I love a good value buy. And right now, market volatility means a ton of great stocks, including real estate investment trusts (REITs), are trading at a discount.
Sun Communities (SUI 1.48%) in particular is down 14% year to date, despite having one of its best-performing years on record in 2021. I personally see a lot of potential and growth momentum for the company moving into 2022 and beyond, which is precisely why I'm putting $1,000 into this residential REIT.
Image source: Getty Images.
A closer look at Sun Communities
Sun Communities is the largest residential REIT specializing in the ownership, leasing, and sales of mobile homes, marina slips, and recreational vehicle spots in its 602 resorts across the U.S. and Canada. The majority of its portfolio, about 62%, is derived from mobile homes, where it either rents the units on annual leases or sells them outright and collects monthly lot rental fees. The remainder of its portfolio is in RV resorts (19%) and marina wet slips and dry storage (19%), which are both doing exceptionally well right now.
Its revenue in 2021 increased 62.5% year over year, while net operating income (NOI) grew 188%, and funds from operations (FFO) jumped 27%. This isn't because 2020 was a bad year for the company, which would make any improvements in 2021 seem like a huge gain in comparison. As the pandemic lingers on, the company is simply benefiting from soaring demand for mobile homes, both for rent or sale, as well as for RVs and boat slips.
Its explosive revenue growth over the past year is definitely impressive, but it's not an anomaly. Sun Communities has consistently performed well, with a 5% compounded annual growth rate (CAGR) for its NOI since 2000, more than double that of a basket of other multifamily REITs. It has also managed to outperform the S&P 500 as well as its closest competitors, Equity Lifestyle Properties and UMH Properties, for the past 10 years.
Image source: Getty Images.
Its growth isn't done yet
Sun Communities entered 2022 in a strong financial position, with more than enough cash on hand to cover its dividend payments and debt maturities coming due in 2022. Its total debt ratio is 5.7 times earnings before taxes, interest, depreciation, and amortization (EBITDA), which is slightly elevated, but historically this debt ratio has fluctuated between 4 times to 7 times without major concern.
Its growth prospects are one of the reasons I think this company is such a great buy right now. In 2021, the company added 2,483 sites to its portfolio, while its properties across its mobile home communities and RV resorts were 97.4% occupied at year's end. And demand for mobile homes and RV spaces is only getting stronger, with pandemic-related concerns hindering travel options and home prices and rental rates continuing to climb.
Sun Communities is also in the process of acquiring Park Holidays UK, the premier mobile home and RV resort operator in the U.K. This acquisition, which is scheduled to close in Q1 2022, will add 15,326 sites to its portfolio.
I've already made my first investment in the company, which was roughly half my total $1,000 investment. I plan to purchase my second round of shares in the next few weeks once I see which way the market continues to move. Further market volatility means I could purchase shares at a notable discount.
Right now, Sun Communities is trading at roughly 28 times its FFO, meaning today's price is lower than recent highs, but it's still on the more richly valued side of things. But richly valued or not, its growth prospects, recent performance, and business model make it a sound buy for long-term investors.
