LIC.ASX - Lifestyle Communities.

[cameronfen]

For those people who think I only pick high flyers, here is something that hopefully will reestablish some of my value investor credibility:

 

AFAIK, trailer park REITs have been the best compounders in the REIT department with Sun Communities having a total return CAGR of 19% over the past 10 years.  Equity Lifestyles has returned 38% annually since IPOing in 1993.  UMH has compounded at similar rates. 

 

The basic idea behind a trailer park is to sell a manufactured house to the owner of the property, but the REIT owns the land the house sits are.  While these houses are technically mobile, they cost something like 40k to buy, but nearly 10k to move in total costs, which means the renters are basically captive customers.  Furthermore the cost to live in a 1 or 2 bedroom house, is significantly cheaper then renting a comparable apartment, with the additional kicker that you owning a house is within reach even with people with lower incomes (although I don’t want to give the impression that the industry occupies the moral high ground in affordable housing).  Thus trailer park REITs can basically raise prices 3-6% every year in addition to new developments.  Recognizing the economics of this business, Sam Zell started Equity Lifestyles.  Likewise Warren Buffet bought Clayton Homes which is the dominant maker of these manufactured homes. 

 

Now the trailer park REITs in the US trade at 26x P/FFO and have saturated the large cities and now are developing in lower ROI exurbs and suburbs of smaller cities.  However, in Australia you have a un-developed trailer park REIT market that should follow the past growth rate of the comparable REITs in the US.  Here is a map of all the trailer parks UMH owns: https://www.umh.com/find-a-community .  You will notice that it basically blankets the Mid-atlantic states with no obvious increased concentration around large cities where home prices and therefore ROE is higher.  The reason is because in the US the market is saturated.  Now compare this to Ingenia Communities in Australia (which is one of the largest if not largest trailer park REITs in AU): http://onlinereports.irmau.com/2018/INA/6/ .  Notice the entire market is around the coast next on Tier 1 Australian cities: Newcastle, Gold Coast, Canberra, Brisbane, Sydney, Melbourne and Perth.  This is evidence that the market is still in the growth phase in Australia where players still can pick cream of the corp locations for trailer parks.  I didn’t show Lifestyle’s map because it’s concentrated all in Melbourne which is even more high quality than Ingenia.  To add another data point, Sun has invested in a joint project with Ingenia to develop more parks in Australia. 

 

Now lets talk about pricing power.  In the US, if you rent both the house and the land (comparable to renting an apartment you pay about 1100 a month.  I got the land rent price from Sun Communities AR: https://seekingalpha.com/filing/4109434  (search “Monthly base rent per site – MH”).  I added to that 550 dollars which is on the low end for a monthly mortgage payment/mobile home rent implied by this article: (https://www.usatoday.com/story/money/personalfinance/2013/08/03/money-quick-tips-mobile-homes-hosuing/2610469/ ).  I also saw this in a Sun Communities IR presentation but I couldn’t find it again.  This compares to the average price of renting a 1-bedroom apartment in the US which costs 1200 a month.  Keep those two numbers in mind. 

 

Now looking at this pg 10 of this presentation from Ingenia: http://www.ingeniacommunities.com.au/wp-content/uploads/austocks/ina/2018_08_21_INA_1534844040.pdf you will notice that the average rent per week is $166 Australian dollars.  This comes out to be $719 a month.  Now keep in mind that the portfolio is near more expensive cities than US trailer parks.  Perth, which is a proxy for the the median comparable house price for Ingenia properties, has a monthly rent of 1711 Australian dollars.  Thus compared to US trailer parks, Ingenia has a lot of room to raise prices.  Lifestyle communities is similar as I saw that its average rent is about 900 dollars a month and the price of a 1 bedroom in Melborne metro area is 1970 Australian dollars. I do not have a source for the Lifestyle number as this was from memory which I could not find again but the source for Melborne is here: https://www.expatistan.com/cost-of-living/melbourne . 

 

Couple other notes:

 

-Housing has dipped in price in Australia recently, but the trailer REIT business is very recession resistant as, for example, Equity REIT has increased NOI every quarter since 1998 (https://www.nreionline.com/alternative-properties/manufactured-home-reits-outperform-market). 

 

-They have taken some of the innovation for a second revenue stream from New Zealand retirement homes like: https://www.rymanhealthcare.co.nz/  and amortize a management fee for houses that accumulates but is never charged until the house is sold, which allows seniors to not have to pay as much money while they are living.  Companies like Ryman health and other have shown that this is an attractive ROI opportunity (these retirement villages are also good investments and I have seen them written up somewhere I don’t remember). 

 

-For compounders valuation doesn’t matter much but the company (Lifestyle) is trading at 10x earnings.  Ingenia is a bit more expensive.  Lifestyles also focuses on mobile home retirement communities which benefits from demographic factors and comparably cash rich population (seniors that have just sold a home). 

 

-There has also been some buying by a director. 

 

-I also think buy Ingenia is interesting too. 

 

-Do your own DD and the regular qualifiers. 

[Scunny Bunny]

FWIW Ingenia (INA.AX) is Sir Ron Brierley's largest holding in his publicly listed Mercantile Investment Co vehicle (MVT.AX)

[Spekulatius]

So LIC develops a site, then sells houses on this site that sit on a 90year lease and then generate a growing income stream from lease payments. What could go wrong? For one thing, it’s still a real estate developer - if they can sell the houses on their plots (because housing prices came down while they were developing it) then they sit on idle land and won’t generate lease income either.

 

Their leverage is fairly low though and the business model seems like a good one. Thanks for posting.

[Packer16]

The way parks typical run is the park does not own or build the manufacture home but the person leasing the lot does.  The parks is responsible for the parks common areas & infrastructure.  This reduces inventory quite a bit & creates nice returns on investment if the park is has decent occupancy.  Once the park is up & going the development is risk is reduced quite a bit.

 

Packer

[Saluki]

I've been reading a lot about mobile home parks on BiggerPockets and listening to MHP podcasts (yes, plural because there are a few) because I was looking into buying into one as an owner/operator. I came up with "Wheel Estate" and thought I was clever, but it turns out someone beat me to it :(

MHPs and self-storage are the two types of real estate business that I find most attractive as a owner/operator because in the former the leaky roofs and clogged toilets are not your problem (you own the dirt, but the trailer is the tenant's property and the tenant's problem) and the latter is just storage and empty boxes don't complain, they just sit there quietly and pay you rent. I don't know about investing in it as a REIT in a foreign country, but it could work.

 

THE GOOD

In additional to what you identified, if a MHP is in a growing city, it has a nice terminal value because if the area around it get's really expensive, you can clear the park and sell the dirt to a developer. Palm Beach County florida had a lot of orange groves and MHPs 20 years ago, now it's all been sold to developers.  And if someone doesn't pay, even in a tenant friendly state, it's easy to kick them out since they aren't renting a house from you, they are renting the land in the same way that you would rent someone a parking spot. 

 

THE BAD

I don't know about Australia, but the double edged sword is that communities don't really want them because of the low income tenants. You don't get a lot of property taxes so if a family has 3 kids in public school and the park owner is only paying a few hundred dollars property tax on that patch of dirt, it's a really bad deal for the city.  So, if you have an old one and new ones can't get approved, it's a safe place to put your money.  The downside is that if people leave and take their trailer with them and you don't replace it quickly the city can withdraw the entitlement and you can't put a new one on there to replace the old one.\

 

THE UGLY

Even though the park operator doesn't own the units, you should pay close attention (if you can) to how old the units are.  Some MHPs have trailers from the 80s (or the 70s!) and have no resale value.  If the rents are raised and the tenant can't pay it, they won't haul that pile of rusting metal away, they leave it behind and it costs thousands of dollars to get rid of it. 

 

Still, it's an interesting idea and probably a good idea that's counter cyclical (in a downturn demand for cheap housing will go up), so I'll start researching this one.  Thanks for the heads up.

[cameronfen]

I've been reading a lot about mobile home parks on BiggerPockets and listening to MHP podcasts (yes, plural because there are a few) because I was looking into buying into one as an owner/operator. I came up with "Wheel Estate" and thought I was clever, but it turns out someone beat me to it :(

MHPs and self-storage are the two types of real estate business that I find most attractive as a owner/operator because in the former the leaky roofs and clogged toilets are not your problem (you own the dirt, but the trailer is the tenant's property and the tenant's problem) and the latter is just storage and empty boxes don't complain, they just sit there quietly and pay you rent. I don't know about investing in it as a REIT in a foreign country, but it could work.

 

THE GOOD

In additional to what you identified, if a MHP is in a growing city, it has a nice terminal value because if the area around it get's really expensive, you can clear the park and sell the dirt to a developer. Palm Beach County florida had a lot of orange groves and MHPs 20 years ago, now it's all been sold to developers.  And if someone doesn't pay, even in a tenant friendly state, it's easy to kick them out since they aren't renting a house from you, they are renting the land in the same way that you would rent someone a parking spot. 

 

THE BAD

I don't know about Australia, but the double edged sword is that communities don't really want them because of the low income tenants. You don't get a lot of property taxes so if a family has 3 kids in public school and the park owner is only paying a few hundred dollars property tax on that patch of dirt, it's a really bad deal for the city.  So, if you have an old one and new ones can't get approved, it's a safe place to put your money.  The downside is that if people leave and take their trailer with them and you don't replace it quickly the city can withdraw the entitlement and you can't put a new one on there to replace the old one.\

 

THE UGLY

Even though the park operator doesn't own the units, you should pay close attention (if you can) to how old the units are.  Some MHPs have trailers from the 80s (or the 70s!) and have no resale value.  If the rents are raised and the tenant can't pay it, they won't haul that pile of rusting metal away, they leave it behind and it costs thousands of dollars to get rid of it. 

 

Still, it's an interesting idea and probably a good idea that's counter cyclical (in a downturn demand for cheap housing will go up), so I'll start researching this one.  Thanks for the heads up.

 

Addressing the bad and the ugly.  First with lifestyle, they target senior citizens with something like 50-100k+ in equity as their houses cost 200-300k, which means the tenants are somewhat more well off than the stereotypical renter in the US. 

 

The Units could get old in the future, but trailer parks are a new phenomenon in Australia and so most parks probably aren't very old.  I will pay attention to that though, but again higher prices mean less likely to to abandon (although also means higher towing costs which is a good thing).

 

I like the name wheel estate.  You should just go with it.  No shame that someone beat you to the name. 

 

Also regarding Spek's comment, occupancy is 90+% for the parks that have been around for 4 or 5 years. 

[SHDL]

Thanks for the idea and discussion.  I guess what gives me a pause here is the fact that Australia’s multi-decade housing bull market (which some argue is a bubble) looks like it’s finally coming to an end.  The key question to me is then how well is this company likely to do if home prices were to stop going up or start going down.  Still looking into this, but their reported earnings seem to include property value appreciation, so I would expect that number to take a big hit at a minimum.

[cameronfen]

Thanks for the idea and discussion.  I guess what gives me a pause here is the fact that Australia’s multi-decade housing bull market (which some argue is a bubble) looks like it’s finally coming to an end.  The key question to me is then how well is this company likely to do if home prices were to stop going up or start going down.  Still looking into this, but their reported earnings seem to include property value appreciation, so I would expect that number to take a big hit at a minimum.

 

These companies basically never have a down year.  As I said in my original post, Equity Lifestyle REIT has increased net operating income every quarter since 1998 (including the Great Recession and Housing Crisis).  The other US mobile home REITs are similar if not as impressive.  Second, compared to the US, all in rental prices for Australian MHPs are a half of actual home prices, while their US counterparts are about 90% of 1 bedroom prices.  This means come a down turn these are actually more attractive places to live. 

 

Third they break down total profit into underlying profit which takes out fair value adjustments.  Underlying profit is 33 million which means it's trading at 16x those earnings.  Differed management fees will take a hit if a recession hits. 

[SHDL]

I just spent a few hours reading more about Australia’s housing market and I’ve decided that I don’t feel comfortable getting involved in it at this time.  Thanks again for the idea and discussion though.

[cameronfen]

I just spent a few hours reading more about Australia’s housing market and I’ve decided that I don’t feel comfortable getting involved in it at this time.  Thanks again for the idea and discussion though.

 

Fair enough. 

[Cigarbutt]

I just spent a few hours reading more about Australia’s housing market and I’ve decided that I don’t feel comfortable getting involved in it at this time.  Thanks again for the idea and discussion though.

@cameronfen: Thanks for the specific idea and the industry topic.

 

It would seem that demand for affordable housing in "trailer parks" would actually go up in a downturn, even in a housing-related downturn. Manufactured house owners face high switching (moving) costs and even if they have a loan (typically a personal loan) on the property with a higher interest rates, these owners typically have lower debt to wealth/income ratios.

 

If Australia's housing goes down under, some people may simply have to switch communities, gated or not.

[cameronfen]

I just spent a few hours reading more about Australia’s housing market and I’ve decided that I don’t feel comfortable getting involved in it at this time.  Thanks again for the idea and discussion though.

@cameronfen: Thanks for the specific idea and the industry topic.

 

It would seem that demand for affordable housing in "trailer parks" would actually go up in a downturn, even in a housing-related downturn. Manufactured house owners face high switching (moving) costs and even if they have a loan (typically a personal loan) on the property with a higher interest rates, these owners typically have lower debt to wealth/income ratios.

 

If Australia's housing goes down under, some people may simply have to switch communities, gated or not.

 

I've probably said this too many times but in addition to Equity Lifestyle REIT have something like 80 straight quarters of net operating income growth (1998-current), right through the housing crisis and great recession, if you look at the investor relations for Sun Communities and UMH they are not shy about posting their performance over the housing crisis as well and it might have been slightly negative but much better than GDP and REIT peers (I'm sure I have seen a slide or two for SUI not as sure for UMH).

[Spekulatius]

Stunning performance. Stock up 60% since mentioned. The old saying that the less posts the better the performance is once again true.

 

I looked at this and didn’t buy either, although it did seem interesting. Time window until liftoff was just too small for me to get in.

[cameronfen]

Stunning performance. Stock up 60% since mentioned. The old saying that the less posts the better the performance is once again true.

 

I looked at this and didn’t buy either, although it did seem interesting. Time window until liftoff was just too small for me to get in.

 

Thanks, but I think this was just luck as far as my call.  My record is okay and not great although I seem to better on more value type investments than garpy things although I actually like the Garpy things better.  Obviously risk return is worse now than before as IV probably grew at 15% when I mentioned and stock price grew at 60%.  Still is a fair price to be paying for the stock though at 15x earnings (compared to 10x before).