Issue link: https://read.dmtmag.com/i/441836
JANUARY 2015 14 THE JOURNAL The manufactured home community industry is poised to make significant progress this year on many fronts. While the stock market has already exhausted its bull market run at the start of 2015, the community business is only just beginning, and has huge upside in available deals, signifi- cant "spreads", industry consolidation and ac- ceptance in the financial markets, and limitless demand. Here's why we think 2015 will be a landmark year for community owners. Stable interest rate environment With Obama still two years from leaving office and economic recovery anemic, interest rates should remain stable throughout 2015. No econ- omist that we talk to sees any chance of signifi- cant rate bumps over the next twelve months. That will continue to create a huge "spread" be- tween interest rates and cap rates, and give today's deals some of the highest cash-on-cash returns ever, for smart buyers. We have never seen "spreads" this large in our lifetime, and in- tend to acquire as many communities as we can under this framework, while it lasts. We are ex- pecting, however, to see rate increases of around one point with the end of quantitative easing by the U.S. government. Beyond that, however, we think interest rates will remain extremely sta- ble. Plenty of great mom & pop and bank REO deals available Of the roughly 44,000 manufactured home communities in the U.S., around 40,000 of those are owned by "moms & pops" – often the original builder who owns them free and clear and lacks highly polished management skills. This group continues to retire at a fast rate, making more and more of these properties available at at- tractive prices. In addition, the REO supply of failed banks loans that were born of the poor un- derwriting of the pre-crash years continues to in- tensify. We have been buying some of these REO deals for fifty cents on the dollar at auction, and mom & pop deals at significant discounts to real value. It's worthy of note that the bulk of these REO deals are the fault of poorly managed bor- rowers and not of the properties themselves. The industry is entering an era of higher values through more attractive perception There is widespread greater acceptance of the manufactured home community as a stable, at- tractive investment property. As has been noted, the self-storage industry faced the same lack of respect at one time and ultimately became mainstream, increasing values by 30% or so in the process. The manufactured home commu- nity business is saddled with a stigma that can only be erased when more investors – and re- spected investors – learn about the industry and put their capital at work there. We are seeing this happening every day with more large private eq- uity groups moving into the space. Just as War- ren Buffet brought renewed respectability to the industry when manufacturing was stumbling, the introduction of new names, such as the Carlyle Group, will make more and more investment firms take note of our sector and set about ele- vating it to mainstream status. If you simply own a community when the caterpillar finally turns into a butterfly, your holdings will significantly increase in value just by being there – kind of like holding Apple stock throughout its rocky period. Industry consolidation is healthy There is no question that industry consolida- tion is already underway, with the acquisition of American Land Lease by SUN Communities only the most recent example. Industry consolidation pushes all community values significantly higher, through the simple process of supply and de- mand. I've seen it before, as I was the largest private billboard owner in Dallas before the in- dustry consolidation lead me to sell to a public company and the supply of billboard firms fell from sixty to less than ten in the Dallas market. I feel like I am in a repeat of that same movie – only this one's in color, and much larger in scale. The demand for what we do has never been higher I am amazed at how fortunate we have been in virtually all U.S. megatrends. The endless de- cline of the U.S. economy has been a godsend for our contrarian industry of affordable housing. At the same time, the fall in quality of Class B and Class C apartments have thrust millions of Americans into our sector, just to find a safe, clean place to live at a reasonable price. As a re- sult of the apparent need for affordable housing, city and state government has come to embrace our product, and the better managed affairs of new owners have made us no longer the enemy of our neighbors. Conclusion We are very, very bullish on the manufactured housing community industry going into 2015. We have put our money where our mouth is, and own over 14,000 lots in 20 states. We currently have almost thirty new communities under con- tract. While we are pessimistic by nature, the stars have all aligned for this industry, and we are extremely confident that 2015 will be a landmark year for this sixty-plus year old industry – perhaps its finest. It would be hard to come up with a stronger set of fundamentals going into a new year. That does not mean that you can purchase any old community and do well with it. But it means that, if you set your sails properly and in- telligently with the right sort of community, the strong winds of demand will push you faster than ever before towards your goal. Frank Rolfe has been a manufactured home commu- nity 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 manage- ment are the top-selling ones in the industry. To learn more about Frank's views on the manufactured home community industry visit www.MobileHomeUniver- sity.com. Why We're Bullish On The Industry In 2015 BY FRANK ROLFE COMMUNITY CONSULTANT T J