This Already Resilient 3%-Yielding Dividend Stock is Getting Even Stronger

Sun Communities (NYSE: SUI) has a very durable business. The real estate investment trust (REIT) is the largest publicly traded owner-operator of manufactured home and RV communities. These properties produce very resilient recurring revenues, which help support the REIT's 3% yielding dividend.

The residential REIT's already highly resilient dividend is about to grow even stronger in the future. Driving the improved sustainability are asset sales that will significantly bolster its already solid balance sheet.

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Highly durable properties

Manufactured housing communities are some of the most durable rental properties. It's very expensive to relocate a manufactured home ($6,000 to $10,000). Because of that, most tenants remain in place for years and eventually sell their homes to a new tenant when they want to move. Meanwhile, with virtually no new supply of manufactured home communities and strong demand due to the affordability of these properties, landlords can steadily raise lot rents, even during a recession.

RV communities also produce lots of recurring revenue. About 11.2 million households own an RV, while there are only 1.7 million campsites in the country. With more people going camping every year, demand for sites is high and growing. It's leading many RV owners to sign annual leases to ensure they have a spot in their desired campground.

These dynamics have driven very durable income growth for Sun Communities. For more than 20 years, the REIT has reported positive same-property net operating income (NOI) growth every individual year or rolling four-quarter period. Since 2000, Sun Communities has grown its NOI at a 5.2% compound annual rate, which is much faster than apartment REITs (3%) and the REIT sector as a whole (3.2%).

That steady growth has supported decades of dividend stability and growth for the REIT. While Sun Communities hasn't increased its dividend every year, it has never reduced its payout in its 30 years as a public company and has grown its payout more than 111% during that period.

Strengthening the financial foundation

Sun Communities backs its durable real estate portfolio with a rock-solid balance sheet. The REIT ended last year with solid investment grade bond ratings (BBB/Baa3) supported by a reasonable leverage ratio for a REIT (6.0 times).

That leverage ratio will come down significantly this year. The REIT has been divesting non-core properties to strengthen its financial profile. It sold a portfolio of 13 Canadian RV properties for $64 million, a manufactured home development property for $13 million, and a UK holiday park for $7.6 million in the fourth quarter. That brought its total to $570 million of non-strategic asset sales last year. It sold another RV property portfolio for $92.9 million in the early part of the first quarter.

The company also agreed to sell its entire marina platform, Safe Harbor Marina, in a nearly $5.7 billion deal. That sale marks a highly profitable exit of its investment in marinas ($1.3 billion gain in four years). Sun Communities initially expects to use the proceeds to significantly deleverage its balance sheet.

The company anticipates its leverage ratio will decline to a range of 2.5x-3.0x following the sale's closing. That will give it additional financial flexibility to return more cash to shareholders (e.g., share repurchases, special dividends, or dividend increases) while also investing to grow its core business. Selling its marina platform will also enhance the durability of its annual income stream by reducing its exposure to more volatile service, retail, dining, and entertainment, as well as other non-recurring income streams.

The company's deleveraging strategy will put it in a stronger position to grow its core business. It will have more financial flexibility to buy high-quality manufactured home and RV communities while also investing in capital projects to enhance existing locations by adding more sites and amenities.

A durable dividend stock

Sun Communities has been a very durable dividend stock over the decades. That's due to the resiliency of its real estate portfolio. With the REIT on track to significantly bolster its already rock-solid balance sheet this year, the payout should grow even safer. That makes it an excellent option for those seeking very bankable dividend income.

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Matt DiLallo has positions in Sun Communities. The Motley Fool recommends Sun Communities. The Motley Fool has a disclosure policy.