Last week, I wrote an article about UMH Properties (NYSE:UMH), a manufactured housing REIT. Today, I explore its peer Equity LifeStyle Properties (NYSE:ELS), which operates in the same space. While I like manufactured housing for the durable rental income that they generate, there should be a limit to how much an investor should be willing to pay.
Equity LifeStyle has had a decent recovery since the sell-everything phase from back in March. On a year-to-date basis, ELS has posted just a -6.2% return, which is far better than the performance of some other REIT sectors. In this article, I evaluate whether if this stock presents an attractive investment opportunity, so let’s get started!
(Source: Company website)
A Look Into Equity LifeStyle Properties
Equity LifeStyle Properties is a leading REIT that owns and operates manufactured home (MH) communities, and RV resorts and campgrounds in North America. It’s been in business for over 50 years, and currently owns or has a controlling interest in more than 400 communities and resorts in 33 states and British Columbia, with more than 156,000 sites. As seen below, Equity LifeStyle’s properties are generally located in attractive coastal markets, which have attractive income demographics and population growth. In addition, its RV and MH sites generally form clusters, thereby making them more efficient to manage.
(Source: Company Investor Presentation)
COVID-19 presented Equity LifeStyle with some headwinds to its RV business, as its RV rental income declined by 8.8% YoY in the latest quarter. This was mostly driven by a steep 47.7% drop in its transient segment and was partially offset by a 4.7% increase in its longer-term annual side of the RV business. However, I’m encouraged to see that the MH segment held up well, which helped the company generate a 1% YoY growth in its overall core income in the latest quarter. Without COVID-related expenses, core income grew by 1.8% YoY.
What’s attractive about the MH segment is that it continues to grow both its occupancy and rental income. Reported occupancy for this segment is currently 95% with a 99% rent collection rate, and rental income grew by 4.6% YoY. This is supported by the fact that only 6% of the tenants in the MH portfolio are renters, which means that 94% of the tenants own their homes. This helps to ensure portfolio stability, as the vast majority of its tenants have significant “skin in the game”.
The balance sheet is in strong shape, as debt-to-total market capitalization stands at just 17.3%. This results in a strong interest coverage ratio of 4.9x and a net debt-to-adjusted EBITDAre of 5x. As seen below, the debt maturity schedule is well-laddered, with 67% of its debt maturing after 2029. Equity LifeStyle also enjoys a low weighted-average interest rate of just 4.05% on its debt.
(Source: July Investor Presentation)
While Equity LifeStyle has had an impressive track record of growth, I see the current share price valuation as a being rather high. I wanted to calculate what the PEG ratio would be, if I replaced Earnings with FFO in the calculation. I apply the following figures into the formula below:
- Price: $66.01
- FFO: 2.13 (trailing 12-months)
- FFO Growth Rate: 9.3 (based on the 5-year CAGR in FFO/Share)
The end result is a PEG ratio (with FFO substitute) of 3.3, which implies the stock is overvalued. In addition, I was also being generous, as I applied a pre-pandemic CAGR growth rate (2014-2019).
Lastly, Equity LifeStyle has had an impressive dividend growth streak, with a 24% CAGR since 2006. However, it should be noted that the payout ratio was much lower in 2006, and the dividend growth rate has slowed in recent years. While the dividend payout ratio remains safe at 64% (based on trailing 12-months FFO), I expect the growth rate to trend down towards the FFO growth rate.
(Source: July Investor Presentation)
Equity LifeStyle Properties is a leading owner and operator of MH and RV communities across the U.S. and Canada. While COVID-19 has had limited impact to its RV business, the MH business continues to show strong growth. This is supported by the fact that renters make up only 6% of its MH communities, thereby ensuring stability and durability of the income stream. The company is also backed by a strong balance sheet, with solid debt metrics.
However, I see the current valuation as being rather high. This was demonstrated by the modified PEG ratio (with FFO substitute) that I calculated. As seen below, shares are trading at a blended P/FFO of 31.2, which sits substantially higher than the stock’s normal P/FFO of 21.2. As such, while I’m bullish on the future growth of this company, I don’t see the shares as being reasonably priced at present.
(Source: F.A.S.T. Graphs)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any 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.