Manufactured housing plays an important role in the real estate market, providing affordable housing for retirees or families that in many ways would be priced out of the market. Sun Communities (NYSE: SUI), a real estate investment trust (REIT) that specializes in owning, operating, selling, and leasing manufactured housing, prides itself on being a leader in the industry.
With a strong track record and interest in over 142,000 developed sites that brings in $303 million in revenues, Sun Communities looks like an appealing buy. Let's take a look at who Sun Communities is, where they stand today, and whether we think they're a buy in the current market.
High-quality community living
Sun Communities primarily owns, sells, and rents mobile homes on a short- and long-term basis in both Canada and the United States, in addition to leasing vacation rentals and short-term and permanent camping spots in over 124 RV resorts. 72% of their revenue is attributed to their interest in mobile home parks and resorts, with the remaining 28% coming from yearly RV and transient RV rentals with a mixture of age-restricted communities and non-age-restricted communities.
The company does ground-up development, expansion, and redevelopment as well as general improvements for existing facilities to meet a higher quality and standard of living with luxury amenities and community features, with many of their sites being beachfront or lakeside. All their properties are located in highly desirable areas for retirees or vacation rentals, with over half of all sites being located in Michigan and Florida.
Where the company stands today
The company's latest second-quarter 2020 earnings missed the mark, coming in lower than expected. However, the company is still in a strong financial position with major expansion and development projects underway. COVID-19 had a direct impact on Sun Communities upon the initial outbreak, as it did with many other REITs. Certain RV communities shut down in response to the outbreak, but now all RV communities are reopened and fully operational. Despite increased expenses relating to COVID-19, the company achieved an impressive 97.3% occupancy rate for all sites, with RV sites achieving 98% occupancy and mobile home occupancy reaching 97%, a percentage above the same quarter of the previous year. Rent collections also remain in line with 2019 rates, at 97% and 98%, respectively, for both mobile home and RV rentals.
The company is rapidly expanding, having added five new communities and 1,445 new sites to their portfolio so far this year for a total cost of $132.3 million. Additionally, the company completed nearly 500 ground-up and expansion sites in Q2 2020. The company recently reduced their debt burden by over 2 basis points, extending their average weighted loan maturity bringing their total debt to earnings before interest, tax, depreciation, and amortization (EBITDA) to 4.8x, which is conservative ratio for REITs. Their fairly conservative 70% payout ratio means there is plenty of wiggle room for the company if revenues continue to dip.
Where the company's most vulnerable
The biggest risk the company faces right now is the uncertainty over further aid from the coronavirus pandemic. Many mobile home tenants are on a fixed or low income, meaning some of its tenant base could have suffered from a loss of job or income during the pandemic. Additional money from a stimulus package would help guarantee high collection and occupancy rates are achieved; however, the increased demand in short-term RV rentals will likely make up a portion of lost income for the remainder of the year.
Environmental threats are also a big risk for the company and something they have to be prepared for each storm season. A large portion of their portfolio resides in areas that experience storm threats like high winds or flooding, which could hit their portfolio hard.
Is Sun Communities a buy?
There are definite risks and vulnerabilities in this asset class, but the quality of the Sun Communities parks warrants a higher-quality tenant, adding a layer of security. The company's stock took a hit in early March and hasn't been able to regain its losses fully, meaning this company may be slightly undervalued at the present moment. Currently, the dividend yield is around 2.15%, not a high dividend return by any means, but I believe this company has plenty of room to grow in the coming years and is meeting a very necessary and desired demand in the marketplace. The third quarter is typically the strongest for the company, so their next release will help determine whether they are on the rebound and headed in the right direction as hoped.