Equity Lifestyle Earnings: Solid Same-Store NOI Growth Despite Drop in Transient Business

Second-quarter results for no-moat Equity Lifestyle ELS 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.

Management explained that the decline in RV transient income was due to significant weather events in California, the Pacific Northwest, and along the east coast in the second quarter of 2023. We believe that weather events are likely to continue to negatively affect the transient portion of the company’s business for the foreseeable future, likely increasing the volatility of this business segment. Therefore, we think management’s strategy to promote its Thousand Trails membership program and convert more of the transient business into long-term, annual commitments is a prudent strategic move to produce more stable cash flows and consistent growth.