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Is Equity LifeStyle Properties A Buy?

Jul 19, 2020 by Deidre Woollard

The COVID-19 pandemic has had a wide variety of impacts on the real estate industry. One area that has been booming is sales of residential vehicles (RVs). Now you probably don't think real estate when you think of RVs, but all those RVs have to be somewhere, and that's where RV parks come in.

Equity LifeStyle Properties (NYSE: ELS) is a real estate investment trust (REIT) that operates manufactured home communities, RV parks, and campgrounds in the United States and Canada. In specific, it owns or has an ownership interest in over 400 properties in 33 states and British Columbia. It has over 150,000 individual sites, and 70,000 of those are in manufactured home communities. It has a particular focus on retirement or destination areas, and more than 90 of its properties have lake, river, or ocean frontage.

ELS makes its money mostly through renting these sites out to both temporary and permanent residents. It offers rentals as well as membership subscriptions for residents who own or lease their homes. Some RV and marina sites are also leased on an annual or seasonal basis.

This REIT is betting on demographics to some extent. As the population ages, ELS believes that baby boomers, as well as Gen Xers and some millennials, will seek out manufactured homes and RV sites for second homes and vacation destinations. It is also betting on the affordability factor, which may lead some younger generations to opt for manufactured homes over traditional site-built homes.

The company sees demand as outpacing supply partly because the entitlement process to develop new communities of this type is often restrictive. Developing new communities requires the approval of the local government and can face resistance from residents.

ELS currently has a market capitalization of $11.4 billion as of July 2020. It released second- quarter results in June 2020 that included a second-quarter dividend of $0.3425 per share, which equals $1.37 on an annualized basis. ELS issues dividends quarterly, and its dividend has been relatively consistent. The current dividend yield is a modest 2.19%.

How is Equity LifeStyle Properties faring since the pandemic started?

Like many REITs, ELS saw its stock drop dramatically in March. Since then it has rebounded and is essentially tracking in line with the S&P 500.

For the first quarter, its manufactured-home base rental income was up 4.9% from 2019 to $6.6 million and monthly base rental income in the core portfolio rose to $688 from $659 in 2019 as occupancy rates remained mostly stable around 95%.

One important factor is that the bulk of its site rentals come from people who own their homes but rent the site it sits on. Just 6% of the occupancy is renters, which means that if these people want to leave, they essentially have to figure out how to move their homes.

In April, Equity LifeStyle Properties borrowed $100 million on a line of credit. It also increased the number of common shares stocks from 400 million shares to 600 million shares. The company also created a rent deferral program for those suffering financial hardship and waived late fees and cancellation fees for some residents and guests.

Some of ELS's revenue depends on people taking vacations or purchasing second homes, and this could be at risk as people consider cutting back. Of its over 50,000 RV sites, over 10,000 are seasonal and around 14,000 are transient. In the first quarter of 2020, it saw its transient RV revenue drop to $11.1 million from $12 million in the first quarter of the previous year.

How else does ELS make money?

In addition to its site rentals, ELS also has a home sales and rental operations business that generates revenue by selling or leasing manufactured homes inside its properties. It does this through a joint venture called ECHO Financing. In the first quarter of 2020, it saw new home sales increase 70% year over year.

When owners want to move, it also has a service that brokers those homes for sale. At some properties, ELS also operates golf courses, pro shops, stores, and restaurants.

Some risk factors to consider

While demographics are in ELS's favor, there is always a chance that people will turn away from RVs again as the economy shifts. They could be less able to afford a second home or RV. A sluggish economy could also cause ELS to pause or delay some of its planned rent increases.

Another concern is climate change. ELS has opted for many coastal communities because they are attractive to retirees, but that also puts it at risk from flooding, hurricanes, and other weather conditions.

And we can't rule out the impact of other virus outbreaks. As COVID-19 hit, ELS had to delay the openings of some of its seasonal RV parks. And ELS could be forced to close some of its parks again.

ELS is currently heavily focused on baby boomers and retirees who are on a fixed income. The good news is that this is a customer who is resilient during times when unemployment is high; the bad news is that as this customer ages, they may need to seek other options, such as assisted living. ELS needs to make sure it's attracting new residents.

The Millionacres bottom line

While the COVID-19 pandemic is hopefully a temporary phenomenon, it could have a long-term impact on RV site rentals as people consider travel and vacations that are closer to home. A boom in RV sales is good news for ELS in the short term and could have longer-term implications.

ELS is well-positioned to take advantage of interest in retirement communities in the snowbird states such as Florida and Arizona. It is well-capitalized and has a customer base that's very solid. ELS isn't likely to blow the doors off with a high dividend yield or rocketing stock prices, but its relative stability makes it a good buy if you're looking for a bit of consistency and steady growth.

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Deidre Woollard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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