Equity Lifestyle (ELS) is a public REIT and the largest owner of RV Parks in the U.S. They recently announced their 2023 earnings and there are some interesting conclusions that can be drawn from them. In this RV Park Mastery podcast we’re going to explore what the ELS financial performance suggests about the future of the industry.
Episode 97: What The Success Of Els Suggests About This Sector’s Future Transcript
Equity Life Style, also known as its stock symbol ELS, is the largest RV Park owner in the United States, founded by Sam Zell. They own properties across America in a larger quantity than anyone else. And being a public company in America, they actually release their earnings on a quarterly basis. And at the end of the year, they give their full year results. Recently, ELS gave out their full year results for 2023, and they announced that their net income for the year was up 5%, and that they now have $100 million of cashflow after debt and dividends, which is amazing. So ELS currently, actually at the end of the day, after making all their debt payments and all their shareholder distributions, they still have $100 million a year left to make further acquisitions.
Now, clearly that's a very, very successful report card. It's extremely successful at a time in which much of the rest of American real estate is suffering mightily. Look at what's going on right now with things like office buildings and retail centers. What do you see going on? Well, you see a decline in occupancy, you see a decline in revenue. Now, I don't follow office REITs or retail REITs, but I'm willing to bet if we looked at them, they're seeing a huge decline in net income, and a huge decline in value. You probably have read articles on the upcoming, what they call the real estate debt apocalypse, which starts this year. There'll be a two year run in which nearly $2 trillion of commercial real estate debt, mostly office and shopping center all comes due. And people are concerned that at the end of the day, when they get the appraisals on office buildings that at one time were 95% occupied, and today are 50%, and they might have had rents in the old days for 30 bucks a square foot, now it's down to $15, that there will be a blood bath of losses on those loans.
New York Community Bank already announced that they had to increase their loss reserves on commercial real estate debt from $50 million to $550 million. They got people talking about potential of a bank failure. It's one more sign of what they call the real estate lending apocalypse, but RV Parks are not part of that. As other forms of real estate are suffering mightily, RV Parks simply are not. So why are RV Parks doing so well? Why is ELS a REIT, but not the best known REIT in America? People don't go around talking about it too much. Why is he doing so much better than all the other forms of real estate?
Well, there's a few key reasons for that. Number one, RV Parks, and mostly out of sheer luck, are perfectly positioned with all of the current American mega trends. You've got 10,000 baby boomers retiring roughly every day in America. And a huge percentage of those are gonna go, want to go get in their RV or buy an RV, and travel America in their retirement. And then you have at the other end of the age scale, millennials. Millennials have become bigger RV fans, maybe than baby boomers. They like to go ahead and have RVs. They like the fact that they're low cost, and they love the fact that it's all about outdoor activities, 'cause millennials are a generation that really likes the great outdoors. Also, coming off of the COVID-19 crisis, many people who really weren't into nature before suddenly were, because they were forced for about a two to three year run of simply exercises and doing things outdoors. And that made them very, very interested in something, which prior to that, they were pretty much city dwellers and didn't even really care much about being outside.
Also, RVs offer people a way to live small. That's why you're seeing a lot more RV use. It's more in what's called the extended stay category, from people who live in that RV Park, maybe full-time. Maybe they are younger and work remote, or they're older and they're retired. But nevertheless, we're seeing changes where people look at RVs not as a temporary thing, but as a long term way to live. Also, RV sales are perpetually always going up. Every year, there are more RVs sold, and as they're sold, people have to have a place to put them, a place to use them. The average RV hits the road for 14 days a year, and so the more RVs you have on the road, the more days in RV Parks you have that are full.
Another issue is that RV Park residents, RV Park customers are rich for the most part. They have disposable income. As RV Parks tend to raise their rates based on market forces, they can easily afford it. They're not going to not take that RV out on the road because rates went up a little. In the case of ELS, if they raised their rates by 5%, people thought, well, you know what? There's no way that 5% is gonna impact me much at all based on my income, based on me using my RV, so I don't even really care. At a time in America, when people are really strapped on everything, whether it's gasoline or food, it's refreshing to be in an industry where most people actually have the money to pay more if they need to, without having to choose between doing that and some other essential service.
The bottom line to it is that RV Parks are very, very well positioned for America in 2024. It's not really a recessionary business. People are gonna use their RV, no matter what's going on in the economy. Retirees could care less if all jobs ended. As long as their social security checks and other pension monies keep coming in, it doesn't matter to them at all. So the RV Park business has positioned itself to be extremely well located, based on the pending recession and other issues that negatively impact other forms of real estate. Now, do we see that changing? Do we see ELS's net income decreasing in the years ahead? No, I really can't see that, simply because all of mega tens are so positive, and also the fact that RV Parks, new RV Parks are rarely constructed. One of the benefits which everyone in the RV Park industry realizes is that in a supply and demand world, having restricted supply has always been a good thing.
Now, in a world where we see new office buildings, new shopping centers, new self storage facilities, new hotels going up all the time, it's nice being in something where we don't have to worry about that, because under supply and demand, every time someone opens a new property, it means less customers for your property. It means less revenue for your property and less value. The bottom line to it all is that RV Parks are doing very, very well indeed, Sam Zell's ELS results for the year of 2023 were not a fluke. They were simply a reflection of how well-positioned the RV Park industry has become, and how well it will stay positioned for the future. This is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.