Jason Sirotin:
It is nice to hear from you. We have been so busy. We haven’t done enough of these, so I’m glad that you hit me up today, because just when I thought that the mobile home park industry was going to be down and out with the coronavirus, somebody on your team, a guy we’re about to meet, broke a state record for a mobile home park sale. That’s crazy.
Glenn Esterson:
He did. He did, and we’re closing deals often and frequently. And at the same time, if anything, the coronavirus has shown the MH industry exactly how strong it is and how much of a gut punch the economy can take, and us in the industry not really having too much effect from it, Rent collections across the board are on par with where they were pre-COVID. And deals are still going under contract. Deals are still getting listed. Deals are still getting sold. And in this case it was a heck of a sale that my teammate Brandon did. And let’s introduce him real quick.
Jason Sirotin:
Yeah, so joining us is Brandon Pearson. Brandon, how are you?
Brandon Pearson:
Doing well, doing well. Hey, thanks for having me.
Jason Sirotin:
Congratulations, man. Quite a feat. We can’t go into all of the details, of course, but can you take us through? How long were you working on the sale? When did it originate? How did it close? How did it go down? And then, on the other side, I’m curious just how you felt when it all went down.
Brandon Pearson:
Yeah, no, absolutely. So, we put that deal together back in January, and COVID happened. Rent collections were still strong. There’s obviously a bunch of hurdles to get over with something like this. I mean obviously, it’s unprecedented, but we were able to just keep the buyer in it and push forward to the finish line. The rent collections, I think, was probably the biggest issue, but we’re still able to command highly aggressive pricing, a four cap deal. So class-A assets are certainly still bringing great demand, and that’s the biggest thing.
Glenn Esterson:
Absolutely. Hey, Brandon, on this transaction, this started from a normal pursuit that we do with a lot of guys. We’re on the phone with the buyer. He’s like, “Hey, find me something like this.” And it was a mom-and-pop who called, and you were able to put this together quietly and off-market with the mom-and-pop, get a mom-and-pop paid top dollar, and I know they’re happy about that. And get your client a hell of a deal, even though it’s on surface level you might have some sticker shock when you hear low forecasts. So talk about that a little bit, how you were able to kind of convince the seller that the buyer was a real buyer and convince the buyer that the pricing wasn’t something to be scared of? Where was the value at on something like that, that made this deal attractive and a forecast not scary?
Brandon Pearson:
Yeah, realistically, I mean, it was simply just a function of the amount of upside through utility bill back, low rent, that sort of thing. So it was a whole lot of lots, so each one of those lots that get the utility bill back makes a big difference. And they were able to go in there and just kind of see the vision of the park itself and able to make sense of it. So it might sound [inaudible 00:04:04], a low four cap deal, but in all realities, they’re going to operate it at a pretty attractive rate in my opinion. And that should be sooner rather than later.
Glenn Esterson:
Exactly. I mean, when people look at these deals and they forget to account for the value add-in in current rent versus market rent. And when they forget to add in the value added of the vacant lots and all those little things, and then especially the bill backs that are not maybe currently happening at the point that the park is uncovered, but eventually could with the right people and they’re putting this heavy infrastructure in. That makes this deal worth millions more than this. And this was already a mid-10-figure deal. So, I mean, there’s still value to be found in deals of that size. And then, there’s still that same concept of a deal on deals that are in that under five million range. For most of the audience that’s listening, we can still apply these same exact tactics onto some of these smaller deals that you guys are looking at.
It’s just a matter of way of looking at things and not being scared of the going-in cap rate. Everybody seems so terrified of a going-in cap rate that’s the below a six. Guys, it’s not scary anymore if you understand there’s upside, and you understand the debt. So Brandon, with this deal from tip to tail, it sounds like you had it first contact to close in about 120 days. So how many calls did you have to make to put that thing under contract?
Brandon Pearson:
Three.
Glenn Esterson:
Three. And for the sellers out there that might be listening, and you have a high quality asset, please, now’s the time to take a look at some valuations. We’re getting top dollar across the board. We do not feel impacted. We have six closings scheduled for June already, and there’s a lot of light coming back to the game. So if you’re on the sidelines that are just curious what the values are, reach out to Brandon. If you’re out in the Colorado region or in the Northwest region, or somewhere on the western side of the Rockies, he’s your man. He definitely will be able to help you with some valuations. We’ve got a whole team behind him that’s going to help him with the valuations as well. So, Jason, what else would be interesting to talk about on the show? I know we don’t have a whole lot of time, but we want to talk about this deal and there’d be a few other things.
Jason Sirotin:
I mean, I want to know the emotional side. Brandon, when you closed that deal, that must’ve been really exciting.
Brandon Pearson:
Yeah, no, I mean, I think it’s going to work out well for the buyer, and that’s my main concern. So as long as it performs well for them, I’m a happy camper. And obviously, it was a sizeable deal, so very excited about that. But no, it’s my client’s interests that certainly come first. So as long as they’re happy about it, then I can pretty much celebrate it.
Jason Sirotin:
Yeah, that’s awesome, man. I think it’s really cool. Have you guys seen… I know Glenn you’ve talked about deals are alive. Deals are closing. Has anything really changed in the business? Have you seen a shift?
Glenn Esterson:
Yes, yes. There’s definitely been a shift. And the shift, that at least I’m experiencing with all of this from the transactional level, is that that banking became even harder than it already was because CMBS dried up. And we’re not doing any CMBS loans. So deals are now having to be priced, if they can be financed by a Fannie loan, or if it’s going to have to be a community bank or a cash deal. And community banks have a major backlog. They’re still going to have a hard time doing a deal in less than a hundred days right now. So from a seller standpoint, the financing has been a real trick with this. If it’s a quality deal, Fanny right now, Fannie Mae, Freddie Mac, there’ll be all over this stuff. They really like mobile home parks right now. And one of our really good clients, who I just admire highly, he was able to just get a new purchase loan closed on a deal that was maybe two, three weeks ago in Massachusetts. He was able to get a Fannie loan, a non-recourse loan, on a deal that was his first purchase in that state. He is a large owner and owns a lot of parks, but they gave him 10-years interest-only on a 30 year loan. Non-recourse-
Jason Sirotin:
How the hell did he get a no… I don’t even understand.
Glenn Esterson:
2,45%, less than two and a half percent interest, non-recourse, 10 years IO.
Jason Sirotin:
Could I get that?
Glenn Esterson:
[crosstalk 00:09:08] he had to put down. I don’t know if anybody can get that. He’s kind of been climbing up the ladder really quick, and he’s got some great connections in the banking world. But these things do exist in the stories, for the guys that are qualified are able to do that. And so you have to put down more reserves. I think he had to put like two and a half years of reserves down, which is no small chunk of change, but he gets half of that back in one year. And with a low interest rate and interest only like that, it makes it very attractive. I don’t think, on the deal that Brandon’s just closed, we were privy to the financing side of it. But Brandon, I am curious. Was their agency debt on this? Or how did that look on this deal?
Brandon Pearson:
I can say that it was agency debt, and it was a phenomenal loan. Outside of that, I can’t really disclose much else, but it was a solid loan.
Glenn Esterson:
Yeah. And that’s what we’re seeing across the board for guys that are qualified. If you’ve got 10 or more properties, and you’ve got a hundred million dollars maybe worth of assets, you’re probably going to get some insane type of financing right now, if the park itself qualifies for Fannie-type of debt, [inaudible 00:10:20] and all that kind of stuff. But the lending world is open, but it’s a small window of people that are able to do that. And so the effects from COVID, we lost financing. That caused a lot of sellers to pull out, because most sellers with good parks are not going to sell in a down market. They want to only sell the top of the market. And they’re only willing to get paid top price. So by them pulling out of the market, we’ve seen all these buyers coming to the market, thinking there’s blood in the water.
It’s actually, even though our cap rates haven’t receded at all, debt has gotten cheaper. And our prices didn’t go up as they typically do, because we typically chase a cap rate a point and a half to two points above what the achievable debt is from a bank for that deal. We aren’t doing that necessarily right now. It’s kind of maintaining more of a two to a two and a half point spread, whereas before COVID, that wouldn’t have been the case. So, it’s really retaining a seller’s market right now. And the buyers that are there, that aren’t looking for blood in the water, are some of the best buyers out there. I’m under contract with numerous institutions right now, and they make my life so much easier to get a deal done with. There’s not nearly as much emotion.
But for the guys that are buying their first or second or third park, it’s going to be emotional. And it’s going to be harder to understand how to get to these numbers that are being achieved, especially when all your gut feelings and logic say the economy is in shambles right now, or will be, or might be, or can be with enough time if we don’t get back to work, and all these things. But it’s not having an effect on the lowest on the lowest rung of the ladder for housing. And that’s exactly why the safety net for MH is so enticing to institutional-style investors at this point, because they’ve seen that, even during the recession, MH rents were still growing year over year. And now we’re going back into what might be the same kind of recession, maybe smaller, maybe bigger. We don’t know, but we’re pretty confident that collections as a whole are going to remain pretty solid for MH above any of the other real estate verticals that we’re following.
Jason Sirotin:
So what else is going on with you guys? What kind of deals do you have going on? Anything that might interest me?
Glenn Esterson:
Sure. Yeah. We’re a shoe for every foot, right? I mean, we got a lot of great guys on the team, and we source deals. I mean, geez, we’re closing a deal that’s $335,000 for $45,000 here in three or four days, five days in North Carolina. And as you heard, we just closed the deal up in the mid-10 figures for the Northwest. And we do everything in between. Right, now we have about a hundred million dollars, plus or minus, of parks listed and/or under contract. I think about two-thirds of them are under contract right now. And these aren’t just contracts that have only been getting extended. These are newer contracts. I just put a $24 million portfolio up in the Midwest under contract. And it’s looking like that thing’s going to get moving. And that was also a nice, quiet off-market deal.
And so things are moving on all levels, but the buyers in that below-million dollar range are having the hardest time getting to the finish line. But we have deals for everybody. Brandon, you’ve got a couple of nice deals. Why don’t you tell them about a couple of your deals?
Brandon Pearson:
Yeah, we’ve got a deal down in Colorado Springs right now listed, 3.7 million, 55 lots, phenomenal mobile home park market down there. We’ve got that. We’ve got-
Glenn Esterson:
What’s the upside on that one?
Brandon Pearson:
Realistically, it’s a little bit low in rent. So there’s a little bit of room on that. And then, there’s opportunity to do a utility bill back as well. So you can [crosstalk 00:14:27]-
Glenn Esterson:
And all together you can reduce… What was it? It was $70,000 of utilities expense in that deal.
Brandon Pearson:
Yeah, around there, 65,000.
Glenn Esterson:
Around there?
Brandon Pearson:
Yeah. I mean, that’s [crosstalk 00:14:39] deal for anybody that’s comfortable with Colorado Springs.
Glenn Esterson:
And Colorado Springs is one of the hottest markets in Colorado. And this is a nice little park. It’s a mom-and-pop park, and it’s got value add. And this is the kind of stuff that really flies off the shelves when people start kind of hearing about it. And you’ve got another nice deal too. Tell us about that one.
Brandon Pearson:
Yeah, we’ve got a deal right here in Englewood, 20-lot, 1.7 million. It is a little bit price-heavy, but the location, I mean, it couldn’t be any better.
Glenn Esterson:
[crosstalk 00:00:15:11].
Brandon Pearson:
It’s right there on… Yeah. It’s on one of the main thoroughfares through Englewood to Denver. So, I mean, there’s plenty of public transportation right there as well.
Glenn Esterson:
It’s got excellent ingress and egress. This is not a mobile home park that stays a mobile home park. It’s a future land development of some sort. It’s a good quarter. It’s great access. And it’s seven miles from downtown Denver.
Jason Sirotin:
Man, I have businesses in Colorado, so that sounds sexy. I wish it wasn’t so much, 1.7 for 20 units. Are the units old or are they newer?
Glenn Esterson:
It’s all lot rent. And an older type of park, as most things are in the Denver markets, but this is the kind of park that you upsell your tenant base by giving them financing options for newer homes. And you slowly upgrade this deal, if you’re going to retain it for 10 years or 20 years waiting for the land to become so valuable. And this is the kind of thing that you can do to play around with it. You have below market lot rents there. You have a very clean, clean park. So homes aren’t terribly old, but they’re eighties and nineties, or seventies and eighties, something like that. But they’re in decent shape. And Brandon, they’re all tenant-owned, right? There’s no park-owned homes there.
Brandon Pearson:
All tenant-owned homes, yep.
Glenn Esterson:
All tenant-owned homes, so there’s some real inherent value in that from the time-headache value model that I talk so much about. But the sticker shock scares people, especially for the guys that are unsophisticated in this business and have been taught, “I only buy 10 caps.” It’s unfortunate for those guys. They might be finding them, but they’re not finding them through brokers, because the brokers are out of things that… We’re stressing to find eight caps right now. You know what I mean? I have an eight and a half cap out in North Carolina in the Fayetteville market. It’s a $750,000 deal or so. In my world, there’s so much value in that deal. And now people are still thinking that because it’s below a million dollars and it’s COVID that there should be more meat on the bone.
So there’s a very fine line between the guys that are actually going to win through this whole experience and come out ahead on the top of the next cycle, and these guys that are going to argue about 10 caps. They aren’t just going to get deals anytime soon, or they’re going to have to buy some really hairy-looking deals to get the 10 caps. That’s kind of how the market has been for the last couple of years, but now we’re kind of seeing it go more so in this direction of the unsophisticated losing out and the sophisticated just consolidating the heck out of the market right now. And I mean right now. I mean through this whole COVID period, because that’s the Rambo. They’re here to dominate. There’s 60,000 parks owned by probably about 15,000 people.
And of those 15,000 people, half of them are parks that will never make it up to anybody’s table. They’re just small, tiny little parks in the middle of nowhere. So really what you’re left with is 5,000 owners give or take 8,000 owners maybe next. And of those, a hundred of those owners are trying to consolidate the rest of the industry. And you can’t blame them. The economics work wonderfully when you consolidate. So that’s what the new guy, who’s trying to buy a 10 cap, is up against. There’s a guy who’s got a much bigger idea of what the value inherently is in this industry.
Jason Sirotin:
Man, you guys know a lot about this stuff. I’m always shocked. It is an insane amount of information on so many pieces of property. I love the deals that are going on. Brandon, congratulations on closing your deal. And Glenn, congratulations on rocking it out during COVID. That’s so good to hear. It’s nice to hear that people are still on the grind and getting things done. If you’re interested in talking to Brandon, you can reach Brandon at [email protected]. And if you want to talk to Glenn, you can hit up Glenn at [email protected]. And Glenn, what’s your phone number if you want to reach out?
Glenn Esterson:
(423) 483-0492. Of course, you guys can always call our hotline number, and somebody will answer and get you to the right person to talk to about your deal, whether it’s me, Brandon, or somebody else on the team that might be most appropriate. And that phone number is (720) MHP-4YOU, MHP-4YOU. I don’t know what the real numbers are offhand, otherwise I’d tell them to you, but if you look on your phone.
Jason Sirotin:
No, I hate that. You got to look at it. It’s like doing Morse code.
Glenn Esterson:
(720) MHP-4YOU.
Jason Sirotin:
And you can visit Glenn’s website at themhpexpert.com. On behalf of the Mobile Home Park Expert Podcast, I’m Jason Sirotin for Glenn Esterson. We’ll see you next time.
