Sun Communities REIT: Income And Great Total Return Play

Summary

• Sun Communities' total return overperformed the Dow for the 54.5-month test period by 75.80%.
• Sun Communities' dividend is 3.1% and has been increased three of the last 10 years, and the dividend is well covered.
• Sun Communities can continue its steady upward growth trend benefiting from the increasing demand for low-cost housing as the population increases.

This article is about Sun Communities (NYSE:SUI) and why it's a buy for the income and total return investor that that is being reviewed by The Good Business Portfolio guidelines. Sun Communities is a specialty real estate investment trust (REIT) in the manufactured housing sector.

Fundamentals of Sun Communities will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return And Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways And Recent Portfolio Changes.

Good Business Portfolio Guidelines.

Sun Communities passes 8 of 11 Good Business Portfolio Guidelines a poor score, a good score is 10 or 11. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review." These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average. Some of the points brought out by the guidelines are shown below.

Sun Communities is a mid-cap company with a capitalization of $6.4 Billion. They are one of the largest companies in the manufactured housing business. This size will allow SUI the ability to buy and add smaller companies to continue its great long-term growth.

Sun Communities has a dividend yield of 3.1%, and its dividend has been increased for three of the last 10 years, not meeting my requirement for dividend growth. The payout ratio of FFO is high at 70% because of its REIT designation. Sun Communities therefore is a dividend income story as the demand for the manufactured housing continues to increase with the population growth.

Sun Communities income is great at $1.10/share FFO which leaves Sun Communities plenty of cash flow, allowing it to pay its high dividend and have a enough left over for its continued growth investments and increase its dividend.

I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% more for a yearly distribution of 5%. Sun Communities has a three-year CAGR of 15% more than meeting my requirement. Looking back five years $10,000 invested five years ago would now be worth over $24,300 today (from S&P IQ). This makes Sun Communities a good investment for the income investor with its steady 3% increasing dividend and earnings growth.

Sun Communities' S&P Capital IQ rating is a hold with a target price of $86.0. Sun Communities is overpriced at present by 1% and a good choice for the income investor. Some investors may want to wait for a better entry point, but it's hard to buy good businesses at a discount.

One of my guidelines is whether I buy the whole company if you could. The answer is no; the dividend stream has a good yield, but the growth of the dividend is slow in a growing industry. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business and also generates a fair income stream. Most of all what makes SUI interesting is the growing business they are in with the need for more low-cost housing growing day by day.

Total Return And Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Sun Communities did much better than the Dow baseline in my 54.5-month test compared to the Dow average. I chose the 54.5-month test period (starting January 1, 2013, and ending to date) because it includes the great year of 2013 and other years that had fair and bad performance. The great total return makes Sun Communities appropriate for the total return investor, with the 3.1% dividend good for the income investor. The dividend is well above average and easily covered by the FFO and has been increased three years over the last 10 years.

DOW's 54.5-month total return baseline is 65.14%

Company Name	54.5 Month total return	Difference from DOW baseline	Yearly Dividend percentage
Sun Communities	140.94%	75.80%	3.1%

Click to enlarge

The five-year chart below is impressive, going up and to the right very strongly.

SUI data by YCharts

Last Quarter's Earnings

For the last quarter on April 27, 2017, Sun Communities reported FFO earnings of $1.10 that beat expected by $0.03 compared to last year's FFO of $0.92. Revenue was higher at $234.4 Million higher than a year ago by 34.2% and beat expected by $53.27 Million. This was a great report. SUI maintained their guidance for 2017. The Company affirming its 2017 full year guidance of FFO per Share of $4.16 to $4.24, and anticipates FFO per Share of $0.93 to $0.95 for the second quarter. The Company also affirms 2017 full year guidance of Same Community NOI growth of 6.4 percent to 6.8 percent.

The steady growth in Sun Communities should provide a company that will continue to have above average total return and provide steady income for the income investor.

Business Overview

Per Reuters:

Sun Communities, Inc. is a self-administered and self-managed real estate investment trust (REIT). The Company is a fully integrated real estate company, which, together with its affiliates and predecessors, has been in the business of acquiring, operating, developing, and expanding manufactured housing (MH) and recreational vehicle (RV). As of December 31, 2016, it owned and operated or had an interest in a portfolio of properties located throughout the United States and Ontario, Canada, including 226 MH communities, 87 RV communities, and 28 properties containing both MH and RV sites. The Company operates through two segments: Real Property Operations and Home Sales and Rentals. The Real Property Operations segment owns, operates, or has an interest in a portfolio, and develops MH communities and RV communities throughout the United States and is in the business of acquiring, operating, and expanding MH and RV communities.

SUI is in a growing segment of the American economy as the senior citizen population lives longer and needs more lower-cost housing in their later years. The company's management has shown over the last few years that they know how to grow the business with increasing FFO almost each quarter.

On the recent earnings call, Sun Communities CEO Gary Shiffman said:

I’m pleased to share that 2017 has gotten off to an excellent start with Same Community NOI growth of 6.7%, strong occupancy gains of 170 basis points in our Same Community portfolio and 40 basis points in the portfolio overall, as well as an 8% increase in the number of homes sold.

While the quarter was a relatively quiet one from an external growth perspective, our prior hard work on that front coupled with our best-in-class operating platform and focus on sustained internal growth allowed Sun to deliver 22% FFO per share growth, a growth rate that we are certainly very proud of.

In the quarter, we permitted over 500 manufactured housing expansion sites that were completed late in the fourth quarter of 2016 and delivered over 250 newly built manufactured housing expansion sites in three communities as part of our 2017 expansion program.

We are on track to deliver an additional 870 expansion sites in 10 communities in the second quarter. On the [earnings] side of our business, we converted over 200 transient sites to annual seasonal rentals as compared to approximately 150 conversions in first quarter of 2016.

The graphic below shows the wide distribution of SUI properties.

Source: Sun Communities Earnings call slides

SUI has an overhang, which I believe is that rising interest rates will hurt the company's earnings. The economy is showing moderate economic improvement right now, but I think the Fed will only increase the interest rates one more time this year, later in the year; they do not want to trigger a recession.

Takeaways and Recent Portfolio Changes

Considering Sun Communities' steady current dividend yield of 3.1% and its total return better than the Dow average, Sun Communities is a buy for the income and total return investor. The Good Business Portfolio will not consider SUI as an investment for the portfolio right now but will keep it on its watch list. I keep the portfolio at 25 companies or less since I can't keep track of more than that and 25 gives good diversification. There is not an open slot in the portfolio at this time.

Recently on July 14 trimmed Boeing (BA) from 10.2% of the portfolio to 9.9%. Great company, but you have to be diversified. The Paris Air Show was great for Boeing and they easily beat Airbus in orders by a mile.

Wrote some HOG July 21 strike 54.0 calls on a portion of the holding. If the calls remain in the money they will be moved up and out as it gets closer to the expiration date. These calls can make 4% in a little over two weeks if the price remains the same.

Added to position of Digital Reality Trust (DLR) now at 2.6% of the portfolio. I feel the computer industry facilities business has nowhere to go but up and DLR pays an above average 3% dividend. I wrote an article on Digital Reality Trust this year if you are interested. This is another specialty REIT in a growing sector.

Trimmed Harley Davidson (HOG) to 1.3% of the portfolio. Growth looks likely to be negative again this year. S&P raised HOG target to $60 but sales look slow for a while. 3M (MMM) is intended to be bought after the HOG position has been sold off.

Started a position (position number 25, portfolio now full) in American Tower (AMT) a specialty REIT at 0.4% of the portfolio. Their earnings for the first quarter were great, beating expected by $0.13 and with revenue increasing 21.3% year over year.

Added to position of Texas Instruments now at 4.4% of the portfolio a full position. S&P raised TXN target price to $84 from $77.

Increased position of Omega Healthcare Investors (OHI) to 6.2% of the portfolio. I wanted a little more income. They just increased their dividend to $0.64/Qtr.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are, Johnson and Johnson (JNJ) is 8.4% of the portfolio, Altria Group (MO) is 8.0% of the portfolio, Home Depot (HD) is 8.3% of portfolio and Boeing is 9.9% of the portfolio, therefore BA, JNJ, MO and Home Depot are now in trim position.

Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 Million in the first quarter, a increase from the fourth quarter. The first-quarter earnings were good with Boeing beating the estimate by $0.07 at $2.01. S&P Capital IQ also raised its one year target to $210. If Boeing is still above 10% of the portfolio after the next earnings report on July 25 it will definitely be trimmed to under 10%.

JNJ will be pressed to 9% of the portfolio because it's so defensive in this post-Brexit world. Earnings in the last quarter beat on the top and bottom line but Mr. Market did not like growth going forward. JNJ is not a trading stock but a hold forever, it is now a strong buy as the healthcare sector remains under pressure.

For the total Good Business Portfolio please see my article on The Good Business Portfolio: 2017 First Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.

I have written individual articles on HOG, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors, TXN and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.

Of course, this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.

Analyst’s Disclosure: I am/we are long BA, JNJ, HD, DIS, OHI, MO, HOG, DLR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.