One of the major issues in the real estate market currently is the lack of affordability. Home prices have surged, making it increasingly difficult for potential homeowners to save for a down payment or afford higher mortgage costs. However, there are opportunities in the residential real estate investment trust (REIT) sector that offer affordable housing solutions. In this article, we will discuss two top-tier REITs, Sun Communities and Camden Property Trust, that provide stable income and growth potential in the shifting real estate landscape.
Sun Communities (SUI): Affordable Manufactured Housing
Sun Communities is the largest operator of manufactured housing (MH) communities, which offer high-quality amenities and affordable prices. With a market cap of $13 billion, Sun Communities generates approximately half of its revenue from its 354 MH communities, covering 118,000 sites with a 95.3% occupancy rate. Additionally, 30% of its revenue comes from its RV communities, with 182 communities and 59,000 sites. The remaining revenue is generated from its marinas segment, which owns 48,000 dry storage spaces and wet slips.
Compared to single-family homes, MH communities offer a more cost-effective option for residents, with prices per square foot over 50% cheaper and larger square footage. The average rent in these communities is $1,261 per month, significantly below the average for single-family homes. Sun Communities also provides stability, with consistent occupancy rates, rent increases, and rental agreements linked to market rates or inflation.
The company has a strong balance sheet, with a net leverage ratio of 6.2x, a high percentage of fixed-rate debt, and no major maturities until 2026. Sun Communities currently offers a dividend yield of 3.5%, supported by a 57% adjusted funds from operations (AFFO) payout ratio. The stock is attractively valued, trading at 16.6x AFFO, with the potential for a return of 16.4% per year through 2025 if it returns to its normal valuation of 20.2x AFFO.
Camden Property Trust (CPT): Reliable Multifamily Income
Camden Property Trust is a leading REIT with a top-tier business model and a focus on the highly desired Sunbelt region, covering nine states. The company owns 172 communities with close to 59,000 apartments, primarily low-rise suburban apartments with an average age of 15 years. Camden boasts a 95% occupancy rate and attracts tenants with a median age of 31 and average annual household incomes of $120,000, resulting in a favorable rent-to-income ratio.
Despite being in a high-demand market, Camden benefits from below-average supply growth, supporting rent growth as demand remains strong. The company expects to grow net operating income by at least 4.0% this year and has a capital recycling program to generate value. Camden has a strong balance sheet, with an A- credit rating, a low average interest rate on debt, and ample liquidity.
Camden is currently trading at just 15.4x AFFO, below its long-term normalized valuation of 20.6x. A return to the normal valuation by 2025 could result in an annual return of more than 23%. The company offers a dividend yield of 4.3%, with a 66% AFFO payout ratio. The dividend has a five-year compound annual growth rate of 5.2%, and the company hiked its dividend by 6.4% recently.
In today’s real estate landscape, where affordability is a major concern, REITs like Sun Communities and Camden Property Trust provide attractive investment opportunities. Sun Communities offers affordable manufactured housing with stability and growth potential, while Camden Property Trust focuses on reliable multifamily income in the thriving Sunbelt region. Both companies have strong balance sheets, attractive valuations, and a history of dividend growth. As the real estate market continues to evolve, these REITs offer investors stable income and potential for long-term growth.
“This environment favors landlords with strong balance sheets.” – Brad Thomas