A couple of months ago, in a Daily Alert for Wall Street’s Best Dividend Stocks, I published a recommendation from our contributor, Jon Markman, editor of Pivotal Point Trader, to buy shares of Sun Communities, Inc. (SUI), a manufactured home Real Estate Investment Trust (REIT). I liked the housing REIT for many reasons.
The company had just come off a quarter in which it had beaten analysts’ estimates by $0.10. I believed the growth in the company was a testament to the booming housing market, which is driving some folks into more moderately priced homes, as well as the many improvements in the industry that have made these homes very attractive. And the shares also paid a nice dividend.
In his recommendation, Jon had this to say about SUI:
“Since 1975, Sun Communities, Inc. (SUI) has been flying under the radar. Managers have been buying and operating trailer parks. And they have been making a fortune for shareholders.
“It’s easy to ignore Sun Communities. After all, manufactured housing and RV communities lack the chic appeal of high-end retail, or panache of technology companies. Yet, Sun executives adopted the best practices of acclaimed retailers, while carefully implementing new technology to grow its trailer park business in profound new ways.
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“With a market cap of $7.7 billion, Sun Communities is no longer a small cap. It has grown mightily. But its domestic focus, coupled with very strong cash flows, will curry favor among small-cap value investors.
“The company is carefully rolling up a deeply fragmented trailer park industry. Managers then rebrand and refurbish the communities, raise rents, and send money back to shareholders through its Real Estate Investment Trust structure. The process began almost immediately after the company sold shares to the public in 1993.
“In 2016, Sun bought 103 communities, mostly located in California, Florida and Ontario, Canada, for $1.7 billion. These communities are now 350 strong and offer well-maintained grounds and amenities such as exercise facilities, pools and saunas. Many are pet-friendly.
“Sun has raised occupancy rates from 92.4%, to 98.1%, and boost the net operating income from $1.9 million to $3.1 million.
“The average rent is $917, for a 1,250-square-foot home, with an expected increase of 3.8% in 2018. And the average tenure of residents is 12 years.
“Sun has recorded 18 consecutive years of positive net operating income. It is a very compelling business model. And company managers are keeping track of everything with state-of-the-art cloud computing tools running custom SAP (SAP) software.
“Since 2008, the total return on investment through 2017, including dividends, is 857.6%. The comparable return for the S&P 500 is 126%.”
And that investment is continuing to pay off. Since our recommendation, SUI is up about 2.5%, and with the 2.9% dividend yield, investors are already a little richer.
After I wrote the article, I had a thought-provoking email from one of our subscribers (Helen M.), who said, “I would love it if you would take a look at the whole manufactured home space.
“This market has taken off but has a ceiling and the rent of $900+ is that ceiling. People who buy into a park cannot afford much more albeit there is a tax offset. Manufactured homes are now in Brookline, Massachusetts, and many are beautiful—indiscernible from a regular home. In Santa Cruz, California, those with land ownership by owners in 55+ parks in good condition go for $500k.”
I’ve been thinking about Helen’s comments since then and keeping my eye on the industry.
Baby Boomers Propelling Rapidly-Expanding Sector
And just recently, I ran across an article that mentioned the recently published list of the 50 largest manufactured home community owners and operators in the United States. The source of the study, The Manufactured Housing Institute’s (MHI) National Communities Council (NCC), rated Sun Communities number 1, and cited its astonishingly high 83,294 home sites under management!
Ranked number 2 was Equity LifeStyle Properties (ELS) of Chicago with 73,700 home sites, followed by privately-held RHP Properties of Farmington Hills, Michigan, with 60,163 sites, and Communities of Denver with 47,278 sites and MHP Funds of Cedaredge, Colorado, with 31,652 sites.
This group of 50 communities has more than 693,000 home sites with portfolios ranging in size from more than 80,000 sites to just under 3,000.
And that is just the tip of the iceberg. According to MHI, there are some 38,000 manufactured home communities in the U.S., with 4.2 million homes sites.
And these are not the trailer parks of our youth. Many of these communities offer resort-style neighborhoods with golf courses, swimming pools and country clubs. A few years ago, I had a chance to visit some of my husband’s relatives who lived in a gated manufactured home community near Orlando. I was very pleasantly surprised to see how spacious and pretty it was.
This segment of housing is growing very rapidly, especially in light of our aging population, as you can see in the following graph.
Demand/Supply Imbalance Contributing to Growth
In a recent report from HOYA Capital Real Estate, they noted that “one of the distinct features of the MH sector is the complete lack of new supply expected to be constructed. With essentially zero net supply coming online for the foreseeable future, manufactured housing is relatively immune from the oversupply fears that encumber other REIT sectors. Across the country, zoning commissions continue to have a sharply unfavorable view of manufactured housing communities. Getting approval for a new development is nearly impossible.”
That is an attractive proposition for an investor in the manufactured homes industry. Adding to that catalyst is the fragmentation of the industry, with publicly traded housing REITs owning less than 20%. That sounds like a fantastic consolidation opportunity to me!
Besides SUI and ELS, there is just one more public housing REIT, UMH Properties (UMH), which operates in the Northeast and Midwest.
With 145,000 sites, Equity Lifestyle is the largest. Its rents average $600/month, and it is geographically diversified. Its properties fall into the resort and retirement category.
Sun Communities is the second largest of the manufactured housing REITs with about 90,000 sites and average rents of $500 per month.
UMH Properties is the smallest, with a market cap of just $578 million, 20,000 homesites and 112 communities. Its average rent is $441/month.
In 2017, the manufactured home REITs returned almost 25% to their investors—handily beating office, retail, multifamily, hotel and healthcare REITs.
And I expect the manufactured home sector will continue to be attractive to investors over the next few years, due to three primary catalysts:
Affordability: The Manufactured Housing Institute says the average cost per square foot for a manufactured home is $57.21, compared to $87.76 for an existing home and $108.10 for a new construction.
Consolidation: All three housing REITs have been on a buying binge, and industry fragmentation should boost M&A activity even further. In 2018, SUI is expected to add 1,000 home sites in 12 communities; ELS recently spent $48.2 million to buy two communities in Florida (total of 654 sites); and UMH intends to buy 2,200 home sites in six communities.
Lack of Supply: For various reasons cited above, the supply of manufactured homes is dwindling—receding from an annual average 242,000 shipped from 1977-1993, to just 92,500 in 2017, according to the Urban Institute.
More Room to Run for Housing REITs
These three housing REITs have been returning some nice gains for investors, but I don’t think the boom is over. There’s still plenty of money left on the table in this growing niche of the housing sector.
Nancy Zambell, Editor of Wall Street’s Best Investments, has spent 30 years helping investors navigate the minefields of the financial industry. Nancy scours more than 200 advisories and research reports to select the top recommendations, which she collects for you in this easy-to-read digest.Learn More