Commercial real estate has evolved as an asset class over the years. It has grown from mostly apartment buildings and office complexes to include an ever-growing list of income-generating properties.
Sun Communities (SUI 0.14%) focuses on more niche property classes. The REIT owns manufactured housing (MH) communities, recreational vehicle (RV) resorts, and marinas. The company's strategy of investing in these more off-the-beaten-path parts of the real estate sector has enabled it to face less competition for acquisitions. That's helped drive above-average income growth (supporting an attractive and rising dividend) and total returns for the REIT.
A leader in its niches
Sun Communities is a leading operator of properties focused on affordable housing and recreation. The residential REIT has an extensive real estate portfolio:
- North American MH: Sun Communities is the largest publicly traded owner/operator of MH communities in North America, with nearly 300 communities and 100,000 home sites.
- UK MH: It's the second largest MH owner-operator in the UK, with 55 holiday parks comprising 18,000 MH sites and 3,000 transient sites.
- RV Communities: It owns 182 RV communities in North America with 58,000 sites (roughly 31,000 annual and about 28,000 transient).
- Marinas: Sun is the largest and most diversified owner-operator of marinas in the U.S., with 135 locations consisting of 48,000 wet slips and dry storage locations.
The company's large and diversified portfolio supplies it with stable and growing rental income. MH communities are historically extremely durable investments because moving a manufactured home is expensive. That keeps turnover very low, enabling Sun Communities to raise rents even during a recession. Meanwhile, its RV and marina properties benefit from the growing demand for outdoor recreational experiences. That keeps occupancy high, enabling the REIT to steadily raise rates.
Sun Communities has generated positive net operating income (NOI) growth in every rolling four-quarter period over the last two decades. Since 2000, the REIT has grown its NOI at a 5.1% compound annual rate. That's faster than multifamily focused REITs (3.1%) and the REIT industry average (3.2%).
A stable and rising dividend
Sun Communities' durable and growing income supports its dividend. The REIT currently offers a 3.1% dividend yield, almost double that of the S&P 500. Sun Communities will generate about $31 of annual dividend income on a $1,000 investment at that rate. That makes it attractive for investors seeking to generate passive income from real estate.
The REIT also has a solid track record of paying dividends. It has either maintained or increased its payout every year since going public:
SUI Dividend data by YCharts
Sun Communities most recently increased its dividend by 5.7% in February 2023.
Ample expansion opportunities
Healthy income growth at its existing properties is a big driver for Sun Communities. However, it's not the REIT's only fuel source. It also has ample opportunities to invest capital into expanding existing locations and acquiring new properties to grow even faster.
The company has the potential to organically expand its existing MH communities by about 7,000 sites. In addition, it has room to expand its RV resorts by another 9,000 sites. It also sees the potential to convert half of its transient RV sites into annual leases. This switch historically increases revenue per site by 40% to 60% in the first year after conversion. The company steadily capitalizes on these expansion opportunities. For example, it expanded its existing communities by over 110 sites during the second quarter.
Sun Communities also has an excellent track record of making value-enhancing acquisitions. It will acquire expandable platforms and additional properties. In 2020, the company acquired Safe Harbor Marinas for about $2.0 billion, adding a portfolio of 99 owned marinas and eight managed for third parties. Meanwhile, it closed its acquisition of leading UK holiday community platform Park Holidays for $1.3 billion last year, purchasing 40 owned and two managed communities.
The company will also purchase additional properties as opportunities arise. For example, during the first quarter, it spent $107 million to buy one MH community and one marina in the U.S. It also spent $34.9 million to acquire three pieces of land in the U.S. and UK to potentially develop another roughly 1,250 sites.
Sun Communities' combination of organic and acquired growth has helped drive strong earnings growth. That's helped increase the value of the company. Add the dividend, and Sun Communities' total return has outperformed the S&P 500 and other REITs during the last five- and 10-year periods. For example, over the last 10 years, Sun Communities has grown a $1,000 investment into over $3,800 compared to less than $3,200 for a similar investment in an S&P 500 index fund.
Going off the beaten path can pay big dividends
Sun Communities pays a solid and growing dividend. On top of that, its investment strategy of focusing on niche property classes has enabled it to increase its income at an above-average rate. These two forces combined help the REIT generate strong total returns.
With ample expansion opportunities, the REIT should continue growing its dividend and producing attractive returns. That makes it look like a great place to invest $1,000 these days.
