2020: Exciting Acquisitions Ahead!

December 31, 2019

We sincerely appreciate your involvement and interest in our firm in 2019.  It was a groundbreaking year for us in many ways.

Here are the summary numbers:

1. 8  The number of new communities we purchased in 2019.
2. 114  The number of new investors to Saratoga Group in 2019.
3. 692  The number of new families to Saratoga Group in 2019 (between move-ins and those that came under our umbrella when we purchased their community).
4. 1775  The number of MH spaces under ownership/management by the end of 2019.
5. 1881  The number of MH spaces under contract to purchase in the first few months of 2020.
6. 55%  The average occupancy upon acquisition at our communities.
7. 17  The number of new employees at Saratoga Group in 2019.

The story is certainly more than the numbers.  What I am most excited about are the efforts we made to lay a foundation for efficiency and future growth.  Those efforts include the following:

1. Hiring a new CFO, Becky Smallwood, with an extensive history in real estate…specifically in Mobile Home Communities.  Becky came to us from FollettUSA, a large and sophisticated operator of self-storage and MH Communities.
2. Building a proprietary “web crawler” to scour the web for MH Communities in Opportunity Zones.  This accomplished two things: 1) Daily updates for any MH community that hits the market and is located in an OZ 2) Database of 44,000 MH communities with an identifier for those located in OZs.
3. Automation of 1) contract creation for all new residents 2) weekly reports from all of our on-site managers including highlight videos/photos 3) syndicated listings across all major platforms with instant reporting of conversion rates, follow-up from on-site managers and A/B testing results 4) payments by tenants through Paylease so that our on-site managers don’t physically need to collect rents 5) Peer to Peer training across the company by developing experts in our different platforms and tools 6) a program called AvidX to create more efficiency for reviewing and paying invoices.
4. Started on our efforts to use international Virtual Assistants (VA) that will provide professional results in a cost-effective and timely manner.  For example, we used international talent to create professional community maps for $20/map.  We plan to build a full-time VA team that will help with underwriting, financial analysis and even the messy work of figuring out how to get abandoned titles on mobile homes.
5. Hiring a Senior Regional Manager from another MH operator, Josh Delcour. 
6. We launched our resident-focused website at SGcommunities.com. 

The real estate market is definitely “frothy”.  Transaction CAP rates across all sectors are at ridiculous levels.  It’s a reflection of the capital pouring into the “safe haven” of US real estate.  We have certainly seen CAP rate compression over the last 10 years in the MH space as well.  Saratoga Group paid more in 2019 than we would have in 2009. 

However, there are multiple factors at work that point to strong performance across both our recent and target acquisitions.  First, our average acquisition is only 55% occupied on average.  So if we purchased a property in 2019 at a 6.5 CAP that we could have purchased at a 9 CAP in 2009….that’s a higher multiple on the income and not on the vacant lots.  For example, a community we purchase today at $3M (6.5 CAP) might have been only $2.2M (9.0 CAP) in 2012; an $800k premium.  But we are paying the same amount for those vacant lots because the CAP rate hasn’t been applied to anything not creating income.  In addition, we are purchasing almost exclusively from “mom and pop” sellers.  Rents have escalated 32% on average nationwide in the last decade and typically these “mom and pop” sellers haven’t increased their rents one time in the past 10 years.  At Saratoga Group, we are more interested in the “income potential” rather than the “current income”.

We went “full cycle” on two properties in Phenix City AL that were purchased in May 2017 for a combined price of $3.1M.  We invested about $200k in road improvements, new kids park, infrastructure issues with water/sewer/electrical lines, new fence and pulling out old homes.  The appraisal came back at $4.6M.  Interestingly, at the time of appraisal, we hadn’t even increased occupancy yet.  We simply kicked out bad tenants (replaced them with good paying tenants who are buying their homes instead of renting), and got the costs under control.  We are adding 3-5 families per month.  These two communities will be worth about $6.0M by the time we complete the lease-up.  This is the same formula we are following for ALL of our communities.

Our goal is to have 5000 MH lots under ownership by the end of 2020.  This is going to take strong support from our investor network.  We anticipate raising around $50M in 2020 towards these acquisitions.  We have an 1100 lot portfolio (not an Opportunity Zone) that we will launch in January.  We plan to launch two more OZ funds in 2020 as well.  We believe that as long as we continue to find solid “value add” opportunities, we will be able to raise the capital from our investor network.

Finally, terms like “triple bottom line” or “impact investing” are bandied about….often times disingenuously.  We started an initiative in 2019 to help the kids at our communities in school by providing a program called IXL for free.  You can ready more at https://sgcommunities.com/ixl-partnership/ but we plan to push this in 2020 and see some real results at our communities.  In addition to paying for the program, we are providing $50 gift cards for each child who finishes a grade level in one of the subjects.  With my own children we have seen miraculous results from IXL…and I hope to see the same at some of our communities in 2020!

Sincerely,

Sam Hales