Manufactured Housing REITs Come Off the Sidelines

For the first time in more than a decade, manufactured housing REITs are aggressively seeking to expand their portfolios.

As seller expectations have decreased and yields have increased, all three publicly-traded REITs—Equity LifeStyle Properties Inc. (NYSE: ELS); Sun Communities Inc. (NYSE: SUI) and UMH Properties Inc. (NYSE: UMH)—have made significant acquisitions over the past 12 months, and they tell Wall Street and their investors to expect more.

“There was a period of more than 10 years when REITs just weren’t in the market,” notes Russ Warner, a broker in Cassidy Turley’s Manufactured Housing Group. “They’ve finally come off the sidelines to make some acquisitions. They’re in a great position to improve the size and quality of their portfolios.”

Last month, for example, UMH Properties inked an agreement to acquire 11 manufactured home communities in Pennsylvania and New York for roughly $28.3 million. These 11 all-age communities total 966 sites situated on 200 acres.

Similarly, Sun Communities acquired three manufactured housing communities in Florida for $25 million earlier this year. The purchase added 488 permanent recreational vehicle sites and 636 seasonal recreational vehicle sites to the REIT’s portfolio.

The biggest deal in the sector involved Equity LifeStyle Properties agreement to purchase 75 manufactured home communities and one RV resort containing 31,167 sites on approximately 6,500 acres located in 16 states for $1.43 billion. The REIT is systematically closing on the assets.

This increased acquisition activity bodes well for the future growth and performance of manufactured housing REITs, notes Paul Adornato, a REIT analyst with BMO Capital Markets.

Historically, manufactured housing has been a sleepy sector from an external growth perspective, primarily because owners enjoyed the steady income manufactured housing offers and were loathe to sell any properties. However, a shift in the lending environment for manufactured homebuyers, known as chattel finance, has created difficulties for smaller and regional manufactured housing operators. Under a chattel mortgage, a purchaser borrows funds for the purchase of chattel—movable property—from a lender.

Historically, manufactured housing operators—REITs included—have generated income from leasing the site on which homes are located. During the 1990s, manufactured housing ownership increased significantly since chattel finance was widely available. However, the chattel lending industry went through its own crisis in the late 1990s, making it more difficult for Americans to get loans.

More importantly, the recent recession has forced many manufactured housing owners to default on their chattel loans, creating higher vacancies in manufactured housing parks, especially those in America’s heartland. The solution? Rental programs where manufactured housing park owners and operators take possession of the homes and rent them to tenants with the goal of eventually transitioning renters to owners.

All three REITs have implemented rental programs, which are more capital intensive than simply leasing manufactured housing sites. However, many manufactured housing park owners have been unable to institute rental programs, says Taylor Schimkat, a REIT analyst with Keefe, Bruyette & Woods. “Many owners have found that rental programs require more than their capital structure can handle, creating opportunities for REITs to acquire these parks,” he explains.

Moreover, Adornato notes that long-time manufactured housing owners are getting older and looking to retire. He points out that the majority of manufactured housing parks were built during the 1970s by local and regional entrepreneurs who are seeking an exit strategy. “They don’t have the desire or the means to continue to re-invest in their properties, so they’re eager to sell,” he explains.

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