volume rose 1.3% to 837 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 in two 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 of approximately 1,350 expansion sites in 16 communities, of which 1,000 are in 12 manufactured home communities and 350 are in four 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 the second quarter. Construction at Carolina Pines, our 840-site development in South Carolina, began in the first quarter. We expect to complete approximately 470 sites by the second quarter 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. 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 outsized 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%. 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. With that, I would like to 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 five 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 four RV resorts in 2017. The demand for both manufactured home and RV sites 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. The average selling price on our pre-owned homes increased to 15.8%. We gained 616 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 first quarter 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 first quarter. 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%-5.8%.
We have kicked off our summer RV resort campaign. Advanced bookings for the second 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. Sun reported $1.14 of core FFO per share for the quarter ended March 31st, 2018, at the top end of previously provided quarterly guidance. With respect to capital markets, during the quarter, we repaid four mortgages totaling $24.4 million 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 $26.2 million of loans maturing, and we have approximately $40 million of remaining debt maturities in 2019. At the end of the quarter, Sun had $3.1 billion of debt outstanding with a weighted average interest rate of 4.45% and a weighted average maturity of eight and a half years.
At quarter end, we had $15.2 million of unrestricted cash on hand, and our net debt to trailing 12-month recurring EBITDA was 6.2 times, an attractive level that provides us with the capacity to continue to support our growth initiatives. At quarter end, we issued 220,000 shares of common stock through our at-the-market equity sales program at a weighted average price of $91.31 per share. Net proceeds from the sales were $19.8 million. 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-$4.58. We anticipate core FFO per share for the second quarter of $1.03-$1.06.
We are modifying same community annual NOI growth guidance by 25 basis points to 6.75%-7.25%, from 7%-7.5%, based on the level of operating expenses incurred in the first quarter. As is our usual practice, our guidance does not include any impact from prospective acquisitions or capital markets activities, which may be included in analyst estimates. This completes our prepared remarks, we'd like to open up the call to questions. Operator?
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Nick Joseph with Citigroup. Please proceed.
Thanks. Just starting on same store growth. Just want to confirm, same store revenue guidance for 2018 is the same as what was provided with 4Q? What's the updated same store expense growth guidance for full year 2018?
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 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%-4%.
Great. Thanks. Just in terms of Indiana occupancy, it looks like it dropped from the end of the year. Is that a reflection of expansion sites, or is it something on the demand side?
Hey, Nick, this is John. That's a direct reflection of one of the properties that was part of that 246 expansion sites is located in Fort Wayne, Indiana.
Okay. 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 three to six months?
Sure. Typically, we don't discuss acquisitions under contract until they are actually closed. We are working on a full pipeline of acquisition opportunities. The timing was just such that nothing fell in the first quarter. When we talk about what we've done aside from the large portfolio transactions, we look to do between $100 and $200 million of acquisitions per year of basically one-off or twosies. 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 million for the year. The expectation is we would continue in that $100 million-$200 million range.
Thanks.
Yep.
Our next question is from Drew Babin with Robert W. Baird & Co.. Please proceed.
Hey, good afternoon.
Hey, Drew.
Hey, Drew.
A quick question on the same-property revenue growth. It looks like the 5.7% is below just the addition of the 3.8% rent growth and 220 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 in kind of the first phase of the Carefree integration? Is that indicative of maybe a trend that continues through the rest of the year?
Drew, no, I think I would look at it a different way. There wasn't really necessarily a deceleration in fee growth. When you look at that 2.2% occupancy gain, a piece of that is transient to annual conversions, where that's an increase in revenue rather than sort of a one for one, 100% revenue contribution as a previously unrented site would be. I think it's more about that rather than a deceleration in fee income.
Okay. Lastly, on the expense growth, and 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 3% in 3Q17. Would 3Q18 maybe have a little more expense growth based on seasonality or comps, or is there any color you can give there?
Drew, it's a good question. Because Sun Communities has so much change in it, we added 100 Carefree communities into it. 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. The makeup and the seasonality is there. It's tough for me to provide you that type of guidance.
Okay. All right. Thank you very much. That's all for me.
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 nine, 10 years through acquisitions and reduction in leverage, there's been a commitment really to maintain debt neutrality. I think we're at 6.2 times
Expecting to be at 6x by the end of the year, 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 % of rents, 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. 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, is sort of tough love, which is we follow the process. 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, particularly in affordable housing. To answer your question, it's been down just slightly.
What is it as a % of rents?
It's about 60 basis points.
Yep.
Okay. Thanks very much.
Yep.
Our next question is from Todd Stender with Wells Fargo. Please proceed.
Thanks. For the expansion sites delivered in the quarter, did year-to-year, maybe number of sites and allocated budget?
Hey, Todd, we lost your question in the middle of it. It went silent for a second. Can you repeat it?
Of course. Sorry about that. New expansion sites delivered in the quarter, what was the cost? 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 the specifics on the expansion and development spend in Q1 was around $25 million, primarily related to expansion. Site count, I think we have an expectation of another-
Well, it'll be 1,350 left.
13 left. Another 1,000, 1,100 sites, average cost of around $30,000.
$25,000-$30,000, yeah. $25,000-$30,000.
Okay, per site?
Yep.
Got it. Okay. Thank you. It sounded like you tapped the ATM for $20 million. The timing of that was post-quarter?
Yes.
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.
Yeah. As Gary mentioned, we have a pretty good visibility into the acquisition pipeline. We just thought it was prudent to take advantage of accessing the capital markets for a small capital raise. It did take the line down. It was $20 million.
Okay. Thank you.
As a reminder, if you would like to ask a question, it is star one on your telephone keypad. 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. 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.
It creates somewhat of a scarcity effect on the assets, 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, therefore, places somewhat of a premium on the existing available sites for the residents, in turn, creates pricing pressure on the demand for the assets themselves. It's a good time to be in the manufactured housing and RV business, I think as indicated in my earlier remarks, the year-over-year growth, double digit for both 2017 over 2016, the manufactured housing sales and RV sales have been very, very strong. I don't expect to see much change in the near term.
Okay. Looking at the payroll and benefits, about 1.3% this quarter, what are your expectations for the year? What is, I guess, if it's going to remain, call it sub 3% 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 additional color on what drove the expenses so low.
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 for guidance by line item.
Yeah, I think we're very careful of 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. I don't think it's coming from that.
Okay. Thanks a lot.
If you would like to ask a question, hit star one on your telephone keypad. We will pause for a brief moment to poll for questions. Our next question is from Samir Khanal with Evercore ISI. Please proceed.
Hi. Good afternoon. I guess, just wanted a little bit more color on the utility expenses. I know it was up around 12%, wouldn't you see some sort of an offset on the revenue side as well on that?
Yeah. Our utility increases, that 12% is actually net of utility reimbursements also. Significantly, the utility usage increase was in water sewer, it was in electric and gas. I think John may be able to give you some more information about the Carefree portfolio.
Yeah. 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. 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. 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, or excuse me, Q1, historically had not metered water sewer usage. We've implemented metering programs that's been underway, and we expect to complete that over the next couple of quarters.
Okay. Thanks for the color.
Yep.
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 second quarter 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.