Sun Communities Looks to Be a Buy Heading Into Earnings

Sun Communities (NYSE: SUI) will announce second-quarter earnings after the market closes on July 22. At this time, analysts expect SUI’s earnings to come in at $1.17 per share on revenue of $330.71 million. Sun Communities operates as a real estate investment trust (REIT).

If Sun hits those numbers, the company will post gains on both the top and bottom lines on a year-over-year (YoY) basis. That’s pretty impressive considering that companies in other sectors are looking at disastrous second quarters.

And it appears Wall Street believes the company will hit or exceed its numbers. The stock is up nearly 2.5% in midday trading. Let’s take a closer look at why investors may be getting excited about SUI stock.

The sun is still shining on this kind of REIT

Some REITs are facing a clear and present danger as restaurants, bars, and other entertainment and shopping venues remain closed during the pandemic. But Sun Communities doesn’t operate in those areas.

The company owns, operates, and finances manufactured housing communities in the Midwest and Southeastern United States. As of March 31, 2019 the company had a portfolio of 379 communities made up of 132,000 developed sites in 31 states and Ontario, Canada.

The company collects money in one of two ways. They can either collect rent from tenants who live in one of the company’s manufactured home rental units. Or they collect rent on the lot from resident-owned homes that are on the properties. 

The National Association of Realtors recently reported that sales of previously-owned homes jumped 20.7% in June. Analysts will be looking for the impact this trend may be having on the company’s properties.

The company’s portfolio also includes recreational vehicle communities and properties that serve as recreational vehicle sites, primarily for vacation purposes.

Sun Communities Occupancy and rent payments are on track

Investors may be concerned that Sun Communities is losing revenue as tenants find it difficult to pay rent due to a job loss or reduced income during the pandemic. However, that doesn’t appear to be the case.

Speaking on the company’s earnings call, Sun management spoke of the measures the company was taking to help tenants weather the pandemic. One of those steps was a hardship program that would allow the tenants to defer April and May rent with a repayment program that started in July.

As of the date of the company’s last earnings report, approximately 3% of the company’s tenants had applied and been approved for a deferral. Sun was estimating a deferral of $1.9 million for both April and May which includes both resident-owned homes on sites and the company’s manufactured housing rental units.

And more encouragingly, the company also said that as of April 22, they had collected 98% of its rents, which was on pace with 2019.

The shelter in place restrictions and subsequent re-openings are different in every state. And so while April marked the peak of lockdown conditions for some of the company’s properties, there will be others, including in the company’s home state of Michigan where lockdown conditions persisted significantly longer.

Sun Communities is also doing a good job with retention

At the end of 2019, Sun Communities' total portfolio occupancy rate was 96.7%. This confirms data that shows how Sun Communities residents stay on-site for an average of 14 years.

And leading into the pandemic, the company saw same community occupancy increase to 98.4% from 96.6% the year prior. And the company continues to see strength in home sales, which should continue to go up as the U.S. housing market showed continued strength.

Sun Communities - Slow and steady is a good combination

Sun Communities also has a solid balance sheet. At the end of March, Sun Communities had $380 million of unrestricted cash on its balance sheet with a trailing net debt to EBITDA ratio of 5.6x. The company has no material debt maturities until 2023.

 The company has also increased its dividend in each of the last three years. True, REITs are subject to different rules that require them to pay a significant portion of their earnings as a dividend. But the fact that the company is managing to increase its dividend shows that they are in a good place financially.

Sun Communities is not a sexy stock pick. It’s not even going to offer the highest dividend that you can find. However, an investment that investors made five years ago would have doubled by now. And those same investors would have collected a dividend along the way. In a market where many stocks are charging forward on little more than hope, Sun is offering solid numbers to justify your investment.