Earlier this week, Sun Communities (SUI) – the largest mobile home park reit- announced its intent to acquire Safe Harbor Marinas – the largest owners of Marinas - for $2.1 billion.
This acquisition will increase Sun’s revenue by 15% and its enterprise value by 12%. This is not a small bet. It’s too early to tell how accretive this acquisition will be to Sun’s business over the long-term but our initial take is positive.
Our rationale:
- Sun is running out of large, 4+ star mobile home park portfolios to buy, single park purchases no longer move the needle when you’re worth $17 Billion
- Private equity entrants such as Blackstone are pushing park cap rates to sub 4%
- The acquisition should return a compelling high 6% yield year one
- Marina real estate has similar characteristics to existing business: high barriers (shrinking supply), fragmented industry, sticky tenants, low capital expenses (last time we checked, water is fairly cheap to maintain)
Boats are not exactly a necessity, so this niche is not quite as compelling as the mobile home park business, but they share a lot of similarities.
Of course, this acquisition is not without risk. No investment is. As compared to mobile home parks, the marina business is more susceptible to extreme weather and recessions. It also has more moving parts including fueling and boat servicing.
To mitigate operational risk, Sun has wisely kept the Safe Harbor team onboard to continuing running the portfolio. Plus, Sun can also leverage its existing customer base within this segment and use its cost of capital as a weapon for new marina acquisitions.
Lastly, while entering new business line might seem like a bad idea for a mobile home REIT, we’d argue that the Sun management team has earned the benefit of the doubt. They have been on quite the run.
Sun Communities is an acquisition and operating machine. Since 2010 they have acquired, transitioned and repositioned approximately $5.8 billion in total property value.
They are not just deal junkies though. They have operating talent. This is clear driven same store net operating income year in and year out.
The chart also demonstrates the strength of the business model. Thanks to sticky tenants, the firm has been able to consistently grow rents faster than expense inflation. This shows the platform's operating leverage:
Sun Communities is one of the elite manufactured housing reits. The company is clearly still focused on growth; it is unlikely to deliver high dividends in the near future. The dividend as of today is 2.1%. Therefore, this stock is appropriate for long-term growth-oriented portfolios, vs. dividend investors that are looking for income.
Evergreen is long SUI. We hope to hold forever.
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Evergreen's statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities mentioned above.
