Next big play

Warden Springs Caravan Park on the Isle of Sheppey of coast of Kent, England.(Carl France/Pixabay)

Equity Group Investments’ Sam Zell, Brookfield Asset Management’s Bruce Flatt, and Blackstone Group’s Stephen Schwarzman are some of the world’s top real estate investors. They’ve bought and sold billions of dollars of properties over the years. Many of their deals focus on trophy buildings that dot the skylines of America’s major metro areas.

However, while they’ve made headlines for deals involving higher-priced properties, they’ve also quietly made notable investments in a more affordable segment in recent years: manufactured home communities. The driving factor is that these properties tend to earn strong returns for investors.

Manufactured housing communities have historically generated steady cash flow throughout the real estate cycle. These properties benefit from very low turnover, since it’s costly to move a manufactured home, making it relatively easy to raise lot rental rates each year. That makes these properties recession-resistant, enabling them to produce better returns than other asset classes.

An ideal real estate investment

Those returns have caught the eye of big-time real estate investors, which have been snapping up these properties in recent years. Sam Zell’s Equity LifeStyle Properties is one of the largest owners and operators of manufactured home communities in North America. Equity LifeStyle Properties currently owns 205 manufactured communities, 206 RV resorts, and 23 marinas that generate steady, predictable revenues, primarily from renting lots and slips at its properties under annual contracts, with rates that typically rise each year.

When combined with a steadily growing portfolio as it gobbles up more properties, this steady rental growth has enabled Equity LifeStyle to create significant value for investors over the years.

Since its IPO in 1993, Equity Lifestyle has produced a nearly 6,000 percent total return, crushing the roughly 1,400 percent total return of the S&P 500 during that time frame. It’s not the only manufactured housing-focused real estate investment trust (REIT) that has produced monster returns. Sun Communities was one of the five best-performing REITs over the past decade.

Those returns have drawn other large investors into this space. Brookfield Asset Management bought a portfolio of 135 manufactured home communities in 13 states for $2.04 billion in 2017. (Brookfield acquired the century-old Forest City portfolio of 18,500 apartments in 2018.) It recently refinanced that portfolio, which now has 124 mobile home communities and RV sites, for $2.2 billion.

That financing will pay off an existing loan and preferred equity investment while returning $760.4 million in cash to Brookfield and its fund investors.

Brookfield is currently competing with Onex Corp. to purchase Modulaire Group, the European designer of modular buildings that can be used as rented living or work space. Modulaire could be valued as much as $5.4 billion.

Blackstone Group has also bet big on manufactured home parks in recent years. It purchased 40 parks from Summit Communities last year for $550 million through its non-traded REIT, BREIT. That’s one of several mobile home community purchases by Blackstone, which also made a $200 million deal for seven parks in early 2020 and a $172 million purchase of 14 communities in 2018.

Despite that shopping spree, Blackstone owns less than 1 percent of the manufactured housing communities in the U.S. due to highly fragmented ownership in the sector.

Room to grow

Because so many smaller owners hold these properties, big institutional investors and REITs have ample room to keep growing their manufactured housing portfolios through continued consolidation.

These investors can also expand existing communities by turning vacant land into additional income-generating lots and developing new communities due to the growing need for affordable housing.

Excerpt Matthew DiLallo, Motley Fool