Predicting the Future Position of Sun Communities' Shares in Three Years
Over the past three years, Sun Communities' stock has plummeted 36%, while the S&P 500 has skyrocketed 31%. Despite reinvested dividends, the real estate investment trust (REIT) has delivered a negative total return of 31%. Like many other REITs, Sun has wrestled with rising interest rates, driving income investors towards safer investments. However, Sun's decline was exacerbated by additional challenges, including a short-seller report, CEO retirement, and board shakeup.
Let's ponder if Sun Communities can shine bright once more over the next three years.
How Sun Communities Generates Revenue
Sun primarily invests in RV communities, marinas, and manufactured home communities. As an REIT, it rents out these properties, splitting the rental income with investors. At the end of 2023, Sun owned 659 properties across North America and the U.K. - 288 manufactured housing properties, 179 RV properties, 138 marina properties, and 54 U.K. properties. However, its portfolio has dwindled from 670 properties a year ago due to manufactured housing portfolio restructuring.
Despite interest rate woes, Sun's occupancy rates remain steady. In Q3 2024, the North American blended occupancy rate swelled 50 basis points year-over-year to 97.7%. U.K. segment occupancy improved by 90 basis points, reaching 91.5%. If interest rates fall and the market recovers, Sun's prospects should improve. Unfortunately, Sun anticipates a 4%-5% FFO decline in 2024 as it reduces its manufactured housing business. In 2025, it plans to keep slashing costs and rejuvenating its business.
Why Sun Communities Lags Behind Other REITs
Investors often gravitate towards REITs for their high yields and attractive dividends. However, Sun only offers a forward yield of 3%, while Realty Income provides a forward yield of 5.8% monthly and Vici Properties, a quarterly dividend yield of 5.9%. With interest rates at 4.6%, Sun appears less appealing as an income investment. Meanwhile, trading at 19 times its core FFO for 2024, it falls behind Realty and Vici, both of which boast higher occupancy rates and trade at lower multiples.
Adding fuel to the fire, accusations of Sun inflating FFO, CEO retirement, and board member departures cast doubts on its future.
Sun's Future Prospects
The next three years may be tumultuous for Sun. It's still wrestling with manufactured housing portfolio restructuring, and its RV and U.K. segments are struggling in the current market. The company won't name a new permanent CEO until late 2025, leaving future direction in flux.
Focusing on known factors, interest rates should decrease as the economy stabilizes, expanding Sun's portfolio and boosting NOI. Those improvements will foster future dividend hikes. However, these macro trends should also benefit high-yielding REITs like Realty and Vici. As before, Sun may face a hard time attracting investors due to lower yields and higher valuations.
While Sun's stock won't plummet, it's unlikely to outperform the market or most industry peers over the next three years. Short-term investors might be lured by Sun's ticker similarity to the Sui cryptocurrency, but long-term investors should disregard this short-term noise.
Given the current challenges facing Sun Communities, such as a declining manufactured housing portfolio and a temporary leadership vacuum, investors may be hesitant to invest their money directly in the company's stock. However, for those focused on long-term finance strategies, considering investing in Sun Communities' REIT shares could still yield potential returns. As interest rates decrease and the economy stabilizes, Sun's portfolio is expected to expand, boosting its net operating income (NOI) and enabling future dividend hikes. This could potentially make Sun Communities an attractive investing opportunity, despite its lower yield and higher valuation compared to some of its competitors.