Equity LifeStyle Properties is one of the country’s most successful REITs, having seen 40 straight quarters of occupancy growth. We dive into its financials and discover big opportunities in the fast-growing vacation and recreation space.
15 Minute Read
- As home prices have become increasingly expensive, more and more Americans are living in manufactured homes, RVs, and boats. We show you how to get involved through investing/operating, ancillary services, and new products.
- An estimated 10k baby boomers are expected to turn 65 every day over the next decade. Equity LifeStyle Properties (ELS) is betting big on retirees having big demand for vacation, recreation, and leisure getaways in North America, especially in sunny locations (e.g., Florida, California, and Arizona). Our analysis shows that there are plenty of opportunities in the space.
- We also discover emerging trends in the recreation and vacation space such as novelty getaways and marinas.
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Billionaire Sam Zell is considered the father of the modern real estate industry in the United States.
His empire began more than 50 years ago with the founding of Equity Group Investments. Over the decades, his real estate investment firm has — at some point — been the largest apartment owner in the US (Equity Residential) and the largest office owner in the US (EQ Office).
To round out the real estate dominance, Zell also controls Equity Lifestyle Properties (ELS), the largest campground, recreational vehicle (RV), and manufactured home (MH) park owner in America.
The campground, RV, and MH businesses have thrived in the years since the great financial crisis. As more baby boomers retire and enjoy their leisure years, ELS’s recreation and vacation properties have benefitted.
Over this same span, ELS has strongly outperformed the broader US market as an investment.
Source: Trading View
In this report, we tell you how ELS makes money, why it’s been so successful, and how to capitalize on the still-growing campground, RV, and MH space.
What exactly does Equity Lifestyle Properties do?
ELS is a real-estate investment trust (REIT) that primarily owns land and campgrounds which customers can rent on either a short and long-term basis; the land is typically used to place RVs, manufactured homes, and cottages.
Many of the sites have “resort-style” amenities like docks, golf courses, gyms, club houses, swimming pools, and professional on-site management. (Later in this report we’ll discuss opportunities related to ancillary services — like campground software — and accessory products — like generators, batteries — that have demand among MH and RV consumers).
As of end-2018 (end-2019 information available next month), ELS wholly owned 397 properties consisting of nearly 150k sites across the United States and Canada.
Source: ELS 2018 Annual Report
Geographically, the individual states with the most sites are Florida (38% of total), Arizona (11%) and California (9%). Across the portfolio, it’s roughly a 50/50 split between MH and RV sites (two brands are Thousand Trails and RV Resorts).
At this point, you’re probably wondering, what do these things even look like?
Below are representative images of an ELS manufactured home park and RV park.
Source: Google Images
How does ELS make money?
ELS is a leading owner and operator of manufactured home communities, RV resorts, and campgrounds in North America. The company makes money primarily from 2 sources: rental revenue and membership revenue.
ELS derives 95% of its revenue via its Property Operations unit with the balance from its Home Sales unit (which we will not cover in this report).
Within Property Operations, the firm’s 2018 revenue was more than $900mn and came from primarily two streams:
- Rental revenue (83%)
- Membership revenue (17%)
Below, we take a closer look at the two revenue buckets.
- Rental Revenue
- Community-based rental income, rental home income, and resort-based income constitute rental revenue and make up more than 80% of ELS’ Property Operations top line.
- A typical lease for the rental of a site between ELS and the owner or renter of a home is month-to-month or for a one-year term.
- Rental prices vary by geography (and whether you only need a lot) but, as an example, you can rent a 3BR (1,220 square-foot) manufactured home in California from ELS for $1,150 a month.
- While the lease is not “long-term” per se, ELS does have long-term customers: From the company: “our portfolio is comprised primarily of longer-term customers. Our RV annual customers, they stay with us on an average 10 years.”
2. Membership Revenue
- ELS’ “right-to-use” revenue streams are essentially memberships that provide access to various sites, parks,and campgrounds (typically for shorter-term, vacation, transient stays).
- ELS has over 100k membership payers. As an example, one of its membership packages under the Thousand Trails brand costs $565 a year and allows access to 5 geographic areas.
- ELS also makes money from upgrades on membership. Upgrades can include increased length of stay, advanced reservation rights, discounts on rental units, and so on.
According to its latest quarterly filing (Q3 2019), ELS’ business has seen 40 straight quarters of occupancy growth and greater than 95% occupancy across its site portfolio.
As we’ll discuss in the next section, the company believes there’s even more room for growth in the decade to come.
The Industry Tailwinds & Market Structure Are Very Attractive
According to ELS, there are a number of demographic and industry tailwinds that have buoyed the MH and RV business over the past decade and look to continue into the 2020s.
- Baby Boomer Demand
- Retiring Baby Boomers are relocating to states where ELS has a significant presence (e.g., Florida and Arizona).
- ELS states that it is seeing “increased online and on-property activity” for its properties. Boomers also make up the largest portion of RV owners in America and are purchasing vacation homes at an increased clip.
- ELS estimates that 10k boomers will turn 65 daily through 2030, providing a robust customer base for the RV and MH business.
- Millennials and RVs
- Per ELS, retail sales of RVs totaled approximately 436,440 in 2018, a 3.6% increase from 2017 RV sales of 421,436 and a 17.0% increase from 2016 RV sales of 373,032.
- Millennials — many of which grew up vacationing in ELS properties — “now make up 26% of RV buyers, and millennials and Gen X combined represent more than half of RV buyers.”
- Manufactured Homes May Help Ease The Housing Cost Crisis
- The latest issue of The Economist cited a telling stat: “In 1990, a generation of baby boomers, with a median age of 35, owned a third of America’s real estate by value. In 2019 a similarly sized cohort of millennials, aged 31, owned just 4%.”
- With housing affordability an increasingly salient issue, the attractiveness of manufactured homes is on the rise. Per recent data via the US Census Bureau (table below), the average cost per square foot of a single-family home ($111/square foot) is at least double that of a single manufactured ($44/square foot) or double manufactured ($54) home.
- The cost advantage of manufactured homes come from: 1) more efficient factory assembly method; 2) lack of weather delays because they are built indoors; 3) economies of scale for building materials; 4) lower property taxes.
- While not a silver bullet, current housing trends suggest manufactured homes will become an increasingly viable option.
Getting into the MH and RV space
Based on the aforementioned industry tailwinds, here are a few ideas on how to capitalize in the still-growing recreation and vacation property rental space.
Buying into MH or RV parks
According to ELS, the RV and MH park industry is extremely fragmented. While ELS owns ~400 properties, the company estimates that there are 50k manufactured home and 8k RV properties in North America. The majority of them are not operated by a large operator.
This fragmentation creates an opportunity for those looking to enter the space.
Below are two options to do so:
- Build Option
The build route is definitely a heavy lift, fraught with many obstacles. The basic considerations for starting an MH or RV park are:
- State and local permitting (many regions may not be receptive to manufactured home parks as they can be seen as a drain on resources with a low tax base)
- Property size (minimum of 3-5 acres)
- Financing (difficult to secure relative to home loans)
- Existing utilities in area
- Geographic attractiveness
- One proxy to decide on where to potentially build is to look at US regions seeing high inbound moves. According to the US Tax Foundation, the states that saw the most inbound moves in 2019 were Vermont, Idaho, Oregon, Arizona, and South Carolina.
- Buy Into Existing Properties (Which You Can Also Choose To Operate)
Buying into existing MH/RV properties is certainly an easier path vs. building one from scratch. Fortunately, there are a number of resources to inform such a decision. (Do note, though, that this type of investing is considered quite high risk and your tolerance may vary):
- Mini-Case Study: Jaffa Parks (How A Former Goldman Analyst Launched A Lucrative Manufactured Home Community Business)
After graduating from the University of Michigan, Dan Weissman began his professional career at Goldman Sachs before working at a hedge fund.
Looking for a career change and seeing a favorable supply-demand dynamic in the trailer park home industry following the financial crisis, Weissman founded Jaffa Parks in 2011.
With many people losing homes and looking for more affordable options, manufactured homes and trailer parks entered the picture. However, as noted in this report, the industry is very fragmented.
Most lot owners are mom-and-pop operations, often in derelict areas that lack basic services and financing options. These attributes also limit the amount of competition in the space.
By bringing in professional management and financiers, Jaffa Park breathes new life into these communities. Per the company’s website, Jaffa Park is actively expanding its portfolio to areas with “diverse employment opportunities and attractive retirement conditions. [They] seek both stable properties and distressed assets, including notes, and we close transactions from $2m to $50m swiftly and discreetly.”
At present, the firm primarily operates in Tennessee and Texas.
- Additional Resources (Note: we have used “manufactured” as an interchangeable term for “mobile” in this report)
- Two manufactured home course programs in the space (Disclaimer: quality of content has not been vetted by us)
- Real Estate Investing Podcasts
Here are the key variables ELS looks at when considering acquiring an existing MH/RV property.
Source: ELS 2018 Annual Report
Other Opportunities: New Recreation Trends, Ancillary Services, and Products
- Glamping & Novelty Vacations
Although recently spun off from its parent ELS, Petite Retreats is a brand that offers novelty and glamping vacation rentals such as tiny house, tee-pee tents, colorful cottages, and yurts.
Of these offerings, the tiny homes option presents an interesting opportunity.
Looking at Petite Retreats rental rates, a single tiny home can generate $40k a year.
According to The Spruce — a home & lifestyle publication — the cost of one tiny house unit ranges from $15k (DIY) to $50k+ (turnkey ready-to-go).
Depending on how reasonable maintenance and land rental costs are, if a tiny home can be secured at the lower end of the range, such a rental business could pay back costs in less than a year.
Source: Petite Retreats, The Spruce, Trends Analysis
- Are Marinas The Next Trend?
On its latest earnings call, ELS spoke about a new investment space it is entering: marinas. From the call:
“There are about 4,500 marinas in the United States…of that, 500 we would consider institutional quality. So — and there’s about three large owners that account for less than 5% of the overall revenue in the marina space. So it’s highly fragmented. [ELS thinks] much like what you’ve seen us do in the RV space where there’s marinas that have long-term cash flow that makes sense for us that are in locations that we like, and you see us continue to buy.”
One of the representative properties in the marina space that ELS has invested in is Suntex. The company has more than 40 marinas (with 2k+ “slips” for water vehicles) dotted across the US, including multiple locations in Texas, California, Florida, Kentucky, Georgia, and Virginia.
- Property Management & Ancillary Services
Just as with city apartments and condos, there are a number of ancillary services related to cleaning, maintenance, and upkeep that RV/MH parks require:
- Clerical staff
- Maintenance workers
- Customer Service
- Recreation Support
- MH & RV Accessories
Another avenue to get involved in the space is to sell MH and RV accessories. Here is a list of popular items: