Issue link: https://read.dmtmag.com/i/355277
AUGUST 2014 12 THE JOURNAL Important Thoughts On Building The Perfect Portfolio BY FRANK ROLFE COMMUNITY CONSULTANT T J We own 104 communities at the moment. As a result, we spend a great deal of time contem- plating what to buy to increase the performance of our macro portfolio. While there are only around five companies that own as many com- munities as we do in the U.S., this topic should be as important to the person buying their first community as it is to those building large group- ings – yet it's rarely discussed. With so many "Wall-Street" types joining the ranks of manu- factured home community owners, industry con- solidation is the next logical step, and we think it's about time that we put some intelligence to the strategy of building assemblages. Here are our thoughts on building the perfect portfolio, in- cluding high- lighting some of the industry myths that actually damage overall performance. Diversity and Risk Balance is Key Would you invest all of your capital in a single stock? To do so would be lunacy. For every Google there are a thousand Enrons. That's why we're always amazed that some community own- ers actually seek out only properties with huge numbers of lots. Is it better to own 1,000 lots in a single community, or two 500-lot communi- ties? Or is it smarter to buy ten 100 lot commu- nities? From strictly a diversity standpoint, ten 100-space properties is clearly the best choice. Our industry has become so focused on simply the number of lots under ownership, that nobody ever discusses or thinks through risk balance or the impact of owning a few giant properties over a larger volume with smaller lot count. We have always tried to deliberately keep our risk hedged by having an average of 100 lots per community in our portfolio. In that manner, we can weather a tornado, or the closing of a major employer – or any other catastrophe – with only minor damage to our macro whole. If you own just one 1,000- space community and it gets wiped out in Hurri- cane Ivan, then you're as wiped out as the property. Why then is portfolio diversity never discussed in this industry? Is it maybe because most of the larger owners don't have much? The perfect portfolio should have diversity. The Myth About Community Size Advantages Another of the great mysteries of large com- munity portfolio owners is the myth of the vast "efficiency" of owning only giant communities. While it is true that it is hard to justify a full-time manager on communities under 100 lots, where it the benefit once you exceed that number? The number one cost center of manufactured home communities is utilities, and there are no dis- counts given regardless of lot size. In fact, all of our costs – from top to bottom – have no "volume discount" after you reach 100 lots. Sure, maybe you can get dry-erase markers and street signs at a 10% discount, but where are the real savings? The truth is that there are none. The next time that somebody tries to claim that there are effi- ciencies in owning 1,000 lot properties, look over their P&L and highlight what those are, be- cause we've never seen them. The perfect port- folio should have communities desirable by individual performance, regardless of size, not just based on some minimum lot concept. Geography is Vital Spreading risk through geographical diversity is also key. Just ask the operators who had huge holdings in the Detroit area. We invest not in state, but in regions. We are in 16 states throughout the Great Plains and Midwest. We believe in those areas. But we're smart enough to know that nobody can predict upheavals such as what happened in Detroit. So to protect us from this risk, we like to have our holding across entire regions, not just one finite area. We be- lieve that you need to hedge risk of individual markets by not having too many eggs in one local market. How many REO deals have you seen where the portfolio owner had 90% of their com- munities in one finite area? Too many. The per- fect portfolio should be spread over entire regions of the country. Location, Location, Location Enough of the macro, let's focus on the micro for a moment. Each property needs to have an outstanding location. You cannot build a great portfolio by throwing in a bunch of junk to offset a couple great properties. That would be like the Metropolitan Museum building a collection of great paintings that came half from Sotheby's and half from a high school art class. Every one of your properties needs to be a jewel – there is no benefit from having a big pile of fool's gold over a nugget of the real stuff. The perfect portfolio would have each and every property spectacular, and then balanced and risk hedged through a di- versity of numbers and locations. This is the con- cept that Warren Buffet has used to build the highest stock returns in history, and there's no reason why these same dynamics should not be used in manufactured home community portfo- lios. The perfect portfolio should have every community a winner. Conclusion Now that our industry is becoming under scrutiny of more professional owners, it's impor- tant to discuss more successful strategies and common sense to portfolio building. Many large community owners have never really thought through what they were trying to build. Many have already failed due to this oversight, and others are living with risk betas that would make a stock analyst jump from a window. There are logical steps that every community owner should take to hedge the risk that we all live with every day, and to make the sum of the pieces stronger than a single asset. The perfect portfolio can be built, but it takes some scientific consideration, and not just left to random luck. Frank Rolfe has been a manufactured home community owner for almost two decades, and currently ranks as part of the 15th largest community owner in the United States, with more than 10,000 lots in 17 states in the Great Plains and Midwest. His books and courses on community acquisitions and management are the top- selling ones in the industry. To learn more about Frank's views on the manufactured home community industry visit www.MobileHomeUniversity.com.