Chicago REITs you should consider
This really is Chicago’s best-performing REIT
As many investors ditch real estate shares, some have found sanctuary in Sam Zell’s mobile home recreational areas.
The share price of Equity LifeStyle Properties, the billionaire financier’s cellular home park business, hit an all-time high in early Feb, avoiding the stock market downdraft that has afflicted many other investment trusts. Equity LifeStyle shares have generated a 27 percent total return in the last year, tops among Chicago-area REITs and fifth among all Ough. S. REITs, according to S&P Global Market Intelligence.
Trophy office towers and high-class hotels in stylish cities might have more sex appeal, but the land under double-wides in locations like Ocala, Fla., and Mesa, Ariz., has made investors more money-and not just for the short term. Of the 42 REITs that were around when Equity LifeStyle went public 23 in years past, only two have delivered higher stock returns over that time period.
It’s a slow, steady-and some might say boring-business with characteristics investors love: little competition, low expenses, a strong balance linen and strong demographics. And it’s a favorite of Zell, in whose $4. 8 billion fortune includes U. S. apartment and workplace buildings, Mexican shopping centers and Indian hotels. “I don’t know of any stock or any company that I’m involved with which has a better prospect than Equity LifeStyle, ” he said in the December interview with Bloomberg TV.
With almost 144, 000 cellular home and recreational vehicle sites in 32 states and Uk Columbia, Equity LifeStyle is the biggest company in a fragmented industry by having an image problem. To many, mobile home parks are where rapacious landlords collect rent from an underclass that can’t afford to reside anywhere else.
Though many landlords cater to low-income tenants, Equity LifeStyle focuses more on retirees who wish to live affordably in such warmer climes as Texas, Southern Ca and Arizona. It owns just three mobile home parks within Illinois-in Elgin, Monee and Beecher-but 98 in Florida, its greatest market.
BABY BOOMERS AGING
Many Equity LifeStyle shareholders are betting that demand for that company’s mobile home parks will grow as the baby-boom era ages. CEO Marguerite Nader likes to remind analysts on meeting calls that 10, 000 boomers turn 65 every day.
Nader as well as Zell, the REIT’s 74-year-old founder and chairman, decline to remark.
The recovery of the housing market has been another in addition. With home prices so low after the bust, many people about the verge of retirement held off on selling their conventional homes to maneuver into Equity LifeStyle properties down South, says Paul Adornato, an analyst and managing director at BMO Capital Markets in Ny. Rising home prices have solved that problem. “The flow of retirees towards the Sun Belt has resumed, and that’s been a positive with regard to ELS, ” he says.
Equity LifeStyle reported funds from procedures of $261 million, or $2. 84 a share, last 12 months, up 6 percent from $246. 6 million, or $2. 69, within 2014. FFO is a key profit metric for REITs that excludes items for example depreciation.
Revenue rose 5. 7 percent in 2015, to $821. 7 zillion.
Its stock touched an all-time high of $67. 79 the share on Feb. 3, though it slipped in the tumbling marketplace to close at $66. 03 on Feb. 12.
Equity Way of life makes money by renting home sites in its parks. The typical monthly rent last year: $569. The company’s tenants own their own homes, which technically are portable but are very expensive to maneuver. That’s why many investors love the business. Their customers tend to be “sticky, ” unlikely to leave because of the cost and hassle-even if their rent goes up-and landlords do not have to pay much to maintain their properties because they don’t personal the homes. “It’s a very good low-cap-ex story that is actually pretty unique, ” says Ryan Burke, an analyst at Eco-friendly Street Advisors, a research firm in Newport Beach, Calif.
Zell, whose 7 percent stake in Equity LifeStyle may be worth about $264 million, is so high on the company since it owns a product that no one else is making. It’s so hard to obtain zoning for a mobile home park that few are being built-in contrast towards the apartment business, where developers are going wild. “Supply and demand is what it’s about, ” Zell said in the Bloomberg interview.
Before the economic downturn, Equity LifeStyle diversified into RV parks. Retirees also account for any big share of that business, which has boosted the REIT’s development profile: Base rental income in the company’s mobile home section rose just 3. 5 percent last year, while its RECREATIONAL VEHICLE park income rose 7. 9 percent.
RISKIER SEGMENT
The RV business is riskier and may be more vulnerable to a recession, because leisure travel is really a discretionary expense that people could eliminate if the economy requires a dive. And the RV park business did suffer during the final downturn, Burke says.
Yet the company’s core mobile home park business still generates over fifty percent of its revenue, limiting its exposure. Indeed, the company’s “steady Eddie” reputation like a reliable performer has made it attractive to investors looking to lessen their risk in a turbulent market, says James Kammert, primary and portfolio manager at Chicago-based Harrison Street Securities, which spends in REITs. “It’s a safe harbor on a relative foundation, ” he says.
Still, given how much Equity LifeStyle gives have risen, few analysts are urging their clients to stock up on them right now. Even Zell, who made a career from buying low, can appreciate that advice.
CHICAGO AREA REITS’ 2015 PERSPECTIVE
REITs had a banner year in 2014, outperforming other areas of the stock market with returns even hitting 40% for home REITs. We talked to Trepp senior director of research Susan Persin by what this year might have in store for our hometown REITs.
Among the best pieces of news, says Susan, is REITs’ upcoming reclassification to their own Global Industry Classification Standard (GICS) sector, a big change MSCI and S&P will implement in 2016. What that indicates: equity REITs will now be separate from the financial services category and may receive a major boost in allocation and capital inflow from institutional investors (earlier than you think, since it takes time to shift sector dumbbells). It legitimizes REITs’ new mainstream appeal and only spells growth for that sector (expect spinoffs and increased specialization to continue), Leslie says. Now let’s zoom in on trends affecting Windy Town REITs:
Multifamily Mavens: Sam Zell’s Equity Residential and Equity Lifestyle Properties Apartments and mobile homes continue being REITs’ strongest performing asset class, Susan says. Even with people’s issues about overbuilding rentals, the market’s overall outlook is strong and can only benefit from rising interest rates in 2015 (which will make homeownership more expensive). EQR tends toward the urban youthful professional renter, Susan says, a demographic with increasingly positive possible as job growth improves and Millennials feel confident enough in order to ditch their roommate situations.
Retailers and Hoteliers: General Growth Qualities, Retail Properties of America, Inland Real Estate, Strategic Hotels & Resorts Retail (our profile of RPAI BOSS Steve Grimes here) and hotel REITs (BEE CFO Diane Morefield here) ought to be feeling really good about these falling gas prices, Susan informs us. People who aren’t spending their whole paycheck on gas have a lot more disposable income to spend on shopping and travel. The downside is going to be for those heavily invested in energy markets like Houston as well as Denver. Those cities are already seeing layoffs, she says, especially from companies which make equipment for suppliers to the industry.
Hot Hot Healthcare: Ventas and Aviv REIT The Affordable Care Act has treated healthcare REITs well for any simple reason: More people having insurance (especially in today’s aging population) means a larger demand for services. Susan has noticed a trend among healthcare REITs of broadening their scope being less reliant on federal reimbursements. That means a push into areas like assisted living or age-restricted housing along with nursing homes (which propelled Aviv toward a killer buyout), in addition to international investments, like the Ventas acquisition of independent living qualities in Canada. (Here’s our profile of CEO Debra Cafaro, pictured. )
Peaceful Industrial and Office: First Industrial Realty Trust and Equity Commonwealth Industrial and office was product types with comparatively lower returns in 2014 (if you can’t complain about 20%), but with supply and demand unchanged you may expect an uptick in 2015, Susan says. Office faces its challenges as companies use space more proficiently, and it will be interesting to see young Equity Commonwealth’s strategy with Sam Zell back at work game. Industrial may not be glamorous, but online companies’ proceed to same-day delivery continues to generate demand for warehouses closer to urban centers which “last mile, ” she tells us.