Damris Capital and Four Peaks Capital Partners are actively documenting the multi-year journey of our investment in an 84 pad MHP in Dothan, AL.
Last Property Update: October 2019
Why do we own a Mobile Home Park in Dothan, AL?
We Are Inflation Harvesters...
Inflation (the relentless increase of prices) is arguably one of the most consistent and stable trends in modern financial history. While most investors fear inflation, we see the stability of this trend as an opportunity to be harvested for predictable long term profits. We call this investment approach Inflation Harvesting™.
As an Inflation Harvester, we demand three simple requirements from the asset we own (all of which make MHPs the perfect tool to harvest inflation):
The asset is highly correlated with (wage) inflation - fundamentally tethered to wages.
The asset has access to secure & efficient leverage - low borrowing costs/good terms.
The asset must be “easy to hold” - Own Cash Cows (not Cash Hogs).
We encourage you to read more details about Inflation Harvesting™ in our new whitepaper (check back in late October).
Why Mobile Home Parks Specifically?
Great question... Read Our Whitepaper: The Investment Case For MHPs
How Damris invests in MHPs...
We are a group of like-minded Co-Investors building Diversified MHP Portfolios. We only partner with proven boots-on-the-ground operators that share our core beliefs (in and out of the parks). This Property Spotlight is highlighting an asset in our portfolio managed by one of our Strategic Partners, Four Peaks Capital Partners.
Property Overview
This Dothan, AL MHP was purchased at an attractive price for the cash flow it was producing; however, this property was purchased operating well below it's potential. It has relatively new infrastructure (Park built in 2000) with city water and sewer hook ups. With a proven Resident Plan and proper Capital Improvements (CAPEX) this Growth-Focused Property is expected to achieve excellent efficiency metrics and cash flow under our ownership. Moreover, because the neighboring park to the south commanded 30-40% higher rents with better occupancy, we have strong evidence that the market has tenants which are happy to pay much more for a higher quality community. A great (asymmetric) risk:reward opportunity.
MHP Investor Note: Due to the significant Capital Improvements required, Growth-Focused Properties often take 12-24 months before they are stabilized. As such they provide less cash flow potential in the near term (as has been the case on Sierra MHP to date), but more cash flow and appreciation later (which is why we try to balance these units with other value-add Income-Focused Properties, which are able to cash flow sooner). That said, all of these capital improvements are building equity while providing significant tax write-offs.
Sierra MHP Property Spotlight At Acquisition (July 2019)
Park Size: XX.XX Acres
Lot Count: 84 Pads
Tenant Owned Homes (TOH): 10
Park Owned Homes (POH): 71
Empty lots: 3
Average TOH Rent: $185/month
Market Rental Rate (TOH): $250+ (Over 35% Upside)
Average POH Rent: $260+$185=$445
Market Rental Rate (POH): $500 - $750
Occupancy Rate: 72.6%
Collection Rate: 69%
Annual Revenue: $##
Annual Expenses: $##
Operating Expense Ratio: ##%
Net Operating Income (NOI): $##
Purchase Price: $#,###,###
Cap Rate (@ Purchase): ##%
Sourcing The Sierra Mobile Home Park
This deal was sourced through a smaller, regionally focused broker. Four Peaks had spent several years cultivating this relationship by responding to other deals and giving feedback.
"Even when we pass on a deal, we like to give feedback to show the brokers we’re active --the feedback helps them reset expectations with Sellers." - Four Peaks Team
On-Site Pictures From The Due Diligence Period
The Value-Add Business Plan For This MHP
Drive Top-Line Revenue Growth by increasing lot rents from $185 to $250 over 5 Years while increasing units available for rent, improving occupancy rates and improving Operating Efficiency ratio.
In-Fill vacant lots with rent-able units
Reduce turnover by either Rehabbing or Replacing dilapidated units – the park was experiencing a lot of turnover due to the owners not doing much at each turn. Based on the adjacent park, we saw the opportunity to fix up inventory and bring our rents up to match that park.
Enforce rules – This is a "safe community"located in a strong school district for the area, with tenants reporting they leave their doors unlocked at night. However many residents were in violation of rules that devalued the park. They had pets despite a no pet policy. There were some residents parking commercial vehicles in the park (potentially causing damage to the road), along with other minor violations that needed to be cleaned up.
Add parking pads to improve curb appeal and avoid damage from cars parking on the grass (the cars would sink / get muddy on the grass).
Results & Financial Impact
We evicted quite a few non-paying residents in Q1, which is why the bad debt expense is so high. Overall this is a great community with a huge demand for residents, and we expect to stabilize the occupancy quickly.
Occupancy continues to climb throughout 2019
Two construction teams arrived in the first quarter of 2019 and diligently worked on the rehabbing of homes (see the results below). They are rehabbing 43 homes as per the business plan (the transformation is powerful as this is ~50% of the units in the park). They have completed XX as of Q2 2019 (scheduled to be done xx/xx/xxxx). You can take a look at the latest Rehabbed Property Listings For Sale/Rent on the property listing website here (filter to Dothan).
The Sierra MHP manager, Chris Caldwell, has been recognized for his excellence as a manager in the South East Region.
Signs of stabilization are clear: collections have gone from 69% to 100% and Income has increased by 42% from Q4 2018