Issue link: https://read.dmtmag.com/i/708576
AUGUST 2016 18 THE JOURNAL The fact that there have been three separate $2 billion transactions over the past 180 days (Carefree, Northstar and YES) has put a spot- light on the manufactured home community business. The fact that the cap rates on these three purchases were relatively low has caused some skeptics to claim that the manufactured housing industry is at the top of a cycle. Is it? Or is it just beginning its ascent? Our cap rates are still significantly higher than apartments Cap rates on these three transactions are un- clear, but appear to be in the 6.5% range. Let's compare that to Sam Zell's recent sale of $5.36 billion of apartment units at a rumored 5.5% cap rate – nearly 20% lower. And that does not include the hundreds of apartment transactions per year that end up at less than 5%. Don't for- get the large office portfolio sale to Blackstone in the 3.5% to 4.5% cap range less than a decade ago. The Carefree/Northstar/YES cap rates seem low based on prior manufactured home community cap rate levels, but compared to other real estate sectors they certainly are not. Sam Zell is not selling Nobody has been more accurate in selling at the top than Sam Zell. He sold his office hold- ings at the summit, and the recent sale of his apartments to Starwood was heralded by many as acknowledgment of the top of multi-family. However, despite being the largest owner of manufactured home community lots in the U.S., he has not sold a single community off since inception. Our rents have a huge amount of room to grow The average lot rent in the U.S. is estimated to be at around $275 per month. That's a ridiculously low figure. In many markets, the average apartment rent is $1,000 per month or more over the average manufactured home community's lot rent. We have found that most customers much prefer our product over Class B and Class C apartment living, since we offer no neighbors knocking on walls or ceilings, a yard, the ability to park by the front door, the chance at the American dream of home owner- ship, and a stable community feel. The manu- factured home community product does not need inferior pricing to stay full – and more pro- fessional management will be raising rents sub- stantially as moms and pops sell out. Our occupancy can still be hugely improved Most manufactured home communities are in the 80% to 90% occupancy rate arena. We are not full. New aggressive home programs, such as 21 st Mortgage/Clayton's CASH program make filling lots easier than ever before. You could see gains of at least five to ten points in occupancy over the next decade. And virtually all of that rent falls to the bottom line of the community owner. There's so much opportunity to grow existing portfolios Our industry is so lacking in consolidation that virtually all communities are still owned by the original moms and pops. These original builders – often known as the "Greatest Gener- ation" – are fighting a biological clock on aging and are interested in passing the baton to the next generation. There are roughly 44,000 communities in the U.S., and around 35,000 of these are still mom and pop owned. Moms and pops offer great pricing and plenty of room for operational improvements. There is no growth limit to active portfolio owners who have the desire and capital to expand. Our buyer pool is only beginning to grow The number of private equity groups looking to enter the manufactured home community business has been growing for several years. The Carlyle Group – America's largest private eq- uity group – started acquiring communities a few years ago, but many potential buyers are still on the sideline. We're also seeing a huge increase in apartment portfolio owners making the tran- sition. The sale of Northstar to Brookfield is an example, as Brookfield's traditional investment niche is multi-family. As the pool of buyers in- creases, so does the demand for community as- sets, and that should boost pricing. We are just now attaining international investment interest Both the Northstar and YES transactions are to foreign buyers. That's a first. There have been no prior large manufactured home com- munity purchases by any group outside the U.S., and now it's two out of three. As in- vestment groups from all over the world go in search of yield, they are finding that manufac- tured home communities meet all of their goals, as well as unbelievably stable cash flows and the absence of new competitive construction. Al- though you do not find the manufactured home community niche of real estate outside of North America, foreign investment groups are fast learners and not afraid of writing big checks for the right assets. Conclusion Only those who don't know the manufac- tured home community business think that it's approaching the top. Insiders have long known the mammoth potential to increase rents and occupancy, as well as to acquire additional, compelling properties. We believe that you will see more consolidation over time as smart in- vestment groups realize that the industry is nowhere near the top, and the upside is un- matched by any other real estate sector. Frank Rolfe has been a manufactured home community owner for almost two decades, and currently ranks as part of the 5th largest community owner in the United States, with more than 21,000 lots in 25 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.Mo- bileHomeUniversity.com. Are We At The Top Of A Cycle – Or The Bottom? BY FRANK ROLFE COMMUNITY CONSULTANT T J