Initiating Coverage of Manufactured Housing REITs Sun Communities and Equity Lifestyle Properties

We are initiating coverage of manufactured housing REIT Equity Lifestyle Properties ELS with a fair value estimate of $77 per share and manufactured housing REIT Sun Communities SUI with a fair value estimate of $173 per share. We assign both companies a no-moat rating, a Medium Uncertainty Rating, and a Standard Capital Allocation Rating. Both companies are currently trading at a material discount to our fair value estimates at current prices.

Both companies own a diversified portfolio of communities for manufactured homes and residential vehicles and also own a portfolio of marina properties. While the residents generally own their manufactured homes, residential vehicle, or boat, they pay Sun for the right to place their homes or park their vehicles in the community. The portfolios are geographically diversified across many states where many retired people look to own an affordable second home or that are considered attractive for vacations. The growth of the baby boomer generation has driven a high level of demand for these portfolios over the past decade. Additionally, all three segments have high barriers to entry and low supply growth, which has allowed both companies to push rental rate growth and same-store net operating income growth at a spread significantly above inflation over the past decade.

We anticipate that this sector will continue to experience strong rate and same-store NOI growth for the next several years as the baby boomer generation continues to enjoy their retirement years. However, we do worry that demand will flatten out over the course of the decade once the baby boomer generation starts to turn 80, which is when we believe that people age out of the target demographic for manufactured housing. Still, we believe that both companies should provide consistent growth for the next several years and are also attractively priced for those looking to invest in the residential REIT sector.