Issue link: https://read.dmtmag.com/i/406201
NOVEMBER 2014 26 THE JOURNAL Let me start off by saying that I have no idea of the actual numbers regarding SUN Commu- nities' $1.32 billion purchase of Green Courte's portfolio including American Land Lease, other than what I've read and heard in casual con- versation. The basic numbers imply a valua- tion of around a 6% cap rate – this has been expressed in the actual announcement by SUN's CEO Gary Shiffman. While many ask if 6% is too low a figure giving the current inter- est rate environment, I think there may be other macro issues that people are missing out on. The "stigma effect" of our industry, and the ramifications when it gets resolved Manufactured home communities are weighted down by what I would call the "stigma effect". While other sectors of real estate trade at roughly equivalent cap rates, manufactured home communities suffer cap rates that are a two to three points higher. Self-storage had this same "stigma effect" in its infancy, but when it was accepted as mainstream real estate, the cap rates declined to match those of office, retail and industrial. The net effect of such a decline in cap rate perception stands to boost the val- ues of all manufactured home communities by as much as 20% to 30%. This "Berlin Wall" of cap differential is already starting to fall apart, as we are already seeing cap rates declining in select markets. This negativity against the in- dustry is casually eroding with every article on the industry, and every entrance by a well-re- spected investment group. I felt the first shift when Warren Buffet bought Clayton. And I feel tremors every day. While 6% seems low today, this may be the norm of tomorrow. Maybe that's what SUN is betting on. The pending consolidation of the industry It comes as no surprise that the manufactured home community industry is poised for massive consolidation. With the entrance of the Car- lyle Group and others into this space, there are clear signs of interest by private equity groups who are looking for a roll up. Being tenth largest in the U.S., we receive these calls on a regular basis. There are around 44,000 manu- factured home communities in the U.S., and only 4,000 of those are currently owned by pro- fessional investors. Self-storage is over three times more consolidated than manufactured home communities – and that's the most frag- mented of the real estate sectors next to us. Maybe SUN is trying to beat the consolidation game to the punch. The future of lot rents Manufactured home communities are the ul- timate in affordable housing. We deliver roofs over heads for less than any other option. But one benefit of being inexpensive is that you have to ability to grow those rents significantly. We often think to ourselves "why are my rents less than 50% of apartments?" At some point, the industry may find out that rents can go up 50% and still not lose any customers, as there is nowhere else to go that can still even match that price. It reminds me of Wendy's. The other day I hit the drive-thru while out driving our properties, and the bill was $9. Even though I thought that was shocking for a fast food meal, are we really going to alter our eat- ing habits if the dollar menu goes away? Maybe lot rents have a lot more flexibility than we think. And maybe SUN believes this to be the case going forward. The efficiencies of large portfolio management When you are the second largest REIT, there are certain efficiencies in management by com- bining another portfolio. After all, you only need one back office and there's certain savings in firing the acquired companies overhead. And it's not only true for REITs. We find the same efficiencies in our portfolio of around 13,000 lots. There are folks out there with 2,000 lot portfolios, who pay a much larger percentage of their revenue on overhead than we do with a highly streamlined crew that can handle a much larger collection of properties. Maybe SUN is using this cost savings as one way to improve on the 6% cap rate it is buying. Can you name an- other acquisition that offered the same benefit? How about American Airlines and U.S. Air- ways? As I recall, that was one of their big sell- ing points to investors. Conclusion Only history will prove out whether SUN's acquisition is a smart one. It certainly looks ag- gressive to most folks in the industry. But maybe there are certain forecasts that we're missing. While I'm the first person to be skep- tical of such moves, there is so much going on the industry right now that I'd also be the first one to admit that there are many business an- gles that we are not completely in the loop on. These are interesting times in the manufactured home community business, and I'm just glad to be a part of it – I feel like we are seeing the in- dustry's future in the making every day right now. It will be interesting to see, many years from now, what the industry history book says about these events. Frank Rolfe has been a manufactured home com- munity owner for almost two decades, and currently ranks as part of the 10th largest community owner in the United States, with more than 13,000 lots in 20 states in the Great Plains and Midwest. His books and courses on community acquisitions and management are the top-selling ones in the indus- try. To learn more about Frank's views on the man- ufactured home community industry visit www.MobileHomeUniversity.com. Why Sun's Purchase Of American Land Lease May Not Be As Crazy As It Sounds BY FRANK ROLFE COMMUNITY CONSULTANT T J