Good article about recent purchase by Sun Communities in Florida$257 million for 3,150 lots$81k / per lot Sun Communities buys 7 Orlando mobile-home parks – Orlando Sentinel
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Reminds me of an auction in which, sometimes, the winner is the loser.
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Sean15, thanks for posting the article.Wow, Frank is right:’…sometimes, the winner is the loser.'Their per lot price of $81K seems like an excess amount to pay.
Sam Zell average cost per space I believe is more than Sun Community who has over 300 parks. 96% occupancy show very good management and they did not become successful by buying junk–probably plus 3 star parks that attract middle class retires. I have spent time in Florida at destination parks they are VERY NICE and Warren Buffet would be very happy with the deal. Some park owner make an exceptional living not owning 1 or 2 star family parks and enjoy buying upscale retirement destination property. Owning more than 200 parks is a big statement on their creditability. Thanks for the article that just shows the industry is quickly changing and maybe a big thumbs-up is in order.
With 60% of the portfolio being age restrict this indicates these are likely more upscale communities. As such this is a different game than your run of the mill “park”. Quality costs more but at the same time should equate to ease of management and more stable profit margins. I don’t think this indicates any overall change in the industry simply the acknowledgement that this industry has a broad range of pricing as with any type of rental property. I personally would not invest in turn around parks but will pay a premium for a quality age restrict community.
Wouldn’t the lot rent have to be upwards of $1000 for this deal to work out? Even at $1000, the expenses have to be around 19% of revenues, far less than industry norms. I agree with Frank that sometimes the winner is the loser if they don’t have a walkaway price.
If you work backwards, that means that each lot must have an EBITDA of $8,100 per year at a 10% cap rate, which means a lot rent of $1,000 per month and a 30% expense ratio. But this deal was done at roughly a 6% cap rate, so you can tie the numbers together with lower lot rent, but the bottom line is that the “spread” is atrocious. We shoot for a 5 point spread (the difference between the interest rate on the loan and the cap rate) and this deal has around a 2 point spread. It’s hard to make any real money at less than a 4 point spread. However, this is very consistent with “lifestyle choice” groups, who seem to have no problem with a 10% or less cash-on-cash yield, as they pay their investors a low rate of return (I think ELS’s dividend is currently 3.7%, for example). Personally, we don’t find those kind of numbers compelling at all.
Total agreement with Greg that since we operate retirement parks the management problems are nil and the payment on time is excellent vr. the family parks we USE TO OWN. .If Sun investors are happy with the returns so be it. Wealthy people want returns on there money and also like being invested in NICE PARKS. In the business world there are bottom feeders and upscale property owners–who are we to criticize their success or profit margins. Greg there is a change more and more park are being operated by a single company and in the near future this tend will increase because of the security of the investment and the hedge funds are really becoming involved. In Tulsa, Ok just this past month a whole city block of apartments was bought by a one company–consolidation–and efficiency of size.
So if making money is not the goal of the “lifestyle choice” operator, then what’s the actual goal? I think most of the stock holders in the REITs would actually prefer that management focus on making money. As always, I disagree with Carl’s assertion that “wealthy people want nice parks” as I think the correct theory is that “wealthy people want high returns” which is how they got wealthy to begin with. If Warren Buffet owned parks – which he doesn’t – I’m pretty sure he’d opt for the “affordable housing” parks, as he likes niches that appeal to the masses and are not that focused on aesthetics (go to Nebraska Furniture Mart for proof). Same with the Walton family. The only person I know of that would select aesthetics over return is Donald Trump, and he’s not been doing that well lately.At the same time, I respect Carl’s opinion, as that diversity is what makes the forum special. In the end, we all put our money where our mouth is, and we all have different goals and lessons learned.
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I used to have some REITs but eventually decided that their goal isn’t necessarily to make money for their shareholders. To me it seemed more like they had a number to make, their dividend number, and after that number was made they did something else, not with their shareholders in mind.
As for Sun Communities, they may see something else. We are now in the mass retirement mode of the baby boomers. The year 2012 started the SS full retirement wave, 66 I believe, so they may be betting on a huge increase in demand from those folks. Thus, they are buying future returns with premium prices paid today. Just a guess on my part but it’s what I’ve been thinking myself.
JIm Allen
Jim,I’m in complete agreement with the concept that they are betting on the future, and that somewhere in their budget is an assumption of increasing rents.
Since Mobile Home Parks are Investment / Cash Flow vehicles, one of the end goals is to make money.I would much rather have a 10% return on my investment versus a 6% return.Mobile Home Parks are very diverse with housing ranging from affordable to retirement.The above are very different markets.However, ultimately (unless you are a Non-Profit Organization) one of your top goals should be to produce a good return on your money.As for wealthy individuals and companies ‘having money’ does not necessarily equal a successful investment strategy. Look at all the individuals/companies who in the heat of the real estate market overpaid for real estate and lost their shirts in the process.
Kristin,Everything that you say is correct. Sun, however, is betting that many boomers will be retiring, and in fact are now retiring, with an eye towards resetting their financial structure. They will, my thoughts, sell their houses which still have mortgages, move to a warmer climate, pay cash for a nice MH, pay the rent from their SS or pension, then have a bunch of cash left to travel or whatever. They still have mortgages because of 2 things. One, they drank the koolaid and borrowed on their house before the great recession and are still carrying part of those loans. Two, that same great recession beat up their 401k’s, 401a’s, 403b’s, and 457’s. I’m speaking from my experience with neighbors, friends, and relatives. Many sold their holdings at or near the market bottom (duh!), and haven’t fully recovered, sadly. If Sun can increase rents reasonably quickly, ahead of the rate of inflation, it may turn out that they have hit a home run even at 6% initial cap rate.Last comment on REIT’s: an MLP (master limited partnership) or oil trust or dividend ETF will compete handily with many of them on dividends.Jim Allen
Jim, I totally agree with you that the boomers will be retiring in droves and a large amount of them will be selling their homes in the north and moving to warmer climates. I also agree with you that a large amount of these boomers will head to Florida.Where I disagree is with Sun’s Purchase Price for their Florida MHP Investment. Listed below are the points:1.) There Is A Maximum (Ceiling) Lot Rent That A Retirement MHP Can Charge: Just because you own a Retirement Mobile Home Park, you cannot just assume that the Retirees will come and pay whatever exorbitant Lot Rent you present them with. Sun would need to charge $1,000 Monthly Lot Rent on their investment. This might be acceptable in California. However, Florida’s dirt value is not that high. There is a maximum point at which these Retirees will seek other housing options. The same is true for Mobile Home Lot Rent and Mobile Home Rent for Affordable Housing. If your price point exceeds this maximum, your ‘Potential Tenant’ will find another housing alternative.2.) Retirees On Fixed Incomes - Not Able To Absorb Lot Rent Increases: As per Frank’s Article:‘The Cold Hard Lessons Of Mobile Home U’ http://www.nytimes.com/2014/03/16/magazine/the-cold-hard-lessons-of-mobile-home-u.html?_r=0Frank states the following:'…seniors tend to live on fixed incomes, greatly limiting their ability to absorb rent increase…'3.) Not All Retirees Like Florida (Halfback Retirees): There is a group of Retirees that prefer to settle in the mid-South (Carolinas, Tennessee, Virginia, Georgia) versus Florida. This group is called ‘Halfbacks’.Below is an article on 'Halfbacks’http://www.nytimes.com/2012/09/12/business/retirementspecial/more-retirees-find-the-mid-south-an-alternative-to-florida.html?pagewanted=all4.) Mobile Home Parks Have A Stigma: As per the following article:‘How The Trailer Park Could Save Us All’:http://www.psmag.com/navigation/politics-and-law/how-the-trailer-park-could-save-us-all-55137/The article states the following:'TRAILER PARKS HAVE REPUTATIONS: they’re considered havens of crime, perches for transients; they’re flimsy rusting structures, dangerous during disasters - “blight” that brings down neighborhood property values.'The Retirees of the past did not have this same stigma for Mobile Home Parks. A lot of them (educated professionals) lived in Mobile Home Parks during their lifetime.However, the Retirees of today (and the future) have not had this same experience. Thus, they do not feel as comfortable with the idea of living in a ‘Trailer Park’ (as they would call it).
All good points. I hear from many senior park operators that they’re having trouble filling homes while our phone rings off the hook with families looking for affordable housing. That’s why we exclusively buy family parks and shun senior. Convincing baby boomers to live in trailers – when they are accustomed to bathrooms larger than the whole unit – is a tough sell. I think you will see further divisions among senior operators in the future, as those with hot locations and great amenities will flourish, while those that are simply a bunch of trailers in a field with “Seniors Only” signs will suffer due to the very reasons you outlined above. Some of these senior operators are delusional in thinking that they are on par with ELS, who has perfected the senior model. Drive through an ELS community and then a SUN or UMH community and you will see why one business model works and one doesn’t (and I’ll leave it up to you to guess which is which).
With our senior parks we have NO trouble filling spaces and most retires want to DOWNSIZE and have less to maintain Having lived in Florida and owned parks in the Valley they overbuilt in the 80’s and got greedy and suffered. I believe to built new parks in Florida are nearly cost prohibited but remember over 10,000 new retires are occurring each day. In Texas the space to grow is huge but again there has been lots of consolidation in ownership. My point there is ebb and flow in most types of parks and I heard family parks struggled to increase their cash flow 2007-2009 and with senior parks they tend to overbuilt but remember RV sales are high and some of the million dollar rigs want some Nice amenities and price is not a problem–some are not leaving money for their children. Retires is a beautiful niche market that is very easy to manage and from experience they are willing to spend but most family parks the residents have little appetite for rent increases.
The key point being that seniors parks are a niche market. It is a sub section of the Mobile Home park investment strategy. Obviously not main stream but clearly the preference for those choosing that path of investment. Middle of the road is understandably the preferred and generally the best path to follow for most investors.
Hi Kristin:
You always have such great advice.
What price per pad would you guess is reasonable for an 80 space park in Indiana w $275K lot rent, city WS (tenant pays) and only 33 of the lots are rented?
I’m at approximately 600-630k and just wanted your take.
Thanks!
Drew
@Benji, thank you for your kind words.
The following is how I valued it:
- Total Lots: 80 Lots
- Cap Rate: 12% - (This is subjective. It could go up based on the low occupancy or it could go down based on a great metro with lots of demand.)
- Lot Rent: $275
- Expenses: 50% - (This is really subjective as the Tenant Pays W/S. However, is the Water/Sewer Direct Billed to the Tenant by the Utility Company or do you have to bill? Also, there are lots of Vacant Lots that you will have to maintain. Really this expense number could be much lower, but you would need to look at current expenses.)
- Occupied Lots: 33 Lots
- Vacant Lots: 47 Lots - (I give some value to the Vacant Lots. I know Frank, who I greatly respect, does not give value to Vacant Lots as they require time and attention with no immediate payback. However, I see the potential in them. Thus, I give value to them and just increase the expense ratio.)
- POHs: None
- $615,000
You can play with the numbers based on:
- Seller Financing
- Bank Financing
- Metro
- Demand
- Location
- Condition
We wish you the very best!
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This one didn’t age well.