Canadians seeking to diversify equity portfolios by gaining exposure to an alternate asset class should consider investing in real estate investment trusts (REITs)
Real estate investments are capital intensive. Consider that average house prices in Toronto are well over $1 million, despite falling more than 14% year over year.
Typically, homeowners opt for mortgage loans to fund these purchases. In the rising interest rate environment, though, this option is quite expensive. Alternatively, you can invest in REITs with as low as $5 and create an alternate income stream, as well as benefit from long-term capital gains.
Given these factors, let’s see if you should invest in Flagship Communities REIT (TSX:MHC.UN), shares of which have almost doubled in the last year.
What is Flagship Communities REIT?
Flagship Communities is one of the largest developers of residential manufactured housing communities (MHCs) in the Midwest region south of the border. Valued at a market cap of $1 billion, the MHCs are located in Ohio, Illinois, Indiana, Tennessee, Arkansas, and Missouri.
Flagship Communities REIT owns and operates a portfolio of income-producing housing communities. It currently operates 67 MHCs with 11,876 lots. These communities are located near business centers and other highly desirable areas in the U.S.
The REIT is well poised to accelerate growth by focusing on proven strategies. These growth strategies include aligning lot rents, leasing vacant lots, converting renter-occupied lots to homeowner-occupied lots, optimizing its cost base, and relying on accretive acquisitions.
The MHC industry is fragmented, allowing Flagship Communities to consolidate the market. For example, the top 50 MHC investors account for 17% of the 4.2 million manufactured housing lots available for rent.
With more than 5,300 MHCs in existing markets, Flagship Communities has enough room to expand aggressively in 2023 and beyond.
Should you invest in Flagship Communities stock?
Flagship Communities is the only pure-play publicly traded MHC investment vehicle in Canada that offers you an opportunity in the U.S. Over the years, the MHC industry has demonstrated a track record of outperformance across market cycles. For instance, the MHC industry in the U.S. has increased net operating income by 4% on average in the last 20 years.
Further, the industry is characterized by stable cash flows with low operational volatility and attractive returns on investment. MHCs operate on a land lease business model, allowing homeowners to rent a lot and place a home within the community. So, maintenance capital expenditures are much lower for MHC owners. Moreover, MHCs have a diverse and entrenched resident base with low turnover, minimal delinquency, and long tenure.
Home buyer appreciation of single-family homes should continue to outpace household income growth in the United States, indicating demand for MHCs will remain strong.
In the upcoming decade, Flagship Communities is looking to increase cash flow growth by improving occupancy rates and increasing lot rents. It has targeted value-enhancing investments and is eying acquisitions to expand its base of cash-generating assets.
The REIT has increased revenue from $15.4 million in 2019 to $55.3 million in the last 12 months. With its expanding revenue base, the company should be able to increase cash flows and dividends per share in 2023 and beyond. It already pays investors a dividend yield of 2.9%, which is quite tasty.