MILKING, then & now…
Milking, then & now…
goes by several names; avarice, covetousness in Holy writ, and simple old fashioned greed. As Random House Webster’s College Dictionary posits, ‘…to get something from; exploit: The swindler milked her of all her savings.’ It also occurs when a pettifogger bills clients ‘whatever the traffic will bear’, rather than what’s honest, fair
Well, landlease (nee manufactured home) communities, over the years, have experienced various nefarious milkings, as in ‘pulling excess profits out of the income – producing property type’, as well.
During the early days of landlease community (‘LLCommunity’) consolidation, roughly from the late 1970s through 1980s, when there were many half full properties on the market, it was common for frustrated, ailing, and near retirement owners/operators to sell their realty investments to buyers, sometimes limited partnership syndicators. These buyers would frequently meet the seller’s top dollar price expectation, while insisting on a low down payment and lengthy contract term; reminiscent of the acquisition mantra: ‘You can name the price or the terms of the deal, but not both!’ Then, after ‘closing’, the now somewhat wealthy, former – but still on the accountability hook, LLCommunity owner/operator, would oft ‘move away’ to begin his or her new, and usually comfortable, lifestyle.
In the meantime, the individual or syndicator buyer nunc owner would start managing the property, sometimes from afar, as a passive investor. And early on there’d usually be attempts to fill the remaining vacant rental homesites with ‘repo’ units, that were in abundance at the time, either as ‘rentals’ or contract sale units, to ‘get the rent meter running’. But along the way, and for various reasons, this flurry of activity tended to slow. Critical operating expense bills would continue be paid, albeit slowly, while routine maintenance became deferred maintenance; and soon, the departed seller nunc retiree – if still alive, would see contract payments arriving later and later, until sometimes stopping altogether. In the meantime, milk money going to the contract buyer (i.e. new owner) would continue, even increase for awhile, until the ‘still on the accountability hook’ former LLCommunity owner/operator filed suit and received a court order allowing him or her to take the property back – usually in far worse condition than when it had been sold ‘for more than it was really worth’. And another property had been milked, through excess profit – taking, by both owners, one more than the other.
So, do similar scenarios play out on a larger scale, say with privately – owned and publicly – owned LLCommunity portfolios? Yes, but in different ways and generally on a grander scale.
LLCommunity asset class consolidation has been underway for more than 30 years. The headcount of known LLCommunity portfolio owners/operators numbered slightly more than 25 in the mid – 1980s, when the Roulac Real Estate Consulting Group of Deloitte Haskins + Sells published an annual list of these ‘players’ in Roulac’s Strategic Real Estate newsletter. Today, however, according to the 21st annual edition of the ALLEN REPORT (a.k.a. ‘Who’s Who Among LLCommunity Portfolio Owners/operators in North America!’), published January 2010, that number has mushroomed to 500+/- in 2009 & 2010.*2 What’s a portfolio owner/operator? For the purposes of the ALLEN REPORT, it’s a business entity, whether a sole proprietor, limited or general partnership, private corporation, or a real estate investment trust (‘REIT’), that owns and or fee manages a minimum property portfolio of five LLCommunities and or at least 500 rental homesites.
Milking, on the privately – owned LLCommunity portfolio level, over the years, often began with the acquisition of investment grade properties (i.e. usually more than 100 rental homesites per location, with good physical occupancy, & low operating expense ratios*3), ideally including several in the same or neighboring local housing markets. If not already at a high occupancy level, the new owner often took necessary steps to fill vacant rental homesites; often, in the recent past, with assistance from local manufactured housing retail sales centers (a.k.a. MHRetailers nee street dealers or dealers). Then, once a fairly high level of physical occupancy was achieved, say 95 percent, the property owner would start ‘jacking site rents’, in accords with the old bromide: ‘If occupancy is higher than 95%, the rent level is too low!’ While this max profitability maxim focused on the positive fiscal health of the business enterprise, it overlooked the potential consequences of too high rents, e.g. Higher the site rent, the less home (price & mortgage) prospective homebuyers can afford to purchase, encouraging them to go where there’s ‘more bang for their bucks’! Irregardless; given this favorable ‘Return On & of (one’s) Investment (‘ROI’) window of opportunity, per max occupancy, high site rent, and maximum net operating income (‘NOI’) via trimmed expenses, some portfolio owners frequently refinanced with high percentage Loan to Value (‘LTV’) mortgages, that allowed them to walk away with large amounts of money from the property or properties. This was especially common between 1998, when average national physical occupancy among portfolio LLCommunities was at an historic high of 95 percent, and there was far ‘too much easy money chasing too few deals’, and 2008 when financial markets tanked.
Present day consequences? Given excessively high rents (Defined as exceeding the 3:1 Rule of Thumb, where LLCommunity site rent is more than 1/3rd the monthly rent for largest 3BR2B conventional, non – subsidized apartment units in the same local housing market!), homebuyers no longer could afford even modest sized and priced homes in such an overpriced landlease property, so went elsewhere – especially during the run up of the site – built housing bubble of the last ten years! As a result, physical occupancy plunged to 80, 70, 60 percent and lower; while site rents remained unchanged, even increased in places; and now some LLCommunities, and portfolios of these properties, are going into forbearance or foreclosure, depending on the structure of the underlying mortgage financing! In one recent example, as much by dint of mismanagement as out of sync rent levels, a large LLCommunity that sold for more than $11,000,000.00 less than ten years ago, was recently purchased out of foreclosure for $2,000,000.00 cash.
The contemporary REIT experience, is similar in some ways, different in others. UMH, Inc., in Freehold, New Jersey, was the sole LLCommunity REIT carryover from the 1980s, when the 1990s decade began. During 1994, Chicago headquartered ELS, Inc. (nee MHC, Inc), Detroit’s Chateau Properties, Inc., and Sun Communities, Inc. made their debut, making it four REITs. Three years later, Chateau merged with Denver – based ROC Communities, to more than double its’ size, in terms of rental homesite inventory, changing its’ name to Chateau Communities, Inc. The following year, Clearwater, Florida domiciled American Land Lease, Inc. ‘went public’ with an initial public offering (‘IPO’) of its’ stock.; so, ‘then there were five REITs’. This happy family of five began to fall apart in 2003, with demise of Chateau Communities, Inc., acquired and taken private by Hometown America. The following year, upstart Affordable Residential Communities (‘ARC’) appeared on the REIT scene, but lasted only two years, too taken private, via auctioning of assets and direct purchase, eventually resurfacing and renamed as American Residential Communities, still using the ARC acronym. Today there are but three publicly – traded REITs: ELS, Inc., Sun Communities, Inc., and the enduring, though recently renamed, UMH Properties, Inc. American Land Lease, though still a public company, is managed by Green Courte Partners, LLC., out of Lake Forest, IL. What happened to Chateau Communities, Inc., ARC, Inc., and American Land Lease?
While all three corporate stories vary, some lay a significant part of the blame at the feet of aggressive Wall Street analysts who, via published expectations of continually improving financial performance from REIT LLCommunities, effectively treated and feted these otherwise stable realty investments as ‘growth stocks’, feeding investors confidence that dividends would not only be continual, from period to period, but would increase in amount as well. Such overly optimistic expectations fueled operational cost cutting, aggressive rent increases, search for ‘alternative income to rent’ measures, or AITR, e.g. ancillary services paid for by homebuyers/site lessees; and for a time, a flurry of additional LLCommunity acquisitions, on the part of REIT executives. In time, some of these portfolios overheated, no longer able to sustain the profit pace near – dictated to them by Wall Street denizens; so, either merged with other like firms, experienced disposition, were taken back to private ownership, or effected one or another combination of these strategies.
In the private sector, milking of assets has been similar to that described in an earlier paragraph, the major difference being that of scale. For example, when a property portfolio acquires an otherwise healthy and attractive investment grade LLCommunity for top dollar (i.e. often ‘on the come’, or specifically, ‘on the – expectation of rent increases to – come’); then, take the rental homesite rent level upwards to 50 percent or higher, of what’s being charged for large 3BR2B apartments in multifamily rental communities in the same local housing market, would – be homebuyers, even existing LLCommunity residents, soon figure out it’s more economical for them to live in said apartments, maybe even buy a site – built tract home (until recently), with no down payment requirement and an adjustable rate mortgage (‘ARM’) with extremely low monthly payment for the first year of ownership. Repeat this scenario over as many times as there are LLCommunities in a given portfolio being milked, and one can see how millions of dollars quickly add up.
The challenge for LLCommunity site rents to be kept in sync with local conventional apartment communities is compounded when apartment rent rates are reduced in a given local housing market, almost always indirect response to declining physical occupancy levels – though they prefer to refer to this performance benchmark statistic in terms of ‘vacancy percentage’. Do LLCommunity owners/operators respond likewise? Generally, not. The only rationale, for not doing so, that makes any sense, are couched within these two disparate perspectives: First, since our annual turnover of homes runs only about 5 percent, in most good years, due to size of contemporary homes and high expense to relocate them, homeowners/site lessees tend to be a ‘captive audience’. The other, maybe lesser reason, has to do with the 3:1 Rule. When an apartment community rolls its’ rent back by $60.00/month, the equivalent amount of rent roll back for the LLCommunity in the same local housing market would be only $20.00/month. In the minds, I suppose, of many owners/operators, that’s not a large enough amount to waste time and effort to make the adjustment. Or is it?
Believe it or not, the foregoing is just a pretty good sized ‘drop in the bucket’ where this subject of milking is concerned. Do you have business experience, to this end, you ‘d be willing to share with blog readers, or maybe even in a future issue of the new Allen Letter professional journal? If so, communicate with me directly, via GFA c/o Box # 47024, Indianapolis, IN. 46247, or phone (317) 346-7156, or respond directly to this blog and website.
If you’re with me this far, it’s important you let me know you desire to receive advance notice of future weekly blog postings, and information about upcoming MHIndustry & LLCommunity issues and events. For example; as you read this, during or shortly after the week of 1 February 2010, you should ‘want to know’ what transpired –or, just as importantly, did not occur, at MHI’s Winter Meeting in Savannah, GA. Frankly, and tellingly, there’s going to be only one business press outlet broadcasting and printing that story: this one, and the new Allen Letter professional journal! When I post next week’s blog, on 8 February 2010, advance notice will be sent only to businessmen and women who’ve already emailed me, requesting to be kept on the Blog Posting Blast Email Alert Notice List, and those responding to this specific paragraph in this particular blog! Why the sharp focus? As an industry and asset class we are on the veritable cusp of our collective failure, or a potentially bright future, depending on what we do, or don’t do, during the weeks and months ahead! I only have time and inclination to communicate with peers who care as much about our business future as I do. And, as was hinted at in last week’s blog (Read ‘stealth Starbucks & manuFractured Housing!’), our collective Bottom Line is we need a New Business Model, to convert manufractured into A.C.E. housing or some other improved image and brand presence!*4
Are you keeping 2/26/2010 open on your ‘Save Our Industry!’ calendar?
1. Pettifogger. A mean, tricky, unscrupulous lawyer. Courtesy of Mrs. Byrne’s Dictionary, NJ, 1974.
2. 21st annual ALLEN REPORT available for $250.00 from PMN Publishing via community-investor.com or by phoning the MHIndustry HOTLINE: (877) MFD-HSNG or 633-4764 or (317) 346-7156. It’s ‘free’ with a $134.95 one year subscription to the new Allen Letter professional journal!
3. Physical occupancy = # occupied rental homesites, divided by total # of rentable sites; and OER = either total $ amount of annual operating expenses (or a particular line item from the Industry Standard Chart of Accounts), divided by total $ amount of site rent collected from that particular property. Home sales generally treated as a separate profit center. Allen Model = 40% OER. For detailed information on this strategic subject read, How to Find, Buy, Manage & Sell a Manufactured Home Community (as an Investment), available from PMN Publishing. See previous end note for contact and ordering information.
4. Uniquely Attractive, Cost – Effective residences, American – made, Comfortable & Energy – efficient!
George Allen, Realtor®, CPM®, MHM
Consultant to the Factory – built Housing Industry &
The Landlease Community Real Estate Asset Class
Box # 47024
Indianapolis, IN. 46247