Company Reports

Equity Lifestyle reported first-quarter results that were in line with our expectations, leading us to reaffirm our $77 fair value estimate for the no-moat company. Occupancy for the same-store manufactured homes portfolio held steady at 94.9% in the first quarter and monthly rental rates increased 6.3% year over year. After reporting declines for much of 2023, the seasonal and transient portions of the recreational vehicle and marina segment saw 2.2% and 1.4% respective growth. This, combined with the 8.1% growth from the annual membership business, led to revenue growth of 5.8% for the RV and marina segment. Equity Lifestyle reported same-store revenue growth for the total company of 5.8%, which matched our estimate for the first quarter. Same-store operating expenses only grew 4.0% in the quarter, leading to same-store net operating income growth of 7.1% that was slightly ahead of our 6.4% estimate. The company reported normalized funds from operations year-over-year growth of 8.6% to $0.78 per share in the first quarter, which matched our estimate.

Equity Lifestyle Properties is a residential REIT that focuses on owning manufactured housing, residential vehicle communities, and marinas. The company currently has a portfolio of 451 properties across the U.S. with a higher concentration in the Sunbelt region with 38% of the company’s properties located in Florida, 12% in Arizona, and 8% in California. Equity Lifestyle targets owning properties in attractive retirement destinations with over 70% of the company’s properties either being age-restricted or having an average resident age over 55.

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

Fourth-quarter results for no-moat Equity Lifestyle Properties were relatively in line with our expectations, giving us confidence in our $78 fair value estimate. Occupancy for the manufactured home portfolio held steady at 94.6% in the fourth quarter while rental rates per site were up 7.3% year over year, in line with our estimate of 7.4% rate growth for the segment. Rate growth for the recreational vehicle and marina segment was 3.9% in the fourth quarter as the annual membership component grew 8.3% but the seasonal and transient business declined 7.7%. As a result, core revenue increased 6.6% in the fourth quarter, which matched our estimate. Core operating expense grew 8.6%, slightly worse than our estimate of 6.4%, leading to same-store net operating income growth of 5.2%, slightly below our 6.3% estimate. However, other revenue was $2.4 million higher than we anticipated, so Equity Lifestyle reported normalized funds from operations of $0.71 per share in the fourth quarter, beating our $0.69 estimate and higher than the $0.64 reported in the fourth quarter of 2022.

Equity Lifestyle Properties is a residential REIT that focuses on owning manufactured housing, residential vehicle communities, and marinas. The company currently has a portfolio of 450 properties across the U.S. with a higher concentration in the Sunbelt region with 34% of the company’s properties located in Florida, 11% in California, and 10% in Arizona. Equity Lifestyle targets owning properties in attractive retirement destinations with over 70% of the company’s properties either being age-restricted or having an average resident age over 55.

Equity Lifestyle reported third-quarter results that were slightly below our estimates, though we don’t see anything in the quarter that would materially change our $77 fair value estimate for the no-moat company. Occupancy for the manufactured housing portfolio sequentially remained flat at 94.6%, relatively in line with our estimate of 94.7%. Core manufactured home rates per rental site were up 7.1% year over year, slightly below our estimate of 8.0% for the segment. Meanwhile, recreational vehicle and marina rental rates were only up 2.0% year over year as seasonal and transient business fell 9.1% and 7.6%, respectively. As a result, core revenue increased 4.7%, below our estimate of 6.9% growth. However, operating expense growth was also below our estimate, coming in at 4.8% growth compared with our estimate of 7.7% growth in the third quarter. Therefore, net operating income was up 4.4% in the quarter, slightly below our estimate of 6.3%. Lower NOI growth led to Equity Lifestyle reporting funds from operations of $0.71 per share in the quarter, which was below our $0.73 estimate but matched the midpoint of management’s prior guidance of $0.68 to $0.74 for the third quarter.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

Second-quarter results for no-moat Equity Lifestyle were relatively in line with our expectations, leading us to reaffirm our $77 fair value estimate. The manufactured housing portfolio occupancy was down 30 basis points year over year to 94.6%, slightly below our estimate of 94.7%. Manufactured home rates per rental site increased 7.0% year over year, slightly better than our 6.5% growth estimate, leading to manufactured home rental revenue growth of 6.7%, which was in line with our estimate. However, RV and marina income only grew 2.3% in the second quarter because, while revenue from annual members increased 8.0% and was in line with our expectations, revenue from transient sources fell 14.1% year over year. As a result, total revenue growth of 5.0% in the second quarter was slightly below our 6.1% estimate. However, operating expenses grew 7.2% in the quarter, less than our estimate of 10.1% growth, leading to same-store net operating income growth of 3.3%, which slightly beat our 2.9% estimate. Slightly higher operating income from the portfolio led to Equity Lifestyle reporting normalized funds from operations of $0.66 per share in the second quarter, a penny better than our estimate for the quarter and $0.02 better than the $0.64 figure reported in the second quarter of 2022.

Equity Lifestyle Properties is a residential REIT that focuses on owning manufactured housing, residential vehicle communities, and marinas. The company currently has a portfolio of 450 properties across the U.S. with a higher concentration in the Sunbelt region with 34% of the company’s properties located in Florida, 11% in California, and 10% in Arizona. Equity Lifestyle targets owning properties in attractive retirement destinations with over 70% of the company’s properties either being age-restricted or having an average resident age over 55.

We are initiating coverage on manufactured housing-REIT Equity Lifestyle Properties with a fair value estimate of $77 per share and on manufactured housing-REIT Sun Communities with a fair value estimate of $173 per share. We assign both companies a no-moat rating, a Medium Uncertainty rating, and a Standard Capital Allocation rating. We view both companies as currently trading a material discount to our fair value estimates at current prices.

We are no longer providing equity research on Equity Lifestyle Properties ELS. We provide broad coverage of more than 1,700 companies and adjust our coverage as necessary based on client demand and investor interest.

Equity Lifestyle Properties is targeting lifestyle-oriented and seasonal homeowners to make up for slower growth in its retirement communities. Although demographic trends favor this strategic shift--retiring baby boomers are expected to boost demand for resorts--we think the company will probably pay a high price to enter new markets. Still, we believe Equity Lifestyle's existing stable of retirement communities should continue to prove a stable source of cash flows, earning this real estate investment trust a narrow economic moat.

Equity Lifestyle Properties is targeting lifestyle-oriented and seasonal homeowners to make up for slower growth in its retirement communities. Although demographic trends favor this strategic shift--retiring baby boomers are expected to boost demand for resorts--we think the company will probably pay a high price to enter new markets. Still, we believe Equity Lifestyle's existing stable of retirement communities should continue to prove a stable source of cash flows, earning this real estate investment trust a narrow economic moat.

Equity Lifestyle Properties is targeting lifestyle-oriented and seasonal homeowners to make up for slower growth in its retirement communities. Although demographic trends favor this strategic shift--retiring baby boomers are expected to boost demand for resorts--we think the company will probably pay a high price to enter new markets. Still, we believe Equity Lifestyle's existing stable of retirement communities should continue to prove a stable source of cash flows, earning this real estate investment trust a narrow economic moat.

Equity Lifestyle Properties is targeting lifestyle-oriented and seasonal homeowners to make up for slower growth in its retirement communities. Although demographic trends favor this strategic shift--retiring baby boomers are expected to boost demand for resorts--we think the company will probably pay a high price to enter new markets. Still, we believe Equity Lifestyle's existing stable of retirement communities should continue to prove a stable source of cash flows, earning this real estate investment trust a narrow economic moat.

Equity Lifestyle Properties is targeting lifestyle-oriented and seasonal homeowners to make up for slower growth in its retirement communities. Although demographic trends favor this strategic shift--retiring baby boomers are expected to boost demand for resorts--we think the company will probably pay a high price to enter new markets. Still, we believe Equity Lifestyle's existing stable of retirement communities should continue to prove a stable source of cash flows, earning this real estate investment trust a narrow economic moat.

We are placing our fair value estimate for Equity Lifestyle Properties ELS under review as we transfer coverage to a new analyst.

Equity Lifestyle Properties ELS announced second-quarter results in line with our expectations, and we are maintaining our fair value estimate. Year-over-year property operating revenue increased 23% to $116.1 million, compared with $94.3 million this time last year, largely thanks to an $18.9 million contribution (net of deferrals) from its Privileged Access acquisition (closed in August 2008). Total property operating income grew 10.1% to $52.5 million compared with $47.7 million last year. Excluding the Privileged Access acquisition, core year-over-year property operating revenue was relatively stable, growing roughly 3.2% to $97.2 million (excluding deferrals), while property operating expenses fell roughly 2.4% to $40.4 million. Monthly base rent per site grew at 2.9% to $528 and average occupancy contracted slightly to 90.3% from 90.5% in the year-ago quarter.

Equity Lifestyle Properties is targeting lifestyle-oriented and seasonal homeowners to make up for slower growth in its retirement communities. Although demographic trends favor this strategic shift--retiring baby boomers are expected to boost demand for resorts--we think the company will probably pay a high price to enter new markets, leading to our very high uncertainty rating for this narrow-moat real estate investment trust.