Company Reports

No-moat Sun Communities' first-quarter results were slightly better than we anticipated, and we are reaffirming our $172 fair value estimate. Same-store occupancy for the manufactured home segment fell 60 basis points sequentially but rose 70 basis points year over year to 96.7%. Rental rates increased 6.0%, leading to same-store revenue growth of 6.8%, beating our 4.9% estimate. Operating expenses were up only 3.4%, so same-store net operating income grew 8.0% for the segment. Recreational vehicle revenue growth continued to show significant divergence, with the annual business up 13.4% and the transient business down 13.1%. However, operating expenses for the segment were down 1.7%, so same-store NOI growth came in at 8.1%. Combined with marina same-store NOI that was up 7.5%, total company same-store NOI grew 7.9%, better than our 7.0% estimate. As a result, Sun reported core funds from operations of $1.19 per share, $0.04 better than our $1.15 estimate.

Sun Communities is a residential REIT that focuses on owning manufactured housing, residential vehicle communities, and marinas. The company has grown significantly over the past decade after spending $11.8 billion since 2010 to build a portfolio of 667 properties from just 136 at the end of 2010. Sun targets owning properties that are desirable as second homes or vacation properties with nearly 50% of the portfolio located in either Florida or Michigan near major bodies of water.

Sun Communities is a residential REIT that focuses on owning manufactured housing, residential vehicle communities, and marinas. The company has grown significantly over the past decade after spending $11.8 billion since 2010 to build a portfolio of 667 properties from just 136 at the end of 2010. Sun targets owning properties that are desirable as second homes or vacation properties with nearly 50% of the portfolio located in either Florida or Michigan near major bodies of water.

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

Sun Communities is a residential REIT that focuses on owning manufactured housing, residential vehicle communities, and marinas. The company has grown significantly over the past decade after spending $11.8 billion since 2010 to build a portfolio of 667 properties from just 136 at the end of 2010. Sun targets owning properties that are desirable as second homes or vacation properties with nearly 50% of the portfolio located in either Florida or Michigan near major bodies of water.

Sun Communities reported fourth-quarter results that were ahead of our estimates, giving us confidence in our $170 fair value estimate for the no-moat company. Same-store occupancy for the manufactured housing portfolio increased 70 basis points year over year to 97.3%, slightly better than our 97.0% estimate, and same-store revenue was up 8.6%, also slightly better than our estimate of 8.3% growth. Revenue for the residential vehicle segment was up 2.1% as the membership portion grew 15.8% while the transient portion declined 17.7%. Finally, the marina segment saw revenue growth of 8.2% in the fourth quarter. Combined, same-store revenue growth for the whole company was 6.3% in the fourth quarter. Meanwhile, operating expenses for the same-store portfolio were only up 0.3% as supplies and repairs fell 16.3% and utility costs were down 8.3%. As a result, total same-store net operating income, or NOI, grew 9.6% in the fourth quarter. Sun reported core funds from operations, or FFO, of $1.34 per share, which was ahead of our $1.25 estimate.

Sun Communities is a residential REIT that focuses on owning manufactured housing, residential vehicle communities, and marinas. The company has grown significantly over the past decade after spending $11.8 billion since 2010 to build a portfolio of 670 properties from just 136 at the end of 2010. Sun targets owning properties that are desirable as second homes or vacation properties with nearly 50% of the portfolio located in either Florida or Michigan near major bodies of water.

Sun Communities is a residential REIT that focuses on owning manufactured housing, residential vehicle communities, and marinas. The company has grown significantly over the past decade after spending $11.8 billion since 2010 to build a portfolio of 670 properties from just 136 at the end of 2010. Sun targets owning properties that are desirable as second homes or vacation properties with nearly 50% of the portfolio located in either Florida or Michigan near major bodies of water.

Third-quarter results for Sun Communities were better than we anticipated, giving us confidence in our $173 fair value estimate for the no-moat company. Same-store occupancy increased 20 basis points year over year to 97.0%, slightly better than our estimate of 96.8% for the third quarter. Manufactured housing same-store revenue was up 7.4%, below our estimate of 10.0% growth, but recreational vehicle same-store revenue was up 2.2%, better than our estimate of a 0.2% decline, while marina same-store revenue was up 8.4%, in line with our estimate. Combined, total company same-store revenue was up 5.5%. Meanwhile, same-store operating expenses were only up 3.0% in the quarter, leading to same-store net operating income growth of 6.7%, which was better than our estimate of 4.8% growth in the quarter. As a result, Sun Communities reported core funds from operations of $2.57 per share in the third quarter, $0.15 better than our $2.42 estimate.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

Sun Communities reported second-quarter results that were in line with our expectations, leading us to reaffirm our $173 fair value estimate for the no-moat company. Occupancy for the manufactured housing segment increased 10 basis points sequentially to 96.9%, slightly better than our estimate of flat growth. Manufactured housing rent increased 5.7% year over year, in line with our estimate, while residential vehicle rent increased 8.6% year over year, which beat our estimate of 3.7% growth. However, the company continues to transition RV sites to annual membership locations, which pay a consistent level of rent throughout the year, from transient locations, which collect higher revenue during the busy vacation season but significantly lower in the other parts of the year. As a result of this shift in business mix, same-store net operating income growth for the RV segment was 3.3% in the second quarter, matching our estimate. Combined with same-store NOI growth of 5.7% for manufactured housing and 11.7% for the marina portfolio, total company same-store NOI growth was 6.3% in the second quarter. Sun Communities reported core funds from operations of $1.96 per share, which is a penny better than our estimate for the quarter.

Sun Communities is a residential REIT that focuses on owning manufactured housing, residential vehicle communities, and marinas. The company has grown significantly over the past decade after spending $11.8 billion since 2010 to build a portfolio of 671 properties from just 136 at the end of 2010. Sun targets owning properties that are desirable as second homes or vacation properties with nearly 50% of the portfolio located in either Florida or Michigan near major bodies of water.

We are initiating coverage on manufactured housing-REIT Equity Lifestyle Properties with a fair value estimate of $77 per share and on manufactured housing-REIT Sun Communities with a fair value estimate of $173 per share. We assign both companies a no-moat rating, a Medium Uncertainty rating, and a Standard Capital Allocation rating. We view both companies as currently trading a material discount to our fair value estimates at current prices.