Summary
- When I was younger, I always enjoyed analyzing business models and studying financial statements.
- Call me a nerd, but I spent more time in my college finance classes than I did partying at fraternity row.
- So, let me break down another REIT that I'm adding to my personal SWAN portfolio.
I’m just around halfway through my new book, REITs For Dummies , in which I will be helping investors navigate the global real estate investment trust, or REIT, universe.
I’m very excited to get the book finished because I know that thousands of investors are on the fence when it comes to REITs, simply because they’re not sure if there’s value in owning real estate stocks.
Of course, one of the greatest myths when it comes to REITs is that they’re dangerous because of the many cut dividends during the Great Recession.
I can certainly relate to that, as I was a real estate developer in 2008-2009 and I know firsthand the pain when the subprime crisis turned into a complete financial market meltdown.
Of course, there’s always a silver lining, and for me the Great Recession forced me to shift from real estate developer to real estate analyst. And thanks to the 100,000+ followers on Seeking Alpha, I was able to totally reinvent myself and become a trusted voice in the income space.
Before Seeking Alpha, I was primarily focused on net lease and shopping center development, where I orchestrated over $1 billion of transactions. Part of this “ground up” experience allowed me to conduct due diligence on many of my tenants, such as Advance Auto Parts ( AAP ), Walmart ( WMT ), Dollar General ( DG ), Sherwin-Williams ( SHW ), and Blockbuster Video.
When I was younger, I always enjoyed analyzing business models, and studying financial statements. Call me a nerd, but I spent more time in my college finance classes than I did partying at fraternity row.
So, the great thing about my job today, as CEO at Wide Moat Research, is that I can analyze a variety of companies. The one common denominator, of course, for all of our research is summed up in one word: INCOME.
Last week I was traveling in South Florida, and I decided to meet a friend at Safe Harbor in Fort Lauderdale. His company had a famous yacht, Casino Royale, docked in Safe Harbor, and he invited me over to take a tour. The yacht appeared in "Casino Royale" as the "floating lair" of the movie's villain, Le Chiffre.
Safe Harbor (in Fort Lauderdale) is the largest yacht repair/refit facility in the country, an impressive 65-acres in the Yachting Capital of the World. The property has 1600 total vessel visits and completes over 1300 vessel hauls per year with 5 lifts, one of which has the hauling capacity of up to 485-tons.
The marina offers dry docks and wet slips for vessels up to 200 ft. LOA and also offers an on-site restaurant, YOT Bar and Kitchen, which overlooks the New River. It has over 130,000 square feet of workshop and office space, with over 20 premier on-site contractors representing all primary shipyard trades on-site, ready to meet all project demands.
In the words of Safe Harbor’s CEO Baxter Underwood, the Safe Harbor brand is the “ intersection of luxury and adventure in the context of boating .”
Brad Thomas
A Bold and Safe Acquisition
In September 2020, Sun Communities, Inc. ( SUI ), a REIT involved in manufactured housing and recreational vehicle communities, entered into an agreement to acquire Safe Harbor Marinas, the largest and most diversified marina owner and operator in the United States.
SUI Investor Presentation
Safe Harbor owns and operates 101 marinas, manages five marinas on behalf of third parties, and has an approximate 40,000-member network of boat owners across 22 states. The transaction for cash and SUI equity is valued at $2.11 billion.
SUI Investor Presentation
This was a strategic “bolt on” acquisition for SUI, as it provides the REIT with 46k wet slips and dry storage spaces and over 46K members in the network. 80% of the Marina are in coastal markets.
- Florida 5,139 spaces
- Michigan 3,742 spaces
- Texas 2,064 spaces
- California 4,133 spaces
- Connecticut 3,325 spaces
- Other locations: 27,382 spaces
- Total: 46,185 spaces.
Marinas are great assets to own, as the existing base has over 12 million registered boats within the U.S. and an estimated supply of 900K to 1 million leasable wet slips. There’s a shrinking supply of Marinas due to redevelopment of waterfront properties.
Also, pre-owned boat sales under 30’ grew by 17% from 2012-2021 whereas sales for boats over 30’ increased 52% - the average slip length in the SUI portfolio is 41’. Over 85% of SUI’s marinas have a waitlist.
Over 50% of Marinas within SUI’s portfolio offer service, which increases membership tenure on average by 26% compared to non-service properties. Service availability drives premium rental rates for wet slips and dry storage spaces.
SUI Investor Presentation
In Q3-22 marinas continued to experience strong performance, as SUI’s Same Marina real property NOI increased 9.6% compared to Q3-21, driven by increased annual boat slip revenue and storage revenue. Demand for slips and storage is persistent.
Also, in Q3-22, SUI increased its Marina same-property midpoint of full year guidance to 6.6%, a 20 basis point increase from the prior range. The REIT expects same-property Marina growth of 6.1% at the midpoint in Q4.
As viewed below, SUI has the scale advantage within the marina sector (130 owned marinas) – or around 20% of revenue - while Equity Lifestyle Properties, Inc. ( ELS ) has a smaller percentage of marina revenue (as shown below).
SUI Investor Presentation
Who’s Ready For a Road Trip?
As many of you know, I provide members at iREIT on Alpha with daily video updates and many C-suite interviews. More recently I have been traveling around to meet the CEOs at their office…
A few weeks ago I visited Highwoods Properties ( HIW ) CEO Ted Klinck at his office in Raleigh, N.C. I also drove to Birmingham, Alabama, to meet with Medical Properties Trust ( MPW ) CEO Edward Aldag.
Like the marina visit last week at Safe Harbor, I plan to begin visiting many other REIT-owned properties across the U.S. and Europe. These so called “boots on the ground” interviews are extremely rewarding for our analyst team as well as our members at iREIT on Alpha.
I’ve been thinking about even renting an RV to travel around so I can visit the properties, meet CEOs, and conduct a road show my new book (REITs For Dummies) and REIT ETF Index. What do you think?
Well, guess what?
SUI also owns best-in-class RV communities, with ~60K sites located in highly desirable destinations with ~7K sites for expansion and greenfield development. As shown below, RV communities represent 31% of SUI’s rental revenue:
SUI Investor Presentation
The supply and demand for this property sub-sector is compelling: 11 million households own ab RV versus 1 million RV campsites. 9.5 million people plan to buy an RV in the next 5 years and the RV rental market added over 2 million new enters in 2021.
SUI’s RV communities offer affordable vacations where the average trip is 2-3 hours from a customer’s home address. In 2021, 250K new guests visited a SUI community and 145K new guests in 2022 (thru Q3). 7-in-10 households identify themselves as at least occasional campers.
SUI Investor Presentation
As SUI explains on the Q3 2022 earnings call (emphasis added):
“RV communities continue to experience high demand and transient conversions to annual leases accelerated 30% as compared to the third quarter of 2021. Year-to-date, we have converted approximately 2,000 transient sites to annual leases, which exceeds our full year record set in 2021. Each conversion equates to a 40% to 60% revenue uplift the first year and creates a new stream of recurring revenue.
On a Same Property basis, annual RV revenues increased 13.4% and total NOI grew 8.4% compared to the third quarter last year. Monthly base rent per RV site increased by 7% year-over-year. On a combined basis, blended total portfolio manufactured housing and annual RV occupancy was 97.1% , with over 2,300 revenue-producing sites gained year-to-date.”
The Core Business Model
SUI was stablished in 1975 and became a publicly owned corporation in December 1993. In 1996, the company acquired 25 manufactured housing communities for $226 million. As you can see below, since 2010, SUI has acquired properties valued at over $11.7 billion, increasing its number of properties by 4.9x (completed over $6.5 billion of acquisitions since 2020).
Manufactured housing represents ~49% of SUI’s revenue and this sub-sector is considered its core business platform. SUI has the largest manufactured housing portfolio in Nort America with more than 99K sites. In addition, the company is the 2 nd largest park owner and operator in the U.K., with 55 holiday parks consisting of 22K sites.
In total, SUI has 352 manufactured housing communities consisting of 144K revenue producing sites and 9K sites for expansion and greenfield development.
Manufactured housing fundamentals are strong, as SUI’s portfolio is at 96.2% occupancy, with 70% of its communities at 98% (occupancy). SUI is also one of the largest annual purchasers of manufactured homes, with 2K homes per year.
Annual home move-outs in SUIs’ manufactured housing communities are 0.5%, and that’s truly an uninterrupted rental income stream: average tenure of residents in SUI communities is ~14 years. This low turnover is driven by a $6k - $10k average cost for a resident to move a home.
SUI Investor Presentation
Manufactured homes in SUI’s communities provide 25% more space at ~54% less cost per square foot:
SUI’s manufactured housing, Same Property NOI increased 4.9% in Q3-22 compared with Q3-21 supported by 4.3% gains in monthly base rent per site, increased occupancy and ability to manage expenses.
The Balance Sheet
At the end of Q3-33, SUI had $6.7 billion of debt outstanding that carried a weighted average interest rate of 3.4% and a weighted average maturity of 8.8 years. The net debt to trailing 12-month recurring EBITDA ratio was 5.7x.
Excluding the bank revolving credit and term loan facilities, the remaining $4.9 billion of debt has a weighted average interest rate of 3.4% and a weighted average maturity of 9.9 years.
SUI Investor Presentation
In terms of capital markets activity in Q3-22, SUI repaid $318 million of debt secured by 35 properties, increasing its unencumbered assets to total asset ratio to ~79%.
SUI Investor Presentation
In terms of dividend growth – which is a key metric for us to evaluate at iREIT on Alpha - we can see that ELS outperforms SUI. In 2008-2009 ELS did NOT cut its dividend, while SUI did. In addition, ELS has grown its dividend every year, while SUI has not been as consistent.
iREIT
However, we noticed an interesting trend taking place, in which SUI’s payout ratio was declining which makes the value proposition more attractive. Meanwhile, ELS has seem its payout ratio increase:
Valuation Matters
On the Q3-22 call, SUI increased the midpoint of full year guidance - funds from operations ("FFO") per share - by $0.08 to a revised range of $7.32 to $7.38. It established a Q4-22 constant currency core FFO per share guidance in the range of $1.23 to $1.29. The new range represents 6% growth at the midpoint for the full year and implies the 6.6% growth at the midpoint in Q4-22.
As viewed below, analysts forecast AFFO per share to grow by 14% in 2022 and around 6% in 2023. That’s on top of a record year of growth in 2021 (+27% in AFFO per share).
Keep in mind that it was only in 2021 that SUI obtained inaugural credit ratings from S&P and Moody’s, validating the balance sheet stewardship, strong operating track record, and industry-leading position. As SUI’s CEO said,
“These ratings represent another important milestone in Sun’s ongoing evolution as we continue to grow our portfolio and further strengthen our balance sheet.
We believe these ratings will allow us to continue to execute on our growth strategy with additional flexibility, broadened access to capital and incremental improvements to our overall cost of capital.”
As you can see (above), SUI is now trading at 24x current P/AFFO, and historically shares have traded around 26x. However, Covid-19 presented an outlier scenario where shares traded as high as 37x, where pre-Covid shares traded at 12x to 25x.
Remember, though, SUI is a much different animal today, with a much-improved balance sheet, much safer dividend (payout ratio), and more consistent dividend growth (~5.5% CAGR).
As mentioned, SUI trades at 24.3x versus ELS that trades at 30.8x. Also, SUI’s yield is 2.2% compared with ELS’s dividend yield of 2.5%. Analysts forecast SUI to grow AFFO per share by 6% in 2023, and ELS is projected to grow by 5%.
We are maintaining a BUY and I’m adding SUI to my personal SWAN portfolio. Having visited Safe Harbor myself last night, I’m extremely excited to become a marina landlord in addition to RV communities and manufactured housing sites.
I also see that Jeff Blau, CEO at Related Companies, has joined SUI’s board, and this is another positive addition to the management team. SUI is set to release Q4-23 earnings soon, with the earnings call at 11:00 on February 23 rd .
iREIT’s Annualized Total Return estimate is 15% as shown below:
As always, thank you for reading and commenting.
Happy SWAN Investing!
For further details see:
Sun Communities: I'm Adding This 'Safe Harbor' REIT To My SWAN Portfolio