Sun Communities (NYSE:SUI) is riding its momentum from 2019 into 2020. After posting revenue that beat analysts’ expectations, SUI stock opened to a new record high on February 20. In early trading, the stock had pushed past its previous high of $169.13 and was trading over $172 per share.
On February 18, the real estate investment trust (REIT) announced that it would be increasing its quarterly dividend by 5.3% for 2020. The new dividend, which will be issued for the first time in April 2020 is now $3.18, up from $3.00 in 2019.
As many investors know, a REIT is legally obligated to pay out at least 90% of its profits to shareholders in the form of a dividend. So for a REIT to increase its dividend is generally a sign that the company expects to generate more revenue. That’s been the case thus far with Sun Communities.
A mixed earnings report is nothing to worry about
On February 20, Sun Communities released its 2019 fourth-quarter earnings report. The company delivered earnings per share (EPS) that were below analysts’ expectations. However, as noted above, the company posted larger than expected revenue.
Despite having earnings that came in below estimate, the company’s numbers were higher on a year-over-year basis not only for the quarter but for the entire year as well. In a press release that the company issued, Sun Community announced it increased its fourth-quarter revenue by $27.8 million. This was over 10% higher ($301.8 million vs. $274 million) than the same period in 2018.
The same was true of net income which came in at 31 cents per diluted common share for the quarter. That blew away the 11 cents per diluted share number for the fourth-quarter of 2018.
And for the entire year, the numbers again showed a large increase. Total revenues were up more than 12% and net income was up over 40%.
Can the Run Continue?
Sun Communities is one of the leading REITs in the residential sector. One of the areas it specializes in is manufactured homes, which was the sub-sector that showed the highest percentage growth of all REITs in 2019.
Part of the reason for the growth in this sector is that manufactured homes are in many cases the most viable choice for lower-income households. According to data from the Housing Assistance Council, lower-income households still make up the primary market for manufactured homes. The HAC lists the median annual income of households residing in manufactured housing as $28,374. That number is almost half the median income of households living in “traditional” single-family homes.
And as the quality of manufactured homes and the amenities, they offer to continue to increase, manufactured homes are beginning to cater to an aging population. Even as millennials are tip-toeing into the housing market, baby boomers are looking to downsize. And the affordability of manufactured homes compared to traditional homes makes these a nice investment.
Sun Communities is also doing a good job with retention
At the end of 2019, Sun Communities had a total portfolio occupancy rate of 96.4%. This speaks to the idea that once residents are part of these communities, they tend to stay in the community. In fact, data shows that Sun Communities residents have an average stay of 14 years.
This is a key reason why I am bullish on SUI stock. Investors routinely reward growth companies like Apple (NASDAQ:AAPL) when they can get regular subscription revenue. So when you look at a residential REIT and see an occupancy rate of over 96%, you know that the company will have regular income flowing into the top line.
To bear this out, let’s take a look at the company’s Net Operating Income (NOI). NOI is a key metric that investors use to analyze the performance of a REIT. In 2019, Sun Communities posted NOI “same-store” growth of 7.6% for the quarter and 7.3% for the year. The average for apartment REITS is between 2% and 4%.
All of this data points to the idea that Sun Communities may continue to be growing for quite some time.
Sun Communities Continues to Expand its Portfolio
In late October, Sun Communities completed its acquisition of the Jensen portfolio. Sun Communities now owns, operates, or has an interest in 420 communities over approximately 140,000 developed sites in 32 states and Ontario, Canada.