Market Overview

2015's Top-Performing REIT Sector May Surprise You

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2015's Top-Performing REIT Sector May Surprise You

Investment bank MLV & Co. published its Weekly REIT Beat on March 16, which includes varies updates on the U.S. REIT Sector and its component subsectors.

The most well-known commercial real estate asset classes which are familiar to most investors, include: Retail, Office, Industrial, Healthcare, Lodging and Multifamily REITs.

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However, first place honors so far this year go to Manufactured Housing REITs, which include: Equity Lifestyle Properties, Inc. (NYSE: ELS), Sun Communities, Inc. (NYSE: SUN) and UMH Properties, Inc. (NYSE: UMH) leading the way through mid-March with a 9.4 percent average.

Related Link: Morgan Stanley's 'Realistic REIT Bull Case' For MGM

While manufactured homes are often viewed as a depreciating asset, the land underneath these modular homes, trailers and RV vehicles is the major source of NOI for this REIT sector.

Tale Of The Tape - YTD Performance

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Not A Fluke - Past Year Performance

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The Vanguard REIT Index ETF (NYSEMKT: VNQ) is a good proxy for the overall REIT sector.

While REITs as an asset class outperformed the S&P 500 during the same period, $3.7 billion cap Sun Communities and $4.8 billion cap Equity Lifestyle, outperformed by a considerable margin.

Mr. Market hasn't been as kind to $247 million small-cap UMH Properties; which is also reflected by the UMH outsized dividend yield of ~7.3 percent.

Sun Communities - Deeper Dive

Sun Communities owns and operates 242 manufactured housing and RV communities, with an aggregate 88,900 lot located across 29 states.

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Secret Sauce

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The most of the revenue is derived from tenant land rent payments, which in turn reduces the amount of cap-ex required to fund the same store communities.

Steady Accretive Growth

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The recently closed "ALL" portfolio acquisition totaled 19,500 lots for over $1.3 billion, while the pending "Berger" acquisition of 7 MH communities located near Orlando, FL will be 3,150 sites at a price of $256.7 million.

Organic Growth - Existing Portfolio

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SUI Five Year - Relative Outperformance

 

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Sun Communities leading the pack is consistent with SUI's history of outperformance.

Equity Lifestyle Properties - Deeper Dive

Equity Lifestyle is the largest player in this sector with more than 370 communities and resorts, with over 143,000 sites, spread across 32 states and British Columbia.

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Low Cap-Ex Business Model

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Predictable land rents are the main source of revenues, which can also be adjusted annually.

Growth & Performance

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A history of long-term outperformance by Equity Lifestyle Properties to back up recent strong performance.

Industry - Secret Syrup

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Demographic tailwinds bode well for this entire sector moving forward.

Bottom Line

Manufactured home REITs currently benefit from a growing U.S. economy and low interest rates as well as aging Baby Boomers.

However, this sector is also somewhat recession resistant, due to being a low cost provider vs. conventional rental communities, and other housing options.

Image credit: WoodleyWonderworks, Flickr

 

Related Articles (ELS + SUI)

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