EQUITY LIFESTYLE PROPERTIES INC (ELS) stock intrinsic value fair value estimate & owner earnings analysis

Equity LifeStyle Properties owns or has stakes in 453 properties with about 173,000 sites in 35 states and British Columbia: manufactured-home communities, RV resorts and marinas. It owns the land and rents out the sites. Most manufactured-home residents own their homes, and moving a home is expensive, so turnover is low and the rent roll is steady. The weak points are where the properties sit and how rents are set. There are 139 properties and 19 marinas in Florida and 49 properties in California, so hurricanes, wildfires and insurance costs are a real exposure. Also, 33 wholly owned properties fall under state or local rent control, including 14 of 47 in California, all 7 in Delaware and 6 of 11 in Oregon. Those rules generally limit increases to 60% to 100% of inflation. How we measure earnings. We start from the cash the operations bring in. We take out stock-based pay and timing swings in working capital. We then subtract the capital spending needed to keep the properties in their current condition. Spending that clearly paid for growth is left out of that deduction, and on this business that is small. In early 2024 the company restated its filings: purchases of homes for resale moved from capital spending into operating cash flow. We applied that same treatment to 2016 to 2019, so all ten years are on one basis. As a result, our earnings figures for those years are higher than in our previous estimate, which deducted home purchases twice. Lenders are valued separately: we add back interest paid, value the business as a whole, and then subtract the debt. On that basis the business produced between $1.78 and $2.47 per share a year before interest over 2016 to 2025. It grew about 2.8% a year over the decade, with dips in 2020 (the shutdown) and 2022 (the Hurricane Ian year). We start from $2.02 per share, about $404 million a year. That is the middle of 2021 to 2025, the years since the 2021 acquisitions gave the portfolio its present size. The two strongest years, 2024 and 2025, were lifted by lower hurricane rebuilding costs and by leaving 2024 property-upgrade spending in the maintenance figure. We do not treat them as the new normal. Growth. In 2025, business cash flow per share grew 3.7%. Rent on core manufactured-home sites rose 5.5% and annual RV and marina rent rose 4.1%. Our base case starts below that, at 2.8% a year, which is the company's actual ten-year rate. It continues for ten years, then slows to 2% a year through year 30, then holds flat. The reason it continues is structural. The company reports that permits for new communities are very hard to get in its markets, and the land and pads do not wear out because their upkeep is already deducted. We do not count new acquisitions, faster rent growth or demographic tailwinds, because none of them is secured. On this path the business is worth about $9.79 billion. Debt is about $3.31 billion. Most of it is fixed-rate mortgages at a weighted 3.77%, maturing from 2028 to 2041. Because that debt is well below a normal long-term borrowing cost, we credit about $383 million for the savings, for net debt of about $2.93 billion. That leaves about $6.86 billion for shareholders, or $34.27 per share. Over 60% of that value comes from beyond year 10, so the estimate depends heavily on the communities keeping their earning power for decades. Bear case. Next year is flat. Then one bad year cuts business cash flow by about 12%, the same size of drop as 2022, when Hurricane Ian hit Florida, and a little worse than the 2020 shutdown drop of about 10%. Recovery is only partial, at 3% a year for two years, then 1.5% a year to year 10 and 1% after that. That reflects rent control spreading, insurance costs staying high, and refinancing the 2028 to 2030 maturities of about $1.27 billion at higher rates. Interest coverage stays near 2.7 times even in the worst year. The business is worth about $7.19 billion, owes about $2.93 billion, and leaves $21.27 per share. Bull case. Earnings start from the 2024 to 2025 average of $2.42 per share. Rent growth of 3.5% a year continues for ten years, the pace of recent core rent increases, then 2.5%. The business is worth about $12.98 billion, owes about $2.93 billion, and leaves $50.22 per share. Margin-of-safety price. We are fairly confident about the level of earnings. There are ten years of history, and even the worst years (2020 and 2022) were only about 12% below our starting point. The hard-to-insure risk is a direct major hurricane on the Florida Gulf Coast. The company's main rebuilding costs from Ian were about $34 million, covered largely by insurance, but a larger storm or a pullback by insurers would hurt more. Leverage is moderate and mostly long-dated fixed-rate debt, which means the business should survive that. The two things we are most likely to get wrong are the earnings level and long-run growth. If earnings are really at the 2022 level of $1.78, the shares are worth about $28.53. If growth is only 2% and then 1%, about $27.69. If both are wrong, about $22.73. We set the margin-of-safety price at $22. At that price the current dividend of about $2.17 a year is close to a 10% yield. From that price the base case implies about 28% a year over three years and about 21% a year over five, counting dividends. Even the bear case implies a positive return. The price assumes a three-to-five-year holding period.