Sun Communities: Park Holidays Acquisition Is A Key Positive
Summary
- Sun Communities recently agreed to acquire Park Holidays.
- The deal was highly accretive, in my view. The announcement was more positive for me than just the numbers. The move augurs a favorable growth strategy in an attractive geography.
- There is an opportunity here as the consensus revisions seem conservative and the stock price is at the same point as before the announcement.
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Investment Thesis
Sun Communities' (NYSE:SUI) recent acquisition of Park Holidays was a key benefit for the stock. The deal is attractively valued for the prime asset and should be highly accretive for Sun. I believe that this deal is the first of many in the attractive and fragmented British market for the company where it can fuel its future growth at attractive rates.
European expansion is likely to follow Britain. Both Britain and Europe have attracted private capital from prestigious funds. Sun seems to be heading in the same direction as smart money.
The benefits of the new geography aren't limited to revenue growth but also offer a lower cost of capital through attractive interest rates.
Overall, I see the deal as a key positive that hasn't been reflected in the share price and in my view not fully in estimates.
Sun Communities Begins its European Invasion in Britain
There have been articles of good quality on Sun Communities on SA evaluating the company's performance and valuation. I will try to add to the conversation by analyzing the company's recent acquisition in this article.
Sun Communities recently announced that it'll be acquiring the #2 player in the UK by the number of communities, Park Holidays. The agreed-upon transaction amount is GBP 950 mn and includes Park Holidays' 42 communities, 15,325 sites, and 2,400 expansion sites. The majority of these are located in coastal areas in southern England and are a reasonably short drive away from London. The acquisition is material to Sun as Park Holidays assets are ~7% of current properties. The market lauded the deal initially with Sun Communities' share price rising on November 16th from ~$189 to ~$197 but have sold off since then back down to ~$190.
Sun will finance the deal mostly with cash but will use cash from raised equity. The company had a forward offering of 3.5 mn shares at a per-share price of $185. The company sold an additional $450 mn of shares with an at-the-money offering. This covers ~$1.1 bn of the $1.27 (GBP 950 mn) deal and the rest will be financed through the recent $600 mn senior debt issuance.
The deal is expected to close next year, I expect it to do so in Q1. This is important as Sun will be facing pandemic-fueled tougher base earnings to lap around the rest of the year.
The acquisition is a Great Deal for Sun
Sun is acquiring at a great value compared to its current multiple. The acquisition is at ~12.8x EV/EBITDA given the disclosed GBP 74 mn last twelve month (LTM) EBITDA well below Sun's current multiple of 29x and below its pre-pandemic historical range of 22-27x. The cap rate of Park comes out to ~9.5% off of the disclosed GBP 90 mn net operating income which is also very attractive as the universe of quality assets in the industry in the US is almost entirely below 5%. The deal will be highly accretive.
I expect Sun Communities to increase operating efficiency in Park. Sun has a much larger scale and likely better know-how in managing costs. The management will be looking to apply best practices to drive lower costs in Park assets to improve margins.
The market finds the deal accretive as well. The consensus funds from operation (FFO) per share estimate increased by 2.86% for FY22 and 2.11% for FY23 following the announcement while the high estimate increased by 4.98% and 5.12%. I've provided the progression of consensus expectation below.
Source: CapitalIQ
However, I find the deal more attractive than the market given the attractive valuation, potential to drive costs lower, and the attractiveness of the UK market. The GBP 74 mn or $99 mn disclosed LTM EBITDA is 10.6% of Sun Communities' LTM EBITDA. There is little new share issuance due to the deal. Moreover, there is an organic growth opportunity of ~15% from the 2,400 expansion properties of Park Holidays. I see the consensus revisions as overly cautious and see an opportunity, particularly in FY23, as the stock price displacement since the announcement is effectively zero as noted above.
Furthermore, this deal unlocks a better cost of capital for Sun Communities. The company can use the British debt markets as a cheaper source of financing. The 10-year Gilt yields 0.85% while the US 10-year Treasury yields 1.4%. Needless to say, the cost of capital is crucial for REITs and low-cost borrowing could help in differentiating Sun.
UK Market is an Attractive One and Opens a New Avenue for Growth
The UK market is promising. UK holiday park industry is worth GBP 5 bn according to data shared with the announcement. It grew with an 8% CAGR from 2019 to 2021 and is projected to grow with a 6% CAGR from 2021 to 2025. This is attractive growth for a stable industry that can pass through price increases.
There is potential for future acquisitions. The UK market is highly fragmented with platforms with 10 or more properties representing just 7% of total properties and single community operators representing >80%. Sun Communities could leverage its scale and go on a shopping spree to consolidate the British market to grow revenue and drive synergies.
The attractiveness of the market is evident in the recent entrants. A lot of prestigious private capital has been moving in the same direction. CVC Capital Partners acquired Away Resorts from Freshstream in June while Blackstone (BX) agreed to acquire Bourne Leisure in January. These companies rarely go places where there isn't value and their actions highlight the opportunity for Sun Communities.
Furthermore, Sun can use its British operations to grow in the European continent. There is interest in European assets as well; KKR (KKR) acquired Roompot recently. The UK and Europe represent a whole new avenue of growth for Sun and could be very attractive given the lower cap rates and cost of funding.
Net-Net I Find the Acquisition is Very Positive and Overlooked by the Market
Sun Communities' acquisition of Park Holidays is bullish both due to the favorable terms of the deal and also as an indicator of what's to come. The deal itself is very accretive with a low acquisition multiple and a high cap rate that's unseen in North American markets. Sun will likely get more out of the assets than prior owners did with its scale and know-how. I believe that the new asset will be positive to the stock price in its first year with better cost management than expected.
Perhaps the intangibles of the deal are even more important. The acquisition augurs a European expansion beginning in Britain. Britain is perfect for Sun's platform where it can leverage its scale to consolidate an attractive but fragmented market. The British market is large and growing fast and should enable significant alpha for Sun over the coming years. The advantages of the expansion are not limited to revenue growth as Sun can use its British operations to fund its business at attractive rates.
Overall the deal is a key tangible positive for me as well as offering intangibles such as better growth prospects and a higher valuation through a lower cost of capital. This offers an opportunity as the positives weren't reflected in the share price and estimates.
This article was written by
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