Manufactured housing REITs occupy an enviable place in the real estate market today as they continue to benefit from a dearth of new supply and healthy demand for affordable housing options, analysts say.
According to Ryan Burke, an analyst at Green Street Advisors, approximately 10 new manufactured home communities have been built in the United States in the past two decades – “an eye-popping anomaly among real estate sectors.” He notes that aging baby boomers are driving demand at age-restricted communities, while all-age communities are popular with younger families looking for affordable housing options.
“Nowhere else in real estate do we see this complete lack of new supply and the favorable demand dynamics,” Burke says. “It’s a pretty good story.”
Drew Babin, an analyst with R.W. Baird, says manufactured housing REITs and existing owners of manufactured housing communities currently have a “chokehold on the market.”
The favorable supply-demand dynamics have not been lost on investors. In 2016, manufactured housing REITs posted a total return of 28.5 percent, compared with total returns of 18.2 percent for apartment REITs and 12.8 percent for single-family homes during the same period. The FTSE/NAREIT All REIT Index’s total return last year was 9.3 percent.
“As [manufactured housing] continues to outperform other sectors, particularly in the private market at the property level, there’s no way the outperformance will go unnoticed,” Burke says.
Among the barriers to entering the manufactured housing market are the communities’ long lease-up periods. It can take more than five years to reach a stabilized occupancy level, Burke notes. “It’s tough for a developer to be able to underwrite that lease-up period,” he adds.
Acquisitions Likely to be “Episodic”
Manufactured housing REITs generally own assets on the higher end of the quality spectrum in the market. According to Green Street, manufactured housing REITs own about 1 percent of the estimated 50,000 manufactured housing communities in the U.S., but nearly 15 percent of the institutional-quality stock.
With new supply non-existent, REITs will look to enlarge their portfolios through acquisitions as well as by expanding existing sites, analysts say. In 2016, Sun Communities, Inc. (NYSE: SUI) paid $1.7 billion to acquire a portfolio of interests in more than 100 manufactured housing and recreational vehicle (RV) communities owned by Carefree Communities Inc.
While there may be a couple of high-quality manufactured housing portfolios of comparable size to Carefree still available in the market, analysts mainly expect to see smaller deals going forward on the scale of one to two assets.
“There are a few larger, institutional-quality portfolios out there, but my view is that it will be more episodic,” says Nick Joseph, an analyst at Citi Research.
Burke points out that most of the manufactured housing parks are held by smaller investors that own up to three properties. He said they hesitate to sell for several reasons: they make a good living from the properties; they would be hit with high taxes if they sold; and many sellers would be unsure how to reinvest the proceeds to achieve similar yields.
“There’s a whole lot of demand for these properties across the board from REITs and institutional investors and very few properties coming to market relative to other property types,” Burke adds.
Indeed, the appeal of the manufactured housing sector has not been lost on international investors, according to Joseph. Singapore global wealth fund GIC took a stake in an owner of U.S. manufactured housing communities in 2016.
Strong Internal Growth Profile
Analysts agree that manufactured housing REITs enjoy a sound internal growth profile that includes the ability to increase density at existing sites where they own adjacent land.
“They’ve been very aggressive about doing that because it’s so hard to find entitled land,” Babin says. “Oftentimes the best land is on their existing properties.”
At the same time, REITs will continue to push through rent increases to existing tenants. Babin notes that annual increases have been around the 3 percent range.
“It’s tough to drive rents beyond that. Tenants stay for a long time and you don’t want to get too aggressive,” he adds.
Meanwhile, REIT portfolios also include RV parks – a segment that offers the REITs more flexibility to pass on rent increases when new amenities are added, according to Babin.
RV parks comprise about 25 percent of manufactured housing REITs’ revenue, a number that has increased dramatically in the last 10 years, according to Burke. “REITs have used RV parks as another avenue of growth,” he says.