Sun Communities Inc

NYSE:SUI

Earnings Call Analysis

Optimistic 2024 Outlook with Strong Revenue Growth

The company projects a robust year ahead, with full-year 2024 core FFO per share guidance set at $7.04 to $7.24 and Q1 at $1.14 to $1.19. North American properties are expected to drive a 5.6% increase in same-property NOI, buoyed by manufactured housing, RVs, and Marinas, while the UK anticipates growth between 1.3% to 3.3%. A strategic disposition of Rezplot and sale of a $53 million loan portfolio helped reduce the sizable $7.8 billion debt burden by paying down existing obligations. The company's capital expenditure will focus on ongoing developments with a significantly reduced budget, forecasted at 54% lower than the previous year's spending. This fiscal prudence extends to G&A expenses expected to decline by 2.7% but increase by 5.3% when considering nonrecurring costs. The provided guidance does not cover potential future acquisitions, dispositions, or financial activities.

Streamlining Property Ownership and Simplifying Operations

The company has made significant strides in simplifying property ownership by selling its majority equity interest in three joint-venture properties and acquiring minority interests in 14 joint venture properties to now own 100% of them. Notably, these 14 properties are seen as having a long growth runway, with opportunities for conversion from transient to annual RV sites. The company also sold its interest in Rezplot and its Campspot Software, though it will continue using the software for RV bookings. These moves, along with capital recycling from a $53 million manufactured housing loan portfolio sale, were strategically employed to reduce the company's debt.

Financial Guidance and Performance Metrics for 2024

The company has set forth its financial guidance for 2024, with core FFO per share expected to range between $7.04 to $7.24, and first quarter core FFO per share to range from $1.14 to $1.19. In terms of property operations, 95% of the properties are included in the same property pool. Projections for same-property NOI growth are robust in North America, with an anticipated 5.6% total increase, driven by growth across manufactured housing, RVs, and Marinas. In the UK, growth expectations are more modest, ranging from 1.3% to 3.3% for the year.

Home Sales and Revenue-generating Site Expansion

Guidance for North American home sales in 2024 forecasts an FFO contribution between $14.4 million and $15.9 million. In the UK, home sales are expected to contribute between $62.3 million and $69.9 million to the FFO, with a planned sales volume of 2,750 homes at the midpoint. Furthermore, the company intends to increase revenue-producing sites by 2,600 in North America for both manufactured housing and RVs.

Strategic Reduction in Development Spend and Debt Management

In a move to manage finances more conservatively, the company plans to allocate approximately $115 million towards ongoing development projects, marking a 54% reduction from the previous year's development spending. This includes around $50 million for the redevelopment of properties impacted by Hurricane Ian. Moreover, the company has successfully reduced its variable rate debt to about 10% of total debt, after issuing $500 million of 5-year senior unsecured notes. As of December 31, 2023, the company had approximately $7.8 billion in debt outstanding, with a net debt to trailing 12-month recurring EBITDA ratio of 6.1x.

General and Administrative Expenses and Nonrecurring Costs

The company anticipates a G&A expense ranging from $262.2 million to $267.4 million for the year, reflecting a 2.7% decrease from the previous year at the midpoint. However, after considering nonrecurring expenses, a 5.3% increase in G&A expense is expected at the midpoint.

Concerns Over Flow-through to FFO and Interest Expense Guidance

An analyst inquired about the factors influencing the lower flow-through from NOI growth of 6.3% to 7.3% to flat to up 2% FFO growth. The company's executive explained this primarily results from the absence of interest income from the Royale Life note in 2024. Additionally, an increase in year-over-year interest expense from 2023 to 2024 is factored into the guidance, partly from the new $500 million bond issuance that begins the year with about 10% of floating rate debt.

Marina Guidance Outperformance and Service Sector Underperformance

Addressing concerns about the Marina segment's strong performance compared to an expected 11% decline in service, dining, retail, and entertainment, the company forecasts a 10% increase in Marina transient revenue, while overall transient revenue for RV is projected to decrease by 2.75%. This points to a nuanced performance in different segments of the company's operations.

Rationale Behind Selling Campspot

One analyst questioned the decision to sell Campspot, speculating on whether it was a strategic choice or due to concerns over the optics of data ownership. The executive responded by emphasizing the company's focus on returning to fundamental operations and driving growth in its core businesses, suggesting this was the primary motivation for the divestment.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sun Communities Fourth Quarter and Year-End 2023 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 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, President and Chief Executive Officer; and Fernando Castro-Caratini, Chief Financial Officer. After their remarks, there will be an opportunity to ask questions. [Operator Instructions] 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, executive]

Good morning, and thank you for joining us as we discuss fourth quarter and full year results for 2023 and our guidance for 2024. 2023 results demonstrated the resiliency of our best-in-class portfolio and our ability to generate reliable, strong same-property NOI growth. For the year, Sun's core FFO per share of $7.10 was in line with our expectations. Same-property NOI increased 7.3% compared to last year, surpassing the high end of guidance.

Our operational strength highlights the enduring robust demand and limited supply fundamentals of our portfolio, which supports continued strong revenue growth complemented by diligent expense management. For the fourth quarter, total same-property NOI increased 9.6% compared to the same period in 2022. The outperformance was driven by higher rental revenues from MH and Marinas and lower expense growth across all segments.

For the quarter and year, MH same-property NOI increased by 8.6% and 6.8% and RV same-property NOI increased 9.3% and 4.8%. Same-property occupancy in MH and RV increased 230 basis points during 2023 as compared to '22. The increase was largely driven by transient to annual RV site conversions of more than 2,100 sites. Since the start of 2020 when we began to strategically focus on transient to annual RV site conversions, we have completed approximately 6,900 conversions and have increased the number of annual sites by 24%.

Within our Marina same-property portfolio, the continued strong demand for wet slip and dry storage spaces led to another positive quarter and year with a 12.5% increase in NOI for the quarter and an 11.7% increase for the year. In the U.K. the real property NOI of $66.7 million for the year was in line with guidance, demonstrating the strong value proposition our Holiday Parks represent. The value of owning a holiday home in Park Holidays property is exhibited by the average resident tenure increasing to approximately 8 years.

Demand for U.K. home sales showed signs of stabilizing during the second half of the year. U.K. home sales and margins were in line with our guidance, which reflected economic headwinds facing U.K. consumers, including higher inflation and interest rates. We anticipate a continuation of current volume and margin trends.

Based on the macroeconomic dynamics in the U.K., we have recognized total noncash impairments of approximately $370 million related to the goodwill associated with the Park Holidays platform acquisition.

Despite of our year-end audit process, it was determined that the impairments should have been recognized in earlier periods, resulting in a material weakness in internal control over financial reporting. These impairments, which are now recognized at March 31, June 30 and September 30, 2023, reduced balance sheet goodwill and GAAP net income. They are noncash, and there is no impact on revenues or FFO for operational metrics.

From Park Holidays and as previously disclosed, in late December, we obtained tied-up a 3 real estate assets securing the U.K. note. Additionally, we've recently completed the receivership and disposition processes related to the manufacturing businesses that represented the remaining collateral on U.K. note. As we previously stated, because we did not wish to operate the manufacturing businesses, we moved expeditiously to dispose of them.

As of this month, the U.K. note has been completely resolved. At the end of the year, we reclassified Sandy Bay, a high-quality MH community that's held for investment. Sandy Bay, along with 1 operating property and 3 development parcels that were not part of the original Park Holidays acquisition, are now being operated by the Park Holidays team. We continue to seek to maximize value related to these assets.

We are excited about the prospects awaiting us in 2024 and beyond. Our primary goal remains simplifying our operations, while positioning Sun for steady earnings growth. Achieving this involves maintaining focus on our best-in-class portfolio and operating team, which have consistently delivered strong same-property NOI growth.

As detailed in our earnings press release, we sold our shares in Ingenia, monetized the portfolio of MH consumer loans, divested our interest in Campspot and meaningfully reduced the number of properties owned in joint ventures.

During 2024, we intend to focus on capital recycling strategies, including via select asset sales. By remaining highly selective with development projects and acquisitions, we intend to allocate our free cash flow and any additional capital proceeds generated towards deleveraging. As detailed in last night's press release, our Board announced a $0.01 per share increase to our quarterly distribution or $0.04 on an annual basis.

I would also like to take this opportunity to welcome Jerry Ehlinger and Craig Leupold to our Board. We look forward to their contributions and new perspectives. Last and certainly not least, I would like to thank all of our team members for their hard work and dedication.

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

[Fernando Castro-Caratini, executive]

Thank you, Gary. For the year and the quarter, Sun reported core FFO per diluted share of $7.10 and $1.34, respectively, both of which were in line with guidance. During the year, same-property NOI grew 7.3% versus the prior year, driven by a 6.2% increase in revenue and a 4.2% increase in expenses. For the quarter, same-property NOI increased 9.6% compared to the prior year due to a 6.3% increase in revenues, driven by strong rental rate increases and occupancy gains.

Expenses grew by only 30 basis points in the quarter led by utilities and supply repair cost management and a onetime benefit from lower real estate taxes. Looking at same property results across each segment, manufactured housing performance was strong. NOI grew 8.6% in the quarter due to a 7.6% increase in revenues and expense growth of 4.8%.

For the year, same-property NOI in manufactured housing increased by 6.8% compared to 2022. Strong revenue growth for the year of 7% was partially offset by a 7.5% growth in expenses. Same-property RV NOI increased 9.3% in the quarter, driven by a 2.1% increase in revenues and a 4.7% reduction in expenses.

The expense savings were driven by aligning controllable costs with lower transient revenues, especially in supply and repair, utilities and payroll. For the year, same-property RV NOI increased 4.8%. The continued strong volume of transient to annual RV site conversions also supported operational efficiency as annual RV sites typically allow for lower operating expenses.

Our same property adjusted occupancy for manufactured housing and RV increased by 230 basis points to 98.9% reflecting the demand to be a resident in a Sun Community. On the RV front, we have a long runway of transient sites that can be converted to annual over the coming years.

The Marina same-property portfolio had another very positive quarter and year, with a 12.5% increase in NOI for the quarter and an 11.7% increase for the year. The outperformance was driven by continued strong demand for wet slip and dry storage spaces due to higher boat traffic, especially in the Southeast. Strong revenue growth was supported by expense management and real estate tax savings. As discussed earlier, U.K. real property performance showed strong growth and home sales volumes were in line with guidance.

Our property level results were partially offset by higher interest expense, G&A and other corporate costs. Regarding new investment activity, during the year, we delivered approximately 800 expansion and development sites in North America. To simplify our business and reduce exposure to variable rate debt, in the fourth quarter, we made strong progress towards monetizing assets no longer deemed to be strategic. We materially simplified our Sun NG joint venture, an arrangement entered into in 2018 with Northgate Resorts, and experienced RV owner and operator.

We have a successful relationship with them, and it helped us achieve our leading position as an owner and operator, one of the highest quality RV portfolios in the U.S. Given our focus on simplifying how we own properties, we sold our majority equity interest in 3 joint venture properties and acquired their minority interest in 14 joint venture properties so that we now own 100% of them.

Notably, we believe these 14 properties have a long runway of embedded growth with meaningful opportunity for transient to annual RV site conversions over the coming years. 5 properties remain in consolidated JVs, where we hold approximately 95% ownership interest. During the quarter, we also sold our ownership interest in Rezplot, whose Campspot Software is a valuable tool that we continue to use for managing our RV bookings.

Given the strong position we helped Campspot achieve over the past several years, it was an opportune time to divest our interest. In total, the Sun NG and Rezplot transaction netted us a minimal positive cash benefit. which was used to pay down debt. During the quarter, we recycled capital from a $53 million portfolio of manufactured housing consumer loans held on our balance sheet and used the net proceeds to pay down debt.

As Gary discussed, we completed the receivership process related to the U.K. note. The 3 real estate assets are now reflected on our balance sheet as their currently assessed fair market value of $264 million as supported by updated third-party valuations. Now that we own them, these assets in Sandy Bay are being managed by the Park Holidays team and all income derived from their operating performance is included in our 2024 guidance.

The remaining assets that collateralize the U.K. now were manufacturing businesses. Disposing of these businesses expeditiously was a key priority. And in mid-February, they were sold for a total of approximately $10.7 million. We have no further legal, financial or other obligations to these businesses.

Regarding our balance sheet, at December 31, 2023, the company had approximately $7.8 billion in debt outstanding, and our net debt to trailing 12-month recurring EBITDA ratio was 6.1x.

With respect to capital markets activity, in January, we issued $500 million of 5-year senior unsecured notes with a 5.5% coupon. We used the majority of the net proceeds to repay borrowings outstanding under our senior credit facility. Adjusting our year-end debt balances for this new issuance, we reduced our variable rate debt to approximately 10% of total debt.

Turning to guidance for 2024. For 2024, we are establishing full year guidance for core FFO per share in the range of $7.04 to $7.24. We are also establishing guidance for first quarter 2024 core FFO per share in the range of $1.14 to $1.19. For 2024, 95% of our properties are included in the same property pool, including Park Holidays.

In North America, at the midpoint, we expect same-property NOI growth of 6.5% for manufactured housing, 2.8% from RVs and 6.8% from Marinas to generate total same-property NOI growth of 5.6% for the year. In the U.K., we forecast real property operations will generate same-property NOI growth of 1.3% to 3.3% for the year. Our outlook for same-property NOI is anchored on solid expected rental rate growth, and we are confirming the average rental rate guidance provided in October of a 5.4% increase for manufactured housing in North America, 6.5% for RV, 5.6% for Marinas and 7.1% for manufactured housing in the U.K.

For home sales in North America, our guidance assumes an FFO contribution from $14.4 million to $15.9 million in 2024. The in the U.K., our 2024 guidance assumes an FFO contribution from home sales of $62.3 million to $69.9 million, reflecting home sales volume of 2,750 homes at the midpoint. At the midpoint, our guidance assumes we increase revenue-producing sites in North America across manufactured housing and RV by 2,600 sites in 2024.

For ground-up developments and expansion activity, our 2024 guidance assumes we allocate approximately $115 million to advance or complete projects already in progress. This includes approximately $50 million of spending related to the redevelopment of our Hurricane Ian impacted properties in Fort Myers.

We are not planning to commence any new ground-up developments. And our average expected investment this year would mark a 54% decrease from our development spend in 2023. For the year, we expect G&A expense to run between $262.2 million and $267.4 million, which equates to a 2.7% decrease over 2023 G&A at the midpoint. Adjusting for anticipated add-backs of nonrecurring expenses, we expect G&A to increase 5.3% at the midpoint.

As a reminder, our guidance includes acquisitions and dispositions and capital markets activity through February 20, but 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 up for questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from Michael Goldsmith with UBS.

[Michael Goldsmith, analyst]

My question is on the flow-through of the NOI growth of 6.3% to 7.3% to FFO growth that's flat to up 2%. This seems to be driven by a number of factors. So as you look to evolve the business, how can you drive better flow-through? And then specifically, can you walk through the interest expense guidance. Your debt load in the fourth quarter was $7.8 billion at 4.23% or $330 million annualized. So how do you bridge the gap there to kind of your guidance, which is $35 million higher for '24?

[Fernando Castro-Caratini, executive]

Michael, this is Fernando. The primary driver for the flow-through to flat to just over 1% growth expected in core FFO per share in 2024 is primarily due to the interest income from the Royale Life note that we will not have in 2024 and have been communicated with the market. That headwind as we step into 2025, will not be there, which will aid in reaccelerating that growth and that flow-through of strong same-property NOI growth expected not just for this year but for next year as well, as you've seen and underwritten for the company for many years.

As it relates to interest expense this year, starting the year off with our $500 million bond issuance, we start the year with about 10% of floating rate debt. So that will be the largest component of contributing to an increase in year-over-year interest expense from '23 into '24 embedded in our guidance are the latest forward curves as it relates to SOFR and SONIA for that floating rate piece of about 10% of our current debt stack.

A step-up in interest expense is related to the secured borrowings that are now on our balance sheet from our consumer note sale during the fourth quarter that is -- from an accounting perspective, these notes that were sold are still on our balance sheet and are recognized as both an asset and the liability. On the asset side, it's a collateralized receivable. On the liability side, it's a secured borrowing. And those amounts offset each other from an income and expense standpoint, but that is adding about $5 million of interest expense to the number.

[Operator]

Our next question comes from John Kim with BMO Capital Markets.

[John Kim, analyst]

I wanted to ask about the Marina guidance that's still expected to be strong this year. But conversely, service, dining, retail, entertainment, or F&B is expected to decline 11%. And I thought those 2 would probably be a little bit more correlated. So I just wanted to ask you about that.

[Fernando Castro-Caratini, executive]

Sure. So John, transient revenue expectations in total for RV are expected to be down 2.75%. In Marina, we are expecting an increase or underwriting an increase in Marina transient revenue of about 10% for the year. And in the U.K., we are expecting transient revenue to increase just above 2.5% for the year. From an SRD&E perspective and the decline expected underwritten forecasted for this year, that is primarily coming from the Marina side, where we are forecasting lower boat sales for this year. But you are right that boat's transient revenue is correlated to the SRD&E side, overall.

[John Kim, analyst]

My second question is on your decision to sell Campspot. I know it's not a very big investment for you. I thought it was a pretty interesting prop-type investment. Were you concerned with the optics of being a large RV owner and having ownership of this third-party data? Or was it just simply a distraction and you just wanted to sell at this time?

[Gary Shiffman, executive]

John, that's a great question. This is Gary. I think that as we'll continue to share over this call and as we have been sharing with our stakeholders over the last few quarters, in this effort to get back to basics and focus on this strong growth in our core businesses and translate that directly to per share growth, we're looking to simplify our business to remove complexities, both from a modeling standpoint but also from an investment standpoint so we can redirect any capital that would be required to continue to develop and invest in Campspot and other type of projects like that to the reduction of debt.

So this is a decision where we can get the best of both worlds. We can continue using Campspot, which is the really best software that's out there to manage our REIT communities and monetize it and use the monetization to pay down debt.

[John Kim, analyst]

Just to clarify, were there any regulatory concerns of investing in Campspot?

[Gary Shiffman, executive]

None that we are aware of.

[Operator]

Our next question comes from Jamie Feldman with Wells Fargo.

[James Feldman, analyst]

It was a very active quarter and earnings release for the simplification process. So how should we think about what's left to do? You have 2 new Board members. You have a new investment review committee. When do you think you get to just kind of a clean quarter or a quarter where you're not taking impairments, accounting reviews and we can just kind of get back to the fundamentals of the business. So maybe asked another way, what do you still have to work through in the simplification process to get to that moment? And when do you think that is?

[Gary Shiffman, executive]

That is a great question and something we're very eager to share and demonstrate as we move forward in 2024. We previously and even during this call talked about some of those projects. But we are painfully aware and recognize how challenging 2023 was for all of our stakeholders. The headwinds faced by Park Holidays and the difficulties brought on by the U.K. note restructuring had a meaningful impact on our performance, the stock and investors' perceptions of Sun.

So what we can share with you the extinguishment of the U.K. note that included the sale of the manufacturing businesses, the transfer of the land parcels on to our balance sheet allows them to move them towards Park Holidays management team where we continue to share are absolutely outstanding. So we'll be able to operate that group of properties and seek to maximize its value. So we'll look to be able to report on that as the year goes forward.

There are 5 properties that they'll be taking over in this process. We talked about Sandy Bay. It is income producing. There is a second one [indiscernible] has a minor amount of income coming through it now and the 3 other development parcels. So we're eager to get those in the hands. And Park Holidays, in fact, they are now overseeing it.

Park Holidays itself has performed well in a pretty challenging environment. They have been gaining market share overall and increasing their real property NOI. While we're frustrated as everyone is with the added complication of the announced noncash goodwill impairment here at Sun, the impact does not affect any of Park Holidays' historical cash flow or their operating metrics, including NOI, core FFO or its future growth prospects. So we're happy to move forward on that. We expect Park Holidays' 2023 performance to really be a baseline for future growth.

And as we've reflected in guidance, while somewhat flattish, we believe we will continue to see improvement with continued improvements in the macroeconomics in the U.K. We've continued to talk about, as we reflect towards 2024 guidance, the things we're focused on. We've announced the sale of the stake of Ingenia, the Northgate recapitalization, which we just shared, which really does take a lot of complexity out of the JV and the reporting and leaves us with the best communities that we think we can optimize growth.

They're excellent properties. They have a great runway to be able to convert transient to annual, so should be positive as we go forward. Fernando mentioned reducing our exposure to floating rate debt and continued reduction in transient revenue through a conversion of more stable and predictable annual RV revenue. All these things, I think, position us going forward to return to the kind of year-over-year translation of core growth into meaningful FFO per share growth.

So this is something we're going to have to demonstrate quarter-by-quarter. Our guidance for '24 does have the headwinds that Fernando shared with regard to the income interest that we don't have starting out the year, but it leads to solid growth and solid guidance on all our business platforms, and we look to be able to update and share everybody quarter-by-quarter as we continue to make progress on these goals.

[James Feldman, analyst]

That's very helpful. If I could just ask one clarification. Just in terms of kind of accounting review, impairment risk, I mean what's the latest conversation with the auditors? Is it the kind of clean bill of health going forward? Or is there still stuff under review?

[Fernando Castro-Caratini, executive]

Jamie, with last night's release, we did announce the noncash impairment to goodwill charges that will be -- that will flow through when we file our 10-K, but we provided details to it in our supplemental that totaled $370 million of noncash goodwill impairment for -- cumulatively for the year itself. So there's -- nothing else is contemplated as it relates to impairment at this time.

[Operator]

Our next question comes from Josh Dennerlein with Bank of America.

[Joshua Dennerlein, analyst]

Maybe just a follow-up to Jamie's last question. I read the 8-K last night on the material weakness in company's internal controls. I guess just -- was it just related to how you guys reviewed goodwill? Or is there anything else you guys want to improve as far as internal controls? Just kind of curious the scope.

[Fernando Castro-Caratini, executive]

Sure, Josh. A material weakness is a deficiency in internal control over financial reporting, which results in a reasonable possibility that a material misstatement of our financial statements will occur. We identified a material weakness specific to the design of accounting controls over assessing goodwill at Park Holidays. As a result of the material weakness in the design of this control, we failed to take the material goodwill impairment charge at the appropriate quarters.

We will now reflect that in our 10-K. We are working on the remediation plan for this control moving forward, and we can update the market as we move forward over the course of the next couple of quarters.

[Joshua Dennerlein, analyst]

And then, Gary, I appreciate your comments on just getting back to the basics, focusing on the core growth. I see like you cleaned up the JVs, the Cam site. Is there anything larger that you guys are contemplating as far as like shedding asset wise or just simplifying? Any kind of color there? And would that potentially include like an exit from the U.K.?

[Gary Shiffman, executive]

So great question, Josh. I think that, in general, we have shared our intention to look at certain assets we can define them as noncore or smaller or regionally, not located in areas where we have efficiencies. So we will continue on a relatively small magnitude certain dispositions. We mentioned we have 2 of them out for sale that we expect to close very shortly. And the magnitude of those is something equal to or less than what we last said, I think, in 2014 or '15, a total of over or up to $300 million.

But with no certainty, there's nothing forcing us to sell those assets. And we will manage those as we find interest and determine that we can sell them on a logical and accretive basis. So with regard to those types of dispositions, we're focused on that, and we shared that in the market.

With regard to the U.K., I think that we've discussed that certainly, the macro headwinds have impacted home sales. And at the same time, real property contribution has been growing during the current difficult financial environment in the U.K., and guidance reflects flat, but a little bit of growth for '24.

So our goal at this time based on market in the U.K. and the fact that we have really well-located properties and an excellent management team is managing through these difficult times that we will continue to operate the platform with maximize growth and value with what we consider a great management team and make determinations on a quarterly and annual basis as to best decisions moving forward.

[Operator]

Our next question comes from Samir Khanal with Evercore ISI.

[Samir Khanal, analyst]

Gary or Fernando, I guess just can you expand on the U.K. home sales a little bit more here? I know when you look at the sales volume, I think you're expecting it to be sort of flat to down, but then kind of what you alluded to in the prior question, you're saying the contribution will be up. So maybe help us think through that, maybe the margins you're assuming for the business.

[Fernando Castro-Caratini, executive]

Thank you, Samir. You're correct. At the high end of the range, we are expecting flat volume for -- on a year-over-year basis at the midpoint about a 3.5% decline in volume. On an adjusted basis, 2023 U.K. NOI from home sales margins were just above $21,000 per home. For 2024, our margin expectations are higher than in 2023, given the contribution to overall margin from home sales at Sandy Bay, which is now, as Gary had stated, being operated by the Park Holidays team.

Given that this community is a year-round primary home community that typically sees higher home prices and gross NOI dollar margins above $110,000 per home. To frame expectations of volume at Sandy, we are expecting somewhere within 30 to 50 homes sold in that community, which is driving overall margin for the year, up above the 2023 levels.

[Samir Khanal, analyst]

Okay. Got it. And if I could just ask one more here on the expense side. I know insurance growth has moderated this year, but expense growth is still expected to be higher than what we were anticipating. Maybe give us color around sort of the components of expenses and kind of what you're -- how you're thinking about the various line items?

[Fernando Castro-Caratini, executive]

Sure, Samir. During '23, we had active cost containment strategies in place, mainly across payroll, utilities, supply and repair and advertising that are budgeted to return to normalized -- at the normalized state in 2024. This is leading to that expense growth year-over-year in North America same property of 8.6% at the midpoint.

So certainly, in supply and repair, we saw a decrease year-over-year, for example, in '23, and we are growing off of that base north of 10% from an expectation standpoint. We certainly will look to continue managing our costs in response, right, to any revenues, especially on the RV side. And so that could -- right, that could change over the course of the year. But those are the primary drivers that are taking, call it, overall expense growth higher than in 2023.

[Operator]

Our next question comes from Keegan Carl with Wolfe Research.

[Keegan Carl, analyst]

Going to take a more bigger picture approach here. I guess, first, maybe on Marinas. Gary, I mean, how should we think about pricing power going forward? And then, I guess, specifically, where are you seeing your waiting list demands at today? And how does that compare to last year?

[Gary Shiffman, executive]

Good questions, Keegan. Obviously, as we've stated in our remarks that we continue to see strong demand for wet slip and dry storage. At over 80% of the Marina portfolio, we're experiencing continued weight lift of at least 1 size. So there's still continuing demand. We've had over 7% and over 11% same-property growth in '22 and '23. And as we've guided in '24, we still expect continued growth. I think that we look at everything in our core businesses as a marathon. As we've shared even with the headwinds that we had in '23, obviously, we're all aware of how the portfolios performed.

So in thinking through rental increases, expense control, CapEx investment for the long term, our expectation is that for all of our businesses, including Marinas, we look forward to continued steady growth, the type of core growth that we've exhibited and seen throughout Sun's ownership of these platforms. So -- and we feel very good going forward. And we're laser-focused on resolving the things that we want to resolve to be able to translate that growth to our stakeholders going forward.

[Keegan Carl, analyst]

Got it. That's really helpful. And then, I guess, just shifting to the other big picture theme here on Park Holidays. I know we spent a lot of time on the call on it. But with the impairment behind you, I guess, I'm trying to get more clarity on what the outlook is for the business going forward. And I guess I'm looking more from -- what are your plans for this platform, right? If you're gaining market share, if the business delevers and the macro environment improves, and in theory, this business outgrows your portfolio average, should we expect you to grow your exposure to this platform over time? And if not, why?

[Gary Shiffman, executive]

I can say at this time, we're very comfortable with where our exposure is. I go back to the same thing. The reasons for the investment there were to gain continued exposure to manufactured housing revenue, which is highly sticky, highly valued. It had a disproportionate fair to home sale, disproportionate share of contribution from home sales.

We've committed to working through that on a 5- to 7-year basis. We're over 2 years into that right now, and we're continuing to see the benefit where we reduce home sales margin, whether intentional or not, and seek to increase occupancy and contribution through real property rent and lease payments, if you will.

That's all going very well. Certainly, as we've shared, the disproportionate attention and focus in the downward guidance we experienced in '23 are all areas that we are focused on. And as we continue to focus in '24 to grow the company, to create value, to take on the assets that they're now operating and to create value from them, we'll make a determination. There are no determinations made at this time. But as always, all options are on the table, and we're excited for the management team to turn in the best results to take in '24.

[Fernando Castro-Caratini, executive]

And Keegan, if I can add, similar to our nonstrategic asset capital recycling program here in the U.S., we are under those plans in the U.K. as well, where we can potentially monetize a few assets from the portfolio over the course of this year.

[Operator]

Our next question comes from Eric Wolfe with Citibank.

[Nicholas Joseph, analyst]

It's Nick here with Eric. Gary, at the end of last week, you obviously announced the cooperation agreement and the standstill on the 2 new Board appointees, but also the Capital Allocation Committee. So I was hoping if you could dive into that a bit in terms of what the Capital Allocation Committee will be doing? How it's different than what you were doing previously and kind of what additional rigor you think it brings to your investment decisions?

[Gary Shiffman, executive]

Yes. Thanks, Eric (sic) [ Nick ]. I think that we're very pleased with the fact that the Board has established the Capital Allocation Committee to review the company's use and investment of capital and to make recommendations to the full Board. It's a more formalized process what has always taken place at a Board level. We're pleased to have Craig Leupold serve on that Capital Allocation Committee and we will have 2 independent Board members on that committee as well.

And we have formulated and begun to formulate a charter for that. So we look forward to their contribution. And we think it will be a continued benefit as we move forward and strengthen the Board and the company in the future.

[Eric Wolfe, analyst]

It's Eric here. I guess since everyone's breaking the rule, so just a quick one on your CapEx guidance. I was just curious if you can maybe give us a sense for what's included in terms of recurring, nonrecurring CapEx as well as free cash flow?

And I think you mentioned that you might have some free cash flow that would be used to pay down debt, but trying to understand how then you would sort of get to that $360 million of interest expense that's in your guidance because the fourth quarter run rate would suggest something that's a bit lower. I understand the $5 million of secured borrowing impact, it still seems like there's another, call it, $10 million or so more get to your guidance.

[Fernando Castro-Caratini, executive]

Eric, on the interest expense quickly, right, there were increases to underlying rates over the course of 2023. So there is a full year of that impact at the higher rates than where they started in 2023, which should help bridge that gap. As it relates to recurring capital expenditures for our business, we are expecting $120 million, $125 million of recurring CapEx across our platform in total, currently, and this is something that we are continuing to work through.

But we are underwriting and all other categories, right? We've mentioned expansion, ground-up development and redevelopment, but spending over 50% less in CapEx in the other categories than we did in 2023.

[Operator]

Our next question comes from Wes Golladay with Baird.

[Wesley Golladay, analyst]

If I could just follow up on the interest expense question, what do you think for capitalized interest this year?

[Fernando Castro-Caratini, executive]

Given that we are spending less on the ground-up development and expansion side, there is a production year-over-year in capitalized interest. Wes, let me get back to you with that exact amount. I don't have it in front of me.

[Wesley Golladay, analyst]

Sounds good. Okay. And then can you talk about what drove the reclassification of the indirect expenses this quarter?

[Fernando Castro-Caratini, executive]

Sure. So Wes, this is in an effort to better refine the indirect expenses to their revenue drivers. This is no different. If you'll recall, when the Marina portfolio joined the same-property pool, we did have a re-class exercise between real property and SRD&E mainly. As the Park Holidays portfolio joined our same-property pool, we did undertake the same exercise in aligning and -- best aligning those indirect expenses to the revenue drivers.

While there are -- there is some impact across other categories, the primary ones are in home sales and SRD&E. The indirect expenses being reallocated or payroll -- shared payroll benefits and taxes, advertising, utilities, credit card processing fees that are now best going to those revenue drivers themselves. And there's no impact of overall NOI productivity from the properties themselves.

[Operator]

Our next question comes from Brad Heffern with RBC Capital.

[Brad Heffern, analyst]

So for the properties received in the U.K. receivership process, how far away are those from being meaningful earnings contributors? And do you plan to market those or to hold them?

[Gary Shiffman, executive]

I think it's an excellent question again. As it relates to the 5, what we call non-Park Holidays U.K. assets that are now going to be managed by Park Holidays, they consist of 2 operating assets, Brad, and 3 development parcels, 4 of which were related to the U.K. loan. So now that we have full ownership of them and operational control, we're able to really assess best how to move forward with them and how to maximize value with them.

So I think we're going to be able to share that with you over the next couple of quarters. But there are only 2 of the properties that are actually contributing to guidance this coming year, and the other 3 will have to determine what next steps will be with the undeveloped properties.

[Fernando Castro-Caratini, executive]

And Brad, to frame roughly on the U.K. home sales NOI, Sandy is expected to contribute about 10% of our -- of the overall NOI contribution for the year. The other asset that Gary mentioned [indiscernible] has a nominal contribution to real property, about $1 million.

[Brad Heffern, analyst]

Okay. And then for the Arizona and Florida communities that you're selling, can you give the details of what those assets are and also the expected cap rate?

[Gary Shiffman, executive]

I'm going to suggest Fernando might have the exact number of the sale. But as we discussed, we are looking at the disposition of properties on an accretive basis. And as we are discussing with interested parties, those properties' cap rates come into play. And at an appropriate time in the future where we've completed the transactions, we'll be able to share the specifics of the cap rates with you.

[Operator]

Our next question comes from John Pawlowski with Green Street.

[John Pawlowski, analyst]

I have a follow-up question on the disposition program in the U.S. Gary, you guys have been talking about the capital recycling since, I think, last September. So curious -- it feels like it's taking longer than expected. So what has changed in terms of the volume you're looking to sell? And how has pricing changed as you brought these assets to market? How your pricing expectations changed versus the fall?

[Gary Shiffman, executive]

John, thanks for the question. I think that when we've talked about capital recycling, it's included both the properties as well as some of the other things that we've shared with you selling our position in Ingenia the balance sheet notes, unwinding the complexity in our very large JV and other things that we continue to look at of which dispositions is just one part of.

Since we've discussed that, as you referenced, we've spent a good deal of time assessing the portfolio, determining which assets might be candidates, running all the prework and the preparation to be able to market some of those properties, the fruit of which is just coming to bear for the first time this week.

It has been an ongoing process, and we hope to be able to continue to share more on those dispositions as we can do so. As we shared before, we don't typically announce the dispositions or capital market impacts until they're actually close. So -- I think that as far as how we're viewing things, they're pretty similar to how we have in the past.

Certainly, interest rates have impacted both pricing and how we look at the accretiveness of the transactions. And we feel comfortable with what we're looking at near term. And as we negotiate through those, we look forward to being able to share them with you. But it's just a little bit too early, John, to know exactly how the market is going to price everything. But moving forward, we're -- I could say we're within 25 to 75 basis points of the areas that we expected to be in.

[Operator]

Our next question comes from Anthony Hau with Truist Securities.

[Anthony Hau, analyst]

Can you guys provide any color on the transaction market for Holiday Parks? What EBITDA multiple and cap rates for these assets trading at today compared to 3 years ago?

[Gary Shiffman, executive]

Anthony, it's Gary. I guess I suggest overall that just aren't very many comps out there. Obviously, as it goes into our recognition of valuation of the Park Holidays platform, as we think about opportunities to acquire or dispose of assets, we're very, very focused on keeping a pulse in the market there.

And the fact of the matter is that while we believe firmly, Park Holidays is gaining market share from other big operators out there who are struggling both through the macroeconomics and some internal issues that are being made aware at those companies.

We grabbed that market share. We are working through creating operational value through home sales and through occupancy, and we'll have to continue to study and share with you what we're seeing with valuation in the market. But as of right now, there's just nothing to turn to.

And I'll also turn it over to the U.S. as well. When we look at the limited amount of transactions going on in manufactured housing, in particular, in the U.S., there just isn't a lot to reference out there as indicative cap rates or indicative pricing. So we continue to watch it very thoughtfully.

[Anthony Hau, analyst]

If I can just squeeze a quick one and another one in. Fernando, I saw that same-properties revenue for U.K. is 200 bps lower than the average rental rate increase. Just curious like what's the difference? Is it because the transient side is a little bit weaker? Or is it because of occupancy?

[Fernando Castro-Caratini, executive]

Sure Anthony, their transient growth expected in the U.K. for this year is at about 250 basis points of growth year-over-year. So that certainly is a driver of revenue being -- revenue growth being less than the rental increase of north of 7%. And then it would be timing of nonrenewals to when we are expecting the sales and bringing in new homeowners.

So there is right, as you know, our rental increases go out in the fall. We already have over a 90% renewal for the portfolio, but it essentially is timing differences from an occupancy perspective.

[Operator]

Our next question comes from Anthony Powell with Barclays.

[Anthony Powell, analyst]

I had a question on the RV NOI growth guidance of 2.1% to 2.5%, but that seemed a bit light given the strong kind of annual growth rate. So can you talk about your changing demand assumptions and also your assumptions for RV expense growth this year?

[Fernando Castro-Caratini, executive]

So Anthony, thank you for the question. On the revenue side prior we are expecting transient revenue growth for the portfolio to be at -- to be down about 2% -- 2.75% for the year, and that is what we are currently underwriting. And we are -- we do have higher expenses expected for the portfolio this year. And again, it's returning to more normal conditions.

Last year, we did put in a number of active cost containment strategies across payroll, utilities and supply and repair. And budgeting, forecasting for those to be at more normal levels over the course of 2024 is driving expense increase year-over-year of just under 10% for the year.

That's -- those are the 2 drivers where our NOI growth at the midpoint is expected at 2.8%. We are forecasting another very strong year of conversions for our portfolio that will continue to drive operational efficiencies over the course of the next couple of years.

[Anthony Powell, analyst]

Right. So is that transient revenue demand assumptions all driven by site conversions? Or is that also assuming it's weaker against the visitation, weaker pricing?

[Fernando Castro-Caratini, executive]

Anthony, I'm sorry. Can you ask the question as it cut in and out?

[Anthony Powell, analyst]

Yes, sorry. On the transient revenue decline assumption, is that driven all by site conversions? Or is that also driven by visitation or other assumptions that are driving that decline?

[Fernando Castro-Caratini, executive]

That is primarily driven by the site conversions that occurred over the course of last year and continued conversions into this year. Given that we converted last year over 6% of our sites, we are underwriting strong rate growth on the transient side. That is -- that gets you to the down year-over-year, about 2.75% currently.

[Operator]

There are no further questions at this time. I'll hand the floor back to management for closing remarks.

[Gary Shiffman, executive]

We thank everybody for participating in the conference call. And we really do look forward to sharing with you our first quarter results and the rest results as they are able to be shared throughout the year. Thank you, operator.

[Operator]

Thank you. And that concludes today's call. All parties may disconnect. Have a good day.