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The Allen Survey II - 1997 by Laurence G. Allen, MAI with George Allen, CPM Manufactured Home Communities Come of Age! "These Properties Are Solid Investment Opportunities for Large & Small Investors." So proclaims the title and subtitle of a recent feature article in the prestigious Commercial Investment Real Estate Journal (9-10-96). Seems recently, the entire investment real estate community is lining up to take a long and hard look at this Cinderella of income-producing properties. What is driving this renewed interest in an asset type that's been around for a half century? High physical occupancy (98.2% during 1996), healthy rent levels, low turnover (5% for manufactured homes proper and only 10% among homeowners/renters vs. 60% with conventional apartments dwellers) and one of the lowest operating expense ratios(38.2%)...data from the 8th annual Allen Report. Realizing the need to look beyond above-referenced basic performance indicators, we researched and prepared the inaugural Allen Survey in 1996. This year's Survey is much more than a refinement of last year's landmark statistics. Lead researcher Laurence Allen demonstrates how to use this never-before-published data to critically evaluate one's manufactured home landlease community investment(s). This Allen Survey is the same as last year, in terms of the information obtained. The results however demonstrate an increasing understanding of this important topic. In last year's inaugural survey, published in The Journal, we compared Survey statistics with those of a nationally recognized investment survey of other real estate asset categories including apartments, strip shopping centers, suburban office, industrial, and economy hotel. In general, the manufactured home community investment, as demonstrated by the Allen Survey, had the highest rate of return, with almost the highest capitalization rate, the highest rent growth and the lowest expense growth. These benchmarks still hold true with this year's Survey, although results indicate a tightening of the spreads. In this article we will not repeat the line-by-line comparison, but rather present a wider range of Survey results and two examples that demonstrate how these factors come into play in a real estate investment analysis. A direct capitalization and discounted cash flow analysis will be used to demonstrate these factors. This survey provides further insight into how manufactured home communities perform as investments as well as useful guidelines for the acquisition or disposition of a manufactured home community. The baseline or benchmark for this analysis is the Survey itself. We received responses from more than 45 owners of manufactured home community portfolios. The total number of communities that respondents owned was 563 and the number of homesites 129,804. In analyzing the results of this Survey, averages were used because it is the simplest to use and understand, even though results can sometimes be distorted by extreme responses. It is also helpful to look at low and high responses. The low and high provides a market-based range that brackets most responses. In terms of further describing the participants, it was observed that the average number of properties owned was thirteen and that the average number of homesites was 2,885. This works out to an average number of 222 homesites per community. The owners were domiciled in 17 states, with the largest number of respondents in California. Location, however, can be misleading since the home office of owners, and the location of their communities, are often in different states. Last year we defined the surveyed indicators. These remain the same and include the following: The "average" responses to these questions are presented in the following table:
The fact that this data is averages means that most responses were above or below the numbers reported, are useful in that they provide benchmarks for comparing what individual owners or investors think about the local market compared with the average response from 45 other owners and investors across the U.S. In order to better understand what these investment facts mean and how they interplay in a manufactured home community investment, we have utilized the average results and created a proforma valuation using direct capitalization. This is a valuation methodology that arrives at value by applying an overall capitalization rate (OAR) or cap rate to the stabilized net operating income, net income after normal operating costs have been deducted, but before interest, depreciation and capital improvements. The following chart is a valuation example using investment factors from the Survey:
The Gross Potential Income was based upon average rent of $235.57 times the average number of homesites(222). The Vacancy Loss was based upon one minus the average occupancy of 93.94% or approximately 6%. The Effective Gross Income is the Gross Potential income less the Vacancy Loss. The Operating Expenses are based upon the average expense ratio of 37.89%. The Net Operating Income is the Effective Gross Income less the Operating Expenses. The Overall Rate is the average cap rate from the survey of 9.51%. The Indicated Value is the Net Operating Income divided by the Overall Rate. The Value Per Site of $17,343 is the Indicated Value divided by the number of sites. Also presented is a Gross Potential Income Multiplier. This is calculated as the Indicated Value divided by the Gross Potential Income. In this case it works out to 6.14 which means that the hypothetical benchmark community is valued at 6.14 times its gross rents. Both the average, as well as the ranges in cap rates and multipliers are useful benchmarks for the acquisition or disposition of communities. Another way this data can be used in the analysis of manufactured community investments is by looking at implications over a ten year ownership horizon. This can be done by making certain additional assumptions including the rate of rent growth, the rate of expense growth and the residual capitalization rate. These items were also gathered in the survey and can be applied to our hypothetical valuation model to indicate the effects of these factors on the investment. To do this the net operating income was projected out 11 years which represents a 10 year investment and a sale at the end of ten years based upon the 11th year net operating income. Chart A is an example of this type of analysis utilizing the investment factors from the survey. |
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In addition to utilizing all of the factors from the previous example several other factors were used. The average rent growth rate of 4.07% was utilized. The average expense growth rate of 3.07%. The residual capitalization rate of 10.67% was used to capitalize the 11th year net operating income into a resale price. Based upon a purchase price of $3,850,222 and the assumptions based upon the average response levels from the survey the resulting internal rate of return is 13.39%. This is lower than the 14.21% average response from the survey but well within the low/high range of 12.08%/18.71%. The Survey results present the owner or investor in a manufactured community some useful investment benchmarks to evaluate his purchase/sale decision. Obviously each community and market is different and there is a wide range of rents, occupancies, expense ratios, cap rates, rent growth rates, expense growth rates and residual cap rates. What this survey does for the first time is to provide the industry with benchmarks for these important factors that will help it begin to evaluate investments in the same way other real estate asset classes are evaluated and create a more informed and efficient market. We would like to again thank the participants in this year's survey and I look forward to even wider participation next year. The previous paragraphs clearly demonstrate why the manufactured home community asset type is so popular these days. Further underscoring the reality that the millenium-spanning years of 1995-2005 are truly the Decade of Manufactured Housing and the Manufactured Home Community! For more information about the Allen Survey(or request free reprints of the Allen Survey #1 and the current Allen Report), call George Allen at (317) 888-7156. To talk with Laurence Allen about the Allen Survey, reach him at (248) 433-9630. |
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