Equity LifeStyle Properties (NYSE: EL) owns and operates a portfolio of manufactured home (“MH”) communities, recreational vehicle (“RV”) resorts, campgrounds and marinas in North America, with a focus on private beach and sun spots.
their business model centers in the location they own land for clients who own their own MHs and cottages, RVs, or boats. These contracts are either on a long-term or short-term basis. At the end of 2022, their portfolio includes 449 properties consisting of approximately 170K locations located across 35 states in the US and British Columbia in Canada.
Within the space, Sol Communities (SUI) is the closest competitor in size and scope. Compared to the broader S&P 500 (SWAP), both companies have significantly outperformed the market over the long-term.
but both in later ages they descend more widely.
Despite the trap, the long-term outlook for the region is positive. Business fundamentals have also proven resilient through business cycles, good and bad. ELS’ greater exposure to MH also leads them to capitalize strongly on the growing demand for affordable housing. Favorable demographic trends for their properties provide another tailwind for continued demand. However, shares are now trading near their 52-week average and at a premium to a relatively large range. While this may be justified in some sense, I consider the stock more neutral in the currency environment. In addition, it is still well-warranted.
In 2022 the bus grew net operating income (“NOI”) by 5.7%, leading to a 7.4% increase in core funds from operations (“FFO”).
Their MH portfolio is also 95% occupied. It is more remarkable that 96% of their sites are they hold the homeownerscontinuing a positive upward trend over the years in relation to the renter population.
This is important since their income typically stays for less than three years, while owners stay for about ten years. As it is, about 90% of its operating income is derived from stable annual sources. A growing share of owners further consolidates this stability.
Their homeowners also have strong credit quality. In 2022, for example, nearly 80% of their 2022 new home sales, which entered the high 1,100 units, will be residents with a FICO score greater than 680.
Looking forward, the company will continue to pursue the benefits of the direct investment made in housing. Considering that over 70% of MH owners own their age-restricted properties or reside with an average age of over 55, demographic trends should work in their favor.
The population of those 55 and over, for example, is expected to increase by 17% from 2022 to 2037. Additionally, it is estimated that approximately 10K Baby Boomers will turn 65 every day by 2030.
Growing demand is matched by dynamic supply. With an uptick in supply growth in 2022, development has been essentially flat since then The Great Financial Crisis of 2007-2008. Tenth, challenging development management is one reason for limited supply growth. But local resistance is different, as the “not in my backyard” stigma is often associated with MH communities.
Despite the lower supply, MH still offers greater value compared to other housing options, whether buying or renting. The average sales price for a new MH is lower than a new single-family home. And in ELS markets, renters pay nearly 30% less per square foot than the average two-bedroom rental in their submarkets.
While SUI’s peers own more MH communities overall, ELS has a larger share of MH’s revenue than SUI’s, about 60% compared to 53%. This puts them in a stronger position to gain a foothold in the market. It also protects them from the more variability that is presented in the RV and Marine business.
Another competitive advantage is their balance sheet, which not only owes less overall, but also has less total weight in near-term maturities. Just 26% of its 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 times below the 5.8x reported by SUI.
For 2023 guidance, ELS is guided to normalized FFO at a midpoint of $2.84/share, which represents 4.1% YOY growth. In contrast, SUI sees FFO landing at a midpoint of $7.32/share. This would essentially be flat by 2022 degrees. In addition, ELS approved a 9.1% increase in the dividend. This is surrounded by a 5.7% dividend increase.
Despite a smaller operating margin, ELS trades at a premium to SUI, with a current forward FFO multiple of 23.6x versus 19.2x, driven by SUI.
While ELS generates higher margins, the growth of their revenues and profits is significantly dragged down by SUI.
And for 2022, ELS reported an increase in FFO of 7.4%. This was a slow 12.9% increase in SUI. Given the stronger increase in the SUI in recent periods, one can rightly question whether the current ELS estimate is justified.
ELS operations are also more geographically concentrated in coastal areas and sun belts. For example, approximately 45% of their annual total site rent is in the Florida market. This is almost comparable 28% to SUI. While exposure to the market has its benefits, it also bears unique risks, such as those related to natural disasters.
In 2022, for example, the impact of Hurricane Ian resulted in significant expenses due to debris removal and cleanup costs. And it forced some properties, specifically those in the area or near Fort Myers, to be placed out of service due to the damage caused.
And while ELS is currently unsupported from a MH perspective, in part because of the regulatory tails, MH seems to be the type of property that is more suitable for non-construction due to its unique construction advantages.
Together, these properties are built in controlled construction environments, minimizing weather delays. In addition, builders are more able to purchase materials in bulk. And their more centralized workforce provides for faster workforce training and retention.
This should be noted due to the greater dependence of ELS on MH compared to SUI revenues. As it is, there is already an uptick in construction in 2022. If it continues to track higher levels going forward, ELS charges will occur at a continuous rate of increase.
ELS appears well-placed to capitalize on the dynamic demand/demand/demand in the MH sector, especially as the population of those over 55 continues to grow. Now, they appear to be profitable steady, long-term income streams that support their strong homeowners’ credit quality, as evidenced by a strong 95% occupancy rate. The growing share of owners relative to renters provides further stability to these recurring incomes.
ELS’s balance sheets are also less encumbered, with lower maturities closer to peers, which provides greater flexibility to pursue other positions to increase opportunities for growth or dividends. In this case, the company has set a more favorable increase for the annual salary, to 9.1%.
Despite these benefits, ELS trades at a higher valuation than its peer, SUI, despite slower revenue and earnings growth in recent times. In addition, they have a greater geographic connection to coastal markets such as Florida.
This exposes society to greater risks of natural disaster. While the benefits of the market outweigh the risks, it is still worth considering. Moreover, the MH sector is susceptible to construction, which disproportionately affects ELS, if supply growth continues to increase.
Despite these concerns, ELS’s current favorable supply/demand dynamics, steady income streams, and strong financial position make it a worthy prospect. In addition, ELS has a solid record of increasing its dividend, signifying its commitment to providing shareholder value.
However, with shares around the middle of their 52-week high, and a larger premium multiple, I view the stock more neutrally. As such, to “hold” shares while I look at a more attractive point.