The share price of Sun communities (NYSE: SUI) is down 40% from its 2022 high. The Real Estate Investment Trust (REIT) now offers a dividend yield of 3.1%, putting it near the highest level since roughly 2018. Is this a buying opportunity, or is this fast-growing REIT slowing down?
Sun Communities has fallen below $125 per share, a level that would put the dividend yield at a nice round 3%. Given the company’s growth over the past decade, investors may find it an attractive entry point for growth and income stocks. It may sound strange to call a REIT that specializes in manufactured home communities, RV parks and marinas a growth stock, since its renters are typically focused on enjoying their retirement years, but Sun Communities has grown very quickly.
In 2010, the company owned 124 manufactured home communities, four specialty RV parks and eight properties that were a combination of both. In 2020, it owned 276 manufactured home communities, 136 RV parks and 34 properties with both. It also added an entirely new property type, with 106 marinas. As of the third quarter of 2024, Sun Communities owned 288 manufactured home communities in the United States, 179 RV parks and 138 marinas. It also had 54 manufactured home communities in the UK, adding a whole new country to the mix (it stopped breaking out mixed communities). It is clear that Sun Communities is in the expansion phase.
Between 2010 and 2022, investors happily paid for that growth, sending the stock price higher and higher. Then something changed. Core Fund from Operations (FFO) per share in 2022 was $7.35. The company forecast the 2023 figure to be between $7.22 and $7.42 per share. It ended at $7.10. Clearly, the company’s financial results fell far short of what investors should have expected, and they responded accordingly.
Sun Communities’ results haven’t exactly improved as 2024 has progressed. In the first quarter, core FFO was $1.19 per share, compared to $1.23 in the same quarter of 2023. The second quarter, core FFO per share was $1.86, compared to $1.96 in the second quarter of 2023. The figure for the third quarter of 2024 came to $2.34 per share. compared to $2.57 last year.
It looks like 2024 will be another bad year for core FFO. From a bigger perspective, it also appears that Sun Communities’ growth engine has stalled. The first major problem appears to be a rapid increase in operating costs. However, that’s just the tip of the iceberg for Sun Communities, due to the nature of its properties.
As the baby boomer population nears retirement, the number of people who would be interested in manufactured housing communities, RV parks and marinas is rapidly increasing. But as this group ages, there is a material risk that their interest will shift from enjoying their retirement to maintaining their health and well-being. That would indicate a shift toward more permanent living arrangements, including in senior housing projects that meet the increased health needs of older adults.
Rising costs will eventually be addressed. Sun Communities can increase rents and reduce costs over time. But once demand for the very specific types of properties it owns has peaked, a much bigger problem awaits. That’s the problem investors have to grapple with.
For conservative income investors, Sun Communities probably won’t be an attractive choice. The yield isn’t really high enough compared to other REITs to offset the uncertainty the company faces. For growth and income investors, that decision is much more complex. Rising costs are likely a temporary problem, but changing demographics could potentially put an end to the growth Sun Communities has experienced. More conservative investors will likely want to wait on the sidelines until there is more evidence that Sun Communities is back on the growth path, even though the stock is below $125 per share and yielding more than 3%.
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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.
Should You Buy Sun Communities While It’s Under $125? was originally published by The Motley Fool
