Q: Why invest in something as 'unattractive' as mobile home parks?
A: It's a fragmented industry with poor management, growing demand, and fixed supply.
Mobile home parks present a compelling low-risk investment opportunity for four key reasons that have not changed since the industry came into existence in its modern form after World War II.
First, while accurate manufactured housing industry statistics are difficult to come by, best estimates are that approximately 4% of Americans live in one of 50,000 mobile home parks across the United States (1). Equity Lifestyle Properties (NYSE:ELS) is the largest community owner, with over 370 mobile home parks as of Q4 2013. While ELS’ portfolio is impressive, it represents less than 1% of all the mobile home parks in America. The manufactured housing industry is extremely fragmented, and approximately 80% of properties are privately-owned by individual ‘mom-and-pop’ operators (2). The industry therefore offers tremendous opportunity for smaller, well-managed operators to accelerate the inevitable industry consolidation. Additionally, assets can be purchased directly at steep discounts to the prices one must pay to own them through a publicly-traded REIT.
Second, affordable housing is always in demand by young families, middle-aged people in transition, and seniors on a fixed income (3). 25.7% of American households earn $25,000 per year or less (4). Mobile homes, by virtue of being mass-produced in factories at low-cost, have always presented a better combination of quality and price than comparably-priced site-built homes or apartments. Demand for affordable housing is stable and grows in proportion to the overall population – and actually accelerates in difficult economic times (5).
Third, over the past few decades most every major City and County in America has ‘outlawed’ the development of new mobile home parks. Whether zoning has been changed to literally outlaw new development of manufactured housing communities, or whether density or other requirements have been written to make them uneconomical to develop (for instance, requiring two acres of land per home), there will likely be very few new mobile home parks developed in the decades to come. Further, approximately 1% of mobile home parks are redeveloped every year into higher and better uses. Mobile home parks are a unique asset class because property owners benefit from participating in a government-enforced oligopoly, and supply is likely actually shrinking.
Fourth, mobile homes are not actually ‘mobile.’ It is estimated that over 90% of mobile homes never leave the land they are set on after leaving the factory. It costs over $3,000 to properly move and set a single-wide mobile home, and more than twice that to move and set a double-wide (multi-sectional) mobile home. Mobile home park owners benefit from the pricing power inherent in industries where customers have high switching costs.
Lilly & Company believes the next three to five years will offer attractive mobile home park acquisition opportunities that will be viewed as wise acquisitions in the decades to come. The manufactured housing industry will likely continue to consolidate, demand for affordable housing will continue to grow steadily in good times and in bad, and the supply of mobile home parks will continue to slowly shrink.