ELS Succeeds in Troubled Economic Times

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February 19, 2009 by   - () Leave a Comment

Equity Lifestyle Properties Inc. (ELS) is parked between two troubled industries — struggling manufactured-home makers and the slowest real estate market in decades.
And yet, the Chicago real estate investment trust, the biggest operator of manufactured home communities and RV resorts in North America, is keeping its units filled, residents happy and analysts optimistic, according to Chicago-based Medill Reports.
Last year, the economic crisis led to rising operating costs and falling values for Equity Lifestyle’s 25,000 acres of property. The company — a spinoff of real estate magnate Sam Zell’s Equity Group Investments LLC (Zell still serves as board chairman) —adapted quickly.
It initiated a rental program in early 2008, temporarily halted its no-longer-profitable new homes sales in the fourth quarter and will wait until later this year to acquire any new assets.
One sign of success: Equity Lifestyle has maintained a 90.4% occupancy rate in its 112,000 units over the past two years. Despite the sales shutdown, it sold 55 new homes in the fourth quarter and rented out between 70 and 80.
“They have been able to avert a potential problem because the occupancy rate of their communities has been quite stable,” said Paul Adornato, an analyst for BMO Capital Markets Corp. in New York.
Shares of Equity Lifestyle trade around $35, with a 52-week-low of $22.61 on Nov. 21 and high of $56.01 on Nov. 20.
The company earned $97.6 million in funds from operations, or $3.20 per diluted share, in 2008, up about 5% from $92.8 million, or $3.05 per diluted share, the year before. Real estate investment trusts use FFO as a measure because net income, with its substantial depreciation for real estate, can misrepresent company performance.
Baby Boomers The Key
Despite the annual growth, its home sales lost $2.2 million over the year, after earning $2.6 million in 2007. Business depends on Baby Boomers who spend part of the year in Equity Lifestyle’s warm-weather resorts along the West Coast, in Arizona and in Florida, or move to its manufactured home communities that host activities especially for seniors, such as garden clubs and theater performances.
The company typically sold homes to people in their 60s who were ready to move and retire, but with a tight housing market, “that customer is not selling his house today,” said Michael Berman, chief financial officer.
Equity Lifestyle’s decline in sales is nowhere near the huge hit taken by manufactured home makers, whose volume of 7,000 a month is down more than 80% from a decade ago, CEO Tom Heneghan said during the company’s fourth-quarter earnings call Jan. 27.
Home manufacturers shipped an estimated 81,900 new units in December, the lowest-ever annual figure in the 50 years the Census Bureau has surveyed the industry. In 2007, they shipped 95,600. Every year before that, the number was well above 100,000.
“Manufacturers are facing a challenging time. What we’re trying to do is work with some of them to come up with lower prices,” said Berman, the CFO.
The company aims to pay less than $30,000 for an 800-square-foot, two-bedroom home, which it can rent for between $800 and $1,000 a month.
“From an affordability standpoint, this is for someone who doesn’t have the capital or who has the money and wants to free up some,” said CEO Heneghan.
Though inexpensive relative to traditional built-on-site houses, some of Equity Lifestyle’s manufactured homes are just as impressive — with cathedral ceilings, stainless steel kitchen appliances and coastal views.
“They’re surprisingly nice,” said BMO analyst Adornato, who has visited Equity Lifestyle properties. “They’re upscale retirees. These are folks that are a generally stable part of the economy.”
Obama Visits RV 'Capital'
Still, falling demand and the push for cheaper homes has caused factories making mobile and manufactured housing to shut down by the dozens. Last week President Obama visited Elkhart, Ind., one of the cities hardest hit by the recession. Three-quarters of all RVs are made in Elkhart, and manufacturer layoffs there have tripled the unemployment rate, to 15.3% in December.
“RV sales were down about a third in 2009,” said Kevin Broom, spokesman for the Recreation Vehicle Industry Association (RVIA) in Reston, Va. “But we know that people are continuing to use RVs.”
After Equity Lifestyle's acquisition of Thousand Trails LP and its 80 campgrounds last summer, RV properties provided about a quarter of the company's $443.5 million in revenue in 2008. Equity Lifestyles is increasingly relying on the estimated 8 million RV owners in the U.S. and anticipates the sector will perform better at the end of this year than in the first quarter.
“Looking forward, we expect that some business lines will continue to exhibit weakness (e.g. RVs, front-line sales), but that overall results should remain stable,” Citi Investment Research’s Michael Bilerman, stated in a report to investors. Bilerman rates the stock a “hold.”
Campgrounds 'Resilient'
RV vacations are a relatively affordable way to travel in today’s economy, business is good in “snowbird states” this winter, and travelers are already making reservations for the summer, according to the National Association of RV Parks and Campgrounds (ARVC).
“The RV (manufacturing) side of our industry is not doing well, but the campground side is pretty resilient,” said Linda Profaizer, ARVC president. “It should be a decent year.”
Compared to Equity Lifestyles communities for retirees, its Thousand Trails locations and campgrounds for RVers draw a slightly younger crowd, who will stay for a few days or weeks rather than months at a time.
The average RV buyer is 51, said Heneghan, the CEO, and these properties are “much more dynamic.” Visitors can either stay in their vehicles or in cozy, 600 square-foot cottages.
Equity Lifestyle owns 300 properties across the U.S., but most of the country’s manufactured home communities and RV parks are individually owned and privately held. Research company Hoovers Inc. reports that the industry’s 50 largest companies make up only a quarter of the market.
The company has outperformed its far-smaller competitors, including Southfield, Mich.-based Sun Communities Inc., with just 136 properties, and Clearwater, Fla.-based American Land Lease Inc., with about 30 properties. American Land Lease is currently being purchased by a private company, Green Courte Partners LLC.
“It is very much a niche sector,” said BMO analyst Adornato. “Looking at all real estate companies, it’s on the good side,” he said of Equity Lifestyle.

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