Editor’s Note: Companies like Sun Communities can pay special dividends because they’ve spent years quietly compounding cash from essential real estate. What happens when you own those kinds of income machines from the start? Robert Rapier has been tracking that question for 36 years in Utility Forecaster. His portfolio of 41 essential-service stocks now averages 33% in annual yield on his original investment. See how the compounding works →

What is the opposite of investment?

Well, that would have to be divestment.

One deposits money into an asset; the other withdraws it. A purchase versus a sale.

Asset divestments come in many forms, from equity carve-outs and spinoffs to outright sales. Whatever the mechanism, S&P companies have been actively shedding parts and pieces this year. Most recently, Stanley Black & Decker (NYSE: SWK) sold its aerospace manufacturing division to a private buyer for $1.8 billion in cash.

It had previously acquired this unit for $1.5 billion back in 2020.

These separations are undertaken for many reasons. They rarely involve the company’s crown jewels, but rather non-core units or subsidiaries that may no longer be a good strategic fit. From a valuation standpoint, the operations often go overlooked by the market, particularly when tucked inside a much larger organization.

In other words, they can be hidden balance sheet assets. That’s why CFOs put them on the auction block and sell to the highest bidder. The proceeds are then used to pay down debt or deployed elsewhere. The untethering process can also reduce future capex spending and allow the streamlined company to sharpen its focus.

That was the case with Sun Communities (NYSE: SUI). Just over a year ago, the real estate trust unveiled plans to sell off the boat marinas in its portfolio. They had been acquired for $2 billion in the fall of 2020, during the tail end of the Covid lockdowns.

Think parking your car downtown is tough? Try the nearest lake. There are roughly 1 million wet slips in the U.S., against 12 million floating vessels. That ratio keeps availability tight and prices firm. Ask any boat owner — towing and launching is a hassle. Most find a dedicated mooring well worth the cost.

Under Sun’s watch, Safe Harbor marinas expanded to 138 locations stretching from coastal cities in Florida to vacation lakes in Connecticut. These dockside properties sell everything from ice, fishing tackle and fuel to poolside cocktails, but nearly three-fourths of their gross profits are generated by monthly rental income paid by 48,000 members. Many cater to superyachts.

Keep in mind, these waterfront complexes often have a wait list to get in and are built on lakes that have a moratorium on new marina construction.

It’s a great business… one that was built with financial backing from the likes of Guggenheim Partners. So I wasn’t too surprised to see Sun turn ownership back over to private equity. After all, a $5.65 billion cash offer can be very persuasive.

The buyer (Blackstone) agreed to pay about 21 times Safe Harbor’s annual funds from operations (FFO), a generous multiple. After transaction costs, Sun stood to pocket $5.5 billion and book a realized gain of $1.3 billion. Here’s what one of the firm’s top execs had to say at the time.

“We are very pleased with this transaction, which further accelerates Sun’s strategy to refocus on our core segments. Proceeds are anticipated to be used to support a combination of debt reduction, distributions to shareholders and reinvestment in the Company’s core businesses.”

Based on some pro-forma number crunching, I anticipated about $4 billion in debt reduction, which would dramatically deleverage the balance sheet. As for the rest of the windfall? I saw a special dividend distribution of $0.5 billion ($3.84 per share) on the horizon.

I decided to take a position in the stock. Less than three months later, the deal was finalized – and things began to happen. Management quickly outlined plans to wipe out $3.3 billion in mortgage, credit lines and other borrowings. The board also authorized a “one-time special cash distribution of $4.00 per share, equating to $520 million.” That was a bit above my calculation, a pleasant surprise.

Why bring all this up now? Because it’s about to happen again. On May 21, Sun announced plans to sell its U.K. division to Aermont Capital for $1.03 billion. The deal is expected to close within the next six months, and CEO Charles Young affirms that the cash infusion may be targeted towards growth opportunities and capital returns.

Sun’s core operations will remain intact. The company owns 300 manufactured home (MH) communities containing 100,000+ individual sites or lots. These aren’t the aging, run-down trailer parks you might be imagining. Think custom-built, gated communities with lakes, tennis courts, pools, bike paths, fitness centers, and other amenities.

Most tenants buy their homes and rent the lot. The average tenure is approximately 19 years. Moving/relocating can cost up to $10,000, which keeps turnover low. With rental rates climbing about 5% annually, net operating income (NOI) from these lots is closing in on $200 million per quarter.

… and 50,000 new applicants send in paperwork each year to live in a Sun community.

This is also one of the nation’s largest recreational vehicle (RV) park owners. At last count, there were just 1.7 million RV campsites for 11.2 million registered RVs across the country. That disparity generally means few empty spots, particularly during busy holidays and weekends. Rental rates for RV sites are rising even faster than those for manufactured homes.

Combined, these 158,000 rental sites have delivered positive NOI growth every year since 2000. That’s 25 straight years up, zero years down.

I don’t see that streak ending anytime soon. With an occupancy rate of 98%, Sun squeezed a healthy 6.3% increase in NOI last quarter and upped its full-year Funds from Operations (FFO) guidance to around $7 per share, enough to cover the annual dividend distribution 1.5 times over.

With or without a special dividend encore from the U.K. transaction, this pure-play manufactured home and RV community landlord remains a compelling buy.

The manufactured-home and RV-park business Nathan describes today — 25 straight years of positive NOI growth, 98% occupancy, rental rates rising 5% annually — is a textbook compounding income machine. Essential real estate with captive tenants who rarely leave. Our colleague Robert Rapier has spent 36 years finding businesses with the same structural advantage in Utility Forecaster: utilities, water companies, and infrastructure operators where growing cash flows translate directly into growing dividends. His portfolio of 41 such stocks now averages 33% in annual yield on his original investment — with five positions paying over 100% annually on cost. See which 41 stocks are on the Dividend Map →