Sector Spotlight: Manufactured Housing REITs (NYSE:ELS)

Via SeekingAlpha.com

This is the third report in our newest series: Sector Spotlight. In each article of this series, we will provide detailed data and analysis on a specific REIT property sector. Information will be provided for the sector as a whole and for sub-sectors (for property types that contain sub-sectors such as health care or hotels). Additionally, data across a variety of metrics will be provided for each REIT in the sector. There will be no minimum market cap needed for coverage, as all REITs micro cap to large cap will be included in the data (when available) and analysis.

The Manufactured Housing Sector

The manufactured housing sector has performed very well in recent years, driven by favorable trends in demographics and population migration. Manufactured housing is a highly fragmented industry in which REITs and other large players own a small portion of properties around the country. Much like the self-storage industry used to be, manufactured housing is largely composed of small mom-and-pop businesses. For both manufactured homes and RV parks, landlords own the land and charge fees to those visiting or living in the communities. In some communities, the manufactured homes are owned by the landlord and are rented out, whereas in others the homes are owned by the tenant.

Manufactured housing presents a very clear and attractive value proposition. It offers the opportunity to rent or purchase a comparable amount of space for a significantly lower price than would need to be paid for a traditional apartment or single family home. Alternatively, a larger amount of space can be rented or purchased through manufactured housing than could be attained from traditional housing for a comparable price. For example, Sun Communities (NYSE:SUI) states that its manufactured homes are 25% larger and rentable at 50% less per square foot.

Manufactured housing can be broken down into specific sub-sectors:

Workforce Housing: The working class has largely been priced out of single family homeownership in many markets and even the cost of renting a traditional apartment can be unaffordable to some. However, manufactured homes present an attractive alternative that allows families to afford to rent more space for less money or even to potentially become homeowners. This makes manufactured homes an ideal form of workforce housing. UMH Properties (UMH) focuses on providing affordable workforce housing both through the sale and rental of homes within their communities.

Retirement Communities: Many Americans reach retirement age without having substantial savings. Given the high cost of traditional senior housing, manufactured homes offer an affordable alternative. This allows for savings to stretch farther in retirement. Some manufactured housing communities are open to people of any age, whereas others are exclusively for the elderly demographic. Sun Communities, for example, receives 56% of its manufactured home revenue from all age communities and 44% from age-restricted communities. The average age of new residents in Equity Lifestyle Properties’ (NYSE:ELS) manufactured housing communities is 59 years old.

RV Parks: RV parks provide a comfortable location for RV owners to spend either a short visit or an extended stay. These parks collect revenue through annual fees or membership fees from long-term residents and frequent guests. Rental fees are also collected from transient and seasonal visitors to the parks. Much like manufactured housing retirement communities, RV parks attract an older demographic, driven by the fact that a disproportionate share of RV owners are in retirement. The average age of new RV Park residents in Equity Lifestyle Properties’ communities is 55 years old. Unlike manufactured homes, which offer an affordable living alternative, RVs are typically quite expensive to purchase. As a result, the appeal of the RV lifestyle is the freedom and flexibility that is provided through having the ability to drive your home to a new city at any time.

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Rent Collection

In an effort to reduce the rapid spread of the coronavirus, many state governments implemented strict lockdowns that prevented most businesses from opening. This rapidly created devastating job losses across a variety of industries. The unemployment rate went from 3.5% in February to 4.4% in March and then shot up to 14.7% in April. The federal government has provided stimulus to both businesses and individuals to help reduce the economic carnage, but it remains to be seen how many REIT tenants will be able to financially survive (and continue to pay rent to their landlords). Thus far, manufactured housing REITs have weathered this storm very well and have maintained substantially better rent collection that the majority of other REITs. SUI and ELS had the greatest success in April with impressive rent collection of 98% and 96% respectively, whereas UMH was the weakest with a still solid 94%.

Same-Store NOI Growth

Source: Graph by Simon Bowler of 2nd Market Capital, Data compiled from SNL.com. See important notes and disclosures at the end of this article

The same-store NOI growth of all three manufactured housing REITs dwarfs that of other REIT property types. ELS and SUI have impressive gains of 5.2% and 6.7% respectively, but the outstanding 14.1% SS-NOI growth of UMH stands above nearly every single company in the REIT sector. This continuously extraordinary property level performance has unfortunately not consistently translated into FFO/share growth for UMH due to the seemingly endless issuance of new common and preferred shares. However, the fact the UMH issued a substantial amount of shares prior to the February-March market collapse gives it ample capital to work with going forward without the need to take on much additional debt.

Debt

Source: Graph by Simon Bowler of 2nd Market Capital, Data compiled from SNL.com. See important notes and disclosures at the end of this article

The balance sheets of manufactured housing REITs are fairly conservative relative to other property types. Debt ranges from 18.3% (ELS) to 31.4% (UMH) of the capital structure. It is worth noting, however, that UMH also has three different preferred securities: UMH.PB, UMH.PC and UMH.PD. Although these preferred shares are not debt, they are senior to common shares within the capital stack.

G&A

Source: Graph by Simon Bowler of 2nd Market Capital, Data compiled from SNL.com. See important notes and disclosures at the end of this article

One expense that often warrants greater scrutiny is G&A due to its significant variance within the REIT sector. G&A expense as a percent of total revenue is typically lower in larger companies due to economies of scale. It is therefore not at all surprising that ELS, which has a market cap of $11.2B, has lower G&A/Total Revenues than UMH, which has a market cap of only $500.2M. SUI, which has the largest market cap of $13.1B, spends an enormous amount on executive compensation, resulting in G&A/Total Revenue of a staggering 9.74%. This compares to only 6.43% for UMH and 3.66% for ELS.

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Valuation

Source: Graph by Simon Bowler of 2nd Market Capital, Data compiled from SNL.com. See important notes and disclosures at the end of this article

The premium or discount to net asset value is depicted in a bar chart above and as a data table below (data table includes additional information).

Prior to the recent market crash, manufactured housing REITs traded at huge premiums to NAV. Despite sizeable share price declines for all three REITs during the market selloff, large caps ELS (+19.39%) and SUI (+15.35%) still trade at double-digit premiums. Small cap UMH (-15.80%), however, now trades at a double-digit discount to NAV. The manufactured housing sector averages an NAV premium of 6.31%, which stands in stark contrast with the REIT sector as a whole which averages an NAV discount of -22.97%.

Source: Graph by Simon Bowler of 2nd Market Capital, Data compiled from SNL.com. See important notes and disclosures at the end of this article

There is a wide range of FFO multiples in the manufactured housing sector, from only 18.3x for UMH up to 29.8x for ELS. The average P/FFO of manufactured housing REITs is 25.2x, with a median of 27.5x. Considering that the average multiple for the REIT sector is only 13.5x, manufactured housing REITs are trading at a substantial premium to their peers. Given the consistent operating outperformance achieved in recent years and the superior rent collection achieved thus far in the economic downturn, a premium of some magnitude certainly appears to be warranted.

Dividends

Dividend yields in the manufactured housing sector range from as low as 2.23% (ELS) to as high as 5.93% (UMH), with an average yield of 3.51%. Despite numerous dividend increases for SUI and ELS over recent years, yields have remained low due to stellar share price appreciation.

Source: Graph by Simon Bowler of 2nd Market Capital, Data compiled from SNL.com. See important notes and disclosures at the end of this article

Two out of the three manufactured housing REITs raised their dividend in the last year, with both ELS and SUI hiking their payouts in the first quarter. Although a litany of REITs have significantly cut or suspended their dividends since the implementation of the government lockdowns, none of the manufactured housing REITs have cut thanks to the strength of their balance sheets and the solid fundamentals in the sector.

The table below shows whether and to what extent each REIT cut or raised their dividend over the past year:

Source: Table by Simon Bowler of 2nd Market Capital, Data compiled from Seeking Alpha. See important notes and disclosures at the end of this article

Dividend Coverage

Source: Table by Simon Bowler of 2nd Market Capital, Data compiled from SNL.com. See important notes and disclosures at the end of this article

AFFO payout ratios vary widely among manufactured housing REITs, ranging from 74.9% to 113.8%. Both ELS (79.2%) and SUI (74.9%) are generating sufficient AFFO to comfortably cover their respective dividends. UMH (113.8%), however, does not currently have sufficient dividend coverage. This does not necessarily mean that a dividend cut is in the near future, but does mean that UMH will not have the ability to raise the dividend in upcoming quarters. UMH still has a substantial amount of capital that has been raised but not yet deployed. Once this capital is invested, it should lead to a meaningful boost to AFFO. If UMH continues to achieve stellar property-level operating results and dramatically scales back its aggressive pace of share issuance, there is strong potential for AFFO/share to increase by enough to provide adequate dividend coverage.

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Total Return by REIT Over Past 12 Months

The manufactured housing sector (+4.41%) averaged a better total return than the SNL U.S. REIT Index (-12.6%) over the past year. SUI (+9.27%) and ELS (+6.98%) were the top performers. UMH (-3.02%) fell short of manufactured housing peers, but still outperformed the REIT sector as a whole.

Source: SNL.com. See important notes and disclosures at the end of this article

This was the third Sector Spotlight report and more will follow with detailed information and data for other REIT property types. For early access to Sector Spotlight and more of our research, data and analysis as well as access to our two real-money high yield REIT portfolios, you can subscribe to a free 14-day trial to our Seeking Alpha marketplace: 2MC Retirement Income Solutions.

Disclosure: I am/we are long UMH, UMH.PC, UMH.PD. 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.

Additional disclosure: 2nd Market Capital and its affiliated accounts are long UMH, UMH.PC and UMH.PD. I am personally long UMH.PC and UMH.PD. This article is provided for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the writer. Information contained in this article is impersonal and not tailored to the investment needs of any particular person. It does not constitute a recommendation that any particular security or strategy is suitable for a specific person. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. The reader must determine whether any investment is suitable and accepts responsibility for their investment decisions. Simon Bowler is an investment advisor representative of 2MCAC, a Wisconsin registered investment advisor. Positive comments made by others should not be construed as an endorsement of the writer’s abilities as an investment advisor representative. Commentary may contain forward looking statements which are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCAC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts and findings in this article. Although the statements of fact and data in this report have been obtained from sources believed to be reliable, 2MCAC does not guarantee their accuracy and assumes no liability or responsibility for any omissions/errors.