2023-04-03 09:45:35 ET
Summary
- Equity LifeStyle Properties owns a large portfolio of manufactured home communities, along with RV resorts, campgrounds, and marinas in North America.
- The company reported solid results in 2022, including a 5.7% increase in NOI and a 7.4% increase in FFO. This came as they sold a record number of new houses.
- Favorable demand drivers paired with accommodative supply dynamics positions the company well for further growth in future periods.
- Shares, however, appear fairly valued, given current trading levels, especially in relation to one of their close competitors.
Equity LifeStyle Properties ( ELS ) owns and operates a portfolio of manufactured home (“MH”) communities, recreational vehicle (“RV”) resorts, campgrounds, and marinas in North America, with a focus on coastal and sunbelt retirement locations.
Their business model centers on leasing the land they own to customers who own MHs and cottages, RVs, and/or boats. These leases are either on a long-term or short-term basis. At the end of 2022, their portfolio included 449 properties consisting of about 170K sites located across 35 states in the U.S. and British Columbia in Canada.
Within the space, Sun Communities ( SUI ) is their closest competitor in terms of size and scale. Compared to the broader S&P 500 ( SPY ), both companies have significantly outperformed the broader markets over a long-duration timeframe.
But both are down to a greater extent in recent periods.
Despite the pullback, the long-term outlook for the sector is positive. The fundamental business has also proved resilient through business cycles, good and bad. ELS’ greater exposure to MH also positions them strongly to capitalize on the growing demand for affordable housing. Favorable demographic trends of their properties provide another tailwind for continuing demand. Shares, however, are currently trading near the mid-point of their 52-week range and at a premium to their larger-sized peer. While this can be justified in some sense, I view the stock more neutrally in the current market environment. A further dive, nevertheless, is well-warranted.
The Bull View
In 2022, ELS grew net operating income (“NOI”) by 5.7%, leading to a 7.4% increase in core funds from operations (“FFO”).
In addition, their MH portfolio is 95% occupied. More notable is that 96% of their sites are occupied by homeowners , continuing a positive trend higher through the years in relation to their renter population.
This is important since their renters typically stay less than three years, while homeowners stay approximately ten years. As it is, about 90% of their property operating revenues are derived from stable annual sources. The growing share of homeowners further solidifies this stability.
Their homeowners also have strong credit quality. In 2022, for example, nearly 80% of their 2022 new homes sales, which came in at a record high of 1,100 units, were to residents with a FICO score greater than 680.
Looking ahead, the company is likely to continue reaping the benefits of favorable demand drivers for manufactured housing. Considering that over 70% of their MH properties are age-restricted or have a resident with an average age of over 55, current population trends should work in their favor.
The population of those 55 and over, for example, is expected to increase 17% from 2022 to 2037. Additionally, it is estimated that approximately 10K Baby Boomers will turn 65 every day through 2030.
The growing demand is paired with favorable supply dynamics. While there was an uptick in supply growth in 2022, development has been essentially flat since the Great Financial Crisis of 2007-2008 . A challenging regulatory environment for development is one aspect of limited supply growth. But local resistance is another, as there is often a “not in my backyard’ stigma associated with MH communities.
Despite the lower supply, MH still provides greater value when compared to other housing options, whether buying or renting. The average sales price for a new MH is lower than that of a new single-family home. And in ELS’ markets, renters pay approximately 30% less per square foot than the average two-bedroom rental in their submarkets.
While peer SUI owns more MH communities overall, ELS derives a greater share of revenues from MH than SUI, at about 60% compared to 53%. This puts them in a stronger position to capture the embedded upside in the market. It also protects them from the more variability exhibited in the RV and Marina business.
Another competitive advantage is their balance sheet, which is not only less indebted overall, but also less top-heavy in near-term maturities. Just 26% of their debt, for example, matures in the next five years. This compares to the REIT industry average of 46%. And at a net debt multiple of 5.3x, leverage is a few turns below the 5.8x reported by SUI.
For 2023 guidance , ELS guided for normalized FFO of $2.84/share at the midpoint, which represents 4.1% YOY growth. In contrast, SUI sees FFO landing at a midpoint of $7.32/share. This would be essentially flat from 2022 levels. In addition, ELS approved a 9.1% increase in their dividend. This outflanked the 5.7% dividend increase provided by SUI.
The Bear View
Despite operating on a smaller scale, ELS trades at a premium to SUI, with a current forward FFO multiple of 23.6x versus the 19.2x commanded by SUI.
While ELS does generate higher margins, their growth rate of revenues and earnings significantly trails SUI.
And for 2022, ELS reported growth in FFO of 7.4%. This lags the 12.9% increase reported by SUI. Given the stronger growth rates in recent periods by SUI, one could reasonably question whether ELS’ current valuation is justified.
ELS’ operations are also more geographically concentrated in the coastal and sunbelt locations. For example, about 45% of their total annual sites are concentrated in the Florida market. This compares to about 28% for SUI . While exposure to the market has its benefits, it also comes paired with unique risks, such as those relating to natural disasters.
In 2022, for example, the impact of Hurricane Ian resulted in significant expenses for debris removal and cleanup costs. And it forced some properties, specifically those in or near the Fort Myers area, to be placed out of service due to the damage incurred.
And while ELS is currently benefiting from a favorable supply outlook for MH, owing in part to regulatory tailwinds, MH appears to be an asset type that is more susceptible to overbuilding due to unique construction advantages.
For one, these properties are built in controlled construction environments, mitigating delays relating to weather. In addition, builders are more able to purchase materials in bulk. And their more centralized labor force provides for faster workforce training and retention.
This needs to be noted due to ELS’ greater dependence on MH for revenues compared to SUI. As it is, there was already an uptick in construction in 2022. If it continues to track higher in the periods ahead, ELS may encounter headwinds in continued rate growth.
The Takeaway
ELS appears well-positioned to capitalize on the MH sector’s favorable supply/demand dynamics, particularly as the population of those over 55 years old continues to grow. And at present, they appear to be benefiting from stable, long-term revenue streams, supported by the strong credit quality of their homeowners, as evidenced by strong occupancy levels of 95%. An increasing share of homeowners in relation to renters provides further stability to these reoccurring revenues.
ELS’ balance sheet is also less indebted, with lower near-term maturities than their peers, which provides greater flexibility to pursue other priorities, such as growth opportunities or dividend increases. In this case, the company enacted a more competitive increase to their annual payout, at 9.1%.
Despite these benefits, ELS does trade at a higher valuation than its peer, SUI, despite a slower growth rate of revenues and earnings in recent periods. In addition, they have greater geographic concentration to coastal markets such as Florida.
This exposes the company to greater natural disaster risks. While the benefits of the market may very well surpass the risks, it’s still worth consideration. Furthermore, the MH sector is susceptible to overbuilding, which could disproportionately affect ELS if supply growth continues to increase.
Despite these concerns, ELS’s favorable supply/demand dynamics at present, stable revenue streams, and strong financial position make it worth a look. Furthermore, ELS has a solid track record of increasing its dividend, indicating its commitment to providing value to shareholders.
With shares near the midpoint of their 52-week range, however, and at a multiple that is at a premium to their larger-sized peer, I view the stock more neutrally. As such, I am maintaining shares as a “hold” until there is a more attractive entry point.
For further details see:
Equity LifeStyle Properties: Well-Positioned But Shares Appear Fairly Valued