Sun Communities: a real estate business at an attractive price (SUI)

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Sun Communities (NYSE: SUI) stocks have fallen 44% year-to-date and have significantly underperformed the Vanguard REIT (VNQ) index/ETF. While the price chart of the recent past is indeed ugly, over the past decade. SUI-Shares have performed very well against VNQ as mobile home and RV parks are a fantastic business with favorable long-term supply and demand dynamics. With shares selling at the low end of their historical range, I believe now is the perfect time for a long-term conservative investor to acquire shares of Sun Communities.

Insight

Insight (Sun Communities Investor Presentation)

Supply (or lack of supply)

While we have seen a boom in apartment construction that is expected to hit the market over the next 12-18 months (mainly in the sunbelt markets), there has been no boom in the supply of mobile home parks. The growth of mobile home park supply is limited by two factors, the main one being NIMBYism (Not In My Back Yard). Homeownership associations near a proposed mobile home/RV park tend to oppose development as homeowners believe it will create a blight and negatively impact property values. single-family homes.

ELS Procurement

New very limited offer from MH (Equity Lifestyles Investor Presentation)

Over long periods of time, supply in the mobile home sector has remained roughly flat – while we are seeing a small number of new mobile home park openings, this is offset by mobile home park closures. Mobile home/RV park closures are usually the result of converting the property to “its highest and best use”, for example redevelopment of the property into a community for single family homes or even a industrial park.

These supply limitations have helped SUI produce very stable results, as shown below.

SUI NOI xcycle

Same-store NOI growth across all cycles (Sun Communities Investor Presentation)

Request

The demand outlook for mobile home park operators is excellent as

1.) Mobile homes are the most affordable form of housing with total monthly costs significantly lower than renting an apartment or owning a single family home. This is becoming increasingly important as apartment rental rates have skyrocketed over the past two years, while the cost of owning a single-family home has risen further due to soaring real estate prices. associated with soaring mortgage rates.

2.) Life in a mobile home park is favored by those 55+ (in fact, many SUI properties are age restricted i.e. 55+ only ), a market segment that will grow faster than the overall population over the next 15 years.

3.) There has been a boom in RVs in the United States in recent years, which bodes well for transient occupancy in the company’s RV segment.

Other Things I Like About the Mobile Home / RV Park Business

Unlike some classes of real estate assets, such as offices or retail, mobile home/RV parks require very little capital outlay to maintain. In the vast majority of cases, the tenant (and not SUI) owns the structure that is on SUI’s land. As such, there is very little capital outlay required to maintain the existing facility (only common areas/leisure facilities).

SUI Investments

Low capital expenditure and high switching costs (Sun Communities Investor Presentation)

If the tenant wishes to move, they must move the structure (or, more likely, sell the structure to SUI who will then lease or sell it), which is quite expensive ($6,000 – $10,000; equivalent to approximately one year site rent). This high cost of moving ensures that tenants are much less likely to move out due to a rent increase, as evidenced by their average tenure of 14 years.

Growth Opportunities

SUI has grown organically (impressive that the NOI of the same store has increased by 7% per year over the past decade) and through the acquisition of new properties. In recent years, the company has gone beyond its core US RV/RV business by acquiring a US marina business as well as an RV/RV business. United Kingdom.

growth

Growth Opportunities (Sun Communities Investor Presentation)

As shown below, marina business has similar characteristics to RV/RV business: limited new supply, favorable demand, and high switching costs.

Marina

Marina Industry Fundamentals (Sun Communities Investor Presentation)

Although the fundamentals of marina ownership are attractive, marinas are generally available at higher capitalization rates (less competitive market for acquisitions), which should provide SUI with another avenue to enable continued above-market growth. in FFO/share.

Evaluation and conclusion

After the share price plunge this year, SUI is trading at just 15.5 times my estimated FFO for 2023 per share. This is at the low end where the stock has traded over the past decade (a range of 14.5 to 29 times FFO forwards) and well below Equity’s valuation. LifeStyle (ELS), a pair of mobile homes/RV parks.

Interestingly, after this year’s decline, SUI is trading in line with large cap multi-family REITs when historically it has traded at a 10-15% premium (and as I wrote recently, I find multi-family REITs attractive at today’s prices). I believe the current share price represents an attractive entry point for long-term, risk-averse investors. I expect the stock to revalue to 20-22x FFO (mid-historical range), which would represent a 30-40% upside.

Risks

1.) REITs have fallen out of favor in 2022 as interest rates have soared and it is possible that SUI stocks will see further price declines in the near term.

2.) Although management is used to creating shareholder value through acquisitions, it is possible for the company to acquire something that does not create shareholder value.


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