As of writing, we are seeing many temporary factors that impact the performance of MHPs. Damris Capital is in a unique position to observe these factors as we manage multiple MHP investment funds that hold diversified portfolios throughout the United States.
Factors Impacting MHP Investments Through COVID-19
In the short run, the following will lower gross revenue forecasts, including:
Temporary decreases in collection rates.
Temporary halts of rent increases.
Temporary reductions in the top line due to waiving late fees/credit card fees and offering incentives to prepay rents in full.
Temporary slowing of CAPEX and marketing spending to reduce expenses.
Long Term Impact of COVID-19 on MHPs
Demand for Affordable Housing Will Increase
Just 7-10% of the U.S. population reside in mobile home parks (the most affordable non-subsidized housing available). If the overall financial position of American households degrades, that will open an opportunity for >90% of the population to trade into this more affordable living option.
Supply Of New Housing Will Wane and the Supply of MHPs Will Not Expand
After 2009, new construction came to a halt and a similar case will likely happen again. The impact was a decade of under-building and a supply-and-demand imbalance in the housing market which caused traditional housing to fall in affordability. The relative value of living in a mobile home becomes more attractive in such a scenario. Coupled with the fixed supply of MHPs due to wide-spread zoning restrictions and pricing-power is well supported.
Interest Rates Have Fallen And Are Expected To Remain Low
Every time interest rates hit a new low, the ability to create incremental cash flow from a refinance or new purchase improves. Over the coming years, cash-out refinance transactions may become increasingly attractive for investors holding the asset class.
Stricter Lending Criteria Results in More Renters
The real estate industry's access to financing during the lock down as been restricted, forcing would-be-buyers to remain or become renters. For example, one of the largest retail lenders, Chase, has raised credit score requirements to >700 and now requires a 20% down payment. This type of tightening affects affordable housing disproportionately where underwriting of potential borrowers is the weakest.
While the CMBS market has paused recently and local banks have remained cautious, there are signs that the lending market is re-opening, especially with the Fed acting as a stabilizing force.
MHPs Will Benefit From Monetary Inflation Triggered BY COVID-19
The US dollar is being diluted (ie. the pace of increasing access to dollars is outpacing GDP). This is not up for debate. Every tool in their toolbox is being used to support the economy, including, but not limited to:
Reinstating ZIRP - Zero Interest Rate Policy
Expansion of the Fed's balance sheet by several trillion dollars
Stabilizing markets by being a buyer of last resort
The Treasury has accelerated the pace of increasing the money supply -"printing"
Stimulus checks & stimulus programs - "helicopter money"
Where Will Price Inflation Appear?
Anything priced in dollars will experience monetary inflation. However, don’t expect inflation to show up universally. Many assets and commodities will experience a drop in demand that will cancel out the devaluation of the US dollar. This can lead to flat (or even deflated) prices in the face of the Fed’s aggressive “printing”.
For example, a barrel of oil is priced in dollars.
Let's imagine for one moment that the supply and demand of oil is stationary.
Each new day, as the dollar's value decreases, more dollars would be required to purchase a barrel of oil than the day before.
In reality, the current supply and demand forces of the oil market have a greater impact on price than monetary inflation. Recently, the global lock down resulted in over supply (due to a lack in demand) and the price of oil experienced massive deflation (even briefly going negative as suppliers raced to get rid of their inventory).
Should oil demand revert and stabilize with the supply coming into the market, only then would inflation be able to creep in.
Of course, if demand reverted but supply did not keep pace, the price of oil would increase. Scenarios like this are fairly common following extreme events. For example, its almost a certainty fewer oil companies will survive. It may take months or years before investment and CAPEX catches back up, quite similar to the under-building in residential real estate in the 2010s.
Monetary inflation is mostly likely to appear in assets, commodities, products, and services where demand outpaces supply.
We see MHPs as likely candidate of asset inflation, similar to its performance following the monetary expansion of 2008-2016.
Conclusion
Any of these factors by themselves would act as a tailwind for MHPs. A combination will be an even stronger force.
(higher demand) + (stable supply) + (low interest rates) + (monetary inflation)
= Long Term MHP Price Appreciation
We remain positive on the MHP asset class as a long term hold.
Why Do We Invest in MHPs? --> Access Our Whitepaper "The Case For Mobile Home Park Investments"
Disclaimer:
At the time of writing the author holds a sizable position in a Diversified Mobile Home Park Portfolio through several private equity funds managed by Damris Capital for Accredited Investors.
The author does not hold any positions in Energy stocks or derivatives.
Reference Sources In The Analysis:
https://fileunemployment.org/unemployment-benefits/unemployment-benefits-comparison-by-state/
https://mobilehomeliving.org/mobile-home-community-lot-rent-across-nation/
https://www.nytimes.com/interactive/2020/04/23/business/economy/unemployment-benefits-stimulus-coronavirus.html
https://www.cnbc.com/2020/04/23/weekly-jobless-claims.html
https://seekingalpha.com/article/4285003-apartment-reits-roaring-rents
https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2019/fast_facts19.html
https://fred.stlouisfed.org/series/EMRATIO
https://fred.stlouisfed.org/series/UNRATE/
http://www.trivisonno.com/wp-content/uploads/Food-Stamps-Percent.jpg
https://www.bls.gov/cps/definitions.htm#population
https://fileunemployment.org/unemployment-benefits/unemployment-benefits-comparison-by-state/
https://www.businessinsider.com/percentage-workforce-employed-by-government-every-us-state-2019-1
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.html