REIT Rankings: Manufactured Housing
(Hoya Capital Real Estate, Co-produced with Brad Thomas)
Manufactured Housing REIT Overview
Manufactured Housing REITs (“MH REITs”) have proven to be immune from coronavirus-related headwinds that have slammed much of the real estate sector, collecting nearly 100% of rents, while also boosting dividends this year. Within the Hoya Capital Manufactured Housing REIT Index, we track the three MH REITs, which account for roughly $25 billion in market value: Equity LifeStyle Properties (ELS), Sun Communities (SUI), and UMH Properties (UMH). In addition to MH communities, these REITs also manage transient, seasonal, and membership-based RV parks and boat marina, which account for roughly 30-40% of the REITs’ portfolio.
While not included in the REIT indexes, it should be noted that Cavco Industries (CVCO) and Skyline Champion Corp. (SKY) are the largest publicly traded builders of manufactured homes, while Winnebago Industries (WGO), Thor Industries (THO), and Camping World Holdings (CWH) are all closely linked to the performance of the RV sector. MH units, colloquially known as “mobile homes”, are typically the most affordable non-subsidized housing option in most markets. MH REITs own roughly 5% of the five million manufactured housing sites in the United States. MH REITs comprise 2% of the “Core” REIT ETFs and also represent 4% of the Hoya Capital US Housing Index, the benchmark that tracks the GDP-weighted performance of the US housing industry.
Roughly one in twelve Americans live in a factory-built manufactured home, and shipments of these units represent roughly 10% of housing starts in a typical year. The quality and appearance of MH sites can vary significantly from communities that are indistinguishable from a typical single-family, master-planned community to the stereotypical “trailer parks”. These REITs generally own communities in the higher tiers of the quality spectrum and are more “retiree-oriented” than the average MH community. While all three MH REITs are diversified across the country, we note that ELS has a higher concentration in Florida, while SUI has a large portfolio in Michigan. UMH’s portfolio is highly concentrated in the northern Appalachian shale region.
Utilizing a low cost of equity capital, these REITs have continued to grow externally by adding units to existing sites and by growing via acquisitions and site expansions. Amid this housing shortage, MH REITs have begun investing in a new – but fundamentally similar – asset class: boat marinas. SUI announced a deal this month to acquire Safe Harbor Marinas, the largest marina owner and operator in the US, in a relatively large deal valued at roughly $2.1 billion. The acquisition will comprise approximately 15% of SUI’s annual revenue next year. SUI follows in the footsteps of ELS, which owns a roughly $100 million portfolio of marinas following the acquisition of Loggerhead Marinas in 2017, and we believe that the Safe Harbor portfolio fits nicely within SUI’s existing manufactured housing and RV portfolio.
It’ll take more than a pandemic to slow down the perennially outperforming manufactured housing REIT sector, which has been far and away the best-performing property sector over the last decade. The headwinds we cited during the last report – the shutdown of RV parks and the slowdown in RV and manufactured housing sales in late-Spring – have quickly become tailwinds amid a broader revival across the U.S. housing industry. These REITs have proven to be relatively immune from coronavirus-related headwinds, collecting nearly 100% of rents. Consistent with the strong rent collection metrics reported by residential REITs, as well as other “essential” property sectors, MH REITs collected roughly 99% of rents from April through July.
Low supply and strong demand have driven stellar fundamental performance for manufactured housing REITs over the past half-decade, and the MH sector continues to deliver sector-leading NOI growth. It’s been a story of “haves and have-nots” in the REIT sector over the past half-decade, and that bifurcation will surely intensify further in 2020. Among the “haves” are these essential property sectors noted above, which continue to report mostly positive same-store NOI growth, led by housing, industrial, and technology REITs. While MH REITs reported a slowdown in Net Operating Income (“NOI”) growth to 2.0% in Q2 due to the temporary shutdown of many seasonal RV parks, we expect a strong rebound in same-store NOI metrics, as all properties are now open.
Manufactured housing REITs have so far been untouched by the wave of dividend cuts and suspensions that have hit the sector over the past six months. Equity LifeStyle Properties and Sun Communities are two of just 29 equity REITs to boost their dividend this year. With near-perfect rent collection and resilient property-level fundamentals, we believe that residential REITs are one of the most immune sectors from dividend cuts, along with industrial and technology REITs. Meanwhile, the “shutdown-sensitive” property sectors – particularly the retail and lodging sectors – have seen widespread dividend cuts, and we’ve now tracked 65 equity REITs out of our universe of 170 equity REITs that have now announced a cut or suspension of their common dividends.
As discussed in our REIT Decade in Review, at the real estate sector level, three themes dominated the 2010s: 1) The Housing Shortage, 2) The Retail Apocalypse, and 3) The Internet Revolution. No REIT sector has benefited more from the affordable housing shortage than MH REITs, which produced an incredible 23% annual compound total returns from 2010 through 2019 and have continued that outperformance into 2020 in the face of the coronavirus pandemic. MH REITs are the sixth best-performing REIT sector this year but still remain lower by 3.9% in 2020, compared to the 15.9% decline on the Vanguard Real Estate ETF (VNQ) and the 3.7% gain in the SPDR S&P 500 Trust ETF (SPY).
Deeper Dive: Inside The Manufactured Housing Sector
For residents, the economics of manufactured housing takes on the qualities of both renter and homeowner. Residents generally own their home but lease the land underneath it, paying an average of $70k for a new 1,500-square foot prefabricated home. The average monthly lease to set their home on a site and hook up to utilities in the MH or RV community can range from $300 to $1,000 per month. By foregoing the investment in the land, however, property appreciation is generally minimal, and as a result, MH homeowners in land-lease communities generally cannot finance MH or RV purchases with traditional mortgages, and as with RVs, owners must finance the acquisition with a personal property (chattel) loan at a higher interest rate.
Often misunderstood by investors, manufactured homes are generally not truly “mobile”, as roughly 80% of MH units remain where they were initially installed, but units are generally built to higher-quality standards than commonly believed. The manufactured housing resident base is incredibly “sticky”, as the average MH owner stays in a community for 14 years, far higher than the 3-5 year average for other rental units. Manufactured housing REITs are among the most “efficient” real estate sectors, commanding a relatively low operating and overhead expense profile and requiring minimal ongoing capital expenditures.
Also explaining some of this outperformance, MH REITs operate with some of the most well-capitalized balance sheets across the real estate sector, a critical attribute for REITs amid the unprecedented volatility seen during the worst of the coronavirus crisis. As discussed in our recent report, “Cheap REITs Get Cheaper”, consistent with the persistently “winning factors” exhibited by the REIT sector over the last decade discussed in the prior report, higher-yielding, higher-leveraged, and “inexpensive” REITs have declined nearly twice as much as their lower-yielding, lower-leveraged, and more “expensive” counterparts in 2020. ELS and SUI operate with debt levels well below the REIT sector average of 31%, while UMH operates with higher leverage levels.
Investors should also note that while all three REITs are internally managed, corporate governance has been a lingering concern with UMH Properties, which allocates capital amounting to 6% of its market cap to a portfolio of other REIT common stock, primarily in industrial REIT Monmouth Industrial (MNR), which were both founded and controlled by the Landy family. Since 2015, no REIT sector has delivered higher average annualized returns than MH REITs, led by SUI and UMH, which have each returned more than 20% per year over this time compared to the roughly 5% annual return from the REIT Index.
UMH Properties offers a suite of three preferred issues – UMH.PB, UMH.PC, and UMH.PD – that have call dates between October 2020 and January 2023. UMH announced last month that it will indeed redeem all 3.8 million issued and outstanding shares of its 8.0% Series B cumulative redeemable preferred stock on October 20, 2020. These preferred issues – which are standard cumulative redeemable preferred stock – have delivered steady performance in 2020 and pay an average yield of roughly 7.0%, while trading almost exactly at par value. These 3 issues are lower by an average of 2.1% this year but have outperformed the UMH common stock by an average of 6.3% in 2020.
Manufactured Housing REIT Fundamental Performance
Same-store NOI, which is measured on a “cash basis”, did decline from above 6.0% in Q1 to 2.0% in Q2 due to the temporary closure of many seasonal RV parks due to the pandemic and to a relatively strong Atlantic hurricane season which impacted properties along the Gulf coast. Driving the 2.0% rise in same-store NOI growth was a 3.8% decline in operating expenses, again due to the temporary closure of many RV properties. SUI and ELS both reported late in Q2 that all of their RV properties with delayed openings and all marina properties are now open, so we expect a strong bounceback in metrics in Q3. Underscoring this effect, UMH Properties – which does not own RV parks – reported metrics that were seemingly unaffected by the pandemic.
As mentioned above, the vast majority of manufactured housing residents have stayed current on their rents despite rent deferment plans made available by ELS and SUI. Occupancy rates actually ticked higher by another 45 basis points in Q2, while “core” manufactured housing rents increased by nearly 4%. However, as with the majority of the REIT sector, ELS and SUI have not yet reinstated their previously issued guidance for 2020, but we expect reinstatement during Q3 earnings season. Previously, 2020 guidance called for 6.0% average NOI growth, compared to the 5.7% growth initial forecast for the prior year.
Strong organic revenue growth is only half the story for manufactured housing REITs. MH REITs acquired nearly $800 million worth of properties over the last year through the end of the second quarter, largely in one-off acquisitions. Strong internal and external growth resulted in core FFO growth averaging 8.0% in 2019, the fourth straight year of over-8% growth. Initial FFO 2020 guidance called for a slight deceleration in 2020, although the 6.2% average is actually on par with 2019’s initial guidance, which ultimately ended the year at 8.0%. Absent a “second wave” of economic shutdowns and assuming a continuation of some level of fiscal stimulus measures, we forecast Core FFO growth will ultimately end 2020 only slightly below initial guidance.
State of the Manufactured Housing and RV Industry
Consistent with the trends observed across the broader housing sector, sales of manufactured housing units slowed considerably during the “shutdown months” amid the coronavirus pandemic, but have exhibited a clear V-shaped recovery pattern throughout the summer. As with sales of New and Existing Home Sales across the broader housing sector, MH unit sales tend to be highly interest rate-sensitive, so this period of record-low interest rates should continue to provide a tailwind for unit sales in the back-half of 2020. While 2019 ultimately ended with a 2.1% decline in total MH unit sales, the sales rate during July (the most recently reported month) was 6% above that in July 2019.
Interestingly, MH sales plunged during the early 2000s housing boom as demand shifted to site-built homes amid a period of incredibly easy credit conditions and seemingly relentless home price appreciation. While MH home sales have bounced back in the post-recession period, the recovery has been slow, but steady. Part of that effect, perhaps, is explained by a surge in RV sales, which has provided an added tailwind for these REITs. Seeing very similar trends as MH sales, RV sales plummeted during the “shutdown months” but have recorded record-high sales this summer. The RVIA revised its RV sales forecasts dramatically higher over the last quarter from 320k units to 424k units, which would amount to a 5% increase from 2019.
With SUI’s major investment in Safe Harbor Marinas, these MH REITs are now the two largest owners of boat marinas in the United States, an asset class with nearly identical fundamental characteristics as their large portfolio of RV parks. Following ELS’s acquisition of a roughly $100 million marina portfolio from Suntex, CEO Marguerite Nader commented, “the longer term revenue streams [from marinas] are really analogous to MH revenues.” She noted that marinas offer strong operating parallels to the company’s RV business and similar constraints on new supply as the MH business. There are roughly 4,500 marinas in the US, of which 500 would be considered “institutional quality”. As with RV sales, boat sales have delivered strong growth in the post-recession period and have surged over the last several months.
Valuation and Dividend Yield Of Manufactured Housing
Trading at the loftiest valuations in the REIT sector, investors will continue to demand perfection but haven’t been let down in quite some time. MH REITs trade at a sizable premium to the REIT sector average based on consensus Funds From Operations (“FFO”) metrics, as they have for most of the past five years. MH REITs also trade at a 20-30% premium to Net Asset Value (“NAV”), one of the few REIT sectors that have consistently enjoyed an NAV premium over the past three years. A healthy NAV premium can have positive effects on fundamentals, particularly for REITs focused on external growth.
While certainly not cheap, MH REITs have consistently delivered the strongest FFO and dividend growth rates in the REIT sector, a trend that we expect to continue for at least the next several years. Manufactured SUI has produced a 3-year FFO growth rate of 15.8%, compared to 9.6% for ELS and -5.8% for UMH. On the dividend front, SUI has increased its dividend by an average of 5% per year over the last 3 years, compared to nearly 15% from ELS. UMH, meanwhile, has kept its dividend flat for more than a decade.
MH REITs pay an average dividend yield of 2.4%, ranking towards the bottom of the REIT sector average of around 3.2%. As noted above, however, ELS and SUI were two of just 29 equity REITs to raise their dividend this year and have consistently delivered sector-leading dividend growth rates. MH REITs pay out just 70% of their available cash flow, so these firms have greater potential for future dividend growth than other sectors and have more capital to fund external growth. UMH Properties pays the highest dividend yield in the sector, but the company has underperformed the sector on a total return basis over most recent measurement periods. Equity LifeStyle Properties pays a dividend yield of 3.0%, while Sun Communities pays a dividend yield of 1.8%.
Key Takeaways: Not Cheap, But Stellar Fundamentals
MH REITs have proven to be immune from coronavirus-related headwinds, collecting nearly 100% of rents, while also boosting dividends. Driven by the macroeconomic tailwinds associated with the affordable housing shortage and favorable demographics, MH REITs have been the best-performing real estate sector of the past decade. Amid this housing shortage, they have begun investing in a new – but fundamentally similar – asset class: boat marinas. MH REITs aren’t cheap, but long-term fundamentals remain stellar as low supply and strong demographic-driven demand for affordable housing continue to provide a compelling backdrop.
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