A New Look for Trailers Parks

06/13/2019 5:00 am EST

Focus: REAL ESTATE

Jim Powell

Principal Analyst, Global Changes & Opportunities

I have been stressing in recent months that when an economic growth cycle matures, second tier opportunities in many industries often become very profitable, recalls Jim Powell, editor of Global Changes & Opportunities Report.

Currently, several new opportunities in real estate are appearing as millions of Millennials become successful enough to finally buy their own homes.

Because most Millennials are not as affluent as their Generation Z parents, or their Baby Boomer grandparents, they are more likely to buy affordable manufactured homes in parks than they are to purchase site-built homes in more upscale areas.

As a result, trailer parks — as they are still often called — are no longer considered to be the black sheep of the housing industry. Instead, they are becoming cash cows.

Today’s newer manufactured home parks are especially popular because they usually offer attractive amenities. Security is at the top of the list. Most upscale parks are actually gated communities for people who can not afford to live in one for site-built homes in more expensive areas.

Many trailer parks also have swimming pools, tennis courts, dog exercise areas, meeting halls for parties, and so on. A growing number of parks are also restricted to older residents who would rather not be in a family park with kids and parents coming and going all the time.

A few parks go in the other direction: they cater to young families. I visited a family park on a weekend a year ago, and it was pure pandemonium. I could not get out fast enough. Of course, the children loved it.

Several large equity firms — including the Blackstone Group — have discovered the profit potential of upscale trailer parks. We beat them all to the party when we purchased Sun Communities (SUI) in March 2014 when it was $44.31.

The stock has been a top performer and is now up 185.0% to $126.27. Sun is surfing the current housing trend and seems likely to keep going. It isn’t too late for long-term investors to buy the stock.

Likewise, Cavco Industries (CVCO) — which we purchased in January — remains attractive, and just made a big price jump. The company makes many of the innovative manufactured homes that appeal to Millennials. Cavco is still “OK to buy”, but I would wait for the recent price spike to come down.

I can now also recommend Equity Lifestyle Properties (ELS) that is profiting from the increasing popularity of modern trailer parks. ELS owns or manages 412 properties in 33 states and British Columbia. In total the company has 155,133 individual sites.

Equity Lifestyle is the leading operator of manufactured home communities, RV resorts and campgrounds in North America. The company has somewhat more upscale properties than Sun Communities and should be a good companion stock to own.

Equity Lifestyle Properties also focuses on popular retirement locations and vacation destinations along canals, lakes, and golf courses.

In addition, the company offers many rental units, a business that most parks avoid. Equity Lifestyle Properties is prospering. For the most recent quarter, net income increased from $53.1 million, or $0.58 per share, to $113.3 million, or $1.26 per share. I think ELS will be a profitable long-term investment.

More aggressive investors who would like a smaller company that operates manufactured home communities should consider UMH Properties (UMH). The company has 21,000 developed home sites, primarily in the Northeast and Midwest. The company also has an attractive portfolio of REIT securities.

What I find most attractive about UMH is it has a great deal of institutional support. In fact, institutions own 62% of the company. UMH is also doing well; after eight consecutive years of double-digit growth, first quarter rental and related income increased 12% compared to the same period in 2018.

The company carries a lot of debt, but that is almost always the case for REITs that are buying and developing properties to expand their business.

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