Q2 2019 Earnings Call

July 25, 2019

Good morning, ladies and gentleman 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 90 to 95.

Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sun Communities Q2 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.

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 yesterdays press release and from time to time in the Companys periodic filings with the SCC.

The company undertakes no obligation to advise or update any forward looking statements to reflect events or circumstances. After the date of this release.

Operator: 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.

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. Schiffman you may begin.

Good morning, and thank you for joining us on our second quarter 2019 earnings Conference call.

Gary Shiffman: Good morning. Thank you for joining us on our Q2 2019 Earnings Conference Call. Our portfolio has continued to exhibit strong growth during Q2, 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 Q2 was $1.18 per share, up 10.3% from the prior year. $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, a $0.03 increase at the midpoint.

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 experienced strong demand for affordable housing and vacationing.

Core FFO for the second quarter was a $1.18 per share up 10.3% from the prior year and four cents 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, a 90 cents worth three cents increase at the midpoint.

Gary Shiffman: 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 three 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 management's 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.

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 Mark the opening of the first phases of three 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 2200 sites.

With strong demand and limited new supply, putting management's development expertise to work should yield steady incremental growth as new development sites are built out overtime.

We continue to focus attention towards developing in high demand areas, where we can build new communities and resorts had 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 three RV resorts in Tennessee, Louisiana, and New Hampshire for a total of $49.2 million.

Gary Shiffman: 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 three 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.

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.

There's been a differentiating factor in our ability to execute on over $5 billion of acquisitions over the last eight 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.

Gary Shiffman: 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.

We've achieved a great deal over the past six months and remain optimistic in our ability to continue delivering strong performance over the near and long term as we execute on our four core capital allocation initiatives.

First the continued reinvestment in our operating portfolio in order to secure continued demand for 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.

The highly accretive returns.

Gary Shiffman: 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?

And fourth selectively building, the best new resorts and communities in the country.

Together these core initiatives, we will continue to drive long term shareholder value creation.

I'll now turn the call over to John Karen to discuss the results in detail.

Thanks, Gary Sun delivered great operational results for the second quarter with strong contributions across the portfolio.

John McLaren: 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%, 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 six months, manufactured housing revenues have increased by 6.2%.

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 six 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 and the same community portfolio over the last 12 months.

John McLaren: 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 Q2, 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 Q2.

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 exceed 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 20 589 revenue producing sites over the last 12 months, including the addition of 668 site gains during the second quarter.

John McLaren: In our manufactured housing expansion communities, 265 sites were filled in Q2 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 Q2 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 Q2, we completed the construction of approximately 120 vacant expansion sites across four manufactured home communities and RV resorts.

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 and 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 four manufactured home communities and RV resorts.

John McLaren: 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 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 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 Fourth of July is an important long weekend for our northern RV resorts.

The bulk of our vacant expansion side deliveries are expected in the second half of the year.

We continue to be on pace for the addition of 1200 1400 total expansion sites and 18 communities for 2019.

As Gary mentioned earlier, we opened the first phases of three Premier RV Resorts Carolina Pines in Myrtle Beach, South Carolina.

The River run and Granby, Colorado, and Joe's Stone Golden Valley, and Bostic North Carolina.

We also opened the first 50 sites of one of the Florida keys properties redevelop to after Hurricane era, and expect a strong home sales pace there for the next few quarters.

The fourth of July is an important long weekend for our northern RV resorts.

John McLaren: 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 Fourth of 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 Q2. Our results are a reflection of our commitment to deliver excellence to our residents and guests, that effort is translating into shareholder value. With that, I will turn the call over to Karen to discuss our financial results. Karen?

Since fell on a Wednesday last year and a Thursday. This year most comparable way to look at it is the 10 day period inclusive of the weekends before and after the fourth of July .

For this period, our resorts had 4.8% same community revenue growth year over year.

We are encouraged by our strong performance and trends in our view 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.

Thanks, John .

Karen Dearing: Thanks, John. SUN reported $1.18 of core FFO per share for the Q2 ended 30 June 2019, $0.04 ahead of the top end of previously provided quarterly guidance and a 10.3% increase over the Q2 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 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 active on the capital market side, ensuring that the balance sheet remains in optimal condition to continue to support our growth initiatives.

On reported one dollar an 18 cents of core FFO per share for the quarter ended June Thirtyth 2019, four cents 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 annualized 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 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 an optimal condition to continue to support our growth initiatives.

Karen Dearing: 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. 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.

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 within GGR.

At quarter end, the company had $28.7 million of unrestricted cash on hand, let's total debt outstanding of 3.1 billion.

Karen Dearing: 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 rates. At quarter end, the company's net debt to trailing twelve-month EBITDA ratio was 5.2x, down from 6x at the end of 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 2019, as previously mentioned, as well as the impact of our equity offering.

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 six times 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 and 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.

Karen Dearing: 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?

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, our 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.

Operator: At this time, we will be conducting a question-and-answer session. 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. One moment, please, while we pull for questions. Our first question comes from Nick Joseph, Citigroup. Please proceed with your question.

At this time, we'll be conducting a question answer session. 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 Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star Keith one moment, please while we pull for questions.

Our first question comes from Nick Joseph Citigroup. Please proceed with your question.

Thanks.

Elliot Mash: Thanks. For the development openings, can you walk us through where we are today in terms of occupancy and the timing and path to stabilization for each of the projects?

Operator: Thanks. For the development openings, can you walk us through where we are today in terms of occupancy and the timing and path to stabilization for each of the projects?

The development openings can you walk us through where we are today in terms of occupancy and the timing impact stabilization for each of the projects.

Sure Nick I want to make sure.

Gary Shiffman: Sure, Nick. I wanna make sure we heard your question right. It related to greenfield development occupancy?

We heard your question right it related to the Greenfield development occupancy.

Elliot Mash: 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.

Gary Shiffman: 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.

That's right, where we are today in terms of the occupancy because I know they're faced openings and then how you expect that occupancy to grow and how long it takes to actually stabilize each of those projects.

Gary Shiffman: Sure. It's obviously different for manufactured housing and RV. We speak of RV as stabilizing in a shorter period of time, about a three-year period of time on a 300-site RV community. So stabilization is reached, and we look for a high single-digit return upon stabilization. The first 221 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 how many sites in Labor Day? I included my 700 sites to be completed by Labor Day, and our expectation is that we would meet that modeling.

Sure, it's obviously different for manufactured housing and RV.

We speak of RV has.

Stabilizing in a shorter period of time about a three year period of.

Time on a 300.

Site RV community.

So stabilization is reached and we look for a.

Hi 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 two other communities were.

Delivered.

In July .

With a total of.

Nominees sites and labor day.

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.

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

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

Drive demand initially.

Hey, Nick this is John so.

John McLaren: Hey, Nick, this is John. There's a lot that goes into it, you know, a year ahead of these ground-up developments opening. 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. You know, Cava Robles out in California is a really good example of that, where we opened that up in May of last year, and a lot of people... You know, one, 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.

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 that.

Has to do with just the relationship we already have with existing RV years in these particular cases.

Within the Sun portfolio already.

Ill cover rolls out in California is a really good example of that where we open that up in may of last year and a lot of people when 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 area as well as markets where people typically draw from.

John McLaren: You know, just to give you an example of that particular opening, it was sort of a phased, staged opening. People got to test drive, 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. In terms of the communication it has within it's, you know, that it's really a combination of things that I'm trying to say that really drives that initially and, you know, really kicks it into gear.

And then.

Just to give you. An example of that particular opening it was sort of a phase 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 is kind of a pretty small community and then in terms of the route.

The communication that has within it and its a.

You know that it's really a combination of things what I'm trying to say that really drives that initially in.

Yes, really kicks into gear.

Thanks.

Elliot Mash: Thanks.

John McLaren: Thanks.

John McLaren: Yep.

Yep.

Our next question comes from John Kim BMO Capital markets. Please proceed with your question.

Operator: Our next question comes from John Kim, BMO Capital Markets. Please proceed with your question.

Karen Dearing: Thank you. looking at your income statement and the transient revenue, there was a large increase.

Thank you I'm looking at your income statement and the transient revenue.

There was a large increase.

Operator: ... year-over-year of 42%. Your number of transient sites only went up 8%. I'm wondering what's driving that disproportionate increase in transient revenue?

Year over year of 42% and your number of.

Traded sites only went up 8% from one I'm wondering what's driving that.

Just proportionate increase in transient revenue.

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

Gary Shiffman: Yeah, most of that has to do with the Northgate acquisition that we did last year.

Okay, So thats a higher.

Operator: Okay, that's a higher price point, and that's what's driving it more than 8%?

Price point, and that's what's driving it more than 8%.

So the we only had the arcade for a portion of the year last year. So we are have you have a significant amount of more revenue coming from northgate in this year and the site would have been added last year.

Karen Dearing: We only had Northgate for a portion of the year last year, so you have a significant amount of more revenue coming from Northgate in this year, and the sites would have been added last year.

Okay.

Operator: 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?

It seems like the development and acquisition opportunities are more available for you in RV and MH.

Just given pricing do you see your mix changing over time.

We don't.

Gary Shiffman: We don't. 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 out of the 4,000 sites were actually manufactured housing. I think as we look at the pipeline, John, our expectation is that we would continue to have opportunities to fit the basic profile of the existing portfolio.

I don't think that.

And 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 3000 of the 4000 sites, we're actually manufactured housing so.

I think as we look at the pipeline John our expectation is that we would.

We continue to have opportunities.

The fit the basic profile of.

Of the existing portfolio.

Karen.

Operator: Karen, in past calls, you've talked about being comfortable running leverage at, in the low sixes net debt to EBITDA. This quarter, it's down to 5.2. You know, 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?

Past calls you've talked about.

Being comfortable running leverage it in the low sixs net debt to EBITDA.

This quarter is kind of two.

Your equity raises recently have been well supported and your closest peer trades.

As leverage below five do you still feel comfortable taking leverage above thanks.

Well you are correct in all your comments, yet we are running a bit lower at this time and.

Karen Dearing: Well, you're correct in all of your comments. We are running a bit lower at this time, and, you know, we are comfortable running at that 6 times leverage level, you know, based on the stability of the cash flows of this asset class. You know, 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, you know, 6 times, and we don't believe that's imminent. It appears that we will likely remain in the mid to low 5s near term.

Yes, I don't think.

We are comfortable running at that six times leverage level, we know based on the stability of the cash flows at 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's it would take a pretty large transaction to move us back to that higher level of.

It was six times and we don't believe Thats eminent so it appears that we have will likely remain in the mid to low fives near term.

Great. Thank you.

Operator: Great. Thank you.

Our next question comes from John Polaski Green Street Advisors. Please proceed with your question.

Operator: Our next question comes from John Pawlowski, Green Street Advisors. Please proceed with your question.

John Pawlowski: Thanks. Could you share the cap rates on the three RV acquisitions?

Thanks could you share the cap rates on the three RV acquisitions.

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

Sure.

John the.

Cap rates fell between.

The range of five and six and there were three of them in total.

Okay.

John Pawlowski: 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. 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?

Hey, Gary or John could you help us understand.

Particularly the Louisiana.

The acquisition just to that type of customer demand customer demand.

The percent transient because it's your first purchase in Louisiana as a bit tougher to find on a map. So how durable are the cash flows for that five to six ish cap rate, how do you underwrite that acquisition versus your existing RV portfolio.

Gary Shiffman: Sure. This is Gary. I'll start out. John can add whatever I leave out. 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. 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. 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.

Sure.

This is Gary I'll start out John can add whatever.

I leave out but.

We're really excited too.

Begin.

Differentiating a little bit in our footprint and always very very focused on location.

Because location really will drive growth in demand and I think this.

Our management team is always very focused on.

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.

And our movie.

Destinations.

The average derive time that we look at is what is the population within a three to four hour.

Drive time, and then renew Union Lake I think is the name of the property.

Gary Shiffman: 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. As we plot out how we think about buying an RV community, we saw that there were 5.5 million people within a 3-hour driving distance to the resort. Additionally, there's 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. We project a very, very strong growth over the next 5+ years at that particular community, and that was the impetus to acquire it.

It's about 45 minutes from New Orleans, and 45 minutes, the Baton Rouge. So.

As we apply it out.

How we think about buying an RV community. We saw that there were 5.5 million people within a three 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 in title, but we expect to.

Apply for expansion entitlement.

So we project a very very strong growth over the next five plus years at that particular community and that was the impetus to acquire.

Okay, and you intend to grow in Louisiana, Mississippi, Alabama type of areas 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.

John Pawlowski: Okay. You intend to grow in the Louisiana, you know, Mississippi, Alabama type of areas?

Gary Shiffman: ... I think we're very cautious with everything that we underwrite, but we are looking for a diversification in our geographic footprint. Most likely, we will be very, very selective in those areas. 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. As we continued to do our diligence, one of the things that surprised us, that the park has the most amount of visitors in the entire country, about 11 million annually.

In those areas and when we can check the box.

Not not to give you more information really.

Then 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 six 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 as well as the most amount of visitors in the entire country by the 11 million annually. So it was an area that.

Gary Shiffman: 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.

We really focused on and that's kind of how we're looking at the different opportunities and our acquisition pipeline now.

John Pawlowski: Okay, understood. One broader transaction market question across your footprint. Could you give us a sense for a transient RV park and a annual RV park? What's the typical prevailing cap rate spread?

Okay understood and then one broader transaction market question across across your footprint could you give us a sense for a transient RV park in a annual RV Park, what's the typical prevailing cap rate spread.

Sure.

Gary Shiffman: Sure. 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 three to five years? That will be a big function of the cap rate that we are willing to pay. Generally, we do not differentiate as much between annual and seasonal. It's more, as I said, first 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.

I think in.

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 three to five 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 of growth.

Trajectory, but also importantly, when we convert transients too.

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 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.

Gary Shiffman: 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.

Okay. Thank you.

John Pawlowski: Okay, thank you.

Gary Shiffman: Mm-hmm.

Our next question comes from Todd Stender Wells Fargo. Please proceed with your question.

Operator: Our next question comes from Todd Stender, Wells Fargo. Please proceed with your question.

Thanks.

[Analyst] (Wells Fargo Securities): Hey, thanks. Just back to the acquisition. 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?

Todd Stender: Hey, thanks. Just back to the acquisition. 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?

Just back to the acquisition the New Hampshire property was a low price point and Didnt site count can you just maybe characterize what that property it looks like.

Gary Shiffman: Sure. That's a great question. It's Gary again, only because I'm probably most involved in the recent acquisitions. 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 350 sites.

Sure.

Great question.

And it's Gary again.

Only because im 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 a 139 sites.

Very very high quality and the SR asset that.

We will manage with it will be over 350 sites.

So you wont buy that sister asset yield as management is that right now will be we will be acquiring at its not closed yet okay got it. Thank you.

[Analyst] (Wells Fargo Securities): You won't buy that sister asset, you'll just manage it? Is that right?

Todd Stender: You won't buy that sister asset, you'll just manage it? Is that right?

Gary Shiffman: No, we'll be acquiring it. It's not closed yet.

[Analyst] (Wells Fargo Securities): Okay, got it. Thank you. 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 paying for that, and are those expansion sites entitled yet?

Todd Stender: Okay, got it. Thank you. 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 paying for that, and are those expansion sites entitled yet?

And then a Louisiana property Youve got the developed sites and then you've got expansion sites do you differentiate between the price point that you're paying for that and are those expansion sites and title yet.

So the first 69 sites are entitled.

Gary Shiffman: 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. 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.

And.

Each individual dealers different sometimes they come along built into the purchase price.

Sometimes we will acquire them separately, sometimes we'll acquire 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 you will go in and in the call. It in the fives at a cap rate and then there'll be some stabilized yield.

[Analyst] (Wells Fargo Securities): You'll go in and call it in the 5s at a cap rate, and then, you know, there'll be some stabilized yield in the 7s, I guess, a couple years from now. Is that fair?

Todd Stender: You'll go in and call it in the 5s at a cap rate, and then, you know, there'll be some stabilized yield in the 7s, I guess, a couple years from now. Is that fair?

In the Sevens I guess couple of years from now is that fair.

Certainly, it's something we would strive for.

Gary Shiffman: Certainly it's something, we would strive for.

[Analyst] (Wells Fargo Securities): Okay. Just because you're developing RV resorts, you've got the Paso Robles, the Myrtle Beach. Just because it's not MH, they're not gonna 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?

Todd Stender: Okay. Just because you're developing RV resorts, you've got the Paso Robles, the Myrtle Beach. Just because it's not MH, they're not gonna 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?

Okay.

And then just because you're developing our RV report.

Resorts Youve got the Paso Robles, Myrtle Beach, and just because it's not an age they're not going to be permanent residents. How how do you show or how do you measure the success.

The lease up how do you how do you kind of.

Look to see that they are on pace and holding their own.

Yes, I think first it's important to recognize that.

Gary Shiffman: I think first it's important to recognize that 60 plus % of the portfolio, John, what is annual as a makeup of our RV?

60, plus percent of the portfolio John what is annual as a makeup of our RV.

John Pawlowski: Yeah.

Yes, it's like 60% yeah.

Operator: It's 60.

John Pawlowski: 60%.

Gary Shiffman: Yeah. 60% of it is annual, it will operate and function and pay rent that's recognized over the period of a year. We certainly have the ability to monitor the success of occupancy in that fashion. 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.

60% of it is annual so it will operate and function and pay rent.

That is recognized over the period of a year or so.

We certainly have the ability to monitor.

The success of occupancy in that fashion, and then our transient side.

We're very engaged in.

Really analyzing and working on our own proprietary.

Our software right now of how to.

Continue to cash manage the transient side of things. So I think Todd the only thing I'd add to that as on an RV resort it's really.

John McLaren: I think, Todd, the only thing I'd add with that is in an RV resort, I mean, to some extent, 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 and a development to sort of hit the ground running with all sites available, being able to generate revenue, as well as vacation rentals. 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 a year, it frankly doesn't make sense to, you know, convert to an annual on a particular sites within a community.

I mean to some extent sort of like the best of all worlds in my opinion, because you've got multiple revenue streams to draw from which as you've got annual switches. The majority of it like Gary talked about.

Transient sites, which allow you on 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 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.

John McLaren: You know, again, that balance is important because one of the other things that, you know, 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.

But again that balance is important because one of the other things that having a high percentage of annual so within the overall RV portfolio does is create stability in that revenue upside and that stability is important when it comes in terms of weather and things like that that that happen.

Hi, Good we addressed your question Todd Yes, you did thank you and then John just I guess final question just to stick with you with that new home sales.

Gary Shiffman: All right. Did we address your question, Todd?

[Analyst] (Wells Fargo Securities): Yes, you did. Thank you.

Todd Stender: Yes, you did. Thank you.

Gary Shiffman: Okay.

[Analyst] (Wells Fargo Securities): John, just I guess a final question, just to stick with you, new home sales.

Gary Shiffman: Okay.

Todd Stender: John, just I guess a final question, just to stick with you, new home sales.

John McLaren: Sure.

[Analyst] (Wells Fargo Securities): 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 buy them outright? Maybe just any color there.

Todd Stender: 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 buy them outright? Maybe just any color there.

They appeared solid.

Can you just maybe speak to some of the underlying.

Whether it's credit affordability buying trends age and anything you're seeing with folks buying new homes and their ability to to to either buy them outright maybe just any color there.

John McLaren: Yeah, 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, 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. You know, I think the biggest draw has been, you know, the continued need for affordability, which is what our product and our communities offer and the quality that we offer along with it. You know, we continue to see really solid demand. You know, 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.

Yeah, I mean, it's really a sort of a little bit of everything on what you just said I mean.

When you get into the age restricted communities, where we are seeing the vast majority of those purchases are coming in the form of cash sales.

You get into the family communities are more supported by finance.

You know I think the biggest driver 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 were 10% ahead of last year, even with a big year like that in 2018. So.

John McLaren: As well as, you know, pricing has been continuing to go up, as a result, you know, of a lot of customers, you know, 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. You know, from a credit standpoint, really, that's how the portfolio breaks apart. You know, it really comes back to that being in a community that is beautiful and affordable at the same time, which is the draw.

As well as pricing has been continuing to go up.

As a result of a lot of customers.

No really wanting to stack up their houses so to speak.

As well as all the different benefits and the amenities that we have within the houses so.

From a credit standpoint, it really thats, how the portfolio breaks apart.

But.

It really comes back to that being in a community that is it is beautiful.

And affordable at the same time, which is the draw.

Thank you.

[Analyst] (Wells Fargo Securities): Thank you.

Todd Stender: Thank you.

John McLaren: Yep.

Yep.

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

Operator: 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.

Gary Shiffman: Thank you, operator. We'd like to thank everybody for participating on our Q2 call, we look forward to announcing results at the end of Q3. Thank you.

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 the third quarter.

Thank you.

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

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

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