Sun Communities Earnings: Strong Rent Growth Drives Solid Same-Store Net Operating Income Growth

Sun Communities SUI reported second-quarter results that were in line with our expectations, leading us to reaffirm our $173 fair value estimate for the no-moat company. Occupancy for the manufactured housing segment increased 10 basis points sequentially to 96.9%, slightly better than our estimate of flat growth. Manufactured housing rent increased 5.7% year over year, in line with our estimate, while residential vehicle rent increased 8.6% year over year, which beat our estimate of 3.7% growth. However, the company continues to transition RV sites to annual membership locations, which pay a consistent level of rent throughout the year, from transient locations, which collect higher revenue during the busy vacation season but significantly lower in the other parts of the year. As a result of this shift in business mix, same-store net operating income growth for the RV segment was 3.3% in the second quarter, matching our estimate. Combined with same-store NOI growth of 5.7% for manufactured housing and 11.7% for the marina portfolio, total company same-store NOI growth was 6.3% in the second quarter. Sun Communities reported core funds from operations of $1.96 per share, which is a penny better than our estimate for the quarter.

Management reduced 2023 FFO guidance by 2.2% at the midpoint to a new range of $7.09 to $7.23 from the prior range of $7.22 to $7.42. The reduction comes from a combination of slightly lower home sales in the recently acquired UK portfolio, higher interest rates, and lower NOI from service, retail, dining, and entertainment sources. However, the lower FFO guidance puts our $7.13 estimate now within management’s guidance range. Additionally, management slightly raised 2023 same-store NOI growth for the total company to a new range of 5.3% to 6.1%, a 20-basis-point increase over the prior range of 5.0% to 6.0%. As a result, we now have more confidence in our estimates for the company, as management’s outlook comes more in line with our views.