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Business Observer Friday, Jul. 18, 2014 4 years ago

Hot Communities

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Institutional investors are paying top dollar for manufactured-home communities, lured by high occupancies and steady income. Even private equity firms are looking at the hot sector.
by: Jean Gruss Contributing Writer

In fact, they're about as hot as apartments, the current darlings of the real estate investment world.

Fort Myers-based Murex Properties, a company that manages eight manufactured-home communities in three states, has attracted the attention of insurance giant Northwestern Mutual. Northwestern Mutual is the nation's largest individual-insurance provider with $217 billion in assets.

Recently, Northwestern Mutual financed the third acquisition in Murex's portfolio, acquiring Ventura Lakes in Punta Gorda for $19 million. The gated community is restricted to residents over the age of 55 and has 273 home sites.

“They're a big lender on these kinds of communities,” says Steven Adler, 63, president of Murex Properties. So far, Northwestern Mutual has invested more than $100 million in acquisitions with Murex, and the team is working on the acquisition of a fourth undisclosed 700-unit property.

Today's manufactured-home communities aren't your typical trailer parks. For example, Schalamar Creek Golf & Country Club in Lakeland has an 18-hole championship PGA golf course and a 22,000-square-foot clubhouse with a 350-seat ballroom, library, dance floor and performance stage. Murex hosts lecture series, a farmers' market and other events for residents, many of whom are seasonal retirees.

In fact, Schalamar is such a desirable community that the Manufactured Housing Institute recently awarded it the coveted “Community of the Year” award. A panel of independent judges from the industry group rated communities for the award based on aesthetics, marketing, site plans and community involvement.

Just like apartments
In most manufactured-home communities in Florida, residents own their house but the developer owns the land and leases it to them. The houses are manufactured in a plant and trucked to the site and are considered the residents' personal property. In effect, residents lease the land and as a result owe no property taxes.

Historically, individual developers built these communities as income-generating properties. Now, investors are realizing how reliable the income is from them because it's hard for people to leave unless they sell the house or get kicked out.

When you consider what investors are willing to pay as a percentage of net operating income, manufactured-home communities are as hot a sector as apartments. “Like apartments, we have almost no collection problems,” says Adler.

That's because the price is right, an important consideration for baby boomers with modest retirement savings. What's more, because of the lease structure, manufactured housing is benefiting from the rental boom.

A land lease usually costs about $300 to $600 a month, and it's adjusted annually only for inflation, like Social Security. In Murex communities, a new home costs $80,000 to $100,000 and a resale ranges from $50,000 to $80,000.

And Murex provides residents with amenities and activities. Only six of its 100 employees work at the Fort Myers headquarters; the rest are all onsite maintaining the properties and organizing things for residents. “They're looking for lifestyle,” Adler says of residents. “They're not making a bet on real estate.”

The key is providing services that the residents enjoy. “We keep the properties impeccable,” Adler says. Murex Properties posted strong revenue growth last year. In 2013, Murex Properties reported revenues of $15.2 million, a nearly 27% increase over 2012.

Institutional investor interest
Murex acquires only communities with the best locations and the highest occupancies. Institutional investors such as Northwestern Mutual look for income that will deliver steady annual rates of returns over the long term, and Murex says there is the potential for 12% annual rates of return.

Achieving those results is usually done with 30% to 50% leverage, which gooses up returns. Lenders in this sector include Wells Fargo and General Electric, Adler says.

But these kinds of returns are possible after many years. “It's not a short-term investment profile,” says Adler. For example, insurance companies such as Northwestern Mutual may look at manufactured-home communities as investments for a decade or longer.

Still, the sector has recently attracted the interest of private equity investors, somewhat surprising because these investors have traditionally had shorter-term expectations with much higher returns. For example, private equity firms usually want to exit an investment within three to five years and look to achieve annual returns in excess of 20% with much higher leverage.

“There's a lot of capital out there,” says Adler. Although he's in discussions with undisclosed private equity firms, he questions whether manufactured-housing communities are the right sector for such short-term investors. That's because well-located, income-producing communities rarely trade at a discount.

While there's no such thing as recession proof, Adler says capitalization rates for well-located manufactured-housing communities with low vacancies have remained stable throughout the years, even during the downturn. The “cap rate” is a ratio of the property's net operating income divided by the price paid, indicating a valuation expressed as a percentage. For example, the cap rate on the Ventura Lakes acquisition in Punta Gorda was in the mid-5% range, indicating a higher value compared with other property types such as office buildings and warehouses that have higher, more reasonable cap rates of 6% to 8%. “The cap rates don't fluctuate like distressed properties,” Adler says.

For now, most of the interest is on existing manufactured-home communities. But Adler foresees new development in the years ahead if the economy continues to improve. “It's getting closer to the start of the cycle,” he says.

Trailer Park Roots
Steven Adler was born in Miami but moved with his family to Sarasota in 1955.

Shortly after moving to Sarasota, Adler's father, Syd Adler, developed the first trailer-park community restricted to residents over age 55. It's appropriately called Trailer Estates and it's located between U.S. 41 and Sarasota Bay in Bradenton. Unlike today's manufacturing communities that lease land to residents, the elder Adler sold lots at Trailer Estates.

But son Steven Adler had other plans rather than follow in his father's footsteps. “No way I would ever do that,” he told himself.

Of course, the younger Adler went on to become a top executive with some of the largest developers and owners of manufactured-home communities in the U.S.

From 1986 to 1999, Adler rose through the ranks to become president of Uniprop, an owner and operator of 15,000 home sites in 12 states. From 1999 to 2002, Adler was president and CEO of Forest Communities, which under his leadership purchased and developed 17 communities in seven states. He then served as senior vice president with Sun Communities before starting Murex in 2004.

Executive Summary
Company. Murex Properties Industry. Real estate Key. Steady income draws investors.

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