Morningstar

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

Illustration of a black two story house outlined in blue and part of a black two story house outlined in yellow in front of a black background depicting the real estate industry
Securities In This Article
Equity Lifestyle Properties Inc
(ELS)

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.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Kevin Brown, CFA

Senior Equity Analyst
More from Author

Kevin Brown, CFA, is a senior equity analyst, AM Financial Services, for Morningstar*. He covers healthcare, hotel, residential, and retail REITs the United States. He has created and maintains financial models for all companies under coverage, focusing on the historical performance and then forecasting the fundamentals to derive a fair value estimate for each company. He has also written multiple thought-leadership reports on the broader REIT sector and the subsectors under his coverage.

Before joining Morningstar in 2018, Brown worked at an asset-management company focused on global real estate, spending nine years covering healthcare and hotel REITs. He developed buy/sell recommendations in each sector to enable portfolio managers to create individualized sector allocations for each client portfolio. He conducted property tours and meetings with company executives and industry experts to evaluate individual company strategies and deepen his understanding of sector fundamentals. Brown was also a board member for the FTSE EPRA/NAREIT North American Advisory Committee between 2008 and 2017.

Brown holds a bachelor’s degree in economics from Dartmouth College. He also holds the Chartered Financial Analyst® designation.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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