Issue link: https://read.dmtmag.com/i/454549
FEBRUARY 2015 18 THE JOURNAL For those who fail to grasp the concept of the "affordable housing" segment of the manufactured home community business – which is the by far the largest component of the roughly 50,000 commu- nities in the U.S. – they should look no further than Southwest Airlines. Southwest's business model is similar to the affordable housing niche in most regards, with that of American Airlines sim- ilar to the higher-priced "lifestyle choice" sector. The battle of Southwest and the more premium carriers has been going on for decades, and it serves as a good metaphor to the manufactured housing community battle that quietly rages on be- tween "affordable housing" and "lifestyle choice" owners. To hit the bulls-eye you have to shoot for the middle Southwest Airlines flies over 133 million cus- tomers per year. They have achieved this by of- fering what the majority of travelers want: great service at a low cost. Southwest has no first class or upgraded cabins. They offer a simple product at a simple price structure. This has garnered them huge rates of customer retention and the ability to keep their flights nearly full when others battle to attract customers. "Affordable housing" manu- factured home communities offer the same simple promise: safe, clean neighborhoods for a low cost. This is a theme that resonates with a nation in which around 30% of American households are in need of housing they can afford on incomes of $25,000 per year or less. Sure, this means that we're missing out on 70% of the market, but we are trying to strike a market with little competi- tion and better margins. Focus on low fares Affordable housing proponents look at their home and lot pricing and think "am I still the low- est in the market?" They strive to keep the lot rent at an affordable rate, regardless of market rents, because we know the limitations of our customers. We have many households getting by on minimum wage or disability payments. Sure, we could raise rents as high as most "lifestyle choice" communi- ties, but that's not our business model. We forego higher rents for greater occupancy and retention. There are some communities owned by REIT op- erators that are only a block or so from our com- munities, and they look identical. In some cases, in fact, our communities look better than theirs. However, the REIT charges $100 a month more than we do. Like Southwest, affordable housing community owners try to always be the low cost leader as a business model, and refuse to gouge. And our customers appreciate that and reward us with their business for a lifetime. No frills Southwest serves no in-flight meals; just peanuts and pretzels. They offer no special serv- ices of any type. There is no first-class cabin, and the legroom and seat density is the same through- out the airplane. They do not even have assigned seating, instead opting for simple first come/first served accommodation. This is identical to af- fordable housing community owners, who offer virtually no amenities. We believe that our cus- tomers are more concerned with keeping costs low than having a pool with a waterfall that they might use three days per year (if ever). We opt not to include seasonal color at the entry, or a jogging trail, as that's effectively throwing our resident's money down the drain. And they appreciate that. Ask anyone inside a REIT community if they would be willing to trade the clubhouse for $50 less rent – 100% will ask where to sign up. I think that these amenities, in fact, are mostly just to try to impress stockholders and look good on annual re- ports – mainly because I never see anyone utiliz- ing them. The proof is in the financial performance The biggest difference between Southwest Air- lines and its peers is in one big item: profitability. Southwest is the only airline that has recorded 39 straight years of profitability, at a time when other carriers have been wiped out through bankruptcy or merged to avoid such a fate. Southwest is able to stay the most profitable carrier by having the highest occupancy, the lowest costs, and efficient operations. Profitability is also the single largest attribute of affordable housing community owners over lifestyle choice enthusiasts. Affordable hous- ing communities traditionally sell at cap rates of 8% to 10%, while the recent purchase of Ameri- can Land Lease by SUN is reported to be a 6% cap rate, as was RHP's purchase of much of the ARC portfolio. A simple look at the dividends of the three U.S. manufactured home community REITs show ELS paying out roughly a 3% annual dividend, SUI a 4.5% annual dividend, and UMH a little over 7% annual dividend. These re- turns on investment would make most affordable housing operators cringe. In fact, it would be near to impossible for an affordable housing community owner to exist at these type of return levels; they would be unable to raise capital or obtain lending. Conclusion We would estimate that 80% of the manufac- tured home communities in the U.S. are based on the affordable housing model, and not lifestyle choice. And with good reason. Just as Southwest Airlines has succeeded with a simple business model focused on low costs and low fares, so have these owners. It's only a matter of time before in- dustry consolidation develops the first affordable housing REIT, and the results may prove embar- rassing for those currently on Wall Street. Frank Rolfe has been a manufactured home community 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 commu- nity 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. Southwest Airlines Is A Good Role Model For The Majority Of Community Owners BY FRANK ROLFE COMMUNITY CONSULTANT T J