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Sun Communities (NYSE: SUI) made a big splash during the pandemic. The real estate investment trust (REIT) expanded its niche property focus into the marina sector by acquiring Safe Harbor Marinas for about $2.1 billion. That deal gave it an expandable platform in the highly fragmented marina sector.
The REIT is now cashing in on this investment. It has agreed to sell Safe Harbor Marinas to affiliates of Blackstone infrastructure for a whopping $5.65 billion in cash. That sale will lock in a $1.3 billion windfall profit for shareholders. It will also streamline Sun's focus and significantly enhance its already solid balance sheet.
Cashing in on the big splash
Sun Communities has agreed to sell 100% of its interest in Safe Harbor Marinas to affiliates of Blackstone. The $5.65 billion all-cash price represents a 21 times multiple on the funds from operations (FFO) the business produced last year -- a strong valuation. The company expects the sale to generate $5.5 billion of pre-tax proceeds after transaction costs, which it intends to use to strengthen its already solid investment-grade balance sheet. The sale will initially lower the company's leverage ratio from about 6 times to between 2.5 times and 3 times at closing, further enhancing its solid investment-grade balance sheet (BBB/Baa3 bond ratings).
The REIT expects to realize a substantial gain on the sale of $1.3 billion over its four years of ownership. The company initially paid about $2.1 billion for Safe Harbor in 2020. At the time, it was the largest and most diversified marina owner with 99 properties and 30,000 wet slips (and another 8,000 dry racks) across 22 states. Under Sun's ownership, Safe Harbor has grown to 138 marinas with 49,000 wet slips and dry storage spaces.
Sun Communities is evaluating strategies to minimize the tax impact of that gain for investors. That could include paying a one-time special dividend or completing real estate exchange transactions to expand its core manufactured home and RV platforms.
Getting back to its roots
Safe Harbor Marinas has turned out to be a fantastic investment for Sun Communities. It bought the business during the pandemic at an attractive price. It has since grown its portfolio, which has further enhanced the value it has created for shareholders.
However, selling the business will enable Sun Communities to refocus its business strategy on its core North American manufactured housing and RV community portfolios, which should produce 90% of its net operating income (NOI) going forward, with the rest coming from its U.K. holiday parks. Those properties produce very durable annual income streams that come primarily from leases. Contrast that with the marinas, which have some more variability in their income streams due to service, retail, dining, and entertainment offerings and other non-annual revenue streams.