October 15, 2013

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Written by Dawn Wotapka - The Wall Street Journal

Private-Equity Firm Adds Trailer Parks to Its Diverse Portfolio

Carlyle Group LP, a private-equity firm that has interests in everything from an oil refinery to a vitamin maker, is adding trailer parks to its portfolio.

The Washington-based company has struck a deal to acquire two Florida communities for a total of $30.8 million. The sellers are two entities managed by Shamrock Holdings LLC, a Paradise Valley, Ariz., owner and operator of communities, said owner Patrick O'Malley. The deal is expected to close this month.

Carlyle declined to comment. But analysts said the deal is evidence that big investors are betting that the demand for low-cost manufactured housing, the latest generation of trailers or mobile homes, will rise as other housing alternatives become too expensive for a number of Americans, especially senior citizens.

Landlords like the steady income stream—tenants tend to stay put, especially retirees—and the low maintenance costs. Also, the communities are easy to run and typically stay full and see rents increase during market downturns.

Carlyle's presence will "create awareness of the industry…and help legitimize this space as worthy of investment," said Frank Rolfe, vice president of MHP Funds, a private owner of about 9,000 individual lots in 82 communities nationwide. "The industry struggles for respect. It always has."

According to brokers, investors are particularly interested in communities geared toward retirees who are more likely to have steady income from Social Security and other retirement benefits. Such communities were 92% full in October, according to research firm JLT & Associates.

The two communities that Carlyle is acquiring, Village of Ponce de Leon in Melbourne Beach and Sun Valley Estates in Tarpon Springs, both cater to those 55 and older. At Sun Valley, occupancy is 89% and average rents are $582 a month, Mr. O'Malley said. Village of Ponce de Leon is 82% full and has average rents of $681, he said.

Mr. O'Malley said "less sophisticated" buyers might have been turned off by the vacancy rate, but Carlyle "worked with us to structure a deal around the vacancy so that the price made sense for both parties."

Manufactured housing has come a long way since its trailer-park days. Many of today's manufactured homes resemble single-family residences, with several bedrooms, backyard patios or decks, wooden kitchen cabinets and stainless-steel appliances. Some trailer-park communities are located near lakes and rivers and boast amenities ranging from swimming pools to tennis courts.

Prices for the manufactured homes are substantially lower than typical housing. Residents often purchase the homes at prices that can range from less than $10,000 to up to $200,000. In addition, residents also must pay a monthly rental fee to a landlord. Those fees averaged $391 a month in October, up 2.3% from a year ago, according to JLT, the highest level since the firm began tracking in 1996. Owners of the park communities make most of their income on the monthly rental fees, although they also own some of the homes and rent them out to tenants.

Because the cost of relocating a home is expensive, residents are less likely to move away. "Our customers have no alternative shot at homeownership, nor do they [normally] even have the credit scores and quality to seek anything better," Mr. Rolfe said. "They never leave the park they are in, and the revenues are unbelievably stable as a result."

Of the three publicly traded owners of manufactured-housing communities, shares of Sun Communities Inc. have climbed 6.8% this year and Equity LifeStyle Properties Inc. are up 5%. UMH Properties Inc. is down 3.6%. In comparison, the MSCI U.S. REIT Index has increased 2.5% in 2013.

To be sure, not everyone wants to own manufactured-housing communities because the sector isn't widely established as investing in apartments or other real estate.

Still, increased investor demand is pushing up prices of individual lots. Hometown America, a private owner and operator of manufactured-housing communities, recently paid $38 million, or nearly $121,000 a lot, for a 315-space community in Prescott, Ariz. The price was the highest ever paid per unit in Arizona, said Evan C. Barry, an associate director with Marcus & Millichap's National Manufactured Home Communities Group, which represented the buyer and seller.

Sam Landy, chief executive of UMH Properties said individual lot prices have jumped nearly 50% in the past two years. It expects to pay an average of $40,000 per lot this year, up from $26,000 in 2011. That hasn't decreased UMH's appetite for deals: It expects to spend about $38 million on land purchases this year.

"If we could find more deals, we'd do more," Mr. Landy said. "There are many more players looking to buy."

The industry has made a remarkable turnaround since the 1990s, when lax lending standards fueled a boom in shipments of new manufactured homes that led to a bust. A wave of repossessions left plenty of cheap, used manufactured housing available. The industry's woes worsened during the housing boom, when mortgages for traditional homes were easy to obtain.

The WallStreet Journal