Equity Lifestyle Properties: Expense Woes Continue

Last October we wrote MHP Expenses Surging highlighting how Equity Lifestyle Properties’ (ELS) expense increases were stunting their NOI growth.

At that time, utility prices were sky-high and ELS’s insurance premiums jumped 20% (a shocking number back then) as they were contending with Hurricane Ian damage.

Given the hurricane and construction labor shortages, we predicted another large insurance premium increase this year.

Well Here We Are

ELS recently released their Q1 2023 earnings report, and the expense pain continues.

ELS’s insurance premiums rose a shocking 60% year over year - a number that likely caused the c-suite to pass out when the bid came in.

To confirm that increase wasn’t an anomaly specific to ELS, Sun Communities saw a 50% increase in insurance premiums.

We gasped at 20% expense bumps last year but 50-60% ?

This is a just tab bit higher than most acquisition models that typically assume yearly 3% expense increases. Oopsies.

MHP expense budget variances (pro forma vs. actuals) are not looking so hot right now.

So what happened?

2022 was a brutal combo of weather events, labor shortages and construction cost inflation. Insurance companies price their premiums on both the likelihood of damage and the cost of repairs. Both sides of that equation were awful last year.

Furthermore, ELS’s portfolio concentration is heavy in Florida and insurance companies were taken to the woodshed in FL after Hurricane Ian.

Just in 2022, the National Oceanic and Atmospheric Administration reports 18 costly natural disasters resulted in over $165 billion in losses — up 6% compared to 2021. Florida alone accounted for $116.7 billion of those losses due to Hurricane Ian that pummeled the state.

So, insurance companies are aggressively boosting renewal rates this year to try and stay solvent should storm activity remain high.

The Good News

Construction material costs (while still elevated) are finally showing signs of abating along with supply chain disruptions.

Plus….

Remarkably, despite these record expense increases, ELS was still able to grow net operating income 5.7% vs. Q1 2022. Sun Communities grew NOI by 6.7%.

This is a testament to the resilience of mobile home parks in the face of extreme cost increases. Most real estate sectors (and businesses in general) do not have this luxury.

Happy Trails

MHP WEEKLY