With this week’s (July 26, 2022) earnings release from Sun Communities (SUI), we have now had the two primary manufactured housing REITs report earnings for the second quarter of 2022. Equity Lifestyle Properties (ELS) led things off last week with a solid, but mixed report which caused the common stock to trade down 3.2% on the day of the earnings call.[1] The company reported earnings that were in line with guidance and while they maintained full year 2022 funds from operations (FFO) guidance, they did reduce their same property net operating income (NOI) forecast by roughly 70bps to 5.6-6.6% from 6.3-7.3%. The reduced forecast was driven by moderated growth expectations from the transient RV (recreational vehicle) segment of the business, which represents approximately 7% of total revenue. They are also now projecting modestly higher operating expense growth for the balance of the year driven by utility expenses and labor costs.[2] It is noted that the transient RV segment, essentially short-term vacation bookings that occur anywhere from 60 days in advance of stay to one week in advance of stay is a more volatile part of an otherwise stable business. In recent years, ELS has been converting more transient sites in their RV resorts to seasonal and annual leases.
There are several explanations as to why the transient RV business might have peaked, with 2021 representing a highwater mark. There were still limited venues for safe vacation travel last year with international travel not an option and families concerned about domestic flights and hotel stays, making RV travel an excellent alternative. While demand for RV vacations remains high, 2022 offers more vacation options for wealthier travelers, and the bite of inflation including high fuel costs are putting a squeeze on more price conscious families. The company prefaced that while the transient RV business saw revenue down 2.3% in 2Q22 versus 2Q21, it still represented mid-teens growth above 2019 (pre-covid) levels. [3]
Sun Communities (SUI) has a higher percentage of revenue coming from the transient RV segment at just over 10%. SUI has also been pivoting a portion of their transient business to longer term leases at a rate of 1,000-1,200 sites per year. The company currently has approximately 28,000 transient RV sites across their resort portfolio and they believe roughly 25% are appropriate for conversion. SUI has communicated that they generate a revenue “pickup” or 40-60% upon conversion of sites from transient to seasonal/annual. [4] Their June 2022 investor presentation provides an example in which revenue per site jumped to $9,324/annum from $6,158/annum with lower average daily rate (ADR) on leases more than offset by higher occupancy. The mid-quarter update from June also highlighted that for Memorial Day weekend, transient RV revenue for the same property portfolio increased 12.5% compared to the very strong 2021 period. This positive data point did carry through for the quarter as the company was able to achieve 12.3% RV revenue growth for the period and transient RV revenue was also positive at 0.60%. For the Independence Day weekend, transient RV revenue increased 9.4%. The company attributes the continued success of the transient RV business to three primary factors, a proprietary reservation system tied to brand awareness, prime locations of the resorts and customer service throughout the experience. [5]
While SUI was able to report operating results from the transient RV business which was materially better than results achieved by their peer, ELS, they did also acknowledge many of the same challenges which will result in a moderation in the trajectory of growth over coming quarters. SUI tempered full year operating forecasts for same property NOI primarily due to higher-than-expected real estate taxes and a second half slowdown in transient RV revenue.
We continue to believe that the diversified manufactured housing REITs are an exceptional way to achieve exposure to affordable housing and affordable leisure travel with stable cash flows that are resilient to both recession and inflation.
Footnotes:
[1] Yahoo Finance
[2] Equity Lifestyle Properties: Second Quarter 2022 Results
[3] Equity Lifestyle Properties: Second Quarter 2022 Results
[4] Sun Communities: June 2022 Investor Presentation
[5] Sun Communities: Second Quarter 2022 Results
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