Published on March 24th, 2023 by Aristofanis Papadatos
Flagship Communities Real Estate Investment Trust (MHCUF) has two appealing investment characteristics:
#1: It is a REIT so it has a favorable tax structure and pays out the majority of its earnings as dividends.
Related: List of publicly traded REITs
#2: It pays dividends monthly instead of quarterly.
Related: List of monthly dividend stocks
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Flagship Communities REIT’s combination of favorable tax status as a REIT and a monthly dividend make it appealing to individual investors.
But there is more to the company than just these two factors. Keep reading this article to learn more about Flagship Communities REIT.
Flagship Communities REIT is one of the Midwest region’s largest developers of residential manufactured housing communities. Its communities are located throughout Kentucky, Ohio, Indiana, Tennessee, Arkansas, Illinois, and Missouri. With 27 years of experience in developing and managing manufactured housing communities, Flagship has developed great expertise in real estate, financing and community management.
The manufactured housing industry has generated consistent performance over the last 25 years.
Source: Investor Presentation
As shown in the above chart, the manufactured housing industry has generated superior growth of same-property net operating income when compared to most other types of properties over the last two decades. It is also important to note that the manufactured housing industry continued growing same-property net operating income even during the Great Recession, which was the worst housing crisis of the past 80 years. It is thus evident that the business of Flagship Communities REIT offers significant advantages to investors.
Manufactured houses are attractive for many individuals, who cannot afford much more expensive traditional houses. These individuals resort to manufactured houses and thus they have the pride of home ownership.
Thanks to its solid business model, Flagship Communities REIT has enjoyed consistent growth in its rent rates and its occupancy in recent years.
Source: Investor Presentation
Moreover, Flagship Communities REIT currently enjoys positive business momentum. In the fourth quarter of 2022, the trust grew its same-property net operating income by 8.2% and its rental revenue by 29% over the prior year’s quarter. However, its adjusted funds from operations (FFO) per unit dipped 6%, primarily due to expenses related to non-completed acquisitions of properties, which did not meet the criteria of management. On the bright side, these expenses are non-recurring in nature and hence the REIT is likely to improve its FFO per unit in the upcoming quarters.
Flagship Communities REIT has three growth drivers in place. It tries to grow its funds from operations (FFO) per unit by raising its rental rates every year, by increasing its occupancy rate and by reducing its operating expenses.
Flagship Communities REIT added 6 communities and 1,273 lots in its asset portfolio during 2022. It thus grew its revenue, its net operating income and its FFO by 36.5%, 35.8% and 36.0%, respectively, over the prior year.
It is also worth noting that Flagship Communities REIT operates in a highly fragmented market, with great opportunities for consolidation. It is estimated that the top 50 investors control about 17% of manufactured housing lots for rent. Therefore, there is ample room for future growth.
Given the solid business model of Flagship Communities REIT but also the sensitivity of its results to the gyrations of the exchange rate between the Canadian dollar and the USD, we expect the REIT to grow its FFO per unit by about 2.0% per year on average over the next five years.
Dividend & Valuation Analysis
Flagship Communities REIT is currently offering a dividend yield of only 1.0%. This is one of the lowest dividend yields in the entire REIT universe. In fact, most unitholders of REITs own stakes in these companies primarily for their attractive dividends. Therefore, the exceptionally low dividend yield of Flagship Communities REIT is likely to render this stock unsuitable for most investors.
Investors should also be aware that the dividend of Flagship Communities REIT may fluctuate significantly over time due to the fluctuation of the exchange rates between the Canadian dollar and the USD.
The low dividend yield of Flagship Communities REIT has resulted primarily from the exceptionally low payout ratio of the company, which is currently standing at 18%. In other words, the trust could offer a more generous dividend to its unitholders but it prefers to preserve funds for the acquisition and development of new properties.
We also note that Flagship Communities REIT has a material debt load in its balance sheet. Its net debt is currently standing at $425 million, which is 126% of the market capitalization of the stock. This is certainly disappointing, as the preservation of funds from the low dividend payout would normally be expected to result in a stronger balance sheet.
In reference to the valuation, Flagship Communities REIT is currently trading for 18.0 times its FFO per unit in the last 12 months. We consider this a fair valuation level for this REIT, which has a solid business model and promising growth prospects.
Taking into account the 1.0% dividend and assuming that Flagship Communities REIT will grow its FFO per unit by 2.0% per year on average over the next five years, the stock could offer a 3.0% average annual total return over the next five years. This is an unattractive expected return and hence we recommend waiting for a much lower entry point before purchasing the stock.
Flagship Communities REIT has a solid business model in place, with ample room for future growth. However, the stock is offering an exceptionally low dividend yield of 1.0%, one of the lowest yields in the REIT sector. As a result, the stock is likely not suitable for income-oriented investors.
While Flagship Communities REIT seems to have promising growth prospects thanks to the highly fragmented structure of its markets, the stock seems fully valued right now. Therefore, investors should wait for a significant correction of the stock before purchasing it.
Moreover, Flagship Communities REIT is characterized by extremely low trading volume. This means that it is hard to establish or sell a large position in this stock.
Don’t miss the resources below for more monthly dividend stock investing research.
- The Monthly Dividend Stocks List
- 20 Highest Yielding Monthly Dividend Stocks
- 10 Cheapest Monthly Dividend Stocks
- 10 Safest Monthly Dividend Stocks
- 3 Top ‘Hold Forever’ Monthly Dividend Stocks
And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
- Dividend Kings: 50+ years of rising dividends
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- Dividend Aristocrats: 25+ years of rising dividends and in the S&P 500
- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 4%+ dividend yields
- Blue Chip Stock: Kings, Aristocrats, and Achievers
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more