Sun Communities (NYSE: SUI) is the largest residential REIT, or real estate investment trust, focused on manufactured homes by market cap, according to Nareit's most recent update. It's an industry consolidator with a long history of creating value for investors. The REIT has outperformed both the major REIT index and the S&P 500 over the last decade by steadily growing its community count, cash flow, and dividend.
Here's a look at what seems to be ahead for the leading REIT focused on consolidating highly fragmented real estate sectors.
Where Sun Communities is today
Sun Communities currently owns and operates 426 manufactured housing and recreational vehicle (RV) communities across 32 states and Ontario, Canada, consisting of more than 143,000 developed sites. It primarily leases sites and manufactured homes to those seeking affordable housing options under annual contracts. It also generates income from transient RV site rentals and manufactured home sales.
Where Sun Communities seems headed over the next three years
Sun Communities has spent more than $5.8 billion since 2010 to acquire new communities, growing its portfolio more than threefold. During the first half of 2020, the company bought five communities for $132.3 million, adding 1,445 sites.
This steady diet of acquisitions will likely continue over the next three years. Given the company's acquisition prowess, it has lots of visibility into the current pipeline of opportunities as well as those that will likely come available in coming years. It also has a strong balance sheet to support this growth, with a low leverage ratio and minimal upcoming debt maturities through 2024.
While Sun Communities' primary focus has been on acquiring manufactured housing and RV communities, that will likely change over the next three years. That's because it recently agreed to buy Safe Harbor Marinas for $2.11 billion. Safe Harbor is one of the largest, most diversified marina operators in the country, as it owns and operates 101 locations and manages another five on behalf of third parties across 22 states.
The marina sector, much like both manufactured housing and RV communities, is highly fragmented. The top five operators -- led by Safe Harbor, which is more than three times larger than its next rival -- control a mere 4% of the country's 4,000 marinas, leaving significant consolidation potential. Sun Communities plans to allow the company to operate independently and continue acquiring marinas.
Meanwhile, Sun Communities has three notable organic expansion drivers within its RV and manufactured housing operations:
- Develop or redevelop communities: The REIT aims to start two to four new development projects each year. It has already spent $83 million to deliver 300 sites across four communities in 2020 and is on track to deliver 550 to 750 new sites across five properties this year.
- Expand existing communities: The company has about 7,600 vacant sites available for expansion within its existing communities. It has already spent $42 million to deliver 200 new sites across five communities in 2020.
- Transient RV site conversions: The company has been steadily converting transient RV sites to annual contracts. It currently has 22,300 short-term rental sites and converted an average of 1,100 sites per year. Those conversions typically yield a 40% to 60% revenue increase during the first year.
Sun Communities should have no problem continuing to expand its portfolio over the next three years. It will soon operate in three highly fragmented industries (manufactured housing, RV communities, and marinas) with abundant consolidation potential. Meanwhile, it sees internal expansion opportunities in both its manufactured housing and RV community segments as it continues to increase the supply of affordable housing options in the country.
Expect an even bigger REIT in three years
Sun Communities is a consolidator. It has been steadily buying up manufactured housing and RV communities over the last decade, growing into the largest operator in this still highly fragmented space. Meanwhile, it's adding a new growth platform in marinas, another highly fragmented industry ripe for consolidation. As long as the REIT maintains a strong financial profile, it should have no problem continuing to expand its portfolio, earnings, and dividend over the next three years.