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Sun Communities, an Attractively Priced RV REIT

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This real estate investment trust is successfully playing the growing trend of traveling the country by recreational vehicle.

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Sun Communities (SUI), a real estate investment trust, is one of the largest owners of manufactured housing and recreation vehicles communities, with 162 communities, mostly in the Midwest and southeast US.

With a rich yield of close to 6%, well above the average 3% for its REIT peers, Sun is attractively priced for new money.

The trust has paid $0.63 per share since 2005. That annualizes to $2.52 per share, for a yield of 5.8%. For the last few years, about 75% of the distribution was return of capital, which is not taxable in the year received, but reduces your cost base when sold.

The balance was taxable as ordinary income. Given the large portion of nontaxable return of capital, the shares are appropriate for a taxable account.

About 80% of revenue comes from property rentals. Sun leases mobile home lots on a monthly or annual basis, generally adjusting the rates in line with the going market rate.

Sun's communities are not what you might imagine when you think of a trailer park. They are residential communities with paved streets and may have amenities such as a clubhouse, swimming pool, and tennis courts.

Its business continues to benefit from a weak housing market. As new home sales fell in March by the largest amount in more than a year, demand for Sun's low-cost housing remained strong.

Funds from operations (or FFO) per share rose nearly 9% to $0.89 in the first quarter of 2012, from $0.82 a year ago, despite a 12% increase in outstanding shares due to an equity issue in January.

These strong results and continued weakness in the housing market have led analysts to raise their estimates of FFO per share by $0.02 to $3.26 in 2012, and by a penny to $3.52 in 2013, up from $3.13 last year.

At 14 times FFO of $3.07 per share for the trailing 12 months, the shares are trading at a discount to an average 21 times for residential REIT peers and represent good value.

Editor's Note: This article was written by Carla Pasternak of High-Yield Investing.

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No positions in stocks mentioned.
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