Mobile Home Park Funds Newsletter

We have never seen such an episode of instability in the United States. The Republican party appears to be ready to self-destruct rather than name their winning candidate as their heir apparent for President. Meanwhile, the Democrats are fielding a former Secretary of State who is potentially to be indicted for her use of email, and a self-proclaimed Socialist. At the same time, the world is heading into recession, North Korea is firing missiles, ISIS is committing gruesome attacks, and oil has fallen 70% in a year. So how does anyone sleep at night? On the investment front, we can give you positive news that mobile home parks are a bet on the “poverty business” and America is on a perpetual decline that makes our industry look like a blue chip. Regardless of who wins President in November, there will be continual upheaval, government missteps, world crisis and mass despair to contend with. We hope that mobile home parks offer you some solace amongst the chaos. At times like these, perhaps the best way to maintain a positive attitude is to think “small” – your family, your town, your state. While we can’t solve the world’s problems, we can have quite an impact on the “micro” world around us where we can be our own President, Mayor and Chamber of Commerce. Those are easy elections to win.

We recently had a first in company history. The Mississippi River rose to nearly 50’ in height – the highest in recorded history. As a result, all the streams and tributaries that drain into the Mississippi started flowing backwards. Areas that had never seen flooding before suddenly started going under water. And such was the case for our Village Green park east of St. Louis. Waters rose so quickly that within a matter of hours, the park had to be evacuated, as did the surrounding city. By the end of the day, it was a surreal scene in which the city was completely submerged and all roads into the area were severed and closed. When the waters receded, however, we were glad to find that the damage to our park and homes was minimal, while entire neighborhoods of brick homes were wiped out. How did we fare so well?

Mobile homes are on stilts by definition, so they can survive where other dwellings perish

The big advantage that our homes had over the stick-built homes was that our units are about four feet off the ground. While the water was midway up their front doors, the water had not even reached our transoms. This is a simple advantage that most people don’t think about. The water can flow under the floors of mobile homes and the only damage is to the skirting.

They are simple to repair

Another advantage of mobile homes in a flood situation is that they are simple to repair. HUD allows mobile homes to have a very simple design – basically a shoe box on a chassis. While a traditional home is highly complicated to repair and typically involves masonry and demolition, a mobile home is nothing but a combination of 2”x 4”s and plywood. What can cost thousands with a brick home costs hundreds with a mobile home.

They rarely contain expensive finish out

And equally important with structural repair are the expensive cosmetic touches that a stick-built home require, and which mobile homes do not. Texturing on walls, expensive floor treatments – these are standard on a brick home and non-existent in our product. And that does not include the fact that our customers are much less discriminating. In a McMansion there are 100 different shades of white paint, and in a mobile home, only a couple.

Furnishings are sparse and inexpensive – and easy to move in a crisis

Mobile homes rarely are furnished with huge amounts of furniture and bric-a-brac. And they are rarely repositories for priceless antiques. Most park residents can fit their entire households into a U-Haul truck – or even a pickup truck in some cases. And if there was damage, it would not be too expensive to replace the ruined pieces. Just the contents of the brick homes that were destroyed probably exceeded the value of all of the homes in our park.

Conclusion

We had never had an issue with park flooding until the recent historic Mississippi River incident. However, we learned a lot from that, and now know that a particular strength of mobile home parks is that they are inherently flood-resistant. We hope to have no further experimentation in this matter, but with the increased severity in American weather events, it’s good to know that we have that on our side.

Northstar is a giant private equity group in New York City that was one of the most aggressive buyers of mobile home parks in recent history, having purchased several giant portfolios at extremely high prices – reportedly a forward looking 6% CAP rate (which means that it was more like around 5% at time of purchase). The only reason these transactions were possible was that they were able to get loans at around 3% thanks to the collapse of the U.S. economy in 2008 and the resulting drop in interest rates to around 0%. Northstar has now announced that they are interested in selling this portfolio for $2.5 billion, which works out to around $75,000 per lot for their roughly 33,000 lots. This sale will be very important for the industry – and our portfolio – for several reasons.

It will create a huge amount of publicity for the industry

There has never been a single transaction this large, and that unique fact will definitely create some significant media interest. The mobile home park industry is widely fragmented, and the typical purchase is a few parks. The word “billion” is never used. So the sheer scale of this sale is going to bring some new visibility to the industry, and that would be a positive effect.

It will test the market on cap rates. We think it will be priced at around a 5% cap rate

While we have not seen the sales package or any of the specific numbers, it’s our guess that it will be priced at a 5% cap rate. We think that because they paid roughly around $1.5 billion for this portfolio to begin with, and they would not be able to hit a $2.5 billion asking price without a pricing around a 5% cap rate. Additionally, that’s a cap rate that is in-line with some recent multi-family transactions, such as Sam Zell’s sale of a third of his apartment holdings – around 23,000 units for $5.4 billion – at a 5.5% CAP rate. Our guess is that they will price this grouping at a 5% cap rate with a hope of selling it around 5.5%. If this deal is consummated, it will create a precedent for CAP rates that are more similar to apartments.

It will test the market on per-lot values at around $75,000 per lot for 33,000 lots

We have no statistics on the Northstar portfolio’s valuation. We have no idea how many of those roughly 33,000 lots are occupied. But even assuming that they are 100% occupied – which we’re sure they’re not – that works out to a whopping $75,000 per space. Typical mobile home park lot values range from around $20,000 to $50,000 per lot, based on lot rent. At Northstar’s pricing, this would be one of the most expensive transactions in history, based on sheer value per lot. By comparison, our portfolio average is only around $30,000 per lot.

It will test the market on both “lifestyle choice” and “affordable housing” properties, since many of their portfolio is just down the street from parks we own

The bulk of the large transactions in the mobile home park sector have been in the “lifestyle choice” segment of the industry, the one focused on by the REITs. “Lifestyle choice” is the upper end of the mobile home park industry, typically to be found in coastal California and Florida, while our business model is “affordable housing”. However, although Northstar often pretends to be “lifestyle choice”, their locations are right in line with many of our markets. The sale of this portfolio will set comps for many of our parks, and at the highest prices in history.

It’s the biggest transaction in recent history, and will bring out a number of new players

We frequently receive calls from private equity groups that want to enter the industry, but only if they can enter in sufficient scale. They typically have a minimum investment amount of $100 million. This transaction will be large, with over $700 million of cash needed to complete it. But it will attract new entrants to the industry who have been waiting for an opportunity of this scope. This may lead to more industry consolidators, which may lead to more competition and higher prices going forward. While this may slow our acquisitions, it will be important for the value of our existing properties.

Conclusion

We think that Northstar’s offering of around 33,000 lots for $2.5 billion is a huge news story for 2016. And it will be a story that will more than likely last throughout the year, as the offering price is far too high, in our opinion. But regardless of the outcome, it will more than likely have a positive effect on our comps and the industry in general.

It was recently revealed that actress Hillary Duff, who is getting divorced, owns a mobile home in one of the two mobile home parks on the beach in Malibu. When reporters asked her why she owns a “trailer” she answered “it’s one of those ritzy things that the rich do”. While these mobile homes cost around $500,000 and pay around $2,000 per month in lot rent, it’s hardly “ritzy” and the park is not exactly where you would find your definition of the Los Angeles “rich”. But it does bring to focus the diverse clientele that live in the 8 million mobile homes located in the U.S. This is the same mobile home park where Pam Anderson once lived, as did Sean Penn. It has been described as where stars live when they are on their way up, or on their way down. It gives them a Malibu address and access to the beach. And it serves as one of the best examples to offer when someone says to you “only poor people live in mobile home parks”.

Being an election year, all candidates are trying to put their best foot forward. That being said, there are some ugly truths about the U.S. economy that are rarely mentioned, but are extremely important in creating the vast opportunity in the affordable housing sector. So here are the facts that nobody wants to talk about.

Too many Americans are living below the poverty line

Roughly 15% of Americans fall below the poverty line, which is defined as less than $23,834 for a family of four, and $12,000 for an individual. This statistic, as has already been identified, is erroneous as it does not include non-legal aliens living in the U.S., which many believe would take this number well about 20%. Regardless of the exact percent, it means roughly 60,000,000 Americans do not have enough money to buy food and shelter. In a country that applauds itself for quality of life, we are not delivering that message to about a fifth of our population.

And far too many are on the dole

Over 50% of Americans are on some form of social subsidy. In addition, 45.3% of Americans pay no income tax, but instead live here for free. These folks are using massive amounts of social services (healthcare, school tuition, police, fire, etc.) without paying in a dime. And those who pay nothing are rallying to increase their subsidies and programs higher.

Americans hold too much debt

The sum of all U.S. household debt is a staggering $13 trillion, which works out to around $40,000 per person for each of the 318 million Americans. This is a gigantic amount of debt. It is broken into four main categories: credit card, student loan, automobile and mortgage. In each category, the numbers are at historical limits. This means that Americans not only have little additional ability to borrow, but they are being crushed under the weight of those payments.

And the government has $19 trillion of their own

If you thought the household debt is gigantic, the U.S. national debt has grown to around $19 trillion – almost $9 trillion of which has occurred over the past decade. If you add this debt load to the folks that collectively represent the residents of our country, the total debt is closer to $100,000 per person. When you add in the interest burden of supporting that debt, it begins to look hopeless. This is one of the great challenges of America going forward: how to create a surplus and gradually eradicate the red ink.

Job creation is anemic and low paying

Nearly 50% of all jobs created since 2008 are minimum wage to $13 per hour (which are classified by the government as “low paying”). So those jobs that have reduced our perceived unemployment rate to 6.2% are actually low paying substitutes for the jobs lost. Of jobs paying over $13 per hour, more jobs have been lost than gained since 2008. In fact, the largest segment of job production in the U.S. since 2008 has not been high-tech or manufacturing but, in fact, fast food. The fast food industry has been booming over the past decade, probably since most job holders can now only afford … fast food.

Baby Boomers cannot afford to retire

The median amount of savings of those who retire is $60,000. At current CD levels of 1%, that would yield only $600 per year. Add to that the average social security check of $1,341 per month, and you can see the problem. AARP suggests that you save ten times your annual income as a retirement stockpile, and that you should live on no more than 4% annually of that amount. So that means that the median American needs around $500,000 in the bank (compared to $60,000) and that they will need to live on $2,400 per year (4% of $60,000). Clearly, nobody is telling the truth here. In both directions, the projected needs of retirement are ten times more than the reality of what’s been saved. How will this play out?

But young people have an even more bleak retirement future

Because of high student debt, a lousy job market, and low potential for savings, the future of young people regarding retirement is even more bleak. This is a topic that almost all politicians avoid. Young people seem to support Bernie Sanders’ “free college” message, even though that does little to solve their future misery. In the absence of higher wages and lower costs, there will be nothing to save.

There is no affordability in housing

The shortage in affordable housing is well known. There are only 28 affordable living options for every 100 American households that need them. As a result, households are living well beyond their means as far as housing is concerned. Those needing affordable housing since 2000 have grown by 38%, yet the supply of such housing has increased only 7% during this period. The median home price in the U.S. is $170,100 and the average three-bedroom apartment rent is $1,290 per month. Based on earnings, these prices are unsupportable by a majority of the U.S. population.

And the same is true with healthcare, college tuition, and everything else

It would be one thing, if the normal U.S. household had only retirement and housing to worry about, but then there’s the lack of affordability in almost everything else. The Obamacare initiative has failed to gain traction because the premiums cannot be afforded by the middle class. College tuition has increased at a compounded 8.9% over the past decade, rendering higher education a luxury that fewer can afford. While American wages decline, the price of everything goes up. This is not a formula with long-term sustainability.

Conclusion

Building a wall along the border with Mexico and re-establishing ties with Cuba are the least of our problems. We have core economic issues that are so massive and impossible to comprehend that nobody wants to discuss them. These are the drivers that makes mobile home park demand so large, but also threaten the sheer survival of our economic system. Hopefully, we can collectively, and honestly, address these issues in the near future and make improvements in them. It will involve hard choices on cost cutting and revenue enhancement, but there’s no way to sugar coat the reality. Just like a failing mobile home park demands a turn-around, our failing economy requires tough love – and soon.

This is the “Trailer Park” building on Hollywood Blvd. in Los Angeles. No, it’s not America’s first high-rise mobile home park. Instead, “Trailer Park” is an advertising agency which serves such clients as ABC, the Academy Awards, American Express, Audi, CBS, CNN, Disney, Honda and the History Channel, and has offices in both LA and London. The only mystery is why they call themselves “Trailer Park”. Their corporate bio offers no clues, and a call to the receptionist resulted in an answer of “I have no idea”. So perhaps we can come up with a positive answer. Maybe “Trailer Park” represents a large number of diverse clients happily thriving side-by-side under the management of one marketing manager. It sounds good, anyway.

Did You Know...

Did you know that municipalities really don't like to build new mobile home parks (which is great for us)? Click Here to read about how the the Limerick, PA municipality wants to change the zoning to a Mobile Home Park district - but then change the township code so town-homes and a senior-living facility can be built, but not a mobile home park! This is similar to Frank's park in Springfield, Missouri, in which the municipality used the mobile home park zoning as a lever to allow for high-density apartments. Throughout America, developers are learning that the easiest access to difficult zoning is to buy a mobile home park and re-develop it into a different use. This enormous value of the mobile home park "permit" is something that is not factored into our buying decisions, but is a reality in many major metro markets.

New Fund Coming Soon!

We are excited to let you know that the wait is almost over and we will be having new fund opportunity available soon! So stay tuned over the next couple of weeks for more information...