Sun Communities, Inc.

27777 Franklin Road, Suite 200
Southfield, Michigan 48034
U.S.A.
Telephone: (248) 208-2500
Web site: https://www.suncommunities.com

Public Company
Incorporated: 1985
Employees: 2,727
Sales: $982.57 million (2017)
Stock Exchanges: New York
Ticker Symbol: SUI
NAICS: 531110 Lessors of Residential Buildings and Dwellings

Sun Communities, Inc., operates as a real estate investment trust (REIT) that owns, operates, and develops manufactured housing and recreational vehicle (RV) communities. In 2018 the company owned 350 communities with approximately 122,000 developed sites. Sun's manufactured home communities typically maintain an occupancy level of nearly 95 percent and have an average monthly base rent of $510 per site. The firm operates in 29 states, plus Ontario, Canada, with the majority of sites in California, Florida, Michigan, and Texas.

Milton M. Shiffman began investing in real estate in 1964. Working at the time as a doctor, Shiffman was involved in the development, acquisition, and construction of commercial property in his spare time. In 1975 he established the predecessor to Sun Communities. In 1981 Shiffman retired from his medical practice to concentrate fully on his growing company. He and his son, Gary A. Shiffman, began focusing on acquiring and then either expanding or renovating manufactured housing communities. In 1985 the pair incorporated the firm to pursue further growth options.

During the late 1980s, however, the real estate industry began experiencing a decline. In fact, by the early 1990s commercial property values dropped from between 30 percent and 50 percent. As a consequence, the Shiffmans began toying with the idea of launching a REIT. Congress created the REIT in 1960 to enable small investors to take a stake in large real estate investments. REITs were designed to pool the resources of many investors into a single entity that was focused on producing income through commercial real estate ownership and finance. Ninety percent of a REIT's taxable income was then paid out to its shareholders each year.

During the early 1990s many private real estate companies began utilizing the REIT structure to gain capital. At the same time, investors also began eyeing the commercial real estate industry as a lucrative investment and were confident that the market would recover from the troubles of the 1980s. The Shiffmans made the same calculation, and in December 1993 they took Sun Communities, Inc., public as a REIT, offering 5.7 million common shares. At the time of the initial public offering (IPO), the company operated 31 manufactured communities with 9,036 sites in six states.

Sun Communities began expanding rapidly after its IPO, which raised $145.8 million. In January 1994 it acquired Timberline Estates, a manufactured community with 296 sites located near Grand Rapids, Michigan. In March the firm purchased Meadow Lake Estates for $12 million, increasing the number of its Michigan-based holdings to 12.

By July of that year, Sun had acquired seven more communities and set plans in motion to sell an additional 3.5 million shares of its common stock. Chateau Properties Inc., a competing REIT based in Clinton Township, Michigan, took notice of Sun's activities. According to Jean Halliday in Grain's Detroit Business in July 1994, Jeffrey Kellogg, the CEO of Chateau, “speculated that Sun Communities maybe figured out they're not big enough and wanted to hurry up and grow while REITs are still popular with investors.” Kellogg also explained that there was “a certain amount of do-it-while-you-can philosophy” among REITs.

That philosophy certainly held true for Sun, which by the end of 1994 had the best-performing stock among manufactured housing REITs; Chateau Properties's stock was second in the ranking. During its first year of operating as a public REIT, Sun acquired 15 properties for $92 million, and expanded into Florida and St. Louis, Missouri. It also secured revenues of $32.3 million and a net income of $7.8 million.

Sun continued to expand in 1995, adding 3,900 new sites to its inventory. In April of that year, the firm acquired Scio Farms of Ann Arbor, Michigan, for $23.6 million. At the time, Scio—with 853 sites—was the largest single community that Sun had ever acquired. Sun then went on to purchase Kensington Meadows, also located in Michigan. The company funded the deal through the issuance of 51,678 operating partnership (O.P.) units. This was the company's fifth purchase using O.P. units. In a 1995 company press release, President Gary Shiffman explained the benefits of the units, stating, “The issuance of O.P. units creates opportunities to acquire quality communities that would not otherwise be available because of tax ramifications to the seller. In addition, Sun has the ability to fund acquisitions without the costs associated with raising equity in the public marketplace.”

During the mid-1990s manufactured housing was the fastest-growing segment of the U.S. real estate industry. Investors were encouraged by their financial planners to buy shares in manufactured housing REITs, leaving Sun well positioned for continued growth. In fact, by year-end 1995 Sun had acquired two new communities in Florida as well as two in Austin, Texas, which was considered the fastest-growing area in the state in terms of population and job creation. Its revenues for the year increased 39 percent to $45.1 million, while its net income reached $11.7 million.

In March 1996 the company announced plans to purchase 25 new manufactured housing communities from Aspen Enterprises Ltd. The $226 million deal increased Sun's holdings by nearly 60 percent, secured the company's hold on the Michigan market, and expanded the firm's reach in both the Florida and Arizona markets.

In August Sun made a $380 million stock offer for Chateau Properties. Two days before Sun's bid, Chateau had received a hostile $387 million cash bid from Manufactured Home Communities Inc. (MHC). At the time of the offers, Chateau had plans in the works to merge with ROC Communities Inc. However, a merger of Sun and Chateau would secure Sun's position as the largest manufactured home community owner in the United States, as well as rescue Chateau from the MHC bid—Chateau management felt a deal with MHC would not be beneficial for the firm.

Despite its failure to acquire its largest competitor, Sun continued to expand and, by year-end 1996, operated 79 communities. Its revenues increased, reaching $73.2 million, up 62 percent over the previous year. The company's net income also rose to $18.6 million.

The firm continued its acquisition strategy in 1997, with the purchase of nine communities from Park Realty Inc. for approximately $93 million. The deal strengthened Sun's foothold in Florida and Indiana. By year's end, Sun had acquired a total of 14 communities and developed 917 new sites. Through its subsidiary Sun Home Services, the company also sold 548 new homes and was involved in the resale brokerage of 555 additional homes. That same year Sun also spun off Bingham Financial Services Corp. as a financial services firm that offered financing and insurance to Sun's residents.

Revenues continued to grow in 1998, reaching $120.6 million. The company acquired 10 communities that year, bringing its holdings to 106 communities. In 1999 Sun partnered with the Champion Development Corp., a subsidiary of Champion Enterprises Inc., to develop manufactured housing communities in new-growth markets. Operating under the name SunChamp, the venture developed nine communities in Indiana, North Carolina, Ohio, and Texas during its first year of business. Sun also purchased nine existing communities and developed 1,125 new sites. Revenues for the year increased 12 percent over 1998.

During its first six years of operating as a public REIT, Sun experienced good fortune. The company's earnings increased at an average annual growth rate of 10 percent. Its acquisition record was strong, homesite demand was high, and finance companies eased up on lending restrictions, allowing more people to finance homes. In fact, homes were selling at a record pace and according to the company, nearly 20 million people in the United States lived in manufactured housing, representing 8 percent of the U.S. population.

In 2000, however, the manufactured housing industry began experiencing a decline. Finance companies that had set credit standards too low during the 1990s were now stuck with unpaid loans as well as repossessed homes. Lenders then raised credit qualifications, leaving many buyers unable to obtain home loans. With the flood of repossessed homes on the market, sales of new homes began faltering and the number of new manufactured home buyers dropped.

Although Sun's growth slowed in 2000, it still recorded positive revenues of $134.4 million and a net income of $29.1 million. That same year company founder Milton M. Shiffman died; son Gary remained at the helm of Sun as chair and CEO. The firm acquired three new communities in 2000 and developed 751 new sites. It sold five slow-growth communities in Florida as part of its strategy to focus on communities with stronger earnings potential. At the start of the 21st century, Sun also launched its “Residents First” program, which was designed to improve its customer relations, reduce turnover in communities, attract new residents, and create demand for Sun properties.

By 2002 market conditions were beginning to significantly affect Sun's community members, and thus the company's bottom line. Sales for the year dropped to $145.7 million, with profits of only $13.6 million, less than half of the previous year's net. The company saw improved results in 2003, as sales rebounded nicely to $193.5 million and its net income increased to $23.7 million. Then came 2004. Occupancy rates dipped below 90 percent, especially during the second half of the year. With revenues of $203.3 million, Sun suffered a net loss of $40.5 million from the previous year. Things improved only slightly the following year, with a loss of $5.5 million on sales of $210.9 million.

Between 2004 and 2005 Sun experienced its first slump in sales of manufactured homes, some new, some preowned. These were generally “conversions” of renters to owners. In 2004, 537 sales were completed. In 2005 that number dropped to 425, and in 2006 it rose to 492. Meanwhile, occupancy rates in Sun's communities dropped below 85 percent in 2005 and below 83 percent in 2006, where it remained, on average, for two more years. Although other measures remained positive in response to aggressive cost-cutting actions, Sun's profitability numbers took a hit each year from 2006 to 2009: net losses were, respectively, $25 million, $16.6 million, $34.5 million, and $6.3 million. During these years acquisitions of additional communities fell off dramatically from the scale of previous years' activity.

Despite these losses, by 2007 there were signs of recovery. Sales of new and preowned units increased to 712. Applications by prospective tenants across all Sun properties reached 15,000, 50 percent more than the previous year's total of 10,000. This increased to 17,000 in 2008, and continued to rise. As the U.S. economy as a whole slumped at the end of the decade, the relative affordability of life in a manufactured home community caused consumers in need of housing to take a look at what Sun Communities had to offer.

In 2009, even though the company would post a net loss for the year, there were more signs of recovery for Sun. The number of revenue-producing sites owned by the company increased by 224 that year. This was the first such gain of 200 or more since 2000. In 2010 the increase in revenue-producing sites represented the highest increase since 1999. Another sign was the year-to-year increase in new or preowned units sold to residents: in 2008 this hit 965, and by 2012, with increases each year, the number reached 1,742. Recovery seemed to be just around the corner.

In the company's release of year-end results for 2011, Shiffman noted that although each of the most recent years had been an improvement over its previous year, 2011 stood out as one of the best in several ways: samesite occupancy rates were above 85 percent, the company had acquired 23 new properties in Florida and Michigan, and a public equity offering at the end of the year resulted in net proceeds of more than $150 million.

In 2012 Sun raised another $382.8 million through common stock and preferred equity offerings and saw occupancy rates across its portfolio reach 87.3 percent by the end of the year, with same-site rates up to 86.7 percent. Sales of homes increased more than 21 percent over the previous year. The company also acquired another 14 properties, including an RV community in Lancaster County, Pennsylvania, and the Palm Creek Golf & RV Resort in Casa Grande, Arizona, a five-star institutional property for active adults. By year-end 2012 Sun had acquired several RV and resort-type communities in Connecticut, Maine, Massachusetts, New Jersey, Ohio, Virginia, and Wisconsin. More geographic diversification in the RV and resort properties took place in 2013, and the year ended with sales of $415.2 million.

In 2014 and 2015 Sun not only acquired new properties but also sold others that no longer supported its long-term strategies. It continued its longstanding practice of acquiring communities and converting them to income-producing properties by investing in infrastructure and amenity upgrades, such as paved roads, clubhouse and pool facilities, landscaping, and recreational facilities, and providing skilled, on-site property management. In 2016 Sun announced that it would acquire Carefree Communities for around $1.7 billion. The acquisition increased its properties in California, Florida, and Ontario, in particular, with additional units in Arizona and Texas. By year-end 2017 its revenues reached $982.6 million, and its net income was $77.2 million.

A strategic mix of manufactured home communities, resort and RV communities in popular vacation areas, and robust home sales and rental income had kept the company afloat even during the most financially challenging years of its history. In June 2018 the Forbes analyst Jon Markman wrote that Sun's “compelling business model” had allowed it to notch “18 consecutive years of positive net operating income,” even during recessionary downturns. Acknowledging that investing in manufactured housing may “lack the chic appeal of high-end retail, or panache of technology companies,” Markman observed that from an investment perspective what is important is that “the company is building durable competitive advantages. And for shareholders, these moves are building value.”

Christina M. Stansell
Updated, Pamela Willwerth Aue

Sun Communities Acquisitions, LLC; Sun Communities Operating Limited Partnership; Sun Home Services, Inc.

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