Rental Businesses Love the Part-Time Economy

by Lawrence Meyers | September 6, 2013 6:45 am

The economic situation in this country is not good.

Ever since hitting bottom during the financial crisis, the economy has been growing at an anemic rate. More to the point, however, jobs are not returning to the economy at a rate that makes a recovery sustainable.

The uncertainty surrounding the state of the economy, the size of the federal deficit and debt, the uselessness of Congress in resolving any issue of any substance, and the expensive burdens placed on business because of Obamacare have left employers wanting to take labor risk out of the equation. The result is that most of the jobs being added are part-time.

Fortunately, there’s a stock market for every economy. If you were short in the early 70’s, you did very well, as you would have during the financial crisis. Today, the market is generally doing well because quantitative easing has pushed money out of bonds and into the market. Some businesses, however, do very well organically in this environment.

Businesses that focus on rentals are the perfect example. The theory is that a weak economy filled with part-time employment means people can’t afford to buy stuff, so they rent instead.

Auto sales have done extremely well as the economy recovered. Now, auto dealers are seeing a huge increase in lease deals — 27.6% of financed new vehicle purchases in the second quarter were lease deals. Three years ago, that number was 17.7%. Experian reports that average monthly lease payments are about $50 less than buying a new car with a traditional loan.

In addition, the traditional 5-year period for an auto purchase is being stretched out to six or seven years. If sellers can rent an asset rather than sell it outright, chances are great that they’ll make more money. If you want to take advantage of this trend, look at AutoNation (AN[1]). The company is enjoying solid 18% annual growth and trades at only 17x earnings.

One of the greatest businesses in terms of cash flow is the rent-to-own business. Here, a company like Rent-a-Center (RCII[2]) will buy, say, a washing machine. Then it will turn around and rent that item to a consumer at a rate high enough that it earns back what it spent relatively quickly. Every subsequent month the appliance stays rented or gets re-rented is pure profit.

I love Rent-a-Center, but it’s working in a saturated market. It’s pegged to grow at 9.25% annually and trades at 12x earnings. However, it pays a 2.2% dividend, and only pays out about 37% of its free cash flow in dividends, so there could be room for a divvy increase. Competitor Aaron’s (AAN[3]) is growing at 12% and trades at 14x earnings, but pays a tiny 0.3% yield. Still, both are solid stalwarts with good days ahead in a secular bull market for rentals.

Finally, we have apartment REITs. A lot of folks lost their homes in the financial crisis, but they still have to live somewhere. There are about 40 million renters right now in the U.S., and demand over the next four years suggests a 10%-12% increase in that time frame.

UDR Inc. (UDR[4]) owns, acquires, renovates, develops and manages middle-market apartment communities. The company targets young professionals, blue-collar families, single-parent households, older singles, and immigrants. And it pays a 4.2% yield. If that’s not enough for you, Home Properties (HME[5]) pays a 4.9% dividend.

But my favorite type of rental play are timeshares. What could be better than selling the same unit 52 times over? 2800 resorts all over the world! Timeshares have nice cash flow, thanks to minimal capex. Just look at Interval Leisure Group (IILG[6]), which is up 15% since May. Earnings are set to almost double this year and grow 10% over the long term, and it trades at 16x estimates.

But I much prefer Marriott Vacations Worldwide (VAC[7]) because it’s disconnected from the part time economy, yet it’s still a rental business — it caters to more upscale folks under both the Marriott name and the exclusive Ritz-Carlton name. Earnings are expected to increase 60% this year and 11% next year, and it trades at 21x earnings.

Until full-time employment starts powering back, rental businesses will continue to be a good bet for investors.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc.[8], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[9] and blogs about public policy, journalistic integrity, popular culture, and world affairs[10]. Contact him at pdlcapital66@gmail.com[11] and follow his tweets @ichabodscranium.

Endnotes:
  1. AN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AN
  2. RCII: http://studio-5.financialcontent.com/investplace/quote?Symbol=RCII
  3. AAN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAN
  4. UDR: http://studio-5.financialcontent.com/investplace/quote?Symbol=UDR
  5. HME: http://studio-5.financialcontent.com/investplace/quote?Symbol=HME
  6. IILG: http://studio-5.financialcontent.com/investplace/quote?Symbol=IILG
  7. VAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=VAC
  8. PDL Broker, Inc.: http://www.pdlcapital.com/
  9. written two books: http://www.investorplace.com/author/lawrence-meyers/
  10. blogs about public policy, journalistic integrity, popular culture, and world affairs: http://www.ichabodscranium.com/
  11. pdlcapital66@gmail.com: mailto:pdlcapital66@gmail.com

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