The Recession Playbook

Recessions are unpredictable, right? Not if you simply follow the science of past downturns. That’s the focus of this Lecture Series Event. It’s titled “The Recession Playbook,” and it’s a candid discussion of the math and science behind recessions and how past performance data can be overlayed onto the current situation for an educated guess on what will unfold. And the focus, of course, will be on what these predictions mean for the mobile home park industry.

Your host is Frank Rolfe, who is not only the “human encyclopedia of all things mobile home park” according to the New York Times, but also holds an economics degree from Stanford University. And following the lecture, there will be a lengthy Q&A session with no topic too taboo.

The Recession Playbook - Transcript

Welcome to tonight's lecture series event. This is Frank Rolfe, I'm glad you can be here. It's a topic I've always had a great deal of interest in and I think it's right now very timely, we're titling tonight's lecture series event The Recession Playbook. So let me talk about my love affair with recessions. Before I ever got involved in mobile home parks or billboards, all the way back in the late '70s and the early '80s, I was an economics major at Stanford University out in California, and in fact, graduated with a degree in economics. And during my stay at Stanford in economics, I loved reading books on the Great Depression and on recessions. I don't know why exactly but they fascinated me with how people survived from the toughest economic times in American history, and yet the economy went on, the people went on and things improved, and I just found them very inspirational and very fascinating. So I have been as an adult through six of the 11 recessions we're gonna talk about tonight, which are the 11 recession since 1950, so I've been an adult in six of those recessions.

So nearly half of them have fallen... Or more than half of them has fallen during my watch as an adult, and you have to be at least 32 years old to have been an adult in the last recession. So if you say, "Recession? What recession?" Well, then that tells me you're less than 32 years old because if the only recession you know in the whole wide world was what people told you about 2007, 2008, then you're the generation that has never really experienced a recession to its fullest. And for that, I apologize because for those of us who've been through them in the past, we know how it all works, but if you never have, it's hard for you to grasp how it's going to unfold. And the key item on recessions is they can either be very terrifying or they can be a great buying opportunity, it's your choice. Recessions are pretty egalitarian, they don't really pick sides. You are free to either go into them with fear and loathing or you're free to go into them thinking this is a great opportunity for you to excel in your mobile home park buying.

Now, J. Paul Getty loved recessions. I read two of Getty's biographies, in most cases, he was happiest during recessions, he says so in the book. He always thought recessions were a great time to "knock the barnacles off the boat." And he just liked the fact that recessions take every business and ground them back to the basics periodically and create buying opportunities. So he thought it was a good time for businesses he owned and an even better time for businesses he hadn't quite bought yet.

William Kaiser, the steel magnate, the guy that created our American steel industry, he once said that problems are only opportunities in work clothing, because he also loved recessions, and if you read about the biography of most business people who have done great things in American history, the champions of industry, they all love recessions, so you gotta go with them that recessions are good. And I also love them, but it took me a while to learn why. So initially, I wasn't a big fan, and then gradually I realized that, "No, these weren't bad things, these were potentially good things."

So let's start off with, what is a recession, and are we in one now? Well, if you go to Wikipedia and you put in, "What's a recession?" You're gonna find out that it very clearly states, "A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters." So therefore, based on the Wikipedia definition of a recession, we are clearly in one. We've had two back-to-back quarters that were negative on GDP. So we are in a recession. I find it very irksome right now that some would say that we are not in a recession. If you don't like the score in the game, you can't rewrite the rules of football, so I don't know why America for the first time in over 200 years would suddenly change the methodology to drive a recession. It makes no sense to me. What are we trying to escape? Let's just call it like it is. Yes, we are clearly based on every economic definition of a recession, there's no way you can sugar-coat it.

And the question is not, "Are we in one?" Let's just cut through that BS. And the question is simply, "How long will it last and how severe will it be?" Because anyone who has any knowledge of business or life knows that you must embrace reality, there's no future in embracing fantasy, doesn't really work well. So let's just give up on this whole crazy notion that we're not in a recession. Let's admit we're in a recession and then so we move on to, how bad will it be? Now, let's start with a historical review of all the recessions since 1950. Now, why 1950? Why don't I go back to the Great Depression or the various recessions that occurred between the 1930s Great Depression and roughly 1950? And the problem is the Great Depression, at least we hoped, was accelerated, it was made much more significant due to things in the banking world that have now radically changed. As you probably have heard or read about or seen on TV or movies, back in the Great Depression, there was a huge run on banks and no one's money was secure, so people would run down to the bank, they might have $1000 in the bank but all they were gonna get out was whatever they could claw their way out from the teller, and that was it.

So I'm hoping we've moved beyond that today, checking accounts are guaranteed by the government through the FDIC to a certain amount. So hopefully the Great Depression is beyond anyone's expectations of ever recurring with that much force. Additionally, you had a series of aftershocks from the Great Depression which followed through to World War II, and we're not in a world war right now, and will hopefully never be another world war like World War II. So I thought those weren't really fair for the basis of our analysis tonight, so I excluded those. Should I have excluded them? I don't know, you tell me. I thought probably it made a lot more sense to look at economic recessions that were devoid of a major world war or devoid of complete collapse of the banking industry to really be fair, save for when I start analyzing the stats that we're going to be, but that's what I've started off as a given, is, we're only talking about the 11 recessions since 1950.

As you see before you on this slide, we give you a chart of what those recessions were. It also shows you how long it was between them, and how long they lasted, and a few other items of interest. And most of these early ones from the '50s you've never really heard of, and probably the '70s, you know the oil and gas recessions, that's what really caused them. So most people looking at this chart, the first one you're gonna remember, the first one that I truly remember and say, "Boy, those were bad times," was recession of '81, '82 because I had just gotten out of college at that point, and then additionally, the big one for me, the first one that was just ground-breaking in my understanding of recessions was the one that in Dallas started in 1987 to '88. So on this chart is called the 1990 recession. But in Texas, it started earlier before it grew nationwide. Others on here, I'm sure you'll remember the great dot-com recession of 2000, and then of course the Great Recession of 2007 and 2008. And then the little covid blip recession that started in 2010.

So those are the 11 recessions, and on the right side of the slide, you could read the causes, but we all know them, so I don't think it's worth a lot of time really reviewing things we already know. So let's talk more importantly about what those recessions meant and what they mean today and what information we can glean from those. So I took those 11 recessions, being a good old economic student, and I analyzed the data for you, and here are the results. The average recession since 1950 lasted 10.2 months. That sounds pretty reasonable. I think we would all say, "Yeah, that sounds like what I would anticipate a recession would last."

So I'm pretty comfortable with that bit of data. The shortest was the 2020 recession, which was only three months in length, and the longest was the 2007, 2008 Great Recession, which lasted 18 punishing months, so it went all the way from a very short phenomenon to a very long... The longest of all time was only 18 months, I say "only" because right now things are so terrible, it would appear recessions could last for years, but in fact, a year and a half is our national world record, the average time between recessions was five years and six months, so five and a half years is the average. But if you take out the covid blip recession, we are very overdue for one, I think that comes as no shock because right now we are running about two times the norm. So about 12 years in length. About two times that five-year, six-month average. So if there was ever a country that was ready and overdue to have a major recession, we're it, so it should come as no shock to anyone, since we all know that recessions are cyclical, that we're about due for one.

And the big takeaway, if you look at that chart that list of those 11 recessions, is a simple fact, the recessions run in cycles, so they always just come back around, it's just a matter of when, you can never say, "Oh well, we have created the utopian society now and we'll never have another recession." Well, it's never been achieved yet. So it's unlikely. So if in 70 years, we've never been able to cure the recession, it appears that we can't. So we should all anticipate that recessions will in fact occur periodically, 'cause that's just life, that's just a natural cycle of how things work.

Let's focus for a minute probably on the most important part to mobile home park owners, and that's interest rate movement in the past versus today. So what I did was, I not only took when recessions began and when they ended, but I then also went and got the prime rate, interest rate during the beginning and the end of each of those 11 recessions. I thought that would be an interesting exercise. Then I averaged those, and the conclusion I came up with when analyzing the data is that the average interest rate declines from the start of the recession to the end by 2.4 points. Now, why would that be? Well, we all know why, because when the Fed tries to jumpstart the economy because it's dead as a doorknob, they're trying to bring life-saving fuel and electrical spark back to the engine, they do it traditionally by dropping interest rates. It's just about their only tool. And on average, it takes them 2.4 points of drop to get the engine to fire back up, and that makes sense to me, I can totally see that, I'm sure you can totally see that. So right now, the prime rate began in the current recession of these two quarters of negative GDP at 4%.

So if you say, "Well, you gotta take 2.4 off to restart the economy." That would take you down to 1.6. Can we get back down to 1.6? I don't know, the current prime rate is around 5%, so they keep jacking it up to give ourselves more maneuvering room to reduce it down, but we just don't know how far the rates will in fact go down, because again, that 2.4 points is an average. Some recessions, it took more to restart the engine, and some took less, and since we're very close, we have very low interest rates right now, it's possible at this time, the decline will be smaller because we don't really have that much room to maneuver with the rates, but I think it's all very reasonable that we would all admit that, "Yes, rates will have to drop before the recession ends." Why? Because that's how it worked in all prior 11 recessions over the last 70 years.

So if the prime rate when things began was at 4, it's a safe bet we have to be less than 4 at the end. Now how much less? I don't know, maybe it goes down to 3.25, maybe it goes down to 1.6, we don't know for sure, but we do know they're coming up on the horizon, at some point, the Fed will have to start dropping rates, and again, that is their only tool... The Fed doesn't have a lot to do as far as lots of arrows in the quiver to try to get the economy going again. It pretty much just has that one, it's got the smallest playbook in the world, it just has interest rates, and it's about all it can maneuver.

So the Fed has a tough choice right now because it has to decide between taming inflation and taming the recession, and the choice of which direction they take interest rates clearly favors one over the other. Right now, the Fed has announced they're gonna kill inflation. "We are gonna go out, and no matter what it takes, we're gonna beat down inflation." And to do that, they have to raise rates, and you've seen that. They've raised the rates, and they've raised them a lot. They've raised them up over a point and a half. And pretty soon, this month, here shortly, they're probably gonna raise them again. We don't know how much. They say 0.75 or maybe it will be a full point. We don't know, but right now, that seems to be their sole focus. We have the highest inflation in 40 years, and by heavens, they're gonna kill that thing off if it kills everyone. But then at the same time, if they wanna get the recessions ended and the economy restarted, they must drop interest rates. So they're in a tough position. They've got inflation, or even stagflation on one end of the spectrum, and the recession on the other.

But you also have to remember that the government, whether we like it or not, is just a bunch of people. It's no magical group, it's not a bunch of guardian angels that watch over us. No, it's just a bunch of professionals, some elected and some not elected, and they have a little problem right now, and it's our Federal debt. So right now in the United States, we are the poorest, brokest nation in the world. We have over $30 trillion of debt. It's crazy to imagine we're this broke and this poor because I remember at one time when we had almost no deficit whatsoever. In fact, during Reagan, we were less than a trillion, and during the Clinton administration, we were knocking that down on a regular basis. So it appeared we would get back down to zero.

And then overnight, we just went nuts and powered our way into $30 trillion of basically charged card debt. So that's where we've all ended up. And the problem is those higher interest rates are crushing on the US government. The total tax collection in the US is $4.1 trillion a year. Well, let's study where that goes for a moment. These are the 2021 stats 'cause they've not revealed the 2022, but mandatory spending from the government is $3.184 trillion and the discretionary is $1.593 trillion. And you're gonna say, "Wait a minute. You've already outstripped the tax collection. We only get a little over $4 trillion, and you just spent $4.7 trillion, $4.8 trillion, and we're not even to the interest cost." Yes, that's right. That's totally correct. The interest right now on our debt in 2021 was about $290 billion, but that was back at those low rates. If you start jacking that rate up on that debt, you are going to have a tremendous amount of interest to pay, roughly about a trillion.

So picture that for a moment. The government, which is already completely broke, deficits everywhere, and now you're gonna slap an additional 700 billion a year of interest on top. They're not gonna be able to do that. There's no way in the world. So the bottom line is, although Jerome Powell may be bluffing you and saying, "Oh yes, I am going to attack inflation if it kills all of us," he doesn't mean it. His own self-preservation would say he's lying to you, and he's lying to you because the government being the largest debtor cannot afford more interest to pay because we're already completely broke. So all of your government officials really are only giving lip service to this concept of raising rates and keeping them high. They can't possibly afford it. So as a result, they are going to have to start dropping them down.

And when it comes between the choice between battling inflation and battling the recession, I'll let you make the decision, which one do you think they're going to do? Battling inflation? Wait a minute now, inflation helps the Federal government. Inflation makes that $30 trillion of debt in real terms decline. Or let's raise the rates to the moon to battle inflation and take up $700 billion of additional interest cost. No. Instead they'd rather play the hero, dropping those rates and pulling us out of the recession. So that's why I don't think and why most economics don't believe and no one really believes that this interest-rate phenomenon is going to be long-term. It's just a question of how short-term it will be. Clearly they're gonna power through this year on this hunt to destroy inflation, this false premise that that's the goal of the Fed, only so they can go ahead and raise the rates up enough that they can then plunge them down and drop them to get back to a level where they can spur the economy to reignite.

So now let's take everything I just discussed, and let's overlay that on the mobile home park business 'cause that's why we're all here tonight. This is an MHU lecture series event. It's not an armchair Stanford economics major event. So all we really care about is, what does that do to the mobile home park business? Well, we know some things. We know that mobile home parks perform exceedingly well in recessions. So there's one thing that we do know. How do we know that? Well, the great recession, the great, grandpapa of all recessions, most of us have been through just recently, it's the most recent inflation other than the covid blip recession, and parks did fantastically during that period. How do I know? Because I was very much in the park business during that era. And here's what I saw. I saw that mobile home parks are all about affordable housing, and therefore recessions only make that demand higher.

So that makes complete sense. Right? So sure. Does demand for our product go up when things get bad? You bet it does. It certainly does. And we also learned from covid that mobile home park customers are pretty insulated from layoffs of every variety because they either work in essential jobs or they're retired. That's what they do. If you look at what happened during the covid era, almost all of our residents still maintained their jobs. They weren't in on essential items, they weren't in supervisory roles. They are the people who make America work, the ones that drive trucks and change tires and cook food and clean things. So as a result, we're pretty well insulated as an industry from layoffs in the mobile home park business. Also, mobile home park customers are not big investors in stocks and bonds, and so when things plunge and crash, they don't cry 'cause they didn't own any of that stuff. So if the stock market fell tomorrow by 1000 points, 3000 points, they wouldn't care, it's not gonna impact their finances whatsoever.

Also, mobile home park residents mostly own their own homes and therefore they have a serious skin in the game on collections. And this is something that was proven during covid like no other. So why did our industry do so much better than apartments when it came to collection? Simple. Our people own their homes and they rent the land, they knew if they did not pay the rent on the land, they would then lose their homes. And they didn't wanna do that. They wanted to keep those homes and therefore they would pay the rent no matter what because they didn't wanna lose their largest asset. And that's what makes our business so unique, where our residents are effectively stakeholders.

Well, it really becomes a very important thing when it comes to collecting money. And because they own the home and we own the land, we always seem to get paid. Also, mobile home park rents are stupid low and can be raised even in recessions and even in depressions and no one's gonna leave 'cause our rates are just so dumb, they don't even make any sense. And don't let the media for a minute, trying to make you believe anything different. With the average apartment in America now breaking the $2000 a month barrier, and the average lot rate in America we believe to be around $300 a month, but let's say it even rack up to $400 a month. Then there's no way you can tell me that a mobile home park is not a bargain to the consumer when their alternative is five times more.

Every time I say that, particularly if I'm talking to a journalist of some type, they say, "Aha, you are an idiot because the apartment, you get the whole thing but your mobile home park lot rent, you're missing the big part. You're missing the home." No. I think you'll find nationwide, about 80% to 90% of mobile home park residents own their home. So their all-in cost is simply lot rent. So when I compare it to an apartment, I'm basically saying, "Okay, if they don't live in their home in that mobile home park, what will they be paying?"

And then another person will say, "Yeah, but even then, you're still lying because they got a mortgage on their home." No, they don't. By far, the majority. Again, I'm gonna guess 80% of all mobile homes in every mobile home park in America, you see, their own free and clear are nearly paid off because most of the homes in your park are not something that occurred in the last few years with mobile home prices that have exceeded $60,000 to $80,000. They're back in the day, not that long ago, where mobile homes cost $20,000 to $30,000, and even then they've been paying down the notes for a long time. So our rents are crazy stupid low. It's just the fact of how it all turned out.

Now, they should be higher. Moms and pops fail. They fell asleep at the wheel and they never raised rents in line with inflation, and that was a terrible idea. That was really dumb. If they just raised them up a little bit every year, the rents today, if you average it out based on CPI and the value of the dollar, those rents today would average about $500 plus a month. But because mom and pops never kept track with inflation, you have to make up for decades of deferred inflation, and that's why the rates ended up being so low. But the bottom line is, even during the greatest depression of all time, could I raise the rent in any mobile home park $50 a month annually? And the answer is "yes." Until I reach a level in which my product is no longer a good value when compared to others, then I could continue to raise my rates. And that's exactly what's going to happen.

People think it's just private equity groups and others who buy up parks and then raise the rates usuriously. No, it's not all private equity groups, it's every other type of investor, and they all realize that to bring the old mobile home parks back to life, you've got to raise the rent, "And oh, by the way, our rents are ridiculously stupidly low." Also, mobile home parks are extremely insulated from inflation. Now, we all know we are in this inflationary stagflation moment. Let's look at how parks perform based in that environment. Our expense ratio in mobile home parks is about 30% to 40%. If we say the inflation runs 10% because that's roughly what it's doing, then only 30 to 40 cents of every dollar goes up by 10%. So that's only three to four cents. But if we raise our rents by 10% to make up for the 10% inflation in the United States, we actually are gonna benefit by six to seven cents.

Now, if you look at other industries who do not have as good margins as we do, if you look at, for example, a grocery store, you're gonna see it's not the same thing at all 'cause the grocery store only has about 1% to 3% of income. So if goods and services, products in the grocery store go up 10%, we'll have to raise everything up 10% and we'll eat up all of their profit. But our industry, because we have a much lower expense ratio, even in times of inflation, even in times with our insurance and property tax and water and sewer, if those all go up by 10% even and we raise our rates also 10% in keeping with the rest of the economy, then we actually are still getting ahead.

Also, from back when I was an economics major at Stanford, I remember a very simple fact, because I was fascinated with recessions, I remember there was a textbook that said... It had it broken down into things to do well in different kinds of environments. And it said that in a time of a recession or a depression, there's only two things you want to own. One, precious metals like gold, and the other is income-producing real estate, because what happens is, the real estate holds its value 'cause it's a very tangible asset and it's income producing. So that's why I always thought of real estate as being a great thing to be in, even back when I was at Stanford because I was a studier of recessions and because I believe they would occur on a regular basis. When they hit, you wanted to be in the real estate business, you wanna own a bunch of gold. That's just... If you look at most of your textbook today, you'll still see that's still part of it.

So it's just a given. The parks will do well in the recessionary, stagflation world, it doesn't matter what you throw at parks, parks just seem to fend it all off pretty well. So therefore, we don't have to worry about the business model when we discuss mobile home parks and recessions 'cause it's been proven over and over again, as recently as 2007, 2008, that it's an industry that does fantastically. In fact, it probably performs its best during recessions. So that brings up the subject of opportunity.

Now, let's first talk about my experiences with recessions, and I'll subtitle this How I Made My First Fortune During the Texas Savings & Loan Crisis in the 1990 National Recession. So before I ever got into the mobile home park business, which was in 1996, but after I got out of Stanford, I started my first company, a billboard business. Now, what is a billboard business? You basically build signs along highways and major secondary arterial roads and you then rent them out to advertisers. So you basically go to the property owner and you pay them rent to allow you to build the sign structure, and then you go out and you rent the sign structure, like a middle man, although the landowner would never dare to do such a thing and the advertiser would never put the capital in to build a billboard when they only might be on it for a year or so.

So I get outta Stanford and things are going great. I graduate in 1982, start my sign company up, and I'm just doing terrifically until the 1987, 1988 Texas Savings & Loan crash. And then my entire world started to fall in. It got so bad during the Texas S and L crash that every single highrise building in Dallas, every single one went into foreclosure. It was brutal. There were buildings that had just been built for $100 million that were selling on the courthouse steps for $10 million, $15 million. Everyone had heard stories of cases where a couple of highrise buildings might have gone bankrupt together and somewhere they made a mistake and they took it to auction and they didn't even really separate the two and they just gave the person the other building 'cause they were considered worthless during that period, things were so bad. And everyone knew people jumping off of roofs and out of windows. I had a billboard lease with a bank president, and I dropped it off for him to sign, we were in agreement he would sign it, I called in the morning to see if it was ready for me to pick up. And his assistant tells me, "No, I'm sorry. He just killed himself. He jumped off the roof of the bank." And yet I wasn't even that shocked because that was what we saw every day.

One time I went down into my building, my office building that I often stayed in Dallas to get my dry-cleaning. A simple menial task, until you go down and you see the doors chained shut because the landlord has gone after them for unpaid rent and they've run off with everyone's clothes, and I never got my clothes ever again. That same night, I took my wife out to a restaurant for dinner, and when I pulled the door, I found that door also chained shut. It was a landlord lockout. That's how bad things were. So here I was in this very depressing moment, I had gotten outta college, I'd built up this company, but who knew if I could keep it in operation? My rent had fallen 50%. It was very, very bad. Very depressing.

So I went over to Fort Worth, Texas with my wife and I was walking around the streets and I went in an old used-book dealer and right there near the door was a copy of a book I had never heard of before called The Man Who Bought The Waldorf, The Story of Conrad Hilton. So I bought a copy of it, I think I paid a dollar or $2 for it, and then I read that book and it completely changed my perception of what was going on, and it gave me hope. Now, what was it about the book that changed my life? Well, the story of Hilton, if you don't know, it's a fascinating story, I'll just give you little bits and pieces of it. Hilton grew up in his father's hotel out in, I believe, Cisco, Texas, a very small town in the middle of nowhere. It was a little [0:29:45.5] ____ hotel, two stories, didn't have a lot of rooms, didn't make a lot of money, life is tough, but Hilton had big dreams, he wanted to be somebody, he wanted to have a nice house and sports car and all this kinda stuff.

So his mother said, "Well, Conrad, if you wanna build big ships, you have to go where the water's deep, you gotta get into the city, you gotta go out there and think big." So he goes to the city, Dallas was his first stop, and he convinces a lender and some other folks, other capital partners to go ahead and build Dallas' first luxury high-rise hotel. And it does famously well. So using that model, he does it again and again and again all over Texas and the surrounding area. And so he thinks he's doing terrific, and then hits the Great Depression. So when the Great Depression hits, he loses every single hotel he ever built. All he has left is his parents' little motel out in Cisco, Texas.

Now, most anybody else at this point in the movie would've become very, very depressed 'cause Hilton was not a young man at this point. So he really thought he had it made, and then it was all taken away from him, and seemingly not his fault, he was a very great hotel operator. So what do you do, middle-aged, lost everything, what's the plan? Well, Hilton wasn't gonna give up. The average person might just curl up in a ball and lay on the ground and cry or just decide, "Well, I guess I better go get a job at a restaurant or something." But no, Hilton had a plan. Hilton went back to the lenders who had all foreclosed on him and said, "Hey, you know what? I may have lost the hotel, but you have to admit, I was pretty good at running these hotels back in the day." They said, "Yes, Hilton, you were the best hotel operator anyone had ever seen. So sad we had to take the hotel away from you." And he said, "Well, I have an idea. Could I manage the hotel that you took away from me?"

And they said, "No, we couldn't do that, that would be so awkward. I mean, you built this thing from scratch and then we took it away from you, you'd have such sour grapes, you'd run it into the ground, you'd want us to fail miserably because you'd want everyone to do bad. That's just how people are." And he said, "No, that's not how I am. I wanna operate them 'cause I built them and I think I know them better than anyone. And can you just give me a shot at managing it? And if I do a poor job, you can fire me, but I guarantee you, I'll do a great job." Well, most of the lenders said, "Well, if you want it... " Again, this is during the depression when no one's running rooms, no one's doing anything. "If you want them so bad, alright, we'll do a management agreement and we'll see if you can manage them." And so they did. But what Hilton was really doing was he was watching for the moment to buy them back. He had an innate sense that the hotel business in America could not remain in the dumpster forever. So he thought he'd be in the cat-bird position if he was managing them because then he would notice before anyone when the turnaround began.

Lo and behold, he noticed it. And when he saw the turnaround coming before anyone else even saw it on their radar screen, he went back to those lenders and said, "What would you want for this hotel?" And they said, "Well, gosh, Conrad, as you know, you spent a fortune building it, and today it's not worth almost anything." And so he got prices for them that were very, very low. And he went back to the same capital partners that had bankrolled him before and some new ones and said, "Hey, I wanna buy back the old chain."

Well, you would think they'd say, "Well, Conrad, you already lost all of our money, why would we work with you again?" But he was so fanatical that he had this plan, many of them were fascinated and said, "Well, okay, I'll throw some money in if you think you can buy your old hotels back and not lose them this time. Sure, I might be game just to see what will happen with it." And that's exactly what he did. He started buying not only his old hotels back, but as the economy kept improving, NOI kept going up, he had a great portfolio piece for raising even more money. Next thing you know, he started buying up all the other luxury hotels. By the end of the movie, Hilton had bought basically every luxury hotel in the United States of any stature. He owned the Palmer House, he owned The Plaza Hotel, he owned the Waldorf Astoria. He owned everything. Why? Because he realized that that recession would be short-lived. It was cyclical and it wasn't a time for him to cry, it was a time for him to aggressively start buying.

So I read that book and I thought to myself, "You know what? I'm just like Hilton at this point. My revenues are down 50%. I can either try and eke it out and survive and struggle through this recession or I can see it as a buying opportunity." So that's what I did. I started buying when everyone else was selling, and everyone thought I was stark raving nuts. I was buying $50,000 steel billboards for 5000 bucks. I once bought a million dollar portfolio of billboards from the FDIC of all people for about 200 grand. And when I sold my billboard company to a public company in 1996, out of curiosity I looked back at all those signs I had bought during the Texas S and L crash, and I realized that the bulk, about 70% of the total profit from my portfolio sale came from those signs. And what that means is that to me, that 1987, '88, and National 1990 recession was the best thing that had ever happened to me. So I learned from that that a recession can be good or it can be bad, but it's based on your perception and what you do during the recession. So you can look at it as a moment of terror or you can look at it as a moment of opportunity.

So that then begs the question, where is the opportunity in this recession? So what do you do with mobile home parks in the recession that we are already now in? Well, the first thing is you have to define, what is an investment-grade mobile home park? 'Cause buying mobile home parks on the cheap, if it gets to that point, still will not do you any good unless they're good mobile home parks.

So to us, a good mobile home park, one worthy of investment today, would have a metro population of about 100,000 people, a single-family home price of about $100,000, a three-bedroom apartment rent of about $1000 a month, 12% or less housing vacancy rate, which is the US average, and a diverse recession-resistant economy. We define that ourselves as most of the employment coming from government and health care and education. Because those are industries that even in the recession depressions, they don't lay anybody off, they're absolutely essential.

You also want a park with solid infrastructure in good functional condition. You want one that has density that allows for at least 14 x 48 homes, that is the smallest new or even used home, single wide that you can find to fit on the lot. And preferably lots that will hold 14 x 76, or even better yet, 16 or 18 x 76. You want homes that range in age from roughly the 1980s to new. A mixture is nice. You don't have to have all new homes, but you also don't wanna have a possible all 1960s and '70s pre-HUD homes. You want a location that's in a desirable suburb or an exurb or a safe urban area, and that you document that by doing a test ad and getting strong test ad demand. So those are the minimum criteria you need as far as a mobile home park you'd want to invest in.

And then you have to price it in a manner where you can pay the mortgage and yet have upside in occupancy, raising rents, submetering water and sewer and cutting costs. So the best deals you'll find in mobile home parks have been, are now, or will always be stabilized deals with upside. You don't want the park to be completely full, you don't want the rent to be completely at market. Either it has to be at market enough and full enough that it's liquid and you can get lending on it. Most lenders wanna see at least 80% occupancy.

You then are gonna wanna buy at higher cap rates that are necessitated by the increase in interest rates and then ride those interest rates down so you have a giant spread. So as the Fed is pushing these interest rates up, it's going to cause cap rates to theoretically go up because buyers will demand a nice spread, typically two to three points above interest rate. And then once you get that in position, watch the interest rates, as the Fed tries to restart the economy, come back down, so you'd capture an even bigger spread. So if you bought it where you had a spread of three points and then they drop rates two points, you would then have a five-point spread out of nothing, no effort on your part, just smart, strategic thinking, the rates are going to go back down.

Meanwhile, you're gonna wanna defend your position, defend your bet by constantly growing NOI to the playbook of raising rents, filling vacant lots and homes, submetering water and sewer and cutting costs. This is the basic playbook on how the mobile home park business works and the one that we've been following since we got in the business and the one we've been advocating for the last 25 years. Meanwhile, let inflation meet your debt down and allow you to raise your rents with freedom because, as we all know, inflation is great with debt, as things inflate, it makes the real value of that debt go down, so use inflation also as a driver.

They're gonna drop rates to restart the economy, they're gonna let inflation remain relatively high. They're both good if you buy a mobile home park properly. And then just basically just keep repeating that simple formula until you run out of your own capital that you want to invest in mobile home parks. And at that point, if you wanna continue on, get a capital partner or two, or maybe even at the other end of the spectrum, starting a Reg D5 or 6 or some other financial tool to raise capital to buy more parks.

But what do you need to do to prepare for this recession? If we're saying that the recession has a successful playbook, what you gotta do to get in position to do that? Now, in the billboard business, when I hit the Texas S and L crash wall and used that to my game, I was very fluent in billboards. I knew what a good billboard was from a bad billboard, and I knew how to run the ad space, so what do you have to do with mobile home parks to get prepared for the recession?

First thing you have to do is, you have to have access to debt. So the way I was able to buy up all of those billboards back when everything hit the dumpster was, I went out of Texas to find a bank that would play with me. And I couldn't even find a bank but I found a thing called Courtesy Leasing in Montgomery, Alabama. They were a leasing company. And the way it worked is you'd buy a billboard and they'd lease it to you for a number of years. If you made your payments, then you got it at the end for your final payment. So that's how I structured it. I had finally found a lender who would play ball with me despite the fact that most of your Texas banks were completely out of business.

Now, there are only a few ways to get financing for mobile home parks. Let's go over how those things are gonna work in the recession. Number one, mom-and-pop seller financing, it is not impacted in any way by a recession, so as a result you shouldn't have any problem with it. I don't really see any impact of the recession on mom-and-pop debt. Mom-and-pop debt is our favorite. That's how I got in the business, that's how Dave got in the business, so we love mom-and-pop seller financing. Next, you've got small-town banking. What will happen with small-town banking more than likely is you'll have what's called the flight to quality and also lower loan-to-values, and why this is the banks wanna protect themselves from you failing. So they figure that if they only go with parks that are nicer and they don't put as much a debt on them, there's no way they can go wrong, and it's true. It's a normal transition that bankers do when times get tough, is they do that flight to quality and the lower loan-to-value.

Conduit debt made to leave the building for a while during a recession. We haven't seen it happen yet, they're still making loans, but based on past experience it's very possible, particularly if there's a lot of interest rate instability, that the conduit lenders as a group will basically hit the brakes and just sit back and watch for a while before they go back to making lots of loans.

And then you have Fannie Mae, Freddie Mac, good old agency debt, but we don't really know how that's gonna work out because that hasn't really been a big player in the industry till now, so there really aren't a lot of prior recession evidence as to what they will do. But we have to imagine agency will be a lot more consistent than conduit will mainly 'cause it has the backing of the federal government.

Next, you have to learn as much as possible about how mobile home park investing works. You've got to understand what is a good deal from a bad deal so you can put any deal almost at sight in one of two boxes. Either it might be a deal or definitely not a deal, you have to have that ability to sort them. Until you can do that, you're not dangerous enough to really do a whole lot. So you have to look at a deal and be able to just say, "Based on what I've seen, what I've read, in my experience, this deal might be a winner and this deal is a failure." And it ties back to what we already talked about. Size of market, economic construction, single-family and multi-family pricing, all of those drivers, that's what helps you to figure out whether a thing is good or bad.

Also, you've gotta have confidence in your decision making. So tonight's conversation is great as far as giving you a little bit of insight, but if you really wanna do something with that insight, you gotta learn more about the economy and the mobile home park business. Read a lot more, don't just listen to me. Read other people's opinions on the recession, ponder them, ponder how they interact with mobile home parks. And when you are 100% convinced you know what you're doing, then you'll have the conviction to actually do something and then you'll gain confidence in your decision making. So don't come out of just this one lecture series event and say, "Oh, I have a mastery of it all, I know exactly how it will all turn out." No, you don't. You've heard some of my thoughts, but what are your thoughts? Read up on it, see what you think.

Also, you're gonna wanna build a giant deal funnel because the key item in finding good deals is looking everywhere for them. Online resources, brokers, cold calls, direct mail. Focus just on a sheer volume to find the best available deal at all times. There's no question that people who look at lots of deals, who make lots of offers always fare better in this industry than those who do not. The fewer deals you look at, the more you are reliant on luck. I don't like partnering with luck. Luck has been a lousy business partner historically for every business in America, so instead of luck, let's swap luck for actual effort and for playing the odds. And if you look at enough deals and you start to have knowledge of what you're doing, then you can start separating them into those two most important boxes.

So what are the conclusions that we would have from this chat on recessions and mobile home parks? Well, the first one is, yes, we are definitely in a recession. So the only question now is how long and how bad will it be, but let's just ignore those who say we're not in a recession. There are political motives in that. We're coming up to midterm elections very soon, within 60 days. So clearly, there are those among us who would want to pretend that we are not, that we're just doing great, our economy's booming. Those articles are ridiculous, do not believe those. I don't know of any economist in the world who would agree with any of those assertions. As you look through MSN every day and you go through the business section and you look down, you'll always see those articles by people who are shockingly qualified. People who are the heads of very large mutual funds or people who have experienced recessions before, made big bets and won, like the guy that did The Big Short. He's been writing articles on it. Even Warren Buffett and others are writing articles on it, and they all admit we're in a recession, so let's cut the nonsense, cut the BS that we're not, we clearly are.

Number two, the only tool in the US to battle any of this, the only thing the Fed has are interest rates. That's it. So if you wanna track what's going on in America with the recession and the inflation, simply watch the Fed and what they do. What is Jerome Powell up to? We know right now he's poised to raise the rates higher, but we don't know for sure what he's gonna do, but we know if you really look at past recessions, it's a pretty obvious cycle. You've got to raise the rates to battle inflation, then you gotta drop them to restart the economy, and because we have more recession now than any of those earlier recessions, except maybe back into the '50s. I'm not sure. But right now we're in a 40-year cycle high of inflation. Of those 11 recessions since 1950, the bulk of those did not occur during high-inflation environments, so we don't really know what the plan is this time, but we do know that the US economy, all the people employed by it, I'm sure even Jerome Powell himself in some regards have a vested economic interest in lowering those rates.

So my bet... But don't just go by my thoughts, come up with your own. But I am betting that interest rates right now are being used as a public relations tool to feign people into believing that America is all about battling recession. But I guarantee you... I'm sorry, battling inflation. But I guarantee they're gonna change over to the battling recession as soon as they can sell that sound bite to the media. And again, the average interest rate decline historically, from the very start to the end of the recession, has been 2.4 points. Now, the biggest decline ever was in the biggest recession over the last 50-70 years, and that was the great recession. There we saw interest rates go down all the way to zero, so that obviously skewed the results a little bit. But at the same time, we're back in the same boat where we are right now in many ways, including our national debt. So I would be shocked if you don't see rates declines, while maybe not hitting 2.4 points it's still gonna be probably at least a couple of points, and that's really, really good if you're a mobile home park buyer.

Now, the recession is a bigger worry than inflation for the Fed because again, they are paying to raise those rates. They have skin in the game. So it makes sense to me, if you believe that Americans and humans, all typically are in it to CYA, if you think people pretty much talk a big game but at the end of the day are only trying to protect their own interests, I think you're probably pretty much correct. And as a result, I think there will be a much greater focus on lowering rates going forward than there will be on raising them. When will that occur? I don't know, but I imagine probably some time next year.

I have the feeling that inflation will start to moderate. I've seen reductions in gas costs and other items, but I know that recession is gaining a lot of momentum as a talking point among politicians, in the midterm election, among the media. And pretty soon the Fed will have the easy route of saying, "Oh no, inflation was a big thing but the bigger story now is recession. And now I must tame the recession by dropping the rates." I think you'll be hearing a lot of that coming up. We all have to agree that mobile home parks do well in recessions, probably better than any other real estate sector or investment vehicle. We are in fact the dollar store of real estate. So as a result, when you're the dollar store, you do great. You've probably seen the articles recently, they're shocked. I'm not shocked. Maybe you're shocked that so many wealthy people are now changing over to stores like Dollar General or Costco. No, it makes complete sense. Everyone throughout America is feeling the brunt of the inflation and they're trying to be smarter shoppers.

There's certainly nothing wrong with that. That's the whole concept of capitalism. People compete for the consumer by offering different prices and people shop based on value. So mobile home parks, we are the kings and queens of value. We are the people who provide low-cost housing that's safe, clean, nice, good locations, and we do it at an exceptionally low, embarrassingly low rate. So when times get tough, mobile home parks are definitely where investors wanna go.

I recall during the 2007-2008 Great Recession, going to an NHI event out in Vegas, and people were talking to each other saying, "Hey, I don't know what's going on but let's keep America in the toilet as long as we can. This is the best thing we've ever seen from the park business." And it was. That Great Recession of 2007-2008, it ushered in the new era of mobile home parks. If you recall, a lot of your institutional purchasing came after that event, a lot of your significant rent increases came after that event, a lot of the manufacturers building lower-cost mobile homes to be sited on vacant lots all came after that recession. So recessions are terrific for the mobile home park industry.

Also, recessions can either be an opportunity for you or a nightmare. It is completely your choice on how you wanna look at it. Now, sure, there are those among us who will say, "Well, recession is a particular problem for me because I feel my job is at stake," and I would fully appreciate that. But assuming you can survive through on your day job or whatever it is that you have going on, you can either look at the recession as a very, very depressing moment, or you can look at it as the best buying opportunity ever. And remember that although recessions come in cycle, we all get progressively older and you may not get another good recession down the road, this might be your last one. I'm sure J. Paul Getty near the end of his life, and William Kaiser, no different, at every recession as they got older, thought, "Wait a minute, is this my last recession? I better go bigger this time, I better be more aggressive, I may not get this opportunity again."

So as long as recessions cycle, this issue will come up in your lifetime over and over and over. And so you can then approach it when it does come up in a positive framework and optimistic framework or a very negative one. That was the choice that I made back there in Dallas, back when I read Hilton's book, back when I was in my all-time low. I chose to make it a good thing, a profitable thing, and the proof was in the pudding because at the end of the movie, my billboard career, when I sold out, most of my profits had come because I had embraced the recession, I had grabbed that thing and ridden that thing like someone in a rodeo. But it's up to you. It's your choice. If you say, "No. No. I just wanna be depressed." Okay, that's fine. But for those of you who wanna do something positive during this recession that we are in, then I would urge you to take the bright side of that and to make the right steps to harness that power 'cause again, it doesn't come your way all the time. In fact, once you have mastered how a recession works you're gonna be really unhappy. Your depressing moment will be when times are good. You'll be there waiting for the recession to come, for the gun to go off, the race has begun again to buy good stuff using the recession playbook.

And it's really important if you're gonna get going to get into position now. Again, this recession has just begun, we are officially in one but none of us know how long it will last. Many economists right now say this could be one of the biggest recessions we've ever had, maybe as big as the Great Depression. Why do they say that? Well, they simply look at how extreme we are in many cycles, single-family home price and a stock market that values nothing, it's insane. Just look what happened with bitcoin and all of those economic things that people said, "Oh, this is a great investment that will only go up, up, up, up, up," only to collapse.

We have a stock market that does not even... Is not even measured by price-to-earnings ratio. When I was in college, we were taught in our stock class not to buy things that exceeded a 10 price-to-earnings ratio or a 10 PE. Today, some of the darlings of Wall Street, whether it be Amazon or electric car makers, they're valued at things that don't even tie to earnings 'cause they have no earnings. You cannot have a healthy economy where you don't base things on how much money they make. So the key is, if you wanna take advantage of the recession, you need to start doing it now. You need to start learning the industry and you need to start looking at deals, you need to start making offers. On that note, I will throw out, not in a self-serving manner, but if you want to learn the correct way to identify, evaluate, negotiate, perform due diligence on, renegotiate finance, turn around and operate mobile home parks, you should consider coming to our next mobile home park investors boot camp. It's coming up on September 23rd to 25th. It's completely virtual, so you have no travel cost or time to attend, but the bottom line is, do something. If you wanna harness the recession, you need to be in an industry that does well during bad times, mobile home parks fit that description. And you oughta understand how it works so you can make smart buys when things get really, really bad.

Bottom line to it all is we really appreciate you being here for this lecture series event called The Recession Playbook. It's a topic that I am very enthused and excited to bring to you because I'm hoping that some of you out there will listen to this and say, "Wait a minute, I like that plan. I realize that this is all about how I perceive what's happening right now in America, and I can either harness that power for good or for evil, it's all up to me". Because in America today, we've lost sight completely of accountability, but we all are completely accountable for what we do. If your life turns out like you want it to turn out, it's 'cause you did it, and if it doesn't, it's probably the choices you made. I would suggest you make the choice, if nothing else, to at least explore how recessions work and what your role can be to make that recession not a bad thing, but a good thing for you and your family.

I also wanna take this opportunity to thank Brandon Reynolds who puts together these lecture series events, without him, we would not be able to hold any of these. I have no technology skills at all, I think we all know that, so we appreciate Brandon for putting this together, and we of course appreciate you taking time out of your evening to chat with me, to listen to my thoughts on this unusual topic, hopefully you've learned something from this. And again, thanks everyone for being here. Have a good evening.