The best investments aren't always the most obvious choices. Sometimes, you'll find great opportunities when you go off the beaten path. There's usually less competition, enabling you to quietly earn outsize returns.
For example, manufactured home communities might not seem like an appealing investment at first glance. However, they've been some of the best-performing real estate investments over the past couple of decades due to the durable demand for space in these properties.
Sun Communities (SUI 1.90%) is the leading owner of manufactured home communities. The real estate investment trust (REIT) also owns other niche properties, like RV resorts, marinas, and U.K. holiday parks. Its strategy of investing off the beaten path has enabled it to produce strong total returns for its investors over the years. Here's why those with a little money to invest should take a closer look at Sun Communities.
Very durable properties
Sun Communities owns 288 manufactured home communities in North America with about 97,000 sites. The REIT also owns 179 RV communities, 138 marinas, and 54 U.K. holiday parks. It's the largest publicly traded owner and operator of manufactured home communities, RV parks, and marinas and the No. 2 player in the U.K. holiday park space. Manufactured housing supplies about 45% of its rental revenue, followed by RVs (26%), marinas (21%), and U.K. holiday parks (8%).
Demand for these properties is strong and resilient, but there's limited new supply coming to the market each year. Because of that, Sun Communities can steadily increase rates regardless of economic conditions. For example, it has increased rents at its manufactured home communities by at least 3.4% each year over the past decade, while RV rental rates have grown by a minimum of 2% annually.
If we go back even further, Sun Communities has delivered positive same-property net operating income (NOI) growth every single year and rolling four-quarter period for more than two decades. Since 2000, its NOI has grown at a 5.2% compound annual rate, which is faster than the REIT sector average of 3.2%.
One factor driving the resiliency of manufactured home communities is the expense of relocating a manufactured home to another community. It can cost thousands of dollars, depending on the size of the home. Because of that, most owners either stay in their homes and pay the increased rent (which is still much cheaper than other housing options) or sell their property to a new owner.
Many ways to continue growing
Sun Communities expects to push through some healthy rental increases in 2025. The company plans to boost rents at its manufactured home and RV communities by more than 5% this year while increasing those at its marinas and U.K. holiday parks by 3.7%.
Rental increases are only one growth driver for the REIT. It also has the potential for more occupancy gains by leasing vacant manufactured home sites, including 900 expansion and development sites it has delivered over the past couple of years. Further, Sun Communities has been steadily converting transient RV sites to annual leases. Annual sites generate more income because they reduce vacancies. The REIT has also been investing some capital to expand its properties and add more sites, which will continue.
In addition to these organic growth drivers, Sun Communities has a strong investment-grade balance sheet, giving it the financial flexibility to make acquisitions and expand its portfolio. It routinely buys properties as opportunities arise. Sun Communities has also completed a couple of larger-scale acquisitions in recent years, including buying Safe Harbor Marinas for about $2 billion in 2020 and purchasing Park Holidays UK for $1.3 billion in 2022.
The company's growth drivers have enabled it to increase shareholder value over the years, too. Since its initial public offering in 1993, it has boosted its dividend by 111%. That rising income stream has added to its total return, which has averaged 12.6% since it came public, outperforming the S&P 500's 10.6% average annual return during that period.
Sun Communities is in a strong position to continue growing shareholder value in the future. It currently has a 3% dividend yield (more than double the S&P 500's), which provides investors with a solid base return. For example, a $500 investment would produce about $15 of dividend income each year. That income should grow, as should the share price.
A potentially enriching investment
Manufactured home communities, RV resorts, and marinas might not be the most exciting investments. However, they have delivered steadily growing income for Sun Communities over the years, which has enabled the REIT to produce above-average total returns over the long term. With more growth ahead, Sun Communities could continue to be a winning investment.
