Sun Communities, Inc. (SUI) Business Profile

What it does

Sun Communities is a real estate investment trust, or REIT, that owns and operates manufactured housing and recreational vehicle communities. It is headquartered in Southfield, Michigan. Charles D. Young is its chief executive officer.

A manufactured housing community is a residential subdivision where residents place factory-built homes on individual sites. An RV community provides sites for recreational vehicles for varying lengths of time and, in some cases, vacation rental homes. Sun generally owns the land and infrastructure and leases individual sites to residents and guests. It also sells and leases new and pre-owned homes through Sun Home Services, a taxable REIT subsidiary.

Sun manages most of its properties itself, although independent contractors manage some communities and lessees operate others under ground leases. Its communities offer amenities alongside housing or vacation accommodation. Most of its RV communities operate under the Sun Outdoors brand.

Before the sale of its UK business, Sun also owned UK holiday parks, where homeowners paid site fees and the company sold and rented homes. Sun completed the sale of its UK business in September. Its business is now focused on manufactured housing and RV communities in North America. It also has an interest in the Sunjenia manufactured housing development joint venture in Australia.

How it makes money

Sun earns much of its revenue by renting sites to people who place manufactured homes or RVs on its land. Customers receive access to utility connections and community amenities. Revenue depends on occupancy and on the rental rates Sun can charge. Its revenue streams are predominantly derived from customers renting sites on a long-term basis.

In the United States, manufactured housing site leases are typically year-to-year or month-to-month. Annual RV agreements typically run from year to year or from move-in until the end of the calendar year. Sun generally makes market-rate adjustments annually. It also offers transient RV sites for shorter stays. Sun sets rents community by community, considering factors including occupancy, retention, demand and local markets.

Sun Home Services markets, sells and leases new and pre-owned homes to residents and prospective residents. Its rental program generally uses annual home leases. Sun says the program helps lease up communities, with the goal of converting many renters into homeowners over time. Home sales and rentals also involve purchasing homes and managing repairs and refurbishment when tenants leave.

Before its sale, the UK business generated income from holiday-home sales, site licenses and short stays. Sun sold that business in September, so its later results will not include the UK contribution after the sale.

Customers and how it sells

Sun serves individuals and families seeking a place to live in manufactured housing communities, as well as RV customers seeking longer stays or vacations. Some residents own their homes and rent only the site; others lease a home from Sun. The company markets homes to current and prospective residents and also offers vacation rentals and tent camping through Sun Outdoors.

At the year-end before the UK sale, Sun had an interest in developed properties across the United States, Canada and the UK. The portfolio then included manufactured housing communities, RV communities and UK communities. This is a historical snapshot: Sun sold its UK business in September and has also bought and sold other properties since that year-end.

At the year-end before the UK sale, Florida, Michigan, Texas and California contained much of Sun’s manufactured housing and RV sites. The UK parks were largely in England before the sale. Sun subsequently sold RV communities in Fort Myers, Florida, and in October it acquired manufactured housing communities in the Pacific Northwest.

Suppliers and costs

Manufactured homes are produced off-site by manufacturers and installed within Sun’s communities. Sun purchases new and pre-owned homes for its rental program and also sells homes to residents. It generally owns and maintains the land, utility connections, streets, lighting and common amenities. Homeowners are responsible for maintaining their own homes and leased sites.

Property operating costs include insurance, real estate taxes and utilities. Sun employs on-site managers and maintenance personnel, while third-party managers oversee some RV properties. At the year-end before the UK sale, the company employed 3,614 full- and part-time people.

Sun says insurance has become more difficult and expensive to obtain, with lower coverage limits, higher deductibles and higher premiums. It has retained more exposure through self-insurance. The home rental program also requires repair and refurbishment spending when tenants vacate and homes are re-leased. Alongside property costs, the company incurs interest, depreciation and amortization, and general and administrative expenses.

Competitive position

Sun competes for residents and guests with other manufactured housing and RV communities and with alternative housing, including site-built homes, apartments, condominiums and townhouses. Its home sales and leasing operations compete with national and local manufactured home dealers and other community owners. No individual competing companies are identified.

Sun’s communities combine sites and utility access with amenities. The company manages most properties itself and uses on-site managers to monitor property conditions and resident concerns. It says its Sun Outdoors brand supports its position in the outdoor market. Its home sales and rental operations can also help fill sites and give the company more control over home quality.

Residents can own their homes while leasing the land beneath them. Some homes in Sun’s manufactured housing communities have been removed by their owners; others have been sold to new owners who assumed the rental obligation.

Our reading: Low home removal supports resident retention as a source of competitive strength, although sales of homes to new residents and competition from other housing still matter. Our reading: On-site management and integrated home sales can support occupancy, but the evidence does not establish how much advantage they provide over specific rivals.

Growth opportunities

Sun’s growth strategy includes increasing rental rates, improving occupancy and managing property expenses. It also develops and expands communities and selectively acquires manufactured housing and RV properties. The company shifted toward operating efficiencies and rental-rate growth while continuing to pursue selected acquisitions and expansions that meet its investment criteria.

Sun acquired manufactured housing and RV properties. It also sold properties and development land as part of its portfolio strategy. The sale of Safe Harbor Marinas and the subsequent sale of the UK business narrowed the company’s operating focus. Sun used proceeds from those sales for purposes including debt repayment, share repurchases and investment.

In October, Sun acquired manufactured housing communities in the Pacific Northwest. It is also investing in technology and data for operating efficiency, revenue management, pricing and procurement. In its RV business, the company has converted sites to annual use and is working on the mix of annual and transient sites.

Sun expects average rent increases for manufactured housing and annual RV sites. It also expects a lower contribution from its Australian joint venture because fewer home sales are expected.

Structural risks

• Demand and concentration: Local economic conditions, excess supply of sites or homes, and weaker demand can affect property revenue. Sun’s manufactured housing and RV sites are concentrated in several states, exposing the portfolio to conditions in those markets.
• Costs and insurance: Insurance premiums, real estate taxes and utility costs can increase. Insurance coverage has become more expensive and difficult to obtain, and Sun has retained more self-insurance exposure. Natural disasters, including hurricanes and floods, can damage properties and interrupt business.
• Rent and regulation: Rent control, zoning restrictions and other changes in real estate laws can affect operations. Market conditions may also limit rent increases needed to meet rising expenses without reducing occupancy.
• Debt and financing: Sun may be unable to refinance maturing debt on favorable terms or at all. Debt payments and restrictive covenants can limit cash available for other needs and reduce operating flexibility.
• Acquisitions and development: Acquired properties may underperform or be difficult to integrate. Development can face permitting delays, higher construction costs, financing difficulties and slower lease-up.
• Home purchases: Potential buyers may struggle to obtain affordable financing, while repossessed manufactured homes can provide lower-priced competition to new home sales.

Bottom line

Our reading

Sun is principally a property operator earning recurring site rent, with home sales and rentals supporting its communities. Our reading: Low home-removal rates support retention, while returns remain exposed to occupancy, rent limits, property costs and financing. The sales of the marina and UK businesses have narrowed the portfolio, making manufactured housing and RV operations more central to the business.