Manufactured Home Communities, Inc.
Manufactured Home Communities, Inc.
Manufactured Home Communities, Inc.
Sales: $105 million (1996)
Stock Exchanges: New York
SICs: 6798 Real Estate Investment Trusts
Manufactured Home Communities, Inc. is one of the most successful and fastest-growing real estate investment trusts (REIT) in the United States. The company owns or possesses a majority interest in 69 manufactured home communities (as opposed to site-built residences) in 19 states. Normally, an REIT is primarily engaged in closed-end investments in real estate or in related mortgage assets management and operations, so that the company could meet the requirements of the Real Estate Investment Trust Act of 1960, which exempts such trusts from corporate income and capital gains taxes, provided that the company invest primarily in specified assets, pay out most of its income to shareholders, and meet certain criteria regarding the dispersion of trust ownership. Manufactured Home Communities is not subject to federal income tax, therefore, to the extent its REIT taxable income is distributed to its stockholders. The company’s total revenues amounted to $105 million in 1996, and its acquisitions during the same year brought the total number of its sites to 27,356, making the company one of the countries largest owners and operators of manufactured housing communities.
The driving force behind the growth and development of Manufactured Home Communities is Samuel Zell, a Chicago-based entrepreneur with a penchant for motorcycles, not unlike one of his billionaire contemporaries, the late Malcolm Forbes. Having been raised and educated in modest circumstances in the Midwest. Zell met his future partner while an undergraduate student at the University of Michigan. Robert Lurie, another ambitious product of a middle-class American family, struck up a friendship with Zell that was to last a lifetime. Roommates and fraternity brothers at the university during the late 1960s, Zell and Lurie decided to form a business partnership with the intention of acquiring and managing a corporate empire.
In what developed into an affectionate and symbiotic partnership, the first move made by the enterprising young men was the formation of Equity Group Investment, Inc., the company that would become the holding firm for their burgeoning empire. As Zell traveled back and forth across the United States doing what he does best, namely, making multimillion-dollar deals, Lurie remained the cornerstone of the firm and established a solid foundation for the company’s day-to-day operations and financial management. Soon the two men were owners of real estate properties, and investors in major private and public operating companies throughout the U.S. By the mid-1970s, Zell and Lurie had become millionaires.
Zell and Lurie developed a reputation for free-wheeling, no-holds-barred business deals, specializing in the acquisition, reconfiguration, and turnaround of an extremely diverse range of companies. One of the more arcane financial arrangements made by Lurie and Zell during the late 1970s involved a $400 million tax-loss carry-forward which enabled Zell to transform his newly purchased Itel Corporation, an integrated network and cabling firm, into a vehicle that engaged in the acquisition of other companies. As their holdings increased, Zell and Lurie became owners of hundreds of millions of dollars of real estate, and such disparate companies as real estate investment trusts, integrated network and cabling firms, a fertilizer company, an international communications company, and a management fund that specialized in corporate turnarounds.
Change and Transition During the 1980s
Lurie and Zell continued their winning ways during the early part of the 1980s, accruing one acquisition after another in the building of their corporate monolith. Yet Lurie began to feel listless and unwell, and after returning from a doctor’s appointment told his lifelong partner that he had lung cancer. Zell was distraught by the news, but the two men continued their partnership while Lurie battled his disease. At the same time, however, Lurie was not unaware of the seriousness of his condition and decided to groom a possible successor in the event of his passing away. When Robert Lurie died in 1990, his hand-chosen protégé, Sheli Rosenberg, a lawyer who had been trained by Lurie and Zell since coming to work for Equity Group Investments in 1979 as its in-house lawyer, did not lose a step in taking over the day-to-day operations of what had developed into a corporate giant.
As Rosenberg assumed the chores and responsibilities of Lurie during the mid- and late 1980s, commercial banking capital had all but dried up, and the real estate market was hard hit by overcapacity. Consequently Zell, still affected by the death of his closest friend and loyal business partner, was entirely thwarted in his fervor for making business deals due to the lack of available cash. Rosenberg, well trained by Lurie, suggested to Zell that the next logical step was to take public many of the larger companies the two partners had purchased during the 1980s. Soon Zell and Rosenberg had raised over $600 million by selling shares in companies such as American Classic Voyages, a major cruise ship operator; Vigoro, a large fertilizer firm; and numerous apartment holdings. With his new head of operations, Zell was back in business and with Rosenberg’s help successfully set up the Zell/Chilmark merchant banking fund capitalized at over one billion, and the two billion Zell/Merrill Lynch Real Estate Opportunity Partners Fund.
The Early 1990s
It was during the mid-1980s that Zell and Lurie had organized a manufactured housing community business named Mobile Home Communities, Inc., along with certain already established limited partnerships, that owned and operated 41 manufactured housing communities. Manufactured home communities had grown in popularity throughout the 1980s, and the two partners saw an investment opportunity that was hard to avoid. One of the most important reasons for the growth of such communities was the average cost of approximately $23 per square foot of living space, less than half of what it costs in site-built homes. For a growing number of people, especially the elderly living on fixed incomes, this was the only way to achieve home ownership. With centralized entrances, paved streets, club houses, exercise rooms, swimming pools, tennis courts, cable television and organized social activities, manufactured housing communities offered a highly attractive lifestyle to many retirees.
Renamed Manufactured Home Communities, Inc. and organized as a real estate investment trust (REIT), the company went public in 1993. From its inception, Manufactured Home Communities was the largest national manufactured housing community REIT in existence, with 50 company-owned communities in 17 states, and containing more than 16,000 home-sites. In just a few short months after its initial public offering in March, the company acquired over 4,000 additional homesites and significantly increased its revenues and income. By the end of fiscal 1993, Manufactured Home Communities had increased its revenue by 22 percent over the previous year, from $34.5 to $42 million.
The year 1994 was a successful one for Manufactured Home Communities. Total revenues for the company increased 64 percent, impressive by any standard, to $68 million. The primary reason for this dramatic increase was the number of acquisitions made by Zell and his management team. During 1994 alone, Manufactured Home Communities grew from 50 communities with 20,000 homesites to 67 communities with over 25,000 homesites. In addition to completing an offering of 4 million shares of stock and raising approximately $76 million in four days, the company also announced a two-for-one stock split.
Since the average monthly rent in one of Zell’s Manufactured Home Communities amounted to a total of only $294, not only retired people but younger residents began moving into manufactured housing rather than conventional homes. Due to the fact that manufactured homes are built at a factory, not onsite, and then shipped to the housing community location, the actual construction time for the unit is measured in days instead of months. This type of manufactured construction results in lower costs, usually between 20 percent and 50 percent less than the normal construction of an onsite home. In 1994, company statistics reveal that 80 percent of Manufactured Home Communities residents were retired people, while the remaining 20 percent were young adults.
Acquisitions during this period of time were numerous, including the six manufactured housing communities of Palm Shadows, Brentwood Manor, Del Rey, Oak Bend, Spanish Oaks and the Heritage, and the entire holdings of DeAnza Group Properties, which alone accounted for an additional 5,738 sites in 11 communities. Most of these acquisitions increased the company’s presence in the sunbelt states of Arizona, New Mexico, and Nevada. Having acquired some of the finest manufactured home communities in the nation, one of the earlier properties purchased by the company, Pine Lakes in North Ft. Myers, Florida, was listed in 1994 in The 50 Best Retirement Communities in America.
Our mission is to operate high quality manufactured housing communities responsibly and ethically, to share an absolute passion for excellence and resident satisfaction at every level. To empower every employee to take initiative and be a creative agent of change. To set and meet aggressive goals that benefit our residents, employees and shareholders.
Continued Growth During the Mid-1990s
Without interruption, revenues for the company continued to grow at an impressive rate. By the end of fiscal 1995, Manufactured Home Communities had increased its revenues by 41 percent over the previous year, from $68 million to $96 million. Much of this was due to the successful integration of the properties acquired in 1993 and 1994. The average occupancy rate at the company’s housing communities increased slightly from 1994 to 1995, while the average monthly rent per site increased a modest eight percent. An aggressive internal cost control program significantly reduced the company’s administrative expenses to under 10 percent of total revenues. Yet Zell and his management team continued to search for bargain acquisitions, and added a total of 225 sites to the company’s portfolio for 1995.
As a real estate investment trust, Manufactured Home Communities used its capital and management skills to identify and acquire high-quality communities that enhanced its portfolio and, consequently, its earnings and stock price per share. In 1996, the company made $50 million in acquisitions, including Waterford Estates in Wilmington, Delaware, Candlelight Village in Columbus, Indiana, Casa del Sol I and Casa del Sol II in Phoenix, Arizona, and California Hawaiian Mobile Estates, a manufactured housing community located near San Jose, California. Most of these acquisitions were made near resort or vacation areas, and were highly attractive to retired persons looking for value in a housing site.
With a hefty supply of capital at his disposal, Zell continued his acquisition strategy even more aggressively by making an unsolicited offer of approximately $400 million for Chateau Properties, Inc., a REIT based in Clinton, Michigan, with 47 manufactured home communities and over 20,000 sites nationwide. Management at Chateau Properties, however, was not inclined to accept Zell’s offer. Undeterred, Zell offered a surprising $26 per share for Chateau, at one time a 12 percent premium over its closing stock price. Still management at Chateau refused and, instead, accepted a merger with ROC Communities, Inc., an Engelwood, Colorado, manufactured home community firm for approximately $300 million.
Unfortunately, as Zell and his management team focused on a growth through acquisition strategy, revenues at Manufactured Home Communities slowed dramatically. From 1995 to 1996, the company’s total revenues grew from $96 million to $105 million. The large number of acquisitions during the early and mid-1990s had left the company with a large unanticipated overhead and, in spite of administrative cost-cutting measures, earnings for the company and its stock price began to drop precipitously. Realizing his mistake, Zell shuffled some of the management team at Manufactured Home Communities to other positions within his corporate empire, with the result of a gradually improving earnings performance for the company.
With management now stable, Zell is confident that he can increase the holdings of Manufactured Home Communities, while at the same time continuing its aggressive expansion strategy. Since Zell is on the board of directors or runs 25 other companies within his empire, a good management team at Manufactured Home Communities is essential for its continued growth and success.
DeAnza Group, Inc.; Realty Systems, Inc.
“Chateau Properties Inc.,” Wall Street Journal, October 4, 1996, p. A4(E).
“Chateau Properties Inc.,” Wall Street Journal, November 14, 1996, p. B4(E).
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“Manufactured Home Buyback,” Wall Street Journal, May 15, 1997, p. B6(E).
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Melcher, Richard A., “Has Sam Been Minding the Store? With Parts of His Empire Languishing, Zell Is Bolstering Management,” Business Week, November 13, 1995, pp. 120-121.
Pacelle, Mitchell, “Zell Drops His Offer for Chateau, Sweetens Merger Proposal Terms,” Wall Street Journal, November 8, 1996, p. B6(E).
Upbin, Bruce, “A Zelluva Partner,” Forbes, June 2, 1997 pp. 122-123.
Vinocur, Barry, “Sam Zell’s Offer for Chateau Properties Exposes a Flaw in a Common REIT Structure,” Barron’s, August 26, 1996, p. 34(1).
Wangensteen, Betsy, “Zell’s Hidden Asset: Just One of the Boys,”Grain’s Chicago Business, November 4, 1996, p. 1.