Value never goes out of fashion, both for equity investing and for purchasing or renting a home. In terms of housing choices, manufactured homes are much more affordable than single family site-built homes or apartments. When it comes to investing, manufactured housing REITs’ defensiveness in the form of low turnover rates and limited overbuilding risks remains very attractive to value investors. Sun Communities Inc (NYSE:SUI), a REIT that owns and develops manufactured housing and recreational vehicle sites, is an excellent proxy for this defensive property type. Sun Communities also sports a higher yield and is more capital efficient than its closest peer.
Why home buyers and tenants choose manufactured housing?
It is typical of investors to make the mistake of analyzing a stock from an investor’s perspective, before even considering from a customer’s perspective if people will buy the company’s products. For example, a consumer goods company might appear to be an attractive stock investment if it is undervalued and debt-free, and if it sports an attractive dividend yield, but the stock price of the company will still collapse if the firm loses customers because of inferior products or poor customer service. Along the same lines, it is necessary to understand why there is demand for the manufactured housing developed by Sun Communities Inc (NYSE:SUI).
Manufactured homes have proven to be popular with both home buyers and tenants looking to stretch their dollar. According to the 2012 Quick Facts report released by the Manufacturing Housing Institute, the 2011 average sales price for a manufactured home was $60,600, compared with $207,950 for a single family site-built home (excluding land cost). In its most recent earnings conference call, Sun Communities Inc (NYSE:SUI) disclosed that the average rent for its manufactured homes was $0.55 per square foot, almost half that of $0.92 per square foot of rent for an average apartment. Another way to see this is that a tenant gets about 50% more space by renting a manufactured home with the same amount of rent paid for an apartment. Again, be it groceries or housing, value for money never goes out of fashion.
Why investors choose manufactured housing REITs?
If affordability is the buzzword for home buyers and tenants in choosing manufactured homes, then defensiveness is the key factor in investors choosing manufactured housing REITs over other types of REITs.
Firstly, Sun Communities’ manufactured housing business is largely recession-proof. The low turnover rate of manufactured housing REITs puts office building REITs and shopping center REITs to shame. Sun Communities Inc (NYSE:SUI)’ tenants typically occupy its manufactured homes for an average of 13 years.
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.
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