Flagship Communities Real Estate Investment Trust ("Flagship Communities REIT" or the "REIT") is an internally managed, unincorporated and open-ended real estate investment trust established pursuant to a declaration of trust under the laws of the Province of Ontario. The REIT owns and operates a high-quality portfolio of 54 income-producing manufactured housing communities ("MHC") comprising 8,793 lots, located in attractive Midwest U.S. markets. The REIT is positioned as a consolidator in the fragmented MHC industry.
Flagship Communities REIT is positioned to accelerate its growth by executing on its proven growth strategies. Organic growth initiatives include aligning lot rents with prevailing market conditions, leasing vacant lots, converting renter-occupied lots to homeowner-occupied lots, implementing value-enhancing investments, optimizing revenue and expenses, and expanding established communities by developing excess land. External growth will come through acquisitions. The MHC industry is highly fragmented, and comprised primarily of local owner-operators. With approximately 5,300 manufactured housing communities in the REIT's existing markets, there is a substantial opportunity for continued growth in the REIT's own backyard.
Opportunity to Gain Exposure to a Niche Asset Class with a Track Record of Outperformance
Flagship Communities Real Estate Investment Trust is the only pure-play, publicly traded manufactured housing investment vehicle in Canada. It represents a unique opportunity to invest in U.S. manufactured housing communities ("MHCs"). The MHC industry has demonstrated a strong track record of outperformance throughout all economic cycles, having achieved 20 consecutive years of positive same community net operating income growth. The U.S. MHC industry's net operating income has experienced an average growth rate of approximately 4% per year over this period, outperforming all other real estate sectors.
Defensive Asset Class with a Favourable Business Model that Outperforms Throughout the Economic Cycle
The MHC industry is characterized by stable and growing financial performance, with attractive investment returns and low operational volatility. Manufactured housing is predominately a land lease business model, whereby residents are owner-occupiers of their homes and rent a lot on which to place their home within a community. As a result, maintenance capital expenditures borne by MHC owners are generally minor and limited to community infrastructure. MHCs typically have a large, diverse and entrenched resident base with long tenure, low turnover, and minimal delinquency. Given the continued appreciation of single-family housing prices at a rate exceeding household income growth in the United States, management believes that demand for MHCs will remain strong from residents seeking affordable housing.
Fragmented Industry with High Barriers to Entry and Imbalanced Supply and Demand Dynamics
The MHC industry is highly fragmented and primarily consists of local owner-operators, public real estate investment trusts and institutional investors. The top 50 MHC investors are estimated to control only 17% of the 4.2 million manufactured housing lots estimated to be available for rent in the United States, presenting an opportunity for consolidation. Factors such as regulatory restrictions, competing land uses and scarcity of land zoned for manufactured housing development have limited new supply, causing an imbalance in supply and demand and creating high barriers to entry for new market participants. The REIT's management is unaware of any new MHCs having been built within its current operational footprint during the past 15 years.
Contiguous, High Quality Portfolio with Regional Footprint in Stable Markets
The REIT's communities are located in markets with stable population growth, stable employment trends and favourable regulatory environments. The communities are strategically concentrated within four contiguous U.S. states and are conveniently located near interstate highways, necessity-based retail centres, post-secondary institutions, healthcare facilities and major metropolitan employment centres. The regional footprint has enabled management to develop deep market insights and intelligence, build enduring relationships with market participants and establish a market-leading position. In addition, the geographic proximity of the communities allows the REIT to generate significant economies of scale and expense savings.
Well Positioned to Capitalize on Strategic Growth Opportunities
The REIT has identified four strategic avenues for growth:
- Organic cash flow growth through improving occupancy, increasing lot rents, and expense optimization initiatives;
- Targeted value-enhancing investments and community improvements;
- Third party acquisitions; and
- Expansion of certain communities through the development of excess land.
Management's extensive relationship network, deep knowledge of local markets and regular dialogue with local owner-operators supports the execution of off-market acquisitions within the REIT's current operational footprint and other target markets. The REIT can offer potential vendors tax-deferred Class B Units, providing them with an additional incentive to transact. The REIT can also access numerous sources of debt financing including government agency debt, commercial mortgage-backed securities and life insurance companies, providing significant flexibility to pursue acquisitions. In addition, the REIT has a preferential right to purchase MHCs offered by Empower Park, LLC, an entity controlled by the REIT's Chief Executive Officer and Chief Investment Officer. The MHCs owned by Empower will be offered at a discount to appraised value.
Vertically Integrated Platform Led by an Experienced and Aligned Internal Management Team
The REIT's management platform is composed of a fully integrated team of seasoned professionals with more than 50 combined years of experience across the full spectrum of the manufactured housing industry. The REIT's vertical integration will enable it to actively control, manage and execute across all aspects of MHC investment management. The REIT's executive officers collectively own an approximate 22.2% effective interest in the REIT, providing a significant alignment of interests with other Unitholders.
Stable Cash Yield and Conservative Capital Structure
The REIT intends to pay predictable, sustainable and growing cash distributions to Unitholders. The initial annual distribution is $0.51 per Unit, payable monthly. This provides Unitholders with an approximate annual cash distribution yield of 3.4%, based on an AFFO payout ratio of approximately 65% for the 12 months ending September 30, 2021. The REIT also has an attractive debt structure, with new Fannie Mae and Freddie Mac mortgages secured against 30 of its communities with 10 to 12-year terms, a weighted average interest rate of 3.11% per annum, and interest-only payments for the first eight to 10 years. The REIT is focused on maintaining a conservative leverage profile with a Debt to Gross Book Value Ratio of approximately 45% to 55%, long-term debt maturities, and a diversified capital structure to avoid reliance on any particular source of capital.