Sun Communities Inc

NYSE:SUI

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Communities Fourth Quarter and Year End 2022 Earnings Conference Call.

At this time, management would like me to inform you that certain statements made during this call, which are not historical facts, may be deemed forward-looking statements within the meanings 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 these 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, President and Chief Executive Officer; John McLaren, Strategic Adviser; and Fernando Castro-Caratini, Chief Financial Officer. After their remarks, there will be an opportunity to ask questions. For those who would like to participate in the question-and-answer session, management asks that you limit yourself to two questions, so everyone who would like to participate has ample opportunity. As a reminder, this call is being recorded.

I'll now turn the call over to Gary Shiffman, Chairman, President and Chief Executive Officer. Mr. Shiffman, you may begin.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

Good morning, and thank you for joining us as we discuss fourth quarter and full year results for 2022 and our guidance for 2023.

This year marks Sun's 30th year as a public company. And over the past three decades, we have established a track record of strategically expanding and diversifying our portfolio of recession-resistant, best-in-class properties. We and our stakeholders have benefited from the compelling supply and demand dynamics that underpin manufactured housing, RV communities and marinas.

Our strategic approach has delivered an attractive balance of a reliable organic growth and strong FFO per share increases. We have increased rents throughout economic cycles, and our strong results for 2022 and outlook for Same Property NOI growth in 2023 demonstrates the benefits of operating in segments where supply is perpetually constrained and demand is resilient. In 2022, core FFO per share grew 12.9%, driven by strong demand for our offerings as well as our accretive investment activity.

Demand for our manufactured housing communities and RV locations is evident in our consistently high occupancy levels, gains in revenue-producing sites and solid Same Property NOI growth. At year-end, our combined MH and RV occupancy was nearly 97%, reflecting approximately 96% occupancy within our manufactured housing portfolio.

During the year, we achieved a record of over 2,900 revenue-producing site gains, driven by more than 2,250 conversions of transient RV sites to annual leases, which topped last year's record conversions of nearly 1,700 sites and represented a 36% year-over-year increase.

In marinas, our 2022 Same Property results continue to demonstrate supply-demand tailwinds, with a 12:1 ratio of registered boats in the U.S. to the existing supply of leasable wet slips and dry storage spaces. This creates a very sticky customer base and gives us the ability to grow rents.

The resilience of our platform can be seen in our full year total manufactured housing, RV and marina Same Property NOI results, which grew by 5.8% over 2021.

With regard to external growth, since acquiring Park Holidays in April 2022, we have focused on integration as well as being very selective in our approach to acquisitions. The U.K. market for holiday parks remains highly fragmented. And as we have done in the U.S. over the years, we have used our Park Holidays' footprint to opportunistically scale our presence in the U.K. Subsequent to the Park Holidays transaction, we acquired 14 best-in-class holiday parks in the U.K. These investments have accretive going-in cap rates, and we believe they will deliver significant ongoing growth and yield strong returns.

In light of current market conditions, we have shown discipline with regard to our approach to capital allocation, and we'll continue to do so going forward. As we sharpen our pencil and assess capital and funding alternatives, growing our revenue-producing sites through expansions and ground-up developments continues to offer accretive returns.

During 2022, we delivered 2,000 new expansion and greenfield development sites in North America, which was at the high end of our guidance. These new sites will begin contributing revenue in 2023 and provide a new base for growth in the coming years. We have inventory of over 16,000 fully-entitled sites for development and delivery in future years, representing embedded continued growth. Additionally, we regularly evaluate our portfolio for capital recycling opportunities to enhance our long-term growth profile.

With respect to ESG, we continually identify ways that we can enhance our corporate citizenship. Sun recently set a target to achieve carbon neutrality by 2035 and net-zero emissions by 2045.

And as previously announced, we added Jeff Blau, CEO of Related Companies, to our Board of Directors. Jeff's experience and leadership will be a tremendous addition to our team.

Lastly, our Board has raised our 2023 distribution to $3.72 per share, a 5.7% increase from the prior year.

We're very pleased with our 2022 achievements. I'd like to thank all of our Sun team members who contributed extraordinary efforts to our collective success. As we look ahead to 2023, we once again expect to deliver a year of solid Same Property growth.

As our 30-year track record has demonstrated, we have a business model that delivers results throughout economic cycles, supported by compelling supply-demand fundamentals. We will remain disciplined in our investment activity, and our unparalleled expansion and development platform will continue to provide us with a differentiated growth opportunity.

I will now turn the call over to John and Fernando to speak to our results and guidance in detail. John?

[John McLaren, Strategic Adviser]

Thank you, Gary.

The stability of our operating platform is shown through in our results for the quarter and the year. MH and RV Same Property NOI increased by 4.4% in the quarter. 4.9% growth in revenues reflected a 5% increase in weighted average monthly rent and a 180-basis point occupancy gain. 5.8% increase in expenses was primarily related to turnover costs in our rental program, as one consequence of the pandemic was lengthened average stay and therefore, higher related refurbishment costs. Having turned over these units, we are now able to realize higher rents on incoming leases.

For the full year, Same Property MH and RV NOI grew 5.4%, driven by a 5.7% increase in revenue and a 6.2% increase in expenses. The strength of our portfolio is a direct result of our irreplaceable locations, the hard work of our team members and our continued reinvestment in our communities.

At our RV communities, we set another annual record for site conversions to annual leases. Full year transient Same Property RV revenues grew by 3.1%, reflecting an average rate of growth of 14.1%, despite an almost 10% reduction in available site nights from the strategic conversion of transient sites to annual leases. Occupancy in our Same Property MH and RV portfolio remained strong, increasing 180 basis points during 2022 to end the year at 98.6%.

Park Holidays' portfolio is performing above our original underwriting, and the management team has done an excellent job integrating into Sun. The fourth quarter continued to show strength. For the 31 properties Park Holidays has owned since at least January 2021, home sales rose 17%. Full year weighted average rental rates increased 5.4%, driving a 24% increase in home revenues.

Marina has exceeded our expectations with a 10.4% increase in same marina NOI during the quarter and a 7.7% increase for the full year. The outperformance is due to higher demand for wet slips and dry storage spaces. Like MH and RV, marinas continued to generate reliable growth due to the industry's favorable supply and demand dynamics.

In terms of external growth, during 2022 and through the date of this call, Sun acquired 70 operating properties for $2.2 billion and spent approximately $62 million for developable land parcels. The acquired land can support over 2,500 future MH and RV sites.

Development is in Sun's DNA. For the full year 2022, Sun delivered approximately 1,160 expansion sites at 11 existing communities and over 840 sites at six development communities in the U.S. for a total of 2,000 future revenue-producing sites. Looking ahead, we have a solid development and expansion pipeline that can deliver accretive growth for years to come as well as the proven skill set and platform to sustain our growth. Going forward, we will focus on delivering two to three new MH developments each year as well as continued expansions at our existing properties.

With regard to home sales, our average new home selling price in the U.S. was $196,000 for the quarter, reflecting the high demand at and strategic locations at our properties. Within our MH and RV portfolio, we gained over 2,900 revenue-producing sites for the year. Total portfolio occupancy of 96.8% includes newly delivered development and expansion sites.

Included in our revenue-producing site gains were over 2,250 transient RV annual lease conversions this year, a new record for Sun. We received an approximate 50% uplift in revenue in the first full year after conversion. Value proposition of an RV vacation one to three hours from home opens Sun to new customers who discover or rediscover the joy of a long-term RV experience.

With regard to the three properties most directly affected by Hurricane Ian, I would note that the cleanup is complete, and we have started the rebuilding process. We relocated as many people as possible to other properties, including our team members in the area. We have recently received our first permit to place new homes, and our new home sales program is largely set in anticipation of reopening sites in the second half of the year.

Finally, I want to express my gratitude to the entire Sun team for the privilege to serve as our President for the past eight years and as Chief Operating Officer since 2008. We are an unparalleled team that has assembled a best-in-class portfolio and operating platform that has delivered impressive results over many years and continues to be positioned for future growth. As I assume my new responsibilities focusing on our MH development efforts, I look forward to supporting Bruce and the entire team.

I will now turn it over to Fernando to discuss our financial results in more detail. Fernando?

[Fernando Castro-Caratini, Chief Financial Officer]

Thank you, John.

For the year, Sun reported core FFO per diluted share of $7.35, a 12.9% increase from 2021. For the fourth quarter, we reported core FFO per diluted share of $1.33, a 1.5% increase from the prior year. Similar to last quarter, this quarter's outperformance was driven by total marina real property NOI, interest income and U.K. tax favorability.

As of December 31, Sun had $7.2 billion of debt outstanding that carried a weighted average interest rate of 3.8%, with a weighted average maturity of 7.4 years. On a run rate trailing 12-month basis, our net debt-to-EBITDA ratio was 5.8 times.

In terms of capital markets activity, during and subsequent to quarter end, we completed a $311 million add-on to an existing secured financing with a weighted average interest rate of 4.6%. The proceeds were used to repay amounts on our revolving credit facility. In January of this year, we issued $400 million of 10-year senior unsecured notes, which benefited from $250 million of treasury locks and used those proceeds to further reduce our line of credit balance. Since we achieved an investment-grade rating in 2021, we have now issued $2.2 billion of unsecured fixed-rate notes across four tranches. Pro forma for this activity, our floating-rate debt was reduced to 16% of total debt, which has now decreased from 26% as of December 31, 2020.

Turning to guidance for 2023. As summarized in yesterday's press release, we are establishing full year guidance for core FFO per share in the range of $7.22 to $7.42. We are also establishing guidance for first quarter 2023 core FFO per share in the range of $1.15 to $1.20. Note that we expect first quarter results to reflect the seasonality of U.K. operations, as outlined in our supplemental, which we acquired in April 2022.

In 2023, we expect total Same Property NOI across manufactured housing, RV and marinas to increase between 4.9% and 5.9%. At the midpoint of the ranges, summarized in our press release, this total Same Property NOI growth assumes 4.6% growth from manufactured housing, 5.8% growth from RV and a 7% increase from marinas.

Regarding average rental rate increases, we reiterate the guidance ranges provided back in October. At the midpoint, these rental increases are 6.3% for manufactured housing, 7.8% for RV and 7.5% for marinas.

On a total portfolio basis, we expect total revenues from real property to increase between 8.1% and 8.7% in 2023, and expenses to increase between 13.5% and 13.9%. Included in this expected expense growth is an approximately $18 million increase in property-related insurance costs.

We expect total real property NOI to increase between 4.5% and 5.7% during 2023 due to strong resident, guest and member demand at our properties. Our U.K. operations are included in our guidance for total NOI. We are also providing certain guidance data points to help the investment community track Park Holidays' performance.

Our guidance assumes we increase revenue-producing sites by 2,800 to 3,100 sites in 2023. And we expect about 60% of these revenue-producing sites to come from RV transient site conversions to annual leases. We anticipate investing roughly $200 million in our ground-up development and expansion activity.

Throughout 2022, we continue to focus on corporate expense rationalization, including process efficiencies and reducing our office footprint. Despite the high inflation environment, for 2023, we expect G&A expense to run between $256 million and $262 million, which equates to minimal growth over 2022 at the midpoint. Importantly, we expect our G&A as a percentage of revenue to decline this year.

The final note, increasing interest rates were a headwind on FFO growth in the back half of 2022 and continue to be a headwind in our 2023 guidance. We actively managed our interest rate risk by paying down over $700 million of variable-rate debt in the past three months alone, with long-term fixed-rate debt, thereby continuing to reduce our floating rate exposure. We believe our guidance reflects the current interest rate outlook at the time of this call and is informed by forward interest rate curves as of the time of providing our guidance. Our platform of recession-resistant, best-in-class properties is positioned to continue generating strong cash flow growth for the benefit of our stakeholders.

As a reminder, our guidance includes acquisitions, dispositions and capital markets activity through February 22, 2023, and the effect of a property disposition under contract expected to close in March 2023. It does not include the impact of prospective acquisitions, dispositions or capital markets activities, which may be included in research analyst estimates.

This concludes our prepared remarks. We will now open the call for questions. Operator?

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Michael Goldsmith with UBS. Please go ahead.

[Michael Goldsmith, UBS]

Good morning. Thanks a lot for taking my question. My first question is on the insurance. You called out $18 million increase in property-related insurance. When was your -- when did your insurance renewal take place? How much is the insurance as a percentage of operating percentage? And just to try to frame it out, like if insurance is 15% to 20% of expenses and it was 20% higher than anticipated, that would be a 300 basis point to 400 basis point headwind. So, ex that drag, is the expense growth 6% to 7% and matching kind of like the top-line growth? Thanks.

[Fernando Castro-Caratini, Chief Financial Officer]

Hi, Michael. Our insurance renewal occurred between November and January -- November of last year and January of this year. Legal taxes and insurance of our Same Property portfolio represent -- are expected to represent about 10% this year. That is an increase of about 300 basis points over 2022. So, your math as far as the headwind from an expense growth perspective tracks.

[Michael Goldsmith, UBS]

Got it. And then -- thank you for that. And then, my second question is just on the flow-through of the NOI growth. Your NOI is expected to grow 4.5% to 5.7%. Your Same Property NOI is growing 4.9% to 5.9%, yet your guidance is calling for earnings to be down in 2023. So, can you walk through some of the pressure or other factors that are below the line that's not when you see the Same Property NOI growth flow through to the FFO?

[Fernando Castro-Caratini, Chief Financial Officer]

Sure. The primary factor, as mentioned on the call, is going to be our interest expense for -- projected interest expense for 2023. We are actively and programmatically working on a number of strategies to continue to reduce our exposure to variable-rate debt. But certainly, as we look out at expectations from a market perspective, there's potential for 2023 to set baseline as far as interest expense and then that either becomes neutral or a tailwind heading into future years.

[Michael Goldsmith, UBS]

Thank you very much. Good luck this year.

[Fernando Castro-Caratini, Chief Financial Officer]

Thank you, Micahel.

[Operator]

Thank you. Our next question is from the line of Josh Dennerlein with Bank of America. Please go ahead.

[Josh Dennerlein, Bank of America]

Hey, guys. I feel like throughout the fall, the messaging on the rate growth you were sending out was going to line up with expense growth. Correct me if I'm wrong, on -- that's kind of the message I got...

[Fernando Castro-Caratini, Chief Financial Officer]

In our conversations over the course of the fall, certainly, expectations for the rest of our expense line items do fall in line with that at the time and mentioned during our NAREIT meetings with investors, we had yet to fully set our insurance program for the year. So that was the remaining item from that perspective, and we did realize a larger-than-expected increase for 2023.

[Josh Dennerlein, Bank of America]

Okay. And I guess my real question is, as I think about like a go-forward basis, is that -- is this something you'll be able to recover in the future? Like, obviously, like insurance jumped up a lot this year outside of your control a little bit. Like is there a way to kind of recover it kind of over the long term? Is that how you guys are thinking about it? Or has something kind of shifted in the model a bit?

[Gary Shiffman, Chairman, President and Chief Executive Officer]

Hey, Josh, it's Gary. We feel it's definitely recoverable. One of the key factors of our business that we are able to pass on, expenses in the form of rental increases. And as we've talked about before, our business is really about reliable growth because of the strong demand and short supply. So, our expectation is that we can't pass-through the expenses.

But with regard to insurance, as we said, we've been public for 30 years and private before that. I would suggest that we're really seeing, maybe a little bit earlier than others from a renewal standpoint, what everybody else has been or will be seeing going forward. It reflects the environment for insurance at this point in time. As we know, that can go up and down. So, our expectation is that we will pass-through these costs through rental increases as we go forward because they're part of our operating business.

But that being said, we can't underscore the fact that with this increased cost, as Fernando mentioned of $18 million, we're still seeing at Same Property growth of 5.4% at the midpoint. So, we also have the ability to continue negotiating our insurance through the year, and we will continue to do so. But in the effort of being totally transparent of where our costs have gone to, that's what is included in our guidance.

[Josh Dennerlein, Bank of America]

Appreciate the color, Gary. One last one from me. I know the marinas [under the] (ph) safe harbor. You guys are -- there's a membership program where now you can get your annual [indiscernible] at cost. Is that the main reason the service retail dining and entertainment NOI is declining year-over-year? And then, how are you guys thinking about the kind of payback as you kind of increase rate on the annual side? Like is it a two-year kind of payback, three-year? How are you guys thinking about that?

[Gary Shiffman, Chairman, President and Chief Executive Officer]

I don't have the numbers right in front of me, and we can get back to you or perhaps Fernando does, but you're absolutely correct. As everyone might recall, strategically, we are always looking to convert lower-margin business over to the stickier side of rent. And while these aren't loss leaders, we are passing off gas, fuel at our cost to attract members. And I think it's reflected by the fact that we now have a waiting list in 80% of our marinas. I think it's growing from there right now, that we've noticed rental increases. What were they on the marina side, Fernando?

[Fernando Castro-Caratini, Chief Financial Officer]

At the midpoint, we were expecting 7.5% for this year. The waitlist, we're now -- we now have a waitlist at 91% of our marinas. And then, Josh, yes, the bulk of the SRD&E NOI year-over-year is coming from that active program on the fuel side. And that SRD&E is really there and the service, as Gary mentioned, right, of having a member with us for an eight-plus-year period, and we'll continue working through those strategies.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

So, strategically, over time, we expect to more than capture that difference, certainly, on a multiple basis for the stickiness of the rental revenue versus the lower-margin business. That being said, we firmly feel that these SRD&E activities, especially the service, is very, very important to the occupancy and to the stickiness and demand for the safe harbor marinas as compared to marinas that don't offer the service.

[Operator]

Thank you. Our next question is from the line of Steve Sakwa with Evercore ISI. Please go ahead.

[Steve Sakwa, Evercore ISI]

Yes, thanks, good morning. I guess maybe for Gary, just on the home sales in general, whether it's U.S., U.K., are you seeing anything by region, by product type, by price point? Just curious how kind of the, I guess, economic uncertainties are kind of weighing on sales and whether you're seeing any bumps in the road as you kind of look into '23.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

Steve, I can share with you, as of this point, and I'll let John go more into specific sales. New home sales are up. Average price was about...

[John McLaren, Strategic Adviser]

$196,000.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

$196,000. I think it's one of the high points that we've seen. I think it totally reflects quality, location and value of the assets in our portfolio. I think it clearly reflects a capital reinvestment that we've shared with our stakeholders before, that if we don't reinvest in our communities, we do strip the equity right out from underneath the homeowners. So, we have a stringent policy there.

On the used -- pre-owned home side of things, ironically, we've seen demand that's so strong that we've been able to buy less inventory over a period of the last 12 months or so. So, our new home or pre-owned home sales being down a little bit, it's just reflective of the demand, people staying in their homes longer. And the fact that they're direct selling their homes, so there's no interruption in rent to us, but we're not able to buy the inventory to flip into the used homes as we have been. It tracks over a 30-year period of time that will go up and down a little bit, so we don't see that as anything negative whatsoever.

On the U.K. side, we're seeing enormous strength on the higher end of home buying, the more expensive homes increasing. And I turn to John, who's overseeing that, to talk a little bit more about the particulars of the U.K. home sales.

[John McLaren, Strategic Adviser]

Yes. I mean with respect to U.K. home sales, I mean, our team over there sold over 2,900 houses in 2022, which is a 23% increase year-over-year. So, like Gary said, the demand continues to be very strong, so much so that we -- I think we shared before that we've built out almost 700 expansion sites over the course finishing in 2022, that all sold up in 2022, and look to expand another 500 going into the season this year, which will be filled up by the end of 2023.

So really, really strong demand. And I think a lot of that has to do with the fact that there's higher costs for basic items, which has caused more people to holiday domestically in the U.K. rather than go to Europe. We're fortunate that the higher income earners in the U.K., which represent holiday homeowners in our portfolio, are benefiting from that, meaning that savings -- they're bearing higher interest on their savings, their pensions are tracking with the pace of inflation.

And as we shared with the original information we provided on the deal, Brexit still makes it difficult to travel in the continent. It's gotten more expensive. The pound is still devalued in comparison to this time last year, and it's -- most people travel within two hours to get to the properties.

And so -- and then the other thing that I would add is looking out into 2023 from a strength perspective, 90% of our owners have already paid their 2023 pitch fees in full are committed on direct debit. So, things are rock-solid.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

That 90% is ahead of the same time last year and the previous years.

[Steve Sakwa, Evercore ISI]

Great. Thanks for that answer. I guess just one for Fernando on the balance sheet. Obviously, floating-rate debts caught a lot of people maybe not by surprise, but certainly been more powerful and had a bigger negative impact. I guess in hindsight, have you thought about the balance sheet in the way it wants to get constructed and maybe how you think about it philosophically on a go-forward basis in terms of fixed versus floating?

[Fernando Castro-Caratini, Chief Financial Officer]

Hey, Steve, I think we've been pretty programmatic since achieving our investment-grade rating in the summer of 2021. We've done over $2.2 billion of IG unsecured bonds with that public market. We've also taken advantage of the fact that our assets that are still under secured financing or still have mortgages, because of their strong performance, we're able to borrow up on existing financings and did a $311 million one that closed between December and January over the course of the last couple of months. Today, we stand at about 16% floating-rate debt.

As we look at our -- as we look strategically at the portfolio, and Gary mentioned in his remarks, right, we can -- we look at our investment program and ground-up development and expansion, we will be able to practically self-fund our investment activity in 2023, are selectively looking at opportunities on the capital recycling front, there's a couple of assets here and there, that over time can also reduce variable-rate debt.

And I would remind the market, we have very manageable maturities, no looming towers over the course of the next couple of years. We have about $117 million, $118 million coming due in the second half of the year and are being programmatic about locking in that cost today, as we've done over the course of the last couple of years. But certainly, looking to actively manage our exposure to floating-rate debt.

[Steve Sakwa, Evercore ISI]

Great. Thanks. That's it from me.

[Fernando Castro-Caratini, Chief Financial Officer]

Thank you, Steve.

[Operator]

Thank you. Our next question is from the line of John Kim with BMO Capital Markets. Please go ahead.

[John Kim, BMO Capital Markets]

Thank you. I wanted to follow on Steve's question. And he alluded to it, the rising rates is not necessarily a surprise, especially in the last few months. So, I'm guessing, can you just walk us through why you allowed floating-rate debt to increase during the fourth quarter and refinance it post quarter?

[Fernando Castro-Caratini, Chief Financial Officer]

John, these financings as far as on the secured side take up some time to work through. It's actually one that we started on in July of the second quarter. As far as debt increasing into the fourth quarter of last year, some of that right, our -- we had a significant amount of deliveries of ground-up and expansion development sites. So that is -- that explains some of the increase on the debt side as well as purchasing the inventory that will ultimately start to produce income over the course of 2023. Those would be the primary reasons from that perspective. And then, about 20%, 25% of it is, right, we -- is the FX on the debt amount. So, from the end of September to the end of December, the pound did appreciate significantly. So that would -- that accounts for about an additional $90 million of that quarter-to-quarter increase.

[John Kim, BMO Capital Markets]

And then to further reduce the floating rate exposure, are you looking to use interest rate swaps or utilize fixed-rate debt?

[Fernando Castro-Caratini, Chief Financial Officer]

We've been quite programmatic from that perspective to support our issuance in the unsecured bond market. We did over since December of 2021 about 850 of treasury locks and swaps. We also did swap 400 million of our pound sterling term loan in the U.K. So yes, that does factor into our toolbox.

[John Kim, BMO Capital Markets]

Okay. A follow-up question on insurance. How much is your increase in insurance due to your exposure to Florida? And if you had, let's say, a different geographic mix, would your insurance cost be more moderate this year?

[Gary Shiffman, Chairman, President and Chief Executive Officer]

Yes. It's a great question. And the scale and size, John, I think we're able to get best-in-class pricing, so to speak, and it is a question that we certainly asked. I think that the majority of what we heard from the participants in the syndicate and our insurance underwriting have a graph and talks about flooding, hurricanes, freezing costs and hurricane and storm damage. And they look at the claims that they've paid out versus the premiums they've taken in. And I think this is where when I referred to the fact we're seeing the reality of what's out there overall. We're not going to reflect that different than our competitors and other asset classes.

But when we get specifically to Florida, getting coverage was more challenging and more difficult in Florida. We don't have it broken down individually to Florida. We negotiate as a package. So, I would just point to the overall increase in insurance. The fact that we're in Florida, Texas and California is by design. There's over 100 million people there, and we focus our geographic footprint and target the right markets to operate in. And the demand for affordable housing has never been stronger in those markets, so it speaks to the high occupancies, the ability to push through inflationary rental increases. And we will closely evaluate and continue to evaluate our exposure that is impacted by insurance as we go forward.

[John McLaren, Strategic Adviser]

And I would just emphasize the point that Gary made in his answer, which is that this has a lot more to do with what events are taking place across the world, okay? This is less of a Sun issue, an asset class issue or anything like that. I mean you look at everything, whether it's earthquakes in Turkey and so forth that's impacting the cost of insurance for everybody. And really, that's -- I think that sort of everybody is, for lack of better words, the beneficiary of those events happening in the form of higher costs.

[John Kim, BMO Capital Markets]

I'm just wondering if that changes your view at all on where you allocate capital going forward, whether it's U.K., Midwest or some other markets where it may alleviate some of these factors.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

I think that absolutely does have bearing on how we think about things and how we look at things. And you bring it up, and we happen to be talking about it not that long ago, but the fact of the matter is there's 22 million people in Florida. 320,000, I think, we talked about moved in there last year. So strategically, we do have to think about the cost return proposition in that state as we do everywhere. And I would suggest that strategically, we're looking at it very carefully.

[John Kim, BMO Capital Markets]

Appreciate it. Thank you.

[Operator]

Thank you. Our next question is from the line of Keegan Carl with Wolfe Research. Please go ahead.

[Keegan Carl, Wolfe Research]

Hey, guys. Maybe first on same store revenue expectations for '23. They definitely came in looking pretty strong, so just a few questions. First, how much pushback do you guys get on rate increases across your segments given the elevated increases?

And second, specifically on marinas, how much longer do you think you can push at an elevated level? I think the past channel checks we've done, there's concern for a while that outsized pricing power is eventually going to deteriorate because it's going to break boat owners. So curious for your thoughts there.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

I'll address the marine part, and you can talk about the rest of the portfolio, John. But I think when we talk about supply/demand, we talk about over 11 million vessels registered for 800,000, 900,000 wet and dry slips. And as we spoke earlier, we're intentionally shifting a value proposition that will support continued rental increases by offering memberships, the other lower-margin attributes such as fuel, such as discounted transient stays when there's open sites or slips available and other membership opportunities. So, with that kind of a supply/demand out of balance, we're very comfortable and expecting to continue growth similar to what we've been experiencing. So, we don't currently see those type of headwinds that you're suggesting in the marina business.

And I'll let John talk really about a 40-year history of manufactured housing.

[John McLaren, Strategic Adviser]

Yes. I mean it's -- Keegan, it's really it's a balanced conversation, which is to say, obviously, looking at what expense growth is and applying to passing that on to our residents, but we view rent increases like a marathon versus a sprint. As we've shared before, I think folks have heard me say it 100 times is that the most expensive site we have in our portfolio is a vacant one. And I think our strategy has really stood the test of time.

For 25-plus years, we've delivered positive revenue and NOI growth every year when others have seen ups and downs. We continue to deliver long-term cash flow stability. We maintain a solid relationship with our resident base, which is also our sales force. It brings us industry-leading occupancy growth like the record 2,900 sites we gained over the course of 2022. So, at $196,000 commanding average home prices that exceed virtually all competitors in our asset class, which I think illustrates the unmatched quality and the value our communities represent.

So really, in summary, our strategy is well balanced, we believe, across all stakeholders, including our residents that live in well-maintained communities and create value in their homes. And so, it's something that we watch and talk about very closely as we think about what increases and how we can push further on both MH and RV.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

And the only thing I'd add and then we covered in our posted deck is the delta difference between alternatives, whether it being single-family residential, whether it be multifamily, where you still do provide 25% more space at 50% of the per square foot cost offer a lot of advantages of being able to pull right up to the house, bring your groceries on, have your car in a carport, a garage, et cetera. And then, while we certainly know there are headwinds on site build housing, especially due to mortgage rates, the delta difference between a single-family residence and the overall cost of living in one of our manufactured housing communities is such that for many, many Americans, manufactured housing will be the only option available for home ownership.

So, I think, again, 40-year track record, 30-year public, 10-year private, indicates that we will be able to continue to get the correct growth based on the value proposition. Same is true in the RV for vacationing. And certainly, in the U.K. as the second vacation home, an alternative to more expensive vacationing in the U.K.

[Keegan Carl, Wolfe Research]

Got it. And then, taking a step back, so if we think about your -- both your real property, excluding transient and transient on a like-for-like basis, if we exclude your transient conversion expectations for '23, where would the numbers shake out, both on excluding transient, then transient as a whole, right? Because you obviously expect to compare a lot of sites, which means the comparative pool for transient is going to be much lower.

[Fernando Castro-Caratini, Chief Financial Officer]

Keegan, I'll give you the comparative for Same Property. We were expecting about a 90-basis point increase year-over-year in revenue from transient RV. That is on a base of approximately 7.5% to 8% fewer site nights. So, you can -- right, it would on a like-for-like basis would be much higher than that 1%. But as John mentioned or maybe I mentioned during -- in my section of the script, we are expecting another very strong year of conversions from transient sites to annual leases. Of the 3,100 at the high end, 60% is expected on the RV side. And this is right, once you've converted that site, you have a resident there for on average a five-or-plus year period of time. That is very likely making improvements to that site and bringing up the value of the community itself or being hyper-focused on continuing the conversion program over to the annual side.

[Keegan Carl, Wolfe Research]

And just on the excluding transient portion too, right, what would the range be if you exclude your expectations, because there's going to be a bit of an uplift?

[Fernando Castro-Caratini, Chief Financial Officer]

I don't have that broken out here in front of me. We can follow up, that's a very quick follow-up with you after the call.

[Keegan Carl, Wolfe Research]

Great. Thanks, guys.

[Operator]

Thank you. Our next question is from the line of Wes Golladay with Baird. Please go ahead.

[Wes Golladay, Baird]

Hi, everyone. I just have a question on the service retail and dining guide. I just want to make sure I'm looking at it correctly. It does look like it's going down a little bit year-over-year. And more so a question on how we should think about modeling this line item going forward. I think you mentioned and maybe in the prepared comments that it was almost like a loss leader. So, should this only grow with acquisitions? And then second part, I did see a termination income. Is there anything impacting the guide this year from the termination of a lease?

[Gary Shiffman, Chairman, President and Chief Executive Officer]

Yes, Wes, it's Gary. I don't want anyone to think of it as a loss leader, because it's not a loss leader. We've just elected to shift smaller margin over to higher valuation in the form of sticky rent. So, we're not losing money or subsidizing anything. And when we talk about passing on guests at our cost, it's not just the cost we buy it at the pumper truck, but it's the cost associated with delivering it. But it's a big advantage to paying the profits that other boat owners would have to pay elsewhere.

[Fernando Castro-Caratini, Chief Financial Officer]

And on the lease termination, we did mention in my remarks, we did rationalize some space in our main office and got out of two floors in our offices here in Southfield.

[Wes Golladay, Baird]

Okay. Got it. And then, you did mention potentially asset recycling. Do you have a preference from proceeds, whether it's to pay down variable-rate debt or to recycle or to buy assets? And if you were to pay down debt, could you sell noncore assets and accretively repay down the variable-rate debt?

[Gary Shiffman, Chairman, President and Chief Executive Officer]

I think everything is under review. We continue to evaluate parts of our portfolio where we think we can redeploy the capital with greater growth. Certainly with the headwinds of interest rates today, that is one big focus, Wes. So, we're not running to shed assets, but we are reviewing them very, very carefully as to growth. And as we've shared, again, that today, one of the areas that I think differentiates Sun and gives us the greatest opportunity is the ability to create new ground-up developments and expand our manufactured housing portfolio.

So, because there is a cost associated with over 16,000 sites that we've already bought and paid for, that are not yielding any return, we carry on debt. And by paying down that debt, if that's what we elect to do, we obviously recapture of that lost interest rate. So that is one area.

The second area is certainly funding the development costs so that we can generate the high returns and create value for the stakeholders by increasing our manufactured housing portfolio.

And third, of course, is that difficult economies often turn up opportunities, and we are looking at a number of opportunities from all of the different platforms. There is nothing identified yet or nothing that is meaningful. But I believe in these periods of times, as I said before, as people have to refinance things at a whole new rate in a whole new world, opportunities may become available there that are accretive across our current cost of capital.

So, paying down variable debt is probably something that allows us greater opportunity to create growth in the future or if there's something very accretive, we would look at that as well. So, there's no specific plan. I think just general good stewardship of how we think about reducing that variable debt.

[Wes Golladay, Baird]

I appreciate. Thanks a lot.

[Operator]

Thank you. Our next question is from the line of Robyn Luu with Green Street. Please go ahead.

[Robyn Luu, Green Street]

Hi, good morning. I wanted to follow up on the previous question on home sale trends in the U.S. and U.K. So, home sale prices fell by 15% from last quarter in the U.K., but was flat in U.S. MH business. So, I understand the fourth quarter is typically a seasonally slow period in the U.K., but can you maybe talk to the weakness in the U.K. prices? Is -- does the 15% reflect market prices? Or are you perhaps pushing discounts to get the volume?

[John McLaren, Strategic Adviser]

No. I mean it's not really discounts to push the volume, but I think when we walked in, I think part of the investment thesis that we shared in the beginning was the fact that we might thin the margin a little bit to gain more sites and gain more ongoing revenue, okay, on those sites. And so basically, we're just executing the plan that we set out to do.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

Yes. We prefer the stickiness of the rent over the one-time margin on the home sales. So, you will continue to see an emphasis on that strategy as we go forward.

[Robyn Luu, Green Street]

So, that doesn't reflect market prices to 15%?

[Gary Shiffman, Chairman, President and Chief Executive Officer]

Sorry, Robyn, what was the question?

[Robyn Luu, Green Street]

So, the 15%, just to clarify, the 15% does not reflect market prices for U.K. home sales?

[Gary Shiffman, Chairman, President and Chief Executive Officer]

No. I think it reflects our strategic plan with management. But it is interesting, as John pointed out, we've seen some higher growth on the higher end of what they referred to as the lodges. And that's an area that we're focusing on, and there are also smaller margins on the lodges than there are on the lower-based homes.

[Robyn Luu, Green Street]

Yes. Thanks. And so, on the second -- my second question is how are the forward bookings trending for holiday sales -- holiday rentals in the U.K.?

[John McLaren, Strategic Adviser]

They're actually trending a little bit ahead of this past year, which of course, as we shared before, is great because that is the feeder for more holiday home sales and more rent paying sites.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

So, in the Park Holidays portfolio, correct [if I'm getting] (ph) this wrong, 40% of all homebuyers have stayed in one of the rentals in the property and 60% of all buyers have stayed in a rental, in a park, in a holiday property. So, it really is the feeder, if you will. So, seeing the demand, where it is now, is very encouraging for us.

I will add that we did speak to them the other day. There is a fair amount of competition out there and some discounting that's taking place outside of the Park Holidays and the more inferior properties, but I think it's driving people to expect quality at Park Holidays. And with the addition of Park Leisure, which are really the high end of holiday vacation parks, they have a much lower percent of fleet home ownership in those 14 properties.

[John McLaren, Strategic Adviser]

Almost none.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

Almost none, yes.

[Robyn Luu, Green Street]

Thank you.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

Yes, we are seeing positive strength there.

[Operator]

Thank you. Our next question is from the line of Brad Heffern with RBC Capital Markets. Please go ahead.

[Brad Heffern, RBC Capital Markets]

Yes. Good morning, everyone. What are you seeing on the leading-edge demand for transient RV? I know it's obviously the low demand time of year, but any color on what happened year-to-date in the forward bookings would be great.

[John McLaren, Strategic Adviser]

Sure. I think from the booking pace perspective, right now, we are trending just a little bit ahead of last year, which is great. We are nearly 95% booked, which is better than we were at this time last year for Q1. So, we're running a little bit ahead. But if you look out into the whole year, we're a little bit ahead in total booking pace, meaning bookings that have actually happened at this point in time versus where we were last year.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

I think I'd remind everybody, we're going back to more of a pre-COVID normal pattern. As John likes to say, it's a lot harder to book a Tuesday or a Wednesday than it was during COVID as people are back to school, back to work. And so, our expectation is a more normalized year-over-year transient growth. People are still positive about experiencing that outdoor vacation. There is an increase in the surveys that we've done and our competitor has done, with expectation of RV stay and camping this coming year. So, it's more back to normal, I think.

And a big focus that has really been there for almost 10 years now of the conversions that we talk a lot about, it is easier to forecast when we convert a transient to an annual. It is more cost effective in picking up that 50% increase on a per site basis for the first year, and about 7.5% conversions last year of our transient to annual. And going forward, we expect good solid growth this coming year. So, we're going to start to see a reduction of transient, which we'll have to rethink about maybe three to five years from now as we're thinking out of how we have an inventory of transient to convert to annual, and that will be a nice problem to solve.

[Brad Heffern, RBC Capital Markets]

Okay. Thanks for that. And then, on the U.K., it looked like MH occupancy was down almost 300 basis points in the fourth quarter. Is that a demand impact? Is that seasonal? Or is there some other explanation?

[John McLaren, Strategic Adviser]

That's a result of adding sites to the portfolio through expansion.

[Brad Heffern, RBC Capital Markets]

Okay. Got it. Thank you.

[Operator]

Thank you. Our next question is from the line of Anthony Powell with Barclays. Please go ahead.

[Anthony Powell, Barclays]

Hi, good afternoon. Just one quick one from me on acquisitions. Could you maybe go into the three deals you did in December, MH, RV, marina in terms of cap rate sourcing? And would you expect your volume of acquisitions in 2023 to be lower or higher than 2022?

[Gary Shiffman, Chairman, President and Chief Executive Officer]

Trying to grab the paperwork here. I think that we don't typically provide guidance towards acquisitions and, of course, capital marketplace activities. We've discussed the fact that cost of capital is such that we have sharpened our pencil razor thin. I don't believe we'll lose any opportunities because Sun always has a seat at the table and just about all of the sellers will reach out to Sun, either directly or through a relationship or brokerage. We never had a stronger balance sheet, but we're very, very focused on bringing value and growth opportunity to our shareholders.

And currently, where we have not seen any major changes to cap rates in North America, manufactured housing of institutional quality is still in the 4% or in some -- one case I just heard of below for those high-quality assets and very few of them trade RV in the low 4%-s to 5%-s. Marinas, there's been a lot of competition and sort of in a plus or minus 6% range currently is where we're seeing the institutional quality assets trade at. So, it's going to take a real opportunity. It has accretiveness and embedded growth where we can justify deploying capital in this environment and deliver the kind of growth our stakeholders are used to.

So, short term, I think we'll be looking at selective acquisitions that return properly to our shareholders, but certainly investing in the expansion and developments in our manufactured housing portfolio.

[Anthony Powell, Barclays]

Got it. Maybe a follow-up on that in terms of the development sites. How construction costs changed on those? And how is kind of the ROI profile of your development sites evolved the past 12 months?

[Gary Shiffman, Chairman, President and Chief Executive Officer]

Yes, that's a great question. We certainly saw the cost of development spike up through the pandemic, short supply, supply chain, et cetera. We have begun to see it decline. We're looking to build our new developments to a high single-digit unlevered IRR upon stabilization. Currently, we've adjusted our returns to low double digit, in part because of the large rental increases as a reflection of CPI and inflation. So, as we model out going forward, our going-in rents are higher than we originally modeled them out. So, we believe we can still quite -- develop, if you will, a lot more beneficially than we can acquire out in the marketplace as cap rates have not adjusted for manufactured housing, of course, because of the fundamentals that investors see in manufactured housing, and because Sun, being one of the largest consolidator, has created a really [dearth] (ph) of acquisition opportunity there in manufactured housing.

[Anthony Powell, Barclays]

Thank you for the color.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

Yes.

[Operator]

Thank you. As there are no further questions at this time, I would like to turn the floor back over to Gary Shiffman for closing comments.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

We always appreciate the opportunity to have these calls and speak about the business. Today marks a very special day, and really want to take this opportunity to thank John for his unbelievable stewardship, both as President and Chief Operating Officer since 2008, if I got that correct. And really look forward to John's 10-year operating our communities, in particular, manufactured housing and being able to transfer that over to the 16,000-site inventory we now have to grow by. And in his stewardship and direction over there, we believe we will derive great benefit for our shareholders as we go forward in an area that really differentiates us from all others in our asset class.

So, on behalf of the entire company, from the communities on up to senior management and executive team, I do want to extend our appreciation to John. Job well done.

[John McLaren, Strategic Adviser]

Thank you.

[Gary Shiffman, Chairman, President and Chief Executive Officer]

We look forward to our next call and certainly invite anyone to reach out to Fernando and his team with any follow-up questions. Thank you, everybody.

[Operator]

Thank you for your participation in today's conference. This does conclude the company's remarks. You may now disconnect your lines.