Sun Communities(NYSE: SUI) is a manufactured housing real estate investment trust (REIT). However, that's not really the whole picture because these assets only make up a little more than half of the company's rent roll. To decide if you want to buy, sell, or hold this REIT, you need to look at what's happening today, consider the future opportunities it has, and take the risk/reward balance into consideration. Here's a quick overview of what you need to think about.
Buy Sun Communities
The biggest piece of Sun Communities' business is its manufactured housing communities, with the vast majority located in the U. S. It owns some U.K.-based communities, as well. Manufactured housing is an affordable alternative to a regular home or an apartment. The important dynamic is that Sun Communities owns the land, leasing it to the tenant, while the tenant owns the structure, which is usually built at a low cost in a factory and shipped to the site.
Image source: Getty Images.
The rest of Sun Communities' business is split between parks for recreational vehicles, or RVs, (around 26% of rents) and marinas (21%). These are lifestyle properties where people either choose to live as nomads in an RV, often in early retirement, or decide they want to own a boat, usually something that more wealthy individuals choose. All in, the REIT has an interesting mix of assets.
Sun Communities' stock is down roughly 40% from its highest point in early 2022. A period of rising costs dented its growth and led to management efforts to cut costs and reposition the company for the future. That effort shifted into higher gear in late 2024 with the announcement of a leadership change. There haven't been many specifics about how the current strategic plan might be altered.
If you believe that Sun Communities can get back onto the growth track, it could be worth buying after the share price pullback. Just make sure to keep an eye on the management transition to ensure that the new leader's goals line up with your expectations.
Hold Sun Communities
The hold thesis is basically the same. You need to believe, even after the cost-cutting efforts so far, that a new chief executive officer will find more ways to streamline Sun Communities' business. That's not unreasonable, given that the retiring CEO had been with the company for four decades. There might have been inefficiencies that crept into the system that were missed, or that could be dealt with more quickly by a new leader. In order to continue sticking around, however, you need to believe that a turnaround is in the cards. Otherwise, you might want to consider capturing your losses here for tax purposes.
Sell Sun Communities
The sell thesis is bigger-picture in nature. While the core manufactured housing business is quite stable, many regions frown on this type of property. Sun Communities' growth over the years has been driven materially by acquisitions. The best opportunities are likely gone at this point, meaning that acquisitions are probably going to be less of a growth driver. The company can continue to build out its own properties, adding new space on undeveloped land, but that can only last for so long. Slow and steady seems the most likely outcome as the REIT raises rents on existing tenants.
RV parks and marinas are a bit more difficult to quantify. Living in an RV is usually a lifestyle choice among older adults (who choose to live the so-called RV life) and one that was more popular in years past. As current RVers age out, it isn't clear that there will be a large cohort to replace them. And, like manufactured housing, RV properties aren't a favorite in many communities when it comes to development efforts. Marinas, meanwhile, tend to serve wealthy individuals. Although that provides some resilience, there are only so many locations for new marinas, particularly in the face of environmental issues. Thus, the historical growth that has come from its marina acquisitions may not be indicative of the opportunities ahead.
All in, even if Sun Communities manages to cut costs, it isn't clear that it can return to historical growth levels. That brings up the dividend yield, which is roughly 3%. The average REIT is offering a yield of 3.8%. That suggests that Wall Street is still paying a premium for this REIT's shares despite the huge stock pullback. If the company's growth doesn't rebound to historical levels, there is a very real chance that the stock will remain moribund for an extended period of time.
If you aren't willing to sit around and wait, you might want to move on or simply avoid Sun Communities. If you are looking for a high-yield stock, meanwhile, it clearly isn't the best option.
A lot depends on the turnaround
Sun Communities appears to be at a crossroads. The historical story here is very strong, but Wall Street has begun to realize that the future may not be like the past. If that's the case, Sun Communities deserves a different, and likely lower, valuation than it has had in the past. The big stock price drop could be the outcome that is starting to take shape. Unless you believe the company can return to its former growth rates, most dividend investors will probably find better opportunities elsewhere.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Sun Communities. The Motley Fool has a disclosure policy.
