Why Sun Communities (SUI) Makes Sense for Both Value and Growth

Investors are cheering strong housing starts data. In its last report issued in December 2019, the National Home Builders Housing Market Index moved up five points to hit its highest point in two decades. But what is particularly good news for the home builders is that this continues an upward trend.

The economy continues to show strength in the areas of low unemployment and rising wages. And the Federal Reserve’s decision to lower interest rates appears to be giving prospective homebuyers the catalyst they needed to get off the sidelines.

With that said, there is a segment of the housing market that is growing and it could be very profitable for investors. Manufactured homes have been growing in popularity for a variety of reasons. One of the largest is the aging of our population, particularly the retiring baby boomer generation.

How to invest in manufactured homes?

Manufactured homes are usually part of a development community that is owned by a real estate investment trust (REIT). A REIT is a corporation (usually publicly traded) that owns or finances real estate. A REIT trades like any stock, but it has to meet certain conditions per the Securities and Exchange Commission (SEC).

REITs are commonly thought of as a value investment. That’s because a REIT is obligated to pay out at least 90% of its profits as a dividend. But as the housing market surges, REITs are also becoming a growth play.

Not all REITs are the same

Just as there are different equity sectors and even some diversification within different sectors, there are also different classifications of REITs. In this way, a REIT is similar to a mutual fund or exchange-traded fund (ETF).

Some REITs, for example, are focused on commercial development (shopping malls, etc.). Others may focus on health care properties (hospitals, medical centers, etc.). And some focus on manufactured homes. One of the leading REITs in this space is Sun Communities Inc. (NYSE:SUI).

Sun Communities is one of the largest REITs in North America. As of September 2019, SUI had a portfolio of over 389 communities throughout the United States and Ontario, Canada. Approximately 7% of the United States population lives in manufactured housing. Some of this is due to their affordability, particularly as it compares to traditional housing.

The median price of houses relative to median household income is nearly $60,000 (approximately $59,000). This makes manufactured homes a much better investment for retirees. Why spend over five times your annual income on a traditional home, when you can spend 1.4 times your annual income on a more affordable, manufactured home.

A key metric for evaluating REITs is Net Operating Income (NOI). By that measure, SUI posted a 7.2 same-store NOI growth on year-over-year (YoY) basis. This is significantly higher than most apartment REITs which came in between 2-4% YoY NOI. What is equally impressive for Sun Communities is that they are seeing a rise in same-store occupancy of 2.1% YoY.

One of the reasons for this is that manufactured housing tends to be more affordable than traditional housing. SUI also benefits from “stickiness” that is not always common among REITs. The average tenant stay is 14 years. While past performance is not a guarantee of future performance, the fact that these communities have high occupancy acts like a subscription in terms of repeatable, predictable income. This is a factor that is critically important to investors.

Is Sun Communities a growth play right now?

Through September, Sun had sales growth of 13%. This propelled its share price up 46% for 2019. And in the last three years, the stock has shot up 100%. The industry average for both time periods is 20%.

The good news for investors is, despite its impressive growth, SUI shares are currently selling at a slight discount. As of January 2, the stock was approximately 9% below its 52-week high. Another positive technical indicator for the stock is that it has slipped below its 50-day moving average. In the past three years, the stock has rarely stayed below that line for long. Zack’s is forecasting revenue growth of just over 7% for 2020 with an increase in share price of 9% from current levels.

And as we mentioned above, REITs are usually regarded as good dividend stocks and SUI is no exception. The stock’s current dividend yield is 2%, which is higher than that of the 10-year U.S. Treasury note.