Flagship Communities Real Estate Investment Trust (MHCUN) Earnings Call Transcript & Summary

Hello everyone. Thank you for standing by. Welcome to the Flagship Communities REIT First Quarter 2022 Earnings Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. Today’s presenters are Kurt Keeney, Flagship President and Chief Executive Officer; Nathan Smith, Chief Investment Officer; and Eddie Carlisle, Chief Financial Officer. Please note that comments made on today’s call may contain forward looking information and this information by its nature is subject to risks and uncertainties. Actual results may Ture from the views expressed today. For further information on these risks and uncertainties, please consult the company’s relevant filings on CDAR. These documents are also available on Flagship’s website at flagshipcommunities.com. Flagship has also prepared a corresponding PowerPoint presentation, which it encourages you to follow along with during this call. And now I’ll pass the call over to Kurt Keeney.

Thank you, operator. The positive results in the first quarter of 2022 show the resiliency of the manufactured housing sector in the face of interest rate concerns, pullbacks in the capital markets and economic downturns. It has outperformed all of the real estate sectors for the past decade. This is what attracted us to manufactured housing 27 years ago. And the experience we have gained over the years provides us with the ability to generate strong results from this attractive asset class. In the quarter, net operating income and AFFO grew as a result of our acquisition activity, occupancy growth, and lot rent increases. The growth in same community metrics demonstrates our skills as operators. Same community occupancy was 81.3%, and we achieved 4.2% year over year growth in same community lot rent. As of March 31st, 2022, the REIT owns 11,454 manufactured home community home sites across 64 communities. We continue to add to the portfolio in the quarter by purchasing a hundred lot resort community in Northern Ohio. This community has 99% occupancy and a 141-boat slip marina. More recently, we added a second community in Springfield, Illinois, reflecting our strategy of growing into adjacent states and building our presence with complementary acquisitions. Both of these acquisitions were immediately accretive. Since the end of the first quarter, 2021, we have added ten communities and 2,764 lots and established a presence in 3 additional states. Central to our commitment to being good operators is a focus on ESG. This commitment makes us better operators supports transparency, and strong governance contributes to improved safety and environmental performance and strengthens our connection with local communities. I’ll point out that sustainability begins with the homes themselves. Manufactured homes generate 50% less waste in construction than site-built homes. Also, today’s manufactured homes are made with the latest technology to optimize energy efficiency, and many of our new homes are equipped with energy star appliances. We have recently released our ESG report, which details our progress on all fronts. We continue to make progress on our solar lighting initiative and our water and sewer conservation. As one of our – as one of the largest MHC operators in the Midwest and upper south. We are setting the standards for the industry. I’ll now turn it over to our chief investment officer Nathan Smith for additional details. Nathan?

Thanks, Kurt. Good morning, everyone. As the only MHC provider listed on the TSX, we feel it is important to reiterate the features of the sector as an investment. Manufactured homes are an attractive housing option for many; our residents can live in a detached structure with their own deck, yard, driveway and in-home laundry. They also typically have access to many onsite recreational amenities, from basketball courts and soccer fields to clubhouses and fishing lakes. For investors. MHC provides in-demand housing and attracts long term residents. This stable asset class is proven to deliver reliable returns. As we have said in the past, the MHC industry is highly fragmented and provides many external growth opportunities. The top 50 MHC companies are estimated to control around 17% of the estimated 4.2 million housing lots available for lease in the United States. The acquisitions we have completed to date adhere to our strict and disciplined criteria as follows. First, we’re looking for strategic opportunities to provide long term shareholder returns. Second, we are seeking opportunities that will enable us to leverage management synergies and generate economies of scale. And finally, we’re seeking acquisition targets within adjacent US states where we currently operate or in new states with similar regulatory frameworks and characteristics as the existing markets within our portfolio. Following this framework allows us to achieve measured growth as we enter new markets or growth, our operation platform in existing markets. Our recent acquisitions were in line with our strategy to grow our presence in adjacent states. In February, we strengthened our presence in Ohio by purchasing a 13-acre high-quality resort community in Northern Ohio. That includes a hundred MHC home sites that are 99% occupied and a 141 boat slip marina. This community was purchased through our strategic partnership with Empower LLC. We have a right of first refusal on Empower properties, which the REIT independent trustees approve. It proves – provides us with a – another avenue for acquisitions. In April, we purchased a 103-site manufactured housing community in Riverton, Illinois, that is 89% occupied. This is our second location in the area and continues our bolt-on strategy in Illinois. The community is located just 5 miles from our first Illinois community in Springfield. We provide ourselves – we pride ourselves on being excellent operators, focusing on efficiencies and creating great communities for our residents. We were very pleased to see our efforts recognized by the national – by – with the national award presented by the Manufactured Housing Institute. Waterford Point in Evansville, Indiana, was recognized as the land lease community of the year. An F3 tornado struck the Waterford Point community in 2005, which destroyed 150 of its 300 homes. We acquired the community in 2016 with the goal of giving the community new life again and erasing the stigma of the past disaster. Since then, we have built 2 playgrounds, a basketball court and added soccer fields. We have upgraded the streets with new paving and landscaping and added a half-mile nature trail. We’ve also enhanced the lake on the property. This improves the habitat for the wildlife and for the enjoyment of our residents. Soon, we will start to put solar street lighting in place. Our work at Waterford Point has just begun. It is an excellent example of the effort we put into our communities to generate consistent improvements in operating performance and resident satisfaction. I’ll now turn over to Eddie, our CFO, to talk about our financial performance for the quarter. Eddie?

Thanks Nathan. Good morning, everyone. We generated a revenue of 13.7 million during the first quarter of 2022, 41% higher than the first quarter of 2021. Revenue growth was driven by acquisitions as well as lot ran increases and occupancy increases across the portfolio. Net operating income and NOI margin were $9.3 million and 67.6%, respectively, both of which were higher than the prior period. Funds from operations were $5.6 million in the first quarter, compared to $3.5 million in the prior period, a 59% increase. FFO was 28.4 cents on a per unit basis compared with 27.6 cents in the prior period, a 3% increase. Adjusted funds from operations and AFFO per unit were $4.9 million and approximately 24.8 cents per unit in the first quarter; this represents a 6.60% and 4% perspective increase over the prior period. The AFO pay ratio in the quarter was 54%. To further bolster our acquisition capability, the REIT borrowed $9 million on March 24th. The interest rate is at 4.37% for 30 years, with 180 monthly payments being interest only. On April 30th, we borrowed an additional $18 million at a fixed interest rate of 3.8% for 20 years. The first 60 monthly payments are interest only. To take advantage of the several opportunities we see in our markets to make further acquisitions, we will look at further funding initiatives, which could include at the market offerings. Our approach will be one that provides flexibility while delivering the best value for our unitholders. The REIT’s unitholders continue to benefit from a growing and strong-performing portfolio. Same community occupancy was 81.3% at March 31st compared to 80.8% at December 31st, 2021. This consistent and growing occupancy rate reflects our commitment to resident satisfaction and ensuring our communities are in desirable locations. Rent collections for the first quarter when 99%, which was a slight increase over Q1 of 2021 and consistent with prior periods, demonstrating the strength and reliability of the MHC asset class. As of March 31st, our total lot occupancy was 83.1%, and our average monthly lot rent was $385. Both of these metrics were within our expectations, and we ended the quarter with total cash and cash equivalents of 15.1 million with no near-term debt obligations. With that, I’ll now turn it back over to Kurt for some follow-up remarks. Kurt?

Thanks. Eddie. The MAC sector has shown a consistent track record of growth over the past 20 years, and we’ve remained bullish on the sector’s outlook. Many macro characteristics and trends in the United States real estate and housing industry offer investors significant upside potential. These are as follows. First, increasing household formations due to inflation or driving buyers to seek alternative forms of housing. The United States is currently in the midst of a favorable demographic shift that is expected to materially benefit the real estate – residential real estate sector. Second, lower housing affordability. As millennials enter the prime age for household formation and homeownership, they are doing so in an economic environment in which house – housing price growth has out paid wage growth for the past decade. Third, the declining single-family, residential homeownership rates. Traditional single-family homeownership is out of the reach for many Americans, particularly millennials. With inflation over 7% and mortgage rates rising, manufactured housing is becoming a more affordable pathway to homeownership for many Americans. And finally, there’s a lack of new manufactured housing communities. Currently, in the US, there is limited new community supply, creating high barriers to entry for new market participants. We are one of the Midwest region’s largest MHC operators, and we are the only pure-play manufactured housing investment in the Canadian capital markets. Our REIT offers investors an opportunity to participate in a niche and stable market with significant growth potential. We certainly thank you for your time today, and I will now open up the line for questions.

[Operator Instructions] Your first question comes from Scott Fromson with CIBC.

Just a question on average lot rent, it was a bit higher than we had forecast. Can you talk about what contributed to the increase and how much of that was from acquisitions, and with inflation, what do you see as a near-term sustainable growth level?

Well, I think most of, most of the lot rent was organic. It really wasn’t from acquisitions. And the truth is in our markets, multifamily is where we price against when we’re looking at lot rent and housing affordability. And I think we’ve already stuck to, you know – you know, 4% to 5% range on lot rent year over year. And you know that – in our – in our world, that’s a $20 kind of conversation, give or take a little bit. But our competitors in multifamily are raising their rents, you know, a hundred dollars when they’re coming, 2 hundred dollars when they’re coming to maturity. So we think there’s some runway for us in the future, but we’re just really mindful that, you know, about 40% of our residents are on some time of fixed income social security disability, maybe a pension plan. So, we’ve got to be mindful how we – how we approach rent increases with them. And I think – I think it’s a very sustainable model at 4%o 5%. And some – some years you’ll get a little over 5 and some years you’ll be right around 4.

So, with that in mind, do you think you’re – you’re gaining market share from MHCs that have been acquired by financial investors and I would say using their Ouija boards [indiscernible] that’s too much.

First of all, you made – you made Nathan’s day by referencing Scott.

That’s who I was hoping to please.

The Ouija board is getting more difficult. Let’s just say that. Yes.

You know, we real – we really – in all sincerity, Scott, we don’t take our customers from the – from the manufactured housing community down the street. They come from – they come from apartments, they come from single-family home rentals or mom and dad’s basement. And by the way, mom and dad don’t want them in the basement.

No, no, no at MHC certainly. And – and final question before turning it over. Have inflation and labor challenges had any impact on discussion with potential property sellers and like, just in terms of trans – accelerating, transaction timing and, and valuation?

Well, you know, I don’t think it’s completely set in yet, Scott. While we’ve had 2 acquisitions in – so far this year, I – I – I think you’re going to see that it’s going to take maybe the third or fourth quarter to do that.

Yes, Scott, and I’d also add to that the one thing that I think, you know, could have some – some positive headwind or some positive tailwind for us when – when we’re talking about inflation and acquisitions, you know, the – the energy prices that – that we’re seeing – folks that aren’t good at – at submetering the utilities and have an efficient process in place and – and a system to do it. Energy – energy prices can really wreak havoc on those folks. You know, we’ve invested in that over the last 5 years and really have kind of honed our skills when it comes to – to submetering these utilities. And, and I think that could be something that could really first drive some people that say, ‘Hey, this is becoming unsustainable for us to continue to operate in sell,’ but it’s a – you know, could be a really large opportunity for us in the future as well.

Your next question comes from Mark Rothschild with Canaccord.

Maybe just following up on some of what you were discussing. You know, talking about the rent growth, it seems like the same property rent growth accelerated slightly. Was – was there anything notable there, maybe just the properties or is – is that along with rising rents for apartments, the same type of idea?

Morning, Mark. It’s the same type of idea. Again, we looked at it. I – I will note that most of our rent increases already took effect for the year. So it – it’s – it’s nice that we had a healthy first quarter because you know, that bodes well for the rest of the year.

Okay. And then maybe just on the same point that you were discussing earlier, as far as inflationary pressures and for apartments where the – the landlord is responsible for more the operating costs, they kind of need to pass on more of a rank growth, but, you know, for you guys, are you able to still achieve comparable rent growth, even though you’re not necessarily going to face the same inflationary pressure on the cost side?

Yes. Yes, I think we can. And again, what’s interesting is when you go through the submetering process the big – the big needle mover is conservation actually. And, and so that’s actually the big difference maker, especially in water and sewer. Again, you’ll – when you sub-meter a community, you know, you’ll see water and sewer consumption drop by 30 or 40% just from leaky toilets not leaking. So, I – I think you’ll – some of those operators that don’t have the ability to actually pass through that and do the monitoring of that will have to raise their rents to chase the – the expense at a higher level. So, we – again, we that’s – I – I think we’re in good shape on that front as we speak. Again, the margins, you know, as you – as you’ve seen – increase slightly. That’s where it would show up, of course.

Okay. Then maybe just lastly, you know, interest rates clearly have – have – have been rising. Do you anticipate that impacting on the level of deal flow that you’ll see over the next little while?

You know, great question. It – it – I think it’s actually going to give us opportunities. And the reason I say that is, you know, Eddie’s done a fine job stretching our – our debt maturities. We actually pushed them out. We don’t have anything coming due till 2026, right now; 2027. And the – the – so – so our cost of capital is, is intact. I think, where, where we may see it is some folks when their debts maturing they’re going to have decisions to make, and those decisions are going to be to dig in and reinvest and – and opt for another 10, 12, 15 years. And they may or may not want to be able to do that with higher interest rates. So I think we’re in a good position to take some advantage of that moment when we can. So I don’t – I don’t think it’s a head – I don’t think it’s a headwind actually for us.

Your next question comes from Kyle Stanley with Desjardins.

So you said in the past, your biggest competitor for residents has been subprime credit. With rates rising, are you seeing any relaxation of credit standards or is this something that’s concerning to you at the moment at all?

Yes. Another good question. I actually – we’ve been reaching out to some of the mortgage presidents of – of local banks in our markets and the other folks that we’ve got contacts with Fannie and Freddy, and we have not seen any loosening of credit standards. What’s interesting is I thought we were going to see credit standard tightening, and we did not see that either. So from a credit underwriting perspective of the competitive stick-built house, there is – there’s really nothing in credit underwriting that’s changing that we can see. What we are seeing is, of course, a 30-year fixed-rate mortgage is now over 5%. So, we’re seeing people being pushed to us because – and inflation in the house is probably the biggest factor they’ll be pushed to us. It’s – you know, housing – stick-built housing’s gone up 30, 40%. So the – the relative down payments have gone up, and the interest rates are pushing people – you know, payments up as well. So what that’s happening is we’re getting folks directionally pushed toward manufactured housing, and we – again, that’s a – that’s a tailwind for us actually.

Okay, great. And I – it kind of builds on my – my next question. You – I think you kind of answered it there, but I mean, we haven’t seen that many periods of rising rates in – in recent memories. So, you know, is that typically what happens as you see rates rise, you see the people from stick-built, being pushed down into MHC. So that would be kind of a positive demand driver for MHC?

It will, it will. As long as people are employed and – and right now in our markets if you want a job, brother, you’ve got a job. And there’s no problem, you know, in our markets with folks needing a place to work. And so, I – so yes, it is absolutely pushing folks directionally toward us. And – and it’s because, you know, our average house is selling somewhere between $50,000 to 60,000 on the single section and maybe 60 to $90,000 on a multi-section. You know, the entry-level house for stick-built housing in our markets would easily be $200,000. And, you know, you want to add anything to that?

No, I think it’s, it’s great.

Okay, perfect. Perfect. And then, I mean, this quarter with the – the acquisition from empower the MHC resort, you know, we did see the first time you’ve issued class B units, I believe as – as part of an acquisition. Is this something in – in your conversations with vendors, is this something that’s becoming more topical or are they being, you know, potentially more willing to accept class B’s?

You get a little – you get a lot of people that think about it, but because the capital gains is so low right now in the United States, we’ve not had them taking so much up on it. But, you know, it’s always – you know, it’s kind of interesting. They – they see it as a diamond that they want to discuss and talk about, but then most of them turn around and take it and take the cash. But I think you’re going to see more of that, especially coming in the future as – as we kind of settle in and you know, we’re liable to have a rent. I mean, a tax increase in the United States because as we come out of COVID and stuff.

Fair enough. That makes sense. And just the last one. You may not have this off the top of your head, but do you have what the same community occupancy was for the first quarter of 2021? Just looking for a year over year. I think you quoted year-end, and it was about a 50-basis point increase. So just curious if you have that number.

Yes, the – the growth was about a 1.4% growth year over year if you look at it quarter versus quarter.

Your next question comes from Brad Sturges with Raymond James.

Just on your commentary there about rising rates, maybe increasing acquisition opportunities. Do – do you think that could allow for some larger portfolio opportunities as well? Or do you – do you think it’s going to be more the – the onesie and twosies still?

Well, you know, I’m always looking for the onesies and twosies because when families exit it’s normally very good for us, but you know, I do think so. And I think you’ll also see private equity having a more difficult time because you know, when they get on the Ouija board, they – they pick a rate that’s really low cause they like that floating stuff. And we like that stuff that’s locked in Eddie doing a great job 20 and 30 – 30 years. And they like that floating stuff. So, when that – when it, when it goes up, it makes them less competitive with us. So, you know, and sometimes they get their belly full real quick.

And by stuff, you know, Nathan means interest rates.

Hey, you know, I’m an acquisitions guy and a sales dude.

Does – does your underwriting standard change at all in terms of what you’re requiring for going in yield? Change with the rise...

Well, I can’t – I can’t don’t the Ouija board correctly, so Eddie has to be the one that checks off on that.

No, so Brad, I don’t think – I don’t think it really does. You know, so the nice thing again, that – that we have going for us – obviously, we – we’ve – we’ve – over the last year and a half, we’ve driven our debt down as a per cent of gross book value. And to kind of put ourselves in position now to be able to go out and really have a strong balance sheet and be able to – to do these acquisitions. I – I – I do think to your point that, you know, there’s going to be some opportunities for some – for some bigger deals, hopefully in – in – in the future. And – and by having the balance sheet where we have it today, that’s going to give us the opportunity to really go in and be competitive.

And on a – a longer-term basis, where do you want to run leverage on the balance sheet? Where is the rough target?

Yes, so you know, we – we’ve always given guidance of, you know, 45% to 55%. We certainly didn’t set out that we were going to – to drive it down, you know, 10 plus per cent in the first year you know, kind of how things worked out this first year. It has – I’d expect to see in the rates – I mean, I’m sorry, the percentage increased slightly. You know, certainly don’t see, you know, going back to where we started as an IPO, but as the opportunities present themselves to your – to the question about you know, the pipeline being – being full for acquisitions, as those opportunities present themselves, you know, we’ll probably have to do a little more leverage and get it back up, you know, above, you know 40% or so. But you know, it’ll be – we’ll have to look – look at the – the market or both the debt and equity and decide what’s the – what’s the best way to go.

Your next question comes from Himanshu Gupta with Scotiabank.

So just one question there. How’s the availability of debt for your asset class, and has that changed at all in the current environment?

Can you repeat the question for me Himanshu? Good morning, by the way.

Oh, yes. Good morning, yes. So how’s the availability of debt for your asset class? And has that changed at all. I know you don’t use non-bank debts. I’m just wondering how Fannie May – Fannie May are reacting. And basically, you know, the question is how’s the cost of financing going now for your asset class?

Sure, yes so – so the availability is certainly there. We obviously just closed a Fannie May deal in the first quarter. Thirty-year fixed-rate deal with Fannie. So, business – the doors are open, and they are certainly still lending. You know, we’ve done some life-co deals in the deals that we talked about; the 18 million that we just closed is becoming really, really attractive. You know, these are long term fixed-rate deals. We’ve got some good partners in the life-co business that – that we use. We’ve now got some diversification even within life-co with our lenders. I – and they are very happy with us – very – like really like the asset class and are looking to lend, you know, getting a lot of phone calls from them asking, you know, kind of where that next deal is. So, the availability is there. Certainly, we’re seeing, you know, increased – increased rates like – like everyone, but you know, the – the deal we just closed was a 20-year deal. And we did it for 3.8% versus, you know, the – the lower – low to mid threes that we were looking at last year when we closed a couple of light-co deals. So we’re seeing some increases, but – but the availability there you know, and at those rates you know, for – we’re still able to – to make some really nice accretive acquisitions.

Got it. Thank you. So – so it doesn’t look like – you know, because like we are seeing unsecured venture financing in Canada, I think that has gone up quite a bit similarly on the mortgage side as well. So 3.8 doesn’t look that high to me compared to, you know, what you were seeing like 6 months back. So thanks for your comment. And then on same community and Y growth, I think it was 7% in that range in Q1. So would full year 2022, same community and Y growth look very similar to the Q1 number? Given that you are consistent on that growth and occupancy doesn’t, you know – not likely to change much [indiscernible].

Yes. I would expect kind of more of the same. That’s our temperament at this point. I – I don’t see any reason that – that I would expect it to be, you know, much more or much less. That’s probably a pretty good – pretty good run rate for us.

Okay. Thank you. And my last question is on your lot rent growth. So if I look at over the years I mean, what information you have provided, it has been in the range of 3% to 5%, you know, kind of consistent. But now, you know, with inflation picking up so much, is there a view to go with, you know, inflation plus kind of pricing for lock rent growth? Any thoughts there?

Yes, no, I don’t – I mean, you know, Kurt kind of spoke to that early on and – and that’s our temperament, right? So, we think we can get consistent 4% to 5% lot rent growth. And, and, you know, we – we – we try to manage that very carefully, right? We – we – we don’t want to cut the golden Goose’s head off and for us by, you know, being able to do 4% or 5%, which again, to Kurt’s point earlier, is $15 to $20 per month per resident, that’s manageable for those – for those folks. And it keeps – it keeps us very competitive with the multifamily. And, you know, the nice thing is, you know, if you talk – we talk about multifamily increasing. I think they – I’ve heard somewhere between 15% to 17% they’ll come back and do rent concessions. The nice part is we don’t – we don’t do concessions. We’ll get our 4% to 5% this year. We’ll get our 4% to 5% next year, and we’ll get our 4% to 5% the – the year after. And, and that kind of consistency is what – what makes the business beautiful.

Got it. Thank you for that. And – and maybe just last question, and by the way, I joined the call later, I don’t know whether it has already been launched or not. So in terms of the expansion, I – I think we’re already in 7 states now. So any other states are on your radar? I mean, can you further expand the geographical territory or is it the idea is to be gaining scale in the existing markets now?

Well, yes, we’re always looking at new states. The question is, can we get enough there to go and – and do we like that state? And so I think in the second and third quarter, you’re going to see us looking at all kinds of different opportunities. And if we find something that is really special for this company, we will absolutely look at it and try to do our best to – to purchase it for our stockholders because you’re talking to some of the biggest ones in the room.

Absolutely.

Himanshu, if I just tag onto that with Nathan. You know, what we’re looking for is what we call scope of control. And it’s the reason that our – our margins expanded. You know, we need to get – we – we continue to try to get more efficient in the current markets, and you’ll see us do that. But we’ve got plenty of runway in those markets, put to Nathan’s point, you know, always looking at the adjacent markets always keep keeping your head up for the opportunities.

Your next question comes from Tal Woolley with National Bank.

Just to follow up on the earlier question, you were saying that that debt pricing of 3.8% that’s for like a 30-year advertising mortgage from like Fannie May, kind of thing?

So the – the 3.8% was actually a – a 20-year fixed-rate mortgage. We did 4.37 – sorry, the 3.8 20-year fixed rates with life-co. The 30-year fixed-rate with Fannie was at 4.37%.

Perfect. Okay. Just maybe to take a step back and look at like sort of the – the pro – the – the manufactured home, like, supply chain. How is availability of product right now? And can you speak a little bit to pricing dynamics as well?

Well, I’ll start with the availability. We have been a long term, you know, supporter of both Champion and Clayton. We have not had any problems getting the homes. The difference is we’ve been doing business with them for 27 years. So, you know, and many of their plants are within our service area. So, we’re not having this issue. The issue you see, and you hear people talk about is when you have properties in – one off and you buy one in Louisiana and one in North Dakota, you’re going to have a much more difficult time getting a factory to pay attention to you. But when you own 70, within a 4-hour drive of a Benton Kentucky plant, they have a lot more issues to – you know, a lot more reasons to get your – your house and get it when you want it. So we have not had any of that. So, I have heard of other REITs and other people having problems with that, but we have not experienced that. We’ve all experienced the increase in the cost of housing. I do believe that that is a little bit back – the backlog in housing because they’ve raised rates because they can too. So I think you’re going to start seeing the cost of maybe some of these houses starting to come down a little bit, because they have probably had a fun time. I don’t know what the word is, but I – you know, giving it to me pretty good. And I plan on giving it back to them even more. So, you know, it’ll be – it all turns around. So –

If you don’t mind, I’ll – I’ll jump in. You know, one of the interesting things about – about our position in today’s market is that we’ve bought some vacant lots and the lots are ready. And some of the issues with stick-built housing is that the entitlement process with the competing product for stick-built, nobody’s been lending on that in our markets for the last 5 years. And therefore, there’s not enough, lots on the ground to actually provide new housing, even if you can get the stonemasons and the brick guys and – and the drywallers to show up. So, you know, our – our – our – our sites are essentially ready to go for the new product at any time. So I think you’ll continue to see us sell new homes in this market. I think housing inflation is not going to – for the competing products out there, stick-built, I – in our markets, it’s going to be tough for them to – to calm down. There’s going to be continued constriction there, and that’ll push people toward us.

Okay, and then can you just speak a little bit to how the like, home supply chain tends to function if during – you know, during a recession, like obviously, rates decline, there’s that concern ahead of us? Like, what should we be looking – or what should we expect, you know, if growth started to go in reverse here?

Well, the first thing you’ll start doing is you’ll start seeing that the street retailer will start having inventory climb. So, like, instead of him, maybe, or her having 30 pieces of inventory on one of their retail sales centers suddenly they’ll have 40. And when that starts happening, that’s when the backlog starts coming down and the manufacturer starts getting more concerned. And so they start finding new and inventive ways to make a house cheaper and start cutting their own profit centers. So that’ll be the first. So, if you – the question is like for like Clayton homes and some of them, if their inventory is building at a location, that’s a problem. And – and quite frankly, it’s a great question because, you know, I spent a lot of time in a in a truck going around 7 states and rest assured, my friend, it is building. They are building, and it’s building very quickly, and you’re seeing the same thing in the RV business. RVs, I mean, they went, and they sold, them like mad for about 2 years and now that inventory’s starting to build. The third question is, when boats start building, and you start seeing inventory on boats, you’ll know that the party is getting ready to end.

I think our customers, the key – the key thing with our folks is that under Nath’s premise, which is – think is on point, you – you’ll see home inventory, wholesale costs come back down. That – that’ll be the net result of that. But again, in our markets, as long as people are working and they – and they have gainful employment and the population’s growing and all those things are true as we sit here today, even with the recessionary – you know, each recession looks a little different, is what I would say that we’ve been through. Again, we’ve been through the great recession. We’ve been through all of them for the last 27 years. And – and you see housing prices come down. Our folks – you’ll see more folks get pushed to us because again, those – those other pressures will, you know, housing affordability and household formations, you know, that’ll push people toward us.

And can you also talk a bit about like the pricing of credit for your tenants to buy homes? How that – you know, how much should we expect that to rise and how does that – how does that play out on some [indiscernible].

Yes, it’s – it’s an interesting question is that right now we have seen some slight increases on the chattel front financing somewhere between a half a point and a point on the interest rates. It’s not stopped us. We – we’ve had some record home sales months. So we haven’t seen it slow down. Again, part of that could be that – that more people are being pushed to us because they can’t come up with, you know, 10, 20% down on a 200 or $250,000 home.

I tell you, I’m going to add onto that with Kurt. In 19 – in 2008, we passed Dodd Frank in the United States, which keeps the lender from raising rates. More than just – before, you could just pick a rate. If you vote, you’d get somebody to pay 60%; they’d pay it. But now it’s all tied to the – to the treasury. And so, they can’t – they can’t raise, so this may be in a – in a recession this time it may even be more competitive for – I mean with manufactured housing, getting its – more than its share because it’ll be able to keep the rates down.

And sorry, and where’s pricing for a chattel home right now?

Somewhere, you know, between 8 and 9 and a half.

Okay.

Depending on credit scores and down payment and term.

And I – you know, I appreciate you guys speaking a bit about how you price rents in this market. I just – maybe to drill down more specifically like, again, if there’s some kind of recession, you know, you’d sort of I think talked about kind of like 4% plus. Like that, you think, you know, rank growth of that you think is still reasonably achievable in a – you know, in a more recessionary environment?

It is. We went through the great recession, and we raised rent. I don’t know what more we can say. The great recession, we raised rent every year. And – and it’s because you don’t get – again, you don’t want to chop the golden gooses head off, you know, for lack of a better analogy right now is, you know, you just want them to keep golden eggs.

Yes, you don’t – during times, you don’t give it to them like some people were given a hundred dollars rent increases. We weren’t doing that. We’re giving a $20, you know, and that leaves a lot more on the table for our stockholders and in the future.

You know, the – the – the working premise at the company is that you want people to move in because it’s affordable and you want them to stay because they actually like it. And – and you know, when you look through the lens at those moments, I think that’s right where we’re at.

Your next question comes from David Chrystal with Echelon Capital Markets.

Given higher home prices, higher – you know, less – less availability of physical homes in inventory, does that change your calculus at all to actually renting inventory homes? Or does the idea still get those off the balance sheet?

Yes. Our rental home fleet went down 25 units in the first quarter, which we would like to see it go down even more. And we don’t have any problem with – with home availability at all. We have as much as we want in need right now. So again, our – our model is rental homes are not going to go away. We – we – we’ve – we’ve given in to that moment. We’ll always have a rental home fleet, but we’d like to march it down if we can over time. And right now, I think we’re running about 10% Eddie, something like that.

Correct.

And, you know, would we like it to be 5%? Yes. Do we think it would be zero? No. As a percentage of occupancy, but we do have – we absolutely have communities that have no rental homes in them that are in the 90% occupied and – and frankly, those are great margin communities for us.

Okay. Thanks. And then yes, I think you probably touched on – on the answer in a couple of prior questions, but you know, in – in a world of inflationary cost increases, would you – would you ever look at getting, you know, outside the upper bound of that 4% to 5% range, or would you really look at staying generally within that and picking up you know, maybe any slippage in margin picking it up in later years?

It – it gives us the opportunity to do that. That’s the honest answer to your question and – and you might need to keep that bullet in the gun for a while. You, you don’t pull it out and use it unless you – you just have op have moments that you – you have to do that. But as we sit here today, we think we can get our growth and our returns for the investors by increasing occupancy. So, you always have to be careful about raising rents too much because you may give it back in occupancy and then it’s a – you don’t really achieve the goal that you’re looking for. So, what we have is an incredibly stable resonant base, and – and we – we look to maintain that but could – could we do it if that’s the question – we could.

There are no further questions at this time, Mr. Keeney, you may proceed.

Well, thank you for everyone. And thank you for participating today. Please feel free to reach out to our investor relations team at info – at – I’m sorry, [email protected], if you have further questions.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.