REIT Rankings: Manufactured Housing
That is an abridged model of the total report printed on Hoya Capital Earnings Builder Market on September twenty seventh.
Manufactured Housing REITs (“MH REITs”) have emerged over the previous decade from relative obscurity into a number of of the biggest and most well-run publicly-traded property house owners on the earth, however have uncharacteristically struggled this 12 months amid a historic surge in rates of interest and, extra not too long ago, from the anticipated impacts of Hurricane Ian on the crucial Florida market. Inside the Hoya Capital Manufactured Housing Index, we monitor the three U.S.-listed MH REITs, which account for roughly $30B in market worth: Fairness Way of life (ELS), Solar Communities (SUI), and UMH Properties (UMH). We additionally monitor small-cap Flagship Communities (OTCPK:FLGMF), which trades on the Toronto Inventory change however owns MH communities within the U.S. Midwest.
With Hurricane Ian making landfall as a damaging Class 4 storm on the Southwest Florida coast on Wednesday, this report examines the anticipated impression on manufactured housing REITs. The storm took an analogous path to preliminary landfall as Hurricane Charly in 2004 and Hurricane Irma in 2017 – which on the time was essentially the most intense hurricane to strike the continental United States since Katrina in 2005 – however early indications are that the impacts of Ian are more likely to be extra important as a consequence of its more-northerly landfall which resulted in substantial storm surge results within the Fort Myers and Port Charlotte areas. The 2 largest manufactured housing REITs – Fairness Way of life and Solar Communities – every personal a number of dozen communities that had been straight impacted by the storm – a number of of which have clearly sustained important harm based mostly on information stories which have featured close by MH communities.
Solar Communities owns 129 complete communities in Florida – accounting for roughly 25% of its complete revenues – whereas Fairness Way of life owns 135 properties – roughly 40% of its complete rental income. For Irma, SUI reported complete damages of $32M – decreased to $8M web after insurance coverage recoveries – which represented roughly 1% of its annual FFO. Fairness Way of life reported damages of $13M in complete – decreased to $4M after recoveries – which represented a <1% hit to its annual FFO. Critically, MH REITs usually personal solely the land below the websites and never the manufactured houses themselves. That stated – SUI and ELS do provide restricted leases of REIT-owned homes which comprise roughly 2% of ELS’s complete websites and 6% of SUI’s complete websites.
Whereas there’s a increased potential for misplaced revenues from destroyed houses from Ian, income losses had been muted from Irma and had been remoted to restricted misplaced transient RV revenues. Of be aware, nonetheless, ELS and SUI have each invested closely in marina amenities over the previous a number of years – which haven’t but seen any main hurricanes below their possession – and given the extra damaging storm surge in comparison with Irma – we might very properly see extra important damages incurred from Ian even when the MH communities handle to flee with comparatively minor damages.
Manufactured housing REITs have traditionally been considered as probably the most “recession-resistant” property sectors given the countercyclical demand tendencies of manufactured housing demand, which is usually the most cost effective housing choice out there in america. SUI and ELS have each made a push into extra pro-cyclical analogous asset lessons – RVs and marinas – which have offset a few of these results – maybe on the expense of upper threat associated to main storm occasions – however all of those sub-sectors profit from an analogous basic backdrop of restricted provide and comparatively excessive obstacles to entry. RV parks now comprise roughly a 3rd of property for ELS and SUI, whereas marinas comprise 5% and 19%, respectively. UMH and newly-listed FLGMF focus completely on conventional manufactured housing communities.
Beneficiaries of the intensifying inexpensive housing scarcity throughout america ensuing from a decade of underbuilding manufactured housing REITs have been the single-best performing REIT sector for the reason that begin of 2010 with common annual complete returns of almost 25%, however have uncharacteristically lagged in early 2022. Counterintuitively, regardless of the historic double-digit annual returns, MH REITs are nonetheless among the many most interest-rate-sensitive property sectors, ensuing primarily from the outstanding consistency in delivering mid-single-digit lease development whatever the macroeconomic atmosphere. As famous above, we imagine that MH REIT lease development will shock to the upside over the following twelve months given its the more-direct linkage with the CPI Index than different residential REIT sectors.
This CPI-linkage is available in two types – not directly by the wage results pushed by Social Safety Value of Residing Changes (“COLA”) and straight by the specific CPI-linkage on longer-term MH floor leases. As essentially the most inexpensive housing choice in most areas and with a typically older resident base, a big share of renters are in retirement age and receiving social safety earnings or different inflation-linked transfers. Social Safety advantages obtained a 5.9% cost-of-living adjustment for 2022 – the very best enhance in about 40 years – and can enhance additional in 2023. The Social Safety Administration is predicted to announce the COLA enhance on Oct. 13 and is calculated utilizing the CPI-W index for the third quarter – averaging the year-over-year enhance in July, August, and September – which seemingly find yourself within the 8.5% to 9.0% vary as soon as the September knowledge is launched in early October. In consequence, we imagine MH REITs will obtain their strongest lease development on file in 2023 regardless of broader macroeconomic weak spot.
Whereas the vast majority of leases are decided by market charge changes on an annual foundation, a direct CPI linkage impacts roughly 10% of MH websites owned by ELS and SUI – primarily these in Florida and California as a consequence of state lease management statutes. The multi-decade highs on the CPI Index can successfully “unlock” embedded lease development on below-market leases that had been capped below the earlier financial regime of low inflation and start to “catch-up” with market rents which proceed to rise by double-digit annual charges throughout the nation per the most recent Zillow (Z) report. Whereas MH renters are unlikely to see double-digit lease hikes within the foreseeable future, we do anticipate lease development to meaningfully speed up and considerably exceed analyst forecasts.
Progress in funds from operations (“FFO”) – the earnings per share “equal” for REITs – is pushed by the mix of same-store “natural” development and by exterior development by acquisitions and new growth. Manufactured housing REITs delivered unimaginable FFO development of twenty-two% in 2021, which was considerably above their earlier estimates and was the strongest 12 months of FFO development on file for all three of those REITs. As mentioned in our REIT Earnings Recap, the outlook for 2022 requires common FFO development of almost 10%. We imagine that Hurricane Ian’s impacts will lead to a 1-2% FFO hit for this 12 months, however nonetheless imagine that these REITs will meet the full-year goal because the upside rental charge results will offset the draw back storm-related impacts.
Following a uncommon “miss” from Fairness LifeStyle within the first week of Q2 earnings season pushed by a gas-price-driven slowdown in transient RV demand, Solar Communities reported stronger outcomes, elevating the midpoint of its Core FFO outlook based mostly on its newly-reported constant-currency conference – which it started reporting following the acquisition of Park Holidays within the UK. SUI expects FFO development of 11.7% this 12 months following development of almost 30% in 2021 and but nonetheless trades close to its “most cost-effective” stage in almost a decade. ELS, in the meantime, maintained its full-year FFO steerage however did cut back their NOI development goal by 70 foundation factors, citing moderating development expectations from transient RV demand, however the current stabilization in fuel costs ought to assist to alleviate a few of the stress. Whereas each ELS and SUI have been working to transform their transient RV websites into annual websites, transient and/or seasonal websites nonetheless characterize roughly 12% of revenues for each corporations.
Manufactured Housing Fundamentals
Roughly one-in-twelve Individuals reside in a factory-built manufactured dwelling, and shipments of those models characterize roughly 10% of housing begins in a typical 12 months. MH REITs comprise 2% of the “Core” REIT ETFs and likewise characterize 4% of the Hoya Capital US Housing Index, the benchmark that tracks the efficiency of the US housing business. These REITs typically personal communities within the increased tiers of the standard spectrum and are extra “retiree-oriented” than the common MH group. Usually misunderstood by buyers, manufactured houses are typically not “cell” (apart from leisure automobiles “RVs”) as about 80% of MH models stay the place they had been initially put in, and newer models are typically constructed to higher-quality requirements than generally believed.
For residents, the economics of MH takes on the qualities of each renter and house owner. Residents typically personal their dwelling however lease the land beneath it, paying a mean of $70k for a brand new 1,500-square foot prefabricated dwelling. The typical month-to-month lease to set their dwelling on a web site and hook as much as utilities in MH or RV group can vary from $300 to $1,000 per thirty days. By foregoing the funding within the land, nonetheless, property appreciation is usually minimal, and because of this, MH householders in land-lease communities typically can’t finance MH or RV purchases with conventional mortgages, and as with RVs, house owners should finance the acquisition with a private property (chattel) mortgage at the next rate of interest.
Earlier this 12 months, Harvard College’s JCHS printed its annual “State of the Nation’s Housing.” Researchers famous that “the availability of present houses on the market has by no means been tighter,” as hovering dwelling costs and rents have been fueled by “the mix of sturdy demand and restricted provide.” JCHS concluded that “the pandemic is partially accountable for such tight circumstances, however the largest motive behind the constraints on provide is the underproduction of recent houses for the reason that mid-2000s.” The report famous that “provide constraints are almost common,” however notably within the inexpensive housing segments. A separate report by the NAR estimated that the underproduction of recent housing models relative to family formation totals 6.8 million models.
MH REITs have been the “canary within the coal mine” of the intensifying housing scarcity for the previous decade, persevering with to provide sector-leading NOI and FFO development and, because of this, have outperformed the Fairness REIT Index in every of the previous 9 years – the longest streak of consecutive outperformance ever throughout the REIT sector. Pushed by sturdy efficiency of their RV phase and occupancy enhance of their core manufactured housing parks, the three main MH REITs – ELS, SUI, and UMH – delivered same-store NOI development of 10% for full-year 2021 and these REITs predict NOI development of roughly 6% at 2022 on the midpoint of their up to date monetary outlook.
As famous, MH REITs have traditionally been probably the most interest-rate-sensitive REIT sectors – a operate of their traditionally counter-cyclical fundamentals and the outstanding consistency in delivering mid-single-digit lease development whatever the macroeconomic atmosphere. The diversification into RV parks and boat marinas – which have a extra economically delicate demand and money circulation profile – have offered a pro-cyclical counterbalance that ought to neutralize a few of the potential headwinds from rising charges and inflation. Whereas gross sales ranges are anticipated to return to pre-pandemic ranges this 12 months, the RV Business Affiliation reported that RV gross sales set record-highs in 2021 regardless of dealing with related provide chain points as conventional homebuilders, demand that helped energy a 6% rise in “same-community” RV rents in 2021.
Leisure boat gross sales additionally accelerated considerably throughout the pandemic regardless of ultra-lean stock ranges. The leisure boating business – which incorporates MarineMax (HZO), Malibu Boats (MBUU), MasterCraft Boat (MCFT), and Brunswick Company (BC) – delivered very sturdy earnings leads to 2021 regardless of the continued provide chain constraints. With SUI’s main funding in Protected Harbor Marinas, these MH REITs at the moment are the 2 largest house owners of marinas within the nation. Institutional-quality marinas – of which there are roughly 500 throughout the U.S. – provide substantial working parallels to the corporate’s RV enterprise. ELS now owns 23 marinas comprising 6,800 slips whereas SUI owns 41,275 slips throughout 114 marinas.
Gross sales of recent manufactured housing models have additionally exhibited a powerful acceleration during the last 12 months, eclipsing 100k models in a twelve-month interval for the primary time in 14 years, pushed largely by web site expansions of present MH REIT parks. MH gross sales peaked within the late Nineties when zoning and credit score requirements had been free, however declined sharply starting within the early 2000s throughout the pre-GFC housing increase as demand shifted to site-built houses. MH models are usually essentially the most inexpensive non-subsidized housing choice in most markets and the manufactured housing resident base is extremely “sticky”, as the common MH proprietor stays in a group for 14 years, far increased than the 3-5 12 months common for different rental models.
MH REIT Inventory Worth Efficiency
MH REITs edged out the Fairness REIT Index in 2021 with complete returns of 42% to push their unimaginable streak of 9 straight years of outperformance. Pressured by rising rates of interest and the growth-to-value rotation throughout the REIT sector, nonetheless, MH REITs had uncharacteristically underperformed for a lot of 2022, however have been among the many best-performing REIT sectors over the previous month amid a rotation again into “important” and defensive property sectors. The Hoya Capital Manufactured Housing REIT Index is decrease by 30.9% this 12 months, barely lagging the 29.6% decline from the cap-weighted Vanguard Actual Property ETF (VNQ) and the 22.0% decline from the S&P 500 (SPY).
The non-REIT gamers within the manufactured housing and RV business have additionally been below stress this 12 months following a sturdy 2021. After main the features final 12 months, MH builders Skyline Champion (SKY) and Cavco Industries (CVCO) are every off by roughly 30% whereas RV retailer Tenting World (CWH) can also be decrease by greater than 40%. RV producers together with Thor Industries (THO) and Winnebago Industries (WGO) have seen related declines of 30-35% to date in 2022, as have RV and marine components sellers Patrick Industries (PATK) and LCI Industries (NYSE:LCII).
Manufactured Housing REIT Dividend Yields
Manufactured Housing REITs pay a mean dividend yield of two.6%, rating in direction of the underside of the REIT sector and under the market-cap-weighted common of three.9%. MH REITs, nonetheless, have delivered one of many strongest charges of dividend development during the last 5 years. ELS and SUI are two of solely a dozen REITs that raised their dividends in 2020, 2021, and once more in 2022. MH REITs pay out simply 55% of their out there money circulation, implying sturdy potential for future dividend development and extra free money circulation to fund exterior development.
Among the many three bigger MH REITs, UMH pays the very best dividend yield within the sector at 4.90% however went almost 20 years with zero dividend development earlier than lastly elevating its distribution for the first time since 2008 final 12 months. Fairness LifeStyle pays a dividend yield of two.59%, whereas Solar Communities pays a dividend yield of two.52%. ELS has delivered common annual dividend development of 8.3% during the last 5 years, among the many finest within the REIT sector, whereas SUI has taken a extra growth-oriented strategy with a decrease payout ratio.
The Bull & Bear Thesis For MH REITs
Beneath, we define 5 causes that buyers are bullish on MH REITs.
Beneath, we define 5 causes that buyers are bearish on MH REITs.
Takeaways: Excessive-Conviction Optimistic Outlook
Whereas we’ll get extra readability over the impacts of Hurricane Ian over the following few days, we imagine that these REITs will nonetheless meet the full-year FFO goal because the upside rental charge results will offset the draw back storm-related impacts. We proceed to anticipate MH REITs will leverage the record-setting cost-of-living adjustment (COLA) changes which ought to lead to a roughly 9% rise in advantages to a big proportion of MH REITs’ resident base. MH REITs have remarkably delivered 9 consecutive years of outperformance in comparison with the broader REIT Index, benefiting from sturdy operational execution, important provide constraints, demographic tailwinds, and excessive obstacles to entry, and when all is claimed and finished this 12 months we anticipate MH REITs to increase their streak to a tenth-straight 12 months of outperformance.
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Disclosure: Hoya Capital Actual Property advises two Trade-Traded Funds listed on the NYSE. Along with any lengthy positions listed under, Hoya Capital is lengthy all elements within the Hoya Capital Housing 100 Index and within the Hoya Capital Excessive Dividend Yield Index. Index definitions and an entire listing of holdings can be found on our web site.