Fairness LifeStyle Properties (NYSE:ELS) owns and operates a portfolio of manufactured house (“MH”) communities, leisure car (“RV”) resorts, campgrounds, and marinas in North America, with a deal with coastal and sunbelt retirement areas.
Their enterprise mannequin facilities on leasing the land they personal to clients who personal MHs and cottages, RVs, and/or boats. These leases are both on a long-term or short-term foundation. On the finish of 2022, their portfolio included 449 properties consisting of about 170K websites situated throughout 35 states within the U.S. and British Columbia in Canada.
Inside the area, Solar Communities (SUI) is their closest competitor by way of dimension and scale. In comparison with the broader S&P 500 (SPY), each firms have considerably outperformed the broader markets over a long-duration timeframe.
However each are right down to a better extent in latest intervals.
Regardless of the pullback, the long-term outlook for the sector is optimistic. The elemental enterprise has additionally proved resilient by enterprise cycles, good and unhealthy. ELS’ better publicity to MH additionally positions them strongly to capitalize on the rising demand for reasonably priced housing. Favorable demographic tendencies of their properties present one other tailwind for persevering with demand. Shares, nevertheless, are presently buying and selling close to the mid-point of their 52-week vary and at a premium to their larger-sized peer. Whereas this may be justified in some sense, I view the inventory extra neutrally within the present market atmosphere. An additional dive, however, is well-warranted.
The Bull View
In 2022, ELS grew web working revenue (“NOI”) by 5.7%, resulting in a 7.4% improve in core funds from operations (“FFO”).
As well as, their MH portfolio is 95% occupied. Extra notable is that 96% of their websites are occupied by owners, persevering with a optimistic development increased by the years in relation to their renter inhabitants.
That is necessary since their renters sometimes keep lower than three years, whereas owners keep roughly ten years. As it’s, about 90% of their property working revenues are derived from secure annual sources. The rising share of house owners additional solidifies this stability.
Their owners even have sturdy credit score high quality. In 2022, for instance, practically 80% of their 2022 new properties gross sales, which got here in at a report excessive of 1,100 items, had been to residents with a FICO rating better than 680.
Trying forward, the corporate is more likely to proceed reaping the advantages of favorable demand drivers for manufactured housing. Contemplating that over 70% of their MH properties are age-restricted or have a resident with a median age of over 55, present inhabitants tendencies ought to work of their favor.
The inhabitants of these 55 and over, for instance, is anticipated to extend 17% from 2022 to 2037. Moreover, it’s estimated that roughly 10K Child Boomers will flip 65 each day by 2030.
The rising demand is paired with favorable provide dynamics. Whereas there was an uptick in provide development in 2022, improvement has been primarily flat for the reason that Nice Monetary Disaster of 2007-2008. A difficult regulatory atmosphere for improvement is one side of restricted provide development. However native resistance is one other, as there may be usually a “not in my yard’ stigma related to MH communities.
Regardless of the decrease provide, MH nonetheless gives better worth when in comparison with different housing choices, whether or not shopping for or renting. The common gross sales value for a brand new MH is decrease than that of a brand new single-family house. And in ELS’ markets, renters pay roughly 30% much less per sq. foot than the typical two-bedroom rental of their submarkets.
Whereas peer SUI owns extra MH communities general, ELS derives a better share of revenues from MH than SUI, at about 60% in comparison with 53%. This places them in a stronger place to seize the embedded upside available in the market. It additionally protects them from the extra variability exhibited within the RV and Marina enterprise.
One other aggressive benefit is their steadiness sheet, which isn’t solely much less indebted general, but additionally much less top-heavy in near-term maturities. Simply 26% of their debt, for instance, matures within the subsequent 5 years. This compares to the REIT business common of 46%. And at a web debt a number of of 5.3x, leverage is just a few turns under the 5.8x reported by SUI.
For 2023 steerage, ELS guided for normalized FFO of $2.84/share on the midpoint, which represents 4.1% YOY development. In distinction, SUI sees FFO touchdown at a midpoint of $7.32/share. This may be primarily flat from 2022 ranges. As well as, ELS authorised a 9.1% improve of their dividend. This outflanked the 5.7% dividend improve supplied by SUI.
The Bear View
Regardless of working on a smaller scale, ELS trades at a premium to SUI, with a present ahead FFO a number of of 23.6x versus the 19.2x commanded by SUI.
Whereas ELS does generate increased margins, their development price of revenues and earnings considerably trails SUI.
And for 2022, ELS reported development in FFO of seven.4%. This lags the 12.9% improve reported by SUI. Given the stronger development charges in latest intervals by SUI, one may fairly query whether or not ELS’ present valuation is justified.
ELS’ operations are additionally extra geographically concentrated within the coastal and sunbelt areas. For instance, about 45% of their whole annual websites are concentrated within the Florida market. This compares to about 28% for SUI. Whereas publicity to the market has its advantages, it additionally comes paired with distinctive dangers, comparable to these regarding pure disasters.
In 2022, for instance, the impression of Hurricane Ian resulted in important bills for particles elimination and cleanup prices. And it compelled some properties, particularly these in or close to the Fort Myers space, to be positioned out of service because of the injury incurred.
And whereas ELS is presently benefiting from a good provide outlook for MH, owing partly to regulatory tailwinds, MH seems to be an asset sort that’s extra prone to overbuilding because of distinctive building benefits.
For one, these properties are in-built managed building environments, mitigating delays regarding climate. As well as, builders are extra capable of buy supplies in bulk. And their extra centralized labor drive gives for sooner workforce coaching and retention.
This must be famous because of ELS’ better dependence on MH for revenues in comparison with SUI. As it’s, there was already an uptick in building in 2022. If it continues to trace increased within the intervals forward, ELS might encounter headwinds in continued price development.
ELS seems well-positioned to capitalize on the MH sector’s favorable provide/demand dynamics, notably because the inhabitants of these over 55 years previous continues to develop. And at current, they seem like benefiting from secure, long-term income streams, supported by the sturdy credit score high quality of their owners, as evidenced by sturdy occupancy ranges of 95%. An rising share of house owners in relation to renters gives additional stability to those reoccurring revenues.
ELS’ steadiness sheet can be much less indebted, with decrease near-term maturities than their friends, which gives better flexibility to pursue different priorities, comparable to development alternatives or dividend will increase. On this case, the corporate enacted a extra aggressive improve to their annual payout, at 9.1%.
Regardless of these advantages, ELS does commerce at a better valuation than its peer, SUI, regardless of a slower development price of revenues and earnings in latest intervals. As well as, they’ve better geographic focus to coastal markets comparable to Florida.
This exposes the corporate to better pure catastrophe dangers. Whereas the advantages of the market might very effectively surpass the dangers, it’s nonetheless price consideration. Moreover, the MH sector is prone to overbuilding, which may disproportionately have an effect on ELS if provide development continues to extend.
Regardless of these issues, ELS’s favorable provide/demand dynamics at current, secure income streams, and powerful monetary place make it price a glance. Moreover, ELS has a strong observe report of accelerating its dividend, indicating its dedication to offering worth to shareholders.
With shares close to the midpoint of their 52-week vary, nevertheless, and at a a number of that’s at a premium to their larger-sized peer, I view the inventory extra neutrally. As such, I’m sustaining shares as a “maintain” till there’s a extra enticing entry level.