Sun Communities - Q4 2017

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Communities' fourth quarter and full year 2017 earnings conference call. At this time, management would like me to inform you that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the company's periodic filings with the SEC. The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release.

Having said that, I would like to introduce management with us today: Gary Shiffman, Chairman and Chief Executive Officer, John McLaren, President and Chief Operating Officer, and Karen Dearing, Chief Financial Officer. After their remarks, there will be an opportunity to ask questions. I'll now turn the call over to Gary Shiffman, Chairman and Chief Executive Officer. Mr. Shiffman, you may begin.

Gary Shiffman (Chairman and CEO)

Good morning, and thank you for joining us on our 2017 fourth quarter and year-end earnings conference call. 2017 was another exceptional year for Sun Communities and its shareholders. Our strong results and industry-leading internal growth are a direct reflection of our team's intensive focus on execution, as well as our best-in-class manufactured housing and RV portfolio. For the year-end of 2017, Sun delivered a 10% increase in core FFO per share as we drove industry-leading same-community revenue and NOI growth of 6% and 6.9%, respectively. We saw strong performance from the Carefree portfolio acquired in 2016 and added nine operating communities to our portfolio during the year. We ended 2017 with total portfolio occupancy of 95.8%, providing ample room for continued occupancy gains across the portfolio.

In 2017, we delivered nearly 1,800 manufactured housing expansion sites and over 300 RV expansion sites, bringing the total expansion site deliveries to more than 2,100. We entered 2018 well-positioned to once again deliver superior internal growth with expected weighted average same-community rental rate increases of 3.8%, occupancy gains of 170 basis points, and a full year of NOI from our 2017 revenue-producing site gains and acquisitions. The desirability and affordability of being a Sun resident was clearly evident throughout 2017, given the almost 49,000 applications received for our available home sites, our highest total number of applications ever to live in a Sun community. Of these 49,000 total applications, almost 16% of them were sales applications, a figure that has trended higher year-over-year for the past five years.

This sustained demand for our product supports our consistently strong occupancy, ability to drive rental increases, and helps fuel our home sales business. In the fourth quarter, home sales grew by 11.6% as we sold 850 homes, and our annual home sales rose to a record of nearly 3,300 homes. Of the homes sold during the year, approximately 1,200, or 36%, were to existing renters who have elected to become homeowners in a Sun community, continuing to demonstrate the effectiveness of our rental program's life cycle. We look forward to another strong year of home sales as we continue to fill our available inventory. On that note, in 2017, we grew revenue-producing sites by nearly 43% as compared to 2016 by leasing over 2,400 sites. Of these, roughly 575 revenue-producing sites were filled in the fourth quarter.

Over the course of 2018, we expect to fill between 2,700 and 2,900 revenue-producing sites, which will continue to drive elevated organic growth. During the year, we completed approximately $150 million of acquisitions and nine operating assets, which added approximately 2,700 sites to our portfolio and one land parcel. This included two properties for a total of $52 million acquired in the fourth quarter. These were a 201-site combination manufactured housing and RV resort in Panama City, Florida, for $19.5 million, and a 383-site age-restricted manufactured housing community in Port Orange, Florida, for $32.5 million. The land parcel purchased in the second quarter of 2017 is being developed into an 840-site RV resort in Myrtle Beach, South Carolina.

As we've discussed in the past, this resort is one of several developments that we have underway where we feel we can capture high demand and create value at a cost below acquiring existing properties in these areas. We currently have three development communities which will collectively add approximately 1,500 net sites as the projects are delivered in multiple phases over the next several years. They include Carolina Pines in Myrtle Beach, which I just mentioned, Cava Robles, a 332-site RV resort in California wine country, and Jellystone, Larkspur, a 500-site redevelopment project just outside of Denver, Colorado. Of these, we expect to see Cava Robles completed and open for business by the end of second quarter this year. Each of these new development properties represents 12-24 months of entitlement and permitting work prior to closing on the acquisition of the land we then develop.

On the acquisition front, we continue to actively vet and underwrite a number of opportunities in both the manufactured housing and RV property types, covering both age-restricted and all-age communities. Our strategy remains similar to 2017 as we pursue one-off transactions and small portfolios that complement our footprint and offer the ability to create value. We've been strategically focused on constructing an operating platform that delivers compelling current returns as well as future growth. Our portfolio of age-restricted and family communities and premier resort destinations reach a broad demographic with a common theme: the desire to live or vacation in high-quality, affordable communities. Our resident base is highly stable, providing a level of visibility on future cash flows that is hard to replicate in other real estate asset classes.

Consistent annual rent increases, opportunities to capture occupancy gains, the development and lease-up of our available expansion sites, and the conversion of transient RV sites to annual leases provide us with a runway to deliver sustainable, attractive results in 2018 and beyond. The solid operating backdrop, coupled with our strong balance sheet, led us to announce a 6%, or 16 cents, raise to Sun's common dividend of $2.68 to $2.84 for the 2018 fiscal year. I'd like to thank the Sun team for their dedication and hard work during 2017, and I look forward to continuing 2018 with great enthusiasm. With that, I'd like to turn the call over to John and Karen to discuss our results and annual guidance in more detail.

John McLaren (President and COO)

Thank you, Gary. Before I begin sharing our performance metrics for the fourth quarter and the year, I wanted to note that our fourth quarter performance was one of the strongest in our history. This level of performance would not have materialized without Sun's decades-long focus on superior customer service and the constant refinement of our operating systems. Sun delivered a total portfolio revenue increase of 10.7% in the quarter and 17.9% for the year. Revenue increases across our different business lines were also strong, with manufactured housing revenues increasing 6.6% for the quarter and 13.5% for the year. Inclusive of the approximate 1,000 vacant manufactured housing expansion sites delivered during the fourth quarter, year-end manufactured housing occupancy was 94.6%. Even when taken into account these expansion site deliveries, 132 of our manufactured housing communities exhibit 98% occupancy or greater.

We believe we have ample room in our portfolio to push manufactured housing occupancy higher and continue to deliver strong revenue growth from this business line. Annual RV revenues rose 14.1% for the quarter and 41.9% for the year. Transient RV revenues rose by 14.1% for the quarter and 34% for the year. Annual and transient RV revenues for Carefree, included in total portfolio, rose 14.6% and 1.3% for the fourth quarter. In addition, home sales revenues increased by 26.5% in the quarter and 15.3% for the year, as total homes sold increased by 3.5% for the year. Our average new home selling price exceeded $118,000 for the quarter, with over 80% of new home sales occurring in Florida, South Carolina, Arizona, and Michigan.

Along with a record average new home sales price for the fourth quarter, we also saw a margin improvement in new home sales of 170 and 100 basis points for the quarter and the year, respectively. We gained over 2,400 revenue-producing sites in our total portfolio, an approximate 43% increase over nearly 1,700 revenue-producing site gains in 2016. 60%, or approximately 1,400, of our gains were in manufactured home sites, and 40%, or just under 1,000 sites, were RV transient to annual conversions. Our same-community portfolio continues to deliver solid year-over-year growth, resulting from the strategic positioning of the portfolio over the last five to seven years. Revenues rose 6.4% for the quarter and 6% for the year, driven by a 3.6% weighted average monthly rental rate increase and a 190 basis point occupancy gain to 97.3%.

This resulted in same-community NOI growth of 7% for the quarter and 6.9% for the year. Both revenue and NOI growth percentages exceeded our top end of our 2017 annual guidance range. Same-community manufactured housing revenues rose 5.9% for the quarter and 5.7% for the year. For our same-community RV properties, revenues continued their upward trend, with annual RV revenues increasing by 8.3% for the quarter and 7.8% for the year, while same-community transient RV revenues were up 4.5% for the quarter and 5.5% for the year. We've had a great start to the winter RV season, with budgeted first quarter 2018 reservations at 95%, ahead of this time last year by approximately 7%. Overall for the year, we expect to achieve a mid-5% revenue growth contribution from our same-community transient portfolio, despite a 7% year-over-year expected decline in available transient sites.

The decline in available site nights is a product for our transient site conversions to annual RV leases, where, as Gary has mentioned before, we experience a 40%-60% revenue increase per site for the first full year after conversion. Our revenue management programs allow us to see increases in revenue per available site through rate and occupancy optimization. We have also seen a tremendous growth through our digital marketing efforts, where we engage new and repeat Sun guests through a broad range of social media and other traditional online campaigns. In addition, we expect to complete the construction of approximately 1,350 expansion sites in 2018, with 1,000 manufactured housing expansion sites in 12 communities and over 350 RV sites across four resorts.

Each of these operating metrics points to the exceptional capabilities of our operations team to drive growth for our shareholders while maintaining outstanding levels of customer service to our residents and guests. Sun enjoys a number of attractive fundamental tailwinds: the increasing cost of site-built housing, the limited supply of high-quality, affordable housing, and the strong demand for manufactured housing and RV lifestyles leave Sun well-positioned to deliver industry-leading internal growth for the coming years. Karen?

Karen Dearing (CFO)

Thanks, John. Sun reported $0.98 of core FFO per share for the quarter ended December 31, 2017, in line with our previously provided guidance. For the 12 months ended December 31, 2017, core FFO per share was $4.17, up 10% from the prior year. Included in core FFO is an add-back for lost earnings net of insurance deductibles from the Florida Keys properties damaged during Hurricane Irma, which totaled roughly $300,000 for both the quarter and the year. These properties are out of service and are now part of our redevelopment pipeline. As Gary detailed earlier, we acquired nine operating communities for a total of $145 million and one land parcel for approximately $6 million in 2017. Our deployment of roughly $150 million in acquisitions for the year is in keeping with our efforts to deepen our presence in desirable and complementary markets.

Five of the communities were located in California, two in Florida, and two in the Midwest. With respect to capital markets, we were very active in the fourth quarter and early 2018, retiring high coupon debt and preferred units. These transactions included the November redemption of our $85 million Series A preferred stock that carried a coupon of 7.125%, the December and January redemptions of 8.6 million of Series B-3 units with a coupon of 8%, and the December defeasance of a $38.6 million mortgage with a 5.25% fixed rate. Concurrent with the defeasance, we entered into a $100 million mortgage with an interest rate of 4.25% encumbered by the same property. In January 2018, we have also retired $7.6 million of mortgages maturing in 2019, with a weighted average interest rate of 6.25%. Our forward debt maturity schedule is well-balanced and very manageable.

During 2018, we have just $26.2 million of remaining loan maturities. We will continue to pursue the restructuring or pay down of liabilities maturing in 2018 and beyond to drive down our cost of funds. At December 31, 2017, Sun had $3.1 billion of debt outstanding, with a weighted average interest rate of 4.5% and a weighted average maturity of 8.9 years. Our net debt to trailing 12-month recurring EBITDA was 6.3x, an attractive level that provides us the capacity to continue to support our 2018 growth initiatives. On the equity side, we issued roughly 322,000 shares of common stock through our ATM program in the fourth quarter at a weighted average price of $93.33, raising roughly $30 million. The proceeds of the ATM issuance were used to match fund our acquisitions in the fourth quarter. Now let's turn to guidance.

For 2018, we expect full-year Core FFO per share in the range of $4.48-$4.58, and Core FFO per share for the first quarter of $1.12-$1.14. Additionally, please keep in mind the following considerations. On the operating front, we are expecting a same-community weighted average rental rate increase of 3.8% and expect to capture same-community occupancy growth of roughly 170 basis points during the year. We are anticipating full-year same-community NOI growth of 7%-7.5%. The same-community portfolio has increased to 336 communities as compared to 231 communities in 2017, reflecting the inclusion of the Carefree portfolio. We are expecting an increase of 2,700-2,900 additional revenue-producing sites. Of the estimated revenue-producing site additions in 2018, approximately two-thirds are in manufactured housing sites and one-third in RV conversions from transient to annual leases.

Our core FFO guidance includes an add-back for lost earnings from the three offline Florida Keys communities, which we expect to recover through the business interruption insurance claim process. The estimate is based on historical NOI contributions from these properties and totals $1.3 million, or $0.015 per share for 2018. I would also note that our guidance does not include any impact from prospective acquisitions or capital markets activities, which may be included in analyst estimates. Please refer to our supplemental document for additional guidance on home sales, same-community and core FFO seasonality by quarter, general and administrative expenses, and other details. This completes our prepared remarks, and we'd like to open up the call to questions. Operator?

Operator (participant)

Thank you. If you'd 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'd 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 comes from the line of Drew Babin with Robert W. Baird & Co. Please proceed with your question.

Drew Babin (Senior Research Analyst)

Hey, good morning.

Gary Shiffman (Chairman and CEO)

Good morning, Drew.

Karen Dearing (CFO)

Good morning.

Drew Babin (Senior Research Analyst)

Quick question on the deals that were executed in the fourth, sorry, in the fourth quarter. Can you give cap rates on those deals and, I guess, give kind of your update on what's out there in the transaction market, whether anything has changed in terms of deal flow or, I guess, the volume of opportunities that you're seeing?

Gary Shiffman (Chairman and CEO)

Yeah. Sure. There's an awful lot in each part of that question. I'll start with the easiest. The blended cap rate for the acquisitions in the fourth quarter was 5.5. Then moving on to a little bit of what Sun's pipeline looks like. I think that I would suggest that it just remains very, very constant and similar to what we've experienced for the last several years. When you separate out the large portfolio transactions, in 2015, we did about $100 million of single-type acquisitions. In 2016, about $200 million. And in 2017, $150 million. So with the pipeline that we see in front of us right now, we would expect to be very, very similar to that average range in there. We're seeing and have under review manufactured housing, both age-restricted and all-age, as well as RV resorts.

I think we've got good solid opportunity there, but I'd suggest that strategically, we're very, very focused on acquiring properties that can grow at least equal to our current portfolio, if not value-add opportunities where we can accelerate outsized growth through management and systems and experience over here like we've done in the past. That being said, what are we seeing in the market? I would share with everybody that we continue to see contracting cap rates. I think that fundamentally, there is a lot more interest in the asset category from both public and private investors. Generally, we talk about cap rates in the 5%-7% range.

I can share with everybody that we have seen transactions 100-150 basis points below that range and a lot less discernment between the quality of the assets and even the fact of whether they're age-restricted, all-age, or, in fact, RV communities. So we're seeing that compression take place out there. Haven't really seen any impact by interest rates. I think in large part due to the amount of equity interest in the asset class, as well as the continued interest by lenders, I think, for all the fundamentals that characterize manufactured housing and the RV resorts. So whether it be the life company, CMBS, or other type of funding, it's still readily available and very, very competitive out there.

We're definitely very disciplined in what we're doing, but the expectation from the existing pipeline will just continue selectively acquiring properties as we've done over the past few years.

Drew Babin (Senior Research Analyst)

Thanks, Gary. That's great, color. John, a quick question for you. In the last couple of days, you've heard some news about both home building permits and housing starts kind of jumping a little bit going into this year. Demand's strong. It seems like home builders are getting a little more active at the margin. I guess in your kind of experience, do you see any type of higher density, value-oriented, amenity-heavy type of home building going on in any of your markets? Or do you see that as, I guess, why aren't home builders trying to, in some way, capture this opportunity as far as it restrains things holding them back, land scarcity? If you could just speak to that a little bit and just give us an update on whether you're actually seeing anything on the ground in that form.

John McLaren (President and COO)

Yeah. So my thoughts on that, Drew, are it's obviously within our communities, it's a whole different lifestyle, and it goes, frankly, a little bit beyond even the amenities. The amenities support it, and we've got a very, very healthy stack within our communities to do that. But really, it has to do with the experience that happens on the property. I think one of the other sort of distinctions between us and maybe some of this going on is the fact that there's still, when you're looking at stick-built single-family, the barrier to entry is higher from a financial outlay standpoint for somebody to buy a single-family home as compared to our product.

And so when you look at sort of the square footage values that we have by comparison and then, like I said, the amount that they have to pull out of pocket to do that, I think it puts us into an advantage because I don't, the only thing that really kind of, and we've talked about this before, that impacted us was before the mortgage crisis when there were unqualified credits that were allowed to buy single-family homes. And so that still factors into us. So I still think that from a competitive standpoint, whether it's the amenities themselves, the experience at the properties, and the barrier to entry to own a home puts us still at an advantage.

Drew Babin (Senior Research Analyst)

All right. That's great detail. Thank you.

John McLaren (President and COO)

Yep.

Operator (participant)

Thank you. Our next question comes from the line of Nick Joseph with Citigroup. Please proceed with your question.

Speaker 8

Great. Thanks. This is John here with Nick. Question on the same store. Could you quantify the benefit to 2018 same-store NOI growth from adding the new properties to the same-store pool?

Karen Dearing (CFO)

Adding the Carefree Communities to the pool?

Speaker 8

Yeah.

Karen Dearing (CFO)

So yeah. As we said in the past, when we purchased Carefree and as we underwrote that, we did anticipate that Carefree would be outperforming our core portfolio. In fact, that is what is occurring. That acceleration of the same-community NOI growth to 7%-7.5% from where we were in 2017 is really driven by that higher growth rate in the Carefree portfolio than in the core portfolio.

Speaker 8

I guess along those lines, how long would you expect that to occur for? How much longer, like a year or two, for that outsized clip?

Karen Dearing (CFO)

Yeah. When we looked at it, it was for another, how should I say this? We underwrote it. After our first year of acquisition, it would outperform our portfolio for another 2-3 years.

Speaker 8

Okay. Great. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

John Kim (U.S. Real Estate Analyst)

Thanks. Good morning. You guys mentioned in your prepared remarks about increasing your revenue-producing sites. Your main competitor in public space, ELS, had pretty much said the same thing on expansion opportunities. What about the private owners? I mean, do you get a sense that they're expanding as quickly as possible just given the strength in the market? And how do you see new supply this year versus in recent years?

Gary Shiffman (Chairman and CEO)

Yeah. It's Gary, John. I think that we've shared before that in the backdrop of what we're aware of going on in our markets and across the country, there's certainly very little new greenfield development, although there's a pocket here or there we're starting to hear about right now. Sun, of course, has been focused on the new development side of trying to deliver 2-3 communities per year. Other than that, nothing on the new development. On the expansion side, I would say it's really unchanged. I can't point to anything, and I know that's John, that it's different today that we see expansion-wise across the general board. We did note that our competitors, I think, were looking at expanding their communities at a rate probably much higher than in the past.

I think that as we've shared, it's a very healthy way for us to create growth. The fixed costs are in place, and the margins are higher when we expand. But I can't really sit here and tell you that we are aware of a lot of other expansion taking place out there. It does play a big role in acquisitions, as I've said before, where we can acquire properties that have contiguous land that either comes with the acquisition or that we can acquire separately. It's strategically important for Sun to continue to gain that type of extra additive growth. So what I would say is that most of what I see out there is opportunities on acquisitions that might have some embedded expansion opportunity in it, but not a lot that I see that's really taking place out there.

John Kim (U.S. Real Estate Analyst)

Could you give us a ballpark on new supply this year in MH and RVs?

Gary Shiffman (Chairman and CEO)

Yeah. In manufactured housing, new supply, we're doing 2-3 communities. And if there's another 2-3 communities going on across the entire country, I'm not aware of them. Same is true basically on RV and MH. I may be aware of a handful, 3-5 community owners that I've spoken to in one way or another, either for acquisition purposes or other purposes, that might have expansions pending. So you might put that at maybe 12 across the country. And again, these are just estimates. And I turn it over to John. Are you aware of anything more?

John McLaren (President and COO)

Yeah. I think I would echo what you said before too, Gary, which is that, I mean, similar to what we're talking about with some of these with the previous question today, I mean, the barrier to entry is difficult. The entitlement process is difficult. The zoning process is difficult. It can take 12-24 months to get through that process. And so it's hard to do, which I think plays into the fact why there's just not that much going on. That's part of it.

John Kim (U.S. Real Estate Analyst)

Okay. And then, John, you mentioned that the 2018 RV reservations are at 95% of the market and about 700 basis points. What is that driven by? Is that the strong economy, or are there other factors?

John McLaren (President and COO)

Well, I think a lot of it, frankly, is driven by obviously, there's a lot that we do from a social and a web online presence that drives a lot of business to our communities. But I think more important than that is really what happens at the resort itself. Okay? And it's really that experience that happens on the ground because when we have a lot of focus on the service and the relationship that we have with our guests and residents and what that turns into is really building your resident and guest sales force for your brand. And that by itself is our largest segment of marketing that we have. And so it really is a product of that.

I think one of the things that really is the biggest example that demonstrates that is the success that we've had in having guests that were transient guests become annual guests in our communities. We grew by nearly 1,000 sites in 2017 with that conversion. When they do that, I mean, they're committing to being there for the long term. I think, again, I think what happens on the ground drives that the most.

John Kim (U.S. Real Estate Analyst)

Okay. And then finally, I had a question on your guidance, especially on the expense side. It looks like property operating and maintenance, you're expecting a 2.8% increase at the midpoint. In the fourth quarter, you had payroll increase of 8%, legal tax and insurance, 16% increase, and that's by other. But how do you manage the OpEx being growing so low compared to the fourth quarter and maybe compared to inflationary pressures?

Karen Dearing (CFO)

I think that we're known for our operating expertise. And certainly, it's just a focus that we have internally. Last year, we did have some increases in healthcare claims and some utility costs and things like that. I don't think that the guidance for the year-to-date for last year expense growth was 3.8%. And so we're guiding to a little bit less than that in this year at the midpoint at 3.3%. And we're very active in our real estate taxes also as far as I just lost my train of thought, really.

John Kim (U.S. Real Estate Analyst)

Assessments.

Karen Dearing (CFO)

Yeah. Fighting assessments that come in. We've been really successful in receiving some refunds on prior assessments for our communities.

Gary Shiffman (Chairman and CEO)

Yeah. The only thing I would add is fundamentally, for those who want to really look at one of the main characteristics of operating these communities is that we don't have any real vertical structures. We don't have things to maintain like the apartment or multifamily does. The customer that owns their home is responsible for maintaining their own lawn, their own site. So the actual areas where we can come under pressure, I think, are just fewer. That doesn't mean we don't experience the inflationary increases and other related increases, but they are a lot smaller in total than other asset classes.

John Kim (U.S. Real Estate Analyst)

Can you just remind us what's in the other bucket in OpEx? Because that's the one that's kind of moderating last year's expense growth.

Karen Dearing (CFO)

Trying to find that page.

John Kim (U.S. Real Estate Analyst)

I'm referencing page 14.

Karen Dearing (CFO)

Yeah. Advertising is in there. My bad debt expense is in there. Those are the two that are coming to my mind right now.

John Kim (U.S. Real Estate Analyst)

Okay. Great. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star one on your telephone keypad. Our next question comes from the line of Joshua Dennerlein with Bank of America Merrill Lynch. Please proceed with your question.

Joshua Dennerlein (Equity Research Analyst)

Hey. Good morning, guys.

Gary Shiffman (Chairman and CEO)

Good morning.

John McLaren (President and COO)

Morning, Joshua.

Joshua Dennerlein (Equity Research Analyst)

Could you maybe walk us through how the board got to the 6% dividend increase this year? Do they kind of think about it as a AFFO payout?

Gary Shiffman (Chairman and CEO)

Yeah. I think that there was a, it's Gary, a lot of deliberation and careful thought that went into it. We have been a company that most recently has used as much of our retained earnings and definitely been into the equity marketplace to restructure the balance sheet to grow the opportunity for the shareholders through the transformational acquisitions. With much of that behind us right now, we did think it was in order to increase the dividend for the shareholders. I think part of that certainly was looking at AFFO and a lot of other metrics, seeing how the company positioned against the rest of the companies, the REITs that are out there, and felt comfortable that we were very, very close to the average range. That helped govern us along with how we viewed growth in the company through 2018 and the foreseeable future.

It was all of those types of things that went into the thought process to arrive at that dividend increase.

Joshua Dennerlein (Equity Research Analyst)

Gary. Also, for the revenue-producing sites in 2018, it looks like you're forecasting 2,700-2,900. How much of those sites are just from pure occupancy gains versus expansion sites that you've built out but that aren't revenue-producing yet? That's something you'd like to break down.

Gary Shiffman (Chairman and CEO)

Do we have that? I think approximately.

Karen Dearing (CFO)

I think it's about, yeah, I think it's about 1,200 is expansion site sales.

Joshua Dennerlein (Equity Research Analyst)

Okay. Thank you. And then just one last one from me. For 2018, you're forecasting a 3.8% weighted average monthly rent increase. How does that compare to historical rent bumps? And is there any possibility that as inflation picks up, you could see the monthly rent increase going forward accelerate?

John McLaren (President and COO)

Yeah. So this is John. I think that, well, to give you some history, I think approximately our rent increase in 2016 weighted average was 3.4%, which went to 3.6% in 2017. And now, like you said, guidance of 3.8% for 2018. It continues to be at the higher end of the 2%-4% range that we've gotten for the last 20+ years. I think it's important to note that high occupancies provide multiple benefits. One of the things I think that differentiates Sun is our experience and expertise in filling vacant sites and creating additional avenues for growth. We create lease-up opportunities by expanding our existing communities, acquiring communities on a creative basis with additional vacancies to fill, and by building new communities.

Really, associated with the lease-up of those vacancies that we buy or create are the multiple levers that we talk about that drive overall growth. Those levers are rent increases but also include occupancy gains, home sales, conversion to transient RV sites, annual seasonal sites. Of course, rent increase drives solid year-over-year growth, but it's only one of those levers. I think it's important that to us, it's important to strategically balance all those different levers as we try to optimize the annual revenue growth and maximize the returns for shareholders.

Joshua Dennerlein (Equity Research Analyst)

Great. Thanks, guys.

John McLaren (President and COO)

Yep.

Operator (participant)

Thank you. Once again, as a reminder, please press star one to join the question queue. Our next question comes from the line of Todd Stender with Wells Fargo. Please proceed with your question.

Todd Stender (Managing Director and Senior Equity Analyst)

Hi. Thanks. Just on the timing of those new expansion sites coming online, can you estimate when they're coming, how long they take to generally fill up, just to get a sense of maybe the dilution you're assuming, and then if it's quicker than expected, maybe a little upside?

Gary Shiffman (Chairman and CEO)

Yeah. Scary. And John, you can add anything else in. But I think the way that we look at it is occupancies and the expansions are generally 4-8 per month. As John and Karen shared, we're looking to fill up about 1,200 of the over 2,100 sites that were developed in 2017. So the lag is really as we build sites in 2018, they won't be filled into 2019. I think any dilution is kind of built in from the standpoint that in 2017 we did 2,100, and 2018 we'll be doing somewhat less. So we would expect to see a slight pickup as these sites are filled versus the amount of capital being put out in 2018 for new sites.

And finally, with regard to how we look at things, that if we're going to fill 1,200 sites this year, they'll fill sort of ratably over the year. So we would expect the full benefit to equal something like 50% on the weighted average of what we'll experience in additional revenue from those sites.

Todd Stender (Managing Director and Senior Equity Analyst)

Okay. Thanks. And I guess just switching back to the renter-to-owner conversions, can you speak to the length of stay that you're seeing the renters rent before they buy? And then maybe just go through the cost difference of renting versus owning.

John McLaren (President and COO)

Yeah. I mean, generally speaking, our average renter is in the home between 18 and 24 months. That's been the case for a long, long time we've had the program. Generally speaking, the rents within that program have continued to grow. And even in comparison to other multifamily and certainly other rental opportunities that are out there in the market, it's once again, you're in a situation within Sun's communities where we've got amenities and other services that are provided that are different than some of the others out there. One of the things that Gary noted during his remarks was that 36% of our home sales were to existing home renters, which is it's a third of our sales. It's over a third of our sales.

I think one of the things that really that process of having the rental home program is one of the things that fuels our sales overall and brings in new revenue into Sun. I think it's important to note that out of the 3,282 homes that we sold in 2017, which was a record, that 1,600 or nearly 50% of those homes had previously been rented. What does that do? I think it's a strong indicator of the demand that we continue to see for our homes and our communities. Ultimately, for that incremental gain above the 1,200 or so that we sold, it generates a new revenue stream on top of that versus somebody simply converting as a renter to an owner within the community.

Todd Stender (Managing Director and Senior Equity Analyst)

Can you quantify some of that just to get a sense of what your site rent is? If you can convince someone to now own it, maybe their chattel loan payment is actually less than renting. Is there that dynamic?

Gary Shiffman (Chairman and CEO)

Yes. Yep. Interestingly enough, we've always shared with the market that we do see high-teen returns on our capital invested in the rental program. And we do, in fact, trade off some FFO when we convert them into a homeowner. However, the concept that I remind everybody is that with average turnover of homes moving out of our portfolio, less than 2% a year, and another 6%-8% that actually sell their homes, but we get continuous rent. Once we convert from a renter to an owner, we have an income stream of a minimum of 40+ years in. So while we do lose a little bit of FFO, we do gain that security of the income stream.

Todd Stender (Managing Director and Senior Equity Analyst)

Thank you.

Operator (participant)

Thank you. Mr. Shiffman, there are no further questions. I'll turn the floor back to you for any final comments.

Gary Shiffman (Chairman and CEO)

Well, we'd certainly like to thank everybody for participating on our year-end fourth-quarter call. We do look forward to having everybody join us for our first-quarter earnings call. Both John, myself, and Karen always encourage anybody to feel free to reach out to us for any additional information. Thank you.

Operator (participant)

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