On Thursday, Sun Communities (NYSE:SUI), a real estate investment trust (REIT) specializing in manufactured housing and recreational vehicle communities, received a positive outlook from a Jefferies analyst. The firm initiated coverage on the company with a Buy rating and set a price target of $160.00.
The analyst cited a few reasons for the underperformance of Sun Communities compared to its peers Equity LifeStyle Properties (ELS) and other residential peers since the 2021 peak. The primary concerns were a lack of earnings growth in 2023 and 2024, with core Funds From Operations (FFO) per share expected to decrease by 3.6% and then marginally increase by 0.2%, respectively.
This was largely due to interest rate headwinds and operational issues that led to the company reducing its guidance multiple times for its UK portfolio in 2023.
Despite these challenges, the outlook for Sun Communities appears to be improving. The analyst noted that with short-term interest rates declining and the company's efforts to sell $357 million in assets year-to-date to reduce leverage, the financial pressures should ease in 2025.
Moreover, Sun Communities is working to lessen its dependence on home sales in its UK business, which is anticipated to contribute 45% of the UK's net operating income (NOI) in 2024.
The Jefferies analyst forecasts a compound annual growth rate (CAGR) of 5.4% for Sun Communities' FFO per share through 2026, which is slightly below the consensus estimate of 5.7%. The report suggests that a return to mid-single-digit FFO per share growth in 2025 will likely align Sun Communities' stock valuation more closely with ELS and surpass those of residential peers with lower growth projections.
Sun Communities' current stock valuation is 17.6 times FFO, compared to ELS's 23.1 times and the weighted average of 18.7 times for residential peers. The analyst believes that as the company addresses its headwinds and begins to show growth, its valuation could improve to reflect its stronger growth prospects.
In other recent news, Sun Communities Inc . has been making strategic moves to bolster its financial health. The real estate investment trust recently issued 243,273 common operating partnership units through its subsidiary, Sun Communities Operating Limited Partnership, in exchange for certain assets.
The initial holders of these units have agreed to a lock-up period, preventing them from selling the corresponding common stock shares for six months.
Sun Communities has also been focusing on its earnings and revenue performance. The company's second-quarter earnings met core Funds From Operations (FFO) expectations at $1.86 per share. This is in line with the company's shift towards annual RV site agreements, which has led to increased annual income and improved profit margins, despite a decrease in transient RV segment revenue.
Analysts have been closely monitoring these developments. Baird has maintained an Outperform rating for the company, raising its price target to $145 from $144. In contrast, Truist Securities raised the price target to $138 from the previous $127, following an increased Net Funds From Operations (NFFO) estimate for the year.
Other recent company news includes the sale of eight properties, generating over $300 million, aligning with its capital recycling program. Sun Communities' CEO, Gary Shiffman, has also outlined plans to convert over 10,000 transient RV sites to annual agreements within the next five years. These developments are part of the company's efforts to increase annual income, manage expenses, sell non-core assets, and reduce debt.
InvestingPro Insights
To complement the Jefferies analyst's positive outlook on Sun Communities (NYSE:SUI), recent data from InvestingPro provides additional context for investors. The company's market capitalization stands at $17.33 billion, reflecting its significant presence in the Residential REITs industry.
Sun Communities has demonstrated a commitment to shareholder returns, with InvestingPro Tips highlighting that the company has raised its dividend for 7 consecutive years and maintained dividend payments for an impressive 32 consecutive years. This track record of consistent dividend growth aligns well with the REIT structure and may appeal to income-focused investors.
The company's revenue for the last twelve months as of Q2 2024 was $3.21 billion, with a modest revenue growth of 4.12% over the same period. This growth, albeit slow, supports the analyst's projection of improving financial performance in the coming years.
While the P/E ratio appears high at 262.91, the adjusted P/E ratio for the last twelve months as of Q2 2024 is a more moderate 92.72. This valuation metric, combined with the analyst's growth projections, suggests there may be room for multiple expansion as the company navigates through its current challenges.
For investors seeking a deeper dive into Sun Communities' financials and prospects, InvestingPro offers additional tips and insights. In fact, there are 8 more InvestingPro Tips available for SUI, providing a comprehensive view of the company's financial health and market position.
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