REIT Rankings: Manufactured Housing
Manufactured Housing REIT Overview
Powered by the macroeconomic tailwinds associated with the affordable housing shortage, Manufactured Housing REITs (“MH REITs”) have been the best-performing real estate sector of the past decade, and it isn’t particularly close. 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 resort-style RV parks, which account for roughly 30% of the REITs’ portfolio.
While not included in the REIT indexes, it should be noted that Cavco Industries (CVCO) and Skyline Champion (SKY) are the largest publicly traded builders of manufactured homes, while Winnebago (WGO), Thor Industries (THO), and Camping World (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.
As we’ll discuss throughout this report, while the sector faces near-term headwinds related to delayed openings at RV resorts, impaired rent-paying capacity among lower-income residents, and a slowdown in RV and MH unit sales, we believe that the positive momentum should be enough to keep it rolling in 2020. Beyond the sector-leading internal growth, external growth through acquisitions and site expansions have provided an added boost. Below, we present our framework for analyzing each property sector based on their direct exposure to the anticipated COVID-19 effects, as well as their general sensitivity to a potential recession. We note that MH REITs fall into the “Average” category in the direct COVID-19 sensitivity – higher than other residential sectors due to the older and more at-risk skew of their resident base – but it is also one of the most countercyclical REIT sectors.
It’ll take more than a pandemic to slow down the perennially outperforming manufactured housing REIT sector. 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 98% of April and May rents, while UMH reported that rent collection in June was running consistent with last year. As we’ll discuss below, while full-year guidance was suspended by ELS and SUI in their Q1 reports, we expect a resumption of guidance when they report Q2 results next month given the steady operating performance amid the worst of the pandemic months, and see full-year NOI growth essentially on par with pre-pandemic expectations.
Manufactured housing REITs have so far been untouched by the wave of dividend cuts and suspensions that have hit the sector over the past three months. “Shutdown-sensitive” property sectors – particularly the retail and lodging sectors – have seen widespread dividend cuts, and we’ve now tracked 58 equity REITs out of our universe of 165 equity REITs that have now announced a cut or suspension of their common dividends. As we’ll discuss in more detail below, 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.
Manufactured Housing REITs: Resilience Amid Pandemic
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 fifth best-performing REIT sector this year but still remain lower by 11.5%, compared to the 20.3% decline in the Vanguard Real Estate ETF (VNQ) and 5.4% decline in the SPY S&P 500 Trust ETF (SPY).
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 43%, 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. All three MH REITs delivered total returns in excess of 40% last year, led by SUI at 50.1% and ELS at 47.7%, compared to the 28.7% total returns from the broad-based REIT index. Small-cap UMH Communities, a favorite with some yield-focused investors despite its substantially inferior historical total returns, continues to lag the other, better-capitalized MH REITs.
As tracked in our all-new REIT Preferred Stock & Bond Tracker available to iREIT on Alpha subscribers, 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. These preferred issues – which are standard cumulative redeemable preferred stock – have delivered steady performance in 2020 and pay an average yield of roughly 7.3%, while trading at mild discounts to par value. These 3 issues are lower by an average of 6.5% this year but have outperformed the UMH common stock by an average of 11.8% in 2020.
Deeper Dive: Inside The Manufactured Housing Sector
Roughly 7% of the US population lives 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.
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 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 “mobile”, as roughly 80% of MH units remain where they were initially installed, and 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. Despite the recovery in new home construction over the last several years, by nearly every metric, housing markets remain significantly undersupplied due to a historic level of underinvestment in new and existing homes over the preceding decade.
Manufactured Housing REIT Fundamental Performance
Low supply and strong demand have driven stellar fundamental performance for manufactured housing REITs over the past half-decade, and the sector didn’t skip a beat in Q1 during the outset of the pandemic. Same-store NOI remained above 6% in Q1, consistent with the 5-year average which has been more than double the REIT average. Building new manufactured housing communities in moderately high-value areas is notoriously difficult, a function of local politics and restrictive zoning regulations. “Ground zero” of the affordable housing shortage, the total supply of manufactured housing sites is estimated to have grown at a rate of 0-1% per year over the past decade, compared to 1-2% per year supply growth in the major real estate sectors.
Driving the 5.3% rise in same-store revenue growth in Q1 was a 4.2% average rise in core manufactured housing rents, a 5.3% rise in RV rental rates, and another impressive 95-basis point uptick in same-store MH occupancy to fresh record-high levels. At 3.8%, same-store expense growth in 2019 was a tick higher than in 2019, when it averaged 4.1%. A NOI hit from delayed openings at seasonal RV parks remains the biggest near-term risk factor, but SUI and ELS both reported earlier this month that all of their RV properties with delayed openings and all marina properties are now open. As with the majority of the REIT sector, however, ELS and SUI both withdrew their previously issued guidance for 2020, but we expect reinstatement during Q2 earnings season. Previously, 2020 guidance called for 6.0% average NOI growth, compared to the 5.7% growth initial forecast for the prior year.
The vast majority of manufactured housing residents have stayed current on their rents despite rent deferment plans made available by ELS and SUI. While rent collection in the 98-100% range may surprise some observers given that “rent strikes” were given ample media coverage, this was consistent with our calls discussed in our Single Family Rental and Apartment REIT reports, where we noted that the combination of direct cash infusions and enhanced unemployment insurance as part of the $2.2 trillion stimulus package should be a more-than-effective short-term bridge for rental payments. We noted that these benefits total 100% or more of the previous monthly income for the majority of American households that lost their jobs from COVID-19 shutdowns, but we’ll be closely monitoring if rent collection dips if the federal unemployment program is not renewed after expiration next month.
Strong organic revenue growth is only half the story for manufactured housing REITs. Utilizing a strong 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. MH REITs acquired nearly $700 million worth of properties over the last year through the end of the third quarter, largely in one-off acquisitions while not disposing of any assets. Site expansions continue to be a positive catalyst, as both REITs control a land bank large enough to grow total sites by roughly 2% per year for the next five years through site expansions alone. ELS expanded its total revenue-producing sites by roughly 1% over the past year, while SUI has expanded by more than 7%.
Despite the sell-off, MH REITs still have the capacity to deliver another strong year of external given the 10-20% premium to NAV enjoyed by the sector, among the best in the REIT industry. 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 within shouting distance of the initial forecasts around 6.0%.
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, and while the broader housing industry has exhibited a clear V-shaped recovery pattern with record months for New and Pending Home sales in May, MH unit sales may be slower to rebound due to challenging financing conditions for less credit-worthy potential buyers. MH unit sales tend to be highly interest rate-sensitive and were showing clear signs of reacceleration in late 2019 following the “mini housing recession” of 2018. While 2019 ultimately ended with a 2.1% decline in total MH unit sales, the sales rate during 1Q20 was 11% above that of 1Q19.
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. Part of that effect, perhaps, is explained by an uptick in recreation sales, as the past half-decade has seen substantial growth, given sales have more than doubled since 2009. Strong RV resort performance has provided an added tailwind for these REITs. Seeing very similar trends as MH sales, RV sales plummeted during the “shutdown months” after a strong back-half of 2019 and early 2020, and may be slower to record a bounceback in the broader housing sector. The RVIA forecasts that RV sales will total 320k units in 2020, which would amount to a 20% decline from 2019.
While clear headwinds related to credit availability remain, we believe that the risk is to the upside for MH and RV sales, which would ultimately benefit MH REITs over time. We continue to discuss the potential “urban exodus” and the suburban and urban revival that may be accelerated by the pandemic and may overwhelm the credit-related and rent collection headwinds. It may be several months before we see it in the hard data, but high-frequency data such as Google Search activity suggests that interest in “Recreational Vehicle” and “RV resort” are at their highest levels on record.
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 based on consensus FFO metrics, as they have for most of the past five years. MH REITs pay an average dividend yield of 2.6%, ranking towards the bottom of the REIT sector average of around 3.5%. MH REITs pay out just 70% of their available cash flow, however, so these firms have greater potential for future dividend growth than other sectors and have more capital to fund external growth. MH REITs trade at a 10-20% premium to 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.
Diving deeper, we note that UMH Properties screens as the “cheapest” MH REIT and pays the highest dividend yield in the sector, but the company has woefully underperformed the sector on a total return basis over every recent measurement period. Equity Lifestyle pays a dividend yield of 3.2%, while Sun Communities pays a dividend yield of 2.0%. ELS has produced a 10-year Compound Annual Dividend Growth Rate of 16.11%, compared to 1.8% for SUI and 0.0% for UMH Properties. In our recent report, “The REIT Paradox: Cheap REITs Stay Cheap“, we discussed how and why lower-yielding REITs in faster-growing property sectors with lower leverage profiles have historically produced better total returns than their higher-yielding counterparts.
Key Takeaways: A Play On The Housing Shortage
It’ll take more than a pandemic to slow down the perennially outperforming manufactured housing REIT sector. These REITs have proven to be relatively immune from coronavirus-related headwinds, collecting nearly 100% of rents. Powered by the macroeconomic tailwinds associated with the affordable housing shortage, Manufactured Housing REITs have been the best-performing real estate sector of the past decade, and it isn’t particularly close. Four of the five best-performing real estate sectors over the decade were on the residential side as the positive tailwinds of the affordable housing shortage continue to provide a favorable macroeconomic backdrop for companies involved across the United States housing industry.
The positive momentum should be enough to keep the sector rolling in 2020. Beyond the sector-leading internal growth, external growth through acquisitions and site expansions have provided an added boost. Near-term headwinds related to delayed openings at RV resorts, impaired rent-paying capacity among lower-income residents, and a slowdown in RV and MH unit sales remain risks to monitor. 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. While yields of around 2% may be understandably too low for many income-oriented investors, those with a more dividend growth-oriented strategy would be wise to take a look at ELS and SUI, as we believe the combination of historically low housing supply and strong demographic-driven demand provides a compelling macroeconomic backdrop.
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Disclosure: Hoya Capital Real Estate advises an Exchange-Traded Fund listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index. Index definitions and a complete list of holdings are available on our website.
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Disclosure: I am/we are long ELS, SUI, HOMZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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