Sun Communities (SUI 0.50%) has a niche property type that's positioned to prosper as baby boomers retire. It's not a healthcare real estate investment trust (REIT), though it does offer seniors an affordable housing option via its collection of mobile home parks. But recent moves suggest that management is taking the portfolio to the next level.
Maybe not what you think
When mobile home parks get shown on television shows and in movies they are generally presented in a rather unflattering light. Those types of trailer parks undoubtedly exist, but they aren't exactly representative of the category. Sun Communities' mobile home assets are more like little resorts, with amenity-filled properties in high-demand markets in coastal regions and retirement havens. Mobile home parks make up around half of the real estate investment trust's rents today.
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In addition it also generates around 30% of rents from recreational vehicle (RV) parks. These are a lot like the company's mobile home assets, only the "homes" can be driven to new locations. Again, being in the right places with desirable amenities is a huge benefit. Notably, Sun Communities expects its full-year 2021 same property net operating income (NOI) to increase by roughly 11% over 2020 levels. That's a sign that demand is high for the properties this REIT owns. And it is helping to power the company's funds from operations (FFO) growth, which management expects to be a huge 27% at the midpoint of its guidance. In 2022, meanwhile, it expects to be able to increase rents in its mobile home and recreational vehicle properties in the mid-4% range.
The problem is that they aren't making any more property, and most of the best locations in these two sectors are already locked up. There are still desirable properties that can be bought, but not nearly as many as there were, say, a decade ago. So what's a REIT to do? Get creative.
Big shifts
The first big strategic change at Sun Communities took place in late 2020 when it agreed to buy Safe Harbor Marinas for $2.1 billion. This expanded the REIT's portfolio into a new category that had rough similarities to its existing business. With the addition of Safe Harbor's more than 100 marinas, this business now accounts for around 19% of rents. More important, it gives the company a new avenue for growth.
SUI data by Y Charts
But Sun Communities isn't done yet. It recently agreed to buy Park Holidays UK for roughly $1.3 billion. This adds 40 mobile home parks to the REIT's portfolio. It clearly understands this business, but the key here isn't what type of property it is buying but where it is doing the buying. Park Holidays is the second largest RV park in the United Kingdom. Notably, the management team that's currently in place at Park Holidays is staying put, so not only is Sun Communities gaining a foothold in a new market, but it is also adding the expertise needed to operate in that market. Sun Communities expects the deal to be accretive to core FFO in 2022. But, once again, the big draw is that it creates a new avenue for growth, this time a geographic one. After the deal is complete, the REIT expects mobile home parks to make up 45% of rents, RV parks 24%, marinas 19%, UK mobile home and RV parks 7%, and combination mobile home and RV parks in North America 5%.
Notably, in both cases, Sun Communities adds material balance sheet capacity to the business it has taken on. The REIT has an over $20 billion market cap, and the average interest rate on its debt is just 3.3%. That suggests that it can use both of these moves as platforms for further acquisitions, which are a key piece of its long-term growth plan. Only now, instead of just two primary drivers (North American mobile home and RV parks), it has four (North American Mobile, RV parks, UK parks, and marinas).
The future's looking bright
To be fair, the business strength here in the face of the pandemic and the new growth opportunities added over the past year or two have not gone unnoticed. Value-conscious investors probably won't find Sun Communities' historically low 1.7% dividend yield all that attractive. However, the dividend has increased 27% over the past five years, or around 5% a year. That's not bad for a large REIT, and current shareholders should be pleased with the moves management is taking, as they suggest that more solid dividend hikes will be forthcoming in the years ahead. And if there's a broad and indiscriminate market sell off, Sun Communities could easily become attractive to value types as well.
