Secondly, manufactured housing REITs have low capital expenditure outlays, as most of the tenants own their manufactured homes. Sun Communities owns the land and is responsible for the maintenance of common areas, but does not own the homes themselves. Recurring capital expenditures accounted for less than 3% of Sun Communities’ fiscal 2012 revenues, according to its most recent 10-K.
Last but not least, it has traditionally been difficult to get land zoned for manufactured housing, because of certain zoning regulations that exclude manufactured homes from being located in areas zoned for single-family residential use. This has helped the segment avoid the oversupply issues associated with other property types.
Peer comparison
Sun Communities’ peers include manufacturing housing REIT Equity Lifestyle Properties, Inc. (NYSE:ELS) and apartment REIT Home Properties, Inc. (NYSE:HME).
Equity Lifestyle Properties is the largest REIT in the manufactured housing REIT space with 383 properties consisting of more than 142,000 sites in 32 states and British Columbia. In contrast, Sun Communities Inc (NYSE:SUI)’s portfolio comprises of 184 communities consists of over 67,000 sites. Equity Lifestyle Properties is perceived to have a “higher quality” portfolio than Sun Communities, given the strategic locations of its properties. Equity Lifestyle Properties has more than 80 properties with river or ocean frontage and over 100 properties within 10 miles of the coast. These locations enjoy natural barriers to entry. Moreover, those looking to retire or vacation are naturally drawn to these types of locations.
However Equity Lifestyle Properties has a higher capex-to-sales ratio of 4.1%, compared with 2.6% for Sun Communities. In addition to being more capital efficient, Sun Communities Inc (NYSE:SUI) also sports a higher dividend yield of 5.0%, versus a lower 2.6% yield for Equity Lifestyle Properties.
Similar to Equity Lifestyle Properties, Home Properties boasts quality assets in the form of apartments located in the suburbs of major metropolitan areas on the East Coast. Home Properties has tried to create a better apartment living experience, upgrading baths and kitchens and adding washers and dryers in a bid to improve overall apartment quality. Such efforts have paid off, with resident turnover below 40% for 2012, significantly below that of the company’s peers.
Conclusion
Investors usually have to pay a premium for quality assets in the form of lower dividend yield and lower capital efficiency. Given that I am choosing manufactured housing REITs on the basis of their defensiveness, I am less eager to pay a premium for quality assets. Instead, I am happy to go with Sun Communities for its higher yield.
Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article 1 Defensive Housing REIT With a Solid Dividend Yield originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
