Many homebuyers stayed on the sidelines in 2023 because of high mortgage costs. Real estate investment trusts (REITs) also lagged and underperformed relative to the broader market due to the high-interest rate environment and elevated inflation. I, too, have reservations about investing in REITs in 2024, particularly sub-sectors sensitive to interest rates.
However, I’ve changed my mind about one REIT that showed resiliency amid massive headwinds. Flagship Communities (TSX: MHC.UN) reported a 52.5% increase in net and comprehensive income in 2023 versus 2022. The $434.5 million REIT also proved that the manufacturing housing communities (MHC) industry is more defensive than other real estate sectors.
If you invest today, the share price is $16.30, while the dividend yield is a decent 3.47%. The Canadian stock started paying monthly dividends in November 2020 and hasn’t missed a payout.
REIT Overview
Flagship Communities is a REIT that owns and operates family-oriented MHCs in Midwest U.S. markets. The property portfolio consists of 73 income-producing MHCs (13,310 lots) in desirable locations in Arkansas, Illinois, Indiana, Kentucky, Missouri, Ohio, and Tennessee.
Besides the MHCs, Flagship owns approximately 1,200 manufactured homes for lease to residents and two recreational vehicle (RV) resort communities in key markets (470 sites). The business or homeownership model of manufactured housing is predominately a land lease, whereby residents are owner-occupiers of their homes and rent a lot within a community.
Maintenance capital expenditures are minor and limited to community infrastructure, as MHC owners shoulder all costs. The low operational volatility enables the REIT to deliver attractive returns and sustain monthly dividend payments.
Flagship’s large, entrenched resident base, long tenure, low turnover, and minimal delinquency are competitive advantages. As of year-end 2023, rent collections were 99.4% compared to 98.7% in 2022.
According to management, Flagship Communities is Canada’s only pure-play, publicly traded manufactured housing investment vehicle. The REIT expects demand for MHCs and affordable housing in the U.S. to remain robust. Moreover, it is well-positioned to be an industry consolidator.
Financial highlights
In the 12 months ending December 31, 2023, net operating income (NOI), revenue, and net income increased 20.5%, 20.8%, and 52.5% year-over-year to US$46.9 million, US$71 million, and US$65.1 million, respectively. The same community occupancy rate rose to 1.5% to 84.8% from 83.3% a year ago.
Notably, Flagship maintains a conservative, low-cost debt profile. The REIT has no substantial debt maturities until 2030. Its ongoing strategy is to convert rental homes to tenant-owned homes from time to time. The rental home fleet may also grow due to property acquisitions and targeted additions based on community needs.
Near-term objectives
Flagship Communities offers an opportunity to invest in MHCs and RV resort communities in attractive U.S. markets. Its primary objective is to provide unitholders with predictable, sustainable, and growing cash distributions.
The near-term growth strategy is to expand the REIT’s asset base in its existing operational footprint and target growth markets. Thus far, the stable and growing same-community occupancy rate since 2018 reflects the REIT’s successful organic growth.
Investors should be comfortable investing in Flagship Communities because of its defensive nature, niche asset class, and dividend track record.
