- ELS is a blue-chip REIT in the manufactured housing and RV park space, boasting 17 consecutive years of strong dividend growth.
- Investors have continuously shown a willingness to bid up the valuation multiples of ELS further and further into the stratosphere.
- ELS exhibits impressive growth both organically and (more recently) externally through portfolio expansion.
- Astonishingly, the REIT's share count has barely risen at all in the last decade.
- Despite being a solid business, it's hard to pull the trigger on a 35x FFO multiple.
- Looking for a helping hand in the market? Members of High Yield Landlord get exclusive ideas and guidance to navigate any climate. Learn More »
Thesis: Missed The Boat (And The RV) On This One
Equity LifeStyle Properties (NYSE:ELS) is a real estate investment trust that owns manufactured housing / mobile home communities, recreational vehicle ("RV") parks, and marinas primarily in coastal regions of the United States. The "trailer park" reputation of many mobile home communities being run-down and poorly maintained is not true of ELS's communities, which are some of the highest quality and most amenitized (e.g. clubhouses, swimming pools, tennis courts) in the nation.
One nice element of this business model is that the tenant almost always owns the home or mobile vehicle, whether it's a manufactured home, RV, or boat. As such, the tenant is responsible for the upkeep of their property and simply rents a plot of land (or slip of water) from ELS in something akin to a short-term ground lease.
What's more, ELS has specifically chosen to focus on locations in retirement and vacation destinations, especially those near rivers or bodies of water. Over 70% of ELS's MH communities have age restrictions or an average resident age over 55. This makes ELS something of a play on both a post-pandemic return to travel and vacationing as well as affordable housing for a growing number of retirees.
ELS also enjoys one of the most prudent management teams and conservative balance sheets in the REIT sector. These elements have resulted in strong growth over the years.
From Q3 1998 to Q3 2020, ELS's same-store NOI growth has averaged 4.1% annually, compared to 2.8% for the overall REIT industry. In October 2021 quarter-to-date, MH base rent rates increased 4.2% while RV annual base rents grew 4.3% YoY.
And as my High Yield Landlord colleague R. Paul Drake points out in an article published in July 2021, ELS has also managed to grow AFFO per share at an annual rate of 7.5% over the last seven years.
On the back of this solid track record, ELS has also established itself as a consistent dividend grower. The REIT has boosted its dividend for 17 consecutive years, and these have been no mere token increases. In the last decade, the average annual dividend growth has been around 15%. In the last 7 years, according to Paul, it has come in at 16% annually.
That said, investors seem to be well aware of ELS's strong track record and have bid the stock up accordingly. Over the last decade, ELS's enterprise value to EBITDA has risen further and further, from the single-digits to over 30x.
Moreover, looking at price to operating cash flow, we find again that ELS has rarely been this richly priced anytime in the post-Great Recession period.
With a paltry dividend yield of 1.65%, even 10 more years of 15% annual dividend growth would only deliver a yield-on-cost of 6.7%.
And a price to 2021 FFO of 35x strikes me as just far too much to pay for almost any REIT. I would have to feel a high degree of confidence that the REIT has a long runway of rapid growth to pay that much. Though I like ELS's growth profile, I do not have that degree of confidence. As such, ELS is going on my watchlist as a potential "buy" in the future.
Brief Overview of ELS
The portfolio is primarily concentrated along the coasts with clusters of properties in the Midwest, Arizona, and Texas as well.
Source: ELS November Presentation
As of the end of 2020, here were ELS's top five markets by operating revenue:
- Florida (44.3%)
- California (12.9%)
- Northeast (11.0%)
- Arizona (9.5%)
- Midwest (5.5%)
Occupancy in ELS's core MH segment sat at 95.2% in Q3 2021, roughly flat against 2020 occupancy levels. But, given that this is the most affordable housing available in many areas, occupancy tends not to drop significantly during recessions.
Tellingly, during the pandemic year of 2020, base rent in ELS's MH communities rose 4.8%, well above its long-term average annual growth of 4.1%.
The portfolio makeup consists as follows:
- 205 manufactured housing communities (47%)
- 208 RV resorts (48%)
- 23 marinas (5%)
As Paul points out in his article mentioned above, ELS has managed to grow AFFO/share at a similar pace as close peer Sun Communities (SUI) over the last seven years — 7.5% annually for ELS compared to 7.8% for SUI. But the nifty thing about ELS is that it has accomplished this while growing its total share count at a tiny fraction of SUI:
This is very unique among REITs, which typically issue lots of equity to fund portfolio expansion. Indeed, SUI's equity issuance has been to do just that: expand its property portfolio.
Much more of ELS's growth has come organically than for SUI, which means that it is less reliant on external growth for consistent AFFO/share growth.
This situation may be changing, however, as ELS has kicked its acquisition engine into high gear this year:
Source: ELS November Presentation
As you can see, acquisitions completed in 2021 are more than double the average amount from recent years. This could meaningfully boost AFFO/share growth going forward if continued into future years.
As for recent performance, there's no mistaking that ELS enjoyed a great year in 2021. Third quarter YTD revenue increased 15.5% YoY.
Meanwhile, Q3 YTD FFO per share of $1.88 increased a phenomenal 21.3% YoY. Compare that to a YTD dividend of $1.0875 and we arrive at an FFO payout ratio of 57.8% for the first three quarters of the year.
For the full year, ELS expects core income from property operations to rise 8.1% to 8.7% YoY. And the midpoint of 2021 FFO/share guidance is $2.50. Considering the annual dividend of $1.45, ELS's FFO payout ratio for 2021 should be around 58%.
Now, FFO is not the most accurate metric to measure a true free cash flow payout ratio. It would be better to use adjusted FFO or funds available for distribution ("FAD"), but ELS does not report these metrics. In any case, however, investors can rest easy, knowing that ELS's payout ratio is quite low, making its dividend safely covered by recurring cash flows.
ELS is a solid business, and I would love to own it. But I can't bring myself to pay 35x FFO for it. Even using analysts' consensus estimate for 2022 FFO/share of $2.69, ELS is still pricey at a 32.6x FFO multiple. The business is good, but is it that good?
Then again, remember that investors have exhibited a willingness to pay ever higher valuation multiples for ELS over the past decade as the REIT has proven itself a blue-chip performer. How much higher can those valuation multiples go?
Candidly, I have no idea. But I don't care to be the one helping to push them up.
As such, though I consider ELS a blue-chip dividend growth REIT, it's a hold for me.
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This article was written by
I write about high-quality dividend growth stocks with the goal of generating the safest, largest, and fastest growing passive income stream possible. My style might be called "Quality at a Reasonable Price" (QARP) in service to the larger strategy of low-risk, low-maintenance, low-turnover dividend growth investing. Since my ideal holding period is "lifelong," my focus is on portfolio income growth rather than total returns.
My background and previous work experience is in commercial real estate, which is why I tend to heavily focus on real estate investment trusts ("REITs"). Currently, I write for the investing group, High Yield Landlord.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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