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Welcome to the Mobile Home Park Mastery Podcast where you will learn how to identify, evaluate, negotiate, perform due diligence on, finance, turn-around and operate mobile home parks! Your host is Frank Rolfe, the 5th largest mobile home park owner in the United State with his partner Dave Reynolds. Together, they also own and operate Mobile Home University, the leading educational website for both new and experienced mobile home park investors!
I like Sun Communities. They do an excellent job as one of our top three US REITs for the mobile home park industry. They operate their properties well, they do a great job, but unfortunately, they went down a strange path recently, and I thought we'd review it. Not in any way to condemn what they do. They've been a very, very successful operator, but instead just to plow through the lessons learned. Because it's very rare in our industry that you see a loss on a mobile home park deal. This is Frank Rolfe with the Mobile Home Park Mastery Podcast. We're gonna talk about what happened to Sun out there in the United Kingdom, out in England, across the ocean, because I think there are a lot of lessons learned from the way that transaction went down. So in April of 2022, Sun, which is one of our American REITs that services just mobile home and RV parks, they bought a group called Holiday Parks in England for, I believe, if you look at AI, about $1.2 billion. And then they held it for five years, and then they sold it recently for about $768 million, or at least that's what it reports online, which theoretically means you lose about $500 million in the transaction. In fact, if you Google it up and look at it on AI, it states that the loss was even greater. It states there was about a billion dollars total of loss, although it was not all cash loss. But that doesn't really matter to me. I don't really care what the actual amount of loss was. I'm always trying to learn from things that go bad. Why? I'm like someone at the FAA who wants to go over the airplane crash scene to say, "What can we learn from that so we don't have the same thing befall us?" So here's what I think happened with Sun going into the United Kingdom and why that deal did not work out well for them.
So the first thing to me is let's look at the timing. They bought this thing in 2022, and of course, Jerome Powell started raising the interest rates like a fiend in 2021. But I can't blame it all on interest rate movement, because they saw what was going on. It isn't like they bought these properties right before Powell started putting the pedal to the metal on interest rates. So we already knew interest rates were going up. They were already going up very quickly by 2022. So I don't think that was technically the problem, although it's easy to say that might be it. But I don't think that's it. Sun's a very careful company. I don't think they in any way assumed by 2022 that Powell was done with raising up the interest rates. And of course, as interest rates go up, so do cap rates. Because when you buy a property, you have to get it financed. Everyone is seeking a high rate of return. And to get a high rate of return, you have to have a cap rate higher than the interest rate on the debt. But I don't think that was the whole culprit. I don't think it was just the timing of that. I think instead what you have to look to in any transaction such as this one that Sun had over in England is the fact that US mobile home parks have nothing in common with their European equivalents. And this is noted if you look at the different analysis and articles that are available online regarding this transaction, that they somehow forgot what fuels mobile home park and, for much of RV park, what fuels the success in America. Because it really just boils down as usual to the difference between a necessity and a luxury, and additionally, the law of supply and demand.
So in the United States, it's very, very hard to get a permit to build a mobile home park. Nearly impossible. I don't care whether it's a small town like my little town in Missouri, or the big city like Dallas, Texas. People don't want mobile home parks to be built anywhere near them. They've come to accept the ones that exist. That's called grandfathering. But they sure don't want any new ones. I don't know of any city or town clamoring to have a new park built for the simple reason... It brings property values down, typically, and also it produces a lot of cost for the city that they don't recover enough of in property tax. It's just not a good use of land in the view of almost every zoning official across America. But over in Europe, it's not quite the same thing. Because over there, these things, which are often called caravan parks, are not seen as a necessity. They're not really there for full-time living. Instead, they're more for vacationing, having a second home, that kind of luxury enterprise. And that's very, very foreign in America. I mean, yes, we have some RV parks that are upscale. There are some mobile home parks which are upscale, like the ones out of Malibu. But for the most part, an American mobile home park, and in many cases even an American RV park, is there because of the basic human need for housing. And that's become established as the low-cost provider of housing in America. And that's why our phone rings off the hook, because people need a place to live that they can afford, and we have a huge shortage. Case in point, the average single-family home in the US is around $400,000. But in most mobile home parks, you can buy a unit right now, used, for anywhere from probably 5 to $30,000, and even brand new, probably up to maybe 70 or $80,000. That's about the price of a car.
So for the price of a car, you can own a home with a yard in an attractive location. And that's what has made the US model work continuously. But sadly, not the same over in Europe. And I think in many ways where Sun missed the mark was they didn't fully understand it would be very, very hard to raise rents in England and very, very hard to push occupancy up, because it's not something where there's a burning demand. Nobody really has to have it. And in England, their economy has not been doing outstandingly well, and it hasn't been doing well for a long time. So apparently the number of people over in England who are wanting to have that RV spot out by the lake to go out to occasionally on weekends, that demand is just not white-hot. And that is a big reason, I think, they were unable to push rents and occupancy to overcome the fact of the interest rate adjustment. A typical mobile home park in America has fared extremely well despite the rapid rise of interest rates, thanks to Jerome Powell and the Fed. They've been able to raise rents to cover their costs, to go ahead and fill occupancy, and most of that has offset that interest rate movement. That's why mobile home parks still have less than 1% of the loans in default, while apartment complexes, which have much less ability to push rents and occupancy, now hovers around 8% of their loans in default. So I think that is a big piece of it. Another problem the Sun had in their whole European adventure was this guy named Bob Bull Jr., Robert Bull Jr. You have to look this guy up. You have to read the story. It's the craziest thing you've ever seen. It's a guy that in England they thought was worth nearly $2 billion, but was actually insolvent. Most everything that he had accomplished, just from reading this thing on AI... I don't know the guy, I'd never heard of him before.
But talk about a staggering reversal of fortune. And then when they started to dissect it, when the creditors started to dissect it, they found all kinds of gaping holes. This guy had been taking out loans on properties that he bought for $3 million in one article and had rapidly gotten the thing reassessed at $70 million. I'm sorry, but property just doesn't go up like that overseas. That's just not the way that it works. And then, of course, there were incessant complaints about all kinds of corruption and family members, etc. But this is the guy that Sun was affiliated in some way... I don't really understand the whole story... With their holdings over there. And that's flagged by AI as, again, one of the key reasons the thing kind of fell apart. But what's the lesson learned from all this? The lesson learned is stay in America if you're trying to build a successful portfolio of mobile home parks. I think it should be obvious to everyone, this one giant conclusion. Because Brookfield, which is one of Canada's largest REITs, mostly owning apartments, they also own RHP, which is one of the largest American portfolios of mobile home parks. So why would a Canadian REIT only own mobile home parks in the United States? And why would Flagship Communities, another Canadian REIT, only own mobile home parks in the US? And the conclusion is simple: because it works better over here. In no other country does the mobile home park model succeed like it does in the good old USA. So when you're looking at properties, and there's roughly 44,000 mobile home parks alone in America, you don't need to leave the boundaries of our good country. You are not gonna be able, in all likelihood, to go to any country outside of our boundary and be successful. Why do I say this? I'm yet to see a single example of it. All I see is Canadians and Europeans buying mobile home parks in America. Look at the transaction that happened not that long ago, about 2016 roughly. You had Singapore, their sovereign nation fund GIC, buy Yes! Communities in the US. GIC is a giant company. They could have bought those mobile home parks anywhere in the world. There are mobile home parks in many other countries. But they knew better. They're smart business people, and they knew that a mobile home park in America is a very solid investment built on the fundamentals of supply and demand. It cannot be matched outside of our US border. This is Frank Rolfe with the Mobile Home Park Mastery podcast. Hope you enjoyed this. Talk to you again soon.