Wall Street Analyst Muses about Land Lease Communities as Investments
Blog Posting # 603 @ 18 Sept 2020; Copyright 2020: Educatemhc.com
Perspective. ‘Land lease communities, previously manufactured home communities, and earlier, ‘mobile home parks’ comprise the real estate component of manufactured housing!’
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INTRODUCTION. Two interesting parts to this week’s blog; one quoting a Wall Street analyst, the other, an abbreviated outline I use when sharing the Official State of the Manufactured Housing Industry, with various audiences. ANNOUNCEMENT. If not already a subscriber to The Allen Confidential! newsletter, you might want to do so ASAP. Why? Because the lead feature in the October issue is titled: PAST ‘PLAYERS’, Where are they today? Have spent the last month or so identifying and tracking down 50 or so individuals that were once widely recognized names in the MH & LLCommunity business models. Some very interesting findings. Active ‘players’ are not profiled; and those who’ve died, as you may or may not know, are identified in a Memorial column, each month, in the TAC! newsletter. To subscribe: visit www.educatemhc.com
Wall Street Analyst Muses about Land Lease Communities as Investments
Two reports, prepared by non-MHIndustry or land lease community ‘players’, appeared on the business news scene recently. I’ll review one of them here: ‘You are About to Change our Mind on Manufactured Housing’, by Brad Thomas. Perhaps next week we’ll take a look at ‘The Basics of Investing in Manufactured Home Communities: History, Evolution and Opportunities’, produced by LoopNet.
Thomas, from the very beginning, struggles, using inappropriate manufactured housing terminology. His description of choice for our unique, income-producing property type? Manufactured Housing Parks, when he should be penning land lease communities!
One of the writer’s first observations is how this realty asset class is: “…unique, controversial, and (a) vastly underappreciated segment of commercial real estate’. P.1
Now, this is interesting. Thomas cites $27.7 billion (market cap) for this realty sector. He calculated that figure by adding together the market caps (i.e. market cap values for REITs ELS, Inc. @ $12 billion; Sun Communities @ $15 billion). Unclear whether he included UMH Properties @ $619 million, or not. So, as you can see, this is a very narrow window of examination, covering just two, maybe three, publicly-traded portfolios of land lease communities. How does this $27.7 billion compare to other REIT segments? Industrial, office, self-storage and retail are pegged at $125.7; $78.8; $60.7; and $101.2 respectively. FYI. EducateMHC prepares and circulates, to PRIME subscribers of The Allen Confidential! monthly newsletter, a combined ‘Official MH Shipment & Stock Market Report’, describing the performance of all eight public MH & land lease community-related firms. To subscribe, visit www.educatemhc.com
Nice to know. Among all REITs (real estate investment trusts), “…manufactured housing parks were the top-performing real estate sector in 2019.” P.5.
“Owners of manufactured homes…stay in their homes longer than traditional homes.” (15 years vs. 13 years) p.7. Another factoid worth hanging onto.
But here’s a claim I challenge: “…there were only 10 new manufactured housing parks established in the U.S. in all of 2019.” P.9. Writer provides no documentation of this claim. I’d be comfortable with a number twice that amount, based on what I’m hearing these days.
“Manufactured home parks are designed for those living off around $30,000 per year.” Note: National average AMI or Area Median Income, of late, has been in the $50,,000-60,000 range. Do you know how to use AMI to estimate housing price points for any local housing market? If not, request a copy of the ‘Ah Ha! & Uh Oh! Worksheet’ via firstname.lastname@example.org
Now, this is interesting. “Manufactured home park depreciation schedules typically average 15 years, compared to apartments of 27.5 years, and commercial properties (e.g. office and industrial) of 39 years.” This means, “The higher depreciation rate equates to higher after-tax cash flows to investors, based on identical income generation.”p.18. Bet most of you didn’t know that.
“Existing REITs in this sector, Equity LifeStyle Properties, Inc., Sun Communities, Inc., and UMH Properties (UMH), buy essentially all their properties from individuals or families at around net asset value. Once in the REIT, however, they are immediately valued at a -20% premium. This creates immense value for shareholders.” P.18
Land Lease Communities Today…
Most of the time, when I’m asked to present the Official State of the Manufactured Housing Industry, I cover two major sectors: manufactured housing per se, and land lease communities at large. What follows here is an abbreviated summary of just the latter half.
According to the 31st annual ALLEN REPORT, for year 2019, not much changed from the previous year. Access to chattel capital, for on-site seller financing of home-only loans, continues to be the dominant, albeit frustrating challenge for most community owners/operators nationwide. One continuing result, an emerging trend, is the return to renting out of new homes on-site…just as we did during the late 1970s and early 1980s.
Statistics from the ALLEN REPORT indicate 93 percent national physical occupancy, among portfolio firms, during 2019; and, 41 percent operating expense ratio or OER. A new ‘measure’ came on the scene during 2019, the National Average Multifamily Rental Rate (for conventional garden style apartment communities). For example, during the measurement period, that figure was $849.00/month rent. Compare this amount to $800/month for a manufactured home in a land lease community where site rent is $300/month and PITI is $500/month. Taken together, the $800 monthly figure, compared to $849/month, suggests a $49/month incentive to live in a land lease community. However, if utility expenses, for said home in a land lease community, are included in the monthly payment, that ‘incentive’ disappears, unless site rent is reduced or lesser (more affordable) home is financed.
The new tripartite advocacy, resource, and communication presence for land lease communities nationwide?
• Manufactured Housing Institute or MHI. National legislation, representation, regulation, and issues affecting MH, and realty asset class at large.
• National Communities Council (NCC) division of MHI. National projects, property management & installation training via MHEI, and networking opportunities relative to community owners/operators nationwide
• EducateMHC. Primary resources (e.g. ALLEN REPORT & 12 additional Resource Documents updated monthly), communication (via this weekly blog & The Allen Confidential! newsletter), and services (e.g. Manufactured Housing Manager or MHM training & certification, & confidential assessments of property operations performance.
And yes, there are emerging – and existant, trends to watch as time passes.
• Continued consolidation of Mom & Pop-owned land lease communities into private and publicly-owned property portfolios, too often resulting in less coorporate support for state manufactured housing associations.
• Increased presence of resident-owned communities or ROCs.
• More new HUD-Code homes shipped directly into land lease communities for sale, e.g. 25 percent in 2009 & 40 percent during 2015 and beyond.
• Success or failure of properties acquired by outside investors (hedge funds) paying exorbitant amounts, then increasing site rents to much higher levels.
• New HUD-Code homes ‘sold on-site’, often with minimal profit margins, to ‘make the deal’, relying almost wholly on the annuity nature of site rent into the future.
Two perennial issues affecting all manufactured housing and land lease communities:
• Continued absence of two secondary markets: resale of manufactured home and valuation thereof, via continued use of ‘book value’; and, selling off of seasoned ‘contract sale’ paper on MHs, to replenish chattel capital for the purchase of new homes on-site in land lease communities.
• And now, a new (?) challenge for the industry and realty asset class! Economic Impact Analysis or EIA. While a complicated process – researching and publishing accurate economic impact of various industries, and realty asset classes, on local, state, and national levels, it’s how we best justify our existence, even need for less regulation, if appropriate. The (?) mark? EIAs have appeared, over the decades, in various states, e.g. Indiana in late 1980s, and recently in Wisconsin. Should be done in every state and, by MHI, MHARR, and or MHCOA, on the national level! Let’s see if it happens.
We’ll conclude this part of the blog by making an observation about ‘doing business’ during the coronavirus pandemic. Virtually every land lease community owner/operator I’ve talked to during the past six months has expressed mild surprise about how well homeowner/site lessees have honored their rental commitments. Yes, some have incentivized the process with earl pay discounts, etc. But, by and large, it appears residents appreciate having their own home (to self-quarantine within) and do not want to risk losing it during these stressful times!
George Allen, CPM, MHM