With the stock market tumbling, it may not feel like things are heating up for the summer season, but Sun Communities (SUI -1.15%), a real estate investment trust (REIT) that invests in mobile home communities, RV resorts, and marinas across Canada, the United States, and the United Kingdom, is still red hot.
Despite being down 27% this year, this under-the-radar stock could be one of the summer's hottest buys. Here's why.
RV mania isn't slowing down
The coronavirus pandemic sparked an RV buying frenzy as people sought a safer way to travel. 2021 was a record year for the industry, with RV sales and deliveries up 47% from pre-pandemic levels. Cut to 2022, and many expected RV sales to slump as gas prices soar and international travel reopens, but it seems this iconic American pastime is here to stay.
As of April 2022, RV shipments are up 14.1% from last year's already record-breaking year, which is great news for Sun Communities, which owns 192 RV and hybrid RV-marina resorts. Its first-quarter transient RV revenues were up 38.5% over last year, while Memorial Day, a holiday that often marks the start of the summer season, saw revenues grow 12.5% above 2021 levels.
For RVers, the summer is doing anything but cooling off. Even if gas prices and recession concerns put pressure on RV travel, it's unlikely that RV owners will ditch the RV altogether. A recent survey found that of the 700 respondents who owned an RV, only 3% said gas prices would influence them not to use their RV. The majority stated they would take fewer trips, while a smaller percentage said they would cut back elsewhere.
Occupancy levels and revenues should continue to grow for the company over the summer, but its revenue opportunities don't end there. Sun Communities is actively focused on converting transient tenants to long-term tenants, which has historically increased revenues by 40% to 60% per site due to increased occupancy. As of April 2022, its transient conversions were in line with pre-pandemic levels. Plus, the company also has its core business to help boost its growth, which is booming.
Its core business is as strong as ever
Sun Communities earns around 48% of its total revenues from renting and selling homes in its 283 mobile home resort communities. Affordability is by far the biggest concern for housing today. Decade high inflation, rising mortgage rates, and an extremely competitive and expensive housing market make alternative housing solutions like mobile homes increasingly popular.
Same-property bookings, which include leasing non-transient spaces in its RV resorts and mobile home communities, are 4% ahead of last year for the second quarter of 2022 and 10% ahead of the first half of 2021. A positive sign that despite the traditional housing market losing steam, it's still seeing strong demand and steady growth. Its occupancy levels remain at 96.7%, with 78% of its mobile home communities having an occupancy rate above 98%.
The company's debt did increase after its acquisition of Park Holidays, the premier mobile home park and RV resort operator in the UK, at the start of 2022, which now sits at 5.9 times earnings before taxes, income, depreciation, and amortization (EBITDA). However, it's still in a strong financial position and shows no signs of its higher debt hindering its forward momentum. It has five new mobile home park developments under construction and an expansion of 600 sites across existing properties, which will help it meet the growing demand for affordable housing.
Why it's a smoking buy right now
When many companies are battling shrinking revenues and slower sales, Sun Communities' strong performance offers investors some relief. And thanks to the bear market pushing share prices down 27% year to date, its historically conservative dividend yield is now over 2% while its pricing is more favorably valued at 23 times its funds from operations (FFO),a metric that works similar to the price-to-earnings (P/E) ratio for REITs.
I bought more shares of Sun Communities after the latest market dip, taking advantage of its favorable pricing and great exposure to these red-hot industries. While future market movement could push prices down further, its business model is still going strong.
