2023-05-02 08:05:00 ET
Summary
- SUI is a well-managed MH, RV, and Marina REIT with robust NOI growth from sticky tenant relationships.
- It carries modest leverage and has a strong track record of paying a reliable dividend.
- The stock is down materially from a year ago, and investors could see potentially strong total returns from here.
Commercial real estate has made plenty of headlines in recent months for all the wrong reasons. It's important, however, to consider that most of the negative attention has been focused around office buildings. Nonetheless, the broader REIT ( VNQ ) market seems to have been lumped into one bucket.
Such appears to be the case with the well-run Sun Communities ( SUI ) which as shown below, has fallen by 18% over the past year. With the market being bearish around even high quality REITs, I highlight why conservative income growth investors ought to take a hard look at SUI at current levels, so let's get started.
Why SUI?
Sun Communities, along with peer Equity LifeStyle Properties ( ELS ), is one of the two leading manufactured housing, RV, and marina REITs in North America. At present, its portfolio consists of 671 properties covering 180K sites, and 48K wet slips and dry storage spaces in the US, UK, and Canada. About half (49%) of SUI's rental revenue comes from MH sites, with the rest coming from RV (31%) and Marinas (20%).
It's an open secret that manufactured housing, when done properly, can be a great asset class. That's because it carries the durable benefits of housing with sticky tenant relationships, since the landlord owns the underlying land, with the tenant having made investments in the physical property.
Meanwhile, SUI has lived up to its strong reputation for growth, with same property NOI growing by 6.7% YoY during the first quarter. Also encouraging, same property blended occupancy for the MH and RV segments grew by 190 basis points over the prior year period to 98.6%. As shown below, SUI's marina segment was a key growth driver, as this segment's revenue growth far outpaced expense growth, resulting in a robust 15% YoY NOI growth.
Importantly, SUI is well-positioned for the long run, as transient RV conversions to annual leases accounted for 65% of SUI's revenue per site gains in this segment, resulting in stickier tenant relationships and better long-term visibility.
Moreover, SUI's internal development program delivered meaningful growth, with 200 new sits at three ground-up development properties, and it expanded existing communities by over 130 sites. SUI can be considered as having a "land bank" and it opportunistically adds to its inventory of land, which at present represents a pipeline of 16,000 additional sites.
Potential headwinds include an economic slowdown in the UK, in which management has seen a slowdown in the time between when a buyers puts in a down payment and when the deal closes. However, management is seeing positive momentum post-Q3 in that market, as noted during the recent conference call :
Obviously, the economic headwinds in the UK are fact that CPI is still double digit and it has an impact on the home sales decision making. But at the same time overall the portfolio performance is quite strong as we indicated. The retention is high. Site fees have been collected for the year.
But we are very cognizant and aware of the economy there and have adjusted the home sales as we look out to match what we’ve seen in this more recent period of time, which really did correlate with the March period of time. That being said, we can share that April we’ve been following closely and there’s been positive undertones
Notably, SUI carries a BBB investment grade rated balance sheet to handle near-term uncertainties. It carries reasonable leverage with net debt to EBITDA ratio of 6.1x, weighted average interest rate of 3.9%, and long weighted average debt maturity of 7.4 years.
Admittedly, SUI isn't a high income stock with a 2.7% dividend yield. However, the dividend is well-protected by a 53% payout ratio based on the midpoint of management's 2023 FFO per share guidance of $6.98. It also has a long track record of paying an uninterrupted dividend through at least 3 recessions since 1994.
Lastly, while SUI isn't cheap at the current price of $139 with forward P/FFO of 19.0, it isn't expensive either. This is considering its durable attributes, forward growth potential, and the 7% to 10% annual FFO per share growth that analysts expect in the 2024 to 2026 timeframe. Analysts have a consensus Buy rating on the stock with an average price target of $160.64 , implying potential for an 18% total return over the next 12 months.
Investor Takeaway
SUI is a well-managed MH, RV, and Marina REIT that has demonstrated continued robust NOI growth at the property level. This comes from sticky tenant relationships and an internal development program, which comes with a strong pipeline for future development. SUI also carries a modest amount of leverage and has a strong track record of paying a reliable dividend. While SUI isn't cheap, I find it to be reasonably priced at present for potentially strong total returns from here.
For further details see:
Sun Communities: Relax And Enjoy The Steady Flow Of Income