Sun Communities Inc Q1 FY2024 Earnings Call

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Communities First Quarter 2024 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 meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. Factors and risks that 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. This company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release. Having said that, I'd like to introduce management with us today. Gary Shiffman, Chairman, President and Chief Executive Officer; and Fernando Castro-Caratini, Chief Financial Officer; and Aaron Weiss, Executive Vice President of Corporate Strategy and Business Development. As a reminder, this call is being recorded. I would now like to turn the conference call over to your host, Gary Shiffman, Chairman, President and Chief Executive Officer. Mr. Shiffman, you may begin.

Good afternoon, and thank you for joining us on our conference call to discuss first quarter 2024 earnings and our updated guidance. We're pleased to report solid first quarter results underpinned by strong operational performance in each of our businesses. Core FFO per share of $1.19 for the quarter was driven by robust 7.9% year-over-year growth in North American same-property NOI and strong U.K. same-property NOI growth. Our first quarter results underscore how the favorable dynamics of high demand and limited supply, inherent in our best-in-class portfolio generate resilient real property income. Same-property manufactured housing NOI increased 8% compared to the first quarter of 2023 due to several factors, including rental rate increases, occupancy growth and lower expenses. Same-property RV NOI increased 8.1%, primarily reflecting the positive impact of converting transient sites to annual leases, and continued expense savings that partially offset lower transient revenues. Same-property Marina NOI grew 7.5% compared to the prior year. The outperformance was driven by continued strong demand for wet slips and dry storage as well as strong rental rate increases. As we enter our third full year of ownership of our U.K. portfolio, this segment is now included in our same-property reporting. U.K. same-property NOI in the quarter was approximately $11 million, which is a strong start to the year. We remain focused on our capital recycling strategy. And as disclosed on our last earnings call, we have sold 2 manufactured housing properties. Currently, we have additional assets in the market and feel positive about our ability to transact. In terms of capital deployment, Sun continues to be highly selective. Year-to-date, Sun has acquired several bolt-on Marina properties for approximately $12 million that strategically enhance our Marina member network on the East Coast. We recently published our sixth annual ESG report. Key highlights include completing our inventory methodology for reporting scopes 1, 2 and 3 greenhouse gas emissions and a 73% increase in team member volunteer hours compared to 2022. Additionally, we continue to prioritize our dialogue and interactions with our stakeholders and to work with our supply chain partners to understand their ESG programs. We continue to execute on a plan, focused on delivering earnings growth from reliable real property income. I would like to thank our talented team members for their continued dedication and strong performance and all our stakeholders for their continued support. I will now turn the call over to Fernando to discuss our results and guidance in more detail. Fernando?

Thank you, Gary. In the first quarter, Sun reported core FFO per diluted share of $1.19, driven by strong real property revenue growth and our continued focus on managing expenses. In North America, total same-property NOI for the quarter grew 7.9%, driven by a 6% increase in revenues and a 2.2% increase in expenses, further detailing each segment. Same-property manufactured housing reported another solid quarter with an 8% increase in NOI compared to 2023. The NOI was driven by a 6.8% increase in revenue and expense growth of 3.4%. For same-property RV, its 8.1% NOI growth was driven by a 3.1% increase in revenue and a 1.8% decrease in expenses. The year-over-year decline in RV operating expenses was due to aligning controllable costs with transient revenues, notably in payroll and utilities. Occupancy for same-property manufactured housing and RV, adjusted to include expansion activity, increased 180 basis points year-over-year to 98.9%. Part of the uplift in occupancy can be attributed to conversions of transient to annual RV sites. For the trailing 12 months ended March 31, 2024, Sun converted over 1,750 transient sites to annual contracts accounting for approximately 65% of our revenue-producing site gains. We are continuing our strategic focus on converting transient to annual sites. Since the start of 2020, we have completed nearly 7,100 conversions and have increased the number of annual sites by approximately 27%. Marina posted another strong quarter with same-property NOI increasing 7.5% compared to 2023. This was driven mainly by rate increases for wet slips and dry storage spaces across the portfolio and stronger transient demand, resulting in a 7.1% increase in revenue, partially offset by a 6.5% increase in expenses, primarily driven by payroll. In the U.K., same-property NOI increased by $3.3 million, representing a 44.5% increase over 2023 same-property results, higher rental rates increased customer retention and the early timing of the Easter holiday break drove a 12.3% increase in revenue in the quarter. Property operating expenses decreased 1.7% year-over-year primarily reflecting timing differences for supply and repair and payroll costs. First quarter U.K. home sales volumes were in line with expectations. We sold more than 620 homes representing a 5.4% increase compared to the previous year. FFO contribution was $10.2 million for the quarter, reflecting the strong sales volume, offset in part by lower margins. The strong unit sales performance in the first quarter will lead to an increase in community occupancy and site rent for the year. This aligns with our strategic objective to shift a larger share of our U.K. business activity from home sales to real property rents. Regarding capital allocation, Sun remains extremely disciplined, pursuing limited strategic opportunities. As Gary indicated, we recycled approximately $52 million of proceeds from selling 2 assets this year and acquired 4 highly strategic Marinas for approximately $12 million. Turning to our balance sheet. On March 31, 2024, the company had approximately $7.8 billion in net debt outstanding and our net debt to trailing 12-month recurring EBITDA ratio was 6.1x. We remain focused on further enhancing our balance sheet strength. During the quarter, Sun issued $500 million of 5-year senior unsecured notes with an interest rate of 5.5%. Net proceeds were used to pay down borrowings outstanding under our senior credit facility. During the quarter, we also paid off our corporate term loan with our revolving credit facility. Our weighted average debt maturity is 6.8 years, and our variable rate debt was approximately 11% at the end of the quarter. We intend to use free cash flow from operations and proceeds from planned asset sales to reduce overall leverage and variable rate debt percentages. As detailed in yesterday's release, we are updating our 2024 guidance for first quarter results as follows: we narrowed our full year core FFO per share guidance to a range of $7.06 to $7.22. We are also establishing guidance for the second quarter of 2024 core FFO per share in the range of $1.83 to $1.91. For our total portfolio, we expect real property NOI growth in the range of 6.5% to 7.3%. Higher expected NOI growth in MH and Marinas should offset lower expected NOI from RV. In North America, the updated full year same property growth range is 4.6% to 5.8%. The 40 basis point reduction at the midpoint is primarily due to transient RV revenue headwinds. Revised expectations are 6.2% to 7.1% for manufactured housing, a 15 basis point increase at the midpoint, negative 0.3% to 1.3% for RVs, a 230 basis point decrease at the midpoint driven by transient RV revenue headwinds, which we are partially offsetting with controllable expense reductions, and 6.4% to 7.6% for Marinas, a 20 basis point increase at the midpoint. In the U.K., we forecast approximately the same total FFO contribution for the year, but with a greater contribution now expected to come from real property results. We are increasing our full year same property NOI forecast from the prior range of 1.3% to 3.3% to a new range of 6% to 8%. The increase is driven by greater expected rental revenues complemented by continued cost management efforts. The higher real property revenue outlook is a function of the previously implemented rental rate increases and higher home sales volume and retention achieved year-to-date. For U.K. home sales, we maintain our range of expected volume for the year, but expect lower FFO contribution due to lower margins. Our U.K. strategy remains focused on shifting a larger proportion of our income from home sales margins into the resilient, reliable NOI generated by real property rents. Overall, we are pleased with our operating performance, expense management, and minimizing capital spending over the course of this year. Please refer to our supplemental for additional guidance information. As a reminder, our guidance includes acquisitions and dispositions and capital markets activity through April 29, but it does not include the impact of prospective acquisitions, dispositions or capital markets activities, which may be included in research analyst estimates.

Our first question comes from Michael Goldsmith with UBS.

It seems like you have been able to shift your strategy in the U.K. from primarily generating income from home sales to increasing revenue from rent growth. How did you manage to achieve this in such a short time frame, which has significantly impacted your guidance?

Thanks for the question, Michael. The U.K. business is generally performing in line with our expectations. Since the acquisition, we have adopted a strategy to accept a lower margin on home sales in order to establish a more consistent and reliable real property income through pitch fees. This approach has proven to be effective, as evidenced by the first quarter results. However, there are still economic pressures and challenges in the U.K. While we have seen growth in volume, we, like the U.S., are not experiencing the expected benefits of interest rate reductions as soon as anticipated. Ultimately, we believe that we are positioned for even further success and expect to continue this trajectory throughout the year and into the future. We will maintain our approach of sacrificing some margin to enhance real property revenue, which has been beneficial thus far and we anticipate it will continue.

And my follow-up question is, there were several moving pieces in the 2024 expectations, and that came 2 months after issuing your initial outlook 2 months ago. So as we look forward from here, do you sit here and think, okay, now we've got a much better grasp on the year sitting in the middle of spring. And so there shouldn't be as much volatility with the guidance going forward? Or at this point in the year, could there still be kind of large shifts within the expectations going forward? I'm just trying to gain a better understanding of where the visibility is into the year at this point?

It's certainly a question we can relate to and understand as we move forward to a very focused plan on taking the underpinning and the incredible performance, if you will, of our business platform and translating it into growth for our shareholders. We're working very, very hard on a number of different areas that we've shared previously, certainly, the simplification, the recycling of capital, and many of the things that we've accomplished over the last couple of quarters. All in an effort, and this includes the continued conversions of transient, where it is harder to forecast out transient RV into annual agreements in our RV communities. All this and the approach that we've taken to looking hard at first quarter and knowing that it's the lowest contributor across the Board first and fourth quarters to our overall FFO performance. We feel comfortable with the adjustments that we made will leave us in the best position to really deliver the results that we're sharing with you today.

And Michael, while there certainly are moving pieces to the guidance, we did reiterate our FFO guidance per share with the second quarter.

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

I wanted to follow up on the FFO guidance, which you maintained, but it seems like there’s a $0.15 decrease in your outlook due to non-same-store real property items. Part of that is attributed to higher general and administrative expenses, but my question is how confident are you that you can recover that $0.15, or 2% of FFO, in your same-store portfolio?

John, the general and administrative expenses are increasing with each guidance update from a GAAP perspective. This does not factor in certain add-backs we consider for Funds From Operations, primarily related to deal and transaction costs, which amounted to just over $11 million in the quarter. These transaction expenses were associated with wrapping up the receivership process linked to the Royale Life note and engaging with investors during the first quarter. While there is a noted increase in G&A on the guidance page, after accounting for these add-backs, we still anticipate that at the midpoint, our G&A growth will be approximately 4.6%.

And the other items, I mean, maybe my second question is your RV guidance was the only part that went down on your same-property outlook. You had 8% growth in the first quarter. So you're basically implying it's going to go negative for the rest of the year. I realize that the transient to seasonal or annual conversion, but typically, you get a big uplift in revenue when you make that conversion. So what is driving that reduction in the same-property RV outlook?

John, you are observing the increase in occupancy reflected in an annual growth of just over 13% for that line item in the first quarter. The downward adjustment in the RV segment is mainly due to transient challenges mentioned earlier, which we aim to counter as much as possible through controllable expense cuts. Our February forecast indicated a 2.6% decrease in transient revenue for the year, which included the effects of conversions. Based on the current information related to pace and shorter booking windows, we now expect a reduction of about 8% for the year, making it the primary factor affecting the RV segment. Overall, when factoring in our Manufactured Housing and Marina platforms, the total downward adjustment in NOI is approximately $4 million.

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

Maybe just wanted to touch on the asset sales and just like how that marketing process is going.

Well, Josh, we certainly got off to a good start and shared the 2 assets that we did sell. We are currently in the market. And there are a number of opportunities that we feel very good within the selected assets that we offer for dispositions. Again, these are assets that we feel will benefit somebody else in the long run. And there are still buyers out there. There are those that are looking to build platforms and looking past the negative leverage, if you will. But there is definitely a shift in the marketplace with debt costs being higher than they had been for the last long period of time. We look forward to being able to share with everybody the results of these dispositions that we have in the market right now. And hopefully, we'll be able to do that in this coming quarter.

I appreciate that, Gary. I wanted to follow up on Michael's question about the guidance. When I consider your guidance, it seems like every line item had its range revised. Looking at the bigger picture, what is your philosophy on providing these guidance ranges?

We aim to offer as much information as possible to the market regarding all our business platforms and other line items. With the guidance provided, you can closely track almost the entire profit and loss statement. In February, we included guidance on the expected interest expense, which was not disclosed previously. Our goal is to provide clarity on our expectations, which may have shifted both upwards and downwards, as indicated by the guidance shared last night. This is the most accurate information we have available to share with you and the market today.

Josh, the only thing that I would add to that is the fact that we certainly got through a lot of challenges in '23, have had some headwinds in '24 as we've shared with everybody. But I've also shared a strong desire to be simplifying and assisting with the ability to model. So we continue to do a lot of work on that. And as we go through '24, some of the steps that are taking place, I think, will put us in a cadence be able to provide an understanding and information as we go forward. A good example is U.K. home sales, where we will sacrifice the margin and made a decision and management is actually executing on the decision to increase volume at the cost of a little bit of margin to add to real property income. They've done an outstanding job at Park Holidays. We really want to commend them on that. And it's things like that, that are causing adjustments. But I think as we continue quarter-by-quarter, we'll take a cadence that will feel much better.

Our next question comes from Brad Heffern with RBC Capital Markets.

Is there any color that you can give about the pace at which you expect to move NOI out of the U.K. home sales business and into real property going forward? Should we continue to see sort of big chunky moves like this as the year goes on? Or does the guidance kind of fully reflect the underlying change in strategy?

The guidance fully reflects the underlying change in strategy, focusing on shifting more income into the reliable real property side.

Okay. And is there any color you can give on kind of the pace at which we should expect that to happen? Obviously, in the U.S., home sales are not a big contributor. Is there visibility on that happening in the U.K. over the next 5 years or 3 years? Or any sort of framework you can give us around the speed at which you can accomplish the transition?

Brad, are we talking about the U.K.? Again, I'd kind of reiterate what Fernando said in the fact that even going back to when we announced the acquisition, we had a strategy recognizing that the model in the U.K. is different than it is in the U.S. And we would sacrifice margin for increase in occupancy and gaining that more sticky dependable, if you will, and modelable is such a word, FFO on the real property side. So what you're seeing is a continuation on that. In '23, definitely hit headwinds of a slowing economy that caused that to accelerate faster than our 5- or 7-year plan originally had it. But I would say right now, where we're at, we're right on target where we want them to be, with Park Holidays. And I think you'll just continue to see us hit guidance and if things should improve or if we have an opportunity to make more rapid, we would definitely share that in the future.

Our next question comes from Wes Golladay with Robert W. Baird.

I just want to go back to the transient forecast. Can you unpack that a little bit? What has driving the EBITDA adjusted for the conversions? Are you seeing any rate pressure? And then when you have your forecast for the balance of the year, are you extrapolating the current trends into the balance of the year?

Wes, we continue to believe in the long-term strength of the overall RV sector. And as you know, we've been strategically reducing our transient exposure and relative contribution over the past few years in favor of the stability of the growth of the annual agreements that we're really, really focused on. So we've increased the annuals by about 27% by converting the transient since 2020. And our expectation and our outlook moving forward, if you'll continue to see that. And again, that allows us to budget and forecast with a higher degree of confidence as we have those homes in on an annual basis, and they're not subject to the concerns of whether, again, much of the transient is within a 3-hour drive of the home base of our guests. And so weather conditions as we saw in April. And as we've seen more recently in the last couple of years, do impact that short-term transient guest stability to be able to forecast it. So I think that while it's a good business, and we will continue to have a percentage of it, we will continue to focus on converting those transient over to annuals. And we're seeing stronger and stronger demand, and we're opening up more and more of our transient sites and will allow them to be converted to annual.

Yes, I understand that. Looking at the transient forecast, it has decreased by about 5% or 6%. I'm curious whether this is due to rate pressure or just occupancy levels. Are the trends you're observing primarily influencing this, and do you anticipate these trends continuing into the second half of your forecast? I'm trying to gauge if your guidance might be overly cautious, especially with the current weather conditions affecting it.

Yes. I would just suggest, as Fernando mentioned, certainly, pace has a lot to do with it. We're seeing it 8% down year-over-year. There is a concept that says the shorter booking windows will yield the potential for upside, but in our efforts to give the best guidance that we can going forward. We're looking at outpacing is right now. I don't know if Fernando of you have anything to add.

Our next question comes from the U.K. Are there any one-time items that affected the first quarter? Additionally, what can you share about the forward guidance? Can you also confirm that lowering the pricing to establish consistent income from the real property is not a new strategy this year, but rather something you have been implementing all along?

I'll answer the first part, and Fernando can talk about guiding forward. But the strategy of shifting margin for occupancy gain has been our strategy all along. As I indicated before, it more rapidly accelerated in 2023 as we brought margins down due to the headwinds of the economy. But what you're seeing right now is continued strong demand for the Park Holidays community and a management team that from day 1, understood the concept of being able to increase occupancy and increase real property contribution over the concept of the onetime sales margin that probably worked much better for them as the portfolio was owned by private equity firms in the past. So it's pretty much it exactly where we want it to be now, and we're hoping to continue it and really make a difference in how we're going to look long term at the value creation, if you will, of the real property contribution.

And then, Wes, on aggregate, the total FFO contribution from Park Holidays for 2024 is in line with original expectations. Park Holidays contribution to core FFO also includes SRD&E through retail and F&B operations and head office personnel and corporate activities on the G&A side. In the first quarter and for the year included in the overall contribution to core FFO was an expected payroll tax withholding that refund and third-party costs related to securing this refund. These various items had a net impact of about $2 million to our aggregate $153 million of core FFO in the first quarter or much larger for the rest of the year. These changes are similar and consistent with, call it, it's akin to real estate tax or sales tax or other expense changes that are periodically, reflected, updated treatment of revenue or expense. These changes are sometimes favorable or unfavorable to the current period.

Okay. And so just the bottom line that is a contract expense you had. And so the U.K. real property revenue is just a true upward lift in, on the full year.

Yes. It was on the same property and that is detailed during the call, is primarily driven by the higher rental rates, higher retention than expected and we did see a stronger Easter break, which also the comp on a year-over-year basis where Easter was during the second quarter in 2023.

Our next question comes from Keegan Carl with Wolfe Research.

Maybe first, I guess, just on your acquisition of the land parcels. It was a bit surprising given your comments on development and expansion last quarter. So I guess I'm just curious what changed on this front.

Yes. I think we've talked about being very, very strategic in our thinking with use of capital. And we've also shared the plan that we're looking to both recycle capital and dispositions as well as through cash flow by shutting down development and using that capital to pay down more costly debt on a rate basis. I think that when you have 500 to 600 properties that are very, very strategically located and the strategic piece of land or opportunity comes about, we take advantage of that, thinking about the long-term nature of Sun. And all you're seeing there is, as you saw in the Marinas. There are just some bolt-on opportunities where we have a very, very low cost, a great deal of potential value creation in the future, and those are just one-off strategic opportunities, small in nature.

And then shifting gears here on home sales, I guess, both in the U.S. and U.K., maybe U.K. first. I know you mentioned margin. Is it just a function of mix? Like are you selling more used homes to new homes? Or is it just lower general pricing. Is there any update on Sandy Bay as well as those are higher-priced homes? And then in the U.S., I know that outlook was reduced too. Is it explicitly tied to existing home sales? Or is there something else we should be aware of?

Keegan, on the U.K. side, that's a mix of both of pricing and mix shifting more towards the pre-owned side of sales. Sandy Bay is ramping up well as it relates to marketing efforts for sales heading into a busier season over the course of the next couple of months.

Yes. On the U.S. home side, Keegan, really given the high occupancy of which our MH properties operate and our strategic shift away from deploying capital into that development and expansion. We did guide towards much lower home sales this particular year. And that is something I think that just demonstrates a little bit of the strength that we're seeing at nearly a 98% occupancy in the MH and annual communities.

Our next question is from Eric Wolfe with Citibank.

As you look at your guidance, I was just wondering if there's anything in the core numbers that is sort of one-time in nature, one way or the other. So for instance, it seems like there might have been a tax refund in the U.K. same-store NOI this quarter. Just trying to understand if there's anything in this year's core FFO that won't be repeated next year as we think about the right sort of base from which to project things in 2025.

The contribution in the U.K. included a VAT refund related to real property. It also involved increased expenses due to payroll tax withholding and costs tied to obtaining that refund. The overall impact of these figures is approximately $2 million for the quarter or the year. This situation is comparable to real estate tax assessments, where we might pay more based on the state's assessment. If we can navigate that assessment successfully, we could see a refund in a future period, which is consistent with that practice.

Yes, that makes sense. I guess I was just trying to make sure there was nothing else. I mean, so it sounds like just net like maybe $2 million and understood on the reason for it, I just want to make sure that when we're projecting out to 2025, there's nothing else that would sort of distort those numbers. I guess second question on the recurring CapEx. It looks a little bit high relative to last year's quarterly average. Just wondering if we should expect it to come down? And then also, I saw that there's a decrease in sort of acquisition CapEx, but still a bit of this sort of bolt-on investment to former acquisitions. I guess, when should we expect that to come down as well?

Thank you, Eric. The spending on recurring capital expenditures remains steady, with increased recurring CapEx in the Marina and U.K. sectors during the first quarter. This expense is anticipated to decrease for the remainder of the year. In terms of total nonrecurring CapEx for the quarter, we are looking at approximately a 45% decrease compared to the first quarter of last year. As we've mentioned in discussions with the market, our CapEx spending is projected to reflect around a 55% reduction from the amounts recorded in 2023.

Our next question comes from Anthony Powell with Barclays.

I guess another question on transient RV. I understand that you're trying to convert many of those sites to annual, but you still have a meaningful amount of transient sites. So I'm curious, are there any trends that you can employ to maybe improve growth there? And what's your optimal annual transient split in that business?

In response to the second part of your question, we discussed reducing transient sites from the high 20,000s to around 14,000 or 15,000 over a 3 to 5-year period. These transient sites will be our top performers and will also help us attract annual RV guests as they transition out. We're making significant progress on this front. Regarding other opportunities, we've been very focused on social media and marketing. There's been a lot of discussion about the substantial growth we experienced during COVID and the return to pre-COVID levels. Our main focus is on growth from our current position, and we have engaged several third-party experts with hospitality experience to explore different revenue management strategies and business activities during the shoulder parts of the week and seasons. We believe there's a near- to long-term opportunity to enhance our transient properties and sites, ensuring that the remaining portfolio represents the best transient offerings. As we continue transforming, we expect to see mid- to long-term improvements in growth, though I cannot point to anything specific that indicates a direct change is forthcoming.

Our next question comes from Jamie Feldman with Wells Fargo.

I guess just focusing on the balance sheet. Can you just remind us your deleveraging or leverage objectives and floating rate debt objectives in terms of those metrics? And can you also give us some thoughts on the glide path to get there? What do you think it takes to get to your goal? And how long do you think it takes to get to your goals for both of those items?

Sure, Jamie. As we've stated previously, our long-term leverage targets are to be at 5.5x and below. Today, we are at 6.1x from a leverage perspective. Growth in EBITDA over the course of the year should provide deleveraging by the end of the year as well, as Gary had stated before, we have multiple opportunities from a capital recycling standpoint that we trust we'll update the market with over the course of the next couple of months and quarters that should also contribute towards reaching and surpassing that goal of 5.5x. Floating rate debt today as of the end of the quarter was just above 11%, we will look to manage that percentage to be below 10%. So that's something that we can do here over the course of the short term.

Okay. And just to confirm, the 5.5x, you're saying by year-end? Or no, that's going to take much longer.

That takes us into 2025 from that standpoint.

Okay. And then I guess just taking a step back, over the last 9 months, year, a lot of new initiatives at the company. You added 2 new board members. You took the plan to simplify earnings. I think whether it was NAREIT meetings in November or end of year conference call discussions, it seemed like you had ring-fenced a lot of the concerns on the U.K. and some of the problems that certainly the market was concerned about. So you look today, you guys maintained your guidance. Your core business actually seems a little bit better than expected when we started the year, but the stock is underperforming by almost 600 basis points to REITs. Can you just talk about maybe looking behind the curtain of what's going on at the company and some of the initiatives that your Board is debating, your management team is debating, your company is debating about ways to address the problem, fix the problem. Just maybe things that we, on this side of the fence don't necessarily have a view on that people can look forward to as they think about this company and what's to come the year ahead.

Sure. I want to emphasize the importance of simplifying processes across the company. As we have expanded, some complexities have arisen. We are making solid progress in addressing these issues, particularly with the Board, and we are happy to welcome new members and set up committees for the future. Our disposition program is performing well, allowing us to recycle capital effectively. We have been able to greatly simplify one of our joint ventures, specifically the Northgate properties we discussed last quarter. Additionally, we have exited the headstock in Australia and divested our stake in proprietary software for managing our RV communities, although we still utilize Campspot, which is an excellent tool. The ongoing conversions we have talked about allow us to manage our business more efficiently, leading to better cost margins in annual properties compared to transient properties. This will contribute to future growth. Our strategy in the U.K. is currently effective as we shift from volatile home sales margins to consistent property income. We have successfully navigated the foreclosure process regarding our U.K. assets, and Park Holidays has done a commendable job managing them, particularly at Sandy Bay. We are eager to share the positive results from this market. The Board and management team are laser-focused on these developments. I also want to mention Aaron Weiss, who joined us two years ago as part of our effort to strengthen our executive team. We are optimistic about how our commitment to simplification will drive FFO growth, as has been our historical trend. However, we recognize there is still work to be done to regain lost credibility into 2024. We are diligently pursuing this goal, supported by the solid performance of our business platform, and we will continue to provide updates on our progress in future quarters.

Very helpful and lots to think about. I guess just one quick follow-up, if you don't mind, just because we get asked this a lot. I mean how long does it take for whatever initiatives, even if all the initiatives you've put in place at year-end or all the initiatives you're going to do? Like how long does it really take for it to have the full impact.

I'm going to echo what we discussed at NAREIT and during various conferences that 2024 presents some challenges. We've highlighted the specific financial obstacles and the steps we are taking to simplify the business. Our main focus is on 2025, when we expect that many of these challenges will be behind us and we can start converting our strong core business growth into benefits for our shareholders. While there is potential for improvement, we are also aware of the risks as we move through the year. The economy remains tough and uncertain. However, we believe that we will be in a strong position as we wrap up 2024 and transition into 2025.

Our next question is from Anthony Hau with Truist Securities.

Given that you brought sales margin down in the U.K., are you seeing more buyers, homeowners buying premium lodges compared to before? And what percentage of buyers are buying standard versus premium today?

We have reduced our margin expectations for the year by about $2,600, which is helping to increase sales of preowned lodges. We will continue to engage with customers who purchased a preowned home in the last couple of years and are interested in upgrading. This is part of our strategy aimed at improving the retention we have been discussing for our homeowners across the portfolio.

And when you upgrade a home from like standard to premium, you increased your pitch fee by 3x, right?

It's going to depend, Anthony, on the size of that home and that site and where that site is in the portfolio. But yes, there is usually a premiumization, not just from the sale of the home, but also on the pitch fee side.

Okay. And just one quick question about revenue for using sites gain. I think the initial guidance assumed 2,400 to 2,700 site gains, has the underlying assumption for this metric change for the current guidance? And how confident are you to achieve this target given that only 233 sites were gained in the first quarter?

Anthony, no change to the expectations for the full year as it relates to the revenue-producing site gains across manufactured housing and RV for the year.

Our next question comes from John Pawlowski with Green Street.

I have 2 questions on the RV business. One, just a clarifying question on the comments made. So is it that the 8% shortfall in reservation pace, is that revenues for the second quarter and third quarter are trending 8% below a year ago? Is that just a number of reservations. Could you just be more specific on that stat?

Sure, John. The 8% number that I quoted is expected year-over-year decline in revenue growth for the full year. Currently, as it relates to the second quarter, we are expecting about an 8.6% decline in revenue year-over-year.

Can you provide some insights on the current state of consumer demand? Which regions are experiencing the most noticeable decline? Is it primarily affecting resorts with high amenities, or is camping also seeing a downturn? I would appreciate your local teams' observations to better understand current consumer price sensitivity.

Generally, the situation has been fairly uniform, though at a slower pace. We are adjusting our guidance based on this year-over-year trend. The second quarter has been quiet, and as we approach the seasonal openings in April and May, some weather-related issues have had an impact, but overall, it’s mainly just the general pacing. There isn't a single factor we can identify, and we don't want to set expectations for outperformance. We expect that with shorter visitations returning closer to normal, bookings might see an uptick. However, at this point, we don't have anything specific to highlight; we frequently discuss these topics with our management team. There has been a noticeable return to various vacation forms across the board. We will keep you updated on any specific changes we observe, but currently, there’s nothing significant to report, either regionally or within specific segments of our communities.

Okay. Final question from me. Fernando, the $0.14 you're adding back in transaction costs and nonrecurring general and administrative expenses is similar to the costs added back in 2023 and 2022 during more acquisitive years. Outside of Royale Life, what else is included in this number? I assume Royale Life was identified at the beginning of the year. So once again, what caused the $0.07 incremental add-back guidance compared to the previous guidance?

The activity from the first quarter is primarily responsible for the increase in our guidance, as we communicated in February. We anticipated around $9.5 million in add-backs for the year but exceeded that in the first quarter. We are now forecasting over $18 million, mainly due to debt deal costs from transactions we have been underwriting. We have also moved away from certain transaction costs as previously outlined. Furthermore, we have implementation expenses for our technology platforms, which we amortize over time, reflecting the investment in developing and implementing these technologies. Currently, the total expected add-back for the full year is $18.4 million, as mentioned in yesterday's press release. This indicates about $7 million in additional add-backs planned for the remainder of the year, but this figure may be subject to change.

We have reached the end of the question-and-answer session. I'd now like to turn the call over to Chairman, President and CEO, Gary Shiffman for closing remarks.

Thank you, everybody. We just want to end, and letting everyone know we are very, very focused on the concept of understanding, closing the gap in valuation and we are working very, very hard with everything we do to move forward on that, and I look forward to speaking to everybody on the next quarterly call. Thank you, operator.

You're welcome. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation. Goodbye.