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Sun Communities (NYSE:SUI)

Q1 2014 Earnings Call

April 30, 2014 11:00 am ET

Executives

Gary A. Shiffman - Executive Chairman, Chief Executive Officer, Member of Executive Committee and Director of Sun Home Services Inc

Karen J. Dearing - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Corporate Controller, Treasurer and Secretary

Analysts

Nicholas Joseph - Citigroup Inc, Research Division

Jana Galan - BofA Merrill Lynch, Research Division

Ryan Burke

Paul E. Adornato - BMO Capital Markets U.S.

Michael Sunderland Beall - Davenport & Company, LLC, Research Division

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

David Harris - Imperial Capital, LLC, Research Division

Todd Stender - Wells Fargo Securities, LLC, Research Division

Chris Pearson - Davenport & Company, LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Sun Communities First Quarter 2014 Earnings Conference Call on the 30th of April, 2014. 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 this morning's press release form 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'd like to introduce management with us today. Mr. Gary Shiffman, Chairman and Chief Executive Officer; Ms. Karen Dearing, Chief Financial Officer; and Mr. Jeff Jorissen, Director of Corporate Development. [Operator Instructions]

I would now like to turn the call over to Mr. Gary Shiffman. Please go ahead, sir.

Gary A. Shiffman

Thank you, operator, and good morning. Today, we reported funds from operations of $38.3 million, or $0.95 per share for the first quarter of 2014, compared to $31.7 million, or $0.93 per share for the first quarter of 2013. These results exclude acquisition-related costs incurred in each of the referenced quarters. Revenues increased to $111.2 million in the first quarter of 2014, compared to $102.9 million in the first quarter of 2013. The year 2013 was our 20th full year as a public company. Prior to the initial public offering, we owned 24 manufactured housing communities comprising over 6,500 sites in the states. Today, we own 193 communities comprising more than 72,000 sites in 27 states, including nearly 40 RV communities. The size and scope of the activities that have grown are even more emphasized and we consider that today, we include sophisticated marketing programs processing 30,000 applications for occupancy a year and managing home sales and rental programs, among other things.

While the company's enterprise value now exceeds $3 billion, up from less than $200 million at the IPO, the attributes that undergird our success are unchanged from those we cited in our initial public offering roadshow. First and foremost, affordability. This is a basis for the demand for occupancy in our communities. The average manufactured home is nearly 50% more square feet at a 40% lower cost per square foot than the national average for a comparable apartment. The economic advantage extends to single-family housing which costs about 3.5x the cost of a manufactured home. And that's excluding the land. While the down payment and operating cost of a single-family home are substantially larger in dollar terms, there's no better measure of the impact of affordability on demand and the recurring annual increases in applications to live in our communities.

The stability of revenues is another key attribute. The site rents for our residents have increased by an average of 3% to 4% for over 20 years. This pricing power exists because of the quality of our asset management and the cost of moving a home. Only an average 3% of our residents have moved their home out of our communities during the last 20 years. In addition, same property net operating income has increased every year in our public company history. We were characterized as recession resistant at the time of our IPO and that assessment has been fulfilled over the instilling 2 decades. As we are largely a landownership business, our CapEx is low relative to other asset classes. Our CapEx, which approximates 3.5% of revenues, is significantly lower than multi family at 8.8%, student housing 4.8%, self storage 4.7% and the overall average of 5.8% for Res. While the amount is not large, we consider it crucial to reinvest in the properties to maintain quality and curbside appeal. In 1993, we told prospective investors that this industry possesses strong, long-term prospects for acquisitions because of the highly-fragmented nature of ownership. After purchasing nearly 200 communities, that statement remains true. And the same is true of recreational vehicle community ownership where we've been focusing our attention and efforts in recent years. Similar to manufactured home affordability attributes, the value proposition in RV is affordable vacationing and attractive acquisition opportunities come to our attention with frequency.

Obtaining zoning has long been a daunting obstacle to the development of manufactured housing communities, and it remains so. This barrier has added the decline and shipments of homes and the loss of thousands of dealers, which has substantially raised the economic barrier to entry. New developments of communities are very rare, supply of new sites is perhaps more constrained now than at any other time, and we are fortunate to own over 6,000 zoned and entitled sites for development adjacent to our communities to serve as additional sources of growth.

As we enter 2014, the 20-year total return to our shareholders has been 863%, which places us 18th in the equity REIT universe, 10-year ranking places us 28th, while we are in 8th place over the last 5 years.

And at this time, I'd like to turn our attention to our portfolio review of the first quarter. Occupancy increased by 560 sites in the first quarter, on track for the annual budgeted increase in occupancy of approximately 1,900 sites. Total portfolio occupancy increased to 90.2%. Applications to live in our communities increased by over 5% to nearly 8,000, despite the adverse weather conditions during the first quarter in several of our markets. Same property revenues increased by 6.8% in the quarter, while expenses increased by 7.2%, generating a 6.6% increase in net operating income. Nearly half of the expense increase resulted from the weather's effect during the first quarter on repairs, snow removal and utility costs. Occupancy for the same site portfolio increased to 89.9% in the quarter from 88.6% in the 2013 quarter. Home sales totaled 369 for the quarter compared to 466 homes sold during the first quarter of 2013. The impact of home sales in the quarter was related to weather, new legislative provisions requiring modification to application and processing, as well as closing requirements, which were resolved by the middle of March. The company has made no revisions to its previously provided guidance of 2,200 annual home sales. Expansions continue to lease up successfully. The most recently completed communities located in Texas, North Carolina and Ohio, filling at an average rate of 7-plus sites per month. We expect to complete building approximately 800 additional sites in Texas and Colorado by the end of 2014. The company is also pleased to note that the Board of Directors increased the quarterly dividend to $0.65 starting in this quarter.

And now, I'd like to provide an updated guidance. 2014 full-year FFO guidance has been revised to reflect the effect of our recent equity offering; community acquisitions completed through April 30, 2014; the potential dispositions of 11 communities and certain operating results through March 31, 2014.

FFO per fully diluted share excluding acquisition related cost is expected to approximate $3.33 to $3.43 per share for the year, and $0.74 to $0.76 per share in the second quarter. No prospective acquisitions or prospective acquisition-related costs are included in guidance. And today's press release contains additional detailed information regarding guidance assumptions that have been revised from those originally provided in January of this year.

And at this time, operator, we'd like to open it up for questions and answers.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Nick Joseph with Citigroup.

Nicholas Joseph - Citigroup Inc, Research Division

Just starting on the dispositions. Can you give more color on the timing, expected total pricing, expected cap rates for them?

Gary A. Shiffman

Sure. I think the pricing cap rates are pretty reflective of what has been very high demand for manufactured housing communities in general, as well as the fact that the specific 11 communities have been maintained to the same high standards of all our properties and contain no deferred maintenance or CapEx expenditures as you might find in the general marketplace today. We've executed a purchase agreement on 1 of those properties so far and it's under due diligence, and are currently exchanging final drafts and negotiating through purchase agreements on 6 other of the properties. So other than to say, the expected proceeds, should we execute on disposition of all 11 communities, should be in the range of $65 million to $75 million.

Nicholas Joseph - Citigroup Inc, Research Division

Great. Kind of the expected cap rate on all 11 I guess -- if you put it altogether?

Gary A. Shiffman

Yes, I think everyone would have to interpolate backwards at this point, until we're a little further along and having the purchase agreements completed.

Nicholas Joseph - Citigroup Inc, Research Division

And then can you touch on the financing market right now for MH and RV properties, what you're seeing there?

Gary A. Shiffman

I think we're seeing high demand to finance communities, and we've seen it from probably 4.25% to 5.25% on a fixed rate basis for one-off. And under typical terms you would expect to find in the marketplace today, but there are an abundance of choices that one can make to go to find financing today. I think that's one of the main reasons we thought it would be a good time to begin a disposition program and fix some of the proceeds and redeploy them in areas that we think will be less management intensive for us and we can get higher growth for the return on the investment.

Nicholas Joseph - Citigroup Inc, Research Division

So I guess the flip to that is, if you found it more difficult to actually source acquisitions given how much I guess private demand you've seen in the space and how strong the financing market is?

Gary A. Shiffman

I think that there is greater demand out there today and we are seeing competition, but that competition is generally coming for a different quality of asset. And hence, the opportunity that we're trying to take advantage of is that aggressive pricing in the marketplace for that asset, for the assets that Sun has been focused on and for the type of value creation. We're well capitalized and have the ability to utilize our rental program and creating inventory for, for-sale product within our properties. We're not seeing a strong competition in demand. So we're pretty much acquiring the same as we have been for the last 3 or more years now. Cap rates being very much the same, and we've been able to take advantage of expanding our geographic footprint as we shared before and creating growth opportunities through buying properties with vacancy and opportunity that I think some of the other investors don't have the capital to pursue, or the systems for that matter to pursue.

Operator

Our next question comes from the line of Jana Galan with Bank of America Merrill Lynch.

Jana Galan - BofA Merrill Lynch, Research Division

Going back to the dispositions, planned dispositions. How did you decide on these properties and are you trying to lower exposure to certain markets?

Gary A. Shiffman

I think that we do have an asset management group that reviews all of our properties quarterly, and Jana, I just briefly indicated, I think that this was an opportunity to identify these 11 properties, which are in very, very good shape and I think very desirable to the demand out there in the market. But there are communities that will require a little bit greater management focus and resources where we could redeploy similar or the same dollars, and I think it better growth opportunity in new acquisitions with the capital that would be returned to us, regardless of whether it's in the Midwest or elsewhere in the country.

Jana Galan - BofA Merrill Lynch, Research Division

And I just had a question on the components of the revenue growth this quarter. It was very impressive and we're trying -- I think we got 3.2% was guided to in terms of increase in site rent, you had 130-basis-point increase in occupancy and then a 1% increase in rental home rates. So was it primarily driven by transient revenues?

Karen J. Dearing

Yes, Jana, we had an outperformance in our transient revenue in the RV portfolio and also some additional miscellaneous income related fees.

Operator

Our next question comes from the line of Ryan Burke with Green Street advisors.

Ryan Burke

Hoping you can provide some color on the entrance of Freddie Mac to the space. In particular, is there any difference in the benefit to Sun versus the benefit to, say, some of your smaller private operators that you compete against?

Gary A. Shiffman

Is this a benefit on the financing of the homes or the communities that you're referencing, Ryan?

Ryan Burke

The communities.

Gary A. Shiffman

Communities. I think that on the community side, the aggressive lending that's out there right now, I think benefits everybody. I mean, we're financed heavily through Fannie programs and our own portfolio. And we don't see the competitiveness, if you will, where rates are, terms and leverage changing that much to make any difference in general, in the playing field of acquisition.

Ryan Burke

Okay. And switching over to the rental program. You provided some very insightful color on the last call in regards to the type of property that you were ramping that program up in and the type of the property where you expected to see a decline in that program. Can you provide an update on just in terms of where you currently stand? Has there been any change in view from that perspective?

Karen J. Dearing

Ryan, I think that -- as you mentioned, we have talked in the past about where we're reaching total portfolio occupancies in excess of 90% that we're seeing declines in that rental program at that stabilized occupancy. When I looked back at the last 12 months, 30% of the communities in which we operate a rental program had occupied rental declines. That's very consistent with the number that we -- the percentage we have budgeted for declines in 2014. Colorado, 75% of those committees are declining; in Texas, 60% of the communities are declining. The ones that aren't declining are the Texas communities where we've had recent expansions and those are continuing to fill. Michigan has about 20% of the rental communities declining over the past 12 months. So we -- we're seeing exactly what we said and continuing to utilize that program to -- in markets where communities have not achieved that 93% to 94% occupancy. And again, in the acquisition and expansion communities.

Ryan Burke

Got it. Last question just on the legislation that you mentioned that impacted home sales for the quarter. Sounds like it's been resolved, but if you could just provide a bit more color on what that was and how it impacted your operations and what we can expect moving forward.

Gary A. Shiffman

Sure. I think that the language requirements that I were -- we were referencing basically had to do with purchaser's rights and those requirements really had nothing to do with Sun, but the ultimate take out lender that needed to really understand more of the Dodd-Frank regulations. And it took them some time to really finalize the language that we then had to incorporate, with regard to the borrower's rights into our contract form, and I suggest with you that by the time it got completed, by the end of the March, not much language actually changed, but it was a necessary and required exercise that we just had to be patient with.

Operator

We have a question from the line of Paul Adornato with BMO Capital Markets.

Paul E. Adornato - BMO Capital Markets U.S.

It looks like you had a very healthy profit per home sale of over $6,000, and I remember way back when you kind of ran the program, primarily to increase occupancy and not necessarily to make a profit. And so, I was wondering how you're thinking about that trade-off, that is, perhaps if you offered homes at a lower price point, you'd be able to sell more of them and increase the rental income stream. So maybe you could give a little color how that's shaping up.

Gary A. Shiffman

I think that you're exactly right, Paul. We entered the rental home process and the process of buying repossessions as a defensive move way back in 2000. And that defensive move has sort of turned into a component of our business model. And we always felt that when we were buying homes at a basis far below placement cost, 2 things would happen: we'd be creating value for the first time, for the home buyer by buying them at prices that we feel will at least maintain their equity, if not appreciate, and we're certainly seeing a lot of that with the increased profitability on the used home side. And on the new home side, we are not looking to make a profit, though we have certainly looked at others who have been utilizing the homes and sustaining certain losses to maintain occupancy. I think there is an opportunity for us, if you will, to evaluate the homes that we actually do have on the books and determine how we want to approach the next couple of years from the standpoint of occupancy growth versus profit on the selling of those homes. I think for right now, I would share with a broader market that we're really looking to gain a 92% to 94% occupancy in our overall portfolio. And at that time, historically, in the business, we found we can get more aggressive with both sales prices and rental increases. So I don't think we'll be looking to maximize further profits on the sale of homes until we do hit that 92% to 94% occupancy rate.

Paul E. Adornato - BMO Capital Markets U.S.

Okay, great. That's helpful. And I was wondering if you could comment on the overall segmentation of the industry. Just -- I guess related to the aggressive acquisition market, I know there's a lot of private equity players out there. And so if you were to look at the universe of institutional quality properties, what percent is owned by institutional investors, that is, private equity plus the public companies?

Gary A. Shiffman

I would suggest that if you were to talk about institutional quality, there are basically just the 2 public companies that would fit in that category and then some portions of some other private companies. But the vast majority of property turning over today and the interest that's been focused by the financial funds, I would not personally consider institutional quality. So while I don't have an exact percentage for you, I would say there's far great -- far lower than 10% held by the 2 public companies and much of it is still held in private developer ownership fragmentation that we referred to earlier and that our competitors referred to in our universe. So there are no large portfolios of institutional property that we feel will be coming to the market in the near future. So that everything has to be done on a onesie and twosie basis to be able to get that quality of the property, and I think there's also the opportunity for some limited development and development I think today of onesies and twosies and will also offer some opportunity in the future for companies searching for that institutional quality property.

Michael Sunderland Beall - Davenport & Company, LLC, Research Division

Okay, great. And just 1 final question. You guys perhaps have the best kind of long-term perspective on both the family-oriented communities, as well as the age restricted. And so I was wondering if you could give us your assessment of the outlook for fundamentals in both sides of the business?

Gary A. Shiffman

Well, I think I'll start and if Karen has anything to add, I think that we've always shared with the investment community and our shareholders the concept that, while all age communities hold a very large component, over 50% of what we would call senior residents that qualify for age-restricted communities, the non-age restricted communities I think tend to perform even better in a growing economic environment. And I think that perhaps in more challenging economic environments, some of the age-restricted communities tend to perform slightly better. So I think that our personal point of view at Sun is that we expect, and are starting to see the results as we posted and reported today, that the economies in and around our all-age communities are doing well, creating strong demand for the affordability of manufactured housing. So we think for the foreseeable future, that the all-age communities will certainly outperform in revenue increases on an annual basis, due to the fact that age-restricted communities are much more tied to CPI and other indexes that are very low right now.

Operator

Our next question comes from the line of Paula Poskon with Robert W. Baird.

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

Just a follow-up on the operating fundamentals, broadly speaking. I'm just curious anecdotally, what types of trends are you seeing in terms of residents moving in versus residents moving out? And in the context of is it job growth that's driving new people to move into your markets, is it downsizing baby boomers and conversely, what are the drivers that make people decide to leave?

Gary A. Shiffman

I'll share with you what we found in our different markets. Certainly when we talk about the Midwest and the scenario we're seeing very solid performance right now. Fundamentally, coming out of the issues related to what we'll call the great recession in 2008, the restructuring of the automotive world that obviously has big influence in the Midwest. With all that stabilization, there is a downsize I think in much of the population that did shift for necessity of jobs and other things. But the uncertainty for those people who did have jobs in the Midwest and the environment, especially related to auto, has been lifted. Automotive is creating profits. Those profits have a good trickle-down effect. Employees are given bonuses. Those that were on the sidelines feel secure with their job positions, in our opinion. And so therefore, in the Midwest, we're seeing people move off the sidelines, more secure, with greater down payments and more money and moving into our communities. When we get to other areas of the country, as Karen indicated, in Texas and Colorado, aside from our expansions, we're virtually fully occupied. And I think much of that is related to job growth and the high demand in those marketplaces as there was a shift of employment base as well. So Florida, we've stayed pretty steady and fundamentally, while the economy is still not fully recovered, I think the concept of job growth and more security for those who are employed right now has made greater opportunity and probably a greater need and demand for the affordability aspect of manufactured housing. And I think that's why the concept of understanding the stability of the revenues in our industry is being talked about a lot again as we reach full occupancy in many of our marketplaces. So I just think good, solid fundamental economics. As far as shift from downsizing to smaller dwellings, I think we discussed in the past, I think there are 2 fundamental changes that are happening. People who are moving to retirement areas are -- instead of disposing of residences, they're at least maintaining, often a smaller residence in the area that they're coming from, and taking up secondary residency, sometimes in the form of manufactured housing. And other in their retirement markets, but they don't exit completely like they used to. And on the downsizing thing, in the all-age communities, we still appeal to both ends of the market. First-time homebuyers, single parents who are raising families and need the affordability feature of entrée into homeownership. And then on the downsizing where, as I said, people are moving into sun belts and more retirement communities, but want to maintain a secondary residence, we are finding stronger demand in selling a site built home, but maintaining a manufactured home in the Midwest in particular.

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

And just 1 last question. Across the portfolio, what would you estimate the opportunity set is for continued expansion and redevelopment?

Gary A. Shiffman

Karen, do you have the states where we're focused on?

Karen J. Dearing

States as far as expansion?

Gary A. Shiffman

Yes.

Karen J. Dearing

We have 6,000 sites available for development. Is that what you're asking, Paula?

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

Yes.

Karen J. Dearing

And let's see. I think 30% of them are in -- 35% of them are in Michigan and 38% of them are in Texas. So we've started -- obviously, been very active in Texas and we'll continue in Texas and as Michigan moves to greater occupancies, it's at 88.6% now. As it reaches further, we'll start looking at individual communities just to start expanding there in the future.

Operator

Our next question comes from the line of David Harris with Imperial Capital.

David Harris - Imperial Capital, LLC, Research Division

Gary, I wonder how much you deliberated on the issuance of equity at a price below that you issued 12 months previously?

Gary A. Shiffman

I think the choice for equity came out of a commitment that we've made to the market to accept the dilution over the last few years on behalf of the shareholder to reduce leverage. Our ratios today are at the best point and the highest position of, I think, almost any time that I recall. But certainly, in the last 10 to 12 years. So we repositioned the balance sheet, brought down leverage, I think in a slow methodical way, took advantage of the pricing and the demand in the marketplace to do so. But at the same time, made the commitment to those same shareholders that we would not lever back up. And so the debate really was in offering the equity where we're offering the equity and the basis that we were going to be able to take that capital and create greater growth for the shareholder by using the proceeds primarily for acquisition. And the acquisitions that we made, that we announced previously, fit that category. I shared with the market that we look for 15% to 20% growth in NOI within a 24-month period of time of acquiring those acquisitions. And when you run the accretion to the shareholder, both midterm, call it those 24 months and long-term out there, that was an easy decision for us to go out and issue the equity.

David Harris - Imperial Capital, LLC, Research Division

Did you get any pushback from any shareholders in this regard?

Gary A. Shiffman

I would say that this equity offering, based on performance over the last few years, there was no pushback, no.

David Harris - Imperial Capital, LLC, Research Division

Okay. And did internal considerations of NAV play any part in your thinking about the price at which you'd be willing to issue equity?

Gary A. Shiffman

Sure. I think that it always has to play a part in it. And while we don't publish our own NAV anymore, we do look very careful at what our view internally is. And I think that the utilization of this capital definitely warranted the issuance of the equity.

Operator

Our next question comes from the line of Todd Stender with Wells Fargo.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Just including the impact of the new equity into your guidance, just seems like 2014 guidance is still pretty conservative. You include the impact of the asset sales, but no acquisitions. Is a lot have to do with timing? Is that kind of why you incorporate the $0.05 to $0.06 impact?

Karen J. Dearing

As far as the not inclusion of acquisition, Todd, it's difficult. It depends on what you're buying. If you're buying MH or you're buying RV, depends on if you're buying northern season or southern season and when the majority of revenues come in. So the timing of the acquisition and the type of acquisition that you're doing really impacts what we would be able to put out there for guidance. So that is why we don't include potential acquisitions in guidance.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Okay. And any mortgages on these -- on the assets you're selling, just looking at the potential positive balance sheet impact that you can factor in?

Karen J. Dearing

We have been working over the past couple of years, restructuring our debt and to unencumber certain assets. The majority of these assets are unencumbered.

Todd Stender - Wells Fargo Securities, LLC, Research Division

And then just when you look at the renters converting to new homeowners, how much flexibility is in that number? Just kind of getting a sense of how much that can change throughout the year? Does the current interest rate environment have to kind of stay the way it is right now and do you expect the bulk of this activity to what we would think of as the spring selling season, so call it Q2 and into Q3?

Gary A. Shiffman

I don't think we've experienced a lot of seasonality. I think we've shared with the marketplace, we converted on average I think around 11% annually, and it just doesn't seem to change that much. I that think aside from the remarks we already shared regarding weather and some difficulties in getting our contracts amended for the new legislation on lending, one of the things that did impact us in the quarter is the focus and attention to keeping our affected communities that were affected by the weather, safe, manageable, roads clear, things like that probably took a little bit of focus off of the conversions and the ability of our staff and team to convert. I mean, talking to them because we want to really have good insight -- the best insight we can in reissuing guidance. Everyone felt pretty comfortable that anything that was lost will probably reflect in a little bit of pent-up demand going into the spring season. So we're comfortable that the numbers will be the same, and we don't see a lot of seasonality. It's funny, I think we do see a lot of growth actually towards the end of the year in the winter season as people are trying to wrap things up year end, and perhaps making more move from renters to homeowners, but it isn't anything to point to.

Operator

Our next question comes from the line of David Rooney, [ph] private investor.

Unknown Analyst

Yes, my questions relate to your proposed dispositions of the communities. The first is, do you expect to recognize a material taxable gain with respect to the dispositions? And if yes, will you attempt to defer these gains with Section 1031 exchanges? And if no, will this have a material impact on the portion of your dividend, which is return of capital?

Gary A. Shiffman

I think that by nature -- by the nature of the fact as a REIT, we would not have any taxes to pay on these gains. We would not have to look at any exchanges or anything like that. I think that when you -- and I'll step out a little bit. When you get a little deeper into year-end assessment of return of capital versus distributions, there are some implications, but I'll leave that to Karen and the accounting department. But we will not pay any taxes on the gains of these -- sale of these communities.

Unknown Analyst

But my question is, how will it impact my taxability of the dividend.

Gary A. Shiffman

Yes, the capital gains would flow through and I'd like Karen to address anything else on it.

Karen J. Dearing

I don't have an estimate of what that capital gain would be to share with you at this time, David.

Gary A. Shiffman

Sorry for not answering that correctly.

Operator

[Operator Instructions] Our next question comes from the line of Chris Pearson with Davenport & Company.

Chris Pearson - Davenport & Company, LLC, Research Division

I was just wondering if you could elaborate a bit on the positive trends you're seeing in the transient revenue. I guess, just talk a bit about what surprised you relative to your expectations this quarter. And then I guess I'm wondering if that level of revenue growth is also baked into your guidance or if that could be additional source of upside throughout the year?

Karen J. Dearing

I think the transient revenue growth is a function of all of the marketing efforts that we have in place, the call center that we have in place, the websites that reach out to individuals. Proactively through many markets or many media we're trying to reach consumers, follow-up with individuals who have stayed with us previously, extend stays of individuals who are currently with us and would like to stay a little bit longer. So we're very proactive on all of those fronts. And that is all of the marketing initiatives that we've been working on as we've gone further and further into the recreational vehicle business. And so it's certainly is helping in the transient side, helping in vacation rentals, where we are finding a strong demand for -- and cottage rentals within our communities. And it's also helping us with moving -- it's actually helping on the annual seasonal side too, and that we are finding more individuals moving from transient to seasonal annual stays with us. So all of those positives are an outcome of the marketing efforts that we have put in place. And we have included the positive of the transient revenue increase in our guidance going forward.

Operator

I would now like to turn the conference back to Mr. Shiffman for any closing remarks. Please go ahead, sir.

Gary A. Shiffman

I'll conclude it there and we look forward to next quarterly earnings announcement and call. And in the meantime, at any time, please feel free to reach out to Karen, myself or Jeff in the company. Thank you, operator.

Operator

Thank you, sir. Ladies and gentlemen, this concludes the Sun Communities First Quarter 2014 Earnings Conference Call. Thank you for your participation. You may now disconnect.

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