By some estimates, the average retirement account balance for those between the ages of 65 and 75 is roughly $426,000. That seems like a big figure, but it really isn't when you consider that people are trying to live off of that sum during what may be decades of retirement.
Keeping expenses in check is going to be important for a large number of retirees. This is where manufactured homes come in. It's a property niche you can tap into via a trio of real estate investment trusts (REITs) that focus on this low-cost housing niche.
What a savings!
Averages are tricky things. One of the most common examples of this is that a bar with 10 people in it would have an average net worth well north of a billion dollars per person if one of those people happened to be Bill Gates. In other words, while the average retirement savings of those between ages 65 and 75 might be $426,000, there are going to be a lot of people with less than that figure.
For better or worse, that's a good thing for manufactured-housing REITs like Sun Communities(NYSE: SUI), Equity Lifestyle Properties(NYSE: ELS), and UMH Properties(NYSE: UMH).
Image source: Getty Images.
The numbers are pretty compelling. By Sun Communities' estimates, the average manufactured home costs about $0.98 per square foot, versus $1.98 for other rental options. The size of the average manufactured home, meanwhile, is around 1,250 square feet, versus 1,000 for other options in the same price range. And the average monthly rent works out to roughly $1,220, versus $1,980.
All in, that's roughly 25% more space for about half the price of alternatives. That's a compelling selling point for manufactured homes.
This is why REIT Sun Communities has been able to keep its occupancy high and growing, even during periods of economic weakness. For example, during the Great Recession, the company's U.S. occupancy levels actually increased, rising each year from 2008 to 2012. First-quarter occupancy was just under 97%.
Equity Lifestyle's manufactured-home occupancy was just shy of 95%. And UMH's occupancy increased 1 percentage point year over year in the first quarter to 87%. All of those are fairly strong numbers that are likely to remain resilient as more and more baby boomers roll into retirement.
Similar but different
Sun Communities isn't a pure-play manufactured-home landlord. Manufactured homes make up around half of its portfolio, with RV parks at about 30%, and marinas the remainder.
There are some overlaps in these businesses, but the latter two property types are likely to be more rewarding in good economic times than bad ones. That said, the core of the business is still manufactured homes, both in the U.S., where Sun is the largest public name by market cap in the sector, and in the U.K., where it's the No. 2 owner/operator. Notably, it has an internal expansion opportunity to add 7,000 more home sites to the roughly 118,000 it currently owns.
The company has increased its dividend annually for seven years, with a compound annual growth rate of roughly 5.5% over the past five years. The dividend yield is 2.8% today.
Equity Lifestyle is fairly similar, with a geographically diversified portfolio of manufactured homes in the U.S., as well as RV properties and marinas. The biggest difference between this and Sun Communities may be on the dividend front.
Equity Lifestyle has increased its dividend annually for 19 consecutive years, with a compound annual growth rate of more than 13% over the past decade. The dividend yield is about 2.8%.
But for dividend-growth investors, the slightly lower absolute yield will probably be well worth accepting for the dividend-growth opportunity. Notably, Equity Lifestyle is planning to expand its manufactured-home portfolio of around 171,000 locations by roughly 1,000 annually during the next few years.
The odd man out in this group is UMH Properties, the smallest company here. Its roughly $1 billion market cap is just a fraction of its competitors, and it only has 25,700 home sites. However, it's also geographically focused in the Northeast, though it's looking to continue its expansion into the Southeast. The REIT also hopes to add between 700 and 800 homesites a year over the near term.
The dividend yield tops its peers at 5.1%, but the dividend has only been increased for three years in a row, if you include 2023. The adjusted funds from operations (FFO) payout ratio in the first quarter was just over 100%.
If you're looking to maximize your passive income stream, this stock is worth a deep dive, noting that its growth plans should lead to higher FFO levels over time. Just go in knowing there's more dividend risk than with the other two options above.
Thinking long term
There's no right answer as to which is the best choice for an investor in this property niche. The three options above might actually suit different investors, from high yield to dividend growth. But the strong underpinning of the manufactured-home business, which offers cheap housing to cash-strapped residents, appears very attractive, given an increasing number of retirees.
Also worth noting is the fact that these REITs have fallen between 25% and 40% from their early 2022 highs, so they're now cheaper than they have been in a few years. And yet the yield on the larger manufactured-home REITs, where FFO payout ratios are comfortably below 100%, remains notably below the 4.2% yield for the average REIT, using Vanguard Real Estate Index ETF as a proxy.
That suggests that the sector still has a strong following on Wall Street. Given the trends noted above, you might want to join the group on that one.
10 stocks we like better than Sun Communities
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Sun Communities wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of June 5, 2023
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Sun Communities and Vanguard Specialized Funds-Vanguard Real Estate ETF. The Motley Fool recommends UMH Properties. The Motley Fool has a disclosure policy.
