Sales of $5 million Manhattan apartments and $15 million Malibu spreads may attract more attention and envy, but business is also good at the nation’s trailer parks , or, in the industry lingo, manufactured home communities.
By Howard Rudnitsky
December 2000
Institutional Investor Magazine
Among the top three publicly traded manufactured home real estate investment trusts, occupancy rates run at a healthy 92 to 95 percent, a welcome repeat of their performance last year. The rents these REITs charge to homeowners have been growing at a consistent 4 to 5 percent a year for the past decade. This year through September, funds from operations, a key measure of profitability, were up 6 percent on average for the trio, and analysts expect an 8 percent increase next year. Even so, the sector’s stock prices lag those of REITs as a group. Through November 9, manufactured home REITs posted total returns of 8.8 percent, far below the 16 percent gain for equity REITs overall.
The trouble lies less with the owners of mobile home communities than with the manufacturers of the trailers and the firms that finance their purchase. The problem is twofold: an excess supply of homes and a rise in loan delinquencies.
In addition, while business is good for the three REITs (which have a combined market cap of $2.2 billion), thousands of landlords of small, privately owned mobile home parks have had a tougher time, particularly in the Southeast.
Says Howard Walker, CEO of Chicago-based Manufactured Home Communities: “There’s no reason manufactured home REIT shares shouldn,t rebound, except for the perception that the manufacturers and lenders are in trouble. So people conclude we must be in trouble. We clearly aren,t.”
Between August 1998 and July 1999, the three leading manufactured-home-community REITs , Manufactured Home Communities; Farmington Hills, Michigan,based Sun Communities; and Greenwood Village, Colorado,based Chateau Communities , outperformed the Morgan Stanley REIT index by an average of 15 percent. Between July 1999 and July 2000, when REIT stocks surged, all three underperformed the index by 15 percent. Since then the relative performance hasn,t changed much.
Acting as the landlord of a mobile home community is a fairly steady business, which has its advantages and disadvantages. Says Jim Bracken, an analyst at real estate research firm Green Street Advisors: “Since mobile-home-community owners have a very stable resident base, the landlords have limited pricing power. Their average turnover in a community is 10 to 15 percent a year, versus 50 to 60 percent in apartments.” Yet because of that stable residential base, manufactured-home-park landlords tend to have more defensive protection than apartment landlords have when the economy turns weak.
But the business of manufacturing mobile homes has been anything but secure. Despite a 15 to 25 percent sales decline of new manufactured homes during the past 12 months, caused by higher interest rates and tighter credit, builders produced nearly the same number of homes as the previous year, causing a major oversupply in many markets. Share prices of leading manufacturers, such as Oakwood Homes Corp., Fleetwood Enterprises and Champion Enterprises, have fallen as much as 70 to 85 percent from their 1999 highs.
So far this turmoil does not faze Walker of Manufactured Home. Still, he says, “there’s probably going to be a time when we see what the impact of oversupply and the unknown number of repossessions will have on our sector. A new community could buy a portfolio of repossessed homes at 40 to 50 cents on the dollar and offer very competitive packages.”
To some extent, most REIT sectors periodically move in and out of fashion. Manufactured home REITs have been a steadier group, with more modest ups and downs. By contrast, hotel and office REIT shares fell 55 and 22 percent, respectively, in 1998, but this year they were both up about 20 percent through late November. Says Gary McDaniel, CEO of Chateau Communities: “We are racing against the other REIT-sector shares that have jumped out front for now. But the tortoises will be there at the end of the race.”
