clubfoto
Fairness LifeStyle Properties (NYSE:ELS) is an actual property funding belief (“REIT”) that owns and operates a portfolio of 445 properties together with cell residence communities, RV parks, and marinas throughout the US. Regardless of the inclusion of RV parks and marinas, it is vital to notice that 89% of ELS’s income derives from annual leases or contracts.
For the sake of this text, I’ll evaluate ELS to its two closest REIT friends within the manufactured residence area:
Solar Communities (SUI) – $18.3 billion market cap UMH Properties (UMH) – $900 million market cap
ELS just isn’t fairly as massive as SUI with its $12.7 billion market cap. In comparison with SUI’s $16.2 billion in undepreciated actual property belongings, ELS has a mere $7.3 billion in undepreciated actual property belongings.
Overview of Fairness LifeStyle
ELS owns a high-quality portfolio of principally cell residence and RV properties throughout the US, with a small allocation to marinas which are overwhelmingly situated on the coast of Florida.
ELS Investor Presentation
Somewhat than focusing on cell residence communities broadly, ELS primarily focuses on communities in fashionable retirement locations which are both age-restricted to 55+ or are principally occupied by older folks. This has its execs and its cons.
On the one hand, resident turnover could be very low, and the overwhelming majority of leases/contracts are annual or longer, making money flows very secure. Furthermore, the inhabitants of older People is rising sooner than the general inhabitants, as round 10,000 child boomers will flip 65 day by day by 2030.
Then again, lease charges sometimes do not rise a lot sooner than value of residing changes for Social Safety and different pension advantages. Thus, in years like 2021 and 2022 when most residential rents are hovering by double-digit percentages, ELS’s mid-single-digit lease progress seems to be piddly compared.
Then once more, within the 20 years from 2001 to 2021, ELS’s common NOI progress almost doubled the CPI throughout that point. So, in additional “regular” occasions, ELS’s portfolio really beats inflation.
For probably the most half, ELS owns the land whereas the tenants personal the enhancements or belongings sitting on the land, together with cell properties, RVs, or boats (within the case of marina slips). Most of those properties are situated in comparatively shut proximity to some physique of water, whether or not or not it’s a river, lake, or the ocean.
One of many strongest points of ELS is the corporate’s steadiness sheet and monetary administration (extra on the latter beneath). ELS enjoys an funding grade steadiness sheet with comparatively low debt, little floating-rate publicity, and a protracted common maturity.
ELS Investor Presentation
Lower than 10% of debt is maturing over the subsequent three years, and solely 18% of debt matures by 2026, far decrease than the REIT trade common of 43%.
Discover additionally within the above picture that ELS has grown its dividend at a compound annual progress price of twenty-two% within the 15 years from 2006 to 2021. That could be a phenomenal progress price, but it surely needs to be famous that a lot of this got here from an increasing payout ratio, as normalized FFO per share progress solely averaged 9% throughout that point.
ELS Investor Presentation
Dividend progress averaged “solely” 11% over the previous 5 years, and because the payout ratio slowly rises, that progress will finally need to sluggish to the identical stage of progress as FFO per share.
One of the enticing points of ELS is its resilience within the face of recessions. Look intently on the chart beneath, which exhibits ELS’s same-property NOI progress in comparison with residences and the REIT trade extra broadly quarter by quarter.
ELS’s same-property NOI progress merely doesn’t flip destructive throughout recessions. It slows down however doesn’t decline.
ELS Investor Presentation
That’s largely a results of the age restriction side of the portfolio. Since lots of ELS’s residents are retirees, their revenue principally comes from Social Safety, which doesn’t falter throughout recessions. ELS is principally amassing lease checks from Uncle Sam by the middleman of their retiree tenants.
One other side of ELS that I like is the long-tenured and seasoned administration workforce. The CEO, CFO, and COO have labored at ELS for a mean of 29 years (every having been there both 28 or 29 years).
Comparability To Friends
I wish to make the case that ELS is the best-in-class cell residence REIT. Truly, one different peer has carried out barely higher than ELS on a complete return foundation, as we’ll get to beneath, however ELS has the very best monetary administration of the three.
First, discover the intense (and I imply excessive) disparity within the stage of fairness dilution over the previous decade between ELS and its two cell residence friends:
Knowledge by YCharts
ELS’s portfolio has expanded throughout that point, as have its income. However this growth was funded principally by different means than fairness issuance – particularly, capital recycling, even handed use of debt, retained money, and low-cost in-house improvement.
That stated, SUI’s portfolio has expanded far sooner than ELS’s, funded largely by fairness issuance.
Knowledge by YCharts
Since 2010, SUI has grown its portfolio measurement by round 5x.
(To be honest, SUI doesn’t make rather more use of debt than ELS in an effort to have interaction on this portfolio growth. In comparison with ELS’s Q3 web debt to EBITDA a number of of 5.2x, SUI’s web leverage ratio sits at 5.7x.)
Portfolio growth is all effectively and good so long as it’s accretive to the underside line on a per-share foundation. However as ELS demonstrates, it’s doable to develop one’s portfolio of belongings at a a lot slower price whereas additionally matching or exceeding a peer’s FFO per share progress.
From 2011 to 2021, SUI’s core FFO per share elevated 108% from $3.13 to $6.51.
In the meantime, throughout that very same interval from 2011 to 2021, ELS’s normalized FFO per share (not precisely apples to apples with core FFO however directionally correct) elevated round 150% from round $1 to $2.53.
What about complete returns?
ELS is within the “Fairness”-branded household of actual property funding corporations based by Sam Zell. For probably the most half, Zell’s actual property investments have carried out terribly effectively, and ELS isn’t any exception.
That stated, SUI’s complete returns have been barely higher than these of ELS over the previous decade, with each REITs lapping their a lot smaller rival UMH.
Knowledge by YCharts
However the place ELS actually shines, particularly for dividend progress buyers like me, is within the tempo of dividend will increase the REIT has given shareholders. ELS’s dividend progress over the previous decade fully obliterates its friends:
Knowledge by YCharts
This dividend progress must be saved in thoughts when evaluating the dividend yields of every cell residence REIT:
ELS: 2.56% SUI: 2.49% UMH: 5.01%
Not solely does ELS have the marginally larger yield than SUI, it additionally has the higher dividend progress monitor file.
ELS has turned in 17 consecutive years of dividend progress, whereas SUI’s file of will increase solely spans 5 consecutive years.
Admittedly, although, SUI does have the benefit when it comes to payout ratio. Yr-to-date in 2022, ELS’s payout ratio primarily based on normalized FFO has been 59%, whereas SUI’s core FFO payout ratio has been 44%, probably setting the REIT up for some larger dividend will increase within the years to come back.
Backside Line
There’s lots to love about ELS. Admittedly, the REIT is costly at round 24x NFFO, as of this writing. However even that top a number of is decrease than its common valuation within the territory of 30x.
In the meantime, 2023 needs to be a terrific yr for ELS as elevated Social Safety value of residing changes permit the REIT to boost rents at the next price than the previous few years. ELS does profit from inflation, solely the profit is a little more lagging than it’s for different residential REITs.
And, as proven above, even when the US economic system dips into recession, it doubtless will not portend destructive same-property NOI for the REIT, as ELS has a wonderful monitor file of rising proper by recessions.
The low beginning dividend yield can be unappealing for buyers on the lookout for excessive present revenue, however for these with very long time horizons or primarily fascinated by complete returns, ELS seems to be like a terrific purchase proper now.
Source 2 Source 3 Source 4 Source 5
