Here’s Why Equity LifeStyle Properties Is A Long-Term Dividend Beauty – Seeking Alpha

In this article, I am going to discuss one of my favorite REITs. And when I say favorite, I don't just mean another REIT that pays a good yield but a company with tremendous long-term potential that finally can be bought at a discount. Equity LifeStyle Properties (NYSE:ELS) is one of the biggest residential REITs in the United States with a focus on manufactured housing and recreational vehicle communities. The company is operating in a stable and predictable environment and is massively outperforming its peers with regard to dividend hikes and stock price performance during bull and bear markets and is offering investors a strong business model with satisfying debt levels.

Source: Equity LifeStyle Properties

I have been a contributor to this website since 2015. And I have to say that the current crisis is by far the worst (unsurprisingly). Especially REITs are getting hit hard as companies are unable to pay rents while retail foot traffic is pretty much nonexistent. While I have been at home for more than four weeks, I have thought long and hard about the best places to invest in the long-term. Sure, real estate, in general, is always a good place to be. However, with some big guys like the Simon Property Group (NYSE:SPG) dropping to 2010 levels, I think it would be a waste of everyone's time and money to just start buying high-yielding REITs. That's why I am starting my 'own' bucket of REITs that I hope will easily outperform the iShares US Real Estate (NYSEARCA:IYR). Therefore, in this article, I am going to show you why I believe that ELS is a great addition to that bucket.

Before I start telling you anything about ELS, let me remind you that my other two high-conviction REITs are Extra Space Storage (NYSE:EXR) and Sun Communities (NYSE:SUI).

Just like Sun Communities, ELS is a residential REIT focused on manufactured housing (MH) and recreational vehicles (RV). The company has a market cap of currently $9.7 billion and is not a member of the S&P 500. This Chicago, IL-based REIT has been in business for more than 50 years and owns 413 properties across 33 states and British Columbia containing more than 150,000 sites. As you can see below, the company's assets are mainly located at the West and East Coast. To give you a number, more than 120 out of 413 properties are within 10 miles of coastal United States. More than 90 properties have lake, river, or ocean frontage.

Source: Equity LifeStyle Properties Investor Presentation (February 2020)

One reason why I like manufactured housing, in general, is because it is a good alternative for many people who are looking for affordable housing. Especially the increase in manufactured housing quality has allowed this segment to become a feared competitor for 'traditional' housing. On top of that, there is a second reason why I like this segment, and that's the threat of the coronavirus. Most major cities have 'stay at home' orders in place, and consumers are often reluctant to leave their homes. While this is bad news for the entire economy as it hits almost everyone, it hits retail REITs the hardest as stores are facing tenants who are either unwilling or unable to pay rents. While the same applies to some residential tenants as well, one has to acknowledge that refusing to pay rent is one of the last things someone does. Way after all discretionary expenses have been cut. In addition to that, the $1,200 coronavirus stimulus payments will be used to buy food and pay rents, making this segment even safer as massive domestic tenant eviction would be a worst-case scenario.

With that said, ELS has more benefits as it focuses on an older demographic. The average age of MH residents is 59. For RV communities, the average age is a bit lower at 55. Between 2020 and 2035, the population of people age 55 and older is expected to grow by 18% with 10,000 people turning 65 every day until 2030 according to ELS. So far, a favorable demographic and strategic site locations have benefited ELS's occupancy rate. As of 1/31/20, the company has a 95.1% occupancy rate among manufactured home communities.

As a result, the company is offering significantly higher same-store net operating income growth than its peers and the industry average, as you can see below. Even the prior two recessions were unable to hurt ELS's business.

Source: Equity LifeStyle Properties Investor Presentation (February 2020)

The graph below shows the long-term trend of total sales and operating income. Both have a compounded annual growth rate of 8.0% since 2004 without pullbacks during the Great Financial Crisis. On a side note, this does not mean that a company is immune to recessions. ELS's stock price is currently down more than 20% year-to-date as it is a risk asset and subject to selling in times when liquidity is needed. Investors also adjust their growth expectations - hence, a lower P/E ratio and stock price. The 'fact' that the company continues to grow in a recession makes it a tremendous buy during tough times as comebacks are often rapid and profitable for (new) investors.

Source: TIKR.com

As a result of the company's rapid expansion, the company has raised its dividend every single year - even during the recession of 2008. Mathematically speaking, dividend payments per share have risen by 35% per year since 2004. However, as dividend payments were almost zero in 2004, one needs to take this growth rate with a grain of salt. Since 2012, when the US housing market started to accelerate, the company has increased its dividend by 13.7% per year on average. It's much lower than 35%, but still a good growth rate.

Source: TIKR.com

Of course, this is only possible because of a healthy cash flow.

Just like its peer Sun Communities, ELS is rapidly expanding its business. In 2019, the total money spent on the acquisition of real estate assets was $443 million. This is up from $415 million in 2018 and one of the highest numbers in history as only 2011, with acquisition volumes of $713 million, is able to come in higher. In both 2019 and 2018, the company managed to fund 100% of acquisitions with cash from operations (100% coverage). Regardless, management has issued new stock worth more than $60 million every single year since 2016. This has allowed the company to remain financially flexible as total debt has failed to outperform total assets, while free cash flow has managed to stay fairly close to zero in every single year. Currently, total liabilities are valued at 69% of total assets. This is one of the lowest levels in company history.

Source: TIKR.com

Unfortunately, so far, the focus has not been on dividends. The current payout rate is 51.7%. The trend is increasing, but cash is currently used to fund the company's acquisitions. Note that the trend below is down instead of up. This is only because the total dividend paid is a negative value on the cash flow statement. Hence, a falling trend is an improvement in terms of cash spent on dividends.

Data by YCharts

Adding to that, the company's dividend yield is currently at 2.4%. This is 110 basis points below the iShares US Real Estate ETF yield of 3.5% and one of the highest levels in years.

Data by YCharts

From a personal point of view, it does not bother me that the company is issuing shares and is paying a below-average yield. Money is well spent on the company expansion, and even a slight reduction in investments will make room to rapidly increase dividend payments. Besides that, dividend growth of roughly 10% on a long-term basis with average free cash flow growth of 15% will still reward investors who are just now buying a below-average yield. Moreover, the current valuation of 21.8x cash from operations is not cheap. However, I believe this is justified as the company's business model is simply better than a lot of its REIT peers right now, and with bond yields near-record levels, it makes sense to pay a slight premium for 2.4% yield and long-term growth potential.

What I mean when I say paying for premium can be seen below. Portfolio 1, in this case, displays the performance of ELS. Both assets show the total return including dividends since 2001.

Source: Portfolio Visualizer

While the graph above leaves no room for doubt with regard to which stock is superior. However, the stats as seen below shows the true power of ELS.

The company has a historical CAGR roughly twice as high as IYR and a lower standard deviation. Adding to that, the worst year outperformed the ETF by more than 20 percentage points, while the best year was more than 10 full points stronger. Adding to that, the correlation to the US stock market is lower.

Source: Portfolio Visualizer

Of course, this is BACK testing. Unfortunately, forward testing does not exist yet. However, I still believe that the company's business model and the current economic situation warrants a long-term entry as I am convinced that ELS will outperform the US Real Estate ETF and deliver long-term capital gains on top of rapidly rising dividend payments.

With all of this being said, make sure to start buying a small position if you are not invested yet. Market volatility is high, and the market could technically drop another 10% to 15% if the virus accelerates further. Regardless, I believe current prices are a good entry point for investors with a long-term horizon who prefer dividend growth over a high dividend yield right now.

Be safe, and thank you for reading!

Thank you very much for reading my article. Feel free to click on the "Like" button and don't forget to share your opinion in the comment section down below! My long-term investments are stated in my Seeking Alpha biography.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ELS over 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.

Additional disclosure: This article serves the sole purpose of adding value to the research process. Always take care of your own risk management and asset allocation.

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Here's Why Equity LifeStyle Properties Is A Long-Term Dividend Beauty - Seeking Alpha