Frank Rolfe discusses the impact of consolidation on the mobile home park industry. He reviews what consolidation is and who he sees as the winners and losers as consolidation unfolds. His arguments are accurate and compelling, and based on his insights as the 5th largest owner of mobile home parks in the U.S. (with his partner Dave Reynolds). It’s an important topic for all park owners and soon-to-be owners to consider.
Episode 4: Mobile Home Park Consolidation & It's Impact Transcript
Consolidation, it's one of the hottest topics in the mobile home park industry right now. We're going to discuss, what is consolidation? As well as, what does it mean for the average person seeking to buy and operate a mobile home park?
First off, as we all know, consolidation is that moment in time when any industry, as it matures, suddenly is set about with operators starting to grow by buying up other operators. Prior to consolidation, in this industry, what you've had is people buying out moms and pops one at a time, growing their portfolio. Then there's another level that every industry enters into. We saw in the self storage industry. Moms and pops were purchased by more professional operators who then started aggregating their holdings such that today, in self storage, you have groups like Public Storage and Extra Space. People that own large amounts of the total number of properties in their sector. Self storage, today, is three times more consolidated than mobile home parks are. It's perfectly natural for our industry to start consolidating.
Typically, what triggers consolidation is access to capital and financing. That's exactly what you're now seeing in the mobile park sector is many private equity groups and new financing products, like agency debt, have come on the scene allowing people to buy more and more products in an institutional format. Consolidation is not something to feared, in our opinion. It's something that actually we should all embrace. Let's examine what consolidation means to the industry. What are the good things about it, as well as what are the bad?
First off, let's talk about the benefits of consolidation is it lets all operators, who want to exit, that ability to have a liquidity event. There are people out there who have been acquiring mobile home parks for decades now. Some of them date from the '60s, the '70s, the '80s. Perhaps, it's time for them to pass the baton to somebody new. A consolidation means to some operators is the fact that they now have greater chances of liquidity, and that's a good thing. Those who want to get off the ship, certainly should have the capability to do that.
Another benefit of consolidation is going to be higher rents. What you're going to see is that more professional groups are not going to be so faint of heart as to raise rents to where they should've been all this time. It's a topic I talk about frequently and often. I get very negative feedback from people saying, "My gosh. You're the affordable housing business. Aren't you supposed to focus on keeping things cheap?" My response is, "No. I'm supposed to focus on providing a nice, safe, clean,place for people to live at an affordable price, but I'm not in the business of providing that item at an insanely low price." It makes absolutely no sense.
Down the road from her, here in Missouri, is a barbecue restaurant that has really, really, good food, but the pricing was crazy. Their barbecue sandwich was 50 cents. Think about that. You can't even go into an Arby's and get some kind of processed barbecued for less than a couple dollars. Here, down the street from me in small town Missouri, was a restaurant that, since the 1940s, has produced a barbecued sandwich for 50 cents. Well, the price has now gone up. They no longer do it for 50 cents, but people still love the sandwich, and they're still buying the sandwich. Why? Because the price was crazy stupid before at 50 cents. Now today, even though it maybe three or four times higher, it's still a great value. Value is the key item to focus on, not the actual numeric price.
What a lot of these aggregators will do is, they'll look at our rents, at our lot rents in particular, and say, "Gosh. This makes absolutely no sense. In a market where the apartments are $1,500 a month, why oh why are your lot rents at $300?" You know what? They are exactly right. The average lot rate in the US is hovering around $280 a month at a time when the average apartment is over $1,000 a month more. It makes no sense. What you'll see happening as industries get more consolidated is, you'll see prices rise. They're not rising from people gouging. They're rising because people who have a better business sense are starting to set those rents.
Look at Denver, Colorado, for example, one of the most aggregated markets in the US. The average lot rate in Denver hovers around $700 per month. Why so high? Why is it roughly twice that of Kansas, just one state over? The answer is, it's almost all owned by larger institutional players now, and they refuse to give their product away.
Another thing you'll find from consolidation is you're going to get better quality management. As consolidation grows and there's more media and attention to the fact that operators are getting larger and larger, they'll start to attract better talent. People that typically would not have considered a career in the mobile home park industry will suddenly think maybe it's a fast growing industry and worth of consideration. You'll see that as far as even community managers and district mangers, as these larger operators will start to look to other industries that are already consolidated and get their best talent.
One of the best sources, for example, of a lot of your best mobile home park management talent comes from the multi-family industry. I went to the apartment show in Las Vegas a few years ago, and what did I see? Well, I saw that an industry that's probably 10 times larger than mobile home parks and probably about 10 times better as far as the caliper of talent. That's definitely a good thing in our opinion.
You're also going to find that this accent on better talent will also lead to overall better satisfaction by cities and residents with the product itself. Look at what Public Storage has done, for example, to self storage industry. People think of Public Storage and their orange sign and their orange doors when you simply say the words, "self storage." That is probably what's opened the doors to so many rezoning cases of people who wanted to build new self storage facilities, was because they all knew of Public Storage and respected what they did. As you have more quality folks owning an operating these properties, people who are just better professional operators, you're going to find a lot less negative stigma against the product on the part of residents. That's going to lead to more people wanting to live in mobile home parks. You also see the same sentiment from cities. The cities are going to say, "Gosh. We're a lot happier with this product these days. We're no longer going to be negative in our approach to the industry." Again, all kinds of good things that happen.
Now, what is wrong with consolidation? Well, the biggest thing you'll hear from people is, "Gosh. It's going to be all that cap rate compression. I won't be able to buy anything good anymore." Well, you're exactly wrong. Most of the consolidators that I know, that I have talked to over the last several years, only buy what we call finished product. They do not buy broken or turnaround product. Why is that? Because they're more institutional. They like to buy properties that all the heavy lifting has been completed. If you're out there buying broken parks to fix them, which is what we do, you really won't find any more competition in the era of consolidation than you did prior.
However, what you will find is a more ready buyer for your finished goods. When you buy that park, and you turn it around, and you make it good, and you make it nice, you now have many more exit options. Rather than just simply placing it on MobileHomeParkStore.com or with a broker, you may be able to go to one of the great aggregators that will be spring up in the future and try selling it there. It definitely cannot be a bad thing.
One more thought on cap rate compression is, a lot of people are misunderstanding what that exactly is. When people talk about cap rate compression, what they traditionally talk about, people who are getting stupid in their buying and pushing cap rates down. Do not mistake that for the final acceptance of low interest rates and the effect on cap rates.
When Dave and I wrote the book, The 10-20 System, we were used to interest rates being around 7%. That's how they'd always been. That's where they've been through American history. That's where they were back in 1776. However, after the 2007 crash and the invention of quantitative easing, interest rates fell to levels so low they've never been seen before in American history. As a result, everyone thought, "Well, those rates can't stay that low. This is a temporary blip." The same thing that black and white movie folks were saying about talkies when they first came out. They were all wrong, and we were all wrong. I know that Dave and I used to think, when we saw those interest rates we could obtain on loans at 4%, we thought, "Well, I bet in a year or so, it'll be back to seven," but guess what? It's not.
It's now been one decade since the great recession began, and interest rates have not gone up hardly at all. In fact, I don't think they can. Here's why. If you look back on the Reagan era, when interest rates were up in the teens, you'll notice there's one unusual fact between the time of Ronald Reagan and the time of now. That was the amount of debt we had as a nation. Less than a trillion under Regan. Today, 19 trillion. As the largest borrowers in the world, our country could hardly survive a hike in interest rates. I don't know exactly when we would go insolvent as a nation, but I guarantee you it can't be much beyond 8%. I'm not even sure we could survive that.
What's happened is, interest rates are finally being accepted as being low. As we've discussed many a time, it's the spread that gets you your yield. Most park operators are looking for a three point spread, and that three point spread is what gets them to 20% cash on cash return. When you've got a three point spread, typically you're in really good shape. Some operators are not even looking for three point spreads, they're looking for two point spreads. When you're benchmark begins life at 3% or 4%, you can see how the lowering of effective cap rates, when you used to be used to 10%, could be perceived as cap rate compression, when in fact, it's simply not. Even if the industry was not going through any form of consolidation, you would still see these same interest rate declines. That's simply because people are now pegging the values of that cash on cash return accurately to what interest rates not only are now but what they'll be perceived to be in the future, which again, is about what they are now.
Now, what should you do? If we are going to have consolidation, and let me add, there's probably nobody out there who could talk on the topic better, since is fifth largest owner in the US, Dave and I are a constant receiver of calls from private equity groups and other groups trying to consolidate, so we're pretty well versed in it, so what should you do? Right now, what action steps can you do to embrace consolidation? Well, the first is, buy good mobile home parks. That's all you have to do. Don't change your business model. Don't change the way you look at the industry. Don't think you've got to rush into anything that isn't good, because, "Oh my gosh. I've got to beat the clock. I've got to get my timing down." No. Keep doing exactly what you're planning on doing.
Find properties that are in all the correct categories as far as infrastructure, pricing, permits, everything. Just do exactly what you've been doing. The British used to say during World War II, "Stay calm and carry on." That's pretty much true for all park buyers and park operators today. Consolidation may take years in this industry. We don't know how long it would take. The industry started off with a pretty big negative stigma. It's going to take a while for a lot of your more institutional players to overcome that stigma. Even then, they're going to be looking for opportunities that they feel are profitable and have a great future. It's not going to be an overnight change. It's not that we're going to wake up one day and say, "Oh gosh darn, the industry's consolidated. I better give up. There's nothing more I can do." That's not the case. Just go about your business, because what's going on is a good thing.
Industry consolidation is certainly nothing to be afraid of. There should be no fear of consolidation. When I look back on my earlier life as a billboard owner, I've been right through this movie once before. Here I was, the largest private owner of billboards in Dallas Fort Worth, minding my own business, continue to build signs here and buy signs there. Then suddenly, a group went public called Universal Outdoor of Chicago and it ushered in a new wave of consolidation. There were 60 companies in the billboard industry prior to consolidation, and after consolidation it was less than 10. That's in the Dallas Fort Worth area. What did it mean? Well, what it meant was a lot of operators who wanted to sell out, did. Others stayed in the industry. Look at what it did as far as the value of billboards. Look at the change in the rents. Rents in some markets went up 10 fold under consolidation from where they'd been. Those who elected to hag on and stay in the industry did incredibly, incredibly, well.
Again, consolidation is nothing to be afraid of. It's something that you should actually look forward to. I think, it's probably the best thing going on in the industry right now. I mean, there's a lot of great aspects to this business. I love all the new steps the government's taking to get more active under duty to serve. I'm loving the fact that our model is so well constructed that we don't have to worry about competition in most markets. I think that the future of consolidation is a huge boon to every single operator out there. Everyone out there looking at buying a mobile home park, it's a great time to be in it simply because you have this consolidation play just quietly happening behind the scenes.
Over the last two years there have not been one, not two, but three $2 billion transactions in this industry. Carefree Communities sold to Sun. Northstar sold to Brookfield Asset, a Canadian Company. Yes! Communities sold to GIC, the sovereign nation fund of Singapore. That's a lot of activity. I think we will all agree. There's still probably more to come. Various rumors fly of different operators selling to different private equity groups. We've seen the Carlisle Group, the largest private equity group in the US, now get into the industry, and bought up communities in Florida and other areas. I think they're now up to several thousands lots. These are all great things. It's all part of the rosy future for the industry. We're all going to look back in time, 10 years from now, or 20 years from now, and say, "You know what? That was a really great time to be in the industry, because those who bought parks in this period were able to ride the higher rents and the more professional management of consolidation. As a result, they profited handsomely."
When I hear the word, consolidation, I never think to myself, "Oh gosh, that's bad." I always think, "Oh gosh, that's good." Really, the big thing I wonder today is, who will the great consolidators be in the affordable housing sector? I don't know. We all have our favorites. Some think it'll be Yes!, Northstar. We don't know who it will be. All we know is, whoever it is will be doing a great thing for the industry, as they bring a new level of professionalism and new vision to an industry that, let's frankly, we all have to admit had lost steam. It had lost its way over the last half century. It's time to inject it again with a positive feeling and positive performance. Again, consolidation, don't fear it. Embrace it. It's good for all of us. I'll be back soon. Thank you.